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Rather, we view the transaction as bundled and judge it in its
entirety.
Colgate's position within the partnership was functionally
analogous to an interest rate swap. This is the way
contemporaneous documents of its treasury department analyzed
Colgate's overall interest rate exposure, the way Colgate's
accountants recommended that the investment in ACM be treated for
financial reporting purposes, and the way Pohlschroeder described
Colgate's intentions in designing ACM. The swap analogy is apt
and useful for purposes of our economic substance analysis.
Suppose that Colgate issues fixed-rate debt and, in order to
reduce its exposure to interest rate movements, enters into a
"plain vanilla" interest rate swap in which it receives fixed and
pays floating interest. As a result, Colgate is hedged. Now
suppose that Colgate modifies the swap agreement such that
whenever interest rates fall or rise the fixed rate that it is
entitled to receive on the asset leg of the swap will be lowered
or raised by some specified proportion of the notional principal
amount. The reason offered for this modification is that Colgate
wants to limit its exposure to interest rates "within the four
corners of the swap", by ensuring that both its rights and
obligations under the swap will move in tandem. There is a major
fallacy in this proposition. The only effect of modifying the
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