Caisse's Rousseau to face grilling on ABCP investments – Update

22 November 2007
A lighter look at the subprime mortgage mess
For those who are still confused by the ABCP/subprime mortgage crisis, we are delighted that the National Post’s Jonathan Chevreau has enthusiastically joined the Long Johns fan club, writing enthusiastically about the humour and noting that “the answers are honest, insightful and screamingly funny”.

November 28, 2007
Quebec’s Caisse says has C$13.2 billion of ABCP
MONTREAL (Reuters) – Quebec’s public pension fund manager, Caisse de depot et placement, said on Wednesday it has C$13.2 billion of exposure to nonbank asset-backed commercial paper.
Testifying before the finance committee of the Quebec legislature, Caisse Chief Executive Henri-Paul Rousseau said less than C$1 billion of that amount represents exposure to the troubled U.S. subprime credit market. Rousseau said the Caisse expects to take a C$500-million write-down on its subprime assets at year end.
Rousseau said the Caisse, which is leading a group of Canadian and international banks seeking a workout to their investments in the C$35-billion nonbank asset-backed commercial paper market, said the Caisse, which has C$143 billion of net assets, is not facing a liquidity crisis.
November 26
Caisse will face tough questions
DON MACDONALD, The Gazette
“What were they smoking?” That’s the question Fortune magazine asks on the cover of its latest issue about Wall Street banks and the billions of dollars of losses they’ve run up on complex credit securities. The same question could be asked about the Caisse de dépôt et placement and its reported $14-billion exposure to Canada’s frozen asset-backed commercial paper market.
The public shouldn’t expect too much in the way of new information about this mess from Caisse CEO Henri-Paul Rousseau when he appears before a legislature committee on Wednesday.
For one thing, Rousseau’s appearance has been conveniently scheduled for a time – 8 p.m. to midnight – when media coverage will be limited by deadlines for evening telecasts and the next day’s newspapers. For another, Rousseau likely won’t be revealing the key piece of information that opposition committee members will be demanding: How much does the giant pension fund manager stand to lose on the ABCP fiasco?
Of course, that won’t stop opposition parties from making the most of the opportunity to grill Rousseau before the cameras. The ABCP problem is so poorly understood by the public that it provides a blank slate upon which the opposition parties can write what they will in an effort to embarrass the Liberal government.
Rousseau isn’t likely to reveal an estimate of potential losses because the Caisse doesn’t have to officially value its assets until the end of the year.
And between now and then, a committee restructuring the non-bank ABCP market will have reported with its analysis of what the paper is worth based on the quality of the underlying assets.
The committee, headed by former Imasco Ltd. chairman Purdy Crawford, has so far kept a tight lid on that information for fear hedge funds could exploit it to the detriment of Canadian investors. But Crawford has been making encouraging noises about the asset quality.
… But the losses could be much heavier … given that the National Bank has taken a heavy writedown of $575 million, or 25 per cent of its ABCP holdings.
Whatever the final figure is for the Caisse’s losses, this saga has already become a major embarrassment for Rousseau and an unfortunate blot on his admirable record of turning the pension-fund manager around after the excesses of former CEO Jean-Claude Scraire’s reign.
… And the ABCP saga is all the more serious because it can’t be blamed on misguided political interference, but rather on a failure in the Caisse’s core mandate – prudent risk management.
The full story of how the Caisse became so exposed to this asset class – about 10 per cent of its $140 billion in assets if media reports are correct – won’t come out on Wednesday. But out it must come.
Could a clue lie in the close relationship between the Caisse and the National Bank, a big player in the non-bank ABCP market? Or can it be traced to the Caisse’s aversion to dealing with the Bay Street banks?
What is clear is this problem comes at a particularly inopportune time for Rousseau. Pension fund managers are facing the prospect of their first losing year in five because of poor stock-market performance and the impact of the soaring Canadian dollar on the value of investments denominated in foreign currencies.
The latter factor could weight heavily on the Caisse, which has 37 per cent of its assets abroad versus about 30 per cent for the typical Canadian pension fund, according to Jean Bergeron, principal in the asset-management practice at Morneau Sobeco.
If you aren’t satisfied with what you hear from Rousseau, be patient. The post mortem on this affair is only beginning.
Time for Caisse to justify actions
Sean Silcoff, Financial Post
22 November 2007
MONTREAL -The hulking Henri-Paul Rousseau can be intimidating when he doesn’t like your question or opinion. That gives him the right stature to head the Caisse de depot et placement du Québec, the mighty provincial agency that manages money for 20 pension and insurance funds. But when he appears before a government public finance committee next week to explain its role in the nonbank asset-backed commercial-paper (ABCP) crisis, Mr. Rousseau should be cut down a few sizes.
Before he arrived in 2002, the Caisse had a history of making bad investment choices, informed by politics, regional economic development priorities and the whims of managers. The bright and commanding Mr. Rousseau led changes to focus on improving returns, shrinking the bloated organization and improving governance and risk management.
Yet, five years on, the Caisse is dealing with its biggest crisis, and it has itself to blame again. According to unconfirmed reports, the Caisse has $14-billion in non-bank ABCP, short-term IOUs backed by credit-card, mortgage and car payments and such murky instruments as collateralized debt obligations — equal to 10% of net assets under management at the end of 2006.
The Caisse says it won’t disclose its exposure until next year, but there’s no doubt the amount is huge: It was the top backer and client of Coventree Inc., the leading issuer in the $35-billion non-bank ABCP market.
The Caisse and other investors are now trying to restructure the paper — frozen since August — but investors have started to take writedowns of as much as 25% of the value of the paper. That suggests the Caisse could face a writedown of $3.5-billion, which would exceed losses on past goofs, such as its investment in Videotron ltee or misadventures in Nortel Networks Corp. stock during the tech bubble.
The first question committee members should ask is: If the number is correct, how did a fund manager charged with investing pension money have 10% of its assets in this stuff ? Was the promise of 10 extra basis points worth eschewing safer bankers’ acceptances and T-bills? Were those charged with allocating assets ignorant, deluded or negligent, not to mention inadequately supervised?
As the Financial Post has reported, non-bank ABCP in Canada carried risks spelled out by Standard & Poor’s and the Bank of Canada, namely that in a credit crunch, banks that backed issuers could walk from funding commitments to roll the paper into replacement securities. That made it riskier than suggested by DBRS’s high credit ratings. The agency has been vilified for its role in the crisis and some investors have pleaded ignorance about the loophole. But, as a sophisticated player, the Caisse and its well-paid money managers should have known the risks. If they didn’t, the committee members should ask, ‘Why not?’
More questions: Why were the Caisse’s short-term investments so concentrated in one corner of the market? Did its risk managers apply the correct discount to the paper, given the inherent dangers? Was the risk system geared to flag risks in what was supposed to be such a highly rated part of the portfolio?
And what led to the aggressive drive for that extra bit of yield? Was the Caisse overcompensating for the past or trying to keep up with Ontario Teachers’ Pension Plan, given that politicians and the media make so much of the results reported to the National Assembly each February and the relative performance?
Finally, a deeper question: Is the Caisse the right model for investing Quebec’s pension assets? Pension funds aim to balance expected risks/ returns against obligations to pensioners over the long-term. The Caisse, as an asset manager only, is one level removed from that. Is it focused enough on getting the balance right, or is it too obsessed with beating the peer group? That may open another can of worms. But it still leaves plenty of explaining for Mr. Rousseau to do.