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, Y