“Yougotto know when to hold ‘em, know when to fold ‘em, know when to walk away and know when to run.”
Kenny Rogers’ “The Gambler” holds many lessons for Department of Energy (DOE) Secretary Steven Chu in his handling of the Solyndra bankruptcy fiasco. In an effort to force a stimulus success story of “green” jobs, Mr. Chu took a gamble with taxpayer money and lost on the Solyndra loan guarantee. Instead of knowing when to hold ‘em, he doubled down by subordinating taxpayers’ interests and lost again. Every gambler has to take risks, but Mr. Chu made reckless bets with a bad hand, costing taxpayers $170 million that never should have been gambled.
Following meetings with investors, Mr. Chu’s DOE staff made a decision by Dec. 10, 2010, to subordinate $75 million of taxpayer money so more private capital could be injected into Solyndra. Subordination gave private investor money priority over taxpayer money, meaning that in the event of bankruptcy, private investors would be paid before taxpayers. At that point, $440 million of the $535 million loan guarantee already had been pumped into the company. Instead of maneuvering to buy more time and send more good money after bad, it was time to fold ‘em.
In fact, by law Mr. Chu wasn’t allowed to subordinate the taxpayers’ money. The Energy Policy Act of 2005 states that any DOE loan guarantees are not to be subordinate to other financing. It was the clear intention of Congress that taxpayers should be reimbursed first. Other federal agencies, including the Department of Treasury and Office of Management and Budget raised concerns, but those concerns were shrugged off.
Mr. Chu ignored other warnings as well. DOE sought the opinion of outside counsel on the legality of subordination. In a 17-page draft memo obtained by the House Energy and Commerce Committee, DOE’s private attorneys seem to acknowledge that the law prohibits the subordination of department-guaranteed loans. However, this draft memo was never finalized. Instead, an email was sent by a lawyer at the law firm stating that DOE’s rationale for subordination “makes the best case possible based on a reasonable interpretation supported by the restructuring policy arguments.” Making the best case possible is one thing, but one could conclude that the case wasn’t good enough for the firm to put its reputation on the line by issuing a formal opinion letter.
Mr. Chu also ignored other parts of the law. The law requires the energy secretary to notify the attorney general in the event of a default on a loan guarantee. In a Dec. 13, 2010, letter to Solyndra, Jonathan Silver, then-executive director of the DOE’s Loan Programs Office, notified Solyndra it was in default. However, Mr. Silver’s boss, Mr. Chu, apparently did not alert the attorney general, as required by law. The Department of Treasury also expressed concerns to DOE about the legality of subordinating taxpayer interests and advised DOE to seek a legal opinion from the Justice Department. At every step along the way, Mr. Chu ignored the law and did whatever he could to push through the subordination, which will result in taxpayers losing most of their money.
From a business standpoint, Mr. Chu’s decision-making skills are even worse than his legal acumen. Essentially, he was betting blind. In a Nov. 17 hearing before the committee, Mr. Chu admitted to not knowing the value of Solyndra’s patents, other intellectual property or manufacturing facility. He decided it was in the best interest of the taxpayers to keep a company in business by having taxpayers be second in line to private investors to the tune of $75 million with no idea of Solyndra’s value in the event it went belly-up.
Had Mr. Chu walked away, the taxpayers at least would have walked out of the DOE stimulus casino with some of their chips. If DOE had not illegally approved the subordination and simply had let Solyndra fold in December 2010, taxpayers would not be on the hook for $95 million of the loan guarantee that had yet to be dispersed in addition to the $75 million that was subordinated. This is a case of throwing good money after bad, and taxpayers are left holding the $170 million tab because of bad bets.
Rep. H. Morgan Griffith, Virginia Republican, is a member of the House Energy and Commerce subcommittee on oversight and investigations.