Media Covering Up Caisse's ABCP Scandal?

On Tuesday, Le Journal de Montréal published two articles by Andrew McIntosh on why we need a new special commission to look into the asset-backed commercial paper (ABCP) scandal which ended up costing the Caisse de dépôt et placement du Québec billions in losses.

The articles are not available online but I took a picture (click on image above) just to show you that an entire page was devoted to this subject (page 9). Andrew McIntosh should be commended for his outstanding work of investigative journalism. If you check out his Twitter profile (@AndrewQMI), you'll see he also happens to be a certified fraud examiner (CFE), which tells me he knows what he's talking about and did a thorough job analyzing the tapes and the evidence before publishing his bombshell revelations last week.

This week, Andrew McIntosh followed up with a couple of more articles. The main one was devoted to how l'Association québécoise des retraité(e)s des secteurs public et parapublic (AQRP), the Caisse's biggest client which represents Quebec civil servants, is demanding that the government of Quebec does another special commission to determine why the Caisse lost billions in the ABCP fiasco. It quotes Mathieu Santerre, the acting director of the AQRP as saying the new revelations are serious and need to be investigated. "Le chat est finalement sorti du sac," which means "the cat is out of the bag."

The second article quotes me as saying "Quebecers and Canadians deserve to know the truth." It also mentions that I dined with Henri-Paul Rousseau roughly a year before the crisis erupted and he told me the Caisse has the "best risk management among all pension funds in Canada." You can read my full comment on the Caisse and how it was warned of the ABCP meltdown here.

Unfortunately, the article doesn't mention the main culprit I singled out in my comment, Richard Guay, the former head of risk at the Caisse who was also placed as the CEO when Rousseau left the Caisse. That stint didn't last long as Mr. Guay couldn't handle the pressure of the job. He was replaced by Michael Sabia who moved quickly to clean up the mess his predecessors created (Sabia has done a great job for the most part which is why his mandate was recently renewed for another five years).

Richard Guay left the Caisse and is now teaching finance at the University of Quebec in Montreal. No doubt, he's teaching his students all the wonders of the efficient market hypothesis and how markets are always rational (what a joke!). He'll also teach them how indexing is far superior to active management (it is in most cases but  not always, a concept which was alien to Guay who foolishly decided to index away the Caisse's global markets and emerging markets stock portfolios after he sold equities at the worst possible time to shore up liquidity and make up for the losses in the ABCP and complicated swap portfolios).

As I stated in my comment last week, Richard Guay and others need to be brought in front of a second special commission looking into the new revelations on the ABCP losses that roiled the Caisse. The first few questions I would ask Guay are: "Mr. Guay, you're a very smart guy. You have a PhD in finance, a CFA, understand market risk extremely well, so how did you not see the liquidity mismatch in the ABCP portfolio? Didn't you understand the extreme risks the Caisse was taking investing in illiquid commercial paper? Why did the Caisse buy more when the market was crashing? How much leverage did the Caisse use to fund these portfolios and other illiquid portfolios?"

I suspect Guay will answer that "nobody saw the crisis coming" and "this commercial paper was well rated by the ratings agencies." We now know the Caisse was warned of the ABCP meltdown. I even saw the credit crisis coming and researched it the summer of 2006 when I was working as a senior investment analyst at PSP Investments. I was actually looking more at U.S. issuance of CDOs and it scared the hell out of me (the ABCP crisis in Canada hit before the U.S. crisis).

As far as the ratings agencies, they screwed up royally. Period. I remember a conversation I had with Scott Hayman, the former VP, Investments at Kruger's pension fund, where he told me a broker called him up to sell him ABCP. Scott told me the broker threw this pitch at him: "It's well rated paper, it's a no-brainer." He replied: "It's a no-brainer because you have to have no brains to invest in this paper."

I'll share another true story with you, a lunch I had with Christian Pestre, the former CIO of the Caisse, and two former traders who are now managing high net worth money here in Montreal. Pestre was trying to get them to seed his hedge fund. He carefully explained his strategy arbitraging long-term interest rate swaps and was convinced they would buy into it. One of the traders looked at him and blurted: "Stay where you are and keep using the Caisse's balance sheet, nobody in their right mind would ever fund your strategy" (the look on Pestre's face was absolutely priceless!!!).

I'm telling you, I should write a book on all the crap I've seen in Pensionland, it will blow your mind away. I've seen it all. So many smart people doing such ridiculously stupid things, it's mind-boggling. The problem is most of these "intelligent people" never managed money in their lives. They think their degrees and industry credentials make them top money managers but they're utterly clueless. In fact, their degrees and credentials make them extremely dangerous because they fool most people into thinking they know what they're doing (they don't, they're just polished academic hacks who will knock your socks off with fancy PowerPoint presentations and meaningless financial lingo).

