13595 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 JULY 9, 1998 22 ESQUIRE DEPOSITION SERVICES (713) 524-4600 13596 1 A-P-P-E-A-R-A-N-C-E-S 2 ON BEHALF OF THE AGENCY: 3 KENNETH J. GUIDO, Esquire Special Enforcement Counsel 4 PAUL LEIMAN, Esquire SCOTT SCHWARTZ, Esquire 5 BRUCE RINALDI, Esquire RICHARD STEARNS, Esquire (Not present) 6 and BRYAN VEIS, Esquire (Not Present) of: Office of Thrift Supervision 7 Department of the Treasury 1700 G Street, N.W. 8 Washington, D.C. 20552 (202) 906-7395 9 ON BEHALF OF RESPONDENT MAXXAM, INC.: 10 FRANK J. EISENHART, Esquire 11 of: Dechert, Price & Rhoads 1500 K Street, N.W. 12 Washington, D.C. 20005-1208 (202) 626-3306 16 13 DALE A. HEAD (in-house) 14 Managing Counsel MAXXAM, Inc. 15 5847 San Felipe, Suite 2600 Houston, Texas 77057 16 (713) 267-3668 17 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO. AND CHARLES HURWITZ: 18 RICHARD P. KEETON, Esquire 19 KATHLEEN KOPP, Esquire of: Mayor, Day, Caldwell & Keeton 20 1900 NationsBank Center, 700 Louisiana Houston, Texas 77002 21 (713) 225-7013 22 ESQUIRE DEPOSITION SERVICES (713) 524-4600 13597 1 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO., CHARLES HURWITZ, AND MAXXAM, INC.: 2 JACKS C. NICKENS, Esquire 3 of: Clements, O'Neill, Pierce & Nickens 1000 Louisiana Street, Suite 1800 4 Houston, Texas 77002 (713) 654-7608 5 ON BEHALF OF JENARD M. GROSS: 6 PAUL BLANKENSTEIN, Esquire 7 MARK A. PERRY, Esquire of: Gibson, Dunn & Crutcher 8 1050 Connecticut Avenue, N.W. Washington, D.C. 20036-5303 9 (202) 955-8500 10 ON BEHALF OF BERNER, CROW, MUNITZ AND HUEBSCH: 11 JOHN K. VILLA, Esquire MARY CLARK, Esquire 12 PAUL DUEFFERT, Esquire (Not present) of: Williams & Connolly 13 725 Twelfth Street, N.W. Washington, D.C. 20005 14 (202) 434-5000 15 OTS COURT: 16 HONORABLE ARTHUR L. SHIPE Administrative Law Judge 17 Office of Financial Institutions Adjudication 1700 G Street, N.W., 6th Floor 18 Washington, D.C. 20552 Jerry Langdon, Judge Shipe's Clerk 19 REPORTED BY: 20 Ms. Marcy Clark, CSR 21 Ms. Shauna Foreman, CSR 22 ESQUIRE DEPOSITION SERVICES (713) 524-4600 13598 1 2 INDEX OF PROCEEDINGS 3 Page 4 RON HUEBSCH 5 Examination by Mr. Guido................13607 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 ESQUIRE DEPOSITION SERVICES (713) 524-4600 13599 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:00 a.m.) 3 THE COURT: Be seated, please. We'll 4 be on the record. 5 Mr. Eisenhart. 6 MR. EISENHART: Good morning, Your 7 Honor. One preliminary matter before we start. 8 As Your Honor may have guessed, we are 9 at a somewhat important juncture in this case now 10 in that we're starting to take testimony from the 11 respondents. This is an issue that I understand 12 isn't going to arise in the case of Mr. Huebsch, 13 but I thought I ought to surface it now because 14 it's an important issue that I think is going to 15 affect the rest of the respondents, and I thought 16 we ought to have Your Honor's views on it. 17 We are concerned at the pace this case 18 is presenting and, while OTS is presenting their 19 case and we really can't influence the way they 20 choose to present it, we hope we can suggest some 21 ways that maybe things won't slow down anymore. 22 We are at the point with the ESQUIRE DEPOSITION SERVICES (713) 524-4600 13600 1 respondents following Mr. Huebsch where I believe 2 OTS is going to begin to use the permission that 3 Your Honor has given them to conduct the 4 examination by multiple questioners. And Your 5 Honor has ruled on that. I'm not here to reargue 6 it. But in thinking through how that's likely to 7 proceed, we have -- it has occurred to us that 8 there is some potential to slow things down, and 9 we have two suggestions, really, to make that we 10 hope will address that. 11 One is that if the OTS is going to use 12 multiple questioners for a particular witness, as 13 they have already told us they are going to do, I 14 think, with respect to Mr. Crow, who's scheduled 15 to be the next witness up, we think that the OTS 16 lawyers who are going to do the questioning should 17 all be physically present in the courtroom during 18 the entirety of the witness' testimony. 19 I'm afraid if that doesn't occur, what 20 we're going to see is a lot of repetitive 21 questioning, much of it inadvertent, or a lot of 22 wrangling over whether this is a question that's ESQUIRE DEPOSITION SERVICES (713) 524-4600 13601 1 already been asked before and, of course, the OTS 2 lawyer, if he wasn't in the courtroom, won't be 3 really in a position to address that. 4 We think the easiest way to prevent 5 that and to prevent slowing things down as a 6 result is to simply have them all be here so that 7 they can all hear all of the questioning. 8 The second procedure that we think will 9 keep things moving along a little more crisply is 10 that the questioning by multiple lawyers ought to 11 be sequential. That is, Lawyer A gets up, asks 12 all the questions on all the topics he's going to 13 cover, sits down. Lawyer B gets up, asks all the 14 questions on all the topics he's going to cover, 15 sits down. No moving back and forth because I 16 think, inevitably, if that happens, if Lawyer A 17 gets up again after a little bit of a break, well, 18 maybe he's going to question on a different 19 subject. 20 THE COURT: All right. I agree with 21 you on that, and that's the procedure we'll 22 follow. We'll go back to the other point in a ESQUIRE DEPOSITION SERVICES (713) 524-4600 13602 1 minute. 2 MR. EISENHART: Those are really the 3 only two suggestions we have, Your Honor. 4 THE COURT: Mr. Guido, do you have any 5 objection to having your people all here during 6 the complete -- 7 MR. GUIDO: Yes, Your Honor. The -- 8 there is no need to do so. We're getting daily 9 transcript, and people are reviewing the 10 transcript so we can avoid the duplication by 11 doing so. In addition, given the resources the 12 government has and given my health condition, it 13 is rather imperative for us to be able to prepare 14 during the period of time that we're not actually 15 asking questions of witnesses. 16 This fact is a fact that's known to 17 opposing counsel. In fact, I had discussion about 18 that with one of the opposing counsel yesterday 19 when this issue arose where I indicated that one 20 of the reasons that we would be doing witnesses 21 with separate counsel is so that a person could be 22 out of the courtroom preparing so that we could ESQUIRE DEPOSITION SERVICES (713) 524-4600 13603 1 move much more expeditiously than we would do 2 otherwise. 3 So that I don't think, one, it's 4 necessary to have anybody in the courtroom to 5 avoid duplication. And, two, is that it would 6 cause an enormous burden on the OTS, particularly 7 in my case, if I had to sit in the courtroom while 8 witnesses are being questioned about, for example, 9 the compensation issue. That would deprive me of 10 the opportunity to prepare for the enormous part 11 of this case that I am presenting for the 12 government, Your Honor. And I don't think, one, 13 it's necessary. Two is that I think it impairs my 14 ability to prepare. And three is I think that it 15 was designed to create that problem for me in 16 light of what I was told by opposing counsel, that 17 they understood that it would have an impact on my 18 ability to prepare in light of my health 19 condition. 20 MR. RINALDI: Your Honor, I would also 21 like to add that you will observe that I have 22 probably been in the courtroom for virtually every ESQUIRE DEPOSITION SERVICES (713) 524-4600 13604 1 witness with the exception of one or two that I 2 was preparing for early on in the proceeding and 3 wasn't available. But I am familiar with all of 4 the testimony in all of the areas, and one of 5 the -- and I think the reason why I have been is 6 to try to avoid any repetition or overlap. And I 7 will, you know, make every effort to discuss with 8 the other attorneys coming up exactly what's gone 9 on so that there will be -- will minimize the risk 10 of that repetition. I will tell the Court that to 11 the extent that I have witnesses myself to 12 prepare, there may be periods of time when I have 13 to absent myself from the courtroom. In my 14 absence, I will see that someone else is available 15 to make -- to take notes and be certain that any 16 repetition is held to a minimum. 17 MR. EISENHART: Well, I certainly don't 18 do it to deliberately inconvenience Mr. Guido. As 19 a matter of fact, I haven't even had any 20 conversations with him lately. So, whoever he had 21 the conversations with, it wasn't me. But I do 22 think as much as we try to think that the case ESQUIRE DEPOSITION SERVICES (713) 524-4600 13605 1 breaks down very crisply and cleanly along subject 2 matter lines, there's a lot of non-subject matter 3 questioning that goes on during the course of 4 questioning one of these witnesses, and I do see 5 that kind of thing getting repeated, probably 6 inadvertently, if they are going to follow this 7 procedure. 8 THE COURT: Well, it is a problem. We 9 will try to avoid duplication of testimony. But 10 in view of the representations of the OTS, I'm not 11 going to require -- I wasn't aware that you were 12 getting daily transcripts. Of course, that won't 13 take care of matters during the day where, from 14 day to day it may help; but if the following 15 attorney reads the previous day's transcript, it 16 might be helpful. But if A examines in the 17 morning and B in the afternoon -- 18 MR. GUIDO: Your Honor, given the 19 subject matters and the way they break out, I 20 don't think there's likely to be many instances 21 where there's a break in the middle of the day. 22 But as Mr. Rinaldi indicated, he will be in the ESQUIRE DEPOSITION SERVICES (713) 524-4600 13606 1 courtroom for all of the testimony so that there 2 is someone this to explain it to the upcoming 3 counsel. 4 THE COURT: All right. 5 MR. EISENHART: Thank you, Your Honor. 6 MR. GUIDO: I have another preliminary 7 matter, Your Honor. 8 THE COURT: All right, Mr. Guido. 9 MR. GUIDO: At the outset, we invoked 10 the witness rule that anyone who wasn't -- who was 11 a witness wasn't in the courtroom while any other 12 witnesses are testifying. I noticed that Bruce 13 Williams, although he's a very busy man, is here 14 today. He is on the respondents' witness list, 15 and I do believe he should be excused from the 16 courtroom. 17 MR. NICKENS: Your Honor, Mr. Williams 18 has already testified. I don't believe either 19 side had requested that he be here. I believe he 20 came in of his own interest. 21 THE COURT: Is he going to testify 22 again? ESQUIRE DEPOSITION SERVICES (713) 524-4600 13607 1 MR. NICKENS: Not that I'm aware of, 2 Your Honor. Something new would have to come up 3 from this point forward where he would need to 4 explain it, but we don't plan to call Mr. Williams 5 in our case and I believe the OTS has completed 6 their examination of him. But as I say, neither 7 side requested, that I'm aware of -- had requested 8 that Mr. Williams be here. I just think that -- 9 my understanding is that he was interested in 10 these proceedings. 11 THE COURT: All right. If neither side 12 contemplates recalling him, I'm not going to 13 exclude him from the proceeding. 14 MR. GUIDO: Your Honor, we'd like to 15 resume the testimony of Mr. Huebsch at this time. 16 17 EXAMINATION 18 19 Q. (BY MR. GUIDO) Mr. Huebsch, when we 20 broke last evening, we were discussing the 21 question of USAT Mortgage Finance and its -- the 22 reasons for why USAT Mortgage Finance was ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13608 1 collapsed. 2 Do you recall that testimony? 3 A. Yes. 4 Q. And would you tell us again in your own 5 words who you were relying upon to conclude that 6 you should sell the $350 million worth of 7 mortgage-backed securities and that you should put 8 on a mirror swap to cover the $350 million worth 9 of swaps that were outstanding in that portfolio 10 when it was collapsed? 11 A. We were directed by senior management 12 to do that. 13 Q. Who was the senior management? 14 A. Well, there's, you know, Mr. Crow, 15 Mr. Gross, you know. I'm sure the lawyers had 16 something to do with this decision. 17 Q. But -- 18 A. And the accountants. Those kind of 19 people. 20 Q. But who in particular? 21 A. I don't know who their -- I don't know 22 the person who told us. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13609 1 Q. Was there a meeting in which it was 2 discussed? 3 A. There may have been. I don't recall. 4 Q. You don't recall? 5 A. No. 6 Q. Now, you indicated that for matters 7 like that you relied on the advice of counsel when 8 it dealt with regulatory matters. 9 Do you recall that? 10 MR. VILLA: I'll object to 11 characterizing his testimony. I believe he also 12 referred to accountants on issues of liability 13 growth and other things. I think that that 14 unfairly characterizes extended testimony by the 15 witness. 16 Q. (BY MR. GUIDO) Was one of the people 17 that you relied upon the association's counsel? 18 A. It may well have been. It was probably 19 told to the asset/liability committee that it 20 was -- we -- there had been a change in thinking 21 on this subsidiary and that we should take off X 22 amount. That's probably -- that might be where I ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13610 1 heard it. 2 Q. But where did you hear the reason for 3 why it was done? 4 A. I don't know where I heard the reason. 5 Q. And what was the reason that you heard? 6 A. To me, it came through as a regulatory 7 reason. I didn't really get into it any more than 8 that. 9 Q. Was -- were you told that the reason 10 was that the finance subsidiary, USAT Mortgage 11 Finance, would not qualify as a finance 12 subsidiary. Therefore, its liabilities had to be 13 combined with USAT's for purposes of determining 14 the liability growth? 15 A. I may have heard that. I don't 16 remember that detail. The only thing I remember 17 was that for regulatory -- it was a regulatory 18 reason, too. I don't recall any other details. 19 Q. Who was responsible for interpreting 20 the regulatory requirements at USAT at that time? 21 A. I would presume the general counsel. 22 Q. And who was that? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13611 1 A. It was -- at that time, it was either 2 Mr. Pledger or Mr. Berner. 3 Q. I'd like to show you Tab 585, which is 4 Exhibit B690, which is a memorandum from Jim 5 Pledger to distribution. 6 A. (Witness reviews the document.) 7 Q. Dated December 11th, 1985, Jim Pledger 8 to distribution. The distribution is on the last 9 page, and it says it's to Mr. Gross, Williams, 10 Munitz, Crow, Berner, Wolfe, Phillips, and Bruce 11 Williams. 12 Do you see that? 13 A. Right. 14 Q. Have you ever seen this memorandum 15 before? 16 A. I don't recall. 17 Q. Has this memorandum been shown to you 18 in the last few days? 19 MR. NICKENS: It was shown to him 20 yesterday, Your Honor. 21 MR. VILLA: By Mr. Guido. 22 Q. (BY MR. GUIDO) Prior to yesterday. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13612 1 A. I may have seen it the day before. 2 Q. You were -- prior to the collapse of -- 3 or putting USAT into receivership, had you ever 4 seen this memorandum? 5 A. That, I can't recall. 6 Q. So, you don't know? 7 A. I don't know. 8 Q. Now, I'd like to direct your attention 9 to the first paragraph. It says "On December 9th, 10 1985, the Bank Board adopted revised regulations 11 concerning finance subsidiaries and securities 12 issued through other subsidiaries of insured 13 institutions. The advantage of issuing securities 14 through a finance subsidiary is that the" -- 15 THE COURT: Slower, please. 16 Q. (BY MR. GUIDO) "The advantage of 17 issuing securities through a finance subsidiary is 18 that the issuance constitutes off balance sheet 19 financing. Although these amendments broaden the 20 regulations in some cases, they restrict the types 21 of financing that may be used by finance 22 subsidiaries and thereby reduce the off balance ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13613 1 sheet advantages available to the association. As 2 a result, issuances not qualifying for off balance 3 sheet treatment will increase the association's 4 liability growth and net worth requirements." 5 I'd like to then turn to Page 2. Do 6 you see where it says "Impact on United's finance 7 subsidiaries"? It says "United currently has 8 three finance subsidiaries: USAT Finance, Inc. 9 which issued DARTs in July of 1985; two, USAT 10 Mortgage Finance, Inc. which issued 500 million in 11 reverse repurchase agreements collateralized by 12 mortgage securities; and three, USAT Mortgage 13 Securities, Inc. which has a shelf registration 14 outstanding for $1 billion CMO." 15 Do you see that? 16 A. Yes. I see the list of three -- 17 Q. Then it says under "USAT Finance, 18 Inc.," that's the DART subsidiary, "The DARTs 19 preferred stock issuance by USAT Finance, Inc. is 20 exempt from the net worth regulations for a number 21 of reasons." 22 Then it goes on and lists the reasons. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13614 1 The DART subsidiary, USAT Finance, Inc., was not 2 collapsed in December of 1985, was it? 3 A. From this -- from this writing, it 4 seems that it was okay, need not be collapsed. 5 Q. And you were on the investment 6 committee, were you not -- 7 A. Well -- 8 Q. -- in 1986 when it was formed? 9 A. Yeah. I mean, this is the 10 pre-investment committee. 11 Q. I understand that. 12 A. When -- 13 Q. And the DARTs subsidiaries existed 14 during the time you were on the investment 15 committee, did they not? 16 A. I believe they did. 17 Q. Then the second page says that "USAT 18 Mortgage Finance, Inc., the 500 million reverse 19 repurchase issuance by USAT Mortgage Finance, Inc. 20 was completed before the effective date of the 21 regulations and would, therefore, be exempt at the 22 effective date." ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13615 1 Do you see that? 2 A. (Witness nods head affirmatively.) 3 Q. "The securities issued in the 4 subsidiary were reverse repurchase agreements, and 5 these agreements have a maturity of 60 to 90 days, 6 at which time the securities have to be renewed or 7 rolled over. This renewal or rollover will cause 8 the issuance to be treated as a new issuance under 9 Section 563.13-2(b)(2). After such a renewal, the 10 issuance will be tested for inclusion as part of 11 net worth under Section 563.13-2(c). The two 12 tests are, one, the duration match test (without 13 regard to swaps or hedges), discussed previously, 14 and, two, whether the proceeds were remitted in 15 exchange for a liability issued by the association 16 (which would be included in the association's 17 total liabilities). Within ten days after the 18 renewal, the subsidiary will be required to submit 19 to the Federal Home Loan Bank of Dallas a written 20 certification as to the accuracy and validity of 21 the duration measurement. A copy of the 22 certification must be sent to the Office of Policy ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13616 1 and Research at the Bank Board in Washington." 2 Then it goes on to say, "If the 3 issuance fails to meet the duration matching test, 4 the proceeds of the issuance will be counted in 5 the association's calculation of total 6 liabilities. Since the duration matching test 7 does not permit the consideration of hedges or 8 swaps, it appears there will be significant 9 difference between the maturities of the 10 repurchase agreements and the mortgage securities 11 and would, therefore, be included in the 12 association's total liabilities." 13 Do you see that? 14 A. Yes, I do. 15 Q. Is that your understanding after 16 reading that of why the finance -- the regulations 17 effected USAT Mortgage Finance? 18 MR. VILLA: Your Honor, I object to the 19 question. We're trying to find out what this 20 witness knew at the time. He's now been read two 21 pages of a memo that wasn't copied to him, wasn't 22 sent to him, that he never saw, that was written ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13617 1 about 13 -- 14 years ago and asked whether that 2 was his understanding. 3 Now, we can give him documents and read 4 them all day and ask him what he has gathered from 5 those documents, but the issue is what did he 6 understand at the time. So, I think this is 7 wholly irrelevant and it's really misleading 8 because he's trying to argue legal issues through 9 a witness who has said he's a portfolio manager. 10 So, I object to this line of 11 questioning. I can't imagine how it's relevant to 12 what he knew at the time. He can ask him does it 13 refresh his recollection as to what he knew at the 14 time. That's the appropriate question, not is 15 that his understanding of the reason. 16 THE COURT: Well, I think that was 17 implicit in the question. 18 MR. GUIDO: Thank you, Your Honor. It 19 was. I was trying to assist the witness to recall 20 events that did occur quite a while ago, and I'm 21 trying to refresh his recollection. 22 MR. VILLA: I'm sorry. I misunderstood ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13618 1 the question. 2 Q. (BY MR. GUIDO) Does that refresh your 3 recollection? 4 A. My recollection was that this was a 5 regulatory problem. I really at no time knew this 6 amount of detail about why -- I never knew then, 7 and I never knew now why it failed. 8 Q. Did you know that it was a liability 9 growth problem? 10 A. I don't know. It was, to me, a 11 regulatory problem. 12 Q. Just a regulatory problem? 13 A. From where I sat and what I did. 14 Q. And who did you rely upon as the 15 executive vice president for investments for 16 regulatory issues? 17 A. Well, the investment department would 18 rely on counsel for regulatory things. 19 Q. Let me read on. 20 A. Okay. Sure. 21 Q. It picks up. It says, "An increase in 22 total liabilities could have a significant impact ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13619 1 on the association's net worth requirements and on 2 its liability growth. Note also that the 3 association's board adopted a resolution to limit 4 liability growth to $4.68 billion by year end. 5 The effective date of these regulations is almost 6 certainly going to be before year end. Therefore, 7 the actual rollover dates of the reverse 8 repurchase agreements will be very important. If 9 they occur after January 1, 1986, then the impact 10 on liability growth can be much more easily 11 managed and the association will be able to meet 12 its 4.68 billion liability target." 13 Do you see that? 14 A. Yes. 15 Q. Did anybody tell you that at the time 16 they asked you to sell the $350 million of 17 mortgage-backed securities? 18 A. I don't think anybody ever told me this 19 in this detail. 20 Q. Did they tell you that if the rollovers 21 occurred after January 1, 1986, the impact on 22 liability growth could be more easily managed? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13620 1 A. No. I don't believe anybody ever told 2 me that. 3 Q. Now, I'd like to direct your attention 4 to another document that is in the record. It is 5 at Tab 1133. 6 THE COURT: The exhibit number? 7 MR. GUIDO: 13008, Your Honor. 8 Q. (BY MR. GUIDO) Do you know who Andy 9 Creel was? 10 A. No, I don't. 11 Q. This is a memo from him to 12 distribution. I don't have the second page of the 13 document in front of me. 14 Would you read into the record the 15 distribution? 16 A. Gross, Williams, Crow, Huebsch, 17 Phillips, Graham, Childress, Dorsey, Wolfe, 18 Williams, Pledger, Carlson, Dolittle. 19 Q. Now, do you recall receiving this 20 memorandum? 21 A. I don't recall receiving this 22 memorandum. I may well have received it, though. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13621 1 Q. Did you periodically receive regulatory 2 compliance reports? 3 A. I don't know. I probably received this 4 one. I don't know whether I was on their regular 5 list or not. 6 Q. Now, do you see the item -- it says, 7 "The attached schedule compare the results of our 8 activities to certain regulations established by 9 federal and state regulators. As present -- as 10 presented, we are in compliance with the 11 regulation requirements as summarized below." 12 Do you see that? 13 A. I see that. 14 Q. Okay. And do you see III, liability 15 growth, annual growth rate 11.29 percent? 16 A. I see that Roman Numeral III. 17 Q. Uh-huh. And do you see where it says 18 it's better than the limitations by 389,518,000? 19 A. The federal limitation? 20 Q. Right. 21 A. Right. 22 Q. Now, that's more than the $350 million ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13622 1 of mortgage-backed securities that you sold at the 2 direction of senior management. Right? 3 A. It's a larger number. 4 Q. (BY MR. GUIDO) And now I'd like to 5 direct your attention to a document that we 6 discussed yesterday which is at Tab 557. 7 MR. GUIDO: It's Exhibit A5010, Your 8 Honor. 9 Q. (BY MR. GUIDO) A5010 is a memorandum 10 to the board of directors dated February 7th, 11 1986, and the subject is "Fourth quarter and total 12 1985 performance." 13 Do you see that? 14 A. Yes. 15 Q. And do you recall -- look at the first 16 page that I directed your attention to the net 17 income for that time period. 18 Do you recall that? 19 A. I have net income of quarter's end for 20 the year. 21 Q. And for the quarter, what does it show 22 for net income? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13623 1 MR. NICKENS: Which quarter? 2 Q. (BY MR. GUIDO) For the fourth 3 quarter. 4 A. It says 1,821,000. 5 Q. Now, I'd like to turn your attention to 6 Page No. 3, the non-interest income. It says, 7 "Non-interest income finished above the quarter 8 and total year budget 20,500,000 and 21,400,000 9 respectively." 10 Do you see that under "non-interest 11 income"? 12 A. Okay. All right. 13 Q. Do you see that? 14 A. The mortgage-backs corporate 15 securities? 16 Q. And liquidity securities. 17 Do you see that? 18 A. Yeah. For a total of 20,236,000. 19 Q. Okay. Now, the corporate securities, 20 does that refer to high-yield bonds? 21 A. That would be high-yield bonds. It may 22 also reflect equity risk arbitrage. I don't know. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13624 1 I can't tell from this. 2 Q. Okay. So, from the term "corporate 3 securities," you can't tell whether or not that's 4 high-yield bonds or equity arbitrage? 5 A. Not from this, I can't. 6 Q. Okay. Now, then it goes -- do you know 7 what the term "liquidity securities" refers to? 8 A. Well, yesterday, I think we had a 9 discussion -- it's that pool of money that's 10 invested very short-term. It's purpose in case -- 11 is to be used in case there is an emergency like a 12 run on the bank. High quality, very short 13 maturity securities. 14 Q. Who managed that portfolio? 15 A. This portfolio would be, at this time, 16 under Mr. Phillips'. 17 THE COURT: Sir, would you speak a 18 little louder, please? 19 THE WITNESS: Okay. 20 A. I'm not quite sure, but I believe it 21 was. 22 Q. (BY MR. GUIDO) Under Mr. Phillips? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13625 1 A. Right. 2 Q. Who reported to you? 3 A. Right. 