In early 2007, Ted Eliopoulos took over as head of the massive real estate investments division at the California Public Employees' Retirement System, just as global real estate markets were about to implode.
Housing prices were sliding, subprime mortgage lenders were declaring bankruptcy, and financial markets were going haywire — and Eliopoulos was saddled with some extremely risky bets the nation's largest public pension fund had made on real estate.
With the portfolio poised for disaster, he had two choices: Hit the brakes or step on the gas.
Eliopoulos cautiously tapped on the brakes, but it was too little too late — CalPERS' real estate portfolio went off a cliff. And kept falling. By the end of September 2009, the portfolio's value had plunged by almost half, wiping out more than $9 billion. CalPERS has yet to recover.
The ventures "were disasters," Eliopoulos conceded recently. "A whole series of opportunistic investments collapsed during that time period."
Eliopoulos' cautious instincts and methodical investment style now matter more than ever.
Last fall, CalPERS' governing board installed the 50-year-old former Ivy League tennis star as its new chief investment officer, with a salary this year of $717,000, including incentives.
He may be the most important person California taxpayers have never heard of.
Charged with paying benefits to 1.7 million current and future retirees, CalPERS has the power to compel government employers to make up any shortfall in its $300-billion fund. That could trigger draconian cuts in spending on schools, street repairs and the like and force big property tax hikes and even municipal bankruptcies.
As of June 30, the fund was able to meet only 77% of its obligations. That means it can demand the state and local governments — taxpayers — to give it more money to bring it back to the 80% level pension experts consider adequate.
In turning to Eliopoulos, a consummate insider, CalPERS' board made what is in some ways an odd choice.
Trained as a lawyer, not an investment professional, Eliopoulos has spent much of his career in state bureaucracies and had never directly managed stocks or bonds — more than 70% of the total CalPERS portfolio — before being named interim chief investment officer a year ago.
His area of expertise had been in buying, selling and managing real estate, which makes up only 10% of CalPERS' portfolio and remains a rehabilitation effort.
The biggest task ahead for Eliopoulos may be to steer the fund through a financial landscape that will test the skills of money managers everywhere as the Federal Reserve, as most economists expect, starts to raise its benchmark interest rates by mid-year.
Eliopoulos must earn ever-higher yields from its massive portfolio. Some believe even the most deft investor can't keep the system solvent over the long term. But his supporters said he's up to the task.
Former state Treasurer and Democratic Party Chairman Phil Angelides called Eliopoulos, whom he mentored, a methodical thinker and steady manager.
"He's not threatened by having good, strong people around him," Angelides said.
Eliopoulos won grudging respect on Wall Street and from pension-fund watchers for a decision in September to shut down CalPERS' complex and underperforming $4-billion investment program in hedge funds.
It was a bold move in the hidebound world of pension investing, where maintaining good relations with Wall Street is considered a priority. CalPERS paid hedge funds $135 million in fees in its fiscal year ended June 30.
His lack of stock-and-bond experience may matter less than his ability to manage the massive investment operation that includes 400 in-house staffers and dozens of highly paid consultants and advisors, said investment professionals.
"It's perfectly possible to be a very effective leader even if you don't have all the experience in the weeds," said Michael Rosen, a principal at Angeles Investment Advisors, which advises institutional investors.
One CalPERS board member, J.J. Jelincic, isn't so sure Eliopoulos can do the job. Jelincic, who worked under Eliopoulos in the real estate division, told Pensions and Investments Magazine in September that Eliopoulos "doesn't have the temperament or the management skills" to be chief investment officer.
He also accused his former boss of relying too much on the advice of consultants, making the wrong decision to increase CalPERS' exposure to riskier non-core real estate assets before the financial crisis and playing favorites with employees.
Jelincic, who was recused from voting on his former boss, told the Los Angeles Times that the quotes were accurate, but he declined to comment further.
Jelincic's remarks drew a formal rebuke from the board, which called them "unfortunate" and a breach of board governance rules on "civility and courtesy."
CalPERS President Rob Feckner said Eliopoulos had proved himself to be the best candidate through a rigorous process overseen by the national search firm Korn/Ferry International. He said Eliopoulos was a "good fit for CalPERS," clearly understood the organization's goals and had the experience and the demeanor to handle a high-pressure job.
