Earlier this week, the Treasury Department’s Office of Inspector General (OIG) released an audit report on Treasury’s role in reviewing, in March 2009, the Department of Energy’s (DOE’s) $535 million loan guarantee to Solyndra, the solar panel manufacturer that filed for bankruptcy in September 2011. Before going belly up, Solyndra burned through $528 million of the $535 million it received from Treasury’s Federal Financing Bank (FFB). Nearly all of the defaulted loan will be paid off by American taxpayers.
An agency’s OIG is supposed to be a watchdog guarding the public fisc from waste, fraud, and abuse. Watchdogs bark and even bite. This watchdog pussyfoots.
The title of the audit report is “Consultation on Solyndra Loan Guarantee Was Rushed.” Well, it was that. Treasury signed off on the Solyndra loan guarantee only two days after being asked on March 17, 2009 to vet it so that DOE could issue a press release touting the loan on the morning of March 20.
A more accurate title would be “Consultation on Solyndra Loan Guarantee Was Half-Assed.” Granted, government reports must eschew the use of idiomatic pejoratives. Nonetheless, the OIG did not have to make excuses for Treasury and DOE. The report ascribes to regulatory vagueness derelictions more reasonably attributed to negligence, incompetence, and pliancy in the face of political pressure.
DOE issued the Solyndra loan guarantee under Title XVII of the 2005 Energy Policy Act, as amended by the 2009 American Recovery and Reinvestment Act (a.k.a. the Stimulus Program). Under the Act, DOE is authorized to make loan guarantees to companies investing in “innovative” “clean” and “renewable” technologies after consultation with Treasury. The Act itself does not specify the nature of the consultation, but, as the OIG points out, the regulations implementing the Act (10 CFR § 609) require that consultation with Treasury be concurrent with DOE’s review process:
Concurrent with its review process, DOE will consult with the Secretary of the Treasury regarding the terms and conditions of the potential loan guarantees.
However, reports the OIG, “In the case of Solyndra, Treasury was not consulted on the terms and conditions of the loan transaction prior to or concurrent with DOE’s review process. Furthermore, the consultation that did occur was rushed.”
How rushed? Treasury was not consulted about the Solyndra loan guarantee until March 17, 2009, after DOE and the Office of Management and Budget (OMB) had already approved it. OMB asked Treasury to sign off on the loan guarantee that day. Treasury asked for more time. “DOE originally agreed to extend Treasury’s review time to noon on March 20, 2009. However, Treasury then agreed with a DOE request to expedite the review to March 19, 2009, so that the press release could be issued on the morning of March 20, 2009” (p. 6).
Treasury did express “concerns” about the loan guarantee in an email dated March 19, 2009, in particular the amount of skin Solyndra’s private investors had in the game:
. . . this should have been 65% debt and 35% equity instead of 73% debt and 27% equity . . . . DOE says their hands are tied on this issue . . . They are under pressure to complete a deal [p. 7].
Along the same lines, following a conference call with DOE, another Treasury email states:
. . .we pressed on certain issues as why we aren’t providing only a partial guarantee and covering a smaller percentage of eligible project costs, but the train really has left the station on this deal [p. 7].
So Treasury’s review was exceedingly rushed to meet the political exigency of getting out a press release. Treasury was brought into the process too late in the game to change the loan’s terms and conditions. Too late to minimize taxpayers’ risk if Solyndra went bust, which it did.
“Treasury told us that all comments raised were addressed by DOE” (p. 7), and “Treasury officials told us that this time period [one day] was sufficient in the case of its review of the Solyndra loan guarantee” (p. 10), the OIG reports without objection. Huh? If treasury’s review had been “sufficient,” taxpayers today might not be on the hook for a half billion-dollar loan default.
To the OIG, the problem is not negligence, incompetence, or undue political influence but statutory and regulatory vagueness regarding Treasury’s consultative role. “After numerous interviews with Treasury officials and evaluation of available documentation, it still remains unclear as to how Treasury delineates a consultation with regard to DOE’s LPG [loan guarantee program],” the OIG reports.
Amazing. Let’s grant that “Neither the Act nor 10 CFR § 609 defines or explains ‘consultation’ or ‘consult’ on the part of Treasury” (p. 8). Nonetheless, Treasury officials who review loan guarantees are supposed to know how to do their job, and they are supposed to be vigilant in the taxpayer’s interest. Treasury’s lack of a well-defined process for reviewing federal loan guarantee applications is itself scandalous!
