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.

Henry Hazlitt, author of Economics In One Lesson, arguably the best introduction to economics ever written, nailed it decades ago:

The proposal is frequently made that the government ought to assume the risks that are “too great for private industry.” [1]  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” [2]; 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.

[1] Such as investments in the ”clean tech industries of the future” are often said to be.

[2] Creating “green jobs,” in today’s parlance.

Yesterday, I participated on a panel discussion about the Department of Energy’s Loan Guarantee Program for low carbon energy sources. I’ve long been a fierce opponent of the DOE’s green bank—see here, here, here, and here for my take.

In a nutshell, I argue that investment banking is well outside the core competency of Energy Department bureaucrats, so there is no reason to believe that they could start a successful green bank from scratch. Even if they could, political concerns would trump economic reasoning, such that loan authorizations would get funneled to the well-connected, instead of the deserving.

Regarding this last point, consider this recent report by the Center for Public Integrity and ABC News, on the remarkable correlation between the success of DOE Loan Guarantee applications and the amount of money that the applicant raised for Barack Obama’s campaign for the White House.

In addition to the panel, we also organized a coalition letter to the House Appropriations Committee, on the need to excise the DOE’s green bank from the budget. Signatories included CEI, Taxpayers for Common Sense, George Marshall Institute, National Taxpayers Union, and the Nonproliferation Policy Education Center. Click here for a copy of the letter.

As I describe elsewhere (here, here, and here), the Department of Energy’s green bank is one of the worst government programs, ever.

For starters, financing is well outside of the DOE’s core competency, so there’s no reason to expect that it could start a successful banking operation from scratch. There’s also the fact that government has a horrid record picking energy ventures in which to invest taxpayer money. As such, the odds of the green bank failing were high when it was created by the 2005 Energy Policy Act.

During the whole of the program’s existence, evidence has mounted confirming that the green bank is a bad idea. The Government Accountability Office, the top federal watchdog, has issued three separate reports raising serious doubts about the DOE’s management of the program. These suspicions were validated when the DOE first loan guarantee, for $535 million, went to a California solar power company, Solyndra, that now teeters on the brink of insolvency.

Unfortunately for taxpayers, it gets worse, because the results of a recent investigation suggest that the green bank lacks transparency. Last week, the DOE’s Office of the Inspector General published a report finding that the green bank program “could not always readily demonstrate, through systematically organized records, including contemporaneous notes, how it resolved or mitigated relevant risks prior to initiating loan guarantees.” According to the report (available here), 15 loan guarantees (out of 18 total) lacked “pivotal” information regarding risk ratings.

Notably, House of Representatives eliminated the program in its 2011 budget, which is great news for taxpayers. It could save them up to $70 billion in bad loans to boondoggles. However, green energy enthusiasts in the Senate (Senator Dianne Feinstein is chief among them), are intent on rescuing the program from the chopping block, so its fate is uncertain.

I’ve been a vehement critic of the Department of Energy’s Loan Guarantee Program (see here and here). In a nutshell, I argue that the DOE has no business starting a bank from scratch. Even if it could cobble together the necessary expertise and infrastructure, the U.S. government has a long history of picking losers in the energy market (see: breeder reactors, synfuels).

My case against the DOE’s green bank has been made persuasively by the Government Accountability Office, the top federal watchdog. In 2007, 2008, and 2010, the GAO released reports concluding that the program is being not being run well.

My case was further made by the pending collapse of the first recipient of a loan guarantee. In September 2009, the DOE issued a $535 million loan guarantee to Solyndra, a company that you may recall from reports of it being a total financial disaster. It canceled an IPO after a PriceWaterhouse Cooper audit found that the company’s shaky finances “raise substantial doubt about its ability to continue as a going concern.” Evidently, Solyndra already has lost $557 million. In November, the company announced that it would shutter a plant and lay off 170 employees.

Cutting the fat from the federal budget is more politically popular than ever, and the green bank’s troubled history suggests it’s a risky bet better made when the budget isn’t far in the red. Accordingly, House Republicans axed the program in its proposed budget.

