Those who talk finance with me know that I have an abiding respect for investor Bill Ackman.  It comes close to man-love, I must admit.  Bill is eloquent, thoughtful, intelligent, well-informed and any other adjective that gives praise.

My first experience reading about and listening to Bill came about this time last year when I was struggling with whether to invest in General Growth Properties.  At the time last April, GGP was entering bankruptcy.  But the market and economy had just begun to turn and I had personal experience with GGP properties and management and thought the company had excellent mall properties and was well run.  I wanted to invest in GGP which was then selling for only $0.65 per share and had a total capitalization only around $200M on a business with properties once valued at $30B.  If it were possible to solve the debt problem at GGP, then the company had an excellent chance of survival.

Enter Bill Ackman into my life.  As I was researching GGP, I came across research that Bill had put together as his hedge fund, Pershing Square Capital Management.  He had done a very thorough job researching GGP and was able to show that with even modest "cap rate" assumptions, GGP would do very well.  All it needed was time to restructure its debt.  Ackman proceeded to take an active role in buying time for GGP, first by offering to provide bridge (DIP) financing (later provided by another party), helping convince the court of the merits of GGPs survival and later by joining the GGP Board of Directors. 

As the year 2009 progressed, Ackman's activism and my confidence in his research proved very profitable for both of us.  I have now exited my GGP investment (much too early) but Ackman, to my knowledge, remains on board and has seen his investment return over 20-fold.  I admire this type of clear vision and the courage to act on it.

Ackman was a noted short trader earlier in his career.  He gained notoriety for his big short position in credit card company MBIA in 2005, for which he was investigated by the now-notorious Elliot Spitzer, then New York State Attorney General.  He was able to demonstrate to Mr. Spitzer his innocence and turned the table on MBIA by exposing the Attorney General their fraudulent practices, the reason for his short position  (presaging the debt crisis to come).  He took a "sow's ear" and turned it into the proverbial "silk purse".  That taxes moxy.  That takes class.

Given his career path and the level to which he has risen, Ackman is very intimate with the inner workings of Wall Street.  He shows himself to be rational and level-headed and has a thorough, first-hand understanding of the arcane financial instruments that Wall Street has created.  So, when he gives his opinion on the Goldman Sachs situation, I listen (much more so than to EF Hutton).  Today as guest host on CNBC Squawk Box, Bill Ackman shared with us his assessment.  He comes down on the side of Goldman Sachs for all the reasons I have provided in the past two weeks, but with the conviction that can come from only an insider.  Here is an excerpt from the show:

Goldman Sachs did not commit fraud and the insurance company that bought the product that is the subject of a government investigation should have known the risks, Bill Ackman, founder and CEO of hedge fund Pershing Square Capital Management, told CNBC Tuesday.

“I don’t believe that Goldman committed fraud,” Ackman told “Squawk Box Europe.” “(ACA, the counterparty to Goldman - Paulson Partners) took their own risks.  "They’re sophisticated investors.” “I don’t think the (Securities and Exchange Commission) has a good case,”  Ackman said.

“Having been the subject of investigation in the past  (for the MBIA case referenced earlier)… I don’t feel sorry for Goldman Sachs, but they’re not being treated fairly (either).”

Not only does Ackman contend that Goldman is innocent of the charges of fraud, as I also maintain, in addition, it would even have been unethical if Goldman had disclosed that hedge fund manager John Paulson was shorting the housing trade to any investors taking long positions, Ackman said.

Ackman argued that sophisticated investors (the German and Dutch bank that bought the long positions from ACA) have the information at their disposal to make their own decisions, and are also responsible for their own mistakes.

“Imagine that Soros and Buffett were on the two sides of this transaction,” he said. “We wouldn’t even be talking about this now.” 

But later in the interview, Ackman states that the true victims are the taxpayers as they do not know they are party to the trade via "too big to fail" and taxpayer rescues.  This is true in Germany and the UK, as well as in America.  It is the taxpayer that has to cover the losses made by overly aggressive bank managers who are playing with OTM (other people's money) in order to win large bonuses.

So, it is not Goldman Sachs that should be taking the fall for the financial crisis, but the bank managers that lost money and the regulators / government officials that are charged by the public with protecting the financial system.  The "witch hunt" that is today's Congressional hearing is completely misdirected and intended to make the Congressmen who failed in their sworn responsibilities, look better, much better, than they really are. 