Treasury’s attitude toward its consultative responsibility could fairly be described as lackadaisical. Only five of 11 officials asked to review the documents did so, and one or more were clueless:
Treasury’s Office of Policy and Legislative Review (OPLR) was assigned to coordinate Treasury’s consultation on DOE’s LGP for Solyndra. Subsequent to the assignment, the Director of the OPLR contacted 11 individuals, asking them to review Solyndra documents. In the end, only 5 individuals reviewed the documents and provided comments. Strangely, not everyone we spoke with was aware of being officially part of the consultative team. [p. 9]
Treasury was also slipshod about record keeping, thanks to which we may never know how DOE addressed the concerns Treasury raised during its “sufficient” one-day review of the Solyndra loan:
The Government Accountability Office (GAO) established standards for internal control in the federal government. In its guidance, GAO provideds that internal control and all transactions and other significant events need to be clearly documented, and the documentation be readily available for examination. . . .All documentation and records should be properly managed and maintained. . . .Ultimately, Treasury did perform a consultation on the Solyndra loan but was unable to provide sufficient documentation to support its review. . . .To support its review, Treasury officials provided e-mails and a brief memorandum summarizing a conference call with DOE dated March 2010. However, that memorandum was finalized 1 year after the conference call took place. . . .So, while Treasury officials told us that they had sufficient time to review the Solyndra documents, and all pertinent questions and concerns were adequately addressed, they maintained no documentation of DOE’s responses to the questions and concerns raised. [pp. 10-11]
But surely, after it was clear Solyndra was in financial trouble and DOE had to give the company an additional $75 million to keep it afloat and subordinate the government’s (i.e. taxpayers’) interest to that of private investors, Treasury scrutinized these changes in the loan’s terms and conditions? Actually, no. In this case, Treasury performed no review at all. Again, the OIG suggests, the fault lies neither with Treasury nor DOE but with lack of definitional clarity. You see, it all depends on whether “changes” in a loan rise to the level of “deviations” — or whether “deviations” add up to “substantial change”:
Treasury was not consulted on the restructure and it was uncertain if Treasury should have been consulted in accordance with CFR § 609.18 dealing with deviations from the financial terms of a loan guarantee. According to CFR § 609.18, “DOE will consult with OMB and the Secretary of the Treasury before DOE grants any deviations that would constitute a substantial change in the financial terms of the Loan Guarantee Agreement and related documents.” However, we were told by Treasury officials that it was unclear if Solyndra’s restructure was considered a deviation. [pp. 8-9]
If you want a good laugh, try to imagine the head loan officer of a private bank resorting to such definitional hair splitting to avoid reviewing a $75 million loan restructuring agreement.
The real lesson of the OIG’s investigation is not that we need clearer regulatory definitions of “consult” and “deviation.” Rather, it is that government lending and loan guarantee programs are inherently susceptible to waste, negligence, and political manipulation, because government loan officers are playing with other people’s money.
The proposal is frequently made that the government ought to assume the risks that are “too great for private industry.”  This means that bureaucrats should be permitted to take risks with the taxpayers’ money that no one is willing to take with his own.
Such a policy would lead to evils of many different kinds. It would lead to favoritism: to the making of loans to friends, or in return for bribes. It would inevitably lead to scandals. It would lead to recriminations whenever the taxpayers’ money was thrown away on enterprises that failed. . . .
But we shall pass over all these evils for the moment, and concentrate on just one consequence of loans of this type. This is that they will waste capital and reduce production. They will throw the available capital into bad or at least dubious projects. They will throw it into the hands of persons who are less competent or less trustworthy than those who otherwise would have got it. For the amount of real capital at any moment (as distinguished from monetary tokens run off on a printing press) is limited. What is put into the hands of B cannot be put into the hands of A. . . .
[Private investors] may sometimes make mistakes. But for several reasons they are likely to make fewer mistakes than government lenders. In the first place, the money is either their own or has been voluntarily entrusted to them. In the case of government-lending the money is that of other people, and it has been taken from them, regardless of their personal wish, in taxes. The private money will be invested only where repayment with interest or profit is definitely expected. This is a sign that the persons to whom the money has been lent will be expected to produce things for the market that people actually want. The government money, on the other hand, is likely to be lent for some vague general purpose like “creating employment” ; and the more inefficient the work — that is, the greater the volume of employment it requires in relation to the value of the product — the more highly thought of the investment is likely to be.
 Such as investments in the “clean tech industries of the future” are often said to be.
 Creating “green jobs,” in today’s parlance.