<PAGE>

                                                                    EXHIBIT 4.12

                          LIQUIDATED DAMAGES AGREEMENT

     THIS LIQUIDATED DAMAGES AGREEMENT (the "Agreement") is made and entered
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into as of October 25, 1999 by and among ASTORIA FINANCIAL CORPORATION, a
Delaware corporation (the "Company"), ASTORIA CAPITAL TRUST I, a business trust
                           -------
formed under the laws of the state of Delaware (the "Trust"), and SANDLER
                                                     -----
O'NEILL & PARTNERS, L.P. ("Sandler O'Neill" or the "Initial Purchaser").
                           ---------------          -----------------

     WHEREAS, as an inducement to the Initial Purchaser to enter into the
Purchase Agreement, dated October 25, 1999 (the "Purchase Agreement"), by and
                                                 ------------------
among the Company, the Trust and the Initial Purchaser (providing for, among
other things, the sale by the Trust to the Initial Purchaser of 125,000 of the
Trust's 9.75% Capital Securities, Series A, liquidation amount of $1,000 per
Capital Security (the "Capital Securities"), the proceeds of which will be used
                       ------------------
by the Trust to purchase 9.75% Junior Subordinated Deferrable Interest
Debentures due November 1, 2029, Series A, of the Company (the "Subordinated
                                                                ------------
Debentures")), and as a condition to the several obligations of the Initial
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Purchaser thereunder, the Company and the Trust have agreed to provide to the
Initial Purchaser and its direct and indirect transferees certain registration
and related rights pursuant to and in accordance with the terms of the
Registration Rights Agreement, dated the date hereof (the "Registration Rights
                                                           -------------------
Agreement"), by and among the Company, the Trust and the Initial Purchaser; and
---------

     WHEREAS, notwithstanding the fact that the Company and the Trust have
consummated or will consummate an Exchange Offer, pursuant to Section 2(b) of
the Registration Rights Agreement, the Initial Purchaser may, under certain
circumstances, require the Company and the Trust to file a Shelf Registration
Statement for the resale of certain Registrable Securities held by it;

     WHEREAS, the Registration Rights Agreement contains certain provisions
concerning the time within which the Company and the Trust must file the Shelf
Registration Statement and the period for which such Shelf Registration
Statement must remain effective and usable for resales; and

     WHEREAS, the Company, the Trust and the Initial Purchaser desire to provide
for the payment of liquidated damages by the Company directly to the Initial
Purchaser in the event that the Company and the Trust fail to comply with such
contractual provisions, as more fully set forth herein.

     NOW, THEREFORE, in consideration of the foregoing, and for other good and
valuable consideration the receipt of which is hereby acknowledged, the parties
hereto agree as follows:

     1.     Definitions. Capitalized terms used (including in the foregoing
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recitals) but not defined herein shall have the meanings given to such terms in
the Registration Rights Agreement, except that (a) the term "Shelf Registration
Statement" shall refer only to a Shelf Registration Statement filed by the
Company and the Trust pursuant to Section 2(b) of the Registration Rights
Agreement, and (b) the term "Registrable Securities" shall refer only to those
Registrable Securities held at such time by the Initial Purchaser.
<PAGE>

