Free Proposed Findings of Fact and Conclusions of Law - District Court of Federal Claims - federal

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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. ) ____________________________________) PROPOSED FINDINGS OF FACT OF PLAINTIFF ASTORIA FEDERAL SAVINGS & LOAN ASSOCIATION

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 August 6, 2007

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TABLE OF CONTENTS Page I. THE SAVINGS AND LOAN INDUSTRY AND SUBURBIA FEDERAL SAVINGS AND LOAN ASSOCIATION: BACKGROUND .......................................... 1 A. B. C. D. E. The Savings And Loan Industry In The 1980's Was In Economic Distress ......... 1 The Federal Savings & Loan Insurance Corporation Was Charged With Insuring The Viability Of The Thrift Industry....................................................... 4 The FSLIC Fund Had Sufficient Capital To Cover The Costs Of Liquidating Suburbia In 1984. ............................................................................... 5 The FSLIC Developed Several Low-Cost Strategies, In Addition To Liquidation, To Resolve Failing Thrifts ................................................................ 5 The FHLBB And The FSLIC Pursued Regulatory Initiatives To Address The Troubled Savings And Loan Industry, Resulting In The Garn-St Germain Depository Institutions Act Of 1982. Among Other Measures, The Garn-St Germain Act Permitted The Use Of Net Worth Certificates And Appraised Equity Capital Programs............................................................... 9 The FSLIC Always Took Action With Troubled Thrifts Before The Thrift's Capital-To-Asset Ratio Reached Zero.................................................... 10 The Number Of Thrifts Liquidated And The Aggregate Value Of Deposits Paid By The FSLIC Increased Significantly In The 1980's ................................ 11 The Capital Condition Of Suburbia Federal Savings And Loan Association Suffered Under Negative Interest Rate Spreads .............................. 13 Suburbia Became A Troubled Institution In The Late 1970s And A Serious Regulatory Concern By 1980.................................................................. 15 Suburbia Was Being Kept "Solvent" With Artificial Capital: Net Worth Certificates And Appraised Equity Capital.......................................................... 24 Suburbia's Eligibility For Future Net Worth Certificates Was Questionable ........................................................................................................ 26 Regulators Shopped Suburbia To Prospective Merger Partners.......................... 28 The Options Available To Regulators For Suburbia In 1984 Were The Fidelity Merger, Liquidation, Or Re-Bidding...................................................... 33 The Fidelity Merger Was The Only Reasonable Option For Resolving Suburbia ............................................................................................................... 35 The Regulators Determined That The Surviving Institution Was Viable............ 37 Despite Fidelity's Loan Problems, Regulators Chose Fidelity To Be Suburbia's Acquirer ............................................................................................. 39

F. G. H. I. J. K. L. M. N. O. P.

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TABLE OF CONTENTS (continued) Page Q. Besides The Fidelity Merger, Liquidation Was The Only Other Alternative For Suburbia's Resolution For Which Regulators Performed A Cost Analysis................................................................................................................ 40 The FHLBB Accepted Fidelity New York's Proposal To Acquire Suburbia In 1984.................................................................................................. 42 The Fidelity-Suburbia Merger Was Done Using The Purchase Accounting Method ................................................................................................................. 48 Peat Marwick's Opinion Approved The Terms Of The Fidelity-Suburbia Merger.................................................................................................................. 52 Goodwill Must Be Amortized Against Real Cash Earnings................................ 54 After Its Merger With Suburbia, Fidelity Strengthened Its Management Team. ................................................................................................................... 59 Mr. Powderly And Mr. Wesp Were Well Qualified To Guide Fidelity Through Its Challenges. ....................................................................................... 60 Fidelity's Actual Growth Experience Before FIRREA And After It Was Released From The Capital Plan Was Robust And Impressive........................... 62 Like Many Savings And Loan Institutions At The Time, Fidelity Became Active In Commercial Real Estate Lending ........................................................ 65 New Directions: Fidelity Projected Its Strategies For The Future In February And October 1988 Business Plans ....................................................... 73 Fidelity Began To Engage In A "Wholesale" Financial Strategy........................ 85

II.

THE FIDELITY-SUBURBIA MERGER........................................................................ 42 A. B. C. D.

III.

POST-MERGER OPERATIONS AT FIDELITY........................................................... 59 A. B. C. D. E. F.

IV.

FINANCIAL INSTITUTIONS RECOVERY, REFORM, AND ENFORCEMENT ACT OF 1989 ("FIRREA") .............................................................. 93 A. Anticipation Of FIRREA: The Savings And Loan Industry, The Regulators, And Fidelity Had Anticipated Regulatory Changes In The Time Leading Up To FIRREA's Enactment ....................................................... 93 In Anticipation Of FIRREA, Fidelity Sought To Restructure Its Balance Sheet And Increase Capital.................................................................................. 99 The Technical Requirements Of FIRREA......................................................... 103 FIRREA Had An Immediate And Devastating Effect On Fidelity.................... 110 There Is A Stark Contrast In Fidelity's Capital Position Before And After FIRREA ............................................................................................................. 114 FIRREA's Effects On Fidelity Were Not All Institutional................................ 116 -ii-

B. C. D. E. F.

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TABLE OF CONTENTS (continued) Page G. V. Fidelity Intended To Grow Its Home Equity Portfolio, But FIRREA Prevented It From Fulfilling Its Business Goal. ................................................ 117 Fidelity's Capital Plan Imposed Draconian Restrictions. .................................. 122 After FIRREA, Fidelity Operated In A Harsh Regulatory Environment .......... 146 Fidelity Succeeded With Its Capital Plan, While Many Of Its Peers Failed ..... 168 Fidelity Had To Increase Its Pace Of Goodwill Amortization Significantly In Order To Achieve The Capital Targets In Fidelity's Capital Plan. ............... 169 Mr. Powderly's Management Of Fidelity's Troubled Real Estate Loans After FIRREA Would Have Been Much More Effective If Fidelity Still Had A Capital Cushion ...................................................................................... 171 Fidelity Converted To A Stock Institution Through An Initial Public Offering In May 1993, And Its Subsequent Merger With Astoria Occurred In January 1995.................................................................................................. 175 While Fidelity's Stock Conversion Enabled Fidelity To Achieve Full Capital Compliance, It Did Not Result In The Level Of Capital Required For Fidelity To Be Competitive After Surviving FIRREA ............................... 186 Astoria Acquired Fidelity In January 1995........................................................ 189 Astoria Federal Savings And Loan Association: Background. ......................... 190 At The Time Of Astoria's Acquisition Of Fidelity, It Was Not Possible To Assign A Value To Fidelity's Goodwill Claim. ................................................ 195 Dr. Kaplan's Qualifications ............................................................................... 196 The Evidence Supporting Fidelity's Claim For Lost Profits Satisfies The Legal Requirements Of Causation, Forseeability, And Reasonable Certainty............................................................................................................. 201 The Testimony And Exhibits Admitted At Trial Support Fidelity's Claim For "Wounded Bank" Damages......................................................................... 212 Fidelity's Restitution And Reliance Damages Claims....................................... 214

FIDELITY'S POST-FIRREA OPERATIONS.............................................................. 122 A. B. C. D. E.

F.

G.

VI.

FIDELITY'S MERGER WITH ASTORIA................................................................... 189 A. B. C.

VII.

FIDELITY'S LEGAL CLAIMS.................................................................................... 196 A. B.

C. D.

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I. A. 1.

