Taken literally, such a headline probably wouldn’t surprise many people. But this is actually a good thing. New York City has a problem. They’ve got a lot of kids that end up in jail. And about half of them are very likely to end up in jail again. This is counterintuitive to the point of jail as a punishment, but has been a reality of our justice system for decades now.

NYC would like to rectify this problem however programs of such a nature cost money. Money is always tight for governments, but it’s especially so these days. So the city is partnering with Goldman Sachs to finance the Adolescent Behavioral Learning Experience (ABLE) program. Goldman Sachs is essentially investing in the success of this program. Goldman is providing the city with what are called “social impact bonds” to the tune of just under $10 million. So like I said, GS is investing in child criminals, but in a good way.

Social impact bonds are an interesting financial product. They work by having a lender invest in a program that benefits the greater good. If the program is successful, then the borrower will pay back the loan plus interest. If the program fails, they don’t pay it back. This is not unlike a traditional loan.

We all borrow money with the expectation of having more money in the future to pay off the loan. If we don’t then we’ll default. NYC in this case would realize cost savings by keeping more kids out of jail. That money could then be diverted to pay back GS plus interest. If the program doesn’t work, it’s GS that loses money, not the city.

On paper this sounds like a great idea. Banks are in the business of taking risks and from their perspective this is little different than financing a cost reduction program at a corporation. If they believe it can be done while making a decent return, they’ll do it. No doubt in this case the underwriting process was less formal. Goldman is doing this to be good citizens. The capital at risk is minor and likely a part of a social responsibility program.

In practice, there is good reason to be cautious with this idea. The public is wary of banks profiting off social improvement and like any bond it could be conceivably packaged and sold to other investors if a sophisticated market for these programs were to take off. It’s probably best to keep the social impact bond simple for now and just see if the idea even works in practice.

Regardless of the outcome, we should encourage new ideas to get many parties involved in solving problems. So kudos to Goldman and New York City and best of luck investing in the kids.

Read: Goldman Sachs Hopes To Profit By Helping Troubled Teens (NPR)

Image: D Services

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categories: banking, government, investing, loans