Why the Solyndra Loan Wasn't Like a VC Investment

Great post by Megan McArdle

"Despite all my Solyndra-blogging earlier in the week, I missed making one point that I really wanted to about the various facile comparisons between the DOE loan guarantee programs, and venture capital firms.

A number of people have claimed that the government had to make these loans because they're "too risky" or "too big" for the private sector, forcing the government to act as a VC firm. That riskiness means that yes, a non-insubstantial number of the loans will fail.

But this doesn't really make any sense. The private sector doesn't have any trouble dealing with risky ventures; it simply prices the capital accordingly, demanding high interest rates, or a larger equity chunk, in exchange for money.

Nor is the private sector unable to provide large sums of money--indeed, you may have noticed that it is doing so this very year, to the government. It may not be able to provide the capital through one bank, or one firm, but it can certainly syndicate a loan or do a large securities offering in order to aggregate many providers into one giant pile of cash.

Now, maybe you think that there is some unpriced social return of these investments. But then this has nothing to do with VCs, portfolios, or risk; it's a subsidy. And loan guarantees are not a very good way to structure that subsidy.

Here's why: at the company level, there's no difference between an optimal market outcome, and an optimal social outcome (from the DOE's point of view); both investors and society benefit if more solar cells are sold. If the solar cells are unlikely to be sold to many people, than the loan guarantee is not a good idea--it will not foster much environmental benefit. If the solar cells are likely to be sold to many people, than the loan guarantee should not be needed; private investors should be easily found to back the manufacturing.

The loan guarantees may help make the product slightly cheaper, of course. But again, if the product is sufficiently likely to be popular, capital should be available in the marketplace at a fairly decent price; the difference in interest rates should not be the difference between success and failure unless the loan itself represents an unsustainably large portion of the company's assets and income.

At any rate, it does not make sense to issue a massive loan guarantee in order to make a company's solar panels slightly cheaper; that's maybe a case for subsidizing solar panel installations, but it's not a case for guaranteeing the loans of a particular solar panel manufacturer.

So no, this isn't much like a VC. Or anything else that makes financial sense in the private sector. It's like . . . the government giving money to companies that sound whizzy."