13137 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 25, 1998 22 13138 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 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 13139 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 (Not present) 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 13140 1 2 EXAMINATION INDEX 3 Page 4 BRUCE WILLIAMS 5 Examination by Ms. Clark...................13142 6 Voir Dire Examination by Ms. Clark.........13310 7 Voir Dire Examination by Mr. Guido.........13312 8 Further Voir Doir Examination by Ms. Clark.13313 9 Examination by Mr. Guido...................13315 10 11 12 13 14 15 16 17 18 19 20 21 22 13141 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:04 a.m.) 3 THE COURT: Be seated, please. The 4 hearing will come to order. 5 Is Mr. Guido here? 6 MR. RINALDI: He is, Your Honor. He 7 just stepped out for a moment to get a drink of 8 water. If we could just hold up for a second, 9 I'll go grab him. 10 THE COURT: Are you ready to go, 11 Ms. Clark? 12 MS. CLARK: Yes. Mr. Williams, would 13 you like to come and take the stand, please? 14 MR. GUIDO: Sorry, Your Honor. 15 THE COURT: The hearing will come to 16 order. The witness is Bruce Williams, and he has 17 been sworn previously in this matter and remains 18 under oath. 19 Ms. Clark, you may cross. 20 MS. CLARK: Thank you, Your Honor. 21 22 13142 1 2 EXAMINATION 3 4 Q. (BY MS. CLARK) Mr. Williams, we've 5 brought you back here today to complete testimony 6 that you began last December. 7 When you were here in December, you 8 indicated that you were in the middle of a large 9 project at work that was keeping you extremely 10 busy. 11 Do you recall that? 12 A. Yes, ma'am. 13 Q. Have you completed that project? 14 A. We are about 95 percent completed, but 15 the major portion of it is over. 16 Q. Can you tell us what that project is? 17 A. It was a conversion -- I work for Chase 18 Bank of Texas, and we were in the process of 19 converting all of our deposit systems to the Chase 20 New York system. So, it was about a nine-month 21 project and, you know, impacted a half a million 22 to 750,000 customers. So, it was an extremely 13143 1 important project and I basically spent most of my 2 time the last eight months living with that 3 project. 4 Q. And it's coming to completion now? 5 A. Yes, yes. It's just winding up. 6 Q. So, life is a little bit less hectic 7 than it was in December? 8 A. It's becoming more normalized, yes. 9 Q. Has the name of your employer changed 10 since you were here in December? You indicated it 11 was Texas Commerce Bank when you were here in 12 December. 13 A. Yes. The name change, I think, 14 officially was January 20th. We changed from 15 Texas Commerce Bank to Chase Bank of Texas. 16 Q. Is there a reorganization going on 17 within Chase Bank of Texas? 18 A. It's kind of an evolution, yes. I'm 19 not real sure where it's going to end up, but it's 20 evolving and changing daily. 21 Q. Has your job changed since last year? 22 A. Not as of today. 13144 1 Q. Do you anticipate that it will? 2 A. Yes. 3 Q. For the moment anyway, you're still 4 senior vice president and manager of retail 5 deposit and investment products for what is now 6 Chase Manhattan of Texas? 7 A. Or Chase Bank of Texas. 8 Q. Chase Bank of Texas; is that correct? 9 A. Right. 10 Q. Okay. Just to get the chronology in 11 mind again, I think we established last time by 12 looking at some documents that you joined USAT in 13 March of nineteen -- April of 1984 and became 14 treasurer in March of 1985. 15 Do you recall that? 16 A. Yes. 17 Q. And you worked at United for about four 18 and a half years until it was put into 19 receivership in December 1988 and turned over to 20 new ownership? 21 A. Yes. 22 Q. We spent some time in December talking 13145 1 about what you did in your role as head of the 2 corporate planning and analysis function. 3 Do you recall that? 4 A. Yes. 5 Q. We talked about various kinds of 6 reports, both formal reports and informal reports, 7 that you and your group prepared to provide 8 information to management about where the company 9 is going, what parts were profitable, and the 10 like. 11 Do you recall that? 12 A. Yes. 13 Q. Mr. Guido also asked you about the 14 committees that existed at United while you were 15 there, and I would like to ask you some additional 16 questions about the roles that the committees 17 played in gathering information and providing 18 information for management to use in making the 19 various business decisions that management had to 20 make. 21 One of the committees that Mr. Guido 22 asked you about was the asset/liability committee. 13146 1 And as I recall your testimony, you couldn't 2 remember specifically what that committee's 3 function or charter was. I'd like to show you two 4 documents relating to the asset/liability 5 committee and see if they can help refresh your 6 recollection about the particular function of that 7 committee there: Exhibit B516, which was 8 previously admitted and is at Tab 586A. 9 MR. GUIDO: Pardon? 10 MS. CLARK: Tab 586A. 11 MR. GUIDO: And what's the exhibit? 12 MS. CLARK: B516. 13 MR. GUIDO: And what was the second? 14 MS. CLARK: The second is Exhibit A1608 15 at Tab 490. 16 Q. (BY MS. CLARK) Mr. Williams, do you 17 have either of those documents in front of you at 18 this point? 19 A. I have 1608. 20 Q. 1608. Exhibit 1608 is a memorandum 21 that you prepared regarding the asset/liability 22 committee on June 7th, 1985; is that correct? 13147 1 A. Yes. 2 Q. Can you tell from this document when 3 the asset/liability committee was set up 4 officially and began to function? 5 A. It looks like on or about June 7th, 6 1985, based on this memo. 7 Q. Okay. And now do you have Exhibit B516 8 in front of you, as well? 9 A. Yes. 10 Q. And does that also reflect that in -- 11 that the kick-off meeting for this new committee 12 was to be Friday, June 7th? 13 A. Yes, it does. 14 Q. Who are the initial members of the 15 asset/liability committee? 16 A. Mike Crow, Ron Huebsch, Joe Phillips, 17 and myself. 18 Q. To whom did you report your work? 19 A. Basically, I think based on this memo, 20 we were giving our recommendations for actions to 21 Gerald Williams and Jenard Gross and then we 22 provided copies to other group managers within the 13148 1 institution. 2 Q. What positions did Mr. Gross and 3 Mr. Williams have in the association? 4 A. I believe at that point, they were 5 president and chairman; but I don't specifically 6 remember. 7 Q. Reviewing these memos, do you recall 8 now what the purpose of the asset/liability 9 committee was, what your functions were supposed 10 to be? 11 A. Well, based on this memo, yes. There 12 were a number of functions. One was to review the 13 asset/liability structure of the organization. It 14 was to review our liquidity position and where 15 that was headed and our cash flow, our borrowing 16 capacity, deposit pricing, where we thought 17 interest rates were headed, and that type of 18 activity. 19 Q. And was the purpose of this review to 20 gather information and make recommendations to the 21 president and chairman of the association so that 22 they could use that information in making 13149 1 decisions for the entire association? 2 A. Yes, yes. 3 Q. Were you aware that the outside 4 auditors and the examiners routinely reviewed the 5 minutes of the various committees at USAT? 6 A. I had -- 7 MR. GUIDO: Objection as a leading 8 question, Your Honor. 9 THE COURT: Denied. You may answer. 10 A. As I recall, yes. I mean, that was -- 11 the purpose of the minutes of the meeting was to 12 document for examiners and for the books and 13 records of what took place in the meeting. So, 14 that was my understanding. 15 Q. (BY MS. CLARK) I would like to ask 16 you to look at Exhibit B1183, Mr. Williams. 17 Mr. Williams, this exhibit, B1183, is a portion of 18 the work papers of the 1986 Federal Home Loan Bank 19 of Dallas examination of USAT. And it appears to 20 contain copies of minutes of the asset/liability 21 committee. 22 Can you take a quick look through the 13150 1 document and confirm for me that that does appear 2 to be the contents of this portion of the work 3 papers? 4 MR. GUIDO: Objection, Your Honor. 5 This witness had nothing to do with the examiners 6 and is not qualified to respond to the question, 7 plus it is also a leading question. 8 THE COURT: Well, he should be able to 9 tell us whether they are the minutes of the 10 committee that he served on. It looks like he can 11 compare them. 12 MR. GUIDO: I think the question was 13 whether or not he can ascertain whether or not 14 these are part of the work papers of the 15 examiners. 16 MS. CLARK: Your Honor, it's been 17 stipulated between the parties that this is part 18 of the work papers. The Bates numbers so 19 indicate. I wasn't asking him to confirm that 20 these were the work papers. I'm simply asking him 21 to confirm that these work papers appear to 22 contain the minutes of the asset/liability 13151 1 committee during the period from June of 1985 2 through August of 1986. 3 MR. GUIDO: If the question, Your 4 Honor, was do Bates stamps OW120916 through 5 OW120970 contain minutes of the asset/liability 6 committee meeting of August 15th, 1985, through 7 whatever the last date is, June 12th, 1985, Your 8 Honor, we have no objection. 9 THE COURT: Well, are you disputing 10 that these are part of the work papers? 11 MR. GUIDO: Your Honor, I have no idea 12 whether these are part of the work papers, and 13 this witness clearly doesn't have any idea whether 14 they are part of the work papers. 15 MS. CLARK: Your Honor, it is not 16 essential to my line of questioning that we 17 establish that these are part of the work papers; 18 but, indeed, it has been stipulated between the 19 parties and, as far as I'm aware, it is not in 20 dispute. But in order to expedite the 21 examination, I can just move on to the next 22 question or rephrase it. 13152 1 THE COURT: All right. You're offering 2 the exhibit? 3 MS. CLARK: Yes, I am offering the 4 exhibit. 5 THE COURT: Received. 6 MS. CLARK: Thank you. 7 Q. (BY MS. CLARK) Was it one of your 8 asset/liability committee main responsibilities to 9 monitor and make recommendations concerning the 10 asset/liability position of the association? 11 A. Yeah. It would have been one of the 12 areas we would have covered, to review the 13 asset/liability position and make recommendations 14 depending upon numerous other factors. 15 Q. When we talk about the asset/liability 16 position, are we talking about the interest rate 17 risk position of the association? 18 A. Both the interest rate risk and market 19 valuation risk, but primarily the interest rate 20 risk is what it amounted to. 21 Q. I'd like you to look through the 22 minutes, if you could. I think they begin 13153 1 chronologically at the back and work closer to the 2 present going forward. So, perhaps, looking from 3 the back, I'd like to review a few of them with 4 you to see if they might refresh your recollection 5 about some of the steps that you took with respect 6 to this issue of monitoring and making 7 recommendations on the asset/liability position of 8 the association. For example, the very last 9 document, which is the first minute in time, 10 June 7, 1985, the last paragraph relates to gap 11 position. 12 Is that the asset/liability position 13 that we're talking about? 14 A. Yes. 15 Q. What does that indicate that you were 16 doing with respect to analyzing the gap position 17 of the association as of June 1985? 18 A. It appears as though this was the 19 beginning of the process of providing some of the 20 investment bankers with details of our 21 asset/liability position so that they could do 22 some modeling for us. 13154 1 Q. Okay. 2 A. And so, it looks as though we were 3 going to use a number of different firms so that 4 we could, you know, get different opinions. 5 Q. So, as of the middle of 1985, you were 6 going outside the association to other firms, 7 investment banking firms, for assistance in 8 analyzing your interest rate position with respect 9 to USAT; is that correct? 10 A. Yes. 11 Q. If you go forward to Bates Page 964, 12 that's the minutes of June 28. 13 What does that indicate with respect to 14 what you were doing on monitoring the 15 asset/liability or risk position of the 16 association in July of 1985? 17 A. I'm sorry. What was the question 18 again? 19 Q. What does that indicate you were doing 20 with respect to this issue of monitoring the risk 21 position of the association in July? 22 MR. GUIDO: What's the Bates stamp? 13155 1 MS. CLARK: The Bates page in 2 particular is 965. It's the second page of the 3 minutes of June 28, 1985. 4 A. With regard to modeling, it looked like 5 the decision or the recommendation was being made 6 to use Goldman Sachs -- 7 Q. (BY MS. CLARK) Do you recall -- 8 A. -- as an alternative. I'm sorry. 9 Q. I'm sorry. I didn't mean to interrupt 10 you. 11 Were you finished? 12 A. Yes. 13 Q. Do you recall whether you did, in fact, 14 obtain and use a model of the asset/liability 15 position of the association from Goldman Sachs? 16 A. I don't specifically recall. 17 Q. Okay. Come forward to the August 23 18 minutes, if you would. That's Bates Page 957. 19 Do you see there is again a reference 20 to the gap position of the association and the 21 strategy? 22 A. Yes. 13156 1 Q. And what does that indicate that the 2 asset/liability committee was doing with respect 3 to that issue in late August 1985? 4 A. That we would come up with a 5 recommendation or a recommendation would be 6 developed to try to begin closing the gap, 7 hopefully without materially affecting our net 8 interest margin. 9 Q. Can you explain to us what that means, 10 "closing the gap"? 11 A. Again, without having all the details 12 behind it, generally it means reducing the net 13 interest rate exposure to rising or falling rates, 14 typically to rising rates, using various types of 15 hedges. 16 Q. So, at this point, you were talking 17 about presenting a strategy to close the 18 association's gap -- that is, the company-wide 19 gap; is that correct? 20 A. The association's gap, yes. 21 Q. Turn to Bates Page 955, which is the 22 September 6th, 1985 minutes. 13157 1 A. Okay. 2 Q. Does that indicate that you did, 3 indeed, proceed with the Goldman Sachs 4 asset/liability model? 5 A. Yes, based on Point No. 3. 6 Q. And then just go to the next minutes 7 which, in order, I think -- which would be Bates 8 951, the October 18, 1985 minutes. 9 A. Okay. 10 Q. What does that indicate that the 11 asset/liability committee was doing with respect 12 to the asset/liability position of the association 13 at that point? 14 A. It indicates we were moving ahead with 15 the use of the Goldman Sachs modeling effort. 16 Q. There is a reference to the Salomon 17 Brothers model. 18 What does that indicate you were doing 19 with respect to a model that you would obtain from 20 a different investment banking house, Salomon 21 Brothers? 22 A. To collect the information that was 13158 1 required to input into one of these 2 asset/liability models was a very cumbersome task 3 because it was a very low level of detailed 4 information that needed to be provided to the 5 investment bankers. So, apparently here, it looks 6 like we had decided to go ahead and use the 7 Goldman Sachs model for the total association; but 8 we were going to use Salomon Brothers model for 9 the investment portfolios, which would primarily 10 be the corporate securities and mortgage-backed 11 securities. 12 Q. What do you mean when you say that you 13 needed to collect a very low level of detailed 14 information to do an asset/liability model? 15 A. You basically have to provide, on your 16 securities portfolio, a listing of every security, 17 what the principal amount is, what the life of it 18 is, what the coupon rate is, what the purchase 19 price is. And you have to do the same thing on 20 the loan side in terms of providing them very 21 detailed loan-by-loan information on the deposit 22 side, as well. 13159 1 So, you have to go down to a very low 2 level of detail so that they can model it. And 3 it's almost at an account level. 4 Q. And you did engage in that exercise 5 with respect to the Goldman Sachs model in late 6 1985? 7 A. I think this indicates we were moving 8 ahead with it at this point, yes. 9 Q. Come forward, if you would, to Bates 10 943. This is the minutes of the November 22, '85 11 meeting. 12 MR. GUIDO: Did you say November 22, 13 '85? 14 Q. (BY MS. CLARK) What does this 15 document indicate the association was doing with 16 respect to gap at this point? 17 A. At this point, it looks like Ron 18 Huebsch -- or the recommendation was for Ron to 19 purchase five to 600 million of three-year 20 interest rate caps to close the gap in that time 21 period or the interest rate exposure in that time 22 period. 13160 1 Q. And how would that accomplish closing 2 the gap as indicated in the minutes? 3 A. It would reduce our exposure or limit 4 our exposure to an upward or a rise in interest 5 rates so that if rates did rise, we would be 6 capped at a certain level. So, if rates rose 7 above that, our exposure would have been limited 8 to up to the cap, basically. 9 Q. And does this indicate that the 10 proposal was to buy the caps to protect the 11 association as a whole against a rise in interest 12 rates? 13 A. Yes. 14 Q. That's what's being discussed in this 15 minute? 16 A. Yes. Most of these minutes, as I 17 recall, we were addressing the association as a 18 whole. 19 Q. Let's see. Let's go, if we can, 20 please, to Bates 925, the June 20, 1986 minutes. 21 Based on these minutes, can you tell us 22 what the asset/liability committee was doing with 13161 1 respect to the interest rate risk issue at USAT at 2 this point? 3 A. This is on June 20th? I hope I'm 4 looking at the right minutes. 5 Q. June 20th, 1986. I'm looking in 6 particular at the third paragraph regarding CMO, 7 MBS hedge recommendations. 8 A. It looks like, at that point, we were 9 talking to Goldman Sachs and First Boston to get 10 recommendations. 11 Q. And there is a reference to Smith 12 Breeden. What was Smith Breeden -- 13 A. Smith Breeden was -- 14 Q. -- doing? 15 A. -- a consulting firm, for lack of a 16 better term, out of North Carolina that 17 specialized in asset/liability management. So, it 18 looks like at that point, we were beginning 19 discussions with them on getting more input in 20 terms of just additional recommendations or 21 thoughts -- 22 Q. So -- 13162 1 A. -- on alternatives. 2 Q. This would be on top of the exercise 3 that you had already gone through with respect to 4 modeling on the Goldman Sachs model? 5 A. Yes. 6 Q. Turn to the next minute, which is Bates 7 No. 923 and, in particular, to the second page of 8 that minute. The minutes are July 25, 1986. And 9 on the second page, Paragraph 4, there is another 10 reference to Smith Breeden. And it appears -- 11 A. Excuse me. Which minutes? 12 Q. The Bates number is 924 for that 13 particular reference. 14 A. And what's the minutes date? 15 Q. Minutes is July 25. Does that indicate 16 that Smith Breeden did conduct an analysis and 17 present some conclusions to the association with 18 respect to the asset/liability situation? 19 A. Yes. 20 Q. And what were the conclusions that 21 Smith Breeden presented? 22 A. The association did not have a major 13163 1 gap problem on a consolidated basis at that point. 2 Q. And does it also indicate that what 3 they told you was that the association was in the 4 position that it would lose whether the rates went 5 up or down. In other words, it was balanced so 6 that a movement of rates in either direction, up 7 or down, would worsen the mark-to-market 8 situation -- 9 A. Right. 10 Q. -- at USAT? 11 A. Yes. 12 Q. Now, you went ahead and reported that 13 conclusion in the minutes of the asset/liability 14 committee where it could be read by anybody, like 15 the examiners and/or the outside auditors, 16 correct? 17 A. Yes. 18 Q. Did any of the examiners, for example, 19 ever come to you and ask you any questions about 20 the matters that you included in the minutes of 21 the asset/liability committee? 22 A. They may have, but generally, I had 13164 1 very little interaction with that group. So, I 2 don't recall anything specifically. 3 Q. You don't recall anyone coming to you 4 and asking you about Smith Breeden's conclusion 5 that the association would lose whether the 6 interest rates went up or down? 7 A. I don't recall. I mean, it could have 8 happened; but I don't specifically recall. 9 Q. Turn forward to exhibit -- sorry -- to 10 Page 919 of the exhibit, the minutes of 11 August 8th, 1986. 12 Does that indicate in Paragraph 2 that 13 Smith Breeden actually came and personally made a 14 presentation to USAT regarding its conclusions? 15 A. The minutes indicate that, yes. 16 Q. Okay. Turn forward to the last minute 17 in this collection, which is August 15, 1986. And 18 on the second page, there is another reference to 19 the Smith Breeden presentation. 20 You record some comments that Ron 21 Huebsch apparently made at the meeting. Based on 22 reviewing, this what was Mr. Huebsch's comment 13165 1 concerning the Smith Breeden presentation? 2 A. He thought it was important, and it 3 looked like he was recommending that Doug Hansen 4 and I fly to North Carolina to meet with them on 5 developing a presentation that senior management 6 could understand. They tended to present very 7 detailed quantitative type exhibits. And so, the 8 intent was to try to distill it down into an 9 easier to understand document. 10 Q. And did Mr. Huebsch also take the 11 position that this was such an important topic 12 that it should be the primary subject of an 13 investment committee meeting in preference to the 14 usual agenda? 15 A. That's what it looks like based on the 16 minutes. 17 Q. Did you go to North Carolina? 18 A. Yes, I did. 19 Q. And what happened in North Carolina? 20 A. We spent a couple of days working with 21 Smith Breeden, going over and digging into all the 22 details of their modeling and trying to understand 13166 1 their assumptions and their hedging strategies at 2 a very detailed level so that we could sum it up 3 in a more summary level or executive level summary 4 type document. 5 Q. And do you recall whether they came and 6 made a presentation to the association of their 7 results after your meeting in North Carolina? 8 A. I don't specifically recall. They may 9 have. We may have presented it to senior 10 management. I'm not real sure how we followed up 11 on that. 12 Q. Was there ever a time when you and 13 other members of senior management at USAT did not 14 monitor the asset/liability situation of USAT? 15 A. I can't recall a period where we didn't 16 monitor it, no. 17 Q. Were you trying at all times to obtain 18 the very best information that you could on that 19 subject? 20 A. Yes. That was one of the first things 21 I started working on when I joined the 22 association. 13167 1 Q. And in your observation, did the 2 management of USAT take steps to manage the 3 interest rate risk of the association as best they 4 could based on the available information? 5 A. Yes, they did. 6 Q. And did you record at least the 7 committees' analysis and conclusions in the 8 minutes of the asset/liability committee? 9 A. Generally, yes. I mean, that's what's 10 documented here, it looks like, in what we 11 presented in terms of recommendations. So, based 12 on my recollection, yes. 13 Q. What was your purpose in making these 14 minutes that we've just reviewed? 15 A. To formalize and document the history 16 of how we were evolving and what our 17 recommendations were. It would be very difficult 18 to operate in an environment where everything was 19 in the form of oral presentations and there was no 20 documentation to go back to. It certainly made 21 sure everybody was on the same wavelength and 22 there weren't any questions or disagreements 13168 1 because everybody agreed to the minutes. And so, 2 we didn't leave with misunderstandings or 3 misinterpretations of what the intent was. 4 Q. Was that part of the management 5 information structure that you were trying to help 6 put in place at USAT, to record the deliberations 7 of the committees in minutes that were then 8 provided to senior management? 9 A. Yes, and to make sure everybody had a 10 common understanding of what was agreed to. 11 Q. One of the other committees was the 12 investment committee, correct? 13 A. Yes. 14 Q. Mr. Guido asked you whether you were a 15 member of the investment committee from the time 16 it was first formed. And as I recall your 17 testimony, you couldn't remember when it was 18 formed or whether you were a member at that time. 19 I'd like to show you the investment 20 committee minutes for April 24, 1986, which are 21 Exhibit A1388, and they are found at Tab 525. 22 Do you have those in front of you, 13169 1 Mr. Williams? 2 A. Yes, I do. 3 Q. Take a look the first couple of 4 paragraphs of the minutes of the investment 5 committee meeting of April 24, 1986, and see if 6 that indicates whether you were a member of the 7 investment committee at that time. 8 A. Based on these minutes, at that time, I 9 was a member. 10 Q. And do these minutes indicate that the 11 committee had been functioning on an informal 12 basis without minutes prior to this particular 13 meeting which is April 24, 1986? 14 A. Yes. That's -- this document indicates 15 that that was taking place and that they wanted to 16 formalize the minutes. 17 Q. And is that consistent with your 18 recollection? 19 A. I don't recall specifically, but my 20 guess is it would be. I mean, we were trying to 21 formalize all of our committees with minutes. And 22 so, this would have been just another committee 13170 1 that we wanted to document the results, 2 recommendations, and actions of. 3 Q. Can you tell us in general what was the 4 purpose of the investment committee as you 5 understood it? 6 A. Generally, it was to look at 7 recommendations for investments, whether it was 8 corporate securities, equity securities, 9 mortgage-backed securities, things that didn't 10 deal with what I would consider to be the 11 traditional S&L activities such as consumer loans 12 or mortgage loans. And so, generally, it was to 13 look at those types of activities. The investment 14 managers would make recommendations and discuss 15 the investment proposals, and a recommendation 16 would be made either to approve or disapprove 17 them. 18 Q. Were the three parts of the balance 19 sheet, so to speak, that you had jurisdiction over 20 the mortgage-backed securities, the equity 21 arbitrage, and the high-yield securities? Are 22 those the three business lines that fell under the 13171 1 investment committee? 2 A. Those were the three primary lines, and 3 I believe -- I don't know if they also looked at 4 the overall hedging activities. At some point, 5 they may have looked at hedging the association, 6 as well, but those were the three primary 7 activities. 8 Q. Did the investment committee actually 9 manage these three portfolios? 10 A. Not directly, no. I think the 11 investment managers of each of those three areas 12 managed the portfolios, and they would bring 13 recommendations to the committee to be discussed. 