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David Stockman on Fisker and Tesla: Green Vanities of the Billionaires


In the following excerpt from his new book, Stockman argues that the "big bucks from Washington are being used to prop up billion-dollar bids by venture capitalists to create totally new car companies."

Editor's note: David Stockman's new book The Great Deformation: The Corruption of Capitalism in America (PublicAffairs, 2013) has triggered strong reactions from economists and reporters although it only hit store shelves in the first week of April. Stockman -- who was Ronald Reagan's budget director (1981-1985), and is a former member of Congress from Michigan (1977-1981) -- has stirred controversy and heated debate by questioning the Fed's low interest rate policy. In a recent New York Times op-ed, he referred to the recent highs seen in the Dow (INDEXDJX:.DJI) and S&P 500 (INDEXSP:.INX), saying, "Instead of cheering, we should be very afraid." He added, "Sooner or later - within a few years, I predict - this latest Wall Street bubble, inflated by an egregious flood of phony money from the Federal Reserve rather than real economic gains, will explode, too." Although Paul Krugman, a left-leaning, Nobel Prize-winning economist and New York Times columnist, has come down hard on Stockman's outlook, many reviews of the book have pointed out that The Great Deformation is anything but partisan. As one reporter says, the book has "something for everyone to hate, including Republicans, Democrats, central bankers, and Wall Street executives of all stripes."

The following is an excerpt from the book used by permission of the publisher; it picks up from a chapter about solar companies in the US. To read David Stockton's past articles for Minyanville, click here.

The Great Deformation: The Corruption of Capitalism in America, Chapter 29

The solar boondoggles are modest compared to the crony capitalist capers in the electric vehicle (EV) sector. Here the Obama administration has guaranteed loans of $530 million for Fisker Automotive and $465 million for Tesla Motors (NASDAQ:TSLA) and provided $270 million in stimulus money for a company called A123 that makes electric vehicle batteries. The first two of these are essentially failing vanity projects of Silicon Valley billionaires that are now being bailed out by the taxpayers for no discernible reason. The third has already filed for bankruptcy, taking the taxpayers down the drain with them.

The US treasury was put in harm's way in all three of these cases not simply to boost the debatable concept of electric-battery vehicles. The global automotive industry is already rife with efforts in that direction by incumbent car companies including the Toyota Prius, the Nissan Leaf, the Chevy Volt, the upcoming (2013) Ford (NYSE:F) Escape electric vehicle, and countless more.

Instead, the big bucks from Washington are being used to prop up billion-dollar bids by venture capitalists to create totally new car companies. Yet unless you believe in tin-foil hat theories about Detroit buying up all the patents on magic carburetors which get a hundred miles per gallon, the last industry that needs start-up companies fostered by government is autos. In fact, the global automobile industry is hungry for new product markets owing to its vast overcapacity and is endowed with all of the engineering and manufacturing competence that could ever be needed to bring electric cars to market-that is, if consumers wanted to buy them.

Since gasoline still sells at 1973 prices in real terms, however, there remains only a tiny market for hybrid and electric vehicles. Thus, notwithstanding approximately $1.2 billion of venture capital funding, mainly from Kleiner Perkins Caufield & Byers, Fisker Automotive is literally going down in flames: in addition to massive financial losses, many of the five hundred gasoline-electric hybrid cars it has actually sold have ended in fiery destruction in their owners' driveways. Indeed, the folly of Washington's Fisker caper could not have been more poignant than when Hurricane Sandy hit the New Jersey docks with its vast storm surge; more than a dozen Fisker cars ignited and burned to rubble when washed over by seawater.

Given the $100,000 price tag for these vehicles, however, the story is not really about any hardship suffered by the credulous buyers of the Fisker Karma. The actual hardship will soon fall on the taxpayers because the underlying deal stinks to high heaven. It seems that Silicon Valley's leading venture capital firm had a failing auto start-up and Vice President Joe Biden had a failed GM (NYSE:GM) auto plant in his home state of Delaware. Kleiner Perkins's chief green energy maven and major Obama fund-raiser, John Doerr, therefore arranged a deal.

