Zitron is literally the worst person to raise alarms about the financials of the AI ecosystem because he's so hyberbolic and pollutes his own arguments with nonsense.

Take:

> When somebody decides to build an AI data center, they form a special purpose vehicle (much like a CDO), which then raises debt, in some cases slices it into tranches and, in most cases, sells them to institutional investors, asset managers or banks.

This is just such a weird and wrong comparison. A CDO's assets are other people's debt claims. The same mortgage bond could be split among many CDOs at once, those CDOs could be re-tranched into further CDOs, and thanks to credit default swaps, synthetic CDOs could reference bonds nobody in the deal actually owned. So basically exposure to a fixed pool of mortgages could be manufactured without limit.

A data center SPV's assets are the building, the power interconnect, the GPUs, and the customer contract. If the SPV fails, the loss is limited to what those things are actually worth. There are no multipliers as there are with CDOs.

Later in the post, Zitron even concedes this:

> What differs this from the subprime mortgage crisis is that the systemic risks aren’t driven by derivatives or complex financials but by the sheer scale of costs to build an AI data center, a catastrophic misunderstanding of the AI industry itself and the dangerous lending standards of private credit.

He claims this isn't important:

> When every single debt deal is over $500 million and usually numbering in the billions, we don’t need a vast web of different contracts to create a systemic risk, just clusters of projects that either fail to keep up with their SPVs’ debt or bonds that go unpaid by destitute or defunct data center developers.

But here's the thing: systemic risk isn't a function of how big the losses are. Instead, it's a function of who takes the losses and whether they propagate.

Equity holder losses just get absorbed by equity holders. What happened in 2008, on the other hand, was that the losses hit leveraged intermediaries funding long assets with overnight money, so one firm's distress became another firm's funding withdrawal.

Big deal sizes don't create that type of situation. A $10 billion SPV default is a $10 billion loss distributed across whoever bought the debt.

He brings up Lehman but that's literally the worst example for his argument. Lehman's losses were trivial against its $600 billion balance sheet. It failed because of a funding run. Repo counterparties refused to roll, the clearing banks demanded more collateral and prime brokerage clients pulled their balances. This doesn't happen in an SPV because SPV debt is term debt. It's sized and dated to match the asset. There are no runs on a term loan. When an SPV breaches its DSCR defaults, the lenders take the assets. It's not pretty, but it's contained. It can't spread beyond its own confines and multiply because there is no maturity mismatch, which is what killed Lehman.

A warning: I'm very naive in anything financial.

What happens if the assets collected drop in value as they get repoed? Wouldn't the lender now also be in harms way and in turn have issues financing themselves?

Thanks

CDOs and SPVs have two things in common:

They're acronyms and they are financial engineering.

Maybe this time it will be different?

The problem is the current media landscape/environment rewards hyperbole and drama. Calm narratives of the facts doesn't find much traction.