It was the poster child for the Obama’s green energy and green jobs program. But two weeks ago Solyndra shuttered its operations, laid off 1,100 people, and filed for bankruptcy after vaporizing over a half billion dollars in taxpayer money. Obama may be our worst president but he is an even worse venture capitalist.
Solyndra was a green-tech start up which had developed a novel photovoltaic element for solar panels. Conventional solar panel arrays are flat, and when installed in multiple rows on a roof, they must be tilted toward the sun. Also, rows must be spaced several feet apart to avoid casting shadows on each other, meaning that a considerable area of a roof is squandered. Moreover, the material used to convert light energy into electrical energy is silicon – a material used also in the production of semiconductors and therefore in increasing demand. Because this forced the solar industry to compete for silicon with the computer industry, silicon prices began increasing by double digit percentages after 2005.
That same year Solyndra founder Dr. Chris Gronet, an expert in semiconductor materials, devised a cylindrical photovoltaic cell design that consisted of a glass tube inside of another glass tube. Wrapped around the inner tube were 150 solar cells made from copper, indium, gallium and diselenide, rather than silicon. The cylindrical design, looking somewhat like a fluorescent bulb, could absorb light from any direction, including reflected and diffused light, and convert it to electricity. Arranged side by side in an array, the Gronet array weighed less than conventional solar panel designs and therefore eliminated the need to reinforce a roof. High winds exerted less force on a roof than with flat solar panels, and the absence of silicon got rid of a pricey commodity which, at the same time, would keep the price of competitive silicon-based panels high.
The downside to Gronet’s design was that it was more expensive in materials and manufacturing cost. Still, he believed that if the sell-through volume could be increased, manufacturing scale economies and automation would allow it to be produced in quantities that would make the venture profitable. That would prove to be an insurmountable “if.”
In 2006 Solyndra, along with a number of other companies, applied for a new federal loan program that had been created the previous year to fund innovative energy technologies. By the end of 2007, the Department of Energy completed enough preliminary due diligence to short-list 16 companies – among them, Solyndra. Another year passed for the DOE to complete its investigations. In late 2008 a favorable recommendation was forwarded to the credit committee for a $535 million loan. However, in the waning months of the Bush administration, the committee rejected the recommendation and called for an independent study of the company's long-term market prospects, including the possibility of obsolescence. The committee did say that "the project appears to have merit."
During his election campaign, Obama had made renewable energy and green jobs a priority of his administration, so his Energy Secretary was told to speed up green-tech loan programs in the pipeline. White House emails show that a lot of pressure was being pushed down the line to speed up approval of the Solyndra loan guarantee. Biden wanted to attend the groundbreaking of a new Solyndra manufacturing plant and he wanted to announce the approval of the loan guarantee at that event.
Here is part of an email between the Office of Management and Budget and the office of the Vice President that was among those subpoenaed by the House Oversight Committee when the Solyndra story broke:
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). We would prefer to have sufficient time to do our due diligence reviews and have the approval set the date for the announcement rather than the other way around.
Solyndra had leased a plant (called Fab 1) in Fremont, CA in 2007 and began commercial production in 2008. But silicon prices began to decline in 2008 as more worldwide production capacity came on line. Heavily subsidized factories were opening in China. This had the unhappy consequence of allowing conventional solar panel producers to drop their prices. Solyndra’s value proposition evaporated – evidently without the notice of anyone in the Obama administration and the Energy Department, anxious as they were to spend stimulus money, which the Solyndra loan had now become.
The Solyndra loan guarantee was finalized in September 2009 and construction of the new plant (Fab 2) was started. DOE issued this press release:
The guaranteed loan, expected to provide debt financing for approximately 73% of the project costs, will allow Solyndra to initiate construction of a second solar panel fabrication facility (Fab 2) in California ….
Interestingly, the Fab 2 factory was to be built in two phases. The government funding would help pay for the first phase, which would cost an estimated $733 million. For the second tranche, the company would have to turn to the stock market.
