
New York Taxi Mogul, Seeking a Bailout, Says He’s Too Big to Fail - foobarqux
http://www.nytimes.com/2015/04/11/upshot/new-york-taxi-mogul-seeking-a-bailout-says-hes-too-big-to-fail.html?hp&action=click&pgtype=Homepage&module=second-column-region&region=top-news&WT.nav=top-news&abt=0002&abg=0
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MCRed
Bailouts are not part of capitalism. IF we want to have a healthy economy,
it's imperative-- not just "right" or "good", but _imperative_ \-- that
uneconomic businesses be allowed 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.

~~~
kiba
Capitalism: the word that can mean anything you want.

~~~
MarkPNeyer
when people debate 'the merits of capitalism', they are almost never debating
the same thing.

people who don't like "capitalism" generally mean they don't like the status
quo.

people who want 'capitalism' generally mean something which is different from
the status quo.

what's the fastest way to start an argument between two people who agree? ask
them why they agree.

------
jayess
Reminds me of Bastiat's 1845 satirical essay styled as a petition from
candlemakers to the French Parliament to force people to close their windows
so they buy more candles. They need help competing against the sun.

[http://bastiat.org/en/petition.html](http://bastiat.org/en/petition.html)

~~~
rokhayakebe
This the funniest thing I have read in a long time.

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dankohn1
Also note that the medallion system should never have been created in the
first place. If, instead, the city could auction off 13,347 medallions good
for a year, all the price appreciation would have gone to the taxpayers of New
York instead of characters like Mr. Friedman.

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

~~~
MCRed
How about get rid of medallions and let a free market exist? Uber is going to
provide it if they don't, in fact, that restriction on the market--
artificially for political purposes-- is what made Uber possible.

~~~
bryanlarsen
Uber's, taxis and other cars get to use Manhattan streets for free. The real
estate those streets sit on is perhaps the most valuable in the entire world,
and the maintenance for those streets is paid for via property taxes. I'm all
for a free market, as long as players in the game aren't freeloading.

~~~
SamReidHughes
There exist gas taxes. Also the people using Uber are paying or doing business
with entities paying property taxes.

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danielrakh
“I have delivered, personally, in excess of $300 million to the city in these
auctions,” he said. “Do I not have a little bit of standing to say there
should be support from that institution that I delivered, personally, $300
million to? To do what the government does for every other industry? Am I not
being logical?”

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

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icebraining
_According to the letter, entities related to Mr. Freidman control one-sixth
of New York’s mini-fleet taxi medallions, which would mean approximately 1,000
of them. They would be worth around a billion dollars even after recent price
declines._

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

~~~
dankohn1
No, there are currently 13,347 regular medallions [0] (I believe handicapped
and hybrid are treated separately). At their peak price of $1.2 M each, the
value was $16 B.

[0]
[https://en.wikipedia.org/wiki/Taxicabs_of_New_York_City#Meda...](https://en.wikipedia.org/wiki/Taxicabs_of_New_York_City#Medallions)

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humanarity
Response to disruption:

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?

~~~
drawkbox
If the response was innovation, as most engineers or product people would
focus on, then many of these giants would be in a better place.

If you aren't going to disrupt your own model regularly then others will.

Good leaders know this and are constantly investing in R&D and innovating to
stay ahead. Non-innovation is a stale path that will set the market leader
back if they don't recognize it and react.

For the workers the only way to minimize the pain is inform them well ahead
and cheaper education not just focused fresh out of high school but all
working ages to get them into new industries. Robotics will remove many jobs
but create lots of work, new work we can't imagine yet, just like computing
and the internet did.

~~~
humanarity
Yes!

------
forrestthewoods
Not only is he not too big to fail, he _deserves_ to fail. He invested in an
abstract concept that only has value due to artificial rules. If the rules
change and the value is reduced to zero then too bad. That was part of the
risk assessment when the bet was made. You lost and society is better off now.
#DealWithIt

~~~
chrismcb
He is only losing because someone else came in that isn't playing by the
rules.

~~~
forrestthewoods
Actually I'd argue that Uber is playing by the rules. The top most system
isn't the written law. The law exists within a system of governance. That's
where Uber is playing. At a higher level.

Uber ignores the written law. Delivers a product that is technically illegal
but hardly immoral or unethical. There are potential penalties for doing this.
They've been forced to pay some of them. But what has happened almost every
time is Uber delivers to customers an experience so vastly superior that
politicians are forced to change the law to satisfy their constituents. This
is not a bad thing.

A few years ago in Seattle the local taxi cartel proposed a smartphone app to
let riders hail. They were told no because the lawmakers didn't want to write
new laws to let that be legal. Uber came in and public demand forced the laws
to be updated. The old cartel now has an app.

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DrStalker
Why would it be a problem if the prices of taxi medallions drops? People who
invested in them will lose money but I don't see how that is a problem for
anyone else.

~~~
patmcguire
It's all financed. If $5 billion out of $6 billion of equity vanishes
overnight, that could be a problem. The first-generation immigrants splitting
a medallion and a million dollar loan will lose their life savings, but the
bank is losing whatever's left. And if they leveraged it more...

