Free Post Trial Brief - District Court of Federal Claims - federal

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 1 of 364

IN THE UNITED STATES COURT OF FEDERAL CLAIMS ____________________________________ ) ASTORIA FEDERAL SAVINGS & LOAN ) ASSOCIATION, ) ) Plaintiff, ) No. 95-468C ) (Judge Thomas C. Wheeler) v. ) ) UNITED STATES OF AMERICA, ) ) Defendant. ) ____________________________________)

PLAINTIFF ASTORIA FEDERAL SAVINGS & LOAN ASSOCIATION'S RESPONSE TO DEFENDANT'S PROPOSED FINDINGS OF FACT AND CONCLUSIONS OF LAW

Frank J. Eisenhart Counsel of Record Catherine Botticelli Tara R. Kelly Catherine E. Stahl Craig Falls Dechert LLP 1775 I Street, NW Washington, DC 20006 Attorneys for Plaintiff Astoria Federal Savings and Loan Association October 5, 2007

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 2 of 364

TABLE OF CONTENTS Introduction ................................................................................................................................ 1 Issues Presented .......................................................................................................................... 4 Replies to Individual Proposed Findings of Fact ...................................................................... 8 Plaintiff's Reply to Defendant's Contentions of Law ........................................................... 271 I. OVERVIEW............................................................................................271 A. The Court Should Not Be Misled By Defendant's Specious Analysis Of Precendent........ 271 B. The Law Of Contracts, And No Special Winstar Law, Governs This Case. ....................... 272 C. The Law Of Contracts Is Extremely Lenient And Accomodating To A Plaintiff's Recovery Once Breach And Fact Of Loss Are Established........................................................... 274 1. The Government, As The Breaching Party, Is Responsible For Making Plaintiff Whole. ........................................................................................................................... 275 2. The Court Has Broad Powers Under The Law To Fashion A Suitable Award to Make Plaintiff Whole............................................................................................................... 275 3. The Plaintiff's Recovery Is Not Precluded By Uncertainty As To The Precise Amount Of Plaintiff's Loss.......................................................................................................... 276 4. Plaintiff's Fact Of Loss Is Overwhelmingly Established By The Evidence............. 277 5. Plaintiff's Amount Of Loss Is Not Made Uncertain By Defendant's Unsupported Speculations. .................................................................................................................. 279 6. Dr. Kaplan's Conservative Measurements Of Plaintiff's Award Could Never Constitute A Windfall For Plaintiff. .............................................................................. 280 II. PLAINTIFF'S RESPONSES TO DEFENDANT'S CONTENTIONS ADDRESSING EXPECTANCY............................................................................................................ 281 A. Defendant's Speculations Do Not Make Plaintiff's Damages Model An Unfair Or Unreasaonble Approximation Of Fidelity's Loss. ......................................................... 281 1. Defendant Has Identified No Legal Impediment To Plaintiff's Recovery. .............. 281 2. Defendant's Speculations About Alternative Scenarios In The But-For World Do Not Make Plaintiff's Damages Estimate Unfair Or Unreasonable....................................... 283 3. Defendant's Speculations About How It Might Have Modeled Plaintiff's Damages Differently Do Not Make Plaintiff's Damages Estimate Unfair Or Unreasonable. ...... 284 B. Plaintiff Is Entitled To Lost Profits. ..................................................................................... 286 1. It Was Foreseeable At The Time of Contracting That Fidelity Would Lose Profits If The Government Breached The Contract. ..................................................................... 286

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 3 of 364

2. Fidelity's Lost Profits Were Definitely And Substantially Caused By The Government's Breach. ................................................................................................... 290 3. Fidelity's Lost Profits Are Reasonably Certain ........................................................ 292 C. Plaintiff's Responses To Defendant's Factual Arguments Regarding Expectancy. ............ 296 1. Defendant's Speculations About the But-For World Are Not Credible (Causation).296 2. Defendant's Attempts To Create Uncertainty Are Not Credible (Reasonable Certainty).. ..................................................................................................................... 305 D. Plaintiff Is Entitled To Wounded Bank Damages................................................................ 312 III. PLAINTIFF'S RESPONSES TO DEFENDANT'S LEGAL CONTENTIONS REGARDING RESTITUTION.................................................................................. 315 A. The Use Of Liquidation Costs In The Calculation Of Restitution Is Not Foreclosed By Federal Circuit Precedent............................................................................................... 315 1. The Use Of Liquidation Costs In Calculating The Defendant's Subjective Gain Is Not Foreclosed. ..................................................................................................................... 316 2. The Use Of Liquidation Costs In Calculating The Objective Value Of Plaintiff's Performance Is Not Foreclosed...................................................................................... 316 B. Plaintiff Is Entitled To A Restitution Award. ...................................................................... 317 1. A Plaintiff Is Entitled To Restitution By Performing The Contract. ........................ 318 2. The Court May Choose Between Two Alternative Measurements Of Restitution .. 321 3. The Federal Circuit Has Not Foreclosed The Possibility Of Using Liquidation Cost In The Calculation Of The Objective Value Of Plaintiff's Services.................................. 323 4. The Federal Circuit's Chief Concerns Regarding The Use Of Liquidation Costs In Calculating The Defendant's Subjective Gain Are Not Present In This Case............... 326 C. Defendant's Contentions On Restatement Section 384 And Offsetting Benefits Are Mistaken ...............................................................................................332 1. Defendant's Contentions Regarding Restatement Section 384 Are Mistaken. ........ 332 2. Defendant's Contentions Regarding Offsetting Benefits Are Mistaken................... 333 D. Plaintiff's Replies To Defendant's Factual Arguments Regarding Restitution................... 336 1. The FSLIC Could Affford To Liquidate Suburbia ................................................... 336 2. It Is Irrelevant That Liquidation Is The Last Option When It Is The Only Option................................................................................................338 3. Plaintiff's Liquidation Cost Estimate Is Reasonable And Supported By The Record.. ..............................................................................................343 4. Plaintiff Fully Conferred The Benefit On The Government..................................... 344

ii

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 4 of 364

IV. PLAINTIFF'S RESPONSES TO DEFENDANT'S CONTENTIONS REGARDING RELIANCE .................................................................................................................. 345 A. Plaintiff's Reliance Claim Is Not Premised On Net Liabilities Assumed, But On The Real And Significant Costs That Fidelity Incurred In Performing the Contract................ 345 1. The Government Is Obligated To Reimburse Plaintiff For Foreseeable Costs Incurred In Reliance On The Contract ......................................................................................... 347 2. Plaintiff's Cost of Amortizing The Suburbia Goodwill Was A Foreseeable Cost Of Performing The Contract And Would Not Have Been Incurred Absent The Contract. 349 3. Plaintiff Not Only Assumed The Supervisory Goodwill, But Fully Amortized It At Great Expense To Fidelity's Profitability And Viability............................................... 350 B. Plaintiff's Responses To Defendant's Factual Arguments Regarding Reliance................... 352 Conclusion............... ............................................................................................................ 354

