How Openai Uses Complex and Circular Deals to Fuel Its Multibillion-Dollar Rise

Depending on your POV OpenAI and the surrounding AI hype machine is at the extremes either the dawn of a new era, or a metastasized financial cancer that’s going to implode the economy. Reality lies in the middle, and nobody really knows how the story is going to end.

In my personal opinion, “financial innovation” (see: the weird opaque deals funding the frantic data center construction) and bullshit like these circular deals driving speculation is a story we’ve seen time and time again, and it generally ends the same way.

An organization that I’m familiar with is betting on the latter - putting off a $200M data center replacement, figuring they’ll acquire one or two in 2-3 years for $0.20 on the dollar when the PE/private debt market implodes.

He also has a podcast called Better Offline, which is slightly too ad heavy for my taste. Nevertheless, with my meagre understanding of the large corporate finances I was not able to find any errors in his core argument regardless of his somewhat sensationalist style of writing.

This comment is pretty depressing but it seems to be the path we're headed to:

> It's bad enough that people think fake videos are real, but they also now think real videos are fake. My channel is all wildlife that I filmed myself in my own yard, and I've had people leaving comments that it's AI, because the lighting is too pretty or the bird is too cute. The real world is pretty and cute all the time, guys! That's why I'm filming it!

Combine this with selecting only what you want to believe in and you can say that video/image that goes against your "facts" is "fake AI". We already have some people in pretty powerful positions doing this to manipulate their bases.

https://youtu.be/Q0TpWitfxPk

Central banks don't print money[1] but investment banks do. Think about it like this: Someone deposits $100. The bank pays interest, to make money on to pay that interest, ~$90 is loaned out to someone.

Now, I still have a bank slip that says $100 in the account, and the bank has given $90 of that to someone else. We now have $190 in the economy! The catch is, that money needs to be paid back, so when people need to call in that cash, suddenly the economy only has $10, because the loan needed to be paid back, causing a cash vacuum.

But that paying back is also where the profit is, because you sell off the loan book, and you can get all your money back, including future interest. So you have lent out $90, sold the right to collect the repayments to someone else as a bond, so you now have $120, a profit of $30

That $30 comes pretty much from nowhere. (there are caveats....)

Now we have my bank account, after say a year with $104 in it, the bank has $26 pure profit AND someone has a bond "worth" $90 which pays $8 a year. but guess what, that bond is also a store of value. So even though its debt, it acts as money/value/whatever.

Now, the numbers are made up, so are the percentages. but the broad thrust is there.

[1] they do

The practice was known as “zaitech”

> zaitech - financial engineering

> In 1984, Japan’s Ministry of Finance permitted companies to operate special accounts for their shareholdings, known as tokkin accounts. These accounts allowed companies to trade securities without paying capital gains tax on their profits.

> At the same time, Japanese companies were allowed to access the Eurobond market in London. Companies issued warrant bonds, a combination of traditional corporate bonds with an option (the “warrant") to purchase shares in the company at a specified price before expiry. Since Japanese shares were rising, the warrants became more valuable, allowing companies to issue bonds with low-interest payments.

> The companies, in turn, placed the money they raised into their tokkin accounts that invested in the stock market. Note the circularity: companies raised money by selling warrants that relied on increasing stock prices, which was used to buy more shares, thus increasing their gains from investing in the stock market.

https://www.capitalmind.in/insights/lost-decades-japan-1980s...

OpenAI applies the same strategy, but they’re using their equity to buy compute that is critical to improving their core technology. It’s circular, but more like a flywheel and less like a merry-go-round. I have some faith it could go another way.

This boom is a data center boom with AI being the software layer/driver. This one potentially has a lot longer to run even though everyone is freaking out now. If you believe the AI is rebuilding compute then this changes our compute paradigm in the future. As well as long as we don't get an over leveraged build out without revenue coming in the door. I think we are seeing a lot of revenue come in for certain applications.

The companies that are all smoke and mirrors built on chatGPT with little defensibility are probably the same as the ones you are referring to in the current era. Or the AI tooling companies.

To be clear circular deal flow is not a good look.

I can see the both sides of bull and bear at this moment.