The spectacular collapse of Solyndra has all of the trappings of an epic Washington scandal, with serial revelations of embarrassing and potentially improper White House machinations to secure a $535 million federal loan guarantee for a startup company with dubious prospects of success. The sudden bankruptcy of the Fremont, California, manufacturer of solar panels after it was feted as a model creator of "green jobs" by President Obama and Vice President Biden has already featured FBI raids, contentious congressional hearings, and demands for a special prosecutor to investigate. The plot thickened further last week when Solyndra's two top executives, who made 20 trips to the White House while their loan application was under consideration, invoked the Fifth Amendment rather than answer questions from the House Energy and Commerce Committee.
Even if the administration eventually escapes any finding of legal wrongdoing, Solyndra threatens to haunt the green energy campaign in much the same way that the collapse of Lincoln Savings became the emblem of the savings and loan industry's recklessness in the 1980s. The Solyndra story includes Obama campaign donors and everybody's favorite Wall Street whipping boy, Goldman Sachs, in the middle of the whole sorry mess. Yet it would be a mistake to mark the story down as merely another excrescence of crony capitalism. It is much worse.
The green energy lobby is probably hoping that Solyndra's failure can be portrayed as an isolated case of illegal influence, lest it cast a shadow over the entire edifice of massive subsidies that green energy requires to survive. But Solyndra is merely the most spectacular of several recent green energy failures. And beyond the domain of green energy, the Solyndra fiasco is emblematic of the Obama administration's economic philosophy, which harks back to the mid-20th-century hubris of state-planned enterprise. It is also fair to note that the origins of this fiasco predate the Obama administration, and illustrate the continuing incoherence and wishful thinking of U.S. energy policy.
Here's what we know so far: Solyndra was founded in 2005 on the concept that lightweight, high-efficiency thin-film solar panels in a unique tubular design could compete effectively with traditional silicon-based flat panels. Thin-film solar is the energy equivalent of thin-thigh diets dazzling results are always promised but seldom delivered. Still, the high price of silicon solar panels at the time, along with $78 million in initial capital from several investors, including the Walton family (of Walmart fame) and George Kaiser, an Oklahoma energy billionaire and subsequent donor to the 2008 Obama campaign, were enough to get the company up and running in 2006. At roughly the same time, Congress passed and President George W. Bush signed the Energy Policy Act of 2005, another in a long series of energy acts that essentially gave a little to "all of the above" on everyone's wish list. One section of the law created a new loan guarantee program in the Department of Energy "to support innovative clean energy technologies that are typically unable to obtain conventional private financing due to high technology risks." In other words, it was intended to back projects too unpromising for the marketplace.
Solyndra came knocking at the DOE's loan office in December 2006 asking for a loan guarantee to enable it to build a brand new manufacturing facility in Fremont. (The loan amount requested in the initial application has been redacted from the publicly available documents.) This was only a few weeks after the DOE announced the program but before Congress had appropriated funds and before DOE had even begun the formal rule-making process for the program. DOE didn't issue the final regulations until October 2007, so the due diligence process for Solyndra and every other applicant spilled over into 2008. DOE's main interest with the loan program at that time was in pushing nuclear power technology and improvements to the electricity grid. So Solyndra's application proceeded slowly. Meanwhile, Solyndra raised another $144 million in private capital during 2008.
In the closing days of the Bush administration in January 2009, the Department of Energy tried to get the Solyndra loan through the Office of Management and Budget's review, but the OMB team found Solyndra's application insufficient. OMB "remanded" the application back to DOE for further review and modification. As when the Supreme Court remands a case to lower courts for reconsideration, this step is usually tantamount to killing the application.
But then along came the American Recovery and Reinvestment Act of 2009, better known as the Obama stimulus, which put the DOE clean-energy loan guarantee program on steroids. The stimulus nearly doubled the budget authority for loans (even though the existing program had yet to make its first loan), and set a deadline of September 30, 2011, to spend all the program's money. The emphasis now was more on creating jobs than generating energy; the DOE described the amended program as "a temporary program designed to address the current economic conditions of the nation." More than one DOE staffer told me at the time that they didn't know how they were going to be able to spend all the stimulus money being thrown at the department.
