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Fisker's DOE loan inspires bipartisan battle

by William McConnell in Washington and Jamie Mason | Published April 25, 2013 at 9:58 AM

Politics continued to overshadow the legitimate questions raised by the Department of Energy's failed $192 million investment in electric car maker Fisker Automotive Inc. in a Wednesday hearing conducted by the House Committee on Oversight and Government Reform.

Republicans, led by Rep. Jim Jordan of Ohio, chairman of the panel's economic growth, job creation, and regulatory affairs subcommittee, painted the investment and the DOE's Advanced Technology Vehicles Manufacturing, or ATVM, program that administered it as a "fiasco" plagued by favors to campaign contributors and the reckless waste of taxpayer dollars.

Democrats countered that conducting a hearing into the Fisker investment was itself a needless expenditure of government funds.

Of seeming secondary importance to the bickering lawmakers was whether the DOE mishandled its investments in Fisker and whether the agency's track record with that one investment contains enough lessons about the federal government's oversight of investments in technology companies and whether those investments should continue at all.

"The loan program has been one of the most disastrously mismanaged and corrupt programs in American history," Jordan said.

He dismissed Democrats' complaints that the Fisker investment accounted for only 2% of the $8 billion in guarantees the DOE issued under the ATVM program. The bulk of the guarantees were issued to Ford Motor Co., Nissan Motor Co. Ltd. and Tesla Motors Inc. -- all of which are on track to repay loans they received under the program.

Jordan suggested that the handling of the Fisker investment should stand on its own and that the notion that investment losses of nearly $200 million were a sign of success "boggles the mind."

He said that, unlike those other companies getting investments, Fisker was a startup with a below-investment grade credit rating.

"Fisker should have never received taxpayer money," Jordan said. "It was rated triple-C+. It was a junk-grade investment. The company built a car that cost $100,000. They built them in Finland. It was a taxpayer-subsidized luxury vehicle for the likes of Justin Bieber and Leonardo DiCaprio."

Fisker was never destined to become a job creator but a "skillful rent-seeker," Jordan said. "Its Northstar was the political winds of Washington."

He particularly criticized DOE for continuing to provide Fisker money even after it missed developmental benchmarks. He blamed the DOE's continued willingness to fund Fisker on the political ties of former Fisker chairman Ray Lane and John Doerr, general partner of Fisker investor Kleiner Perkins Caufield & Byers.

Comments from the subcommittee's Democrats painted a radically different picture of DOE's role in the Fisker investment and the ATVM program generally.

"The American people should be quite proud of what the ATVM program has achieved," said Rep. Matt Cartwright of Pennsylvania, the subcommittee's ranking Democrat, who cited the EcoBoost battery that Ford developed with funding from the program.

Cartwright noted that Congress expected some loans to fail and provided $7.5 billion to cover losses in the program, which was created during the administration of President George W. Bush. He also noted that Fisker was originally provided $529 million in guarantees but only drew down $192 million before DOE pulled the plug when it was clear benchmarks weren't being met.

"If Congress were not such a dysfunctional, partisan place this hearing would lend some perspective on this 2% potential loss," Cartwright said. "In the world outside the [Washington] Beltway, anyone who exceeds expectations 98% of the time gets an A+."

Rep. Elijah Cummings, D-Md., suggested that the hearing in itself cost the taxpayers money because the negative attention was making it more difficult for Fisker to raise new private financing, increasing the likelihood that the government guarantees won't be recouped.

Executives of Anaheim, Calif.-based Fisker testified Wednesday. Among the company's representatives was Henrik Fisker, its former chairman and co-founder, who told the subcommittee that while the company's Karma was the first American car to win the Top Gear Luxury Car of the Year award, it needs to secure financial and strategic resources to continue to build on its achievements. The company sold approximately 2,000 of its electric plug-in hybrid engine vehicles, known as Fisker Karma.

"I sincerely hope that the company can find a way to move forward and repay its Department of Energy loans," Fisker testified.

The company's co-founder and CEO in Europe and the Middle East, Bernhard Koehler, testified that the company's outlook wasn't clear.

"While I do not know exactly what the future holds for Fisker Automotive, including whether the company will find new investors or whether the company may be obliged to seek bankruptcy protection to facilitate its continued efforts to preserve value for all stakeholders, I intend to keep working toward achieving the mission and vision of the company," Koehler said.

The DOE's supervisory senior investment officer, Nicholas Whitcombe, meanwhile, who also testified, reported that the DOE has been in continued communication with Fisker regarding its business plan and its obligations under its loan agreement.

But at that point, Jordan, the subcommittee chairman, interjected that "it is hard to understand why the Department of Energy ever thought Fisker was a viable company that should receive taxpayer money. The Obama administration owes the American taxpayer an explanation as to why this bad loan was made in the first place, and what they are going to do to minimize the loss that taxpayers face."

Zoe Lipman, the former senior manager for New Energy Solutions, Climate and Energy Program, National Advocacy Center, National Wildlife Federation, testified that the $7.5 billion ATVM program that Bush signed into law in 2007 by President Bush presumed a significant default rate "far higher than what has been experienced even with the current problems faced by Fisker."

"Even if the full $193 million [loan] to Fisker must be written off, that loss is less than 2.4% of the funds loaned and less than 3% of the budget authority for this program," Lipman continued. "The taxpayer is doing well, and communities and businesses are doing even better."

Fisker's troubles began last year when the company lost access to part of the DOE's loan, which was to be used to fund production of its $50,000 Atlantic sedan, because of the company's failure to meet production and sales milestones. DOE stopped making disbursements from the loan in June 2011.

DOE seized $21 million from Fisker's reserve account on April 11.

According to Fisker, the former chairman, DOE had approached the company and encouraged it to apply for the loan.

"I am not aware and do not believe that any improper political influence was used in connection with the company's loan application or subsequent negotiations with the Department of Energy," Fisker testified.

Fisker has been exploring its strategic alternatives over the past several months, hunting for a buyer or an investment in its company. Fisker slashed its roughly 200-person workforce by about 75% in early April.

Fisker has been working with J. Stephen Worth, a senior managing director at Evercore Partners Inc., since December. The company also hired Kirkland & Ellis LLP to advise it on a restructuring.

Fisker Automotive, which was founded in 2007, has raised more than $1.2 billion in debt and venture financing from investors including Kleiner Perkins, New Enterprise Associates and Palo Alto Investors LLC, as well as high-net-worth individuals.

The company experienced longer-than-expected regulatory approvals for its cars in the U.S., which led to a delayed production and delivery schedule. After it began delivering its Karmas to customers, it had two recalls for parts supplied by outside vendors.

Fisker's troubles worsened when the company hit another road block when its battery supplier, A123 Systems Inc., filed for bankruptcy protection on Oct. 16 in the U.S. Bankruptcy Court for the District of Delaware in Wilmington, which caused Fisker to have to cease production of the Karma. Worse still, Fisker said it lost more than 330 cars that were destroyed by Hurricane Sandy in late October, resulting in a more than $30 million loss in irreplaceable inventory.

Then, on March 13, Henrik Fisker resigned from the company, citing disagreements with management over strategy.

Fisker hasn't been able to resume its operations since a July shutdown, Koehler said during his testimony.

Last month, the company lost a few interested buyers. Chinese automaker Dongfeng Motor Corp. reportedly backed away from negotiations, just days after Zhejiang Geely Holding Group Co. Ltd. walked away from the bidding.

The company, which has plans for a second car called the Atlantic, also drew down $23 million on a second loan from the DOE. The company bought a closed General Motors plant in Delaware for future production of the Atlantic, which has been in development for more than two years.

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