Free Response to Order to Show Cause - District Court of Federal Claims - federal

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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)

APPENDIX TO AMBASE'S STATEMENT OF ISSUES REPLY BRIEF

Charles J. Cooper Counsel of Record Vincent J. Colatriano David H. Thompson Howard C. Nielson, Jr. David M. Lehn COOPER & KIRK, PLLC 555 11th Street, NW, Suite 750 Washington, D.C. 20004 Telephone: (202) 220-9600 Facsimile: (202) 220-9601

October 19, 2006

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INDEX Declaration of Charles W. Calomiris (July 14, 2006) (excerpts) .................. Deposition of Charles W. Calomiris (Jul. 5-7, 2006) (excerpts) ................... Deposition of Anthony Saunders (Oct. 3-4, 2006) (excerpts) ....................... Conservatorship Strategic Plan (Dec. 4, 1992) (Saunders Dep. Ex.7) .......... Memorandum from J. Jupiter to T. Horton (Aug. 23, 1993) (Saunders Dep. Ex. 8) ............................................................................... Memorandum from E. Mahaney to T. Horton (Dec. 21, 1993) (Saunders Dep. Ex. 9) ............................................................................... Email from A. Richards to H. Held (Sept. 15, 1994) (Saunders Dep. Ex. 12) ............................................................................. Email from A. Richards to H. Held (Sept. 16, 1994) (Saunders Dep. Ex. 13) ............................................................................. PNC Bank Corp 10Q (for period ending Sept. 30, 1993) (excerpts)............. Cost of Resolution (projected) to Anticipated Thrift Closing (Oct. 31, 1994) .......................................................................................... Liability Register (Oct. 29, 1998) .................................................................. Timothy Curry & Lynn Shibut, The Cost of the Savings and Loan Crisis: Truth and Consequences, 13 FDIC BANKING REV. 26 (2000) (excerpts) ............................................ U.S. GEN. ACCOUNTING OFFICE, RESOLUTION TRUST CORPORATION: PERFORMING ASSETS SOLD TO ACQUIRERS OF MINORITY THRIFTS (1995) (excerpts).................................................... U.S. GEN. ACCOUNTING OFFICE, FINANCIAL AUDIT: FEDERAL DEPOSIT INSURANCE CORPORATION'S 1997 AND 1996 FINANCIAL STATEMENTS (1998) (excerpts)................................................ ANTHONY SAUNDERS & MARCIA MILLON CORNETT, FINANCIAL MARKETS AND INSTITUTIONS: AN INTRODUCTION TO THE RISK MANAGEMENT APPROACH (2007) (excerpts) ........................ Deposition of James R. Mindnich (Mar. 16, 2006) (excerpts) ...................... Consolidated Taxable Income Year 1992...................................................... Reply App. 00001 Reply App. 00011 Reply App. 00013 Reply App. 00034

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UNITED STATES COURT OF FEDERAL CLAIMS

AMBASE CORPORATION and CARTERET BANCORP, INC., Plaintiffs, and FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff-Intervener,

) )

1
)

1
) ) ) ) ) ) ) )

No. 93-53 1 Judge Loren Smith

1
THE UNITED STATES OF AMERICA, Defendant.
) ) )

Qualifications Introduction 1. Inappropriate Interest Calculations Inflated the Receivership Deficit After the Resolution A. Because the Government Does Not Pay the Time Value of Money for Damages, It Is Inconsistent and Incorrect for the Government to Impute Interest When Calculating the Receivership Deficit The Time Value of Money Used for Computing Imputed Interest Costs for a B. Receivership Deficit Should Be CalcuIated Using Short-Term Floating U.S. Treasury Interest Rates for the Period of the Receivership

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mortgage brokerage business during the liquidation. Section V considers the additional inflation of the receivership deficit that resulted from the delayed sale of some financial assets, which resulted in lower sales prices for those financial assets.
9.

Table 1 summarizes my findings that the adjustments described in each ofthe five

sections have a significant effect on the principal and interest balance ("P&l balance") of the receivership deficit. Rows (I) through (IV) of Table I show the effects of each set of changes in isolation. The last row of Table 1 shows the effect on the receivership deficit P&I balance of combining all the proper adjustments discussed in Sections I, 11, 111, and IV.' When all the appropriate adjustments are made, the receivership would have a surplus P&l balance of $87.4 million. This is a conservative estimate, which does not fully take into account all of the factors I identify that would have added to the receivership surplus.

TABLE: RECEIVERSHIPDEFICIT 1 BUT-FOR COMPUTATIONAL AND INJURY, CLOSURE OF CARTERET MORTGAGE COMPANY, CONCEPTUAL ERRORS, CONGRESSIONAL
AND CONTRACTUAL BREACH IN THE TREATMENT OF GOODWILL Difference from Receivership Deficit P&I Balance of Receivership $175.4 Million Using Deficit P&I Balance as of Government's 1213112005 Methodology Scenario ($Million) ($Million) (I) Charge no interest on receivership deficit & eharge no 20.7 154.7 interest on escrow (11) Impact of Congressional delay on sale of branches (23.1)' 198.5 (111) Supervisory goodwill restored 59.6 115.8 (IV) Mortgage origination unit sold 138.0 37.4 Corrections (I), (It), (111). & (1V) Combined (87.4)* 262.8 Difference in Interest Balance from Government's Interest Balance of $156.6 Million ($Million) 156.6 156.6 97.0 19.0 156.6

* Parentheses indicate a P&I surplus balance. Results listed in this column without parentheses indicate a deficit.

1. Although I do not attempt to quantify the effects on the receivership deficit from the adjustments discussed in Section V, these adjustments would decrease the receivership deficit when considered in isolation from any other adjustments and when combined with any other adjustments.

