Wednesday, November 28, 2007

Caisse under fire over commercial paper


Source: Reuters

MONTREAL — Quebec's public pension fund manager, Caisse de depot et placement, came under fire from opposition politicians Wednesday for taking what may be a multibillion-dollar stake in the troubled nonbank asset-backed commercial paper market.

Henri-Paul Rousseau, chief executive of the Caisse, Canada's largest pension fund, was scheduled to testify before the legislature's finance committee in Quebec City Wednesday afternoon on the extent of its holdings in the $35 billion market for so-called ABCP.

Before his testimony, however, Quebec's two main opposition parties demanded answers from the minority Liberal government on the Caisse's role in the frozen market for ABCP.

Mario Dumont, leader of the Action Democratique du Quebec, accused the government of washing its hands of the ABCP mess.

He criticized Quebec Finance Minister Monique Jerome-Forget for telling the legislature Wednesday that rating agency Standard and Poor's has lauded the government's policy of not intervening in the Caisse's management of investments.

“It's interesting that she cites Standard and Poor's. They said not to buy it -- commercial paper -- and the Caisse has $14 billion of it,” Dumont said.

Daryl Ching, head of Clarity Financial Strategy, which aims to educate corporations and professionals about the ABCP market, said there is plenty of interest in finding out exactly how much ABCP the Caisse holds.

“There have been guesses about their exposure of anywhere between $12 billion and $20 billion,” he said.

“If it's much higher than $13 billion, that'll be a shock to the market,” Ching added.

In Quebec City, Jerome-Forget told the legislature she had communicated with the governor of the Bank of Canada and Canadian Finance Minister Jim Flaherty on the matter, but Quebec would not intervene in the day-to-day management of the Caisse's portfolios.

“It's not that the Caisse has commercial paper, it's what is the quality of that commercial paper,” she said.

Gilles Taillon, finance critic for the ADQ, wanted to know if the Caisse's ABCP holdings could affect the solvency of some $27 billion of public employees' pension funds.

The Caisse, which manages Quebec's public pension and insurance funds, has $237 billion in assets under management.

It is widely believed to have been the biggest investor in that part of the ABCP market that is not run by the country's big banks.

That market faltered badly in August when investors balked at buying the securities because of fears that the assets backing the opaque instruments had hidden exposure to the default-ridden U.S. subprime mortgage market.

The Caisse led other key investors such as National Bank of Canada in signing the Montreal Accord, an agreement by those holding more than 80 per cent of the market to not trade the paper until a workout strategy could be put in place.

The deadline for that workout, which would seek to replace the paper with longer-term debt, is Dec. 14.


ClarityFinancialStrategy said...

Henri-Paul Rousseau, chief executive of Caisse de Depot, Canada's largest pension fund, revealed their holdings of ABCP to be $13.2 billion.

The Caisse is currently one of the largest stakeholders in the Montreal Accord and is highly motivated to work with Purdy Crawford`s committee to work out a solution in which the assets return a value as close to par as
possible. The Caisse has a substantial balance sheet and can wait out the restructure and flip their investments into their long-term portfolio, which they hope to yield par over a 7-10 year period.

Whether it is $12 or $20 billion of ABCP holdings, the Caisse should have been fully aware it was a significant percentage controller of the entire Canadian non-bank ABCP market. They should have been aware that their actions would have a significant influence on the entire ABCP investor community, and they should have taken the proper precautions to warn and explain to the market why they were no longer buying. When investors see spreads widen in a vacuum of information, there is a natural tendency to panic.

As an example, if Pension Fund Co. owned 30% of XYZ Corp., and if Pension Fund Co. were to sell all his holdings in one day without warning, this would cause wide panic and create a chain reaction of selling by the rest of the investors due to loss of confidence. When the Caisse decided not to purchase ABCP on August 13, it was a signal to the rest of the market that they had lost confidence in their investments.

In a world with very little transparency and where investors do not have a solid understanding of the underlying structures, when Elvis leaves the building, so does everyone else.

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