12757 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 22, 1998 22 12758 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 (Not present) 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 12759 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 (Not present) 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, CS R 22 12760 1 2 EXAMINATION INDEX 3 Page 4 DOMINIC BRUNO 5 Examination by Mr. Guido................12763 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 12761 1 P-R-O-C-E-E-D-I-N-G-S 2 (10:05 a.m.) 3 THE COURT: Be seated, please. The 4 hearing will come to order. 5 Mr. Guido, do we have a witness? 6 MR. GUIDO: Yes, Your Honor. At this 7 time, Your Honor, the OTS would like to call 8 Mr. Dominic Bruno. 9 THE COURT: Would you take the oath, 10 please? 11 THE WITNESS: Yes. 12 13 DOMINIC BRUNO, 14 15 called as a witness and having been first duly 16 sworn, testified as follows: 17 THE COURT: Be seated, please. 18 MR. GUIDO: Your Honor, we are going to 19 work from the sets of binders again with this 20 witness in an attempt to expedite the movement of 21 paper around. The first binder is a packet of 22 exhibits for the examination of Dominic Bruno. 12762 1 The second -- 2 3 (Discussion off the record.) 4 5 MR. GUIDO: The second are three 6 binders of investment committee minutes, Your 7 Honor, for the year 1988 which Mr. Nickens and I 8 concluded would be best to introduce in the record 9 in bulk.) 10 11 (Discussion off the record.) 12 13 MR. GUIDO: For some reason, Your 14 Honor, my staff didn't bring down the performance 15 reports. What I'd like to do -- 16 THE COURT: I have three volumes of 17 these. Are these all minutes? 18 MR. GUIDO: These are all investment 19 committee minutes, Your Honor. Mr. Langdon, did 20 you get a copy? And Mr. Bruno, you didn't receive 21 a copy. You only received that one. Right? 22 THE WITNESS: Yes. 12763 1 (Whereupon Mr. Guido handed the witness 2 the binders.) 3 4 MR. GUIDO: What I'd like to do, Your 5 Honor, if I might, is start examining the witness 6 and then move these documents into evidence at the 7 point in time that we get to the issue of -- 8 THE COURT: All right. Proceed. 9 10 EXAMINATION 11 12 Q. (BY MR. GUIDO) Mr. Bruno, would you 13 state your full name for the record, please? 14 A. My name is Dominic R. Bruno, Jr. 15 Q. And where do you reside? 16 A. My address is 81 Valley Drive, 17 Greenwich, Connecticut. 18 Q. And what is your business address? 19 A. My business address is 1185 6th Avenue, 20 New York City. 21 Q. And what business are you affiliated 22 with at that address? 12764 1 A. The name of the firm is M.D. Sass 2 Investors Services. 3 Q. Could you spell that for us, please? 4 A. M as in Michael, D as in David, Sass, 5 S-A-S-S, Investors Services. 6 Q. And what is your position with that 7 firm? 8 A. My title is senior vice president, and 9 I'm a portfolio manager with this firm. 10 Q. And what kind of portfolios do you 11 manage on behalf of the firm? 12 A. I manage fixed income portfolios spread 13 across a variety of fixed income securities, 14 primarily mortgage securities. 15 Q. Okay. Are those what are known as 16 mortgage-backed securities? 17 A. That is correct. 18 Q. Okay. And can you tell us a little bit 19 about your educational background after high 20 school? 21 A. I have a Bachelor's Degree in Economics 22 from St. Joseph's College. That's 1972. And I 12765 1 have a Master's Degree in Economics from the 2 University of Maryland, 1975. 3 Q. Have you taken any post-graduation 4 courses? 5 A. Aside from the economics classes, I've 6 done other work, non-degree types of classes at 7 Carnegie-Mellon. I have some work I've taken 8 there. 9 Q. What kind of courses did you take 10 there? 11 A. Quantitative finance classes. 12 Q. And can you tell us what you did in 13 terms of your employment history after you first 14 got your master's degree? 15 A. For a while, I was an instructor at the 16 University of Maryland in economics. After that, 17 I entered into the financial field working for a 18 period with the Chicago Board of Trade in Chicago 19 in futures and options. I worked briefly for 20 Merrill-Lynch also in the field of futures and 21 options. I worked with Aetna -- for Aetna Life 22 and Casualty for a few years as an investment 12766 1 officer and as a bond trader. And then I had a 2 couple of jobs, very brief positions, with two 3 thrifts. One of them was for Meritor Savings Bank 4 in Philadelphia, and one was for United Savings in 5 Houston. Since the United Savings position -- I 6 was only there, to my memory, 11 months. And 7 after being unemployed after that position for 8 five months, I've been with M.D. Sass for nine 9 years. 10 Q. Now, when you were -- how did you learn 11 about USAT as an employment opportunity? 12 A. This was through, quote, unquote, a 13 headhunter, a recruiter. 14 Q. Did the recruiter approach you? 15 A. Yes, he did. 16 Q. And did the headhunter arrange 17 interviews for you with people at USAT? 18 A. Yes. 19 Q. And did the headhunter indicate who had 20 contacted the headhunter from USAT? 21 A. Yes. I believe it was Mike Crow. 22 Q. And did the -- who was it that you 12767 1 interviewed with when you went to USAT? 2 A. I interviewed with several people: 3 Mike Crow, Bruce Williams, Jenard Gross, Barry -- 4 I forget the gentleman's name who worked for 5 Charles Hurwitz. 6 Q. A man named Barry knew Munitz? 7 A. Barry Munitz. 8 Q. Anybody else? 9 A. Gene Stodart, the high-yield manager. 10 And afterwards, after I took the position and got 11 there, I met Mr. Hurwitz. 12 Q. When did you meet him? 13 A. That was probably my first week into 14 the position. 15 Q. And what were the circumstances of 16 meeting Mr. Hurwitz? 17 A. He asked to speak with me. He welcomed 18 me to the firm, just some very general 19 conversation, and he wished me luck in my 20 position. 21 Q. Did he meet with you any time after 22 that? 12768 1 A. No. We would see each other in the 2 haul, just greet each other. He would see me in 3 the trading room. After that first meeting, it 4 was a matter of just greeting each other politely. 5 Q. Was -- did he attend any of the 6 investment committee meetings that you were at? 7 A. Yeah. I forgot about those. He did 8 attend a small number of the investment meetings, 9 the weekly investment meetings. Not many, but he 10 was there for a couple of them. 11 Q. And where was your office located? 12 A. It was on the same floor as 13 Mr. Hurwitz'. It was on the same floor as the 14 trading room. I spent 99 percent of my time in 15 the trading room. There was, away from that, an 16 office for me; but I never spent any time in that 17 other office. I was primarily in the trading 18 room. 19 Q. Now, what were you doing in the trading 20 room? Were you monitoring the computer screens to 21 see how the market was performing? 22 A. Yes. Monitoring market activity, 12769 1 keeping track of all kinds of developments in the 2 market, and also spending a lot of time monitoring 3 the portfolio. 4 Q. Now, when you were hired, when you were 5 interviewed, did anyone indicate to you what the 6 financial condition of USAT was at the time? 7 A. Yes. I had been told that the company 8 was in pretty bad shape; but the plan was that 9 throughout the course of the following year, the 10 company was confident that it would be 11 recapitalized with the help of the regulatory 12 authorities, that this institution was well liked 13 by the regulators. The plan was that this company 14 would be acquiring other institutions and would 15 become a solid and solvent institution over the 16 next several months. 17 Q. Was any mention made of the so-called 18 Southwest Plan to you at that time? 19 A. I do not recall; but in general, I had 20 some conception of the Southwest Plan at the time. 21 Q. Was what they were describing to you 22 what you now have learned has become known as the 12770 1 Southwest Plan, that they hoped to participate in 2 that? 3 A. Yes. 4 Q. And did anyone indicate to you the 5 state or the condition that the mortgage-backed 6 portfolio was in? 7 A. No. 8 Q. Now, they didn't mention that to you? 9 A. No. 10 Q. Now, they were interviewing you to 11 manage the mortgage-backed security portfolio, 12 were they not? 13 A. And in addition, the hedging position 14 behind those assets. 15 Q. Okay. Now, what was the time frame of 16 these discussions? Was this early 1988 or late 17 1987? 18 A. I think this was very early 1987. 19 Q. Early 1987? 20 A. Nineteen -- 21 Q. '87 or '88? 22 A. Late '87. 12771 1 Q. Late '87? 2 A. Early '88. 3 Q. Now, when you joined USAT, did you have 4 an opportunity to review the investment committee 5 minutes to ascertain the condition that the 6 mortgage-backed security portfolio was in? 7 A. No. I reviewed the actual portfolio 8 itself. I did not review any investment committee 9 minutes. 10 Q. When you first joined, you did not? 11 A. Correct. 12 Q. I'd like to direct your attention to 13 the Binder No. 1 of the investment committee 14 minutes and direct your attention to -- 15 MR. GUIDO: Before I do that, Your 16 Honor, I might as well move in the investment 17 committee minutes that we have. And I'll go 18 through them in the order that they are in the 19 binder. 20 The first set of minutes are 21 Exhibit A1484. They are the minutes of the 22 investment subcommittee, January 5, 1988. The 12772 1 second is A1485. That's the minutes of the 2 investment committee of January 8, 1988. The 3 third is A1486. That's the minutes of the 4 investment committee of January 13, 1988. 5 THE COURT: Just hold it a minute. I'm 6 having trouble finding 1485. 7 MR. GUIDO: There are blue-colored tabs 8 that divide the pages. 9 THE COURT: Okay. And then 1486. 10 Okay. 1487. Continue. Excuse me. 11 MR. GUIDO: 14 -- I'm sorry. Could the 12 court reporter indicate to me which was the last 13 number that I read? 14 MR. NICKENS: 1486. 15 MR. GUIDO: The next one is 1487, which 16 is January 20, 1988. The next one is A1488. That 17 is January 27, 1988. The next one is A1489. 18 That's February 3rd, 1988. The next one is A1490. 19 That's February 10, 1988. The next one is A1492. 20 That's February 27, nineteen -- it says 1987, Your 21 Honor, at the top; but if you look the first 22 sentence, it says "A meeting of the investment 12773 1 committee was held on February 17, 1988." And if 2 you look, it says Dominic Bruno was there. He 3 clearly wasn't there on February 17th of 1987. 4 These are 1988 minutes. The next one is A -- I 5 think this issue had come up once before in 6 another set of minutes. 7 The next one is A1493. That's the 8 minutes of the investment committee of 9 February 24, 1988. The next one is A1494. That's 10 the minutes of the investment committee of 11 March 2nd, 1988. The next exhibit is A1495. 12 That's the minutes of the investment committee of 13 March 10th, 1988. And the last one in that 14 binder, Your Honor, is March 16th minutes of 15 investment committee. That's A1496. 16 Turning now to the second binder, Your 17 Honor. 18 MS. CLARK: Mr. Guido, I'm sorry. Is 19 there an A1491? 20 MR. GUIDO: I do not have an A1491. 21 The second binder, Your Honor, starts 22 with A1497. That is a memo from Bruce Williams to 12774 1 the investment committee. The second is A1498, 2 Your Honor. That's the minutes of the investment 3 committee of March 23, 1988. The third, Your 4 Honor, is A1499. That's the minutes of the 5 investment committee for March 30, 1988. The next 6 one, Your Honor, is A1500. That's the minutes of 7 April 6, 1988, for the investment committee. The 8 next one, Your Honor, is A1501. That's the 9 minutes of the investment committee of April 13, 10 1988. The next one, Your Honor, is 1502. That's 11 the minutes of the investment committee for 12 April 21, 1988. The next one is A1503, Your 13 Honor. That's the minutes of the investment 14 committee for April 27, 1988. The next one, Your 15 Honor, is A -- 16 THE COURT: Wait a minute. What -- 17 1502 is what? 18 MR. GUIDO: 1502, Your Honor, is the 19 minutes for the investment committee of April 21. 20 THE COURT: All right. Continue. 21 MR. GUIDO: A1503 is the minutes for 22 April 27, the investment committee. A1504 are the 12775 1 minutes of the investment committee for May 4, 2 1988. A1505 are the minutes of the investment 3 committee for May 11, 1988. 4 The next one, Your Honor, I believe is 5 a duplicate of what comes later, but it is A1506. 6 And it is a portion of the investment committee 7 for May 18th, 1988. I believe that the reason 8 this is in here, Your Honor, is the investment 9 committee minutes that are behind it may be 10 incomplete and there's an issue about Bates 11 stamps. These were, I think, compiled by -- I 12 don't know the individual, but the respondents 13 compiled this. And I believe that this 14 compilation was done in this way because of a 15 problem with the minutes of May 18th. 16 Then the May 18th, 1988 minutes are 17 actually at A1507, Your Honor. The next one is 18 A1508. That's the minutes of the investment 19 committee of May 25, 1988. The next one is A1509. 20 That also appears to be a duplicate of 1510, but 21 it's a subportion of the minutes of the investment 22 committee of June 1, 1988. The next one is A1510, 12776 1 Your Honor, which are the minutes of the 2 investment committee of June 1, 1988. The next 3 one, Your Honor, is A1511 which are the minutes of 4 the investment subcommittee of June 7, 1988. And 5 the next one, Your Honor, is the minutes -- is 6 A1512. Those are the minutes of the investment 7 committee of June 8th, 1988. The next one is 8 A1513, Your Honor, which are the minutes of the 9 investment subcommittee of June 9, 1988. The next 10 one, Your Honor, is A1514 which are the minutes of 11 the investment committee of June 15th, 1988. The 12 next one, Your Honor, is A1515 which are the 13 minutes or a portion of the minutes of the 14 investment committee of June 15th. The next one 15 is A1516, Your Honor. That is the minutes of 16 June 22nd, 1988. And then the last one in this 17 binder, Your Honor, is A1517. Those are the 18 investment subcommittee meeting notes from Gene 19 Stodart to the investment committee dated 20 June 22nd, 1988. 21 The third binder, Your Honor, has the 22 remainder of the investment committee minutes that 12777 1 the respondents and the OTS were able to locate. 2 And that starts with A1518, which are the minutes 3 of the investment committee of June 29, 1988. The 4 next one is A1519, which are the minutes of the 5 July 6th, 1988 investment committee. A1520, Your 6 Honor, are the minutes of the investment committee 7 of July 13th, 1988. A1521 are the minutes of the 8 investment committee for July 20, 1988. 9 Now, the next one, Your Honor, you'll 10 notice the tab or the exhibit number doesn't 11 appear to have a number on it. Since the one 12 following that is A1522A, I move the minutes of 13 the investment committee of July 27th as 1522 so 14 that that is clear for the record. Oh, it is 1522 15 on Mr. Nickens' copy, Your Honor. 16 A1522A are the minutes of the 17 investment committee of August 3, 1988. A1523 are 18 the minutes of the investment committee of 19 August 10th, 1988. A1524 are the minutes of the 20 investment committee of August 25, 1988. A1525 21 are the minutes of the investment committee of 22 August 31, 1988. A1526 are the minutes of the 12778 1 investment subcommittee of August 31, 1988. 2 Exhibit A1527 are the minutes of the investment 3 committee of September 14th, 1988. A1528 are the 4 minutes of the investment committee of 5 September 14, 1988. A1529 are a portion of the 6 minutes of the investment committee of 7 September 14th, 1988. 8 THE COURT: Wait a minute. I'm having 9 trouble finding it. Does it have a Bates stamp on 10 it? 11 MR. GUIDO: The Bates stamp, Your 12 Honor, is -- 13 THE COURT: For 1529. 14 MR. GUIDO: A1529, Your Honor -- 15 THE COURT: I'm sure I have that one 16 somewhere. All right. Thank you. You may 17 continue. 18 MR. GUIDO: The -- I think the last one 19 I spoke about are the portion of the investment 20 committee minutes of September 14th, 1988: A1529. 21 It's my understanding, Your Honor, that when -- if 22 you look at 1528, that's also minutes of the 12779 1 investment committee of September 14th, 1988. The 2 duplicates are in because there may be something 3 wrong with a page or two or copies of those. And 4 so, another copy was inserted by respondents' 5 counsel when they prepared the documents. 6 A1531, Your Honor, is minutes of 7 investment committee of August 5th, 1988. 8 October 5th, 1988. 9 MR. NICKENS: Did you say 1530 for some 10 reason? 11 MR. GUIDO: I don't have 1530. 12 Your Honor, at the lunch break we'll 13 make a copy of it. I don't think -- well, I don't 14 intend to use it, but Mr. Nickens may. It's 15 A1530, which are the minutes of the investment 16 committee of September 20, 1988. And we'll 17 provide the court with copies at the break. 18 A1531 I indicated was the October 5th, 19 1988, investment committee minutes. A1532 are the 20 minutes of the investment committee of 21 October 19th, 1988. A1533 are the minutes of the 22 investment committee of December 7th, 1988. And 12780 1 A1534 are minutes of the investment committee of 2 December 29, 1988. 3 Your Honor, at this point in time, we 4 would like to move the admission of the exhibits 5 that I just read into the record starting with 6 Exhibit A1584, the minutes of January 5th, 1988, 7 and running through A1534, the minutes of the 8 investment subcommittee of 12/29/88. 9 MR. NICKENS: Your Honor, no objection, 10 although I should note for the record that our 11 records indicate that A1487 has been admitted at 12 Tab 388. A1530 has been admitted at 287. I think 13 that's the one I showed Mr. Guido. 14 For some reason, my set did not have a 15 copy of 15 -- A1515, A1528, or A1529. But based 16 upon the representation that that's what they 17 are -- we will check them later -- there is no 18 objection. 19 I also do not have a copy of A1497 20 which Mr. Guido described as a Bruce Williams 21 memo. And if I could be supplied with a copy of 22 that, I'm sure I could quickly indicate -- 12781 1 MR. GUIDO: What's the date? 2 MR. NICKENS: I don't have the copy. 3 MR. GUIDO: 1497? 4 5 (Whereupon Mr. Nickens reviews the 6 document.) 7 8 MR. NICKENS: No objection, Your Honor. 9 10 (Discussion off the record.) 11 12 MR. GUIDO: I'd like to resume with the 13 questioning -- 14 MS. CLARK: Mr. Guido, just to make the 15 set complete, you can have that one. 16 MR. GUIDO: Your Honor, Ms. Clark just 17 gave me the document that's A1491 to make the set 18 complete. This is one that we will provide the 19 Court after the lunch break. That's the minutes 20 of the investment subcommittee of February 12th, 21 1988. The document that she gave me is a 22 three-page document. We will provide a copy of 12782 1 that after the break. 2 THE COURT: All right. These documents 3 are received. Our records do indicate, as 4 Mr. Nickens stated, that 1487 and 1530 are in 5 evidence. 6 MR. GUIDO: Okay. 7 Q. (BY MR. GUIDO) Now, Mr. Bruno, I'm 8 sorry for the delay. 9 A. That's all right. 10 Q. Now, when you were hired, who were you 11 told you were to report to? 12 A. It was pretty clear to me that I 13 reported to Mike Crow. 14 Q. Okay. So that he was the person that 15 you reported to? 16 A. (Witness nods head affirmatively.) 17 Q. Did you report at any time to 18 Jenard Gross? 19 A. Well, by implication, I felt I reported 20 to everyone above Mike Crow. Mr. Gross was senior 21 to Mike Crow; so, I considered him a superior. 