Social impact bonds starting to take off

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I noted not too long ago that Goldman Sachs (NYSE:GS) was pioneering an approach to social engineering via so-called social impact bonds.

The bank agreed to finance an experimental program aimed at reducing recidivism among people released from Riker's island prison. 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 could lose as much as $2.4 million.

Since the program was announced in August, the idea has caught fire. Bank of America seems intrigued.

The National Journal notes that, "President Obama requested $485 million for SIBs in his last budget, and several federal agencies have already made money available, including $20 million from the Labor Department. Massachusetts has authorized $50 million to finance two social-impact bonds, New York state has requested suggestions, and Illinois plans to do the same."

I can only hope that these experiments work out. Goldman Sachs deserves credit for boldly stepping into a new area. But it's running a business as after all.

"Goldman itself was leery of a high-risk, low-return loan, so Bloomberg Philanthropies offered to guarantee a $7.2 million repayment even if the intervention fails. The foundation is also covering MDRC's costs," the article notes.

So the key to success may well be philanthropies willing to provide financial guarantees. What might be interesting for some banks is to consider holistic solutions that depend on the bank's philanthropic arm in some way.

For more:
- here's the article

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