Free Memorandum of Contentions of Fact and Law - District Court of Federal Claims - federal

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

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

PLAINTIFF'S MEMORANDUM OF CONTENTIONS OF FACT AND LAW 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) December 21, 2007

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TABLE OF CONTENTS Page TABLE OF AUTHORITIES ............................................................................................... i INTRODUCTION ...............................................................................................................1 PLAINTIFFS CONTENTIONS OF FACT .........................................................................5 A. Carteret's Success & Profitability Prior to the Breach ............................................5 B. The Government's Breach of the Supervisory Goodwill Contracts ......................11 C. The Effect of the Breach on Carteret .....................................................................11 D. Congress and the FDIC Create A Receivership Deficit .........................................20 1. Congress's actions radically inflated the receivership deficit...........................20 2. The post-solvency interest has no relationship to the actual cost of the loans .21 3. The tax liability is a chimera of the FDIC's own making.................................24 4. The Minority Preference Program prevented Carteret from using its own assets to finance its resolution and reduced the premiums it obtained .............26 5. The RTC shut down Carteret Mortgage Company abruptly .............................28 STATEMENT OF ISSUES OF FACT AND LAW ..........................................................29 PLAINTIFFS' CONTENTIONS OF LAW .......................................................................30 I. PLAINTIFFS ARE ENTITLED TO THE VALUE OF THE BANK. ..................32 A. The Loss of Carteret's Value Was Reasonably Foreseeable .................................32 B. The Loss of Carteret's Value Was Caused by the Government's Breach .............38 1. Government regulators acknowledged that absent the breach, Carteret would have survived .........................................................................................41 2. Carteret's successful performance prior to the breach and prior to seizure confirms that Carteret would have survived ....................................................43

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3. The breach devastated Carteret ........................................................................46 a. Asset shrink and deposit runoff ...........................................................48 b. 1990 branch sales .................................................................................51 c. Increased cost of funds.........................................................................52 d. Commercial real estate sales and writedowns .....................................53 4. Carteret's capital position absent the breach ...................................................53 5. The Government's causation arguments are meritless ....................................57 a. Adding back goodwill as of time of seizure ........................................57 b. Carteret's supposed mitigation and the 1991 preliminary injunction ..59 c. The goodwill written off in connection with the 1990 branch sales ....60 d. Carteret's exposure to commercial lending losses ...............................64 e. Carteret's supposed failure to mitigate by raising capital ....................67 C. Carteret Can Prove Its Expectancy Damages With Reasonable Certainty ............70 II. III. IV. V. PLAINTIFFS SUFFERED SIGNIFICANT WOUNDED BANK DAMAGES. ..76 AMBASE IS ENTITLED TO RELIANCE DAMAGES. .....................................80 AMBASE IS ENTITLED TO RESITUTION DAMAGES. .................................82 THE RECEIVERSHIP DEFICIT IS OVERSTATED ..........................................83 A. Section 1821 Does Not Bar Review of the Validity of the Receivership Deficit ..83 B. The FDIC Breached Repeatedly Its Fiduciary and Statutory Duties Toward Carteret and AmBase ......................................................................................................85 1. The tax "liability" is a phantom liability that will never be paid by the FDIC ................................................................................................................86 2. The tax liability is a creation of the FDIC's repeated errors in filling out Carteret's tax returns ................................................................................................87 a. The FDIC concedes that is erroneously overstated taxable income as a

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result of its treatment of federal financial assistance ...........................87 b. The IRS will allow the FDIC to deduct up to $84 million as an interest expense for 1995 ..................................................................................89 i. ii. The FDIC failed to deduct interest actually paid by Carteret ..90 The FDIC failed to deduct interest actually accruing on loans to Carteret .....................................................................................90

c. The FDIC failed to carry forward the 1992 tax return .........................93 d. Penalties for nonpayment will not be assessed and thus are not a proper component of the receivership deficit .............................................94 e. Interest on the tax liability is attributable to Congress's actions .........95 C. The FDIC's Estimates of Post-solvency Interest Should Be Excluded from the Receivership Deficit...............................................................................................96 1. The United States is not entitled to deduct interest in the RTC loan from the damages due AmBase ......................................................................................98 a. Interest on the RTC loan should not be deducted from the damages due AmBase because that loan is wholly attributable to Congress's failure to provide funding for the RTC ...........................................................98 b. Interest should not be deducted from the damages due AmBase because those damages cannot be adjusted to reflect the time value of money ...................................................................................................99 2. If interest is deducted, it must be calculated pursuant to 12 C.F.R. § 360.3(b) .....................................................................................100 a. The interest rates used in the FDIC calculations are contrary to law..................................................................................................101 b. The interest rates use in the FDIC calculations upset reasonable, wellsettled expectations ............................................................................103 c. The interest rates used in the FDIC calculations have no economic justification .............................................................................................105 3. If the FDIC's interest rates are used, its calculations must be corrected to eliminate other flaws .............................................................................................106

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a. The FDIC's interest calculations misallocate payments from the sale of Carteret's assets .................................................................................106 b. The FDIC's interest calculations improperly treat the premiums from Carteret's deposit sales ......................................................................108 D. The Receivership Deficit Was Overinflated Due to the Breach and Delays in Resolution ............................................................................................................110 E. The Unconstitutional Minority Preference Program Inflated Substantially the Receivership Deficit .................................................................................................113 1. The Minority Preference Program .................................................................113 2. The Minority Preference Program violates the Due Process Clause .............114 a. Congress failed to demonstrate a compelling interest of the Minority Preference Program ............................................................................115 b. The Minority Preference Program is not narrowly tailored to a compelling interest.........................................................................................117 3. The Minority Preference Program harmed Carteret and AmBase .................120 a. The RTC held back Carteret's assets to sell minority acquirers of other institutions ..........................................................................................120 b. Minority bids for Carteret were preferred over non-minority bids ....122 VI. DAMAGES SHOULD BE PAID TO AMBASE DIRECTLY ............................124 A. Governing Principles of Contract Law Require That Damages Be Paid Net of the Receivership Deficit.............................................................................................124 B. Direct Payment of Damages to AmBase, As the Thrift's Sole Residuary Claimant, Will Vindicate Controlling Principles of Contract Law ......................................127 C. Direct Payment of Damages to AmBase Will Avoid Substantial Questions under the Taking Clause ................................................................................................128 CONCLUSION ................................................................................................................130

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TABLE OF AUTHORITIES Cases Page/s

