Coyote Blog

I have argued many times that private investors, over the long haul, will make better investment choices than the government, in part because they have better incentives and information to guide their decision-making.  The straw-man argument against this is to point out anecdotes of failed private investments.  Heck, I can do that.  Pets.com famously blew through $300 million of private capital with a corporate strategy that never made much sense to people.

The Pets.com investors were chagrined, and probably learned a lesson from their mistake.  Certainly most of us thought the blame, if blame existed, for the debacle rested on the investors for pouring money into a bad proposition.  Certainly no one accused the management of fraud -- I am sure they were diligently, honestly trying to make the company a success, even if they were misguided as to where that success lay.

As it turned out, everyone, not just the Pets.com investors, learned from the mistake.  The failure was an important driver in an industry-wide rethink as to what a successful Internet business model might look like.  This benefit only came because people were willing to acknowledge not just that the Pets.com investment was flawed, but that it represented a systematic mistake that was being made vis a vis Internet startup investments.

Now, consider solar manufacturer Solyndra.  It failed this week, likely taking with it most of $535 million in taxpayer money that the Obama Administration was so eager to give them that it short-cutted its internal processes to fork over the cash more quickly.

Many of us on the outside would love to see the government rethink such investments in a systematic way, and reconsider if it is even possible for the government to make such investments, and in particular whether "green jobs" investments make any sense at all.

But the likelihood of that kind of introspection happening in the public world is about zero, and my bet is that Obama is going to propose more of the same tonight in his speech.

In fact, the Department of Energy (the source of the loan) and the FBI have today sent armed agents into Solyndra looking for evidence of fraud.   While Zero Hedge argues that fraud would be bad for Obama, in fact I think it would probably be the best possible outcome and one he is hoping for.  If he can say, "wow, you and I both got tricked here by some evil folks we are going to put in jail" it deflects attention from the fact that he put a half billion dollars of taxpayer money into a business plan that never made a lick of sense.

Another me-too solar manufacturer with a factory in California of all places was never going to compete in a global commodity market.  This company's plan was always to sell dollars for 50 cents and to make it up on volume.  I don't see how any investor thought this was going to work.  My guess is that the private investors didn't know much about solar and invested because it had a certain hip-ness to it, or less charitably, they knew it never made sense but hoped that Uncle Sam, once it was already in for a half billion, would keep more money flowing or perhaps agree to buy out their production at above market prices.

There may have indeed been fraud, but as in the case of Pets.com, it is perfectly possible no real internal fraud existed and they ran through a ton of money against a stupid business plan that should never have been funded.  Obama would greatly prefer to call it fraud rather than his own failure of judgement.  As an aside, Fannie and Freddie are pursuing exactly the same course in suing banks, arguing that they were defrauded by the banks in buying mortgages, a fairly laughable proposition in the great scheme of things when one considers Fannie and Freddie were at the forefront of the industry in driving down lending standards and promoting the expansion of the mortgage market.

Benjamin Wallace-Wells via Jesse Walker at Reason

What have Patriot Act "Sneak and Peak" Warrants Been Used For (2006-2009)

This is an interesting and frustrating article describing the efforts by environmental groups to ban thermal paper with BPA in it.  The argument is that thermal paper receipts touch money, contaminating the paper money supply such that people will have BPA pass into their bloodstream by dermal absorption from money.

Of course, this is only scary if you have absolutely no common sense about doses.  The exposures are simply absurdly small, from a chemical that it is not even clear has long-term harms (the article talks about nano-grams of exposure -- when you start talking nano-grams, you might as well just count individual molecules).  And, as an added bonus, its ban in thermal paper simply pushes manufacturers to use chemicals that are not necesarily safer, just less studied and without the "BPA" name that the media has tarnished so badly.  Incredibly, at least one state, Connecticut, actually followed through on this useless ban scheme.

You don't have to convince me money is dirty -- I am sure any bill in my pocket is crawling with viruses and bacteria and other weird stuff.  Carrying around money is like toting around pieces of clothing someone else has worn for 6 months without washing.  So I am sure the bills in my pocket are icky, but to get worked up about BPA rubbed off from my last Home Depot receipt is just insane.

I get grief in hard core libertarian circles for supporting a basic, no-frills government safety net.  However, in watching Europe right now, I may change my opinion.  Folks in this country use the European rioting as a sort of threat to warn us that we need to continue to be profligate in government spending or else face the same kind of riots here.  I come to the opposite conclusion -- if people are going to riot when the charity they receive has to be reduced, isn't that a reason not to get them hooked on the charity in the first place?

