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J.P. Morgan's OpenAI loan is strange
- fred_is_fred 1y ago"We're the primary lender for the AI boom" has some $$$ value as well.
- themafia 1y ago[flagged]
- flanked-evergl 1y agoAll the money lent to banks via TARP during the 2008 crisis was paid back with interest.
- themafia 1y agoTARP was a collection of programs and not a general loan facility.
- missedthecue 1y agoMore money was returned to the government than was disbursed under TARP.
- drivebyhooting 1y agoPaid back with interest but also inflation.
- thevillagechief 1y agoThe government(and taxpayers I assume) actually made out pretty well on the bailout loans. Considering the government still owns 99% of Fannie Mae and Freddie Mac, after retaining billions in profits over the last decade and a half.
- stackskipton 1y agoYes, US Treasury has gotten profit from Fannie/Freddie. However, there is concern from OMB that risk is not properly being calculated and thus in event of small housing crisis, US Government would have to back stop them again and possibly wipe out any profits gained.
- adventured 1y agoThe primary bailout during the 2008 housing crisis went to homeowners, not to banks through TARP. The secondary bailout was to banks, the Fed bought up trillions of dollars worth of garbage housing assets. That homeowner bailout was never paid back: it damaged the economy in the form of dollar debasement (ie lower purchasing power for everybody holding dollars). The Fed increased its balance sheet 400% in six years, and never looked back. The housing bailout was trillions of dollars, meant to keep that gigantic housing asset pool inflated artificially. We did it again during Covid, with another gigantic consumer bailout. See: gold at $400 vs gold at $4,000. Aka the destruction of the USD.
- JamesBarney 1y agoInflation was stable and pretty low for the 10 years after the financial crisis. Gold wasn't at $400 per oz before the financial crisis, and the spike in gold prices was fairly recent. Basically the financial crisis response didn't cause inflation, the covid response did.
- flanked-evergl 1y agoThe covid response was what the occupy protests told us the bailouts were. Never has there ever been a bigger transfer of wealth to the 1% than during the covid era.
- javaunsafe2019 1y ago[flagged]
- greenfish6 1y agoThe first example has a miscalculation; if you invest 1k and the EV is 900, then your choice has negative ROI, not positive.
- quirino 1y agoThe calculation that arrives at 900 has already subtracted the 1000 from the start.
- breischl 1y agoHe's calculating EV above cost. If you look at the calculation, the first term is -1000 to account for the initial investment. So the final value is tell you that you got back the initial money plus 900 more.
- neom 1y agoHowever, the article is technically inconsistent in framing.
- postflopclarity 1y agoit's correct. the EV is 900 after accounting for the 90% probability of -$1000. that's what the first term in the sum is for.
- deleted 1y ago[deleted]
- deleted 1y ago[deleted]
- riazrizvi 1y agoThis just reminds me of how flimsy cases are bolstered as soon as you put numbers and formulae in them.
- daft_pink 1y agoI’m pretty sure the banks view the intellectual property value as the security for their loan not the potential profits of the company. I’ve worked for enough startups that even if your company folds and goes bankrupt with no business plan the ip generally can easily cover the outstanding loans.
- nradov 1y agoThat was one of the key parts of Silicon Valley Bank's business model. And that part worked pretty well: their collapse was caused by mismanaging interest rate risk and they never took many losses on loan defaults.
- nine_zeros 1y agoParts of SVB got picked up by JPM.
- SoftTalker 1y agoI think that's got to be highly variable. I've worked for a couple of startups that went under and the IP had basically zero value. Who is going to pay for a failed implementation of a failed idea?
- JamesBarney 1y agoI don't think OpenAI will be one of those companies. I can't imagine a world where OpenAI sells for less than 4b.
- ohdeardear 1y agoTheir web-application is worth $200,000. The software of the training infrastructure is worth perhaps $2M; the inference infrastructure is worth perhaps $500,000. Their hardware is worth nothing in 3 years. Their B2B relations are worth perhaps $5M. The "data" they have is worth nothing in 5 years, because a sufficiently smart model will be able to learn without human feedback. They have no moat. So, how do you get to $4B? I think the models are wrong way too often for relatively simple queries, so unless they give a secret prompt like "be wrong a lot in the free version" to users, it's basically worthless.