Acme Process Equip. Co. v. United States, 347 F.2d 509 (Ct. Cl. 1965) .........................82 Adarand Contructors, Inc. v Pena, 515 U.S. 200 (1995) ...............................................114 AmBase Corp. v. United States, 61 Fed. Cl. 794 (2004)......................83, 84, 100, 125, 126 AmBase Corp. v. United States, 58 Fed. Cl. 32 (2003).............................................. passim American Capital Corp. v. United States, 472 F.3d 859 (Fed. Cir. 2006).........................81 American Capital Corp. v. United States, 66 Fed. Cl. 315 (2005) ....................................80 Bailey v. United States, 341 F.3d 1342 (Fed. Cir. 2003) ...................................84, 100, 127 Belmont Indus., Inc. v Bechtel Corp., 425 F. Supp. 524 (E.D. Pa. 1976) .........................69 Bluebonnet Sav. Bank, FSB v. United States, 339 F.3d 1341 (Fed. Cir. 2003) .................76 Bluebonnet Sav. Bank, FSB v. United States, 266 F.3d 1348 (Fed. Cir. 2001) ......... passim California Fed. Bank v. United States, 395 F.3d 1263 (Fed. Cir. 2005) .........................124 California Fed. Bank v. United States, 245 F.3d 1342 (2001) ..................................35, 125 Carteret Sav. Bank v. OTS, 963 F.2d 567 (3d Cir. 1992) ................................14, 16, 48, 60 Carteret Sav. Bank v. United States, No. 91-661, slip op. (D.N.J. July 8, 1991) ..................................................................................15, 51, 60, 61 Carteret Sav. Bank v. OTS, 762 F. Supp. 1159 (D.N.J. 1991), vacated on other grounds, 963 F.2d 567 (3d Cir. 1992)......................48 Castle v. United States, 301 F.3d 1328 (Fed. Cir. 2002) .................................................129 Christian v. United States, 46 Fed. Cl. 793 (2000) ..........................................................115 Citizens Fed. Bank v. United States, 474 F.3d 1314 (Fed. Cir. 2007) .........................38, 39 Citizens Fed. Bank v. United States, 59 Fed. Cl. 507 (2004).................................38, 39, 40 City of Richmond v. J.A. Croson Co., 488 U.S. 469 (1989) ...........................114, 117, 119 Coast Fed. Bank v. United States, 323 F.3d 1035 (Fed. Cir. 2003)...................................63 Coast Fed. Bank v. United States, 48 Fed. Cl. 402 (2000) ....................................39, 40, 64 Commercial Fed. Bank v. United States, 59 Fed. Cl. 338 (2004)..........................39, 64, 76 Commercial Fed. Bank v. United States ,125 Fed. Appx. 1013 (Fed. Cir. 2005) .............39 Energy Capital Corp. v. United States, 302 F.3d 1314 (Fed. Cir. 2002)...............30, 32, 38 Energy Capital Corp. v. United States, 47 Fed. Cl. 382 (2000), aff'd in part and rev'd in part, 302 F.3d 1314 (Fed. Cir. 2002) ...........................................................................38 FDIC v. Mallen, 486 U.S. 230 (1988) ...............................................................................22

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FDIC v. Meyer, 510 U.S. 471 (1994) ................................................................................22 First Fed. Sav. & Loan Bank v. United States, 76 Fed. Cl. 106 (2007).............................40 Glendale Fed. Bank, FSB v. United States, 43 Fed. Cl. 390 (Fed. Cl. 1999) ..............76, 77 Glendale Fed. Bank, FSB v. United States, 54 Fed. Cl. 8 (2002) ................................77, 80 Glendale Fed. Bank, FSB v. United States, 378 F.3d 1313 (Fed. Cir. 2004) ........70, 77, 79 Glendale Fed. Bank, FSB v. United States, 239 F.3d 1374 (Fed. Cir. 2001) ............ passim Globe Savings Bank v. United States, 65 Fed. Cl. 330 (2005), aff'd in part and vacated in part, 189 Fed. Appx. 964 (Fed. Cir. 2006) ............................................................33, 76 Granite Management Corp. v. United States, 416 F.3d 1373 (Fed. Cir. 2005) .................79 Grutter v. Bollinger, 539 U.S. 306 (2003) ...............................................................114, 116 Hansen Bancorp, Inc. v. United States, 367 F.3d 1297 (Fed. Cir. 2004) ..........................81 Hirabayashi v. United States, 320 U.S. 81 (1943)...........................................................114 Holland v. United States, 75 Fed. Cl. 483 (2007) ..............................................................40 Home Sav. of Am., FSB v. United States, 399 F.3d 1341 (Fed. Cir. 2005) ................ passim Home Sav. of Am., FSB v. United States, 50 Fed. Cl. 427 (2001) .....................................62 Hughes Commc'n Galaxy, Inc. v. United States, 271 F.3d 1060 (Fed. Cir. 2001) ...........79 Koby v. United States, 53 Fed. Cl. 493 (2002) ............................................................69, 84 La Van v. United States, 382 F.3d 1340 (Fed. Cir. 2004) .................................................32 Landmark Land Co. v. United States, 256 F.3d 1365 (Fed. Cir. 2001) ......................33, 81 LaSalle Talman Bank, FSB v. United States, 317 F.3d 1363 (Fed. Cir. 2003) .........70, 110 Locke v. United States, 283 F.2d 521 (Ct. Cl. 1960) ........................................................70 Myerle v. United States, 33 Ct. Cl. 1 (1897) ......................................................................39 NLRB v. Catholic Bishop, 440 U.S. 490 (1979) .............................................................129 Northeast Sav. Bank v. OTS, 770 F. Supp. 19 (D.D.C. 1991) ...........................................15 Nyquist v. Randall, 819 F.2d 1014 (11th Cir. 1987) ....................................................69, 84 Old Stone v. United States, 63 Fed. Cl. 65 (2004), aff'd in part and rev'd in part, 450 F.3d 1360 (Fed. Cir. 2006) ....................................................................................39, 44 Perry v. United States, 294 U.S. 330 (1935) .....................................................................82 Reich v. Collins, 513 U.S. 106 (1994) ...............................................................................83 Rothe Dev. Corp. v. United States Dep't of Defense, 262 F.3d 1306 (Fed. Cir. 2001) ..................................................................................115, 117, 118, 119 Shaw v. Hunt, 517 U.S. 899 (1996) .................................................................................116 Slattery v. United States, 73 Fed. Cl. 527 (2006) ....................................124, 125, 126, 127

