The Fickle Blessing Of "Senior" Debt

One of the more controversial aspects of the Solyndra disaster was the Obama Administration’s decision to put private investors ahead of taxpayers.  This happened when the massive Solyndra loan was restructured in January 2011.  The idea was that in order to attract new private investors to Obama’s floundering “green energy” flagship, it would be necessary to guarantee they could recover their investments in the event of bankruptcy.  Politicians are always happy to double down on failed bets, but private investors are risking their own money, which makes them a good deal more cautious.

As it turns out, Solyndra did indeed go bankrupt, and taxpayers were forced to eat $385 million in losses, while those late-arriving private investors skated off with $75 million in “senior debt” covered.  Only $150 million of the money Barack Obama forced taxpayers to give his good friend and top donor George Kaiser was treated as “senior” to the money provided by private investors.  Gambling is a lot less nerve-wracking when you know taxpayers are standing by to cover your losses!

On the bright side, Obama’s busted green-energy flush will soon be selling off its physical assets, which should bring in a few million dollars.  That should help ease the pain for taxpayers who… oh, no, wait, sorry.  We won’t be getting one thin dime of that money.  It’s all going to private investors.  Once their “senior debt” is made whole, you and I might have a chance of getting paid back from a future auction.  Maybe.  This is Obama green-energy junk we’re talking about.  I wouldn’t make any bets on how much enduring value it has.  Especially since taxpayers don’t cover my bets.

How was this remarkable arrangement arrived at?  Simple: the Energy Department re-wrote the law.  No one has ever seen anything like it before.  Treasury officials testified before the House Energy committee that taxpayers have never been held inferior to private investors in such a situation.  An increasingly panicked White House has been hoarding Solyndra paperwork, but in one of their classic Friday night document drops, we learned the Office of Management and Budget questioned the very legality of the Solyndra loan restructuring as far back as December 2010. 

“I have never seen anything like this in all my years in Congress,” said Oversight Subcommittee Chairman Cliff Stearns (R-FL).  “Here we have one cabinet-level agency concerned that another has broken the law, and taxpayers are on the hook for half a billion dollars as a result.”  But don’t worry – the Obama Administration says only the riskiest government loans, to the most distressed companies, will be treated this way.  Crony capitalism requires cronies.

No one should be more astonished by the unprecedented consideration shown to Solyndra investors than General Motors bondholders.  Remember them? 

When the government stepped in and bailed GM out, the bondholders were given a back seat to the U.S. government, the auto-workers union, and even the Canadian government.  This was really more of a union bailout, as the United Auto Workers not only got 17.5% of the company, but also billions in stock options.  Common stockholders lost about $12 billion in value.  The bondholders, who loaned $27 billion to General Motors before it became Government Motors, only got 10% of the company.

The bondholders were not happy about this arrangement.  When they insisted their long-standing investments should give their debt “senior” status, the White House called them “vultures” and threatened them with public destruction.  As bondholder attorney Thomas Lauria reported, “one of my clients was directly threatened by the White House and in essence compelled to withdraw its opposition to the deal, under the threat that the full force of the White House Press Corps would destroy its reputation if it continued to fight.”  The White House Press Corps didn’t seem terribly upset by Obama’s assumption they would be willing to serve as his attack dogs upon command.

As for the taxpayers, well, we lost about $14 billion on the government’s $80 billion bailout, which seems like a small price to pay for the United Auto Workers to keep their incredible compensation packages.  At the time of the bailout, union employees were costing the Big Three automakers about $70 per hour in wages and benefits.  They got profit-sharing checks averaging $4000 last year, which the UAW described as “a good example of how we are sharing in the success” of Government Motors.  When do the taxpayers get to share in that success by recovering their $14 billion loss?

Sometimes the government’s “partners” have senior debt, and sometimes they don’t.  In an environment of politicized economics and institutionalized corruption, it all depends on who you know.  The one constant is that taxpayers always get a raw deal.