Is it a bad sign when people start making Enron comparisons? It seems like a bad sign.

Following up on yesterday's post. If you're not interested in the AI bubble, you might want to come back next week because this thread is going to be running through Friday.

Here is Ed Zitron discussing the AI industry's huge off-the-books debt. Before we jump in, however, there's one point I want to emphasize (we'll dig into this even deeper tomorrow when we discuss Patrick Boyle's analysis). This story is Enron-esque. It is Enron-reminiscent. It is "a little bit Enron." It is not, however, another Enron.

The executives at that company engaged in criminal accounting fraud. People went to jail. As far as I can tell, no one is seriously accusing any of the major AI players of that kind of Enron-level behavior. The key phrase here is "at least on a balance sheet basis." Oracle and all the rest are hiding their debt from people who do not read the footnotes. Legally, that's a huge distinction, the kind that determines who goes to jail and who doesn't, but the difference can be smaller than you'd expect (more on that tomorrow).

The problem with these SPV-based deals is that they allow companies to, at least on a balance sheet basis, hide the scale of their debts. Meta’s long term debt sits, as of its latest quarter, at around $58.7 billion. It’s as if the $39 billion in debt for gigawatts’ worth of AI data centers doesn’t exist out of the payments it’ll eventually have to make. 

This is all legal, worrying, and yes, a little bit Enron.  

 

Per Amanda Iacone of Bloomberg:

Enron Corp. exploited US accounting rules to hide from investors and lenders hundreds of millions in debt it had bundled into off-balance sheet entities — obligations that contributed to one of the biggest corporate collapses in US history.

Alphabet Inc. and Meta Platforms Inc. each have turned to vehicles known as variable interest entities (VIEs) as part of the financing mix needed to construct data centers and related energy infrastructure.

Meta, the parent of Facebook, last year formed a joint venture, a VIE, to build a Louisiana data center through a partnership with Blue Owl Capital. The social media titan’s maximum exposure for the venture is $46 billion, according to its filings with the Securities and Exchange Commission. The company announced last week that it would expand its planned campus and is expected to spend as much as $250 billion on the project, Bloomberg News has reported.

To be clear, a Variable Interest Entity is a type of SPV where you have control over the entity, and you must consolidate it into your balance sheet…unless you are not considered the “primary beneficiary,” which Meta argues isn’t the case despite being the primary tenant and reason that Hyperion is being built. Per Bloomberg:

Meta determined it shouldn’t bring billions in debt from the Louisiana project onto its own balance sheet because it isn’t responsible for finding tenants to replace or join it at the nearly 4,000-acre campus — a critical job that impacts the entity’s economic performance, the social media company said in its most recent quarterly SEC filing. Meta said its role is limited to construction management, along with administrative and property management services.

Auditor Ernst & Young raised a “red flag” (per the WSJ) about this arrangement, flagging it as a “critical audit matter,” adding that it “...was especially challenging due to the significant judgment required in determining the activities that most significantly affect the VIE’s economic performance.” Nevertheless, it was approved, it happened, and everything is fine and normal. 

This is why Google backstopped Fluidstack and Cipher Mining’s 300MW data center and another for TeraWulf. Both will, eventually, operate as data centers that Google will lease to provide compute to Anthropic, booking revenue for doing so, acting as the sole tenant and the entire reason that the debt was raised, yet because Fluidstack and TeraWulf and Cipher Mining are the actual entities involved, nothing shows up on Google’s balance sheet. 

What’s also important to note is that none of the money going into these SPVs counts as capital expenditures. For example, across the space of five quarters (Q1 2025 through Q1 2026), Meta spent around $88.6 billion in capital expenditures, but that doesn’t include any of the debt or purchases of GPUs or anything else done in its name as part of the Hyperion SPV, despite it having (per its own fillings) $45.95 billion of exposure.