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Goldman Sachs Gambling on Social Impact Bonds

Dale Wannen
Dale Wannen | Monday September 24th, 2012 | 1 Comment

So the big boys have entered the room.  It was recently reported that Goldman Sachs has invested $9.6 million into the nation’s first ever Social Impact Bond or SIB. This bond addresses the recidivism rates in NYC prisons and will be used to help train and counsel at-risk incarcerated youths.  SIBs, in a nutshell, are a new investment tool that fund social programs in the hope that the goals are reached and in turn create a profit for the investor (If you are unfamiliar with SIBs an explanation can be found here).

With Goldman Sachs entering into this arena, it seems as if big banks are starting to take notice of a possible way to profit. Whether this is a plus or minus remains to be seen. Goldman’s investment will be guaranteed by Mayor Bloomberg’s wealthy philanthropic group, backing their $9.6 million. If the recidivism rate drops by 10 percent over a 4 year period, Goldman could profit up to $2.1 million. Granted, let’s keep in mind that Goldman Sachs brought in about $37 billion in revenues last year  and Goldman employees make 8 times the average worker.

Alicia Glen, head of the Urban Investment Group at Goldman, states that this will “hopefully be the beginning of the development of a broader financial instrument that can create a marketplace for financial institutions to invest.”  A two-minute pitch of SIBs can be seen here.

The reason for so many voicing concern here is, well, it’s Goldman Sachs. Goldman is in the business of making money, not providing social benefit. One can only look at this last financial crisis to see that this company’s push to make a profit almost led to the second Great Depression and is a big reason that the unemployment rate has been sitting above 8 percent for almost 4 years straight. Monetary incentives have the ability to do encourage people to do very nasty things and many people in the philanthropic or nonprofit field are saying this could and probably will distort the outcome of these potentially positive vehicles. As Willy Foote of Root Capital states, one of the obvious skeptical claims is that this could “establish a trend toward greater corporate control of the public sector, like charter schools.”

Cash-strapped cities and states may be licking their chops at the entry of such a big player into funding programs that municipalities simply cannot afford.  In a past post, a team of Presidio Graduate School alumni, including myself, sent a letter to governor Jerry Brown asking to consider the use of SIBs in the state of California. With Goldman Sachs entering into this playing field though, the game and perhaps the rules may be in jeopardy.

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  • Ethical Banker

    Is it that surprising? GS lends $9.6m to a programme – it has a chance of making $2.1m profit, and has (virtually) no chance of a loss exceeding $2.4m. Add in a bit of rudimentary due diligence, and it’s probably pretty easy to get to this being a good economic bet for them. And they have got fabulous press coverage off the back of this investment too!

    What will be more interesting is if GS will still invest if & when Social Impact Bonds become more than an experiment, and start paying lower rates of return.