# Anchor Savings Bank, FSB v. United States

> United States Court of Federal Claims · March 14, 2008 · 81 Fed. Cl. 1

URL: https://www.frixlaw.com/law-library/cases/6657633

## Case

- **Full name:** ANCHOR SAVINGS BANK, FSB v. United States
- **Court:** United States Court of Federal Claims
- **Decided:** March 14, 2008
- **Citations:** 81 Fed. Cl. 1; 2008 U.S. Claims LEXIS 74; 2008 WL 725518
- **Precedential status:** Published
- **Opinion:** Opinion of the court by Block
- **Judges:** Block
- **Cited by:** 22 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/6657633

## How later opinions describe it (automated extraction)

- finding that the “sheer volume of goodwill” rendered the magnitude of the lost profits from RFC’s sale foreseeable
- discussing documents and testimony describing NAMCO’s large geographic presence, significant proportion of wholesale mortgage originations, and reliable non-interest revenue streams

## Opinion text

Opinion And Order
BLOCK, Judge.
I. Introduction
This case is one of the last of the Winstar-related progeny facing this court. It involves a series of contracts in which the government promised to allow the plaintiff, Anchor Savings Bank, FSB (“Anchor”) to account for “supervisory goodwill” as a capital asset that would count toward Anchor’s regulatory capital requirement and be amortized over a 25-to-40 year period. The contracts accompanied Anchor’s acquisition in the 1980s of four failing financial institutions, at the behest and under the supervision of federal thrift regulators. The government hoped those “supervisory” acquisitions would prevent its contingent deposit insurance liability from maturing. Following a change in thrift regulatory policy, however, the 1989 Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”) disallowed substantially all of Anchor’s supervisory goodwill as a capital asset. As a consequence, Anchor immediately became a severely under-capitalized financial institution and was forced to make radical operational changes to avoid being seized and liquidated by its regulators. In a series of earlier opinions, this court concluded that FIRREA breached the government’s supervisory goodwill contracts with Anchor. The issue of damages, alone, remains.
Before trial, this court noted that the tales that the parties crafted harken back to Charles Dickens’ A Tale of Two Cities. Anchor portrayed its business and operations in the period leading up to the breach as the proverbial “best of times,” with the bank poised for extraordinary success, but the government countered with a more pessimistic approach, challenging Anchor’s performance as a quintessential “worst of times” in which Anchor was headed towards failure. See Anchor Sav. Bank, FSB v. United States, 59 Fed.Cl. 126, 128 (2003) (summary judgment decision). At the time, the court was in no position to weigh those arguments against one another and decide which version—the best of times, or the worst of times—was more credible.
Following an almost month-long trial, it is now more clear what is the real story in play. The extremist arguments proffered by both parties have given way to a truth that lies somewhat in the middle—it was neither the Dickensian “best” of times nor the “worst.” It was, however, a time of remarkable change and innovation in both the savings and loan industry and its progeny, the mortgage-banking industry. Anchor appears to have been one of the institutions most prepared to respond to that change, as its management had deliberately positioned the bank to be a leading player in the evolving mortgage-banking industry. As that industry began to rely more heavily upon thrifts as intermediaries between borrowers and the secondary mortgage market’s capital supply, Anchor was ready to be an industry leader.
The abrupt disallowance of most of Anchor’s supervisory goodwill as regulatory capital was a near-fatal blow. It forced Anchor to fundamentally alter its business plan and, in so doing, to sacrifice substantial long-term profits in favor of one-time gains from the sale of assets to prop up the suddenly failing, capital-starved institution. In the aftermath of FIRREA, Anchor’s manage *4 ment was forced to operate the business in a defensive posture that could best be described as triage, with a singular focus on preventing the thrift from falling into receivership and maintaining a stripped-down platform from which a profitable enterprise might someday re-emerge, like a phoenix from its ashes.
After the breach, Anchor shrank by more than $1 billion in assets in just two years. It sold geographically diverse branch deposits in a depressed market and abandoned a twenty-year-old plan of geographic expansion and diversification. Anchor also sold a profitable subsidiary that was the leading private player in the secondary mortgage market. This subsidiary was poised for explosive, long-term growth precisely when Anchor was forced to sell it. Indeed, in just the first two years after Anchor sold its subsidiary, the subsidiary earned pre-tax income nearly equaling the entire forced-sale price; in only three years, its after-tax, net income exceeded the sale price. See PX 971 (demonstrative summarizing RFC financials, PX 258-265).
On January 13, 1995, Anchor sued the United States for breach of contract, alleging that the provisions of FIRREA and its implementing regulations that disallowed the inclusion of supervisory goodwill as regulatory capital contradicted the terms of Anchor’s contracts for each of its supervisory mergers during the 1980s. According to Anchor, the breach left Anchor in a crippled, undercapi-talized position that caused considerable losses and harm. In a series of opinions and orders, this court previously concluded that, consistent with the Supreme Court’s decision in Winstar, the United States did in fact breach four contracts with Anchor corresponding to its supervised acquisitions of the Peachtree, Crisp, Sun, and Suburban savings and loan institutions. Anchor, 59 Fed.Cl. at 130-32 .
Liability established, the government moved for summary judgment on whether Anchor sustained or could prove any eompen-sable damages and the viability of some of Anchor’s proffered damages theories. In a September 29, 2003 opinion, this court granted those portions of the motion addressing Anchor’s restitution theory of recovery, but concluded that Anchor’s expectation and “wounded bank” theories of recovery were legally viable and that genuine issues of fact remained. The government’s motion was therefore denied with respect to the expectation and “wounded bank” damages. Between June 13 and July 20, 2005, the court conducted a trial in Washington, D.C. on the remaining damage issues.
This opinion, then, is all about damages. It is about lost profits (a type of “expectation damages”) as a viable measure of damages in the Winstar context. It is about how the doctrines of “foreseeability” and “certainty” are applied in the lost profit context. It is about the economics of what is of value and exactly how that value is created. And once economic value is determined, it is about what constitutes harm to that economic value in order for a plaintiff to recover under a lost profits theory. The problem thereafter, of course—for both Anchor and other Winstar litigants—is how to quantify that harm in the form of damages. How might the court best account for harm suffered long ago, and apply the appropriate rule of damages law?
As the following makes clear, there was indeed harm suffered here. The opinion below constitutes the court’s findings of fact in this case after weighing all the evidence proffered by the parties in light of the relevant context inexorably resulting from the history and the economics of the times, both exceedingly crucial because of the need to determine what factors are “foreseeable” as a matter of law in determining damages. Nevertheless, what is particularly essential are the actions of the main protagonists since “the actions of men,” as John Locke opined, generally constitute “the best interpreters of their thoughts.” 1 These findings make up the body of the opinion. The skeleton of that body is the law as applied by the court. *5 Thus the conclusions of law that the court renders serve as another level of context in which to view the facts of this ease. In toto, it is the proper interpretation of relevant damages law, and especially that law as it has evolved through other Winstar cases, that the court must apply.
Due to the length of this opinion, the court provides the following table of contents:
Topic Page
II. Background.................................................................6
A. The Plight of the Savings and Loan Industry in the 1970s and 1980s: The Problem of Risk Reduction in a Heavily Regulated Business Model.......8
B. The Federal Government Responds to the Industry’s Problems: Risk Reduction through Deregulation and Encouraging Thrifts To Become More “Bank-Like”....................................................12
1. Accounting Forebearances............................................12
2. Asset Deregulation..................................................14
C. Market Responses: A Primer on the Secondary Mortgage Market.............15
D. The Tale of Anchor Savings Bank before the Thrift Crisis....................21
E. Anchor’s Expansion.....................................................22
F. The Supervisory Mergers that Anchor Used To Grow: Benefits, Costs and Promises.........................................................26
G. Anchor’s Performance in the 1980s and the Acute Impact of Anchor’s Acquisitions..........................................................29
H. Anchor’s Long-Term Business Plans in 1985-87.............................32
I. Anchor Acquires Residential Funding Corporation...........................33
J. The Arrival of James Large As CEO and His Vision of a More Efficient Bank................................................................36
K. FIRREA and Its Sudden Impact on Anchor’s Capital Compliance and Operations...........................................................41
L. The Capital Plan and Anchor’s Efforts To Stave Off Foreclosure: The Sale of the Branch Network and RFC ...................................43
1. Sale of Branches in Florida, Atlanta, Southern New Jersey and Northern New York................................................44
2. Sale of RFC.........................................................45
3. Conversion of Anchor’s Preferred Stock Held by the FDIC and Other Capital Growth Activities...........................................46
M. Anchor Weathers the Squall..............................................47
N. Anchor Focuses Once Again on Growing Its Business........................50
III. Discussion.................................................................51
A. The Failed Hamilton Bank Merger Is Inapposite to Damage Issues in This Case............................................................52
B. Plaintiff Is Not Precluded from Claiming Damages Merely Because Anchor Savings Bank Was Profitable after the Breach.....................54
C. Damages Attributable to the Forced Sale of RFC-The Legal Issue of Expectancy Damages in the Federal Circuit..............................57
1. The Breaching Provisions of FIRREA Caused Anchor To Sell RFC......59
a. Prior to the Breach, Anchor Did Not Intend To Sell RFC.............60
b. The Sudden Effect of the Breach ..................................61
e. The Impact of the Loan-to-One-Borrower Restriction................63
d. Anchor Did Not Sell RFC for Independent Business Reasons..........65
i. The Role of Defendant’s Expert Witness........................65
ii. Mr. Large’s November 1989 Memorandum.....................67 e. The Risk-Based Capital Provisions Would Not Have Caused
Anchor To Sell RFC But For the Breach..........................69
i. The Mechanics of the Risk-Based Capital Requirement..........69
ii. The Impact of Risk-Based Capital on Anchor and RFC..........70
f. The Investment-in-Subsidiary Limitations Did Not Force Anchor To SeU RFC ............................................ 72
*6 Topic Page
2. Anchor’s Lost Profits Were Foreseeable at the Time of Contracting......75
3. Anchor Proved Its Damages with Reasonable Certainty..................84
a. The Standard of Reasonable Certainty and Expectation Damages......85
b. Theoretical Approaches to Lost Profits.............................86
i. The Irrelevance of Fair Market Value in This Case..............86
it The Ex Post versus Ex Ante Approach.........................88
c. Lost Profits from 1990-97.........................................91
i. The Accounting Model.......................................91
it The Regulatory Model.......................................98
1. Testimony of Jess Lederman and Credit Enhancement Alternatives...........................................98
2. Testimony of P. Allan Schott and Anchor’s But-For Capital Model........................................109
Hi. Quantum of Lost Profit Damages............................118
iv. Reduced Stock Proceeds.....................................122
v. Damages Attributable to the Acquisition ofNAMCO ...........124
vi Tax Gross-Up Award.......................................134
D. Damages Attributable to Anchor’s Branch Sales in Georgia, New Jersey and New York.......................................................135
1. Anchor’s Pre-Breach Branch Philosophy..............................136
2. The Immediate Impact ofFIRREA...................................137
3. The Breach Caused the Atlanta Branch Sales..........................138
J. Strategic Changes to Anchor’s Capital Development and Branch Franchise Led to Sales of Remaining Branches......................139
5. Calculating Damages for the Georgia Branch Sales.....................144
6. The Lincoln Acquisition Did Not Mitigate Damages from the Atlanta Branch Sales.............................................146
E. Wounded Bank Expenses ...............................................147
1. Costs Associated with the Sale of RFC and Other Assets.................147
2. Costs Associated with the Sale of Branches ............................148
3. Costs Associated with the Formation of a Holding Company and the Negotiated Exchange of the FDIC’s Preferred Stock...................149
I. Increased FDIC Insurance Premiums ................................150
IV. Conclusion................................................................153
II. Background
The history of the savings and loan crisis, as well as the responses of both the government and the financial services industry, were chronicled at length in the Supreme Court’s United States v. Winstar Corp. decision. See United States v. Winstar Corp., 518 U.S. 839 , 116 S.Ct. 2432 , 135 L.Ed.2d 964 (1996). In most subsequent Winstar-related opinions, it has been sufficient to briefly note this history and dive right into the case-specific facts. But it must be remembered that the law of damages is not based on an algorithmic certainty, instead being the product of the overlapping of a loose degree of empiricism and, at times, broad common sense. Thus, expert testimony is needed to establish some sort of verity in the amount of damages, but once liability has been established exactitude is not a necessity so long as the approximation does not become speculation. See e.g., Story Parchment Co. v. Paterson Parchment Paper Co., 282 U.S. 555, 563 , 51 S.Ct. 248 , 75 L.Ed. 544 (1931) (reasoning that an innocent injured party need only prove an approximate, non-speeulative, figure for damages); Lam, Inc. v. Johns-Manville Corp., 718 F.2d 1056, 1065 (Fed.Cir.1983) (observing that plaintiffs burden of proof for lost profits is “not an absolute one, but rather a burden of reasonable probability”). See generally Dan B. Dobbs, Law of Remedies §§ 3.4, 3.5 (2d ed.1993) [hereinafter “Dobbs”].