14 So, it was really the portfolio 15 managers that day-to-day managed the activities 16 and reviewed the investments and their portfolio 17 performance. 18 Q. When you met, were the portfolio 19 managers at the meetings? 20 A. At the investment committee meetings, 21 yes. 22 Q. They were members of the investment 13172 1 committee? 2 A. I don't know if they were official 3 members or not. I mean, they came to all the 4 meetings and especially if they had 5 recommendations. But they tended to be at all the 6 meetings. I don't know if it was ever formally 7 documented that they were members; but, in fact, 8 though, they were. 9 Q. You mentioned that they made 10 recommendations. 11 Did they ever present written materials 12 to the committee to support their recommendations? 13 A. Yes. 14 Q. And, indeed, were they expected to 15 provide written materials so that the members of 16 the committee could review those materials in 17 connection with the recommendations? 18 A. Yes. 19 Q. Did they make oral presentations? 20 A. Yes, they did. 21 Q. Can you just tell us generically how 22 the managers' oral presentations went, what they 13173 1 covered, how long they lasted, and so on? 2 A. Depending upon, again, which type of 3 investment they were making -- but, for instance, 4 a corporate securities recommendation, the manager 5 would present background credit information on the 6 company being considered for purchase, what their 7 earnings history, interest coverage might be, and 8 just their overall financial performance. He 9 would also probably discuss how this fit in with 10 the rest of the portfolio and just general 11 information like that, how he expected it to 12 perform, what the terms of the bond were, et 13 cetera, and why he would recommend it. Basic due 14 diligence is what he would present. 15 Mortgage-backed securities type 16 investment would include the characteristics of 17 the security, the type of security, its duration, 18 how, once again, it affects the overall portfolio 19 in terms of the asset/liability mix, and where 20 this would fit in the portfolio and why it was 21 being purchased. 22 Q. I guess that leaves equity arbitrage. 13174 1 Do you recall anything about the equity 2 arbitrage presentations? 3 A. Typically, those were on announced 4 takeover deals. So, the presentation would 5 include the company, you know, being taken over, 6 the acquirer, the acquiree, what the terms of the 7 deal were and what the expected return on the 8 investment would be and the dollar amount of the 9 investment and where that would put him in terms 10 of if you had portfolio size limits, you know, if 11 it would put him over limits or under limits. 12 Q. In addition to making recommendations, 13 did any of the portfolio managers also make 14 presentations concerning general market conditions 15 or other more general issues that might affect the 16 investment committees' deliberations? 17 A. Yes. We typically had a discussion 18 before we got into the investment proposals of the 19 general market conditions. For instance, I can 20 recall many times Sandy Lorenson, for instance, 21 would call up brokerage firms and get updated 22 information. Sometimes we would actually call the 13175 1 economists of some of the brokerage firms and have 2 them give us presentations. So, that was 3 typically discussed prior to going through the 4 investment proposals. 5 Q. With respect to the proposals, when the 6 presentations were made and recommendations for 7 transactions were made to the committee, did the 8 members of the committee ask questions and discuss 9 the pros and cons of whether such a transaction 10 should be done? 11 A. For the most part, yes. I mean, there 12 were some fairly generic, plain vanilla investment 13 proposals where there was not a whole lot of 14 discussion. But generally, yes, that was the 15 purpose of the committee, was to discuss and get 16 everybody comfortable with what the investment 17 consisted of. 18 Q. Now, you mentioned Sandy Lorenson. 19 She was the portfolio manager for the 20 mortgage-backed securities portfolio; is that 21 correct? 22 A. For a period of time, yes. 13176 1 Q. I think the record indicates that would 2 be from October '86 through early 1988. 3 Is that consistent with your 4 recollection? 5 A. I think so. I mean, I don't 6 specifically remember when she was -- 7 Q. Do you -- I'm sorry. 8 A. I'm sorry. That's it. 9 Q. Do you remember that Mr. Guido asked 10 you some questions about how you and Lorenson 11 interacted with one another? 12 A. I recall some questions concerning 13 that, yes. 14 Q. And I believe your testimony was that 15 Sandy Lorenson really didn't particularly like 16 answering questions. 17 Did you ask questions anyway? Did you 18 persist in asking her questions, and did you 19 expect answers before you would support any of her 20 proposed transactions? 21 A. Typically, yes. 22 Q. And did this sometimes lead to friction 13177 1 between the two of you? 2 A. Yes. It created friction. 3 Q. Nevertheless, did you consider that 4 Sandy Lorenson was knowledgeable about 5 mortgage-backed securities? 6 A. I think she was extremely knowledgeable 7 about them, yes. 8 Q. And did you think, based on your 9 working with her, that she was competent to manage 10 the portfolio, as far as you could tell? 11 A. As far as I could tell, yes. 12 Q. Would you say that part of the reason 13 for the friction between you and Ms. Lorenson 14 could be attributable to a sort of difference in 15 outlook or cultural difference between a kind of 16 portfolio manager mentality and the perspective of 17 a corporate planning manager and treasurer? Was 18 there some difference of outlook that kind of went 19 with your roles that you saw at play? 20 A. I'm not real sure of your question. I 21 mean, part of my role, I guess I felt like I 22 assumed, was asking questions and making sure 13178 1 everybody in the committee understood the 2 investments. 3 There were times when Sandy would 4 present investments for mortgage-backed securities 5 that weren't necessarily just your generic 6 mortgage-backed securities. She would present 7 something called a dwarf, let's say, which was a 8 mortgage-backed security with a much shorter life 9 than a regular mortgage-backed security. They may 10 have different characteristics. 11 In many cases, everyone on the 12 committee didn't understand exactly what that 13 security was and how the risks were different from 14 a generic mortgage-backed security. So, I would 15 ask questions to elicit or bring out that type of 16 information. 17 Q. So, you viewed your role as just making 18 sure that both you and, to the extent you could 19 assist in that process, that the other members of 20 the committee had a better understanding of the 21 transactions that she was presenting and how they 22 would affect the overall portfolio? 13179 1 A. Yes. 2 Q. Were there times when the committee did 3 not approve transactions that Lorenson presented? 4 A. Yes, there were. 5 Q. And why was that? 6 A. I don't specifically remember whether 7 it just didn't fit into the overall mix or it may 8 have affected the asset/liability position in the 9 association in a way that we didn't want to take 10 on or -- I don't specifically remember. 11 Q. What about Ms. Lorenson's successor, 12 Dominic Bruno? How did he interact with members 13 of the committee? 14 A. I really don't recall. 15 Q. Do you recall any of the friction that 16 existed with Lorenson? 17 A. And Dominic? 18 Q. Yes, with Dominic Bruno. 19 A. My guess is there was probably some 20 friction, but I don't recall specifically. 21 Q. Was it -- there was nothing that stands 22 out in your mind that was unusual in regard to 13180 1 Dominic Bruno's interaction with the members of 2 the investment committee? 3 A. Not that I can specifically remember. 4 Q. Do you recall whether there was any 5 significant change in the role of the portfolio 6 manager between the time when Sandy Lorenson was 7 the mortgage-backed securities portfolio manager 8 and when Dominic Bruno fulfilled that role? 9 A. As I recall, he was probably in more of 10 a caretaker mode than actively managing the 11 portfolio. I think the association's financial 12 position was different when he was there versus 13 when Sandy was there. And at that stage, I think 14 it was probably less actively managed and was just 15 in a maintenance mode basically. 16 Q. Why was that? 17 A. Once again, I'm not real sure when 18 Dominic came in. But the association's financial 19 picture wasn't rosy at that time. So, I think 20 management was focused on other issues and things. 21 Q. Mr. Guido took you through a series of 22 questions. He asked you who was primarily 13181 1 responsible for the mortgage-backed securities 2 portfolio when Joe Phillips was there, and I think 3 you answered "Joe Phillips." And I think the same 4 questions were asked and the same answers were 5 given with respect to Lorenson and Mr. Bruno. 6 That is, Lorenson was primarily responsible for 7 the mortgage-backed securities portfolios when she 8 was there, and Mr. Bruno was primarily responsible 9 for those portfolios when he was there. 10 Do you remember any difference among 11 those three individuals in that regard? 12 A. No. To the best of my recollection, 13 that was pretty much it. 14 Q. So, each of them was equally 15 responsible for the portfolio when he or she was 16 there at the association? 17 A. Yes. 18 Q. You indicated that you asked questions 19 to make sure that you understood and hopefully 20 that others understood the transactions that were 21 being presented. 22 Were you an expert on mortgage-backed 13182 1 securities in the second half of the 1980s? 2 A. I don't believe I was an expert. I 3 became very knowledgeable, but I -- I don't 4 believe I was an expert. That was one of the 5 reasons I asked questions. I mean, in addition 6 to -- there may have been characteristics about 7 the investment that I knew about that needed to be 8 brought up, but there were also things I didn't 9 understand myself. So, I would ask questions, as 10 well. But I was clearly not an expert on the 11 level of Sandy Lorenson or Dominic Bruno. 12 Q. How about the other members of the 13 investment committee? Were they experts on 14 mortgage-backed securities? 15 A. No, they weren't. 16 Q. Did they also ask questions and try to 17 understand the information that was being 18 presented to them so that they could exercise 19 their oversight role as members of the committee? 20 A. Yes, yes. 21 Q. How did you view your role as a member 22 of the investment committee in regard to the 13183 1 investment decisions that were made by the 2 portfolio managers? 3 A. Basically, just a member of the 4 committee that would analyze the risk, the 5 liquidity implications, borrowing implications, 6 the asset/liability implications of each 7 investment. So, it was just kind of how did each 8 investment fit into the overall structure and 9 picture, goals, and objectives of the portfolio 10 and the association. So, it was, as you 11 mentioned, kind of an oversight due diligence 12 review. 13 Q. So, in performing your function as a 14 member of the committee, you brought to bear the 15 information that you had available as a result of 16 your role as treasurer and your role as the head 17 of the corporate planning and analysis function? 18 A. Yes. 19 Q. And would you say the same was true for 20 the other members of the committee who had other 21 particular pieces of information -- 22 A. Yes. 13184 1 Q. -- that they bring that other 2 information to bear on their role in the 3 committee? 4 A. Yes. 5 Q. And was that one of the purposes of 6 having an investment committee, so that different 7 parts of the organization can be represented, so 8 to speak? 9 A. Right. Absolutely. To make sure we 10 got input from as many areas as possible within 11 the organization with different perspectives and 12 points of view. 13 Q. And again, sometimes the committee 14 would accept the recommendations and sometimes the 15 committee would not accept the recommendations; is 16 that correct? Is that consistent with your 17 recollection? 18 A. Yes. 19 Q. And in making those decision, did the 20 committee, as far as you observed, conscientiously 21 try to take into account all the relevant 22 information and make the best decisions that they 13185 1 could? 2 A. Yes. 3 Q. One of the things that we noted in the 4 earlier exhibit was that the investment committee 5 in approximately April of 1986 began to keep 6 minutes, correct? 7 A. Yes. 8 Q. And I think you indicated that this was 9 a time when the association was trying to 10 formalize some of the information gathering and 11 decision-making processes through keeping minutes 12 and recording what was going on; is that correct? 13 A. Yes. 14 Q. Who kept the minutes of the investment 15 committee? 16 A. I believe, generally, Art Berner did. 17 And if he wasn't there periodically, I would or 18 someone else would. But I think Art was the 19 general secretary of the meeting. 20 Q. Do you recall whether the written 21 materials that were presented to the committee 22 were also kept with the minutes? 13186 1 A. I'm not sure. I'm not real sure what 2 Art collected and put in the formal books and 3 records. So, I'm not sure about that. 4 Q. I'm going to show you another document. 5 This happens to be an excerpt from the minutes of 6 the investment committee meeting of June 19th, 7 1986. I'm sorry. The June 20, 1986 minutes. And 8 the document is Exhibit A11137. 9 This particular copy came out of the 10 examination work papers for the May 1986 Federal 11 Home Loan Bank of Dallas examination of USAT. I 12 just wanted to see if you can identify this as a 13 memo that you wrote to the investment committee 14 dated June 19, 1986. 15 A. It appears as though it is, yes. 16 MS. CLARK: I'd like to offer this, 17 Your Honor. 18 MR. GUIDO: No objection, Your Honor. 19 THE COURT: Received. 20 Q. (BY MS. CLARK) Have you had a chance 21 to look at the -- at the memo, Mr. Williams? 22 A. Yes. 13187 1 Q. This is a memo to the investment 2 committee in which you address generally the 3 status of the mortgage-backed securities arbitrage 4 portfolio, is it not? 5 A. Yes, it is. 6 Q. At this point, what was the size of the 7 mortgage-backed securities arbitrage portfolio in 8 terms of assets? 9 A. It looks like 690,000. 690 million. 10 Excuse me. 11 Q. And what was the notional amount of the 12 hedges that were in place that were being related, 13 at least for this purpose, to the -- to those 14 assets? 15 A. 760 million. 16 Q. And as you indicate in your memo, that 17 meant that there were almost $70 million of what 18 you call excess hedges at this time? 19 A. Yes. 20 Q. What do you -- what does your analysis 21 indicate was the spread on the arbitrage portfolio 22 as of the date of this memo? 13188 1 A. As of May, it's negative. In April, it 2 was 56 basis points negative. Excuse me. In May, 3 it was 11 basis points negative. 4 Q. Is that -- the negative spread, is that 5 the same thing as book yield or accounting yield? 6 A. That would be the book or the 7 accounting yield on the mortgage-backs less the 8 funding cost, including all of the hedge expense. 9 Q. So, that represents sort of the net 10 yield for accounting purposes on the portfolio? 11 A. Yes. 12 Q. Now, what would be your purpose in 13 presenting this information regarding the status 14 of the portfolio to the investment committee? 15 A. It's a good question. I have no idea 16 why I would have been presenting something like 17 this unless Sandy or Joe or whoever managed the 18 portfolio would have been out of the bank and I 19 would have been doing this for them. But 20 generally, I didn't make recommendations for 21 investments on mortgage-backs like this. So, I 22 don't know what was taking place around this time 13189 1 period. 2 Q. This memo was written in 1986, which is 3 12 years ago. So, is it fair to say you don't 4 remember this specific memo? 5 A. Right. 6 Q. But based on just reviewing it, it 7 appears that you were making a recommendation to 8 add some additional mortgage-backed securities to 9 the portfolio in order to balance the asset and 10 hedge -- 11 A. Yes. 12 Q. -- mix at that point? 13 And presumably, was this presented to 14 the investment committee so the investment 15 committee would have this information available in 16 making decisions about how to go forward? 17 A. I would have to check the minutes, but 18 I assume it was presented to the investment 19 committee. 20 Q. It's addressed to the investment 21 committee? 22 A. Yes. 13190 1 Q. Were the memos that you ever 2 submitted -- sorry. 3 When you wrote memos to the investment 4 committee, were you ever less than totally candid 5 out of fear of what the examiners of the outside 6 auditors might think when they reviewed the 7 minutes? 8 A. I don't believe so. 9 Q. So, this was your best effort to set 10 forth the situation of the portfolio at the time, 11 including the fact that it had a negative 12 accounting spread? 13 A. Yes. 14 Q. There's something I'd like to clarify 15 for the record, Mr. Williams. Mr. Guido asked you 16 a series of questions about whether the finance 17 administration department at USAT had the ability 18 to track the performance of the mortgage-backed 19 securities arbitrage portfolio, including the 20 effect that the swaps had on that performance. 21 And the date that he was asking you about was 22 March 31st, 1986. 13191 1 I'd like you to look again at three of 2 the documents that Mr. Guido was questioning you 3 about when you were here in December. And the 4 exhibit numbers are A10601, which is Tab 857, 5 Exhibit A10603, which is Tab 858, and Exhibit 6 A10615, Tab 862. 7 Do you have those in front of you? 8 A. Yes, I do. 9 Q. These are three documents dating from 10 the first -- 11 MR. GUIDO: We haven't found the 12 documents as yet. Could you wait one minute, 13 please? 14 MS. CLARK: Oh, certainly. 15 16 (Discussion off the record.) 17 18 MR. GUIDO: It's not in the packet of 19 documents that you gave us that you were going to 20 use today, Ms. Clark. I'm sorry. I'm looking at 21 the wrong book. 22 MS. CLARK: Mr. Guido, these are three 13192 1 of the documents that you questioned Mr. Williams 2 about. And if you would like, I'll give you my 3 copies to follow along if you don't have them in 4 front of you. 5 MR. GUIDO: I do not have 10602. I 6 have 10601 and 03. Now I have all three of them. 7 8 (Discussion off the record.) 9 10 MR. GUIDO: We do not have 10615. 11 Q. (BY MS. CLARK) I'm sorry for the 12 delay, Mr. Williams. 13 Have you had a chance to peruse these 14 documents while we've been trying to collect them 15 on our side? 16 A. Briefly, yes. 17 Q. Do they appear to be documents 18 reflecting questions that Mr. Jenard Gross was 19 asking at this time about whether you had the 20 ability to track the performance of the 21 mortgage-backed securities arbitrage on a 22 deal-by-deal or block-by-block basis? 13193 1 A. Yes. 2 Q. And if you look at Exhibit A10615, 3 Mike Crow is answering Mr. Gross' question about 4 "Do we know where we stand?" 5 And he says "Yes, we do know where we 6 stand with regard to the mortgage-backed 7 securities and the net spread." And he refers to 8 the schedule in the performance report that was 9 called Schedule SF, correct? 10 A. Yes, ma'am. 11 Q. And then Mr. Crow goes on to explain 12 that you-all had never tracked the mortgage-backs 13 on a block-by-block basis the way, for example, 14 the equity arbitrage deals had been tracked, 15 correct? 16 A. Correct. 17 Q. In your testimony, Mr. Guido then asked 18 you about those references in the documents. And 19 then he asked you about the new accounting system 20 that Mr. Crow mentions in his memo. And I believe 21 you explained to Mr. Guido that the 22 mortgage-backed securities accounting system did 13194 1 not analyze the value of the swaps because the 2 swaps were not part of the securities. 3 Do you recall that? 4 A. Right. The mortgage-backed securities 5 system basically just performed the accounting and 6 interest accruals for mortgage-backed securities, 7 and that was the only thing that would have been 8 on that system. 9 Q. And it didn't have anything to do with 10 the swaps, correct? 11 A. Correct. 12 Q. Did you mean to say in your testimony 13 in December, Mr. Williams, that USAT did not have 14 the ability at this time to analyze how the 15 mortgage-backed securities portfolios were 16 performing in relation to the swaps? 17 MR. GUIDO: Objection, Your Honor. 18 It's clearly a leading question. 19 THE COURT: Denied. 20 A. We can -- we could measure and report 21 on large blocks or total portfolios to the extent 22 that portfolios were segregated. We couldn't 13195 1 necessarily report the profitability or 2 performance of a deal-by-deal basis. Initially, I 3 think we started trying to do that. Once interest 4 rates started falling and prepayments picked up, 5 typically they were having to roll down or sell 6 securities by lower coupon securities to slow 7 prepayment speeds. And at that point, it was 8 pretty difficult to keep track of which securities 9 went with which hedges. And so, on a deal-by-deal 10 basis, it was difficult. But on large blocks of 11 the portfolio, we could do it. 12 Q. And what Mr. Gross was asking or that 13 you couldn't do at this time was the 14 block-by-block or deal-by-deal portfolio analysis; 15 is that right? 16 A. He -- I think he was asking, if I 17 remember, a deal-by-deal. And we really couldn't 18 do that. We could keep track of large blocks or 19 portfolios, but not on a deal-by-deal basis. 20 Q. If you look back at the previous 21 exhibit, 11137, that document clearly demonstrates 22 that you did have the ability to track exactly how 13196 1 the swaps were affecting the portfolio at that 2 time? 3 A. What's -- 4 Q. 11137, which was your memo about the 5 status of the portfolio in June. 6 A. Which one is that? I'm sorry. Oh, 7 this one? 8 Q. Yes. 9 A. Okay. I'm sorry. Yes, ma'am. 10 Q. And looking at that memo, there is no 11 question at all that you had the ability to track 12 how -- to track how the swaps were affecting the 13 performance of the portfolio of mortgage-backed 14 securities as of June 1986, correct? 15 A. Yes. 16 Q. And did you have that same ability in 17 March of 1986? 18 A. I don't know in March of nineteen -- I 19 would assume. So -- I mean, I can't imagine why 20 we would not have been able to do that. 21 Q. So -- 22 A. At that point, we had one major, I 13197 1 believe, portfolio that was a treasury portfolio 2 and this arbitrage portfolio. And the two were 3 booked, I believe, in separate cost centers. So, 4 we would have been able to track that. 5 Q. And there is nothing in the analysis in 6 that June document that called for information 7 that you didn't already have or weren't already 8 collecting in March of 1987, correct? 9 A. Correct. 10 Q. Mr. Guido also asked you about the 11 reference in I think it's A10615 to the treasury 12 department being unaware that the investment 13 department was rolling down coupons. 14 Do you see that reference? 15 A. Which item is that? 16 Q. I think it's Item 3. Yeah, Item No. 3. 17 MR. GUIDO: On which memorandum? 18 MS. CLARK: A10615. 19 Q. (BY MS. CLARK) This is the March 18, 20 1986 memo from Mike Crow to Gerry Williams 21 addressing -- 22 A. Yes. 13198 1 Q. -- Mr. Grosses questions. And 2 Mr. Guido asked you about Item No. 3 where it says 3 that "the finance administration was aware that we 4 were" -- "unaware that we were rolling down 5 coupons in mortgage-backed securities." 6 Do you see that reference? 7 A. Yes, I do. 8 Q. And he asked you when you first became 9 aware of these transactions, and I believe your 10 answer was that you couldn't really remember other 11 than as they were happening. 12 Mr. Williams, isn't it true that the 13 treasury department would be aware of every single 14 transaction that happened in the mortgage-backed 15 securities portfolio when it happened because you 16 were, in fact, closing those transactions for 17 them? 18 A. Yes. We would sell the securities and 19 the buys and sells on the transaction. 20 Q. And in a case of a roll-down, what 21 we've been calling the roll-down, which happened 22 in the first half of 1986 when Mr. Phillips was 13199 1 taking the higher coupon mortgage-backs, selling 2 and replacing them with lower coupon 3 mortgage-backs, do you recall that you were 4 actually deferring the profits from those sales by 5 rolling the gain into the basis of a replacement 6 security? 7 A. I don't know if that was in '85 or '86, 8 but that was the situation when the initial 9 roll-down started, is the gains were deferred and 10 rolled back into the basis of the securities 11 repurchased. 12 Q. Let me see if I can remind you of that. 13 Let me ask you to look at A13047, which is a 14 collection of the group managers bi-weekly staff 15 meeting minutes that Mr. Guido offered in 16 evidence. It was accepted in evidence, and it's 17 at Tab 1207. 18 Mr. Williams, I'm going to ask you to 19 just go directly to the minutes of a meeting on 20 January 27, 1986. 21 MR. GUIDO: Does that have a Bates 22 stamp number? 13200 1 MS. CLARK: The Bates number is 2 CN715566. That's the first page of the minutes. 3 Q. (BY MS. CLARK) And now I'd like you 4 to turn to the next page under the heading 5 "financial matters continued," about the eighth or 6 ninth item down. 7 Do you see where it says, "Completed 8 trades of 190 million in mortgage-backed 9 securities. Profits taken must be amortized"? 10 A. Yes. 11 Q. And it has the initials "JHP" as the 12 responsible person. 13 Do you see that? 14 A. Yes. 15 Q. Does that help you put these events in 16 a time frame? 17 A. Yes. 18 Q. Okay. So, that as of January 27th, 19 1987, the sales that Mister -- 20 MR. NICKENS: '86. 21 MS. CLARK: '86. I'm sorry. I 22 misspoke again. 13201 1 Q. (BY MS. CLARK) As of January 27th, 2 1986, the sales that Mr. Phillips was making in 3 the mortgage-backed securities arbitrage, the 4 profits on those sales were being amortized rather 5 than recognized as current income, correct? 6 A. Correct. 7 Q. Now, does that indicate to you, 8 Mr. Williams, that you were aware that these 9 securities were being rolled down and replaced 10 rather than simply sold outright? 11 A. Yes. I mean, I remember there was a 12 specific roll-down program. I don't remember the 13 exact date I became aware of it, but it was in 14 that time frame. 15 Q. And in order to accord it the 16 accounting treatment that it was being accorded, 17 you would have had to have been aware of the 18 purpose of these transactions. Otherwise, you 19 would have simply recorded this profits as income, 20 correct? 21 A. Correct. 22 Q. So, that would indicate to you that the 13202 1 treasury department, anyway, was aware of the 2 purpose of those roll-down sales, at least as of 3 January 1986? 4 MR. GUIDO: Objection as a leading 5 question again, Your Honor. 6 THE COURT: Denied. 7 Would you answer? 8 THE WITNESS: We would have been aware 9 when the roll-down program started because we 10 would have needed to know that to book or defer 11 the gains or roll the gains on the basis of the 12 new securities. 