Check against delivery
November 28, 2007
Opening statement by Mr. Henri-Paul Rousseau, President and Chief
Executive Officer of the Caisse de dépôt et placement du Québec, on the
occasion of the review of the commercial paper crisis by the Committee on
Public Finance of the National Assembly of Québec
QUEBEC CITY, Nov. 28 /CNW Telbec/ -
Members of the National Assembly,
Thank you for your invitation.
Before going any further, there are a number of things that I should like
to state quite clearly.
The Caisse is in excellent financial shape.
The same is true of its depositors.
Over the past four years, the Caisse has made a great deal of money, with
returns of 15.2%, 12.2%, 14.7% and 14.6%.
Since December 31, 2002, depositors' net assets have increased by
$65.8 billion, going from $77.7 billion to $143.5 billion at the end of 2006.
Our returns account for 84%, or $55.3 billion, of that growth. Simply put,
this is a return of $13.8 billion a year.
Our depositors have received very substantial amounts of money.
Those were very good years. The Caisse outperformed the market and
outperformed its Canadian peers.
It is important to make as much money as possible in good years, because
in the world of finance, some years are good and others are not so good.
Moreover, each year for the past four years, I have said and written that
returns like the ones we were earning were not sustainable over the long term.
The depositors' long-term target return is 7%, and the average return for
the past four years is 14.15%.
The financial health of the Caisse and of its depositors is therefore
good, even very good. Québec's contributors and retirees do not have to be
The current problems on Canada's commercial paper market are not going to
There are at least four reasons why I can make that statement:
- First, the assets underlying the ABCP held by the Caisse are of very
good quality; that has been confirmed by the work of the Pan Canadian
Committee overseeing the restructuring of this market;
- Second, the Caisse's exposure to the well-publicised U.S. subprime risk
is limited, and the eventual provisions regarding these investments
will not change the depositors' financial equilibrium;
- Third, there is no liquidity crisis at the Caisse. We have classified
all our holdings of third-party ABCP as medium-term investments. We
have re-established the necessary liquidity to meet our depositors'
needs and to continue making investments. The Caisse therefore has no
need to liquidate its investments in ABCP.
- Fourth, the Caisse is a long-term investor and fully has the means to
wait until it investments in ABCP produce the expected return. That is
not true for all the investors, but it is for the Caisse.
Finally, I would like to point out that commercial paper is a quality
financial product. It is true that Canadian ABCP includes subprime mortgages,
but in a very limited proportion. We now know that Canadian ABCP appears to
correspond more or less to what it was deemed to be, namely assets of very
We will see, however, that Canada has a specific variation of this global
crisis. The mechanisms that were supposed to maintain the market did not work,
essentially because the international banks that were supposed to provide
liquidity lines in such a situation did not do so.
From the outset, the Caisse assumed leadership in Canada by bringing
together investors to put in place a solution to the problem. The
restructuring of the market by the Pan Canadian Committee that is overseeing
this project is well on its way and will ensure an orderly resolution of what
was a crisis and is now being put into proper perspective.
That is the essence of my comments.
Now let's take a look at some of the details.
First, I am compelled to state clearly and unequivocally that at no time
during my tenure as head of the Caisse de dépôt et placement du Québec have I
encountered any direct or indirect interference from anyone who has held the
position of Premier or Minister of Finance or any other political or
administrative position in the government, whether in this government or the
The Board of Directors and senior managers are legally responsible for the
Caisse's management and results, and we are always surprised when this
responsibility is attributed to politicians who are not and must not be
involved in these decisions.
As the most senior officer, I am fully accountable for the Caisse's
results and the quality of its management, and I assume my responsibilities.
You will therefore understand that I was impatient to meet with you in
order to respond to your questions and concerns.
In addition to ABCP, I know that economic development is of interest to
you and I can also answer your questions on that matter.
In the normal course of its operations, under its incorporating Act, the
Caisse prepares audited financial statements as at December 31 of each year
and makes a full accounting in its annual report, made public in the spring.
