AI's 'circular finance' model: Innovation or economic minefield?

A sophisticated web of "circular finance" is rapidly forming within the booming artificial intelligence sector, linking major AI firms, chip manufacturers, and cloud computing providers. This complex financial engineering, characterized by mutual investments, loans, and guarantees, is fueling unprecedented spending on AI infrastructure but is also drawing scrutiny for potential systemic risks.

Global investment in AI infrastructure is projected to reach nearly $1 trillion next year, according to the Bank for International Settlements. The funding structures often involve AI developers like OpenAI and Anthropic, hyperscalers such as Google and Microsoft, chipmakers like Nvidia and AMD, and cloud service providers like CoreWeave. These entities engage in "circular finance" by directly investing in each other, providing collateral, or offering guarantees to secure loans for chip acquisitions.

One prominent example is Nvidia's partnership with OpenAI, announced last September, involving up to $100 billion in equity investments or loans over several years. Another model sees cloud companies using Nvidia's own chips as collateral for loans. CoreWeave, for instance, raised $8.5 billion in leveraged loans in March, using GPU chips and the resulting cloud rental cash flow as security.

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The future of financial engineering.

More recently, Nvidia announced a $500 billion "comprehensive financial platform" with major Wall Street firms like BlackRock and Goldman Sachs. This initiative moves beyond direct support to customers, instead attracting external capital from pension funds and insurance companies. Nvidia partially guarantees the value of chips, sharing some credit risk with lenders. This positions Nvidia as a financial intermediary, connecting investor capital with data center operators.

Despite the enthusiasm from some, like BlackRock CEO Larry Fink, who called it "the future of financial engineering," concerns are mounting. Investment bank Morgan Stanley noted the uncertainty surrounding sustained chip sales and data center demand, as well as the difficulty in identifying the ultimate bearers of financial risk. The Bank for International Settlements warned that the interconnectedness of these circular finance arrangements could lead to contagion, where a credit crisis in one major AI player could rapidly spread throughout the ecosystem.

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The AI investment frenzy, driven by extreme competitive pressure where only a few companies survive, and the emerging circular finance systems could lead to risks spreading to all other companies if one or two giant firms fall into a credit crisis.