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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' POSITION STATEMENT ON THE COURT'S TRIAL SCHEDULE

Charles J. Cooper Counsel of Record David H. Thompson Vincent J. Colatriano COOPER & KIRK, PLLC 1523 New Hampshire Avenue, NW Washington, D.C. 20036 Telephone: (202) 220-9600 Facsimile: (202) 220-9601

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TABLE OF CONTENTS Page TABLE OF AUTHORITIES .............................................................................................. ii I. II. III. CARTERET WAS A SUCCESS STORY UNTIL THE BREACH. .......................3 THE BREACH CAUSED CARTERET'S FAILURE. ...........................................6 CARTERET'S DAMAGES ARE AMPLY SUPPORTED BY SUBSTANTIAL EVIDENCE..............................................................................................................9 THERE IS ABUNDANT EVIDENCE DEMONSTRATING THAT THE GOVERNMENT'S CLAIMED RECEIVERSHIP DEFICIT IS GROSSLY INFLATED. ...........................................................................................................11

IV.

CONCLUSION ..................................................................................................................14

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TABLE OF AUTHORITIES Cases Page/s

American Fed. Bank v. United States, 68 Fed. Cl. 346 (2005) ............................................1 American Sav. Bank v. United States, 62 Fed. Cl. 6 (2004) ................................................1 Anchor Sav. Bank v. United States, 59 Fed. Cl. 126 (2003) ...............................................1 Astoria Fed. Sav. & Loan Ass'n v. United States, 72 Fed. Cl. 712 (2006) ..........................1 California Federal Bank v. United States, 245 F.3d 1342 (2001) .......................................2 Carteret Savings Bank v. Office of Thrift Supervision, 762 F. Supp. 1159 (D.N.J. 1991), reversed on other grounds 963 F.2d 567 (3rd Cir. 1992) ......................5 Citizens Fin. Servs. v. United States, 57 Fed. Cl. 64 (2003) ................................................1 Citizens Fed. Bank v. United States, 52 Fed. Cl. 561 (2002)...............................................1 Coast Fed. Bank v. United States, 48 Fed. Cl. 402 (2000) ..................................................1 Energy Capital v. United States, 302 F.3d 1314 (Fed. Cir. 2002) .....................................10 Fifth Third Bank of W. Ohio v. United States, 55 Fed. Cl. 223 (2003)................................1 First Fed. Lincoln Bank v. United States, 68 Fed. Cl. 602 (2005) ......................................1 Franklin Fed. Sav. Bank v. United States, 55 Fed. Cl. 108 (2003)......................................1 Globe Savings Bank v. United States, 59 Fed. Cl. 86 (2003) ..............................................2 Granite Management Corp. v. United States, 416 F.3d 1373 (Fed. Cir. 2005) ...................1 Holland v. United States, No. 95-524, 2007 U.S. Claims LEXIS 40 (Fed. Cl. Feb. 20, 2007) .................................................................................................1 Hometown Fin. v. United States, 56 Fed. Cl. 477 (2003) ....................................................2 La Van v. United States, 382 F.3d 1340 (Fed. Cir. 2004) ...................................................1 Long Island Sav. Bank v. United States, 60 Fed. Cl. 80 (2004) ...........................................2 Northeast Savings v. United States, 72 Fed. Cl. 173 (2006) ............................................1, 2 Slattery v. United States, 69 Fed. Cl. 573 (2006) ................................................................1 Southern Nat'l Corp. v. United States, 57 Fed. Cl. 294 (2003) ...........................................2 Westfed Holdings, Inc. v. United States, 52 Fed. Cl. 135 (2002) ........................................2

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PLAINTIFFS' POSITION STATEMENT ON THE COURT'S TRIAL SCHEDULE Plaintiffs AmBase Corporation and Carteret Bancorp, Inc. ("Plaintiffs") hereby respectfully submit this position statement concerning whether the trial schedule should be modified in order to provide for a summary judgment phase. In this case, Plaintiffs intend to prove damages that largely track the damages awarded in Slattery v. United States, 69 Fed. Cl. 573 (2006). Just as a trial was necessary in that case to resolve the issues of causation and reasonable certainty, so too these inherently factual questions will have to be resolved at trial here. Given that Slattery has already set forth the legal framework governing such damages, summary judgment in this context will serve no purpose other than delay for delay's sake.1

Defendant has previously cited to a handful of Winstar decisions in which Defendant was granted summary judgment on damages issues. See Gov't Opp. to Pretrial Schedule at 3-4. The fact of the matter is that the reported Winstar decisions convincingly establish the virtual certainty that our damages claims will not be fully resolved on summary judgment. We are aware of at least 20 cases in which this Court or the Federal Circuit have held that Defendant's summary judgment motion should be denied either in full or in part. Indeed, earlier this year, this Court observed that it " `often has rejected the use of summary judgment in considering claims for expectancy damages.' " Holland v. United States, No. 95-524, 2007 U.S. Claims LEXIS 40, at *22 (Fed. Cl. Feb. 20, 2007) (quoting Astoria, 72 Fed. Cl. at 717)). In fact, in one of the cases relied upon by Defendant, Judge Miller acknowledged that in light of the inherently factual nature of the damages questions raised in these cases, "it would be the rara avis, indeed, that could merit summary judgment." Fifth Third, 55 Fed. Cl. at 236. See California Fed. Bank v. United States, 245 F.3d 1342 (2001); Granite Management Corp. v. United States, 416 F.3d 1373 (Fed. Cir. 2005); La Van v. United States, 382 F.3d 1340, 1352 (Fed. Cir. 2004); Northeast Sav. v. United States, 72 Fed. Cl. 173 (2006) (motion denied in full); Astoria Fed. Sav. & Loan Ass'n v. United States, 72 Fed. Cl. 712 (2006) (motion denied in full); Holland v. United States, No. 95-524, 2007 U.S. Claims LEXIS 40 (Fed. Cl. Feb. 20, 2007) (motion denied in full); American Fed. Bank v. United States, 68 Fed. Cl. 346 (2005) (motion denied in part); American Sav. Bank v. United States, 62 Fed. Cl. 6 (2004) (motion denied in part); Anchor Sav. Bank v. United States, 59 Fed. Cl. 126 (2003) (motion denied in part); Citizens Fed. Bank v. United States, 52 Fed. Cl. 561 (2002) (motion denied in part); Citizens Fin. Servs. v. United States, 57 Fed. Cl. 64 (2003) (motion denied in part); Coast Fed. Bank v. United States, 48 Fed. Cl. 402 (2000) 1

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Not only is it virtually certain that summary judgment motions will not obviate the need for a trial, it is also virtually certain that such motions would not substantially narrow the scope of that trial. As described below, any damages trial in this case will almost certainly focus on quintessentially factual issues, including such questions as whether the claimed damages were caused by the breach, whether Carteret Savings Bank would have failed even absent the breach, and whether the claimed damages have been calculated with reasonable certainty. There is simply no appreciable chance that these inherently fact-bound questions could be resolved on summary judgment. See California Federal Bank v. United States, 245 F.3d 1342 at 1350 (2001) ("Both the existence of lost profits and their quantum are factual matters that should not be decided on summary judgment if material facts are in dispute."); Northeast Savings v. United States, 72 Fed. Cl. 173 at 180 (2006) ("Causation presents a quintessential issue of fact."); Globe Savings Bank v. United States, 59 Fed. Cl. 86 at 98 (2003) ("Causation . . . is an issue of fact and ordinarily is not properly adjudicated on a motion for summary judgment."). The only conceivable basis for granting summary judgment in favor of the government would be the absence of evidence supporting plaintiffs' claims. As we briefly demonstrate below, on each of the potentially material factual issues raised by the government's experts, there is substantial evidence supporting plaintiffs' claim for damages.

