Caisse's $40 Billion Train Wreck?

The Caisse de dépôt et placement du Québec, one of North America’s biggest pension funds, saw the value of its investments shrink by a quarter last year, the worst performance in its 44-year history:

Although much of the loss was due to the turmoil in global markets, the Caisse was also hit by its heavy exposure to the meltdown in Canada’s asset-backed commercial paper market. In addition, it posted large foreign-exchange hedging losses as the Canadian dollar fell in line with the slump in commodity prices.

Depositors’ assets shrank to C$120.1bn ($95.7bn) as of December 31 from C$155.4bn a year earlier. Total assets under management fell from C$257.7bn to C$220.5bn.

The reversal comes amid renewed controversy over the role of the Caisse, a Quebec government agency that manages the assets of 25 provincial, municipal and sectoral pension and insurance funds.

The agency operates in a politically charged atmosphere, torn between its role of promoting the economic independence of Canada's French-speaking province and its obligation to seek the highest returns for the investments that it manages.

DBRS, a Toronto-based credit ratings agency, forecast on Wednesday that last year’s setback in its performance would attract considerable political attention.

“This will likely trigger internal changes,” DBRS said. But it added that the Caisse maintained “a very strong credit profile”, buttressed by its mandate to manage an array of public assets, its sizeable liquidity and its large investment portfolio.

The agency is without a permanent chief executive. The previous incumbent, Richard Guay, left in January after less than a year in the job, including several months on “exhaustion leave”.

The financial cost of the Caisse’s political role was highlighted nine years ago when it threw its weight behind a hostile takeover bid by Quebecor, a media group based in Montreal, for Groupe Videotron, the province’s biggest cable TV operator. Videotron had favoured a rival offer by Rogers Communications, a cable TV group based in Toronto. Both Quebecor and the Caisse were later forced to take hefty writedowns on the investment.

The Caisse has also been a force in expanding Quebec’s pharmaceuticals, telecommunications, biotechnology and software industries.

It has increasingly moved beyond its Quebec roots during the past decade in a quest to become a global asset management powerhouse. Among other investments, it has built a large presence in the US commercial property market.

The Quebec legislature is expected to hold a special hearing on the Caisse’s performance within the next few months. The separatist Parti Québécois has blamed the Liberal government for the fund manager’s problems by allowing it to expand its investments outside the province.

The province’s finance minister said this month that she would seek to appoint a government representative to the Caisse’s board, overturning an earlier policy designed to put more distance between the agency and its political masters.

Fernand Perreault, acting chief executive, said the Caisse had increased its holdings of liquid assets, pushing the share of equity investments down from 36 to 22 per cent, while increasing its exposure to fixed income investments from 30 to 44 per cent.

Mr. Perreault also addressed the liquidity concerns:

"At no time during this period did the Caisse run short of, or come close to running short of, liquid assets," Perreault said in a release.

The Globe and Mail reports that in light of the record losses in 2008, Quebec's Finance Minister announced sweeping changes to the pension fund's management and requested a National Assembly committee hold special hearings to examine the debacle as early as next week:

“I'm very disappointed. It's a major loss, … it's obvious it is not something I wished for,” Monique Jérôme-Forget said. “Let's put some perspective on this; let's remember that all the funds have lost a lot of money, between 18 and 20 per cent. In fact some funds in the U.S. and in Europe have lost 27 per cent. That doesn't make our situation any better.”

Within weeks or even days, the provincial government will appoint new members to the Caisse's board of directors and approve the appointment of a new president and chief executive to replace interim president Fernand Perreault.

“All of this will present itself in the coming days, even in the weeks ahead but not in months,” the Finance Minister said during a news conference Wednesday.

Ms. Jérôme-Forget said the National Assembly committee will hear testimony from the Caisse's former president, Henri-Paul Rousseau, as well as current managers. Mr. Rousseau presided over the pension fund's decision to invest massively in the money losing asset-backed commercial paper (ABCP).