13 Q. (BY MS. CLARK) Well, we've talked 14 about a number of parts of the management systems 15 in place. I'd like to ask you next about the 16 strategic planning meetings and how that fit into 17 the management functions at USAT. 18 Mr. Guido asked you when you were here 19 in December when the strategic planning committee 20 was established. I believe you answered that you 21 really couldn't recall when the strategic planning 22 committee was established. So, I would like to 13203 1 show you Exhibit B3925, which is a memorandum from 2 Mr. Crow dated April 28, 1986, and see if that 3 indicates to you when the strategic planning 4 committee was officially constituted at USAT. 5 Is this a memorandum from Mr. Crow to 6 Mr. Hurwitz, Mr. Gross, Dr. Munitz, 7 Gerry Williams, Mr. Huebsch, Mr. Gray, you, Art 8 Berner, and Jim Jackson dated April 28, 1986? 9 A. Yes, it is. 10 MS. CLARK: I offer Exhibit B3925, Your 11 Honor. 12 MR. GUIDO: No objection, Your Honor. 13 THE COURT: Received. 14 Q. (BY MS. CLARK) Does this indicate to 15 you when the first meeting of the strategic 16 planning committee occurred at USAT? 17 A. It looks as though from this memo it 18 was scheduled for May 2nd, 1986. 19 Q. Now, I indicated in my question that 20 this was the first official meeting. 21 Do you remember attending informal 22 strategic planning sessions prior to this time 13204 1 when the committee was officially established? 2 A. I don't specifically remember. We may 3 have had some, but I don't specifically remember. 4 Q. You don't remember when in your tenure 5 at USAT you began to attend informal strategic 6 planning sessions? 7 A. No, I do not. 8 Q. Let me ask you, if you would, just to 9 describe for us in general what kinds of 10 discussions took place at the strategy meetings. 11 And for the moment, I'm not going to distinguish 12 between the official committee meetings following 13 the April 1986 establishment of the official 14 committee or before. But just generally, what do 15 you recall about these strategic planning -- 16 MR. GUIDO: Your Honor, I object to the 17 question. It misstated the witness' testimony. 18 He said he didn't recall any informal meetings 19 prior to April 26th. Ms. Clark's question now 20 assumes that there were such informal meetings. I 21 suggest that she establish that they occurred 22 first before she asks witness questions. 13205 1 THE COURT: All right. I'm sustaining 2 the objection. 3 Q. (BY MS. CLARK) Mr. Williams, without 4 regard to any date in particular, can you describe 5 for us what you recall about the nature of the 6 strategic planning meetings that you attended 7 while you were at USAT? 8 A. Generally, it was reviewing the overall 9 position of the S&L, the industry, where the 10 association's earnings were being generated from 11 in terms of different portfolios. We attempted -- 12 I think we talked previously about shredding the 13 balance sheet and looking at the different 14 components of the balance sheet and looking at 15 alternatives in the market in items of what could 16 be added to the association or how could the 17 association's asset/liability mix be revised or 18 changed to improve the financial outlook, how 19 should we allocate resources in terms of 20 incremental growth, those types of conditions. 21 Q. Was one of the purposes of those 22 meetings to help provide a framework for the 13206 1 budget process of budgeting the resources of the 2 company into different business lines? 3 A. That topic could have been covered, 4 yes. 5 Q. Let me ask you to look at an exhibit 6 that's previously been received in evidence. It's 7 Exhibit A1394, and it's found at Tab 531. It's 8 the investment committee minutes for the May 28th, 9 1986 meeting of the investment committee. 10 MR. GUIDO: A1394? 11 Q. (BY MS. CLARK) This is one of the 12 documents that Mr. Guido asked you about when you 13 were here in December. I'm going to ask you about 14 a different part of the document, and that is the 15 part entitled "investment policy." And, in 16 particular, on Bates Page 4756 there is a 17 Subparagraph C regarding annual planning. 18 Do you see that? 19 A. Yes, I do. 20 Q. What it says in this "investment 21 policy," which has a date of May 25, 1986, is that 22 "On at least an annual basis, senior management 13207 1 and selected members of United's board of 2 directors shall meet to determine resource 3 allocation and cash flows to provide a framework 4 for the company's annual budget. The discussion 5 topics and results shall include" -- and then it 6 lists a review of the company's asset/liability 7 structure and objectives, evaluation of the 8 profitability, credit risk, interest rate risk, 9 and capacity to provide service in each 10 existing/proposed asset and liability category. 11 And three, defining the priority, timing, and 12 allocation of asset growth and funding strategies 13 for the following year. 14 Based on your experience at other 15 companies, including First City Bank and Texas 16 Commerce Bank, was there anything unusual about 17 having strategic planning meetings periodically to 18 discuss topics like this? 19 A. No. It's fairly common. 20 Q. And were the strategic planning 21 meetings that occurred or that you attended 22 generally consistent with what is set forth in 13208 1 this policy that was adopted in May of 1986? 2 A. I think the recommendations from the 3 strategic planning committee would have fallen in 4 these categories. We typically did a lot of just 5 off-the-wall brainstorming in terms of coming up 6 with ideas, but it would have been distilled down 7 into something that would have covered these 8 topics. 9 Q. Was there an agenda -- a set agenda for 10 these meetings of the strategic planning group? 11 A. I don't recall. The best I can 12 remember, the agenda changed meeting to meeting 13 depending upon what the situation was and where we 14 were during the year. 15 Q. Do you remember who called the 16 meetings? 17 A. No, I do not. 18 Q. Do you remember who did the talking at 19 the meetings? Was it more of a -- kind of a 20 formal presentation or more of an informal 21 give-and-take discussion? 22 A. A little bit of all of those things. 13209 1 There may have been topics on the agenda that 2 specifically someone would have prepared a package 3 and addressed. But generally, it was kind of an 4 open discussion to get everybody's inputs and 5 thoughts and ideas. 6 Q. So, everybody was expected to 7 contribute whatever information or ideas he or she 8 might have? 9 A. Yes. 10 Q. And did everybody tend to participate 11 in the discussions? 12 A. Yes. 13 Q. Let me show you Exhibit A1590, 14 Mr. Williams, and ask you if you can identify this 15 document for us. 16 Does this appear to be your copy of 17 documents relating to a strategic planning meeting 18 in November of 1985? 19 A. It appears as though that's the case. 20 It's got my initials and my handwriting on it. 21 Q. And the date of this meeting was 22 November 17, 1985, correct? 13210 1 A. Correct. 2 Q. So, it does appear, does it not, that 3 you had informal strategic planning sessions prior 4 to the official establishment of the strategic 5 planning committee in April 1986? 6 A. Based on this document, yes. 7 Q. The first page appears to be an agenda, 8 does it not, for the topics to be discussed at the 9 meeting? 10 A. Yes. 11 Q. Can you tell who prepared this agenda? 12 A. No, I cannot. 13 Q. Looking at the agenda, can you tell 14 which department appears to have prepared it, 15 based on the contents? 16 A. My guess is that -- this is just a 17 guess -- it would have been the financial 18 department. 19 Q. Okay. 20 MS. CLARK: Your Honor, I offer 21 Exhibit A1590. 22 MR. GUIDO: That is, Your Honor, 13211 1 US3008018 through US3008045 that we discussed the 2 other day, and we had a question about this 3 document. And it has the handwritten notes on 4 US3008028 which appears to be a recordation of 5 what transpired at that meeting, and those go 6 through 008035. 7 Is that the document you're talking 8 about, Ms. Clark? 9 MS. CLARK: Your Honor, this is the 10 document we are offering; and I will ask the 11 witness about its contents. Those are the correct 12 Bates numbers. 13 THE COURT: No objection? 14 MR. GUIDO: No objection, Your Honor. 15 THE COURT: Received. 16 Q. (BY MS. CLARK) Now, you indicated 17 that based on the contents of the agenda on the 18 first page, it would be your guess it was prepared 19 by the finance department. 20 Who would that mean? 21 A. It could have been Mike Crow. It could 22 have been me. It could have been Jim Wolfe. 13212 1 Could have been -- I don't know if Doug Hansen was 2 there then. I would guess one of that group. 3 Q. Based on the -- again, on the contents 4 of the document, does it appear to be a document 5 that, for example, Jenard Gross sat down and 6 prepared? 7 A. I don't believe Jenard would have 8 prepared this, no. 9 Q. And how about Barry Munitz? Does it 10 appear to have been prepared by Barry Munitz? 11 A. No. I don't believe Barry would have 12 done this. 13 Q. How about Art Berner? Does it look 14 like Art Berner would have prepared this document? 15 A. I don't believe Art would have done it 16 either. 17 Q. Ron Huebsch, does he appear to have 18 prepared this document? 19 A. I don't believe Ron would have. 20 Q. And how about Charles Hurwitz? Does 21 this look like something Mr. Hurwitz sat down and 22 wrote out? 13213 1 A. I don't believe so. 2 Q. So, based on your review of the 3 document and your knowledge of the various people 4 at USAT and what they did, it would be your belief 5 that this was prepared by someone in the finance 6 department? 7 A. Or Gerry Williams. 8 Q. Or Gerry Williams? 9 A. Right. 10 Q. All right. Looking through the 11 document, can you tell us what some of these -- 12 well, looking at the agenda, there is a list of 13 topics under the heading "Announcements and brief 14 discussion topics." Then the next topic is 15 "Growth for the remainder of '85 and into 1986." 16 There is a list of subtopics under "Asset growth 17 constraints." The fourth topic is "Funding 18 alternatives in relation to the gap position." 19 And then the three final topics are "1986 20 asset/liability allocation, 1986 macro forecast," 21 and, finally, "Tasks to be completed." 22 Does this look like the kind of menu of 13214 1 topics that you recall discussing at strategic 2 planning meetings during the time you were at 3 USAT? 4 A. Yes. 5 Q. Now, look, if you would, at the third 6 page. There is another typewritten page that has 7 a heading of "Liquidity risk review." 8 Can you tell from looking at that 9 document which department at USAT would have 10 prepared it? 11 A. My guess is the treasury department. 12 Q. That would have been your staff or you 13 personally? 14 MR. GUIDO: Are you making reference to 15 US3008020? 16 MS. CLARK: Yes. 17 MR. GUIDO: All right. 18 A. Yeah. I'm not sure if I was treasurer 19 if November of '85; but if I was, yes, this would 20 have been my group. 21 Q. (BY MS. CLARK) And the next one is 22 "1986 earnings/investment alternatives." 13215 1 Can you tell from looking at the 2 document which department at USAT would have 3 prepared this document for the strategic planning 4 meeting in November 1985? 5 A. No, I cannot. 6 Q. Okay. Does it appear to be a document 7 prepared either by the finance administration 8 department or the accounting department? 9 A. It would have come out of finance or 10 accounting. 11 Q. And would that same -- would that same 12 statement hold true for the next page which is 13 Bates 8022, which is the consolidated 14 asset/liability allocation summary? 15 A. Yes. 16 Q. And how about the "Tasks to be 17 completed," which is Bates numbered 8023? 18 Can you tell from looking at that 19 document who prepared it or what department, if 20 not what individual? 21 A. It looks as though -- it's got Mike 22 Crow's initials at the bottom. 13216 1 Q. So, does it appear to you that 2 Mike Crow was the person who prepared a list of 3 tasks to be completed for the November 1985 4 strategic planning meeting at USAT? 5 A. That's what this page would indicate, 6 yes. 7 Q. What are the next three pages? Can you 8 tell? 9 MR. GUIDO: What are the Bates stamp 10 numbers? 11 MS. CLARK: 8024, 8025, and 8026. 12 A. They appear to be a high-level balance 13 sheet forecast and income statement. 14 Q. (BY MS. CLARK) Can you tell from the 15 contents of the document who prepared these pages? 16 A. No, I cannot. It would have come out 17 of the financial accounting area, though. 18 Q. Are those your handwritten notes on 19 Page 8026? 20 A. Yes, they are. 21 Q. And can you tell whether that would 22 have been your notes of the discussion during the 13217 1 meeting? 2 A. Could have just been my thoughts while 3 other people were talking. I really don't know. 4 Q. Turning to the next page, what is that 5 document? 6 A. Somebody manually put together 7 something on minimum net-worth. 8 Q. Is that your handwriting? 9 A. No, it is not. 10 Q. How about on the bottom? 11 A. No, it is not. 12 Q. Do you recognize whose handwriting it 13 is? 14 A. No, I don't. 15 Q. Let's go to the next page which begins 16 a set of handwritten notes that go from Page 8028 17 through Page 8035. 18 Are those your handwritten notes? 19 A. Yes. 20 Q. And do they appear to be notes that you 21 took during the course of the strategic planning 22 meeting on November 17, 1985? 13218 1 A. Yes. 2 Q. Mr. Williams, were you taking a 3 verbatim account down of what was said during that 4 meeting? 5 A. I don't believe I was. I'm not real 6 sure who was keeping the notes or minutes of the 7 meeting; but generally, this just looks kind of 8 like my notes and thoughts as we went through and 9 discussed items. It wasn't necessarily a verbatim 10 discussion of what was discussed or even agreed 11 to. 12 Q. So, you did not try to write down every 13 word that each person said during the course of 14 the meeting? 15 A. I don't think so, but I don't -- I 16 don't recall. 17 Q. Well, can you tell just by looking at 18 the first page, for example, whether it looks as 19 if you were writing down every word that people 20 said? 21 A. Yeah. I don't think I was writing down 22 every word. Looks like I was writing down 13219 1 thoughts and periodically putting initials out to 2 the side so I could remember who was commenting 3 and who we needed to follow up with to get 4 answers. 5 Q. Okay. On the first page, you mentioned 6 initials. I see the initials "CH" and "JG." 7 Who were those people? 8 A. Without knowing who all attended the 9 meeting, I would guess Charles Hurwitz and 10 Jenard Gross. 11 Q. What was Charles Hurwitz' position with 12 United at this time? Do you know? 13 A. No, I do not. 14 Q. Do you know whether he was chairman of 15 UFG, United Financial Group, Inc., at the time of 16 this meeting? 17 A. He may have been, but I don't 18 specifically remember. 19 Q. What was Jenard Gross' position at this 20 time? 21 A. I believe Charles was -- excuse me -- 22 Jenard was chairman of the association. 13220 1 Q. On this first page next to the initials 2 "CH," can you tell us what your notes indicate 3 there? 4 A. I'm not real sure what this is 5 referring to. It looks like it has to do with 6 sale of loan servicing, and Charles requests that 7 we look into "can we defer or amortize the gain 8 over four years as opposed to taking it all at one 9 time." 10 Q. Is that four years or four quarters? 11 A. Oh, four quarters. Excuse me. 12 Q. How about the note next to the initials 13 "JG" on that first page? Can you tell us what 14 that's about? 15 A. I'm not real sure what that even refers 16 to anymore. 17 Q. Okay. Turn over to the next page. In 18 the middle of the page, there is a 1B, a 1C, and a 19 1D. 20 MR. GUIDO: Which Bates stamp? 21 MS. CLARK: This is Bates Page 8029. 22 Q. (BY MS. CLARK) I'd like you to just 13221 1 look on this page at 1B. There is the initials 2 "VC" and then "Prospectus printed; will get 3 George" -- is it G-O -- "G-E-O K," is that George 4 Kozmetsky? 5 A. It may have been. That's the only 6 George K. I would have known at that time or known 7 of. 8 Q. "Will get George K. to come down to 9 luncheon and push it." 10 "CH - make more out of management" -- 11 is that "management and advisory board"? 12 A. Yes. 13 Q. Then "JG visit with S&Ls." 14 And then what's the next? 15 A. I think "high net-worth individuals." 16 Q. "Other small S&Ls and banks." 17 Is this -- is that what your notes 18 indicate? 19 A. Yes. 20 Q. Does that refer to venture capital, 21 that "VC"? 22 A. Yes. Probably would have. 13222 1 Q. So, this indicates that there was a 2 discussion about the possibility or prospects for 3 doing a venture capital deal? 4 A. Yes. 5 Q. Trying to get George Kozmetsky involved 6 and get an advisory board to help and that sort of 7 thing? 8 A. Right. 9 Q. Turn to the next page, which is 8030. 10 Do you see there is a 1E that refers to 11 an investment policy committee? 12 A. Yes. 13 Q. And there is a reference to an A/L 14 policy committee? 15 A. Yes. 16 Q. Does that indicate that at this 17 meeting, people are beginning to talk about 18 formalizing an investment policy committee and 19 asset -- well, I guess the asset/liability policy 20 committee was already in existence at this time, 21 correct? 22 A. Yes. 13223 1 Q. So, what does this indicate about 2 investment committee? 3 A. It looks as though they are possibly 4 creating another committee at the board level 5 which would have been more of an asset/liability 6 policy committee that would kind of set the 7 overall guiding principles or guidelines for the 8 association. 9 Q. And do you know whether that ever 10 occurred? 11 A. I do not. 12 Q. Then there is a 1F, and it says "bonus 13 plans." 14 Can you read for us what you said in 15 that regard? 16 A. "Bonus plans. Short-term bonuses for 17 collectors. Get with servicing, REO, and real 18 estate brokers." 19 Q. And then there is an initial "CH." 20 What do you have down there for that? 21 A. "Emphasize lower level, not 22 executives." 13224 1 Q. So, does that appear that Charles 2 Hurwitz was saying with respect to bonuses that 3 the lower-level people should be emphasized rather 4 than the executives? 5 A. Yes. In this case, I think he was 6 referring to real estate and loans or real estate 7 in general performing poorly in terms of 8 foreclosures, et cetera. There was a lot of 9 buildup on the collection side of the mortgage 10 portfolio to keep loans as current as possible and 11 to collect on them. And so, they wanted to, I 12 believe, build some incentives for that group to 13 make sure they did as good a job as possible on 14 the collection process. 15 Q. The next section of your notes -- 16 THE COURT: We'll take a short recess. 17 MS. CLARK: Thank you. 18 19 (A short break was taken.) 20 21 THE COURT: Be seated, please. We'll 22 be back on the record. 13225 1 Ms. Clark, you may continue. 2 MS. CLARK: Thank you, Your Honor. 3 Q. (BY MS. CLARK) Mr. Williams, when we 4 broke, we were talking about Exhibit A1590, which 5 is your set of materials from the United strategic 6 planning meeting of November 17th, 1985. 7 I'd like you to look at exhibit -- 8 sorry -- Page 8031, which has a heading called 9 "running rate." 10 What was "running rate"? 11 A. That refers to the ongoing operating 12 profits of the company or the association less any 13 one-time sales, whether they were branch sales or 14 loan servicing sales or equity arbitrage type 15 activities. 16 Q. The first item under that heading has 17 the initials "JG." 18 Can you tell us what comment you were 19 recording in your notes here? 20 A. Jenard is asking for -- it looks like 21 Jenard is asking for ongoing monthly profitability 22 reporting at a profit center level. 13226 1 Q. What does that mean? What's a profit 2 center? 3 A. Typically, it's the lowest level within 4 the organization at which you book income and 5 expense or loans or deposits. And I think in this 6 case, it was probably more referring to lines of 7 business. So, we would look at consumer loans as 8 a line of business or a group of profit centers or 9 mortgage banking as a group of profit centers or 10 investments as a group of profit centers. 11 Q. So, he was asking on a monthly basis to 12 know how each different line of business was doing 13 within the company? 14 A. Right. 15 Q. Is that correct? 16 A. Similar to that shredding the balance 17 sheet or the income statement approach. 18 Q. Which was what you described in -- back 19 in December that Gerry Williams was promoting? 20 A. Yes. 21 Q. And the next item has the initials "CH" 22 next to it. 13227 1 Can you tell us what comment you were 2 recording in your notes at that point? 3 A. It looks like Charles made some comment 4 about the depressed economy and discussing what is 5 United's niche in terms of "Are we going to 6 specialize in some portion of real estate 7 lending?" And I'm not real sure what all that 8 refers to after that. It has something to do with 9 long-term fixed-rate loans where we would have an 10 upside potential in terms of the returns of the 11 project. 12 Q. And there is a comment there about not 13 giving people answers quick enough? 14 A. Yeah. I don't know what that makes 15 reference to unless it's related to real estate 16 lending and turnaround times in terms of being 17 able to get decisions on lending deals or loans 18 that would come in. 19 Q. And going down the page, there are 20 other comments that are made. Some of them have 21 initials next to them, some don't. So, that would 22 indicate you're just making notes of various 13228 1 people's comments during the meeting? 2 A. Either comments or my thoughts on 3 things I need to follow up on. 4 Q. Turn to the next page, if you would, 5 please, which is Bates numbered 8032. The heading 6 appears to be "Growth for remainder of '85 and 7 '86." 8 A. Yes. 9 Q. And does that correspond to one of the 10 topics on the agenda that was prepared by the -- 11 A. I believe -- 12 Q. -- finance department? 13 A. -- it did, yes. 14 Q. And what's the -- what does the first 15 note indicate was discussed under that topic? 16 A. Consensus on growth and whether we 17 wanted to be larger. 18 Q. Okay. Next item? Next phrase? 19 A. I'm not real sure what the next -- can 20 we -- looks like "Can we fill junk bonds?" And 21 then the next phrase is "Is the junk bond market 22 there? We may have reached our limit per Charles 13229 1 Hurwitz." 2 Q. Okay. And then go on. "Internally" -- 3 A. "Internally get net-worth target 4 internally to 4 percent. Don't report losing 5 quarter. Don't show quarter-to-quarter declines." 6 And then there is a topic "liquidity" and initials 7 Charles Hurwitz, "Need to avoid quarterly losses. 8 Try to move gains to smooth out earnings." And 9 the goal would be not to show quarterly loss in 10 1986. 11 The next line is "What is realistic," I 12 believe, "net income figure? Try for 1.5 million 13 per quarter." And then it refers to Jim Jackson, 14 growth. 15 Q. Who is Jim Jackson? 16 A. He was manager, I believe, of the money 17 desk or -- I think our wholesale CDs, which would 18 include broker CDs and jumbo CDs. 19 Q. Okay. Let me go back up to the top 20 now, and we'll go over some of those items. 21 "Consensus on growth. Do we want to be 22 larger? Can we fill junk bonds?" Then you say 13230 1 "Is junk bond market there?" 2 Can you tell us what that question 3 refers to, "Is junk bond market there?" 4 A. The best I could recall, it would be 5 referring to what is the condition of the junk 6 bond market and the potential returns. And I 7 don't remember what the exact economic conditions 8 of the economy and interest rates were at that 9 time, but it's basically questioning what is the 10 future of junk bonds and will we continue to see 11 good returns. 12 Q. So, it appears then that the strategic 13 planning group is sitting around talking about the 14 status of the junk bond market and whether it 15 would be a good place to make more investments or 16 not? 17 A. Right. Should we allocate more 18 resources to that group of investments. 19 Q. Okay. And then down here where it says 20 "Need to avoid quarterly losses. Try to move 21 gains and smooth out earnings," that's under a 22 section with Mr. Hurwitz' initials. 13231 1 What do you understand the term "try to 2 move gains" to refer to? 3 A. Typically, some gains, whether it's 4 from loan sales or sales of servicing or branch 5 sales, within a quarter-to-quarter, sometimes 6 there's leeway in terms of "do you book it this 7 quarter or next quarter?" Generally it's going to 8 get within the year. It's just 9 quarter-to-quarter. Sometimes there's play. And 10 the reference here is to try to smooth earnings 11 out quarter-to-quarter so there's not gyrations 12 where we have a big loss this quarter and a little 13 gain this quarter, kind of get the two quarters to 14 level out. So, it's referring to that. 15 Q. In your experience, Mr. Williams, do 16 public companies generally try to smooth out 17 earnings from quarter to quarter? 18 A. Generally, they do. I know for the 19 larger companies there's -- you know, analysts 20 make projections of earnings and they typically 21 try to do what they can to meet analysts' 22 expectations within reason. I mean, there is not 13232 1 wholesale manipulation of the income statement; 2 but typically quarter to quarter there's some 3 small things you can do to vary things within a 4 quarter or two. 5 Q. And was UFG or United Financial Group, 6 Inc. a public company? 7 A. Yes, it was. 8 Q. Turn two more pages to 8034, please. 9 I'd like you to go to the bottom of the page where 10 there is an arrow and another item about junk 11 bonds and tell us what that note reflects. 12 A. It makes reference to matching junk 13 bonds in terms of duration or maturity. And then 14 Charles Hurwitz, it looks like, is making a 15 reference to adding another hundred to 200 million 16 if we can get matching liabilities to go with it. 17 And then equity arbitrage is making a reference to 18 200 to 250 million as a target portfolio range. 19 Q. Did USAT go out and buy another hundred 20 to $200 million of junk bonds as a result of the 21 discussion at this meeting? 22 A. I do not know. 13233 1 Q. If it did, would that be reflected in 2 the books and records of USAT? 3 A. It should have or would have been in 4 the investment committee minutes. 5 Q. But sitting here today, you don't know 6 whether they did or they didn't? 7 A. No. I don't know which of these 8 recommendations were formally approved or 9 completed. 10 Q. Now, we've looked at one set of notes 11 and agenda for a strategic planning meeting and 12 the kinds of issues that appear to have been on 13 the agenda and discussed during the meeting. 14 Would it be fair to say that these 15 meetings were addressed at the big picture issues 16 that would affect United's ongoing profitability 17 and prospects? 18 A. Generally, yes. They were big picture 19 discussions. Sometimes the focus got down to a 20 detail level; but generally it was big picture 21 directionally, where should the institution head 22 or place its resources. 