4 Q. Then it goes on to say, "The gains on 5 mortgage-backed security sales were largely 6 produced by the liquidation of 350 million of the 7 500 million financing subsidiary established in 8 late November." Okay? 9 A. I see that. 10 Q. And then it goes on, "The liquidation 11 was required due to new regulations adopted after 12 the subsidiary was established which excluded it 13 from qualifying as a financing subsidiary." Okay? 14 A. I see that. 15 Q. So, the $12,504,000 under 16 mortgage-backed securities were largely produced 17 by the liquidation of the $350 million of 18 mortgage-backed securities from USAT Mortgage 19 Finance. 20 Is that what that's saying? 21 A. That's what it says, yes. 22 Q. Okay. Now -- and when you combine that ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13626 1 with the sale of corporate securities and 2 liquidity, you get $21,236,000 profit? 3 A. Right. I see that number, yes. 4 Q. Okay. Without that, what would the net 5 income figure have been? 6 A. Well, I would subtract it from -- the 7 net income for the year, '85, I'd subtract plus 21 8 million from minus 3,148,000. 9 Q. So, you would show a loss somewhere 10 around twenty-four, three. Right? 24,300,000 for 11 the year? 12 A. Yes. 13 Q. Okay. Now, if that figure, the gains 14 on the sales of the securities, were excluded from 15 the fourth quarter profits, what would the fourth 16 quarter profits have been? 17 A. Is the 21 million a fourth quarter 18 figure? 19 Q. Go back and look at Page 3. What does 20 it say? 21 A. In the fourth quarter, right. So -- 22 Q. $21,236,000 were non-operating gains ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13627 1 including sales from mortgage-backed securities, 2 corporate securities, and liquidity securities. 3 Right? 4 A. Yeah. 5 Q. If you subtract that from the net 6 income figure for the fourth quarter, what does it 7 show? 8 A. Well, it would be, like, 19 something. 9 Q. Okay. It's somewhere over 19. Right? 10 A. Right. 11 Q. Now, do you remember when we looked at 12 the performance reports yesterday that the 13 November 30 performance reports showed an excess 14 net worth over the regulatory minimum of $17 15 million? 16 A. I recall a figure somewhat like that. 17 Q. Okay. Now, if these gains were not 18 recorded in the fourth quarter, would the fourth 19 quarter results have been below the regulatory 20 requirements? 21 MR. NICKENS: Your Honor, I object to 22 that question. This witness has no personal ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13628 1 knowledge of this. He's been gone through -- he's 2 now been put through a series of calculations 3 where he's asked to compare year end results with 4 fourth quarter results. He's been asked to simply 5 subtract one from the other. And there is no 6 basis on which he could answer that question based 7 upon these calculations that Mr. Guido has given 8 him. He has no personal knowledge. He wasn't 9 responsible for doing these numbers. I don't know 10 why we are going through this record through a 11 witness with documents that are in the record when 12 he has no personal knowledge which he could add to 13 the information that the Court should consider. 14 THE COURT: Mr. Guido, do you want him 15 to subtract the 21 million from the 17 million? 16 MR. GUIDO: I think he said 19 million 17 is what he comes up with after he does the 18 calculation. 19 Q. (BY MR. GUIDO) And does that show 20 that the regulatory minimum was not being met? 21 THE COURT: That's assuming that your 22 figure is the regulatory minimum. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13629 1 MR. GUIDO: That's correct, Your Honor. 2 MR. NICKENS: For which he has no 3 personal knowledge, Your Honor. 4 THE COURT: I understand. Denied. 5 Let's have the answer. 6 Q. (BY MR. GUIDO) Mr. Huebsch? 7 A. Yes. 8 Q. If those are the figures, was the 9 regulatory minimum met or not met as of December 10 31, if you exclude those non-operating gains that 11 are on Page 3 of that exhibit? 12 A. You know, assuming, you know -- 13 assuming the numbers are right. I can't quarrel 14 with the arithmetic. I don't know what regulatory 15 net worth -- I'm sure it's some term of art. I 16 don't know what it is. But the numbers 17 indicate -- 18 Q. Well, you did -- 19 A. I believe in the arithmetic. I don't 20 know the term "regulatory net worth." 21 Q. Now -- but you did rely as the 22 executive vice president of USAT on -- for ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13630 1 regulatory advice -- the general counsel, which at 2 the time was Mr. Pledger. Right? 3 A. Right. 4 Q. And you relied on the accounting 5 department for accounting issues. Right? 6 A. Right. 7 Q. And you relied upon the accounting 8 department and the treasurer's department for the 9 performance report that you were receiving. 10 Right? 11 A. I relied on them, yes. 12 Q. Now I'd like to show you a document 13 which is Exhibit A10557. 14 MR. GUIDO: It is not in the record as 15 far as I know, Your Honor. I don't have the 16 exhibit number on the document, but it is on our 17 exhibit list. It's A10557, and it's a document 18 that I provided. 19 MR. NICKENS: Your Honor, we'd like to 20 get at least a couple of copies. He provided us 21 with one copy. 22 THE COURT: All right. We'll be off ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13631 1 the record for a moment. 2 3 (Discussion held off the record.) 4 5 THE COURT: All right. We'll be back 6 on the record. 7 Q. (BY MR. GUIDO) I'd like to show you 8 Exhibit 1625, which is Tab 507, Mr. Huebsch, which 9 is the minutes of the asset/liability committee of 10 January 31, 1986, dated February 19th, 1986. It's 11 a memo from Bruce Williams to Mike Crow, Joe 12 Phillips, Charles Patterson, Ron Huebsch, Jim 13 Jackson, Doug Hansen, and Jim Walker. 14 Look at the -- well, before that, who 15 is Jim Walker or was Jim Walker? 16 A. I don't remember him. 17 Q. Now, it says, "Two, finance subsidiary. 18 It was agreed that in February when the reverse 19 repos and the financing subsidiary roll, we should 20 officially dissolve the entity and consolidate the 21 assets, liabilities, and swaps into USAT." 22 Do you see that? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13632 1 A. Right. 2 Q. Is it your understanding that the 3 reverse repos that were used to finance the 4 acquisition of the mortgage-backed securities that 5 USAT Mortgage Finance rolled in February of 1986? 6 MR. NICKENS: Your Honor, is he asking 7 about all the reverse repos for that -- 8 THE COURT: I didn't get the question 9 yet. 10 Was the question complete? 11 MR. GUIDO: Yes, it was, Your Honor. 12 My question was: Is it his understanding that the 13 reverse repos that financed the purchases of the 14 mortgage-backed securities that were purchased for 15 the USAT finance subsidiary, was it his 16 understanding that they rolled in February of 17 1986? 18 MR. NICKENS: Your Honor, I have this 19 objection. This is very misleading to the witness 20 for something that happened 12 or 13 years ago. 21 This is clearly a reference to the remaining repos 22 that existed in the finance subsidiary. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13633 1 Mr. Guido knows that those securities 2 were bought at different times with different 3 expiration date for the reverse repos. We just 4 read a document a few minutes ago that said 60- 5 and 90-day repos. He now reads to the witness 6 something that occurred 13 years ago referring to 7 the remaining repos. And then he asks the witness 8 a much broader question saying, "Was it your 9 understanding that the reverse repos for the 10 entire subsidiary rolled in February?" 11 That's just very, very misleading and 12 unfair to a witness some 12 years later. 13 MR. VILLA: Your Honor, my objection 14 has been that the questions posed to these 15 witnesses, when he asks them "is this your 16 understanding," is not an inadvertent question. 17 It's a deliberate question. The question 18 appropriately asked by a lawyer is "Does this 19 refresh your recollection as to what happened with 20 the reverse repos?" And that's the question he 21 should be asking, and that's why we're misleading 22 witnesses by showing these portions of documents ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13634 1 and asking the question like that. 2 I'd object to the question. The 3 question should be "Does this refresh your 4 understanding or recollection of what happened to 5 the reverse repos?" So, I object on those 6 grounds. 7 MR. GUIDO: Your Honor, may I respond, 8 Your Honor? 9 THE COURT: Yes, you may. 10 MR. GUIDO: I think if there is a 11 question of ambiguity, Mr. Nickens can bring it 12 out on cross-examination. I think he brought it 13 out himself that the document we just talked about 14 talked about the reverse repos. All the reverse 15 repos repricing at 60 to 90 days would take them 16 to February of '96. Well, the memo is dated, 17 Mr. Nickens, in the middle of December '95. 18 MR. NICKENS: Yes, Your Honor. But the 19 record is very clear that the securities were 20 bought, some of them, in the first week of 21 November and some of them a few days later. So, 22 that connection is simply not there. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13635 1 What is going on, Your Honor, and what 2 is our concern is is that Mr. Guido is making a 3 record through a witness that couldn't possibly 4 remember that kind of detail but who, 5 nevertheless, wants to be cooperative and has just 6 been read a sentence that in a casual reading 7 might suggest to a person that the reverse repos 8 for the entire portfolio rolled in February. That 9 is not the case. Even if it were important, it is 10 not the case. 11 What's going to happen is that we're 12 going to have a record and there will be a 13 citation to you in the post-hearing briefs that 14 Mr. Huebsch testified that the reverse repos for 15 USAT Mortgage Finance rolled in February. That is 16 what is going on here, and it is -- first of all, 17 it is factually incorrect. But secondly, 18 Mr. Huebsch could under no circumstances provide 19 that information for the Court. 20 THE COURT: Well, if the witness 21 doesn't understand or doesn't remember or doesn't 22 know, he should say so. And if he does, then he ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13636 1 may answer. 2 A. I understand the question, but I 3 frankly don't remember. 4 Q. (BY MR. GUIDO) You don't remember? 5 Do you have any reason to dispute the accuracy of 6 this statement on Paragraph 2 of Exhibit 1625? 7 MR. VILLA: I object, Your Honor. The 8 general rule is that if a person doesn't remember, 9 he has no reason -- he has no knowledge one way or 10 the other, he can't dispute the accuracy of the 11 statement or he can't endorse it. 12 The question is misleading. So, I 13 object to it. He said he doesn't remember. 14 MR. GUIDO: Your Honor, I have to tell 15 you, I find this whole set of objections to be 16 just a blatant attempt to coach a witness. 17 If Mr. Nickens has facts to dispute the 18 response or the statement in this document, he'll 19 have an opportunity to put a witness on to 20 demonstrate it. And it seems to me that's the 21 appropriate time for him to do so and not stand 22 here and testify and tell this witness facts that ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13637 1 he knows are not true, Your Honor. And I think 2 the record will show that when we get finished 3 with this proceeding. 4 THE COURT: Well, if we have a dispute 5 over this, we will have to have both sides. We'll 6 hear all witnesses on both sides. 7 MR. GUIDO: That's correct, Your Honor. 8 MR. NICKENS: Your Honor, we're in the 9 sixteenth week of the hearing, and we have not had 10 an opportunity to call any witnesses as yet. Now, 11 many of these witnesses are people that we would 12 have called in our case. So, it's not so much 13 that. But for Mr. Guido to suggest that I have to 14 wait till the 30th week of this proceeding to 15 bring up facts that are already in the record, 16 what I object to is a knowing misleading of the 17 Court and this witness as to these facts. And if 18 Mr. Guido want to challenge me as to whether these 19 facts are in the record, I will gladly provide 20 them to the Court at whatever time the Court 21 should designate. 22 My objection is to the reading of a ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13638 1 single sentence out of a memo of February 19th, 2 1986, and asking this witness whether he agrees 3 with it. 4 THE COURT: So, Mr. Guido, you're 5 disagreeing with Mister -- 6 MR. NICKENS: Nickens, yes, sir. 7 THE COURT: Sorry. Mr. Nickens' 8 representation of the facts; is that right? 9 MR. GUIDO: That's correct, Your Honor. 10 And I think he misstated the facts. 11 THE COURT: I apologize, Mr. Nickens. 12 MR. NICKENS: That's fine, Your Honor. 13 I'm fine. 14 MR. GUIDO: I think based on what 15 Mr. Nickens has said that there were 60- to 90-day 16 reverse repos and that they were purchased 17 sometime in November, it seems to me that they 18 rolled sometime after December 31, 1985. 19 MR. NICKENS: That's simply -- 20 THE COURT: Well, we have a question of 21 fact in dispute. Let's proceed and see if the 22 witness knows. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13639 1 MR. NICKENS: Yes, sir. Thank you. 2 MR. VILLA: Your Honor, if I may 3 restate my objection. If the witness doesn't 4 remember anything, it's hard for him to dispute it 5 or remember anything. 6 THE COURT: He can tell us that, too. 7 MR. NICKENS: As long as the witness 8 understands, Your Honor, that if he doesn't 9 remember, he should say he remembers or doesn't 10 remember. 11 THE COURT: I think he understands 12 that. He's a lawyer. So, he ought to know. 13 MR. GUIDO: I do think that I'm 14 entitled to ask this witness if he knows of 15 anything that would contradict this statement -- 16 THE COURT: All right. Well, pose your 17 question. 18 Q. (BY MR. GUIDO) Mr. Huebsch, do you 19 know of anything that would contradict the 20 statement that's in Paragraph 2 of Exhibit A1625? 21 A. Well, the only way to verify it is to 22 get a schedule of the reverse repos and when they ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13640 1 were put on and what they were -- and what they 2 financed. 3 Q. Do you know of anything that 4 contradicts today -- anything today that 5 contradicts that statement? 6 A. I don't know where the schedule is 7 which would verify or contradict this. 8 Q. Do you know when the reverse repos were 9 put on? 10 A. I assume -- I don't know when they were 11 put on. They had to be put on to finance the 12 purchase of the mortgage-backs whenever the 13 mortgage-backs were purchased or settled. I 14 forget when -- I would guess when they settled. 15 Q. Take a look at Tab 504, which is A1622. 16 Does that refresh your recollection of 17 when the securities purchased for USAT Mortgage 18 Finance settled? 19 A. They settled today, which I take it was 20 November 20th. 21 Q. Now -- or it could be November 15th, 22 the day of the meeting, could it not? Could be ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13641 1 five days earlier? 2 A. Yeah, it could be. 3 Q. Now, what is the typical duration of 4 swaps? I mean reverse repurchase agreements. 5 Excuse me. 6 A. They could be anything. 7 Q. Now -- 8 A. I mean, they are generally short-term. 9 Q. But the mortgage-backed securities and 10 the reverse repurchase agreements were not put on 11 at any time prior to November 15th, 1985, if A1622 12 is to be believed as accurate. 13 Is that fair? 14 A. I don't remember, but it says here that 15 they were -- I guess it means -- does it mean all 16 of the securities or some of the securities? 17 Q. It says the securities, doesn't it? 18 A. "The securities settled today," 19 which -- 20 Q. So, it couldn't have been earlier than 21 November 15th, based on that memorandum? 22 A. Based on this memorandum. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13642 1 Q. Now, let's look at Mr. Pledger's 2 memorandum, Tab 585, which is B690. I think I 3 just showed it to you at the outset, and I would 4 direct your attention to Page 2 at the bottom of 5 the page. It says, "USAT Mortgage Finance. The 6 500 million reversion repurchase issuance made by 7 USAT Mortgage Finance, Inc. was completed before 8 the effective date of the regulations and would, 9 therefore, be exempt at the effective date. The 10 securities issued in this subsidiary were reverse 11 repurchase agreements, and these agreements have a 12 maturity of 60 to 90 days, at which time the 13 securities have to be renewed or rolled over." 14 Do you see that? 15 A. Uh-huh. (Witness nods head 16 affirmatively.) 17 Q. If that statement is correct, did the 18 reverse repurchase agreements roll after December 19 31, 1985? 20 A. If we add -- and I'm going by what it 21 says here. If we add 60 days -- 60 days to 90 22 days onto November 15th or November 20th, we would ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13643 1 get past December 31. That's what it says here. 2 I don't recollect this. 3 Q. Do you recall the durations on the 4 reverse repurchase agreements that were purchased 5 for USAT Mortgage Finance? 6 A. No, I don't. 7 Q. You don't have an independent 8 recollection? 9 A. No, I don't. 10 Q. Do you have any reason to dispute the 11 accuracy of this statement Mr. Pledger's memo? 12 A. I have no reason to dispute it. 13 Q. Now I'd like to direct your attention 14 to the document which we had copied which was 15 A10557. This is -- 16 A. This is -- 17 MR. GUIDO: A performance report of 18 February 1986, Your Honor. And it is from 19 Mike Crow to the board of directors in a memo 20 dated March 25th, 1986. It's Bates stamp US1672 21 through US1680. 22 Q. (BY MR. GUIDO) And I'd like to direct ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13644 1 your attention to Page 4 of this document, 2 Mr. Huebsch. 3 Do you see the section under 4 "regulatory compliance"? 5 A. Yes, I do. 6 Q. Do you see the regulatory net worth 7 figures? 8 A. Yes, I do. 9 Q. And do you see the figure as of -- 10 let's take 2/28/86, the actual net worth figure. 11 A. Yes, I see that. 12 Q. What does that show? 13 A. 189. 14 Q. That's $189 million. Right? 15 A. $189 million, correct. 16 Q. And then regulatory limit, what does it 17 show? $175 million, does it not? 18 A. That's correct. 19 Q. Okay. And the difference between those 20 is $14 million; is that correct? 21 A. That's what the arithmetic indicates. 22 Q. And the -- who was Mike Crow? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13645 1 A. Mike Crow was the -- I believe by this 2 time, he was the CFO. 3 Q. Okay. Was he the person who was 4 responsible for the books and records of USAT? 5 A. He was in charge of the -- guy in 6 charge of all the financial records, I believe. 7 Q. Okay. And was he the person who 8 periodically reported to the board on the 9 performance of the association? 10 A. That, I don't know. 11 Q. You do or don't know? 12 A. I don't know what his schedule was as 13 far as the board goes. 14 Q. Now, remember the $21,236,000 in gains, 15 non-operating gains that we looked at earlier in 16 the earlier performance report? 17 A. Was that for the fourth quarter? 18 Q. Yeah. Fourth quarter 1985. 19 A. I remember that number. 20 Q. If that were deducted, had not been 21 recognized on the books and records, would the net 22 worth have met the 175-million-dollar figure as of ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13646 1 February 28th, 1986? 2 A. We -- didn't we say it was 19, the 21 3 was 19 after reducing it for the 1.8 million? 4 Q. That's when we adjusted it against the 5 1.8-million-dollar figure. 6 A. So, 19 something. 7 Q. Okay. 8 A. Well, these are 14. 9 Q. Well, I mean, this figure here of 10 189 million at 2/28/86, that includes the 1 8 11 million-dollar profit from the fourth quarter of 12 1985, does it not? 13 A. I guess so. I don't know. 14 Q. If the books and records are kept 15 accurately, that would be your understanding. 16 Right? 17 A. That would be my understanding, yes. 18 Q. So, if you subtract the 21,236,000 from 19 the 189, does that take you below the 20 175-million-dollar regulatory limit? 21 A. Your arithmetic would indicate that. 22 So would my arithmetic. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13647 1 Q. Thank you. 2 Do you know what the consequences 3 were -- 4 MR. GUIDO: Your Honor, I offer A10557 5 as an exhibit. 6 MR. VILLA: No objection. 7 THE COURT: Received. 8 Q. (BY MR. GUIDO) Do you know what the 9 consequences would have been as of December 31, 10 1985, or February 28th, 1986, of USAT failing to 11 meet its minimum regulatory requirements? 12 A. No, I do not know the consequences. 13 Q. Had you, when you were at USAT, ever 14 heard of the concept called a supervisory letter? 15 A. I had heard of that, but I've never 16 seen one. I don't know. 17 Q. Had you ever received a supervisory 18 letter while you were there? 19 A. I may have. I don't know. I would not 20 know. 21 Q. Now, how did you hear at USAT about the 22 concept of a supervisory letter? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13648 1 A. I don't recall how I heard it. 2 Q. Did it come up in the context of a 3 potential failure to meet net worth -- minimum net 4 worth regulatory requirements? 5 A. That, I don't know. I wouldn't know 6 that, then or now. 7 Q. Did you know at the time if USAT had 8 failed to meet its net worth maintenance 9 requirements, it could not invest in high-yield 10 bonds? 11 A. No, I did not know that. 12 Q. Did you know at the time -- 13 MR. VILLA: I'll object to the question 14 as misleading. It states a fact not in evidence. 15 THE COURT: Well, we had the answer. 16 I'm certain it's not established, but continue. 17 Q. (BY MR. GUIDO) Did you know at the 18 time that if USAT failed to meet its net worth 19 maintenance requirements, it could not engage in 20 equity arbitrage transactions? 21 MR. NICKENS: Your Honor, "net worth 22 maintenance requirements"? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13649 1 MR. GUIDO: I'm sorry. Net worth 2 requirements. 3 A. No, I did not know that. 4 Q. (BY MR. GUIDO) Was USAT Mortgage 5 Finance's assets of $350 million of 6 mortgage-backed securities and the purchase of the 7 mirror swap to match off the existing swaps, was 8 that transaction designed to generate profits at 9 year end 1985? 10 A. Not that I know of. 11 Q. Why did you put on the mirror swap? 12 A. I believe it was to neutralize the 13 swaps that were on. 14 Q. Why didn't you just sell the swaps? 15 A. I don't -- I can't recall why we didn't 16 sell them. 17 Q. Did you not just sell the swaps because 18 you did not want to recognize a loss on the swaps? 19 A. That was not in my bailiwick, Mr. 20 Guido. 21 Q. Who bought the swaps, the mirror swaps? 22 A. I assume Joe Phillips did. But the ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13650 1 recognizing of income in one period or deferring 2 it to another was not something that Mr. Phillips 3 and I were concerned with. We were trying to buy 4 the best possible assets and the best possible 5 hedging devices. 6 Q. You testified that you sold the $350 7 million worth of mortgage-backed securities 8 because someone came to you and said, "There is a 9 regulatory problem. We have to get rid of $350 10 million worth of mortgage-backed securities." 11 Right? 12 A. I believe that's what happened. 13 Q. And you were responsible for managing 14 the investment portfolio at USAT, were you not? 15 A. Yes. But when somebody told me 16 something had to be sold for a regulatory reason, 17 I didn't argue with them. 18 Q. Did anyone tell you that regulatory 19 reasons required you to purchase a mirror swap? 20 A. I don't recall that. I don't recall 21 that at all. 22 Q. Do you recall why the mirror swap was ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13651 1 purchased as opposed to just selling the swaps? 2 A. I don't know -- I don't recall -- I 3 mean, I may never know what the defined difference 4 was between that. 5 Q. Between what? Selling swaps and 6 purchasing a mirror swaps? 7 A. Mirror. 8 Q. Well, did somebody tell you to buy the 9 mirror swap? 10 MR. VILLA: Objection. Asked and 11 answered. 12 THE COURT: Denied. 13 Q. (BY MR. GUIDO) Did somebody tell you 14 to buy the mirror swap, or did you and Joe 15 Phillips do it on your own? 16 A. We did not do it on our own. 17 Q. So, you believe -- is it your testimony 18 that somebody told you to buy the mirror swap? 19 A. That's right. 20 Q. And that you did not yourself exercise 21 the discretion to determine whether you were going 22 to sell the swaps or buy a mirror swap? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13652 1 A. That was not my decision. 2 Q. Whose decision was it? 3 A. I don't recall. It was from higher 4 management. 5 Q. Okay. Who were the higher management? 6 A. Well, the higher management were the 7 legal department, finance department, Mr. Crow, 8 Mr. Gross, people like that, Gerry Williams. 9 Q. Did you report to Michael Crow? 10 A. No. 11 Q. So, he wasn't your superior. Right? 12 A. No. 13 Q. So, was he higher up? 14 A. You know, I would listen to him. I had 15 to listen to him on financial matters. 16 Q. Well, I mean, this is an investment 17 decision. Right? 18 A. Well -- 19 Q. To sell something? 20 A. It was more than an investment 21 decision, I believe. 22 Q. It was accounting-driven, wasn't it? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13653 1 A. I think it was accounting, regulatory. 2 It had to come from somebody who knew the whole 3 picture of the association at that time. 4 Q. Were you told to put on the mirror 5 swaps so that you didn't have to -- so the 6 association did not have to recognize the 7 $11 million in losses embedded in those swaps? 8 A. I don't know. I don't know. 9 Q. You just -- 10 A. I don't know the reasoning behind 11 putting on the mirror swaps. 12 Q. You just testified that it was 13 accounting-driven? 14 MR. NICKENS: Your Honor, that was not 15 his testimony. He said -- we heard his testimony. 16 He said it was -- there were accounting issues. 17 This were legal issues. There were regulatory 18 issues. That was not his testimony. 19 THE COURT: What's your question? 20 Q. (BY MR. GUIDO) One of the basis that 21 you testified for putting on the mirror swaps was 22 an accounting issue. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13654 1 Do you recall that? 2 A. No, I don't recall that. I recall 3 this. I believe it was a decision that came -- it 4 had accounting aspects to it. It had legal 5 aspects to it. It had regulatory aspects to it, 6 and it had aspects of how the whole institution's 7 balance sheet was going to look and, you know, 8 whether the assets and the liabilities were 9 properly matched in the eyes of the people who saw 10 the whole institution and was responsible for the 11 whole balance sheet. Those are the people who 12 talked to me. 13 There wasn't any -- I can't recall any 14 single -- any single one of those constituencies 15 telling me anything. It was a decision that would 16 have had to have come touching all those basis. 17 Q. Are swaps a balance sheet item? 18 A. Well, they are not when they are in an 19 off balance sheet subsidiary. 