Coyote Blog

A few years ago I was asked to give a presentation in front of a group of Phoenix business leaders on climate and alternative energy.  I can't remember what particular group it was, but it was some public-private group that was heavily invested in advocating for local subsidies to promote strategic businesses - the sort of local MITI that most large cities have, that has this delusion that they can ramp up the city's growth by focusing public and private investment into a few selected industries (that they select, of course).

I told them that I thought their focus on solar manufacturing was dumb.  First, the whole idea that because Arizona is a good solar market meant that it should have some advantage in solar manufacturing made absolutely no sense.  This only makes sense for products with high transportation costs or a particular input cost that can be gotten more cheaply in one particular area (the location of aluminum manufacturing near cheap electricity in the Northwest comes to mind).  By the same logic all car manufacturers would be located in LA.

Second, I said that the whole solar business was completely driven by subsidies.  If the subsidies were to go away, the heart of the business would go away faster than pets.com.  I specifically mentioned First Solar in a positive context here, saying that though they where wholly dependent on subsidies for their revenues, they at least acknowledged as a corporate strategy they needed to get costs low enough to compete without subsidies.  (Someday, solar will get to that point, I hope, but I am skeptical that current approaches will yield the breakthrough, but that is another discussion).

If you want to understand the financial problems First Solar is having, let me show you four items.

First, from their 2010 annual report:

Geographic Risk. Our solar modules are presently predominantly sold to our customers for use in solar power systems concentrated in a single geographic region, Germany. This concentration of our sales in one geographic region exposes us to local economic risks and local public policy and regulatory risk in German.

This is way back in the notes on page 133.  By the way, I took a whole course in business school on reading financial reports.  Here is the key lesson for those not in the financial industry:  read them from the back.  Skip all the glossy crap at the front, go straight to the notes.

OK, here is the second bit of information.  Here is a world map of solar insolation, which is essentially the total solar energy available to produce power in a location when adjusted for atmosphere, weather, latitude, etc.

See Germany?  I won't insult your geographic knowledge by pointing at it, but much of Germany is in that yellow-green color which, for solar potential, means (in scientific terms) "it sucks."  Let's zoom in, and compare it to the US to get a feel for it (combined from two charts here)

Apparently the better sites in Germany have the same solar potential as ... Seattle!  The sliver of absolute best sites in Germany have approximately the same solar potential as Buffalo, NY.

So we have a company whose fortunes are dedicated almost entirely to selling solar panels into one of the most unpromising solar sites in the world.   Why is Germany buying so much solar?

OK, here is the third bit of information.  For years Germany had enormous feed-in tariffs (mandated above-market minimum prices)  for solar electricity:

The German feed-in tariff scheme has been in operation since 1991 and is regarded as one of the most successful in the world. In Germany, feed-in tariff rates are differentiated according to the source of the renewable energy. Separate tariffs are determined for biogas, biomass, hydroelectric, geothermal, solar and wind energy sources. The tariff paid for solar generators varies between EUR 45.7c/kWh and EUR 57.4c/kWh, depending on the capacity of the system and other design features. The tariff is greater for generators that are attached to the roof of a building or structure and greater again for generators that are attached to another part of a building. In Germany, the feed-in tariff is paid for a period of 20 years

Note the language from several years ago where "most successful" is determined without references to costs.

0.574 Euros per kWh is equal to about $0.75 today and even more several years ago when exchange rates were higher.  Remember this is a wholesale price, and should be compared to a $0.04 to $0.06 wholesale electricity price in the US  (I use US numbers to as its not clear to me Europe has a particularly competitive wholesale market.  The French have some sort of fixed price system set around $0.06).

However one wants to look at it, these are enormous subsidies.  People putting up solar panels in Germany were getting paid 10-15x what a market price for the same electricity might have been.

Finally, here is the fourth piece of evidence leading to First Solar's woes.  In 2010 and 2011 Germany, whose consumers began to balk at paying the highest electricity rates in the world in order to subsidize the method of electrical generation least suitable to Germany, began substantially cutting these tariffs.  In 2012 they will cut them even further:

German Environment Minister Norbert Roettgen and Economy Minister Philipp Roesler are set to hold a press conference on Thursday to outline the government's new approach on subsidies. However, the indications are that the cuts will be heavier than the market has been expecting:

• a 30% cut in the feed-in-tariff (FIT) to 13.5 cents per kilowatt hour for new large solar installations

• and a 20% cut in the FIT to 19.5 cents for new small plants

The market has of course been expecting cuts in the German FIT system. However, this news is decidedly worse than expected and likely to continue to pressure solar stocks - particularly those such as Yingli (YGE) with a significant exposure to German solar demand.

From a peak of $0.75 per kWh, Germany will now pay $0.255 per kWh for smaller installations, still four times the market price for wholesale electricity but only a third of what they paid during First Solar's boom years.  As I wrote yesterday, Germany was essentially paying $2 for milk from brown cows and $25 for milk from black cows.  This can't be sustained.

