Officials from the Federal Reserve Bank of New York spent part of last week inside four banks. JPMorgan, Wells Fargo, Barclays and Morgan Stanley. They were not there about capital ratios or stress tests. They were asking a narrower and more interesting set of questions: how much are you lending to private credit firms, how do you manage that risk, and what exactly is the collateral behind those loans. Regulators do not walk into four systemically important banks to ask about collateral quality because they are curious. The trigger, according to Semafor, was something JPMorgan did in March. The bank quietly marked down a portfolio of loans it had made to private credit firms. The loans in question had been extended to software companies, and the reason for the markdown was that those software companies looked vulnerable to being disrupted by artificial intelligence. Hold that thought, because it is the hinge of everything that follows. Those marked-down loans are not sitting idle. They are collateral. Private credit funds pledge them to borrow more. So artificial intelligence is now simultaneously the thing creating the largest credit demand in a generation, and the thing eroding the value of the collateral behind an older generation of credit. The same technology sits on both sides of the ledger. The scale nobody mentions Bank lending to nonbank financial institutions has grown from roughly $300 billion in 2016 to more than $1.5 trillion. That is about 11% of all bank loans in the United States. The private credit industry itself is estimated at around $1.8 trillion. This is not a new worry. Gundlach said it felt like 2006 back in June 2025. Jamie Dimon suggested private credit investment might have peaked a month later. Blue Owl restricted investor withdrawals in February. The difference now is that the regulator has stopped reading about it and started visiting. Meanwhile, the financing got creative Last Friday, Broadcom began assembling something remarkable. A special purpose vehicle that will raise around $60 billion, and potentially approach $100 billion across the full structure, to buy Broadcom's own custom AI chips and lease them to Anthropic. Investors put up the money. The SPV buys the silicon. Anthropic leases the compute rather than owning the hardware. Bank of America, Citi and Morgan Stanley are syndicating it. The capital stack tells you who is taking the risk. Roughly $42 billion of senior secured debt carries a Broadcom guarantee. Around $18 billion of junior debt does not. Blackstone has committed about $9 billion to that junior tranche, which is the piece that absorbs losses first. Bank of America models potential exposure reaching $370 billion by 2029. The whole structure works on one assumption: that Anthropic's revenue keeps compounding at close to its current rate for years rather than quarters. Should growth merely normalise to what a very good software company does, the junior tranche is where that lands. And the company that needs money least borrowed anyway In June, Nvidia sold $25 billion of bonds across seven tranches, some maturing as far out as 2056. It was the company's first bond sale since 2021. The order book reached $85 billion against an initial $20 billion target. Nvidia is sitting on an enormous cash pile and generating more of it than almost any company in history. It did not need the money in any ordinary sense. What it did was establish that it will use its investment grade credit rating to keep the ecosystem funded, protecting its own balance sheet while the machine keeps running. When the most cash-rich company in the trade starts terming out debt to 2056, it is making a statement about duration. It expects to be financing this for thirty years. The bond market has already noticed While equities were making new highs on Monday, the ten year Treasury yield reached 5.315%, a fresh 52-week high. The thirty year hit 5.670% and the twenty year 5.717%. The explanation given for the steepening was elevated real yields, heavy borrowing, and competition for capital. Competition for capital. That is the bond market saying, in its own flat language, that something very large is bidding for money and it is not the government alone. What the economy underneath looks like Consumer confidence fell 6.7 points in September to 81.9, the lowest reading since April 2014 and a fourth consecutive monthly decline. The expectations component dropped to 63.6. Consumers named prices, the cost of goods, and fuel. The Strategic Petroleum Reserve fell another 767,000 barrels last week to 283 million, the lowest since 1982 and the twenty-eighth consecutive weekly drawdown. Saudi Aramco's chief executive described global stockpiles as "scarily thin." And Oracle, which has become the clearest live case study in all of this, is offering voluntary separation packages to managers. Six weeks of severance plus a week for each year served. Oracle has already shed roughly 21,000 roles this year, cutting headcount about 13% to around 141,000, at a restructuring cost near $2.8 billion. It carries roughly $125 billion of debt and a BBB- rating, one notch above junk. The money saved is going into data centres. Where this leaves you I want to be careful here, because this is not a crash call. The Nasdaq made a record high on Monday. Nvidia is above $5.7 trillion. Demand for AI compute is real, visible in Micron's accounts, and JPMorgan now thinks memory stays supply-constrained through 2028 with order discussions reaching into 2031. The point is narrower and, I think, more useful. The AI trade has quietly stopped being an equity story and become a credit story. It is being financed through special purpose vehicles, junior tranches, lease structures and investment grade bond issuance, and increasingly through the same nonbank plumbing that a central bank spent last week inspecting. That changes what you should watch. Equity drawdowns announce themselves. Credit does not. It goes first in the places nobody is looking, in marked-down loan books and widening spreads and a fund that quietly gates redemptions. So watch Oracle's credit default swaps rather than its share price. Watch whether that Broadcom junior tranche fills easily or struggles. Watch the thirty year, because if term premium keeps rising while equities make records, one of those two markets is wrong. And remember that in March, a very large bank looked at a book of loans to software companies, thought about what AI was going to do to them, and wrote the value down. Nobody noticed at the time either. Not financial advice. https://cycledesk.substack.com/p/the-fed-went-looking-for-something?r=7unzzg&utm_campaign=post&utm_medium=web&showWelcomeOnShare=true
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