12474 1 UNITED STATES OF AMERICA Before the 2 OFFICE OF THRIFT SUPERVISION DEPARTMENT OF THE TREASURY 3 In the Matter of: ) 4 ) UNITED SAVINGS ASSOCIATION OF ) 5 TEXAS, Houston, Texas, and ) ) 6 UNITED FINANCIAL GROUP, INC., ) Houston, Texas, a Savings ) 7 and Loan Holding Company ) ) OTS Order 8 MAXXAM, INC., Houston, Texas, ) No. AP 95-40 a Diversified Savings and ) Date: 9 Loan Holding Company ) Dec. 26, 1995 ) 10 FEDERATED DEVELOPMENT CO., ) a New York Business Trust, ) 11 ) CHARLES E. HURWITZ, ) 12 Institution-Affiliated Party ) and Present and Former Director ) 13 of United Savings Association ) of Texas, United Financial Group,) 14 and/or MAXXAM, Inc.; and ) ) 15 BARRY A. MUNITZ, JENARD M. GROSS,) ARTHUR S. BERNER, RONALD HUEBSCH,) 16 and MICHAEL CROW, Present and ) Former Directors and/or Officers ) 17 of United Savings Association of ) Texas, United Financial Group, ) 18 and/or MAXXAM, Inc., ) ) 19 Respondents. ) 20 21 TRIAL PROCEEDINGS FOR JUNE 19, 1998 22 12475 1 A-P-P-E-A-R-A-N-C-E-S 2 ON BEHALF OF THE AGENCY: 3 KENNETH J. GUIDO, Esquire Special Enforcement Counsel 4 PAUL LEIMAN, Esquire SCOTT SCHWARTZ, Esquire 5 BRUCE RINALDI, Esquire RICHARD STEARNS, Esquire 6 and BRYAN VEIS, Esquire of: Office of Thrift Supervision 7 Department of the Treasury 1700 G Street, N.W. 8 Washington, D.C. 20552 (202) 906-7395 9 ON BEHALF OF RESPONDENT MAXXAM, INC.: 10 FRANK J. EISENHART, Esquire 11 of: Dechert, Price & Rhoads 1500 K Street, N.W. 12 Washington, D.C. 20005-1208 (202) 626-3306 16 13 DALE A. HEAD (in-house) 14 Managing Counsel MAXXAM, Inc. 15 5847 San Felipe, Suite 2600 Houston, Texas 77057 16 (713) 267-3668 17 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO. AND CHARLES HURWITZ: 18 RICHARD P. KEETON, Esquire 19 KATHLEEN KOPP, Esquire of: Mayor, Day, Caldwell & Keeton 20 1900 NationsBank Center, 700 Louisiana Houston, Texas 77002 21 (713) 225-7013 22 12476 1 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO., CHARLES HURWITZ, AND MAXXAM, INC.: 2 JACKS C. NICKENS, Esquire 3 of: Clements, O'Neill, Pierce & Nickens 1000 Louisiana Street, Suite 1800 4 Houston, Texas 77002 (713) 654-7608 5 ON BEHALF OF JENARD M. GROSS: 6 PAUL BLANKENSTEIN, Esquire 7 MARK A. PERRY, Esquire of: Gibson, Dunn & Crutcher 8 1050 Connecticut Avenue, N.W. Washington, D.C. 20036-5303 9 (202) 955-8500 10 ON BEHALF OF BERNER, CROW, MUNITZ AND HUEBSCH: 11 JOHN K. VILLA, Esquire MARY CLARK, Esquire 12 PAUL DUEFFERT, Esquire of: Williams & Connolly 13 725 Twelfth Street, N.W. Washington, D.C. 20005 14 (202) 434-5000 15 OTS COURT: 16 HONORABLE ARTHUR L. SHIPE Administrative Law Judge 17 Office of Financial Institutions Adjudication 1700 G Street, N.W., 6th Floor 18 Washington, D.C. 20552 Jerry Langdon, Judge Shipe's Clerk 19 REPORTED BY: 20 Ms. Marcy Clark, CSR 21 Ms. Shauna Foreman, CSR 22 12477 1 2 EXAMINATION INDEX 3 Page 4 DOUG HANSEN 5 Examination by Mr. Guido................12478 6 Examination by Mr. Nickens..............12626 7 Examination by Mr. Blankenstein.........12695 8 Further Examination by Mr. Guido........12699 9 Further Examination by Mr. Nickens......12741 10 Examination by Mr. Eisenhart............12743 11 12 13 14 15 16 17 18 19 20 21 22 12478 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:02 a.m.) 3 THE COURT: Be seated, please. The 4 hearing will come to order. Mr. Guido, are you 5 ready to proceed? 6 MR. GUIDO: Yes, Your Honor. At this 7 time, Your Honor, the OTS would like to call 8 Mr. Doug Hansen. 9 10 DOUG HANSEN, 11 12 called as a witness and having been first duly 13 sworn, testified as follows: 14 15 EXAMINATION 16 17 Q. (BY MR. GUIDO) Would you state your 18 full name for the record, please. 19 A. Douglas Brayshaw Hansen, Jr. 20 Q. What is your business address? 21 A. 591 Redwood Highway, Suite 3100, 22 Mill Valley, California 94941. 12479 1 Q. What is your business affiliation? 2 A. The company is Redwood Trust, Inc. 3 Q. Can you tell us what Redwood Trust 4 does? 5 A. Redwood Trust is a mortgage company 6 that owns mortgages in portfolio and packages and 7 sells mortgages. It's also structured as a real 8 estate investment trust. 9 Q. What kind of real estate is it? 10 A. Single-family mortgages. 11 Q. Do you have any affiliation with a 12 company called GB Capital Management? 13 A. It no longer exists; but when it did, I 14 was a partner there. 15 Q. Is that related to Redwood Trust in any 16 way? 17 A. No. 18 Q. Can you describe your educational 19 background since high school? 20 A. I graduated from Harvard College in 21 1979, and I graduated from Harvard Business School 22 in 1983. 12480 1 Q. Did you have any specific major in the 2 Harvard College? 3 A. Economics. 4 Q. All right. And did you receive a BA 5 degree? 6 A. That's right. 7 Q. You received an MBA from Harvard 8 Business School? 9 A. That's correct. 10 Q. What year was that? 11 A. '83. 12 Q. Now, when did you start college? 13 A. '75. 14 Q. Did you work in between college and the 15 Harvard Business School? 16 A. Yes. I worked at CitiBank in New York. 17 Q. What was your position in CitiBank? 18 A. I was in the corporate finance 19 department. 20 Q. Now, in the corporate finance 21 department, what were your responsibilities? 22 A. Primarily working for the head of 12481 1 mergers and acquisitions. So, we were acting as 2 the advisor arranging those; and I was a financial 3 analyst. 4 Q. Did you do diligence on acquisitions? 5 A. Not for the most part. 6 Q. What kind of financial analysis did you 7 do? 8 A. For instance, building models of what 9 two companies would like if they were merged 10 together and projecting the results, that sort of 11 thing. 12 Q. After you graduated from the Harvard 13 Business School, where did you go to work? 14 A. I went to work for Bain & Company. 15 Q. What is that? 16 A. It's a management consulting firm. 17 Q. Where is it located? 18 A. The headquarters are in Boston. I was 19 working in London. 20 Q. How long did you work there? 21 A. Until sometime in 1986, 1985, I 22 believe. 12482 1 Q. And what was the reason for leaving 2 Bain & Company? 3 A. I was tired of living in London. 4 Q. And what did you do as an employee of 5 Bain & Company? 6 A. I had worked with several clients at 7 that time, mostly on strategic management 8 consulting. For instance, I spent a bit of time 9 with a large beer company helping them with 10 business growth plans. 11 Q. What do you mean by "strategic 12 management consulting"? 13 A. Trying to help companies figure out how 14 to best achieve their goals in sort of a very 15 general sense and then taking that all the way 16 down to various levels in the company and helping 17 the individual divisions of the company lay their 18 plans out to conform with the overall goals of the 19 entire corporation. 20 Q. Did part of your responsibilities 21 include an evaluation of the profitability of the 22 existing business lines in the corporation? 12483 1 A. Yes, it did. 2 Q. Did it include advice on how to 3 restructure those business lines to increase the 4 profitability of the institution? 5 A. That's right. 6 Q. Did it include an evaluation of how 7 they were implementing the changed policies to the 8 restructuring to increase the profitability of the 9 company? 10 A. Yes. 11 Q. Did it include anything else? 12 A. I did some mergers and acquisitions 13 work, trying to achieve the same ends, did some 14 work negotiating with labor unions and whatnot, 15 but it was really all pointed in that same 16 direction. 17 Q. The same three steps that I laid out 18 for you? 19 A. There may have been more steps; but 20 that generally covers it, I think. 21 Q. Now, when did you -- where did you go 22 to work after you left Bain & Company? 12484 1 A. At USAT. 2 Q. Okay. And who did you first interview 3 at USAT for a position? 4 A. Well, I wasn't interviewing for a 5 position at USAT. My first contact with any part 6 of that organization was with Barry Munitz and 7 then with Charles Hurwitz. 8 Q. Now, how did you come to meet Barry 9 Munitz? 10 A. When I left Bain in London, I found it 11 was difficult to try to interview jobs in the 12 United States while I lived in London. So, I quit 13 my job, traveled for a while, came back to the 14 States to look for a job. My parents lived in 15 Houston; so, I stayed with them while I was 16 looking for a job and sent out resumes and started 17 talking to people. And I sent a resume into 18 Hurwitz's office. 19 Q. You sent a resume to Charles Hurwitz's 20 office? 21 A. Uh-huh. (Witness nods head 22 affirmatively.) 12485 1 Q. Did you receive a call back in response 2 to that resume? 3 A. I don't remember exactly, but I presume 4 that I did. 5 Q. You indicated that you first 6 interviewed or met Barry Munitz? 7 A. I think he was the first person I met, 8 yes. 9 Q. Did he indicate to you what it was 10 about your resume that interested him? 11 A. The reason, I believe, that they said 12 they called me in was that some part of -- one of 13 the organizations anyway had used Bain & Company 14 as a consultant and had thought that they had done 15 a good job. So, they knew who Bain was. And then 16 they got a resume from a Bain person, and they 17 thought they would call him to see what it was all 18 about. 19 Q. Did he ever mention to you a man named 20 David Neurenburg at Bain & Company? 21 A. I think the name was mentioned. 22 Whether it was mentioned at that particular point 12486 1 in time or at some later time, I have no 2 recollection. 3 Q. Did he indicate to you -- is that David 4 Neurenburg or Neurenburger? 5 A. I'm not sure. 6 Q. Is he the individual that eventually 7 purchased Far West Savings and Loan, to your 8 knowledge? 9 A. I think that's true, but I couldn't be 10 positive. 11 Q. And did they indicate to you that he 12 had done an analysis of United Savings Association 13 of Texas for them? 14 A. No. 15 Q. Okay. Did they indicate to you that he 16 had done a -- given them advice on restructuring 17 United Savings Association of Texas? 18 A. No. 19 Q. Did they indicate to you what it was 20 that they thought you could do for one of the 21 Charles Hurwitz companies? 22 A. No. It was sort of vague. 12487 1 Q. It was vague at that point in time? 2 A. Right. 3 Q. What did you and Mr. Munitz discuss 4 when you met with him? 5 A. I don't really recall specifically. 6 Q. You discussed your credentials, I 7 presume? 8 A. I would presume so, yes. 9 Q. But you don't recall what it was that 10 he was interested in having you do for -- 11 A. The only thing I recall is that there 12 were several options discussed in the sense that 13 they were involved in a variety of different 14 companies at the time, and for some -- they made 15 it clear that they were interested in continuing 16 to talk to me, but it wasn't clear which of the 17 companies they might want to have me work for. 18 Q. On your first meeting that you had, was 19 it only with Barry Munitz? 20 A. I don't remember if I met Mr. Hurwitz 21 at that time or not. 22 Q. Okay. But at some point in time early 12488 1 in the interviewing process, you met Mr. Hurwitz? 2 A. Yes. 3 Q. Was that before you met anyone else 4 from USAT? 5 A. Yes. 6 Q. Now, subsequent to your initial 7 interviews with Mr. Hurwitz and Mr. Munitz, did 8 you meet with anyone else? 9 A. Anyone else? You mean before I was 10 assigned to -- before they asked me if I wanted to 11 work for United Savings, you mean? 12 Q. Yes. Before they offered a job to you. 13 A. I don't remember. 14 Q. Now, when they offered you the job, who 15 was it that made the offer to you? 16 A. I'm pretty sure it was Munitz, but I 17 can't remember for sure. 18 Q. Now, what was -- 19 A. Actually, I have to correct that. He 20 said, "I think you might be useful working at 21 United Savings." 22 Q. Okay. 12489 1 A. And then I went down and met the United 2 Savings people. 3 Q. Okay. 4 A. So, who offered me the job, I don't 5 know. Munitz is the one that said, "It seems like 6 maybe you should work for United Savings. Maybe 7 we'll steer you in that direction." 8 Q. What was your initial position at 9 United Savings Association of Texas? 10 A. I was an assistant to the chairman. 11 Q. Okay. And did anyone tell you why you 12 were assigned that position? 13 A. I'm not sure anybody told me. 14 Q. What was your understanding of why you 15 were assigned that position? 16 A. My feeling why I was assigned that 17 position -- whether anybody told me this or not, 18 I'm not sure -- is that Jenard Gross had been at 19 some point, fairly recently -- I'm not sure how 20 long prior -- become the chairman of USAT and that 21 he needed some help and that there were a variety 22 of people, managers in the company who had come 12490 1 from banks who were doing a decent job running the 2 institution but there were a lot of issues to be 3 involved with and, also, that there was going to 4 be a lot of potentially interesting things that 5 would happen there and it might be something that 6 I was interested in doing. 7 Q. Was one of your understandings that 8 some of the new areas that USAT was going to 9 become involved in were areas that Mr. Gross 10 didn't have any particular expertise in? 11 A. Well, I think Mr. Gross' particular 12 expertise was in real estate, which was clearly 13 one of the main reasons for existence of the whole 14 organization. 15 Q. I mean, when you interviewed for the 16 position, did they explain to you that they were 17 going to expand investments in equity securities? 18 A. I can't recall specifically. 19 Q. Can you recall whether or not they 20 indicated to you that they were going to expand 21 investments in high-yield bonds? 22 A. I don't recall that specifically. 12491 1 Q. Do you recall whether or not they told 2 you they were going to expand their investments in 3 mortgage-backed securities? 4 MR. NICKENS: Your Honor, could we find 5 out who "they" is? The implication has been left 6 that this gentlemen was hired by only talking to 7 Mr. Munitz and Mr. Hurwitz. Now we have the 8 question "they" which may mean any number of 9 people. It may be important to the record to know 10 who that might be if the witness remembers. 11 Q. (BY MR. GUIDO) Did Barry Munitz 12 communicate to you what he thought the business 13 would become at USAT when you met him? 14 A. I don't recall. 15 THE COURT: Let's clear up -- when you 16 say "they," who are you referring to? 17 THE WITNESS: What I'm trying to say is 18 that when I took the job at United Savings, I 19 don't believe I had any specific knowledge of the 20 various things that they were doing or were 21 planning to do, whether by Munitz or Hurwitz or 22 Gross or anybody else I met. 12492 1 THE COURT: Who else did you meet. 2 THE WITNESS: I met with Jenard Gross, 3 I met with Jerry Williams, and I believe I might 4 have met with Mike Crow. 5 Q. (BY MR. GUIDO) Did you meet with the 6 three of those individuals prior to your hiring at 7 USAT? 8 MR. NICKENS: Could you answer audibly? 9 A. Yes, I did. 10 Q. (BY MR. GUIDO) Okay. Now, did your 11 position change at any point in time when you were 12 employed at USAT? 13 A. My title changed, but my position 14 didn't. 15 Q. What did your title become? 16 A. Senior vice president. 17 Q. When did you leave? 18 A. I don't remember exactly, but the -- in 19 reviewing these memos and whatnot last night that 20 you gave me, it appears that I left in early 1987. 21 Q. And when were you hired? 22 A. Again, I don't have an independent 12493 1 recollection of exactly when it was. Sometime in 2 late 1985. 3 Q. All right. Was it sometime in November 4 of 1985 in reference to the documents? 5 A. In looking through this last night, I 6 noticed that one of the documents dated in October 7 had my name on it. So, it might have been 8 October. 9 Q. Now, when you left, why did you leave? 10 A. The main reason was my wife hated 11 living in Houston. 12 Q. Any other reasons? 13 A. The -- I had been spending a lot of 14 time trying to get some of the more 15 entrepreneurial activities at United Savings 16 going, and I felt like -- I had also been spending 17 a lot of time talking to Jenard to see if I could 18 get a position rather than a staff position and if 19 there was any way where something might develop in 20 the future where I could have more responsibility 21 or have people reporting to me. All of those 22 slots were taken; so, it didn't appear that that 12494 1 would happen anytime soon. 2 Q. What sort of slots were you open to in 3 the line positions? 4 A. All sorts of positions. 5 Q. Did you want to move beyond just doing 6 analysis and you wanted to be an operations 7 person? 8 A. Right. But the main reason was my wife 9 just really hated Houston and we had lived here 10 for over a year at that point and she really 11 wanted to get out. 12 Q. Now, where did you go to work after 13 that? 14 A. I went to work for Merrill Lynch. 15 Q. What was your position at 16 Merrill Lynch? 17 A. I was institutional representative on 18 the West Coast covering savings and loans. 19 Q. What do you mean by "an institutional 20 representative"? 21 A. I was representing the sales and 22 trading desk, both the mortgage desk and the swap 12495 1 desk at Merrill Lynch in terms of delivering their 2 services to financial institutions. 3 Q. So, you were providing services with 4 regard to mortgage-backed securities to savings 5 and loans? 6 A. Correct, and other products; but it was 7 more mortgage securities than anything else. 8 Q. And with those mortgage securities, you 9 were also providing them with services with regard 10 to swap instruments? 11 A. Correct. 12 Q. Now, did you at any point in time 13 initially meet with any of the other 14 vice presidents of USAT? 15 A. Before I joined? 16 Q. Before you joined. 17 A. I don't remember. 18 Q. Shortly thereafter, did you meet with 19 any of the vice presidents of USAT? 20 A. Once I started work, I got to know 21 everybody. I don't remember if I met anybody 22 prior to that or not. 12496 1 Q. Did you have any dealings with Ron 2 Heubsch? 3 A. To the best of my recollection, he's 4 one of the people that I met after I joined. 5 Q. And what did he do? 6 A. He managed the investment operations, 7 specifically equity investments and, to some 8 degree, junk bonds. 9 Q. Did he have anything to do with the 10 mortgage-backed securities when you first joined 11 USAT? 12 A. I don't know what he did when I first 13 joined or not. 14 Q. Who did he report to with regard to his 15 activities on equity investments? 16 A. Jenard. 17 Q. Did he meet with Jenard on a regular 18 basis? 19 A. There were regular meetings of various 20 sorts where both of them were present, and they 21 talked on the phone. 22 Q. Was there anyone who worked closely 12497 1 with Mr. Heubsch when you first joined USAT? 2 A. I believe Joe Phillips was there at 3 that time. 4 Q. And was there anyone else there as a 5 manager of investment portfolios when you first 6 joined USAT? 7 A. Not that I recall. 8 Q. And who did Mr. Phillips report to? 9 A. I'm not quite sure. He might have 10 reported to Ron or somebody else. I can't recall. 11 Q. Did you ever find that you had problems 12 with either Mr. Heubsch or Mr. Phillips in 13 obtaining information or getting responses to 14 questions that you or Mr. Gross, through you, had 15 transmitted to them? 16 A. They would always respond direct to a 17 direct request for information, but there was a 18 feeling that I had that we had to ask a lot of 19 questions to get a full picture of what they were 20 doing sometimes. And that might have been just 21 because me, in particular, didn't know anything 22 about those type of activities when I first 12498 1 joined. So, it was not maybe -- if I was asking 2 the questions -- maybe I didn't know the right 3 questions to ask. They would always answer a 4 direct question. 5 Q. Did you find -- strike that. 6 Did they report to Mr. Munitz or 7 Mr. Hurwitz on their activities, to your 8 knowledge? 9 A. They were on the same floor, I believe. 10 They weren't on the same floor as us. They might 11 have been on the same floor as -- so, I'm sure 12 there was contact walking back and forth. 13 Hurwitz, my understanding is, occasionally would 14 hear things that would be relevant to USAT's 15 investment activities; so, they would have some 16 conferences in that manner. 17 Q. Were the things that Hurwitz had heard 18 that you previously hadn't heard with regard to 19 USAT's investment activities? 20 A. I don't know. I'm not even sure what 21 those things were, since I was not involved in 22 those discussions at all. On "should we buy this 12499 1 or that," those types of discussions, I was not 2 involved in. My general understanding was that 3 just like if Jenard heard something about a 4 company and then we were thinking about investing 5 in it, he would pass that on. So would Hurwitz. 6 Hurwitz was in a position to hear more of that 7 type of thing that might be useful to the company. 8 Q. During the period of time that you were 9 employed at USAT, did you get an impression of 10 people's views of Joe Phillips's competence? 11 MR. NICKENS: Is he asking him to 12 relate what his impression is of other people's 13 impressions of Joe Phillips? If so, I object to 14 that. If he had his own impression, I don't 15 object. His impression of other people's 16 impressions, I think, is a bit far removed. 17 MR. GUIDO: I'll clarify the question, 18 Your Honor. 19 Q. (BY MR. GUIDO) Did you have an 20 impression of Mr. Phillips's competence? 21 A. My main impression was he was a little 22 bit overwhelmed. He was trying to manage the junk 12500 1 board portfolio and the mortgage-backed portfolio 2 at the same time. 3 Q. You thought that that was too much? 4 A. It was probably better to have two 5 people doing that rather than one. 6 Q. Did you express that to him? 7 A. I don't know if I did or not. 8 Q. What led you to that conclusion? 9 A. I'm not sure exactly that I can recall 10 the specific reasons. 11 Q. Can you tell us what interest rates 12 were doing at the time that you were employed at 13 USAT? 14 A. I don't really remember. 15 Q. Were they moving up? 16 A. I remember that they were moving, but I 17 don't remember if they generally ended lower or 18 higher or -- I haven't gone back and investigated 19 it. I don't remember exactly. 20 Q. Now, did you observe the degree to 21 which the mortgage-backed security portfolio was 22 traded at USAT when you were there? 12501 1 A. Certainly not at the beginning. But 2 towards the end, I was more aware of it. 3 Q. And what was your impression at the end 4 of the degree to which the mortgage-backed 5 security portfolio was traded? 6 A. I don't have a lot of independent 7 recollection; but looking back through the memos 8 that you have provided me, it shows that at the 9 end, we had an investment committee where we were 10 discussing various trades. And it didn't seem to 11 me, from looking at those memos, like there was a 12 lot of trading going on. 13 Q. Now, did I provide you or did anyone 14 provide you with any of the investment committee 15 meeting minutes? 16 A. I believe some of them were. 17 Q. Was it investment committee meeting 18 minutes or the investment committee subcommittee 19 minutes? 20 A. I'm not sure. 21 Q. Now, I would like to turn to one of 22 those packets of material that I provided to you; 12502 1 and that is the binder that has the strategic 2 planning committee minutes in it. 3 MR. GUIDO: Your Honor, this is a 4 binder, again, that has previously been admitted 5 and has unadmitted documents in it. 6 Q. (BY MR. GUIDO) In addition, as you 7 might recall, there were problems with the -- some 8 of the strategic planning committee minutes 9 because of the font that was connected to the 10 computer that Mr. Hansen utilized; and so, some of 11 the documents were not legible. 12 As a consequence, counsel for the 13 respondents has had retyped a number of those 14 documents which we said we were going to 15 substitute into the record. It turns out that the 16 text of those documents are fairly accurate. I 17 mean, for the portions that I'm going to be 18 addressing with this witness, they are very 19 accurate. So, for ease of reading, we had 20 provided those in the book. 21 We, at this point in time, are not 22 going to move to substitute those documents 12503 1 because we haven't been able, between the OTS and 2 respondents' counsel, been able to totally verify 3 the accuracy. For example, you know one of the 4 documents that Mr. Hansen prepared, he indicates 5 in a chart which is drawn from Mr. Giarla's work 6 that interest rates, if they went down 100 basis 7 points, I think there was an additional 8 $50 million loss. It shows in the retyped version 9 a lot of 504 million which is clearly not correct. 10 I use that as an example. 11 We are at this point in time and we're 12 going to try over the next week to have paralegals 13 review them very carefully so that we can move a 14 clean copy -- clean, accurate copy into the record 15 either as an additional exhibit or with a "/1" 16 number or "/2" number or substitute the exhibits 17 that are in the record. 18 MR. NICKENS: Your Honor, all I have to 19 add to that is we had people go through and try as 20 best they could to read those and to put them in a 21 form that they would be readable for the witness 22 and for the lawyers and for yourself. I believe 12504 1 they are substantially accurate. In every 2 instance, we have included the best copy we have 3 of the document with it. I don't dispute that 4 there may have been errors, particularly in the 5 numbers, which are very difficult to read. 6 So, I think that the process that 7 Mr. Guido is suggesting -- that is, that we go 8 ahead and use the documents to the extent we find 9 them useful, identify them, and then give 10 everybody an opportunity to review and point out 11 any discrepancies they can find -- would be the 12 best one. We transmitted these documents about a 13 week to ten days ago to the OTS and everybody 14 getting ready for trial proceeding. I'm sure 15 that's not been the highest priority. I believe 16 them to be accurate; but I can't say there aren't 17 instances, just in the transcription and all of 18 that, that we don't have some variances. 19 MR. GUIDO: Your Honor, for our 20 purposes, we both agree that with regard to the 21 text, that they are substantially, if not totally, 22 accurate with regard to the text. It's only the 12505 1 numbers that are in some of the documents that may 2 be a problem. 3 THE COURT: All right. Let's proceed. 4 MR. GUIDO: Now, I would like to direct 5 your attention to the second document in the 6 binder which has not been admitted. We have -- 7 that is a document that has had two numbers 8 assigned to it, Your Honor: A1590 and T4136. We 9 are moving the admission of that document as 10 A1590, which is a packet of materials, I think, 11 that actually starts -- if you look at the second 12 page of the binder -- at US 380018, and it goes 13 through US 380085, Your Honor. That packet in the 14 first tab is the set that we're moving into 15 evidence. 16 MR. NICKENS: Your Honor, I have some 17 problems with this document that I would like to 18 state for the record. And maybe the witness can 19 help us with that. I don't know. For example, 20 the first page of the exhibit is repeated a few 21 pages into the document. 22 THE COURT: What is the first page of 12506 1 the document? 2 MR. GUIDO: The first page, Your Honor, 3 it is the page that had the OTS T4136 exhibit 4 number. In the OTS set, they were out of order. 5 So, what I have done is after the first page -- we 6 only put the first page in there for purposes of 7 indicating that it had been designated. 8 THE COURT: It says, "Tasks to be 9 completed" and dated November 17, 1985, is that 10 the document? 11 MR. GUIDO: That's right. That first 12 page document, Your Honor, is repeated in the 13 packet of materials that follow that which have 14 the Bates stamp number. 15 MR. NICKENS: As you can see, 16 Your Honor, it bears the number 8023, which then 17 the next number is 8018. And then it goes over to 18 8023, not surprisingly five or six pages later. 19 So, it looks like this has been pulled from the 20 middle of the document and put on the front of it. 21 In addition, like on the second page, 22 8018, there is handwriting that says "rest of 12507 1 T4136," which I can't -- couldn't possibly have 2 been on the original. 3 MR. GUIDO: That, for some reason, 4 ended up on there. That's my handwriting very 5 clearly. 6 MR. NICKENS: Your Honor, more 7 substantively, at 8028 there's a series of 8 handwritten notes. I don't know whose notes those 9 are. I don't know if they are the witness's. And 10 then at -- I don't know if the witness attended 11 this meeting. 12 And then at 8036, there's a notation 13 "This copy from HOP/SUT," which I believe to be 14 Hopkins and Sutter, a Chicago law firm that 15 represents the FDIC in a lawsuit against 16 Mr. Hurwitz here in Houston. So, I don't believe 17 that would have appeared on the document. 18 And then at the -- after Page 8045, 19 there are unnumbered documents which appear to be 20 better copies of the first part of the document 21 but -- the source of which is totally unknown to 22 us because of the absence of any Bates numbers. 12508 1 If put in a proper form, Your Honor, I 2 don't think I would have a problem with this 3 document; but those are the questions that have 4 come up in just looking at the document. And I'm 5 unsure whether the witness can resolve any of 6 those, some of which clearly are having to do with 7 the litigation process. 8 MR. GUIDO: A couple of those -- the 9 second reference looks like it's my handwriting, 10 as well, Your Honor. And the packet of materials, 11 as I understand it, was designated as A1590; and 12 I -- and I, you know -- 13 THE COURT: All right. You can use the 14 document for questioning the witness, and maybe we 15 can clarify some of these problems. But before 16 it's received, I think you had better get together 17 with the respondents and make it -- 18 MR. GUIDO: The only portion -- the 19 only pages within this tab of this binder that I'm 20 moving to be admitted are those that start with 21 the second page of the pieces of paper behind this 22 tab that start with -- if you look at the top, it 12509 1 says "BFW" up at the upper right-hand corner, 2 which I believe was put on this document at USAT. 3 And it starts with Bates stamp US-3008018 through 4 008045. 5 MR. NICKENS: 45 or 35? 6 MR. GUIDO: 45. 7 THE COURT: Well, you've got other 8 materials mingled in with this, don't you. 9 MR. GUIDO: No, Your Honor. Within 10 that packet of that range of US-3008018 through 11 US-3008045, they are sequentially numbered; and I 12 believe that that is the packet of exhibits that 13 pertain to the November 17th, 1985 strategic 14 planning committee meeting. 