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Case 1:93-cv-00531-LAS

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS __________________________________________ ) AMBASE CORPORATION AND ) CARTERET BANCORP, INC., ) ) Plaintiffs, ) ) and ) ) FEDERAL DEPOSIT INSURANCE ) CORPORATION, ) ) Plaintiff-Intervenor, ) ) v. ) ) UNITED STATES OF AMERICA, ) ) Defendant. ) __________________________________________)

Civil Action No. 93-531 (Judge Loren Smith)

PLAINTIFFS' PROPOSED FINDINGS OF FACT Charles J. Cooper COOPER & KIRK, PLLC 1523 New Hampshire Ave, N.W. Washington, D.C. 20036 (202) 220-9600 (202) 220-9601 (fax) Counsel of Record Of Counsel: Vincent J. Colatriano David H. Thompson Jesse Panuccio COOPER & KIRK, PLLC 1523 New Hampshire Ave, N.W. Washington, D.C. 20036 (202) 220-9600 (202) 220-9601 (fax) July 1, 2008

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TABLE OF CONTENTS Page TABLE OF AUTHORITIES ......................................................................................................... iii I. THE SUPERVISORY GOODWILL CONTRACTS ..........................................................1 A. B. II. A. B. C. D. E. F. III. Carteret Acquires Failing Thrifts, Saving the Government the Cost of Resolution...........................................................................................................1 Government Regulators Knew Supervisory Goodwill Was Indispensible..............3 Sustained Profitability Prior to the Breach ..............................................................7 AmBase's Acquisition of Carteret ..........................................................................8 Carteret's Market Value at the Time of the Breach: $251.4 Million.....................11 Carteret's Loan Losses Were Not Apparent in 1989 and Did Not Cause Market Decline......................................................................................................14 The Value of Carteret's Undiscounted Cash Flows: $782.2 Million.....................17 The Present-Day Value of Carteret in the Nonbreach World: $904 Million..........................................................................................................22 The Importance of Supervisory Goodwill to Carteret ...........................................26 The Breach's Devastating Effect on Carteret ........................................................27 1. 2. 3. 4. 5. 6. 7. 8. 9. C. IV. A. The Breach Devastated Carteret's Capital Profile and Regulatory Posture........................................................................................................29 The Breach Sparked a Downward Spiral Resulting in Seizure .................32 The Breach Caused Carteret to Shrink its Asset Base ...............................35 The Breach Prevented Expansion ..............................................................38 The Breach Caused Substantial Deposit Run-off ......................................38 The Breach Caused an Increase of Carteret's Cost of Funds and a Loss of Relative Advantage................................................................................41 The Breach Caused Carteret to Sell Branches in 1990 ..............................43 The Breach Caused Carteret to Take Ultraconservative Loan Loss Reserves .....................................................................................................47 The Breach Caused a Variety of Other Harms ..........................................56

CARTERET'S VALUE WAS LOST AS A RESULT OF THE BREACH........................7

THE BREACH AND ITS DEVASTATION OF CARTERET.........................................36 A. B.

The Injunction ........................................................................................................58 Carteret Would Never Have Fallen Out of Capital Compliance in the i

CARTERET WOULD HAVE THRIVED IN THE NONBREACH WORLD.................59

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Nonbreach World...................................................................................................59 1. 2. A Conservative Counter-factual Picture of Carteret..................................59 Assuming the Need, Capital Easily Could Have Been Raised ..................63 a. b. c. d. e. f. g. B. V. VI. AmBase Could Have Raised Capital in the Nonbreach World .....64 Carteret Could Have Raised Capital in the Nonbreach World ......67 Carteret Could Have Securitized and Sold Residential Loans.......68 Carteret Could Have Merged .........................................................68 Carteret Could Have Sold Its Servicing and Origination Businesses ......................................................................................68 Carteret Could Have Unlocked its Substantial Franchise Value ...70 Carteret's Trends Demonstrate Sustainable Profitability ..............72

The Government's Contentions Regarding Survival Are Incorrect ......................79

WOUNDED BANK DAMAGES......................................................................................81 EXACERBATING THE BREACH BY PREVENTING MITIGATION.........................82 A. B. The Date of Carteret's Seizure was Arbitrary and Unreasonable..........................82 Government Regulators Inhibited Recapitalization of Carteret.............................91 The FDIC Has Inappropriately Accounted For, and Artificially Inflated, the "Post-Insolvency Interest" ...............................................................................97 The Mere Transfer of Carteret to the RTC was a Value-destroying Event .........110 The Breach Prevented the RTC from Realizing the Value of Carteret's Supervisory Goodwill ..........................................................................................111 Congress's Failure to Fund the RTC Increased the Cost of the Carteret Liquidation...........................................................................................................113 The Minority Preference Program Substantially Inflated the Receivership Deficit.............................................................................................113 The Tax Liability Is a Chimera of the FDIC's Own Making ..............................117 The RTC Squandered the Value of Carteret Mortgage Company.......................121 The Receivership Deficit Includes Questionable Administrative Expenses........122

VII.

CONGRESS AND THE RTC CREATE A RECEIVERSHIP DEFICIT .........................97 A. B. C. D. E. F. G. H.

VIII. IX.

PROFESSOR SAUDNERS WAS NOT A CREDIBLE WITNESS ...............................123 TAX GROSS UP .............................................................................................................124

ii

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TABLE OF AUTHORITIES Cases Page AmBase Corp. v. Commissioner, 2001 T.C.M. (CCH) 1657.........................................................65 Ambase Corp. v. United States, 58 Fed. Cl. 32, 44 (Fed. Cl. 2003) ............................................2, 3 Bank of America v. United States, 67 Fed. Cl. 577 (2005) ............................................................64 Carteret Sav. Bank v. OTS, 963 F.2d 567 (3d Cir. 1992) ..............................................................59 Carteret Sav. Bank, FA v. OTS, 762 F. Supp. 1159 (D.N.J. 1991)........................................ passim Carteret Sav. Bank, F.A. v. OTS, No. 91-661, slip. Op. (D.N.J. July 8, 1991)..............................59 Northeast Sav., F.A. v. OTS, 770 F. Supp. 19, 23-25 (D.D.C. 1991) ............................................59 Slattery v. United States, 69 Fed. Cl. 573, 585 (2006) ..............................................................1, 19 United States v. Winstar Corp., 518 U.S. 839, 845 (1996)..........................................................113 Other 12 U.S.C. 1464 (t)(2)(A).............................................................................................................30 12 U.S.C. 1464(t)(3)(A)..............................................................................................................29 12 U.S.C. 1441a(w)(17)(C) ......................................................................................................113 26 U.S.C. 172............................................................................................................................120 12 C.F.R. 360.3 .................................................................................................................102, 104 12 C.F.R. 360.3(b) ....................................................................................................................100 12 C.F.R. 360.7(b)(3)................................................................................................................106 12 C.F.R. 567.8 (1990) ...............................................................................................................30 RTC Completion Act, Pub. L. No. 103-204, 3(a), 107 Stat. 2369, 2375-76 (1993) (codified at 12 U.S.C. 1441a(w)(17)(A).............................................................................113

