Obama advisors raised warning flags before Solyndra bankruptcy

By Tom Hamburger, Kim Geiger and Matea Gold, Washington Bureau

Sept. 26, 2011 12 AM PT

Reporting from Washington — Long before the politically connected California solar firm Solyndra went bankrupt, President Obama was warned by his top economic advisors about the financial and political risks of the Energy Department loan guarantee program that boosted the company’s rapid ascent.

At a White House meeting in late October, Lawrence H. Summers, then director of the National Economic Council, and Timothy F. Geithner, the Treasury secretary, expressed concerns that the selection process for federal loan guarantees wasn’t rigorous enough and raised the risk that funds could be going to the wrong companies, including ones that didn’t need the help.

Energy Secretary Steven Chu, also at the meeting, had a different view. Under pressure from Congress to speed up the loans, he wanted less scrutiny from the Treasury Department and the Office of Management and Budget, or OMB.

The divisions foreshadowed a question that has emerged since Solyndra’s bankruptcy: Was the program’s vetting process thorough enough? The disagreements also spotlighted an issue that has confronted Obama since he took office: What is the appropriate role of the government in stimulating the private marketplace?

Skeptics, noting that taxpayers could now be on the hook for $527 million the federal government loaned Solyndra, said the administration would have been better off making greater use of market incentives, not individual company loan guarantees.

“It was completely predictable that there would be a colossal failure among the bets,” said one person familiar with the internal debate.

Defending the program as an overall success, administration officials say that the $17 billion in loan guarantees now on track to go to 30 companies will help double renewable energy generation in Obama’s first term.

The program that funded Solyndra is set to expire at the end of the month, and the White House is pushing to provide more green-energy loan guarantees through other initiatives and keep the U.S. competitive globally. The Chinese government, the Energy Department says, last year committed $30 billion to solar-panel manufacturers.

Almost immediately after the 2008 election, Obama advisors began debating how to create jobs while reducing the nation’s reliance on fossil fuels. Some advisors pushed to expand a George W. Bush administration loan-guarantee initiative to help green-energy companies launch commercially. Others were philosophically opposed to providing help to individual companies and warned against betting taxpayer money on inherently risky ventures.

Nevertheless, the administration went forward with the loan guarantee program as part of the 2009 stimulus law. High-level disagreements on the program continued.

In late October 2010, administration officials took their opposing views directly to Obama. In preparation, a memo was drafted by Summers, who remained wary of the program, and two others who were more supportive: then-energy advisor Carol Browner and Ron Klain, then chief of staff to Vice President Joseph Biden. The memo laid out their different concerns and options to fix a “broken process” for getting loans approved.

Warning that the program could “fail to advance your clean-energy agenda” by investing in companies that didn’t need help, the memo proposed alternatives, including diverting the funds into grants available to the entire industry. By contrast, Energy Department officials wanted to end the “deal by deal” reviews by the Treasury and OMB, the memo said.

After the meeting, officials worked to streamline the process but didn’t make significant changes.

It is unclear whether an overhaul would have helped anticipate the problems at Solyndra. In February, the Energy Department agreed to restructure the company’s loan. A little more than six months later, Solyndra declared bankruptcy, laying off 1,100 people and triggering FBI and congressional investigations.

The administration originally touted the green energy program as a tool that would create or save tens of thousands of jobs. So far, 30 projects are on track to create about 16,750 construction jobs and 2,577 permanent jobs. The Energy Department notes that a related loan guarantee program helped save 33,000 jobs at Ford by helping the company modernize its factories.

But some critics argue that other government loan guarantee programs do a better job of protecting taxpayers.

For example, a Transportation Department program to spur infrastructure improvements limits loan guarantees to 33% of the cost of a project, said Autumn Hanna of the nonpartisan Taxpayers for Common Sense. Energy Department guarantees can amount to 80%.

Critics also question whether the Energy Department has the expertise to select which companies to help.

“Questions have to be raised about the quality of their analysis,” said analyst Shyam Mehta of GTM Research in Cambridge, Mass.

Jim Nelson, chief executive of Solar 3D, a Santa Barbara company that is developing three-dimensional solar cell technology aimed at making more efficient solar cells, said the government should stay out of the business.

“If private investment cannot find a reason to invest in emerging technology to make it commercial,” he said, “what is government doing it for?”

Energy Department officials counter that only projects that have met the test of the marketplace are considered.

“We don’t pick winners and losers,” spokesman Damien LaVera said. “The private sector does.” Companies selected for loan guarantees, he added, have been “deeply, deeply, deeply capitalized by the private capital markets.”

Many clean-energy investors say the loan guarantees have been essential to getting capital flowing, particularly during the credit crunch. It’s important for the government “to bridge this difficult gap between where venture capital is able to fund these companies and where traditional project finance kicks in,” said Sunil Paul, a San Francisco-based clean-energy investor.

Rhone Resch, president and chief executive officer at the Solar Energy Industries Assn., credited the program with creating “more than $40 billion of private investment in both energy generation and manufacturing projects,” and said the solar projects selected would not have gone forward without government backing.

But government audits in recent years have found problems in the implementation of the program.

A July 2010 report by the Government Accountability Office found that the department committed to back the loans without completing required studies of market, legal and technical issues.

“Without this information, it is not clear that the program could have fully evaluated the risk of the loans it committed to,” said Frank Rusco, an analyst for the GAO.

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Melanie Mason in the Washington bureau contributed to this report.