     2.   Payment of Liquidated Damages. (a) In the event that (i) the Shelf
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Registration Statement is not filed with the SEC on or prior to the 45/th/ day
after a request for such filing is properly made by the Initial Purchaser in
accordance with Section 2(b)(iv) of the Registration Rights Agreement (provided
that in no event shall such date be required to be earlier than 75 days after
the Issue Date), or (ii) the Shelf Registration Statement is not declared
effective by the SEC on or prior to the later of the 40/th/ day after the date
such Shelf Registration Statement was required to be filed pursuant to the terms
of the Registration Rights Agreement and the 180/th/ date after the Issue Date,
or (iii) the Shelf Registration Statement has been declared effective and such
Shelf Registration Statement ceases to be continuously effective or usable for
resales (whether as a result of an event contemplated by Section 3(e) of the
Registration Rights Agreement or otherwise) at any time during the 180-day
period (and any extensions of such period pursuant to the last paragraph of
Section 3 of the Registration Rights Agreement) immediately following the date
on which the Shelf Registration Statement is first declared effective (other
than after such time as all Registrable Securities have been disposed of
thereunder or otherwise cease to be Registrable Securities pursuant to the terms
of the Registration Rights Agreement), then in each case the Company shall pay
liquidated damages to the Initial Purchaser, at a rate of 25 basis points per
annum in respect of the aggregate liquidation amount of Capital Securities held
by the Initial Purchaser or, in the event that the Trust is liquidated and
Subordinated Debentures are distributed to holders of Capital Securities, the
aggregate principal amount of Subordinated Debentures held by the Initial
Purchaser, as the case may be, in respect of the period (x) commencing on the
46/th/ day after such request for the filing of a Shelf Registration Statement
is made by the Initial Purchaser (provided that in no event shall such date be
required to be earlier than 76 days after the Issue Date) and terminating upon
the filing of the Shelf Registration Statement (in the case of clause (i)
above), (y) commencing on the later of the 41/st/ day after the date the Shelf
Registration Statement was required to be filed and the 181/st/ day after the
Issue Date and terminating upon the effectiveness of the Shelf Registration
Statement (in the case of clause (ii) above), or (z) commencing on the day the
Shelf Registration Statement ceases to be effective or usable for resales and
terminating at such time as the Shelf Registration Statement again becomes
effective and usable for resales (in the case of clause (iii) above), provided,
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however, that the maximum aggregate amount of liquidated damages payable by the
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Company pursuant to this Agreement and the Registration Rights Agreement shall
not exceed 25 basis points per annum in respect of the aggregate liquidation
amount of the Capital Securities or, in the event the Trust is liquidated and
Subordinated Debentures are distributed to holders of Capital Securities, the
aggregate principal amount of Subordinated Debentures.

     (b) Any amounts of liquidated damages payable by the Company pursuant to
this Section 2 shall be paid in cash directly to the Initial Purchaser on the
next succeeding May 1/st/ and November 1/st/, as the case may be, following the
period in respect of which such Liquidated Damages have become due and payable
hereunder.

     3.   General.
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     (a) Counterparts. This Agreement may be executed in any number of
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counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
<PAGE>

     (b) Amendments. This Agreement may be amended by the parties hereto only by
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a written instrument duly executed on behalf of each of the parties hereto.

     (c) Entire Agreement. This Agreement and the Registration Rights Agreement
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constitute the entire agreement and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof.

     (d) GOVERNING LAW. THIS AGREEMENT SHALL BE DEEMED TO HAVE BEEN MADE IN THE
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STATE OF NEW YORK. THE VALIDITY AND INTERPRETATION OF THIS AGREEMENT, AND THE
TERMS AND CONDITIONS SET FORTH HEREIN, SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO ANY
PROVISIONS RELATING TO CONFLICTS OF LAWS. EACH OF THE PARTIES HERETO AGREES TO
SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK IN
ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF
THE MATTERS CONTEMPLATED HEREBY, IRREVOCABLY WAIVES ANY DEFENSE OF LACK OF
PERSONAL JURISDICTION AND IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY
SUIT, ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT. EACH
OF THE PARTIES HERETO IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY
EFFECTIVELY DO SO UNDER APPLICABLE LAW, ANY OBJECTION WHICH IT MAY NOW OR
HEREAFTER HAVE TO THE LAYING OF VENUE OF SUCH SUIT, ACTION OR PROCEEDING BROUGHT
IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT
IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

     (e) Notices.  All notices and other communications hereunder shall be in
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writing and shall be deemed given if delivered to the parties at the addresses
set forth in, and in a manner contemplated by, the Registration Rights
Agreement.
<PAGE>

          IN WITNESS WHEREOF, the parties have executed this Liquidated Damages
Agreement as of the date first written above.

                              ASTORIA FINANCIAL CORPORATION


                              By:   /s/ George L. Engelke, Jr.
                                    --------------------------------------
                                    George L. Engelke, Jr.
                                    Chairman of the Board, President
                                    and Chief Executive Officer


                              ASTORIA CAPITAL TRUST I


                              By:   ASTORIA FINANCIAL CORPORATION
                                    as Sponsor

                              By:   /s/ Monte N. Redman
                                    --------------------------------------
                                    Monte N. Redman
                                    Executive Vice President
                                    and Chief Financial Officer


                              SANDLER O'NEILL & PARTNERS, L.P.


                              By:   SANDLER O'NEILL & PARTNERS CORP.,
                                    the sole general partner


                              By:   /s/ Catherine A. Lawton
                                    --------------------------------------
                                    Catherine A. Lawton
                                    Vice President