Pod Insights Better Offline Monologue: AI Isn't Too Big to Fail About this episode In this week's Better Offline monologue, Ed Zitron breaks down why AI isn’t too big to fail, why no bailout is coming, and how people need to learn more about history before using it to justify burning billions of dollars.
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Transcript 4,664 words · 11 speakers
Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
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2:12 Speaker 02 Call Zone Media.
2:15 Ed Zitron? Hello and welcome to this week's Better Offline Monologue. I'm your host, Ed Zitron.
2:28 Ed Zitron? That's right, it's your second damn monologue this week, but next week we're gonna have an awesome guest, economist Paul Kudrowski, and no doubt some sort of news will break that will make next week's monologue even spicier than this one, and man is this spicy. Anyway, earlier this week I put out a free newsletter about the subprime AI crisis, my ongoing theory that as AI companies strive to try and make their rotten economics work, they'll have to start cranking up the price and making rate limits worse, and generally trying to move things around to make these products anything close to profitable, but they won't even get close. Now, take a little history trip, that's what I'm calling it. When the subprime crisis happened, the subprime mortgage crisis of course, millions of people built their lives around the idea that easy money would always be available, and that
3:13 Ed Zitron? anyone could get a mortgage, and that housing would only ever increase in value. In reality, the value of housing was massively overinflated by the lax standards of a mortgage industry incentivized the sign as many people as possible, thanks to a lack of regulation and easily available funding. The value of housing, and indeed the larger housing and construction boom, was a mirage. In reality, housing wasn't worth anywhere near what it was being sold for, and the massive demand for housing was only possible with unlimited resources and lax, well, underwriting, which is the process of evaluating whether someone can get a house. You might know that, but I've been encouraged by Robert and Sophie to be obvious with things. Those buying houses they couldn't afford with adjustable rate mortgages either didn't
3:55 Ed Zitron? understand the terms or believed members of the media and government officials that suggested housing prices would never decrease, and that one could easily refinance the mortgage in question. You know, kind of like saying things like, you know, "AI is always getting more efficient", "the value is always going up", and "venture capital will always invest", and that "this is the new hypergrowth era". Similarly, AI startups' products are all subsidized by venture capital, and must, in literally every case, allow users to burn tokens far in excess of their subscription fees, a business that only works... And I put that in quotation marks, as long as venture capital continues to fund it. And when I say that, I'm being quite literal. If you go and use perplexity, you're comfortably able to, even on a $20 plan, burn $30, $40, $50, $100 worth of tokens within a calendar
4:40 Ed Zitron? month. Anthropic allowed you, until very recently, to burn anywhere between $8 to $13.50 per dollar of subscription revenue. While from the outside, these may seem like these are functional businesses with paying users, without the hype cycle justifying the endless capital, these businesses wouldn't be possible, let alone viable, in any way, shape, or form. And indeed, they wouldn't have any customers, my evidence being, if they could get customers by charging their actual rates and offering a non-subsidized product, they'd have them, and they would have had them from the beginning. Let me give you an example. Harvey is an AI tool for lawyers that just raised $200 million at an astonishing $11 billion valuation,
5:21 Ed Zitron? all while having an equally astonishingly small $190 million in ARR, or $15.8 million a month. It raised another $160 million in December 2025, after raising $300 million in June 2025, after raising $300 million in February 2025. Where's the fucking money, Harvey? Where are you putting it? Harvey, Mr. Harvey has been very unfair to the venture capitalists. Actually, they're fueling it, I can't even say that. Remove even one of those venture capital rounds, and Harvey coughs up blood and dies. Much like subprime loans allowed borrowers to get mortgages they had no hope of paying, hype cycles create the illusion of viable businesses that cannot and will never survive without the subsidies. The same goes for companies like OpenAI and Anthropic, both of whom
6:06 Ed Zitron? created priority processing tiers for their enterprise customers in the middle of 2025, and the latter of which, just as I discussed in my last monologue, added peak rate limits from 5:00 AM to 11:00 PM Pacific Time, you know, just the entire day. And that was after they created weekly limits late last year. Their customers are the subprime borrowers, too. They built workflows around using these products that may or may not be possible with new rate limits. Think about it. If your whole business, the whole reason you use this software subscription is to do tasks, and suddenly the amount of tasks you can do is limited, is this really, is anything tenable anymore? Especially if you're one of those people who can't actually code and are using this to vibe code, I'm not really sure this works.
