Goldman’s Social Impact

Goldman Sachs has become, in certain circles, a punching bag for demagogues and panderers who would have you believe that the firm somehow symbolizes all that critics dislike about global capitalism in general and Wall Street in particular.

Goldman deserves better, but that’s another argument for another time. For now, it is important to note the firm now has a financial stake in reforming New York’s criminal justice system. It’s the sort of public-private policy initiative that ought to be encouraged at all levels of government, particularly as states and municipalities continue to struggle with budget deficits.

The Bloomberg administration has agreed to allow Goldman to invest about $10 million in a program designed to reduce the troubled recidivism rate among the city’s prison population, especially among males in their late teens. The investment marks the first time in U.S. history that a private firm has partnered with a local government in a new financial instrument known as “social impact bonds.” The bonds have been tried in Britain and in Australia, but never before in the U.S.

Goldman will loan the city $9.6 million, which will allow the Bloomberg administration to launch a four-year program that will create an infrastructure to support black and Latino prisoners, especially those in their highly vulnerable late teens, after they are released from Riker’s Island. At the moment, half of all prisoners released from Riker’s return within 12 months.

Goldman now has a stake in helping a vulnerable population get back on its feet. If the recidivism rate decreases by more than 10 percent, the firm could make a profit of just over $2 million on its investment of slightly less than $10 million. Not a bad return—but for the city and for the lives that may be rescued, the rate of return is incalculable.

Joining Goldman in financing the effort is the mayor’s personal foundation, Bloomberg Philanthropies, which announced that it will guarantee a $7.2 million loan to the social services firm MDRC, which will do the hard work of providing the human resources necessary to keep released prisoners on the straight and narrow.

Social impact bonds are not without critics. Some ideologues object to the very idea of a private company making a profit while also helping to achieve a social good. To them, social progress and private profit are polar opposites.

Not surprisingly, the mayor has a very different approach. He noted that while potential investors might well benefit from social impact bonds, the true beneficiaries will be “citizens and taxpayers.” Keeping former prisoners out of jail obviously will have an impact on the city’s treasury. But more to the point, the program, if it succeeds, will transform the lives of former prisoners.

That sort of result would benefit everyone. Goldman’s stake in trying to achieve that result is a very good thing indeed.