What becomes transparent is the importance of context to these matters. This *7 should not be surprising since contract analysis—much like statutory construction—is a matter of interpretation and interpretation becomes an exercise in the determination of meaning, which is itself a search for context. See Gen. Dynamics Land Sys., Inc. v. Cline, 540 U.S. 581, 595 , 124 S.Ct. 1236 , 157 L.Ed.2d 1094 (2004) (“language must be read in context [since] a phrase gathers meaning from the words around it”) (quoting Jones v. United States, 527 U.S. 373, 389 , 119 S.Ct. 2090 , 144 L.Ed.2d 370 (1999)) (alteration in original) (internal quotations omitted). See generally Felix Frankfurter, Some Reflections on the Readings of Statutes, 47 Colum. L.Rev. 527, 529 (1947) (noting that context is important because “unlike mathematical symbols, the phrasing of a document, especially a complicated enactment, seldom attains more than approximate precision. If individual words are inexact symbols, with shifting variables, their configuration can hardly achieve invariant meaning or assured definiteness.”); 2A Norman J. Singer, Sutherland’s Statutory Construction § 45.01 (6th ed.2000) (quoting Frankfurter, Some Reflections ).
And context is especially important in any lost profits case. This is because lost profits have been recoverable at common law only where such profits were foreseeable to the breaching party at the time of contracting, and such profits could be established with a reasonable certainty. See Hadley v. Baxendale, 156 Eng. Rep. 145 (1854). This rule with some modifications (as will be explained below) has been extended to suits against the government. See, e.g., Cal. Fed. Bank v. United States, 245 F.3d 1342 (Fed. Cir.2001) (recognizing that lost profits are an acceptable measure of damages in Winstar cases). The Federal Circuit has adopted a three-part test to determine lost profits: (1) the loss was the proximate result of the breach; (2) the loss of profits caused by the breach was within the contemplation of the parties because the loss was foreseeable or because the defaulting party had knowledge of special circumstances at the time of contracting; and (3) a sufficient basis exists for estimating the amount of lost profits with reasonable certainty. See, e.g., Energy Capital Corp. v. United States, 302 F.3d 1314 (Fed.Cir.2002); Cal. Fed. Bank, 245 F.3d at 1349 . Clearly, the reliability of evidence showing foreseeability, special knowledge, and even proximate causation depend in large measure on context. Accordingly, the very history of the savings and loan crisis, including the market forces that contributed to it and the regulatory and market responses leading up to and including the enactment of FIRREA, are critical to understanding Anchor’s long-term business plans and the impetus for the bank’s diversification. Both of these, in turn, are essential to the court’s subsequent lost profit analysis because each goes to the heart of Anchor’s claim for damages. Shakespeare was indeed prescient when he wrote that the “past is prologue.” 2
Specifically, what underlay these issues were the inherent flaws in the savings and loan business model, which left the industry exposed to rapid interest rate fluctuation and acted as an impetus for Anchor’s actions. As the government intervened to alleviate growing systemic problems through regulatory and statutory responses, some of the industry’s problems were alleviated, others grew worse, and new ones appeared. Simultaneously, a secondary mortgage market emerged, predicated on securitizing mortgages (in so-called “mortgage-backed securities” or “MBS”), which offered savings and loan institution a hitherto unknown income stream, thereby helping them to eventually emerge from the crisis. The economic state of the industry, as well as the regulatory response to the perceived financial crisis facing thrift institutions, formed the stage on which both Anchor and its regulators acted. No discussion and analysis of the legal issues in this ease can be divorced from this prologue.
That history in place, the history of Anchor itself follows, along with the tale of Anchor’s expansion through the 1980s and its reaction *8 to the government’s breach in 1989 and beyond.
A. The Plight of the Savings and Loan Industry in the 1970s and 1980s: The Problem of Risk Reduction in a Heavily Regulated Business Model
Financial service institutions share many things in common with ordinary businesses. Nevertheless, financial services institutions have traditionally been extremely sensitive to risk. Consequently, risk reduction has been a mainstay policy of any financial institution, including commercial banks, savings banks, thrifts, credit unions, and the newer creations of the marketplace. 3 One reason this is true is that, unlike Europe and the rest of the world, where a government-controlled national bank regulated finance, and oligopoly was the present feature of the finance market, the United States traditionally has had thousands of financial institutions licensed and competing on both the state and federal levels. See, e.g., Dep’t of the Treasury, Geographic Restrictions on Commercial Banking—The Report of the President 1 (1981) (noting that the American financial system encompassed roughly 42,000 depository institutions and 15,000 commercial banks in 1981). This multiplicity of American financial services institutions is the result of both the geographic immensity of this country and a longstanding strain of populism that distrusts centralized financial interests. Id.; see also Robert V. Remini, Andrew Jackson and the Bank War: A Study In The Growth of Presidential Power (1967) (detailing Andrew Jackson’s celebrated battle with Nicholas Biddle and the Con-gressionally-chartered Second Bank of the United States).
The latter led to pervasive regulation limiting both the geographic expansion of and the types of services that banking institutions could provide to consumers, thereby fertilizing the financial soil of the United States for a mushrooming of financial services institutions. See Symposium, The Law of Corporate Groups, Transcript of Afternoon Session, 13 Conn. J. Int’l L. 449, 451-53 (1999). Examples abound on both the federal and state levels. The most famous were the McFadden Act, 12 U.S.C. § 36 (as amended in 1933), which severely limited branching, and the Bank Holding Company Act, 12 U.S.C. §§ 1841 et seq. (1956), which in essence prohibited the use of bank holding companies to evade the McFadden Act’s anti-branching provisions. The result of these regulations was to curtail competition and to foster a plethora of institutions that were free from local competition. One unintended consequence was the undercapitalization of American financial service companies, which made these institutions particularly susceptible to economic downturns (whether cyclical or not) and pressures from sustained competition and the perception of regulatory impediments to growth. See Donald R. Ko-robkin, Vulnerability, Survival, and the Problem of Small Business Bankruptcy, 23 *9 Cap. U.L.Rev. 413, 425-28 (1994) (observing that smaller businesses are more susceptible to, and less likely to survive, financial distress, in part because they are undercapital-ized and less diversified).
Indeed, one can view the entire history of American banking as a search for a Holy Grail to insulate financial services institutions from financial risk. Historically, this Holy Grail was found in various devices of risk reduction, including the ability to offer various financial products to consumers (such as loans, mortgages, credit cards and other credit devices, automobile loans, investments, including savings accounts, etc.), devices intended to increase deposits (such as interest-bearing accounts), and the ability to expand geographically (whether through branches or by subsidiary banks or other financial services institutions).
Thus, risk reduction is of paramount importance because of its economic insulation properties. The greater the ability of financial services institutions to provide different types of products to consumers and to be insulated from the economic misfortunes of a particular geographic area, by being able to compete in a more prosperous region, the greater the financial health and profit-making ability of the financial services company and the industry as a whole. See Kris James Mitehener, Are Prudential Supervision and Regulation Pillars of Financial Stability? Evidence from the Great Depression, 50 J.L. & Econ. 273 , 278 (2007) (observing that “[l]aws permitting branch banking are often cited as reducing financial instability by enabling banks to diversify their portfolios over a wider geographical area or customer base or by introducing competition into a previously geographically segmented market and removing inefficient banks from the system”). To be sure, a diversified financial institution has its proverbial eggs in many baskets; it is not nearly as susceptible to economic hardships in a particular industrial sector or geographical region. Id.; Douglas H. Ginsburg, The Future of Interstate Banking, 9 J. Coep. L. 655, 658-59 (1984) (noting that “diverse areas are affected differently by business cycles and turns in the fortunes of a particular industry or sector of the economy”). The concept of risk reduction, whether accomplished through the ability to offer various types of financial products to consumers, or by being able to expand geographically the sale of those products and the providing of deposit and other services to consumers, is at the heart of the instant case. That story began during the years of the Great Depression.
In the wake of the Great Depression, the heavily regulated savings and loan industry arose as the primary intermediary to finance local residential home ownership. Historically, the industry focused on facilitating home ownership through the pooling of local personal savings, which were then allocated in the form of residential mortgage loans. Initially, savings and loan institutions, or “thrifts,” were circumscribed by regulatory geographic limitations that prohibited them from providing mortgage loans on homes more than fifty miles from the thrift’s home office, and this at a time when most thrifts were single-office institutions. H. Rep. No. 101-54(1), at 293 (1989), as reprinted in 1989 U.S.C.C.A.N. 86, 89. As a result, traditional thrift lending was severely geographically concentrated. In time, as thrifts engaged in branching the lending radius was extended to 100 miles, then statewide in 1970, and ultimately nationwide in 1983. Id.
In addition to the geographic concentration of their loan portfolios, thrifts historically suffered from restrictions on the types of financial products that they could offer and assets that they could hold. Thrifts primarily invested in long-term, fixed-rate, low-yield mortgage loans that generated steady, if unspectacular, rates of return. Throughout the period from the Great Depression until the 1970s, the heavily regulated thrift business model worked fairly well. See Winstar, 518 U.S. at 845 , 116 S.Ct. 2432 . Under the aegis of the Federal Home Loan Bank Board (“FHLBB”), the principal regulator for the federal thrift industry, and the Federal Savings and Loan Insurance Corporation (“FSLIC”), the insurer of federal thrifts, the industry mostly succeeded in supplying capital to the residential housing market and promoting the availability of affordable housing. H. Rep. No. 101-54(1) at 294. Between *10 1940 and 1965, the assets controlled by federally insured thrifts increased from $3 billion to over $124.5 billion. Id.
Beginning in 1966, the thrift industry ben-efitted largely from the application of banking Regulation Q, promulgated by the Federal Reserve Board, which capped the interest rate that thrifts could pay for customer deposits and which kept thrifts’ cost of deposit funds artificially low. At the time, thrift and commercial bank deposits were effectively the only high-liquidity investment options that consumers had. Federal commercial banks were also subject to Regulation Q, but were forced to pay lower interest rates than thrifts (25-50 basis points, or tenths of one-percent) on time and savings deposits. Id. at 295-96; Act of Sept. 21,1966, Pub.L. No. 89-597, 80 Stat. 823 (1966). The interest rate difference gave thrifts a competitive advantage over commercial banks in attracting deposit funds.
Throughout this period, then, thrifts generated income by lending money for home mortgage loans at slightly higher interest rates than they paid for short-term deposits; they lent long and borrowed short. By the end of the 1970s, however, the confluence of rising interest rates and inflationary pressures began to unravel the business model upon which the entire thrift industry had been historically predicated. First, bouts of disintermediation caused capital to flee the thrift industry in search of market-rate re-tums-on-investment.
Thrifts had long been the primary destination for personal savings deposits. As noted above, however, interest rate returns on federally-insured thrift deposits were capped by Regulation Q. Throughout the 1970s, there was a volatile increase in inflation. In 1979, the Federal Reserve adopted a new monetary policy to curb inflation—choosing to control the growth of the money supply instead of stabilizing interest rates. H. Rep. No. 101-54(1) at 295. The result was a dramatic increase in interest rates. Inflation, coupled with rising interest rates, “produced conditions ripe for disintermediation.” Id. at 295 ; see Robert J. Laughlin, Note, Causes of the Savings and Loan Debacle, 59 Fordham L.Rev. S301, S303-04 (1991). As non-banking firms such as securities firms and insurance companies came online with alternative investment vehicles, including money market accounts and mutual funds that paid market interest rates unrestricted by Regulation Q (and therefore higher rates than thrifts offered) to customers:
Customers gradually became more sophisticated and realized that as long as the inflation rate was higher than the interest rate they earned on their deposits [in federally insured financial institutions regulated by Regulation Q], they were actually losing money by having major balances in depository institutions. In order to avoid losing money on their deposits, consumers periodically withdrew massive amounts of money from financial institutions, a phenomenon known as disintermediation.
