Ktismatics

2 August 2012

Another Way for Goldman to Make a Buck

Filed under: Culture — ktismatics @ 11:11 am

In the discussion of this April post I made this remark:

“Homelessness is on the rise in this new Gilded Age, and with political pressure to cut Medicaid there will be even more uninsured people. Imagine how Blackwater or one of those for-profit prison companies would sell and manage this sort of short-term convalescence program to maximize return on investment on a national scale.”

Now in today’s NYTimes we get a piece on a related do-gooder enterprise, entitled Goldman to Invest in City Jail Program, Profiting if Recidivism Falls Sharply. Here’s the business opportunity: Fifty percent of male adolescents incarcerated at Rikers Island are reimprisoned within a year. It costs New York City a lot of money to arrest, prosecute, and warehouse a prisoner. But running a program to prevent recidivism of released convicts is also expensive, especially when the payoff from such a program isn’t immediate.

As I understand it, here’s Goldman’s scheme: a social impact bond. Goldman lends money to NYC, with the proceeds paying for a program intended to reduce reincarceration of juvenile offenders. The program will be outsourced and to MDRC, a nonprofit private contractor. If recidivism drops by 10%, the City pays back the loan in full, plus interest. If recidivism drops more than 10%, then the City pays Goldman a bonus of up to 22% of the original bond amount. If recidivism doesn’t drop by at least 10%, Goldman loses up to 25% of its initial investment.

But then I read farther down in the article:

In a twist that differentiates New York’s plan from other governments’ experiments with social impact bonds, [NYC Mayor] Bloomberg’s personal foundation, Bloomberg Philanthropies, will provide a $7.2 million loan guarantee to MDRC. If the jail program does not succeed, MDRC can use the Bloomberg money to repay Goldman a portion of its loan; if the program does succeed, Goldman will be paid by the city’s Department of Correction, and MDRC may use the Bloomberg money for other social impact bonds…

This means that Goldman lends the money not to the city but to MDRC, the program administrator. If the program hits its recidivism reduction target, then the City pays MDRC enough to repay Goldman’s loan in full. If the program falls short on the recidivism target, MDRC must come up with its own money to repay up to 25% of the loan amount. However, MDRC can use Bloomberg’s loan guarantee to make up the difference. But if the program exceeds its target, then Goldman makes a profit of up to 22%.

In other words, Goldman outsources all of its risk while retaining the possibility of earning 22% profit from the taxpayers of New York City for work done by a nonprofit contractor.

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