22 Q. And did you consider Mr. Connell to be 12783 1 a superior when he arrived at USAT? 2 A. Yes, I did. 3 Q. And what position did he take at USAT? 4 A. The same position that Jenard Gross had 5 held. 6 Q. Okay. And then what happened to Jenard 7 Gross' position? What did he become at that point 8 in time? 9 A. I think he became chairman. I think he 10 replaced Charles Hurwitz. 11 Q. As chairman of USAT? 12 A. Yes. But I'm not 100 percent clear. 13 Q. Or the chairman of UFG? 14 A. Yeah. I don't -- I don't remember. 15 Q. Now, did you feel that you had a 16 responsibility to report to Barry Munitz? 17 A. No, I did not feel that. 18 Q. You didn't report directly to Barry 19 Munitz? 20 A. I met Barry briefly when I interviewed, 21 and I really don't think I've seen him since. 22 Q. Okay. Did he attend any of the 12784 1 investment committee meetings? 2 A. No, he did not. 3 Q. Now, did Jenard Gross attend the 4 investment committee meetings? 5 A. Yes. 6 Q. And did Ron Heubsch attend the 7 investment committee meetings? 8 A. Yes. 9 Q. Now, I'd like you to turn to the 10 Binder 1, the document that's previously been 11 admitted as A1487, which is the minutes of the 12 investment committee of January 20, 1988. I'd 13 like to direct your attention to the Bates stamp 14 number US3012509, which is one of those charts I 15 think that are referred to as sensitivity charts. 16 Do you see that? Do you have that 17 page? 18 A. Can you repeat that number, please? 19 US -- 20 Q. US3012509. 21 A. 509. 22 Q. It's about a quarter to a half an inch 12785 1 into the packet. 2 A. I have it. 3 Q. Now, do you see the chart at the top of 4 the page? It says, "Summary: Daily 5 mark-to-market 15 January 1988"? 6 A. Yes. 7 Q. Now, January 15th was right before you 8 arrived. I think you first started around 9 February 10th, 1988? 10 A. I believe that's correct. 11 Q. We'll get to that in a minute. Now, 12 that describes a mortgage-backed security 13 portfolio, does it not? 14 A. And other items. 15 Q. Okay. Now, let's start with that 16 portfolio. It says, "DARTs, AMPs." 17 Do you see that? 18 A. Yes. 19 Q. Now, were those securities -- 20 mortgage-backed securities that were held in 21 separate subsidiaries of USAT? 22 A. I believe that's correct, but my memory 12786 1 is very vague. 2 Q. And then it says, "treasury." 3 Do you see that? 4 A. Yes. 5 Q. And was that a portfolio in USAT 6 itself? 7 A. I do not remember. 8 Q. Okay. And do you see where it says 9 "investments"? 10 A. Yes. 11 Q. Was that a portfolio in USAT itself? 12 A. I do not remember. 13 Q. Now -- then it has "Arb 1, Arb 2." 14 Do you see those? 15 A. Yes. 16 Q. Does that make reference to portfolios 17 that were in United MBS, the subsidiary of USAT? 18 A. I believe that's correct. Very 19 vaguely, that sounds familiar to me. 20 Q. Now, I'd like to direct -- and then 21 look. It says, "IOs and POs in Arb 2." 22 Do you see that? 12787 1 A. Yes. 2 Q. Is that making reserves to IOs and POs 3 that were held in the United MBS subsidiary? 4 A. I believe that's correct. 5 Q. Now, when we talk about the United MBS 6 subsidiary, do you understand that to be the 7 subsidiary that was set up at about the time that 8 Sandy Lorenson arrived at USAT to manage the 9 portfolio? 10 A. That is my understanding. 11 Q. Now, it says at the bottom that USAT 12 and other book value, $1,310,556,000. 13 Do you see that? 14 A. Yes. 15 Q. Is that your understanding of the 16 approximate size of the USAT portfolio that you 17 were asked to manage when you were hired? 18 A. You know, I remember it as being 19 larger; but I mean, that's certainly -- it was a 20 large portfolio. 21 Q. Okay. Do you remember it being around 22 $3 billion in total -- 12788 1 A. Yes. That's the number that rings 2 clearly to me. 3 Q. Okay. Now, the portfolio was divided 4 between that United MBS -- that Sandy Lorenson 5 subsidiary and USAT and other subsidiaries, was it 6 not? 7 A. Right. 8 Q. Now, look at the next entry. It says, 9 "United MBS book value." 10 Do you see that? It says 11 1,731,816,000. 12 Do you see that? 13 A. Yes. 14 Q. Okay. Now, is it your understanding 15 that those are the portfolios that you were asked 16 to manage at USAT when you first started there? 17 A. That along with other assets, that make 18 up what I remember as being 3 billion. 19 Q. Pardon? 20 A. I remember 3 billion in assets. 21 Q. Okay. Well, did those two figures add 22 up to 3 billion -- 12789 1 A. You know. 2 Q. -- 41? 3 A. I could hardly read this, but that's 4 the 3 billion. 5 Q. Now, they add up to about $3 billion? 6 A. That's it, yeah. 7 Q. Now, were there also subsidiaries that 8 were set up that had CMOs in them? Do you 9 remember those? 10 A. I recall CMOs, absolutely. 11 Q. And that there were residuals that were 12 held by USAT as part of those. Right? 13 A. Yes. 14 Q. Were you also asked to manage those 15 residuals? 16 A. Yes. 17 Q. Now, these mortgage-backed securities 18 or derivatives that you were asked to manage, were 19 you also asked to manage hedged instruments that 20 accompanied those portfolios? 21 A. Yes. 22 Q. Did those include swaps? 12790 1 A. Yes. 2 Q. Were there any swaps unrelated to these 3 mortgage-backed securities or derivatives that you 4 were asked to manage separate from that? 5 A. I do not recall. I don't believe so. 6 Q. Now, I'd like to direct your attention 7 to the sensitivity summary at the bottom of the 8 page. 9 Do you see, that has the same 10 description of investments or assets that -- at 11 the top. And look at the column that says 12 "unchanged." 13 Do you see that column? 14 A. Yes, I do. 15 Q. Okay. It's a little hard to read, but 16 it says that "The mark-to-market value of the 17 total assets were -- had a negative 179,797 from 18 book value." 19 Do you see that? 20 A. Yes. 21 Q. And then it lists a number of 22 instruments that look like hedging instruments. 12791 1 There are swaps? 2 A. Right. 3 Q. Caps, Eurodollar strips, asset options. 4 Do you see those? 5 A. Yes. 6 Q. And then that the total loss 7 mark-to-market as of that date, just prior to you 8 taking over the portfolio, was $245,844,000. 9 Do you see that? 10 A. Yes. 11 Q. Is that your understanding of basically 12 the status of the portfolio when you took it over? 13 A. That's the understanding of some key 14 statistics along with other implications that I 15 drew from that, that's correct. 16 Q. Now, what were you asked to do with 17 that portfolio that you found in that condition? 18 A. I'm not 100 percent sure what 19 specifically I was asked to do. My memory is that 20 I was there to come up with some ideas for 21 improving performance -- what "performance" meant 22 was not agreed upon by all relevant parties -- but 12792 1 to make judgments about activities we can engage 2 in to improve on performance. 3 Q. Were you asked to help solve the 4 problems in that portfolio so that USAT might 5 qualify to be part of the so-called Southwest 6 Plan? 7 A. In terms of being a participant to the 8 required restructuring, yes, I was. 9 Q. So, you were asked to help restructure 10 that portfolio to get USAT into some condition to 11 qualify for the Southwest Plan? 12 A. Yes. 13 Q. Now, the -- how were the -- I guess the 14 next question is: What were the nature of the 15 instruments -- there is reference to IOs and POs 16 in there. 17 Can you tell us what IOs and POs refer 18 to? 19 A. There are numerous mortgage-backed 20 derivatives, a variety of securities whose cash 21 flows depend on an underlying mortgage-backed 22 security. Now, two kinds of mortgage-backed 12793 1 derivatives whose cash flows depend on an 2 underlying mortgage-backed security consist of 3 interest-only securities, IOs, and POs, 4 principal-only securities. 5 Now, the way that an IO or an 6 interest-only security or a PO, a principal-only 7 security, is created is in terms of taking a plain 8 vanilla mortgage bond -- for example, let's 9 suppose a mortgage-backed security having a coupon 10 of 8 percent, a mortgage-backed security which is 11 basically a mortgage loan pays monthly principal 12 and interest. The way we derive in IO and a PO is 13 to take those monthly interest and principal 14 payments and break them up and sell the interest 15 portion to one investor and the monthly principal 16 payments portion to a second investor. 17 So, you carve the monthly cash flows 18 into its interest-only portion, its principal-only 19 portion, and you, therefore, have an IO and a PO. 20 Q. Now, there were also residuals -- 21 A. Yes. 22 Q. -- portfolios that you managed. 12794 1 Can you tell us what those residuals 2 were in that portfolio? 3 A. The residual, as the name suggests, has 4 to do with residual cash flows that result out of 5 this creation of a large derivative structure. 6 When a CMO is created, when a collateralized 7 mortgage obligation is created, a collateralized 8 mortgage obligation is a series of bonds or series 9 of tranches. Now, those series of bonds have 10 their cash flows derived from a mortgage-backed 11 security. So, there's this existing 12 mortgage-backed security which is the source of 13 all the cash flows of these CMO bonds. There 14 might be a two-year CMO, a five-year CMO. There 15 are a variety of little bonds created from the 16 cash flows of the mortgage security. 17 In the creation of a CMO structure, it 18 is not 100 percent clear what the all conclusive 19 cash flows that will result from the underlying 20 mortgage security. That level of uncertainty, 21 that final level or series of cash flows is 22 encompassed in terms of a residual. So, there are 12795 1 some residual cash flows that are left over after 2 all the various tranches or bonds get their 3 required cash flows. So, it's this uncertain 4 level or residual of cash flows. It's the -- it's 5 what's left over. 6 Q. Is that the most volatile in terms of 7 reaction to interest rates in value? 8 A. It depends on the kind of CMO structure 9 that is created. I found the residuals in this 10 portfolio to see some of the most volatile I have 11 ever seen. 12 Q. Now, with regard -- looking back, there 13 were the treasury portfolio, the investments 14 portfolio, Arb 1 and Arb 2. They don't -- and the 15 DARTs and AMPs portfolios. There's no description 16 of those. 17 I'd like to direct your attention to 18 the exhibit in the book -- the smaller of the four 19 books that I've shown you: Exhibit T6083, which 20 is -- it's your memorandum of -- I think it's 21 August 29th -- to Jenard Gross, Larry Connell, and 22 Mike Crow. And I want to direct your attention to 12796 1 Bates stamp US3012834. 2 MR. GUIDO: Before I do so, I'd like to 3 move the admission of T6083, Your Honor. 4 MR. NICKENS: T6083 consists of Bates 5 Nos. 2812 through 28137? 6 MR. GUIDO: That's correct. 7 MR. NICKENS: No objection. 8 Q. (BY MR. GUIDO) I'd like to direct 9 your attention -- 10 THE COURT: Excuse me. You're moving 11 608 -- 12 MR. GUIDO: -- 3, Your Honor. The 13 binder, Your Honor, is in chronological order. 14 THE COURT: I think I have it. I have 15 6082. 16 MR. NICKENS: Your Honor, it actually 17 comes after -- 18 MR. GUIDO: It's four back from that, 19 Your Honor. 20 THE COURT: All right. Received. 21 Q. (BY MR. GUIDO) Now, I'd like to 22 direct your attention to US3012834. It says, "It 12797 1 is noted that close to two-thirds of United's 2 portfolio is in the form of new 30-year current 3 coupon MBSs." 4 Do you see that? 5 A. Yes. 6 Q. Was that what you recall the MBSs to 7 consist of? 8 A. I only recall it because it's here, but 9 I'm sure this is true. 10 Q. Okay. And -- I mean, you did write 11 this memorandum? You recall that? 12 A. Absolutely. 13 Q. Now, I'd like to direct your attention 14 to the memorandum which is T6082, which is the 15 document that the judge just reported to. That's 16 a memorandum from you to Jenard Gross and 17 Mike Crow dated July 28th, 1988. And the heading 18 is "Mortgage-backed securities and investment 19 strategy." 20 Do you recall preparing that 21 memorandum? 22 A. 6082? 12798 1 Q. That's four in front of the document I 2 just showed you. 3 A. Oh, it's four -- 4 Q. Back to the front. 5 A. Right. Okay. I have that. 6 Q. And do you recall preparing that 7 memorandum? 8 A. Vaguely, I do. 9 MR. GUIDO: I'd like to move in 10 admission, Your Honor, Exhibit 6082, which is 11 US3012839 through US3012842. 12 MR. NICKENS: Your Honor, my copy of 13 the document begins US3012838, not -- 14 THE COURT: So does mine. 15 MR. GUIDO: I'm sorry. What did I -- 16 MR. NICKENS: You said "39." 17 MR. GUIDO: 38. I'm sorry. I 18 misspoke. 19 MR. NICKENS: No objection, Your Honor. 20 THE COURT: Received. 21 Q. (BY MR. GUIDO) Now, the -- this has 22 written in the upper right-hand corner, "He's 12799 1 right. Let's discuss." 2 Do you know whose handwriting that was? 3 A. I have never seen that note, and I 4 don't recognize the handwriting. 5 Q. Okay. Now, look at the second 6 paragraph. 7 A. By the way, I'm sure that's 8 Jenard Gross; but I don't know for a fact. 9 Q. Pardon? 10 A. That's -- I'm sure that's Jenard Gross 11 who wrote that note. That's -- Mike Crow would 12 not have written that. 13 Q. Okay. Why is it that did Michael Crow 14 disagreed with your assessment of the portfolio? 15 A. He had a different philosophy and also, 16 his understanding of investments was limited. 17 Jenard Gross was more of an astute investment 18 person. 19 Q. Okay. Now, I'd like to go to the 20 next -- the second paragraph, or let's do the 21 first one. It says, "In keeping with the spirit 22 of the Operation Bootstrap, this memo is intended 12800 1 to outline an investment and also funding strategy 2 for the MBS portfolio." 3 Do you see that? 4 A. Yes. 5 Q. So, is this one of the memoranda that 6 you prepared in response to what you felt was your 7 charter to develop an investment strategy for USAT 8 so that it qualify for the Southwest Plan? 9 A. I felt it was part of my mandate so 10 that it could move ahead constructively and also 11 qualify for the plan. 12 Q. Okay. And, you know, the August 29th, 13 1988 memo that we just spoke -- I addressed your 14 attention to just before this which was entitled 15 the "Mortgage-backed securities portfolio 16 restructuring," was that memorandum also prepared 17 in response to what you felt was your obligation 18 to develop a plan of action to restructure the 19 portfolio at USAT? 20 A. Yes. 21 Q. And I'd like to direct your attention 22 to another memo, which is T6079. That is a 12801 1 memorandum dated May 17th, 1988. The subject: 2 "The MBS portfolio: Objectives, direction, and 3 strategy," to Mike Crow. 4 A. Right. 5 Q. Was that another memorandum that you 6 prepared in response to what you felt was your 7 direction to restructure the portfolio so that it 8 could qualify for the Southwest Plan? 9 A. Yes. 10 MR. GUIDO: I'd like to move the 11 admission, Your Honor, of 6079 unless this -- I'd 12 like to just move the admission of T6079, Your 13 Honor. 14 MR. NICKENS: Your Honor, our records 15 indicate that this T6079 is at Tab 246, which was 16 part of Mr. Duffie's testimony. 17 MR. GUIDO: Your Honor, I have -- if 18 it's already in, I withdraw my motion to move that 19 document. 20 Q. (BY MR. GUIDO) So, these three 21 documents, the May 17th, 1988, the T6079 exhibit, 22 your July 28th memorandum, T6082, and your 12802 1 August 29th memo, T6083, were prepared as your 2 explanation to the people at USAT of what you 3 thought should be done or your thoughts regarding 4 restructuring the portfolio so that it could be 5 straightened out enough for the thrift to qualify 6 for the Southwest Plan? 7 MR. NICKENS: Your Honor, it's obvious 8 Mr. Guido has a theme here which has been 9 repeated. But he is leading the witness, and I'm 10 not at all sure that we're getting the witness' 11 testimony as to what his intention was with 12 these -- with these memoranda. 13 So, I object to the question as leading 14 and suggesting the answer, which I just don't know 15 what the witness' answer would be. 16 MR. GUIDO: Your Honor, I'll rephrase 17 my questions. I think that Mr. Nickens has a 18 valid point. 19 Q. (BY MR. GUIDO) The -- were these 20 three memoranda prepared for a specific purpose? 21 A. They were prepared to reflect what I 22 felt was the constructive direction of the firm in 12803 1 terms of activities that would enhance the value 2 of these assets and these liabilities and also 3 with the intention of being in a better position 4 to qualify for the Southwest Plan. 5 Q. Now, did these memoranda also -- were 6 they intended to record your views of what the 7 condition of the portfolio was when you found it? 8 A. Yes. 9 Q. And were they intended to be your views 10 of what should be done to that portfolio to 11 hopefully restructure it to make it profitable? 12 A. Yes. 13 Q. And were they -- were they memoranda 14 that you had discussions with your superiors at 15 USAT about during the course of your employment at 16 USAT? 17 A. No. We really -- it did not go farther 18 than my writing these memos. There was no 19 discussion of it and no action taken as a result 20 of these memos. 21 Q. Now, look at Exhibit 6082. It says, 22 "As of 7/18/88, the MBS portfolio totaled 12804 1 approximately 2.8 billion and was under water by 2 $207 million." 3 Then it says, "A large duration gap 4 exists between MBS assets and its liabilities. 5 The assets have an effective maturity of 6 approximately five and a half years, while the 7 liabilities have an effective maturity of less 8 than two years. Given this mismatch, the 9 portfolio is subject substantially to the risk of 10 hire interest rates. From an income standpoint, 11 the year-to-date net yield spread (between assets 12 liabilities on the portfolio) is only 5 basis 13 points. Assuming interest rates remain changed, 14 this net yield spread is approximated to be zero 15 over the next year." 16 Did you recommend that there be actions 17 taken to lessen that duration gap that existed 18 between the MBS assets and its liabilities? 19 A. Yes. By virtue of writing these memos, 20 that was one of my key themes to convey. I did 21 recommend that. 22 Q. Now, did anyone indicate to you why 12805 1 they didn't think it was necessary to adjust for 2 that large duration gap that you found? 3 A. To my memory, there was a real concern 4 about recognizing losses. To get this portfolio 5 in order, what was necessary, that some capital 6 losses be recognized both on assets and 7 liabilities. But my memory is that that was the 8 big problem, the recognition of losses. 9 Q. Now, take a look at the second page of 10 your memorandum. It says, "Swaps, caps, liability 11 management. We are continuing to seek 12 clarification from an accounting and regulatory 13 standpoint as to what our flexibility is in this 14 area. The interest rate swaps for the most part 15 are imposing an economic and accounting burden on 16 the balance sheet. We consider it a priority to 17 seek opportunities to restructure the swap 18 liabilities. I am not sure at this point what the 19 full implications of the accounting and regulatory 20 constraints are in terms of attempting to 21 rebalance the swaps. I do believe, however, that 22 the overriding consideration or decision making 12806 1 should be more the economic rather than the 2 accounting considerations. In this regard, I 3 would strongly recommend that we allow at least 4 some allowance for recognizing losses." 5 Do you see that? 6 A. Yes. 7 Q. Why was that? Why was it that you 8 thought that that needed to be done? 9 A. Because they were part of the problem 10 as I saw it. The problem had to do with assets, 11 the kinds of assets there, the maturity of the 12 assets, and the kind of liabilities. So, that was 13 the second part of the equation. You had the 14 assets. You had the liabilities. So, it was in 15 terms of that whole theme. 