H. Rep. No. 101-54(1) at 295, U.S.Code Cong. & Admin.News 1989, pp. 86, 91. These periodic bouts of disintermediation, when market interest rates would rise above those offered on deposits by the thrift industry, caused liquidity problems for the thrifts that restricted their ability to fund new mortgage originations. See Richard C. Breeden, Thumbs on the Scale: The Role that Accounting Practices Played in the Savings and Loan Crisis, 59 Fordham L.Rev. S71, S72 (1991) [hereinafter Thumbs],
In response to the disintermediation pressures, Congress initiated a corrective tide of interest rate deregulation (the abrogation of Regulation Q) so that thrifts could pay depositors market rate returns. This occasionally presented thrifts with an “interest rate gap,” a scenario in which their cost of funds (primarily the interest paid on short term deposits) exceeded their revenue from long-term, fixed-rate mortgage assets acquired when interest rates were lower. Congress’s goal was to return to thrifts the competitive advantage to attract consumer deposits, but the deregulation operated, in part, as a Pandora’s Box for the thrift industry.
In 1980, the Depository Institutions Deregulation and Monetary Control Act (“DIDMCA”), Pub.L. No. 96-221, 94 Stat. 132 (1980), began to phase out the Regulation Q interest rate caps on federally regulated thrift and bank deposits and authorized de *11 pository institutions to offer Negotiable Order of Withdrawal accounts that would compete for funding with money market mutual funds and other similar investment products. H. Rep. No. 101-54(1) at 295. The DIDMCA also increased the federal deposit insurance limits from $40,000 to $100,000, giving investors further incentive to maintain savings in the thrift industry rather than in uninsured competing financial instruments. In effect free to compete for funds by offering market rate returns on deposits, thrifts were finally armed to deal with the problems of disin-termediation. However, the industry was generally unprepared for how interest rate deregulation would expose the inherent flaws of the savings and loan business model.
Thrift assets consisted overwhelmingly of long-term, fixed-rate mortgages; at the time, adjustable-rate mortgages (“ARM”) were largely prohibited by law and viewed skeptically by consumers. 4 This concentration of assets—a singular focus on long-term, highly illiquid investments—as the font of most thrift revenue was “the Achilles heel of the S & L industry.” William K. Black, Ending our Forebearers’ Forbearances: FIRREA and Supervisory Goodwill, 2 Stan. L. & Pol’y Rev. 102, 103 (1990). When market interest rates rose rapidly, thrifts were forced to pay ever-increasing rates to attract and retain customers’ deposits. Those rates, however, exceeded the interest revenue generated by the thrifts’ assets, which increased only gradually as older mortgages were paid off and the capital was reinvested at new, higher interest rates. “By 1981 thrifts were paying an average of 11 percent for their funds while their mortgage portfolios were yielding only 10 percent—a negative 1 percent spread.” H. Rep. No. 101-54(1) at 296, U.S.Code Cong. & Admin.News 1989, pp. 86, 91-92. This negative spread, also referred to as the “interest rate gap,” caused annual industry losses in excess of $4 billion in both 1981 and 1982. Id. It eroded industry capital, and caused scores of thrifts to fail: 81 in 1981, 252 in 1982, and 102 in 1983. Id.
The interest rate gap problems were caused in large part by the fact that thrifts’ long-term, fixed-rate mortgage assets were illiquid and could not re-price (be liquidated with the proceeds subsequently re-invested at the new, higher interest rate) as quickly as interest rates rose. Since the mortgages were long-term, thrifts’ capital investments in mortgages were tied up for several years. 5 To be sure, until the life of those mortgages ran, a thrift would be unable to re-invest its capital at the higher interest rates. As noted below, the secondary market for whole mortgage loans was still in its earliest stages; there was little opportunity for thrifts to sell these assets and immediately liquidate their investment. Moreover, as interest rates increased, the market value of an existing fixed-rate mortgage declined precipitously, because the fixed-rate mortgage delivered a lower return on investment than steadily rising market rates. One commentator explained the mechanics of these so-called “underwater” mortgages:
A simplified example illustrates this reduction in market value. Assume that an S & L makes a 30-year, fixed rate mortgage loan of $100,000 at a 5 percent interest rate in 1978. By 1980 mortgage rates rise to 10 percent____If the S & L sells the mortgage note in 1980, no purchaser will buy it for $100,000 because the market is offering a 10 percent return on similar mortgage loans made in 1980. To earn a market return the purchaser will pay only $50,000 for the 1978 mortgage note. At that price, the $5,000 per year of interest income provides an annual yield of 10 percent.
Black, supra note 5, at 103.
Clearly, the industry was in dire trouble. In the high-interest-rate environment thrifts *12 were simply unable to survive, so long as their investment authority was limited to long-term, fixed-rate mortgages. The FSLIC could hardly withstand a wave of thrift failures that would trigger its contingent deposit insurance liability. 6 To address the core flaws in the thrift industry’s business model at this late stage—when blood was already in the water-—Congress and regulators adopted a paradigm shift in the way that thrifts would be permitted to conduct business. The hope was that through broader investment authority and fewer regulatory restrictions on capital the entire industry might be able to grow out of its problems— or at least buy enough time until interest rates held steady or declined to sustainable levels at which thrifts could again be profitable through “traditional” means.
B. The Federal Government Responds to the Industry’s Problems: Risk Reduction through Deregulation and Encouraging Thrifts To Become More “Bank-Like”
1. Accounting Forebearances
Many in the government ascribed to the belief that the thrift industry’s problems were only temporary, and that market corrections to the high interest rate environment would eliminate the interest rate gap and eventually resolve the industry’s solvency problems. See History of the Eighties— Lessons for the Future 173 (Federal Deposit Insurance Co., 1997) [hereinafter History of the Eighties]. To this end, the thrift crisis was addressed, in part, through deregulation of the thrift industry’s capital requirements and new accounting methods that temporarily overlooked solvency problems and helped prop up failing thrifts. See Winstar, 518 U.S. at 846 , 116 S.Ct. 2432 (“The use of various accounting gimmicks and reduced capital standards masked the worsening financial condition of the industry, and the FSLIC, and enabled many weak institutions to continue operating with an increasingly inadequate cushion to absorb future losses.”) (quoting H. Rep. No. 101-54(1) at 298, U.S.Code Cong. & Admin.News 1989, pp. 86, 93-94). The goal of these maneuvers was to buy time; if a regulatory seizure could be temporarily avoided, there was hope that market corrections would naturally bail out troubled thrifts.
“Capital requirements are the most powerful source of discipline for financial institutions” because they “reduce the incentive to take excessive risks[,] provide a cushion against loss,” and “serve[ ] as a check against uncontrolled growth.” 7 Thumbs at S75. In *13 the wake of volatile interest rates, however, the “prevailing view was that S & Ls should be granted regulatory forbearance until interest rates returned to normal levels.” History of the Eighties 173. Accordingly, the FHLBB rolled back capital reserve requirements from five to four percent of assets in November 1980, and then from four percent to three percent in January 1982. Winstar, 518 U.S. at 845-46 , 116 S.Ct. 2432 (citing 45 Fed.Reg. 7111 (Nov.1980); 47 Fed.Reg. 3543 (Jan.1982)).
In addition to more-relaxed capital benchmarks, Congress and the regulators also adopted regulatory accounting principles (“RAP”) for calculating a thrift’s regulatory capital compliance. RAP differed from generally accepted accounting principles (“GAAP”), and was considerably more lenient:
[RAP] accounting gimmicks included permitting thrifts to defer losses from the sale of assets with below market yields; 8 permitting the use of income capital certificates, authorized by Congress, in place of real capital; letting qualifying mutual capital certificates be included as RAP capital; allowing FSLIC members to exclude from liabilities in computing net worth, certain contra-asset accounts, including loans in process, unearned discounts, and deferred fees and credits; 9 and permitting the inclusion of net worth certificates, qualifying subordinated debentures and appraised equity capital 10 as RAP net worth.
H. Rep. No. 101-54(1) at 298, U.S.Code Cong. & Admim.News 1989, pp. 86, 93-94.
A final piece of Congress’s regulatory capital forbearance initiatives involved special accounting treatment for those thrifts willing to assume ownership of insolvent, failed thrifts that threatened the FSLIC’s contingent deposit liability. These so-called “supervisory mergers,” which have been the catalyst of the Winstar litigation, included “an understanding that the acquisitions would be subject to a particular accounting treatment that would help the acquiring institutions meet their reserve capital requirements imposed by federal regulations.” Winstar, 518 U.S. at 848 , 116 S.Ct. 2432 . Because the FSLIC did not have sufficient cash to “make up the difference between a failed thrift’s liabilities and assets, the [FHLBB] had to offer a ‘cash substitute’ to induce a healthy thrift to assume a failed thrift’s obligations.” Id. at 849-50 , 116 S.Ct. 2432 . This “cash substitute” came in the form of supervisory goodwill, an intangible accounting credit that captured the amount by which an acquired institution’s liabilities exceeded its assets— essentially, the quantification of the institution’s negative net worth. Under the purchase method of accounting, a thrift that acquired such a failed institution could count the full amount of the supervisory goodwill involved in that transaction as an asset towards the acquiring institution’s regulatory capital reserve requirement.
The [FHLBB] did not have sufficient resources to close all insolvent institutions, [but] at the same time, it had to consolidate the industry, move weaker institutions into stronger hands, and do everything possible to minimize losses during *14 the transition period. Goodwill was an indispensable tool in performing this task.
Id. at 850 , 116 S.Ct. 2432 (quoting Savings and Loan Policies in the late 1970’s and 1980’s: Hearings Before the House Committee on Banking, Finance, and Urban Affairs, 101st Cong., 2d Sess., Ser. No. 101-176, p. 227 (1990) (Test, of Richard Pratt, former FHLBB Chairman)).
Supervisory goodwill allowed an acquiring institution to avoid immediate regulatory insolvency after taking on a failed institution’s excess liabilities. Id. at 850 , 116 S.Ct. 2432 . Furthermore, it gave the acquiring institution the leeway to invest in more assets, with the hope that additional investment would generate future profits to help fill the balance sheet gap created when an acquiring institution assumed the failed institution’s net liabilities. Id. at 851 , 116 S.Ct. 2432 (“From the acquiring thrift’s perspective, however, the treatment of supervisory goodwill as regulatory capital was attractive because it inflated the institution’s reserves, thereby allowing the thrift to leverage more loans (and, it hoped, make more profits).”). Moreover, some transactions involving failed thrifts featured a further inducement, described as a “capital credit” that arose when the FSLIC “contributed cash to farther a supervisory merger and permitted the acquiring institution to count the FSLIC contribution as a permanent credit to regulatory capital.” Id. at 853 , 116 S.Ct. 2432 . This additional asset, however, was not required to be subtracted out of the supervisory goodwill generated by the acquisition, so “regulators effectively permitted double counting of the cash as both a tangible and an intangible asset.” 11 Id.
Thrifts were permitted to amortize the goodwill over an extended period of up to 40 years, consistent with GAAP. Id. at 851 , 116 S.Ct. 2432 . Amortization recognized that supervisory goodwill, as an intangible asset, had diminishing value over time. A thrift, therefore, must amortize, or “write down”, a portion of any goodwill each year, reflecting that declining value. Id. The annual amortization was reflected on the thrift’s financial statement as an operating expense. Id.
2. Asset Deregulation
The other half of Congress’s solution to the industry’s interest rate gap crisis focused on thrifts’ asset management powers. Congress deregulated the asset-side of a thrift’s balance sheet, permitting investment in a broader range of assets with the intention of reducing the thrift industry’s reliance on residential mortgages as a sole source of revenue. In other words, the ability to provide greater financial services was believed to reduce the overall risk that thrifts faced. The centerpiece for this deregulation was the Garn-St Germain Depository Institutions Act of 1982, Pub.L. No. 97-320 (Oct. 15, 1982) (“Garn-St Germain”), which was broadly considered “the most significant piece of thrift legislation since the Great Depression.” H. Rep. No. 101-54(1) at 296, U.S.Code Cong. & Admin.News 1989, pp. 86, 91-92. Simply put, Garn-St Germain expanded thrifts’ investment powers considerably, permitting the industry to engage in entire new lines of business and commit greater resources to already existing lines of business that had previously been subject to more restriction. The goal of Garn-St Ger-main’s asset deregulation was to allow thrifts to expand out of the residential mortgage niche to which the industry had been relegated. “[Tjhese actions gave thrifts far greater flexibility in deciding how their money could be invested.” Id. at 297 . It was “a rapid expansion in the scope of permissible thrift investment powers.” Winstar, 518 U.S. at 845 , 116 S.Ct. 2432 (quoting H. Rep. No. 101-54(I) at 291, U.S.Code Cong. & Admin.News 1989, pp. 86, 87). In other words, thrifts were becoming much more like commercial banks, which had not been as adversely affected by rising interest rates in the late 1970s because they were able to invest in a wider range of commercial loans and other *15 assets that repriced faster than fixed-rate mortgages.