THE SAVINGS AND LOAN INDUSTRY AND SUBURBIA FEDERAL SAVINGS AND LOAN ASSOCIATION: BACKGROUND. THE SAVINGS AND LOAN INDUSTRY IN THE 1980'S WAS IN ECONOMIC DISTRESS. Beginning in approximately October 1979 and lasting until approximately 1981, thenchairman of the Federal Reserve Paul Volcker permitted interest rates to rise in an effort to combat inflation. (Beesley, Tr. 1147, line 14 to p. 1149, lines 25). 2. When interest rates started to rise, depositors began to withdraw their money from banks and savings and loan institutions to invest in money market and other investment options. (Beesley, Tr. 1147, line 14 to p. 1149, line 25). 3. To attract more depositors' funds, thrifts raised deposit interest rates. (Beesley, Tr. 1147, line 14 to p. 1149, line 25). The thrifts soon began paying more money in depositors' rates than they were earning on their long-term loans. (Beesley, Tr. 1147, line 14 to p. 1149, line 25). 4. During the early 1980s, as the costs of savings increased, disintermediation progressed, and interest rates remained high, thrifts paid substantial amounts for their money in relation to what they could earn. (Pratt, Tr. 69, lines 1-16). 5. Interest rates peaked at their all-time historical highs in late 1981--early 1982. They then fell dramatically until 1983, when they started to go back up. In 1985 they began to fall again, bottoming out in 1986, then starting to rise again in 1987 and 1988. This spike upward in 1987 and 1988 caused spreads to narrow and put additional pressure on institutions that were in a weakened state or had impaired capital. (Kaplan, Tr. 2714, line 8 to p. 2715, line 12; Tr. 2723, line 8 to p. 2726, line 9; PDX 5 and PDX 6).

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6.

The regulations of the Federal Home Loan Bank Board ("FHLBB") required thrifts to carry a minimum capital level and prohibited thrifts from operating with a negative capital account. (Beesley, Tr. 1150, line 25 to p. 1151, line 7).

7.

The Federal Savings and Loan Insurance Corporation ("FSLIC") evaluated thrifts' solvency by determining the percentage of capital held in relation to its assets. (Beesley, Tr. 1151, lines 8-24).

8.

Richard Pratt was appointed by Ronald Reagan as chairman of the FHLBB in April 1981. (Pratt, 47, lines 10-13). He earned a bachelor's degree in business and an MBA from University of Utah, as well as a doctorate in business administration from University of Indiana. (Pratt, Tr. 47, lines 3-9).

9.

According to Dr. Pratt, the industry was "massively insolvent" in an accounting sense in 1980. (Pratt, Tr. 66, lines 7-23; Pratt, Tr. 76, lines 18-22).

10. The savings and loan industry sustained damage due to the high interest rates of the era. Dr. Pratt testified at trial that if the interest rates did not fall, the thrift industry would have failed en masse. (Pratt, Tr.115, line 2 to p. 116, line 7). 11. Horace Brent Beesley was the director of the FSLIC from Spring 1981 through early 1983. (Beesley, Tr. 1142, lines 3-13). He earned a bachelor's degree in economics from Brigham Young University, and MBA and JD degrees from Harvard University. (Beesley, Tr. 1141, line 20 to p. 1142, line 2). 12. The only solutions that Mr. Beesley believed could address the savings and loan industry's woes were a massive bailout from Congress or falling interest rates. (Beesley, Tr. 1152, line 24 to p. 1154, line 2).

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13. In the early 1980s many of the thrifts insured by the FSLIC had no real capital. Even though the institution's books indicated that there was some capital, if the assets were marked to market, there would be a deficit of assets to liabilities. (Beesley, Tr. 1154, line 21 to p. 1155, line 16). 14. If the assets of the thrift industry had been marked to market in the spring of 1981, the approximate deficit would have been between $300 and $400 billion. (Beesley, Tr. 1153, lines 3-13). 15. The asset figure on the balance sheets of thrifts during the early 1980s was not an accurate reflection of the assets' true value. (Beesley, Tr. 1150, lines 9-17). The thrifts carried the loans on their balance sheets as the original book value or historical cost, instead of their fair market value. (Beesley, Tr. 1150, lines 18-24). Most thrifts' capital to asset ratios during the early 1980s would have been substantially negative, if they were evaluated using the true value of assets and liabilities. (Beesley, Tr. 1151, lines 17-24). Despite the use of historical cost valuation, the interest rate mismatch ate into thrifts' net capital. (Beesley, Tr. 1150, lines 18-24). 16. Prior to 1983, the majority of FSLIC problem cases involved interest-rate spread difficulties, but asset quality problems predominated thereafter. (Stearns, Tr. 5846, line 18 to p. 5847, line 5; DX 197 at p. 23). 17. Decreased interest rates would not have solved spread problems for all thrifts. (Beesley, Tr. 1241, lines 7-14). The passage of time, by itself, would not cure the thrift industry's asset-quality problems. (Beesley, Tr. 1237, line 15 to p. 1238, line 14).

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18. Mr. Beesley noted at the time that, despite a generally positive outlook for the savings and loan industry in 1983, "the weakest [institutions] will continue to slide toward failure." (Beesley, Tr. 1194, lines 3-12; PX 113 at p. 13). Some institutions had been so weakened by the stress of the interest rate volatility that their survival remained precarious even when interest rates began to fall. (Beesley, Tr. 1193, lines 3-8). B. THE FEDERAL SAVINGS & LOAN INSURANCE CORPORATION WAS CHARGED WITH INSURING THE VIABILITY OF THE THRIFT INDUSTRY.

19. The FSLIC's primary responsibility was to insure the deposits of depositors in savings and loan institutions, so that the depositors would not suffer a loss in the event that the insured institution failed. It managed the capital within the insurance fund and provided supervision to the insured institutions. (Beesley, Tr. 1144, line 18 to p. 1145, line 9). The FSLIC also resolved troubled institutions. (Beesley, Tr. 1147, lines 3-13). 20. The FSLIC's insurance fund was created in the 1930s and funded by insurance premiums that the member-insured institutions paid in. (Beesley, Tr. 1152, lines 6-16). 21. The payment of annual insurance premiums and the income earned from its invested funds were the two sources of the FSLIC's income. (Beesley, Tr. 1188, lines 5-13). The fund did not contain any government funds or taxpayer funds. (Beesley, Tr. 1152, lines 6-16). 22. The total number of cases resolved by the FSLIC were increasing in both number and value of assets by 1984. (Stearns, Tr. 5855, line 16 to p. 5856, line 1; PX 375 at p. 26).

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C.

THE FSLIC FUND HAD SUFFICIENT CAPITAL TO COVER THE COSTS OF LIQUIDATING SUBURBIA IN 1984.

23. The FSLIC had a net worth of $6.4 billion in 1983, $5.6 billion in 1984, and $4.6 billion in 1985. (Stearns, Tr. 3942, lines 5-6; Stearns, Tr. 3955, lines 14-15; DX 197 at p. 23; PX 375 at p. 25). 24. The $1 billion decrease in the fund between 1984 and 1985 was due to the FSLIC's taking a contingent estimated loss expense of $1.6 billion for the first time in its history as opposed to an actual decrease in funds available to pay out depositors. (PX 375 at p. 25). 25. Even though the insurance fund was decreasing during this period, the FSLIC was still financially able to cover the costs of liquidation when it was necessary to resort to that solution. (Stearns, Tr. 5848, line 16 to p. 5849, line 4). 26. The FSLIC's Analysis and Evaluation Division in 1984 prepared an estimate based in part on the assumptions contained therein that the present value of the total cost to the FSLIC of liquidating Suburbia was $147.9 million. (Joint Stipulation of Facts, April 2, 2007, ¶ 40; PX 210 at WFZ009 021). D. THE FSLIC DEVELOPED SEVERAL LOW-COST STRATEGIES, IN ADDITION TO LIQUIDATION, TO RESOLVE FAILING THRIFTS.

