Monday, January 5, 2009

A Caisse of Risk Management Theater?

My first day back at work and already things are going crazy. The Caisse issued a press release today stating that Richard Guay will step down as President & CEO:

Pierre Brunet, Chairman of the Caisse de dépôt et placement du Québec, announced today that Richard Guay had decided, for personal reasons, to step down as President and Chief Executive Officer.

“The Board of Directors has accepted his resignation. It understands Mr. Guay’s decision and has thanked him for his contribution to the Caisse’s management since May 2008,” Mr. Brunet stated. The resignation will take effect on January 7, 2009.

Further to this decision, Mr. Guay will continue to work for the institution and, starting January 8, will hold the position of Strategic Adviser to the President and Chief Executive Officer, providing counsel on investment policy and asset allocation.

“The Caisse is pleased that it can continue to rely on his expertise and in-depth knowledge of the organization and financial instruments,” Mr. Brunet stated.

Mr. Guay was appointed President and Chief Executive Officer on September 5, 2008, having been responsible for interim management of the institution since May 30, 2008. He has worked for the Caisse since 1995, in positions that include Chief Investment Officer (2006-2008) and Executive Vice-President, Risk Management and Depositors’ Accounts Management (2002-2006).

The Caisse’s Board of Directors has recommended that the Québec government approve the appointment of Fernand Perreault as President and Chief Executive Officer for a period of six months ending July 7, 2009.

“The Board believes it is appropriate at this time to entrust Mr. Perreault with a transitional mandate. During this transition, Mr. Perreault and the senior management team will continue to implement the appropriate decisions so as to adapt the Caisse’s strategies to the changes caused by the global financial and economic crisis,” Mr. Brunet explained.

The Board of Directors will undertake the recruitment of a new President and Chief Executive Officer at the appropriate time.

René Tremblay, President and Chief Executive Officer of Ivanhoe Cambridge, a subsidiary of the Caisse de dépôt et placement du Québec, has also been appointed Executive Vice-President, Real Estate, to replace Fernand Perreault. Mr. Tremblay will hold this position on an interim basis from January 8 to July, 7, 2009, and in this capacity will be a member of the Caisse’s Executive Committee.

About the Caisse de dépôt et placement du Québec

The Caisse de dépôt et placement du Québec is a financial institution that manages funds primarily for public and private pension and insurance plans. As at December 31, 2007, it held $155.4 billion of net assets. One of the leading institutional fund managers in Canada, the Caisse invests in the main financial markets as well as in private equity and real estate. For more information:

Now if you ask me, something smells awfully fishy here. Rumors were swirling that Mr. Guay was not coming back but I think there is a lot more to this story than meets the eye.

Importantly, why did the Board decide to keep Mr. Guay on as a "Strategic Adviser to the CEO"? Huh? And what is the "appropriate time" to undertake recruitment for a new President & CEO?

What a disgrace! This is a multi-billion dollar pension fund managing the money of Quebec civil servants, teachers and all Quebecers who contribute to the Quebec Pension Plan.

I will tell you who should have resigned, the Board of Directors for their flagrant lack of proper supervision over the ABCP fiasco. Had they done their job properly over the last few years, this latest episode would have never happened.

Something really stinks over at Quebec Inc. and I hope politicians are going to finally wake up and conduct a full blown investigation including an independent performance and operational audit of the pension fund and all its operations. While they are at it, bring in a team of Certified Fraud Examiners to conduct a thorough fraud examination of all activities.

Talk about timing. Mr. Rousseau left right before the credit markets froze and all hell broke loose and guess who ended up being the fall guy for the Caisse's poor results?

Now the Board wants to wait for an "appropriate time" to recruit a new President and CEO. Are they going to try to time the bottom of the bear market to bring in some political hack who doesn't know the first thing about managing money or leading a huge pension fund?

I have written about this before. You can bring a monkey at the bottom of a bear market, right down all that ABCP crap off the Caisse's books, and he will look like an investment "god" as he rides the wave up. And the press will suck it all up and marvel at this person's supposed investment acumen.

The last thing the Caisse needs right now is some political monkey who doesn't know the first thing about risk management, money management and leading a pension fund.

Moreover, it's high time the Caisse starts recruiting and retaining talented individuals from diverse backgrounds that will add real alpha and manage downside risk.

This preamble is perfect for tonight's topic: risk management theater. A few weeks ago, 60 Minutes carried out a story on airport security where one expert called TSA screening "security theater".

As I watch pension funds losing billions, I think back at all the "experts" who thought they can diversify away all risks investing huge chunks of money into alternative investments without thinking about the systemic risk they were recklessly contributing to.

They were all guilty of fueling this alternative investment bubble and now they are reconsidering these alternative investments and buying property derivatives to hedge their losses.

Too little, too late! The damage is done. Pension funds (except for South Korea's national pension fund) were heavily exposed to equities and alternative investments and they got clobbered in 2008. And 2009 will not look any better, especially for alternative investments.

You can expect the downturn in commercial real estate to continue as the economy weathers a severe recession sending lenders in a crisis. Private equity will also struggle except maybe in some distressed debt segments.

As for hedge funds, only the best will survive the brutal shakeout. John Paulson is right to blast hedge funds that are suspending redemptions. Moreover, waiving management fees when you are not producing alpha will only buy you time, delaying the inevitable flood of redemptions.

I end tonight's comment with a NYT article on risk management that Diane Urquhart sent me. I quote the following passage, but you should read it all:

Given the calamity that has since occurred, there has been a great deal of talk, even in quant circles, that this widespread institutional reliance on VaR was a terrible mistake.

At the very least, the risks that VaR measured did not include the biggest risk of all: the possibility of a financial meltdown.

“Risk modeling didn’t help as much as it should have,” says Aaron Brown, a former risk manager at Morgan Stanley who now works at AQR, a big quant-oriented hedge fund. A risk consultant named Marc Groz says, “VaR is a very limited tool.”

David Einhorn, who founded Greenlight Capital, a prominent hedge fund, wrote not long ago that VaR was “relatively useless as a risk-management tool and potentially catastrophic when its use creates a false sense of security among senior managers and watchdogs.

This is like an air bag that works all the time, except when you have a car accident.” Nassim Nicholas Taleb, the best-selling author of “The Black Swan,” has crusaded against VaR for more than a decade. He calls it, flatly, “a fraud.”

The problem wasn't with VaR per se but with the idiots who thought they can measure and mitigate away all risks, including systemic risk, using some VaR model.

It all turned out to be risk management theater and taxpayers will ultimately foot the bill as pension deficits soar to unprecedented levels in the coming years.


Read the latest from the Globe & Mail, Caisse engulfed by political battle:

According to sources close to the board, it disagreed with the government of Mr. Charest and his Finance Minister, Monique Jérôme-Forget, over the selection of a successor to Mr. Rousseau, whose fund held a $12.6-billion exposure to non-bank-sponsored, asset-backed commercial paper, or short-term debt.

Mr. Charest vetoed the Caisse board's choice of portfolio manager Jean-Guy Desjardins because of his links to the Action Démocratique du Québec party, according to two sources.

Ms. Jérôme-Forget pushed to get Christiane Bergevin, the head of SNC-Lavalin's finance division and a Caisse director, appointed as the new chief, but the board resisted and wanted Mr. Guay, Mr. Rousseau's "dauphin," according to one of the sources.

What a mess! Quebec Inc. is in dire straits and we have more political theater or as I like to call it, Caisse Sera Sera. No wonder Quebecers are fed up with the shenanigans at the Caisse!

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