It’s a shame that the Obama administration didn’t pay as much attention to the details of Solyndra’s business plans and financial liabilities as it did to the details of the President’s photo op at the company’s facility on May 26, 2010. But, given the rampant mismanagement and weaknesses associated with the Energy Department’s whole loan guarantee program, there was no incentive to do so.
Even though the company just laid off 1,100 employees, the Obama administration could still tout Solyndra as a job creator, because keeping tabs on the rapidly emerging scandal could be a full time job.
Every day brings new and more damning revelations; today’s news stories will revolve around the spectacle of the hearings on Capitol Hill featuring company executives robotically asserting their right to remain silent after very congressional query; not going to be a bright spot for the White House, that is certain.
Today’s New York Times article outlines the basics:
The government’s backing of Solyndra, which could cost taxpayers more than a half-billion dollars, came as the politically well-connected business began an extensive lobbying campaign that appears to have blinded government officials to the company’s financial condition and the risks of the investment, according to a review of government documents and interviews with administration officials and industry analysts…Some lawmakers on Capitol Hill question whether the firm’s executives may have engaged in a cover-up of their precarious financial condition, allegations the company denies.
But, as sensational and tenacious as the Solyndra scandal is turning out to be, it really should have come as no surprise.
The underlying catalyst for the boondoggle is the Department of Energy’s Loan Guarantee Program (LGP) itself.
The Government Accountability Program (GAO) has written no fewer than four reports limning the contours of a mismanaged, capricious, unaccountable loan program, awash in stimulus money, which grew aggressively both in dollar authority and in policy scope….a fiscally deadly combination. It doesn’t even take a close reading to see that the GAO was sounding alarm bells almost from the LGP’s inception. It had all the characteristics of a rogue program that would sooner or later lead inexorably to a Solyndra-like implosion.
Solar energy expert Peter Lynch told ABC News and others that the pitfalls of Solyndra’s business model were accessible to anyone reading the company’s prospectus:
It’s very difficult to perceive a company with a model that says, well, I can build something for six dollars and sell it for three dollars…Those numbers don’t generally work. You don’t want to lose three dollars for every unit you make.
Undeterred, Solyndra executives recognized new funding opportunities under the incoming Obama administration (the company’s largest private investor was also an Obama campaign bundler); it redoubled its efforts, spending $1.8 million in lobbying the Department of Energy.
The Daily Caller reported that Solyndra executives and investors visited the White House 20 times between March, 2009 and April 2011.
The program was first authorized in 2005 under the Bush administration as a way to fund innovative energy projects, decrease air pollutants and greenhouse gases by employing new or significantly improved technologies. But the Bush administration passed on funding Solyndra’s project, concerned over the way it was pricing its technology vis a vis its competitors.
The LPG was cited in all four GAO reports for putting the funding cart before the oversight and due diligence horse, for making arbitrary decisions on winners and losers, for internal management weaknesses, and for having an appeals process that could either be characterized as “flying-by-the-seat-of your-pants” or nonexistent. The GAO virtually predicted the Solyndra debacle when it said in its July, 2008 report that:
Risks inherent to the LGP will make it difficult for DOE to estimate subsidy costs, which could lead to financial losses and may introduce biases in the projects that receive guarantees….The likelihood that DOE will misestimate costs, along with the practice of charging fees to cover the estimated costs, may lead to biases in the projects that receive guarantees. Borrowers who believe DOE has underestimated costs and has consequently set fees that are less than the risks of the projects are the most likely to accept guarantees. To the extent that DOE underestimates the costs and does not collect sufficient fees from borrowers to cover the full costs, taxpayers will ultimately bear the costs of shortfalls.
Of course, the Obama administration’s take is very different. According to Energy Department official Matthew C. Rogers:
We had to knock down some barriers standing in the way to get these projects funded…” Mr. Rogers said Energy Secretary Steven Chu had been personally reviewing loan applications and urging faster action on them.
In another disturbing twist, Energy officials restructured the Solyndra loan early in 2011 to make taxpayers’ subordinate to private sector investors, which appears to violate the law. According to Washington Times investigative reporter Jim McElhatton:
The restructuring of the Solyndra loan, months before the company collapsed, has raised serious concerns that taxpayers weren’t as well protected as some of the company’s biggest private investors in case of a liquidation. Under a restructuring deal earlier this year, the Energy Department agreed that $75 million in new funds from investors Argonaut Private Equity and Madrone Capital Partners would be paid back in the case of a liquidation before the hundreds of millions of dollars loaned to the company by taxpayers.