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Slattery v. United States, 69 Fed. Cl. 573 (2006) ...................................................... passim Southern California Sav. & Loan Ass'n v. United States, 422 F.3d 1319 (Fed. Cir. 2005) ............................................................................................................40 Stone v. FDIC, 179 F.3d 1368 (Fed. Cir. 1999).................................................................22 Suess v. United States, 74 Fed. Cl. 510 (2006) ..................................................................31 Suess v. United States, 52 Fed. Cl. 221 (2002) ......................................................30, 59, 72 Toyota Indus. Trucks USA, Inc. v. Citizens Nat'l Bank, 611 F.2d 465 (3d Cir. 1979) .........................................................................................................69, 84 United States v. Burton Coal Co., 273 U.S. 337 (1927) ....................................................79 United States v. Virginia, 518 U.S. 515 (1996) ...............................................................116 United States v. Winstar Corp., 518 U.S. 839 (1996) ......................................5, 34, 68, 124 Webb's Fabulous Pharmacies, Inc. v. Beckwith, 449 U.S. 155 (1980) ...........................100 Westfed Holdings, Inc. v. United States, 407 F.3d 1352 (Fed. Cir. 2005) .........................81 Westfed Holdings, Inc. v. United States, 55 Fed. Cl. 544 (2003) ................................39, 68 Westfed Holdings, Inc. v. United States, 52 Fed. Cl. 135 (2002) ......................................38 Wygant v. Jackson Bd. of Educ., 476 U.S. 267 (1986) ....................................................115

Other 12 U.S.C. § 1441a(w)(17)(A) ............................................................................113, 118, 27 12 U.S.C. § 1441a(w)(17)(C) ..........................................................................................113 12 U.S.C. § 1813(j) ..........................................................................................................102 12 U.S.C. § 1821 ......................................................................................................101, 102 12 U.S.C. § 1821(d)(10)(C) .............................................................................................105 12 U.S.C. § 1821(d)(11) ............................................................................94, 124, 127, 128 12 U.S.C. § 1821(d)(13)(E)(iv)........................................................................................118 12 U.S.C. § 1821(g)(2) ....................................................................................................105 12 U.S.C. § 1821(j) ..................................................................................................127, 128 26 U.S.C. § 448 ..................................................................................................................94 26 U.S.C. § 597 ..................................................................................................................87 26 U.S.C. § 6621(d) .........................................................................................................110 26 U.S.C. § 7507(b) ...........................................................................................................86 vii

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28 U.S.C. § 1961 ..............................................................................................................103 28 U.S.C. § 2516(a) .....................................................................................................98, 99 Resolution Trust Corporation Completion Act, Pub. L. No. 103-204, § 3(a), 107 Stat. 2369 (1993) (codified at 12 U.S.C. § 1441a(w)(17)(A)) .....................................26, 113 12 C.F.R. § 1.446-1(e)(2)(i) ...............................................................................................94 12 C.F.R. § 360.3 ...............................................................................................................94 12 C.F.R. § 360.3(b) ..................................................................................97, 100, 101, 103 12 C.F.R. § 360.7 .............................................................................................................105 12 C.F.R. § 360.7(b)(3)....................................................................................................106 66 Fed. Reg. 65,144 (Dec. 18, 2001) .........................................................23, 101, 102, 106 139 CONG REC. H10,162 (1993) ......................................................................................116 5 ARTHUR CORBIN, CORBIN ON CONTRACTS § 1012 (1964) ..............................................33 5 ARTHUR CORBIN, CORBIN ON CONTRACTS § 1039 (1964) ..................................69, 69, 84 11 ARTHUR CORBIN, CORBIN ON CONTRACTS § 57.11 .......................................................69 DOBBS, LAW OF REMEDIES § 1.1 ......................................................................................125 Douglas G. Baird, The Uneasy Case for Corporate Reorganization, 15 J. LEGAL STUD. 127 (1986) ............................................................................................................27, 122 Kenneth H. Bacon, As Deposit Insurance Dwindles, FDIC Wonders If It Should Start Running the Banks It Seizes, WALL ST. J., Dec. 31, 1990, at A30 ...............................66 RESTATEMENT (SECOND) OF CONTRACTS § 344(a) ..........................................................125 RESTATEMENT (SECOND) OF CONTRACTS § 344(b) ............................................................80 RESTATEMENT (SECOND) OF CONTRACTS § 344(c) ............................................................82 RESTATEMENT (SECOND) OF CONTRACTS § 347 ................................................................77 RESTATEMENT (SECOND) OF CONTRACTS § 349 ................................................................81 RESTATEMENT (SECOND) OF CONTRACTS § 350 ................................................................69 RESTATEMENT (SECOND) OF CONTRACTS § 352 cmt. a ......................................................81 RESTATEMENT (SECOND) OF CONTRACTS § 352 cmt. c ......................................................77 24 SAMUEL WILLISTON & RICHARD A. LORD, A TREATISE ON THE LAW OF CONTRACTS § 64:2 (4th ed. 2002) .......................................................................................77, 124, 125 Steve Klinkerman, The High Road is Costing RTC Time and Money, AMER. BANKER., Aug. 6, 1990, at 1 .........................................................................................................66 Stuart D. Root, Bank Capital, Asset Liquidation, and the Credit Crunch, 1993 COLUM. BUS. L. REV. 169 (1993)...............................................................................................66

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Pursuant to RCFC App. A, ¶ 14(a), Plaintiffs AmBase Corporation ("AmBase") and Carteret Bancorp, Inc., respectfully submit this Memorandum of Contentions of Fact and Law pertaining to the damages issues that are to be tried in this action. As discussed in detail below, the evidence at trial will establish that Ambase is entitled to recover substantial damages that were caused by the government's breach of contract. INTRODUCTION In 1982, Carteret Savings Bank, F.A. ("Carteret") 1 agreed to acquire from the federal government two massively insolvent thrifts whose combined liabilities exceeded their assets by over $200 million. The acquisition on its face would have been "madness," as the Supreme Court aptly put it in Winstar, but for the government's promise to allow Carteret to count $214 million in supervisory goodwill toward its regulatory capital requirements over 40 years. The fundamental economic premise of this contractual arrangement, as in Winstar, was that Carteret would be able to earn enough profits over the 40-year life of the contract to eliminate the capital deficiency of the insolvent thrifts it had acquired. In the years prior to FIRREA, Carteret performed exactly as the regulators had hoped. From 1983 to 1988, Carteret generated more than $150 million in profits. But, as this Court has found, the government breached its contractual obligations to Carteret with the passage of FIRREA in 1989 and eviscerated Carteret's regulatory capital profile. Overnight, Carteret went from being a well-capitalized thrift to falling out of compliance with its fully phased in capital requirements by some $80 million.