At the end of this segment, the former SEC general counsel, Simon Lorne, appeared with Bill Ackman. Mr. Lorne offered his highly informed opinion that the case by the SEC against Goldman Sachs is "weak". This is the position I have maintained. The facts will show that there was no "fraud". If anything, there may have been some technical error of omission where disclosure is involved. This might justify a fine of some sort, even a large fine given the stakes involved. But Mr. Lorne says it all much better than me:

Disclosure: I am long GS with October Call contracts; If I could be, I would be short the Congress;

And now for the rest of the story, as Paul Harvey liked to say.

Today's post is a follow on to my post from last Friday, August 16.  At that time, Goldman Sachs, GS, was being charged by the SEC in a civil suit for failing to disclose John Paulson's (Paulson Companies) participation in a CDO fund invested in sub-prime mortgages.  This failure constitutes fraud if it is intended to deceive.  The failure might be found a technicality in court of there was no intent.  The SEC is hungry for a scapegoat for the banking crisis.   GS, which went through the crisis almost unscathed, is an attractive  target in the mind of the Obama Administration both because it is large and because it profited during the crisis.  Getting GS would satisfy some of the populist blood-lust of Obama's public, even at the expense of the overall economy, as it hurts banks which just now on the mend.

But, as is often the case, this might be much ado about nothing.  I thought as much last week and now the details are appearing that prove this point.

The first big new piece of information comes from an article written in the Wall Street Journal on Monday.  In this article is a portion of an interview with Paolo Pellegrini who was the deal maker for John Paulson on the contested CDO case. 

With this release the story became a little clearer the last couple of days.  It turns out that Obama's government might be trying to deceive the public itself.  The SEC covered up, or at least did not make public, the fact that they had an interview with Pellegrini of the Paulson company.  In that interview it was revealed by Pellegrini there were discussions directly with ACA at the time of the selection of the CDOs and that ACA was made aware that Paulson would be taking the opposite side of the transaction (going short) which ACA needed to get the deal done. We also found this week that the SEC vote was partisan, (3) Democrats to (2) Republicans in favor of filing the lawsuit with Obama appointee, Mary Schapiro, casting the tie breaking vote.

Here is a little background on Pellegrini's role in the deal, from WSJ on April 19, Monday:

http://finance.yahoo.com/retirement/article/109342/paulson-point-man-on-cdo-deal-emerges-as-key-figure?mod=retire

The main contention of the SEC in bringing the civil charges against Goldman is that it deceived "the public" when it failed to disclose its client, Paulson Companies, was taking a short position in the sub-prime CDO deal, while Paulson had a hand in selecting the mortgages. Now it is revealed, that ACA, the "third party", was in fact the first party and the primary buyer of the CDOs it created, around $950M of the $1B.  Goldman bought $90M itself.   And, in fact, it sought out Pellegrini from the Paulson Companies to do the deal, not the other way around.  So it seems this was a one-on-one deal and both the buyer and seller were in conversation about what comprised the deal.  So, there was complete and full disclosure.

This blows a very wide hole in the SEC's case and in fact, brings a huge question mark to the motives for bringing the charges. These potential political motives are now under investigation by the Congressional watchdog committee run by CA Rep Darrel Issa, top Republican on the Congressional Oversight Committee.

http://corner.nationalreview.com/post/?q=YzRjOWZjZDdkYzhjYzVjOGIwMjU5MjNkZjVjNDc0OGU=

Steve Liesman of CNBC is on top of this case. Here is more detail from a piece on Wednesday morning:

http://www.cnbc.com/id/36640296

Also, this testimony (from Pellegrini to the SEC) reinforced the key point I have been making: ACA knew that Paulson was taking a short position. ACA was looking for someone to take the other side of the deal which is why they chased down Pellegrini on vacation in Jackson Hole to have meetings. They let Pellegrini suggest mortgage packages (RMBS) to get Paulson on board the deal. Also, ACA was the primary buyer of the CDOs and so there was complete disclosure directly to the buyer as to whom was the seller.

The SEC case looks like it may be going down in flames and there is a good chance there will be discovery of political motivations behind the accusations.  Should be fun to watch.

