No one really likes Goldman Sachs Bank USA. But how would you feel about Goldman Sachs Bank USA investing millions of dollars in an effort to lower youth recidivism rates in New York City? Well, it doesn’t matter how you feel because it will be happening: the investment bank will be making a $9.6 million investment, in something called a “social impact bond.” The lower the recidivism rate goes, the more money Goldman stands to make. Is this, perhaps, an icky arrangement?
Institutional Investor has the story on how this works.
Mayor Michael Bloomberg announced that Goldman would invest $9.6 million to cover the costs of a program designed to reduce youth recidivism by providing education, training and counseling to 16- to 18-year-olds incarcerated on Rikers Island. Goldman’s investment, structured as a loan to the nonprofit overseeing the intervention, will cover the program’s cost for four years (and makes the “bond” descriptor something of a misnomer). If, after that time, the program is deemed a success — a threshold achieved if recidivism falls by 10 percent or more — the city’s Department of Corrections will repay Goldman’s loan in full. Depending on how sharply the rate of reoffending falls, the $923 billion financial firm stands to earn a return of up to $2.1 million from the deal (provided recidivism drops by 20 percent or more).
Because housing inmates at Rikers cost the city money, any effective program to substantially lower recidivism would, therefore, lower the city’s expenses by easily measurable amounts. These potential savings would go into Goldman’s return.
According to Institutional Investor, Goldman believes that this will help it out with its Community Reinvestment Act ratings, but that is not the sole reason for the investment. The CRA was passed in the 1970s to encourage banks to invest within their own footprint, especially to poorer individuals and families. Goldman is headquartered in New York, so it makes sense why it believes this might help its CRA rating.
One very interesting aspect of the deal is that Goldman is protected from losing too much money in this loan by a philanthropy. Not just any philanthropy, either — it’s Bloomberg Philanthropies, which of course belongs to Mayor Bloomberg, and it is guaranteeing the loan up to $7.2 million. Goldman’s potential losses, capped at $2.4 million, are roughly equal to its potential gains: $2.1 million.
These social investment bonds aim, like public-private partnerships, to bring private sector know-how and efficiencies to wasteful and perennially over-budget public spending projects. But unlike investing in infrastructure, investing in a social goal doesn’t always deliver a clear outcome, nor does it always have an easily calculable source of revenue — in the case of reducing youth recidivism, however, it does — nor, most importantly, can a social goal’s value be pegged to the dollar. The Economist, in a piece from earlier this month, says this more eloquently:
this seems an instance of a society-wide effort to annihilate any kind of valuation that money cannot measure. And that’s a hard problem to describe…What’s wrong with targeting socially valued goals by getting financial institutions to place bets on them? I haven’t yet put my finger on it, but I’m pretty sure it’s a sucker’s bet, and that the reason why it ultimately won’t work is that it betrays a society that is losing track of what values actually are and where they come from.
Furthermore, there’s plenty of room for a slide into something like corruption, here, if this isn’t already sort of dirty. It is Mayor Mike’s philanthropy that is providing a backstop for the City’s private investors, and Mayor Mike’s city coffers that provide a return to private investors if the program actually works. Success is well-defined in this SIB, but will SIBs in the future not potentially always help banks both bolster their CRA ratings and get a healthy return? With the bank taking on all that risk, and with success so hard to define in most social spending programs, how does a city prevent itself from being captured by the bank’s interests? As The Economist puts it:
if the bonds become all the rage in the non-profit sector, they will become another meaningless charade of pseudo-accountability that teams of grant-writers know how to plug in to get the money flowing, with the metrics selected such that the financial institutions are almost guaranteed of receiving their full payout. Basically, they’ll become a means for government to use the prestige of financial institutions to claim to taxpayers that their money is being well spent.
Goldman told Institutional Investor that it hopes these SIBs become “commodity product[s]”, but for now they’re “quite bespoke.” Maybe it would be best if they stayed that way, and maybe some day politicians won’t need to defer to the private sector’s know-how on matters so far outside their areas of expertise.