Goldman Sachs to issue "social bonds" for NYC

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Goldman Sachs is embarking on an interesting financing experiment with New York City to create "social bonds" in the form of a $9.6 million loan for a program to reduce recidivism rates of prisoners.

The New York Times explains that the loan proceeds will go to MDRC, a social services provider, to run the program. If the program reduces recidivism by 10 percent, the bank would be repaid the entire $9.6 million. If recidivism drops more, Goldman could make as much as $2.1 million in profit. If recidivism fails to fall by at least 10 percent, Goldman would lose as much as $2.4 million.

Central to the plan is the move by Mayor Michael Bloomberg to use his personal foundation, Bloomberg Philanthropies, to 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."

You can't blame Goldman Sachs for wanting to burnish its reputation by doing good in its backyard, and you can hardly fault it for putting its financial acumen to work in interesting ways. But setting forth financial incentives for social programs will not sit well with everyone. There could always be some unintended consequences.

With that said, Mayor Bloomberg is a financially savvy ex-executive. He knows what he's buying. Then again, lots of savvy people pushed cities into interest rates swaps that proved disastrous to all.

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- here's the article