By Suzy Kenly
Photographs by Ken Schles
Harry Wilson is gunning for one of the toughest jobs in New York: cleaning up Albany’s finances. A former partner at Silver Point Capital, Wilson is running on the Republican ticket for the office of New York State Comptroller. If he wins, Wilson faces a Sisyphean task. The state’s $130 billion pension plan, the New York State Common Retirement Fund, has been tarnished over the so-called pay-to-play scandal, and New York State Attorney General Andrew Cuomo has said the pension was turned into “a criminal enterprise” in his indictment of former pension officials involved in the scandal.
Albany has certainly seen better days. The pension’s former chief investment officer David Loglisci was charged with shaking down private equity and hedge funds, ordering them to pay kickbacks to a placement agent run by a friend of Alan Hevesi, the former comptroller, in exchange for an investment from the pension. Loglisci pleaded guilty to a corruption charge in March. Hevesi, Loglisci’s boss, resigned in December 2006 and later pleaded guilty to defrauding the government.
There is little doubt that a change is needed in Albany. But given the populist fury against Wall Street, a former hedge fund manager who started his career at Goldman Sachs may not be their first choice for comptroller. Wilson, who is running against incumbent Thomas DiNapoli, thinks he has exactly what the state needs: a background in finance, investment experience and knowledge of what makes the markets tick.
Wilson has his critics—including DiNapoli’s campaign manager, who publicly derided Wilson’s background. But Wilson argues that DiNapoli’s lack of financial experience is exactly why DiNapoli is wrong for the job. (DiNapoli failed a pop quiz on basic economics administered by a New York Post reporter in 2007.)
While most of his early working life was spent in finance, Wilson is not brand-new to public policy. He most recently served as one of the top advisers on President Barack Obama’s automotive task force, which led to the successful restructuring of General Motors in 2009. He was instrumental in the process, which is now being described as a historic component of the administration’s sweeping industry overhaul.
Wilson says that if he is elected, he will restructure the state pension’s entire portfolio, improve professionalism in the pension fund offices in Albany and form a group of retired successful investors to advise him.
Last month staff writer Suzy Kenly caught up with Wilson to discuss his plans for revamping the pension, how his background as a hedge fund manager benefits him, and why he thinks hedge fund managers should become more involved in politics.
What went wrong with New York’s pension fund, and how will you fix it?
There were several problems. One was complete theft of pension taxpayer resources. Second was a complete breach of trust in the eyes of the public, which has to be repaired. It turned off managers from dealing with pension funds. A lot of managers said, “Hey, I don’t want to deal with these guys. I know they’re trying to shake me down. I’ve got a good business. Why would I subject myself to that form of conduct?” There are a lot of folks who didn’t want to deal with that. In creating a highly professional and ethical investment practice, it will open the door to folks who wouldn’t have gone for pension money recently.
Thomas DiNapoli’s campaign manager said: “The comptroller doesn’t need a lecture on fiscal policy from someone whose only experience is making millions as a hedge fund manager and crafting a multibillion-dollar taxpayer bailout.” What is your response?
I actually found his criticism quite funny. What he’s accusing me of is being a successful investor. The whole job of the comptroller is to manage the pension fund, which, anywhere outside of Albany, one would expect would require investment expertise. Only in Albany is that not a prerequisite for the job. What he did is call me a successful investor, so I should thank him for that.
Secondly, he accused me of leading this highly successful restructuring of GM, which is exactly what I intend to do with New York state. I will use the audit power of comptroller to go after wasteful spending and fiscal mismanagement, just like I did with GM. Now that we’ve gotten through the process, GM is growing. It’s gained market share, it’s reopened plants, it’s hiring employees, it’s profitable on an operating level, it’s paying back money to the government. It happened because we had a successful restructuring. And once New York goes through that, we’ll be able to grow again; attract businesses, jobs and people; and be able to reclaim our lost heritage as the Empire State.
We’re going to present a very stark contrast between a career politician versus a self-made businessperson and restructuring expert, and in November we’ll ask the voters of New York what’s more necessary and what’s more valuable at this point in history. I very much look forward to that debate.
