Sep 24, 2020
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Spin Alert: Despite What DOE Says, Its Loans Are Not Making Money

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The Department of Energy snookered the media last week with a report that seems to expose that its clean energy lending programs are profitable. Remember Solyndra? Those loans are earning profits went a common headline. Unfortunately that s not true. Taxpayers are losing money on DOE lending. Less than originally expected and less than you will expect given media coverage of Solyndra Fisker and a few other failed loans


But smaller losses are still losses not profits. To appreciate DOE s spin consider an easy example. Suppose your spouse borrows $10 000 from a bank at 5 percent interest over 10 years for you to lend it for your friend Bob at the same terms. Everything goes well in the first year


Bob pays you and your spouse pays the bank. If your aunt asks how the deal is going what would you say? An outstanding answer would be We are breaking even; let s hope Bob keeps paying us back. You and your spouse are in this together the loans from the bank and to Bob offset one another and your best hope is for that to continue


If DOE were asked however it apparently would say Things are great; Bob paid me $500 in interest and I’m on track to earn $5 000. DOE takes credit for the interest that businesses pay on their loans but it doesn t subtract—or even report—the interest costs that taxpayers pay to finance those loans


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After Beirut s Deadly Explosions Youth Work To Rebuild Their City DOE s report doesn’t address this issue except in a footnote in a table (cut and pasted above) revealing that its $810 million of interest earned was calculated without respect to Treasury s borrowing cost


In other words DOE reports gross interest received not the net interest taxpayers have earned after subtracting Treasury borrowing costs. The incomplete figures in the table seem to signify that DOE has eked out a $30 million profit on its lending ($810 million in interest less $780 million in loan losses). But if we account for Treasury borrowing costs taxpayers are actually well behind


The report doesn’t allow us to assert just how far behind. We do know however that DOE loans tend to be made at small sometimes zero spreads above Treasury rates. So a large part of DOE s interest earned must have been offset by borrowing costs. That puts taxpayer losses in the hundreds of millions of dollars


A similar concern applies to DOE s statement that interest payments on these loans will eventually top $5 billion. Some media outlets are reporting that as $5 billion of profit. It s not. That $5 billion doesn’t include the cost of Treasury financing or of any defaults. DOE s $5 billion figure is like claiming your loan to Bob is scheduled to bring in $5 000 in interest; it s technically true but tells you nothing about profits


Indeed the Obama administration still predicts that DOE s loans will lose money over their lifetimes. DOE s lending programs shouldn’t be evaluated solely or even primarily in keeping with their profitability or lack thereof. What matters is their overall social impact. How much are they advancing new technologies? How much are they reducing future pollution? Have they created jobs and economic growth? And are any gains worth the taxpayer subsidies? Those are the questions we should be trying to answer


If DOE wants to play the profitability card however it may do so in a correct and transparent way. Last week s report falls woefully short. DOE owes taxpayers a decent accounting of the financial performance of its lending programs. P. S. In recent work I raised concerns about how the government budgets for lending programs


One issue is whether we should measure profitability against Treasury borrowing rates (as currently done) or against market rates (which the government could earn by unsubsidized lending). I expected that issue to arise in DOE s accounting. Instead the agency ignored the cost of capital entirely. Budget policymakers eliminated that ploy more than two decades ago so this is stunning DOE would resurrect it

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