13845 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 10, 1998 22 13846 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 13847 1 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO., CHARLES HURWITZ, AND MAXXAM, INC.: 2 JACKS C. NICKENS, Esquire 3 of: Clements, O'Neill, Pierce & Nickens 1000 Louisiana Street, Suite 1800 4 Houston, Texas 77002 (713) 654-7608 5 ON BEHALF OF JENARD M. GROSS: 6 PAUL BLANKENSTEIN, Esquire 7 MARK A. PERRY, Esquire of: Gibson, Dunn & Crutcher 8 1050 Connecticut Avenue, N.W. Washington, D.C. 20036-5303 9 (202) 955-8500 10 ON BEHALF OF BERNER, CROW, MUNITZ AND HUEBSCH: 11 JOHN K. VILLA, Esquire MARY CLARK, Esquire 12 PAUL DUEFFERT, Esquire of: Williams & Connolly 13 725 Twelfth Street, N.W. Washington, D.C. 20005 14 (202) 434-5000 15 OTS COURT: 16 HONORABLE ARTHUR L. SHIPE Administrative Law Judge 17 Office of Financial Institutions Adjudication 1700 G Street, N.W., 6th Floor 18 Washington, D.C. 20552 Jerry Langdon, Judge Shipe's Clerk 19 REPORTED BY: 20 Ms. Marcy Clark, CSR 21 Ms. Shauna Foreman, CSR 22 . 13848 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. Mr. Guido, you may continue 5 with your examination. 6 MR. GUIDO: Your Honor, I would like to 7 double back a bit. 8 9 CONTINUED EXAMINATION 10 11 Q. (BY MR. GUIDO) Mr. Huebsch, during the 12 questioning of Mr. Huebsch, it became clear that 13 there was something puzzling about the interest 14 rate charts that we were looking at. Remember 15 4.2.1 and 4.2.2 of Exhibit 11 -- A11012, which is 16 Tab 422. 17 MR. GUIDO: And I would like to also 18 have him look at Exhibit A13005, which is at 19 Tab 1112, as well as Exhibit A1394, which is at 20 Tab 531 to clear up any confusion that there may 21 be in the record. 22 A. (Witness reviews the documents.) 13849 1 MR. GUIDO: Tab No. 244, which is the 2 Duffie expert report which has the tables on it, 3 the Tables 4.2.1 and 4.2.2. That's A11012. Then 4 there is the Mike Giarla report to USAT, which is 5 Tab 1122. That's A13005. 6 If you look at Table 4.2.1, which is 7 from the expert's report, Mr. Duffie, it says that 8 the source is the Smith Breeden Associates 9 documents. It's my understanding that 10 Smith Breeden had testified in a number of cases 11 or produced documents in a number of cases and 12 that the chart that may have been available to 13 Mr. Duffie was different than the chart that was 14 Exhibit A13005 at Tab 1122. 15 The differences are, Your Honor, if you 16 look at the 10-year chart, that in April of 1984 17 under the Table 4.2.1, the -- that has a figure of 18 12.50 after a figure of 12.02 for February 29th of 19 '84, which I presume is February 28th, '84. The 20 chart in Exhibit 13009 has a figure inserted there 21 after the 12.50 for April of 12.80, which -- 22 THE COURT: What page is that on? 13850 1 MR. GUIDO: That is on Exhibit -- it's 2 Page 2 of Exhibit 13005. 3 THE COURT: Thank you. 4 MR. GUIDO: In addition, another 5 difference between the two charts is if you look 6 down on the 10-year chart down to the month of 7 2/28/86, there is a figure of 8.14 in the chart on 8 Exhibit -- Page 2, Exhibit 13005. And there is a 9 number on Table 4.2.1 of 7.35. It appears that 10 they are duplicates of the 7.35 to fill in the gap 11 that is caused by the omission of the figure 12.80 12 as of April 30th, 1986. 13 THE COURT: I'm not following you. 14 MR. GUIDO: Okay. Your Honor, 15 basically -- 16 MR. NICKENS: It would appear that 17 Mr. Duffie made some mistakes in copying the 18 Smith Breeden charts. 19 MR. GUIDO: Well, that, I don't know 20 because I haven't been able to talk to Mr. Duffie 21 because he's been abroad. But it's very clear 22 that there are differences between the chart. 13851 1 I have reviewed the expert report 2 and -- of Mr. Duffie; and it does not appear that 3 the changes in these figures, if this exhibit, 4 13005, is the accurate set of information, is 5 materially affected or affected in any way. But I 6 still need to talk to Mr. Duffie about that. 7 THE COURT: Well, I don't know what 8 we're going do with it with Mr. Huebsch. 9 MR. GUIDO: I have some questions based 10 on Mr. Giarla's chart because it has an effect on 11 moving the interest rate number we were talking 12 about yesterday of March 31st of 11.3 -- 13 THE COURT: March 31st of what? 14 MR. GUIDO: 1985. Of moving that 15 figure of 11.38 from March 31, '85, forward to 16 April 30th, 1985. That is the effect. So, if you 17 take a look at April 30, 1985, instead of having 18 an interest rate of 10.26, you have an interest 19 rate of 11.38. If the -- taking the 11.38 figure 20 and running that down to December 31, '85, you 21 have a move of 237 basis points, Your Honor, as 22 opposed to a move of -- in the 4.21 of 220 basis 13852 1 points. I bring that out just to clarify that 2 issue. 3 MR. VILLA: Your Honor, I would object 4 to re-examining this witness. Do you intend to 5 re-examine him on these differences? 6 MR. GUIDO: No, I do not. I'm just 7 clarifying for the record the difference between 8 the two charts that are there in light of the fact 9 that when we were looking at the charts yesterday, 10 it seemed to be that when we looked at 4.2.2 and 11 compared it with 4.2.1, there appeared to be some 12 inconsistencies. And I believe that will explain 13 those. I wanted the record to be clear on that 14 point. 15 A. The 4.2.2 is for zero coupons, and the 16 4.2.1 is for coupons. 17 Q. That could explain the difference 18 between the two? 19 A. Perhaps. 20 Q. Now -- 21 THE COURT: If this is an issue, I 22 don't consider it to be fully explained and 13853 1 established; but let's go on. 2 MR. GUIDO: Your Honor, it may not be 3 an issue. I just wanted the record to be clear 4 that we went and ascertained, based on what 5 happened in the Court yesterday, that there are 6 differences between Exhibit 13005 and the expert 7 report, A11012 in this regard. I do not believe 8 that it is materially significant; but I just 9 felt, for purposes of completeness, that the OTS 10 had an obligation to bring it to the Court's 11 attention and to bring it to opposing counsel's 12 attention if they believe it's material enough to 13 make an issue of it going forward. 14 Q. (BY MR. GUIDO) Now, you indicated -- 15 Mr. Huebsch, you indicated that you -- I want you 16 to keep 13005 out. 17 You indicated that you were surprised 18 at the events that occurred between the spring of 19 1985 and the spring of 1986 with regard to changes 20 in the composition of the status of the 21 mortgage-backed security portfolio at USAT. 22 Do you recall that testimony? 13854 1 MR. VILLA: I'll object to 2 characterizing the man's testimony. He did ask 3 him for a day and a half about these issues. 4 MR. KEETON: I object because it's a 5 total mischaracterization of what the witness 6 said. 7 MR. VILLA: If he would just ask him 8 whether he was surprised, it would be appropriate. 9 THE COURT: Restate it. 10 Q. (BY MR. GUIDO) You testified that you 11 were surprised about some of the events that 12 occurred between the spring of 1985 and '86 with 13 regard to the mortgage-backed securities 14 portfolio. 15 MR. KEETON: Your Honor, I object. 16 What he said was the pay-down rate surprised him. 17 Q. (BY MR. GUIDO) Well, you testified -- 18 MR. GUIDO: If I may, Your Honor. 19 THE COURT: Well, restate your 20 question. 21 Q. (BY MR. GUIDO) Did you testify 22 yesterday that you were surprised by events that 13855 1 occurred between April 1985 or spring of 1985 and 2 the spring of 1986 that impacted the 3 mortgage-backed security portfolio? 4 A. I stated that I was surprised by the 5 rate of acceleration of the prepayments in 6 mortgage-backed securities. 7 Q. I would like to now show you your 8 deposition that you gave to the OTS in this 9 proceeding. I would like to direct your attention 10 to Page 107 of that deposition. In fact, I would 11 like you to back up to Page 106. Excuse me. 12 See where it says at the top of the 13 page, "During the period of time that the interest 14 rates were moving down and prepayment speeds were 15 changing in early 1986, did Joe Phillips ever 16 report to any committee or any officials what the 17 status of that portfolio was?" 18 Then you pick up with, "Yes, it did." 19 Do you see that? 20 A. Yes. 21 Q. I would like you to read the next two 22 pages or the next three pages. 13856 1 A. (Witness complies.) I've read it: 2 106, 7, and 8. 3 Q. Have you finished through 108? 4 A. Yes. 5 Q. Now, does that testimony refresh your 6 recollection as to what it was that surprised you 7 about the decline of interest rates between 1985 8 to spring of 1986? 9 A. Yes. 10 Q. Okay. Was it the drop in interest 11 rates that surprised you? 12 A. Well, it was more the prepayment 13 acceleration that surprised me. 14 Q. Does that testimony say anything about 15 prepayments? 16 MR. VILLA: Yes, it does, Your Honor. 17 MR. KEETON: First sentence does. 18 MR. VILLA: The question wasn't the 19 testimony. It was what the witness remembers. He 20 has been asked to read a deposition from three 21 years ago. It's not proper cross-examination. 22 Q. (BY MR. GUIDO) Was what you were 13857 1 surprised about in 1985 was a rapid drop in 2 interest rates or the acceleration in prepayments 3 in relationship to a drop in interest rates? 4 A. Well, I may be surprised at both; but I 5 was particularly surprised about the acceleration 6 of the prepayment rates caused by that drop. 7 Q. Was it because you didn't anticipate 8 that the prepayment rate would accelerate at that 9 rate given a 200 basis point drop? Is that your 10 testimony? 11 A. Yes. 12 Q. Now, I would like to direct your 13 attention to another document that I have put in 14 front of you, which is A -- excuse me -- A1394, 15 which is the investment committee minutes of 16 May 28th, 1986. I would like to direct your 17 attention to the memorandum that's attached to 18 that dated May 27th, 1986, from Bruce Williams to 19 the investment committee which says, "MBS 20 prepayment speed assumptions" which is at Bates 21 stamp US3004762, 63. 22 Do you see that? 13858 1 A. Okay. 2 Q. I'm directing your attention to the 3 chart, "MBS prepayment assumptions." 4 A. The chart on 4763? 5 Q. 4763. 6 A. I see that. 7 Q. Those are prepayment assumptions that 8 were presented to the investment committee of May 9 1986? 10 A. Right. 11 Q. I would like to direct your attention 12 to the Exhibit A13005 that we were just talking 13 about with the interest rate assumptions that 14 Smith Breeden had for the time period from 15 January 31, 1984, through May 30, 1986. 16 MR. NICKENS: Did I hear him say those 17 were Smith Breeden assumptions? 18 MR. GUIDO: That's right. That's what 19 Mike Giarla testified to, that those were the 20 assumptions that Smith Breeden had developed for 21 their interest rates -- 22 THE COURT: These are not actual 13859 1 interest rates. 2 MR. GUIDO: I didn't mean interest 3 rates, Your Honor. These are assumed prepayment 4 rates. 5 MR. NICKENS: I thought you were 6 referring us back to the interest rates. 7 MR. GUIDO: No. I'm referring you back 8 to the prepayment rates chart which is on Page 3 9 of Exhibit A13005. 10 MR. NICKENS: And what tab number is 11 that? 12 MR. GUIDO: At Tab 1122. 13 MR. NICKENS: Okay. 14 A. 1123? 15 Q. (BY MR. GUIDO) It's at Tab 1122. You 16 have it as an exhibit number. You're fine. 17 Are the actual prepayment rates that 18 are set out for coupon Fannie Mae 12s and Freddie 19 Mac 12s on the actual prepayment schedule that 20 Bruce Williams submitted to the investment 21 committee significantly different than the actual 22 prepayments that show for the month of December of 13860 1 nineteen -- December 31, 1985, for the coupons 11 2 and 12 percent? 3 MR. VILLA: I'll object as 4 mischaracterizing the document. They don't say 5 they are actual prepayment rates. 6 THE COURT: Which one is the actual? 7 MR. GUIDO: The actual prepayment rates 8 on the May 27th, 1986 document say "actual three 9 months average" in the far right-hand column, 10 Your Honor. 11 THE COURT: Okay. 12 MR. NICKENS: Your Honor, I -- 13 MR. GUIDO: They show, Your Honor, for 14 Fannie Mae 11, 7.7 and Fannie Mae 12s at 25.6. 15 For Freddie Mac 11s, they show 10.9. And for 16 Freddie Mac 12s, they show 27.3 in terms of the 17 CPR. For Fannie Mae 10s under the Smith Breeden 18 assumptions of December 31, 1985, it shows assumed 19 interest -- prepayment rates of 15.0 for the 11s 20 and 20.0 for the 12s. 21 Q. (BY MR. GUIDO) My question for 22 Mr. Huebsch: Are those figures for the assumed 13861 1 rates significantly different than the actual 2 rates that were reported to the investment 3 committee in May of 1986? 4 MR. NICKENS: Your Honor, I apologize. 5 I'm simply not following. The page that I had 6 turned to in response to Mr. Guido's description 7 was the prepayment assumptions page in 8 Exhibit A1394, and I simply don't know where he's 9 reading from if there are actual prepayments. 10 THE COURT: I believe it's the extreme 11 right column that's says "actual" out on the side. 12 MR. NICKENS: Thank you. 13 Q. (BY MR. GUIDO) Now, were the actual 14 figures for 11 and 12 coupons that are in 15 Exhibit A1300 -- A1394, the actual figures in the 16 far right-hand column, significantly different 17 than those that show up on the Smith Breeden 18 assumptions in A13005 for December 31, 1985? 19 A. Okay. I'm looking at -- we're talking 20 about the 12 coupon? 21 Q. 11s and 12s. 22 A. I'm seeing -- just to get it straight, 13862 1 I'm seeing, from this page, 15 percent and 2 20 percent. 3 Q. 15 percent for the 11s. 20 percent for 4 the 12s for December 31, 1985? 5 A. That's right. 6 Q. And on the -- Exhibit A1394, the 7 May 26, 1986 page, it says "MBS prepayment 8 assumptions." In the far right-hand column, it 9 says "actual three-month average." It shows for 10 Fannie Mae 11s at 7.7, Fannie Mae 12s at 25.6. 11 For Freddie Mac 11s, it shows 10.9; and for 12 Freddie Mac 12s, it shows 27.3. 13 My question is: Were the actual 14 prepayment assumptions reflected in A1394 15 significantly higher than the prepayment 16 assumptions that show up on A13005, which is the 17 Smith Breeden assumptions for December 31, 1985? 18 A. All right. If we can take the Fannie 19 Mae 11s, the Smith Breeden assumption is 20 significantly higher than the actual; and the 21 Fannie Mae 12s is significantly lower. 22 Q. What do you mean by "significantly"? 13863 1 A. It's 20 versus 25.6. Are we talking 2 about the same numbers? 3 Q. Yes. 4 A. Okay. 5 Q. So, you're saying that the five points 6 from 20 to 25.6 is significantly higher? 7 A. Yes. But the 7.70 actual on the 11s is 8 significantly lower than the 15. 9 Q. Take the Freddie Mac 11s and the 10 Freddie Mac 12s. 11 A. Okay. I have, on the 11s, 10.90 versus 12 15.0 and 27.30 on the actual to 20.0 on the 13 assumed. 14 Q. So, is the 10.9 similar or 15 significantly different? 16 A. I think they are both different, both 17 ways. 18 Q. Okay. 19 A. It looks like to me. 20 Q. Now -- 21 A. But I'm just looking at these things. 22 Q. I understand that. I'm going to take 13864 1 you one step further. Now, let's take a look at 2 A13005. Okay? 3 A. I'm here. 4 Q. And look at the interest rate, the 5 actual interest rates during that time period. 6 A. That's in the previous page? 7 Q. Right. We've been comparing 8 December 31, 1985, in terms of the assumptions. 9 Okay? The Smith Breeden assumptions to the actual 10 figures from May 27th, 1986. Right? 11 A. Well, I don't know that. 12 Q. What do you mean you don't know that? 13 A. I have these -- I have this thing dated 14 May 27th. It says, "Actual three-month average"; 15 and I don't know what months those are. 16 Q. Are you assuming that they are not the 17 most recent three months? 18 A. Which were -- do we have May in here? 19 Q. May isn't completed yet. Right? 20 A. It would appear to. 21 Q. It would be fair to assume it's the 22 most recent three completed months? 13865 1 A. I don't know. 2 MR. VILLA: He already elicited from 3 the witness there's a 60- or 90-day lag from the 4 direct-examination of this witness. He's really 5 confusing this witness on an issue he ought to 6 present to an expert. There's no basis for the 7 assumption that we're looking at the most recent 8 three months. 9 MR. GUIDO: I think Mr. Huebsch has 10 testified about the document. I think the 11 document has the most recent three-month time 12 period. 13 THE COURT: What's the basis for that? 14 MR. GUIDO: Mr. Williams testified 15 about this particular document. He's the one who 16 prepared the document and was asked about the 17 accuracy of the document. 18 THE COURT: Well, if he did, then we 19 will assume that. 20 MR. GUIDO: The document is in the 21 record, Your Honor. I mean, I can go to the 22 assumptions. I can use the assumptions and do the 13866 1 same thing. I was trying to use the actual 2 results to make it easier. May I finish? 3 MR. VILLA: I would like a standing 4 objection to asking him to assume things that I 5 think have not been established in the record and 6 now asking him to draw conclusions. 7 THE COURT: You may. Let's continue. 8 MR. GUIDO: Believe me, Your Honor, 9 we're perfectly capable to put on experts to 10 testify to this; but I don't believe it's 11 necessary. 12 Q. (BY MR. GUIDO) The interest rates 13 between the time of this May 27th, 1986 report and 14 December 31 dropped significantly, did they not? 15 A. That's right. Excuse me, Mr. Guido. 16 These are not Mr. Williams' figures, are they? 17 Q. These are figures that Mr. Williams 18 compiled, as the cover memo says, for the 19 investment committee for its use. 20 A. Well, the actual source -- what is the 21 actual source? 