If one assumes a wholesale electricity price of 6 cents, First Solar's German customers were getting a 92% subsidy.  Sure, First Solar now faces other problems like Chinese competition and they have shot themselves in the foot on quality, but at the end of the day the only way they can survive is to convince some other government to turn on the taxpayer money spigot to keep them in business.  I am hoping we in Arizona and the US will not be the suckers, but I fear that we will.  One can argue the projects I discussed the other day, including the one where we taxpayers loaned First Solar the money to sell its solar panels to its own subsidiary, are evidence of this.  My guess is that First Solar will be throwing a lot of money and time towards Obama, praying for his re-election.

Update:  I found a bit more time to give some more background on First Solar and German feed in tariffs here.

If I had the time, I would love to try to research and list every subsidy recieved by a company like First Solar.  Here are just a few:

First Solar is an Arizona-based manufacturer of solar panels. In 2010, the Obama administration awarded the company $16.3 million to expand its factory in Ohio -- a subsidy Democratic Gov. Ted Strickland touted in his failed re-election bid that year.

Five weeks before the 2010 election, Strickland announced more than a million dollars in job training grants to First Solar. The Ohio Department of Development also lent First Solar $5 million, and the state's Air Quality Development Authority gave the company an additional $10 million loan.

After First Solar pocketed this $17.3 million in government grants and $15 million in government loans, Ex-Im entered the scene.

In September 2011, Ex-Im approved $455.7 million in loan guarantees to subsidize the sale of solar panels to two solar farms in Canada. That means if the solar farm ever defaults, the taxpayers pick up the tab, ensuring First Solar gets paid.

But the buyer, in this case, was First Solar.

A small corporation called St. Clair Solar owned the solar farm and was the Canadian company buying First Solar's panels. But St. Clair Solar was a wholly owned subsidiary of First Solar. So, basically, First Solar was shipping its own solar panels from Ohio to a solar farm it owned in Canada, and the U.S. taxpayers were subsidizing this "export."

But this is just a few of them, even on this deal.  For example, the Canadian solar farm very likely picked up federal and provincial subsidies from Canada, and even more likely gets some kind of subsidized feed-in tariff (meaning that an above-market wholesale rate is paid for its electricity).  This sort of feed-in tariff, which is paid by electricity consumers, is wholly un-transparent and likely makes up the large bulk of solar subsidies.   I know the state of Arizona threw a lot of money at First Solar as well (which is headquartered in the Phoenix area.)

During First Solar's boom years, the company was mainly supported by sales to Germany, probably one of the worst solar sites in the world after perhaps Seattle.  But the German government mandated feed-in tariffs for solar that were five times (or more) the market price for electricity.  It was like saying that, while milk generally goes for $2 a gallon, the government mandated that milk from  brown cows could be sold for $10 a gallon, and what's more, consumers had to buy it.

The House Your Tax Money Built

The arch-corporate-statist  -- and official manufacturing company of the Obama Administration is feeding at the trough again.  Apparently a perfectly profitable company cannot buy assets from another profitable company without a large subsidized loan from taxpayers.  In this case, the Obama Administration is funding the KCS in its purchase of 30 new locomotives from GE.  The Obama Administration has recently doubled-down on its backing of the US Ex-Im bank, which has been helping to fund Boeing aircraft sales to foreign airlines (each of which, surprise!, has a couple of GE engines on it).

GE knows how this political game is played, with resources allocated based on quid pro quo.  Just the other day, GE announced that it would help bail out Obama and Government Motors buy mandating that all its company vehicles be Chevy Volts, in effect committing to buy more Volts than Chevy sold to consumers all last year.  Of course, the circle has no end, so in turn GE will be rewarded with $90,000,000 in government subsidies for its 12,000 Chevy Volts, a number that could increase to $120 million if Obama's proposal to increase the per car subsidy is accepted.

By the way, the Obama Administration has criticized oil companies like Exxon-Mobil for earning excessive profits and getting overly large tax breaks.  In 2010, Exxon paid a whopping 40.7% of its income in taxes ($21.6 billion in taxes on $53 billion in profits).   In the same year, Obama subsidiary General Electric paid 7.4% of profits in taxes.

In a Senate budget hearing with the Department of Energy, one would have expected a lot of questions about the loan program to avoid future Solyndras.  But Al Franken uses his time to pester the DOE to give taxpayer money to a corporation in his state.

This is the answer as to why so many bone-headed loans were made despite evidence of likely disaster.  You can bet that Boxer and Feinstein were all over the DOE several years ago pushing for the Solyndra loan.  Franken doesn't give a rip whether the loan is smart or not, or whether the taxpayers' money is safe or not.  He wants a multi-million dollar press release to get himself in the Minnesota news for a newscycle or two helping out the home state.  After that, the money's purpose has been achieved and I can't imagine him caring what happens to it.  Certainly that is the fate of most of these jobs-related government investments - big splashes up front with promises of hundreds of new jobs, but absolutely no scrutiny in the back end when, likely as not, these jobs don't actually materialize.

