When Investors Have Police Forces

I have argued many times that private investors, over the long haul, will make better investment choices than the government, in part because they have better incentives and information to guide their decision-making.  The straw-man argument against this is to point out anecdotes of failed private investments.  Heck, I can do that.  Pets.com famously blew through $300 million of private capital with a corporate strategy that never made much sense to people.

The Pets.com investors were chagrined, and probably learned a lesson from their mistake.  Certainly most of us thought the blame, if blame existed, for the debacle rested on the investors for pouring money into a bad proposition.  Certainly no one accused the management of fraud -- I am sure they were diligently, honestly trying to make the company a success, even if they were misguided as to where that success lay.

As it turned out, everyone, not just the Pets.com investors, learned from the mistake.  The failure was an important driver in an industry-wide rethink as to what a successful Internet business model might look like.  This benefit only came because people were willing to acknowledge not just that the Pets.com investment was flawed, but that it represented a systematic mistake that was being made vis a vis Internet startup investments.

Now, consider solar manufacturer Solyndra.  It failed this week, likely taking with it most of $535 million in taxpayer money that the Obama Administration was so eager to give them that it short-cutted its internal processes to fork over the cash more quickly.

Many of us on the outside would love to see the government rethink such investments in a systematic way, and reconsider if it is even possible for the government to make such investments, and in particular whether "green jobs" investments make any sense at all.

But the likelihood of that kind of introspection happening in the public world is about zero, and my bet is that Obama is going to propose more of the same tonight in his speech.

In fact, the Department of Energy (the source of the loan) and the FBI have today sent armed agents into Solyndra looking for evidence of fraud.   While Zero Hedge argues that fraud would be bad for Obama, in fact I think it would probably be the best possible outcome and one he is hoping for.  If he can say, "wow, you and I both got tricked here by some evil folks we are going to put in jail" it deflects attention from the fact that he put a half billion dollars of taxpayer money into a business plan that never made a lick of sense.

Another me-too solar manufacturer with a factory in California of all places was never going to compete in a global commodity market.  This company's plan was always to sell dollars for 50 cents and to make it up on volume.  I don't see how any investor thought this was going to work.  My guess is that the private investors didn't know much about solar and invested because it had a certain hip-ness to it, or less charitably, they knew it never made sense but hoped that Uncle Sam, once it was already in for a half billion, would keep more money flowing or perhaps agree to buy out their production at above market prices.

There may have indeed been fraud, but as in the case of Pets.com, it is perfectly possible no real internal fraud existed and they ran through a ton of money against a stupid business plan that should never have been funded.  Obama would greatly prefer to call it fraud rather than his own failure of judgement.  As an aside, Fannie and Freddie are pursuing exactly the same course in suing banks, arguing that they were defrauded by the banks in buying mortgages, a fairly laughable proposition in the great scheme of things when one considers Fannie and Freddie were at the forefront of the industry in driving down lending standards and promoting the expansion of the mortgage market.

  • caseyboy

    Solyndra was hoping that new government regulations would require that all new home and office construction include a solar panel system perhaps with a partial government rebate.

  • Noah

    Are there any adults left in President Vacation's administration? President Nixon went down for improper use of the FBI. Using the FBI to paper over the failure of DOE to do due diligence is an example of the DOJ and the FBI carrying re-election water for President One and Done.

  • Jim Collins

    As I recall the only person to make out from the Pets.com mess was the guy who did the sock puppet that they used in their advertising. Personally I'd be curious how much of that $500+ million made it's way to the coffers of the Democratic Party.

  • Zach

    My guess would be that even if no fraud actually took place, the feds will invent some, much like the cops that plant pot on little old ladies that they mistakenly serve no knock warrants on.

  • DHL

    I have first-hand knowledge of the stupidity of the Pets.com management team. They forgot to negotiate a shipping contract with UPS, so they were paying full retail rates to ship 50 lb. bags of dog food by air.

    Is that fraud? In a sense it is, because investors make the reasonable assumption that the people running the businesses in which they invest are not profoundly stupid and ill-equipped to succeed.

  • http://that-xmas.livejournal.com/ Xmas

    There's a churning story about how one private investor in the company had his loan repaid from the government funds...right before the business declared bankruptcy.

    The political connections of the investor are...interesting.

  • Ted Rado

    The whole "green" energy thing is a fraud. One of the cardinal rules of investing is: don't buy anything you don't understand. As I have pointed out in previous posts, any engineer can, in a few hours time, show that the alternative energy schemes are not viable on a large scale. If you invest in them with the hope that the USG knows what they are doing when they subsidize them, it is at your own risk. This latest fiasco is a warning re ALL green investments.

    Standard engineering practice is to lay out a project proposal on paper and do the numbers (heat and material balance, prelim design, cost estimates, market studies). If it looks good on paper, then, and only then, you spend serious money on it. Ninety nine percent of project proposals fail at this point. Competent management would not dream of proceeding without this sort of analysis. To plunge ahead on the basis of "we are helping the environment" or other emotional reasons is a sure recipe for disaster. As to the investors in this sort of thing, Barnum had it right: there is a sucker born every minute.

  • Another guy named Dan

    Discovery at gunpoint: every plaintiff's lawyers dream.

  • anonymous

    Having the FBI raid the office also has the added benefit of making sure all the evidence is kept under executive branch control and thus inaccessible to republicans who might like to investigate what mr. jim collins has alluded to, that much if not all of this taxpayer money went directly to democrat activism

  • steve

    Don't courts go through all the records of a company declaring bankruptcy anyway? Am I mistaken?

  • Ted Rado

    The whole alternative energy industry would be bankrupt without USG subsidies. The Spanish government has started a huge downsizing of the wind/solar business by lowering subsidies. Sooner or later, this will occur everywhere, as governments can't afford it. Then the alt energy pushers can point out how many jobs they have LOST by pushing the idea. What nonsense.

    Meanwhile, the Chinese are expanding their share of the wind/solar industy. Boy, are they in for a rude awakening.

  • Sam L.

    Steve?? GM. Sure they went thru the books. Chrysler; yeah, right.

    The Won would rather be defrauded than have his administration been just dumb. Both are likely the case.

  • steve

    @Sam L

    From looking at the article on the GM bankruptcy in Wikipedia, it appears that they only had to give the court an accounting of their assets and debts. It seems the court takes these declarations at face value and doesn't look into it.

    So I guess an FBI raid would be necessary if fraud is suspected.