Is Uber Undermining New York City's Taxi Medallion Racket?

Investors seem to think so.


Andrew Murstein (right), with his father Alvin. |||

"The taxi business is as strong as it's ever been, despite Uber, because people in major cities will still go and stick their hands in the air," Andrew Murstein, the CEO of Medallion Financial told Bloomberg Businessweek in February. "Uber is nothing more than a terrific black car company."

The investors who've been hammering Medallion Financial's stock may see things differently.

Medallion Financial (ticker symbol: TAXI) is the only publicly traded company that owns a large portfolio of New York City taxi medallions, which are the city-issued permits that drivers are required to rent or own in order to operate a yellow cab. Murstein's grandfather and the company's founder, Leon Murstein, purchased his first medallion from the city in 1937 for $10; today a medallion sells for as much as $1.31 million. Since 1980, the price of a medallion has risen more than 1,000 percent, far outpacing the gold market or practically any other type of investment.

Now, thanks to Uber, Gotham's medallion boom may finally be over. Medallion Financial's share price is off about 33 percent from its record high last November, and in the past year, the company's stock is down 13.73 percent. In yesterday's trading, share prices fell over 6%.

Medallion Financial Corp.'s stock price over 6 months. |||

As many observers of Gotham's cab business have noted, Uber's having a bigger impact on livery car service companies that serve the outer boroughs than on yellow cabs, which predominate in Manhattan. But Uber isn't only competing with the yellow taxi industry for passengers; it's also competing for drivers. There are 13,437 taxi medallions in New York City, and about 58 percent of them are "fleet" medallions, meaning they can be bought and sold by a company liked Medallion Financial. According to one industry insider, who spoke on the condition of anonymity, Uber has made it harder for garages to attract new drivers to rent these fleet medallions, which cost (along with a car) about $114 per shift.

Also, Medallion Financial's share price reflects long-term expectations for the industry. On top of its portfolio, the company owns a bank that issues loans to drivers to buy their own "independent" medallions, which sold last year for $967,000 on average. These are generally 25-year loans, so in other words drivers are being asked to take a quarter-century bet worth almost a million dollars that yellow cabs can withstand the Uber threat. If drivers aren't feeling nervous, lenders are: Over the past 9 months, according to my source, some of the leading credit unions that regularly issue medallion loans have tightened standards, demanding 25 percent down payments when 10 percent used to suffice. Inevitably, higher down payments will disqualify certain borrowers, leading to a slack in demand, a fall in prices, and a downgrade of Medallion Financial's credit rating.

Of course, there are many other factors that could explain Medallion Financial's recent plunge. And over the last five years, the company's stock is still up around 70 percent. Either way, as I argued last week in The Daily Beast, taxi cartels are ultimately doomed.