Northeast Savings, F.A. v. United States

OPINION ON DAMAGES

WILLIAMS, Judge.

This Winstar-related case comes before the Court after a trial on damages. Plaintiff Northeast Savings, F.A. (“Northeast”), seeks three elements of damages: $112,352 million in lost profits, $15,287 million for the cost of raising capital, and “wounded bank damages” comprised of $313,000 in advisory service fees incurred in connection with an abandoned shareholder rights offering and $1,334 million in excess deposit insurance premiums. In the alternative, Plaintiff requests the Court to award it damages based upon a jury verdict methodology. Because Plaintiff has not demonstrated that the breaching provisions of FIRREA were a substantial factor causing it to lose profits or incur costs, the Court denies recovery.

Findings of Fact

1

The Mergers: May 11, 1982 and October 8, 1982

In 1982, Plaintiff, Northeast, formerly known as Schenectady Federal Savings Bank, merged with three failing thrifts in two separate transactions. In the first transaction, on May 11,1982, Schenectady Savings merged with Hartford Savings and Loan Association (“Hartford”) and became Northeast. A few months later, the regulators invited Northeast to submit proposals for the acquisitions of Freedom Federal Savings and Loan of Worcester, MA (“Freedom Federal”) and First Federal Savings and Loan of Boston MA (“First Federal”). Northeast bid on both ailing thrifts, resulting in the merger of Northeast with Freedom Federal and First Federal, effective October 8, 1982. PX 228; PX 231; PX 232; PX 234; PX 235; PX 236; PX 1065.

In its decision granting summary judgment on liability, this Court found that “[t]he merger agreements, resolutions approving the mergers, forbearance letters, and contemporaneous documentation surrounding [the] transactions evinee[d] the Government’s agreement to permit Northeast to record supervisory goodwill as an intangible asset that could be counted toward satisfying its regulatory capital requirements for up to 40 years.” Northeast Sav. v. United States, 63 Fed.Cl. 507, 508 (2005). This Court further found that the enactment of the Financial Institution Reform, Recovery and Enforcement Act (“FIRREA”) breached this contract. Id. at 518-19 .

Northeast’s Accounting for Supervisory Goodwill

During the course of the contract, Northeast accounted for its supervisory goodwill as an intangible asset under generally accepted accounting principles (“GAAP”), counting the goodwill towards its regulatory capital requirements and amortizing the goodwill over a period of up to 40 years. As is well-known, “GAAP represents those accounting principles adopted by the Federal Accounting Standards Board (“FASB”). GAAP changes as FASB promulgates new standards.” 2 Home Sav. of Am., FSB v. United States, 57 Fed.Cl. 694, 703 (2003).

In addition to GAAP, thrift regulators developed special accounting standards for thrifts for reporting to the FHLBB. These principles were known as “regulatory accounting principles” or “RAP.” United States v. Winstar, 518 U.S. 839, 846 , 116 S.Ct. 2432 , 135 L.Ed.2d 964 (1996). Under RAP, the regulators could permit thrifts to vary their accounting practices from GAAP. Accordingly, thrifts would report their financial status under GAAP in Forms 10-K or Forms 10-Q to the Securities and Exchange commission (“SEC”) and separately under RAP to the FHLBB. Under the contract, Northeast ac *268 counted for its supervisory goodwill as capital under both GAAP and RAP.

FHLBB Resolution 82-167, approving the merger of Hartford and Schenectedy, required that Northeast stipulate that any goodwill arising from the transaction be determined and amortized in accordance with FHLBB Memorandum R-31b. PX 228 at 2-3. Memorandum R-31b required application of APB Opinion No. 16 “Business Associations,” and APB Opinion No. 17 “Intangible Assets.” 3 PX 672. APB No. 17 allowed amortization of supervisory goodwill for a period of up to 40 years under the straight-line method. PX 668 at ¶¶ 29-30. APB Opinion No. 17 provided for future writeoffs of goodwill under a paragraph entitled “Subsequent review of amortization,” stating in relevant part:

A company should evaluate the periods of amortization continually to determine whether later events and circumstances warrant revised estimates of useful lives. If estimates are changed, the unamortized cost should be allocated to the increased or reduced number of remaining periods in the revised useful life but not to exceed forty years after acquisition. Estimation of value and future benefits of an intangible asset may indicate that the unamor-tized cost should be reduced significantly by a deduction in determining net income.

PX 668 ¶ 31.

Kent Dixon, then President of Schenectady, in a stipulation to the FHLBB, confirmed that Northeast would determine and amortize any goodwill arising from the merger of Hartford and Schenectady in accordance with Memorandum R-31b. DX 829. The independent accounting firm of Peat, Mar-wick, Mitchell & Co. substantiated that it expected that Schenectady’s final accounting-statements “would also comply with the requirements of FHLBB — R-31B.” DX 827.

Projections on Northeast’s Viability

Before the regulators approved these acquisitions, they conducted a viability analysis to assess Northeast’s long-term prospects. The viability analysis, dated October 8, 1982, was authored by Brent Beesley, the Director of the Office of the Federal Savings and Loan Insurance Corporation (“FLSIC”), the highest authority in the day-to-day operations of that agency. Beesley Dep. at 4; PX 1065. The regulators projected that “Northeast [would] operate at a loss for the first five years, [but] beginning in the sixth year the association [was] projected to become profitable.” PX 1065 at 14. The regulators determined that Northeast after the mergers “would result in a viable” institution. PX 1065 at 14. The regulators anticipated that Northeast would achieve profitability through a decline in market interest rates and the maturing or paying off of its assets, which were mortgage loans.

Northeast’s Supervisory Goodwill and Issuance of Income Capital Certificates

The amount of supervisory goodwill recorded by Northeast was $108,951,000 as a result of the Hartford acquisition, to be amortized over 40 years, $163,330,000 as a result of the Freedom Federal merger, and $17,738,000 as a result of the First Federal merger. PX 2 at 54. Northeast booked this supervisory goodwill as an asset included in capital for regulatory purposes in reports it filed with the FHLBB. See, e.g., PX 120.

On October 8, 1982, Northeast issued $50 million in income capital certificates (“ICCs”) to the FSLIC in connection with the Freedom Federal acquisition, which Northeast could also count toward its regulatory capital requirements. Northeast, 63 Fed.Cl. at 510-13 ; PX 6 at 23; PX 231 at 5-6; PX 235. 4

Northeast’s Performance (1982-1987)

1982-1985

At the time of its creation, Northeast had a high interest rate risk and negative net-earning assets. PX 192 at 2. To overcome these problems, Northeast’s management decided to “streamline and enhance retail distribution *269 and pursue growth through increasing the origination of ARMs [adjustable rate mortgages].” Id. Northeast leveraged its supervisory goodwill, growing the balance sheet by acquiring wholesale securities, though Northeast’s wholesale investments were limited at the outset. PX 192 at 2. Additional capital was raised to increase Northeast’s assets, which included some wholesale investments. Id. 5 Northeast also grew its traditional retail operations from 1982-1985. This included originating home mortgages and funding them through retail deposits from consumers. 6

However, by the end of FY 1985, Northeast’s retail business had not grown as expected and its earnings were worsening— there was a $5.1 million loss for that year. G & A expenses greatly increased as a result of alternative lines of activity, which included “nationwide mortgage banking, out-of-area consumer lending, and retail investment brokerage services.” PX 192 at 2.1. These endeavors were not successful and were expensive to unwind. Id. In year-end 1984, Northeast had total assets in the amount of $4.11 billion, which included, inter alia, $2.56 billion in net mortgage loans and contracts, $177 million in net non-mortgage loans, and $822 million in mortgage securities. In year-end 1985, Northeast had total assets of $4.6 billion, which included, inter alia, $8.1 billion in net mortgage loans and contracts, $298 million in net non-mortgage loans, and $739 million in mortgage securities. At year-end 1986, its total assets increased to $5.93 billion, of which $4.66 billion were in net mortgage loans and contracts, $273 million were in net non-mortgage loans, and $1.97 billion were in mortgage securities. DX 224 at 4.1-4.2. By 1986, Northeast had a higher percentage of total assets in mortgage securities than its peers. Id. at 4.1.

1985-1988 Risk Controlled Arbitrage (“RCA”) Strategy

After the acquisitions, Northeast participated in limited wholesale investment activities. However, starting as early as FY 1985, Northeast’s management began to rely increasingly on risk-controlled arbitrage (“RCA”) activities — a portfolio of wholesale liabilities funding wholesale assets to produce earnings and compensate for a lack of growth in Northeast’s retail activities. PX 192 at 2.18; Tr. 1465-66; Tr. 227-28. In calendar year 1986, the wholesale assets were funded by short-term borrowing sources, primarily reverse repurchase agreements. DX 224 at 2.8. Substantial growth occurred in traditional wholesale investments such as MBS, purchased 1-4 family housing loans, and CMOs. PX 192 at 2.6. However, the RCA program included some riskier wholesale investments, such as high-yield corporate securities, and purchased CMO residuals. PX 192 at 2.5. The regulators later found that Northeast’s RCA activities ultimately resulted in large amounts of criticized assets— 6.6% of Northeast’s total assets as of the December 12, 1988 Report of Examination. PX 192 at 1, 2.5.

The RCA or wholesale banking strategy differed from retail banking activities in three ways that affected the income statement of Northeast. First, wholesale banking typically has narrower spreads than retail banking because wholesale assets tend to have lower interest rates than retail assets and wholesale liabilities tend to have higher interest rates than retail liabilities. PX 192 at 2.33; PX 2038; PX 2039. 7 Second, whole *270 sale assets, such as MBS that are backed by a federal housing agency, have relatively low credit risk in comparison to a retail portfolio. Tr. 225-2, 230-31, 2700-01. Third, the G & A expenses associated with a wholesale portfolio were normally much lower than the expenses of retail banking. Tr. 227.

Northeast’s Interest Rate Risk

Northeast’s RCA activities (as well as its retail activities) were subject to interest rate risk — the degree to which a thrift is exposed to changes in interest rates. The effect of rising and falling interest rates on Northeast’s books were described in terms of the “repricing gap” — the difference in the speed at which the thrift’s assets and liabilities reprice. 8 A thrift’s repricing gap is calculated by determining what proportion of its assets will reprice within a given period, and then subtracting the proportion of liabilities that will reprice in the same period and dividing by total assets. Tr. 251.

The repricing gap signifies whether a thrift is at more risk in the event of falling or rising interest rates. If a thrift is positively gapped, i.e., asset-sensitive, then the net interest spread of the thrift increases if interest rates rise and narrows if interest rates fall. 9 Conversely, for a negatively gapped, liability-sensitive thrift, the net interest spread will narrow if interest rates rise and will widen if interest rates fall. Tr. 2152-54.

During the time in which it engaged in RCA activities, Northeast hedged its exposure to interest rate risk by entering into interest rate swap agreements “with the intent of synthetically increasing the duration of the short-term borrowed funds to match the increased duration of the MBS investments.” DX 224 at 2.9. Between March 1986 and March 1988, the one-year cumulative repricing gap of the thrift ranged between about -9% and -13%. PX 2061.

Northeast’s Balance Sheet Growth

From the time of the acquisition up to just before the time of the breach, Northeast’s balance sheet growth as a result of the RCA strategy or wholesale banking was dramatic. In March 31, 1984, Northeast had $3,477,494,000 in total assets. PX 2005. On March 31,1985, Northeast had $4,089,882,000 in total assets. Id. By March 31, 1986, when the RCA strategy was strongly under way, Northeast had expanded by nearly $1 billion to $5,075,023,000. Id. Northeast expanded in excess of $1 billion for the years ended March 31, 1987-88, with total assets in the amounts of $6,264,657,000 and $7,555,281,000, respectively. Id. However, by March 31, 1989, Northeast had slowed down its expansion, with total assets in the amount of $7,942,695,000. Id.

Northeast’s Growth in Net Interest Income

With growth in the balance sheet came growth in net interest income. Northeast’s net interest income grew from $14.5 million in FY 1983, to $40.5 million in FY 1984. PX 2005. 10 By March 31, 1985, the net interest income earned for this fiscal year was $50.3 million, and with the RCA strategy under way, expanded to $78.2 million for FY 1986. Id. Finally, Northeast reached a height in net interest income earnings of $102 million for FY 1987. However, net interest income *271 declined to $98.5 million for FY 1988 and further to $94.2 million for FY 1989. Id.

The net interest income grew from FY 1983 through FY 1987 because the net interest spread throughout the period remained positive. PX 6 at 2; Tr. 540. In addition, during this period of time, interest rates declined, which, along with the running off of low-earning loans from the thrift’s books, helped close the gap in the negative spread for Northeast’s retail assets and liabilities. As the process was explained by Dr. Baxter:

And [Northeast] had to work its way out of this hole, if you will, through a combination of hoped-for declines in market interest rates, which would raise the value of the assets; through the fact that the assets would ultimately be paid off, they were mortgage loans, the people would pay off the mortgages, move out of their homes, refinance them; through the fact that some of the assets would be held to maturity and then they would gradually appreciate because if they weren’t bad, if they got paid off, they would get paid off in par, but that wouldn’t be immediately. That would be as they approached maturity. So that was the workout. Amd then the goodwill would be amortized and these discounts would be either accreted into income, which is the accountant’s term for some of the opposite of depreciation, you gradually raised the value of these assets or if rates permitted and the market permitted, they might be sold for gains, and that’s the way they would ultimately turn a profit.

But the regulators expected that would take until the sixth year,[ 11 ] actually it took less time than that.

Tr. 527-28.

The FHLBB’s February 17, 1987 RepoH of Examination

The FHLBB conducted an examination of Northeast that began on February 17, 1987, using financial data as of December 31, 1986, which provided an evaluation of the bank, including its RCA strategy. 12 DX 224. In this Report of Examination (“ROE”), the FHLBB found that Northeast had overall “favorable” findings, improved profitability, “satisfactory” asset quality, increased regulatory capital, and, with respect to interest rate risk, an “appropriate” one year repricing gap. Id. at 1. However, it also found that Northeast’s earnings were lower than those of its peers and that an accelerated write-off of goodwill was “highly desirable.” Id. Specifically, the FHLBB stated in relevant part:

Overall, the findings of the examination are favorable. Asset quality remains satisfactory with only one percent of assets subject to criticism. Regulatory capital has increased and is now equal to 6.3 percent of assets. The one year gap position has been maintained at appropriate levels despite a $1.3 billion or 28.2 percent increase in assets for calendar year 1986. At year end, the one year gap stood at a negative 7.7 percent. Although earnings continue to be lower than New England peers, the institution is showing improved profitability on an operating basis and has managed a consistent [return on assets] during a high growth period. Operating expenses, as a percentage of average assets, have declined and, with the impending sale of 17 branch offices in 1987, expenses are expected to decline further. However, the decline in expenses will be offset by the acceleration of the write-off of goodwill. Although the two actions cancel each other out in terms of the institution’s bottom line, the faster -write-off of goodwill is regarded as highly desirable and a sound operating strategy that will be to the long term benefit of the institution.

Id.

The February 17, 1987 ROE, however, expressed concerns about Northeast’s RCA strategy, specifically, with respect to the utilization of interest rate swaps to hedge the repricing gap. The report continued:

Arbitrage: The institution’s growth has come primarily from its investment arbi *272 trage strategy, whereby, short-term funds were used to acquire long term, higher yielding mortgage-backed government obligations. To hedge the mismatch inherent in this activity, the institution has utilized interest rate swaps. While the hedging activity has been effective to this point, we have noted a number of steps that should be taken such as periodic review of the activity by the Board, improved documentation; and, better analysis to support the correlation considerations of the hedge.

Id. The ROE also found that the tangible capital base of the thrift was thin as a result of the goodwill in its assets, which made it difficult for Northeast to achieve earnings parity with its New England peers:

Intangibles: Due to a substantial amount of goodwill, the institution’s tangible capital base is thin, but improving. The significant amount of non-earning assets makes it difficult for the institution to achieve earnings results comparable to its New England peers. The quality of the institution’s assets and improvements ... serve to mitigate concerns normally associated with the low tangible base. Moreover, we note that the institution is using every opportunity to improve its tangible capital position and we believe that this is a prudent strategy.

Id. at 1.2. As of December 31, 1986, the institution’s regulatory capital totaled $378.1 million or 6.3 % of total assets, which exceeded the minimum regulatory capital requirement of $171.0 million by $207 million. Id. at 2.7. However, the ROE found that GAAP net worth and tangible net worth were significantly below the level of regulatory capital. GAAP net worth was $245.5 million or 4.1% of total assets. Id. Tangible net worth, which was measured by GAAP net worth less goodwill plus general loan loss reserves was negative $82,000, which represented an increase of $28.4 million over the prior year’s level. Id. For calendar year 1986, total regulatory capital growth was $96.5 million or 34.2%, but the majority of growth was attributed to the addition of $57.5 million in 8% convertible subordinated debentures; absent these debentures there would have been 13.8% regulatory capital growth. Id.