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I. THE SUPERVISORY GOODWILL CONTRACTS A. Carteret Acquires Failing Thrifts, Saving the Government the Cost of Resolution 1. As of August 1982, Carteret had total assets of $2.3 billion and positive net worth of $36.4 million.1 Up to that point, Carteret had "operated relatively free of supervisory concern" and had "operating ratios [that were] generally more favorable than those of like-sized institutions." PX 2433 (Mem. from H. Beesley, 9/30/82) at OAM0060026. Many of Carteret's peer institutions were not so well situated. As interest rates rose in the early 1980s, "some 435 thrifts failed between 1981 and 1983." United States v. Winstar Corp., 518 U.S. 839, 845 (1996). This parade of failures left the federal government in a bind. The Federal Savings and Loan Insurance Corporation (FSLIC) "lacked the funds to liquidate all of the failing thrifts." Id. at 847. To solve this problem, the Federal Home Loan Bank Board (FHLBB) "encourag[ed] healthy thrifts . . . to take over ailing institutions in a series of `supervisory mergers.' " Id. 2. Accordingly, in the spring and summer of 1982, government regulators began soliciting potential acquirers to take over two FSLIC-insured failing thrifts, Barton Savings & Loan Association of Newark, New Jersey ("Barton"), and First Federal Savings and Loan Association of Delray Beach, Florida ("Delray"). See PX 2433 (Beesley Mem.) at OAM0060022, 24. Both institutions had recorded significant operating losses that had completely eroded their capital, and rendered them insolvent. Id. at OAM0060021, 23. By the fall of 1982, the total amount of

See PX 2433 (Mem. from H. Beesley, 9/30/82) at OAM0060016. Carteret Building and Loan Association of Newark, New Jersey, a successor to thrift institutions dating back to 1888, was incorporated as a state-chartered savings and loan association on September 15, 1939. See PX 6 (Carteret Bancorp, Inc. 1987 Annual Rpt.) at AMB013909; DX 8124 (OTS "S" Mem., 11/22/92) at FAM0020549. The thrift converted to a federally chartered mutual association on May 5, 1982, and to a federally chartered stock association on September 7, 1983. DX 8124 at FAM0020549. On January 15, 1986, the thrift was renamed Carteret Savings Bank, F.A. Id. 1

1

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the insolvency of Delray and Barton was $168 million and $46 million, respectively.2 3. On September 29, 1982, Carteret and FSLIC entered into an Assistance Agreement whereby Carteret agreed to acquire Barton and Delray in return for certain benefits. See PX 2429. Because the failing thrifts' net liabilities far eclipsed Carteret's positive net worth, the government promised Carteret that it could include the supervisory goodwill resulting from the acquisitions in the calculation of its regulatory capital, to be amortized over a period of up to forty years.3 The ability to use supervisory goodwill was the sine qua non of the bargain between Carteret and the government. As this Court found in the liability phase of this case, "it would have been irrational . . . for [Carteret] to stake its very existence upon continuation of current policies without seeking to embody those policies in some sort of contractual commitment." AmBase Corp. v. United States, 58 Fed. Cl. 32, 45 (2003). The supervisory goodwill that arose from the 1982 acquisitions was approximately $214 million. Id. at 36; PX 2702A (Calomiris 5/07 Rpt.) at 10; PX 9001; Tr. 656:2-13 (Calomiris); DX 7000A (Kennedy Rpt.) at 4. 4. Carteret acquired two additional FSLIC-insured failing thrifts on June 6, 1986--First Federal Savings and Loan Association of Montgomery County, Blacksburg, Virginia ("First Federal"), and Mountain Security Savings Bank of Wytheville, Virginia ("Mountain Security"). PX 5 (1986 CSB Annual Rpt.) at AMB013889. In that transaction, the federal government again promised, inter alia, that Carteret would be permitted to include supervisory goodwill in calculating its regulatory capital, this time for a period of up to twenty-five years. AmBase, 58 Fed.
2

DX 7368 (Mem. from J. Carfora, 1/14/92) at CAM2460220; PX 2702A (Decl. of Charles W. Calomiris, 5/19/07) at 9 [hereinafter "Calomiris 5/07 Rpt."]; DX 7000A (Expert Report of David A. Kennedy) [hereinafter "Kennedy Rpt."] at 3-4; AmBase Corp. v. United States, 58 Fed. Cl. 32, 36 (2003). 3 AmBase, 58 Fed. Cl. at 35-36, 43; PX 2433 at OAM0060020; PX 504 (1984 CSB Annual Rpt.) at AMB 030000; PX 1601 (Carteret Offering Circular, 8/30/83) at CAM5240896; PX 2441 (J. Finn to R. O'Brien, 9/30/82; L. Hayes to R. O'Brien, 10/12/82); Connell Dep. 32:8-9 (JX 1 at 23); Tr. 656:14-17, 1329:15-22 (Calomiris). 2

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Cl. at 36-37, 46; PX 2483 (Letter from Peat Marwick, 6/4/86); PX 6845 ("S" Mem. from M. Simone, 5/30/86) at WOR0630891. Carteret booked a total of $21.7 million in supervisory goodwill--$20 million from Mountain Security and $1.7 million from First Federal. PX 9002; Tr. 657:8-14 (Calomiris); DX 7000A at 4. As this Court has noted, "[w]ithout the goodwill, it is likely Carteret would not have entered the transaction." AmBase, 58 Fed. Cl. at 49. Indeed, absent supervisory goodwill, Carteret would have been out of capital compliance immediately upon absorbing First Federal and Mountain Security. 5. By acquiring Barton, Delray, First Federal, and Mountain Security, Carteret relieved the government of the substantial cost of liquidating these thrifts. The total avoided cost was $187.4 million.4 With debt servicing costs factored in, the total savings comes to $709 million. Tr. 1053:22-1054:4 (Calomiris). B. Government Regulators Knew Supervisory Goodwill Was Indispensible 6. Before approving the 1982 acquisitions, the government conducted a viability analysis to assess Carteret's prospects for longer-term success. See PX 2433 (Beesley Mem., 9/30/82). As FSLIC Director Beesley acknowledged: "the purpose of [the viability analysis] was to make sure that the resulting institution would be healthy and would be able to stay in compliance with its minimum capital requirements." Dep. 22:22-23:2 (JX 1 at 15); see also id. at 43:24-44:4 (JX 1 at 16).5 7. FSLIC concluded that "Barton and First will be absorbed without detrimental affect
4

See PX 2702A (Calomiris 5/07 Rpt.) at 10 n.15; PX 9102; Tr. 1050:1-1053:21 (Calomiris); PX 2481 (First Federal and Mountain Security Cost Summary) at WOR990240; PX 2433 (Beesley Mem., 9/30/82) at OAM0060023. 5 See also Beesley Common Dep. at 94:13-95:16 (JX 1 at 20-21) ("[the viability analysis] measured whether or not . . . the combined institution . . . would continue throughout the period of the analysis to maintain at least its minimum capital requirements, and--and that was the definition of viability. . . . [T]he theory was they wouldn't fail their regulatory capital requirements during the period that was examined."). 3

