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The Solyndra Bankruptcy: Scandal or Casualty of Market Competition?

published: 2011-10-03 8:56

When U.S. solar manufacturer Solyndra LLC, announced it was closing its doors and releasing 1,100 full and temporary workers, nowhere was the reverberations heard louder than in the Obama White House. President Obama has been receiving ongoing criticism for his relationship to the major investor in Solyndra -- George Kaiser of Argonaut Private Equity. Kaiser worked as a major fundraiser for the Obama presidential campaign.

On August 31, 2011, the beleaguered company released a statement that it intended to file a voluntary petition for protection under the United States Bankruptcy Court. Solyndra, which   manufactured cylindrical solar systems for commercial rooftops installations, cited “global economic and solar industry market conditions” as the reasons for its decision.

Founded in 2005, Solyndra opened it headquarters in Fremont, California the following year. The company submitted its application for the coveted Department of Energy (DOE) Loan Guarantee Program, in 2006. George W. Bush was still in the White House. In late 2007, Solyndra was one of 16 companies selected to move to the next phase of the process.

According to one report, the Bush administration attempted to present the Solyndra package to the credit review committee the day before the Obama's inauguration. The committee sent the loan package back to the DOE because it was not ready for the conditional approval sought.

The Washington Post reported that someone in the White House sent e-mails, in August 2009, asking the Office of Management and Budget (OMB) to expedite the loan guarantee approval. OMB makes the final determination on guarantee loan requests.

On September 1, 2009, Solyndra received the $535 million loan guarantee. Vice-President Biden, Secretary Chu and Governor Arnold Schwarzenegger publicly announced it a few days later during the company's groundbreaking ceremony for its new state-of-the-art manufacturing plant.

Just six months later, in March 2010, auditors from PricewaterhouseCoopers raised concern about Solyndra's, which reached $100 million revenue in 2009, ability to stay afloat. The audit revealed the company lost $558 million over the five years it had been in business. In addition, Solyndra had a negative cash flow and a very questionable and “flawed” business model.

Nonetheless, in May 2010, President Obama toured the facilities and championed the company as a model for job creation in the solar energy sector. By January 2011, executives at the company informed the administration that it was on the verge of bankruptcy. The following month, the Energy Department worked out a refinancing arrangement with Solyndra. Investors sink an additional $75 million from investors.

In early March 2009, the Wall Street Journal (WSJ) named the firm the number one clean energy company in the United States. Later that same month WSJ rated Solyndra fifth in the “top 50 venture-back companies.”

The criteria for the ranking included the record of accomplishments for the venture-capitalist investors sitting on the company's board, funds raised by the firm over the preceding three years, and the record of accomplishment for the founder and CEO.

Inquiry into Solyndra's Loan Guarantee

Lawmakers on Capitol Hill want to know if someone in the White House “pressured” the OMB into approving the loan guarantee. The question remains whether Solyndra received the loan guarantee based on the merits of its application or its majority investor's political connection to President Obama.

Contrary to some reports, which states the Bush Administration “denied Solyndra’s application, the DOE's credit committee stated “ the project had  merit,” but required more information before it could make a recommendation for a conditional commitment.

The same committee established a time line for completion of the necessary due diligence for March 2009 and eventually approved the application for submittal to the review committee, which issued the conditional commitment and forwarded the guarantee request to the OMB.

According to Jay Carney, White House spokesperson, the e-mail sent from the White House to the OMB in August 2009, clearly shows the White House wanted to know  when the loan would be approved so that it could “put on an event and that sort of thing,” not pressure the OMB staff into making the loan, as some have claimed. The Washington Post article states that OMB staff felt pressured to complete their assessment. Another e-mail stated, “There isn't time to negotiate."

The subcommittee also wants to know how the firm spent the money. The company's CEO Brian Harrison and CFO W.G. “Bill” Stover received subpoenas, which ordered them to appear before the House Energy and Commerce Committee's Subcommittee on Oversight and Investigations to answer questions about the collapse of the CIG solar panel manufacturer. 

The failure of Solyndra comes in an environment where some critics question the wisdom of risking taxpayer dollars, in a time of massive federal debt and cuts to domestic programs, to support solar and other renewable energy initiatives.

The loans director for the Energy Department, Jonathan Silver, testified before the subcommittee on September 14. He stated that the loan guarantee warranted approval because of the potential returns to the taxpayer. Sliver went on to say, "The rest of the world takes the industry enormously seriously." Furthermore, "It's a multitrillion-dollar market that will create tens of thousands of jobs."

Executives from Capital Partners and Argonaut Private Equity will appear before the sub committee to answer questions about the federal loan guarantee. The Walton family, of the Wal-Mart empire, funds Madrone Capital Partners. The Walton's have supported Republican candidates to the tune of millions of dollars.

In a letter sent to the investigative subcommittee, two sub committee members Henry A. Waxman and Diana DeGette wrote,” One important question for the committee to examine is whether there were sound reasons to make an investment in Solyndra." The letter went on to state, "Some sophisticated and experienced private venture capital investors thought the answer was yes, and they invested over $1 billion in Solyndra - twice the support provided by the federal government." Argonaut Private Equity invested $271 million and Madrone Capital Partners $37 million in the failed company. Another venture capital company associated with Kaiser, GKFF Investment Co., also invested $50 million.

U.S. Solar Industry Seeks to Control Political Fallout

The Solar Energy Industries Association (SEIA), a U.S. based solar industry trade group has already gone into its public relations mode to help ensure the Solyndra bankruptcy, and subsequent investigation, doesn't cause irreparable harm to the entire sector. SEIA president Rhone Resch said it's critical to set the record straight and not malign the entire U.S. solar industry. "You can't judge an industry by the bankruptcy of one company."

Earlier this year, the SEIA cited statistics that showed the solar sector as the “fastest growing” sector in an economy that struggles to create jobs. The industry employs over 100,000 people in 5000 companies. Resch also expressed concern about legislation - solar or otherwise, getting caught up in partisan haggling

Perhaps a “smoking gun” does not exist. Solyndra may have simply succumbed to the same fate as Evergreen Solar, another recipient of taxpayer dollars that went bankrupt a few months ago. Stiff competition from Chinese solar panel manufacturer's, and, as revealed in the audit performed well after the loan guarantee approval, an obsolete business model.

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