Over the next few months, the White House appears to have become intensely interested in the fate of the Solyndra loan guarantee, during which time Solyndra executives and investors made their multiple visits to the White House. In March 2009 DOE granted Solyndra's revised application with a "conditional commitment" for the loan one of the first out of the chute which is merely the first hurdle to final approval, even though an OMB staffer wrote in an email that "This deal is NOT ready for prime time." The DOE's credit review board and OMB still had to "score" Solyndra's business plan again, and were unsatisfied with several aspects of Solyndra's outlook. A few people in the White House had misgivings. Vice President Biden's chief of staff, Ron Klain, noting the DOE's continuing reservations, emailed OMB staff to say, "Can we chat on Monday about the DOE flag in here on Solyndra. . . . If you guys think this is a bad idea, I need to unwind the W[est] W[ing] QUICKLY." One OMB email on March 6 said, "DOE staff just told me that there's a 99 percent certainty that President Obama, on March 19 in California for other reasons, will announce that DOE is offering a loan guarantee to Solyndra. As far as I can tell the obligation won't be entered into until May, but once the President endorses it, I doubt seriously that the Secretary will withdraw for any reason."
OMB continued to push back with complaints about the "time pressure" coming from the White House, leading to "rushed approvals." One OMB staffer said, "I would prefer that this announcement be postponed. . . . This is the first loan guarantee and we should have full review with all hands on deck to make sure we get it right." Even at the time of these email exchanges, DOE staff noted that a credit-rating agency had warned that Solyndra would run out of cash by September 2011. The email trail makes clear that as the proposed September groundbreaking approached, the White House was interested in the political points they could score with Solyndra. An aide to chief of staff Rahm Emanuel wrote to OMB and DOE on August 11 to say, "As the closing of the Solyndra deal nears, we want to think about the potential announcement value in this." The September 4 date loomed large for the White House because, as the same Emanuel aide emailed on August 25, "It's the same day the unemployment numbers come out, and we'd want to use this as an example where the Recovery Act is helping create new high tech jobs." It appears that the groundbreaking date was moved up from September 8 at the request of the White House for this reason. On the other side of the ledger, by invoking their Fifth Amendment rights against self-incrimination in House hearings, Solyndra's executives no doubt hoped to avoid answering (among other things) pointed questions about whether they sought the administration's involvement in a splashy groundbreaking as a marketing tactic and means of attracting more investors.
The $535 million loan finally went through on September 2, 2009, just two days before the scheduled groundbreaking for the new plant. Around this same time Solyndra attracted another $219 million from private investors. This, despite the fact that Solyndra had already lost $558 million in its five-year life, and that PricewaterhouseCoopers had warned that Solyndra "has suffered recurring losses from operations, negative cash flows since inception and has a net stockholders' deficit that, among other factors, raise substantial doubt about its ability to continue as a going concern." (Emphasis added.) Energy Secretary Stephen Chu showed up at the groundbreaking of Solyndra's massive 300,000-square-foot, $344 million factory two days later, with Vice President Biden putting in an appearance by video link to praise the "permanent jobs" Solyndra was creating. Solyndra soon closed its existing manufacturing plant nearby, raising the question of why it had needed to build the new plant in the first place. The existing plant was capable of producing 110 megawatts of panels a year; in 2010 Solyndra sold only 65 megawatts worth of panels. Employees began noticing that unsold solar panels were starting to stack up. "Everyone knew the plant wouldn't work," a former Solyndra employee told radio talk host Mark Levin.
Jobs weren't the only thing Solyndra was creating with its temporarily flush coffers. Former employees told the Washington Post about lavish spending for frills such as "a gleaming conference room with glass walls that, with the flip of a switch, turned a smoky gray to conceal the room's occupants. Hastily purchased state-of-the-art equipment ended up being sold for pennies on the dollar, still in its plastic wrap." One employee told the Post that the massive federal fillip "made people sloppy." Meanwhile, Solyndra submitted an application for an additional $469 million from the DOE's loan guarantee program. According to an SEC filing from Solyndra in 2009, the DOE had given an initial green light for the additional loan. It is not clear when this decision may have been reversed.