"Being in a fishbowl is not easy for [some] folks," Feckner said. "It takes a lot of constraints and restraints. Ted showed he had good experience. He also had good political acumen, which is also important."
A native of San Mateo, Calif., Eliopoulos is the son of a public middle school teacher and an office assistant who were active in the area's Greek American community. After his graduation from Dartmouth College, where he was an All Ivy League doubles player, and the University of Virginia School of Law, he worked as a real estate lawyer for the white-shoe firm of Latham & Watkins in Los Angeles.
In the early 1990s, a politically active friend told him: "You're a Greek American; you should meet one of the most prominent Greek Americans in the state." Soon, Eliopoulos was introducing himself to Angelides, who eventually recommended him for a job in the Clinton administration's Energy Department.
Angelides, who was elected state Treasurer in 1998, hired Eliopoulos as a deputy treasurer in 2002 working under another aide, Anne Stausboll, who eight years later took over as CalPERS' chief executive and had a hand in the search that picked Eliopoulos as chief investment officer.
By the time Stausboll took over CalPERS, Eliopoulos already was knee-deep trying to sort out the pension fund's real estate losses.
When the crisis hit, the real estate portfolio was far more extended than even most public pension funds in the riskiest ventures.
It had, for instance, $1 billion in LandSource, a huge residential development north of Los Angeles; $500 million in a controversial project to uproot working-class residents in Manhattan's Peter Cooper Village housing project; and $3.4 billion on Centerpoint, a massive Chicago warehouse owner — all deals that included major construction and leasing risk, legal fights or other speculative elements.
"They were clearly the dumbest guys in the room [heading into] the downturn," Michael Kirby, chairman of real estate research firm Green Street Advisors in Newport Beach, said about those who made the initial investments.
Eliopoulos made modest efforts to rein in what most concede was an unusually freewheeling department.
In his first week on the job, Eliopoulos cut off funding to a high-profile plan for a 53-story condo and hotel in downtown Sacramento that was over budget.
On the other hand, his group went forward with a deal to buy the well-known KOIN Center office tower in Portland, Ore., in mid-2007 for $109 million. Two years later, CalPERS defaulted on a $70-million mortgage and walked away from the investment. He also generated controversy by proposing a strategic plan for real estate that would set aside a minimum of only 20% of the portfolio for safe assets — fully leased towers in strong markets, known as core holdings — and the rest for riskier and potentially higher-yielding properties.
Many described the plan as highly aggressive, but Eliopoulos said it was less risky than what CalPERS was doing without any strategic plan. But in 2011, he reduced the risk drastically by raising the core level to 75% to 100% of the portfolio.
Lately, the real estate group has begun to make up ground, modestly outperforming its peers over the three years ended June 30 with a total return of 12.4%, while the benchmark garnered 10.9%. CalPERS' real estate still trails the broader real estate markets by nearly 6 percentage points over the last 10 years.
William J. Wolfe, who manages and co-owns a Maryland real estate partnership with CalPERS, said Eliopoulos was thorough in assessing every aspect of a deal Wolfe brought him to buy a national portfolio of shopping centers in early 2009, a time when real estate had crashed and few had the courage to buy.
As a last precaution before taking it to the CalPERS board, Eliopoulos gave Wolfe his cell, office and home phone numbers in case Wolfe wanted to talk it over again. "'You know how to reach me,'" Wolfe recalled him saying. The deal has made a big gain, Wolfe said.
Eliopoulos now faces the bigger job of managing CalPERS' armada of consultants — its real estate managers alone charged more than $800 million in the last fiscal year — while steering the fund toward its crucial goal of earning 7.5% a year on its investments.
Some believe CalPERS' target, similar to those of most public pension plans, is simply unrealistic given historical stock market returns and the fund's growing obligations.
"Bottom line, they can't do it no matter who's at the helm," asserted David Crane, an advisor to former Gov. Arnold Schwarzenegger and critic of the pension system.
That doesn't faze Eliopoulos.
"We're a long-term investor," he said. "We try not to get distracted by short-term viewpoints and noise."