The Caisse's financial statements are audited by the Auditor General of
Under the Act and the agreements with its depositors, Caisse senior
managers also report regularly to the Board of Directors and to the
depositors, on both its results and its management.
But you will say that the commercial paper crisis is not part of the
normal course of things.
So why has the Caisse not disclosed the figures pertaining to its
investment in third-party ABCP?
If we have not done so until now, it is because we decided, with the
agreement of the Board of Directors, that it was not in the depositors'
interests to do so.
Here is the explanation.
Canada's commercial paper crisis does not stem above all from the problem
of subprime mortgages in the United States, even though this problem was one
cause of the crisis.
We now know that subprimes represent only a small percentage of the total
ABCP that is being restructured, and that 97% of this paper consists of
high-quality assets, as recently established by the Crawford Committee as well
as by DBRS.
The Canadian crisis is therefore not a credit crisis but a made-in-Canada
liquidity crisis, caused essentially by the large international banks, which
realized that, as a result of a loophole in Canadian regulation, they possibly
could not be legally obliged to honour their liquidity undertakings in Canada
and thus could use their liquid assets elsewhere in the world.
The result was a complete standstill for transactions involving this paper
and the crisis we know. After making many telephone calls in Canada and
outside the country and realizing that the lack of liquidity could have
repercussions not only for the investors concerned but also for the Canadian
market as a whole, the Caisse quickly took the initiative of bringing together
other investors to find a solution.
That is how we ended up, August 15, 2007, in the middle of the night, in a
meeting room at the Caisse, with other Canadian investors, namely the federal
Public Sector Pension Investment Board (PSP), the Desjardins Group, National
Bank, CIBC, Scotiabank and the rating agency DBRS, negotiating with the large
These meetings gave rise to what is now referred to as the Montréal
Accord. Although CIBC and Scotiabank refused to sign on, the agreement binds
the international banks involved in Canadian ABCP. The signatory banks are
ABN AMRO, Barclay's Capital, Deutsche Bank, Merrill Lynch and UBS.
Since September 6, 2007, the agreement has been overseen by a Pan Canadian
Committee chaired by Purdy Crawford. In addition to the original members, a
number of other Canadian investors have joined the Committee. They are Alberta
Treasury Board Financial, Canada Post, Credit Union Central of British
Columbia, Credit Union Central Alberta, Credit Union of Ontario, Credit Union
of Saskatchewan, Canada Mortgage and Housing Corporation, Credit Union Central
of Canada, Canaccord Capital Corporation, NAV CANADA, Northwater Capital
Management, University of Alberta and Magna International.
The agreement was initially concluded until October 14, 2007, but has
since been extended until December 14, 2007.
Between August 15 and September 6, the objective of all the parties was to
progress from crisis management to control over the situation.
The initial period was complex and difficult, because we had to gather the
investors around the table and ensure that the interests of the various
It meant increasing the percentage of support for the Montréal Accord by
ensuring that the Canadian banks, which had not signed the agreement,
contacted their clients and persuaded them to join the agreement. It also
meant co-ordinating numerous stakeholders on a completely private basis,
including investors, distributors, trustees and limited partners. Lastly, it
meant obtaining from the large international banks the information needed for
an orderly negotiation.
And Québec's Minister of Finance was instrumental in helping me and the
Québec signatories to the agreement accomplish the three things I just listed.
Her initiatives with respect to the Bank of Canada and the federal
Department of Finance were very important in enabling us to stabilize the
situation. She did so tactfully because she had to respect the confidential
and strategic nature of the information I provided her with, while respecting
the Caisse's independence in accordance with the applicable rules of
governance and while playing her role as the ultimate fiduciary. Her
interventions to the Governor of the Bank of Canada and the federal Deputy
Minister of Finance contributed to the successful creation of the Crawford
Committee and our obtaining the support of 84% of Canada's third-party ABCP
You should know that, from the outset of the negotiation, we planned to
make public the amounts invested by the Caisse in third-party ABCP.
