With Nathan Lipson

In the stricken U.S., rocked by serial accounting scandals, dark dealings between bankers, analysts and accountants, and criminal investigations into some of the biggest names and corporations, Alan G. Hevesi is a unique phenomenon. While the rest of corporate America is leaning toward greater accountability among managements and enhancing the independence of supervisory bodies, while expanding the circle of decision makers and power brokers, Hevesi retains enormous power in his own two hands.

His status is all the more remarkable because of his feisty, well-publicized battle against corporate corruption. Hevesi was among those pressing Richard Grasso to resign as chairman of the New York Stock Exchange. He also spearheaded some of the greatest civil suits against corrupt corporate practices.

Formally, his title is state comptroller of the State of New York. He commands a workforce of 2,400 people. But his real power derives from his position as sole trustee of the NYSCRF, or the New York State Common Retirement Fund. He is the man who makes the decisions regarding the fund, free of pressure from any managerial board. There is an advisory board, but it is powerless. "I have a great, big and wonderful job," as Hevesi himself says. "I don¿t report to anybody."

The NYSCRF is enormous, by American standards too. One of the biggest pension funds in the United States, it has $105 billion worth of assets, second only to CalPERS of California. And all that economic clout lies under the sole sway of Hevesi.

Few private sector managers have access to resources like that, and their moves are restrained by boards, auditing committees, regulators, and a well-oiled system of checks and balances. In the case of NYSCRF, Hevesi is the board, the auditor, the sovereign, the brake and the check. "Only the law restricts me," he says modestly.

Few Israelis knew his name, and those were mainly venture capitalists. But his recent decision on behalf of NYSCRF makes him one of the most influential people in Israel's economic sphere. Hevesi decided that NYSCRF will be investing $200 million in Markstone, an investment fund that means to raise $500 million for investment in Israel alone.

An investment that large by a body like NYSCRF is one of the best things that could happen to a fund manager. It is far from usual that the second-biggest fund in the U.S. decides to pledge 40% of the amount the fund seeks to score. It is even rarer for a major U.S. fund to invest that kind of money in a single country, with a tiny economy that is wracked by internecine bloodshed and political instability. But Hevesi's special status allows him to get away with decisions like that.

Fielding mudballs

Markstone was established by U.S. businessman Elliot Broidy, former Lehman Brothers Israel general manager Ron Lubash, and a former VP at Arison Investments, Amir Kess. The fund is slated to become one of the biggest and most liquid players in the Israeli scene. Its success was apparently the main reason the U.S. fund Carlyle withdrew from a plan to launch a similar fund in Israel, with $250 million capital pledges.

Hevesi shrugs off criticism of his choice to invest that much in Israel, via a single investment vehicle. He's used to fielding mudballs.

Alan Hevesi is the grandson of the Chief Rabbi of Budapest. After World War II broke out, Hevesi's father, an economist at the Hungarian embassy in the U.S., acceded to the grandfather's request and remained in the U.S., never returning to Hungary. Hevesi, born in the U.S., spearheaded several battles to regain Jewish assets held by European banks, most notably Swiss banks. Hevesi won, but not before being slammed by critics for taking actions that were a matter of national foreign policy.

He chose to invest in Markstone in order to expand beyond the confines of the U.S. economy. Its phenomenal 7.2% GDP growth in the third quarter of 2003 left him unmoved. "That growth was nothing more than a sugar rush," he says, that might leave traces over the coming year. He anticipates a downturn after the next presidential election, as happened in the past when debts accrued during the Reagan and Bush eras triggered recessions. "The American economy stands before a downturn, as that growth was financed mainly by a steep increase in debt, sucking the oxygen out of the economy," he warns.

The U.S. national debt has been constantly expanding for 20 years. The year 2000 brought the fastest growth in the superpower's history, and the debt seemed to be stabilizing. But come 2001, it resumed its expansion, and faster at that. From September 2002 to September of this year, it grew by almost 9%, the steepest climb in a decade. That national burden is nearing $7 trillion, more than 60% of the United States GDP. And about 23% of that debt is not held by American hands. In parallel, savings by households has plunged, now threatening to fall below 3%.

The charmer meets the vacuum in Israel

If the U.S. debt deters him, why doesn't Israel's?

Israel suffers from a lack of competition, Hevesi explains. But after meeting with Finance Minister Benjamin Netanyahu and Industry minister Ehud Olmert, he gained confidence that Israel will make every effort to pull down the barriers and enable growth. "There was a vacuum in the Israeli market," he describes, and Markstone is stepping into that vacuum.

What sectors interest Markstone? "The traditional ones, Bezeq, construction. Nobody will compete with us. I¿m convinced we'll see higher yields than what we were used to in the past."

He professes to be unworried by investing a sum that large in a single vehicle investing only in Israel. It isn't risk free but it's also a great opportunity, Hevesi says: Israel's economy is flourishing, and Markstone is coming in for the long run. Nor does it faze him to be the trailblazer.

Reinforcement for his stance comes from one of his staffers, David Loglisci, a former investment banker at Salomon Smith Barney and today director of alternative investments for New York's state comptroller. "Attitudes toward Israel are completely misguided," Loglisci says. "When you watch CNN's reports on Israel, you get the impression it's a war zone." But he visited and felt more comfortable in Tel Aviv than in some areas of New York, he continues. Israel has suffered from a capital flight, so assets that trade in U.S. at double their cash flow trade at ten times their cash flow in Israel. "If I could I would put my own money in the fund," he says.