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computations, the FDlC applies the debt repayments on a pro-rata basis to all three loans. Presumably, the FDIC's rationale is that some creditors of the thrift should not be paid off before others. Although that approach might make sense when crediting various private parties who are creditors, here the identity of the creditor for all three loans is the same: the government. In this case, there are no preferences or conflicts among creditors because the loans are all from the same entity. Thus, payments should be allocated first on the highest cost loans, regardless of the timing of their resolutions. There is no economic justification for a pro rata pay down of the debt. 44. FDlC witness Wayne Green testified in a deposition that the three loans had the

same priority, that dividends for all three loans were paid into the same FRF RTC resolution fund, and that the receivership-maximizing allocation of dividends would be to allocate dividends to the highest rate liability.35 He testified that the payments were allocated across all three liabilities rather than to any particular liability?6 He admitted that allocating payments to the claims on a pro-rata basis rather than to the highest cost claims resulted in increasing the cost of the receivership.37
2. Assuming the Government's Faulty Interest Rates Are Not Corrected, the Government's Failure to Allocate Payments to the Highest-Cost Resolutions First SubstantiaIly Inflated the Receivership Deficit through December 2005

45. down:'

If payments are allocated to the highest-cost resolution until its principal is paid

and then payments are made to the next highest-cost resolution until its principal is paid

down, and then payments are made on the third resolution until its principal is paid down, then the receivership deficit's P&l balance would be $124.3 million as of December 31, 2005 if

35. Deposition of Wayne S. Green at 291-294 (Mar. 1,2006) 36. Id. at 294-295. 37. Id. 38. The principal for the three resolutions should be paid down first, because once the principal is paid down, interest stops accruing according to the FDlC accrual rules. See Deposition of Wayne S. Green at 456-457 (Apr. 5, 2006); "Post Insolvency Interest Procedures Analysis," June 17, 1997 (AMOO10499); E-mail from Michael P. Caco to Karen Hughes et al., re: Post-insolvency Interest (AM0010453-10454).

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interest stops accruing in an individual loan once the principal in that loan is paid. This deficit is $51.1 million lower than the $175.4 million deficit's P&l balance calculated using the FDIC's faulty methodology. If payments are allocated to the highest-cost resolution until its principal is paid down, and then payments are made to the next highest-cost resolution until its principal is paid down, and then payments are made on the third resolution until its principal is paid down, then the receivership deficit's P&I balance would be $1 61.9 million as of December 3 1, 2005 if interest stops accruing in an individual loan once the principal amounts in all loans are paid (row (4) of Table 2). This deficit is $13.5 million lower than the $175.4 million receivership deficit P&l balance calculated using the FDIC's faulty methodology. Of course, if one properly excludes interest from the receivership calculations, or if one includes interest but uses floating short-term Treasury yields instead of the frozen 52-week rates, then the receivership deficit calculations would not be affected by the allocation of payments among the three loans. Thus, correcting the FDIC's assumed allocation of payments is only relevant if one inappropriately includes interest in the receivership deficit, and if one uses the FDIC's incorrect interest rate concept in those calculations.
E.

The RTClFDIC Failed to Credit Sales Premium to the Loan Principal Using a Consistent Measure of the Time Value of Money

46.

As noted above, the RTC credited the sales premium from branch sales to an

escrow account and did not credit the resolution loans by the amount of the sales premium until April 1995. That delay mattered because the RTC used a lower interest rate when calculating accrued interest on the escrow account than the rate it used when calculating interest costs of the receivership. According to FDlC spreadsheets, the interest earned in the escrow account was

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institutions: Carteret spent 826 days in resolution, compared to 673 for Atlantic and 693 for Lincoln. Given Carteret's quality and the timing of its resolution, it is conservative to assume that in the but-for world it would have been resolved in 365 days, which is the average resolution period for the other 10 large thrifts that failed in the late 1980s and early 1990s. including Atlantic and Lincoln. 82. Had Carteret been resolved in the average time period in which thrifts of

comparable size in the late 1980s and early 1990s were resolved, then Carteret's resolution would have occurred on or before December 4, 1993-365 days after it was seized. But-for the

Congressional funding delays to the RTC, the RTC could have marketed Carteret as a whole bank, thus enabling it to sell Carteret's deposits and assets simultaneously at the time of resolution. In addition, the absence of the minority preference program would have lifted another obstacle to selling Carteret as a single entity. In this but-for world, if the value of Carteret's assets plus the deposit premium were greater than or equal to the value of Carteret's deposits, then no loan would be required to fund the resolution, and there never would have been a receivership deficit. 83. As of December 31, 1993, Carteret had $1.787 billion in deposits. I assume that,

but-for the delay, Carteret would have sold its branches at the same 10.5 percent deposit premium as it actually sold its branches in the second resolution (the first 14 New Jersey branches sold subject to the minority preference program). This is a conservative assumption, as the deposit premium likely would have been higher but-for the minority preference program, as 1 explain below. Given its deposits of $1.787 billion and a 10.5 percent deposit premium, 1 estimate that but-for the delay resulting from Congressional actions, the Carteret branches would have sold for a total deposit premium of $187.6 million-$43.8 million greater than the $143.8

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million deposit premium the branches actually sold for. I assume that the sales proceeds from Carteret's assets in December 1993 would have been $1.205 billion+qual to the sum of actual

dividends paid toward the resolution loans ($1.351 billion), minus the actual interest earned from the escrow account of $1.9 million, minus the actual deposit premiums of $143.8 million from the resolutions. This is a highly conservative approach to valuing the but-for market value of Carteret's assets, as I explain in the remainder of this section and in Section V. I estimate the total sales proceeds (equal to deposit premium plus assets sold, minus settlement interest94) butfor the delay to be $1.393 billion at the time of the but-for resolution (versus the $187.3 million in sales proceeds at the time of the actual resolutions). 84. Because the but-for sales proceeds of $1.393 billion exceed the actual resolution no loan would be required to fund the resolution when

loan principal of $1.370 billion?

correcting for the delay and value destruction of Carteret's receivership, and the receivership's

P&I balance would be $23.1 million in surplus. As shown in row (1) of Table 4, this balance
would have been $198.5 million lower than the government's inappropriate estimate of that balance as of the end of 2005.

94. When calculating the but-for receivership deficit's P&I balance under any scenario throughout my report, I use the actual value of settlement interest without adiustine it. The settlement interest aid bv the RTC to the acquirors reflected the two to three day delay between closing the sale and wiring the funds equa'l to the difference between the amount o f deposits assumed less premium paid and assets purchased. The value of actual settlement interest, which was less than $500,000, or 0.26 percent of total sales proceeds, is inconsequential to the results ofthe analysis. 95. The deposit runoff between the time Carteret should have been sold in December 1993 and the time its branches were actually sold was funded dollar for dollar by earnings and asset sales. Therefore, the difference between the but-for sales proceeds, including the earnings and asset sales that funded the deposit runoff, and the balance of deposits in December I993 is equal to the difference between my measure of the but-for sales proceeds of $1.393 billion and the actual resolution funding requirement of $1.37 billion.

.

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c.

Isolating the Consequences of Delay and Deposit Runoff from the Minority Preference Program

85.