(motion denied in part); Fifth Third Bank of W. Ohio v. United States, 55 Fed. Cl. 223 (2003) (motion denied in part); First Fed. Lincoln Bank v. United States, 68 Fed. Cl. 602 (2005) (motion denied in part); Franklin Fed. Sav. Bank v. United States, 55 Fed. Cl. 108 (2003) (motion denied in part); Globe Sav. Bank v. United States, 59 Fed. Cl. 86 (2003) (motion denied in part); Hometown Fin. v. United States, 56 Fed. Cl. 477 (2003) (motion denied in part); Long Island Sav. Bank v. United States, 60 Fed. Cl. 80 (2004) (motion denied in part); Southern Nat'l Corp. v. United States, 57 Fed. Cl. 294 (2003) (motion denied in part); Westfed Holdings, Inc. v. United States, 52 Fed. Cl. 135 (2002) (motion denied in part). 2

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I.

CARTERET WAS A SUCCESS STORY UNTIL THE BREACH. By way of background, Carteret acquired two massively insolvent savings and

loan associations, Barton and Delray, in 1982. Immediately after, and as a direct result of, the acquisitions, Carteret's tangible net worth went from positive $40 million to negative $210 million. 1982 S ­ Memo for Barton and Delray (Exhibit 1). Carteret was given forty years to amortize the resulting supervisory goodwill and to fill the capital hole created by its acquisition of Barton and Delray. Carteret's operation of these insolvent thrifts was a success story prior to the passage of FIRREA. In the mid-1980s, Carteret generated substantial earnings. Indeed, according to the government's own expert witness, Carteret generated earnings of more than $165 million from 1983 to 1988. Report of Anthony Saunders at Exhibit 3 (Exhibit 2). Through its retained earnings, Carteret had eliminated the net tangible capital deficit it had inherited from Barton and Delray. Report of Charles Calomiris of May 19, 2007 at 19 (Exhibit 3). During 1990 and 1991, Carteret, like virtually every other financial institution in the country, sustained losses. But even with those losses, Carteret had closed $170 million of the $210 million deficit it had assumed from the government. Report of Roy Smith at Exhibit 3 (Exhibit 4). Moreover, Carteret had substantial earnings in 1992 as the recession of 1990-91 lifted. Calomiris Report at 72 (Exhibit 3). In light of Carteret's success in generating strong earnings, AmBase acquired Carteret in August of 1988 for more than $266 million. AmBase's valuation of Carteret was supported by an exhaustive fairness opinion prepared by CS First Boston. Calomiris Report at 12 (Exhibit 3). The valuation was also supported by Chase Manhattan Bank which in June of 1988 loaned AmBase $250 million secured by Carteret's stock. Id. at

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12-13. AmBase's purchase price for Carteret represented a slight discount to Carteret's book value. Id. at 19. Over the course of 1989, Carteret's book value declined slightly as it paid dividends to its parent and amortized its supervisory goodwill. Id. at 17. Plaintiffs' expert, Professor Charles Calomiris of Columbia Business School, conservatively estimates the value of Carteret as $254 million as of July 31, 1989. Id. at 17-19. This valuation is confirmed by documentary evidence showing that inside directors made a bid of $252 million for Carteret in May of 1989. Id. at 15-16. As the breach became a virtual certainty in May of 1989, the directors withdrew their bid. Id. at 16. The breaching provisions of FIRREA sent Carteret into a death spiral. Overnight, Carteret went from having a significant capital cushion to being out of compliance with the fully phased in core capital requirement.2 The stock market immediately recognized the negative ramifications of the breach as reflected by its reaction to the defeat of the Hyde Amendment, which would have removed the breaching provisions from FIRREA. Id. at 23. A front page story in The New York Times on May 25, 1989, acknowledged that the Hyde Amendment was the last realistic chance to remove the breaching provisions from FIRREA. Id. at 22. When this effort failed, the stock market capitalization of AmBase fell $45 million within a week. Id. at 23. The stock market's concern was well-founded. As Angelo Vigna, the top regulator in the northeast region of the OTS, recognized, the breaching provisions of FIRREA According to Carteret's 1989 Annual report, Carteret exceeded its core capital requirement by $32.4 million as of December 31, 1989. 1989 Carteret annual report at Bates KH053726 (Exhibit 5). At that date, Carteret had $164.3 million in supervisory goodwill on its books. Id. at KH053717. Thus, on a fully-phased in basis -- that is, excluding all of its supervisory goodwill, Carteret did not satisfy its core capital requirement.
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"had a very substantial impact on the regulators' assessment of [Carteret's] safety and soundness." Vigna Deposition at 81 (Exhibit 6). As the district court found in issuing a preliminary injunction in April 1991, the breach adversely affected Carteret's asset size. Carteret Savings Bank v. Office of Thrift Supervision, 762 F. Supp. 1159 (D.N.J. 1991), reversed on other grounds 963 F.2d 567 (3rd Cir. 1992). Indeed, in 1989, Carteret shrank by more than $700 million from $6.8 to $6.1 billion. See 1989 TFRs (Exhibit 7). The government's expert also conceded that Carteret's relative cost of funds increased because of its capital shortfall. As a result of its lack of regulatory capital, Carteret was also forced to sell its commercial real estate at the bottom of the market. Carteret also took large write downs in its commercial loan portfolio because of its breach-induced need to raise capital. As Mr. Vigna explained, Carteret's write downs were "ultraconservative" and were driven by its need to raise substantial costs of capital: 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 Deposition at 110 (Exhibit 6). By taking "ultraconservative" write-downs in an effort to raise capital, Carteret lowered its capital ratios below where they would have been otherwise. Taken together, the negative effects of FIRREA doomed Carteret to failure. This conclusion parallels the finding of Judge Bissell of the United States District Court for New Jersey who granted Carteret's request for injunctive relief precisely because of the irreparable harm that the breach was continuing to inflict on Carteret. Carteret, 762 F. Supp. at 1181.

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II.