I think not.  This is a politically motivated action brought against GS by an SEC controlled by the Obama Administration.  That motive is to demonstrate to the public that the Federal government will hold accountable banks for activities leading to economic damage.  There is a lot of pressure on the Obama Whitehouse to attack and punish "Wall Street" in retribution for the economic crisis and housing crash.  Goldman is the "poster child" for perceived banker abuses and is seen by some as the cynical and greedy conductor of fraud to take advantage of innocents.  But in reality, the processes charged in the SEC case as fraudulent are typical everyday practice. 

The people on both sides of the sub-prime mortgage CDO trade are large, institutional investors who should know their risks and be prepared to accept losses.  This is true of any trade.  There are buyers and sellers of every financial instrument and subsequent winners and losers.  It is common, in fact, for financial instruments to be created by "market makers" like Goldman Sachs at the request of a buyer or seller who believe they have insights that will allow them to profit at someone else's expense. 

This is how financial markets work.  The market maker may have an opinion of its own about which side is right and which side is wrong.  For this reason, an independent third party is brought into to assess and vet the investment vehicle to insure it is fairly created and accurately represented.  This appears to have happened with the GS CDO in question. 

Jim Cramer, who at one time in the early 1980s, worked for Goldman Sachs and understands the inner workings of the investment banking world, explains what happened:

Before people went too far in their attacks on Goldman Sachs, as today’s charge of fraud by the SEC will train even more proverbial guns on the Wall Street titan, Cramer felt the need to clarify the case. He wasn’t exactly defending the firm, but he wanted viewers to know exactly what happened.

First, full disclosure: Cramer got his start on Wall Street at Goldman [GS  160.70    -23.57  (-12.79%)   ] , and he still has friends there. But he insisted that that was in no way the reason he was challenging the SEC. He said that while he wouldn’t want to be associated with the trade, that didn’t mean there was anything “illegal … immoral or even unethical about it when you pull it apart,” he said.

So here it is pulled apart:

Goldman created a product, a collateralized debt obligation, for hedge fund Paulson & Co., which “at the time wasn’t known as a particularly smart client,” Cramer said, that allowed for a bet against the value of housing. To make sure the product was vetted ahead of its sale, Goldman hired an independent company, ACA Management, to do just that. And they released a report telling potential buyers exactly what was in there.
 

Now, Cramer would never have bought the CDO, but not everyone was as bearish on housing as he was in late 2006, which is when the product was put together. Though he could see how less informed clients may have found it attractive. But in the end, no one forced people to buy this CDO. And “a sucker was born the minute the trade was made,” he said, “and the loss booked soon after.”

So did Goldman do something illegal when it vetted the product, letting everyone know what was in it? Or was the buyer just plain stupid for wanting it in the first place?

“I think the latter,” Cramer said.

He likened the situation to the tech boom of the late ‘90s. If someone created a similar product to bet against these stocks, it would have been an entirely legal, but losing proposition until 2000. It was only after that run that the bet would have paid off. Well, housing was exactly like that, Cramer said, going into 2007. And the buyer of this CDO fully expected to continue making money, only to be shocked awake when the market collapsed. Now Paulson & Co. is known as a house of genius, while the people who went long on housing are the fools.

We learned today that Goldman sunk $90 million of its own money into the CDO. While Cramer’s not sure if that absolves the company, he does know one thing: The SEC is under tremendous pressure to bring cases against Wall Street right now. And he knows that Democrats in Washington are fighting for financial reform. So this is a great time to bring this case before the public and punish the firm perceived as the most arrogant and least reformed in the room.

But while arrogance may be a terrible personality trait, Cramer said, it isn’t illegal. And he’d be the first person to call out Goldman if the company were wrong. But he doesn’t think this is one of those cases. If anything, this was a case of “overzealous prosecution,” he said.

“That’s exactly what I think happened today against Goldman Sachs,” Cramer said. “And I think you’ll see it exactly as I do as time goes by.”

The role of the Federal government is very simple, and is outlined in the Constitution in Article 1, Section 8. Congress's only roles are to establish national security (defense) and commercial regulation in all its forms including bankruptcy law, patent law, banking regulation, foreign trade, etc. And that is it! Everything else legislated by Congress jeopardizes the very idea of democracy.