Northeast’s Performance from 1987 to 1988

In the late 1980s, interest rates began to rise. As a result of the rising interest rates and the fact that it was liability-sensitive, Northeast’s net interest spreads began to narrow. Tr. 266; PX 19 at 15. While Northeast’s net interest spread was 2.36% in FY 1986, its spread narrowed to 2.14% in FY 1987 and to 1.59% in FY 1988. PX 6 at 2, 25; PX 7 at 25; PX 19; PX 262. As such, Northeast’s net interest income in FY 1988 was $98.5 million — $3.5 million less than in FY 1987. PX 2005.

Reduced Amortization and Write-off of Goodwill

During FY 1988, Northeast reduced the amortization periods for its contractual goodwill from 40 and 30 years to 25 years for both RAP and GAAP purposes. Tr. 2340-41; DX 7 at 28. The accelerated amortization necessarily applied to contractual supervisory goodwill because goodwill was counted towards both GAAP capital and regulatory capital. In addition, in 1988, Northeast sold 17 of its less profitable branches, which resulted in a write off of $16 million in goodwill — including contractual goodwill. PX 7 at 28, 36.

The September 21, 1987 Special Report of Examination

On September 21, 1987, the FHLBB commenced a special examination of Northeast, using financial data as of August 31, 1987, in light of “recent changes in the overall direction of the institution and the management changes which followed.” 13 DX 225 at 1. The regulators found that “the institution is sound, but in a period of transition as management seeks to ensure profitable operating results.” Id. With respect to regulatory capital, the ROE found that Northeast’s *273 ratio of regulatory capital to total assets declined from 6.3% to 5.3%, which was “fully due to the growth of the institution.” Id. However, “the amount of net worth [was] still more than adequate to meet regulatory requirements.” Id. As of August 31, 1987, Northeast had regulatory capital plus general loan loss reserves in the amount of $379.2 million. Id. at 7. The ROE found that GAAP net worth and tangible net worth improved since the previous examination as a result of trading ICCs for preferred stock and profits from the sale of 17 branch offices. Id. at 1. As a result, GAAP net worth was now $316.1 million as opposed to $245.5 million in the last examination, and tangible net worth was $90.9 million as opposed to a negative $82,000. Id. As a whole, Northeast’s capital base was deemed to have “improved since December 31, 1986; yet tangible capital [remained] low.” Id. at 7. Additionally, the regulators found the interest rate risk assumed by the thrift “to be manageable.” Id. at 1.

However, the regulators found that Northeast was “operating at a loss.” Id. at 1. Northeast would have reported a $2.7 million loss for the calendar year without net non-operating income of $9.2 million. Id.

The regulators also found Northeast’s underwriting for corporate debt securities (“junk bonds”) to be inadequate. Id. With respect to the RCA activities, they noted that such activities had increased in 1987 with the purchase of $322 million in MBS, funded by $472 million in reverse repurchase agreements. Id. at 8-9. As of August 31, 1987, there was $2.3 billion in MBS and $1.8 billion in reverse repurchase agreements outstanding. Id. at 9. The regulators found that management was not properly reporting Northeast’s RCA activities to the Board of Directors. They recommended that “Reports to the board should reveal the goal to be achieved from the transaction, the effective cost and the effect on the net interest margin of the hedge in place.” Id. at 2, 8.

The April 15, 1988 Special Board of Di rectors’ Meeting

On April 15, 1988, the Board of Directors held a special meeting. At the meeting, Dixon announced that a potential acquirer had decided not to extend an offer to purchase Northeast for the foreseeable future. DX 334 at 1. The would-be acquirer stated that the amount of goodwill on the balance sheet and the intent of the acquirer to dismantle the RCA portfolio caused pricing problems. Id. The Board reached a consensus that no further efforts to solicit a purchaser for the bank should be made. Id. Accordingly, “Mr. Dixon stated that future strategic direction should have as a foundation the improvement of the balance sheet, by reduction of goodwill and the increase of tangible net worth.” Id. The Board agreed to a press release which, among other things, said that Northeast intended to increase its tangible net worth through acquisitions and other growth and by providing service to customers. Id. at 2. The Board also engaged in a discussion concerning its search for a new Chief Executive Officer. Id.

NoHheast’s Neiv Management

In July 1988, Northeast’s Board of Directors brought in a new Chief Executive Officer and Chairman, George Rutland. PX 19 at 4; PX 192 at 1.2, 2; Tr. 218-19. The regulators stated that Dixon was replaced by Rutland, in part, as a result of deteriorating conditions at Northeast including higher interest rate risk exposure and a RCA mismatch problem that was an obstacle blocking-attempts to sell Northeast. PX 192 at 2.1-2.2. Rutland had previously been President and CEO of California Federal Bank or CalFed, a $30 billion thrift. Tr. 218. 14

At the July 22, 1988 annual meeting of shareholders, Rutland outlined the state of the thrift and prospects for its future operations. DX 513. He stated that Northeast had increased its tangible net worth with a corresponding decrease in goodwill. Id. at 17. After noting that the faster goodwill could be written off, the greater Northeast’s *274 tangible net worth would be, he stated that among his goals would be to continue Northeast’s increase in tangible net worth. Id. Rutland identified as a challenge to Northeast’s future operations its “interest rate sensitivity in an environment of unsettled interest rates.” Id. Although the March 31, 1988 one-year gap was less than 10%, the rise in interest rates caused Northeast’s net interest income margin to decline from 1.78% to 1.5% between June 1987 and June 1988. Responding to this decline would be his “most immediate priority area over the near term.” Id.; see also DX 341 at 1 (“[Rutland] was particularly concerned about the effect of the recent sharp increase in interest rates upon Northeast’s business plan.”).

The July 28, 1988 Meeting with Regulators

On July 28, 1988, less than a month after Rutland’s arrival, the regulators called a meeting with Rutland and other Northeast representatives in order to get a better sense of Northeast’s current condition and strategies for future operations. PX 1146 at 1. John E. “Jack” Ryan, Executive Vice President of the Federal Home Loan Bank of Boston, noted that earnings were below projections even though Northeast was tracking its business plan. Id. at 1. He expressed concerns about Northeast’s investments in junk bonds and the overall growth in assets, funded by short-term funds such as REPOs. Id. Northeast’s decline in income from 1987 to 1988 was attributed to the faster repricing of the short-term liabilities, particularly brokered CDs and REPOs, as a consequence of an increase in interest rates, as well as an agreement with regulators to build up a general reserve to 1% of outstanding junk bonds. Id.

Further, as the regulators recounted, Rut-land intended to change Northeast’s strategy:

Rutland spoke up and indicated that he is not comfortable with the composition of [Northeast’s] balance sheet and that he shares the concerns expressed by Jack Ryan. He said that the present strategy of purchasing ARMs ... produces too narrow a spread to be profitable and that the small spread is eroding as interest rates rise. The only profit being produced is in the new loans being purchased which requires the bank to continue to grow in order to remain profitable. He noted that [Northeast] is running out of capital and cannot pursue this strategy very much longer.

Rutland said that he does not believe the strategy employed by [Northeast] over the past few years has been the correct one. He said he intends to return to the fundamentals and rely less on a money market operation. Rutland is looking at various alternative ways to address [Northeast’s] future all of which will involve some major changes. He said he is considering unwinding the money market operation which will shrink the bank by billions of dollars. If the reduction strategy is employed, [Northeast] will have to take large losses. Rutland believes, however, that even with the large losses, [Northeast’s] remaining capital will be sufficient to support additional growth off the smaller base.

Id. at 1-2. Rutland also considered taking the thrift private, expanding the junk bond portfolio, concentrating on the local mortgage market, or performing some commercial lending. Id. at 2. However, Rutland stated that he had not decided on a strategy and would keep the regulators informed. Id.

The July 1988 Kaplan Smith Special Study

In July 1988, Rutland undertook an assessment of Northeast and evaluated various strategies for the business because he was concerned about the impact of the sharp increases in interest rates on the business strategy of Northeast. DX 341 at 1. To that end, Rutland hired the consulting firm, Kap-lan, Smith & Associates (“Kaplan Smith”), to examine strategic options. Kaplan Smith filed two reports in connection with the assessment, one dated August 19, 1988, and another September 16, 1988. PX 66; PX 67. The August 19, 1988 report reviewed Northeast’s historical financial performance and condition. PX 66. The September 16, 1988 report reviewed the current conditions facing Northeast and presented alternative strategic options for Northeast’s future operations. *275 PX 67. In its first report, Kaplan Smith found that, as of June 1988, Northeast held over $6.5 billion in wholesale assets derived from non-retail loans, MBS, and investments, and nearly $4.5 billion in wholesale liabilities derived from brokered deposits and borrowings. PX 66 at 6. Kaplan Smith also found that, for the year ended March 31, 1988, Northeast — which was a mixed wholesale/retail thrift — had a lower net interest spread (1.57%) than either its wholesale peers (1.73%) or its retail peers (2.79%). Id. at 17.

The August 19, 1988 Kaplan Smith Report

On August 19,1988, the first Kaplan Smith report was presented to Northeast’s Board of Directors. DX 341. The presentation consisted of four parts. The first part was “A Review of Northeast’s Historical Financial Performance and Condition.” Id. at 2. Points raised during the first part of the presentation included:

During the past four years Northeast Savings has experienced significant asset growth while retaining modest earnings thereby diluting its capital position;

Northeast’s growth in assets has been sustained in large part from purchased assets versus retail originations;

Most of Northeast’s income has been generated through non-recurring items and taxes; and

Over the past year and one half, the Association’s common stock price has declined.

Id. at 2.

The next part of the presentation was entitled “Peer Group Analysis: Northeast Versus Wholesale Thrifts Versus Northeast Retail Thrifts.” Key points from this part included:

Northeast has approximately $2.4 billion of retail deposits funding wholesale assets (termed the “mixed bank”);

Northeast’s net interest income when compared with other wholesale and retail institutions is lower than both; 15

Both Northeast Savings and other wholesale banks have higher funding costs than retail institutions; and

Net operating income generated by Northeast Savings has been somewhat lower than that of wholesale institutions and significantly lower than income generated by Northeast retail thrifts.

Id.

The discussion during the next part of the presentation “Pro Forma Financial Projections — Status Quo Growth Scenario,” included:

Maintaining the present growth direction results in a very narrow margin of profitability.

At current growth, Northeast Savings would fail to meet its minimum regulatory capital requirements at the end of the 1989 fiscal year.

Id. 16 (emphasis added). The final part of the presentation was entitled “Analysis of Problem.” Major points raised during this part included:

The retail bank is earning a good spread; 17

The wholesale bank is earning a poor spread; 18

The combined spread of retail and wholesale is mediocre; 19 and

*276 The mixed bank is operating at a loss.

Id. at 2-3.

The September 16, 1988 Kaplan Smith Report

The September 16, 1988 Kaplan Smith report identified the major issues facing Northeast and some options to deal with these issues. The first problem was that the “mixed bank” had a narrow yield-cost spread with high G & A expenses. DX 67 at 2. Second, Northeast had a high level of overhead for the amount of retail liabilities and a very high level for the amount of retail assets that it held. Such underutilized retail infrastructure resulted in low profitability. Id. Third, Northeast had limited retail asset generation capability, which meant limited fee income, less intérest income and no off-balance sheet assets derived from loan servicing. Id. Fourth, Northeast had a low level capital base which constrained future growth and caused higher costs for borrowing. Id. Fifth, Kaplan Smith found an assetdiability repricing mismatch resulting in less net interest income in a rising interest rate environment. Id. Sixth, wholesale assets were carried at more than market value, which would mean that, if sold, they would cause a $132 million total loss. Id. Seventh, there were unspecified “regulatory concerns” and thus less flexibility in choice of operations. Id.

Kaplan Smith identified seven options for Northeast’s future operations. Id. at 4. The first option was to continue the current business plan which represented a 20% annual growth in the thrift, which would result in a net worth below the regulatory requirements after March 1989. Id. at 14. The second option was to cut the current $88 million in G & A expenses by either $5, $10, or $15 million. Id. at 15. The third option, entitled “Freeze Entire Bank” would decrease the capital position of Northeast, as Northeast took writedowns on assets or if rates continued to rise. Id. at 16. Northeast’s capital position would be less than the 4% required on January 1,1990. Id. 20

The fourth option, entitled “Unwind Wholesale Bank,” provided that Northeast would sell off immediately over $3 billion in wholesale assets and use the receipts to pay off an equal amount of wholesale liabilities. Id. at 21. However, Kaplan Smith recognized that this option would have a very negative impact on Northeast’s earnings. Id.

Under the fifth option, entitled “Replace Wholesale Assets,” Northeast would sell $2.4 billion of assets and replace them with newly originated ARM mortgages at a rate of $1 billion a year. The impact of such a strategy, however, would be that Northeast would have negative income for four years and slightly positive in the fifth year, and the capital ratio would decrease over time to less than 3%. Id. at 25. Under the sixth option, “Dispose of Retail Liabilities,” Northeast would sell $2 billion of deposits for a $120 million or 6% gain, and fund that sale with $1.9 billion of wholesale assets. Northeast would take a loss on the sale of assets in the amount of $33 million, thereby netting a gain of $87 million. Id. at 29. While net interest income would decline, net income would increase as a result of the gain from the sale. Id. The ability to achieve these earnings would be dependent on G & A cuts as a result of branch sales. Id. Northeast’s capital ratio would increase to over 5% and would increase further over time. Id.

The seventh option was disposing of retail liabilities and replacing wholesale assets with retail assets' — which is a combination of options four and six. Id. at 34. In this scenario, Northeast would sell $2 billion in retail deposits for a $120 million gain and fund that sale by selling $1.9 billion of wholesale assets for a $32 million loss. Id. It would sell $2.8 billion in wholesale assets over time taking a $63 million loss and use the proceeds plus loan repayments to fund $1 billion a year in ARM originations. Id. G & A expenses would be reduced by $40 million, and net income could increase over time as ARMs *277 reprice. Capital immediately would increase to over 5% and increase further over time. Id 21

On September 16,1988, the Board rejected options one through five outright “because of the resulting reduction in capital and/or losses and/or decreases in earnings that would be incurred.” PX 250 at 3. Upon Rutland’s recommendation “that the Association move forward in preparation with a branch sale combined with partial unwinding of the Association’s wholesale assets over time replaced by future ARM originations,” the Board reached a consensus approving the strategy recommended by Rutland — apparently adopting Kaplan Smith’s option seven. Id. at 3-4. 22

Rutland then conducted a series of meetings with regulators. On September 28, 1988, two Federal Home Loan Bank of Boston officials, Ford Peekham 23 and Bill Murphy, visited Rutland and two other officers of Northeast. PX 1151 at 1. At the meeting, Northeast informed the regulators that the next week it would announce a loss of $15-$16 million. Id. However, the “good news” about the loss was that it was “non-recurring, and represent[ed] ‘clear the decks’ chargeoffs by a new CEO.” Id.

In his memo recapping the visit, Peekham recounted that:

Mr. Rutland is uncomfortable with the wholesale operation, and plans to unwind it over five years with a “back to basics” plan. Northeast will be originating its own mortgage product, and will phase out asset purchases. This will require a re-invigorating of the branch system and to do that, Mr. Rutland plans to remove a layer of management over the branch system. This will cut G & A expenses and make lines of accountability shorter and more precise.

Id. at 2; Peekham Dep. 22-23. Rutland went on to inform the regulators that “[ojver-all, Northeast’s thrust will remain consumer real estate lending. The emphasis will be to generate core deposits to support Northeast’s own mortgage production. At the same time, [Northeast’s] wholesale purchased assets/funds positions will be unwound.” PX 1151 at 2.

Another regulator, Richard Riecobono, 24 recalled that he met with Rutland and Walters when they were trying “to see if they could turn the institution around by raising capital and their plan was to sell off a piece of the business, the New York sector, if you will, of the business and take the proceeds from the sale and put it into the Connecticut and Massachusetts operations.” Riecobono Dep. at 25-26.

At an October 12, 1988 meeting, the FHLBB representatives reserved support of the branch sale pending further study. Id. at 27-28. On or about October 20, 1988, Jack Ryan phoned Rutland and informed him that the FHLBB of Boston was not yet ready to support Northeast’s restructuring proposal. PX 1156 at 1. Among other reasons, Ryan indicated his concern that the most valuable part of the bank and the most difficult to rebuild — New York branches — would be sold. Id. When Rutland expressed his disappointment, Ryan stated that Rutland could cut expenses, run the bank on a breakeven basis, and unwind the RCA portfolio when market conditions permitted him to do so without taking capital losses. Id. As Ryan testified, this strategy,

*278 wouldn’t be necessarily to stop growth per se. I mean, as I looked at the institution it was really a bifurcated institution. I mean, you had a retail franchise and you had the money market operation. And what I was suggesting was that the emphasis should be put on improving and building the retail side and unwinding the other side .... [n]ot stopping growth entirely, but trying to reduce this in order to offset any additional growth that you might have or hopefully more than offset.