THE BREACH CAUSED CARTERET'S FAILURE. The centerpiece of the government's defense in this case is its contention that

Carteret would have failed even absent the breach. But as Carteret's principal regulators themselves candidly acknowledged during fact discovery, if Carteret's supervisory goodwill had been counted toward regulatory capital requirements, Carteret would not have been seized. Mr. Vigna was clear on this point during his deposition: Question: If the injunction that Judge Bissell entered had not been vacated but continued to be in effect, requiring OTS to accord full regulatory capital treatment to Carteret's unamortized supervisory goodwill, would Carteret have been seized, in your opinion? Answer: No. Vigna deposition at 159 (Exhibit 6). Likewise, the regulators acknowledged that if supervisory goodwill had been viewed as tangible capital, as required by the contract, Carteret would not have been seized. Again, Mr. Vigna's deposition is clear: Question: If Carteret had cash, tangible cash, for example, Carteret had raised $150 million to replace dollar for dollar the supervisory goodwill that it lost, would Carteret had been seized, in your opinion? Answer: No. Id. at 158. Likewise, Robert Albanese, the second highest ranking regulator in the OTS's Northeast region, acknowledged that if Carteret had met its tangible capital requirement, as it would have absent a breach, Carteret would not have been seized. Albanese Deposition at 159-161 (Exhibit 8). Indeed, Mr. Vigna acknowledged that during his 32 years as a government regulator, he was unaware of any thrift that was seized while it was in compliance with its tangible capital requirements. Vigna Deposition at 156 (Exhibit 6). These unequivocal admissions of the OTS regulators are more than enough to defeat a summary judgment motion on the question of whether the breach caused Carteret to fail. Additionally, there is ample evidence to support the regulators' admissions. For

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one thing, the generally favorable economic climate that prevailed in 1992 allowed Carteret to return to profitability for the 14 months prior to seizure. Calomiris Report at 72 (Exhibit 3) (citing 1992 Annual Report, AMB030515.) For Carteret in 1992, "the trends were very positive," as Mr. Albanese acknowledged. Albanese deposition at 138-141 (Exhibit 8). The regulators also had great confidence in the management of Carteret -Mr. Vigna testified that "this was as good a team as you'd find." Vigna Deposition at 106-107 (Exhibit 6). In short, Mr. Vigna testified that even in a breach affected world, Carteret would have survived if it had been given more time and would have been "very successful, very successful." Id. at 151-153. It necessarily follows that in a non-breach world, Carteret would have done at least as well. In the face of this compelling evidence that Carteret had returned to profitability and was enjoying "very favorable trends," the government still attempts to argue that Carteret would have failed even absent a breach. The centerpiece of the government's argument is the facile assumption that even with the supervisory goodwill, Carteret would not have satisfied all three regulatory capital requirements in late 1992. But (1) the government can point to no thrift with a regulatory capital profile comparable to Carteret's (assuming no breach) that was seized and (2) in any event, the government's calculations are irrelevant because they fail to take into account the harm that the breach inflicted on Carteret between 1989 and 1992 as a result of the asset shrink, the increased cost of funds, the severe write down of commercial assets pursuant to an ultraconservative write-down policy, and the forced sale of assets at the nadir of the commercial real estate market. See Calomiris Report at 50-57 (Exhibit 3). The government should not be

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allowed to disavow the testimony of its own regulators and rewrite history, especially in the context of a summary judgment motion. Even if the government's revisionist history were correct, it is undisputed that Carteret would have had to raise much less capital in a non-breach world than it was required to do by the government regulators in the aftermath of the breach. The government regulators conceded the obvious: that it would have been easier for Carteret to raise a smaller amount of capital (at worst, no more than $50 million would have been necessary) than the $200 million it had to seek after the breach. Albanese Deposition at 159161 (Exhibit 8). Carteret had a myriad of different ways in which to raise such capital. First, AmBase had approximately $35 million of cash that could have been infused into Carteret. Calomiris report at 48 (Exhibit 3). Second, Carteret could have sold its servicing business for more than $100 million or its mortgage origination business for $20 million. Id. at 63. Third, Carteret could have securitized its mortgage loans and thereby reduced its risk-based capital requirements -- securitized mortgage backed securities have a lower risk weighting than unsecuritized loans. Supplemental Declaration of Charles W. Calomiris of July 12, 2007 at ¶ 11 and Table 2 (Exhibit 9). Fourth, Carteret could have shrunk further. Additionally, Carteret could have raised capital in the open markets. Calomiris report at 64 (Exhibit 3). In short, there is ample evidence in the testimony of the regulators themselves, the contemporaneous documents, and the expert analysis of Professor Calomiris demonstrating that Carteret would have survived absent the breach.

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III.

CARTERET'S DAMAGES ARE AMPLY SUPPORTED BY SUBSTANTIAL EVIDENCE. Each of Carteret's three primary damages claims is amply supported by substan-

tial evidence. 1. As in Slattery, Carteret is entitled to the fair market value of the thrift prior

to the breach. Here, Carteret's value is established by an arms length sales transaction. AmBase paid $266 million in cash, as well as other consideration, in August of 1988, with the regulators' encouragement and approval. Less than six months later, FIRREA was announced. As a result, Carteret began shrinking its asset base in the second quarter of 1989 to increase its capital ratio -- from March 31, 1989 to December 31, 1989, Carteret's assets shrank from $6.82 billion to $6.097 billion. See 1989 TFRs (Exhibit 7). Clearly, it would not have been prudent to wait for FIRREA to be enacted, let alone implemented in regulations, to take action to meet FIRREA's requirements. Thus, at the latest, Carteret's value should be measured as of July 1989. Professor Calomiris has calculated the value of Carteret to have been at least $251.4 million as of July 31, 1989. Calomiris Report at 17-18 (Exhibit 3). Professor Calomiris's market valuation is based on his analysis of stock market trends and valuation for thrifts from August of 1988 until the passage of FIRREA. Professor Calomiris's analysis is confirmed by a contemporaneous bid of $252 million for Carteret made by two of its directors in May of 1989. This evidence is more than sufficient to defeat any summary judgment motion by the government as to the reasonable certainty of Carteret's fair market value prior to the breach. 2. The framework of damages announced by this Court in Slattery is based

on the sound proposition that the fair market value of an institution is a reasonably certain

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method of ascertaining future profits. But in measuring fair market value in 1989, the profits inherent in such valuation have been discounted by investors back to 1989. For example, if investors in 1989 believed that Carteret was likely to make $20 million for the next twenty years, then the value of Carteret's earnings for the next twenty years would not be $400 million. The fair market value of those earnings would be the present value of such earnings discounted back to 1989. Thus, awarding the fair market value of Carteret in 1989 is tantamount to discounting lost profits back to the date of the breach. In Energy Capital v. United States, 302 F.3d 1314, 1330 (Fed. Cir. 2002), the Federal Circuit clarified that only profits that would accrue post-trial are to be discounted. Applying the holding of Energy Capital to the damages framework in Slattery yields the conclusion that Carteret's earnings should not be discounted back to 1989. Thus, in the simple example provided above, Carteret's earnings from 1989 through 2008 would equal $400 million. The fair market value of those earnings would not be the equivalent of pre-judgment interest. Rather, prejudgment interest would involve increasing the face amount of each year's earnings by an interest factor. Professor Calomiris has not done so. Rather, he has simply added together the face amount of the undiscounted earnings accruing prior to trial that are implicit in Carteret's fair market value as of 1989. Calomiris Report at 25-28 (Exhibit 3). 3. Additionally, Professor Calomiris has quantified the value of Carteret to-

day, since in the absence of a breach, Carteret would still be a vibrant financial institution. Professor Calomiris has calculated the value of Carteret by analyzing the earnings Carteret would have retained in the absence of the breach and then applying market to book ratios that prevail in the market today. Id. at 28-41. Professor Calomiris has ana-