Because I am compassionate, I accept a very minimal social safety net, as opposed to entitlements. A safety net should keep people from suffering, but should not allow some to live the good life on another's dime.

The best prescription for healthcare, as part of that social safety net that most of us agree is needed, is to convert the industry to a utility. Just like electric, gas and communications utilities, healthcare would be subect to regulated fees at the state level to some minimum federal level of service. This preserves the sovereignty of the states (which will be the subject of at least one Constitutional challenge of Obamacare) that are expected to administer the current and future Medicare, but without additional funding by the Feds.

The big advantage of state-administered healthcare programs is that it keeps decision making closer to the taxpayers and beneficiaries, and preserves the opportunity for innovation amongst states. One state might find a better way than another and pass that approach along. This, along with multiple private administrators of the programs, much like multiple telecom carriers, will preserve the benefits of competition.

I am involved in the Solar industry through my company.  I sit on the PV Group industry steeering committee for SEMI, the semiconductor industry association which sponsors a solar manufacturing section.  It is with interest that I have observed almost every country in the world promote the use of solar energy and foster that use through incentive programs to overcome the low cost of established fossil fueled electrical generation.

Feed-in tarriffs in Europe have been the key to widespread and rapid adoption of solar energy on homes, businesses and utility-scaled projects.  American policy makers have rejected this type of incentive as "anti-free-market".  Until now.  It seems we are on the edge of significant Federal, State and Local programs to implement feed-in tarriffs on a broad scale.  Once that occurs, the fortunes of solar product companies like First Solar (FSLR), Evergreen (ESLR), and Applied Materials (AMAT) will increase commensurately.  TAN, an ETF,  is maybe the best way to play this coming electrical revolution. 

Solar power manufacturing has traded in direct relation to oil and coal, the alternate fuels. When the global economy broke down in late 2008, so did solar. As oil has rebounded in 2009, so has solar. Solar will become more attractive as alternate fuels cost more over the coming years. But it is important for America to get in front of the oil cost wave that is fast approaching. Here is Dan Martin's article first posted on the "Solar Feed" blog:

While significant progress has been made in government funding and support of solar power in the United States, the most effective renewable energy policy and solar incentive available—the feed-in tariff—has yet to receive major attention outside of the Europe Union.
Photovoltaic (PV) energy conversion is based on semiconductor technology, and the experience of the last decades has shown that the cost of PV electricity is reduced by 20% with each doubling of the total installed volume. Thus, it is necessary to design market incentives that allow for a rapid increase of the market size in order to quickly reach production volumes with the accompanying cost reductions to first reach parity with household electricity rates, and later with production costs of fossil and nuclear energy.

The feed-in tariff, or FIT, has proven to be a powerful tool to create managed economic incentives that yield meaningful results in system deployments, job creation, cost reduction, and market development--yet many policy makers, especially in the US, continue to rely upon renewable portfolio standards, investment tax credits, low interest loan guarantees, and other mechanisms to reduce fossil fuel dependency. The solar industry in the US should take pride in achieving recent legislative and funding victories, but also must recognize the powerful role that FITs can bring to rational and responsible energy policy.

Simply speaking, a capless FIT offers any producer of solar power a pre-determined rate for any kWh of electricity produced, regardless of the own consumption. If this rate is guaranteed for e.g. 20 years, and set in order to allow a decent return on investment for the owner of the system, it mobilizes powerful market forces towards rapid implementation of growing amounts of solar energy.

The German Solar Miracle

FITs are the highly effective policy engine behind the German solar miracle. Recognizing that return-on-investment is the principle barrier to wider market penetration for renewable energy alternatives (not lowering up-front costs), German policy makers required utilities to pay a rate of between €0.35/kWh and €0.47/kWh for solar electricity from newly installed PV systems. The German FIT program authorizes the utilities to pass on this extra cost, spread equally, to all electricity consumers through their electricity bill. In this way, the feed-in program works through market incentives independent of government budgets and subsidies.

