Free Response to Motion - District Court of Federal Claims - federal

Case 1:93-cv-00531-LAS

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Exhibit C:
Excerpts from Report of Charles W. Calomiris (May 19, 2007)

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UNITED STATES COURT OF FEDERAL CLAIMS

AMBASE CORPORATION and CARTERET BANCORP, INC., Plaintiffs, and FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff-Intervenor, v. THE UNITED STATES OF AMERICA, Defendant.

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DECLARATION OF CHARLES W. CALOMIRIS OF MAY 19,

2007

Qualifications Introduction
I. Carteret's Value at the Time of the Breach and the Subsequent Increase in Its Value ButFor the Breach A. Carteret Was Sold to AmBase for $266 MiIlion in August 1988--One Year . Before the Breach B. Carteret's Value Did Not Substantially Change Between the Time of Its Sale to AmBase and the Breach 1. In May 1989, a Bid of $252 Million Was Made to Purchase Carteret

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proper measure of damages due in 2008 would include the sum of dividends received in the butfor world that were not received in the actual world through 2008, and the 2008 but-for market value of the bank.
TABLE 6: BUT-FOR UNDISCOUNTED CASH FLOWS FROM AUGUST 9, 1989 TO DECEMBER 3 l, Cash Flows Net of Dividends Distributed Net Income Dividends (Million $) (Million $) (Million $) Period [A] [B] = 31.6% x [A] [C] = [A] - [B] 8/9/1989- 8/8/I 990 $20.5 $6.5 $14.0 8/9/1990- 8/8/1991 $21.4 $6.8 $14.6 8/9/1991- 8/8/1992 $22.3 $7.1 $15.2 8/9/I 992- 8/8/1993 $23.2 $7.4 $15.9 8/9/I 993- 8/8/1994 $24.2 $7.7 $16.5 8/9/1994- 8/8/1995 $25.2 $8.0 $17.2 8/9/I 995- 8/8/1996 $26.2 $8.3 $17.9 8/9/1996 - 8/8/1997 $27.3 $8.7 $18.7 8/9/I 997 - 8/8/1998 $28.5 $9.0 $19.5 8/9/1998 - 8/8/1999 $29.7 $9.4 $20.3 8/9/1999 - 8/8/2000 $30.9 $9.8 $21.1 8/9/2000 - 8/8/2001 $32.2 $10.2 $22.0 8/9/2001 - 8/8/2002 $33.5 $10.6 $22.9 8/9/2002 - 8/8/2003 $34.9 $11.1 $23.9 8/9/2003 - 8/8/2004 $36.4 $11.5 $24.9 8/9/2004 - 8/8/2005 $37.9 $12.0 $25.9 8/9/2005 - 8/8/2006 $39.5 $12.5 $27.0 8/9/2006 - 8/8/2007 $41. I $13.0 $28.1 8/9/2007 - 8/8/2008 $42.8 $13.6 $29.3 8/9/2008 - 12/31/2008" $17.7 $5.6 $12.1 Total 8/9/1989 - 12/31/2008 $595.6 $188.7 $406.9

2008

8/9/2006 - 12/31/2006 $16.3 $5.2 $11.2 Total 8/9/I 989 - 12/31/2006 $510.2 $161.6 $348.6 Note: * For the final partial periods, August 9, 2008 to December 31, 2008 and August 9, 2006 to December 31, 2006, I assume that net income is distributed evenly throughout the year.

D.

But-For the Breach, Carteret's Value Can Be Estimated Based on the Performance and Growth of the Thrift Industry 1.
37.

The Growth in Market Values of the Thrift Industry
The market value of any firm represents a discounted prediction of the firm's

future cash flows. The market's predictions of Carteret's future profitability in 1988 and 1989 were, with the benefit of hindsight,