13234 1 Q. And the idea was that you wanted to see 2 where you were, where the resources could best be 3 used in order to try to make this company survive 4 and succeed in the future? 5 A. Yes. 6 Q. Is that the goal for these meetings? 7 A. Yes. 8 Q. Turn to another subject. Mr. Guido 9 asked you several questions about whether United 10 sold mortgage-backed securities in order -- and, 11 actually, high-yield bonds, as well -- in order to 12 generate accounting profits. I'm going to 13 follow-up on some of those questions. But before 14 I do, I want to talk about the mortgage-backed 15 securities arbitrage portfolios a little bit. 16 Mr. Guido asked you a number of 17 questions about other mortgage-backs, but I'd like 18 to focus on the arbitrage portfolios, 19 mortgage-back arbitrage. 20 First of all, a question about all of 21 the arbitrage portfolios that USAT had over time. 22 When you bought mortgage-backs for those 13235 1 portfolios, what was your goal? What was the 2 purpose of buying those securities? 3 A. The general intent was to create a net 4 interest margin that would be generated off of 5 those assets. 6 Q. So, if somebody were to come into this 7 courtroom and testify that you and Mike Crow were 8 always promoting the goal of maintaining the net 9 spread on those portfolios, would you agree with 10 that or would you disagree with that? 11 A. I would agree with that with one 12 exception. I think at one point there was a -- 13 and I forgot the name of the portfolio, but it was 14 a speculative portfolio. It wasn't large. But at 15 one point, there was some money set aside for 16 that. But the rest of the portfolio was to 17 generate net interest margin. 18 Q. And again, apart from the speculative 19 portfolio that was created for a period of time, 20 the arbitrage portfolios of mortgage-backs, if 21 someone said that and you Mike Crow were always 22 promoting the objective of maximizing the cash 13236 1 flow yield, would you agree with that statement? 2 A. I would say to maximize the net 3 interest margin. I don't know if that's 4 necessarily the exact same thing as the cash flow 5 yield; but generally, it's the same thing. 6 Q. The basic idea is one that you would 7 agree as the goal that you and Mike Crow were 8 promoting, correct? 9 A. Yes. 10 Q. And was that, in fact, the objective of 11 the portfolio as it was managed at USAT? 12 A. Yes. 13 Q. Was that true for Joe Phillips' 14 original RCA or risk-controlled arbitrage 15 portfolios and for the portfolio after Sandy 16 Lorenson came and set up a new portfolio in United 17 MBS? 18 A. To the best of my knowledge and 19 recollection, yes, that was the goal of those 20 portfolios. 21 Q. Did the fact that USAT was managing the 22 portfolio in order to generate net spread affect 13237 1 the way that the purchase of the securities was 2 funded? 3 A. Generally, yes, because the 4 mortgage-backs -- they were funded with what we 5 call wholesale liabilities which tended to be 6 reverse repos because those were a cheaper source 7 of funding than deposits for S&Ls at that time. 8 So, that tended to be the primary funding source. 9 Q. Now, if you were -- well, did the fact 10 that you were looking to maintain net interest 11 spread into the future affect your decisions as to 12 whether to try to lengthen the liabilities in any 13 way, to match the duration of the asset side of 14 the portfolio? 15 A. Yes. Generally, the assets were 16 long-term and the liabilities were very short-term 17 renewable liabilities. So, the goal would have 18 been to have a stabilized net interest margin as 19 opposed to one that would varied depending upon 20 swings in interest rates. So, hedges were put on 21 the books in addition to the reverse repos to 22 hedge most of the liabilities or many of the 13238 1 liabilities. 2 Q. Many of the liabilities, okay. 3 And so, that was a common thread for 4 all of the mortgage-backed arbitrage, that the 5 goal was a net interest spread over time and that 6 you funded the purchase of the securities in a way 7 that tended to lengthen the maturities to match 8 better the asset side of the equation, correct? 9 A. Yes. 10 Q. I'd like to focus now on some 11 differences. We talked about a common thread. 12 I'd like to focus now on some differences between 13 the different arbitrage portfolios that were put 14 on over time just to make sure that we're all on 15 the same page. 16 Do you recall that there was what we've 17 called in this proceeding the original Joe's 18 portfolio -- 19 A. Yes. 20 Q. -- which was put on in early 1985? 21 There was another portfolio that was put on in 22 late 1985 in a special purpose subsidiary and then 13239 1 sort of collapsed and put back into USAT at the 2 end of the year? 3 A. Right. 4 Q. Do you recall that? 5 A. Yes. 6 Q. And then do you recall that in the fall 7 of 1986, a new portfolio manager was hired and 8 another portfolio was created in a finance -- in a 9 subsidiary called United MBS Corporation? 10 A. Yes. 11 Q. So that, basically, there were three 12 portfolios which were collapsed into two 13 portfolios over time, correct? 14 A. Correct. 15 Q. Okay. Tell us what the basic structure 16 of the original Joe's portfolio was. What was the 17 structure of the assets and the liabilities and 18 the hedges? 19 A. Initially, it was fairly generic 20 mortgage-backed securities. I don't recall or 21 have the information to tell you what coupons. 22 And funded with -- primarily with reverse repos 13240 1 and hedged with interest rate swaps. 2 Q. Were there approximately equal dollar 3 amounts of liabilities and notional amount of 4 swaps on that portfolio? 5 A. Yes. 6 Q. And did you have an expectation about 7 what the achievable spread would be in that 8 structure? 9 A. Typically, the target that was 10 discussed was 100 basis points. 11 Q. Did you have an expectation about how 12 the structure would perform under different 13 interest rate changes? 14 A. When Joe put his portfolio on, I wasn't 15 there in part of that decision. But generally, it 16 was hoped that it would maintain a spread under 17 various interest rate scenarios, although in all 18 likelihood it wouldn't maintain the original 100 19 basis points. 20 Q. This is very basic, but I just wanted 21 to lay sort of a common groundwork here. 22 Tell me, if you can, what differences 13241 1 there were in the approach that was taken when 2 Sandy Lorenson set up a new mortgage-backed 3 arbitrage portfolio in United MBS. 4 A. Well, with Joe's portfolio, as you 5 mentioned, there was typically, as I recall, a one 6 for one asset to hedge ratio. So, if he put on 7 $100 million of mortgage-backs, he'd put on 8 100 million swap, which didn't necessarily leave 9 room for adjustments for prepayment speeds. So, 10 you know, looking back in theory, he maybe should 11 have put on $85 million worth of swaps with 12 $100 million of mortgage-backs. 13 When Sandy came on, Sandy realized that 14 given the volatility of the mortgage-backed 15 securities market, that that wasn't the 16 appropriate thing to do. So, she used a variety 17 of hedges that tended to have, although long 18 durations, not extremely long durations, tended to 19 be maybe three to five years. And she used 20 futures and options and caps and just a variety of 21 hedges as opposed to just using interest rate 22 swaps. 13242 1 Q. I want to ask you, if you would, to 2 look at Exhibit A13043. 3 MS. CLARK: It has previously been 4 admitted, Your Honor, and it's at Tab 1176. I 5 believe that it was offered by the OTS in the 6 testimony of Jerry Claiborne. 7 Q. (BY MS. CLARK) Can you identify this 8 document as a document that you prepared in -- I 9 believe the date there is -- well, I won't make a 10 representation in that regard. 11 Is this a document that -- 12 MR. GUIDO: I'm sorry. We haven't 13 located the document yet. Can you give us the 14 number again? 15 MS. CLARK: Certainly. It's Exhibit 16 A13043, and it's at Tab 1176. 17 MR. GUIDO: Thank you. 18 THE COURT: Would you restate the 19 question? 20 MS. CLARK: Yes, Your Honor. 21 Q. (BY MS. CLARK) Do you recognize this 22 document, Mr. Williams? 13243 1 A. Yes. I've seen it before. 2 Q. Does this relate to the -- one of the 3 programs that Ms. Lorenson put in place within the 4 United MBS Corporation portfolio? 5 A. Yes, it does. 6 Q. Okay. And is this what you were 7 referring to when you said that she used a set of 8 different hedging devices than Mr. Phillips had 9 used with respect to the original Joe's portfolio? 10 A. Yes. In this case, this was, I 11 believe, the first time we had used Eurodollar 12 futures as a hedging device. 13 Q. Now, do you recall that this program 14 was one part of the mortgage-backed securities 15 investments that she made within United 16 mortgage -- United MBS Corporation but not the 17 entire corporation? 18 A. Right. This was just one proposal or a 19 piece of that portfolio. 20 Q. And this part of the company involved a 21 structured hedge in which you would actually do 22 correlation analysis to make sure that there's 13244 1 proper co-variance between the movement of the 2 hedges and the movement of the hedged items, 3 correct? 4 A. Yes. 5 Q. And that would be different from the 6 situation in old Joe's portfolio where you simply 7 had swaps on the books that were not necessarily 8 specifically correlated to anything? 9 A. Right. The accounting treatment for 10 Eurodollar futures as a hedge was different than 11 swaps or caps or collars. 12 Q. Now, you mentioned that Joe's 13 portfolio, if we can call it that, was hedged on a 14 dollar-for-dollar basis -- one dollar of repos, 15 one dollar of notional amount of swaps -- and that 16 when Sandy Lorenson set up her new portfolio, that 17 she did not necessarily hedge the portfolio on a 18 dollar-for-dollar basis; is that right? 19 A. Yes. 20 Q. And in that sense, she didn't fully 21 hedge the portfolio if you mean by -- well, would 22 you understand the term "fully hedged" to mean 13245 1 that sort of dollar-for-dollar notional amount 2 versus hedged instrument idea? 3 A. Right. Right. 4 Q. Okay. And in that sense, it was not 5 intended that her portfolio would be fully hedged 6 the way Joe's portfolio had been? 7 A. Correct. 8 Q. And was that known to the investment 9 committee when it authorized Lorenson to set up 10 the new mortgage-back securities arbitrage 11 portfolio? 12 A. You know, if I see a document that says 13 "no, it wasn't," then no. But I believe it was. 14 I mean, it was generally understood when we 15 discussed in investment committee and was commonly 16 known. 17 Q. So, it would be your belief that that 18 was an issue that was discussed by the investment 19 committee with Ms. Lorenson and a decision was 20 made about the general approach to hedging her 21 portfolio in United MBS. Is that -- 22 A. Yes. 13246 1 Q. -- your testimony? 2 A. Yes. 3 Q. Okay. And did the investment committee 4 consider the risks, consider the approach, and 5 make a business judgment that that was a 6 reasonable approach at the time? 7 A. I believe they did. 8 Q. And again, the aim of her new portfolio 9 was to generate a net interest spread; is that 10 correct? 11 A. That's correct. 12 Q. Now, I didn't mention Mr. Bruno's 13 portfolio. Sandy Lorenson left USAT in early 1988 14 and was replaced by Mr. Bruno. 15 Do you recall whether there were any 16 new portfolios added in the mortgage-backed 17 securities area under Mr. Bruno's stewardship? 18 A. There may have been, but I don't 19 specifically remember that. 20 Q. Do you remember whether there were any 21 new initiatives or approaches that were adopted 22 during the period that Mr. Bruno was the portfolio 13247 1 manager? 2 A. No, I don't. 3 Q. I think your earlier testimony was that 4 his tenure was as a sort of caretaker tenure over 5 the existing portfolios. 6 Is that how you recall it? 7 A. That's the best of my recollection. 8 Q. And that was because of the economic 9 circumstances of the company as a whole at that 10 time? 11 A. Right, as well as just the time it took 12 to manage all the other mortgage-backs that were 13 in the portfolio. 14 Q. All right. I'd like to ask you a few 15 questions about -- going back to the sales that 16 were made out of the structured arbitrage. 17 Mr. Guido asked you about three kinds 18 of sales that are reflected in the minutes. The 19 first kind were rebalancing. The second kind of 20 sale were referred to as value trades. And the 21 third kind of sale was referred to as sales to 22 generate gain. I guess a more appropriate term 13248 1 might be to recognize gain rather than to generate 2 gain. 3 Would you agree? 4 A. Generally, those are the same; but, 5 yes. 6 Q. Let's talk about the rebalancing sales. 7 Why was there a need to rebalance Joe's 8 portfolio by making sales of the high coupon 9 securities and purchasing replacement securities 10 that had lower coupons? 11 A. I don't remember what the exact 12 economic environment was at the time and how much 13 rates fell. But generally, as he put on his 14 initial portfolio, there was a fairly steep 15 decline in terms of interest rates. And so, the 16 asset side of the investment arbitrage began to 17 prepay at a fairly rapid rate. And so, his 18 roll-down into lower coupon securities was 19 basically to stem that prepayment that had picked 20 up in the higher coupon securities. 21 Q. And was the basic idea there that if 22 you have a -- if a homeowner has a mortgage 13249 1 that's, say, 12 percent and the market rates move 2 down and he could now refinance and get a mortgage 3 at 10 percent, he's likely going to prepay the 4 mortgage? 5 A. Exactly. 6 Q. And a lot of people are going to do the 7 same thing so that the mortgage-backed securities 8 just sort of start to melt away. You have a 9 12 percent security, but fewer and fewer mortgages 10 behind that security? 11 A. Correct. 12 Q. Right? And that's because the market 13 rates have moved so that it's no longer 14 advantageous for the homeowner to keep paying at 15 12 percent. Right? 16 A. Yes. 17 Q. And what's the effect, then, of rolling 18 down the coupon of your mortgage-back? What 19 effect does that have on the rate of prepayment? 20 A. By rolling down to a lower coupon or 21 closer to what is then the current coupon or 22 current interest rate, you slow down the 13250 1 prepayment speed of the assets. So, that 2 basically gives you a longer life asset on the 3 books as opposed to having to prepay in a couple 4 of years potentially. 5 Q. And in this structured program, because 6 you have essentially lengthened the duration of 7 your funding through the hedges that you've put 8 on, that would result in a better balance between 9 the duration of the asset side and the liability 10 side? 11 A. Yes. 12 Q. And that's what we're talking about 13 with respect to rebalancing? 14 A. Yes. 15 Q. And that's what happened, correct? 16 A. Right. 17 Q. Do you recall that Mr. Gross asked lots 18 of questions about the roll-down as it was 19 occurring? 20 A. I don't remember specifically, but I'm 21 sure he did ask lots of questions. He tended to 22 ask lots of questions about those types of 13251 1 activities. 2 THE COURT: Would you speak a little 3 louder, please? 4 THE WITNESS: Yes, sir. 5 A. Yes. He probably did. I don't 6 specifically remember his questions, but Jenard 7 tended to ask a lot of questions about the 8 mortgage-backed portfolio and the roll-down. 9 Q. (BY MS. CLARK) Well, Mr. Guido showed 10 you some documents where Mr. Gross seemed to be 11 asking about the economic effect when you sell a 12 higher coupon security and replace it with a lower 13 coupon security. In particular, where Mr. Gross 14 was asking whether it was a true profit or not 15 when you sold a security at a gain and reinvested 16 the proceeds in a lower coupon security. 17 Is it a true profit to sell it at a 18 gain and invest in lower coupons? What's the 19 answer to that question? Is it a true profit? 20 A. My interpretation is no. And we 21 initially, when the roll-down program started, 22 were capitalizing those gains and rolling them 13252 1 back into the basis of the security because it was 2 still part of the original arbitrage transaction. 3 So, from my perspective, no. I think the 4 appropriate accounting would have been to defer 5 the gains. That's not what the accountants said 6 we ultimately should do, though. 7 Q. For the other history majors in the 8 room, can you just explain how that works if you 9 capitalize it and defer it into the basis? Can 10 you just walk us through what it was you were 11 doing? 12 A. If, you know, we put on 13 100-million-dollar -- a hundred million dollars 14 worth of mortgage-backs and a hundred million 15 dollars of hedges and the mortgage-backs started 16 prepaying, typically that means the interest rates 17 have fallen. So, the value of those 18 mortgage-backs have gone up and have an embedded 19 gain in them. So, if we bought them at par, maybe 20 they are selling at 105 as opposed to 100. 21 Because they are prepaying so quickly, 22 the asset side of the transaction quickly becomes 13253 1 much lower than the liability or hedge side. So, 2 if you sell the security, you have a gain. But 3 then you have to buy another security to replace 4 it. And because rates have gone down, the yield 5 on the security you bought to replace it is going 6 to yield less than the security that you just 7 sold. So, in theory, you ought to take that gain 8 and roll it into the new security that you 9 purchased to maintain the yield to raise the yield 10 back up to -- or the attempt would be close to 11 what your original yield was on your other coupon 12 security. 13 Q. Well, let me try to ask -- make sure 14 that this is clear. If you roll it into the basis 15 of the replacement security, that means that 16 you -- on your books, you take a security that you 17 may have bought for $100 and you say that you 18 bought it for 98? 19 A. Exactly. 20 Q. So, you lower the basis? 21 A. Right. 22 Q. Now what happens? What happens next? 13254 1 A. Your book yield goes up. 2 Q. The book yield goes up? 3 A. So, rather than taking the gain 4 immediately, at the bottom line, you defer that 5 gain and amortize it over the life of your new 6 asset which could be, you know, 10 or 15 years, 7 whatever. 8 Q. So, if you made even -- let me change 9 numbers here. Let's say you made $100 on the 10 sale. That is to say you got $100 more cash than 11 you bought the security for or its amortized 12 price. You have $100 of gain. You don't take 13 that into income today. Instead, you reduce the 14 carrying amount of the new security and, instead, 15 you just take the hundred dollars in over time -- 16 A. Yes. 17 Q. -- into income? 18 A. Yes. 19 Q. You just defer taking it into income? 20 A. Right. 21 Q. And that has the effect of improving 22 the book or accounting yield on the replacement 13255 1 security? 2 A. Right. 3 Q. Okay. And that's the accounting 4 treatment that you adopted during -- while the 5 roll-down was going on? 6 A. Right. That was the initial guidance 7 we got from Peat Marwick in terms of how we ought 8 to account for the gain. 9 Q. And what ultimately happened on that 10 front? 11 A. Subsequently -- and I don't remember 12 exactly who it was, but Peat Marwick came back and 13 they had gotten a ruling from their offices in New 14 York, I believe, that the accounting guidelines 15 would require us to recognize the gains on the 16 roll-down immediately as opposed to deferring it. 17 Q. And so, you went back and restated the 18 first quarter of 1986, correct? 19 A. Correct. 20 Q. And, in fact, the first five months of 21 1986, correct? 22 A. It was some time period in there, yes. 13256 1 Q. Now, when you changed the accounting 2 treatment and were forced to take the gain 3 currently instead of spreading it out over the 4 life of the replacement security, what did that do 5 to your reported book yield in the portfolio? 6 A. That significantly reduced the yield on 7 the asset side. So, the margins on those 8 transactions or arbitrages would have been 9 extremely narrow to negative. 10 Q. Let me show you a document that 11 Mr. Guido showed you. I believe it's 12 Exhibit 5010, and the tab number is 557. 13 MR. GUIDO: What's the exhibit number 14 again? 15 MS. CLARK: I think it's 5010, 16 Mr. Guido. 17 MR. GUIDO: A, B, C? 18 MS. CLARK: Oh, I'm sorry. A. 19 Q. (BY MS. CLARK) This is a packet of 20 performance reports -- 21 MR. GUIDO: I'm sorry. I don't have it 22 in the list of documents identified as exhibits. 13257 1 Let me find it for a minute. 2 THE COURT: We'll be off the record for 3 a moment. 4 5 (Discussion off the record.) 6 7 THE COURT: Back on the record. 8 Do you have it, Mr. Guido? 9 MR. GUIDO: Yes, I do. 10 Q. (BY MS. CLARK) Actually, before we 11 look at this exhibit, let me ask one or two more 12 questions about the -- about the roll-down 13 accounting. 14 Was there any difference, in your view, 15 between the transactions that occurred at the end 16 of 1985 with the sale of $350 million of 17 mortgage-backs from the USAT Mortgage Finance 18 subsidiary and what was going on in early 1986 19 with Joe Phillips' portfolio and the roll-down? 20 A. I believe the year-end '85 transactions 21 were related to the dissolution of a subsidiary or 22 special purpose subsidiary that was set up. And 13258 1 Joe's portfolio was just a whole separate series 2 of transactions and arbitrages. So, the sales in 3 '85 occurred as a result of the dissolution of 4 that subsidiary. 5 Q. And as far as you know, the sales in 6 1985 of the mortgage-backs from USAT Mortgage 7 Finance, that subsidiary, were not rebalancing 8 sales where the mortgage-backs were sold and 9 replaced at the same time with lower coupon 10 securities. They were simply sales for all time, 11 nothing -- no replacement -- 12 A. I believe that was correct. We sold 13 them, and they weren't replaced. 14 Q. So, there's really nothing to roll the 15 basis into because they weren't being replaced? 16 A. Right. 17 Q. And that would be the difference 18 between, in your view, the proper accounting for 19 those two transactions? 20 A. Yes, right. One was put on initially 21 as an arbitrage. The other one, the special 22 purpose sub, was not the same. 13259 1 Q. Ultimately, you were overruled. But 2 initially at least, you thought the fact that they 3 were being replaced meant that you should roll the 4 gain into the basis and spread it out over time? 5 A. Correct. 6 Q. Now, I'd like you to look, if you 7 would, at Exhibit 5 -- A5010 and, in particular, 8 at the second quarter performance report. This 9 document is Bates numbered at the bottom, and 10 it's -- the first page of that report is Bates 11 Page 1762. 12 Do you find that report? 13 A. Not yet. I'm getting close. 14 Q. Huh? 15 A. This number down here? I'm not sure 16 I -- 17 Q. The problem is they are not 18 sequentially numbered. 19 A. Oh, here's the very back. 20 Q. Look at the second -- I guess it's the 21 third page of that document, which is actually 22 Bates 1764. 13260 1 Do you see a reference in that second 2 paragraph to the change in accounting treatment -- 3 A. Yes, I do. 4 Q. -- for gains? And what does that 5 performance report say about the effect that that 6 accounting change had on the ongoing yields of the 7 portfolio? 8 A. That it caused the yields on the 9 securities purchase in 1986 to decline further. 10 Q. And is that the effect that you were 11 just talking about a minute ago, sort of it's an 12 arithmetic effect, really, when you have to 13 recognize the gains rather than deferring them, 14 that it causes the accounting yield to go down? 15 A. Right. That's what that next sentence 16 explains, yes. 17 Q. Now, that decline in yield could well 18 be of concern to a portfolio manager whose 19 performance is judged based on the yield of the 20 portfolio, could it not? 21 A. Yes, it would. 22 Q. And could it also make it more 13261 1 difficult for the company to track the real 2 economic performance of the portfolio? 3 A. Yes, because the gains have been taken 4 out of the portfolio and they are now in equity. 5 And generally, it's hard to track the economic 6 benefit of the equity and how that would get 7 assigned to different assets on the balance sheet. 8 Q. You just said that the gains were now 9 in equity, and I believe you made a statement to 10 that effect when you were here in December, as 11 well. 12 Could you explain to us what you mean 13 when you say that when the gains have to be taken 14 into income currently, that the gains are now in 15 equity and you can't really -- and it's hard to 16 track the economic benefit from those gains? 17 A. Well, as the gains are recognized, they 18 are booked into the income statement. And to the 19 extent that they are income, they become income 20 closes out to equity. So, it would increase the 21 equity base. But when you go back and look at the 22 return or the spread on that arbitrage, you've 13262 1 taken the gain out. And I think in one of our 2 other documents we looked at before, one of the 3 exercises we went through was to try to break the 4 gains we took out of the portfolio and assign a 5 value to that equity and roll that back into the 6 spread of the portfolio to see what the return 7 would be given value to that equity because at the 8 time, I don't remember what we gave in terms of 9 value to equity, but maybe our cost of capital was 10 15 percent. So, we would have assigned 15 percent 11 earnings to that gain or equity down there. 12 Q. And because of the way the accounting 13 worked, if you just look at the yield or book 14 yield of the portfolio, you would not have a true 15 economic picture of how the portfolio is working 16 because, indeed, there is some equity over here 17 that is also producing a benefit to the company 18 that's not counted in that yield. 19 Is that what you're saying? 20 A. Yes. 21 Q. Okay. That's the first kind of trade 22 that Mr. Guido asked you about. That's the 13263 1 rebalancing trade. And that was in early 1986. I 2 would like to ask you next about the so-called 3 value trades that are reflected in some of the 4 documents that -- from the investment committee 5 that Mr. Guido showed you. He asked you about a 6 subcommittee of the investment committee, which 7 was called the MBS trading committee. And I think 8 you answered that you didn't specifically remember 9 a committee. 10 So, I'd like to show you, if I could, 11 Exhibit B1189 again. I believe that's one of the 12 documents that Mr. Guido was questioning you about 13 on a different issue. It is the minutes of the 14 investment committee, August 25, 1986. 15 Oh, I'm sorry. I misspoke. I will 16 show you Exhibit B1189, which is a memorandum from 17 Mr. Crow to the investment committee. 18 MS. CLARK: Your Honor, I offer Exhibit 19 B1189. 20 MR. GUIDO: No objection, Your Honor. 21 Q. (BY MS. CLARK) Mr. Williams, does 22 this -- this document from Mr. Crow to the 13264 1 investment committee members indicates that "Per 2 instructions from top management, we are currently 3 at a total standstill in mortgage-backed 4 securities trading." 5 THE COURT: Excuse me, Ms. Clark. As a 6 matter of clarification, it appears that this 7 exhibit was put in the record as Exhibit B1190. 8 MS. CLARK: Thank you, Your Honor. 9 We'll refer to it that way. B1190. 