No such thing as a free loan

Remember Solyndra? It was the solar panel manufacturer that went bankrupt in 2011, taking over half a billion dollars in federal investment capital with it. Solyndra had received this investment through the Department of Energy’s Loan Guarantee Program. Its spectacular failure immediately politicized the Loan Guarantee Program and brought the Department of Energy under heavy Republican scrutiny (which was ironic considering that Republicans created the program in 2005). Now the Department of Energy is making a push to clear its name. Unfortunately, it is being deliberately misleading in order to serve its own agenda, and the media is reporting exactly what it wants.

Earlier this month the Department of Energy launched a media blitz that strongly suggested the Loan Guarantee Program had become profitable, and would earn billions more in profits by the time the program was complete. This was "the first estimate for the loan guarantee program released by the Energy Department."  It was also tremendously misleading. The Loan Guarantee Program has cost the United States many billions of dollars. It will not be profitable under any circumstances.

The word "profit" was notably absent from both the press release and the "mini report" associated with it. However, the implication was so strong that many media outlets ran with it. Consider these headlines:

1. NPR: "After Solyndra Loss, U.S. Energy Loan Program Turning A Profit"
2. Bloomberg: "Solyndra Program Vilified by Republicans Turns a Profit"
3. Al Jazeera: "Despite Solyndra failure, US energy loan program turns a profit"

Even Paul Krugman took a few paragraphs of his New York Times column to revel in the misconception that "the program that included Solyndra is, in fact, on track to return profits of $5 billion or more."

These journalists and commentators simply made the mistake of accepting the story that the Department of Energy practically spoon fed to them. The Department of Energy’s various statements were all carefully phrased to imply profit. One particular snippet captured the media's attention: "For loans that have been disbursed to date, we expect to earn more than $5 billion in total interest payments over the full term of the loans -- all of which goes back to the benefit of taxpayers."  The Loan Guarantee Program's director, Peter Davidson, reinforced the idea that this $5 billion figure was a good estimate of profit when he explained to Reuters that "losses are not expected to rise significantly, while "every month money continues to roll in" from interest payments."

As if projecting future profit wasn’t enough, the Department of Energy further implied that the program was already profitable despite its failed investments:

"today, actual and estimated loan losses to the portfolio are only approximately $780 million, or only a little over 2 percent of the program’s loans, loan guarantees and commitments -- and less than the more than $810 million in interest payments the program has earned to date."

Obviously the Department of Energy intended to suggest the program was profitable by $30 million.  The media almost entirely failed to scrutinize this number, and it should have.  The number is completely wrong.  It is based on feeble estimates, it doesn't account for inflation, and it completely ignores the massive costs of the program.

A "profit" of $30 million, out of $34.25 billion in loans, is a miniscule margin of 0.09% - one accountant’s sneeze away from being a loss.  That is why we should be concerned that the Department of Energy only "estimated" the $780 million in losses, and is not allowing this estimate to be independently verified.  Considering the enormous volumes of money it is doling out, another $30 million in non-performing loans would be a pittance.  If the Department of Energy is under-estimating its losses by even 0.09% then the Loan Guarantee Program is still losing money. Such a small error would be easy to make under any circumstances, but bad estimates are a rule in the venture capital industry, not an exception.  For that matter, the renewable energy industry is particularly unpredictable and difficult to estimate.  So the notion that the Loan Guarantee Program is currently profitable is highly dubious without even considering the Department of Energy's strong political motivation to bend the truth with a small under-estimate.  This is the least of the problems with the Department of Energy's numbers.

Simply accounting for inflation makes the Loan Guarantee Program a loser.  The Loan Guarantee Program's first loans were in 2009.  The U.S. dollar experienced inflation of 10.1% between 2009 and 2014.  Using the Department of Energy's same clumsy way of calculating things, we can say inflation has consumed the 0.09% profit margin 115 times over. (10.0747% / 0.08759%)

Even if the Department of Energy were accurately estimating its losses and accounting for inflation, it would still be badly misleading the American people.  As observed by Donald Marron, the Department of Energy "takes credit for the interest that companies pay on their loans, but it doesn’t subtract — or even report — the interest costs that taxpayers pay to finance those loans."  Marron is talking about the federal deficit spending that is paying for the Loan Guarantee Program. That’s right – the federal government funded this massive venture capital program with debt. The government may be receiving interest payments from funded companies, but at the same time it is making interest payments on the Treasury bills it issued. Painfully, it must keep making those interest payments even if the company it loaned money to has gone bankrupt like Solyndra, Fisker, or Abound Solar.  The cost of these Treasury bill interest payments dwarf any "profit" the Loan Guarantee Program might make.

After 5 years of operations, the Loan Guarantee Program has issued $34.25 billion in loans and other financial commitments. If we assume these loans were funded with 10-year Treasury bills issued in 2009 (the year of the Loan Guarantee Program’s first loan) then we can estimate an interest rate of about 2.5%.  That amounts to $856 million in interest payments per year, for an estimated total of $4.3 billion in interest paid to date. If the Department of Energy issues no more loans, and interest rates remains at their historical lows, and the debt is repaid in 20 years, then the Loan Guarantee Program will cost about $21.4 billion in interest payments. That already far outstrips the $5 billion in estimated interest payments, and none of those best-case assumptions are even plausible. In fact, the Department of Energy is currently issuing the remaining $40 billion of loans it has been authorized to distribute.

Whether or not the Loan Guarantee Program is a valid public policy initiative, it will never be a money-making initiative. Even if the Department of Energy’s 20-year projections are correct and its investments do return $5 billion in interest payments, the loans required to pay for those investments will cost tens of billions of dollars.

This isn't the first time the federal government has mis-characterized one of its recent market interventions as being profitable.  In 2011, the Treasury Department announced that the Troubled Asset Relief Program (TARP), which was created in 2008 to bail out banks and auto-makers, had turned a profit of $6 billion.  This was blatantly false.  This profit margin of 2.4% over 3 years didn't account for either inflation or borrowing costs.  When properly accounting for either, the program was clearly a loser.  Interest payments on the $245 billion that was borrowed to pay for TARP have long since consumed the $6 billion in "profit" and continue to cost the United States billions of dollars every year.

The media needs to be far more discriminating in what it passes along as factual information from our federal government. As the Department of Energy has proven yet again, we cannot blindly trust federal officials to be transparent. In the meanwhile, the Department of Energy is losing credibility every day it continues to allow the media to mis-report the facts.  It knows the Loan Guarantee Program isn't profitable, because it knows there is no such thing as a free loan.