20 Q. They are off balance sheets, aren't 21 they? 22 A. But even a subsidiary has to -- has a ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13655 1 balance sheet. 2 Q. Okay. Is it your understanding or was 3 it your understanding at the time when you put on 4 the mirror swaps you did not have to recognize the 5 losses on the swaps? 6 A. No, that was not -- that was not my 7 understanding at all. 8 Q. What was your understanding? 9 A. I didn't -- I didn't have any real 10 understanding except that the swaps, initial 11 swaps, were a hedge and that the hedge was no 12 longer needed. Therefore, the mirror swap. 13 Q. And then what did you do? You put on a 14 mirror swap. Right? 15 A. Right. 16 Q. Why didn't you sell the swaps? 17 A. Nobody told me to. 18 Q. Well, you didn't need them anymore, did 19 you? 20 A. That was not -- I don't know if we 21 needed them or didn't need them. 22 Q. Well, you just said -- I think you just ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13656 1 testified that what they hedged wasn't on the 2 books anymore. 3 A. Some. 4 Q. $350 million worth. 5 A. Perhaps they were going to use them to 6 hedge something else. I don't know, Mr. Guido. 7 Q. Well, would they have hedged anything 8 else after -- 9 A. They may have. 10 Q. -- being mirrored? 11 A. After being mirrored, they were 12 neutralized. 13 Q. Okay. So, they didn't hedge anything 14 after you mirrored them, did they? 15 A. I don't see how you could. 16 Q. So, they weren't kept to hedge any 17 other instrument, were they? 18 A. Well, after they were mirrored, they 19 would have little, if no hedging capacity. 20 Q. Back to my question. Were the assets 21 of USAT Mortgage Finance, the 350-million-dollar 22 mortgage-backed securities, sold and the mirror ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13657 1 swap put on to generate an accounting gain at year 2 end 1985? 3 A. I cannot answer that. I don't know. 4 Q. You don't know? 5 A. I just don't know. 6 MR. GUIDO: Your Honor, I'm finished 7 with this segment. Do you want me to move on, or 8 do you want to take a break? 9 THE COURT: All right. We'll take a 10 short recess. How much more do you have? 11 MR. GUIDO: I have quite a bit more 12 with this witness, Your Honor. This could go well 13 into tomorrow. 14 THE COURT: We'll take a short recess. 15 16 (A short break was taken.) 17 18 THE COURT: Be seated, please. We'll 19 be back on the record. 20 Mr. Guido, you may continue. 21 MR. GUIDO: Thank you, Your Honor. 22 Q. (BY MR. GUIDO) When we broke, I had ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13658 1 asked you -- 2 MR. GUIDO: Oh, before we do that, Your 3 Honor, Mr. Nickens and I would like the record to 4 show that Mr. Bruce Williams is not in the 5 courtroom at the present time. 6 THE COURT: Thank you. 7 Q. (BY MR. GUIDO) The -- before we 8 broke, I had asked you a question and I hadn't 9 completed the question. 10 You testified that you were told by 11 senior management to liquidate the USAT Mortgage 12 Finance portfolio that you liquidated, and I was 13 asking you questions about who the senior 14 management was at USAT. I asked you about Mr. 15 Crow. I think you testified that Mr. Gross you 16 considered senior management? 17 A. Yes. 18 Q. And Mr. Williams you considered senior 19 management? 20 A. Yes. 21 Q. Anyone else? 22 A. Gerry. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13659 1 Q. Gerry Williams. Anyone else? 2 A. What time are we -- 3 Q. This is December of '85. 4 A. I think Mr. Bentley was gone by then. 5 Q. What about Mr. Munitz? 6 A. Yes. I would consider him senior 7 management. 8 Q. What about Mr. Hurwitz? 9 A. Yes, he was in the holding company. 10 Q. And what about Mr. Berner? 11 A. Yes. I considered him senior 12 management. 13 Q. Is there any reason that you can think 14 of to put on a mirror swap to neutralize the 15 effect of the swap as opposed to selling the swap 16 other than to avoid recognition of a loss? 17 A. Nothing comes immediately to mind. 18 Q. Now, I'd like to move to the packet of 19 documents that start with A1593, which is Tab 20 1909; Tab 855, which is the Exhibit A10597; Tab 21 856, which is A10599; Tab 857, which is A10601; 22 Tab 858, which is Exhibit A10603; Tab 859, which ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13660 1 is Exhibit A10605. 2 Do you have those documents in front of 3 you? 4 A. What was the first one, Mr. Guido? 5 Q. Tab 1309, which was A10593. 1309 is 6 the tab. Here it is. 7 A. That's one, two, three, four, five, 8 six? 9 Q. I think that's right. 10 MR. VILLA: Could you repeat that first 11 number one more time, sir? 12 MR. GUIDO: Tab 1309. It's A10593. I 13 think we discussed it briefly yesterday. 14 THE COURT: You may continue, 15 Mr. Guido. 16 MR. GUIDO: Thank you, Your Honor. 17 Q. (BY MR. GUIDO) I'd like to direct 18 your attention to the first document in the packet 19 that you have in front of you. It's Tab 1309, and 20 it's Exhibit A10593. 21 A. Yes, I have it, Mr. Guido. 22 Q. And this is a memo from Jenard Gross to ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13661 1 Gerald Williams dated January 6th, 1986. And at 2 the top, it says it's the performance report on 3 Ron Huebsch. 4 Do you see that? 5 A. I see that, yes. 6 Q. Do you recall -- do you recall that 7 there was an issue on how to calculate the bonuses 8 for the investment department that arose at the 9 beginning of 1986? 10 A. You know, there may have. I don't 11 recall it right now. 12 Q. Did -- within the last week or so, did 13 you review any documents pertaining to the bonus 14 plan for the investment department during the 15 period -- 16 A. Yeah, I read some of them. 17 Q. Okay. Now, the -- and do you recall 18 whether there was an issue about how the 19 performance bonus for the investment department 20 should be calculated? 21 A. I believe there was some controversy 22 about that. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13662 1 Q. Do you recall what the controversy was? 2 A. I think it evolved around the portfolio 3 manager's ability to maintain the spread. 4 Q. Did it involve any other issues? 5 A. Well, it probably involved a lot of 6 other issues. 7 Q. Well -- 8 A. How he, you know, conducted himself, 9 whether he worked with the other employees, how 10 well he worked with the other employees, was he 11 creative. I mean, a whole bunch of things. 12 Q. Well, was the issue how you measured 13 the financial benefit to USAT from the investment 14 manager's management of the portfolio? 15 A. That was something that I was wanting 16 to see happen. 17 Q. And that was the issue that arose of 18 how you calculate what the financial benefit was 19 to USAT. Right? 20 A. I believe so, yes. 21 Q. Okay. Now, let's take the January 6th 22 memorandum which I -- which is the first document ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13663 1 in your packet which I have attempted to put in 2 chronological order dealing with the performance 3 report on your operations. 4 It says, "I would say that he would 5 have had a better return on investment had we not 6 taken profits during the year which had the net 7 effect of reducing his spread." 8 Do you see that? 9 A. Yeah, but this is -- this isn't a 10 report on the department. It's a report on me. 11 Q. Okay. But it's a performance report. 12 Right? 13 A. That's what it says, yes, sir. 14 Q. And were performance reports used at 15 USAT as a basis for determining people's bonuses? 16 A. You know, I didn't -- I don't really 17 know. It was my hope that they were. 18 Q. Okay. Now, have you ever seen this 19 document before? 20 A. No, I don't -- I might have seen it in 21 the last, you know, couple of days but -- 22 Q. Do you recall seeing it when you were ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13664 1 at USAT? 2 A. No. I wasn't in this channel here. 3 Q. What do you mean you weren't in this 4 channel? 5 A. The Williams to Gross channel. 6 Q. Well, take the first sentence. It 7 says, "I would say that he would have had a better 8 return on investments had he not taken profits 9 during the year which had the net effect of 10 reducing his spread." 11 What profits were taken in 1985 in the 12 portfolios that were under your supervision? 13 A. Well, we hoped -- with the equity 14 arbitrage, we hoped to take any profit we could 15 find any day at any time. 16 Q. Was the equity arbitrage a portfolio 17 that had a net spread in it? 18 A. It was -- it only had a spread in this 19 sense that there was a cost of funds attached to 20 it. 21 Q. Okay. 22 A. There -- it was no spread -- it was, ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13665 1 you know, hedged showing long, things like that. 2 Q. But there was no -- there was no 3 effective spread in the equity arbitrage. You 4 just bought it and hoped to make money on an 5 increase in capital value. Right? 6 A. It was our intent to sell everything we 7 bought as soon as we could -- 8 Q. Were there other assets under your 9 supervision besides the equity arbitrage assets in 10 1985? 11 A. Well, Mr. Phillips handled the junk 12 bond portfolio, and he was under my general 13 supervision. 14 Q. Okay. Did he also handle 15 mortgage-backed securities? 16 A. Yes. He also handled mortgage-backed 17 securities. 18 Q. And were the high-yield bonds and the 19 mortgage-backed securities portfolios that 20 typically had spreads in them? 21 A. They were both spread portfolios. 22 Q. And that -- and were sales made out of ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13666 1 the high-yield bond portfolio that generated gains 2 in 1985? 3 A. From time to time, there were. 4 Q. And did they have the effect of 5 reducing the net interest spread? 6 A. They would generally have that effect. 7 Q. Were sales made out of the 8 mortgage-backed securities portfolio in 1985 that 9 generated gains? 10 A. No, there were not. 11 Q. There were no sales made out of the 12 mortgage-backed securities -- 13 A. There were sales made, but there was no 14 intent -- 15 Q. I'm not asking about intent at this 16 present time. I didn't use the word "intent." I 17 said, were sales made out of the mortgage-backed 18 securities portfolio in 1985 that generated gains? 19 A. Which one? 20 MR. VILLA: Object. That was not the 21 question asked him. He said to generate gains. 22 THE COURT: Which question do you want ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13667 1 him to answer? 2 MR. GUIDO: I'll rephrase the question. 3 MR. VILLA: Thank you. 4 MR. GUIDO: This is the question I 5 wanted answered. I'm sorry, Mr. Villa. 6 Q. (BY MR. GUIDO) Were sales made out of 7 the mortgage-backed securities portfolio in 1985 8 that generated gains? 9 A. Which portfolio? 10 Q. Any mortgage-backed security portfolio 11 in 1985. 12 A. The only gains that I recall from 13 having read this that refreshed my memory over the 14 last two days were the gains on the folding up of 15 one of the finance subsidiaries. 16 Q. USAT Mortgage Finance? 17 A. There may have been gains out of the 18 Joe's portfolio RCA, but I don't think so. 19 MR. VILLA: Mr. Huebsch, could you keep 20 your voice up just a little bit? 21 THE WITNESS: Okay. Sorry. 22 Q. (BY MR. GUIDO) There were no sales ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13668 1 out of USAT's mortgage-backed securities 2 portfolios in 1985 that generated gains other than 3 the collapse of USAT Mortgage Finance. 4 Is that your testimony? 5 A. There may have been just -- gains might 6 have happened -- might have occurred just managing 7 the portfolio whereas -- 8 Q. I'm not asking you anything about the 9 purposes for why the sales were made. I'm only 10 asking you: Were sales made out of USAT's 11 mortgage-backed securities portfolios in 1985, 12 other than the sales of USAT Mortgage Finance, 13 that resulted in gains? 14 A. You know, I don't really recall. 15 Q. Okay. That's all I was trying to ask. 16 A. Okay. 17 Q. Now -- and you don't know -- do you 18 know whether or not there were transactions that 19 were in the mortgage-backed securities portfolio 20 at USAT in 1985, excluding USAT Mortgage Finance, 21 that had the net effect of reducing the net 22 interest spread on those portfolios? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13669 1 A. I am not aware of it. 2 Q. You're not aware of it, or you don't 3 think it occurred? 4 A. I just don't know. I just don't know. 5 MR. VILLA: I'm sorry. I couldn't hear 6 the last answer. 7 THE WITNESS: I just don't know. 8 MR. VILLA: Thank you. 9 Q. (BY MR. GUIDO) Now, the second 10 sentence says, "I think that the size of the 11 blowup of his investment portfolio were all out of 12 proportion to what we had originally envisioned." 13 Do you see that? 14 A. I see that. 15 Q. Do you know what that refers to? 16 A. It's -- you know, I have trouble 17 following -- when he says "his," I have trouble 18 with the word "his." Does that mean just the 19 portfolio I had responsibility for, which was the 20 equity risk arbitrage? I also have trouble with 21 "investment portfolio." I don't know which one -- 22 Q. Do you recall whether or not -- ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13670 1 A. Which one or both -- I can't -- I'm not 2 getting any feel for what he's talking about. I 3 know what he's talking about generally, but the 4 specifics, I -- 5 Q. What do you think he's talking about 6 generally? 7 A. I think he's saying that he's probably 8 talking not about the equity risk arb portfolio. 9 He's probably talking about Joe's portfolio of the 10 mortgage-backed, commonly called Joe's portfolio, 11 and the junk bonds portfolio. 12 Q. What was it about the size of the 13 portfolios and high-yield bonds that was in issue 14 in January of 1986 at USAT? 15 A. What was the issue there? 16 Q. Yeah. What was it -- see, it talks 17 about the blowup. The size of the blowup. 18 A. Well, there was no blowup in junk 19 bonds. I mean, they were all doing very well. 20 Q. No. This says, "I think that the size 21 of the blowup of his investment portfolio were all 22 out of proportion to what we had originally ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13671 1 envisioned." 2 Does the term "blowup" refer to growth 3 in that sentence? 4 A. It's probably more likely that than a 5 blowup of the market. 6 Q. Let's talk about growth. What was the 7 growth issue about the high-yield bond portfolio 8 in January of 1986 that's being addressed in this 9 memo? 10 A. That, I have, you know -- the only 11 thing I can -- well, I really don't know. They 12 certainly grew in '86. If they were beyond 13 Jenard's expectations, I don't know. You'll have 14 to ask Jenard. 15 THE COURT: Excuse me. You said they 16 grew in '86, but this memo is dated earlier. 17 THE WITNESS: I'm sorry. In '85, Your 18 Honor. Sorry. 19 Q. (BY MR. GUIDO) So, it grew in 1985. 20 Who was Jenard Gross at that time? 21 A. I think Jenard was chairman. 22 Q. Chairman of what? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13672 1 A. Of USAT. 2 Q. Now, you said that he's probably also 3 referring to mortgage-backed securities there? 4 A. Yeah, but I don't know that for sure. 5 Q. Did the size of the mortgage-backed 6 securities portfolio grow significantly in 1985? 7 A. Both the mortgage-backs and the junk 8 bonds. All portfolios grew. 9 Q. Do you recall what the magnitude of the 10 growth was in the high-yield bond portfolio in 11 1985? 12 A. Well, I would say that all of them were 13 substantial because we were starting from a very 14 low base at the end of 1984. But I don't know the 15 numbers. 16 Q. Would you say it was substantial? 17 A. Yes. 18 Q. Now, then he goes on to say, "I think 19 that within the framework of what occurred, I 20 think that he did some outstanding things." 21 Do you see that? 22 A. Yes. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13673 1 Q. Do you know what he's referring to 2 there? 3 A. Well, we had good records on the 4 various portfolios. 5 Q. Which portfolios? 6 A. Well, I think the arb portfolio did 7 very well and the junk bonds did very well. 8 MR. VILLA: Excuse me. I couldn't hear 9 that. 10 THE WITNESS: The arb and the junk 11 bonds did very well. 12 Q. (BY MR. GUIDO) You mean in terms of 13 total return to the association? 14 A. Well, junk bonds in spread and the 15 equity arbitrage in total return. 16 Q. I think you testified that there were 17 gains out of the high-yield bond portfolio in 1985 18 which had the effect of reducing the net interest 19 spread. 20 A. I think that's what happened. And what 21 he's saying here is that perk, any -- if your 22 calculation, performance calculation, was based on ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13674 1 the spread, it would naturally hurt the portfolio 2 manager if he were being rewarded for keeping the 3 spread. I think that's what -- I think that's -- 4 I think that's what the conflict might be in here. 5 Q. We'll get to that. Let me move on to 6 the next sentence. You said that the equity 7 arbitrage did well. The next sentence says, "On 8 the other hand, there is no question that the 9 arbitrage situation has not worked out as well as 10 hoped." 11 A. Right. 12 Q. Does that refer to the equity 13 arbitrage? 14 A. I think he was talking about the MBS; 15 but, you know, I don't know. I don't know for 16 sure. 17 Q. Well, what is it about the MBS that 18 didn't work out as well as hoped in January of 19 1986? 20 A. Well, apparently, Jenard found 21 something that -- that was happening different 22 from what he expected. I don't know exactly what ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13675 1 he's saying here. 2 Q. So, you don't know what that -- that 3 refers to? 4 A. That's only a guess. 5 Q. Was there a portfolio that was in place 6 in 1985 that resulted in a substantial loss to the 7 institution in the mortgage-backed securities 8 area? 9 A. Not that I -- not that I'm aware of. I 10 think -- I think what may have happened is that 11 interest rates were starting to come down and the 12 prepayments may have been picking up. 13 Q. In January of 1986, how far had 14 interest rates fallen from the time 15 mortgage-backed securities were put on USAT's 16 portfolio in what's referred to as Joe's 17 portfolio? 18 A. I don't really know that. 19 Q. Was it in the magnitude of 250 basis 20 points? 21 A. Well, I don't remember these days. I 22 think the magnitude from the start of Joe's ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13676 1 portfolio through the first quarter of '86 was in 2 the magnitude of well over 300. I don't -- that's 3 the only period I remember. 4 Q. Okay. Now, I'd like to direct your 5 attention to the second document, which is Tab 855 6 which is Exhibit A10597. 7 A. We're not -- not the second one in 8 here? 9 Q. No. This is now turning to the 10 specifics of the investment department bonus plan. 11 A. Okay. This is the January 21 -- 12 Q. -- 21, 1986 memorandum from Gerald 13 Williams to Charles Hurwitz, Barry Munitz, and 14 Jenard Gross. 15 A. I see it. 16 Q. And it has attached to it a not very 17 legible copy of a memorandum from Ron Huebsch to 18 Joe Phillips to Charles Hurwitz dated sometime in 19 December of 1985 regarding performance bonuses. 20 A. I see -- I see these scratchings here. 21 Q. Or dots? I mean, it's not apparently 22 legible. I'm not going to ask you the specifics ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13677 1 of the document. What I'm going to do is address 2 what's on the cover memo from Gerry Williams to 3 Charles Hurwitz and Barry Munitz and Jenard Gross. 4 Before I do so, did you prepare a 5 bonus -- performance bonus plan that you 6 recommended to Charles Hurwitz in December of 7 1985? 8 A. Yeah. I'm assuming this is saying 9 December -- I assume this says December 30th, 1985 10 on the first line. 11 Q. That's what it appears to be. 12 A. Yeah. It appears to be to Charles 13 Hurwitz from Ronald Huebsch and Joe Phillips. 14 Q. Okay. And it deals with the question 15 of performance bonuses? 16 A. Yes. 17 Q. Maybe it will help refresh your 18 recollection if you look at the first page of the 19 exhibit, which is the first paragraph. It says, 20 "Due to the unique attributes of United's 21 investment department, we have been asked to 22 approve a bonus program for that group effective ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13678 1 January 1, 1986. In that regard, I have reviewed 2 a preliminary proposal from Ron Huebsch to Charles 3 Hurwitz outlining his ideas for a bonus program." 4 Then it says "attached." 5 Do you see that? 6 A. I see that. 7 Q. Okay. And it's your understanding 8 that -- your recollection that you made a proposal 9 to Charles Hurwitz for performance bonus for 10 United's investment department in December 1985? 11 A. That's what I did. 12 Q. Okay. Now, did you propose what the 13 basis would be for the calculation of performance 14 bonuses for the investment department? 15 A. We had a formula and a basis. 16 Q. Okay. 17 A. And -- 18 Q. And was the formula broken up based on 19 performance in the various portfolios managed by 20 the investment department? 21 A. You know, it looks that way from -- I'm 22 back over -- ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13679 1 Q. You're back over to what? 2 A. I'm back over to 0000895. 3 Q. Okay. 4 A. It looks like the headings would be the 5 various portfolios we were involved in, corporate 6 bonds. 7 Q. Corporate bonds was one of them. 8 Right? 9 A. Common stock arbitrage, liquidity 10 portfolio, and mortgage-backed. 11 Q. It says mortgage-backed "securities 12 arbitrage," does it not? 13 A. Yeah. That's the complete title. 14 Q. So, those are the portfolios that were 15 under the management of the investment department 16 in January of 1986? 17 A. Right. 18 Q. Okay. Now, what was the performance 19 that you recommended that the department be -- be 20 used for the department to calculate its 21 performance bonus for the corporate high-yield 22 bonds? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13680 1 A. Well, I see -- I can read this script 2 over on the right better than I can -- 3 Q. Is the script in your handwriting? 4 A. Some of the script is -- this script 5 from here up in the right-hand column is my 6 handwriting. This is -- there's some script here 7 that's not in my handwriting. And then there's a 8 third -- in the left column, there's another 9 comment in script that looks like a third -- yet 10 another person's handwriting. 11 Q. Let's take the portion that has the 12 arrows on the right-hand side. 13 A. Yes, yes. 14 Q. Those -- those notations are your 15 notations? 16 A. That's right. That's my handwriting, 17 yes. 18 Q. All right. Now, I know they are 19 difficult to read. But starting with the 20 corporate bond, what is the performance that the 21 bonus you propose was to be based upon? 22 A. Well, you know, I can see these numbers ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13681 1 in the spread. Mr. Guido? 2 Q. Yes. 3 A. Could you come over here? I'll tell 4 you -- 5 Q. That doesn't help the record to tell 6 me. 7 THE COURT: Well, we'll try to make it 8 appear on the record. 9 Q. (BY MR. GUIDO) Let's start -- 10 A. I mean, I can see the spread numbers. 11 Q. There's a spread. So, that is one of 12 the figures -- 13 A. Well, I don't know. These may be -- 14 like, actual spread, anticipated spread. They are 15 spread in basis points. 16 Q. Okay. Basis point spread -- let me ask 17 you a question. 18 The spread refer to net interest 19 spread? 20 A. Net interest spread. It would be 21 the -- I would look at it as the interest received 22 from the bonds less expenses. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13682 1 Q. Interest paid? 2 A. No. Interest received on the bond. 3 Interest paid on the CDs. 4 Q. Okay. Fine. Let's call that net 5 interest spread, okay, for purposes of the record. 6 All right? 7 THE COURT: Where are the figures that 8 refer to that? If we're going to make a record, 9 this document is very illegible and I'm afraid 10 we're getting nowhere as far as making a record is 11 concerned. 12 A. I think this is -- the column on the 13 right shows some numbers. But the calculations is 14 in the left-hand column in print, which is -- I 15 can't read. 16 Q. (BY MR. GUIDO) Well, let me ask you a 17 general question. I'm not particularly interested 18 in the specifics. I'm interested in the concept. 19 Was the bonus for the high-yield bond 20 portfolio anticipated to be based on some 21 percentage of the net interest spread that was 22 earned on the high-yield bonds? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13683 1 A. It was Mr. Phillips' and my hope that 2 it would be, and that's why it was put in this 3 proposal. 4 Q. Did your proposal include a bonus for 5 gains that were made by sales out of the 6 high-yield bond portfolio? 7 A. There is -- the only evidence I can see 8 is that it says here that 1985A is adjusted for 9 year end profit taking. So, it was an attempt, 10 apparently, on our part to adjust the spread for 11 the profit taking. I don't know how we did it or 12 how Mr. Phillips did it. He would be more able to 13 do it than I. 14 Q. So, your proposal was that the 15 investment department's bonus, performance bonus, 16 based on the financial return to USAT, be based 17 upon the net interest spread plus some credit for 18 profits that were made out of sales from that 19 portfolio? 20 A. I don't want to go that far. I'll say 21 adjusted for because I don't know -- 22 Q. Increased or decreased? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13684 1 A. Hopefully for Mr. Phillips, I would 2 hope it would be increased; but it was adjusted. 3 And I can't -- I can't tell you from this how 4 adjusted. 5 Q. Okay. That's fine. 6 Now, the common stock arbitrage, was 7 that bonus to be paid as a percentage of the 8 profits that were earned on the sales of the 9 common stock that were in the arbitrage? 10 A. I can't tell from here; but because 11 this was a total return account, it would have to 12 consider both income and profits. 13 Q. Okay. You mean -- 14 A. But I can't -- 15 Q. Let me ask you a clarifying question. 16 With regard to the common stock arbitrage, was the 17 bonus to be paid as a percentage of the profits in 18 that portfolio that were calculated by taking the 19 gains that were made on the sales, gains or losses 20 that were made on the sales of the stock, plus any 21 mark-to-market adjustment at the end of the 22 period? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13685 1 A. Plus any net income like dividends. 2 Q. Dividends. Okay. But it was a total 3 performance calculation, some percentage of that? 4 A. (Witness nods head affirmatively.) 5 Q. Now, the liquidity portfolio, how was 6 the performance to be measured there to ascertain 7 what percentage of profits? 8 A. Well, I can't make it out from here; 9 but again, you had -- this was a total return 10 account. 11 Q. So, it was -- 12 A. Believe it or not. 13 Q. It was all income, less expenses, 14 adjusted for market value? 15 A. Yes. 16 Q. Okay. 17 A. But it wasn't -- the problem with this 18 account was that because of the, you know, 19 restrictions on the very high quality, very 20 short-term maturity, it was always going to lose 21 money. 