Reporting on Solyndra

Missing basic concepts about the government's loan-guarantee program.

Much of the press coverage of the Solyndra bankruptcy has been poor on some basic concepts at the heart of the story.

This is what happens when beat reporters meet stories with business, political, and science angles, and why news organizations need to team up their people across beats.*

What happened with Solyndra? Presidents Bush and Obama sought to guarantee half a billion dollars in loans so it could build a big plant to make its unique solar panels. The Obama administration made it official.

There are questions about whether some sort of fraud was committed at Solyndra—the FBI raided the company recently—or whether the Obama administration improperly leaned on the DOE to lend to it. Those will be sorted out in the coming weeks, but in the meantime, the press needs to do a much better job of explaining this program.

Take this New York Times story this morning with the no-kiddin’ headline, “Market Risks Are Seen in Energy Innovations.”

The same market forces that doomed Solyndra, the solar cell manufacturer that received $528 million in government loans and then went bankrupt, could imperil other manufacturing ventures that have received loan guarantees from the Energy Department, energy experts warned this week.

Think about what a loan guarantee is: It’s the government stepping in to help an industry get financing that is otherwise cost-prohibitive. We want more clean energy more quickly than it’s coming, and we want the manufacturing capacity here at home. The market doesn’t care whether its money is used for social good—it wants its money used to make money, with as little risk possible.

So this Department of Energy loan-guarantee program (created by the Bush administration and the Republican Congress back in 2005, by the way) is the DOE leveraging its capital to incentivize the private sector to lend cheaply to promising companies. Startup companies (and startup technologies) need cheap capital to grow quickly, but they’re inherently risky, which is why governments decided they needed this kind of government-as-venture-capitalism-lender corporate welfare.

Venture capitalists give startups capital in the unlikely hope that their companies will turn into the Next Big Thing. For every Google that makes it megabig, there are hundreds of companies that lose their investors’ money or muddle along. More than half of the firms backed by venture capital go bust and investors lose their money.

One firm going bust doesn’t mean that the program is a failure. Indeed, firms going bust was baked into the cake here: DOE knew from the beginning that some of the firms it funded would go bust. That’s the nature of what it’s doing.

Meantime, check out this page-one Washington Post story from yesterday headlined “Obama green-tech program that backed Solyndra struggles to create jobs.” Here’s the lede:

A $38.6 billion loan guarantee program that the Obama administration promised would create or save 65,000 jobs has created just a few thousand jobs two years after it began, government records show.

The program — designed to jump-start the nation’s clean technology industry by giving energy companies access to low-cost, government-backed loans — has directly created 3,545 new, permanent jobs after giving out almost half the allocated amount, according to Energy Department tallies.

First, the Post reports the $38.6 billion number as if that’s what the government is handing out to businesses. That’s misleading. That number is almost all private-sector capital backed up by a sliver of taxpayers’ money—$4 billion of government capital. The Department of Energy planned for $2.5 billion in losses before it lent any money out. The Post doesn’t report these numbers at all.

The Post compounds the problem with this:

The eventual cost of the loan guarantee program for taxpayers remains unclear. If the revised 60,000 target is reached, it would work out to about $640,000 in loan guarantees for every job created or saved.

Because it does such a poor job of explaining what a “loan guarantee” is, and how much the government really might spend, that $640,000 number is also misleading. All $38.6 billion of those loans would have to go bad for it to cost $640,000 per job created (assuming the 60,000 number). But the government expects to actually “spend” $2.5 billion in losses on the program. Maybe it will end up being more, maybe less. But it won’t be anywhere near $38.6 billion.

And the idea behind the program is not just to create jobs and help American companies, but to lower the price for renewable energy so we can use more of it. Electric-car battery prices are going down, as the Times points out. This is not a bad thing. It’s the whole point. Batteries are the biggest reason why electric cars cost more than internal-combustion ones. Solyndra itself was brought down largely by the plunge in solar-panel prices.

Another thing that I haven’t seen in many press reports, though the Post briefly touches on it: How likely is it that the government will actually lose the entire $535 million it guaranteed for Solyndra? The government has priority on payback according to this Wall Street Journal story. Does the company has some assets worth liquidating or might another firm swoop in and pay something for it? Bankruptcy doesn’t wipe a company’s value out, which is a popular misconception.

Then there’s the idea that the failure of one company proves that the government can’t allocate capital—as if every place it puts money goes bust. That conspicuously neglects the success of the government’s capital-allocation to General Motors and Chrysler.

More problematically, it assumes by implication that the private sector is always great at allocating capital, despite the fact that we’re living through a depression caused by the catastrophic failure of markets during the last decade.

Remember how the government had to allocate capital to folks like Goldman Sachs to save us from an utter meltdown caused by the fact that folks like Goldman Sachs had done such a bad job allocating capital?

*I wrote this thought on Twitter after I published this and thought it made sense to add it here.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , , ,