Saba Partnership, Brunswick Corporation, Tax Matters Partnership - Page 84




                                       - 50 -                                         

         case, involve derivatives.  The structured transaction that                  
         Merrill Lynch offered to Fuji and Norinchukin consisted of two               
         swaps:  (1) A basis swap related to the asset that the banks                 
         would be purchasing (the Chase PPNs), and (2) a hedge swap                   
         related to the liability that the banks would be undertaking in              
         connection with the issuance of the LIBOR notes.  In general                 
         terms, a swap is an agreement between two parties to exchange one            
         set of payments for another.  For example, one party might                   
         exchange payments based on a floating interest rate for a payment            
         based on a fixed interest rate.                                              
         Economically, the Fuji and Norinchukin swaps provided the                    
         banks with both an asset and a liability that were attractively              
         priced compared to other alternatives in the market.  Merrill                
         Lynch was the counterpart in the swaps.                                      
         The Fuji and Norinchukin basis swaps had the effect of                       
         passing to Merrill Lynch the interest payments that accrued on               
         the Chase PPNs from March 21, 1990 through the date that the                 
         Chase PPNs were terminated.  Further, Merrill Lynch made payments            
         to Fuji and Norinchukin which, when considered in conjunction                
         with the purchase of the Chase PPNs, enhanced Fuji's and                     
         Norinchukin's returns from the Chase PPNs.  The net cash flows               
         resulting from the combination of the Chase PPNs with the basis              
         swaps were tied to LIBOR--the interest rate index under which                
         Fuji and Norinchukin normally conducted business.                            





Page:  Previous  40  41  42  43  44  45  46  47  48  49  50  51  52  53  54  55  56  57  58  59  Next

Last modified: May 25, 2011