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Your article is perceptive, although it misses one key element that makes the subprime mortgage comparison even more apt: private credit.
If you haven’t heard of that before, you aren’t alone. PC is the debt equivalent of private equity firms, where non-bank institutions lend money to risky ventures with minimal transparency. Only instead of getting a controlling share of the company and siphoning part of the profits, they own debt instruments that need to be repaid. Because of the higher risk, these loans are often at very high interest rates (10-14% or more).
They argue this is fine because they don’t have traditional individual shareholders or depositors to repay. However…
They get a lot of their money through borrowing from actual banks, so these risky loans do touch the “real economy,” they’re just largely off the books of the big tech companies
Pension funds and endowments have been investing in PC, and recent changes allowed 401ks to invest in them too, so bad debt can potentially be infecting a much larger section of the economy
As economist Noah Smith writes:
“In 2013, only 1% of U.S. banks’ total loans to non-bank financial institutions was to private equity and private credit firms; today it’s 14%. A recent note by Berrospide et al of the Federal Reserve shows the rise in bank lending to private credit.” (see figure I attached)
AI companies of all size have been utilizing private credit to fund their massive CapEx, in part because the costs dwarf any actual profits or cash flow from the investment, and because it looks terrible on their balance sheets. Some of these debt deals like the datacenter company CoreWeave are backed by GPU chips as collateral. What problem can you possibly foresee there? Oh yeah, it’s a terrible idea to use a rapidly depreciating asset to underwrite your loans.
Private credit ominously played a role in the bankruptcy of a recent auto parts company called First Brands. While the company seems to have been poorly-run, and tariffs impacted their profitability, the disturbing thing is how much money just… disappeared, leaving financial institutions holding the bag for billions in losses.
Full NYT article here:nytimes.com/2025/10/10/…
So in my view, we now have all the ingredients for a classic financial crisis:
Highly-speculative investments in a single risky industry, with a narrative about unrealistic growth and transformational technology that will “change everything” and that “this time is different” — AI
High-interest, opaque debt tied to depreciating assets that is linked to the broader financial system — private credit
Exogenous supply shocks buffeting the economy — tariffs and radical immigration policy changes
Buckle up, it’s gonna be a bumpy ride…