So here is an interesting local story giving us a window into race relations.    First, a black comedian named Katt Williams (I never heard of him either) called a Mexican man a "nigga" and told him to go back to Mexico.   Then a Hispanic woman created a profanity-laced 6-minute video calling Katt Williams "a white supremacist."

Outstanding.  Actually, I think that this has little to do with race relations and more to do with a post-modernist view of language.  I am still working on writing about this phenomenon, wherein certain political phrases have become all-encompassing insults or descriptors of the opposition, wholly stripped of their original meaning.  Thus "Soros-funded" or "Koch-funded" become synonyms for being extreme left or libertarian, rather than actually being supported by any evidence of such funding.  My interest in this topic began with a comment on Kevin Drum's site, where one sympathetic reader smacked Tea Partiers as merely mouthing Republican talking points, and the proceeded to repeat in now-standard terminology every Democratic talking point about the Tea Party.  The juxtaposition was so obvious I thought it might be performance art rather than a real comment.

Most of you will know that the California solar company Solyndra has failed, burning through in less than two years nearly $535 million in taxpayer money.

I wrote in Forbes yesterday that it was a headscratcher why anyone thought this a sound investment

Obama’s investment of taxpayer money into Solyndra is a great example.  It is clear little due diligence was completed before the loan guarantees to Solyndrawere rushed out the door in 2009 in time to meet Energy Secretary StevenChu’s artificial target date for the first loan of Obama’s green jobs program.  A good, well-timed sound bite on the evening news was more important that the actual details of the investment.

But, in fact, little due diligence should have been necessary.  Already in 2009 it was clear that the solar panel industry had commoditized, and low-cost manufacturing would be the key to succefully competing in the market.  Further, European countries whose subsidies and high feed-in tariffs for solar were driving most of the market growth were already in the process of dialing back those incentives.

Surely any reasonable investor would have been leary about entering such a market with an under-scale startup, much less one which chose California of all places to build their plant.  Most rational investors would cite California as a huge liability in a falling-price commodity market, but it was an asset for a company trying to compete in capturing taxpayer dollars, being the home of many of the most powerful politicians most likely to buy into the green jobs boondoggle (of course it did not hurt that Solyndra’s largest investor is a major Obama campaign contributor).

It turns out that the numbers were worse than I imagined, and reading ZeroHedge, it seems like some outright fraud may be involved (hat tip to a reader who I cannot never figure out if he wants to have his name mentioned or not)

What was in the prospectus was, no doubt, the real reason that investor chose to take a ‘pass’ on the deal. There were revenue/expense numbers for the nine months preceding the proposed deal:

Revenue: $58.8mm

Cost of Goods Sold: $108.0mm

That is an absolute complete disaster. This is a low margin business to begin with. At Solyndra they were losing 84 cents for every dollar of sales. Adding in SG&A and CapEx the losses and cash drain had to be very heavy.

Wow, that is really a fail.  Even in the worst run late 90's Internet company I ever encountered, they were not selling dollars for 50 cents.  One wonders what numbers Steven Chu and company saw before they funded this dog, and whether from the very beginning these guys were counting on a steady stream of 9-figure government subsidy checks.

My new column is up at Forbes, and discusses why politicians, particularly this administration, think they can allocate capital better than the market

The problem is that this top-down override of market capital allocations is almost certain to destroy wealth, because there are at least two problems with it (beyond the obvious liberty and property rights issues).

First, the decisions are being made by, at most, a few hundred government workers.  There is no possible way these workers can ever gather the knowledge and information posessed by millions of private actors making similar investment decisions.  Like monkeys throwing darts, some of the investments will work out, but on average their success rate has to be far lower than the network of individuals in the broader economy.

Second, and probably more important, government decisions-makers have terrible incentives when making these investments.  Seldom, if ever, are government re-allocations of capital made with an expectation of earning a return.  In fact, many of these programs promote themselves explicitly as shifting capital to investments no rational private investor would touch.  These investments are undertaken because they promote some sexy technology, or create jobs among a favored constituency, or even just because they make for a nice bullet point on a politician’s reelection web site.

Obama’s investment of taxpayer money into Solyndra is a great example.  It is clear little due diligence was completed before the loan guarantees to Solyndra were rushed out the door in 2009 in time to meet Energy Secretary Steven Chu’s artificial target date for the first loan of Obama’s green jobs program.  A good, well-timed sound bite on the evening news was more important that the actual details of the investment.

But, in fact, little due dilligence should have been necessary. ....