There was a terrific piece in the Wall Street Journal this week outlining how companies like Solar City take advantage of federal tax incentives to purchase cheap solar materials from China and benefit Wall Street financial firms. This is a must read for anyone that is considering a solar lease. Washington and the consumer gets screwed, domestic solar manufactures get screwed, Wall Street makes a mint. Sound familiar?
Subsidizing Wall Street to Buy Chinese Solar Panels by TJ Rodgers
At the end of the recently released film "Margin Call," the chairman of the fictional investment bank that triggered the mortgage-backed securities meltdown sits in his executive dining room, looking down on the Hudson River sunset while enjoying a steak and an expensive bottle of Bordeaux. Why not? He has just saved billions for his shareholders by dumping the firm's entire "toxic loan" portfolio in one hectic trading day. Just before giving a bonus to the brilliant analyst who foresaw the meltdown only hours in advance, the chairman predicts, "There's going to be a lot of money made coming out of this mess."
Wall Street understands how to make money, up-market or down. "Margin Call" may fuel Occupy movement ire, but in creating mortgage-backed securities, Wall Street did nothing other than facilitate home-financing access to the next tier of less-qualified home buyers, as demanded by every president since Bill Clinton. After that, the bankers did exactly what their shareholders wanted: bundle those risky loans into securities, sell them to lock in the profits, and dump the risk right back onto the federal government—where it belonged.
My purpose is not to debate the morality of mortgage-backed securities but to update the Law of Unintended Consequences with the corollary Law of Misguided Subsidies: Whenever Washington disrupts a market by dumping subsidies into it, Wall Street will find a way to pocket a majority of the money while the intended subsidy beneficiaries are harmed by the resulting market turmoil.
The recent crash in mortgage-backed securities was a near-repeat of the savings-and-loan crash of the 1980s, in which Washington insured the S&L industry but failed to set limits on high-risk loans. When the bubble burst, Washington paid Wall Street the insurance money while homeowners lost huge sums in real-estate hell. Wall Street understands how to manage risk; the federal government and consumers do not.
Consider the current 30% federal solar energy subsidy. A home solar system with 60 solar panels produces about 15,000 watts of power, enough to completely offset the $6,000 annual electricity bill of a typical upscale California home. The system costs about $90,000 prior to the 30% federal income-tax credit, which reduces its cost to $63,000. After a simple payback period of about 10 years, the homeowner literally enjoys free electricity for the remainder of the guaranteed 20-year system life, a very profitable 10 years.
But what if that $27,000 tax credit, the accelerated-depreciation tax savings, and most of the hefty post-payback profits went to Wall Street firms with a "tax appetite," not the homeowner? That's just what happens with the majority of new home solar-system installations today.
Washington and consumers are both notoriously shortsighted investors. Washington thinks in two-year election cycles, and consumers will usually choose a financially unfavorable option if it offers no money down. Today's most successful pitch for home solar financing goes like this: "Why pay a lot of money when you can get your solar system installed free and immediately reduce your utility bill?" Most homeowners find that proposition compelling. They ignore the fine print: "You must give your tax credit and depreciation to us and sign a long-term contract to buy power from us at prices just below market."
Today, most new home solar systems are purchased by special Limited Liability Corporations (LLCs) that are specifically created by Wall Street firms to purchase home solar systems and to sell power to the homeowner on a cell-phone-like contract. The homeowner does not mind giving up the tax benefits as long as the "free" system reduces utility bills.
However, when the system is paid off and the monthly LLC profit jumps to 100% of the electricity bill, the LLC solar electricity price to the homeowner is maintained just below market—and the profit really begins to roll into the LLC. Since the risks to the LLC grow as the solar systems age, many banks offload their risk by selling the LLCs before their 20-year lifetime is up, locking in much of the long-term profit. There is now a growing market for what might be called "solar-backed securities." Wall Street understands the time-value of money; the federal government and consumers do not.
One of the largest solar-system installers in the U.S., SolarCity Corp., uses the LLC strategy and currently buys a majority of its solar panels from the low-cost Chinese supplier, Yingli. Thus when President Obama said that we must subsidize our solar industry to remain competitive with the Chinese, it would have been more accurate to say that we subsidize Wall Street to create employee-less corporations that buy and install Chinese solar panels in the U.S. Wall Street and consumers understand that free markets are borderless; Washington does not.
Just last week, the U.S. International Trade Commission found the Chinese solar industry guilty of "dumping" solar panels in the U.S. Tariffs are likely to be levied against Yingli and others. Here then, is a practical guide to the Obama administration's nonsensical solar policy: Washington gives tax breaks to Wall Street to fund LLCs that buy solar panels from the Chinese to "help" the American solar industry, while the ITC threatens to levy a tariff on those solar panels, which would raise the price of solar energy to U.S. homeowners. In short, Wall Street pockets the money and consumers get higher solar-energy prices.
We should stop reflexively indicting Wall Street "greed" and focus instead on Washington as the disruptive force in one market meltdown after another. Solyndra, the poster child of the Law of Misguided Subsidies, borders on irrelevancy compared to the full impact of bad economic policy.