27. Liquidation was the last option in FSLIC's arsenal of potential tools for addressing problem thrifts. (PX 35 at p.2; Beesley, Tr. 1170, lines 16-20). 28. At the time of the Suburbia-Fidelity merger, the FSLIC would conduct "a traditional liquidation accompanied by the cash payment of insurance...when and if there is no less costly or less disruptive alternative available." (PX 112 at D3-0006243).

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29. The 1981 FHLBB Annual Report stated, "FSLIC handled 30 default prevention cases and effected its first case of actual payment of insurance in almost 10 years." (PX 42 at p. 6; Pratt, Tr. 150, line 25 to p. 151, line 21). Dr. Pratt testified that the phrase "payment of insurance" meant the use of funds to pay depositors so that they were made whole on their insured deposits. The process is not technically a liquidation, but it has hallmarks of liquidation. (Pratt, Tr. 150, line 25 to p.151, line 21; Stearns, Tr. 5842, lines 12-17; PX 286 at p. 18). 30. The cost of liquidation was the benchmark against which the bids for a proposed supervisory merger were judged. (Beesley, Tr. 1179, lines 3-14; PX 83 at WIN-111197POI-11B2/3-008070). The benchmark cost for resolution of Suburbia was the liquidation cost which the FSLIC calculated. Had Fidelity not acquired Suburbia and successfully discharged its liabilities, it is highly likely that the Government's cost of resolving Suburbia would have been greater than what it spent in connection with the Fidelity acquisition and might well have involved the ultimate cost of liquidation at a price higher than that which was estimated in 1984. (Kaplan, Tr. 3780, line 24 to p. 3783, line 11). 31. According to the FHLBB Annual Report for 1981, during the last 7 months of 1981, the FSLIC resolved 23 cases involving assets of $12.3 billion at an estimate present value cost of $663 million, or 5.1% of assets. (Pratt, Tr. 131, 132; PX 42 at p. 8). 32. In 1982, FSLIC oversaw 446 mergers. Of those, 230 were voluntary, 167 were supervisory (directed by the FHLBB), and 49 mergers involved the FSLIC's financial assistance, for a total of $1.1 billion (Pratt, Tr. 150, lines 3-8; PX 113 at p. 4).

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33. The tools and strategies that the FSLIC used to resolve troubled institutions are memorialized in a memo dated February 2, 1982 from H. Brent Beesley and D. James Croft and Thomas P. Vartanian. (Beesley, Tr. 1159, lines 1-23; see generally PX 35). 34. The FHLBB did not apply the straight sequential order of preferences from the preference memos to each case, because it recognized that one or more options may not be feasible. "...[T]he situation is much more complex than just applying sequential lists to these circumstances." (Pratt, Tr. 153, lines 2-21). The sequential order of preference was "subject to special circumstances." (PX 1341 at p. 1235; Pratt, Tr. 152, lines 2-21). 35. One of the tools at FSLIC's disposal for resolving troubled thrifts was "new capital," which involved an entity infusing cash or other real assets into the troubled institution to enhance the asset side of the balance sheet and reduce the negative real capital. (PX 35 at p.1; Beesley, Tr. 1159, line 24 to p. 1160, line 6). There were very few investors interested in giving new capital to troubled thrifts during Mr. Beesley's tenure at the FSLIC. (Beesley, Tr. 1160, lines 7-10; Beesley, Tr. 1160, line 24 to p. 1161, line 2). 36. Another tool that the FSLIC used to help troubled thrifts were arranging private, nongovernment-assisted acquisitions. (Beesley, Tr. 1160, lines 3-20). 37. The FSLIC also coordinated mergers of weak institutions into "strong" FSLIC-insured associations. (Beesley, Tr. 1161, line 21 to p. 1162, line 7). Describing the continuing institution as "strong" actually meant "less weak." (Beesley, Tr. 1161, line 21 to p. 1162, line 7; Beesley, Tr. 1206, line 20 to p. 1207, line 2). 38. When it coordinated the mergers of two FSLIC-insured institutions, the FSLIC's order of preferred merger method was: (1) voluntary non-supervisory in-state mergers; (2)

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voluntary unassisted in-state mergers; (3) involuntary unassisted in-state mergers; (4) "marginally" assisted in-state mergers; (5) unassisted interstate mergers; (6) "marginally assisted interstate mergers; (7) conditionally approved supervisory mergers; and (8) assisted mergers. (PX 35 at pp.1-2). 39. In "non-supervisory" mergers, the parties merge without any assistance from the FSLIC; "supervisory" mergers are ones in which the FSLIC has provided certain non-cash inducements (such as waiving certain rules) to encourage the merger. (Beesley, Tr. 1163, lines 2-13). An "assisted" merger is one in which the Government pays money to facilitate the merger. (Beesley, Tr. 1164, lines 20-25). An assisted merger may be either voluntary or supervisory. (Beesley, Tr. 1165, lines 1-3). 40. When conducting a supervisory merger, the FSLIC typically required the board of a troubled institution to sign a resolution giving the FSLIC broad powers over the institution. (Beesley, Tr. 1176, line 22 to p. 1177, line 25). 41. Purchase accounting was a method that the FHLBB used to address the large number of failing institutions without having to dedicate significant funds. (Pratt, Tr. 114, line 14 to p. 115, line 1). 42. The FSLIC held bidder's conferences to encourage proposals from less weak institutions to acquire troubled institutions. (Beesley, Tr. 1178, lines 1-15). However, not all bidder's conferences resulted in successful or viable bids. (Beesley, Tr. 1214, lines 921). If a bidder's conference produced some proposals, the FSLIC would evaluate their proposed costs and the viability of the surviving entity. (Beesley, Tr. 1178, lines 16-20).

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E.

THE FHLBB AND THE FSLIC PURSUED REGULATORY INITIATIVES TO ADDRESS THE TROUBLED SAVINGS AND LOAN INDUSTRY, RESULTING IN THE GARN-ST GERMAIN DEPOSITORY INSTITUTIONS ACT OF 1982. AMONG OTHER MEASURES, THE GARN-ST GERMAIN ACT PERMITTED THE USE OF NET WORTH CERTIFICATES AND APPRAISED EQUITY CAPITAL PROGRAMS.

43. Dr. Pratt represented the FHLBB before Congress in July 1981 to request help in the form of, among other things, extending corporate checking power to thrifts; broadening thrifts' real estate powers; expanding consumer and commercial lending; expanding equipment lending; increasing service corporation investments; and increasing flexibility for mutual / stock conversion forms. (Pratt, Tr. 85, line 9 to p. 89, line 20; PX 1336 at pp. 51-56). 44. The regulatory initiatives that Dr. Pratt and the FHLBB pursued were necessary goals for the viability of the industry. (Pratt, Tr. 98, line 14 to p. 99, line 1). 45. There was a significant amount of resistance by the banking industry and other interested parties to the FSLIC's suggestions of giving thrifts expanded powers. (Pratt, Tr. 97, lines 9-17). 46. The changes that Dr. Pratt advocated for Congress to adopt eventually became codified in a bill called the "Garn-St Germain Depository Institutions Act of 1982." (Pratt, Tr. 92, lines 12-18; Pratt, Tr. 101, lines 10-16; PX 1352 B). The Garn-St Germain Act was originally known as the Pratt Act. (Pratt, Tr. 89, line 21 to p. 90, line 6). 47. The FHLBB created Net Worth Certificates, which were issued by thrifts in exchange for notes from the FSLIC, for thrifts to use as capital. "We didn't have the cash to inject, so we created paper, that's what the net worth certificates were." (Pratt, Tr. 107, lines 5-14).