Carteret Building and Loan Association of Newark, New Jersey was incorporated as a state-chartered savings and loan association on September 15, 1939. On May 5, 1982, the thrift converted to a federally chartered stock association; later that year it was renamed Carteret Savings Bank, F.A. See PX 6 (Carteret Bancorp Inc., 1987 Annual Report) at C-A-MA 0056661. 1

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Carteret responded to this capital crisis by shrinking its balance sheet by almost $2 billion and foregoing the positive spread income on those assets. The timing of this massive downsizing could not have been worse, for the commercial real estate market was in the midst of a major downturn. While other financial institutions in the Northeast were able to ride out the real estate downturn, Carteret was forced to sell hundreds of millions of dollars in commercial real estate at the nadir of the market. To make matters worse, Carteret's cost of funds went up significantly as negative publicity about the impact of the government's breach on Carteret's capital profile became known. Carteret was also forced to cannibalize its branch network to increase its capital ratios. Notwithstanding the difficulties resulting from the breach, Carteret's management team was able to restore the thrift to profitability. From September of 1991 through November of 1992, Carteret generated profits in each month. Problem assets were reduced significantly. The thrift's mortgage origination business thrived, with originations totaling $1 billion in the year prior to seizure. Carteret also had a multibillion-dollar servicing operation that was very efficient and consistently generated earnings. Most important, Carteret had a stellar franchise. As the RTC recognized after the seizure, Carteret's branch network was very well situated and enjoyed a very high level of customer satisfaction. Indeed, even after the RTC had allowed Carteret's deposit base to run off by more than 50% during the conservatorship, Carteret's competitors were willing to pay a premium of $143 million for the remaining deposit base. This premium is a testament to the franchise value of Carteret. Not surprisingly, the regulators were uniform in their praise of Richard Bianco, the CEO of Carteret, and his management team for their extraordinary efforts in restoring Carteret's profitability.

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Nevertheless, the government maintains that Carteret would have failed even absent the breach's harmful effects on Carteret. The centerpiece of the government's argument is that Carteret would not have been in capital compliance even if the government had honored its contractual promises and Carteret's $168 million in bargained for supervisory goodwill had been included in Carteret's regulatory capital ratios at the time of seizure. But this contention rests on the false premise that Carteret suffered no harm whatsoever from shrinking its asset base by $2 billion, selling off its branch network, enduring a higher cost of funds, and a myriad of other problems created by its breach-induced capital shortfall. Moreover, even if additional capital had been needed, it would have been far easier to raise a small amount of additional capital. But the Court need not take our word for the proposition that Carteret had turned the corner and would have survived even absent the breach. The top regulators in the OTS Northeast region have unequivocally testified under oath that Carteret would have survived if the supervisory goodwill promise had been honored. We know of no other Winstar case in which the sworn testimony of the actual regulators on the ground so strongly contradicts the Department of Justice's litigation position. The Department should not be allowed to rewrite history and disavow the sworn statements of the government's top regulators. The damages flowing from this breach are substantial. Carteret had a value of the least $251 million on the eve of the breach. Indeed, AmBase had acquired Carteret for $266 million just a year before the passage of FIRREA. These market valuations in 1989, however, represent projected earnings discounted back to 1989. The Federal Circuit has now made clear that profits that would have been earned prior to trial should not be discounted. Accordingly, Professor Charles Calomiris of Columbia Business School has analyzed the undiscounted amount of profits implied by the 1989 valuation. He concludes that the stock market expected Carteret to generate

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$595 million of profits between 1989 and the present. Moreover, Professor Calomiris demonstrates that the stock market was unduly conservative in 1989 about the prospects of the financial services industry. Given the thrift industry's performance since the breach, Carteret would plainly have made far more than that amount and today would be a vibrant financial franchise worth at least $1 billion. If Carteret is to be made whole for the effects of the government's breach, then it should receive the full value that the franchise would enjoy today. The FDIC in its capacity as a receiver seeks to siphon off these damages as an offset to pay the so-called receivership "deficit." As this Court held in Slattery v. United States, 69 Fed. Cl. 573 (2006), such an offset makes no sense where, as here, there would have been no receivership but for the government's breach. Additionally, as we demonstrated at length in our 2006 statement of issues, the alleged deficit is the result of Enron-style accounting. The FDIC, for example, posits that a receivership that is alleged to have generated hundreds of millions of dollars of losses nevertheless generated significant taxable income. But these statements cannot both be true, and here neither is. Even assuming that it is appropriate to include interest in the deficit, the FDIC also has manipulated the interest component of its alleged deficit through a series of changes retroactively applied with the specific effect of artificially increasing the interest of by tens of millions of dollars. And the tax liability results in part from the FDIC's failure to deduct the bogus interest it seeks to charge the receivership. For these reasons, the damages should not be offset for any portion of the so-called receivership deficit. But if this Court concludes that such a reduction is mandatory even for a demonstrably bogus receivership deficit, then it should hold that AmBase has suffered a taking of property. If the government can evade paying damages for breach of contract simply by

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creating artificial offsets, then the contract remedy is an empty promise and a taking has occurred. PLAINTIFFS' CONTENTIONS OF FACT A. Carteret's Success & Profitability Prior to the Breach In 1982, Carteret had a positive net worth of nearly $37 million. See PX 2433 (S-Memos re: FSLIC Assister Merger of Barton and Unassisted Supervisory Merger of Delray into Carteret (Sept. 30, 1982) at WOR8390347, 0358). Carteret had "operated relatively free of supervisory concern and had operating ratios that were generally more favorable than those of like-sized institutions." AmBase Corp. v. United States, 58 Fed. Cl. 32, 41 (2003) (internal quotation marks omitted). Many of Carteret's peer institutions, however, were not so well situated. As has been well-documented, rising interest rates in the early 1980s visited a financial crisis upon the thrift industry. Many thrifts held "long-term, fixed-rate mortgages created when interest rates were low" but had to "raise the rates they paid to depositors in order to attract funds." United States v. Winstar Corp., 518 U.S. 839, 845 (1996). Due to this negative spread, "some 435 thrifts failed between 1981 and 1983." Id. This parade of failures left the federal Government in a bind. The Federal Savings and Loan Insurance Corporation ("FSLIC")--the entity responsible for regulating thrifts and insuring thrift deposits--"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. Thus, in the spring 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,