“What we are going to get from the management of the Caisse and from Mr. Rousseau, I'm sure, are indications as to what happened and what they feel should be done in the future. I'm sure they have opinions as to what could be done, what should done and how it should be done,” the Finance Minister said.

Ms. Jérôme-Forget said she will not testify before the commission nor will she support opposition calls for an independent inquiry into the pension fund's heavily indebted position into ABCP.

The close to $40-billion in losses put the government in a difficult political situation. It has been largely blamed for allowing the Caisse to take unnecessary risks with money received from depositors such as the Quebec Pension Plan, the Auomobile Insurance Board or the Workmen's Compensation Board in order to increase short-term benefits.

Increases in pension fund contributions or automobile insurance rates may be required to make-up for the shortfall. “You will have to ask each of these groups what they intend to do,” the Finance Minister said, stressing that pension payments under the Quebec Pension Plan will not be affected by the loss in revenues.

Pierre Plamondon, chief actuary of the Quebec Pension Plan, said the Caisse's losses would have no short-term impact on the plan's contribution or benefit levels:

"We don't react immediately to any year of low or negative return," he said.

Plamondon acknowledged higher QPP contributions might be necessary to respond to the demographic challenge, but that would come only after a public consultation in the next year.

Former Caisse official, Michel Nadeau, said markets will normally rebound strongly after a 50 per cent plunge from top to bottom, and such a recovery would put pension plans on the road to health.

But if there are negative returns in the neighborhood of 15 per cent or more this year, tough decisions might have to be considered on contribution increases or trimming of benefits, he added.

"What happened last year was exceptional, once in a century," said Nadeau, who is now executive director of the Institute for Governance of Private and Public Organizations.

The former head of the Ontario Teachers Pension Plan Board, Claude Lamoureux, said that there should be no gloating about the massive losses reported by the Caisse:

You're competitive but at the same time you don't like your competitors to look bad and to lose money for their members or not to do well for their members because we all lose when that happens," Claude Lamoureux said in an interview.

The country's largest pension fund manager said Wednesday it lost $39.8 billion or 25 per cent of its $155.4 billion asset base last year as a result of a weak stock market and losing investments in asset-backed commercial paper and currency hedges.

Lamoureux said the fundamental tenet of being a large investor is to take risks and the Caisse's performance must be viewed in the context of the worst year since 1973.

'I think there's a bit of hysteria at this point," he said before the Caisse disclosed its worst performance ever in 2008.

Anyone who had invested in the Toronto Stock Exchange lost 33 per cent while world markets were down 42 per cent in local currency or 28 per cent in Canadian dollars, he said from Toronto.

The Teachers reports its annual results April 2. The Ontario Municipal Employees Retirement System said this week it lost $8 billion on its investments, representing a minus 15.3 per cent rate of return. The median return for Canada's large pension funds was minus 18.4 per cent.

Getting burned by weak performances shouldn't prompt pension fund managers to be overly cautious in the face of a recession and sliding stock markets, said Lamoureux, who retired in 2007 after overseeing its assets grow to $106 billion as of the end of 2006 from $19 billion in 1990.

'When everybody is euphoric, time to be careful and when everybody is pessimistic, I think that it's time to invest."

Former Caisse executive Michel Nadeau said while risk is a cornerstone of a money manager's skills, Quebec's investing giant erred in taking too many big bets at the same time.

'That will be the lesson that you should always try to manage the negative impact of your potential bets," he said in an interview.

Large U.S. university endowment funds at Yale and Harvard made the same mistake as the Caisse by making huge bets on alternative investments, subprime markets and currency, said Nadeau.

He expects the Caisse will probably be more prudent in the short-term before the natural drive towards risk to generate higher returns resurfaces.

The use of sophisticated mathematical models that failed to capture the risk of a market meltdown will also likely be reviewed by the Caisse after they failed to work in 2008, added Nadeau.

Each of Canada's five large pension fund managers has its own investment personality and style. Most have one client. But the Caisse invests for 25 different provincial, municipal, sectoral pensions and insurance funds, which have different investment criteria and weightings among bonds, stocks and real estate.

