“Underground Currency” on the Streets of New York — Jumped in Value in 2008

By Travis Johnson, Stock Gumshoe, March 17, 2009

Many folks have sent in this fun ad from the Oxford Club, one of many Agora-related publications — and a few folks even suggested the solution, which is easy if you’ve heard of it, but a bit obscure if you haven’t, and especially if you’ve never been a New Yorker.

How’s that for a tease … from the Gumshoe, no less? Don’t worry, you don’t have to send me any money to find the answer, just slog through a few more paragraphs of my blather and we’ll get you there.

Here’s what Louis Basenese tells us about this special “underground currency” …

“An ‘Underground Currency’ is Trading on the Streets of New York… Making Smart Investors Very Rich

” * Since 2004, this government-issued “legal tender” has more than DOUBLED in value…

” * In the past fifteen years, it’s returned FIVE TIMES the amount of the S&P 500…

“And starting in as little as 72 hours, it could put an extra $11,400 in your bank account.”

Sounds good, right? And it kind of makes you think a little … don’t we all suspect that there’s something secret going on in New York that the rest of us didn’t know about (you know, aside from tiny apartments)? These kinds of ads really trigger the conspiracy theorist who lurks inside each of us … “I thought there was something secret that let people make all that money when I was losing!”

Of course, in truth, it’s nothing as sexy as that … here’s some more from the ad:

“It’s the secret behind some of New York’s biggest fortunes… an “investment” most people know nothing about.

“Yet it dates all the way back to 1937…

“The U.S. was still in the grips of the Great Depression. And New York City was hit especially hard. Unemployment was rampant… Breadlines formed along sidewalks.

“So in March of that year, Mayor La Guardia signed a revolutionary bill. To jumpstart the local economy, he authorized the local government to issue its own “currency”. And it worked… making millionaires out of a small group of average people.

“To this day, it quietly trades among a small circle of roughly 13,000 fortunate New Yorkers.”

So now they bring the Depression in? Well of course, now we MUST have this “underground currency!”

And they throw in a few quotes from reputable news sources, just to remind us that this is real, it’s not just a made up teaser — honest!

“The New York Post reports that this is ‘one of the fastest rides to a huge retirement nest egg.

“And the New York Times agrees that it represents a ‘golden opportunity.’

“Even the New York Daily News says that it’s ‘… as good as gold.’ But they’re wrong…The truth is, it’s far better….

“As a Bloomberg article pointed out, ‘In New York, the capital of world finance, the hottest investment isn’t stocks, bonds, commodities or even Manhattan apartments. It’s [this].'”

And of course, there is a reality behind the ad — they don’t want angry subscribers, so they’re not lying, just adding a shroud of alluring secrecy to a pretty unknown investment.

They go on to talk about the truly staggering returns this investment has given to folks who got in early …

“Consider…Back in 1937, if you had exchanged just US $10 dollars for this currency, today it would be worth $725,000. It’s hard to believe, but…

“That’s a mind-boggling 7,249,900% return!

“And inside experts predict that by 2012, that same $10 investment will balloon to $1 million.

“But unfortunately, most Americans haven’t been able to hitch a ride on this bull market until now…

“That’s because you had to live and work in New York City to take advantage of this opportunity.

“…Like Arnie Tate, who resides on the Upper East Side. He pulls in an additional $36,500 each year…

“…Or Edward Buckner, who has a townhome in Brooklyn. He put an extra $60,000 in his personal bank account thanks to this investment…

“…And Della Goodman, who now owns her own loft in Soho. She’s amassed a small fortune worth over $500,000.

“But finally, there is a safe and simple way for you to make money from this situation – right from the comfort of your own home… no matter where in the world you live.

“And thanks to a rare market anomaly, you’ll only need about $10 to meet the minimum exchange requirement… roughly the same amount people paid back in the 1930’s.”

Of course, back in the 1930s $10 was real money … but still, inflation wouldn’t have turned it into anything close to $700,000. So what are we dealing with here?