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Florida ("Delray"). See PX 2433 (S-Memos re: FSLIC Assister Merger of Barton and Unassisted Supervisory Merger of Delray into Carteret (Sept. 30, 1982)). Both institutions had recorded significant operating losses that had completely eroded their capital, and rendered them insolvent. AmBase, 58 Fed. Cl. at 35; PX 2433 at WOR8390352-WOR8390355. By the fall of 1982, the total amount of the insolvency of Barton and Delray was $168 million and $46 million, respectively. AmBase, 58 Fed. Cl. at 36. 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. Since the failing thrifts' insolvency amounts far eclipsed Carteret's positive net worth, the government induced Carteret to enter this agreement by promising Carteret 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. Id at 35-36. 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, 58 Fed. Cl. at 42 (second alteration in original). The supervisory goodwill that arose from the 1982 acquisitions was approximately $214 million. Id. at 36. This figure closely approximates the financial cost that FSLIC would have been forced to bear had it not been able to arrange for the acquisition by Carteret. PX 2702 (Decl. of Charles W. Calomiris (May 19, 2007) at n. 15) (hereinafter "Calomiris May 2007 Report"). Absent the use of supervisory goodwill, Carteret would have been insolvent

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immediately upon consummation of the transaction, with a staggering negative net worth of approximately $212 million.2 In the years following these acquisitions, Carteret generated significant profits by expanding its franchise into new states, expanding its asset base, and venturing into new lines of business. The following table illustrates Carteret's asset growth from 1983 through 1988: Year 1983 1984 1985 1986 1987 1988 Total Assets $4,267,314,000 $5,045,678,000 $5,121,801,000 $5,537,547,000 $5,910,170,000 $6,682,279,000

As Carteret grew its assets, it generated substantial profits. See PX 0601 (Carteret Bancorp Inc. 1987 10K) at 14; PX 0008 (Carteret Savings Bank 1989 Annual Report) at KH078235KH078236. Year 1983 1984 1985 1986 1987 1988 Net Income $34,809,000 $7,521,000 $25,222,000 $46,091,000 $33,417,000 $22,933,000

These substantial profits enabled Carteret to eliminate the tangible net worth deficit generated by the 1982 acquisitions. By 1988, Carteret had grown to more than $6 billion in assets from just under $2 billion in 1981. Despite its asset growth and the difficult economy in the early 1980s,

Initially, Carteret reported a smaller deficit of $165 million. See AmBase, 58 Fed. Cl. at 42; PX 6844 (S-Memo: FSLIC Assisted Merger of Barton, First FS&LA of Delray Beach, and Carteret). However, when Carteret conducted its Initial Public Offering in 1983, it restated its earnings. 7

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Carteret had maintained and even improved its compliance with regulatory capital requirements. Thus, in its 1988 Report of Examination, the FHLBB concluded that: Carteret remains in a period of asset stability for the calendar years 1985 thru 1987. This followed a period of rapid growth during which time the bank restructured its balance sheet from a traditional thrift lender into a diversified financial services institution. . . . The bank has diversified geographically with primary emphasis on the Mid Atlantic and Florida markets. PX 2104 (1988 FHLBB Report of Examination) at 3. The Report also concluded that: 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 . . . . Id. at 10.3 As part of this growth strategy, 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").4 In that transaction, the federal government again promised, inter alia, that Carteret would be permitted to include the supervisory goodwill resulting from those acquisitions in calculating its regulatory capital, this time for a period of up to twenty-five years. See PX 2483 (Peat Marwick Accounting Letter (June 4, 1986)). Carteret booked a total

See also id. at 1 ("The bank continues to retain an adequate level of capital. In addition, risk factors are well managed . . . ."); id. at 7 ("Carteret has both adequate RAP and GAAP capital position. This has been the result of a combination of good earnings, favorable acceptance in the capital markets, and a sustained period of asset stability, which together have dramatically reversed the precarious capital position Carteret experienced during the early 1980s. The present capital base is sufficient to provide protection against classified assets and reasonable adverse changes in the interest rate scenario, with its negative earnings impact on the remaining asset/liability mismatch."). 4 As part of this transaction, Carteret also acquired a third thrift insured by the Maryland Deposit Insurance Fund. 8

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of $21.7 million in supervisory goodwill--$20 million from Mountain Security and $1.7 million from First Federal. AmBase, 58 Fed. Cl. at 37. Once again, Carteret relieved the FSLIC of a substantial cost in exchange for a goodwill promise that made it economically rational and advantageous to acquire the two failed thrifts. As this Court has noted, "[w]ithout the goodwill, it is likely Carteret would not have entered the transaction." Id. at 55. The 1986 acquisitions contributed to Carteret's strength, and the thrift's growth continued apace from 1986 through 1988. Indeed, in approving the acquisition of Carteret by the AmBase Corporation (then known as The Home Group) in 1988, 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. (June 30, 1988)) 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.5 PX 4897 (Carteret Savings Bank Goodwill Amortization Schedule) at AM00050511. Without its contractual right to count this $182 million in supervisory goodwill toward its regulatory capital requirements, Carteret would have had roughly a $29 million capital deficit, rather than more than $150 million

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--Salomon Brothers, First Boston, Peat Marwick, Cravath, Swaine & Moore, Arnold & Porter, and Chase Manhattan Bank--could have been mistaken in relying on the strength of Carteret's capital position.

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in surplus capital. See PX 1706 (Thrift Financial Report (Mar. 31, 1988)) at AM00050357, 0365; PX 4897 (Carteret Savings Bank Goodwill Amortization Schedule). Such was the state of Carteret's financial condition in the summer of 1988, when AmBase paid $266 million in cash to acquire 100% control of the thrift's holding company, Carteret Bancorp. PX 302 (The Home Group, Inc., Annual Report (1988)) at 29. AmBase's evaluation of Carteret was supported by a formal fairness opinion provided by CS First Boston. PX 5257 (First Boston Fairness Opinion Report). This opinion was accompanied by a detailed analysis that concluded that Carteret's book value was $306 million. Id. Moreover, Chase Manhattan Bank entered into $300 million credit agreement with AmBase for the specific purpose of funding the acquisition of Carteret. PX 2611 (The Home Group, Inc., Credit Agreement, The chase Manhattan Bank (National Association) as Agent). The collateral for the agreement was Carteret's stock. Id. Chase's willingness to accept Carteret's stock as collateral for its loan further confirms Carteret's value in 1988 prior to the breach. As part of the Carteret transaction, AmBase and federal regulators entered into a negotiated, contractual agreement requiring AmBase to infuse additional capital into Carteret in the event that Carteret's capital fell below required levels in the future.6 Specifically, the parties agreed that for so long as AmBase controlled Carteret, AmBase would be obliged to infuse up to $50 million in additional capital to maintain Carteret's regulatory capital at required levels.7 PX 2614 (Memo re: H-(e)1 Application Filed by the Home Group to Acquire Carteret).

