How CHIPS Adopted Risk Practices from Banking

Borrowing private-sector practices to tackle risks in public-sector execution

Solyndra, a startup domestic manufacturer of solar panels, was a showcase loan for the Obama administration’s clean energy program. Despite early championing by the administration, the loan defaulted a few months after Department of Energy approval in 2011, costing the government approximately $527 million. The default sparked criminal investigations, Congressional hearings, and a DOE Inspector General’s Special Report that severely criticized underwriting practices at the DOE and led to political fallout that stymied the clean energy loan program for years.

Solyndra is a case study of what happens when the government makes public investments without appropriate risk safeguards in place. But the “lessons” of Solyndra have been overlearned, and a preoccupation with “Solyndra risk” has led to excessive risk aversion that impedes the government’s ability to meet its goals. For CHIPS, the simplest way to prevent another Solyndra would have been to adopt highly restrictive program requirements, effectively shutting down risk. However, Commerce Secretary Raimondo recognized that the CHIPS mandate required active risk-taking to achieve the program’s objectives, which meant supporting semiconductor projects that wouldn’t succeed without government investment. Not taking sufficient risk would introduce the biggest risk of all — failing to achieve our programmatic goals.

In government, risk is generally viewed as an unwanted byproduct of providing public goods and services. The government inevitably assumes risk in its operations — but it typically doesn’t need to balance risk and return the way a bank or private investor does. CHIPS changed this calculus by turning Commerce into a public investor. The Secretary embraced this investor mindset, in which the benefits of CHIPS projects were balanced against the risks.

I served as the CHIPS Program Office’s (CPO) Chief Risk Officer for the program’s first two years. During my tenure, we stood up an independent risk function within CPO to assess the risks of each deal and the program as a whole. We aligned CPO’s risk mandate with Commerce’s investor role and integrated risk into core processes, allowing decision-makers to thoroughly evaluate the risks of every investment decision. Based on the CHIPS experience, an independent risk function should be a core part of any future government investment program.

Risk management in government usually focuses on operations

I joined Commerce as a Senior Advisor to the Secretary in January 2022, expecting to focus on a diverse policy portfolio. As the likelihood of CHIPS enactment grew, I soon became part of the advance team preparing for CHIPS implementation before the legislation passed in August of that year. Before Commerce, I served for 11 years as the Chief Risk Officer of State Street, a major global custody bank, where I led the rebuilding of risk management after the Global Financial Crisis.

Back in 2016, the Office of Management and Budget (OMB), in Circular A-123, required all federal agencies to stand up an enterprise risk management program aimed at identifying an agency’s top risks and recommending management actions to mitigate or avoid bad outcomes. When I joined the Commerce Department, I was struck by how different the risk function was in government as compared to the financial industry.

In most public services, the government’s main concern is to avoid a blow-up that could disrupt delivery, compromise safety, or impose excessive costs. At Commerce, these risks abound across the Department’s diverse operating bureaus. Examples include a cyberattack or satellite failure that interrupts weather forecasting at the National Oceanic and Atmospheric Administration; an accident at a nuclear facility operated by the National Institute of Standards and Technology; or a poorly designed or badly executed program requiring costly surge staffing at the Census Bureau.

A small central team manages Commerce’s Enterprise Risk Management program, operating in a hub-and-spoke system with one or two risk officers in each of the Department’s main bureaus. Their primary role is risk reporting: to identify risks using a common taxonomy introduced across the Department, monitor efforts at risk prevention, and aggregate and summarize risks for Department leadership. The onus is on each bureau’s management to take any preventive measures.

Because of the nature of Commerce’s activities, the overwhelming focus of the enterprise risk management program historically was on operational risks that affect business execution or impede the delivery of services. Before CHIPS, Commerce’s risk program did not need to consider the financial risks to the government as an investor.

By contrast, in banking, risk management is a core competency because banks are in the business of assuming risk. Risk is part of the cost of goods sold, and banks are continuously balancing risks and returns. As a result, banks have established strong risk management functions to assess the risks of loans, transactions, and other banking products and services. The role of risk management has become increasingly important since the Global Financial Crisis, and subject to intense scrutiny by boards of directors, regulators, and other stakeholders concerned with bank safety and soundness. The risk function operates independently of frontline bankers, relationship managers, and product specialists so that risk managers’ advice is objective and not unduly influenced by the revenue objectives and commercial goals of the business.

CHIPS introduced a financial risk function to the Commerce Department

CHIPS put taxpayer money at risk by committing $39 billion of grants and up to $75 billion of loans to projects aimed at expanding US semiconductor production. The program was designed to act as a catalyst for attracting private investment, with private capital ultimately contributing well over 50% of financing for CHIPS projects.