22 Q. Why was that? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13686 1 A. Because the cost of funds was always 2 generally higher than -- 3 Q. Than what you had earned? 4 A. It was always -- 5 MR. VILLA: I couldn't hear his answer. 6 A. It was always a non-money maker. 7 Q. (BY MR. GUIDO) Because you were 8 investing in treasury, short-term treasuries? 9 A. Real short. Agencies, things like 10 that. 11 Q. Which were paying less interest rate 12 than the cost of funds of the association? 13 A. Right. So, we had a great deal of 14 trouble figuring that out. 15 Q. Okay. Now, let's move to the 16 mortgage-backed securities arbitrage. 17 Was one of the bases for calculating 18 the profit based on the financial return to the 19 association the net interest spread -- 20 A. That's right. 21 Q. -- of the portfolio? 22 And was that to be also increased by ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13687 1 any realized gains that were made out of sales in 2 that portfolio? 3 A. Well, interestingly enough, on this 4 right-hand column in script, I see no adjustment 5 for gains as compared to the footnote or the 6 adjusted corporate bonds. 7 Q. But look at the text, the text. This 8 is a bonus proposal going forward. It says, 9 "Spread income including realized gains, all 10 accounts." 11 Do you see that? 12 A. Yeah. I mean, sort of. 13 Q. So, was the bonus that you were 14 proposing in terms of a performance bonus based on 15 financial returns for the mortgage-backed 16 securities, was that to be based on the amount of 17 gains that were also made by sales out of the 18 portfolio? 19 A. Apparently -- it appears so as a "yes, 20 but" thing. Yes from the left-hand column, but no 21 from the right-hand column. 22 Q. And why do you say "no" from the ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13688 1 right-hand column? 2 A. Because there is no asterisk underneath 3 this right-hand column as -- no footnote as there 4 was under the corporate bonds heading beginning of 5 the column or at the top of the column. 6 Q. Now, let's move to Mr. Williams' views 7 on what he believed the bonus should be based 8 upon. 9 A. This is in the same memo? 10 Q. The same memo. It's the first page -- 11 A. Okay. 12 Q. -- of the memo. 13 A. All right. 14 Q. If you look, the second paragraph says, 15 "I believe Ron's proposal is too complex and could 16 develop unwarranted gains or losses for the 17 department simply because of interest rate 18 movements in the money market." 19 Do you see that? 20 A. Uh-huh. Yes, I do. 21 Q. Do you know what he's referring to? 22 A. I don't know what he's referring to, ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13689 1 but I don't think I like it. 2 Q. What do you mean you don't think you 3 like it? 4 A. I think it's personally moving 5 against -- 6 Q. Pardon? 7 A. I have a terrible feeling this proposal 8 is being turned down. 9 Q. At least your proposal is being turned 10 down? 11 A. Yeah. 12 Q. But you don't know why he's saying he's 13 turning it down? 14 A. No. 15 Q. Okay. But you do -- you do see that he 16 has a problem with it. Right? 17 A. Very, very decidedly there is a 18 problem. 19 Q. Then he says, "The following suggests a 20 plan that is more simplified and yet at the same 21 time can be rewarding if certain targets are met." 22 Okay? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13690 1 A. Yes, I see that. 2 Q. It says, "The investment department 3 bonus plan would be similar to other incentive 4 plans at United. It would be integrated into the 5 company's overall performance and the key 6 measurement criteria would be from the monthly 7 performance report, specifically Schedule SF, Page 8 2." Okay? 9 A. Yes. 10 Q. Now, let's turn to Schedule SF, Page 2. 11 It's the third page of the exhibit. 12 A. Okay. I've got it now. 13 Q. Do you see where it says "United 14 Savings of Texas investments profit contribution 15 for the 11 months ended November 30, 1985"? Now, 16 let's take the securities column. That shows a 17 balance sheet at the top. Right? 18 A. Right. 19 Q. Okay. Which has mortgage-backed 20 securities, corporate securities, ON, and ST 21 investments. 22 Do you see that? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13691 1 A. Yes. 2 Q. Do you know what that refers to: ON 3 and ST investments? 4 A. No. There is a footnote here. 5 Q. Are those the liquidity portfolios that 6 you testified to earlier? 7 A. They may well be. 8 Q. Okay. Now, and then it has the 9 liability side: Retail broker CDs, reverse repos, 10 other debt, equity from securities gains for a 11 total there. Okay? 12 A. Right. 13 Q. Are you with me so far? Then it has a 14 section called "profit contribution." 15 A. Yes. 16 Q. It has interest income? 17 A. Right. 18 Q. Various income. Interest expense, 19 various expenses. Then it has a column "net 20 interest income." Right? 21 Do you see that? 22 A. Net interest income, right. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13692 1 Q. Okay. Which I think is $8,627,000. 2 Do you see that? 3 A. Right. 4 Q. Then it has gain on sale of securities 5 of 8,089,000. 6 A. I see that. 7 Q. Operating expenses of 223, provision 8 for security losses of 826, for a total profit 9 contribution of 15,667. 10 Do you see that? 11 A. Yeah. 12 Q. Now, let's turn back and look at the 13 third paragraph on Page 1. That says "The targets 14 for Schedule SF would be developed as a result of 15 the investment department's approved profit plan, 16 and the expected profit contribution would be used 17 as the target to award bonuses at the end of the 18 year. The only difference from the present SF 19 schedule would be that the arbitrage securities 20 would be marked to market at the end of the year 21 to reflect unrealized gains or losses at year 22 end." ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13693 1 Do you see that sentence? 2 A. Yes. 3 Q. Okay. That's similar to what you were 4 proposing, right, to mark-to-market them, the 5 equity arbitrage? 6 A. There is really no other way to do it. 7 Q. Okay. But it's similar to what you 8 were proposing? 9 A. Yes. 10 Q. Then it says, "Also, it is my 11 recommendation that executive committee decisions 12 to trigger gains or losses on sales of securities 13 should not be considered for the bonus awards." 14 Do you see that? 15 A. Yes. 16 Q. What was he referring to there? 17 MR. VILLA: I'll object. It's 18 speculation. They called Mr. Williams to the 19 stand. They could have asked him these questions, 20 you know. Gerald Williams was called when they 21 had these documents. 22 THE COURT: Well, if he knows, he may ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13694 1 answer. If he doesn't know, he can't answer. 2 A. I can only speculate on what 3 Mr. Williams is telling me. 4 Q. (BY MR. GUIDO) Well, your proposal 5 had proposed that the gains on the sales of 6 securities -- high-yield bonds, mortgage-backed 7 securities -- be used to calculate -- 8 A. Please. In the little thing we saw, it 9 was in conflict about the adjustment for gains 10 in -- in my mind, there was a conflict between 11 Column A and Column B so far as mortgage-backed 12 securities goes. Clearly, corporate bonds, there 13 was an adjustment suggested in our proposal for 14 gains. 15 Q. Right. Who wrote the typewritten 16 portion of your proposal which is on Page 4 of 17 this exhibit? 18 A. It's from myself and Joe Phillips. So, 19 I would guess it's a joint effort. 20 Q. Okay. When did you put the handwritten 21 comments on there? 22 A. I have no idea. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13695 1 Q. And why do you say there is no 2 adjustment there for gains in the handwritten 3 columns under Item 4, "mortgage-backed securities 4 arbitrage"? 5 A. Well, my view of this is that I did put 6 an adjustment or Joe put in an adjustment or we 7 both put an adjustment -- it happens to be in my 8 handwriting -- for corporate bonds. But we didn't 9 put -- and again, I'm on the right-hand column. 10 We didn't put any adjustment on the 11 mortgage-backed securities. That's what -- that's 12 what's -- 13 Q. Why did you propose the adjustment for 14 high-yield bonds and not for mortgage-backed 15 securities? 16 A. Well, because we thought for corporate 17 bonds that the spread should be adjusted for 18 profits. And for MBS securities, we thought there 19 probably would be, you know, no -- not many 20 profits taken in it. It was just a focus on its 21 spread. 22 Q. So, it wasn't contemplated that there ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13696 1 would be sales out of the mortgage-backed security 2 portfolio to generate gains? 3 A. But I mean, I have to agree that on the 4 left-hand column, there's that phrase including 5 realized gains. But I mean, there's -- I can't 6 put the two together. That's my -- just reading 7 here. 8 Q. Well, could you have proposed a formula 9 to include realized gains but when you did the 10 calculations, you didn't anticipate those 11 occurring so that they didn't go into your 12 calculation, your handwritten calculation? 13 A. I just can't tell you that. 14 Q. You don't know? 15 A. I don't know. 16 Q. Now, who made the decisions at USAT of 17 when sales should be made out of the high-yield 18 bond portfolio? 19 MR. VILLA: Objection. Could we just 20 have a time frame? 21 Q. (BY MR. GUIDO) At any time. If it 22 changed over time, tell us that it changed over ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13697 1 time. 2 A. We would, you know, get the word from 3 higher management. 4 Q. To make sales out of the -- 5 A. Or the investment committee. 6 Q. Okay. 7 A. We saw one discussion yesterday of the 8 investment committee. 9 Q. Okay. That September 23rd memorandum? 10 A. Your memory is a lot better than mine, 11 Mr. Guido. 12 Q. Now, who made decisions to make sales 13 out of the mortgage-backed securities portfolio, 14 putting aside USAT Mortgage Finance? 15 MR. VILLA: Again, it would be helpful 16 if we had a time frame. We're talking about three 17 years of mortgage-backed securities. 18 Are you assuming at this time, 19 Mr. Guido? 20 MR. GUIDO: During the period of time 21 that he was there. And if he has any different 22 people at different time periods, I would hope ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13698 1 that he would tell us. 2 MR. VILLA: I hope we don't -- okay. 3 Start in 1985 and go forward then. 4 A. In Joe's portfolio, it was -- Joe made 5 the decisions to sell securities. 6 Q. (BY MR. GUIDO) Pardon? 7 A. Joe would make those decisions. 8 Q. On his own? 9 A. Well, he was responsible for that 10 portfolio. 11 Q. Did you participate in any decisions 12 with him to make sales out of the mortgage-backed 13 securities portfolio? 14 A. I would chat with him, but it was his 15 final call on them. He was, you know, much better 16 than I at mortgage-backed securities and prepays. 17 Q. Now, in the high-yield bond portfolio, 18 you testified that people made instructions that 19 you make sales out of the portfolio. Right? 20 A. That's correct. 21 Q. And you testified that people gave you 22 instructions to make sales out of the USAT ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13699 1 Mortgage Finance subsidiary. Right? 2 A. Right, right. 3 Q. Were instructions given to you or Joe 4 Phillips to make sales out of the mortgage-backed 5 securities portfolio at any time you were at USAT? 6 A. No. It was primarily Joe's call on 7 that. 8 Q. So, there were no instructions given to 9 him to make sales out of the mortgage-backed 10 securities portfolio. 11 Is that your testimony? 12 A. On -- I'm primarily thinking of when it 13 was necessary to roll down the portfolio when the 14 prepays started to come in on the original RCAs. 15 Q. What time period are you referring to 16 there? 17 A. I'm, roughly, in the last few months of 18 '85 or the first quarter of '86. 19 Q. After the first quarter of 1986, were 20 instructions given to Joe Phillips to make sales 21 out of the mortgage-backed securities portfolio? 22 A. Not that I know. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13700 1 Q. Now, I'd like to direct your attention 2 to the next exhibit, which is Tab 856 which is 3 A10599. This is a memo from Jenard Gross to 4 Gerald Williams dated January 24th, 1986. It 5 says, "Before I comment on the investment 6 department bonus plan, the type of thing that I am 7 especially interested in looking at is Schedule 8 SF, Page 2." 9 Go back to Exhibit 10597 and open up to 10 the Schedule SF, Page 2. 11 A. Right. I have it. 12 Q. Okay. It says, "He deals with the 13 profit contributions from the mortgage-backed 14 securities. In trying to determine the 15 profitability aspect, I think first of all you 16 need to know the rate of pay-down on the 17 mortgage-backed securities, whether you are really 18 earning this interest income that is shown, or 19 whether the fact is that the early payouts have 20 cut into that interest income." 21 Do you see that? 22 A. Yes, I do. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13701 1 Q. Okay. What is he referring to there? 2 A. Well, he is referring to -- it looks 3 like from here, he's referring to the prepayments 4 of the mortgage-backs. 5 Q. Okay. And how would that affect the 6 interest income that is shown in the report? 7 A. Well, what would happen is you would 8 get all of your money on those, you know -- on 9 those mortgages paid down. 10 Q. How would that affect the income 11 figure? I mean, income is income, isn't it? 12 A. Yeah. 13 Q. So, what is he talking about here? Is 14 he talking about the yield, the spread again going 15 down? 16 A. He may be. I have trouble following 17 it. He may be talking about that. You'd have to 18 ask him. 19 Q. Well, did you ever have any discussions 20 yourself with Jenard Gross about how to calculate 21 the bonus plan for the investment department? 22 A. I don't think I did. I don't recall. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13702 1 I believe I chatted with Gerry Williams. 2 Q. Did you have any discussions with Barry 3 Munitz? 4 A. I believe I did have discussions with 5 Barry Munitz maybe a year later. I had 6 discussions with senior management at the end of 7 every year about bonuses. 8 Q. Barry Munitz was the chairman of the 9 compensation committee, was he not? 10 A. I don't know. 11 MR. VILLA: I don't believe that's 12 correct. I may stand corrected, but I don't want 13 this record -- any statement -- 14 MR. GUIDO: I believe it is correct. 15 THE COURT: All right. Well, we 16 don't -- the witness doesn't know. So, let's move 17 on. 18 Q. (BY MR. GUIDO) Did you have any 19 discussion with Charles Hurwitz after you sent him 20 that memorandum? 21 A. I don't recall. 22 Q. Now, he then goes on. He says, "The ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13703 1 second thing that you need to know is again on the 2 sale of securities, whether these are real sales 3 or just window dressing sales." 4 Do you see that? 5 A. I see that. 6 Q. What does that refer to? 7 A. That, I don't know. That -- why I 8 don't think I knew then -- well, I didn't get this 9 memo to begin with. I read it, you know, maybe a 10 couple days ago. I didn't understand it two days 11 ago, and I don't understand it now. 12 Q. Well, let's look at the second -- the 13 next sentence. It says, "Are these really 14 honest-to-goodness sales that still leave us with 15 the same yield that we had before rather than a 16 lower yield?" 17 Does that help explain the previous 18 sentence to you? 19 A. No. 20 Q. No? 21 A. I'm still -- I can't follow it. 22 Q. Is this memorandum addressing the ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13704 1 situation where sales were made out of a portfolio 2 that generate gains but have the effect of 3 reducing the net interest spread going forward? 4 A. I think -- and here, I'm just 5 guessing -- that it's a problem dealing with the 6 rolldown, the coupon rolldown that Joe did. But 7 that's -- that's what I get out of this. What 8 I... 9 Q. The sales that were made out of the 10 high-yield bond portfolio in 1985 that generated 11 gains, did they have the effect of reducing the 12 net interest spread? 13 A. It would. 14 Q. They did, didn't they? 15 A. Yes. 16 Q. So, the issue not only came up with 17 regard to the so-called rolldown but also came up 18 with regard to the sales out of the high-yield 19 bonds? 20 A. Well, it says here on this paper that 21 "is even going to be more important on the junk 22 bonds." So, Jenard had some concern. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13705 1 Q. About both. Right? 2 A. Jenard had some concerns. 3 Q. Okay. Now, let's move over to Tab 859, 4 which is A10605. This might refresh your 5 recollection of whether or not you had any 6 discussions with Jenard Gross about the 7 performance bonus plan for the investment 8 department. 9 A. Okay. 10 Q. This is a memo dated February 6, 1986, 11 from Jenard Gross to you and Gerald Williams. 12 Do you see that? 13 A. Right, uh-huh. 14 Q. Have you ever seen this memorandum 15 before? 16 A. I don't recall, but my name is on it so 17 I received it. 18 Q. Now, this addresses the question of how 19 you calculate the performance bonus for your 20 department, does it not? 21 MR. VILLA: Your Honor, although 22 Mr. Guido did give us the exhibits ahead of time, ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13706 1 there were probably 275 exhibits that were about 4 2 linear feet and Mr. Huebsch has not had an 3 opportunity to review every one of them. So, 4 perhaps -- I can see he's reading there. Perhaps 5 we could let him read the exhibit before you ask 6 him the question. 7 Q. (BY MR. GUIDO) Would you please read 8 the document before I ask you any questions about 9 it? 10 A. Okay. (Witness reviews the document.) 11 MR. VILLA: While he's reading, Your 12 Honor, as a point of clarification, Tab 133, 13 Exhibit A1110, which is the USAT board minutes 14 indicates that Mr. Munitz was not on the 15 compensation committee, let alone not the 16 chairman. 17 THE COURT: Thank you. 18 A. Yes, I've read it. 19 Q. (BY MR. GUIDO) Okay. Now, this 20 addresses the question of how you should calculate 21 a bonus based on financial performance of the 22 investment committee, does it not? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13707 1 A. Among other things, yes. 2 Q. Okay. Now, in the first paragraph, it 3 says, "I understand that the bonus plan for Ron is 4 still up in the air. I believe Ron made a 5 proposal which I understand was quite complex. It 6 seems to me that the bonus plan has to be both 7 simple and equitable. Unfortunately, Ron's 8 department is not simple. Let me cite some 9 specific examples of situations that have to be 10 dealt with in designing the bonus plan. Let's 11 take, for instance, the area of junk bonds. Let's 12 suppose Ron bought a 15 percent junk bond and 13 matched it against a 12" -- is that an 8 or a 14 half -- "percent long-term CD." I guess it's a 15 half. "He now has 250 basis point spread." 16 Do you see that? 17 A. I see that. 18 Q. Okay. That makes reference to net 19 interest spread. Right? 20 A. Right. 21 Q. "Suppose the bond goes up in value 22 because yields fall. We sell the bond for a ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13708 1 profit and, in the meantime, yields have gone to 2 the point that we now have junk bonds selling 3 typically at 14 percent yields and jumbo CDs 4 costing 11 and a half. On a new deal, we would 5 have a 250 basis point spread when we matched. 6 However, against the existing CD on which we are 7 now open-ended, we only have 150 basis point 8 spread. While we've got a profit, if you really 9 allocate it out, we really don't have a profit." 10 Do you see that? 11 A. Yes. 12 Q. Is that what you were referring to when 13 you said in 1985 when high-yield bonds were sold 14 out of the portfolio that generated gains that it 15 had an effect, a negative effect on the spread? 16 A. Could have. 17 Q. Okay. 18 A. What this misses in here is that if you 19 paid par for the 15 percent junk bond, interest 20 rates go down 2 and a half percent, you are 21 selling your 15 percent junk bond, 107, 110 -- 22 Q. That's the -- ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13709 1 MR. VILLA: Allow him to finish. 2 THE WITNESS: Let me finish. 3 A. You get more money -- you put in 4 $1 million. You're getting back, you know, 5 $1,150,000. So, you're getting back into your 6 program, reinvested in your program, extra -- that 7 extra money. So, you can buy more of the lower 8 coupon, assuming you're buying a 12 and a half at 9 par, but you can buy more than the 10 1-million-dollar principal amount because you sell 11 your 15 at a tidy amount of money over a million. 12 Q. (BY MR. GUIDO) Okay. So, as a 13 practical matter, you should be able to end up 14 with the same net interest spread if you're using 15 dollars as income earned dollars -- 16 A. You could. 17 Q. Let me finish -- dollars interested 18 paid. Okay? 19 A. In dollars. 20 Q. In dollars. Theoretically, that's what 21 should happen? 22 A. While your spread might be reduced, ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13710 1 your dollar -- your percent -- your basis point 2 spread, which -- your dollars may be the same. 3 Q. So, you end up if you reinvest all of 4 the proceeds? 5 A. Yes. 6 Q. That theoretically is what should 7 happen? 8 A. (Witness nods head affirmatively.) 9 Q. Okay. Now, let's go to the next 10 paragraph. This is talking about mortgage-backed 11 securities. Right? 12 A. Right. 13 Q. "The other problem that we are running 14 into is suppose we had bought a mortgage-backed 15 security pool of 100 million that consists of 20 16 or 30 pools or however many pools are in it and 17 let's say that we bought it at a spread of 115 18 basis points. We also bought it on the basis that 19 1.6 percent of the bonds would run off the first 20 year. Suppose, instead, 3.2 percent of the bonds 21 run off the first year because rates on these 12 22 and a halfs have now gone down to 11 and a half or ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13711 1 11. And you get the money in and you can't put it 2 back out at the same rate that you originally set 3 up the spread on." 4 Do you see that? 5 A. I see that. 6 Q. "You're not really making 115 basis 7 points. You're only making 105. It seems to me 8 that you should have to be dialed in before we 9 determine whether there is profitability in the 10 department." 11 Do you see that so far? 12 A. I don't understand -- 13 Q. "Dialed in"? 14 A. Yeah. 15 Q. Okay. Let's go on. "Everybody tells 16 me that it is very complicated and you really 17 can't tell what you are doing. Well, if you can't 18 tell what you are doing, how do you every know" -- 19 I think it's "ever know" -- "if you, in fact, get 20 115 basis spread or do you get no spread. You may 21 take some profit in these pools, in other words. 22 You may sell some of the mortgage-backed ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13712 1 securities of profit because of market factors 2 which is great. But afterwards, you may be 3 getting a stream of income which is less than what 4 you anticipated. If that is the case, you are 5 really not making that profit." 6 Do you see that? 7 A. Yes. 8 Q. Did you have a discussion with 9 Jenard Gross about that observation? 10 A. I don't know whether I did. I may 11 have. I think it's the same basic observation as 12 he's making about junk bonds in the first place. 13 Q. Okay. And do you have a response to 14 that? Is this -- you have the same criticism of 15 this statement as you do with regard to the 16 high-yield bonds? 17 A. I didn't have any criticism of this. 18 Q. Well, you said the discussion about 19 what happens to the yield was incomplete. 20 A. That's a lot better word, "incomplete," 21 yes. 22 Q. Okay. You had the same observation ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13713 1 about -- 2 A. Well, we had the same -- we don't have 3 the reinvestment part of the equation here. 4 Q. Why not? 5 A. You'll have to -- I mean -- 6 Q. You mean, he doesn't have it in here? 7 A. Yeah. 8 Q. But you think, for it to be complete, 9 it should have your observations that you take the 10 gains and you reinvest the gains? 11 A. That's correct. 12 Q. Now, for the -- your observation to be 13 accurate, when you're selling out of a portfolio 14 for gains, to maintain the income stream going 15 forward, is it your view that the proceeds of the 16 sales, including the gains, must be reinvested? 17 A. If you're maintaining the program, they 18 should be invested. If you've got something 19 better to do with your money, go ahead and do it. 20 If something benefits the association more, do it. 21 But to -- I agree with you so far as maintaining 22 these programs -- ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13714 1 Q. Well, in making sales out of a 2 portfolio to make up for losses in other areas of 3 the association, are you reinvesting those 4 proceeds, including the gains? 5 A. Well, you are reinvesting. You're 6 not -- I hope you're reinvesting the proceeds. 7 Q. You hope? You don't know? 8 A. Well, I think most of these programs 9 reinvested -- 10 Q. -- the gains? 11 A. Yeah. You know, whether the gain came 12 from taking a profit or gain as a result of a 13 pay-down, gains were -- moneys, proceeds were 14 reinvested. 15 Q. Okay. So, your observation that 16 Mr. Gross' view about the effect of taking gains 17 on the spread was incomplete depends upon 18 reinvestment of the entire proceeds that came in 19 from either sales or prepayments of 20 mortgage-backed securities? 21 A. We have to know what happened to the 22 money. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13715 1 Q. Now I'd like to move to another topic, 2 which is the -- which are the transactions that 3 occurred at the end of 1985 and the beginning of 4 1986 pertaining to the mortgage-backed security 5 portfolio. 6 MR. GUIDO: Your Honor, the documents 7 that I'm going to be using for this are A10631, 8 which is at Tab 572; B3713, which is at Tab 587; 9 A13010, which is at Tab -- I think it's 1137; 10 Exhibit A1394, which is at Tab 531; and a document 11 B1409, which has not been admitted in the record. 12 13 (Discussion held off the record.) 14 15 Q. (BY MR. GUIDO) Do you recall that the 16 end of 1985 through the first quarter of 1986 that 17 sales were made out of the USAT mortgage-backed 18 securities portfolio in what has been referred to 19 as the rolldown? 20 A. In the portfolio commonly called Joe's 21 portfolio. 22 Q. Okay. We're not talking about the ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13716 1 350-million-dollar sales out of USAT Mortgage 2 Finance. 3 MR. GUIDO: Your Honor, it's a few 4 minutes before noon. This might be a good time to 5 break because I'm going to move into some rather 6 detailed figures with the witness, if you'd 7 prefer. 8 THE COURT: All right. We'll adjourn 9 until 1:30. 10 11 (Lunch break.) 12 13 THE COURT: Be seated, please. We'll 14 be back on the record. 15 Mr. Guido, are you ready to proceed? 