iii

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 5 of 364

TABLE OF AUTHORITIES

FEDERAL CASES Acme Process Equip. Co. v. United States, 171 Ct. Cl. 324 (1965), rev'd on other grounds, 385 U.S. 138 (1966)......................................................................................................319 Am. Capital Corp. v. FDIC, 472 F.3d 859 (Fed. Cir. 2006)................................................315, 347 Anchor Sav. Bank v. United States, 59 Fed. Cl. 126 (2003) ........................................................350 Ariadne Fin. Servs. Pty., Ltd. v. United States, 133 F.3d 874 (Fed. Cir. 1998) ..........................304 Astoria Fed. Sav. & Loan Assoc. v. United States, 72 Fed. Cl. 712 (2006) ................................315 Bank of America, FSB v. United States, 495 F.3d 1366 (Fed. Cir. 2007)....................................305 Bluebonnet Sav. Bank, F.S.B., v. United States, 266 F.3d 1348 (Fed. Cir. 2001) .......................276 Bluebonnet Sav. Bank v. United States, 67 Fed. Cl. 231 (2005)..................................................335 Cal. Fed. Bank, FSB v. United States, 245 F.3d 1342 (Fed Cir. 2000) .......................................329 Cal. Fed. Bank v. United States, 395 F.3d 1263 (Fed. Cir. 2005) ...............................................290 Castle v. United States, 48 Fed. Cl. 187 (2000), aff'd in part, rev'd in part, 301 F.3d 1328 (Fed. Cir. 2002)...................................................................................................................288 Citizens Fed. Bank, FSB v. United States, 52 Fed. Cl. 561 (2001)......................................327, 329 Citizens Fed. Bank, F.S.B. v. United States, 474 F.3d 1314 (Fed. Cir. 2007) .....................290, 291 Citizens Fin. Servs., F.S.B. v. United States, 64 Fed. Cl. 498 (2005)..........................................288 Columbia First Bank, F.S.B. v. United States, 60 Fed. Cl. 97 (2004) .......................................293 Comm. Fed. Bank, F.S.B. v. United States, 59 Fed. Cl. 338 (2004) ............................................293 Elec. & Missile Facilities, Inc. v. United States, 189 Ct. Cl. 237 (1969) ............................276, 280 Far West Fed. Bank, S.B. v. Office of Thrift Supervision, 119 F.3d 1358 (9th Cir. 1997) ..319, 326 First Fed. Lincoln Bank v. United States, 73 Fed. Cl. 633 (2006) ......................................288, 293 First Fed. Sav. & Loan Ass'n of Rochester v. United States, 76 Fed. Cl. 106

-i-

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 6 of 364

(2007)................................................................................................................287, 293-95, 309-11 Franklin Fed. Bank, F.S.B. v. United States, 55 Fed. Cl. 108 (2003)..........................................350 Glass v. United States, 47 Fed. Cl. 316 (2000), rev'd on other grounds, 258 F.3d 1349 (Fed. Cir. 2001)............................................................................................................................285 Glendale Fed. Bank, F.S.B. v. United States, 239 F.3d 1374 (Fed. Cir. 2001) ("Glendale II") ....................................................................... 273, 275, 316, 319, 326-31, 347, 348 Glendale Fed. Bank, F.S.B. v. United States, 54 Fed. Cl. 8 (2002) ("Glendale III") ..................273 Globe Sav. Bank, FSB v. United States, 65 Fed. Cl. 330 (2005), aff'd in part, rev'd in part, 189 Fed. Appx. 964 (Fed. Cir. 2006) ..................................................................275, 286, 293 Granite Mgmt. Corp. v. United States, 416 F.3d 1373 (Fed. Cir. 2005) .......................88, 327, 348 Hansen Bancorp, Inc. v. United States, 367 F.3d 1297 (Fed. Cir. 2004) ....................................321 Hughes v. United States, 71 Fed. Cl. 284 (2006).........................................................276, 277, 292 Landmark Land Co. v. FDIC, 256 F.3d 1365 (Fed. Cir. 2001) ...................................287, 321, 334 LaSalle Talman Bank, F.S.B. v. United States, 45 Fed. Cl. 64 (1999), aff'd in part, vacated in part and remanded, 317 F.3d 1363 (Fed. Cir. 2003) .........................................328, 329 LaSalle Talman Bank, FSB v. United States, 317 F.3d 1363 (Fed. Cir. 2003)...........................................................................................277, 282, 323, 326, 354 LaSalle Talman Bank, F.S.B. v. United States, 64 Fed. Cl. 90 (2005) ........................286, 287, 289 La Van v. United States, 382, F.3d 1340 (Fed. Cir. 2004)...........................................................282 Locke v. United States, 151Ct. Cl. 262 (1960).............................................................................277 Precision Pine & Timber, Inc. v. United States, 72 Fed. Cl. 460 (2006) ....................................287 Ring v. The Dimitrios Chandris, 43 F. Supp. 829 (E.D. Pa. 1942), aff'd, 133 F.2d 124 (3d Cir. 1943) .....................................................................................................................................350 S. Cal. Fed. Sav. & Loan Ass'n v. United States, 57 Fed. Cl. 598 (2003)...................................293 S. Nuclear Operating Co. v. United States, 77 Fed. Cl. 396 (2007)............................277, 280, 282 Seuss v. United States, 52 Fed. Cl. 221 (2002) ............................................................................277

-ii-

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 7 of 364

Seuss v. United States, 74 Fed. Cl. 510 (2006) ............................................................................291 Slatterly v. United States, 69 Fed. Cl. 573 (2006) .......................................................292, 347, 348 Specialty Assembling & Packaging, Co. v. United States, 174 Ct. Cl. 153 (1966) .....................276 Westfed Holdings, Inc. v. United States, 55 Fed. Cl. 544 (2003), aff'd in part, rev'd in part, 407 F.3d 1352 (Fed. Cir. 2005)...........................................................................................328 United States v. Winstar Corp., 518 U.S. 839 (1996)..................................................263, 272, 275 STATE CASES Barnes v. Lozoff, 123 N.W.2d 543 (Wis. 1963)...........................................................................320 Taylor v. Mark, 376 S.W.2d 927 (Tex. App. 1964).....................................................................350 Wartenbe v. Car-Anth Mfg. & Supply Co., 362 S.W.2d 54 (Mo. Ct. App. 1962) .......................350

ADDITIONAL AUTHORITIES 5 ARTHUR L. CORBIN, CORBIN ON CONTRACTS § 1044 (1964)....................................................348 12 ARTHUR L. CORBIN, CORBIN ON CONTRACTS, Ch. 61, § 1107 (1979) ....................................318 12 ARTHUR L. CORBIN, CORBIN ON CONTRACTS, Ch. 61, § 1112 (1979) ....................................334 12 ARTHUR L. CORBIN, CORBIN ON CONTRACTS, Ch. 61, § 1113 (1979) ....................................325 RESTATEMENT (SECOND) OF CONTRACTS § 237 (1981)...............................................................278 RESTATEMENT (SECOND) OF CONTRACTS § 250 (1981)...............................................................304 RESTATEMENT (SECOND) OF CONTRACTS § 251 (1981)...............................................................304 RESTATEMENT (SECOND) OF CONTRACTS § 253 (1981)...............................................................278 RESTATEMENT (SECOND) OF CONTRACTS § 344 (1981).......................................286, 312. 324, 347 RESTATEMENT (SECOND) OF CONTRACTS § 347 (1981)...............................................................275 RESTATEMENT (SECOND) OF CONTRACTS § 348 (1981)...............................................................275 RESTATEMENT (SECOND) OF CONTRACTS § 349 (1981)...............................................348, 349, 351