22 Q. I don't recall what his testimony was 13867 1 about the actual source. Are you questioning the 2 accuracy of anything that Mr. Williams did? 3 A. I just am asking about where these 4 numbers came from. I don't know. 5 Q. Now, you did testify yesterday that the 6 source of prepayment figures that were used by 7 USAT were figures that were published by Fannie 8 Mae and Freddie Mac, did you not? 9 A. No, I did not testify -- I said that 10 was one of the factors used. 11 Q. What other published sources were used 12 to ascertain Freddie Mac and Fannie Mae prepayment 13 figures? 14 A. That was a source, but we -- I'm sure 15 Mr. Phillips used those numbers and, in addition 16 to that, got the various commentary from the 17 experts in the street, much as Mr. Williams 18 probably did. 19 Q. Okay. Now, if you want, we can go 20 through the estimated prepayment figures and 21 compare them to the prepayment figures that show 22 up in the Smith Breeden assumptions, if you want. 13868 1 MR. NICKENS: Your Honor, if the 2 question is what Mr. Huebsch wants, I suspect it 3 would not be -- 4 THE COURT: Sustained. 5 MR. GUIDO: Thank you, Your Honor. 6 Q. (BY MR. GUIDO) Now, between 7 December 31, 1985, and May of 1986, had interest 8 rates declined significantly? 9 A. They did decline. 10 Q. Okay. By more than 100 basis points? 11 A. Well, this would indicate on the 12 10 year, they declined around 100 -- a little less 13 than 100 from December to May -- through May but 14 maybe through April over 150. 15 Q. Okay. 16 A. That's -- I'm just reading from this. 17 Q. Now, is that what you testified 18 yesterday was a significant drop? 19 A. Well, there was a drop in interest 20 rates, yes. 21 Q. And did it surprise you? 22 A. 150 basis points from that level is a 13869 1 significant drop. 2 Q. Now, from the spring of 1985 to 3 December 1985 using the Smith Breeden figures, 4 what -- on Exhibit A13005, what was the drop? 5 A. The drop was about 250. 6 Q. What was the drop between April and 7 October 31, 1985? 8 A. Give me that again, please. 9 Q. April 30th, 1985, and October 31st, 10 1985. 11 A. It was about -- less than 150. 139. 12 Q. Was that a significant drop? 13 A. That was a good drop. 14 Q. Did that surprise you? 15 A. I don't know whether "surprise" is a 16 good word. 17 Q. Were you on the asset/liability 18 committee? 19 A. Right, yes. 20 Q. And was one of the functions of the 21 asset/liability committee to project interest 22 rates going forward? 13870 1 A. I -- the function on the 2 asset/liability committee so far as rates was 3 this: That we would basically collect a consensus 4 of what the various economists thought where 5 interest rates were going and to see -- to, you 6 know, see how that fitted into our planning. And 7 we could reject them or go with them or use them 8 somewhat. There was no, you know, rigid -- rigid 9 estimation of interest rates in saying that they 10 would be, you know, interest rate X in three 11 months. We had no -- there wasn't anything like 12 that. 13 Q. Did the asset/liability committee in 14 its reports periodically report what it thought 15 interest rates were likely to do going forward? 16 A. Right. 17 Q. And during the period from the spring 18 of 1985 through December of 1985, did the 19 asset/liability committee project if interest 20 rates were going to remain relatively steady or 21 rise? 22 A. I don't remember. I would have to look 13871 1 back. 2 Q. Whatever the documents said would speak 3 for themselves? 4 A. Whatever. I don't know whether our 5 guesses were correct. 6 Q. You indicated in your deposition that 7 you were surprised about the decline in interest 8 rates between the spring of '85 and -- 9 A. Yeah. I keep going back to that we 10 were most surprised by the acceleration of 11 prepayment rates. 12 Q. When you put the portfolio on, did you 13 attempt to ascertain what the relationship was to 14 prepayments to changes in interest rates? 15 A. We attempted to, yes. 16 Q. Were the figures significantly 17 different than those that are shown on the table 18 in the Smith Breeden document, A13005, Page 3? 19 A. I don't really know, Mr. Guido. I 20 don't really know. 21 Q. Now, on October 31st, 1985, you 22 testified that the record shows that interest 13872 1 rates dropped somewhere between 125 and 150 basis 2 points between the spring and October 31, 1985. 3 A. Well, I think it was specifically April 4 that you -- 5 Q. April. 6 A. April to October was about 139. 7 Q. Okay. Was that a significant drop? 8 A. It was a significant drop, yes. 9 Q. Were you and Joe Phillips monitoring 10 the portfolio to ascertain the impact on 11 prepayment speeds in relationship to changes in 12 interest rates at that time? 13 A. I'm sure Mr. Phillips was. I'm sure 14 Mr. Phillips collected the monthly factors from 15 the agencies which probably, by that time, 16 reflected the CPRs were reflecting that decline in 17 interest rates. That's really all I remember. 18 Q. Okay. Now, the rolldown that you 19 testified to, the exhibit that I showed you, 20 remember, it shows that the first transaction 21 occurred in December of 1985? 22 A. That's right. I recall that. 13873 1 Q. And why did you wait until December of 2 1985 to initiate the first transaction? 3 A. Well, Mr. Phillips was running the 4 portfolio. He was much more on top of the weekly, 5 monthly, and daily figures; and I left it really 6 to his judgment. 7 Q. Well, I mean, did you discuss it with 8 him? 9 A. From time to time, we discussed it -- 10 Q. Do you recall discussing -- 11 MR. VILLA: Objection. Let him at 12 least finish his answer. He's very soft-spoken. 13 MR. GUIDO: I'm sorry. 14 A. From time to time, I believe we 15 discussed interest rates. 16 Q. (BY MR. GUIDO) Well, did you discuss, 17 prior to December when the rolldown actually 18 started, taking any action to protect the 19 portfolio from any harm caused by a decline in 20 interest rates? 21 A. I'm sure Mr. Phillips, you know, 22 considered it. He was, you know, a very bright 13874 1 guy, a very diligent worker. I'm sure he 2 considered it. 3 Q. Well, do you recall any specific 4 discussion with him -- 5 A. I don't -- I don't recall any specific 6 discussions. We always had a general conversation 7 about interest rates. 8 Q. Do you know why nothing was done 9 between October 31, 1985, and December of 1985? 10 A. I don't know why. Perhaps he might 11 have thought that interest rates were bottoming 12 and going to go up and the CPRs would turn around. 13 It's a possibility. 14 I don't know what went through his 15 thought process. I relied on his judgment. 16 Q. Well, I mean -- and you don't recall 17 any discussion of why nothing was done until 18 December of 1985? 19 A. You know, I left it -- we were aware of 20 the facts, but I left it to his judgment because 21 he was on top of these things much more than I 22 was. 13875 1 Q. I'm trying to find out whether or not 2 you know of anything he told you about why he 3 waited until December of 1985. 4 A. I don't remember anything specific. 5 Q. Do you recall anything generally? 6 A. Well, what I generally recall is that 7 we constantly talked about interest rates and we 8 talked about the pay-downs. 9 Q. Had either of you ever managed a 10 portfolio of mortgage-backed securities hedged 11 with swaps during an interest rate move prior to 12 this time? 13 A. I hadn't. I don't -- Mr. Phillips had 14 worked at a savings and loan before, at least a 15 savings and loan holding company. I don't know -- 16 I don't recall whether he -- he was in charge of 17 their portfolio. But he had ten years in 18 fixed-income experience. 19 Now, whether he managed a -- I doubt 20 whether he managed a hedged portfolio -- 21 Q. A hedged portfolio with swaps? 22 A. But I don't know for sure. 13876 1 Q. Well, you interviewed him, didn't you? 2 A. Yes. 3 Q. And wasn't his experience in fixed-rate 4 instruments other than mortgage-backed securities? 5 A. I know his experience at American 6 General was probably as you suggest; but he did 7 work, I believe, for a savings and loan holding 8 company. But I can't recall right now whether he 9 managed their portfolio. 10 Q. Now, when -- you went back and you had 11 discussions with senior management about creating 12 a mortgage-backed security portfolio; and you had 13 discussions with them about a portfolio manager, 14 okay, for that portfolio? 15 A. Right, yes. 16 Q. And who did you consider for the 17 position of portfolio manager? 18 A. It was -- it was thought by all that 19 Mr. Phillips would be capable to do it. 20 Q. Okay. Now, it was you and what you've 21 characterized as senior management that had these 22 discussions. Right? 13877 1 A. Yes. 2 Q. Had any of you ever had any experience 3 overseeing the management of a mortgage-backed 4 security hedged portfolio at the time? 5 MR. VILLA: Your Honor, actually, we 6 went through this on the first day and the second 7 day usually on a person-by-person basis. So, I 8 object as being repetitive. 9 THE COURT: Sounds a little repetitive. 10 How many questions do you have on this? 11 MR. GUIDO: I'm almost finished with 12 this line of questioning, Your Honor. 13 THE COURT: All right. I'll deny the 14 objection. You may answer the question. 15 A. I don't know whether any of them had 16 experience with mortgage-backs. They were all, 17 you know, very astute businessmen. They had made 18 investments, whatever. I doubt whether any of 19 them managed a hedged portfolio of mortgage-backed 20 securities. 21 Q. (BY MR. GUIDO) Did you have discussions 22 with Joe Phillips or anyone between October 31, 13878 1 1985, and December 31 of 1985 that we should wait 2 to sell the mortgage-backed securities until the 3 price had peaked? 4 A. I've spent 40 years tying to find the 5 peak in prices. I just have never been able to, 6 Mr. Guido. I might have discussions about the 7 peak in prices, but I could -- I don't know 8 about -- I just never seem to get the peak in 9 prices. 10 Q. Did you have any discussions with 11 Mr. Phillips or anyone about waiting to see if the 12 prices -- if the mortgage-backed securities would 13 increase between October 31, 1985, and 14 December 31, 1985? 15 A. I cannot recall anything along that. 16 Q. You don't know one way or the other? 17 A. I don't know. 18 Q. Do you recall having any discussions 19 with any of the senior management that after the 20 rolldown had occurred and you ascertained the 21 consequences of it, that Joe Phillips had waited 22 too long to rebalance that portfolio? 13879 1 A. I don't recall specifically that 2 anybody brought that up at that time. 3 Q. Did anyone in the year 1986, after the 4 Smith Breeden people had done an analysis of that 5 portfolio, raise that with you? 6 A. I don't know whether they raised it 7 with me. I can tell you that there was a general 8 disappointment in the -- the RCA program that we 9 had engaged in. I think everybody felt 10 Mr. Phillips did an excellent job. It was a very 11 difficult environment for those kind of programs. 12 Q. Did you ever tell Mr. Phillips that "we 13 waited too long to do the rolldown"? 14 A. I don't believe I did. 15 Q. Did anyone ever mention to you that 16 they thought that you and he had waited too long 17 to begin the -- 18 A. No, I don't think it came up. 19 Q. It never came up? 20 A. I don't think it came up. I can't 21 remember. 22 Q. Did anyone ever attempt to ascertain, 13880 1 after they got the Smith Breeden analysis, what 2 had happened to the portfolio to ascertain why 3 that happened? 4 MR. VILLA: Excuse me. I don't think 5 he can answer as to whether everybody did it. 6 Whether anybody ever did it, I think, is beyond 7 this witness. 8 MR. KEETON: I would like to know what 9 the reference to "that" is. 10 MR. GUIDO: I'll rephrase. 11 THE COURT: I think you better restate 12 your question. 13 Q. (BY MR. GUIDO) Did you or senior 14 management ever make an effort to ascertain why 15 the mortgage-backed security portfolio had 16 performed so disappointingly? 17 A. I can't speak for senior management. I 18 did not go back and analyze -- I didn't go back 19 and analyze Mr. Phillips' action. I relied on 20 Mr. Phillips. I thought he did a good job during 21 a very trying period. 22 Q. Did you participate in any discussions 13881 1 after you learned what had happened to that 2 portfolio from Smith Breeden on expanding the 3 mortgage-backed security portfolio at USAT? 4 A. I don't remember whether I participated 5 in any discussions other than when it came up in 6 the investment committee meeting, if it did. 7 Q. Well, did the portfolio increase in the 8 middle of 1986? 9 A. I don't -- to my knowledge, it did not. 10 Q. Well, maybe you're having a problem 11 with the term "the portfolio." What do you think 12 the reference to "the portfolio" means? 13 A. Are we still talking of Joe's 14 portfolio? 15 Q. I'm talking about mortgage-backed 16 securities at USAT hedged with instruments. Did 17 they increase after you learned from Smith Breeden 18 that the portfolios that Joe Phillips had been 19 managing had performed so poorly? 20 MR. VILLA: I'll object to his 21 characterization. Why doesn't he -- he 22 characterizes the words "disappointing," 13882 1 "performing so poorly." 2 Can he just ask the witness the 3 question: Was there a discussion after this 4 point? 5 He is throwing in all kinds of 6 characterizations of the conduct, the history of 7 the mortgage-backed securities portfolio which I 8 think are all objectionable. If he would just ask 9 the witness questions about when he did things and 10 what he knew, I wouldn't have to stand up and make 11 these objections. 12 THE COURT: Break your questions down. 13 Q. (BY MR. GUIDO) What was your reaction 14 to the performance of the mortgage-backed security 15 portfolios that were managed by Joe Phillips? 16 A. I was disappointed. 17 Q. Now, after you learned that and after 18 you were disappointed, did you participate in any 19 discussions to increase the size of 20 mortgage-backed securities portfolios at USAT? 21 A. And we're talking about what time 22 frame? 13883 1 Q. After June of 1986. 2 A. Can I give you my recollections of what 3 happened? 4 Q. Please. 5 A. It was decided, I believe, in the late 6 spring or early summer -- senior management said 7 we should go out and get an expert. I think 8 Smith Breeden were the experts. The existing 9 mortgage-backed portfolios were then run by a 10 committee: Mr. Phillips, Mr. Williams, 11 Mr. Hansen. And they would consult with 12 Smith Breeden. 13 There was also -- senior management 14 went out and started interviewing people with the 15 thought of getting somebody who specialized in 16 mortgage-backed securities and hedging devices. 17 I believe there was little or no growth 18 in the mortgage-backed security portfolio through 19 the middle of '86 until Ms. Laurenson came -- 20 joined the association, and I believe that was the 21 latter part of '86. But I'm -- I have to be rough 22 on these dates because I don't -- don't hold me to 13884 1 these dates because I'm not that sure. But this 2 is a rough history of the middle of 1986. 3 Q. Okay. My question is: Subsequent to 4 June 30, 1986, did you participate in any 5 discussions in which it was discussed -- 6 discussions about increasing the size of the 7 mortgage-backed security portfolios held by USAT? 8 A. Subsequent? 9 Q. To June 30, 1986. 10 A. I believe nothing happened until 11 Ms. Laurenson came aboard, and then the investment 12 committee acted to increase the mortgage-backs. 13 Q. Between June 30, 1986, and 14 Ms. Laurenson's arrival, who managed the 15 mortgage-backed securities portfolio? 16 A. I believe it was this committee. 17 Q. What was the committee? 18 A. I don't remember the name of the 19 committee; but it was Mr. Phillips and Mr. Hansen, 20 Mister -- either Mr. Williams or Mr. Crow, both of 21 them. But they -- they also were advised by 22 Smith Breeden on the mortgage-back portfolio. 13885 1 Q. Were they authorized to trade that 2 portfolio for gains? 3 A. That committee -- I don't know their 4 specific charter. I don't know -- I know there 5 was a committee. I don't know the specific limits 6 and things they could do. I just -- I don't know. 7 Q. Did they make sales out of the 8 mortgage-backed security portfolio to generate 9 gains? 10 A. I -- I don't know. I just -- I don't 11 recall. 12 Q. All right. Let's go to where we picked 13 up -- left off yesterday with Exhibit T4226, 14 Tab 869. This is a memorandum entitled, "United 15 restructuring, July 1986" dated July 14, 1986, 16 from Michael Crow to Jenard Gross, Barry Munitz, 17 and G.R. Williams with copies to Art Berner and 18 Bruce Williams. It says at the outset, "You 19 requested my observations on restructuring for 20 survival-enhanced earnings. This memo will 21 attempt to outline such a presentation. It is 22 presented for discussion purposes only." 13886 1 Now, do you recall ever having any 2 discussions with Michael Crow about business plans 3 or business objectives that needed to be 4 undertaken to restructure United to make it more 5 profitable in 1986? 6 A. I don't recall any. 7 Q. Do you recall ever participating in any 8 discussions about actions to be taken to increase 9 the profitability of USAT in 1986? 10 A. On a strategy -- on a strategy level, I 11 wasn't really involved. I was very conscious of 12 making money and having USAT survive in my way, 13 which was equity risk arbitrage and things like 14 that. I was very conscious of it, but I was not 15 operating at the strategy level. 