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[sic]," and "project[ed] that the resulting association will report a profit during the second year after the merger and remain profitable thereafter. Net worth is projected to remain positive at all times." PX 2433 at OAM0060027-28. In other words, the government concluded that Carteret would make sufficient profits--more than $300 million after the merger--to fill the tangible hole created by the acquisitions, meet the three-percent capital requirement, and thus "absorb[]" Barton and First "without detrimental effect."6 Moreover, the FSLIC viability conclusion was "[b]ased upon," inter alia, Carteret's "historical growth rate," which was 22%. PX 2433 at OAM0060028. Even assuming a much more conservative long-term growth rate, the government necessarily foresaw that Carteret would grow--meaning that the government foresaw that Carteret would make even more than $300 million in order to meet its increasing capital requirement as the supervisory goodwill amortized over the forty-year period. See Tr. 3756:3-11 (R. Smith) (stating that he "understand[s]" that "it was the expectation of Carteret that it would grow after the 1982 acquisitions" and that he "assume[s]" the government understood this "because, otherwise, why would they do this?"). The government could also have reasonably foreseen that Carteret would pay dividends, and in that event, more than $300 million in profits would be needed to keep Carteret in capital compliance.7 Thus, the government actually foresaw

The acquisitions left Carteret with negative tangible capital of approximately $212 million and total liabilities of approximately $3.3 billion. See DX 8000A (Decl. of Professor Roy C. Smith, 9/21/07) [hereinafter "Smith Rpt."], Ex. 3 at 1. Thus, assuming no growth, Carteret would need to make $212 million plus 3% of $3.3 billion (that is, $90 million) to meet its capital requirement over the course of the amortization period. See 47 Fed. Reg. 10511 (Mar. 11, 1982) ("By Resolution No. 82-19, the Federal Home Loan Bank Board lowered the net worth requirement, 12 C.F.R. 563.13, for insured institutions from 4% to 3% of liabilities."). 7 The government based its analysis on predicted profits of $4.6 million for the last half of 1982. PX 2433 at OAM0060028. Even assuming Carteret had no growth over the following 40 years, the government had reason to believe the thrift would make $4.6 million every six months for the next 40 years--i.e., $360 million over the amortization period. In light of Carteret's historical growth, the government had reason to expect profits far in excess of that amount. 4

6

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that Carteret would earn profits sufficient to replace the supervisory goodwill. 8. FSLIC also concluded "that Carteret is projected to be a viable institution as a result of the acquisition of Mountain Security and First Federal." PX 2484 (Mem. from T. Connell, 6/5/86) at WOQ2880347. Thurman Connell, the Acting Director of FSLIC in 1986, explained that the resulting entity was viable only because of the treatment afforded supervisory goodwill. Dep. 32:14-33:8 (JX 1 at 23). By 1986, Carteret was doing exactly what the government had predicted in 1982--earning profits to erase the deficit it had assumed. See PX 9004 (demonstrating that Carteret had net income of $34.8 million in 1983, $7.5 million in 1984, and $25.2 million in 1985). In 1986, Carteret earned $46.1 million. PX 5 (CSB 1986 Annual Rpt.) at AMB013858, 77. Thus, by the time of the 1986 contract, the government had actual evidence of how Carteret had employed supervisory goodwill to its benefit, and thus had reason to foresee that depriving Carteret of that asset would deprive the thrift of the ability to earn profits and remain in capital compliance. 9. Given the economics of the acquisitions, and the fact that FSLIC projected future viability, the government both had reason to foresee and actually foresaw that the use of supervisory goodwill would be necessary for Carteret to survive and absorb successfully the problem thrifts it was taking on. The FSLIC regulators confirmed that they understood, at the time of contract formation, that the purpose of supervisory goodwill was to provide the capital necessary to eliminate the capital deficit of the acquired thrifts, and that Carteret would do so by leveraging supervisory goodwill "in an attempt to make profits and fill the tangible hole it had." Beesley Dep. 45:25-46:5 (JX 1 at 16); see also id. at 63:5-7 (JX 1 at 19) ("But with capital you have the option of leveraging and the expectation and hope of a positive spread.").8 When asked whether

8

See also Beesley Common Dep. 77:4-78:1 (JX 1 at 20) ("But under normal operating 5

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"it would have been the regulator's expectation that that supervisory goodwill would have been leveraged toward profit-making, lending activity," Director Connell answered: "Yes, it would have been our expectation." Dep. 392:12-22 (JX 1 at 26). 10. The FSLIC regulators also testified that they understood the harm that a breach would visit upon Carteret and the drastic mitigation measures it would necessitate. Connell Dep. 392:23-393:8 (JX 1 at 26) (breach would require asset shrink or capital raising). Director Connell testified that if the amortization period for goodwill were shortened in the fifth or sixth year from forty years to one year, "it could have a pretty dramatic impact on what the viability of the institution would be." Dep. 85:7-86:4 (JX 1 at 25). Similarly, Director Beesley testified that "an expectation that goodwill would be excluded from the capital calculation at some point within the time period analyzed," "would be important" to the viability analysis, and that "from an accounting standpoint in a regulatory capital standpoint, the outcome is substantially different than if they had not gone through this process." Dep. 70:9-12, 99:19-100:1 (JX 1 at 19, 21). Accordingly, the government actually foresaw, at the time of the contract, that a breach would have a dramatic impact on Carteret's capital compliance and ultimate ability to survive. At a minimum, it was reasonably foreseeable that such a breach would have devastating consequences for Carteret's capital position, business strategies, and viability.

conditions, leverage allows institutions to make a relatively narrow spread on their assets relative to their liabilities and yet still have a reasonable return on their capital. Q. And to the extent that the addition of goodwill as an asset results in an increase in the institution's capital, that increased capital can be leveraged in the way you just described? . . . [A.] Yes. Q. In recommending supervisory mergers involving goodwill for approval by the bank board, did the FSLIC expect that the surviving institution could leverage the goodwill generated from the transaction to hold more income producing assets? . . . [A.] Well, we would expect--I think we had every expectation that the goodwill would count as an asset which would, by the formula, result in capital being there that would be leveraged, yes."). 6

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II. CARTERET'S VALUE WAS LOST AS A RESULT OF THE BREACH A. Sustained Profitability Prior to the Breach 11. Following the 1982 and 1986 acquisitions, and consistent with the government's expectations, Carteret generated significant profits by extending its franchise into new states, expanding its asset base, and venturing into new lines of business. By the end of fiscal year 1988, Carteret had grown to more than $6 billion in assets, from just under $2 billion in fiscal year 1981. PX 9003. The following table reports Carteret's asset growth and profitability through 1988:9 1983 1984 1985 1986 1987 1988 Year 4,267,314 5,045,678 5,121,801 5,537,547 5,910,170 6,682,279 Assets ($000s) 7,521 25,222 46,091 33,417 19,988 Net Income ($000s) 34,809 12. The 1988 Report of Examination concluded: Carteret has enjoyed improving net operating income in the successive calendar year periods 1985 through 1987. This favorable scenario is the result of earnings from the bank's restructured balance sheet, with emphasis on higher yielding commercial, consumer and commercial real estate lending, during a period of relatively stable interest rates. This has produced a favorable above peer group interest margin . . . . PX 2104 at AMB019349. Brian Dittenhafer, the chief economist and then president of the Federal Home Loan Bank of New York from 1985 through 1992, testified that "relative to the rest of the industry, Carteret was in reasonably good shape." Dep. 8:12-20, 58:8-13 (JX 1 at 63, 66). See also id. at 93:1-8 ("this was a reasonably strong institution") (JX 1 at 69-70). In other words, Carteret was working through the capital deficiencies of Barton, Delray, First Federal, and PX 601 (Carteret Bancorp 1987 10-K) at 14; PX 1001 (Carteret Bancorp 1988 Consolidated Financial Statements) at AMB013962. See also PX 9003; PX 9004; Tr. 657:15-658:3 (Calomiris) (explaining that Carteret's "assets were growing quite impressively from 1982 until the middle of 1989," that Carteret was "quite profitable during this period," and that "profits are an engine of growth for the bank."). 7
9

