Coyote Blog

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. ....

Every study I have ever seen has said that corn ethanol is only marginally energy-positive when its growing and production costs are considered and barely breakeven on CO2.  In other words, it costs a lot and does nothing, even before one considers negative effects to food prices and land use.

So of course, the Obama administration may soon demand that we subsidize more of it

Burdened by falling gasoline consumption and excess production capacity, ethanol producers appealed to the government on Friday to raise the 10 percent limit on ethanol in most gasoline blends to as high as 15 percent.

Ethanol plants are closing across the country and some ethanol producers are declaring bankruptcy. The appeal will require the Obama administration to decide whether to increase federal support for the industry, which has already benefited from an array of subsidies, tax credits and Congressional production mandates.

"Approving the use of ethanol blends up to 15 percent is a necessary and positive step," said Bob Dinneen, president of the Renewable Fuels Association, an industry lobbying group, "to ensure the full potential of a robust domestic ethanol industry."

The Environmental Protection Agency and the Energy Department have been testing higher ethanol blends. The E.P.A. has nine months to review the request, but it could decide before that to increase the blend cap slightly, to 12 or 13 percent.

Energy Secretary Steven Chu has indicated that he would favor at least a small increase in ethanol levels unless auto companies said there was a risk the change would damage their products.

At least the article is marginally honest - its starts with the true reason for the mandate - improving the bottom line of favored businesses, not energy or environmental policy.  Chu seems to be joining Krugman as another Nobel prize winner turned political hack.  In the past I have had Chu's supposed gravitas thrown at me in climate debates -- I think this should settle just how Chu makes choices between what science tells him vs. what politcal pressures are demanding.

Government bureaucracies do not exercise power by allowing activities to occur - they only have power, and thus have reason to justify their continued funding and jobs, when they say no.   Every incentive that they have is to say no.  When a government agency allows progress to proceed smoothly, it is doing so because some person or small group is fighting against the very nature of the organization.  Anyone who believes otherwise about government agencies is challenged to go build and open a new restaurant in Ventura County, California.  Here is the latest example:

The [weatherizing] program was a hallmark of the American Recovery and Reinvestment Act, a way to shore up the economy while encouraging people to conserve energy at home. But government rules about how to run what was deemed to be a ''shovel-ready'' project, including how much to pay contractors and how to protect historic homes during renovations, have thwarted chances at early success, according to an Associated Press review of the program.

''It seems like every day there is a new wrench in the works that keeps us from moving ahead,'' said program manager Joanne Chappell-Theunissen. She has spent the past several months mailing in photographs of old houses in rural Michigan to meet federal historic preservation rules. ''We keep playing catch-up.''

And of course, even in a skeptical article about a "stimulus" project, no one ever mentioned what productive activities the $5 billion was being used for by private individuals before the government yanked it away for this little catastrophe.

By the way, the overblown rhetoric award has to go to this:

''This is the beginning of the next industrial revolution with the explosion of clean energy investments,'' said assistant U.S. Energy Secretary Cathy Zoi. ''These are good jobs that are here to stay.''

Given that the first one was about steel mills and railroads and oil and electricity, if this new industrial revolution is all about caulking, I think I am getting nostalgic for the first one.