12945 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 23, 1998 22 12946 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 (Not present) SCOTT SCHWARTZ, Esquire (Not present) 5 BRUCE RINALDI, Esquire RICHARD STEARNS, Esquire (Not present) 6 and BRYAN VEIS, Esquire (Not present) 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 (Not present) of: Mayor, Day, Caldwell & Keeton 20 1900 NationsBank Center, 700 Louisiana Houston, Texas 77002 21 (713) 225-7013 22 12947 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 (Not present) 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, CSR 22 . 12948 1 2 INDEX OF PROCEEDINGS 3 Page 4 DOMINIC BRUNO 5 Examination by Mr. Nickens..............12949 6 Further Examination by Mr. Guido........13075 7 Further Examination by Mr. Nickens......13130 8 Further Examination by Mr. Guido........13131 9 Further Examination by Mr. Nickens......13133 10 . 11 . 12 . 13 . 14 . 15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . 12949 1 P-R-O-C-E-E-D-I-N-G-S 2 (8:55 a.m.) 3 THE COURT: Good morning. Be seated, 4 please. 5 THE COURT: Unless there are 6 preliminary matters, we will proceed with the 7 cross-examination of Mr. Bruno. 8 Mr. Nickens? 9 10 EXAMINATION 11 12 Q. (BY MR. NICKENS) Mr. Bruno, let me 13 introduce myself. My name is J.C. Nickens. We 14 have never met before, have we? 15 A. Correct. 16 Q. We saw each other in the courtroom 17 yesterday, but we were not introduced? 18 A. Correct. 19 Q. We did have a brief phone conversation. 20 Do you recall that? 21 A. I remember speaking to Ms. Clark. I 22 assume you were the gentleman on the other -- 12950 1 there were two people. Vaguely, I do. 2 Q. That's been within the last few weeks, 3 correct? 4 A. I think so. Could have been five weeks 5 ago. My memory is -- I'm sure that's correct. 6 Q. Ms. Clark and I called you and asked if 7 you would be willing to sit down with us so we 8 could bring some documents and talk to you about 9 your recollections concerning the issues in the 10 case; is that correct? 11 A. Yes, that sounds correct. 12 Q. And initially, you agreed to do so; and 13 we set up a meeting for a Friday afternoon in 14 New York? 15 A. Right. 16 Q. And then you called Ms. Clark back and 17 said that you would not meet with us? 18 A. Right. 19 Q. And the reason that you gave for your 20 unwillingness to speak with us was your bitterness 21 over Mr. Crow? 22 A. That was one of the reasons, correct. 12951 1 Q. And so, you were unwilling to talk to 2 the respondents or their counsel concerning the 3 issues in the case -- 4 A. Right. 5 Q. -- because of your bitterness over 6 Mr. Crow? 7 A. Right. But I also didn't speak to Ken 8 Guido personally. This is the first time I've met 9 him. 10 Q. But you have talked to him a number of 11 times on the phone? 12 A. Not a number of times, no. 13 Q. Well, tell us how many. 14 A. I would guess a handful of times. Many 15 of those conversations were very brief, just 16 checking on detail. 17 Q. Many of those conversations were brief? 18 A. To my recollection. 19 Q. And does that mean that some of them 20 were not so brief? 21 A. I recall one being of some material 22 length; and frankly, I'm not even sure of that. I 12952 1 think it was at home, and I was very tired after 2 work. 3 Q. Now, you -- 4 A. I was an unwilling conversationalist 5 with everyone in this matter, even Mr. Guido. 6 Q. You did talk to him about the substance 7 of the testimony that you gave yesterday? 8 A. It was a revelation to me the level of 9 detail we got into. 10 Q. Did you talk to him about your 11 testimony yesterday? 12 A. I've never met Mr. Guido until 13 yesterday. 14 Q. But we've established you've had phone 15 conversations with him, and those conversations -- 16 A. Much to my reluctance, yes. 17 Q. And those conversations related to the 18 substance of your testimony yesterday? 19 A. In very general terms. 20 Q. Now, you were interviewed by the FDIC? 21 A. I believe FDIC people, lawyers, did 22 interview me. I assume those individuals 10 years 12953 1 ago were with the FDIC. My recollection is not 2 sharp. 3 Q. And prior to your testimony, had you 4 reviewed any documents? 5 A. With the FDIC? 6 Q. With anyone concerning the matters 7 relating to your testimony. 8 A. Mr. Guido sent me memos I had written, 9 and I perused them. 10 Q. And you discussed those with him in 11 subsequent phone calls? 12 A. Yes. 13 Q. Now, did you review any other documents 14 other than those supplied by the OTS? 15 A. I don't recall reviewing any other 16 documents. I do not recall. 17 Q. Did you review any investment committee 18 minutes? 19 A. No, not investment committee minutes. 20 Q. So, among the documents supplied to you 21 by the OTS, there weren't any investment committee 22 minutes? 12954 1 A. Right. 2 Q. Now, have you had any discussions 3 concerning your testimony yesterday since you 4 stepped down from the stand? 5 A. No, not about the testimony. 6 Q. Have you had any conversations with 7 members of the OTS enforcement staff on any 8 subject? 9 A. Yes. 10 Q. At dinner last night? 11 A. No. 12 Q. After your testimony yesterday? 13 A. No. 14 Q. This morning? 15 A. Well, we spoke in general chatter but 16 not about the testimony. 17 Q. Now, you indicated in your direct 18 testimony that at one point in time, you were 19 employed at Merrill Lynch? 20 A. Correct. 21 Q. During what period of time was that? 22 A. I think that was the end of 1983 12955 1 through early '84. 2 Q. And why did you leave Merrill Lynch? 3 A. Because I was recruited to work for 4 Aetna Life and Casualty in Hartford, Connecticut. 5 Q. And you worked at Aetna for about four 6 years? 7 A. Three years. 8 Q. And then you went to work for Meritor? 9 A. Correct. 10 Q. Explain to the Court what Meritor is or 11 was. 12 A. Meritor Savings Banks, also known as 13 Philadelphia Savings Fund Society, was a savings 14 fund. It's in Philadelphia. And I worked there 15 briefly as an investment person. 16 Q. And how long were you there? 17 A. I was there nine months before I got 18 recruited to work for United Savings. 19 Q. So, you terminated your employment at 20 Meritor? 21 A. Yes. 22 Q. What did you do at Meritor? 12956 1 A. I was a portfolio manager. There 2 really wasn't much to do. It turned out to be an 3 institution going under. So, it turned into not a 4 very meaningful position. And the reality is I 5 didn't do very much and that's why I decided to 6 leave. 7 Q. Did they have a mortgage-backed 8 securities portfolio? 9 A. Yes, they did. 10 Q. Did they have risk-controlled 11 arbitrage? 12 A. Yes, they did. 13 Q. And when did the thrift fail? 14 A. It was in the process of failing just 15 as I got there, but I think it lasted another 16 couple of years after I left and finally 17 dissolved. 18 Q. What was the size of their 19 risk-controlled arbitrage? 20 A. It was on the order of billions. I 21 don't remember the exact size, but it was a 22 mega-size. 12957 1 Q. And what was the -- did you conduct 2 dollar rolls while at Meritor? 3 A. I did not; but other people did, yes. 4 Q. And what kind of activities did you 5 have at Meritor with a portfolio that size? 6 A. Personally, it turned out I didn't have 7 much to do; but there were other individuals who 8 did transact. And I was aware of some of their 9 transactions, but I personally did not engage in 10 those transactions. 11 Q. Now, were they in the process of 12 liquidating their portfolios? 13 A. Not Meritor, not at that point in time. 14 Now, I assume after I left, probably a couple of 15 years after, I'm sure they did. 16 Q. Did they have a total return or a yield 17 strategy? 18 A. Yield. 19 Q. And did you agree with that strategy, 20 Mr. Bruno? 21 A. No, I did not. 22 Q. Now, that is one choice that a 12958 1 portfolio manager has to make, whether he's going 2 to adopt a total return or a yield strategy, is it 3 not? 4 A. Yes. 5 Q. And explain to the Court why that 6 adoption of such a strategy is significant. 7 A. Well, it's significant because -- 8 there's a difference between a yield strategy and 9 a total rate of return strategy. A total rate of 10 return strategy is a more comprehensive way to 11 manage total assets. With total rate of return, 12 using all these buzz words, you're just not 13 looking at the yield to assets. It's like buying 14 stock with a high dividend. You're also concerned 15 about the fundamental volatility of the assets. 16 With savings banks and also insurance 17 companies, there's an emphasis on yield and income 18 and net income spread, not so much on total rate 19 of return. 20 Q. And in other words -- first of all, 21 there are certain contradictions between a total 22 rate of return analysis and a yield analysis, 12959 1 isn't there? 2 A. Yes. 3 Q. Depending upon the strategy you have, 4 that can dictate whether or not you would make 5 certain trades or not? 6 A. Correct. 7 Q. And if you have a yield strategy, for 8 example, on a risk-controlled arbitrage -- right? 9 A. Yes. 10 Q. -- you try to maintain a positive 11 yield, knowing that you're going to have changes 12 in market values as a result of changes in the 13 marketplace, correct? 14 A. Not necessarily correct. The first 15 part of that is correct. There is an emphasis on 16 maintaining the yield spread. There's really no 17 analysis of the change in market valuation. 18 Q. Well, even a person adopting -- would 19 you agree with me that a person adopting a yield 20 strategy would often keep track of market values? 21 A. No, I would not. 22 Q. Well, even a person with yield 12960 1 strategy, doesn't that person hedge the portfolio? 2 A. Not hedging of market valuation, no. 3 Q. What generally was the tool for 4 maintaining the hedge on a yield strategy in 5 the -- in 1988? 6 A. A rein investment of cash flows as 7 mortgage assets rolled off. So, as pay-downs 8 occurred on the mortgage assets reinvested the 9 return of cash flow into current assets, that was 10 the primary activity on the asset side. 11 On the liability, it was just as 12 liabilities rolled off or as futures hedges rolled 13 off to reinstitute those hedges. 14 Q. There was a -- are you familiar with 15 the term "duration match"? 16 A. Yes, I am. 17 Q. And in a yield strategy, the portfolio 18 manager would try to maintain a duration match 19 between assets and liabilities? 20 A. Not really. Not really. The duration 21 match here was a misnomer. Duration match really 22 means hedging market valuation of assets against 12961 1 liabilities. And typically speaking, with regard 2 to thrifts, the term "duration match" was very 3 rarely used. It was calculated gap management, 4 which was their attempt -- thrift managers' 5 attempt at duration management. Their 6 understanding of gap management was not what a 7 portfolio manager at a "total rate of return" 8 institution considers. So, it's really a 9 misnomer. 10 Q. Well, your experience at thrifts 11 consisted of nine months at Meritor and 11 months 12 at USAT, correct? 13 A. Yes, it is. 14 Q. So, when you say this is what they did, 15 that is the sum total of your experience? 16 A. That's correct. 17 Q. And are you not aware that USAT used 18 duration matching to manage the portfolios? 19 A. That's not correct. 20 Q. You believe that's not correct? 21 A. I believe that's not correct. 22 Q. Have you ever spoken to Joe Phillips? 12962 1 A. After I left -- I'm not sure I did. If 2 I did, it was because I might have been looking 3 for a job. But I don't remember ever speaking 4 with the man, certainly not about activities at 5 USAT. I wasn't familiar with the portfolio 6 management he engaged in there. 7 Q. Have you ever met or spoken with Sandy 8 Lorenson? 9 A. I've met her, but we did not talk about 10 her activities in terms of managing the portfolio. 11 Q. Now, after you left USAT, did you go to 12 work for Bank United? 13 A. Bank United? 14 Q. That was the institution by the 15 Hyperion Group, Ranieri group? 16 A. For two weeks, yes. 17 Q. Now, Mr. Ranieri was formerly at 18 Salomon Brothers? 19 A. Correct. 20 Q. And he is popularly known as the father 21 of the mortgage-backed securities market? 22 A. He's known as that among other 12963 1 salesmen. He's not known as that among portfolio 2 managers on the management side. 3 Q. Now, you went to work there for two 4 weeks? 5 A. Yes. I'm not sure if it was even two 6 weeks. Twelve days maybe. 7 Q. Did you resign, or were you terminated? 8 A. It was a termination, kind of a mutual 9 "Okay. If you don't think I should work there, 10 maybe I don't think" -- a very vague version. My 11 interpretation was that I was terminated. 12 Q. That's certainly the position that you 13 took in the lawsuit that you brought? 14 A. Yes. 15 Q. And that's the lawsuit of which you 16 have expressed the opinion that Mr. Crow didn't 17 tell the truth in his testimony? 18 A. That's correct. 19 Q. Now, you indicated that the issue there 20 was whether or not there was a contract? 21 A. Yes. 22 Q. Isn't it a fact that the issue there 12964 1 was whether or not there was a contract 2 enforceable against the FDIC? 3 A. It could have been. I never really did 4 appreciate the full legal nuances. 5 Q. Mr. Crow -- pardon me. 6 Have you finished? 7 A. I have finished. 8 Q. Mr. Crow didn't testify that there 9 wasn't a contract, did he? 10 A. My recollection is that he testified 11 that his document to me did not substitute a 12 contract. 13 Q. That is, did not constitute an 14 enforceable agreement against the FDIC? 15 A. That could be correct. That's not my 16 recollection. 17 Q. And that's the very same position the 18 FDIC took, correct? 19 A. It could have been. I never fully 20 appreciated the legal nuances. 21 Q. That was the very same position that 22 Bank United took? 12965 1 A. I don't remember Bank United being 2 involved in the issue. 3 Q. You don't recall that they had 4 responsibility for the lawsuit through its trial? 5 A. I thought that they were not involved. 6 I forget the term, that it became the FDIC's 7 responsibility, all lawsuits after the expiration 8 of USAT. 9 Q. Now, Mr. Crow came to testify in that 10 matter at the request of the FDIC? 11 A. As far as I know, yes. 12 Q. And they sponsored his testimony? 13 A. As far as I know. 14 Q. Now, this is a serious charge. You 15 realize that, of course? 16 A. And I did make that charge. 17 Q. Against Mr. Crow? 18 A. Yes, I did. 19 Q. And you've made it in places outside 20 these four walls, haven't you? 21 A. To lawyers involved in this matter. 22 Q. Anyone else? 12966 1 A. No. 2 Q. Now, I want to ask you a few questions 3 about your recollection. 4 Do you have a clear picture of your 5 activities of 10 years ago, Mr. Bruno? 6 A. No. 7 Q. How would you characterize your 8 recollection of these events? 9 A. Of my activities? 10 Q. Yes, sir. 11 A. Events that, through the passage of 12 time, I have difficulty recalling in detail and 13 that I would prefer to forget. 14 Q. And have been refreshed to the extent 15 of your conversations with Mr. Guido in the 16 matters that he showed you yesterday? 17 A. Yes, to a certain extent. 18 Q. Now, you indicated that your bitterness 19 toward Mr. Crow had not influenced your testimony 20 in any way? 21 A. Yes, that's correct. 22 Q. But that same bitterness prevented you 12967 1 from wanting to hear what the respondents had to 2 say about the issues in the case? 3 A. I'm not sure what you mean by that. 4 Q. Well, you refused to talk to us, to 5 meet with us. 6 A. And I also refused to meet with 7 Mr. Guido -- I don't know if you know that -- in 8 Washington or New York. 9 Q. The reason you gave us was because of 10 your bitterness towards Mr. Crow. 11 A. That was one of the reasons. 12 Q. That influenced whether or not you were 13 wanting to learn about the issues in the case, but 14 it has not influenced your testimony? 15 A. Correct. 16 Q. Now, with regard to your recollections, 17 do you have a clear recollection, for example, of 18 Mr. Williams objecting to the sale of inverse 19 floaters because they didn't want to recognize a 20 loss? 21 A. I have a recollection at an investment 22 meeting of him complaining that that was such a 12968 1 high-yielding asset, that he didn't like the fact 2 that we liquidated it. 3 Q. Didn't you say yesterday it was because 4 he didn't want to recognize a loss? 5 A. Yeah. That was part of it, also. 6 Q. Have you had your recollection on this 7 issue refreshed overnight? 8 A. I haven't thought about it overnight. 9 Q. Have you got an image in your mind -- 10 mental image, if you will -- of these events? 11 A. Very vague mental image. 12 Q. Who was present at the meeting in which 13 Mr. Williams expressed these sentiments? 14 A. I'm not 100 percent sure; but it was 15 probably Mike Crow, Gene Stodart, Mr. Jenard 16 Gross, maybe Art Berner. But any one or two of 17 those individuals might have been missing. Not 18 everyone was always at the meeting. But that was 19 the general cast. 20 Q. Well, that's what I'm trying to get, 21 Mr. Bruno. 22 Do you have a picture in your mind of 12969 1 this meeting where you can put names and faces 2 together as to the events that you've testified 3 about? 4 A. Not in precise detail, no. 5 Q. And so, you have reconstructed this 6 based upon what you think was probable? 7 A. Yes. But my conversation about Bruce 8 Williams complaining, I do remember that. 9 Q. Well, Mr. Williams and others were 10 definitely against taking losses that would erode 11 capital in 1988, correct? 12 A. Correct. 13 Q. And you have indicated in your 14 memoranda that that was the biggest problem that 15 you encountered as the portfolio manager at USAT? 16 A. That was one of them, yes. 17 Q. Now, can you recall what Mr. Williams 18 said about these -- not taking losses on these 19 inverse floaters? 20 A. In exact terms, no. I just remember 21 him having an angry outburst. 22 Q. And it was related to the sale of 12970 1 inverse floaters at a loss which he did not want 2 taken? 3 A. That was my recollection. 4 Q. Now, I'm going to ask you to look at 5 some investment committee minutes with regard -- 6 and Mr. Guido asked you about these yesterday 7 concerning the sale of the inverse floaters. And 8 that was Exhibit 1499, I believe. It was 9 yesterday's testimony, yes. 1499, A1499. 10 Now, Mr. Bruno, this is the document 11 which indicated that you had sold the inverse 12 floaters? 13 A. Yes, it is. 14 Q. And Mr. Guido went over with you 15 yesterday the next-to-the-last paragraph relating 16 to those issues? 17 A. Yes. 18 Q. And what makes you think you sold the 19 inverse floaters at a loss? 20 A. That's my recollection. 21 Q. Do you have as clear a recollection of 22 that as you do of Mr. Williams objecting to the 12971 1 sale at a loss? 2 A. In exact terms, no. 3 Q. Well, in fact, you didn't sell at a 4 loss, did you? 5 A. My recollection is that I did. 6 Q. If you were wrong about that, would you 7 be wrong about your recollection of Mr. Williams 8 objecting to the sale at a loss? 9 A. I'm not wrong that he objected to the 10 loss of the yield, but I do believe it was at a 11 loss. That's my recollection. 12 Q. Well, let me ask you to look at another 13 document, which is B4238. 14 Mr. Bruno, do you recognize B4238 as 15 the structure of the mortgage-backed securities 16 portfolio at USAT and United MBS in January of 17 1988? 18 A. I don't recognize this, but it sure 19 looks like it fits that description. 20 MR. NICKENS: Your Honor, we offer 21 B4238. 22 MR. GUIDO: No objection, Your Honor. 