What the Solyndra Scandal Means for Small Business

As the old saying goes, the road to hell is paved with good intentions. In a nutshell that could sum up the collapse of Solyndra, the Fremont, Calif., maker of solar panels that was a poster child for President Obama's green jobs initiative -- during the company's brief existence, that is.

The term scandal should be used lightly at this point, because, as yet, no criminal wrong-doing has surfaced, although the FBI is investigating what Solyndra officials knew about the company's market and condition, and whether they knew it before accepting $527 million in federally backed loans before collapsing so spectacularly.

As yet, no hint of Obama administration complicity or insider dealing has surfaced, although speculation is rife among scandal mongers. The suddenness of the company's collapse, after raising more than $1 billion from public and private sources, has also sounded alarm bells.

But the real scandal out of the company's collapse would be any effort in Congress to use Solyndra's failure as justification for abolishing or curtailing government-backed loans for small business startups. In this case, no Small Business Administration programs were involved. The money came from a Department of Energy program that was created as part of President Obama's stimulus through a program created by the Bush administration.

But the SBA provides loans that are similar in nature, and critics of the agency could easily target them in any broad-brushed effort to cut what might be billed as "wasteful" government programs. Abolishing the SBA has long been a goal of conservatives going back to the Reagan administration, and the effort has gained new currency in the Republican-controlled House of Representatives.

Some critics argue that Solyndra is the Obama administration's Wedtech, the infamous SBA scandal that tainted the Reagan administration in the 1980s. But so far, Solyndra is no Wedtech, and it's important to understand why.

The Wedtech Corp. was founded in a depressed area of the Bronx in New York City by an immigrant, John Mariotta, who initially set out to build baby carriages. Wedtech became a poster child for the Reagan administration, much like Solyndra was for Obama's, after President Reagan praised its efforts to hire people who otherwise would be on welfare. He cited it as a model for his administration's efforts to cut government assistant to the poor.

But the company was secretly taken over by a politically connected businessman named Fred Neuberger. He saw a gold mine in government contracts, largely from the Defense Department, and knew minority firms were receiving preferred treatment. Indeed, Wedtech won many of its defense contracts under a Small Business Administration program that allowed minority-owned businesses to be awarded no-bid contracts. To keep Neuberger's controlling ownership secret, the company forged documents claiming that Mariotta was still the primary owner.

Neuberger attempted to cash out of Wedtech by taking it public. They payoff to politicians came through the awarding of stock to law firms, ostensibly as payment for services that employed local Congressmen. President Reagan's press secretary, Lyn Nofziger, also used his influence on behalf of Wedtech to win a $32 million no-bid Army contract. In all, the company won $250 million in no-bid deals, and some 20 state, local, and federal officials were implicated, or convicted of crimes, in the scandal. Attorney General Edwin Meese, who had worked as a Wedtech lobbyist before taking office, was the highest official implicated and resigned as a result.

So far, the political connections that were rife in the Wedtech scandal have yet to surface in the Solyndra collapse. The FBI investigation is focusing on whether Solyndra executives knowingly misled the government to secure the loans. A separate seven-month investigation by Republicans on the House Energy and Commerce Committee, titled "The Solyndra Story," blames the Department of Energy and the White House Office of Management and Budget for ignoring red flags "in their rush to spend stimulus dollars."

In still another take on the collapse, The New York Times linked Solyndra's downfall to a major shakeout in the solar panel industry. Prices of solar panels have plummeted in recent months, causing a supply glut that has diminished profit margins across the sector. Solyndra's collapse was the third in as many weeks. Evergreen Solar Inc. of Massachusetts and SpectraWatt of New York also filed for bankruptcy protection, the article noted. Solyndra also suffered because it had a unique product with a limited market.

While the government could be accused of failing to conduct enough due diligence or understanding the nature of the business in which it was committing funds, that shouldn't be used as an argument to cut loan programs. Nor should the riskiness of the loans; the government has traditionally made capital available precisely because startup companies typically involve more risk. But the rewards are often just as high. After all, Microsoft received SBA loans as a startup.

Critics have also zeroed in on the size of the government's commitment. But half the money raised by Solyndra came from private sources. And the soured loan represents just 1.3 percent of the $38 billion in loans extended as part of the loan-guarantee program. What's more, it's the only loan to go bad so far, according to the Washington Post. Critics have also noted the rising number of government-backed loans in default, especially at the SBA. But defaults are rising in the private sector as well because of the bad economy.

With the economy struggling, the worst thing the government can do now is adopt a banking industry mentality: "Only loan to companies that don't need the money." Rather, the government should dramatically expand its loan-guarantee programs as well as provided better oversight. Let thousands of startup companies bloom and watch the economy spring back to life.