15 MR. NICKENS: Your Honor, I have no 16 problem with the procedure that you suggested; 17 that is, we allow him to question the witness 18 about this and find out what he may know. "BFW," 19 I believe, is the initials of Bruce Williams who 20 is a return witness in this matter next week. He 21 might be able to put it into a receivable form. I 22 don't know that. But it's the indication maybe 12510 1 that he might be able to help us in that regard. 2 For current purposes, he can question 3 the witness on what he may know about this or 4 whether it refreshes his recollection, I have no 5 objection. 6 THE COURT: Let's proceed. According 7 to what you were just saying, Mr. Guido, then the 8 first page that's marked to be complete would not 9 be part of the exhibit; is that right? 10 MR. GUIDO: That's right. I put that 11 in there because I knew this issue would come up, 12 and I wanted to be sure we all had all of the 13 pages so that I could address the issue with the 14 Court. We had not been able to resolve that prior 15 to -- 16 THE COURT: I'll defer receiving the 17 document. Proceed. 18 Q. (BY MR. GUIDO) Now, Mr. Hansen, did 19 you, as of the time that you were at USAT, attend 20 meetings of an entity that's referred to -- that 21 was referred to as the strategic planning 22 committee? 12511 1 A. I did, yes. 2 Q. And did you take notes during those 3 meetings? 4 A. Particularly, yes. There's some 5 documents I've seen of my note taking at strategic 6 planning meetings that happened later. 7 Q. Now, with regard to the document that 8 we have just been discussing, there are 9 handwritten notes in that packet of materials. 10 Is that your handwriting? 11 A. No, it's not. 12 Q. Is that Bruce Williams' handwriting, to 13 your knowledge? 14 A. I have no idea. 15 Q. Okay. Did you prepare any notes in 16 1985 of any strategic planning committee meetings, 17 to your knowledge? 18 A. I don't know if I did or not. 19 Q. Now, with regard to this packet of 20 materials, did you attend the strategic planning 21 committee of November 15th, 1985? 22 A. I don't know if I did or not. 12512 1 Q. All right. Do you -- I would like to 2 direct your attention to the document that's 3 referred to as "Tasks to be completed, 4 November 17th, 1985." 5 A. Right. 6 Q. Look at the second item. That's Bates 7 stamped 3008023. The second item says, "As 8 information becomes available, clarify status of 9 recently-formed funding subsidiary in which 10 500 million of assets have been placed. If sub 11 status is not clear cut, must determine whether 12 we'll take the position that it is exempt from 13 consolidation." 14 Do you see that? 15 A. Uh-huh. (Witness nods head 16 affirmatively.) 17 Q. Do you recall the creation of an entity 18 which was referred to as USAT Mortgage Finance? 19 A. No, I don't. 20 Q. Okay. And then Item No. 3, it says, 21 "Determine type and amount of investments between 22 now and year end to obtain maximum benefit of 12513 1 growth regulations." Then handwritten in there, 2 it says, "May use treasuries and reverse repos at 3 year end." 4 Do you see that? 5 A. Uh-huh. (Witness nods head 6 affirmatively.) 7 Q. Do you recall whether or not the issue 8 of compliance with the liability growth 9 limitations at USAT was something that you 10 reviewed on behalf of USAT? 11 A. I believe I did, yes. I doubt that I 12 would have been doing it at this time because, as 13 I mentioned earlier, I would have just joined the 14 institution at this point and probably wouldn't 15 have had any idea of what any of this meant. 16 Q. And you don't recall attending a 17 strategic planning committee in November of 1985? 18 A. Not only do I not recall attending it, 19 but none of these documents look familiar to me. 20 Q. Let's move to the next document. This 21 is a document that has been previously admitted as 22 A10623, and I believe it was at Tab 863. It is a 12514 1 document dated April 17th, 1986, regarding Mustang 2 Island follow-up from Doug Hansen to Jenard Gross, 3 Barry Munitz, Jerry Williams, Mike Crow, Art 4 Berner, and Bruce Williams. 5 Did you prepare that document? 6 A. I presume that I did. 7 Q. Why is it that you presume that you 8 did? 9 A. It says it's from me, and it looks like 10 the font that came -- that had all the memos that 11 came from me were written in. 12 MR. GUIDO: There are -- Your Honor, we 13 had -- before Mr. Nickens had -- had the documents 14 retyped, we had looked for better copies. And so, 15 you will notice in this packet, there are two 16 different Bates stamps on the -- the either faxed 17 or copied or copy of a fax of Mr. Hansen's 18 document. The document that has been introduced 19 in the record, the actual pieces of paper, are the 20 third rendition in the packet. It's marked 21 A10623, and it has Bates stamps US-84 through 22 US-89. The document right before that is a 12515 1 document that Doug Hansen had that -- the "DH" are 2 the numbers that were assigned by his counsel; and 3 it goes DH-27 through 32. The -- the typewritten 4 rendition of Exhibit A10623, we believe the text 5 is accurate; and that's what I'll be referring to 6 with this witness, Your Honor. But in all cases, 7 I'm referring to A10623. 8 MR. NICKENS: I'm unclear, Your Honor. 9 We are just introducing or has been introduced 10 A10623, and he's not proposing to introduce the 11 additional copy? 12 MR. GUIDO: That's correct. They were 13 only in there for purposes of clarification, 14 Your Honor. 15 THE COURT: The exhibit in some form 16 has already been received? 17 MR. GUIDO: That's correct. And the 18 document that's physically in is the one that has 19 the Exhibit No. A10623 and has the US Bates stamp 20 number. 21 MR. NICKENS: No objection, Your Honor. 22 I will say for the record that the DH numbers are 12516 1 copies of documents that Mr. Hansen produced at 2 the time of his OTS deposition but that he had 3 received from the FDIC so that they -- we're sort 4 of going in a circle here. These are not 5 documents that Mr. Hansen had retained or taken 6 from the institution or anything. These are 7 documents that he had received from the FDIC that 8 he was subpoenaed to bring to the OTS, that he did 9 bring to the OTS and now appear in our record 10 again. 11 MR. GUIDO: Your Honor, I was going to 12 get into that. 13 THE COURT: Let's proceed. 14 Q. (BY MR. GUIDO) The rendition that's 15 DH-27 through 32, is that -- that is a set of 16 documents that were produced to the OTS by your 17 counsel? 18 A. I believe so. 19 Q. And those are copies of the documents 20 that you received from the FDIC in the course of 21 them interviewing you after the failure of USAT? 22 A. Correct. 12517 1 Q. Now, looking at the copy that 2 Mr. Nickens had retyped for us, it says, "Please 3 give me your comments as to the relative 4 priorities of the following issues raised at our 5 meetings, and please indicate the issues for which 6 you will take primary responsibility. I will 7 revise this memo and circulate it again with 8 priorities and responsibilities assigned." 9 Do you see that? 10 A. Yes. 11 Q. Now, where did you get these lists of 12 issues from that you put in this memorandum? 13 A. I can only presume that I went to the 14 meeting, took notes, and then afterwards, typed up 15 this memo as a list of issues that were discussed 16 in the meeting. I believe that's what happened, 17 but I'm not completely sure. 18 Q. Is that -- the meeting that you're 19 referring to, is that what's been referred to as 20 the Mustang Island meeting? 21 A. That's what it says on the memo. 22 Q. Do you recall that there was a strategy 12518 1 meeting that was held at Mustang Island? 2 A. I'm not sure -- Mustang Island doesn't 3 ring a bell for me. I don't know if that's the 4 same thing as the Sandpiper condo in South Padre 5 or not. We did go down there for a meeting; but 6 whether that's the same thing as Mustang Island, 7 I'm not sure. 8 Q. At that meeting that you went to at the 9 Sandpiper, who was in attendance? 10 A. I don't remember. 11 Q. But it was your understanding that it 12 was a meeting to discussion strategic planning 13 issues? 14 A. Right. 15 Q. Now, I would like to direct your 16 attention to Item No. 3. It says, "Now that 17 mortgages have prepaid, we have an excess of 18 long-term swaps which are unmatched in our 19 expenses. We should take this into consideration 20 when matching new assets. Maybe we will not have 21 to raise as much brokered funds because we already 22 have excess swaps in place"? 12519 1 A. Yes. 2 Q. Do you recall why there were excess 3 swaps in place? 4 A. My best recollection is the same as the 5 text, which is that the mortgages prepaid. 6 Q. Do you recall why the mortgages had 7 prepaid, what had happened at that time that made 8 the mortgages prepay? 9 A. I presume the interest rates came down. 10 Q. Item No. 4 says, "Profit targets. Our 11 goal has been to show equal quarter-to-quarter 12 earnings increases. If we took larger write-offs 13 each quarter, however, we could make a quick 14 payback by paying off debt at an initial loss. 15 The most important thing is to show some profits 16 each quarter, not necessarily increasing profits. 17 Need to trade this off versus credit watch in the 18 state. We would like to see increasing profits." 19 Do you see that? 20 A. Yes, I do. 21 Q. Why was the most important thing to 22 show profits each quarter? 12520 1 A. It was a public company; and like any 2 public company, it's important to show a profit. 3 If you show a loss, people get very concerned. 4 Q. Now, look at Item No. 6, "Timing of 5 gains. While the branch sales in Weingarten sales 6 are expected to occur second quarter, we should 7 plan for them to occur third quarter. We should 8 see how the second quarter looks without these 9 gains." 10 Do you see that? 11 A. Yes, I do. 12 Q. When you were at USAT, was the timing 13 of gains an important consideration? 14 A. It was one of the important 15 considerations. 16 Q. Now, I would like to move to the next 17 document that's in that packet; and that is a 18 document that has had two numbers assigned to it. 19 I don't think that either of them have been 20 admitted. I want to direct your attention -- 21 MR. GUIDO: I'll move those two 22 documents into evidence, Your Honor, as A10627. 12521 1 It's from Mike Crow to Jenard Gross dated 2 April 21st, 1986, which says, "Attached is a brief 3 general draft of the first meeting of the 4 strategic management council that Barry Munitz 5 mentioned at the Sandpiper Retreat. Please let me 6 know when we can get together to discuss this, the 7 timing of the meeting and, overall, what this 8 entity should accomplish." 9 Then it has an agenda for the strategic 10 planning committee. I move the admission of that 11 document into evidence, Your Honor. 12 MR. NICKENS: Your Honor, no objection. 13 Just for clarity, the document is A10627 which is 14 a two-page document bearing the number 1931 and 15 1932. 16 MR. GUIDO: 1931 and 32, that's 17 correct. It just happens to have the exhibit 18 number on the second page. 19 MR. NICKENS: No objection. 20 THE COURT: All right. A10627 is 21 received. 22 Q. (BY MR. GUIDO) Now, I would like to 12522 1 direct your attention to the strategic management 2 council agenda. 3 Do you see that? 4 A. Yes, I do. 5 Q. It says "asset allocation." Is this 6 currently a problem at all? We're able to grow 7 more quickly and raise the funds to do so than 8 we're able to find attractive investment 9 opportunities." 10 Do you see that? 11 A. Yes, I do. 12 Q. Do you know what that refers to? 13 A. No, I don't. 14 Q. Did you -- were you -- was it the 15 practice that if Jenard Gross received any 16 memoranda regarding the strategic planning 17 committee or the strategic management council, 18 that you would receive copies of those documents? 19 A. To the best of my recollection, there 20 was no formal process to that; but he, under many 21 circumstances, might have passed it on to me or he 22 might not have. 12523 1 Q. Now, I would like to direct your 2 attention to the next document, T4190, which is a 3 two-page document, a memorandum from Mike Crow to 4 Barry Munitz dated April 21, 1986. And that is at 5 US-1933, 1934. 6 MR. GUIDO: I would like to move the 7 admission of that document into evidence. 8 MR. NICKENS: No objection, Your Honor. 9 THE COURT: Received. 10 Q. (BY MR. GUIDO) Look at Item No. 3 in 11 that document, Mr. Hansen. It says, "For the 12 foreseeable future, continue to take extraordinary 13 profits from asset sales (loan servicing, loan 14 sales, bonds, branches, et cetera) in order to 15 provide some level of modest profitable. The bulk 16 of the gains, however, should be used to bolster 17 reserve and take losses to dispose of REO and 18 related problem assets as quickly as possible." 19 Do you see that? 20 A. Yes, I do. 21 Q. And the subject is revenue enhancement. 22 Do you recall during the time you were at USAT 12524 1 that there were sales of assets to generate 2 extraordinary or non-ordinary income in order to 3 bolster profits and net worth? 4 A. I recall that there were sales. 5 Whether they could be characterized as 6 extraordinary or not, I don't know. 7 Q. Now, I would like to direct your 8 attention to the document has been marked as 9 Exhibit A10628. And that has been previously 10 admitted at 864; and it's a memo from Mike Crow to 11 you dated April 22nd, 1986. It says, "Mustang 12 Island follow-up, your memo of 4/17/86." 13 Is that a reference to the document 14 that we've marked as A10623 and has previously 15 been introduced? 16 A. I don't know. It appears to be. I 17 don't know that for a fact. 18 Q. Now, look at the third entry. In your 19 memorandum, that -- at A10623, it says, "Swaps. 20 Now that mortgages have prepaid, we have an excess 21 of long-term swaps that are unmatched and are 22 expensive. We should take this into consideration 12525 1 when matching new assets. Maybe we will not have 2 to raise as much brokered funds because we already 3 have excess swaps in place." 4 Mr. Crow's response is: "Very high 5 priority. Primary responsibility for analysis 6 should be Mike Crow/Bruce Williams/Ron Heubsch. 7 This appears to be a big problem due to the way 8 our interest rate swaps are placed in very large 9 blocks." 10 Do you see that? 11 A. Yes. 12 Q. What is it about the size of the blocks 13 that created a problem at USAT? 14 A. I don't know. 15 Q. Do you recall having any discussions 16 with Mike Crow about that? 17 A. About whether the swaps being in big 18 blocks was a problem? No, I don't recall anything 19 of that sort. 20 Q. Now, look at Item No. 6 in the memo. 21 It makes reference to, again, your memo at 22 A1610623, Item No. 6, "timing of gains." And it 12526 1 says -- this is the response -- "Without any 2 special gains, the second quarter will be grim 3 unless we let our reserves slide precipitously, we 4 will show a loss." 5 Does that indicate to you that the 6 timing of gains was a matter of concern at USAT at 7 the time you were there? 8 A. It would appear to be so. 9 Q. Okay. Now, I would like to move to the 10 next document, which is Tab 378, B1102. Excuse 11 me. I misspoke. 12 There are two documents that I would 13 like to do before that. One is dated June 16th, 14 1986; and that document is in, I think, the front 15 of the binder that you have. It's separate, and 16 it's previously not been introduced. 17 MR. GUIDO: This document, Your Honor, 18 is a June 16th, 1986 document from Doug Hansen to 19 Jenard Gross; and it has a Bates stamp on the 20 original W101043. 21 THE COURT: How is it identified here? 22 Where is it identified? I'm not sure what 12527 1 document you're talking about. 2 MR. GUIDO: There's a packet of the 3 retyped materials that Mr. Nickens provided in 4 addition to what was in the binder. There were 5 some documents that Mr. Nickens found that I did 6 not originally find. 7 8 (Discussion held off the record.) 9 10 THE COURT: Well, now you're discussing 11 Mr. Hansen's memo to Jenard Gross is dated 12 June 16, 1987; but it has no identification. 13 MR. GUIDO: Your Honor, the copy that I 14 got from Mr. Nickens didn't have one. We have 15 found out that it was B1043: June 16th, 1986 16 document. 17 THE COURT: Is that in evidence? 18 MR. GUIDO: No. It has not been moved 19 into evidence as yet, Your Honor. 20 THE COURT: So, it's going to be marked 21 B1043? 22 MR. GUIDO: 1043, Your Honor. And I 12528 1 move B1043 into evidence, Your Honor. 2 MR. NICKENS: No objection. 3 THE COURT: Received. 4 MR. GUIDO: Your Honor, so I'll be -- 5 I'm going to be doing these right together. The 6 June 18th memorandum is B3813, Your Honor. I 7 would like to move the admission of B1043, 8 Your Honor -- 9 THE COURT: Received. 10 MR. GUIDO: -- and Exhibit B3813. 11 MR. NICKENS: No objection. 12 THE COURT: Received. 13 Q. (BY MR. GUIDO) Now, I want to direct 14 your attention to B1043 to start with, Mr. Hansen. 15 It says, "At the last investment committee 16 meeting, you asked about the sensitivity of our 17 mortgage-backed security portfolio." 18 Do you see that sentence? 19 A. Yes, I do. 20 Q. Did you regularly attend the investment 21 committee meetings of USAT? 22 A. I attended a lot of meetings; and 12529 1 whether I regularly attended the investment 2 committee meeting, I'm not sure. I know I went 3 there from time to time. 4 Q. Now, this is -- it says in the second 5 paragraph, "I have reviewed the materials that 6 have come in from various Wall Street firms 7 recently. The Goldman Sachs model is as good as 8 any." And then it says, "The GS model shows that 9 we have lost 47.7 million on our main structure 10 portfolio, (776 million investment)." 11 Do you see that? 12 A. It says 706. 13 Q. 706. Excuse me. 14 THE COURT: Mr. Guido, I apologize for 15 disrupting. But it looks like there's an 16 original, and then there's the recopying by -- 17 which document are you offering? Both of them 18 or -- 19 MR. GUIDO: I am moving, Your Honor -- 20 as we said at the outset, I am only moving the 21 original document. The typewritten documents are 22 here for our convenience; and they will be, in one 12530 1 way or another, included in the record at some 2 point in time in the future. Some of these 3 documents are very difficult to read. This one 4 turns out not to be. 5 THE COURT: All right. Thank you. 6 Q. (BY MR. GUIDO) Now, this makes 7 reference to "our main structured portfolio." 8 Do you see that? 9 A. Yes. 10 Q. Did USAT have more than one 11 mortgage-backed security portfolio? 12 A. I believe that it did, yes. 13 Q. And did -- why did you limit your 14 comments in this memorandum to only the so-called 15 main structured portfolio? 16 A. I don't know. 17 Q. Now, it goes on to say in the second 18 sentence, "Lost 47.7. This does not count any 19 securities gains or losses we may have already 20 realized because the net market value is negative. 21 If we hold these securities, we will take a 22 negative spread into income over time. If we sell 12531 1 them, we have an immediate loss. There is nothing 2 that can be done about this. It has already 3 happened. The impact on current report of profits 4 gets worse over time." 5 Now, I don't understand what you mean 6 by the phrase "the impact on current reported 7 profits gets worse over time." 8 How can that happen? 9 A. Well, my presumption after reading this 10 memo last night, if you turn the page and you look 11 at the table, it shows income; and you can see 12 that in all of the scenarios, it generally gets 13 worse over time. So, I presume that's what I 14 meant when I said that. 15 Q. Do you know why that was about that 16 portfolio, that the income -- the net loss would 17 increase over time? 18 A. I don't remember from that specific 19 meeting. I could guess, but I can't remember what 20 I was thinking when I wrote the memo. 21 Q. Why is it that a portfolio like that 22 could have its reported profits get worse over 12532 1 time? 2 A. Well, one reason is -- and this may 3 have applied in this case; I'm not sure -- is if 4 you own swaps and mortgages and the mortgages are 5 prepaying, over time, you have fewer and fewer 6 mortgages at the high interest rates because they 7 are prepaying. And each year that goes by, you 8 have fewer and fewer of those high-paying 9 mortgages to balance against those swaps. 10 Q. Would it be fair to say that over time, 11 because of prepayments, if you don't do anything 12 about your swaps and they are on there for a fixed 13 period of time that as mortgages prepay, that time 14 creates an imbalance between your swaps and your 15 mortgage-backed securities? 16 A. That's a pretty general statement. I 17 could think of a lot of counter examples to what 18 you just said. If you're referring to this 19 specific situation that I mentioned where you have 20 high income mortgages that are prepaying because 21 interest rates have gone down but you haven't done 22 anything about the swaps or whatever, what you 12533 1 said is generally true. 2 Q. Now, let's move to the last paragraph 3 in that memo. It says, "If we want to protect the 4 situation from getting worse, we need to add 5 something which hedges the risk in the portfolio, 6 not accentuates them. We need something which 7 makes money when rates rise 200 to 300 basis 8 points and also makes money when rates fall by the 9 same amount. The only thing I have heard that can 10 do this is interest rate options, although the 11 interest rate structure of the rest of United may 12 protect us from overall loss should rates fall. 13 Until we figure out how to protect ourselves 14 overall, we can mitigate the effects of a change 15 in interest rates by rebalancing the portfolio as 16 rates change. All the rebalancing we have done so 17 far has been much better than if we had done 18 nothing." 19 Do you see that? 20 A. Yes. 21 Q. Now, it makes reference to "the only 22 thing that I've heard of that can do this is 12534 1 interest rate options." 2 What were you referring to there? 3 A. Are you asking me what I was thinking 4 of when I wrote the memo, or are you asking me 5 what I think of it now? I don't recall what I 6 thought when I wrote the memo. 7 Q. Based on your experience, what do you 8 believe that's referring to there? 9 A. What I believe that's referring to is 10 if you were to buy some sort of hedge or 11 instrument that had optionality in it, which could 12 be options on futures, could be options on swaps, 13 could be a variety of different things with 14 optionality in it, if you were to buy those, then 15 if interest rates fell or rose, if you bought them 16 going both directions, you would make a fair 17 amount of money. You could potentially make a 18 fair amount of money. 19 Q. Now, with regard to the interest rate 20 options, were there any options in place at the 21 time to protect against the increase in 22 prepayments? 12535 1 A. I don't remember if there were or not. 2 Q. It would be fair to assume that since 3 you're recommending the purchase of interest rate 4 options, that they were not in effect at that 5 time? 6 MR. NICKENS: Your Honor, I object to 7 that. He said he didn't remember, and then he 8 asked if it was fair to assume. That is 9 speculative. 10 THE COURT: Sustained. 11 Q. (BY MR. GUIDO) I would like to move to 12 the last sentence: "All the rebalancing we have 13 done so far has been much better than if we had 14 done nothing." 15 What is the advantage of rebalancing a 16 portfolio, mortgage-backed security portfolio? 17 A. Are you talking about the specific 18 instance of a leveraged mortgage portfolio hedged 19 with swaps? 20 Q. Right. I'm sorry. 21 A. The problem is that the interest rate 22 characteristics of the swaps are fairly steady 12536 1 whereas the interest rate risks or characteristics 2 of the mortgages can change over time particularly 3 as rates rise or fall. If you want to maintain a 4 balanced risk profile as interest rates change, 5 one way to do that is to rebalancing the asset 6 side. Another way to do that is to rebalance the 7 liability side or the swap side so that if one 8 moves relative to the other, that they are 9 rebalanced and you're back to a more neutral 10 position. 11 Q. So that -- and how does one do that in 12 a declining interest rate market? 13 A. You can -- you need to either add more 14 interest rate risk to the asset side or you need 15 to reduce the interest rate risk on the liability 16 side. 17 Q. How do you add interest rate risk to 18 the asset side? 19 A. You could do that by buying more 20 assets. You could do that by -- if your mortgages 21 that you own have moved to a premium in price -- 22 in other words, let's say it's an 8 percent 12537 1 mortgage and interest rates for mortgages have 2 dropped to 7 percent, that mortgage that you own 3 at 8 percent will not have enough interest rate 4 risk to cover the potential risk of having the 5 swaps. So, you could either buy treasuries, buy 6 more assets, or you could sell the 8 percent 7 coupon mortgage and move down to a lower coupon. 8 Q. Do you know how far interest rates had 9 dropped at USAT prior to the initiation of the 10 rebalancing for this portfolio? 11 A. I don't know. 12 Q. Did you know at the time? 13 A. I may have. 14 Q. Now, I would like to direct your 15 attention to the next document, which is 16 Exhibit B3813. That's a memorandum from you to 17 Jenard Gross, Barry Munitz, Jerry Williams, Mike 18 Crow, Art Berner, Bruce Williams, Ron Heubsch, Joe 19 Phillips, and Gary Jacobson. 20 That documents says, "We have received 21 the tapes from the recent American Bankers 22 Conference. Several of the speakers discussed 12538 1 risk-controlled arbitrage. I have summarized 2 below some of the points made." 3 Why did you prepare this memorandum? 4 A. I don't know why I did. I can make a 5 guess, but I don't know why I did it at the time. 6 Q. Do you recall whether questions came up 7 in June of 1986 about the level of knowledge that 8 USAT had with regard to how mortgage-backed 9 security portfolios operated when they were 10 financed with reverse repos and hedged with swaps? 11 A. That was the subject of much 12 discussion. 13 Q. Okay. And this addresses that 14 question, does it not? 15 A. I'm sorry. It addresses which 16 question? 17 Q. This memo addresses the questions of 18 how mortgage-backed securities arbitrage 19 portfolios are similar to those USAT had? 20 A. Yes, I believe it does. 21 Q. Now, see where it says "Ken Sullivan"? 22 A. Uh-huh. (Witness nods head 12539 1 affirmatively.) 2 Q. Who was Ken Sullivan? 3 A. I don't know. 4 Q. Was Ken Sullivan a mortgage-backed 5 securities person from Drexel, Burnham, Lambert? 6 A. I don't know. 7 Q. Now, it says -- look at the bullet 8 points. It says, "Risk-controlled arbitrage can 9 be a good investment, but most people overstate 10 the achievable spreads." 11 Do you see that? 12 A. Yes. 13 Q. What does that refer to? 14 A. Are you referring to what I meant it 15 referred to then or what I would presume now that 16 it means? 17 Q. Based on your experience, looking at 18 this document now, what do you interpret it to 19 mean? 20 A. I interpret it to mean that if you do a 21 static analysis, you assume that the interest 22 rates don't ever change after you do make an 12540 1 investment like this. That's generally near the 2 top of the amount of money that you can earn from 3 such an investment. So, if you looked at it 4 naively and assumed that interest rates weren't 5 going to change, you would probably think you were 6 going to earn more money than you most likely 7 would if interest rates did change. 8 Q. Now, the second bullet point says -- 9 first of all, what's the reference to spreads in 10 there? 11 A. I believe what it -- what I presume 12 that it means, what I meant then, was that the 13 spread between you're earning more on your assets 14 and paying out less on your liabilities. 15 Q. Now, then it says, "Actual results will 16 be worse than projected because, whatever happens, 17 you lose spread. Rates up, rates down, rates up, 18 rates down, et cetera"? 19 A. Right. 20 Q. And then it says, "Once rates have 21 moved and you have lost spread, you do not regain 22 it when they move the other way. What is lost is 12541 1 lost." 2 Do you see that? 3 A. Yes, I do. 4 Q. What does that refer to? If rates go 5 down and you lose money, why don't you make money 6 when they go back up? 7 A. Based on my experience since I wrote 8 this memo, I would presume when rates go down, the 9 mortgages prepay. When rates go back up, you 10 don't get the mortgages back again. They are 11 already gone. 12 Q. Why can't you just purchase higher 13 coupon mortgages when interest rates go back up? 14 A. Let's see. I think you could. 15 Q. And then what would you have lost? 16 A. I'm not sure that you would have. 17 Q. Would you have lost the interest that 18 would have been earned between the time that they 19 prepaid and that you bought -- 20 A. Yes, you would have lost that part. 21 Once it did go back and you purchased the new 22 mortgages, if they went back to where they were 12542 1 before, you would presumably be earning at that 2 point. 3 Q. So, when interest rates went back up on 4 you and you bought the higher coupon mortgages, 5 your only loss would be the lost interest in the 6 interim period of time? 7 A. I haven't thought it through fully, but 8 that's all I can think of at the moment. 9 Q. Now, when people rebalanced portfolios 10 when interest rates went down, did they have a 11 practice of buying lower coupon mortgages? 12 A. That was one way to do it, yes. 13 Q. And when they went up in rebalancing, 14 did they have a tendency to sell the lower coupon 15 mortgages and buy higher coupon mortgages? 16 A. I'm not sure about that part. 17 Q. It didn't happen at USAT, did it? 18 A. I don't know. 19 Q. Now, then the next bullet point or one 20 or two down, it says, "You should not use 21 durations to match. Duration or modified duration 22 is misleading because it's based on a static 12543 1 picture. The only way to understand the true 2 volatility of a mortgage-backed security is to 3 model various scenarios in conjunction with your 4 proposed liability structure. Much work has to be 5 done in this way before a hedge is put on." 6 Do you see that? 7 A. Yes, I do. 8 Q. What is that referring to? What is 9 duration or modified duration referring to? 10 A. Duration is a formula that you can find 11 if you picked up a book on bond mathematics which 12 is -- relates -- essentially, when we say 13 something is a long-term asset with a fixed rate 14 coupon and, therefore, has interest rate risk, 15 it's a way of using a formula to say how 16 long-term -- or how much risk does a particular 17 bond have. 18 It doesn't work very well for 19 mortgages, which is what they are referring to 20 here. 21 Q. And that is because of the prepayment 22 option? 12544 1 A. Correct. 2 Q. And what it's saying is that you 3 shouldn't use durations to match using current 4 interest rates exclusively. You should look to 5 different interest rate scenarios to see how it 6 would operate? 