The Corner

The Solyndra Loan: DOE Memo Defends Decision to Put Private Investors Ahead of Taxpayers

One of the many questions Republican lawmakers have sought to answer in their ongoing investigation into the Solyndra loan scandal is whether or not the Department of Energy broke the law when it approved a loan restructuring agreement giving private investors priority — over taxpayers — with respect to the first $75 million recovered in the even of Solyndra’s collapse.

As it turns out, the answer to that question depends in part (to borrow a phrase) on what the meaning of the words “is” is.

According to a memo made public for the first time today, DOE legal council determined that the decision to subordinate taxpayers to private investors in the Solyndra restructuring agreement was not in violation of the Energy Policy Act of 2005. Their reasoning, however, leaves much to be desired.

The relevant statute states that loan guarantees approved by DOE “shall be subject to the condition that the obligation is not subordinate to other financing.” In plain English, this means that taxpayers must be first in line to recoup funds in the event of a bankruptcy, as is the case with Solyndra. As Rep. Phil Gingrey (R., Ga.) said today at a hearing of the Energy and Commerce Subcommittee on Oversight and Investigations, even a child would come to that conclusion.

But that’s not the conclusion that Susan Richardson, chief counsel of the DOE loans program office, came to in January 2011, about a month before the restructuring agreement was finalized. She argued that the “condition” of subordination was “applicable only as a condition precedent to the issuance of a loan guarantee. It is not a continuing obligation or restriction…” This interpretation of the law, she wrote, “is reinforced by the use of the word ‘is,’ which we view as confirming that the condition be satisfied at a single point in time.” Or in other words, the statue only applies to the initial loan agreement, and therefore can be readily tossed aside in subsequent restructuring agreements.

Committee Republicans such as Rep. Brian Bilbray (R., Calif.) find this argument laughable. “How can you think that that is not a violation?” he told National Review Online. “If you take the definition and accept it, that means every time we pass a law that we have to add not just ‘Thou shalt not kill,’ but ‘Thou shalt not kill or ever kill.’”

But Richardson argued that a “continuing obligation” of subordination to the taxpayer would “preclude the use of a common restructuring strategy for a financially distressed borrower.” So, not only can the requirement be ignored during the restructuring process, but it almost by nature must be ignored.

“Investors are unlikely to make an equity investment in a distressed company on commercially acceptable terms,” Richardson wrote. This was essentially the argument that DOE officials made, according to e-mails uncovered by Republican investigators, to skeptics at the Office of Management in Budget, that they had to “restructure the loan to create a situation whereby investors felt there was a value in their investment.” Which, of course, meant giving private investors such as Argonaut Ventures, the investment firm connected to Oklahoma billionaire and top Democratic fundraiser George Kaiser, priority over taxpayers. From the text of the restructuring agreement:

Therefore, under Restructuring…the Borrower’s reimbursement obligations to DOE…will be subordinate in payment priority to the Borrower’s obligations to the Third-Party Lenders for…($75 million principle amount)…

Richardson concluded that the restructuring agreement was necessary to avoid bankruptcy and “offers the best prospect of eventual repayment in full of the Borrower’s obligations” in a way that was “demonstrably preferable to a liquidation.”

But OMB analysts came to exactly the opposite conclusion, determining that the immediate liquidation of Solyndra would be a far better deal — about $170 million better.

The final line of Richardson’s argument is the most revealing:

Moreover, by maximizing the prospect that the Borrower will complete the Project and continue as a going concern, the proposed Restructuring furthers the statutory policies of promoting the commercialization of innovative energy technologies and preserving jobs.

In other words, because the embarrassment of Solyndra’s failure could do substantial harm to the “green” agenda.

On the whole, as Rep. Morgan Griffith (R., Va.) pointed out during the hearing, Richardson’s argument hardly appears to be the product of reasoned, objective analysis, but more resembling the work of a law student assigned to draft a legal justification for a decision that had already been made.

Andrew StilesAndrew Stiles is a political reporter for National Review Online. He previously worked at the Washington Free Beacon, and was an intern at The Hill newspaper. Stiles is a 2009 ...