16 Q. Now, look at your Exhibit 60 -- 17 Exhibit 6079, the 5/17/88 memo. 18 A. Okay. 19 Q. Look at US012861. And I direct your 20 attention under the section that says 21 "recommendations," the second paragraph that 22 starts, "in sum." 12807 1 Do you see that? 2 A. Yes. 3 Q. And look -- it's the second-to-the-last 4 sentence in that paragraph. It says, "I am very 5 concerned about the swaps. Allowing income 6 earning assets to roll without unwinding the swaps 7 is going to destroy the net spread on the MBS 8 portfolio over time." 9 Do you see that? 10 A. Yes. 11 Q. Okay. Now, this is twice you've raised 12 the question of the swaps with management. 13 A. Right. I think it's coming back to me. 14 You know, because this was an asset/liability 15 package, any action involving the assets therefore 16 implied that since this was supposed to be an 17 attempt at matching assets and liabilities, yield 18 on assets with yield on liabilities, that any 19 action taken with respect to assets implied that 20 we were supposed to do something with the 21 liabilities funding those assets. 22 Just having only activity with respect 12808 1 to assets and nothing with respect to swaps 2 obviously meant that we no longer had these two 3 events which were supposed to be synchronized. 4 So, it was just very poor asset/liability 5 management. 6 Q. At that point in time? 7 A. Yes. 8 Q. And when you talk about very poor 9 asset/liability management, are you talking about 10 what had occurred prior to your arriving at USAT? 11 A. It certainly also included that. 12 Q. Now, the -- you also said -- and look 13 at US012861. 14 A. 681 (sic)? 15 Q. Yeah. The same page. Up at the top, 16 you say "United's MBS portfolio" -- the first full 17 paragraph -- "is distinguished by the fact that it 18 possesses significant positions in the riskiest 19 MBS products created by Wall Street over the past 20 two years, i.e., low coupon IOs, high coupon POs, 21 (the same kinds of securities Merrill-Lynch lost 22 millions on several months ago), and residuals off 12809 1 of floater-type CMOs. At this juncture, however, 2 we seem unwilling to take even a small position in 3 reasonably-priced ARMs. ARMs hardly fall into the 4 category of esoteric mortgage products. Perhaps 5 the risk pendulum toward MBS has swung too far 6 from the left to the right." 7 Do you see that? 8 A. Yes. 9 Q. Now, it seems to me that what you're 10 saying, first of all, is -- 11 MR. NICKENS: Your Honor. 12 MR. GUIDO: I'll rephrase that 13 question. I won't even go any further, 14 Mr. Nickens. I'm sorry. 15 Q. (BY MR. GUIDO) Did anyone tell you 16 what their views were with regard to your 17 recommendations regarding how to deal with the low 18 coupon IOs and the high coupon POs? 19 A. No. Again, there was really no 20 response to these memos, no -- which would -- 21 should have come from Mike Crow as my immediate 22 supervisor. He was my point person and he, along 12810 1 with all the other key people there, really had no 2 response to any of these memos. 3 Q. So, you made a number of 4 recommendations after you laid out your views of 5 the portfolio. And you're telling us that Michael 6 Crow had absolutely no response to you? 7 A. Absolutely none. 8 Q. So, what did you do? 9 A. I became frustrated. I was a little I 10 embittered. 11 Q. Look at this memo. I mean, the memo 12 has a number of recommendations. Look at the 13 bottom of the page, US3012861. Okay? It says 14 here you make recommendations against doing 15 certain things. Okay? 16 A. Yes. 17 Q. And what is it that you recommend 18 against doing? 19 A. Well, No. 1 here is buying new 30-year 20 mortgage-backed securities. I do not believe they 21 can be hedged with standard techniques. Also, if 22 we want this kind of volatility, we should just 12811 1 buy treasuries. You know, as I read this, I do 2 recall that, to a certain extent, I did constrain 3 them, the key decision makers -- 4 MR. NICKENS: Your Honor, I don't 5 believe we have a question at this point. The 6 witness is simply volunteering information. 7 MR. GUIDO: I asked him whether or not 8 he recommended against anything. 9 MR. NICKENS: Well, Your Honor, I -- I 10 don't believe that's responsive to the question. 11 The witness just said "As I sit here now, I recall 12 something" and I have no idea whether he -- what 13 he's going to talk about. 14 Q. (BY MR. GUIDO) Well, you did 15 recommend against buying new 30-year MBS 16 securities, did you not? 17 A. Yes, I did. 18 Q. What else did you recommend against? 19 A. Doing large -- well, as the second page 20 of that memo or the next page indicates, 21 US3012862, I recommended against engaging in these 22 spontaneous mega transactions involving billions 12812 1 or several hundred million dollars worth of 2 activities at one time. That did not strike me as 3 an efficient and constructive way to trade 4 securities. 5 Q. And why is that? 6 A. Because engaging in mega transactions 7 at one time basically adversely impacted the 8 market. For example, to go out there, if your 9 goal is to buy, for example, 500 million of a 10 security, to go out there and buy 500 million at 11 one time, you can pretty much count on the market 12 running up on. And you what you will have 13 achieved is working against yourself and buying 14 those securities at a much higher price than if 15 you were to execute that objective in more 16 moderate steps whereby you, for example, one day 17 buy 25 million, three days from now buy 18 50 million. But in terms of this mega large scale 19 spontaneous activity, it was a very bad idea. 20 Q. Is that because the market wasn't 21 liquid enough to handle those mega transactions in 22 one chunk? 12813 1 A. It's not just that the market -- the 2 market was liquid; but in spite of liquidity, this 3 stretched even a liquid market. To go in and 4 execute a billion dollars worth of activity at one 5 time was a challenge even to a liquid market. 6 Q. What was the other thing that you 7 recommended that they not do in this memorandum? 8 A. Just being too taken in with Wall 9 Street firms, with the Wall Street people coming 10 in with their reports and their analyses conveying 11 to these men that they offered products which 12 would provide risk-controlled arbitrages, vehicles 13 that would guaranty a certain yield spread be 14 inherently self hedging, and be careful of people 15 who worked there who came from the street because 16 they came with a certain mindset that was not 17 conducive to the objectives of this firm. 18 Q. Now -- 19 THE COURT: We'll take a short recess. 20 21 (A short break was taken.) 22 12814 1 THE COURT: Be seated, please. We'll 2 be back on the record. 3 Mr. Guido, you may continue. 4 MR. GUIDO: Thank you, Your Honor. 5 Q. (BY MR. GUIDO) I'd like to direct 6 your attention now to a document that's been 7 marked as Exhibit T4463, Mr. Bruno. 8 A. Investment No. 1? 9 Q. No. It says "Exhibits for examination 10 of Dominic Bruno," the small binder. T4463. 11 MR. GUIDO: This document, Your Honor, 12 I'm not sure whether it's been previously 13 admitted. Mr. Nickens? 14 MR. NICKENS: No, Your Honor. Our 15 records indicate that T4463 has not been 16 previously admitted. 17 MR. GUIDO: At this point in time, we 18 would like to move to admit T4463, Your Honor, 19 which is a document of the corporate planning, 20 April 22nd, 1988. And it says, "United Financial 21 Group, Inc. - Assets/Liability Presentation Using 22 the Sendero Model." It's Bates stamped US000708 12815 1 through US0000722, Your Honor. 2 MR. NICKENS: No objection. 3 THE COURT: Received. 4 Q. (BY MR. GUIDO) Now, do you know what 5 the corporate planning department was at USAT, 6 Mr. Bruno? 7 A. No, I do not know. 8 Q. Have you ever heard of the Sendero 9 asset/liability model? 10 A. I have no recollection of it. 11 Q. Were there analyses -- or have you ever 12 learned of analyses that were done of the 13 mortgage-backed security portfolio that you were 14 hired to manage in February of 1988 that were not 15 shared with you? 16 A. None of these analyses were shared with 17 me, any that took place. 18 Q. The analyses that I'm directing you 19 to -- 20 A. Yes. 21 Q. -- T4463, this was never shared with 22 you? 12816 1 A. It was never shared with me. 2 Q. Now, I'd like to direct your attention 3 to Page 709. It says, under the introduction, 4 "The Mortgage Analyzer is a submodel of the larger 5 A/L model." 6 Do you see that? 7 A. Yes. 8 Q. Did anyone ever tell you about a 9 program that they had called the Mortgage 10 Analyzer? 11 A. I certainly have no recollection of it. 12 Q. Did they ever tell you about a larger 13 A/L model that they had? 14 A. Not to my memory. 15 Q. Now, it says, "The Mortgage Analyzer is 16 a submodel of the larger A/L model and has the 17 capability to properly analyze most 18 asset/liabilities that have premium/discount such 19 as mortgage-backed securities." 20 You never heard of such a model at 21 USAT? 22 A. I have never heard of such a model, to 12817 1 my memory. 2 Q. Now, look at the last sentence. It 3 says, "When referring to mortgage-backed 4 securities in the presentation, ARMs and residuals 5 are excluded. The current version of the Mortgage 6 Analyzer cannot properly handle these investments, 7 but Sendero's working on enhancing their model to 8 handle these." 9 Did you ever hear of an entity called 10 Sendero? 11 A. I have no recollection of that. 12 Q. So, they never shared that information 13 with you at USAT? 14 A. I have no recollection of it. 15 Q. Now, on the first -- Page 1 of that 16 document, US0000710, it has a summary analysis of 17 mortgage-backed securities at the top at 18 January 31, 1988. And that has a description of 19 various mortgage-backed securities in it. And it 20 has -- do you see where it has book value, total 21 MBSs with IOs and POs at 2,711,000,000? 22 Do you see that? 12818 1 A. Yes. 2 Q. Is that approximately the size of the 3 portfolio that you recall that you inherited when 4 you became the manager of the mortgage-backed 5 security portfolio at USAT? 6 A. Approximately. 7 Q. And it shows in the right-hand column 8 "gains, losses if sold" of a negative 9 $156 million? 10 A. Right. 11 Q. Now, based on the first page of the 12 document which says that ARMs and residuals are 13 excluded, does that approximate the loss in the 14 mortgage-backed securities at the time that you -- 15 A. I believe that's correct. 16 Q. Now, look at Page 2 of the document, 17 which is US0000711. It says, "As a result of 18 taking gains in the MBS portfolio over the past 19 few years, the book yield on the current portfolio 20 is 124 basis points below what the same securities 21 are yielding in the market. The book yields are 22 below market yields for three primary reasons: 12819 1 Most of the securities that were bought when rates 2 were high and accordingly had higher yields had 3 been sold, much of the current portfolio was added 4 over the past year when the long bond was 75 to 5 125 basis points lower than today, these were 6 added at lower yields, and older securities that 7 were add when rates were lower and had unrealized 8 losses that were never sold and still on the 9 books." 10 Does that conform to your understanding 11 of why the portfolio ended up in the position it 12 was when you inherited it? 13 A. That conforms and there are other 14 factors, but this was one key factor. 15 Q. Okay. What were the other factors? 16 A. You know, in terms of the portfolio 17 being in the condition it was, it was also the 18 result of the kinds of products that were there. 19 They were sufficiently volatile and esoteric that 20 even aside from gains taken, there would have been 21 problems. 22 Q. Now, I'd like to direct your attention 12820 1 now to a little more detail in terms of what it is 2 that you were recommending be done. Now, I'd like 3 to turn to T6079 again. That is your May 17th, 4 1988 memorandum. 5 Do you see where it says "objectives"? 6 A. Yes. 7 Q. It says, "In terms of immediate 8 objectives, it seems clear that my mandate is to 9 shrink the MBS portfolio. Such shrinking is to be 10 achieved by allowing the MBS portfolio to roll off 11 with time and liquidating securities to the extent 12 we can without recognizing losses with the 13 exception of the minimal losses we are currently 14 recognizing as we sell the IOs. It is my 15 understanding that management's desire to reduce 16 the size of the portfolio is based on its concern 17 with its market risk profile and price volatility. 18 Our willingness to liquidate IOs is, in fact, a 19 reflection of that concern." 20 Do you see that? 21 A. Yes. 22 Q. Do you recall whether or not those were 12821 1 the instructions that were given to you? 2 A. I don't recall much, but -- I mean, if 3 it's here, I'm sure that was my thinking then. 4 Q. Now, did you basically let the MBS 5 portfolio roll off over time? 6 A. To my memory, yes. 7 Q. Okay. So, you did implement one of the 8 policies that the management had promulgated. 9 Right? 10 A. Yes, in that respect. 11 Q. And did you attempt to -- or did you 12 sell the IOs and POs that were in the portfolio? 13 A. I remember selling IOs. I remember 14 selling other items. I don't specifically 15 remember the details. 16 Q. Okay. Do you remember selling the 17 portfolios that were in the arbs? 18 A. I don't remember exactly. I remember 19 selling residuals, but I don't remember specific 20 items. 21 Q. Okay. Now, at some point in time, you 22 did develop a liquidation plan for the entire 12822 1 portfolio. 2 Do you recall that? 3 A. Vaguely, I recall that. 4 Q. And was that right before the 5 institution was taken down by the regulators? 6 A. That would be my memory. 7 Q. Putting that aside, I want to focus on 8 what it is that you did in managing the portfolio, 9 what your recommendations were prior to that 10 liquidation of the portfolio or the liquidation 11 plan, I guess, is a better way of describing it. 12 Now, did you recommend that the 13 portfolio be adjusted to try and minimize the 14 interest rate risk in the portfolio? 15 A. Yes. By virtue of these memos, I did. 16 Q. Okay. And what were some of the things 17 that you recommended be done? 18 A. Basically, shorten up on the effective 19 maturity of the assets, restructure the kinds of 20 assets in the portfolios, and recognize losses on 21 issues that, as far as I was concerned, were 22 subject to even greater future losses. 12823 1 Q. Now, look at the second page of A6079. 2 It says, "As we liquidate IOs and as we allow the 3 volatile portion of the MBS portfolio to roll off, 4 I recommend that we be willing to add MBS products 5 which have sensible duration and convexity 6 characteristics for thrift and only when they are 7 fairly priced." 8 Then you say "Such products might 9 include agency and also AA ARMs, CMO floaters, 10 short tranche CMOs, and seasoned MBSs." 11 Do you see that? 12 A. Yes. 13 Q. Okay. Can you tell us what agency and 14 also AA ARMs are? 15 A. Well, ARMs, adjustable rate 16 mortgage-backed securities. By "agency," they are 17 adjustable-rate mortgage securities that carried 18 an agency guaranty; for example, a Ginnie Mae, 19 Freddie Mac, or Fannie Mae. And "AAA means an 20 ARM, a mortgage security that, although it was not 21 backed by an agency, had a AA credit rating. So, 22 it had a high degree of credit quality. 12824 1 Q. So, these were ARMs that were issued by 2 investment banking firms that had AA ratings. Is 3 that what that refers to? 4 A. That could be. And these were short 5 maturity, fairly safe conservative mortgage 6 investments in terms of volatility. 7 Q. Is that because the adjustable rate 8 mortgage repriced on a periodic basis, a year or 9 less? 10 A. Yes, that's correct. 11 Q. And then it says "CMO floaters." 12 What is it that you're referring to 13 there? 14 A. CMO collateralized mortgage obligation 15 floaters. These are a type of bonds whose coupon 16 reset frequently and, therefore, were effectively 17 a short-term maturity security and, a non-volatile 18 security. 19 Q. And then it says "short tranche CMOs." 20 Do you see that? 21 A. Short -- tranche is a bond. So, these 22 are short-term securities with limited volatility 12825 1 characteristics. 2 Q. Now, when you talk about tranches, are 3 you saying you take -- is it, like, a pool of 4 mortgages of 30 years and you just slice them like 5 you slice cheese and so you have, like, one to 6 five years, five to 10 years, 10 to 15? 7 Is that what you're talking about? 8 A. You take the mortgage security which is 9 generating monthly principal and interest, and you 10 use those monthly principal and interest payments 11 to create from that several different maturity 12 bonds or tranches, a one-year tranche or bond -- a 13 one-year bond, a three-year bond, or a three-year 14 tranche. That's what I'm referring to. 15 Q. Now, the one-year tranche, that bond, 16 does that entitle the holder of the bond to the 17 payments that were made by the borrowers under 18 the -- the mortgage borrower's payments for the 19 first year? Is that what that means? 20 A. Effectively, it works out that way, 21 yes. 22 Q. And then seasoned MBSs, what does that 12826 1 refer to? 2 A. These are just mortgage-backed 3 securities. The term "seasoned" is that their 4 roll durations -- they were issued five, seven, 5 10 years ago and now what was originally a 30-year 6 new issue security is now a seasoned older issue 7 that's become less volatile. It's kind of similar 8 to a 30-year treasury that, after 10 years, 9 becomes a 20-year treasury. 10 Q. Is that because most of the volatile 11 prepayments have probably already occurred? 12 A. Yeah, that's a large part of it. 13 Q. Okay. Now, these securities, were 14 these types of securities available in 1985? 15 A. Yes, they were available. 16 Q. Now, I want to turn now to 6082, the 17 first page at the bottom of that document. That's 18 your memo of July 28th, 1988, from you to 19 Jenard Gross and Mike Crow. 20 It says, "the proposed strategy." It 21 says, "The strategy I would propose toward the MBS 22 portfolios and funding would entail" -- and then 12827 1 it has a number of points. Look at Page 12 of the 2 memo, US3012839. 3 Do you see where it talks about low 4 duration assets? 5 A. Yes. 6 Q. Is that basically what we discussed 7 here in terms of what -- 8 A. We're talking about short-term 9 securities. "Duration" is another word for 10 effective maturity. So, these are short-term 11 mature securities. 12 Q. Now, what were the types of instruments 13 which were of longer duration and had a higher 14 risk? Are those mentioned here in this document? 15 A. Well, new 30-year -- at the bottom of 16 that page -- mortgage-backed securities, high 17 coupon POs, inverse floaters. Inverse floaters, 18 these are very long, one of the riskiest 19 investments ever created. 20 Q. Were inverse floaters ever in USAT's 21 portfolio? 22 A. Yes, they were. 12828 1 Q. Were low coupon IOs in USAT's 2 portfolio? 3 A. Yes, they were. 4 Q. Were high coupon POs? 5 A. High coupon POs and low coupon IOs were 6 in the portfolio. 7 Q. And were residuals, in particular 8 residuals which were based on flooding rate CMOs, 9 in the portfolio? 10 A. Yes. 11 Q. And those were what you would consider 12 to be the highest risk? 13 A. They also are some of the highest 14 volatility kinds of securities I've ever seen. 15 Q. Now, we've talked about the swap/cap 16 liability management you proposed. At the top, it 17 talks about this thing called a dollar roll. 18 Do you see that? 19 A. Yes. 20 Q. Can you tell us what it was that you 21 were recommending they do when you made reference 22 to dollar rolls? 