The resignation of Jonathan Silver, the U.S Energy Department’s top loan officer, over the Solyndra scandal may be the tip of the iceberg. He supervised a much larger DOE loan program that suffers from the same problems as Solyndra: over the last 18 months, the Department has awarded more than $9 billion in below-market loans to auto companies under its Advanced Technology Vehicle Manufacturing (ATVM) Loan Program.
The most troubling transaction: a $465 million loan to California’s Tesla Motors. Tesla received a loan rate of 1.6% from DOE to manufacture an all-electric car that will sell for nearly $50,000. It will not exactly be the people’s car. Tesla also builds luxury sports cars that retail for $103,000 to $128,000.
Tesla also is no simple new age car company. It is owned and financed by big donors to the Democratic Party and to Barack Obama’s 2008 presidential campaign. Tesla’s principal owner is Elon Musk, the founder of PayPal. He has an estimated personal wealth of $672 million. His firm received venture capital from the The Westly Group, Daimler Chrysler, and from Abu Dhabi investors. The firm has partnerships with luxury sports car manufacturer Lotus and with Mercedes-Benz.
The secret to access to the DOE money is The Westly Group, run by California Democratic Party stalwart and big Obama campaign bundler Steve Westly. The former eBay executive wasn’t merely a prodigious fundraiser for Obama, raising $500,000 for his presidential campaign. He also served as the president’s California campaign co-chairman. Another Obama $500,000 bundler was Solyndra investor George Kaiser and his foundation.
Westly got statewide attention in 2006 when he spent $35 million of his own money to run an ugly and largely negative race against California state Treasurer Phil Angelides for governor.
Westly is a personal friend of President Obama, and since the election has visited the White House for meetings and social parties. He privately dined with the president in February with a small group of Silicon Valley billionaires. It was called the “trillion-dollar dinner.”
Westly was rumored to be on Obama’s energy secretary short list. When he lost out to physicist Steven Chu, the White House got him a seat on a pivotal DOE advisory committee that made recommendations to the secretary on alternative energy policies. The committee voted in favor of changes to federal rebates for all electric cars — which would benefit Tesla.
Westly’s Washington political connections to the White House have made him a “pied piper” of DOE money for start-ups. DOE records show that Westly’s venture capital firm has reaped at least $500 million in DOE loans for his companies, wowing Silicon Valley’s VC community.
Westly also sat on Tesla’s board of directors early in the car company’s life.
Tesla’s CEO Elon Musk also has been a generous donor to the Democratic National Committee, contributing more than $120,000 over three different election cycles and $292,250 to political campaigns, overwhelmingly to Democrats.
Financial analyst Brian Krasting has called the DOE loan program “free money” for all electric car manufacturers at taxpayer expense. Others have called the Tesla deal a form of “corporate welfare” for the president’s friends. There have been complaints from alternative energy companies that the ATVM loans were awarded because of political connections.
DOE defends the Tesla loan, telling PJMedia it was sound and neutrally approved by its financial analysts. However, the DOE spokesman also acknowledged not knowing of the company’s plan for a $200 million NASDAQ IPO when it awarded the firm the loan. Nor did the spokesman say DOE knew Toyota was to become its partner in the plant when DOE issued the loan.
There is a general question of competence regarding the DOE loan staff’s ability to examine the 130 loan applications they received from high-tech firms. A February 2011 report by the U.S. Government Accountability Office concluded that the staff did not have adequate expertise for evaluating the “green” companies that were seeking the loans:
Without qualified oversight to analyze the information submitted by the borrowers and to provide technical monitoring, the ATVM program cannot be adequately assured that the borrowers are delivering the vehicle and component projects as required by the loan agreements.
Rep. Cliff Stearns — chairman of the House Energy and Commerce Oversight and Investigations Subcommittee that has jurisdiction over the Solyndra scandal — tells PJMedia he is launching an investigation “looking at the entire program, and some specific companies.”
The Model S, for which DOE awarded Tesla most of the $465 million, reportedly will sell for as much as $67,000. The company has yet to record a single quarter of profit and continues to see its own stated production schedule slip. It now promises that the Model S will be launched at the end of 2012, a year late.
Tesla says it still hopes to sell the base model for around $47,000 before governmental rebates. That still may be too steep a tag even for environmental enthusiasts.
When the White House gave a half-billion dollar loan to Tesla, President Obama lauded it as “[a] historic opportunity to ensure that the next generation of fuel-efficient cars and trucks are made in America.”
While on the committee, Westly supported a $7,500 instant rebate for electric car buyers. (Most federal rebates come long after a sale, when a customer files his income tax forms.) The new rule supported by Westly automatically deducts the $7,500 off the retail price of a car at the time of the sale. The regulation is now in force and will apply for all Tesla customers.
When Tesla’s application was before DOE loan managers in 2009, there were many indications it was not even in need of the loan. Tesla’s private investors included Google co-founders Sergey Brin & Larry Page, former eBay President Jeff Skoll, Hyatt heir Nick Pritzker, and VC firms Draper Fisher Jurvetson, Capricorn Management, and the Bay Area Equity Fund (managed by JPMorgan Chase). In May 2009, Daimler Chrysler took a stake in Tesla for a reported $50 million. Abu Dhabi’s Aabar Investments reportedly bought 40% of Daimler’s investment.
Tesla is also building powertrain components for the Mercedes-Benz A Class E-Cell all-electric cars, and is working with Daimler on components for its smart car.
That year Tesla was making presentations to potential investors for an IPO. In June of 2010, Tesla officially launched its IPO on NASDAQ, which instantly capitalized the company at $226 million. The IPO underwriters were not small investment houses, but Goldman Sachs, JP Morgan, Morgan Stanley, and Deutsche Bank. The IPO, however, had troubling fine print that the company would discontinue the production of its roadster after only 1,600 vehicles had been built.
