- 111 -
Through the back-to-back hedge swaps that ABN arranged with
Kannex and Merrill with respect to the LIBOR Notes, ABN
relinquished the opportunity to gain from Kannex's interest in
the LIBOR Notes.
Petitioner's experts correctly point out that it has become
common in the capital markets to enter into one transaction only
for the purpose of using it as the basis for a profitable swap
opportunity. The fact that the swap effectively forecloses the
possibility of gain from the underlying transaction does not mean
that the transaction serves no profit objective. On the
contrary, the underlying transaction is an indispensable
component of the arbitrage scheme. Arbitrage, however, is not a
plausible explanation for ABN's behavior in this instance. Based
upon testimony of Merrill witnesses, petitioner emphatically
maintains that ABN did not approach Merrill with the proposal for
the LIBOR Note hedge swap until shortly before the contingent
payment sale. This was after the decision had been made, with
Kannex's approval, to authorize the sale. If the partnership had
authorized the section 453 investment strategy with the
expectation that it would provide ABN with an arbitrage
opportunity, presumably there would be evidence that ABN had
planned, and attempted to arrange, its swap with Merrill
beforehand.
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