Among others, federally-chartered thrifts were authorized to invest up to 40% of their assets in nonresidential real estate lending, up to 30% of their assets in consumer loans, and 100% of assets in state or municipal securities. H. Rep. No. 101-54(1) at 297. These broader investment authorities were “consistent with recently enacted state laws granting state-chartered thrift institutions broader powers,” as well. S.Rep. No. 97-536 at 18 (1982), U.S.Code Cong. & Admin.News 1982, pp. 3054, 3071-72. Some states, such as Texas, Florida and California, had already removed essentially all portfolio and business activity restrictions for their state-chartered savings and loan institutions. See generally History of the Eighties 176-77.
One result of this deregulated environment was that thrift institutions were gradually becoming more “bank-like.” Beginning with the DIDMCA in 1980, the long-established regulatory differences between thrifts and banks became blurred. After 1980, both were permitted to provide checking account services and negotiable order of withdrawal accounts. Id. at 92-93. “Moreover, thrifts were granted many powers that had been available only to commercial banks. For example, S & Ls could enter consumer loan and credit card businesses, and mutual savings banks could make business loans and accept demand deposits.” Id. at 93.
Some feared that the thrift industry, with its new commercial lending powers and an aversion to fixed-rate mortgage investments, would withdraw from its traditional niche as a residential mortgage lender and that capital might then flee the residential mortgage business, thereby driving up the costs of residential mortgage loans. This was not the case, however, as a burgeoning mortgage-banking industry that began to emerge in the 1970s helped channel capital to the residential mortgage market through both thrifts and mortgage-banking enterprises. Furthermore, the growth of a secondary mortgage market, where whole mortgages and mortgage-backed securities (“MBS”) are sold to both depository institutions and general investors, enabled thrifts to escape the burdens of their fixed-rate mortgage portfolios and recycle capital into new ARM loans. This dynamic secondary market proved to be one of the primary means by which thrifts were able to remedy their maturity gap problems and better respond to interest rate gap problems.
C. Market Responses: A Primer on the Secondary Mortgage Market
A detour into the roots of the secondary mortgage market is essential here for two reasons. First, it was a prevailing market response to many of the lending problems thrifts faced in the 1980s. The emerging secondary market provided liquidity to the mortgage industry reducing risk by helping make mortgages more fungible and, therefore, tradable. Second, during the 1980s, Anchor and other thrifts became major players in the secondary mortgage market, using it as a tool to correct balance sheet problems. Anchor eventually acquired Residential Funding Corporation (“RFC”), which was the leading issuer of so-called “private-label” MBS, discussed below.
Until the 1970s, the residential mortgage market was dominated primarily by “portfolio lenders”—depository institutions (primarily thrifts) that lent money and held the loan in their asset portfolios for the life of the mortgage. Within this capital structure, there was very little turnover of investment capital; the availability of investment capital was determined primarily by a thrift’s deposit structure and the retirement of existing mortgages. Historically, private investment capital was not attracted to the housing market because whole mortgages were not an appealing investment outside the thrift industry. Mortgages themselves are not a liquid asset, so an investor would be committed to either holding one for the life of the loan or incurring substantial transaction costs to sell it. Furthermore, prudent investment in individual mortgages required extensive information on myriad issues, including a borrower’s creditworthiness, a property’s appraisal and local housing market trends. Moreover, the owner of an individual mortgage would be subject to the inherent risk of default on the underlying note, forcing the investor to re *16 sort to costly and cumbersome measures, including foreclosure and sale, to recover the investment. These prohibitive investment concerns left the mortgage market largely unable to attract investor-based capital. Kenneth G. Lore & Cameron L. Cowan, Mortgage-Backed Securities § 3.01 (2001 ed.).
This dynamic became a national concern as population shifts and homebuilding demand moved cross country to the west and southwest, and the demand for local mortgage capital was geographically separated from the concentrated sources of capital in the east. See Secondary Mortgage Market Act of 1984, Pub.L. No. 98-440 at 2, reprinted in 1984 U.S.C.C.A.N. 2809, 2810. What was needed to help eliminate the alternating, temporary regional shortages and gluts of available housing capital (which made the highly volatile housing finance market more or less expensive for the borrower) was an efficient secondary market for residential mortgages that would evenly distribute available capital, attract investor capital independent of thrift organizations, and allow lenders to sell mortgages out of their portfolio to recycle housing capital.
In 1938, Congress had established the Federal National Mortgage Association (“Fannie Mae”) to create a rudimentary secondary mortgage market. See generally Frank J. Fabozzi, The Handbook of Mortgage Backed Securities 3 (5th ed.2001) [hereinafter Fabozzi] (“The market where [mortgage] funds are borrowed is called the mortgage market, which comprises the primary and secondary market. The primary market provides the actual loan to a borrower, whereas the secondary market channels liquidity into the primary market by way of purchasing packages of loans from lenders.”). Fannie Mae was authorized to purchase “unconventional” mortgages—those insured by the Federal Housing Administration (“FHA”), and later, the Veterans Administration (“VA”)—from local lenders and hold them in portfolio, thereby replenishing the supply of lendable housing capital available to local lenders. In 1972, Fannie Mae began to purchase conventional mortgages, for the first time absorbing mortgage capacity that did not involve FHA or VA insurance.
Notwithstanding Fannie Mae’s secondary market purchases of FHA-and VA-insured mortgages up to 1972, the secondary mortgage market remained rudimentary in nature and, until the 1970s, “the capacity to attract investor based capital to the mortgage market had not developed to any great degree.” Pub.L. No. 98-440 at 2. In turn, Congress created the Government National Mortgage Association (“Ginnie Mae”) in 1968 and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) in 1970, with the designated goal of enhancing the availability of capital to lenders through a more sophisticated secondary mortgage market relying in principal part on mortgage-backed securities to bridge the gap between the investment community and the residential mortgage market. Fannie Mae itself began issuing MBS in 1981.
MBS use a pool of mortgages as collateral for the issuance of securities in the secondary market, each of which represents a fractional, undivided interest or participation in the underlying pool. Fabozzi at 26. As the mortgages within the pool are repaid, including principal and interest payments, all of those payments are channeled through a party that “services” the pool of securities and distributes a pro rata share of the proceeds to holders of the securities, minus a small servicing fee.
The evolution of MBS backed or issued by the three government-sponsored entities (“GSEs”)—Ginnie Mae, Fannie Mae and Freddie Mac—was a key solution to the mortgage industry’s liquidity problems of the 1960s and 1970s. The principal payments on the mortgages in these pools were guaranteed by the GSEs, and therefore there was no risk of default to the security holder. As a consequence, agency MBS could be rated as “investment grade” securities by the major credit-rating agencies. 12 The strong *17 credit rating, in turn, permitted institutional investors to become active participants in the secondary mortgage market, purchasing and trading MBS just as they might other securities. By converting whole mortgages into more fungible securities, the GSEs succeeded in eliminating the traditional risks associated with investing in whole mortgages. So long as the MBS were rated properly, and the underlying pool met certain needs or requirements of the investor (such as expected return on investment, average maturity of pool mortgages, geographic diversity of pool mortgages, etc.), the investor could safely acquire the MBS without concern for the characteristics of individual mortgages within the pool, or the risk of prepayment of any one mortgage. 13 Such was essential to attracting investor capital to the mortgage market.
By the nature of their congressional charters, however, the three government-sponsored entities did not serve the entire housing market, and the success of the secondary market activities that the agencies inspired notwithstanding, a significant sector of the housing market could not benefit from the federal secondary market initiatives. All three GSEs were established to improve the afford ability of homes and home finance to lower- and middle-income Americans. The mortgage pools that comprise Ginnie Mae MBS consist entirely of unconventional mortgage loans insured by the FHA or guaranteed by the VA. Id. at 3, 28 . Fannie Mae and Freddie Mac, on the other hand, issue securities comprised primarily of conventional mortgages, but those mortgages must conform to certain underwriting standards to qualify for the Fannie Mae or Freddie Mac guarantee. Among the three underwriting standards for a conventional mortgage, a conforming mortgage must not exceed máxi-mums for three categories, including: (1) payment-to-income ratio, measuring a borrower’s capacity to make monthly payments; (2) loan-to-value ratio, measuring the amount of the mortgage loan vis-a-vis the appraised property value; and (3) loan amount, the maximum amount of which typically increases each year to keep pace with inflation. Id. at 5-6 .
By virtue of the GSEs operating in only a portion of the secondary mortgage market— that of conforming loans—there remained a need for a sophisticated secondary market for nonconforming loans that did not meet the GSEs’ strict underwriting criteria. In adapting to this need—a characteristic that has been a hallmark of the mortgage industry since the 1970s—a niche evolved for private companies to issue their own MBS featuring pools of loans that could not qualify for the GSEs’ MBS pools. Beginning with the first privately issued MBS by Bank of America in 1977, the market for so-called “private-label” MBS has continued to evolve and mature. See Kenneth G. Lore & Cameraon L. Cowan, Mortgage-Backed Securities: Developments and Trends in the Secondary Mortgage Market 1-2 to 1-3 *18 (2001). “Beginning in the 1980s, the housing finance sector generated innovation on a scale unseen in the housing industry for years. New ideas, new instruments, new methods, new participants, and new competitors served as the catalysts for the explosive growth of the private secondary mortgage market.” Id. at 1-11 . In the 1980s, private-label MBS were routinely issued by private entities, including banks, thrifts, homebuild-ers, and mortgage-banking companies called “conduits” that specialize in buying mortgages, pooling them, and issuing MBS. See Fa-bozzi at 5-6, 31; see also H. Rep. No. 98-994 at 38, 39 (Statement of Preston Martin, Vice Chairman, Board of Governors of the Fed. Reserve Sys.), reprinted in 1984 U.S.C.C.A.N. 2827, 2843 (noting that “a fair number of banks, thrift institutions, mortgage companies, insurance companies and so-called conduit organizations have issued private pass-throughs”).
Because it is typically more profitable for the originator of a conforming loan to package it in a GSE MBS, private-label MBS mortgage pools tend to consist primarily (if not exclusively) of the leftovers—non-conforming loans. Most of these non-conforming loans fail to satisfy a GSE’s underwriting criteria solely because the amount of the loan exceeds the agency maximum. Id. at 31-32 . These loans (commonly called “jumbo loans”) are traditionally geared towards the affluent homebuyer, who is not a target of the GSEs’ housing initiatives. Id.
Other than the composition of the mortgage pools, one primary difference between agency-issued and private-label MBS involves the credit rating of the securities. As noted above, mortgages, and even pools of mortgages, are susceptible to the risk of default on the underlying loans. For the purchaser of an agency-issued MBS this risk of default is reduced by the agency guarantees that attach to the underlying loans, which bear the full faith and credit of the United States (Ginnie Mae MBS) or the implicit backing of the United States Treasury (Fannie Mae and Freddie Mac MBS). By contrast, private-label MBS have no such federal guarantee and must be credit enhanced by the issuer as a condition to the securities receiving an “investment grade” (AA or AAA) rating by one of the nationally recognized credit rating agencies. See id. at 267-68 .
Credit enhancement is the process by which the issuer provides some protection from the inherent risks of the underlying mortgages in a given pool and thereby improves the investment quality of the security. Credit enhancement for private-label MBS takes one of two forms; it is either “external” or “internal.” Id. External credit enhancement refers to the process in which an issuer of the MBS obtains the favorable credit rating of some third party to envelop the pool of securities underlying an MBS. It comes in the form of a third-party guarantee that provides protection against losses up to a specified amount; typically these guarantees include corporate guarantees, letters of credit, and pool insurance offered by a corporation, financial institution, or insurance company with a strong credit rating. Id. In contrast, internal credit enhancement requires no third-party involvement and primarily involves either a special allocation of the proceeds from the sale of a MBS issuance or the special structure of the security that allows for senior and subordinated classes. Id. at 268-69 . For a “reserve fund,” the issuer will set aside a portion of the issue proceeds into a designated account that is used to offset any pool losses up to the reserve amount. Id. In the case of a “senior-subordinated structure” the security is divided into two or more classes, with the subordinated classes absorbing a disproportionate share of any pool losses, so that the senior class of the security is insulated from loss and may qualify for the higher credit rating. Id. at 269 .
