After receiving a $535 million loan from the federal government, and about $1 billion in venture capital financing, California-based manufacturer Solyndra suspended manufacturing operations today, and laid off 1,100 employees. It also announced its plans to file for bankruptcy protection.

Solyndra was the first company to receive funds under Barack Obama’s highly publicized federal loan-guarantee program, in which government bureaucrats allocate funding to private companies. The company is also at least the second major government-subsidized solar company this month to declare bankruptcy. Massachusetts-based Evergreen Solar entered bankruptcy protection earlier this month, after closing its Massachusetts plant.

This bankruptcy is not really much of a surprise. If the government had bothered to review the company’s IPO filing in 2009, it would never have granted the company over half a billion dollars of tax payer funding. Below is an excerpt from my future book that explains why these two firms failed.

Subsidizing Solyndra’s Sinkhole

The case of Solyndra provides another example of a government program gone awry. After four years of bureaucratic inertia and a backlog of forty billion dollars in loan guarantee applications, Solyndra was the first company to win tentative approval for a massive $535 million loan guarantee in early 2009. The loan would finance seventy-five percent of the construction of a plant in Fremont, California. One of the touted benefits of this award was the anticipated creation of thousands of “new construction, manufacturing and installation jobs.”

By June 2010, Chinese solar manufacturers were dumping cheap, government-subsidized solar panels on the global market, resulting in crippling price declines for the solar industry. In response to the crisis, Solyndra pulled its plans for an initial public offering (IPO), which it filed in December 2009, citing market conditions. From December 2009 to November 2010, the company’s estimates for its total production capacity in 2013 declined from 610 megawatts to as low as 285 megatwatts. As the crisis continued, the company announced in November 2010 that it would shut down its older plant and lay off 190 full-time and temporary workers in favor of transferring production to its government-subsidized $733 million new plant, a start-of-the-art robotic factory.

So much for new jobs.

Furthermore, the company’s cost structure did not seem to point to a profitable future. Using information from Solyndra’s December 2009 IPO filing, Eric Wesoff at Greentech Media determined that Solyndra’s solar panels (or cylinders) cost $6.29 per Watt, while the company sold its products for $3.29 per Watt. Compared to thin-film competitors like First Solar, whose manufacturing cost was $0.85 per Watt in the three-month period ending in September 2009, Solyndra was far from a competitive player in the solar industry. By April 2010, Solyndra’s selling price of $3.24 was still well above the $1.75 per Watt industry norm.

Yet both Republican and Democratic government officials like Governor Arnold Schwarzenegger and President Barack Obama, respectively, threw their political weight behind the project.

Bay State Boondoggle

Evergreen Solar is another classic example of why government bureaucrats should not be in the business of choosing one company or technology over another. The novelty of this case is that the failure was not the result of a federal, but a state program. Deval Patrick, the Democratic governor of Massachusetts, wanted the state to be a leader in the emerging clean-energy industry. Of course, as a government bureaucrat, Patrick was no expert in clean energy, yet he offered Evergreen Solar, an American solar panel manufacturing company, to build a plant at Devens, a former United States Army installation, with “a package of grants, land, loans, and other aid originally valued at” seventy-six million dollars. While Evergreen Solar eventually accepted about fifty-eight million dollars of this aid, the package was one of the largest that Massachusetts provided a private company in its history.

Evergreen Solar is a perfect example of the adverse selection process when companies choose to apply for government financing. From 1994 to the first nine months of 2010, Evergreen Solar “has run up a deficit of over $685 million.” It is also an example of the moral hazard that results when companies accept government grants and aid.

Moral hazard occurs when people behave differently when insulated from risk, than if they were fully exposed to it. For instance, someone who purchase fire insurance for his home may be more likely to use candles, because the insurance company would share a part of the responsibility if that person’s house burned down.

In Evergreen Solar’s case, moral hazard resulted from the company’s decision to build a plant in Massachusetts. Without government financing, it makes no sense to build a manufacturing facility in a Northeastern state with a relatively high cost of living, high taxes, and high labor costs. Yet the state’s lavish aid package insulated the company from many of these risks, so the company built a plant in a part of the country that would make it impossible for it to compete against other solar companies using labor in much cheaper areas of the world.

Heads they win, tails you lose.

Just two years after opening in Devens facility, Evergreen Solar decided to leave the state with 800 Massachusetts jobs lost in its wake to shift its operations to more profitable facilities in Wuhan, China. Now, the company is bankrupt.