16 MR. GUIDO: Yes, Your Honor. 17 Q. (BY MR. GUIDO) I'd like to direct 18 your attention to a document that is Tab 861, 19 which is A10612 in the record, if I may. 20 21 (Discussion held off the record.) 22 ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13717 1 Q. (BY MR. GUIDO) This is another 2 memorandum from Jenard Gross to Mike Crow, you, 3 Charles Hurwitz, Barry Munitz, Gerry Williams, and 4 Jim Wolfe. 5 A. (Witness reviews the document.) 6 Q. Have you had an opportunity to review 7 the document? 8 A. Yes, I've reviewed it. 9 Q. This has the same example that we 10 discussed in the earlier Jenard Gross memorandum 11 to you. 12 Do you see that example? 13 A. Yeah, I remember something similar to 14 this. 15 Q. Okay. And this example has an 16 additional sentence to it. It says, "On the other 17 hand, we had more money to invest so we still came 18 out even." 19 Do you see that? 20 A. Hold on. On Line 10, that should be 15 21 percent junk bond, shouldn't it? 22 Q. Which one? It says 15 jumbo CD? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13718 1 A. Yeah. 2 Q. It should be junk bonds. 3 A. Okay. 4 Q. Let's go down three lines from that. 5 A. Okay. 6 Q. Do you see where it says, "So, it 7 really was not a profit"? 8 A. I see that. 9 Q. Then it says, "On the other hand, we 10 had more money to invest so we still came out 11 even." 12 A. Right. 13 Q. "It is not a profit as opposed to the 14 one being shown." 15 Do you see that? 16 A. Yeah. 17 Q. Okay. Now, that "on the other hand," 18 that sentence, remember when we talked about the 19 earlier Jenard Gross memo and you said, well, it 20 was incomplete because it didn't take into 21 consideration reinvesting the gains? 22 A. I remember that comment. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13719 1 Q. Okay. And this memorandum now takes 2 that into consideration, does it not? 3 A. Well, I'm having trouble with some of 4 these sentences. The one following "came out 5 even." "It is not a profit as opposed to the one 6 being shown." 7 Q. I'll get to that in a minute. Let's 8 just stick to the sentence -- 9 A. Yeah. I think he's completing his 10 prior memorandum. 11 Q. Now, basically, using your example when 12 you said this hypothetical was incomplete because 13 it didn't take into consideration investing in the 14 gains, under your hypothetical or your addition to 15 the hypothetical, you didn't mean to say because 16 there were additional gains that there were 17 profits in the portfolio over and above whatever 18 the previous yield had been, did you? 19 A. I don't understand your question. 20 Q. You said that his hypothetical was 21 incomplete because it didn't take into 22 consideration investing the gain on the sale of ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13720 1 the mortgage-backed securities and, therefore, 2 having more mortgage-backed securities -- 3 A. Mortgage-backed or junk bonds? 4 Q. Either. High-yield bonds or junk 5 bonds. 6 A. Okay. 7 Q. I think he used both examples, did he 8 not? 9 A. Did he? 10 Q. Uh-huh. In the memo that we talked 11 about. 12 A. Right. 13 Q. And you said that both examples were 14 incomplete for the same reason, did you not? 15 A. Right. 16 Q. Because they didn't take into 17 consideration investing the gains which would 18 generate a yield going into the future. Right? 19 A. No, I didn't say that. 20 Q. No? What did you say? 21 A. I said the gain plus the principal 22 amount. In other words, we had a million-dollar ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13721 1 bond, went up to 1,150,000, not only a gain but 2 the whole principal -- 3 Q. Okay. 4 A. -- amount. Not just the 15-point gain 5 but the 115 point -- 6 Q. But you didn't mean to say -- I'm just 7 trying to clarify. 8 You didn't mean to say that the entity 9 would be better off by taking the gains and 10 reinvesting them in the proceeds that it had been 11 if it had just kept the position initially, did 12 you? 13 A. Well, it could be better. It could be 14 the same. It could be worse, depending on the 15 individual -- 16 Q. Transaction? 17 A. -- transaction. 18 Q. But using the hypothetical that you 19 modified, was your assumption that it would simply 20 be a wash, that the entity would be no better or 21 no worse off? 22 A. It could happen that way, yeah, in ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13722 1 terms of cash flow, right. 2 Q. You didn't mean to imply that by taking 3 the gains and reinvesting the gains and the 4 proceeds, that the entity would necessarily be 5 better off? 6 A. No, I didn't want to imply that. 7 Q. I just wanted to clarify that for the 8 record. 9 Now, I'd like to -- with regard to the 10 high-yield bonds that were sold for a profit in 11 1985, was the entity better off, worse off, or the 12 same economically because of the sale of the 13 high-yield bonds and the reinvestment of the 14 proceeds and the gains that you've testified to? 15 MR. VILLA: I'll object. I'm not sure 16 that there's been -- I don't know that he's 17 testified to what happened to the gains and 18 whether it was reinvested or not or whether it was 19 reinvested. 20 THE COURT: Well, let's have the 21 answer. 22 A. I have no idea. I have no numbers to ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13723 1 go by. 2 Q. (BY MR. GUIDO) Now, this memo to you 3 and Mike Crow says, "The question in my mind now 4 is, how much of these are honest-to-goodness 5 profit? How much profit merely for book purposes 6 that we had to reinvest in lower interest rates? 7 Then, we can really tell what we did in that 8 category. Over how many years do we spread the 9 loss on the swaps on the mortgage-back security in 10 December, and what was the exact amount of it?" 11 Do you see that? 12 A. Yes. 13 Q. He's asking essentially how did we do 14 in light of the sales. Right? 15 A. Right. That's what he's saying. 16 Q. And did you respond? Do you recall? 17 A. I don't recall that I responded. 18 Q. Do you recall whether or not there were 19 any discussions at the time of what was the net 20 effect of taking the gains in the portfolios? 21 A. Which question are you asking me? What 22 was the -- ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13724 1 THE COURT: I'm not sure I understand 2 the question. Why don't you restate it? 3 Q. (BY MR. GUIDO) Do you recall having 4 any conversations about what was the net effect on 5 the profits of the institution? 6 A. I don't recall. I may have had them. 7 I don't recall. 8 Q. Now I'd like to move to the next set of 9 documents which start with T4171, which is a 10 memorandum dated February 19th to Ron Huebsch, 11 Charles Hurwitz, Barry Munitz, Joe Phillips, and 12 Gerry Williams. 13 MR. GUIDO: I'd like to move the 14 admission of Exhibit T4171, Your Honor. 15 MR. VILLA: No objection. 16 THE COURT: Received. 17 Q. (BY MR. GUIDO) Now, this memorandum 18 dated February 19th, 1986, says, "I was glad to 19 learn yesterday that you completed your roll downs 20 of your mortgage-backed securities. I wonder if 21 you can determine or if anybody else can determine 22 where we now stand as far as an income stream from ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13725 1 the mortgage-backs and the swaps. Also, what sort 2 of a spread do we now have compared to what we 3 were originally shooting for? Do we currently 4 have on hand any accounting techniques to know 5 what we've done to date on the ones that we roll 6 down and what we'll do in the future on the ones 7 that we've now acquired? If not, is the system 8 that Bruce Williams is looking at and plans to 9 install going to get the job done, or do we need 10 something else? Can Salomon Brothers solve our 11 problems or what to do -- what to know where we 12 are"? 13 Do you recall receiving this 14 memorandum? 15 A. I don't recall receiving it. I'm on 16 the list; so, I probably did. 17 Q. Do you know what the rolldown is that's 18 referred to there was? 19 A. My guess is Joe's portfolio was rolled 20 down from high coupons to lower coupons. 21 MR. VILLA: I'm sorry. I couldn't hear 22 you, sir. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13726 1 THE WITNESS: Joe's portfolio was 2 rolled down from high coupons to lower coupons. 3 Q. (BY MR. GUIDO) And what time period 4 was that rolldown undertaken? 5 A. I believe it was in the December, '85 6 to spring of '86. 7 Q. Now, I'd like to direct your attention 8 to the second document that's in front of you, 9 which is A10631. It's at Tab 572. 10 Now, this document has as its cover 11 page -- if you look on the left-hand side of the 12 page, it has an imaging No. OW002921. 13 Do you see that? 14 A. Yes. 15 Q. And then the next page is OW002922. 16 Do you see that? 17 A. Yes, I have that. 18 Q. And then the third page is OW002923? 19 A. Yes. 20 Q. Okay. I want you to look at the second 21 and third pages of the document and the -- this is 22 a document which Mr. Phillips produced and ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13727 1 testified about. And the third page of the 2 document that you have has, on the left-hand side, 3 descriptions of what the columns are going over to 4 the right. 5 Do you see that? 6 A. Okay, yes. 7 Q. Okay. And then moving from left to 8 right on OW002923, the third page -- 9 A. Right. 10 Q. -- it has the various dates going 11 across the top of the page. 12 Do you see those? 13 A. Yes, I do. 14 Q. Okay. And then if you flip to the 15 second page, back to the second page, it is a 16 continuation of the spreadsheet which has dates 17 going from left to right at the top of the page, 18 as well. 19 Do you see that? 20 A. Okay. So, you would detach this and 21 put -- 22 Q. Right. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13728 1 A. Okay. 2 Q. If they would allow us to alter 3 exhibits, we could detach it. 4 Now, let's start with the third page of 5 the document. It has a number of entries on that 6 page as you go down. And let's use the first 7 column, which is 12/85. 8 Do you see that? 9 A. Yes, I do. 10 Q. Okay. So, that will help explain what 11 the entries are in the very first column. It 12 talks about held bond. 13 Do you see that? 14 A. Right. 15 Q. Then it says "GS." 16 A. Yeah. 17 Q. Then it has "Issuer, Ginnie Mae-GPH," 18 is that right, or "M"? I always get that 19 confused. 20 A. Probably an "M." 21 Q. Okay. And then it has the coupon. 22 Do you see that? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13729 1 A. Right. 2 Q. Then it has the current face amount. 3 Do you see that? 4 A. Right, I see that. 5 Q. In this case, it's 50,750,000. 6 Do you see that? 7 A. That's what I have. 8 Q. Then it has purchase price which is 9 95.84375. 10 Do you see that? 11 A. Right. 12 Q. Then it has market value, 102. 13 Do you see that? 14 A. Yes. 15 Q. Then it has current CPR, 5.16. 16 A. Right. 17 Q. What does CPR refer to? 18 A. I think that's the prepayment. 19 Q. It's the constant prepayment rate? 20 A. Could be, yes. 21 Q. Then "BEY," do you know what that 22 refers to? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13730 1 A. That's bond equivalent yield. 2 Q. And that's 13.25. Right? 3 A. That's correct. 4 Q. Then it says "realized gain," 5 3,124,000. 6 Do you see that? 7 A. Right. 8 Q. Then dropping down, it then has 9 "purchased bond." 10 Do you see that entry? 11 A. Right. 12 Q. That has "Issuer, Ginnie Mae"? 13 A. Right. 14 Q. Do you see that? Coupon 12? 15 A. Right. 16 Q. Purchase price, 101? 17 A. Right. 18 Q. CPR 5? 19 A. Right. 20 Q. Sales proceeds, 51,765? 21 A. Right. 22 Q. Adjusted purchase price, two down, ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13731 1 94.904? 2 A. Right. 3 Q. And BEY, that's the bond equivalent 4 yield, 13.25. Right? 5 A. Right. 6 Q. And there are entries across for all of 7 these bonds that are here. 8 Now, the first entry is at 12/85. 9 A. Right. 10 Q. It's a sale of the bonds. And it shows 11 a profit of $3,124,000? 12 A. Right. 13 Q. I asked you this morning whether or not 14 any bonds were sold out of USAT's mortgage-backed 15 securities portfolio that generated gains. 16 Do you recall that? 17 A. Yes, I believe you did ask me that. 18 Q. And do you recall what your answer was? 19 A. I said I didn't believe so except as 20 part of the rolldown. 21 Q. Is this part of the rolldown? 22 A. It may be. It doesn't -- it doesn't ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13732 1 say "rolldown." 2 Q. If Joe Phillips testified that this was 3 part of the rolldown, do you have any reason to 4 dispute that fact? 5 A. If that's a fact, I have no reason to 6 dispute that. 7 Q. Okay. Now, let's -- let me ask you 8 some questions about this rolldown. It started in 9 December of 1985? 10 A. Right. 11 Q. And if you look across that first page 12 or Page 2 of that exhibit and you look across the 13 first three columns on the second page, what you 14 have are mortgage-backed securities that had a 15 coupon from 11 to 13 percent. 16 Do you see that? 17 A. Some 9 and a half's over here. 18 Q. I said through the first three columns 19 of the second page. 20 A. All right. I'm with you now. 21 Q. You see there is an arrow and a circle 22 with regard to those at -- ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13733 1 A. I see. 2 Q. -- 9 and a half. 3 A. I see that, yes. 4 Q. And we'll discuss that as we go through 5 the document. 6 Did you participate in the initial 7 discussions to increase the mortgage-backed 8 securities portfolio at USAT in early 1985? 9 A. Yes. I was involved in some 10 discussions. 11 Q. Okay. Who were the people involved in 12 the discussions? 13 A. Well, I think, as I recall, most senior 14 management: Joe Phillips, of course, myself. 15 Q. Jenard Gross? 16 A. If he was there. I don't know whether 17 Jenard was there then. But Gerry Williams, 18 Bentley. 19 Q. Who? 20 A. Sonny Bentley. Charles Hurwitz was 21 involved in some of the conversations, meetings. 22 Q. Barry Munitz? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13734 1 A. Yes, Barry Munitz. 2 Q. Now, how did it come about -- who 3 raised the issue with you about increasing the 4 mortgage-backed security portfolio? 5 A. I think it was people from the senior 6 management group. 7 Q. Okay. Who from the senior management? 8 A. I can't remember exactly who -- one or 9 two who -- maybe two or three people might have 10 asked me. 11 Q. Do you recall what you were asked? 12 A. I believe the question was "Do 13 mortgage-backs play a role as investments for the 14 association?" 15 Q. Were you asked whether or not 16 mortgage-backed securities qualified as thrift 17 investments? 18 A. I wasn't asked that. 19 Q. Did the issue come up in those 20 discussions? 21 A. I think that everybody knew that. 22 Q. And did they come up in the context of ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13735 1 the discussion about increasing the size of the 2 institution? 3 A. I think they came up in the context of 4 increasing the size of reducing the interest rate 5 risk, better matching assets, and liabilities. It 6 came up in a number of ways. 7 Q. What do you mean, "a number of ways"? 8 A. Like I just said. They would be 9 helpful for growth, helpful for -- as a 10 replacement for whole loans. 11 Q. Uh-huh. And what else? 12 A. Well, you know, just that they were, 13 like, more convenient than whole loans. 14 Q. They were more liquid. Is that what 15 you mean? 16 A. More liquid, less documentation, no 17 servicing problems. 18 Q. No cost of origination? 19 A. No cost of origination, though we did 20 have an origination department at that time. 21 Q. Did they -- did you also discuss the 22 fact that they didn't pose the same credit risk as ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13736 1 whole loans? 2 A. That was a very important -- that was a 3 very important item, particularly in this area. 4 Q. What about -- let's go to the interest 5 rate risk issue. You said that mortgage-backed 6 securities were discussed as a substitute for 7 whole loans -- 8 A. Right. 9 Q. -- because they didn't pose the same 10 interest rate risk that whole loans posed. Right? 11 A. Well, it says credit risk. 12 Q. Credit risk, not interest rate risk? 13 A. No, no. Credit risk, I should have 14 said. 15 Q. I mean, whole loans were fixed-rate 16 30-year loans. Mortgage-backs were fixed-rate 17 30-year instruments? 18 A. Yeah, but they weren't Houston, Texas 19 or Texas originated. 20 Q. So, you didn't have the credit risk -- 21 A. Convenience. 22 Q. -- with mortgage-backed securities if ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13737 1 they were purchased from Fannie Mae or Freddie 2 Mac. They didn't have the credit risk because 3 they were guaranteed. Right? 4 A. That's right. 5 Q. Now, who did you meet with to discuss 6 how to manage mortgage-backed security portfolios 7 when you first were discussing with senior 8 management the increase in the mortgage-backed 9 security portfolio? 10 A. I believe Joe Phillips arranged a 11 meeting with Salomon Brothers. 12 Q. Okay. Anyone else? 13 A. I believe First Boston and another 14 firm. 15 Q. Anyone else? 16 A. Maybe more firms. 17 Q. Pardon? 18 A. I think there were more firms, but I 19 don't remember. I don't recall who. 20 Q. Did you have any discussions at that 21 time about hiring an advisor to advise you and Joe 22 Phillips on how to manage that portfolio? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13738 1 A. At what time are you talking? 2 Q. When you were originally discussing the 3 origination -- the original increase in the size 4 of the mortgage-backed securities. 5 A. No. We had no -- there was no -- 6 during this discussion period, there was no 7 thought given to the hiring of a mortgage-back 8 person. 9 Q. Who asked Joe Phillips to set up the 10 meetings? 11 A. I don't know. It might have been me. 12 I don't know. 13 Q. Well, who asked you to contemplate 14 increasing the size of the mortgage-backed 15 security portfolio? 16 A. I think I said the senior management. 17 Q. Well, did it occur in a meeting? I 18 mean, do you recall how the discussion -- 19 A. I don't recall any specific meeting. 20 Q. Do you recall any discussions with any 21 specific individuals? 22 A. I don't recall any. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13739 1 Q. Now, you indicated that one of the 2 reasons to expand the mortgage-backed securities 3 was to grow the institution, I think is what you 4 said? 5 A. I believe that was a consideration. 6 Q. And what was the context of growth, the 7 issue of growth? How did that come up? 8 A. As I understood it, there was a change 9 in the institution from a -- from a retail to a 10 wholesale or a combination retail/wholesale 11 operation, deemphasizing the branches, and a 12 phasing out of the mortgage origination, our own 13 origination operation, and moving more into, you 14 know, mortgage-backs. 15 Q. Now -- 16 A. So, it was both a growth, you know, 17 transition step that made management think about 18 mortgage-backs. 19 Q. Now, senior management at that time 20 included who? 21 A. This is, I guess, late '84, early '85? 22 Q. Uh-huh. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13740 1 A. I would guess that Gerry Williams, 2 Barry Munitz. I think Mr. Bentley was there, 3 Sonny Bentley. Charles Hurwitz was there. People 4 like Pledger, Jim Pledger. 5 Q. Was Michael Crow there then? 6 A. Mike Crow was there, right. 7 Q. Was Jenard Gross there then? 8 A. I don't recall whether Jenard was 9 there. 10 Q. Now, of those people, had any of them 11 had experience overseeing a mortgage-backed 12 security portfolio? 13 A. Gerry Williams might have. I mean, he 14 had been in banking all his life. I don't know 15 for sure whether he was -- 16 Q. Did any of the others? 17 A. Not that I know. 18 Q. Well, how long had you worked with 19 Charles Hurwitz at that point in time? 20 A. Probably over ten years. 21 Q. Did you ever observe him overseeing a 22 mortgage-backed security portfolio prior to that? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13741 1 A. No. 2 Q. What about Barry Munitz? How long had 3 you known him? 4 A. Barry Munitz I have known since -- 5 Q. At that time. 6 A. How long -- 7 Q. At that time, how long had you known 8 Barry Munitz? 9 A. Maybe two years. 10 Q. Okay. During that period of time, did 11 you ever see him oversee a mortgage-backed 12 security portfolio? 13 A. No. 14 Q. In what context did you know him at 15 that time? 16 A. Barry Munitz was the administrative guy 17 at Federated Development. 18 Q. Was he an investment guy at Federated? 19 A. No. Dave -- I think Dave Barrett was 20 there, and he had experience with mortgage-backs. 21 Q. How long after the meetings where you 22 first initially discussed increasing ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13742 1 mortgage-backed securities did Mr. Barrett stay? 2 A. I don't know. I don't know. 3 Q. Michael Crow, do you know what his 4 experience had been? 5 A. His was banking experience. No, I 6 don't know whether -- what his familiarity was 7 with mortgage-backs. 8 Q. What had he been brought in to do at 9 USAT? 10 A. He was a financial person. 11 Q. Financial accounting person. Is that 12 what you mean? 13 A. Well, I mean, he was more -- as I 14 understood it, he was more than financial 15 accounting. It was all plans, systems, 16 accounting. 17 Q. You mean financial systems person. Is 18 that what you mean? 19 A. Well, I think his job encompassed all 20 of the various financials. 21 Q. Was he brought in there to do any 22 investment advice? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13743 1 A. Not that I know of. 2 Q. Was Gerry Williams brought in there to 3 do any investment advice? 4 A. Not that I know of. 5 Q. Who of the senior management had 6 previous experience in evaluating investments? 7 A. Well, certainly Charles Hurwitz had, 8 Joe Phillips had, I myself had, Barrett had run 9 the portfolio or the investments. He was a head 10 financial guy. 11 Q. Anyone else? 12 A. Not that I can think of right now. 13 Q. Now, at those initial discussions, what 14 was discussed with regard to mortgage-backed 15 securities investments? 16 A. The main concern was that there were a 17 lot of good things about mortgage-backs for the 18 association, but everybody was concerned about the 19 interest rate risk. So, they wanted a -- some 20 kind of program that would insulate these 21 investments from the interest rate risk. 22 Q. And what -- ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13744 1 THE COURT: The interest rate what? I 2 didn't hear. 3 THE WITNESS: Interest rate risk. 4 Q. (BY MR. GUIDO) What was it that they 5 were concerned about with regard to interest rate 6 risk? What was the fear of what would happen? 7 A. I think the fear was that interest 8 rates would increase and the mortgage-backs would 9 go down in value. 10 Q. Any other interest rate risks that were 11 discussed at that point in time? 12 A. At that point, no. That was our prime 13 concern. 14 Q. Now, the portfolios were then purchased 15 from whom, the initial portfolios? 16 A. The initial portfolios were purchased 17 from the leading dealers on the street. 18 Q. Do you recall who they were? 19 A. I think the leading dealers were places 20 like Salomon Brothers, First Boston. 21 Q. Do you know who the first 22 mortgage-backed securities were purchased from ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13745 1 that Joe Phillips purchased? 2 A. I don't recall the first. 3 Q. At those meetings where you discussed 4 the interest rate risk, did you discuss financial 5 instruments that could be purchased to protect 6 against that interest rate risk? 7 A. Yes, we did. 8 Q. Okay. What did you discuss? 9 A. Well, we discussed primarily swaps, 10 collars, caps, interest rate futures. 11 Q. Now, what is the difference between 12 using a swap and an interest rate futures contract 13 to protect against rising interest rates? 14 A. The swap -- as I recall, the swap gave 15 you better protection. 16 Q. And why did it give you better 17 protection? 18 A. Well, I think if you matched it dollar 19 for dollar, you know, against the asset, you would 20 get very complete protection. 21 MR. VILLA: Mr. Huebsch, would you 22 please speak up? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13746 1 THE WITNESS: Okay. 2 Q. (BY MR. GUIDO) You would get 3 increased protection? Is that what you said? 4 A. No. Complete. 5 Q. Complete protection, whereas you would 6 not with a futures contract? 7 A. I think they were a bit more difficult. 8 Q. Is that because futures contracts were 9 for shorter durations? 10 A. It was -- if you were, you know, 11 protecting your funding costs, short-term funding, 12 you could buy them out, you know, three months, 13 six months, but then they -- there was not much 14 liquidity in the market. In other words, you 15 would have to stack them up six months out. And 16 then as you approached that period, you would have 17 to go out another three months or six months 18 and -- 19 Q. You'd have -- 20 A. -- and stack them up again. So, you'd 21 have this rolling stack of them. 22 Q. Did you have the same problem with ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13747 1 swaps? 2 A. The swap market, you could buy 3 longer-term swaps. I think you could buy swaps 4 from one year to ten years, depending on your 5 needs. 6 Q. So, the swaps were easier to manage. 7 Is that what you're saying? 8 A. I think they were easier to manage. I 9 think they were -- I think the transaction costs 10 were probably substantially less. 11 Q. Now -- 12 A. I would guess because you're just not 13 having that many continuing transactions. 14 Q. Now -- then you mentioned caps and 15 collars. 16 A. Right. 17 Q. Can you tell us what a cap was? 18 A. Well, I've been away from the fixed 19 income market for about 12 years. So, I'll have 20 to explain it in layman's terms. 21 As I understand it, that you could buy 22 a cap against LIBOR at, say, 12 and a quarter ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13748 1 percent and any -- if interest rates -- if LIBOR, 2 for example, went up above 12 and a quarter, you 3 would be paid the difference. If LIBOR went to 4 13, you would get paid that difference between 5 your 12 percent. 6 Q. Well, was the effect then to cap -- is 7 that what the term means -- to cap the interest 8 rate at whatever the strike price was -- 9 A. That was my understanding, yes. 10 Whether they operate that way now, I don't know. 11 Q. Now, what was your understanding at the 12 time of what collars were? 13 A. A collar would be a cap like we just 14 chatted about. And then at the bottom, there 15 would be a floor of, say -- say 5 percent. And 16 you would pay -- and if LIBOR went below 5 17 percent, you would buy -- you would pay the owner 18 of that floor the difference between 5 percent and 19 4 percent, which is 1 percent. 20 Q. Now -- 21 A. That's my -- that's a layman's 22 definition. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13749 1 Q. Let's take caps. 2 A. Caps, right. 3 Q. Let's stick with caps and swaps. 4 A. Right. 