We rapidly saw, however, that our counterparts at the large international
banks were not prepared to disclose the information required to negotiate
Given the extreme difficulty of these talks on access to information, we
decided, like the other members of the Committee, that it would not be in the
interests of the investors to disclose our own information until the
negotiations on access to information were complete and all the parameters
were known. In other words, there was no question of showing our hand
prematurely. That would have weakened the position of the Committee, which had
to speak with a single voice during the negotiation, which was crucial to the
success of the restructuring.
Moreover, the Committee adopted a very strict framework for the control
and confidentiality of information. Each investor and each trust disclosed its
information on a confidential basis to Ernst & Young, which acted as an
information intermediary between the various parties. Ernst & Young in turn
provided the information in aggregate form to J.P. Morgan, the financial
adviser selected by the Committee.
To give you an idea of the complexity of the situation, the negotiations
with the large international banks regarding access to information took two
months, lasting from August 15 to mid-October, 2007.
This long period was due to the fact that, under the Montréal Accord, the
signatories retained their right to take legal action against the
international and Canadian banks. Yet, to negotiate an orderly solution, we
had to obtain strategic information from the banks that had signed the
agreement, although this information might be useful in an eventual lawsuit.
To say that it was a very complicated situation is an understatement.
Once these steps were completed, the quality of the information obtained
from the banks was analyzed by the adviser to the Crawford Committee, J.P.
Morgan, which confirmed its validity at the end of October.
When the Board of Directors met on October 25, 2007, it reiterated the
relevance of respecting the Caisse's annual reporting framework and the
agreement with the Crawford Committee.
With the agreement of the Board, however, I informed the Minister of
Finance that the Chairman and I were prepared meet with the members of the
Committee on Public Finance if they deemed it advisable.
The Minister suggested such an invitation to the National Assembly on
October 30. On Thursday, November 22, we received your invitation to today's
In short, from August 15 to late October, the Caisse could not contemplate
disclosure without running the risk of jeopardizing the negotiation and
protection of the holdings of the depositors and the Crawford Committee
Of the 17 members of the Committee, only four have officially disclosed
their position in the ABCP market, namely National Bank, the Desjardins Group,
Alberta Treasury Board Financial and Magna International. These four members
were obliged to do so because of various obligations applying specifically to
With issues access concerning to and analysis of the information resolved,
Caisse senior management and the Board have decided to make public today the
level of our investments in third-party ABCP and the level of our exposure to
U.S. subprimes. The members of the Crawford Committee have been informed of
this decision and did not object.
Now let's look at the figures.
At the end of 2006, the Caisse had total assets of $207.9 billion. This
amount consisted of $143.5 billion of depositors' net assets and $64.4 billion
of assets financed by borrowing.
As at December 31, 2006, the total assets were diversified among the
following investment categories: bonds, publicly traded equities, private
equity, real estate holdings, real estate debt and investment funds. The
assets also included short-term investments amounting to $33.6 billion, or 16%
of total assets. These short-term investments constitute the Caisse's liquid
assets, in other words investments deemed to offer a high degree of liquidity
and a low level of risk.
The Caisse maintains liquid assets for three main reasons:
First, to meet the requirements of the depositors, which, in their
investment policies, allocate a portion of their funds to this investment
Second, being liquid means we can rapidly take advantage of business
opportunities to enhance depositors' returns;
Finally, the sale of investments, the receipt of dividends and interest,
and the proceeds of financial engineering operations increase the Caisse's
The Caisse manages all these liquid assets centrally, regardless of the
specialized portfolios they belong to.
Since the start of the crisis, third-party ABCP has not been included in
the Caisse's liquid assets.
Despite this change, the Caisse was able to re-establish a solid liquidity
position. Standard & Poor's issued a press release on September 28 confirming
our AAA rating and strong liquidity position. The two other rating agencies
were also informed of the situation and maintained their AAA ratings.