The minority preference program delayed the sale of 16 Carteret branches. This

delay resulted in deposit runoff, which in turn contributed to the lowered amounts bidders were willing to pay for those branches. 86. The initial bids submitted for the 16 branches would have yielded a premium of amount of premium that Midlantic and Sovereign would have offered for

$87.8 million-the

~ those branches before the r e - a u ~ t i o n ?However, the RTC ultimately realized a premium of only $68.4 million on those 16 branches when they were sold in March 1995. Absent the delay caused by the minority preference program, but without taking account of the prior delay associated with the lack of Congressional funding, the branches would have likely been sold for $87.8 million at the same time as the other group of branches were sold in October 1994. In addition, the branches that were actually sold in the January 1995 resolution would have also been sold in October 1994 but-for the minority preference program. Although those branches did not require reauctioning like the branches that sold in March 1995, and therefore did not result in lower deposit premiums from the delay, their sale was still delayed by the problems with the initial disqualified minority bidders. In addition, Carteret would have been sold as a whole bank without the constraints of the minority preference program that forced it to be sold in pieces. Therefore, Carteret's assets and deposits would have been sold simultaneously in 1994, and a loan would have only been required if the sales proceeds from assets and deposits sold did not exceed the resolution funding requirement, approximately equal to the book value of the deposits.

96. Ramey Exhibit 49, at 4-5 (C-AM-A-0130614 - 15); Midlantic National Bank, Bid Form for Carteret National Savings Bank, at C-AM-A-0129998 - 0130000,0130010 - 12.

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2.
88.

The Minority Preference Program Resulted in Lower Deposit Premiums from the Branch Sales

The delays and value destruction by the government not only reduced the deposits

available for sale, they likely reduced the premium received per deposit dollar for the sale of the branches. The premium per deposit dollar likely was reduced by two factors: (I) the valuedestroying structuring of the transactions through which the bank was sold, and (2) the rules of the bidding process for its assets, which likely further reduced the value received. Both the value-destroying structure of the sale and the value-destroying bidding rules were direct consequences of the minority preference program. Although I do not provide any specific estimates of the sizes of the losses of premium per deposit dollar in this report, I present logic and evidence suggesting that these losses were significant economically. Thus, my quantitative estimates in Table 4, which do not adjust for the reduced premium per deposit dollar, should be viewed as highly conservative (low) estimates of the reduction in the receivership surplus that resulted from government value destruction.
a.

The Minority Preference Program Forced Carteret to Be Sold in Pieces, Rather Than on a Whole-Bank Basis

89.

Carteret was sold in pieces rather than as a whole, which tends to reduce the

premium received. The piecemeal sale of Carteret reflected the constraints imposed by the minority preference program, which favored smaller bank bidders for whom Carteret's large size would otherwise have been prohibitive. 90. Recall that Carteret initially qualified for the Accelerated Resolution Program

(ARP) in 1992. ARP resolutions, which are typically reserved for banks with high potential sale premiums, are similar to "Reprivatizations" (save that banks resolved through ARP were not always formally in receivership). According to the standard RTCFDIC measure of going concern value (the estimated difference between "resolution cost" and "payoff cost" of the
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institution, which the agencies compute as part of their analysis of least cost resolution, expressed here in percent terms as payoff cost minus resolution cost divided by payoff cost), Carteret had a high going concern value. Intuitively, that going concern value represents the incremental value of having a going concern make depositors whole versus having the RTCIFDIC do so instead (and then sell the bank assets piecemeal in order to cover the present value of the outlay). If the expected cost of resolution is close to the expected cost of payoff then there is not much perceived value in preserving the institution through creative marketing programs. If, on the other hand, the expected costs are very different, that indicates that the RTCiFDlC believes that an acquiring institution will pay a premium to acquire the resolved bank's assets and liabilities as a package. Because neither the RTCiFDlC nor an acquiring institution should fail to recognize potential value, the going concern value is closely related to the expected premium from sale as a going concern rather than in pieces. Carteret's least cost resolution forecast indicates an expected premium value that compares favorably with other bank and thrift failures, no matter how mea~ured.~' 91. Judging from the RTCIFDIC measure of going concern value, Carteret's expected

premium value of 37.4 percent was better than (that is, above) 75.7 percent of all other banks and thrifts that failed between 1980 and 2004, meaning that Carteret should have commanded a higher transaction premium, ceterisparibus, than more than 75 percent of other institutions that failed in the past two decades. Carteret's expected premium value was higher than 73.7 percent of the other thrifts that failed between 1980 and 2004, higher than 75.0 percent of the other thrifts that failed in 1992, and higher than 90.0 percent of the other thrifts with assets between $4

97. 1 refer to the estimated percent difference between resolution cost and payoff cost as the "expected" premium value, although it is not clear whether this measure is an unbiased forecast of the realized premium. Nevertheless, the estimated percent difference between resolution cost and payoff cost should be highly correlated with realized premiums.

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\\
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\

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billion and $6 billion that failed between 1980 and 2004 (all of which failed between 1988 and 1991). Hence, Carteret should have commanded a much higher sale premium than most other institutions. 92. Because the RTC was not sufficiently funded to assist Carteret to reprivatize in

the ARP program, Carteret ended up being marketed as a Purchase and Assumption more than two years later under the newly-amended minority preference program, which was carried out as a "Branch Sale." Statistically, for thrifts being resolved in the 1990s, the change from a "Reprivatization" to a "Branch Sale" is associated with substantially lower premium received per deposit dollar. 93. How did Carteret's marketing as a Purchase and Assumption (instead of a

Reprivatization under the ARP in early 1992) affect its resolution outcome? Figure 3 shows the propensity for resolutions of different types based upon the institution's particular expected premium value. It is clear from Figure 3 that Merger and Reprivatization transactions enjoy higher expected premium value from resolution, foIlowed by Purchase and Assumption transactions, and Insured Deposit Transfer and Payoff transactions. Mergers and Reprivatizations are the typical means of resolutions when expected premium values lie above 25 percent (Carteret's expected premium value was 37.4 percent) while Insured Deposit Transfers and Payoffs are far more common when premium values approach 0 percent (the cost of resolution is not very different from a payoff, i.e., there is little going concern value to be preserved). 94. The expected premium value is a good predictor of the resolution type, and

institutions with high going concern value are resolved through methods that preserve that vaIue. Judging from Carteret's expected premium in 1992 and its status as an ARP transaction, it is likely that far less value would have been lost had Carteret been resolved through a Merger or

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Reprivatization under the ARP program as originally intended. Instead, as a consequence of the minority preference program, Carteret was resolved by Purchase and Assumption instead of MergerIReprivatization, a style difference that is associated with a 28.8 percent lower average expected premium value of 19.0 percent. The actual deposit premiums obtained in Carteret's three resolutions were 5.6 percent, 10.5 percent, and 1 I . I percent.98

FIGURE VALUEAND RESOLUTION 3: STRATEGY: PRIMARY RESOLUTION TYPES

0%

5%

10%

15%

20%

25%

>=300/,

Enpeded P r m i u m Value

hlergen and RTril.atkations

Purchase and Assumpt~on

Insured Drposit Transadions and Payoffs

98. Exhibit Ramey 38 at 1 (C-AM-A-0088740); Exhibit Ramey 49 at 2 (C-AM-A-0130612); Exhibit Ramey 54 at 2 (C-AM-A-0013422).