One of the amazing aspects of our new post-modern outlook on personal responsibility and obligations is that folks who are profligate and take on too much debt are increasingly considered victims to which other people owe something (generally a bailout).

We see this no only among US mortgage holders but in Greece as well

Greek Prime Minister Lucas Papademos told lawmakers to back a deeply unpopular EU/IMF rescue in a vote on Sunday or condemn the country to a "vortex" of recession.

He spoke in a televised address to the nation, ahead of Sunday's vote on 3.3 billion euros ($4.35 billions) in wage, pension and job cuts as the price of a 130-billion-euro bailout from the European Union and International Monetary Fund.

The effort to ease Greece's huge debt burden has brought thousands into the streets in protest, and there were signs on Saturday of a small rebellion among lawmakers uneasy with the extent of the cuts.

So outsiders generously agree to pay for 130 billion Euros of past Greek spending if only the Greeks will cut their current spending by 3.3 billion Euros (at which spending level the country would still be running large deficits).  And people riot as if they have been gang-raped.  Incredible.

Let the Greeks go.  Of course, this is not actually about bailing out Greece, but about bailing out, indirectly, European banks that invested in Greek bonds.  The banks seem to run public policy in Europe, even more so than in the US.

If you are going to create an homage to Detroit, one might consider actually filming in Detroit.

Via the WSJ

Glendale, Ariz., is selling about $136 million in debt in the municipal-bond market this week, just days after Moody's Investors Service cut its bond rating because of the desert city's obligations to cover losses on a National Hockey League franchise.

In exchange for the NHL's promise to manage team operations and keep the team in Glendale until a new owner is found, the city agreed to compensate the league, the city's executive communications director, Julie Frisoni, said.

The Coyotes filed for bankruptcy protection in 2009, and that spring, the NHL became the owner of the team. In exchange for keeping the team, the city signed an agreement to absorb up to $25 million of the team's losses in both 2011 and 2012, in anticipation of finding a new owner, Moody's analysts said.

Glendale is slowly sinking itself in a mountain of debt to pursue its insane strategy to subsidize every billionaire sports owner in Arizona.  The town of 225,000 people is spending $25,000,000 to fund the operating losses of a freaking hockey team -- that's nearly $500 a year for every 4-person family in the city.  Nuts.  And this is just their operating subsidy, it does not include debt service on the $300 million stadium it built for the team.

The problem is that the team is worth less than $100 million in Arizona (based on recent sales comps of other NHL franchises in warm cities like Atlanta) but might be worth $300-$400 million if moved to Canada (Jim Balsillie made an offer in this range, including an offer to pay down $150 million or so of the city's debt, before RIM stock started to crash).  The NHL, which owns the team now, has promised owners that they will not take a penny less than $200 million for the team, and that they will not suffer any operating losses.

So, because they simply cannot admit they were wrong to subsidize the team the first time around, to keep the team in Glendale the city must either fund $25 million a year in team operating losses or it must pony up $100 million or so to bridge the team's $100 million value in Arizona and the league's $200 million price tag (something they tried and failed to do last year when the Goldwater Institute pointed out that such a subsidy was unconstitutional in AZ.

I repeat, what a big freaking mess.  How do you avoid it?  The only way is the Wargames strategy, ie the only winning move is not to lay the sports team subsidy game in the first place.

It is interesting to study the contrast between the handling of the Toyota accelerator problems, which turned out to be pretty much all driver error, and the Chevy Volt fire issues.

In the case of the former, we had public hearings and government threats.  The government, without evidence at that point, demanded Toyota recall the vehicles and stop production.  Eventually, when the NHTSA determined that the panic and recall was in error and the issue was operator error and not with the car, the Obama Administration suppressed the results.

Now, Volts appear to have a fire problem with their batteries.  This time, the government is keeping things real quiet and, instead of exaggerating the safety issue, they are suppresing it

It now appears the fire hazard was first discovered back in June, when GM first heard about a fire in a Volt that occurred some three weeks after the vehicle had been crash tested.

Yet, almost five months went by before either GM or the US National Highway Traffic Safety Administration (NHTSA) told dealers and customers about the potential risks and urged them to drain the battery pack as soon as possible after an accident.

Part of the reason for delaying the disclosure was the “fragility of Volt sales” up until that point, according to Joan Claybrook, a former administrator at NHTSA.

Demagoguing a non-problem in the first case, covering up a real problem in the second.  Guess which one has a union that supported Obama's election and which does not.  Guess which one Obama bought equity in with taxpayer money?

GM has announced it is willing to give a full refund to customers who bought Volts and are worried they will burst into flames.  My question is this:  In these refunds, does GM or the car buyer intend to reimburse the taxpayer for the $7500 subsidy we kicked in?