In return for the aforementioned $530 million from Uncle Sam, Doerr and his purportedly Republican partner Ray Lane would present a new business plan to Henrik Fisker, the intrepid designer-entrepreneur behind their start-up auto company. Flush with vast new money from Washington, the struggling Fisker Automotive would develop a second version of its electric vehicle-a "people's car" that could retail for a mere $50,000-and build it in Joe Biden's empty auto plant.

While the vice president thought this was a swell solution and duly cut the ribbon at the plant's reopening, Fisker was not the most likely man for the job of building a people's car in Newark, Delaware. In fact, before becoming an electric vehicle tycoon, he had been a famous designer of ultra-luxury vehicles including the 2005 Aston Martin DB9 Volante. The latter carried a price tag of $250,000 and was built by hand in what is essentially an automotive museum in the United Kingdom.

Nevertheless, pending the development of a people's car to be called the Atlantic, Fisker got a $170 million installment from the Department of Energy to complete the design, engineering, tooling, and manufacturing launch of the $100,000 per copy Karma. After repeated delays, the first Karma was delivered to the company's launch customer (and investor) Leonardo DiCaprio, but it is surely the case that the green crusader–actor had not calculated the full carbon footprint of the Karma when it arrived at his Beverly Hills estate.

In fact, the vehicle had been assembled in Finland based on an aluminum frame that was manufactured in Norway and an interior cabin that was made by automotive giant Magna International of Canada, and sent to Finland for final assembly. Moreover, the heart of the vehicle, the electric battery power train, was also shipped back to Finland after it was made by A123, based in Waltham, Massachusetts.

The latter was both an investor in Fisker and also a recipient of $260 million of Obama stimulus money. A few months after DiCaprio got his car, A123 filed for bankruptcy under a cloud, some of which emanated from the fiery demise of batteries it had installed in the five hundred or so Karmas which had been actually delivered to customers.

So the carbon footprint from its far-flung supply chain is considerable, given that all of these components are shuttled to Finland and back. But that's not the half of the Karma's severely challenged claims to being green. One of the great truths of the modern economy is that central-station electric power is grossly inefficient as a thermal matter, with less than 30 percent of the BTUs delivered to plant boilers actually ending up as useful work in homes and factories. Therefore, the fuel efficiency of electric-battery cars can only be fairly measured on a so-called "wells-to-wheels" basis, thereby taking account of the vast thermal losses at power plants and distribution grids from the hydrocarbon fuels originally consumed.

It turns out that the Karma gets nineteen miles per gallon on a wells-to-wheels basis; that is, it has worse fuel economy than the Ford Explorer. So the question recurs as to why public money is being used to fund toys for rich people and to bail out the approximate $1.2 billion that has been invested in Fisker by Kleiner Perkins, Al Gore, and Qatar Holdings, among numerous well-endowed others.

The People's Car From Goldman Sachs

To be sure, electric vehicles are the red-hot flavor of the month, even on Wall Street. That explains how Goldman Sachs (NYSE:GS) got into the act, too, bringing to market in April 2010 the IPO of the Fisker Automotive clone called Tesla Motors. The latter also makes high-end electric-battery vehicles and was created by another billionaire venture capitalist who has also been a serial harvester of the Washington money tree, one Elon Musk. Indeed, so incestuous is the plot that Musk hired Henrik Fisker in one of the latter's earlier ventures to perform design work on an electric vehicle, then sued him for design theft when Fisker launched his own EV venture.

Not surprisingly, the ostensible reason Tesla got its very own $465 million loan guarantee from the DOE was to perform exactly the same gambit as Fisker. Tesla had developed a $110,000 electric vehicle called the Roadster, and so the taxpayer money was supposed to help it develop a people's car called the Model S which would retail at $55,000 before the $7,500 electric vehicle buyers' tax credit that Uncle Sam also had on offer.

