Tag Archives: Goldman Sachs

In Mass., Goldman wants in on prison profit stream

  By

new-york-stock-exchange-200Recently, in some states, Goldman Sachs has been issuing “social impact bonds,” a new financial instrument that purports to help cure social ills with Wall Street’s “help.”

In this case, they’re loaning $9 million to the state of Massachusetts to help support a Boston organization that tries to help young offenders from bouncing back into prison. (Reducing young recidivism is a good social goal, obviously, and would have a ripple effect on crime prevention.)

If the effort reduces the number of days past inmate spend back in prison — which would save the state money — the savings would go back to Goldman Sachs, up to a million dollars. If the effort really pays off (above and beyond the bond repayment terms), then the state would get to keep the money. Of course, if the effort doesn’t hit the minimum targets needed to generate enough savings, Goldman Sachs would still get interest payments on the bond, but would lose the principal loan ($9 million or however much of it couldn’t be repaid due to insufficient savings).

As private investments in the prison industry go, it’s not the worst thing in the world. At least the profit incentive is toward rehabilitation rather than toward further imprisonment in the way privatized prisons are. But the question is why is it even necessary to involve the private sector middleman in the first place?

The state could pay for the upfront cost of the program through tax revenues (if it were willing to raise taxes, of course), instead of taking a loan, it would keep all the money and not end up paying Wall Street no matter how things turn out. That money could be reinvested into expanding the successful efforts even more, thus benefiting all taxpayers.

In my opinion, the job of corrections and the rehabilitation of young offenders is part of the role of government. The private sector is free to help, but it should be an add-on to the process, not a redundant profit diversion mechanism in the middle.

Moreover, Goldman Sachs has a pretty notorious history of cooking the books (BBC video) to make money while temporarily making their loan recipient governments look like a success story until Goldman’s gotten all its money back.

And that’s not a good track record to have, going into this plan.

 
h/t Universal Hub

A brief history of the Greek debt coverup

  By

The problem with not giving anyone central monetary control of a shared currency is that it can become very chaotic and disorganized if everyone is pursuing contradictory fiscal policy at the national level. To avoid this, when the Eurozone was being designed, members agreed that they would have to meet certain deficit and debt targets — keeping the budget deficit (amount spent more than collected) below a certain ratio for a few years — to join and then even below that initial target every year after becoming members.

(Sidebar: The major downside to this strategy is that the economies and parliaments remain separate despite sharing a currency, yet they can’t respond to specific economic conditions in their own countries without violating their deficit and debt targets. This extends recessions in some places, even as other members of the Eurozone continue to do well.)

By 1998, eleven countries had met their targets for joining the Eurozone. Greece was not one of them.

As of 1999, when the currency virtually launched for trading purposes but not ordinary people, Greece had still not met their target to join the Eurozone when it would launch on paper a few years later. In large part, this resulted less from generous social spending and pensions and more from Greece’s chronic inability to collect tax revenues from its citizens – one of the most tax-evading populations in the world.

They were also five years away from hosting the 2004 Summer Olympics, which they had been awarded in 1997. The games had run into huge budget problems and cost overruns, which the government (as a matter of national pride, being Greece) had to help manage. They needed to take on even more debt to pull off the games, which was the opposite of what they needed to join the Eurozone before currency began circulating.

US Investment Bank Goldman Sachs came up with some very elaborate and expensive schemes (see this detailed video explanation of the mechanics from the BBC), which essentially allowed Greece to get the money it needed, while hiding how big their debt (and yearly deficits) had become. This scam allowed Greece to join the Eurozone in 2001, while it was still in its virtual stage, in time to participate when the physical currency launched in January 2002.

greek-euro-10-acropolisOutside observers started exposing the Goldman scam in 2003, and Greek government officials (from a new cabinet) revealed the deal in 2005, but EU regulators essentially pretended it had never happened until well after the crisis hit in 2009 (and continued to deny prior knowledge of it).

Meanwhile, Greece’s already bad debt situation was exploding from 2000 to 2008, as a direct result of the terms of the deal.

In a sense, like so many American homeowners before the end of 2007, Greece was given subprime loans it couldn’t possibly repay. Regulators and monetary authorities failed to perform due diligence ahead of the accession of Greece to the eurozone and then ignored the escalating danger as long as the rest of the global and European economy was doing fine. They only stepped in after the house of cards collapsed and then demanded round after round of budget cuts and other measures that hurt average Greeks who had nothing to do with the bad debt decisions that the rest of the Eurozone should have stepped in to prevent years earlier.

Greece played a part in setting up its own crisis, but the bigger picture is that Greece was failed by its peers and partners in the monetary union, and it was failed by abusive and manipulative lenders, who preyed upon a desperate government and gave them loans it never should have received in the first place.