Via Zero Hedge

today, in a unanimous vote, "The U.S. futures regulator approved on Monday a rule that puts tighter limits on how brokerage firms can use customer funds, a measure that the now-bankrupt MF Global had encouraged the agency to delay." In other words, while before commingling client accounts was assumed to be a clear violation of every logical fiduciary imperative, now it is set in stone. For real. The CFTC means it.

In the past, I believed that a lot of financial regulations were honest (though often misguided) attempts to create transparent and trustworthy markets.  I am increasingly being pushed to the cynical conclusion that financial regulations, like, say, licensing of funeral homes, are mainly aimed at making it impossible for small competitors to survive, while larger competitors either have the scale to pay for compliance departments, or in the case of MF Global, have the political muscle to get themselves exempted (by Administrations of both parties, I should be clear, though the current one certainly gets a hypocrisy award for standing beside OWS while handing out finance and health care law exceptions to the powerful).

MF Global is far worse in my mind than, say, Enron.  In Enron's case, the management was at least mostly pursuing the activities and investments that they were supposed to be pursuing.  They were making bets of the type shareholders expected, though they were likely masking the cost and risk of these bets by aggressive pushes at the margins of accounting rules.

MF Global was doing exactly what everyone supposedly knew to be an absolute no-no, ie using client funds to make leveraged bets for their own account.  If Joe Schmoe in Florida did the same thing, he would already be incarcerated.  In the case of MF Global, no one even seems to be interviewing Corzine and so far the bankruptcy committee has put a higher priority on repaying JP Morgan and Goldman for Corzine's bad bets than on getting investors' money back.

Here is what I remember from the late 1980's - just about every technocratic pundit of the leftish bent, and a number on the right, all hailed Japan as the government economic planning model the US should follow.  One fawning essay after another lauded Japan's MITI and its top-down approach to economic investment.

Practically within hours of when these editorials peaked, the Japanese economy began to crumble.  We know now that MITI and other Japanese officials were creating gross distortions and misallocations in the economy, and inflating an economic bubble with gobs of cheap credit.  These distortions have still not been entirely cleared from the Japanese economy 20 years later, and the country experienced what was called "the lost decade" which may become the lost two decades.

For over a year, it has appeared to me (and many other observers more knowledgeable than I) that China was headed for a crash for many of the same reasons as Japan.  I am now sure this is true,

The current debates about China's currency, the trade imbalance, our debt and China's excessive use of pirated American intellectual property are evidence that the Global Revolution—coupled with Deng Xiaoping's government-led, growth-oriented reforms—has created the planet's second-largest economy. It's on a clear trajectory to knock America off its perch by 2025....

There is no doubt that China will pass the US in total economic size -- it has three times more people than we do.  But their success is clearly due to the small dollops of free enterprise that are allowed in a statist society, and advances are made in spite of, not because of, the meddling state.

Exactly how much economic progress had China made before its leaders brought in the very free market ideas Stern says are dead?  None, of course.  To read China as a triumph of statism and as the death nell of capitalism, when in fact it is one of the greatest examples in history of the power of capitalist ideas and how fast they can turn around a starving and poverty-stricken country, is just willful blindness.

I will include just one other excerpt

While we debate, Team China rolls on. Our delegation witnessed China's people-oriented development in Chongqing, a city of 32 million in Western China, which is led by an aggressive and popular Communist Party leader—Bo Xilai. A skyline of cranes are building roughly 1.5 million square feet of usable floor space daily—including, our delegation was told, 700,000 units of public housing annually.

Meanwhile, the Chinese government can boast that it has established in Western China an economic zone for cloud computing and automotive and aerospace production resulting in 12.5% annual growth and 49% growth in annual tax revenue, with wages rising more than 10% a year.

My first thought on reading this was that Houston used to look exactly like this, with cranes all over the place building things, until we had an Administration that actively opposed expansion of domestic oil production.  My second thought is that this reads so much like the enthusiast essays written by leftists when they used to visit the Soviet Union and came back telling us Russia was so much superior to the US -- just look at the Moscow subway!

The emergence of hundreds of millions of people in China and India from poverty is exciting as hell, and at some level I don't blame Stern for his excitement.  But I fear that what he is seeing is the US housing bubble on steroids, a gross misallocation of capital and resources driven by a few technocrats who think they can manage a billion person economy from their office in Beijing.

Disclosure:  I seldom do anything but invest in generic bond funds and US stock funds, but right now I am out of US equities and I have a number of shorts on Chinese manufacturing and real estate.

Well, it appears that Solyndra has not scared solar companies off from feeding at the state trough

More subsidies for the solar industry in Arizona are crucial to avoid being left behind by other states and China, a Phoenix business leader said today at a solar-power conference.

Tax incentives and loan guarantees "make a lot of sense" right now in Arizona, which is already a leader in the industry, said Barry Broome, president and CEO of theGreater Phoenix Economic Council at the Solarpraxisconvention.