Well, in addition to being an “underground currency” it’s a controlled currency, and one that has shown a remarkable return because of that control …

“In 1937, Mayor LaGuardia introduced only 13,595 units of this ‘currency.’

“But today there are 13,150. That’s 3% less than seventy years ago! Meanwhile, the city’s population has exploded by an additional one million people so demand has never been higher….

“In 2008… It outperformed the world’s “safe haven” Swiss Franc by a margin of more than 28-to-1.
…And it beat “recession-proof” gold by 933%.

“It even blows away gold’s remarkable 300% run-up in the past decade. Since 1999, this investment is up 439%.”

So … trigger those memory bells yet? No? Well, then I can tell you that the secret “underground currency” is the New York City taxicab medallion. With a set number authorized by law, these medallions serve to authorize anyone who otherwise meets the requirements (you have to have a car that matches specifications, license, etc.) to operate a NY taxi and pick up people on the street.

And yes, they have been remarkable investments — and until fairly recently, most of them were owned by local families, fleet owners, or investors who operated the taxis or leased the medallions to drivers. The number is currently set at 13,150, and while there have been a few auctions in recent years of small numbers of medallions (less than 100), I think they’re now at the limit authorized by law. Of course, that could always change, like all laws, but they’ve held pretty strictly to it for 70 years.

But how do you invest in a medallion? Especially if you don’t personally want to run a taxi company, or be a driver?

That’s both the question, and the answer …

“The answer lies in a 70-year-old family run business, now in its third generation. It serves as a virtual ‘private exchange’ for New York’s Underground Currency since almost every transaction runs through this company. In 2007, it exchanged nearly half a billion U.S. dollars into NYC currency.

“And now you could think of it as your backdoor entrance to a very exclusive market… one you can access through a regular trading account.”

So … the investment we’re dealing with today is not the medallions themselves, but a business that works with the medallions. And it ain’t a taxi company … this is:

Medallion Financial (TAXI — good ticker symbol, eh?)

Medallion financial is a financing company that facilitates transactions in taxi medallions (along with a few other niches that don’t necessarily contribute much to the bottom line right now). They are overwhelmingly focused on New York City taxi financing, but they do work with other cities, too. Financing is a key part of the Taxi business in New York, since medallion prices are so insanely high now — the record as of last summer was $650,000 for a medallion sold at auction, and I think the going rate is now $750,000. No other city has “medallions” or licenses that are anywhere near as valuable as New York’s, so the need for financing is much less — there are other big medallion cities, like Chicago, that have similar systems on a much smaller scale, but in Washington, DC, where I live, you could probably start your own taxi business for $10,000 or less. Of course, DC cabbies have much lower cash flow than NY cabbies, too.

Medallion has been run and controlled by the same family since the late 1930s, but has changed forms a few times — it went public as an investment company about a dozen years ago, and that’s how it lives now, with leadership still by the same family (the Mursteins — Chairman and CEO Alvin and his son, President Andrew).

As a registered investment company they live with similar rules to Business Development Companies and Real Estate Investment Trusts — at least as pertains to dividends, they are required to pay out 90% of their income as dividends to shareholders, which is why the teaser says you could get a huge payout from this investment. Currently the dividend is just under 13%, with the share price at about $6.35.

And yes, this is a finance company, and it does include a bank as a subsidiary, so it is important to note that the company is leveraged — market cap is about $110 million, but they carry about four times that much debt. Clearly that’s not an overwhelming amount of leverage for a financing operation, especially since most of their lending is to small businesses and is backed by assets, including those valuable taxi medallions (they do other lending, too), but it remains important to consider debt when analyzing a company like this. Their portfolio of just taxi medallion loans is currently at about $400 million (and they manage close to $200 million more in medallion loans that they’ve sold to investors), so clearly that’s the vast majority of their business and their exposure, so the value of that collateral should form the basis of any understanding of the company’s worth in a “worst case scenario.”

If you choose to look at these shares, note that a 4:1 ratio of debt to equity (roughly) means that if the value of their loan portfolio drops by 20% or more in any permanent way, the common shareholder could end up holding worthless paper — or at least, paper that’s worth less.