Last year, the fund received $4.5 billion from contributors.

Between 2003 and 2007, the Caisse had the Midas touch, generating the strongest annual results among the large Canadian pension fund managers, at 12.4 per cent average return.

But being Canada's largest investor comes with a price - suggestions of political interference.

For years, many in English Canada viewed the Caisse with skepticism. As a creation of the Quiet Revolution, it was seen as being an investment wing of the government. Known as Quebec Inc., its mission was to support francophone companies and advance Quebec's economic growth.

Originally modelled in 1965 on the Canada Pension Plan, its early investments included Quebec government and Hydro-Quebec bonds. Former premier Jean Lesage's goal was for the Caisse to have $2.6 billion of net assets by 1976, a feat that was far surpassed.

In 1967, its first stock market investments included purchasing 3,000 shares of aluminum giant Alcan and 193,000 shares of what has become the National Bank of Canada.

By 1974 it had the largest Canadian equity portfolio in the country with investments in Gaz Metropolitain (TSX:GZM.UN), Canam Manac and Domtar (TSX:UFS).

Concerns reached a peak in the early 1980s when the Caisse tried to buy the Canadian Pacific conglomerate - then Canada's largest company - in a leveraged buyout with Quebec financier Paul Desmarais. The federal Liberal government of Pierre Trudeau was initially persuaded to limit ownership of transportation companies by provincial crown corporations but later withdrew legislation.

Former PQ premier Bernard Landry recently wrote that many Quebec businesses have thrived because of the Caisse's intervention while others, including television network TVA, would no longer be owned by Quebecers without the pension fund.

Jean Charest changed the Caisse's mission in 2005 when the focus was clearly set on maximizing returns.

Critics of government say the Caisse's dismal performance in 2008 can be traced to this policy change.

But defenders of the Caisse said its motives were never well understood, especially by English Canadians.

'Every decision taken by the Caisse was financially motivated," said Nadeau, No. 2 at the Caisse when he retired in 2002 with the arrival of Henri-Paul Rousseau.

Landry said the sale of grocery chain Provigo to Toronto-based Loblaws (TSX:L) demonstrates that accusations of manipulation are unfounded.

The purchase of 30 per cent of Canada's commercial paper investments for $12.6 billion will likely go down as the biggest financial blunder in the fund's 43-year history.

It took a $4-billion writedown on its asset-backed commercial paper holdings in 2008, after taking a $1.9 billion charge in 2007 once the market froze up that summer. The Caisse sold billions in equities after it faced a cash crunch from losses on currency hedging and derivatives.

Previous failed bets are tame by comparison. They include forays into fashion, resources giant Noranda and an attempt to buy the Quebec-based Steinberg's grocery chain.

In 1989, the Caisse bought property developer Ivanhoe to secure Steinberg's real estate assets.

The Caisse's $3 billion investment in Quebecor's (TSX:QBR.B) cable subsidiary Videotron has yet to pay off. It wrote off 85 per cent of the investment in 2002. But the company's rising value has only meant that the investment has taken longer to recoup the money, said Nadeau.

Nadeau said the Caisse's best moves were investments in Quebec companies and real estate. By 1996 it had become the largest real estate owner in the province and second largest in Canada. It also profited after once being the largest owner of office space in Paris.

The investment in British airports such as Heathrow has been so lucrative that the government has ordered the splitting up of the British Airport Authority.

While I agree with Mr. Lamoureux that there is a bit of hysteria at this point, I disagree with his assertion that it's time to invest because everybody is pessimistic.

Importantly, unlike the dips that Mr. Lamoureux witnessed while at the helm of Ontario Teachers, this time is different and it will take a lot longer to recover than in past episodes.

Also, Mr. Lamoureux invested heavily into alternative investments, made millions in the process and exited right before stocks and alternative investments imploded. Great timing, wouldn't you say? Even better timing than Mr. Rousseau who got out of the Caisse before the storm's full fury hit. Mr. Lamoureux saw the writing on the wall and bowed out gracefully.

