The US Department of Energy has loaned Cogentrix, a subsidiary of Goldman Sachs, money to develop solar power in the San Luis Valley. Why does Goldman take government money in order to develop a solar energy project? Why doesn't Goldman use its own money to develop such a project? It makes loans to other companies, so surely it can use its own money. But once a bank learns the benefits of using government money instead of its own, it is difficult for it to wean itself off such assistance.
That is not the first time that Goldman has helped government find a place to put its money. William D. Cohan talks about Goldman Sachs's relationship with its client, Solyndra, a solar panel maker in California. The US Department of Energy gave a loan guarantee to Solyndra in 2009. The loan actually came from the Treasury in the amount of $527 million. Then Solyndra went into bankruptcy and the taxpayers may never recoup their lost money.
Goldman's reputation is already in tatters as Cohan describes Goldman's actions regarding its relationship with Soyndra thusly:
Solyndra Meltdown May Hit Goldman's Reputation: William D. Cohan - Bloomberg
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On Sept. 8, the Solyndra plot thickened again, when the FBI raided the company’s offices in connection with an investigation by the Department of Energy’s inspector general. And last week Solyndra executives pleaded the Fifth Amendment during their congressional hearing.
You would think that this kind of dicey situation would be one that a savvy Wall Street player like Goldman Sachs would know to avoid. Surely, you would think, Goldman would have some sort of internal credit committee that would put its foot down and insist that Goldman’s reputation was too important to be mixed up with a company with both an arrogant management team and a questionable business plan. (Solyndra’s advisers on the Treasury loan, including Goldman, split some $10 million in fees, according to a filing Solyndra made about the loan.)
You would also think the firm’s reputation police would put the kibosh on Solyndra, too. But Goldman, which Solyndra credited as the “exclusive financial adviser” on its Treasury loan application, kept the firm as a client through thick and thin.
According to a letter Joel Cannon, the chief executive officer of TenKsolar Inc., a Solyndra competitor, wrote to the Wall Street Journal, Solyndra failed not because of “cheap capital provided to Chinese solar companies by their government” making for stiff competition for the U.S. solar industry -- as the company would have one believe -- but because “its product cost was far too high and its performance far too low, and everyone who knew the solar business knew this.” Some Wall Street bankers who met the Solyndra management have told me that the flaws of management and the business plan were quickly apparent. Goldman apparently missed them.
But, surely, Goldman Sachs knew that Solyndra was a company, as Cannon pointed out, with a cost structure that made it difficult to finance? In 2008, soon after it was hired, Goldman tried to do a convertible debt offering for Solyndra. Yes, it was a tough time to raise any kind of financing for a relatively new company. Still, the reaction to the prospect of financing Solyndra from more than 100 investors Goldman contacted was a resounding no. Goldman axed the convert.
Goldman’s bankers also showed the deal to two of Goldman’s private equity funds -- a distressed fund and a fund that buys control stakes in companies -- and both these funds said no, too.
It’s not hard to see why Solyndra was being turned down: The company lost an accumulated $557 million from 2006 through the end of 2009, and its financial prospects were grim given its high cost structure.
But Goldman persisted on behalf of Solyndra. In September 2009, along with the Energy Department loan guarantee that made possible the $527 million Treasury loan, Goldman raised almost $200 million more in equity from Argonaut Ventures, an investment vehicle for the Kaiser foundation.
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