Free Motion to Amend/Correct - District Court of Federal Claims - federal

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UNITED STATES COURT OF FEDERAL CLAIMS

ASTORIA FEDERAL SAVINGS ASSOCIATION,

&

LOAN

Plaintiff,

- against

-

Case No. 95

UNITED STATES OF AMERICA, Defendant. - - - - - - - - - - - - - - - - - - -X

August 7,
9:50

2000

a.m.

Deposition of Christopher Quackenbush, taken by Defendant, at the offices of Thacher Proffitt
&

Wood, Two World Trade Center, New

York, New York, before Kelly Culen, a Shorthand Reporter and Notary Public within and for the State of New York.

2 3 0 Park Avenue, Suite 650 New York, New York 10169

Telephone: 2 1 2-557-5558 Fax: 212-557-0050
Email:[email protected]

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Quackenbush
1 2 3 4

Q.

And you said you were talking about your What analysis was that? Of the acquisition. I looked at the

analysis. A. summary.

5
6

I guess the one document that was there

was a summary pro forma financial impact of the transaction. I just really wanted to try and

7

8
9
10

remember the relative sizes of the companies. It's been a while. Q. And what did you recall after having

looked at this document? A. There was a couple billion dollar - -

Fidelity was a couple of billion in size, that we paid $ 2 9 for or thereabouts. That there was

about a hundred million dollars in goodwill generated for the deal. Pretty summary. Q. A. Q.
21 22
- .. ---

Not much more than that.

What was your role in that merger? Advising Astoria. What was your role in that? Financial analysis of the pro forma

A.

impact but as importantly negotiating with the
./

---

-,2 .-3

---.

other side which was, I believe, Solomon Brothers.
Q.

24 25

What do you recall about your analysis?

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Quackenbush
A.

I mean, it was a pretty straightforward

cash acquisition. Q. A. Why cash? Because we just converted - - Astoria It was overcapitalized. Leveraged.

converted.

Pretty straightforward for overcapitalized company that wanted to do a cash deal. I

remember there was a pretty good mark to market in the portfolio meeting that some of the assets were underwater. They were below market value. I

I would know that from the negotiation.

remember that being the case and then our one issue we had with the deal was the impact of interest rates on the mark to market. about it. That's That we

I knew we had to restructure.

were planning on restructuring the portfolio.

Q.
A.

How so? Just to sell some of the underwater That was the bulk of

assets and reinvest them. it. Q.

What did you recall about the

negotiations? A. Not a lot of the details. Just the, you

know, the usual give and take.

I think the most

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Quackenbush
2 3 4 5 6
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keep talking, it's coming back to me.

Q.
A.

I understand.

Sort of like a bad dream, you know? A good dream in this case.

Or

a good dream.
Q.

Do you know if Fidelity was in fact

talking to anybody else? A.
I should know that because it would have I don't think - - I think we

9
10 11 12 13 14
15

been in the proxy.

were under the impression that they were not. But I 'm not sure. Q.
I don't recall.

You were discussing the impact of What impact were you referring

interest rates. to? A.

When you buy a company in a purchase

16

accounting acquisition which this would be, you have to mark the entire balance sheet to market. And with a financial institution you often get, which is primarily a spread business that you're only allowed to mark the asset side or at least at that time that was the conventional wisdom. So I just remember that there was a big mark to market which would have increased the goodwill which would have put a greater strain on capital and the problem was at that time again - -

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I think it's still the case that the mark - - the asset value is.not done at the date of signing of the agreement, but as of the closing, so we had a six-plus month time period that we didn't know what the final mark was gonna be. S o we were

worried about what that would do to our capital position and what that would do to the earning stream going out.
Q.

You said it would have put a strain on What did you mean by that? If interest

the goodwill. A.

It would have increased it.

rates continued t o rise, it would have been an increase in the mark to market which would have increased the goodwill, which in financial institutions goodwill is a direct reduction from capital. I don't think we were capital tight at

the time but it was just a question of the total goodwill relative to our capital position and it was starting to look a bit o n - t h e high side.
Q.

Was Astoria interested in getting more

goodwill out of the deal or less? A. I think it was just a question of how I mean, I don't know if

much we were taking on.

it's more or less because in this case since it's

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Quackenbush
1 2

then just the total size of it. Q. Do you recall what happened with the

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4
5 6 7

interest rates between the six months between the agreement and the closing? 'A. Good question.

I should know that.
My guess is

But

no, I really don't recall that. when was this, ' 9 4 ?

--

8 9
10 11 12 13 14 15 16 17 18 19 20 21 22 23
--A

QA.

Yeah. My guess is they were probably stable

but coming down, but I don't remember. Q. Do you know what effect goodwill would

have on their capital ratios? A. Yeah, goodwill is a deduction from their

tangible equity, so I mean that's what I was saying. It's initially not a good thing from a

capital perspective, but it has the positive and then i t ' s a good kick to earnings and Astoria became a big proponent of cash earnings, which is basic capital generation when you look at the goodwill taken out. Q. Do you know whether or not Astoria

considered doing this as a pooling deal?

-.
25

---

_

.- .

. -

A.

.

I know they didn't. Why?

Q.

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Quackenbush
1 2 3

A. Q. A.

Because it's a cash acquisition. They just weren't interested in that? Didn't make sense financially for us.

4
5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

The turn of leverage on the capital. Q. A. Do you recall who you negotiated with? I should. Let's see, Solly. Was David

Head there?

I don't remember.

It was David Head

and - - I think David was there then, I don't remember. Q. A. Do you recall Dick Shapiro? Oh, yeah, okay. Sorry, Dick. David's

there now, I think.
Q.

With respect to this whole merger, what Were you point person for

was your role? Sandler? A. Q. Sandler? A. Yeah.

You were?

And is Astoria your client at

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21 22 23
u z _ -

Not really.

I mean, I guess at the time

they were.

But we have a number of people who

work with Astoria in different capacities, but if it turns to the merger business, it's myself and
---- well, now it would be Bill Hickey, but at

24 --t-h.e.n. 25

that time it was me.

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Quackenbush Q. client? A. You have to ask George that. I mean And do you still have Astoria as a

yes, we do business in other areas. used other advisors.

They have

In fact, what was interesting at that time was they were using Merrill Lynch on a competing deal, but it's pretty typical for people to use other advisors. I would like to

think of them as a client, but that would be optimistic. Q. Okay. If you wouldn't mind, would you

mind telling me your educational history. A. to stop.
I don't mind at all.

You tell me when I

I'll go backwards from most recent.
I went to

went to law school at NYU.

undergraduate at North Carolina Chapel Hill. keep going? High school at Bay Shore.

And

Grammar

school in Bay Shore.

Q.
history? A.

How about since college your work

I started at Skadden Arps as a lawyer,

corporate work, and went to Merrill Lynch in their merger and acquisition group for financial

230

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Quackenbush institutions and started Sandler Hills Investment Banking Group when the firm started. Q. A. When was that? Actually about six months after that. I came

The firm was formed in August of '88.

over in February of '89 to start the investment banking side.
Q.

Okay. MR. BROWN: Please mark this as

Defendant's Exhibit 127. (Handing.1 (Defendant's Exhibit 127, engagement letter, marked for identification, as of this date. )
Q.

Let the record reflect I've placed

what's been marked Defendant's Exhibit 127 before the witness. Do you recognize this document Mr. Quackenbush? A. It looks like - - it's an engagement

letter, I'm sorry.
Q.

Can you describe it for me, please. Let me read it. Sure.

A.

Q.

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Quackenbush
1 2 3 4 5 6 7

A.

It looks like our reasonably standard

engagement letter. Q. page? A. Yes. Or a bad facsimile copy thereof? A bad facsimile of a bad signature, yes. I would like to direct your a-ttention to Take a moment to review the And is that your signature om the last

Q.
A.

8

Q.

the first page.

second full paragraph on that page. A.
Q.

Urn-hum. I would like to go through each one of

these steps and have you review each one and then what I'm going to be asking you is what tasks you performed and what conclusions you've reached and why with respect to each. The first services it says you provided
19 20 21 22 23
--

was "Performing financial analyses of the company and the second party in the context of a possible business combination." Do you recall what role

Sandler and yourself played in that?
----.-/

-

24 25

Im-general, we will provide a /A - /financial - - historical financial analysis, a

current period financial analysis of the buyer

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Quackenbush
1 2 3 4 5

and seller and then show the impact on the acquisition transaction, what the accounting adjustments are and what the impact on earnings capital and all of that. what we did here. In fact, I - - one of the documents I looked at was sort of a summary of that analysis. Q. And with respect to this transaction, do And I assume that's

6
7

8
9 10 11 12 13 14 15 16 17 18 19 20 21

you recall what conclusions you've reached with respect to that? A. Not really. I mean, I know it was - - I

think I recall it was slightly earnings accreted and obviously it would have reduced the capital. Probably improve the ROE, return on equity. I don't recall any more detail than that. Q. Was that something Astoria was But

interested in doing at this time? A.
Q.