-iii-

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 8 of 364

RESTATEMENT (SECOND) OF CONTRACTS § 370 (1981).......................................................317, 330 RESTATEMENT (SECOND) OF CONTRACTS § 371 (1981)...............................................316, 320, 322 RESTATEMENT (SECOND) OF CONTRACTS § 384 (1981).......................................................332, 333

-iv-

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 9 of 364

Introduction

Defendant's "Summary of Argument" attempts to portray Plaintiff as overreaching, making the unsupported suggestion that Fidelity was better off as a result of the contract despite the Government's breach because Fidelity paid nothing to obtain Suburbia and was provided with $16 million in cash. The Record evidence shows that nothing could be further from the truth. In the 1980s, the FSLIC faced a severe crisis. The Government turned to the private sector to bail out the FSLIC, asking healthy thrifts to discharge the FSLIC's potential obligations on account of failing thrifts. However, the burden of assuming a failing thrift was so high that private thrifts were initially unwilling to assume the Government's burden unless it made an upfront cash assistance payment of approximately 70% of the cost of liquidation so that the merged thrift would have the necessary capital to survive the merger and return to profitability. The Government was later able to greatly reduce the amount of cash assistance it had to pay for a merger, but only because the Government promised potential acquirers that the Government would give them plenty of time and regulatory leeway to survive the merger and return to profitability. This promise of time and leeway was achieved through an accounting tool called supervisory goodwill, which would enable the thrift to amortize the acquired thrift's excess liabilities slowly over long periods of time and count the unamortized portion of goodwill as an asset towards its capital requirements to keep regulators at bay. Thus, the Government was able to pay Fidelity only $16 million in cash to perform the service of discharging the Government's enormous obligation for Suburbia's excess liabilities, which were $160 million and growing at the time of the merger despite drastic improvements in

1

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 10 of 364

interest rates. But this low $16 million price was expressly conditioned on the Government's promise to honor special forbearances that would allow Fidelity to slowly amortize the $160 million in goodwill over thirty years and count the unamortized portion of goodwill as capital to keep regulators from interfering with Fidelity's profitability while it recovered. Defendant characterizes the contract as one in which the Government gave Fidelity a free bank and millions in cash assistance in return for nothing, but this characterization is wholly misleading. Rather, Fidelity was hired by the Government to perform the valuable services of operating a failing thrift and permanently discharging its liabilities, while the Government was required to pay only the paltry sum of $16 million for these services because it promised Fidelity that it would have both sufficient time and leeway after the merger to ultimately make the merger profitable. Only five years into the contract the Government breached these promises, taking away both the time and flexibility that Fidelity needed to be profitable. In breach of the contract, the Government held Fidelity immediately accountable for the tangible capital deficit caused by the Suburbia merger, conditioning Fidelity's very survival on its promise to devote all its efforts to reducing this tangible capital deficit within only five years. Thus, whereas most contracting parties are excused from performance by the other party's breach, Fidelity was instead forced to accelerate its performance, discharging Suburbia's liabilities, not in the remaining twenty-five years as provided in the contract, but in less than five. And Fidelity had to achieve this objective while operating under a restrictive Capital Plan that forced Fidelity to abandon all plans for profitability in favor of focusing entirely on meeting, without variance, interim capital targets and reducing the capital deficit that Fidelity assumed in the merger.

2

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 11 of 364

Moreover, through overly critical examination reports and various other regulatory responses to FIRREA, the Government treated Fidelity harshly after the breach, punishing Fidelity as if it had incurred the tangible capital deficit itself and not as a result of the Government's transfer of its obligations to Fidelity. This harsh regulatory treatment only made Fidelity's performance more difficult and costly, driving Fidelity to the brink of failure as the FDIC threatened to terminate Fidelity's deposit insurance. Only through great expense and sacrifice from both the organization and its employees and through the prudent oversight of the OTS, who saw Fidelity's survival to be in the taxpayers' best interest, was Fidelity able to emerge from the Capital Plan, fully performing its services under the contract to permanently save the Government and taxpayers millions of dollars. (See Vigna, Tr. 1500, line 10 to p. 1501, line 2). But Fidelity was so weakened by these sacrifices that upon emergence from the Capital Plan, Fidelity had no choice but to seek an acquirer, selling itself to Astoria less than two years later. With Fidelity essentially driven out of business so that the Government could avoid its enormous obligations for the small sum of $16 million, Defendant's contention that Fidelity received the better end of the deal is absolutely ludicrous. Defendant has emphasized over and over again in its brief that the law of contracts is not about punishing the breaching party. While this is correct, this does not indicate that the Government is free to breach contracts without repercussions, as the law of contracts demands that the breaching party be held accountable for its breach. Thus, when it regrets a contract, the Government, like any other contracting party, has a choice between paying two costs: the cost of honoring the contract despite the Government's regret, or the cost of compensating the other party for the breach.

3

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 12 of 364

Here, Defendant seeks to avoid making either payment, suggesting implausibly that Plaintiff suffered no damage as a result of the breach and that it would be a windfall to the Plaintiff if the Government were to pay any compensation for Fidelity's services. To the contrary, to compensate Plaintiff through any of Dr. Kaplan's conservative damages awards nearly twenty years after the breach, and without pre-judgment interest, would only enhance the windfall that the Government already received long ago. Thus, while Defendant proposes a number of questions that the Court must answer in determining whether Plaintiff should be compensated for its loss, and while Plaintiff in the same vein has proposed its own series of questions, there is really only one basic question this Court must answer: Did Fidelity suffer a loss as a result of the Government's admitted breach of contract and what is a fair and reasonable approximation of the amount of that loss? Issues Presented 1. Should the Court credit the Department's argument that there is some special body of law applicable to the Winstar cases, or should the Court decide this case based on normal principles of contract law, drawing on decisions in other Winstar cases only to the extent those cases are consistent with traditional principles of contract law? 2. Can the Department possibly be correct that the Government's admitted breach of contract, which instantly rendered Fidelity capital deficient, and which condemned Fidelity to nearly four years of stagnation under a no-growth Capital Plan in a harsh regulatory environment, does not give rise to even a penny in damages? 3. Why should Astoria, as the acquirer of Fidelity, not be permitted to realize the full value of Fidelity's cause of action against the Government for breach of contract, just as it is

4

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 13 of 364

entitled to realize the full value of any of Fidelity's other assets, regardless of what it paid for Fidelity? 4. Does the Court have any reason to be concerned about a "windfall" recovery by the Plaintiff in this case, where any award will take place eighteen or more years after the Government's admitted breach of contract but where the Government has by statute precluded recovery for pre-judgment interest? 5. Should the Court accept the Department's argument that any benefit or potential benefit received by Fidelity as a result of its acquisition of Suburbia be an offset to any damages flowing from the Government's admitted breach of contract, even where those benefits were not conferred on Fidelity by the Government and where they may have been offset wholly or partially by costs or other detriments to Fidelity that flowed from the transaction? 6. Why should Dr. Kaplan's damage calculation be required to mimic in every respect Fidelity's real world mode of operation when the Government's admitted breach of contract forced Fidelity to operate with depleted capital in a manner which it would never have chosen if the breach had not occurred? 7. Why should the Department prevail on its argument that Dr. Kaplan's damage analysis is wrong or is unreliable, when the Department offered no analysis of its own and never tried to demonstrate that a different analysis which took into account other factors or employed other methodology would yield a different result?