The House’s decision to eliminate the loan guarantee program prompted California Senator Dianne Feinstein to take to the pages of the LA Times to plead on the DOE’s behalf. Most of her argument is green jobs boilerplate, but one sentence in particular struck me. According to Senator Feinstein, “The loan guarantee program was created in 2005 with strong bipartisan support and has had a significant impact on the industry.”

She is referring to the 2005 Energy Policy Act. And she’s right—the legislation  was passed by a strong bipartisan majority in the Congress. However, Sen. Feinstein voted against it.

My CEI colleague Chris Horner and I have a piece in today’s Daily Caller, on the Department of Energy’s awful green bank.

This excerpt aptly summarizes out take:

The point of a green investment bank is ostensibly to facilitate the commercialization of new, dormant or otherwise commercially unsuccessful technologies by providing easier financing than is available in the real world, where people scrutinize where they invest their money. It turns bureaucrats into bankers, but with your money, and no real-world incentives to “invest,” as the word connotes and denotes.

Critics argue that these bureaucrats are picking winners and losers. If only. In fact, they just pick from losers.

I especially like that last line, about how the green energy industry is a loser. As Chris and I have explained elsewhere, any industry, like green energy, that owes its creation to government handouts is fundamentally uncompetitive, and, therefore, will always be on the taxpayer dole.

The proof is in the pudding. Solar, wind, and geothermal energy have been heavily subsidized since the Congress passed the Public Utility Regulatory Policy Act in 1978. For more than three decades, they’ve been “the energy of the future.” And despite 30 years of taxpayer supports, they are nowhere near close to being a viable competitor on the energy market. Instead, the wind, solar, and geothermal lobbies warn of catastrophic harm to their industries whenever the Congress reconsiders the generosity of green energy subsidies.

Energy Secretary Steven Chu today testified before the Senate Energy and Natural Resources Committee on the Obama administration’s  budget for the Department of Energy (DOE). Despite the fact that the DOE has yet to spend $21 billion in stimulus money (about 60% of its 2010 budget), the White House proposed a 12% budget increase.

Minnesota Senator Al Franken was unconcerned with the deficit implications of giving billions more taxpayer dollars to a bureaucracy that has yet to spend the billions of taxpayer dollars it already has. Instead, he had a much more parochial matter in mind.

His line of questioning for the Energy Secretary focused on Sage Electrochromic, a Minnesota-based window manufacturer. Senator Franken explained that the window company had received a $70 million loan guarantee from the Department of Energy, which you’d think would be  pleasing to the Senator. After all, a federally backed loan is a taxpayer subsidy that allows recipients to obtain better financing.

Yet it wasn’t generous enough for Senator Franken. He noted that the company was still on the hook for the credit subsidy cost, which is (roughly speaking) the value of the risk that the government undertakes by backing the loan. Point blank, the Minnesota Senator told Secretary Chu, “I’d like to get this credit subsidy cost waived.”

Is this not a shakedown?

The primary Republican talking point for today’s hearing was that the government should not be picking and choosing winners and losers in the energy industry. Secretary Chu vigorously denied this accusation; Senator Franken proved it.

Back in February 2009, when everyone thought a deep depression was imminent, Keynesian economists and their political boosters demanded big government spending. According to their calculations, a “timely, targeted, and temporary” infusion of taxpayer money would defibrillate our moribund economy, the growth of which would make the trillion-dollar price tag seem like small potatoes. It was elementary!

So the White House pushed, and the Congress passed, a gigantic trillion-dollar stimulus, the American Recovery and Reinvestment Act. It was, however, anything but “targeted.” Instead, it was a grab bag of special interest handouts.

About $90 billion of those taxpayer funded giveaways went to “green” energy, which is about as trendy a cause as there is right now. Today, on the thirtieth of June, almost a year and half after the stimulus passed, the Department of Energy has awarded a scant 15% of its “green” energy stimulus funds. So much for “timely.”

Despite the fact that so little of the stimulus has yet been spent, House leadership already wants more. This week, powerful chairman of the House Ways and Means Committee, Michigan Representative Sandy Levin (D) is pushing a bill that would extend Stimulus green energy tax incentives, to the tune of $20 billion. So it seems that “temporary” was also a sham.