Social Impact Bonds, "Pay For Success," Results-Based Contracting, and Blockchain Digital Identity Systems

"A social policy experiment is spreading across the country as a new way to finance, deliver, and improve public services and problems. But its merits are so far unproven.

By Liz Farmer, August 2015
Three years ago, New York City launched an ambitious and unprecedented social policy experiment at its jail on Rikers Island. Thousands of teenage inmates began receiving group therapy aimed at improving their moral reasoning by addressing their beliefs and thought processes in a step-by-step treatment. The goal was to reduce the number of repeat offenses once the inmates were released. Academic studies using the method, known as moral reconation therapy, had reported success in reducing recidivism. Still, no one had ever scaled up these studies to accommodate anything like the 9,240 inmates the four-year Rikers Island program aimed to serve. This month, the program is coming to an abrupt end.

The reason for the program’s demise has to do with another feature of the experiment: It was financed entirely with a $9.6 million loan from Goldman Sachs. New York City was to pay the investment firm back if the repeat offense rate went down by at least 10 percent over four years. In June, a preliminary report showed the program not only was missing its recidivism target, it had no impact on the rate altogether. Goldman Sachs moved swiftly and took a contract option to cancel the program one year early. The first social impact bond program in the United States has officially failed.

“Everyone went into this understanding what they were getting into,” says David Butler, a senior adviser at MDRC, a nonprofit social policy research organization that managed the treatment program at Rikers. “These things are risks. Just because something works in one environment doesn’t mean it will work somewhere else.”

Media outlets have often touted the innovative financing tool with few notes about the complicated nature of the projects. Last year on Capitol Hill, where bipartisan support is famously elusive these days, a $300 million proposal pushed by President Obama to allocate federal funds for social impact bond projects in the states managed to attract proponents on both sides of the aisle.

But as the enthusiasm for social impact bonds has grown, so has skepticism about the concept of partnering with the private sector to accomplish social goals. Last spring, a congressional hearing on the subject ended on a negative note as critics questioned the complicated structure of program contracts between governments, investors and the various private operators involved. “I don’t get this at all,” said Maine independent Sen. Angus King, squinting with disbelief. “I think this is an admission that government isn’t doing what it’s supposed to do. This strikes me as a fancy way of contracting out.”...

For full post see: http://www.governing.com/topics/finance/gov-social-impact-bonds.html 

By Emily Talmage

"This week, the announcement of a massive collaborative between the world’s largest foundations and their philanthropic underlings underscored a disturbing and growing trend among America’s billionaire elite: the use of unprecedented levels of wealth to remake social policy.

If you’re one of those kindhearted Americans who still believes that the nation’s richest families are simply giving away their wealth to little people like us because they care, allow me to do this:

[image of balloon bursting] 

Private foundations have long been used as tax-havens for the elite, but “philanthropy” has lately been retooled to serve a new function: the seeding of a new “social capital” marketthat has the potential to reap these self-proclaimed lovers-of-humanity billions of dollars in profit.

This new market, still in the works but advancing at lightning speed, relies on the complete undoing of the public sphere.

That whole Bill-Gates-Common-Core thing? Sure, he wanted everyone to have to buy his Microsoft products… but not as much as he wanted to build a data-tagging system that he and his cronies could use to “measure” and then profit off the “impact” of their investments. 

Data is king in the new social capital markets, which is why it’s no coincidence that Congress is currently ramming through several bills expanding the role of the Feds to collect and aggregate data on pretty much everything, starting from when you’re a neonate.

And maybe even more creepily, when it comes to “evidence-based policy”, it turns out that “evidence” doesn’t actually mean science or truth or even what’s remotely good for us.

Evidence means data, which can be p-hack’ed (massaged, if you will) anyway investors like.