This understanding was set forth initially in a Stipulation and Agreement ("Stipulation") executed on August 8, 1988, and subsequently in a superseding Regulatory Capital Maintenance/Dividend Agreement ("RCMA") executed November 28, 1988. PX 2617 (Stipulation and Agreement (Aug. 8, 1988)); PX 2625 (Regulatory Capital Maintenance/Dividend agreement (Nov. 28, 1998)) at 3. Also as part of the Carteret transaction, AmBase and the Government agreed that an existing AmBase subsidiary, Imperial Premium Finance, Inc. ("IPF"), could be sold by AmBase 10
7

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B. The Government's Breach of the Supervisory Goodwill Contracts Despite individual success stories such as Carteret, "the overall regulatory response of the early and mid-1980s was unsuccessful in resolving the crisis in the thrift industry." Winstar, 518 U.S. at 856. On February 9, 1989, President George H. W. Bush announced his plan for what would become FIRREA. Because this legislation was a priority for both the Republican president and the Democrat-controlled Congress, the legislative process progressed swiftly. On April 13, 1989, the Senate Committee on Banking, Housing, and Urban Affairs reported S 744 to the full Senate. On May 16, HR 1278 was reported in the House. On May 24, the House Judiciary Committee rejected an amendment offered by Congressman Hyde. The Hyde Amendment would have required a lengthy regulatory review process before an institution could be prevented from counting supervisory goodwill towards regulatory capital. As reported on the front page of the New York Times, the amendment was defeated by a 17-17 tie vote. Calomiris May 2007 Report at ¶ 32. The stock market's reaction was swift and severe. Within a week, $45 million had been eliminated from AmBase's stock market valuation. See Calomiris May 2007 Report at ¶ 33. On June 21, the Senate passed HR 1278 with substitution from the text of S 744. Over the next seven weeks, the two houses conferred and, on August 4, 1989, agreed to the final version of FIRREA. On August 9, 1989, President Bush signed the bill into law. C. The Effect of the Breach on Carteret The market had good reason to react to FIRREA's breach of contract. The breach's impact on Carteret, which had over $168 million in supervisory goodwill in August 1989, was to Carteret for $65 million and would become a subsidiary of Carteret. In order to receive the Government's approval for this sale, however, AmBase was forced to sign a "keep well" agreement (the "IPF Agreement") under which AmBase agreed that, should Carteret subsequently sell IPF to another entity prior to August 9, 1991, at a lower price, then AmBase would (under certain conditions) be obligated to pay Carteret the difference between $65 million and the subsequent sale price. See PX 2618 (IPF Agreement (Aug. 15, 1988)).

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seismic. The breach immediately devastated Carteret's capital ratios. As of June 30, 1989, Carteret had regulatory capital of $312 million, well in excess of its then-applicable regulatory capital requirement. PX 1711 (Thrift Financial Report (June 30, 1989)) at AM050309. After the passage of FIRREA, however, the government drafted an exam report in November 1989, dropping Carteret from its previous status as a composite "2" rated institution--its rating of one year earlier--and instead giving it a composite MACRO rating of "4," which indicated that the bank had an inadequate level of capital and required prompt action to ensure future viability. PX 2106 (Report of Examination (May 22, 1989)). The examination report stated that Carteret would be unlikely to meet any of FIRREA's three capital requirements. Id. at 45. Carteret's core capital ratios reflect the dimension of the breach's impact. At the time of the breach, Carteret had approximately $6 billion in total assets. PX 0008 (Carteret Savings Bank Annual Report at KH 078235). Under the fully phased in capital requirements, Carteret was required to maintain core capital equal to 3% of its assets--here, approximately $180 million. On a fully phased-in basis, however, the breach left Carteret with only $99 million in core capital--some $80 million short of the requirement. PX 1801 (Letter Transmitting Amended TFRs December 1989-December 1990). In short, Carteret went from having a comfortable core capital cushion the day before FIRREA took effect to having an enormous shortfall the day after it took effect. Carteret had only two options for bringing its capital ratios in line with regulatory requirements: it could raise capital or shrink its asset base. Unfortunately, due to the hostile regulatory environment, the capital markets were closed to Carteret for the first two years

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following the breach. Thus, Carteret was forced to shrink. And shrink it did. The following table illustrates Carteret's declining asset base in the post-FIRREA period8: Date 6/30/89 9/30/89 12/31/89 12/31/90 12/31/91 9/30/92 Carteret's Total Assets $7,171,183,000 $6,791,547,000 $6,097,461,000 $5,575,023,000 $5,203,475,000 $4,827,462,000

Significantly, throughout this breach-necessitated shrinkage period, Carteret enjoyed a positive spread income,9 meaning that the breach caused Carteret to sell valuable income-producing assets. Moreover, Carteret had to shrink--that is, sell off its assets--during "one of the worst recessions since the Second World War." (Decl. of Professor Anthony Saunders (Sept. 21, 2007) at 20-21). Thus, precisely when Carteret most needed its capital cushion, FIRREA swept it away and the thrift was forced to sell many commercial real estate assets at a loss. In addition, the breach caused Carteret to begin to dismantle its strong retail deposit franchise. Carteret sold thirteen of its Florida branches to Great Western Bank on October 9, 1990, five of its New Jersey See PX 1710 (Carteret TFR for 3/31/1989) at 1; PX 1711 (Carteret TFR for 6/30/1989) at 1; PX 1712 (Carteret TFR for 9/30/1989) at 1; PX 1713 (Carteret TFR for 12/31/1989) at 1; PX 1724 (Carteret TFR for 12/31/1990) at 3; PX 1734 (Carteret TFR for 12/31/1991) at 3; PX 1737 (Carteret TFR for 9/30/1992) at 3. See PX 802 (Ambase 10K 12/31/90) at 10 (spread of 2.12 at year ended 12/31/89); PX 1504 (Ambase 10Q 3/31/90) at 10 (spread of 2.24 at quarter ended 3/31/90); PX 1505 (Ambase 10Q 6/30/90) at 11 (spread of 2.38 at quarter ended 6/30/90); PX 1509 (Ambase 10Q 9/30/91) at 16 (spread of 2.15 at quarter ended 9/30/90); PX 802 (Ambase 10K 12/31/90) at 10 (spread of 2.21 at year ended 12/31/90); PX 1510 (Ambase 10Q 3/31/92) at 20 (spread of 3.01 at quarter ended 3/31/91); PX 1511 (Ambase 10Q 6/30/92) at 20 (spread of 2.36 at quarter ended 6/30/91); PX 1512 (Ambase 10Q 9/30/92) at 20 (spread of 2.39 at quarter ended 9/30/91); PX 803 (Ambase 10K 12/31/91) at 8 (spread of 1.88 year ended 12/31/91); PX 1510 (Ambase 10Q 3/31/92) at 20 (spread of 2.18 at quarter ended 3/31/92); PX 1511 (Ambase 10Q 6/30/92) at 20 (spread of 3.24 at quarter ended 6/30/92); PX 1512 (Ambase 10Q 9/30/92) at 20 (spread of 2.83 at quarter ended 9/30/92).
9 8