5 Q. The -- what was the advantage of a swap 6 over a cap in your understanding at the time? 7 A. Well, my understanding of a swap was 8 that it didn't cost you anything. You would be 9 merely exchanging an income stream with somebody 10 else. So, there was no cost. 11 Q. Whereas with a cap, you paid something? 12 A. Yes. You'd pay to acquire it. 13 Q. And what was that, the premium? Is 14 that what that was called? 15 A. I don't know what -- I don't recall 16 what it -- 17 Q. It was a fee of some sort? 18 A. Yeah, something like that. 19 Q. You paid somebody to take the risk. 20 Right? 21 A. Right. 22 Q. Whereas with the swap, you just ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13750 1 exchanged two types of interest rates. Right? 2 A. That's my understanding, yes. 3 Q. Any other differences between the two 4 that you discussed at the time? 5 A. I think those were the main -- those 6 are the main ones that I recall now. 7 Q. Okay. Did you have any discussions 8 about what the risks were when interest rates went 9 down in time? 10 A. Yes, we did. 11 Q. Okay. And what were those discussions? 12 A. Those discussions were really clustered 13 around the -- when interest rates went down over a 14 certain amount, there would be a risk that 15 prepayments would accelerate. 16 Q. Now -- 17 A. Accelerate beyond a point that you 18 might have estimated in the -- when you put the 19 program on. 20 Q. Now, let me shift the focus a little 21 bit with you. Let's talk about whole loans for a 22 minute. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13751 1 A. Right. 2 Q. You have a whole loan portfolio in a 3 thrift funded with short-term interest rates, and 4 you have the home loans. Interest rates go down. 5 What is the risk? 6 A. Well, you would have the same -- the 7 same -- 8 Q. You would have prepayments that you 9 would have to worry about? 10 A. Precisely, yes. 11 Q. And when you got that money in, you'd 12 have to reinvest it in mortgages at lower interest 13 rates. Right? 14 A. Presumably, yeah. 15 Q. But if you had whole loans funded with 16 short-term interest rates, wouldn't the short-term 17 interest rates also have gone down? 18 A. Right, they should. 19 Q. So, you didn't have an interest rate 20 risk with whole loans in a traditional thrift, did 21 you? 22 MR. VILLA: Objection. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13752 1 A. Well, yes. Your prepay on whole loans 2 would pick up the same as it would on 3 mortgage-backed securities. 4 Q. (BY MR. GUIDO) What -- if interest 5 rates -- if cost of funds went down, if short-term 6 rates went down, and you had prepayments and you 7 take and reinvest them in lower coupon interest 8 rate mortgages, you don't have an interest rate 9 risk there, do you? 10 A. I guess not. 11 Q. Okay. Now, let's take mortgage-backed 12 security. If mortgage-backed securities funded 13 with short-term rates, reverse repos -- right? 14 A. (Witness nods head affirmatively.) 15 Q. -- to reprice, what is it, 30, 60, 90 16 days was, I think, the example we talked about 17 this morning? 18 A. Right. 19 Q. You have 30-year mortgages. Interest 20 rates go down, and they prepay. 21 What's the risk that you have in terms 22 of interest rate risk if your cost of funds are ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13753 1 also going down? 2 A. Right. There would be -- if the 3 interest rates are going down, there would be 4 little interest rates. 5 Q. What is it about USAT's portfolio that 6 created the interest rate risk when interest rates 7 went down? 8 MR. VILLA: Excuse me. You just asked 9 about the portfolio of mortgage-backs or whole 10 loans? 11 MR. GUIDO: Mortgage-backs. 12 MR. VILLA: Mortgage-backs. 13 A. The interest -- there would be a 14 prepayment risk. I'm sorry. Not an interest rate 15 risk. 16 Q. (BY MR. GUIDO) Well, with the Home 17 Loan Bank example I gave you, you didn't have a 18 whole loan risk but you had a prepayment risk 19 caused by a decline in interest rates? 20 A. Yes. 21 Q. What is it that caused the interest 22 rate risk in USAT's portfolio of mortgage-backed ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13754 1 securities because of prepayments? 2 A. Well, there would be little or no risk 3 in the example you gave me. 4 Q. All right. What was it that created 5 the risk, the interest rate risk? 6 A. If interest rates went up. 7 Q. Down. If interest rates went down. 8 A. There was little or no risk of interest 9 rates. 10 Q. Now, when the mortgage-backed 11 securities were purchased, those initial purchases 12 that were made in '84, '85 time period, were they 13 bought as sort of a package from the investment 14 houses of an investment? 15 A. I don't know what you mean by 16 "package." There were pools. 17 Q. They bought pools, and the pools were 18 funded with reverse repos. Right? 19 A. Right. That's right. 20 Q. And you bought some instrument to 21 protect against rising interest rates at the time, 22 did you not? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13755 1 A. That's right. 2 Q. Okay. And what did you buy? 3 A. They were swaps. 4 Q. Okay. You bought swaps? 5 A. (Witness nods head affirmatively.) 6 Q. Okay. Now, my question is: You still 7 had a prepayment risk in those mortgage-backed 8 securities. Right? 9 A. Right. 10 Q. And now you had a swap. Right? 11 A. Right. 12 Q. That ended up fixing your interest rate 13 at a certain level. Right? 14 A. That's correct. 15 Q. Was it the swap that created the 16 interest rate risk when interest rates declined? 17 A. That's right. 18 Q. Okay. Now, did you have any 19 discussions of what to do about that? 20 A. Yes. There were, you know, numerous 21 discussions. 22 Q. With whom? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13756 1 A. There were discussions with management, 2 with, you know, people in the street, investment 3 bankers. 4 Q. If you had not purchased a swap, okay, 5 but you had purchased a cap which required the 6 payment of a fee -- right? 7 A. Right. 8 Q. -- would you have had an interest rate 9 risk if interest rates declined and prepayments 10 increased? 11 A. If you purchased a cap above the 12 interest rate level when you put the program on, 13 no, there wouldn't be any. 14 Q. Did you discuss that at the time? 15 A. All the -- most of the then-current 16 hedging devices were discussed. 17 Q. Okay. And caps were available at the 18 time? 19 A. Caps were available at the time. 20 Q. Did you choose to use swaps as opposed 21 to caps because of the fee or what I refer to as 22 the premium that had to be paid for caps that ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13757 1 would erode the net interest spread? 2 A. I don't recall whether that was -- that 3 was a factor, but I don't know whether it was the 4 key factor. 5 Q. Well, why -- 6 A. It was one factor in the equation. 7 Q. Why did you choose swaps over caps? 8 A. I -- you know, I believe that swaps 9 would give you more complete protection if 10 interest rates went up. You wouldn't -- the 11 problem with the cap, you would only get money if 12 interest rates went over the cap. But suppose -- 13 suppose you're in a 10 percent world and rates go 14 to 12 and a half and you had a LIBOR -- it really 15 depends on where you put your cap in place. You 16 could -- the answer to your question is where -- 17 Q. But you could have put the cap right at 18 what your cost of funds were, couldn't you? 19 A. Presumably, yes. Yes. 20 Q. Now, when you put on the 21 mortgage-backed securities funded with reverse 22 repos, in each instance, did you purchase a swap ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13758 1 at the outset to protect against rising interest 2 rates? 3 A. They were purchased roughly 4 simultaneously. 5 Q. Were they purchased as a package 6 investment? 7 A. I don't know what package. I mean, I 8 believe they were purchased simultaneously. 9 Q. Okay. And they were intended to be 10 purchased as an investment? 11 A. As a program. 12 Q. As a program. Okay. And when did 13 these initial purchases take place? 14 A. I believe in the spring of '85. 15 Q. Okay. And then there were subsequent 16 purchases that were made for USAT Mortgage 17 Finance. Is that it? 18 A. That's the financing sub we talked 19 about this morning. Yes. Those were -- we saw 20 those mortgage-backs were purchased in November -- 21 Q. Right. Between -- 22 A. -- of '85. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13759 1 Q. Right. Were there any purchases as 2 part of a program between the spring of 1985 and 3 November of 1985? 4 A. I don't remember. 5 Q. Now, let me show you an exhibit which 6 is Exhibit A11012. It is at Tab 244, an expert's 7 report who's testified in this case previously. 8 And I want to direct your attention to the Tables 9 4.2.1 and 4.2.2. It's Tab 244. 10 Do you remember earlier we had a 11 discussion about where interest rates had moved 12 between the time of the rolldown and when the 13 mortgage-backed securities had been purchased? 14 A. Yes, I believe we did. 15 Q. And you said that by the spring of 16 1986, they had moved some 400 basis points, I 17 think is what you had indicated? 18 A. I think I said over 300. 19 Q. Over 300. Okay. Now, where were the 20 interest rates, using the 10-year column, when the 21 mortgage-backed securities were initially 22 purchased at USAT? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13760 1 THE COURT: Mr. Guido, I didn't get the 2 page number. 3 MR. GUIDO: Oh, I'm sorry. There is no 4 sequential pagination on the document. It's 5 Tables, Your Honor, 4.2.1 and 4.2.2. 6 MR. EISENHART: Your Honor, I think 7 we're on a different exhibit than Mr. Guido. 8 MR. GUIDO: I'm at Exhibit -- 9 MR. EISENHART: The tab you gave us was 10 244. 11 MR. GUIDO: A11012 is an expert report 12 that has attached to it tables. 13 THE COURT: And the table you're 14 looking at is 4.2.1? 15 MR. GUIDO: And 4.2.2. They are both 16 on the same page, Your Honor. 17 MR. NICKENS: Our document doesn't have 18 the tables. 19 20 (Discussion held off the record.) 21 22 MR. GUIDO: Your Honor, apparently, ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13761 1 counsel for the respondents don't have the 2 complete exhibit. 3 MR. VILLA: If I may inquire, are you 4 going to talk to him about anything other than 5 that one page? 6 MR. GUIDO: Just the one page. 7 MR. VILLA: Our colleague will make a 8 copy of that page, Your Honor. It will just take 9 a minute. 10 MR. GUIDO: Does everybody have a copy 11 of the document now? 12 THE COURT: You may proceed. 13 MR. GUIDO: Thank you, Your Honor. 14 Q. (BY MR. GUIDO) Where were interest 15 rates using the 10-year column in 4.2.1 when the 16 initial mortgage-backed securities were purchased 17 for the Joe Phillips portfolio? 18 A. I'm looking at March '85. Is that -- I 19 don't -- 20 Q. Okay. So, they were purchased 21 approximately around -- 22 A. No, I don't know. I don't know when -- ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13762 1 I said the spring -- 2 Q. Uh-huh. 3 A. -- of '85, March. 4 Q. Do you recall whether or not, shortly 5 after the portfolio was put on, interest rates had 6 dropped by 100 basis points? 7 MR. NICKENS: Your Honor, may I inquire 8 what interest rates? Are we talking about 9 mortgage rates, treasury rates, LIBOR rates? I 10 mean "interest rates" is a very prod term in this 11 context. 12 THE COURT: Well, I assume we're 13 looking at these treasuries. 14 MR. NICKENS: So, the question is 15 10-year treasuries? Five-year treasuries? 16 One-month treasuries? 17 THE COURT: Is that your question? 18 MR. GUIDO: I'll rephrase the question. 19 I'll first ask a preliminary question. 20 Q. (BY MR. GUIDO) When you put these 21 mortgage-backed securities on, what did you 22 believe was the appropriate treasury rate to look ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13763 1 to to ascertain what the impact was on 2 mortgage-backed securities? 3 A. I believe in those years, they used a 4 10-year. 5 Q. Okay. Had interest rates moved 100 6 basis points between the time the mortgage-backed 7 securities were put on shortly thereafter? 8 A. Well, you've got to give me the date. 9 I don't remember the date when they were first put 10 on. 11 Q. Well, is a 100 basis point move in a 12 month a significant move? 13 A. I would say so, yes. 14 Q. Okay. Do you recall whether or not, 15 after you put on the mortgage-backed securities, 16 whether there was a significant move in interest 17 rates downward? 18 A. I don't recall. 19 Q. You don't know? Okay. 20 So, you don't recall what the interest 21 rates were at the time? 22 A. Well, I know -- that's right. I don't ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13764 1 recall. I know what this says. 2 Q. Now, you testified earlier today that 3 interest rates had moved over 300 basis points, I 4 think is what you testified earlier today, in the 5 spring of 1986. 6 A. No, no. I believe what I said was that 7 from when we put them on till -- from spring to 8 spring, there was 300 plus. I believe that's what 9 I said. 10 Q. Okay. And so -- and are you using when 11 you make reference to "spring to spring," March 12 31st? 13 A. That's -- you know, I don't know when 14 we put them on, but March 31 is just in the 15 spring. 16 Q. Okay. Well, you said you put them on 17 in the spring, did you not? 18 A. Yeah. Could have been April. I don't 19 know. Or it could have been April 15th. 20 Q. Okay. So, interest rates -- let's take 21 April 30th. 22 A. Okay. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13765 1 Q. Interest rates were 10.26 percent on 2 the 10-year, were they not? 3 A. Right. 4 Q. And the month before, 3/31/85, they 5 were 11.38? 6 A. Right. 7 Q. Okay. 8 A. I see that. 9 Q. And then in the spring of 1986, they 10 were 7.35 percent. 11 Do you see that? 12 A. No, I don't see 7.35. 13 Q. 3/31/86, you don't see 7.35 percent? 14 A. No. 15 Q. What do you see? 16 A. I see 7.56. 17 Q. 7.56, you have. Right? 18 A. That's right. 19 MR. NICKENS: It would appear that we 20 don't have the same document, Your Honor. 21 THE COURT: Well, I think the 7.56 22 comes from 4.2.2, and the other figure comes from ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13766 1 4.2.1. 2 MR. GUIDO: Had me worried. 3 A. So, I should be looking only at 4.2.1? 4 Q. (BY MR. GUIDO) I assumed the figures 5 were going to be identical. I was just using 6 4.2.1. But in either case, what we're talking 7 about is a 300 plus point drop in interest rates. 8 Right? 9 A. That's correct. 10 Q. Okay. I'm just trying to establish 11 when it is when they were on. Now, interest 12 rates, if you look at -- let's look at 4.2.1, 13 okay, so we can look at monthly moves on interest 14 rates. 15 Interest rates between March 31, '85 16 and April 30, '85, dropped by over 100 basis 17 points? 18 A. That's right. 19 Q. According to that chart? 20 A. That's right. 21 Q. Now -- and then they continue to 22 decline from that point except in June where they ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13767 1 went up about 37 basis points. 2 Do you see that? 3 A. June, right. 4 Q. Now, did you and Joe Phillips have any 5 discussions in the spring of 1985 about what to do 6 if interest rates declined? 7 A. I believe that we always had 8 discussions of the interest rate scenario, whether 9 they declined or go up or stayed the same, what we 10 should do. 11 Q. Okay. What was your understanding in 12 the spring of 1985 when the portfolio was put on 13 of what Joe Phillips was going to do to protect 14 against interest rate risk caused by declining 15 interest rates? 16 A. I think inherent in the program was the 17 thought that the interest rates would not be a 18 major concern within a plus or minus 200 basis 19 point move. 20 Q. So, you and he assumed that there was 21 no -- nothing that needed to be done before 22 interest rates declined 200 basis points? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13768 1 A. No, I don't think we assumed that. You 2 know, we, I'm sure, questioned, you know, the up 3 200, down 200 scenario. I mean, that was just a 4 number, you know -- a rough guide. 5 Q. So, that was a rough guide that you and 6 he used? 7 A. Well, that was a rough guide that I 8 think the whole street used on these RCAs. 9 Q. What do you mean "the street used"? 10 A. The -- you know, Wall Street, 11 mortgage-backed securities people. 12 Q. Were there any other thrifts that had 13 sizable mortgage-backed securities portfolios in 14 the spring of 1985? 15 A. I don't know. I would guess so, but I 16 don't know for sure. 17 Q. Did you make an effort to ascertain 18 whether there were? 19 A. I didn't myself. Perhaps Joe did. 20 Q. But you didn't? 21 A. No. 22 Q. Did you discuss with Joe whether or not ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13769 1 he did? 2 A. No, I didn't discuss -- 3 Q. Did you discuss with him whether or not 4 there were any advisory firms that were advising 5 thrifts on how to manage mortgage-backed 6 securities portfolios in the spring of 1985? 7 A. I don't recall that conversation. 8 Q. Now -- and your assumption was that the 9 interest rate risk caused by declining interest 10 rates in a swap portfolio didn't require -- wasn't 11 great until interest rates had moved 200 basis 12 points? 13 MR. VILLA: Objection. Misstates his 14 testimony. 15 THE COURT: Well, he can answer. 16 You may answer. 17 THE WITNESS: Could I have the question 18 again please, Mr. Guido? 19 Q. (BY MR. GUIDO) Was it your 20 understanding in the spring of 1985 that the -- 21 there was no significant interest rate risk caused 22 by the downward move in interest rates to USAT's ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13770 1 mortgage-backed securities portfolio until 2 interest rates had moved 200 basis points? 3 A. I think that was our general -- general 4 feeling. 5 Q. What do you mean by "general"? You and 6 Joe Phillips'? 7 A. Yeah. I think we agreed on that. 8 Q. And did that include senior management 9 at USAT? 10 A. I think they were all aware of this 11 band of interest rates that we were working under. 12 Q. Now, you indicated that you had never 13 had any prior experience with managing a 14 mortgage-backed securities portfolio. Right? 15 A. No, I hadn't. 16 Q. And you indicated that the people that 17 you met with were people from Salomon Brothers, 18 First Boston, and the other major houses that were 19 selling packages of mortgage-backed securities or 20 mortgage-backed security programs to thrifts. 21 Right? 22 A. Yeah. I mean, I guess, you know, ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13771 1 Merrill-Lynch, I believe, was involved, firms of 2 that stature. 3 Q. Nature? 4 A. Nature, stature. 5 Q. And you didn't make an effort to locate 6 someone who had been advising purchasers on how to 7 manage mortgage-backed securities portfolios in 8 the spring of 1985? 9 A. I think Mr. Phillips knew most of the 10 people in Wall Street, most of the research people 11 who had written and who knew about this subject. 12 Q. Okay. And those were people with firms 13 that were selling mortgage-backed security 14 programs to thrifts? 15 A. But they were also people who were 16 contributors to the standard texts in the area. 17 Q. Now, when -- what did you do to monitor 18 prepayments from the time of the spring of 1985 19 through December of 1985? 20 A. Well, Mr. Phillips used to get the 21 factors as -- I believe they were put out once a 22 month by Freddie May (sic). ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13772 1 Q. I'm sorry. I didn't hear that. 2 A. By Freddie Mac and Fannie Mae. The 3 factors were put out. I don't know -- I don't 4 know whether he got them on the GPMs. 5 Q. What do you mean by the GPMs? 6 A. The graduated payment coupons. 7 MR. NICKENS: GPMs. 8 A. G-N-M-A-G-P-M. 9 Q. (BY MR. GUIDO) Oh, okay. You mean 10 whether or not -- whether or not Ginnie Mae 11 published any statistics on that? 12 A. Right. But the other agencies, I 13 believe, did. 14 Q. And that's what he -- he would use to 15 monitor prepayment speeds? 16 A. Right, right. 17 Q. Do you know what the delay is between 18 the date a mortgage is prepaid and the date it 19 shows up on those statistics? 20 A. I do not recall. 21 Q. Did you ever know? 22 A. I may have. I just don't know now. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13773 1 Q. Would it be significant if the delay 2 were two to three months? 3 A. It would be. In this interest rate 4 environment, it would be. 5 Q. Now -- 6 A. I might add that I think, you know, 7 when these came out, there was a lot of commentary 8 that the analysts in the street would accompany 9 the publication in these numbers. And I'm sure 10 Mr. Phillips would be on top of, you know, that 11 and people changing their estimates and things 12 like that. He was, you know -- that was his job 13 to follow things like that. 14 Q. Did you ever attempt to model assumed 15 prepayment rates based on projected changes in 16 prepayments? 17 A. I believe Mr. Phillips did. I did not 18 personally do that. 19 Q. So, we'd have to rely on Mr. Phillips' 20 testimony on that? 21 A. I believe you would have to. 22 Q. Okay. So, whatever he testified to ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13774 1 with that regard, you would assume was accurate? 2 MR. NICKENS: Your Honor, I have to 3 object. He's asking him to agree with testimony 4 that, at this point in time, he's not even telling 5 him what it was. 6 THE COURT: All right. Sustained. 7 A. I am -- Mr. Phillips is a fine, 8 intelligent guy. And he's the kind of guy you 9 would rely on. 10 Q. (BY MR. GUIDO) Pardon? 11 A. He's the kind of guy you would rely on. 12 Q. Okay. So -- I mean, you're not saying 13 that you know whether or not he modeled assumed 14 prepayment rates? 15 A. Let me put it this way. I don't know 16 whether he modeled or not, but I think he was 17 privy to many different models. 18 Q. All right. But you don't know whether 19 or not -- 20 A. I don't know. 21 Q. Now, let's go to the exhibit that I 22 gave you at the outset, the spreadsheet. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13775 1 A. Okay. 2 THE COURT: Let's take a short recess. 3 4 (Short break.) 5 6 THE COURT: Be seated, please. We'll 7 be back on the record. We'll be back on the 8 record. 9 Mr. Guido, you may continue. 10 MR. GUIDO: Thank you, Your Honor. 11 Q. (BY MR. GUIDO) Now, you indicated at 12 the outset when you put on the mortgage-backed 13 securities in the so-called Joe's portfolio in the 14 spring of 1985, one of your assumptions was that 15 there would be no significant damage caused by 16 interest -- or no significant interest rate risk 17 until interest rates moved 200 basis points. 18 Is that a fair characterization of your 19 testimony? 20 A. I think it would be better phrased if 21 the -- 22 THE COURT: Would you speak up, please? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13776 1 A. I think a better phrase would be no 2 significant damage to the spread. 3 Q. (BY MR. GUIDO) Okay. 4 A. I think that's a better way to look at 5 it. 6 Q. And why no significant damage to the 7 spread? Why are you making that qualification? 8 A. Well, if interest rates came down over 9 200 percent, 200 basis points, you would expect 10 the prepayments to accelerate. And that would 11 damage the spread. 12 Q. The portfolio? 13 A. The portfolio. Okay. 14 Q. Now, were there any -- 15 A. Can I finish? Adjustments would have 16 to be made to the original portfolio in that -- 17 around that. 18 Q. It was your assumption that the 19 adjustments wouldn't have to be made until the 20 interest rates declined 200 basis points? 21 A. No. I mean, adjustments could be made 22 any time. It would be largely what the portfolio ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13777 1 manager felt had to be done. 2 Q. All right. Now, what -- you indicated 3 earlier when I asked you about those hypotheticals 4 that Mr. Gross had given you and you said that 5 they were incomplete because they didn't take into 6 consideration reinvestment of gains in the 7 principal. Right? 8 A. I recall that exchange. 9 Q. Okay. Now, was one of your assumptions 10 when you put on the mortgage-backed securities 11 portfolios that are known as Joe's portfolios in 12 the spring of 1985 was that when you adjusted the 13 portfolio after it moved 200 basis points, that 14 you would reinvest all of the proceeds that had 15 been received from that portfolio, including 16 gains, the principal when it were sold, and the 17 prepayments? 18 A. I think that was always the assumption, 19 that if something had to be altered, that 20 something, for example, sold at a profit, that all 21 the proceeds would be reinvested in the program. 22 Q. Okay. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13778 1 A. I think that was everybody's 2 assumption. 3 Q. Was that your assumption, that it was 4 necessary to maintain the integrity of that 5 investment program? 6 A. I felt that was necessary, yes. 7 Q. Now, let's look at these transactions. 8 A. Okay. 9 Q. The first transaction is 12/85. 10 Do you see that? 11 A. I see that. 12 Q. And it shows that there is a gain of 13 $3,124,000. Right? 14 A. Right. I see that. 15 Q. Okay. And that -- it shows that there 16 was a sale of a Ginnie Mae 12.25 coupon with a 17 current CPR of 5.16. 18 Do you see that? 19 A. Right. I see that. 20 Q. In exchange for a Ginnie Mae coupon 12 21 with a CPR of 5. 22 Do you see that? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13779 1 A. Right. 2 Q. What is the significance of a change in 3 CPR from 5.16 to 5? 4 A. The significance is .16. 5 Q. What is the magnitude of that 6 significance? 7 A. It's small. 8 Q. Okay. Now, let's look at the entry -- 9 A. But I want -- we should say that this 10 is not a Ginnie Mae 12 and a quarter into a Ginnie 11 Mae 12. It's a GPM into a plain Ginnie Mae 12. 12 Mr. Phillips might have some other reason -- might 13 have some reason that you and I can't see here 14 because these are quite different securities. 15 Q. Well, this is what's been described to 16 the OTS in this proceeding as the rolldown that 17 Mr. Phillips undertook in order to avoid 18 accelerations of prepayment rates. Right? 19 A. Right. I agree with that. It's not -- 20 it's also a switch from one security to another. 21 Same agency, but a different -- 22 Q. Well, now -- I mean, is the purpose of ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13780 1 this transaction when you look at this, based on 2 your experience, to avoid an acceleration of 3 prepayment risk? 4 A. It does that. 5 Q. Marginally. Right? 6 A. It looks small, but I'm saying there 7 may be something else that you and I are missing 8 in this transaction. 9 Q. Let's go to the next one. 2/20 -- 10 2/18. 11 MR. NICKENS: You mean the next one on 12 the sheet as opposed to -- because there's some at 13 the end that appear to be earlier in time. 14 Q. (BY MR. GUIDO) I'm talking about the 15 next on this sheet. Excuse me. 16 2/18. 17 A. Right. I see that. 18 Q. Okay. That is Freddie Mac 11 coupons. 19 Right? 20 A. Right. 21 Q. For Freddie Mac 10 coupons. Right? 22 A. That's right. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13781 1 Q. And that the Freddie Mac 11s are being 2 sold at 96 -- I'm sorry -- at 103.09. Right? 3 A. Yes. I see that. 4 Q. And the Freddie Mac 10s are being 5 bought for 99.56. Right? 