NAVCS part 2

One of the highlights of yesterday’s North American Venture Capital Summit in Quebec City was a virtual global economic tour, provided by none other than CDP CEO Henri Paul Rousseau. I had never seen him in action before, and I was struck both by his sense of humour as well as his readiness to answers questions directly and frankly. His imposing figure is softened by his demeanour, which isn’t expected in the form of the most powerful figure in Quebec business.

On Monday night, my former boss, Brian Mulroney, told a story of his congratulatory call to Mr. Rousseau on the news of his appointment to the top role at CDP. Mr. Mulroney said that “I used to call him ‘Henri-Paul’, but now I call him ‘Your Excellency’. And he didn’t mind it one bit.”

Mr. Rousseau delivered a powerpoint presentation to a very focused group of 200+ leading merchant bankers and VCs, and there were plenty of insights worth passing along. One got the sense that he was sharing with us the very data that drives decision-making at the $150 billion fund. He seems to be exactly the type of person that you’d want running La Caisse.

Here are the highlights from his lecture:

“Confidence in the credit markets depends on the credit agencies.”

“The short term challenge is now to transit from a potential credit cruch; to do that we need to:

– reduce short term rates
– have higher and more appropriate credit spreads
– encourage renewed liquidity”

“Markets will overshoot on pricing in the short term.” In essence, people will charge more for credit than might be warranted. Sounds like what’s currently going on with LIBOR.

Mr. Rousseau cautioned that while the capital markets may appear to be on their way back, “not all problems have been resolved. Bank funding remains difficult in the 6 month duration, volatility is still high, CDX index says credit spreads – and therefore risk – are substantially higher.”

I thought that one of the most frank points was his warning that the “crisis is likely to drag on. [The] length of the crisis is expected to be longer than previous ones.”

Some of the key events still to be dealt with include:

– “roll-over of large amount of ABCP in the Fall. How?”

– “many of the [CDO] vehicles’ valuation could be tied to indicies, rather than the underlying assets. Which means that even though the underlying assets are performing, the valuation will drop due to these 3rd party, indrect indicies.”

– “Erosion of global banks’ balance sheet” due to undercapitalization on the one hand, and the gradual implementation of Basel II scheduled in Europe for 08 and US for 09.

– “U.S. mortgage interest rate resets will have an impact on 5% of homeowners.” This will touch more homeowners via the wealth effect.

– “70% of US GDP is from consumption,” so if the wealth effect turns negative, consumption will have to drop.

Three key questions for the coming months:

– “Regulators – can they unscramble the omlette.

– Will the world economy bail out US recession?

– Will Bernake reflate or not?”

On the last question, Mr. Rousseau believes that Bernake will have no choice but to “decrease rates.” That may well explain the continued weakness in the US$.

The message for governments, regulators and large financial institutions. “In the short term: weather the storm. Medium term: clean up the mess. Long term: establish transparency and restore full confidence.”

One of the things Mr. Rousseau wants is a “reform” of “rating systems and practices”. A clear shot at the Dominion Bond Rating Service, but also Moodys and S&P.

To sum it all up: “Positive for stocks. Negative for long term bonds. Patience is the key word.”

The guy was fabulous, obviously comfortable with the intricacies of economic theory, and he even can laugh at himself. When Mr. Mulroney, told the “Excellency” story, Mr. Rousseau laughed as loudly as the rest of us. Not many titans of finance are that comfortable in their own skin, and it was a treat to see.

MRM