12972 1 THE COURT: Received. 2 Q. (BY MR. NICKENS) Now, do you see the 3 inverse floaters on this list? 4 A. I see one on the first page. I see one 5 inverse floater: Merrill Lynch. 6 Q. That's the only one they had, wasn't 7 it? 8 A. To my recollection, that was it, yes. 9 Q. And it was principal amount of 10 $23 million in a portfolio of a little bit over 11 3.1 billion? 12 A. Yes. 13 Q. So, it was less than two-thirds of a 14 percentage point of the assets of the institution? 15 A. Correct. 16 Q. And what was -- what was their basis in 17 these inverse floaters as indicated by 18 Exhibit 4238, Mr. Bruno? 19 A. It indicates the basis to be 15. 20 Q. So, it had been purchased at a discount 21 and had a basis of 15? 22 A. Yes, as all inverse floaters are. 12973 1 Q. That is, inverse floaters are purchased 2 at a discount? 3 A. This one, I believe, was. 4 Q. Not all inverse floaters are purchased 5 at a discount, are they? 6 A. You're right. Not all inverse floaters 7 are purchased at a discount. 8 Q. Now, this isn't some crazy idea -- an 9 inverse floater simply means a bond whose coupon 10 is determined by a formula such that the coupon 11 goes up and down in an inverse relationship to 12 interest rates? 13 A. With varying degrees of price 14 sensitivity, that's correct. 15 Q. So, for example, the coupon might be 16 determined by a formula typically as simple as 17 your coupon is equal to 24 minus 3 times the 18 LIBOR? 19 A. Yes. 20 Q. That's a typical formula for an inverse 21 floater, isn't it? 22 A. And you've just described an extremely 12974 1 volatile issue, but that's a formula for an 2 instrument of enormous price sensitivity. 3 Q. And it is used both for speculative 4 purposes and for hedging purposes? 5 A. If that's used for hedging purposes, 6 I'm not sure what volatile liabilities an 7 instrument like that could be hedging. 8 Q. Well, isn't it true that an inverse 9 floater is one of the few instruments among 10 mortgage-backed security based instruments that 11 goes up in value when interest rates go up? 12 A. No. It goes down in value. 13 Q. Excuse me. It goes down in value when 14 interest rates go up. In other words, it behaves 15 differently than most mortgage-backed securities? 16 A. No, no. This is an instrument that 17 when interest rates go down, its coupon goes down 18 and, therefore, its price goes down. 19 Q. And also -- well, okay. 20 You're not familiar with the use of 21 inverse floaters as hedging instruments? 22 A. I'm really not, no. 12975 1 Q. It does have leveraging aspects depend 2 dependent on the multiplier in the security? 3 A. That's exactly correct, high leverage. 4 Q. And high volatility? 5 A. Extremely high. 6 Q. Volatility for a hedging instrument is 7 not necessarily a bad thing, correct? 8 A. That's true. 9 Q. In fact, often, if you're hedging, you 10 will try to buy volatility? 11 A. Depending on the instrument, yes. 12 Q. And the reason you do that is you can 13 make a smaller investment in the more volatile 14 instrument and achieve your hedging objectives; is 15 that correct? 16 A. In a very general term. I'm not quite 17 sure this instrument fits into that, but you're 18 right. 19 Q. So, often, from hedging, you're trying 20 to buy volatility? 21 A. In a very general sense, yes. 22 Q. I mean, nitroglycerin is expensive, 12976 1 obviously; but it's very useful if your job is to 2 try to do a tunnel through a mountain, isn't it? 3 A. I'm not sure. 4 Q. You would agree with that? 5 A. I believe so. 6 Q. And so, to say that a financial 7 instrument is volatile does not mean that it 8 doesn't have great uses? 9 A. We need to qualify the context of 10 volatility. 11 Q. Well, would you say that volatility by 12 itself is bad? 13 A. Depending on how it's fitting into the 14 portfolio, it could be very bad. 15 Q. And it could be very good? 16 A. Yes. 17 Q. And you don't know what these inverse 18 floaters were purchased for, what their purpose 19 was? 20 A. That's correct. I do not know why that 21 was purchased. 22 Q. Now, are you familiar with the fact 12977 1 that among mortgage-backed securities, inverse 2 floaters were the best-performing securities in 3 1991 and '92? The very best? 4 A. And at other points in time, they were 5 a disaster. 6 Q. In that particular time frame, they 7 performed better than any other mortgage-backed 8 securities? 9 A. And at other times, they were the worst 10 performer, correct. 11 Q. That's the nature of their volatility. 12 Right? 13 A. Depending on interest rates, that is 14 correct. 15 Q. And billions of dollars of inverse 16 floaters were created and sold to institutional 17 investors? 18 A. Yes. 19 Q. So, when you said yesterday that no one 20 should have one of these, that's simply incorrect? 21 A. My opinion was that financial 22 institutions should not have one of these. Now, 12978 1 if they, in fact, purchased it, in my opinion, it 2 was a mistake. 3 Q. For any purpose? 4 A. For a thrift, yes. 5 Q. Now, let's look back at the exhibit, 6 1499. And can you tell us at what price you sold 7 the inverse floaters? And I refer you to 8 Page 11650. 9 A. It was sold at a price of 22.95. 10 Q. Well, nearly $23 million, correct? 11 A. That was the par value sold. Now, if 12 that's the par value sold -- I don't see what 13 price it was sold at. 14 Q. You don't think that's what you got? 15 A. No. That might be referring to the par 16 value. 17 Q. Well, it might be; but it might also be 18 referring to the price, wouldn't it? 19 A. No, not necessarily. 20 Q. Well, the question is: Do you know? 21 A. No, I don't know. But that's 22 typically -- anybody reading that from a financial 12979 1 standpoint would read that as par value. 2 Q. Did you record in the minutes -- well, 3 let's see. Did you record in the minutes anywhere 4 that you had recorded a loss on those securities? 5 A. I did not write the minutes. 6 Q. Well, you did prepare these reports, 7 did you not? 8 A. I don't remember preparing -- by the 9 way, I could have; but I don't remember preparing 10 B4238. 11 Q. Mr. Bruno, that's not what I'm asking 12 you about. I'm asking you about the reports that 13 are attached to A1499 where, on about 30 occasions 14 yesterday, we looked and it said "Mr. Dominic 15 Bruno reported" and then it was indicated that 16 your reports were to be attached to the minutes. 17 You did prepare those reports? 18 A. If that's what you're asking me about, 19 then my answer is yes. 20 Q. In those reports, you did not record or 21 indicate any loss? 22 A. I assume that's correct. I have not 12980 1 reviewed these in detail. I just don't remember. 2 I mean, I have not looked at these in detail. 3 Q. And a few weeks later when you sold 4 some IOs, you did indicate that it was sold at a 5 loss? 6 A. Okay. I don't remember, but I'm sure 7 that's correct. 8 Q. Now, let me ask you to turn over to 9 Page 11648 in Exhibit A1499. 10 A. Okay. I have it. 11 MR. GUIDO: Which exhibit? 12 MR. NICKENS: A1499. 13 MR. GUIDO: The page? 14 MR. NICKENS: Page 3011648. 15 Q. (BY MR. NICKENS) Now, do you see there 16 an article from the Mortgage Market Review about 17 the very issue concerning total return versus 18 yield? 19 A. I see this article by Morgan Stanley, 20 yes, a seller of these products. 21 Q. And you had this article attached to 22 the minutes of the investment committee. Right? 12981 1 A. That very well might be the case. I 2 don't remember. I don't remember the article, but 3 that's fine. 4 Q. And the very first line of the article 5 indicates, "This report examines the trade-off a 6 portfolio manager makes between investing for 7 yield and investing for total return. In the 8 mortgage market, these objectives are generally 9 conflicting and often lead to very different 10 results." 11 Do you agree or disagree with that 12 comment? 13 A. I agree with that comment. 14 Q. And you were a total return guy? 15 A. That's my background, yes. 16 Q. And typically, thrift institutions and 17 insurance companies were yield people? 18 A. Typically, yes. 19 Q. Anything -- now, I want to ask you some 20 more questions about the scope of your knowledge, 21 Mr. Bruno. But first let me ask you to look at 22 the employment agreement that you had with USAT 12982 1 which is Exhibit B1954. 2 A. Thank you. 3 Q. Can you identify Exhibit B1954 as the 4 employment agreement with USAT? Is that what it 5 is? 6 A. Yes, it is. 7 MR. NICKENS: Your Honor, we offer 8 Exhibit B1954. 9 MR. GUIDO: No objection, Your Honor. 10 THE COURT: Received. 11 Q. (BY MR. NICKENS) Now, this was the 12 employment contract that you entered into with 13 USAT signed by you and Mr. Crow? 14 A. That is correct. 15 Q. Now, yesterday, you indicated that you 16 reported to Mr. Crow? 17 A. Correct. 18 Q. And if you'll notice in the second 19 paragraph of your employment agreement -- in the 20 letter, it's written, "You will report to me; but 21 as we discussed, all of the investment managers 22 receive policy direction from the investment 12983 1 committee." 2 Do you see that? 3 A. Yes, I do. 4 Q. Now, was that true? 5 A. Well, according to this -- this is 6 true, but it certainly didn't pan out in such 7 clear-cut terms. 8 Q. Well, you had weekly meetings with the 9 investment committee. Right? 10 A. Yes. 11 Q. And you reported your activities at 12 that meeting? 13 A. Correct. 14 Q. And decisions were made on a joint 15 committee basis as a result of those reports and 16 the reports of the other managers? 17 A. Yeah, that's correct. 18 Q. And so, certainly in that sense, it was 19 a committee system? 20 A. In that sense, you're right. 21 Q. And had you forgotten about that aspect 22 of your reporting relationship? 12984 1 A. Most of the time, my understanding was 2 that my direct communication was to Mike; but, 3 nevertheless, I agree with you. In this sense, 4 there were joint decisions made at that investment 5 committee. 6 Q. And you didn't go to Mike Crow and say, 7 "Mike, I think I need to swap out of these caps 8 into a higher coupon cap"? You didn't go to him 9 with that level of information outside these 10 committee meetings, did you? 11 A. At times, I did; but at the same time, 12 I'm agreeing with you. That was also a matter 13 that was communicated to the investment committee. 14 Q. The general idea was you would come 15 with your proposals and present them to the 16 investment committee? 17 A. Yes. 18 Q. And it would be approved or not 19 approved, and then you would execute those trades? 20 A. Yes. 21 Q. Now, there's an indication here that 22 your bonus was to depend -- it says, "You will 12985 1 receive a sign-on bonus of $65,000 payable when 2 you start work. Your starting salary will be 3 $150,000. You will participate in the company's 4 bonus program, and your actual bonus will depend 5 upon your job performance. For 1988, you are 6 guaranteed a bonus level of at least 50 percent of 7 your base salary." 8 Were those the terms of your 9 employment? 10 A. Yes. 11 Q. And what did it mean by "performance 12 bonus"? 13 A. That was never spelled out. 14 Q. Did you believe that it related 15 primarily to the performance of the portfolios you 16 were managing? 17 A. Performance of assets relative to 18 liabilities in terms of relative market 19 valuations. That was my understanding. 20 Q. And the directive that you had from 21 management was to allow the mortgage-backed 22 securities portfolio to roll off? 12986 1 A. After I got there and became integrated 2 into what really was happening, as it evolved very 3 quickly, it became a matter of shrinking the 4 portfolio. 5 Q. By "shrinking," they meant allowing the 6 mortgage-backed securities portfolio to pay down 7 through prepayments and reduce the investment of 8 the institution in mortgage-backs? 9 A. Yes. 10 Q. And meanwhile, it was your job to try 11 to maintain a positive spread if possible. Right? 12 A. If possible. 13 Q. I mean, that was one of the objectives? 14 A. Realistically speaking, it became clear 15 that that was not really necessarily the 16 objective. And that wasn't an "agreed on across 17 the board" objective. 18 As I indicated yesterday, there were 19 those who tended to lien in the direction of net 20 income. There were others who were concerned 21 about market valuation volatility. 22 Q. But in terms of your objectives as 12987 1 communicated to you, one of them was that you were 2 to try to maintain a positive spread? 3 A. That was the message from Mike Crow and 4 Bruce Williams. That was not the message from 5 Jenard Gross and others. 6 Q. Now, you were also instructed that you 7 were to try to maintain a hedged position on the 8 mortgage-backs. Right? 9 A. I wasn't specifically instructed to do 10 this, but that was the general -- my general 11 understanding. 12 Q. And as we go through these investment 13 minutes as Mr. Guido did yesterday, we see much of 14 your activity was in rebalancing hedges or, for 15 that matter, buying new hedges? 16 A. Which was in accordance with my 17 understanding and I did carry that out. But it 18 wasn't necessarily a clear message. There wasn't 19 really a situation of consensus across the board 20 about what my activities were supposed to be. 21 Q. But you reported on a weekly basis to 22 the investment committee? 12988 1 A. Yes, I did. 2 Q. Did you disagree with these objectives? 3 A. Some of them, I did, yes. 4 Q. Did you express that disagreement? 5 A. I expressed disagreement, and some 6 disagreed with me. Others agreed with me. 7 Q. How long did it take you -- as I 8 understand it, you hadn't looked at the portfolio 9 before you accepted employment? 10 A. I don't recall doing a detailed 11 analysis of the portfolio before I accepted 12 employment. 13 Q. And you didn't go back and read the 14 prior minutes of the investment committee at any 15 time? 16 A. Prior to assuming the position? 17 Q. Yes. 18 A. No. 19 Q. And so, how long did it take you 20 before -- well, you just had to look at the 21 portfolio and be told that it was shrinking to 22 know that it was going to be difficult for you to 12989 1 earn much of a bonus on your performance bonus. 2 Right? 3 A. I did not have to be told that. By the 4 way, it wasn't that clear. I had never had it 5 spelled out, what activities or what formula or 6 what principal would determine this concept of a 7 performance bonus. So, it wasn't really that 8 clear. 9 Q. Well, didn't you believe that your 10 chances of getting a performance bonus would be 11 increased if you could show positive yield from 12 the mortgage-backed securities portfolios? 13 A. I figured that would be one component 14 of it. What was more important to me was that I 15 would reduce the duration gap in an economic 16 sense. 17 Q. And you did set about doing that. I 18 mean, most of your activities during the year were 19 rebalancing hedges, entering into dollar rolls, 20 and selling off the IOs and the more volatile 21 securities and adding hedges, correct? 22 A. Some of what I did was consistent with 12990 1 that, yes. 2 Q. Well, isn't that basically -- you take 3 those four items -- basically what you did during 4 those 11 months? 5 A. But the dollar rolls weren't 6 necessarily in line with maintaining -- dollar 7 rolls were a financing technique. 8 Q. I'm asking you about what you did; and 9 I tried to encompass, based upon looking at those 10 investment minutes, what I saw. And I'm asking 11 you if that's correct and if you've got something 12 to add to it. 13 A. Okay. Dollar rolls, rebalancing 14 hedges. 15 Q. Yes, sir. 16 A. The other two -- 17 Q. Selling off the more volatile 18 securities to the extent you could without 19 realizing a loss and adding hedges? 20 A. Yes, I would agree with you. 21 Q. Now, adding hedges was certainly -- 22 that had the effect of reducing the gap, correct? 12991 1 A. Yes. 2 Q. And that was a conservative management 3 approach? 4 A. Yes, which conflicted with adding net 5 income; but it addressed the issue of reducing the 6 company's volatility. But it did not enhance net 7 income. 8 Q. There is an obvious dilemma there that 9 you set forth in the memoranda we looked at 10 yesterday and may look at today in that the more 11 risk you take, the better chance you have of 12 making that income? 13 A. Yes. 14 Q. And the less risk you take, you reduce 15 net income? 16 A. Correct. 17 Q. And you were telling the management of 18 USAT that they were too risk averse for 19 mortgage-backed securities. Right? 20 A. Depending upon the context of my 21 conversation, yes. 22 Q. You were telling them that "You guys 12992 1 won't do anything and, as a result, you're not 2 going to be able to make any money because you 3 have to take some risk in order to make money"? 4 A. Right. 5 Q. And you advocated purchasing ARMs, 6 adjustable rate mortgages, as a compromise but, 7 nevertheless, a riskier strategy than management 8 was prepared to take? 9 A. Some of management. 10 Q. Well, in terms of the decisions that 11 were made, the decisions that were made was to add 12 on hedges, rebalance hedges, sell off the more 13 volatile securities? 14 A. Right. 15 Q. And, in fact, your proposal to buy ARMs 16 was approved? 17 A. To a very limited degree. Not everyone 18 agreed with it. 19 Q. I'm going to come back to it. But 20 don't you recall that you were authorized to buy 21 $100 million of ARMs? 22 A. A very small amount relative to a 12993 1 multi-billion-dollar portfolio. Not everyone was 2 comfortable with it. 3 Q. How many ARMs did USAT already own? 4 A. They owned a good size, but -- which 5 was very normal for -- which was not abnormal for 6 that kind of portfolio, a thrift portfolio. 7 Q. I'm going to refer you back to 4238. 8 Do you see there that book value, they held 9 $300 million in ARMs? 10 A. Yes, I see that. 11 Q. And they -- 12 A. Still not a lot of size, but they did 13 own 300 million. 14 Q. That's not a lot? 15 A. Not for them. 16 Q. That was about 10 percent of the 17 overall portfolio? 18 A. It's a tiny chunk. Other thrifts held 19 80 percent of portfolio in ARMs. 20 Q. Other thrifts, that's not based on your 21 personal experience but what you read? 22 A. I wasn't there, but I certainly was 12994 1 aware of that. 2 Q. Meritor had 80 percent? 3 A. Taking into account their whole loan 4 nonagency adjustable rate mortgages, I do not 5 know. They were pretty high if you take into 6 account their nonagency holdings of adjustable 7 rate mortgages. 8 Q. About two-thirds of the mortgage market 9 at that time was adjustable rate mortgages, wasn't 10 it? 11 A. I disagree with that. 12 Q. Okay. I think that is recovered by 13 some of the minutes of your report, but I'll come 14 back to that. 15 In any event, they approved a purchase 16 of $100 million of adjustable rate mortgages which 17 was consistent with your proposal; but it was less 18 than what you wanted to do? 19 A. Yes. 20 Q. Now, did anyone talk to you about what 21 USAT's experience with adjustable rate mortgages 22 had been? 12995 1 A. No. Are we talking agency or 2 nonagency, because the nonagency stuff that didn't 3 have the agency guarantee, which was not what I 4 was talking about, obviously was inflicted by the 5 damage that occurred in the Houston real estate 6 market at that time; but that's not what I'm 7 talking about. 8 Q. Was the paper that was on USAT's books 9 nonagency paper? 10 A. That was another part of the company. 11 Nonagency adjustable rate mortgage loans, I had 12 nothing to do with those. That was not my area. 13 Q. So, the 300 million that we're talking 14 about were all agency -- 15 A. Correct. 