ABCP

* Summary
Ambase (ABCP) is a very interesting litigation outcome opportunity
with asymmetric payoff potential. Ambase, today a shell,
was once one of the nation's largest thrifts until 1992 when the FDIC
seized its bank subsidiary. Ambase subsequently sued the US Government under
the Winstar doctrine. After many years, the Ambase litigation looks
as if it is finally coming to a conclusion. If Ambase's trial court
win is upheld on appeal, ABCP should liquidate for $4.33 per share. The expected
value of Ambase across scenarios is at least $2.95 - almost double
where the stock is today. Final resolution of Ambase may occur within
weeks as settlement negotiations with the government are
underway.

* The Case
ABCP is one of the last Winstar cases, which are likely familiar to
many VIC members. In the mid-1980s the FDIC encouraged healthy
financial institutions to acquire troubled banks by offering
regulatory forbearance. In many cases, the FDIC contracted that
acquirers would be allowed to count goodwill towards their required
minimum capital levels. However, in 1989 Congress passed FIRREA which
disallowed the use of goodwill as regulatory capital. This change in
policy forced a large number of previously healthy financial
institutions, including Carteret, into distress.

The Winstar case, which was ultimately decided by the Supreme Court,
determined that where the FDIC entered into contracts explicitly
allowing the use of goodwill regulatory capital, the Government was liable to pay
damages for subsequent harm caused by the enforcement of FIRREA.

In August, 2011, a US Court of Claims awarded $205MM of damages to
ABCP under the Winstar doctrine. The award explicitly requires the
FDIC to make a tax gross-up payment, if necessary, to render the $205MM
an after-tax award to ABCP. ABCP has 47.2MM fully diluted shares
outstanding. $205MM in damages + $10MM current equity less $5MM in
projected expenses for liquidation yields a value of $4.40/share. The
CEO has an incentive program linked to the results of the FDIC
litigation which subtracts $0.34 from this amount for a total of
$4.07. The trial court opinion can be found at: http://www.uscfc.uscourts.gov/sites/default/files/SMITH.AMBASE083111.pdf

As expected, the government appealed the judgement to the US Court of
Appeals for the Federal Circuit. On March 8, the Department of
Justice filed a motion to extend their deadline for filing an initial
appellate brief. Ambase released an 8k explaining that it was in
preliminary settlement discussions with the US and "[i]n light of
those discussions, the Company does not intend to contest the DOJ’s
motion [for an extension]."

I allocate probabilities to the following potential outcomes as
follows:
10% : Award overturned on Appeal: ABCP value = 0
60% : Settlement for 65% of award: ABCP value = 2.59
30% : Award confirmed on appeal: ABCP value = 4.07
----
Expected value = $2.76

I believe that ABCP has a strong position going into the Appeals
process. After reviewing the case, most of the issues I would
highlight as most uncertain for ABCP are matters of fact, not law, and
an appellate court will show tremendous deference to the trial court on
matters of fact. Moreover, as this is one of the last Winstar cases,
much of the relevant case law is well settled by this point.

* The Tax Case
A second potential source of value for Ambase lies in another
lawsuit, Ambase Corp v USA. In the case Ambase brought an action
seeking a Federal tax refund for the year 1989. At issue is whether
Ambase can adjust its 1992 bad debt reserve and carry back the 1992
net operating loss to tax year 1989. On summary judgment, the Court
determined that Ambase may increase its reserve addition for losses in
an amount "necessary to offset any net increase in taxable income, as
redetermined, as a result of the subsequent adjustment to its federal
tax return." Ambase believes that this decision entitles it to deduct
$69MM from its previous tax returns (although Ambase's interpretation
is being challenged by the US).

In its March 2000 amended, consolidated federal income tax return for
1989 Ambase sought $10.7MM plus assessed and statutory interest. I
must confess that while I have a legal background, I have a fairly
weak grounding in tax issues Thus, while I am very comfortable with my analysis of the core
Winstar litigation for Ambase, I am much less so with regards to the
tax litigation (all of you VIC ex-tax lawyers please chime in to help
out).

Ambase filed its original amended tax return for 1989
in 1995. If statutory interest of approximately 3% is used back to
1995, the total recovery for Ambase would be $17.6MM or $0.37/shr.
Assigning a haircut to this number to account for my uncertainty
regarding the law here and the existing government challenge to
Ambase's interpretation of the law, I arrive at an expected value of $0.19.

This brings the total expected value of Ambase to $2.95 and a
potential value of $4.44. A settlement with the FDIC could be imminent.
If the case is not settled I would expect an ultimate resolution late
this fall.

* Liquidation is likely
Beyond the lawsuits, Ambase is a shell holding $7MM in t-bills and a
commercial office building carried at $2MM (a 14.5k square foot office
building in Greenwich, CT). The CEO, who owns 38% of
the company, has been at Ambase for decades presiding over the
litigation effort. The terms of his 2007 Employment Agreement
stipulate that if the lawsuit has not been resolved by the end of this
year, he will enter into an independent consulting contract with
Ambase "solely for the purpose of assisting the Company in obtaining
such a recovery." A liquidation following resolution of the
litigation seems like the most likely option for Ambase.

Ambase did raise the possibility of making some form of acquisition
after the lawsuit in its recent 10-Q. While I consider this unlikely,
Ambase does have $38MM in NOLs ($0.80/shr) with a full valuation
allowance. This is potentially an additional source of value in a
non-liquidation scenario which is not included in my expected value
numbers above.

* Risks
- Ambase loses on appeal or the settlement value is well below my
expectations
- The company does not liquidate but uses the lawsuit proceeds to make
a poor investment