Good morning, Mr. Chairman and members. Thanks for the opportunity to come here this morning.
I come as a private individual. I took up this issue in 2002, so I come at it from an intellectual and moral perspective.
What I'm trying to focus on is the Canada Pension Plan and the board and its conduct. So I'll read from this text that you all have in front of you but others may not have seen.
The formation of the CPP IB as an independent corporation had to have occurred after representations were made that moneys surplus to the immediate needs of the CPP could be invested in other than government bonds to a significant financial benefit of the plan members.
The CPP legislated mandate is to act in the best interests of CPP contributors and beneficiaries, to maximize investment returns without undue risk of loss, and to take into consideration the CPP’s funding status and ability to meet its obligations. The reference there is from the legislation.
Beginning in 2002 I expressed my concerns to the finance minister, and my worries then and now are the following.
First, the CPP IB might become an investor of last resort for failing companies.
Second, equity investments represent an elevated level of risk incompatible with the mandate, and not understood or accepted by the contributors or the beneficiaries.
Third, private equity investments--more correctly described as speculations--have no place in the CPP fund, as valuations are not determined objectively when either purchased or valued.
Fourth, liquidity of many of the investments at the CPP fund will be compromised and often are unavailable.
Attached under tab 1, which you don't have, are copies of my representations, predominantly to the ministers of finance, beginning with a letter dated January 14, 2005, to the Honourable Ralph Goodale, and finishing with a letter dated February 18, 2009, to the Honourable James M. Flaherty. In each letter the theme is the same, but I have introduced examples of inappropriate investments--speculations, in my judgment--which support my concerns.
Attached under tab 2 are copies of articles and notices of these inappropriate investments. To help with the appreciation of the nature of a financial investment and speculation, I've included a short definition as well.
A speculation is where there is no promise of safety of principal and a financial return on the money, such as an interest payment. Posted on February 28, 2007, was a report titled “CPP Investment Board dips toe into U.S. real estate market”. The $500 million U.S. was characterized by the author of the article as a first major bet.
In contrast and well before this transaction, the Governor of the Bank of England publicly cautioned the British banks to be prepared for a 40% rollback in real estate values.
Additionally, the CPP IB would have had knowledge of the U.S.-based Case-Shiller housing index. In early 2007 that index was at an all-time high of 210, when the steady state is normally around 100.
Posted in The Globe and Mail on May 5 was a story about the CPP IB speculating on the prospect of building a very controversial power transmission line in Patagonia.