The Enron-Era Tricks Are Back in AI: How These Companies Are Hiding Their Debt | The Weekly Wrap

The Real Eisman Playbook

Steve Eisman examines the resurgence of dangerous off-balance sheet financing techniques within the AI industry, drawing direct parallels to

Key takeaways

• The 1-year Treasury yield breaching 5% is identified as a critical threshold that could trigger a market correction.
• Oracle's credit rating was downgraded to BBB- due to high leverage and concerns over Project Jupiter's funding.

Main topics

• Off-balance sheet financing
• AI infrastructure costs

Notable quotes

The only two variables that matter right now are oil prices and the 10-year yield.

Conclusion

Investors must look beyond top-down narratives and perform deep bottom

Transcript preview

Speaker 1 (0:00) The only two variables that matter right now are oil prices and the 10-year yield. Should the 10-year remain above 5%, a correction, I think, is probably imminent. There was some troubling news from Oracle and Blue Owl Capital. The leverage it has taken on forced S &P to downgrade the company's credit rating to BBB-, which is only one level above junk. What I find disturbing... In some of the off-balance sheet financing, using special purpose vehicles, the debt will not sit on Meta's balance sheet. That's some fancy schmancy footwork that's reminiscent of bad times past. The GFC gave birth to the concept of too big to fail. Are we there again? Are we going to do this all over again? Speaker 1 (0:54) Hi, this is Steve Eisman, and this is another episode of the Weekly Wrap. This is for the week ending Friday, September 25th, but recorded Thursday night, September 24th. This last Wednesday, September 23rd, on our premium Substack subscription service, we posted part two of how to analyze banks, my masterclass. I'm providing you in this class with all the tools to understand how banks work. and how to think about large cap and small cap and mid cap and the investment banks as well. This coming Wednesday, September 30th, we will post an interview with Edwin Dorsey, creator of the Bear Cave newsletter. I believe these prediction markets provide a lot of high quality value and information, which helps people make better decisions. Ed has become a real expert. In prediction markets, we spend a great deal of time discussing the value of prediction markets and their problems. Also, we get occasional requests from subscribers to purchase our coffee mugs, pillows, and other merchandise. Go to steveeisman.com, which will bring you to Substack and our merchandise page. On this week's wrap, we will discuss the war in Iran, oil prices, and interest rates. Troubling news from Oracle and Blue Owl Capital. Paramount cleared for takeoff. SoftBank junk borrowing to fund an equity investment. Some aspects of AI circular financing that I find particularly disturbing. Meta's beignet. Meta's muse. Now that agentic AI is cute, is it deflationary and will it make a real difference? and one mailbag about shorting against the box. And now let's get started. I've said this before. This is a tough market, in that the only two variables that matter right now are oil prices and the 10-year yield, neither of which, in my view, is predictable, and both of which move the market. War news flips like a pancake, and the 10-year keeps climbing. Earlier in the week, The 10-year declined below 5 % for a short period of time, and the market rallied. But on Wednesday, there was some very strong economic data, and the 10-year has now climbed to a multi-year high of 5.10 % plus, and the market declined. But later on Thursday, there were reports of a potential deal regarding the Strait of Hormuz, and the market rallied back to flat. However, for now, It looks like 5 % is the Rubicon for the market. Should the 10-year remain above 5%, a correction, I think, is probably imminent. Moving on. There was some troubling news from Oracle and Blue Owl Capital. Blue Owl is developing an AI data center called Project Jupiter for Oracle. Oracle sent a notice citing force majeure, a legal term, to Blue Owl. The notice is an attempt to put off payments if the data center gets derailed and fails to come online on time. Now, the debt tied to Project Jupiter was already trading at stress levels at around 90 cents on the dollar. I'm sure it's under more pressure today, Thursday. Although this shows that Oracle is becoming increasingly nervous about its lack of cash flow, its high debt levels, and its weak credit ratings. This week, Paramount settled the antitrust lawsuit that was brought by 11 state attorneys general. I've always thought this lawsuit was ridiculous. Netflix has a $300 billion market cap. Disney is at $180 billion. And the combined Paramount Warner Brothers company has a market cap of something like $88 billion. In the streaming wars, size matters. So the merger actually improves competition. This case was never about antitrust. The California State Attorney General wanted to place controls on the company. That's why the settlement involves a board overseeing CNN and a requirement that Paramount release 30 films in theaters each year. None of that has anything to do with antitrust. Frankly, I don't find any of these entertainment companies to be good investments. Netflix has hit a growth wall. because the streaming wars have stopped being about expanding the pie and become only a food fight for market share. The only way to increase revenue seems to be price increases. But prices are now so high that raising them more risks angering the customer base. Moving on. In AI news, SoftBank really went out on a limb. Masayoshi Son, the chairman of SoftBank, has a history, a very long history, of loving... leverage. During the summer, he got a $10 billion bridge loan from a group of banks to fund a $10 billion investment in chat GPT OpenAI. This week, he is in the process of raising $11 billion in junk bonds to fund that $10 billion investment in OpenAI. The bonds will cancel the bridge loan. This is all really out there on the frontier of risk. It's one thing to invest your own cash. It's another thing to raise junk-rated debt to make an equity investment. Moving on to AI circular financing and why looking from the top down, which is conceptually accessible, needs to be paired with bottom-up analysis of the accounting and specifically the underlying off-balance sheet financing