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95.

How did the Branch Sale structure, arising from the implementation of the

minority preference program, further affect the outcome? Figure 4 shows the frequency of branch sales based upon different premium values of different institutions. Again, branch sales are typically used where there is less expected premium value to be preserved through more value-preserving resolution techniques. Branch Sales are uncommon when premium values lie above 25 percent (recall, again, Carteret is 37.4 percent) while Branch Sales are very common when premium values approach 0 percent (since the cost of resolution is not very different from a payoff, i.e., there is little value to be preserved). Again, the main point is that a low expected premium value is a good predictor of a Branch Sale, while other institutions with high expected premium values are resolved through different methods that preserve their franchise values. It is likely that far less value would have been lost had Carteret been resolved through a Merger or Reprivatization under the ARP program as originally intended. Instead, Carteret was resolved by Branch Sale, a style difference that is associated with an average 15.1 percent lower value premium on deposit sales over non-branch sale resolutions. 96. The average expected value premium on Mergers and Reprivatizations was 47.9

percent, whereas the average expected premium for a standaIone Purchase and Assumption was 20.1 percent, the average expected premium for a Purchase and Assumption with a Branch Sale was 14.3 percent, the average expected premium for a standalone Insured Deposit Transfer was 7.6 percent, and the average expected premium for an Insured Deposit Transfer with a Branch SaIe was 2.1 percent. The lack of Congressional funding and increased minority preference restrictions imposed by Congress during the wait for funding resulted in Carteret being resolved as a Purchase and Assumption with a Branch Sale, implying an average expected premium value of 14.3 percent rather than a Mergers and Reprivatization transaction with an average expected

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premium value of 47.9 percent, an absolute difference of 33.6 percent (or viewed alternatively, a 70.1 percent drop in expected premium value). The actual deposit premiums obtained in Carteret's three resolutions were 5.6 percent, 10.5 percent, and 11.1 percent.99

FIGURE VALUE 4: AND RESOLUTION STRATEGY: BRANCH SALES

.No

Brand, Sale

Br~nd,Sale

1

b.
97.

The Minority Preference Program Discouraged Non-Minority Bidders from Participating in the Auction for Carteret's Branches

Controlling for other factors, the bidding rules of the minority preference program

reduced the number of bids and created disincentives for high bids. The preference program

99. Exhibit Ramey 38 at 1 (C-AM-A-0088740); Exhibit Ramey 49 at 2 (C-AM-A-0130612); Exhibit Ramey 54 at 2 (C-AM-A-0013422).

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amounted to the granting (for free) of a valuable option to minorities to match the high bid of others who had invested resources to value Carteret's branches. The effect of such a grant is to discourage entry by non-minority bidders, which in turn, depresses auction prices. Indeed, an internal government memo confirms that the minority preference program likely discouraged non-minority bidders from participating in the auction. In a memo dated October 26, 1995, J. Paul Ramey, Vice President, Division of Resolutions of the RTC, considered whether "[plrescreening of bidders and minority bidder preference programs may discourage bidder interest and lower premiums received." His complete response was as follows: Although the statement may be true, I believe apples and oranges have been mixed here; what do "pre-screening of bidders" and "minority bidder preference programs" have in common? The pre-screening, if you are talking about up-front disqualification from bidding, would likely result in a lesser number of initial attendees at a bidders' meeting and theoretically decrease the competition. As for any type of bidding preferences, it has been my personal opinion that this is a deterrent to the competitive aspect of the bidding process; however, this has not been definitively proven to be the case.loO Mr. Ramey reasons correctly that non-preferred entities would not want to make the investment necessary to value a series of branches if they thought that their efforts would be futile or could be utilized by a preferred bidder. The cost of preparing a bid is not trivial. Given this significant cost of participation, it is reasonable to conclude that a non-minority bidder would not incur such an expense if it knew that its high bid could be matched and thus the likelihood of winning was close to zero.

c.

The Minority Preference Program Induced Non-Minority Bidders to Bid Less Aggressively Than They Otherwise Would Have Conditional on Entering the Auction

98.

Unfortunately, the price-depressing effect of the minority preference program was

not limited to deterring entry. By creating a "toehold" advantage for certain bidders, the minority

I00.Memo of J. Paul Ramey, Oct. 26,1995, Exhibit Ramey 12 at 4 (C-AM-A0125188). CONFIDENTIAL MATERIALS SUBJECT TO PROTECTIVE ORDER
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preference program could have depressed prices in ways not contemplated in the Ramey memo. In particular, the minority preference program may have induced non-minority bidders to bid less aggressively than they otherwise would have conditional on entering the auction. In a seminal auction paper, Professors Bulow, Huang and Klemperer show that even a slight toehold advantage to one bidder can have a significant impact on auction revenues in a common-value ascending (English) a u ~ t i o n . ' ~ ' Hence, the minority program could have depressed the deposit premium for Carteret in two separate yet complementary ways: ( I ) by discouraging entry by non-minority bidders, and (2) by inducing non-minority bidders to bid less aggressively during the auction.

99.

To understand the intuition behind a toehold advantage, consider a very simple

example in which two bidders compete for a prize equal to the sum of the money in bidder 1's wallet (which is unknown to bidder 2) plus the money in bidder 2's wallet (which is unknown to bidder I). For ease of exposition, assume that the most money in either bidder's wallet is $I. If bidder 1 wins the auction, he gets paid the sum of the money in the two wallets less his bid. If bidder 2 wins, he gets paid the sum of the money in the two wallets less 95 percent of his bid. In the language of Bulow, Huang and Klemperer, bidder 2 has a "toehold advantage" equal to 5 percent. When the auction is symmetric-that is, when neither bidder has a toehold advantage,

each bidder remains in the auction until the price for the content of the two wallets reaches roughly two times the content of his own wallet.'02 When bidder 2 has a slight toehold equal to 5 percent, bidder 1 remains in the auction until the price for the content of the two wallets reaches

IO1.Jeremy Bulow, Ming Huang & Paul Klemperer, toehold^ and Takeovers, 107 J. POL.ECON.427 (1998). IO2.ld. at 438-439. CONFIDENTIAL MATERIALS - SUBJECT TO PROTECTIVE ORDER

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Charles Calomiris July 7.2006 Ambase Corporation and Carteret Bancorp., Inc. v. Federal Deposit Insurance Corporation

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Filed 10/19/2006

Page 18 of 60

UNITED STATES COURT OF FEDERAL CLAIMS

- - - - - - - - - - - - AMBASE CORPORATION and
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CARTERET BANCORP, INC , Plaintiffs,

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FEDERAL DEPOSIT INSURANCE 7 CORPORATION,

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NO. 93-531 Judge Loren Smith

THE UNITED STATES OF 10 AMERICA, Defendant.