12829 1 A. It was -- it was a vehicle for -- it's 2 a very -- this is one of the most economic 3 transactions that a mortgage person can engage in 4 because, in general terms, when Wall Street needs 5 securities because they are short securities, they 6 will pay up for those securities. So, this is a 7 cheap way for an institution -- in this case, 8 USAT -- to lend these securities to Wall Street. 9 I mean, that effectively is the economics of it. 10 I can discuss more about it, but it's a very 11 convenient financing technique. 12 Q. And was this an attractive alternative 13 for USAT because of its large portfolio of 14 mortgage-backed securities? 15 A. That is exactly correct. 16 Q. Okay. Now, is one of the risks with 17 dollar rolls the risk that you won't get back a 18 pool of mortgage -- mortgages that have the same 19 characteristics as those that you gave up? 20 A. This risk is more theoretical than 21 real. Given the size of the portfolio, rolling 22 the security is where you tell Wall Street, "Okay. 12830 1 Here. You can have the security. You have to 2 return these kinds of securities to me 30 days 3 from now, and I'm going to extract a fee for 4 that." So, the risk you refer to is that you are 5 getting back inferior pools. Well, that's a 6 theoretical risk because the size of the 7 transaction was so large that, realistically, the 8 streets or any other counter-party's ability to 9 contrive a set of securities in return that were 10 inferior, it was minimal. We're talking about 11 such a large diversified selection of pools that 12 that risk was not significant. 13 Q. And your recommendation here in a 14 number of places, you made reference -- I think if 15 you look at US3012841 under the "income versus 16 price risk," the second paragraph, it says, "I 17 find our lack of consensus on what compromise, if 18 any, should be made between income versus price 19 risk very disconcerting." 20 Do you see that reference? 21 A. Yes. 22 Q. Now, this is your writing in July of 12831 1 1988. Now, what was it? What was this lack of 2 consensus on compromise that you were referring 3 to? 4 A. The lack of consensus had to do with 5 the fact that some parties were strictly 6 interested in accounting and accounting formulas 7 and were strictly interested in income to the 8 extent that securities with apparently high 9 income, even though they were volatile, were 10 acceptable investments. 11 Another group of individuals tended to 12 favor instruments that had solid structure. But 13 even those individuals who favored sound, 14 non-volatile structures, I don't want to convey 15 the impression -- there was really no direction 16 from anyone to carry out any of these 17 recommendations. But there were different people 18 who favored different strategies. 19 Q. Now, the people that favored accounting 20 income and gain recognition, were those people, in 21 your view, sensitive or insensitive to the 22 economics of the transaction? 12832 1 A. Insensitive. 2 Q. And why do you think that they were 3 insensitive to the economics of the transaction? 4 A. Lack of investment expertise. Just 5 deeply steeped in accounting and just without 6 qualification to make economic portfolio 7 decisions. Just limited background for this 8 field, not portfolio management people but 9 accountants who were in the wrong job. 10 Q. Now, who were these people? 11 A. Mike Crow and Bruce Williams. 12 Q. And were they responsible for 13 management of the mortgage-backed securities 14 portfolio? 15 A. To the extent that I reported to 16 Mike Crow, who was heavily influenced by Bruce 17 Williams, they were quite influential. 18 Q. Now, the -- you made mention to the 19 reluctance to absorb any accounting losses or any 20 losses in the portfolio because of the -- the risk 21 of having to have that show up in the -- 22 A. Financials. 12833 1 Q. -- financial statements; is that right? 2 A. Yes. 3 MR. GUIDO: Now, I'd like to direct 4 your attention to a number of documents that sort 5 of clarify what the accounting was as you 6 understood it at the time. 7 And the first is the memorandum in 8 here -- I think it's dated August 1st. It's in 9 the packet. It's exhibit -- this document does 10 not have an exhibit as yet, Your Honor. The 11 document is a packet of documents that -- one 12 document says Dominic Bruno to distribution dated 13 August 5th, 1988. That's at CN531140. And then 14 there is another document dated August 1st from 15 Dominic Bruno to distribution that has the Bates 16 stamp CN531141, and that runs through CN531156. 17 I'd like to have that packet of 18 materials that start with a cover page of a file 19 folder at CN531062 and it goes through the last 20 page that I just read, CN531156, I'd like to have 21 that admitted as Exhibit 13060, Your Honor. 22 MR. NICKENS: 13060A? 12834 1 MR. GUIDO: 13060. 2 MR. NICKENS: Your Honor, this appears 3 to be a compilation and Mr. Guido is introducing 4 it as a file whereas -- and these -- the CN 5 numbers go from 31062 and 63, 63 being the 6 document control card put in by the attorneys when 7 they took over the institution, and then it skips 8 to 140. So, we appear to be missing 37 -- about 9 77 pages of this file. 10 THE COURT: Well, I haven't found it 11 yet. Is it in the -- 12 MR. NICKENS: Well, it's unmarked, Your 13 Honor. 14 MR. GUIDO: It's unmarked, and it's 15 about two-thirds of the way or 60 percent of the 16 way through the packet, Your Honor. 17 Mr. Nickens? 18 MR. NICKENS: Yes. I'm sorry. I don't 19 have an objection to the documents themselves. I 20 have an objection to having them introduced as a 21 file with a large portion of the file missing. 22 MR. GUIDO: Your Honor, I -- 12835 1 THE COURT: I think we'll have to 2 identify the various memoranda that are included 3 if we're going to admit this as one document. 4 MR. GUIDO: Okay. Your Honor, I would 5 like to move the admission of this document as a 6 packet of materials, and I will drop the 7 characterization that it is the -- a file because 8 Mr. Nickens may be right. It may not be complete. 9 It's my understanding it was, but I will introduce 10 this by Bates stamp number with a description of 11 what documents constitute each of the pages of the 12 document. 13 MR. NICKENS: Your Honor, I would have 14 no objection to the introduction of Bates stamp 15 Nos. 531140 through 531156 since all of those 16 documents appear to be memoranda prepared by 17 Mr. Bruno. If we can assign that number to those 18 Bates numbers, then I will -- I have no objection. 19 MR. GUIDO: Your Honor, I think that 20 Mr. Nickens has come up with an appropriate 21 resolution. 22 THE COURT: All right. And this is 12836 1 document 13160. 2 MR. GUIDO: 13060, Your Honor. 3 THE COURT: Is there a letter prefix? 4 MR. GUIDO: Yeah. A13060, Your Honor. 5 THE COURT: All right. Received. 6 Q. (BY MR. GUIDO) Mr. Bruno, do you 7 recall preparing those memoranda? 8 A. I'm having trouble finding this 9 collection. 10 Q. I want to direct your attention to the 11 memorandum dated August 5th, 1988, from you to 12 distribution and it's headed "Hedge 13 effectiveness." 14 Do you see that? 15 A. Yes, I do see this. 16 Q. Do you recall discussing -- preparing 17 this memorandum? 18 A. Very vaguely. 19 Q. Okay. Now, I'd like to direct your 20 attention to the second document which says 21 August 1 from Dominic Bruno to distribution. It 22 says, "Futures effectiveness test." 12837 1 Do you see that? 2 A. Yes. 3 Q. And then it has some handwritten notes. 4 It says "Dominic, please see my comments, re: 5 FASB 80. If you have any questions, let me know. 6 Russell." 7 Do you know who Russell refers to? 8 A. Russell was an accountant who worked 9 for Bruce Williams. I can't remember his last 10 name. 11 Q. Pardon? 12 A. He was an accountant who worked for 13 Bruce Williams. I do not remember Russell's last 14 name. 15 Q. Look at the cc's there on -- 16 A. Russell McCann. It's right there. 17 Q. And I want to direct your attention to 18 the note on the Page 3 of that memorandum that 19 says Dominic Bruno to distribution, August 2, '84, 20 "Effectiveness test for financial futures." And 21 particularly, the -- it's Page 3, and it's Bates 22 stamped CN531144. It says, at the top of the 12838 1 page, FAS -- the handwritten note, it says "FASB 2 80 does not allow for cross variances. Allows 3 cross hedges if, one, clear economic relationship 4 between the two and high correlation is probable." 5 And then it has this note, it says, "Hedge 6 accounting permitted only when linked to 7 identifiable assets (no macro/each hedge would be 8 viewed separately.)" 9 Do you see that? 10 MR. NICKENS: Your Honor, I believe 11 that says "each hedge would be viewed separately." 12 Q. Okay. So, "no macro/each hedge would 13 be viewed separately." 14 Is that the way you read that? 15 MR. NICKENS: I don't see a slash, Your 16 Honor. I see a -- 17 MR. RINALDI: Close paren. 18 MR. NICKENS: -- close paren and then a 19 dash that sets off the parenthetical. 20 Q. (BY MR. GUIDO) Okay. A dash. I'm 21 sorry. I misspoke. 22 Q. (BY MR. GUIDO) Now, does your 12839 1 understanding of the accounting literature based 2 on the information that you received from the 3 people at USAT indicate that there was a 4 distinction for the accounting for micro as 5 opposed to macro hedges? 6 MR. NICKENS: Your Honor, I object to 7 the extent that this would be interpreted as a 8 receipt of some expert opinion on accounting. 9 This man's not an accountant. He hasn't been 10 presented as an accountant. He hasn't gotten us 11 an expert report. I believe the question is 12 phrased in such a way as to ask for his 13 understanding; but based upon the facts that this 14 is not an expert's understanding, I want to record 15 that objection. 16 MR. GUIDO: I'm only asking for the 17 witness' understanding, Your Honor. 18 THE COURT: All right. You may answer. 19 Q. (BY MR. GUIDO) Did you have any 20 understanding of the difference between macro -- 21 macro hedging -- 22 A. I certainly do have an understanding. 12840 1 A macro hedge versus a micro hedge is simply this: 2 By the way, the thinking has changed, accounting 3 thinking. But anyway, if you're hedging five 4 assets and you set up a hedge vehicle, a micro 5 hedge is where you take your hedge vehicle and 6 specifically say "this hedge vehicle will hedge 7 this asset, Asset 1 or 2 or 3." 8 A micro -- a macro hedge is where 9 you're not so concerned about earmarking that 10 hedge vehicle to one of those assets. You're just 11 saying, "Here's a hedge vehicle. I'm not going to 12 say it goes with No. 1 or No. 2," which is just 13 there to hedge volatility in the assets but should 14 not -- you're not extending yourself to say that 15 it's specifically hedging what particular asset. 16 Q. Now, was USAT engaged, in your 17 understanding, in micro hedging of the 18 mortgage-backed securities portfolio or macro 19 hedging? 20 A. Effectively speaking with regard to 21 what were called risk-controlled arbitrages, that 22 was macro hedging. Now, I don't know if the 12841 1 people knew that, but they constituted macro 2 hedges. So, it's interesting that this accountant 3 would say macro hedges are not allowed. They were 4 engaging in multi-billion-dollar macro hedges. 5 Q. Now, let me direct your attention to 6 the -- look at Binder No. 3. And it is 7 Exhibit A1522. It's the minutes of the investment 8 committee of United Financial Group, July 27, 9 1988. It's about 40 percent into the packet. 10 A. Okay. 11 Q. I want to direct your attention in that 12 Exhibit 1522 to the third paragraph. It says, 13 "Mr. Dominic Bruno discussed the mortgage-backed 14 securities, hedges, portfolios, and interest rate 15 sensitivity. He reviewed his analysis of recent 16 economic indicators in events along with recent 17 activity in the treasury and mortgage markets. He 18 noted that during the last week there had been no 19 new activity in the area of hedging 20 mortgage-backed securities or dollar roll 21 activity. He did note, however, that the 22 accounting issue of relating through restructuring 12842 1 of hedges such as interest rate swaps and caps 2 have been clarified bid Peat, Marwick, Main & 3 Company. A memo from Jim Wolfe and micro and 4 Dominic Bruno was ordered attached to the minutes 5 of the meeting which indicate that gains and 6 losses resulting from closing positions of 7 interest rate swaps and caps should be deferred 8 over the remaining life of the instruments." 9 Do you see that? 10 A. Is this August 3rd we're talking about 11 here? I followed what you said. I -- 12 Q. Oh, July 27th, I'm sorry. 13 A. A1522. 14 Q. I'm sorry. A1522 -- 15 16 (Discussion off the record.) 17 18 Q. (BY MR. GUIDO) Do you see the 19 paragraph that I just read into the record? 20 A. Yes, I see it and I follow -- 21 Q. You followed what I have to say? 22 A. Yes. 12843 1 Q. Then look at A1522A, which is the 2 minutes of the investment committee of August 3rd. 3 The sixth paragraph says, "The committee discussed 4 the institution's swap positions. It was noted 5 that Peat, Marwick, Main had stated that if swaps 6 were unwound, losses could be deferred. The 7 committee requested that this opinion be affirmed 8 and that other accounting firms also be requested 9 to express their opinion on this position. 10 Mr. Bruno noted that it would take time to unwind 11 the swap positions. The committee reviewed the 12 income effect of unwinding swaps and also 13 discussed the need to add hedges when swaps were 14 sold." 15 Do you see that? 16 A. Yes. 17 Q. Now, the copy of the minutes of 1522 18 that we have doesn't include the Jim Wolfe memo to 19 Mike Crow and to you so your memory may not -- may 20 be all that we can rely upon. 21 MR. NICKENS: Your Honor, I mean, 22 Mr. Guido makes that representation to the Court. 12844 1 But I believe that at US3014746.003 there is at 2 least a portion of what might appear to be that 3 memo, plus I believe it's in the record as B2333. 4 Would you like to use that one? 5 MR. GUIDO: Thank you. Is B2333 in the 6 record? 7 MR. NICKENS: It has not been 8 introduced, I don't believe. 9 MR. GUIDO: Your Honor, we'll have a 10 copy of this made and submitted for the record. 11 We move B2333 into the record. 12 MR. NICKENS: No objection. 13 THE COURT: That's the only copy that 14 you have? 15 MR. GUIDO: It's the only copy, Your 16 Honor. I will read the document into -- 17 MR. NICKENS: Well, we have copies. 18 MR. GUIDO: You have copies? Okay. 19 20 (Discussion off the record.) 21 22 MR. NICKENS: Mr. Farley's retrieving 12845 1 the document, Your Honor. 2 THE COURT: All right. 3 MR. GUIDO: Your Honor, we move B2333 4 into the record. 5 THE COURT: Received. 6 MR. NICKENS: No objection, Your Honor. 7 MR. GUIDO: Thank you, Mr. Nickens. 8 MR. NICKENS: I would indicate that the 9 right-hand portion of the document appears in the 10 minutes, as indicated where it -- and the number 11 is OWO49426. That's the imaging number. 12 Q. (BY MR. GUIDO) Now, these references 13 to Peat, Marwick, Mitchell indicate that Jim Wolfe 14 and people at USAT understood that Peat, Marwick, 15 Mitchell was saying that the swaps could be sold 16 and the losses that were incurred on the sale of 17 the swaps could be deferred over the remaining 18 respective swap and cap lives. 19 Do you see that? 20 A. Yes, I do. 21 Q. Now, is it your understanding that the 22 swaps that were in USAT's portfolio were micro or 12846 1 macro hedges? 2 MR. NICKENS: Your Honor, are we 3 talking about all of the swaps? I mean, this 4 gentleman bought $500 million worth of swaps while 5 he was there. 6 Is he talking about the swaps that were 7 bought as a part of Joe's portfolio? I don't 8 think we're going to know, based upon that 9 question. 10 Q. (BY MR. GUIDO) I'm talking about the 11 swaps that existed prior to your purchase of 12 swaps, Mr. Bruno. 13 A. It's clear. My opinion is that they 14 were macro hedges. 15 Q. They were macro hedges? 16 A. Yes. 17 Q. And in your discussions with people at 18 USAT about how to account for the termination of 19 swaps and any losses or gains on those swaps prior 20 to termination and subsequent to termination, was 21 it your understanding that the literature that 22 they were focusing on to determine the proper 12847 1 accounting for the swaps was what's referred to as 2 FAS 80? 3 MR. NICKENS: Your Honor, once again, 4 this is just trying to get an expert accounting 5 opinion from a person who's not an accountant. 6 He's asking somebody to examine what somebody else 7 was relying on when this man didn't even talk to 8 them. 9 THE COURT: Well, he's asking for his 10 understanding. We can get that. 11 MR. GUIDO: I'm asking for his 12 understanding of what was the literature that -- 13 A. The answer to your question is yes, 14 that's my understanding. 15 Q. (BY MR. GUIDO) Now, do you know why, 16 in the August 3rd minutes, A1522A, after it says, 17 "It was noted that Peat Marwick Main had stated 18 that if swaps were" -- do you know why it was said 19 after in the committee minutes it was noted that 20 "Peat, Marwick, Main had stated that if swaps were 21 unwound, losses could be deferred." It said the 22 following: "The committee requested that this 12848 1 opinion be affirmed and that other accounting 2 firms also be requested to express their opinions 3 on this position." 4 Do you know why the committee wanted 5 other opinions? 6 A. Even though Peat Marwick -- this 7 individual apparently informed Jim Wolfe that it 8 was okay to defer these losses, I think a number 9 of the people at USAT did not believe it, did not 10 agree with that interpretation. 11 Q. And wanted a second opinion? 12 A. They certainly wanted more opinions, 13 yes. 14 MR. GUIDO: Your Honor, I'm finished 15 with this segment of this witness' examination. 16 This might be a good time to break for lunch. 17 THE COURT: All right. We'll adjourn 18 until 2:00 o'clock. 19 20 (Luncheon recess.) 21 22 THE COURT: Be seated, please. We'll 12849 1 be on the record. 2 Mr. Guido, you may continue. 3 MR. GUIDO: Thank you, Your Honor. We 4 are now going to move the admission of the 1988 5 performance reports, Your Honor. I have two 6 binders. And these have been tabbed. So, it will 7 be easier to go through these documents. 8 At this point in time, I'd like to move 9 the admission of a packet of performance reports 10 of United Financial Group and USAT for the time 11 period of the calendar year 1988. They run 12 through January of 1988 through November of 1988. 13 The first document is A5029. That's 14 the United Financial Group performance report for 15 January of 1988. The second, Your Honor, is 16 A5030. That's the United Financial Group 17 performance report for February of 1988. The 18 third is A5031. It's the United Financial Group 19 performance report, March of 1988. The fourth is 20 A5032. It's the United Financial Group 21 performance report of April 1988. The next one is 22 A5033, Your Honor. It's United Financial Group 12850 1 performance report for May of 1988. The next one 2 is A5034. It's the United Financial Group 3 performance report for June of 1988. The next one 4 is A5035. It's the United Financial Group 5 performance report for July of 1988. The next one 6 is A5036. It's the United Financial Group 7 performance report for August of 1988. 