- neom 1y agoInteresting that they seem to misunderstand the difference between Equity Risk and Debt Risk, they also misapplied bond spreads. Anyway, J.P. Morgan's OpenAI loan isn't strange, it's calculated exposure to Microsoft.
- sberens 1y ago> This Reuters article claims OpenAI is going to generate $3.6 billion in revenue this year, but the costs will lead to a loss of more than $5 billion. It expects a major revenue jump next year to $11.6 billion The article linked[0] is from last year. A recent article[1] from this year says "OpenAI looks to meet its full-year revenue target of $13 billion and a cash-burn target of $8.5 billion, the report added." [0]https://www.reuters.com/technology/artificial-intelligence/openai-establishes-4-bln-credit-facility-2024-10-03/ https://www.reuters.com/technology/artificial-intelligence/o... [1] https://www.reuters.com/technology/openais-first-half-revenue-rises-16-about-43-billion-information-reports-2025-09-30/ https://www.reuters.com/technology/openais-first-half-revenu...
- Rudybega 1y agoYeah, this is a pretty major error. They already have a higher revenue than the article's quoted "jump next year" (which was this year and was an underestimate).
- NewsaHackO 1y agoDon't worry, people in the thread are now going to pivot to "Uhh, those numbers don't matter! Here's an opinion from some tech blog about the financials of a private company!"
- emp17344 1y agoAren’t they still deep in the red? What’s the justification for claiming they’ll become profitable?
- JCM9 1y agoMixing the AI bubble with the financial system. What could possibly go wrong.
- chrisoconnell 1y agoI mean, let's be honest there. This is much different than the blockchain bubble, in which 2/3 of the population is actually utilizing or interacting with AI daily. While, yes, it's overhyped and takes up too much of the spotlight, it isn't going anywhere and is going to continue to be a staple in our lives moving forward, and will continue to increase in impact as it improves. Blockchain will always be blockchain, and it was absolutely a bubble. Will it improve? Sure. Will it ever be as impactful to the everyday individual as AI? Maybe, but most people will not know or care. It will mostly be a passive experience. AI will/has fundamentally changed how we work in the matter of 3 years. So, financial system jumping on board this, is much safer than jumping onboard crypto hype trains. (I'm not saying crypto is bad / is a bad investment, but lots of crypto and ai startups are both trash, well, most startups are trash, I say that as a founder who has had many trash ideas)
- ipaddr 1y ago"AI will/has fundamentally changed how we work in the matter of 3 years" The past 3 years or the next 3 years or 1.5 years both ways? It hasn't really done that yet. The work from home zoom meetings has made a bigger impact. Maybe in a few years? Its on par with the metaverse at this point.
- hansmayer 1y ago> I mean, let's be honest there. This is much different than the blockchain bubble, in which 2/3 of the population is actually utilizing or interacting with AI daily. You do remember that by the time the blockchain bubble burst, literally everyone and their mother were "interacting" with it? > AI will/has fundamentally changed how we work in the matter of 3 years For people in bullshit jobs creating workslops, yes its probably an absolute blessing. Enjoy it while it lasts.
- akshayshah 1y agoI'm no expert in corporate finance, but whether or not OpenAI goes bankrupt feels like the wrong question to me (in thinking about this loan). Wouldn't a bank be more concerned with (1) the likelihood that OpenAI can raise another round of financing from which to repay the bank, and (2) the likelihood that OpenAI will have assets worth >10B when/if they do eventually declare bankruptcy? The bank's risk seems quite a bit lower than the VC's risk.
- Closi 1y agoAlso 5% would be a ridiculously low rate for this sort of corporate finance. You would expect more like 8-12% I think? Plus the post seems to only include 1 year of interest. Unless we know the terms, I don't think we can necessarily calculate EV from JP Morgan's perspective. I would say that they aren't usually carelessly giving away money though... They probably have terms where they can get out early if OpenAI's position weakens etc.
