Steve Eisman says AI dealmaking is showing some of the same qualities as one of the 2000’s most infamous corporate blowups.
Eisman has been warning investors about the AI trade all year, specifically its reliance on just a few companies to sustain the good vibes. On an episode of The Real Eisman Playbook podcast on September 25, he took his bearish thesis further, comparing the tactics used by some of today’s AI leaders to Enron, one of this century’s biggest corporate accounting frauds.
“What I find disturbing is some of the off-balance sheet financing using special purpose vehicles that I thought had gone the way of the dodo bird after the Enron and post GFC debacles,” Eisman said. “I was wrong. It’s still happening and in size and boy do I feel foolish.”
The term special purpose vehicles refers to off-balance sheet entities that have been used by AI companies to finance big infrastructure projects without saddling the parent company with more debt. Eisman noted that former Enron chief financial officer Andrew Fastow masterminded this scheme for Enron, allowing it to hide significant debt and inflate its profits before the company imploded.
Eisman drew a parallel between Enron’s collapse and the Great Financial Crisis of 2008. He highlighted how ratings agencies allowed banks to keep structured investment vehicles full of risky securitized debt off balance sheets.
“It’s always good to go back in history and recall relevant stories now that off balance sheet techniques are back with a vengeance in the new world of AI,” Eisman added.
In his view, the business dynamic has changed for hyperscalers like Microsoft, Alphabet, Oracle and Meta, formerly capital light businesses that are now forced to raise money in the debt markets to fund their AI capex.
Eisman used Oracle as an example of the problems he sees, noting that high leverage prompted a recent downgrade by S&P Global to a BBB- rating, one level above junk status.
“That’s why off balance sheet financing is so tempting and has come back in vogue,” he noted. “If you can get some of that debt off the balance sheet, it’s possible the ratings agencies will give you credit for it, thereby preserving your credit rating.”
Meta may be an even more relevant example, Eisman said, noting that the debt for the company’s Hyperion AI data center project is Louisiana being held by an off balance sheet vehicle called Beignet Investor LLC.
The entity is a joint venture between Meta, which owns 20%, and Blue Owl Capital, a private credit firm. The SPV has issued $27 billion of debt to fund the project.
Now Eisman sees more problems ahead as Meta doubles down on balance sheet maneuvers that have preceded trouble for companies in the past.
“Even though Meta is building the data center and has promised to rent the data center from Beignet for 20 years and bears the cost of any project delays and overruns, the debt will not sit on Meta’s balance sheet,” he stated. “That’s some fancy schmancy footwork that’s reminiscent of bad times past, and it doesn’t pass the smell test.”