From the November 2008 issue of Investment Advisor • Subscribe!

November 1, 2008

Catching Up With: Ken Fisher

Over the past few years, we've checked in with Ken Fisher several times to see how the founder and CEO of this largest of RIA firms, Fisher Investments, is investing, or acquiring smaller RIA firms, or maintaining its low client turnover rate, or fostering specialization among its 1,200 employees. We thought it might be interesting to hear how Fisher is coping with the crisis, where he might see opportunities, and how he thinks we got into this mess. Not surprisingly, Fisher was not at a loss for words or opinions in an hour-long exclusive interview with Editorial Director Jamie Green during a visit to New York on October 10.

On how the crisis happened and the reaction to it.

The notion of interbank lending process simply freezing up--no one saw it coming; we didn't see it coming. I only figured it out three days after the AIG deal [when I asked:] How in the hell do you take the same people with the same mindset and reconcile the Lehman Brothers deal, the Fannie and Freddie deal, the Bear Stearns deal, and then the AIG reaction--what held them all together? In every instance, what holds them together is that Bernanke and Paulson chose to subjugate non-bank financial services for bank security at every turn. The primary counterparties in Lehman were not banks; the primary counterparties in Bear Stearns, in Freddie and Fannie, in AIG, were banks. Everybody can see that investment banking as we know it is gone; but it was a planful process they had in mind, not a mal-intended process.

On the roles of Secretary Paulson and Fed Chairman Bernanke.

I never figured they'd behave like this. The history of Treasury secretaries is that they're little pissants compared to Fed chairmen. I mean, try and think of five Treasury secretaries that were worth anything, and don't count Alexander Hamilton! To see Bernanke act as second fiddle to Paulson is a mind-blowing testament to Bernanke's fecklessness.

The Fed has several powerful tools that it hasn't used. When banks fail, by definition they had inadequate reserves. So when you have a bunch of banks failing, you drop reserve requirements.

The other thing you do [is] manipulate, planfully, the spread between the discount rate, the Fed funds rate, and the T-bill rate...The way to end the liquidity crisis is to drop the discount rate relative to the Fed fund rate, which then motivates banks which are troubled to go to the discount window, plead baby shoes, get cheap money at the discount window, and then turn their rear ends around and lend it out at the Fed fund market rate because it's free money. You borrow at the discount window cheap, you lend it to the safest bank you know, and now that bank has excess reserves, and they lend it out. The way the Fed has always unlocked liquidity freezes is to increase the spread between the discount rate and the fund rate. If you want to get more extreme, drop the discount rate below the T-bill rate, and now you have a riskless transaction.

In my view, Paulson is evil. Bernanke isn't evil, he's just not doing what he's supposed to do....There's no way that three years from now Goldman doesn't gain market share because of this, materially...

The effect of the crisis on our industry, and for clients.

All of our lives, the wirehouses have traded clients with each other, and a few have rippled off into independent firms and RIAs, and that's why they've grown. The challenge for the advisor is not that the other place is a better place to go, just like PaineWebber wasn't a better place to go than Merrill Lynch.

This is going to affect people just like when you find out your spouse has been cheating. You may be able to forgive your spouse for the indiscretion if your spouse is serious about repairing the marriage, but you'll forever be more skeptical. That's the new car smell. When the person gets a divorce, and finds someone new, they can pretend that they don't have those same concerns about the new person, because the new person has the new car smell.

If you had a balanced account or all-equity account [for your clients], which is most of the industry, your client is going to look at you like you were the spouse who cheated.

Coming out of this, the weak will get killed and the strong will pick up market share. How do you get strong? Keeping your termination rate from going up too darn much--no one's termination rate is going down after this, unless you had everyone in all cash--and getting new clients.

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