5

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 14 of 364

8. Why should the Court conclude that the regulators in October 1984 had alternative solutions for dealing with Suburbia other than liquidation or rebidding, when there is no evidence in the contemporary record that such alternatives existed or were considered? 9. Why should the Court find that liquidation of Suburbia was not an alternative in October 1984, when the annual reports of the FSLIC for 1984 and later years consistently reference liquidations of failed thrift institutions? 10. Why should the Court speculate that the regulators could have found a buyer for Suburbia in a timely fashion had the Fidelity deal not gone through, when the previous effort to market Suburbia had produced only four offers, and Suburbia's position had seriously deteriorated in the years since those offers were solicited? 11. Why should the Court speculate that the regulators might have put Suburbia into a Phoenix program as an alternative to the Fidelity merger, when the Phoenix programs were coming to an end in 1984, when the Suffolk Phoenix, the only Phoenix institution on Long Island, had been sold in 1983, and when the testimony of Mr. Stearns, head of the FSLIC in 1984, was that transfer to a Phoenix would have been discussed in the Issues Memorandum presented to the Federal Home Loan Bank Board if it was a viable alternative for Suburbia? 12. Why should the Court speculate that Suburbia could have recovered simply by waiting for falling interest rates, when interest rates had declined in both 1983 and 1984, yet Suburbia continued to lose money in every quarter and was rapidly approaching zero capital even on a regulatory capital basis?

6

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 15 of 364

13. Why should the Court credit the Department's speculation that Suburbia could be kept afloat through the issuance of more and more net worth certificates, when the testimony of Angelo Vigna, Suburbia's principal regulator, and the contemporary written record confirm that Suburbia would no longer be eligible for such certificates after it dipped below 0.5 percent of regulatory capital? 14. Why should the Court conclude that an unbreached and fully capitalized Fidelity would have been constrained from growing by its commercial real estate problems in the same way the breached Fidelity was constrained by FIRREA, when the evidence shows that institutions with adequate capital have many more options for dealing with problem loans than do institutions that are undercapitalized? 15. After Fidelity fully amortized the Suburbia goodwill and replenished the capital taken away by the Government's admitted breach of contract, ten years after Suburbia had ceased to exist, what, if any, risk was there that the Government insurance fund would ever have to make any payment on account of liabilities of Suburbia? 16. With Fidelity having eliminated any possibility that the Government insurance fund would ever have to make a payment on account of liabilities of Suburbia, why should that avoided liability not be an appropriate measure of damages in this case? 17. Why should the Court engage in the needless exercise of trying to guess whether, in a non-breach world, Fidelity or Astoria would have chosen to leverage their additional capital to engage in the purchase of mortgage-backed securities funded by borrowings, when Dr. Kaplan made it abundantly clear that he offered such a strategy as a method of calculating lost profits, not as a prediction of what the institutions would actually have

7

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 16 of 364

done, and where he testified that had he calculated the damages based on alternative strategies, it would only have served to increase the damages? 18. Why should this Court accept the Department's position that it cannot award any damages to the Plaintiff despite the Government's admitted breach of contract in light of Mr. Vigna's statement that Fidelity's management "did an outstanding job" that avoided the need to liquidate the institution after FIRREA at a probable cost of hundreds of millions and instead produced "a great success story?" 19. Why should the Court view Fidelity's replenishment of its capital through retained earnings and ultimately through the public offering of its stock as full mitigation of damages, when the undisputed evidence is that Fidelity's public offering was far less successful than those of its peers who had been unaffected by FIRREA, and that even after its public offering Fidelity was in a weak competitive position that left it no alternative except to seek an acquirer? Replies to Individual Proposed Findings of Fact In its Replies to Defendant's Proposed Findings of Fact ("DPFOFs"), the Plaintiff does not give Record citations for quoted material where the quote appears, and can easily be found, in the portions of the Record cited by Defendant in the DPFOF under discussion. However, Record citations are provided whenever reference is made to material outside the scope of the citation offered by Defendant or when the material cited by the Defendant is sufficiently lengthy that the quote might not be easily found. Some of Defendant's Proposed Findings of Fact are footnoted. Where the footnote is explanatory and is not a substantive part of the Proposed Finding, Plaintiff does not include the

8

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 17 of 364

footnote in this Reply. Plaintiff's own explanatory footnotes are set in bold type to distinguish them from Defendant's footnotes. DPFOF 1 During the early 1980s, thrifts and their regulators were faced with a period of extraordinary difficulty. The economic problems faced by the thrift industry at the time included continued inflation and unprecedented fluctuation in interest rates. PX 10 at 6 (FHLBB annual report for 1980); Tr. 68:19-22 (Pratt). During this period, the prime rate of interest reached 21 percent; the average yield on assets was about 8 percent, and the Federal Government was paying as high as 12 percent or 13 percent upon its risk-free obligations. These factors caused disintermediation (the withdrawal of deposits by passbook savers for higher-yielding returns) and put tremendous pressure on thrifts. Tr. 69:1-16, 70:17-71:25 (Pratt). Reply: Plaintiff makes no objection to DPFOF 1. DPFOF 2 The high interest rate environment of the early 1980s led to thrifts becoming insolvent. Tr. 1147:14-1149:25 (Beesley). Book accounting, however, masked thrifts' marked-to-market insolvency. Tr. 1150:1-17 (Beesley). To illustrate, institutions had about $500 billion of assets on a nominal [book value] level while their real value was probably $180 or $190 billion less than that. Tr. 66:11-23 (Pratt). Thrifts were failing their regulatory capital requirements on a book basis despite lowered capital requirements. Tr. 1150:18-1151:24 (Beesley). Indeed, a vast majority of thrifts were insolvent on a marked-to-market basis in the early 1980s. Tr. 1202:6-11 (Beesley). Given its outstanding assistance commitments at that time, and given the continuing

9

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 18 of 364

decline of the health of a large number of thrifts, the FSLIC was effectively near-insolvent. PX 286 at 76. Reply: The first sentence of DPFOF 2 is overstated. Mr. Beesely testified that over time "more and more" thrifts became insolvent. DPFOF 2 can be read to suggest that all thrifts became insolvent, but the citation does not support that. In fact, Defendant's own witness, Peter Stearns, testified that when he left the FSLIC in 1985, something on the order of 10 percent of thrifts were insolvent, though this number might get closer to 20 percent if "real accounting" were applied. Mr. Stearns described the industry at that time as divided roughly into thirds. A third of the industry was making "record profits." Another third were "surviving all right," and the last third were "dead in the water." (Stearns, Tr. 3938, lines 11-21). The second sentence is not an accurate summary of what Mr. Beesely said. He made no reference to "book accounting," which in any event is a meaningless term. Mr. Beesely referred to the accounting practice of carrying assets on the books of a savings institution at "book value" (historical cost) rather than market value. He noted that this practice made it difficult to assess the true value of a thrift's assets merely by looking at its financial statements. He did not say the practice "masked thrifts' mark-to-market insolvency" (and the term "mark-to-market insolvency" is another meaningless term). The third sentence is accurate only to illustrate conceptually a possible difference between the nominal (or book) value of the industry's assets and their economic value. Mr. Pratt gave the numbers from memory and admitted they "may be off a substantial extent."