What is even more important, the Caisse continues to carry out its
business plan and it has the necessary liquid assets take advantage of all
The Caisse has a total of $13.2 billion invested in third-party ABCP.
This amount may seem high. Moreover, it is correct to say that, in dollar
terms, the Caisse is the investor that holds the most third-party ABCP in
Canada. But as a percentage of its equity, if we compare it to those who have
disclosed their positions to date, the Caisse is the least exposed. The Caisse
was therefore not the only Canadian investor with a strategy that assigned an
important role to third-party ABCP.
Now let's talk about subprimes.
Of the $13.2 billion, the Caisse's exposure to subprimes is slightly less
than $1 billion.
But let me make this clear: not all of the one billion dollars of exposure
to subprimes will eventually be subject to a provision.
Currently, the provisions taken by the large international banks represent
from 30% to 50% of their subprime exposure.
Assuming a provision as high as 50%, for the Caisse that would mean a
provision of $500 million. Such a provision would have an impact of 30 basis
points on the Caisse's return, or 0.3%, which is not likely to affect the
financial equilibrium of the Caisse and its depositors.
To cite another point of comparison, Goldman Sachs estimated in a recent
study that the provisions of the large international banks for their U.S.
subprime exposure were equivalent to 8% of their equity. For the Caisse, as I
have stated, this ratio appears to be 0.3% of net assets as at December 31,
The remainder, namely $12.2 billion, consists of assets of very good
quality, as confirmed by J.P. Morgan, the adviser to the Crawford Committee.
Now let's look at another important matter.
As you know, a few publicly traded companies recently had to state the
fair value of the third-party ABCP they hold. It is important to note that
these companies had no choice but to do so now, in light of their obligation
to publicly disclose their financial results and generally accepted accounting
principles in Canada.
The timing of this valuation could not have been more poorly chosen,
however, because the market is experiencing a liquidity crisis and the
Crawford Committee has not yet finished its work.
We must draw a clear distinction between a valuation that establishes a
liquidation value rather than an ultimate recovery value. It is necessarily
the recovery value that must apply in the case of a solid investor prepared to
wait for repayment of the underlying debt when nothing indicates that such
repayment is in jeopardy. The quality of the assets is the essential
For example, more than a third of the Caisse's assets are not liquid, such
as private equity and real estate holdings. But these assets are not recorded
at their liquidation value.
Thus far, investors holding up to $10 million of third-party ABCP have
taken writedowns ranging from 0% to 40%. Those holding from $10 million to
$100 million have taken provisions ranging from 0% to 15.4%. Those holding
$100 million to $1 billion have taken writedowns ranging from 0% to 19.3%. The
decrease in value for the three investors with direct exposure exceeding
$1 billion is 6.5%, 8.4% and 25%.
There are several reasons for these differences:
- First, there is the degree of subprime exposure;
- Second, there is the fact that the restructuring of the market is not
- Third, the write-downs taken by certain institutions may be greater
because they simultaneously played several roles on the ABCP market,
acting as trustees, distributors and advisers as well as suppliers of
assets and liquidity. That is not true of the Caisse;
- And, fourth, there is diversification. Unlike the Caisse, certain small
investors did not have the same degree of diversification among the
various trusts, which also explains the differences observed.
The Caisse will therefore determine the fair value of its third-party ABCP
as at December 31, 2007, according to the context and the circumstances
prevailing at that time. Now that we know what our subprime exposure is,
what's left is to do a valuation of the other assets as at December 31, 2007.
We will do so rigorously, but since the quality of the assets has been
demonstrated and the Caisse is a patient investor, none of the scenarios
contemplated is likely to change the financial equilibrium of the depositors,
given, among other factors, the amounts earned in the past four years.
