Ron Klain is a sharp-elbowed Democratic political operative with no medical expertise. Tapping him as “Ebola czar” may not be the president’s best move when, as it is, no one can believe a word the Obama administration says. And that’s not just because Mr. Klain is yet another lobbyist recruited despite Mr. Obama’s vow that his administration would shun lobbyists.
Klain was also a central player in the president’s Solyndra fraud, which soaked taxpayers for over half a billion dollars for the benefit of Obama cronies.
In Faithless Execution, I recount the Solyndra fraud. It never got the attention it deserved — involving, as it did, potential felony fraud violations of federal law. Even for people who did give it attention at the time, Solyndra is so many Obama scandals ago that its unseemly details are tough to recall. The story is thus worth retelling. As our nerves fray over the Ebola crisis, it is a valuable window into the administration’s priorities and an indicator of the level of trust we can put in the new czar’s assurances.
Solyndra was a solar-energy company backed by the family foundation of George Kaiser, an Oklahoma oil magnate and major Obama fundraiser. Prior to Obama’s coming to power, Solyndra had sought government funding under the economically absurd 2005 Energy Policy Act. That law lets the government play venture capitalist, investing taxpayer money in private “green energy” boondoggles that cannot attract adequate market financing.
Notwithstanding the Bush administration’s zeal to hop on this politically correct bandwagon, it declined Solyndra’s application. As one private analyst later put it, the company was “an absolute complete disaster,” with operating expenses, including supply costs, nearly doubling its revenue — and that’s without factoring in high capital and other costs in an industry with low profit margins. Given that solar-panel competitors backed by China were producing energy at drastically lower prices, the chance that Solyndra would ever become profitable was practically nonexistent.
But in 2008, Americans elected as president a devotee of renewable-energy experiments who had enjoyed major support from Kaiser. Obviously, Solyndra backers were thrilled. The Department of Energy (DOE) continued to stiff-arm the company in the days just before Obama’s inauguration, citing unresolved concerns. Yet, within just a week of the new president’s taking office, a DOE staffer noted in an e-mail, “We are approaching the beginning of the approval process for Solyndra again.”
Company officers and investors reportedly visited the White House no fewer than 20 times while the loan guarantee was being considered and, later, revised. In short order, Obama made Solyndra the very first recipient of a public loan guarantee when the Energy Act program was beefed up with “stimulus” spending. The loans and credits eventually amounted to a staggering $535 million.
At the time, Ron Klain was chief of staff to Vice President Joe Biden. Hot to become the face of Obama-administration green initiatives, Biden planned to announce the Solyndra loan during a much-publicized September 2009 energy speech. Officials at DOE and the Office of Management and Budget (OMB) had major qualms: They realized that the company was hemorrhaging money; even with the loan, Solyndra would lack the necessary working capital to turn that equation around. Yet the loan was approved in time for Biden’s speech. A rueful OMB official lamented in an e-mail that the timing of the loan approval was driven by the politics of the announcement “rather than the other way around.”
Although Solyndra was a private company, it was using its government loans as a springboard to go public. That triggered the obligation to comply with Securities and Exchange Commission (SEC) rules. For an initial public offering of stock, SEC rules require the disclosure of a company’s financial condition.
In Solyndra’s case, outside auditors from PricewaterhouseCoopers (PWC) found that condition to be dire. “The company has suffered recurring losses from operations, negative cash flows since inception, and has a net stockholders’ deficit,” the PWC accountants concluded. Even with the gigantic loan, Solyndra was such a basket case that PWC found “substantial doubt about its ability to continue as a going concern.” I italicize “going concern” because it is a term of art. Auditors invoke it when there is an extraordinary need to protect themselves and the company from legal liability because that company is likely to fail.
With no alternative if they wanted to make a play for market financing, Solyndra’s backers disclosed the auditors’ bleak diagnosis in March 2010. The administration had thus been aware that the company was a basket case for two months when Obama came to Solyndra on May 26. The company was to be the backdrop to a big presidential speech on administration energy initiatives.
The administration was not only aware; it was worried. As ABC reports, just two days before Obama’s speech, his eminence grise, Valerie Jarrett, was warned by California businessman Steve Westly that visiting the company might “haunt [the president] in the next 18 months if Solyndra hits the wall and files for bankruptcy, etc.” Alarmed, Ms. Jarrett reached out to Mr. Klain, admonishing that “we clearly need to make sure that they are stable and solid.”
Klain, in turn, consulted with DOE before downplaying Solyndra’s problems in reporting back to Jarrett:
Sounds like there are some risk factors here — but that’s true of any innovative company that POTUS would visit. It looks OK to me, but if you feel otherwise, let me know.
Jarrett said she would rely on Klain’s assessment, notwithstanding that it conceded the very real possibility, if not likelihood, of catastrophe. As Klain elaborated in a follow-up e-mail to Jarrett:
The reality is that if POTUS visited 10 such places over the next 10 months, probably a few would be belly-up by election day 2012 — but that to me is the reality of saying that we want to help promote cutting edge, new economy industries.
I can hear him now: Ebola? There may be some risk factors, but hey, we’ll be promoting cutting-edge treatments . . .