8 Apparently, we have been unable to find the next 9 document in the A exhibits. We have A5038, 10 United Financial Group performance report for 11 October of 1988. Then we have A5039, United 12 Financial Group performance report for November of 13 1988. We do not have a performance report in this 14 packet for September of 1988, which I presume is 15 marked as A5037. But the set of the joint 16 exhibits, we didn't get that exhibit. 17 I move the admission of Exhibits A5029, 18 A5030, A5031, A5032, A5033, A5035, A5036, A5037, 19 A5038, A3039, Your Honor. 20 MR. NICKENS: Your Honor, I have no 21 objection those exhibits. We are missing from the 22 copies that were made for us A5036. 12851 1 MR. BLANKENSTEIN: I believe A5036 and 2 A5037 are already in evidence. 3 MR. GUIDO: Have been admitted? 4 MR. BLANKENSTEIN: Have been admitted. 5 We have them as Tabs 324 and 325 in our set. 6 THE COURT: All right. Other than 7 those, they are received. 8 Q. (BY MR. GUIDO) Now, when we adjourned 9 just before lunch, we were talking about the 10 accounting issue, you recall, that Peat Marwick 11 had provided advice and you indicated that some 12 people on the investment committee or 13 asset/liability committee had disagreed with Peat 14 Marwick's assessment of the accounting issue with 15 regard to -- 16 A. Some people. 17 Q. Some people. Who were those people? 18 A. The people who disagreed with that, to 19 my memory, were Bruce Williams and Wolfe, Jim 20 Wolfe. 21 Q. Jim Wolfe? 22 A. And as a result of their disagreeing 12852 1 with it, Mike Crow. 2 Q. Now, I'd like to start with the exhibit 3 books that are the investment committee minutes. 4 And I'd like to walk through with you those 5 transactions that are in those books for you. And 6 the first is the investment committee minutes -- 7 starting with Book No. 1, the investment committee 8 minutes of February 10, 1988, which is at A1490. 9 I believe that's halfway into the first binder. 10 Have you found A1490 in your binder? 11 A. February 10th, 1988, right. 12 Q. Look at the last paragraph. It says 13 "Mr. Dominic Bruno reported on the mortgage-backed 14 securities activity during the past week. He 15 noted that approximately 78 million of 16 mortgage-backs have been sold during -- in an 17 attempt to reduce the size of the portfolio. Most 18 of the sales had been at break-even or slight 19 profits." 20 Do you recall that transaction? 21 A. No, I do not. 22 Q. Is there any reason to dispute that 12853 1 that was a transaction that was made for the 2 purpose of reducing the size of the portfolio? 3 A. I don't believe so. 4 Q. Is that consistent with what you 5 understood your directions to be from the 6 investment committee at the time? 7 A. It is consistent. 8 Q. Now I'd like to direct your attention 9 to A1499, which is in Binder No. 2 of the 10 investment committee. It's at the front of that 11 binder. And that's the investment committee 12 minutes of March 20th, 1988? 13 MR. BLANKENSTEIN: I believe it's 14 March 30th. 15 MR. GUIDO: Pardon? 16 MR. BLANKENSTEIN: March 30th. 17 MR. GUIDO: March 30th. Excuse me. 18 Q. (BY MR. GUIDO) That should be the 19 third set of investment committee minutes. And I 20 direct your attention to the first page of those 21 minutes, which is US3011612. 22 It says "Mr. Dominic Bruno reported on 12854 1 the mortgage-backed securities portfolio. His 2 reports were ordered attached to the minutes of 3 the meeting. He reviewed the weekly transactions 4 and noted that he had acquired 550 million of 5 interest rate caps which would help the 6 association in its maturity matching credit 7 calculation. He noted that he had sold the 8 inverse floaters. He reviewed the market data and 9 market sensitivity of the portfolio." 10 What was the purpose of purchasing the 11 interest -- the $550 million worth of interest 12 rate caps, Mr. Bruno? 13 A. I don't recall. I just very, very 14 vaguely -- something about making sure that we 15 qualified for some regulatory benefit by having 16 those caps on. But that's about all I can 17 remember. 18 Q. Was that a transaction that you 19 initiated or someone suggested that you do? 20 A. My memory is that someone else 21 suggested it, and I believe it was Bruce Williams 22 coming from the standpoint of some accounting 12855 1 regulatory issue. 2 Q. Was it -- did it have any impact on the 3 duration mismatch that you testified existed in 4 the portfolio at the time you took it over? 5 A. That would serve to alleviate the 6 mismatch. 7 Q. So, the caps -- 8 A. So, that had a positive effect on that 9 mismatch. 10 Q. So that the purpose of the caps would 11 have a positive effect? 12 A. Yes. It had a positive effect. 13 Q. And then it says, "He noted that he had 14 sold the inverse floaters." 15 Do you see that? 16 A. Yes, I do. 17 Q. Do you recall why the inverse floaters 18 were sold? 19 A. Well, you know, that was part of -- in 20 terms of continuing with the objective to sell. I 21 sold the I versus floaters -- and I can remember 22 something that's not in these minutes -- how upset 12856 1 Bruce Williams was because I recognized the loss, 2 I remember, on one of those and I was just 3 delighted to be out of it because my argument was, 4 "Well, you can either recognize this much loss now 5 or a much bigger loss later." 6 So -- but his concern was with the 7 yield on it, not the volatility characteristics. 8 Q. Was there -- so, that's an example of 9 the disagreement you had with Mr. Williams? 10 A. That's the example, and that was as 11 volatile a set of securities I've ever seen. They 12 don't belong in any portfolio. Well, I don't want 13 to go too far into this. 14 Q. Now, let me ask you with regard to that 15 dispute: Was that dispute aired before the 16 investment committee, or was that separate? 17 A. Yeah, that was aired. 18 Q. Now, I'd like to direct your attention 19 to A1501. That's April 13th of 1988. 20 A. Right. 21 Q. And I'd like to direct your attention 22 to the first page to start with, which is 12857 1 US3011506. And that makes reference, "Mr. Bruno 2 discussed the swap of interest-only pieces (No. 7, 3 8, 9, 10, and 11 of his report) in detail." And 4 then I'd like you to switch over to the activity 5 report which is at US3011539. 6 A. Okay. 7 Q. What is the reference to the -- discuss 8 the swap of interest-only pieces. What does that 9 mean? 10 A. Let me see if I can recall. Let's see. 11 On US3011539 -- oh, okay. If you take a look at 12 that page, April 7th -- 13 Q. Uh-huh. I'm on April 13th. I'm sorry. 14 A. April 13th. Activity report where the 15 activity is as of April 7th to April 12th. 16 Q. Okay. 17 A. It looks as if there was a sale of 18 certain ideas -- IOs and a buy of different IOs. 19 So, one was being sold, it looks, in favor of 20 another. So, there was a swap. In this case, 21 it's not an interest rate swap. It's the swap of 22 one IO for another. That is what appears to be 12858 1 the case here. 2 Q. Do you know what the purpose of that 3 transaction was? Can you recall? 4 A. No. I don't know what the purpose -- I 5 mean, I can surmise. 6 Q. Looking at this set of transactions, 7 was the purpose of those Transactions 7 through 11 8 I think are the -- 7, 8, 9, 10, and 11 on that 9 page -- were those done in order to simply 10 generate accounting gains? 11 MR. NICKENS: Your Honor, the witness 12 said he didn't know. And now Mr. Guido is leading 13 him after the witness has said he didn't know. I 14 object to a leading question, particularly in that 15 circumstance. 16 MR. GUIDO: Let me rephrase the 17 question, Your Honor. 18 Q. (BY MR. GUIDO) Can you tell from 19 those entries in themselves, based on your 20 experience as the portfolio manager at USAT, 21 whether those transactions had an economic impact? 22 A. Based on this, I can't tell. 12859 1 Q. Let's go to A1503, which are the 2 minutes of April 27th, 1988. 3 Do you have that page, the first page? 4 A. Yes, I do. 5 Q. It says, "Mr. Bruno reported on the 6 mortgage-backed securities portfolio. His reports 7 were ordered attached to the minutes of the 8 meeting. He noted that he had sold approximately 9 64 million original face amount of IO securities." 10 Do you see that? 11 A. Yes. 12 Q. Do you recall what those 13 transactions -- the purposes of those 14 transactions? 15 A. I do not recall. I can surmise, but I 16 can't recall exactly. 17 Q. What do you mean by "surmise"? 18 A. Well, I can guess what it was about. I 19 mean, I think I was shrinking -- 20 MR. NICKENS: Your Honor, I would 21 object to him guessing. 22 THE COURT: Sustained. 12860 1 Q. (BY MR. GUIDO) I'd like to direct 2 your attention to A1504, which is the minutes of 3 the investment committee of April 4th, 1988, and 4 direct your attention to the investment committee 5 activity report which is at US3011304. 6 MS. CLARK: Your Honor, I believe to 7 correct the record, that's May 4th, 1988. 8 MR. GUIDO: I'm sorry. May 4th. I'm 9 sorry. 10 THE WITNESS: Okay. I have it. 11 Q. (BY MR. GUIDO) That makes reference 12 to three dollar rolls. 13 Do you see those? 14 A. Yes. 15 Q. Okay. Are those the dollar rolls -- is 16 that the designation you used for the dollar roll 17 transactions that you described earlier in your 18 testimony? 19 A. That is the designation. 20 Q. And then it says "sold an IO trust 21 No. 24." 22 Do you see that? 12861 1 A. Yes. 2 Q. Okay. Do you know what the purpose of 3 that transaction was? 4 A. As I go through this, I'm starting to 5 recall. I do believe it's in line with shrinking 6 the portfolio as I see more and more of this. 7 Q. Okay. Now, let's go to A1505, which is 8 April 11th, 1988. And I -- that's the minutes of 9 May 11th, 1988. And I direct your attention to 10 the activity report at US3011262. That records -- 11 do you see the activity report? 12 A. Yes. 13 MR. NICKENS: Your Honor, I haven't 14 gotten there yet. What did you say the number 15 was, Mr. Guido? 16 MR. GUIDO: The Bates stamp -- do you 17 want the exhibit number or the Bates stamp number? 18 MR. NICKENS: The activity report. 19 MR. GUIDO: It's US3011282, I believe. 20 Oh. 262. Excuse me. It looks like an 8. 21 MR. NICKENS: Your Honor, I'm with it. 22 Thank you very much. 12862 1 MR. GUIDO: Pardon? 2 MR. NICKENS: I've found it. 3 Q. (BY MR. GUIDO) Now, that makes 4 reference to two dollar rolls. 5 Are those the dollar rolls that you 6 described earlier? 7 A. Yes. 8 Q. Okay. So, any time there's a 9 designation on one of these pages with a dollar 10 sign and a roll, that's reference to the dollar 11 rolls that you testified to were a form of 12 generating cost savings to the thrift? 13 A. Correct. 14 Q. Now, it says, "Sold 19 million of IO 15 Trust No. 28." 16 Do you see that? 17 A. I see that. 18 Q. Do you recall what the purpose of that 19 transaction was? 20 A. I believe it's in line with shrinking 21 the portfolio and liquidating esoteric products. 22 Q. I'd like to direct your attention now 12863 1 to A1507, which are the minutes of the investment 2 committee of May 18th, 1988, and direct your 3 attention to the last paragraph. It says, 4 "Mr. Dominic Bruno then discussed the 5 mortgage-backed securities portfolio and activity. 6 He presented a number of reports which were 7 ordered attached to the minutes of the meeting. 8 He noted that during the last week he had 9 completed a number of dollar rolls as well as 10 selling $40 million of IO Trust 9 at an $87,000 11 loss. The result of this transaction was to 12 reduce the company's market and end interest 13 income volatility." 14 Do you see that? 15 A. Yes. 16 Q. Now, does that refresh your 17 recollection of what the purposes of the sales of 18 the IOs had been up to that point? 19 A. I believe it was in line with 20 liquidating esoteric products and shrinking -- 21 Q. What do you mean by "esoteric 22 products"? 12864 1 A. As we shrunk the portfolio, particular 2 emphasis was on liquidating the esoteric and the 3 particularly volatile stuff. 4 Q. I'd like to direct your attention now 5 to A1510, which are the minutes of the investment 6 committee of June 1st, 1988. 7 Have you found those minutes? 8 A. Yes. 9 Q. Okay. I'd like to direct your 10 attention on those minutes to the activity report 11 which is at US3015054. 12 A. Okay. 13 Q. The first two entries are dollar rolls, 14 which I won't get into with you. I want to direct 15 your attention to the third entry which says "294 16 futures contracts, rolling position forward 17 (rolled June Eurodollars to September bills)." 18 Do you see that? 19 A. Yes. 20 Q. What does that refer to? 21 A. To maintain this hedge with regard to 22 these futures positions as given futures contracts 12865 1 mature, it is necessary in an effort to maintain 2 the hedge, to, quote, unquote, "roll it forward." 3 Now, this is dated June 1st. And 4 notice that I'm closing out a June futures 5 contract. If I just close that out with no 6 rolling it forward, then the hedge is terminated. 7 So, we're letting June mature and then we're 8 reinstituting the hedge by going into September. 9 Q. Okay. So that -- are futures contracts 10 for a term period? Is that why this is necessary? 11 A. Yeah. These were -- the June contract 12 here, 294 June Eurodollar futures, they were 13 coming up to their maturity. Now, I could have 14 let them expire, but then that's the termination 15 of that hedge. If I had not reinstituted in 16 September, then there would be no further hedge. 17 Q. Okay. 18 A. So, it was to maintain the hedge. 19 Q. Now, it talks about rolling June 20 dollars to September bills. 21 Why did that happen? Is there any 22 reason for that? 12866 1 A. Well, I could just as easily have gone 2 from June Eurodollar futures into September 3 Eurodollar futures, but T bills at the time 4 appeared to be the cheaper hedge vehicle. 5 Q. Were they basically comparable hedge 6 vehicles? 7 A. Yes. 8 Q. Now, I'd like -- 9 A. Better relative vehicle at the time. 10 That's why I'm switching from Euros to bills. 11 Q. Now I'd like to direct your attention 12 to the last -- it says, "$5 million, ARMs 13 purchase, Fannie Mae 8.76 percent, 11 dist. cost 14 of funds, life cap 13.04 percent." 15 What does that refer to? 16 A. Some of this is coming back. I think 17 that there was a big concern that we were perhaps 18 shrinking too much and foregoing too much income. 19 So, in line with my thinking as we reinvested in 20 some income-earning assets, we went into an 21 adjustable rate mortgage. 22 Q. Okay. Now, the A1512, the investment 12867 1 committee of June 8th, 1988. And I'd like to 2 direct your attention to the activity report which 3 is at US3015042. 4 A. 042? 5 Q. 042. 6 A. Okay. I have it. 7 Q. The first entry there makes reference 8 to "278 futures contracts, rolling position 9 forward (roll June Euro dollars to December Euro 10 dollars.) 11 Do you see that? 12 A. Yes, I do. 13 Q. Is that another example of moving an 14 expiring contract into the next active contract? 15 A. Yes, it is. 16 Q. And in this case, it was Eurodollar 17 futures for Eurodollar futures? 18 A. In this case, that's correct. 19 Q. Is there any reason for switching back 20 to Eurodollar futures here? 21 A. The market opportunities -- at that 22 time, the Euro contract was the more attractive 12868 1 vehicle to maintain the hedging. 2 Q. Item No. 4 talks about 260 futures 3 contracts, rolling position forward. 4 Do you see that one? 5 A. I see that. 6 Q. Now, that also -- is that also a 7 transaction to move from the expiring contract to 8 the next liquid contract? 9 A. Yes, it is. 10 Q. And then there are dollar rolls. 11 When -- there are mentioned in these minutes -- 12 we've now done a number of them. When they are 13 mentioned in these minutes of rolling futures 14 contracts forward, is that, in all cases, moving 15 from an expiring month to the next active month or 16 the next liquid month? 17 A. As far as I know, yes. 18 MR. NICKENS: Your Honor, the witness 19 hasn't even demonstrated that he's read all these 20 minutes, and now Mr. Guido is having him testify 21 as to what's in the minutes he hasn't read. 22 MR. GUIDO: Your Honor, I'm sorry. 12869 1 I -- Mr. Nickens and I had a discussion before we 2 started, and I didn't want to burden the Court 3 with, you know, going through all of the details 4 of these activities just like I've done with the 5 dollar rolls where I asked him when you use the 6 term dollar rolls. Is that essentially what 7 you're referring to? I was trying to do the same 8 thing with futures contracts. I wasn't trying to 9 do anything tricky, as Mr. Nickens is implying by 10 his questioning question. 11 MR. NICKENS: I have not suggested that 12 at all, Your Honor. What I have suggested is it's 13 not a proper question to ask the witness, is 14 everything in the documents a certain fact when he 15 hasn't read those documents or even looked at 16 them. 17 THE COURT: Well, I think we had the 18 answer to that last question. 19 MR. GUIDO: I thought he said that when 20 he uses those terms, he's essentially referring to 21 shifting from an expiring contract to an active 22 contract. 12870 1 MR. NICKENS: Well, that's not his 2 terms in these documents. These are other -- 3 these are the investment committee minutes. And 4 the question, as I recall it, related back to the 5 investment committee minutes. And I believe the 6 witness had said that he had not read these 7 minutes, at least in some time. 8 THE COURT: I'm not sure that question 9 was based on minutes. 10 MR. GUIDO: No. It was based on the 11 activity reports. 12 Q. (BY MR. GUIDO) Did you prepare the 13 activity reports, Mr. Bruno? 14 A. Yes. 15 Q. Okay. So, this is your language? 16 A. Yes. 17 Q. Okay. And when you use the term in 18 these reports "rolling a position forward in 19 futures contracts," are you essentially talking 20 about moving from an expiring contract to the next 21 active month? 22 A. Yes. 12871 1 Q. Now I'd like to look at Item No. 9. 2 And that is a 30-million-dollar six month reverse 3 repo, 7.85 percent fixed rate. 4 Do you see that? 5 A. Yes. 6 Q. What does that refer to? 7 A. This is just the short-term financing. 8 This is effectively borrowing money for six months 9 at a cost of money of 7.85 so the repo -- that's 10 the mechanics of the transaction. This is a 11 collateralized short-term borrowing. 12 Q. And look at the next document, A1513, 13 the minutes of the investment subcommittee. 14 Is that essentially making reference to 15 that Transaction No. 9, or is that an additional 16 reverse repo? 17 A. I don't really know. One says 18 30 million. Then this other item says 31 million. 19 Q. So, that was at least a separate 20 amount? 21 A. I believe it is. 22 Q. Okay. I'd like to direct your 12872 1 attention to A1515, which is the June 15th, 1988 2 activity report. And look at Items 2 through 4. 3 2 says, on 6/13, "76 futures contracts. Unwind 4 remaining June Eurodollar contract. June 13th, 39 5 futures contracts. Unwind remaining June 6 Eurodollar contracts. June 13, 25 futures 7 contracts. Roll June Eurodollar contracts forward 8 to September." 9 Do you see that? 10 A. Yes. 11 Q. Now, what does it mean when you say 12 "unwind remaining June Eurodollar contracts"? 13 A. The hedge was being adjusted. Through 14 time, the requisite number of contracts changed 15 and they diminished. And to the best of my 16 recollection, what I was doing here was adjusting 17 the number of contracts I needed to maintain the 18 hedge. It was not a fixed number. 19 Q. Okay. So, you were basically 20 rebalancing the hedge? Is that a fair 21 characterization? 22 A. It is. 12873 1 Q. Okay. And look at the Item No. 5. It 2 says, "Sell 425 10-year T note futures 3 September '88. Open new position to hedge 4 50 million PC 8s (buy one million six-month T 5 bills as margin collateral.)" 6 Do you see that? 7 A. Yes, I do. 8 Q. Is that also part of the balancing of 9 the hedge, to match durations? 