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branches to Bankers Corp. on October 22, 1990, and five of its Maryland branches to Loyola Federal Savings and Loan Association on December 17, 1990. See PX 9 (Carteret Savings Bank FA, 1990 Annual Report (Feb. 1, 1991) at C-A-MA-0394503. Carteret received a premium of $40.74 million on these three sets of branch sales, which increased Carteret's capital.10 In an effort to save the institution and vindicate its contract rights, Carteret filed suit against the OTS and the FDIC on February 14, 1991, seeking to enjoin the regulators to abide by the government's goodwill promises. After holding a hearing and reviewing volumes of documentary evidence, the District of New Jersey found that "Carteret had a contract with the government to use its supervisory goodwill for regulatory purposes." Carteret Sav. Bank v. OTS, 762 F. Supp. 1159, 1180 (D.N.J. 1991), vacated on other grounds, 963 F.2d 567 (3d Cir. 1992). The district court emphasized that "Carteret alleviated the Government's obligation of bailing out the four thrifts acquired, in exchange for the right to use supervisory goodwill." Id. The court also found that Carteret had been placed under "extreme" regulatory restrictions solely "because OTS does not count the supervisory goodwill in making its [regulatory capital] determination." Id. at 1165. As the district court put it: This case constitutes an example of agency discretion gone haywire. Despite operating losses in 1990, Carteret has not exhibited financial instability or poor management; in fact, it has made considerable effort to come into compliance with the new requirements. Despite these facts, however, OTS apparently wants to charge in and micro-regulate the institution because OTS chooses not to honor a valid contract made by its predecessor.

Bankers Corp. paid a premium of $12.041 million, Great Western paid a premium of $28.336 million, and Loyola paid a premium of $0.363 million. PX 4726 (Branch Closing Statement, Interim Federal Savings Bank, Bankers Savings and Bankers Corp. (Dec. 17, 1990)) at CAM4900015; PX 4718 (Branch Closing Statement, Great Western Bank (Oct. 9, 1990)) at CAM4441169; PX 4724 (Loyola Branch Sale Deposits and Calculation of Premium (Nov. 21, 1990)) at CAM4900499.

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Id. at 1177 (footnote omitted). The court emphasized that Carteret was financially sound and that the regulators themselves posed the only threat to Carteret's survival. "There is no apparent threat that the regulatory agencies will be required to `bail out' Carteret in the near future. Ironically, the OTS' threatened actions are more likely to produce that result, if unrestrained." Id. at 1180-81 (emphasis in original). In light of these findings, and the district court's determination that Carteret was likely to prevail on its claims, the court, on April 25, 1991, preliminarily enjoined the regulators from taking any action inconsistent with fully counting Carteret's supervisory goodwill as regulatory capital. Id. at 1182. Specifically, the court saw that enforcement of the FIRREA capital requirements would result in "injury to Carteret in terms of lost business opportunities, withdrawals and damage to its reputation in the community," that these "damages are immeasurable," and that "[t]he institution itself will have lost the benefit of the current balance of what was initially over $200 million in supervisory goodwill, an amount it would have otherwise required in tangible assets before acquisition of the failed banks, or else it would not have entered the transaction." Id. at 1180. On July 8, 1991, the district court clarified that the OTS had to count the approximately $50 million of supervisory goodwill in the Carteret capital calculations, which goodwill had been written down for financial statement reporting purposes when Carteret sold the branches in 1990 as a result of the breach. See Carteret Savings Bank, F.A. v OTS, No. 91-661, slip op. (D.N.J. July 8, 1991). The impact of this favorable ruling, however, was muted. Both Carteret and the market had early indications that the injunction might not hold. For example, on July 16, 1991, the District Court for the District of Columbia held, in a similar case, that a thrift's FIRREA-based breach of contract claim was cognizable only in this Court. See Northeast Sav., F.A. v. OTS, 770

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F. Supp. 19, 23-25 (D.D.C. 1991). And, indeed, on May 7, 1992, the Third Circuit similarly held that this Court has exclusive jurisdiction under the Tucker Act over Carteret's claims against the government. Carteret Sav. Bank v. OTS, 963 F.2d 567 (3d Cir. 1992).11 The Third Circuit therefore vacated the preliminary injunction. On May 22, 1991, the AmBase Board installed new management and board members at Carteret. PX 2111 (OTS Report of Examination (June 17, 1991)) at 1. Richard Bianco was named the new Chairman and CEO of Carteret. Mr. Bianco had enjoyed a successful career as a Wall Street investment banker and brought with him an experienced team of professionals. As Mr. Bianco will explain at trial, the new officers understood that to rescue the crippled thrift they had one important mission: to improve the bank's regulatory capital position so as to make up for the drastic loss in capital caused by the loss of supervisory goodwill. Because AmBase had by this time been reduced primarily to Carteret's holding company, this mission required an infusion of capital from an outside investor. In the effort to convince outside investors quickly that Carteret was a promising investment regardless of regulatory actions or economic fluctuations, Carteret's new management took the highly unusual step of voluntarily taking huge additional loss reserves. In 1991, $172 million was added to the allowance for losses, of which $150 million was recorded in the second quarter. PX 0803 (Ambase 10K for 1991) at 31, 37-38. Absent the need to raise capital, the thrift could have carried its assets at their existing book values, taking much smaller reserves at that time, and waited as the value of the thrift's assets was restored by the rebound in

Finding that "compensation could certainly be paid for damage to the thrift's business," the court concluded that "[i]t follows that because the Tucker Act remedy is available to Carteret, Carteret must seek to vindicate its taking claim in Claims Court." Id. at 583, 584.