And so we have folks like Tripp Jones of Massachusetts calling for an expansion of “evidence-based policy” while children die at alarming rates in his former for-profit foster care program; folks like Bill Gates relentlessly terrorizing the public school system in pursuit of an investment-friendly sector; and the folks who managed to balloon the national student debt to astronomical levels advancing new credentialing systems and grading systems…

…all under the guise of philanthropy."...

https://emilytalmage.com/2017/11/16/we-need-to-talk-about-our-philanthropy-problem/ 

"When you think of child exploitation, what do you think of?

A grimy basement filled with whirring sewing machines and silent children, toiling for an evil, shouting, and unshaven boss with a grease-stained shirt and a belt in his hand? Or little boys stuffing sausages in a frigid, unsanitary, meatpacking operation from over a century ago – like in the picture above? At least something like that, right?

How about high-stakes testing and high-pressure ‘evaluations’ of 5, 6, and 7 year-olds?

This is one story of how child labor has made its’ way into the 21st century: the wealthiest Americans are pinning their investment returns on children’s pre-kindergarten, 1st, and 2nd grade performance. 

In Chicago, these new, sophisticated child exploiters are celebrated and honored, receiving praise and patronage from politicians, and minimal scrutiny from the press – but make no mistake, they are the same child exploiters, repackaged. Is this child labor 2.0™?

Indeed, what seems to be drowning out the cries of Chicago’s children is the clinking sound of champagne glasses in the halls of Chicago’s elite.

Why do the richest people in the United States want to make money off of the work of Chicago 5 year-olds?

On November 5th, the Chicago City Council approved a $17 million loan to the Chicago school board from a group of finance capitalists, which will allow the city to expand its’ pre-kindergarten slots by about 2,600 kids.

The lenders are guaranteed to make a killing from their investment – up to $30 million – but only as long as the little kids can be forced to produce results.

It is not a stretch to say that the most powerful finance capitalists in the world are dead-set on undermining education in the public interest.  For years, these vampires have been making massive amounts of money at the expense of Chicago schools in scams such as auction-rate securities, which allow Goldman Sachs and their buddies at Bank of America to steal and/or gamble away up to $100 million of the public’s money. I guess when you can steal that kind of dough, why not get into the harder stuff – why not get into tying your profits directly to the performance of school kids?

Goldman Sachs (the most powerful finance firm in America,) Northern Trust (which financially represents 20% of America’s richest families,) and the Pritzker billionaires (Hyatt hotels, Royal Caribbean cruise lines, etc.,) have instituted what they call a Social Impact Bond, designed to generate wealth based on the hard work of preschoolers. Taking their orders from The Most Corrupt Man In Chicago – Mayor Rahm Emanuel – the rubber stamp city council voted the measure through with little debate, which is perhaps the strongest argument for their wholesale replacement (only five no votes against the scam).

So, if the politicians, newspapers, and TV stations are going to stop short of saying it, let me make this clear: There is an epic crime afoot in Chicago – Tying profits to the work of children is a violation of child labor laws.

Millions in cash transfers with names like, “Kindergarten Readiness Payments” and “Third Grade Literacy Payments,” will be funneled directly from public funds to the banks’ escrow account. I couldn’t make this up.

Emanuel’s cowed neoliberal defenders may argue that this technically isn’t a legal conspiracy to commit crimes against minors. However, in political, civil, – and most assuredly – in moral terms, what I’ve just described cannot be characterized as anything other than child labor violations.

Why has the press allowed this scam to be described in glowing terms by the establishment (from the Mayor to The Civic Federation,) with no questions about how this is the very definition of child exploitation?

It doesn’t take a genius to know that when Goldman Sachs starts going after little children in Chicago, you can’t for a minute consider yourself safe. No matter where you live."...

https://mediacolossus.wordpress.com/2014/11/08/19th-child-labor-repackaged-for-21st-century-chicago/ 

Picture caption: 

Before our unions smashed child labor, founder of Northern Trust, Armour and Co. ruthlessly exploited children for gain in their meatpacking business – now they would like to “educate” your toddlers for profit. Northern Trust is a partner in the new pre-k initiative.