If you are elected as comptroller, how will you reorganize New York’s $130 billion pension?
I’d look to reassess the entire portfolio top to bottom, in terms of both asset allocation and actual investments. The primary challenge with the current portfolio is that it hasn’t been rebalanced in a material way in years, despite the market volatility we’ve gone through. For large liquid investments, more lower-fee index positions make sense, and within the alternative portfolio, I would really assess performance—who should stay, who should go—and also begin branching out to new investments.
What strategies would make sense for the pension? Why?
We’re in a period of significant volatility and risk with issues in Europe and China, so I think market-neutral strategies would make sense for the fund, likely for the next 24 months. I also think some strong short sellers make sense too. That would be good protection for the portfolio overall.
How would your experience as a hedge fund manager benefit you in this role?
The skill set of any investor has to be to objectively assess the facts, work through them, and based on those facts, figure out what the right outcome is and make judgments. That’s a useful skill set for many walks of life but particularly for investing. Much like I had to make decisions on asset allocation and individual stock and security selection, working with different managers and different funds, that’s very similar to the skills I would need to run the pension.
The state pension fund has invested $3.6 billion of its portfolio in hedge funds, and plans to increase that allocation to $5.2 billion, or 4%, in the next few years. Would you increase that percentage?
I’m looking to increase the number of high-quality managers. The fund hasn’t been guided by an investment professional at the top, so I suspect they have not done the best job looking for the best-quality managers. If there are enough high-quality alternative managers, then yes. If there aren’t, then we wouldn’t. I don’t want to stretch and overallocate. I’m more interested in finding the best managers that are out there. It depends on a case-by-case basis. Directionally, is 4% the right number? I don’t think we should stretch to get to 4% if we can’t find high-quality managers.
What makes a manager high quality? Should the pension invest only in the huge multibillion-dollar brand names, or are there some start-ups that fit this category?
I think it’s both. Because of the size of a pension fund, you have to have investments with large managers. You certainly need some larger funds in the mix, but a lot of the best results come from younger emerging managers who have had successful track records at previous funds but are now branching out on their own. That should be a portion of the fund’s assets.
Investing is hard work. It’s hard to find great investments, and those with smaller and more focused strategies often can have outsize success. You have to balance that with a manageable portfolio.
I would look at historical track records and where I think they’re going over time, and whether they either maintain a consistent strategy or develop new niches, or have a real competitive edge in a particular asset class or business.
Should the pension invest in hedge funds via funds of funds or go direct?
In recent years pensions have tried to do more direct investing and less through funds of funds. It depends on the asset class itself. Certain asset classes lend themselves to very accomplished managers. I would not need the expertise of funds of funds to make an assessment. But for esoteric assets or other areas where I have less expertise, funds of funds could be more valuable. I haven’t done a lot of investing in Asia, for example. Some of those markets are a lot trickier.
You have said you would like to create a committee of retired investors who would help guide the comptroller’s investment decisions. Why?
Every well-managed investment organization in the world has a person on top that’s accountable to investors and an investment committee. I want to create something as close to that as possible. I would be serving as head of the fund and the person who’s ultimately accountable for performance, but I would also have a world-class set of retired investors from all walks of the investing public who could advise me. They’d have to pledge to remain conflict free.
It would help professionalize the office, create greater investment judgment and also serve as an ethical construct, rather than this concept of a politicized ward made of political appointments, which does nothing to help the investment process—arguably it hurts investment performance—but also creates all of these ethical risks. You want a bunch of folks who are doing it as a public service.
What do you mean by conflict free?
For example, if you’re a partner in a fund, your personal trading is highly restricted. When I worked at Silver Point, I wasn’t able to trade a lot of investments without approval from our compliance officer. That was done intentionally. Our first priority had to be to our investors. Any personal trading had to be done through approvals.
Same thing with the pension. I’d create a situation where they couldn’t engage in personal trading that wasn’t approved by a compliance officer because you don’t want to create a situation where there will be a potential conflict.
The Securities and Exchange Commission has accused Goldman Sachs, your prior employer, of fraud. If you were comptroller, would you direct the state to redeem from Goldman Sachs Asset Management or not allocate to it until the case is settled?
