Aaron Elstein at Crain’s New York wrote a weird article on September 28. Normally, I wouldn’t link to it, but I’m going to in order to provide some context for this critique of his piece. I also engaged in correspondence with him, which I appreciated, because most reporters are far too arrogant to stoop to defending their stories. So I give Elstein a lot of credit for doing so.

Still, there’s something very weird about the article.

Let’s start with facts. Generally Accepted Accounting Principles REQUIRE that an asset’s value be written down or written up based on numerous conditions, all of which are disclosed in the company’s regulatory filings. The company has some 20 investments, all of which are subject to being marked-to-market every quarter, including its banking subsidiary.

Elstein says, “The article doesn’t say Medallion Financial accounting is improper and says it operates within the ground rules accorded to investment companies.”

Okay, then why does the article repeatedly insinuate that something is untoward about the accounting? Just look at the language used in the headline alone:“Taxi lender pulls accounting maneuver to show a profit” That same language, which reeks of skepticism, appears throughout the piece. Elstein’s not-so-veiled subtext is clear: the only reason for the profit was “accounting maneuvers”.

Yet Elstein stops short of making any kind of accusation. So I asked him if he was making an accusation, and he said, “I have no reason to think Medallion created the external interest”.

So the external interest is real, and the accounting is both legal and required.

Then why is he editorializing? Why the innuendo? I asked Elstein.

He suddenly went silent.

The logic doesn’t add up. Clearly, Elstein has some kind of unspoken agenda. Is he shorting shares of the company and not disclosing it? Does Crain’s have a stake in Uber? Does he just hate taxis, or have an axe to grind with management? And why was he so sloppy with some of the other facts?

He claimed the company is “one of the largest owners of [medallions]”. That’s entirely false. The company owns 159 Chicago medallions, purchased out of foreclosure some ten years ago. That’s the only time they’ve ever purchased medallions. He had to ask me who the other entities are that have larger holdings?

Is he kidding? Has he never heard of Gene Friedman, for one?

He claims that the company’s taxi loans “used to have low default rates”. I pointed out the difference between delinquencies and defaults, the latter of which are actual write-offs, and that the company has never had a loss on a taxi loan. His admitted that the two were different, but when asked if he would correct the article to reflect this, he went silent.

Aaron Elstein quotes an accounting professor who has also apparently never heard of GAAP, given the quotation that is provided in the article. Did he vet this guy?

And why did he quote James Hickman, already exposed by another reporter? Prior to publishing his article, Elstein knew that Hickman is not a “hedge fund manager”. In fact, he is not a manager of anything at all. For starters, there is no “HVM Capital”. Hickman lied regarding its existence when he first began publishing in December. Although he formed an LLC in May in Massachusetts with that name, the LLC has no board members, no managers other than himself, conducts no operations, and has no income. It is a shell designed to back-and-fill to cover his misrepresentation. He is also under a Consent Order in Connecticut.

Elstein’s reply is again illogical and weird: “It doesn’t bother that his firm, or purported firm, is a one-man shop – I know quite a few money managers who operate that way. He didn’t misrepresent himself to me.”

If Hickman didn’t claim to be “Chief Investment Officer of HVM Capital”, then why did Elstein refer to him as a “hedge fund manager”, when he isn’t?

There are too many unanswered questions here, that Aaron Elstein and Crain’s need to answer.

Finally, with respect to the bank’s valuation, there’s a great article at SeekingAlpha which discusses this. Here’s a quote:

“The company has been conservative in that it has always valued the Bank at book value. As I wrote before, the Bank made about $27 million in 2014. I originally assigned a 17x multiple on it, based on other regional bank valuations, giving it a value of $459 million. It may be worth less or more, but consider this: the Bank has no branches or depository accounts. Is that something that lowers the potential value? No. Exactly the opposite. In a world moving increasingly to virtual banking, that is a positive. The Bank makes small consumer loans backed by hard assets.
The fact that there is real collateral behind these loans means the lending base is more stable than other banks making consumer loans, namely LendingClub (NYSE:LC) and OnDeck Capital (NYSE:ONDK), both of which are running at enormously high valuations despite both running annual losses”

I would add that with no retail operations or internal bureaucracy, that’s a huge advantage for the Bank. In addition, whereas so-called “smart money” like Goldman Sachs and Morgan Stanley had to dispose of their bank holding company charters to get their TARP money, this Bank did not, giving them far more flexibility with its operations. Claiming, as Elstein does, that only have broker deposit relationships increases risk, I say it’s just the opposite.

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