As with private investing efforts, CHIPS’s success was driven by the financial success of the projects it supported. This dependency exposed Commerce to the same types of financial risks as a bank or investor. Financial risk captures the risks lenders or investors incur in financing a project and encompasses both the credit risk of making loans and the equity risk of contributing capital to a business. But while private investors need to balance risk against financial returns, CHIPS had to balance risk against strategic returns and the value of achieving the program’s objectives.

Although CHIPS only technically incurred direct financial risk from nonpayment of loans, we underwrote the risks of our grants as if they were equity investments. To be clear, we were not taking equity: the core purpose of the program was to offset the cost difference with Asian manufacturing of semiconductors, and that objective would have been undercut by providing equity capital (which carries a cost of equity). But in effect, grants (or “Other Transaction Agreements,” the legal form they took in CHIPS) are a contribution of free capital by the government in exchange for contractual commitments to meet specified milestones. For the CHIPS risk function, this meant applying a financial risk lens to all deals — whether they were grant (OTA) only, a combination of grants and loans, or loan-only.¹

Potential risks we evaluated included project inputs, commercial drivers, and financial levers. The projects CHIPS supported were complex, multiyear CapEx investments in some of the world’s most sophisticated — and costly — manufacturing processes. The cost of constructing and outfitting a leading-edge fab can run to $20 billion or more, and our largest mega-deals exceeded $100 billion of committed capital. Not surprisingly, the risks of these projects were equally complex and varied. While these ultimately manifested as financial risk, the underlying triggers covered the full range of risk factors. Some of our chief concerns included cost overruns and delays during construction; regulatory, permitting, and environmental factors; lack of commercial take-up (perhaps due to shifts in demand or superior competitive products); innovation risk and technological obsolescence; and supply-chain vulnerabilities. These risks could cause sponsors or investors to pull the plug on a project, leaving behind a mothballed factory or a hole in the ground.

But the risk here was two-sided. On the other side of the coin was the national security and economic resilience risk of not investing, and forgoing the additional US semiconductor capacity the projects were expected to deliver. Our investment process had to strike the right balance in this range of outcomes.

How CHIPS managed financial risk

Every CHIPS transaction was supported by three organizations within CPO, each of which reported directly to the program director:²

• The investments team, which created individual deal teams of investment professionals (drawn mostly from industry or financial roles) to manage negotiations with applicants and underwrite the financial and commercial aspects of each deal;

• The Strategy team, which interfaced with the investment team on each deal to inject specialized expertise on economic security, national security, workforce, and permitting issues; and

• The Risk team, which added an independent evaluation of each deal’s risks and ensured that risk considerations were factored into deal assessment and structuring.

The Chief Investment Officer, Chief Strategy Officer, and Chief Risk Officer all served on an Investment Committee (IC) responsible for deal review, structuring, and making final investment recommendations. The IC also included two external members with specialized industry, financial, and policy expertise. This created a forum for openly discussing and debating the financial underwriting, strategic implications, and risk analysis of each deal. The IC then made recommendations to a Transaction Review Committee (TRC) composed of the Secretary and other senior officials, who had ultimate decision-making authority.

Within a year, we built a Risk team of 12 professionals with a mix of backgrounds in risk and compliance from the private sector, other parts of Commerce, and other government financing programs. Risk performed its own evaluation of each potential deal, focusing on the base case and downside scenarios. We asked what could go wrong: What were the major project execution risks and commercial risks? Were there critical dependencies or supply-chain vulnerabilities? Were the economic projections too rosy? Were we confident in the financial viability of the project sponsor? Was there sufficient private “skin in the game”? Did the deal terms offer the minimum investment of taxpayer money necessary for the project to succeed?

For CHIPS loans, the Risk team played a special role in leading credit underwriting, focusing on the borrower’s ability to repay. Our role was responsive to OMB Circular A-129 — the rulebook for federal credit programs, which was issued in the aftermath of Solyndra — and included rating the default risk of each loan, similar to S&P and Moody’s ratings of corporate bonds.

Investment decisions need to balance reward and risk. Our deal teams included some of the best investment professionals I’ve worked with, and they naturally tended to focus on the upside of deals and how projects could contribute to the CHIPS mission. The Risk team’s mandate was to act as professional skeptics who focused on the downside and tilt the seesaw back into balance. This didn’t mean that we were any less committed to program success: we understood that CHIPS couldn’t succeed without taking risks. But we wanted to make sure that decision-makers could assess each deal with a full understanding of the risks and downside scenarios.

