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Sept. 29 (Bloomberg) -- It isn’t hard to predict how the controversy over defunct solar-panel maker Solyndra LLC will end. Congressional Republicans will in due course issue a final report decrying crony capitalism and demanding an end to the federal program of loan guarantees to alternative energy companies.
Democrats will respond with a dissent, concluding that no rules were broken or even bent, but proposing, just in case, the addition of a new layer of expensive bureaucratic overseers atop the program.
Certainly there will be plenty of grist for both mills. Solyndra’s decision to file for bankruptcy and dismiss more than 1,000 employees after receiving a $535 million loan guarantee from the Energy Department is a black eye for the program, especially now that journalists have uncovered many red flags that bureaucrats missed along the way. And the insistence by the White House that no political favors were involved fails to pass the giggle test.
On the other hand, with commercial lending markets still largely locked up, and the need for the development of alternative fuels as pressing as ever, a better-managed program of loan guarantees has an undeniable appeal.
And if the Republicans are right that the process by which Solyndra was approved stinks of cronyism, the Democrats are right in pointing out that plenty of Republican lawmakers have fought for federal loans and grants for questionable projects in their own districts. (Indeed, as reported by Bloomberg News’s Jim Snyder, Representative Darrell Issa, chairman of the House Committee on Oversight and Government Reform -- whose questions top executives of Solyndra declined to answer last week on Fifth Amendment grounds -- pressed for a loan for a local company under the very green-energy program against which he is now thundering.)
Still, “everybody does it” smacks of desperation when you happen to be the fellow caught with your hand in the cookie jar. Thus Democrats and their allies have also offered a quite different and more sophisticated defense of the Solyndra loan. The green-energy program, they contend, was created on the assumption that a certain number of its beneficiaries -- the figure 15 percent has been bandied about -- would fail. But this would be more than compensated by the 85 percent that succeeded.
That relatively high expected failure rate, together with the fact that the Energy Department’s portfolio of green-loan guarantees stands near $30 billion, has led some observers to argue that the program should be considered as analogous to a venture capital shop. The department, after all, is putting money into lots of startups, knowing that some will fail, but betting that a few will hit it big.
Government Making Bets
True, the program deals with loans rather than making investments -- but we are speaking here of an analogy, not an identity.
Like the Energy Department program, the venture capitalist makes bets, many of them very high risk, on many companies that otherwise would have trouble raising capital, except perhaps at prohibitive cost.
Yet the analogy fails because the venture capitalist is disciplined in his lending by two forces that government does not face. First, if the venture capitalist makes too many bad bets, he will lose his investors. Government loan guarantee programs, on the other hand, can be refunded by Congress as often as politically convenient, and have been known to grow larger after making bad bets.
Second, venture capitalists face potential liability for breach of fiduciary duty if they fail in the duty of care and loyalty imposed by law on those private individuals who handle other people’s money. Government officials and departments, with minor exceptions, are shielded from lawsuits by the doctrine of sovereign immunity.
There is no way to subject a federal loan guarantee program to the discipline of the markets, and that might be reason enough for the government to stay out of the business of picking winners and losers. But if the program is here to stay, perhaps we should seek to discipline its administration through the alternative route: a partial waiver of sovereign immunity.
The case for sovereign immunity is strongest when liability would interfere with core functions of government: the provision of security, for example. But even there, a partial waiver of sovereign immunity has occurred: Law enforcement officials are subject to civil suits for violations of rights.
The case for sovereign immunity is weakest when government is largely providing goods or services that have duplicates or analogues in the market. Suppose that in a town with two grocery stores, the state is unhappy with the way the stores are operating, and decides to open a third -- but immunizes the store from suit, in the case, say, of selling adulterated food.
An Implicit Subsidy
This implicit subsidy would have two bad effects: First, it would provide an undeserved cost advantage to the state-owned store, which would not be required to insure against liability; second, it would reduce the incentive of the state-owned store to take adequate precautions to ensure the freshness and purity of its wares. (If you believe that competition would be adequate to provide the incentive, then there is no need for the private stores to be liable either.)
This argument would seem to apply a fortiori when the government decides, in effect, to operate a venture capital shop, providing loans to selected private businesses in order to help them become growing concerns.
One might object that in some cases private equity investments have slowed. Thus the loan guarantees might be necessary as a demand-side stimulus, and should be considered closer to a core government function than to the duplication of a service available in the market.
But it is not clear that this is so, particularly in the market for alternative energy. Solyndra was able to raise hundreds of millions in cash before the federal loan was awarded and, according to some experts, could have raised more if needed -- except that the federal loan became an obstacle, because the government initially had priority over other lenders in case of default.
Some might also object that the prospect of facing personal liability would distract federal officials from a proper performance of their jobs, and that departmental liability might lead to damages that would waste taxpayer funds. These are strong arguments, but they are just as strong when made against lawsuits in the private sector, where the risk of liability is a constant but necessary distraction, and where corporate liability hits the pockets of investors and consumers.
Liability is one risk of running a company that picks winners and losers in the marketplace. If the alternative energy loan guarantee program would be unable to function in the face of potential liability, one might reasonably ask whether it should exist at all.
(Stephen L. Carter , a novelist, professor of law at Yale University and the author of “The Violence of Peace: America’s Wars in the Age of Obama,” is a Bloomberg View columnist. The opinions expressed are his own.)
--Editors: Tobin Harshaw, Stacey Shick
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