10 A. I vaguely recall this as being some new 11 hedge. 12 Q. Okay. 13 A. As opposed to a rebalancing of an old 14 position. 15 Q. Then it says 6/15 -- it says "sell," 16 however, doesn't it? It says "sell." I mean, do 17 you usually put on a new hedge by selling a 18 futures contract? 19 A. It depends on the kind of hedge. In 20 this case, hedging the market value of some 21 assets, it looks to be to me that the assets were 22 Freddie Mac -- those PC, that's FHLMC. That's a 12874 1 Freddie Mac security. That's Freddie Mac 8s. So, 2 Freddie Mac mortgage securities whose market value 3 we were concerned about, well, to hedge against a 4 decline in the market value of those Freddie Mac 5 8s against that, we were selling 10-year note 6 futures. So, in that context, that was a 7 legitimate hedge. 8 Q. Okay. Then in the next one, it says 9 sell "213 10-year T note futures, September '88. 10 Open new position to hedge 25 million PC 8s." 11 Is that -- was that done for a similar 12 purpose? 13 A. Yes. 14 Q. Now -- 15 THE COURT: Excuse me. Could I back up 16 to a prior statement that the minutes of June 9th 17 refer to the preceding one to buy 30 million 18 six-month reverse repos. It seems like on 1515, 19 you bought the 31 million. So, there are two 20 transactions, aren't there? 21 THE WITNESS: It very well could be, 22 Your Honor. I don't know. 12875 1 THE COURT: Well, isn't that what the 2 documents show? 3 THE WITNESS: It seems to show that. 4 THE COURT: All right. Continue. 5 6 (Discussion off the record.) 7 8 MR. GUIDO: Your Honor, my recollection 9 is a little different. But Mr. Nickens says that 10 he thinks that his recollection is -- going 11 through the minutes, that the investment 12 subcommittee didn't always have its transaction 13 then approved by the investment committee or 14 reflected in the activity reports. So, it could 15 likely be a second transaction, Your Honor. 16 MR. NICKENS: Well, Your Honor, the 17 letter is dated June 9th, which is the day after 18 the minutes, which would be further evidence, in 19 addition to the fact that there is a difference in 20 the amount, that there was a separate transaction. 21 MR. GUIDO: I think the judge is asking 22 about the June 15th minutes of the investment 12876 1 committee that show a 31-million-dollar 2 transaction. 3 MR. NICKENS: Right. But I think -- as 4 I understood it, Your Honor's question wasn't 5 going back to the June 8th minutes. Since I don't 6 have the June 15th minutes, I'm somewhat 7 handicapped. 8 THE COURT: It shows a transaction of 9 June 8th, investment committee shows a transaction 10 on June 7th, and the investment committee activity 11 report shows a transaction on June 10th for 12 31 million. 13 MR. NICKENS: It would appear there are 14 two transactions. 15 Q. (BY MR. GUIDO) Now, I'd like to 16 direct your attention to the minutes of the 17 investment committee of June 22nd, which is A1516. 18 And the -- it says in the second-to-the-last 19 paragraph, "Mr. Dominic Bruno reported on the 20 mortgage-backed securities portfolio. His reports 21 were ordered attached to the minutes of the 22 meeting. He reviewed the activity report and 12877 1 noted that he had sold approximately 150 million 2 of dollar rolls. These sales resulted in a 3 savings of approximately 230 basis points as 4 compared to the mortgage repurchase rates. 5 Are those the dollar rolls that you 6 described initially as a way of a cost savings to 7 the institution? 8 A. Yes. 9 Q. Now, when you use 230 basis points like 10 there to judge the benefit, is that on a yearly 11 basis if they were outstanding for a year? 12 A. It's on a yearly basis. 13 Q. Okay. Now, if the transactions were 14 for 30 days, it's not a full 230 basis point 15 sayings for a year, is it? 16 A. Correct. It's not. It's one-twelfth 17 of that, roughly speaking. 18 Q. Now -- then it says "Mr. Bruno was 19 requested to establish a procedure to review the 20 pools which the association was getting back from 21 the dollar rolls." 22 Do you see that? 12878 1 A. Yes. 2 Q. Do you recall why -- who asked or 3 requested that? 4 A. I believe Bruce Williams. 5 Q. Pardon? 6 A. I believe it was Bruce Williams. 7 Q. Do you recall why it was that he wanted 8 to know that? 9 A. I think -- you raised an earlier point 10 about one criticism of dollar rolls is that you're 11 selling out pools and you might be getting back 12 inferior pools back. And I think I was being 13 asked here to document that that was -- whether or 14 not that was the case. 15 Q. Now, let me direct your attention -- 16 take a look at the binder of exhibits -- to T6085 17 in the binder of exhibits. 18 MR. GUIDO: This is in, Your Honor, as 19 B2339 at Tab 1139. It was discussed with Mary 20 Mims. 21 THE WITNESS: Excuse me, Mr. Guido? 22 Where is it? 12879 1 Q. (BY MR. GUIDO) It's T6085 in your 2 binder at B2339 in the record. It's July. 3 4 (Discussion off the record.) 5 6 Q. (BY MR. GUIDO) Is the document that's 7 in your binder, T6085, which is 2339 as part of 8 the minutes, is that an analysis that you did in 9 response to the request that's reflected in the 10 June 22nd, 1988 minutes? 11 A. Yes, it is. 12 Q. Now, I'd like to -- 13 MR. NICKENS: Your Honor, for the 14 record, there's a document attached that I don't 15 believe goes with it. It's the fourth page, which 16 is US1659, but I don't really -- I don't 17 believe -- 18 MR. GUIDO: Your Honor, we can delete 19 that, Your Honor. I don't think that that belongs 20 as part of the exhibit. 21 THE COURT: Well, I assume that's not a 22 part of the -- 12880 1 MR. GUIDO: 2339. No, Your Honor, it 2 is not. 3 THE COURT: Fine. 4 MR. NICKENS: I don't believe so, Your 5 Honor. 6 THE COURT: Thank you. 7 Q. (BY MR. GUIDO) Now, I'd like to 8 direct your attention to the June 22nd minutes of 9 the investment committee which is A1516 again and 10 direct your attention back to the back part of the 11 report, the activity report which is at 12 US3015014.081. It's toward the back of that 13 packet. That's the activity report of June 22nd, 14 1988. 15 A. And what is the page at the bottom 16 right? US what, please? 17 Q. It's -- 081 are the last three numbers. 18 A. Okay. Thank you. 19 Q. Now, that says under Item No. 1, 20 June 16th, "Sell 212 10-year T note futures, 21 September '88. Open new positions to hedge 22 25 million PC 8s. (Buy one million six-month T 12881 1 bills as margin collateral.)" 2 Can you tell us what that transaction 3 reflects? 4 A. I think the initiation of a new hedge 5 against those assets, those PC 8s. 6 Q. So, that's to protect against a decline 7 in the value of those PC 8s? 8 A. Yes. 9 Q. Okay. And that decline in value would 10 come about how? 11 A. Interest rates going up, which would 12 cut into the market value, reduce prices of 13 fixed-income assets. 14 Q. Now I'd like to direct your attention 15 to the next binder, the third binder. And I 16 direct your attention to A1518, which are the 17 minutes of the investment committee of June 29, 18 1988, which are the first minutes. 19 A. Okay. 20 Q. And looking at US-3,014,857.021. 21 A. .021? 22 Q. .021. 12882 1 A. Okay. I have it. 2 Q. Do you see those? 3 A. Yes. 4 Q. Those are all dollar rolls? 5 A. Yes. 6 Q. Do you see that? 7 A. Yes. 8 Q. And are those the dollar rolls that you 9 described earlier in your testimony? 10 A. Yes. 11 Q. Now I'd like to direct your attention 12 to 1520. That's the July 13th, '88 minutes of the 13 investment committee. 14 A. Right. 15 Q. Then it says -- look at the paragraph 16 in the middle of the page. It says "Mr. Dominic 17 Bruno reported on the mortgage-backed securities 18 portfolio. He presented a weekly report on 19 economic indicators as well as additional reports 20 relating to the portfolio. His reports were 21 ordered attached to the minutes of the meeting." 22 And then it says, "He noted that he had 12883 1 exchanged the 8 percent Freddie Mac pool for one 2 giant pool and that he had also completed 51.4 3 million of dollar rolls with a savings of 4 approximately 171 basis points over the repo 5 rate." 6 Do you see that? 7 A. Yes. 8 Q. Okay. Now, what is this reference to 9 this exchange? 10 A. Of the Freddie pool for the giant pool? 11 Q. Yeah. 12 A. The agency, the Federal Home Loan 13 Mortgage Corporation, had a program whereby you 14 could consolidate smaller pools into a larger 15 pool. So, basically the thrifts, we went through 16 and we collected a bunch of smaller pools; and we 17 consolidated them into one large pool. And 18 basically, what this refers to is that we sent all 19 these pool numbers over to the agency, Freddie 20 Mac, and they gave it a pool number and made it 21 one pool. So, it was consolidating all these 22 individual pieces into one large, more liquid 12884 1 block. 2 Q. How does that square with your view 3 that the thrifts should avoid mega transactions? 4 A. This wasn't a transaction. This was an 5 accounting convenience kind of situation here. We 6 weren't buying. We weren't selling. We were 7 literally saying, "We have all these individual 8 pools on our books. Rather than having a thousand 9 different pools of Freddie Mac 8s with a thousand 10 different pool numbers, please, on your books, 11 Freddie Mac, recognize all those pools and give us 12 one pool number for all of them. So, it's not 13 even a transaction. It's just a consolidation 14 kind of event. 15 Q. So, this isn't a sale or a purchase or 16 appear exchange at all? 17 A. Well, theoretically it's an exchange 18 but nothing was moved. We kept the pools. We got 19 a pool number, one pool number, in exchange for a 20 thousand pool numbers. 21 Q. Now, I'd like to direct your attention 22 to the minutes of July 20th, and the second page, 12885 1 that's A1521. The second page is US3014748. It 2 says, "Mr. Bruno" -- in the second full paragraph, 3 it says, "Mr. Bruno discussed the mortgage-backed 4 securities portfolio. He reviewed his reviews on 5 economic indicators in the portfolio activity for 6 the week. His reports were ordered attached to 7 the minutes of the meeting. He discussed his 8 dollar roll and swap transactions and noted that 9 he had also traded some caps. He noted that he 10 was looking into the question of unwinding some 11 swaps and determining its effect on the 12 institution." And then take a look at US3014753. 13 A. Okay. 14 Q. There are the first three transactions 15 up there that are described as the dollar rolls. 16 A. All right. 17 MR. BLANKENSTEIN: Your Honor, if I 18 might, Mr. Bruno seems to be marking on those 19 exhibits which I understand to be the Court 20 exhibits, the official exhibits. So, if he could 21 just -- I know that's inadvertent. So, if he 22 could just refrain from doing that so that we 12886 1 don't have any marks that the witness is putting 2 on the documents. 3 MR. GUIDO: We'll go through and look 4 at the documents. We have another set, and we'll 5 just replace a clean set if we have to. 6 Q. (BY MR. GUIDO) The first three of 7 those are -- the dollar roll transactions and then 8 there's an entry there, "Buy 4100 shares of 9 Freddie Mac preferred stock." 10 Do you see that? 11 A. Yes. 12 Q. And then the next one says, "Sell 4100 13 shares of Freddie Mac preferred stock." 14 Do you recall what those two 15 transactions dealt with? 16 A. Yes. Mike Crow wanted to purchase -- 17 us to purchase Freddie Mac stock. He had been, to 18 my knowledge, talked into it from some 19 stockbroker. So, I executed the transaction on 20 his behalf. Now, after we bought the stock, 21 someone -- I think it was Art Berner, but I could 22 be wrong in this -- who says he didn't think we 12887 1 were supposed to be buying this stock for some 2 reason. So, I sold it. 3 Q. Okay. You ended up making a gain on 4 this transaction of about $6,000, did you not? 5 A. Luck. 6 Q. Now, let's go to the next two 7 transactions. It says, 7/18 -- Item No. 6. "75 8 futures contracts, unwind July position. Hedge 9 No. 1." 10 Do you see that? 11 A. Yes, I see that. 12 Q. And then Item No. 7, 7/18, it says "34 13 futures contracts, unwind July position. Hedge 14 No. 2." 15 Do you know what that refers to? 16 A. It's a rebalancing of some liability 17 hedge. 18 Q. Okay. 19 A. It's a rebalancing of a hedge with 20 regard to our cost of funding, and I'm adjusting 21 and rebalancing. 22 Q. Okay. Look at the Items 9 and 10. It 12888 1 says "Sell 50 million 8 percents of 3-'92 interest 2 rate gaps, (gain of 1 million)." 3 What does that refer to? 4 A. I'm not sure what it refers to. I 5 don't remember. 6 Q. Is that a transaction that was simply 7 for an accounting gain? 8 A. Oh, you know what? I think what's 9 happening here is I see "buy 50 million 8 and a 10 quarters. Maybe we were adjusting the strike 11 price on the cap. The sell 50 million had a 12 strike rate of 8 percent. That's the rate we were 13 trying to cap. And to buy 50 million, the rate 14 there was 8 and a quarter and that was partly to 15 adjust the rate and that was partly to recognize 16 the gain, yeah. 17 Q. Did it have anything to do with 18 adjusting the portfolio for interest rate -- 19 A. No. I believe we were doing two things 20 at one time: Adjusting the cap rate and also 21 exploiting an opportunity to recognize a gain. 22 Q. And why was it that you were adjusting 12889 1 the cap rate? 2 A. It's not unusual to change your hedge 3 targets. And in this case, maybe there was a 4 different viewpoint about interest rates which, 5 therefore, would make us more ever comfortable 6 with trying to cap 8 and a quarter percent funding 7 as topped to 89 percent funding. 8 Q. Did anyone direct you to do that 9 transaction? 10 A. I don't remember. 11 Q. Now, I'd like to direct your attention 12 to A1522 -- I'm sorry -- 1522A, which are the 13 minutes of August 3, 1988. 14 A. Right. 15 Q. Look at the paragraph -- the fourth 16 paragraph down, the last sentence. It starts, 17 "Mr. Bruno reported on the mortgage-backed 18 securities portfolio." 19 A. Yes. 20 Q. And the last sentence says, "He noted 21 that he had completed 180 million of dollar rolls 22 and also acquired 100 million of caps at a strike 12890 1 price of 8 and a quarter at a cost of 64 basis 2 points." 3 Do you see that? 4 A. I see that. 5 Q. Now, do you recall what the purposes of 6 purchasing the caps was? 7 A. I don't recall. My thinking would be 8 that it was some ongoing hedging effort. But 9 beyond that, I don't recall. 10 Q. Okay. Now, let's move down a couple of 11 paragraphs. See the paragraph that starts with 12 "Mr. Connell"? 13 A. Yes. 14 Q. It says, "Mr. Connell suggested 15 Mr. Bruno and he discuss the strategy and 16 philosophy of the mortgage-backed securities 17 portfolio within the next one to two weeks." 18 Do you see that? 19 A. Yes. 20 Q. Do you recall why he wanted to discuss 21 the philosophy with you? 22 A. I don't recall. I don't even recall 12891 1 him making that suggestion. 2 Q. Okay. Do you recall ever having a 3 conversation with him about it? 4 A. It's quite possible. I do not recall. 5 Q. Now, I'd like to direct your attention 6 to 1523, which is the minutes of the investment 7 committee of August 10th. 8 A. Okay. 9 Q. It says that "Mr. Bruno reported on the 10 T note futures hedge transaction, presented an 11 updated report." 12 Is that making reference to a 13 transaction to adjust the hedges? 14 A. Yes. 15 Q. Okay. Now look at 1524, which is 16 August 25th of 1988 of the investment committee 17 minutes. 18 A. Okay. 19 Q. Do you see the last paragraph on the 20 first page of that which is US3014678? It says, 21 "Mr. Bruno reported on various hedge vehicles. 22 After discussing at length the economic basis for 12892 1 acquiring swaps, caps, or treasury note futures, 2 the investment committee determined that it was 3 appropriate and prudent to acquire $250 million of 4 two-year caps and 250 million of three-year caps. 5 Mr. Bruno was directed to acquire between 25 and 6 50 million of caps per week." 7 Do you see that? 8 A. I see that. 9 Q. Do you know what that's making 10 reference to? 11 A. My interpretation is just continuing 12 with our various hedging activities. I mean, we 13 were supposed to be trying to hedge the portfolio 14 and that's just part of that effort. 15 Q. Now, take a look at US3014711, which 16 says "Hedge vehicles, benefits versus costs." 17 A. Okay. 18 Q. Do you see that? 19 A. I see that. 20 Q. Is that the document that's referred to 21 as the discussion regarding the economic basis for 22 acquiring swaps, caps, or treasury -- 12893 1 A. It would appear to be, yes. 2 Q. Pardon? 3 A. It would appear to me to be, yes. 4 Q. Can you tell us what that document is 5 explaining in terms of the economic basis for 6 acquiring those instruments? 7 A. It's, I guess, in some fashion, 8 supposed to reflect the trade-offs. And, for 9 example, No. 2 where I'm talking about interest 10 rate caps, unlike No. 1 and No. 3, caps are 11 effectively options. A cap is another word for an 12 option. To purchase an option requires a fee. 13 And with respect to No. 2 in the caps, you can see 14 we have a two-year, three-year, and four-year cap. 15 And to engage in that hedge vehicle, it entailed a 16 cost. So, that was one of the disadvantages. 17 Q. An out-of-pocket cost at the time you 18 put the transaction on? Is that what you mean? 19 A. Yes, because in that kind of hedge, you 20 had an option where you could walk away from it. 21 You didn't have to exercise it. Unlike No. 2, 22 No. 1, and No. 3 did not have a cost. But the 12894 1 disadvantage of No. 1 and No. 3 is that even 2 though they didn't entail a cost like special rate 3 caps, you had to exercise, unwind that hedge 4 vehicle. You couldn't walk away from it. It 5 wasn't an option. No. 2 had optional 6 characteristics that No. 1 and No. 3 did not. And 7 because No. 2 had optional characteristics, it 8 cost money. It was an out-of-pocket cost. 9 Q. So, why did you have this discussion 10 with the investment committee in August of 1988, 11 August 25th, 1988, when you had been there since 12 February of 1988? Did someone ask the question? 13 A. Someone must have asked the question 14 because it is kind of strange for an institution 15 that regularly hedging itself to ask for this 16 discussion. I mean, this seems pretty basic. I 17 don't remember why. Someone must have asked them. 18 Q. I mean, you basically say that it costs 19 money, out-of-pocket money to put on a cap just 20 like any other option contract. Right? 21 A. Just like any other option. 22 Q. And that with a T note future, because 12895 1 the spread between mortgage-backed securities and 2 treasuries vary -- 3 A. Well -- 4 Q. Let me finish my question. Did you 5 find it necessary to explain to them that the -- 6 that there was a risk of using T note futures 7 contracts as a hedging vehicle because it didn't 8 always move in tandem with mortgage-backed 9 security prices? 10 A. Yes. 11 Q. And why was that? 12 A. Why did I find it necessary to explain? 13 Q. Why was it or why is it that T note 14 futures contracts do not necessarily move in 15 tandem with the changes in the values of 16 mortgage-backed securities? 17 A. Because they are different markets. 18 All instruments in the fixed-income marketplace -- 19 mortgages, corporates, treasuries -- are 20 correlated, but they are not equally correlated. 21 So, whether interest rates are going up or going 22 down, it does not mean that mortgages versus 12896 1 corporates versus municipal bonds versus 2 treasuries are moving in lock stead fashion. 3 Q. Is one of the reasons that the treasury 4 market instruments don't move in lock step with 5 mortgage-backed securities because of the 6 prepayment option in mortgage-backed securities? 