The Washington PostDemocracy Dies in Darkness

Investors who can’t bet on Uber are betting instead on the death of taxi medallions

One hedge fund is warning of 'financial ruin.'

(REUTERS/Sergio Perez)

The 23-page market report warns of "financial ruin" for Medallion Financial Corp., a 70-year-old company that has long lent money to drivers and investors in New York, Chicago and Boston looking to buy expensive taxi medallions. The coveted assets give owners the right to operate taxicabs, and for decades they have been the best investment in America, providing a steady business for a company that goes by the ticker symbol TAXI.

But the market report, released to the media on Thursday at a time when transportation companies Uber and Lyft are threatening established taxi markets across the globe, predicts a much darker future. "Medallion Financial," it reads, "has left itself and its shareholders exposed to an economic reckoning rarely observed in free-market economies – the collapse of an asset class propped up by decades of government-sponsored, monopolistic entry barriers with the sudden, unconstrained introduction of new supply."

The research was produced by HVM Capital, a small, opaque hedge fund with no Web presence and no history of weighing in on a publicly traded company. The fund has sold short shares of Medallion Financial, a fact disclosed in the last sentence of the report.

It is effectively betting against the company — or, put another way, betting that Uber will crush it.

Over the last year, and increasingly over the last month, Medallion Financial's stock price has been battered by widening fears that companies like Uber will undermine the financial backbone of the taxi industry — and by short sellers looking to profit off of those fears. The company has lost a third of its value over the past year, falling from $15 a share to $10.26 as of Friday evening. It’s lost a fifth of its value in the past three months alone. As of the end of November, 1.11 million of the stock shares were short. That is up from 448,000 shares a year ago.

As Uber, now valued at more than $40 billion, has rapidly grown, Medallion Financial has become an unlikely foil for investors. Uber itself isn't publicly traded (it is expected to go public in the coming years). And so most investors — aside from venture capitalists and a few others — have no way of putting their money directly behind the company.

"People are looking for ways to bet on Uber," says Andrew Murstein, Medallion Financial's president. "This is the next best thing. To me, that’s like shorting JPMorgan stock because they’re a lender to Hilton Hotels, and Airbnb is going to hurt Hilton Hotels. We’re not even a taxi operator, or a taxi owner — we’re lender to the industry, and a lender that's been doing it for 70 years and has had zero losses."

James F. Hickman, HVM's chief investment officer and the author of the market report, says that the hedge fund's strategy isn't "a back door, diluted way of 'playing Uber.'" Rather, he says that the firm, which has expertise in the medallion industry, has become convinced that medallions in general — and Medallion Financial in particular — are collapsing for reasons that the company now cannot stop.

Historically, large cities like New York and Chicago have sold a limited number of medallions to owners and investors, tightly restricting the supply of cabs that operate in the city. That limited supply is what gave medallions their value. And over the years, as the population of potential riders expanded, that value grew even more.

In New York, the price of a medallion at its peak has surpassed $1 million, in Boston $700,000, in Chicago $350,000. In his report, Hickman illustrated the trends with these charts.

Since they launched in San Francisco in 2011, Uber and Lyft have increasingly disrupted this picture, flooding city streets with new, often cheaper alternatives to licensed cabs. The influx has eroded the monopoly medallions once conferred. Many cities have resisted the companies, banning, suing or issuing them cease-and-desist letters, often at the demand of the taxi industry.

But others — including Chicago, San Francisco, Seattle, and Washington, D.C. — have legalized the services and created new regulations for them. With that track record, Hickman argues that it's only a matter of time before Uber expands to new cities, becomes entrenched in the local market, and entirely wipes out the value of medallions.

New York has been the most resistant to these ride-for-hire alternatives, and so Hickman warns that it may be the last city to fall. But the momentum has already begun, with medallions prices declining, sometimes sharply, in multiple markets.

"It's really difficult to come to terms with major secular change in a business that’s had almost no change and total stability for seven decades," Hickman says. "I almost don’t even blame them for not being able to get their arms around it. But at the end of the day, I don’t see how you can see it any other way."

By publicly saying so, HVM is further promoting the narrative of the company's downfall from which it stands to benefit. But Hickman, who declined to disclose the major investors in the hedge fund, says that he is merely explaining Medallion Financial's free-fall, not precipitating it.

"I think I’d be giving ourselves way too much credit if I thought writing this report was somehow going to hasten that outcome," he says. "The outcome is going to happen or not happen on its own."

Other analysts, though, are unconvinced that this little-known company can't weather all of people now betting against it. The investment bank and research firm Keefe, Bruyette & Woods, which counts Medallion Financial as a client, gives the company a neutral outlook.

While it has retained its original name, and its ticker symbol, Medallion Financial now makes only about 28 percent of its revenues from loans on taxi medallions. In this business, Medallion acts like a bank giving someone a mortgage to buy home. But in this case, the borrower would be a driver or businessperson looking to run a taxi business, or an investor looking to bet on the price of medallions.

Over the years, however, the rest of Medallion Financial's business has expanded to cover entirely unrelated commercial loans.

"This is much more of a consumer lending business than a taxi lending business at this point," says Greg Mason, a research analyst at KBW who is independent of firm's investment banking department. "I’m not overly concerned about huge losses in medallion loans that they’ve made. I definitely think Uber’s going to be an issue, but I would also say never underestimate the power of the government when they make a ton of money off an industry."

New York and other cities make millions of dollars auctioning medallions to buyers, and they profit every time a medallion is sold on the secondary market from one owner to another. Bill de Blasio's administration, which has grand plans to expand affordable housing and accessible transportation, hopes to make $1.3 billion by selling an additional 2,000 taxi medallions. And so city officials with the power to protect taxi medallions have a lot of their own reasons to do so.

"When Uber raises a billion dollars, the city of New York gets nothing," Medallion Financial's Murstein says. "If New York City wants to sell a thousand medallions for one billion dollars, the city of New York gets everything."

The bulk of Medallion Financial's taxi lending business — about 75 percent, Murstein says — is also in New York. For these reasons, he argues that the company's stock price has been tumbling for reasons that don't reflect the company's actual stability: "It’s the perception of this that hurts our stock price," he says, "not our earnings."

Mason agreed with that assessment.

These wildly diverging pictures of Medallion Financial — on the verge of collapse on one hand, on perfectly stable ground on the other — point to an odd new chapter in the story of Uber: Investors are now responding to the rise of the Silicon Valley startup by trying to drive down the stock of a decades-old company worth a fraction of Uber's value.