Despite the high-profile financial failure of the Solyndrasolar plant this year in California, Broome told a packed conference room that solar power is destined to be a major force in Arizona and elsewhere. The only question, as he sees it, is whether sunny-skied Arizona will take full advantage....

Behind Broome on an overhead screen, a chart showed that Texas, Oregon, Nevada and other states provide more "aggressive economic development tools," (a.k.a. public money), for solar power than Arizona, and the state can't compete without doing the same thing.

What is this, a football game?  This strikes me as turn-of-the-century small town boosterism updated to the 21st century, with a dollop of tribal rivalry thrown in. He's talking mainly about manufacturing of solar components.  I am left with a couple of questions

• Why should the fact that Arizona has sunny skies have any bearing on whether or not it is an appropriate spot to manufacture solar panels.   Should Seattle subsidize umbrella manufacture because it is rainy there?   My sense is that transportation costs are a small part of the price to end users.  Arizona clearly will be a great spot for solar panels to be installed -- why does that mean we need to manufacture them?
• If other states like Oregon or China are subsidizing solar products that we might buy, shouldn't we celebrate that?  Thanks, taxpayers of Oregon, for forking over your tax money so we can buy solar panels cheaper in Arizona.  Why in the hell should be try to out-do them at this?  Now we can go invest our capital in a business that actually makes money.
• I am obviously not a fan of government-led economic/industrial policy, but if I were, why in the hell would I want to direct my state's capital and manpower towards a business that requires subsidies, ie can't make a profit  on its own in the marketplace?

Its just too easy to snipe at about everything in this article, but this caught my eye in particular

To help move the industry's message, Broome said, solar advocates must stop infighting over their competing technologies and present a unified and positive position.

Normally, I think an economist would argue that in an immature (both market-wise and technologically) product, competition and creative destruction between various competitors is critical to ultimate success.  So in fact this advice is totally senseless, unless you see the industry as a taxpayer-money-magnet rather than a real business, and then it makes perfect sense.  Politics, after all, demands simple sound bytes and a unified front.

Update:  In the first week of Harvard Business School, I learned a lesson from strategy class, in a series of two cases, that still may be the most important thing I learned there.  The cases were a hot, sexy electronics company, and a boring, dull as dirt water meter company.  To cut to the chase, the electronics company sucked as an investment, and the water meter company was a gold mine.  The moral, among several takeaways, is don't get fooled into thinking the hot, sexy business of the moment is necessarily a good investment.  Our development agencies in AZ are making this mistake in spades.  In fact, the entire history of government economic development efforts in Phoenix has been to chase sexy businesses at the top of the market, spend taxpayer money to get some plant relocations, and then see the businesses struggle.  We certainly did this with semiconductor fabs a couple of decades ago.

My new column is up at Forbes, and discusses solutions to the European debt crisis.  The problem is that there are really only three, and all are bad, so most solutions being proposed either attempt to disguise that they are bad or to disguise that they are not really doing anything.  An excerpt:

The default option will almost certainly wipe out a lot of powerful banking and financial interests as well as make it very hard for governments to keep spending money at their historic pace.  This will certainly have a bad effect on the larger economy, but we should be careful accepting forecasts of economic catastrophe as most of these come from these same powerful bankers and politicians.   Every group, down to the local dog catchers, argue that the world will suffer a calamity if their particular profession is harmed.  What we do know is that large banks and financial companies are even more intertwined with the political elite in Europe than they are in the US.   We can be pretty certain that, push come to shove, a solution that saves the banks and allows politicians to keep spending will be preferred.

That is why the Europeans will likely end up printing money to pay off the debt.  They almost certainly would be doing so already,were it not for Germany’s strong memories of its Weimar inflation years, when exactly this kind of money printing to pay down government debt led to hyperinflation and political instability.  But the appeal to politicians of shifting the costs from themselves and banks to the average consumer is simply too great to pass up.  If Germany can be convinced, then the European Central Bank will print Euros.  If Germany cannot be convinced, then countries will leave the Euro and print Lira and Drachma.

I will leave aside the issue of the recently revealed massive loans from the Fed to various banks.  It can be argued that being the provider of last resort for short-term liquidity in the banking system is a legal, even legitimate, role for the Fed.

But scan this list.  Here are some of the "banks" that got close near-interest-free money from the Fed

• Verizon
• Chrysler
• Caterpillar
• Harley-Davidson
• Baxter International

I presume these loans were nominally for their financing arms, but what is the systematic-risk argument for backstopping manufacturer's credit operations?

When I was at McKinsey & Co, part of their relocation package was a $10,000 interest-free one year loan.  I had any number of new recruits say they did not need the loan.  I told them it was a business IQ test.  If you turned down the loan, we revoked your job offer (just kidding, of course).  I took the loan and dropped it into T-bills.