10

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 19 of 364

The fourth sentence is not supported by the Record cites, and Plaintiff does not understand what is meant by "failing [a] regulatory capital requirement on a book basis." Plaintiff has no objection to the fifth sentence, though the term is "mark-to-market," not "marked-to-market." The last sentence of DPFOF 2 is nothing but argument by the Department. There is no citation to testimony in support of the statement, and "PX 286 at 76" does not support, and in fact contradicts, the statement. The FSLIC balance sheet that appears at p. 76 shows that in 1983 the FSLIC had $5.7 billion in primary and secondary reserves available for potential losses. (See, notes 7 and 10 on p. 77). DPFOFs 3 and 4 Traditionally, the FSLIC used three primary mechanisms to prevent the default of institutions: the purchase of problem assets; assisted mergers; and capital contributions from the Government. PX 286 at 16 ¶ 1; Tr. 1199:2-1200:4 (Beesley). By 1981, however, the FSLIC understood that its capital reserves were not adequate to deal with the magnitude of problem thrifts with these methods alone. Accordingly, it introduced new alternatives to avoid the default of thrifts: various forms of mergers, including interstate and inter-industry mergers and the use of income capital certificates. PX 286 at 16. Reply: These two DPFOFs should be joined together for context. Plaintiff has no objection to them, since they are nearly verbatim quotes from PX 286. However, the cited reference to Mr. Beesely's testimony has nothing to do with the subject and does not support the PFOFs.

11

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 20 of 364

DPFOF 5 In March 24, 1983, the FHLBB and FSLIC issued a memorandum (revising a similar memorandum issued in 1982) setting forth guidelines to facilitate the most efficient resolution of supervisory cases. PX 112 at D3-0006238. Those guidelines, which remained in place until 1986, specified the mechanisms by which the FSLIC and FHLBB intended to resolve thrifts whose problems required regulatory supervision. The resolution solutions were arranged in order of desirability. The preferred method of resolving thrifts was the introduction of new capital into the thrift from outside the Government. Following that were methods involving various forms of mergers, whereby weak institutions would merge into stronger institutions; the introduction of new capital assistance from the Government; mergers involving Government assistance; and inclusion in the so-called Phoenix program, where several troubled thrifts were combined into a new thrift. The last option considered to resolve a troubled thrift was a liquidation. PX 112 at D3-0006238-43 (Beesley). Regulators consistently specified that liquidation was the last alternative. See PX 35 at OGG036 0002, PX 112 at DX-0006243, and PX 370 at 11; Tr. 1511:22-1513:22 (Vigna). Reply: Plaintiff does not dispute the description of PX 112, but Plaintiff does challenge the relevance of the document to this case. There was no evidence that PX 112 (or a successor document, PX 35) was ever consulted or specifically followed by the regulators in the course of their decision-making on Suburbia. In fact, Peter Stearns, who chaired the FSLIC when the Fidelity/Suburbia merger was approved, testified at trial that he was not sure he had ever seen PX 112, and at his deposition seven years earlier (when he admitted his recollection was better),

12

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 21 of 364

he testified he was sure he had not seen PX 112 but wished he had, because he thought it was "a good memo." (Stearns, Tr. 3965, line 10 to p. 3973, line 5). DPFOF 6 Among the options considered before liquidation was the possibility of a merger with another thrift. One advantage of mergers was that the acquiring thrift benefited from net "purchase accounting" income in the years immediately following the merger. Tr. 1182:111184:15 (Beesley). This "purchase accounting" income helped thrifts buy time until interest rates came down. Tr. 1184:16-1185:13 (Beesley). Reply: The Record citations do not support the first sentence, but Plaintiff does not quarrel with its accuracy. Plaintiff has no objection to the second sentence. Plaintiff objects to the third sentence. Not only is it not supported by the cited reference to Mr. Beesely's testimony, but his testimony would seem to take issue with it. When he was first asked why purchase accounting was used in these transactions his reply was that it was required by GAAP and there was not much option about using it. (Beesely, Tr. 1182, lines 1119). He described its usefulness to the acquiring thrifts as allowing the thrift to record income in the early years following the merger in a way that would hopefully offset the negative effects of having to amortize the goodwill. He made no reference to interest rates coming down in this testimony. (Beesely, Tr. 1182, line 20 to p. 1184, line 3). DPFOF 7 In the early 1980s (and for all relevant time periods with respect to the FSLIC's resolution of Suburbia), it was well known that FSLIC had very little capital available to

13

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 22 of 364

liquidate problem thrifts. Tr. 126:2-6 (discussing 1981-82 time frame) (Pratt). FSLIC could not afford to liquidate thrifts given its lack of funds and the fact that those funds were tied up in long-term investments. Tr. 114:14-21, 128:5-20 (Pratt). In March 1983, PX 1352, a FHLBB report to Congress entitled "Agenda For Reform," at 280, lists FSLIC assets as $6.42 billion in 1982, an inadequate amount of funds to liquidate all of the troubled thrifts. Tr. 57:14-20, 127:9128:8 (Pratt). If FSLIC had wanted to liquidate all troubled thrifts at one time, it would have taken at least 180 or 190 billion dollars. Tr. 126:25-127:8 (Pratt). In 1983, FSLIC reported that it had 53 cases requiring supervisory resolution with total assets of $17.6 billion, while it had a primary reserve of only $5.7 billion. PX 286 at 17, 76 (Beesley). Reply: The first sentence is an example of a clever shell game that the Department has engaged in consistently throughout this case. The question Mr. Pratt was asked was: "But in the 1981-1982 time frame, did the FSLIC have enough funds to liquidate all the problem thrifts?" (emphasis added). Mr. Pratt replied to that question in the negative. (Pratt, Tr. 126, lines 2-6). However, in DPFOF 7, this has been subtly twisted to say instead that: "FSLIC had very little capital available to liquidate problem thrifts" ­ not all problem thrifts (the question posed to Mr. Pratt), but just some (or perhaps any) problem thrifts. Of course, the only issue really relevant to this case is whether the FSLIC in October 1984 had sufficient funds available to liquidate Suburbia, and the evidence is clear that it did. As of December 31, 1983, the FSLIC had in excess of $8.3 billion and had reserves (primary and secondary) in excess of $6.4 billion. (PX 286 at p. 76). As of December 31, 1984, the FSLIC had total assets of nearly $9 billion and reserves in excess of $5.6 billion. (DX 197 at p. 80).