10 THE COURT: It is slightly different in 11 that the underlying in the second paragraph does 12 not appear on mine. 13 MS. CLARK: May I proceed to question 14 the witness on this version, Your Honor? 15 THE COURT: Which version? 16 MS. CLARK: The one that I have in 17 front of him, 1189. 18 THE COURT: You want to put that in 19 there, too? 20 MS. CLARK: No. I just -- 21 THE COURT: All right. Proceed. 22 Q. (BY MS. CLARK) Mr. Williams, 13265 1 Mr. Crow's memo refers to the pending arrival of 2 our mortgage-backed securities expert who is -- 3 that USAT was currently trying to employ and 4 request that until such person arrives that a 5 mortgage-backed securities committee -- trading 6 committee be established. 7 Does this refresh your recollection at 8 all about the creation of a mortgage-backed 9 securities trading committee during the period 10 when you were recruiting a new mortgage-backed 11 securities portfolio manager? 12 A. Yes. 13 Q. It says -- this memo says, "As 14 opportunities present themselves, it will prove 15 beneficial to trade from one mortgage-back to 16 another to improve the overall portfolio." 17 Is that consistent with your 18 understanding of what the term "value trade" 19 meant? 20 A. It -- value trades could be included in 21 this part of that definition. I mean -- 22 Q. Now let me ask you to look, if you 13266 1 would, at the minutes of August 28, 1986, the 2 investment committee. It's Exhibit A1406, and 3 it's found in the record at Tab 543. 4 If you look at the page that has the 5 Bates No. 4861, Mr. Williams, you'll see there is 6 a paragraph -- it's the third paragraph -- where 7 there's further discussion of the value trades and 8 the creation of this new mortgage-backed 9 securities trading committee. 10 Do you see that paragraph? 11 A. Yes, I do. 12 Q. There is a reference there to Smith 13 Breeden. 14 Do you recall that Smith Breeden was 15 consulted with respect to value trades that this 16 committee engaged in during the fall of 1986 17 pending the arrival of the new mortgage-backed 18 securities expert? 19 A. I don't specifically remember that; but 20 I assume, since it's in the minutes, that's what 21 we were doing. 22 Q. And again, the term "value trade" here 13267 1 is described as a value trade that will improve 2 the overall portfolio position and yield. 3 Is that consistent with your 4 understanding of the objectives of those so-called 5 value trades? 6 A. Yes, it was. 7 Q. Go on to the next minute of the 8 investment committee, which is Exhibit A1407 and 9 in the record at Tab 544. 10 If you turn to the second page, at the 11 very top there is another reference to the 12 creation of the committee. The members were 13 Mr. Phillips, Mr. Crow, Mr. Hansen, and you. And 14 the authority to make value trades is referred to 15 in that first paragraph again. 16 Do you see that? 17 A. Yes, I do. 18 Q. If you'll go down to the fourth 19 paragraph, do you see there is a reference to a 20 lengthy discussion about the concept of a total 21 return versus a yield portfolio? Do you see that? 22 A. Yes, I do. 13268 1 Q. What was the issue that was being 2 discussed at this investment committee that's 3 referred to in that paragraph? 4 A. That paragraph to me looks like it's 5 referencing more corporate securities than 6 mortgage-backs. I guess given the last sentence 7 referring to credit risk. It's referring to 8 basically the purpose of the portfolio is to 9 generate a net interest spread as opposed to 10 generating gains from sales. 11 Q. And you believe that that's in 12 reference to the corporate securities portfolio 13 rather than the mortgage-backs? 14 A. Just based on the last -- very last 15 sentence, that the concept was very similar for 16 mortgage-backs as it was for the corporate 17 securities portfolio in terms of the intent was to 18 maintain a net interest margin over the long run. 19 Q. And the yield portfolio is the 20 portfolio where your intent is to maintain the net 21 interest margin, and the total return portfolio 22 would be the portfolio where your intent was to do 13269 1 what? 2 A. To take into consideration both the 3 yield and gains that you can generate off of 4 sales. So, it would be looking at the combination 5 of those two as opposed to just focusing on the 6 net interest spread as your return. 7 Q. And at least according to your 8 interpretation of these minutes, with respect to 9 the high-yield portfolio, it was decided at this 10 investment committee meeting that the high-yield 11 bond portfolio should continue to be managed as a 12 yield portfolio at this point. 13 Is that your interpretation? 14 A. That's my interpretation of this, yes. 15 Q. Now, in your view, was there anything 16 inconsistent between managing the mortgage-backed 17 portfolio as a yield portfolio and engaging in 18 these value trades that your committee was 19 assigned to do? 20 A. I don't believe so. The general intent 21 is to maintain a net interest margin in both of 22 them. 13270 1 Q. And the value trades that were done 2 were consistent with that intent in your 3 understanding? 4 A. Right. To try to increase the yield on 5 certain pieces of the portfolio. 6 Q. What was the purpose of these value 7 trades, more particularly? Can you explain to us 8 what was involved? 9 A. Conceptually, I guess what the managers 10 were looking at is if you had a Ginnie Mae 12 and 11 it was yielding -- depending upon the basis you 12 bought it, but let's say it's yielding 12 percent 13 and you're able to go out and find a Fannie Mae 12 14 but you can buy that at a discount so the yield on 15 that maybe is 12.05 percent, you might be willing 16 to sell the Ginnie Mae and buy the Fannie Mae 17 because you pick up 5 basis points in yield. 18 So, it's selling one security and 19 buying another fairly similar security. But 20 depending upon the pricing that exists in the 21 market, you may be able to pick up a few basis 22 points in terms of yield and improve the yield on 13271 1 the asset side. 2 Q. And the moves that you're talking about 3 would be small moves. You wouldn't be moving 4 large distances in coupon or -- 5 A. Generally, yes. It was within, you 6 know, 50 basis points, as I recall. 7 Q. And again, the purpose then would be to 8 marginally or at the margin improve the yield of 9 the portfolio without basically restructuring it 10 in any way? 11 A. Yes. It's little market aberrations 12 appear that they would take advantage of in terms 13 of bid/ask prices in the securities and the 14 resulting yields you would get. 15 Q. Okay. So, that's value trades. That's 16 the second of the three kind of transactions that 17 Mr. Guido asked you about. I'd like to ask you 18 about the third kind, and those are the ones that 19 Mr. Guido showed you where there are references to 20 trades that produced an accounting gain on sale 21 but also reduced the book yield. 22 Do you recall him showing you documents 13272 1 reflecting that kind of a situation? 2 A. I recall. I don't remember specific 3 documents, but... 4 Q. Were trades like that frequently or 5 routinely made out of the mortgage-backed 6 securities arbitrage portfolio, trades where you 7 would have an accounting gain but a decrease in 8 yield as a result of the transaction? 9 A. Generally, no. Most of the 10 transactions fell in the first two categories we 11 talked about. There may have been some trades 12 that fell in that category, but the majority of 13 them I don't recall falling in that category. 14 Q. What was the thinking of the investment 15 committee regarding those kinds of trades? 16 A. Generally, there was reluctance to go 17 in and tinker with the portfolio and take gains 18 out of it because it disrupted the net interest 19 margin or spread that was the goal of the 20 portfolio. 21 Q. Now, during this time frame -- and I'd 22 like to focus you in the same period where 13273 1 Mr. Guido was focusing you by his question, which 2 was the last quarter of 1986 and the first quarter 3 of 1987. 4 Was one of the strategic issues that 5 was facing the company during this period the 6 question of how to raise capital and how best to 7 use the capital that you had? 8 A. That sounds familiar, yes. 9 Q. Okay. Do you recall that I asked you 10 last time whether you needed to have the 11 permission of the regulators to raise capital on 12 the market? That is, to issue a capital note or a 13 capital debenture to raise additional capital? 14 A. I don't remember. You know, I don't 15 know what all the regulations were back then. But 16 generally, I would imagine we would have to have 17 their permission and involve the regulators if we 18 were to ever do anything like that. 19 Q. Just let me ask you to look at 20 Exhibit B3926 on that issue and see if it 21 refreshes your recollection. It's a memorandum 22 from Mike Crow dated February 13, 1986, to 13274 1 GerryGerry Williams, Art Berner, and you. 2 MS. CLARK: Your Honor, I offer Exhibit 3 B3926. 4 MR. GUIDO: No objection, Your Honor. 5 THE COURT: Received. 6 Q. (BY MS. CLARK) Mr. Williams, does 7 this refresh your recollection as to whether the 8 company needed to get approval by the Federal Home 9 Loan Bank of Dallas in order to raise additional 10 capital on the market? 11 A. This particular vehicle, it appears as 12 though that's the case. This looks like it has to 13 do with selling capital notes actually out of the 14 S&L as opposed to having an investment banker 15 perform a major underwriting. So, yes. 16 Q. Do you see the bottom paragraph -- the 17 first paragraph discusses selling them out of the 18 bank, and then the bottom paragraph refers to an 19 underwritten public capital note issue? 20 A. Right. 21 Q. And does that indicate that regulatory 22 approval would also be required if you had a 13275 1 public issue through a public underwriting? 2 A. Yes, it does. 3 Q. Okay. Now, as far as you know, did the 4 regulators ever grant permission to USAT to try to 5 raise capital on the market? 6 A. I do not know that specifically. 7 Q. Would it be fair to say, Mr. Williams, 8 that during this time the cost of capital to 9 United and its value to United were things that 10 were very much on the minds of management? 11 A. Yes. 12 Q. Now, going back to Joe's portfolio and 13 that experience, even though capital was extremely 14 important to United, management decided not to 15 take the gains from the sale of that portfolio in 16 the roll-down but rather to defer it over time, 17 thereby not increasing capital through that means, 18 correct? 19 A. Correct. 20 Q. When the auditors -- and that meant 21 that rebalancing could occur without affecting 22 capital one way or another. In fact, without 13276 1 affecting the current profit and loss of the 2 association, correct? 3 A. Correct. 4 Q. Once the auditors changed the 5 accounting treatment and required USAT to 6 recognize gains currently as income when 7 mortgage-backs were sold, did that mean that 8 management had to consider the effect of sales and 9 transactions on the capital level of USAT when 10 making those decisions? 11 A. Yeah. They had to consider both the 12 impact on capital as well as the impact on that 13 spread we had discussed earlier in terms of 14 maintaining the spread on the portfolio. So, both 15 of those became factors to consider. 16 Q. So, in a way, it -- that development of 17 the change in accounting treatment injected the 18 issue of the value of capital into the 19 decision-making process with respect to how to 20 manage the mortgage-backed securities portfolio. 21 Would that be fair? 22 A. Yes. 13277 1 Q. What did you do to address that issue? 2 A. What did I personally do? 3 Q. What did the investment committee do to 4 address that issue? 5 A. I know -- we had looked at some 6 documents before, but part of what we attempted to 7 do was to go back and look at the spreads on the 8 portfolios and try to factor in some value for the 9 equity that had been taken out of the portfolios 10 as gains due to the roll-down program. 11 Q. Let me show you, if I may, 12 Exhibit B1102, which again is a document that 13 Mr. Guido asked you about. It is at Tab 378 in 14 the record, and it is a memo from Doug Hansen 15 dated July 14, 1986. 16 This is a very hard document to read. 17 So, let me just read it for you. I've read it 18 enough times that I think I can do so. I'm going 19 to read under the "capital" section beginning with 20 an item that says "Implied worth of capital to 21 United is very high due to necessity to survive 22 and should be willing to pay a lot for capital. 13278 1 High worth of capital means we should hesitate to 2 realize losses for the next 18 months, even though 3 long-term economics may recommend doing so. Thus, 4 we should not call bonds or whatever at a loss. 5 We should value very highly any opportunity to 6 realize gains." 7 Then Mr. Hansen's memo goes on and 8 says, "For example, the real cost of carry of 9 Eastchase is very high because there is" -- and I 10 can't read on my copy, but it appears to be "10 to 11 15 percent unrealized gain." If we value capital 12 at 20 percent, then the carrying costs of this 13 land is $4 million even before taxes, et cetera." 14 Then there's some numbers that are hard 15 to read. "We can afford to sell that land which 16 we carry at a gain at a much lower price than the 17 land which we carry at a loss. Price is probably 18 not the major reason why we have not been able to 19 sell land, but we need to realize that the 20 break-even selling price for Eastchase and others 21 is really very low." 22 Now, I realize that you didn't write 13279 1 this memo, and I don't -- as I recall, you didn't 2 remember reading it before. But could you just 3 explain to us why the value of capital or how the 4 value of capital might enter into your 5 calculations when you were deciding whether to 6 sell a -- an asset that has appreciated that has 7 an embedded gain in it? 8 A. Well, in this particular case, one, 9 capital is very difficult to raise, especially for 10 S&Ls during that time frame. So, any incremental 11 capital you could get to support growth and 12 generate incremental earnings was intuitively just 13 very valuable. And I think he's trying to make 14 the case here in this particular real estate 15 transaction that having an asset on the books with 16 a gain and not taking the gain is extremely 17 expensive because the cost of carry on that asset 18 and all the operating expenses that go with it 19 basically go to the bottom line as losses and eat 20 up your capital. 21 And so, in this particular example, I 22 think he's recommending that to the extent we 13280 1 could get these off the books, it may be 2 beneficial to us. 3 Q. And is he saying that if you sell an 4 asset that you can get more money on the market 5 for than your cost basis is, that you will have a 6 gain which will add to your capital which you can 7 then put to more productive use rather than -- 8 A. Right. 9 Q. -- leaving it sit there in an asset 10 that's not really doing much for you? 11 A. Right. In theory, you could redeploy 12 it and grow in a more profitable area. 13 Q. So, that's the kind of thinking that 14 when capital is very important and very expensive, 15 you have to look at your assets and see whether 16 there are some that have embedded gains that 17 really aren't being put to their most productive 18 use? 19 A. Correct. 20 Q. Is that the basic idea of his 21 discussion of Eastchase? 22 A. That's what I read into this, yes. 13281 1 Q. Let me ask you to look at another 2 document that Mr. Guido showed you, I believe. 3 It's Exhibit B1212. And it's found in the record 4 at Tab 379. 5 MR. GUIDO: Is that the September 8th 6 memorandum from Doug Hansen? 7 Q. (BY MS. CLARK) This document, 8 Mr. Williams, is another memo to Mike Crow, Joe 9 Phillips, Bruce Williams regarding the 10 mortgage-backed securities trading committee. The 11 date is September 8th, 1986. 12 Does this appear to be the notes of the 13 proceedings of this little trading committee that 14 was set up in the fall of 1986 pending the arrival 15 of the new mortgage-backed securities expert? 16 A. That's what this looks like, yes. 17 Q. Okay. Would you look down at the very 18 bottom of the memo? There are two paragraphs 19 which I think are legible enough that I'll just 20 ask you to read to yourself and not read into the 21 record beginning with "The committee noted that." 22 A. (Witness reviews the document.) Okay. 13282 1 Q. Mr. Williams, there is a reference in 2 the first of those two paragraphs to the recent 3 accounting change. 4 Do you understand that to refer to the 5 change of Peat Marwick's position with respect to 6 recognizing gains on the roll-down in Joe 7 Phillips' mortgage-backed portfolio? 8 A. That would be my understanding or 9 interpretation, yes. 10 Q. And there is a reference here to a 11 trade-off that exists in every transaction now 12 that the recent accounting change has been made. 13 Can you explain to us what trade-off 14 you are faced with if the accountants are going to 15 make you recognize gains on your sales out of the 16 portfolio? What trade-off does that present to 17 you? 18 A. Well, it's very similar -- the 19 accounting would be similar to what we had 20 discussed earlier on Joe Phillips' roll-down 21 trades in that if you sell one security and invest 22 in another, if the sale generates a gain, that 13283 1 gain is required to be reported as income. So, 2 you're not able to defer that gain on the basis of 3 a new security and maintain the yield, book yield, 4 although there is economic value to that equity. 5 So, you have to consider the value of the equity 6 and the gain that you got off the sale when you 7 look at the overall yield of the new asset. 8 Q. You have two sides. One is your equity 9 is going to go up because you're going to 10 recognize a gain currently. But the other side is 11 that the book yield, sort of an arithmetical 12 result, the book yield is going to go down -- 13 A. Correct. 14 Q. -- as a result of such a transaction, 15 correct? 16 A. Correct. 17 Q. And you have to have some kind of -- he 18 refers here to some sort of decision rule that 19 says "Is the value of the capital high enough that 20 it makes up for the decline in book yield"? 21 A. Correct. 22 Q. And did the little committee that was 13284 1 set up, did you try to consider this trade-off as 2 you went ahead and carried out your 3 responsibilities with respect to the 4 mortgage-backed portfolio in the fall of 1986? 5 A. I believe we did. 6 Q. Do you recall how you did that? 7 A. We developed -- and once again, I don't 8 know where it fell out. But as he says at the 9 bottom of the first page, the cost of capital, you 10 know, ranges from 9 to 10 percent or 28 percent, 11 and I believe we came to some agreement as to how 12 we would value capital. And it may have been 13 15 percent. So, we would add the value of that 14 capital back into the return of the security to 15 judge whether the yield had truly increased or 16 decreased. 17 Q. And that was a decision rule which you 18 at least wanted to consider that information when 19 making a decision as to whether to do any 20 particular transaction or not? 21 A. Yes. 22 Q. Let me ask you to look at B1231, if you 13285 1 would, please. 2 THE COURT: Ms. Clark, how much more do 3 you have? 4 MS. CLARK: Your Honor, I have, I would 5 say, another 15 minutes on this line and then 6 maybe 15 minutes on one final subject. 7 THE COURT: All right. We'll adjourn 8 until 1:30. 9 10 (Luncheon recess.) 11 12 THE COURT: Be seated, please. We'll 13 be back on the record. 14 You may continue with your 15 cross-examination. 16 MS. CLARK: Thank you, Your Honor. 17 Q. (BY MS. CLARK) Mr. Williams, before 18 the break, we were talking about the decision rule 19 that you and the members of the mortgage-backed 20 securities trading committee tried to apply in 21 deciding whether to engage in these so-called 22 value trades and the fact that that would depend 13286 1 on the value that United was placing on capital. 2 I'd ask you to look at -- 3 MR. GUIDO: Objection, Your Honor. 4 That isn't the testimony. 5 Value trades, I think, are something 6 separate from generating capital, Ms. Clark. 7 There is no testimony in the record that the value 8 trades were done to generate capital. It was to 9 generate yield, I think the witness testified to. 10 I object to her phrasing of the 11 question, Your Honor. It mischaracterizes the 12 testimony. 13 THE COURT: Well, maybe you'd better 14 have the witness explain it. 15 Q. (BY MS. CLARK) Mr. Williams, do you 16 recall the document -- I believe it's in front of 17 you -- Exhibit B1212, the memo by Mr. Hansen of a 18 meeting of the MBS trading committee on 19 September 18th, 1986? We discussed that 20 immediately prior to the break. 21 A. Yes. 22 Q. September 8th, 1986. Do you see the 13287 1 paragraph that discusses a trade-off and a 2 decision rule at the bottom of the document? 3 A. Oh, yes. 4 Q. And there is a reference there to the 5 decision rule hinging on the value United places 6 on capital; is that correct? 7 A. Yes. 8 Q. Let me ask you: Did the 9 mortgage-backed securities trading committee try 10 to consider the value of capital to the company 11 when deciding whether to approve trades that would 12 result in recognized -- in a recognition of 13 accounting gains but a decline in accounting 14 yield, the trade-off that we were discussing 15 immediately before the break? 16 A. Yes. The intent was to give some 17 economic value to that equity so that you could 18 come up with an adjusted yield or an adjusted 19 return. 20 Q. Would you look, please, at 21 Exhibit B1231, the September 22nd, 1986 memo from 22 Mr. Hansen regarding the mortgage-backed security 13288 1 trading committee? 2 A. Yes. 3 Q. Do you see that the committee noted 4 that the implied capitalization rate on the 5 transaction being discussed in this memo was 6 21 percent? 7 A. Yes. 8 Q. Is that 21 percent number a measure of 9 the trade-off that was involved in selling the 10 security now and investing the capital gain 11 elsewhere as opposed to leaving that appreciated 12 security on the books and collecting the 13 above-market interest rate over time into the 14 future? Is that a measure of that trade-off? 15 A. That -- right. That 21 percent times 16 the gain booked would give you the implied ongoing 17 earnings value of that gain. 18 Q. Does that 21 percent represent a sort 19 of break-even point with respect to that 20 trade-off? 21 A. Well, the 21 percent would be our 22 implied cost of capital. So, I'm not real sure 13289 1 how to answer your question exactly. 2 Q. Well, let me ask you this way: The 3 complied cost of capital number, is that the 4 number that says essentially if we can earn at 5 least 21 percent on this capital that we are 6 creating through the trade, if we can earn at 7 least 21 percent on it, then this is a wash, this 8 is a break-even transaction? 9 A. Right. In this case -- no, I see what 10 you're saying. That's what that 21 percent 11 references. 12 Q. Okay. And that's one piece of 13 information that the committee considered in 14 making a decision as to whether to approve this 15 particular transaction; is that correct? 16 A. Correct. 17 Q. What the sort of break-even point would 18 be on that transaction. 19 Now, that 21 percent number is a little 20 bit higher than the 15 percent number that you 21 were talking about earlier and also a little 22 higher than the 20 percent number that we saw in 13290 1 some of the documents? 2 A. Right. 3 Q. But you still decided, based on your 4 analysis, to go ahead with this transaction; is 5 that correct? 6 A. Well, I wasn't -- I guess Doug Hansen 7 and Smith Breeden did. It looks like Mike Crow 8 and I, on this particular transaction, weren't 9 there to approve it. But yes, I would guess they 10 went ahead and approved it. I don't know 11 specifically whether they did or not. 12 Q. Yes, you're quite right to point that 13 out. I did not notice that you were both absent 14 from this meeting. 15 So, it appears from this transaction 16 that Smith Breeden was consulted and that Doug 17 Hansen was the member of the committee who was 18 present at the time that this transaction was 19 approved; is that correct? 20 A. Yes. 21 Q. This analysis that we see in this 22 document of the implied capitalization rate, was 13291 1 that part of your effort to consider the economic 2 impact and not just the accounting impact of a 3 sale of a security at a gain? 4 A. Yes, yes. 5 Q. And this is the kind of analysis that 6 you and the other members of the committee did 7 during the period that you were operating in this 8 little committee to approve the trades until the 9 new portfolio manager came on board? 10 A. Yes. 11 Q. Okay. Well, I think we've covered all 12 of the different kinds of transactions that 13 Mr. Guido asked you about: The rebalancing 14 transactions in Joe's portfolio, the so-called 15 value trades, and the transactions which resulted 16 in accounting gains but a decline in accounting 17 yields. 18 Let me ask you whether any of those 19 kinds of transactions had anything to do with 20 trying to make a profit from short-term rate 21 swings in the market? 22 A. Of those three type of transactions, 13292 1 no. The intent was managing the net interest 2 spread. 3 Q. As far as you knew at the time, did any 4 of these transactions, these kinds of 5 transactions, hurt the company economically? 6 A. To the best of my knowledge, no. 7 Q. And do you have any reason to think 8 that they hurt the company as you sit here now 9 today? 10 A. No, I do not. 11 Q. I'd like to read to you something that 12 the OTS has said about the management of United's 13 mortgage-backed securities risk-controlled 14 arbitrage portfolios? 15 MS. CLARK: And, Your Honor, this is 16 from Paragraph 209 of the notice of charges. 17 Q. (BY MS. CLARK) What the OTS says is 18 that "All trades of the MBS portfolios were made 19 to generate an illusory profit to bolster USAT's 20 net-worth." 21 Mr. Williams, is that a true statement 22 or a false statement? 13293 1 A. I believe it to be a false statement. 2 Q. Based on your observation and 3 experience at USAT, that's simply a false 4 statement? 5 A. Yes. 6 Q. Let me ask you to look, Mr. Williams, 7 at Exhibit B1327, which was previously admitted in 8 evidence and is found at Tab 188. I was going to 9 ask you to look, Mr. Williams, at the exact same 10 document that Mr. Guido asked you about, but it 11 does exist in another form which we can show you 12 if people are having trouble finding the exhibit. 13 Do you have the exhibit in front of 14 you? 15 A. This new one? 16 MS. CLARK: For the record, Your Honor, 17 I'm asking him to look at T4310 which, I believe, 18 was previously admitted in evidence at Tab 188. 19 MR. GUIDO: Would you describe the 20 document, please? 21 MS. CLARK: Yes, Mr. Guido. It's a 22 memo from Bruce Williams dated November 24th, 13294 1 1986. The subject is a review of the MBS/swap 2 arbitrage activities. 3 Do you have your copy? 4 MR. GUIDO: I have it. 5 Q. (BY MS. CLARK) Mr. Williams, this 6 document appears to be an analysis in 7 November 1986 of the overall results of the MBS 8 arbitrage to date. 9 Is that what this document represents? 