16 Q. So, they are not subject to any credit 17 problems? 18 A. That's correct. 19 Q. And what I'm asking you is whether 20 anyone told you that "We have not had such a great 21 experience with investing in ARMs." 22 A. Well, as I've indicated in my memos 12996 1 very clearly, in buying securities, you have to 2 pay careful attention to the price you pay. Now, 3 I do know that Sandy Lorenson achieved the 4 all-time record for buying ARMs at the richest 5 point in history. 6 Q. Did anybody tell you that she violently 7 objected to that and was nearly fired over it? 8 A. I have never heard that. 9 Q. You weren't told that in order to 10 achieve a directive from the Government relating 11 to maturity matching credit, the institution 12 bought a substantial amount of ARMs, along with 13 every other thrift in the country such that the 14 market was built up and they were thought to be 15 overpriced? 16 A. I take that as fact. I had not heard 17 about that. 18 Q. And that on their books as reflected 19 there in January of 1988, they had a 20 17-million-dollar loss in ARMs? 21 A. Okay. 22 Q. Correct? 12997 1 A. I don't know, but I take that as a 2 fact. 3 Q. Now, you did attend the investment 4 committee meetings. Right? 5 A. Yes, I did. 6 Q. And although you have not gone back and 7 read the minutes, generally if you were there, 8 that was reflected? 9 A. Yes. 10 Q. And do you know of any instance where 11 that was incorrectly recorded? 12 A. I do not know of any. 13 Q. Did you review the minutes after they 14 had been circulated to the members of the 15 committee? 16 A. I think we were given the opportunity 17 to, and maybe I did. I just don't recall. 18 Q. And with regard to your report, 19 Mr. Bruno, you kept the same format that 20 Ms. Lorenson had developed. Right? 21 A. I'm sure that's correct. 22 Q. I mean, if we -- if we look at the 12998 1 nature of the report from the time that you 2 started and from the time before, we won't see 3 much difference in the format of the report? 4 A. I assume that's correct. I don't 5 really know. 6 Q. Well, you did prepare the report? 7 A. Yes. 8 Q. And it would typically include a market 9 review? 10 A. Yes. 11 Q. And a mortgage-backed securities 12 review? 13 A. Yes. 14 Q. And a list of any transactions that had 15 taken place the prior week? 16 A. Yes, that's correct. 17 Q. And, if necessary, a memoranda 18 reflecting the reasons for the transaction? 19 A. I believe so. 20 Q. And it would have a sensitivity 21 analysis? 22 A. I believe. That sounds familiar to me, 12999 1 yes. 2 Q. And that was a format developed by 3 Ms. Lorenson? 4 A. I continued the prior format, and I 5 suppose she did develop it unless Joe Phillips 6 developed it. 7 Q. That's my point. You didn't come in 8 with a new format. Whether it was Sandy's or 9 Joe's, it was one you continued? 10 A. Yes. 11 Q. Now, just for the record, Mr. Bruno, I 12 want to ask you about some events before you came. 13 Okay? 14 Did you ever talk to anyone about the 15 risk-controlled arbitrage established in 1985 16 known as Joe's portfolio? 17 A. I don't believe so. 18 Q. You don't know what kind of securities 19 were purchased for Joe's portfolio, do you? 20 A. No, I do not. 21 Q. And you don't know what kind of hedges 22 were used? 13000 1 A. That's correct. I don't know. 2 Q. And you don't know what the amount of 3 the assets were? 4 A. I don't know. 5 Q. You don't know what the original 6 coupons were? 7 A. Correct. 8 Q. You don't know the amount of the 9 liabilities? 10 A. That's correct. 11 Q. Or the hedges? 12 A. Correct. 13 Q. Those are all decisions that the 14 portfolio manager at the time would have to make 15 in setting up an RCA, correct? 16 A. Correct. 17 Q. And you don't know about that? 18 A. Correct. 19 Q. And do you know what the durations were 20 of the assets? 21 A. Prior to my getting there, I did not 22 know. 13001 1 Q. And that would be a function of what 2 interest rates were at the time, correct? 3 A. Yes. 4 Q. And prepayment assumptions? 5 A. That's correct. 6 Q. So, if you change either of those two, 7 then you would have different durations? 8 A. Correct. 9 Q. Now, do you know what the durations of 10 the assets -- whether the assets and liabilities 11 were matched? 12 A. At the time that, for example, Joe 13 Phillips was set up? 14 Q. Yes. At the time they were set up. 15 A. No, I do not know. 16 Q. And you don't know whether they were 17 managed for spread income or total return? 18 A. No, but I was very familiar with the 19 general principles of a risk-controlled arbitrage. 20 I mean, they were fairly popular products; so, 21 they pretty much were very similar. If you've 22 seen one, you pretty much had seen them all. 13002 1 Q. And they were generally managed for 2 yield, correct? 3 A. Net income. Not for total rate return. 4 Q. That was a difference in philosophy 5 that you had with those people who favored the net 6 income approach? 7 A. Correct. 8 Q. Now, have you ever heard of USAT 9 Mortgage Finance? 10 A. I think that -- is that that other 11 subsidiary? Yes, I believe so. 12 Q. USAT Mortgage Finance was set up in 13 late 1985, Mr. Bruno, as contrasted perhaps to 14 United MBS. Is that what you were thinking about? 15 A. I was thinking of United MBS. 16 Q. Have you ever heard of USAT Mortgage 17 Finance? 18 A. I do not recall, but it's quite 19 possible I had heard about it. 20 Q. Certainly, you don't know today what 21 assets were purchased for USAT Mortgage Finance? 22 A. No, I don't know. 13003 1 Q. Or what hedges were used? 2 A. I do not know. 3 Q. What the durations were at the time? 4 A. Do not know. 5 Q. That's something you haven't studied 6 and didn't study at the time? 7 A. I don't even remember the name of that 8 entity. 9 Q. Right. And I want to establish that 10 for the record. 11 A. Okay. 12 Q. So, basically, you don't have any 13 opinions or information to offer about United 14 Mortgage Finance? 15 A. I do not. 16 Q. Now, had you ever heard of the rolldown 17 begun in December of 1985 and continued through 18 the first two quarters of 1986? 19 A. The rolldown? 20 Q. Yes. 21 A. I'm not familiar with that, no. 22 Q. Now, let me ask you about what you know 13004 1 concerning the events in 1986, '87. 2 What were the assets, if you know, 3 originally purchased for United MBS? 4 A. In '86 and '87? 5 Q. Yes, sir. 6 A. I do not know. 7 Q. What were its liabilities? 8 A. Do not know. 9 Q. What were the hedges? 10 A. I don't know. 11 Q. What were the durations? 12 A. I don't know. 13 Q. Do you know to the extent they were 14 matched? 15 A. Do not know. 16 Q. Do you know whether or not it was 17 managed for spread income or total return? 18 A. I believe spread income, but I don't 19 know for a fact. 20 Q. And was that management successful for 21 spread income? 22 A. I do not know. 13005 1 Q. Have you gone back to look at the 1987 2 performance reports to see whether a positive 3 spread was maintained in United MBS? 4 A. I do not know. Perhaps it was, but I 5 don't know. 6 Q. Now, you indicated in your testimony 7 yesterday that durations was another word for 8 effective maturity? 9 A. It can be thought of that, but this 10 gets pretty -- 11 Q. Inside baseball? 12 A. Inside baseball, exactly. 13 Q. In fact, it is not effective maturity, 14 is it, Mr. Bruno? 15 A. In terms of literally defined, no. 16 Duration is a measure of interest rate 17 sensitivity. 18 Q. It is a measurement of price 19 elasticity, to use an economist's term, correct? 20 A. Correct. 21 Q. And it measures the price movement of a 22 security in response to a specified movement of 13006 1 interest rates? 2 A. That's correct. 3 Q. And although it is expressed in years, 4 it, in fact, is not a measure of maturity? 5 A. Correct. 6 Q. Now, let me ask you to look at 7 Exhibit A1487, which is the investment committee 8 minutes that -- investment committee minutes of 9 January 20th, 1988. 10 A. Okay. 11 Q. Now, this is before you were there, 12 correct? 13 A. That is correct. 14 Q. And I want to ask you to turn over -- 15 Mr. Guido, I believe, asked you about this 16 document with regard to the sensitivity summary. 17 I would like to ask you to look over at 18 Page 12503. 19 A. Okay. I have it. 20 Q. And do you see that as being the 21 year-to-date report for December 1987, United MBS 22 Corporation? 13007 1 A. Yes, I do see that. 2 Q. And this is a reporting format that was 3 familiar with you. Right? 4 A. Correct. 5 Q. And what does it indicate that the net 6 interest rate spread for the year was on United 7 MBS's overall total portfolio? 8 A. 163 basis points, 1.63 percent. 9 Q. And managed for a yield, is that good 10 or bad? 11 A. For a yield, that's good. 12 Q. And what was -- of the different assets 13 indicated -- the fixed hedge, fixed unhedge, 14 Arb 2, ARMs -- what was the poorest-performing for 15 the year? 16 A. In terms of spread, adjustable rate 17 mortgages. 18 Q. Do you think that fact might have 19 influenced the reception that you received in 20 recommending ARMs in 1988, Mr. Bruno? 21 A. No, I really don't. 22 Q. You don't think that their prior 13008 1 experience would have influenced the management of 2 USAT as to how they looked at these securities? 3 A. I do not think so. 4 Q. Now, with regard to United MBS, did you 5 maintain a positive -- did the portfolio maintain 6 a positive spread during 1988? 7 A. After I got there? 8 Q. Yes, sir. 9 A. When I got there, it was pretty much no 10 spread; and that pretty much was the way it was 11 when I left. 12 Q. Well, let me ask you to look at the 13 performance report for September 30th, 1988, which 14 is Exhibit number -- it's Exhibit A5037 which is 15 in at Tab 325. 16 A. I have it. 17 Q. Can you find the performance -- the 18 mortgage-backed securities performance report, 19 which -- it should be under SB1 and 2. I'm told 20 that it may be the last page of the exhibit. See 21 if that works. 22 A. Is that it? Okay. 13009 1 Q. Is that the page labeled "SB2"? 2 A. Yes, it is. 3 Q. Does it indicate the year-to-date 4 performance for the mortgage-backed securities 5 portfolios at USAT and United MBS? 6 A. Correct. 7 Q. And what is the net interest spread on 8 United MBS in September of 1988? 9 A. .62 percent. 10 Q. So, it was, in fact, positive? 11 A. Okay. 12 Q. And what was it on USAT? 13 A. Negative 1.19. 14 Q. And so, as of September 30th, 1988, for 15 the year, they had lost $3.395 million on those 16 two portfolios net? 17 A. In net income. 18 Q. Minus .15 percent? 19 A. In net income, correct. 20 Q. And so, for United MBS, you were 21 maintaining a positive spread? 22 A. I see this. I don't remember, but 13010 1 okay. 2 Q. And what happened in October was that 3 upon instructions from the Federal Home Loan Bank, 4 the institution took massive losses in the sale of 5 swaps that you executed, correct? 6 A. Okay. Yeah. That sounds familiar to 7 me, yes. 8 Q. So, if we look at October, these 9 numbers will go to, like, minus 4, from September 10 to October? 11 A. Okay. 12 Q. And there's not any question that that 13 was caused by the sale at a loss of the swaps at 14 the institution of the Federal Home Loan Bank, is 15 there? 16 A. That sounds correct to me. 17 Q. Now, did you agree -- you indicated 18 that your approach was more a total return 19 approach? 20 A. Yes, that's correct. 21 Q. And that the typical thrift institution 22 was more on a yield basis? 13011 1 A. Yes. 2 Q. Now -- and I gather from what you've 3 told us that there was disagreement among the 4 management of USAT as to which approach to take? 5 A. Correct. 6 Q. Now, did you express that -- you became 7 aware of that tension very early on, correct? 8 A. Yes. 9 Q. And did you sign on to do whatever you 10 could -- whatever the decision was, whether it was 11 to go to yield or whether it was to go to total 12 return? 13 A. It wasn't that clear-cut in terms of 14 signing on. Every week was an event; and just 15 basically, we were under such bombardment by the 16 regulators that the notion that there was adhering 17 to some consistent policy just never really 18 applied. Everyone was kind of going with the 19 flow, if you will. 20 Q. And the flow was being dictated by the 21 regulators? 22 A. To a large extent, yes. 13012 1 Q. Let me ask you to look at a document 2 that we have labeled as Exhibit A11039. 3 Mr. Bruno, I think I know the answer to this 4 question; but have you ever seen Exhibit A11039? 5 A. No, I have not. 6 MR. NICKENS: Your Honor, I believe the 7 record will show that it is from the examination 8 work papers in 1988; and we offer A11039. 9 MR. GUIDO: No objection, Your Honor. 10 THE COURT: Received. 11 Q. (BY MR. NICKENS) Now, let me ask you 12 to turn over, Mr. Bruno, to the page that is 13 marked with the imaging number 129273. 14 A. Okay. I have it. 15 Q. Now, were you interviewed by the 16 examiners? 17 A. I was -- I spoke to some people. I'm 18 sure that's who these people were. I mean, there 19 was some regulatory people. 20 Q. And do you see that page -- where we 21 have at Exhibit A11039 Page OWO129273 which is a 22 report of an interview of you dated May 2nd, 1988? 13013 1 A. I see that. 2 Q. And by that point in time, you 3 certainly were aware of the tension at USAT as to 4 which direction to go: Net income or total 5 return? 6 A. I was aware of the conflict. It was 7 not necessarily agreed upon which direction we 8 should go, but I was aware of that tension. 9 Q. And you were interviewed by examiners 10 who had -- who were in the institution as 11 reflected on the page that we're looking at? 12 A. Correct. 13 Q. And let's see if we can read it. It 14 says, "Appears" -- down at the bottom, "Appears to 15 be very familiar" -- I believe that says "within 16 industry, mortgage-backed securities. Appears to 17 be willing to work/operate within parameters 18 established by executive management." 19 Do you see that? 20 A. Yes, I do. 21 Q. Then they went on to say, "Need more 22 time to assess Mr. Bruno's performance." 13014 1 Do you see that? 2 A. Yes, I do. 3 Q. Now, was that consistent or 4 inconsistent with what you expressed to the 5 examiners as to your point of view in May of 1988? 6 A. I do not recall. I don't recall even 7 the interview. 8 Q. Well, were you willing to work with 9 within the parameters set by management? 10 A. Yes. 11 Q. And if that was that they were going to 12 shrink the institution by letting the 13 mortgage-backed securities run off, you were 14 willing to execute that strategy? 15 A. Yes. 16 Q. By the way, have you ever looked back 17 to see what that strategy would have resulted in 18 had it not been interrupted by the wholesale 19 sell-off of assets at the end of 1988? 20 A. Because the interest rate market turned 21 around, you mean? 22 Q. Well, for whatever reason. Have you 13015 1 ever looked back to see whether that strategy 2 would have, in fact, succeeded? 3 A. Well, it at times did well and at times 4 did poorly depending on interest rates. Depends 5 on what time we look back on. 6 Q. Have you done any analysis to see what 7 would have happened had the institution not been 8 required to liquidate its portfolio at the end of 9 the year 1988? 10 A. I did not. 11 Q. Now, there isn't any doubt that the 12 sales of the swaps and the sales of the 13 mortgage-backed securities at the end of the year 14 was dictated by the bank, is there? That is, the 15 Federal Home Loan Bank. 16 A. Federal Home Loan Bank? 17 Q. Right. At that point in time, they 18 were basically running the institution? 19 A. I would say that's accurate. 20 Q. Now, let me ask you to look at a 21 document that we have labeled B2610. Yesterday, 22 Mr. Guido asked you some questions relating to 13016 1 the -- your memo about "Here is an appropriate 2 time to sell these assets." 3 Do you recall that? 4 A. A time frame, correct. 5 Q. You had prepared a memorandum for a 6 plan of liquidation? 7 A. Correct. 8 Q. And you indicated on that document 9 certain time periods that you felt were necessary 10 to get appropriate value for the assets. Right? 11 A. Yes. 12 Q. And in response to his question, you 13 indicated that those time frames were not 14 followed? 15 A. That's correct. 16 Q. But they were not followed by the 17 Federal Home Loan Bank. Right? 18 A. Correct. 19 Q. It wasn't -- so, any implication that 20 it was the management of USAT that didn't follow 21 those standards is incorrect. Right? 22 A. Yes, I agree with you. 13017 1 Q. And if you would -- 2 MR. NICKENS: We would offer, 3 Your Honor, B2610. 4 MR. GUIDO: No objection, Your Honor. 5 THE COURT: Received. 6 Q. (BY MR. NICKENS) I would like to draw 7 your attention to the second page at the first 8 full paragraph that starts "after this brief 9 introduction." 10 A. Okay. 11 Q. It says, "After this brief 12 introduction, Mr. Connell turned the meeting over 13 to Mr. Scott Shea. At that time, Mr. Shea 14 described the proposed transaction by which 15 Ranieri Wilson would acquire United Savings 16 Association of Texas. Mr. Shea outlined the major 17 elements of the transaction, apparently reading 18 from the terms sheet. Mr. Shea stated that it was 19 important and part of the deal, that the 20 securities in question in the USAT investment 21 portfolio be liquidated prior to closing. 22 Mr. Shea explained that this was necessary because 13018 1 of goodwill treatment which would be created if 2 the mortgage-backed securities and other 3 securities were not liquidated." 4 Do you see that? 5 A. Yes, I do. 6 Q. So, does that indicate to you that the 7 timing of the sales of the assets of USAT were 8 dictated by the needs of the person taking over 9 the new institution? 10 A. Yes. 11 Q. And was that -- would that do harm to 12 United Savings? 13 A. Yes. Well, it conflicted with the best 14 execution for the sale of the assets. 15 Q. It would be your expectation that you 16 would get a lower price? 17 A. Yes. 18 Q. And, in fact, earlier you had a memo 19 about not doing mega-transactions? 20 A. Yes. 21 Q. The only mega-transaction that you 22 instituted while at USAT was at the instructions 13019 1 of the Federal Home Loan Bank? 2 A. Not the only, but most of them. 3 Q. Well, do you recall any that you were 4 instructed to enter into by USAT management? 5 A. Yes. We did a large interest rate cap 6 transaction at one point, several hundred million 7 at one time. But your point -- I'm agreeing with 8 your point. For the most part, it was the Home 9 Loan Bank that dictated the mega-transactions. 10 Q. Okay. 11 A. I'm no fan of the regulators, trust me. 12 Q. I've noted that, Mr. Bruno. 13 Let me ask you to step back in time a 14 bit. I want to ask you a few questions about when 15 you first arrived. Now, we have seen your 16 contract was dated January 16th, 1988. But was it 17 some period of time before you actually started 18 work? 19 MR. GUIDO: I think the date is 20 January 12th, Mr. Nickens. 21 MR. NICKENS: My copy -- 22 MR. GUIDO: I'm sorry. The signature 13020 1 is the 16th. Pardon me. 2 Q. (BY MR. NICKENS) Let me show you a 3 document that has been marked as Exhibit B4239, 4 which is the announcement. 5 MR. NICKENS: Your Honor, we offer 6 Exhibit B4239. 7 MR. GUIDO: No objection, Your Honor. 8 THE COURT: Received. 9 Q. (BY MR. NICKENS) This was the internal 10 announcement of your having joined the 11 organization. 12 A. Okay. 13 Q. And it was dated February 10th, 1988? 