Q. Growing retail, shrinking wholesale?

A. Yeah.

Ryan Dep. at 71.

Rutland stated in response that he would resign before undertaking such a strategy. Ryan then indicated that the proposed plan might be possible on a more measured basis. PX 1156 at 1. Rutland responded that such a plan might work and “proposed Northeast sell only one or two of the New York branches to see how it works out.” Id. at 1. Rut-land agreed to consult with the Board of Directors. Id.

Rutland reported to Northeast’s Board that the Federal Home Loan Bank of Boston did not support the branch sale and that Northeast “must now7 focus on less desirable strategic alternatives.” PX 251 at 2. “In conjunction therewith the Chairman announced that the Association [would] reduce staff by approximately 9% or 164 officers and employees, which will reduce General and Administrative expenses by an estimated $4.1 million.” Id.

The FHLBB’s Proposed Risk-Based Capital Requirement

On December 23, 1988, the FHLBB published a proposed new risk-based capital requirement which included an interest rate risk component, but continued to allow thrifts to count goodwill as regulatory capital. Regulatory Capital Requirements for Insured Institutions; Proposed Ride, 53 Fed.Reg. 51800 (Dec. 23, 1988); DX 855. This proposed risk-based capital requirement, however, never went into effect and was superseded by the FIRREA risk-based capital requirement.

The proposed FHLBB risk-based capital requirement included a provision under which an insured institution was required to have capital in the amount of 6% of its risk-weighted assets. 53 Fed.Reg. at 51818. On-balance sheet assets — cash, U.S. government obligations other than mortgage backed securities, and items collateralized by cash were given a zero percent risk weight. Obligations by U.S. government sponsored enterprises and qualified mortgage-related securities guaranteed or sponsored by government sponsored enterprises, such as Ginnie Mae, Fannie Mae, and Freddie Mac were given a 20% risk weight. Qualifying mortgage loans, were given a 50% risk weight. Assets not classified were given a 100% risk weight. Intangible assets, including goodwill, and real estate owned were given a 200% risk weight. Equity-risk investments were given a 300% risk weight. 53 Fed.Reg. at 51805-OS.

The proposed FHLBB risk-based capital requirement included an interest rate risk component. 53 Fed.Reg. at 51810. The interest rate risk component would be calculated by means of “[a] discounted cash-flow analysis ... to estimate the effect on an institution’s value (market value of portfolio equity) of an immediate and permanent 200-basis-point movement in interest rates, either up or down.” Id.

The proposed risk-based capital rule provided that thrifts structure their portfolios so that they would be in full compliance with the rule by January 1, 1993. Id. at 51814. However, there was to be a transition period requiring that by January 1,1991, all insured thrifts have capital equal to 80% of their fully phased-in capital requirements and core equity equal to 2% of assets. Id.

The December 12, 1988 Board of Directors Meeting

At the December 12,1988 regular Board of Directors meeting, there was a discussion concerning the FHLBB’s proposed new risk-based capital requirements. PX 253 at 1. The minutes reflect how Northeast understood the components of the proposed new capital requirements:

1) a credit risk component which is calculated by multiplying asset balance by *279 risk weight by 6%. The proposed risk weights are 0% for cash and U.S. government obligations, 20% for GNMA, FNMA, FHLMC mortgaged-backed securities, 50% for qualifying 1-4 residential mortgages, 100% for all other assets, 200% for goodwill and real estate owned and 300% for equity risk investments;

2) an interest rate risk component which equals 50% of change in value of the Association resulting from a 2% change in rates; and

3) a pledged asset component which is calculated by multiplying pledged assets by 3%.

Id. at 3. The minutes noted that the proposed requirements would be phased in from January 1, 1990, through January 1, 1993. During the phase-in period, Northeast would be required to maintain capital levels at 70% of total capital requirements with a 10% annual increase until full capital compliance was achieved. Id. Rutland indicated that the proposed regulation was applied to Northeast’s current portfolio, and while there might be difficulties, he believed that Northeast would be able to meet or exceed the proposed risk-based requirement. Id.

Northeast’s December 1988 Business Plan

A new strategy for Northeast was set forth in a business plan for calendar year 1989 that would gradually shift Northeast’s business from wholesale to retail banking while holding the size of the bank’s assets constant. PX 146 at 2. 25 The document was titled “Northeast Savings, F.A., 1989 Business Plan.” 26 Id. at 1. Although the document stated that “[t]he new strategy is aimed at enhancing the long term profitability and capitalization of the Association,” the document did not address a plan beyond calendar year 1989 and included no projections beyond calendar year 1989. Id. at 3. As stated in this plan:

The key elements of this strategy are:

1) rebuild a mortgage loan origination network,

2) build a commercial lending capability,

3) stop balance sheet growth and substitute loans made directly within Northeast’s primary markets for wholesale assets,

4) improve the capital position by managing the Association’s size and maximizing contributions to capital, and

5) maintain the current ratio of general and administrative expenses to total assets while improving fee income.

PX 146 at 2. 27

The Business Plan stated that “[t]he new strategy is aimed at enhancing the long-term profitability and capitalization of the Association.” PX 146 at 3. Northeast intended to retain the additional earnings it would receive from the shift from wholesale banking to retail banking in order to strengthen the thrift’s regulatory capital position. PX 146 at 2-3; PX 241 ¶ 17. Under the Business Plan, Northeast intended to increase income and profit as the portfolio shifted from wholesale to retail assets. Tr. 229. Northeast also hoped that a ramped-up retail operation would generate additional spin-off income by developing customer relationships that would enable it to sell additional products, thereby generating additional fee income. PX 19 at 6; PX 146 at 3.

Northeast’s Plan to Shift from Wholesale to Retail Banking

The December 1988 Business Plan indicated that “[rjebuilding the mortgage lending *280 network is a key element in the Northeast Savings’ strategy of generating its own assets through a return to portfolio lending, and the rebuilding effort [was] the dominant part of the Association’s 1989 business plan.” PX 146 at 4. As Walters testified, “[t]he traditional thrift and banking activities would be to originate residential mortgages, typically single-family residential mortgages, often referred to as 1 to 4 residential mortgages, and [t]o fund[ ] those mortgages through retail deposits from consumers.” Tr. 224. Northeast projected that by December 31, 1989, it would have $1.4 billion on its balance sheet in residential mortgages that it originated. PX 146 at 17. “The overall goal of this effort is to develop the capacity to originate $1 billion in mortgages annually, and to originate as much of this volume as possible in variable rate products to be booked for portfolio.” Id. at 4. Specifically, Northeast hoped to originate $302 million in residential mortgage loans in New York, Connecticut, and Massachusetts, $340 million in southern California, $91 million in Long Island, and $97 million in New Jersey. Id. at 3. The plan stated that Northeast was already in the process of expanding in the southern California, Long Island, New Jersey, and Connecticut markets. Id. at 1.

In addition to residential mortgages, Northeast sought to originate $150 million in commercial mortgage loans. Id. at 3. Such lending was to be “almost exclusively devoted to real estate lending” including “commercial mortgage lending, construction financing, and industrial development loans.” Id. at 2, 5. In addition, this business plan projected that it would originate “other” loans which include “consumer loans.” Northeast’s planned consumer lending operation would originate “mainly real estate related [loans] such as home equity credit lines and loans and home improvement loans.” Id. at 6.

The Business Plan anticipated that, as of December 31, 1989, wholesale assets would still comprise nearly 70% of its total assets— 31% in mortgage-backed securities, 18% in investment securities, and 19% in purchased loans. Id. at 17.

Northeast’s Plan to Hold Balance Sheet Size Constant

The December 1988 Business Plan provided that “the bank size [would] stay[] constant” despite the change from a wholesale-oriented profile to a retail-oriented profile, stating:

The strategy calls for a stop to the aggressive asset growth which the Association has experienced in the past several years. This growth has come about largely through the purchase of wholesale assets funded by wholesale borrowed funds at narrow margins. Under the new strategy, as the Association originates its own assets, they will be substituted for wholesale assets. No growth in the balance sheet will be required.

Id. at 2. With respect to the asset side of the balance sheet, Walters testified that as Northeast’s wholesale assets ran off the books, Northeast planned to reinvest those assets in new retail loans, primarily residential home loans. Tr. 232-33. On the liability side of the balance sheet, Northeast planned for no growth with gradual substitution of retail deposits for wholesale borrowings. PX 146 at 2,12.

The December 1988 Business Plan contemplated that the wholesale assets would run off the books gradually. PX 146 at 13; Tr. 237. Moreover, revamping its retail operations, as a practical matter, would have been difficult to complete quickly. Tr. 238.

The plan included a pro forma projection for required regulatory capital for December 31, 1989. It included an alternative minimum capital requirement of 4%, and Northeast projected that it would have $1.3 million in excess of the 4% minimum capital requirement. PX 146 at 21. It also included a pro forma projection for the proposed FHLBB risk-weighted capital requirement which Northeast would not have met, instead incurring a deficit of $16 million. PX 146 at 24. The pro forma sheet assumed that Northeast would count all of its supervisory goodwill towards regulatory capital. PX 146 at 24; Tr. 374-75. The plan also assumed that the key interest rates would remain unchanged through calendar year 1989. PX 146 at 21, 26; Tr. 375.

*281

Interest Rate Risk Strategy

According to the Business Plan, Northeast’s assets and liabilities were structured such that it had “generally implie[d] a repricing mismatch between assets and liabilities within the one year time horizon (one-year gap) of 20% of total assets or less.” PX 146 at 8. Under the then current regulations, such a range was acceptable to the regulators as FHLBB regulations provided that an institution whose one-year gap was less than 15% would receive a credit of 1% of total liabilities towards meeting capital requirements. Id. at 19. In addition, the same regulations provided that an institution whose three-year gap was less than 15% would receive an additional credit of 1% of total liabilities towards meeting capital requirements. Id. If the gap were within 15% and 25%, the institution would receive a reduced credit. Id.; Tr. 1662-63. As of October 31, 1988, Northeast was entitled to a 1% credit as a result of the one-year gap, and an 0.85% credit for its three-year gap. PX 146 at 20.

The Business Plan included the following strategy regarding interest rate risk:

With regard to the management of interest rate risk, Northeast Savings maintains a balanced asset and liability repricing structure. Such a structure generally implies a repricing mismatch between assets and liabilities within the one year time horizon (one year gap) of 20% of total assets or less. This range provides the flexibility to respond to the basic risk of all financial intermediaries whose retail assets and liabilities do not move in lock step with rate changes in the money markets. Therefore, the Association manages the interest rate risk profile of the entire institution and does not place undue emphasis on discrete components of the balance sheet. This “macro” approach enables the Association to manage the dynamics of its balance sheet most effectively without exposing the company to undue rate risk or the corollary erosion of asset values and net interest margin. This gap range will again be maintained in 1989.

PX 146 at 8. 28 At the same time as Northeast intended to maintain the 20% one-year gap, it intended to increase its origination of residential mortgage lending by means of variable rate assets, i.e., adjustable rate-mortgages. Id. at 4. Northeast expected that its three-year gap would be less than 15% by December 31, 1989, and would receive the full 2% in matching credits from the FHLBB instead of the 1.85% that it expected to receive otherwise. PX 146 at 20-21. 29

The Regulators’ Knowledge of Northeast’s New Business Strategy

The regulators were aware that Northeast planned to shift from wholesale banking to retail banking. Ford Peckham testified that a letter dated December 12, 1988, stated: “the new plan, in qualitative terms, calls for a refocused retail banking effort. Balance sheet growth has stopped and wholesale mortgage asset runoff will be substituted for loans originated by Northeast.” Peckham Dep. at 28. Jack Ryan also testified that this letter was consistent with his recollection of Northeast’s business plan, namely, to “stop overall asset growth, grow the retail side of the bank, and use that to replace the wholesale side of the bank, which was the risk-arbitrage strategy.” Ryan Dep. at 80. 30

*282 Ryan further testified that Rutland’s new strategy “was in general to run a thrift institution rather than a market-based kind of strategy that the former management was going to run. He was going to wind down this huge arbitrage, concentrate on building the franchise, and make loans locally and deal with the local customer base.... [H]e was going to take deposits from local customers, instead of buying money from Wall Street. And instead of investing in residuals and exotic instruments that were involved in the risk-controlled arbitrage, he was going to invest in generating local business” — residential and commercial. Ryan Dep. at 40-41. He also testified that Rutland planned to unwind the RCA portfolio “over time.” Id. “It took some doing to unwind it, I think. There were complicated hedges and — that had to be undone and had to match up his funding with his unwinding. It was ... going to take a while.” Id. at 41-42; 76.

FHLBB’s Examination of Northeast for the Period February 18,1987-December 31, 1988: A MACRO Rating of “4”

On December 12, 1988, the Federal Home Loan Bank of Boston commenced an examination of Northeast. PX 192. The examiner in charge was Thomas C. Kovac. Id.; Tr. 1454. The examination was based on December 31, 1988 consolidated data and covered the time frame since the prior examination of February 17,1987, through December 1988. PX 192 at l. 31 The regulators found that Northeast was in an “unsatisfactory condition,” PX 192 at 1, and gave it a composite MACRO 32 rating of “4,” which meant that Northeast “was in very serious trouble, that unless certain actions were taken, there was a^ — -given the existence of current market conditions, there was a possibility of them failing.” Tr. 1457-58; PX 192 at 1.3.

The ROE found that “[gjiven its $7.9 billion in liabilities and $305.4 million (3.7%) of regulatory capital at December 31, 1988, the institution, in the absence of certain prompt measures, faces the prospect of failing the pending January 1990 [non-FIRREA] four percent minimal capital requirement.” PX 192 at 1. The $305.4 million of regulatory capital included goodwill. Tr. 385. The report went on to state that Northeast:

must also contend with the probability of generating little or no earnings for at least the next one to two years. There exists, therefore, a strong need to shrink assets and for the recently hired new CEO, George Rutland to establish a basis for adequate future profitability in an extremely competitive New England banking environment.

PX 192 at 1. Kovac testified that the shrinking of Northeast’s balance sheet was “needed to bring about capital compliance and, secondly, to ensure the continued existence of the institution.” Tr. 1461.

The regulators stated that despite positive earnings reported in FYs 1986-88, Northeast “fundamentally was and continues to be in a weakened condition ... in large part brought about by a dwindling retail business generating capacity, a more heavily leveraged capital, and an unacknowledged, but greatly increased interest rate risk exposure.” PX 192 at 1.1. The report went on to say that the interest rate risk exposure “was masked by frequent reference to one year gap position that was misleading considering the hedges in place and other activities being conducted.” Id. The report noted than “an acceleration in the rate of decline in the net interest spread and margin [was] brought on by a prolonged period of steadily rising rates and more recently by the inversion of the yield curve. This rate exposure is expected to be a continuing factor and explains why annualized net income remains at the same total dollar amount as two years ago, in early 1987 when assets were $2 billion less, not as risky, and capital was far less leveraged.” Id. at 1.2.

The regulators found that Northeast’s capital level, while exceeding its minimum capi *283 tal requirement, was marginal. PX 192 at 2.13. Regulatory capital totaled $347.6 million for the fiscal year-end March 31, 1988, with a minimum capital requirement of $216.9 million, but declined to $305.4 million as of December 31, 1988, or 3.7% of total assets, exceeding the minimum capital requirement of $237.8 million. Id. at 2.13, 2.16. The decline in the capital bases was a result of “[w]eak earning performances and a substantial increase in the financial leverage” of Northeast. Id. at 2.13. However, the regulators noted that Northeast’s general loan loss reserves of $18 million of regulatory capital were sufficient to protect the capital base under the risk profile of Northeast’s asset portfolio. Id. Because Northeast projected no asset growth and only net income of $2.1 million in its business plan for the year ended December 31, 1989, 33 the regulators anticipated that Northeast would fail to have sufficient regulatory capital for the first quarter ended March 31, 1990. Id. at 2.16. As stated in the report: “[bjarring the absence of additional capital or a reduction in liabilities the scheduled increase in its minimum capital requirement beginning on January 1990, would cause the institution to fail its capital requirement for the quarter ended March 31, 1990.” Id. at 2.14. Walters testified that, according to the regulators, this meant that Northeast faced two alternatives: either raise capital or shrink. Tr. 387.

