| It's the off-balance sheet structures that Marks homes in on as the key weakness for AI, citing Azeem Azhar, a well-known tech newsletter writer. Special-purpose vehicles, or SPVs, were among the biggest contributors to the growth and subsequent collapse of energy giant Enron more than two decades ago. Here's how SPVs work as Azhar describes it: A company and its partners set up an SPV for some specific purpose and supply the equity capital. The parent company may have operating control, but because it doesn't have majority ownership, it doesn't consolidate the SPV on its financial statements. The SPV takes on debt, but that debt doesn't appear on the parent's books. The parent may be an investment grade borrower, but likewise, the debt isn't an obligation of the parent or guaranteed by it.
Translation: the tech companies have a lot more exposure to debt than their balance sheets suggest. While they may not be liable for that debt, they are equity owners of SPVs which are liable. That equity will be worthless when the overbuilt phase of AI comes, forcing the parent companies to write it off. Even more worrying are the credit writedowns that private equity investors will have to take when the SPVs default on their obligations -- exposing the vulnerability of private markets where the biggest partners and lenders in these entities reside. As we know from past financial crises, when a mass of debt gets written down, the debtholders are often forced to flog off good assets on the cheap along with the bad ones. The central conceit of a blog I started in 2008 named Credit Writedowns was that the Great Financial Crisis wouldn't end until all of the problematic debt was written off. Writedowns create contagion as lenders are forced to sell assets to gain liquidity. In this cycle, private market operators are roughly akin to the investment banks of that cycle. These entities aren't central to the financial system and have no direct access to liquidity from the Federal Reserve. If they go bankrupt, the central bank won't come to their rescue. However, problems at these 'shadow banks' could be big enough to become systemic and 'infect' the regulated banking system. In 2008, the downfall of Lehman Brothers and insurer AIG were too much for the system to bear. None of these institutions were traditional regulated banks, yet they proved to be systemic. If 2025 was what 1997 was like in the dot.com era as Marks put it, then we should worry about 2026 being like 1998. That's when hedge fund Long-Term Capital Management hit the skids. The risks from LTCM were roughly similar in importance to Lehman Brothers, the difference being that LTCM was rescued and Lehman was not. There's no obvious private-market equivalent this time and if a series of interest-rate cuts by the Federal Reserve help stabilize the labor market, AI's debt-fueled growth can continue unperturbed. Still, even if the risks of a US downturn have receded,they're still high. Moody's puts the risk of a 2026 recession at about 42%, well above what would be justified in a healthier economy, according to chief economist Mark Zandi. Watch for these pockets of vulnerability to get exposed when the tide recedes. | 
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