- nradov 1y agoJPMorgan Chase might not mind ending up owning much of OpenAI's IP if they default on the loan. Banks have largely been locked out of making equity investments in OpenAI so far so perhaps they see this as the next best alternative?
- photonthug 1y ago> feels like the wrong question to me I agree but had different questions. TFA mentions the consideration of whether failure cases are correlated, but of course if OpenAI wins big, there's a good chance this directly or indirectly creates much instability and uncertainty in many other loans/partners. What's the EV on whether that is net-positive considering this is a loan at 5% and not an investment? On the other side, if OpenAI crashes hard, is it really such a sure thing that Microsoft will be the on the hook to pay off their debts? Setting aside whatever the lawyers could argue about in a post-mortem, are they even obligated to keep their current stake / can they not just divest / sell / otherwise cut their losses if the writing is on the wall?
- beambot 1y agoSecured debt doesn't go to zero in the 90% failure mode...
- adventured 1y agoAll that text to somehow not realize that large companies routinely take on banking relationships, including debt, specifically to start cultivating the various relationships/trust they'll want access to in the future. Apple and Microsoft both did this at massive scale even though they didn't have to, in order to prime the debt markets in regards to relationships/trust.
- ferguess_k 1y agoAt this point I would rather consider this kind of large loans to be "political" than "technical", that is say, they may or may not make sense in terms of $$$, but may make a lot of sense in other areas.
- groby_b 1y agoMy very first thought was that somebody needs to take the lead for the IPO circus... (Also, a revolving credit facility is not a loan, which this discussion misses)
- einrealist 1y agoThey don't need an IPO. "Private equity funds" are already being offered to retail investors. Less oversight and a way to pass the risk to gullible retail investors.
- ericmay 1y agoThe scenario and assumptions used in this are not just wrong, but they are simple and wrong.
- seanhunter 1y agoWhat a weird analysis. A company that has revenues and is extremely well-capitalized gets debt finance. That is not news. That is totally commonplace. "Shouldn't all their capital come from investors?" No. Companies at all stages typically use a mixture of debt and equity finance. His EV calculation is completely flawed also. Debt finance is typically senior to equity in recovery at bankruptcy, so when JPMC do this analysis (and believe me they did this analysis) they are not assuming 0% recovery. They are thinking it is most likely in a bankruptcy that they get some x>0% recovery. Finally, banks don't think about their relationship with a multi-billion-dollar company in terms of the ROI on a single revolving credit. (even though this will in all likelihood be very profitable for JPMC). They think about how giving this revolving credit makes it more likely they get advisory on any future bond issuance and I-banking work when OpenAI want to do takeovers, and a foot in the door at IPO time etc.
- addicted 1y agoAre there other examples of well capitalized technology startups that have significant revenues that have also opted for significant debt financing?
- frankchn 1y agoAmazon issued $1.25 billion in convertible debt in 1999: https://www.wired.com/1999/01/an-amazonian-debt/ https://www.wired.com/1999/01/an-amazonian-debt/
- dmurray 1y agoConvertible debt is very different: if you do the same (simplistic) analysis as in the article, it behaves almost like the equity example, not the debt one.
- Closi 1y agoAmazon? https://www.seattletimes.com/business/amazon-pays-off-its-historic-debt-early/ https://www.seattletimes.com/business/amazon-pays-off-its-hi...
- chadash 1y agoThe math is wrong: > Cost: $1,000 Case 1 (90%): OpenAI goes bankrupt. Return: $0 Case 2 (9%): OpenAI becomes a big successful company and goes 10x. Return: $1,000 + 5% interest = $1,050 Case 3 (1%): OpenAI becomes the big new thing and goes 100x. Return: $1,000 + 5% interest = $1,050 The actual math is that if OpenAI succeeds, then there's a nod and a wink that JPM will land the lead role in the IPO or any mergers/acquisitions, which translates into huge fees.
- addicted 1y agoThis is correct. This isn't a financial transaction. This is a "relationship" transaction.
- JamesBarney 1y agoNot to mention the risks that OpenAI even if it does goes bankrupt sells for less than 4b is not anywhere close to 90%.