16 Q. Did you ever participate in any 17 discussions about how large the equity arbitrage 18 portfolio should be, for example, to sort of 19 provide to USAT? 20 A. What I would say to the investment 21 committee people, I would say -- I feel that at 22 this time, money could be well spent in the equity 13887 1 arbitrage area because there were a large number 2 of deals, good spreads. I would make those kind 3 of comments. 4 Q. Would you make recommendations about 5 how large the portfolio could be and still make a 6 profit? 7 A. Well, the size didn't necessarily mean 8 profit. I mean, it may -- I could make a profit 9 on 100 million. I could make a profit on 10 200 million. 11 Q. But the likelihood of making a larger 12 profit is greater if the size of the portfolio is 13 greater, isn't it? 14 A. Hopefully, but that has not always 15 happened to me, Mr. Guido. 16 Q. Okay, or to a number of us. 17 A. I tried my best at all sizes. 18 Q. But when you had discussions about the 19 size of the portfolio or the amount of 20 opportunities that were out there, did you give 21 people some impression of what the size of the 22 portfolio could be? 13888 1 A. No, I didn't really. I would just say 2 it was -- I felt it was an opportune time, and 3 money could be well-invested in this -- in this 4 spot right now. 5 Q. Just take the equity arbitrage 6 portfolio. 7 A. Sure. 8 Q. What does its size vary from, from 9 large to small? 10 A. I think we -- I think we -- I think we 11 determined yesterday over the period '85 through 12 sometime well into '88, it probably varied 13 between -- because '85 was a "ramp up" year. We 14 had just started. Generally, it was probably 15 between 100 million and 400. 16 Q. Is that a significant difference in the 17 size of an equity arbitrage portfolio? 18 A. Yes, it is. 19 Q. Pardon? 20 A. Yes, it is. 21 Q. Now, did you have discussions with 22 anyone about how that fit in with USAT's business 13889 1 plan? 2 A. You know, I've always told everybody I 3 thought it was a good place to place money. I 4 thought we could make a high return on it. But in 5 the -- I believe USAT had limitations as to -- 6 there were regulatory limitations of how much you 7 could put in corporate securities. I believe 8 equity arbitrage came in under corporate 9 securities. 10 So, in the sense it was always -- had 11 to be -- the size of the equity arbitrage 12 portfolio always had to be considered along with 13 the size of the junk bond portfolio, special 14 investments that were equity investments. It was 15 not -- so, that was a consideration: Size. 16 Q. And how was the size of those three 17 portfolios combined affected by regulations? 18 A. Well, I believe there was a limit to 19 the amount that a thrift, any thrift, could put in 20 corporate securities. 21 Q. And corporate securities included 22 high-yield bonds, common stock, and other direct 13890 1 investments? 2 A. Right, yes. 3 Q. Okay. And was that a percentage of the 4 total assets? 5 A. I forget what the regulatory limit was. 6 Q. But you recall that there was some sort 7 of a limit? 8 A. There was some sort of a limit. 9 Q. And who provided you with information 10 about what that limit was? 11 A. I suppose, ultimately, the legal 12 department would tell us. 13 Q. Did that limit increase -- let's take 14 January 1, 1986, through December -- November, 15 1988. Did that aggregate limit increase over 16 time? 17 A. Equity risk arb, no. It decreased. 18 Q. And did the limit for high-yield bonds 19 increase during that period? 20 A. That, I can't be -- I don't know. I 21 think it topped out as we moved into '88 in junk 22 bonds, but I don't really know. I know equity 13891 1 risk arbitrage tailed off substantially from the 2 middle of '87 to, let's say, February of '88. 3 Q. Was that because of this regulatory 4 cap? 5 A. That might not have been the whole 6 reason. 7 Q. Well, what were the reasons? 8 A. Well, I can't tell the whole reason 9 because I don't know; but I think -- I think 10 people were -- became very cautious about anything 11 to do with common stocks after the plunge in 1987; 12 and they were, you know, reluctant to build up 13 after that decline. 14 Q. What did the plunge in 1987 do to 15 common stocks? 16 A. Well, I think -- well, I know one day, 17 it went down 500 points. 18 Q. Where was it -- 19 A. In the 2700 level for the Dow, 2500. 20 Q. Where was it three months later? 21 A. Three months later, it was -- it had 22 made a nice recovery. 13892 1 Q. So, it was back to where it was before 2 the crash? 3 A. That, I don't know. 4 Q. But it made a significant recovery? 5 A. Yes. Not the first couple of months. 6 But as we moved into January and February, it 7 started to revive. 8 Q. Now, what happened to high-yield bonds 9 during the crash? 10 A. Well, I think -- I don't remember 11 specifically; but there was, you know, a general 12 flight to quality. I mean, investors, you know, 13 opted for Treasury bills, notes, Treasury bonds. 14 They just didn't want to have a thing to do with 15 equity or junk bonds. 16 THE COURT: Mr. Guido, could I 17 interrupt just a moment? 18 Could you give us a succinct definition 19 of the equity risk arbitrage program? 20 THE WITNESS: Sure. I would be happy 21 to. 22 Basically, we would wait for an 13893 1 announcement, public announcement, that one 2 company was taking over another company. We would 3 then purchase the acquired company if there was a 4 spread between the offer the acquirer made and 5 what the acquiree was selling it. We would buy 6 the acquiree short -- we would short the stock of 7 the acquirer. If the acquirer was offering cash, 8 all cash, we would just buy the acquiree and take 9 advantage of what its price was selling at and the 10 price -- the cash price offered by the acquirer. 11 And we would make our money on that spread between 12 the offer and what the security of the acquiree 13 was trading at. 14 THE COURT: Thank you. 15 MR. GUIDO: May I ask a few follow-up 16 questions, Your Honor? 17 THE COURT: Yes. 18 Q. (BY MR. GUIDO) You said that the equity 19 arbitrage was to purchase stocks in anticipation 20 of someone making an acquisition at a price that 21 was greater than the price that was paid? 22 A. No, I did not say that. 13894 1 MR. KEETON: I object. I he didn't 2 even listen to the answer. 3 A. We did not anticipate -- 4 Q. (BY MR. GUIDO) You did not 5 anticipate -- 6 A. As I told His Honor, we waited for 7 public -- 8 Q. Okay. So, you would buy the stock if 9 the price was lower than what the announced 10 acquisition price was? 11 A. Correct. 12 Q. Did that occur in all instances? 13 A. I would say it occurred in 98 percent. 14 Q. What were the 2 percent, Mr. Huebsch? 15 A. I knew you were -- 16 Q. I thought you knew I was going to ask 17 you that. What were the 2 percent, Mr. Huebsch? 18 A. Here's an example. It's a local 19 example. It was -- Texas Commerce Bank made an 20 announcement that it was up for sale; and we felt 21 that it offered, you know, good value and that 22 somebody would be sure to come along. And 13895 1 ChemBank shortly thereafter made an offer for it. 2 So, while it was an announced -- what we mean by 3 "announced" was an announced deal or an 4 announcement in public that the company intended 5 to sell out. 6 Q. Was the acquisition of the stock in a 7 company called AMF before or after an announced 8 attempt to purchase control of AMF? 9 A. I don't recall. I know our general 10 principle was to wait for the announcement. There 11 was an announced deal portfolio. There was not an 12 anticipatory one. 13 Q. The acquisition of stock in Amsted, 14 A-M-S-T-E-D -- 15 A. That's different than AMF. 16 Q. That's right. I'm asking about another 17 company -- was that before or after the 18 announcement of an attempt to take over the 19 company? 20 A. Mr. Guido, I don't remember Amsted. It 21 was our guiding principle to wait for these public 22 announcements. 13896 1 Q. Were the purchases of stock in Pacific 2 Lumber before or after the announcement of an 3 attempt to take over the stock? 4 A. We didn't -- as far as I know, USAT 5 never bought any shares of Pacific Lumber. 6 Q. Did UFG purchase any shares? 7 A. I don't believe so. 8 Q. Did any subsidiary of either of them 9 purchase any shares? 10 A. I don't believe so. 11 Q. Did anyone at USAT have the authority 12 to make purchases of equity security stock other 13 than yourself? 14 A. Sure. 15 Q. Who? 16 A. Mike Crow. 17 Q. Who else? 18 A. Jenard. I'm sure they -- 19 Q. Who else? 20 A. I don't know who else. 21 Q. Did Charles Hurwitz? 22 A. Could he? I don't know. I'm sure 13897 1 if -- he would have to -- he would have to consult 2 with -- he couldn't go out and buy it himself. 3 I'm sure he would consult with Mr. Gross or 4 Mr. Berner, people like that; but they could 5 collectively go out and purchase stock. 6 Q. What -- 7 A. And they did. I believe they bought 8 Weingarten Realty. Our department was not 9 involved in that or shares of that. 10 Q. Were you involved in any purchases of 11 stock in a company called Transcontinental 12 Services Group? 13 A. I was not involved in the purchase of 14 that. I believe I was involved in the sale of it. 15 Q. On whose behalf did you negotiate the 16 sale of stock of Transcontinental Services Group? 17 A. On whose behalf? 18 Q. Uh-huh. 19 A. I forget which specific entity owned 20 it, whether it was the holding company or the 21 association. 22 Q. What do you mean by "the holding 13898 1 company"? 2 A. United Financial Group. 3 Q. Now, when you managed the equity 4 arbitrage portfolio of USAT, did you also manage 5 equity arbitrage portfolios for other entities? 6 A. Yes, I did. 7 Q. And what were those other entities? 8 A. Well, there was United Financial Group. 9 There was MAXXAM-Federated Development. 10 Q. So, you managed stock acquisitions for 11 MAXXAM-Federated at the same time you were doing 12 that for USAT? 13 A. No, I didn't say that. 14 Q. I'm sorry. 15 A. I managed equity risk arb portfolios. 16 Q. For all three entities? 17 A. Well, all four. 18 Q. Counting USAT, UFG, Federated, and 19 MAXXAM? 20 A. Right. 21 Q. Or MAXXAM and another subsidiary? 22 A. Right, right. 13899 1 Q. Any other entities? 2 A. I believe for a short period of time, 3 we managed some money for an insurance company: 4 United -- I forget the name. United Republic. 5 Q. Was that owned by UFG? 6 A. I believe it was. 7 Q. Any other entities? 8 A. Not that I can recall. 9 Q. How did you decide who it was that you 10 were buying the securities for when you bought 11 securities in the equity arbitrage portfolio? 12 A. Well, because all of them had a similar 13 investment goal. We would buy the same 14 securities. We would buy, you know, 50,000 shares 15 of stock. And then at the end of the day, we 16 would allocate it according to size to each of the 17 accounts we managed. 18 Q. If you bought it at different prices 19 during that day, how would you allocate it? 20 A. Well, we would usually get the average 21 price of all transactions that day. 22 Q. So, you would allocate it according to 13900 1 the average cost? 2 A. No. We would not allocate it on a cost 3 basis at all. We would get an average price for 4 all the securities bought that day and then 5 allocate it according to size. If we had a 6 100-million-dollar account and a 50-million-dollar 7 account, the 100-million-dollar account would get 8 twice as many shares as the 50-million-dollar 9 account. 10 Q. What were the relative sizes of the 11 accounts? 12 A. I can't remember specifically. I can 13 remember one figure that was at the very end, like 14 1988, about September -- it was -- about 15 57 percent was USAT and UFG, and about 42 percent 16 was MAXXAM-Federated Development. 17 Q. How did that come up at the end of 18 1988? 19 A. How do I remember those numbers? 20 Q. Yeah. 21 A. My bonus was geared to those. 22 Q. Were allocations made prior to 1988 of 13901 1 your bonus? 2 A. The bonuses before that were 3 subjective, and I don't really know how they came 4 up with the numbers. 5 Q. Remember the bonus proposal that we 6 looked at yesterday? That doesn't have any 7 allocation in it for equity arbitrage, does it? 8 A. The proposals I made? 9 Q. Yeah. 10 A. I can't believe I would leave myself 11 out of those, Mr. Guido. 12 Q. I'm sorry. Allocations between 13 MAXXAM-Federated on one hand and USAT and UFG on 14 the other. 15 A. No. I think, for example, it was 16 understood I was -- in one instance, I believe it 17 was Mr. Hurwitz; and the next year, I went to 18 Mr. Munitz. These were people involved with both 19 the USAT side as well as the MAXXAM-Federated 20 side. 21 Q. The bonus proposals that we looked at 22 that you made, those were bonus proposals that you 13902 1 were making for your work with UFG, USAT, and 2 MAXXAM-Federated? 3 A. So far as the equity risk arbitrage 4 portfolios go, you are right. 5 Q. Okay. Let's go back to where we left 6 off yesterday. 7 MR. GUIDO: I'm sorry for the 8 diversion, Your Honor. 9 THE COURT: Excuse me. I didn't have a 10 very clear concept of it. 11 MR. GUIDO: I'm going to get into this 12 in more detail later on in this witness' 13 questioning. 14 THE COURT: All right. Proceed. 15 MR. GUIDO: I felt I needed to clear it 16 up, what the scope was. 17 Q. (BY MR. GUIDO) Look at Exhibit 4226, 18 the United restructuring. On Page 2 of the 19 document, it's addressing -- at the top of the 20 page, it says -- at the end of that carry-over 21 paragraph, it says, "The combination of a real 22 estate investment portfolio and foreclosed and 13903 1 nonaccruing loans has become such a burden that 2 the company cannot operate without extraordinary 3 earnings" -- 4 MR. NICKENS: Gains. 5 Q. (BY MR. GUIDO) "Gains." Excuse me. 6 I'm sorry. 7 In 1986, were you aware that the 8 combination of the real estate investment 9 portfolio and foreclosed and nonaccruing loans had 10 become such a burden on USAT that it couldn't 11 operate without extraordinary gains? 12 A. Well, I probably knew the first half of 13 your question. The foreclosures were, you know, 14 severe in this area. I knew real estate was a big 15 problem then. 16 Q. Now -- then it says, "The need to 17 attack these two problems becomes more intense 18 when one considers the following factors: One, 19 United does not have a major amount of special 20 gain opportunities left. It is easy to envision a 21 quarter/year when the bond market is weak, equity 22 arbitrage is nonexistent or losing money, and 13904 1 items such as Weingarten stock are gone." 2 Do you see that? 3 A. I see that. 4 Q. Now, in 1986, the beginning of the 5 year, were sales made out of the high-yield bond 6 portfolio to generate gains? 7 MR. VILLA: Objection, Your Honor. 8 We've gone through this for some hours that it's 9 beyond tedious. He asked him this question 10 sometime during the first day and the second day. 11 I think this is simply repetitive questioning. 12 So, I object to it again. That's why we're here 13 for three days: Showing him documents he never 14 received, never authorized, never was copied on. 15 I object. 16 MR. GUIDO: Your Honor, I think I'm 17 entitled to ask that to lead into the next 18 question. If it's been asked and answered -- 19 THE COURT: Let's go to the next 20 question. 21 Q. (BY MR. GUIDO) Prior to June of 1986, 22 were sales made out of the mortgage-backed 13905 1 securities portfolio to generate gains? 2 A. Out of the mortgage-backed portfolio? 3 I don't recall any sales being made out of that 4 portfolio for gains or the intent of gains. 5 Q. Were gains made on the sales of the 6 so-called rolldown that occurred in the beginning 7 or the spring of 1986? 8 A. Gains may have been made in that 9 instance. 10 Q. Pardon? 11 A. In that -- as part the rolldown, 12 gains -- 13 Q. Now, I would like to direct your 14 attention to a document that has been marked as 15 Exhibit B1102, which is at Tab 378. 16 A. It's very blurry. 17 THE COURT: We'll take a short recess. 18 19 (Whereupon a short break was taken.) 20 21 THE COURT: Be seated, please. We'll 22 be back on the record. 13906 1 Mr. Guido, you may continue. 2 MR. GUIDO: Thank you, Your Honor. 3 Q. (BY MR. GUIDO) Out of deference to 4 Mr. Villa, I'm going to skip this document and 5 move to the next document, which is T4246. 6 A. 4226? 7 Q. No. 4246. It's a memorandum dated 8 September 8th, 1986, from Doug Hansen to the 9 strategic planning committee. 10 MR. GUIDO: Do you have the tab number? 11 MR. NICKENS: 335. 12 Q. (BY MR. GUIDO) These are minutes of 13 a -- or notes regarding capital growth strategy 14 for the next six months dated September 8th, 1986, 15 from Doug Hansen to Charles Hurwitz, Jenard Gross, 16 Barry Munitz, Jerry Williams, Mike Crow, Art 17 Berner, and Bruce Williams. And it says that 18 "This memo summarizes the current thinking on a 19 number of questions. An action list is included 20 at the end. I think we should meet soon to 21 discuss these thoughts and observations as a 22 group." 13907 1 Do you see that group of individual 2 there? Did you ever attend any meetings with 3 those individuals where you discussed, on a 4 periodic basis, strategic -- what are referred to 5 as strategic issues at USAT? 6 A. No, I don't believe so. 7 Q. Now, I would like to direct your 8 attention to the page that's Bates stamped 9 US0000468 which is into that memo -- 10 THE COURT: Mr. Guido, the copy I have 11 doesn't have Bates stamps. 12 MR. GUIDO: Does it have imaging 13 numbers, Your Honor? 14 THE COURT: Doesn't seem to have that 15 either. 16 MR. GUIDO: Okay. I think this is one 17 of those where someone found a cleaner copy, 18 Your Honor. Yours doesn't have an imaging number 19 on it either? 