A Caisse of wild expectations

Take a deep breath. Remember, as you try to get to sleep at night, that while the $40 billion figure is staggering, it's not catastrophic.

Pas grave...

Led by opposition politicians and many media pundits, Quebecers were wringing their hands and shaking their heads yesterday over the news that the Caisse de dépôt et placement du Québec lost $39.8 billion last year.
That's about 25 per cent of the Caisse's whole value 14 months ago. The decline is much worse than the average drop in Canadian pension plans, which was 15.9 per cent.
Take a deep breath. Remember, as you try to get to sleep at night, that while the $40 billion figure is staggering, it's not catastrophic. The Caisse's total nest egg remains at $120 billion, more than it managed in 2004. And 56 per cent of the reported loss represents current holdings at market prices: a stock-market recovery would move those values back up, though surely not as fast as they have fallen.
Still, this is certainly the kind of news that generates angry questions. The Caisse manages Quebecer's pension funds, a matter our aging population takes seriously. What are we paying all those people in that over-priced building to do? National Assembly hearings will be necessary to get some answers, although there's a real danger that these will become a partisan sideshow.
The Caisse says it has two broad objectives, "generating a return that meets its depositors' expectations" and "limiting the risk of its overall portfolio." What happened over the fat years before 2008 was that these two goals became mutually exclusive as everyone's expectations rose.
In a sense all parts of Quebec society share the responsibility for this debacle, and the unfortunate results that might well flow from it. Everyone shared in the willful blindness of boom times - and walked blindly off the risk cliff late in 2007 and last year.
Look at the overall returns the Caisse reported under Henri-Paul Rousseau: 15.2 per cent in 2003, 12.2 per cent in 2004, then 14.7 and 14.6 per cent in the next two years. No Canadian pension fund did better. Those numbers look surreal from today's perspective, don't they? But in fact they merely mirror the boom in stock prices through those years.
We can see now that there was a "don't ask, don't tell" ethos at the Caisse, as across Canada and around the Western world. Nobody challenged the cornucopia of good news. Nobody asked about bubbles. We certainly didn't hear Quebec opposition parties, so vocal today, ask hard questions about those fat returns. Nor did we in the media. Nor did the investment industry, or just about anyone else.
So who should now answer for this eye-opening $40 billion loss of value? Certainly Caisse executives, starting with Rousseau, have some explaining to do. We know already that asset-backed commercial paper was a debacle, and the Caisse bet wrong on currency movements, too. Some detail about what went into these decisions would be welcome.
The Caisse is now without a permanent CEO. Rousseau abandoned ship last year, and his successor Richard Guay soon left, citing exhaustion. A new CEO, preferably from outside the organization, is urgently needed.
What's not needed is any review of the Caisse's basic mission. The Parti Québécois wants a Caisse vigilant to "protect Quebec's interests" by which that party always means interfering politically in ways designed to minimize economic integration with the rest of Canada. That kind of meddling was wrung out of the Caisse's mandate in the Liberal government's first term; it should not be revived.

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