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DEPOSITION OF CHARLES W. CALOMIRIS VOLUME 3 N e w York, N e w York Friday, July 7, 2006

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REPORTED BY: DONALD R. THACKER

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Case 1:93-cv-00531-LAS

Charles Calomiris - July 7,2006 Ambase Corporation and Carteret Bancorp.. Inc. v. Federal Deposit Insurance Corporation
Page 609

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Q Slight in the government's favor? A May I? Q Yes. A There is a very slight difference in -over time, that is not clear whether it is statistically significant difference. When you look at transactions as I have had occasion to do, very informally, so you could say that we know that in the business cycle generally that especially the indushy financial cycle for banks and savings and loans, that deposit premium may vary over the cycle. Now, if we were doing a but-for calculation for 1991 or early 1992 there would be a significant. not necessarily statistically significant still, because there are so few observations that one has, but there would be at l w t a somewhat economically significant difference, maybe of a couple percentage point. between let's say 1991. '92. and something like 1994-'95. Remember that -- so if we were looking at let's say 1991-'92 we might see a couple of
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that I knew I could use I would have done it. It would have been essentially zem ior the comparison between December '93 and the end of 9 4 as far as I know, but I also don't. haven't seen a database that would allow me to do that with any statistical precision. More impomtly, my calculation is very conservative so the difference of let's say 10.5 percent versus 10.4 percent or 10.2 percent. if it Nmed out that such a database existed, and it might produce very, very slight differences, I am confident that they would be slight differences between December '93 and December '94, if at all. and that those slight differences would be dwarfed by the considerations that I am leaving out that make this analysis very conservative, which we discussed at length yesterday. So just to summarize, if this were an analysis of a 9 1 but-for transaction I think that there would be some need to discuss this issue, it would still probably, that two percentage point or whatever it would be different would probably be
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percentage point difference in the average deposit premiums received, because that was such a starkly different time. P I versus '94-'95. By about the middle of 1993 there had been a very big recovery in deposit premiums in the market. to the extent that we can have a small sample of observed deposit premiums really make those kind. of fine distinctions about exactly when you would say near full recovery had happened. And there is, as far as I can tell from

I dwarfed by the other aspect. of this calculation 2 that are being left out which I have discussed at 3 length. 4 Q So as I undersmd -5 A But. I don't believe that there is a 6 significant either economically or statistically 7 significanceof any that magnitude between December 8 9 3 and 94, far as I h o w . as 9 Q If there were a two point difference in 10 the government's favor between the m k e t for 12 that that would have been more than made up for by 14 conservative appraisal you have made? 15 A Given all the conservatisms. having to do

12 past, which are not enough observations to do a 14 don't have enough. that change was pretty much 15 complete by the end of 1993.

So if I could have made an adjustment 22 based on reliable statistical inference with data

0 1993 counter factual, it is a December of '93 1 counter factual. And given my howledge of the 2 market I can say with some confidence that

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Anthony Saunders - October 3,2006 Ambase Corporation and Carteret Bancorp, Inc., v. The United States of America

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UNITED STATES COURT OF FEDERAL CLAIMS

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AMBASE CORPORATION and CARTERET BANCORP, INC., Plaintiffs, -andNo. 93-531

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FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff-Intervener, -against-

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THE UNITED STATES OF AMERICA, Defendant.

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Tuesday, October 3, 2006 9:46 a.m.

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Deposition of ANTHONY SAUNDERS, taken by Plaintiffs, pursuant to Notice, held at the offices of Navigant Consulting, 666 Third Avenue, New York, New York, before Lisa Rosenfeld, a Shorthand Reporter and Notary Public within and for the State of New York.

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Anthony Saunders - October 3,2006 Arnbase Corporation and Caneret Bancorp, Inc., v. The United Stales of America
~agc 102 Page l M leading to a high degree of customer loyalty? I services that high-balance households demand. It 2 might not be the best sbategy if I am a bank in A. Yes, then I would have to look at 3 Newark which this bank had a presence in Newark. It turnover rates and depositors and turnover rates in loan customers. So that means a number of numerical 4 might be better if I had better service for let's 5 say low-balance households. So it's not clear. m u r e s there I can apply. But as I said, l 6 haven't done the application so 1don't h o w . Q. Do you have an opinion as to what the 7 value of Carteret's franchise was on a fair m k e t Q. So you wouldn't teat this as 8 value basis, its branch network franchise in presumptively correct without doing your own 9 December of 1992? analysis? 10 A. No, I don't have an analysis. A. Yes, you're asking me as an economist 11 and I'm saying so. Q. Do you have an opinion as to what the 12 fair market valuation of Carteret's branch network Q. If it were m e and if you did conclude 13 was as of December 1993? that this was correct, would that be a positive for 14 A. I haven't done that analysis either. an acquirer? 15 Q. Let's turn in your report to page 53. A. Ym. 16 In paragraph 100 you talk about ''The errors in logic Q. Now the same with the stalemenu on page 17 arise in pan from a mixing up of argumenu relating 26 that I read t you and into the record about the o 18 to thc differcnce in the value of goodwill of a office network being well positioned in strategic 19 going concern versus that of a failed institution markets and located in some of the top performing 20 like Carterel." market areas. If that were true, would those be 21 Before we get into the specifics of positives for an acquirer? 22 this, you talk about the errors in lo@cthat A. Yes, if that was me.

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1 Q. Turning to the paragraph right above 2 liquidity on page 27, it says "The bank's 3 penetration of high balance households far exceeds 4 its overall market penetration in cach of the New 5 Jersey and Florida counties where CFSB has a retail 6 office present. Average account balances for each 7 product at CFSB exceed industry averages. These 8 characteristics combined with the relative stable 9 depusit base further enhance the valuation of the I0 bank's franchise." 12 those statemenu? 13 A. Again it's the same as I've said before,
15 agree or disagree.

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Professor Calomiris committed. Does Professor Calomiris have a good reputation in the academic community? A. Yes. Q. He does, okay. In terms of the value of goodwill to a going concern. Do you recall testifying in Fifth Third that goodwill's value to an open institution was, quote, virtually nil, close A. Open in what context, open a failed

Q. Open an ongoing institution. A. I think I was opining on Fifth Third, I
15 context. There's a difference between a value of

19 accurate that it would enhance value of the A. It depends. I mean high-balance

Q. Well, for a successful going concern 19 hank with lots of excess regulatory capital, big 2 0 capital cushion, do you think supervisory goodwill 21 had substantial value?