Yes. Do you recall what their capitalization

was at that time? A.
Q.

22
23 24 25

No, I don't. Turning to the second matter listed as a

service, "assisting the company in its determination of appropriate and desirable values

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Quackenbush to be exchanged in a business combination." you recall what tasks you performed there? A. Main idea there is figuring -out what's Do

the preferable form of consideration, cash or stock. And I think both of us had agreed that And then

cash made the most sense at that time. just how much to pay. Q. A. Why did cash make most sense?

Again because they were overcapitalized

at the time.
Q.

D o you recall whether o r not you looked

into your discounting of cash flow analysis? A. There is a standard part of our

presentation that does a discounting cash flow analysis of both the target company. Usually we

do it with our client as well if it's the buyer and then the pro forma company. was probably part of it.
Q.

So yeah, that

Do you recall the results of that

analysis?
A.

No. What other merger partners did you look

Q.

at at this time for Astoria? A. I don't remember.

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Quack enbu sh ratios look like; here's the range in prices we're talking about; he.relsthe impac.t.of it. Q. And with respect to those elements, do

you recall what your conclusions were that you presented to the board? A. Well, we gave a fairness opinion in the

deal, so I'm sure the conclusion was it's a fair transaction for them, Q. The next element says you participated

in counseling with the company and any approaches to or discussions or negotiations with the second party. Do you recall what your role in that was

and what did - A.

That was basically negotiating with

Solly and the lawyers.

Q.
A.

For the record, what is Solly? Solomon Brothers, I'm sorry. I believe

that's its advisor to Fidelity. Q. went? A. Not really. I mean, I know that they - Do you recall how those negotiations

there was a series of meetings, some of them I think here at Thacher. Astoria's counsel. I believe Thacher was

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Quackenbush equity. And in this case, I think it was - - it

did on both counts, improved our earnings, improved our return on equity. anyway.
Q.

Tangible equity

Are there any other factors you can

think of that went into your determination that $29 was fair? A.

I mean, there's a host of intangibles

that you look at as possible values, franchise value. There's the obvious, you know, the

goodwill issue was raised.
Q.

What goodwill issue? The goodwill claim that they had as one

A.

possible thing.
Q.

Did you value that? No. Why? Didn't have a way to. Didn't really - -

A.
Q.

A.

didn't really think it had a value that we could ascertain at that time. Q. S o the $29 figure that - The goodwill for whatever reason played no role in your decision of $29? A.

I can say that - - I don't know if it

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Quackenbush 1 2 3 4 5 6 7 8
9

says no role. us.

I said it wasn't a :major factor to

It was something that Solomon was touting You

but our negotiating factor was prove it. know.

QA.

Were - Was it a factor in the mix? You know,

we didn't place a tremendous value on it. Q. After the merger was completed, did you

10 11 12 13 14 15 16 17 18 19 20 21

feel that it had a positive impact that you had projected, return on investments and whatnot? A. Yeah.
I think it had the impact of

leveraging Astoria's capital.

I think it Not

established Astoria as a credible buyer.

that they weren't before, but it was just another step and this is not Sandler O I N e i l l doing it. This is Astoria doing it. I think it was a lot So it put Astoria

of goodwill that was absorbed.

in the position of having to be a poster child for cash earnings which had mixed results over time. Q. But I think on balance has been okay Turning to the next factor, it indicates

--.-

-.-

--------. __._.
23

22

thaf-'you had been requested by the company to render an opinion. opinion? D o you recall rendering that

24 25

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Quackenbush this was - - this Fidelity purchase was an exciting opportunity. Why exciting?

A.

Like I said that was the word when I

just said I'm not sure these are my words.

I I

don't think I would ever say it was exciting. wouldn't use that phrase. a good acquisition. Q. A. Q. A. You thought it was a good opportunity? Yes. Why is that? A billion and a quarter of deposits in That was basically it.

But we thought it was

their backyard. Q.

And you discussed the potential benefits Could you tell

associated with the acquisition. me what those were? A.
Q.

A billion in deposits in your backyard. Anything else?
I think if there was a driving force

A.

here, it was picking up a billion of deposits in your backyard. Q. Do you recall any other factors that

would be driving it, if any - A. What is driving it? Factor into the deal?

Q

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Quackenbush A. Yeah, it was leveraging your capital

position, but if you had to say was there one thing driving, I would say it was a good acquisition in your backyard with reasonably low execution risk.

Q.
A.

What would a million in deposits - A billion. A billion enable - Just leveraging your balance sheet.