The regulators expressed concern about Northeast’s tangible capital. Northeast had only $68.1 million in tangible capital as of December 31, 1988, representing 0.83% of total assets which was deemed “marginal” to Northeast’s long-term viability. PX 192 at 2.16. It attributed the low level of tangible capital to the level of goodwill in Northeast’s asset base, amounting to 2.6% of total assets or $217.0 million, as of December 31, 1988. Id. According to this ROE, Northeast was insolvent on a tangible capital basis — after adjustments were made for unrealized losses, off-balance sheet items and unearned purchase accounting discounts, Northeast had a total adjusted tangible capital of negative $31,969. Id. at 2.16-17. 34 According to Ko-vae, insolvency on a tangible capital basis “means you are broke.” Tr. 1484. Based on Northeast’s tangible capital position, the regulators “would significantly restrict the amount of leveraging that would be permitted.” Id. 1485.

The regulators also found that Northeast was subject to “a significant degree of interest rate risk.” PX 192 at 2.18. This risk contributed to operating losses for the nine months ended December 1988, and a “significant deterioration in the net asset value of the institution since December 1986. The risk existent in the balance sheet is a result of the strategic direction pursued by the institution, the implementation of this strategy, and adverse market conditions which unfolded in a manner contrary to assumptions made and tactics employed.” Id. The “strategic direction” referred to Northeast’s wholesale strategy. Tr. 390. The regulators noted that Northeast’s interest rate risk was “masked to an extent by six month and one year ‘gap’ measures which do not account for the very slim margin being earned on assets, and which are distorted by a portfolio of ineffective interest rate swap liability hedges.” PX 192 at 2.18. “Management’s interest rate risk policy, which largely focuses upon the one year ‘gap’ measure as an indicator of the degree of risk, is considered to be overly simplistic and inadequate as a guide to decision making and performance evaluation for [Northeast].” Id. The regulators found that Northeast’s exposure to interest rate risk caused significant unrealized losses of $127.8 million in the wholesale asset portfolio as of December 31,1988, which:

far exceeds the institution’s tangible capital base, and illustrates the imprudence of the operational strategy pursued to the extent that the wholesale activity cannot generate acceptable margins insulated from rate risk, and cannot be unwound without large losses.... The only option available to the institution in the absence of a significant drop in interest rates is to stop wholesale asset growth and allow the *284 assets to pay clown and converge with par value.

Id. at 2.26. In other words, “the $127.8 million [in unrealized losses] would wipe out tangible capital.” Tr. 1493. These unrealized losses reflect a lower market value of Northeast’s wholesale investments as compared to their book value. PX 192 at 2.6.

In this ROE, the regulators outlined the history of the management of Northeast from the time of its creation in the 1982-1983 acquisitions by the former Schenectady Savings Bank up through the time of the examination. Id. at 2-2.4. Specifically, the ROE indicated that, beginning in 1985-1986, Northeast grew its wholesale banking portfolio by purchasing mostly mortgage securities funded by short-term non-retail liabilities hedged with interest rate swaps. Id. at 2.1, 2.18. Northeast “understood at the outset that the margins available from this activity would be substantially less than those available from retail banking ... yet this approach allowed the institution to rapidly grow in order to provide needed additional, absolute net interest income.” Id. at 2.18. However, the manner in which the RCA portfolio was managed and market events, including rising interest rates and inappropriate hedge positions, caused the incremental yields to decline. Id. To increase yields, Northeast began to invest in adjustable rate MBS and CMOs. Id. at 2.20. Northeast also purchased high-yield junk bonds and CMO residuals and increased asset growth to generate net interest margin sufficient to cover operating-expenses. Id. However, these purchases increased the risk to Northeast’s limited tangible capital base and did not return hoped-for yields.

During fiscal years 1986, 1987, and 1988, Northeast generated profits by selling off mortgage securities and loans during periods of falling or low interest rates, which was motivated in pai’t to maintain its stock price and to discourage hostile takeovers. Id. at 2.1, 2.19. The regulators also found that the interest rate swaps entered to protect the spread on wholesale assets were not terminated as they were supposed to be, but were maintained rather than acquiring lower-yielding replacement assets because the hedges would have created some losses that would have offset the gains. Id. at 2.1. The effect was an appearance of an improved one-year gap position which lowered the regulatory capital requirement permitting additional leveraging, but the hedges could not work as intended. Id. Thus, Northeast was being fundamentally weakened as its capital was leveraged at dangerous levels and its retail asset generation capacity was declining. Id.

In addition, the regulators found that “[s]ince its formation in 1982 the institution has never been able to generated except for a small profit in FY 1986[,] any bona fide core earnings. With the exception of 1986, sizeable losses would have been shown for every year without gains on sales, net purchase accounting and tax benefits and net extraordinary gains.” Id. at 2.2. The lack of core earnings was related to Northeast’s “lack of growth in retail activities.” Id. Ko-vac testified that the negative core earnings indicated that Northeast’s “operations are not producing any positive income.” Tr. 1468-69.

The ROE then stated that “[t]he presence of goodwill cannot alone primarily account for the fact that net retained earnings have increased by only $33.2 million, to $118.8 million, since FY 1983 while during this time assets have grown from $3.1 billion, to $8.2 billion at December 31, 1988.” Id. When asked what this finding indicated about Northeast’s profitability, Kovac stated:

Well, that the course of action [Northeast] had pursued was not producing positive results. The reason I expressed this in this way, I wanted to explain to the reader, it wasn’t simply the existence of goodwill. In other words, the cost of amortizing goodwill each year or the fact that there was a sizeable amount of goodwill, which is a nonearning asset on the asset side of the balance sheet, that was not the explanation of why they had such poor- — why they had such small amounts of an increase in retained earning. It had to do with fundamental flaws in the way the business was being operated ... [which] were mainly manifest in the RCA, the fact that they had taken on a large growth in wholesale *285 assets funded by wholesale liabilities, which produced little or no positive benefit.

Tr. 1470-71.

According to the regulators, Northeast’s Board of Directors did not realize that the RCA program was not working properly until it became a barrier to attempts to sell the institution. PX 192 at 2.2. In 1987, during the period of time when there was a ehange-of-eontrol challenge, the Board was informed that sometimes “leverage banking” did not work. Id. Moreover, according to the thrift examiners, the interest rate risk policy was overly simplistic, and there were neither reviews of the policy nor systematic reports showing separately the deterioration of the “leveraged banking” component of the thrift. Id.

George Rutland replaced Dixon in mid-1988, and undertook a new business strategy. Id. at 1.2, 2.3. The regulators described Northeast’s new business strategy as follows:

After a period of assessing the causes of the institution’s present predicament, Mr. Rutland beginning in December 1988 initiated a new course of action for Northeast Savings. The plan calls for no growth in assets beyond the approximate $8 billion pi-esent total; shrinking, as necessary, at minimal or no loss to meet future increased capital requirements; holding the line on non-interest expenses and a return to a more traditional retail thrift orientation. Emphasis will be placed on originating ARMs for portfolio that will gradually replace existing wholesale assets. The objective of the redirection is to achieve larger gross spreads (compared to wholesale), reduce the level of credit and interest rate risk of recent years, and in general, achieve a more productive leveraging of capital with better utilization of the retail infrastructure.

Id. at 1.2.

The Regulators and the Unwinding of Northeast’s RCA Portfolio

The regulators would not have permitted Northeast to continue RCA activity, if a near-term decline in interest rates allowed the disposal of the RCA in less than three years. Kovae testified: “we wanted [Northeast] to get out of [RCA] as quickly as possible, without causing a threat to capital, ... they would not have been permitted to loiter in the RCA program and let it hang around. We wanted it closed out.” Tr. 1489.

Other regulators reiterated that Northeast’s RCA program was a serious problem and that they wanted Northeast to wind it down and shrink the thrift. Jack Ryan testified that the regulators were concerned with RCA activities because “all other things being equal, you don’t make money on a financial transaction unless you take a credit risk or an interest rate risk. [Northeast was] doing too much of this, given their capital structure. That was the concern.” Ryan Dep. at 36. Ryan agreed with Rutland’s strategy of unwinding the RCA position over time, and neither recommended nor thought that it would be a good strategy to “dump this entire portfolio overnight.” Id. at 41-42.

Peekham recalled several meetings on unspecified dates among Rutland, Gridley, the Deputy Regional Director of the FHLBB in Boston, and himself, in which Rutland said that “the bank’s balance sheet was much too large, that they had a huge volume of mortgage backed securities that was supported with borrowed money, that they had hedges in place. They weren’t sure how the hedges would perform, and the spreads were narrowing.” Peekham Dep. at 57. “So he wanted to dismantle that part of the balance sheet, which was pretty dramatic.” Id.

Ralph Gridley stated that the shrinking of Northeast “helped it to survive” because “if they had stayed with all of the assets that they had originally, when they were at about $9 billion, they’d have tanked.” Gridley Dep. at 18. In Gridley’s view, Northeast would have not survived “[bjecause the assets stunk.” Id. Such assets included “[hjigh risk [assets]. Junk bonds, for one. They had some ... securities ... some repos and some other stuff that was just dangerous stuff for them to have on the balance sheet.” Id. Such assets had “interest rate risk dangers.” Id. at 19.

Changing Regulatorg Environment: The Advent ofFIRREA

February 1989 — FIRREA Proposed

On February 17, 1989, the Board of Directors Northeast met and discussed the *286 Bush Administration’s proposed thrift rescue plan and recognized that “a major concern may be that the administration plan may not include supervisory goodwill as a part of capital.” PX 257 at 1. Rutland indicated that he had met with members of Congress and testified before the FHLBB on “the origin and role of supervisory goodwill as a component of capital.” Id. With respect to the treatment of goodwill as capital, Rutland stated that “under the proposed regulatory capital requirements goodwill is assigned a risk factor of 200% which requires the maintenance of 12% capital against goodwill.” Id. He further stated that “capital requirements under the proposed regulations are going to be substantially higher than presently required.” Id. at 2.

March 1989 Board of Directors Meeting

At the March 17, 1989 Board of Directors Meeting, Rutland reported on the status of the Government’s proposed thrift rescue plan. He stated that “the legislative process is moving extremely rapidly, with House committee markup scheduled for April 6.” PX 258 at 1. According to Rutland, the thrift rescue plan provided that, among other things, by June 1, 1991, regulatory capital requirements for thrift will be at least equal to those required of national banks. Id. Rutland further stated that “management is continually reviewing the ability of the Association to meet the capital requirements as likely to be passed by Congress and as proposed by the regulators. If additional capital cannot be raised, it appears the balance sheet of the Association will have to be reduced.” Id. at 2.

March 17, 1989 Financial Management Committee Meeting

At a meeting of Northeast’s Financial Management Committee, Rutland reviewed proposed legislation to rescue the thrift industry. DX 509 at 1. Along with an increase in the minimum capital requirement, Northeast anticipated that the new legislation would phase out goodwill as capital over a 10-year period starting in 1991. Id. at 5.

The Committee noted that applying the proposed regulation to Northeast’s December 31, 1988 assets, there would have been a regulatory capital deficiency of $147,327,000. Id. To meet the capital deficiency, Northeast would have to shrink from $8.2 billion in December 31,1988, to $7.5 billion by December 31,1989, and to $5.2 billion by December 31,1992. Id. at 2, 8. 35

Northeast’s April 21, 1989 Board of Directors Meeting

At the April 21,1989 meeting, the Board of Directors formally approved the hiring of Kirk Walters, Rutland’s former colleague at CalFed, as executive vice president of Northeast. PX 259 at 1, 3. Walters later assumed the duties of Controller and Principal Accounting Officer of Northeast. PX 260 at 1. He subsequently became Chief Financial Officer, then President in 1991, and CEO and Chairman in 1993. Tr. 219-21. Previously, Walters had risen through the ranks of CalFed, becoming Controller of the entire bank at the age of 33. Tr. 217-18.

In addition, Rutland reported on the state of the House and Senate versions of FIR-REA. Both versions contained a 1.5% tangible capital requirement, but the Senate version deferred implementation of the new capital standards until June 1, 1991, rather than June 1, 1990, as provided in the House version. Id. at 4. Northeast would not, under any reasonable interest rate scenario, meet the tangible capital requirement in June 1990, and so Rutland intended to actively lobby Congress to adopt the Senate version or to limit enforcement actions to a growth restriction if a thrift failed to meet regulatory capital requirements. Id.

Northeast’s Revised Mag 15,1989 Business Plan

A new strategy for Northeast was set forth in a document entitled “Northeast Savings, F.A. Revised 1989 Business Plan with 1990 & 1991 Projections,” dated May 15, 1989. DX 179. 36 -pjjg revised plan stated that:

*287 [t]he original business plan for 1989 established a new strategic direction for Northeast Savings. In place of the previous course of aggressive asset growth achieved by wholesale banking, the new direction called for a return to traditional thrift and banking activities with an emphasis on residential mortgage lending, a deemphasis on wholesale activities and a stop to the growth in the balance sheet. This new direction remains the fundamental strategy of the Association.

Id. at 1. The revised business plan, however, was designed to take into account FIRREA as then proposed, with the assumption that regulatory forbearances of supervisory goodwill would be provided:

The original business plan for 1989, however, was drafted within the context of a much different regulatory environment from what has evolved since the plan was drafted. And although the changing regulatory environment has not substantially affected the new strategic direction of the Association, it has affected the manner in which Northeast Savings intended to implement that strategy. For this reason, the Association has reviewed its business plan for 1989 and revised it in light of the new capital requirements contained within the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) currently before Congress. This revised business plan is part of a long range strategic plan under which the Association meets the proposed capital requirements for tangible capital, core capital and total risk-based capital assuming regulatory forbearance of supervisory goodwill.

Id. (emphasis added); Tr. 377. Unlike the original 1989 business plan which assumed that the balance sheet would be held constant, the revised 1989 business plan contemplated shrinking the wholesale portfolio and the balance sheet of the thrift more quickly in order to meet the then-proposed FHLBB capital guidelines that would be in effect for 1990-that assumed the continued forbearance of supervisory goodwill. DX 179 at 1.

Specifically, the revised May 15,1989 business plan projected that Northeast would shrink from $7.9 billion in assets as of March 31, 1989, to $6.79 million by December 31, 1989, then to $4.9 billion on December 31, 1991, in order to comply with the anticipated FHLBB risk-based capital requirements and anticipated increases in the minimum capital requirement. Id. at 4, app. at 5, 17, 24, 26; Tr. 379-80; Tr. 2243. Northeast was projected to have $266 million in regulatory capital as of December 31, 1989, including goodwill. DX 179 at 5; Tr. 377-78. The revised business plan stated that “[tjhese objectives, combined with the goals stated below for the other business units of Northeast, result in a net loss for 1989 of $17.6 million.” DX 179 at 5; Tr. 378.

Northeast’s May 19,1989 Board Meeting

At the May 19, 1989 Board of Directors meeting, Rutland reported on the status of FIRREA as then proposed by the House and Senate and urged directors to contact members of the pertinent House committees to request consideration of an amendment that would permit inclusion of supervisory goodwill in core capital or limit regulatory remedies against supervisory acquirers. PX 260 at 1.

The Board also discussed Northeast’s commercial lending activities and how they fit into Northeast’s strategic and business plans in light of the proposed legislative capital requirements and proposed risk-based capital regulation. Id. at 3. Rutland stated that Northeast would be required to maintain 6% capital for commercial loans as opposed to 3% for residential loans, thereby reducing margins earned. Id. Under the current regulatory envii’onment, it was probable that commercial lending activities would have to be curtailed. Id. Furthermore, the ability of Northeast to originate assets would be limited by its efforts to meet new capital requirements, thereby causing Rutland to conclude “that it may no longer be prudent to emphasize the commercial lending as a line of business.” Id. at 3.

*288

Northeast’s 1989 Annual Report and Rut-land’s May 31, 1989 Letter to Shareholders and Q & A Interview

Included in Northeast’s annual report and 10-K for the fiscal year ended March 31, 1989, was a letter from Rutland to Northeast’s shareholders, dated May 31, 1989, and an accompanying question-and-answer interview with Rutland. PX 19. As of March 31, 1989, Northeast had total assets in the amount of $7.9 billion, including $211 million in supervisory goodwill. Id. at 3. However, Northeast also had a loss that year of $12.9 million, in part due to writing down or selling off certain marginal or non-earning assets. Id. at 21. Rutland attributed that year’s “lackluster performance” to a sharp rise in interest rates and the fact that the interest rate swaps and hedges in place did not sufficiently offset the rising rates. Id. at 8.

The annual report also noted the deempha-sis of commercial lending as a line of business as a result, in part, of the risk-based capital regulations and legislation setting new capital requirements. Id. at 16. Rut-land, in his letter to stockholders, reiterated Northeast’s new business strategy shifting focus from wholesale to retail banldng. Id. at 4.