20 THE COURT: No, it does not. 21 MR. GUIDO: It's the next-to-the-last 22 page of the exhibit, Your Honor, which says, 13908 1 Section B, "The Smith Breeden senior management 2 meeting will be Monday, September 15th, from 3 3:00 p.m." 4 Q. (BY MR. GUIDO) I want to direct your 5 attention to that entry, Mr. Huebsch. 6 We've been discussing this morning the 7 Smith Breeden analysis. 8 Do you recall that? 9 A. I recall that. 10 Q. And do you recall that Smith Breeden 11 had been retained to do an analysis of the 12 condition of USAT's mortgage-backed security 13 portfolio? 14 A. Well, I -- I had heard that. I 15 wasn't -- I wasn't part of retaining them. 16 Q. Okay. Did you attend any meetings 17 where they made a presentation on what had 18 happened to the mortgage-backed securities 19 portfolio? 20 A. Well, I remember attending one meeting. 21 I don't know the exact subject matter. 22 Q. Did you attend more than one meeting? 13909 1 A. I don't believe so. 2 Q. Okay. Now, this makes reference to a 3 meeting in September of 1986. It says, 4 "Attending: Hurwitz, Gross, Munitz, B. Williams, 5 Berner, Crow" -- this says B. Williams again. I 6 think the first one is probably G. Williams -- 7 "Wolfe, Huebsch, Phillips, Hansen, Smith, Breeden, 8 Giarla, and Schumacher." 9 Do you see that? 10 A. Yes. 11 Q. Now, do you recall attending a meeting 12 in which Smith Breeden gave a presentation 13 regarding the condition of USAT? 14 A. I believe I attended one meeting. This 15 may well have been it. 16 Q. Okay. I would like to direct your 17 attention now to the next -- 18 A. Are we through with this one? 19 Q. Yes. The strategy meeting of 20 September 15th, 1986, at United Savings 21 Association of Texas. I think it's 22 Exhibit A10666, Tab -- 13910 1 MR. NICKENS: Tab 870. 2 MR. GUIDO: 870? 3 Q. (BY MR. GUIDO) Would you please take a 4 look at A10666? 5 A. What was the page? 6 Q. I just wanted you to look at the 7 document overall. Have you seen the document 8 before? 9 A. I don't believe so. I -- I don't 10 recall it. 11 Q. Now, do you recall -- you do recall 12 attending one meeting where Smith Breeden 13 Associates made a presentation. 14 Do you recall that? 15 A. I recall a meeting with Smith Breeden, 16 right. 17 Q. And was it sometime after the rolldown 18 of the mortgage-backed securities at USAT? 19 A. That would be after the spring. 20 Q. After the spring of 1986? 21 A. Right, yes. 22 Q. And was it before Sandy Laurenson had 13911 1 been hired at USAT? 2 A. I believe so, if we're figuring she was 3 hired in the fall, late summer, fall. 4 Q. Now, at the meeting that you attended, 5 do you recall what was discussed? 6 A. I don't have a good recollection. I 7 mean, obviously, they talked about mortgage-backs; 8 but I don't know exactly what they talked about. 9 I don't recall exactly what they talked about. 10 Q. At the meeting, did they discuss and 11 describe the condition of the mortgage-backed 12 security portfolio? 13 A. They may have. They may have. 14 Q. Did they discuss any recommendations on 15 what to do going forward that you recall? 16 A. They may well have, but I just don't 17 recall the substance of the meeting. 18 Q. Look at Page -- look at the second page 19 of the report which is the third page of the 20 exhibit which says at the top, "To United 21 Financial Group. Condensed balance sheet and 22 liquidation value." 13912 1 Do you see that? 2 A. Right. I see that. 3 Q. Do you recall discussing with them 4 the -- the market value in relationship to the 5 book value of the assets and liabilities of USAT? 6 A. I don't recall that. It says -- this 7 isn't a holding company balance sheet, is it? 8 Q. It says "United Financial Group." 9 A. This is not the association. 10 Q. What's the -- I'm sorry. I don't 11 understand why you're asking the question. 12 Is there something about the difference 13 between USAT and UFG that leads you to raise a 14 question about this? 15 A. No, I just wondered. 16 Q. Wondered why it says "United Financial 17 Group" at the top? 18 A. Yes. 19 Q. Did United Financial Group have any 20 assets other than those assets that were held by 21 USAT? 22 A. I believe so. 13913 1 Q. And how significant were they? 2 A. I can't remember, but they had -- I 3 know they had a -- an arbitrage -- 4 Q. They had an arbitrage? 5 A. -- portfolio. 6 Q. Anything other than an arbitrage 7 portfolio? 8 A. Not that -- I don't know. Obviously, 9 they had assets other than the stock holdings in 10 the association. 11 Q. And does this indicate in any way for 12 you to tell whether or not this balance sheet that 13 appears on this page includes or excludes the 14 equity arbitrage assets held by UFG? 15 A. You know, I can't tell from this. 16 Q. What was the size of the equity 17 arbitrage portfolio held by UFG? 18 A. I don't recall specifically. 19 Q. All right. Now, looking at this 20 balance sheet, which it says it's United Financial 21 Group's balance sheet, do you see the entry under 22 "interest rate swaps"? 13914 1 A. Yes, I do. 2 Q. Okay. And you see the figure 3 $122 million? 4 A. Right. 5 Q. Do you recall that Smith Breeden had 6 done an analysis and, in the course of doing its 7 analysis of the mortgage-backed securities, had 8 evaluated the market value of the swaps? 9 A. I don't recall that. They may well 10 have, but I don't recall that. 11 Q. Now, do you remember our discussion 12 about swap contracts? 13 A. Yes. 14 Q. You indicated that they were contracts 15 that were negotiated between two parties where one 16 would receive a fixed interest rate and pay a 17 variable and the other party would receive a 18 variable interest rate and pay a fixed rate? 19 A. Exchange cash flows, yes. 20 Q. And those were negotiated agreements, 21 yes? 22 A. Right. 13915 1 Q. Now, how -- did you ever make any 2 attempt to value the swaps that were on the books 3 of USAT at the time you were the executive 4 vice president for investments? 5 A. I did not make an attempt to value 6 them. 7 Q. Did you at any time ever make an 8 attempt to value non-publicly traded fixed-rate 9 debt instruments? 10 A. I don't believe so. I don't believe 11 so. 12 Q. Did you ever attempt to ascertain the 13 market value of any non-publicly traded high-yield 14 bonds? 15 A. I may have, or Mr. Phillips may have. 16 Most of the things we dealt with were publicly 17 traded. 18 Q. And were all of those that were 19 publicly traded traded over an exchange? 20 A. In the junk bond area, if they were 21 traded on the -- on an exchange, it would be a 22 very nominal market. Most of the trading took 13916 1 place in an over-the-counter negotiated market. 2 Q. Now, how did you -- I mean, did you 3 periodically attempt to ascertain what the value 4 of the high-yield bond portfolio was at USAT, the 5 market value? 6 A. Yes. Joe Phillips would. 7 Q. How did he do it? 8 A. I believe he would, you know, check the 9 principal dealers to find out where a particular 10 bond -- the range at which a particular bond might 11 be traded. 12 Now, for financial reporting purposes, 13 those valuations, I believe it was customary to go 14 to a dealer -- the auditors would go to a dealer 15 and give him a list of bonds and say, "What are 16 these worth?" And the dealer would come back with 17 some numbers. And the auditor would go by those 18 numbers. 19 So, there was actually always sort of, 20 you know, two numbers. One number for financial 21 reporting purposes which was independently arrived 22 at, plus the number Mr. Phillips used for trading. 13917 1 Q. Okay. Now, with regard to those 2 instruments -- you said dealers -- the accountant 3 would go to the dealers. 4 Who were the dealers? 5 A. The principal dealers in junk bonds 6 during that time would be Drexel, First Boston, 7 Merrill Lynch, firms -- Goldman Sachs. Firms -- 8 major firms. 9 Q. Major investment banking firms? 10 A. Yes. 11 Q. Who were the dealers in swap agreements 12 at that time? 13 A. They would be probably -- the two 14 biggest factors would probably have been Salomon 15 and First Boston and then Merrill, Goldman, places 16 like that. 17 Q. Was any attempt ever made by you or Joe 18 Phillips to ascertain the market value of the swap 19 agreements by going to those investment bankers to 20 ascertain what they ascertained -- what they 21 determined the value to be? 22 A. I didn't, but I'm sure -- I would guess 13918 1 Mr. Phillips did. 2 Q. To value the swaps, would you have to 3 do the same thing you would have to do with 4 high-yield bonds? 5 A. Well, I don't know exactly; but the 6 major dealers in swaps would have an idea. I 7 don't know -- I don't know -- I don't know the 8 process that the auditors went through to 9 ascertain them. I would assume it's the same kind 10 of process, but I'm not sure. 11 Q. Was there a swap dealers association at 12 the time? 13 A. There may well have been. I don't 14 know. 15 Q. Were you aware of there being one? 16 A. I don't think I was aware of any 17 association. 18 Q. Now, this memorandum goes on on Page 9 19 talking about some recommendations. I would like 20 you to take a look at that, please. 21 A. (Witness reviews the document.) 22 Q. This is a series of recommendations. 13919 1 Do you recall any discussion about recommendations 2 that were made at that meeting with Smith Breeden? 3 A. No, I don't really recall the 4 recommendations made at that -- at that meeting. 5 Q. Do you recall whether or not there were 6 any disputes about what should be done with the 7 mortgage-backed securities portfolio that were 8 expressed at that meeting? 9 A. No, I'm not aware of a dispute. 10 Q. Now, this says, under "immediate 11 strategies," "Take gains on portfolio to offset 12 operating losses." 13 Do you see that? 14 A. I see that, yes. 15 Q. In the time period subsequent to 16 September 15th, 1986, to June 30, 1987, were sales 17 made out of USAT's mortgage-backed securities 18 portfolio in order to generate gains? 19 A. I don't know. I would have to, you 20 know, look at the investment committee -- 21 Q. Minutes? 22 A. -- minutes probably. 13920 1 Q. Now, let's go to Exhibit T4250, which 2 is at Tab 871. This is another Doug Hansen memo. 3 This one is dated September 22nd, 1986. I would 4 like to direct your attention to Item No. 31, 5 which I think is on the third page of the 6 memorandum. It says "earnings and growth 7 strategy." 8 A. Right. I have that. 9 Q. Okay. It says, "Our actual net 10 worth" -- do you see under "earnings and growth 11 strategy"? 12 A. Yes. 13 Q. "Prospects for positive GAAP and RAP 14 earnings are poor in '86-'87. Our actual net 15 worth will be the same as or below required net 16 worth at the end of the third and fourth quarters 17 unless action is taken. We need earnings and good 18 net worth in the third quarter as we still will be 19 bargaining with the examiners and looking for a 20 capital note issue. There's a strong case for 21 taking portfolio gains in the third quarter in 22 order to shore up reserves and the capital 13921 1 position. Third quarter results need to be close 2 to those forecast in the regulatory business 3 plan." 4 Do you see that? 5 A. I see that. 6 Q. Now I want to direct your attention to 7 the next page. 8 A. The next page? 9 Q. The next page which, at the top, the 10 first line starts "sale of servicing." 11 Do you see that? 12 A. I see that. 13 Q. Now, move down six bullet points where 14 it says "quarter end actions." 15 Do you see that? 16 A. Yes. 17 Q. It says, "Quarter end actions will be 18 considered next Monday. We should take all MBS 19 and liquidity portfolio gains, monitor equity 20 arbitrage results, alert Joe as to the possibility 21 of taking junk bond gains, and track the profit 22 and capital positions closely." 13922 1 Do you see that? 2 A. Yes, I see that. 3 Q. Do you recall that subsequent to 4 September 22nd, 1986, you or Joe Phillips were 5 asked to identify mortgage-backed securities from 6 which gains could be taken? 7 A. I was probably not asked. 8 Q. Do you recall any discussions about 9 making sales out of the mortgage-backed securities 10 portfolio subsequent to September 22nd, 1986, in 11 order to generate gains? 12 A. No, I don't. 13 Q. Now, I would like to direct your 14 attention to a document which is at Tab -- I think 15 it's Document T4251 at Tab 567. This is a memo 16 from Mike Crow to Jenard Gross and Jerry Williams 17 dated September 23rd, 1986. It says, "The 18 attached schedule presents our best estimate of 19 gains that will be needed for quarterly earnings. 20 We are proceeding with taking these gains." 21 On the second page, it says "Gains - To 22 Alleviate Deficit." 13923 1 Do you see that? It says "liquidity." 2 A. Right. 3 Q. Freddie Mac stock, mortgage-backed 4 securities? 5 A. Right. 6 Q. And junk bonds? 7 A. Right. 8 Q. Do you recall whether or not sales were 9 made out of the mortgage-backed securities 10 portfolio subsequent to September 23rd, 1986, to 11 bolster quarterly earnings? 12 A. No, I don't recall that. 13 Q. All right. I would like to direct your 14 attention to T4320, which is at Tab 569. 15 A. Could I have that again, Mr. Guido? 16 Q. T4320. 17 A. Here's 4302. 18 Q. No. 4320. I want to direct your 19 attention to Paragraph 9 on that document. It 20 says, "MBS should grow up to an additional" -- I 21 think it's "500 million" -- "in the sub in 1987 22 with a minimum 103 basis point real spread. 13924 1 Economic spread to date is 45 basis points. This 2 will give an accounting spread of 103 basis points 3 in 1987 due to profit taking." 4 MR. VILLA: At least on the version I 5 have, I can't read the numbers. Perhaps Mr. Guido 6 has much better eyes than I have, but I can't read 7 the document. I don't want the record to be left 8 with those numbers being -- 9 THE COURT: Well, it's not very 10 distinct. 11 MR. GUIDO: I think we went through 12 this with Mr. Hansen, Your Honor, and he agreed 13 that's what those figures say. The record will 14 show in either case. It's my understanding that 15 that's what he testified to. 16 Q. (BY MR. GUIDO) My question for you is: 17 Does this refresh your recollection that gains 18 were taken out of the mortgage-backed securities 19 portfolio in order to bolster earnings after 20 September 23rd, 1986? 21 A. This does not -- this is, I think, a 22 mere proposal, a strategy meeting. This doesn't 13925 1 help me recall anything. I believe the 2 mortgage-back was run by a subcommittee. Or was 3 Sandy involved in it? Sandy Laurenson? 4 Q. We'll get to that. We're right at the 5 transition. 6 A. Okay. 7 Q. I would like to direct your attention 8 to A10726, and I don't have the tab number. 9 MR. NICKENS: Tab 874. 10 THE WITNESS: 874? 11 Q. (BY MR. GUIDO) This is a memo from Mike 12 Crow to Jenard Gross dated February 20th, 1987. I 13 want to direct your attention to the second 14 paragraph. It says, "In February, we have booked 15 approximately 7.5 million in profits for 16 mortgage-backed security gains and have recorded 17 approximately 3.0 million in equity arbitrage 18 profits net of cost of carry. With the target for 19 junk bonds gains at 5.0 to 7.5 million, we should 20 fall comfortably within the range of required 21 gains necessary to break even." 22 Does that refresh your recollection 13926 1 that subsequent to September 23rd, 1986, sales 2 were made out of the mortgage-backed securities 3 portfolio to bolster profits? 4 A. I just don't recall that period of 5 time, Mr. Guido. 6 Q. Okay. At this point in time, I would 7 like to show you -- do you have any reason to 8 dispute the accuracy of that statement in that 9 exhibit? 10 MR. VILLA: Excuse me. Which 11 statement? The document or the question you 12 asked. 13 MR. GUIDO: The statement that I just 14 read him in that document. 15 A. Well, I can't dispute that -- I mean, 16 Mr. Crow I would rely on to say that they have 17 booked 7.5 million in profits for mortgage-backed 18 securities gains and have recorded 3.0 million in 19 equity arbitrage profits. That, of course, cost 20 of carry. These items -- these two items look 21 like they happened before the date on the memo; 22 and, you know, Mr. Crow is a reliable, honest 13927 1 fellow. So, I guess that happened if that's what 2 it says here. 3 Q. (BY MR. GUIDO) I would like to now go 4 to some investment committee minutes which I think 5 you made a reference to earlier. 6 MR. GUIDO: And the documents that I'm 7 going to be using here are the -- A1402, which is 8 at Tab 539; A1406, which is at Tab 543; A1407, 9 which is at Tab 544; A1408, which is at Tab 545; 10 B1212, which is at Tab 379. It could be an 8. 11 A1409, which is at Tab 380; B1231, which is at 12 Tab 380. 13 MR. RINALDI: That's the same tab. 14 MR. GUIDO: 380A. Excuse me. A1411 at 15 Tab 547; A1412, which is at Tab 343; A1413, which 16 is at Tab 344; A1416, which is at Tab 347; A1417, 17 which is at Tab 348; A1419, which is at Tab 350; 18 A1420, which is at Tab 351; A1422, which is at 19 Tab 353. 20 MR. VILLA: Mr. Guido, was that A1420 21 or A1421, the second-to-the-last one? 22 MR. GUIDO: 20. Tab 351. I have it as 13928 1 12/86 investment committee minutes. 2 MR. GUIDO: Your Honor, yesterday I 3 forgot to move the admission of B1409. It was a 4 memo from Mr. Huebsch to Mr. Munitz regarding the 5 compensation plan and the structure of the 6 investment department dated January 5th, 1987. I 7 would like to move its admission at this point in 8 time, Your Honor. 9 MR. VILLA: No objection, Your Honor. 10 THE COURT: That's B1409. 11 MR. GUIDO: Yes, Your Honor. 12 THE COURT: Received. 13 THE COURT: Well, I'm showing that as 14 having already been received. Oh, that's A1409. 15 I'm sorry. 16 MR. GUIDO: B1409, Your Honor. May I 17 proceed? 