14

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 23 of 364

Moreover, the FSLIC laid out $1.5 billion in cash during 1984 to settle insurance in some nine liquidating receiverships. (Id. at p. 23). The FSLIC's 1984 estimated cost of liquidating Suburbia was $147.9 million. (Joint Stipulated Facts ¶ 40). Clearly the FSLIC had enough funds in 1984 to cover the estimated cost of liquidating Suburbia. The same problem exists in the second sentence. Dr. Pratt was clearly talking about the adequacy of the FSLIC's reserves to liquidate all troubled thrifts, not to "liquidate thrifts" (as stated in DPFOF 7). The third and fourth sentences accurately state Dr. Pratt's testimony. They are simply not relevant to this case. The issue is not whether the FSLIC could liquidate all troubled thrifts. The issue is whether it could and did liquidate selected troubled thrifts, and, as noted above, it clearly could and it clearly did. The fifth sentence compares apples and oranges. The cost of resolving a troubled thrift does not equate to the total assets of the troubled thrift. Suburbia is a good example. The FSLIC's Institutional Analysis showed that as of April 30, 1984 Suburbia had assets of $653 million. However, the FSLIC estimated the present value liquidation cost of Suburbia at $147.9 million. (See PX 210). DPFOF 8 As set forth in the FSLIC's 1984 Report to Congress, the type of thrift problems facing the FSLIC shifted dramatically from a predomination of interest spread problems in 1982 to asset quality problems in 1984 involving thrifts with real estate investments and other illiquid assets.

15

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 24 of 364

Tr. 3937:12-25; 3945:21-3946:5 (Stearns); PX 342 at 25 at Chart 3. 1 Asset quality problems were far more costly to resolve than spread problems. See Tr. 3939:20-3940:2, 3942:21-3943:3 (Stearns). By 1984, 70 percent of the cases where FSLIC resolved problem thrifts were asset quality problems. Tr. 3942:21-24 (Stearns); PX 342 at 23. The FSLIC's 1985 Report to Congress again noted the shift in the type of problems affecting the FSLIC's caseload: Prior to 1983, a large majority of FSLIC problem cases involved interest rate spread difficulties. In the last two years, severe asset quality problems, which are much more complex as well as more expensive to resolve, have predominated. Tr. 3954:16-21 (Stearns) (quoting PX 375 at 25). Reply: DPFOF 8 is accurate but irrelevant. Accepting that the FSLIC was starting to see by 1984 more asset quality problems than interest rate problems, there is no evidence that this had any effect on the FSLIC's or FHLBB's decision-making with respect to Suburbia. Suburbia was a critical supervisory issue in 1984, and it had to be resolved. (See Plaintiff's Proposed Findings of Fact (hereinafter PPFOFs) 103-127). The fact that the FSLIC had other problem institutions whose problems were of a different nature than Suburbia's problems doesn't change these facts. DPFOF 9 Government policy in the early 1980s operated on the assumption that market interest rates would decline and alleviate, at least partially, the problems of the thrift industry. DX 1147 at 25 ¶ 87. 2 As Dr. Pratt testified, the measures FSLIC had available to it at the time were
1

Defendant includes multiple references in its PFOFs to PX 342, the FHLBB/FSLIC Annual Report for 1984. However, PX 342 was never admitted in evidence. The version of the report admitted into evidence was DX 197. Dr. Pratt testified that, at the time, he had stated that, if interest rates stayed the same:

2

16

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 25 of 364

stopgap measures, undertaken in an effort to buy time, in the assumption that interest rates would come down. Tr. 115:15 -116:12 (Pratt). Had interest rates not fallen, no thrifts would have survived. Tr. 128:21-129:10 (Pratt). With interest rates at all-time historical highs, the general consensus was that interest rates would fall. Tr. 1175:21-1176:11 (Beesley). Interest rates did, in fact, decline in the mid-1980s, easing the spread problems for thrifts. Tr. 1238:15- 1240:10 (Beesley). Reply: Plaintiff does not dispute that the first sentence of DPFOF 9 is an accurate quote from Dr. Carron's report (as cited). However, the citation in Dr. Carron's report to pp. 79-80 of "Agenda for Reform," (DX 1147) does not support the conclusion that it was "government policy" to assume that interest rates would come down. That was certainly the hope, because, as both Dr. Pratt and Mr. Beesely noted, the thrift industry might not survive if they did not come down. More importantly in terms of this case, though, government regulators did not always have the luxury of waiting for interest rates to decline. When an institution's "accounting capital" got to about 2 percent, that institution would be on the FSLIC's "priority list." By the

there's some good news and some bad news. The bad news is that every thrift will fail and go away, it cannot survive. The good news is it will clearly be the smallest problem in the U.S. economy. So had the prime rates stayed at 21 percent, had Treasury bonds stayed at 13, every thrift would have failed, but it wouldn't have even been noticed because of the other havoc that would be wreaked. So our entire tenure [sic] was one assuming that interest rates would come down but not predicting they would. If they didn't come down, there was nothing lost in modernizing the industry. If they did come down, a lot of economic value would return to these balance sheets and they would have a chance of survival. Tr. 115:19-116:7 (Pratt).

17

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 26 of 364

time it got to 1 percent, the FSLIC was hopefully on its way to a resolution. When that capital got to zero percent, something the FSLIC never allowed to happen, it would have been illegal to keep the institution open. (Beesely, Tr. 1154, line 21 to p. 1157, line 2.) Also, regulators recognized, as Mr. Beesely noted, there were always going to be some institutions that were so damaged by high interest rates that they were unlikely to survive even if rates fell. (Beesely, Tr. 1192, line 6 to p. 1194, line 2). Dr. Kaplan believed Suburbia's embedded losses would have been an insurmountable obstacle to its survival no matter what happened to interest rates. (See, PPFOF 104). Similarly, Mr. Vigna recognized in October 1984 that the regulators no longer had the luxury of waiting for lower interest rates as a potential solution for Suburbia's problems. He believed Suburbia's situation was critical and required immediate resolution. (See, PPFOFs 106 and 127). DPFOFs 10 and 11 By 1983, FSLIC could not afford to liquidate all troubled thrifts. See PX 286 at 76; Tr. 1233:5-1234:6 (Beesley). Specifically, in 1983, at a time when Suburbia had $700 million in assets, the FSLIC liquidated only six small institutions in the entire United States, whose assets cumulatively totaled $295 million, with the average asset size totaling only $49 million. PX 286 at 18, 20-21; Tr. 1234:7-1236:12 (Beesley). None of these institutions were located in the Northeast United States, and the problems that predominated were asset quality problems (e.g., loans that were not being repaid), not interest rate differential or interest "spread" problems. PX 286 at 20-21. In 1983, none of the liquidations involved actual payouts of funds to depositors. Tr. 1230:2-12; Tr. 1231:22-1233:4 (Beesley).

