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The 40% historical recovery rate comes from a long line of companies that actually built things and produced products, often in factories with equipment in them... and a warehouse full of product that didn't sell at full price.

If OpenAI folds, there are two basic scenarios:

- one: the LLM crash has come, and OpenAI barely has any material assets. Microsoft isn't putting more money into it, and they won't take it over -- people with seven figure salaries will be looking for six-figure jobs.

- two: somehow, only OpenAI crashes, and the rest of the LLM boom continues. This likely involves OpenAI being extraordinarily outcompeted, so it's a long slow decline as contracts run out and are not renewed. 40% is probably high, but if JPM can retract the revolving debt before it all goes out the door, not ridiculously high.

> the LLM crash has come, and OpenAI barely has any material assets

They have claims on the use of assets via their leases.

More directly, if AI crashes in the next 2 years, they get bailed out. Between OBBA, tariffs and immigration enforcement, the American economy less AI is probably already in a recession. Trump and the GOP would get desperate if the political leash the AI boom has granted them is shortened. Borrowing another few trillion dollars to fix it would be worth the gamble.

You are much more optimistic than I am about the attention the present regime pays to anyone who wants money from them, versus those who are promising them planes and donations and outright cash bribes.

Bluntly: nobody in the Trump administration has the ability to soft-land the economy. When the ship is undeniably sinking, the rats will flee.

The American economy minus AI is most definitely in a recession. The common people are struggling to buy groceries. Wages have been stagnant and prices go up and up.

The problem is that AI is ultimately a luxury good. Even at it's currently ultra-subsidized rate, it's hard to justify. If it gets any more expensive, no consumers will buy it.

Which might be fine, if we turn to enterprise. Except: a problem. Companies produce goods, which people then buy. AI can replace labor maybe, but it can't replace consumers.

> If OpenAI goes bankrupt, JPMC will get more than 0 on their loan.

Depends what other creditors OpenAI has, and the priority on their claims.

>For some reason I have yet to comprehend, when I was sitting on a credit desk pricing CDS, they always used 40% as the recovery rate.

That doesn't mean its the actual amount they will recover, just that it is sonething like the expected average for a large class given the criteria JPMC uses when entering such a position and the anticipated range and distribution of outcomes when those firms fail.

This, and thanks to certain loopholes in the U.S., it is possible that JPMC may receive nothing at all. Depending on the jurisdiction, companies have been known to sell off all assets for near zero and eventually leave creditors and investors on the hook.

Do you have examples of this? I would like to learn more.

A quick Google search tells me:

    > Generally, a U.S. company can sell assets below cost, as long as the transaction is transparent, conducted in good faith, and serves a legitimate business purpose.

The problem with recovery rates is that they different by orders of magnitude across different borrowers and credit products (for example car loans are around 70%, industrials are a bit loweer at 40%-50%, and high yield credit cards are single digits) so if you have a random sample of credit products in a portfolio it will approximate 40%. What generally happens is that the bank will sell it off to a specialist distressed investor long before the bankruptcy event so 40% is both wrong and not a horrible number to go by.

4) If things don't go great, OpenAI will be looking for more financing. Guess who will help them?

Who? I can only think of the Saudis/UAE and SoftBank.

If Softbank buys OpenAI, they don't just sign a contract and send a cheque. They need powerpoint slides from JPMC to make the deal happen, and that costs money.

> more financing

As we've seen from the NVidia/Oracle and AMD deals, there is more than one way to structure investments. Financing doesn't just mean "deposit cash into my bank account:.

> 3) If things go great and OpenAI ends up buying smaller guys or getting bought out (probably MSFT?) then JPMC will be right in there with those young bankers who don't sleep. They will pull in many many millions in fees with very little expense.

Which is exactly the same argument that the author made, no?

> immediately said 40%, with no explanation

This means the number is wrong.