Bergeron: The Caisse Post-ABCP

Coverage of the 2017 Risk Management Conference

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A decade ago, the asset-backed commercial paper market (ABCP) in Canada seized up, presaging the global financial crisis a year later. It took years to resolve and Claude Bergeron, now the chief risk officer at the Caisse de depot et placements, was in the thick of it.

Securitization markets seem to be flourishing now, but Bergeron. says he learned a number of lessons from the risk time-out. The most important: “You must know in detail in what you invest. That for me is the basic rule.”

Part of the problem then was that, unlike traditional securitizations, where a bunch of loans are packaged together and tranched out to investors, the product contained synthetic securities as well as leverage. Today, he says, people are a lot more careful.

Another lesson: “You cannot presume that the liquidity is there forever in any products.”

Barbell approach 

Now the Caisse has a deliberate strategy around liquidity, adopting a barbell approach in fixed income as well as holding a liquidity reserve based on scenario analysis and stress testing.

For ABCP, another part of the problem was the duration mismatch between the short-term paper marketed as a higher-yielding alternative to T-bills and the underlying derivative exposure. People assumed there would be no variation in the credit spreads as the paper was rolled over.

“Despite the fact that the underlying credit was very good, to assume you can nance a long-term exposure like this with a short-term paper,” says Bergeron. “It doesn’t make sense.” Thus, analysts must pay attention to the structuring of products.

Beyond that, with the elevation of Michael Sabia to CEO – a CEO who didn’t come from the investment world – the Caisse has broken down its once-siloed compartments.

Today, investment committees oversee particular strategies with members drawn from all sectors – public equities, private equities and risk management, for example.

“There are people from the portfolio and people from outside the portfolio,” explains Bergeron. “All together are accountable for the decisions, so in fact we have a new culture where you force people to go in depth because they are challenged – and now it’s normal to be challenged.”

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