18

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 27 of 364

In 1984, for the entire United States, the FSLIC liquidated only nine institutions, with combined deposits of $829 million, with the size of the average thrift totaling $92 million. PX 342 at 26. As the FSLIC noted, "severe asset quality problems" predominated as the FSLIC undertook resolution actions in 1984. PX 342 at 23. There were no thrift liquidations in the Northeast in 1984. Tr. 3948:4-19 (Stearns); PX 342 at 26; PX 232 at WOL315 0205; Tr. 1504:17-19 (Vigna). Reply: See Plaintiff's replies to DPFOFs 7 through 9. DPFOF 12 Going into 1985, the FSLIC's concern was very simple: to strengthen the FSLIC fund. Tr. 3948:20-3949:11 (Stearns); PX 342 at 27. Indeed, by the end of 1984, the FSLIC's financial condition was so dire that, when examining the audited financial statements of the FSLIC, the Comptroller General of the United States reported to the FHLBB that there could be no opinion given as to the adequacy of the insurance fund to meet future claims against it. Tr. 3949:123950:2 (Stearns); PX 342 at 79. Reply: DPFOF 12 is accurate but irrelevant. Suburbia's condition reached "critical" in 1984, and, as Mr. Vigna recognized, the regulators had no choice but to resolve it when they did. (See PPFOFs 106 and 127).

19

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 28 of 364

DPFOF 13 Given the state of FSLIC's finances in 1984 and 1985, the last resolution that the FSLIC would have pursued for Suburbia, an institution of about $700 million in assets that had interest spread problems, would have been liquidation. Tr. 3959:19-3960:4 (Stearns). Reply: This is Mr. Stearns's opinion. He had no personal involvement with the Suburbia case, having just arrived at FSLIC, and he had little or no familiarity with it. (Stearns, Tr. 3960, line 15 to p. 3961, line 10). However, the facts belie his conclusion that liquidation of Suburbia in 1984 was not "feasible." (See Reply to DPFOF 7). The FSLIC did not have to be in a position to liquidate every troubled thrift in order to liquidate Suburbia. DPFOF 14 To deal with these problem thrifts and the FSLIC's lack of capital, FSLIC was "forced . . . to come up with solutions that would prevent cash payouts. We just didn't have the cash available . . . . And so we were forced to find ways to close down the sick institutions without using up cash." Tr. 3939:2-8 (Stearns). FSLIC came up with innovative ways to resolve problem thrifts in a manner avoiding liquidation, "invent[ing] one about every two months." Tr. 3943:1923 (Stearns); PX 342 at 23. These innovations included the issuance of capital certificates, setting up Phoenix corporations (whereby several troubled thrifts were merged to create a new institution), and management consignment programs. Tr. 3943:15-3944:4 (Stearns); PX 342 at 23.

20

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 29 of 364

Reply: DPFOF 14 is accurate but irrelevant. Mr. Stearns arrived at the FSLIC in August 1984, and, as he noted, the resolution of Suburbia by the FSLIC took place only two months later. He had no involvement in Suburbia's resolution other than to sign the papers and pass them along to the FHLBB. (Stearns, Tr. 3960, line 15 to p. 3961, line 10). Therefore, when he describes "innovative techniques" developed at the FSLIC during his tenure, he is necessarily talking about things that happened after Suburbia was resolved. None of the techniques he mentioned was considered by the FSLIC or the FHLBB as a possible solution for Suburbia. (See PPFOFs 158, 159, and 200-205). DPFOF 15 In 1985, as one step to protect the FSLIC's insurance fund, the FHLBB adopted regulatory measures to bring the classification of thrift assets into conformity with commercial bank regulators, requiring increased reserves for classified problem loans. Tr. 3953:10-3954:4 (Stearns); PX 375 at "The Chairman's Report" (p. v.). Reply: DPFOF 15 accurately summarized Mr. Stearns testimony, but it is irrelevant to the topic being discussed. DPFOF 16 In 1985, for the entire United States, the FSLIC liquidated only ten institutions, with the average institution liquidated holding $189 million in deposits. PX 375 at 27. None of these institutions were located in the Northeast. Id.

21

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 30 of 364

Reply: DPFOF 16 is accurate, so far as it goes. Although the 10 institutions liquidated in 1985 represented only a slight increase over 1984, the size and complexity of the operations steadily increased. In 1984 the average liquidation involved deposits of $92 million with the largest case involving deposits of $306 million. In 1985, the average liquidation involved deposits of $189 million ­ double the 1984 level ­ and included the largest institution ever in terms of the number of accounts, a thrift with 96,541 accounts totaling $410 million in deposits, and the largest institution ever in terms of deposit base, a thrift with 16,722 accounts totaling $463.2 million in deposits, representing an increase of 51.3 percent over the largest deposit base liquidated in 1984. (PX 375 at p. 27). In its Institution Analysis of Suburbia prior to the Fidelity acquisition, the FSLIC said Suburbia had $602 million in deposits. (PX 1243). Suburbia's deposits were therefore only 30 percent larger than the largest deposit base liquidated in 1985. DPFOF 17 Between 1980 and 1989, no New York thrift under Mr. Vigna's supervision was liquidated. Tr. 1503:14-16 (Vigna); Tr. 4127:25-4128:2 (Albanese). When the FSLIC did liquidate thrifts during this time period, it did so primarily where a thrift had bad assets, rather than a mere interest spread problem, which affected the majority of thrifts in the United States. Reply: The first sentence of DPFOF 17 accurately summarizes the testimony cited. However, it says nothing about whether Suburbia would have been liquidated had Fidelity not acquired it. (See Reply to DPFOF 9).

22

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 31 of 364

The second sentence of DPFOF 17 is simply argument. The Department gives no Record cite to support it as a Finding of Fact. DPFOF 18 Fidelity acquired Dollar Federal Savings & Loan Association ("Dollar") on June 30, 1982. Tr. 1020:2-7 (Teurfs); Tr. 1396:23-1397:2 (Vigna); JSF ¶ 1. The acquisition of Dollar consisted of a takeover of assets and the assumption of existing liabilities outstanding at the date of acquisition. Fidelity paid no cash or other consideration in connection with the acquisition. PX 1283 at AST060064; JSF ¶ 1. Fidelity acquired approximately $105 million in assets from Dollar; it increased its branches from 4 to 8; and it increased its deposits by almost $70 million, to a total of $273.4 million. JSF ¶ 2; PX 1283 at AST060064; PX 986 at AST064 173. Reply: Plaintiff makes no objection to DPFOF 18. DPFOF 19 Fidelity accounted for the acquisition of Dollar as a purchase. The goodwill generated in the Dollar acquisition, or excess cost over fair market value of the net assets acquired, was $25,815,000. JSF ¶ 3; Tr. 1050:23-25 (discussing PX 1283 at AST060064) (Teurfs). This amount was being amortized to expense over thirty years using the straight-line method. Tr. 1076:23-1077:5 (Teurfs); PX 1283 at AST060064. Regulations existing at the time of the Dollar acquisition permitted Fidelity to utilize this goodwill toward its regulatory capital computations. See United States v. Winstar Corp., 518 U.S. 839, 850 (1996). Reply: Plaintiff makes no objection to DPFOF 19.