By Emily Talmage

"Across the country, teachers are being asked to collect, record, and slog through mountains of data that "experts" insist is meant to improve their practice. There are pre-assessments and post-assessments, habits of work rubrics, writing prompts, social and emotional screeners, standards-based grading systems, RTI data, student learning objectives, professional growth goals, student surveys, self evaluations,…"

For full post, please see: 

https://emilytalmage.com/2017/07/07/is-wall-street-about-to-take-over-public-education-once-and-for-all/ 

By Steve Denning

"It is clear to anyone who has studied the financial crisis of 2008 that the private sector’s drive for short-term profit was behind it. More than 84 percent of the sub-prime mortgages in 2006 were issued by private lending. These private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year. Out of the top 25 subprime lenders in 2006, only one was subject to the usual mortgage laws and regulations. The nonbank underwriters made more than 12 million subprime mortgages with a value of nearly $2 trillion. The lenders who made these were exempt from federal regulations.

How then could the Mayor of New York, Michael Bloomberg say the following at a business breakfast in mid-town Manhattan on November 1, 2011?

It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp. Now, I'm not saying I'm sure that was terrible policy, because a lot of those people who got homes still have them and they wouldn't have gotten them without that. But they were the ones who pushed Fannie and Freddie to make a bunch of loans that were imprudent, if you will. They were the ones that pushed the banks to loan to everybody. And now we want to go vilify the banks because it's one target, it's easy to blame them and Congress certainly isn't going to blame themselves.”

Barry Ritholtz in the Washington Post calls the notion that the US Congress was behind the financial crisis of 2008 “the Big Lie”. As we have seen in other contexts, if a lie is big enough, people begin to believe it.

Even this morning, November 22, 2011, a seemingly smart guy like Joe Kernan was saying on CNBC’s Squawkbox, “When the losses at Fannie and Freddie reach $200 billion... how can the ‘deniers’ say that Fannie and Freddie were enablers for a lot of the housing crisis. When it gets up to that levels, how can they say that they were only into sub-prime late, and they were only in it a little bit?”

The reason that people can say that is because it is true. The $200 billion was a mere drop in the ocean of derivatives which in 2007 amounted to three times the size of the entire global economy.

When the country’s leaders start promulgating obvious nonsense as the truth, and the Big Lie starts to go viral, then we know that we are laying the groundwork for yet another, even-bigger financial crisis.

The story of the 2008 financial crisis

So let’s recap the basic facts: why did we have a financial crisis in 2008? Barry Ritholtz fills us in on the history with an excellent series of articles in the Washington Post:

• In 1998, banks got the green light to gamble: The Glass-Steagall legislation, which separated regular banks and investment banks was repealed in 1998. This allowed banks, whose deposits were guaranteed by the FDIC, i.e. the government, to engage in highly risky business.

