The Fed’s semiannual financial stability report on Friday laid out the books on the AI business: through October this year, debt issuance tied to advanced computing topped $680 billion, compared with just $130 billion for all of 2023—about five times as much. This borrowing now accounts for 31% of issuance of investment-grade bonds by nonfinancial companies.
The report calls this structure “circular financing”: big tech companies backstop computing contracts, while GPU makers guarantee the residual value of collateral. With several layers stacked on top of one another, if AI really takes a downturn, the scale of defaults could be bigger than what shows up in financial statements. In a market outreach survey, 87% of institutions named AI as the top financial stability risk. Hedge fund leverage has also climbed to its highest level in more than a decade. When times are good, nobody asks who’s paying the interest, do they?
The report calls this structure “circular financing”: big tech companies backstop computing contracts, while GPU makers guarantee the residual value of collateral. With several layers stacked on top of one another, if AI really takes a downturn, the scale of defaults could be bigger than what shows up in financial statements. In a market outreach survey, 87% of institutions named AI as the top financial stability risk. Hedge fund leverage has also climbed to its highest level in more than a decade. When times are good, nobody asks who’s paying the interest, do they?