The Caisse and the mysterious life of market makers
The political crisis around the Caisse’s dismal performance continues to haunt the political scene in QuÃ©bec. Urged to explain how up to 40 billion dollars might have been lost during his management Caisse ex-director Henri Paul Rousseau largely blamed the economic and financial crisis, factors beyond his control. Asked why and how the Caisse ended up with so much ABCP in its books in the weeks leading up to the credit crunch (more than half Â of non bank ABCP) Rousseau replied that it remains “one of the mysteries of life”.Â
Some mysteries are more easily solved then others.
When Rousseau was called to the helm of the Caisse by PQ Prime minister Bernard Landry (and self-styled third way social democrat) he explicitly underscored his desire to change the Caisse’s dual mandate from the active pursuit of economic development and financial returns to a new mandate inspired by financial market efficiency theory: what’s good for financial markets must be good for economic development. Armed with this new mantra Rousseau asked that the Caisse’s operations and investment decisions by “neutralised” politically and that the mandate to develop QuÃ©bec’s economy and protect “QuÃ©bec INC’s interests” be scrapped. It took a provincial election and the rise to power of the (neo) liberal party of Jean Charest for the mandate to be changed.Â Progressives and left wing nationalists have argued since that the Caisse has not only deserted QuÃ©bec’s economy as a major investor, but that it hasÂ tacitlyÂ supported neoliberal policies such as P3’s.Â
What does this have to do with ABCP ? I’ve argued in the francophone press (an op-ed piece in the Devoir) Â and media that in fact the Caisse did have a new mandate of economic “development”. Given it’s size in QuÃ©bec’s economy and in Canada’s financial system, a decision to limit the Caisse’s investment strategy to the pursuit of highest possible financial returns condemned the Caisse to develop Canada’s …. financial markets. The Caisse owned at least a 10% stake in Coventry, a major provider of non bank ABCP, it also controlled the Montreal exchange, who’s derivative activity is intimately tied to the development of non bank ABCP, and it Â works closely with National Bank, a major reseller and broker in the non bank ABCP market in Canada back in the good old days when these constructs where assimilated to highly liquid, highly secure, highly profitable “money market” instruments. All the evidence I’ve stumbled on seems to point to the Caisse acting as “market maker” in this situation, why ? Because developing this new segment was highly profitable in a context of low returns on stock, because it supported the Montreal exchange’s bid to become an important player in the derivatives scene, because it dovetailed with the National bank’s strategy, and on the whole the Caisse seemed, back then, to help Montreal’s insignificant financial district become a significant player again.Â
Progressives in QuÃ©bec are arguing that in times of economic crisis and crunched credit markets the Caisse should be available as a policy tool to help ourÂ beleagueredÂ manufacturing sector weather the storm and more importantly lead with a public investment strategy our economy towards greener and more socially sustainable growth. Instead the current government is thinking of having the Caisse finance P3’s that the private sector can’t fund and has named the head of the Montreal exchange as president of the Caisse’s administrative council…. more of the same to come ?
Professor of sociology at UQAM and political economist specialised in the analysis of financial systems, institutions and relations.