It’s worth noting at this point in the Solyndra story that we Southern boys know you can’t jump part of the way over a ditch; if you jump you’d better get all of the way across. Likewise, we know that you shouldn’t build a factory with only part of the money committed. It’s best to have all of the money in hand, or if not, you’d best be absolutely sure you can get the rest. Solyndra had neither. But this didn’t trouble the DOE.
In December 2009 Solyndra filed papers with the US Securities and Exchange Commission for an initial public stock offering worth $300 million. For a company that had generated so much excitement – $600 million in venture capital had been syndicated at that point – the details in the S-1 were grim. The company had an accumulated deficit of $505 million and expected to incur net losses "for the foreseeable future." The second phase of factory construction would cost an additional $642 million – over twice what the IPO was raising.
According to the S-1, Solyndra’s revenue in the nine months ending October 2009 was $59 million and half of that was concentrated in just three customers – not a broad market. The cost of goods sold for the same period was $108 million and the electrical capacity of the product sold was 17 megawatts. That works out to a sale price of $3.42 per watt and a cost of $6.29 per watt. They surely couldn’t hope to make that up on volume. And they surely had no way with those losses to ever pay back the DOE loan. You’d think somebody on Team Obama would have noticed that.
In March 2010, auditors with PricewaterhouseCoopers questioned whether Solyndra could survive. Despite raising $970 million in venture capital by that point, the company's deficit had reached $557.7 million. One hopes the auditor’s opinion was known by the White House, but Obama went ahead with his visit to Fab 2 in May, praising the company and insisting he was "not prepared to cede America's leadership" in green technology. Tell that to China.
Two months after Obama’s visit to the new Solyndra factory, the IPO was canceled "due to adverse market conditions" and the availability of alternative funding from existing investors. Solyndra once again turned to the government for help, asking for $469 million to pay for phase two of the factory's construction.
The competitive climate for Solyndra continued to worsen throughout 2010 and the company continued to burn cash. Inventories were piling up. Dr. Gronet, Solyndra’s founder, was pushed out and replaced as CEO.
In late 2010, the Energy Department warned that it would not release any more of the loan money unless Solyndra lined up additional private financing. Solyndra's two largest investors – Argonaut Ventures and Madrone Partners – agreed to provide a $75 million loan with the option of another $75 million later. In return, they wanted the DOE to restructure Solyndra's loan agreement by extending the repayment schedule and taking a junior position behind their loan in case of bankruptcy. Not only is that unheard of, it’s also illegal for the government to take a junior position. DOE did it anyway.
In February 2011, DOE gained observer rights in all Solyndra board meetings and was included in all conference calls. Its loan officer, Jonathan Silver, agreed to the restructuring terms knowing it was a big risk. Silver would later justify the decision, explaining that had he refused, Solyndra would have been forced to shut its doors immediately and at least this way the operating assets of the company would be of greater value if bankruptcy occurred. Apparently it never occurred to Silver that the Solyndra assets were so specialized that they would be worth little to anyone else except another business willing to pursue Solyndra’s flawed business model. At this point Solyndra had received $460 million from the DOE and the new factory had started production in January.
But the market changes that had pushed Solyndra to the brink just kept on coming. In the first eight months of 2011, solar cell prices fell another 42% largely because of $30 billion in Chinese government subsidies to its solar sector. The US share of the worldwide solar-panel market had fallen from a peak of 43% in 1995 to just 7%. Obama and the Solyndra investors were betting against the house, and in this case, the house was the Chinese government.
An August 2009 email exchange between DOE staff members acknowledged that a credit-rating agency predicted Solyndra would run out of cash in September 2011. Despite that, when the House Oversight Committee began subpoenaing the White House for documents related to the loan guarantee, Solyndra launched a $480,000 public relations effort directed at Congress. In July 2011 lobbyists filed with the Senate to begin lobbying activity, staging media events so Solyndra’s CEO Brian Harrison could publicly affirm the firm’s fiscal stability. One of those events included a series of meetings with Congressmen, including Representatives Henry Waxman (D-CA) and Diana DeGette (D-CO). Harrison said lawmakers should "separate Solyndra and its business results from the political process that is ongoing."