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48. Under the Net Worth Certificate program, the FSLIC issued Net Worth Certificates as IOUs to a failing thrift. The thrift could count the certificate as an asset to help the thrift avoid reaching a zero capital balance. In return for the certificate, the recipient institution had to agree to certain FSLIC requests. (Beesley, Tr. 1171, line 23 to p. 1173, line 13). The program's terms required that the FSLIC ultimately had to repay the certificates in cash. (Beesley, Tr. 1173, line 14 to p. 1174, line 1). The program was a way of "papering over" the capital problems of struggling thrifts. It was not real money. The use of net worth certificates did not change the thrift industry's economic status as "massively insolvent." (Pratt, Tr. 107, lines 15-23). 49. The FSLIC created a new category of asset, Appraised Equity Capital, to permit thrifts to book the appreciation of value that existed on real property without having to sell the property. (Beesley, Tr. 1174, line 15 to p. 1175, line 16). It was another strategy that the FSLIC employed to keep institutions from reaching a zero capital balance. (Beesley, Tr. 1175, lines 17-20). 50. Dr. Pratt testified that when he appealed to Congress for help in the early 1980s, even if Congress granted expanded lending powers to the thrift industry, there would still remain a great number of thrifts that would likely not survive. (Pratt, Tr. 98, line 14 to p. 99, line 1). F. THE FSLIC ALWAYS TOOK ACTION WITH TROUBLED THRIFTS BEFORE THE THRIFT'S CAPITAL-TO-ASSET RATIO REACHED ZERO.

51. The FSLIC was statutorily required to intervene before a thrift's capital level reached zero. (Beesley, Tr. 1155, line 14 to p. 1156, line 18; p. 1157, line 14 to p. 1158, line 1; p. 1175, line 21 to p. 1176, line 4).

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52. When an institution reached the 2% capital-to-asset ratio level, the FSLIC placed it on a priority list. (Beesley, Tr. 1155, line 24 to p. 1156, line 18). If a thrift's capital ratio continued dropping to 1%, it was expected that the FSLIC had begun a process to resolve the problem. (Beesley, Tr. 1155, line 24 to p. 1156, line 18). 53. The FSLIC never let an institution fall to zero regulatory capital. (Beesley, Tr. 1156, line 19 to p. 1157, line 2). G. THE NUMBER OF THRIFTS LIQUIDATED AND THE AGGREGATE VALUE OF DEPOSITS PAID BY THE FSLIC INCREASED SIGNIFICANTLY IN THE 1980'S.

54. The liquidation of Economy Savings & Loan in Chicago, which occurred in 1981, was the largest payout that had ever been made. (Beesley, Tr. 1171, lines 4-19). 55. In the last seven months of 1981, the FSLIC resolved 23 cases involving assets of $12.3 billion at an estimated present value cost of $662 million, or 5.1% of assets. (PX 42 at p. 8; Beesley, Tr. 1189, lines 9-19). These were, historically speaking, high levels for FSLIC. (Beesley, Tr. 1189, lines 20-23). 56. In 1982, the FSLIC placed 14 institutions with 751,000 savings accounts totaling $3.7 billion into receivership. (PX 113 at p. 13; Beesley, Tr. 1190, line 20 to p. 1191, line 21). Mr. Beesley testified that 14 institutions in receivership is a high number for the FSLIC. (Beesley, Tr. 1191, lines 18-21). 57. In 1983, the FSLIC liquidated 6 institutions with aggregate deposits of $295 million. (Stearns, Tr. 5848, lines 3-10; DX 197 at p. 24). The 6 institutions liquidated during the year 1983 reflected one-third of all insurance settlement cases in the FSLIC's history. (Beesley, Tr. 1231, line 25 to p. 1232, line 13; PX 286 at 14).

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58. Peter O. Stearns was appointed director of the FSLIC by President Reagan in August 1984. (Stearns, Tr. 3935, line 19 to p. 3936, line 5). He left the position a short time later in November 1985. (Stearns, Tr. 3938, lines 1-3). He earned a bachelor's degree in economics from Dartmouth, an MBA from Wharton, and a master's degree in history from New York University. (Stearns, 3934, line 23 to p. 3925, line 1). 59. Whereas the largest thrift liquidated by the FSLIC in 1983 had assets of $118 million, in 1984 the FSLIC liquidated an institution with $306 million in assets, the largest case in FSLIC history at the time and a 160% increase from the prior year. (Stearns, Tr. 3944, lines 20-24; Stearns, Tr. 3945 lines 17-20; DX 197 at p. 24). 60. The costs of liquidating a thrift were increasing significantly after 1983 and assets were becoming significantly more worthless as time went on. (Stearns, Tr. 5849, line 20 to p. 5850, line 7; Stearns, Tr. 5854, lines 4-17). 61. In 1984, the FSLIC placed 9 thrifts into liquidating receiverships, paying an aggregate of $829 million in deposits. (Stearns, Tr. 3943, lines 8-14; Stearns, Tr. 3944, lines 10-24; DX 197 at p. 24). 62. In 1985, the FSLIC liquidated another 10 institutions, paying an aggregate of $42.2 billion in cash payouts to depositors. (Stearns, Tr. 3956, lines 24-25; PX 375 at p. 27, Table 5). Five of the ten thrifts liquidated in 1985 had deposits in excess of $270 million. The largest thrift liquidated in 1985 had assets of $463 million. (Stearns, Tr. 3957, lines 4-19; PX 375 at p. 27, Table 6).

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63. The FSLIC's sale or merger of 25 problem cases in 1985 involved an average savings of 52% over the cost of liquidation, and this level of savings was likely understated. (Stearns, Tr. 5854, lines 4-22; PX 375 at p. 25). 64. The average cost of liquidations had grown exponentially between 1983 and 1985, approximately doubling each year from $49 million in 1983 to $92 million in 1984 and $189 million in 1985. (Stearns, Tr. 3944, lines 18-24; Stearns, Tr. 3957, lines 4-8; DX 197 at p. 24; PX 375 at p. 27). H. THE CAPITAL CONDITION OF SUBURBIA FEDERAL SAVINGS AND LOAN ASSOCIATION SUFFERED UNDER NEGATIVE INTEREST RATE SPREADS.

65. Angelo Vigna received a Bachelor's degree in Accounting from St. Peter's College in 1963 and graduated from the Savings and Loan Banking School at Indiana University in 1975. He went to work for the Federal Deposit Insurance Corporation as a Field Examiner in 1964. In 1968 he joined the Federal Home Loan Bank of New York ("FHLB-NY") as a Supervisory Analyst and progressed through the ranks until in 1990 he held the position of Senior Executive Vice President and Director of Agency Functions. In 1990 he moved with the regulatory staff of the FHLB-NY to the newly created Office of Thrift Supervision as District Director for what had formerly been Federal Home Loan Bank District 2 (New York, New Jersey, Puerto Rico and the Virgin Islands). A year later he was appointed Regional Director for the Northeast Region of Office of Thrift Supervision ("OTS"), a position he held until retiring from government service in 1996. Since leaving the Government, Mr. Vigna has worked as a Managing Director of Sandler O'Neill Partners in New York City. (Vigna, Tr. 1243, line 1 to p. 1245, line 22; Vigna, Tr. 1402, line 12 to p. 1403, line 13).