10 A. Yes. 11 Q. And was this the kind of analysis that 12 you were called on to prepare from time to time to 13 assist senior management in making the business 14 decisions that it faced? 15 A. Yes. 16 Q. Now, the results of your analysis were, 17 in fact, presented to the investment committee, I 18 believe. And I'd like you to take a look at the 19 document that we have marked as Exhibit A1419, 20 which is the minutes of the investment committee 21 meeting of November 25, 1986, and has been 22 previously admitted in evidence as Tab 350. 13295 1 Mr. Williams, would you look at the 2 second page of the minutes and, in particular, at 3 the second-to-the-last paragraph? And does this 4 reflect that you did present a report on the 5 MBS/swap arbitrage activities to the meeting of 6 the investment committee on November 25, 1986? 7 A. It indicates I presented a report. I'm 8 not real sure if it was this or some derivative of 9 this, but -- 10 Q. Then if you would look at the Bates 11 Page No. 5112, can you identify the report in 12 question? 13 A. Yeah. That's the same report. 14 Q. Now, Mr. Guido asked you several 15 questions about this document. It does indicate 16 that as of the date of this analysis, there was a 17 mark-to-market loss on the interest rate swaps of 18 $122 million; is that correct? 19 A. That's what the memo says, yes. 20 Q. And if you compared that to both the 21 amount of the realized gains on the asset side and 22 the unrealized gains on the asset side, you would 13296 1 see that there is about a 43-million-dollar 2 negative mark-to-market number again as of the 3 date of this analysis? 4 A. Yes. 5 Q. Is that correct? And if you would turn 6 to the next page. Do you see that you've analyzed 7 what the net spread is as of that date, as well? 8 A. Yes. 9 Q. And what was that number? 10 A. Net spread on that piece of the 11 portfolio was negative 99 basis points. 12 Q. And again, did anyone suggest to you 13 that those results were too negative to put in a 14 document that was submitted to the investment 15 committee and available for review by auditors or 16 examiners or anyone else who looked at the 17 investment committee minutes? 18 A. No. 19 Q. Take a look at the last part of the 20 memo. This is the part that Mr. Guido did not ask 21 you about. 22 Do you see where you talk about 13297 1 "Although the $67 million of realized gains had 2 been credited as a source of free funds in the 3 previous table, the equity gains could 4 theoretically be leveraged to support 1.1 billion 5 of new asset growth assuming a 6 percent capital 6 liability ratio, thus assuming a 15 percent cost 7 of capital. The economic impact of recognizing 8 the MBS gains is actually about break-even when 9 the equity capital is fully leveraged." 10 Do you see that? 11 A. Yes. 12 Q. Then you have some -- a schedule that 13 shows in numbers what you were talking about in 14 the paragraph immediately above. 15 Is this basically the same sort of 16 reasoning that we saw in the other memos and the 17 minutes, talking about how you have to -- in order 18 to get a true economic picture, you have to take 19 into account the economic value of capital to the 20 association? 21 A. Yes. This is an example of that. 22 Q. And again, this would be part of 13298 1 management's efforts to look at the economic 2 reality and not just the accounting results of 3 this portfolio's performance; is that correct? 4 A. Yes. 5 Q. I have one final subject I'd like to 6 ask you about. 7 Mr. Guido asked you about a memo that 8 you wrote in June of 1987 in which you refer to a 9 transfer of adjustable rate mortgages and caps 10 from United MBS to USAT. 11 Do you recall being questioned about a 12 memo you wrote on that subject? 13 A. I recall some questioning about that, 14 yes. 15 Q. Now, in response to his questioning, I 16 believe you testified that you're no longer sure 17 that your memo was factually accurate with respect 18 to a transfer of caps from United MBS to USAT. 19 Do you recall that? 20 A. Yes. 21 Q. And you said the reason you were no 22 longer certain that your memo was factually 13299 1 accurate was that I had shown you some documents 2 that raised a question in your mind. 3 Do you recall that? 4 A. Yes. 5 Q. And when Mr. Guido asked you what those 6 documents were, you were unable to recall what 7 they were and to tell him. 8 Is that as you recall? 9 A. It seems the best of my knowledge, yes. 10 Q. I'm not sure I recall either, but I 11 would like to show you some cap contracts that we 12 found in the records of USAT. Those documents 13 have been marked as Exhibits B4428 through 4432. 14 I misspoke. Let me correct that. I should have 15 said B4228 through 4232. 16 MR. GUIDO: These are the documents 17 that were supplements to the exhibit list? They 18 are beyond the range of exhibit numbers that were 19 given to the OTS at the outset of this proceeding. 20 MS. CLARK: These are documents that 21 have been added to the exhibit list and provided 22 to you as requested last Saturday, I believe, 13300 1 Mr. Guido. 2 MR. GUIDO: At the direction of the 3 Court. 4 MS. CLARK: Your Honor, I offer 5 Exhibits B4228, B4229, B4230, B4231, and B4232. 6 MR. GUIDO: No objection, Your Honor. 7 THE COURT: Received. 8 Q. (BY MS. CLARK) Mr. Williams, these 9 are five different documents, each of which is 10 entitled "Interest rate protection agreement." 11 Do you recognize these to be what we 12 would call a cap agreement or a cap contract? 13 A. Yes. 14 Q. Okay. These contracts are all dated 15 March 16th, 1987. 16 Can you identify who the parties to 17 these contracts are? And I believe they are all 18 the same, but you should look and satisfy 19 yourself. 20 A. It looks like United Savings 21 Association and Merrill-Lynch Capital Services in 22 each case. 13301 1 Q. Okay. And each of these contracts has 2 been executed on behalf of United Savings 3 Association of Texas by Sandra Lorenson; is that 4 correct? 5 A. Yes. 6 Q. Now, Mr. Williams, if it were the case 7 that these are among the cap contracts referred to 8 in your memo, would this cause you to question 9 whether your memo was factually accurate as to the 10 fact that a transfer had occurred from United MBS 11 to USAT? 12 A. If this is the only documentation 13 related to these caps, it would imply that the 14 caps were already in the association. They were 15 not in the sub. So, they wouldn't have been 16 transferred. 17 Q. Now, there has been expert testimony 18 that it was USAT and not UMBS or United MBS that 19 paid for the caps referred to in your memo and 20 that the payment went through USAT's general 21 ledger. 22 Do you recall that USAT's general 13302 1 ledger was called the consolidated transaction 2 list or USAT consolidated transaction list? 3 A. No. 4 Q. Let me show you a document which has 5 been marked as Exhibit B3778. Mr. Williams, this 6 document that we've marked as Exhibit B3778 7 includes excerpts from two different sets of 8 documents that we found from the -- in the records 9 of United. One is the consolidated transaction 10 list, and that's what is on the first page and the 11 several following pages. And then toward the back 12 of this exhibit, there are some pages from 13 something called the USAT director's report proof 14 list. 15 Can you tell from looking at the 16 document with it right in front of you whether the 17 consolidated transaction list appears to be a 18 portion of the general ledger of USAT? 19 A. It looks like it could be, but I am not 20 that familiar with the general accounting reports 21 that were used. So, I couldn't positively tell 22 you one way or the other. 13303 1 Q. Okay. Well, tell me, if you would, 2 then, if you bought a cap -- you spent some money, 3 paid the fee, and bought a cap which would provide 4 interest rate protection for you for some period 5 of time, how would that purchase be reflected in 6 the accounting records of the company that bought 7 the cap? 8 A. There would either be an asset or a 9 liability. I'm not real sure which side of the 10 balance sheet it would show up on: Credit, 11 debits. Maybe there would be an asset on the 12 books for the cost of the cap which would be 13 amortized over the life of the cap. To the extent 14 that interest rates went up and the rate went 15 through the ceiling of the cap, there would be 16 general ledger entries into the income and expense 17 part of the general ledger to reflect either 18 payments we received or paid. 19 Q. Okay. 20 MS. CLARK: Your Honor, I do not 21 believe this has previously been received in 22 evidence, and I would offer it at this time. 13304 1 MR. GUIDO: Objection, Your Honor. The 2 document is incomplete. And as this witness has 3 testified repeatedly, when you're talking about 4 the financial records, you have to have the 5 complete set of financial records before you. 6 These are only excerpts of these transactions. 7 There could be and most likely are other 8 transactions in these ledgers that reflect how 9 these funds actually flowed through the 10 organization, Your Honor. 11 Ms. Clark said she was going to produce 12 the entire consolidated transaction list for these 13 particular months to me. She did not do so. She 14 only produced a portion of them, Your Honor. 15 I do not believe that it's appropriate 16 for this document to be received into evidence. 17 First, this witness can't authenticate the 18 document. Second of all, I haven't received the 19 entire document to be able to examine this witness 20 about the document at all. I presume that she's 21 going to try and show that there were some entries 22 in this document that are relevant to this issue. 13305 1 I do not believe that that's 2 appropriate, Your Honor. This witness has 3 testified repeatedly that you have to have the 4 full financial records before you before you can 5 do so. And there has been no such document 6 produced to us as yet. And pursuant to the 7 Court's order, I do not think the document should 8 be admitted into the record at this time. If 9 Mr. Crow is coming up, there's plenty of time to 10 address this issue coming down the road, Your 11 Honor. I do not believe that to use a document 12 that is potentially that misleading, given the 13 fact that this witness says you have to see the 14 entire financial records to ascertain what 15 happened to those funds, it would be inappropriate 16 to have that document introduced at this time. 17 THE COURT: Well, it does seem like the 18 witness doesn't know anything about the document. 19 So that -- or maybe I'm overstating it, but he 20 doesn't profess to have a great deal of knowledge 21 about it. I think we should have a witness that 22 knows something about it if we're going to 13306 1 introduce it. 2 MS. CLARK: Your Honor, these documents 3 were produced from the records of USAT. They have 4 been made available to us through the FDIC, and 5 Mr. Guido has had access to the consolidated 6 transaction lists of both United Savings 7 Association of Texas and United Mortgage -- MBS 8 Corporation for several years now. 9 I am prepared to offer as an exhibit, 10 if the Court would prefer, the entire consolidated 11 transaction list for the month of March which was 12 offered to Mr. Guido over the weekend. Apparently 13 he decided he wasn't interested in looking at it. 14 MR. GUIDO: Your Honor, that's an 15 incorrect statement. The document was not made 16 available to us. It initially was offered -- the 17 document was offered to us, and then we were told 18 we weren't going to get it. We did not expect the 19 document to be introduced. And that is the fact, 20 Your Honor. And I think that Ms. Clark has 21 totally misstated. And if you look at the size of 22 that document, it falls within the scope of what I 13307 1 have objected to, that Williams & Connolly has 2 done repeatedly in this case, in trial, walking 3 in -- walking in and dropping a document on this 4 desk, that this document is almost a full 8 to 5 10 inches thick, Your Honor. There is no way I 6 can evaluate that document at this time and to be 7 able to question this witness about that document. 8 And I think that to use that document 9 now is a clear violation of your order that you 10 directed her to produce that document over the 11 weekend and she did not do it, Your Honor. 12 MS. CLARK: Your Honor, this is an 13 unfortunate misunderstanding. Perhaps I'm not in 14 the -- I don't make a practice of questioning 15 opposing counsel's bona fide. So, I'm sure there 16 is a misunderstanding here. It is my 17 understanding that he was provided with an actual 18 copy of the entire consolidated transaction list 19 for United MBS, and he was told this document 20 would be available for him if he wished to have it 21 over the weekend and we were told that he never 22 got back to us to pick it up. It took a 13308 1 considerable amount of time to copy it. 2 I do not propose to offer the entire 3 document in evidence because there are only three 4 or four pages of it that are pertinent to the 5 inquiry. But Mr. Guido has made a suggestion to 6 this Court that when we identify the cap purchases 7 on the USAT general ledger, that that was somehow 8 not evidence that the caps were USAT caps because 9 the USAT general ledger somehow included UMBS. 10 So, I am prepared to prove, through the 11 use of the documents from the records of the 12 association, that the USAT general ledger and the 13 United MBS general ledger for the period in 14 question are not overlapping. It's a point that 15 was put into dispute by a suggestion made by 16 Mr. Guido. That's the purpose of having both of 17 these documents here. 18 It seems to me that it's a fair point 19 to address. And the idea that these documents are 20 somehow unavailable to Mr. Guido after all these 21 years and after all of the contentions he's made 22 about those records, I think is simply not a fair 13309 1 point to make. 2 MR. NICKENS: Your Honor, might I add 3 one point to this? The OTS expert witness, 4 Mr. Hargett, examined these very documents and 5 came to the conclusion that they -- and testified 6 in this proceeding -- I believe that Ms. Clark has 7 the transcript reference -- that these 8 transactions went through the books of USAT and 9 not United MBS. 10 Now, precisely the opposite suggestion 11 was made by Mr. Guido through the questions to 12 Ms. Mims. You'll recall toward the end of the day 13 we went back and forth several times on that, and 14 I indicated that we would try to come forth with 15 the evidence that would indicate what I believe to 16 be the case as reflected by Mr. Hargett's 17 testimony. 18 Now, Mr. Hargett is their expert 19 witness who has examined these books and come to 20 that conclusion and testified in the record in 21 this case. And now for Mr. Guido to not have -- 22 not to want those records to become a part of the 13310 1 record, I don't know what further we would have to 2 do to come forward to authenticate them. 3 THE COURT: Well, I think both sides 4 should have both sets of records, and we should 5 have a witness that can testify as to the 6 accounting procedures. And it doesn't seem like 7 Mr. Williams is that witness. So, I'm sustaining 8 the objection at this time. 9 MS. CLARK: Your Honor, may I ask voir 10 dire of this witness regarding the books and 11 records of the association? 12 THE COURT: Yes. 13 14 VOIR DIRE EXAMINATION 15 16 Q. (BY MS. CLARK) Mr. Williams, do you 17 recall that the general ledger of USAT was 18 maintained separately from the general ledger of 19 United MBS so that transactions entered into by 20 the association were in a different set of profit 21 and loss and interest expense and premium 22 amortization accounts and the like than 13311 1 transactions involving United MBS? 2 A. Yeah. It was my understanding that 3 there was a separate general ledger for each 4 entity and each subsidiary. And United MBS would 5 have showed up on United Savings Association, just 6 as one line, "investment in subsidiary" or 7 something along those lines. But there was a 8 separate set of general ledger accounts for each 9 subsidiary. 10 Q. And if we would take the general ledger 11 of United MBS on a given date and compare it with 12 the general ledger of USAT MBS -- I mean USAT 13 itself for a given account, for example, an 14 account showing the holdings of Ginnie Maes, would 15 we be able to tell whether one general ledger was 16 a subset of the other? 17 A. Well, I don't know if you could tell by 18 looking at the general ledger; but by definition 19 of a general ledger, they should not have been a 20 subset. Ginnie Maes booked on United MBS would 21 not be on United Savings Association's books. 22 Q. And would the same be true that Ginnie 13312 1 Maes owned by United MBS would not be booked on 2 USAT's general ledger? 3 A. Yes. 4 Q. And would that also be true for cap 5 agreements or cap contracts? 6 A. Yes. 7 Q. So that if you found the cap agreements 8 on the USAT general ledger, that would indicate 9 that they were USAT caps, correct? 10 A. Yes, yes. 11 Q. And not United MBS caps, correct? 12 A. Yes. 13 MR. GUIDO: Your Honor, may I voir dire 14 the witness? 15 THE COURT: Yes. 16 17 VOIR DIRE EXAMINATION 18 19 Q. (BY MR. GUIDO) Was there a 20 reconciliation account that was maintained at the 21 USAT level? 22 A. I'm sure there were many reconciliation 13313 1 records. 2 Q. Was there a reconciliation account for 3 transactions between subsidiaries of USAT and 4 USAT? 5 A. I don't specifically know that. 6 Q. You don't know that? 7 8 FURTHER VOIR DIRE EXAMINATION 9 10 Q. (BY MS. CLARK) Let me ask you: If 11 there were a transfer of an asset including a cap 12 from United MBS to USAT, would that require that 13 you make an entry into both general ledgers to 14 show it going from one to the other? 15 A. Yes. 16 Q. And if there is no such entry, would 17 you conclude that no such transfer occurred? 18 MR. GUIDO: Objection, Your Honor. 19 This isn't voir dire at this point in time. This 20 is asking the witness questions about this 21 document that Ms. Clark is now trying to introduce 22 again over our objection. I still think that it's 13314 1 appropriate to get someone who knows something 2 about the accounting system. She's talking about 3 a general -- 4 THE COURT: If he knows the answer to 5 these questions, he can answer. I still haven't 6 changed my ruling on what I said, that I think the 7 document should be exchanged, both parties should 8 have them. There should be a witness that can 9 answer the questions about the accounting. 10 MS. CLARK: Your Honor, I believe that 11 the document is really no longer necessary to 12 prove the point that we are advocating here. And 13 I think the witness is capable of answering the 14 questions and is doing so. So, I think I've 15 concluded my examination on that subject. 16 I thank you, Mr. Williams. 17 THE WITNESS: Thank you. 18 Q. (BY MS. CLARK) Oh, I'm sorry. I 19 understand that we did not get an answer for the 20 record to the last question which is: If there is 21 no entry on the books and records of either USAT 22 or United MBS showing a transfer of cap agreements 13315 1 from one to the other, would you conclude that no 2 such transfer occurred? 3 A. Yes. 4 MS. CLARK: Thank you. I now have 5 concluded my questions. I appreciate it. 6 THE COURT: Mr. Guido, do you have some 7 redirect? 8 MR. GUIDO: Yes, Your Honor. 9 10 FURTHER EXAMINATION 11 12 Q. (BY MR. GUIDO) Mr. Williams, was 13 the -- who were the people that were responsible 14 for maintaining the consolidated transaction list 15 of USAT? 16 A. In terms of this particular document? 17 Q. No. Just the consolidated transaction 18 list. I'm not asking you to refer to any 19 document. If you know. 20 A. It would be a combination of -- in 21 terms of -- what do you mean by "maintaining"? 22 Q. Who were the people who were 13316 1 responsible for making the entries into the -- 2 into the -- 3 A. It would primarily fall in the treasury 4 department and the accounting department. 5 Q. Okay. And who in the treasury 6 department? 7 A. It would have been a combination of 8 people that worked in the operations, security, 9 settlement area. 10 Q. Okay. And who was the head of that 11 department? 12 A. Mary Mims. 13 Q. And are they authorized to make any 14 transactions or insert any transactions in there 15 with regard to securities unless a proper approval 16 had been received for those transactions? 17 A. No, they are not. 18 Q. And how do they get their approval? 19 A. They would get trade tickets with 20 proper signatures or initials on them. 21 Q. Okay. And do those trade tickets 22 typically indicate the entity on whose behalf the 13317 1 transaction was to be executed for? 2 A. Yes. 3 Q. And how do the people who have the 4 initials on the trade tickets know whether or not 5 the transaction that's being executed is 6 authorized? 7 A. You would have to ask them. Typically, 8 what would happen is we would -- the treasury 9 department would review the minutes of the 10 investment committee and basically make sure that 11 the trades had been authorized by the investment 12 committee. So, there would be some documentation 13 to back that up. 14 Q. Specific transactions had to be 15 authorized by the investment committee? 16 A. Well, actually, by the time a trade 17 ticket got down to the operational area, they had 18 to settle it. It wasn't like they could turn it 19 back. All they could do was report that there had 20 been a violation and that this particular 21 transaction may or may not have been approved. 22 But once the ticket got down there, the 13318 1 transaction was committed. So, they settled it. 2 Q. Will you take a look at the exhibit -- 3 I think it's the May 26th, 1986 investment 4 committee minutes that Ms. Clark showed you. 5 THE COURT: Do you have an exhibit 6 number, Mr. Guido? 7 MR. GUIDO: Your Honor, I'm trying to 8 find the number. Let me get it here. It's 9 May 26th, 1986, Your Honor. While we're looking 10 for that, Your Honor, I'd like to direct the 11 witness' attention to a series of investment 12 committee documents that are dated starting in 13 February of 1987: A1431, Your Honor. A1432, Your 14 Honor. A1434, Your Honor. A1435, Your Honor. A, 15 1437, Your Honor. A1438, Your Honor. A1439, Your 16 Honor. And A1440. 17 MS. CLARK: Your Honor, are these 18 documents that were used in the direct examination 19 of Mr. Williams? I don't believe I used them in 20 my cross-examination. 21 MR. GUIDO: They were not used in 22 direct examination. They are in response to your 13319 1 claim that these transactions were -- they are in 2 response to your suggestion and your extracting 3 testimony which you believe supports the 4 conclusion that the caps were appropriately on the 5 books and records of USAT. 6 MS. CLARK: Are there tab numbers, 7 Mr. Guido? 8 MR. GUIDO: I don't know if there are 9 any tab numbers. I have the documents. I don't 10 know of any tab numbers. 1432 through 1441. 11 MS. CLARK: Your Honor, without the tab 12 numbers, it will take us some time to find the 13 documents. 14 THE COURT: We'll be off the record 15 until we find the documents. We'll take a short 16 recess. 17 18 (A short break was taken.) 19 20 THE COURT: Be seated, please. We'll 21 be back on the record. 22 MR. GUIDO: Your Honor, I'd like -- 13320 1 THE COURT: You may continue, 2 Mr. Guido. 3 Q. (BY MR. GUIDO) I'd like to direct 4 your attention, Mr. Williams, to Tab 531, A1394, 5 the investment committee minutes that Ms. Clark 6 directed your attention to earlier. 7 MS. CLARK: 531A? 8 MR. GUIDO: Tab 531. 9 MS. CLARK: That's the investment 10 committee minutes of May 28, 1986? 11 MR. GUIDO: That's correct. And it's 12 Exhibit A1394. Your Honor, I have -- 13 14 (Discussion off the record.) 15 16 MR. GUIDO: Have you found a copy, Your 17 Honor? 18 THE COURT: Yes. 19 Q. (BY MR. GUIDO) I'd like to direct 20 your attention, Mr. Williams, to the -- see where 21 it says "Guideline strategies, A, investment 22 committee"? "The committee shall establish 13321 1 investment policy criteria, approve specific 2 investments made by and on behalf" -- 3 A. I'm sorry. I'm not on the same page 4 you are. 5 Q. I'm sorry. On Page US3004756 under the 6 "investment policy." 7 Do you see that? 8 A. Okay. 9 Q. Do you see where it says "investment 10 committee" under "guideline strategy"? 11 A. I do. 12 Q. It says, "The committee shall establish 13 investment policy criteria, approve specific 14 investments made by and on behalf of the company." 15 Do you see that? 16 A. Yes. 17 Q. Is that what you were referring to when 18 you said that the investment committee had to 19 approve specific transactions? 20 A. I believe so, yes. 21 Q. Okay. Now, I'd like to direct your 22 attention to the packet of investment committee 13322 1 minutes that I gave -- that I put in front of you 2 starting with A1432. In fact, I'd like you to 3 flip over to 1433. We added an additional one, 4 and it wasn't necessary. I'd like to direct your 5 attention to Bates stamp number US3005420.023 of 6 that document. 7 MS. CLARK: Your Honor, I'm sorry. I'm 8 lost. I can't -- I don't know what document he's 9 referring to. Is this exhibit -- 10 MR. GUIDO: A1433. 11 MS. CLARK: 1433? We don't seem to 12 have it. 13 MR. NICKENS: 384. 14 MS. CLARK: Okay. 15 Q. (BY MR. GUIDO) And do you see the 16 Bates stamp .023? 17 A. This page? 18 Q. No. I'm sorry. It's the page that 19 says "mortgage market" at the top. If you flip 20 back to Page 022, it's the beginning of that 21 section. It refers to market review, treasury 22 market, economic indicators, mortgage market, and 13323 1 then activity highlights, P&L highlights on 024, 2 and then plans for the coming week. 3 Do you see that? 4 A. I see that. 5 Q. Is that what the investment committee 6 report that Sandy Lorenson made to the investment 7 committee typically contained? 8 A. Without going through each and every 9 one of them, I would say, yes, typically it 10 contained those elements. 11 Q. Now, I'd like to direct your attention 12 to -- back to .023, that page. See where it says 13 "activity highlights"? 14 A. Yes. 15 Q. "The MBS subbalance stands at 1.2 16 billion. Last month's prepay figures prompted 17 some pruning of the 1 billion high coupons." 18 The second -- 19 THE COURT: Mr. Guido, excuse me. The 20 document you're referring to, 1433, I can't find 21 the pages you're citing. And I think there are a 22 couple versions of that document, and you're 13324 1 reading from one that's not in the record. 2 MR. RINALDI: Here's the version I 3 think you're reading from. 4 MR. BLANKENSTEIN: Your Honor, it may 5 be that the Bates stamp pages are out of order. 6 They were out of order in my copy of this exhibit, 7 as well. 8 MR. GUIDO: Your Honor, here's a copy 9 of A1433 as we understand it as being part of the 10 record. 11 THE COURT: Well, the version that you 12 just gave me has these Bates numbers in the back, 13 and the one that was received does not. It's a 14 different document that was received. A1433 was 15 received in October, but it is not -- it does not 16 have those numbers. 17 MR. GUIDO: Does yours have the imaging 18 numbers, Your Honor? 19 THE COURT: The document that was 20 received does not have the .023, point 0 numbers 21 to it. 22 MR. GUIDO: Okay, Your Honor. 