Solyndra, and other federal boondoggles

In September, a California solar energy company named Solyndra went bankrupt, taking with it more than $535 million in federal (read: taxpayer funded) loans as well as laying off more than 1,000 employees. I got to thinking about the philosophy and history behind this kind of attempt by the Feds to guarantee the operations of a company in a favored industry. What I found was revealing. 

Transcontinental monkey business   

Of course we’ve all heard of the golden spike that completed the Transcontinental Railroad in Utah in 1869.  What I did not know was how federal subsidies impacted the cost and timing of the project. Subsidies were paid per mile of track laid. Get this: $16,000 per mile on flat ground; $48,000 for mountainous terrain. Unsurprisingly, the execs of the rail companies constantly found the most circuitous routes over the hilliest ground — with scant regard for efficiency or safety. As the two federally subsidized companies, the Central Pacific and the Union Pacific, approached each other from the west and east, respectively, they actually ran track parallel to each other for 200 miles. Why? Well, they got at least $16,000 per mile, so between them they got an extra $6.4 to $19.2 million in extra subsidies. Real money in the 1860s.So why not lay extra track?

The outcome was a celebratory golden spike followed by five years of financial scandals, rebuilding and rerouting. And then — you guessed it — bankruptcy. Yes, both the Union Pacific and the Central Pacific went broke. Three other federally subsidized long haul railroads, the Northern Pacific, Santa Fe and Southern Pacific, also followed the smooth glide path into bankruptcy.

In counterpoint to such fraud, waste and abuse (and subsidies), there was only one privately built transcontinental railroad: the Great Northern, built by James Hill. He took neither free federal land grants nor track subsidies. He built more slowly but more efficiently. He bought the land he built the rails on. Using more expensive but higher quality materials, Hill correctly figured that the maintenance costs would be much less. In the long term, that meant much more efficient operation. And the Great Northern prospered. Eventually, Hill even bought control of the Northern Pacific which despite federal help had gone bust.

Federal help did not guarantee success 140 years ago. Indeed, in multiple situations it presaged financial failure. Why does this pattern repeat? My thought is that James Hill was in the railroad business, while the execs of all the other railroads were in the business of getting subsidies for laying track — a completely different mindset. 

I love innovative technology

Solyndra spent hundreds of millions of taxpayers’ cash building a state-of-the-art factory to produce solar cylinders, rather than the more established solar wafers. This was a technology that was unproven as to economic viability. The only reason Solyndra got to spend in excess of $500 million on their bet was that the Feds paid them the equivalent of a “track subsidy” to move ahead.

During my career as a CPA, I had the privilege to work with dozens of innovative companies, mostly in medicine and biotechnology. Often at an early stage of research, they were able to secure government grants (not a giant grant masquerading as a loan!) for a few million dollars to help kick-start their early research ideas. Had the government sponsored 100 solar research projects for $5 million each, think how many promising technologies might have been birthed compared to providing $535 million of “track” for one Solyndra.

As public policy, I believe a solid case can be made for taxpayer support of early stage technology. For a relatively small price, we citizens have a chance to benefit from breakthrough ideas. In contrast, having the government try to support the operations of a relative few favored companies, versus providing research dollars for many companies, is a recipe for failed policy.

Solyndra on the edge

Beyond my overall concerns about government “investment” in operations, Solyndra was a particular doozie. Red accounting flags were all around. In March 2010, its auditor, PricewaterhouseCoopers, said its 2009 results cast significant doubt that it could survive another year. Hey, it made 18 months. Guess that’s a victory of sorts. However, Solyndra had a basic problem. They were selling a product that cost $8 to make, for $4. Ouch.

It gets even worse. The feds allowed a $75 million private investment to have priority over the $535 million which we taxpayers put up, after the red flags had already been raised. Try this one out on a friend sometime:  Let’s invest in XYZ company’s stock. A share costs $610. You put up $535 (88 percent) and I’ll put up $75 (12 percent). But I get the first $75 out when we sell. Your friend likes you so much (yeah, right), she agrees. XYZ proceeds to lose a boatload of money. A share is now worth only $60 and you sell. The result of your sweetheart deal?  You get $60 back (20 percent loss); your (former) friend gets zilch (100 percent loss). If you know anyone who’d do that deal, send them this way. But that’s the deal we taxpayers got on Solyndra. 

We got the zilch. Not exactly a model of rational governance. And now coming to a congressional committee near you, the post-mortem investigations.

Richard Shanley, CPA is a retired audit partner of the accounting firm of Deloitte & Touche. He lives in Salisbury.