Goldman Sachs Is Investing in Boston Gang Members

Associated Press

Goldman Sachs is putting a multi-million dollar bet on the hope that Massachusetts gang members will stay out of jail.

A fascinating story from Bloomberg News describes Goldman’s “social impact bond” program through which the bank put together $21 million to fund the expansion of a Boston-area nonprofit that seeks to keep high-risk young men out of prison.

The plan hinges on the idea that Massachusetts could save a lot of money by reducing the number of people that return to prison within three years of getting out. Bloomberg writes:

In Massachusetts, the state deems 4,000 men ages 17 to 24 at high risk of incarceration as they leave the juvenile justice system or probation each year. Many return to prison, staying 2.5 years on average and costing the state $291 million.

The Boston non-profit Roca works with young at-risk people to help them get on their feet, find jobs, and stay out of jail. Goldman will act as the primary lender, giving Massachusetts money to expand the non-profit program so it can serve more people. The bank collects 5 percent interest on the loan every year, with the potential to collect more:

Under the deal, if men targeted by Roca spend 22 percent fewer days in jails and prisons than their peers, Massachusetts would save enough to repay Goldman’s $9 million loan. An even bigger drop in recidivism would hand Goldman as much as $1 million in profit. If Roca fails and too many men end up behind bars, Goldman will lose almost everything it ventured.

Most people bill this as a win-win-win. People who benefit from Roca’s expanded program don’t have to live in prison. Massachusetts probably saves money, and doesn’t risk losing it. And Goldman probably makes money.

To the extent that there are naysayers, they mostly take issue with the state. If the program works, shouldn’t the state want to fund it themselves on the assumption that it will make them money that they then needn’t hand over to Goldman Sachs? But it seems Goldman is more willing to adopt the risk that Roca won’t reduce the number of days its young people spend in prison than taxpayers are. For now, Roca’s founder Molly Baldwin answers those complaints this way: ““That’s what Wall Street does: They make money … If there was another way, I’d go for it. But there isn’t.”

“Social impact bonds” are being used to fund other state initiatives, too, so time will tell whether this one pays off.