7 A. There's another term which is used in 8 mortgages which would be the effective duration or 9 the empirical duration. You could use that to 10 match mortgages; but if you're using the strict 11 duration formula that you would get out of a book, 12 then you're right. You would be misleading 13 yourself if you used that. 14 Q. What was USAT using at the time that 15 you arrived at USAT? Were they using the 16 durations out of a book? 17 A. I don't believe so. 18 Q. No? What were they using? 19 A. If you see the prior memo, June 16th, 20 you can see a form of scenario analysis. That's 21 the sort of thing that we would look at. 22 Q. Okay. Now, where would you get the 12545 1 prepayment assumptions that would affect that 2 scenario analysis that you referred to in 3 Exhibit B1043? 4 MR. NICKENS: Your Honor, I'm unclear 5 whether he's asking about present practice, the 6 practice then or what. Where would you get it 7 is -- 8 MR. GUIDO: I'm sorry, Your Honor. 9 I'll rephrase the question. 10 Q. (BY MR. GUIDO) When you prepared the 11 memo, B1043, what was the source of the 12 information on the prepayment rates that you used 13 to ascertain what the returns would be under that 14 scenario analysis that you did? 15 A. This is the prior memo, the June 16th 16 memo? 17 MR. NICKENS: Your Honor, this memo 18 appears on its face to merely be a recapitulation 19 of something Mr. Hansen has listened to about 20 other people's opinions. I'm unclear as to what 21 the question is getting at. If he's asking about 22 prepayments in June of 1986 and he's associated 12546 1 with a memo of other people's opinions as related 2 by Mr. Hansen in his memo -- 3 MR. GUIDO: Mr. Nickens maybe didn't 4 hear what I said. I said: When you did that 5 scenario analysis, where did you get the 6 prepayment figures to do the analysis in that 7 memorandum? 8 MR. NICKENS: I understand. Maybe I 9 misheard the question. I thought he said at the 10 time you were preparing this memo, and I thought 11 he was referring to 3813. If he's referring to 12 the one that he actually prepared about his work, 13 I have no objection. 14 THE COURT: That's the one we're on. 15 MR. GUIDO: I'm making reference to 16 B1043, Your Honor. 17 THE COURT: Let's restate the question. 18 Q. (BY MR. GUIDO) When you did the 19 scenario analysis that you just made reference to 20 in B1043, what was the source of information on 21 the prepayments that were embodied in that 22 analysis? 12547 1 A. I have no recollection if I did that 2 analysis or if I'm just repeating the analysis 3 that Goldman Sachs provided. 4 Q. Okay. But when you make reference to 5 an analysis that was done, you're making reference 6 to the analysis in B1043 that Goldman had -- 7 A. When I made reference to it? When was 8 that? 9 Q. You said that USAT had done scenario 10 analysis? 11 A. Similar to the type of analysis that's 12 in that document, yes. 13 Q. And this one was done by Goldman Sachs? 14 A. I said I had no recollection as to 15 whether I did it independently or whether 16 Goldman Sachs did it. 17 Q. Did you have a model to do a scenario 18 analysis, a computer model at USAT, to do a 19 scenario analysis? 20 MR. NICKENS: Your Honor, there's two 21 questions there. 22 Q. (BY MR. GUIDO) Did you have a model at 12548 1 USAT to do a scenario analysis? 2 A. I had a computer. I had a spreadsheet 3 program, and I knew how to use it. What models I 4 did, I don't remember. 5 Q. Okay. Now, I would like to move to 6 the -- the last sentence of that. "Much work has 7 to be done in this way before a hedge is put on." 8 Do you see that? 9 A. Yes. 10 Q. Do you know whether or not USAT had 11 done such scenario analysis prior to putting on 12 their mortgage-backed securities hedged with swaps 13 financed with reverse repos? 14 A. That was before I got there. I have no 15 knowledge. 16 Q. Now, turn to the next page. It says, 17 "There is no hedge strategy apart from options 18 which will allow you to make money in a falling 19 rate environment." 20 Do you see that? 21 A. Yes. 22 Q. And then look at the -- what is it 12549 1 about options that, as a hedge strategy, would 2 have allowed an institution such as USAT with a 3 mortgage-backed security portfolio funded with 4 reverse repos hedged with swaps that would allow 5 you to make money in a falling rate environment? 6 A. If you bought options that were in the 7 nature of a call option, then you would be paying 8 a -- some sort of premium, an expense, which would 9 be a known number. And depending on which option 10 you bought and over which time period rates 11 changed, if that option went into the money, in 12 other words, if bond prices rose or bond yields 13 fell sufficiently in the proper time frame, then 14 you could make money on the call. But in the 15 event that that didn't happen, the most you would 16 lose would be whatever premium you put up. 17 Q. I would like to direct your attention 18 to two bullet points down from there. It says, 19 "The way to measure how you're doing is to mark 20 the entire portfolio to market and see what the 21 gains are. You cannot manage the portfolio by 22 just looking at the current spreads." 12550 1 Is the reference to spreads the 2 interest rate paid on the liability side corrected 3 with the swaps and the amount received on the 4 mortgage-backed securities side? 5 A. That's what it sounds like. 6 Q. It says, "You cannot manage a portfolio 7 by just looking at current spreads." 8 Why is that, or why was that at the 9 time? 10 A. Based on my current knowledge, I would 11 say what they are referring to -- there is -- you 12 can be in a position to -- similar to the one we 13 talked about earlier whereby, let's say, if rates 14 have fallen and your mortgages haven't prepaid yet 15 but they are about to, you still can see that 16 you're earning a decent rate; but if you marked to 17 market, you would see that you would have trouble 18 ahead. 19 Q. So, would current spreads be net yield? 20 Would that be a fair term? 21 A. Net yield is a more ambiguous term in 22 my mind. 12551 1 Q. Now, let's move down to the next -- it 2 says "Alvin Toevs, Morgan Stanley." 3 Do you know who he was? 4 A. I remember the name. He's sort of a 5 famous guy. 6 Q. And is he viewed as an expert on 7 mortgage-backed securities, or was he at the time? 8 A. He was invited to speak at this 9 conference. 10 Q. I would like to direct your attention 11 to six bullets points down. "The best way to 12 monitor a portfolio is to monitor market values 13 rather than the accounting spread income." 14 Do you see that? 15 A. Yes. 16 Q. Is that the same point that was made by 17 Ken Sullivan in the one that we just discussed 18 about spends? 19 A. Appears to be. 20 Q. Now, the next points says, "Without 21 options or rolldowns, no matter how you set it up, 22 it only takes a small change in interest rates to 12552 1 wipe out the initial spread." 2 Do you see that? 3 A. Yes, I do. 4 Q. Why is that? 5 A. The general nature of -- it's the same 6 issue we were talking about before. The duration 7 of mortgages changes differently than the duration 8 of the swaps or whatever long-term liabilities or 9 whatever you're using to extend the duration of 10 the liabilities. And because of that changing 11 issue, generally for a leveraged mortgage 12 portfolio or, in fact, for pretty much any 13 leveraged portfolio, whether it's corporate loans 14 or anything else that a bank might own, the best 15 environment is one of reduced volatility whereas 16 the worst environment would be one of rates going 17 way up or way down. 18 Q. Now, what is the reference to small 19 change in interest rates there? Do you know? 20 A. No. It's puzzling to me. Since my 21 presumption is that that's not really true, that a 22 small change in rates would wide out the spread, 12553 1 my only presumption is that interest rates back 2 then were changing a lot more than they have in 3 the last four or five years. 4 Q. Do you know what he was referring to as 5 "small" back then? 6 A. I have no idea. 7 Q. Now, then the last point says, "The 8 break even point for rebalancing is about 75 basis 9 points. That is, if rates fall 75 basis points 10 and stay there, it will have made no difference 11 whether you rebalanced or not. 12 What does that refer to? 13 A. What I believe it's most likely 14 referring to is if rates fall 75 basis points and 15 you do not rebalance, you probably would have lost 16 something because of the rates falling by 75 basis 17 points. If you did rebalance along the way, you 18 have the transaction costs of rebalancing. So, 19 presuming you may have protected yourself to some 20 degree by rebalancing along the way, you probably 21 would have lost whatever gain you made by -- 22 through transaction costs. He's presuming under 12554 1 some specific structure -- which I don't know 2 which type of arbitrage he's referring to. But 3 whatever one he's referring to, he's calculated 4 that the -- if rates fall by 75 basis points, 5 you'll approximately break even whether you 6 rebalanced or not. That's what I think it means. 7 Q. Now, you said depending on what kind of 8 risk-controlled arbitrage portfolio you had? 9 A. Correct. 10 Q. What were the different kinds of 11 risk-controlled arbitrage portfolios at the time? 12 A. Well, you could have owned adjustable 13 rate mortgages, first of all, instead of fixed. 14 Most of them were fixed at the time. You could 15 hedge with swaps or futures or by extending your 16 liabilities, which would have had a different 17 outcome. You could have initially purchased 18 premium mortgages and put on less swaps, or you 19 could have initially purchased discount mortgages 20 and put on more. You could have used a strategy 21 of rebalancing your liabilities rather than 22 rebalancing your assets. You could have bought 12555 1 some sort of optional things that would help you 2 out in some circumstances which might be worth the 3 cost. There's a variety of different ways of 4 setting it up. 5 Q. There are different kinds of 6 risk-controlled arbitrages with different interest 7 rate sensitivities caused by prepayments? 8 A. Sure. I wouldn't call them different 9 kinds. They are all risk-controlled arbitrages. 10 They are different varieties of it. 11 Q. Or structures? 12 A. Right. 13 Q. Some have greater interest rate risk 14 than others? 15 A. Absolutely. 16 Q. How would you or did you view USAT's 17 risk-controlled arbitrage portfolio which was 18 mortgage-backed securities, financed with reverse 19 repos for 30 to 60 days and hedged with swaps? 20 A. That was the standard way of doing it. 21 Q. At that time? 22 A. Uh-huh. (Witness nods head 12556 1 affirmatively.) 2 Q. And was the risk greater for that 3 portfolio if it was current coupons that were 4 purchased, current interest rate coupons that were 5 purchased when the portfolio was put on, as 6 opposed to discount coupons? 7 MR. NICKENS: What kind of risks? 8 Q. (BY MR. GUIDO) Interest rate increase 9 because of prepayments? 10 A. I can't answer that question. There's 11 too many variables. 12 THE COURT: We'll take a short recess. 13 14 (Short break.) 15 16 THE COURT: Be seated, please. We'll 17 be back on the record. 18 Mr. Guido, you may continue. 19 MR. GUIDO: Thank you, Your Honor. 20 Q. (BY MR. GUIDO) Mr. Hansen, have you 21 had any discussions with anyone about your 22 testimony in this matter? 12557 1 A. Mr. Nickens and Mister -- some of the 2 defense attorneys, yes. 3 Q. Have you ever had any discussions with 4 Mr. Gross about your testimony? 5 A. I haven't talked to Mr. Gross except 6 for when I talked to him just now for a few 7 minutes. 8 Q. Thank you. 9 Now, I would like to go back to this 10 exhibit, B3813, and turn your attention to the 11 entry that says, "Greg Smith, Smith Breeden." 12 Do you see that? 13 A. Uh-huh. (Witness nods head 14 affirmatively.) 15 Q. Who was Greg Smith? 16 A. Greg Smith was one of the principals of 17 Smith Breeden. 18 Q. Was he one of the people that was 19 retained by USAT to provide advice to USAT in 20 1986? 21 A. He was part of the team at 22 Smith Breeden who were working on United Savings. 12558 1 Q. Now, look at the entry it says, "When 2 you're 100 percent duration matched, you must 3 monitor it on a daily basis and be ready to make 4 dramatic changes." 5 Do you see that? 6 A. Yes. 7 Q. What does that refer to? 8 A. It's the same sort of thing we've been 9 discussing, that you need to monitor your position 10 to see what's happening. 11 Q. Is that because it's highly sensitive 12 to changes in interest rates? 13 A. It could be, yeah. 14 Q. Now, look at Item No. 2. "You should 15 not look at your accounting income so much as 16 changes in market values and changes in economic 17 net worth. Economic net worth is the discounted 18 present value of the cash flows from the 19 arbitrage." 20 Do you see that? 21 A. Yes. 22 Q. Is that, again, the point that the 12559 1 other speakers made? That you don't look at 2 spread; you look at changes in market value to 3 evaluate the performance of the mortgage-backed 4 securities portfolio? 5 A. And his point about economic net worth 6 is similar to the point we made earlier about 7 doing the analysis. 8 Q. "Options are the way to hedge against 9 losses from large interest rate moves in 10 risk-controlled arbitrage." 11 Do you see that? 12 A. Yes. 13 Q. Is that, again, the reference that 14 options are an effective way to protect against 15 changes in prepayment speeds? 16 A. That's one way to do it. Right. 17 Q. Then it says, "There is almost no way 18 to make a true economic spread in any savings and 19 loan activity. Once all the risks are taken into 20 account, it is more than 100 to 150 basis points"? 21 A. Yes. 22 Q. Is that a point that the other speakers 12560 1 also made? 2 A. I don't know. 3 Q. Do you recall when the American Banker 4 Conference was held that's referred to in that 5 memorandum? 6 A. No, I don't. 7 Q. Do you recall how it came to be that 8 you obtained copies of the documents? 9 MR. NICKENS: Your Honor, the document 10 indicates "tapes." 11 A. To the best of my recollection, I 12 considered going to the conference. And for some 13 reason I didn't go; so, I ordered the tapes. 14 Q. (BY MR. GUIDO) So, the conference 15 occurred sometime when you were employed at USAT? 16 A. I believe so. 17 Q. And was it sometime close to the date 18 of this memorandum? 19 A. I don't think there's any way to know 20 because I don't know how long it would have taken 21 them to produce the tapes, and I don't know how 22 long after the conference I ordered the tapes. 12561 1 Q. Now, I would like to direct your 2 attention to the next exhibit in the binder, which 3 is July 14th, 1986; and it's B1102. It's at 4 Tab 378, and it's a memo from you to Jenard Gross 5 regarding strategy for next 18 months. 6 THE COURT: Would you repeat that, 7 Mr. Guido? 8 MR. GUIDO: It's Tab 378. It's 9 Exhibit B1102. It is a memorandum from Doug 10 Hansen and to Jenard Gross regarding strategy for 11 next 18 months; and it is dated July 14th, 1986. 12 THE COURT: Thank you. 13 Q. (BY MR. GUIDO) Now, look at the first 14 page under "capital." It says, "Capital is going 15 to be king over the next few years. We might 16 consider having a long-run target of building 17 capital even above the raised regulatory minimum 18 to lower risk and increase ability to take 19 advantage of opportunities." 20 Bullet, "In the short run, our bundling 21 capital is our largest problem. Implied worth of 22 capital to United is very high due to necessity to 12562 1 survival should we be willing to pay a lot for 2 capital." 3 Bullet, "High worth of capital means we 4 should hesitate to realize losses for the next 18 5 months even though long-term economics may 6 recommend doing so. Thus, we should not call 7 bonds or whatever the loss. We should value very 8 highly any opportunity to realize gains." 9 Do you see that? 10 A. Yes. 11 Q. Is that a reflection of the views of 12 the strategic planning committee during the period 13 of time that you were at USAT? 14 A. The first sentence in the memo says 15 what follows are my views on the United 16 priorities. 17 Q. Right. I understand. 18 A. So, I have no recollection as to 19 whether this was a general view -- it was clearly 20 my view. 21 Q. But you don't know whether or not it 22 was anyone else's view? 12563 1 A. My only presumption would be if I took 2 the trouble to write it down. If it was a 3 consensus item that everybody understood, I 4 wouldn't have written it down. 5 Q. You did write some memoranda that were 6 consensus memoranda, weren't they? 7 A. I don't remember. I don't remember 8 seeing any memorandum labeled as such. 9 Q. We'll get to it in a minute. 10 A. Okay. 11 Q. Now, but this was your view, that 12 capital was very significant to USAT at that time? 13 A. Right. 14 Q. Okay. Do you recall anyone expressing 15 any disagreement with that view? 16 A. I don't recall one way or the other. 17 Q. Was survival, avoiding being placed 18 into conservatorship or receivership, something 19 that was considered important at USAT at the time 20 you were there? 21 A. Was it considered important? 22 Q. Yes. 12564 1 A. Yes, it was. 2 Q. Was it something that was considered 3 necessary to avoid? 4 A. Certainly desirable to avoid. 5 Q. Was it something that people were 6 concerned about? 7 A. Not so much at first. But as the real 8 estate got worse and worse over the years -- over 9 the time that I was there, it became more of an 10 issue. 11 Q. Now, look at the second page of that 12 document under "liquidity ability to down size." 13 A. Uh-huh. (Witness nods head 14 affirmatively.) 15 Q. It says, "Mortgage-backed securities 16 are carried at slight gains so they could be sold 17 quickly but they are mostly financed by repos 18 which would have to be paid off. This would not 19 raise much money to cover a run." 20 Do you see that? 21 A. Yes. 22 Q. On the first page, you say, under 12565 1 "capital," "any opportunity to realize gains." On 2 this page, you talk about selling mortgage-backed 3 securities at a slight gain. 4 Was the sale of mortgage-backed 5 securities at a gain something that was considered 6 in order to bolster profits and, thereby, increase 7 capital at USAT? 8 A. I think, yeah, it was certainly 9 considered. 10 Q. Okay. Now, look at the next page of 11 the document, the last bullet point. It says, 12 "Another interest rate problem is the 13 risk-controlled arbitrage portfolio. 14 Smith Breeden should give us some help in not 15 having a repeat disaster in balancing the swaps 16 versus our overall interest rate risk posture. I 17 think there must be a way so we do not have to 18 roll up and down all the time. I think 19 risk-controlled arbitrage can be a good business. 20 Once we understand it better, we might even 21 consider starting a Berner-Posen black hole 22 subsidiary and doing some more of it. (That is, 12566 1 if we had not already taken our portfolio and put 2 it into a sub." 3 Do you see that? 4 A. Yes. 5 Q. What is the reference to the repeat 6 disaster? 7 A. My presumption is that we saw a memo 8 earlier where we saw that the mark-to-market, at 9 least according to Goldman Sachs, was negative 10 $47 million not counting any gains that had to be 11 taken out. We also saw a memo where the 12 projections of income going forward turned 13 negative after three years. So, I would presume 14 that it's referring to those sort of issues. 15 Q. By this time, had Smith Breeden done 16 their analysis of the USAT portfolio for you? 17 A. I don't know. 18 Q. I would like to show you a document 19 that -- that was introduced into the record as 20 A13005 in the course of the Mike Giarla testimony. 21 It is a memorandum dated June 30, 1986, entitled 22 "United Savings' analysis of mortgage-backed 12567 1 securities, interest rate swaps, caps, and 2 collars." 3 I would like to direct your attention 4 to Page 4 of that document and ask you whether or 5 not you recall having received that document from 6 Mr. Giarla at Smith Breeden. 7 MR. NICKENS: It's numbered Page 4? 8 MR. GUIDO: Numbered Page 4. It's the 9 sensitivity analysis after the prepayment 10 assumption. 11 A. I believe your first question is 12 relating to the whole document as to whether I 13 recall receiving it? 14 Q. (BY MR. GUIDO) The whole document, 15 yeah. 16 A. These graphs look vaguely familiar, but 17 I couldn't say anything as to this particular 18 document or not. 19 Q. But the date of that indicates that it 20 was prepared on June 30, 1986? 21 A. Right. 22 Q. And take a look at the chart on Page 4. 12568 1 What does that show in terms of how the 2 risk-controlled arbitrage portfolio had performed 3 up to that point in time? 4 MR. NICKENS: Well, Your Honor, I 5 object. There's no evidence that this is the 6 risk-controlled arbitrage. This is the current -- 7 we've had this issue before. I asked Mr. Giarla 8 about it. It's reflecting total back value of the 9 mortgage pools of 1,907,000,000 which was 10 substantially more than the witness has indicated 11 was the principal risk-controlled arbitrage. 12 You'll recall his earlier document says around 13 700 million. 14 My objection is that he has asked the 15 question as if representing to the witness that 16 this was the risk-controlled arbitrage and an 17 analysis of it when I think the facts are going to 18 show that's plainly wrong. The witness, 19 obviously, doesn't remember from so long ago. 20 So, it's -- I feel it's my obligation 21 to point that out so that we can you understand 22 his testimony. 12569 1 THE COURT: All right. Thank you. 2 MR. GUIDO: Your Honor. 3 Q. (BY MR. GUIDO) Mr. Hansen, at any 4 time that you were at USAT, did USAT ignore the 5 interest rate risk of mortgage-backed securities 6 when it purchased them and not attempt to hedge 7 them? 8 A. I think you just asked two questions. 9 At no point did we do anything that -- where we 10 didn't take into consideration interest rate risk. 11 We may have, at some point, purchased 12 mortgage-backed securities without hedging those 13 specific mortgage-backed securities with the goal 14 of rebalancing the interest rate risk of the 15 entire institution. But there was not a period of 16 time when people conducted activities without 17 taking into account interest rate risk. 18 Q. Were swaps placed on mortgage-backs at 19 the same time that mortgage-backed securities were 20 initially placed in USAT's portfolio? 21 A. I don't know. 22 Q. Okay. Now, that document says at the 12570 1 outset -- and maybe this will help Mr. Nickens. 2 It says, "Analysis of mortgage-backed securities, 3 interest rate swaps, caps, and collars." 4 Is your reference to risk-controlled 5 arbitrage portfolio in your memorandum dated 6 July 14th, 1986, a reference to those instruments 7 in USAT's portfolio? 8 A. I don't know. 9 Q. You don't know? 10 A. There were several different 11 portfolios. I don't know if I was referring to 12 more than one of them and I don't know if this 13 memo refers to more than one of them. 14 Q. Now, taking a look at that memo, it 15 says it's addressing mortgage-backed securities, 16 interest rate swaps, caps, and collars. 17 What does the sensitivity analysis show 18 you on Page 4 of that document? 19 A. It shows that the net mark-to-market 20 value of the entire portfolio, including the 21 hedges, gets worse as rates rise and, also, as 22 rates fall. 12571 1 Q. What does it show you that happened to 2 those mortgage-backed securities swaps, caps, and 3 collars with interest rates at the level that they 4 were? 5 A. That there was a mark-to-market loss at 6 that particular point in time. 7 Q. Of how much? 8 A. 58 million. 9 Q. Would you characterize that as a 10 disaster? 11 A. I don't recall how much capital the 12 institution had at the time; so, I'm not sure if I 13 can answer if that was a disaster or not. 14 Q. I think you made reference to 15 Goldman Sachs as it being an indication of a 16 disaster in the structured arbitrage portfolio. 17 Right? 18 A. Goldman Sachs -- 19 Q. I asked you what it was you were 20 referring to in terms of disaster. You referred 21 the Court to B1043. 22 A. Actually, what I was trying to refer to 12572 1 was general types of information. One specific 2 example would be in the Goldman Sachs memo of the 3 fact that there was a mark-to-market loss and the 4 spread was not as high as people had hoped. 5 Q. And it shows 700 million in the memo, 6 does it not? 7 A. Yes, it did. 8 Q. And the memo from Smith Breeden shows a 9 58-million-dollar loss, does it not? 10 A. It does, yes. 11 Q. You prepared a memorandum that 12 summarizes the Smith Breeden -- one of the 13 Smith Breeden presentations, and it is at -- it's 14 Exhibit A10653, Your Honor. It's a memorandum 15 dated July 24th, 1986, Doug Hansen to Jenard 16 Gross, regarding the Smith Breeden presentation. 17 That says, "Mike Giarla from 18 Smith Breeden produced a preliminary look at the 19 interest rate sensitivity of United." 20 THE COURT: Is that supposed to be in 21 my folder? 22 MR. GUIDO: It's in the -- at the front 12573 1 of the book, there is a retyped rendition of the 2 document and a copy of the document. I think that 3 packet in the front are still in chronological 4 order. It has a little chart at the bottom of it. 5 It's dated July 24th, 1986, Your Honor. It's in 6 the loose packet in the front of the binder, 7 Your Honor. 8 THE COURT: It's marked? 9 MR. GUIDO: Pardon? 10 THE COURT: That document is marked? 11 MR. GUIDO: It doesn't have an exhibit 12 number on it, Your Honor. This copy of it 13 doesn't. It's in the Mike Giarla binder that I 14 gave the Court yesterday. The document that's 15 been retyped is the same document as 16 Exhibit A10653. 17 THE COURT: All right. Proceed. 18 Q. (BY MR. GUIDO) Now -- 19 MR. GUIDO: Your Honor, when we were 20 discussing the question of the accuracy of the 21 documents, this is one of the documents where the 22 number isn't accurate in the retyped rendition. 12574 1 As you'll see, it shows a loss of $504 million for 2 hedges with a 1 percent decrease in interest 3 rates. That figure should be 54, Your Honor; and 4 it is on the original that's attached to it, which 5 is a copy of Exhibit 10653. 6 THE COURT: Am I understanding you to 7 say that this document has been received as 10653? 8 MR. GUIDO: That's correct. 9 MR. NICKENS: Your Honor, I don't 10 believe it has been offered. 11 MR. GUIDO: 10653? 12 MR. NICKENS: Right. 13 MR. GUIDO: Mr. Giarla's -- 14 THE COURT: This is not Mr. Giarla's 15 document. 16 MR. GUIDO: A10653, if it has not been 17 admitted, I move the admission of 10653. 18 THE COURT: That is what? 19 MR. GUIDO: That is the July 24th, 1986 20 memorandum from Doug Hansen to Jenard Gross 21 regarding the Smith Breeden presentation. I'm 22 sorry. I thought it had been admitted when we 12575 1 examined Mr. Giarla. 2 MR. NICKENS: Your Honor, it looks like 3 this. 4 THE COURT: I have it. 5 MR. NICKENS: Okay. I have no 6 objection to it. 7 THE COURT: All right. Received. 8 9 (Discussion held off the record.) 10 11 MR. NICKENS: Your Honor, may I 12 inquire? Is your copy of A10653 a one-page 13 document? 14 THE COURT: Yes, it is. 15 MR. NICKENS: Mine is -- 16 17 (Discussion held off the record.) 18 19 MR. NICKENS: Your Honor, my copy of 20 the document bears the -- well, it includes some 21 attachments from Mr. Giarla's report that this is 22 reporting on. There are three pages. I don't 12576 1 know at the moment whether that is -- I believe 2 that to be the accurate copy of A10653, and we'll 3 supply the Court with a copy. 4 THE COURT: Well, as of now, I have 5 received A10653 which is a one-page document. 6 Now, it's accompanied by Mr. Nickens' clean copy 7 that we are not receiving at the moment, as I 8 understand it. 9 MR. GUIDO: If we can take a second, 10 I'll give this to Mr. Farley; and he can make us 11 copies of the entire document. 12 THE COURT: All right. Mr. Guido, the 13 retyped version of this document doesn't have any 14 attachments? 15 MR. GUIDO: That's right. It's just 16 the first page. Mr. Nickens says he just retyped 17 the first page because that was the page that was 18 prepared to the printer that had the font that was 19 not legible. 20 MR. NICKENS: Your Honor, Mr. Farley 21 was ahead of us. He had already made the copies. 22 There they are. 12577 1 MR. GUIDO: Thank you. 2 I would like to move the admission, 3 Your Honor, of the three-page document which has 4 been marked as Exhibit A10653. It's a memorandum 5 dated July 24th, 1986, from Doug Hansen to Jenard 6 Gross regarding a Smith Breeden presentation. 7 MR. NICKENS: No objection, Your Honor. 8 THE COURT: Received. 9 Q. (BY MR. GUIDO) Now, this document, 10 Mr. Hansen, says that "Mike Giarla from 11 Smith Breeden has produced a preliminary look at 12 the interest rate sensitivity of United. The 13 overall result is similar to what we would look 14 like if the whole institution was in 15 risk-controlled arbitrage. If we -- we lose if 16 rates move in any direction." 17 Then drop down to the third paragraph. 18 It says, "The magnitudes are large as shown below. 19 A rate change of minus 200 basis points causes 20 United to lose $50 million in market value. A 21 rate change of plus 200 basis points causes United 22 to lose $21 million. These losses will be 12578 1 reflected in income over time." 2 Now, is that a reflection of 3 information that you believe reflected that there 4 had been a disaster in the management of the 5 mortgage-backed security portfolios at USAT? 6 A. I can give you my current opinion. 7 Q. Of what the term "disaster" means? 8 A. Whether this represents a disaster. 9 Q. Okay. 10 A. I don't know what I thought back then. 11 My opinion is that the fact that there's fairly 12 large numbers to the left and right of this 13 table -- for instance, minus 150 million at minus 14 400 and minus 140 million at plus 400 -- that's 15 not an issue of major concern. 16 I can't remember how big the capital 17 was at the institution as a whole; but I can 18 guarantee you that if interest rates dropped 19 suddenly 400 basis points in one day, which is 20 what this is representing, or rose 400 basis 21 points in one day, almost every financial 22 institution in the country would be having severe 12579 1 problems. 2 The problem with this table is that the 3 in the middle, minus 100/plus 100, that there 4 isn't a lot of positive market value in the 5 portfolio which suggests that future income will 6 not be healthy. 7 Q. So, that's what you're referring to 8 when you use the term "disaster"? 9 A. Right. Well, no. I'm not sure what I 10 was referring to then. If I was going to look at 11 this today and say what is disastrous about this 12 picture, I would say that's the problem. 13 Q. Now -- now, you then say in that 14 sentence, "I think" -- this is looking at B1102. 15 This is going back to the July 14th, 1986, Doug 16 Hansen to Jenard Gross memo. 17 The last paragraph on Page 3 says, "I 18 think there must be a way so we do not have to 19 roll up and down all the time. I think 20 risk-controlled arbitrage can be a good business. 