6 A. Yes. 7 Q. Okay. 8 A. That's what it says. 9 Q. And the CPR for that which was sold was 10 an 11. Right? 11 A. Right. 12 Q. And the CPR for what was bought was an 13 11. Right? 14 A. Right. 15 Q. Is that transaction a transaction that 16 was designed to roll down the portfolio in order 17 to avoid acceleration of prepayments? 18 A. Well, the CPR is the same. I have to 19 question -- I have to question the -- how the CPR 20 could be the same. I mean, I don't -- 21 Q. Are you saying that Joe Phillips has 22 inaccurate information on this chart? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13782 1 A. I don't know. It just seems strange to 2 me. 3 Q. Now, let's look at the transaction at 4 3/21. 5 A. Okay. 6 Q. That is a Freddie Mac again, 11 -- 7 A. Right. 8 Q. -- being sold. Right? 9 A. Right. 10 Q. With a CPR of 11? 11 A. Right. 12 Q. And it's being replaced with a Fannie 13 Mae 10. Right? 14 A. Right. 15 Q. With a CPR of 10? 16 A. Right. 17 Q. Okay. Is the CPR significantly 18 different when it goes from 10 to 11 or 11 to 10? 19 A. Well, it's somewhat significant. 20 Q. Well, what does that mean in terms of 21 the percentage that's being prepaid in a given 22 year? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13783 1 A. It's -- I assume these are annual CPRs, 2 but I don't know. I assume it's 1 percent a year. 3 Q. Okay. Now, look at the -- look at 4 the -- I think it's called the collar, the Ginnie 5 Mae. 6 A. I see "collar." 7 Q. The $47 million of the collar. Do you 8 see that? It's the fourth column, Freddie Mac 9 13s. 10 Do you see that? 11 A. Yes, I see that. 12 Q. And that shows a coupon of 13, Freddie 13 Mac collar 13 being sold for a Freddie Mac collar 14 13. 15 Do you see that? 16 A. Right. 17 Q. And it shows a CPR of 30 for what was 18 sold in exchange for a CPR of 30? 19 A. Right. 20 Q. Was that -- does that look like a 21 transaction that was done in order to avoid the 22 acceleration of prepayments? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13784 1 A. No, it doesn't; but I -- you know, I 2 don't -- if this transaction occurred, I'm sure 3 Mr. Phillips had a good reason for doing it. 4 Q. But it doesn't look like it was done in 5 order to avoid acceleration of prepayment speeds 6 if these figures are correct, does it? 7 A. If the CPRs are, in fact, 30 on each, 8 it wouldn't seem like it's helping your CPRs. 9 Q. Okay. Now, let's take the next column, 10 the 50 million. The collar Ginnie Mae 12s being 11 sold, the collar Ginnie Mae 12s being bought. 12 Do you see that? 13 A. Right. 14 Q. With a CPR of what was sold of 13 and a 15 CPR of what was purchased is a 13. 16 Do you see that? 17 A. Right. 18 Q. Does that look right? If those figures 19 are accurate that those transactions were 20 undertaken to avoid acceleration of prepayment 21 speeds -- 22 A. I really -- Mr. Guido, I have to ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13785 1 question this thing. It's almost -- this was 2 purchased -- this was sold at exactly the same 3 price to three decimal points that it was 4 purchased at. That's -- I've been away from this 5 a long time, but that's almost an impossibility. 6 Q. What do you mean, "it's almost an 7 impossibility"? 8 A. That something -- do we know when these 9 were bought and when they were sold? 10 Q. They were supposed to be 11 simultaneously. 12 A. Excuse me? 13 Q. They were supposed to be relatively 14 simultaneously is what I understand the rolldown 15 to have been. 16 A. No, no. I'm sorry. Let's go back to 17 that Ginnie Mae 12. Do we know when that was 18 bought? See, my problem is the purchase price is 19 94.844. The sales price on this Ginnie Mae is 20 94.844. Nine months later, you're selling a 300 21 basis point plus drop in interest rates and you're 22 selling something for the exact price to three ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13786 1 decimal points that you bought. 2 Q. What you're saying is it's a 3 transaction that doesn't look like it makes sense 4 as reported here? 5 A. Yeah. I can't understand it. 6 Q. Okay. Let's go back to the other 7 collar. It's the same problem. Right? 8 A. I think something's wrong here. 9 Q. Why do you think it is wrong? 10 A. Well, that's one example. That's why I 11 can't -- I can't imagine that happening. 12 Q. Well, let's say you sell something, 13 okay. The current face amount of the 13s is what? 14 47 million? The Freddie Mac collars, 47 million. 15 Right? Pardon? 16 A. I'm looking at the Ginnie Mae 12. 17 Q. Okay. You're looking at the Ginnie Mae 18 collar 12? 19 A. Well, I have the current face on the 20 purchase is exactly the same as the current 21 face -- everything is the same. It looks like -- 22 it looks like the second half of the column is the ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13787 1 first half of the column and that it's just been 2 duplicated. 3 Q. So, you don't think that one is a sale 4 and one is a purchase? 5 A. No. They both look like purchases to 6 me. 7 Q. Okay. 8 A. But that was back some time ago. 9 Q. At an earlier point in time? 10 A. Right. 11 Q. So that you don't think that those 12 transactions were really part of the rolldown? 13 They don't look like it to you? 14 A. Well, that one doesn't. 15 Q. Okay. 16 A. I mean, I don't -- I just can't explain 17 that. 18 Q. Okay. Now, let's look at the 19 transactions at the very last column. Okay? 20 A. That's on the next page? 21 Q. No. It's on the same page, the third 22 page. The DBL, it says "FNM." ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13788 1 Do you see that? 2 A. The 12 and a half's, yes. 3 Q. Okay. Do you see that? What does that 4 show in terms of the CPR of what was sold? 5 A. The CPR was 20 when it was purchased -- 6 I'm sorry. You move down from a Freddie Mac 12 7 and a half with a CPR of 20 to a Freddie Mac 11 8 with a CPR of 11. 9 Q. Okay. Now, let me ask you this 10 question: What were the CPRs on the 11 mortgage-backed securities that were purchased in 12 the spring of 1985? Do you recall? 13 A. I can't recall, no. I mean, no, I 14 can't. 15 Q. Were they around 5 or 6? 16 A. I just don't recall, Mr. Guido. They 17 may well be -- here again, the GPM would probably 18 be considerably lower. 19 Q. Right. 20 A. But I don't know. 21 Q. And why would the GPM be considerably 22 lower? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13789 1 A. Because it was a longer-lived graduated 2 payment. It starts with -- in the beginning with 3 low payments, and then they graduate upwards. 4 Q. Is an increase -- 5 A. So, it just inherently has a longer 6 life. 7 Q. Is a CPR moving from a 6 or a 5 to a 20 8 a significant move? 9 A. I would -- it is certainly a 10 significant move over a relatively short period of 11 time. 12 Q. If it's less than a year, is that 13 significant? 14 A. I would call that significant. 15 Q. And a CPR move from 5 or 6 to 30 would 16 even be more significant, wouldn't it? 17 A. That's even a larger move. 18 Q. And would a CPR move from 5 to 6 to 20 19 have a significantly negative impact on the 20 portfolio? 21 A. You would start losing assets. 22 Q. In fact, you would lose significant ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13790 1 asset value, wouldn't you? 2 A. Well, you would lose -- over a one-year 3 basis, you would lose 20 percent of your assets. 4 Q. Now, let me show you another document, 5 which is Exhibit B3713. 6 Do you have B3713 in front of you? 7 A. Yes, I do. 8 Q. Okay. This is a handwritten chart of 9 various trades, including some of those that we've 10 taken a look at here. 11 A. Right. I guess so. 12 Q. And it goes through December 18th, 13 1985, through, it looks like, part of July 1986. 14 Right? 15 A. It goes on for a number of pages. 16 Q. I have a five-page -- I have it goes 17 from Imaging Stamp No. OW159220 through OW159224. 18 A. Right. That's what I have. 19 Q. The transactions starting with those on 20 April of 1986, what was the purpose of those 21 transactions? 22 A. I can't tell from -- from here if they ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13791 1 are -- if they are linked or not. I don't know 2 whether they are linked. I don't know whether 3 they -- the Freddie Mac 9s are a replacement for 4 the Ginnie Mae 12s and the Freddie Mac 13. I 5 don't know. 6 MR. VILLA: Excuse me. What page are 7 you on? 8 MR. GUIDO: Pardon? 9 MR. VILLA: Which page of the document? 10 MR. GUIDO: It's April 1986 MBS trades. 11 It's 159222 is what I had asked him to look at. 12 MR. VILLA: Thank you. 13 Q. (BY MR. GUIDO) What about the 14 transaction -- 15 A. There are two sales -- the purchase is 16 quite a bit later on. It's about two and a half, 17 two plus weeks after the sales. I don't know 18 whether these -- from this information, I don't 19 know whether the purchases are linked with the 20 sales or not. 21 Q. Now, if you go back to the first 22 document that I showed you, T4171, that one-page ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13792 1 document that says "I was glad to learn yesterday 2 that you completed your rolldowns of your 3 mortgage-backed securities," that document is 4 dated February 28th? 5 A. Right. 6 Q. Did the rolldown continue after 7 February 19th, 1986? 8 A. I don't know for sure. We would have 9 to see whether the interest rates were still going 10 down and the CPRs were still accelerating. 11 Q. Well, based on your memory -- 12 A. We see they bought them, then -- 13 Q. Go back to the interest rate chart. 14 A. Yeah. 15 Q. Why don't you take a look at that 16 again? 17 A. I think the market -- I think the bond 18 market went down -- it looks like it finally 19 bottomed in March, end of March, down another 80 20 or 90 basis points from the end of February to the 21 end of March. 22 Q. And then they started going back up. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13793 1 Right? 2 A. And then in May, they started to go 3 back up. And in September, they started to go 4 down a little bit and ended up at 820 at the end 5 of the year. I'm at the bottom table. 6 Q. So, using the bottom table? 7 A. To get the extra -- the last part of 8 '86. 9 Q. But when you start -- 3/31/86, using 10 the table, it bottoms at 7.56, and then it starts 11 going up again through September 30, 1986. Right? 12 A. Yeah. We have a bottom in March. 13 Q. So that based on your understanding at 14 the time, there would have been no reason to sell 15 out of the portfolio after March to avoid 16 accelerations of prepayments? 17 A. Well, we're looking at interest rates. 18 Q. Right. 19 A. We're not looking at prepayment rates. 20 Q. Right. And what's the significance of 21 that? 22 A. Well, I think prepayment rates can act ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13794 1 a bit differently. 2 Q. And why is that? 3 A. Well, I think one of the great problems 4 in this period of time is that -- where most 5 everybody was a bit fooled is that because it was 6 much more easier for the homeowner to refinance 7 mechanically, that prepayment rates accelerated 8 more than they did in the prior cycle during the 9 same amount of drop in interest rates. It was 10 just easier. It's like today, it's even easier 11 than it was in '86 to refinance. It wasn't 12 compounding -- 13 Q. How do you know that? 14 A. Well, you know, we viewed this. 15 Q. When? 16 A. In '86. 17 Q. In '86, you looked at the prepayment 18 rates -- 19 A. Well, everybody was, you know, very 20 conscious of them. 21 Q. The prepayment rates went from what to 22 what during spring and summer of 1985? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13795 1 A. I can't recall, but what I remember, 2 the lore at the time was that they accelerated 3 more in that interest rate cycle than they had in 4 the prior one. 5 Q. Now -- 6 A. Each interest rate cycle, each down 7 cycle, because things are, you know, easier to do, 8 easier for the homeowner to refinance, the CPR 9 problem is more aggregate. 10 Q. What was the change in the previous 11 interest rate cycle between the -- when there was 12 a 200 basis point move in interest rates? 13 A. I don't recall, but the commentary in 14 '86 was it was greatly increased. 15 Q. What commentary are you referring to? 16 A. Well, the commentary you would get from 17 the investment banking houses. I believe 18 Mr. Phillips told me this, too. 19 Q. Mr. Phillips told you that the 20 commentary in '86 indicated that the increase in 21 prepayment rates that had happened in the interest 22 rate cycle, spring of '85 through December of '85, ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13796 1 was unforeseen? 2 A. I -- let me say underestimate. But I 3 mean -- and not during that -- so much the '85 4 period, you know, like December '85 through the 5 spring. 6 Q. December '85 through the spring? 7 A. I think that's -- I think that's when 8 the prepayments accelerated. 9 Q. And at the time, you were relying on 10 these published reports from Freddie Mac and 11 Fannie Mae to ascertain what the prepayments were? 12 A. I think that was one of the tools that 13 Mr. Phillips used. 14 Q. Do you recall in your deposition being 15 asked questions about the decline in interest 16 rates between March of '85 and December of '85? 17 A. I don't specifically recall that. 18 Q. Have you reviewed your deposition prior 19 to your testimony? 20 A. Yes, I reread it. I don't remember 21 that part on interest rates. 22 Q. You don't recall any discussion about ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13797 1 interest rates from your deposition? 2 A. I don't remember. 3 Q. You don't recall? 4 A. I can't recall. 5 Q. Now, if the purpose of making the sales 6 out of the mortgage-backed security portfolio in 7 early 1986 was to avoid the acceleration of 8 prepayment rates, should we expect all of the 9 higher coupon mortgage-backed securities to have 10 been sold during that time period? 11 A. I don't know. Mr. Phillips sold some. 12 I don't know whether he sold all of them. 13 Q. Well, if the purpose of the sales was 14 to avoid damage to the portfolio, significant 15 damage to the portfolio caused by prepayments, 16 wouldn't it be fair to expect that all of the high 17 coupon mortgage-backed securities had been sold? 18 A. I don't -- I don't think that's 19 necessarily fair at all. 20 Q. Why not? 21 A. Well, he might have sold way down in 22 one instance and not so far down in another. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13798 1 Q. Did he ever roll down beyond current 2 coupon -- 3 A. That's what I don't know. I don't 4 know. 5 Q. Assume that he had only rolled down to 6 current coupons. Okay? 7 A. Okay. 8 Q. Take that assumption. 9 A. Okay. 10 Q. If the purpose of making the sales in 11 the spring of 1984 was to avoid the acceleration 12 of prepayments, would it be fair to expect him to 13 have made sales of all the high coupon 14 mortgage-backed securities? 15 A. In theory. 16 Q. Okay. Now, let's turn to Exhibit 17 A1394, which is Tab 531. These are the minutes of 18 the investment committee of United Financial 19 Group/United Savings Association of Texas dated 20 May 28th, 1986. And I want to direct your 21 attention to the document -- the page that is 22 Bates stamped US 3007004765. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13799 1 A. Right. 2 Q. Do you have that page? 3 A. Yes. 4 Q. Now, looking at that page, it lists on 5 the left categories of mortgage-backed securities. 6 Right? 7 A. Right. 8 Q. Okay. It lists the coupon in the next 9 column. It lists the face amount in the next 10 column, the premium discount, and the price. 11 Right? 12 A. Right. 13 Q. And that shows that in the treasury 14 portfolio, that it holds mortgage-backed 15 securities that range from 13 and a half percent 16 down to, what, 7.5? 17 A. I see -- in treasury, I see a 7.25 in 18 there. 19 Q. That's right. 7.25. $634,000. Right? 20 A. Yes. 21 Q. Would it be fair to expect -- 22 A. Incidentally, that would be your ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13800 1 example of an undermarket rate mortgage-backed 2 security. 3 Q. Mortgage-backed security? 4 A. If we said the market bottomed at 5 around 7.34 in the spring and you know you 6 generally have a 100 basis points difference 7 between a treasury and a mortgage-backed, this is 8 probably better than a hundred basis points yield 9 under the market. 10 Q. So, you believe that he bought below 11 market -- 12 A. Well, I don't know. I'm just pointing 13 this out. I don't -- I can't remember exactly 14 what he did. 15 Q. Okay. But this portfolio contains high 16 coupon mortgage-backed securities? 17 A. It contains -- 18 MR. NICKENS: Your Honor, which 19 portfolio are we referring to? 20 Q. (BY MR. GUIDO) The treasury 21 portfolio -- 22 MR. NICKENS: Have we established that ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13801 1 the treasury portfolio was part of Joe's 2 portfolio? 3 Q. (BY MR. GUIDO) Were there any 4 portfolios of mortgage-backed securities that 5 weren't managed by the investment department, 6 Mr. Huebsch? 7 MR. NICKENS: Now, that's a different 8 question, if he's purporting to address the issue 9 that I raised. 10 Q. (BY MR. GUIDO) Mr. Huebsch, were 11 there any portfolios of mortgage-backed securities 12 that were not managed by the investment 13 department? 14 A. I can't remember. I don't think so, 15 but I don't know for sure. 16 THE COURT: When you use the term 17 "Joe's portfolio," is that a distinct entity or is 18 that everything that's managed by the treasury 19 department or what? 20 THE WITNESS: No. That -- Joe's 21 portfolio was the original RCAs, which were the 22 risk-controlled arbitrage portfolios, set up in ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13802 1 the beginning of spring of '85. They are the ones 2 that contained swaps only as the hedge and was -- 3 I don't remember the exact amount of them, but 4 that was sort of the original mortgage-backed 5 effort by United Savings became -- 6 THE COURT: These figures we have here, 7 are they referring to this -- that portfolio? 8 THE WITNESS: I can't really tell from 9 these figures. 10 Q. (BY MR. GUIDO) Were there any 11 mortgage-backed securities that were held by USAT 12 during the period of time that you were there that 13 were managed by anyone other than Joe Phillips and 14 Sandy Laurenson? 15 A. I don't believe so. 16 Q. Now, look at the investment portfolio. 17 A. Yes. 18 Q. That has various coupons there. Right? 19 A. Right. 20 Q. Including one Ginnie Mae 12 of 21 $19 million. Right? 22 A. Right. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13803 1 Q. Down to the Freddie Mac of 9. Right? 2 A. Right. 3 Q. Does that indicate that there are 4 mortgage-backed securities that were not sold 5 prior to April 30th, 1986, that had coupons that 6 were above the market interest rate by at least 7 200 basis points? 8 A. Well, these -- if these prices are 9 correct, there were only two over par so that -- 10 and the -- so, these are under current market. 11 The aggregate is 9521 for this group of eight that 12 I'm looking at. These were, as a group, selling 13 at 95, which is 5 points under the current market. 14 Q. Didn't you just testify that in 15 nineteen -- spring of 1986, that you ascertained 16 that prepayments had accelerated much greater than 17 you had anticipated given the market change? 18 A. I testified that during the first part 19 of 1986 that everybody underestimated -- 20 underestimated the acceleration of prepayments. 21 Q. Did you testify that in this early part 22 of 1986 that you had ascertained that you had ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13804 1 underestimated the changes in prepayment speeds? 2 MR. VILLA: Your Honor, I object. 3 Instead of asking this witness what he's testified 4 to two or three times, because it is pretty 5 confusing, why doesn't he just ask him the 6 question? 7 THE COURT: I think the witness 8 understood and answered the question. Let's move 9 on. 10 Q. (BY MR. GUIDO) So, in the early part 11 of 1986, is it your testimony that you ascertained 12 that prepayments had accelerated more quickly than 13 you had previously anticipated? 14 A. That's right. 15 Q. And by April 30th of 1986, was that the 16 case? 17 MR. NICKENS: Your Honor, was what the 18 case? If that's -- 19 Q. (BY MR. GUIDO) Is that your 20 understanding as of April 30, 1986? 21 A. I'm just -- I'm not so good at the 22 monthly dates. I've got -- I can't remember other ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13805 1 than the first part of 1986. It's impossible for 2 me to -- 3 Q. Okay. What do you mean by "the first 4 part of"? 5 A. You know, the first four or five 6 months. 7 Q. So, you mean, up to the first half of 8 the year? Is that what you mean? 9 MR. VILLA: Your Honor, we're asking 10 him to go back 12 years and specify to a day. I 11 mean, really, the witness has answered the 12 question. I object to further attempts to force 13 him -- a witness who's trying to cooperate with 14 the question to give him an exact date 12 years 15 ago. 16 THE COURT: He said four or five 17 months. You wanted to make it six months. I 18 don't know if he wants to go along with that or 19 not. 20 A. I don't know. 21 Q. (BY MR. GUIDO) You just don't know? 22 A. I don't know. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13806 1 Q. Now, you testified earlier about what 2 was needed to maintain the integrity of the 3 portfolio. 4 Do you recall that? I'd like to show 5 you a document which is B1409. It is a memorandum 6 from you to Barry Munitz dated January 5th, 1987. 7 Do you recall preparing this memorandum 8 on the compensation plans and structure for the 9 investment department? 10 A. Yes, I recall preparing this. 11 Q. Okay. Have you reviewed this document 12 recently? 13 A. Yes. I read it a couple days ago, like 14 two days ago, the day before yesterday. 15 Q. Now, what position did Barry Munitz 16 hold at USAT at the time you wrote him this memo 17 in January of 1987? 18 A. I don't know exactly. He was very high 19 up in the organization. 20 Q. I want to direct -- it says, 21 "Compensation plans and structure of investment 22 department." And then it says, "One, general. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13807 1 You may not wish to give this section out for 2 general distribution. Two, specific comments on 3 PM&M's plan." 4 Do you see that on the second page? 5 A. Okay. Right. 6 Q. What is the reference to PM&M's plan? 7 A. I believe PM&M was asked to come up 8 with an incentive plan. 9 Q. Is PM&M a reference to Peat Marwick and 10 Mitchell? 11 A. I believe it is. 12 Q. Okay. 13 A. Or probably the management consulting 14 part of PM&M. 15 Q. All right. Now, look at Page 3 of the 16 document. This is in the section under "Specific 17 comments of PM&M's plan." It says, "Several other 18 points are made below." 19 Do you see that? 20 A. Right, I see that. 21 Q. Do you see that in Paragraph No. 1 it 22 says, "1986 mortgage-backed plan and threshold ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13808 1 numbers. It took several months into 1986 for 2 accounting to determine the cash flows -- prepay, 3 pay-down, and interest for 1985. Management then 4 stubbornly refused to reinvest these cash flows 5 which were eventually determined to be roughly 100 6 million. Small wonder there was a shortfall on 7 MBS income. In short, the assumptions used to 8 derive threshold goals were flawed from the start 9 and subsequent lack of decision turned 1986 into 10 year when money was needlessly frittered away." 11 Do you see that? 12 A. Yes. 13 Q. What were you referring to there? 14 A. I was referring to, you know, a rumor I 15 had heard that all the money wasn't being 16 reinvested back into the MBS program. 17 Q. And what was it about that that you 18 found objectionable? 19 A. Well, again, you know, I felt that the 20 program, though battered, should be -- the 21 integrity should be maintained. 22 Q. And why had it been battered? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13809 1 A. Well, the prepayment rates. 2 Q. The prepayment rates. 3 Was it prepayment rates or was it not 4 positioning the portfolio prior to the 5 acceleration of prepayments? 6 A. We were surprised by the acceleration 7 of the prepayments. 8 Q. And were you also surprised at the 9 rapidity of the decline in interest rates between 10 the spring of 1985 and December of 1985? 11 A. I'm not -- I wasn't so much disturbed 12 by those. I was disturbed by the rapidity in the 13 decline, December '85 to whenever we figured out 14 that day in the first part of '86. May, June of 15 '86. 16 Q. Well, what happened to interest rates 17 between December of '85 and May/June of '86? 18 A. Well, let's take a look. They went 19 from a little over 9 to 734, five. 20 Q. So, that's what you're talking about 21 being surprised? 22 A. No. The surprise was the effect a ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13810 1 decline in interest rates had on the prepayment 2 rates. 3 Q. And you had not anticipated rapid 4 escalation of prepayment rates with 100 to 200 5 basis point move? 6 A. No. We knew they would go up, but we 7 didn't know they would accelerate that fast. We 8 knew they would increase. 9 Q. Now, prior to learning about the 10 increase in prepayment rates, had you done any 11 study yourself or seen any studies that Joe 12 Phillips showed you of what the increase of 13 prepayment rates had been during previous interest 14 rate cycles in which interest rates had declined 15 by 200 basis points? 16 A. I can't recall. It may have happened, 17 but I can't -- 18 Q. You just -- you don't recall seeing 19 anything? 20 A. (Witness shakes head negatively.) 21 Q. I would like to move another packet of 22 documents, if I might. The first document I'd ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13811 1 like for you to look at is Tab 862, which is 2 A10615. This is a two-page exhibit. The cover 3 memo is from Mike Crow to G.R. Williams dated 4 March 18th, 1986, answer to attached memo. 5 You see the memo that's attached is the 6 memo from Jenard Gross to you, Charlie Hurwitz, 7 Dr. Barry Munitz, and Joe Phillips that we 8 discussed earlier? 9 A. Yeah. We discussed that, but I have 10 not -- I have not seen this. 11 Q. You mean today or -- 12 A. Ever. 13 Q. Ever? Okay. Starting with the second 14 page of the memo -- 15 A. You want me to go to the second page 16 first? 17 Q. You have to read them together to know 18 what the first one is responding to. Item No. 1 19 on the first page is No. 1 on the attachment. 20 Right? 21 A. Okay. 22 Q. It says, "I wonder if you can determine ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13812 1 or if anyone else can determine where we now stand 2 as far as an annual income stream from the 3 mortgage-backs and the swaps." 4 Do you see that? 5 A. Right. 6 Q. Okay. Then Item No. 1 on Mr. Crow's 7 response, "We do not know where we stand in terms 8 of mortgage-backed securities and the related 9 spread per the performance report Schedule SF. 10 This is on an overall total portfolio basis. This 11 analysis does not attempt to segregate 12 mortgage-backed securities by block or purchase 13 date nor measure against any original targets." 