Megan McArdle on the Solyndra Scandal
Megan McArdleis a senior editor for The Atlantic, where she writes about business and economics. Megan was interviewed by The Motley Fool's Tim Hanson at our 2011 Investing Conference, held in Arlington, Va., at the end of September. What follows is a lightly edited transcript of their discussion.
Tim Hanson: Another topic that you addressed recently on your blog, which I will be reading about as well, is the Solyndra scandal, which, is if there is a bright side to it, gave the material for a fabulous Daily Show segment. Is this something we should be concerned about sort of systemically, in terms of how some of these loans and stimulus are being given out by the government, or is this really more of just a one-off problem that is horrible and unfortunate, but we don't need to worry about everything else that went out at the same time?
Megan McArdle: I think we should be concerned about it systemically, but not for the reasons that a lot of people are saying. So the Republicans are trying to make this, for understandable reasons, into a corruption scandal. There is this guy, George Kaiser. He is a big bundler for Obama. His family foundation has this private-equity wing called Argonaut Ventures, and they were basically the major investor. And not only that, but they have now apparently managed to get the receivables of Solyndra factored to them at extremely attractive rates. We would all really like to get in on this kind of deal. And also they handle the debtor-in-possession financing for the bankruptcy, so it looks quite likely, at least from what I was reading today, like Argonaut is going to get hold of basically all of the assets of Solyndra for a fairly small amount of money.
That is a problem. But I don't think it is a problem because the Obama administration went down to the DoE and said to the civil servants, "Hey, why don't you just give this company to my friend, George Kaiser?" I think it is a problem because, first of all, what we did, we did loan guarantees. And I have a really deep and visceral reaction to any form of co-signing. I don't think that people should co-sign. You should not co-sign for your children or your grandchildren or your nephews or your brother. It gets you into huge trouble; people co-sign because they don't actually have the money. If you had the money, you would just lend it to your brother. If you thought your brother was a good risk, you would give him money, right? But you don't; you co-sign instead. These loans go bad at a really high rate, which is why they need a co-signer. And so the chances are you have just lent this money to your brother.
And that is actually true of this, too. The way we cost this is: What probabilities does DoE assign to Solyndra defaulting? Well, did the DoE really have a good handle on what was happening in the market for polysilicon and what that was going to do to Solyndra's market for their non-silicon-based solar cells? No, they really didn't. And so they are not good at pricing this risk.
And so we went in and we gave these loan guarantees, and Solyndra seems to have kind of gone hog-wild, although again, not necessarily in the way people think. They did apparently have some stupid conference room where you could press a button and the windows would darken.
Hanson: See, that sounds awesome. [Laughing.]
McArdle: It sounds awesome, but I remember talking to a friend who is a VC guy, and he was like, "Yeah, we went in. We didn't do the investment of the company I looked at today." And I said, "Why?" And he said, "Well we walked in and they had these crazy, like, 360 glass window shades, and you press a button and they go up and down, and they showed us this. And we were like, 'You guys, we are not giving you our money. This is what you are going to spend it on?'" So there was some of that.
But the actual big problem seems to be that they had fab one, and they got this money from us to build fab two, and this was supposed to give them economies of scale, and it was going to be fantastic. And then the prices of solar panels started crashing because the Chinese poured massive subsidies into the industry.
This had already happened before they built the second facility. But the loan was tied to building a second facility, and so they were like, "Well, I guess we will build the second facility, huh? Because we have got $535 million; we are not just going to give it back." The bank didn't care because we were guaranteeing it. And the VCs didn't care because it wasn't their money. And so they went and built this second $334 million factory and then spent another $200 million or so getting it up and running, and it is totally wasted money. Not only that, when they got close to bankruptcy and they desperately needed a little bridge financing to get by, we allowed the bridge financers to take a senior position to us on that second fab, so they now are the senior creditor on this factory.
Why did we do this? This is stupid, right? The reason that they were losing money was they were selling a product that cost them $6 to make, and when they had decided to build the factory, they were selling them for $3, but they figured they could get scale. And now these things are selling for $1.30. There is no possible scenario at this point, other than aliens coming down and destroying China, in which they are going to get to a point where they can make money on these things, right? It is like that old economist joke? We are losing money on every unit, but we make it up in volume?
But why did we do this? Well, because there was some infinitesimal chance that aliens would, in fact land, destroy Beijing and solve our problem. And as long as they put it off, or as long as you keep pouring money in, you don't have to admit that you just poured $1.5 billion, which is their total financing, down the rathole of this economically unviable factory.
And so we did this, and this is the problem that I think is that, first of all, it is not our money, and when you are playing with other people's money it is a lot easier to double down. People do this anyway, right? Have you ever been to Vegas, right? Like "I lost ..."
Hanson: No one here has ever been to Vegas, I can tell you that.
McArdle: "I lost $1,500 at blackjack; I need to get it back. That is totally going to work, because the house isn't going to have an edge this time." And so like people do this, but I don't care when they do it with their money; I care a lot when the government does it with my money, and the government should, fundamentally to me, not ever be doing loan guarantees, because it disguises the cost, and, second of all, should be very careful about dealing with some costs. They have the economic dream team. I feel like someone could have gone down to the DoE and just taken five minutes to explain that.
At the time this article was published