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Mountain Security--the "problem" that Carteret had relieved the government of in 1982 and 1986. Id. at 103:11-19 (JX 1 at 71) ("Carteret [was] working [itself] out of a problem."). FDIC examiner William Day similarly affirmed that he had an "impression of Carteret as a healthy institution prior to the passage of FIRREA." Tr. 1523:10-20; Dep. 51:6-9 (JX 1 at 46). And Russell Meyer, the OTS's examiner-in-charge for Carteret, testified that, prior to breach, the thrift was "nationally recognized," a "good institution," and that OTS "never had a problem" with Carteret. Dep. 15:11-12, 17 (JX 1 at 368). B. AmBase's Acquisition of Carteret 13. Such was the favorable state of Carteret's financial condition when, in the summer of 1988, AmBase Corporation (then known as The Home Group) paid $266 million in cash to acquire 100% control of the thrift's holding company, Carteret Bancorp. See PX 302 (Home Group 1988 Annual Rpt.) at 29. In approving the acquisition of Carteret by AmBase, the government described Carteret as "profitable," stated that "[t]he bank is considered financially strong and is not the subject of supervisory concern," and noted that as of March 31, 1988, the bank had "[n]et regulatory capital of $321.9 million represent[ing] 5.70% of total liabilities." PX 2612 (FHLBB District Bank Mem., 6/30/88) at 9. Underlying this financial analysis of Carteret, and inescapably central to the FHLBB's positive judgment in 1988, was the fact that more than $182 million of the capital on Carteret's balance sheet (as of March 31, 1988) was backed up by a contractual promise from the government, and was therefore assumed by all of the sundry professionals involved in the acquisition to be as solid as any other type of capital.10 PX 4891 (CSB

The professional firms that analyzed and executed the Carteret acquisition included some of the most sophisticated and experienced lawyers, financiers, lenders, and accountants in the country. It is implausible that all of these firms--including, Salomon Brothers, First Boston, Peat Marwick, and Chase Manhattan Bank--could have been mistaken in relying on the strength of Carteret's capital position. See PX 4805 (Salomon Bros. to The Home Group, 8/17/87); PX 8

10

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Goodwill Amortization Schedule) at AM00050511. 14. AmBase had begun discussions with Carteret in early 1987. In August of that year, Salomon Brothers issued a fairness opinion supporting a $320 million valuation of Carteret.11 After the stock market crash in October 1987, the parties renegotiated a $266 million purchase price. See Tr. 666:9-23 (Calomiris); PX 9009. 15. In addition to the $266 million cash payment, AmBase assumed two other obligations in acquiring Carteret. First, before approving the acquisition, federal regulators required AmBase to enter into a contractual agreement whereby AmBase agreed to infuse up to $50 million into Carteret in the event that Carteret's capital fell below required levels in the future.12 AmBase was ultimately required to infuse the $50 million into Carteret under the terms of this agreement. See PX 402 (AmBase 1990 10-K) at 78. 16. The second obligation involved AmBase's sale of Imperial Premium Finance (IPF) to Carteret for $65 million. To receive the government's approval for this sale, AmBase agreed that, should Carteret subsequently sell IPF to another entity at a lower price prior to August 9, 1991, AmBase would (under certain conditions) be obligated to pay Carteret the difference between $65 million and the subsequent price. See PX 2618 (IPF Agreement, 8/15/88). 17. As Professor Roy Smith, the government's investment banking expert, recognized, AmBase's assumption of the RCMA and IPF obligations on top of the purchase price suggests

5319 (First Boston to Carteret Bancorp, 3/2/88); PX 2611 (Credit Agreement between The Home Group and Chase Manhattan Bank, 6/10/88); PX 2608 (Application to FSLIC for Home Group Acquisition of Carteret) at AMB028474 (listing Arnold & Porter). 11 PX 4805 (Salomon Bros. to The Home Group, 8/17/87); PX 5174 (Carteret Press Release, 8/4/87) at 1; PX 9009; Tr. 666:9-14 (Calomiris). 12 PX 9009; Tr. 667:4-8 (Calomiris); PX 2617 (Stipulation & Agreement) at AMB009226; PX 2625 (Regulatory Capital Maintenance Agreement) at 3; PX 2614 (FHLBB Mem. re: H-(e)1 Application Filed by The Home Group to Acquire Carteret) at 5-6; PX 402 (AmBase 1990 10K) at 78. 9

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that $266 million is a conservative estimate of Carteret's value in 1988. See Dep. 378:16-379:5 (JX 1 at 533) (affirming that it would "be appropriate" to "add some factor for the value of the obligation that was assumed" in the RCMA); id. at 382:21-383:3 (acknowledging that whatever value AmBase put on the IPF option "would be in addition" to the purchase price). 18. The $266 million valuation of Carteret is amply supported by the record: CS First Boston evaluated the renegotiated deal and, after a detailed analysis, concluded the valuation was fair.13 Chase Manhattan Bank entered into a $300 million credit agreement with AmBase for the specific purpose of funding the acquisition of Carteret. See PX 2611; Tr. 667:19-25 (Calomiris). AmBase pledged Carteret's stock as the sole collateral for the agreement. PX 2611 at AMBNP013514-15, 17. As Professor Calomiris explained, Chase "would have understood very well the value" of Carteret's franchise and "obviously was very comfortable with a fairly high value to that franchise, since it was willing to accept that as collateral." Tr. 668:6-12. Chase's acceptance of Carteret's stock as collateral thus suggests that AmBase's valuation was accurate because, as Professor Calomiris explained, "[t]ypically, we require in banking that collateral be worth more than the value of a loan." Tr. 668:13-14.14 As Professor Smith acknowledged at trial, the AmBase-Carteret deal was an arms-length transaction, and the "actual sales price of a company is the best indication of the value of the company provided it's an arm's length transaction." Tr. 3048:15-23 (R. Smith). See also R. Smith Dep. 378:13-15 (JX 1 at 533). See PX 5319 (First Boston to Carteret Bancorp, 3/2/88). Salomon Brothers also revaluated and approved the deal. See PX 1611 (Carteret Bancorp Proxy Statement, 5/18/88) at WOQ6991047. 14 Even Professor Smith acknowledged that Chase's willingness to enter into the credit agreement suggested that Chase was valuing the stock at "at least $150 million." Tr. 3051:243052:4. See also R. Smith Dep. 383:25-384:4 (JX 1 at 534). 10
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The stock market capitalization of Carteret prior to the announcement was $198 million. See DX 8000A (Smith Rpt.) at 17 (reporting that AmBase agreed to acquire Carteret in August of 1987 for $291.9 million, which reflected a control premium of 47.5%). The remainder of the purchase price reflected a control premium, which Professor Smith acknowledged was "within the realm of reason." Tr. 2927:1-18; 3050:10-12.

