Investors hunt for protection against AI debt bust

0:03Good morning from the Financial Times. Today is Monday, December 15th, and this is your FT News briefing. Gunmen open fire on a Hanukkah celebration in Australia, and traders are getting nervous about the vast amount of borrowing that's financing the artificial intelligence boom. Investors aren't yet ditching their AI bonds or AI stocks, but they are starting to look for some protection. I'm Victoria Craig, and here's the news you need to start your day.

0:37An attack on Jewish beachgoers in Sydney, Australia Sunday is being treated as an act of terrorism. Gunmen opened fire on an event marking the first night of Hanukkah, which drew more than a thousand attendees. Video footage shows people fleeing as shots can be heard. More than a dozen are dead, with more hospitalized, including two police officers. Australian Prime Minister Anthony Albanese called the attack, quote, an act of evil anti-Semitism. The head of Australia's intelligence agency, meanwhile, said one of the shooters was known to his agency, but not from a, quote, immediate threat perspective.

1:14He said he did not expect the country's terror rating to change from the current level of probable.

1:25What's old is new again in one part of the U.S. financial market. Credit default swaps played a central role in the 2008 financial crisis because they were a way to bet against the housing market. Now they've seen a dramatic resurgence, particularly for individual companies like Oracle, Meta, and Alphabet. That means that costs are rising to protect against the risk that the AI boom turns to a bust. Kate Duguid is the FT's U.S. markets editor, and she joins me now to parse this out. Hi, Kate. Hi. So just remind us what credit default swaps are and how they work. Sure. So a credit default swap is a financial agreement that basically acts like insurance against a company's bond.

2:09It transfers the risk of a bond defaulting from one investor to another. And so the person who's buying the credit default swap gets paid out if the company defaults. And so what has spurred the renewed interest? Like, what's the scale that we're talking about now from investors? So this market has sort of long been dormant. And I will say that activity in the market as a whole has not increased dramatically. But for these single-name AI-related companies. So we're talking about Alphabet, Amazon, CoreWeave, Meta, Microsoft, Oracle. Trading volume in the CDS of those companies has gone from, you know, roughly$3 billion at the start of this year on a weekly basis to over$8 billion today.

2:58And what is the concern about exactly? Because you referenced some of these companies that are playing a big role in the AI boom. Is it nervousness around that? Because last week, we saw a lot of activity in Oracle stock after its earnings report. Yeah. So it's worries that companies are borrowing a ton of money to sort of build out this infrastructure that they won't ultimately need because their AI projects might not work as expected. Oracle CDS has been sort of the bellwether for worries about AI and AI borrowing. Trading in the companies, CDS has more than doubled this year. And that trading really picked up after the company announced that it was going to be borrowing all this money.

3:43That's one thing that I think is very notable for all of these companies is that trading was maybe picking up a little bit this year prior to these bond announcements. But after the announcements that they were going to borrow record amounts of money, sort of between September and November. That's when this move really took off. So have the companies said anything about this activity in CDSs? The companies have not addressed it directly. Certainly they are, I think, alive to questions that have been asked or are starting to be asked about how much they are borrowing. And credit default swaps are theoretically protecting against a company defaulting on its bonds.

4:28Is that the concern from investors now? Investors are not worried that Meta is going to default on its bonds. What they're trying to do is sort of hedge their exposure to this AI boom, right? Everybody in both their bond and stock portfolios has massive exposure to these companies. And so investors are really protecting themselves against big moves in bond prices. The other thing is that the CDS were very illiquid for a long period of time. There weren't a lot of investors trading in them. Some of them didn't even exist prior to these borrowing announcements this fall. And so prices were really out of whack with borrowing levels.

5:11And so it was a really, really, really cheap way for investors to buy some protection, a much cheaper way than shorting the stock. So there aren't necessarily alarm bells ringing on Wall Street just yet. This isn't a signal of that. I would say that this signals investors aren't yet ditching their AI bonds or AI stocks, but they are starting to look for some protection. Kate Duguid, the FT's U.S. Markets Editor, thanks so much for your time. Thank you.

5:44Ukraine peace talks are continuing today in Berlin. the German capital is the backdrop to a series of discussions between European leaders, Ukrainian President Vladimir Zelensky, and a U.S. delegation on a plan to end the nearly four-year war. On Sunday, Zelensky said he's ready to give up on a demand for NATO membership. In exchange, he wants security guarantees from the U.S. and Europe in a style similar to NATO's Article 5 clause. That offers mutual protection for any member under attack. Russia has said it will probably reject all proposals from Ukraine and Europe, and that has thrown doubt on whether U.S.