As far as Mr. Nadeau, why wasn't he talking up governance and risk management when he was second in command at the Caisse? Has he forgotten about the Caisse's Nortel debacle and other poor investment decisions that took place when he was second in command at the Caisse?

Back on topic. Most of the articles written today were hysterical, calling for the Caisse's abolishment or just screaming for heads to roll. I think the nearly $40 billion headline figure got people very nervous but the 25% loss was in line with what other large global pension funds lost.

For example, at the beginning of December, the California Public Employees' Retirement System (CalPERS) portfolio had lost 31.1 percent of its value since peaking last fall, a staggering $81.4 billion drop. The reality is that the downturn clobbered public pension funds, especially those that were highly exposed to public equities and alternative investments like private equity, hedge funds and real estate.

But the 25% haircut in total assets, has raised concerns about the security of Quebec pensioners. It also has people in the financial sector calling for a re-evaluation of risk models adopted by the Canadian institutions.

"It's clearly a staggering loss in absolute dollars," says Tawfik Hammoud, partner and managing director of The Boston Consulting Group in Toronto. "The government should mandate a bottom up review of their asset model, risk strategy and organization" he says. He adds: They also need a strong full-time CEO who can develop a credible path to recovery and deal with the various stakeholders."

With its risk strategy under attack, it seems certain that the Caisse will take a more conservative approach in the future. Already, Quebec's Finance Minister has announced an overhaul of the organization, and has requested a National Assembly committee hold special hearings to examine the issue of losses.

All asset classes -- with the exception of the best government securities - recorded steep losses at the pension plan. In addition to a significant writedown due to hedging its foreign exchange risk on assets outside the country, the Caisse took a huge financial blow investing in asset-backed commercial paper (ABCP). The Caisse was forced to write down 43% ($5.6-billion) of its $12.8-billion investment in the toxic paper.

In a statement to the press, Fernand Perreault, president and chief executive of the Caisse, did a mea culpa: "The risk management policy had not set overall limits on the amount of AAA-rated money market instruments that could be held. In hindsight, we placed too much confidence in these securities."

Speaking to the issue of the Caisse's ABCP loss, Finance Minister Jim Flaherty was quick to point out that had the government not come to the rescue, the losses "would have been much worse." But for pension watchers like Keith Ambachtsheer, director of the Rotman International Centre for Pension Management at the Rotman School of Management, the losses only speak to poor oversight.

"These institutions need to do their own due diligence," he said. "Just because the agencies rate them as AAA doesn't mean they are," he says.

Not all the Caisse's $40-billion losses were real. While the pension plan realized losses on the sale of its investments of $23.2-billion, over 56% of its losses were unrealized decreases in value, otherwise known as paper losses. While the real estate portfolio generated more net rental income in 2008 than the previous year, the fund estimated that the mark-to-market value of real estate declined 22%.

[Note: Unrealized losses - or paper losses - can become realized losses if things get very ugly for a prolonged period.]

So far the Caisse's losses stand in dramatic relief to losses at the other pension funds and calls into question the performance of the managers. The Caisse had a benchmark portfolio of a 18.5% loss, but posted a 25% loss. That's 650 points below its benchmark and a shortfall that is considered disastrous by pension fund managers. By contrast, Ontario Municipal Employees Retirement System (OMERS) declared a negative 15.3% return for 2008 compared with a benchmark of negative 13.2% which represents 210 basis points below benchmark.

Despite Wednesday's bad news, "the Caisse continues to have a strong liquidity position and they still have a massive amount of capital," said Huston Loke, co-president of DBRS Ltd. While the rating agency looks at how funds do in relation to their peers, Mr. Loke likes the fact that the Caisse appears to be recalibrating its risk models and focussing on assets that "are more understood."

The Caisse announced it has suspended its "asset allocation operations" a risky portfolio (although non-transparent portfolio) that contributed to $2-billion in losses last year.

