Solar Energy Firm’s Bankruptcy Calls Obama’s “Green Jobs” Program Into Question
Ordinarily a Chapter 11 filing by yet another solar energy firm would not be news, bankruptcies in the industry are rather common it seems. However, the bankruptcy filing by a Silicon Valley firm yesterday is raising questions about the Obama Administrations “Green Jobs” program, and leads one to wonder why the Federal Government is providing loan guarantees to companies in an industry with a history of insolvency:
WASHINGTON — A Silicon Valley maker of solar power arrays that was started with high hopes and $527 million in loans from the federal government said on Wednesday that it would cease operations. The failure of the company — and the loss to taxpayers — is likely to renew the debate in Washington about the wisdom of clean energy subsidies and loan guarantees.
President Obama praised the company, Solyndra, for its advanced technology during a visit last year. But in a statement on Wednesday, Solyndra said its business had run into trouble because of difficult global business conditions, including slowing demand for solar panels, and stiff competition.
The Energy Department, which approved the funding, said China’s subsidies to its solar industry were threatening the ability of Solyndra and other American manufacturers to compete. The price of a solar array, measured by cost per watt of capacity, has fallen 42 percent since December 2010, the agency said.
Two other American solar companies, Evergreen Solar and SpectraWatt, also sought bankruptcy protection in August, and both said competition from Chinese companies had contributed to their financial problems.
In the case of Solyndra, some experts said that regardless of the competition, the company’s unique designs, which were expensive to manufacture, were to blame for its failure.
Solyndra was promised loans of up to $535 million under a guarantee program authorized by Congress as part of the 2009 stimulus package. The Energy Department has made more than 40 promises of guarantees, of which Solyndra was the first. It has committed $18 billion in guarantees and expects to allocate several billion dollars more by the time the program finishes at the end of September.
The government calculates premiums for the guarantees, essentially a loan fee based on the risk of default, but it picks up the cost of the premiums for the companies in the subsidy program. By that yardstick, it has spent $2.4 billion in credit subsidies for the program.
This was not a typical government guaranteed loan. Rather than being provided by a commercial bank and guaranteed by the government, the loan was provided by the government itself through an entity known as the Federal Financing Bank, a division of the Treasury Department. In essence, then, the program was loaning taxpayer dollars to these companies with one hand, while guaranteeing the repaying of these loans to the FFB, also with taxpayer dollars, with the other. Neither Solyndra nor any of the other companies that benefited from these “loans” (it’s really more appropriate to call them gifts) assumed any risk. All the risk was assumed by the American taxpayer, which makes the appallingly bad judgment that was apparently used here even more egregious.
In the case of Solyndra, one has to wonder how the company ever qualified for loan guarantees to begin with. The company has never recorded a profit in its entire history and earlier this year cancelled an expansion that was supposedly going to be financed in part by the loans received through the Obama Administration program. Just a year ago, PriceWaterhouseCoopers issued a scathingly negative report on the company two months before President Obama went there to tout the company as an example of his investment in “Green Jobs.” It leads one to question both the criteria that were used to determine who gets the loan guarantees to begin with, and the political judgment of the White House in choosing this particular firm to showcase the President’s economically dubious idea that subsidizing so-called “Green Jobs” will somehow create demand for “Green” products where it doesn’t currently exist.
At least one Member of Congress is raising questions about how Solyndra was able to qualify for this Federal gift despite having no record of actually making money, and plenty of reasons to doubt it could succeed:
“In an apparent rush to push stimulus dollars out the door, the Obama administration wasted $535 million in taxpayer funds in guaranteeing a loan to a firm that has proven to be unviable in the global market,” said Representative Cliff Stearns, the Florida Republican who is chairman of an investigative subcommittee of the House Energy and Commerce Committee.
He said the Energy Department might have authorized the guarantee because an Oklahoma oil man who was a donor to the Obama campaign, George Kaiser, was an investor in the project. In a joint statement, Mr. Stearns and Representative Fred Upton of Michigan, the chairman of the committee, said, “We smelled a rat from the onset.”
But the Energy Department dismissed that assertion, saying that Solyndra applied for federal help during the Bush administration and that Obama-era officials merely finished the process the Republicans had begun.n
That last bit, of course, doesn’t really answer the question of whether or not political connections inside the Obama Administration helped Solyndra gain approval for participation in the program, which apparently didn’t come until well after George W. Bush had left office.
As Bruce McQuain points out, this case is a microcosm of what happens when government tries to do something it isn’t designed or intended to do. Traditionally, start up companies like Solyndra start out by getting their initial working capital from a combination of the assets of the owners, private investors, and venture capitalists. Given that Solyndra is located in the center of the venture capital world, where tech companies that won’t show a profit for years are given money by VCs who believe that they’ll one day be something big. The number of tech companies that are household names today that started out this way is quite large. But venture capitalists are risking their own money, or the money of people who have entrusted them with the decision making authority to choose investments, and they’ve typically got experience in the industries in which they’re investing. More importantly, most large VC investments come with strings attached that include bringing in professional management, and otherwise guaranteeing that what started out as a project between friends is run professionally by people who make sound business decisions.
None of that is true when the decisions are being made by the government. For one thing, the people who make the decisions aren’t playing with their own money and they don’t owe any fiduciary or contractual obligations to the people whose money they are investing. If a VC makes a bad judgment on an investment, he either loses his own money or likely loses investors. If a government bureaucrat makes a bad judgment on a program like this, they’re unlikely to lose their job, they haven’t lost their own money, and all they need to do when the loan guarantee has to be paid is send the bill to Congress. They don’t have the incentive to make the right decisions, and they likely don’t have the experience either. And they’re playing with your money and mine.
One final point is worth noting. If Solyndra was not able to obtain venture capital funding in Silicon Valley of all places, that fact alone should have raised eyebrows. As it turns out there were significant problems with the company’s business model and its product design that were pointed out long before the loans were approved by Treasury. These concerns were either not known to the decision makers, or they were ignored in the name of helping a “Green” company. Neither choice is good.
NBC’s Bay Area affiliate calls the bankruptcy a political catastrophe for the President. While I’m not sure I would go that far, it is certainly Exhibit A in the case against the kind of “smart people” Industrial Policy that Democrats have longed to engage in for years, and which President Obama foolishly went forward with in the name of “Green Jobs.”