18 THE COURT: Yes, you may. 19 Q. (BY MR. GUIDO) When I was showing you 20 the strategic planning committee minutes and the 21 internal memoranda, I asked you whether or not 22 those refreshed your recollection that sales were 13929 1 made out of the mortgage-backed securities 2 portfolio to generate gains. You indicated that 3 they did not. 4 Do you recall that? 5 A. That memo didn't refresh me. 6 Q. And you -- you made mention to the 7 investment committee minutes as something that you 8 might look to. 9 A. Right. 10 Q. Why was it that you said we should look 11 to the investment committee minutes to refresh 12 your recollection? 13 A. Well, because I was a member of the 14 investment committee. 15 Q. Okay. Now I would like to have you 16 look at Exhibit A1402, which are the minutes of 17 the investment committee of United Financial 18 Group, Inc. and United Savings Association of 19 Texas of July 23rd, 1986. 20 Do you see that? 21 A. Yes. 22 Q. Was there one or two investment 13930 1 committees? 2 A. I don't know. It looks like -- like 3 this was -- either there were two or they both 4 used the same investment committee. 5 Q. Did you ever attend separate investment 6 committee meetings? 7 A. Not that I recall. 8 Q. Okay. Now, turn to the second page of 9 the minutes. 10 A. (Witness complies.) 11 Q. It says "secretary of the meeting." 12 Do you see that? "Arthur S. Berner." 13 A. Right. 14 Q. Was Arthur Berner the person who kept 15 the minutes of the investment committee during the 16 period of time that you served on it? 17 A. I believe most of the time. I'm not -- 18 most of the time, yes. 19 Q. Okay. And when he wasn't there to keep 20 the minutes, did Bruce Williams keep the minutes? 21 A. He may well have. That would be a 22 logical guy to do it. 13931 1 Q. Now, were the minutes of previous 2 meetings submitted to the investment committee for 3 its review and approval at the subsequent meeting? 4 A. I don't recall whether that was 5 standard operating procedure or not. 6 Q. The minutes don't -- these minutes 7 don't indicate that that occurred on July 23rd, 8 1986, is why I asked you the question. 9 A. They may not have. As I recall, there 10 were minutes typed up; and we were sent a copy, 11 you know, a couple of days later. 12 Q. Do you recall whether or not there was 13 any formal adoption of these minutes at the 14 subsequent meeting of the investment committee? 15 A. That, I don't know. 16 Q. You don't recall, or you don't know? 17 A. I don't know. 18 Q. But to your recollection, it never 19 occurred? 20 A. I just don't know, Mr. Guido. 21 Q. I would like to direct your attention 22 to the second paragraph of Page 2. It says, 13932 1 "Mr. Phillips then discussed the company's 2 mortgage-backed securities program. He presented 3 a list of the mortgage-backed securities trades 4 for July 1986 and discussed this in detail." 5 Do you see that? 6 A. Yes. 7 Q. Then it has attached to it two pages 8 which looks like a spreadsheet of MBS trades. 9 Do you see that? 10 A. I see that, yes. 11 Q. And it -- 12 A. Well, they are not -- it looks like 13 they are not all trades. 14 Q. What do you mean? 15 A. Well, there's some dollar rolls here. 16 Q. Okay. So, they are transactions. Is 17 that a fair way of describing it? 18 A. Well, you know, I don't know the 19 precise definition of a dollar roll. 20 Q. What do you mean you don't know the 21 precise definition of a dollar roll? 22 A. Whether it is a true transaction. It's 13933 1 not a -- it's not really a buy and a sale. 2 Q. A dollar roll is not a buy and a sale? 3 A. I don't believe so. 4 Q. What do you believe it to be? 5 A. I believe it's a short-term financing 6 technique. 7 Q. By making a sale and a purchase. 8 Right? 9 A. I don't think there's a sale and a 10 purchase involved in the dollar roll. I don't 11 know for sure, but I don't think there is. 12 Q. You sat on this committee, and you 13 voted on these transactions. Right? 14 A. Right. 15 Q. What is your understanding of what it 16 was you were voting on? 17 MR. VILLA: Objection. I don't think 18 there's any indication that he voted on the dollar 19 roll transactions. Perhaps I didn't see that yet. 20 A. Well, it was -- I can't give you the 21 definition of a dollar roll. I can give you its 22 effect, which is to lower your financing. 13934 1 Q. (BY MR. GUIDO) Now -- 2 A. But I don't think it's a true purchase 3 and sale of securities. 4 Q. Let me -- 5 A. But this may not have anything to do 6 with your point. I don't think it's a true 7 purchase and sale. 8 Q. Clearly not the price of oats in 9 Singapore which is one of the metaphors that's 10 been used in this proceeding. Let me go back to 11 Mr. Villa's point because I think it will maybe 12 help clarify. 13 Did the investment committee approve 14 transactions in the mortgage-backed security 15 portfolio at the time you served on it, or did it 16 simply receive reports from the managers of the 17 portfolio for its information? 18 A. It depended, strictly speaking, on the 19 portfolio involved. 20 Q. All right. Let's -- go ahead. 21 A. For example, the one I was involved in 22 were the equity risk arbitrage because you had a 13935 1 need for an almost instantaneous transaction when 2 you saw an announcement by a company. So, I was 3 allowed to purchase securities before I got 4 permission from the investment committee because 5 time was of the essence. 6 Q. Okay. 7 A. So, in that case -- 8 Q. Now, let's move over to high-yield 9 bonds. 10 A. As far as I can recall, high-yield 11 bonds were pre-cleared by the investment 12 committee. 13 Q. Do you mean that no high-yield bonds 14 were bought until the high-yield bond appeared on 15 a list of approved purchases by the investment 16 committee? 17 A. To the best of my knowledge, that is 18 correct. 19 Q. Now, what about mortgage-backed 20 securities? 21 A. I believe mortgage-backed securities, 22 again, were -- more discretion was given to the 13936 1 portfolio manager. I don't -- I think on major 2 programs, they had to be -- the major program had 3 to be approved. 4 Now, in this period of time where there 5 was a subcommittee -- and I believe the 6 subcommittee that made these trades was acting 7 with Smith Breeden as an outside advisor. So, 8 these trades may not have been preapproved; and 9 probably, the dollar rolls didn't have to be 10 preapproved. 11 Q. This indicates that Mr. Phillips made 12 the report on the mortgage-backed securities here. 13 A. I believe he was on that committee. 14 Q. He was on that committee? Why was the 15 committee formed if you had Mr. Phillips? Why did 16 you need a committee? 17 A. Well, I think what management had 18 decided, to the best of my knowledge, was that 19 they wanted to relook -- back in the late spring, 20 relook at the whole mortgage-back program at the 21 association. They went to an outside advisor. 22 They formed a committee to do the trading, and 13937 1 they took steps to hire an expert in 2 mortgage-backs and hedges to be put in place when 3 they found one. I think -- and that person would 4 specialize only in mortgage-backs and hedges. 5 I think this is -- I think I said this 6 before. This is what I saw happening in the 7 middle of '86. 8 Q. Why did they want to relook at 9 mortgage-backed securities? 10 A. Well, I think they were somewhat 11 disappointed with the results of the original 12 RCAs. They thought we should have a specialist 13 aboard to focus just on them. These are my 14 guesses. I don't know everything that went 15 through their minds; but this is, you know, 16 what -- what I learned. It's probably not 17 everything. 18 Q. Now, looking at these MBS schedules 19 that are headed "MBS trades," does that refresh 20 your recollection that subsequent to the spring of 21 1986, sales were made out of the mortgage-backed 22 securities portfolio to bolster earnings? 13938 1 A. Well, you know, sales were made out of 2 the mortgage-backed portfolio, it appears here. I 3 don't see -- I don't see the -- well, I can't -- 4 in this "comment" column over here, I can't see 5 the trade rationale except for when I see "dollar 6 roll." 7 MR. NICKENS: Your Honor, the witness 8 might be directed to the next page. 9 A. I'm going to have trouble with this 10 one, Mr. Guido. 11 Q. (BY MR. GUIDO) This is Page W101015. 12 Does that refresh your recollection? 13 A. Yes. Well, I see Item 1 is a dollar 14 roll. 15 Q. Does this refresh your recollection 16 that sales were made out of the mortgage-backed 17 securities portfolios to bolster profits? 18 A. You know, I would have to read all 19 these rationales. In my recollection, the effect 20 of a dollar roll was not to create a profit but it 21 was to lower your cost of financing. But we have 22 to ask somebody who can define precisely what a 13939 1 dollar roll is. I can no longer do it. 2 Q. Putting aside dollar rolls for the 3 moment, okay, does this document refresh your 4 recollection that sales were made out of the 5 mortgage-backed securities portfolio in order to 6 generate gains? 7 A. I would have to go through every single 8 one of them. The second one seems to be -- the 9 rationale is for taking profits. It's to stem 10 prepayments. 11 We will have to go through every single 12 one of them, Mr. Guido. 13 Q. Let me go through a couple of them. 14 Okay? 15 A. Okay. 16 Q. One of them says down here -- move down 17 the page to where it says, "Dealer unavailable to 18 deliver." 19 Do you see that: "Sold back at 20 profit"? 21 A. Which number? 22 Q. Well, it doesn't have a number. It 13940 1 just says, "Dealer unavailable to deliver." 2 MR. NICKENS: It's about two-thirds of 3 the -- 4 MR. GUIDO: About seven from the 5 bottom. 6 MR. EISENHART: I'm unsure what the 7 pending question is. Is he asking whether there 8 were transactions here that did generate gains, or 9 is he asking whether there are transactions here 10 that were entered into solely for the purpose of 11 generating question? Those are two very different 12 questions. 13 THE COURT: I thought the question was 14 whether this statement refreshes his recollection 15 as to whether the sale of securities was to 16 generate profits. 17 MR. GUIDO: That's correct, Your Honor. 18 That was my question. 19 THE COURT: Is your recollection 20 refreshed by this document? 21 THE WITNESS: I asked -- I asked 22 Mr. Guido -- obviously, I'm finding some that had 13941 1 nothing to do with generating gains; i.e. the 2 dollar rolls. So, I'm asking Mr. Guido, can we go 3 through the list and talk about each transaction? 4 Q. (BY MR. GUIDO) Mr. Huebsch, I'm not 5 testifying. I'm showing you a document. 6 I'm asking whether the document 7 refreshes your recollection of whether or not 8 sales were made out of the mortgage-backed 9 securities portfolio in order to generate gains. 10 A. I'll have to go -- could I have a few 11 minutes? 12 Q. Take a few minutes, yes. 13 A. Can I mark this? 14 Q. No. You can't mark the exhibit. Maybe 15 someone will have another copy for you which you 16 can mark. 17 THE COURT: Mr. Guido, I assume you had 18 pinpointed certain ones you wanted to direct his 19 attention to. 20 MR. GUIDO: Your Honor, it turns out 21 that isn't the case. It turns out that these 22 transactions are a series of transactions that 13942 1 occurred during this period of time. He has a 2 list of the transactions. He has a list of the 3 rationales. Some of the rationales may be 4 accurate. Some of them may not be accurate in 5 that description. What I'm asking him is does 6 this document refresh his recollection that there 7 were trades made out of the mortgage-backed 8 securities portfolio to generate gains. If it 9 doesn't, it doesn't; and I'm happy to move on. 10 MR. VILLA: The document is 11 semi-legible. We're talking about events that 12 happened 12 years ago. If there's some entry in 13 here that's supposed to bring his memory to the 14 fore, I'm sure that we ought to direct his 15 attention to it. Otherwise, it's going to take us 16 forever to look through all these documents. 17 THE COURT: That's what I thought. It 18 seems Mr. Guido indicates he has no specific 19 instrument in mind. 20 MR. GUIDO: I'm talking about the 21 entire category of documents. 22 THE COURT: It seems the left-hand side 13943 1 of the page is cut off. We don't have a page 2 which -- 3 MR. GUIDO: Your Honor, this document 4 is a document that the respondents put together 5 pursuant to an agreement with the OTS since they 6 had the access to all of the documents that 7 included the official records of the institution. 8 This is the best document they have been able to 9 provide. 10 MR. NICKENS: I don't want it to appear 11 on the record -- we did have access, but that was 12 because the FDIC had them in a warehouse. I don't 13 want the suggestion to be that we had possession 14 of the documents. We got access through the FDIC. 15 THE COURT: Okay. 16 MR. GUIDO: The respondents had the 17 access to the entire warehouse is my 18 understanding. 19 THE COURT: Well, you did, too. 20 MR. GUIDO: There was an agreement 21 between the parties that the respondents, with 22 regard to this category of documents, would take 13944 1 the responsibility of generating the exhibits to 2 be used in this proceeding. 3 MR. NICKENS: Your Honor, I don't want 4 to get -- we did not have access to the entire 5 warehouse. It turned out that there was a section 6 of the warehouse that we were not given access to 7 which was labeled on some map as "hot documents." 8 That's a dispute that we have with the FDIC that 9 we don't have to get into here. 10 I don't want the record to reflect that 11 we had access to the entire warehouse. We did 12 not. 13 MR. GUIDO: All I want the record to 14 show is that my perception is the parties on both 15 sides have done the best they can under the 16 circumstances to get the best document we could 17 for Your Honor. 18 Is that fair, Mr. Nickens? 19 MR. NICKENS: For current purposes, we 20 can agree on that, Your Honor. 21 MR. GUIDO: We agree on one thing, 22 Your Honor. 13945 1 Q. (BY MR. GUIDO) Has that refreshed your 2 recollection, the review of the document? 3 A. Mr. Guido I've had an opportunity to 4 review it. The -- the transactions -- the third, 5 fourth, fifth, and sixth transactions from the 6 bottom -- 7 Q. Third, fourth, fifth, sixth 8 transactions from the bottom, yes. 9 A. Those four items, I believe, were 10 trades to increase the yield on the portfolio. 11 Q. Okay. 12 A. All other -- all other things on here 13 appear to me, at a quick reading, to be dollar 14 rolls or transactions to stem prepayments. 15 Q. Now, a dollar roll, I think you 16 testified, was a transaction that was designed to 17 reduce the funding costs; is that correct? 18 A. Yeah. I don't know whether it's called 19 a transaction. It was a device to decrease your 20 funding costs, yes. 21 Q. By decreasing your funding costs, did 22 that have the effect of increasing the yield? 13946 1 A. It certainly did, Mr. Guido. 2 Q. So, the dollar rolls would fall within 3 the same category as these yield-enhancement 4 transactions you've described? 5 A. What category is that? 6 Q. The third from the bottom, fourth from 7 the bottom, fifth from the bottom, sixth from the 8 bottom. It would have the same net effect? 9 A. One is increasing your yield by -- by 10 selling and buying another security. 11 Q. Right. 12 A. The dollar roll doesn't involve the 13 purchase and sale of a security. It's just 14 putting in securities one month and getting them 15 out the next month. There's not a true -- 16 there's -- it's not a buy/sell transaction. 17 Q. Do you get back the same securities 18 with a dollar roll? 19 A. No. You could not be assured of that. 20 It's unlikely that you would. 21 Q. You're giving up one set of securities 22 in the dollar roll, and you're getting back 13947 1 another set? 2 A. Yes. 3 Q. On these yield-enhancement swaps that 4 you referred to, you're giving up one set of 5 securities; and then you're getting back a 6 different set of securities. Right? 7 A. Right. 8 Q. Okay. And in each case, the net effect 9 is to increase the net interest spread? 10 A. In each case, your net interest spread 11 would be increased. 12 Q. Okay. Now, I would like to move to 13 Tab 543, which is A1406. These are the minutes of 14 the investment committee of August 28th, 1986. I 15 direct your attention to the third page which has 16 the signature of Bruce Williams, secretary of the 17 meeting. 18 Do you see that? 19 A. Yes. I see that right here. 20 Q. I would like to direct your attention 21 to the paragraph that says, "Mr. Phillips noted 22 that there was only one mortgage-backed security 13948 1 transaction that occurred during the prior two 2 weeks which was a value trade of 80 million 3 Freddie Mac 9s to 50 million Fannie Mae 9s. The 4 economic result of this transaction was to 5 increase the yield on these securities by about 12 6 basis points." 7 Do you see that? 8 A. I see that. 9 MR. VILLA: I think it's $50 million of 10 Fannie Mae 9s. 11 Q. (BY MR. GUIDO) "The economic result of 12 this transaction was to increase the yield on 13 these securities by about 12 basis points." 14 Does that refresh your recollection 15 that there were sales made out of the 16 mortgage-backed securities portfolio subsequent to 17 the spring of 1986 in order to generate gains? 18 A. Well, I don't see anything about gains 19 here. I see a pick-up in yield. 20 Q. Okay. So, it doesn't refresh your 21 recollection that sales were made out of the 22 mortgage-backed securities portfolio to generate 13949 1 gains? 