At the end of the day, pension insiders don't think the province is going to throw the Caisse out with the bathwater.

"The province is so proud of the Caisse," said one analyst. "They put them through the ringer in front of the General Assembly, but at the end of the day they will simply ask them to strengthen internal controls and make some changes," he said.

One word of caution. As I stated before you cannot properly compare pension funds unless you know the benchmarks that govern the underlying investments. And even though they aren't perfect, the Caisse's benchmarks are much tougher than any other pension fund in Canada.

In her article, Caisse de depot's trainwreck part 2, Diane Francis writes the following:

Now we know that the Caisse de Depot et Placements du Quebec lost a staggering $39.8 billion in 2008, or around 25% of its value -- and possibly more down the road -- through a combination of internal mismanagement, poor controls and an inappropriate appetite for gambling.

These huge losses were unreported until the provincial election was over and those responsible bailed out, or went on sick leave, with big bonuses.

I exposed the grave financial problems, and lack of reporting transparency, with the help of whistleblowers close to events on December 4. A second appeared in January. But these stories were ignored by the Canadian, and Quebec, media alike. They were also attacked by a Caisse public relations spokesman in a letter to The Financial Post.

My articles appeared in early December just before the Quebec provincial election. They should be re-read.

It was clear that the Caisse's management did not have proper personnel or controls. It was clear that the Caisse gambled the nest egg of Quebeckers. The beginning of the problem was its huge purchase of real estate assets at bubble prices then asset-backed paper, both of which turned out badly in today's markets.

To make matters worse, the fund behaved like a speculator by making multi-billion dollar bets that blew up in its face, betting the U.S. dollar would fall and that commodities would remain at peak prices. Both bets were very wrong and possibly made in order to recoup the asset-backed losses which surfaced in August 2007. Whatever the explanation, no pension fund should ever be allowed to get involved in such naked gambling maneuvers.

It's not just the Caisse

My two articles are well worth reading because they point out other issues that should be investigated by Quebec provincial authorities in their legislative committee process which was announced by Premier Jean Charest today.

All other provinces and the federal government should also take note because regulations obviously must change. Here are some questions and some suggestions:

-- Why were there no internal controls in place to insure that such huge, unhedged bets were made? Is this occurring in other pension funds too?
-- Is it true that several teams of portfolio managers were fired for catastrophic results and not replaced?
-- Why did the Caisse Chair and CEO get huge bonuses for 2007 and 2008 despite such mishaps?
-- Is it true that the Caisse does not have sufficient computer systems to monitor investments in real time? And that huge amounts of money have been spent with outsource computer contracts that have done little to fix the problem?
-- Is it true that the Caisse is over-staffed compared to other large pension funds? Are other pension funds the same?

It's also important to point out that the Caisse is not the only worrisome, large pension situation around. I have serious concerns about the recent behavior of the Ontario Teachers Pension Plan with its move into a vastly leveraged, high-risk private equity takeover involving BCE. Fortunately the deal failed or else Canadians would have a second giant pension fiasco to backstop and replenish.

Among reforms that should be undertaken by all governments:

1. I believe that pension commissions in governments should be overhauled and do the job they are supposed to do. The Ontario Pension Commission allowed Ontario Teachers Fund to make a takeover even though there are restrictions limiting ownership by pensions to no more than 30%.
2. Governments must break up the biggest funds into smaller pieces. This will greatly reduce risks.
3. Governments must outsource pension portfolio managements of these smaller entities in order to be able to ruthlessly, when necessary, fire and hire better brainpower.
4. Governments must require pension funds to report as often and as fully as public corporations must report. This means quarterly reports with full, complete and timely disclosure.
5. Governments, because tax dollars are backing up these losses, must require full, timely and complete disclosure of material facts as is the case with public companies. If major losses occur, publicly-backed pension funds must issue immediate press releases. In this case, the Caisse was able to avoid disclosure of huge and serious losses for many months after these occurred, thus allowing both management, directors and politicians a chance to postpone the bad news.

