When the Energy Department set out to restructure the federal loan for now-bankrupt solar company Solyndra, White House budget staffers insisted that allowing the company to go bankrupt and liquidating its assets would provide greater returns for the taxpayer than the deal DOE had struck with the company’s private investors.

That deal gave two venture capital firms priority in the repayment of their loans in the event of a Solyndra bankruptcy – which occurred about six months later. As a result, taxpayers will only see about $24 million of their $527 million “investment” returned – less than a third of what private investors, including the venture capital firm owned by Obama bundler George Kaiser, will recoup.

It didn’t have to be this way, according to emails from the White House Office of Management and Budget to be released as part of a congressional report. While a taxpayer loss in the wake of a Solyndra bankruptcy was inevitable, OMB estimated that restructuring the loan in the way DOE did would cost taxpayers $385 million. Liquidation, according to OMB, would produce taxpayer losses of “only” $141 million.

But even OMB acknowledged that DOE had a political stake in preventing a Solyndra bankruptcy, even if it meant greater returns for taxpayers. “DOE is likely to be very sensitive about optics if it should default,” one budget office staffer wrote in an email.

Rather than accept the advice of the White House’s budget team, DOE did what it had not done for any other company financed under the Department’s 1705 loan guarantee authority: it subordinated taxpayers to private investors in the repayment of Solyndra’s refinanced loan.

The Washington Post has details on the email exchanges between OMB and DOE staffers:

[OMB analyst Kelly] Colyar said in e-mails that the Energy Department appeared to be giving away its “upper hand” in financing negotiations with private investors, creating additional risk. At the time, Solyndra had failed to meet the terms of its loan and was on the edge of bankruptcy because disbursements from the loan had been frozen.

Colyar said in one e-mail that she was “vastly confused by DOE’s decision to negotiate away their senior position in this transaction.” She also questioned whether the Energy Department underestimated how much taxpayers could recoup if the company were shut immediately and its California factory sold. The proceeds of an immediate sale would be “significantly HIGHER than DOE’s estimate,” she wrote in a January 2011 e-mail, meaning that the government “is better off liquidating the assets today than restructuring under DOE’s proposal.”

As Scribe explained in the Washington Examiner last year, the chief counsel for DOE’ Loan Program’s Office held that legal prohibitions against taxpayer subordination only applied to the initial loan guarantee, and not to subsequent restructuring agreements. Because private investors would never consider sinking more money into Solyndra, Richardson explained, a refinancing agreement demanded that taxpayers be subordinated.

This new legal interpretation of the Energy Policy Act will likely lead to greater financial losses for taxpayers is applied to other federal loans, since taxpayers will be subordinated to private investors only for those loans that are too risky to attract standard private investment.