Rutland maintained that this new strategy would “over the long term, provide a basis for sustained earnings.” 37 Id. at 5. Rutland went on to say that Northeast’s “return to profitability will be gradual, and an element which is key to our success is the direction of interest rates. Our return to consistent operating earnings will be dependent upon a downturn in rates.” Id. According to Walters, a downturn in interest rates was necessary for consistent operating earnings because Northeast was liability-sensitive, and a decrease in interest rates would have increased earnings and capital. Tr. 266.

In a question and answer section of the Annual Report, Rutland addressed the reasons Northeast’s “lackluster” financial performance for the past year and stated:

There are several reasons. First, after I joined the Company last July, the Board and I made a careful review of the Company’s current and proposed new direction, and consistent with this new direction, the Company subsequently wrote down or sold down certain assets to strengthen the balance sheet. We completed those steps in the second and third fiscal quarters. Clearly, however, the most adverse [effect] on us has been the sharp rise in interest rates. The interest rate swaps and hedges we had in place were not sufficient to offset the recent large rise in interest rates. As the Federal Reserve continues to hold or push rates higher, we experience a squeeze on our interest rate margin, and that won’t change until there is a downturn in rates.

PX 19 at 8 (emphasis added).

When asked how long it would take for Northeast to have “consistent core operating earnings,” Rutland stated: “It’s a three to five year turnaround. Three years if we get a substantial downturn in interest rates. If there’s no downturn in interest rates it will probably take longer than five years.” Id.

When asked about the proposed thrift rescue plan, Rutland stated:

I commend the Bush Administration for acting quickly to take control of unhealthy savings and loans. And generally, I view the proposed changes as necessary and positive, with one significant exception: the way supervisory goodwill is treated in the proposed capital requirement. In 1982 and 1983, the government strongly encouraged healthy financial institutions to take over failed institutions, and we took over three. These three supervisory acquisitions resulted in putting on our books $285 million in supervisory goodwill. At the time of the mergers, the government made it clear that generally accepted accounting principles would be used, thereby counting supervisory goodwill for all capital purposes. If we and others like us are no *289 longer permitted to count this supervisory goodwill for all capital purposes, then the government is unilaterally breaching its contract.

Id. at 9. When asked what Northeast’s biggest challenge would be in the coming years, Rutland responded that the “capital requirements [in the pending legislation] are going to be the single biggest hurdle [for Northeast], because the legislation calls for the thrift industry to raise ten times the amount of capital in the public markets in a two-year period than the amount it raised over the previous ten-year period.” Id. at 10.

When asked about the impact of “full interstate banking” on Northeast, Rutland responded:

[Full interstate banking] will improve our franchise value. Today, it’s very difficult for another financial institution to look at Northeast Savings as an acquisition candidate because of the regulations against interstate operations. Once interstate branching becomes reality, our operations will have a higher franchise value. The strategy to build our retail and loan business 'will enhance the value of our franchise whether we remain independent, acquire another institution in the future, or become an acquisition candidate.

Id. at 11. Shortly after that time, interstate banking laws changed to permit banks such as Northeast that were not headquartered in a state to branch into that state or to acquire banks within that state. Tr. 328-29.

Northeast’s June 1989 Board Meeting

Northeast’s Board of Directors held a meeting on June 16,1989. Both Rutland and Walters attended this meeting. PX 261 at 1; Tr. 449. At this meeting, the Board adopted a new interest rate risk management policy. PX 261 at 5. With respect to the proposed savings and loan legislation, Rutland reported that “the Bush Administration has clearly prevailed in its position on supervisory goodwill and core capital requirements and other issues of concern to Northeast.” Id. at 6.

In addition, the CEO presented his recommendation to the Board that commercial lending be significantly curtailed for the next six months to allow the Association the opportunity to assess the impact of the risk-weighed capital requirements for commercial loans. Id. at 5-6.

Finally, Rutland and Walters presented a proposed interest rate risk management policy, as required by FHLBB Thrift Bulletin 13 (“TB 13”), and the Board adopted this Interest Rate Risk Management Policy as proposed. Id. at 1, 5; PX 560. Thrift Bulletin 13, issued on January 26, 1989, required insured institutions such as Northeast to adopt formal interest rate risk policy statements which establish limits on the sensitivity of the thrift’s earnings and net asset value to changes in interest rates. PX 558 at 1-2. TB 13 “imposed behavior constraints on an institution because ... they couldn’t have too much risk relative to the level of their economic capital.” Tr. 1662-63. Northeast’s new interest rate risk policy stated, in relevant part:

In formulating this interest rate risk management policy, the Board of Directors acknowledges that Northeast faces major uncertainties about future capital requirements and the impact which such requirements may have on interest rate risk management. Legislation now pending in Congress may have a direct impact on the level and the composition of the Company’s required capital and an indirect impact on the size and composition of the Company’s balance sheet. These issues in turn may have a substantial effect on how the Company manages interest rate risk.

PX 560 at 1. The interest rate risk policy also recognized that “the interest rate risk in the basic business cannot be permanently offset through the use of hedges at a cost consistent with a reasonable return to shareholders.” Id. at 2.

Table B of the policy set forth limits on changes in net interest income or net asset value for a given change in market interest rates. Id. at 10-11. The exposure limits in Table B were to be viewed in conjunction with the probabilities of interest rate changes contained in Table A of the June 16, 1989 policy. Id. at 10-11. Thus, this new interest rate risk policy no longer measured interest rate risk in terms of the one year “gap” of +/20% of total assets as an acceptable range. *290 Because exposure limits would be sensitive to changes in the interest rate outlook, the Board was to review the limits periodically in light of such changes and could modify the exposure limits in Table B as required. Id. at 11.

Northeast’s July 6, 1989 Response to the December 12, 1988 FHLBB Report of Examination

On June 6, 1989, the FHLBB transmitted its Report of Examination of Northeast, commenced December 12, 1988, with a cover letter. DX 228A. The letter stated that “[t]he findings of the enclosed report of examination (ROE) indicate a generally unsatisfactory condition of your institution.” Id. at 1. The letter also stated that “Lo]f paramount importance now is the necessity to restructure your balance sheet by reducing the dependency on wholesale sources and uses of funds and establishing a stronger retail orientation for your institution.” Id. The letter went on to state that as a result of its RCA activity, Northeast was in danger of failing its minimum capital requirement and was potentially subject to enforcement action:

A direct and unfavorable result of the wholesale strategy pursued by your institution is the excessive leveraging effect it has on your capital position. Such effect in tandem with recent losses and poor prospects for earnings in the near future raises the possibility that the institution will fail its minimum capital requirement in early 1990. Among the consequences of such a failure are the prohibition on the payment of dividends on common and preferred stock, certain operating restrictions, ... and the possible imposition of a capital directive....

DX 228A at 1. The letter requested Northeast to outline the actions that it intended to take to avoid failing the minimum capital requirement and to improve its interest rate risk profile. Id.

On July 6, 1989, George Rutland sent a response to the regulators on behalf of the Board of Directors and “[did] not disagree with [the regulators’] characterization of [Northeast’s] condition as generally unsatisfactory.” PX 211 at 1. Northeast further “agree[d] that the necessity to restructure [its] balance sheet by reducing the dependency on wholesale sources and uses of funds and establishing a stronger retail orientation for Northeast Savings is of paramount importance.” Id. The letter stated that this need to restructure the balance sheet was identical to the “strategic direction that was presented by Management to the Board of Directors and approved by it in December 1988, prior to the commencement of the Examination.” Id.

The letter went on to state that Northeast’s previous RCA strategy could have resulted in the inability of Northeast to meet its minimum capital requirements:

As the strategic direction alternatives available to the Company were reviewed during the fall of 1988 by the Board of Directors and Management, it was fully understood that the wholesale strategy in tandem with recent losses could have adversely affected our ability to meet minimum capital requirements in early 1990. Hence, following the study, the new strategic direction.

Id. at 1. Such “minimum capital requirements” referred to “pre-FIRREA capital requirements.” Tr. 1500. Walters, however, testified that the response reflected “knowledge of FIRREA at that point.” Tr. 401.

As part of a summary of “substantial progress” made towards its “new strategic direction,” Northeast stated:

[Northeast] has reduced assets from $8.2 billion at December 31, 1988 to $7.8 billion at June 30, 1989 ($7.2 billion if the balance sheet is reduced for asset sales commitments at June 30, 1989 that will settle in July or August) and expects a further reduction to approximately $5.8 billion by December 31,1989.

PX 211 at 1. According to a table in the letter listing the projected capital structure, Northeast projected to shrink further to $5.42 billion in assets by December 31,1990, and then increase slightly to $5.49 billion by December 31, 1991 — throughout which time it projected keeping supervisory goodwill on the balance sheet. Id. at 18; Tr. 1502. The next table indicated that the ratio of tangible capital to *291 total assets as of December 31, 1989, would have been 1.15%. PX 211 at 19.

Northeast’s letter also stated that it had reduced wholesale brokered deposits by $450 million, originated $600 million of ARMs, reduced its junk bond portfolio by $234 million and CMO residual portfolio by $16 million since December 31, 1988. Id. at 2. Consequently, Northeast projected regulatory capital of $283 million and a capital ratio of 4.88% of total assets, which would result in Northeast meeting its minimum capital requirement in the first quarter of 1990. Id. This projection of regulatory capital and capital ratio included the use of supervisory goodwill and did not contemplate FIRREA’s requirements. Tr. 402-04.

The cover letter also discussed Northeast’s proposed corrective action with respect to “[ijmprovement in the institution’s Interest Rate Risk (IRR) profile, including the data and means of measuring the IRR, together with better information systems for reporting IRR.” PX 211 at 6.

With respect to its RCA portfolio, Northeast’s response stated that its “Risk Controlled Arbitrage activity was conducted within FHLBB regulations Sections 563.17-6 and 571.3.” Id. at A-l. Kovac disagreed with Northeast’s comment. Tr. 1505-06. Northeast’s response continued, “[t]he ... Company’s experience in this activity shows that RCA is an inappropriate, risky activity and should not be allowed as a permissible activity.” PX 211 at 4. 38 Based on “extensive continuing discussions with George Rutland,” Kovac understood that Rutland “didn’t like [RCA activity], wanted to get rid of it.” Tr. 1506.

The July 14, 1989 Meeting Between Northeast’s Board of Directors and the FHLBB

On July 14, 1989, Northeast’s Board of Directors met with Federal Home Loan Bank of Boston officials regarding the results of the December 12, 1988 ROE. DX 229 at 1. Representing the FHLBB were Jack Ryan, Kevin McCarthy, Thomas Kovac, and Colin Greeley. Id. Representing Northeast were Rutland, Walters, and other members of the Board. Id. A memo recounting the meeting prepared by the regulators stated:

Jack Ryan informed the board members that as a result of receiving an examination composite rating of “4” we were required to initiate supervisory action. He stated that we would rely upon the board resolution to be passed in lieu of formal cease and desist supervisory action in light of our agreement as to the direction the institution is pursuing (i.e. a further reduction in asset size and a retail orientation).

Id. at 2. Kovac testified that if Northeast had not voluntarily agreed to reduce asset size and switch to a retail orientation, the regulators would have issued a cease and desist order requiring Northeast to stop the RCA activity. Tr. 1508-09. Such supervisory action would not have related to FIRREA. Id. at 1509.

Rutland informed the attendees that Northeast had reduced its assets to $7.5 billion as of June 30,1989, and, as of the' date of the July 14 meeting, further reduced them to $6.8 billion. DX 229 at 1.

The July 21, 1989 Revised Business Plan and 1990 Outlook in Contemplation of FIR-REA

On July 21, 1989, Northeast again revised its December 1988 Business Plan. PX 154. This revised business plan, which included a 1990 outlook, was submitted by Northeast, with a cover letter from George Rutland, to the FHLBB on July 31,1989, “in accord with our response to the report of examination.” Id. Walters testified that Northeast would have been revising the business plan “for— where ... we thought FIRREA was going. But aside from that, also addressing any questions, issues that they would had in the examination report.” Tr. 292. The Board of Directors reviewed the plan and outlook at its regular July 1989 meeting. PX 154. 39 *292 While the revised plan reaffirmed the strategic direction called for in the original December 1988 business plan, “[t]he original business plan for 1989, however, was created within the context of a much different regulatory environment from what has evolved since the plan was created” which “has brought about some adjustments to the strategy and to the manner in which Northeast will implement the strategy.” Id. at 1. The revised plan stated that it would “put the Association in a better posture to meet whatever capital requirements result from [FIR-REA] currently before Congress.” Id.

The revised business plan contained three pertinent changes from the original December 1988 business plan. First, Northeast would “reduce its portfolios of wholesale assets and liabilities more rapidly than previously planned and concomitantly ... reduce the size of the Association more quickly.” Id. Specifically, Northeast projected that it would shrink to $5,603 billion by December 31, 1989. Id. at 2, 6. Second, there would be a stronger emphasis on residential mortgage lending than under the original plan as Northeast reduced its risk-based capital requirement by reducing lending and investment activities requiring higher capital. Id. at 1. Third, Northeast would reduce G & A expenses during the course of its shrink. Id. at 1-2. Northeast projected that these changes would result in “a substantial reduction in the leverage of capital, an increase in the overall credit quality of assets and a corresponding decrease in risk based capital requirements, a decrease in interest rate risk, and an enhancement to the long-term profitability of the Association.” Id. at 2.

With respect to short-term profitability, the plan stated, “[although the strategy and plans encompassed in the revised 1989 plan are designed to improve the long term profitability of the Association, a return to profitability in the short-term will require a reduction in the overall level of interest rates and in the level of short term interest rates in particular.” Id. at 3-4. This was because, at that time, Northeast had a negative gap position with liabilities repricing faster than assets. Tr. 294-95. With falling interest rates, Northeast would make more net interest income. Id.

Walters testified that Northeast held discussions with investment bankers and private equity firms to raise capital in 1989, because it was unclear during that year what the regulatory “changes were going to be exactly, how the standards were going to be interpreted, and as importantly how the regulators were going to implement them, [which] provided a tremendous level of uncertainty in the capital markets, which made it, you know, impossible to raise capital.” Tr. 285.

In anticipation of FIRREA, Walters testified that Northeast started selling corporate bonds in the second quarter of 1989. Tr. 289. “And then continuing to go ahead and downsizing the balance sheet ... based on what we knew at that point, which was the expectation of the final rules.” Id. When asked why wholesale assets were selected for divestment, Walters responded:

Well, for a couple of reasons. One, because our strategy was to focus on moving back to and also expanding our retail assets and our liabilities, and we did not want to lose sight of that strategic focus. And the second was the wholesale assets tended to be very liquid and readily marketable within the market, and so you could quickly sell the assets and pay off wholesale liabilities to effectuate the shrink as quickly as possible.

Id.

The Enactment of FIRREA and the Ongoing Shrink of Northeast

On August 9, 1989, FIRREA came into effect. The legislation abolished the FHLBB, created the Office of Thrift Supervision (“OTS”) and directed OTS to promulgate new regulatory capital requirements to replace those that were previously in effect. United States v. Winstar Corp., 518 U.S. 839, 886 , 116 S.Ct. 2432 , 135 L.Ed.2d 964 (1996); 12 U.S.C. § 1464 (t). These regulations became effective as of December 7, 1989. 54 Fed.Reg. 46845. FIRREA imposed three requirements pertinent to Northeast.

*293 First, thrifts were required to maintain “tangible” capital equal to 1.5% of assets. 12 U.S.C. § 1464 (t)(2)(B). Tangible capital under FIRREA did not include supervisory goodwill or cumulative preferred stock. 12 U.S.C. § 1464 (t)(g)(A). Because Northeast was contractually entitled to count its supervisory goodwill and some of its cumulative preferred stock for regulatory capital purposes, and FIRREA excluded those items from regulatory capital, the new tangible capital requirements constituted a breach of contract by the Government. Northeast, 63 Fed.Cl. at 518-19 . As a result of the new regulations, Northeast fell out of capital compliance as of December 31, 1989. Northeast, 63 Fed.Cl. at 513 .

Second, thrifts were required to maintain “core” capital equal to 3% of total assets. 12 U.S.C. § 1464 (t)(2)(A). The amount of supervisory goodwill that could be counted toward core capital would be phased out over several year’s. Specifically, thrifts could count supervisory goodwill up to 1.5% of total assets through 1991; up to 1.0% through 1992; up to 0.75% through 1993; and up to 0.375% through 1994. After December 31, 1994, thrifts could not count any supervisory goodwill towards core capital. Id. § 1464(t)(3)(A). At no point could thrifts count cumulative preferred stock towards core capital.

Third, regulations promulgated by OTS as required by FIRREA imposed a new “risk-based” capital requirement, in which Northeast was required to maintain “risk-based” capital equal to 6.4% of “risk-based” assets. 12 U.S.C. § 1464 (t)(2)(C); PX 156 at 4. 40 The risk-based requirement was to escalate to 7.2% on December 31,1990, and then to 8.0% on December 31, 1992. PX 156 at 15. The risk-based capital requirements constituted a breach to the extent they restricted inclusion of supervisory goodwill in meeting these capital requirements.