This is no way to run our affairs and the pension sector must be reined in immediately by all unions, provinces, corporations and the federal government.

Now, let me end with my analysis. Ms. Francis is right on some points and wrong on others and I will try to go over the major points below.

Please go to the Caisse's website to view the press release and the accompanying financial statements. You can also click on the image above to view the returns of the specialized portfolios.

As you can see, Canadian public equity did slightly better than its index, returning -32.4% versus -33%. Both the hedged U.S equity and foreign equity did a lot worse than the unhedged portfolios mainly because of the 20% drop in the Canadian dollar in 2008.

The decline in the Canadian dollar also hit alternative investments like private equity (-31.4%), real estate (-21.9%) and real estate debt (-7.6%), hedge funds (-20.9%) and commodities (-25.4%).

Importantly, these alternative investments are 100% hedged, meaning they were 100% hedged back into Canadian dollars, so as the value of the Canadian dollar lost ground, this exacerbated to the losses in alternative investments, which all got clobbered last year.

It is worth noting that the Caisse was aggressive in writing down its illiquid private market assets, much more than OMERS and probably any other pension fund out there. As far as hedge funds, this includes several internal absolute return strategies that blew up and lost hundreds of millions in 2008 and their Tremont index had some Madoff in there (ask the red-faced Man Group about poor due diligence.)

What Diane Francis got wrong is that these are not active decisions, but passive hedging decisions which were predetermined by the Caisse's depositors.

What I would like to know is why don't they just hedge 50% their F/X exposure and/or why did they buy currency options to partially mitigate these foreign exchange losses? Didn't they see the bubble in commodities and deduct that the Canadian dollar was going to get hammered too?

That leaves us with the last sticking point - ABCP. I will quote Andrew Willis of the Globe and Mail, How ABCP plays into Caisse loss:

As bad as the Caisse de dépôt et placement du Québec's performance numbers look, its 25 per cent loss actually understates a miserable year for the pension fund.

A large part of the Caisse's loss in 2008 came on its $12.8-billion portfolio of asset-backed commercial paper, which was written down by a further $3.8-billion last year. Over all, the Caisse's ABCP program is now valued at $7.2-billion, or 57 cents on each dollar of face value.

Now, if you're a pessimist, you'd argue that this valuation is generous. When ABCP that's been restructured in a Caisse-backed rescue finally starts to trade, bond desks will tell you that the new notes are going to change hands at around 30 cents on the dollar. The exact price is going to reflect the quality of the underlying assets owned by investors - all ABCP is not created equal - and the sophistication of the seller.

As it gets rolling, the ABCP market promises to be ugly (or inefficient, to use a less loaded description), which is why banks hung up in the ABCP mess are advising clients to sit tight on the paper. But if this debt is in fact trading at 30 cents on the dollar, the Caisse is down far more than advertised.

Now, if you're of an optimistic bent, then the ABCP situation is improving. A lengthy and complex restructuring is now complete, and commercial paper has been transformed into notes that mature in eight years. For investors who don't need to cash in right away, holding on to ABCP means making back paper losses.

That positive attitude prevails at the Quebec fund, as the Caisse said Wednesday in a release that it “believes that a large portion of this cumulative provision will be reversed in the years to come.”

Most fixed-income investors agree that, over time, the Caisse will make back some of its ABCP losses. But the pain caused by this outsized holding in flawed assets stands as a permanent stain on the records of Caisse executives, including departed CEOs Henri-Paul Rousseau and Richard Guay.

As acting CEO Fernand Perreault said Wednesday: “The ABCP episode is without doubt a difficult page in the Caisse's history.”

I happen to think that ABCP was generously valued and the Caisse is hiding its real losses. Even PSP Investments, which also took a sizable haircut on ABCP in its FY2008, was more aggressive in writing this paper down.

Speaking of PSP Investments, Andrew Willis writes that it dipped into the bond market:

Lousy returns on investments haven't undermined faith in Canada's pension funds, as PSP Capital showed Tuesday with a $400-million bond issue.