President Obama turned up at Solyndra's new facility in May 2010 with Governor Arnold Schwarzenegger in tow to tout Solyndra as "leading the way toward a brighter and more prosperous future" and pronounce that "the true engine of economic growth will always be companies like Solyndra." (The photos of Obama's visit, once prominent on Solyndra's website, have now been scrubbed.) While Obama was praising Solyndra as his model of how to create prosperity, behind the scenes Solyndra's management was looking frantically to find more capital and struggling to sell an uncompetitive product. Solyndra had already canceled plans to go public with a stock offering to raise still more private capital, but managed to raise another $175 million in private equity. They also began spending more money on Washington lobbyists, in the usual manner of politically tethered businesses. Solyndra's lobbying expenses jumped from $160,000 a year in 2008 and 2009 to $550,000 in 2010 as it ramped up efforts to secure the second loan guarantee.
Red flags began popping up all around both Solyndra and the loan guarantee program. In July 2010 the Government Accountability Office issued a critical report on the program, saying among other things that the DOE had weak controls on the loan evaluation and had taken shortcuts in its approval of several loans. GAO did not single out Solyndra, but congressional investigators say Solyndra is certainly one of them.
By late last year the Obama administration was starting to worry about Solyndra's prospects and the political fallout to come if Solyndra folded. A January 31, 2011, email from an OMB staff member said presciently: "The optics of a Solyndra default will be bad. . . . The timing will likely coincide with the 2012 campaign season heating up." Energy officials began sitting in on Solyndra board meetings at some point while various financial restructuring plans were considered. Solyndra continued to tell the White House that things were going well, saying in one email that the company had "good market momentum, the factory is ramping up and our plan puts us at cash positive later this year. Hopefully, we'll have a great story to tell toward the end of the year." Greg Nelson, the White House staffer who had been liaison to Solyndra (and who had dismissed pessimistic news stories about Solyndra as "B.S."), wrote back: "Fantastic to hear that business is doing well keep up the good work! We're cheering for you."
At length the Department of Energy capitulated with a questionable restructuring of the loan guarantee in February of this year that put equity investors ahead of taxpayers in the event of a bankruptcy liquidation, an unorthodox move that may have violated the law. Solyndra argued that the debt subordination was necessary if Solyndra was going to succeed in attracting more private capital. George -Kaiser came through with another $75 million, but it clearly wasn't enough. Solyndra filed for bankruptcy on September 6, laying off nearly its entire workforce of 1,100 employees. A few days later the FBI raided the company's headquarters and the homes of its senior executives. Taxpayers would likely have received more of their money back if the plug had been pulled back in February. An email from an OMB analyst at the time warned, "While the company may avoid default with a restructuring, there is also a good chance it will not. . . . At that point, additional funds have been put at risk, recoveries may be lower, and questions will be asked." As of right now, we're only starting to get the answers.
While there seems little doubt that the White House took an inordinate interest in Solyndra and bigfooted the loan through the DOE, the Solyndra story should be understood more broadly for what it highlights about the economic illiteracy of liberalism today, especially in its "green energy" guise. Already the defenders of "green energy investment" are circling the wagons behind the fact that the Solyndra loan guarantee represents only 1.3 percent of the $38 billion in federal loan guarantees extended to more than 40 entities, including some large and well-established conventional companies such as Areva (nuclear power), Ford, Sempra, and Valero Energy. But the bulk of the loan guarantees are for renewable energy and politically trendy outfits like Tesla Motors ($465 million), which is producing a sporty high performance all-electric roadster that you, too, can own for the base sticker price of $109,000. Tesla went public in 2010, but has yet to make a profit, despite several rounds of additional private capital. Kevin Drum, a defender of the administration, wrote in Mother Jones, "There was no scandal in the loan process, and there's nothing unusual about having a certain fraction of speculative programs like this fail. It's all part of the way the free market works." Solyndra may be the only loan to have gone bad so far, but stay tuned.
Quite aside from the issue of how many of the loans end up being squandered is the more fundamental question of why we're doing this on such a scale in the first place. How far we've come since 1979, when there was a serious national debate about whether it was appropriate for the government to provide a mere $1.5 billion loan guarantee to Chrysler a legacy company with more plausible prospects for profitability than Solyndra. Opponents argued then that once the government starts backstopping individual businesses, it will undermine the discipline of the marketplace and create a moral hazard. Now we're bailing out auto companies directly and handing out billions in loan guarantees like Halloween candy to shaky startups, with scarcely any debate. Looks like the Chrysler loan critics had a point.
