Solyndra Gets More Scandalous

Last week, I wondered if Solyndra, the bankrupt California solar panel firm, was going to be the first real scandal of the Obama administration.  This week, I watched the Energy and Commerce hearings on the Solyndra decision, and there was some pretty fierce grilling going on, even though the Solyndra executives dropped out at the last minute.  Meanwhile, though the White House has maintained that it did not intervene in the Solyndra loan, yesterday the Washington Post broke the news that the White House had pressed the Office of Management and Budget to greenlight the loan in a hurry.

The August 2009 e-mails, released exclusively to The Washington Post, show White House officials repeatedly asking OMB reviewers when they would be able to decide on the federal loan and noting a looming press event at which they planned to announce the deal. In response, OMB officials expressed concern that they were being rushed to approve the company's project without adequate time to assess the risk to taxpayers, according to information provided by Republican congressional investigators.

Solyndra collapsed two weeks ago, leaving taxpayers liable for the $535 million loan.

One e-mail from an OMB official referred to "the time pressure we are under to sign-off on Solyndra." Another complained, "There isn't time to negotiate."

"We have ended up with a situation of having to do rushed approvals on a couple of occasions (and we are worried about Solyndra at the end of the week)," one official wrote. That Aug. 31, 2009, message, written by a senior OMB staffer and sent to Terrell P. McSweeny, Biden's domestic policy adviser, concluded, "We would prefer to have sufficient time to do our due diligence reviews."
ABC previously reported "White House officials have said in interviews that they did not intervene in the Solyndra deal or others benefiting companies backed by supporters of the president." Forgive me, but these two passages do not sound entirely consistent.  The administration, perhaps realizing this, now says that they were just, well, very interested in the timing of the release.

That doesn't mean that we're going to uncover corruption. In fact, I doubt that the important story here is the one conservatives are pushing, that a major fundraiser was involved in the company.

It's possible, of course, but national politicians tend to have enough sense to steer clear of such grubby quid-pro-quos.  Rather, I think that the real story that's emerging is one of questionable judgement.  These loans were part of ARRA, which because the Democrats treated it like a Christmas list for all sorts of things they'd been wanting to do for decades, was full of things that didn't really make for optimal stimulus.  Because they were "stimulus", instead of "stuff we'd like to do", money had to be moved out of the door as fast as possible.  Meanwhile, the administration seems to have wanted photo-ops to sell their stimulus program, which inevitably meant pressure to move things even faster.  And once they'd attached their names to this high-profile project, they may well have taken inappropriate steps to try and avoid an embarrassing failure.

Consider the initial decision to make the loan.  The White House has been making much of the fact that the process was initiated under the Bush administration.  But according to ABC, after considering the project, the Bush Administration turned it down:

The results of the Congressional probe shared Tuesday with ABC News show that less than two weeks before President Bush left office, on January 9, 2009, the Energy Department's credit committee made a unanimous decision not to offer a loan commitment to Solyndra.

Even after Obama took office on Jan. 20, 2009, analysts in the Energy Department and in the Office of Management and Budget were repeatedly questioning the wisdom of the loan. In one exchange, an Energy official wrote of "a major outstanding issue" -- namely, that Solyndra's numbers showed it would run out of cash in September 2011.
How did this project suddenly go from red-light to green light in three months? Supporters tout the fact that the Bush-era panel had turned it down "without prejudice" and says that it passed because the loan package three months later was much stronger. But what was so much improved when the company had never made a profit, and was scheduled to run out of money in . . . er . . . September 2011?  And why was the loan given conditional approval before the legal and marketing reports were all in?  Jonathan Silver, the director of the DOE office that oversees this program says that this is standard, but according to ABC, the GAO disagrees.

The administration's rather wan defense seems to be that private investors put more than $1 billion of their own money into the firm.   But the fact that some idiot, somewhere was willing to bet on something is not reason for the government to follow suit--otherwise, we'd be sending people from DOE to the Bellagio every week to put buckets of cash on red.