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lyzed this issue from a number of different perspectives, including the stock market performance of thrifts from the date of the breach to the present, market to book ratios of the thrift industry, and peer group analyses for comparable thrifts. Id. Although the government disputes Professor Calomiris's conclusions, this is not a basis for granting a summary judgment motion. * * *

Finally, we note that Carteret's damages should be grossed up. The government's experts have admitted that fair market values reflect projected after-tax earnings. Saunders Deposition at 66 (Exhibit 10). For example, if the market predicts that an institution will have pre-tax earnings of $20 million in year one, it will assume after tax cash flow of $13 million (assuming a tax rate of 35%) in arriving at a stream of earnings to be discounted back to present value. Accordingly, since the market values are after tax numbers and awards of expectancy damages are to be made on a pre-tax basis, the damages must be grossed up in order to make Carteret whole. IV. THERE IS ABUNDANT EVIDENCE DEMONSTRATING THAT THE GOVERNMENT'S CLAIMED RECEIVERSHIP DEFICIT IS GROSSLY INFLATED. Likewise, the government is not entitled to summary judgment on the issues relating to the validity and size of the receivership deficit claimed by the government. In our statement of issues, filed on June 16, 2006, we marshaled overwhelming evidence that the receivership deficit is grossly inflated -- far more than sufficient evidence to withstand any summary judgment motion by Defendant. Specifically, there were two principal (but by no means the only) sources of inflation of the receivership deficit: taxes and interest.

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The documentary evidence relating to Carteret's alleged tax deficit of some $90 million demonstrates three key errors. First, the 1995 federal income tax return filed by the FDIC on behalf of Carteret, which is the sole source of the alleged tax liability, includes interest on loans as gross income, but has no offset for the interest expense associated with funding those loans. No financial institution would file a return that is so facially flawed. Second, the returns filed by the RTC failed to utilize net operating loss carryforwards and carrybacks that were available to shield the legitimate components of net income, if any, realized by Carteret in 1995. Third, the FDIC's returns demonstrate that they improperly recorded federal financial assistance as an item of income on multiple returns. In addition to the returns themselves, there are numerous internal documents and emails from the FDIC that confirm these errors, as well as the sworn testimony of the FDIC's 30(b)(6) witness. See Plaintiffs' Statement of Issues (June 16, 2006) at 2947 (compiling evidence demonstrating the tax liability is a pure fiction). With respect to the interest that the FDIC has been charging Carteret's receivership, the factual record confirms that the government's own expert calculates the resolution cost to the RTC without any interest component. See Anthony Saunders, Financial Markets & Institutions at 348-349 (Exhibit 11). Likewise, internal government documents demonstrate that the FDIC charged Carteret a floating rate of interest for several years and then retroactively switched the rate back to a much higher fixed rate once rates dropped. As outlined in our statement of issues, there is plainly sufficient evidence to defeat a summary judgment motion defending the government's calculation of interest. *** Given the fact that summary judgment motions are extremely unlikely to obviate

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the need for or significantly narrow the scope of the trial, and given the fact that every day in which the resolution of this case is delayed threatens to further erode the damages to which Plaintiffs may be entitled, the balance of the entities weighs heavily in favor of holding a trial on all relevant issues in February 2008. In short, any inefficiencies or unfairness that might result from the parties being required to continue preparing for trial during the pendency of summary judgment motions pales in comparison with the inefficiencies and unfairness that would result should pretrial proceedings and trial be suspended for months while summary judgment motions that stand no realistic chance of either obviating the need for or materially limiting the scope of trial are litigated. Ultimately, Defendant's argument that trial should be put off indefinitely in favor of lengthy summary judgment proceedings has nothing to recommend it. After fourteen years of litigation in this Court (to say nothing of previous litigation in the district court), and with the all-too-real dangers further delay poses to any prospect of recovery by Plaintiffs for Defendant's breach, this Court should insist on a compelling justification before it adopts a proposal that would put off the final resolution of this case any longer than is necessary.

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CONCLUSION For the foregoing reasons, Plaintiffs respectfully request that the Court maintain the current trial schedule and reject any request by the government to postpone the trial pending the resolution of a summary judgment motion. November 7, 2007 Respectfully submitted, /s/ Charles J. Cooper ________________________ Charles J. Cooper Counsel of Record David H. Thompson Vincent J. Colatriano COOPER & KIRK, PLLC 1523 New Hampshire Avenue, NW Washington, D.C. 20036 Telephone: (202) 220-9600 Facsimile: (202) 220-9601

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CERTIFICATE OF SERVICE I hereby certify that on this 7th day of November 2007, I caused to be served by the Court's electronic filing system copies of the foregoing on the following counsel: David Levitt, Esq. U.S. Department of Justice Commercial Litigation Branch Civil Division 1100 L Street, N.W.--Room 12006 Attn: Classification Unit--8th Floor Washington, DC 20530 Andrew Gilbert, Esq. FDIC Legal Division 550 17th Street, N.W. Room 2098 Washington, DC 20429

/s/Charles J. Cooper ____________________________

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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. ) __________________________________________)

No. 93-531 Judge Loren Smith

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 Million 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

CONFIDENTIAL MATERIALS ­ SUBJECT TO PROTECTIVE ORDER

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C.

D.

E.

F. G. II.

Based on the Valuation Changes in Standalone Publicly Traded Thrifts, Carteret's Market Value Could Not Have Substantially Decreased Between the Date of Its Acquisition by AmBase and the Date of the Breach 3. AmBase's Stock Price Movements Are Correlated with News Relating to the Evolution of FIRREA Before Its Passage Carteret's Market Value Was a Reflection of its Discounted Future Cash Flows, Whereas Its Undiscounted Future Cash Flows Net of Dividends from August 9, 1989 through 2008 But-For the Breach Would Have Been $406.9 Million But-For the Breach, Carteret's Value Can Be Estimated Based on the Performance and Growth of the Thrift Industry 1. The Growth in Market Values of the Thrift Industry 2. The Growth in Book Values and Market-to-Book Ratios of the Thrift Industry But-For the Breach, Carteret's Value Can Be Estimated Based on the Performance and Growth of Comparable Institutions that Survived FIRREA 1. The Growth in Market Values of Comparable Institutions that Survived FIRREA 2. The Growth in Book Values and Market-to-Book Ratios of Comparable Institutions that Survived FIRREA Damages Are Equal to the But-For Market Value of Carteret Plus Any But-For Dividends That Were Not Distributed in the Actual World Any Damage Award Should Account for AmBase's Tax Liability on the Damages

2.

