Subscribe to Money Morning get daily headlines subscribe now! Money Morning Private Briefing today's private briefing Access Your Profit Alerts

Why the Government Should Have Seen the Solyndra Collapse Coming

If you knew of a company that had high manufacturing costs, was in a highly competitive market, and was hemorrhaging money, would you invest in it?

Well, U.S. President Barack Obama and the federal government did – using taxpayer money.

And now that company, Solyndra LLC, is bankrupt, and the $535 million loan it secured from the government stands little chance of being repaid.

Republicans have seized upon the Solyndra collapse as a political embarrassment for the Obama administration, which pressured the U.S. Department of Energy to approve the loan application in August 2009.

President Barack Obama's May 2010 visit to the Fremont, CA, facility established Solyndra as a focal point for his green jobs initiative.

But as a money-losing company with a business model that virtually assured eventual collapse, Solyndra was a bad bet. The company filed for Chapter 11 bankruptcy protection on Sept. 6.

"Solyndra was never profitable, and it was obviously poorly managed and unviable in the global market," Rep. Cliff Stearns, R-FL, chairman of a congressional panel investigating the Solyndra bankruptcy, told The New York Times.

It's amazing Solyndra needed a federal loan guarantee at all; it attracted $1 billion in private capital in addition to half billion it received through the federal loan guarantee program in September 2009.

Yet, by the end of August, most of it was gone.

Although the Obama administration has blamed the Solyndra collapse on poor luck and stiff competition from Chinese solar companies, many warning signs were apparent even before the loan guarantee was approved.

The evidence includes:

  • E-mails between DOE staff members in Aug. 2009 acknowledged that a credit rating agency had predicted Solyndra would run out of money in September 2011.
  • Based on securities filings, Solyndra's average sales price for the first nine months of 2009 was $3.24 per watt, while its manufacturing costs were $4 per watt. Worse yet, manufacturing costs for rival First Solar Inc. (Nasdaq: FSLR), which makes silicon-based solar panels, were far lower — just under $1 per watt (they're now about 75 cents per watt).
  • Industry experts had predicted the sharp declines in the cost of silicon as far back as 2008. High-grade silicon was $1,000 per pound in early 2008, but fell to just $100 per pound by September 2009.
  • Solyndra lost $172.5 million in 2009 on revenue of $100.5 million. Its cumulative losses at that point totaled $373 million.

It Only Gets Worse

Solyndra's woes accelerated after the DOE approved the$535 million loan in September 2009, but instead of cutting off the flow of money, the Obama administration kept promoting the company as a showcase of green tech success.

In the months following approval of the loan guarantee:

  • Solyndra applied for a second federal loan guarantee for $469 million just weeks after winning the first, but the DOE never approved it.
  • In December 2009, Solyndra filed for an initial public offering (IPO), with plans to raise $300 million. Less than six months later, the company's board abandoned the idea after its investment bankers, Goldman Sachs Group Inc. (NYSE: GS) and Morgan Stanley (NYSE: MS), warned the stock would flop.
  • Solyndra used the money from the DOE loan guarantee to build a second factory with more capacity – capacity that wasn't needed. The new factory could produce 500 megawatts of panels, far exceeding the 110-megawatt capacity of the original factory. But 2010 sales amounted to just 65 megawatts. Employees became concerned as unsold inventory stacked up.
  • In March 2010, the company's own auditor, PriceWaterhouseCoopers LLP, cited Solyndra's "ability to continue as a going concern."
  • In July 2010, founder and Chief Executive Officer Chris Gronet stepped down. Successor Brian Harrison shut down the original factory to cut costs and address the excess capacity problem.
  • In January 2011, the Office of Management and Budget (OMB) was warning of an imminent default. The DOE rushed to release an additional $67 million installment of the loan to Solyndra.

With such a relentless stream of negative news, the chatter within the solar industry was that a Solyndra collapse was at least a strong possibility. As early as February 2010, the Greentech Media Website was warning investors the Solyndra story was "fraught with uncertainty," listing five major challenges, including the gap between manufacturing cost and selling price as well as the risk the company would burn though its cash before it would become competitive.

What Were They Thinking?

So why did the Obama White House jump on the Solyndra bandwagon and stay there right to the end?

Part of the explanation lies with President Obama's strong desire to promote green technologies. Solyndra, with its impressive and unusual approach to solar, caught the administration's fancy.

In addition, the federal loan guarantee program, started under President George Bush in 2005, had yet to approve any loans. President Obama allocated funds from his stimulus bill to the program both to help get it moving and boost the U.S. economy. Solyndra was the first company on the list.

But blinded by the allure of an innovative green tech company that had created 1,100 jobs, the Obama administration brushed aside a sea of red flags. With Solyndra's collapse, not only are those jobs gone, but so is $535 million of taxpayer money.

News and Related Story Links:

Join the conversation. Click here to jump to comments…

  1. King Ralph | September 28, 2011

    This is a pittance compared to the amount of money we wasted in Iraq. That war has cost over a trillion dollars so it's difficult to get excited over 500 million.