Not surprisingly, Tesla has stumbled bringing its people's car to market just like Fisker has. In fact, Fisker is so far behind that even the DOE has had to freeze its funding; the company has fired the few workers who had been hanging around Joe Biden's empty car plant and now suggests the Atlantic may not appear until 2015, if ever.

Yet the Tesla stumble is the more egregious because it was brought to the public market by Goldman and its billionaire promoter in an utterly cynical manner as an upside call on the US treasury. As it happened, Tesla had lost in excess of half a billion dollars building and selling about two thousand Roadsters, notwithstanding their $110,000 sticker price and well-advertised celebrity owners like George Clooney.

So with the company at death's door by late 2008, Elon Musk had to publicly confess that the long-promised high-volume S Model was a pipe dream and suspended development; that is, until Tesla could get on Uncle Sam's life-support system by obtaining the massive DOE funding needed to develop the "people's car" version of his electric battery vehicle. Not surprisingly, the Obama administration had no trouble believing that the world needed another car company, and that a true believer in the green gospel like Musk could bring a volume production vehicle to market.

In June 2009, Tesla got its $465 million in federal money and proceeded to plow it into the development of the S Model and funding of a corporate ramp job designed to suggest a muscular business with orders and factory production capability. To that end, it promoted advance sales through $5,000 deposits which conveniently could be recovered from $10,000 worth of federal and California electric vehicle tax credits.

This was cash-out financing for the prosperous classes. Not surprisingly, the company has booked about 10,000 orders and upward of $100 million of customer cash via this backdoor infusion from the IRS. It also used $40 million of its federal loan in May 2010 to purchase the cavernous but shuttered General Motors–Toyota assembly plant in Fremont, California-approximately one mile from the Solyndra plant, as it turned out. The Potemkin village aspect here lies in the fact that the Freemont plant had assembled upward of 250,000 cars per year in its salad days compared to scheduled S Model production of less than 3,000 vehicles in 2012.

But a bulging order book, even if an artifact of EV tax credits, was exactly what Goldman needed to pump the Tesla story. So the IPO at $17 per share was launched in June 2010, just one month after the company acquired its taxpayer-financed manufacturing plant. After rising 40 percent the first day, Tesla became a favorite rabbit of the momo chasers, and spurred by breathless "research" from Goldman and other Wall Street firms, the stock price reached $35 by later 2010 and has cycled around that level since. In short, Tesla has been valued at about $3.5 billion by the stock market on the strength of the S Model hype and the simulacrum of a company
propped up by Uncle Sam's $465 million loan and EV tax credits.

The company's SEC filings leave little doubt that it is the humble taxpayers of America who have fueled Elon Musk's pretensions of grandeur. During the eighteen quarters since January 2008, Tesla has booked $500 million of revenues, but has racked up $750 million of net losses and nearly $1 billion of negative operating cash flow. Not surprisingly, in October 2012 Tesla got a delay from DOE on its loan repayment obligations and a waiver on its debt covenants. So as Tesla circles the drain, it is essentially following the playbook that had been used by its former next-door neighbor, Solyndra.

It goes without saying that Tesla would have been Chapter 11 bait years ago without the $465 million federal loan, and will likely end up there anyway. Yet the question recurs as to why the public purse was opened to this scam in the first place. After all, the S Model has turned out to be a high-end luxury sports sedan which will retail with normal customer options for at least $75,000. Like all EVs, its environmental benefits are dubious at best. Unlike most of its more stodgy competitors, however, it does accelerate from 0 to 60 mph in 4.4 seconds.

In truth, the historic boundary between the free market and the state has been eradicated, and therefore anything which can be peddled by crony capitalists like Musk and Doerr in the name of social uplift is fair game. In this instance, the Obama administration adopted the entirely capricious goal of one million electric vehicles on the road by 2015 and had the dollars to throw at it, thanks to the bipartisan fiscal follies that have now become firmly entrenched.