7 A. That is, indeed, one of the reasons. 8 Q. Now, under swaps, you indicate that 9 swaps have proven not to be effective hedges over 10 time. 11 Do you see that? 12 A. Yes, I see that. And it's for that 13 prepayment issue. 14 Q. Okay. Now, what was it about swaps 15 that are proven not to be effective hedges over 16 time? 17 A. The fact that they weren't effective 18 is, again, getting to this point where they didn't 19 move in lock stead fashion with the underlying 20 mortgage assets. And you hit the nail on the 21 head. The reason they were ineffective is because 22 mortgage securities are subject to prepayment risk 12897 1 and, in particular, the kinds of mortgages being 2 held here which were uniquely subject to 3 prepayment risk, it did not make for a good hedge 4 to have these kinds of mortgage assets hedged with 5 this kind of hedge vehicle. 6 Q. Okay. 7 A. A lot of these mortgages were not 8 hedgible. 9 Q. Now, the option contracts weren't 10 option contracts of mortgage-backed securities 11 either, was it? 12 A. Were there options contracts on 13 mortgage securities? 14 Q. The options contracts that were being 15 referred to here. 16 A. No. These were options on Euro 17 dollars. 18 Q. Now, don't Euro dollars have the same 19 special mismatch potential that treasury 20 instruments do because they don't have the 21 prepayment option that the mortgage-backed 22 securities have? 12898 1 A. Well, this gets at why you pay money 2 for options. They are a much more suitable 3 hedging vehicle because the fact of the matter is 4 while mortgages tend to behave very adversely when 5 interest rates move because of prepayment, risk by 6 way of contrast, caps provide offsetting 7 volatility characteristics when interest rates 8 move. 9 So, the old buzz word is -- and, you 10 know, whereas mortgages have prepayment risks or 11 finance people say negative convexity, options 12 have very positive investment characteristics that 13 tend to offset the adverse volatility 14 characteristics of mortgages. That's why they are 15 a better hedge vehicle. 16 Q. Now, you make reference to caps here. 17 Okay? 18 A. Yes. 19 Q. What -- and those are capping what? 20 A. Are cost of funding. So, if we know we 21 have to borrow next year and we're concerned that 22 when we get around to borrowing money, special 12899 1 rates will go up, this vehicle will provide us 2 with an opportunity, if interest rates, in fact, 3 do wind up, going up, this vehicle allows us to 4 exercise this contract and lock in our cost of 5 funds. 6 Q. Now, what about the problem with 7 declining interest rates? What kind of instrument 8 was used for that? 9 A. Well, if -- if, in fact, your hedge was 10 an interest rate cap and interest rates wind up 11 going down, don't exercise your option. You just 12 walk away from it and you just go out into the 13 marketplace and borrow at these lower rates and 14 let that cap contract go unexercised. 15 Q. Now, how did institutions protect 16 themselves from a decline in interest rates which 17 resulted in acceleration of prepayments? What was 18 the instrument that was used for that? A put 19 option? 20 A. Really, there's no perfect hedge here. 21 And let me again say with respect to -- not just 22 plain vanilla mortgages. With respect to the 12900 1 kinds of esoteric products that were on the books 2 here, some of these instruments were unhedgible 3 against prepayment risk. 4 Q. I know that. 5 A. They -- 6 Q. I heard your testimony on that, 7 Mr. Bruno. 8 What I'm asking you here is: Was there 9 an instrument that was available that could be 10 used to hedge against the prepayment risk that 11 would incur with a declining interest rate? 12 A. Theoretically, yes. 13 Q. Okay. 14 A. In practice, no. The cost because of 15 the particularly volatile nature of these mortgage 16 issues. 17 Q. These particular mortgage issues? 18 A. Yeah. 19 Q. Now, discussing less volatile 20 mortgages, let's say seasoned pools, could one use 21 put options to protect against a decline in 22 interest rates? 12901 1 A. Yes. Not a perfect hedge, but one 2 could. 3 Q. And could one use put options to gain 4 some protection from a decline in interest rates 5 if they bought at-the-money coupon mortgage-backed 6 securities? 7 A. Yes. 8 Q. I'd like to direct your attention to 9 the minutes of September 14th. 10 MR. BLANKENSTEIN: Mr. Guido, what 11 exhibit number is that? 12 MR. GUIDO: A1527. 13 Q. (BY MR. GUIDO) It says, "Mr. Dominic 14 Bruno reported on the mortgage-backed securities 15 portfolio activity during the prior week. He 16 reviewed the prior week transactions which 17 included dollar rolls in the purchase of 18 50 million of two-year interest rate caps. It was 19 noted that these interest rate caps were acquired 20 under the previously-approved program to purchase 21 up to 50 million of interest rate caps to reduce 22 the association's interest rate gap. This brought 12902 1 the total interest rate caps purchase under this 2 program to $75 million." 3 Then it says, Mr. Bruno then presented 4 reports showing the current mark-to-market 5 position of the mortgage-backed securities 6 portfolio and hedge positions. Additionally, he 7 presented an analysis of the current futures hedge 8 position and explained the correlation and success 9 of this hedging program. His reports were ordered 10 attached to the minutes of the meeting. 11 Can you tell us which pages of that 12 report contain your correlation analysis of the 13 hedging program? 14 THE COURT: Mr. Guido, just for the 15 record, I think you read 50 million for 16 500 million. 17 MR. GUIDO: I'm sorry, Your Honor. 18 500 million of interest rate caps. 19 THE COURT: All right. 20 A. I'm looking for it. Yeah. It looks to 21 be page US3014595. 22 Q. (BY MR. GUIDO) And is that -- 12903 1 A. And the periodic mark-to-market is at 2 the bottom. 3 Q. Okay. Now, this bottom part, you see 4 that part? It says "Correlation 0.9933. 5 Regression coefficient, 1.2991. Coefficient of 6 determination, 0.9867." 7 Do you see that? 8 A. I see that. 9 Q. Are those the correlation -- the 10 results of the correlation formulas that are 11 typically used to determine whether or not there's 12 a correlation between the changes in the value of 13 hedge instruments and the underlying asset or 14 liability that's being hedged? 15 A. Those are popularly used statistics. 16 Q. Now, this hedge analysis, what is this 17 analyzing the hedge? 18 A. This is analyzing how well the market 19 value of the hedge vehicle is offsetting the 20 market value of the assets. For example, on 21 August 25th, notice that the assets here have lost 22 $281,250 as a result of interest rates clearly 12904 1 going up. On the hedge vehicle side where we were 2 short, higher interest rates resulted in a net 3 gain there of $265,625. So, if we were not hedged 4 on that day, we would have lost $281,251. The 5 hedge vehicle provided us with a market value gain 6 of 265,625 which meant we lost only $15,000 as a 7 result of being hedged. 8 Q. Is this an analysis for a micro or a 9 macro hedge? 10 A. This is a macro hedge. 11 Q. Now, I'd like to direct your attention 12 to A1531, which is October 5, 1988. 13 A. Okay. 14 Q. Now, do you see the paragraph that 15 starts, "Mr. Bruno reviewed the mortgage-backed 16 securities portfolio. He detailed the activities 17 of the week, including the unwinding of certain 18 swaps, approximately 300 million in residuals, 19 five of six residuals held by the association. He 20 also noted that he had liquidated the treasury 21 note futures hedge." 22 Do you see that? 12905 1 A. Yes. 2 Q. Okay. Now, what were the purposes of 3 those transactions? 4 A. Well, the residuals were in line with 5 the need to liquidate and shrink assets and get 6 rid of esoteric products before the end of the 7 year when it was pretty clear -- I do believe at 8 this time it was pretty clear we had to unwind 9 assets as we were getting to January 1, 1989, and 10 something big was going to happen with ownership. 11 So, we had to get the assets off the books. 12 Q. Okay. So, that's what this was about? 13 A. Uh-huh. (Witness nods head 14 affirmatively.) 15 Q. And was there a program to unwind swaps 16 and residuals? 17 A. There was a program, yes, to unwind 18 these. 19 Q. Now, I'd like to direct your attention 20 to -- in your -- the book that I've marked 21 exhibits for Dominic Bruno's examination, the 22 document that has been -- has a number of numbers. 12906 1 The copy that's in the book is T4517. It is a 2 memorandum from you to Larry Connell and Mike Crow 3 dated October 3rd, 1988. And it makes reference 4 to residuals and interest rate swaps. 5 A. Yes, I see this. 6 Q. Now, that -- was that a memorandum that 7 you prepared in anticipation of the events that 8 you indicate would be transpiring at the end of 9 the year? 10 A. Yes. 11 Q. And was it your attempt to lay out a 12 program for liquidation of those securities in the 13 most prudent way possible? 14 A. Yes. 15 Q. Now -- and were those instruments 16 liquidated subsequently by the association? 17 A. Yes. 18 Q. I'd like to direct your attention in 19 the same book to a number of documents that are 20 Bates stamped -- let's start with T4518. That 21 makes reference -- it's also October 3rd. And 22 it's a letter to you confirming the buy-out of 12907 1 various interest rate swaps between United Savings 2 Association and Drexel Burnham Lambert. 3 Was that one of the liquidations that 4 you make reference to in the October 5th 5 minutes -- investment committee minutes A1531? 6 A. Yes. 7 Q. And look at -- 8 MR. GUIDO: I move the admission of 9 T4518, Your Honor. 10 MR. NICKENS: No objection. 11 THE COURT: Received. 12 MR. GUIDO: I also move the admission, 13 Your Honor -- I have just been told that I failed 14 to move T4517. I move the admission of T4517. 15 MR. NICKENS: No objection. 16 THE COURT: Received. 17 Q. (BY MR. GUIDO) Then the next document 18 in that packet is T4521, Mr. Bruno. And that 19 makes reference to unwinding of interest rate 20 swaps. It's a memo from you on October 6th, 1988, 21 to the investment committee, T4521. 22 MR. GUIDO: I move the admission of 12908 1 T4521, Your Honor. 2 MR. NICKENS: No objection. 3 THE COURT: Received. 4 Q. (BY MR. GUIDO) Is that a document 5 that you prepared to reflect -- 6 A. Yes. 7 MR. NICKENS: Your Honor, I'll note for 8 the record, although the middle two pages of the 9 document don't have the US number, the imaging 10 numbers are consecutive. 11 THE COURT: Thank you. 12 Q. (BY MR. GUIDO) That reflects the 13 transactions that were referred to in the 14 investment committee minutes of October 5th, 1988, 15 at A1531, Mr. Bruno? 16 A. Yes. 17 Q. And then T6087, which is a memo of 18 October 10th from you to Mike Crow -- in my book, 19 there are two copies of it. 20 MR. GUIDO: We are moving the admission 21 of 306, 307, as exhibits. That is, T6087, Your 22 Honor. 12909 1 MR. NICKENS: No objection. 2 Q. (BY MR. GUIDO) Is that another memo 3 that reflects what the status of the swap 4 portfolio was in response to the -- what was 5 mentioned in the October 5th, 1988 minutes of the 6 investment committee, A1531? 7 A. Yes. 8 THE COURT: All right. T6087 is 9 received. 10 Q. (BY MR. GUIDO) Then, the next 11 document makes reference -- and I have marked this 12 next document as A13061. It is an October 11th, 13 1988 memorandum from you to Art Berner. And it 14 makes reference to some Salomon Brothers interest 15 rate swaps. 16 A. Right. 17 Q. I'd like to -- is that a document that 18 you prepared? 19 A. Yes. 20 MR. GUIDO: Okay. I'd like to move the 21 admission of A13061, Your Honor, which is Bates 22 stamped CN259654. 12910 1 MR. NICKENS: No objection. 2 THE COURT: That's A13061? 3 MR. GUIDO: Yes, Your Honor. 4 THE COURT: Received. 5 MR. GUIDO: 13062, Your Honor. I'm 6 sorry. No. 13061. I'm sorry, Your Honor. 7 THE COURT: Received. 8 Q. (BY MR. GUIDO) Then I want to direct 9 your attention to a document I've marked as 10 A13062, which is the October 17th, 1988 memorandum 11 from you to Art Berner. The subject is Salomon 12 Brothers interest rate swaps. 13 Is that a memorandum which you prepared 14 on the status of negotiations regarding the 15 Salomon Brothers interest rate swaps and their 16 closure? 17 A. It is. I haven't seen this in close to 18 10 years, but this is a memo I wrote. 19 Q. Okay. Now, with regard to those swaps, 20 did you find that you had difficulty with Salomon 21 Brothers regarding what you thought was the 22 appropriate price to close out those swap 12911 1 positions? 2 A. Yes. 3 Q. And what was that difficulty? 4 A. The difficulty was that for the first 5 time ever in my career, Salomon Brothers tried to 6 leverage in a difficulty regarding a real estate 7 matter with USAT that occurred years before, a 8 dispute involving nothing to do with these swaps, 9 $2 and a half million. They tried to -- well, 10 they effectively leveraged their feeling that they 11 were owed $2 and a half million into this 12 transaction and effectively refused me to get 13 competitive bids. This is most unusual in this 14 business, this transaction. 15 Q. And you found that rather offensive, 16 didn't you? 17 A. I found it shocking. 18 Q. Now, let's move on to -- 19 THE COURT: Did you move that into 20 evidence? 21 MR. GUIDO: Yeah. I move that into 22 evidence, Your Honor. 12912 1 MR. NICKENS: No objection. 2 THE COURT: Received. 3 Q. (BY MR. GUIDO) Now, I'd like to 4 direct your attention to -- going back to the 5 third binder of the investment committee minutes, 6 Mr. Bruno. 7 A. Yes. 8 Q. And I think it's the next-to-the-last 9 document in that binder, which is A1533. 10 A. Okay. I have it. 11 Q. Now, that is the investment committee 12 minutes of December 7th, 1988. 13 Okay. And I'd like to direct your 14 attention to the second page of the minutes, which 15 is US3010600.002. And the second paragraph says, 16 "Mr. Bruno discussed a liquidation strategy but 17 noted, however, if the portfolio needed to be 18 liquidated rapidly, it would be extremely costly 19 to the association." 20 Do you see that? 21 A. I see that. 22 Q. And then I'd like to direct your 12913 1 attention to the document which I think is that 2 same Bates range, US3010600, and it's the document 3 that is 017. It has an imaging number of 4 OWO49860. It has at the heading "US liquidation." 5 A. Right. 6 Q. Do you see that? Is that -- 7 A. Yes. 8 Q. Is that what you prepared that's 9 referred to in the investment committee minutes? 10 A. Yes. 11 Q. And it says, "The following plans 12 provides for an orderly liquidation of assets and 13 liabilities. That is, efficiency of execution is 14 assumed to be the objective of this litigation" -- 15 "liquidation." Excuse me. 16 Do you see that? 17 A. Yes. 18 Q. Okay. Now -- they -- you set out 19 certain periods there. 20 Are those your views of what you 21 thought were the appropriate periods to liquidate 22 those portfolios given those markets? 12914 1 A. Yes. 2 Q. Okay. Were those periods followed, to 3 your knowledge? 4 A. To my knowledge, no. 5 Q. No? 6 A. No. 7 Q. Were the periods greater than that? 8 A. Shorter. It was a rapid -- 9 Q. It was a rapid sell-off? 10 A. It was a rapid sell-off. 11 Q. So, that was not followed? 12 A. Right. That was not followed this way. 13 Q. Now, I only have a few other questions. 14 I'd like to direct your attention, Mr. Bruno, to 15 the same page. And on that page, you say "USAT 16 assets, 1.2 billion. Loss equals $99 million"? 17 A. Yes. 18 Q. Okay. What does that refer to? 19 A. I think that was my assessment of the 20 market value and the implied loss that was going 21 to be recognized at that point in time. 22 Q. This doesn't make any mention of the 12915 1 United MBS portfolio, does it? 2 A. I don't see any mention of United MBS 3 here. 4 Q. Did you develop a liquidation strategy 5 for the United MBS portfolio? 6 A. I do not remember. 7 Q. Okay. Now, I'd like to direct your 8 attention -- I think it's the same document -- to 9 Bates stamp US3014569.25. 10 MR. NICKENS: Can we have an imaging 11 number, Your Honor? I can't -- 12 THE WITNESS: I can't find that. 13 MR. GUIDO: Okay. We are in 14 Exhibit A1532, Your Honor. I'm sorry. 15 THE COURT: Is the imaging 16 No. OWO49868? 17 MR. GUIDO: Yes, Your Honor. OWO4986 -- 18 MS. CLARK: 9868. 19 MR. GUIDO: -- 8. And I'd also like to 20 direct your attention to the second page of that, 21 as well, which is OWO49869, the imaging number. 22 THE WITNESS: I can't find those. 12916 1 THE COURT: We'll take a short recess. 2 3 (A short break was taken.) 4 5 THE COURT: Be seated, please. We'll 6 be back on the record. 7 MR. NICKENS: Your Honor, before we 8 proceed with Mr. Bruno, I'd like to raise with the 9 Court a scheduling issue. We had thought that we 10 would complete Mr. Bruno's testimony today, but 11 it's now clear that that's not going to be the 12 case, that we will have to finish tomorrow. 13 In addition to that, one of the 14 witnesses that was scheduled for later this week 15 we were informed at lunch or just after lunch 16 would not be available because of an illness in 17 his family. The plan had been to start, I think, 18 with Mr. Huebsch, one of the respondents, toward 19 the end of the week. And I'm -- I'm just 20 inquiring about where we are. I don't know what 21 the Court's wish is -- I'll be happy to go this 22 afternoon as long as we can, but it's clear to me 12917 1 that we will have another hour or two of 2 examination of Mr. Bruno tomorrow, even if we go 3 fairly late today. And there's so many -- there's 4 been so many documents brought in, just the bulk 5 of it is going to require some organizational work 6 this evening. 7 MR. VILLA: Your Honor, may I also make 8 a point? On behalf of Mr. Huebsch -- I'll be 9 representing him during his -- at least a portion 10 of his cross-examination. 11 Our concern about Mr. Huebsch is that 12 we start him so late in the week that we won't be 13 able to complete him and we'll have to carry him 14 over the ten days or whatever it is until we 15 resume. With a respondent, his testimony is 16 important and we were hoping that we could begin 17 and complete Mr. Huebsch all at one time so the 18 Court would appreciate all of his testimony and 19 hear all of his testimony from both sides at once. 20 So, our concern is the way this week is 21 shaping up that we will not be able to do that. 22 And we wanted to raise -- on behalf of Mr. Huebsch 12918 1 and on behalf of this group of respondents, that's 2 a scheduling issue that we'd like to raise and 3 perhaps we could -- 4 MR. GUIDO: May I be heard on that, 5 Your Honor? With regard to Mr. Villa's point, I 6 really don't think that that has much merit 7 because we were planning on starting Mr. Huebsch 8 later and we are now talking about moving him 9 forward. So, that has nothing to do with the 10 illness in Mr. Stodart's family. 11 It seems to me that, you know, we just 12 go with the witnesses as they come and we -- I 13 think we have a better shot at finishing 14 Mr. Huebsch now. If Mr. Villa's saying that we 15 don't put Mr. Huebsch on at all, I believe that 16 that's affecting the OTS's order of witnesses, 17 Your Honor. And I believe that we should be 18 permitted to start with Mr. Huebsch. I don't 19 believe that there's any merit to the claim that 20 we should put him off until afterwards and then 21 not have anything to do for three days while we're 22 all here in Houston. 