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the real estate and commercial debt markets beginning in early 1993. As Angelo Vigna, the top regulator for the northeast region of OTS, explained: They took a very, very aggressive and I would say ultraconservative view of the valuation of their portfolio and their real estate assets; far, far more conservative than any of the other institutions, at least in our region, and probably nationally. Q. Did you assess that as being a good thing, a prudent managerial approach? A. I think it was, as I recall, the feeling was if they're going to raise capital from outside investors, that they'd have to be very conservative in valuing the assets, so that after they brought in the investor money there was no surprises, other big writedowns subsequent to that. Vigna Dep. at 110. By taking "ultraconservative" write-downs in an effort to raise capital, Carteret lowered its capital ratios below where they would have been otherwise. The efforts of the new management team paid dividends. By September 1991, Carteret had returned to profitability, and from that date until the date of seizure recorded positive net income totaling more than $13 million. PX 3802 (Carteret Savings Bank Financial Report (Nov. 30, 1992)). The following table illustrates Carteret's return to black in the months prior to seizure12:

See PX 6814 (Carteret Savings Bank Financial Report (September 30, 1991)) at CAM4731489; PX 6815 (Carteret Savings Bank Financial Report (October 31, 1991)) at CAM4731456; PX 6816 (Carteret Savings Bank Financial Report (November 30, 1991)) at CAM4731423; PX 6817 (Carteret Savings Bank Financial Report (December 31, 1991)) at CAM4731390; PX 6818 (Carteret Savings Bank Financial Report (January 31, 1992)) at CAM4820244; PX 6819 (Carteret Savings Bank Financial Report (February 29, 1992)) at CAM4820211; PX 6820 (Carteret Savings Bank Consolidated Financial Statements Purchase Accounting Basis (March 31, 1992)) at CAM4820577; PX 6821 (Carteret Savings Bank Financial Report (April 30, 1992)) at CAM4820522; PX 6822 (Carteret Savings Bank Financial Report (May 31, 1992) at CAM4820145); PX 6823 (Carteret Savings Bank Financial Report (June 30, 1992)) at C-AM-A-0186353; PX 6824 (Carteret Savings Bank Financial Report (July 31, 1992)) at CAM4820112; PX 6825 (Carteret Savings Bank Financial Report (August 31, 1992)) at C-AM-A-0181259; PX 6826 (Carteret Savings Bank Financial Report (September 30, 1992)) at CAM4820343; PX 6827 (Carteret Savings Bank Financial Report (October 31, 1992)) at C-AM-A-0184905; PX 3802 (Carteret Savings Bank Financial Report (November 30, 1992)) at CAM4820011.

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Month 9/91 10/91 11/91 12/91 1/92 2/92 3/92 4/92 5/92 6/92 7/92 8/92 9/92 10/92 11/92 Total

Net Income $3,000 $208,000 $915,000 $1,032,000 $509,000 $740,000 $1,542,000 $680,000 $852,000 $1,472,000 $1,383,000 $965,000 $977,000 $1,357,000 $533,000 $13,148,000

Nonetheless, achieving capital compliance by attracting new capital into a savings and loan industry still reeling from the effects of FIRREA and a depressed real estate market proved to be a very tall order. While AmBase and Carteret managed to attract a number of interested investors, no investor was immediately willing to expose itself to the regulatory risk of becoming a savings and loan holding company subject to the whim of the regulators. Despite its difficulties attracting outside capital, Carteret remained profitable in 1992, as the above table indicates. Indeed, in their depositions, OTS regulators had high praise for Carteret's new management. Thus, as both internal conditions and external market conditions turned more favorable in 1992, the prospects for an outside capital infusion heightened. Accordingly, throughout 1992, OTS's regional regulators repeatedly expressed favorable opinions about Carteret and argued against its seizure. For example, in a July 7, 1992 letter to the FDIC, Robert Albanese--OTS's Regional Deputy Director--stated that Carteret had made "reasonable progress toward achieving a recapitalization of Carteret without federal assistance." PX 2816 (Letter from R. Albanese to N. Ketcha (July 7, 1992)) at WOP3340862. Most tellingly, 18

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just two weeks before OTS seized Carteret, the agency's regional directors expressed the unequivocal opinion that the thrift had turned a corner, was attracting potential investors, and should not be seized. A memorandum authored by Mr. Albanese on November 17, 1992, is illustrative of what the evidence will show at trial: A conference call with Jonathan Fiechter, Deputy Director for Washington Operations, was held on Monday evening, November 16, 1992, to discuss the scheduled transfer date of Carteret Savings Bank, FSB to the Resolution Trust Corporation. Mike Simone and I represented OTS-Northeast on the call. We had initiated the call after becoming concerned that the transfer date for Carteret was being moved up to this Friday (November 20). . . . We strongly recommended that more time be given to Carteret's management because there was still considerable interest being expressed by investors in the institution, and there were no compelling reasons for not leaving the institution open for the few weeks needed to consider a possible offer from First Gibraltar. We pointed out that, in our view, the institution's financial condition continued to improve, and that supervisory risk of loss while it remained open was very low. We argued that the possible benefit of leaving Carteret open while recapitalization discussions were continuing; namely, a possible unassisted resolution of this $5 billion troubled institution, would far outweigh any perceived benefit of an early transfer date. Frankly, we did not view the transfer date, whether it was November 20th, December 4th or January 4th, to be a critical factor in our analysis of the situation. PX 2819 (Internal Mem. From R. Albanese to File (Nov. 17, 1992)) at WOQ6791063. As the regional directors understood, Carteret was an institution on the mend, with bright prospects for an unassisted resolution. The strength of the new management team, and the favorable results they had achieved from September 1991 forward readily apparent. Moreover, the RTC itself recognized, immediately after the seizure, that Carteret had a strong franchise. According to a February 1, 1993 RTC memorandum valuing the bank's franchise: · · Carteret's "retail office network is well-positioned in strategic markets and offers a prime opportunity for any acquiring institution." Carteret's "retail offices in New Jersey and Florida are located in some of the top performing market areas in each respective state."

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· ·

Carteret had, in recent years, "made every effort to maintain the stability of the manager and his or her staff at each of its retail