Can You Disintermediate?
He missed his deadline, was forced to refund money to all his advertisers and promptly went out of business himself.
In 1989, Key Book Services, the warehousing and shipping facility for 850,000 books belonging to 65 publishers, was locked down by the Federal Bankruptcy Court in Bridgeport, Conn. The publishers—owners of the books—were not allowed access to their books. They could not transfer them out of the facility, fill orders or accept returns. A number of publishers were forced out of business.
These are corporate horror stories where intermediaries destroyed the businesses they were hired to support.
What about personal intermediaries?
Catherine Austin Fitts
What triggered this edition of Business Common Sense was waking up at 3:00 a.m. and turning on my tiny portable radio with earpiece, hoping to find some nightly prattle to send me back to sleep.
Instead, I hit on "Coast to Coast AM" being hosted by one of the legends of talk radio, the mellifluous-voiced Art Bell, who has a true Renaissance mind and whose probing questions and patience with tongue-tied callers is unmatched.
Bell’s guest was Catherine Austin Fitts, of whom I'd never heard. Her background: managing director of Wall Street firm Dillon Read & Co., assistant secretary of housing under Bush 41, president of Hamilton Securities Group and founder of Solari Investment Advisory Services.
The subject was the subprime crash, Wall Street and disintermediation.
I'd heard about disintermediation but never really understood it until Catherine Austin Fitts told two stories:
- Fitts was talking to a woman who was roundly complaining that her investments were going south and her water bills through the roof. Fitts suggested that she take some money out of her portfolio and hire someone to dig a well, thus dealing with two money-losing intermediaries at the same time. I thought it elegant in its simplicity!
- Fitts, whose headquarters is in Hickory Valley, Tenn., 63 miles east of Memphis, was sitting at dinner between three women. The two women on her right had CDs with a New York bank that paid 4% per annum. Coincidentally, the woman on her left had a credit card issued by that very same bank to which she was paying a 23% APR. The bank—the intermediary—was more than 1,000 miles away. It was being empowered by these women to issue subprime mortgages, which directly contributed to the current recession and the great taxpayer bailout. As a result of TARP and Obama's proposed infusion of cash into the system, the national debt will exceed $14 trillion—more than the GDPs of Germany, Japan, China and Great Britain combined. Every newborn baby will enter the world owing $40,000 on the national debt. Thanks, ladies.
What followed was a long and fascinating discussion among Art Bell, Fitts and callers about the horrendously complex business of subprime mortgages, collateral debt obligations and credit default swaps—investment vehicles that nobody in the financial community understood from Alan Greenspan on down to a broker in the local Merrill Lynch office who foisted them off on his sucker clients.