It's definitely just someone trying to get free money, but they may also have
a point on accident.

~~~
kjksf
No one gives million dollar loans to "first-generation immigrants".

Rich people buy the medallions and lease them out to poor people (i.e. taxi
drivers). This presents a cash flow issue: they have to pay for a medallion
up-front but it only repays itself over many years.

Rich people are smart and understand leverage. If the income from leasing
medallions produces a better ROI than a cost of the loan, they can get a loan
and get more medallions than they otherwise could and become richer even
faster.

However, a bank only gives loans if you're already rich.

My point is that this tugging on emotional strings by invoking "first-
generation immigrants loosing their life savings" doesn't reflect the reality
of situation. You just can't get a million dollar loan if you're poor.

Also, the only thing that vanishes is resell value.

This guy is making money by leasing the medallion to drivers. The price he
paid affects how long it will take for this investment to pay for itself until
he actually starts to make money.

Unless he did something stupid (like paying so much that leasing revenues
wouldn't repay the cost in his lifetime), he'll keep making lots of money from
the medallions that he didn't foreclose on.

~~~
RockyMcNuts
The leasing rate fluctuates, and if drivers can go drive for Uber and not have
to lease a medallion, it's not going to help leasing rates.

If he was leasing for enough to service the debt, he wouldn't be looking for a
bailout.

He sure figured out the American way, take a big risk, if you succeed call
yourself a successful entrepreneur and job creator, if you fail blame the
government.

I don't think he has any leverage, maybe there's some chaos in the yellow cab
industry if the medallions get tied up in litigation, but I kind of doubt it.

------
moey
Gotta pay to play my friend.

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.

~~~
rtpg
I think the thing is that he knows this is the beginning of many more seizures
for him. Much like Lehman failing triggered a huge chain of events (to take
the guy's own analogies).

So for him, he's looking to save his business. Doesn't mean we should bail the
guy out, but the situation might be much graver than that 87 number might
imply.

~~~
defen
Yep. I suspect he is way over-leveraged, and losing the income stream from
those 87 medallions will prevent him from servicing the debt on his _other_
medallion loans. Could set off a chain reaction that wipes out everything he
has (not that this means we should bail him out).

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parm289
Just a little background on medallion finance:

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.

------
refurb
_Another reason medallions gained so much value in recent years was that
record-low interest rates made them cheap to finance._

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)?

~~~
kjksf
The big difference is that a medallion makes money and a house doesn't.

Medallion is like rental property - it keeps generating revenue. According to
[http://blogs.reuters.com/felix-salmon/2011/10/21/why-taxi-
me...](http://blogs.reuters.com/felix-salmon/2011/10/21/why-taxi-medallions-
cost-1-million/), you can make $75k/year leasing a medallion.

If you pay $750k for it, it'll pay for itself in 10 years and after that it'll
print money. In 20 years, you would make $750k.

You can still go bust if you pay more than it makes sense for the above math,
but as long as medallion brings $75k/year of essentially no-work-required
profit, it'll always be worth some multiply of that value.

The only thing that can bring this system down is:

a) government lifting the artificial limit on supply of medallions (in which
case a driver can just get one from the government instead of leasing it from
medallion owner)

b) all taxi drivers becoming Uber drivers (if Uber can give them better deal
than a medallion owner, then why wouldn't they switch?)

~~~
Lendal
If you pay off a house, all the rent money you collect after that is profit.
If you pay off a medallion, all the rent money you collect after is profit.
They are exactly the same.

When the banks started finding themselves the new owner of thousands of vacant
real estate properties, they failed to manage them because they're a bank not
a property management company.

The same thing could happen with medallions. When the banks start finding
themselves owning thousands of medallions what makes you think they'll
suddenly be interested in running a taxi company? They won't. They'll just let
the medallions rot like they did the houses. When a medallion goes unmanaged
the taxi it belongs to rots in the garage or gets liquidated. The drivers will
go find other work or collect unemployment. There will be fewer taxis on the
street. Pretty simple logic.

~~~
seunosewa
Why wont the banks sell the medallions instead of letting them rot?

~~~
URSpider94
They will, of course. It's highly unlikely that a bank that took possession of
a medallion in a foreclosure would let it sit idle (and TFA says as much).

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patmcguire
God bless the New York Times for scare-quoting "stakeholders".

------
mathattack
This kind of thing gets me very angry. His windfall should not exist. He
protects it with a lobby. Terrible terrible terrible. Makes me cheer for Uber
all that much more, and happy to see articles like this ->
[http://www.bloomberg.com/news/articles/2015-04-07/uber-is-
wi...](http://www.bloomberg.com/news/articles/2015-04-07/uber-is-winning-over-
americans-expense-accounts)

------
jgalt212
Evgeny Freidman's PR man, Ronn Torossian, is also quite a character.

[http://gawker.com/tag/ronn-torossian](http://gawker.com/tag/ronn-torossian)

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anigbrowl
_“I have delivered, personally, in excess of $300 million to the city in these
auctions,”_

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

------
spikels
This is hillarious!

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taksintik
Crocodile tears have been shed.

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anonymoustrolol
I'm fairly certain if the gov creates an asset class it has some
responsibility to buy them back if they allow them to decrease in value by not
enforcing the power of the asset class (limiting ridesharing). Tax payers will
pay for it, but the tax payers will also get the benefit of the new
system/ride sharing. No shocks here.

~~~
InclinedPlane
I don't see that at all. The government is the authority behind real estate
ownership, yet they have very limited responsibility toward existing owners if
they make changes to, for example, zoning restrictions.

~~~
anonymoustrolol
If, for instance, they wanted to flood your land for the greater good, they
would have to buy it back at "market rate", see TVA. I know it goes against
the SV mentality, but apparently these opinions aren't popular here so I'll
restrain myself going forward.

~~~
InclinedPlane
Indeed. But if they made some zoning changes that resulted in a new part of
town becoming a more popular place to live, they'd owe you nothing whatsoever.