• Low interest rates fueled an apparent boom: Following the dot-com bust in 2000, the Federal Reserve dropped rates to 1 percent and kept them there for an extended period. This caused a spiral in anything priced in dollars (i.e., oil, gold) or credit (i.e., housing) or liquidity driven (i.e., stocks).
• Asset managers sought new ways to make money:  Low rates meant asset managers could no longer get decent yields from municipal bonds or Treasurys. Instead, they turned to high-yield mortgage-backed securities.
• The credit rating agencies gave their blessing: The credit ratings agencies — Moody’s, S&P and Fitch had placed an AAA rating on these junk securities, claiming they were as safe as U.S. Treasurys.
• Fund managers didn’t do their homework: Fund managers relied on the ratings of the credit rating agencies and failed to do adequate due diligence before buying them and did not understand these instruments or the risk involved.
• Derivatives were unregulated: Derivatives had become a uniquely unregulated financial instrument. They are exempt from all oversight, counter-party disclosure, exchange listing requirements, state insurance supervision and, most important, reserve requirements. This allowed AIG to write $3 trillion in derivatives while reserving precisely zero dollars against future claims.
• The SEC loosened capital requirements: In 2004, the Securities and Exchange Commission changed the leverage rules for just five Wall Street banks. This exemption replaced the 1977 net capitalization rule’s 12-to-1 leverage limit. This allowed unlimited leverage for Goldman Sachs [GS], Morgan Stanley, Merrill Lynch (now part of Bank of America [BAC]), Lehman Brothers (now defunct) and Bear Stearns (now part of JPMorganChase--[JPM]). These banks ramped leverage to 20-, 30-, even 40-to-1. Extreme leverage left little room for error.  By 2008, only two of the five banks had survived, and those two did so with the help of the bailout.
• The federal government overrode anti-predatory state laws. In 2004, the Office of the Comptroller of the Currency federally preempted state laws regulating mortgage credit and national banks, including anti-predatory lending laws on their books (along with lower defaults and foreclosure rates). Following this change, national lenders sold increasingly risky loan products in those states. Shortly after, their default and foreclosure rates increased markedly.
• Compensation schemes encouraged gambling: Wall Street’s compensation system was—and still is—based on short-term performance, all upside and no downside. This creates incentives to take excessive risks. The bonuses are extraordinarily large and they continue--$135 billion in 2010 for the 25 largest institutions and that is after the meltdown.
• Wall Street became “creative”: The demand for higher-yielding paper led Wall Street to begin bundling mortgages. The highest yielding were subprime mortgages. This market was dominated by non-bank originators exempt from most regulations.
• Private sector lenders fed the demand: These mortgage originators’ lend-to-sell-to-securitizers model had them holding mortgages for a very short period. This allowed them to relax underwriting standards, abdicating traditional lending metrics such as income, credit rating, debt-service history and loan-to-value.
• Financial gadgets milked the market: “Innovative” mortgage products were developed to reach more subprime borrowers. These include 2/28 adjustable-rate mortgages, interest-only loans, piggy-bank mortgages (simultaneous underlying mortgage and home-equity lines) and the notorious negative amortization loans (borrower’s indebtedness goes up each month). These mortgages defaulted in vastly disproportionate numbers to traditional 30-year fixed mortgages.
• Commercial banks jumped in: To keep up with these newfangled originators, traditional banks jumped into the game. Employees were compensated on the basis loan volume, not quality.
• Derivatives exploded uncontrollably: CDOs provided the first “infinite market”; at height of crash, derivatives accounted for 3 times global economy.
• The boom and bust went global. Proponents of the Big Lie ignore the worldwide nature of the housing boom and bust. A McKinsey Global Institute report noted “from 2000 through 2007, a remarkable run-up in global home prices occurred.”

• Fannie and Freddie jumped in the game late to protect their profits: Nonbank mortgage underwriting exploded from 2001 to 2007, along with the private label securitization market, which eclipsed Fannie and Freddie during the boom. The vast majority of subprime mortgages — the loans at the heart of the global crisis — were underwritten by unregulated private firms. These were lenders who sold the bulk of their mortgages to Wall Street, not to Fannie or Freddie. Indeed, these firms had no deposits, so they were not under the jurisdiction of the Federal Deposit Insurance Corp or the Office of Thrift Supervision.
• Fannie Mae and Freddie Mac market share declined. The relative market share of Fannie Mae and Freddie Mac dropped from a high of 57 percent of all new mortgage originations in 2003, down to 37 percent as the bubble was developing in 2005-06. More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions. The government-sponsored enterprises were concerned with the loss of market share to these private lenders — Fannie and Freddie were chasing profits, not trying to meet low-income lending goals.
• It was primarily private lenders who relaxed standards: Private lenders not subject to congressional regulations collapsed lending standards. the GSEs. Conforming mortgages had rules that were less profitable than the newfangled loans. Private securitizers — competitors of Fannie and Freddie — grew from 10 percent of the market in 2002 to nearly 40 percent in 2006. As a percentage of all mortgage-backed securities, private securitization grew from 23 percent in 2003 to 56 percent in 2006.