2 A. There may have been a gain here. I 3 can't see it from this. 4 Q. Now, the next paragraph says, "Mr. Crow 5 proposed that until our new mortgage-backed 6 securities position was filled that we consider 7 moving ahead with approving mortgage-backed 8 security value trades that will improve the 9 overall portfolio position and yield. In the 10 future, he proposed that mortgage-backed 11 securities trading be accomplished through a 12 committee consisting of Mr. Crow, Mr. Phillips, 13 Mr. Bruce Williams, and Mr. Doug Hansen. 14 Mortgage-backed securities trades would be 15 executed by a majority vote of the members of the 16 committee and the concurrence of Smith Breeden 17 Associates. Smith Breeden would be consulted on 18 each trade involving mortgage-backed securities 19 and the economics and reason for each trade would 20 be reported to the investment committee. The 21 committee approved these procedures for future 22 trading in mortgage-backed securities, and they 13950 1 were to be presented for final approval to 2 Mr. Jenard Gross for implementation." 3 Do you see that? 4 A. I see that. 5 Q. Is that the committee that you 6 discussed previously? 7 A. Yes, yes. 8 Q. And are those the procedures that you 9 understood were to be followed by that committee? 10 A. They were. 11 Q. Does that paragraph refresh your 12 recollection that sales were made out of the 13 mortgage-backed securities portfolio subsequent to 14 the spring of 1986 in order to generate gains? 15 A. Well, it could have happened; but what 16 it says here, to improve the overall portfolio 17 position and yield. So, gains could have -- there 18 could have been gains resulting from these kind of 19 practices. 20 Q. Does this refresh your recollection -- 21 A. Well, I haven't seen -- maybe later on, 22 we'll see some trades. You know, it wouldn't 13951 1 surprise me. 2 Q. This doesn't refresh your recollection 3 that sales were made out of the mortgage-backed 4 securities portfolio in order to generate gains? 5 A. Not this. 6 Q. This itself? This paragraph itself? 7 A. No. 8 Q. Now, I would like to move to the next 9 document, which is Tab 544, which is A1407. I 10 direct your attention to -- these are the minutes 11 of January 3rd, 1986. I direct your attention to 12 the second -- 13 THE COURT: Wait a minute. 14 September 3rd? 15 MR. GUIDO: September 3rd, 1986. I'm 16 sorry. 17 THE COURT: I think you said January. 18 MR. GUIDO: I'm sorry. 19 Q. (BY MR. GUIDO) At the top of Page 2, it 20 says, "Mr. Phillips then discussed the 21 association's mortgage-backed securities 22 portfolio. It was decided that a committee 13952 1 consisting of Mr. Phillips, Crow, Hansen, and 2 Bruce Williams with the advice and consent of 3 Smith Breeden would be empowered to make value 4 trade within the current portfolio without he can 5 up and down go such portfolio. Then it goes on to 6 say Mr. Hansen note thanked commit Breeden would 7 be making a presentation to the investment 8 committee on September 16th, 1986. It was decided 9 that the meeting would commence about 3:00 p.m. 10 and would run through dinner. It was suggested 11 that the meeting be held on the 22nd floor of the 12 large conference room." Then it goes on to say to 13 say, "Mr. Phillips reported that no trade had been 14 made in the mortgage-backed security portfolio. 15 The committee discussed whether or not the 16 association would increase its portfolio by 17 approximately $100 million to offset the current 18 negative swap position. It was decided that no 19 such acquisitions would be made until the 20 Smith Breeden meeting." Then it goes on to say, 21 "The committee then discussed at length the 22 concept of a total return versus a yield 13953 1 portfolio. It was decided that the association 2 still believed that it sufficient a yield 3 portfolio but that, once again, it should look at 4 upgrading its creditors." 5 Do you see that? 6 A. I see that. 7 Q. Do you know what that last reference is 8 to a total return versus a yield portfolio is? 9 A. Well, I'm kind of thinking that the -- 10 I think when he's saying yield, he means spread. 11 Q. Right. Net interest spread? 12 A. Yeah. 13 Q. What portfolio is being discussed 14 there? Do you recall? The high-yield bond 15 portfolio or is it the mortgage-backed security 16 portfolio or both? 17 A. Or -- or a total return portfolio in 18 addition to the spread portfolio. I can't get any 19 more meaning than that out of it. 20 Q. You don't know what portfolio it's 21 referring to? 22 A. No. 13954 1 Q. Pardon? 2 A. No. I can't make it out. 3 Particularly, I can't make out -- it should look 4 at upgrading its credit risk. I mean, that's -- 5 Q. There is no credit risk with 6 mortgage-backed securities. Right? 7 A. Right. 8 Q. So, I mean -- 9 A. I don't understand that; and I think it 10 was just a proposal anyhow, looks like. 11 Q. Okay. Now, the first three 12 paragraphs -- the first paragraph, it's discussing 13 that committee again. 14 Do you see that? 15 A. Starting from the beginning again? 16 Q. The first paragraph on Page 2. 17 A. Okay. 18 Q. Okay. 19 A. Right. 20 Q. It says, "It was decided that the 21 committee would be set up and empowered to make 22 value trades in the current portfolio without 13955 1 expanding such portfolio." 2 Do you see that? 3 A. I see that. 4 Q. Does that refresh your recollection 5 that trades were made out of the mortgage-backed 6 securities portfolio subsequent to the spring of 7 1986 in order to generate gains? 8 A. This -- this paragraph tells me that 9 they were thinking about making value trades. 10 They probably hadn't done anything yet that I know 11 of, that I've been refreshed on. 12 Q. Does it refresh your recollection -- 13 let me rephrase the question. 14 What do you think the term "value 15 trades" refers to their? 16 A. It could be, you know, yield 17 enhancement. It could be coupon trades going -- 18 selling a Fannie Mae 9 and buying a Freddie Mac 9, 19 things like that, or going from coupon to coupon, 20 agency to agency. 21 Q. Does it include, in your view, the sale 22 of mortgage-backed securities in order to generate 13956 1 gains? 2 A. It might -- that might occur but -- and 3 again, you might have a value trade that you take 4 a slight loss in but you pick up yield. 5 Q. Does the use of the term "value trade" 6 include the making of sales out of the 7 mortgage-backed securities portfolio for the 8 purpose to generate gains? 9 A. I don't know what the purpose -- it 10 could happen; but, I mean, nothing has happened 11 yet. 12 Q. I'm talking purpose. 13 A. Purpose? Value trades just could be 14 made in the normal course of actively managing a 15 portfolio, but they -- you're right. They could 16 create gains. 17 Q. There's a difference between putting on 18 a trade to effect a yield that generates a gain or 19 a loss and putting on a trade in order to generate 20 a gain, is there not? 21 A. I don't know. You would have to -- can 22 you give me a better example? 13957 1 Q. Well, I mean, I guess you and I are 2 having a problem with the meanings of words. 3 If you put on a trade for purposes of 4 enhancing the yield and it generates a gain, that 5 isn't putting that trade on for the purpose of 6 generating a profit, is it? 7 A. No. It increases the yield. 8 Q. That's the purpose. We're talking 9 purposes here. 10 Now, the use of the value trades -- 11 when this committee authorized this trading 12 committee to engage in activity, was it 13 authorizing the committee to make sales out of the 14 mortgage-backed security portfolio for the purpose 15 of generating gains? 16 A. If the generating of gains would help 17 the portfolio, I suppose that that was their 18 thinking. 19 Q. Okay. But can you tell that from the 20 use of the word "value trades"? 21 MR. VILLA: Excuse me, Your Honor. He 22 didn't use the word "value trades." The word 13958 1 "value trades" was in the document prepared by 2 another person 12 years ago. 3 Q. (BY MR. GUIDO) I mean, these are 4 minutes of the investment committee. It says, "It 5 was decided that a committee consisting of 6 Mr. Phillips, Crow, Hansen, and Bruce Williams 7 with the advice and consent of Smith Breeden would 8 be empowered to make value trades in the current 9 portfolio without expanding such portfolio. These 10 are minutes of the investment committee." 11 You sat on that investment committee, 12 did you not? 13 A. Right. 14 Q. It says all members of the committee 15 were present at that meeting? 16 A. Right. 17 Q. What were you authorizing the trading 18 committee to do when you authorized them to make 19 value trades? 20 A. Well, we -- it's my understanding that 21 they -- value trades could be made if they 22 increased either the value through profits or 13959 1 increased yield, whichever -- whichever occurred 2 that would benefit the portfolio as a whole. 3 Q. So, your understanding -- 4 A. I don't think they meant to say that we 5 shouldn't take profits or a value trade shouldn't 6 create profits. 7 Q. But your interpretation of this 8 approval by this committee as a member of the 9 committee was this was authorizing the trading 10 committee to make sales out of the mortgage-backed 11 securities portfolio for the purpose of generating 12 gains? 13 MR. VILLA: Objection. He's 14 mischaracterizing his answer. He got an answer to 15 the question, and now he wants to take one half of 16 the answer and try to recast it for this witness 17 who has been unbelievably patient throughout this 18 at five minutes after 12:00 when he's gone for 19 about nearly two hours. I would object to that. 20 He mischaracterized his answer. 21 He got his answer. Now let him live 22 with it. 13960 1 MR. GUIDO: He didn't answer this 2 question, Your Honor. My question is: Is it his 3 understanding as a member of the investment 4 committee -- does the use of the term "value 5 trades" authorizing the subcommittee to make value 6 trades include the authorization of that committee 7 to make sales out of the mortgage-backed security 8 portfolio for the purpose of generating gains? 9 It seems to me I'm entitled to an 10 answer to that question which is a very crucial 11 answer to this proceeding, Your Honor. 12 THE COURT: All right. Do you 13 understand the question? 14 THE WITNESS: Yes, I do. 15 THE COURT: All right. Let's have an 16 answer. 17 A. Within the confines of this committee, 18 they -- this indicates that they would be allowed 19 to make trades that would create a profit, yes. 20 Q. (BY MR. GUIDO) That isn't my question. 21 Okay? My question was: Were they authorized to 22 make trades for the purpose of generating a gain? 13961 1 A. They could make value trades for the 2 purpose of generating -- 3 Q. That's not what I asked you. I asked 4 you whether or not they were authorized to make 5 sales out of the mortgage-backed security 6 portfolio to generate gains on the sale. 7 MR. VILLA: He's arguing with the 8 witness now, Your Honor. The witness has told him 9 that they could make value trades which would 10 generate gains. Now he doesn't like that. Now he 11 wants to take the word "value trade" out and ask 12 him a different one. 13 He's had his answer three times. He's 14 badgering this witness, Your Honor. Asked and 15 answered. 16 MR. GUIDO: Your Honor, I don't believe 17 that's the case. The witness keeps saying -- when 18 I asked him -- and all he has to do is say "yes" 19 or "no" -- is the committee authorized to make 20 sales out of the mortgage-backed securities 21 portfolio for the purpose of generating gains? 22 He keeps coming back with Mr. Villa's 13962 1 mantra, which is they are authorized to make value 2 trades which will generate gains, Your Honor. 3 Obviously, they are authorized to do that. 4 I'm asking him whether or not they are 5 authorized to do something else. And the 6 something else is: Are they authorized to make 7 sales out of the mortgage-backed securities 8 portfolio for the purpose of generating gains? 9 That's a different question than what 10 this witness keeps answering, and the answer is 11 Mr. Villa's mantra. 12 MR. NICKENS: Your Honor, the problem 13 is that it's not something else. Mr. Guido is 14 trying to make it be something else, but it isn't 15 something else. The witness has said that it was 16 his understanding of the authorization that they 17 could make trades for the purposes of generating 18 profits and of increasing yield within his 19 understanding of that authorization. 20 Now Mr. Guido is trying to take that 21 testimony, which has been there, and make it into 22 something else which encompasses his question. 13963 1 MR. GUIDO: Your Honor, it doesn't 2 respond to my question; and I think it's very 3 clear that making a trade for the purpose of 4 generating a gain is different than making a sale 5 for value to enhance yield which happens to 6 generate a gain. Those are two different types of 7 transactions, Your Honor. He's answered it 8 authorizes the first, and that is to enhance yield 9 which will have the effect of increasing the gain. 10 The respondents do not want to allow this witness 11 to answer the second question. That is: Are 12 sales made out of the mortgage-backed securities 13 portfolio for the purpose of generating gains? 14 I think it's very clear that those are 15 two different types of transactions, Your Honor; 16 and I believe I'm entitled to the answer to the 17 second question. I would request the Court to 18 direct this witness to answer the second question. 19 MR. NICKENS: Your Honor, the witness 20 has answered the question. Whether we go over 21 this one more time for Mr. Guido's sake -- if we 22 can end it, then I would suggest that the witness 13964 1 try one more time. 2 THE COURT: Mr. Huebsch, do you 3 understand the distinction that Mr. Guido is 4 making? 5 THE WITNESS: Yes, I do. 6 THE COURT: Can you answer it? 7 THE WITNESS: I can answer it this way: 8 This refreshes my memory to the extent that value 9 trades could be made by this committee for the 10 purpose of increasing the yield or obtaining a 11 profit. 12 THE COURT: All right. We'll adjourn 13 until 1:30. 14 15 (Lunch break.) 16 17 THE COURT: Be seated, please. We'll 18 be back on the record. 19 Mr. Guido, you may continue. 20 MR. GUIDO: Thank you, Your Honor. 21 Q. (BY MR. GUIDO) I think that the last 22 document that we were talking about was 13965 1 Exhibit A1407, Tab 544. I would like to now move 2 to Exhibit A1408 -- the tab number, I don't know. 3 MR. NICKENS: 545. 4 MR. GUIDO: 545. 5 Q. (BY MR. GUIDO) -- which is the minutes 6 of the investment committee of September 10th, 7 1986. I would like to direct your attention to 8 the second page of the exhibit. It says, 9 "Mr. Crow then discussed the association's 10 mortgage-backed securities transactions. He noted 11 that the mortgage-backed securities committee had 12 met twice during the past week and that their 13 minutes an recommendations had been submitted to 14 the investment committee. After full review and 15 discussion, such recommendations were unanimously 16 approved." 17 Do you see that? 18 A. I see that, yes, sir. 19 Q. Turn to the last page of the document 20 which is a memo from Doug Hansen to Bruce 21 Williams, Joe Phillips, and Mike Crow entitled 22 "Mortgage-backed security trading committee." 13966 1 Do you see that? 2 A. I see that. 3 Q. It says, "The committee approved the 4 execution of dollar rolls prior to September 30, 5 providing the dollar rolls are not extensions of 6 current dollar rolls (securities which have been 7 dollar rolled more than once require a subsequent 8 35-day holding period before they are available 9 for sale)." 10 Do you see that? 11 A. Right. I see that. 12 Q. Do you know what the 35-day period is 13 referring to? 14 A. I don't recall. Could I just read 15 this? 16 Q. Sure. 17 A. No. I'm unfamiliar with that holding 18 period. 19 Q. All right. Now, let's go to the fourth 20 paragraph or the third paragraph. "The committee 21 discussed two possible constraints on dollar rolls 22 at this time. Both were found not to be real 13967 1 constraints at this time. The first was the 2 possible necessity of selling the mortgage-backed 3 securities in order to reinvest in a service 4 corporation prior to the end of the third 5 quarter." 6 Do you see that? 7 A. I see that. 8 Q. Do you recall why that was an issue? 9 A. No. I don't recall the thinking behind 10 this. I don't. 11 Q. Then it says, "The purpose of this 12 would be to meet guidelines for the maturity 13 matching credit on required net worth. Upon 14 consultation with the accounting department, it 15 was determined that the restatement of swaps and 16 caps on FHLB, Section H, will bring the one-year 17 GAP to 17 percent and the three-year GAP to 18 15 percent. This will allow United to qualify for 19 almost all of the maturity matching credit without 20 the movement of MBS to a sub." 21 Do you know what that's referring to? 22 A. I think it was, you know, a regulatory 13968 1 accounting issue. 2 Q. Why was this an issue that was being 3 raised by the mortgage-backed security trading 4 committee? Do you know? 5 A. That's surprising to me, except if they 6 were -- I don't know why it would come up there. 7 Q. The next point says, "The second was 8 the possibility that United would wish to swap out 9 of the current coupon MBS or set up an MBS sub 10 before the end of the year. If dollar rolls are 11 executed now, the securities would not be free for 12 sale until November. If the market drops between 13 now and then, United would be hung with the 14 securities received from the dollar roll, and 15 therefore lose the flexibility to restructure the 16 portfolio. It was determined, however, that 17 should United decide in the next few weeks to 18 restructure the portfolio, the current values 19 could be protected by making a forward sale at 20 this time for settlement in November or December." 