Market conditions continued to deteriorate, forcing Solyndra to cut its revenue expectations. Its private backers balked at giving the second $75 million loan unless the government loan was again restructured. This time DOE refused, forcing the company to shut down and terminate 1,100 people on August 31. On September 6, the company filed for bankruptcy protection and two days later the FBI raided the company’s headquarters and its officers’ homes.
The government had loaned about $527 million to the company by the time the end came Obama’s green dream had proved a nightmare and taxpayers had lost over a half billion dollars.
But Solyndra’s troubles had caught the attention of Republicans on the House Energy and Commerce Committee, who months earlier had started investigating the company's loan. They also had learned that Argonaut Ventures is run by George Kaiser, a billionaire Oklahoma oilman who served as a campaign contribution bundler for Obama's 2008 campaign. Kaiser made 16 visits to the White House since 2009, according to White House visitor logs, and was a big contributor to Lady Obama’s charities as well as Obama’s election and reelection campaigns. Is there a rat in this wood pile? Stay tuned.
Solyndra’s CEO and CFO have been called to testify before a House committee. Their lawyers have announced that both will plead Fifth Amendment protection. Lamar Smith (R-TX) has sent a letter to Attorney General Holder asking that he appoint an outside investigator through the US trustee’s office, which can request one in bankruptcy court if there’s suspicion of fraud or misconduct.
Solyndra's rise and fall spanned six years – short even by Silicon Valley standards. Its bankruptcy provided yet another example of waste in Obama’s stimulus spending not to mention setting off a debate about using taxpayer money to play venture capitalist.
Was Solyndra’s ill-fated end predictable? Absolutely.
Solar and wind power are in the same category of junk science as ethanol. They look good on paper but they perform terribly in the marketplace. No one has earned a return of their investment in these “feel good” technologies.
Solyndra had a clever product concept but its economics were awful and its technology was far more risky than flat panel silicon arrays. Selling a watt at $3.42 even at a loss didn’t come close to flat panel prices of $1.25 per watt. And the company’s value proposition depended on the price of silicon remaining high to keep silicon-based competitors from lowering prices. Nature abhors a vacuum and economics abhors a shortage. Invariably new capacity comes on line to exploit the high prices caused by shortages and predictably there will be too much new capacity, producing too much output and tanking prices. That happened with silicon.
And who in his right mind would start a new venture like this one in business-hating California not to mention the Bay area community of Fremont? Regulations are driving businesses out of that state mostly into the business-friendly arms of Texas. Regulations jack up the cost of nearly everything including energy. Unemployment is higher in California than the national average because of regulations and safety standards. Regulations govern water, air, waste management, environment disturbance – everything – all of which increases the operating expense of business in California.
All things considered, this investment was an equity risk – an entirely inappropriate use of taxpayer money. Even though the DOE transaction was called a loan, that doesn’t change the fact that the loan was exposed to an equity risk but would at best earn a creditor’s return – interest.
Obama and his boys bought the sizzle, not the steak, because they are bush league business men and they were using other people’s money. Maybe they got taken in by the $600 million in private equity that was in the deal when the DOE was approached. But the IPO told a tale that should have gotten the DOE’s attention. Wall Street had no stake in the deal to protect and didn’t want one. Solyndra’s equity investors, on the other hand, were already in the hole, and like the gamblers they were, they kept ponying up to protect their stake, perhaps hoping they wouldn’t have to face their investors when the money was gone – something Obama won’t have to do.
The Solyndra loan was made out of a $38.6 billion program to promote the theology of green energy. The Washington Post says the fund has created exactly 3,545 jobs after parceling out half its dough. That works out to around $5 million a job for those of you in Palm Beach County, Florida.
Kermit the Frog was right. It’s not easy being green.
