“What I find disturbing is some of the off-balance-sheet financing using special purpose vehicles that I thought had gone the way of the dodo bird after the Enron and post-GFC debacles. I was wrong. It's still happening, and in size, and boy, do I feel foolish.”

The only two variables that matter right now are oil prices and the 10-year yield. Should the 10-year remain above 5%, a correction I think is probably imminent. There was some troubling news from Oracle and Blue Owl Capital. The leverage it has taken on forced SP to downgrade the company's credit rating to triple B minus, which is only one level above junk. What I find disturbing is some of the off-balance sheet financing using special purpose vehicles. Their Debt will not sit on Meta's balance sheet. That's some fancy schmancy footwork that's reminiscent of bad times past. The GFC gave birth to the concept of too big to fail. Are we there again? Are we going to do this all over again? Hiding Their is Steve Eisman, and this is another episode of the weekly wrap. This is for the week ending Friday, September 25th, but recorded Thursday night, September 24th. This last Wednesday, September 23rd, on our premium substack subscription service, we posted part two of how to analyze banks, my master class. I'm providing you in this class with all the tools to understand how banks work and how to think about large cap and small cap and mid-cap and the investment banks as well. This coming Wednesday, September 30th, we will post an interview with Edwin Dorsey, creator of the Bear Cave newsletter.

I believe these prediction markets provide a lot of high-quality value and information, which helps people make better decisions.

