Why it's better to fund solar energy with venture capital than with government loans

A compelling argument by Megan McArdle.

The whole post is worth reading, but here's a sample:

A number of people have claimed that the government had to make these loans because they're "too risky" or "too big" for the private sector, forcing the government to act as a VC firm. That riskiness means that yes, a non-insubstantial number of the loans will fail.

But this doesn't really make any sense. The private sector doesn't have any trouble dealing with risky ventures; it simply prices the capital accordingly, demanding high interest rates, or a larger equity chunk, in exchange for money. . . .

[A]t the company level, there's no difference between an optimal market outcome, and an optimal social outcome (from the DOE's point of view); both investors and society benefit if more solar cells are sold. If the solar cells are unlikely to be sold to many people, than the loan guarantee is not a good idea — it will not foster much environmental benefit. If the solar cells are likely to be sold to many people, than the loan guarantee should not be needed; private investors should be easily found to back the manufacturing.

"How Did Solyndra Spend All That Money?"

Megan McArdle asks the question, and she gives some answers from a financially savvy friend of hers and also from a Solyndra insider.

McArdle concludes:

I don't think this is going to end up being a story about corruption. I think it's going to end up being a story about bad decision making: at Solyndra, among its investors, and in the Obama administration. People took large bets with low expected values, because the alternative was admitting that the money they'd already spent was gone, and not coming back. They doubled down, just like some chump who lost his stake at the Vegas blackjack tables.

This does happen in the private market, of course. The difference is, when Argonaut Ventures takes a flyer on a longshot, they're not doing so with my money. The administration was supposed to have the economic dream team. Couldn't they have spared a moment to sit down with the folks at DOE and explain the concept of sunk costs?

5 myths about Solyndra

The Washington Post punctures conventional wisdom from the left and right about the solar-power company, which went bankrupt after receiving loan guarantees from the Obama administration. (Background.)

Solyndra probed

The Wall Street Journal reports:

The political scandal over the failure of Solyndra, the politically connected solar-panel maker, just got a lot more interesting. The FBI raided the company's Fremont, California offices yesterday and executed a search warrant.

Congress has been investigating the company, which received a $535 million government loan guarantee in March 2009 and announced August 31 that it is filing for bankruptcy. Yesterday's FBI raid is the first hint of a larger government probe, which is being conducted in cooperation with the Department of Energy's Inspector General. . . .

Solyndra was once a leading light, if you will, of the Obama Administration's signature "green jobs" dreams. The Energy Department signed off on the loan guarantee under a George W. Bush-era law, and the Federal Financing Bank, a unit of the Treasury Department, also provided a loan with a 1.025% quarterly interest rate. A parade of Administration officials praised the investment, including President Obama, who said in a speech last year at the company's Fremont headquarters that "companies like Solyndra are leading the way toward a brighter and more prosperous future."

Solyndra never did turn a profit and laid off employees in November. But in February the company renegotiated its loan guarantee—with a hitch. Under the new agreement, Solyndra's investors would loan the company $75 million but be first in line on repayment in the event of bankruptcy, in front of taxpayers.

WSJ gives the Obama administration's spin:

Speaking about the bankruptcy earlier this week, White House spokesman Jay Carney said: "There are no guarantees in the business world about success and failure. That is just the way business works, and everyone recognizes that." He added that "you cannot measure the success based on one company or the other."

WSJ responds:

That is all true enough, but then most businesses don't stick taxpayers with hundreds of millions of dollars in potential losses when they fail. The problem with politically directed investment isn't merely that bureaucrats are betting with someone else's money on industries they may not understand. Such investment also invites political favoritism for the powerful few at the expense of millions of middle-class taxpayers. Americans need to know the full story of who made or influenced the decision to give Solyndra its loan guarantee, and if political pressure was brought to bear.

My mom comments on the raid:

Political connections can come back to bite you, when the politicians you were connected to need to gnaw through that connection and run like hell.