In the Secondary Mortgage Market Act of 1984, Congress recognized the explosive growth of the secondary mortgage market and its ever increasing role in providing liquidity to residential mortgage lenders. Congress noted that the federal agencies “have served well, and made mortgage-backed securities acceptable to investors by standardizing products and procedures and by developing a range of investment instruments.” S.Rep. No. 98-293 at 2, reprinted in *19 1984 U.S.C.C.A.N. 2809, 2810. Nevertheless, it was clear that “the existing Federal agencies simply [would] not be able to provide all the liquidity for mortgages that [would] be required” in the future due to the projected demand for mortgage credit. Id. Instead, it became imperative for Congress to “broaden the number of participants channeling investor capital to the homebuyer” and create an environment in which “the private sector [could] assume a more significant market role.” Id. Paying homage to the financial services deregulation in Gam-St Germain, Congress noted that:
Almost two years ago, an important procedural deregulation trend began, complementing the structural changes occurring in the financial services industry. For the first time, it became economically attractive for private sector actors to form conduit operations through which they could pass ownership in pools of mortgages to investors in the form of “pass-through” securities.
Id.
The Secondary Mortgage Market Act of 1984 implemented several changes designed to foster the growth of the private-label secondary mortgage market and, particularly, to encourage federal thrifts to become more active participants in the private-label market. Among these changes, the Act broadened the transactional exemption from the security registration requirements of the Securities Act of 1933, a change “designed to expedite the sale by mortgage originators (essentially financial institutions supervised by either state or federal agencies) of securities backed by pools of mortgages to sophisticated institutional investors.” Id. at 5 (parenthetical in original); see Pub.L. No. 98-440 Sec. 105 (c). Furthermore, and critical to thrifts’ investment power and their ability to participate in the secondary mortgage market, the Act preempted state laws that restricted thrift ownership of private-label MBS, authorizing any thrift to “purchase, hold, and invest” in any MBS, including private-label MBS, provided the security is appropriately rated by one of the national credit-rating organizations. Pub.L. No. 98-440 See. 106. In effect, the 1984 Act granted the authority to expand their portfolio holdings of MBS.
As the secondary mortgage market evolved throughout the 1970s and into the 1980s, the roles of different market players— each serving unique market needs, yet markedly intertwined—became more defined, along with the manner in which each party in the process could generate income, either through fees or interest-rate movements. The first entity involved in the MBS process is the “mortgage originator,” the original lender that extends the loan to a residential borrower. S. Rep. No. 98-293 at 4, reprinted in 1984 U.S.C.C.A.N. 2809, 2810. When a lender obtains a mortgage by extending a home loan directly to the borrower, it is referred to as a “retail origination.” Among the ranks of retail originators are thrifts, mortgage bankers, and commercial banks. The retail originator generates income on the mortgage in three ways. First, the retail originator generally charges a loan origination fee, along with certain application or processing fees. Second, the retail originator may retain the right to service the mortgage for the life of the loan, collecting payments from the borrower and making annual insurance or tax payments before forwarding the proceeds on to the buyer of the mortgage. This type of servicing is called “primary servicing,” and the party performing primary servicing charges a fee. As an ancillary benefit of the primary servicing, the retail originator often can earn interest revenue on the “float” due to any permitted delay between when individual mortgage payments are received and when the payments must be forwarded on to insurers, tax authorities, or mortgage owner. Id. at 7 . Finally, depending on interest rate movements between when the loan is originated and when it is sold into the secondary market, the retail originator may recognize a gain on sale. 14 *20 Id. Of course, if the mortgage is originated by a thrift that prefers to hold the whole mortgage in its investment portfolio, the mortgage is not sold on the secondary market.
Once the mortgage originator closes the loan, it will either (1) hold the loan in portfolio, (2) securitize the loan, 15 or (3) sell the mortgage to an investor that will either hold the mortgage in portfolio or securitize it. Often, if the mortgages are insured by the FHA or VA and qualify for a Ginnie Mae guarantee, the retail originator may simply pool the mortgages into an issue of “Ginnie Mae” securities. 16 Typically, however, the originator sells the mortgage to Fannie Mae or Freddie Mac, or to one of several private conduit companies. The agencies and private conduits specialize in acquiring a large “warehouse” of mortgages and then selecting mortgages from that inventory to pool together into securities offerings. Conduits typically obtain their mortgage inventory not through retail originations (in which the conduit loans money directly to the borrower), but instead through wholesale origina-tions, in which the mortgages are purchased on the secondary mortgage market from brokers or correspondents that conduct the retail originations. Id. at 6-7 .
Given the large inventory of mortgages in their warehouses, conduits are able to tailor a security offering to the needs of a particular institutional investor or market demand. The conduits earn income through gains-on-sale and servicing fees. Gain-on-sale occurs when the conduit is able to sell the securities for more than the face amount of the mortgages in the pool, as a type of value-added fee for the service of pooling the loans and issuing the securities. The servicing that the conduit provides, referred to as “master servicing,” requires the conduit to collect the loan payments for all mortgages within a pool and then distribute the pro rata shares of the collection to the security holders. Just like the primary servicing that an originator may perform, the conduit charges a fee for its master servicing.
Ultimately, it was the continued development of the secondary mortgage market and the introduction of ARMs that helped the thrift industry work through the troubles that the heavily regulated industry’s business model had imposed on it through the 1970s. By creating liquidity in the market and providing thrifts a constant source of secondary market demand for their whole mortgages, thrifts were finally able to recycle money and match the maturities of their asset and risk portfolios. This freedom, for those thrifts that properly managed this maturity gap, reduced risk by permitting a them to deal more successfully with changing interest rate environments and made thrifts less prone to the inherent dangers of the financial services industry.
Notwithstanding the dramatic relaxation of thrift capital requirements, accounting principles and asset management powers in the early 1980s and the emerging secondary mortgage market that relieved some pressures in the industry, the thrift crisis persisted. In order to prevent an industry collapse, Congress resorted to what was, in effect, a retrenchment of thrift regulatory policy and enacted FIRREA. Winstar, 518 U.S. at 856 , 116 S.Ct. 2432 . FIRREA changed the mechanism of thrift regulation. It eliminated the FSLIC and created the Federal Deposit Insurance Corporation (“FDIC”) to insure thrift deposits in its stead. Id. The Office of Thrift Supervision (“OTS”) replaced the FHLBB as the regulator of federally insured savings associations, and the Resolution Trust Corporation (“RTC”) was created to liquidate or dispose of failed thrifts and their assets. Id.
The most significant retrenchment of FIR-REA, for the purposes of this case, was a new core capital requirement of 3% and a new definition of “core capital” that excluded “unidentifiable intangible assets,” such as su *21 pervisory goodwill. Id. at 857 , 116 S.Ct. 2432 . Stricter capital requirements reflected a belief in Congress that “the size of the thrift crisis resulted from utilization of capital gimmicks that masked the inadequate capitalization of thrifts.” Id. (citation omitted). OTS specifically noted that FIRREA eliminated the capital and accounting fore-bearances previously promised to certain thrifts by the government—including the right to count amortized supervisory goodwill as a capital asset—and directed “[a]ll savings associations presently operating with these forebearances [to] eliminate them in determining whether or not they comply with the new minimum regulatory capital standards.” Id. (citation omitted). In addition to implementing stricter capital accounting standards, FIRREA also introduced new risk-based capital provisions that created heightened capital requirements based on the relative risk of loss inherent in a thrift’s assets.
FIRREA’s impact on institutions that had acquired failing thrifts in exchange for special supervisory goodwill treatment was swift and severe. Many institutions immediately fell out of capital compliance, became insolvent and were subject to seizure by thrift regulators. Id. at 858 , 116 S.Ct. 2432 (citing Black, swpra note 5, at 107 (“FIRREA’s new capital mandates have caused over 500 S & Ls ... to report that they have failed one or more of the three capital requirements.”)).
As a consequence of FIRREA, many thrifts that lost the privilege to specially account for supervisory goodwill sued the government for both a taking and breach of contract. In Winstar , the Supreme Court concluded that in some circumstances the government had an express contractual obligation to permit thrifts to count supervisory goodwill as a capital asset to be included in core capital. Id. at 864-68 , 116 S.Ct. 2432 . The Court held that FIRREA deprived the plaintiffs of that bargained-for benefit and, therefore, breached the supervisory merger agreements between the government and certain thrifts. Id. at 909-10 , 116 S.Ct. 2432 .
D. The Tale of Anchor Savings Bank before the Thrift Crisis
With an introduction to the thrift industry, the risks it faced, and the mortgage-banking industry through the 1980s firmly in place as a backdrop, it is appropriate to finally turn towards the history of the plaintiff in this case, Anchor Savings Bank, and review the manner in which Anchor attempted to weather the storm of the thrift crisis.
The relevant history of Anchor Savings Bank begins in Brooklyn, New York, in the 1960s. It was a state-chartered, single-branch institution that operated in the Bay Ridge neighborhood as Bay Ridge Savings Bank. Bay Ridge Savings Bank was a community-centric institution whose presence was limited, both geographically and operationally, primarily to its surrounding community. As a New York state-chartered institution, the bank was restricted to eight branches, and could not open more than one new branch in any one-year period. See Tr. at 2621-22 (Test, of George Schneider). As one of Anchor’s regulators testified at trial, “Bay Ridge Savings Bank was one of the most sound mutual savings banks in the State of New York____ It was very, very stable.” Tr. at 4127 (Test, of Robert Gough).
In 1966, Mr. Donald Thomas came to Bay Ridge Savings Bank as its new president. PX 989 at 6 (Depo. of Donald Thomas, May 12, 1997). 17 With him, Mr. Thomas brought a vision for a new, more dynamic institution that would—in his opinion—be better suited to accommodate change and weather squalls in the savings and loan industry. Mr. Thomas was primarily concerned that Bay Ridge Savings Bank might suffer from its geographic isolation in Brooklyn: “Brooklyn has 4 million people, and if you had economic downturn in that one area or even in that one section of that area, you could be in severe economic problems with loans. And at that time most of those loans made by savings banks were within local areas.” Id. at 9. *22 Other senior officers at Anchor echoed this sentiment. “[Bay Ridge] was an older community, l-to-4 family attached ground houses, four-story walk-ups, a lot of apartment buildings, and all the real estate was basically developed. So there was ... no place to lend the money within the community.” Tr. at 2622-23 (Test, of George Schneider).
The first substantive step that Mr. Thomas instituted at Bay Ridge was a name change in 1968. Mr. Thomas hoped that adopting “Anchor Savings Bank,” a more generic title not identified with a specific local community, would be a first step towards greater geographic diversity. Id. at 9. Soon after Mr. Thomas’ arrival, Anchor embarked upon a long-term strategic plan of expanding the bank’s base. In 1969, Anchor merged with Bushwick Savings Bank, a four-branch Brooklyn institution that complemented Anchor’s base. Id. at 9-10. Anchor also expanded into Long Island, opening a de novo branch in Carle Place, “a thriving community with a good economic base.” Id. at 9. Later, in 1977, Anchor acquired the North New York Savings Bank, which gave Anchor a presence in the Bronx borough, “bordering on Westchester which is a very prestigious area in the New York community.” Id. at 13. One upshot of the geographic expansion within the New York metropolitan area was that it allowed Anchor to maximize marketing efficiencies, reducing what Mr. Thomas called “waste marketing.” Id. at 15.
In 1980, Anchor converted to a federally chartered savings institution. Mr. Thomas “perceived greater freedom” in the ability to open new branches as a federally chartered institution. Id. at 16; PX 1 at 003 (Annual Rep. to the Trustees, 1980). Federally chartered institutions also had access to borrowed funds from the Federal Home Loan Bank, which gave Anchor flexibility in acquiring mortgages. PX 989 at 17; PX 1 at 005. Borrowings from the FHLB helped Anchor weather some of the pressures brought on in the late 1970s and early 1980s by the inverted interest rate yield curve that gave rise to the interest rate gap discussed above. As noted, this phenomenon was not isolated to just Anchor or other New York savings institutions, but was instead endemic to the entire thrift industry.
E. Anchor’s Expansion
As alluded to above, Mr. Thomas and Anchor’s senior management seemed to be acutely aware of the problems that would eventually plague the thrift industry. From his arrival at then Bay Ridge Savings, Mr. Thomas committed Anchor to a strategy of deliberate growth outside its Brooklyn community: “I felt it was absolutely necessary to get out of one area of investment. And I also knew that you couldn’t survive and get new deposits forever in one area. So you had to expand to different market areas.” PX 989 at 21 (Depo. of Donald Thomas, May 12,1997).
