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Saturday, September 17, 2011

The Most Charitable Interpretation of Solyndra: Obama Is Clueless

Any rookie business student knows what it means when a company’s outside  auditor  raises “substantial doubt about its ability to continue as a going concern.”  A negative “going concern” verdict means that the auditing firm has concluded, after examining the company’s assets, liabilities, and net income that it is unlikely the company will survive.

Such a ruling warns potential investors to stay clear of the company.

Apparently, one of the few who did not understand this accounting message was President Barack Obama. Instead of staying clear, he made a televised visit to  Solyndra in Freemont, California in May of 2010. There he stated before the assembled employees, press, and TV crews that: "It is here that companies like Solyndra are leading the way toward a brighter, more prosperous future."

Solyndra declared bankruptcy and laid off  its workers on August 31.   

This was a strange upbeat message for a President to deliver about a company that received a negative “going concern” verdict from PriceWaterhouseCoopers two months earlier.  The PriceWaterhouseCoopers auditor found cumulated losses of $558 million and negative cash flows. (By the way, these cumulated losses are suspiciously close to the federal loan guarantee).

The negative audit, by the way, was no secret. It was reported by Reuters and on GreenTech websites on April 2, 2010. It would seem that some one in the Department of Energy or on Obama’s staff would have seen these accounts. If not, that is a scandal in itself.

The audit report would not have been the only sign of trouble, but it alone was enough. The numerous visits of Solyndra executives to the White House must have been about getting more bailout money. There must have been a large number of red flags we will never know about.

Obama’s visit to Solyndra was not a casual drop-by. It constituted an integral part of the selling of his top-priority green technology program. Solyndra was the first company to get a stimulus green-technology loan guarantee. Obama’s staff carefully choreographed the event and made sure it got extensive press coverage. 

How are we to explain how a U.S. President can  publicly back a company whose own auditors correctly conclude it will not survive?  None of the possible explanations inspire confidence.

One possibility is that Obama’s time horizon is so short that he was prepared to risk long-term embarrassment and scandal for short-term political gain. He could even have thought that his personal presence would cause investors to throw their money down the Solyndra pit. Who knows on this.

A second interpretation is that Obama believes his naïve view of the world –we need solar power, hence a Solyndra must be viable – trumps everything else including the fact that Solyndra was spending huge amounts of money and earning no revenues. In this case, a religious belief in green technology outweighed hard economic facts.  

A third possibility is that he is clueless when it comes to business matters. Obama could argue that no one on his staff told him – that he was kept in the dark. If we accept this argument, then we must conclude that Obama has a totally incompetent staff and administration. Obama should be reminded of  Harry Truman’s “the buck stops here.”

Of the three possibilities, the clueless argument is the most charitable.

The Solyndra affair casts doubt on the competence of the President. It also reveals the dark underbelly of state industrial policy. World experience shows that governments make poor investment bankers. The mistakes of Japan’s once-acclaimed industrial policy contributed to its three decades malaise. Mahathir’s decision to build jumbo jets in Malaysia at least was stopped before it bankrupted the country. China’s government banks throw money at political projects. Solyndra joins this  band. Let’s hope a lesson was learned.

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