Even there, however, the original 2005 statute states that the language requires projects to have a “reasonable prospect of repayment,” pretty weak language with plenty of room for finessing by any $450/hour lawyer.
The LGP program is a toxic brew to begin with, even when all players are operating above board and free of political or self-interested financial agendas. Add in a torrent of unaccountable stimulus money, an administration driven by an aggressive environmental agenda, and rampant conflicts of interest; a flare up was inevitable.
Government officials do not have the expertise to make the decisions about funding emerging technologies in volatile industries, such a solar energy. More to the point, they are not investing their own money, but the taxpayers’ money. That is why we have private equity markets; private-sector investors routinely make financing decisions based upon a close vetting of the companies’ fundamentals and a meticulous analysis of market conditions. When private money is at risk and there are rewards to be reaped, the market will markets will their own money is involved, they will delve much more deeply into the details and with a lot more healthy skepticism.
The loan program itself skewed the company’s behavior, incenting it to worry more about its political status and in pleasing its government benefactors in the Energy Department and the White House than in making sound business decisions. And the government’s involvement also had personal financial ramifications for the company executives. A September 16, 2011 Wall Street Journal article describes company executives behaving almost giddily at the prospect of cashing in at the taxpayers’ expense:
In mid-2009, Solyndra had a choice: It could hunker down with its existing factory and try to slash costs to meet competition, drawing on additional private capital as needed, according to the people familiar with the company. Or, with a loan from Uncle Sam, it could gamble and build a brand-new, bigger factory in a bid to gain economies of scale and dominate the market…
Solyndra’s founder and chief executive at the time, Chris Gronet, decided to go for the gamble. “Chris was really a hard driver,” said the former executive involved in the production of the solar panels. “The faster you solve problems, the faster you build your infrastructure, the quicker you are to market. You spend money to solve problems.
There was another motivator—Solyndra’s management and investors had an eye on an initial public offering. “There was a perceived halo around the loan,” said an investor with knowledge of the company. “If we get the loan, then we can definitely go public and cash out.
Needless to say, that decision turned out to be another in a long line of bad decisions, but this time taxpayers will pick up the very expensive pieces.
The Congress and the Department of Energy’s Office of Inspector General are all hell bent on getting to the bottom of the Solyndra scandal, which is all well and good. However, the LPG program itself is illustrative of what can and often does go wrong when an invasive federal government creeps into industries and areas where it does not belong and, more to the point, where it is not needed. It is outrageous that a risky taxpayer-underwritten federal loan program can be leveraged with impunity to create billionaires.
Once Congress sheds a bright light on the depths and breadth of the Solyndra scandal, it should move to turn the lights off on the Energy Department’s loan guarantee program and protect taxpayers from being burned like this again.
Oh, and file these two tidbits under “adding insult to injury for taxpayers”:
One, according to Jim McElhatton at the Washington Times, Solyndra used millions in stimulus money to retain highly-paid lawyers and consultants to structure the original deal and presumably, the subsequent modification to the loan to ensure that, in the event that the company was forced to liquidate, the company’s investors would be repaid before taxpayers.
Two, the company has, of course, lawyered up to deal with the multiple investigations and its impending bankruptcy and the fees that will be paid for the company’s posse are eye-popping. Former Massachusetts Governor William Weld will rake in $8Xx per hour for his work, xxxx , and a former Reuters report will be paid $425 per hour for his crisis management advice. The more money that these folks absorb, the less there will available to repay taxpayers when it’s all said and done. (I am betting there will be NONE).
Three, 1,100 ex-Solyndra employees are applying for federal trade adjustment assistance, which is more extensive than average unemployment benefits. If the company is permitted to claim that its demise was the direct result of unfair trade practice by the Chinese, they would be eligible for job retraining, allowances for job searching, health benefits, and up to 130 weeks of income support. That aid is estimated to cost $13,000 per worker for the coming year; but what’s another $14.3 million after losing $535 million.