Solyndra was a green-tech start up which had developed a novel photovoltaic element for solar panels. Conventional solar panel arrays are flat, and when installed in multiple rows on a roof, they must be tilted toward the sun. Also, rows must be spaced several feet apart to avoid casting shadows on each other, meaning that a considerable area of a roof is squandered. Moreover, the material used to convert light energy into electrical energy is silicon – a material used also in the production of semiconductors and therefore in increasing demand. Because this forced the solar industry to compete for silicon with the computer industry, silicon prices began increasing by double digit percentages after 2005.
That same year Solyndra founder Dr. Chris Gronet, an expert in semiconductor materials, devised a cylindrical photovoltaic cell design that consisted of a glass tube inside of another glass tube. Wrapped around the inner tube were 150 solar cells made from copper, indium, gallium and diselenide, rather than silicon. The cylindrical design, looking somewhat like a fluorescent bulb, could absorb light from any direction, including reflected and diffused light, and convert it to electricity. Arranged side by side in an array, the Gronet array weighed less than conventional solar panel designs and therefore eliminated the need to reinforce a roof. High winds exerted less force on a roof than with flat solar panels, and the absence of silicon got rid of a pricey commodity which, at the same time, would keep the price of competitive silicon-based panels high.
The downside to Gronet’s design was that it was more expensive in materials and manufacturing cost. Still, he believed that if the sell-through volume could be increased, manufacturing scale economies and automation would allow it to be produced in quantities that would make the venture profitable. That would prove to be an insurmountable “if.”
In 2006 Solyndra, along with a number of other companies, applied for a new federal loan program that had been created the previous year to fund innovative energy technologies. By the end of 2007, the Department of Energy completed enough preliminary due diligence to short-list 16 companies – among them, Solyndra. Another year passed for the DOE to complete its investigations. In late 2008 a favorable recommendation was forwarded to the credit committee for a $535 million loan. However, in the waning months of the Bush administration, the committee rejected the recommendation and called for an independent study of the company's long-term market prospects, including the possibility of obsolescence. The committee did say that "the project appears to have merit."
During his election campaign, Obama had made renewable energy and green jobs a priority of his administration, so his Energy Secretary was told to speed up green-tech loan programs in the pipeline. White House emails show that a lot of pressure was being pushed down the line to speed up approval of the Solyndra loan guarantee. Biden wanted to attend the groundbreaking of a new Solyndra manufacturing plant and he wanted to announce the approval of the loan guarantee at that event.
Here is part of an email between the Office of Management and Budget and the office of the Vice President that was among those subpoenaed by the House Oversight Committee when the Solyndra story broke:
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). We would prefer to have sufficient time to do our due diligence reviews and have the approval set the date for the announcement rather than the other way around.
Solyndra had leased a plant (called Fab 1) in Fremont, CA in 2007 and began commercial production in 2008. But silicon prices began to decline in 2008 as more worldwide production capacity came on line. Heavily subsidized factories were opening in China. This had the unhappy consequence of allowing conventional solar panel producers to drop their prices. Solyndra’s value proposition evaporated – evidently without the notice of anyone in the Obama administration and the Energy Department, anxious as they were to spend stimulus money, which the Solyndra loan had now become.
The Solyndra loan guarantee was finalized in September 2009 and construction of the new plant (Fab 2) was started. DOE issued this press release:
The guaranteed loan, expected to provide debt financing for approximately 73% of the project costs, will allow Solyndra to initiate construction of a second solar panel fabrication facility (Fab 2) in California ….
Interestingly, the Fab 2 factory was to be built in two phases. The government funding would help pay for the first phase, which would cost an estimated $733 million. For the second tranche, the company would have to turn to the stock market.
It’s worth noting at this point in the Solyndra story that we Southern boys know you can’t jump part of the way over a ditch; if you jump you’d better get all of the way across. Likewise, we know that you shouldn’t build a factory with only part of the money committed. It’s best to have all of the money in hand, or if not, you’d best be absolutely sure you can get the rest. Solyndra had neither. But this didn’t trouble the DOE.
