Solyndra and Commodity Markets: Volatility Giveth and Taketh Away

Edward Tenner Sep 27 2011, 11:28 AM ET

It wasn't government mismanagement that brought Solyndra to bankruptcy; it was soaring silicon prices

The Los Angeles Times presents more details on the Solyndra bankruptcy without resolving the question. If this was a politically-linked scam, why were so many people with no ties to the Democrats or the green movement so keen on it at first?

It was market forces -- soaring prices for high-quality silicon -- that brought hundreds of millions of dollars in private investments before federal loan guarantees kicked in:

"They were considered very exciting," said Shayle Kann, managing director of consulting firm GTM Research's solar practice. "They had the potential to substantially reduce solar costs at the time, and they had attracted an enormous amount of private investment."

One investor, British billionaire Richard Branson's Virgin Green Fund, bragged that it had selected only Solyndra from a pool of 117 solar companies seeking backing. Other investors included billionaire Oklahoma oil baron George Kaiser, and a fund that manages the money of the family behind Wal-Mart Stores Inc. Wall Street heavyweight Goldman Sachs Group Inc. was its lead investment banker.

"Very high-profile money was all over that company," said Bailey, the investment banker. "Nobody else had anything as strikingly different as Solyndra."

When the company emerged from what it called "stealth mode" in October 2008, it had already raised $600 million and was the toast of Silicon Valley.

Seeing Solyndra as partisan corruption overlooks the breadth of enthusiasm: "Even as the company was losing millions, the Wall Street Journal ranked it the top clean-tech company in the country." And it was the Energy Department under George W. Bush that promoted the loan guarantee program, as David Milbank reminds us in the Washington Post, and helped the Solyndra application along.

The crash of silicon prices and aggressive pricing by Chinese competitors wrecked the original business plan. Was there fraud? Invocation of the Fifth Amendment by company executives is no admission of guilt but suggests at best that the facts will be at least embarrassing.

Commodity cycles have long been an underestimated peril of technology investments. I remember a college acquaintance in Chicago, an architect who in the early 1970s had a promising idea for a structure for pigs as a more humane and cleaner alternative for freedlots. Then came the 1970s oil embargo and fuel costs wrecked the business plan -- to my knowledge, before a first round of investment. But what if he had proposed and funded his innovation a few years earlier?

Perhaps the most notorious case of timing involved an Austrian-born hedge fund manager, Michael Berger, who pleaded guilty to securities fraud in 2002, then fled to Austria and has avoided extradition under Austrian law. Berger, the subject of a riveting documentary, actually was right about the dot-com bubble when he started Manhattan Investment Fund, Ltd. in 1996. If he had been able to hold out for a few months longer, he might be a billionaire hailed as a Wall Street prophet rather than sought as a fugitive.

I've already discussed the messiness of fundamental innovation here. Solyndra is a reminder of another dimension of risk. The same volatile commodities markets that help create technological opportunities can also destroy them, whether prices soar or crash or just fluctuate wildly. Even a sound basic idea can fall into a temporary trap. Whatever the verdict on Solyndra, it may, like other failures, have a lot to teach us.

Image Credit: Reuters