- 70 -
notes at a price equal to the unpaid principal balance remaining
on the amortizing leg. For BFCE, the hedge swap effectively
created a synthetic asset paying an attractive margin over LIBOR,
and, for Merrill Capital, a hedge for its payment obligations
under the outstanding swap with BOT.
According to Beder's calculations, the midmarket value of
the BOT LIBOR Notes at the time of their sale to BFCE was $11.18
million. The bid-side spread of $220,000 implicit in the
purchase price that BFCE paid ACM for the notes financed the
gains shared by Merrill and the bank from the transaction. See
diagram 3 supra p. 68. Ultimately, the cost of engineering this
structured transaction, like the two before it, was borne almost
entirely by Colgate.
9. ABN's Investment Management
In conformity with the requirements for approval of Kannex's
loan, den Baas and his colleagues at ABN New York took steps to
protect the bank from the risks of Kannex's participation in ACM
and to ensure the bank an adequate return. ABN New York had the
authority to implement a comprehensive financial management
program for Kannex by virtue of ABN New York's financial services
agreement. First, Kannex's exposure to the intrinsic interest
rate risk of partnership assets would be "fully hedged". Den
Baas never considered relying on the partnership's LIBOR Notes
for this purpose. He made no attempt to evaluate their hedging
Page: Previous 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 NextLast modified: May 25, 2011