What kind of return do they expect? Loglisci: "25% gross, which is 20% net."

How was contact with Markstone established? Hevesi: "The first contact was with Broidy. The one who introduced us was the comptroller of Buffalo."

Broidy waited for him to take the job and then told him, "I was glad to hear you're both a Zionist and a comptroller," Hevesi relates. "In general, after I became state comptroller for New York, a lot of people find me charming."

Hevesi felt the lure of politics from a tender age, though his first real exposure came through academia. Hevesi, who holds a doctorate in public law and administration from Colombia, taught at Queens College and stresses that he received tenure there.

In 1971, he was elected to the New York city council for the Democrats, a job he kept until 1993. That year he took over as New York City's comptroller, a seat he held for eight years.

He has always dwelled in Queens, a borough with a high proportion of Jewish residents. All the homes he ever lived in are all of two miles apart, he smiles, and to complete the patriotic, pastoral picture, he adds that he's been married to the same woman for 36 years.

Going to bat for Holocaust victims

Taking advantage of his connections and clout as New York City's comptroller, Hevesi threatened to stop doing business with Swiss banks that were preventing access to accounts of Jews killed in the Holocaust, unless they reached an arrangement. In 1995, they did, but the signed agreements fell through due to pressure inside Switzerland that forced the banks to renege. "A few weeks later we declared a new plan," Hevesi explains, to persuade the banks to reverse yet again. "I told them, simply, they had stolen property."

The second round went better. In August 1998, another arrangement was signed, in which the two biggest Swiss banks, Credit Suisse and UBS, agreed to transfer $1.25 billion to make the claims go away.

During these struggles, Hevesi took a lot of criticism. Some said he was abusing his official power to pursue aims that could be called, at the least, narrow. U.S. foreign affairs officials complained that Hevesi seemed to be intruding in their turf.

In 2001, wreathed with the laurels of victory over European banks and with praise from the American officials who had lambasted him, Hevesi turned to pursue his next political goal. He wanted the Democratic nomination for the New York mayoralty.

He lost the 2002 primary but lost no time marking his next goal ¿ the office of the New York State Comptroller. Of the state, not the city. And he won. "I slaughtered my opponent by four points, 46 to 50," he jests. The victory was not an easy one, nor was it cheap. His campaign cost around six to seven million dollars, and was financed by 5,000 donors.

While his jobs grant him tremendous financial clout, his primary interest remains politics. Throughout his career he chose his battles as a politician would, from taking on the Swiss banks to ousting Grasso.

His current war against corporate corruption bears all the marks of a political fray. As the sole trustee of the second biggest pension fund in the U.S., his struggle touches on the professional sphere, and attracts not only national but international interest. That could well help him up the political ladder later on.

Hevesi says he's fighting corporate malfeasance at three levels. One level is to impose pressure via the SEC to legislate, the second is to promote legislation, and the third is to plug loopholes in the Sarbanes-Oxley law enacted in 2002 to improve auditing practices.

Hevesi also acts on behalf of a coalition of pension funds that together manage half a trillion dollars worth of assets. The coalition was one of the most strident critics of Richard Grasso, whose resignation Hevesi openly demanded back in mid-September. In his statement, Hevesi wrote: "Unfortunately, he has lost the ability to implement needed reforms at the NYSE and to regulate and monitor its members and listed companies."

Hevesi's fundamental position is that the corrupt practices are undermining the public's faith and causing massive losses to the NYSCRF and to other investors.

The harbinger of the debacle that so incensed Hevesi was Enron, whose creative and fraudulent accounting practices blew up in its face in October 2001. That bombshell was closely followed by Global Crossing, WorldCom, Xerox, Qwest and Tyco. The burgeoning number of cases, coupled with the suspicions falling on investment banks and accounting firms, dented confidence that the supervisory institutions can uphold the law. The upshot was a deep crisis of faith in the soundness of the U.S. economy and financial markets.

On August 20, 2003, as New York State Comptroller, Hevesi published a statement entitled, "Corporate corruption cost New York State's economy $2.9 billion, cut tax revenues by $1 billion and decreased pension fund value by $9 billion." His figures, based on a study by the Brookings Institution in August 2002, described the damage caused to the U.S. economy by corporate corruption.

The "Cooking the books¿ study was enlightening. Brookings estimated that corporate corruption cost the U.S. economy $35 billion in the first year after the finagling was uncovered. Hevesi's office calculated that the damage done to New York was $2.9 billion, partly due to losing a billion dollars worth of tax as capital gains evaporated.

Of the $15 billion loss the NYSCRF was caused in the fiscal year ending in March 2003, about $9 billion was caused directly by the accounting and management scandals. That impacts Hevesi's office directly, as sole trustee of the fund. The fund commits to meeting defined benefits for retirees, and if the fund underperforms, the insurer must make up the difference out of pocket.

Armed with these assessments, the NYSCRF filed a class action motion against many of the companies found to have indulged in corrupt practices. NYSCRF is the chief plaintiff against WorldCom, co-leading plaintiff against Chubb, primary plaintiff against Bayer, and has asked to receive leading status in the suit against Global Crossing too.

Why are there no Israeli Enrons? Hevesi: "There could be two reasons. A, Israeli supervision is the best and managerial quality is good."

And the other? "B is everything that isn't A."

"There are two kinds of capitalism," Hevesi sums up the interview. "There is capitalism of total laissez-faire, where the government plays no part and the big ones eat up the little ones, then the children of the little ones."

And the other? "The other is the American kind, enabling the existence of a financial industry, but with regulation."