14 A. Yes. 15 Q. And would that indicate to you that 16 your first work at the institution was in the 17 early part of 1988? 18 A. Yes. 19 Q. Now, I want to go back and ask you some 20 questions about the memoranda that Mr. Guido asked 21 you about yesterday that are in the record at 22 T6079 at Tab 246, Tab -- excuse me -- T6082, which 13021 1 I believe was introduced yesterday. 2 MR. NICKENS: What's the tab number? 3 4 (Discussion held off the record.) 5 6 MR. NICKENS: Tab No. 1261. 7 MR. GUIDO: Pardon? 8 Q. (BY MR. NICKENS) And Exhibit T6083, 9 which is Tab No. 1260. And also, if I could, I 10 would like for you to have in front of you 11 Exhibit B2122. 12 MR. NICKENS: Your Honor, we offer 13 B2122. 14 MR. GUIDO: No objection, Your Honor. 15 THE COURT: Received. 16 Q. (BY MR. NICKENS) Now, Mr. Bruno, let's 17 go through these chronologically, if we might, 18 some of which has already been covered by 19 Mr. Guido. 20 With regard to B2122, that's a meeting 21 of April 4th, 1988 or a memo -- excuse me -- of 22 April 4th, 1988, from you to Mr. Gross? 13022 1 A. Right. 2 Q. And what were you doing there? 3 A. I was estimating for Mr. Gross under 4 three interest rate scenarios over the course of 5 the following year what the approximate pay-down 6 of the mortgage portfolio would be. 7 Q. And you indicated that if interest 8 rates remain stable, the approximate 9 3 billion-dollar portfolio would pay down at a 10 rate of 12 percent a year? 11 A. Correct. 12 Q. So that in the first year, you would 13 pay down approximately $360 million? 14 A. Right. 15 Q. And was this reflective of the 16 management instructions to shrink the 17 mortgage-backed securities portfolios? 18 A. It certainly seems to have been in that 19 spirit. 20 Q. Now, let me ask you to look over at the 21 next one chronologically, which is T6079 dated 22 May 17th, 1988. 13023 1 A. Okay. 2 Q. Now, again, the mandate, as you 3 indicated, was to shrink the portfolio by allowing 4 it to roll off? 5 A. Right. 6 Q. And you noted that management was 7 concerned with price volatility and the difficulty 8 of hedging which was a positive sign, from your 9 point of view? 10 A. Right. 11 Q. And then you expressed a concern as we 12 have indicated earlier, that management was too 13 risk averse toward MBS. That's in the fourth 14 paragraph under -- first paragraph under 15 "concerns." 16 A. Okay. 17 Q. That was correct. Right? 18 A. Yeah. About adding anything, that is 19 correct. 20 Q. And your recommendations were reflected 21 on the next page; and you had been, apparently, 22 instructed to liquidate the IOs, correct -- 13024 1 A. Right. 2 Q. -- which you were -- which were at 3 about a break-even or slight loss position? 4 A. I don't remember. That very well might 5 be the case. 6 Q. Do you remember the Sendero model that 7 Mr. Guido asked you to look at yesterday? 8 A. Right. 9 Q. Do you recall there saying that the IOs 10 were at about a break-even position? 11 A. Now I recall. 12 Q. And your recommendations were that they 13 could purchase, if they wanted to take a more 14 aggressive position, ARMs, CMO floaters, short 15 tranche CMOs, and seasoned MBS? 16 A. Not aggressive products, but a position 17 in some stable products. 18 Q. More aggressive than their risk averse 19 position where they were at. Right? 20 A. More aggressive than the policy of 21 reducing assets. 22 MR. NICKENS: Your Honor, this is a 13025 1 point where I'm going to -- if we could take our 2 morning break. I'm going to finish this up and, I 3 think, be within what I indicated to the Court 4 yesterday about two hours or maybe a few minutes 5 more of my examination with Mr. Bruno. 6 THE COURT: All right. We'll take a 7 short recess. 8 9 (Short break.) 10 11 THE COURT: Be seated, please. 12 MR. NICKENS: May I proceed, 13 Your Honor? 14 THE COURT: We'll be back on the 15 record. 16 MR. NICKENS: May I proceed, 17 Your Honor? 18 THE COURT: Yes, you may. 19 Q. (BY MR. NICKENS) Mr. Bruno, when we 20 took our morning break, I was referring you to 21 Exhibit 6079. Do you have that document in front 22 of you? That's your memorandum of May 17th, 1988, 13026 1 to Mr. Crow. 2 A. Yes, I have that. 3 MR. GUIDO: Your Honor, I have an 4 objection to any questions until we resolve the 5 question of the memorandum. The document that is 6 the T document is different than the 6079 which we 7 questioned the witness about yesterday. I think 8 that the 6079 -- I may be wrong. I may have the 9 wrong document. One of these documents -- the 10 document that's in as Tab 246, Your Honor, has 11 different notations on it, Your Honor. I don't 12 think it's relevant to the questions, but I do 13 think that's a problem with the documents that 14 we've been using. I would propose that the 15 document that the witness is looking at, which is 16 T6079 -- and I believe it's the copy that the 17 Court has before it -- be designated as T6079A. I 18 think it has a comment at the top with Mike Crow's 19 signature on it, Your Honor. I think that that 20 document is different than the document that was 21 in the record with earlier witnesses as 6079. 22 That document does not have the handwritten 13027 1 notation at the top right-hand corner of the 2 document. 3 So, I propose that the document that 4 the witness is looking at right now and that the 5 Court has before it be designated as 6079A. 6 THE COURT: Well, when was this 6079 7 put in? 8 MR. GUIDO: Your Honor, it was Tab 246. 9 So, it had to have been very early in the 10 proceeding. 11 THE COURT: The document that I have 12 that was put in at the time that has the notation 13 at the top, it was put in in October. 14 MR. GUIDO: The copy that you have has 15 the Mike Crow designation at the top? 16 THE COURT: Yes, it does. 17 MR. GUIDO: Okay. Your Honor, I'll 18 move the other document in at a later point in 19 time. I'm sorry for the confusion. My copy in my 20 binder of 6079 has a note memo to Mike Crow not 21 made part of the investment committee minutes, 22 which is a different document. 13028 1 MR. NICKENS: This is the document that 2 we have in our files, Your Honor. 3 THE COURT: Well, it's the document 4 that I have as the exhibit that was put in in 5 October. 6 MR. NICKENS: In any event, the 7 typewritten portions are the same; and I was going 8 to question the witness about that. 9 Q. (BY MR. NICKENS) Mr. Bruno, I would 10 like to refer you to the paragraph on the top of 11 the second page of Exhibit 6079 where you state, 12 "United's MBS portfolio is distinguished," and 13 this was read into the record yesterday. 14 Do you recall that? 15 A. Yes, I do. 16 Q. Now, you refer to the riskiest MBS 17 products created by Wall Street over the past two 18 years, low coupon IOs and high coupon POs, 19 correct? 20 A. Correct. 21 Q. Now, you don't know for what purpose 22 those securities were originally purchased by 13029 1 Sandy Lorenson, do you? 2 A. As part of a risk-controlled arbitrage, 3 I would presume. 4 Q. And asset hedges? 5 A. Yeah. Even though I might disagree 6 with that, I'm sure that was the intent of the 7 purchase. I disagree they were effective, but I'm 8 sure that was the purpose. 9 Q. And you explained yesterday an IO and a 10 PO is similarly a dividing up in the income stream 11 of a mortgage? 12 A. Correct. 13 Q. If you took the very same mortgage pool 14 and you owned the IO and the PO, you would own the 15 mortgage? 16 A. Correct. 17 Q. But by dividing them up, you allow 18 buyers to determine their own risk profile and to 19 make selections that make these instruments more 20 usable than they would in their pure form as a 21 mortgage, correct? 22 A. Correct. 13030 1 Q. And the -- the amount of IOs -- well, 2 let me ask you: IOs and POs tend to hedge each 3 other? 4 A. It depends on the underlying coupon of 5 the IO versus the underlying coupon of the PO so 6 that -- the answer is it depends. 7 Q. And you don't know where interest rates 8 stood when these securities were purchased? 9 A. I do not know. 10 Q. So, you don't know if they were 11 purchased, and we don't know -- well, you don't 12 know whether these were purchased as high coupon 13 or low coupon? 14 A. That's correct. 15 Q. And interest rates could change; and 16 when you look at them at a time later, then they 17 could be of a different nature? 18 A. Correct. 19 Q. Now, you refer to "The high coupon POs 20 as being the same kind of securities Merrill Lynch 21 lost millions on several months ago." 22 Do you see that? 13031 1 A. Yes. 2 Q. Were you trying to imply that this was 3 an indication of their volatility? 4 A. Yes. 5 Q. Do you understand the circumstances 6 under which Merrill Lynch lost money on those POs? 7 A. As a matter of fact, I do. 8 Q. Do you recognize the name Howie Ruben? 9 A. Yes, I certainly do. 10 Q. What happened was that Merrill Lynch 11 owned a block of IOs and POs. Mr. Ruben, who was 12 a registered rep there -- 13 MR. GUIDO: Objection to the lawyer 14 testifying. I don't mind a question; but he said, 15 you know -- was telling the witness who Mr. Ruben 16 is and what he did. 17 THE COURT: The witness says he knows 18 about Mr. Ruben, but I think Mr. Nickens is -- 19 MR. NICKENS: Let me ask a question, 20 Your Honor. 21 Q. (BY MR. NICKENS) Tell us what you 22 recall about the situation that led to this loss 13032 1 at Merrill Lynch. 2 A. Ruben frankly, who tried to sell this 3 PO when I was at Aetna -- I refused to buy it -- 4 owned this position. The reason -- where interest 5 rates were, it was an unadvisable purchase with 6 respect to its coupon relative to the market. At 7 the time, there was an enormous amount of down 8 side relative to the up side that I felt the 9 security could experience. It had a lot of down 10 side, limited up side. 11 So, I did not purchase this issue -- he 12 lost money for Aetna Life and Casualty -- even 13 though they placed great pressure on us. Ruben 14 was stuck with this position. I don't know the 15 facts of what happened. The market was going 16 against him. The down side was kicking in 17 relative to whatever limited up side existed for 18 this issue which was there; and the facts of his 19 experience after that, I don't know. There's some 20 indications that he concealed the size of his 21 position to management, but I don't know 22 specifically. 13033 1 Q. Wasn't it reported in The Wall Street 2 Journal that Mr. Ruben had simply put his sale of 3 the matched IOs in his desk? The trade tickets? 4 A. That might very well have been the 5 case. I don't remember that. I'm not going to 6 disagree with that. Something was put in the 7 desk. 8 Q. And that as a result of this account, 9 Merrill Lynch was unaware of the need to hedge its 10 position in POs? 11 A. I don't remember the facts of it, but 12 I'll accept what you're saying. 13 Q. Well, if those are the facts, then the 14 loss in POs is not an indication of market 15 volatility. It's an indication of an employee's 16 defalcation. Right? 17 A. That would not be my interpretation. I 18 don't remember what happened to interest rates; 19 but given the coupon of this PO, to say that it 20 was hedgable is more theoretical than in 21 actuality. Just because an instrument is called a 22 PO and just because there's an IO and they are 13034 1 supposed to behave inversely, it is not that 2 simplistic. It really does depend. It would be 3 theoretically interesting to say there was 4 something that could hedge his PO position. But I 5 could just as well have bought it when he tried to 6 sell it to me. I didn't feel it could be hedged. 7 Q. Don't you recall he had sold the IO 8 position to another customer that was being used 9 to hedge the PO position? 10 A. My only point is I didn't feel any IO 11 could hedge this position and -- but what you're 12 saying is, you know, fine. I'm not going to 13 contest it. 14 Q. Well, you don't -- you don't recall 15 what was reported in the national press on that 16 subject? 17 A. Right. I don't. I'm sure what you're 18 saying is true. 19 Q. You would admit that if the IOs and the 20 POs were from the same mortgage pools, then they 21 would serve to hedge each other? 22 A. Well, that's true because then he would 13035 1 have the same coupon on the IO and the PO. But 2 then by owning the mortgage security, he's still 3 subject to other kinds of risks; so, he's not 4 completely devoid of risk. That's why this gets a 5 little bit strange. 6 Q. That's the very sort of thing that 7 Merrill Lynch would hedge against. There would be 8 treasuries or whatever to hedge against their 9 mortgage-backed position? 10 A. Typically speaking, but they don't 11 always hedge. 12 Q. If the loss was attributable to the 13 fact that they didn't know that Mr. Ruben had sold 14 the IO position and was holding the PO position, 15 would you agree with me that that would not be a 16 good example of the problems of volatility? 17 A. I would not agree with that, no. 18 Q. Now, were you aware of the fact that 19 USAT knew this story? 20 A. I'm sure they did because it was a 21 pretty big deal in our market. I'm sure Sandy 22 Lorenson knew about it. 13036 1 Q. And, indeed, it was reported in their 2 investment committee minutes at Exhibit A1441. 3 Excuse me. Tab 368. 4 Do you have that? 5 A. Yes, I have it. 6 Q. Page 5704 under "mortgage market." 7 A. Yes, I see that. 8 Q. Now, if USAT management was aware of 9 the circumstances under which Merrill Lynch had 10 suffered this loss and Mr. Ruben's activities in 11 that regard, do you believe that might have 12 influenced how they would receive this information 13 from you about the PO loss? 14 A. I see that here; but when I brought it 15 up, there was no reaction at all. I mean, that -- 16 obviously, they were informed about it; but when I 17 brought up that issue in this memo, there was no 18 reaction to the memo at all, my memo. 19 Q. Let me ask you to look over at the last 20 page of the memo -- 21 A. (Witness complies.) 22 Q. -- on the summary paragraph. 13037 1 A. This is the very last page of this? 2 Q. I'm sorry. I'm asking you to go back 3 to T6079. 4 MR. GUIDO: You're asking him to look 5 at US3012862? 6 MR. NICKENS: 862. 7 A. Yes, I have that. 8 Q. (BY MR. NICKENS) Under the summary, 9 you say, "Currently, the mandate for the MBS 10 portfolio is to shrink and this strategy, I 11 believe, should not be too much at the expense of 12 net income," correct? 13 A. Correct. 14 Q. And you were advocating that they were 15 too risk averse? 16 A. In respect to not buying conservative 17 assets, that's correct. 18 Q. And the next paragraph, you said, "I do 19 believe that the portfolio can be turned around." 20 Was that your belief? 21 A. Yes. 22 Q. And in the last paragraph, you say, "I 13038 1 would like to end by noting that these are, of 2 course, challenging and difficult times for the 3 bank. Personally, I am excited to be part of the 4 bank's efforts to turn itself around." 5 Was that your frame of mind in May of 6 1988? 7 A. Yes, it was. 8 Q. Now, let's look at 6082, if we might, 9 Mr. Bruno. That's the next one: July 28th, 1988. 10 MR. GUIDO: Which document are you on, 11 Mr. Nickens? 12 MR. NICKENS: 6082. 13 MS. CLARK: Is this from yesterday? 14 MR. NICKENS: Yes. 15 16 (Discussion held off the record.) 17 18 A. All right. I have it. 19 Q. (BY MR. NICKENS) 6082 is your memo of 20 July 28th, 1988. Right? 21 A. Yes. 22 Q. And Mr. Guido asked you questions about 13039 1 the second paragraph where you describe the -- the 2 mark-to-market situation with the portfolio? 3 A. Correct. 4 Q. But then you go on to describe what you 5 call the dilemma. Right? 6 A. Yes. 7 Q. And what was that dilemma? 8 A. The dilemma was that the portfolio was 9 not matched; therefore, exposing itself to the 10 risk of higher rates and the consequent 11 deterioration of assets relative to liabilities. 12 If you tried to do something about that mismatch 13 by hedging, that, in turn, would succeed in 14 further reducing the net income spread. 15 So, on the one hand, at the time, we 16 were at risk to higher rates. On the other hand, 17 trying to do something about that would further 18 enhance a negative spread between assets and 19 liabilities. 20 Q. And you were -- it wasn't that 21 management was unwilling to indicate what that 22 higher -- to deal with that higher interest rate 13040 1 risk, was it? 2 A. It was not a consensus. Again, it goes 3 back to the tension. The accountants were against 4 it. Others kind of leaned in that direction. 5 Q. In fact, what the institution did was 6 to add on substantial additional hedges? 7 A. We added hedges. I just don't recall 8 them being substantial enough to cure that 9 mismatch. 10 Q. But the direction was to add additional 11 hedges? That was what was actually done? 12 A. Okay. I mean, I do remember doing some 13 hedging. 14 Q. And if you look over at Page 3 of your 15 memorandum, you say, "On the other hand" -- this 16 is in the second paragraph. "On the other hand, 17 if our sole concern is to avoid all price risk, 18 then we should purchase no MBS securities and we 19 should continue to allow the portfolio to shrink." 20 Do you see that? 21 A. I do see that. 22 Q. And then you go on to make a proposal 13041 1 for the purchase of ARMs? 2 A. Correct. 3 Q. And you were allowed or authorized to 4 purchase up to $100 million in ARMs? 5 A. I don't remember that exact number, but 6 that sounds -- I'm sure that's correct. 7 MR. NICKENS: For the record, without 8 taking the time at the moment, I believe if we 9 refer to the investment minutes of May 25, 1988, 10 Exhibit 1508, that one would find that 11 information. 12 Q. (BY MR. NICKENS) Now, you indicated in 13 these memos that you believed that seasoned MBS 14 was less volatile than new MBS, correct? 15 A. Correct. 16 Q. What do you mean by "less volatile"? 17 A. Less volatile means that because -- 18 "seasoned issue" is a word for an instrument that 19 has wound down, was issued maybe 10 years ago and 20 it's not quite as long a maturity as it was when 21 it was originally issued. 22 What I mean by "less volatile" is that 13042 1 when interest rates moved, it exhibits a less 2 sensitivity to an interest sensitivity. 3 Q. How would their durations compare? 4 A. It depends just on how old or seasoned 5 the mortgage issue. There's a variety of 6 seasoning among mortgage issues. If you were to 7 buy a mortgage issue that used to be a 30-year 8 original mortgage and now you have homeowners who 9 have 10 years left in their mortgage, that 10 instruments with 10 years to final maturity left 11 might only have the interest rate sensitivity of, 12 believe it or not, a three-year bond. 13 Q. Isn't it the case that if you look at 14 the durations of seasoned MBS versus new MBS, that 15 the differences are quite small? 16 A. Depends on how seasoned they are. 17 Q. If you go to the very end of the life 18 of a pool, you're telling us that by that time, 19 there may be some significant difference? 20 A. It's a fact. 21 Q. But in the earlier lives of so-called 22 seasoned pools, those differences in duration are 13043 1 generally quite nominal? 2 MR. GUIDO: I object to the question, 3 Your Honor. It's rather vague. It's not clear 4 how Mr. Nickens is using the term "seasoned." 5 THE COURT: Well, the witness can 6 clarify, I believe. 7 Can you answer his question? 8 THE WITNESS: Yes, I can, Your Honor. 9 A. When finance people talk about seasoned 10 mortgages, they are talking, generally speaking, 11 about issues that are 8 to 10 years old or older. 