21 Do you know what that paragraph is 22 referring to? 13969 1 A. No. I don't have a clear idea. I 2 think -- I think that 35-day thing is what's 3 bothering them down here, but I don't know the -- 4 Q. What do they think the 35-day period is 5 going to prevent them from doing if interest rates 6 drop? 7 A. I don't think they can sell any -- it 8 looks -- from -- what I'm getting from here -- and 9 I don't remember at the time -- what I see here is 10 that you have to wait 35 days after you get your 11 securities back from a dollar roll before you can 12 sell them. 13 Q. Is this addressing the problem that if 14 you have to wait the 35 days, the 35-day period 15 may prevent you from making sales out of the 16 mortgage-backed securities in order to generate 17 gains? 18 A. You know, I don't know whether that's 19 the thrust of this. 20 Q. Okay. Let's go to the next document. 21 It's Tab 379, B1212. And this is the 22 mortgage-backed security trading committee meeting 13970 1 of September 8th. The memo is from Doug Hansen to 2 Mike Crow and Joe Phillips, and it makes reference 3 to particular transactions. And this is the 4 second of the two trading committee meetings that 5 occurred prior to Exhibit A1408. 6 I want to direct your attention to the 7 last paragraph on the first page of B1212. "With 8 the new accounting treatment, gains and losses on 9 trades are recognized immediately. There's a 10 trade-off with every transaction between one-time 11 earnings gains or losses and changes in the 12 recurring net interest margin. The committee 13 recognized the need to devise a decision rule for 14 these situations. The decision rule would hinge 15 on the value United places on capital. The 16 committee discussed a variety of possible cost of 17 capital numbers ranging from 9 to 20 percent. 18 Input from the investment committee on this matter 19 would be helpful." 20 Do you see that? 21 A. Right. 22 Q. Do you recall that discussion coming up 13971 1 in the investment committee meeting? 2 A. I don't recall it. 3 Q. You don't recall it having come up? 4 A. No. It may have. I just don't recall 5 right now. 6 Q. Now, let's take a look at the second 7 page, the last paragraph. "The committee noted 8 that when rates rise, MBS trading becomes 9 difficult due to declines in market values." 10 Do you see that sentence? 11 A. Yeah, I see that sentence. 12 Q. Do you recall that being discussed? 13 A. You know, we talked about, you know, 14 rates going up and down in the investment 15 committee, yes. 16 Q. Well, did you discuss the difficulty of 17 trading the mortgage-backed securities portfolio 18 in a rising interest rate market? 19 A. Not that I remember. I mean -- 20 Q. What would be the consequence of making 21 sales out of the mortgage-backed securities 22 portfolio in a rising interest rate market? 13972 1 A. It would -- if you made sales? 2 Q. Uh-huh. 3 A. You know, if you had a current coupon 4 and then, after purchasing that, market rates rose 5 and then you sold it, you would have a loss 6 obviously. 7 Q. If you brought a premium coupon and 8 interest rates rose, would you still have a loss 9 if you sold it? 10 A. Where did you buy the premium? 11 Q. Let's say you bought a 12 percent in a 12 10 percent environment. You would still lose 13 money if interest rates rose, wouldn't you? 14 A. Right. 15 Q. And that's because the premium would be 16 priced based on the 10 percent market. Right? 17 A. Right. 18 Q. The same thing for discounts. Right? 19 A. Right. 20 Q. Now, going back to the last sentence on 21 the first page, it says, "With the new accounting 22 treatment, gains and losses on trades are 13973 1 recognized immediately." 2 Do you see that? 3 A. I see that. 4 Q. Is the reason in a rising interest rate 5 market USAT wasn't in a position to be able to 6 sell its mortgage-backed securities because it 7 would result in an accounting loss? 8 A. If -- if anybody sold mortgage-backed 9 securities in a rising interest rate market, there 10 would be less gains or possibly losses, yes. 11 Q. Do you know what the accounting 12 treatment that's referred to on the first page of 13 Exhibit B1212 is? 14 A. No, I don't. I don't recall what that 15 was. 16 Q. When the rolldown started -- remember 17 the rolldown? It started in December of 1985. 18 A. Yes. 19 Q. Was it your understanding that any 20 gains that were generated at that time could be 21 recognized for accounting purposes? 22 A. I don't -- I don't know what -- how the 13974 1 accountants treated those gains that came up. 2 Q. I didn't ask you how they treated them. 3 What I asked you, Mr. Huebsch, was: Was it your 4 understanding in December of 1985 when sales were 5 made out of the mortgage-backed security portfolio 6 at the beginning of that rolldown that the gains 7 were to be recognized for accounting purposes? 8 A. I don't know. 9 Q. You don't recall? 10 A. I don't recall. The primary thing we 11 were trying to do is get the portfolio in a better 12 balance. 13 Q. I understand that. I'm just trying to 14 understand -- 15 A. No, I didn't understand the accounting 16 implications of those sales. 17 Q. Let's go to the next document, which is 18 Exhibit 380A, B1231. I would like you to read 19 that document, please, which is a memorandum dated 20 September 22nd, 1986, from Doug Hansen to Mike 21 Crow, Joe Phillips, Bruce Williams, and the 22 investment committee. 13975 1 A. (Witness reviews the document.) Yes, 2 I've read it. 3 Q. Okay. It says in that transaction 4 there's a trade from Freddie Mac 9 and a halfs to 5 Freddie Mac 8 and a halfs. 6 Do you see that? 7 A. I see that. 8 Q. And the amount was $30 million face 9 amount? 10 A. Is that 38 million? 11 Q. Is it 38? $38 million. 12 A. Right. 13 Q. Okay. And it has a -- the price was 14 100.375, is that it, of what was sold? 15 A. Four and three-eighths, right. 16 Q. And the cost of -- what is that -- 98 17 point -- 18 A. 839 (sic), I read. 19 Q. And has a book yield of 9.89 and a 20 market yield of 9.33. 21 Do you see that? 22 A. Right. 13976 1 Q. Now, this says, "The gain booked is 2 $700,000." Right? 3 A. Right. 4 Q. It says, "The loss in spread income is 5 $150 million in the first year"? (sic) 6 A. Right. 7 Q. Does that refresh your recollection? 8 MR. NICKENS: 150,000. 9 Q. (BY MR. GUIDO) Does that refresh your 10 recollection that there were sales made out of the 11 mortgage-backed securities portfolio in 1986 in 12 order to generate gains? 13 A. Well, there was a gain generated on 14 this trade, yes. 15 Q. And there was a loss in the yield -- in 16 that yield, wasn't there? 17 A. Well, I notice that the market yield is 18 higher on the 8 and a halfs than it was on the 19 9 and a halfs. 20 Q. But the loss in spread income was 21 clearly $150,000 per year. Right? 22 A. Yes, I see that. 13977 1 Q. Was this a trade of yield for gain? 2 A. It was a trade to make almost five 3 times in gain what the annual yield was. 4 Q. Okay. Now, I would like to move -- 5 well, does this refresh your recollection that 6 sales were made out of the mortgage-backed 7 securities portfolio in order to generate gains? 8 A. I have -- you know, I have no doubt 9 that this document is not true. 10 Q. Okay. Let's go to A1411. That's the 11 minutes of the investment committee -- it's 12 Tab 547. Excuse me. They should be in order. 13 14 (Discussion held off the record.) 15 16 Q. (BY MR. GUIDO) This is the minutes of 17 the investment committee dated October 1st, 1986. 18 In the fourth paragraph, it says, "Mr. Phillips 19 recommended the sale of a portion of the liquidity 20 and mortgage-backed securities portfolios to 21 recognize profits which were recently created by 22 the market rally." 13978 1 Do you see that? 2 A. Yes. 3 Q. Does that refresh your recollection 4 that there were sales made out of the 5 mortgage-backed securities portfolios at USAT in 6 order to generate gains in 1986? 7 A. What it says here was it was to take 8 advantage of a rally in the market, but gains were 9 recognized. 10 Q. Okay. Does that refresh your 11 recollection that sales were made out of the 12 mortgage-backed securities portfolio in order to 13 generate gains? 14 A. It refreshes my memory to the extent 15 that profits were recognized due to these sales 16 during a market rally. 17 Q. It says, "Mr. Phillips recommended the 18 sale of a portion of the liquidity and 19 mortgage-backed securities portfolios to recognize 20 profits which were recently created by the market 21 rally." 22 Doesn't that indicate the purpose was 13979 1 to recognize profits? Yes or no? 2 A. It seemed so, yes. 3 Q. Thank you. 4 Let's move to the next document. That 5 is a document, Tab No. 343, which is A1412. These 6 are the investment committee minutes of 7 October 8th. I would like to direct your 8 attention to the second page of those minutes. 9 A. I'm here. 10 Q. At the top, it says, "Ms. Laurenson 11 then discussed the association's mortgage-backed 12 securities. She presented a proposal regarding 13 mortgage-backed security trading policy. Such 14 proposal was fully discussed and unanimously 15 approved by the investment committee. It was 16 ordered that such proposal would be presented to 17 the board of directors for their approval." 18 A. I see that. 19 Q. On the first page, it says, "A meeting 20 of the investment committee was held on October 8, 21 1986. All members of the committee were present 22 with the exception of Mr. Crow." Okay? 13980 1 A. I see that. 2 Q. Now I would like to turn your attention 3 to the document that says United's -- regarding 4 mortgage-backed security trading policy. 5 A. Where is that, Mr. Guido? 6 Q. That is at US3004917. It's probably 7 halfway into the packet of documents. 8 A. 4917? 9 Q. 4917. 10 A. Yes, I have it. 11 Q. It says, "It shall be the policy of 12 United Savings Association of Texas to undertake 13 appraised trading activities related to the 14 mortgage-backed securities investment portfolio 15 trading operation from time to time in order to 16 enhance the profitability of the association." 17 Do you recall that policy being 18 discussed at the investment committee in October 19 of 1986? 20 A. If this is the same proposal as in 21 Paragraph 1 of -- then I'm sure it happened, and I 22 was there. Is this -- is 4917, trading policy, 13981 1 the one referred to in this first paragraph? 2 Q. Well, it was found in the files of 3 USAT; and it was Bates stamped consecutively to 4 the attachments. 5 A. Okay. Then I assume that this is the 6 policy the committee was reviewing. 7 Q. Now, does that refresh your 8 recollection that trades were made out of the 9 mortgage-backed securities portfolios at USAT in 10 order to generate gains? 11 A. Well, if -- if the production of gains 12 enhanced the profitability of the association, 13 that's what this did. 14 Q. Well, do you recall whether or not 15 there was a discussion at the investment committee 16 of the meaning in order to enhance the 17 profitability of the association? 18 A. I think that was what the committee 19 wanted to do, yes. They wanted to increase the 20 profitability of the association. 21 Q. Did that include making sales out of 22 the mortgage-backed security portfolio in order to 13982 1 generate gains? 2 A. From time to time, I'm sure it would. 3 Q. Okay. Let's move to Tab 344, which are 4 the minutes of October 16th, 1986: A1413. And 5 those are -- I want to direct your attention to 6 the fourth paragraph. It says, "Ms. Sandy 7 Laurenson then discussed the association's 8 mortgage-backed securities portfolio. A report 9 showing her views on market and economy were 10 ordered attached to the minutes of the meeting." 11 And attached to this is a transaction description: 12 Mortgage-backed security value trade summary, 13 which is at Bates stamp US34938. 14 A. Yes, I'm there. 15 Q. Do you see that? 16 Now, this is a value trade summary. 17 This shows that the Freddie Mac 9 was sold at a 18 par value of 114 million and a Freddie Mac 9 and a 19 half was bought with a par value of 114 million. 20 And it shows the basis, the price of what was 21 sold, the price for what was bought, the remaining 22 maturity. 13983 1 Do you see that? 2 A. I see that. 3 Q. It has a CPR. 4 Do you see that? 5 A. Right. 6 Q. It has a bond equivalent yield. 7 Do you see that? 8 A. I see that. 9 Q. What was given up was a 9.26 percent 10 and what was bought was a 9.28 percent. 11 Do you see that? 12 A. I see that, right. 13 Q. And then there's the annualized impact 14 of the trade. Right? 15 A. Right. 16 Q. It says the yield -- the gain and loss 17 on the yield was .0002 percent. Right? 18 A. Right. 19 Q. Which resulted in the annual yield of 20 $24,000. Right? 21 A. Right. 22 Q. Okay. And then under "leveraged gain," 13984 1 the net gain or loss on the sale was $94 million. 2 Right? $91,000. Excuse me. 3 A. Right. 4 Q. Now, this is a situation where there's 5 an increase in the yield, right, of .0002 percent? 6 A. That's right, yeah. 7 Q. And that's calculated using what? 8 A. It's calculated by using the coupon 9 versus the market value versus the coupon market 10 value of the item sold. 11 Q. So, in other words, it's to take what 12 the price is -- right? 13 A. Right. 14 Q. Okay -- and adjust the interest rate, 15 the coupon interest rate based on the price. 16 Right? 17 A. Right. 18 Q. Okay. Were there any other adjustments 19 that were made to ascertain whether or not there 20 had been a yield pick-up? 21 A. There may be. I'm not aware of them. 22 Q. When transactions like this were 13985 1 brought to the investment committee, was the yield 2 adjusted for -- that was referred to as the option 3 adjustment? 4 A. That, I don't know. 5 Q. Have you ever heard of adjusting yields 6 for options? 7 A. No, I can't say that I have. 8 Q. I would like to go to the next 9 document, and that is Tab 374 at -- it's 10 Exhibit 1416. 11 MR. NICKENS: I think you mean 347. 12 MR. GUIDO: 347. 13 Q. (BY MR. GUIDO) These are the minutes of 14 the investment committee of November 5th, 1986. 15 A. Yes, I have them. 16 Q. Okay. I would like to direct your 17 attention to the second paragraph before I go into 18 the mortgage-backed securities issues. It says, 19 "Mr. Ron Huebsch introduced the representatives of 20 Caywood-Christian who proceed to describe the 21 operations of their company, their investment 22 style, their overall performance results to date, 13986 1 and the performance of the United portfolio with 2 Caywood-Christian. Material presented by 3 Caywood-Christian was distributed to the committee 4 and was ordered attached to the minutes." 5 Do you see that? 6 A. Yes. 7 Q. Who was Caywood-Christian? 8 A. Caywood-Christian was an investment 9 advisory firm that specialized in the managing of 10 high-yield bonds. 11 Q. How did you learn about them? 12 A. Both Mr. Caywood and Mr. Christian were 13 well-known, you know, people in the junk bond 14 advising business. I knew Mr. Caywood from maybe 15 10 or 12 years before when he was at Merrill 16 Lynch. 17 Q. Did you -- when did Caywood-Christian 18 first come to your attention when you were at 19 USAT? 20 A. I can't remember a date. I had known 21 of Caywood-Christian as a firm for five or six 22 years before this probably. 13987 1 Q. When you were at USAT, how did the 2 relationship between you and Caywood-Christian 3 come about between USAT and Caywood-Christian? 4 What was the first contact? 5 A. I might have called them up, but I 6 don't know. 7 Q. Did you have any discussions with 8 Charles Hurwitz about Caywood-Christian before you 9 called them? 10 A. I may well have. I may have. 11 Q. Did you and he discuss the advantages 12 of retaining Caywood-Christian -- 13 A. Yes. 14 Q. -- at USAT? 15 A. Yes, we did. And I probably talked 16 with other people in senior management about 17 Caywood-Christian. 18 Q. This paragraph indicates that they were 19 already managing a portfolio at USAT at the time 20 you introduced them to the investment committee on 21 November 5th, 1986, does it not? 22 A. I can't see where you're reading. 13988 1 Q. It says, "Mr. Huebsch introduced the 2 representatives of Caywood-Christian who proceed 3 to describe the operations of their company, their 4 investment style, their overall performance 5 results to date, and the performance of the United 6 portfolio with Caywood-Christian." 7 So, they obviously were managing the 8 portfolio. Right? 9 A. Sure. I just missed that sentence. 10 Q. So, at the time you introduced them to 11 the investment committee, they had already been 12 managing a portfolio for United? 13 A. Yeah, a small portfolio. 14 Q. How did that come about? 15 A. The rationale behind this was that this 16 was a well-known junk bond managing firm whose 17 performance we felt was good. We also -- also 18 important in the decision was that it would afford 19 us a -- an access to their research on junk bonds 20 which would supplement our own. It was just a way 21 of broadening our research as well as having some 22 money managed by some very capable people. 13989 1 Q. Did you know who the owners were of 2 Caywood-Christian? 3 A. I may have at the time. I'm sure 4 Mr. Caywood and Mr. Christian owned some of the 5 stock in Caywood-Christian. 6 Q. My question is: Do you know who owned 7 Caywood-Christian? 8 A. I may have. I don't remember now who 9 owned Caywood Christian. 10 Q. You don't know now who owned 11 Caywood-Christian? 12 A. (Witness shakes head negatively.) 13 Q. I would like to direct your attention 14 now to the paragraph -- I guess it's the 15 attachment to this set of minutes which is a 16 memorandum from Mike Crow to the investment 17 committee dated October 30th, 1986, which is at 18 Bates stamp US3005042. 