The driving force behind the crisis was the private sector

Looking at these events it is absurd to suggest, as Bloomberg did, that "Congress forced everybody to go and give mortgages to people who were on the cusp."

Many actors obviously played a role in this story. Some of the actors were in the public sector and some of them were in the private sector. But the public sector agencies were acting at behest of the private sector. It’s not as though Congress woke up one morning and thought to itself, “Let’s abolish the Glass-Steagall Act!” Or the SEC spontaneously happened to have the bright idea of relaxing capital requirements on the investment banks. Or the Office of the Comptroller of the Currency of its own accord abruptly had the idea of preempting state laws protecting borrowers. These agencies of government were being strenuously lobbied to do the very things that would benefit the financial sector and their managers and traders. And behind it all, was the drive for short-term profits.

Why didn’t anyone say anything?

As one surveys the events in this sorry tale, it is tempting to consider it like a Shakespearean tragedy, and wonder: what if things had happened differently? What would have occurred if someone in the central bank or the supervisory agencies had blown the whistle on the emerging disaster?

The answer is clear: nothing. Nothing would have been different. This is not a speculation. We know it because an interesting new book describes what did happen to the people who did speak out and try to blow the whistle on what was going on. They were ignored or sidelined in the rush for the money.

The book is Masters of Nothing: How the Crash Will Happen Again Unless We Understand Human Nature by Matthew Hancock and Nadhim Zahawi (published in 2011 in the UK by Biteback Publishing and available on pre-order in the US).

In 2004, the book explains, the deputy governor of the Bank of England (the UK central bank), Sir Andrew Large, gave a powerful and eloquent warning about the coming crash at the London School of Economics. The speech was published on the bank’s website but it received no notice. There were no seminars called. No research was commissioned. No newspaper referred to the speech. Sir Andrew continued to make similar speeches and argue for another two years that the system was unsustainable. His speeches infuriated the then Chancellor, Gordon Brown, because they warned of the dangers of excessive borrowing. In January 2006, Sir Andrew gave up: he quietly retired before his term was up.

In 2005, the chief economist of the International Monetary Fund, Raghuram Rajan, made a speech at Jackson Hole Wyoming in front of the world’s most important bankers and financiers, including Alan Greenspan and Larry Summers. He argued that technical change, institutional moves and deregulation had made the financial system unstable. Incentives to make short-term profits were encouraging the taking of risks, which if they materialized would have catastrophic consequences. The speech did not go down well. Among the first to speak was Larry Summers who said the speech was “largely misguided”.

In 2006, Nouriel Roubini issued a similar warning at an IMF gathering of financiers in New York. The audience reaction? Dismissive. Roubini was “non-rigorous” in his arguments. The central bankers “knew what they were doing.”

The drive for short-term profit crushed all opposition in its path, until the inevitable meltdown in 2008.

Why didn’t anyone listen?

On his blog, Barry Ritholtz puts the truth-deniers into three groups:

1) Those suffering from Cognitive Dissonance — the intellectual crisis that occurs when a failed belief system or philosophy is confronted with proof of its implausibility.

2) The Innumerates, the people who truly disrespect a legitimate process of looking at the data and making intelligent assessments. They are mathematical illiterates who embarrassingly revel in their own ignorance.

3) The Political Manipulators, who cynically know what they peddle is nonsense, but nonetheless push the stuff because it is effective. These folks are more committed to their ideology and bonuses than the good of the nation.

He is too polite to mention:

4) The Paid Hacks, who are being paid to hold a certain view. As Upton Sinclair has noted, “It is difficult to get a man to understand something, when his salary depends upon his not understanding it.”

