New York Taxi Mogul, Seeking a Bailout, Says He’s Too Big to Fail

That's what clears the way for the guy who has a better idea who knows the market better and who can deliver value better.

I say this because sometimes people talk about bailouts as a failure of capitalism. It is not. In capitalism, government does not support or hinder businesses from doing business. Government's role should only be to protect rights (eg: so if someone ships a defective product, government provides the courts and laws to hold them accountable for the damages.)

When government is picking winners and losers it's not capitalism, and when they are propping up losers-- like the banks-- it's really not capitalism.

And no, we wouldn't have had a worse situation if the banks had been allowed to fail-- that's the rationalization. Strong banks like Wells Fargo would have grown and absorbed the remains of the dead banks. A lot of people got a lot of money out of the housing crisis because the government stepped in and didn't let them lose it--- thus the bad actors were not punished in the way capitalism punishes bad actors: with bankruptcy.

http://bastiat.org/en/petition.html

Issuing medallions as a property right was a ludicrously short-sighted move (or more likely, a corrupt one).

In other words: "I've been paying you corrupt chumps off in an excess of $300 million, doesn't that mean anything anymore?"

And people talk about Uber's $40B valuation as crazy. This is just for the 1/6 of the medallions of a single city!

First try regulation, then try PR hostility, and finally, when the window for improving the old business model has closed due to losses, appeal to the government for a bail out.

"It wasn't our fault, we couldn't have done anything to avert this!" When all along instead of trying to pretend the disruption wasn't a natural evolution in the provision of the service, they could have been learning from it.

At the same time it's a microcosm for a scenario which will play out many times in the coming decade: as older industries are appified and roboticised, how is that transition for the old-skool workers managed to minimise the pain, while maximize the upside of the emerging new models?

You, a billionaire, own 1000+ medallions, and you can't pay for 87 more because you can't secure the money?

You made an investment, and it failed. Time to move on.

A few summers ago, I worked in commercial credit and we did a financing for a "taxi mogul." He was replacing several cars in his fleet, and wanted to take out term loans for the full purchase price of the cars (approx. $30k each, IIRC).

The loans would be secured by cash flow, but the business also posted medallions as collateral. Each loan was attributed to the vehicle purchased with the proceeds and secured by that vehicle's medallion.

It's hard to value something like a taxi medallion. Medallions aren't liquid -- they are usually sold in very low volumes at auctions controlled by the TLC (in NYC). Additionally, the TLC limits the number of outstanding medallions. In practice, most of the medallions are concentrated in the hands of "taxi moguls" who started taxi businesses in the early 20th century when medallions were cheap (think $30k). The best approximation for value we had was the prices commanded by medallions at auction. When I was doing diligence on this deal a few years ago (before Uber), prices were accepted as $1.1mm per medallion. (In reality, that was at best the value of the "marginal" medallion sold; i.e. you could probably not put 10 medallions up for auction at $11mm.)

That means that a $30k term loan would have a loan-to-value of about 3% -- a dream for a bank, assuming the medallions can be seized and sold at market value upon default. That also meant that the loans would be approved almost regardless of the integrity of cash flow. Those characteristics allowed the more cunning taxi moguls to borrow a lot of money against their medallions, securing low rates due to the strength of their collateral posting, and lend the money out at higher rates to earn arbitrage.

There was a good amount of discussion about the medallion bubble -- all it would take is a significant increase in the number of medallions authorized by the TLC or a few failed auctions, and a medallion sold at a large haircut, for the value of all medallions to plummet. Granted, the drop in value might not trip loan covenants, but it would significantly erode the balance sheets of these businesses. At the time, we didn't expect that there would be an external force that would hurt medallion values.

Honestly, skyrocketing medallion prices made it clear that additional ride capacity was needed/demanded. The interesting fact is that the medallion market wasn't disrupted by the issuance of additional medallions, but rather a drop in the demand for yellow cab rides -- a scenario that taxi moguls likely hadn't planned for.

All in all, an interesting asset class that most people aren't aware of -- those 4-letter signs on taxis hold no meaning to riders, and almost nobody on the street would guess that they represent assets worth over one million dollars.

Think about that statement for a minute. What else has increased in value because of record-low interest rates? Houses come to mind.

What is going to happen when interest rates rise again (historical average is almost double that of current rates)?

http://gawker.com/tag/ronn-torossian

Between this comment and the guy's general demeanor, the phrase 'money laundering' springs unavoidably to mind.