Michael Burry, the investor known for betting against subprime mortgages before the 2008 financial crisis, is warning that AI-linked debt securities piling up in the private credit market could trigger a broader economic problem.
Burry shared a research paper on his Substack that examines how private equity firms have been acquiring insurance companies and loading them with asset-backed securities. His specific concern: much of that debt is now tied to AI infrastructure.
"Those asset backed assets and structured securities are increasingly coming off data center and chip leases," Burry wrote. "This is where the possible contagion takes down the economy - by withdrawing funding for the data center buildout, which is also an increasing part of United States economic growth."
Why insurers are at the center of the risk
The paper Burry cited focuses on a structural issue unique to insurance. Unlike banks, which have federal deposit insurance, insurers are backstopped by state guaranty programs. That means taxpayers absorb losses if an insurer fails, a system the paper's authors say "socializes losses more sharply than banking's federal deposit insurance."
Burry has spent much of this year calling the AI market a bubble. He announced short positions against Nvidia and Palantir, and in April said both private credit and private equity are nearing the "end of the road."
Rising rates could force a reckoning
Burry said higher interest rates may be the trigger that exposes the fragility of these debt structures. He pointed to the 10-year Treasury yield, which closed at 4.68% on the day he posted his warning.
"That is not acceptable to the PE boys, who have been holding their collective breath for a long while now," he said.
The yield has risen sharply over the past five years, making debt-fueled mechanisms at the heart of the private equity-private credit complex increasingly hard to sustain. Burry said private equity firms have been "kicking the can down the road," but that won't work if rates keep climbing.
"Nothing virtuous about this process," he added. "This is Private Equity kicking its final can down to the end of that very long road. Taxpayers wait there."
Why this matters for insurance professionals
If you work in insurance, this isn't an abstract market debate. The investments Burry is flagging sit on insurer balance sheets, and the people managing those portfolios may be taking on more illiquid risk than their policyholder obligations can safely support.
For actuaries, underwriters, and risk managers, the practical takeaway is to examine your own company's exposure to asset-backed securities tied to data center and chip leases. The structures may carry attractive yields, but the underlying collateral depends on a single industry's continued spending. If AI funding tightens, those assets could lose value quickly - and unlike a bank, an insurer can't rely on a federal backstop if the losses pile up.
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