C. Carteret's Market Value at the Time of the Breach: $251.4 Million 19. The purchase price of $266 million reflected a market-to-book ratio of 86.9%. See PX 5257 (Kaplan Smith to Carteret Bancorp, 5/11/89) at PM004286 (reporting Carteret's book value as $306 million); PX 9010; Tr. 668:15-23 (Calomiris). 20. From July 31, 1988, to July 31, 1989, the average market-to-book ratios for all publicly-traded thrifts increased by 7.4%. See PX 9011; Tr. 668:24-669:11 (Calomiris). Assuming Carteret's market-to-book ratio increased by the same amount during that period, its market-tobook ratio as of July 31, 1989, was 93.4%. PX 9011; Tr. 669:12-23, 672:19-23 (Calomiris). This is a reasonable and conservative assumption. First, this assumption does not account for the hydraulic effect Carteret's amortization of goodwill had on the thrift's market-to-book ratio. Tr. 671:5-6 (Calomiris). Carteret had a large amount of its book value in the form of amortizing goodwill. Because goodwill is worth less than its stated book value, the amortization of the goodwill mechanically increases the market-to-book ratio. Tr. 670:12-671:10 (Calomiris). Second, this assumption also does not account for the dividends Carteret paid during this period, which "tend to be viewed by the market as a very favorable event." Tr. 671:11-672:6 (Calomiris). Third, this assumption does not account for the fact that Carteret's servicing portfolio increased by $2 billion during this period, an increase which was not reflected in Carteret's book

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value.15 Fourth, Carteret's deposits grew by more than $200 million, thereby increasing its franchise value. See PX 1708 (TFR, 9/30/88) at AM050377; PX 1712 (TFR, 9/30/89) at AM050321. 21. Carteret's book value on June 30, 1989, was $270.5 million. PX 9012; Tr. 672:1113; PX 1002 (Financial Statement, 6/30/89). To obtain the book value of Carteret one month later, Professor Calomiris accounted for Carteret's monthly amortization of goodwill--that is, he subtracted $1.3 million in goodwill from the June 30 value. Thus, on July 31, 1989, Carteret had a book value of $269.3 million. PX 9012; Tr. 672:13-18 (Calomiris); PX 4822 (Goodwill Amortization Schedule, 8/1989). Multiplying Carteret's book value by a market-to-book ratio of .934 demonstrates that Carteret's market value, as of July 31, 1989, was $251.4 million. PX 9012; PX 9013; Tr. 672:24-674:7 (Calomiris). 22. Several independent pieces of evidence confirm Professor Calomiris's calculation of Carteret's July 1989 market value of $251.4 million: In May 1989 a group of investors offered to purchase Carteret for $252 million. PX 4836 (R. O'Brien to G. Scharffenberger, 8/29/90) at 2; PX 9014; Tr. 674:8-16 (Calomiris) ("In my view this was a significant and credible corroboration of the number."). See PX 4836 (Letter from R. O'Brien, 8/29/90) at 2. Two of the investors, General Alexander Haig and Harry Jacobs, were former directors of Carteret and thus had intimate knowledge of the thrift and its value. Mr. Jacobs was also the former chairman of Prudential-Bache Securities and remained a senior officer there at the time of this bid. See PX 9014; Tr. 675:24-676:4 (Calomiris). AmBase's rejection of the offer suggests that $252 million was a conservative estimate of Carteret's value in May 1989. Tr. 675:20-22 (Calomiris) ("I thought it was significant that See Tr. 3842:19-23 (Saunders) (explaining that, under GAAP, servicing rights are carried at the lower of historical book value or present value); PX 1708 (CSB TFR, 9/30/88) at AM050379 (listing servicing of $6.142 billion); PX 1712 (TFR, 9/30/89) (listing servicing of $8.448 billion) at AM050323. 12
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the offer was turned down, too.") The analytics embraced by the government's own expert, Professor Smith, confirm that Carteret was worth at least $251.4 million in July 1989. First, Professor Smith asserted that Carteret was worth $22 million in 1992, after it had suffered significant credit losses. Tr. 2985:13, 19-20. Second, he testified that credit losses affect valuation at greater than a dollar-for-dollar rate. Tr. 3075:10-3076:18; 164:7-13 (JX 1 at 519). Third, he testified that Carteret's credit losses occurred after 1989. DX 8000A (Smith Rpt.) at 26; 426:4-17 (JX 1 at 537); Tr. 3765: 12-22. Fourth, the evidence shows that Carteret, by 1992, had taken approximately $280 million in credit losses. See DX 201 at WOP3260180 (reporting credit losses of $106 million in 1990); PX 6817 (CSB Financial Rpt., 12/31/91) at 1 (reporting credit losses of $172 million in 1991). Thus, according to Professor Smith's own formula, Carteret must have been worth at least $300 million in 1989. 23. Moreover, Professor Calomiris's calculation is a conservative estimate of Carteret's market value just prior to the breach. First, Carteret's franchise value confirms that $251 million is a conservative valuation. A thrift's assets "consist[s] of tangible assets and intangible assets." Tr. 680:5-6 (Calomiris); PX 9015. Franchise value is an intangible asset that represents "the value of the relationships that the bank enjoyed by virtue of operating where it did with the people it did." Tr. 680:12-15 (Calomiris). The $251.4 million valuation assumes that Carteret's franchise value was $99.9 million, or 2.2% of deposits. Yet, when Carteret and the RTC sold branches in 1990 and 1994, the deposit premiums received were much higher--on the order of 3.5 percent and 10 percent (and deposit premiums themselves are only part of franchise value).16

PX 9016; PX 9017 Tr. 681:4-684:5 (Calomiris); PX 4718 (Branch Closing Statement, 10/9/90); PX 4724 (Loyola Branch Sale, 10/21/90); PX 4726 (Branch Closing Statement, 12/17/90); PX 4986 (Consolidated Florida Branch Resolution Summary) at AM54120696; PX 13

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Second, as noted above, AmBase paid $266 million in cash and assumed two contingent liabilities upon purchasing Carteret. Those liabilities represented a cost to AmBase and thus lowered the cash price AmBase was willing to pay. See Tr. 3049:7-3050:9 (R. Smith). Because the starting point for Professor Calomiris's valuation is conservative, so is the end result. Third, a value of $251 million is conservative when viewed in light of the substantial discount it represents from Carteret's stated book value. The $251 million value is inclusive of a control premium. Assuming the 47% control premium calculated by Professor Smith, DX 8000A at 39, Carteret's implied trading value was only $170 million ($170 million increased by 47% is $251 million). Given that Carteret's stated book value on July 31, 1989, was $269 million, PX 9013, the implied trading value based on Professor Calomiris's market value calculation represents a 37% discount from stated book value ($269 million decreased by 37% is $170 million). So, rather than a market-to-book ratio of 11, as hypothesized by Professor Saunders, Professor Calomiris's calculation actually represents a steep discount from book value. 24. Professor Saunders argued that a valuation of $251 million implies a market-to-book ratio that he has "never seen." Tr. 3552:4-10. But in reaching this conclusion Professor Saunders improperly excluded intangible capital from the book value of Carteret, and his opinion should thus be discounted. As Professor Smith recognized, intangible capital is properly included in book value: "The book value is the net assets of the company, minus the liabilities. . . . It includes goodwill in this case." Tr. 2915:17-21. See also Tr. 2913:8-10 (noting that calculation of Carteret stockholder equity in 1983 includes supervisory goodwill). Indeed, Professor Saunders himself included intangible capital when calculating market-to-book ratios elsewhere in his analysis. See DX 9745; Tr. 3944:3-6 (Saunders).

