Sep

25

 The Government's $535 million loan guarantee to solar company Solyndra on a hurry-up schedule to comport with highly publicized visits by Biden and Obama, followed by Solyndra's bankruptcy and taxpayer loss of the entire amount guaranteed, has prompted considerable criticism in the media and Congress.

The Solyndra case was able to garner such public outrage because political contributions by the company's backers were so clearly on the record, the Government's due diligence was obviously put secondary to the Administration's self-promotion schedule, and Solyndra's quick bankruptcy revealed the Government's incompetence in choosing which "green jobs" company to support with taxpayer dollars. But the true lesson of this sad case is that the Government's SBA (Small Business Administration) and Green Jobs programs are virtually always incompetent and politically motivated.

It is extremely difficult for private venture capitalists to analyze and decide which early-stage companies are likely to succeed. And private venture capitalists possess great expertise, and have the extreme incentive and personal discipline that the money they are risking is their own and that of their investors. The Government on the other hand has practically no expertise in such complex and subtle analysis, and lacks personal discipline in that the money being risked belongs to no one in particular. Or worse, wasting the money is considered a positive because it is part of a "stimulus program", or is necessary to "help small business which, as we all know, generates most of the jobs." Further, lacking true expertise and personal financial discipline, the Government will inevitably be influenced by political considerations.
The upshot is that virtually every Government SBA and Green Jobs guarantee or grant will be some version of a scam, either from the standpoint of incompetence or outright fraud, resulting in loss to the taxpayers of the great majority of the tens of billions of dollars allocated to these programs by the President and Congress. But in most cases it will take several years for the recipient company's difficulties to become clear, and by then no one will notice.

Equally detrimental (although much more difficult to notice or understand), subsidies to these economically undeserving companies distort the market and are significantly damaging to other businesses who are more competent and seek to play by the normal rules of capitalism. This happens is various direct and indirect ways. A subsidized company like Solyndra drives up the price of expert labor and specialized raw materials, to the detriment of non-subsidized competitors. Subsidized Solyndra will also tend to charge prices that do not cover its true costs, again hurting honest competitors.

And more subtly, the enterprise prices and ownership of businesses themselves will be distorted.Without the Obama Administration subsidy, Solyndra would have been in trouble in early 2009.The owners would probably have been forced to try to sell out at a distress price. If the company had any value at all, it could have been purchased by more competent management at perhaps ten cents on the dollar, and that management may have had a good chance to make an economic success of Solyndra, to the far greater benefit of its employees, suppliers and customers.

I can testify this is not just theoretical. For many years I have been in the business of trying to acquire and run small companies in a variety of industries. I cannot tell you how many times, when I analyzed and made what I considered a fair market bid to purchase a company, I was told that my bid was too low, that the broker for the seller was arranging for another buyer to obtain an SBA loan to purchase the company at a higher price. Such a buyer, who typically would not have the personal net worth to buy the company, was in effect getting a free option: Either he would be successful with the company and pay off the SBA loan. Or he would be unsuccessful and be relieved of the loan through bankruptcy. And in the meantime he could draw a salary and expenses from the company and live quite well.


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