  2. CP | September 28, 2011

    And so, why is Obama walking the streets? And we wonder why we are in trouble. There is no justice in this country. The courts are only designed to incarcerate the victims while the thieves run free.
    Keep in mind, this guy is not our legal President. John Boehner is our President Pro Temp. Biden is not our legal V. Pres., either because he was appointed by our illegal President.
    This makes Obama a flat-out criminal thief.

  3. FG | September 28, 2011

    It seems when humans in Gov are involved with money it spells big problems, especially when it isn't their money. Just look around the World. Only solution that I can see is starting by voting them ALL OUT. Then possibly have a few bankruptcies here and there. Then get some fiscal conservatives in charge of the check books. And in the USA's situation, stop trying to save the World and try minding our own business for a change.

  4. Patrick McClelland | September 28, 2011

    Why are these people, including Obama, not brought before Congressional committee and indicted on fraud and abuse of public trust charges? This continues the long list of financial directives (health care, anyone?)not only supported, but originated and propagated by a corrupt group of elected officials. The only difference between this administration and the professional gangs of Chicago is that they hold higher governmental seats from which to oversee the progress of their agenda. Why are their actions any less treasonous than those who betray our country via more stealth like measures? It sure seems their grand design is to bring us down economically, and for reasons far beyond the capacity of the American public to understand. At the very least these people need to be fired and their actions exposed for all to see.

  5. Rick | September 28, 2011

    Why are some people shocked by this mess ????? The President was advised that this was a risky deal, the entire industry is comperting with China on this one, (China has the edge), and the US economy was, and is tanking…… Hmmmmmm The President has never been in business, could not even keep his law license active (if he truly ever had one) and is surrounded by advisors that have their heads so far up where the sun doesn't shine, well what else does one expect, and there's more disaster heading to a country (USA) near you…..

  6. true | September 29, 2011

    Your article is ignorant to the point of retardation for the following reasons:
    1. It shows you know absolutely nothing about business (manufacturing especially). At lower production rates manufactures operate a loss when capacity is increased and fully utilized they tend to make more money. It is called "economies of scale". Very elementary business concept you seem entirely unaware of.
    2. The U.S. is and has been for quite some time only bit player in the "global solar market" Both Italy and Germany have far lager solar markets that dwarfs the amount of solar energy consumption in the U.S. (even though the U.S. has a wildly larger overall economy).
    3. The idea that someone 's half backed prediction of Solendyra's cash flow "2 years out!" is expected to be taken seriously considering the volatile expansion of the solar market is laughable. You might as well have them pick the nightly lotto number two years into the future.
    4. Solar energy was on a tear as one of the fastest growing most successful industries' in the world two years ago. Though USA had nothing to do with it. European support drove production, which drove economies of scale, which drove prices down. That is supposed to be a good thing! (Cheaper energy duh!)
    1. A “Loan Guaranty” is not and does not “hand over tax payer dollars” It’s an F’'king guarantee. Tax payers usually never spend dime on a guarantee. It’s just a promise to help cover the difference if something goes wrong. So for the outset everyone one of your numbers about “costing taxpayer money” is wildly inaccurate and untrue.
    5. Obama indeed has screwed things up. However much like hope, change, withdraw from Iraq, what Obama says he will do/fix/inspire tends to be the exact opposite form what he actually does. Obama campaigned on, then mentioned over and over again how would fight for green jobs (True). However out of the $800 spent on stimulus only $8billion was actually designated for green energy while vast majority was spent on subsidizing State government union pensions. Of that only $8 billion designated for green energy the majority was slated for give always in the form of home repair money for sealing windows, electric golfs and etc. Then for even the very little that went to solar, DOE directed the majority to fund GE/ (NBC television) projects based outdated mirror technology. Obama has done nothing for the solar panel industry. But Many American entrepreneurs took him seriously, then risked everything, on hope that he would keep his word and help support he industry, then did nothing. American solar business are failing because they ramped production anticipation of Obama delivering the “feed in” market support that never materialized.
    2. Why is there zero outrage about billions actually tax payer dollars (not loan guarantees) being handover top planned parenthood for more abortions, or Acorn, Government union pension funds. And if Loan guarantees are such a big deal why would give a crap about a couple billion in guarantees for new clean energy when the government and already giving Fannie Mae and Freddie mac guarantees in the tens of trillions of dollars’ worth.
    3. Why such the backlash? Maybe NBC is owned by GE which by the way owns the patents for competing outdated solar tech compared to what the PV companies you are attacking use. Entrenched corporate American coal companies tend to be less then thrill when they hear solar is becoming so cheap that it is approach parity with fossil fuel

    • fred | October 1, 2011

      This is the most ridiculous piece of drivel i have evr read. As of ignorance about business, you obviously talk about yourself.
      "Tax payers usually never spend dime on a guarantee." please do tell where else US government gets the money, other than from tax payers.
      And it always helps to read the article, obviously you missed the part that they were producing 1W for $4, while their direct competitor here in US was producing it for $1.

Leave a Reply

Your email address will not be published. Required fields are marked *

Some HTML is OK