4986 at AM54120691; PX 4986 at AM54120693. 14

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D. Carteret's Loan Losses Were Not Apparent in 1989 and Did Not Cause Market Decline 25. Professor Saunders based his opinion of Carteret's value prior to the breach on the premise that Carteret's loan losses caused the market to devalue the thrift between the AmBase acquisition and the breach. See Tr. 3411:23-3422:11.17 This premise is false. 26. First, as numerous government witnesses testified, the magnitude of problems in Carteret's commercial loan portfolio were not apparent until 1990 and 1991--well after the breach. For example, when asked whether "Carteret's stock price in 1989 and [at] the end of 1989 had taken into account the magnitude of those future losses," Professor Smith "suspect[ed] that it did not." Tr. 3077:12-16 (R. Smith). And he testified that "there's some suggestion that [the writedown] was a surprise in the sense that it was something that was presented as unknown to them before." Tr. 3077:21-23.18 Carteret's regulators were of the same opinion. FDIC Regional Director Zamorski testified that the commercial loan losses "didn't become really apparent, I think, until probably near the fall of 1990." Tr. 2066:21-23.19 Similarly, Mr. Downey of the OTS acknowledged that the amount of Carteret's 1991 asset writedown "was not anticipated." Tr. 2531:7-13. Investor sentiment, which Professor Smith acknowledged was reflected through Carteret's level of uninsured deposits, confirms this conclusion. Tr. 3766:13-25. Carteret's unin17

Professor Saunders testified that he was "sure that they became aware of [the coming elimination of supervisory goodwill] as of the February introduction of the FIRREA legislation in '89." Tr. 3963:13-3964:18. See also Vigna Dep. 80:13-14 (JX 1 at 589) (stating that FIRREA "certainly also had an impact on their market value"). Accordingly, analyzing the market's valuation of Carteret as of June 1989 is conservative in that it allows for a devaluing of Carteret based on the breach. If the true pre-breach frame of reference is used--February 1989--there is simply no argument to be made that the market was aware of any commercial loan portfolio problems at Carteret. See Slattery v. United States, 69 Fed. Cl. 573, 585 (2006) (using a prebreach valuation date of August 1, 1988). 18 See also R. Smith Dep. 59:6-19 (JX 1 at 505-06) (same); DX 8000A (Smith Rpt.) at 26 (noting "the collapse of the loan portfolio in 1990 and 1991"). 19 See also Tr. 2103:17-23, 2105:13-20 (Zamorski) (examining a statement in a November 25, 1991 letter and stating that "it had been about a year since--in my view, since the unsafe and unsound condition was first evident"). 15

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sured deposit base grew from the fourth quarter of 1989 through the first quarter of 1990, and did not fall off sharply until the second half of 1990.20 Thus, this barometer demonstrates that the severity of Carteret's asset quality problems did not become apparent until well into 1990.21 27. Second, Professor Saunders' own testimony suggests that the stock market did not devalue Carteret's stock in 1989. He testified that Home Insurance--AmBase's only other major holding at the time--was downgraded to junk status and that the "junk quality rating of Home . . . would have a serious effect on AmBase value." Tr. 3435:7-8. Yet Professor Saunders also testified that AmBase's stock price increased between FIRREA's introduction and passage. Tr. 3436:14-18.22 If the market considered AmBase's other major holding to be of junk status in 1989 and AmBase's stock price still rose during that period, then it follows that the market value of Carteret must have appreciated during this time. 28. Third, both Mr. Kennedy and OTS examiner O'Rourke testified that, under FASB and GAAP, loan losses must be taken at the time the loss is identified. See Tr. 3165:17-3166:6, 3146:7-13 (Kennedy); Tr. 2371:17-24 (O'Rourke). Thus, if Carteret's losses truly were apparent to the management, the auditors, or the regulators in the second quarter of 1989, then they would have had to have been written down at that time. Yet the OTS stated that reserves had to be taken as of December 31, 1989--not May, June, or July. See Tr. 1925:19-22 (S. Smith). Prior to
20

See PX 1712 (TFR, 9/30/89) at 2; PX 1713 (TFR, 12/31/89) at 2; PX 1715 (TFR, 3/1990) at 16; PX 1718 (TFR, 6/1990) at 16; PX 1721 (TFR, 9/1990) at 16; PX 1724 (TFR, 12/1990) at 16. 21 Professor Smith also offered other testimony implying that investors did not know about Carteret's commercial loan losses in 1989. See, e.g., Tr. 2924:23-2925:1 ("These were bad loans or weak loans that were time bombs, in a sense, and which were ignited by the economic conditions prevailing in 1990 and '91."); Tr. 3052:24-3053:4 (agreeing that "Carteret would have had some access to the capital markets at reasonable rates prior to 1990 after which the loan loss problems would be so considerable they would have interfered with the public offering"). 22 See also Tr. 3439:1-2 ("AmBase's stock price actually rose during the passage of FIRREA."); Tr. 3439:5-8 ("The stock price actually rose 29 percent between the day of President Bush's announcement of FIRREA legislation and August 9 the day of its passage."). 16

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that time--in the 1988 Report--the OTS "felt that the monitoring of the problem assets was pretty good." Tr. 2047:16-17 (S. Smith). Tellingly, when Professor Saunders was confronted with the fact that Carteret's auditors did not require additional reserves as of June 30, 1989, he had to admit he "d[id not] know exactly" when the auditors required additional reserves. Tr. 3942:7-24. 29. Fourth, Professor Saunders based his opinion on the false notion that the OTS called for "an additional 77.2 million in loan loss reserves" in its 1989 exam report. Tr. 3412:23422:11. In fact, the OTS later lowered this recommendation by almost $30 million to $49.8 million.23 Professor Saunders was completely unaware of this easily ascertainable fact. Tr. 3943:6-12. Because he failed to account for this critical information, his opinion is wholly suspect and unreliable. Carteret ultimately agreed to book only $49 million in additional reserves. See 91. Moreover, reliance on the 1989 exam report, completed in November, is suspect because it was breach-affected. See Albanese Dep. 78:7-21 (JX 1 at 5) (agreeing that at the time of the report "management was focused on the difficulties that FIRREA posed and its exclusion of goodwill, and presumably so was the examiner and supervisory staff"); Tr. 1968:3-20 (S. Smith) (acknowledging that report was issued after the effective date of FIRREA and that even as of May 22, examiners were aware of the likely legislative changes affecting thrift capital). E. The Value of Carteret's Undiscounted Cash Flows: $782.2 Million 30. The parties agree that because Carteret's stock market capitalization reflects the discounted present value of its expected future earnings, the undiscounted value of those earnings
23

See DX 781A (OTS Internal Mem., S. Smith to File, 2/14/90); Tr. 1999:1-2001:13 (S. Smith); see also Tr. 1915:7-14, 1918:13-16, 1921:16-1922:15, 1979:14-1980:7 (S. Smith). At the time, the OTS recognized that the $77 million recommendation in the 1989 report was unreasonable. See PX 6909 (Mem. from M. Simone to D. Dorgan, 11/9/1989) ("If Carteret says that 50 base points is extremely steep for 1-to-4s, we pretty much would have to agree with them."); PX 4824 (Notes of R. Meyer, 11/1/89) at 2 (same); Tr. 1984:6-9 (S. Smith) (recognizing that 1989 report assigned 50 basis points to one-to-four family mortgages); Tr. 1990:19-1991:6 (S. Smith). 17