In December 2009 Solyndra filed papers with the US Securities and Exchange Commission for an initial public stock offering worth $300 million. For a company that had generated so much excitement – $600 million in venture capital had been syndicated at that point – the details in the S-1 were grim. The company had an accumulated deficit of $505 million and expected to incur net losses "for the foreseeable future." The second phase of factory construction would cost an additional $642 million – over twice what the IPO was raising.
According to the S-1, Solyndra’s revenue in the nine months ending October 2009 was $59 million and half of that was concentrated in just three customers – not a broad market. The cost of goods sold for the same period was $108 million and the electrical capacity of the product sold was 17 megawatts. That works out to a sale price of $3.42 per watt and a cost of $6.29 per watt. They surely couldn’t hope to make that up on volume. And they surely had no way with those losses to ever pay back the DOE loan. You’d think somebody on Team Obama would have noticed that.
In March 2010, auditors with PricewaterhouseCoopers questioned whether Solyndra could survive. Despite raising $970 million in venture capital by that point, the company's deficit had reached $557.7 million. One hopes the auditor’s opinion was known by the White House, but Obama went ahead with his visit to Fab 2 in May, praising the company and insisting he was "not prepared to cede America's leadership" in green technology. Tell that to China.
Two months after Obama’s visit to the new Solyndra factory, the IPO was canceled "due to adverse market conditions" and the availability of alternative funding from existing investors. Solyndra once again turned to the government for help, asking for $469 million to pay for phase two of the factory's construction.
The competitive climate for Solyndra continued to worsen throughout 2010 and the company continued to burn cash. Inventories were piling up. Dr. Gronet, Solyndra’s founder, was pushed out and replaced as CEO.
In late 2010, the Energy Department warned that it would not release any more of the loan money unless Solyndra lined up additional private financing. Solyndra's two largest investors – Argonaut Ventures and Madrone Partners – agreed to provide a $75 million loan with the option of another $75 million later. In return, they wanted the DOE to restructure Solyndra's loan agreement by extending the repayment schedule and taking a junior position behind their loan in case of bankruptcy. Not only is that unheard of, it’s also illegal for the government to take a junior position. DOE did it anyway.
In February 2011, DOE gained observer rights in all Solyndra board meetings and was included in all conference calls. Its loan officer, Jonathan Silver, agreed to the restructuring terms knowing it was a big risk. Silver would later justify the decision, explaining that had he refused, Solyndra would have been forced to shut its doors immediately and at least this way the operating assets of the company would be of greater value if bankruptcy occurred. Apparently it never occurred to Silver that the Solyndra assets were so specialized that they would be worth little to anyone else except another business willing to pursue Solyndra’s flawed business model. At this point Solyndra had received $460 million from the DOE and the new factory had started production in January.
But the market changes that had pushed Solyndra to the brink just kept on coming. In the first eight months of 2011, solar cell prices fell another 42% largely because of $30 billion in Chinese government subsidies to its solar sector. The US share of the worldwide solar-panel market had fallen from a peak of 43% in 1995 to just 7%. Obama and the Solyndra investors were betting against the house, and in this case, the house was the Chinese government.
An August 2009 email exchange between DOE staff members acknowledged that a credit-rating agency predicted Solyndra would run out of cash in September 2011. Despite that, when the House Oversight Committee began subpoenaing the White House for documents related to the loan guarantee, Solyndra launched a $480,000 public relations effort directed at Congress. In July 2011 lobbyists filed with the Senate to begin lobbying activity, staging media events so Solyndra’s CEO Brian Harrison could publicly affirm the firm’s fiscal stability. One of those events included a series of meetings with Congressmen, including Representatives Henry Waxman (D-CA) and Diana DeGette (D-CO). Harrison said lawmakers should "separate Solyndra and its business results from the political process that is ongoing."