12 Now, you can have issues that were issued eight 13 years ago, 12 years ago, 16 years ago. So, a 14 generalization about this relative disagreement of 15 price sensitivity between a seasoned issue and a 16 new issue needs to be qualified. If you're 17 talking about a mortgage issue that was issued 18 four years ago -- 19 Q. (BY MR. NICKENS) Which would qualify as 20 being seasoned? 21 A. Some people might consider that as a 22 seasoned issue. They would probably say that's 13044 1 four years of seasoning to make sure that it's not 2 misunderstood that that is a very old issue. 3 Q. You didn't indicate how many years 4 seasoned? 5 A. I didn't in this case. 6 Q. That would be the only situation in 7 which you would have a meaningful difference in 8 durations, in general? 9 A. If it was eight to ten years of 10 seasoning or more, which is not qualified here, 11 you're right. 12 Q. And the average life of a Ginnie Mae 13 pool has historically been about 12 years? 14 A. No, that's not the case. 15 Q. Or seven years? 16 A. It's really moved -- with interest rate 17 volatility and the technological improvements in 18 the mortgage market, I don't know what the average 19 life is. Now, five to ten years ago, the answer 20 to your question would have been 7 to 10 years. 21 If you take into account the past five years' 22 experience worth of prepayments, I don't know what 13045 1 the average life is. 2 Q. You indicated that one of the reasons 3 for preferring seasoned MBS was because there 4 would be a higher adjusted yield? 5 A. Higher yield netting out the options 6 risk, the prepayment risk. 7 Q. That's what we mean by "adjusted," 8 option adjusted yield? 9 A. Option adjusted yield. 10 Q. That is the case only if the investor 11 holds the security to maturity? 12 A. No. To categorize an instrument having 13 a high options adjusted yield is just a statement 14 that at the time of purchase, when you net out 15 projected prepayment risk, its effective yield if, 16 in fact, you were to hold it to maturity, it would 17 be higher. 18 Q. But to take advantage of this 19 difference that you projected between seasoned MBS 20 and new MBS, one would have to hold it to 21 maturity. Right? 22 A. That's not correct because what happens 13046 1 is that if an instrument has a sufficiently -- I 2 can understand you're saying that. In fact, it 3 goes beyond that. If an instrument has a high 4 options adjusted yield, it pretty much means that 5 it's undervalued. So, what's going to happen is 6 that the market will correct for that; and the 7 relative price of that instrument will tend to 8 gain. That price gain affords the investor the 9 opportunity to sell it before it matures and 10 experience a gain in that fashion. 11 Q. That's very difficult for the investor 12 to do. That's an advantage that the broker may be 13 able to make but difficult for the investor to 14 pass on to a new one, is it not? 15 A. That's not difficult. If, in fact, the 16 issue is undervalued and this price stream does 17 take effect, if I'm the owner, I could just as 18 well sell that. I do that every day in my 19 position now. All mortgage people do. 20 Q. Let me ask you about your statement 21 that there was better convexity on the seasoned 22 MBS. 13047 1 A. Correct. 2 Q. Under what circumstances does one find 3 better convexity? 4 A. Better -- now we're getting into the 5 jargon. Lesser negative convexity means that a 6 highly-seasoned issue, now four years old, has 7 better performance characteristics when interest 8 rates move. It is less subject to adverse 9 movement in its average life characteristics when 10 interest rates move. The more seasoned the 11 mortgage issue is, the less is its adverse price 12 sensitivity to interest rate movements. 13 Q. Isn't it a fact that that is true only 14 in circumstances where you have discount -- where 15 you bought at a discount or if the security is 16 what is known in the industry as being burned out? 17 A. Which would imply that it's a high 18 premium, this burn-out effect. But it's also -- 19 no, that's not necessarily true. It's also 20 true -- it doesn't have to be a discount or a high 21 coupon burned out mortgage security. It could be 22 a current coupon security that's highly seasoned. 13048 1 Right now, current coupon mortgages are 2 roughly a 7 percent coupon. Now, if you were to 3 buy a 20-year-old or 10-year-old 7 percent current 4 coupon issue, that doesn't have much negative 5 convexity. This jargon -- I hope some people are 6 following it. It doesn't have to be a discount or 7 a premium. 8 Q. Okay. Now, let me turn to a different 9 subject. Well, let me ask you to wrap that up. 10 Are these matters on which experts 11 might disagree? 12 A. Experts would not disagree on the 13 points I've just made. These are pretty 14 conventional basic mortgage principles. 15 Q. Let me turn to another subject. You 16 indicated that the -- to Mr. Guido that the 17 members of the investment committee didn't respond 18 to your recommendations. Did I hear that 19 correctly yesterday? 20 A. Yes, you heard it correctly. 21 Q. Now, if we go -- in fact, you were 22 allowed to buy ARMs but less than what you wanted, 13049 1 correct? 2 A. Correct. 3 Q. So, that was a response? 4 A. Okay. That was a response, a small 5 amount of ARMs. 6 Q. And you were told to continue with the 7 balancing of hedges and adding of hedges. That 8 was a response, wasn't it? 9 A. That was something of a response, 10 correct. 11 Q. And you were told to continue to allow 12 the portfolio to roll down? 13 A. Right. 14 Q. That was a response. It just wasn't 15 what you wanted to do? 16 A. Correct. 17 Q. Now, in fact, you were allowed to make 18 a presentation of your views, not only as often as 19 you wanted in the development committee, but to 20 the board of directors, did you not? 21 A. That might be the case. I don't ever 22 even remember meeting the board of directors or 13050 1 whether or not I had the option. That might be 2 the case. I just don't remember. 3 Q. Let me ask you to look at 4 Exhibit A1149, which is -- which, I believe, is in 5 the record at T8068, Tab 460. 6 MR. NICKENS: Your Honor -- 7 MR. GUIDO: Is this the May 10th, 1988 8 investment committee minutes? 9 MR. NICKENS: These are the board of 10 directors minutes of May 10th, 1988. 11 MR. GUIDO: I'm sorry. Board of 12 directors minutes. 13 Q. (BY MR. NICKENS) Mr. Bruno, would you 14 take a look at the minutes of the board of 15 directors of United Savings Association of Texas, 16 May 10th, 1988? 17 A. Yes, I have them. 18 Q. And specifically the third paragraph. 19 A. Uh-huh. (Witness nods head 20 affirmatively.) I see that. 21 Q. And it indicates that "Mr. Gross stated 22 at this point, he wanted to depart from the agenda 13051 1 items and present Mr. Dominic Bruno who would 2 review the mortgage-backed securities portfolio of 3 the association. Mr. Bruno discussed at great 4 length the mortgage-backed securities portfolio 5 and reviewed in detail the association's 6 portfolio, mark-to-market position, sensitivity to 7 interest rate fluctuations, hedging devices, and 8 alternative strategies for dealing with interest 9 rate fluctuations. The board questioned Mr. Bruno 10 at great length concerning the current position of 11 the portfolio and suggestions for dealing with 12 interest rate fluctuations." 13 A. Yes. 14 Q. Now, does that refresh your 15 recollection that you were given an opportunity to 16 and did, in fact, make a presentation to the board 17 of directors? 18 A. Well, I can see here that I did. I 19 just don't recall the meeting. 20 Q. Now, would you call that a fair 21 response to your suggestions? 22 A. That I was given an opportunity to meet 13052 1 with the board? 2 Q. Yes, sir. 3 A. It would appear to be. 4 Q. Now, are you familiar with the term 5 "value trades"? 6 A. That means different things to 7 different people. That term is used quite 8 frequently, "value trades." There is no 9 definition of that, but I am familiar with it. 10 Q. There are times in the market where a 11 given mortgage-backed securities issue will have 12 an increased spread to treasuries? 13 A. Correct. 14 Q. And that will open opportunities for 15 so-called value trades? 16 A. Price appreciation, yes. 17 Q. And that is something that a good 18 portfolio manager should look for and do? 19 A. Yes. That's in conflict with yield 20 management. That's total rate of return 21 management. I am familiar with that. 22 Q. That is something that you believe 13053 1 should be done when those opportunities present 2 themselves? 3 A. Depending on constraints, yes, I do. 4 Q. Now, in the time period you were at 5 USAT, the spread to treasuries was generally quite 6 tight, was it not? 7 A. My memory is that it was. 8 Q. And that would limit the opportunities 9 for doing value trades? 10 A. For a number of mortgage products, yes. 11 Not all mortgage products. 12 Q. The mortgage products that USAT owned? 13 A. There were opportunities within the 14 market where there were opportunities to do -- if 15 we want to use this term -- value trades. But in 16 general, the market was rich. 17 Q. Now, let me ask you about the -- your 18 dollar roll activity. There isn't any question 19 that you regarded that as being valuable to the 20 institution, is there? 21 A. Dollar rolls, it's pretty clear after 22 all these years, are the one opportunity in the 13054 1 mortgage market that I believe anyone would 2 recognize as value added. 3 Q. And this is simply a financing 4 technique to reduce the cost of funds? 5 A. In this context, yes. 6 Q. And why did USAT use dollar roll 7 financing? 8 A. To achieve savings in its cost of 9 funding. 10 Q. Did it harm the institution in any way 11 that you can think of? 12 A. Not in any ways that I've even come to 13 believe afterwards, correct. It was value added. 14 Q. And the reason these dollar roll 15 opportunities were available was primarily because 16 of the great activity in the creation of the CMO 17 market, is it not? 18 A. That's the thrust of it, yes. 19 Q. And so, it was a function of that 20 expanding market that gave institutions like USAT 21 an opportunity to do dollar rolls? 22 A. That's a key determinant. Not the only 13055 1 one, but that certainly added to the 2 opportunities. 3 Q. Now, I want to ask you some questions 4 Mr. Guido asked you yesterday about the Sendero 5 model. Specifically, Exhibit T4663, which he 6 showed you yesterday. 7 This is the -- you told Mr. Guido that 8 you didn't recollect ever having heard anything 9 about the Sendero model, correct? 10 A. That continues to be my recollection. 11 Q. And you indicated that in a response to 12 a question -- well, did you suggest to the Court 13 that this had been kept from you for some reason? 14 A. No, I don't -- the idea of anybody 15 keeping it from me I don't think is true. I just 16 don't remember it being presented to me, the 17 analysis, before I took the job or anything. 18 Q. So, you did not intend to suggest that 19 someone had kept this information from you? 20 A. No. 21 Q. Okay. In fact, if we look at it, 22 there's -- on Page 3, numbered Page 3, it's 13056 1 US712 -- 2 A. Okay. 3 Q. -- do you see on the right-hand side, 4 it says -- someone has written "Not so. Get with 5 Dominick"? 6 A. I see that comment, yes. 7 Q. And at Page 720, someone has written, 8 "Dominick's table"? 9 A. Yes, I see this. 10 Q. That would certainly suggest that 11 someone who was making these notes expected to 12 talk to you about it, would it not? 13 A. It would suggest that to me. 14 Q. All right. And if we look at Page 710, 15 back toward the front -- are you with me, 16 Mr. Bruno? 17 A. Yes, I am. 18 Q. There, we have an analysis at 1/31/88 19 indicating that the portfolio tends to be fairly 20 diversified with respect to coupon rate with the 21 effect that prepayment risk is largely mitigated? 22 A. I couldn't say this portfolio is fairly 13057 1 diversified. 2 Q. Well, that was what someone was telling 3 United Savings at this point in time. Would you 4 agree with that? 5 A. That someone was telling them that? 6 Q. Yes, sir. 7 A. I -- could be. 8 Q. And that the high coupon MBS had 9 premiums, low coupon had discounts. Was that true 10 or not? 11 A. Low coupon securities are discounts. 12 High coupon securities are premium, that's 13 correct. 14 Q. And the IOs were close to break-even 15 and were used as a hedge against MBS. 16 Do you see that? 17 A. I see that. 18 Q. And similarly, the POs are $24 million 19 below water and were used as a hedge against a 20 high coupon MBS? 21 A. Okay. I see this. 22 Q. That's exactly what you would expect. 13058 1 Right? That if the IOs had either appreciated in 2 value or break even, you would expect the POs to 3 be below water? 4 A. Well, there's no doubt there's a 5 negative correlation between IOs and POs no matter 6 what their relative coupons. 7 Q. Turn to the next page, if you would. 8 It says, "As a result of taking gains on the MBS 9 portfolio over the past few years, the book yield 10 on the current portfolio is 124 basis points below 11 what the same securities are yielding in the 12 market. The book yields are below market yields 13 for three primary reasons." And they go on to 14 give the reasons. 15 Do you see that? 16 A. I see that. 17 Q. Was that consistent or inconsistent 18 with your information about USAT's portfolio? 19 A. Well, I guess at this point in time it 20 was consistent. 21 Q. Now, let's see if we can -- can you 22 explain to the Court why it is that if one takes 13059 1 gains, that reduces your book yield? 2 A. Because if you buy a security today, 3 the market rallies. You sell that security. But 4 as you go to -- and you experience a gain. The 5 problem is that you've experienced a gain because 6 interest rates have declined. So, now, you have 7 to reinvest in a market climate where your 8 reinvestment rates are low. 9 Q. Well, let me give you -- let's see if 10 we can illustrate the example here of just having 11 to do with the calculation of yield. 12 Let me ask you to assume that you have 13 a 10 percent current market -- let's just say a 14 one-year treasury -- 15 A. Okay. 16 Q. -- and that you buy a million dollars 17 par amount one-year treasuries in a 10 percent 18 market. So, your yield is 10 percent. Right? 19 A. Correct. 20 Q. You have a million dollars invested at 21 10 percent coupon, 10 percent yield, correct? 22 A. Correct. 13060 1 Q. Now, I'm going to ask you to assume 2 that interest rates go down to 8 and that the 3 effect of that is that your treasury security is 4 now worth 1,250,000. 5 A. A million two roughly, correct. That's 6 correct. 7 Q. And at 8 percent, you get exactly -- 8 let's say you sold it and you reinvest in the 9 current coupon, 8 percent. Right? 10 A. Right. 11 Q. So, you're getting exactly the same 12 amount back that you had with your 10 percent 13 coupon. Right? 14 A. Okay. 15 Q. A hundred thousand dollars a year, 16 correct? 17 A. Correct. 18 Q. Now, what's your yield? 19 A. Your yield to maturity is 8 percent. 20 Q. So, you have lost a book yield of 200 21 basis points because you've got more money 22 invested? 13061 1 A. Right. 2 Q. But you're economically in exactly the 3 same position? 4 A. This is true. It's the accounting. 5 That's how the accounting works out. That's 6 right. 7 Q. And so, if one takes gains -- and, 8 obviously, this is more complicated in real-life 9 situations because you have transaction costs. 10 Right? 11 A. Even allowing that, I agree with your 12 example. 13 Q. All right. So, the basic notion is 14 that as a matter of accounting, when one takes 15 gains, you end up with a reduction in yield even 16 though economically you can be in a better 17 position -- 18 A. No better. Roughly the same position. 19 Q. The amount invested has grown to 20 1,250,000? 21 A. But at a lower yield. It's going to be 22 roughly the same economics; I mean, the accounting 13062 1 action of recognizing that gain. 2 Q. If you decided that you wanted to sell 3 your 8 percent security to reinvest it in some 4 better opportunity, 8 percent, you would have 5 $1,250,000 to invest? 6 A. But the current average climate is only 7 8 percent. 8 Q. And presumably, if you had held on to 9 your 10, it would still be worth 1,250,000? 10 A. That's correct, after this period of 11 time. 12 Q. Now, let me ask you to turn over to 13 Page 6 at the top of this document -- well, 14 Page 8, please. There is a net spread analysis 15 for whatever Sendero was looking at at that point 16 in time? 17 A. Correct. 18 Q. And what does it indicate at the top? 19 What was the hedged spread at the bottom? 20 A. The hedged spread -- okay. We have 21 four scenarios. With a flat scenario, 22 .24 percent. 13063 1 Q. And the unhedged spread? 2 A. 1.52 percent. 3 Q. And that spread got better if interest 4 rates went down? 5 A. Correct. 6 Q. And it got slightly negative if 7 interest rates went up a little and more negative 8 if it went up 200 basis points? 9 A. Correct. 10 Q. And that's a spread analysis as opposed 11 to a mark-to-market analysis? 12 A. Precisely. It's a net income spread 13 analysis. 14 Q. And it indicates that the funding of 15 the MBS was 67 percent hedged with swaps and caps 16 excluding $550,000,000 of caps that had been 17 added? 18 A. With respect to net income, correct. 19 Q. Then if we look at the next page, we 20 have an analysis of the spread after hedging? 21 A. Correct. 22 Q. And it's basically saying that hedged 13064 1 away most of the spread? 2 A. Hedged away most of that income. It 3 probably reduced the overall volatility, which 4 this does not show. It hedged away a lot of the 5 net income spread. 6 Q. Now, let me ask you to look at 7 Exhibit 1516, which are the investment committee 8 minutes of June 22nd, 1988. 9 MR. GUIDO: What's the number? 10 MR. NICKENS: A1516. 11 Q. (BY MR. NICKENS) Do you recall looking 12 at this document yesterday, Mr. Bruno? 13 A. I recall looking at a number of 14 minutes. I'm sure I looked at this. 15 Q. And Mr. Guido focused you on the bottom 16 part of the page dealing with your reporting of 17 mortgage-backed securities? 18 A. Correct. 19 Q. I would like for you to look at the 20 first paragraph. 21 A. Okay. 22 Q. Actually, the second paragraph where it 13065 1 says "Mr. Schwenkel? 2 A. Uh-huh. (Witness nods head 3 affirmatively.) 4 Q. You attended this meeting, didn't you? 5 A. I'm sure I did. 6 Q. And it says, "Mr. Schwenkel reviewed in 7 detail the Sendero asset/liability model. We 8 presented a report to the committee and discussed 9 it at great length. The report was ordered 10 attached to the minutes of the meetings. The 11 report reviewed the model's attempt to project the 12 effect of the interest rate fluctuation on the 13 mortgage-backed securities portfolio. After 14 discussing the report, Mr. Schwenkel left the 15 meeting." 16 Do you see that? 17 A. Yes, I do. 18 Q. Would that refresh your recollection 19 that, in fact, you did know about Sendero? 20 A. I do remember this fellow, Kurt 21 Schwenkel, coming to a meeting. I just don't 22 remember -- as I told Mr. Guido, I just don't 13066 1 remember it. 2 Q. So, you told Mr. Guido that you just 3 didn't remember it? 4 A. I don't remember the model. I vaguely 5 remember Kurt giving a presentation. 6 Q. You didn't ever suggest in any way that 7 this information was kept from you? 8 A. No. I know of no motivation on the 9 part of anybody to keep this analysis from me. 10 Q. Actually, if we turn over to the third 11 page, this is -- what's attached to this 12 memorandum is a later Sendero analysis -- 13 A. Okay. 14 Q. -- dated June 22nd, 1988. 