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would be higher than the thrift's market capitalization. See PX 9301 (Saunders Enron Rpt.) at 7 ("[T]he value of stock is something less than the sum of the future cash flows that the stockholder can expect to receive"); Tr. 3775:15-3776:21 (R. Smith). Professor Calomiris thus calculated a second ex ante measure of damages: the undiscounted earnings implied by Carteret's net present value of $251 million as of July 31, 1989. In order to calculate the future earnings implied by a stock market capitalization, the only necessary data is the market price and the required rate of return, or discount rate. See PX 9018; Tr. 685:5-686:19 (Calomiris). 31. Professor Calomiris calculated the required rate of return at 12.34%. PX 9021. This calculation is conservative since it is drawn from capital-raising activity from 1993 and 1994, when rates of return were lower. See Tr. 697:10-698:4 (Calomiris). Professor Smith acknowledged that investors in 1989 were requiring a rate of return of 20 to 25%. Tr. 3072:15-25. If Professor Calomiris had utilized a higher required rate of return, then the cash flows implied by a valuation of $251 million would have been significantly higher. 32. For purposes of calculating Carteret's expected cash flows, Professor Calomiris assumed that, on average, Carteret was expected to make $20.5 million a year as a baseline measure of earnings. PX 9021. These earnings were based on Carteret's actual earnings from 1982 through 1988. PX 9020; Tr. 689:17-690:4. Although 1982 was an aberrational year in the thrift industry, Professor Calomiris conservatively included Carteret's 1982 losses in calculating Carteret's expected earnings. PX 9020. 33. The government has objected that Carteret's earnings were not "core earnings," but as Professor Smith admitted, "nobody really knows what core income is anyway." Tr. 3063:1314. Indeed, the FDIC and the OTS utilize different definitions of core income. Compare PX 2119 (FDIC 1990 Exam Rpt.) at C-AM-A-0054146 (including gains on sale of assets in net op-

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erating income), with PX 2118 (OTS 1992 Exam Rpt.) at WOQ6730070, 88 (excluding gains on sale from operating income). In any event, both Professors Calomiris and Smith agreed that investors look at cash flows, so the government's argument about "core earnings" is irrelevant. See Tr. 2839:22-2840:9 (Calomiris); Tr. 3060:11-18 (R. Smith). 34. The government also has objected that Carteret's historical earnings do not mirror cash flows because they include accretion income. It is true that accretion income might not precisely match cash flows in a particular year--accretion income attempts to reflect the amount of principal that will be returned on loans that have been marked to market, and the cash flows could be lower than earnings (in the case of lower prepayment than expected) or higher (in the case of higher prepayment than expected or asset sales). See Winstar, 518 U.S. at 852. But as Professor Calomiris explained: "When you look over many years, [ ] for example 1982 to 1988, you're getting a very clear view of the cash flows." Tr. 2841:10-2846:21. Specifically, the accretion income will mirror the receipt of the principal balance of the loan over the life of the loan. And return of principal is a cash flow. In light of this reality, both Professor Smith and OTS officials acknowledged that accretion income reflects real expected cash flows. See, e.g., Tr. 3069:23-3070:17 (R. Smith); Tr. 2030:24-2032:21 (S. Smith). Tellingly, as accretion income is included in interest income, the OTS included accretion income in net operating income in its exam reports. PX 2118 (OTS 1992 Exam Rpt.) at WOQ6730070. Likewise, Professor Smith included accretion income in calculating the critical ratio he used to assess the health of an institution. Tr. 2981:24-2982:2; 3066:14-25; 3071:3-3072:14. 35. Because Professor Calomiris was measuring cash flows, he included gains on the sale of assets. As Professor Smith admitted, such gains represent cash flows. Tr. 3067:1-18. Carteret regularly generated cash flow by selling assets at a gain. Specifically, Carteret Mort-

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gage Company originated close to $1 billion a year worth of loans with the bank retaining approximately $100 million and selling the remainder at a gain. See PX 2807 (CSB Company and Investment Overview, 3/9/92) at 5; Tr. 187:3-8, 188:9-14 (Bianco); PX 4898 (Mem., D. Cribbs to J. Mindnich, 12/7/92) at 2. Professor Smith agreed that security sales that are a regular part of a company's business are part of core earnings. Tr. 3061:15-3062:9. Thus, even if core earnings were a relevant concept, gains on sales such as those booked by Carteret would qualify. See Tr. 2018:23-2019:5, 2021:13-15 (S. Smith) (agreeing that mortgage loans were a regular part of Carteret's business and that mortgage banking constitutes core earnings). 36. Professor Calomiris also calculated the market's expectation of the growth in future earnings for Carteret. He concluded that the market expected Carteret to grow at a rate 4.2% in the future. PX 9021; Tr. 698:15-699:10. This is a conservative calculation because it assumes a rate of future growth that is only half the nominal rate of growth in the economy as a whole. Professor Saunders explained in his Enron expert report for the government that GDP grows on average at a rate of 8 to 10% each year. PX 9301 at 21; Tr. 3608:19-25 (Saunders). For Enron, a company with wildly fluctuating earnings, Professor Saunders assumed a growth rate of 15% for the first five years and then a perpetual rate of growth of 8 to 10% to mirror overall economic growth. Tr. 4014:15-21. Thus, Professor Calomiris's use of a rate less than half of that used by Professor Saunders for perpetual growth is necessarily conservative. If Professor Calomiris had used a higher growth rate reflecting overall economic growth, the expected undiscounted stream of future cash flows would have been higher than those he calculated. 37. The government made much of Professor Calomiris's use of the Gordon Growth Model. But Professor Saunders utilized a "minor variation" of the formula in both his Enron and United Global reports--he assumed a high growth rate in early years and then a perpetual rate of

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growth thereafter. Tr. 4039:25-4040:15; 4013:17-20; 4014:13-17. Professor Saunders's use of a perpetual growth rate in these valuations confirms that the Gordon Growth Model is an appropriate valuation tool. As for Professor Saunders's specific criticism that the model is just "an extremely useful rule of thumb," Tr. 3447:20-3448:8 (citing BREALEY, PRINCIPLES OF CORPORATE FINANCE), this is not a reason to reject Professor Calomiris's approach. Just because the formula is often used to solve for the valuation of a company, there is no reason that it cannot be utilized to solve for the growth rate. See Tr. 2859:21-2862:19 (Calomiris). Indeed, when confronted with other examples of this use of the model, Professor Saunders could only respond that "two people can make mistakes." Tr. 4045:10-4046:19. 38. Finally, the notion that the Gordon model can only be used for an entity in a constant rate of growth is belied by Professor Saunders' own utilization of a perpetual rate of growth for Enron, United Global, and Liberty Media--companies with far more variability in earnings than Carteret. See, e.g., PX 9301(Enron Rpt.); Tr. 4018:7-9 (Saunders) (admitting that Enron's earnings were not stable); Tr. 4033:1-11 (admitting that United Global's earnings were not stable); 4037:19-25 (Saunders) (admitting that Liberty Media's earnings--which were down 88% in 1997, up 1,631%, down 197%, and down 517%--were not stable). 39. Even if the government were correct that Professor Calomiris had not demonstrated an appropriate growth rate, that would simply mean that Carteret was entitled to at least $410 million of future expected earnings--a no-growth assumption of $20.5 million of earnings over a twenty year period. See PX 9020. 40. This second measure of damages is an ex ante measure, and therefore it is appropriate to ignore the unexpected losses sustained by Carteret in 1990 and 1991. Even though results in 1990 and 1991 were well below expectations as of 1989, the overall cash flows expected by