I wonder how many of these recipients really needed the money to survive or just got smart enough to claim dire need and took the money and just dropped it into something interest-bearing.

1.  Accepting for a moment that the purpose of the loan program under which Solyndra received its money was truly reduction of CO2 output and fossil fuel use, what is the metric the DOE uses to score these investments against these goals (e.g. tons of CO2 output avoided over the next 10 years per dollar of government investment).

2.  How did Solyndra and other companies that were accepted for the program score on your metric?  How did companies that were turned down score?

Of course there was no such analysis -- the government appears to have invested in whatever companies raised the most money for Obama or got Joe Biden's heart palpitating or both.  Even if one pulls the obvious politics out of it, it appears they invested in stories they found appealing, the same mistake many novice investors make.

The Left works hard to wrap itself in the mantle of science, and Republicans just let them do so.  If Chu wanted to take the high ground of  trying to do the right thing for US energy policy, questioners should have taken him at his word and challenged how well his internal process matched his bold words.   Politicians are too obsessed with finding some crime or smoking gun.  The underlying failure is that the loan process does not, never will, and in fact cannot match the stated ideals and goals of the program.

This Newsweek article reviews the amazing coincidence that so many Obama DOE loans and subsidies benefited heavy-duty Obama campaign supporters.  The author seems surprised:

...these were highly competitive grant and loan programs—not usually a hallmark of cronyism. Often fewer than 10 percent of applicants were deemed worthy.

Nevertheless, a large proportion of the winners were companies with Obama-campaign connections. Indeed, at least 10 members of Obama’s finance committee and more than a dozen of his campaign bundlers were big winners in getting your money.

I found this fascinating, if unsurprising, via Zero Hedge:

Ran Duchin and Denis Sosyura of the University of Michigan looked at the U.S.’ Capital Purchase Program. You may recall that this became the centerpiece of TARP once Hank Paulson decided that the money would be better spent directly buying into the banks as opposed to overpaying them for dodgy asset-backed bonds. (Mind you, other parts of TARP were spent overpaying for dodgy asset-backed bonds.)

The CPP lasted a little more than a year and invested $205 billion of taxpayer funds into various qualifying institutions. Not every bank that filled out the 2-page application was successful in gaining access. Others were approved but ultimately decided not to take the funds (probably because of the attached restrictions on pay and on paying out dividends.) In the end, 707 financial institutions received the funds.

Duchin and Sosyua looked at a sample of 529 public firms that were eligible for CPP and slotted them into categories based on whether they applied, whether they were approved and whether they ultimately took the money. They controlled for non-random selection (via measures of the banks’ financial condition, performance, size and crisis exposure); for changes in national and regional economic conditions; and finally for potential distinctions in credit demand.

They then viewed the banks’ CPP participation status in comparison with their subsequent risk appetite as demonstrated by (1) their consumer mortgage credit approvals or denials (viewed on a risk-profile controlled, application-by-application basis); (2) their participation in syndicated corporate loans for riskier credits and; (3) the risk profile of their investment asset portfolios. What did they find?

They found more risk, across the board.  There is a lot of detail, so I will leave it to you to go to the source for more, but Zero Hedge concludes:

The bail-out itself increased our chances of having the bail the banks out all over again. Moral hazard is no longer in the realm of the abstract

A few months ago I went through an unbelievable hassle refinancing my loan.  Based on current appraisals, my loan to value was less than 50%, but I still ended up coming to the table with more equity to reduce the new loan size.  I was staggered at how hard it was to close what should have been a dead-safe loan, given the LTV and my income and credit history.  The study actually has a finding related to that:

For mortgages the bailed-out banks increased their risk–

“after CPP capital infusions, program participants tilted their credit origination toward higher-risk loans by tightening credit standards for the relatively safer borrowers and slightly loosening them for riskier borrowers.”

–while at the same time ensuring that they didn’t trip off any alarms

“This pattern would be consistent with a strategy aimed at originating high-yield assets, while improving bank capitalization ratios, since the key capitalization ratios do not distinguish between prime and subprime mortgages.”

This is a fascinating sort of metric manipulation.  Having my loan go from 45% to 40% LTV does nothing, really, for the overall safety of the bank, but it improves their averages and makes them look safer, while all the way they are actually engaging in more risky behavior.

Perhaps I do not give Sarah Palin enough credit, because this is a really good passage, from one of her recent speeches (emphasis added by Mickey Kaus)

We sent a new class of leaders to D.C., but immediately the permanent political class tried to co-opt them – because the reality is we are governed by a permanent political class, until we change that. They talk endlessly about cutting government spending, and yet they keep spending more. They talk about massive unsustainable debt, and yet they keep incurring more. They spend, they print, they borrow, they spend more, and then they stick us with the bill. Then they pat their own backs, and they claim that they faced and “solved” the debt crisis that they got us in, but when we were humiliated in front of the world with our country’s first credit downgrade, they promptly went on vacation.