The driving force behind this goal of geographic expansion was the diversification of risk. Id. at 23. Operating within one small market like Brooklyn, or even the metropolitan New York area, exposed Anchor to the kind of event risk that could be catastrophic because most of its mortgage assets and deposit base were so geographically concentrated. Even after Anchor began to expand outside of Brooklyn, it felt the pains of this kind of event risk when thrift deposits began to leave the state of New York in favor of California through both market forces 18 and disintermediation. Id. at 19-21. Anchor’s original core market of Brooklyn was particularly affected by the outflow; in the early 1980s, Anchor’s Brooklyn branches experienced a net deposit outflow that was more acute than other branches in the New York region. See PX 1 at 014 (“Anchor’s 1980 deposit experience continued to show a trend of net deposit outflows from our New York City offices and, in particular, our Brooklyn-based locations.”); PX 2 at 017 (1981 Annual Report to the Trustees); PX 3 at 012 (1982 Annual Report to the Trustees) (“Our three oldest offices, located in Brooklyn—Bay Ridge, Boro Park and Bushwick—experi- *23 eneed a combined net deposit outflow of $18.2 million.”). Moreover, officials within Anchor viewed the Brooklyn market as one of limited growth potential that may not have been able to sustain a growing enterprise over time. Mr. Cody Sickle, a senior officer for Anchor who oversaw the bank’s branch network through most of the 1980s, noted that in the early 1980s “Anchor’s structure ... had a lot of very sound, stable branches, but we had a lot of that stability in neighborhoods that were very old. And by ‘old,’ I mean a lot of our Brooklyn branches, while they were viewed at that time as the crown jewels of the company, they were neighborhoods that were not going to see—not likely to see dramatic growth over the next 20 years.” Tr. at 844.
Mr. Thomas also seemed to anticipate the industry flaws associated with systematically borrowing short and lending long. He realized the perils of holding illiquid 1-4 family home mortgage assets in a period where interest rates rapidly fluctuated and outstripped the interest revenue derived from the mortgages. To this end, in the 1970s he gradually moved Anchor towards the nascent mortgage-banking industry to take advantage of the growing secondary mortgage market and promote Anchor’s liquidity. “[T]he whole idea was to make mortgages ... bundle them, sell them, [so that] you get your money back, but then you service them and you have the fees. So that made you more liquid, and that’s how you met some of the challenges of being locked in” at interest rates below the costs of deposits. PX 989 at 29. The first step towards this goal was the acquisition in 1979 of Anchor Mortgage Resources, a mortgage-banking enterprise that originated mortgages in the Atlanta, Georgia area. Id. at 61-63.
Mr. Thomas had long planned to diversify geographically within the state of New York, and this was evidenced by the Bushwick and North New York acquisitions in 1969 and 1977. He also grew the bank in northern New York, opening new branches in Niagra County, near the Canadian border. Id. at 23. Beginning in 1981, after Anchor had converted to a federal charter, the Federal Home Loan Bank in New York presented Anchor with opportunities to pursue its expansion within New York through the acquisition of troubled thrifts. In 1981, Anchor acquired Guardian Federal Savings & Loan with offices in Nassau and Suffolk counties and later the New York & Suburban Federal Savings and Loan Association with offices in New York and Richmond counties. PX 2 at 41 (1981 Annual Report). Each of these supervisory transactions were completed with cash assistance from the FSLIC and FDIC. See id. at 23-24. In 1982, Anchor acquired three small thrifts in upstate New York; the acquisitions were accounted for as “pooling” arrangements in which no goodwill was created. PX 3 at 32 (1982 Annual Report); PX 6 at 22 (1985 Annual Report).
For all of its growth within the New York market, however, Anchor’s interstate expansion was restricted by federal regulation that generally prohibited interstate branching. Without the opportunity to develop branches in other states, Anchor was geographically limited to growth in only the state of New York. That restriction changed in 1982, however, with the passage of Garn-St Germain. Under Garn-St Germain, the FSLIC was authorized to arrange mergers of institutions across state lines, notwithstanding interstate branching prohibitions. See S.Rep. No. 97-536 at 49 (1982), reprinted in 1982 U.S.C.C.A.N. 3054, 3103. Anchor seized this opportunity to finally extend its geographic reach beyond the borders of New York and enter new, growing markets.
In 1982, Anchor became the very first savings bank in the country to boast an interstate branch network when it completed supervisory mergers arranged by the FHLB with Peachtree Federal Savings and Loan Association in Atlanta, GA (“Peachtree”) and First Federal Savings and Loan Association of Crisp County in Cordele, GA (“Crisp”). PX 3 at 003. By the year’s end, the Georgia franchise accounted for nearly $140 million in deposits. Id. At the time, “Atlanta was the fastest growing major city in the United States” and Anchor “looked at that market as a terrific long-term market.” Tr. at 844 (Test, of Cody Sickle). For Anchor, the opportunity to extend the bank’s branch system outside of its home state into emerging mar *24 kets was viewed as a long-term business plan, designed to hedge against future stagnation in Anchor’s traditional New York markets. See id. at 845 (“[The Atlanta branches] were going to grow for the long term so that they would position the bank when and if the older neighborhoods that we were in New York started not to grow at all; we would be in a position of growing in rapidly growing communities.”). When Anchor’s metropolitan New York branches were suffering deposit outflows in 1982, its Georgia-based branches increased deposits for the year. See PX 3 at 012.
In 1983, Anchor continued to expand its branch network in both the Georgia and New York markets. Anchor merged with Standard Federal Savings & Loan and Tri City Savings & Loan in Georgia, adding 16 branches and nearly $250 million in deposits to the thrift. PX 4 at 004 (1983 Annual Report to the Trustees). Anchor also merged with Heritage Federal Savings and Loan, which added nine branches and over $260 million in deposits to the bank’s Long Island branch system. Id. The following year, Anchor would also merge with United Federal Savings and Loan Association in Waycross, GA and add five branches in the southern portion of Georgia, along with $68 million in deposits. PX 5 at 004 (1984 Annual Report to the Trustees).
Far and away the largest expansion that Anchor undertook in 1983, though, was directed towards the New Jersey market—a market that was, in large part, geographically and financially contiguous with Anchor’s existing metropolitan New York franchise. In August of 1983, Anchor acquired Suburban Savings and Loan Association, adding 27 branches in New Jersey and $1.8 billion in deposits to the bank’s base. Id. at 003-004. This acquisition alone increased the size of Anchor’s deposit base by nearly 75%; along with Anchor’s other mergers in 1983, the bank nearly doubled in size. See id. Anchor’s officials viewed the Suburban transaction as a coup, of sorts: “New Jersey clearly being right next door to New York, a significant portion of the New Jersey market is a suburb of New York City. So our name recognition was very strong in New Jersey to begin with. It’s an adjoining market. Population density is terrific. So the opportunity there was terrific.” Tr. at 846 (Test, of Cody Sickle). For metropolitan commuters, Anchor’s expansion into New Jersey allowed the bank “to serve [its] customers with offices near their homes and places of business.” PX 4 at 004.
In addition to the sizeable deposit base that Anchor acquired in the Suburban transaction, it also acquired one of Suburban’s subsidiaries, Suburban Coastal Corp., which was a major mortgage-banking enterprise. Id. “Anchor’s acquisition of Suburban Coastal Corp ____ positioned the Bank as a major mortgage banker with a nationwide origination network and a servicing portfolio of $6.4 billion, ranking Anchor as the sixth largest mortgage banking institution in the nation.” Id. Anchor would eventually rename Suburban Coastal Corp. as “Anchor Mortgage Services, Inc.” (“AMS”) and use that subsidiary to position the bank as a major player in nationwide mortgage origination and secondary market activity. Id. at 021. As Anchor’s expert Jess Lederman, an industry insider explained, Anchor’s “acquisition of one of the largest mortgage banking companies in the country” was “a significant expansion [by Anchor] into the secondary [mortgage] market.” Tr. at 1407-08 (Test, of Jess Leder-man).
As a mortgage-banking enterprise, AMS was in the business of acquiring whole mortgage loans through one of two means. First (and primarily), as a retail originator of mortgages, AMS had a nationwide system of offices through which AMS could originate loans directly with customers, the home buyers seeking mortgages. AMS conducted its retail originations through a network of branch offices across the nation. Second, as a wholesale originator, AMS had the capability to purchase mortgages on the secondary market that had already been originated by other lenders. See id. at 1405-08; Tr. at 2307-08 (Test. of John Brull); Tr. at 2685 (Test, of George Schneider). AMS conducted its wholesale originations from a central location, relying on a cadre of correspondents who conducted the original, retail origination.
*25 Anchor derived multiple benefits from AMS. First, AMS helped move Anchor towards Mr. Thomas’ long-term goal of becoming less dependant on interest-sensitive income because the primary revenue that AMS produced was in the form of servicing fees. While AMS originated hundreds of millions of dollars in mortgages each year, it did not hold those mortgages in portfolio. Instead, AMS would sell the mortgages on the secondary market, either as whole loans to an institution that would hold the mortgages in portfolio itself or as part of Freddie Mac, Fannie Mae or Ginnie Mae mortgage backed securities. AMS, however, would retain the primary servicing rights to the individual mortgages—i.e., it would continue to collect the monthly mortgage payments, coordinate appropriate insurance or tax payments, and distribute the monthly payments to the ultimate mortgage owners—and receive a fee for those services based on the size of the mortgage loan. See Tr. at 2642 (“When a borrower takes out a mortgage, every month he makes a principal [and] interest [payment], and payment of taxes and insurance. The mortgage servicer collects that money and then sends it to the ultimate investor, and for that service, it collects a fee____”) (Test, of George Schneider, President of Anchor).
The revenue generated from the servicing was therefore directly dependent not on the interest rate environment, but instead on the volume of servicing business that AMS could generate. 19 As Anchor’s Senior Vice President and Chief Financial Officer testified, AMS’s servicing fee revenue was typically more than 25 basis points, or slightly more than a quarter of one percent, of its servicing portfolio. See Tr. at 2292, 2303 (Test, of John Brull). “In addition to that, [Anchor] would have free use of escrow funds” for a limited period of time, “which [were] relatively free costing funds.” Id. at 2303. Furthermore, AMS’s servicing portfolio had inherent resale value, because a market emerged in which mortgage-banking companies could buy or sell servicing rights. Id.; see Tr. at 2647 (Test, of George Schneider) (“Servicing has value, like any other investment vehicle, and generally, it was considered servicing is worth 1 percent of the principal amount of the servicing. And like anything else, there were times when, for whatever reason, somebody is willing to pay more for servicing than Anchor would consider it would be worth.”) (recalling that Anchor sold servicing rights for at much as a 2.8% premium).
The second substantial benefit that Anchor derived from its relationship with AMS was the ability to fill Anchor’s own need for loans that the bank would hold in portfolio as interest-earning assets. See id. at 2305. For a time, AMS would become Anchor’s “primary source for portfolio origination of both real estate related and consumer loans outside of the market areas served by [Anchor’s] branch network.” PX 34 at 15528 (Feb. 12, 1987 Common Stock Offering Circular); see also Tr. at 2700 (Test, of George Schneider) (“[I]n the 1985 fiscal year, 87 percent of the total dollar volume of [AMS’s] closed loans were sold to Anchor Savings Bank.”) (citing PX 7 at 799549). Furthermore, as Anchor tried to manage its asset portfolio in the mid-1980s and liquidate some of its long-term, fixed rate assets (mortgages), it was able to use AMS as a vehicle through which the bank could swap those assets for Freddie Mac MBS that provided better liquidity and, therefore, more flexibility to deal with interest rate issues. See PX 7 at 007 (1986 Annual Management and Operations Report to the Trustees). Anchor could also use AMS to originate ARMs that were interest-rate sensitive and that Anchor could hold in portfolio long-term without the same interest rate risk that attached to fixed-rate mortgages. See Tr. at 2695-96; 2700-01 (Test, of George Schneider).
In 1985, Anchor continued its geographic expansion by acquiring Sun Federal Savings and Loan Association (“Sun”) of Florida (the acquisition became effective January 1,1986). *26 Again taking advantage of the new interstate-banking provisions of Garn-St Germain by taking on a troubled thrift under the auspices of the FSLIC, Anchor acquired 16 branches spread across the northern panhandle of Florida and $338 million in deposits. See id. at 005. Once authorized to operate in the state, Anchor had a long-term plan to expand down the coasts of Florida into the wealthy areas of the state where Anchor felt it already had some name recognition. See Tr. at 844-45 (Test, of Cody Sickle). Anchor officials felt that expansion throughout Florida would make strategic sense because the expansion would allow the bank to track what it considered its “snowbird” customers-those New York residents that fled to Florida’s warmer climate in the wintertime. See id. at 845; PX 989 at 26-27, 48 (Depo. of Donald Thomas).
