Authored by Patrick Feeley via Substack,
Very few people in the AI financing debate are reading the deals like a credit trader would. We have had a week of headlines about who is raising what. Amazon is moving $8 billion of chips off its balance sheet. Broadcom is lending $42 billion to its own customer. Nvidia is offering to backstop $125 billion of the debt people use to buy Nvidia. The coverage treats each number as a scoreboard. Hardly anyone asks the question that matters once the paper is sold, which is who is holding the risk and whether they know it.
There is one person who would have asked. He went to federal prison, and he was also right about a version of this problem forty years before almost anyone else.
Berkeley, 1965.
In 1965 Michael Milken was an undergraduate at Berkeley when he came across an NBER monograph by W. Braddock Hickman, Corporate Bond Quality and Investor Experience, published in 1958. Hickman had gone through decades of corporate bond records, from 1900 to 1943, and reached a conclusion that should have been scandalous. Investors usually overestimated the risk in higher-yielding bonds. They treated the rating as the risk, and the rating was wrong often enough that the paper everyone feared tended to do better than its reputation.
Milken later wrote that he "was stru
