- 132 -
of flexible and precise hedging instrument that Kannex would have
required in order to provide Southampton with the Yield Component
option it desired at an affordable cost. Taylor knew that this
was unnecessary because ABN would not be relying on the LIBOR
Notes in any case. Yordan testified that before the formation of
ACM he asked Taylor why ABN would be willing for Kannex to bear
the burden of the flexible interest rate risk allocation
mechanism that Merrill contemplated. "[H]is answer was that they
intended to - to enter into some hedge transactions to neutralize
that risk". As Taylor expected, Southampton was able to
negotiate for the Yield Component option at little or no cost.
The partnership was successful because ABN exploited its
comparative advantage in a manner consistent with rational
economic behavior, and did not behave in the manner implied by
the theory of the LIBOR Note hedge.
The LIBOR Notes served no useful risk management function
for the partnership. Nor was there any genuine expectation on
anyone's part that they would. The theory of the LIBOR Notes as
a hedge "within the four corners of the partnership" was nothing
other than an elaborate tax avoidance scheme that had no economic
substance.
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