6:21President Donald Trump's push to end the war can succeed.

6:29Corporate whistleblowers in the U.K. have long complained that they risk their careers to report wrongdoing and in return end up receiving little compensation. But there are efforts now underway to remedy that. My colleague, Michaela Tendera, hosts the FT's Behind the Money podcast, and she's been looking into this issue for a two-part special series. Hi, Michaela. Hi. Thanks for having me. Thanks for being here. So we're going to get to how things are changing in a second, but first, let's just take a little bit of a step back. What prompted you to look into this story in the first place? Yeah, well, the journey that a whistleblower puts themselves through is something that for a long time I've just been really struck by.

7:10These people put their careers and livelihoods on the line in order to report wrongdoing. But what I learned more recently in talking with our colleagues in London, who've been reporting on this for the paper, is that it's essentially like an open secret that whistleblowers in the UK just have a pretty rough go of it. And you've spoken to some of those people. What have they told you about their experiences? What struck me was how this experience really took over their lives for a period of time. George Patelis was one of the people I spoke with. He reported wrongdoing at a U.K. firm called Tayuda in 2011.

7:48And he's still dealing with the fallout 14 years later. My help suffered. I was diagnosed with PTSD. and to this day I'm still taking medication and I still see a psychiatrist every couple months. So the blast radius on these sort of things is wide. It's not, none of it's isolated. This didn't just affect me. It affected my wife, my kids. So, Michaela, why is it so difficult for those who want to report wrongdoing to be able to do it? Yeah, that's a good question. The whistleblowers I spoke with had a number of criticisms about the U.K.'s Financial Conduct Authority. They worked with the FCA to report their claims.

8:35But I think one of the biggest challenges is that oftentimes these whistleblowers make their report and their career is effectively over. They can't find work at the same level that they were at before. Now, in the U.S., that blow is softened a bit because whistleblowers can be eligible to receive some sort of compensation if, say, a fine is levied against the firm that they made the report about. But in the U.K., that hasn't really been the case. And one of the arguments I kept hearing for why whistleblowers aren't paid in the U.K. is because it's just not British. But the interesting thing now is that the UK is focusing on beefing up protections around compensation for whistleblowers.

9:20Yeah, that's right. It does seem like things are shifting a little bit. I spoke with Nick Effgrave. He is the head of the UK's serious fraud office. And since he started in this position in late 2023, he's really been agitating for whistleblower rewards. We need this thing in this country, you know, a massive improvement in our ability to detect and prosecute corruption, protecting the UK's economy, protecting victims, bringing justice more swiftly. And if I can make that happen, at least help make it happen, I'll be a very happy man. And as it turns out, we're really starting to see some shifts throughout the UK government.

9:58One example is that at the end of November, just a few weeks ago, in the government's autumn budget, it was announced that the U.K.'s tax authority, the HMRC, would be paying whistleblowers up to 30 percent of any tax recovered as a result of the information that they turn in. My colleague who I worked with on this, Susie Ring, told me that this closely mirrors the way that the IRS, the U.S. tax authority, handles whistleblower payments. So that, to me, shows that the U.K. is really starting to take a leaf out of the U.S.'s book in this regard. And, Michaela, you've taken a deep dive into this in the second episode of your special series, which is out today.

10:38Listeners can find the link to that in our show notes. Michaela Tendera, host of Behind the Money. Thanks so much for telling us about this. Yeah, thanks.

10:52Before we go, it might be the week before Christmas, but all is not quiet in the economics world. This week is a big one. Here in the U.S., a pair of key figures are due out Tuesday and Thursday. Those include the delayed November jobs report and inflation figures. The data will provide the best read in months on the trajectory of the world's biggest economy after the longest government shutdown in history delayed regular releases. It also comes after the Federal Reserve's rate decision last week showed deep divisions within the central bank over whether to prioritize a weakening jobs market or creeping inflation.

11:28Across the world, meanwhile, the Bank of England is expected to cut its benchmark interest rate for the sixth time since last summer, while the European Central Bank is likely to keep rates on hold, and the Bank of Japan could either hold or increase its rate marginally. You can read more on all of these economic stories and all the others featured in today's show for free when you click the links in our show notes. This has been your daily FT News Briefing. Check back tomorrow for the latest business news.