21 Once we understand it better, we might even 22 consider starting a Berner-Posen black hole 12580 1 subsidiary and doing some more of it." 2 Do you see that? 3 A. Yes. 4 Q. "Once we understand it better" -- what 5 are you referring to there when you say "once we 6 understand risk-controlled arbitrage better"? 7 A. What I believe I was referring to was 8 that the risk-controlled arbitrage was a 9 relatively new phenomenon at the time which people 10 all over the country were trying to understand as 11 well as Smith Breeden were, trying to help us an 12 well, as the fact that we hadn't done just such a 13 great job of it so far. 14 Q. Let's take the next page of the 15 document: 1102. Stay with 1102 and stay at the 16 same page. Look at the section where it says 17 "diminishing opportunities to realize a gain on 18 sale." 19 A. Right. 20 Q. It says, "Our stock of unrealized gains 21 is running low. We should quantify how much we 22 have left, make plans to realize them on demand if 12581 1 possible, construct worst-case scenarios to see 2 how much we might need, and rationalize our gains 3 so that we do not waste them." 4 Do you see that? 5 A. Yes, I do. 6 Q. What are you referring to when you're 7 referring to "our stock"? What assets are you 8 referring to? 9 A. I have no idea. 10 Q. And what are you making reference to 11 when you say "we should rationalize our use of 12 these gains so we do not waste them"? 13 A. I'm not completely sure what I meant 14 back then. 15 Q. Does it mean we should be careful when 16 we use them in terms of ensuring that we have 17 that, I think you said, a small profit in each 18 quarter? 19 A. It seems likely now when I read these 20 memos that that refers -- that's not completely 21 dissimilar from the remark made in one of the 22 things we earlier reviewed saying it's good for a 12582 1 company to show profits rather than losses. I 2 don't know if I made that connection back then or 3 not. 4 Q. Let's look at Tab 335, T4246, which is 5 your memo dated September 8th, 1986, entitled 6 "Growth and capital strategy - next six months." 7 And it goes to Charles Hurwitz, Jenard Gross, 8 Barry Munitz, Jerry Williams, Mike Crow, Art 9 Berner, Bruce Williams, and Jim Wolfe. 10 Do you see that? 11 A. Yes, I do. 12 Q. "This memo summarizes the current 13 thinking on a number of questions. An action list 14 is included at the end. I think we should meet 15 soon to discuss these thoughts and observations as 16 a group." 17 Do you see that? 18 A. Yes. 19 Q. What current thinking are you referring 20 to? 21 A. I would presume that I wrote this down 22 because I believed it was what at least a majority 12583 1 of the people thought or that I had picked up in 2 discussions that seemed like there was some 3 general agreement. And then I was writing it down 4 and circulating and saying, "We should meet soon 5 to discuss these thoughts and observations." 6 Q. Which people's thinking? That group, 7 the recipients? 8 A. I wouldn't know who I was referring to. 9 Q. Now, look at Item A under 10 "conclusions." It says, "United probably has 11 enough capital to avoid a supervisory letter if 12 scheduled items do not exceed 400 million. One, 13 our required net worth should drop in 1987 under 14 the new rules, assuming United receives a maturity 15 matching credit. To receive this credit in 3/87, 16 some changes to the balance sheet by 9/86 may be 17 necessary assuming a full credit." 18 Do you know what that refers to? 19 A. I don't remember exactly how it worked, 20 but the rules for capital were changing all the 21 time. There was something promulgated called a 22 maturity matching credit. I presume from this 12584 1 memo that it was based on a balance sheet six 2 months prior. So, if we wanted to get such credit 3 in March of '87, we had to do something by 4 September of '86. 5 Q. Now, turn to the second page of the 6 document. It says that, "(C) United should be 7 able to receive most of the maturity matching 8 credit in 1987"? 9 A. Where is that? 10 Q. The bottom of the second page of the 11 document. 12 A. Oh, there it is. Okay. I don't see -- 13 right. I got it. 14 Q. Okay. And then, if you look -- it's 15 discussing the maturity matching credit. I want 16 to direct your attention to the Item 6. It says, 17 "Other ways to reduce the GAP are under 18 investigation as a matter of high priority." 19 Do you see that? 20 A. Yes. 21 Q. Are the other ways that were being 22 considered a reconfiguration of the balance sheet 12585 1 of USAT vis-a-vis its subsidiaries? 2 A. I have no idea. 3 Q. Now, turn to the last page of the 4 document, Item No. G. It says, "The 5 Smith Breeden/senior management meeting will be 6 Monday, September 15th, from 3:00 p.m. to 7 9:00 p.m." And it has a list of the people who 8 will be attending: Hurwitz, Gross, Munitz, Gerald 9 Williams, Berner, Crow, Bruce Williams, Wolfe, 10 Heubsch, Phillips, Hansen, Smith, Breeden, Giarla, 11 Schumacher. 12 Who is Schumacher? 13 A. I don't know. 14 Q. Then it says, "Agenda: UFG current 15 position and interest rate risk, recommendations 16 on strategy for UFG and for the risk-controlled 17 arbitrage portfolio, hedging, Smith Breeden 18 philosophy, CMOs." 19 A. Okay. 20 Q. "Prior to the September 15 meeting, 21 Bruce Williams, Wolfe, and Hansen will go to 22 Chapel Hill, North Carolina, to help develop the 12586 1 recommendations and the presentation." 2 Do you see that? 3 A. I don't know. 4 Q. Did that trip occur? 5 A. I think you asked me that in the 6 deposition. I don't remember. I did meet with 7 Smith Breeden several times in Kansas City. I 8 don't recall going to North Carolina. I don't 9 recall if maybe Bruce Williams and them went 10 without me. 11 Q. Let me show you the document that is 12 A10665 from the Mike Giarla -- 13 MR. GUIDO: Is it 10665-1, the Mike 14 Giarla rendition? 10665-1. 15 Q. (BY MR. GUIDO) This is a copy of the 16 same memorandum that we've been looking at that 17 has been discussed with Mike Giarla, and he 18 identifies it as a document that he had. And it's 19 his handwritten notes on that document. 20 Did you provide him a copy of the 21 memorandum that you prepared on September 8th, 22 1986, entitled, "Growth and capital strategy - 12587 1 next six months"? 2 A. I don't know if I gave it to him or 3 not. 4 Q. Do you recall discussing with him in 5 Kansas City or in any of the meetings that you had 6 with him the observations of current thinking in 7 the September 8th, 1986 memorandum which was 8 marked as Tab 335, T4246? 9 A. When I went to Kansas City, I remember 10 meeting with Greg Smith. I don't remember if I 11 met with Mike Giarla or not. 12 Q. Do you remember discussing any of the 13 conclusions that are in the document, the 14 September 8th, 1986 memorandum, with him? 15 A. No. 16 Q. Now, I would like to direct your 17 attention to the -- the next document that's in 18 the binder that I gave you at the outset. It's 19 Tab 870, and it's A10666. Can you tell us what 20 that document is? 21 A. It says it's a strategic management 22 committee meeting. 12588 1 MR. NICKENS: Well, Your Honor, for the 2 record, it says "strategy meeting" -- 3 MR. GUIDO: He's looking at the wrong 4 document. 5 MR. NICKENS: Okay. 6 Q. (BY MR. GUIDO) 10666, can you tell us 7 what that document is? 8 A. I can read the title page. 9 Q. Okay. It says, "United Savings 10 Association strategy meeting, September 15th, 11 1986"? 12 A. Right. 13 Q. Is that the meeting that's referred to 14 in your memorandum of September 8th at Tab 335, 15 being T4246? 16 A. I don't know. 17 Q. You don't know? 18 A. (Witness shakes head negatively.) 19 Q. Do you recall attending a strategy 20 meeting that's referred to in your September 8th 21 memorandum, Exhibit T4246? 22 A. There were -- I vaguely recall just 12589 1 that we, at times, talked to Smith Breeden people. 2 I don't remember any specific meetings. 3 Q. Okay. Now, let's turn to the next 4 document, which is T4250 at Tab 871. That is a 5 memorandum from you to Charles Hurwitz, Jenard 6 Gross, Barry Munitz, Jerry Williams, Mike Crow, 7 Art Berner, Jim Jackson, and Bruce Williams 8 regarding strategic management committee meeting, 9 September 22, 1986. 10 Do you see that? 11 A. Yes, I do. 12 Q. Is that a document that you recall 13 preparing? 14 A. I don't recall preparing it, no. 15 Q. Okay. When you look at the -- the 16 original of that document, does that refresh your 17 recollection? 18 A. I don't remember writing it. But it 19 has my name on it, and it looks like the font that 20 I was using. 21 Q. Okay. Now, I would like to direct your 22 attention to Page 3 of the document. See where it 12590 1 says, "31 earnings and growth strategy"? 2 A. Yes. 3 Q. That says under the third bullet point, 4 "We need earnings and good net worth in the third 5 quarter as we still will be bargaining with the 6 examiners and looking for a capital note issue." 7 Bullet, "There's a strong case for taking 8 portfolio gains in the third quarter in order to 9 shore up reserves in the capital position. Third 10 quarter results need to be close to those forecast 11 in the regulatory business plan." 12 Do you see that? 13 A. Yes, I do. 14 Q. Is this the views -- a summary of the 15 views of the committee meeting? 16 A. I don't know, but generally -- I don't 17 know. 18 Q. It doesn't say these are your views? 19 A. Right. 20 Q. It just says, "Strategic management 21 committee meeting." Did you take notes at the 22 strategic planning committee meeting? 12591 1 A. I presume that I did because I don't 2 think I would be able to remember all this in my 3 head. 4 Q. Did you prepare memoranda from those 5 notes and distribute them to members of the 6 committee? 7 A. That's what this looks like it is, 8 yeah. 9 Q. Look at the very last sentence on that 10 Page 3. It says, "Quarter end actions will be 11 considered next Monday. We should take all MBS 12 and liquidity portfolio gains, monitor equity 13 arbitrage results, alert Joe as to the possibility 14 of taking junk bond gains, and track the profit 15 and capital positions closely." 16 Do you see that? 17 A. Yes. 18 Q. Why was it necessary to consider taking 19 MBS gains and junk bond gains at quarter end, 20 September 1986? 21 A. I don't have any independent 22 recollection, and I haven't read this entire memo. 12592 1 So, there may be other considerations in here. 2 But if you go back to the first part of that 3 Point 31, it says that we wanted to show earnings 4 close to the regulatory growth plan so that we 5 could consider continuing bargaining with the 6 examiners and looking for capital note issue. 7 There might have been other considerations, as 8 well. I don't know. 9 Q. Now, I would like you to switch over to 10 another document. This document is -- has been 11 admitted at Tab 569. It's T4320. It's a 12 memorandum from you to Charles Hurwitz, Jenard 13 Gross, Barry Munitz, Jerry Williams, Mike Crow, 14 Art Berner, and Bruce Williams. 15 I would like to direct your attention 16 to Bullet Points 8 and 9: High-yield bonds: In 17 Quarter 1, we should grow with '88 bonds" -- 18 A. Upon reviewing that, I think it's 19 double B rated. 20 MR. GUIDO: This is one of those where 21 there's a typo, Your Honor. 22 Q. (BY MR. GUIDO) "a 250-million-dollar 12593 1 phased in. Need to look at bonds and CD zeros. 2 Need to decide duration of funding." Then it 3 says, "Economic spread to date has been 360 basis 4 points. This has been reduced to 220 on an 5 accounting basis due to profit taking." 6 Do you see that? 7 A. Yes. 8 Q. Okay. Does that indicate that sales 9 were made out of the high-yield bond portfolio 10 that resulted in profits, reported profits to USAT 11 that had the effect of reducing its spread income 12 in the high-yield bond portfolio? 13 A. That's what it implies. 14 Q. Then No. 9, it says, "MBS: Should grow 15 up to an additional 500 million in the sub in 1987 16 with minimum 100 basis point real spread. 17 Economic spread to date is 45 basis points. This 18 will give an accounting spread of minus 108 basis 19 points in 1987 due to profit taking." 20 Do you see that? 21 A. Yes. 22 Q. Is that making reference to the -- the 12594 1 effect of sales of mortgage-backed securities that 2 were made to generate profits in 1986? 3 A. It sounds like it. 4 Q. Now, there are three documents at the 5 outset. 6 MR. GUIDO: Your Honor, the three 7 documents are the -- at the front of the binder. 8 They are Doug Hansen memos, and they reference 9 mortgage-backed security trading committee. The 10 first one, the September 10th, is B1216, 11 Your Honor. The September 8th is B1212, 12 Your Honor. And the September 22, Your Honor, is 13 B1231. 14 Q. (BY MR. GUIDO) I would like to direct 15 your attention to the September 8th. 16 MR. GUIDO: Which is B1212, Your Honor. 17 Q. (BY MR. GUIDO) Do you know what the 18 mortgage-backed security trading committee was? 19 A. I don't really know. I'm guessing that 20 there was a time period where Joe was not as 21 involved in the mortgages but we had not yet hired 22 Sandy Lorenson and we might have formed this 12595 1 committee during that period, but I'm not 2 completely sure. 3 Q. But you think that may be the case? 4 A. It could be. I have only vague -- 5 Q. Recollection of that? 6 A. Yeah. 7 Q. I mean, this committee, was this 8 essentially denominated, in your vague 9 recollection, as a subcommittee of the investment 10 committee? 11 A. I don't know. 12 Q. Okay. If the records of the investment 13 committee show it to be the case, would you have 14 any reason to dispute the accuracy of that? 15 A. It seems sensible that that might have 16 been the case. 17 Q. Okay. Now, let's take the 18 September 8th transaction. Is that what is 19 usually denominated as a dollar roll transaction? 20 A. I'm sorry. Is what a dollar roll 21 transaction? 22 Q. The transaction on the September 8th, 12596 1 1986 -- 2 A. Hold on. Let me read it. 3 Q. It's the second and third paragraphs? 4 A. Second and third paragraph? 5 Q. Uh-huh? 6 A. No. 7 Q. How would you denominate that 8 transaction? 9 A. That's a sale of one type of security 10 and the purchase of a different type of security. 11 Q. Is that what has been traditionally 12 denominated as swapping securities? 13 A. You could call it that. 14 Q. And was that a transaction that was 15 designed to generate a gain? 16 A. It appears that the first paragraph, it 17 was considering selling Fannie Mae 8s at a gain; 18 and it was decided not to do so for economic 19 reasons. 20 It appears the second paragraph is 21 talking about two trades which appear to be 22 talking about the relationship between how Freddie 12597 1 and Fannie 9s trade. That relationship varies 2 over time. And one strategy that savings and 3 loans used at the time was when those 4 relationships got out of whack, you bought one and 5 sold the other; and when they returned, you closed 6 out the trade. 7 Q. When you say "savings and loans," what 8 savings and loans are you talking about that you 9 knew about at the time? 10 A. At the time, I'm not sure I knew of 11 any. But when I left and went to Merrill Lynch, I 12 knew of quite a few. 13 Q. And at the time you were at USAT, what 14 did you understand the purpose of this trade to 15 be? 16 MR. NICKENS: He's asking him to 17 remember what -- I think I understand. 18 Q. (BY MR. GUIDO) What's the purpose of 19 this particular trade? 20 A. I don't know what I -- I can read the 21 language, and I can tell you what it says. But I 22 don't know what I thought at the time. 12598 1 Q. Reading the language, what would one 2 infer? 3 MR. NICKENS: Your Honor, I do object 4 to that. Perhaps he could say what he infers, but 5 what one would infer -- 6 Q. (BY MR. GUIDO) What do you infer from 7 that? 8 A. That the company owned Freddie Mac 9s. 9 They saw an arbitrage opportunity to take -- to do 10 some sort of trade. They switched into Fannie Mae 11 9s and back into Freddie 9s. So, they went back 12 to what they owned originally and they correctly 13 anticipated the change in the basis between those 14 two securities and they made a gain. 15 Q. Now -- they made an accounting gain? 16 A. No. It's a real economic gain. 17 Q. Okay. Now, did the characteristics of 18 what USAT received back, the characteristics of 19 the particular pools that USAT received back, have 20 the same duration of the pools that it gave up 21 initially at the beginning of that transaction? 22 MR. NICKENS: Your Honor, there is an 12599 1 assumption in that question that they gave up and 2 received something different. That is not 3 reflected in this paper. The implication that 4 this document tells him that is not correct. 5 THE COURT: I thought that was the 6 question. Do you know? 7 THE WITNESS: I don't know, but I can 8 tell you what it says on the piece of paper. It 9 says they owned Freddie 9s and they ended up with 10 Freddie 9s. It's exactly the same thing. 11 Q. (BY MR. GUIDO) Aren't there 12 differences between different pools of Freddie 9s? 13 A. There are. 14 Q. Does this reflect an analysis of the 15 similarity to differences between those pools? 16 A. No, but the implication is -- there are 17 what's called TBA Freddie Mac 9s which means that 18 there are some pools -- for instance, if you had a 19 very old pool, it might trade differently at a 20 different price than TBA, which means to be 21 announced. You don't know what pool you're 22 getting because they are all approximately the 12600 1 same. 2 I would be very surprised if there were 3 any pools they sold or received back that were 4 substantially different from each other. 5 Q. This doesn't reference back to TBA, 6 does it? 7 A. No, it doesn't. But, first of all, you 8 would never do a trade like this unless it was 9 TBAs. Secondly, the normal pattern is to assume 10 it's TBA; and if it's not, you indicate so 11 otherwise. 12 Q. Now, the September 10th, 1986 13 memorandum, it makes mention in the third 14 paragraph to the maturity matching credit again. 15 Quote, "The first was the possible necessity of 16 selling the mortgage-backed" -- the second 17 paragraph. The third paragraph says, "The 18 committee discussed two possible constraints on 19 dollar rolls at this time. Both were found not to 20 be real constraints at this time. The first was 21 the possible necessity of selling the 22 mortgage-backed securities in order to reinvest in 12601 1 the service corporation prior to the end of the 2 third quarter. This purpose -- I think it was -- 3 the purpose of this would be to meet guidelines on 4 the maturity matching credit on required net 5 worth. Upon consultation with the accounting 6 department, it was determined that the restatement 7 of swaps and caps of Federal Home Loan Bank, 8 Section 8, would bring the one-year gap to 9 17 percent and the three-year gap to 15 percent. 10 This will allow United to qualify for almost all 11 of the maturity matching credit without the 12 movement of MBS to sub." 13 MR. NICKENS: "To a sub," Your Honor. 14 MR. GUIDO: "To a sub." Excuse me. 15 Q. (BY MR. GUIDO) What does it mean when 16 it says, "Restatement of swaps and caps on Federal 17 Home Loan Bank, Section 8"? 18 Do you know? 19 A. I don't know. 20 THE COURT: Mr. Guido, does this 21 document have a number? 22 MR. GUIDO: This is B1216, Your Honor. 12602 1 It has previously been admitted. 2 MR. NICKENS: It has not been 3 previously admitted. 4 MR. GUIDO: Your Honor, I move the 5 admission of Exhibit B1216. 6 MR. NICKENS: No objection. 7 THE COURT: Received. I assume that's 8 the original document, and the retyped document is 9 to be offered in evidence? 10 MR. GUIDO: This is the original 11 document we're moving into admission, Your Honor. 12 It was the copy that was just there for the 13 Court's convenience. 14 Q. (BY MR. GUIDO) B1321 is the 15 September 27th, 1986 memo from you to Mike Crow, 16 Joe Phillips, Bruce Williams, and the investment 17 committee; and it's re: Mortgage-backed security 18 trading committee. Can you tell us what that 19 transaction was? 20 A. Freddie Mac 9 and a halfs were sold; 21 and a lower coupon mortgage, Freddie Mac 8 and a 22 halfs, were purchased. 12603 1 Q. Do you recall what the purpose of the 2 trade was? 3 A. It doesn't say. 4 Q. This was at a time when you were 5 discussing the need to make sales out of the 6 mortgage-backed security portfolio in order to 7 generate gains to bolster profit and capital in 8 the third quarter of 1986, wasn't it? 9 A. I haven't been tracking the dates; but 10 presumably, it was about the same time. 11 Q. Okay. 12 A. There's a sale of a premium mortgage 13 and a purchase of a discount mortgage, though. 14 Q. And the result's of a gain of 15 $700 million. Right? 16 A. 700,000. 17 Q. And in exchange for that, there's a 18 loss in spread income of $150,000 in the first 19 year? 20 A. In the first year, right. 21 THE COURT: Now, what's the number of 22 this document again? 12604 1 MR. GUIDO: B1231, Your Honor, and it's 2 previously been admitted. 3 THE COURT: Thank you. 4 MR. GUIDO: I would like now to turn to 5 another set of documents, if I may, Your Honor; 6 and it's the materials that refer to the group 7 managers meetings at USAT. I've marked this 8 packet of materials as A13047, Your Honor; and it 9 is a packet of what's referred to as the group 10 managers staff meeting and group managers 11 bi-weekly staff meeting that were extracted from 12 the Castro warehouse files by counsel for the 13 respondents. And we would like to move the packet 14 of materials into the record. 15 The -- they have -- for some reason, I 16 think that the documents were located at different 17 times and different places; and they have Bates 18 stamps number on them so that the packet of 19 materials is not sequential in terms of the Bates 20 stamp numbers. 21 So, for purposes of identification, I 22 am going to read into the record the dates of 12605 1 those minutes for purposes of identification 2 unless respondents' counsel has a better 3 suggestion. 4 MR. NICKENS: No, Your Honor. I think 5 that's what we should do. What I think happened 6 is that they were located and then they were put 7 in chronological order and -- stamped and then put 8 in chronological order, which had the effect of 9 making these not sequential by number. The 10 easiest way to identify them would be by date. I 11 have no objection to any of these documents. I 12 just want to make sure all of them are in. 13 THE COURT: Are you going to read the 14 dates? 15 MR. GUIDO: I am. The first is 16 November 14th, 1984. The second is November 26th, 17 1984. The third is December 17th, 1984. The next 18 one is December 31, 1984. The next one is 19 January 7, 1985. The next one is January 21, 20 1985. The next one is February 4, 1985. The next 21 one is February 25, 1985. The next one is 22 March 25, 1985. The next one is April 15, 1985. 12606 1 The next one is May 13, 1985. The next one is 2 June 3, 1985. The next one is July 15, 1985. The 3 next one is August 12, 1985. The next one is 4 September 23, 1985. The next one is October 15, 5 1985. The next one is November 4, 1985. The next 6 one is November 25, 1985. The next one is 7 December 16, 1985. The next one is January 6, 8 1986. 9 MR. NICKENS: '86, I believe. 10 MR. GUIDO: Excuse me, Your Honor. 11 '86. The next one is January 27, 1986. The next 12 one is February 18, 1986. The next one is 13 March 10, 1986. The next one is April 1, 1986. 14 The next one is May 6th, 1986. The next one is 15 June 16, 1986. The next one is July 28th, 1986. 16 The next one is September 8th, 1986. The next one 17 is October 20, 1986. The next one is January 26, 18 1987, Your Honor. 19 I move the admission of Exhibit A13047 20 which contains the minutes of those dates, 21 Your Honor. 22 MR. NICKENS: Your Honor, I have no 12607 1 objection. I would ask that the -- since we're 2 putting these all in the same place, that we 3 include the minutes of October 15th, 1985, which 4 is at Bates No. CN715581 and CN715582. 5 MR. GUIDO: That wasn't in my packet? 6 MR. NICKENS: No. You started in 7 November. 8 THE COURT: I believe you said October 9 '85. Do you mean '84? 10 MR. GUIDO: I thought I had it. 11 MR. NICKENS: I thought the first one 12 you called out was November 14th, '84. I 13 apologize. Your Honor, I have no objection. I 14 just had this out of place. 15 THE COURT: All right. Received. 16 Q. (BY MR. GUIDO) Now, I would like to 17 direct your attention to the October 15th set of 18 those minutes which Mr. Nickens just referred to, 19 Mr. Hansen. Is that the document you say you 20 referred to that refreshed your recollection 21 that -- of when you had first joined USAT? 22 A. I wouldn't say it refreshed my 12608 1 recollection, but it was evidence that I was 2 there. 3 Q. Now, I would like to direct your 4 attention to the November 4th, 1985 minutes. It 5 has at the top "attendees" and it lists you as one 6 of the attendees and then it has people who were 7 absent. 8 Do you know who prepared these minutes? 9 A. No, I don't. 10 Q. Did you ever see these minutes before? 11 A. I don't recall seeing them, no. 12 Q. Now, what they -- what they seem to 13 show is that there are matters that are discussed 14 in there. And then on the right-hand side, it has 15 initials of people who are responsible for those 16 tasks. 17 Do you recall attending bi-weekly staff 18 meetings at USAT? 19 A. I don't remember meetings called that, 20 but there were many meetings of all sorts that I 21 went to. So, it's probably not surprising. 22 Q. Were there meetings of department heads 12609 1 that occurred periodically at USAT that you 2 attended? 3 A. Like I mentioned, there were many 4 meetings; and they -- the nature of the meetings 5 and who attended often overlapped and was fluid. 6 Q. Well, take the strategic planning 7 committee meetings. 8 Did Jenard Gross attend those meetings 9 on a regular basis? 10 A. I believe he did. 11 Q. Did Michael Crow attend those meetings 12 on a regular basis? 13 A. I believe he did. 14 Q. Did Ron Heubsch attend those meetings 15 on a regular basis? 16 A. I don't know. 17 Q. Did you attend those meetings on a 18 regular basis? 19 A. I attended some of them, yeah. 20 Q. Did Charles Hurwitz attend some of 21 those meetings? 22 A. I don't know. But going by the 12610 1 documents that I prepared, the minutes, it appears 2 he was at some and not at others. 3 Q. Now, I would like to direct your 4 attention to the November 4 group managers staff 5 meeting. It says -- under "financial matters" -- 6 do you see that? It says, "Purchased $100 million 7 in mortgage-backed bonds last week; shifted to 8 interest rate swaps and collar combination." 9 Do you see that? 10 A. Yes. 11 Q. What does that refer to? 12 A. I don't know. 13 Q. You don't know? 14 A. (Witness shakes head negatively.) 15 Q. Look at Page 2 of the memorandum, 16 second entry from the bottom. 17 A. Page 2 of November 4? 18 Q. Of November 4. 19 A. I only have one page. 20 THE COURT: That's all I have, and part 21 of that is cut off. 22 A. It's hard to read over to the left of 12611 1 the one page I do have, but I don't have a second 2 page. 3 Q. (BY MR. GUIDO) You don't have a 4 second page? 5 MR. GUIDO: I'll just move on, 6 Your Honor. 7 THE COURT: We'll take a noon recess 8 until 1:30. 9 10 (Lunch break.) 11 12 THE COURT: Be seated, please. 13 We'll be back on the record. 14 Mr. Guido? 15 MR. GUIDO: Thank you, Your Honor. 16 Q. (BY MR. GUIDO) I'd like to direct 17 your attention to the minutes of April 1, 1986, of 18 the group managers staff meeting, which is part of 19 Exhibit A13047, please. Look at the 20 next-to-the-last entry. It says, "Junk bonds have 21 come down due to quarter end profit taking/will 22 add $100 million." 12612 1 What is your understanding of the 2 meaning of that entry? 3 A. Well, I was not at the meeting, as you 4 can see. It's very clear what it says. 5 Q. And what does it say to you? 6 A. It says that junk bonds were sold at 7 quarter end to take profits or, in any event, they 8 resulted in profits. 9 Q. All right. Now, we've gone through 10 these minutes of this group managers staff meeting 11 and we've gone through minutes of the strategic 12 planning committee meeting. 13 Based on your experience at USAT, was 14 the purpose of the strategic planning committee to 15 reach consensus on the business plan for the 16 institution going forward? 17 A. The business plan and the action plans, 18 yes. 19 Q. Okay. And was the purpose of the group 20 managers staff meeting for people to receive the 21 directions that were promulgated by the strategic 22 planning committee and implement those plans in 12613 1 their groups? 2 A. I don't think so, no. 3 Q. What do you think the purpose of it 4 was, based on your review of these documents? 5 A. I think the purpose of the management 6 meeting was to get everybody in a room 7 occasionally and surface the issues that needed to 8 be addressed. Based on my admittedly vague 9 recollections, I doubt there was any linkage 10 between strategic planning and staff meetings. 11 Q. Take, for example, this April 1st, 1986 12 set of minutes that I showed you. It was broken 13 down into various subject matters. It says 14 organizational matters, operational matters, 15 financial matters, and legal administrative 16 matters. 17 A. Right. 18 Q. Do you know what the distinction is 19 between those categories? 20 A. Only as a person reading it now. I 21 have no recollection from back then. 22 Q. Well, reading it now based on your 12614 1 experiences at USAT, what do you understand 2 "organizational matters" to mean? 3 A. You know, I can only -- from reading 4 through these minutes, this morning at breakfast 5 was the first I would have any knowledge of that. 6 And I could make the same presumption that anybody 7 could make, which is under "organizational 8 matters," they talk about stuff like employees and 9 political contributions and starting up an 10 insurance company or whatever. 11 Under "financial matters," they are 12 talking about things that have to do with finance. 13 And under "legal administrative," they 14 are talking about various issues that have to go 15 through the legal department is what it looks like 16 to me. 17 Q. Okay. Thank you. 18 Now, let's go back to the binder that 19 I've labeled "strategic planning committee." And 20 I'd like to direct your attention to 21 Exhibit No. 1102, Tab 378. 22 A. All right. This is the one that says 12615 1 "strategy for the next 18 months"? 2 Q. Yes. And this you've described as your 3 views on United's priorities, I think it was 4 described as? 5 A. Right. 6 Q. And I'd like to direct your attention 7 to the third page of the memorandum. It says, 8 "The largest interest rate margin problem is one 9 with which we are just beginning to deal: Real 10 estate. There are 359 million plus non-earning 11 real estate related assets. This uses up a 12 tremendous amount of capital which is very dear to 13 us. All in a complete solution to the real estate 14 problem would provide at least a 50-million-dollar 15 profit swing. This problem dwarfs such problems 16 as excess overhead." 