12919 1 MR. NICKENS: Your Honor, this comes up 2 because of an uncertainty for Friday afternoon 3 before the holiday. We didn't know the Court's 4 wishes about how late you'd want to go. We've had 5 a couple of unexpected -- although most of this 6 part of the proceeding has gone as we had planned 7 it, this is the first time -- it's clear 8 Mr. Bruno's going to have to be held over. We 9 thought we were going to finish. We had a witness 10 for whom we had designated a day with Mr. Stodart, 11 who's suddenly not there. 12 And so, we're just trying to inform the 13 Court of the problems that we are dealing with and 14 to get some guidance from you about how you would 15 like for us to proceed. 16 THE COURT: All right. What's the next 17 witness for OTS? 18 MR. GUIDO: Your Honor, the next 19 witness is Mr. Williams for his cross-examination 20 tomorrow. And then what we were planning on doing 21 is when we finished with Mr. Williams, we were 22 going to call Lois Suder, one of the expert 12920 1 witnesses for the OTS, and then we were going -- 2 we were originally going to do Mr. Stodart before 3 Ms. Suder. We're now going to move her up and 4 then we're going to start with Mr. Huebsch at that 5 period of time. 6 We're trying -- there is a difficulty 7 with her schedule, Your Honor, because she has two 8 small children and she lives in California. And 9 we're trying to move her up a day so that we can 10 then do Mr. Huebsch hopefully in that block period 11 of time. 12 THE COURT: Well, is it necessary that 13 you have her on the stand before Mr. Huebsch? I'm 14 thinking maybe you could start Mr. Huebsch and 15 leave her until later. 16 MR. GUIDO: We could do that if that's 17 your wishes, Your Honor. We'd start 18 Mr. Huebsch -- 19 THE COURT: How much time are you going 20 to take with him? 21 MR. GUIDO: Pardon? 22 THE COURT: How much time are you going 12921 1 to take with him? 2 MR. GUIDO: It's probably going to take 3 a few days, Your Honor, or at least a day, day and 4 a half for the OTS. 5 THE COURT: And how long is the cross 6 completion of Mr. Williams -- 7 MR. NICKENS: We're estimating -- 8 Ms. Clark has estimated, Your Honor, a half a day 9 for her portion. Sorry. 10 MS. CLARK: He speaks for me. 11 MR. NICKENS: Not all the time, Your 12 Honor, but I'm right on this one. 13 THE COURT: And the other respondents, 14 I assume -- are they going to have some cross for 15 Mr. Williams? 16 MR. EISENHART: I don't think so, Your 17 Honor. I don't plan on it. 18 MR. BLANKENSTEIN: I have no plans 19 right now, Your Honor. 20 MR. KEETON: If any, it will be brief, 21 Your Honor. 22 THE COURT: Thank you. If we finish 12922 1 with Mr. Bruno by noon tomorrow, we should finish 2 with Mr. Williams by evening? 3 MR. NICKENS: Yes, Your Honor, 4 depending upon the length of the redirect of both 5 Mr. Bruno and Mr. Williams. 6 THE COURT: So, in three days, we 7 should be able to finish with Mr. Huebsch then? 8 MR. NICKENS: That would be a good plan 9 if we could do that. 10 MR. GUIDO: So, in other words, you're 11 proposing that we not call Lois Suder before we 12 call Mr. Huebsch and just save her for sometime in 13 the future, Your Honor? 14 THE COURT: It sounds to me like if 15 you're going to have Mr. Huebsch this week, it 16 sounds to me like that would be the way to finish 17 it. 18 MR. RINALDI: We could end up short at 19 the end of the week. 20 MR. GUIDO: At the end of the week, we 21 could end up with some extra time, Your Honor. 22 MR. NICKENS: For which all of us will 12923 1 be thankful if that should happen. 2 THE COURT: Well, we might be able to 3 deal with it. All right. Let's plan on that 4 then. 5 MR. NICKENS: As far as this afternoon, 6 Your Honor, what would you like in terms of 7 breaking? 8 THE COURT: Well, it's 4:00 o'clock. 9 How much more -- 10 MR. GUIDO: Your Honor, I have about 11 ten minutes, maybe 15 minutes. I have three small 12 areas to do. Mr. Nickens indicated to me that he 13 thought he had two hours of cross-examination. 14 The witness was planning on returning on a flight 15 tonight to New York City. If we could go late 16 today since we started late, that would help 17 accommodate his schedule and give Mr. Nickens that 18 two hours. I can finish in the next 10 or 15 19 minutes and we could go till 6:15. 20 MR. NICKENS: Your Honor, I don't -- I 21 just don't think that's right from a personal 22 point of view to have gone through this entire 12924 1 examination and then have us squeezed into going 2 later in the day, particularly when we've got a 3 stack of documents like this. I've got to go back 4 through these minutes to see what is absolutely 5 necessary to be brought to the Court's attention. 6 I mean, I'll be happy to start and do a few 7 minutes. I think the most sensible thing would be 8 to finish him, break, and I'll end up being 9 shorter than I would be if I start this afternoon 10 and come back tomorrow. 11 THE COURT: All right. I'm going to do 12 that. You finish your direct and we'll adjourn 13 and we'll start with -- on cross tomorrow morning. 14 MR. GUIDO: Mr. Bruno, how does that 15 fit with your schedule? 16 THE WITNESS: I'm here, you know. I 17 have -- 18 MR. GUIDO: So, you'd rather get it 19 over with instead of coming back? 20 THE COURT: Well, I would like to 21 accommodate the witness but, on the other hand, we 22 have our demands that we have to have an orderly 12925 1 proceeding. And I think that there's just so much 2 you can do in a day and I am persuaded by 3 Mr. Nickens suggestion that his cross should not 4 be squeezed in at 5:00 o'clock. 5 MR. GUIDO: Your Honor, that's fine. 6 THE COURT: Proceed. 7 MR. GUIDO: May I proceed, Your Honor? 8 Q. (BY MR. GUIDO) When you joined USAT, 9 do you remember the Exhibit A1487, the first 10 document that I showed you from the investment 11 committee minutes of -- 12 A. What book is this? 13 Q. It's in the first book of the 14 investment committee minutes. It's January 20th, 15 1987. I think I put it on the floor. I'm sorry. 16 I want to direct your attention to 17 something that I directed your attention to at the 18 outset. It's on Bates stamp US301509, and it is 19 the sensitivity analysis that appears on that 20 page. 21 A. 01509? 22 Q. Yes. US301509 is the Bates stamp. 12926 1 A. Okay. Thank you. 2 Q. Remember that sensitivity analysis that 3 I directed your attention to at the beginning of 4 your testimony? 5 A. Yes. 6 Q. And that shows a loss mark-to-market of 7 $245,844,000 at unchanged interest rates. If 8 interest rates go down 100 basis points, it shows 9 that loss declines -- 10 A. Yes. 11 Q. -- to 186,169? 12 A. Yes. 13 Q. And if it goes up, the loss is -- goes 14 up to $337,056,000. 15 Do you see that? 16 A. Yes, I do. 17 Q. Now I'd like to direct your attention 18 to the very last exhibit in the investment 19 committee minutes in Book No. 3, which is 20 Exhibit No. 1533. And I'd like to direct your 21 attention in Exhibit 1533 to the Bates stamp 22 US3010600.026. It's the 26th page in that 12927 1 exhibit. 2 A. Okay. 3 Q. Now, that shows the sensitivity 4 analysis of that date as unchanged for total for 5 all of 217,613,000. 6 Do you see that? 7 A. Yes. 8 Q. And it shows it's declining to 128,752 9 if there is 100 basis point decline in interest 10 rates. 11 Do you see that? 12 A. Yes. 13 Q. And it shows it increases to 14 312,845,000 if there are any -- if there is a 15 hundred basis point increase? 16 A. Right. 17 Q. Now, to -- would it be appropriate, in 18 measuring the performance of the portfolio between 19 the time January 20th, 1988, and December 5th, 20 1988, to compare those two sensitivity analyses? 21 A. I guess it depends on what we're trying 22 to address here. I mean, in many ways, the 12928 1 portfolio has changed. I mean, the hedging has 2 changed. Some of the assets have changed. I'm 3 not quite -- we're comparing two items which are, 4 to a certain extent, similar. In some ways, some 5 of the assets and liabilities are the same; but in 6 many other ways, they are different. 7 Q. I mean, there's been the management 8 over a period of years -- 9 A. Yes. 10 Q. But it's basically managing USAT's 11 mortgage-backed securities portfolio hedged with 12 swaps, caps, and collars? 13 A. Yes. 14 Q. Okay. 15 A. Yes. Managed to a certain degree. Not 16 heavily managed. 17 Q. Okay. But to see what had transpired 18 during that interim period of time, that would be 19 one way to do a comparison? 20 A. It would be one way to do a comparison. 21 Q. Now, don't you also have to add in to 22 that what the net income performance of the 12929 1 portfolio was during that period of time? 2 A. That would be an appropriate 3 consideration. 4 Q. I'd like to direct your attention now 5 to the 1988 performance report binder which, on 6 the very last page, has the last performance 7 report. And that's Exhibit A5039, November 1988. 8 A. Right. 9 Q. Look at the very last page that I've 10 opened up for you. 11 Do you see that? 12 A. Okay. Yes, I have it. 13 Q. All right. You see, that is 14 year-to-date performance through November 30, 15 1988, in thousands. And do you see under net 16 income, it shows USAT losing $45 million, United 17 MBS earning $7,407,000, and then there's $883,000 18 worth of administrative expenses for a net figure 19 of $39,440,000. 20 Do you see that? 21 A. I see that. 22 Q. Okay. So, would it be appropriate to 12930 1 add that figure to the 217,613,000 as of 2 December 5th, 1988, in the investment committee 3 report to ascertain what the basic gain or loss 4 was in that portfolio and its performance between 5 January 20th, 1988, and -- 6 A. I believe that's correct. 7 Q. -- November? 8 A. I believe that's correct. 9 Q. And would that show -- what you would 10 have to do is add the 217,613,000 and the 39,440 11 together to ascertain what the status was of the 12 portfolio? 13 A. 39 million. 14 Q. 39 million? 15 A. Yes. 16 Q. And would comparing those two figures 17 combined with the 245 million of unchanged be an 18 appropriate way to measure the performance of that 19 portfolio over that period of time? 20 A. Yes. 21 Q. Is it your view that you basically 22 maintain the value of the portfolio or its 12931 1 negative value at what it was when you inherited 2 it in the management during that period of time? 3 A. I believe that to be the case. 4 Q. And is it the case that you ended up 5 reducing the interest rate sensitivity to a 6 certain extent at least with regard to declining 7 interest rates in that portfolio over that period 8 of time? 9 A. Minimally. 10 Q. Now, when you joined USAT, you 11 indicated that you were aware of its precarious 12 financial condition. 13 Do you recall that? 14 A. Yes. 15 Q. Did you seek some sort of an agreement 16 that you would be paid a severance if USAT in some 17 way had a change of ownership or a failure? 18 A. Yes. 19 Q. Okay. And what is it that you sought? 20 A. Well, I forget the -- 21 Q. Pardon? 22 A. I was looking for a two-year guaranty. 12932 1 Should something happen in that first year, you 2 know, I wanted a guaranty that I would be made 3 whole for the second year. 4 Q. Okay. 5 A. An employment contract. 6 Q. Okay. And did you enter into an 7 employment contract? 8 A. Yes, I did. 9 Q. Okay. And did -- when you -- when USAT 10 was terminated, did you receive that guaranty? 11 A. I had to go to court for it. 12 Q. Okay. Who was it that you sought it 13 from? 14 A. It was fairly complex, but it turned 15 out to be, I think, the FDIC, I believe. 16 Q. By the time you sued, the FDIC was the 17 owner of the thrift? 18 A. The owner of the thrift at that time 19 was the Hyperian group afterwards. I mean, after 20 the recapitalization -- maybe I didn't answer your 21 question there. 22 Q. Well, in terms of the assets and 12933 1 liabilities of USAT or the person that you had -- 2 the entity that you had the contract with, did 3 that become the FDIC? 4 A. Yes. 5 Q. And you went to court to enforce that 6 agreement, did you not? 7 A. Yes, I did. 8 Q. And did the Court order you to have 9 those payments made to you? 10 A. Yes. 11 Q. Did you have any dealings with any of 12 the management of USAT in the course of that 13 litigation? 14 A. Yeah. I remember two people testifying 15 for the FDIC: Mike Crow and Randy someone, an 16 attorney. I can't remember his name. 17 Q. Randy Hansen? 18 A. That sounds familiar to me. 19 Q. And did -- what do you recall of 20 Michael Crow's testimony? 21 A. That he lied. 22 Q. And what was it about what he said that 12934 1 you felt was a lie? 2 A. He claimed that the contract he entered 3 into with me -- in no uncertain terms, this was a 4 contract and the judge agreed with me -- but he 5 claimed he never considered it a contract and he 6 didn't think it was a legal document and, as far 7 as he was concerned, that it was a contract was 8 something -- this was news to me. But basically, 9 he misrepresented the truth. 10 Q. All right. Do you resent that? 11 A. I do. 12 Q. Okay. Did that in any way affect your 13 testimony about Mr. Crow today? 14 A. Absolutely not. 15 Q. Now, the other question I have for you 16 is: During this period of time you looked at this 17 portfolio when you came in, you did these analyses 18 of this portfolio, and you concluded that it was 19 not an attractive portfolio -- let's put it that 20 way. 21 Is that a fair characterization of your 22 view? 12935 1 A. That's an understatement. That's 2 accurate. 3 Q. It's an understatement. How would you 4 characterize the portfolio? 5 A. A disaster. 6 Q. Okay. Now, did you have any dealings 7 with any of the regulators during the -- 8 A. Yes. 9 Q. -- period of time that you managed that 10 portfolio? 11 A. I had a conversation with Jon Scott. 12 Q. Did you also meet with supervisory 13 people who would come in and look at the 14 portfolio? 15 A. A variety of regulators. 16 Q. Did you also meet with examiners that 17 came in to look at the portfolio? 18 A. Yes. 19 Q. And let's start with the supervisory 20 people. 21 Did you have an impression of what 22 their extent of knowledge was about the portfolio? 12936 1 A. It was very underwhelming. These poor 2 individuals who were trained in accounting really 3 didn't understand the complexity of this 4 portfolio. I'm talking about the everyday type 5 examiner coming in, looking at the books, did not 6 understand it, looked in terms of accounting 7 formulas and completely missed the economic damage 8 that was there. 9 Q. You said they were sort of underwhelmed 10 I think is what you -- 11 A. By their investment expertise. Looks 12 like they were very good accountants. Just no 13 training in portfolio management. 14 Q. So, you felt that they just missed it? 15 A. Totally. 16 Q. Now, you indicated that that you said 17 you had some meetings with Mr. Scott? 18 A. I had one meeting with -- it was lunch. 19 He just -- I met a broker in Dallas, a salesman 20 who I was dealing with from Bear Sterns who knew 21 Jon Scott. Jon Scott happened to be there, and 22 the three of us wound up talking. 12937 1 Q. Okay. And in the course of that 2 discussion, did you indicate to him some of your 3 concerns about the management of the USAT 4 mortgage-backed security portfolio? 5 A. Yes. I wound up ventilating some 6 concern about the accounting orientation and the 7 lack of appreciation with some economic problems 8 within that portfolio. 9 Q. Okay. Did you tell him that you found 10 that the portfolio had been managed from an 11 accounting perspective and ignored the economic 12 reality? 13 A. Yes. 14 MR. NICKENS: Your Honor, could we hear 15 the testimony of the witness as to this encounter 16 rather than Mr. Guido's leading questions? 17 THE COURT: Yes. Sustained. 18 Q. (BY MR. GUIDO) In your meeting with 19 Mr. Scott, did you tell him what it was that you 20 found objectionable about the management of the 21 portfolio? 22 A. I did. I told him what I found 12938 1 objectionable. 2 Q. Okay. 3 A. And -- 4 Q. What was it that you told him? 5 A. That there was such a concern with 6 appearances and window dressing, as the expression 7 is used, accounting income, that there was not a 8 concern with the economic volatility of the 9 assets. And I wound up ventilating this and 10 telling him how deeply I was concerned about this 11 and that there was a ton of money here that was 12 being abused, effectively speaking. 13 Q. Did you subsequently -- when was this? 14 Do you recall? 15 A. Well, Larry Connell at this point in 16 time was president of the company. So, it's after 17 he arrived. 18 Q. Okay. 19 A. Somewhat shortly after he arrived. 20 Q. And did you subsequently learn that 21 Mr. Scott had transmitted your concerns to someone 22 at USAT? 12939 1 A. What I thought was an off-the-record 2 conversation to a regulator, I was shocked to 3 learn that he just immediately called up the 4 people at USAT and conveyed my feelings. 5 Q. Do you recall who it was that he 6 called? 7 A. He called Larry Connell. 8 Q. Okay. And is it your understanding 9 that he transmitted to Larry Connell your 10 concerns? 11 A. Yes, it certainly is. 12 Q. Do you know what -- whether he 13 instructed Mr. Connell to do anything with that 14 information? 15 A. I do not know. 16 Q. Okay. Were you unhappy that he had 17 identified you as the source of that information? 18 A. I was quite -- to this day, I'm shocked 19 that I can speak to a regulator and, as a citizen, 20 communicate some constructive problems with this 21 institution and that it would be conveyed to the 22 management, the culprits. 12940 1 Q. Now, you have testified about your 2 concerns about that portfolio. 3 Do you have any views about how it 4 happened in light of the fact that it was an 5 institution that was subject to regulations that 6 were designed to preserve the safety and soundness 7 of that institution? 8 A. I do. 9 Q. And what is that? What are those 10 views? 11 A. My views are that the guidelines, the 12 policies, the regulatory policies which outline 13 what thrifts can do are poorly conceived. I think 14 the government, with its guidelines, was asking 15 for trouble. I think they were providing 16 management with the opportunity to engage in 17 excessive amounts of risk. So, they were 18 providing managers and owners of thrifts with the 19 opportunity to abuse the company. 20 Q. Do you believe that the regulations 21 that were applicable at the time were overly 22 broad? 12941 1 A. Absolutely. They still are. 2 Q. Now, do you -- what was your basis for 3 the understanding of the applicable regulations at 4 the time based on information that you obtained 5 from the people at USAT who were responsible for 6 the regulatory interpretations? 7 A. That basically with a limited amount of 8 capital, one can own a thrift, leverage it up to 9 an enormous amount of risk where it's basically an 10 institution that has an enormous amount of debt 11 relative to its thin capital exposing it to 12 enormous amounts of risk. 13 Q. Do you know whether or not the 14 regulations as they existed in 1985 through 1987, 15 authorized or prescribed the reliance on 16 accounting income generation, so-called window 17 dressing, I think is what you described it as, as 18 opposed to managing an institution so that it was 19 managed in accordance with minimizing the interest 20 rate risk that the institution had to bear? 21 A. No, I don't know. 22 MR. GUIDO: No further questions, Your 12942 1 Honor. 2 THE COURT: All right. We'll adjourn 3 until 9:00 o'clock tomorrow morning. 4 5 (Whereupon at 4:21 p.m. 6 the proceedings were recessed.) 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 12943 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 22nd 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 12944 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 22nd 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