Today's tech titans are using similar financial tactics to Enron, but that doesn't mean they're careening toward disaster, one AI guru says.
Enron, an energy supplier and trading powerhouse, collapsed into bankruptcy in 2001 after it was revealed to be a fraud. But it was also a story of three things, Ram Bala, an associate professor of AI and analytics at Santa Clara University's Leavey School of Business, told Business Insider in an email this week.
The corporate giant shifted debt off its balance sheet using special vehicles, employed mark-to-market accounting to book future sales projections as immediate revenue, and used circular transactions to make customer demand appear more independent than it was in reality, Bala said.
"The AI buildout is replicating versions of all three, entirely legally, and that is exactly why it deserves attention," said the coauthor of "The AI-Centered Enterprise," and the cofounder and chief product and AI officer of an AI startup named Samvid.
Hidden risks
Bala said that private credit is playing the same role now that Enron's special purpose entities did, as "the place where risk goes to become less visible."
He described how private equity firms including KKR are helping to finance the AI buildout. But he emphasized that "Nvidia gets paid upfront, the borrowers and their lenders carry the default risk, and because private credit is ultimately funded by ordinary savers through instruments like pension funds, the tail risk lands on households."
Fragile forecasts
As for demand projections, Bala said the current buildout is being "financed against demand curves that are marked to model, not to market."
Bala recalled Anthopic CEO Dario Amodei saying his company has invested less in compute than its rivals, as a small error in demand projections could be the difference between success and bankruptcy.
"When the smartest guys in this room are that candid about forecast fragility, leveraged borrowers underwriting to the optimistic case should give everyone pause," Bala said.
Going in circles
Bala said that circular-financing deals such as Nvidia investing in OpenAI, then OpenAI using the cash to buy Nvidia's microchips, could be viewed as vendor financing, which is common in industries where equipment is expensive.
An example from a consumer's perspective might be leasing a car using financing from the car's manufacturer.
Vendor financing can increase market liquidity and generate value, but "done too much with uncertain outcomes, it can be risky," Bala said.
"Folks like Burry are saying that the math is not right given the risk," he continued, referring to Michael Burry, the investor of "The Big Short" fame, who's been one of the loudest skeptics of the AI boom.
Burry told his 2 million X followers this week that "history is repeating" so they should revisit "The Smartest Guys in the Room," a book telling the story of Enron's rise and fall.
"This is so much bigger than one company, and orders of magnitude more dangerous to the economy and investors than Enron," Burry said in another X post this week.
However, Bala said he believes this boom is "not like bubbles of the past," and that long-term demand for AI will justify tech companies' current financial strategies, but "only time will tell who is right."
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Theron Mohamed is a London-based correspondent on the International team at Business Insider. His coverage spans finance, investing, wealth, markets, and the economy.Theron joined BI in 2019 as a reporter at Markets Insider and rose to the rank of correspondent before moving to the Trending team then the broader International team. He previously covered tech, media, and telecom stocks for Investors Chronicle magazine and had a brief stint on the Financial Times' Data team. He interned at the Wall Street Journal in New York where he primarily wrote for Heard on the Street.Theron has freelanced for The Independent, The Telegraph, WIRED, and several smaller publications. He holds an undergraduate degree in geography from the London School of Economics, and a master's degree in journalism from Columbia University.Theron often covers Warren Buffett, Michael Burry, and other elite investors. He also writes about the world's wealthiest people and shares financial advice from all manner of rich and successful people.Email Theron at [email protected] and follow him on X @theron_mohamed.