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Hi, Steve Eisman here. Most people spend days researching a hotel, but life insurance, they take the first quote and move on. SelectQuote shops over 100 policies and finds you a better rate for free in about 15 minutes. You'll save an average of 30%. On $150,000 monthly premium, that's over $10,000 back across a 20-year term. They've been doing this 40 plus years with 11,000 TrustPilot reviews rated excellent. Get your free quote at selectquote.com slash Eisman. That's selectquote.com/slash Eisman. They shop, you save. Now let's look at the off-balance sheet techniques which are back with a vengeance in the world of AI. Their appearance is due to the following: costs are rising. Also, flooding balance sheets with debt will destroy company credit ratings, and bad ratings will increase the costs of the debt. It's a vicious cycle which requires fancy footwork to hide the debt. What costs are rising? Well, NVIDIA's chips are expensive and getting more expensive. NVIDIA just recently raised prices by 15%. And it turns out that a Costs a lot, and I mean a lot, to build an AI data center, and it takes a great deal of time to build them. The combination of all of these cost increases has changed the dynamics of the business models of the large tech companies that are now called hyperscalers, Google, Amazon, Microsoft, and Oracle, and Meta as well. They used to be capital-light businesses that threw off so much cash that they barely knew what to do with it all. This year, the hyperscalers will spend something like $700 billion on AI CapEx, and their cash flow has disappeared. They are raising capital for the first time in decades and a lot of debt. In the case of Oracle, the leverage it has taken on forced SP to downgrade the company's credit rating to triple B minus, which is only one level above junk. That's why off-balance sheet financing is so tempting and has come back in vogue. If you can get some of that debt off the balance sheet, it's possible the ratings agencies will give you credit for it, thereby preserving your credit rating. It's early in the AI off-balance sheet shenanigan story. Last year, Meta dipped its toe in the world of off-balance sheet financing in order to fund a $27 billion data center in Louisiana. Their Debt center is financed, of course, with debt, but the debt is not on Meta's balance sheet. Instead, an off-balance sheet vehicle, a special purpose vehicle, SPV, was set up called Benier Investor LLC SPV. Quite a mouthful. Hat tip to the name, though, as anyone who has spent time in New Orleans knows that Beniets are delicious. Meta wins my vote for cuteness with Muse and Benier, but the financing is less cute. Meta owns technically only 20% of Benyet, with the rest owned by Blue Owl and Pimco. Yeah, Blue Owl again. So even though Meta is building the data center and has promised to rent the data center from Benyet for 20 years and bears the costs of any project delays and overruns, the debt will not sit on Meta's balance sheet. That's some fancy schmancy footwork that's reminiscent of bad times past and it doesn't pass the smell test, at least not to me. Perhaps with the memory of what happened to Arthur Anderson in mind, Ernst ⁇ Jung, Meta's auditor, was not totally comfortable with this masterpiece of off-balance sheet financial engineering. In Meta's 2025 10K, ENY flagged it as a quote, critical audit matter, unquote. I'm going to quote a long section from the 10K. Note that here, the SPV is called a variable interest entity, VIE. It's the same thing. Pay attention to the language in the 10K that I'm going to quote. The takeaway is that sometimes accounting language illuminates and sometimes it obscures. Here, it obscures. And I am quoting the relevant section at length, so bear with me. Quote, as described in Note 5 to the consolidated financial statements, the company entered into an arrangement, the venture, to co-develop a data center campus. The company determined whether it holds a variable interest in the venture, whether the entity in which the company has a variable interest is a variable interest entity, and whether the company is required to consolidate the entity. A VIE is consolidated by its primary beneficiary, which is the party that has both the power to direct the activities that most significantly affect the economic performance of the VIE and a variable interest that absorbs losses or receives benefits from the VIE that could potentially be significant to the VIE. Auditing the company's determination of the primary beneficiary of the VIE was especially challenging due to the significant judgment required in determining the activities that most significantly affect the VIE's economic performance based on the purpose and design of the entity and assessing whether the company has the power to direct those activities. We, meaning Ernst ⁇ Young, obtained an understanding, evaluated the design and tested the operating effectiveness of the controls over the company's determination of the primary beneficiary of the VIE, including controls relating to the determination of the activities that most significantly affect the VIE's economic performance and assessing which party has the power to direct those activities. To test the company's consolidation conclusion with respect to its interest in the VIE related to the venture, our procedures included, among others, reading the relevant agreements related to the VIE to understand the purpose and design of the venture. We audited the company's determination of the primary beneficiary of the VIE, including its determination of the activities that most significantly affect the venture's economic performance and assessing which party has the power to direct those activities. Unquote. Let me translate this accounting language that is designed to obscure into plain English. This is what I think it means. We at Ernst ⁇ Young are very nervous about this transaction, and we are really not sure at all whether this VIE should be off balance sheet. We relied on the company's description of the transaction, but we did not do any real work of our own to determine whether what Meta said about the VIE is really accurate. After all, we want to get paid, and Meta is a big client. That's my slant on the accounting language. Now, admittedly, this VIE is small. It's only $27 billion. But you should expect many more such transactions in the future and not just at Meta. Unfortunately, this entire situation reminds me of a very powerful scene in the original Judgment at Nuremberg movie released in 1961. Maximilian Schell is representing some Nazi judges, and he is cross-examining Judy Garland, who is on the witness stand. He is berating her terribly, just like she was berated years ago in a Nazi courtroom, and she is weeping uncontrollably. At which point, his own client, who was the presiding judge in that prior case, played by Burt Lancaster, stands up in the courtroom and shouts at Maximilian Schell, Herof, are we going to do this all over again? Exactly. Are we going to do this all over again? Moving on. Meta, after long delays, launched Muse on September 8th. And my wife, Valerie, who is my producer, has not stopped using it. In addition to pointing out the cute creature with headphones on a computer, she has managed to score hard-to-get theater tickets and arranged a business trip all while maintaining a full schedule doing other things. Me? I would have given up on getting the theater tickets and said, this can't be done and no point in trying. So now we are going to a lot of theater in the next few weeks. Yet a day later, she was already complaining about Muse's limitations. My larger point is that Agentic AI, when it lands like Muse did, into social media platforms and makes itself extremely user-friendly, has the power to change consumer behavior. The larger questions are, is it deflationary? How will it shift consumer spending? And how profitable can it be? As far as I can see, in the last two weeks, we have spent more money, but we are spending it differently. It's targeted spending matching our specific needs. We bought cheaper theater tickets than usual because Muse scoured every website. With a secure payment link, purchases were made. Now, the internet is crackling with the demise of bookings and Expedia, something we'll talk about in the future. The value of their brands could become diminished. However, Valerie spoke to an international travel agent who opined that Muse is extremely limited in its abilities, at least with respect to international travel. The user needs knowledge. For example, designing a trip in Southeast Asia takes a lot of knowledge, and the travel agent does not see her business under serious threat. Despite its limitations, though, Muse is going to play a role in e-commerce. However, what's also clear is that this is a use case that once again probably lacks moats. Meta is first to market, congratulations, Meta, and has an advantage selling its agent into its social media platform, but other agentic AI creators will follow soon. Meta will probably monetize Muse via ads. But this brings up an interesting point, the risk to the very brands paying for advertising. Andrew Walker from yet another value blog points out that his loyalty to Nike sneakers may be at risk now that his agent can match his specific running needs and foot architecture to a sneaker that will make his running better. There seems to be a race to the bottom with AI cannibalizing existing revenue streams to justify the new technology. For example, if Nike is already advertising on Meta's social media platforms and the platforms are directing people to use Muse, which then suggests alternative sneaker brands, the value of brand advertising could be at risk. I wish Andrew happy running and I'll let you know how I like the place. And now for the mailbag. From Peter. Quote, Hello, Steve. In your last... weekly summary you suggest shorting against the box is a way to hedge a position in NVIDIA for example under IRS rule 1259 shorting against the box is deemed a constructive sale and you will have to pay capital gains taxes you might as well just sell the position just wanted to clarify thanks and regards thank you Peter and others who correctly pointed out the limitations of shorting against the box to be clear I am absolutely not endorsing any tax strategy or investment ideas here. Last week, I shared that I was getting nervous about some of my high flyers with large embedded gains, and it seemed prudent to take down some risks to protect some of my gains. Partially shorting against the box in my own account allows me to do this to some degree with important limitations as stated in the federal tax code. I will only discuss what I plan to do, and I urge anyone who is interested to do their own research and consult an expert. If I close out my short position within 30 days of year end and I hold my full long position for an additional 60 days after closing the short position, my short against the box will have achieved my goal of taking down my risk during the fall season. I will take the risk back on in 2027, unless I decide at some point to actually close out positions. My shorting was a timing decision, not a final decision on the underlying investments. This is a legally allowed way of controlling risk. It's worth pointing out that for individuals, risk control is allowed in an extremely limited manner. For institutions, the sky seems to be the limit. This last week on Monday, September 21st, we dropped an interview with George Noble, former PM at Fidelity and now a Substack newsletter writer and podcaster. We discussed interest rates, gold, Tesla, and SpaceX, the precarious nature of the AI revolution, and what would cause this market to unwind. This coming Monday, September 28th, we will drop an interview with returning guest Sam Badry, head of investor relations at Cisco. We discuss how the AI capex cycle has dramatically changed Cisco's revenue and earnings trajectory. And we also discussed the AI revolution from Sam's and Cisco's perspective. So please tune in. The best way to support the Real Eisman Playbook is to subscribe to Substack through steveeismond.com. Subscriptions are free, and we appreciate your support. And that's the wrap. This podcast is for informational purposes only and does not constitute investment advice. The host and guests may hold positions and stocks discussed. Opinions expressed on their own and not recommendations. Please do your own due diligence and consult a licensed financial advisor before making any investment decisions.

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