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Goldman Sachs Going to Jail (Not Really)

August 6, 2012
Plain English Version

Goldman Sachs is one of the country’s biggest financial companies. It made huge amounts of money in the mortgage mess that ended with many families losing their homes. It remains a big force in lending money to companies to start and grow businesses.

It is joining with New York City government to start a new program. Something called a “social impact bond” is the source of the money. It is a new form of investing that uses funds raised by private business to pay for government programs.

Goldman Sachs will lend money to the city for a program to lower the rate-of-return (recidivism) of young men who are released from jail and then are brought back to jail for another crime.

Goldman Sachs will loan the city $9.6 million dollars to pay for a program of  counseling to offenders.  If the rate of recidivism goes down by 10 percent, the city will repay Goldman Sachs the full amount of the loan. If the program reduces the rate of recidivism by more than 10 percent, Goldman Sachs will make a profit of up to $2.1 million.

If the rate of recidivism does not go down by at least 10 percent, Goldman Sachs would lose as much as $2.4 million.

The incentive for investors is profit. The incentive for the city is to pay more for good results and to pay less for bad results. Today it pays the same no matter what the results.

Some people think private money should not be used to replace the responsibility of government. Others say it is a way to pay for many other services such as foster care and literacy training.

One government official said, “We have got to change from the idea of just paying and hoping for results. If they get results we pay, if they do not get results we do not pay.”

The New York Times

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