The 1989 Shrink

Walters testified that Northeast shrank in 1989, “[b]ecause we knew that we had to do everything possible within our power to come into capital compliance as soon as possible, and so we tried everything we could, including the fact that we aggressively shrank the balance sheet.... Shrinking of our balance sheet was strictly driven by the lack of capital.” Tr. 287.

According to its Form 10-Q for the quarter ended September 30, 1989, Northeast reduced its asset size to $6.3 billion “in anticipation of the new capital regulations which [were] being promulgated by the Office of Thrift Supervision in accordance with FIR-REA.” PX 46 at 7. Walters testified that at the time of this report, there was enough detail in FIRREA to understand the direction the new capital requirements, though it was not entirely clear how FIRREA would be implemented. Tr. 298. Walters also testified that, after FIRREA, Northeast continued the shift from wholesale to retail. Tr. 320. Walters could not say whether the wholesale or retail side of the business performed better after the breach, but he said that, in general, Northeast believed that it would get a better spread in the retail bank, and that the credit risk was sufficiently nominal that the retail assets funded by retail liabilities would generate more net income than wholesale assets. Tr. 321-22.

Northeast’s November 13, 1989 Five-Year Plan

On November 13, 1989, Northeast submitted to OTS a five-year financial plan in response to the new capital standards. PX 156. This plan discussed the capital position of Northeast relative to the capital standards mandated by FIRREA and outlined the steps which the Association would take to meet these standards. Id. at 1 . The Five *294 Year Plan stated that the new capital standards prohibiting the inclusion of supervisory goodwill in capital would prevent Northeast from coming into compliance as the new regulations became effective on December 7, 1989, but that Northeast would return to compliance with all capital standards by December 31, 1990, so long as OTS did not make any deductions from Northeast’s risk-based capital on account of supervisory goodwill. Id. at 2 .

As of September 30, 1989, Northeast had an asset size of $6.3 billion, had a negative tangible core capital of $28,218 million, translating to negative 0.47% of tangible core assets below the new 1.5% requirement. Id. at 4 . Northeast had $62.7 million in core capital, translating to 1.02% of assets, also far short of the 3% anticipated requirement of FIR-REA. Id. Likewise, Northeast had $125,308 million in risk-based capital, translating to 3.84% of assets, also far short of the 6.4% requirement of FIRREA. Id.

In order to comply with FIRREA’s capital standards, Northeast proposed to convert its outstanding issues of cumulative preferred stocks to noncumulative form, which would infuse $100 million to core capital and to tangible core capital. Id. at 5 . This conversion would allow Northeast to add $169 million to total capital. Id. Northeast stated that the result would be full compliance with FIRREA’s capital standard by December 31, 1990, provided no deductions from risk-based capital were made for supervisory goodwill. Id. Northeast offered two alternative capital strategies to achieve compliance. The first or “base” strategy offered was to 1) convert cumulative preferred stocks to a noncumulative form, 2) reduce the asset size of the thrift from $6.3 billion in September 1989 to $5.3 billion by December 31, 1990, and 3) securitize $500 million in residential mortgage loans to mortgage backed securities to reduce the risk-based requirement. Id. at 6 . The second strategy was to either convert the public preferred stock to a noncumulative form or downstream the public preferred equity in the form of common stock from a holding company to Northeast, convert FSLIC preferred stock to subordinated debt, and perform the remainder of the base strategy. Id. In either case, Northeast’s fundamental business strategy would continue to be a return to basic thrift activities: gathering retail deposits and making residential housing loans. Id. at 5-6 .

November 27, 1989: The Regulators’ Proposed One-Year Capital Exemption

On November 27, 1989, Ford Peekham wrote a memo to Ralph Gridley, the Deputy Regional Director of OTS in Boston, recommending that Northeast be given a one-year exception to comply with the new capital requirements. DX 207. Peekham stated, under the heading “Fairness Argument” that:

Northeast has had the proverbial rug pulled out from under them by FIRREA in that the cumulative preferred stock was ruled negligible and so was the Goodwill they had contracted for with FHLBB Bank Board. It is only proper to give them a decent time interval to bring the preferred stock into compliance with FIR-REA. The present course envisions a holding company which will takeover the preferred [stock] and downstream common [stock] to the subsidiary bank. This will take 60 to 90 days to put the corporate pieces in place.

Id. at 1 . Peekham testified that “there was a point in which this preferred stock was counted as capital, and when FIRREA came into being, it was not, or it was not counted to the same extent. And therefore ... it was the recommendation to give them the opportunity to change ... that form of capital.” Peekham Dep. at 40.

Gridley agreed with Peckham’s statement that “Northeast has had the proverbial mg pulled out from under them,” Gridley Dep. at 38, but also stated that FIRREA’s new capital requirements “might have saved them.” Id. at 39 . Although it was “difficult for [Gridley] to go back and assess the immediate condition of Northeast ... at the time [FIRREA] was written,” he testified that “in view of the ultimate results of Northeast, ... [FIRREA] was more beneficial than harmful.” Id. By “ultimate results,” Gridley meant “the fact that they were able to settle the institution.” Id.

*295 Kovac did not agree with Peekham’s statement that FIRREA pulled the rug from under Northeast. Tr. 1706. Kovac stated that he would have instead “put it that [FIRREA] presented a challenge” to Northeast, and he agreed with giving Northeast a one-year capital exception. Id. Northeast “faced significant restrictions apart from removing goodwill. They had a very low level of tangible, positive tangible capital under GAAP. And that would have ... been a constraint in the courses of action they could have pursued, regardless of whether goodwill was counted or not.” Tr. 1707-06.

In the November 27 memo, under the heading of “Good Faith Argument,” Peckham noted that:

CEO Rutland has embarked on a plan to unwind the risk in the organization. Since Dec-31-88, the institution has been wound down from $8,215 billion to $6,288 billion, a 23% decline in the asset base. The decline in the asset base has come from an emphasis on running out wholesale liabilities (reverse repos and brokered funds) and the mortgage backed securities supported by these funds. These positions held substantial interest rate risk due to imperfect fund matching and basis risk, and spreads were minimal.

DX 207 at 2; see also Gridley Dep. at 44. The Peckham memo also noted that the junk bond portfolio had been reduced 74% between December 31, 1988, and September 30, 1989, from $414 million to $106 million, and also that G & A expense had been reduced by 36% on a quarterly basis from September 30, 1988, to September 30, 1989. DX 207 at 2. It does not appear that the requested one-year capital exception was granted.

The December 5, 1989 Waiver Application

On December 5,1989, Northeast submitted an application to the FDIC, authored by Walters, for waiver of Section 29(a) of the Federal Deposit Insurance Act, which is prohibition against a “troubled institution” accepting or renewing brokered deposits. Tr. 287-88; PX 1199. 41 With respect to the 1989 shrink Northeast informed the FDIC:

Following the introduction of FIRREA by the administration and during the ensuing debate and amendment in Congress, Northeast made a continual analysis of its financial condition as the legislation approached final form. Northeast determined even as the legislation was still pending, that in addition to its traditional thrift retail strategy discussed above, it would shrink its assets and liabilities, primarily wholesale, to assist it in meeting the evolving capital requirements.

PX 1199 at 2. Northeast shrank to $5.4 billion by December 31,1989. PX 1585.

The January 8,1990 Capital Plan

On January 8, 1990, Northeast submitted a capital plan to the Office of Thrift Supervision which set forth how it would comply with the new capital requirements under FIRREA. Northeast was required under FIRREA “to submit a capital plan to the OTS showing how the Association will meet the new standards.” PX 173 at 1-1. According to this plan, “[t]he fundamental deficiency in Northeast’s current capital structure is in core capital which limits Northeast’s ability to comply with each of the capital standards. The deficiency in core capital is due to the exclusion of the cumulative preferred stocks and excess supervisory goodwill from core capital.” Id. at 1-4 . Northeast reported that, as of November 30, 1989, it had approximately $203.3 million of goodwill and $100 million of cumulative preferred stock on its books, and a total asset base of $5.6 billion. PX 173 at 1-3 to 1-4.

Under FIRREA, Northeast had negative $28.6 million in tangible capital which was not sufficient to meet FIRREA’s 1.5% requirement. Id. at 1-3 to 1-4; see also PX 2007. The prospects that Northeast would have been shut down as a result of having negative tangible capital were, in the words of Walters, “relatively high, quite high.” Tr. 274-75. With a 1.5% tangible capital re *296 quirement, Northeast would require $120 million in tangible capital if it sought to be a $8 billion institution, or $90 million in tangible capital if it sought to be $6 billion institution. Tr. 276.

Moreover, Northeast had only $54.5 million in core capital, which equated to 0.97% of assets-short of the required 3% of assets. PX 173 at 1-3 to 1-4. This figure included only $83.1 million of Northeast’s $203 million in supervisory goodwill and none of the preferred stock. Id. at 1-3 .

Finally, Northeast had $108.8 million in risk-based capital, resulting in a risk-based capital ratio of 3.62%, less than the 6.4% required under FIRREA. Id.

To satisfy its new capital requirements under FIRREA, Northeast proposed a three-step response in its Capital Plan. First, it planned to form a savings and loan holding company “to exchange the two outstanding issues of cumulative preferred stock for preferred stock of the holding company and to downstream the preferred equity from the holding company to the thrift in the form of common stock which would qualify as core capital.” Id. at 1-6 . Second, Northeast planned to shrink in asset size to $5.2 billion as of December 31, 1990, “to reduce the leverage of core and of tangible capital.” Id. The final step was to securitize $500 million in residential loans to MBS in calendar year 1990 to reduce the risk-based capital requirement. Id.

January 9, 1990: Regulatory Bulletin 3a-l

On January 9, 1990, OTS issued Regulatory Bulletin 3a-l, which was a “Policy Statement on Growth for Savings Associations.” PX 1594. In Regulatory Bulletin 3a-l, OTS stated that it was its general policy “to ensure that asset and liability growth of savings associations is prudent, adequately capitalized and conducted in a manner that is consistent with safety and soundness and the interests of the insurance fund.” Id. at 1 . To that end, OTS stated that:

all associations except those whose regulatory capital already exceeds the “fully phased-in” requirement must increase their tangible, core and total capital by the capital requirements applicable at the time to support the growth at the time the assets are increased. Associations that meet the “fully phased-in” capital requirements must ensure that proposed growth will not cause them to fall below those requirements in the future. On a case-by-ease basis, where appropriate, District Directors retain the authority and flexibility to impose more stringent growth restrictions than outlined below for associations with capital plans pending or that are otherwise of supervisory concern.

Id. (footnote omitted). Regulatory Bulletin 3a-l defined “fully phased-in capital requirement” as “that amount of capital that an association will be required to hold on December 31, 1994, when the risk-based capital requirements will be fully phased-in and certain assets will be fully deducted in calculating an association’s capital position.” Id. at 2 n. 1.

May 1990: Northeast’s 1990 Annual Report

In May 1990, Northeast issued an annual report. With respect to 1989 asset shrink, the report stated:

Prior to the passage of FIRREA, we had begun implementing a new strategy that put us in the best possible position to meet the new capital requirements when they emerged from this legislation. This strategy called for a reduction in wholesale activities, ultimately leading to a reduced asset size more in line with our retail deposit base. We have reduced our asset size from $8.2 billion at December 31, 1988 to $5.0 billion at March 31,1990.

PX 9 at 3. Specifically, the annual report indicated that on March 31, 1989, there were $7.9 billion in assets, down to $5.0 billion in assets on March 31, 1990, for a shrink of approximately $2.9 billion. Id. at 3, 10 . Approximately $1.2 billion in investments and $1.4 billion of mortgage-backed securities were sold during this time period. Id. at 1, 11, 17 . Walters testified that the assets sold ■were selected on the basis of ease and access to quick sales in the market in order to shrink the balance sheet “as aggressively as possible to meet capital standards.” Tr. 304-05. On the liability side, broker deposits were. reduced by almost $700 million, *297 FHLBB advances were reduced by $100 million, and $1.8 billion in securities sold under agreements to repurchase were reduced. PX 9 at 1. The liabilities reduced were largely wholesale in nature. Tr. 305. On the retail side, there was a reduction of $230 million in loans and a $90 million reduction in retail deposits. PX 9 at 1.

The result of the shrink was a reduction in net income interest from $94 million for year-ended March 31,1989, to $78.5 million for the year-ended March 31, 1990. Id. at 1 ; Tr. 306, 308.

The 1990 annual report also discussed Northeast’s write-off of goodwill. As of March 31, 1990, Northeast wrote off $109.4 million of its goodwill leaving $90 million in unamortized contractual goodwill remaining. PX 9 at 1, 4. Northeast’s 1990 annual report outlined the reasons for the write-off of goodwill as follows:

Since our March 31, 1989 year-end, certain significant and unusual events have occurred which have caused the Company to reappraise the supervisory goodwill on our balance sheet. They are:

• The passage of FIRREA on August 9, 1989, which all but eliminated goodwill as tangible and core capital and phased out the use of the remainder as capital over a five-year’ period.

• The OTS capital regulations which became effective on December 9, 1989 and all but eliminated goodwill in risk-based capital and phased out the remainder over a five-year period.

• The passage of the Connecticut Interstate Banking Law, which together with other laws eliminating barriers to interstate branch banking, will eliminate the uniqueness of our three state charter.

• The deteriorating condition of the banking industry in New England.

As a result of these factors, and upon the advice of Kaplan, Smith & Associates, a subsidiary of First Boston Corporation^] regarding the value of our Connecticut and Massachusetts franchises, we have taken a reduction of $109.4 million in supervisory goodwill as an extraordinary expense as of March 31,1990.

Id. at 4 . Northeast echoed these reasons for the 1990 goodwill writeoff in its March 31, 1990 10-K report. PX 20 at 36.

March 1990: Northeast’s Thrift Financial Report

Northeast submitted a thrift financial report for March 1990 to the Office of Thrift Supervision, the same month as Northeast wrote down over $109 million in goodwill. PX 124. The thrift financial report indicated that Northeast had $73.3 million in “qualifying supervisory goodwill” that counted towards core capital. Id. at 25 . In addition to the goodwill write-off, Northeast amortized $11.5 million in supervisory goodwill, leaving $90 million at the end of FY 1990. Id. at 3, 6 ; PX 20 at 46-47.

April 23, 1990: Northeast’s Internal Goodwill Impairment Analysis

Northeast ci'eated a worksheet entitled “Goodwill Impairment Analysis” dated April 23, 1990, which stated Northeast’s rationale for writing off supervisory goodwill. PX 1246. This analysis was prepared by Northeast’s controller and the head of its financial planning division under Walters’ supervision. Tr. 322-23. The analysis stated, in relevant part:

At March 31, 1990, Northeast Savings had $199.4 million of supervisory goodwill.

The value of this asset has potentially been permanently impaired because Northeast can no longer leverage this asset because it must be deducted from capital.

The unimpaired value of the Connecticut and Massachusetts franchises is approximately $85 million-resulting in a potential write-down of $114.4 million.

Permanent impairment does not mean that the impaired asset is worthless.

PX 1246 at 1.

Walters further testified that the “value of goodwill” was tied to “a future earning-stream, that’s based on ... how you run the company, what your ability is to generate net income, which ... ties into our ability to run leverage, the balance sheet of a particular size and such.” Tr. 324. He went on to testify that “the predominant value of supervisory goodwill was, in fact, to allow us to *298 leverage, you know, it would generate [net income], because of the acquisition of some troubled institutions.” Id. 325 .

June 11,1990: Kaplan Smith Report

Kaplan Smith provided Northeast with a report, dated June 11, 1990, entitled “Valuation of the Connecticut and Massachusetts Franchise of Northeast Savings, F.A.” valued as of March 31, 1990. PX 68. Before the write-off, Kaplan Smith stated that Northeast’s nearly $200 million in supervisory goodwill was entirely related to the supervisory mergers in 1982-1983. Id. at 1 . Kaplan Smith noted that “[t]he three acquisitions allowed Northeast, which was previously a New York State thrift, to enter and operate in the states of Connecticut and Massachusetts, creating a unique three-state franchise. The acquisitions also created additional leverage on Northeast’s capital base.” Id. However, Northeast had to revalue its goodwill due to the decreased value of the Connecticut and Massachusetts franchises:

As a result of recent changes in federal and state banking laws, the value of the Connecticut and Massachusetts franchise has decreased significantly. Northeast’s management is therefore obliged to make an appropriate adjustment to the carrying value of the Connecticut and Massachusetts franchise, i.e. decrease the amount of supervisory goodwill related to that franchise.

Id.