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66. The FHLB-NY was one of twelve district banks in the Federal Home Loan Bank system that provided credit and regulatory oversight to the savings and loan industry. It performed a supervisory function over thrifts in New York, New Jersey, Puerto Rico and the Virgin Islands. (Vigna, Tr. 1245, line 23 to p. 1246, line 25) 67. In the late 1970s and early 1980s Mr. Vigna was the Supervisory Agent for the FHLBNY. He reported to the President of the Bank, who was the Principal Supervisory Agent. Mr. Vigna supervised the day-to-day operations of the supervisory staff, and he became personally involved with institutions where there was a "problem situation." (Vigna, Tr. 1248, line 17 to p. 1249, line 19). 68. Suburbia Federal Savings and Loan Association ("Suburbia") was located in and around Garden City, Long Island. This was a high cost area in the sense that depositors in the area were more sophisticated than the average depositor. They paid attention to what was going on in the markets. They tended to gravitate toward certificates of deposit over passbook savings accounts, and they would move their funds to where they thought they would get a higher rate. This was a problem for Suburbia, as it was for most institutions in urban areas. (Vigna, Tr. 1251, line 7 to p. 1252, line 11). 69. Suburbia's assets were a traditional thrift portfolio, 1-to-4 family, long term (25 to 30 year) fixed rated mortgages. Suburbia's liabilities were passbook savings accounts and "an ever growing number or ratio of certificates of deposit." The cost of these certificates was a concern relative to the low rate of return on Suburbia's assets. (Vigna, Tr. 1250, lines 6-25).

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70. Mr. Robert Albanese served as the supervisory agent for both Suburbia and Fidelity in the 1980s. (Albanese, Tr. 4116, lines 2-15). 71. Suburbia had "the traditional savings and loan problem at the time, negative interest spreads." Its cost of funds exceeded the return on its assets, and the continuing losses were "fairly rapidly eroding capital." (Vigna, Tr. 1249, line 23 to p. 1250, line 5). 72. Although consumer lending was profitable for Suburbia, it faced intense competition from commercial banks with years of consumer lending experience. (Kane, Dep. Tr. 64, lines 2-16). 73. Suburbia attempted to restore profitability by controlling growth to match earning potential, but it was very difficult. (Kane, Dep. Tr. 20, line 11 to p. 21, line 8). It was especially arduous because Suburbia was in the extremely competitive Long Island market. (Kane, Dep. Tr. 21, line 9 to p.22, line 2). 74. Suburbia contemplated converting to a stock institution in the early 1980s, but it was difficult to find investors, and the regulators did not allow thrifts to convert to stock institutions at the time. (Kane, Dep. Tr. 36, line 25 to p. 37, line 17). 75. Suburbia also failed in its attempts to obtain an infusion of capital from outside the thrift industry. (Kane, Dep. Tr. 39, line 13 to p. 40, line 15). I. SUBURBIA BECAME A TROUBLED INSTITUTION IN THE LATE 1970S AND A SERIOUS REGULATORY CONCERN BY 1980. ITS FINANCIAL DECLINE WAS DRAMATIC AND PRECIPITOUS. 76. Suburbia had sustained net losses in each of the fiscal years 1980 through 1984. The losses were as follows: 1980 1981 1982 $1.666 million $6.869 million $17.547 million

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1983 1984

$9.167 million $7.427 million

(Joint Stipulation of Facts, April 2, 2007, ¶ 35). 77. Each of the net losses suffered by Suburbia in the years 1980 through 1984 reduced Suburbia's capital. (Joint Stipulation of Facts, April 2, 2007, ¶ 36). 78. During the second half of 1979, Suburbia suffered a net operating loss of $510,000, as compared to a net operating profit of $337,000 for the preceding 6 month period. In the first month of 1980, Suburbia suffered a net operating deficit of $996,000, a fairly significant loss. This unfavorable trend in financial operations was the result of substantial growth in high-interest-bearing savings certificates and on a larger dependence on borrowings to fund commitments. The "borrowings" referred to were assumed by Mr. Vigna to be Federal Home Loan Bank advances or Wall Street borrowings, either of which would carry essentially a market rate of interest. (Vigna, Tr. 1252, line 12 to p. 1255, line 7; DX 362A at AST0132430). 79. Suburbia appeared to have been in capital compliance as of August 31, 1979. While the Examination Report was not completely clear on this, Mr. Vigna believed that, had Suburbia not been in compliance, the examiner would have cited that in his report. (Vigna, Tr. 1256, line 5 to p. 1257, line 8; DX 362A at PAA113 2666). 80. As of March 14, 1980, the date of the letter which is Exhibit DX 362A, Suburbia was becoming, in Mr. Vigna's mind, "a troubled institution." (Vigna, Tr. 1255, line 20 to p. 1256, line 4; see generally DX 362A). 81. On May 16, 1980, Andrew Kane, then the Chairman and CEO of Suburbia, replied to Mr. Vigna's letter of March 14, 1980 (DX 362A). In his letter Mr. Kane said that

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management had been instructed to reduce expenses as much as possible. Mr. Vigna thought this would help, but he did not think Suburbia's problems could be cured simply by reducing expenses. (Vigna, Tr. 1257, line 9 to p. 1259, line 13; PX 4 at AST 023094). 82. Mr. Kane also talked in his letter of May 16, 1980 about Suburbia reducing the average life of its assets by investing in short-term renegotiable mortgages and consumer loans. While loans of this sort would result in Suburbia's funds being locked up for periods less than 30 years and might yield returns more closely approximating a market rate of interest, Mr. Vigna was skeptical about this as a solution for Suburbia's problems. Given such a severe negative spread, unless there was "a magical and rapid decline in interest rates," Suburbia would not have enough time for such a plan to resolve its problems. (Vigna, Tr. 1259, line 23 to p. 1260, line 25; PX 4 at AST 023094). 83. Looking at the plan proposed by Mr. Kane in his letter of May 16, 1980, Mr. Vigna recalled thinking that "it was probably about all they could do at the time." (Vigna, Tr. 1262, lines 2-15; see generally PX 4). 84. Beginning in 1981, Suburbia's interest expense exceeded its interest income every year. This is significant, because net interest income is the primary driver of earnings for a thrift institution. These are considered a thrift's "core earnings." If a thrift institution cannot produce net interest income, it will be very difficult for that institution to generate bottom line earnings. (Kaplan, Tr. 2894, line 22 to p. 2896, line 25; PDX 17). 85. Suburbia's position was further exacerbated by the fact that its fee income (non-interest income) and its net gains on sale of loans and securities from 1979 to 1984 were never sufficient in any year to offset its operating expenses. Therefore, in addition to its

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inability to realize net interest income, Suburbia was experiencing additional losses in its non-interest operations. (Kaplan, Tr. 2897, lines 4-22; PDX 17). 86. On May 5, 1981, Mr. Vigna wrote a letter to Suburbia's Board of Directors informing the Board that Suburbia was not in compliance with its minimum net worth requirement. As a consequence of its failure to maintain minimum net worth, Suburbia could be subjected to corrective action under the insurance regulations. Suburbia had therefore gone from being capital compliant at the end of 1979 to being capital deficient by May 1981. (Vigna, Tr. 1262, line 16 to p. 1264, line 1; PX 11). 87. As of July 1981, Suburbia projected an additional net loss of 2.49 % of assets for the second half of 1981. This, according to Mr. Vigna, would significantly worsen Suburbia's capital position. Suburbia had lost $73 million in savings deposits since July 1, 1979, and it had to replace these liabilities with borrowed funds, further increasing its cost of funds. Mr. Kane outlined in a July 20, 1981 letter to Mr. Vigna a series of steps Suburbia planned to take to help deal with its problems. Mr. Vigna thought that neither these steps nor anything else Suburbia could do in the short run was likely to solve Suburbia's problems. (Vigna, Tr. 1274, line 23 to p. 1278, line 25; PX 22 at AST 022647-49). 88. By October 1981, Suburbia's condition was such that Mr. Vigna planned to urge its Board to seek a voluntary merger with a suitable partner. Failing that, he planned to have the Board execute a Resolution that would authorize the FSLIC to take steps on Suburbia's behalf. Such steps could include an involuntary merger and a merger requiring Government assistance. (Vigna, Tr. 1279, line 1 to p. 1282, line 18; PX 26).