No, they don’t feel the same urgency that we do. But why should they? For them business is good; business is very good.  Seven of the ten wealthiest counties are suburbs of Washington, D.C. Polls there actually – and usually I say polls, eh, they’re for strippers and cross country skiers – but polls in those parts show that some people there believe that the economy has actually improved. See, there may not be a recession in Georgetown, but there is in the rest of America.

Yeah, the permanent political class – they’re doing just fine. Ever notice how so many of them arrive in Washington, D.C. of modest means and then miraculously throughout the years they end up becoming very, very wealthy? Well, it’s because they derive power and their wealth from their access to our money – to taxpayer dollars.  They use it to bail out their friends on Wall Street and their corporate cronies, and to reward campaign contributors, and to buy votes via earmarks. There is so much waste. And there is a name for this: It’s called corporate crony capitalism. This is not the capitalism of free men and free markets, of innovation and hard work and ethics, of sacrifice and of risk. No, this is the capitalism of connections and government bailouts and handouts, of waste and influence peddling and corporate welfare. This is the crony capitalism that destroyed Europe’s economies. It’s the collusion of big government and big business and big finance to the detriment of all the rest – to the little guys. It’s a slap in the face to our small business owners – the true entrepreneurs, the job creators accounting for 70% of the jobs in America, it’s you who own these small businesses, you’re the economic engine, but you don’t grease the wheels of government power.

So, do you want to know why the permanent political class doesn’t really want to cut any spending? Do you want to know why nothing ever really gets done? It’s because there’s nothing in it for them. They’ve got a lot of mouths to feed – a lot of corporate lobbyists and a lot of special interests that are counting on them to keep the good times and the money rolling along.

If the very rich got that way through special access to government power, then why is the solution to tax them more, and not just to reduce government power?

And if the very rich got that way through hard work and innovation, then why the hell are we proposing to take resources out of these people's hands?

Especially when the government is doing all it can to damp the forces of evolution and extinction.  Via Mickey Kaus

Dysfunctional–or at any rate, not-functional-enough–corporate cultures are hard to change. That would include both the culture of the Old GM and that of many of its suppliers. Obama should have been more skeptical about “New GM’s” ability to turn itself around with its same old workforce and same old union

I warned of something similar long before GM was rescued by Bush and Obama:

But things change.  Sometimes that change is slow, like a creeping climate change, or sometimes it is rapid, like the dinosaur-killing comet.  DNA that was robust no longer matches what the market needs, or some other entity with better DNA comes along and out-competes you.  When this happens, when a corporation becomes senescent, when its DNA is out of date, then its multiplier slips below one.  The corporation is killing the value of its assets.  Smart people are made stupid by a bad organization and systems and culture.  In the case of GM, hordes of brilliant engineers teamed with highly-skilled production workers and modern robotic manufacturing plants are turning out cars no one wants, at prices no one wants to pay.

Changing your DNA is tough.  It is sometimes possible, with the right managers and a crisis mentality, to evolve DNA over a period of 20-30 years.  One could argue that GE did this, avoiding becoming an old-industry dinosaur.  GM has had a 30 year window (dating from the mid-seventies oil price rise and influx of imported cars) to make a change, and it has not been enough.  GM’s DNA was programmed to make big, ugly (IMO) cars, and that is what it has continued to do.  If its leaders were not able or willing to change its DNA over the last 30 years, no one, no matter how brilliant, is going to do it in the next 2-3.

So what if GM dies?  Letting the GM’s of the world die is one of the best possible things we can do for our economy and the wealth of our nation.  Assuming GM’s DNA has a less than one multiplier, then releasing GM’s assets from GM’s control actually increases value.  Talented engineers, after some admittedly painful personal dislocation, find jobs designing things people want and value.  Their output has more value, which in the long run helps everyone, including themselves.

The alternative to not letting GM die is, well, Europe (and Japan).  A LOT of Europe’s productive assets are locked up in a few very large corporations with close ties to the state which are not allowed to fail, which are subsidized, protected from competition, etc.  In conjunction with European laws that limit labor mobility, protecting corporate dinosaurs has locked all of Europe’s most productive human and physical assets into organizations with DNA multipliers less than one.

From AutoGreenBlog

Output of cellulosic ethanol will surge starting in 2013, according to the U.S.' largest corn-based biofuel production firm, Poet LLC.

Poet says 2013 marks the start of commercial-scale cellulosic ethanol production in the U.S. and predicts its lone facility will "open the floodgates" for the advanced biofuel....

As Poet exec Greg Hartgraves points out, production of cellulosic ethanol is expensive and that means those floodgates need to be helped open with federal monies. Without an energy policy mandating its production, U.S. firms are likely to shy away from the cellulosic biofuel, he said.