Carteret Would Not Have Failed in 1992 But-For the Breach A. Carteret Had a Large Franchise Value, Both at the Time of the Breach and at the Time of Failure B. Carteret Would Have Been Sufficiently Capitalized But-For the Breach 1. Carteret Would Have Had Added Extra Capital at the End of 1992 But-For the Breach a. The Inclusion of Supervisory Goodwill in Regulatory Capital Would Have Added $139.1 Million in Extra Capital as of September 1992 But-For the Breach b. Carteret Sold Branches in 1990 as a Result of the Breach c. Carteret's Cost of Deposits Increased as a Result of the Breach, Reducing Its Capital d. Carteret Could Have Counted Supplementary Capital Towards Regulatory Capital But-For the Breach e. Carteret's Size Decreased as a Result of the Breach, Reducing Its Capital 2. Even If Carteret Had Not Had Sufficient Regulatory Capital at the End of 1992, It Could Have Raised That Capital a. Carteret Could Have Raised Capital by Selling Its Mortgage Businesses b. Carteret Could Have Raised Capital through Borrowing

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C. III.

The Breach's Negative Impact on Carteret Was Immediate in AmBase's Stock Price

But-For the Breach, Carteret Would Not Have Failed at Any Time After 1992 A. Carteret's Commercial Real Estate Portfolio Was Not as Troubled as WriteDowns Implied 1. Carteret's Writedowns Were Extremely Aggressive 2. Carteret's Commercial Real Estate Write-Downs Were Excessive in Light of the Eventual Increase in Property Values a. Carteret's Reserves Were Almost Sufficient to Cover the Difference Between the Actual Sales Value of Its Commercial Real Estate Assets and the Principal Balance of Those Assets b. The RTC Did Not Achieve Full Sales Values for Carteret's Commercial Real Estate Assets i. The Real Option Value of Liquidation Limited the RTC's Achieved Sales Value for Carteret's Assets ii. The Replacement of Carteret's Superior Management Limited the RTC's Achieved Sales Value for Carteret's Assets iii. The Minority Preference Program Limited the RTC's Achieved Sales Value for Carteret's Assets c. Commercial Real Estate Values Increased Over Time in Carteret's Markets B. Thrift Failures After 1992 Were Rare AmBase Suffered Significant "Wounded Bank" Damages as a Result of the Breach A. Turning Over Carteret to the RTC Triggered Costs Related to Employment Contracts B. Carteret Endured Costs from Selling Branches Because of the Breach C. Transaction Costs Associated with Efforts to Raise Capital D. Transaction Costs Related to Cease and Desist Proceedings

IV.

Conclusion Appendix A: Estimating the Market Value of Supervisory Goodwill A. Cash Equivalent Value of Supervisory Goodwill B. Cost of Replacement Based on a Common Stock Issuance C. Summary Appendix B: Materials Relied Upon Appendix C: Curriculum Vitae Appendix D: Expert Witness History Since 2003

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QUALIFICATIONS 1. I, Charles W. Calomiris, am the Henry Kaufman Professor of Financial

Institutions at the Columbia University Graduate School of Business and a Professor at Columbia's School of International and Public Affairs. I am the Academic Director of Columbia Business School's Jerome Chazen Institute of International Business and the Director of Columbia University's Center for International Business Education and Research. I co-direct the Project on Financial Deregulation at the American Enterprise Institute (AEI) and am the Arthur Burns Scholar in International Economics at AEI. I am a member of the Shadow Financial Regulatory Committee, a Research Associate of the National Bureau of Economic Research, and was a Senior Fellow at the Council on Foreign Relations. 2. I am Chairman of the Board of Greater Atlantic Financial Corporation, a publicly

traded bank based in the Washington D.C. metropolitan area, and a Managing Partner of Gauss Fund, LP. I served on the International Financial Institution Advisory Commission, a Congressional commission to advise the U.S. government on the reform of the IMF, the World Bank, the regional development banks, and the WTO. My research spans several areas, including banking, corporate finance, financial history, and monetary economics. 3. My recent publications include: "Bank Capital and Portfolio Management: The

1930s `Capital Crunch' and Scramble to Shed Risk" (with Berry Wilson), in the Journal of Business (July 2004); "Credit Card Securitization and Regulatory Arbitrage" (with Joseph Mason), in the Journal of Financial Services Research (August 2004); "Consequences of Bank Distress During the Great Depression" (with Joseph Mason), in the American Economic Review (June 2003); U.S. Bank Deregulation in Historical Perspective (Cambridge University Press, 2000); Emerging Financial Markets (with David Beim, Irwin-McGraw Hill, 2001); "Blueprints for a New Global Financial Architecture" in International Financial Markets: The Challenge of
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Globalization (Leonardo Auernheimer, ed., University of Chicago Press, 2000); and "Is the Bank Merger Wave of the 1990s Efficient?" (with Jason Karceski) in Mergers and Productivity (Steven Kaplan, ed., University of Chicago Press, 2000). 4. I am the recipient of research grants or awards from the National Science

Foundation, the World Bank, the Japanese Government, the Herbert V. Prochnow Foundation, and the Garn Institute of Finance. In 1995, I was named a University Scholar at the University of Illinois, where I served as Associate Professor of Finance and Co-Director of the Office for Banking Research. I am, or have been, a member of the editorial boards of the Journal of Banking and Finance, the Journal of Financial Services Research, the Journal of Financial Intermediation, the Journal of Economic History, the Journal of Economics and Business, and Explorations in Economic History. I serve or have served as a consultant or visiting scholar for the Federal Reserve Banks of New York, Chicago, Cleveland, and St. Louis, the Federal Reserve Board, the World Bank, and the governments of Mexico, Argentina, Japan, China, El Salvador, Connecticut and Massachusetts. My private sector clients have included AIG, Ameriquest, Astoria Savings, Bank of America, Citicorp, Credit Suisse, Fleet Bank, The Limited, Lloyds, UBS Securities, U.S. Trust Corporation, and Xilinx. 5. I designed (with David Beim) and teach an MBA and Executive MBA case

course on emerging market finance, which won the 1997-1998 Chazen International Innovation Prize at Columbia Business School. I have taught international banking, emerging financial markets, and advanced corporate finance at the MBA and Ph.D. levels at Columbia, as well as the MBA core course in Business Values and Ethics. I have taught Ph.D.-level courses at the World Bank and the IMF, including a course at the IMF on Emerging Financial Markets.

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6.

I earned a Ph.D. in economics from Stanford University and a B.A. in economics,

magna cum laude, from Yale University.