In Germany, the monthly extra cost per household due to the feed-in rates for solar electricity is estimated at less than €1.25 in 2008. The result is that every electricity consumer contributes to the restructuring of the national electricity supply network. Equally important, by assuring a rate of return over a sufficient period of time, the German FIT has proven to be an excellent accelerator for private financing. To encourage cost reduction and the eventual elimination of tariffs, the feed-in rate in Germany is reduced each year by 5% (increased to 8 -10 % starting 2009), but only for newly-installed PV systems. Once a PV system is connected to the grid, the guaranteed feed-in rate remains constant over a 20-year period. This approach allows solar customers to easily calculate the return on investment in their PV system, while exerting price pressure on the industry to continuously reduce costs to remain in the market.

A remarkable feature of a FIT is the built-in sunset clause: With the annual degression of the feed-in rate offered to new customers this rate will in only a few years dip below the rate of household electricity, and later compete with conventional power. Thus, the financial burden on today’s rate payers remains limited, and it provides the basis for more stable energy prices in the future, based on a larger fraction of secure, domestically produced electricity.

Spain’s FIT

FITs have been implemented throughout the world with enormously successful results. In Spain’s widely-reported experience, nearly 3 GW in 2008 of solar power projects were deployed last year after generous tariffs were adopted. The result was that Spain briefly became the largest solar power market on the world, adding more than 45% of the world’s new installations and three times more than analysts expected. Today, in response to the impact on utility rate payers, Spain has capped its FIT at 500 MW, an amount still larger than all newly installed systems the in the US last year. While Spain’s FIT is often cited as what not to do in solar policy, and this is partly true, the case clearly demonstrates the effectiveness of FITs to quickly establish a viable solar market.

Part of the confusion and controversy surrounding feed-in tariff is the wide variety of incentive schemes proposed and implemented across the world. In addition to the German example, classic tariffs or premium pricing schemes can be used; FITs can be technology targeted or neutral; capped or uncapped; generation cost based or value based.

FITs Enacted in ROW

FITs have been enacted with varying degrees of success in Australia, Brazil, Greece, Portugal, Korea, Singapore, and in some states in the US. South Korea adopted feed-in tariffs for solar PV in 2006 that distinguishes between systems >30kWp and systems <30kWp. Feed-in rates are quite generous, but necessary when considering the countries’ low solar irradiance profile. The result has been that South Korea’s solar demand now rivals Japan’s as Asia’s largest market (the country has set a goal of installing 1,300MWp by 2012).

By using relatively simple market incentives implemented through regulated utility monopolies, feed-in tariffs have proven effective at overcoming thorny downstream barriers such as financing, market education, distribution and sales, installation support, permitting and zoning fears, and environmental regulations. Energy investors with resources, experience and entrepreneurial zeal can quickly make markets when they understand the risk and have confidence in reasonable rates of return. Policy makers can target residential, commercial and power generation solar markets for development and choose tariff rates or caps to achieve the level of solar penetration desired. Successful fossil fuel reduction--with ancillary beneFITs of job creation, peak management, stable fuel supplies, and more—can be achieved more efficiently, more accurately and more cost effectively than any other policy instrument. In addition, the considerable cost of red tape that is necessary to administrate complicated support schemes like the ones we got used to in the US to prevent fraud can almost be completely eliminated, as the PV system operator will take care to have the system run in the optimum way in order to ensure its profitability.

Reliance on Subsidies

So, why the reliance on tax credits, loans, subsidies and solar energy standards in the US and China, to name two countries, to achieve desired policy outcomes? For one, tax credits have been the traditional incentive instruments in the United States for a variety of worthy goals such as home ownership, R&D, education, and more. It is an instrument that is familiar and politically expedient.

Confusion over the term “feed-in tariff” has also been cited as a barrier. In fact, a FIT scheme is not a tax, it just offers a certain rate to be paid for the production of power. Therefore, some advocates prefer the term “feed-in rates”, “performance-based incentives,” “advanced renewable incentives” or “clean energy buy back” mechanisms.

Most solar policies today rely upon hard or soft mandates on utilities and electrical power providers to establish renewable energy production targets. The American Clean Energy and Security Act of 2009, as passed by the U.S. House of Representatives in June, relies upon the Renewable Portfolio Standards (RPS) to place an obligation on electricity supply companies to produce a specified fraction of their electricity from renewable energy sources. A majority of US states also use RPS policies to achieve favorable renewable energy outcomes. Advocates of RPS mechanisms claim they will result in competition, efficiency and innovation that will deliver renewable energy at the lowest possible cost.