Q.
A.

Poor funding so you can go ahead and make loans, develop customer relationships with more customers. I mean, that's their business. But

it's more customers, more deposits, more core funding, greater leverage without too much of the strain on management.
Q.

And you say in that same sentence or

they summarize in that same sentence that you stated that these benefits are not without risk. What risk did you see inherent in the deal? A. Big wholesale portfolio that would be
I think that

mark to market at some future date. was probably the biggest risk. Q. A. Why is that a risk? Bigger mark to market.

Bigger strain on

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Quackenbush
1 2 3 4 5 6 7

Q. A. Q A.

Okay. I don't mean to sound redundant.
I understand.

That's really

--

if I recall, although I

may be recalling this because I read it here, that they were big branches, but I think that was the case which means it's simple, low cost, easy to run. Q. Do you know if those branches were

8
9 10 11 12 13 14 15 16 17

complementary to Astoria's existing branches? A. Roughly in the same market so

complementary, sure. Q. A. QDo you recall if there was any overlap? No, I don't recall. Do you recall if this would indeed lead Was that a factor? There's so

to eliminating a competitor? A.

A lessor factor, probably.

many competitors. Q. The next thing you mention is a good What about the deposit mix seemed

deposit mix. attractive? A.

I don't remember.

Usually that means if

there's more savings accounts as opposed to CDs. Q. The next sentence you mention due

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Quackenbush operations? A. QA. Q. On their operations? Yeah, if any. I don't remember. In that paragraph that you just

reviewed, it's discussing a number of meetings July 8th and July 10. Do you recall what role

you played in those meetings? A. Q. No. D o you recall what issues were

discussed? A. Q. meetings? A. A deal got done.
I just don't remember

No. D o you recall the results of those

the specific meeting. of give and take.
Q.

I assume that's the series

I would like to ask you a number of

general questions now off the document. recall
--

Do you

I know you mentioned that they had a

lot of tangible cash and that they wanted to invest that.
A.

Astoria you're referring to? Yes. Do you recall any other reasons

Q.

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Quackenbush Astoria was interested in acquiring other institutions at this time? A. I think the main reason for a company to

make acquisitions is to improve earnings. Astoria had recently converted, recently, a couple of years before that, and had a lot of excess capital and was trying to build a franchise, leverage the capital, increase their earnings, increase their stock price. was their general drive.
Q.

So that

Do you recall what importance Astoria

placed on economies of scale in the reduction of expenses? A. It's always a factor in terms of how

much you can afford to pay because that's how you earned back premiums that you've got. Q. I would like to direct your attention to

Exhibit 15, which should be the last one you have there. Take a moment just to glance at it. Do

you recognize this document? A. file. Not really. It looks like a regulatory

I mean, I don't recognize it specifically,

but it's an application for approval for the transaction.

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Quackenbush

Q

It mentions in the second to next full

paragraph "the merger will strengthen FSL franchise." Do you recall if the merger did in

fact strengthen Astoria's franchise? A. That's a matter of opinion.
I think it

did, but I don't know what that word means.
Q.

Why do you recall it did? Well, I think that more presence, more

A.

poor funding, more customers.
Q.

Do you recall whether or not Astoria

realized any increases in revenues from the Nassau County and Suffolk County due to the acquisition? A. Yeah, I think it did. I don't know for

sure, but I 'm sure - - I'm just adding a billion of deposits in Nassau and Suffolk, they had to increase their revenue.
Q.

Do you know if these increases continued

to the present day? A.
Q.

I certainly hope so.

I believe so.

Do you know what returns were estimated

from the expanded customer base? A. No. Do you know if Astoria realized any

Q.

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Quackenbush efficiencies from the Fidelity acquisition? A. Q. A. I'm sure they did. D o you recall what they were? I don't recall exactly what they were. Efficiencies meaning cost

But I know they did. reductions, yes. Q. A.
Q.

Yes. Yes. D o you recall what impacts the accretion

of Fidelity's earnings had on Astoria? A. earnings. was. Q. Directing your attention to page
54

Just that it probably increased their I don't recall specifically what it

of

the document.

I would like to have you take a

moment to look at the balance sheet enhancements paragraph. A.
Q.

Um-hum. Do you recall what Fidelity's portfolio

yields were at the time? A.
Q.

Not the specific yield, no. Do you recall whether or not they were

high or low? A. I don't recall specifically this

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Quackenbush
I

2 3
4

paragraph.

It suggests they were low.

To the

best of my recollection, they were invested in very short-term, high-credit quality securities which would have had a somewhat lesser yield than your average portfolio.
Q.