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Anthony Saunders - October 3,2006 Ambase Corporation and Carteret Bancorp, Inc.. v. The United States of America
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Q. Why not?

A. Because presumably if you're saying substantially it's got a good bank, it's got a lot of capital tangible. So supervisory aspect of goodwill would be of little value. Q. Does it have any value? A. Well, it has some goodwill. I thought you said supervisory goodwill. Q. Yes, does supervisory goodwill to an open institution that's healthy with plenty of excess capital to your opinion have any value to that institution? A. Well, goodwill has value. Q. I'm talking supervisory goodwill. A. It depends, it depends on what its optimal -- you're talking about an open institution where we're counting supervisory goodwill as part of capital? Q. Yes, and where even without counting, it still has plenty of excess capital. And my question is we'll just put some numbers on this, maybe to make it concrete. Let's say you had an institution

capital and that protects me against losses. Supervisory goodwill is intangible capital, does not protect me against losses. Q. But the supervisory goodwill would allow you to stay in business? A. If the regulator was foolish enough to allow you to stay in business. Q. Lefs say the regulator had a contract which required him to allow you to? A. I'm not -- that's a legal opinion. But I'm just saying is a bank with no tangible capital and just supervisory goodwill has no protection against losses and to my mind is insolvent and should not be let to continue to exist. Q. Well, but wasn't -- all these Winstar cases like Carteret, like the Glendale case, 1 mean these were institutions that where you had a healthy thrift come and at the govenunent's invitation to bid, acquire these bad thrifts, failed thrifts, and then when they're done, the day after the merger the combined entity has negative tangible capital. So is the criticism you're making about regulators
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that had a hundred million in assets, it had 20 million in tangible capital, capital requirement of 3 percent. A. Uh-huh. Q. And it has another hundred million of supervisory goodwill. My question is an institution like that, very well capitalized, would the supervisory goodwill in your opinion have value to that institution? A. Very linle value. Q. Now let's say that the institution had zero -- that same institution, a hundred million in assets, 3 percent capital requirements or requirement of 30 million of -- excuse me, 3 million of tangible -- of capital, let's say, and let's say it has zero tangible capital but it has 5 million of supervisory goodwill. Would that institution have value from supervisory will? A. It shouldn't. Q. Why is that, because it could raise capital? A. No, because its bue capital is tangible

allowing these institutions to stay open, are you taking issue with the supervisory goodwill transactions from the get-go? A. No, I mean also the banks themselves have a decision. They didn't have to do the acquisitions. They had a business --they made a business decision. They had, well, we can grow ow assets, we can move into new markets, the fact that it didn't turn out very well is an ex post outcome. But you can't just blame the government for the contracts. There's two sides to any contract. There was no gun at the head of the banks to go into the contracts. Q. Do you think it was ill-advised of the govenunent to set these contracts up? A. 1 think if you look at the economics that they closed the banks when they were -- early on in many cases better than letting them run on and grow and then fail. Q. Of course many of them didn't fail at all, right? A. 1 think 20 percent failed. if not more.

28 (Pages 106 to 109) 202-347-3700 Ace-Federal Rennrters. Inc. 800-336-6646

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Anthony Saunders -October 3,2006 Ambase Corporation and Carteret Bancorp, Inc., v. The United States of America
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A. 1 can't remember. 1 can't remember. Q. You can't remember whether you read it or you can't remember what it says? A. I can't remember what it says and I can't remember whether I read it. Q. Well, if you didn't read it how would you know whethw it was newsworthy or not? A. As I say, I don't until I read it. I didn't dispute, you're telling me it's newsworthy, I'm saying I don't know. It's the editors' decision. If the editors decide it's newsworthy. whether I agree is my own personal opinion. Q. My question is A. I haven't read it so I can't opine. Q. If it were newsworthy then that would explain the bump in the - the drop in the stock price.right? A. It depends when the news came out. News comes on the news wire all the time. Is it old news, is it stale news, is it news from weeks ago when these things happened. Newspapers are often the last to report the news, financial news.
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where it was a vote in the Congress? A. Well, votes in Congress are very quick to come on the wire. So I'm surprised -- it depends, as I say, what time in the day. Was it 1 o'clock, was it 2 o'clock. I'd have to take a look. Q. So if it was after trading houn clmed. then the soonest it could have been reflected was in the morning, right? A. The following morning? Q. Yes. A. Of the next day? Q. Yes. A. After 4:30? Q. Yes. A. 1 agree. If there was any material value to that news. Q. And if the stock market moves in an abnormal direction the morning of the release of a vote that occurred at night, isn't that powerful evidence that the market thought it had an impact? A. Yes, but this is market for what
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Q. This was a report of a key vote in the Congress from the day before, so that's not stale news, is it? A. It depends what time the vote was taken. Q. Back in 1989. A. What t i m of the day the vote was taken. Q. In 1989 news did not get stale fromone day to the next, did it? A. You're a more financial expert than m. Q. Well, let m a s k you. I m a n d o you think news in 1989 got stale in a day? A. Yes, I think the market is pretty efficient. Q. Really? A. Yes. Q. Point me to an example in the late '80s or early '90s where news got stale in a day. A. I'm sure I could find one if I went back to look. Q. But you can't think of one here? A. Not offhand. Q. And you certainly can't think of one
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Carterel stocks, all stocks? Q. Carteret. A. Did all other stocks move? Q. No, that's why it's an abnormal market. A. No, is it an announcement that affects all lhrifts. Was there another announcement on that date that affected all thrifts in the thrift industry. I don't know. Q. You haven't looked? A. I have not lwked. Q. So you have no reason to dispute Professor Calomiris's conclusion that that New York T i e s story explains the stock market performance? A. I just gave you 15 reasons why I do dispute it. Q. No, you gave me 15 reasons of why it might be possible if you had read the arlicle that you dispute it. A. No, I'm just saying a lot of news is stale. A lot of news is not relevant. It depends on the relevance of the news, it depends on what's in the news article and when it's announced. It