As he does each year, the Auditor General of Québec has already filed his
audit plan for 2007, and it includes a review of the ABCP valuation. The
Caisse's overall audited results for 2007 will be made public in February
At this point, I should like to state that I have agreed with the main
depositors that I would inform them of, and that I would make public today,
the allocation of the $13.2 billion of third-party ABCP to their respective
accounts. These amounts are generally speaking in close proportion to their
relative weight in the net assets of $143.5 billion.
The total $13.2 billion of ABCP held in the accounts of the various
depositors breaks down as follows:
- RREGOP $4.0 billion
- RRQ $2.8 billion
- FARR $2.7 billion
- CCQ $854 million
- CSS $779 million
- RRPE $671 million
- SAAQ $634 million
- Other $650 million
In passing, I should like to thank the depositors for their continuing
support for the Caisse in recent months, their understanding and their
patience. I know, because I have spoken with the representatives of many of
them, that they understand the situation and that they support the Caisse's
actions in this matter.
You may ask why the Caisse invested in this financial instrument when
other Canadian investors did not.
We must bear in mind that the Canadian ABCP market has two components.
That of the Canadian banks is estimated at $83 billion and that of third
parties is estimated at $33 billion.
The Caisse, like many other sophisticated investors in Canada, believed
that a liquidity crisis on a market of more than $116 billion was highly
unlikely for three reasons:
- First, a standstill on the Canadian ABCP market as a result of
contamination by U.S. subprimes, while not impossible, was unlikely;
- Second, international and Canadian banks were expected to provide the
necessary liquidity to the market in such a situation, which they did
not do as a result of a certain interpretation of Canadian regulation;
that also appeared to be unlikely;
- Third, we were convinced that if the one component of the market
experienced a liquidity crisis, the other would also be affected and
that, since the market represented $116 billion, the Bank of Canada
would provide liquidity not only to the Canadian banks but also to the
entire market. We now know that the Bank of Canada assisted the bank
component of the market but could not assist the third-party market.
Moreover, the Deputy Governor of the Bank of Canada, Pierre Duguay, stated
in an address he gave in Québec City on November 20, and I quote: "This raises
the question of whether some market failures might be better dealt with if the
central bank established mechanisms that would provide liquidity at terms
longer than overnight, collateralized with a possibly wider range of
Beyond the matter of ABCP, I believe it is important to say a few words
about the year in progress.
The 2007 returns earned by Canadian pension funds will be strongly
influenced by the four following factors: the appreciation of the Canadian
dollar against the world's main currencies, the impact of the credit crisis
caused by subprime loans in the United States, the extreme volatility of the
financial markets and, lastly, the liquidity crisis affecting Canada's
For example, figures available on the performance of pension funds in the
third quarter of 2007 showed that currency-hedging strategies have had a
determining impact during the year in progress. In this respect, the Caisse's
hedging strategy alone will have a positive impact of several billion dollars
on its 2007 results.
We will obviously have to wait until year-end to measure precisely the
impact of the markets and the Caisse's investment decisions in 2007 but I
remain confident about this matter.
In conclusion, I would like to address another matter raised by the
situation, namely: "Does the Caisse assume too much risk in its fund
The answer to this question is most definitely no. In fact, in recent
years the Caisse has assumed less risk and has obtained better results.
The Caisse's objective is to produce value added, namely a performance
superior to that of the markets alone. The Caisse's basic value-added target
is 90 basis points. Since 1986, or for 20 years, the only consecutive
three-year period in which this value-added target was exceeded and when the
Caisse also ranked in the first quartile of large Canadian pension funds was
from 2004 to 2006. That is shown in table 1 appended to the text of this
statement. We achieved this historic performance while reducing the level of
risk in relation to our peers, as shown by the figure in appendix 2.
It would therefore be wrong to state that the Caisse assumes too much
risk. On the contrary, it succeeds, while assuming less risk, in producing
better returns than its Canadian peers.
Thank you for your attention.
To consult the appendices 1 and 2, please click on the following link:
For further information:
For further information: Gilles des Roberts, (514) 847-2175