13325 1 THE COURT: The one that you -- the 2 copy that you just gave me was the one that was 3 withdrawn and another one was substituted for. 4 MR. GUIDO: March 11, '87, the A1433 5 that I have been addressing was withdrawn. And 6 the one that you have, which is US3 -- 7 THE COURT: It's another version of the 8 same document of the same date, minutes of the 9 investment committee, but it doesn't have those 10 numbers you've been quoting. 11 MR. GUIDO: Your Honor, in that case, I 12 move -- I have a feeling that the document that 13 I'm looking at is more complete than the document 14 that was introduced then, Your Honor, because I 15 don't see the pages where -- Your Honor, I would 16 like to move A1433 as -- A1433A as a more complete 17 rendition of the investment committee minutes that 18 are in the record as A1433. 19 MS. CLARK: Your Honor, I'll need to 20 see a copy of what he's moving in. I have no idea 21 at this point. 22 MR. GUIDO: This is a document that 13326 1 Mr. Griffith had prepared and there had been some 2 confusion about the Bates stamp numbers. 3 Subsequent to that, we have been able to ascertain 4 the accuracy of those pages that he produced. And 5 it is -- it starts with US3005416, Your Honor. 6 And it goes through US3005463. And then it picks 7 up at US3005420.007 through US3005420.36. 8 THE COURT: Well, that document was 9 previously offered and then withdrawn. 10 MR. GUIDO: That's correct, Your Honor. 11 MS. CLARK: Is the copy of the 12 March 18, 1987 minutes that's in my book here, is 13 that also being offered at this point? 14 MR. GUIDO: Does that also have the 15 same problem? 16 MS. CLARK: It's just stuck into A1433 17 in the middle of my copy. 18 THE COURT: We'll be off the record. 19 20 (Discussion off the record.) 21 22 THE COURT: I will receive the pages as 13327 1 1433A, the ones that are marked US3005420.001 2 through .036. 3 MR. GUIDO: Thank you, Your Honor. 4 THE COURT: And that's Exhibit A1433A. 5 Q. (BY MR. GUIDO) I'd like to direct 6 your attention now to the Bates stamp .023, 7 Mr. Williams. It says, under "activity 8 highlights," "The MBS subbalance stands at 9 1.2 billion. Last month's prepay figures prompted 10 some pruning of the 1 billion high coupons. The 11 second wave of purchases for the sub, based on a 12 new capital infusion, will consist of Fannie Mae, 13 Freddie Mac swap 9s in combination with Fannie Mae 14 9 IO strip to create a synthetic Fannie Mae 12 15 coupon that prepays like a Freddie Mac/Fannie Mae 16 9. To hedge the financing of the asset, a series 17 of cap agreements to five years is used. (See 18 handout). The result is an asset that yields 19 between 8.99 percent and 9.26 percent which is 20 financed by repo capped at 7 percent rate for four 21 years." 22 Do you see that? 13328 1 A. I see that. 2 Q. Okay. And is it your understanding 3 that the minutes of the investment committee were 4 intended to reflect the activities that were 5 approved by the investment committee? 6 A. Yes, I believe they were. 7 Q. Then take a look at the next -- a 8 couple of pages in at .025. It has an MBS 9 portfolio activity of February 25th through 10 March 10th. 11 Do you see that? 12 A. Yes, I do. 13 Q. Okay. And under "MBS sub," it has a 14 series of caps. 15 Do you see that? 16 A. I see that. 17 Q. And it says two-year cap, 30 at 18 7 percent. 19 Do you know what "MBS sub" refers to? 20 A. I think it's the MBS sub. 21 Q. It's United MBS? 22 A. Yes, I believe that would be -- 13329 1 Q. Then look at the three-year cap, 30 at 2 7; four-year cap, 30 at 7; five-year cap, 40 at 8. 3 Do you see that? 4 A. I see that. 5 Q. Do you know what the numbers 30, 30, 6 and 40 refer to? 7 A. The notional amount of the caps. 8 Q. Okay. And do you know what the 9 percents refer to? 10 A. I would assume that's the cap 11 percentage above which are -- it's the strike 12 price, basically, of the cap. 13 Q. Now, I'd like to direct your attention 14 to A1434, which is the next exhibit. I'd like to 15 direct your attention to the page stamped 16 US3005497. 17 THE COURT: Would you say that again? 18 MR. GUIDO: 005497, Your Honor. 19 Q. (BY MR. GUIDO) I'd like to direct 20 your attention under "Activity highlights" in that 21 report. It says, "We finished purchases of a 22 total of 500 Ginnie Mae 9 and a halfs for the MBS 13330 1 subsidiary. These are hedged by a series of OTC 2 cap agreements to a five-year liquidation 3 horizon." 4 Do you see that? 5 A. I see that. 6 Q. Now, is the MBS subsidiary that's 7 referred to United MBS? 8 A. I would think that's what that implies, 9 yes. 10 Q. Okay. And what's "OTC" refer to when 11 it makes reference to "OTC"? 12 A. I don't know. 13 Q. Does that refer to over-the-counter? 14 A. It very well could. 15 Q. Okay. Look at the next page, O005498. 16 Do you see under "United MBS"? 17 A. Yes. 18 Q. It says, "OTC three-month LIBOR caps"? 19 A. Yes. 20 Q. Is that making reference to the 21 purchase of cap agreements for United MBS? 22 A. It makes reference to cap agreements 13331 1 which were assigned to United MBS. 2 Q. Now, I'd like to direct your attention 3 to A1435. It says, March 25, 1987. 4 Do you see that? 5 A. I see that. 6 Q. And look at Bates stamp 5510. Do you 7 see the section under "plans"? 8 A. Yes. 9 Q. It says, "Purchased some portfolio 10 insurance that both maximizes the maturity 11 matching credit obtained, minimizes USAT's cost, 12 and provides maximum profits if rates increase 100 13 basis points by year end." 14 Do you see that? 15 A. I see that. 16 Q. Okay. Now turn to 005514. 17 Does that show the purchase of any caps 18 in any entity or assigned to any entity at USAT? 19 A. What page are you looking at? 5514? 20 Q. 5515. Excuse me. 21 A. And the question was? 22 Q. Does that refer to the assigning of the 13332 1 purchase of any caps? 2 A. I don't believe I see any caps on here. 3 Q. Okay. Now I'd like to direct your 4 attention to the minutes of April 16th, 1987, 5 which is A1438. That on the first page says that 6 "Ms. Sandy Lorenson then discussed the 7 mortgage-backed securities portfolio. She 8 presented reports which were ordered attached to 9 the minutes of the meeting." 10 Then I'd like to direct your attention 11 to US3005626. 12 Do you see that entry? 13 A. I see that page, yes. 14 Q. Okay. It says, "Mortgage-backed 15 securities transferred to investment portfolio." 16 In the first column, it says "settlement month." 17 Do you see that? 18 A. I see that. 19 Q. The second says "quantity," third says 20 "security," fourth says "rate." Then it says 21 "book price, book yield, and cap rate." 22 Do you see that? 13333 1 A. I see that. 2 Q. What's the cap rate refer to? 3 A. You would have to ask Sandy. 4 Q. Well, does "cap," in your 5 understanding, refer to a cap agreement? 6 A. It could, but I don't know that because 7 these cap rates aren't the same cap rates that 8 were in the other minutes. So, I don't know what 9 this refers to. 10 Q. You don't know what this refers to? 11 A. No, I don't. 12 Q. But it makes a reference to a transfer 13 to the investment portfolio. 14 Do you see that? 15 A. I see the title of the page, yes. 16 Q. Do you recall any transfers of any 17 assets and cap agreements from United MBS to USAT 18 at the time in the spring of 1987? 19 A. Nothing specific without seeing the 20 books and records. 21 Q. But you did write a memorandum at the 22 time? You recall writing a memorandum about 13334 1 transfers? 2 A. Uh-huh. (Witness nods head 3 affirmatively.) Yes. 4 Q. Did you have any reason to believe when 5 you wrote that memorandum that it was false? 6 A. When I wrote it, no; but I've made more 7 than one mistake in life. So... 8 Q. Now, you indicated that -- when I asked 9 you questions about the caps, you said that they 10 were assigned to United MBS. 11 Do you remember that? 12 A. Yes. 13 Q. Now, can -- were there any transactions 14 at the time that you were the treasurer at USAT 15 that were assigned to United MBS initially but 16 were paid for by USAT? 17 A. There could have been. 18 Q. Okay. And why do you say there could 19 have been? 20 A. I don't have the books and records to 21 look at entries and follow transactions; so, I 22 don't -- 13335 1 Q. Did the regulations require the books 2 and records of the associations to separately 3 distinguish between the activity of the thrift -- 4 the registered thrift with the Federal Home Loan 5 Bank Board and its subsidiaries? 6 A. I don't know what all the regs were 7 related to accounting for subsidiaries; so, I 8 couldn't answer that. 9 Q. Were there instances that you can 10 recall that USAT purchased an asset which it 11 assigned to a sub for regulatory purposes? 12 A. Where we purchased an asset -- 13 Q. USAT purchased -- made payments, 14 purchased an asset which for regulatory purposes 15 it assigned to a subsidiary. 16 A. I don't know that that ever occurred, 17 no. 18 Q. Okay. But it could have? 19 A. Could have. 20 Q. But you don't know? 21 A. I don't know. 22 Q. Okay. Now, if the investment committee 13336 1 minutes do not show a purchase of caps, the 2 particular purchases of the caps that Ms. Clark 3 showed you the contracts for -- 4 A. Right. She showed me some contracts. 5 Q. -- would those have been authorized 6 transactions? 7 A. If they weren't in the minutes 8 somewhere in some minutes, they would have fallen 9 under that classification potentially, yes. 10 Q. Now, I'd like to direct your attention 11 to another issue. 12 You testified that the -- when 13 Ms. Clark asked you about the -- your analysis of 14 the mortgage-backed security portfolio at USAT, 15 and your memorandum of November 24th, 1986, which 16 was a review of MBS swap arbitrage activities. 17 I'd like to show you another rendition of that 18 memorandum. This is a memorandum that says -- 19 also dated November 24th, 1986. 20 THE COURT: Would you identify it for 21 the record, please? 22 MR. GUIDO: Yes, Your Honor. 13337 1 MS. CLARK: Your Honor, would you ask 2 Mr. Guido to provide us with a copy of what he's 3 using with the witness, please? 4 MR. GUIDO: Your Honor, I'm rather 5 surprised that that request is made. This 6 document was provided to me over the weekend 7 pursuant to your Court order by Ms. Clark herself. 8 THE COURT: Well, let's identify it. 9 MR. GUIDO: This is a document that is 10 labeled B3861. It's from Bruce Williams to 11 Jenard Gross, Jerry Williams, and Mike Crow dated 12 November 24th, 1986. And it has some handwritten 13 comments on that document. 14 Do you need a copy, Ms. Clark? 15 MS. CLARK: Thank you. 16 MR. GUIDO: Uh-huh. This is a document 17 I received, and Ms. Clark didn't ask you any 18 questions about. 19 I move the admission of Exhibit B3861, 20 Your Honor. 21 MS. CLARK: No objection. 22 THE COURT: Received. 13338 1 Q. (BY MR. GUIDO) Now, Ms. Clark asked 2 you about your review of the MBS swap arbitrage 3 activities, and she showed you a copy of the 4 report that was inserted into the minutes. 5 Do you recall her questions about that 6 document? 7 A. Not specifically about which document. 8 Q. Let me ask you something about this 9 document. 10 Does this document have your 11 handwriting on it? 12 A. A few of the numbers on here are mine, 13 yes. 14 Q. Okay. And which ones? 15 A. The ones that say "Joe Phillips' 16 portfolio," the 1986 November, December, January, 17 February, March, the numbers to the right of those 18 are not mine. 19 Q. Which numbers to the right of those? 20 A. The right -- 21 Q. The dollar figures? 22 A. I don't know what they are. I don't 13339 1 know if they are dollars, dates, or -- 2 Q. Okay. The numbers to the right are not 3 yours? 4 A. Right. And I believe down in the lower 5 section where it says 4/14, those are mine, and 6 the 35 -- 7 Q. Okay. 8 A. -- look like mine. I guess those 9 numbers in that area, I probably wrote. 10 Q. Have you reviewed this document with 11 Ms. Clark? 12 A. Ever? 13 Q. Ever. 14 A. I may have. 15 Q. When? 16 A. It would have been back before December 17 of last year, whenever it was I testified before. 18 Q. Have you reviewed any documents with 19 Ms. Clark between the time that you testified in 20 December and you appeared today to testify? 21 A. No. 22 Q. Now, with regard to these documents, it 13340 1 says, "Joe Phillips' MBS portfolio." 2 What does that refer to? 3 A. It refers to Joe Phillips' MBS 4 portfolio. 5 Q. Okay. Is this memo about the Joe 6 Phillips MBS portfolio? 7 A. I would believe it to be, yes. 8 Q. Okay. Now, let's take a look at the 9 figures that you say are in your handwriting. You 10 see, it says "MBS gains recognized to date," the 11 typewritten figure is 67. 12 Do you see that? 13 A. I see that. 14 Q. Okay. And then there is some kind of a 15 notation. 16 Do you know what that is? 17 A. No, I don't. 18 Q. Okay. Then it says, 96. 19 Do you see that? 20 A. I see that. 21 Q. If we added up the figures that are in 22 those columns under November, December, January, 13341 1 February, March, and we added them to the 67 and 2 we came up with a 96 figure, would that 96 figure 3 essentially be $96 million? 4 A. It could be, but I don't know. I can't 5 tell you factually where that came from. The 96 6 that's on this page handwritten is not my 7 handwriting, nor are those numbers out to the 8 right. So -- 9 Q. Okay. So, the 96 isn't your 10 handwriting either? 11 A. No. 12 Q. Is the 4/14 your handwriting? 13 A. Yes. The 4/14 is mine. The negative 14 64, the 32, the 35, and the negative 67 -- 15 Q. Okay. 16 A. -- are all mine. 17 Q. Now, was this an effort to update the 18 figures that you had developed on November 24th, 19 1986? 20 A. I do not recall. 21 Q. You don't recall? 22 A. No. 13342 1 Q. But those are your figures? 2 A. That's my handwriting. 3 Q. That's your handwriting. And you did 4 do the calculations to ascertain what the negative 5 figure was during the -- for the period 4/14/87? 6 A. I don't know that to be -- I don't know 7 what those numbers are, I think I said. So, I 8 don't -- 9 Q. All right. Now, if those figures under 10 November, December, January, February, March are 11 gains on sales of mortgage-backed securities out 12 of Joe's portfolio, were they -- would they have 13 been made because interest rates had declined 14 during that period of time? 15 A. Without having all that laid out in 16 front of me, I do not know what the economic 17 environment was. 18 Q. I'd like to show you Exhibit A11012, 19 which is the expert report of Darrell Duffie which 20 is at, I think, Tab 244. And it's a report dated 21 January 11th, 1997. And I'd like to direct your 22 attention to Table 4.2.2. 13343 1 THE COURT: Would you state that again, 2 please, Mr. Guido? 3 MR. GUIDO: Pardon? 4 THE COURT: What was the table again? 5 MR. GUIDO: Table 4.2.2, Your Honor. 6 THE COURT: Thank you. 7 MR. NICKENS: Could we have a page 8 reference, Your Honor? 9 MR. GUIDO: There are no pages. There 10 are only table numbers. 11 12 (Discussion off the record.) 13 14 MS. CLARK: Your Honor, does the Bench 15 copy have the tables that Mr. Guido is referring 16 the witness to? 17 THE COURT: It has a Table 4.2.2. It 18 has treasury yield curves for various periods and 19 dates. 20 MS. CLARK: Your Honor, I apologize; 21 but for some reason, our copies don't have that. 22 If Mr. Guido doesn't mind, I'll just look at the 13344 1 same copy -- 2 MR. GUIDO: We'll all be looking at the 3 file copy if you want to come over with the 4 witness. 5 Q. (BY MR. GUIDO) I'd like to direct 6 your attention to the 10-year treasury yield and 7 ask you: What does it show with regard to 8 interest rates at 12/31/86? 9 A. It says 7.76. 10 Q. And what does it show with you regard 11 to March 31, '87? 12 A. 7.85. 13 Q. And what does it show with you regard 14 to June 30, 1987? 15 A. 8.71. 16 Q. Okay. Now I'd like to address your 17 attention to the 30-year treasury yield and direct 18 your attention to 12/31/86. 19 What does that show? 20 A. 7.96. 21 Q. And for 3/31/87, what does that show? 22 A. 8.46. 13345 1 Q. And for 6/30/87, what does that show? 2 A. 8.92. 3 Q. Does that reflect interest rates 4 increasing or decreasing during that time period? 5 A. Basically increasing. 6 Q. Now, I'd like to direct -- ask you, do 7 you know what prepayments were doing beginning in 8 October -- the end of October 1986 through March 9 of 1987? 10 A. No, I don't know. It would depend upon 11 what coupon the securities were. I have no idea. 12 Q. Assume that the prepayments were 13 increasing. 14 MR. NICKENS: Prepayments on what, Your 15 Honor? I mean -- 16 Q. (BY MR. GUIDO) Assume that 17 prepayments on current coupon MBSs were increasing 18 during that period of time. Okay? 19 A. Yeah. I don't quite understand the 20 assumption. 21 Q. Just assume that fact. 22 A. A current coupon security, if rates are 13346 1 increasing, it would be somewhat illogical to have 2 prepayment speeds increasing also. So, I'm not 3 sure I understand. I'll assume -- 4 Q. Just assume the fact. 5 A. Okay. 6 Q. Just assume the fact. I mean, you're 7 not -- you've said you're not an expert in 8 mortgage-backed securities, didn't you? 9 A. I'm not an expert; but generally, I 10 have a feel for the direction and the reaction to 11 rates. But no, I'm not an expert. 12 Q. Suppose markets go too far in one 13 direction and then they correct back. 14 A. Different markets do all kinds of 15 things. 16 Q. But at times, don't markets go too far 17 in one direction and then they correct back? 18 A. I guess they theoretically could. 19 Q. Now, the -- assume that the prepayments 20 increased and assume that interest rates were 21 going up as I showed you from the expert report of 22 Darrell Duffie. 13347 1 What would have been the justification 2 for rolling down securities? 3 A. I don't know what the securities in the 4 portfolio were. 5 Q. Current -- 6 MR. NICKENS: Your Honor, could we have 7 the witness finish his answer? 8 A. Without having a detailed listing of 9 the portfolio, many of them could be high coupon. 10 They are not current coupon. So, if you're making 11 up a scenario where they are current coupon, I 12 don't know. I would have to go back and look at 13 the minutes to see what the logic was. I wasn't 14 the portfolio manager. 15 Q. (BY MR. GUIDO) Assume that the 16 mortgage-backed securities during this time period 17 were mortgage-backed securities of current coupon, 18 prepayments were increasing -- I mean decreasing, 19 and interest rates were going up. 20 A. A while ago, you said prepayments were 21 increasing. 22 Q. I said prepayments were decreasing. 13348 1 Excuse me. I corrected myself. 2 Assume -- I'll rephrase the question. 3 You seem to be getting confused. 4 A. Well, I am. A second ago you said 5 interest rates were increasing and prepayment 6 speeds were increasing and I was trying to 7 clarify. That didn't make sense. 8 Q. Interest rates are going up during this 9 time period. Okay? 10 A. Uh-huh. (Witness nods head 11 affirmatively.) 12 Q. And prepayments are increasing and 13 there are current coupon mortgage-backed 14 securities in the portfolio. 15 Would rebalancing to protect against 16 increasing prepayments have been a justification 17 for those sales? 18 A. I don't have any idea. I don't have 19 any basis for being able to make -- come to a 20 conclusion. 21 Q. Based on that hypothetical? 22 A. No. 13349 1 Q. Okay. You can't reach a conclusion 2 about that hypothetical? 3 A. No. 4 Q. Now, I'd like to direct your attention 5 to a document that is in the record at Tab 1011. 6 It is Exhibit B2785. And attached to it is a 7 blown-up version of the same document without the 8 exhibit number for ease of reading. 9 MS. CLARK: Is that B4103? 10 MR. GUIDO: B2785, Tab 1010. 11 MS. CLARK: 1010? 12 MR. GUIDO: 1010. 13 MS. CLARK: Okay. 14 Q. (BY MR. GUIDO) This is a copy of the 15 work papers of the auditors, Peat Marwick, of 16 USAT. And I'd like to read what it says to you. 17 It says, "PM representative Joe Parsons discussed 18 the accounting treatment of junk bonds" -- 19 THE COURT: Where are you reading from, 20 Mr. Guido? 21 MR. GUIDO: Your Honor, I'm reading 22 from the document which is B2785. I have a blown 13350 1 up rendition which makes it easier to read. 2 THE COURT: Are you reading the first 3 line? 4 MR. GUIDO: The first line, the very 5 beginning of the document, Your Honor. 6 THE COURT: Okay. 7 MR. GUIDO: And that's why I provided 8 everyone with a blowup of the document. 9 Q. (BY MR. GUIDO) It says, "PM 10 representative Joe Parsons discussed the 11 accounting treatment of junk bonds with Bruce 12 Williams on 4/23/89. I told Bruce that" -- 13 MR. RINALDI: '87. 14 MR. NICKENS: '87. 15 MR. GUIDO: Pardon? 16 MR. RINALDI: '87. 17 MR. GUIDO: Excuse me. 18 Q. (BY MR. GUIDO) "I told Bruce that it 19 was our understanding from the audit work that 20 United was to establish a, quote, 'trading 21 portfolio of junk bonds' in addition to their 22 investment portfolio. Williams informed me" -- 13351 1 this is the next paragraph -- "that such an 2 account was not established because they believe 3 that they have not" -- 4 MR. NICKENS: "They were." 5 Q. (BY MR. GUIDO) "They were not 6 currently trading the junk bonds. In fact, the 7 association does not have a bond trader, but they 8 are in the process of attempting to hire a trader. 9 He stated that subsequent to" -- something -- "a 10 bond trader" -- 11 MR. NICKENS: Hiring. 12 Q. (BY MR. GUIDO) "Hiring a bond trader, 13 that they would revisit the concept of a trading 14 account." 15 And then it says, "The association has 16 not established a trading account for -- has 17 established a trading account for MBS in 18 accordance with information supplied to us during 19 the annual audit." 20 Okay. Now, you testified about a spec 21 account. Do you recall that in the MBS portfolio? 22 A. I believe so, yes. 13352 1 Q. And is that last paragraph making 2 reference to that spec account? 3 A. I believe it would. 4 Q. Okay. Now, do you recall making those 5 statements to Joe Parsons with regard to the junk 6 bonds? 7 A. I don't recall specifically a whole lot 8 of conversations 12 years ago. But if he wrote 9 it, I assume we had those conversations. 10 Q. Is making sales out of a portfolio to 11 generate quarterly gains to bolster capital 12 trading, in your view? 13 A. It may be trading in one particular 14 transaction, yes. It could be interpreted as 15 that. It depends on what the transaction was 16 generated for. 17 Q. It was generated solely for the purpose 18 of generating profits? 19 A. If it was generated for the purpose of 20 profits, it could be interpreted as that. 21 Q. I'd like to show you another document 22 which is at Tab 568. It's dated November 17th, 13353 1 1986. And it is A10690. 2 MS. CLARK: Tab number? 3 MR. NICKENS: 568. 4 MS. CLARK: Huh? 5 MR. NICKENS: 568. 6 Q. (BY MR. GUIDO) Have you had an 7 opportunity to review that document? 8 A. The first page. 9 Q. Please take a look at the second page. 10 A. (Witness reviews the document.) 11 Q. Look at the very last sentence. It 12 says, "The portfolio will not be mark-to-market on 13 a periodic basis since it is not a trading 14 account." 15 Do you see that? 16 A. I see that. 17 Q. Okay. And is that policy making 18 reference to high-yield or junk bonds? 19 A. Well, it's related to corporate debt 20 securities is what the title of it is. 21 Q. Are corporate debt securities 22 high-yield bonds in USAT's portfolio? 13354 1 A. They were included as that, yes. 2 Q. Now, I'd like to show you Tab 566, 3 which is a document labeled T4302. That says from 4 Mike Crow to Bruce Williams dated November 13th, 5 1986. "We had a discussion at the investment 6 committee on selling junk bonds for profits for 7 purposes of quarterly earnings. Ron Huebsch made 8 an impassioned plea to get the word now if we're 9 going to need a lot of profits because the market 10 is favorable right now to getting out of some 11 bonds, taking a profit, and having a chance of 12 getting back into some good-yielding stuff. He's 13 probably absolutely correct. GRW and I stated 14 that we would need major amounts of profits 15 because we cannot depend on such things as a 16 branch sale, loan servicing sale, and consumer 17 loan sale to pull us out of the fire. Charles 18 asked to see some projections on the quarter prior 19 to making a definitive decision. Would you start 20 pulling together what you think the quarter would 21 look like without extraordinary gains? It should 22 be macro in nature and it should not be an 13355 1 elaborate exercise and, in my opinion, should not 2 take more than about an hour. At least, that is 3 the kind of effort I am envisioning." 4 Do you see that? 5 A. I see that. 6 Q. Okay. What's the reference to Charles 7 in there? 8 A. I would assume Charles Hurwitz. 9 Q. Okay. And what's the reference to GRW 10 there? 11 A. Jerry Williams. 12 Q. Okay. Now, if these -- if sales had 13 been made, substantial sales had been made to 14 generate major amounts of profit out of that 15 portfolio, would that make the statement that you 16 made to the auditors as expressed in B2785 false? 17 A. Which is -- (Witness reviews the 18 document.) I don't necessarily think so, but it 19 certainly doesn't totally comply with what we were 20 talking to the auditors about. 21 Q. What do you mean it doesn't totally 22 comply? 13356 1 A. Well, it said we wouldn't be until we 2 got a manager -- I'd have to review this again. 3 (Witness reviews the document.) Okay. If you 4 interpreted this as trading securities, then yes, 5 it wouldn't be following what I had talked to Joe 6 Parsons about. 7 Q. Okay. Now, you as a treasurer received 8 this memorandum from Mike Crow, Exhibit T4302. 9 Right? 10 A. Right. 11 Q. Okay. And you as the treasurer, 12 because of your supervision of the people that 13 execute trades, would know the turnover in the 14 portfolio. Right? 15 A. I wouldn't necessarily sit down and 16 calculate the turnover each month, no. 17 Q. But you do review the records of -- 18 that are generated from the accounting system, do 19 you not? 20 A. There are lots of records. So, no, I 21 can't say I review every record that comes out of 22 the general ledger accounting system. 13357 1 Q. So, you may not have known what the 2 turnover was in the high-yield bond portfolio at 3 the time you made that statement? 4 A. Not necessarily, no. 5 Q. So, you may have made a statement not 6 intentionally trying to make -- leave a false 7 impression? 8 A. I made a statement basically 9 representing what my interpretation of the 10 investment committee policy was and desires. 11 Q. And this was to the auditors -- 12 although you -- the auditors for the end of the 13 year audit for November of nineteen -- or December 14 of 1986. Yet, on November 13th, 1986, you had 15 received a memorandum saying "tell us how much 16 gains you need because Ron Huebsch sees some good 17 candidates to take gains out of the high-yield 18 bond portfolio." 19 MS. CLARK: Objection, Your Honor. The 20 document that he is questioning the witness about, 21 I believe, is a third quarter 1987 -- or first 22 quarter 1987 document. And I believe his 13358 1 characterization of this document is materially 2 inaccurate. 3 A. This document you're referring to is 4 dated 1986. 5 Q. (BY MR. GUIDO) Right. 