The Public Sector Pension Investment Board, which cares for the retirement savings of Mounties and federal civil servants, raised money to fund its operations: Other public sector plans have similar programs to finance activities such as real estate investing.

PSP Capital initially targeted a $300-million sale of bonds that mature in 2013, with TD Securities as lead underwriter. The issue was bumped up to $400-million in the face of strong demand, and there is now $1-billion of this debt outstanding.

In awarding these bonds a top, triple-A rating on Tuesday, DBRS said “PSP is expected to have been notably impacted by the equity market downturn, like most of its peers.”

“Nevertheless, PSP continues to exhibit very strong credit fundamentals bolstered by its exclusive mandate to manage assets… as well as its large investment portfolio, solid cash flow outlook and a robust liquidity position” said the credit rating agency.

This access to bond funding means the public sector funds can continue to be active players in the capital markets, despite weak return in 2008. While PSP has not released its numbers from last year, it's logical to assume that the fund will post performance in line with the 15.3 per cent loss announced Monday at OMERS.

Lousy returns on investments haven't undermined faith in Canada's pension funds, as PSP Capital showed Tuesday with a $400-million bond issue.

The Public Sector Pension Investment Board, which cares for the retirement savings of Mounties and federal civil servants, raised money to fund its operations: Other public sector plans have similar programs to finance activities such as real estate investing.

PSP Capital initially targeted a $300-million sale of bonds that mature in 2013, with TD Securities as lead underwriter. The issue was bumped up to $400-million in the face of strong demand, and there is now $1-billion of this debt outstanding.

In awarding these bonds a top, triple-A rating on Tuesday, DBRS said “PSP is expected to have been notably impacted by the equity market downturn, like most of its peers.”

“Nevertheless, PSP continues to exhibit very strong credit fundamentals bolstered by its exclusive mandate to manage assets… as well as its large investment portfolio, solid cash flow outlook and a robust liquidity position” said the credit rating agency.

This access to bond funding means the public sector funds can continue to be active players in the capital markets, despite weak return in 2008. While PSP has not released its numbers from last year, it's logical to assume that the fund will post performance in line with the 15.3 per cent loss announced Monday at OMERS.

PSP Investment's fiscal year ends on March 31st, just like that of the Canada Pension Plan Investment Board (CPPIB). Barring some miracle in the stock market, they will post negative returns too and tapping the bond market is not a good sign.

I will end my comment on the Caisse's results with some thoughts on the hearings that will take place in Quebec. These should be public hearings that shed some light on the performance of each internal and external investment manager at the Caisse. If there were internal or external blow-ups, they should be publicly disclosed. Period.

As far as ABCP, I think several people should testify, including Henri-Paul Rousseau, Richard Guay, Gordon Fyfe, the President & CEO of PSP Investments and former President of World Markets at CDP. Last but not least, the politicians should invite Luc Verville, the vice-president with responsibility for money markets at the Caisse when the ABCP back box exploded.

They should ask Mr. Verville who was responsible for taking leveraged positions on ABCP and why for so long nobody asked him whether he was taking on too much risk relative to the T-bills benchmark that governed his activities. Who was overseeing his activities and why didn't they pull the plug earlier, before the credit crisis hit? Didn't they realize that taking leveraged positions in illiquid securities is flirting with disaster?

The answer is that as long as everybody was making money beating a bogus benchmark, everyone kept their mouths shut. Now that the music has stopped, they have some serious explaining to do.

I think it's time the public finds out exactly what happened at the Caisse. Once the truth is exposed, the new board should implement sound governance policies to make sure that this type of reckless risk-taking never occurs again (go back to read my entry on Clearing the Pensions Fog).

One thing is for sure, if the politicians and new board of directors handle this right, the Caisse will reemerge as a global financial powerhouse. If they bungle it up, the Caisse is doomed to repeat the same costly mistakes and Quebecers will be called upon to bolster the Quebec Pension Plan.

Note: Make sure you read the follow-up post, A Basket Caisse?