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bank would also earn sizeable profits off the bid-ask spread on
swaps necessary to stabilize Kannex's return from the assets in
the partnership portfolio so that it could repay the loan.5
Because of the size of the loan, approval was required at
three levels within the bank: The credit committee at ABN New
York, the North American Credit Committee (NACC) in Chicago, and
the Risk Management Dept. (RMD) in Amsterdam.
After approval by ABN New York, NACC reviewed the proposal
together with a memorandum describing the partnership. On
October 11, 1989, sent an advice to RMD recommending approval
subject to a number of conditions, of which three are noteworthy:
1) The timing of the purchases and sales of the
various securities be adhered to as proposed
such that the credit risk is no greater than
as outlined in partnership memo.
2) Interest rate risk is fully hedged.
3) Colgate's obligation to purchase Kannex's
interest in the partnership by 11/30/89 [sic]
is unconditional (will those proceeds be
assigned to ABN?)
RMD advised NACC and ABN New York of its decision: "We
agree on the condition that Merrill again verbally states to the
partners that they will buy the MTN's at par on November 29,
1989." The reference to "MTN's", or medium-term notes, evidently
denotes the private placement notes in which the partnership was
5 A bid-ask spread is the spread between the price at which
an instrument is bought and sold. The bid price is the price at
which dealers buy the instrument, and the ask price is the price
at which dealers sell the instrument.
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