Lend to customer with your product as collateral

Investment Analysis Clubs Macro Economic Trends and Risks
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It’s not a great idea to lend to your customer with your own product as collateral. Just ask GE Capital in 2008.

It’s an even worse idea when the product is a computer chip with a short life expectancy.

https://www.wsj.com/tech/ai/why-wall-street-and-nvidia-are-building-an-exotic-money-pipeline-for-the-ai-boom-346ba482?mod=hp_lead_pos3

Why Wall Street and Nvidia Are Building an Exotic Money Pipeline for the AI Boom

Executives involved hail it as a new asset class; critics have concerns about using chips as collateral

By Jack Pitcher, Anissa Gardizy and Peter Rudegeair, The Wall Street Journal, Aug. 11, 2026

  1. Nvidia CEO Jensen Huang teamed up with Wall Street firms on a $500 billion plan to standardize chip financing and create asset-backed capital pools.
  2. The plan aims to sell public and private debt to establish dedicated platforms that will finance AI chip deals for smaller buyers.
  3. Nvidia may use its balance sheet to backstop up to 25% of a project’s cost, putting the chip maker on the hook if an end user defaults.

…
Executives involved in the strategic partnership Huang unveiled this week with Apollo Global Management, BlackRock, Blackstone, Brookfield Asset Management, Goldman Sachs and KKR tout the effort as the launch of a new asset class akin to the securitization of everything from airplanes to credit cards to mortgages.

To critics, it is a system that will cover up weaknesses in some corners of the AI marketplace. The concern isn’t about tech heavyweights—Meta, Microsoft, Google—with fortress balance sheets. Instead, it is about the many smaller AI labs, cloud companies and enterprises that have ravenous demand for Nvidia chips but face high interest rates if they want to finance purchases of them…

Now, it will be up to Wall Street to convince debt investors of the merits of the new financing plan. No money has been raised yet under the new partnerships. The goal is to sell public and private debt to pension funds, insurers and sovereign-wealth funds, among others, and use the proceeds to establish dedicated “platforms” that can swing into action and finance AI chip deals.

One challenge: The chips powering data centers become obsolete over time as the technology advances…

That would likely keep the obligations off Nvidia’s books initially but put the chip maker on the hook for a portion of the project if an end user of its chips defaults. Under a residual-value backstop, a guarantor such as Nvidia agrees to make up the difference if the value of a given asset backing a loan falls below a certain floor. …[end quote]

I don’t like the sound of this.

Nvidia gets a hidden liability that’s off the books.

Nvidia is on the hook if the value of a chip used as collateral falls below a certain level – which it’s guaranteed to do given the physical deterioration of high-powered chips and the market value undermined by more advanced chips in the future.

What lender would fall for a scenario like this?

Yield-hungry investors who see Nvidia’s backstop as a plus. But if the small buyers fail, the repossessed chips won’t make much when resold. Especially if a Macroeconomic trigger causes several of the same type of buyer to fail at once.

Wendy

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A sale is not a sale until the check clears the bank. Lots of companies found that out back in 2008. Warren Buffett made a mint bailing out GE. Lots companies had to get out of the money business they thought was an easy moneymaker until it backfired.

GoogleAI:

The Illusion of Margin: Selling a product on credit or through in-house financing looks like a massive win during a boom, but it converts corporate balance sheets into high-risk banks overnight.

The Captain

Edit:

@flyerboys Thanks for the like!

A good friend of mine had a camera shop next to a bank in Caracas . When someone asked him to cash a check he would reply, “We have a deal with the bank. They don’t sell cameras and we don’t cash checks.”

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Isn’t that what GM, for example, has done for decades? One borrows money for a car and the car is the collateral.

DB2

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This is an oversimplification.

With this deal, Nvidia is artificially boosting demand for its product. This will inevitably result in a vicious cycle of higher prices and developers needing to leverage themselves more and more as prices go up.

Because of this deal, if developers fail, the credit stress can spread to lenders, insurers, and investment funds…oh my! Nvidia will also be on the hook for up to 25%. With the circle-jerk deals that Nvidia has with AI hyperscalers and other chip companies…if their on the hook, everyone else is exposed too.

What happens when China swoops in with a low-cost competitive option? The value of Nvidia’s collateral chips drops faster than a knife fight in a phone booth. Who will be left holding the bag? Everybody and their mom.

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To DrBob’s point, this is what GM does by lending on its cars. And since we all know the car devalues the moment it crosses the curb, GM is technically upside down on the loan at least for a while.

(I’ll acknowledge that GM doesn’t have the same level of circularity that the hyper scalers have managed to create, just that the rationale is pretty much the same: give your customers the means to buy your product, with the hope that they will pay you back over time.)

It is worth mentioning that GM credit has gotten itself in trouble more than once; the worst was in the 2008 credit debacle when people couldn’t pay the car loans, and because of the general economic malaise the used cars that were repossessed weren’t worth as much as they were carried for on the books. At least it was car-centric that time; they’ve also gotten in over their heads on credit cards and other stuff. GE Finance (and Westinghouse Credit) did well, serving as credit arms for their customers so that their products could be financed - and that worked well for decades. Then, at Westinghouse, cowboys took over the division and made lots of deals that were lucrative, right up until they weren’t (fees for the deals, like “points” on a mortgage which paid off immediately, but when the deal soured later, Westinghouse was left holding the bag full of golf courses nobody could play and shopping centers nobody wanted. Same story, different details with GE, which found the world of credit too wonderful to ignore, and then too awful to contemplate.)

The most important thing about collateral is that it be easily and quickly sellable. One would think these chips would fall into that category, but as we saw with overbuilt fiber in the 90’s, once there’s a lot of it floating around, nobody needs any more.

This whole AI thing doesn’t have to end badly, but being the economic pessimist I am, I suspect it will.

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With cars the repo is a big help. Other “collaterals” might not be so good. Can you repo chips?

The Captain

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Emilio Estevez can repo anything.

The underlying concept may be similar, but the results will likely be very different.

GM has never had an 80%-90% functional monopoly in their industry. Anything Nvidia does to artificially increase demand will have much broader market impacts.

GM consumer financing hasn’t historically leveraged private credit. I remember when it was a big deal they sold off $2 billion in prime auto loans to private investors back in 2025. However, this isn’t the same as using private credit and SPV shadiness for primitive financing.

Which brings us to derivatives…how long before creative investors are bundling, rebundling, and swapping up a storm? CBS will be the new MBS that blow up in our faces.

As part of this agreement, Nvidia is marketing their chips as having a 10-year lifespan, reality says they’re delusional. After taking a licking in high demand AI environments, many suggest these chips will last 2-4 years. Then their not only devalued, they’re worthless. Even at their worst level of quality, GM has never faced that level of devaluation risk.

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Allow me to introduce you to the Corvair :wink:

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We had a Chevy Vega…

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I don’t know about the economics of this deal specifically, but this is common in the business world. It is called “vendor financing.”

As others noted, car makers routinely do this. But so do big equipment manufacturers like Caterpillar. Boeing provides vendor financing to its customers, as do big tech companies like Microsoft.

The risk here appears to be that the chips depreciate, but I can’t imagine lenders don’t understand the depreciation schedule for their collateral.

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There’s also the risk of shadow lenders operating in the biggest sector or our economy. Black box, low visibility, low regulation shenanigans that conceal risk.

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