- empath75 1y agoAlso, if OpenAI goes bankrupt, you _much_ prefer to have loaned them money to having bought shares in the company. People who own shares in a bankruptcy only recover anything after all the people that loaned them money are paid back in full.
- shmatt 1y agoa company with 800 million weekly active users, and only losing $10B-$15B before implementing ads - which IMO is coming fast and soon to the LLM world - i would never calculate a 90% chance their shares end up at $0 before an exit option This is the easiest money and best relationship JPM could imagine
- deleted 1y ago[deleted]
- kibwen 1y ago> a company with 800 million weekly active users Wow, that's slightly more than Yahoo has. Well, had.
- unethical_ban 1y agoTLDR - MS won't let OpenAI go bankrupt/get seized by JPM so they're loaning with the concept that MS is backing it.
- cs702 1y agoThe loan is likely secured by OpenAI's assets, including hardware, facilities, and IP.
- OtherShrezzing 1y agoThe lead bank in OpenAI’s IPO will take something like 4-5% of the biggest IPO in history. In the 1% scenario, JPM could be looking at tens of billions on the upside, if this loan secures them the lead.
- LudwigNagasena 1y ago> Case 1 (90%): OpenAI goes bankrupt. Return: $0 The loan value in case OpenAI goes bankrupt depends on the details of the deal.
- fred_is_fred 1y agoIt's almost certainly not $0 for JP Morgan. It might be $750 or $400 or whatever but it's not $0.
- johnwheeler 1y agoIt's silly to assume that they have a 90% chance of failure just because startups have a 90% failure rate or whatever.
- millipede 1y ago> Ctrl-F "convertible" > 0 of 0 matches Some analysis.
- JamesBarney 1y ago> However, there's no speculation about what their earnings will be because they're currently selling their services below cost and there isn't really any story as to how they'll turn this profitable. Do we know they're selling their services below cost? I'm pretty confident they're making money on inference and burning through large piles of cash on capex and research.
- deanputney 1y agoI've determined that it's a bad idea for me to write an article like this because every time I've seen one of these they're absolutely riddled with errors and incomplete information. I have no doubt I'd do worse!
- NewsaHackO 1y ago>OpenAI is not a profitable company. People have to stop saying this with NO evidence to back it up. And by evidence I do not mean random investors opinions, anonymous "insider" infomation, etc. Give numbers. Saying the same thing 1000x doesn't make it true.
- swarnie 1y agoSurely the burden of proof lies on the more unbelievable side? Show me how a company setting never before seen piles of money on fire is profitable. Until someone can i'll happily keep claiming they're unprofitable.
- NewsaHackO 1y agoThe burden of evidence is on the side of the person making the claim.
- ImPostingOnHN 1y agoThe claim is that they are profitable -- all businesses are unprofitable until proven otherwise. That's the null hypothesis for business profitability. The null hypothesis is what must be disproven with evidence.
- NewsaHackO 1y agoThat's not the definition of null hypothesis buddy
- ImPostingOnHN 1y agoI am not convinced by your assertion there, friend. Do you, in fact, have evidence they are profitable? Obviously we cannot assume every business is profitable unless proven unprofitable. That's why reporting and audits exist. Note that they totally could be! I'm not asserting one or the other. But unprofitable is the default, absent evidence.
- adrr 1y agoBig banks will give sweetheart loans to startups and officers of startup for the opportunity to take a company public. They’ll make billions on the IPO.
- ohdeardear 1y agoIt's not just strange, but completely regarded, _assuming_ no more information, but since it's JPM, of course they know more, which probably make it a lot less regarded. I would not be happy with this trade if I had any $JPM.
- lordnacho 1y ago1) If OpenAI goes bankrupt, JPMC will get more than 0 on their loan. For some reason I have yet to comprehend, when I was sitting on a credit desk pricing CDS, they always used 40% as the recovery rate. I ran into a credit guy who taught finance at two very famous universities, and he also immediately said 40%, with no explanation. 2) It's a revolver, it's not all being used 3) If things go great and OpenAI ends up buying smaller guys or getting bought out (probably MSFT?) then JPMC will be right in there with those young bankers who don't sleep. They will pull in many many millions in fees with very little expense. 4) If things don't go great, OpenAI will be looking for more financing. Guess who will help them? 5) It's really only in case there's an Enron things are terrible for JPMC. Like if it turns out the whole thing was a bunch of guys in India answering every ChatGPT query, something like that. If there's actually an AI business, and despite JPMC's history of due diligence misses (Javice case) that's probably the case, then there's deals to be done.