17 What do you mean when you say "all in a 18 complete solution to the real estate problem would 19 provide at least a 50-million-dollar profit 20 swing"? 21 A. I don't remember what it meant exactly. 22 Q. Does that refer to the drag that the 12616 1 real estate has on the interest rate margin of the 2 institution? 3 A. That would be one component of that. 4 It may -- I don't know if I meant this at the 5 time, but it may also refer to being able to use 6 the capital that's tied up into it for a more 7 productive purpose. 8 Q. But you don't know whether it's just 9 the net cost or -- 10 A. No, I don't. 11 Q. -- the lost opportunity? 12 A. I don't know what it was referring to. 13 Q. Now, the next bullet says, "I know that 14 much of this cannot be sold because, quote, 'there 15 are no buyers,' close quote. On the other hand, I 16 think our basic attitude has been, quote, 'we are 17 willing to sell this but we do not have to.'" 18 Quote, "We do not really want to sell 19 in a depressed market," close quote. 20 Quote, "The buyers today are looking 21 for land to steal: If we do a deal with them, it 22 must be by definition -- it must by definition 12617 1 have been a bad deal for us," close quote. 2 Quote, "'We want to retain the ups,' 3 close quote; quote, 'We want cash,' close quote; 4 quote, 'Everybody knows all this land is 5 potentially for sale but nobody comes in the door 6 to make a bid: There must not be any buyers out 7 there,' close quote; quote, 'This real estate is 8 the future of our company,' close quote; quote, 9 'This is good land. So, in three to five years, 10 it will be worth a lot more,'" close quote, 11 period. 12 Whose quotes are those, or are those 13 just illustrative comments that you put in? 14 A. No. Those wouldn't necessarily be 15 comments that any person made. I was not quoting 16 any particular person. These were sort of general 17 attitudes that were expressed. 18 Q. Within USAT? 19 A. To the best of my recollection, yes. 20 Q. And within the strategic -- members of 21 the strategic planning committee? 22 A. I don't know if I was reporting on the 12618 1 strategic planning committee members specifically 2 or the general attitude of everybody at the 3 company or the people involved in real estate. 4 Q. So -- and then it says "Attitudes are 5 changing. We are all searching for a solution to 6 dispose of big chunks of this land. We need to 7 push at all levels as the matter of highest 8 priority. Perhaps also attitudes need to change 9 just a little bit more." 10 Do you see that? 11 A. Yes. 12 Q. And when you say attitudes are 13 changing, what are you referring to there? 14 A. Well, it seems to me that the real 15 estate -- the non-earning real estate portfolio 16 was viewed as the jewels of the company and that 17 if we could -- we had a lot of plans for what we 18 wanted to do in the future, and one of them was to 19 make this real estate into something that was a 20 positive asset for the company rather than a 21 negative one. 22 So, you know, at that time, the real 12619 1 estate situation, as the situation with everything 2 in the Houston area and Texas area, was getting 3 worse and worse and worse and nobody knew how bad 4 it was going to be. 5 So, the general -- consistent with that 6 strategy of the real estate is very valuable and 7 it's going to be great for the company to hold on 8 to it, there hadn't been -- at least, it seems 9 like I was thinking at that point there hadn't 10 been enough of an open attitude as to whether that 11 was really a good idea or not, to hold on to all 12 that. And I think what I was trying to do here 13 was to say not necessarily that we should go out 14 and sell the real estate but that we should 15 examine it with the potential sale of real estate 16 with the same amount of rigor as we did with any 17 of the other activities in the company. 18 Q. So that basically what you're saying 19 is -- in this paragraph, if I understand it -- is 20 that you're questioning whether or not the 21 assumptions that the crown jewels was realistic? 22 A. I don't think I was -- well, yeah, to a 12620 1 certain degree. But I think what I was trying to 2 get accomplished was more to approach the problem 3 in an analytical way rather than a feeling that 4 this is is just a long-term investment that we 5 want. 6 Q. So, was it fair to characterize your 7 views at the time that you were essentially saying 8 that you thought that people should have more of 9 an open mind about what the alternatives were -- 10 A. Correct. 11 Q. -- in dealing with the real estate drag 12 on earnings? 13 A. That -- I think that's -- that's what I 14 recall, and that's what the memo seems to say. 15 Q. Now, did -- what happened to your views 16 when you expressed them? Do you recall? 17 A. I believe that people were -- not 18 necessarily because I expressed it, but that I 19 noted here attitudes are changing and I hoped they 20 would change a little bit more. It was an 21 evolving process. 22 Q. But subsequent to that, there were 12621 1 efforts made to examine alternative ways of 2 disposing of the real estate owned by USAT? 3 A. I'm not sure exactly if it was before 4 or after this, but there were increasing efforts 5 to do that, yes. 6 Q. And was that in recognition of the fact 7 that the drag may be too much for USAT to bear and 8 that it had better dispose of those assets? 9 A. Well, I think everybody was always very 10 clear from the beginning that it was a drag. 11 Q. Okay. 12 A. That wasn't a new revelation. 13 Q. No. I said a drag that was too great 14 to bear. 15 A. I don't know if it was a recognition, 16 particularly at this time, that it was too great 17 to bear; but there was certainly recognition 18 hopefully that maybe we had some other options 19 that we should consider. 20 Q. Okay. Now, I'd like to direct your 21 attention to the Tab 335, which is T4246. It's 22 your September 8th memorandum on growth and 12622 1 capital strategy, the next six months. And 2 particularly, I want to direct your attention to 3 the conclusions that I directed your attention to 4 before, but I want to ask you some questions about 5 a different aspect of it. 6 It says, "A, United probably has enough 7 capital to avoid a supervisory letter if scheduled 8 items do not exceed $400 million." 9 What was the consequence of the 10 supervisory letter? 11 A. I'm not completely sure. 12 Q. Was one of the consequences of the 13 supervisory letter that USAT could not invest in 14 high-yield bonds? 15 A. I don't know. 16 Q. Now, turn to the second page of the 17 document under 4, under that section that United 18 probably has enough capital to avoid a supervisory 19 letter of schedule if scheduled items do not 20 exceed 400 million. 21 Item No. 4 says, "The major danger is 22 that the examiners will require an increase in 12623 1 scheduled items to greater than 400 million. We 2 should know the answer to this next week and can 3 plan accordingly thereafter." 4 Do you see that? 5 A. Yes. 6 Q. What does that refer to? 7 A. Again, I have no recollection from back 8 then. But looking at it today, what it appears to 9 refer to is that the examiners are in looking at 10 the loans and the real estate investments, that 11 they will ask us or will, in discussion with them, 12 decide to make some of them scheduled items, and 13 we don't know whether it's going to be over 400 14 million or not. 15 Q. Now, I want to turn your attention 16 to -- excuse me. 17 At that time, did you know that there 18 was a dispute with the examiners about the amount 19 of scheduled items that had to be recognized by 20 USAT? 21 A. No, not specifically a dispute. I 22 mean, I know that we discussed it with them from 12624 1 time to time. 2 Q. Now, let's take a look at one more 3 document; and that is at Tab 873, 4309. And that 4 is your memo dated November 17th, 1986 regarding 5 the strategic planning committee. And I want to 6 direct your attention to the Item No. 8. 7 "We want to grow" -- it says "Growth: 8 We want to grow to overcome our poor ongoing 9 earnings situation." 10 Is that a reflection that this is -- 11 memorandum is a set of conclusions that were 12 reached by the strategic planning committee at 13 November 17th, 1986? 14 A. I don't think there is any way to know. 15 I don't remember if I was generally making notes 16 about things that were discussed or if I was 17 writing down conclusions. 18 Q. Now -- then it says, "This situation is 19 caused primarily by real estate but also by 20 swaps." It's referring to the poor ongoing 21 earnings situation. 22 A. Right. 12625 1 Q. What was it about the swaps that 2 created a poor ongoing earnings situation? Was it 3 the mismatch that we talked about between the 4 mortgage-backed securities and the swaps that we 5 discussed earlier? 6 A. Well, I don't -- I wouldn't use -- I 7 think I know what you mean, but I wouldn't use the 8 term "mismatch." 9 Q. Okay. What would you use? 10 A. I thought -- if you saw the scenario 11 analysis, you could see it was fairly well 12 balanced. It wasn't biased towards rates rising 13 or falling. So, it seems to me the situation was 14 still fairly well matched. So, there was not a 15 mismatch; but they had had the issue of the 16 mortgages prepaying. 17 Q. Okay. And it resulted in the reduction 18 in the spread so that it came down to a minus 108 19 I think you said in your December memorandum? 20 A. That's what it looked like, right. 21 Q. And is that what you're referring to 22 here? 12626 1 A. I would presume so. 2 MR. GUIDO: No further questions, Your 3 Honor. 4 THE COURT: Cross-examination? 5 MR. NICKENS: Thank you, Your Honor. 6 7 EXAMINATION 8 9 Q. (BY MR. NICKENS) Mr. Hanson, I'd like 10 to ask you a few questions about your experience 11 at United Savings. 12 You were there for, what, just over a 13 year or so? 14 A. Right. 15 Q. And tell the Court what you did after 16 you left United Savings. What kind of experience 17 you've had in the last 12 years or so? 18 A. I joined Merrill-Lynch, as I mentioned 19 earlier, in their San Francisco office as a 20 salesman, institutional salesman with banks and 21 savings and loans as clients where we -- I engaged 22 in -- with those savings and loans primarily in 12627 1 trading activities, risk-controlled arbitrage-type 2 of activities, hedging, overall balance sheets, 3 asset/liability management, bringing in 4 Merrill-Lynch's corporate finance people to help 5 them do CMOs and securitizations and that sort of 6 thing. 7 Q. Let me ask you to pause there. 8 Was your experience immediately after 9 USAT with these other institutions -- this was on 10 the West Coast? 11 A. Right. 12 Q. Was it -- was your view -- were their 13 problems different than those of United Savings? 14 A. There were a reasonable number of 15 companies both in the western region and also, 16 since I was aware of what was going on with the 17 rest of Merrill-Lynch's clients, as well, across 18 the country who had done the same thing. The 19 typical problem on the West Coast was a little bit 20 different since, primarily, the companies out 21 there were adjustable rate lenders rather than 22 fixed rate lenders, but there were certainly 12628 1 examples of the same thing. 2 Q. Were the sorts of things that people 3 were doing to try to address their problems 4 different from those that you found at United 5 Savings? 6 A. No. 7 Q. Now, after this experience at 8 Merrill-Lynch, what did you do? 9 A. I left and joined a gentleman by the 10 name of George Bull at his company, GB Capital. 11 Q. And what was their business? 12 A. GB Capital was in the business of 13 advising savings and loans and, to a lesser 14 degree, banks on their asset/liability management 15 for the whole institution and instituting hedging 16 policies to help them achieve their goals. That 17 was his first business. 18 Second business was -- it was in the 19 business of helping banks and savings and loans 20 buy mortgage-backed securities and mortgages, put 21 them on repo, and hedge them. 22 Thirdly, it was in the business of 12629 1 acting as a registered investment advisor managing 2 mortgage portfolios for a variety of different 3 types of institutions. 4 And later in 1991, we got into the 5 business of helping to rehabilitate failed life 6 insurance companies. 7 Q. And was there anything about that 8 experience that led you to believe that what had 9 happened at USAT was peculiar in any way? 10 A. No. We had a number of clients where 11 we were called in even in -- you know, in the 12 Nineties where exactly the same thing had 13 happened. 14 Q. Now, I want to -- I mean, I want to go 15 back to your experience at United Savings. I 16 realize that's been a long time ago. I noted that 17 in many answers to Mr. Guido's questions, you 18 would say "I presume." 19 What did you mean to signify by, if you 20 might, qualifying your answer in that way? 21 A. Well, I do have some vague 22 recollections of what happened back then. So, I 12630 1 tried to -- and some are very clear. Not very 2 many. So, I was trying to say -- if I answered 3 the question definitively, I was trying to denote 4 that I remembered that reasonably clearly. If I 5 said "I have a vague recollection," that's what it 6 was. And if I said "I presume," it means I don't 7 remember anything from back then but I can read 8 these memos and come up with some presumption 9 about it. 10 Q. You're giving your best judgment today 11 based upon 12 years having passed and a lot of 12 experience in the savings and loan industry. 13 Right? 14 A. Yeah. One of the problems is since I 15 continued doing the same thing, it's hard for me 16 to remember what I knew back then versus what I 17 might have learned later. 18 Q. Now, with regard to your experience at 19 United Savings, describe for the Court what your 20 duties and responsibilities were. We've seen a 21 locality of your documentation. 22 If you could, explain to us what you 12631 1 understood to be your role in the organization. 2 A. Well, it was very unclear. I was hired 3 to help Jenard, whatever that means, and to use 4 my -- whatever skills I had as a consultant or 5 analyst from prior jobs and experiences to see if 6 I could help United Savings in any way that I 7 could. 8 Q. In connection with exercising those 9 responsibilities, were you denied access to any 10 information? 11 A. No. 12 Q. Did you have the ability to go to 13 anybody you wanted to and to ask them questions 14 about what was going on in their area? 15 A. Absolutely. 16 Q. Did you ever have the feeling that you 17 were shut off from information concerning the -- 18 what -- how the institution was working? 19 A. No. 20 Q. What was your general sense of what the 21 management of USAT was doing during the period 22 that you were there? And I'm talking about in 12632 1 terms of how to deal with -- identifying the 2 problems they had and how to deal with them. 3 A. Well, they were doing exactly that. 4 There were five or six sort of senior executives 5 in the bigger group of other executives that were 6 more like department heads who met frequently, as 7 I indicated, in kind of a fluid basis always 8 trying to figure out what would be the best thing 9 to do about the various issues that faced the 10 company. 11 Q. And did you have the sense that they 12 were paying attention to those problems? 13 A. Yeah. 14 Q. Now, what was the condition of the 15 institution when you first arrived in October of 16 '85, if that's the correct date? 17 A. I'm not sure that I really knew because 18 I had not been involved in that many financial 19 businesses before. My impression, which might be 20 somewhat colored by my personal experience -- I'm 21 not sure -- is that there was a feeling right when 22 I joined that -- I think that there had been a 12633 1 little bit of job -- or the job growth in Houston 2 or Texas had stopped going down, stopped being 3 negative, and that there was a chance that there 4 was kind of -- maybe we were -- it wasn't going to 5 be so bad in the future. There was some optimism. 6 Q. And what were people -- what was the 7 attitude of the people that you worked with in 8 terms of addressing whatever problems you had? 9 A. Problem -- I didn't have any problems. 10 Q. The problems that the institution had. 11 A. Well, trying to do what a prudent 12 person would do. 13 Q. Did you ever have any sense that 14 somebody was doing something reckless? 15 A. No. I did from time to time question 16 the equity arbitrage portfolio because I didn't 17 understand it very well and it seemed somewhat 18 volatile. Aside from that, no. 19 Q. With regard to the mortgage-backed 20 securities, did you -- was that an area where you 21 had some experience, right, or developed some 22 experience? 12634 1 A. I didn't have before I went, no. 2 Q. Well, with regard to the experience 3 that you had since that time, did you -- do you 4 regard what United Savings was doing in that area 5 as being reckless? 6 A. No. It certainly wasn't reckless. 7 Might have been ill-advised, but it wasn't 8 reckless. 9 Q. Ill-advised in light of what you now 10 know? 11 A. Right. 12 Q. Did you feel it was ill-advised at the 13 time? 14 A. No. 15 Q. Now, was there a sense at United 16 Savings that at various points in time that you 17 sort of had turned the corner? 18 A. I don't think there was -- no, there 19 wasn't concrete evidence of turning the corner. 20 It was -- there was hope that the corner was 21 coming, but there wasn't any concrete evidence of 22 it. 12635 1 Q. Now, let me ask you -- well, and United 2 Savings sought out various advisors about how to 3 deal with their problems, correct? 4 A. Right. 5 Q. I mean, we've seen evidence in your 6 documentation about analyzing Goldman Sachs, 7 Salomon Brothers, Smith Breeden, other consultants 8 and investment bankers. Right? 9 A. Right. 10 Q. Now, what was the -- did a consensus 11 develop that -- that the solution to the problem 12 was to grow out of the problem? 13 A. I think so, yes. 14 Q. And could you explain to the Court what 15 that meant? What was the idea of growing out of 16 the problem? 17 A. Well, if you have capital tied up in 18 investments that are either going bad, like 19 commercial real estate loans or single-family 20 loans for that matter, and you also have it tied 21 up in real estate that's non-earning, for 22 instance, owning land, that capital is sunk. I 12636 1 mean, you can -- unless you radically restructure 2 it. 3 So, the way that every -- you know, a 4 the very normal thing to do in that circumstance 5 is to look for ways to grow and add new assets 6 that are prudently managed and try to earn 7 something from that in order to get your source of 8 growth or profit growth. 9 Q. Now, I want to ask you some questions 10 about who -- your perception of who ran USAT. 11 I'll ask you: Who ran USAT from your perspective? 12 A. Jenard. 13 Q. And under him, who was running the 14 institution? 15 A. Jerry Williams, to some degree. But it 16 was really kind of a group sort of situation 17 really. 18 Q. What was the role of the board of 19 directors of USAT from your perspective? 20 A. Not much. 21 Q. What was your perspective of the board 22 as far as their interest and competence? 12637 1 A. They had regular board meetings. They 2 wanted -- there were various requests for 3 information that would come down from time to 4 time. And although I can't remember who, there 5 were some board members that seemed to take some 6 interest. 7 Q. Was there a committee system at USAT? 8 A. "System" might be too strong of a word. 9 There were definitely committees. 10 Q. And you attended these committees? For 11 example, the asset/liability committee, the 12 investment committee? 13 A. Usually. 14 Q. The loan committee? 15 A. Right. 16 Q. Who was looking -- when you arrived and 17 as you developed, who was it that was looking over 18 the mortgage-backed securities risk-controlled 19 arbitrage portfolio? 20 A. Ron Heubsch and Joe Phillips. 21 Q. And who had responsibility for its 22 day-to-day operation among the two of them? 12638 1 A. Joe did. 2 Q. Now, are you familiar -- Mr. Guido has 3 asked you some questions about the roll-down, 4 which -- you had just arrived at the time that 5 occurred. Right? 6 A. Right. 7 Q. Were you -- do you have any 8 recollection of even being aware of the fact of 9 the roll-down? 10 A. No. Only afterwards in discussions of 11 it. 12 Q. Now, is there any question that that is 13 one of the proper responses to a risk-controlled 14 arbitrage that is experiencing a duration mismatch 15 caused by unexpected prepayments? 16 A. By falling rates, yeah. That is one of 17 the responses. 18 Q. And are you familiar with the term 19 "whipsaw effect"? 20 A. Sure. 21 Q. Could you explain to the Court what 22 that is? 12639 1 A. When you do, for instance, any kind of 2 hedging or related activity. If you run a 3 scenario analysis, which is what people frequently 4 do, you -- the easiest thing to do is you assume 5 rates are down a hundred, rates are down 200, or 6 rates are up 300, whatever, and you fail to take 7 into account what might happen if rates went up 8 and then down and then up and then down. And 9 that's called whipsaw, various other things that 10 you might not have anticipated could happen in 11 that sort of scenario. 12 Q. And what -- what effect does that 13 possible scenario have upon someone who's trying 14 to decide whether they should roll down? 15 A. If you roll down and then the next -- 16 if rates go down and they go down to whatever your 17 trigger point is where you've decided that you 18 want to act and then you decide to do something, 19 then rates could go back up the next day. 20 Q. And then you -- 21 A. And then you would have been better off 22 if you hadn't done what you just did. 12640 1 Q. Looking back on it, you would have said 2 you shouldn't have done that? 3 A. It might not have been as bad as that. 4 But on balance, you would have wished you didn't 5 do it. 6 Q. Now, I'd like to ask you to look at a 7 document that Mr. Guido asked you about which is 8 at Exhibit B3813, which was admitted today, which 9 is your memorandum of June 18th, 1986, entitled 10 "mortgage-backed security arbitrage." 11 A. Is that one of the loose ones that's 12 not in the binder? 13 Q. It's a loose one, yes. 14 A. Okay. 15 Q. Now, I want -- 16 MR. GUIDO: Which exhibit is that 17 again? 18 MR. NICKENS: 3813. 19 Q. (BY MR. NICKENS) Exhibit 3813, which 20 is the review that you did of some tapes that you 21 had received about -- from an American Banker 22 Conference. Right? 12641 1 A. Right. 2 Q. And do I understand correctly that you 3 were trying to record and distribute to others 4 what it was that these people were saying to -- at 5 the American Banker Conference? 6 A. I think that's right, yeah. 7 Q. So, does this reflect your views or 8 were you merely recording what you heard on those 9 tapes? 10 A. I believe what I was doing was 11 recording what I heard on the tapes. 12 Q. Now -- and by that, when you say "I 13 believe," you don't recall? 14 A. Correct. 15 Q. But looking at it and reviewing it 16 today, that is your best guess as to what you were 17 doing? 18 A. Well, it's a little bit more than that. 19 I don't think I would have -- well, I'm just -- 20 maybe that's a false assumption. I'm sorry. I 21 don't think by June I would have developed a 22 strong enough sense of how to do this that I would 12642 1 be confident enough to contradict experts at it. 2 Q. Now, what had been the experience of 3 those people that had risk-controlled arbitrages 4 in the first quarter of 1986? 5 A. I don't know what happened in the first 6 quarter of 1986. 7 Q. Are you familiar with the phrase 8 "always fighting the last war"? 9 A. Sure. 10 Q. What is your understanding of that 11 phrase in a generic sense? 12 A. That generals are famous for doing it. 13 It's an analogy that can be used elsewhere where 14 you learn something from the last war that you 15 should have done better and you focus only on that 16 and you think that that's going to be your problem 17 in the next war but, in fact, some other problem 18 is your problem and you're not prepared for it. 19 Q. And in each of these instances, if we 20 look back to what Mr. Sullivan and Mr. Toevs and 21 Mr. Smith were saying, they were talking about 22 beware of falling rates? 12643 1 A. Correct. 2 Q. And Mr. Guido asked you some questions 3 about the document -- and let me ask you to look 4 the first page, the next-to-last item. Could you 5 read that for the record? It starts out "if you 6 fully hedge." 7 A. The first page? 8 Q. The first page of the document at the 9 next-to-last -- 10 A. Oh, it's the last one on this one. 11 Q. Oh, I'm sorry. You're looking at 12 the -- 13 A. At the retyped copy. 14 Q. Yeah. Let me make sure we're on the 15 same page. On the retyped copy, it's the very 16 bottom item. 17 A. "If you fully hedge yourself using 18 conventional measures of duration matching and 19 then rates fall, you lose big." 20 Q. Now, did you have any understanding 21 that that is what had happened to a lot of people 22 in the first quarter of 1986? 12644 1 A. I couldn't say it was in the first 2 quarter of 1986, but it was clearly something that 3 had happened to a lot of people. 4 Q. In the fairly recent past? 5 A. Right. 6 Q. Now, on the second page -- let me get 7 us on the same part. Just above the reference to 8 Mr. Toevs, could you read for the Court what it 9 says there in that entry? 10 A. "The best way to account"? 11 Q. Yes, sir. 12 A. "The best way to account for returns is 13 to allow the portfolio to retain any profits. 14 Profits create capital. The portfolio should be 15 credited with a rate of return, 15 to 20 percent, 16 on its gains." 17 Q. Now, do you have any recollection of 18 that particular point that you made back nearly 12 19 years ago? 20 A. I can't tell you what I thought about 21 it at the time. 22 Q. Okay. Now, could you tell us, based 12645 1 upon the 12 years of experience that you've had 2 since, what you believe it -- you were referring 3 to or what, I guess, Mr. Sullivan was referring 4 to? 5 A. Sure. If you sell -- let's say that in 6 the process of managing a risk-controlled 7 arbitrage you sell a security at a gain or a loss 8 and you account for it that way. Then the -- if 9 you sold something at a loss, usually but not 10 always, your resulting spread income in the future 11 will be higher. If you sell something at a gain, 12 usually but not always -- and holding all other 13 factors equal -- your future spread income will be 14 at a loss or will be lower than it was before. 15 But what you haven't taken into account is the 16 fact that you have created this capital in this 17 sense: If you sell a bond for a loss, you got rid 18 of capital. It means that you can't use that 19 capital somewhere else in the company. If you 20 sell a bond at a gain, you can use the capital 21 somewhere else. Presumably you can make a rate of 22 return on it and that should offset whatever the 12646 1 lower income is that you're getting from the 2 portfolio. 3 Q. And in this particular case, we see 4 Mr. Sullivan referring to a capital rate of 15 to 5 20 percent. Right? 6 A. Right. 7 Q. What is your understanding of that 8 calculation? 9 A. That would be his assumption of what 10 you might be able to do alternatively with the 11 amount of capital that you've created when you 12 sold something at a gain and took it out of the 13 portfolio. 14 Q. Now, we see this theme in various 15 documents that you have referenced today. 16 Was there consideration after the 17 accounting change for the -- well, let me ask you 18 this: Was it your understanding that, in the 19 early part of 1986, USAT was accounting for the 20 roll-down -- that is, where they sold securities 21 at a gain and replaced them with other securities 22 in the arbitrage -- that they were accounting for 12647 1 those gains by reducing the basis in the 2 securities that replaced them? 3 A. Well, two points. I'm not sure you 4 said that right, first of all. 5 Q. Okay. 6 A. But secondly, I did not remember that. 7 But through reading through these memos, that 8 appears to be what the case was. 9 Q. And there came a point -- do you recall 10 that there came a point where the accounting 11 advice changed and the company had to restate the 12 first quarter earnings and redo the way it was 13 handling its books for the second quarter? 14 A. I didn't remember that. 15 Q. Do you recall a reference in the 16 documents that we looked at to an accounting 17 change leading to the consideration of a decision 18 point for whether or not you should buy or 19 retain -- sell or retain a security? 20 A. Yeah. That was in one of the 21 documents. 22 Q. Tell us what you understand that to 12648 1 mean, that process to mean. 2 A. Well, I think it's related to the 3 change in accounting. In other words, if you're 4 going to have a leveraged hedge portfolio, you 5 want to rebalance from time to time. The 6 accounting treatment that it appears that United 7 was following was highly favorable to that because 8 you could sell securities without worrying about 9 whether you were creating a gain or a loss and you 10 could just retain the basis in the old securities, 11 which means that you didn't want to rebalance a 12 lot because of transactions costs but you didn't 13 have to worry about what your effect was on your 14 profits. 15 One of the reasons why savings and 16 loans generally didn't work for them to do 17 risk-controlled arbitrage over time, although some 18 are still trying, is that they would get to a 19 point where they needed to rebalance and, in order 20 to keep their profits steady or whatever they were 21 trying to accomplish on the profit side, they 22 would -- they wouldn't rebalance because it would 12649 1 have a profit effect. It would either create a 2 loss or a gain that they didn't want to take at 3 the time. 4 So, with the old way of accounting at 5 United -- which I had forgotten about but I read 6 in the memo -- that made risk-controlled arbitrage 7 a lot easier to do. Once the accountants made 8 them change it, then all of a sudden every time 9 you sold something, it might create a certain 10 number of cents per share gain or loss for that 11 quarter which you now had that additional 12 consideration you needed to take into account. 13 Q. And you had to take into account 14 whether or not it was advisable to take that gain 15 and put it to work elsewhere or to leave it in the 16 risk-controlled arbitrage? 17 A. Exactly. 18 Q. And to evaluate whether the loss in 19 accounting spread income, account yield that would 20 occur from taking that gain, was offset or 21 exceeded by the gain that you could get from 22 putting your assets to work in a different place? 