All together, Anchor’s expansion—both from its early geographic confines in Brooklyn and from its restricted “traditional thrift” business model—seemed consistent with a pervading plan that Mr. Thomas brought with him to then Bay Ridge Savings Bank. As Anchor noted in a 1987 stock subscription circular:
Since the early 1980s, Anchor’s strategic business plan has focused on: (i) expanding geographically to broaden and diversify its deposit base and access new markets for its lending products, (ii) diversifying operations to promote less interest-sensitive sources of income, primarily fee income from servicing by AMS and other service related fees and charges earned by the Savings Bank, (iii) stabilizing net interest income and reducing Anchor’s sensitivity to interest-rate fluctuation while maintaining asset quality, and (iv) expanding the range of financial services offered to Anchor’s customers to be directly competitive with those offered by other types of financial service organizations.
PX 34 at 15528. The focus of this plan, economic and product diversity, was aimed directly at overcoming the inherent flaws of the “traditional thrift” model in which institutions relied on borrowing short and investing long to generate revenue on the interest rate spread. By initiating the move to become more “bank like” and diversifying revenue production across a host of business interests, some of which acted independent of the prevailing interest rate, while at the same time gaining access to new, emerging markets, Anchor positioned itself to better handle the interest rate shocks that paralyzed most of its competitors in the industry. Ultimately, Anchor’s strategies during the early 1980s grew the bank by nearly $4.3 billion in assets, expanded the branch network by 104 offices, included AMS offices in eleven states, and led to a full service operation in four states along the East Coast. Id.
F. The Supervisory Mergers That Anchor Used To Grow: Benefits, Costs and Promises
All of Anchor’s mergers and acquisitions from 1980-85 that fueled the bank’s growth were performed under the auspices of the FHLBB and the FSLIC. On par, the institutions that Anchor absorbed were failing or failed thrifts that had either been overwhelmed by the inadequacies of the traditional thrift business model or succumbed to mismanagement. These acquired institutions all shared a common characteristic that was synonymous with the hundreds of other thrift institutions under scrutiny in the Wins-tar litigation: the value of their liabilities far exceeded the value of their assets on a book basis.
As noted above, the FSLIC bore a contingent liability for each of the failing thrifts that Anchor acquired in the 1980s. That is, in the event any of those institutions failed, the FSLIC’s deposit insurance liability would have matured and required cash payments to the depositors. Under the broad plan adopted by the FHLBB, federal officials attempted to shift the immediate risks of short-term thrift failures to healthy institutions like Anchor. The goal was to “buy time” so that the failing institutions might be temporarily propped up by the acquiring private institutions and, over time as the interest rate environment improved, become profitable again and prevent the FSLIC’s contingent liability from ever maturing.
To be sure, for an acquiring institution like Anchor, there was very little about the failing *27 institutions that made them attractive targets on their face. They had underperform-ing assets and balance sheets that showed net liabilities. In a zero-sum world, these were institutions that not even a mother could love, and the FHLBB and FSLIC were unlikely to find suitors willing to assume the liabilities and risks of collapse that the institutions presented. Because the FHLBB had broad authority as a federal regulator of the thrift industry, however, it was able to favorably structure the transactions and offer additional benefits to an acquiring institution that helped reduce the financial and accounting burden that would otherwise be recognized by assuming the failing institution’s net liabilities.
In some transactions, the FSLIC contributed cash or cash equivalents to the acquiring institution to help make up the difference between liabilities and assets; in others, it authorized creative regulatory accounting practices that blunted the negative impact of the assumed net liabilities and provided the acquiring thrift with time to make up the shortfall through enhanced profits.
When Anchor acquired the Guardian Federal and New York & Suburban thrifts in 1981 and 1982, the FSLIC sweetened the pot with direct cash assistance in both transactions. To help compensate Anchor for assuming the thrift’s net liabilities, the FSLIC contributed $19.5 million to the Guardian Federal transaction, and over $210 million to the New York & Suburban transaction. See Pl.’s Proposed Findings of Fact and Conclusions of Law at 5-6 (filed Mar. 1, 2005).
For eight of Anchor’s acquisitions between 1982 and 1985, the FSLIC relied primarily on favorable regulatory accounting incentives—namely the long-term amortization of supervisory goodwill—instead of cash contributions to promote the transactions and create some sort of profitable business incentive for Anchor to assume the liabilities of the otherwise failing thrifts.
By regulation, thrifts were required to maintain a capital reserve measured as a percentage of the thrifts’ total assets—typically in the range of 3-5%. Functionally, the capital requirement prevented thrifts from running too “hot,” or investing every dollar at the thrift’s disposal (be it through customer deposits or thrift borrowings) in profit-producing assets such as loans or securities. The allure of the supervisory goodwill generated from Anchor’s acquisitions was that the total amount of supervisory goodwill could be counted as a capital asset to be applied against the bank’s regulatory capital reserve requirements. For each dollar of supervisory goodwill that Anchor held, then, it could hypothetically grow its asset base by as much as 20-30 dollars. 20 The creation of supervisory goodwill was an avenue to explosive growth for thrifts like Anchor in terms of the volume and value of profit-earning assets that could be held.
Ultimately, the amount of supervisory goodwill that Anchor generated in its eight transactions from 1982-85 was staggering. In 1982, the Crisp and Peachtree transactions in Georgia netted Anchor $35.6 million in supervisory goodwill. PX 6 at 22-25. In 1983 and 1984, Anchor generated nearly $100 million in supervisory goodwill through the Standard, Tri-City, Heritage and United acquisitions. Id. The Sun acquisition in 1985 created $44 million in supervisory goodwill. PX 7 at 44. By far the most substantial creation of supervisory goodwill corresponded with the Suburban transaction in 1983. PX 6 at 27-28. That acquisition provided Anchor with a $50 million direct cash contribution, $469 million of supervisory goodwill, and an additional $150 million promissory *28 note from the FSLIC that Anchor could apply against its regulatory capital requirement, for which Anchor issued to the FSLIC an Income Capital Certificate (“ICC”) that was a security the FSLIC held in Anchor. Id.
Before Anchor began participating in federally-sponsored acquisitions that gave rise to supervisory goodwill, it had a net worth of $124 million (or 4.6% of liabilities) and a capital surplus of $43 million. Pl.’s Proposed Findings of Fact and Conclusions of Law at 3. By 1982, prior to the Peachtree/Crisp merger, Anchor also exceeded its minimum regulatory capital reserve requirement by more than $120 million. Pl.’s Proposed Findings of Fact and Conclusions of Law at 9. Over the course of the eight supervisory acquisitions, however, it took on nearly $650 million in net liabilities and absorbed institutions with a combined regulatory net worth deficit of nearly $270 million; collectively, the eight institutions failed their regulatory net worth requirements by nearly $370 million. PL’s Proposed Findings of Fact and Conclusions of Law at 5-10. Without the regulatory forbearances that allowed Anchor to count accumulated supervisory goodwill as a capital asset for regulatory purposes, the bank would have failed its own regulatory requirements as a result of the acquisitions. See Tr. at 2630-31 (Test, of George Schneider). 21
The supervisory acquisitions and the creation and use of supervisory goodwill were not without their costs, however, both direct and indirect. One of the direct “costs” of the supervisory goodwill was the fact that all of the goodwill Anchor generated in its acquisitions would be amortized over a period of 25-40 years. Each year during the amortization period, Anchor was required to claim the amortized goodwill as an operating expense, which was a persistent drag on the bank’s earnings. See, e.g., Tr. at 2314 (Test, of John Brull) (“[Anchor] had over 500 million in goodwill on its books, and that was amortized over periods extending up to, I think, 35 or 37 years. It resulted in an annual amortization charge or expense of close to 25 million [dollars].”). Indirectly, and as discussed below, Anchor assumed the burden of trying to integrate eight new institutions into its existing franchise. For the most part, the newly acquired institutions were poorly performing, had underperforming assets and high cost structures. Invariably, there were growing pains associated with trying to bring the geographically diverse operations into the “Anchor family.” See id. at 2315 (“We also had a huge array of administrative costs in trying to put our arms around these thrifts we acquired, and digest them and clean them up, clean up the books, clean up the policies, clean up the practices, change the procedures.”). It would not be a seamless transition.
From Anchor’s perspective, however, these growing pains were well worth the bank’s investment in the long-run. Coupled with the long-term amortization contemplated by the FHLBB, FSLIC, and Anchor, the goodwill provided both Anchor and the government with long-term benefits. As Anchor’s President, George Schneider, noted:
It was the understanding when the acquisitions were agreed to and the institutions acquired that this goodwill could be written off ..., that it would be an item that would be charged through earnings, showing as an operating expense for these years [of amortization], the theory being that as the bank grew, the goodwill would become less of a percentage of total assets, and at the same time, the amortization is taking place. It would be reducing, so that in the future, growth of the bank with the amortization of goodwill, there would be a crossover point at which point the bank would be prospering and goodwill would be declining. And over a period of thirty-five *29 years ... Anchor would become profitable. The goodwill would have been written off. And the government would have saved themselves an awful lot of money.
Tr. at 2629-30.
As has been recounted at length in the several Winstar-related cases in this court and the Federal Circuit, the special regulatory accounting treatment that was to be accorded to the supervisory goodwill, and the right to amortize that goodwill over an extended period of time, was frequently the subject of binding contracts between the FHLBB, the FSLIC and the acquiring institutions. See Winstar, 518 U.S. at 847-54 , 116 S.Ct. 2432 . The terms of the agreements were laid out in forbearance agreements in which the FHLBB and FSLIC agreed to allow an acquiring institution to apply the “purchase method” of accounting to the acquisitions and count the target institution’s excess liabilities as a capital asset for regulatory purposes until the supervisory goodwill had fully amortized. In Anchor’s case, this court previously concluded that Anchor acceded to these contractual rights in connection with four of its supervisory mergers, including the Peachtree, Crisp, Sun and Suburban transactions. 22 In both the Peach-tree and Crisp acquisitions, the court concluded that the FHLBB had agreed to allow Anchor to amortize the goodwill associated with those transactions over a period of forty years. Anchor Sav. Bank, FSB v. United States, 59 Fed.Cl. 126, 130 (2003). In the Sun acquisition, the court concluded that the government agreed to allow Anchor to amortize the goodwill associated with that transaction over a period of thirty-five years. Id. at 131 . Finally, in the Suburban acquisition, the court concluded that the government had agreed to permit the amortization of goodwill over a period of thirty-four years, and also that the $150 million ICC was an additional regulatory forbearance to which the government had contractually agreed to allow as a regulatory capital credit. Id. at 131-32 . Collectively, it was these contractual agreements that the government breached with the passage of FIRREA.
G. Anchor’s Performance in the 1980s and the Acute Impact of Anchor’s Acquisitions
Throughout the early 1980s, Anchor consistently outperformed its competitors. In 1980, as Congress first began to deregulate the thrift industry and permitted thrifts to pay increasingly phased-in market interest rate returns on deposits, thrifts began to hemorrhage cash because of the growing cost of funds. See Tr. at 2651-52 (Test, of George Schneider). Anchor, however, had a relatively strong “liquidity position”—that is, it had a relatively high percentage of its assets in the form of cash or short-term investments maturing within one year. Id. (citing PX 1 at 12) (1980 Annual Report to Trustees) (“Anchor maintains a liquidity position more than two and one half times the statewide average for all savings banks, at 5.74 percent, as of year-end.”). The benefit of Anchor’s strong liquidity position relative to its competition was that it was better positioned to both meet the demand for deposit withdrawals and to regularly reinvest its funds at higher interest rates. Id. at 2652 (“Interest rates were through the roof. Deposits were flowing out the door. [The high liquidity position] gave us two things. One, money to meet deposit withdrawals, and also money to invest at a much higher rate in order to *30 offset the higher costs that our deposits were incurring.”).
When Anchor converted to a federally-chartered thrift in 1980, the FSLIC concluded that “[t]he bank appears to be financially sound with good prospects for future earnings.” PX 228 at 005 (FSLIC Report of Examination); Tr. at 681 (Test, of Angelo Vigna). The FSLIC report acknowledged that Anchor had been “operating profitably in a period of instability for area thrift institutions” and that it had a “good net worth position.” Id. Angelo Vigna, the senior supervisory agent for the Second District of the Federal Home Loan Bank and later an acting director of the FSLIC, was one of Anchor’s senior regulators when the bank converted, and he testified that Anchor was well managed under Mr. Thomas and George Schneider at that time. See Tr. at 679, 683-84. Anchor had traditionally been a conservatively run institution that did not have nonperforming loan problems. Id. at 684.