The only question we should all be asking now is why the media is covering up the ABCP scandal at the Caisse. Apart from Andrew McIntosh of the Journal de Montréal and a few others, there is a major media cover-up going on and it really stinks. I know covering the trials and tribulations of mayor Ford and senators Brazeau, Duffy, and Wallin sells newspapers and does wonders for television ratings, but where the hell is the media when it comes to covering how billions were lost in Canada's ABCP market? So many institutional and retail investors got wiped and yet the media is all hush about the latest revelations (never mind what the Caisse and National Bank say).

Finally, a few notes. Jim Leech and Jacquie McNish were in Montreal yesterday promoting their new book, The Third Rail. Jim told me that Ontario Teachers never invested in ABCP. He also stated that they now use a nominal discount rate of 4.75%, which has to easily be one of the lowest discount rates among global public pension funds (he said if they used CalPERS' discount rate, they'd be 180% over-funded).

And last night, I was invited to a cocktail celebrating the 15th anniversary of Crystalline Management Inc., one of the oldest and best convertible arbitrage hedge funds in Canada run by Marc Amireault, a former portfolio manager at the Caisse. They are now looking to expand their strategies and are gearing up to introduce a global macro fund run by Mathieu Lachance who gave us his overview of the global economy and financial markets. I congratulate Marc and his team and urge my readers to contact them for more information. Great guys who know how to manage money.

At the cocktail, I spotted a few former Caisse guys, including Luc Verville, the former trader in the middle of this ABCP scandal who is now CIO of the CSN fund. Another former Caisse guy turned to me and whispered "he was made a scapegoat for all this." I told him "Verville has his share in all this but you're right, he's a peon, there are much bigger fish to fry, starting with Richard Guay."

So let's get on with exposing the truth and start frying some bigger fish. Quebecers and other Canadians deserve to know why billions were lost in the ABCP market. The government of Quebec has to get cracking on a second special commission to investigate the latest revelations. And the Auditor General of Quebec should hire an external firm to help them conduct a thorough investigation into what happened and who was responsible (subpoena emails, records, tapes, and anything else that is needed). Take the time to watch  Sophie Durocher's radio interview with Andrew McIntosh by clicking here.

Below, an older interview with Richard Guay, the former head of risk and CEO of the Caisse, talking about hedge funds. I can't help but smirk when I listen to Guay talking about hedge funds. I'm sure Mario Therrien shares my sentiments.

Postscript: Diane Urqhart, an independent financial analyst who represented thousands of retail investors that got hammered by the ABCP meltdown, shared this with me:

The Caisse made a huge mistake in owning too high a percentage of its total portfolio in ABCP given its exceptionally high risk relative to the marginal incremental return. Also, according to the evidence presented in the OSC hearing on Coventree misrepresentations, the Caisse then engaged in activities compounding its problem: bought more ABCP to keep the market rolling; co-operated with Coventree to move US subprime mortgages out of the trusts it owned to trusts other investors owned; did massive selling of CIBC bankers acceptances to create financial distress on this bank in order to force its co-operation to keep ABCP in its inventories and to make the ABCP market look healthy; and, finally, is rumored to have been the confidential funding source for 60% of the $177 M settlement with the Canaccord and Credential retail customers ($188 M settlement with interest paid from the ABCP trusts) even though it was not responsible for the losses of these people.

Overall, the Caisse did inadequate due diligence and was duped by Deutsche Bank AG, who was the biggest winner from this and who, in my opinion, committed alleged fraud in respect to the design of the paper. There has been no evidence of any specific kick-backs paid to the Caisse managers to buy the ABCP. However, the Caisse's actions to artificially keep the market rolling, move US subprime mortgages out of the paper it owned, force financial distress on the CIBC and then generally cover-up what it did post the ABCP crisis are unsavoury actions, that might reach the level of fraud, even though its own exposure to ABCP was simply gross negligence.

I thank Diane for sharing her insights on this important topic. I received a few comments from people telling me that brokers made off like bandits and there likely were bribes involved. The brokers did make off like bandits in this ABCP scandal and the banks got away with a slap on the wrist. I will leave it up to the police and regulators to determine whether anyone received kickbacks in this sordid affair (it wouldn't shock me).

Gérald Fillion - Le retour des «hedge funds» by radio-canada