12650 1 A. That's exactly how you would analyze 2 it. 3 Q. And was it part of your job to do that 4 analysis? That is, to suggest to the institution 5 that this was something that had to be looked at 6 and we needed to know from management what the 7 decision point was? 8 A. I think it would be part of my job to 9 suggest it. It wouldn't be part of my job to 10 calculate it on a day-to-day basis. 11 Q. You just wanted to make sure people 12 were thinking about that in an analytic way? 13 A. Correct. 14 Q. And was the management of USAT 15 receptive or not receptive to that kind of 16 analytic thinking? 17 A. I think they were quite receptive to 18 it. 19 Q. Now -- and do you regard that a measure 20 of poor management or good management? 21 A. That they were receptive to it? 22 Q. Yes, sir, that they were looking at 12651 1 those kind of issues. 2 A. That would be good management. 3 Q. Now, let me ask you to look down at 4 some of the comments of Mr. Toevs. I believe it's 5 the fifth one down which starts out, "the real 6 duration." 7 Could you read that for the Court? 8 A. "The real duration of a mortgage-backed 9 security is less than any standard mathematical 10 calculation will give you. It's easy to overhedge 11 by mistake." 12 Q. And do you have any understanding today 13 of what might be referenced there? 14 A. That's the same thing I was talking 15 about earlier. If you use -- if you pull out a 16 bond mathematics book and you calculate duration 17 or modified duration or any of the standard terms, 18 it will tell you to hedge mortgages one way. But 19 what that calculation doesn't take into account is 20 the prepay option that you've sold to the 21 borrower. Therefore, the real duration -- or 22 effective duration is another way to say it -- or 12652 1 empirical duration is a lot shorter. 2 Q. Now, further in the document, let me 3 ask you to look at the paragraph that starts out 4 just below "to rebalance or not." 5 A. I'm sorry. Where? 6 Q. It's on the bottom of the second page, 7 towards the bottom of the second page, 8 next-to-the-last paragraph. 9 Could you read that for us? 10 A. I'm sorry. You want me to read it? 11 Q. Yes, please. 12 A. "To rebalance or not. If you do not 13 rebalance and rates go way down for a while and 14 then come back up again, you've lost some spread 15 but you are in okay shape. If you do not 16 rebalance and rates stay down, you are in very big 17 trouble. If you do rebalance as rates fall, asset 18 yields will fall. You will be realizing gains, 19 but the losses on the liability side will be 20 larger than the gains on the asset side. If rates 21 go back up again, you will have to recognize 22 losses in the asset portfolio in order to 12653 1 rebalance. So, if you rebalance and rates stay 2 down, you did the right thing. If they go back up 3 again, you lose." 4 Q. And is that a description of the 5 dilemma that a portfolio manager faced in the 6 question about rebalancing in 1986? 7 A. Well, if it was before the accounting 8 change, the reference in here to worrying about 9 taking losses or realizing gains would not have 10 been a factor. But if it was after, it would have 11 been. There's other factors in there, too. But 12 that particular accounting point would have 13 changed at that point. 14 Q. And how does that description relate 15 to -- earlier to what you told the Court about the 16 whipsaw effect, if at all? 17 A. That's what it's describing. 18 Q. Now, there's been some reference in the 19 case to Drexel. 20 What was your observation of the 21 business relationship, if any, between Drexel and 22 United Savings? 12654 1 A. They were one of the investment banks 2 that we used on the mortgage side, and then they 3 were the leading mortgage bank -- sorry -- 4 investment bank in the junk bond industry. 5 Q. And what do you mean by "leading"? 6 A. They had predominant market share. 7 Q. And if -- let me ask you this: If you 8 were going to do business in the junk bond area, 9 would it have been desirable to avoid doing 10 business with Drexel? 11 A. No, it would have been highly 12 undesirable. 13 Q. And why is that? 14 A. Because the -- I don't know what 15 percentage of the market that they had at that 16 point, but it was very high. So, if you tried not 17 to do business with them, you probably would have 18 gotten bad deals. 19 Q. In all of the discussions that you were 20 privy to or that you participated in, did you ever 21 see any evidence of any special relationship 22 between United Savings and Drexel Burnham Lambert? 12655 1 A. No, I didn't. 2 Q. Did you ever see any relationship other 3 than an ordinary business relationship between 4 those two companies? 5 A. Between those two companies? 6 Q. Those two companies. 7 A. No. 8 Q. Now, I want to ask you a few questions, 9 Mr. Hansen, before we look into some of the issues 10 in the documents concerning the Smith Breeden 11 relationship. 12 You went and talked to Smith Breeden on 13 a number of occasions, correct? 14 A. Right. 15 Q. And you participated in evaluating 16 various proposals they made for the company, 17 correct? 18 A. Correct. 19 Q. And there came a time when the 20 relationship was terminated. 21 Do you recall that, or have you been 22 reminded of that? 12656 1 A. I've been reminded of it. I didn't 2 recall it. 3 Q. What was your sense of the reasons why 4 the relationship was not continued? 5 A. Well, I think that we hired them 6 initially on a one-time project to help us 7 reevaluate or to get a third opinion on what the 8 interest rate risks were in the balance sheet as a 9 whole and what might we do about it. And once 10 they gave us that information and we had gotten 11 what we wanted from them, the next step was to go 12 into an ongoing relationship of portfolio 13 management with them. And United decided not to 14 take that step. 15 Q. And do you have any recollection of 16 what the reasons why -- for not taking that next 17 step. 18 A. I don't, although I don't -- I didn't 19 until I read a memo relating to that. 20 Q. Let me see if I can find that for you. 21 And I'm referring to a memorandum dated 22 October 30th, 1986, from Mike Crow to the 12657 1 investment committee. 2 MR. NICKENS: Which, Your Honor, is a 3 part of Exhibit A1415, which can be found at Tab 4 346. 5 MR. GUIDO: What is the exhibit number? 6 MR. NICKENS: A1415. I believe those 7 are investment committee minutes. We'll get it 8 for you, Mr. Hansen. 9 Q. (BY MR. NICKENS) Is Mr. Crow's memo 10 of October 30th the one that you were referencing? 11 A. I don't recall. 12 Q. You're looking -- this is a part of a 13 longer document. If you could look toward the 14 back of that document. It's Page 7414 on the 15 Bates number, I hope. 16 A. Are those Bates numbers? 17 Q. Yes. Well, it's different than mine. 18 Let me find it for you, if I might. On this copy, 19 the Bates number appears to be 376. 20 Now, is that the memorandum that you 21 referred -- you reviewed earlier that reminded you 22 of the termination of the Smith Breeden 12658 1 relationship? 2 A. Right. 3 Q. Mr. Crow, in the memorandum, is 4 reporting on a discussion with Doug Breeden. And 5 in the first paragraph, he states that "Doug 6 stated that their usual working relationship with 7 clients was one where the client took their advice 8 and executed the trade without any in-depth 9 analysis or questioning. Smith Breeden is 10 offended by Sandy Lorenson's question as well as 11 the groups that we have sent to North Carolina to 12 review their process: Bruce Williams, D. Hansen, 13 and J. Wolfe." 14 And at the beginning, he says -- let's 15 see if I can. Well, was it consistent with your 16 observation at United Savings that there was a 17 culture of asking questions and trying to get 18 answers? 19 A. Yeah. 20 Q. And with regard to the matter described 21 here, is that consistent with a clash of cultures 22 that Mr. Crow refers to? 12659 1 A. Yes, it is. It would be hard for me to 2 imagine anybody there being willing to just turn 3 over trading to an outside firm without knowing 4 what was going to happen or why. 5 Q. Do you see anything wrong with that? 6 A. Well, no. I mean, you know, Smith 7 Breeden had a very good reputation. So, 8 potentially, we were turning our backs on somebody 9 who knew a lot. But if what is said in this memo 10 is right, that they -- they had poor response 11 time, they weren't giving us any attention, they 12 didn't answer our questions, then that was 13 probably the right response. 14 Q. And from a point of view of trying to 15 run an institution, do you see anything wrong with 16 answering -- asking questions and demanding is 17 that you get answers? 18 A. You have to do that. 19 Q. Now, with regard to your overall 20 impression of the management of USAT and looking 21 back at it after 12 years of absence, what is your 22 impression in terms of their diligence or lack of 12660 1 attention to detail and to what their job was? 2 A. I think they had a lot of attention to 3 detail and diligence. 4 Q. Would it be fair to describe this group 5 of managers as talented? 6 A. Yeah, I think so. I don't think that 7 they would win, you know, Forbes' management team 8 of the year award or anything like that; but, 9 yeah. Particularly with respect to their 10 competition in the savings and loan industry, yes, 11 I would call them talented. 12 Q. Well, why -- in terms of that 13 competition, what is your impression of why this 14 group of people was at United Savings? 15 A. Well, I think most of the people came 16 from one of the big Texas banks -- I can't 17 remember which one -- a couple of years before I 18 got there. And I think that they were there 19 trying to develop the institution. I think we 20 were the largest or the second largest or the 21 third largest savings and loan in the state, and 22 the perception was that there was a lot of 12661 1 opportunity to do a lot of interesting things if 2 we could sort of get the real estate problem 3 behind us. 4 Q. And the real estate problem being that 5 you had a lot of assets on your books that were 6 not performing? 7 A. Right. 8 Q. And as to everything you tried, 9 ultimately it came back down to the fact that you 10 had a large amount of non-performing assets on 11 your books? 12 A. I think it was that and the goodwill. 13 Between those two things, the institution started 14 off every quarter with a huge negative operating 15 earnings caused by non-earning assets, direct real 16 estate investments, and goodwill. And so, the 17 question was how long would that continue and what 18 should be done about it? 19 Q. Let me ask you -- Mr. Guido went 20 through the documents pretty much chronologically, 21 and I'm going to try to do the same just because 22 there are so many of them. And I have relatively 12662 1 pointed questions about them. And so, if you 2 could get those in front of you, I'll try to go 3 through them as quickly as we can. 4 Let me ask you -- let's start with 5 Exhibit A10623, which is your -- 6 A. In the binder or separate? 7 Q. It's in the binder, and it's the 8 memorandum of April 17, 1986, entitled "Mustang 9 Island follow-up." 10 Okay. Mr. Guido, among other 11 questions, asked you about Paragraph 4 with regard 12 to profit targets and swaps and some of the other 13 items. 14 First of all, let me ask you this 15 question: Do you see anything wrong with having 16 strategic meetings among management to discuss 17 where the institution was going and what its 18 problems were? 19 A. Of course not. 20 Q. Was there anything that you could tell 21 that was nefarious about getting together to 22 discuss various strategies to deal with their 12663 1 problems? 2 A. It would be ridiculous not to. 3 Q. And specifically, was there anything 4 unusual, out of the way, or anything that -- even 5 looking back at it 12 years later -- about 6 management trying to plan and manage its quarterly 7 results? 8 A. No. 9 Q. Would you tell the Court your 10 experience with regard to that specific issue that 11 you're familiar with at other institutions and 12 other companies, public companies? 13 A. Well, I'm the president of a public 14 company; and we pay attention to our quarterly 15 earnings. We probably would rather not do that, 16 but all of our analysts and shareholders care 17 about it a lot. 18 Q. And what is the nature of the kinds of 19 planning that you see that people do in 20 relationship to quarter or year end results? 21 A. Well, every company has a certain 22 amount of discretion, essentially discretion, as 12664 1 to how much profits they can show from quarter to 2 quarter. Some industries have more or less of 3 that. In the case of a savings and loan, the main 4 discretion they have is whether they sell 5 securities or loans at year end or quarter end in 6 order to create gains. So, we are essentially a 7 financial institution and our competitors and 8 banks and savings and loans sell stuff at profits 9 at the end of every quarter if they feel like it. 10 Q. Do you see anything at all unusual 11 about that even 12 years later? 12 A. Well, I don't think that it's -- you 13 know, I don't think it's the recommended practice 14 that you would follow if you were in fantastic 15 shape. I mean, the best thing to do is get spread 16 earnings and have them go up perfectly every 17 quarter; but that doesn't always happen. 18 Q. Well, let me ask you: When you wrote 19 this memo and sent it to Mr. Gross, Mr. Munitz, 20 Mr. Williams, Mr. Crow, Mr. Berner, Mr. Bruce 21 Williams, did any of them come back to you and 22 say, "Doug, you can't be writing down stuff like 12665 1 this. If anybody ever found out that we were 2 doing planning for quarter's end, you know, it 3 would all be over"? Anybody ever say anything 4 like that? 5 A. No. 6 Q. Well, you wrote down "timing of gains." 7 Surely there was something terrible to try to time 8 your gains for quarter end results. 9 A. If you read analyst reports of banks 10 and savings and loans and institutions similar to 11 ours, every quarter they will say, "This 12 institution earned this amount of money," say -- 13 pick a number -- "20 cents per share for this 14 quarter and 3 cents of it was gains or zero cents 15 was gains or 50 cents was gains." 16 So, I mean, other people do it all the 17 time. There's no -- it's not -- the analysts 18 aren't writing it down -- they may or may not 19 think it's the best thing for the institution to 20 be doing at that particular time, but they are not 21 writing it down like it's something bad. 22 Q. Now, would ignoring quarter end results 12666 1 be good management or poor management for a public 2 company? 3 A. Well, I think, like I said, what you'd 4 like to do is ignore quarter results because they 5 don't mean a lot in the long run. What you really 6 like to do is have long-run success. But 7 unfortunately, as a public company, you don't have 8 that luxury because the stock market and the 9 analysts go off quarter to quarter. 10 Q. Now, there's a reference that Mr. Guido 11 didn't ask you about in the second numbered 12 paragraph about the Berner-Posen black magic hole. 13 Do you see that? 14 A. Yes. 15 Q. And to make sure there's not any 16 misunderstanding about what that may refer to, in 17 reading Paragraph 2, can you tell us what the 18 Berner-Posen black magic hole was? 19 A. I'm not really sure. I mean, I don't 20 remember that terminology, obviously, or I would 21 presume it was somewhat tongue-in-cheek to call it 22 that. Let me read the paragraph. ((Witness 12667 1 reviews the document.) 2 What it appears to be proposing is that 3 we set up a service corporation which for some 4 reason -- which I can't recall -- would have been 5 free from certain growth limitations or other type 6 of limitations, that we do CMO transactions in it, 7 and that that would act as an interest rate hedge 8 to the rest of the institution. It doesn't say 9 this here, but presumably it would help profits, 10 as well. And then it was raising questions as to 11 "is this a good time to do it" and "what are the 12 real risks" and so forth. 13 Q. Now, Mr. Berner was the general 14 counsel? 15 A. Right. 16 Q. And Mr. Posen was the outside 17 regulatory counsel? 18 A. I don't remember who Mr. Posen was. 19 Q. Well, these two lawyers came up with 20 some idea that became described as the black -- 21 the Berner-Posen black magic hole? 22 A. Apparently. 12668 1 Q. To your recollection, was there 2 anything wrong, secret, nefarious about that 3 particular proposal? 4 A. Obviously not. It wasn't a secret 5 anyway. 6 Q. Now -- well, you had been at the 7 institution at this point for, what, six months or 8 so? 9 A. Right. 10 Q. So, it wasn't kept from you; is that 11 correct? 12 A. That's correct. 13 Q. Now, let me ask you to take a look at 14 Exhibit 10627 and specifically to the second page, 15 which was one of the documents in the book and 16 introduced today. It should be toward the front. 17 A. Is this the one that says "Agenda, 18 strategic management council"? 19 Q. That's correct. And I'm looking at the 20 second page where it says "strategic management 21 council agenda" and then a date, blank date. 22 And Mr. Hansen, I just asked you to 12669 1 read over the issues that you have -- that are 2 related there about tactical issues and strategic 3 issues, and my question to you is that -- are 4 these the sorts of things that one would expect to 5 see management considering -- good management 6 considering in trying to position their company 7 for growth in the future? 8 A. I'm sorry. What was the question? 9 Q. The question is: Are these the sorts 10 of things that you would expect to see people 11 addressing in a well-run company? 12 A. Yes. 13 Q. And particularly, the management 14 process under "strategic issues," it's written 15 "How to create/develop a quantitative strategic 16 approach to management. Cannot continue to hop 17 from project to project/emergency to emergency and 18 expect to be an A plus company." 19 Do you see that? 20 A. Yes, I do. 21 Q. Now, with regard to a quantitative 22 strategic approach, was that something that was 12670 1 widely accepted in the thrift industry or, looking 2 back on it, was that a process in which the thrift 3 industry took on to quantitative management 4 approach? 5 A. I think the good ones did. 6 Q. What about this regulatory 7 relationship? Someone is asking, "How do we plan 8 to maintain good relationships with the regulators 9 with all of the new activities and a scale-down of 10 some of the regulators' favorite activities?" 11 Was there something wrong with that, as 12 far as you knew? 13 A. I'm sorry. Something wrong with what? 14 Q. With trying to maintain a good 15 relationship with the regulators, recognizing the 16 fact that you were going into some things that 17 were a little bit different from what they were 18 accustomed to? 19 A. No, of course not. 20 Q. Let me ask you to look over to 21 Exhibit T4190, which is Mr. Crow's memo dated 22 April 21, 1986, to Mister -- Dr. Munitz on revenue 12671 1 enhancement. 2 Mr. Guido asked you about Item No. 3, 3 which was about continuing to take extraordinary 4 profits from asset sales in order to provide some 5 level of modest profitability. And I'm not going 6 to go over it. 7 Is there anything, even looking at it 8 12 years later and reading Mr. Crow's memorandum, 9 that suggests to you that something that shouldn't 10 have been going on was happening in the 11 institution? 12 A. Well, if you read the next sentence, it 13 says "The bulk of the gains, however, should be 14 used to bolster reserves and take losses to 15 dispose of REO and problem assets as quickly as 16 possible." It seems like a prudent thing to do. 17 Q. Let me ask you to go over to 18 Exhibit 10628. And that's Mr. Crow responding to 19 your memorandum which is at 10624, correct? 20 A. I don't know the number. Yeah, he's 21 responding to my Mustang Island memo. 22 Q. And -- so, Mr. Crow was the chief 12672 1 financial officer? 2 A. Right. 3 Q. And you were Mr. Gross' assistant and 4 troubleshooter or whatever? 5 A. Right. 6 Q. Fairly new to the company. And he sat 7 down and responded to your memorandum with, you 8 know, 54 points. Right? 9 A. Right. 10 Q. And -- now, did Mr. Crow do this work 11 himself or did he have, you know, a bevy of 12 assistants to put out these memoranda? 13 A. As far as I know, he did it himself. 14 Q. Now, in responding to your Item No. 6 15 which Mr. Guido asked you about, about the timing 16 of gains, Mr. Crow wrote down in his memorandum 17 "Without any special gains, the second quarter 18 will be grim. Unless we let our reserves slide 19 precipitously, we will show a loss." 20 He was confronting the issue head on, 21 wouldn't you say? 22 A. Yes. 12673 1 Q. Now, let me ask you about item number 2 so and let's go back and look -- first of all, 3 looking at your memorandum, you had posed the 4 questions about "Growth philosophy: Why grow?" 5 And you've listed "for" and "against." 6 Do you see that? 7 A. Yes. 8 Q. And what was Mr. Crow's response to 9 your question about what the institution's growth 10 philosophy should be in April of 1986? If you 11 could read that for the Court. 12 A. He said that "Medium priority for the 13 short run. High priority for the long run. 14 Answer will come from continuing discussions. No 15 growth philosophy is preferable" -- sorry -- "no 16 growth philosophy is preferable if we can figure 17 out how to get enough earnings power without 18 adding on incremental profitable assets. If we 19 cannot, a high growth philosophy will be mandatory 20 for profitability." 21 Q. Now, in terms of management approach, 22 how would you characterize Mr. Crow's response to 12674 1 your question about growth? 2 A. It's cautious. 3 Q. Let me ask you to turn over to the 4 document that's labeled B1043, which is your 5 memorandum of June 16th entitled "mortgage-backed 6 securities." 7 A. Is that -- 8 Q. This is one of the loose ones that 9 Mr. Guido asked you about this morning. 10 A. It's entitled mortgage -- does it have 11 a date on it? 12 Q. "Mortgage-backed securities, June 16th, 13 1986." 14 A. Okay. This is the Goldman Sachs memo. 15 Q. Right. This is your analysis of the 16 Goldman Sachs model. 17 A. Got it. 18 Q. Now, I'm interested -- did you have 19 access to the Wall Street firms and advice and 20 information that they could provide you in trying 21 to perform your work? 22 A. I did. The primary contacts were more 12675 1 likely to be the investment guys, you know, Joe or 2 Ron, and more often Mike or Bruce, than me. But 3 if I wanted to, I could get analysis from them. 4 Q. And was that -- having those -- having 5 that access useful to you? 6 A. I don't recall that I used it very 7 much. 8 Q. Now -- but in this particular case, you 9 were looking at the Goldman Sachs model and 10 applying it to your -- what you described as your 11 main structured portfolio, correct? 12 A. That's what it appears to be. 13 Q. And that was mortgage-backed 14 securities? That's the title of the memo. Right? 15 A. Presumably, it would be mortgage-backed 16 securities, yes. 17 Q. And at that point in time, it was your 18 belief that the main structured portfolio was 19 about a 706-million-dollar investment? 20 A. That is apparently what Goldman Sachs 21 analyzed. 22 Q. And you say here, "This does not count 12676 1 any securities gains or losses we may have already 2 realized." 3 A. Right. 4 Q. What is the significance of the fact 5 that you didn't count those gains in determining 6 the loss? 7 A. Well, in other words, this doesn't 8 imply that somehow the company lost $47.7 million 9 in this portfolio. You don't know how much 10 capital was taken out. Maybe $200 million in 11 capital was taken out as being used somewhere else 12 in the company, in which case what's left has a 13 48-million-dollar loss but maybe it's not so bad. 14 Q. And as we discussed earlier, whatever 15 those gains were, if they were taken out -- pardon 16 me -- taken out and put to use elsewhere in the 17 institution, one would have to analyze the 18 earnings that they had received off of those gains 19 to do a complete analysis? 20 A. Right. In other words, if that 21 200 million was being put to productive use, then 22 the overall investment of that capital would have 12677 1 been done well -- what I'm trying to say is yes, 2 you have to look at what was done with the 3 200 million in order to decide if the use of all 4 of that capital over time, both in the structured 5 portfolio and elsewhere, was profitable or not. 6 Q. And you don't know what the figure is. 7 You're using 200 million -- 8 A. I just made it up. 9 Q. Now, if you look at the next paragraph 10 in the fourth sentence where you start out, "the 11 results summarized below." 12 A. I'm sorry. Which paragraph? 13 Q. It's the -- 14 A. Oh, I see it. 15 Q. Next paragraph of the one we were 16 discussing. "The results summarized below show 17 that our greatest exposure is to rising rates. We 18 lose, however, no matter which way interest rates 19 go. That is the nature of risk-controlled 20 arbitrage." 21 Explain to the Court what was being 22 referenced there. That is, that it was in the 12678 1 nature of risk-controlled arbitrage that you were 2 going to lose no matter which way interest rates 3 go. 4 A. Well, as I explained earlier, a 5 leveraged investment in mortgages or any other 6 type of loan, generally, if you were to draw a 7 graph and show where the net market value or the 8 net spread you're going to earn over time and one 9 axis of that graph was changes -- immediate 10 changes in interest rates, once you get way out 11 into the wings, you know, plus 500 basis points in 12 a day or minus 500 basis points in a day, you're 13 going to be in bad shape. And that's pretty much 14 true of all financial institutions no matter what 15 business they are in. And it is particularly true 16 of risk-controlled arbitrage. 17 THE COURT: Excuse me. Is that because 18 the borrowings are on a short-term basis and the 19 obligations are -- or your assets on a longer 20 term? 21 THE WITNESS: No. It's because in 22 order to sell products like mortgages or life 12679 1 insurance policies or any other type of financial 2 instrument, generally, financial institutions give 3 away options. So, mortgages -- the borrower has 4 the right to prepay the mortgage if rates fall, 5 but they don't have to -- the institution doesn't 6 have the right to call the mortgage if rates rise. 7 So, you've given an option to the borrower. The 8 same thing happens in an automobile lease. The 9 same thing happens in an insurance policy, et 10 cetera. Typically, on the liability side of the 11 balance sheet, you also give options to people 12 through deposits and so forth. 13 So, most financial institutions sell 14 options on their assets, they sell options on 15 their liabilities, and they make a spread in the 16 middle which is fine but if rates ever went up 500 17 basis points in a day or went down 500 basis 18 points in a day, they would be hurting. 19 It's exactly the same with a mortgage. 20 It doesn't really matter -- if you had an asset -- 21 let's say a commercial loan that couldn't be 22 prepaid and had to be paid at the end of 10 years 12680 1 and it was just a bullet security and you matched 2 it with a bullet security, then there wouldn't be 3 any optionality, but that's not the way most 4 financial institutions work. 5 So, because mortgagers -- I'm sorry -- 6 the borrowers have an opportunity to prepay their 7 mortgage, the -- there's no hedge on demand that's 8 going to be cost-effective at the wings 9 assuming -- but rates have never gone up 500 basis 10 points in a day. So -- but you can structure them 11 all sorts of different ways depending on what 12 you're trying to accomplish. 13 Q. (BY MR. NICKENS) Well -- and if one 14 of the things you're trying to accomplish is to 15 sell options, you would put it out in such a way 16 that would show the person who's considering that 17 what the effect would be of not having the options 18 in place if you're trying -- in effect, selling 19 some kind of insurance? 20 A. I'm not sure what you just said. 21 Q. Okay. Well, one of the reasons that 22 you might go out 500 basis points is if you were 12681 1 selling options and you wanted to demonstrate to 2 your potential customer what the effect would be 3 if those -- at those edges as -- or wings as 4 you've described it? 5 A. Yeah. 6 MR. GUIDO: I object, Your Honor. It's 7 purely a hypothetical question. No savings and 8 loan presents to its borrowers or the people that 9 it is lending to a spread of -- a scenario going 10 out 500 basis points plus or minus. It is not 11 only a hypothetical question, it is something that 12 has never occurred in the savings and loan 13 industry -- 14 MR. NICKENS: Well, Your Honor -- 15 MR. GUIDO: -- by saying they sell 16 mortgages by telling the customer they can 17 potentially lose if interest rates -- the bank 18 could lose if interest rates go 500 points either 19 way. 20 I object to it as purely hypothetical. 21 MR. NICKENS: Well, Your Honor, let me 22 respond to that. The OTS has contended based upon 12682 1 a Smith Breeden model that because they reported 2 that the institution would lose whichever way 3 interest rates went, there must have been horribly 4 poor management to create that situation. And it 5 happens that Smith Breeden, in making their 6 presentation -- and the particular documentation 7 that the OTS relies upon in the notice of charges 8 is one in which they go out 500 basis points on 9 either side. 10 My only point was that, you know, how 11 far you go out can be dictated by what your 12 purpose is. But it's clearly highly relevant to 13 the notice of charges that has been brought in 14 this case. 15 MR. GUIDO: But Your Honor, the 16 hypothetical about showing it customers -- 17 THE COURT: All right. Well, let's 18 restate it. 19 MR. GUIDO: -- is highly hypothetical. 20 MR. NICKENS: Well, I've made my point. 21 I'll move on if that's okay, Your Honor. 22 Q. (BY MR. NICKENS) Let me ask you to 12683 1 look next, if you will, Mr. Hansen, at your 2 memorandum of -- labeled B1102, which is your 3 memorandum of July 14th, 1986. 4 A. Is this a loose one? 5 Q. No. This is one in the book. 6 A. I'm sorry. What was the number? 7 Q. It's 1102, B1102, dated July 14th, 8 1986, "Strategy for the next 18 months." 9 A. Okay. 10 Q. And this is the "capital is going to be 11 king" memorandum. Now, Mr. Guido asked you some 12 questions about that. I'm not going to go back 13 over all of this. 14 You had indicated earlier that these 15 were your thoughts at the time, correct? 16 A. Correct. 17 Q. And, in fact, you had said "These are 18 my thoughts on what I would do, quote, if I were 19 king"? 20 A. Right. 21 Q. If you were in charge, these are the 22 sorts of things that you would be looking at? 12684 1 A. Correct. 2 Q. Now -- and No. 1 item was capital. 3 Right? 4 A. Right. 