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.
It's not bailouts that are the failure of capitalism. It's the conditions that bailouts ameliorate that are the failure. Namely that the process of destruction that takes down "losers" can, in some cases, destroy "winners" as well.
The best example of this is the "banking panic" (which is what we had in 2008):
Because all fractional-reserve banks require customer confidence in order to operate, if customers lose confidence in the banking system as a whole, that loss of confidence will destroy even healthy banks.
FDIC insurance was never questioned in 2008 and therefore customer confidence/common depositors were never threatened. Investors who had purchased toxic assets were threatened. Banks who held toxic assets on their balance sheets were threatened. Bankruptcy would have been extremely painful for everyone, but it would have punished the losers and rewarded a new generation of risk takers. It also would have led to a stronger recovery than what we have now, which is a zombie-like market controlled by central bank monetary policy and disconnected from free floating macro economic conditions.
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.
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).
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.
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.
The problem is that once the medallions were created, they represent a property right, and the Fifth Amendment Taking Clause prevents the government from eliminating them without compensation. And, it's hard to see the argument for spending $16 B to do so.
On the positive front, once Uber switches to robot drivers in the next decade, yellow taxis will probably go away forever, and the medallion system can be eliminated.
Then, the city can be compensated via congestion pricing for the traffic that on-demand cars generate.
I highly recommend checking out Move NY for the most credible congestion pricing plan under consideration: http://iheartmoveny.org/
The complaint reminded me of that article a while back decrying tax increases because the writer would probably have to fire his maid and gardener, and be forced to send his kids to public school.
On the other hand, the city did sell the medallion under the promise of keeping competition out. Aren't they scamming the medallion owners by not doing so? Even if we think the medallion system is corrupt and/or unjust, why should the buyers be the ones left hanging, while the city which created the system walks away with the money from its sale?
The medallions are still the only way to run a yellow cab - nothing has changed with regards to that. It'd be like cabbies complaining that new subways were opening, or the busses got better, and their business was going down.
“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?"
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!
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.
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?
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.
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
Sure, but the organization that sold the product was also the one which changed the rules. Isn't this similar to Goldman Sachs shorting the securities that themselves were selling to their clients?
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.
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.
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.
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.
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.
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.
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).
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.
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?)
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.
Maybe. But medallions are a lot easier to manage. They are immune to damage. As far as I know it should be possible to rent them out at a below-market rate with no skill, no risk, and little time invested.
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).
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...
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.
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.
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.
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.
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.