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investors as of 1989 proved to be unduly conservative because thrifts have enjoyed great prosperity over the last twenty years. DX 5001A (Saunders 2006 Rpt.) at 24. 41. In addition to earnings, investors would have expected Carteret to have a terminal value. Professor Calomiris calculated the terminal value of $186.6 million by starting with Carteret's book value at the date of breach, $269.3 million, adding his conservative estimate of franchise value at the time of breach, $99.9 million, and subtracting goodwill amortization of $182.5 million. PX 9024. This is a conservative measure because Professor Calomiris assumed that Carteret's franchise value would not have grown over the last twenty years. The $186.6 million of terminal value combined with intervening cash flows of $595.6 million yield overall expected cash flows as of 1989 of $782.2 million. Tr. 705:4-706:21. F. The Present-Day Value of Carteret in the NonBreach World: $904 Million 42. Mr. Vigna stated that had Carteret not been seized it "would have been very successful." Dep. 153:21-22 (JX 1 at 598).24 From an economic perspective, then, full compensation for the breach requires awarding AmBase the value Carteret would have had today in the nonbreach world. Professor Calomiris determined this value by taking account of intervening cash flows and dividends. Tr. 662:3-16, 706:24-708:10 (Calomiris). 43. There are several reasonable methods of modeling Carteret's current market value in the nonbreach world. These models yield a range of values. See PX 9025; Tr. 708:11-709:24, 713:2-5 (Calomiris). As Professor Saunders noted--and as confirmed by his valuation in the Enron case, which produced a range of values with a 50% spread, PX 9301--it is "not unusual in valuation, that you have a range of numbers." Tr. 4019:14-4020:3. Among the range of values
24

See also id. at 213:23-214:2 (JX 1 at 607); Tr. 321:6-7, 321:15-23, 321:24-322:3, 322:12-14 (Bianco) (stating that Carteret would have been very successful, that earnings would have been comparable to the rest of the industry, that it would have had $10 billion in assets and a book value of at least $500 million). 22

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produced in this case, Professor Calomiris disregarded values that did not appear reasonable based on known data and, as a conservatism, chose the lowest remaining value as a reasonably certain measure of Carteret's current market value in the nonbreach world. Tr. 714:9-21 (Calomiris). Each of the three models used by Professor Calomiris requires a comparison sample of surviving thrifts. He examined two samples: (1) all thrifts extant at each relevant point in time between 1989 and 2008; and (2) thrifts that remained stand-alone through 2008. Tr. 709:25711:2.25 44. Book-value Projection--Stand Alones. The book-value projection method employs a sample of surviving thrifts to calculate a market-to-book ratio and then multiplies that ratio by a projected present book value of Carteret, which is determined using Carteret-specific analytics. See PX 9026; Tr. 711:13-712:1; PX 2702A (Calomiris 5/07 Rpt.) at 39-40. 45. Professor Calomiris preferred the book-value projection method, with a sample of stand-alone thrifts because it is more concrete, and because it is more conservative given that the stand-alones fared less well than the all-thrifts sample. Tr. 714:22-715:2, 717:25-718:4. 46. Professor Calomiris's preferred method yields a September 2007 value of $720.1 million. PX 9031; Tr. 724:15-24. Under the preferred model, Carteret's September 2007 book value is $463.1 million. This figure is calculated by adding to Carteret's July 31, 1989 book value a projection of retained earnings minus projected dividend payouts and amortizing goodwill. See PX 9029; Tr. 718:14-720:23. See also Tr. 1295:3-1296:5 (Calomiris) (these projections do not predict yearly profits, but rather the "aggregate amount of earnings in the long run" about which "there's a huge amount of irrefutable and clear information contained in price").

The stand-alone group consists of those 31 thrifts for which there is Compustat stockprice data from 1989 through 2008. A smaller sample of 9 thrifts results when looking for more complete accounting data. Tr. 710:3-20 (Calomiris). 23

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47. A reasonable market-to-book ratio of 1.555 for September 2007 Carteret can be derived from a sample of nine stand-alone thrifts for which there is adequate accounting data. PX 9030; PX 9031; Tr. 721:6-14. Mr. Bianco's testimony supports the notion that Carteret would have remained stand-alone absent the breach, and therefore these thrifts provide relevant comparisons. Tr. 721:15-722:11, 1391:17-23 (Calomiris); Tr. 322:15-18 (Bianco). This sample also provides the lowest reasonable number produced by the various models. Tr. 1400:15-19 (Calomiris). The market-to-book ratio for these thrifts grew by 67% over the relevant period of time. Tr. 722:12-21, 724:5-14 (Calomiris). This growth rate, used to calculate Carteret's ratio, is conservative because Carteret had a greater amount of amortizing goodwill, which mechanically increases the ratio. Tr. 722:22-723:10 (Calomiris). 48. Book-value Projection--All Thrifts. If the book-value projection analysis is run with a sample of all thrifts, Carteret's September 2007 value in the nonbreach world is $909.7 million. This is a reasonable measure of Carteret's value because it is fair to assume that Carteret, given its excellent franchise value and management, would have done as well as the average thrift in the nonbreach world. See PX 9032; PX 9033; Tr. 725:6-727:25 (Calomiris). 49. Book-value Sample Method. The book-value sample method is similar to the first method, but it measures the book value of Carteret using a sample comparison group rather than Carteret-specific analytics. Tr. 712:2-13; PX 2702A (Calomiris 5/07 Rpt.) at 38. Using the book value sample method with a sample of standalone thrifts yields a September 2007 value of $2.4737 billion. Using a sample of all thrifts yields a value of $861.8 million. PX 9027. 50. Market-tracking--All Stand-alones. The market-tracking method calculates the current market value of Carteret by multiplying the market value of Carteret at the time of the breach by the change in the market value of surviving thrifts since that time. Tr. 712:14-713:1

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(Calomiris). Assuming Carteret's market value increased in an amount equal to the average of of all remaining standalone thrifts, its December 2007 value in the nonbreach would be $2.3414 billion. PX 9036; Tr. 732:10-733:12 (Calomiris). Assuming Carteret's value increased only on par with that of the bottom decile of remaining stand-alone thrifts, its December 2007 value in the nonbreach world would be $871.1 million. PX 9036. Tr. 733:13-734:2.26 This comparison shows the conservatism of Professor Calomiris's preferred method. Tr. 734:3-11. 51. Market-tracking--All Thrifts. Assuming Carteret's market value would have increased on par with the market increase of all surviving thrifts since 1989, its December 2007 market value in the nonbreach world would (depending on the market index used) be between $947.7 million and $1.2863 billion. An average of all market indexes yields a value of $1.0739 billion. PX 9038; PX 9039; Tr. 734:24-735:23, 738:4-16.27 52. The measure of Carteret's present-day market value in the nonbreach world is reasonably certain. At the very least, it is reasonably certain that the 1990s presented a much better economic environment for thrifts than did the 1980s. It stands to reason, then, that Carteret would have turned greater profits in the 1990s than it did in the 1980s ($20.5 million per year). Mr. Simone affirmed that "if interest rates remained low . . . Carteret was well positioned to take advantage of that." Dep. 64:3-9 (JX 1 at 500). And Professor Saunders admitted there was a "massive downward trend in interest rates" in September 1992. Tr. 3572:22-24. Accordingly, it is reasonabl