Just released Carney memo refutes Flaherty's feel good claim

Logic in Carney's memo completely refutes Flaherty's claims that trust market had ever recovered:

Flaherty had attempted to absolve himself and his enormously damaging income trust tax, by arguing, for that brief moment in time about a year ago, that the income trust market had recovered from the $35 billion loss that he inflicted upon it. To make the argument that a return of trust values to something approximating where they were before his Halloween massacre, without regard to events in the larger market is completely spurious and intellectually dishonest, as follows:

Bloomberg News May 16, 2008: “Flaherty, who said in Ottawa Thursday it's "good to see" trusts recover their losses, plans to announce in "weeks" rules governing conversions so that investors and trusts won't be forced to pay taxes on the switch.

Even Mark Carney knows that.

I just came into possession of a memo written and signed by Mark Carney dated October 24, 2005 and sent to Finance Minister Ralph Goodale, where Mark is trying to lessen the impact, in the mind of the reader to the damage that was caused by the announcement in the fall of 2005 by the Department of Finance that CRA had suspended issuing any advance tax rulings that are required for companies seeking to convert to trusts.

Here is the relevant text of that memo and the logic argued by Carney that I agree with. However application of this logic to the situation cited by Jim Flaherty, would serve to completely contradict his feel good and false argument that the income trusts had recovered their lost value. As with any asset, stock market value is both an absolute and a relative thing. Flaherty should know that. How is it fair to say that people have recovered their lost value of $35 billion from his income trust tax, if all it took was 18 months of market risk and oil reaching a high of $180 per barrel? Jim Flaherty once again proves himself to be incompetent and deceitful. Furthermore, this statement completely ignores the fact that people are as concerned about [presrving their stream of montky payments as there are concerned about their value in the marketplace.

Mark Carney in a memo to Ralph Goodale, Finance Minister dated October 24, 2005, wrote:

“While it mat be accurate to say that the trust market lost $18.3 billion in market capitalization since the announcement. However this recent drop is a reflection is a reflection of general factors affecting all equity securities.

As we move further away from the announcement, it is more difficult to attribute movements in the trust market to single event (i.e [the Department of Finance} press release {concerning a suspension in the granting of conversions by the CRA]). We believe that the initial drop and subsequent recovery (September 19 –October 3) of the trust index reflected in the markets’ reaction to the announcement. Since then a number of factors have neagative impact on the trust market and markets generally but these market not be attributed to the announcement.”

This is how CAITI calculates the loss of $35 billion, as per our website:

Calculation of $35 billion loss:

The income trust market closed on October 31, 2006 at 164.86 as measured by the S&P/TSX Income Trust Index. On the evening of that same day, Finance Minister Jim Flaherty announced that he would introduce a 31.5% tax on income trusts. Two days later the index was at 138.21, This represents a loss of 16.2% which on a $200 billion market represents a loss of $32.5 billion. Two weeks later the index was at 135.51 representing a loss of 17.8% or $35.6 billion.

It is for this reason that we calculate the loss to be about $35 billion. To the extent that the Income Trust index has subsequently risen to higher levels does not diminish this “loss”. This is for two reasons. First, some investors may have sold immediately following this devastating announcement. Second, the subsequent increase in the index may itself be as a result of the effectiveness of advocacy against the trust taxation and therefore the market will have rebounded to reflect this degree of optimism. To the extent that this tax policy is actually enacted, this positive anticipation will dissipate and the index will drop to reflect this new reality. Second, there are an infinite number of variables that affect markets that would have intervened in the meantime that make it impossible to isolate the ongoing amount of the loss associated strictly with this policy. Those who cite loss numbers less than $35 billion are making the false assumption that the market, absent Flaherty’s devastating tax, would not currently be at a higher level than it was on October 31, 2006, namely 164.86. Their loss analyses incorrectly make this assumption. The correct loss figure is $35 billion.

For a discussion of “relative value” loss click here