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Are Taxi Medallions Doomed?

Taxi Medallions

A quick overview…..many cities limit the number of taxis that are allowed to pick up customers and earn fares.  They do this by issuing a limited number of taxi medallions.  The medallions, typically mounted to the hood of your cab, give you permission to operate your cab business.  You own the medallion and can sell it, mortgage it, loan it out to another driver, etc.  For years, they have been fantastic investments.  This Washington Post article and accompanying chart shows how Philadelphia, Chicago, and New York medallions crushed it over the 2006 – 2013 period.  The medallions themselves are typically owned by a few large taxi cab companies, drivers themselves, or current or former drivers who lease them to other drivers.  The problem is, Uber and Lyft are taking a huge bite out of the market.  They operate outside or somewhat outside of the limitations that cities place on the number of medallions (driving the supply up), their app to summon nearby driver is far superior to anything taxi cab operators have been able to put out, they put an end to the stupidity of taxi cab payments (cash-only / cash-preferred/ unclear tip expectation), and a lot of people absolutely hate taxi cab companies and love Uber and Lyft.  Financing to purchase a taxi medallion has dried up.  Gloom and doom stories about taxi medallions are everywhere: 1, 2, 3, and there aren’t that many people taking the other side of the argument that the government will crack down on Uber and Lyft and medallion values will recover.

Because of the size and management responsibilities of owning even one medallion for investment purposes, most people outside of the taxi cab world would use publicly-traded Medallion Financial Corp (NASDAQ:TAXI) as their proxy with which to go long or short.  Medallion has a large portfolio of loans with taxi medallions as collateral.  However, Medallion has in recent years, diversified into other types of commercial and consumer lending like loans on motorhomes.  Taxi medallions are only 38% of its total portfolio.  Some of the other financial institutions that have too much exposure to taxi medallions as collateral are 122 different credit unions, many in New York.  For instance, 78% of Melrose Credit Union’s loans are against taxi medallions.  One credit union had 98% of its loan portfolio in taxi medallions, prior to it failing.  There is no way to short them.  There are several banks that have exposure to taxi medallions, from Citigroup to BankUnited to Signature Bank of New York to Alma Bank to Commerce Bank.  Some of these are private and others aren’t publicly traded.  Citigroup is so large that even if taxi medallions become worthless, it is unlikely to have a major impact.

While you could go long by buying a medallion yourself, there is not an obvious way to bet on the decline of taxi medallions.  Shorting (or buying put options) on TAXI might be one way, but you are getting exposure to a lot of other forces.  The other way that comes to mind is to do a lot of research on lenders that might have exposure to taxi medallions, but that have not been forthright about the size of the exposure or how bad those loans are actually performing.  This brings me to another idea that there should be a way to bet on the next bank to fail or on the likelihood of small private banks or credit unions failing by a certain date, even if it were nothing more than a website offering a contest that you could play for free and win prizes.

 

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