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89. On October 19, 1981, Mr. Vigna wrote to the Suburbia Board of Directors summarizing Suburbia's operating results and capital position for the first three quarters of 1981. Suburbia had lost $5.0 million in 1980. In the first half of 1981 Suburbia lost $7.8 million, and it lost an additional $5.6 million during the third quarter. These losses caused its net worth to drop in nine months from $24.3 million to $10.9 million, a 55 % decrease. As of September 30, 1981, Suburbia's net worth represented 1.5 % of assets and 2.0 % of savings. If this trend of operations continued, Suburbia's capital would be depleted before April 30, 1982. (Vigna, Tr. 1282, line 19 to p. 1286, line 5; PX 27 at pp. 1-2). 90. On December 29, 1981, Mr. Kane wrote to Mr. Vigna outlining a number of steps Suburbia was taking in an effort to improve earnings. He outlined a series of steps Suburbia was taking to reduce its cost of operations. Mr. Vigna believed that while each of these would be helpful, neither individually nor in the aggregate would they solve Suburbia's problems. Mr. Kane also described a number of sales of assets by Suburbia. Mr. Vigna agreed that, while each of these asset sales would generate needed cash for Suburbia, each resulted in a loss of future income. (Vigna, Tr. 1289, line 1 to p. 1292, line 18; see generally PX 31). 91. Suburbia's net loss for the second quarter of 1983 was $1.6 million. At the end of the first quarter of 1983, Suburbia's net worth was a negative $3.8 million, so its capital position at the end of the second quarter, absent assistance, would have been negative $5.4 million. Suburbia's actual regulatory capital as of June 30, 1983 was $5,153,000. This reflects capital assistance in the form of $5,450,000 in Net Worth Certificates and

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$5,086,000 in Appraised Equity Capital. (Vigna, Tr. 1346, line 9 to p. 1347, line 15; PX 132 at OAA005 2590). 92. Suburbia deferred loan losses of $35.9 million in 1982 and $9.18 million in 1984. In 1983, Suburbia realized a gain on loan sales in the amount of $618 thousand. Suburbia was changing its accounting treatment period by period as part of its survival strategy. It was deferring losses on loan sales to avoid taking a current hit to its earnings, but it was immediately recognizing gains on loan sales. This was part of Suburbia's survival strategy. (Kaplan, Tr. 2897, line 7 to p. 2898, line 12). 93. In changing its accounting strategy to defer loan sale losses while immediately recognizing gains, Suburbia was being opportunistic and was trying to stay above the 0.5 % regulatory capital level necessary to continue to receive Garn St Germain capital assistance. (Kaplan, Tr. 2897, line 7 to p. 2899, line 7). 94. Suburbia suffered an additional $4 million dollar net operating loss for the second half of 1983. Its regulatory net worth at the end of 1983 was $4 million, which represented 0.6 % of assets. However, this number included $8.3 million in FSLIC Notes issued in return for Net Worth Certificates and some $5 million in Appraised Equity Capital. (Vigna, Tr. 1348, line 3 to p. 1349, line 24; PX 159 at AST 035716-17). 95. Under Regulatory Accounting Principles (RAP), certain adjustments are made to GAAP capital. As of March 31, 1984 Suburbia's GAAP capital was a negative $57.679 million. For RAP purposes, however, it is necessary to add to the GAAP capital deferred losses on sales of loans and securities ($44.531 million), Appraised Equity Capital ($5.078 million), Net Worth Certificates ($9.525 million) and miscellaneous items ($1.876

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million). It was only with these adjustments that Suburbia's RAP capital as of March 31, 1984 was $3.331 million. (Kaplan, Tr. 2903, line 10 to p. 2905, line 15; PDX 19). 96. As of March 31, 1984, Suburbia's minimum regulatory net worth requirement was approximately $19.2 million. On a RAP basis Suburbia's capital deficit on March 31, 1984 was $15.869 million. On a GAAP basis, Suburbia's capital deficit on March 31, 1984 was $76.879 million. (Kaplan, Tr. 2905, line 16 to p. 2906, line 21; PDX 19). 97. On April 18, 1984, Mr. Kane reported to Mr. Vigna that Suburbia was discussing a merger with "another Long Island based Federal Savings and Loan Association." However, he said, this merger would require an infusion of additional capital to bring the net worth of the combined institutions to 3 % of assets. Mr. Vigna understood that to mean that the two institutions standing alone would not have sufficient capital to get the merger approved and would need additional capital to make any merger work. He also noted that even 3 % capital would not necessarily establish viability of the combined institutions, and the regulators, before approving the merger, would want to look at how the business plan of the surviving institution planned to take its capital to a higher level. (Vigna, Tr. 1353, line 2 to p. 1354, line 15; PX 163 at AST 035713). 98. As of June 30, 1984, Suburbia had a regulatory net worth of $3.5 million, equivalent to 0.5 % of assets. (Albanese, Tr. 4178, lines 16-23; PX 232 (S Memo) at WOL315 0201). At that time, its interest-bearing liabilities exceeded earning assets by approximately $52 million. (Albanese, Tr. 4178, line 24 to p. 4179, line 2; PX 232 (S Memo) at WOL315 0201).

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99. If Suburbia's Net Worth Certificates and Appraised Equity Capital were excluded from the calculation of Suburbia's net worth, Suburbia's regulatory net worth as of August 31, 1984 would have been negative $12.4 million. (Joint Stipulation of Facts, April 2, 2007, ¶ 38). On a market value basis, Suburbia was clearly insolvent because the value of its liabilities exceeded its assets by $153.8 million. (Albanese, Tr. 4185, lines 12-19; PX 237 (I Memo) at AA 0000178). 100. Suburbia's balance sheet data from 1979 to 1984 depict (in the "Loans Receivable" and "Total Asset" lines) Suburbia's unsuccessful attempts to "grow out of its problems" and generate additional earnings. From 1982 to 1984, Suburbia consistently had more interest-bearing liabilities than interest-earning assets, indicating that it could not produce the earnings necessary to pay the cost of the liabilities needed to finance its growth. By 1984, that gap was $68 million. On a $650 million company, assuming a costing number of 10 percent, that would indicate nearly a one percent negative return on assets, which illustrates the dilemma Suburbia was in. Further illustrating this dilemma is the fact that the ratio of Suburbia's net worth to its liabilities in 1984 was a negative 8.96%. (Kaplan, Tr. 2899, line 8 to p. 2901, line 6; PDX 18). 101. When an institution adds assets in an effort to generate earnings needed to "grow out of its problems" that often has a negative effect on the thrift's capital. The cost of the loans hits the books immediately, but the earnings, if they come at all, do not begin to materialize for some months. (Kaplan, Tr. 2901, line 23 to p. 2902, line 8). 102. The loans Suburbia added to its books in an effort to grow out of its problems were not "plain vanilla" single family mortgages. Suburbia was pursuing more aggressive loans

