Rousseau Roasted at Quebec Pension Hearing

The former President and CEO of the Caisse de dépôt et placement du Québec got roasted at a hearing probing the Caisse's 2008 losses:

Quebec's pension fund has fared well in recent years despite the latest massive losses caused by the collapse of the asset-backed commercial paper market, said the former head of the Caisse de dépôt et placement du Québec.

"Quebecers can still have every reason to be proud of the Caisse," said Henri-Paul Rousseau in his opening statement Tuesday at a parliamentary commission probing the pension fund's staggering $40 billion losses last year.

Rousseau spent Tuesday morning deflecting a steady stream of accusations from commission members who reproached him for quitting his job at the Caisse, just as the pension fund was bleeding profits. Rousseau announced he was leaving the fund in May 2008 and remained on as an adviser to the board until the end of August 2008.

The former Caisse boss showed a "deep contempt for the interests of our nation" when he chose to accept a $400,000 departure bonus, said Amir Khadir, the legislature's sole Quebec Solidaire MNA.

"As arrogance and contempt often hide a certain disregard, you preferred to resign in the middle of the storm," Khadir added before being brought to order by the commission president.

Rousseau responded by saying he left a lucrative job in the private sector to serve Quebecers at the pension fund from 2002 to 2008, a choice that involved "heavy sacrifices," he told the commission.

He is not to blame for the pension fund's dismal returns in 2008, Rosseau said.

The fund was broadsided by the global economic crisis, and if it wasn't for its investment in asset-backed commercial paper, it would have weathered the downturn much better, Rousseau said.

The Caisse has other issues, Rousseau added, including trouble "training, recruiting and keeping competent staff," he said.

The new head of the fund is Michael Sabia, former head of Bell Canada Enterprises, who took over in March of this year.

According to Montreal Gazette, Rousseau conceded that they made an error:

Former Caisse de dépôt chairperson Henri-Paul Rousseau has again conceded he made a mistake in the commercial paper market which partially explains the massive losses of 2008.

"I have said it, I repeat it today," Rousseau told a National Assembly commission. "We made an error with commercial paper. It was a mistake of which I assume the responsibility."

But he said he immediately issued an order to stop buying to minimize losses and sought help from the Bank of Canada.

Rousseau also insisted the fundamentals of the Caisse are sound anyway.

Aside from the commercial paper losses, the Caisse did well under his authority.

"Quebecers can still have every reason to be proud of the Caisse," Rousseau said in an opening statement.

The commission, however, rapidly fell into a numbers and policy debate with few shockers despite media hype the Rousseau appearance would be a shocker.

Rousseau also off the top trashed the book in which he is blamed.

He described much of the book is "false," and "troubling."

Rousseau's comments came Tuesday morning before the National Assembly commission looking into huge losses by the province’s pension manager. Rousseau headed the Caisse between 2002 and 2008 and was the one in the big chair just before the economy melted and the Caisse suffered the consequences.

The commission, which is made up of Liberal, Parti Québecois and Action democratique du Québec politicians, has set aside a full six hours for Rousseau who, critics have said, got off too lightly for the losses under his regime.

It will be the first time he answers questions about events from politicians. The MNAs have said they don’t intend to give him an easy ride.

“There seems to have been a culture at the Caisse which aimed for maximum returns without worrying about risk,” PQ finance critic François Legault told TVA on Sunday evening.

In March, Rousseau delivered a long speech to the Montreal Board of Trade in which he said the Caisse was hit by what he described as a “perfect storm,” in the economic meltdown.

He accepted “full responsibility” for the asset-backed paper mess which explained a good part of the losses.

But he did not take all the blame, arguing that thanks to him the $120-billion pension fund is worth $15 billion more today than it would have been if it had simply replicated its returns of the 1990s. And he insisted that he was long gone when the global economy began tanking last fall and the Caisse ran up its $39.8-billion loss.

None of his explanations have washed with the opposition critics who today will try and force him to take it on the chin.

They have been unsuccessful in nailing down blamce over previous weeks of the commission. Several top Caisse personalities have referred it to Rousseau for the answers. Even former Finance Minister Monique Jêrôme-Forget, under pressure to answer questions herself, told them to ask Rousseau because she was not to blame either.

Rousseau arrived at the encounter early but did not speak to reporters Tuesday morning.

His appearance coincides with the appearance of a new book in which he gets blamed for losses.

The book La Caisse dans tout ses etats is not on newstands because the Caisse slapped an injunction on its author.

Reuters reports that the book says Rousseau devalued the fund's assets in 2002 as he ushered in a bonus and banking culture at the storied institution:

"La Caisse dans tous ses etats", or "The Caisse in all its Stages", looks at the fund since its early days in 1965, and says its six years under the leadership of then-President and Chief Executive Henri-Paul Rousseau represented a cultural sea change.

The Caisse, an arm's-length agency that manages investments for various public and private pension plans in the province of Quebec, managed C$120.1 billion ($103.9 billion) in assets at the end of last year.