You have to look at the case. Obviously, the most important thing is protecting the pension fund. If you think an investment poses material risk, you should divest. However, there are inaccurate and false accusations made. You have to determine the facts to see if there is actually a risk. Goldman has 25,000 employees or so. If Goldman were convicted of a violation that affected the pension fund’s assets, that’s a serious problem. But if the problem comes down to a handful of individuals, that’s different.
How is it different?
The comptroller’s primarily responsibly is protecting pension fund assets. If there’s any risk, it becomes a judgment call, whether or not the problem creates a risk for the pension fund. That’s what you have to determine. You have to look at the people convicted of wrongdoing and figure out if they were related to the pension fund, and if so, that is cause for divestment. If [the individuals accused] had nothing to do with the pension, if there is no connection, then it doesn’t seem to affect the risk. However, if there is direct risk to the fund, there shouldn’t be an investment.
Should there be a policy on these matters?
If there’s a clear violation of the law, that should be governed by policy. But areas where there’s a question, that depends on the judgment of the comptroller. That’s why you need people with experience to assess the risk.
Does New York have a policy like this?
Not that I’m aware.
Why is it so important for hedge funds to get involved in the political scene?
A lot of hedge funds are afraid of getting involved in politics. They see the mood of the environment and they hide. That’s exactly the wrong answer. The business community as a whole has to be more
engaged in the policy debates in Albany. We have the least business-friendly state in the country. Taxes are too high, which stifles innovation and investment, and it drives out a lot of people. It is unbelievably difficult, painful and expensive to set up a business in New York, and I would argue it is economically irrational. Much of the hedge fund community in Connecticut [where Silver Point is headquartered]
exists because of the tax and regulatory burden in New York. If things were different, much of that community would exist in Westchester.
This year is the critical year to get engaged. That’s why I’m running. I think we’re at a tipping point in our state. The fiscal crisis is so significant, we have to deal with our structural problems now.
How long will that take?
Some people say decades. But my feeling with reconstruction is to do it quickly. Take GM. When we showed up, the GM turnaround plan was projected to last until 2014. I said, “Guys, you cannot do a turnaround over multiple years. You have to assess the problems and quickly cut through it.” It gets people through the pain much more rapidly and allows them to regrow and flourish. So we made a lot of tough decisions over the course of 2009. The result is GM is already growing in 2010. That’s because we cut to the core of the problem and allowed the company to regrow.
You’ve said that although you don’t think the government should be involved in regulating the banks, the nation can’t go into a deep recession. Do you think the Wall Street bailouts have helped the economy?
When the markets were in free fall in February and March 2009 and the market was psychologically paralyzed, I think it was necessary for the government to provide some sort of safety net to restore market confidence. The degree of fragility in the capital markets was unprecedented. Something needed to be done to stabilize things. That being said, there were a lot of mistakes that were made, including some of the things that got us into this mess. Government policies have institutionalized the concept of “too big to fail,” which I think is a tragic mistake for the markets and the financial system.
Does this mean you think it was okay for the government to let Lehman fail?
The more time goes on, the more the opinions on Lehman change. Creating an environment where entities can fail is important for the markets in general. We have to get out of this “too big to fail” mentality for businesses. With regards to Lehman, I think as significant as the consequences were, that’s capitalism.
Now, people now think that the government won’t allow a bank to go bankrupt if it’s of a certain size, and they’ll think the government will step in every time. That is more troublesome. What needs to be done is to focus on the problems that led to the crisis, which were excess leverage and the interconnectedness of large institutions.
What should the government be focusing on with the new regulation?
Not allowing as much leverage to creep into the system, which would protect and reduce the probability of catastrophic collapse. One problem was the interconnectedness of the system.
No one knew what would happen if AIG couldn’t unwind its derivatives contracts. Creating more transparency and reducing the risk of the interconnectedness of a lot of the large firms will help facilitate a better-managed process.
Are the bailouts helping pension funds, like New York’s?
Anyone who held securities in institutions that benefited from government intervention benefited, whether they were GM bondholders or Citigroup shareholders.