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that would allow them to book fee income and higher returns. These loans had increased credit risk. (Kaplan, Tr. 2901, lines 7-22). 103. Suburbia's consistent operating losses between 1980 and 1984 steadily reduced Suburbia's capital. By March 31, 1984, Suburbia's capital, on a GAAP basis, had declined to a negative $57.7 million. This deficit capital position, which existed well before the merger with Fidelity, is what Fidelity took on independent of any merger accounting. (Kaplan, Tr. 2892, line 25 to p. 2893, line 25; Tr. 2903, line 10 to p. 2904, line 7; PDX 16 and PDX 19). 104. In Dr. Kaplan's opinion, Suburbia's $57.7 million deficit GAAP capital position as of March 31, 1984, would have been an insurmountable obstacle to any attempt by Suburbia to continue to operate as a stand-alone institution. This is not the sort of deficit that could be overcome simply by working a little harder. The annual carrying cost of Suburbia's $57.9 million accumulated deficit exceeded what many healthy institutions were able to earn. Suburbia was a "cadaver" and could not resurrect itself. (Kaplan, Tr. 2894, lines 116; Tr. 2903, line 13 to p. 2904, line 7; Tr. 2923, line 22 to p. 2925, line 2; PDX 16, PDX 19 and PDX 24). 105. If Suburbia had not merged with Fidelity, it was inevitable that Suburbia's capital level would have eventually gone negative. (Kane, Dep. Tr. 109, lines 7-15). 106. As of October 4, 1984, Mr. Vigna did not believe the FHLBB and the FSLIC had the option with Suburbia of just waiting to see if interest rates came down. (Vigna, Tr. 1381, lines 11-19). In 1984, regulators recognized that Suburbia had "already been shopped extensively" and that it "continues to deteriorate." (PX 237 (I Memo) at AA 0000180).

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J.

SUBURBIA WAS BEING KEPT "SOLVENT" WITH ARTIFICIAL CAPITAL: NET WORTH CERTIFICATES AND APPRAISED EQUITY CAPITAL 107. In late 1982, Suburbia became eligible for assistance under the 1982 Garn-St Germaine Act in the form of Net Worth Certificates. This could allow Suburbia to continue to exist for some period of time as an independent institution, although the regulators could also proceed with a merger if they thought that was an alternative that would be less costly than the cost of assistance. (Vigna, Tr. 1330, line 8 to p. 1331, line 7; PX 102 at OAA005 0465). 108. Net Worth Certificates were capital certificates that were issued to the FSLIC in exchange for promissory notes that counted toward the troubled institution's capital requirements. (Albanese, Tr. 4116, line 22 to p. 4117, line 10). 109. As a participant in the Garn-St Germain Net Worth Capital Assistance Program, Suburbia issued Net Worth Certificates totaling $9.2 million through August 31, 1984. (Joint Stipulation of Facts, April 2, 2007, ¶ 21; Spaid, Tr. 219, lines 4-10; PX 237 (I Memo) at AA 0000177). 110. Net Worth Certificates were issued on a semiannual basis. (Albanese, Tr. 4119, lines 57). Suburbia issued Net Worth Certificates for each semiannual period beginning in December, 1982 through the Fidelity-Suburbia merger. (See generally DX 3128; DX 3141; PX 184; DX 3187; PX 310). 111. On December 7, 1982, Suburbia informed the FHLB-NY that it was beginning the process of qualifying for and obtaining assistance in the form of Net Worth Certificates authorized under the Garn-St Germaine Act. (Vigna, Tr. 1340, line 20 to p. 1342, line 11; DX 1986).

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112. On March 21, 1983, Suburbia entered into a Master Agreement with the FSLIC for Issuance of Net Worth Certificates. (Joint Stipulation of Facts, April 2, 2007, ¶ 17). 113. On June 3, 1983, Suburbia received $2.5 million of capital assistance in the form of an FSLIC Note issued in exchange for a like amount of Net Worth Certificates. (Vigna, Tr. 1342, line 12 to p. 1343, line 14; PX 132 at OAA005 2587). 114. By letter dated July 29, 1983, the FHLBB informed Suburbia's Andrew Kane that Suburbia was required to complete a new application to issue Net Worth Certificates for the June 1983 cycle. (Joint Stipulation of Facts, April 2, 2007, ¶19). 115. In a November 1, 1983 letter to Suburbia's Andrew Kane, the FHLBB stated that, subject to the satisfactory completion of certain legal documents, Suburbia's application to Issue Net Worth Certificates to the FSLIC in the amount of $2,950,000 had been accepted. (Joint Stipulation of Facts, April 2, 2007, ¶ 20). 116. The FHLBB continued to issue Net Worth Certificates to Suburbia because Suburbia continued to sustain operating losses. (Albanese, Tr. 4122, lines 14-17; Albanese, Tr. 4127, lines 18-21). 117. On August 20, 1984, Suburbia applied for additional Net Worth Certificate assistance in the amount of $925,000. Mr. Vigna noted on the application that Suburbia was not eligible to receive such assistance while the merger transaction was pending. Mr. Vigna did not recall if he knew whether Suburbia's net worth had at that point dipped below a half percent of assets. If it had, Suburbia would not be eligible for further assistance in any event. (Vigna, Tr. 1372, line 9 to p. 1374, line 2; PX 197 at WON758 0022).

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118. Appraised Equity Capital allowed a bank to count as capital any market value in its buildings that was above book value. (Spaid, Tr. 221, lines 9-20). 119. On a market value basis, Suburbia was insolvent. (Spaid, Tr. 222, lines 16-19; PX 237 (I Memo) at AA 0000178). 120. Even with FSLIC assistance in the form of Net Worth Certificates, Suburbia continued to suffer losses prior to the Fidelity-Suburbia merger. (Spaid, Tr. 204, lines 20-25; DX 406A (A Memo) at WOL315 0368). K. SUBURBIA'S ELIGIBILITY FOR FUTURE NET WORTH CERTIFICATES WAS QUESTIONABLE.

121. Suburbia's debilitated capital position at the end of 1983, notwithstanding more than $8 million of FSLIC assistance, was a matter of serious regulatory concern. Mr. Vigna told Suburbia on February 17, 1984 that if interest rates remained at current levels, Suburbia's viability would depend on obtaining either a significant capital infusion (a prospect Mr. Vigna considered unlikely) or continued regulatory assistance. In this latter regard, Mr. Vigna expressed concern that projected losses for Suburbia in 1984 would cause its net worth to decline to a level "dangerously close to 0.5 % of assets, the threshold level for eligibility in the Bank Board's Capital Assistance Program." (Vigna, Tr. 1349, line 25 to p. 1351, line 17; PX 159 at pp. 1-2). 122. As of March 31, 1984, Suburbia had received $9.5 million in FSLIC Notes issued in exchange for Net Worth Certificates under the Garn-St Germain Capital Assistance Program. However, despite this assistance and an additional $5.1 million in Appraised Equity Capital, Suburbia's regulatory net worth was only $3.3 million or 0.52 % of assets. Without the regulatory assistance, Suburbia's net worth would have been a

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negative $11.3 million or a negative 1.7 % of assets. Suburbia was therefore hovering just above the level at which it would continue to be eligible for further FSLIC assistance under the Garn-St Germain Capital Assistance Program. If interest rates did not decline, Suburbia was expected to sustain further operating losses which would cause its net worth to fall below a half percent of assets. If that happened, Mr. Vigna wrote to the Director of the FSLIC, "It would disqualify [Suburbia] from the Capital Assistance Program, and virtually ensure its insolvency." (Vigna, Tr. 1354, line 16 to p. 1357, line 9; PX 169 at pp. 1-2). 123. On August 20, 1984, Suburbia applied for $925,000 of Net Worth Certificates for the June 1984 cycle. Mr. Vigna considered this application unusual, since at that time Suburbia was in the process of being acquired by Fidelity, and he so noted in a handwritten note on the cover letter for the application. Suburbia's application showed that its ratio of capital to assets at that time was 0.39%. This was below the 0.5 %threshold required for such capital assistance by the Garn-St Germain Act. Mr. Vigna believes Fidelity asked that these certificates be issued, and as part of the merger agreement, the regulators agreed to do so. (Vigna, Tr. 2846, line 20 to p. 2847, line 12; PX 197 at WON 758 0022-WON 758 0023). 124. Had Suburbia not merged with Fidelity, in all likelihood the certificates it received as a result of its August 20, 1984 application would have been the last it would have received, since its capital ratio was below that specified in the statute for issuance of further certificates. (Vigna, Tr. 2848, lines 13-20; PX 197 at WON 758 0023).

