Last Thursday, New York City Controller Scott Stringer stood shoulder-to-shoulder with members of the New York Taxi Workers Alliance to offer his support of their proposal for taxi medallion relief. The breakthrough plan that he supports would give medallion owners the option of refinancing at $125,000 with restructured financing over 20 years and 4% interest, meaning a monthly mortgage of about $157.
The city-vetted deal is financially sound for both drivers and taxpayers. But, just as critically, it finally acknowledges the city’s role in creating a speculative bubble, and honors long-unkept promises it made to its drivers.
Once considered to be one of the best investments in America, the medallion industry in New York City has collapsed over the last five years. After having bought the assets for as much as $1,050,000 in March 2014, many owners now find themselves under-water — leading many to lose in their homes, foreclose on their medallions, and in the most extreme cases, commit suicide.
In his speech, Stringer laid the blame for the medallion crisis at the feet of market speculators, saying unscrupulous and predatory lenders distorted the prices and “took drivers for a ride.” To be sure, there were plenty of notorious speculators in this industry — such as “taxi king” Evgeny Freidman and Donald Trump’s former personal attorney, Michael Cohen. And, there were unscrupulous lenders — such as the now liquidated Lomto Credit Union and Melrose Credit Union.
What is lost in Stringer’s telling is how New York City officials played an active role in creating this crisis. Indeed, regulators looked the other way as speculators entered the market, and claimed that it wasn’t their job to regulate lending. The city made tens of millions of dollars from both sales taxes from medallion sales and from medallion auctions.
However, the seeds of this crisis go back decades, spanning mayoral administrations and regulatory regimes. The New York City medallion industry began in 1937, when the City Council passed the Haas Act. Designed to address an oversupply of taxis in the city, the Haas Act restricted entry into the taxicab market by limiting the number in the city to 13,595. To enforce this restriction, every taxicab was issued a numbered owners permit — or medallion. What the Haas Act did not do, however, was explicitly prohibit the transfer of these owners’ permits. Unlike other operating permits, owners of taxicab medallions were implicitly free to sell their permits.
By 1947, a burgeoning black market for taxicab licenses emerged. And, although there was initially a public outcry against the market for medallions, city officials took no action to stop the “racket.” As a result, the city’s inaction legitimated an otherwise illegitimate market, and set the critical pathway for this crisis to emerge.
Beginning in the early 2000s, the Taxi and Limousine Commission began selling additional medallions through auctions. Importantly, the auctions came with minimum upset bids — or, rather, the minimum price at which a property could be sold. Over the subsequent 15 years, those minimum upset prices increased.
The minimum upset price was $219,000 in April 2004. By November 2013, it rose to $850,000. And, although TLC officials would be quick to point out that the minimum upset price is not a value, it was a benchmark number set by city officials that gave confidence to would-be buyers that there was a floor to their investment.
In 2012, Uber entered the taxi industry in NYC.
In a now-infamous strategy, instead asking for permission, Uber introduced their app-based dispatch without the approval of regulators. As the price for medallions reached its zenith, commissioners at the TLC re-interpreted regulations pertaining to black cars to incorporate Uber into the industry. A vestige of the 1980s, there was no cap on the number of black cars that could operate, and Uber quickly flooded the city’s streets with tens of thousands of new cars and drivers.
The ubiquity of the smartphones all but collapsed any difference between the street-hail once reserved for taxis and the pre-arranged service of Uber. As a result, regulators allowed for an unfettered competitor to challenge the capped medallion taxi. Ballasted by hundreds of millions of dollars in venture capital, Uber and its competitors not only quickly outnumbered their medallion counterparts but were able to offer pricing options that the medallion industry could never match.
The market for taxicab medallions is a market like any other, in which nothing is guaranteed. But although the people who purchased medallions did so by their own volition, they were led to believe they were purchasing was a contract with New York City.
The city has historically played an active role in creating this crisis by legitimating an illegitimate market for operating permits, by setting minimum upset prices on the auctions, and then by allowing a hyper-capitalized competitor to enter a regulated monopoly. What it broke, it must now put back together. This proposal can help make that a reality.