5 Q. And you describe here what you have 6 earlier told the Court about, about the trade-off 7 between realizing gains or losses and the effect 8 on capital; is that right? 9 A. Yes. 10 Q. Now, in putting that down here, if you 11 were a king, did you at any point think that there 12 was something improper about examining the 13 trade-off? 14 A. No. I thought it was incumbent upon 15 the institution to examine that trade-off across 16 all the decisions it made in the company. 17 Q. Now, in particular, let me ask you to 18 look over at the -- and Mr. Guido asked you about 19 this, as well -- your paragraph dealing with 20 interest rate margin. And that's on the third 21 page of the version that we have retyped, and it's 22 also at the middle of the third page on the 12685 1 document version. 2 Now, I'm not going to ask you to read 3 this into the record. It is in the record. But 4 in terms of priorities which you saw as the major 5 problems of the institution, where did 6 risk-controlled arbitrage fall? 7 A. Well, I say at the top of this page, 8 "interest rate margin," I say "this is the real 9 problem." So, no, the real problem is interest 10 rate margin. But I don't think that the problem 11 was the mortgage-backed securities portfolio. The 12 problem was the land. 13 Q. I mean, if you go -- you look at -- you 14 say "the second largest interest rate" and you say 15 "goodwill." 16 A. Okay. Right. 17 Q. Right? Then you say "real estate," and 18 there is a long discussion about it, correct? 19 A. Right. 20 Q. And then you say the third largest 21 interest rate margin problem is the cash flow 22 bond? 12686 1 A. Right. 2 Q. And then you come down and say another 3 interest rate margin problem is the 4 risk-controlled arbitrage portfolio? 5 A. Right. 6 Q. And was that your best analysis at the 7 time in terms of the institution's priorities? 8 A. Well, if I didn't think that at the 9 time, I wouldn't have written it. 10 MR. NICKENS: Mr. Farley reminds me 11 that we are just about at our normal break time, 12 Your Honor, and I will be able to finish up within 13 about 30 minutes. 14 THE COURT: All right. We'll take a 15 short recess. 16 17 (A short break was taken.) 18 19 THE COURT: Be seated, please. We'll 20 be back on the record. Mr. Nickens. 21 MR. NICKENS: Thank you, Your Honor. 22 Q. (BY MR. NICKENS) Mr. Hansen, I'd like 12687 1 to refer you to another document with regard to 2 this issue about capital. And I'd like for you to 3 look at Exhibit A1409, which is in at exhibit -- 4 excuse me -- Tab 380. 5 THE COURT: Is that in the book? 6 MR. NICKENS: No, Your Honor. This 7 would be -- I don't believe this is in the book. 8 He has one here. 9 10 (Whereupon the judge was handed the 11 document.) 12 13 Q. (BY MR. NICKENS) Mr. Hansen, these -- 14 this Exhibit A1409 has been previously identified 15 and received into evidence as the minutes of the 16 investment committee of United Financial 17 Group/United Savings Association of Texas for 18 September 18th, 1996. I want to refer you to the 19 second page, the next-to-last paragraph. 20 Do you see a reference there to "The 21 investment committee reviewed the minutes of the 22 mortgage-backed securities trading committee for 12688 1 the week"? 2 A. Yes, I see that. 3 Q. And it indicates that all transactions 4 were approved. And it says "The committee then 5 discussed the implicit cost of capital calculation 6 made when a trade is made which improves the 7 association from an economic perspective and 8 allows a book gain but lowers ongoing book 9 spread." 10 Do you see that? 11 A. Yes. 12 Q. Now, is that the same process that you 13 described earlier for the Court in terms of the 14 trade-off when -- the decision point that USAT was 15 examining in the summer and fall of 1986? 16 A. It's the same if you're referring to 17 when we were discussing the fact that if you book 18 a gain, you have more capital and you can use it 19 for some other purpose and you need to figure out 20 what your cost of capital is, yes. 21 Q. And this is -- Exhibit A1409 is an 22 explicit recognition of consideration of those 12689 1 points in the minutes of the investment committee? 2 A. Appears to be. 3 Q. Now, it references allowing a book gain 4 but lowers ongoing book spread. 5 Now, earlier when you were 6 discussing -- those -- do those reference 7 accounting issues? 8 A. Yes, those are accounting issues. 9 Q. And were you on the mortgage-backed 10 securities trading committee? 11 A. I don't recall if I was or not, but it 12 appears that I was on the memos. 13 Q. Let me ask you to look at a document 14 that we have identified as Exhibit B1190. B1190 15 is a memorandum from Mr. Crow to the members of 16 the investment committee dated August 25th, 1986, 17 entitled "Proposed procedures for mortgage-backed 18 securities trading." 19 Do you see that? 20 A. (Witness nods head affirmatively.) 21 MR. NICKENS: Your Honor, we offer 22 Exhibit B1190. 12690 1 MR. GUIDO: No objection, Your Honor. 2 THE COURT: Received. 3 Q. (BY MR. NICKENS) Now, do you see 4 there the indication of the formation of the 5 mortgage-backed securities trading committee? 6 A. Yes, I do. 7 Q. And you were a member of that 8 committee? 9 A. That's right. 10 Q. And who were the other members of the 11 committee? 12 A. It would be Mike Crow, Joe Phillips, 13 and Bruce Williams. 14 Q. And there is a reference to the fact 15 that trades were not to be done without the 16 concurrence of Smith Breeden Associates? 17 A. Correct. 18 Q. Was that directive followed, to your 19 knowledge? 20 A. As far as I know. I don't really -- 21 you know, it was -- in the memos that we saw where 22 they were discussing various trades, it was clear 12691 1 that they were calling up Smith Breeden to find 2 out what they thought about it. 3 Q. Now, the first sentence, it says "Per 4 instructions from top management, we are currently 5 at a total standstill in mortgage-backed 6 securities trading. Pending the arrival of our 7 mortgage-backed securities, quote, 'expert,' close 8 quote, which we are currently trying to employ, I 9 request that the investment committee approve this 10 procedure outlined in this memo for 11 mortgage-backed securities trading." 12 Do you have any recollection as to what 13 the reasons were for the standstill in 14 mortgage-backed securities trading? 15 A. No. 16 Q. Now, you were there when the 17 institution hired Ms. Lorenson? 18 A. I believe so, yes. 19 Q. And were you a part of the group that 20 interviewed various candidates for that position? 21 A. I don't remember if I was. 22 Q. Let me show you some documents. With 12692 1 Mr. Farley's help, I would reference 2 Exhibit B1127, which is at Tab 370, and 3 Exhibit B1193, which has not yet been offered or 4 received. 5 Do you have those two documents? 6 A. Yes, I do. 7 MR. NICKENS: Your Honor, we offer 8 B1193. 9 MR. GUIDO: No objection, Your Honor. 10 THE COURT: Received. 11 Q. (BY MR. NICKENS) Do these two 12 documents, Mr. Hansen, Exhibits 1127 and 1193, 13 indicate that you were at least scheduled to 14 interview three possible candidates for the job of 15 mortgage-backed securities research position? 16 A. Yes, they do. 17 MR. GUIDO: Your Honor, with regard to 18 B1127, the document that Mr. Nickens showed I 19 don't think is the document that's in the record. 20 This is only a two-page document. I think there 21 is a page missing. If you look at the Bates stamp 22 number, CN128706, and then it jumps over to 12693 1 CN128708. I think that there is another page. 2 All we have are the research papers. We do not 3 have his credentials attached to it. I could be 4 wrong, though, about what's in the file; but I 5 recall that the resume was more complete than just 6 the list of the research papers. The file copy of 7 the Court -- 8 THE COURT: The copy that I have only 9 has two pages, the schedule of interviews and a 10 research paper. 11 MR. NICKENS: Mr. Guido correctly 12 points out that there appears to be a gap between 13 the two pages, but this is the document that has 14 been admitted. We will check to see if there is 15 an intervening document and make that 16 correction -- intervening page. 17 Q. (BY MR. NICKENS) In any event, you 18 were a part of the process to hire somebody. And 19 how did you -- the institution hired Ms. Lorenson 20 to handle the mortgage-backed securities; is that 21 correct? 22 A. That's right. 12694 1 Q. After having gone through a number of 2 candidates for that position; is that correct? 3 A. After having interviewed a number of 4 candidates. 5 Q. Yeah. I didn't mean "gone through" 6 literally, but they had talked to a number of 7 people and ended up hiring Ms. Lorenson? 8 A. Right. 9 Q. Now, you indicated to Mr. Guido that 10 you left USAT in part because of your wife's not 11 wishing to live for any longer in the Houston area 12 and that you were -- you had had a conversation 13 with Mr. Gross about a line position and it looked 14 like it was not going to happen, at least in the 15 time frame that you would have liked. 16 Did I understand that correctly? 17 A. That's correct. 18 Q. So, you were looking to stay on with 19 USAT if you could find a more permanent position? 20 A. That's right. 21 Q. And was it your perception at that time 22 when you were applying for that position that USAT 12695 1 was a sinking ship? 2 A. If I was trying to talk them into 3 making me a line manager, I presume I was not 4 thinking it was a sinking ship. 5 MR. NICKENS: That's all I have, Your 6 Honor. Thank you. 7 MR. BLANKENSTEIN: Your Honor, I have a 8 few questions. 9 THE COURT: Mr. Blankenstein. 10 MR. BLANKENSTEIN: Thank you, Your 11 Honor. 12 13 EXAMINATION 14 15 Q. (BY MR. BLANKENSTEIN) Good afternoon, 16 Mr. Hansen. My name is Paul Blankenstein, and I 17 represent Jenard Gross. I just have a few 18 questions about Mr. Gross. 19 I think you testified in response to 20 one of Mr. Guido's questions earlier today that 21 Mr. Gross had experience on real estate matters; 22 is that right? 12696 1 A. Correct. 2 Q. Was that his principal responsibilities 3 at USAT while you were there? 4 A. No. 5 Q. He had responsibilities for the entire 6 institution; is that right? 7 A. Correct. 8 Q. But did he focus on the real estate 9 matters? 10 A. He focused on all the matters, that I 11 saw. 12 Q. Did he maintain that he had as much 13 experience on the non-real estate matters as he 14 did on the real estate matters? 15 A. No, I don't think so. 16 Q. Did he try and learn more about these 17 non-real estate matters? 18 A. Yes, he did. 19 Q. How did he go about doing that? 20 A. He would ask people questions 21 incessantly about what they were doing and why. 22 Q. And what was the point of those 12697 1 questions? 2 A. Just to be -- you know, like any 3 management, you want to know if the people that 4 you've entrusted to handle the details of the 5 various operations of the company are following it 6 in a way that is, in your opinion, good for the 7 company and if they are the right people for doing 8 it. 9 Q. Was he interested in knowing the true 10 economic results of various transactions that USAT 11 was engaged in? 12 A. Yes, he was. 13 Q. Did he use you in that connection as an 14 assistant? 15 A. Primarily, he asked on his own. 16 Q. Did he give you particular assignments 17 from time to time? 18 A. Yes. 19 Q. Did sometimes you initiate analyses 20 based upon what you thought Mr. Gross was 21 interested in? 22 A. Yes. 12698 1 Q. Did you come to a conclusion that he 2 had absorbed that information? 3 A. Yes. 4 Q. What impression did you have of 5 Mr. Gross based upon about 15 months of service as 6 his assistant? Is that right? 7 A. Right, approximately. 8 Q. Did you come to an impression about his 9 capabilities, his talent, his diligence as a chief 10 executive of USAT? 11 A. He did pretty much what I would have 12 done if I was in his position. 13 Q. Do I understand that to mean that you 14 think he did a good job? 15 A. Yes. 16 Q. Thank you. 17 MR. BLANKENSTEIN: I have no further 18 questions. 19 20 21 22 12699 1 2 FURTHER EXAMINATION 3 4 5 Q. (BY MR. GUIDO) Mr. Hansen, did 6 Mr. Gross participate in meetings of the 7 investment committee of USAT? 8 A. I'm not sure. 9 Q. Did he attend the meetings? 10 A. I don't know. 11 Q. If the minutes indicated that he 12 attended the investment committee meetings, would 13 you have any reason to disagree with that? 14 A. The minutes -- seems to me that when 15 the minutes are written up, I don't know if his 16 name is on there or not, but that might not -- 17 might or might not mean that he was at the 18 meeting. He might just have been on the 19 distribution list. So, I'm not sure you can tell 20 by just looking at the memos whether he was 21 actually in attendance at the meetings or not. 22 Q. But was he a member of the committee? 12700 1 A. I have no idea. 2 Q. Do you know whether or not he dissented 3 from any of the actions that the investment 4 committee or the managers of the mortgage-backed 5 securities portfolio or the high-yield bond 6 portfolios? 7 A. I don't remember him dissenting from 8 any particular specific action that was taken, but 9 he was very anxious to ask a lot of questions to 10 make sure that all the proper considerations were 11 being considered. 12 Q. Was one of his concerns that people -- 13 he wasn't sure if people really knew what was 14 happening with the mortgage-backed security 15 portfolio? 16 A. I think he had some doubts, that he 17 wanted to ask a lot about that to make sure that 18 that was true. 19 Q. Now, what was his position at USAT? 20 A. He was the chairman. 21 Q. Okay. Did he have the authority to 22 terminate any actions that he thought were unsafe 12701 1 and unsound? 2 A. Sure. 3 Q. Okay. Did he terminate any actions 4 because he thought they were unsafe or unsound? 5 A. Yeah, I think he might have. You 6 know -- 7 Q. What? 8 A. I would say not in terms of specific 9 actions, but he terminated strategies or guided 10 them in different directions or made sure that 11 they were consistent with whatever risk tolerance 12 the company had. 13 Q. When Sandy Lorenson was hired, did he 14 direct her to increase the mortgage-backed 15 security portfolio to $3 million -- $3 billion? 16 A. I don't know. 17 Q. You don't know? Did he participate in 18 the meetings of the strategic planning committee? 19 A. I believe he did. 20 Q. Did he dissent from any of the actions 21 that were initiated by the strategic planning 22 committee? 12702 1 A. I don't think the strategic planning 2 committee initiated any actions. 3 Q. Did it reach conclusions or consensus 4 of what the institution should do going forward? 5 A. From time to time, yes. 6 Q. Did he dissent from any of those? 7 A. Seems to me that there were times when 8 he would raise questions about things and he might 9 not be fully satisfied that he had gotten every 10 single answer he needed, but he was willing to go 11 along with the consensus at that time pending 12 future -- more investigation. Whether that's 13 dissenting or not, I don't know. 14 Q. Did he ever, as the chairman of USAT, 15 overturn any business strategy that was approved 16 by the strategic planning committee? 17 A. Not that I know of. 18 Q. Now, I'd like to go back to the 19 questions that you were asked at the beginning 20 about your general sense of the management, I 21 think is the way Mr. Nickens pointed it out. 22 Did Jenard Gross have any experience 12703 1 with mortgage-backed security risk-controlled 2 arbitrage portfolios before he became chairman of 3 USAT? 4 A. Not that I know of. 5 Q. Had he had any experience with the 6 investment in high-yield bonds before he became 7 the chairman of USAT? 8 A. I don't know. 9 Q. You don't know? 10 A. I don't know. 11 Q. Did Michael Crow have any previous 12 experience with the management of mortgage-backed 13 securities portfolios before he joined USAT? 14 A. I don't know. 15 Q. Did Barry Munitz have any experience 16 with the performance of high-yield bond portfolios 17 or management of high-yield bond portfolios before 18 he became a member of USAT's management? 19 A. Not that I know of. 20 Q. Did Bruce Williams have any experience 21 in that regard? 22 A. I don't know if he did or not. 12704 1 Q. Now, you were, I think, as Mr. Nickens 2 pointed out, a member of the mortgage-backed 3 securities trading committee? 4 A. Right. 5 Q. Was Bruce Williams, as a member of that 6 committee, and Michael Crow, as the chief 7 financial officer, interested in generating 8 accounting gains through the mortgage-backed 9 securities portfolio? 10 A. It didn't appear like that was the 11 primary purpose from reviewing the memos. 12 Q. Did it indicate that that's what 13 they -- was one of the purposes that they had in 14 mind? 15 A. It was a result of one of the trades 16 that was -- that I saw. I don't know what the 17 purpose was. 18 Q. Now, we've looked at a lot of material 19 today. And is it -- did that material indicate, 20 besides those three transactions we're talking 21 about, that sales were made or transactions 22 incurred in the mortgage-backed securities 12705 1 portfolio in order to generate accounting profits? 2 A. Well, it seems to me that there is a 3 variety of indications that there was -- that the 4 recognition of gains was noted. And there were 5 the paragraphs that both of you pointed me towards 6 that said that the institution hoped to be able to 7 report at least a little bit of profit each 8 quarter. But there were other paragraphs that 9 talked about how the trades that were done before 10 the accounting change happened were done for 11 economic reasons, and there were other memos that 12 showed cases where there was a chance to take a 13 gain but since it was not considered to be an 14 economic transaction, it wasn't taken. 15 So, it was clearly one of the 16 considerations; but I don't remember people doing 17 transactions in order to take gains. 18 Q. Well, I think you testified when I 19 asked you about the December 1986 memorandum where 20 it talked about taking profits from the 21 mortgage-backed security portfolio that resulted 22 in a negative spread, that that was related to the 12706 1 need for capital that you had referred to in an 2 earlier memorandum? 3 A. I believe that was likely to be the 4 case. 5 Q. Now, you were asked whether or not 6 anything was done that was reckless, I think. 7 Do you recall Mr. Nickens asking you 8 that -- 9 A. Right. 10 Q. -- and you said "no." And I think you 11 used the term you thought some might have been 12 ill-advised, I think is what you said. 13 A. Right. 14 Q. Okay. What did you mean by 15 "ill-advised"? 16 A. Well, certainly the result which we've 17 been looking at of -- that the mortgage-backed 18 securities portfolio got rebalanced and then 19 probably in a good manner, I would guess, before 20 the accounting change and then accountings got 21 into the way of it. It seems like there was a 22 problem. I mean, I myself called it a disaster or 12707 1 a near disaster or whatever I called it. 2 So, I don't know if it's a disaster in 3 the sense that just afterwards, that that was the 4 result and we were stuck with it or if something 5 was actually done that was wrong. But the effect 6 was obviously not good, although we don't know -- 7 as J.C. pointed out, we don't know how many gains 8 were taken out. So, it's really kind of hard to 9 say. 10 Q. Do you know when the accounting change 11 occurred? 12 A. No. 13 Q. So, you don't know whether or not what 14 happened to that portfolio that Smith Breeden 15 analyzed had occurred before or after an 16 accounting change? 17 A. I don't know. 18 Q. Now, when you talk about "ill-advised," 19 would USAT having a portfolio of $900 million of 20 mortgage-backed securities financed by reverse 21 repos, given its capital as you understand it at 22 the end of 1986, would that have been reckless? 12708 1 A. Do you know how much capital they had? 2 Q. Assume they had $200 million worth of 3 capital. 4 A. They did? I don't know. 5 Q. Assume that they had $200 million of 6 capital. 7 A. If they had $200 million of capital, 8 would it be ill-advised to have a 9 900-million-dollar risk-controlled arbitrage, 10 assuming it was properly run? 11 Q. Uh-huh. 12 A. No. 13 Q. Now, if it had a negative capital of 14 $430 million, would that have been ill-advised? 15 A. If it had negative capital of 16 $430 million, it would be out of business and it 17 wouldn't be able to undertake such a thing. 18 Q. Let me show you a figure here. Take a 19 look at Exhibit No. A10666. And I direct you to 20 the page that has an analysis of the financial 21 condition of USAT which was prepared by Smith 22 Breeden & Associates. I think it shows that the 12709 1 book value of capital is something like 2 $123 million; is that right? 3 A. That's what it shows. Well, it says 4 book value, but then it also says "liquidation 5 value" to the left. I assume it means book value. 6 Q. And then it also shows what the value 7 was if you had the liquidation value of that 8 institution. 9 Do you see that? 10 A. Right. 11 Q. And what does that show? 12 A. Negative 431. 13 Q. Okay. Now, if the institution had had 14 a negative value of 431 and was still operating 15 for some reason -- 16 A. Right. 17 Q. -- okay -- it hadn't been placed into 18 receivership, conservatorship, or some creditors 19 hadn't forced it into bankruptcy -- 20 A. And people were still willing to lend 21 it the money. 22 Q. -- and people were still willing to 12710 1 lend it the money for whatever they lent the 2 money, would that have been reckless conduct? 3 A. I don't think so. 4 Q. Why not? 5 A. Because the institution had a chance to 6 exist and to thrive with all of its real estate 7 assets and its activities it was undertaking and 8 if that could get it over the hump of -- through 9 the real estate trough and if it was managed 10 successfully, then it would be helpful. 11 Q. Was there any risk to the shareholders 12 of putting on a 900-million-dollar mortgage-backed 13 security portfolio that wasn't hedged and financed 14 with reverse repos? 15 MR. NICKENS: Your Honor, I object to 16 that. It's a purely hypothetical question. And I 17 don't want to suggest to the witness that those 18 were the facts. And I also wonder about the 19 relevance of the question, the hypothetical issues 20 at this point, when the witness has left -- 21 MR. GUIDO: This witness has been asked 22 a lot of questions -- 12711 1 THE COURT: All right. Let's have the 2 answer. 3 THE WITNESS: Sorry. What was the 4 question again? 5 MR. GUIDO: The institution -- could 6 you read back the question? I'm not exactly sure 7 I can remember the question. 8 9 (Whereupon the requested portion 10 was read back by the reporter.) 11 12 MR. GUIDO: I'll rephrase the question 13 now, Your Honor. 14 Q. (BY MR. GUIDO) Was there any risk at 15 the end of 1986 to the shareholders of USAT if the 16 institution had negative capital of $431 million 17 and it put on a mortgage-backed security portfolio 18 of $900 million financed with reverse repurchase 19 agreements and that the interest rate risk was not 20 hedged? 21 A. If it was not hedged? 22 Q. Not hedged. 12712 1 A. So, we were prior talking about 2 risk-controlled arbitrage where there is hedging 3 happening. Are you changing it and saying now 4 we're not hedging it? 5 Q. No. I'm saying not hedging it, that's 6 correct. I thought I asked the question before of 7 not hedging. 8 A. Maybe I didn't hear it before because I 9 thought that you were before talking about putting 10 on a risk-controlled arbitrage that was managed 11 correctly and was hedged. 12 Q. No. I'm talking about an unhedged 13 portfolio in all of my questions. So, let's go 14 back and repeat because you think that you heard 15 me say -- 16 A. Yeah. I misheard -- I qualified my 17 statements by saying "assuming it was properly 18 managed." 19 Q. Okay. You meant hedged? 20 A. I meant hedged, yes. 21 Q. Assuming that USAT put on a 22 900-million-dollar mortgage-backed security 12713 1 financed with reverse repurchase agreements 2 unhedged -- 3 A. Okay. 4 Q. -- and it had $123 million worth of 5 capital, would that have been reckless conduct? 6 A. You would have to look at the rest of 7 the institution. If it was balancing the interest 8 rate risk that was already in the institution, it 9 could be a very prudent thing to do. 10 If you're talking about the 11 institution's already balanced and there's no need 12 to correct or rebalance whatever interest rate 13 risk is in the institution, they have $123 million 14 of capital and they are talking about buying 15 900 million of fixed-rate mortgages and funding 16 them with no hedging -- 17 Q. And that that risk -- 18 A. Think of it this way. For every 100 19 basis points change in rates, you're going to lose 20 4 to 5 percent of that amount. Okay? 21 Q. Uh-huh. 22 A. So, what's 5 percent of 900 million? 12714 1 It's 45 million. Right? 2 Q. Uh-huh. 3 A. That doesn't sound like it would be 4 prudent, given all the things we just said. 5 Q. Okay. Now, you talked about prudent 6 conduct when you were discussing with Mr. Nickens. 7 And the recommendations in -- I think it's the 8 July 18th memorandum that you have, it has all of 9 the speakers recommending the purchase of options 10 contracts to hedge the prepayment risk of a 11 mortgage-backed security portfolio. 12 Do you recall that memo? 13 A. I don't think that's what it said. 14 Q. What do you think it said? 15 A. I think it said that there's several 16 things that you can do, one of which would be to 17 buy options. The other one would be to slightly 18 underhedge yourself, and a third one would be to 19 rebalance more often. 20 Q. Okay. But they did indicate that 21 options were a method to protect against interest 22 rate -- 12715 1 A. Yes. One of possible methods, right. 2 Q. Now, Mr. Nickens also asked you about 3 what he referred to as the whipsaw effect. 4 Do you recall that? 5 A. Correct. 6 Q. Now, the whipsaw effect is when 7 interest rates go up and they go -- they go down 8 and then they go up again and then they go down 9 again and they just fluctuate back and forth and 10 the institution gets caught because of prepayments 11 happening because of those various changes; is 12 that correct? 13 A. Well, they may or may not get caught 14 depending on what they do about it. 15 Q. Can the whipsaw effect be protected 16 against by the purchase of options contracts at 17 the outset? 18 A. That would be one way to help it, yes. 19 Q. So that options contracts would have 20 ameliorated any effect of the whipsaw effect that 21 Mr. Nickens discussed with you? 22 A. If properly done, it would be 12716 1 ameliorative, yes. 2 Q. Now, Mr. Nickens asked you who ran 3 USAT. 4 Do you recall that? 5 A. Uh-huh. (Witness nods head 6 affirmatively.) 7 Q. And you said that it was a group 8 situation is, I think, what you said. 9 MR. NICKENS: Your Honor, that's not 10 what he said at all. He said Jenard Gross. 11 A. I said Jenard Gross ran it. But he 12 followed on and asked me when issues were 13 considered, who considered them, and it was 14 generally a group process at that point. 15 Q. (BY MR. GUIDO) Okay. Who were the 16 members of that group? 17 A. It depended upon the subject. For 18 instance, if it was real estate, it was Jenard and 19 all the real estate guys. But for a sort of 20 corporate -- and if it was branches, it was all 21 the branch -- but if it was sort of a 22 corporate-level decision, it was the people that 12717 1 were -- the type of people you see on the list of 2 the strategic planning committee. 3 Q. Charles Hurwitz? 4 A. Sometimes was involved. 5 Q. Ron Heubsch? 6 A. He was only really involved if it was 7 involving investments. 8 Q. Michael Crow? 9 A. He was always involved. 10 Q. Arthur Berner? 11 A. Pretty much always. Well, he knew what 12 was going on. He didn't go to a lot of the 13 meetings, I don't think, but he was always aware 14 of what was happening. 15 Q. Barry Munitz? 16 A. Barry, if it focused on larger 17 strategic issues, he might be involved. 18 Q. Now, you indicated in response to a 19 question about the board of directors -- I think 20 you said something to the effect of "not much." 21 Do you recall that? 22 A. I believe the question had something to 12718 1 do with "Was the board involved with day-to-day 2 type operations or decisions," and the answer was 3 "no, not much." 4 Q. Do you know how the strategic planning 5 committee came about? 6 A. No. 7 Q. Was it appointed by the board? 8 A. I doubt it, but I don't know. 9 Q. Now, you were asked some questions with 10 regard to that June 18th memorandum you wrote 11 regarding your observations after listening to the 12 tape of that arbitrage conference. 13 A. Right. 14 Q. Do you remember that? And you said 15 something about, well, your view is that that's 16 your best guess of what was said. 17 A. As opposed to being what I thought, 18 right. 19 Q. Now, did you, when you wrote any 20 memoranda, ever, to your knowledge, write down 21 anything that was false in those memoranda? 22 A. No. 12719 1 Q. Do you have any reason to believe today 2 that any of the memoranda that we looked at that 3 have your name on them were not accurate -- are 4 not accurate? 5 A. Well, are you asking me if I wrote 6 them? 7 Q. Yeah. Those that you wrote, do you 8 have any reason to believe that any of them are 9 inaccurate? 10 A. I have no reason to believe that at the 11 time I did not think they were completely 12 accurate. 13 Q. Okay. Now, Mr. Nickens at various 14 times asked you about implied capital. 15 Do you recall that? 16 A. Uh-huh. (Witness nods head 17 affirmatively.) 18 Q. Now -- and he asked you whether or not 19 it was appropriate to take a 15 to 20 percent 20 implied capital or implied rate of return, I 21 guess, off of the gains on the mortgage-backed 22 securities and give the mortgage-backed security 12720 1 portfolio credit for that in terms of evaluating 2 its performance. 3 Do you recall that? 4 MR. NICKENS: Your Honor, that was not 5 my question, nor the answer. That was published 6 in his review in that particular memorandum by 7 Mr. Sullivan, as I recall, as saying that that was 8 an appropriate range, 15 to 20 percent. It's just 9 a reporting of what somebody else said on that 10 tape. 11 A. That's how I remember it. 12 Q. (BY MR. GUIDO) Look at Exhibit B1231. 13 A. Sorry. Which one is that? 14 Q. That is the mortgage-backed security 15 trading committee of September 22, 1986. 16 A. Got it. 17 Q. Okay. Does that have an implied 18 capitalization rate in it? 19 A. It says the implied capitalization rate 20 is 21 percent. 21 Q. When you were talking about implied 22 capitalization rate, were you using -- when you 12721 1 said that you did analyses using implied 2 capitalization rate, did you use something 3 approximating 21 percent? 4 A. What was happening here was I was not 5 saying that we should use 21 percent. I was 6 reporting that the transaction implied a rate of 7 21 percent. 