Duh.  It's a substitute that is both less effective (lower btu per gallon) and more expensive that what it is supposedly substituting.   I am just floored at the number of investors who are putting money up on the come with an expectation that somewhere down the road they can convince the government to subsidize them.  Poet knows this plant is uneconomic but has built it anyway, probably hoping to extract promises of support from candidates in the Iowa caucuses.  Kleiner Perkins did the same think with Fisker Automotive, making early stage investments that could only be bailed out by future political largess.  As Ayn Rand would say,the aristocrats of pull.

Peter Tchir via Zero Hedge

The AIG moment was the first time that the US threw any pretense of real capitalism out the window.  Bear Stearns at least was done by JPM with government help.  Fannie and Freddie were taken over, but they were always quasi government entities.  It was AIG that was truly special.  The government didn't even attempt to see if the banks had managed their exposures at all.  The government didn't even care if they had.  They panicked and saved the banks from their own folly - they didn't give capitalism a chance.  The US has never truly recovered from that.  The entire system looks to government support more and more.  Since AIG the Fed has been running at least one massive easing program or another constantly.  The government is lurching from spending program to spending program to keep the economy churning.

At the first signs of weakness we beg for the FED or ECB or the government to do something big and fast.  The European credit crisis seemed a final chance to put some capitalism back into capitalism.  To allow dumb decisions to pay the price for failure.  To reward the institutions that had properly navigated through the risks.  There was even a brief moment when it looked like Germany would do that - would force those who failed to pay the price and support those who had taken the best steps.  But now with Dexia bailed out and some super SIV on the way, it looks like we are once again heading down a path of not allowing failure - in fact we are once again rewarding failure and living beyond your means.  It isn't communism, but it certainly doesn't fit any classic definition of capitalism.

Ray Lane of VC Kleiner Perkins is seen in this video trumpeting how the Obama Administration is, for the first time in his memory, succesfully making investments in private companies.  His main example:  Solyndra!

The reason this is particularly timely and fascinating is that just a few weeks ago, Ray Lane took delivery of the first Fisker Karma electric car, financed with $529 million of our tax money and promoted with $7500 of our tax money on every sale,  Mr. Lane and Kleiner are investors in Fisker (and Lane is Fisker's Chairman) and therefore huge beneficiaries of Obama's largess, and Mr. Lane got the first Karma as a big thank you for his political connections that helped score the cash.

Of course Kleiner (who also hired green Crony-in-chief Al Gore) is going to be thrilled with the government money. Nothing is worse than being a VC in with a large early round position in a company and being unable to get the next stage of investment. Since it appears they could not get any private investors to fund this, the taxpayer money probably saved their investment .... at least for a while.

Update: Ray Lane is apparently ticked off by the negative publicity surrounding the Fisker Karma and the money they received from taxpayers. Tough. Surely he is used to his investors being ticked off about bad outcomes. Well, now he gets to see how REALLY ticked off his investors can be when their money was taken against their will, even without their knowledge. At least he can tell his institutional guys, when things go bad, that they came in with eyes open. What's his response to taxpayers?

For those who have not seen it, my article on how the Fisker Karma, even on all electric, uses more fossil fuels per mile than an SUV is here.

I had some fun yesterday, dashing off a quick note about the Fisker Karma electric car and just how bad the electric mileage is if you use the DOE methodology rather than the flawed EPA methodology to calculate an mpg-equivalent.

It was the quickest and shortest column I have ever written on Forbes, so of course it has turned out to be the most read.  It has been sitting on top of the Forbes popularity list since about an hour after I wrote it, and currently has 82,000 reads (I am not a Twitter guy but 26,000 tweets seems good).

I wanted to add this clarification to the article:

Most other publications have focused on the 20 mpg the EPA gives the Karma on its backup gasoline engine (example), but my focus is on just how bad the car is even in all electric mode.    The calculation in the above article only applies to the car running on electric, and the reduction in MPGe I discuss is from applying the more comprehensive DOE methodology for getting an MPG equivilent, not from some sort of averaging with gasoline mode.  Again, see this article if you don’t understand the issue with the EPA methodology.

Press responses from Fisker Automotive highlight the problem here:  electric vehicle makers want to pretend that the electricity to charge the car comes from magic sparkle ponies sprinkling pixie dust rather than burning fossil fuels.  Take this quote, for example:

a Karma driver with a 40-mile commute who starts each day with a full battery charge will only need to visit the gas station about every 1,000 miles and would use just 9 gallons of gasoline per month.

This is true as far as it goes, but glosses over the fact that someone is still pouring fossil fuels into a tank somewhere to make that electricity.  This seems more a car to hide the fact that fossil fuels are being burned than one designed to actually reduce fossil fuel use.  Given the marketing pitch here that relies on the unseen vs. the seen, maybe we should rename it the Fisker Bastiat.

The Fisker Karma electric car, developed mainly with your tax money, has rolled out with an EPA MPGe of 52.   But this number is bogus.  The true MPGe is worse than a Ford Explorer.  Learn why in my Forbes.com piece.