Despite warning signs, Quebec's pension fund manager continued to accumulate asset-backed commercial paper to the tune of $900 million in the summer of 2007, a legislature committee was told Tuesday.

Claude Bergeron, vice-president of legal affairs at the Caisse de dépôt et placement du Québec, was testifying Tuesday at hearings into the financial institution's stunning $40-billion loss in 2008.

Caisse officials were aware that investor confidence in asset-backed commericial paper (ABCP) was crumbling in July 2007.

"There was a certain nervousness, a certain panic," Bergeron said. "And the panic began to rise."

But he added that despite the unfavourable signs, the Caisse "was reassured" by brokers and continued to acquire ABCP until Aug. 10, 2007.

"Today, it's easier for us to conclude the Caisse should not have bought non-bank commercial paper," Bergeron said. "But you have to remember that, at the time, there was uncertainty in the markets and there was not complete transparency and knowledge about the underlying products."

Caisse's poor performance caused by commercial paper, says ex-boss

The Caisse held a total of $13 billion in asset-backed commercial paper when the market collapsed in mid-August 2007.

Fernand Perreault, the former head of the Caisse, also testified and attributed the disastrous result in 2008 to the "error" of acquiring so much asset-backed commercial paper and to the collapse of the market.

Perreault, who was interim CEO after the departure of Richard Guay, said the Caisse would have done well had it not been for the ABCP and the exceptional circumstances.

Perreault also defended the Caisse's risk management policy, which has been cited as one of the reasons for the pension-fund manager's poor performance in 2008.

He said the Caisse's policies were similar to those of other financial institutions.

Perreault later admitted the practices constituted "too high a risk" by the end of 2008, when the markets were in freefall.

"Our practices in terms of diversification, leverage, risk management, variable pay, were neither new, nor unique, nor unusual nor excessively risky in the context that existed before the fall of 2008," Perreault said.

Market collapse was a tough time for Caisse managers

Guay also testified Tuesday at the commission, saying he was exhausted and overwhelmed by the effects of the financial crisis while in the top job. He said he preferred to quit his post rather than make mistakes at the helm of the financial institution.

"I did not know that the financial crisis would reach such a scale," he said.

Guay said he was beset by anxiety and fatigue shortly after taking the job and took the "difficult and agonizing" decision to return to the sidelines.

"I was split between my duty to the organization, to support the management and my colleagues to find a solution to the financial crisis which had hit the Caisse's holdings and my fears of making mistakes due to fatigue," he said.