The Global Financial Crisis of 2007-8 resulted in bailout for financial institutions. When the bubble burst, central banks and states stepped in to mop up. Cue lots of discussion about moral hazard, prudential regulation and so on. The AI bubble is perhaps the first bubble that is known to be a bubble before it bursts. Everyone seems to know that the music will stop, but so far there are still a lot of dancers.
This article in the FT outlines a circular structure of financing of AI data centres and the chips they need to be built. The financial engineering is complex:
David Dayen writing for The American Prospect asks a good question:
The problem is that the industry is bound so tightly with the stock market that a change in feeling from AI investors could be all it takes to generate a market-wide crash, as we’re seeing to some degree. In other words, if AI is propping up the economy, who is propping up AI?
Based on a paper by Drall and Granato (2026), he suggests that answer is the state:
Private equity today owns at least $1.5 trillion in assets in life insurance companies. Apollo bought Athene in 2022; KKR got Global Atlantic a couple of years earlier. As explained in a research paper by Andrew Granato, an assistant professor at the University of Texas at Austin, and Pranjal Drall, a Ph.D. candidate at Yale, these life insurers have mounds of available capital from policyholder payments that don’t need to be paid out until the end of their lives. Private equity firms have plowed this capital into risky private credit loans that could weaken the structure of the life insurer. But if the insurer goes insolvent, the private equity firm won’t have to pay; you will.
That’s because instead of passing through bankruptcy, insolvent life insurers have all their liabilities—in particular the policyholder claims—paid for by state guaranty funds.
That is, it looks very much like the financial engineering discussed by the FT is is backstopped by the US taxpayer, and it has been designed that way.
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