I don’t want to scare you away from this stock — it’s an interesting little niche lender, and they seem to be managed for long term growth by a family who is invested in the company, but that doesn’t necessarily guarantee success … even with a good market share of the taxi medallion lending business in New York (they don’t have a monopoly, of course, there’s nothing to stop anyone else from making these kinds of loans, though it’s not a big enough business to be a real focus of tons of competitors).

So in that light, what might bring a crisis to Medallion shares? Well, people are already a little nervous about the company — the book value is just under $10, and they trade at a substantial discount to that valuation, and the shares have fallen from a high of nearly $11 last Summer.

The argument is certainly made, by this company and their supporters, that NY Taxis are a recession-resistant business — and last year medallions themselves did go up in value, though this company didn’t. They have expanded in recent years into other kinds of lending that might be making people nervous, including RV and boat loans to consumers, and they have also upped their leverage over the last two years, using some new credit lines … but as I noted above, the vast majority of their lending remains taxi-focused, and they have historically had a very low default rate.

The company may be worth a gander if you’re willing to take a little time to understand their business fully — note that they do own a small bank, they do other small business and consumer lending, and they also hold a small investment portfolio, including some medallions held for investment from time to time (not sure if they’re holding any right now, I know they sold some Chicago medallions last year).

Whether or not you want to buy shares is, of course, your call — the shares are certainly cheaper now than they’ve been in a while (except for a quick dip below $4 right before they released earnings last week) … I don’t know if that’s because of concern about the value of medallions going forward, or just a worry about the New York City economy or pressure on the city to possibly create more medallions in the future, or a general uneasiness about all financing companies. To get a better understanding of the business, you could start with a look at their earnings report from last quarter (and the full year), which came out just last week … and you can see some older analyst reports and their other SEC filings and corporate info on their website. Barron’s has also covered this one from time to time, Michael Santoli mentioned them positively over the weekend, and they were profiled back in more bullish days (Summer 2007) here.

If you can get through all that and make yourself comfortable with these shares, you might get yourself a reasonably solid yield that’s backed by historically profitable assets … if not, maybe there’s a skeleton in there somewhere that you’d like to share with the rest of us, let us know either way with a comment below.

And have you ever been a member of the Oxford Club? We’ve had a number of reviews of their main newsletter, The Communique, most of which haven’t been all that charitable … if you’ve got an opinion to add, or just want to see what other folks thought, please click here.


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Taxi Licences: I reside in Gibraltar, a British colony in Southern Spain. When I was a young boy, (in 1988 I was 18), taxi licences were about US$35 – 45K, today each licence can sell for US$400K upwards. Licences are very limited, and no new ones have been issued in years and taxi drivers pay a nominal amount of Income Tax a year (About US1,200), the rest is pure profit. Considering, Gibraltar’s area is about 10 sq miles of roads…these licences are a premium, passed on from a generation to another. Sadly there is no stock ticker for anyone to… Read More »

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When gas was $4/gal last summer, I read some articles about NY cab drivers unable to survive.
If gas goes up, that stock may very well go the other direction. Add to that the current conditions in the finance industry (less clients for the cabs)…

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Another voice speaks: No matter what happens to share price over the next few months, you are buying into a 12% APY dividend. Actually more because the next dividend (1st qtr) will be paid two months from now not three (Paid sometime in late May). There is no toxic debt at all in this company and the interest spread is well over 4%. Whenever a financial market recovery does happen, there will certainly be a significant capital gain in the share price of TAXI. In the meantime you get 12% return on your money. The honest book value of this… Read More »

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Gumshoe, thank you once again for being so timely — I saw this “underground currency” ad just yesterday and knew you would get right on it! You are always a ray of sunshine coming through the dark clouds of financial newsletters’ hype. What would we do without you???

PS – for readers who are not Irregulars for the pittance of a membership fee Gumshoe requests, please become one. This site that Travis maintains is invaluable to all who need worthwhile financial information — he sorts the wheat from the chaff. Thanks.

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