6 A. And this is dated 1987. So, this was 7 subsequent to the fact, not before the fact. So, 8 what transactions took place after November '96 to 9 March of -- or November '86 to March of '87, I 10 have no idea. So, was this statement materially 11 correct or incorrect? I don't know without seeing 12 all the transactions that transpired. 13 Q. I asked you to assume -- 14 A. I can assume all kinds of things. 15 So -- you're asking me to make comments on facts, 16 not assumptions. So -- 17 Q. I was asking you to assume -- 18 THE COURT: All right. State your 19 assumption. 20 Q. (BY MR. GUIDO) I asked the witness to 21 assume that substantial sales were made out of the 22 high-yield bond portfolio sometime subsequent to 13359 1 November 13th, 1986, and prior to the date on 2 Exhibit 2785. 3 If that had been the case, would your 4 statement to the auditors have been correct. 5 MR. EISENHART: Your Honor, I would 6 object to the hypothetical question to the extent 7 he's asking the witness to render what is 8 tantamount to an expert accounting opinion on 9 this. It's an incomplete hypothetical. He has 10 not addressed in any respect the intent of the 11 party -- the intent of USAT at the time it 12 purchased the securities that were sold. And 13 we've heard testimony in this courtroom that, in 14 effect, that was the key consideration. He hasn't 15 addressed that at all in his hypothetical. 16 MR. GUIDO: Your Honor, that wasn't 17 Mr. Claiborne's testimony. Mr. Claiborne 18 testified that his understanding of the accounting 19 rules is that you look at intent and experience, 20 and the memorandums in the file show that 21 expressly. And Mr. Eisenhart knows what the 22 testimony was. He tried to elicit the contrary 13360 1 testimony from the witness and the witness 2 concluded otherwise, Your Honor, on redirect 3 examination. 4 MR. EISENHART: Mr. Guido's question in 5 no respect addressed the issue of intent. We 6 don't know whether these were securities that were 7 bought and held for a day or whether they were 8 securities that were bought and held for two 9 years. And that's all the testimony has been. 10 That makes a very big difference. 11 MS. CLARK: Your Honor, I also object 12 to the hypothetical question. This not only goes 13 beyond the scope of any cross-examination that I 14 gave, I think it's very misleading to the witness. 15 The witness has already answered the question. He 16 said that if you interpret this as trading 17 securities, then it wouldn't necessarily comply. 18 And as we know from the testimony we've had, 19 "trading" is a technical term in the accounting 20 profession. And I believe that his attempt to ask 21 hypotheticals is trying to elicit expert testimony 22 without giving Mr. Williams the proper foundation 13361 1 of assumptions and so on. I think this is a line 2 of questioning that goes way beyond the scope of 3 anything that was covered in cross-examination. 4 It's not appropriate for this witness. 5 THE COURT: Well, I believe he can tell 6 us whether his statement to the auditors are 7 consistent with a certain state of facts. 8 A. Well, there was four and a half months 9 between November 13th, which is this memo here, 10 and 3/31/87 when I talked to Joe Parsons. So, in 11 four and a half months, a lot of things could have 12 transpired both in terms of whose managing the 13 portfolio -- apparently, we didn't have an 14 official manager at some point in there. 15 So, this statement isn't necessarily 16 false because I don't know what happened in that 17 four-and-a-half-month period, nor who was managing 18 the portfolio. 19 Q. (BY MR. GUIDO) So, if trades had been 20 made since November 7th, 1986, you're saying that 21 wasn't currently trading in your view? Is that 22 what you're saying? 13362 1 A. I don't know the reason for the trades, 2 if it was trade for credit reasons, trade because 3 deals were closed and completed. I have no idea 4 what generated those transactions. So, I can't 5 comment on them. You would have to ask Ron or 6 whoever generated the transactions. 7 Q. Well, I mean, is it fair to infer that 8 the memo dated November 13th, 1986, that was sent 9 to you by Michael Crow is talking about generating 10 sales -- making sales to generate profits to 11 bolster the quarterly earnings? 12 A. Yes. And as I mentioned at the very 13 beginning of testimony today, there are 14 transactions which occur close to quarter end that 15 you can put in current quarter or the next 16 quarter. And whether these fell into that 17 category or not, I don't know. They weren't 18 necessarily just taken for gains. I have no idea 19 of being able to testify why these were sold. 20 Q. But you did testify that there were 21 sales that were made out of the portfolio 22 periodically -- the high-yield bond portfolio 13363 1 periodically to generate gains at quarter end? 2 A. There could have been. Out of an 3 800-million-dollar portfolio, there very well 4 could have been. 5 Q. And I think in your deposition -- I 6 mean, we can go back to your deposition if you 7 want. But in your deposition, you indicated that 8 at least it did happen some of the time. 9 Do you recall that? 10 A. No, but it very well could have. 11 MS. CLARK: Your Honor, I object. If 12 Mr. Guido is going to be asking questions from his 13 deposition, I think it's incumbent on Mr. Guido to 14 bring the deposition in and present the testimony. 15 MR. GUIDO: Your Honor, at this hour, I 16 would rather we just proceed and I'll just drop 17 the question. 18 Q. (BY MR. GUIDO) With regard to the 19 turnover in the mortgage-backed security 20 portfolio, do you recall how substantial it was in 21 the third, fourth quarters of 1986 and the first, 22 second quarters of 1988? 13364 1 A. No, I do not. 2 Q. So, you don't know whether or not there 3 were significant sales out of the mortgage-backed 4 securities portfolios in the third, fourth 5 quarters of 1986 and the first, second quarters of 6 1988 to generate profits to bolster net-worth at 7 quarter's end? 8 A. No, I do not know. 9 Q. Now, I'd like to direct your attention 10 to another document which is the -- has been 11 admitted at T4463 in the record. And it is at Tab 12 1262. 13 Do you recall that you testified to -- 14 MS. CLARK: Mr. Guido, could you give 15 us a moment to find the document before you begin 16 your questioning? 17 MR. GUIDO: Do you have the document? 18 MS. CLARK: Yes. Thank you. 19 Q. (BY MR. GUIDO) Do you recall 20 testifying in response to a question from 21 Ms. Clark that you didn't know whether or not the 22 sales that were made out of the mortgage-backed 13365 1 securities portfolios at USAT had harmed the 2 portfolio? 3 Do you recall that testimony? 4 A. Yes. 5 Q. And I'd like to direct your attention 6 now to T4463. 7 Is that your handwriting on that 8 document? 9 A. Yes. 10 Q. Okay. Can you tell us what the Sendero 11 A/L model is? 12 A. That was an asset/liability model that 13 we purchased to begin using in-house. 14 Q. And it says, "Corporate planning. 15 April 22, 1988," on that document. 16 Do you see that? 17 A. I see that. 18 Q. That was quite late in the time that 19 you were at USAT, was it not? 20 A. Late relative to when I left, yes, for 21 the time period I was there. 22 Q. Well, it was clearly at a point in time 13366 1 when you were aware that USAT was failing its 2 capital requirements, wasn't it? 3 A. I don't know where USAT's capital 4 requirements were on April 27th. 5 Q. You don't recall? 6 A. No. 7 Q. All right. Now, it says, "Conclusions: 8 Should not micro hedge, i.e. IO/PO." 9 Do you see that? 10 A. I see that. 11 Q. Do you know what -- what is the 12 reference to "micro hedge" there? 13 A. I don't recall. Generally a micro 14 hedge is when you attach a hedge to a specific 15 transaction as opposed to a general hedge for the 16 overall association. 17 Q. Okay. And why is it significant that 18 something is classified as a micro hedge? What's 19 the significance of that? 20 A. Typically, we would assign a micro 21 hedge if we had some, which we had some, to a 22 specific asset or transaction. 13367 1 Q. Is that an accounting requirement? 2 A. In some cases, it is. In some cases, 3 it was not. 4 Q. Okay. And are you familiar with the 5 term macro hedge? 6 A. Yes. 7 Q. And what does that refer to? 8 A. That's more the type of hedge you would 9 put on to hedge the association's overall 10 asset/liability position rather than a specific 11 asset. 12 Q. Could that be -- a macro hedge be a 13 hedge that's put on to hedge a group of assets or 14 a certain segment of a portfolio? 15 A. Could be. 16 Q. Now, I'd like to direct your attention 17 to Bates stamp US711. It says, "As a result of 18 taking gains on the MBS portfolio over the past 19 few years, the book yield on the current portfolio 20 is 124 basis points below what the same securities 21 are yielding in the market." 22 Do you see that? 13368 1 A. I see that. 2 Q. "The book yields are below market 3 yields for three primary reasons." 4 Bullet, "Most of the securities that 5 were bought when rates were high and accordingly 6 had higher yields have been sold." 7 Bullet, "Much of the current portfolio 8 was added over the past year when the long bond 9 was 75 to 125 basis points lower than today. 10 These were added at lower yields." 11 And Bullet 3, "Older securities that 12 were added when rates were lower and had 13 unrealized losses were never sold and are still on 14 the books." 15 Do you see that? 16 A. I see that. 17 Q. Okay. Do you think that a portfolio 18 that has a minus 1.2 percent yield below what it 19 was intentionally initially put on for has been 20 harmed? 21 A. That's not what that represents. 22 Q. What does that represent? 13369 1 A. That represents the first -- the first 2 column is the book yield and the next column is 3 what the current yield would be on securities if 4 you were to go out and buy them. 5 Q. Okay. 6 A. So, it has nothing to do with a 7 deterioration or anything like that. That 8 comparison isn't ruled out. That's just comparing 9 current yields to what the market would be if you 10 were to go out and get -- 11 Q. So, in other words, you have a 12 portfolio that's yielding 124 basis points below 13 what the current market yield is? 14 A. Right. 15 Q. Now, let me ask you something: You 16 testified about the roll-down. 17 A. Right. 18 Q. Do you remember that? Interest rates 19 went up after the January through June time 20 period, did they not? 21 A. I don't have the information in front 22 of me to be able to say that. 13370 1 Q. Well, I showed you some figures that 2 showed interest rates going up, did I not? 3 A. If that's the time frame you're talking 4 about, yes. 5 Q. Did USAT at any time roll up the 6 coupons that it had to match the durations between 7 its liabilities and assets? 8 A. I can't tell you that. 9 Q. You don't know? 10 A. No. 11 Q. Do you recall it ever being discussed? 12 A. No, because typically, you want to slow 13 down prepayment speeds, not speed them up. So, 14 rolling up would have done just the opposite of 15 what we probably would have wanted to do. But it 16 doesn't mean it didn't happen. I don't 17 specifically remember that occurring, but it could 18 have. 19 Q. Now, look at Page 7 of the document, 20 716. It's OW011313. 21 Do you see under "solutions," it says, 22 "If we decide to hedge, do so carefully." 13371 1 Do you see that? 2 A. I see that. 3 Q. Okay. Then it says, "This analysis has 4 shown that the hedges added to date have been 5 ineffective in the rate environment experienced 6 over the past few years and will continue if rates 7 stay within the minus 100 to plus 200 range." 8 Do you see that? 9 A. I see that. 10 Q. Does that seem to indicate that the 11 management of the portfolio resulted in harm to 12 the portfolio? 13 A. No, it doesn't. 14 Q. It doesn't? 15 A. No. 16 Q. Why not? 17 A. Because, with hindsight, it's very easy 18 to come back and say the positions you have on the 19 books should have been structured differently 20 given what we know over the last year to six 21 months. 22 When the initial arbitrages were put on 13372 1 the books, I think the fear was what you see in 2 the very first line, "From a defensive posture, 3 United has most risk from rising interest rates." 4 So, they were hedged against rising rates and, in 5 fact, subsequent to that, rates fell. 6 So, does that say management did a bad 7 job? I don't think so. If management knew which 8 way interest rates were going, they would have 9 made a different decision. But coming back in 10 hindsight and looking back, you can't make that 11 judgment. 12 Q. I'll hand you a document that is 13 Exhibit B819. It is a handwritten -- it's a 14 typewritten rendition of a handwritten memorandum 15 dated January 31, '86, converting Rick Millinor's 16 notes regarding USAT. 17 MR. GUIDO: It's Tab 586, Your Honor. 18 Q. (BY MR. GUIDO) I'd like to direct 19 your attention to the next-to-the-last paragraph 20 at the bottom of that page and the paragraph at 21 the top of the document on Page 2. 22 A. I'm sorry. What am I supposed to be 13373 1 looking at? 2 Q. Would you please read the -- well, read 3 the entire document. Why don't you take time to 4 read the entire document? 5 A. (Witness reviews the document.) Okay. 6 Q. Now, do you see the bullet point in the 7 middle of the page that says, No. 1, "Under no 8 circumstances would GAAP require or even permit 9 the deferral of the gain on sale of securities 10 whether in a swap program or not." 11 Do you see that? 12 A. I see that. 13 Q. Okay. You testified that with regard 14 to the roll-down, that you deferred the gains on 15 that portfolio, do you recall, and rolled them 16 into the securities that were purchased to replace 17 them? 18 A. Correct. 19 Q. Is that consistent or inconsistent with 20 that Point 1 in that -- 21 A. It's not related to Point 1. 22 Q. Under -- Point 1 says, "Under no 13374 1 circumstances would GAAP require or even permit 2 the deferral of the gain on sale of securities 3 whether in a swap program or not." 4 A. I understand that. 5 Q. That's pretty emphatic, isn't it? 6 A. Right, but -- 7 MR. NICKENS: Your Honor -- would you 8 let him answer the question? He keeps 9 interrupting the witness. 10 A. There's two types of transactions. 11 One's an outright sale with no replacement, and 12 the other is a roll-down. And he is referring 13 here to an outright sale of securities and not 14 replacing them. So, it is not related to the 15 roll-down arbitrage program. He's specifically 16 talking about the underlining of the sub. So, 17 it's not the same. 18 Q. (BY MR. GUIDO) Now, did you get 19 advice from the auditors on when you were 20 obligated to recognize gains on the sale of 21 securities when you replaced them? 22 A. Absolutely, we got guidance from the 13375 1 auditors. 2 Q. And what do you recall that advice 3 being? 4 A. On which transactions? If you're 5 talking about the roll-down, our advice was to 6 defer the gain. 7 Q. Your advice was to defer the gain? 8 A. Yes. 9 Q. Okay. And why do you think your advice 10 was to defer the gains? 11 A. Because we entered in the transaction 12 to maintain an arbitrage spread and that 13 maintained the integrity of that transaction. And 14 that was the -- 15 Q. Do you recall -- 16 MS. CLARK: Your Honor, he's again 17 interrupting the witness in the middle of his 18 sentence. 19 A. It was the conservative approach to 20 booking the transaction. 21 Q. (BY MR. GUIDO) Okay. Which had the 22 effect of increasing the income off of the 13376 1 mortgage-backed security portfolio during the time 2 period that you rolled it down? 3 A. Over the remaining life as opposed to 4 recognizing the full gain immediately, yes. 5 Q. Okay. Now, if you had recognized the 6 gain immediately, what would you have had to do 7 with the swaps? 8 A. To my knowledge, nothing. 9 Q. Nothing. And why not? 10 A. That was the accounting guidelines. 11 Q. Okay. Were the swaps a micro or a 12 macro hedge? 13 A. I don't recall. 14 Q. Okay. If they had been a macro hedge, 15 what would you have had to do with the swaps? 16 A. I don't recall. I don't know what the 17 accounting required on either a micro or a macro 18 hedge for a swap. 19 Q. So, you don't know? 20 A. (Witness shakes head negatively.) 21 Q. Now, I'd like to direct your attention 22 to a document that Ms. Clark asked you questions 13377 1 about. It's 1590. It's your handwritten notes of 2 a meeting of the -- regarding strategic planning. 3 And I think your notes -- 4 A. Do you have a copy or -- 5 Q. You have it there. It's in one of 6 the -- in the stack of loose paper. I'll give you 7 another copy. Apparently, the file copy is 8 missing. 9 I want to direct your attention to a 10 few things that Ms. Clark didn't ask you about 11 when she asked you questions about this document. 12 I'd like to direct your attention to US3008030. 13 Ms. Clark asked you about the point under 1F. It 14 says, "CH/Emphasis lower level, not executives." 15 Do you remember her asking you 16 questions about that? 17 A. Yes, I do. 18 Q. Now, I'd like to direct your attention 19 to the next entry. Could you read that into the 20 record for us? 21 A. It says, "CH. What is maximum equity 22 arbitrage we can leverage stock in UFC state and 13378 1 federal?" 2 Q. What does that refer to? 3 A. I believe it was asking the question in 4 terms of what are the maximum portfolio sizes we 5 could grow that to based on state and federal 6 regulations. 7 Q. Now, I'd like to direct your attention 8 to 8032. Do you see the entry under "liquidity"? 9 Again, the "CH," you were asked about that by 10 Ms. Clark. 11 A. Yes. 12 Q. Okay. Now, it concludes -- it says -- 13 why don't you read the last bullet point because 14 it's not clear to me what the third word is in the 15 last bullet point under "CH." 16 A. The one with the arrow? I think it 17 says what is "realistic net income figure." 18 Q. Okay. Then it says "Try for 1.5 19 million per quarter." 20 Do you see that? 21 A. I see that. 22 Q. Then turn to 8033 at the top of the 13379 1 page. 2 A. Okay. 3 Q. Do you see that with the check at the 4 top? 5 A. Yes. 6 Q. Can you read that into the record? 7 A. "Want fourth quarter '85 at about 1.8 8 million. May report a loss for the year." 9 Q. Was that the conclusion of the group 10 that was meeting? 11 A. No. That was just a bullet point 12 number I wrote down. I don't know what the 13 conclusion of the group was. 14 Q. Well, did you want it or did somebody 15 else want it? I mean, what does it refer to? It 16 says "want fourth quarter '85" -- 17 A. That was 12 years ago. I don't recall 18 why I wrote those words on this piece of paper. 19 Q. Now, look at 8034. Do you see the 20 entry under "junk bonds" at the bottom? 21 A. Yes. 22 Q. Can you read that into the record? 13380 1 A. "Junk bonds. Want to match. Get 2 long-term liabilities. Charles Hurwitz may be 100 3 to 200 million if we can get the liabilities," I 4 think is what it's referring to. "Total equity 5 arbitrage, 200 to 250 million excluding holding 6 company." 7 Q. Okay. Are those Charles Hurwitz' views 8 of what you should be attempting to do? 9 A. I don't recall. 10 Q. Okay. Do you have any reason to 11 believe that it's not his views of what -- 12 A. I think it's more of a look into it and 13 see what the possibilities are. 14 Q. Now, I'd like to direct your attention 15 to a document which has been marked as 16 Exhibit B982 by the -- 17 MS. CLARK: Pardon? 18 Q. (BY MR. GUIDO) B982 by the 19 respondents. You were asked some questions about 20 the composition of the mortgage-backed securities 21 portfolio from Ms. Clark. 22 Do you remember that? 13381 1 A. I don't specifically remember. 2 Q. Well, do you remember being asked 3 questions about Exhibit A11137? 4 MR. NICKENS: Your Honor, we don't have 5 a copy of the document. 6 MR. GUIDO: Well, I'm providing you 7 with a copy of the document, Mr. Nickens. 8 MS. CLARK: Could you -- 9 Q. (BY MR. GUIDO) You were asked 10 questions about 11137 about the portfolio. 11 MR. NICKENS: I don't think the Court 12 has a copy. 13 MR. GUIDO: Huh? 14 THE COURT: We don't have a copy. 15 MR. GUIDO: I'm sorry, Your Honor. 16 THE COURT: Mr. Guido, how much longer 17 do you have? 18 MR. GUIDO: I'm almost finished, Your 19 Honor. 20 Q. (BY MR. GUIDO) B982 is -- 21 22 (Discussion off the record.) 13382 1 MR. GUIDO: B982 is a letter to -- from 2 you to Andy Feigenberg. The respondents had 3 identified the first page as B982 in their 4 exhibits, Your Honor. They had not included the 5 second page nor the exhibits that are referred to 6 in the letter. We have located those documents, 7 and we have attached them to B982 so that the 8 record is complete. 9 Q. (BY MR. GUIDO) And I'd like to direct 10 your attention to that document. 11 MR. NICKENS: Your Honor -- 12 THE COURT: At the present time, there 13 is no B982 in the record. 14 MR. GUIDO: That's correct, in the 15 record, Your Honor. 16 MS. CLARK: Your Honor, is Mr. Guido 17 offering the document? 18 MR. GUIDO: Yes. I am -- well, I was 19 going to ask the witness a question about the 20 signature page, and then I was going to offer the 21 document. 22 Q. (BY MR. GUIDO) Is that your signature 13383 1 on the third page of this exhibit which where it 2 says Bruce F. Williams, senior vice president and 3 treasurer? 4 A. It appears as though it is, yes. 5 MR. GUIDO: I would like to move B982, 6 Your Honor, into the record. The first page being 7 the page that -- the only page that the 8 respondents put in the list of exhibits. The rest 9 of the document which is attached to it is a copy 10 of that page and then the complete document with 11 its attachments, Your Honor. 12 MR. NICKENS: Your Honor, I object to 13 the comment. There's some suggestion that we 14 identified a document that was incomplete to the 15 OTS. I don't know what the facts are about that, 16 but I know that we have received thousands of 17 incomplete documents from the OTS. And if we're 18 going to get into this sort of subrosa comments, 19 then I object to that. If he will simply identify 20 the document so that we know what it is because 21 he's now said for the record that the OTS has put 22 some documents next to this that has not been 13384 1 supplied to us, then we can see whether we object 2 or not. I would like to know for the record what 3 the document is that he is offering. 4 MR. GUIDO: I am offering B982, which 5 is the cover page, and then I complete it and I 6 offer the remaining documents, which are the 7 second page and the attachments to that document, 8 Your Honor. I provided it the way it is so it was 9 clear for the record what it was that I was doing. 10 I did not just take the completed document and add 11 a document to it. I took the document which is 12 one page, B982, and I am moving B982 into the 13 record as that page plus the rendition which is 14 the completion rendition of the document, Your 15 Honor. 16 THE COURT: Are you telling us that the 17 exhibits attached to it are the ones referred to 18 in the first page of the letter? 19 MR. GUIDO: That's correct, Your Honor. 20 MR. NICKENS: What I'm asking, Your 21 Honor, is that he identify for the record which 22 pages they are. I mean, the first page has a fax 13385 1 reference of May 27th, '98 on it. So, this is 2 not -- this document is, in fact, not B982 because 3 we had produced this document long before this fax 4 reference was put on it. 5 MR. GUIDO: Your Honor, I think 6 Mr. Nickens is correct about that. I mean, this 7 case has been proceeding in two different 8 locations, and I had the document faxed to me so I 9 could know -- as you can see, that's the telephone 10 number of the OTS there. 11 The document that I am moving to be 12 admitted is that document that is marked as 13 Exhibit B982. He's right that in the file copy 14 that he produced, it does not have a fax 15 designation at the top. And what I am doing with 16 that B982 is supplying the complete document for 17 the Court. 18 I am sorry if Mr. Nickens thought that 19 I was suggesting there was something nefarious 20 about what had happened in terms of what was 21 filed. All I was doing was explaining what it is 22 I had done and why I was doing it. 13386 1 I am moving this packet as 2 Exhibit B982, which is the first page of a letter 3 from Mr. Bruce Williams to Andy Feigenberg dated 4 May 14th, 1986, and I am attaching to it the 5 complete document that that refers to, Your Honor. 6 MR. NICKENS: My objection is the 7 description as a complete document unless the 8 witness can verify that. What I'm really asking 9 him to do is to read the Bates numbers into the 10 record because on my copy, I can't read them. 11 THE COURT: I can't read them either. 12 Maybe the witness can tell us whether these 13 exhibits are what was attached when the memo was 14 written. 15 THE WITNESS: I have no way of 16 remembering what was attached to this memo. 17 MR. GUIDO: Well, let's just look at 18 the text, Your Honor. I mean, it seems to be 19 self-evident what is referred to. It says, 20 "Attached are exhibits which summarize USAT's 21 April 30, 1986, mortgage-backed and corporate 22 securities arbitrage positions. Exhibits 1, 2, 13387 1 and 3 provide detail of the corporate securities 2 and retail broker CDs which are summarized below." 3 Then it has attached Exhibit 1, 4 "Matched corporate securities analysis." Okay? 5 Exhibit 2, "The weighted average rate 6 simple interest, April 1986." 7 Exhibit 3, "Weighted average rate 8 unearned discount, April 1986." 9 It seems to me that it is very clear 10 that that is referring to the Exhibits 1, 2, and 11 3. Then it goes on -- 12 THE COURT: Well, maybe the witness can 13 verify that. 14 Do you know whether that's the case? 15 THE WITNESS: I don't know where these 16 documents -- apparently, that's what it is. I 17 don't remember what was attached. 18 MR. GUIDO: Then it goes on, Your 19 Honor. "Exhibits 4 and 5 provide the details of 20 the association's mortgage-backed securities and 21 hedges (caps, collars, and swaps)." 22 Then it says, "The funding of these 13388 1 assets is summarized below with the related 2 pricing assumptions." 3 Then it has Exhibit 4, "United Savings 4 Association of Texas, mortgage-backed securities 5 arbitrage portfolio at 4/31/86." 6 And then it has two documents that are 7 attached to that which set out in Exhibit 5, two 8 pages, "United Savings swaps, caps, and collars," 9 Your Honor. It seems to me the document is 10 self-evident of what it is and what the 11 attachments are, and I move its admission. 12 THE COURT: All right. Received. 13 Proceed. 14 MR. GUIDO: I have no further questions 15 for this witness, Your Honor. 16 THE COURT: Do you have any recross, 17 Ms. Clark? 18 MS. CLARK: I have nothing further, 19 Your Honor. Thank you, Your Honor. 20 THE COURT: Thank you, Mr. Williams. 21 You may step down. Unless there are matters to be 22 considered, we'll adjourn until July 8th, I 13389 1 believe it is, at 10:00 a.m. 2 MR. NICKENS: Thank you, Your Honor. 3 MR. GUIDO: Thank you, Your Honor. 4 5 (Whereupon at 4:08 p.m. 6 the proceedings were recessed.) 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 13390 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 25th 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 13391 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 25th 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