- ivape 1y ago4) If things don't go great, OpenAI will be looking for more financing. Guess who will help them? Who? I can only think of the Saudis/UAE and SoftBank.
- lordnacho 1y agoIf Softbank buys OpenAI, they don't just sign a contract and send a cheque. They need powerpoint slides from JPMC to make the deal happen, and that costs money.
- nl 1y ago> more financing As we've seen from the NVidia/Oracle and AMD deals, there is more than one way to structure investments. Financing doesn't just mean "deposit cash into my bank account:.
- dsr_ 1y agoThe 40% historical recovery rate comes from a long line of companies that actually built things and produced products, often in factories with equipment in them... and a warehouse full of product that didn't sell at full price. If OpenAI folds, there are two basic scenarios: - one: the LLM crash has come, and OpenAI barely has any material assets. Microsoft isn't putting more money into it, and they won't take it over -- people with seven figure salaries will be looking for six-figure jobs. - two: somehow, only OpenAI crashes, and the rest of the LLM boom continues. This likely involves OpenAI being extraordinarily outcompeted, so it's a long slow decline as contracts run out and are not renewed. 40% is probably high, but if JPM can retract the revolving debt before it all goes out the door, not ridiculously high.
- tgma 1y agoIt was a waste of time to read. TLDR is if OpenAI were a random startup it’d be strange but because it has credible shareholders that stand to lose in a bankruptcy (weirdly constructed argument), it’s probably safe enough. Duh. Basically the author wrote a word salad to say the bank calculated the probability of them losing money would be lower than what the author pulled out of their ass at the beginning of the article, refuting their own hypothetical point.
- vincefutr23 1y ago- a company with 800m weekly actives is not going bankrupt - existing models are profitable if cutoff future training and focused on inference - debt is senior to equity - if my life depended on one company not going bankrupt over the next decade I’d pick OAI over Citibank - banks use revolving credit as a break even or loss leader for higher fee business - high fixed cost businesses use debt and equity to scale - lead investors would very rarely pay down the debt of an investment, that’s not the backstop - unlikely for revolving credit, but a convertible structure could mitigate any perceived asymmetric downside
- ghawr 1y agoThis is not a serious person. Taken from the About page: Who are you? Hi, I'm the author. I've been dabbling in investing since 2015 and I decided to get more serious about it in 2023. Is this financial advice? No. In fact, everything you read here is be half-baked by design. If it were fully-baked, then I wouldn't have felt the need to write about it in order to distill my thoughts.
- markdown 1y agoAd hom
- wellwelloctober 1y agoI used to work in IB and I'm not that surprised: * Revolving credit facilities tend to have the highest priority of corporate debt when it comes to going after assets in the event of default * RCFs are often about relationship management rather than making money as others have pointed out * Credit agreements (that set out the terms of RCFs) often include a lot of triggers/rules about how much can be drawn and at what rate to protect lenders. e.g. If revenues are below Y you can only borrow Z
- Havoc 1y agoBanks are pretty chill about these things. I've been controller on something with a billion+ revolving facility myself. You can basically throw the entire analysis out on a single point: >Case 1 (90%): OpenAI goes bankrupt. Return: $0 It won't be $0. Creditors have liquidation priority and banks make very sure they're confident in the quality of the collateral before handing out billion dollar facilities.
- mmooss 1y agoOr the banks own the most valuable, exclusive, world-changing IP in decades. Nobody else really has a shot at that IP besides a few other extremely-capitalized AI companies. I'd loan them the money for that opportunity. It's possible that the IP will somehow turn out to be worthless; I don't know what will happen, but I am confident ruling out worthless. Could the lender could refuse Microsoft's payment - from a minority shareholder? OpenAI could accept Microsoft's money and pay the bank; with that offer, OpenAI would have leverage to play Microsoft and the lender against each other. OpenAI could go bankrupt for many reasons having nothing to do with the value of their IP. For example, they could overinvest in developing it - a positive outcome for the lender.