unduly conservative if the breach had not caused Carteret to

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estimate the goodwill amortized from July 31, 1989 to August 31, 1989).64 I then assume that the retained earnings from August 9, 1989 to December 31, 2006 that I estimated in Table 6 ($348.6 million) would have been added to Carteret's book value. This calculation results in a but-for book value for Carteret of $442.9 million as of December 31, 2006 (equal to $269.3 million of book value in July 1989, minus $175.0 million of goodwill amortization, plus $348.6 million of retained earnings). Finally, I estimate Carteret's but-for market value as of the end of 2006 using the same market-to-book ratios estimated in Table 8, where I assumed that Carteret's market-tobook ratio would have increased from July 1989 to December 2006 at the same rate as the average market-to-book ratio for all thrifts. Table 9 summarizes the calculations. TABLE 9: BOOK VALUES AND MARKET-TO-BOOK RATIOS OF ALL THRIFTS IN JULY 1989 AND DECEMBER 2006, ADJUSTED FOR GOODWILL & RETAINED EARNINGS Equal Weight Market Value Weight July 31, Dec. 31, % Change July 31, Dec. 31, % Change 1989 2006 1989 2006 (Obs=49) (Obs=175) (Obs=49) (Obs=175)
Mean Market-to-Book Ratio But-For Carteret Book Value
without Goodwill (Million $)

0.627 269.3 0.934 251.4

1.553 442.9 2.313 1,024.4

148%

1.023 269.3 0.934 251.4

1.815 442.9 1.657 733.9

77%

But-For Carteret Market-toBook Ratio without Goodwill But-For Carteret Market Value (Million $) without Goodwill Sources: Compustat; TFR data.

As Table 9 shows, Carteret's but-for market value at the end of 2006 would have been $1.024 billion (using the increase in the equal-weighted mean market-to-book ratios for all thrifts) or $733.9 million (using the increase in market value-weighted mean market-to-book ratios for all thrifts). The market value-weighted results in Table 9 are significantly lower than the corresponding result in Table 8 ($3.839 billion). In Table 8, I increased Carteret's book value by the increase in weighted average mean book values for the industry. This weighted average gave

64. Goodwill Amortization Schedule (Historical), August 1989 (CAM5300023).

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of the market value of goodwill, then the market value of Carteret's franchise was equal to $99.9 million as of the breach. Table 15 summarizes this calculation.
TABLE 15: ESTIMATING CARTERET'S FRANCHISE VALUE AS OF DATE OF THE BREACH
Category Million $ Carteret's Total Market Value as of July 31, 1989 $251.4 [A] Market Value of Supervisory Goodwill as of July 3 l, 1989 [B] $66.2 Face Value of Total Assets as of June 30, 1989 $7,286.1 [C] Goodwill as of June 30, 1989 [D] $185.1 Face Value of Non-Goodwill Assets as of June 30, 1989 [E] = [C] - [D] $7,101.0 Face Value of Liabilities as of June 30, 1989 [F] $7,015.6 Market Value of Franchise as of the Breach [G] = [A] - ([B] + [E] - [F]) $99.9 Sources: TFR data; Carteret Bancorp Inc. and Subsidiary, Consolidated Statements of Financial Condition (June 30, 1989) (CAM4470985); 1989 Goodwill Amortization Schedule (AM050531); August 1989 Goodwill Amortization Schedule (CAM5300023); Carteret Savings Bank, FA, Thrift Financial Report, Jun. 30, 1989, at Q-I (AM050308); Calomiris calculations.

51. Even though Carteret's market-to-book ratio in 1988 was less than 1, Carteret's implied franchise value was enormous once one has taken into account that supervisory goodwill was such a significant part of its book value. The market clearly understood that these intangible assets were valuable. Further evidence of Carteret's large franchise value is found in independent analysis of the thrift at the time it was acquired by AmBase. Peat Marwick Main & Co. estimated the value of Carteret's deposit base intangible asset to be $53.9 million in August 1988.7o 52. Furthermore, support for a high franchise value of Carteret can be found in the

RTC's post-seizure observations that Carteret's competitive deposit interest rates reflected its high quality of retail banking relationships and effective marketing strategy: In recent years, CSB has generally outperformed competitive financial institutions in attracting retail deposits. During the past year, the Bank did experience a decline in deposits. However, this was more symptomatic of the interest rate environment than the negative publicity pertaining to the Bank's financial condition. CSB regularly tracked competitive retail deposit rates and had a practice of paying among the most competitive rates. However, the Bank rarely offered the highest rate among competitive financial institutions on any retail deposit product. In addition to competitive factors, CSB evaluated its own internal cash needs and rates available on alternative sources of funds when setting rates for retail deposit products. CSB has a
70. Valuation of the Deposit Base Intangible Asset from the Acquisition of Carteret Savings Bank (Aug. 8, 1988), at lII-I (PM 004486).

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