While the Risk team’s assessments were usually aligned with the Investment team’s, there were a few instances of constructive tension. One case involved a company manufacturing a critical technology for national security and competition with China that had a financially precarious profile, both because of the commercial risks of its market and the company’s balance sheet. The potential strategic returns led our Investment and Strategy teams to lean toward funding the project, notwithstanding the financial risk. But the Risk team believed that the financial risks were too high, exposing both taxpayer funds and the program’s reputation — and decreasing the likelihood that the strategic returns would be met. We voiced our concerns and they were taken seriously by other members of the IC and the TRC. The discussions led us to incorporate important financial protections into our proposed deal, including requirements to refinance debt, raise new equity capital, and accept a supersenior federal security interest in the project. Those provisions required difficult negotiations with the company and its financial stakeholders. Ultimately, the deal never closed — which I personally think was the right outcome for the taxpayer.

How CHIPS managed enterprise risk

Along with managing financial risk, we also had to consider the operational and programmatic risks that are typically the focus of government risk management programs. My goal as Chief Risk Officer was to instill a sense of energy and practical utility in our enterprise risk program — qualities that are often absent from government risk functions. I was aided by Olivia Volkoff, my excellent Deputy, and Clio Grillakis, one of our most talented risk professionals, who had experience designing an Enterprise Risk Management program at another federal agency.

We set up a CPO Risk Committee that met monthly to review the programmatic, operational, and strategic risks of CHIPS. The Committee’s reviews were supported by a regular cadence of risk identification over short-, medium-, and long-term horizons, reflecting input from across the leadership team.

Assessing programmatic and enterprise risks across CHIPS helped us step outside of day-to-day management and ask “big picture” questions about how the program could come up short. Our biggest concerns were inward-looking, stemming from the fast ramp-up of the program, the pressure to respond to a large pipeline of deals, and the urgency of getting money out the door. At one point, our top concern was hiring staff to keep pace with deal flow. Later, we worried about the speed of onboarding external advisors who were critical to the due diligence phase, but whose selection was mired in the labyrinthine federal procurement process. We knew we were building the plane while flying it — there were times I’d walk into our Program Director’s office and tell him the wings were about to fall off.

While we tried to be forward-looking, our crystal ball wasn’t perfect. In some cases, we overstated risk. For example, we failed to anticipate the transformational impact of AI on the semiconductor industry; at the other end of the spectrum, we underestimated the program risks associated with the political transition to the next administration.

Lessons from CHIPS Risk

Solyndra cast an unnecessarily long shadow over federal financial assistance programs for nearly two decades. The answer to Solyndra is not to eliminate financial risk, but to ensure that our government’s underwriting of new investments is thorough enough to assume risks with eyes wide open and structure deals responsibly. Unwillingness to accept some financial risk exposes government investment programs to failure altogether.

For CHIPS, building an independent risk function was essential to striking the right risk balance. As a government risk program, the CHIPS risk function was unusual because it worked alongside deal teams on transaction-level risks, in addition to focusing on high-level enterprise risks. It extended the financial risk lens to all forms of financial assistance, including grants and loans. It had an independent voice and a seat at the table. It operated in real time, rather than after the fact, contributing to investment outcomes without slowing down decisions.

While structure matters, tone at the top matters more. The Risk team’s influence was driven by the Secretary and other senior principals, and by the buy-in and support of CPO leaders, especially CPO Director Mike Schmidt and Chief Investment Officer Todd Fisher. They welcomed and empowered the Risk team’s independent perspective. So did principals such as Leslie Kiernan, the Department’s General Counsel, who insisted that Risk’s analysis be incorporated in the TRC materials that went to the Secretary and other senior decision-makers, and that we present our findings for each transaction alongside the deal team’s presentation. At the same time, I would raise our risk concerns, about both deals and wider program issues, in my one-on-one sessions with Mike, in my regular meetings with Leslie, and in my communications with the Secretary. These informal pathways were essential for getting Risk’s messages across.

Ultimately, our greatest value was in acting as the risk conscience of an investor. Our decision-makers weren’t afraid to take risks, but they took risks wisely. In a world of uncertainty, that may be the best that can be expected of risk management — and a reason why an independent risk function should be a core part of any government investment program.

1. Although no loan-only transactions were structured during the first wave of CHIPS projects, they are permissible under the statute and may be forthcoming.

2. The legal team was a fourth (and absolutely essential) leg of the stool and reported directly to the general counsel with a dotted line to the CPO director.