23

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 32 of 364

DPFOF 20 Fidelity recorded $28 million in discounts on the mortgage loans acquired from Dollar. These discounts were to be accreted into income over ten years using the sum-of-the months digit method. JSF ¶ 4; PX 1283 at AST060064. Accordingly, when Fidelity undertook its acquisition of Dollar, it understood that ­ at the latest ­ ten years after its acquisition, or by 1992, it would face as an expense the continued amortization of the Dollar goodwill without any corresponding accretion of income from the loan discounts to offset that expense. Reply: Plaintiff makes no objection to the first sentence of DPFOF 20. The second sentence of DPFOF 20 is simply argument by the Department. It provides no Record citations which would support it as a finding of fact. DPFOF 21 Fidelity acquired, in connection with the Dollar merger, Dollar's loans to condominium/cooperative developers. Tr. 1397:21-1398:8 (Vigna). Fidelity's November 1, 1982 Report of Examination ("RoE"), PX 90, records that Fidelity had an excessive concentration in loans to condo/coop developers, including Gerald Guterman, as a result of the Dollar acquisition. Tr. 1508:22-1509:22 (Vigna). Fidelity experienced substantial losses from these loans to Mr. Guterman and his enterprises ­ losses that had nothing to do with the Suburbia acquisition. Tr. 1510:2-8 (Vigna). Reply: The first sentence of DPFOF 21 is not fully supported by the Record citation, but Plaintiff does not dispute the accuracy of the sentence.

24

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 33 of 364

The second sentence is somewhat misleading. The 1982 Report of Examination, PX 90, notes at pages 12 and 12a (AST029158 and 59) that eight loans involving cooperative or condominium developments were considered by the examiner to be "of supervisory interest or concern." Of the eight loans, all of which were noted to be performing satisfactorily, three involved Gerald Guterman. The third sentence of DPFOF 21 is partly inaccurate. Mr. Vigna did not say that Fidelity suffered substantial losses from "these loans" (i.e., the three Guterman loans referenced in PX 90). Rather he testified that there was "a substantial increase in the number of loans to Mr. Guterman and his enterprises." Some of these loans (i.e., the "substantial increase") failed to perform and resulted in losses to Fidelity. (Vigna, Tr. 1510, lines 2-5). Plaintiff does not challenge Mr. Vigna's conclusion that the Guterman loans had nothing to do with the Suburbia acquisition, except to note that the loans made to Mr. Guterman and to other developers were part of an effort by Fidelity to increase earnings which it would need to amortize the goodwill added in the Suburbia acquisition. DPFOF 22 With the implementation of FIRREA's capital rules, Fidelity was required to phase out the remaining Dollar goodwill on its books as a component of regulatory capital, or approximately $19.3 million, by the end of 1989. PX 526 at AST008365. At that time, the Dollar goodwill, for which Plaintiff has no contractual claim, constituted 13.5 percent of the total goodwill set forth on Fidelity's books. PX 1314A at Ex. 15.

25

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 34 of 364

Reply: DPFOF 22 is not supported by the Record citations. Further, DPFOF 22 is irrelevant. Plaintiff has not asserted any claim related to the goodwill from the Dollar Federal transaction, nor has Plaintiff included the Dollar Federal goodwill in any of its damage calculations. DPFOF 23 Like Fidelity, Suburbia was a Long Island thrift, but, with almost $700 million in assets, was substantially larger than Fidelity in terms of asset size, deposits and branches. PX 1245 at PAA047 0484. Reply: DPFOF 23 is not completely supported by the Record citation, which lists Suburbia's asset size as of February 29, 1984 as $656.1 million. However, it does establish that Suburbia was the larger of the two institutions in terms of assets, savings deposits and number of branches. DPFOF 24 Suburbia had been profitable until around 1979 or 1980, when a negative trend in operating profitability developed due to the high cost of funds, or short term liabilities, relative to the low interest income received on its long-term loans, or assets. This caused an interest "spread" problem. Like all savings and loans, Suburbia suffered from spread problems. Tr. 1021:6-16 (Teurfs). Reply: DPFOF 24 is not fully supported by the Record citation, however, with the exception of the last sentence, Plaintiff does not dispute the proposed finding. The last sentence misstates Mr.

26

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 35 of 364

Teurfs's testimony. He said "many" savings and loans suffered from spread problems in the early 1980s. He did not say "all" savings and loans did so. DPFOF 25 Suburbia's spread problem "was a consequence of the historical structure of savings and loans, with a balance sheet of long-term fixed-rate assets and a liability side of the balance sheet that was priced at interest rates moving with the market. "At that point in time we were in a period of very high interest rates, and because the assets and returns on the asset side were fixed, most ­ many thrifts had a negative spread and were operating at severe losses." Tr. 1502:231503:1 (Vigna). Suburbia's operating losses were "due mainly to the high cost of money and a below average yield on assets." DX 3113 at OAA005 2534; Tr. 1502:15-16 (Vigna); see also Tr. 4122:20-4123:11 (Albanese). Reply: After the first three words, the entirety of the fist two sentences is a quote from Mr. Vigna's testimony and should be punctuated as such. Also, the quote begins on line 19 of p. 1502, not line 23. Plaintiff has no objection to the substance of DPFOF 25. DPFOF 26 Suburbia did not have serious asset quality problems. Tr. 4123:12-15 (Albanese); Tr. 1503:2-4 (Vigna). As Plaintiff admits: "Suburbia's asset portfolio was mainly thirty-year single family mortgage loans." Pl. Mem. (Feb. 15, 2007) at 11. Suburbia's management team was also not a concern to its regulators. Tr. 4116:2-12, 4123:16-18 (Albanese); PX 145 at AST033085; DX 3141 at WON758 0048. Other than its spread problems, Suburbia had no other problem that significantly affected its performance. DX 3490 at 16:17-17:5, 24:17-25:13 (Kane).

27

Case 1:95-cv-00468-TCW

Document 223

Filed 10/05/2007

Page 36 of 364

Reply: Plaintiff has no objection to the first two sentences of DPFOF 26. Plaintiff also does not object to the third sentence, although it notes that of the four Record citations given, only the second of the two citations to Mr. Albanese's testimony actually supports the sentence. Plaintiff has no objection to the last sentence of DPFOF 26 as an expression of Mr. Kane's opinion, but Plaintiff questions seriously the weight that should be accorded to that opinion. Dr. Kaplan testified that by 1984 Suburbia's history of losses, coupled with the riskier loans it was putting on its books in an effort to grow out of its problems, made it highly unlikely that Suburbia could have survived as a stand-alone institution even if interest rates fell and alleviated its spread problem. (See PPFOFs 100 through 104). Mr. Vigna also believed that in 1984 Suburbia's condition was such that the regulators no longer had the option of waiting to see if interest rates came down. (See PPFOF 106). Finally, even Mr. Kane admitted that if Suburbia had not merged with Fidelity, its capital would eventually have gone negative. (See PPFOF 105). DPFOF 27