5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

Do you recall how Astoria was planning

to increase the yields? A. Probably going into a mix of somewhat

longer term assets maybe with not the same kind of pristine government guarantee. typical. Q. Do you recall why Fidelity was invested That's pretty

in those types of things? A.
Q-

No.

Their call.

Do you recall what Fidelity's net

interest margin was? A. Q. No. Do you know if Astoria was successful in

increasing portfolio yields? A. SO.
Q.
.

I don't know for sure, but I would hope

Do you know what their plan was to do

24 25

that? A. From reading this, it's suggested that

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Quackenbush they were going to blow out their arms and invest in again somewhat longer term securities.
Q.

But you don't recall if that was

implemented? A. I'm sure it was.

I'm not - - you know, I

wouldn't bet my children's life on it, but I might bet people in this room. No offense, I'm

just saying I'm pretty sure it happened. Q. Do you know if Astoria was successful in

diverting a significant portion of Fidelity's existing adjustable rate mortgage securities? A. No, I don't.
M R . BROWN:

Let's take a five-minute

break. A. Your call. (A short recess was taken.)
Q.

We have'been discussing today Astoria Do you recall

looking to acquire thrifts.

whether or not at this time if Fidelity was looking to acquire any thrifts? A.
I don't know.

MR. BROWN:

May I have this marked as

Defendant's Exhibit 128. (Handing.)

230

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Quackenbush don't - - hold is a much more typical category. MR. BROWN: A two-minute break.

(A short recess was taken.)
Q.

After this merger, were you involved

with Astoria at all in any other mergers? A. Yeah. What? Well, on the same side of the table, you

Q.
A.

know, I don't remember.

I know we were across

the table from them in Greater New York.
Q.

When you say "across the table"? We represented the Greater New York in You tell me.

A.

sell to Astoria financial.
Q.

Do you know if you were involved in Long

Island, LISB? A. We didn't represent Astoria. We

represented a competing bidder. Q. Do you recall whether or not you were

involved at all in any preparation of business plans for Astoria? A. I don't believe so. That would be

unusual for us to do a business plan.
Q.

Are you familiar at all with FIRREA? Yeah.

A.

Elisa Dreier Reporting Corp.

(212) 557-5558

2 3 0 Park Avenue, Suite 650, New York, NY 1 0 1 6 9

Case 1:95-cv-00468-TCW

Document 185-4

Filed 03/28/2007

Page 26 of 27

Quackenbush
1

Q.

What was your assessment of its impact

on the thrift industry from your analysis? A. From my recollection, writing off the

goodwill hurt some companies.

QA. mergers.
Q.

Were there benefits of FIRREA? Sandler OINeill because there's a lot of

How about for the industry as well? I don't remember all the specifics of

A.

FIRREA, but I think the strengthening of the thrift industry in general is good. But if I

recall, I mean, bigger impact was just rates - bigger positive to the industry was rates starting to come back down. specifically. And I don't recall

But I know some people it made

capital raising a necessary component, but - Q.

Would capital raising be considered a

bad thing?

A.

No.

It depends.

It depends on what

level you raise it at.

I mean, capital - - to

raise capital, if you're a public company, you know, you want to raise capital when your stock is high because it dilutes it. It has less of a

diluted impact on the rest of your shareholders.

Elisa Dreier ~ e p o r t i n gCorp. (212) 5 5 7 - 5 5 5 8 230 Park Avenue, Suite 650, New York, NY 10169

Case 1:95-cv-00468-TCW

Document 185-4

Filed 03/28/2007

Page 27 of 27

Quackenbush Is raising capital a bad thing in general? depends. It

But I don't think you can say it was

good or bad, necessarily.

Q

You mention that as a result of FIRREA, Why was that?

there were a lot of mergers. A. Well, I don't know.

I can't say

specifically FIRREA.

We've got an industry

that's consolidated, so that was probably too broad a statement. MR. BROWN: No further questions. I don't have any

MR. EISENHART: questions.
MR. FORSTOT:

I just want to, as I've

warned counsel for the government I would do, this is not the only case Sandler O'Neill's been subpoenaed in and Sandler O t N e i l l who has produced voluminous documents partly, of course, that they would be paid for their copying costs and in none of those cases have we received a dime and so we ask - - I ask that the lawyers here from the Department of Justice do what they can to see that we get the promised payments. THE WITNESS: And we thank you,very

Elisa Dreier Reporting Corp.

(212)

557-5558

230 Park Avenue, Suite 650, New York, NY 10169