Federal law severely criminalizes schemes to defraud the United States — meaning, the taxpayers. It also extensively regulates the sale of securities. “In connection with the purchase or sale of any security,” the law criminalizes fraudulent schemes, false statements of material fact, and — significantly for present purposes — statements that omit any “material fact necessary in order to make the statements made . . . not misleading.”
Presidents of the United States, moreover, are duty-bound to execute the laws faithfully. The also have a fiduciary responsibility to be forthright with the American people, an obligation that certainly applies when speaking to investors who are about to be solicited for funding by a business into which the president has poured millions of public dollars.
Nevertheless, with Klain & Co. having done the administration’s signature shoddy due diligence, Obama’s speech on May 26, 2010, was jaw-droppingly dishonest.
When it came to channeling public funds into private hands, the president claimed, “We can see the positive impacts right here at Solyndra.” He bragged that the $535 million loan had enabled the company to build the state-of-the-art factory in which he was then speaking. Obama said nothing about how Solyndra was continuing to lose money — public money — at a catastrophic pace. Instead, he painted the brightest of pictures: 3,000 construction workers to build the thriving plant; manufacturers in 22 states building an endless stream of supplies; technicians in a dozen states constructing the advanced equipment that would make the factory hum; and Solyndra fully “expect[ing] to hire a thousand workers to manufacture solar panels and sell them across America and around the world.” Not content with that rosy portrait, the president further predicted a “ripple effect”: Solyndra would “generate business for companies throughout our country who will create jobs supplying this factory with parts and materials.”
In sum, auditors had scrutinized Solyndra and found it to have, from its inception, a fatally flawed business model that was hurtling toward collapse. Well aware of that fact, the president and his administration — with Ron Klain front and center — touted it as a success story that would produce jobs, growth, and spectacular success for the foreseeable future.
Taxpayers, of course, are stuck with the president’s investment decisions. Investors, by contrast, still get to choose where their money goes. Thankfully, when it came to Solyndra, they were more influenced by the PWC auditors than by the president’s delirious speech. The company had to pull its initial public offering due to lack of interest. As the IPO failed and the company inevitably sank ever deeper in the Red Ink Sea, Solyndra’s backers pleaded with the administration to restructure the loan terms — to insulate them from their poor business judgment, allowing them to recoup some of their investment.
This is where the Energy Protection Act’s only sensible aspect is supposed to kick in. The law stipulates that, in the event a company in which the government has invested the public’s money goes bust, taxpayers must be prioritized over company stakeholders when any remaining assets of the bankrupt business are sold. That should have happened with Solyndra. But remember, this is the lobbyist-laden, crony-socialist Obama administration we’re talking about.
OMB officials fully understood that there was no economic sense in the Solyndra restructuring proposal. The government loan put the public first in line for proceeds on the sale of Solyndra assets. With the company hurtling toward inevitable bankruptcy, an immediate liquidation under the original loan terms would net taxpayers a much better deal — about $170 million better. As congressional investigators later learned, so compelling was the argument against restructuring (i.e., the argument for faithfully executing the law) that OMB feared “questions will be asked” if the Department of Energy proceeded with it.
Yet the Obama DOE permitted the Solyndra backers to renegotiate the terms anyway. Preposterously, DOE rationalized that the restructuring was necessary “to create a situation whereby investors felt there was a value in their investment.” Of course, when commerce is not rigged by the government, the value in an investment is the value created by the business in which the investment is made. Here, Solyndra’s business operations produced only losses. New investment in the failing company could be enticed only by an invalid restructuring that prioritized investors over taxpayers — the kind of scheme from which faithful enforcement of the Energy Policy Act is supposed to protect the public.
In February 2011, in exchange for lending some of their own money, Solyndra stakeholders were given priority over taxpayers with respect to the first $75 million in the event the company filed for bankruptcy. A few months later, Solyndra did precisely that.
Negotiations over the restructuring deal had begun in 2010. The time they bought helped delay Solyndra’s implosion beyond the midterm elections. Yet with collapse looming, the company still decided that autumn to lay off nearly 20 percent of its work force. On October 25, 2010, just a week before the midterms, Solyndra CEO Brian Harris alerted the Obama DOE that in three days, the company would shut down its original factory and begin shedding employees and contractors.
The day before that scheduled October 28 announcement, panicked White House energy adviser Heather Zichal e-mailed the redoubtable Ron Klain — as well as Valerie Jarrett and Communications Director Dan Pfeiffer — explaining: “Here’s the deal: Solyndra is going to announce they are laying off 200 of their 1,200 workers. No es bueno.”
Republicans on a House committee investigating Solyndra subsequently learned that DOE pressured the company to delay the announcement. It was finally made on November 3 . . . the day after the midterm elections.
Well, well, well. Here we are just two weeks before the 2014 midterms and Ron Klain is back to manage another crisis — an infectious-disease outbreak. Sure he’s a political fixer, not an epidemiologist, but rest assured that Klain will keep us promptly apprised of all Ebola developments without ever glancing at a calendar or a poll.
— Andrew C. McCarthy is a policy fellow at the National Review Institute. His latest book is Faithless Execution: Building the Political Case for Obama’s Impeachment.