There are several approaches in valuing Northeast’s Connecticut and Massachusetts franchise and Kaplan Smith chose the “earnings approach.” Under the earnings approach, Kaplan Smith projected Northeast’s future earnings over a period of years, based on Northeast’s business plans. Id. at 1-2, 14 . Kaplan Smith projected the earnings of Northeast by using Northeast’s May 1, 1990 three-year business plan’s projected earnings for fiscal years 1991 through 1993, and then assumed constant 1993 earnings for fiscal years 1994 through 2007. Id. at 10-14 . The projected earnings, before taxes and goodwill amortization, were $30.9 million for FY 1991, $48.3 million for FY 1992, and $68.1 for FY 1993 through FY 2007. Id. at 14 . After projecting the portion of Northeast’s earnings attributable to the Connecticut and Massachusetts franchise over the 17 years of remaining supervisory goodwill lifetime, Kap-lan Smith discounted the projected earnings to arrive at a net present value for the Connecticut and Massachusetts franchise of $80-$100 million. Id. at 2, 11 . As a result of that valuation, as of March 30, 1990, Northeast wrote down $109 million of goodwill to leave a balance of $90 million. Id.

Under the heading “Events Triggering the Writeoff of Goodwill,” Kaplan Smith first cited APB No. 17 as the relevant accounting standard which served as the basis for the writeoff in supervisory goodwill. Id. at 5 . The relevant portion of APB Opinion No. 17 Kaplan Smith cited was that management must continually evaluate the “value and future benefits of an intangible asset” and that the “estimation of value and future benefits of an intangible asset may indicate that the unamortized cost should be reduced significantly by a deduction in determining net income.” Id. at 5 ; PX 668 at ¶¶ 31, 35. Walters testified that on a quarterly basis, management was required to consider the valuation of goodwill, and if “there is a material change in the valuation or some material event that has impacted the goodwill, then at that point you do a full analysis and you consider all factors, not only the one or two that may have been material factors.” Tr. 331-32.

The Kaplan Smith report further stated in relevant part:

On August 9, 1989 President Bush signed into law [FIRREA], The new law substantially changed the federal statutes and regulations governing savings associations. In doing so, the law significantly decreased the value of the Connecticut and Massachusetts franchise that Northeast had acquired in 1982. Northeast’s management was therefore required to make an appropriate adjustment to the carrying value of the Connecticut and Massachusetts franchise, i.e., decrease the amount of supervisory goodwill related to that franchise.

Id. at 5-6 . When asked whether Northeast (if it had been able to count all of its supervisory goodwill towards all its post-FIRREA capital requirements) would have written off *299 its supervisory goodwill solely as a result of the change in the Connecticut interstate banking law, Walters responded, “No, I don’t believe so.” Tr. 332. However, Walters also testified that the write-off of goodwill increased Northeast’s future earnings because the thrift did not have the amortization expense of the goodwill. Id. 423 .

June 15, 1990: Northeast’s Three-Year Business Plan

On June 25, 1990, Northeast forwarded a three-year business plan, dated June 15, 1990, to OTS. DX 187. The plan was for fiscal years ending March 31, 1991-1993, and reviewed the history of the effect of FIR-RE A on Northeast’s operations. The June 1990 business plan also articulated the reasons for Northeast’s write-off of goodwill from the balance sheet and its effects on earnings:

As a result of the changes in the legislative and regulatory treatment of supervisory goodwill, the extended time frame anticipated for the resolution of Northeast’s litigation with the OTS and the FDIC, and the passage of full interstate banking in Connecticut, the Association recorded a $109.4 million voluntary reduction in the value of supervisory goodwill as of March 31, 1990. The legislatively mandated exclusion of supervisory goodwill from capital reduces the capital available to the Association to leverage and thereby diminishes the value of the goodwill asset — all of which is associated with Northeast’s acquisition of its Massachusetts and Connecticut franchises through supervisory mergers. The voluntary reduction at March 31, 1990 was based on a valuation of the Association’s Massachusetts and Connecticut franchises done by the firm of Kaplan, Smith & Associates. Although the valuation reduction substantially reduced total stockholders’ equity, it had no impact on the Association’s regulatory capital position at March 31, 1990, or on its ability to meet the interim capital targets set forth in the Association’s capital plan. Actually, the reduction eliminates a substantial drag on earnings and improves future earnings by more than $6 million per year which also improves Northeast’s regulatory capital position through increased retained earnings.

Id. at 1-2 .

The June 1990 business plan then recounted Northeast’s implementation of its new business strategy and shrinkage of the balance sheet:

The reduction in the size of the Association from $7.9 billion at March 31,1989, to $5.0 billion at March 31, 1990, served both the purpose of enhancing the capital ratios of the Association and of returning the balance sheet to a more traditional thrift profile since the assets and the liabilities which were reduced were largely wholesale assets and liabilities. In addition, Northeast reduced its portfolio of high-yield investment securities from $314.1 million net of reserves at March 31, 1989, to $16.1 million at March 31,1990.

Id. at 2 .

Northeast stated that it would continue to pursue its basic business strategy of “oper-at[ing] as a traditional thrift institution making residential housing loans and raising retail deposits.” Id. at 3 . The June 1990 plan noted that, unlike the plan for the past fiscal year, the current “three year business plan calls for modest asset growth at a compound annual growth rate of 6.3%.” Id. at 3 . Specifically, Northeast projected that Northeast would increase its asset size from $4.97 billion as of March 31, 1990, to $5.14 billion as of March 31, 1991. Asset size would further increase to $5.58 billion as of March 31,1992, and $5.97 billion as of March 31,1993. Id. at 20 . However, the plan also noted that “[t'Jhe operative constraint on Northeast’s asset size throughout the three year plan horizon is the Association’s risk-based capital position.” Id. at 3 . It noted that the phase-in of the risk-based capital standard from 6.4% to 8.0% combined with the phase-out of qualifying supervisory goodwill over four years would limit Northeast’s size. Id.

The June 1990 business plan assumed that interest rates would maintain their current levels for fiscal year 1991, with small increases in August 1990 and November 1990. Id. at 5 . Rates were projected to remain un *300 changed through fiscal years 1992 and 1993. Id.

Implementation of the Capital Plan and Corporate Reorganization of Northeast

After the regulators approved the January 8, 1990 Capital Plan on March 12, 1990, Northeast implemented the three-step response to FIRREA’s capital provisions as outlined in the Capital Plan. PX 21 at 24.

First, on July 6, 1990, the FDIC and Northeast’s stockholders approved a plan to reorganize Northeast. Id. On July 9, 1990, the reorganization was completed, and the new holding company, NFC, downstreamed capital to Northeast in the form of common stock, which raised regulatory capital by about $100 million, $60 million of which replaced the FSLIC preferred stock dollar for dollar, thereby fully mitigating that portion of the breach, and $40 million of which represented preferred stocks held by others. Id.; PX 173 at 1-6. The stockholders were required to approve the change because they directly held shares in the thrift, while under the corporate restructure, they would own the shares of the holding company one step removed from the thrift. Tr. 357. By doing so, the thrift converted its $100 million in cumulative preferred stock which did not count towards regulatory capital to common stock which did count toward regulatory capital, on a dollar-for-dollar basis. Id. 280-81 .

Next, Northeast shrank its assets. By March 31, 1990, Northeast had shrunk to $5.0 billion. PX 9 at 3; PX 20 at 38. Finally, Northeast securitized $344 million of its loans by March 20, 1991, at an annual cost to Northeast in excess of $650,000. PX 241 ¶ 18.

By July 9, 1990, Northeast attained compliance with all then-existing capital requirements and had $4.9 billion of assets. PX 21 at 24; PX 1585 at 1.

OTS’ May 7 — August 1, 1990 Examination

From May 7, 1990 through August 1, 1990, OTS conducted a regular examination of Northeast, led by Kovac, who was examiner-in-charge. PX 194. As of May 7, 1990, Northeast was $5.0 billion institution. Id. at 1 . Overall, the regulators found that Northeast had improved since its previous examination, stating: “[u]nder the leadership of George Rutland, CEO and Chairman of the Board, this institution has had marked improvement since the previous examination. Compliance with regulatory capital requirements has recently been achieved through formation of a holding company, significant asset shrinkage and changes in balance sheet composition.” Id. The regulators also found that Northeast’s “capacity to regenerate recurring core earnings has improved since December 1988, as shown in the net interest spread and yield.” Id. The regulators then stated that “[¡Implementation of the current business plan, revised as of June 15, 1990, should lead to further reductions in interest rate and credit risk.” Id. However, the regulators also found that Northeast had $227.5 million in criticized assets which, while lower than the $537.8 million found in the previous examination, was still at 283.3% of tangible capital. Id. The regulators also found that Northeast’s “heavy investment in low documentation loans coupled with its policy to qualify the borrower at the ‘teaser’ rate could impact future asset quality.” Id.

The regulators found:

management has exhibited a great deal of competency while the board of directors appears to be properly performing its role of oversight, monitoring and guidance. Based on the findings of this examination, the course and manner of action in which Mr. Rutland and his assistants have lead this institution appears to have been beneficial and has resulted in much of the improvement to date.

Id. at 1 .1. The regulators gave Northeast a composite MACRO rating of “3.” Id. at 1 .1.

However, the regulators expressed concern with certain aspects of Northeast’s lending practices, stating:

The large increase in residential lending has involved use of nontraditional underwriting techniques and products which raises some concern. In particular, 72 percent of residential mortgages originated in the past 16 months have been qualified under a limited documentation program. This program does not require income, asset or down-payment verification, relies heavily on credit report analysis, and is *301 designed for “quick” approval. In addition, debt ratios are calculated using the initial discounted interest rate. The combination of these factors exposes the institution to greater than normal risk considering the high volume of loans originated under this program.

Id. at 2 .4

The regulators also found that the limited documentation program was used in Northeast’s California residential loans:

The limited documentation program is also used to underwrite COFI ARMs with negative amortization features, thereby increasing the perceived risk. This product, which is only offered in California, has equaled 15 percent of total residential orig-inations during the past 16 months with a material portion underwritten in conjunction with the limited documentation program.

Id. The regulators also found that, aside from work-outs, management had ceased all commercial mortgage lending in October 1989. Id. Similarly, consumer lending had been curtailed, with the cessation of originating student, home improvement, personal, auto and fixed home equity loans. Id. at 2 .5.

With respect to Northeast’s investments, the regulators found that:

Lujnder management’s restructuring strategy, the investment portfolio has been relegated to a secondary function of providing a source of liquidity rather than a primary function of yield enhancement. As a result, high yield corporate debt securities have been reduced by approximately $350 million to $10 million (net) as of April 30, 1990. In addition, CMO residuals have been reduced by $33 million to $89 million. Most of the remaining security portfolio is in highly rated MBSs and CMOs and other lower risk investments.

Id. at 2 .5.

The ROE reviewed Northeast’s capital, stating:

Based on management’s updated financial projections dated June 15, 1990, which appear reasonable, capital compliance appears capable of being maintained at least through the next interim requirement level for risk based capital. Even with management’s success in restructuring the balance sheet, building core earnings capability and reducing the overall level of risk, future adequacy of capital remains very vulnerable to changes in interest rates and the general economic environment. Present and projected margins of capital compliance are quite narrow, amounting to only a few million dollars.

Id. at 2 .7. The regulators stated that Northeast’s capital plan “is now in effect with its goals and projections being met or exceeded as of this examination. The original file year capital plan has been supplemented with a business plan covering a three year period ending March 31,1993.” Id.

The ROE noted that, prior to the holding company conversion, Northeast was not in compliance, in whole or in part, with the three capital standards as a result of the exclusion of goodwill and cumulative preferred stock from regulatory capital. Id. However, after the holding company reorganization, Northeast was in full compliance with capital standards. Id.

The regulators noted that as of March 31, 1990, Northeast had written down $109.4 million in goodwill, with $90 million remaining. The regulators stated the reasons for and effect of the writedown:

LThe $109.4 million goodwill writedown] was reported to have been done to reflect the estimated value of the franchise following the passage of FIRREA and Connecticut interstate banking legislation. Although this greatly diminished GAAP capital, it had no direct impact on regulatory capital as only $70 million of goodwill could be counted for core and risk based capital. Going forward, however, this writedown will benefit future earnings by reducing goodwill amortization expense.

Id. at 2 .9.

May 14, 1991: Rutland’s and Walters’ Quarterly Visit to OTS

A May 14, 1991 memo from Ford Peekham to the file reported Walters’ and Rutland’s quarterly visit to OTS, and indicated that all of Northeast’s junk bonds had been sold off and that the regulators gave Rutland a *302 signed letter freeing Northeast from the Capital Plan. PX 1318 at 1. As of March 31, 1991, Northeast had capital ratios of 2.15% (tangible), 3.65 % (core), and 8.71% (risk-based). Id. The memo stated that Northeast was shrinking to meet a new proposed 4% core capital requirement by June 30, 1991. Id. at 2 . 42 During the quarter ended March 31, 1991, Northeast sold the following assets — $212.5 million in purchased loans, $105.7 million in MBS, $8.9 million in CMO residuals, $3.4 million in high-yield bonds and $9.9 million of home equity loans — for a total of $340.4 million total assets, the proceeds of which were used to pay wholesale liabilities. Id. The memo also noted that “[n]o dividends can be paid because all earnings will have to be retained to offset the roll-off of the supervisory goodwill. Also, the earnings streams will be smaller due to the downsizing of the institution.” Id. at 4 .

August 2, 1991: Northeast Federal Corporation and Northeast’s Business Review

Northeast produced a lengthy document entitled “Northeast Federal Corp. [and] Northeast Savings, F.A. Business Review, Aug. 2, 1991.” PX 161. In this document, Northeast provided its FY 1991 results, a financial overview of Northeast from FY 1985 through 1994, and a three-year business plan for fiscal years ending March 31, 1992, 1993, and 1994. The document recited the major accomplishments of Northeast from July 1988 to the date of the report, including:

• Rebuilding its residential mortgage loan origination capacity to provide Northeast with high-quality ARMs to replace wholesale assets in its portfolio;

• Discontinuing commercial real estate lending;

• Restricting consumer lending to products that are deposit-related;

• Reducing the size of Northeast from $8.2 billion at December 31, 1988 to $4.0 billion by June 30,1991, “and in the process significantly restructured [Northeast’s] balance sheet to be more consistent with [Northeast’s] basic strategy and reduce its overall credit and interest rate risk”;

• Maintaining stable base of retail deposits;

• Reducing G & A expenses from $93.7 million in FY 88 to $75.5 in FY 91;

• “Achieving] sustainable core earnings for the first time since the mid-1970s, before Northeast was formed”;

• Reducing Northeast’s interest rate risk without relying on hedges;

• “Successfully anticipating] the change in thrift capital requirements and brought the company into capital compliance within 7 months of the implementation of FIRREA standards”; and

• Increasing Northeast’s capitalization by June 30, 1991 to 4.13% core, 2.63% tangible and 9.09 risk-based.

PX 161 at 0002-0004.

The August 1991 business review contained a financial overview of Northeast from FY 1985 through 1994, which showed that from FY 1985 through 1988, Northeast had negative core earnings. PX 161 at 0021; Tr. 417-18. In FY 1989 and 1990, however, Northeast reported positive core earnings, but reported negative earnings. PX 161 at 0021; Tr. 417-18.

This business review also contained a three-year business plan for the fiscal years ending March, 31, 1992, 1993, and 1994. First, Northeast reviewed its results for the fiscal year ended March 31, 1991, which it described as a “successful completion of] a very challenging year.” Id. at 0041 . Northeast had “earned a modest profit of $11.7 million for the fiscal year and established a pattern of consistent core earnings.” Id. The plan also discussed its completed capital restructuring through the creation of a holding company “and thereby achieved compliance *303 with the new capital standards mandated by FIRREA and promulgated by the OTS in November, 1989.” Id. Northeast also increased its tangible capital and reduced its risk-based assets and total assets which allowed it to exceed its risk-based capital requirement a quarter ahead of its “effective date of December 31, 1990.” Id. The business review also noted that Northeast satisfied all of the requirements of the Capital Plan it had been operating under since March 1990, and that it had been notified by the Boston OTS that it would be released from its capital plan on May 3, 1991. Id. Northeast continued with its strategy of retail or “basic thrift banking,” and during the fiscal year, originated $768 million in residential mortgage loans, $719 million of which were ARMs. Id. Total assets as of March 31, 1991, were $4.56 billion. Id. at 0044 . It summarized its achievements during the fiscal year as follows:

All in all, the achievements of the past year have positioned Northeast to respond to what has become an increasingly more challenging banking environment, both regionally and nationally. As Northeast begins fiscal year 1992, it does so with higher capital levels, stronger core earnings, a wider net interest margin, and lower general and administrative expenses than it has had since the Company adopted its new strategic direction in 1988.

Id. at 0042 .