The rationale for the energy loan guarantee that such "public-private partnerships" reduce risk and catalyze private capital where it otherwise wouldn't go is probably wrong, and is certainly a less than productive use of private capital. One of the clichés of the green energy economy is that the miracle workers of the Silicon Valley venture capital community would do for energy what they previously did for tech and the Internet. This has proved to be wishful thinking. Daniel Yergin notes in his new blockbuster energy book The Quest that the venture capital community's experience in the world of "clean energy" has been bitter: "The general learning for members of the venture community is that energy is a harder road than they had thought from their experience in other sectors."
The "green tech" bubble is already bursting; even the New York Times has noticed, with a story in mid-August under the headline "Number of Green Jobs Fails to Live Up to Promises." There are actually fewer "clean tech" jobs in Silicon Valley today than 10 years ago, according to a recent Brookings Institution study. This has to be one of the most unusual bubbles in financial history. The "green energy" bubble is collapsing without the usual intermediate step of creating temporary paper value. In the case of Solyndra, the Wall Street Journal reported, the loan guarantee paradoxically made it harder for the company to attract private capital. Large government loans that ordinarily take priority in the event of failure deter many investors from participating. Meanwhile, the story of George Kaiser is becoming all too typical. Kaiser made much of his fortune in fossil fuels, natural gas in particular. Now he's squandered a portion of his assets on a green energy whimsy that is unproductively gobbling up lots of capital from lots of seemingly smart people.
The China card is the next fallback. China is massively investing in solar panel manufacturing, but the simple silicon flat panel design rather than expensive thin-film. It was costing Solyndra about $4 a watt to manufacture its thin-film panels, while Chinese and other U.S. manufacturers such as First Solar were selling traditional solar panels for as little as 75 cents a watt. Not surprisingly the Chinese are starting to grab global market share. Hence the answer from liberals in the wake of the Solyndra debacle is more subsidies for domestic solar! Solyndra is not the first solar company to bow to Chinese competition. Evergreen Solar in Massachusetts closed its facility in the Bay State and planned to relocate to China, despite receiving $58 million in aid from the state of Massachusetts. But Evergreen Solar filed for bankruptcy on August 15. The truth is China will always be able to make solar panels (and wind turbines) more cheaply than U.S. manufacturers for the same reason they make iPods and iPads more cheaply than we can: low-cost labor and more access to raw -materials. U.S. manufacturers can never hope to compete with these factors, or we'd still be making TVs.
The shame of it is that the Obama administration could point to more promising initiatives in energy if it had the wit, especially the ARPA-E (Advanced Research Projects Agency-Energy, modeled after the Pentagon's legendary Defense Advanced Research Projects Agency) unit of the Department of Energy. ARPA-E is intended to conduct research into ways of overcoming the formidable technical barriers necessary to make alternative energy sources from batteries to biofuels scalable at a reasonable price. Like DARPA, ARPA-E is exempt from the usual civil service bureaucracy (and things like Davis-Bacon rules) to allow it to be nimble in ways that are exceedingly rare in the federal government. ARPA-E was set up by legislation passed in 2007, but wasn't funded until 2009. ARPA-E's total budget was only $400 million in its first year less than the Solyndra loan. But the thing to note is that research efforts like ARPA-E aren't about creating jobs, green or otherwise, which is why the agency has been of little interest to the White House. It is meant to expand our base of technical knowledge, leading to new and better options in the future.
But since that future is open-ended and unpredictable, it won't arrive before the next election cycle, and it doesn't offer rewards for political supporters. American energy policy ought to be about generating the amount of energy we need and the kinds of energy we want, rather than being treated as a jobs program. By thinking themselves able to force the market, Obama and his liberal cheerleaders are achieving neither objective. Taxpayers are likely to be out nearly the entire $535 million of the loan, but private investors may lose close to $700 million money that might have created real jobs had they resisted the green-jobs siren song emanating from Washington.
The Solyndra bankruptcy, alas, is not an outlier but a harbinger. This is the kind of economic calamity we will see more of unless the Obama administration sheds its ideological blinders or until it leaves office. Meanwhile, capital will continue to be misallocated through perverse incentives and outright political favoritism, and large amounts of patiently acquired wealth will be wiped out.
Steven F. Hayward is the F. K. Weyerhaeuser Fellow at AEI.