Moreover, at least according to this timeline from Joe Romm--who is very friendly to the deal--prior to the loan guarantee, Solyndra had raised only $450 million on the strength of its technology (a non-silicon-based solar panel, at a time when silicon prices were very high).  This implies that more than half of the money was raised after the feds agreed to a $500 million dollar loan guarantee at extremely attractive below-market rates.

It's not exactly surprising that investors were willing to take a little flyer on a high-risk project that was being heavily subsidized by Uncle Sam--especially since the signal of the subsidy may have served, for some investors, as a substitute for doing their own due diligence.  But I'm not sure that this can serve as evidence that the government's investment was a good idea.

After all, the investors had the potential for upside.  For the government, there was no upside: they were on the hook if the loan failed, but all they got if the loan succeeded was the psychic benefit of a job well done.  And if I'm doing the math right, and it's true that Kaiser, the largest backer, had a roughly 35% stake in the firm, then it looks like the government had by far the largest exposure on Solyndra, even though from the taxpayer's point of view, this deal was "Heads you win, tails I lose."

As if that wasn't bad enough, by November of last year, the company was teetering.  Its technology was essentially a large bet that prices of silicon would stay high, making its product competitive.  It's never clear that this was a good bet--Peter Lynch, a solar industry analyst, told ABC that "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."  But in 2009, thanks to expanded capacity and a recession-induced decline in demand, the price of silicon-based panels began falling.  In June of 2010, the company pulled its IPO.  In November, it laid people off and seems to have been on the brink of bankruptcy.

Last February, there was a hail-mary financing round in which the firm raised $75 million.  But to secure that deal, the administration had to agree to take a back seat to the new investors. Today, the DOE's Silver argued that this was the right decision, because quitting then would have meant liquidation, while now it can be reorganized as a going concern.  Mr. Silver knows more about Solyndra's operations than I do, of course, but I am struggling to see how it can be "more valuable" as a going concern manufacturing products that cannot be sold at a profit.  This is not a case of a company that has crippling debt or legacy costs, or a temporary cash flow problem, which can be resolved in bankruptcy.  It seems to have a permanent structural gap between the cost of manufacturing its products, and the price at which people are willing to buy them.

Given this, I find it hard to understand how the government can have been better off subordinating its claims so that Solyndra could blow through an extra hundred million dollars or so.  Former hedge-fund manager Bruce Krasting makes a compelling case that the main value of Solyndra as a "going concern" is its Net Operating Loss carryforwards.

So what?  I hear you cry.  Well, for those of you who did not have to take several semesters of accounting, an NOL carryforward allows you to use losses from past years to reduce your taxable income in future years.  So if you lose $100,000 in one year, but make $300,000 the year after, you can sort of average them together, and only have to pay taxes on $200,000. (I'm simplifying madly, but this is the general idea.)

These are not supposed to carry through bankruptcy, but in some circumstances they can. Krasting is suggesting that the only reason another company would buy Solyndra is to use its NOLs as a tax shelter.

That's certainly a good deal for the creditors in line ahead of the government; depending on the price another company is willing to pay for those NOLs, they may get all their money back.  But even if DOE gets some money back from the sale, this is not a good deal for the government, because if Krasting is right, 100% of the value of the sale comes from foregone tax revenue. (To be sure, that's a big if--but it's all too plausible.) Adding another nine months of losses to the books might have upped the value of the firm to a potential buyer . . . but only because it was transferring even more money out of the government's pocket and into the pocket of private firms.

Obviously, this story is still developing.  But at the moment, it certainly doesn't look good.

But as Doug Mataconis and Tim Cavanaugh point out, the reason that it doesn't look good is not, as some conservatives seem to be dreaming, because it exposes some deep corruption at the heart of the Obama administration.  Rather, it exposes how badly these things can go wrong when government bureaucrats are assigned to make political dreams come true with Other Peoples' Money.

The problem with Solyndra is not George Kaiser. It's the whole concept behind a program that is supposed to enable politically favored technologies, using loan guarantees that look cheap when they're issued, and end up costing us half a billion dollars because we rushed the due diligence to make sure top officials got a good photo op.  As I wrote the other day, "When banks engage in this sort of behavior, we call it a bubble, and try to figure out how to fix things so they won't do it again. When government agencies do this, we call it a weekday."