Barry Ritholtz  concludes: “The denying of reality has been an issue, from Galileo to Columbus to modern times. Reality always triumphs eventually, but there are very real costs to it occurring later versus sooner .”

For full post, see here:

https://www.forbes.com/sites/stevedenning/2011/11/22/5086/#1ff8a163f92f 

By Nicholas MIdler

“Stanford Analytica” trended on social media Tuesday afternoon as Facebook CEO Mark Zuckerberg testified before Congress on the Cambridge Analytica privacy breach and fielded questions about data mining startup Palantir. But what does Stanford or Palantir have to do with Facebook’s data disaster?

When Senator Maria Cantwell of Washington used the name “Stanford Analytica” for Palantir, she was making a dig at the notoriously secretive tech startup that, like Cambridge Analytica, has close ties to an elite university deeply embedded in the private sector technology and data analytics scene — all but one of the five Palantir founders completed degrees at Stanford. Co-founder Peter Thiel ’89 JD ’92 continues to maintain networks with The Stanford Review, and a healthy contingent of Stanford-educated interns and employees joins Palantir each year.

But the connection between Palantir and the scandal now embroiling Facebook goes deeper than that. It was Palantir employee Alfredas Chmieliauskas who suggested that data scientists at Cambridge Analytica create a personality quiz app to access data about Facebook users’ friend networks, The New York Times reported.

As part of Tuesday’s hearing, Cantwell asked Zuckerberg whether Palantir — whose co-founder Thiel sits on Facebook’s board of directors — had ever scraped data from Facebook. “Senator, I’m not aware of that,” Zuckerberg answered. He later said in reply to another question that he was “not that familiar with what Palantir does.”

Earlier on, Cambridge Analytica whistleblower Christopher Wylie had implicated Palantir in the misuse of Facebook data.

“There were Palantir staff who helped build the models that we [Cambridge Analytica] were working on,” Wylie told members of the UK parliament. “There were senior Palantir employees that were also working on the Facebook data.”

Palantir disputes Wylie’s claims.

“Palantir has never had a relationship with Cambridge Analytica nor have we ever worked on any Cambridge Analytica data,” a Palantir spokesperson told TechCrunch.

The spokesperson acknowledged that an employee “engaged in an entirely personal capacity with people associated with Cambridge Analytica,” an association that the company is currently looking into.

The Times story exposing Cambridge Analytica’s links to Palantir characterized the latter as a “top Silicon Valley contractor to American spy agencies and the Pentagon”; other journalism about the company has emphasized Thiel’s support for President Donald Trump, whose campaign allegedly benefited from Cambridge Analytica’s data). But the nature of Palantir’s business is famously murky, whether to the media or to industry players interested in the company’s finances and valuation.

A document leaked to TechCrunch in 2015 revealed that the company’s operations as of 2013 focused on making human data easily accessible for clients, who do not need to be able to code to query huge datasets.

Applications range from public sector uses such as “predictive policing” to analyzing consumer behavior to humanitarian efforts such as aid distribution to refugees. A 2016 Mercury News profile quoted “a person close to the company” stating that “at least 60 percent of the company’s work is with for-profit companies” despite its roots as a government and defense contractor — but because Palantir is not a publicly-traded firm, its clients, finances and activities remain largely unknown to the general public."

For full post, see:

https://www.stanforddaily.com/2018/04/10/what-is-stanford-analytica-anyway/ 

For a related piece, see:
https://stanfordpolitics.org/2017/11/27/peter-thiel-cover-story/ 

https://wrenchinthegears.com/2017/04/04/global-finance-needs-our-schools-to-fail/ 

http://www.truth-out.org/news/item/40860-impact-investing-and-venture-philanthropy-s-role-in-sowing-the-seeds-of-financial-opportunity 

https://cloakinginequity.com/2017/12/31/social-impact-bonds-bankers-get-paid-only-if-education-works/