15 Have you ever seen that before, to your 16 recollection? 17 A. I don't remember it. Could I have seen 18 it? Yes. I don't remember it. 19 Q. Anyway, this thing about Sendero is 20 simply a function of your recollection and not 21 some suggestion that information was kept from 22 you? 13067 1 A. No. 2 Q. Now, you testified yesterday that -- 3 about a purchase of Freddie Mac preferred. 4 Do you recall that? 5 A. Yes, the stock. The preferred stock. 6 Q. And it was bought and sold within a 7 couple of days' time. Right? 8 A. Something like that, yes. 9 Q. And you said that Mike Crow had been 10 persuaded by some stockbroker to buy Freddie Mac 11 preferred. That was your recollection? 12 A. Correct. 13 Q. Now, did Mr. Guido -- in going over 14 that testimony with you, did he show you 15 Exhibit A1520, which is the minutes of July 13th, 16 1988? I'm going to ask you to focus, Mr. Bruno, 17 at the second page of the minutes, which is at 18 US3014775: "Mr. Crow." 19 A. Yeah, I see that. 20 Q. It indicates that Mr. Crow brought this 21 idea to the investment committee, correct? 22 A. That does indicate that here. 13068 1 Q. And if you turn over to the next page, 2 there is attached a memoranda from Mr. Crow 3 describing a possible purchase? 4 A. Yes, I see that. 5 Q. Do you see that? 6 A. Uh-huh. (Witness nods head 7 affirmatively.) 8 Q. And that's two pages? 9 A. Right. 10 Q. And then next we see some of the 11 consolidated balance sheets for Freddie Mac? 12 A. Uh-huh. (Witness nods head 13 affirmatively.) 14 Q. Do you see that? 15 A. Yes, I do. 16 Q. And then over at Page 14781, we have an 17 article which is by Beatrice Garcia, Heard on the 18 Street. That's a Wall Street Journal column, is 19 it not? 20 A. Yes. 21 Q. And it is describing the reasons why 22 Freddie Mac preferred was a particularly 13069 1 attractive investment at the time for thrifts? 2 A. Yes. 3 Q. And then next we have a report from 4 Anderson & Strudwick, Inc. in Richmond, Virginia, 5 about the reasons why -- if you see the 6 recommendation, it says, "The purchase of Freddie 7 Mac preferred is strongly recommended by any and 8 all institutions who are legally able to purchase 9 these shares"? 10 A. Right. 11 Q. And then you see -- in the next one, 12 you have a research paper from Johnston, Lemon 13 dated June 27th, 1988. And someone has -- it's a 14 recommendation. And someone has gone through and 15 circled various parts? 16 A. Yes, I see this. 17 Q. Indicating, in particular, in the 18 conclusion that "The reasons to purchase Freddie 19 Mac stock are compelling. A thrift" -- 20 A. Where at? 21 Q. I'm at Page 14787 under the conclusion. 22 A. Uh-huh. I see this. 13070 1 Q. "The reasons to purchase Freddie Mac 2 stock are compelling. A thrift can purchase 3 Freddie Mac stock at 4 times estimated 1988 4 earnings of $23 and earn a tax equivalent yield of 5 7.56 percent per year. Also, we believe that 6 within 1988, Freddie Mac stock could be unhinged, 7 arguably resulting in a price increase. Thrifts 8 should consider accumulating 150,000 shares of 9 Freddie Mac stock at $100 per share or less." 10 Do you see all that? 11 A. I do. 12 Q. This, in fact, was a way of increasing 13 capital which was a priority at USAT, wasn't it? 14 A. Yes, at that time. 15 Q. Okay. Now, in reviewing what Mr. Crow 16 put in front of the investment committee, would 17 you say that he had been just sort of taken in by 18 some broker? 19 A. I think what was unconventional about 20 this is that I was directed to buy the stock. 21 Remember, I'm a bond manager. We had other stock 22 portfolio managers. As I recall this, one of my 13071 1 points of confusion is: Why wasn't Ron Heubsch 2 buying it as a stock portfolio manager? You 3 understand that it's highly unconventional for a 4 bond person to go out and buy stock. 5 Q. Sir, yesterday, you told the Court that 6 your bitterness toward Mr. Crow did not influence 7 your testimony. 8 A. My bitterness is what? I'm sorry. 9 Q. Towards Mr. Crow had not influenced 10 your testimony. 11 A. Correct. 12 Q. And you also told the Court that this 13 purchase of preferred was his idea that had been 14 advanced by some broker who had persuaded him? 15 A. Correct. 16 Q. Now, looking at the documentation, 17 wouldn't you say that he had made a fair 18 presentation to the investment committee of what 19 seemed to be a good idea? 20 A. Yes, I would. 21 MR. NICKENS: Your Honor, I would like 22 to simply introduce some documents that I don't 13072 1 believe have yet been introduced. Unless there's 2 an objection, I'm not going to question the 3 witness about them; but I would like to make them 4 a part of the record at this time. 5 Exhibit T4521 -- 6 MR. GUIDO: This is all the swap sales. 7 MR. NICKENS: I'm told it's in. 8 MR. GUIDO: I think T4521 is in. I 9 think I put in a bunch of documents regarding the 10 swap transactions, Your Honor. 11 THE COURT: It was entered yesterday. 12 MR. NICKENS: Your Honor, then I 13 withdraw my offer. 14 Exhibit B3937? 15 MR. GUIDO: I don't think that that one 16 is in yet, Your Honor. 17 MR. NICKENS: I offer B2397. Is that 18 it? 19 MR. GUIDO: B3937. 20 THE COURT: No objection, Mr. Guido? 21 MR. GUIDO: No objection. I'm sorry. 22 THE COURT: Received. 13073 1 MR. NICKENS: Your Honor, I offer 2 B2450. 3 MR. GUIDO: I think this one is in, 4 Your Honor, under -- no objection, Your Honor, to 5 B2450. 6 MR. NICKENS: And Your Honor, I offer 7 B -- I'm sorry. I didn't allow Your Honor to -- 8 THE COURT: B2450 is not in evidence? 9 MR. NICKENS: No, Your Honor. 10 MR. GUIDO: No objection. 11 THE COURT: Received. 12 MR. GUIDO: There is a memorandum that 13 deals with, I think, mortgage-backed security 14 swaps that's in the record that almost looks 15 identical, Your Honor; but it's a separate 16 document. This deals with residuals. 17 MR. NICKENS: Your Honor, I offer 18 B2418. 19 MR. GUIDO: No objection, Your Honor. 20 THE COURT: Received. 21 MR. NICKENS: Your Honor, I offer 22 Exhibit B4233. 13074 1 MR. GUIDO: No objection, Your Honor. 2 THE COURT: Received. 3 MR. NICKENS: And lastly, Your Honor, I 4 offer Exhibit A5028, which are the UFG performance 5 reports for December 1987. Yesterday, we did all 6 of 1988; and I'm offering the last month of 1987. 7 MR. GUIDO: No objection, Your Honor. 8 THE COURT: This may already be in. 9 MR. NICKENS: I apologize, Your Honor. 10 THE COURT: Received in December. 11 MR. NICKENS: I apologize for that, 12 Your Honor. That concludes my examination of 13 Mr. Bruno. 14 THE COURT: Mr. Guido, do you have some 15 redirect? 16 MR. GUIDO: Do you want me to start now 17 or wait until after the break? 18 THE COURT: Yes, I think you'd better 19 start. How much time do you think you're going to 20 have? 21 MR. GUIDO: Probably an hour, hour and 22 a half, Your Honor. 13075 1 2 FURTHER EXAMINATION 3 4 Q. (BY MR. GUIDO) I would like to direct 5 your attention, if I may, to the B4233 document 6 that Mr. NIckens just put into the record. 7 A. I have it. 8 Q. Can you tell us what that document is 9 about? 10 A. This has to do with suggesting that we 11 take all the assets that were purchased as part of 12 risk-controlled arbitrages and, just in the 13 interest of simplicity with a view toward having 14 to liquidate these, it was suggesting that we 15 consolidate everything in the interest of 16 efficient future execution of sales. 17 Q. So, this was a document that you 18 understood was to take all of the mortgage-backed 19 security portfolios and combine them into one or a 20 limited set of numbers for accounting purposes? 21 A. Yes. 22 Q. And for tracking purposes? 13076 1 A. Yes. 2 Q. And so that these numbers were numbers 3 that had previously existed in some cases and they 4 were being combined together? 5 A. Correct. 6 Q. It was basically for tracking purposes? 7 A. Correct. 8 Q. Had that been done before, to your 9 knowledge? 10 A. To my knowledge, no. 11 Q. Had numbers assigned to various 12 portfolios been reassigned at any given point in 13 time? 14 A. Prior to this? 15 Q. Uh-huh. 16 A. I do not know. I don't think so. 17 Q. You just don't know? 18 A. I do not know. 19 Q. And were different -- these refer to RC 20 numbers. Are those portfolio numbers? Is that 21 what those are? 22 MR. NICKENS: Your Honor, this does go 13077 1 beyond the scope of my examination. I just put 2 the document in. I didn't ask him any questions 3 about it. And now he's going to do a full-fledged 4 examination. If there's anything to the rule 5 about going beyond the scope of examination, we 6 are there. 7 THE COURT: Well, I'm not so sure. You 8 put the document in. Was your implication it was 9 to have no -- 10 MR. NICKENS: No, Your Honor. I just 11 don't have any questions of this witness. I think 12 it should be part of the record, but I don't have 13 any questions of this witness. 14 THE COURT: Well, let's see -- 15 MR. GUIDO: I'm only asking questions 16 to figure out what the document is about. 17 THE COURT: I think we've covered that. 18 Do you have some more? 19 MR. GUIDO: I have a couple more 20 questions about the document. 21 A. They are account numbers. 22 Q. (BY MR. GUIDO) It says -- at the 13078 1 heading, it says "consolidation of RCs." Those 2 are the account numbers? 3 A. Right. 4 Q. Is that your understanding, that the 5 mortgage portfolio was a risk-controlled or was a 6 hedged portfolio? 7 A. A lot of -- my understanding was that a 8 lot of the portfolio was purchased as what was 9 part of the risk-controlled arbitrage, yes. 10 Q. Was it your understanding that the 11 portfolio was purchased and intended to be a 12 hedged portfolio? 13 A. In an accounting sense, yes. 14 Q. Okay. 15 A. Not an economic sense. 16 Q. Okay. Now, I would like to go back to 17 the beginning of your testimony, if I might, and 18 ask you some questions. 19 You were asked whether or not -- did 20 USAT attempt to maintain a yield spread in its 21 portfolio management prior to your arrival. 22 Do you recall that? 13079 1 A. Yes. 2 Q. And do you recall that your response 3 was, yes, you -- well, what was your response? 4 I'm sorry. 5 A. I don't remember. 6 Q. Okay. Did they -- let me ask you this 7 question: Was the professed objective of the 8 management of USAT when you arrived to maintain a 9 yield spread in its mortgage-backed securities 10 portfolio? 11 A. "Professed" might be a strong term. 12 There was no real clear enunciation of objectives. 13 That was my understanding, my understanding. 14 Q. Okay. 15 A. Certainly, certain people projected 16 that message, the accounting people. 17 Q. All right. Now, are sales to take 18 gains at quarter end to bolster profits consistent 19 with the objective to maintain a yield spread? 20 A. No. 21 Q. Now, Mr. Nickens later on asked you a 22 hypothetical question about, I think, a million 13080 1 dollars worth of bonds and interest rates would 2 drop 200 basis points, from 10 percent to 3 8 percent, and then the value would be 4 1.2 billion? 5 A. By the way, for a one-year asset, I 6 stand corrected. It would go to 1,020,000 just 7 for the sake of the numbers. 8 Q. With regard to that, he asked you 9 whether or not the portfolio would be in pretty 10 much the same condition whether you took the gain 11 or didn't take the gain. 12 Do you recall that? 13 A. Yes. 14 Q. Now, if you had a portfolio that was a 15 portfolio of mortgage-backed securities and 16 interest rates dropped 200 basis points and you 17 took the gain and that portfolio was funded with 18 reverse repurchase agreements hedged with swaps to 19 protect against rising interest rates, what would 20 be the effect of that? Would you be in the same 21 position as if you had not sold the 22 mortgage-backed securities? 13081 1 MR. NICKENS: Your Honor, I object. 2 This is a hypothetical question to elicit an 3 expert response, and this witness has not been 4 identified as an expert witness. 5 And furthermore, I questioned him; and 6 he indicated that he had no information concerning 7 the earlier time frame with regard the rolldown 8 and that sort of stuff. 9 The particular question that Mr. Guido 10 is indicating that I opened the door with was 11 simply an example for the Court as to how it is 12 that by taking a gain, that one affects book 13 yield. It was for example only and did not open 14 the door to expert testimony about the rolldown 15 that he claims -- that he has testified that he 16 doesn't know anything about. 17 THE COURT: I believe it's close enough 18 for you to answer the question. 19 Q. (BY MR. GUIDO) Mr. Bruno? 20 A. To answer that question, if you now add 21 in the economic impact of prepayments, it is a 22 damaging effect. 13082 1 Q. Thank you. 2 Now, in fact, when you found the 3 portfolio at USAT when you arrived, did you find a 4 duration mismatch between the liabilities that 5 were hedged with swaps and the assets? 6 A. Yes, I did. 7 Q. And did you find that to be a dramatic 8 mismatch? 9 A. Yes, I did. 10 Q. Did you find that to be highly risky to 11 the portfolio? 12 A. Yes. 13 Q. Did you find that difficult, to hedge 14 the portfolio? 15 A. Yes, in the context of not further 16 damaging, the fact that they had no net income 17 spread. I mean, hedging at that point in time 18 meant that we were putting them in a negative net 19 income spread which seemed rather perverse. 20 Q. Now, you were asked questions about the 21 inverse floaters and Mr. Williams' objection to 22 that by Mr. Nickens. 13083 1 Do you recall the series of questions 2 about that and whether or not there were any 3 losses on those inverse floaters? 4 A. Right. I do. 5 Q. Could you have been mistaken in that 6 you may have been thinking about your proposed 7 sales of IOs or POs when you testified yesterday? 8 A. Yes. 9 Q. Pardon me? I didn't hear you. 10 A. Yes. 11 Q. Now, you were asked a question about 12 the Morgan Stanley piece, which is at A1499, 13 Exhibit A1499 that's in the investment committee 14 documents. A1499. You were asked about the 15 Morgan Stanley piece. And I want to direct your 16 attention to the Bates stamp US3011648. 17 A. Yes. 18 Q. Do you have that page? 19 A. I have that in front of me. 20 Q. It has in there, "What is wrong with 21 maximizing the cash flow yield?" 22 Do you see that? 13084 1 A. Uh-huh. (Witness nods head 2 affirmatively.) 3 Q. Is maximizing the cash flow yield what 4 you understood was the professed objective of USAT 5 at the time you arrived? 6 A. Certainly, that was the accounting 7 orientation. 8 Q. And it says -- read the first 9 paragraph. 10 A. "An MBS portfolio" -- 11 Q. I'll read it into the record. 12 A. I'm sorry. 13 Q. "An MBS portfolio strategy that 14 maximizes cash flow yield leaves the portfolio 15 manager with few options in choosing the duration, 16 relative value, and convexity of the portfolio." 17 Do you see that? 18 A. Yes, I do. 19 Q. Now, does that mean that the portfolio 20 manager is adopting something that leaves them 21 with options that are difficult to manage in the 22 portfolio in terms of interest rate risk? 13085 1 A. Yes. 2 Q. Now, I would like to direct your 3 attention to B4238 which Mr. Nickens showed you. 4 It's the document that had the inverse floaters on 5 it. I'm just going to ask a question to clarify 6 the record. B4238. Do you see down at the 7 bottom, it says, "Inverse floater - Merrill Lynch 8 CMO"? 9 A. I see that. 10 Q. It has "book value 15," and it says 11 "principal 23." 12 Do you see that? 13 A. Yes, I do. 14 Q. It says "net premium/discount." 15 Do you know what that refers to? 16 A. That's the discount from book value. 17 That's how I interpret that. 18 Q. Okay. Or is that the book value from 19 the face value of the instrument? 20 A. That's what I should have said. That's 21 what that defines, that discount. 22 Q. Okay. Now, I would like to direct your 13086 1 attention to the performance report that 2 Mr. Nickens spoke to you about. He used, I think, 3 a performance report at A1487, which are the 4 investment committee minutes of January 20th, 5 1988. And he directed your attention, I think, to 6 a performance report -- I think it was 7 year-to-date -- at US3012503. 8 A. Yes. I don't have that in front of me. 9 Q. Okay. 10 THE COURT: What's your exhibit number, 11 Mr. Guido? 12 MR. GUIDO: A1487, Your Honor. It's in 13 the investment committee binder. 14 THE COURT: Thank you. 15 Q. (BY MR. GUIDO) Now, you didn't arrive, 16 I think, as Mr. Nickens pointed out, until 17 February 10th of 1987; is that correct? 18 A. '88. 19 Q. Of '88. Excuse me. 20 A. '88. 21 Q. And how long did it take you to sort of 22 become acclimated to begin actively managing the 13087 1 USAT portfolio. 2 A. I believe probably three to five weeks. 3 Q. So, it would be sometime toward the end 4 of March. Would that be fair? 5 A. That would be fair. 6 Q. I would like to direct your attention 7 to the performance report for year-to-date 8 March 1988, which is in the packet of performance 9 reports that I showed you yesterday and I moved 10 into the record. And that is at A5031. 11 A. Okay. 12 MR. NICKENS: 1988? 13 MR. GUIDO: It's March 1988. 14 Q. (BY MR. GUIDO) And the document that I 15 would like to direct -- the pages that I would 16 like to direct your attention to are the pages 17 that -- the first one is SB1 which says, "United 18 MBS Corporation performance report, March 1988." 19 The next is SB2, United MBS performance report 20 year-to-date, SB2. And then USAT MBS portfolio 21 performance report, March 1988, SC1. And USAT MBS 22 portfolio performance report year-to-date, SC2? 13088 1 A. Yes. 2 Q. And look at the year-to-date, which are 3 the SB2 and the SB1. 4 A. Uh-huh, yes. 5 Q. It shows for United MBS Corporation, do 6 you see the net interest spread total of 7 1.10 percent? 8 A. Yes. 9 Q. And do you see the performance report 10 year-to-date SC2 for USAT MBS? Net interest 11 spread of minus 1.01. 12 Do you see that? 13 A. Yes. 14 Q. Do those documents substantiate your 15 testimony that you felt the portfolio was 16 basically at a break-even point in terms of yield 17 when you took it over? 18 A. Yes. 19 Q. Now, Mr. Nickens then showed you A5037, 20 giving you credit for your management of the 21 portfolio, taking out the consideration of the 22 impact of the sales that were ordered in 13089 1 anticipation of the liquidation of USAT at A5037 2 in the performance reports. I would like to 3 direct your attention to the numbers there. 4 A. I don't have that in front of me. 5 Q. It's not there. It's just one of 6 the -- this is one of the exhibits that 7 Mr. Nickens had previously had introduced into the 8 record. 9 THE COURT: Mr. Guido, we'll adjourn 10 until 1:30. 11 MR. GUIDO: Okay. Thank you, 12 Your Honor. 13 14 (Luncheon recess.) 15 16 THE COURT: Be seated, please. 17 We'll be back on the record. 18 MS. CLARK: Your Honor, I would like to 19 bring up a scheduling issue. Mr. Bruce Williams 20 was scheduled, as you know, to be the witness this 21 afternoon. I called to tell him we would not be 22 getting to him as planned right after lunch. He 13090 1 advised me he has previously-scheduled obligations 2 that would not allow him to return tomorrow to 3 complete his testimony. So, if we were to start 4 him this afternoon, it would necessitate breaking 5 him again. And I think that's not really fair for 6 the witness, and it's certainly prejudicial to the 7 respondents to break up the cross not once but 8 twice. It would also have the effect, it seems to 9 me, of making it more difficult to comply with the 10 Court's directive to complete Mr. Huebsch's 11 testimony in its entirety before we break. I 12 would suggest that we reschedule Mr. Williams' 13 testimony for another time and simply start 14 Mr. Huebsch first thing tomorrow morning. 