The DOE loan was also intended to reconfigure a Fremont car assembly plant partially owned by Toyota. Instead of selling its plant, Toyota became a $50 million partner with Tesla, which could have easily recapitalized the plant.
DOE says they had no inkling of the deals that were in the works when they initially approved the loan, which was announced in June 2009. DOE spokesman William Gibbons tells PJMedia that it was offered “a conditional commitment” in June of that year, but only learned after the issuance of the loan that “Tesla was able to raise significantly more private equity, and made its initial public offering.”
However, many financial analysts have seen Tesla economic prospects differently.
On automotive news website “The Truth About Cars,” Edward Niedermeyer wrote on February 13, 2009, months before DOE approved the loan:
How on earth is anyone supposed to believe his repeated insistence that Tesla is not in financial trouble?
Motley Fool financial analyst Sean Williams wrote:
I just can’t see Tesla turning a profit anytime soon — if ever! … Current analyst projections call for Tesla to grow revenue by threefold in 2012 with the introduction of the Model S, but call me not so convinced. On countless occasions in recent history, Tesla has run into parts supply delays and technical snafus. Let’s just say I wouldn’t be shocked to see the debut of the Model S pushed back beyond the mid-2012 date the company provided.
Williams was right. Tesla’s Model S is now slated for release sometime at the end of 2012.
Financial analyst Bruce Krasting openly worried about the “free money” being given to the automakers. The loans actually are paid by the Federal Financing Bank, a bank supervised by Treasury Secretary Timothy Geithner. Geithner has doubled the size of the bank and redirected its loans from government projects like rural electrification to private sector projects like Tesla. Geithner has total control over the size and disbursements of the bank. He has no oversight. A congressional committee is investigating the bank connected to the Solyndra scandal. Krasting complained that the bank, once reserved for governmental non-profit programs, was being redirected to for-profit companies like Tesla. In September 2011, Krasting tweeted:
Who got this money? Answer: The same characters that have gotten the “Free Money” since O/Timmy G. took control.
Motley Fool analyst John Williams didn’t pull punches when it came to Tesla:
Let’s get real here. Tesla carries a market capitalization of $2.8 billion and has a net worth of less than $400 million, so its stock price is 86% air — a bubble in search of a pin.
Before the Solyndra scandal broke, Tesla representatives said they were primed for a second federal loan from DOE’s ATVM program. But late last month, their CEO reversed course — saying they don’t need the money.
Westly and Tesla were the subject of a joint investigation by the non-profit Center for Public Integrity and ABC News that ran in March of this year. They outlined the nexus between energy politics and money in the Obama administration. They reported that Westly treated DOE’s loan program as his personal bank for capitalizing his portfolio of companies:
He (Westly) visits White House staff and, as a member of a government advisory board on energy policy, has the ear of Energy Secretary Steven Chu, whose department hands out the sort of seed money sought by companies in The Westly Group portfolio. He even has hosted the president at fundraisers in his Northern California home, and co-hosted events for three of Obama’s most influential advisors.
The Center for Public Integrity quoted an environmental reporter regarding Westly’s ability to pull strings in Washington for many companies:
“One of the things the firm pledges that differentiates The Westly Group from other venture capitalists is they help companies navigate the political landscape,” said Eric Wesoff, a senior analyst who specializes in renewable energy and financing for Greentech Media, which covers news and analysis about the green tech market. “If the premise is that The Westly Group is able to pull some strings to get their companies federal funding, that might actually be part of his business plan.”
Like Solyndra, despite the infusion of private and public funds Tesla may not be a financially successful company. Tesla has yet to see a single quarter of profit. Outside financial analysts assert they are skeptical Tesla will ever be profitable.
And like Solyndra, Tesla has been accused of poor financial management. There are charges it was running an unsustainable “burn rate” of $400 million in a short time. Ze’ev Drori, a former Tesla CEO, tried to put a stop to the financial hemorrhaging and slashed spending by ten percent. But Elon Musk reportedly didn’t like this new direction — he fired Drori and replaced him with himself.
Documents obtained by the Center for Public Integrity under a Freedom of Information Act request show that the ATVM program has generated internal complaints that all firms did not get the same welcome mat that Westly and Tesla enjoyed. The Center for Public Integrity reported:
One of the firms turned down for funding in that loan pool complained of unfair treatment and being ignored. In a five-page letter to Chu, dated Sept. 21, 2009, the company said it had been given no reason for its rejection and had to call the Energy Department multiple times simply to learn what happened.
“DOE reviewers never even talked to the founder, inventor, engineers, project leads or primary contractors to obtain additional information,” said the letter from the California electric car maker XP Vehicles, Inc. “Why was staff at DOE during the course of the year positive about the outcome and never asked for additional information?”
Other firms shut out from the car program have expressed similar frustration, James Taylor, CEO of Ohio’s Amp Electric Vehicles, said in a Q&A last week on Edmunds.com. “These are companies trying to get off the ground and are just like us, starving for cash, looking for investors,” Taylor said. The government money is “not falling through the funnel and getting out to us.”
Multiple congressional and federal investigations are now underway over DOE ethics and political corruption besetting DOE and the Treasury Department’s Federal Financing Bank. The Energy Department’s inspector general, Gregory Friedman, said his office has 64 open investigations centered on stimulus spending. They include “the directing of contracts and grants to friends and family.”
Chris Horner, an attorney with the Competitive Enterprise Institute, calls the Tesla deal “corporate welfare.” He tells PJMedia:
This is a handout from the taxpayers. This is standard corporate welfare. It’s run-of-the-mill corporate welfare that they drape it in green rhetorical bunting as if this is different. It isn’t. It’s even worse because this is likely to be uneconomic.