6:48 Ed Zitron? But in the case of the enterprise customers using priority processing, their costs massively spiked, which is why Cursor and Reblit and several other AI startups suddenly made their products worse in the middle of 2025, adding their own rate limits and changing their pricing. In reality, none of this ever made sense. None of this was actually possible outside of endless resources. Now, travelling back in time, by November 2009, 23% of US consumer mortgages were underwater, meaning that they were worth less than their loans. And I think we're eventually going to see that specifically with venture capital valuations. By the way, I think there's going to be a point when it's like 90% of AI startup valuations are going to be way lower, or nil, actually.
7:33 Ed Zitron? And I truly think the subprime AI crisis will be much, much worse for the valyries. AI companies made up more than 50% of venture capital investments in 2025. I actually don't know how any of them make it. This is something that I think about a lot. My thesis basically says that these companies are all dying. I don't see how it works out. They're not getting acquired. They can't go public because they have the worst economics of all time. And the moment you show the markets that, it looks real bad. Minimax, an AI company in China that went public, I think it was 50 something billion dollars of revenue and like 200 something million in losses. A little bit like, I'm making real money. Nevertheless, I really don't know how that works. I truly don't. I sit and think about it. I'm like, is there a way they could get acquired?
8:18 Ed Zitron? Is there something else they could do? There really isn't. All they could do is jack up their prices and hope that people don't leave. And I, I think that's what's going to happen if they even bother and if they can even get that far. Now, I, I know what you're all thinking and I hear this a lot. I'm kind of tired of hearing it, but I'm honest. And I get why people do it, but despite the subprime comparison, this is not a too big to fail situation. And in this week's premium newsletter, I'm going to dig into that question in depth. Please do subscribe. The money goes directly to me. It's my main source of income now, but it's very important to me. But nevertheless, I'm going to give you a sizable preview here because I want this information out there.
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12:12 Ed Zitron? So, too big to fail refers to the troubled asset relief program, TARP, over $400 billion, and specifically the bailouts of AIG in the surrounding finance industry, mostly focused on the commercial paper loan industry that kept major banks and financial institutions going, as well as fucking GE Capital. Oh, and also the PDCCF and TSLF finance systems that kept them going too. I'll get to that in a bit, but the bailout was in the trillions. Like, I don't think people realize how and why it happened, so I'm gonna tell you. Anyway, AIG was too big to fail because it had $20 billion in outstanding commercial paper and several life insurance subsidiaries that were billions of dollars in the holds, thanks to AIG literally gambling with the money, not actually at casinos, on CDSs, CDOs, and the like.
12:57 Ed Zitron? The knock-on effects of AIG's collapse would have been catastrophic for the money market funds that held commercial paper from multiple companies. And commercial paper is a short-term loan-type thing, anywhere from one to four days to like... I think 200 and something days, but most of it was either very short term. And in AIG's case was also mostly without any collateral in any way. In any case, that used to be the primary way that banks and finance institutions, GE Capital, actually used to be able to fund their businesses. They would go to the market and go, hey, why don't you lend us some money just for like a few days? We'll get right back to you. And for the most part, it worked right up until it didn't. I also want to be clear about what the bailout actually bailed out.
13:40 Ed Zitron? Because I think people here do big to fail and they're like, right, they bought the houses that were being foreclosed. No, no, no, that's not what they did. It was like 40 something billion dollars that was meant to go to stop foreclosures. No one really knows what happened to it, which is cool. No, the vast majority of the bailouts were for financial instruments, not houses, not apartments, not helping regular people, but making sure that the toxic financial products associated with the finance industry were absorbed and bought off and that liquidity remained in the market via the primary dealer credit and term securities lending facilities that provided as much as $100 billion to banks and financial institutions a day. Now, these still exist, the repo facility still exists, but are not used at the same scale.