14 A. Okay. 15 Q. Then Item No. 2, "Also, what sort of a 16 spread do we now have compared to what we were 17 originally shooting for?" 18 Item 2, "We have never tracked 19 mortgage-backed securities by block measuring 20 original targets as to spread versus actual 21 results. I believe Joe Phillips has the original 22 targets, but I do not believe that Joe keeps up ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13813 1 with mortgage-backed securities results versus 2 those original targets." 3 Do you see that? 4 A. Yes, I see that. 5 Q. What was the practice in the investment 6 department up through March 18th of 1986 or, let's 7 say, the middle of 1986 to track the performance 8 of the mortgage-backed security portfolio? 9 A. Was -- 10 Q. What did you look to? 11 A. What? 12 Q. What did you look to? 13 A. We would look to, you know, the figures 14 that Joe had, as everybody else did. There were 15 no other people -- Mr. Crow can't find any other 16 people. 17 Q. Pardon? 18 A. Mr. Crow doesn't have the -- it says 19 here that only Mr. Phillips had the original 20 target. 21 Q. So, what did you do in the investment 22 department to track the performance of the ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13814 1 mortgage-backed securities portfolio? 2 A. You know, I assume Mr. Phillips, you 3 know, did it on his computer. 4 Q. Did he provide you with any reports? 5 A. I believe so. I can't remember now. 6 Q. You don't remember? 7 A. No. 8 Q. Now, let's take Item No. 3. "Do we 9 currently have on hand any accounting techniques 10 to know what we've done to date on the ones that 11 we've rolled down and what we will do in the 12 future on the ones that we've now acquired?" 13 Mr. Crow's answer, 14 "Finance/administration was unaware that we were 15 rolling down coupons to mortgage-backed 16 securities. Therefore, we did not analyze 17 projected resulting spreads from the new and 18 rolled down positions. This was done by Joe 19 Phillips since they were involved in actual 20 planning and execution of the rolldowns." 21 Do you see that? 22 A. Right. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13815 1 Q. Why wasn't finance administration 2 notified of the rolldown so that they could see 3 how it fit within the overall financial structure 4 of the institution? 5 A. That, I don't know. I just have no 6 idea why they don't. 7 Q. It says, "Is the system that Bruce 8 Williams is looking at and plans to install going 9 to get the job done, or do we need something 10 else?" 11 Item 4, "The mortgage-backed securities 12 system will not automatically perform the 13 functions that are desired. We will provide a 14 very detailed and sophisticated accounting system 15 for keeping up with mortgage-backed securities 16 that will allow us to be operationally proficient 17 and provide data for analysis purposes." 18 Did the investment department have such 19 a system that would track the performance of the 20 portfolio after it had been repositioned for 21 rolldown? 22 A. I assume Mr. Phillips had. I -- ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13816 1 Q. You don't know? 2 A. I don't know for sure. 3 Q. Item 5, "Can Salomon Brothers solve our 4 problems or what to do to know where we are at?" 5 The answer, "We have worked with 6 Salomon Brothers and know that they cannot solve 7 our problems." 8 This is a memorandum from the chief 9 financial officer responding to questions raised 10 by the chairman of the board of USAT. And he's 11 saying that the entity that is supposed to be the 12 pre-eminent entity of mortgage-backed securities 13 doesn't have a system that can provide USAT with 14 the answers that the chairman is looking for, is 15 it not. 16 MR. VILLA: Objection. He's asking him 17 to just characterize the documents. 18 THE COURT: Excuse me? 19 MR. VILLA: He's just asking the man to 20 characterize a document that he didn't write, 21 receive, interpret at the time. 22 THE COURT: Well, he can tell us ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13817 1 whether he agrees with it. 2 A. I don't know enough about this, whether 3 Joe's reporting system was, you know, good, bad, 4 or indifferent to really comment on this. 5 Q. (BY MR. GUIDO) You were the executive 6 vice president for investments at this time, were 7 you not? 8 A. Right. 9 Q. Okay. You were in charge of this 10 portfolio at this time, were you not? 11 A. Mr. Phillips was in charge. Joe 12 Phillips was in charge. 13 Q. But he was responsible to you. Right? 14 A. Right. And to help. 15 Q. These are memoranda between the chief 16 financial officer of the organization and the 17 general -- the chairman of the board in which they 18 are discussing the chairman of the board's 19 concerns about the inability to track the 20 performance of a portfolio. And you're telling me 21 that you were unaware of the Mike Crow response to 22 Gerald Williams dated March 18th, 1986? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13818 1 A. I've never seen this document before. 2 Q. Now I'd like to move to another 3 document, and this is a document dated April 17th, 4 1986, from Doug Hansen to Jenard Gross, Barry 5 Munitz, Gerry Williams, Mike Crow, Art Berner, and 6 Bruce Williams at Tab 863. And it is Document 7 A10623. 8 Do you have A10623 in front of you? 9 A. Yes, I do. 10 Q. Okay. I want to direct your attention 11 to Item No. 4, profit targets. "Our goal has been 12 to show small quarter-to-quarter earnings 13 increases. If we took larger write-offs each 14 quarter, however, we could make a quick payback by 15 paying off debt at an initial loss. The most 16 important thing is to show some profits each 17 quarter, not necessarily increasing profits. Need 18 to trade this off versus credit match and the 19 state, who would like to see increasing profits." 20 Do you see that? 21 A. Yes, I see that. 22 Q. Do you recall whether in the spring of ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13819 1 1986 that the target was to show some profits each 2 quarter? 3 A. That was not a thought shared with me. 4 Q. It was not a thought shared with you? 5 A. (Witness shakes head negatively.) 6 Q. Now, let's move to the next document, 7 which is A10625. This is a memorandum dated April 8 21st, 1986, from Mike Crow to Barry Munitz titled 9 "revenue enhancement." 10 MR. VILLA: Excuse me. Is that 10625? 11 MR. GUIDO: 10625. 12 MR. VILLA: That wasn't on our list. 13 14 (Discussion held off the record.) 15 16 MR. GUIDO: Your Honor, this may have 17 already been in the record. It's in the record as 18 T4190, Your Honor, at Tab 1202. I'm sorry. 19 Q. (BY MR. GUIDO) It's a memo from 20 Mike Crow to Dr. Barry Munitz entitled "revenue 21 enhancement." 22 A. I have that here. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13820 1 Q. Okay. "As you requested, the following 2 are thoughts concerning revenue improvement. 3 Three, for the foreseeable future, continue to 4 take extraordinary profits from asset sales, loan 5 servicing, loan sales, bonds, branches, et cetera 6 in order to provide some level of modest 7 profitability. The bulk of the gains, however, 8 should be used to bolster reserves and take losses 9 to dispose of REO and related problem assets as 10 quickly as possible." 11 Do you see that? 12 A. Right. 13 Q. Have you ever seen this memorandum 14 before? 15 A. I don't think I have. 16 Q. In the spring of 1986, was it your 17 understanding that the non-ordinary profits were 18 being relied upon at USAT in order to show modest 19 profitability from quarter to quarter? 20 A. I was not aware that this was a policy. 21 Q. Let's go to another document, and that 22 is Tab 864, which you have in front of you, which ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13821 1 is A10628. This is a memorandum that responds to 2 the document A10623. 3 Would you have that in front of you, as 4 well? 5 A. I've lost that. 6 Q. That was the small quarter-to-quarter 7 profits. 8 9 (Discussion held off the record.) 10 11 Q. (BY MR. GUIDO) Now, this is another 12 one of those situations where we have to read two 13 documents together. 14 A. Fine. 15 Q. Now, A10628 has two responses, 4 and 6, 16 that I want to direct your attention to. The 17 first one is -- do you see the response? 18 A. No. 4? 19 Q. Yeah. No. 4, Mike Crow to Doug Hansen, 20 April 22, 1986. It says, "High priority. Will be 21 discussed in strategic planning committee." 22 Do you see that? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13822 1 A. I see that. 2 Q. And that makes reference to 4 in the 3 A10623 document which talks about profit targets. 4 A. Right. I see that. 5 Q. "Our goal has been to show small 6 quarter-to-quarter earnings increases." 7 Do you see that? 8 A. Right. I see that. 9 Q. And Mr. Crow says that's high priority. 10 A. Okay. 11 Q. And now let's move to Item 6 on 10623. 12 A. Okay. 13 Q. It says "Timing of gains. While the 14 branch sales and Weingarten sales are expected to 15 occur second quarter, we should plan for them to 16 occur third quarter. We should see how second 17 quarter looks without these gains." 18 Do you see that? 19 A. Right. 20 Q. Then Mike Crow responds, "With any 21 special gains, the second quarter will be grim. 22 Unless we let our reserves slide precipitously, we ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13823 1 will show a loss." 2 Do you see that? 3 A. I see that. 4 Q. Now, were you aware that there were 5 non-ordinary gains required in the second quarter 6 of 1986 in order to meet profit targets? 7 A. I wouldn't be aware of those things. 8 Q. Pardon? 9 A. I wouldn't be aware of such things. 10 Q. Now, let's go to the last document 11 that's in the -- which is T4192. 12 MR. NICKENS: Tab 565. 13 MR. GUIDO: 565. 14 A. 565? 15 Q. (BY MR. GUIDO) This is April 24th, 16 Mike Crow to Jenard Gross, Gerry Williams. "In 17 the spirit of bad news to the top, this is 18 something I am sure you're aware of, but I thought 19 I would remind you. It appears that several of 20 the gains that we had counted on to bolster second 21 quarter profits may be deferred/not occur: Branch 22 sale to Meribank, number one. Two, consumer loan ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13824 1 to Security Pacific; three, sale of Weingarten 2 stock. Should none of these transactions close or 3 at least get to a state where we can book an 4 accounting profit, second quarter earnings will 5 probably be at a loss position unless, one, we can 6 allow our reserves to slide substantially. This 7 may be impossible unless scheduled items decrease. 8 Two, equity arbitrage has an outstanding 9 performance for the quarter. I am unaware of any 10 significant opportunities to take additional bond 11 profits as we did in the first quarter or any 12 pending real estate sales which would produce a 13 profit." 14 A. I see that. 15 Q. Okay. Were sales made out of the 16 high-yield bond portfolio in the first quarter of 17 1986 in order to generate earnings? 18 A. I don't recall, but it says that we did 19 in the first quarter, it says here. 20 Q. So, it's your understanding the 21 reference to "bonds" means high-yield bonds? 22 A. I would guess so. I'm not sure, but ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13825 1 I -- 2 Q. Okay. Well, were there any other bonds 3 that were held by USAT in the first quarter of 4 1986? 5 A. Might be some short-term -- well, I 6 don't think bonds -- 7 Q. Pardon? 8 A. No. That would probably be all the 9 bonds they owned. I don't know for sure. 10 Q. Now, I'd like to direct your attention 11 to A10641, which is at Tab 866. 12 A. Would it already be here? 13 Q. No, I don't think so. It's a one-page 14 document from Michael Crow to Jim Wolfe and Bruce 15 Williams. It says, "At the request of several 16 important parties, would you please begin thinking 17 about third quarter profits? What are we going to 18 do to ensure profitability?" 19 Do you see that? 20 A. I see that. 21 Q. Do you recall that in the middle of the 22 year of 1986, questions arose with regard to what ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13826 1 assets could be disposed of to generate earnings 2 for the third quarter of 1986? 3 A. I don't -- I wasn't privy to this type 4 of conversation. 5 Q. What do you mean you weren't privy to 6 this type of conversation? 7 A. Well, they wouldn't ask me to ensure 8 profitability. 9 Q. Well, did they ask you to identify any 10 assets that could be sold to generate gains? 11 A. They might have asked me or I might 12 have asked Mr. Phillips or they might have asked 13 Mr. Phillips directly themselves. I just don't 14 know. 15 Q. Well, take the -- 16 A. They had the bond portfolio themselves. 17 Q. So, they knew which ones were 18 profitable and which ones were not? 19 A. (Witness nods head affirmatively.) 20 Q. Okay. Now, did they ever instruct you, 21 beginning in the middle of June of 1986, in the 22 middle of the year 1986, to dispose of any assets ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13827 1 in order to generate gains? 2 A. I don't -- I don't recall whether they 3 did or not. I just don't recall. 4 Q. Did you sit in any meetings of the 5 investment committee in the middle of 1986 in 6 which there were discussions about the sale of 7 investment securities to generate gains? 8 A. I was a member of the investment 9 committee. I was a pretty good attendee. I don't 10 think I missed many. I just can't recall whether 11 in July, August, September that this came up. It 12 may have. It may not have. 13 Q. Do you recall we discussed the 14 memorandum that was, I think, the latter part of 15 '86 about an investment committee meeting where 16 there was a discussion about identifying 17 high-yield bonds that could be sold to generate 18 gains? 19 A. I remember Mr. Crow characterizing 20 something that I said as an "impassioned plea" in 21 November. I don't know whether that was in the 22 investment committee minutes or one of his memos. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13828 1 Q. All right. Let's go on to another 2 document, which is Tab 867. This is A10645, and 3 it's a memo from Mike Crow to Jenard Gross, Barry 4 Munitz, and Gerry Williams. 5 Have you had an opportunity to review 6 that document? 7 A. I read it quite quickly, but -- 8 Q. Have you ever seen it before? 9 A. No. I've never seen this before. 10 Q. Did you review it within the last few 11 weeks? 12 A. No. I don't think -- I don't think 13 I've seen this one. 14 Q. Okay. 15 A. I think this is the first time. 16 Q. Okay. The first sentence says, 17 "Non-operating gains will be necessary to report 18 profits for the third and fourth quarters, unless 19 there is an extraordinary and unexpected 20 turnaround in the level of scheduled items." 21 Do you see that? 22 A. I see that. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13829 1 Q. Then it says, "Net Income 2 Contribution - Net of Cost of Carry." 3 Do you see that? 4 A. I see. 5 Q. It says "Equity arbitrage, Weingarten 6 stock sale, and gain on sale of investment 7 securities." 8 A. Right. 9 Q. $43,008,000. Right? 10 A. Uh-huh. (Witness nods head 11 affirmatively.) 12 Q. Is that a projected budget? 13 A. I know one thing. You can't budget 14 equity arbitrage. 15 Q. Why is that? 16 A. Well, you're a slave to the market. 17 Q. You can't budget gain on sale of 18 investment securities if your gains are dependent 19 on changes in interest rates either, can you? 20 A. It's tough. It's tougher to budget -- 21 Q. Any investments. Right? 22 A. Any securities. ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13830 1 Q. All right. Let's look at some of the 2 options that were discussed. 3 A. Okay. 4 Q. Before we do that, were you aware that 5 non-operating gains would be necessary in the 6 third and fourth quarter of 1986? 7 A. You know, I wouldn't -- I wouldn't be 8 aware of that. I was not -- really not in that 9 loop. 10 Q. You keep talking about loop, and you 11 keep talking about you being outside of this loop. 12 What is this loop you keep talking 13 about? 14 A. I'm outside of the quarterly earnings 15 loop. I'm outside of the loop. I'm in the 16 trenches trading securities. I don't -- I'm not 17 taken in with these people about what quarterly 18 earnings are going to be or may not be. 19 Q. How large was the equity arbitrage 20 portfolio in the middle of 1986? 21 A. I can't tell you that. I mean, the -- 22 over the probably '86, '87, '88 period, it varied ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13831 1 from 150 million to 400 million. And, indeed, it 2 would vary, you know, week to week because deals 3 would come off and couldn't replace them or it was 4 something else at the time. It was a very fluid 5 thing. It was somewhere between, I'd say, 150 6 million and 400 million over that two and three 7 quarter per year. I can't tell you -- 8 Q. What about high-yield bonds? 9 A. High-yield bonds, I think, probably 10 varied between 300 and 600 million over the same 11 period of time, but I don't know. 12 Q. What about mortgage-backed securities? 13 A. Well, they probably vary from -- I 14 don't know -- 500 to 2 billion, something like 15 that. These are rough generalizations. I'd have 16 to see -- obviously have to see the numbers. 17 Q. But it was a sizable portion of the 18 investments at USAT, was it not? Those three 19 categories? 20 A. Yes, yes. 21 Q. And you were the executive 22 vice president of investments. Right? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13832 1 A. Right. 2 Q. And the people who managed those 3 portfolios reported to you. Right? 4 A. Well, they reported to the investment 5 committee, as well. 6 Q. Okay. And you sat on the investment 7 committee? 8 A. Right. 9 Q. And you're telling us that you were 10 outside of the loop of the people who were 11 planning the profit potential of the institution? 12 A. Yes. 13 Q. I'd like to direct your attention to 14 some of these options that are being discussed. 15 And I'd like to direct your attention on Page 3 to 16 Option No. 4. "Sell a substantial part or all of 17 the fixed-rate junk bond portfolio and reinvest 18 the proceeds at current yields." 19 Do you see that? 20 A. I see that. 21 Q. Did you have any discussions with 22 anyone in 1986 about selling the fixed-rate junk ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13833 1 bond portfolio in order to generate gains? 2 A. Certainly not the whole thing as this 3 suggests. 4 Q. But you did have discussions with 5 regard to selling a portion of it to generate 6 gains? 7 A. Well, we saw Mr. Crow's memo that, 8 yeah, from time to time, we would be asked to -- 9 Q. Periodically, I think, was the term you 10 used when you testified. Right? 11 A. (Witness nods head affirmatively.) 12 Q. Was that usually at quarter's end? 13 A. I did my best, you know, not to make it 14 at quarter's end. 15 Q. What do you mean you did your best not 16 to make it at quarter's end? 17 A. Well, because I felt a good time to do 18 it was at an opportune time in the market rather 19 than at quarter's end. An example is the 20 "impassioned plea" memo. I was saying that if 21 you're going to do it, it's better to do it, you 22 know, in October, early November than, you know, ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13834 1 New Year's Eve because I -- you know, I don't know 2 where the market was going to be on New Year's 3 Eve. 4 Q. Now I'd like to direct your attention 5 to Option No. 5. It says, "Sell mortgage-backed 6 securities related to cash flow Series E." 7 What does cash flow Series E refer to? 8 A. That's the part of -- that's a part of 9 mortgage-backs that Joe Phillips and I didn't have 10 anything to do with, I don't believe. This was -- 11 I believe the cash flow bond was -- arose out of 12 the branch sale back in -- 13 Q. Were the -- was any of the collateral 14 sold and substituted with other collateral? 15 A. Out of the cash flow bond? 16 Q. Uh-huh. 17 A. I don't know. 18 Q. All right. Now I'd like to direct your 19 attention to Document 868, T4219. T421. It's a 20 memo dated June 26th, 1986. 21 A. Right. 22 Q. And it has two schedules attached to ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13835 1 it: Schedule 1 and Schedule 2. Right? 2 A. I see those, right. 3 Q. And it's a memo from Mike Crow to 4 Charles Hurwitz, Jenard Gross, Barry Munitz, 5 Gerry Williams, and Art Berner dated June 26, 6 1986. It says "Attached are two schedules that 7 attempt to segregate earnings performance between 8 operating and non-recurring items. While there 9 may be a disagreement as to what is operating and 10 non-operating, a definitive conclusion can be 11 drawn from the schedules. That is, with the 12 company's present structure, operating earnings 13 are significantly negative without extraordinary 14 earnings boost on a monthly basis." 15 Do you see that? 16 A. I see that, right. 17 Q. Did you know that in the middle of June 18 1986? 19 A. I don't know whether I knew that in the 20 middle of June 1986. 21 Q. Did you receive the performance reports 22 that were prepared periodically -- in fact, ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13836 1 monthly -- by the finance department at USAT? 2 A. Yes, I believe I did. 3 Q. Okay. And did those performance 4 reports report on the earnings for the time 5 periods that they covered? 6 A. Yes, they usually did. You know, they 7 were sort of retrospective. I mean, we'd get them 8 like at the end of -- March would end, and we'd 9 get them sometime in April. We wouldn't be privy 10 to these kind of commentaries, though. 11 Q. What do you mean, "the commentaries"? 12 A. Like this. 13 Q. But you were privy to the figures that 14 show -- 15 A. The figures. A bit after the fact, but 16 we did get the figures. 17 Q. You just had the figures. And those 18 were the figures that were produced by the finance 19 and administration department to assist the 20 various managers in ascertaining the status of the 21 financial condition of the organization, were they 22 not? ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13837 1 A. They gave us a picture. 2 Q. Okay. Now, this goes on and says, "As 3 with the company's present structure, operating 4 earnings are significantly negative without 5 extraordinary earnings boost on a monthly basis. 6 For the first five months of 1986, the association 7 has a net loss of approximately 4.5 million per 8 month excluding extraordinary gain. This figure 9 excludes any provision for loan losses. When one 10 couples this fact with the available gains 11 remaining (Weingarten, East Chase, et cetera) it 12 becomes apparent that an early correction of the 13 level of non-performing assets is mandatory. One 14 alternative might be combining foreclosed real 15 estate with attractive real estate and marketing 16 this as a package." 17 Then it has these schedules which have 18 summaries of income statement analysis for the 19 five months ending 5/31/86. 20 Do you see that? 21 A. Yes. 22 Q. Okay. And the second page, Schedule 2, ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13838 1 has earnings for the five months. And it has a 2 column or an entry, "profit contribution from 3 equity arbitrage." 4 A. Right. 5 Q. And it has figures from January through 6 May of 1986. Right? 7 A. Right. 8 Q. Then it has "merchant banking," January 9 through May of 1986? 10 A. Right. 11 Q. Then it has "gain on sale of 12 securities"? 13 A. Right. 14 Q. January through May of 1986. 15 What was included within the term 16 "securities" at the time you were at USAT, 17 Mr. Huebsch? 18 A. "Securities"? 19 Q. Uh-huh. 20 MR. VILLA: Excuse me. Clarification. 21 In terms of what this memo meant that he never 22 received nor sent, or what does the word ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13839 1 "securities" mean? 2 MR. GUIDO: His understanding of what 3 the term "securities" meant in the performance 4 reports at USAT during the time that he was there. 5 THE COURT: Well, we're talking about 6 this document. So, we're not -- the question 7 doesn't necessarily relate to the document? 8 MR. GUIDO: Your Honor, it's exactly 9 the same phrase that's used in the performance 10 reports. I'm asking you what his understanding of 11 this term is that uses the gain on sales of 12 securities refers to is his understanding based on 13 his experience as the executive vice president 14 having had access to the performance reports. 15 MR. VILLA: Your Honor, I object. This 16 is probably the twelfth document in a row that 17 this witness has been questioned on for an hour 18 that he never authored, received, was copied on, 19 or that the OTS in any reason believes that he 20 read. 21 Now, to ask him to interpret the word 22 "securities" in this document and what was -- what ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13840 1 the author meant by it I think really goes far 2 beyond this man's knowledge. So, I object to the 3 question. 4 MR. GUIDO: Your Honor, I happen to 5 think that the questions are highly relevant for a 6 number of reasons, including whether or not this 7 individual had performed his responsibilities 8 appropriately as the executive vice president of 9 this institution in charge of portfolios that 10 could be as large as 50 percent of a 11 6-million-dollar institution. What he knows or 12 doesn't know or didn't receive, I think, is highly 13 significant to the notice -- to the charges that 14 are in the notice that were filed by the OTS. 15 THE COURT: All right. Let's focus on 16 this exhibit. 17 What do you understand the term "gain 18 on sales of securities" to mean as reflected in 19 this exhibit? 20 THE WITNESS: Was that the question, or 21 was the question "securities"? 22 Q. (BY MR. GUIDO) What does the phrase ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13841 1 "gain on sale of securities" refer to? 2 A. Well, I can't tell from this because 3 I -- I would think that equity arbitrage would be 4 part of the gain from securities. I don't know 5 why it's segregated here. It must mean other -- 6 it must mean precisely securities other than 7 equity arbitrage securities and securities other 8 than merchant banking securities which were 9 things, I guess, like Weingarten Realty. So, gain 10 on sale of securities other than the securities 11 above. 12 Q. Okay. 13 A. That's what it means. 14 Q. What securities did USAT own other than 15 the Weingarten Realty and the equity arbitrage -- 16 A. By process of elimination, it would 17 have to be mortgage-backed securities and junk 18 bonds. 19 Q. Thank you very much. 20 Now, I'd like to move to the next 21 document. 22 THE COURT: All right. We'll adjourn ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13842 1 until 9:00 o'clock. 2 3 (Whereupon at 5:44 p.m. 4 the proceedings were recessed.) 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13843 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 9th day of July, 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 ESQUIRE DEPOSITION SERVICES (713) 524-4600 Examination by Mr. Guido 13844 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 9th day of July, 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 ESQUIRE DEPOSITION SERVICES (713) 524-4600