Energy Dept. told to bolster loan reviews

February 10, 2012

A White House consultant’s report said Friday that the Energy Department should bolster its ability to assess loan guarantee risks in the wake of the Solyndra bankruptcy, and urged the department to “aggressively strengthen its position” before more borrowers turn to the government for relief.

“Given the novelty, complexity and scale of the projects and the exacting covenants in their loan structures, the Independent Consultant believes that many projects are likely to seek such relief at some point,” the report said.

The report said that losses from the $23.4 billion in loan guarantees made since 2009 are expected to be $2.7 billion, less than anticipated when Congress authorized money for the loan program. It said that the risk of failure was particularly high among the loan guarantees handed out to cellulosic ethanol projects, solar manufacturing firms and start-up auto manufacturing companies.

The $2.7 billion would be in addition to losses from a half-billion dollars of loans to Solyndra.

The report said the Energy Department should appoint a chief risk officer, fill vacant positions and replace some temporary appointees with managers experienced in project finance and project management. The report said that the department relies heavily on outside contractors and that one manager is acting head of several departments.

The report was done at the behest of the White House by Herbert M. Allison Jr., a former investment banker who was assistant Treasury secretary in 2009-10 overseeing the relief program for banks and the big mortgage finance giants, Fannie Mae and Freddie Mac.

“We have always known that there were inherent risks in backing innovative technologies at full commercial scale, and it is very likely that there will be other companies in the portfolio that won’t succeed, but the vast majority of companies are expected to pay the loans back in full, on time, and with about $8 billion in interest,” Energy Secretary Steven Chu said in response to the report.

The report, which evaluated 30 loans, said that the concentration of the portfolio among certain companies also raised risk. It noted that three projects rely on First Solar, an industry leader, to produce solar panels and three projects rely on the Spanish company Abengoa as their sponsor. It said that seven solar power generation projects would benefit from lower solar panel prices while three manufacturers would be hurt by lower prices.

Five loans were given for advanced vehicle technology to companies such as Ford and Nissan and were much less likely to default, Allison found.

Lawmakers read the assessment in different ways. “The first step on the road to recovery is overcoming denial, and this audit is a long-overdue acknowledgment that the Obama administration has a problem,” House Energy and Commerce Committee Chairman Fred Upton (R-Mich.) and Oversight and Investigations subcommittee Chairman Cliff Stearns (R-Fla.) said in a joint statement.

“It would be a stunning case of bureaucratic disregard to declare victory because the government is expecting to lose ‘just’ $3 billion,” they said. “Taxpayers should not have been placed in the position to lose one dollar, let alone billions, all because the stimulus allowed companies with shaky finances to apply for and receive taxpayer support without putting up any money.”

But Democrats said the report showed that the Energy Department took reasonable risks. “Republicans have been infected by a Solyndra syndrome, and hopefully this report is the cure,” said Rep. Edward J. Markey (D-Mass.).

“As the report makes clear, Congress established these programs to support innovative projects employing technologies that have not reached commercial maturity, and thus were not likely to receive support from commercial debt markets,” Sen. Jeff Bingaman (D-N.M.), chairman of the Energy and Natural Resources Committee, said in a statement. “That’s why Congress provided money up front to account for anticipated losses.”

Besides Solyndra, two other recipients of Energy Department assistance have sought bankruptcy protection. On Feb. 6, a private equity firm, Rockwell Capital, offered to buy the assets of one of them, a power storage firm called Beacon Power. The purchase price would cover much of the Energy Department loan guarantee. Allison’s report did not address allegations made by Republican lawmakers that the Obama administration improperly steered a loan guarantee to Solyndra for political reasons. “There is really no analysis of whether there was any real political influence exerted,” said Paul Bledsoe, communications director at the Bipartisan Policy Center. “This is more a technocratic analysis.”

Steven Mufson covers energy and other financial news.
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