8 Q. Okay. Fine. Now, with regard to that 9 figure, do you know what the actual rate of return 10 was on capital of USAT in 1986? 11 A. I assume it was quite low. Most of the 12 capital was tied up in real estate. 13 Q. So, it was nowhere near 21 percent in 14 terms of actuality? 15 A. In terms of what the whole institution 16 was actually earning, I doubt it was anywhere near 17 that high. 18 Q. Okay. Now, you indicated that the -- 19 you were asked questions about the Drexel 20 relationship, that you didn't know of any 21 nefarious aspect of the relationship between 22 Drexel and USAT. 12722 1 Do you recall that? 2 A. Yes. 3 Q. Were you aware at the time that you 4 were at USAT that Drexel, at the time it was 5 selling high-yield bonds to USAT, was also 6 underwriting the issuance of bonds by MAXXAM -- 7 other MAXXAM-related companies? 8 A. I was aware that there was something 9 going on with Hurwitz' other companies, that he 10 occasionally used Drexel from time to time for 11 other things, yes. 12 Q. Okay. But did you know that Drexel was 13 underwriting the issuance of junk bonds for other 14 MAXXAM-related entities? 15 A. (Witness shakes head negatively.) 16 Q. You -- in talking about the Smith 17 Breeden relationship, you indicated that -- that 18 USAT wanted to make sure that it was making the 19 decisions and that it asked lots of questions, the 20 management of USAT asked lots of questions of 21 those people that were providing advice to it on 22 what to do. 12723 1 Do you recall that? 2 A. That's what the memo said, yes. 3 Q. Okay. And you said that it's your 4 understanding that that happened -- it was a 5 common practice at USAT. 6 Do you recall that? 7 A. I think I said that it -- my knowledge 8 of USAT and its managers would make it hard for me 9 to believe that they would turn over the 10 decision-making responsibility to a third party 11 they didn't know well. 12 Q. Have you ever heard of a third party 13 called Caywood Christian? 14 A. Yes. 15 Q. Do you know what it is? 16 A. Yeah. It's a junk bond management 17 company. 18 Q. And who was it owned by? 19 A. Jim Caywood and Mickey Christian. 20 Q. And do you know who the owners of 21 Caywood Christian were? 22 A. No. 12724 1 Q. Do you know whether or not Imperial 2 Savings was one of the owners of Caywood 3 Christian? 4 A. I believe, if I remember correctly, Jim 5 Caywood -- or maybe it was Mickey Christian -- 6 might have worked at Imperial Savings before they 7 started. So, if they owned part of it, that 8 wouldn't be too surprising. 9 Q. Do you know whether or not Michael 10 Milken with Drexel or any of the Milken -- what we 11 refer to as the Milken partnerships owned any part 12 of either Imperial or Caywood Christian? 13 A. (Witness shakes head negatively.) 14 Q. Okay. Did Caywood Christian have 15 discretion to manage the high-yield bond portfolio 16 without prior approval of the investment committee 17 of USAT? 18 A. I'm not sure if it got to that point or 19 not. 20 Q. What do you mean you're not sure? 21 A. Well, my recollection is we were 22 talking to those guys near the end of the period 12725 1 that I was at United Savings and we were talking 2 with them about helping us manage the portfolio or 3 be an advisor or giving them some money to manage 4 or whatever. And what actually happened, I don't 5 recall. 6 Q. If they had discretion to manage the 7 high-yield bond portfolio for USAT, would that 8 have been consistent with your view that USAT 9 wanted to manage the portfolios itself? 10 A. I don't think that's what I said. I 11 talked to Mickey Christian and to Caywood 12 Christian -- to Jim Caywood and -- you know, to 13 some degree when I was there. And they did not 14 display any of the characteristics that were 15 talked about in that memo regarding Smith Breeden. 16 Q. Pardon? I'm sorry. 17 A. The Smith Breeden memo where Mike Crow 18 was writing about how he doesn't think we should 19 use Smith Breeden because they don't answer 20 questions, they are not responsive, they never 21 come up with any ideas, et cetera, I don't think 22 he could apply those from my limited knowledge 12726 1 of -- and experience that I had talking to Caywood 2 and Christian, they seemed to be quite a 3 responsive and responsible organization as opposed 4 to the characteristics that were laid out in that 5 memo. 6 Q. Now, in that memo that's Exhibit 1415, 7 I'd like you to take a look at that again. 8 A. Is it in the book? 9 Q. No. It's the document that -- 10 A. I've got it. This is the October 30th, 11 Smith Breeden relationship? 12 Q. Yeah. 13 A. Okay. 14 Q. Do you know whether or not any of the 15 statements in that memorandum from Mike Crow, 16 Items 1 through 4 on the first page, are true or 17 false? 18 A. I don't know. I vaguely remember that 19 there was some dissatisfaction with Smith Breeden, 20 but I can't remember the specifics of it. 21 Q. Now, when you -- you were asked 22 questions about the net interest spread, and you 12727 1 indicated, I think, that goodwill was a major drag 2 on earnings at USAT? 3 A. Right. 4 Q. Do you remember that? 5 A. Uh-huh. (Witness nods head 6 affirmatively.) 7 Q. And I think you also listed real estate 8 as another factor that was a negative impact on 9 the net interest margin of USAT? 10 A. Correct. 11 Q. Do you recall that? 12 A. (Witness nods head affirmatively.) 13 Q. And you also listed there the 14 risk-controlled arbitrage as a drag on the net 15 interest margin. 16 Do you recall that? 17 A. Yes. 18 Q. Okay. Now, if the risk-controlled 19 arbitrage, as you pointed out, had a negative 20 spread of 1 percent in September of 1986, do you 21 remember your -- I mean, December of 1986. 22 Do you remember that in your memo? 12728 1 A. Right. 2 Q. If it had that and it was of the order 3 of magnitude of $700 million, what would the drag 4 be per year? 5 A. 7 million. 6 Q. Okay. And what impact would that have 7 had on earnings that were being reported by USAT? 8 A. Well, I recall in looking at that memo 9 a few minutes ago that I said that the third 10 largest factor was the cash flow bond, and it said 11 there the impact was 20 million a year. So, 12 obviously, that shows it wasn't as big as that. 13 What impact did it have on USAT? We 14 said it had, what, 123 million in capital; is that 15 correct? Do you know? 16 Q. I mean, that was the figure that is in 17 the September memorandum that Smith Breeden 18 prepared for -- 19 A. If you look only at the portfolio and 20 it's losing 7 million, that's material. 21 Q. But if you look at the earnings -- 22 A. That's what I'm saying. Losing 12729 1 7 million a year. 2 Q. And you have earnings of -- I think 3 that you said that they had nominal earnings 4 that -- 5 A. I don't know how many earnings. 6 Q. Assume that it was around 1.5 to 7 $2 million per quarter. 8 A. Okay. 9 Q. Okay. Would that have been 10 significant, the drag of the risk-controlled 11 arbitrage? 12 A. Sure. Looked at in isolation, yes. 13 Q. Okay. If it had been as large as a 14 billion two, would it have been significant? 15 A. It doesn't matter how large the 16 portfolio is. It only matters what the income off 17 of it is if you want to say it's significant for 18 income. 19 Q. I'm using the 1 percent figure from 20 your December memorandum. 21 A. I'm not following you, sir. 22 Q. You indicated that if you had a 12730 1 700-million-dollar mortgage-backed security 2 portfolio -- 3 A. Right, and it was -- 4 Q. -- with a 1 percent negative spread 5 earnings, based on an income stream of 1.5 or 6 $2 million, I asked you whether or not that would 7 be significant to impact the income stream. 8 A. Right. 9 Q. It would. And anything above -- if the 10 portfolio was larger -- let's say it was $1.2 11 billion, would that also have been more 12 significant than the -- 13 A. If the 1.2 billion portfolio also 14 earned a negative 1 percent spread, then the drag 15 would be 12 million per year, which is obviously 16 worse than 7 million a year. 17 Q. Now, you were asked by Mr. Nickens a 18 question about whether or not you were ever told, 19 you know, "Don't write this down. Somebody might 20 get it." And you said, no, no one ever told you 21 that. 22 And in the course of your response, you 12731 1 gave an example of financial statements that 2 showed that there were 20 cents earnings per 3 share, 3 cents of that were gains on that. 4 A. It was a hypothetical. 5 Q. And analysts note that. Why did the 6 analysts note that fact? What's the significance 7 of saying that there's 20 cents of earnings as 8 opposed to saying there are 20 cents earnings per 9 share, 3 cents of which are non-ordinary gains? 10 A. Because the analysts take apart all of 11 your earnings as a public company to try and 12 determine what the quality of those earnings are 13 and what the repeatability of them are. So, if 14 they would look in that instance I gave you, they 15 would look upon the 3 cents as something that was 16 relatively -- most likely discretionary by 17 management. May have been undertaken for a good, 18 economic reason. May have been undertaken for an 19 accounting reason. In any event, it's something 20 that might or might not happen the next quarter. 21 Then they would turn their microscope on the 17 22 cents remaining to see if they thought that was 12732 1 repeatable, high-quality earnings or some sort of 2 fluke. 3 Q. Now, you were asked some questions 4 about the Berner-Posen black -- I don't want to 5 misstate. 6 MR. NICKENS: Black magic hole. 7 MR. GUIDO: The black hole? 8 MR. NICKENS: Black magic hole. 9 MR. GUIDO: Black magic subsidiary? 10 MR. NICKENS: Hole. 11 MR. GUIDO: Okay. Excuse me. 12 Q. (BY MR. GUIDO) And the document says 13 that it's -- I'd better get the document out. 14 That is A10623. It's dated April 17th. Look at 15 the second sentence. 16 A. Excuse me. Is that loose or in the 17 book or -- 18 Q. It's in the book. I'm sorry. 19 April 17th, 1986. It's in the book. 20 A. What's the number on the tab? 21 Q. On the tab? It's Tab 863, and it says 22 A10623. 12733 1 A. I've got it. 2 Q. Reading, it says "Service corporation 3 CMO, also known as a Berner-Posen black magic 4 hole. We could register 4 billion plus in CMOs in 5 a service corporation not limited to the 6 30 percent of assets." 7 And then it says this: "The equity of 8 the sub is consolidated so it does not count as 9 direct investment." 10 Do you see that? 11 A. Uh-huh. (Witness nods head 12 affirmatively.) 13 Q. Do you know whether or not that is 14 correct? 15 A. I haven't the faintest idea. 16 Q. Now, you were asked questions by 17 Mr. Nickens as to whether or not taking gains as 18 reflected in the various memoranda that you looked 19 to, if there was anything wrong with it. And you 20 said "no." 21 Do you recall that? 22 A. Uh-huh. (Witness nods head 12734 1 affirmatively.) 2 Q. If the regulators had been told -- if 3 the examiners and the supervisory people of the 4 Federal Home Loan Bank Board had been told that 5 the gains that were being recorded were simply a 6 consequence of rebalancing the mortgage-backed 7 security portfolio for interest rate risk, all 8 right, and it turned out that those sales had been 9 made for purposes of generating accounting gains 10 at quarter's end, would there have been a problem 11 with USAT's activities? 12 MR. NICKENS: Your Honor, this man is a 13 fact witness, and now he's asking him if examiners 14 had been -- I mean, this is not relevant to any 15 potential information he has to bring to the 16 Court. 17 MR. GUIDO: Well, Your Honor, 18 Mr. Nickens did ask this witness whether or not -- 19 THE COURT: I'll deny the objection. 20 MR. GUIDO: Pardon? 21 THE COURT: Let's have the answer. 22 MR. GUIDO: I'd like your answer, 12735 1 Mr. Hansen. 2 A. If the -- let me just restate it so I 3 get it right. 4 If they told the regulators or the 5 examiners or anybody, the shareholders or anybody, 6 right, that the only way they were taking -- 7 reason that they were taking gains was for purely 8 economic transactions, such as rebalancing, which 9 was -- looked like to be the case on that memo 10 that we were looking at, the 21 percent, looked 11 like it was done to rebalance -- yet, in fact, 12 they turned around and made gains at quarter end 13 purely for accounting reasons and no economic 14 reasons, yes, they would have misled people. 15 Q. (BY MR. GUIDO) Now, you were asked 16 questions about Exhibit B1043 which is, I think, 17 your memo of June 16th, 1986, with regard to the 18 Goldman Sachs model. And in response to one of 19 Mr. Nickens' questions, you said you don't recall 20 using Wall Street very much for the analyses, the 21 scenarios -- 22 A. Personally. 12736 1 Q. Personally, you don't -- 2 A. I don't recall using them personally. 3 Q. Right, using them personally. 4 Was there something that you used 5 instead? 6 A. I used -- what I meant was I was not 7 typically the one who would initiate a call to a 8 Wall Street research department in order to get 9 analyses done. That doesn't mean we didn't do a 10 lot of analyses. We did. I just wasn't the one 11 who made the call and personally initiated it. 12 Q. You didn't mean to imply that you 13 wouldn't rely on the Wall Street firms' 14 statements, did you? 15 A. That was not my implication, no. 16 Q. Now, you were asked a number of 17 questions about how far Smith Breeden went out 18 when it did its analysis of interest rate 19 scenarios, and I think it went 500 basis points 20 either way. 21 Do you recall that? 22 A. Uh-huh. (Witness nods head 12737 1 affirmatively.) 2 Q. And you said that you didn't think very 3 often that interest rates in a day, you know, 4 would move 500 basis points? 5 A. Correct. 6 Q. Now, for doing scenario analysis, is it 7 designed to deal with just the situation where 8 interest rates move in one day? 9 A. That's typically the first place that 10 you start. 11 Q. Okay. 12 A. And there's two reasons for that. One 13 is in terms of doing the calculations, it's 14 incredibly simpler to do it that way so you can 15 get it done a lot faster. It's ten times as hard 16 to do it some other way. And the second reason is 17 that that's the most conservative way to look at 18 it. 19 Q. Okay. And what is the general range 20 that people used in the 1985, '86 time period, to 21 your knowledge, the range to analyze the risk -- 22 interest rate risk to a portfolio of 12738 1 mortgage-backed securities? 2 A. People used all sorts of things. I'm 3 not sure what they used back then as opposed to 4 now, but now certainly 400 would be a reasonable 5 number, what maybe people would look at. 6 Q. And then did they go out as far as 200 7 basis points? 8 A. Then? 9 Q. Uh-huh. 10 A. It depends on -- you know, if they were 11 looking at something like saying a strategy where 12 500 basis points didn't matter, then they 13 wouldn't. It depended on the circumstances. But 14 if they were looking, as these were, at the risk 15 to an entire institution, they would probably be 16 best served to look at more than 200 basis points. 17 Q. Now, you indicated that, with regard to 18 the trades that you were shown -- I think one of 19 the exhibits was B1190. 20 21 (Discussion off the record.) 22 12739 1 A. Are you talking about this one right 2 here? 3 Q. (BY MR. GUIDO) If you look at the 4 memorandum, September 22nd, 1986, that you wrote 5 with regard to the -- 6 MR. GUIDO: It was B1231, Your Honor. 7 Q. (BY MR. GUIDO) It says Smith Breeden 8 was consulted on the trade. 9 Do you see that? 10 A. Uh-huh. (Witness nods head 11 affirmatively.) 12 Q. Okay. Does that indicate that Smith 13 Breeden approved the trade? 14 A. I think there was a memo of the 15 mortgage security trading committee that came 16 prior to this and the statement was made that Crow 17 or Williams or somebody had called Smith Breeden 18 and they didn't have any problem with the trade. 19 Q. I think that that was another one of 20 the trades, and I think it said that there was no 21 objection. 22 Do you recall that? 12740 1 A. That one -- I'm not completely sure it 2 was referring to this trade, but -- 3 Q. Now, you were also shown some documents 4 in which you were asked about Mr. Mueller's -- 5 Walter Mueller's hiring, and that was in 6 Exhibit B1127. 7 Was Mr. Mueller, at the time he was 8 hired, a consultant for Imperial Savings in 9 San Diego? 10 A. Now that you mentioned it, it sounds 11 sort of familiar; but I'm not sure. 12 Q. And had he worked with the Caywood 13 Christian people? 14 A. I don't know. 15 MR. GUIDO: No further questions, Your 16 Honor. 17 THE COURT: Any questions by the 18 respondents? 19 MR. NICKENS: Just a few, Your Honor. 20 21 22 12741 1 2 FURTHER EXAMINATION 3 4 Q. (BY MR. NICKENS) Mr. Hansen, were you 5 for or against the use of Caywood Christian by 6 USAT? 7 A. I was for. 8 Q. And you were asked about the basis 9 point spread that you would look at on -- to do a 10 scenario analysis back in 1986, and I believe you 11 said you didn't know what was used back then? 12 A. Right. 13 Q. If you went to analyze a 14 mortgage-backed security today, is it not the case 15 that on Bloomberg the default would be 300 basis 16 points up and down? 17 A. Right. 18 Q. That's today? 19 A. I'll give you another example. We use 20 400 when we do it at our institution, and our 21 board thinks it's conservative to be looking out 22 that far. 12742 1 Q. But if you just go to the most widely 2 used mortgage-backed securities analytic service, 3 Bloomberg -- 4 A. Right. 5 Q. -- and you push the default button for 6 the yield table, you'll get -- 7 A. Plus or minus 300. 8 Q. 300 basis points up or down? 9 A. (Witness nods head affirmatively.) 10 Q. Now, you were asked whether -- with 11 regard to the implicit cost of capital or value of 12 capital, whether you would look at what the -- 13 well, would you look at the rate of earnings for 14 the whole institution as a whole, for the 15 institution as a whole in 1986 at USAT? 16 A. I don't think he asked me if that's 17 what I would use. 18 Q. I think he asked you whether it was 19 lower. 20 A. I think he asked me if the return on 21 equity of the company back then was probably lower 22 than 21 percent, and I said I presume it probably 12743 1 was. 2 Q. Is that something that you would look 3 at to try to establish the value of capital at 4 that point in time? 5 A. No. 6 Q. Could you explain in any way that that 7 would have anything to do with the price of oats 8 in Singapore? 9 A. As far as I'm concerned, whatever the 10 institution as a whole was earning at that time 11 would be irrelevant. 12 MR. NICKENS: I have no further 13 questions, Your Honor. 14 MR. EISENHART: Your Honor, I have just 15 one question. 16 THE COURT: Mr. Eisenhart. 17 18 EXAMINATION 19 20 Q. (BY MR. EISENHART) Mr. Hansen, did 21 you ever see any evidence that Drexel enjoyed any 22 special or favored status at USAT because of any 12744 1 work it might have been doing for other companies 2 in which Mr. Hurwitz was involved? 3 A. No. 4 MR. EISENHART: Thank you. 5 MR. GUIDO: No questions, Your Honor. 6 THE COURT: All right. Thank you. You 7 may step down. We'll adjourn until -- 8 MR. GUIDO: Your Honor, we have one 9 issue the OTS would like to raise before we 10 adjourn, and that is the issue of the documents 11 that -- with regard to the Bruce Williams 12 testimony. 13 THE COURT: You didn't get them yet? 14 MR. GUIDO: I have not gotten the 15 documents as of yet, Your Honor. 16 MS. CLARK: Yes, Your Honor. It's my 17 impression, as I have been in the courtroom all 18 this week, that there's been a great deal of 19 overlap between the matters on which Mr. Williams 20 was examined prior to the break and the testimony 21 of Mary Mims, particularly Doug Hansen today, and 22 Jerry Claiborne. 12745 1 It's my intention over the weekend to 2 review the transcripts and to make appropriate 3 adjustments to my outline and also, therefore, to 4 the documents I'm going to use. 5 Over the last break, I approached 6 Mr. Guido and told him of my plans and asked what 7 his preference would be with respect to at what 8 point he would like to receive the documents. And 9 unfortunately, I don't think I ever got an answer 10 from him. I'm not quite sure what issue he's 11 raising with the Court at this point. The 12 original commitment was to try to get him the 13 documents on Saturday and, if that's his 14 preference, I'm -- I will certainly do that. So, 15 I'm not sure what he's raising with the Court at 16 this point. 17 MR. GUIDO: Your Honor, what I'm 18 raising with the Court is that Ms. Clark told me 19 that she was going to give me -- Mr. Nickens had 20 described the stack to me earlier as being like 21 this (indicating). 22 MR. NICKENS: That's not correct, Your 12746 1 Honor. That is not correct. He asked me whether 2 or not these documents were ready, and I said I 3 simply did not know. He asked me how large the 4 stack was. I said I did not know, but that he 5 could note that yesterday's stack in connection 6 with the testimony that we had yesterday was this 7 high. It has nothing to do with Mr. Williams. I 8 have no idea if there is such a stack. 9 THE COURT: All right. What is the 10 issue? If Ms. Clark is prepared to deliver them 11 Saturday, I guess that's the best we can do at 12 this point. 13 MR. GUIDO: Well, Your Honor, what I'm 14 concerned about -- and I view this as a problem 15 with Williams & Connolly. I do not view it as a 16 problem with other counsel. This issue came up 17 because Mr. Villa, when he questioned the witness, 18 didn't provide me with copies that I believed were 19 simply being used for direct in the guise of 20 cross-examination. The way the Court has set up 21 the procedure, because you allow the witness -- 22 the questions to go beyond cross-examination, is 12747 1 that there are documents that I see that are 2 rather voluminous for the first time when they 3 are -- at that time when they are slapped down on 4 my desk. 5 The issue came up seven months ago with 6 Ms. Clark when I raised the issue. Your Honor 7 directed her to produce the documents in that 8 seven-month period of time, I never heard anything 9 from Ms. Clark. I wrote her a letter last week, 10 and she told me I would get the documents that she 11 was going to use on Saturday. She informed me 12 today that she would give me a stack of documents, 13 but that wasn't the set of documents that she was 14 going to use. It was only going to be some of 15 those documents. I believe, Your Honor, that this 16 amount of time, that this is not a good faith 17 effort to comply with the Court's directive and 18 that's why I'm raising it with the Court, because 19 I do think that as we move forward, we are going 20 to be dealing primarily with Williams & Connolly 21 as the lead counsel on the other side, given the 22 witnesses, and I do not want to be faced with what 12748 1 I believe to be a tactic to disadvantage the OTS. 2 And I'm raising this issue at this time. I would 3 like to have them at the date the Court said I 4 should get the documents that Ms. Clark intends to 5 use on Monday, not those that she intends to sift 6 through and pick for use on Monday. I believe the 7 fundamental fairness in this proceeding and the 8 way it has proceeded in the past between other 9 counsel on the respondents' side has satisfied 10 that need. It has not with the Williams & 11 Connolly people, Your Honor, and that's why I'm 12 asking the Court to address this issue. 13 I believe that Ms. Clark should be 14 directed to produce the documents tomorrow as the 15 Court said that she knows that she's going to use 16 with Mr. Williams on Monday. 17 MS. CLARK: Your Honor, there's been a 18 suggestion that there is tactical reason for the 19 timing of this, and I think that that's clearly 20 not the case. I've tried to give Mr. Guido the 21 option of receiving the documents on Saturday to 22 the extent I have winnowed through and made the 12749 1 decisions or if he would rather have them later in 2 the process. And I -- there's a saying, no good 3 deed goes unpunished. I do not understand what 4 the problem is here. There is no tactic. I do 5 not have the documents completed for the reasons 6 that I've just outlined. 7 When Mr. Guido sent me a letter last 8 week, he was kind enough to enclose a copy of the 9 transcript, and he did remind me what the 10 commitment was. And the commitment was to provide 11 the documents prior to the resumption of 12 Mr. Williams' testimony. That is exactly what I 13 offered to do. That's what I'm going to do, and 14 he has his choice as to at what point he wants to 15 get the documents. They are not being withheld. 16 I can only do the best I can do, and that's what 17 I'm trying to do. 18 THE COURT: Well, what are the 19 documents you're prepared to deliver tomorrow to 20 him? 21 MS. CLARK: I am prepared, beginning 22 tomorrow morning, to review the transcript of this 12750 1 week's testimony, to prepare an outline, and to 2 select documents. And at whatever point during 3 the day tomorrow at whatever time he wants me to, 4 I will give him that list at that point. 5 THE COURT: Is that going to include 6 the documents you're going to use? 7 MS. CLARK: It will include them to the 8 extent that I have them at that point, yes, Your 9 Honor. And hopefully, I will -- 10 THE COURT: Are there other documents 11 you may use that will not be included? 12 MS. CLARK: Not to my knowledge, Your 13 Honor. 14 THE COURT: But you may furnish him 15 documents you're not going to use. Is that the 16 problem? 17 MS. CLARK: I think that is the more 18 likely eventuality, that's correct, Your Honor. 19 And I was trying to give him the option of giving 20 him a more winnowed down set. It is my intention, 21 in light of the testimony that has occurred since 22 Mr. Williams completed his testimony before the 12751 1 break, to try to winnow down the outline. There 2 may be some areas that I will add on, but that's 3 not my intention. My intention is to reduce 4 rather than to expand the examination. I was 5 really just trying to be helpful to him, and I 6 guess I'm not sure why that has prompted this 7 discussion with the Court. 8 MR. GUIDO: Your Honor, the reason I 9 raise this issue is it seems to me that this issue 10 has come up a number of times over a seven-month 11 period of time. And every time it's come up, 12 Ms. Clark has some sort of excuse for not 13 complying with the Court's directive. I believe 14 that there is no legitimate reason for her at this 15 point in time, after seven months of reviewing 16 Mr. Williams' testimony, that she doesn't know 17 what documents she intends to use to cross-examine 18 that witness, Your Honor. 19 MS. CLARK: Your Honor, I'm sorry, but 20 that's just unacceptable. 21 THE COURT: Well, at this point, I 22 think the most that I can do is to order the 12752 1 documents produced by tomorrow and leave the time 2 to the parties. But I do think the other side is 3 entitled to some notice as to what documents 4 you're going to use prior to the appearance of the 5 witness on the stand. I know that there has been 6 an exchange of documents. But in view of the 7 numerous documents, to say the least, it's a 8 little hard for one side to know what the next 9 day's proceedings are going to cover. So, there 10 should be reasonable disclosure in advance of the 11 appearance of the witness of the documents that 12 are going to be used. 13 MS. CLARK: Yes, Your Honor. And I 14 think the procedure up until now and through the 15 several months of hearing before the break was 16 that OTS provided us a list of the documents to be 17 used the next day. And in this situation, he will 18 be getting them slightly in advance of what has 19 been the practice up till now, and that's -- that 20 is what I committed to do, and that is what I'm 21 going to do. 22 MR. GUIDO: I think the practice, Your 12753 1 Honor -- I think that misstates the practice. The 2 practice has been, particularly on weekends, that 3 they are provided on the Friday before and they 4 have been. 5 MR. NICKENS: Well, I mean, Your Honor, 6 the first witness on Monday is Mr. Bruno and I 7 don't yet have a list of Mr. Bruno's documents. 8 So, you know, we're all dealing with a difficult 9 situation. The documents are so voluminous. And 10 I'm not -- I'm sure that I will get a list, and I 11 will do my best to react to that. I'm also sure 12 that Ms. Clark has done her best and, you know, 13 Your Honor, we have these computer lists and we'll 14 get, you know, every document on which the 15 witness' name appears. And we start out with 16 documents this high (indicating) that have, you 17 know, that document in there four or five times. 18 And I'm certain that Ms. Clark is not withholding 19 her list for some tactical reason as has been 20 suggested by Mr. Guido. I know he's doing his 21 best to get me Mr. Bruno's list, and I am certain 22 that Ms. Clark is doing her best to get to him 12754 1 what she might use with Mr. Williams. 2 THE COURT: All right. My order is 3 that Ms. Clark will furnish the documents by 4 5:00 o'clock tomorrow. We'll adjourn until 5 9:00 o'clock Monday. 6 7 (Whereupon at 4:27 p.m. 8 the proceedings were recessed.) 9 10 11 12 13 14 15 16 17 18 19 20 21 22 12755 1 STATE OF TEXAS COUNTY OF HARRIS 2 REPORTER'S CERTIFICATION 3 TO THE TRIAL PROCEEDINGS 4 I, Marcy Clark, the undersigned Certified 5 Shorthand Reporter in and for the State of Texas, 6 certify that the facts stated in the foregoing 7 pages are true and correct to the best of my ability. 8 I further certify that I am neither 9 attorney nor counsel for, related to nor employed 10 by, any of the parties to the action in which this 11 testimony was taken and, further, I am not a 12 relative or employee of any counsel employed by 13 the parties hereto, or financially interested in 14 the action. 15 SUBSCRIBED AND SWORN TO under my hand 16 and seal of office on this the 19th day of June, 17 1998. 18 ____________________________ MARCY CLARK, CSR 19 Certified Shorthand Reporter In and for the State of Texas 20 Certification No. 4935 Expiration Date: 12-31-99 21 22 12756 1 STATE OF TEXAS COUNTY OF HARRIS 2 REPORTER'S CERTIFICATION 3 TO THE TRIAL PROCEEDINGS 4 I, Shauna Foreman, the undersigned 5 Certified Shorthand Reporter in and for the 6 State of Texas, certify that the facts stated 7 in the foregoing pages are true and correct 8 to the best of my ability. 9 I further certify that I am neither 10 attorney nor counsel for, related to nor employed 11 by, any of the parties to the action in which this 12 testimony was taken and, further, I am not a 13 relative or employee of any counsel employed by 14 the parties hereto, or financially interested in 15 the action. 16 SUBSCRIBED AND SWORN TO under my hand 17 and seal of office on this the 19th day of June, 18 1998. 19 _____________________________ SHAUNA FOREMAN, CSR 20 Certified Shorthand Reporter In and for the State of Texas 21 Certification No. 3786 Expiration Date: 12-31-98 22