Goldman Sachs Group Inc., which wagered more than $300 billion last year on things like yen rates and bond spreads, just laid down a bet that guys like Nelson “Johnny” Aguilar can stay out of jail.
Aguilar was at a Dunkin’ Donuts near Boston on a Sunday night in March when a shooting outside left a 21-year-old man with a bullet wound to the gut, police said. They arrested Aguilar, a 19-year-old gang member with a criminal record and a tattoo that says “Life’s a Gamble.”
Such crime-blotter moments are Goldman’s concern thanks to a financial product called a social-impact bond. Goldman is anchoring a $21 million plan to help a Boston-area nonprofit called Roca expand its efforts to steer young men like Aguilar away from dealing drugs, stealing cars or committing assaults and murders.
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.
“It’s not that different than if you were looking at any company” to invest in, said Andrea Phillips, vice president of Goldman’s Urban Investment Group, who leads the bank’s social- impact bond transactions. “You’re relying on a management team. You’re relying on their human capital, their folks who work at the plant and deliver and do what they’re supposed to do.”
(Goldman isn't the only company looking at bonds to lower recidivism rates. Merrill Lynch has also been involved in a New York program.)
Bottom Line
Young men like Aguilar are part of the bottom line: Each participant Roca keeps out of jail for a year saves Massachusetts $12,400, the state calculated. If it can close a 300-person facility and keep from expanding jail space, it could save $47,500 per person per year.
The beauty of social-impact bonds, adherents say, is that everyone wins. States and municipalities get prevention programs that they might not otherwise be willing or able to fund. Social-service nonprofits get stable, multiyear capital to bring about large-scale change. Investors get a chance to do, and be seen doing, good.
Taxpayers, meanwhile, aren’t on the hook if the interventions don’t work out. As for the young men, Roca’s programs have succeeded in keeping many from returning to jail.