However, in its three-year plan, Northeast noted that the OTS’ proposed increases in the minimum core capital standards would cause it to reduce its asset size further:

On the regulatory front, as a result of an increase in the minimum core capital requirement for national banks promulgated by the Office of the Comptroller of the Currency, the OTS has proposed an increase in the minimum core capital standard for savings associations. The new standard, which Northeast expects to be effective as soon as June 30, 1991, would require that all but the most highly rated savings associations maintain core capital equal to at least 4.00% of adjusted assets. Northeast Savings’ core capital at March 31, 1991, was 3.65% of adjusted assets. In order to meet a J.00% minimum, therefore, the Association is planning to reduce its asset size by June 30th to approximately $U.l billion. Northeast Savings already has committed asset sales of $230 million towards the total required of $460 million in sales necessary to reach the target asset size.

Id. (emphasis added). Northeast projected net income for fiscal years 1992, 1993, and 1994 to be $5.1, $7.0, and $14.6 million, respectively. Id. at 0056 . Such results were lower than projected in its June 15, 1990 three-year business plan, which had projected net income of $22.1 and $30.3 million for 1992 and 1993. DX 187 at ll.' 43 In the June 1990 business plan, the tangible core capital ratio was 2.25% and 2.65% of adjusted tangible assets for fiscal years 1992 and 1993. Id. The new projections of tangible capital ratios for fiscal year 1992, 1993, and 1994 were 3.06%, 3.38%, and 3.90% respectively. PX 161 at 0057. In the three-year business plan for FY 1992-94, Northeast stated that “the most significant factor contributing to these lackluster results is the downsizing necessitated by the new minimum core capital requirement of 4.00%.” Id.

The business review continued:

Based on a 3.00% core capital requirement, the previous plan projected that the Company’s average asset size for fiscal year 1992 would be $5.4 billion. The current plan projects that the average asset size for fiscal year 1992 will be $4.1 billion. This reduction in average asset size results in a loss of approximately $22.6 million in net interest income compared to the previous plan (or a loss of $12.2 million in net income).

Id. at 0057 .

The business review contemplated that “Northeast’s fundamental business strategy continues to be to operate as a traditional thrift institution making single family residential housing loans and raising retail de *304 posits. Although the increased core capital requirements will force Northeast to be a smaller institution than planned in the past, the fundamental strategy of the Company remains the same.” Id. at 0044 .

Northeast Federal Corporation’s 1991 Annual Report

Northeast’s 1991 Annual Report discussed the impact of the anticipated increase in required minimum capital proposed by OTS. PX 10. In the report, Northeast estimated that the new capital requirements would take place on or about June 30,1991:

These proposed increases in capital requirements will have a substantial impact on the operations of this company. An increase in the minimum required level of core capital, together with the phaseout by December 31, 1994 of the portion of supervisory goodwill which qualifies as core capital, will require a further reduction in our asset size, which will reduce earnings in the next few years by more than 50% from our current level. As a smaller institution, we will have less capacity to grow capital through retained earnings. We therefore anticipate that we will be unable to pay any dividends before 1995 or 1996 at the earliest, although no guarantee can be made.

PX 10 at 6-7; see Tr. 315-16.

OTS’ Analysis of Gains on Sales of Assets

On September 18,1991, Michael Moriarity, OTS Examiner in Charge for Northeast, and Richard Kane wrote a memo to Ford Peek-ham concerning possible gains trading at Northeast Savings. PX 1361; Moriarity Dep. at 24-25. The authors concluded that Northeast was not engaging in gains trading, but rather:

permanently disposing of assets as part of new management’s business plan to maintain compliance with increasing regulatory [capital][ 44 ] standards and change the focus of the institution from retail to wholesale in nature. Planned asset shrinkage began in 1989 and continued through the first quarter 1990 when assets reached a desired level oLf] approximately $5.0 billion, a $3.2 billion decline. As it became apparent that Northeast’s core capital requirement [would] probably increase to four percent, management began to shrink assets further in 1991.

Id. at 1 . The regulators went on to state that:

[t]otal assets have decreased from $5 billion at year end 1990 to $4 billion at June 30, 1991. Accompanying this 20 percent shrinkage has been a return to core and operating profitability and compliance with current and proposed (4.0 percent core) regulatory capital standards.

Id. The regulators stated that the Board of Directors authorized the transfer of assets out of the “held for sale” portfolio and the sale of assets in the “held for investment” portfolio for this purpose. Id. Such authorization was granted on December 14, 1990, and rescinded on July 19, 1991, once the desired asset size was achieved. Id. The regulators further stated that “[l]ack of capital mandated the need to shrink asset size. The same lack of capital removes the ability to take net losses while shrinking.” Id 45

DEPCO Acquisitions

On September 25, 1991, Rutland called a special meeting of Northeast’s Board of Directors. DX 391. The previous day, Rut-land had been asked to attend, on short notice, a meeting with Ralph Gridley, the Deputy Regional Director of OTS in Boston, in which he was required to sign a confidentiality agreement, binding Northeast. Id. at 1 . The meeting was about certain state-chartered, privately insured credit unions and banks in Rhode Island that had been closed by the Governor of Rhode Island in January 1991, because they were inadequately insured due to the failure of the private insurance fund that supported them. Id.; Tr. 338. As a result, the deposit accounts were frozen, and depositors had no access to their funds for up to nine or ten months. Id. 338-39 . *305 At the request of the Governor and the Rhode Island congressional delegation, OTS was seeking a resolution to the problem. DX 391 at 1; Tr. 328. 46

After a potential acquisition of four such institutions had failed, Gridley requested Northeast to consider acquiring these credit unions. DX 391 at 2. Gridley revealed that the purpose of an accelerated examination of Northeast by OTS that had commenced in August 1991, was to determine whether Northeast was eligible to be a potential acquirer of the four institutions. Id. at 2 .‘ 47 However, time was of the essence, and the OTS needed a prompt expression of interest before the Governor’s scheduled announcement later that week. Id. It was then proposed that Northeast acquire the assets and liabilities of East Providence Credit Union which had $110 million in deposits and five branches. Id. The acquisition would permit Northeast to expand into another New England state and enhance its capital position. Id. Although Rutland had some concerns about the underwriting of East Providence’s commercial loans, they were relatively small — in the $100,000 category. Moreover, East Providence had other assets. Id.

The OTS regulators outlined the proposed transaction. All the assets of the credit unions would be acquired, the assets being-marked to market with a provision for third-party resolution in ease of differences concerning market value. Id. The excess of the value of the liabilities assumed over the market value of the assets purchased would be paid to Northeast in cash. Id. In addition, the State of Rhode Island or an agency of the State would invest in equity of Northeast, most likely in the form of preferred stock to the extent of 10% of the liabilities assumed. Id.

Rutland indicated that if Northeast could structure a satisfactory transaction to acquire East Providence, the transaction could serve as a “prototype” for acquiring the other three credit unions which were more like traditional savings banks. Id. Rutland then asked Northeast’s Board for an expression of interest in pursuing these negotiations, and the Board reached a consensus to go forward with due diligence and negotiations with the Rhode Island state agencies. Id.

On May 8, 1992, Northeast acquired the four failed Rhode Island credit unions. PX 24 at 50-51. Under the final agreement, Northeast’s holding company, (“NFC”), sold to the Rhode Island Depositors Economic Protection Corporation (“DEPCO”) 48 351,700 shares of a new class of cumulative preferred stock, its $8.50 cumulative preferred stock, Series B, and issued to DEPCO a warrant to purchase 600,000 shares of NFC common stock at $2.50 per share and a warrant to purchase 200,000 shares of NFC common stock at $4.25 per share. 49 PX 24 at 3, 47, 50-51. DEPCO purchased these shares and warrants for $35.17 million. Id. at 47 . The net proceeds from this sale were used to build the equity capital of Northeast. Id. at 3 . The preferred stock contained a payment-in-kind (“PIK”) feature which allowed NFC to either pay the first five years of dividends to DEPCO in cash or in additional preferred stock. PX 25 at 134; Tr. 344-45.

Also, in conjunction with the DEPCO acquisitions, Northeast repurchased from the FSLIC Resolution Fund, its adjustable rate *306 preferred, stock for $28 million in cash, and $7 million of the company’s 9% Sinking Fund Uncertified Debentures due for a total fair market value of $32.5 million. PX 24 at 3. Walters testified that if Northeast had a sufficient capital cushion or excess capital available, it would not have sought this infusion because it was not inexpensive capital in terms of the dividends that were being paid and the warrants that were issued. Tr. 341-42.

Thus, as a result of the DEPCO transaction, Northeast was able to repurchase FSLIC preferred stock which had a value of $71.3 million for $32.5 million. Tr. 431-32. Walters testified that these acquisitions were not done to replace capital and were independent of the enactment of FIRREA or any breach of contract. Id. 427 .

December 1991: Enactment of the Federal Deposit Insurance Corporation Act

The Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) was enacted in December 1991, and became effective in December 1992. Pub.L. No. 102-242, 105 Stat. 2236 (1991) (codified in scattered sections of 12 U.S.C.). FDICIA created new categories of capital compliance: “undercapi-talized,” “adequately capitalized” and “well capitalized”. 105 Stat. 2236 , § 131 (codified at 12 U.S.C. § 1831o); see also 12 C.F.R. § 565.4 (1993). If a thrift was not at least “adequately capitalized,” it became subject to various penalties. A thrift that had a “well capitalized” rating had significant benefits including reduced insurance premiums. In order to be “adequately capitalized,” a thrift had to maintain a core capital ratio of at least 4% and a risk-based capital ratio of at least 8%. In order to be “well capitalized,” the thrift had to maintain a core capital ratio of at least 5% and a risk-based capital ratio of at least 10%. 12 C.F.R. § 327.3 (1993).

Northeast’s 1992 Annual Report

• Northeast’s 1992 Annual Report discussed the impact of the increase in required minimum capital as well as the phase-out of supervisory goodwill that could count towards core capital on Northeast. PX 11.

The 1992 Annual Report continued:

It happened as predicted. The increase in the minimum required level of core capital, together with preparing for the phase-out by December 31, 1994, of supervisory goodwill which qualifies as core capital, required a reduction in asset size which accounts for the Company’s decline in net earnings from last year.

PX 11 at 4; see also Tr. 317.

Northeast Federal’s 10-K for the Year-Ended March 31,1992

Northeast’s 10-K, as of March 31, 1992, explained Northeast’s reduction in size between March 31,1991 and March 31,1992, as follows:

During the years ended March 31, 1992 and 1991, respectively, total interest income decreased by $122.1 million and $159.6 million when compared with each of the prior years. These decreases were primarily the result of significant decreases in average interest-earning assets which were required in order to meet current and anticipated capital requirements.

PX 23 at 49. Walters testified that the “anticipated capital requirements” referenced would have been the FDICIA requirements and the “prompt corrective action standards that were passed by the OTS.” Tr. 318.

The 1992 10-K stated that Northeast’s asset reduction was accomplished through reducing wholesale assets and wholesale funding sources (liabilities):

The downsizing of the Association which resulted in the decreases in interest-earning assets and interest-bearing liabilities discussed above, is consistent with the Association’s business plan to meet both the current and anticipated capital requirements mandated by FIRREA and subsequent proposed regulations and was accomplished primarily through reductions in the investment, mortgage-backed securities, purchased residential mortgage loan, and consumer loan portfolios. The proceeds were used to reduce wholesale funding sources, primarily brokered deposits, reverse repurchase agreements, and collat-eralized floating rate notes.

PX 23 at 49. Kovae testified that he never heard from Rutland or Walters that the *307 shrink in assets in 1991 was caused by removal of supervisory goodwill. Tr. 1712-13.

The 1990 10-K further indicated that in managing its interest rate risk at the time, Northeast structured its portfolio to be positively gapped:

As a result of its overall strategy of originating adjustable rate loans for portfolio and of reducing fixed rate assets, the volume of liabilities maturing and/or repricing is exceeded by the volume of assets maturing and/or repricing on a cumulative basis for all time frames within 10 years. As a consequence, [Northeast’s] interest-earning assets can be expected to respond more quickly to changes in interest rates than its interest-bearing liabilities, resulting in an increase in net interest income when rates increase and a decrease when rates decrease.

PX 23 at 65.

September 28,1992: OTS Report on Examination

On September 28, 1992, OTS commenced an examination of Northeast. DX 244. The ROE noted that Northeast had charged off $57 million of goodwill, including $38 million of qualifying supervisory goodwill, leaving $1 million in qualifying supervisory goodwill remaining. DX 244 at 10. Qualifying supervisory goodwill was, by definition, includable in core and risk-based capital. Walters testified that the OTS had informed Northeast that once it had met the fully-phased in capital standards, Northeast could not grow its assets if such growth would cause it to fall below its fully-phased in capital requirements, even if Northeast exceeded the applicable minimum capital standards established for the duration of the FIRREA phase-in period. Tr. 336-37.

October 15, 1992: Kaplan Associates, Inc. Report

Northeast hired Kaplan Associates, formerly Kaplan Smith, to value Northeast’s franchise rights in Connecticut and Massachusetts as of September 30, 1992. Kaplan Associates issued a report on October 15, 1992, which discussed the reasons for the 1992 goodwill writeoff. Under the heading “Key Factors Affecting Remaining Value of Franchise Rights,” Kaplan Associates stated that “the collapse in franchise values brought about through the efforts of the FDIC and RTC to rapidly liquidate hundreds of banks and thrifts during the deepest and longest real estate recession since the Great Depression has led Northeast to continually adjust the scope of its operations. As a result, Northeast has had to shrink its operating base substantially, reducing its assets by half.” PX 69 at 1-4.

The October 15, 1992 Kaplan Associates valuation report went on to enumerate the key factors affected Northeast’s franchise values.

During the latter part of the quarter ended September 30,1992, a confluence of factors has prompted Northeast to reevaluate the prospective net benefits reasonably attributable to its remaining Connecticut and Massachusetts franchise rights. These factors include a number of key events since 1990 that have diminished the expected benefits of the Association’s Connecticut and Massachusetts franchise rights that include, but are by no means limited to, the following:

• The enactment of FDICIA and the promulgation of various federal capital regulations and PCA pertaining to FIRREA and FDICIA.

• For the next two years, under OTS Regulatory Bulletin 3a-l (“RB3a-l”), because Northeast is already in compliance with its applicable fully-phased-in capital requirements, the Company may not leverage itself in a manner that would cause its actual capital ratios to fall below its applicable fully-phased-in requirements even if it continued to comply with currently applicable (i.e., not fully phased-in) capital requirements.

• The OTS’ adoption of new regulations that permit nationwide branching for federally chartered thrifts.

• The consummation of various interstate acquisitions that, over the next few years, will change substantially the competitive profile in Connecticut and Massachusetts.

*308 • The proposed revision of the risk-based capital component to include measures for interest rate risk and credit concentration risk.

• Recently finalized increases in federal deposit insurance premiums based on levels of risk.

• Deteriorating economic conditions throughout the nation and New England, in general, that have led to increasing levels of nonperforming assets and decreased earnings for many banks and thrifts, including Northeast.

• Other federal statutory and regulatory initiatives to impose new operating standards and restrictions on federally insured financial institutions.

PX 69 at 1-4 to 1-5.

The Kaplan Associates study also discussed the effect of Regulatory Bulletin 3a-l on Northeast’s operations:

This statement of OTS policy conflicts in various ways with the federal capital regulations issued previously by the OTS that, in accordance with FIRREA, establish lesser capital standards during the phase-in period. However, during the quarter ended September 30, 1992, [Northeast] confirmed that, inasmuch Northeast had previously achieved compliance with its fully phased-in capital standards, under RB3a-l, it is the position of the OTS that [Northeast] may not grow its assets if such growth would cause it to fall below its fully phased-in capital requirements, even if [Northeast] continues to exceed its applicable minimum capital standards established previously for the duration of the phase-in period.

The effect of this OTS policy statement is to accelerate dramatically the effective date of the fully phased-in capital standards for companies such as Northeast that have achieved fully phased-in compliance in advance of the effective date, and to thereby hold such companies to higher capital standards than those applicable to companies that have not achieved fully phased-in capital compliance as of yet but are otherwise in compliance with their applicable minimum capital standards. This clearly places Northeast at a competitive disadvantage and will decrease the prospective earnings that Northeast may expect to realize from its Connecticut and Massachusetts franchise rights.

Id. at 1-7 .

Kaplan Associates used a different method of valuing Northeast’s franchise value than in Kaplan Smith’s prior study. Rather than using an earnings-based methodology, it used a “market comparables” methodology for two reasons. Id. at 1-9 . First, since March 31, 1990, when Northeast made its previous writedown of goodwill, there were large numbers of banks and thrifts that had resolved by the FDIC and the Resolution Trust Corporation (“RTC”) in federally-assisted transactions as well as numerous private transactions — far more than in March 1990. Id. This made the market comparables valuation method more reliable than in the past. Id. Second, the pervasive effects

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