While much of the funding for this misguided effort came from the Obama stimulus, the fact is that $20 billion came from the Bush administration's Advanced Technology Vehicles Manufacturing Loan Program. This was the source of the loan guarantees for both Fisker and Tesla and, more importantly, also provided the political cover.

Thus these EV boondoggles were not really Obama's green energy waste; these were "Republican loans" and had been applied for during the Bush administration under a program which it had embraced. Indeed, Fisker's lead director, Ray Lane, claimed to be a Bush-supporting Republican benefactor, and dismissed as "silly" the notion that an automotive company could be started without government aid.

He was correct on that point, although the idea that the government should be starting car companies, in a world drowning in auto capacity, was apparently not yet a well-known part of the Republican creed. So whether acknowledged or not, it was the Bush White House which paved the way for the abomination of Fisker and Tesla.

That a megalomaniacal promoter like Elon Musk could walk off with half a billion in taxpayer money, blow it in less than four years, and make himself the toast of Hollywood in the process is powerful evidence that the putative conservative party has vacated the ramparts of the US Treasury Department. The latter now stands politically helpless in the face of whatever flavor-of-the-month projects crony capitalist raiders happen to be promoting.

The Green Energy Dog Which Didn't Bark

At the end of the day, Tesla and Fisker did not have much to do with real conservation. That is evident in the policy dog that didn't bark; namely, a rip-snorting increase in the gasoline tax. To be sure, it is not evident that dragging BTUs through the roundabout path of the electric power grid would really alter the carbon footprint of the typical auto's 10,000 vehicle miles per year. Yet if reduced gasoline consumption is the policy objective, a European scale fuel tax, say, $4 per gallon, would cut US consumption by upward of 3 million barrels per day, or about 35 percent.

In fact, it turns out that Secretary Steven Chu spent nearly as much time disavowing his earlier support for a stiff gasoline tax as he did handing out subventions to crony capitalists of the green energy persuasion. And that symbolizes the problem in a nutshell.

The virtue of a high energy tax is that it harnesses the pricing mechanism silently, efficiently, and relentlessly to the task of altering behaviors throughout the nooks and crannies of the entire Main Street economy. That would be especially true if the tax were levied broadly as a variable level on petroleum imports. Using that mechanism, policy could permanently fix a minimum domestic price floor at, say, a $125 per barrel equivalent by raising or lowering the levy to capture the difference between the floor and the world price.

Henceforth, every consumer and producer in the domestic economy would react as they saw fit to the rule of one price: $125 per barrel of liquid hydrocarbon equivalents, always and everywhere. Thousands of entrepreneurs would be thereupon unleashed to conserve liquid petroleum BTUs whenever investments, from insulation to solar panels to electric vehicles, were profitable under the floor price. Likewise, consumers might decide to buy smaller cars with fewer features and less powerful engines under a guaranteed, permanent régime of high fuel prices. They might even choose to live in smaller houses or locate closer to work or make day trips by light rail.

By the same token, there would be no possible excuse for government subsidies and loan guarantees to encourage energy production or for the myriad oil and gas tax breaks now in place. With a permanent price floor, the message of the marketplace would be "Drill, baby, drill" wherever it was economic, including the cost of regulatory compliance. The big bucks would go to petroleum engineers and geophysicists, not K Street lobbies.

It goes without saying that there is a ferocious bipartisan consensus against a variable petroleum levy; that is, against drafting the marketplace to accomplish conservation goals set by the state, if goals must be set at all. Such a régime would put the energy branch of crony capitalism out of business. It would allow the state to sit back with its feet up on a stool, and to abolish its congressional committees on energy and its busy-body departments and agencies which ceaselessly meddle in markets and waste societal resources. Most importantly, it would remove the energy sector from the checklist of spending options next time Washington gets out the stimulus napkin.

Twitter: @Minyanville

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