Barriers to FITs

The barriers to FITs in the United States are also related to the state and local control over electric utilities and the widely decentralized structure of the electrical generation and distribution system. The US is a labyrinth of 3,100 public utilities, 2,100 non-utility power producers and a not-so-smart transmission system. Despite the complexity, movement is underway to use FITs as an instrument of state, local and national energy policy. In May, Vermont joined California as the only states to pass feed-in tariffs for renewable energy. Several other states, including Michigan, Minnesota, New York, Indiana, and Wisconsin are considering FITs.

"The feed-in tariff has proven to be the best way to get quick movement in renewable energy development and create a lot of jobs," said state Rep. Matt Pierce (D), who has introduced a feed-in tariff proposal in Indiana. (New York Times)

In Florida, the Gainesville Regional Utilities adopted a feed-in tariff with a rate of $0.32 per kilowatt-hour guaranteed for the next 20 years. The program is modeled closely after European systems and reached its self imposed cap of 4 MW in minutes after accepting applications. In comparison, the US Department of Energy took over three years to award the first loan guarantee for solar after the Energy Policy Act passage in 2005.

Perhaps similar to the problems in using European benchmarks in the current US health care debate, FITs are still seen by some as some strange, exotic policy not applicable to the US market. Some observers have even claimed that that the type of incentives does not matter, just the amount. One solar lobbyist even said about Germany, "They've been handing out bags of money and calling it a feed-in tariff. People think that they want a feed-in tariff, but what they really want is those bags of money.”

“A lot of the charm of the feed-in tariff is solid, take-it-to-the-bank security and confidence for the investing community," said U.S. Representative Jay Inslee (D-Wash), a sponsor of legislation that would establish a nationwide FIT. His bill was introduced in Congress last year and would use FITs to incent small projects up to 20 MW and help streamline grid interconnections.

An analysis by the National Renewable Energy Laboratory (NREL) also confirmed that countries with feed-in tariffs have cheaper renewable electricity than those with renewable energy credits, the mechanism behind RPS. The tariff system is less risky, and investors are willing to accept lower profits for long-term stability, according to the report.

"We deal with data and the evidence is very clear," said Toby Couture, a researcher with the NREL in a report by the Sarasota Herald-Tribune (March 22, 2009). "Feed-in tariffs have consistently proven to be cheaper for consumers. That's the bottom line."

Increasingly, FITs are seen as complimentary to well-crafted RPS policies. One report concluded, “RPS policies appear to be converging with some of the design characteristics typically associated with feed-in tariffs. As a result, it could become increasingly possible to incorporate elements of feed-in tariffs into RPS policy making,” (Feed-in Tariffs and Renewable Energy in the USA –a Policy Update, May 2008). A similar conclusion was made in a March, 2009 report by the NREL that concluded: “FIT policies…can be used in parallel and wholly separate from RPS policies, they can replace a part of the current mechanism (perhaps to support a solar carve-out, or distributed generation), or they can be used to entirely replace RPS mechanisms. Of course, they can also be used by states with voluntary renewable energy goals to advance renewable energy development (Technical Report, NREL/TP-6A2 45549 March 2009).

Despite their proven effectiveness and ability to work in conjunction with RPS policies, national, state and regional FIT legislation has been a grass roots affair, not supported by national environmental or renewable energy associations. Rhone Resch of the Solar Energy Industries Association said in January, “What you are also going to see is a focus by industry to create feed-in tariffs at the state level. Creating these programs at the state level will provide a laboratory that shows the federal government how this kind of incentive program stimulates the market. So we are probably a couple years away from a major push on feed-in tariffs at the federal level.”

Call them what you will, but feed-in tariffs or performance-based incentives need be seriously considered by every country and every policy maker in the world looking to expand the contribution of solar energy .They will be required to reach meaningful national climate goals and achieve significant job creation and economic stimulus. Elimination or marginalization of FITs by many policy makers in the US cannot be a healthy sign for optimal legislation in the future. While near-term legislative action needs to focus on winnable, achievable victories, long-term success will require effective instruments grounded in solid economics.

By Dan Martin, Executive Vice President, SEMI PV Group

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