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Anthony Saunden - October 3,2006 Arnbase Corporation and Carteret Bancorp, Inc., v. The United States of America

page 210
comespondence would cut off their supply of inflow of pipeline into the company.
Q. How would that -- is that just a risk that -- how would that risk affect the company? A. If you've got nothing coming in there's nothing to do out so it's defunct. Q. If it were entirely dependent upon correspondence? A. It would significantlybe dependent on correspondence. Q. A couple of times in your report you referred to the assets and liabilities of Carteret Mortgage Company. What assets did Carteret Mongage Company have? A. The assets would have been those assets that it received to sell to outside parties that it held during the period which it was going to turn them over. Q. Do you know what the typical period of time that Carteret Mortgage Company would hold assets? A. 1think pretty short.
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Carteret, was more risky. Q. rmsorry, why does that follow in the sense of Caneret Mortgage Company didn't have any t~oubled assets on its hooks, did it? A. I'd have to go and look at that. Q. You don't know though? A. All I know is a subsidiary of a company that had considerable classified assets. troubled assets. Q. Professor Calorniris is looking at Carteret Mortgage Company as standalone entity that could be spun out, so why would the parent's companies alleged problem have anything to do with-. A. I don't know, there might be contingent assets and contingent liabilities. There generally are between contingent assets and contingent liabilities existing between a subsidiary of a company and its owner or holding company. Q. Were there any such liabilities between Carteret and Carteret Mortgage Company? A. Well, there might have been some --I

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page 21
don't know, there's a potential there for risk shifting. Q. Potential for what? A. Risk shifting.
Q. And but you didn't see any evidence of that risk shifting? A. 1didn't see any evidence, no. Q. What sod of liabilities would C m r e t Mortgage Company have had? A. The most companies Like this raised their funding with short-term paper. Q. Now you make the point that while Imperial was able to hire Carteret Mongage Company staff without acquiring any of the f m ' s troubled assets and liabilities. right? A. Uh-huh.

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1 Q. Do you have any concerns about the 2 assets that Carteret Mortgage Company was holding in 3 December of 1992? 4 A. I didn't evaluate their portfolio that 5 they were holding in 1992. Q. So you don't have any concerns about it? A. 1didn't say 1 didn't have any concerns. 7 8 I don't really know what the composition of that 9 portfolio was to make that evaluation. 10 Q. On page 77 in paragraph 137. about 11 halfway through the paragraph you make reference to 12 the fm's, which I assume is CMC, uoubled assets 13 and liability. Why would you think they're uoubled 14 if you didn't examine their characteristics? 15 A. Well, to the extent that they were 16 absorbing assets and liabilities mortgages from 17 Carteret itself rather than from outside 18 correspondent banks. I9 Q. When you say absorbing, what do you m a n 20 by that? 21 A. WeU. the risk of the underljing holding 22 company here, Carteret, which w a a subsidiary of

Q. Now, the RTC in the real world was stuck
with those assets and liabilities, right? A. Uh-huh, that's correct.

Q. So what impedunent as a financial or economic matter would there have been for the RTC ta say okay, we're stuck with these assets and

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O t b r 4,2006 coe A b s C r o a i nand Cree Bancorp,Inc.,v. T e United States of America m a e oprto atrt h

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UNITED STATES COURT OF FEDERAL CLAIMS

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AMBASE CORPORATION and CARTERET BANCORP, INC . , Plaintiffs, -andNo. 93-531

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FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff-Intervener, -against-

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THE UNITED STATES OF AMERICA, Defendant.

.......................................
Wednesday, October 4, 2 0 0 6 9:37 a.m.

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Continued deposition of ANTHONY SAUNDERS, taken by Plaintiffs, pursuant to Adjournment, held at the offices of Navigant Consulting, 6 6 6 Third Avenue, New York, New York, before Lisa Rosenfeld, a Shorthand Reporter and Notary Public within and for the State of New York.

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October 4,2006 Ambase Corporation and Carteret Bancorp, Inc., v. T h e United States of America Pagc 330

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A. I don't know because a auction is n uncertainty. Q. What d m that mean, there's uncertainty? W54 A. In an auction by definition you're mmpeting. You're uncertain as to whether y w will

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A. In a secondary market? Q.Yes. A. I ~ n secondary market loans are k W55 wadable assers. Q. You say secondary market, is that in distinction t the primary market? o A. Yes, because these loans areoutstanding and Ulen we're selling Ulem in the secondary market. W 5 5 Q. What's Ule primary market?

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7 get thegmds. 8 Q. So how does that impact your bidding 9 strategy? A. 1 might well say if I want it 111 offer 10 1 1 a higher price today to be sure to gel it.

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Q. That's a fair point that maybe the Gulf Coast might have paid an even higher price. But is

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A. Market of originauons. Q. Are there any ethics rules on that? I2 A. The &ulh in lending laws, et cetera. 1 etcetera. 3
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there any reason why they would have paid a lower price if this had been an auction? A. As I say I don't know, I don't know what the assets were and 1 don't know what the value was, but all I can say is observing a higher price is not W54 unusual in an asset sale because it has more private value lo the buyer. Q. Is it unusual for someone robe able to buy loans on one day and sell them for a 6 percent Page 331

14 Q. 1 man on the markup of you buy an asset 1 on one day if you're a broker, can you -5 1 6 A. Then it's a secondary market. Once l 17 sell it, it's a secondary market. It's completely 0956
18 different. 19 MR.L E m I think also it should be 20 pointed out that your statement of issuer 2 1 pointed out that Ule auction w u well prior 22 to the closing and the sale of the w a d e s .

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profit on the next day? 0954 2 A. Yes, I think the loan sales market now

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3 is a market of probably $200 billion a year. it's 4 oneof the largest financial markeu. b a n s get 5 bought and sold every day. 6 Q. At 6 percent profit within a single day? 7 A. It can change aloan. Q. 6 percent in one day? 8 9 A. I'd have to look. 10 Q. You've never seen one that's changed

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9 10 there was a preference that afforded some bidders,
did it? 12 A. All il looked at were wholesale banks

Q. Y w point to solne aucuon articles in your report. Did those study auctions in which there was a preference? A. Which auction anicles are you dking about, Calomiris's ones or my ones? Q. Your ones. A. I lhink the one I pointed to as empirical. Q. That didn't study auctions in which

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l l 6 percent in one day? 12 A. There's 200 billion being traded, I 13 don't know the prices of every single loan but all I 14 know is they're Waded. 15 Q. Sure. 0955 1 6 A. And it's a very frequent activity, I'm 17 sure, there are cases where prices have changed 18 I0 percent or I percent. 5 1 9 Q. Inaday? 20 A. Yes, I wouldn't be surprised. 0955 2 1 Q. Are there ethics mles on brokers about 22 their ability to market up a loan in one day?

