What Would an Investment Banker See in BART?

If an investment banker were to look at the Bay Area Rapid Transit (BART) system, what opportunities might he see?

One thing he might notice is an excellent arbitrage opportunity. Each ticket is priced according to the distance you travel. If he setup a secondary market for tickets, travelers could purchase a one-stop ticket for only $1.75, board a train to their true destination, and upon arrival they would exchange tickets with another passenger who was heading in the opposite direction, paying us a small fee of $0.25 for facilitating the transaction. If there’s no matching passenger, the user pays an exit fare (at no extra penalty) and is finished.

Now, the banker sees this as a win-win. The two customers receive cheaper tickets and he gets paid for making it possible. The banker has provided essential liquidity to this secondary market, leading to better prices and a more efficient market. It’s a free lunch!

And then BART revenues plummet down to 40% of what they were originally. The arbitrage is discovered and re-sellers are banned from operating on the station grounds. The banker doesn’t like this but he is able to adapt by creating a complex system of independent contractors to act as “runners”, transporting tickets to passengers. An arms race begins: BART officials enact new regulation and the banker circumvents it by adding a new layer of indirection.

BART becomes insolvent. However, this service is crucial to the entire Bay Area economy. It’s too big to fail. Thus, the local governments all come together and draft a plan to bail out the commuter system. Unfortunately, it requires raising taxes on the citizens, establishing a new government office to oversee the new income delegation, and adding some complex forms to your tax returns that determine how much your required contribution is to the Bay Area Delivery, Infrastructure, and Destinations Extended Allocation (BADIDEA) fund.

With all this overhead, the average price of a ticket swells. Gate prices jump 400% and the tax payer subsidizes the system an average of $4 per ticket. Thus, after taxes, exhange fees, and base ticket costs, what used to be a simple $5.25 ticket from Union City to Montgomery now costs an astonishing $14.60.

That’s only for Bay Area residents though. The banker technically resides in Connecticut and is incorporated in Delaware. Oh, and he drives to work.

Yep, it’s a win-win.

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