Market conditions continued to deteriorate, forcing Solyndra to cut its revenue expectations. Its private backers balked at giving the second $75 million loan unless the government loan was again restructured. This time DOE refused, forcing the company to shut down and terminate 1,100 people on August 31. On September 6, the company filed for bankruptcy protection and two days later the FBI raided the company’s headquarters and its officers’ homes.
The government had loaned about $527 million to the company by the time the end came Obama’s green dream had proved a nightmare and taxpayers had lost over a half billion dollars.
But Solyndra’s troubles had caught the attention of Republicans on the House Energy and Commerce Committee, who months earlier had started investigating the company's loan. They also had learned that Argonaut Ventures is run by George Kaiser, a billionaire Oklahoma oilman who served as a campaign contribution bundler for Obama's 2008 campaign. Kaiser made 16 visits to the White House since 2009, according to White House visitor logs, and was a big contributor to Lady Obama’s charities as well as Obama’s election and reelection campaigns. Is there a rat in this wood pile? Stay tuned.
Solyndra’s CEO and CFO have been called to testify before a House committee. Their lawyers have announced that both will plead Fifth Amendment protection. Lamar Smith (R-TX) has sent a letter to Attorney General Holder asking that he appoint an outside investigator through the US trustee’s office, which can request one in bankruptcy court if there’s suspicion of fraud or misconduct.
Solyndra's rise and fall spanned six years – short even by Silicon Valley standards. Its bankruptcy provided yet another example of waste in Obama’s stimulus spending not to mention setting off a debate about using taxpayer money to play venture capitalist.
Was Solyndra’s ill-fated end predictable? Absolutely.
Solar and wind power are in the same category of junk science as ethanol. They look good on paper but they perform terribly in the marketplace. No one has earned a return of their investment in these “feel good” technologies.
Solyndra had a clever product concept but its economics were awful and its technology was far more risky than flat panel silicon arrays. Selling a watt at $3.42 even at a loss didn’t come close to flat panel prices of $1.25 per watt. And the company’s value proposition depended on the price of silicon remaining high to keep silicon-based competitors from lowering prices. Nature abhors a vacuum and economics abhors a shortage. Invariably new capacity comes on line to exploit the high prices caused by shortages and predictably there will be too much new capacity, producing too much output and tanking prices. That happened with silicon.
And who in his right mind would start a new venture like this one in business-hating California not to mention the Bay area community of Fremont? Regulations are driving businesses out of that state mostly into the business-friendly arms of Texas. Regulations jack up the cost of nearly everything including energy. Unemployment is higher in California than the national average because of regulations and safety standards. Regulations govern water, air, waste management, environment disturbance – everything – all of which increases the operating expense of business in California.
All things considered, this investment was an equity risk – an entirely inappropriate use of taxpayer money. Even though the DOE transaction was called a loan, that doesn’t change the fact that the loan was exposed to an equity risk but would at best earn a creditor’s return – interest.
Obama and his boys bought the sizzle, not the steak, because they are bush league business men and they were using other people’s money. Maybe they got taken in by the $600 million in private equity that was in the deal when the DOE was approached. But the IPO told a tale that should have gotten the DOE’s attention. Wall Street had no stake in the deal to protect and didn’t want one. Solyndra’s equity investors, on the other hand, were already in the hole, and like the gamblers they were, they kept ponying up to protect their stake, perhaps hoping they wouldn’t have to face their investors when the money was gone – something Obama won’t have to do.
The Solyndra loan was made out of a $38.6 billion program to promote the theology of green energy. The Washington Post says the fund has created exactly 3,545 jobs after parceling out half its dough. That works out to around $5 million a job for those of you in Palm Beach County, Florida.
Kermit the Frog was right. It’s not easy being green.
Thank you for this, Bill. I had heard about this scandal but never had the time to explore it in depth. Your summary is excellent. It shocks me how many times, after a scandal like this, we realize that our fascination for the "sizzle" clouds our judgment and we overlook that fact that there is no steak as stated so well. The basic blocking and tackling requirements of any well-run business are ignored all too often.
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