Situational Awareness hedge fund meltdown was a warning shot for leveraged markets, BofA CEO says

Bank of America CEO Brian Moynihan on Wednesday called the recent near-collapse of high-flying AI hedge fund Situational Awareness a warning shot for financial markets that are being fueled by elevated valuations and borrowed money.

Situational Awareness, led by Leopold Aschenbrenner, was forced to offload most of its public equities to Citadel last week in a fire sale as its bets on artificial intelligence soured. Bank of America was among the firm's prime brokers, executing trades and providing leverage to the fund, along with Goldman Sachs and JPMorgan Chase.

"These are all warning shots," Moynihan told CNBC's Andrew Ross Sorkin. "Valuations get out, leverage in the system gets there. You have to be careful."

Moynihan's comments suggest Wall Street's largest prime brokers are reexamining their exposure to highly leveraged investment firms as the AI trade has fueled surging markets, even as they continue competing aggressively to finance hedge funds. Situational Awareness rode a wave of AI optimism since its inception in 2024, ballooning to a peak of $45 billion in assets before last week's reckoning.

The meltdown of Situational Awareness is the latest case study in the perils of leverage. As technology stocks pulled back, the fund faced mounting margin calls from its prime brokers. To meet those demands, it was forced to sell positions into a falling market, accelerating losses and triggering a downward cycle that threatened the firm's survival.

"You always look and say, 'OK, what happened? Should we learn from it? Should it change?'" Moynihan said. "And so the tendency is to tighten the underwriting standards, just a hair, to adjust — especially with big run-ups in stocks."

Still, Bank of America would've been "fine" even absent the Citadel deal, which provided capital for Situational Awareness to pay off its banks, Moynihan said.

Situational Awareness held concentrated positions in AI hardware suppliers, including South Korean memory-chip maker SK Hynix. Word of the fund's woes sparked a fresh selloff in AI-related shares last week, as investors worried more stock could hit the market if the positions were unwound in a disorderly fashion.

Once Citadel stepped on Thursday, those fears eased. Shares of several AI infrastructure companies rebounded sharply, immediately boosting the value of the positions Citadel had acquired.