INTRODUCTION 7. This report considers the damages to Carteret Savings Bank ("Carteret") that

resulted from the elimination of supervisory goodwill from Carteret's regulatory capital requirements. Section I of this report establishes Carteret's value at the time of the breach in 1989 and the increase in Carteret's value through 2006 had the contractual breach in the treatment of supervisory goodwill not occurred. This counterfactual value of Carteret as of the date damages are awarded, plus any dividends received in the but-for world that were not received, plus additional "wounded bank" damages in the actual world, constitutes the damages due to plaintiffs. Section II demonstrates that Carteret would not have been seized by the Resolution Trust Corporation ("RTC") had Carteret's supervisory goodwill not been excluded from its required capital as mandated by Congress through the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"). Carteret was a healthy institution at the time of FIRREA's passage and would have survived but-for the exclusion of supervisory goodwill from its capital requirements. In Section III, I show that Carteret would not have failed in the years following FIRREA even when considering the weakest aspects of Carteret's business, its commercial real estate portfolio. In Section IV, I estimate the "wounded bank" damages suffered by Carteret as a direct result of the breach. Table 1 summarizes my lowest, highest, and preferred estimates of damages that resulted from the breach. The estimates in Table 1 are shown both before and after accounting for any potential tax liabilities on the damage award.

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TABLE 1: DAMAGES RESULTING FROM THE BREACH OF FIRREA'S REMOVAL OF SUPERVISORY GOODWILL FROM CARTERET'S REGULATORY CAPITAL
Damages Estimate Highest Lowest Preferred Damages Before Accounting for Tax Liabilities ($Million) $4,904.6 $785.7 $1,097.5 Damages After Accounting for Tax Liabilities ($Million) $8,146.2 $1,295.6 $1,814.3

I. CARTERET'S VALUE AT THE TIME OF THE BREACH AND THE SUBSEQUENT INCREASE IN ITS VALUE BUT-FOR THE BREACH 8. Carteret was a federally chartered savings and loan association that was a

successor to thrift institutions dating back to 1888.1 Prior to the breach of contract, Carteret had a consistent track record of growth. As of September 1987, it ranked as the 19th largest thrift in the United States based on deposits.2 From 1982 through 1988, Carteret grew its asset base from $3.62 billion to $6.44 billion.3 Profitability accompanied this growth. Carteret's consistent performance, as indicated by its annual income statements, demonstrates that the company was firmly established and profitable. Furthermore, activity from the financial markets showed that investors had positive expectations about the company's potential. As Figure 1 shows, in the seven years from 1982 through 1988, the last year that Carteret was an independent company, Carteret recorded net losses in only one year, 1982.

1. Carteret Bancorp Inc., 1987 Annual Report, at C-AM-A-0056661. 2. Id. 3. Carteret Savings and Loan Association, FA 1982 Annual Report, at 1 (AMB029911); Carteret Bancorp Inc. and Subsidiary, FHLB Docket #02-4702, Consolidated Financial Statements, Sep. 30, 1988 (AMB013963).

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FIGURE 1: CARTERET NET INCOME, 1982 - 1988
50 40 30 20 Million $ 10 0 1982 -10 -20 -23.2 -30 1983 1984 1985 1986 1987 1988 7.5 46.1

34.8 25.2

33.4

20.0

Sources: Carteret Savings & Loan Association, F.A., Annual Report 1984, at 26 (AMB029992); Carteret Savings & Loan Association, F.A., Annual Report 1985, at 21 (AMB030079); Carteret Bancorp, Inc., Annual Report 1987, at 1 (C-AM-A-0056662); Carteret Bancorp Inc. and Subsidiary, FHLB Docket #02-4702, Consolidated Financial Statements, Sept. 30, 1988, at 3 (AMB013962).

Carteret received income from a diverse range of recurring business activities, including financial services to individuals, households, and corporate customers.4 Carteret's development of fee-based and non-interest income revenue sources, such as residential mortgage financing,5 represented a successful strategy that strengthened the company's bottom line.6

4. Carteret Bancorp Inc., 1987 Annual Report, at C-AM-A-0056661. 5. See Carteret Bancorp Inc., 1987 Annual Report, at 43 (C-AM-A-0056697) ("Through Carteret Mortgage, Carteret has expanded its presence in the mortgage banking industry. Carteret Mortgage originates first mortgage loans, both fixed and adjustable rate and may sell a portion of such loans into the national secondary market while retaining the servicing rights thereto. At September 30, 1987, Carteret serviced $5,964,437,000 of mortgage loans for outside investors compared with $2,104,689,000 at September 30, 1986. For the year ended September 30, 1987, mortgage activities contributed $24,501,000 in loan fees and service charges to non-interest income, and an additional $9,872,000 from valuation of loan servicing retained on loans sold to investors.") 6. See Carteret Savings & Loan Association, F.A., Annual Report 1985, at 21 ("Carteret Savings, as most other thrift institutions, has assets with maturities that exceed those of its liabilities. This maturity difference or `gap', results in the Association's liabilities repricing more rapidly to changes in interest rates than do its assets. In view of the earnings limitations of its fixed-rate, long-term assets as compared to its more volatile liabilities,

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9.

As a result of its strong franchise and consistent profits, Carteret was able

repeatedly to raise capital in the open markets in the 1980s. Carteret's public stock offerings from 1983 to 1986 are summarized in Table 2. TABLE 2: CARTERET ISSUANCES OF STOCK, 1983 - 1988 Year Shares Net Proceeds Type 1983 6,820,000 $58,367,000 Common 1985 1,000,000 $11,027,000 Common 1985 892,000 $21,209,000 Preferred 1986 1,425,000 $28,671,000 Common Sources: Carteret Savings & Loan Association, F.A., Annual Report 1984, at 29 (AMB029996); Carteret Savings & Loan Association, F.A., Annual Report 1985, at 35; Carteret Savings Bank FA, Annual Report 1986, at 28. The success of these transactions indicates that both the company and investors saw great potential in Carteret's future performance. The expectation that Carteret's solid performance would continue caused AmBase Corp. ("AmBase") to explore a merger with Carteret in 1987. 10. In 1982 Carteret acquired two failing thrifts, Barton Savings and Loan of Newark,

New Jersey ("Barton") and First Federal Savings and Loan of Delray Beach, Florida ("Delray"). According to the government's internal reports, Carteret had $2.3 billion in assets and a book value net worth of $36.5 million immediately prior to the transactions.7 At the time of the FSLIC-assisted merger, Barton was experiencing "substantial and accelerating operating losses."8 Delray was in "irreversible decline."9 In connection with the transactions, Carteret recorded supervisory goodwill of $46 million and $168 million, respectively, representing the levels of insolvency of these institutions, which was counted toward regulatory capital for Carteret. Even according to early internal government reports prepared on the eve of the acquisition (before the assets and liabilities were marked to market), the government estimated

Carteret Savings adopted as a major strategy the generation of new earning assets with variable interest rates or shorter terms. A second major goal was diversification into lines of business that produce fee income. New earning assets are generated through an expansion of adjustable rate mortgage lending, diversification into commercial, consumer and income-property lending and retail financial services.") 7. S-Memo, WOR839 0347-0359 at 0347, 0358. 8. Id. at 0350. 9. Id.