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13 versus branch sales, if 1 remember.
14 Q. Right. but it didn't b y to in any way W57 15 address the concern that h f e s s o r Calomiris is 1 raising which is when you give an incentive or some 6 17 preference lo some bidders, that can depress the 18 price? 1 9 A. On the other hand if you really want the W 5 7 20 good is a higher value than the good of the common 21 value that you pay higher. 22 Q. What does that mean. Ule good has a

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1 commonvalue? A. Well. the paper he's referring to is 2
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agee that the asset has the same value, a private

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Q. 1 don't know.

what's called a common value auction where you and I value auctions, you and I incur a particular asset and disagm over ia w e value when we trade. If 5 6 8

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A. I mean you're talking about an ascending auction, but these were not ascending auctions, whieh is another mistake in that article in the sense that it's not a mistake in the article he's 10:lXl private value sealed bid auctions. Q. Have you had any experience in the real

8 will pay higher price. Q. The only way to figure that out is with 9 10 an open auction? II A. No. The same thing, even loskow and 13 results changed flipped, if you like, when there's a 14 private value auction rather than a common value 16 Q. Is there a value to a right of fmt W58 17 refusal, having a right of fust refusal? 18 A. I would think so, yes. 19 Q. If a financial instilution came to you 20 and said we have an opportunity to bid on some 22 do due diligence and at the end of the day our

10 world with private value sealed auctions? MR. LEVI'IT I want to objs-t on A. Have 1 ever done, no. Q. Have you ever had any pmicipation in

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17 Q. Isn't it fair to say that bidders would 18 be concerned if their competitors get advantages and 19 preferences in the bidding process? 20 2 A. Yes, so thereaction is if we really Q. If we really want it? 10:Ol

1 primvy competitor is v e y interested in that 2 market, has aright of fust refusal, is going to 3 see our bid. has a right of fmt refusal. 4 A. If he matches the bid. 5
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Q. Yes, and we're concerned that we may sink a lot of money into this due diligence, wrne up with the right price and our competitor won't spend a dime and say thanks a lot. we like what you've come up with and we'll take it at that price. Would that be a fair concern? A. No. I think what he would say if 1

A. If our private value is sufficiently

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Q. Right, and if your private value isn't sufficiently high it's just 1 lhink it's worth X,

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5 rrn willing to pay X. It's not worth any more to me i, 6 than to h m wouldn't it be a concern Lhat the other 7 person can avoid the due diligence and snap up the 9 A. No, because he has to match my price, so 10 he might think a b u t bidding 95.1 can bid 99. And I I even to get to the second round he's got to match my 13
Q. Why did theRTC h v e a LO percent limit,

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II 12 really wanted the, gmd, I'd pay a higher price 13 bxause 1 want to make sure 1 can outbid the buyer

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15 sure if I really want that asset, I price it higher. 16 not lower or even equal. I push the prices up. 17 That's what a private value auction is. We disagree 19 a panicular bank. 20 Q. Have you ever been involved in any 21 auction in the real world? 22 A. You mean like auction for antiques or

15 LO percent of the highest bid? 16 A. To get to the second round. 17 Q. Yes, why? 19 20 21 Q. Why did the RTC have that feature? A. That was an adminismtive 10 percent. Q. Didn't it serve a purpose which was to 10:02

22 give some comfort to the other -- to the other

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Page 1 rhat your textbook uses a shorter timetable and has 2 $78 billion. m e FDIC has added three years and 3 it's $9 billion, right? 10:34 4 A. I don't h o w , but I'mjust M n g -- I'm 5 jua a reference to Curry and Shibut to what they 6 say from the FDIC.

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(Recess taken) BY MR. 'IBOMPSON:
Q. Professor, do you have your report in front of you? 10:30 A. Yes. Q. I'd like to direct your attention to

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page 1 l of the repon. I particular in paragraph n 24 you state in the middle of it "Despite the

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7 Q. But the numbers in your textbook are 8 reliable, correct? 10:34 9 A. I would hope so. 10 Q. You don't have any reason to doubt il. 11 doyw? 12 A. Not that I can think of. 10:34 13 MR. 'INOMPSON: Let's ask thc court reponer to mark as the next Exhibit 18, Exhibit 18, thecurry and Shibut. (Saunders Exhibit 18, Document, was so marked for identification.) 10:35 Q. Let's turn to page 30, the last paragraph in the left-hand column which reads "However in our new, including financing costs when tallying the costs of the thrift crisis is methodologically incorrect. It is invalid because I( Page 35: in present value terms the amount borrowed is equal lo the sum of the interest charges plus debt repaymenr Adding the sum of interest paymenls w the amount borrowed would overstate the m e economic cost of resolving the crisis. An example 10:36 wiU iUusIrate the point. Assume an individual pays $IW,000 for the purchase of aresidential property and finances the whole amount with a 30-year loan at I0 percent interest. O v a the 30 years of the loan the individual pays more than 10:36 3CQ.000 in lotal costs, compromising interest and principle. Yet thecosr of the home is still $1 00,000 k a u s e the present value of the total cost of 3CQ.000 for 30 years of payments discounted by 10:U the interest rate of 10 percent is approximately ICQ.000." Do you agree with that analysis? A. No. 10:37

enormity of the problem you're talking about failed thriftr, Curry and Shibut estimate the cost of the RTC resolution from 1989 through 1995 as $82.7 billion with 7.1 billion. almost 9 percent borne by the private senor." Do you see that? 10:31 A. Yes. Q. Do you think that's an appropriate estimate of the cost of the cleanup of the thrift pmblem for '89 through '95? A. Tbey are hvo economists at the FDIC so 1 havc no reason lo doubt that that's a reasonable estimate of the cost. Q. Let's look at your textbook and forave me. I hope this isn't a copyright nolation.

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Page 3: MR. THOMPSON: So I'd like to ask the 10:3 court reporter to mark this as Saunders 17. (Saunders Exhibit 17, Excerpt from textbook, was so marked for identification.) Q. In your textbook Financial Markets and Institutions on page 418 you have a discussion at 10:3 the bottom of the p g e in the last paragraph. "In the 1980's the large number of savings association failures depleted the resources of the FSLlC lo such anextent that by 1989 it wasmassively insolvent. 10:3 For example between 1980 and 1988 514 thrifts failed at an estimated cost of 42.3 billion. Moreover between 1989 and 1992 an additional 734 thrifts failed at a cost of 78 billion." Do you see that? A. Yes, 1 do. 10:33 Q. Tbat n u m b is perfectly consistent with what the FDIC came up with, which was 87 billion for '89 through '92, right? A. It would appear these numbers are for '89 through '95. Tbese numbers are '80 to '88 and 10:33 '89 through '92 so they're not coincidental periods. Q. But they are consistent to the extent

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19 Q. So the noumber in your texlbook is wrong 20 and the FDIC is wrong? 21 A. No, I'm disagreeing with the fust 22 sentence.

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