15 THE COURT: Do you have any objection 16 to that, Mr. Guido? 17 MR. GUIDO: I thought the witness was 18 on notice that he was on call for Monday and that 19 he would be here today and he would start this 20 afternoon. I don't understand the problem with 21 this schedule. I think we should hear from him 22 what his scheduling problem is. 13091 1 THE COURT: I don't doubt that that is 2 his schedule. I'm concerned that we may not be 3 able -- if we would have had Mr. Williams 4 tomorrow, it might have raised the question of 5 whether we could finish Mr. Huebsch this week. 6 And I think that should be our objective, and it's 7 Ms. Clark's cross. I think if she has no 8 objection to that, I believe that's what we should 9 do. 10 MR. GUIDO: We will adjourn after we 11 finish with Mr. Bruno today and start with 12 Mr. Huebsch tomorrow? 13 THE COURT: Well, my concern is that 14 we'd probably take the better part of the day with 15 him anyway and wouldn't get to Mr. Williams until 16 tomorrow. That's what I was, more or less, 17 anticipating. Maybe -- 18 MR. GUIDO: Your Honor, I really did 19 think that -- the Government had structured this 20 so that we would finish the -- most of the 21 third-party fact witnesses before we started with 22 the respondents. And I think that now putting 13092 1 Mr. Williams out of order does affect that, and we 2 do believe it's important for the Court to have 3 before it all of the third-party fact witnesses 4 before we start Mr. Huebsch. 5 If that's the case, maybe we should 6 think about adjourning early for the break and 7 start with Mr. Williams when we come back and then 8 pick up with Mr. Huebsch. I do think it's 9 important for the Court to hear the key 10 third-party fact witnesses before the respondents 11 because it provides a factual basis for the 12 questioning of those witnesses. I had anticipated 13 using some of Mr. Williams' responses, assuming 14 that he was more -- his memory was better 15 refreshed than the last time of using that as part 16 of my examination of Mr. Huebsch. I had 17 anticipated having the third-party witnesses 18 before Mr. Huebsch went on the stand, Your Honor. 19 And if that's not going to be the case because of, 20 all of a sudden, Mr. Williams not being available 21 and Mr. Stodart not being available, I thought I 22 could live with Mr. Stodart not being available. 13093 1 If that's the case, I really would like to be able 2 to start with him after the break. Maybe what we 3 need to do is break early so that we can do that. 4 I do think that this suggestion being 5 made now which is sort of the 11th hour is going 6 to create problems for the Government in terms of 7 its questioning of Mr. Huebsch. 8 THE COURT: Well, I'm concerned that we 9 lose trial time if we truncate this week and so 10 on. 11 MR. GUIDO: I understand that, 12 Your Honor. I do strongly believe that having the 13 third -- these principal third-party witnesses is 14 crucial to us questioning people like Mr. Huebsch 15 in particular. 16 THE COURT: Well, you've had him on 17 direct. 18 MR. GUIDO: I've had him on direct, 19 Your Honor; but, you know, the cross-examination 20 of some of these witnesses -- more reluctant 21 witnesses -- has turned out to be beneficial in 22 terms of elaborating the facts that are used, 13094 1 Your Honor, which has been our experience with 2 this proceeding. 3 THE COURT: How much time do you 4 anticipate taking with Mr. Huebsch? 5 MR. GUIDO: It could be quite 6 extensive, Your Honor. At this point in time, I 7 don't know. A lot of it was dependent upon what I 8 was going to do with Mr. Stodart, and then 9 Mr. Stodart all of a sudden had his problems with 10 the health problems of someone in his family. 11 That meant that I had to restructure things. And 12 to be honest, I haven't totally restructured what 13 I'm going to do with Mr. Huebsch based on that 14 problem. I mean, these two witnesses, you know, 15 have separate problems which have now created 16 problems for the Government in terms of how it's 17 going to go forward with the respondents, 18 Your Honor. And, you know, if they came first, it 19 clearly would speed up the process of examining 20 the respondents because we would have a factual 21 basis on which we could -- on a clear factual 22 basis in the record that the Government would be 13095 1 comfortable with examining these respondents who 2 are obviously going to be adverse witnesses. 3 THE COURT: Will Mr. Williams be 4 available on Thursday? 5 MS. CLARK: Your Honor, I have not 6 inquired about his schedule on Thursday. 7 MR. NICKENS: There is a compromise 8 possibility because in addition to the possibility 9 that Mr. Williams could be made available at least 10 some point during this time frame -- Ms. Suder was 11 scheduled for Thursday. Mr. Benson, I don't know 12 where that is. Even Mr. Stodart was out because 13 of a difficulty with his -- surgery for one of his 14 children. I don't know whether that's a three-day 15 disqualification or not. 16 MR. GUIDO: Well, the report that I had 17 is it's a rather serious matter with his child, 18 Your Honor; and it's potentially a 19 life-threatening condition. 20 MR. NICKENS: I'm not trying to 21 inconvenience anyone. 22 THE COURT: I would rather just lose 13096 1 tomorrow if Mr. Williams would be available on 2 Thursday. At least we could complete him this 3 session. I would rather lose just tomorrow than 4 the rest of the week. 5 MS. CLARK: I will call him at the 6 first break or I could call him right now, if you 7 would like, and inquire about his schedule. 8 THE COURT: Maybe we should do it right 9 now. 10 MS. CLARK: Shall we take a short 11 break? 12 THE COURT: We'll take a short break. 13 MR. NICKENS: If Mr. Guido could finish 14 Mr. Bruno in 5 or 10 minutes -- 15 MS. CLARK: I don't think I will be 16 able to finish. I don't think Mr. Guido has five 17 minutes. He indicated he had an hour and a half 18 before lunch. So, let me call Mr. Williams if 19 that would be helpful. 20 MR. GUIDO: Your Honor, with regard to 21 the question of Ms. Suder, this is a person who 22 has two small children and has a lot of other 13097 1 commitments that require a great deal of travel. 2 I think her schedule is now altered so that we 3 cannot go back to her. 4 THE COURT: That's what concerned me. 5 I think we would get into severe problems of 6 whether she could be finished and be brought back. 7 Her schedule dictates -- might determine our 8 schedule here. 9 MR. GUIDO: If your suggestion is that 10 we could put Mr. Williams on on Thursday and 11 complete him on Thursday, that would be, you know, 12 preferable to the Government. Then we can start 13 with Mr. Stodart after the break and then pick up 14 with Mr. Huebsch. 15 THE COURT: That would be preferable to 16 me than to losing the rest of the week. 17 18 (Short break.) 19 20 MS. CLARK: Your Honor, Mr. Williams is 21 available Thursday. He could start first thing 22 Thursday morning; and I assured him if he does 13098 1 that, he will be done by the end of the day. 2 THE COURT: All right. I think we had 3 better do that then. 4 MR. GUIDO: We'll start with 5 Mr. Williams on Thursday morning. 6 THE COURT: And then finish him -- 7 we'll conclude -- well, would Mr. Stodart be 8 available on Friday? How long is his testimony 9 going to take? 10 MR. GUIDO: Your Honor, we can check 11 with him; but as I said, it is a life-threatening 12 situation with his child. 13 MR. RINALDI: When we spoke with 14 Mr. Stodart, they were going to biopsy, he 15 thought, tomorrow. They had admitted his child 16 for surgery, and he didn't know what the results 17 of the biopsy would be for some time. He said if 18 it's bad, it would be very difficult; and in the 19 meantime, he's waiting to hear. He expressed a 20 desire at the time we spoke to him to revisit him 21 after the break. So, we told him we would talk to 22 him the week of the 13th. 13099 1 THE COURT: Mr. Guido, you may resume 2 your examination. 3 Q. (BY MR. GUIDO) Mr. Bruno, I would like 4 to direct your attention to Exhibit 5027, which is 5 the performance report now moving from the March 6 performance report that I showed you to the 7 performance report that Mr. Nickens showed you 8 which is of September 30th, 1988. And what does 9 that show in terms of the total net interest 10 income or the yield net interest spread from the 11 mortgage-backed security portfolios that you had 12 managed starting sometime in February or March of 13 1988? 14 A. It shows a negative 3.395 million. 15 Q. Now, that is the net income. What is 16 the spread percentage that it shows? 17 A. Negative .15 percent. 18 Q. And is that essentially comparable to 19 the spread that you said that existed when we 20 looked at the March 30th, 1988 spread? 21 A. Yes, it is. 22 Q. Now, when you managed the portfolio 13100 1 between March and September of 1988, did you 2 follow the instructions that were laid out by the 3 investment committee for you to follow? 4 A. I adhered to instructions and policy, 5 yes. 6 Q. Okay. And did you -- when you advised 7 them of what it is that you thought should be done 8 for the portfolio, did you essentially suggest a 9 major restructuring of the portfolio in which you 10 recommended sales of the fixed rate current coupon 11 mortgage-backed securities and purchases of 12 adjustable rate mortgages, short tranche CMOs in 13 order to lessen the interest rate risk? 14 A. Yes. 15 Q. Okay. And they did not accept your 16 recommendation? 17 A. Effectively, no. 18 Q. And did you -- why do you use the term 19 "effectively, no"? 20 A. There were limited purchases of 21 adjustable rate mortgages and a limited amount of 22 hedging, but it does not equate with a material 13101 1 program to restructure the portfolio. 2 Q. Now, when you -- Mr. Nickens showed you 3 A1149, a document which was investment committee 4 minutes. There doesn't seem to be a set of them 5 up here. I'll show you my set, and I'll cover up 6 my handwritten note there. I would like to direct 7 your attention to the quote. It says, 8 "Mr. Bruno" -- in the third paragraph -- 9 "discussed at great length the mortgage-backed 10 securities portfolio and reviewed in detail the 11 association's portfolio mark-to-market position, 12 sensitivity to interest rate fluctuations, hedging 13 devices, and alternative strategies for dealing 14 with interest rate fluctuations." 15 Do you know whether or not you 16 discussed any of the recommendations that are in 17 any of those memoranda that you prepared 18 recommending the restructuring of the portfolio? 19 A. I do not remember. I believe I did. 20 It certainly would be consistent with those 21 comments, to discuss that. 22 Q. Now, would it also be consistent with 13102 1 these comments that when you described alternative 2 strategies, that you were describing the use of 3 caps, swaps? 4 A. Yeah. I would think it's the only 5 thing it could mean. That alternative strategies 6 can only mean, to me, hedging and short duration 7 assets. 8 Q. Now, the first memorandum that you 9 prepared -- I think it's 6079 -- was dated 10 May 17th. It hadn't even been prepared as of 11 May 10th, 1988. Had you refined your views as of 12 May 10th, 1988, of what the restructuring should 13 be in the portfolio? 14 A. Yes. 15 Q. You had? 16 A. Yes. 17 Q. So, it is likely that you did advise 18 the board of directors of USAT that they should 19 consider the restructuring proposal? 20 A. I would -- I would have to think that. 21 In light of these memos, it would have had to be 22 that, in my opinion. 13103 1 Q. Now, did -- your views of the portfolio 2 at the time are reflected in Exhibit 6079, T6079, 3 which is the May 17th, memorandum. Right? 4 A. Yes. 5 Q. And T6082, which is the July 18th, 1988 6 memorandum -- 7 MR. NICKENS: July 28th. 8 MR. GUIDO: July 28th. Excuse me. 9 THE COURT: What was that document 10 number? 11 MR. GUIDO: T6082, Your Honor, and 12 T6083. 13 A. Yes. 14 Q. (BY MR. GUIDO) Okay. And Mr. Nickens 15 and I both asked you a number of questions about 16 those documents, and you explained those 17 documents. 18 Now, I would like to direct your 19 attention to the December -- the December 20 investment committee minutes which is Volume 3 of 21 the binder that I gave to you. It was 22 December 5th that I would like to show you. The 13104 1 document is A1533, the minutes of the investment 2 committee of December 7th, 1988. And I'll direct 3 your attention to the Bates stamp US3010600.26, 4 which is the sensitivity analysis. 5 And does that show that the management 6 of the portfolio, although it had reduced the 7 losses in the portfolio, still had a portfolio 8 that had a significant amount of interest rate 9 sensitivity into it? 10 A. Yes. 11 Q. Now, Mr. Nickens showed you a document 12 that he's marked as B2610, which is a memo from 13 Mike Crow to Art Berner dated December 19th, 1988, 14 with regard to meeting with the Federal Home Loan 15 Bank Board, December 16th. 16 Do you have that document in front of 17 you? 18 A. I believe I do. 19 Q. All right. 20 A. Yes. 21 Q. I would like you to take a look at 22 that -- 13105 1 A. Okay. 2 Q. -- document. And is that document -- 3 on Page 2, it says that -- and Mr. Nickens 4 directed your attention to this. It says that 5 after the brief introduction with regard to the -- 6 by Mr. Connell explaining the purposes of the 7 meeting. It says, "Mr. Connell turned the meeting 8 over to Mr. Scott Shea. At that time Mr. Shea 9 discussed the proposed transaction by which 10 Ranieri Wilson would acquire United Savings 11 Association of Texas." 12 Now, who was Mr. Scott Shea? 13 A. I do not remember this man. 14 Q. You don't remember Mr. Scott Shea? 15 A. I don't remember him. 16 Q. Do you recall whether or not he was a 17 representative of Mr. Ranieri, who came in to 18 analyze the USAT mortgage-backed portfolio? 19 A. I assume him to be. 20 Q. Why do you assume that? 21 A. It says "a partner with Ranieri 22 Wilson." Just based on this memo. 13106 1 Q. Okay. Now, see the sentence that says, 2 "Mr. Shea stated it was important and part of the 3 deal that the securities in question in the USAT 4 investment portfolio be liquidated prior to 5 closing"? 6 A. Yes. 7 Q. "Mr. Shea explained that this was 8 necessary because of goodwill treatment which will 9 be created." 10 Do you see that? 11 A. Yes, I do. 12 Q. Now, I would like to ask you a 13 question. 14 Did you have discussions with people at 15 Ranieri Wilson about the composition of the 16 mortgage-backed securities portfolio at USAT and 17 UMBS -- 18 A. I had some conversations, and I -- they 19 are vague; but this would certainly have been the 20 item of discussion, their interest in finding out 21 from me what I knew about the portfolio. I don't 22 remember the details of any of these, but I did 13107 1 have some conversations. 2 Q. Do you recall sharing with them your 3 assessment of the interest rate sensitivity of the 4 portfolio? 5 A. Vaguely, I do. A fellow named Bob 6 Coprash. Vaguely, I do. 7 Q. I would like to give you a document 8 that we've marked as T4532, which is a memorandum 9 from Louis Ranieri to Stuart Root, the executive 10 director of the Federal Savings and Loan Insurance 11 Corporation, dated December 19th -- the same date 12 as the Michael Crow memorandum that Mr. Nickens 13 directed your attention to. 14 A. Okay. 15 Q. And have you ever seen this document 16 before? 17 A. No, I have not. 18 Q. Have I ever shown you this document 19 before? 20 A. No. 21 Q. Have I ever discussed this document 22 with you before? 13108 1 A. No. 2 MR. GUIDO: Now, I would like to move 3 the admission of T4532, Your Honor. 4 MR. NICKENS: Your Honor, I object. I 5 mean, this witness says he's never read it. He 6 hasn't ever discussed it. We haven't had any 7 prior notice of it. I don't know the source of 8 it. I mean, I object to it. 9 MR. GUIDO: Well, Your Honor, 10 Mr. Nickens had raised for the first time this 11 memorandum from Michael Crow in which he says that 12 the reason that the Ranieri Wilson people wanted 13 the portfolio liquidated for some goodwill 14 concern, and it's a memorandum that is written by 15 Michael Crow to Art Berner. We believe that this 16 memorandum is highly relevant to that issue and 17 that it is a response to that and is an 18 appropriate document to raise at this time. 19 THE COURT: It might be relevant; but 20 if there's no stipulation as to its admission, I 21 don't know what the foundation for its receipt 22 would be. 13109 1 MR. GUIDO: Your Honor, the document is 2 part of the T4532 exhibits which respondents were 3 given months ago. It comes out of the supervisory 4 files -- in particular, the S memo exhibits -- 5 which they had access to. And they imaged, as you 6 see, on the left-hand corner: OWO75520. We 7 believe that the document is, in itself, 8 authenticating because of the imaging number and 9 where the respondents found that document. 10 MR. NICKENS: Your Honor, the imaging 11 number just indicates that we copied these 12 documents from the files of the OTS. If they had 13 included a legal memorandum in those files, it 14 would have been copied. The fact that it has an 15 imaging number doesn't say anything other than it 16 was in the possession of the OTS when they made 17 the files available. We don't have an opportunity 18 to cross examine anybody about it. There's no 19 foundation for it. 2610 recounts a meeting which 20 Mr. Bruno attended, a fairly different situation 21 than this one where he's never seen nor heard of 22 it. 13110 1 MR. GUIDO: This document comes out of 2 the OTS supervisory files. The supervisory files 3 under the OTS are self-authenticating under the 4 rules proceedings. We believe the document is 5 admissible. It is a work paper. This Bates stamp 6 number here authenticates that to be the case, 7 Your Honor. These numbers are in the range that 8 were taken from the supervisory files of the OTS. 9 We believe it's a perfectly appropriate document 10 to use on redirect of this witness who has been 11 asked about the purposes of this liquidation that 12 the Ranieri Wilson people had requested be made 13 prior to the closing. 14 THE COURT: So, you're relying on the 15 commission rule that any document in the files of 16 the agency is admissible without authentication? 17 MR. GUIDO: In the supervisory files of 18 the agency, Your Honor. I'm not talking about 19 documents that the attorneys generated in the 20 course of an enforcement proceeding. I'm talking 21 about the supervisory files of the agency. 22 MR. NICKENS: On its face, the document 13111 1 says -- this copy of the document was faxed on 2 June 23rd, 1998, at 9:33. 3 MR. GUIDO: To me from my office in 4 Washington, Your Honor, after Mr. Nickens raised 5 the issue with the witness today. 6 THE COURT: All right. I'll receive 7 it. 8 MR. EISENHART: Your Honor, I have one 9 additional comment with respect to this document. 10 There are five counsel seated at the counsel table 11 here. We have been provided with one copy of the 12 document. The rest of us have an interest in it, 13 as well. It seems to me if the OTS knows they are 14 going to bring in a document of which we have no 15 advance notice, it's incumbent upon them to 16 provide at least enough copies of the document. 