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that it would have cost $42.6 million to liquidate Barton alone.10 According to those same documents, the cost to the government of Carteret's bid for Barton was $23.5 million less than the other bid and $31 million less than the estimated present value cost of liquidation.11 The cost to the government of Carteret's bid for Delray was $20 million less than the next lowest bid.12 As detailed below, Carteret lost the entirety of the value it contributed to these transactions when the RTC seized Carteret as a result of the breach. 11. In 1986 Carteret acquired two more failing thrifts, First Federal Savings and Loan

of Montgomery County, Blacksburg, Virginia ("First Federal") and Mountain Security Savings Bank of Wytheville, Virginia ("Mountain Security"). According to the government's internal reports, Carteret had $5.153 billion in assets as of March 31, 1986 and a book value net worth of $272.5 million immediately prior to the transaction.13 In connection with this combined transaction, Carteret recorded $21.7 million in supervisory goodwill that was counted toward regulatory capital. The government's internal reports show that Carteret's combined bid for the two thrifts represented a savings to the government of $5 million over the next highest bidders and $14.6 million over the present value cost of liquidation.14 As detailed below, Carteret lost the entirety of the value it contributed to these transactions when the RTC seized Carteret as a result of the breach. The government, in contrast, benefited hugely from Carteret's assumption of the liabilities of these failed thrifts.15

10. Id. at 0354. 11. WOR839 0347-0359 at 0353-54. 12. Id. at 0356. 13. S-Memo, WOR063 0879-0893 at 0879, 0887. 14. Cost Summary, WOR999 0240-0253 at 0240. 15. As noted above, the government estimated the cost of liquidating Barton as $42.6 million and the cost of liquidating First Federal and Mountain Security as $14.6 million. The government did not calculate the cost of liquidating Delray. In order to calculate an estimate of the cost of liquidating Delray, I use the ratio of the cost of liquidation as compared to the net liability assumed. For the transactions for which I have data, the ratio was 84.49 percent -- that is, the government's estimated cost of liquidation equaled, on average, 84.49 percent of the net

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A.

Carteret Was Sold to AmBase for $266 Million in August 1988--One Year Before the Breach 12. On August 4, 1987, AmBase (then known as "The Home Group, Inc.") entered

into a merger agreement with Carteret.16 The August 1987 merger agreement called for each share of Carteret common stock to be exchanged for $22.50 in cash on the effective date of the merger.17 In addition, each share of Carteret preferred stock would be converted to common stock, and each share of that common stock would be exchanged for $22.50 in cash on the effective date of the merger.18 AmBase's financial advisor, Salomon Brothers, issued a fairness opinion in support of the $22.50 cash consideration.19 13. On October 19, 1987, just two and a half months after the merger agreement, the

U.S. stock market suffered its worst one-day drop in history. On that date, the Dow Jones Industrial Average fell 22.6 percent,20 Carteret's stock price fell from $18 to $14.625 (18.8 percent), and AmBase's stock price fell from $16.375 to $13.75 (16.0 percent).21 By the end of

liability assumed. The net liability assumed in connection with the acquisition of Delray was $168 million so I estimate the cost of liquidation to be $141.9 million. This is a conservative estimate since, as I discuss below, the government does not realize the full fair market value of assets when it performs a liquidation. Therefore, I estimate the liquidation costs for all four acquisitions would have been $199.1 million. As part of Carteret's acquisition of Barton, FSLIC provided $11.7 million in assistance. See Carteret Savings & Loan Association, F.A. & Subsidiaries, Consolidated Financial Statements, Sept. 30, 1980, 1981, & 1982 (C-AM-A-0265001 ­ 041 at 005, 016). Therefore, the total avoided liquidation cost to the government was $187.4 million. Beyond the total avoided liquidation costs of $187.4 million, the government realized huge savings in not having to issue debt in this amount. Assuming the savings began at the end of the calendar year in which Carteret purchased the institutions, and using the one-year Treasury constant maturity yield compounded annually, I estimate the total savings of avoided liquidation cost plus avoided debt service equals $709 million through the end of 2007. 16. Agreement of Merger of JAM Financial Corp. with and into Carteret Bancorp Inc. at 1 , Aug. 4, 1987, (KH029240). 17. Id. at 4-5 (KH029243 ­ KH029244). 18. Id. 19. Letter from Salomon Brothers to The Board of Directors, The Home Group, Inc., Aug. 18, 1987, (AMB028576 ­ AMB028578). 20. Tim Metz, Alan Murray, Thomas E. Ricks & Beatrice E. Garcia, The Crash of `87: Stocks Plummet 508.32 Amid Panicky Selling --- Percentage Decline Is Far Steeper Than `29; Bond Prices Surge, WALL ST. J., Oct. 20, 1987. 21. CRSP, Center for Research in Security Prices. Graduate School of Business, The University of Chicago 2006.

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1987, Carteret's stock price had risen to $15.25 but had still not reached its pre-crash price.22 In the aftermath of this price decline, AmBase and Carteret renegotiated their merger agreement, and on January 18, 1988, the merger agreement was amended such that Carteret's stock would be exchanged for $19 per share instead of $22.50 per share.23 First Boston Corp., Carteret's financial advisor, issued a fairness opinion in support of the $19 cash consideration.24 Of course, the stock market subsequently rebounded after the purchase price was set in January of 1988 to levels that prevailed when Salomon Brothers issued its original fairness opinion in August 1987. 14. On August 8, 1988, AmBase completed its purchase of Carteret for $19 per share

of common stock (including preferred stock that was convertible to common stock) for a total consideration of approximately $266 million.25 The purchase price for Carteret was supported by an appraisal opinion from Kaplan Smith.26 The facts that a willing buyer paid $266 million for Carteret, and that the purchase price was supported by other financial analysts, constitute powerful evidence of the value of Carteret just one year before the breach. 15. In addition, AmBase secured a credit agreement of $300 million from Chase

Manhattan Bank in June 1988 for the specific purpose of funding the Carteret acquisition. Carteret's common stock was used as collateral for this credit agreement.27 The fact that Chase