Author Mario Pelletier says in his book, published last Friday, that Rousseau devalued certain assets in 2002, among them cable company Videotron, to improve results in subsequent years.

"He was being very conservative, of course, but it served his purpose to make him look better in the year after, the first complete year of his mandate in 2003," Pelletier told Reuters in a telephone interview.

The Caisse denied the allegations on Tuesday and demanded Pelletier print a correction or retraction.

It pointed out that in February 2006, the Montreal daily newspaper La Presse published a retraction after making similar allegations.

"The Caisse has informed Quebec's Auditor General of allegations made in a forthcoming book entitled 'La Caisse dans tous ses états', by Mario Pelletier," it said in a statement.

"For the Caisse, the accuracy of financial statements is crucial and must not leave any room for ambiguity. Alleging that the Caisse's financial statements can be manipulated is not only false but is also likely to cause serious damage to the institution's integrity, its processes and its employees, and to the confidence of its partners and its counterparts on financial markets," the Caisse said.

Pelletier said he will not print a correction, adding that his sources included high-level executives at the company.

He said that his book outlined the move to a bonus-focused banking culture that started after Rousseau took the helm.

Pelletier said Rousseau also devalued other assets, and points at generally higher risk-taking since 2002.

"La Caisse didn't like these statements in my book. They tried to put an embargo on the book," he said.

Pelletier says his publisher kept the books off store shelves over the weekend but decided to start sales on Tuesday. Some 2,000 copies were printed, his publisher said.

Rousseau left the Caisse in August last year.

The Caisse overhauled its management ranks last month in the wake of big investment losses in 2008.

In February, it reported it lost C$39.8 billion in 2008, a quarter of its overall holdings, and blamed the meltdown in global financial markets.

Critics said the Caisse made too many risky investments.

Embargo on a book that is critical of the Caisse? What about an embargo on a pension blog that has relentlessly exposed these big pension bullies for what they really are?

[Note: When pension bullies try to intimidate you, just come at them twice as hard and stick to your guns.]

So did Rousseau devalue certain assets back in 2002? Only an independent and comprehensive audit by industry experts can answer that question, but it wouldn't surprise me if Mr. Pelletier's accusations are accurate.

The problem is that these type of shenanigans are all too common at Canadian public pension funds. With the magical stroke of an accountant's pen, they can write down private market assets in a bad year and write them back up when the markets recover. Presto! Instant alpha!

If you look at the Caisse's 2008 results, they took bigger hits in private markets than their other counterparts (Teachers and OMERS). Why is that? Could it be that 2008 was such a bad year so they decided to write it off and wait till markets recover so they can write some of these private assets back up?

[Note: Go back to read my comment on the model that's killing pension funds.]

In any case, these flexible valuation techniques are not just at the Caisse but people forget. If the Caisse's private asset classes come back roaring next year, people will be all impressed without asking: "hey , how much did they value these assets down in 2008?"

On the contentious issue of $400,000 in bonuses he received upon leaving his post, Mr. Rousseau said he has no intention of returning the cash even though he had, at the time of his departure from the Caisse, already secured a princely gig at Power Corp:

"I left millions of dollars to come serve the people of Quebec," said the former Laurentian Bank boss, adding he made "heavy sacrifices" when he took on the Caisse job.

[Note: Read my comment on whether pension fund managers are paid too much.]

During his testimony, Rousseau defended his record at the Caisse between 2002 and 2008. With the exception of the asset-backed commercial paper disaster, he insisted the Caisse held its own under his direction.

He also deflected blame for the Caisse's poor performance compared with its counterparts in the United States and abroad, arguing recruiting and retaining competent personnel has been a challenge for the Caisse.

Recruiting and retaining competent personnel is a challenge for the Caisse? Give me a break. If the Caisse got rid of all those internal political snakes who try to carve out their own fiefdoms, then they wouldn't have any problems recruiting and retaining talented individuals to that shop.

The problem is that for years internal politics ruined the Caisse. Hopefully Mr. Sabia will focus on reinvigorating the culture of the Caisse but to do that he has to make sure he has the right people in charge, including in human resources.

For me it's simple. Are you promoting a culture where people can't wait to come in the morning and make money in the markets or are you creating a bureaucratic and political shop which effectively kills your employees' morale?

I am dead serious. I have worked at the Caisse and seen it at its best and at its worst. I hope that once this dark chapter subsides, the Caisse can come back to its glory years.

But for that to happen, the Caisse needs to attract and retain the right type of people - money managers and investment analysts who have a passion for markets and making money - not petty politicians who struggle for internal power.

Those snakes should be weeded out. If they remain, they will end up poisoning the Caisse. And that's not something we should be proud of.

***Update***

Some more articles for you to read. Konrad Yakabuski of the Globe and Mail writes, Ex-Caisse chief defends move to private sector. Philip Authier of the Montreal Gazette writes, Ex-Caisse boss stands firm , Caisse losses hurt CSST, SAAQ and more recently, Caisse tapes private: Bachand. Peter Hadekel writes, Caisse needs to look beyond Quebec firms.