14:24 Ed Zitron? But this, I want you to think about this, like every day, 50, 100 billion dollars was just used to keep the, to give them short term funding to just get through the day. People should have been in fucking prison, to be clear. People should have gone to jail for this, but this was necessary to stop the financial system crashing, to actually falling apart. Lending, insurance would not have got funded in the same way. There was basically a credit freeze anyway, but I'm talking nothing would have happened. And even during the great financial crisis, mortgages still were getting written, loans were still getting written. Things still happened. And the financial system is a confidence game and the PDCCF and TSLF existed to stop everything from actually going to zero.
15:09 Ed Zitron? And like I said, those few loans were still being written and funded. And they needed to make sure that insurance and borrowing, they still actually happened because the world runs on debt and insurance. And, oh my God, this really reading about the finance, the great financial crisis really did black pill me all over again though, because you read what these fuck nuts did. They were just, they were like, yeah, we're gonna hedge our bets on the, on the mortgages by buying a credit default swaps that we're not, that we, we assume that AIG will be able to pay, but you don't need to check. Well, they should have checks, they couldn't fucking bet. Anyway, some estimate the true size of the bailout when you account for that liquidity to be over $10 trillion because the under discussed part of the AIG bailout was that
15:51 Ed Zitron? commercial paper, the commercial paper lending industry that funded most of the finance industry, kind of broke. It took years, the finance industry actually had to unwind their dependence on it. Colgate used to use commercial paper, it's fucking weird. In any case, there really aren't any comparables to the AI bubble. While OpenAI and Anthropic might be very prominent and very annoying, their actual economic existence is relatively small and the overall AI industry barely had $65 billion in revenue last year, with much of that flowing between a few counterparties and funded by venture capital dollars. And also, we don't know if all of that was cash, by the way. A chunk of that is the inference spend with Microsoft, now that's still tokens. If you work at Microsoft and you want to talk to me about the finances or any of these
16:37 Ed Zitron? companies, please, please hit me up, I would love to hear from you, easy at betteroffline.com. Nevertheless, had AIG defaulted, it would have left multiple banks without the funds to continue functioning and killed its insurance companies in the process, sending them into government receivership that wouldn't have guaranteed the policies had the same value or even have been fulfilled. Even with that bailout, the government had to plug a hole in the side of the finance industry for several years and ended up bringing it back during COVID as well. While the collapse of OpenAI and Anthropic might tank parts of the market, too big to fail is a term that refers to something that has systemic risk to the economy. And these are two very different things, because the market still shat its pants during the Great Financial Crisis.
17:21 Ed Zitron? That happened. The government wasn't stopping the markets from collapsing by funding the markets. They were keeping the banking system alive so the markets just functioned at all. And I really need you to know that difference, because it's not the same thing. The collapse of AIG would have quickly ripped through the funding mechanisms of most of the US finance industry, and its collapse still materially harmed one of the main funding mechanisms of the US economy. There is no such comparison with AI. AI is not producing productivity benefits at scale. It is not replacing jobs at scale. Not that I want that to happen, of course. It's not load-bearing in an economic sense, in that the flow of money in the US economy would collapse if OpenAI or Anthropic did. And a bailout in general exists to solve a problem rather than pass the buck.
18:06 Ed Zitron? And I also want to be clear, if that, if they were truly too big to fail, I don't know. I don't know, wouldn't it, wouldn't it be that when Anthropic goes down or ChatGPT goes down, the economy would stop? Because that's what would have happened if AIG died. God damn if I nearly said AGI like five times. Anyway, I also want to address that Fannie Mae and Freddie Mac, massive mortgage companies that were absorbed by the US government, they're not a comparison, as the deaths of those companies would have actually destroyed the US housing market. Like, they were like $65 billion in the hole. It was very, very, very bad. Like, I, I need you, like, The Big Short is a great movie. It does not do justice to how fucked things would have been.