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125. As of August 31, 1984, Suburbia's net worth had fallen to 0.25 % of its assets. As a consequence, it would not be eligible for any further Garn-St Germain financial assistance. (Vigna, Tr. 1389, line 25 to p. 1390, line 14; PX 237 (I Memo) at AA0000177). 126. In the S Memo, Mr. Vigna states that "the association's eligibility for continued capital assistance is doubtful, since current budget projections indicate that operating losses will reduce net worth by year-end below the half a percent of assets qualifying threshold." (PX 232 (S Memo) at WOL315 0201). 127. Mr. Vigna's bottom line assessment of Suburbia's position at the time he signed the S Memo on October 4, 1984 was that its situation was critical and required immediate resolution. (Vigna, Tr. 1381, lines 11-19). L. REGULATORS SHOPPED SUBURBIA TO PROSPECTIVE MERGER PARTNERS.

128. As of early 1982, Mr. Vigna thought the most likely solution for Suburbia was a merger with another institution. Suburbia's attractiveness to a merger partner would have to be the fact that it was in a good market of middle-end to high-end communities. An institution with good capital and a strong balance sheet could probably market those communities successfully. However, there was certainly nothing in Suburbia's balance sheet that made it attractive. (Vigna, Tr. 1297, line 18 to p. 1299, line 3). 129. On February 5, 1982, Mr. Vigna sent to Suburbia a Consent Resolution for execution by its Board of Directors. This resolution authorized the FSLIC to act on behalf of Suburbia to negotiate a merger or take such other action as it deems necessary to resolve Suburbia's problem status. Such resolutions are used only in very serious cases. The

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effect of such a resolution is that the institution turns itself over to the FSLIC and must abide by whatever the agency does. (Vigna, Tr. 1293, line 16 to p. 1296, line 13; see generally PX 36). 130. In connection with its consideration of the Consent Resolution, the Suburbia Board asked the FHLB-NY whether the officers and directors of Suburbia would be held liable for acts associated with the operation of Suburbia once its net worth reached zero or became negative. In answer to that inquiry, Mr. Vigna said that it would be impossible to speculate what liability officers or directors might have for specific acts taken under such circumstance. He went on to say, however, that it was the intention of the FHLB-NY to achieve a solution to Suburbia's financial problems prior to depletion of its net worth. (Vigna, Tr. 1299, line 4 to p. 1302, line 22; PX 45 at AST 021822 and PX 52 at AST 021839). 131. Suburbia's Board of Directors executed the Consent Resolution and returned it to Mr. Vigna on June 15, 1982. With the execution of this Consent Resolution, the FHLBB and the FSLIC were empowered to seek a supervisory solution for Suburbia. (Vigna, Tr. 1302, line 23 to p. 1303, line 17; see generally DX 373A). 132. On September 24, 1982, Suburbia submitted to the FHLB-NY a proposed Plan of Merger with Heritage Federal Savings and Loan Association. This was to be a voluntary merger with no regulatory assistance. Suburbia represented that a viability analysis performed by it and Heritage showed that the resulting institution would be profitable in each of the five years following the merger. (Vigna, Tr. 1310, line 15 to p. 1312, line 6; PX 76 at AST 022024-25).

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133. Following receipt of the Suburbia/Heritage merger proposal, the regulators performed their own viability analysis, which showed that the resulting institution would not be viable. The regulators therefore refused to approve the merger. (Vigna, Tr. 1312, lines 7-24; Vigna, Tr. 1345, lines 8-16; PX 132 at OAA005 2588). 134. In fact, Heritage Federal Savings and Loan Association was itself one of four severely troubled institutions (Suburbia being another of the four) for which, in October 1982, the FHLB-NY began a nationwide search for potential merger partners. (Vigna, Tr. 1313, line 5 to p. 1315, line 19; PX 102 at OAA005 0462). 135. The search for merger partners for these four institutions culminated in a Bidders' Conference hosted by the FHLB-NY in New York City on December 20, 1982. Prior to the conference the Bank sent solicitations to more than 200 banks, savings and loans and non-depository institutions that were either identified on a list provided by the FSLIC or were known by the Bank to be potential acquirers. Only 27 of these expressed interest in one or more of the four institutions. (Vigna, Tr. 1315, line 20 to p. 1318, line 6; PX 102 at OAA005 0462-63). 136. Of the attendees at the Bidders' Conference, 22 requested and were given bid packages for Suburbia. Another 3 potential bidders were provided bid packages for Suburbia subsequent to the Bidders' Conference. (PX 102, Exhibit D at WOB017 1812). 137. The FHLB-NY received only four bids for Suburbia as a result of the Bidders' Conference. These were from Albany Savings Bank, Anchor Savings Bank, Long Island Savings Bank and Poughkeepsie Savings Bank. Based on analysis done by the FSLIC's quantitative analysis division, it was determined that the Anchor Savings bid should

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provide the least costly alternative, though the Long Island and Poughkeepsie bids were competitive. It was also determined that the Albany Savings bid appeared excessive. (Vigna, Tr. 1329, line 13 to p. 1331, line 19; PX 102 at OAA005 0464-65). 138. The four proposals elicited by the 1982 bidders' conference ranged from $17.9 million to $33.9 million. (Spaid, Tr. 202, lines 5-7; DX 406A (A Memo) at WOL315 0368). 139. The bid submitted by Anchor Savings Bank was set forth in a January 18, 1983 letter from Anchor's Chairman to Mr. Vigna. Anchor wanted $25 million in market rate variable FSLIC notes with interest payable quarterly. Anchor would issue a like amount of non-interest-bearing Income Capital Certificates ("ICCs"). The FSLIC notes would come due in five equal installments starting at the end of the fifth year. The ICCs would be repaid in the same manner. Anchor's bid was contingent on Suburbia not having negative net worth at the time of the merger, and Anchor wanted indemnification for certain losses and contingencies. The FHLB-NY later estimated the present value cost of this bid to be $17.9 million. (Vigna, Tr. 1331, line 20 to p. 1334, line 20; DX 3117 at WOL315 0549, PX 169 at OAA005 2714). 140. The bid submitted by Long Island Savings Bank was set forth in a January 20, 1983 letter from the LISB's attorney to Mr. Vigna. The LISB bid called for the issuance by the FSLIC of $55 million in Notes to Suburbia, the notes to have a 10 year maturity and to count as regulatory capital. A like amount of Income Capital Certificates and Net Worth Certificates would be issued by LISB and Suburbia. Goodwill from the transaction would be amortized over 40 years and loan discounts would accrete over 15 years. There were a number of additional terms and forbearances requested as well. LISB calculated

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the net present value cost to the FS