17 THE COURT: I agree. 18 19 (Whereupon copies of the document were 20 made and provided to counsel.) 21 22 THE COURT: All right. Mr. Guido, you 13112 1 may continue. 2 MR. NICKENS: Your Honor, I would like 3 to state for the record that Mr. Guido has 4 indicated his use of the document was in response 5 to my use of the document with another witness. 6 The fax time would indicate that this document was 7 faxed prior to the time that I had asked this 8 witness any questions about that document. 9 MR. GUIDO: Your Honor, I had received 10 from Mr. Nickens the document that he was going to 11 rely upon pursuant to the understanding that at 12 least he and I have had with regard to producing 13 the information. So, I had the document after I 14 had received the Crow memorandum from him and had 15 waited until he had brought the issue up before I 16 even intended to use the document. 17 THE COURT: Who is Mr. Ranieri? 18 MR. GUIDO: Mr. Ranieri, Your Honor, is 19 the present chairman of the board of Bank United, 20 the entity that purchased it. I think that 21 Mr. Nickens described Mr. Ranieri as the Godfather 22 of mortgage-backed securities portfolios when he 13113 1 asked Mr. Bruno questions about that, and 2 Mr. Bruno disagreed -- I'm not so sure it's 3 Godfather, but it was something comparable to that 4 and that he -- 5 MR. NICKENS: Your Honor, I don't know 6 what to say. 7 MR. GUIDO: He's the individual that 8 Mr. Nickens and Mr. Bruno were having a dispute 9 over about his representation. 10 THE COURT: All right. What was he 11 when he wrote this memo? 12 MR. GUIDO: He was a consultant in 13 negotiating to purchase USAT. He was one of the 14 bidders in the purchase of USAT. 15 THE COURT: Is he going to be a 16 witness? 17 MR. GUIDO: He's on the witness list, 18 Your Honor. 19 MR. NICKENS: That's a little bit 20 different than your question, Your Honor. You 21 asked: Is he going to be a witness? And 22 Mr. Guido responds that he's on the witness list. 13114 1 MR. GUIDO: We do intend to call 2 Mr. Ranieri, Your Honor. 3 MR. EISENHART: With respect to the 4 hearsay statements in this documents which I've 5 now had a chance to glance at, I don't know what 6 extent Mr. Guido intends to read these into the 7 record. But at the time this document was 8 written, Mr. Ranieri was negotiating to buy the 9 institution. He was also negotiating with FSLIC 10 the terms of the assistance agreement, the terms 11 under which he would buy the institution. It was 12 in his favor to disparage the institution and get 13 as many of those issues covered by the FSLIC 14 agreement as he possible could. I think that may 15 have some bearing on this document. 16 MR. GUIDO: Your Honor, I mean, I 17 appreciate Mr. Eisenhart's testifying about it. I 18 think that the witness should testify about what 19 the facts are and the respondents are perfectly 20 free to call witnesses to testify. 21 Mr. Nickens put the Crow memorandum in 22 the file with the implication that there was 13115 1 something nefarious about how the portfolio was 2 liquidated, directing this witness's attention to 3 the fact that it had something to do with 4 goodwill. This document explains that -- 5 THE COURT: Well, why don't you ask 6 this witness about it. 7 MR. GUIDO: Thank you, Your Honor. 8 Q. (BY MR. GUIDO) Have you had an 9 opportunity to review the document now that -- 10 A. Quickly, I've -- yes. 11 Q. Now, it says, "USAT owns a portfolio of 12 mortgage-backed securities with a book value of 13 1.243 million. The unrealized loss in this" -- 14 A. Billion. 15 Q. Million. I'm sorry. 1.243 billion. 16 "The unrealized loss in this portfolio is 17 approximately 130,000,000 (value" -- 18 THE COURT: You said 130 million. 19 Q. (BY MR. GUIDO) -- "103 million valued 20 by Merrill Lynch on 12/12.) It is our 21 understanding that nearly 987 million of this 22 portfolio is financed with very short-term 13116 1 wholesale and brokered liabilities." 2 Do you see that? 3 A. Yes. 4 Q. Does that conform to your understanding 5 of the portfolio at the time? 6 A. Yes. 7 Q. Then it says, "This portfolio as 8 currently structured is inappropriate for a thrift 9 because of the large mismatch in interest rate 10 sensitivity of the assets versus the financing 11 vehicles. The large portion of overnight or 12 short-term financing creates two potential 13 problems: The value of the assets is 14 significantly more volatile than the liabilities, 15 and the net interest margin is quite sensitive to 16 changes in short-term rates. The portfolio is 17 doubly sensitive to a general rise in interest 18 rates because both the value of the assets and the 19 net interest margin decline as rates rise. A 20 decline in rates would have the opposite effect as 21 both values and margins would improve. This 22 sensitivity to rate movement demonstrates the 13117 1 overall mismatch." 2 Does that conform to your understanding 3 of the portfolio at the time? 4 A. Yes. 5 Q. Okay. Then under "portfolio 6 composition" on the next page, see the first 7 paragraph? It says, "The portfolio contains 8 approximately 265 million (book of ARMs) with 9 unrealized loss of 17 million. These ARMs 10 representing only 21 percent of the portfolio are 11 the most nearly matched securities in the 12 portfolio but even those show a 6 percent loss. 13 They were apparently purchased at a premium for a 14 price of 105 and now trade at 99." 15 Does that conform to your understanding 16 of the -- of the status of the ARMs that were in 17 the portfolio at the time? 18 A. Yes. 19 Q. The next paragraph says, "There are 20 160 million Ginnie Mae 9s with an unrealized loss 21 of 15 million. These are mismatched and have 22 unfavorable convexity characteristics. They will 13118 1 not perform as well in real estate as they will 2 fall in a decline. At the current time, the yield 3 provided makes this position an income drain." 4 Does that conform to your understanding 5 of the composition and the status of the Ginnie 6 Mae portfolio in USAT's portfolio at the time? 7 A. Yes. 8 Q. The third paragraph says, "The Fannie 9 Mae portion of the portfolio, excluding the ARMs 10 mentioned above, account for 327 million book 11 value and over 27 million in unrealized losses. 12 Coupons range from 8 percent to 12.25 percent and 13 all show losses." 14 Does that conform to your understanding 15 of the composition and the status of the 16 Fannie Mae portion of the portfolio? 17 A. Yes. 18 Q. The next paragraph says, "The 19 588 million Freddie Mac portfolio consists of 20 coupons from 7 percent to 11.75 percent, with 21 every coupon listed at a loss. The total loss is 22 43 million. Both these Freddies and the Fannies 13119 1 mentioned above suffer from some convexity 2 problems." 3 Does that conform to your understanding 4 of the composition and the status of the Freddie 5 Mac portfolio at the time? 6 A. Yes. 7 Q. Then it says, "In summary, although the 8 MBS portfolio would improve if interest rates went 9 down, the same increase in rates would result in 10 an even greater loss." 11 Does that conform to your view of the 12 portfolio at the time? 13 A. Yes. 14 Q. "As an economic matter, this entire 15 portfolio should be either liquidated or 16 dramatically restructured. Our numbers and 17 discussions with FSLIC have always assumed this 18 loss would be part of the note at Texas Cost of 19 Funds plus 50 basis points. Adding a portion of 20 the loss to goodwill would have several negative 21 effects." 22 Do you see that paragraph? 13120 1 A. I do. 2 Q. Do you agree that his recommendation to 3 USAT that as an economic matter, this entire 4 portfolio should be either liquidated or entirely 5 restructured conforms to your recommendation that 6 you made in May, July, and August of what they 7 should do with that portfolio? 8 A. Yes. 9 Q. Now, look at the third page of the 10 document at the top of the page. It says, "In the 11 spirit of compromise, we would agree that the 12 mortgage-backed securities portfolio would become 13 a covered asset for 60 days. During this 60-day 14 period, we would conduct an orderly liquidation of 15 some or all of these securities. At the end of 16 the 60-day period, any realized loss and 17 mark-to-market loss would be added to the special 18 reserve account and would yield the Texas Cost of 19 Funds flat." 20 Do you see that? 21 A. Yes. 22 Q. Does the 60-day period refresh your 13121 1 recollection of the period of time in which the 2 mortgage-backed security portfolio should be 3 liquidated or was liquidated? 4 A. No. 5 Q. Okay. Now, I would like to direct your 6 attention to another document which is T6088 which 7 is the Dominic Bruno memo to Mike Crow dated 8 December 8th, 1988, which was in the binder that I 9 gave you. And it had previously not been 10 introduced as an exhibit. This memorandum is 11 dated December 8th, 1988. And the subject is the 12 FSLIC consent agreement dated 11/7/1988. 13 MR. GUIDO: I move the admission of 14 T6088, Your Honor. 15 MR. NICKENS: No objection, Your Honor. 16 THE COURT: Received. 17 Q. (BY MR. GUIDO) Now, take a look at the 18 document that I've just shown you. 19 A. Okay. 20 Q. Is this the plan of liquidation that 21 you proposed to Mike Crow on December 8th, 1988? 22 A. It is. 13122 1 Q. And look under "USAT assets." 2 Do you see that? 3 A. Yes. 4 Q. "Face value, 1.2 billion. Current 5 unrealized loss, $99 million." 6 Do you see that? 7 A. Yes. 8 Q. And it says, "One, general MBS 9 collateral: Face value: 887 million. 10 Approximate liquidation period: Three months"? 11 A. I see that. 12 Q. Now, it says, "These holdings comprise 13 relatively new 30-year Ginnie Mae, Freddie Mac, 14 and Fannie Mae mortgage-backed securities. These 15 securities possess excellent liquidity. However, 16 given USAT's sizable holdings, approximately three 17 months would be needed in order to liquidate these 18 securities in a manner which minimizes market 19 impact. To ensure efficient execution, in 20 general, they should be sold on a competitive 21 basis (i.e., USAT should secure bids from at least 22 three brokers for specific blocks of securities). 13123 1 In some instances, it might be more efficient to 2 utilize collateral for a particular broker's 3 structured deal (e.g., a REMIC structure or an 4 IO/PO structure.)" 5 Do you see that? 6 A. Yes. 7 Q. Now, these securities were sold, were 8 they not, right after the takedown of USAT, were 9 they not? 10 A. They were. 11 Q. Now, I would like to direct your 12 attention to Exhibit A11018, which is the expert 13 report of Joe Hargett at Tab 291. And that is, as 14 I said, Exhibit A11018. I would like to direct 15 your attention to Exhibit A of that document, 16 which is at -- and particularly Page 8, which is 17 the -- Exhibit A being the calculation of the 18 losses in USAT's MBS portfolios and Page 8 has the 19 USAT losses as part of the calculation. 20 Do you see what the losses are on the 21 USAT mortgage-backed security portfolio that is 22 shown there on Page 8? 13124 1 A. Yes. 2 Q. Does that show $112 million? 3 A. Correct. 4 Q. And it says, "Actual net loss on 5 disposition of portfolio during the first quarter 6 of 1989." 7 Do you see that? 8 A. Yes. 9 Q. Then it makes reference to Schedule B. 10 Will you flip over to Schedule B, which is 11 Page 10? 12 A. (Witness complies.) 13 Q. Do you see the losses on that 14 portfolio? Do you see what it says under "MBS 15 sales"? 16 A. Yes. 17 Q. What does that figure show? 18 A. For total MBS sales, 106,285,000. 19 Q. Of losses? 20 A. Correct, negative. 21 Q. And this has CMO residuals. What is 22 the loss that it shows on the CMO residuals? 13125 1 A. Negative -- well, it's a loss of 2 5,725,000. 3 Q. Now, will you take a look back again to 4 Exhibit T6088, your memorandum where you set out a 5 liquidation schedule? 6 A. Yes. 7 Q. See the residuals? 8 A. Yes. 9 Q. And what does that show in terms of the 10 face value of the documents? 11 A. 9.9 million. 12 Q. And it doesn't have a market value in 13 your memorandum? 14 A. Correct. 15 Q. Do you know why? 16 A. I'm not sure why it's not there. 17 Q. Okay. The residuals, were those what 18 you said were highly sensitive to interest rates? 19 A. Correct. 20 Q. Now, this shows the residuals of having 21 a loss of $5,725,000. Right? 22 A. Residuals disposed of in the first 13126 1 quarter of '89, yes. 2 Q. And were they only residuals that USAT 3 had under your listing of the assets the residual 4 that's in Note 2 of face value $9 million where 5 you say approximate liquidation period of one 6 month at Bates stamp 328 of Exhibit 6088? 7 A. Correct. 8 Q. And if you take that end, you end up 9 with 106-million-dollar loss? 10 A. Correct. 11 Q. Is that approximately the amount that 12 the Lou Ranieri memorandum sets out were the 13 losses in the USAT mortgage-backed security 14 portfolio? 15 A. I believe it is. 16 Q. And it is -- it's $7 million higher 17 than the amount that you had? 18 A. Right. 19 Q. Could that have been -- those change in 20 values been due to changes in interest rates 21 during that period of time? 22 MR. NICKENS: Your Honor, it could have 13127 1 been anything. I object. 2 THE COURT: Do you know? 3 Q. (BY MR. GUIDO) Do you know? 4 THE WITNESS: I do not know, 5 Your Honor. 6 Q. (BY MR. GUIDO) You don't know? 7 A. I do not know. 8 Q. Now, look at the liquidation schedule, 9 the dates of sale in Exhibit A10 -- 11018, 10 Exhibit A, Schedule B. 11 A. Okay. 12 Q. Does that show that those 13 mortgage-backed securities were liquidated over a 14 three-month period of time? 15 A. Yes. 16 Q. And are those mortgage-backed 17 securities that were liquidated those that you 18 characterized as liquid? 19 A. Yes. 20 Q. Now, Mr. Nickens asked you a number of 21 questions about your statements that the USAT 22 people were overly risk averse. 13128 1 Do you recall that? 2 A. I do recall that. 3 Q. And you felt that they were overly risk 4 averse because they would not liquidate the 5 portfolio and move to adjustable rate mortgages or 6 those instruments that were less interest rate 7 sensitive. Is that fair? 8 MR. NICKENS: That's a leading 9 question, and that's not the testimony. He said 10 they were risk averse because they did not want to 11 go into the ARMs that he was recommending, not the 12 risk aversion that Mr. Guido has suggested to this 13 witness with this leading question. 14 THE COURT: Restate the question. 15 Q. (BY MR. GUIDO) Why did you conclude 16 that the people at USAT were risk averse in your 17 memoranda at 6079 -- T6079, T6082, and T6083? 18 A. Because they were so shell-shocked and 19 confused that they were afraid to have 20 short-duration assets such as ours. 21 Q. Was one of the consequences of that 22 that they maintained the portfolio that both you 13129 1 and Mr. Ranieri concluded was inappropriate for a 2 thrift because of the large mismatch in interest 3 rate risk? 4 A. Correct. 5 Q. Now, you were asked some questions 6 about the Sendero model and shown some documents 7 with regard to the Sendero model that Mr. Nickens 8 did. 9 Were you ever given access to that 10 model to do any modeling of the USAT 11 mortgage-backed security portfolio? 12 A. No, I was not. 13 Q. Were you ever told that there were -- 14 ever was such a computer model that was available 15 for your use? 16 A. No. 17 MR. GUIDO: No further questions, 18 Your Honor. 19 THE COURT: Mr. Nickens, do you have 20 some recross? 21 MR. NICKENS: Just a few, Your Honor. 22 13130 1 FURTHER EXAMINATION 2 3 Q. (BY MR. NICKENS) With regard to 4 Exhibit 3542, Mr. Ranieri's letter, do you see 5 anything in there about hedges? 6 A. I do not. 7 Q. So, this is an evaluation of a 8 mortgage-backed securities portfolio without 9 consideration of any hedges. Right? 10 A. Correct. 11 Q. And so, if you bought a lot of 12 mortgage-backed securities and interest rates 13 changed -- let's say the interest rates went up -- 14 then it would -- without consideration of any 15 hedging, one would come to the same conclusions 16 about that portfolio as Mr. Ranieri has written in 17 his memo? 18 A. Correct. 19 Q. Now, on direct, Mr. Guido asked you if 20 your timetable was followed; and you indicated 21 that it was not? 22 A. Correct. 13131 1 Q. And then on cross, I brought out that 2 it was not followed by the regulators who were 3 directing the institution at that point, correct? 4 A. Correct. 5 Q. And now, is it your understanding of 6 this information that it was followed by the 7 regulators? Is that where we are? 8 A. Is it my understanding that it was 9 followed by the regulators? Partially, it would 10 appear to have been. 11 MR. NICKENS: I have nothing further, 12 Your Honor. 13 14 FURTHER EXAMINATION 15 16 Q. (BY MR. GUIDO) One question, Mr. Bruno. 17 Looking at T4532, the memorandum that Mr. Nickens 18 asked you whether or not there was any mention of 19 swaps. In your analysis -- 20 MR. NICKENS: Your Honor, I asked if 21 there was any mention of hedges. 22 Q. (BY MR. GUIDO) Hedges. Is there any 13132 1 mention of hedges? It uses the term -- it says, 2 "The portfolio as currently structured is 3 inappropriate for a thrift because of the large 4 mismatch in interest rate sensitivity of the 5 assets versus the financing vehicles." 6 When you did your analysis and you 7 talked about mismatches, you always talked about 8 assets and liabilities, did you not? 9 A. Correct. 10 Q. When you were using the term 11 "liabilities," were you referring to financing 12 vehicles? 13 A. And hedges. 14 Q. Okay. So that when you used the 15 term -- 16 A. Hedges are part of financing vehicles. 17 Q. So, the analysis that's referred to 18 here could be an analysis that included the 19 analysis of the liabilities as affected by the 20 hedging liabilities? 21 MR. NICKENS: Your Honor, I object to 22 the "could be." If the witness knows, fine. To 13133 1 inject into the record what something could be is 2 speculation. 3 THE COURT: All right. Can you tell 4 whether there were or not? I mean, this is a 5 memorandum written by somebody else. 6 THE WITNESS: I cannot tell, 7 Your Honor. I cannot tell. 8 Q. (BY MR. GUIDO) When you used the term 9 "liabilities," you included hedges in your 10 discussion? 11 A. Yes. 12 MR. GUIDO: No further questions, 13 Your Honor. 14 15 FURTHER EXAMINATION 16 17 Q. (BY MR. NICKENS) Do you see that the 18 author of the memorandum has defined the term in 19 the last sentence of the first paragraph: "It is 20 our understanding that nearly 987 million of this 21 portfolio is financed with very short-term 22 wholesale and brokered liabilities"? 13134 1 A. Do I concede that? 2 Q. Do you see that? 3 A. I do see that. 4 Q. And that would not include hedging 5 instruments, would it? 6 A. I would not think so. 7 MR. NICKENS: That's all I have. 8 MR. GUIDO: No further questions, 9 Your Honor. 10 THE COURT: Thank you, Mr. Bruno. You 11 may step down. 12 Are there any other matters to be 13 considered? 14 MR. GUIDO: No, Your Honor. 15 MR. NICKENS: Not that I have, 16 Your Honor. 17 THE COURT: We'll adjourn until 9:00 on 18 Thursday. 19 20 (Whereupon at 2:31 p.m. 21 the proceedings were recessed.) 22 . 13135 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 23rd 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 . 13136 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 23rd 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