18:50 Ed Zitron? I also want to be clear that none of these companies should have been allowed to function in the same way. Like, any of the banks involved in this should have, like, none of the executives in question should be allowed to work in finance anymore. I think that it was genuinely evil, and the whole situation was caused by an industry-wide, just gambling industry. That's what it was. It would, it was truly horrifying, and everyone involved should be in jail or jobless. I think they're fucking awful. Nevertheless, it was necessary to do because of the fuckwit nature of the whole thing. Because of the stupid gambling they did, because of the low reserves they had, and how brittle everything was, which is their fault. That's very different to the bailout not being necessary, no. Now, getting back to AI.
19:35 Ed Zitron? Without OpenAI and Anthropic, the AI industry would disappear, as would the demand for AI compute. It would lead to billions of dollars of loans going unpaid and the value of venture capital would probably be cut in half or as much as eighty or ninety percent, as happened with the dot com bubble. It'd be horrible for the markets. Core Weaver die, Iron would die, and Hebeus would die. I think that OpenAI and Anthropic's death would end up ripping through the entirety of Silicon Valley. I think that it would be a payback for years of focusing on growth rather than creating anything. On the banking side, I do think we are somewhat safer. I think while there aren't heavy reserve requirements, there are actual regulations around high-risk speculation. And the scale of speculation here is teeny tiny compared to, I think it's like five trillion in synthetic CDOs or something of that nature.
20:20 Ed Zitron? There aren't trillions of dollars of speculation here. Billions, hundreds of billions, sure. And I'm fairly sure, fairly confident, that a lot of these banks and private equity firms and private credit firms have some degree of reserves built in for these loans going tits up in the case of AI data centers. Their deaths, these AI companies' deaths, wouldn't create a calamity that would stop loans in general or insurance in general from being collateralized or any other basic functions of the US economy. I'll also add that Nvidia and the rest of the Magnificent Seven aren't going to die as a result of the AI bubble bursting. They're not going to need bailouts. I think Oracle's bailout chances are there, but even then, I'm kind of hesitant to say so because
21:02 Ed Zitron? I don't know what they'd be better, maybe bailing out the loans to create a little Larry Ellison-shaped tarp just for that fuck nut. But I actually don't know if that would happen. Tarp was deeply unpopular, deeply, deeply unpopular. And Trump's already having enough trouble. I'm sure he's doing the "we're touching the stove" competition. But at the same time, I just don't see it happening in the same way. And even then, I still think Oracle would die and get absorbed into another company, probably Microsoft. Wouldn't that be funny? Man, the antitrust would be crazy. That being said, I think that the AI bubble will eventually be seen as a smaller precursor, much like the dot com bubble was to the great financial crisis, to a larger financial crisis created by private credit and private equity and their hundreds of billions of dodgy investments
21:46 Ed Zitron? in software and random companies. I am still working out how bad this would be, and I don't want to be an alarmist, I actually don't think it will be as bad as the great financial crisis, but that is a question I'm going to try and answer in the future. And OpenAI and Anthropic aren't getting bailed out. It's not happening. I don't care if you think, oh, the Department of Defense uses them. They're not going to bail them out for that reason. They're not going to put them into conservatorship. It's not going to happen. It's not. It would be deeply unpopular. And also, to what end? A festering hole in the side of the government? We already have Congress! Anyway, AI data centers aren't getting bailed out either. I really need to be clear about that. Houses were not bailed out. Foreclosures will not bailed out. Perhaps the ABSs might have
22:30 Ed Zitron? some hope, the asset securities, but even then, I don't think the scale of those is anywhere close to the great financial crisis. And to be clear, the collapse of the AI industry will fucking hurt. It will brutalize the banks and private credit firms involved. It will fuck venture capital for years, if not over a decade. Earning seasons are going to look like the dog from John Carpenter's The Thing. It's going to be horrible for them and horrible for people invested in the market. It's not going to be nice. I am not saying that it's not going to hurt. But that is meaningfully different to anything being too big to fail. And I'm tired of people saying things without actually bothering to understand what they mean.
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23:47 Speaker 06 Hey folks, it's Matt Altmaix. And Joel Larsgaard. From the How To Money Podcast.
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