The President’s Argonaut

The FBI conducted a dramatic raid today on a California solar company, Solyndra, that received a loan of $527 million from the Federal Financing Bank (FFB), a subsidiary of the U.S. Treasury. The FBI raid followed the filing of Solyndra’s bankruptcy yesterday.

There are numerous parts of this story that don’t fit together well and suggest favoritism and political influence. Two executive branch agencies and a congressional committee are looking into the activities of the firm and their connection to the White House. The FBI raid was jointly conducted by the Department of Energy’s Office of Inspector General and the FBI. The House Energy and Commerce Committee’s investigative panel will hold a hearing on September 14.

Like many political scandals this one involves influence and money. There is a lot to sort out here.

The first question for investigators and Congress is why Solyndra received a $537 million loan from the U.S. Treasury. Were those responsible in the DOE aware that Solyndra couldn’t find private-sector financing? The FFB is a government corporation, created by Congress in 1973 under the general supervision of the Secretary of the Treasury. It can fund loans that are guaranteed by agencies of the U.S. government. As of 2010 it had made loans on behalf of the DOE for $2.9 billion. Solyndra made up about 20% of that amount. Prior to the Treasury’s loan, the firm had done nine rounds of private financing and filed for an IPO which was subsequently withdrawn.

Two of Solyndra’s largest investors are Argonaut Ventures I, L.L.C. and the GKFF Investment Company, LLC. Both firms are represented on the Solyndra board of directors by Steven R. Mitchell (see Solyndra S-1 page 119). Both are investment vehicles of the George Kaiser Family Foundation of Tulsa, Oklahoma.

George Kaiser was a bundler for President Barack Obama in 2008 election. The Daily Caller has done an excellent job of establishing that Mr. Kaiser visited the White House 16 of the 20 times that Solyndra investors or management visited there. From the Daily Caller (emphasis mine):

According to White House visitor logs, between March 12, 2009, and April 14, 2011, Solyndra officials and investors made no fewer than 20 trips to the West Wing. In the week before the administration awarded Solyndra with the first-ever alternative energy loan guarantee on March 20, four separate visits were logged.

George Kaiser, who has in the past been labeled a major Solyndra investor as well as a Obama donor, made three visits to the White House on March 12, 2009, and one on March 13. Kaiser has denied any direct involvement in the Solyndra deal and through a statement from his foundation said he “did not participate in any discussions with the U.S. government regarding the loan.”

George Kaiser alleges that he didn’t discuss Solyndra with any White House officials but his investment vehicles were very hot for Solyndra. I went back into Solyndra’s IPO filing and totaled up the amount of funding Kaiser’s investment businesses gave Solyndra. Over 9 rounds of financing it invested approximately $337 million, or 48% of all equity raised for the business. Although Kaiser, through Argonaut and GKFF Investment Company, LLC, did not participate in the initial two private financing rounds, they dominated the following funding rounds and were the major venture capital investors in the firm.

Which brings us to the bankruptcy Solyndra filed yesterday in Delaware federal bankruptcy court. Like many bankruptcies there are a lot of creditors in line to be repaid by disposing of Solyndra’s assets. What is unusual is the order of precedence of creditors. When the Solyndra loan was guaranteed by the Department of Energy and paid out by the U.S. Treasury according to US law 10 C.F.R. §609.10(d)(13), the government should have become first in line for repayment (page 2):

Any Guaranteed Obligation may not be subordinate to any other debt and must have a first lien position on all assets of the project and all additional collateral pledged as security for any project debt.

But when I read the bankrutpcy filing it turns out George Kaiser’s investment firm is actually first in line, ahead of the U.S. government, for $69 million. Here is the ordering:

Tranche A: $69,302,901 – Argonaut Ventures I, L.L.C
Tranche B/D Term Loan Facility: $527,808,544 - U.S. Department of Energy
Tranche E Credit Documents: $186,481,645 - Argonaut Ventures I, L.L.C.
The financing documents were rewritten in February 2011 and gave priority to Argonaut for Tranche A. Several commentators have raised the question of why the Department of Energy would have allowed the government to become subordinate to Argonaut given the law.

It turns out that Argonaut was a person who participated in the California Gold Rush. George Kaiser seems to be a man who has participated in many gold rushes and was making a very large bet on solar energy through Solyndra. There are a lot of loose threads here that need to be tied together. Taxpayers money must be recovered first. I hope everything was on the up-and-up and Solyndra was funded entirely on its potential merits rather than political influence. Alleged political favoritism will kill public enthusiasm for reorienting policy towards renewable energy. Solyndra seems to be a tale of dirty solar. Hopefully it won’t block out the sun.