22. Id. 23. Appendix D, Jan. 18, 1988 (AMB068044 ­ AMB068045). 24. Carteret Bancorp Inc. May 18, 1988 Proxy Statement, at F-1 ­ F-2. 25. Carteret Bancorp, Inc., 1989 Annual Report (C-AM-A-0394532); The Home Group, Inc., 1988 Annual Report (Form 10-K) at 9 (C-AM-A-0395940); Home Group Announces Completion of Carteret Acquisition, PR NEWSWIRE, Aug. 8, 1988. 26. Kaplan, Smith & Associates, Inc., Acquisition Valuation: Carteret Bancorp, Inc., Morristown, New Jersey Valued as of August 8, 1988 at Table I-1 (Jan. 18, 1989) (CAM4411095) [hereinafter KAPLAN SMITH VALUATION REPORT] 27. Minutes of the Meeting of the Board of Directors of the Home Group, Inc. (May 20, 1988), at 5-6; The Home Group, Inc., Credit Agreement, Dated as of June 10, 1988, The Chase Manhattan Bank (National Association) as Agent; Letter from Bruce W. Bean, Sr. Vice President & General Counsel, The Home Group, Inc., to the Banks Party to the Credit Agreement Referred to Below & The Chase Manhattan Bank (National Ass'n.) as Agent, Aug. 8, 1988; Letter from Richard R. Butler, Vice President, Chase Manhattan Bank, N.A., & Mark S. Thorum, Director, Chase Manhattan Capital Markets Corp., to Jack R. Plaxe, Sr. Vice President, Chief Financial

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Manhattan Bank specifically requested that Carteret's common stock be used as collateral for the credit agreement further substantiates that Carteret was a significantly valuable property at the time of its acquisition by AmBase, just one year before the breach. Furthermore, the fact that Chase Manhattan, in its role as a sophisticated bank that was very familiar with regulatory capital requirements, was confident to make the loan to AmBase to purchase Carteret demonstrates that there was little doubt about the health and survivability of Carteret as an institution before the breach. 16. The sales value of $266 million is a conservative estimate for the value of Carteret

as of August 8, 1988 because of two obligations forced upon AmBase by the Federal Home Loan Bank Board as conditions of the merger.28 The first obligation was a regulatory capital maintenance agreement (RCMA). As part of the RCMA, AmBase promised to infuse Carteret with up to $50 million in capital if Carteret ever fell out of compliance with its regulatory capital requirements.29 AmBase also agreed to a limit on the dividends that Carteret could distribute.30 This obligation is a real put option with positive value.31 If Carteret ever fell out of compliance with its regulatory capital requirements, the government would exercise its real option to "put" the cost on to AmBase of infusing sufficient capital into Carteret. The value of this put option was relatively low at the time of the sale because the ex ante probability of Carteret falling out of

Officer, & Treasurer, The Home Group, Jan. 25, 1988; The Home Group, Inc., FSLIC Amendment No. 1 to Application H-(e) 1, at 14 (AMBNP026545); The Home Group, Inc., FHLB Application H-(e) 1, at 7 (FAM0010011). 28. Federal Home Loan Bank Board, No: 88-657, Aug. 5, 1988, at 3 (AMB009232). 29. Stipulation and Agreement, Aug. 8, 1988 (ANB009226 ­ ANB009229). The RCMA was amended after the merger, but AmBase was still required to provide up to $50 million in capital if Carteret's regulatory capital did not meet defined criteria. See Exhibit C, Regulatory Capital Maintenance/Dividend Agreement, Nov. 28, 1988 (AMBNP001430 ­ AMBNP001440). 30. Id. 31. For a primer on financial options, see JOHN HULL, OPTIONS, FUTURES, AND OTHER DERIVATIVES 6 (Prentice Hall, 6th ed. 2006). Under a put option, the seller agrees to buy back the commodity or instrument at a strike-price, which is specified in the terms of the option. Id. The buyer has the right, but not the obligation, to exercise the put option at the strike price. Id. Because the put option provides a form of price insurance to the buyer, the buyer pays a premium to the seller for the value of having the put option. Id.

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regulatory capital compliance was low. However, the real put option eventually became valuable as the government's breach resulted in Carteret's falling out of regulatory capital compliance, and AmBase was required to contribute $50 million.32 As a conservatism, I do not attempt to quantify the value of this put option. 17. The second regulatory requirement in the transaction was related to AmBase's

sale of Imperial Premium Finance to Carteret for $65 million as part of AmBase's purchase of Carteret. To appease the Federal Home Loan Bank Board, AmBase was required to cover any potential loss on a future sale of Imperial Premium Finance through August 9, 1991.33 Again, this requirement was a real put option with positive value. Specifically, the strike price of the option was $65 million, equal to the sale price of Imperial Premium Finance to the buyer, Carteret. If the value of Imperial Premium Finance fell below $65 million before August 9, 1991, a value that would have been revealed had Carteret attempted to sell Imperial Premium Finance before August 9, 1991, Carteret would have had the option to, in effect, sell Imperial Premium Finance back to AmBase at $65 million, with AmBase sustaining the loss in value. Ultimately, AmBase paid $12.5 million to satisfy this obligation.34 As with the first option, I do not attempt to quantify this option. However the presence of both of these options indicates that the $266 million sales price is a conservatively low estimate of the value of Carteret as of the date of its sale to AmBase.

32. AmBase Corp. v. United States, 58 Fed.Cl. 32, 38 (2003). 33. Federal Home Loan Bank Board, No: 88-657, Aug. 5, 1988, at 7 (AMB009236); Agreement, Aug. 1988 (AMB009202 ­ AMB009203). 34. AmBase Corp. v. United States, 58 Fed.Cl. 32, 38 (2003).

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B.

Carteret's Value Did Not Substantially Change Between the Time of Its Sale to AmBase and the Breach 18. Once AmBase acquired Carteret, Carteret ceased trading as a standalone public

company and became part of AmBase's portfolio of companies, which included The Home Insurance Company, Gruntal Financial Corp., USI Re, Inc., Commonwealth Insurance Company, and Sterling Forest Corporation.35 Because market values for Carteret are not explicitly observable between the date of its sale to AmBase and the date of the breach, I estimate Carteret's market value at the time of the breach by examining any bids for Carteret during that year, the financial statements of Carteret and AmBase, the performance of other publicly-traded thrifts, and changes in value of AmBase's publicly traded common stock. 1. 19. In May 1989, a Bid of $252 Million Was Made to Purchase Carteret In May 1989, two former directors of Carteret, General Alexander Haig and Harry

Jacobs, among others, offered to purchase Carteret for $252 million.36 Mr. Jacobs and General Haig were intimately familiar with Carteret because Mr. Jacobs served on Carteret's board from 1984 to 1988, and General Haig was on the board from 1986 to 1988. Mr. Jacobs was the former Chairman of Prudential-Bache Securities and remained a senior officer there at the time of his bid for Carteret. As explained in my declaration of July 14, 2006, AmBase experienced a

35. Home Group Announces Completion of Carteret Acquisition, PR NEWSWIRE, Aug. 8, 1988. Carteret had $47 million in pretax earnings in 1989. AMBASE 1989 ANNUAL REPORT, at 21 (C-AM-A-0394701). The Home Insurance Company was AmBase's American insurance division and Commonwealth Insurance Company was AmBase's Canadian insurance division. Both concentrated on larger insurance policies requiring underwriting expertise. Id. at 11 (C-AM-A-0394691). Together they had $168 million in pretax earnings in 1989. Id. Gruntal Financial Corporation was AmBase's investment division, offering many of the same services as the largest investment firm