As Anchor’s annual financial reports reveal, the bank appears to have been better situated to absorb the perils of the sharply deregulated thrift industry in the early 1980s than was the industry at large. In 1980, the first year of the DIDMCA, Anchor posted a net profit as a percent of assets of 0.13%, while industry peers suffered an average loss of 0.15%. See Tr. at 2651 (citing PX 1 at 019). In fact, from 1975 through 1979, Anchor outperformed the industry averages in this measure of profitability for each year but one. See PX 1 at 019. This trend continued into 1981, when Anchor posted a very small net profit as a percent of assets of 0.01% in a year where all other savings banks averaged losses in excess of 0.9%. See Tr. at 2665; PX 2 at 022 (1981 Annual Report to Trustees). In 1982, the weaknesses of the thrift industry finally caught up with Anchor, too, as the bank posted a negative net income as a percent of assets of 0.38%, but this was barely more than half the losses of the national average for all savings banks. See PX 3 at 019 (1982 Annual Report to Trustees).
As Anchor expanded in the early 1980s, it faced the challenge of absorbing failing institutions while continuing to deal with a volatile interest rate environment. As Anchor’s president noted, the acquired failing thrifts “were losing money. Their assets were worth less than their liabilities. And as time would go on, that problem would only get larger and larger and larger.” Tr. at 2678 (Test, of George Schneider). The Suburban acquisition alone presented a daunting rehabilitation effort:
[With] Suburban Savings and Loan, we ended up with 460 some odd million dollars of goodwill that had to be amortized over the 35-year period, which was a charge to earnings. At the same time, there was an asset [, the goodwill,] that was earning no money. So we were paying interest on deposits or other liabilities which was another additional expense. There were operational changes that had to take place within the bank, and most of Suburban Savings & Loan ... [had] mortgages [that] were 30-year fixed rate loans, which were under water, and until such time as the balance sheet can be restructured, we were going to continue losing money at Suburban. The projections that were provided to the Home Loan Bank in the acquisition went out 10 and 20 years, and for the foreseeable future, we projected we would be losing money because you could not turn around something—a two billion [dollar] bank with $460 million worth of goodwill. It was a monumental problem, and we assumed we had 35 years in which to absorb that $460 million.
Id. at 2694.
Anchor’s own regulators expected the bank to take on losses in the years following its acquisitions, as the bank overcame many of the shortcomings associated with the failing thrifts it acquired, particularly Suburban. See Tr. at 704 (Test, of Angelo Vigna). The regulators noted that, among other ills, Anchor acquired a large number of underper-forming or “problem” loans in its acquisitions, which caused Anchor’s traditionally low rate of problem-loans, relative to the rest of its portfolio, to rise. Id. at 718-19. Nonetheless, at the time of the Suburban transaction in 1986 the regulators expressed confidence in Anchor, noting that it “appears financially healthy and well managed, and we have confidence in its ability to absorb Sub *31 urban with little difficulty.” PX 449 at 042 (FHLBB Supervisory Memorandum). Even after absorbing annual costs of amortizing the supervisory goodwill, prospective FHLB viability studies performed in conjunction with the Suburban transaction indicated that in just a few years Anchor would be able to grow the bank and improve earnings to sufficiently accommodate the amortization costs of the supervisory goodwill. See id. at 762-63; PX 441 at 2 (Aug.1983 Viability Analysis).
Anchor had hoped to alleviate the balance sheet problems it inherited by engaging in a longterm asset restructuring program that would allow it to better match its interest-rate maturities. That is, Anchor hoped to become more heavily invested in short term investments or interest rate-sensitive assets (like ARMs) that would leave the bank less prone to sharp, sudden increases in the market interest rates it paid for deposits. See generally PX 5 at 008 (1984 Annual Report to Trustees); Tr. at 686 (Test, of Angelo Vigna).
As Anchor’s own officials appreciated, after the bank had acquired the several failing thrift institutions in the early 1980s, the new, larger Anchor enterprise had a number of problems and inefficiencies that needed to be corrected. As John Brull, Anchor’s Vice President and Chief Financial Officer testified:
[Anchor] truly did grow and grew very fast, and it had many problems from its growth. They were lacking in some levels of management. They were having a difficult time getting their arms around the businesses they acquired, and in certain cases, particularly in the case of Suburban Coastal, the company was devoid of some key talent, and they just had to try to redevelop the company.
Tr. at 2291 (Test, of John Brull). Moreover, Anchor was challenged by its new size; from 1984 to 1987, the bank’s general and administrative expenses, measured as a percentage of its assets, increased by nearly two-thirds, from just under 1.5% in 1984 to just under 2.5% three years later. See DX 131 at 1344 (KPMG Peat Marwick report). This indicated that Anchor was struggling to reign in its operating costs after the supervisory mergers. As John Brull colorfully noted, Anchor at the time was “just ... too fat, we really were____[W]e had a lot of bloat in us, and we really had to get rid of it.” Tr. at 2341.
Moreover, some of Suburban Coastal’s capabilities had eroded in the months prior to Anchor’s acquisition of the Suburban franchise. During its final months as a subsidiary of the near-insolvent Suburban, the mortgage-banking company lost many branch offices and key employees, and its viability declined. See Tr. at 721-22 (Test, of Angelo Vigna). In fact, other institutions that had previously approached the FHLBB about acquiring Suburban had withdrawn their interest after due diligence revealed that Suburban was having significant problems of which even its regulators were not aware. Ibid.
Partially as a result of its acquisitions, Anchor posted net losses from 1982-85 of $7.4 million, $12.0 million, $21.1 million and $52.2 million, respectively. See PX 34 at 15529 (Feb. 27, 1987 Subscription Offering Circular) (“The losses, which commenced in fiscal 1981, were attributable in large part to losses arising from the operation of financially-troubled thrift institutions acquired by Anchor, in particular, [Suburban]____”). In 1985, Anchor again battled an inverted yield curve, in which the interest rates for short-term funds (including deposits, Anchor’s primary source of investment funds) exceeded the rates of return on long-term investments, which exacerbated the thrift’s problems and heightened its annual losses. See Tr. at 2316 (Test, of John Brull).
In addition to the balance sheet issues brought on by the acquisitions, Anchor’s new branch structure—suddenly spread out across four states, including some less-than-ideal branch locations—presented other new challenges. The branches seemed to have high cost structures, management inefficiencies, and excessive staffing. See generally PX 535, DX 103, DX 131 (KPMG Peat Mar-wick Profit Improvement Reports). Furthermore, many branches acquired in Georgia and Florida were either too small or did not have sufficient opportunity to develop into viable, profitable branches. See Tr. at *32 864-65 (Test, of Cody Sickle). This was particularly the ease with several Georgia branches outside the Atlanta area, and several in Northern Florida—those outside Anchor’s target markets of Atlanta and the Florida coasts. Id. In other words, Anchor’s franchise became bloated and there was room for improved organizational and cost efficiencies. To this end, Anchor hired Peat Marwick as a consultant to help streamline procedures and increase profitability. Over the next three years, the consultants helped Anchor focus on eliminating overhead and reducing staffing, thereby reducing costs and bolstering profitability.
In 1986, the interest rate environment improved and Anchor posted a net income of $41.2 million. Anchor attributed the turn in primary part “to the effect of the general decrease in interest rates [that year] on [Anchor’s] net interest income, which increased by $84.1 million in 1986 from 1985, and to the $45.5 million net gain on the sale in 1986 of earning assets, principally mortgage-backed securities____” PX 34 at 15529.
H. Anchor’s Long-Term Business Plans in 1985-87
Once Anchor wound down its geographical expansion plans through the FHLBB-super-vised acquisition of troubled thrifts, the bank recognized that it needed to get its arms around its new, larger, more diverse franchise, reign in costs, and improve profitability. To this end, Anchor embarked on a long-term business plan that would strengthen the bank’s operations and make it more resilient to negative market forces.
As early as 1985, Anchor identified “the risk of rapid escalation of the cost of funds” as “the single most significant factor to Anchor’s future ability to generate earnings.” PX6 at Oil (1985 Annual Report) (“Anchor’s results of operations are dependent on the difference between interest income from loans, investments and other earning assets, (‘interest earning assets’), and interest expense on deposit accounts and borrowings (‘interest bearing liabilities’).”). While Anchor had long been wary of a negative interest rate gap and used the bank’s growth through the early 1980s to reduce its dependence on interest rate income, the long-term plan for the latter half of the 1980s recommitted Anchor to expanding into diverse streams of revenue that were less interest-rate sensitive. See Tr. at 2299-300 (Test, of John Brull). As noted in the 1985 management discussion and analysis (“MD & A”) section of Anchor’s annual report, “Accordingly, Anchor has adopted a long term operating strategy, the principal objectives of which are to minimize the effect of interest rate risk on future operations, to increase non-interest income and to reduce reliance on traditional sources of funds.” PX 6 at Oil. Anchor planned to implement this plan through five distinct approaches, including:
(i) continuing expansion into growth areas to provide a geographically diverse source of funds; (ii) expanding the range of financial services offered by other types of financial institutions; (iii) stabilizing net interest income and reducing Anchor’s sensitivity to interest rate risk through asset/liability management designed to achieve a high degree of maturity and rate matching; (iv) expanding non-interest sources of income, for example fee income from origination and servicing by Anchor Mortgage Services and Anchor Mortgage Resources, and service charges in order to sustain earnings during periods of reduced net interest income; and (v) expanding customer service locations to areas that are currently reached by multimedia marketing programs within New York/New Jersey and Georgia.
Id. at 011-12.
One objective of this long-term plan was to rehabilitate the mortgage origination capacity of AMS. When Anchor acquired AMS in the Suburban transaction, Anchor’s officers were concerned that AMS was a wounded subsidiary whose production capacity had all but collapsed prior to the acquisition. As Anchor’s senior vice president John Brull noted, AMS’s “prime business was originating whole loans. Unfortunately, before Anchor acquired it, I think it was in limbo for a year and a half or so when the regulators had taken over [Suburban Savings Bank]. And many, if not all, of the originators [that comprised AMS’s staff] had left and the *33 branches were kind of left vacant. And [AMS] was not originating much.” Tr. at 2304. As part of AMS’s rejuvenation, Anchor had to rehire key employees and essentially rebuild the company. Id. at 2304-05. While Suburban Coastal had primarily been a retad originator of mortgages, Anchor repositioned AMS to acquire mortgages through both retail and wholesale origina-tions. To the latter end, Anchor “attempted to build a correspondent network” as a “cheaper way of securing loans” for AMS’s operations. Id. at 2307.
While an Anchor senior official testified that the bank was “never ... fully successful in restarting AMS to the engine it was” before Suburban Savings Bank had deteriorated, and AMS did not produce the levels of loans or originations that Anchor expected, id. at 2336, Anchor’s mortgage-banking activities increased markedly in 1986 and 1987. See PX 7 at 007; PX 16 at 006. In 1986, AMS “significantly expanded its mortgage banking activities,” closing $592 million in mortgage loans. PX 7 at 007. In 1987, Anchor as a whole increased its loan origina-tions by 35 percent ($308 million). PX 16 at 6.
In April 1987, Anchor converted to a federally-chartered stock savings bank and issued shares of stock in a public offering. See PX 34 at 15526 (Offering Circular). Anchor’s offering circular hailed AMS as “Anchor’s primary source for portfolio origination of ... real estate related ... loans outside of the market areas served by the Savings Bank’s branch network and for the origination of 30-year, fixed-rate mortgage loans for sale in the secondary market.” Id. at 15528. It stressed the value of AMS in Anchor’s plan to develop “sources of income less sensitive to fluctuations in interest rates” through AMS’s “mortgage banking operations,” including “the origination of residential mortgage and consumer loans for sale in the secondary market and to the Savings Bank and the servicing of such mortgage loans for the Savings Bank and other purchasers.” Id.
Furthermore, the offering circular stressed Anchor’s “progress in reducing its sensitivity to interest rate fluctuations by shifting the emphasis of its loan portfolio from 30-year, fixed-rate mortgage loans to adjustable-rate mortgage loans.” Id. Moreover, Anchor became an active purchaser of “high coupon” mortgage-backed securities that had short-term investment expectations, as part of its ongoing effort to reduce the bank’s “one-year gap,” or the “difference between interest-earning assets and interest-bearing liabilities repricing [i.e., maturing] within one year.” Id. By becoming more heavily invested in shorter-term investments with greater liquidity, Anchor hoped to become less vulnerable to the perils of the traditional thrift business model of lending long and borrowing short. In part, these efforts contributed to Anchor posting a net profit of $41.2 million in 1986.
I. Anchor Acquires Residential Funding Corporation
On June 20, 1988, Anchor strengthened its position in the mortgage-banking industry by acquiring RFC from Salomon Brothers for $47 million. See Tr. at 1287-88; PX 531. Like AMS, RFC specialized in acquiring whole mortgage loans and reselling them in the secondary mortgage market. Unlike AMS, however, RFC served a niche market in which AMS did not routinely operate.
In the parlance of the mortgage-banking industry, RFC was known as a “conduit.” It specialized in

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/6657633. Public record. Not legal advice.