Tags: Tesla | loan | stock | options

Slate's Woolley: Tesla Deal Is Worse than Solyndra's

Friday, 31 May 2013 07:44 AM

By Michael Kling

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Tesla Motors may have turned a profit for the first time, but it's still a boondoggle for taxpayers.

In fact, it's arguably far more costly for taxpayers than the Solyndra fiasco was, writes Scott Woolley for Slate.

The Department of Energy gave Tesla a $465 million low-interest-rate loan in 2009. The company is now making 400 electric cars a week, has a market value of more than $12 billion and paid back the government loan including interest.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

Solyndra, the solar panel maker, by contrast defaulted on its $528 million government loan.

In Tesla's case, the government made a risky venture capital-style investment without a venture capital-style return, Woolley argues.

"The government made the key mistake of loaning money to Tesla without insisting on receiving stock options, options that could have allowed the Department of Energy to pay for the Solyndra losses several times over."

The government had the upper hand and could have named its terms back in 2009. If Tesla did not get a government loan, it would have paid 30 to 40 percent rate for a venture capital loan.

The government did have options on 3 million shares of Tesla, which would be worth $300 million based on current share prices. Yet Tesla extinguished those options by paying back the loan early.

The Energy Department says its goal is not making a profit, but helping entrepreneurs build clean energy.

But affordability is why stock options are typical in venture capital deals, Woolley states.

"When a company is struggling, the options can't be exercised and thus are perfectly affordable, not draining a dollar of cash from a startup company," he explains. "Unlike a loan, stock options only cost the company money if it goes on to success — at which point it can afford to share that success with its early investors."

Elon Musk, Tesla co-founder and CEO, received a 10 percent interest rate on his personal loan to the company, with the option to convert his $38 million loan to Tesla stock. Those shares are now worth $1.4 billion — a 3,500 percent return. The government got $12 million in interest for a 2.6 percent return.

The Treasury Department, on the other hand, demanded ownership stakes as part of its bailout terms and owned 85 percent of AIG's stock and 32 percent of GM's.

"If the government had demanded an ownership stake in reasonable proportion to the amount of money it put at risk, Tesla would be just as successful as it is today," Woolley writes. "The only difference would be that the taxpayers who saved the company would share in that success."

The lack of stock options is stopping commentators from praising the electric automaker. Some are comparing Musk to Lee Iacocca, the Chrysler CEO who repaid a controversial loan early.

"It's a relevant comparison, but for two very different kinds of companies,” Ed Kim, an analyst for AutoPacific Inc. tells Bloomberg.

"If you look at Tesla's performance to date they're a startup that's basically hitting every milestone they set. In the case of Chrysler, you had an older industrial company teetering on the brink of death."

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

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