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by
Tom Blumer

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October 9, 2011 - 12:08 am
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As I wrote in September, “Someone needs to look into the pricing of that equipment, who the seller or sellers were, and whether the items involved were purchased in arm’s-length transactions.” The outsized amounts involved appear to betray a strong likelihood of self-dealing and kickbacks. Since the company had a calendar year-end for financial reporting, this problem would especially apply to transactions completed this year.

The second and far more fundamental lesson is that start-up and early-stage deals like Solyndra should not be financed with loans in the first place — and wouldn’t be financed that way without the federal government’s guarantee of such loans.

While a popular joke has long held that a bank will only lend you money if you don’t need it, the truth is that a bank should only lend you money if it’s supremely confident that you will be able to pay them back. Banks don’t take ownership interests in the businesses to which they lend. They instead allow businesses to rent money, and earn interest as their return. In a market free of government intervention, banks wouldn’t rent their money to start-up businesses — not because they’re hostile to them, but because their business model has almost no room for borrower failure.

A significant percentage of start-up businesses fail in a relatively short time. Guidance shown here indicates that half fail within five years, and 70% do so within ten — and the period studied (1992-2002) was relatively prosperous. In an intervention-free market, a deserving start-up or early-stage business requiring significant amounts of capital obtains it from investors who end up taking an ownership interest, often a controlling one. It often takes multiple rounds of investment before a company reaches self-sufficiency. Investors in these enterprises, who usually make multiple bets while hoping that at least some of them will work out well, are fully aware of the risks and the high incidence of failure, and expect very high returns as compensation when they cash out, usually by selling the enterprise to someone else or going public.

Picking winners and losers in business is not the realm of government, and it’s not the realm of banks. To the extent that politically driven governments and unqualified banks are involved in such funding, society’s limited capital has been and continues to be seriously misallocated and squandered.

Even after solar company failures resulting in stunning taxpayer losses, politicians like Massachusetts Governor Deval Patrick and President Obama insist that they have no regrets. What they’re engaged in isn’t lending; as defined above, it more closely resembles looting. It apparently won’t stop until Patrick, Obama, and people who agree with them are driven from public office.

(Artwork based on a modifed image from Shutterstock.com.)

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Along with having a decades-long career in accounting, finance, training and development, Tom Blumer has written for several national online publications primarily on business, economics, politics and media bias. He has had his own blog, BizzyBlog.com, since 2005, and has been a PJM contributor since 2008.
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