The House Energy and Commerce Committee released a report today on the Energy Department’s decision to subordinate taxpayers to private investors in the ill-fated Solyndra project. That is, the taxpayers would have to wait in line behind the private investors and let them recoup all of their losses first. Only after that could taxpayers could get any money back – assuming there would be any money to recoup at this point. In this case, that would be a reported $328 million of the $335 million federal loan guarantee to Solyndra.

This is significant because the plain language of the department’s own rules for loan guarantees states that taxpayers must not be subordinate and instead must come first. The committee’s report argues that Energy Department officials made a spur of the moment decision to violate this standard as part of a desperate attempt to keep the company afloat, then scrambled after the fact to justify their action:

DOE’s negotiations with Solyndra’s investors over the terms of the restructuring
agreement took place in early December 2010.  The emails and communications exchanged between Solyndra’s investors and DOE during this time period show that the negotiations were tense, and that the investors were hesitant to invest additional capital in the company.  The negotiations between the parties reached a breaking point on December 7.  After DOE rejected a proposal from the investors, the investors then proposed that the parties “should use the time to start discussing the bankruptcy process.”

According to Steve Mitchell, Argonaut’s primary contact with Solyndra and the lead negotiator for the investors in the restructuring negotiations, “To me it was clear that the DOE folks were somewhat caught off guard that we weren’t going to bail out the company.”  After the investors indicated their intent to prepare for a bankruptcy, DOE made the offer to subordinate the taxpayers’ interest.

According to an email exchanged between advisors for Argonaut, “[w]e broke from this meeting and Frances [Nwachuku], the lead decision maker for the DOE at this week’s negotiations (Jonathan Silver did not attend the meetings), grabbed me and wanted to discuss one final proposal from the DOE.  She suggested that we (current investors) commit to fund $75 million now and in exchange the DOE would fund the remaining $95 million (all of the variables described in the transaction last night would apply lower in the capital stack). Under her new proposal, in a downside situation – i.e. a liquidation scenario – our $75 million would receive 100% of the liquidation proceeds until we were made whole and her $95 million would stand behind us.”


It was only after DOE made this last minute offer to subordinate its interest to the
interests of two private equity investors in Solyndra, and that offer was accepted, that DOE began its legal analysis of the Energy Policy Act and its prohibition on subordination.

Why did the administration go to such lengths to help these private investors recoup their loses first? Administration officials have argued it was necessary to attract private capital to support the company. But they may have had another motivation. Argonaut is the investment vehicle The George Kaiser Family Foundation. Through it GKFF owned a 35% stake in Solyndra. Despite being called a foundation, GKFF is not a nonprofit in the conventional understanding of the term, but an exotic variation that allows the wealthy to park their assets tax-free. The foundation’s namesake is a major fundraiser of President Obama’s. He was often a guest in the White House and even discussed Solyndra with officials there.

In any event, the Energy Department officials then worked to produce a legal opinion that would justify this decision to put taxpayers behind private investors. That proved difficult because other administration officials at Treasury Department and the Office of Management and Budget were not on board with this.

OMB pointed out that the original economic analysis of the project “assume(d) that DOE would
maintain a senior secured position in the event of default.” In December 2010 email, the OMB energy branch chief told DOE officials that they had “stretched” the provision on subordination “beyond its limits.”

Similarly Treasury Assistant Secretary Mary Miller told DOE officials in an August 2011 email – this was just before Solyndra announced its bankruptcy – that it was the opinion of Treasury’s “legal counsel that the statute and the DOE regulations both require that the guaranteed loan should not be subordinate to any loan or other debt obligation.”

The Energy Department nevertheless had its in-house lawyer produce an analysis saying that Energy Secretary had authority to renegotiate the terms and remove the subordination language. Apparently administration officials attempted to justify this to the committee staff by saying that the use of the word “is” in the statute was “confined only to the moment the Secretary issues the guarantee.” In other words, it depended on what your definition of “is” is.

The committee’s report concludes:

While it is true that the loan may not be subordinate to other financing in order for the Secretary to guarantee its repayment, this condition does not cease to exist the moment the Secretary does so — the loan is subject to the condition that it is not subordinate to other financing at any time throughout its existence. When DOE agreed to subordinate its obligation to third-party financing, it did so in violation of the law.