- deleted 1y ago[deleted]
- skopje 1y agoFTFY >>> Or the banks own the most valuable, exclusive, world-changing "AMERICAN" IP in decades. You do realize other countries are working on this too, right? The biggest one rhymes with INA.
- mmooss 1y agoThere are other American companies too, but the list of AI projects anywhere that operate on the highest level, and have the capitalization for the massive data centers (apparently) required to reach the next level, is small and very exclusive.
- RayVR 1y agoThis author obviously has no experience with investment banks. OpenAI is massive, fairly risky, associated with Microsoft, etc. all true. What matters to JPM is potential future business. There’s potentially an enormous IPO in the future. The credit line is just good business. They are fostering the relationship.
- lumost 1y agoThe doomerism on OpenAI finances is unfounded IMO. They will survive and be a large company at this point. The big question marks are on just how big, when, and the cost to get there. If they lost all financing tomorrow, they'd deploy a cheaper model and slow down research. I don't have a hard time imagining that they could pull off a 75% reduction in costs in such a scenario. No one is OpenAI’s financing while anthropic et al. keep raising. The big risk is that future innovation fails to live up to the hype and they can't afford full priced GPUs or the proposed datacenters.
- wyre 1y agounfounded, are you sure? They've made 8 billion this year with 800 million users, or $10 ARPU (average revenue per user). They have committed to spend a trillion dollars over the next 5 years. I'll call it $200 billion/year, with a (rounded-up) billion active users, they would need to make $200 ARPU . For comparison Meta has about $50 ARPU. I'm having a harder time finding Google's ARPU, but with $350 billion in revenue last year if they made $200 ARPU they would have less than 2 billion users (I can't find how many user's they actually have but I would bet money it's a lot more). They would have to be making 3-4x more money per user than two of the largest companies in the world for this bet to work out. I don't see how this is going to work out for them.
- lumost 1y agoI'd doubt that they intend to spend a full trillion. The spend commitment is such that no one else can plausibly outspend them. If you take the position that spend is correlated with outcome - then they are on a positive track to win. The existence of this spend commitment will motivate some market players to exit the market.
- wyre 1y agoI think I agree here. I don't have all the numbers, but I'm under the impression that OpenAI spend is much higher than their competitors, with Meta trailing behind them. I don't think Anthropic or Xai is spending nearly as much as OpenAI, yet ChatGPT performance is not scaling with spend. Their moat seems to be entirely based on having the most users.
- deleted 1y ago[deleted]
- zeckalpha 1y agoThis looks a bit like JP Morgan trying to make an AI ZIRP without the Fed lowering rates.
- tug2024 1y ago[dead]
- FilosofumRex 1y agoThe loan amount is small & revolving to be too risky for a bank the size of JPM, but undue optimism about OpenAI also isn't justified. Google, Amazon, Apple, MSFT, Meta & Nvidia didn't face "China risk", but AI firms do. As Tik Tok saga has proven, the days of running large losses for years, to recover it all back in IPO, and monopolize thereafter, may be over. China might win the AI race and force the hand of USG for yet another national security imperative, to expropriate foreign assets.
- xg15 1y ago> What happens if we instead put our lender hat on? [...] Case 1 (90%): OpenAI goes bankrupt. Return: $0 Even for a very simple model, this seems unrealistic. Isn't the whole point of a loan that your liable to pay it back if you're in any way able to? (very roughly) So the bank would have claim to some of OpenAI's existing assets even if they went bankrupt. The probability that they not only go bankrupt but also have no assets left at all would be much lower.
- jbs789 1y agoI'd suspect the revolver has conditions that limit the circumstances under which it can be drawn. A public company is required to file the details of the facility but in this case... suspect OpenAI has gone for the headline but the details matter.
- AbstractH24 1y agoHypothesis: It's worth investing in OpenAI even if you never see a dollar of it back. Simply because it adds credibility.
- petersonboots 1y ago[dead]