19 A. Right. I have it. 20 Q. Okay. Now, that is a letter to the 21 committee regarding the Smith Breeden 22 relationship. 13990 1 Have you had an opportunity to review 2 that letter previously? 3 A. No, I haven't. 4 Q. Okay. It shows you as being a 5 recipient of that letter, does it not, on Page 2 6 of that memo? 7 A. Okay. Yeah, sure. 8 Q. Okay. 9 A. I haven't reviewed it in the last week 10 or so. 11 Q. Okay. Now, had you had an opportunity 12 to -- will you just quickly review the first 13 paragraph? 14 A. (Witness reviews the document.) Yes, 15 I've read the first paragraph. 16 Q. Now, do you recall discussions about 17 the termination of the Smith Breeden relationship 18 in the investment committee? 19 A. I don't recall any discussions about 20 the termination of the agreement. 21 Q. Smith Breeden had been retained 22 sometime shortly before May of 1986. Right? 13991 1 A. Yeah, I would say the late spring of 2 '86. 3 Q. And they were terminated sometime 4 around October 30th, 1986. Right? 5 A. It appears that way, right. 6 Q. That seems to be a rather abrupt 7 change, does it not? 8 A. Abrupt? I guess it was abrupt. I 9 don't know how abrupt it was. I wasn't really 10 part of the termination. It could have been 11 abrupt. 12 Q. You sat on the investment committee. 13 You participated in discussions with Smith Breeden 14 where they did an analysis of the portfolio. They 15 made recommendations. Right? 16 A. They never made -- as I understand the 17 process, they made -- that the special 18 subcommittee on mortgage-backed securities 19 consulted them on every trade. 20 Q. Okay. 21 A. And then they would do it, and then the 22 investment committee would -- they were a constant 13992 1 consultant. 2 Q. And they also had done an analysis of 3 the performance of the mortgage-backed securities 4 portfolio. Right? 5 A. Right. I think they did an analysis of 6 the whole savings and loan, too. They -- they had 7 done a number of things. 8 Q. Well, do you recall, you know, any 9 question coming up of why were they terminated? 10 A. I don't know. I would -- but I have 11 no -- I have no dispute with what it says here, 12 that it was a clash of cultures. Mr. Crow 13 describes it as that. I have no reason not to 14 believe him. 15 Q. Do you recall what the clash of 16 cultures was that was an issue? 17 A. Well, he does go into some details on 18 the clash of cultures. They didn't get along with 19 Ms. Laurenson. 20 Q. All right. Let me direct your 21 attention to another page of this packet of 22 materials, and that is US3005063. 13993 1 A. Yes, I have it. 2 Q. Okay. Do you see where it makes a 3 reference to Amsted Industries? 4 A. I see that, yes. 5 Q. What is this that's being purchased 6 here? 7 A. Excuse me? 8 Q. What is it that this is describing a 9 recommendation to purchase? 10 A. It looks like a junk bond to me. 11 Q. Now, who at the time was managing the 12 junk bond portfolio? This is November 5th, 1986. 13 A. I'm not sure of the precise dates; but 14 when Mr. Phillips left, senior management asked me 15 and Dr. Terry Dorsey to take over the junk bond 16 effort. They asked Dr. Dorsey on a permanent 17 basis; and they asked me could I, on an interim 18 basis until Dr. Dorsey got up to speed and/or we 19 hired somebody else, would I help out with the 20 junk bonds. And I said I would. 21 So, it was an interim appointment of 22 mine with Dr. Dorsey until Dr. Dorsey got up to 13994 1 speed on junk bonds. 2 Q. Now, if you would turn back to the 3 first page -- keep that page there marked. Turn 4 back to the first page. And you notice that the 5 first and second page, there's no mention of 6 Mr. Phillips anymore? 7 A. Yes. I don't remember that date. 8 Q. Then in the fourth paragraph, it says, 9 "Mr. Stabell then discussed the association's 10 high-yield corporate bond portfolio. His report 11 was ordered attached to the minutes of the 12 meeting. He also presented an investment summary 13 of a portion of the companies which were in the 14 company's portfolio." 15 Who is Mr. Stabell? 16 A. Stabell. 17 Q. Stabell. 18 A. Mr. Stabell was a junk bond analyst 19 that Mr. Phillips had taken on in his department. 20 He had been there a while. 21 Q. Did Mr. Stabell report to you after Joe 22 Phillips left? 13995 1 A. Well, yeah. He reported to either 2 myself or, more likely, Dr. Dorsey. But, you 3 know, Mr. Stabell would -- 4 Q. Did you participate in the decision to 5 purchase Amsted Industries junk bonds that are 6 referred to in that sentence? 7 A. I don't know whether -- I don't know 8 what the committee said, whether this 9 recommendation was acted upon. 10 Q. It says an investment summary of the 11 portion of the companies which were in the 12 company's portfolio? 13 A. It says, "Held amount: 15 million." 14 So, I take it we owned it. 15 Q. Did you participate in the decision to 16 purchase that stock? 17 A. Probably, yes. 18 Q. Do you know who the principal owners 19 were of Amsted Industries at the time? 20 A. No, I don't recall. 21 Q. Now, I would like to direct your 22 attention to -- in mine, it's a foldout. I don't 13996 1 know whether yours is -- you have a legal size. 2 It's US300547. 3 Do you see that? 4 A. Yes. 5 Q. It says, "Summary of swaps to take 6 profits." 7 Do you see that? 8 A. Yes. 9 Q. The first line says, "Freddie Mac 9 and 10 a halfs, 57 million sold. Bought Freddie Mac 9s. 11 The book price: 98.04. Sale price: 101.8215. 12 An accounting gain of $1,805,376. A yield of a 13 minus .13." 14 Do you see that? 15 A. Uh-huh. (Witness nods head 16 affirmatively.) 17 Q. And something called "economic value of 18 198,396." Can you tell us whether or not that 19 trade was made in order to generate gains by sales 20 of the mortgage-backed securities? 21 A. Well, it certainly did make a gain 22 here. 13997 1 Q. And it resulted in a decreased yield. 2 Right? 3 A. That's right. 4 Q. And in the next two transactions, those 5 show a yield increase as well as an accounting 6 gain, do they not? 7 A. I see that. 8 Q. On the yield, was the yield 9 calculation, according to your understanding, an 10 option-adjusted yield? 11 A. You asked me that before. I'm just 12 unfamiliar with that term, Mr. Guido. 13 Q. I would like to direct your attention 14 now to the Bates stamp -- or Exhibit 348, A1417. 15 It says on the second page, "Ms. Sandy Laurenson 16 then discussed the association's current 17 mortgage-backed securities" -- 18 A. Excuse me. I skipped over 347. 19 Q. I'm on 348, Tab 348. I'm sorry. Too 20 many numbers. 21 A. Okay. 22 Q. I'm looking at Exhibit 1417; and I'm 13998 1 looking at the second page of the exhibit, which 2 is 344. Okay? 3 A. Right. 4 Q. It says, "Ms. Sandy Laurenson then 5 discussed the association's current 6 mortgage-backed securities portfolio. Her report 7 was ordered attached to the minutes of the 8 meeting. Ms. Laurenson reviewed the market for 9 the past week and her outlook for the following 10 week. Ms. Laurenson requested clarification of 11 her acquisition authority. It was noted that she 12 was authorized by the investment committee to 13 acquire up to 400 million in mortgage-backed 14 securities through United MBS Corporation 15 Subsidiary." 16 Do you see that? 17 A. I see that. 18 Q. What was United MBS Corporation 19 Subsidiary? 20 A. It was a -- I believe the -- one of the 21 portfolios that Ms. Laurenson managed. 22 Q. Do you know what the clarification was 13999 1 that she sought? 2 A. No, I don't remember that specifically. 3 Q. And then in her report, if you turn to 4 Bates stamp US3010347, it says, "Mortgage-backed 5 securities portfolio. Goals for each segment of 6 portfolio. Investments: Maintain current yield 7 levels on assets. Use opportunities to take 8 profits and swap to higher-yielding securities. 9 Use opportunities to shorten swap maturities, take 10 fee income, and reduce swap yields by riding puts 11 on 5- to 10-year treasuries." 12 Do you see that? 13 A. Right. 14 Q. Let's take the first -- the second 15 sentence. It says, "Use opportunities to take 16 profits and swap to higher yielding securities." 17 What does that refer to? 18 A. Well, if opportunities came up -- what 19 I'm reading here -- and I don't remember this 20 specifically. But what I'm reading here was to 21 take profits and, with those profits, to move to 22 higher -- you know, increase your yield. 14000 1 Q. Does that refresh your recollection 2 that sales were made out of the USAT 3 mortgage-backed securities portfolios in order to 4 generate gains? 5 A. Well, she's instructed here to use such 6 opportunities to take profits. I see that here. 7 Q. Now, let's go to Tab 350, A1519. 8 MR. VILLA: 1419 or 1519? 9 MR. GUIDO: A1419. I'm sorry. 10 THE WITNESS: Right. I have it here. 11 Q. (BY MR. GUIDO) Okay. It says -- the 12 second page, second paragraph -- "Ms. Sandy 13 Laurenson then presented a report on the 14 mortgage-backed securities portfolio. Her report 15 was ordered attached to the minutes of the 16 meeting. The report was discussed at great 17 length, including the current trading in the 18 portfolio in order to adjust the portfolio for 19 market gains and losses." 20 Do you see that? 21 A. I see that. 22 Q. What does that refer to, "in order to 14001 1 adjust the portfolio for market gains and losses"? 2 A. That -- I don't know what that means. 3 Q. Does that include -- 4 A. I mean, I just don't know what it 5 means. I can't figure out the language. 6 Q. I'm sorry? 7 A. I can't figure out -- I don't know what 8 this language means. 9 Q. You don't know what the -- 10 A. "To adjust the portfolio for market 11 gains and losses." I don't -- 12 Q. You don't understand what that means? 13 A. (Witness shakes head negatively.) 14 Q. What happened in these investment 15 committee meetings in terms of how it did its 16 business as a general matter when a portfolio 17 manager made a report? I mean, what typically 18 happened? 19 A. They made a report. Questions were 20 asked. As questions were answered and there were 21 no more questions, the program was approved or 22 partially approved or not approved; and we went on 14002 1 to the next portfolio. 2 Q. With the equity arbitrage portfolio, 3 you indicated you had discretion and you 4 essentially made a report to the committee? 5 A. Well, because of the nature of the 6 portfolio, it was felt best to do it that way. 7 Q. With regard to the high-yield bond 8 portfolio, did -- 9 A. As we saw, like, Mr. Stabile's write-up 10 on Amsted, those items were pre-submitted. 11 Q. For clearance by the committee? 12 A. Right, yes. 13 Q. What about the mortgage-backed 14 securities again? 15 A. I think -- what I'm getting from this, 16 there was a general -- I think most of 17 Ms. Laurenson's major moves were preapproved. Not 18 all the smaller trades. I just don't know about 19 them. I'm sure the major funding of her 20 portfolios was approved. 21 Q. Beforehand? 22 A. Beforehand. 14003 1 Q. Then I want to direct your attention to 2 the paragraph that says, "Ms. Laurenson also 3 distributed a report on the current yield and a 4 report which showed what the yield would be if 5 rates were up 150 basis points." 6 Do you see that? 7 A. Yes, I see that. 8 MR. VILLA: How many basis points? 9 MR. GUIDO: 50 basis points. Excuse 10 me. 11 Q. (BY MR. GUIDO) Then it says, "A lengthy 12 discussion was had on the effect of interest rate 13 changes on the portfolio; and it was determined 14 that in view of the desire to adjust the 15 portfolio, it would be appropriate to take profits 16 from the AMPs, mortgage-backed securities 17 collateralizing the DARTs and AMPs issues while 18 keeping the yield at an appropriately high 19 spread." 20 Do you see that? 21 A. I see that. 22 Q. What does that refer to? 14004 1 A. Those were the -- I believe the 2 preferred stock issues, and it refers to -- to 3 changing -- changing the collateral in there. 4 These were, I believe, separate finance 5 subsidiaries. 6 Q. They were separate finance subsidiaries 7 of USAT? 8 A. These are the preferred stock. I 9 can't -- I'm searching for the name. There was a 10 name for that. Investors would buy periodically. 11 Q. They would buy preferred stock 12 periodically? 13 A. Yes, yeah. 14 Q. And those funds were then used by the 15 association to invest in mortgage-backed 16 securities which collateralized the preferred 17 stock. Right? 18 A. That's my understanding, yes. 19 Q. And that here, the committee is 20 approving the sale of the collateral underlying 21 those finance subsidiaries. Right? 22 A. Yes. I mean, they would be -- they 14005 1 would probably be approving the sale, but you 2 would have to buy other collateral or you wouldn't 3 have a preferred -- yes. 4 Q. Does this refresh your recollection 5 that sales were made out of USAT's mortgage-backed 6 securities portfolios in order to generate gains? 7 A. I can't tell about these subsidiaries. 8 I don't even know whether those gains were taken 9 into USAT itself, if there were gains. 10 Q. Well, does this show that the committee 11 approved sales out of the DART and AMPs 12 subsidiaries in order to generate gains? 13 A. Yes, but it might also have been to, 14 you know, strengthen the collateral. I'm reading 15 the profits. There were profits taken, but there 16 may have been other reasons, also. 17 Q. Well, I mean, do the minutes of the 18 investment committee not include the reasons for 19 the transactions that are approved by the 20 investment committee? 21 A. They should. And also -- also, on 22 every bond ticket that the portfolio manager made 14006 1 out, a sell ticket, there was a place on there to 2 put down -- where they were obligated to put down 3 the rationale for the trade. So, that was the 4 original documentation of the rationale. If we 5 could get ahold of those trade tickets, we would 6 get the complete picture of these trades that took 7 place. 8 Q. This says that what was being discussed 9 was taking profits due to the effect of interest 10 rate changes, does it not? 11 A. That's what it says, yes. 12 Q. Okay. 13 A. I'm saying it might have been, you 14 know, like the rolldown situation in Joe's 15 portfolio. I can't tell from this. 16 Q. Now, let's turn to the document that's 17 at US3005112. It's a memo from Bruce Williams to 18 Jenard Gross, Jerry Williams, and Mike Crow dated 19 November 24th, 1986. And it's titled "Review of 20 MBS swap arbitrage activities." 21 Do you see that? It's the same 22 exhibit. 14007 1 A. I'm sorry. 2 Q. It's just the last two pages of the 3 exhibit. 4 A. Okay. 5 Q. It says, "Since the inception of the 6 mortgage-backed security arbitrage program, the 7 association has recognized approximately 8 67 million in gains on sales through October 1986. 9 These gains were largely attributable to the MBS 10 rolldown program from high coupon to current 11 coupon securities. When combined with current 12 unrealized gains of 12 million, the MBS arbitrage 13 program has provided about 70 million (sic) in 14 total gains compared to the interest rate swap 15 mark-to-market loss of 122 million." 16 MR. NICKENS: Your Honor, for the 17 record, it's 79 million. 18 MR. GUIDO: Excuse me. I'm having 19 trouble reading the numbers these days, 20 Your Honor. 21 Q. (BY MR. GUIDO) Now, I would like to 22 direct your attention to the second page of the 14008 1 document. It says, "Based on our portfolio at 2 October 31, 1986, the estimated net spread on the 3 MBS arbitrage (excluding the new MBS subsidiary 4 and AMPs) is negative .99 percent and is 5 summarized below." 6 Do you see that? 7 A. I see that. 8 Q. Now, what was the purpose of the 9 rolldown program in the spring of 1986? 10 A. The purpose of the rolldown program was 11 to prevent further loss of assets, mortgage-backs, 12 from the acceleration of prepayment rates. 13 Q. What was the -- your understanding of 14 what you were to do at the outset of the creation 15 of the mortgage-backed securities portfolios that 16 we talked about earlier? How were you going to 17 protect that portfolio from reductions in interest 18 rates which resulted in an increase in prepayment 19 speeds? 20 A. Well, there were, you know, a number of 21 suggestions. You know, adding to the portfolio; 22 adding, you know, Treasury bonds; adding zero 14009 1 treasuries. Rolling down was one. There were a 2 number of, you know, adjustments you might make. 3 Q. Here's a rolldown to a .99 negative 4 spread. 5 A. Right. 6 Q. I presume that the purpose of a 7 rolldown is to maintain some sort of net yield, 8 wasn't it? 9 A. Yes. 10 Q. Okay. Why wasn't it successful? 11 A. Well, the -- I think the biggest 12 problem was the rapid acceleration in prepayments. 13 Q. Which were caused by what? 14 A. They were caused by a decline in 15 interest rates. They were caused by refinancing 16 made cheaper, made more convenient, less paperwork 17 to the mortgage -- to the homeowner. 18 Q. Was the prepayment rate -- the change 19 in prepayment rates that occurred between the 20 spring of 1985 and December 1985, given that 21 magnitude of an interest rate change, any 22 different than the prepayment rate change from 14010 1 previous interest rate declines of a similar 2 nature? 3 A. That, I don't know for sure; but I 4 believe it was. I don't know for sure. 5 Q. Why do you believe that to be the case? 6 Did anybody tell you that? 7 A. Well, I think that was what came out 8 of -- you know, after this acceleration occurred, 9 that was the explanation given by the experts. 10 Q. Where did you hear this? 11 A. I can't identify it. I don't think I 12 heard it from a single source. I heard it from a 13 number of sources. 14 Q. Who? What type of sources? 15 A. Well, they would be, you know, the 16 investment bankers or the analysts on the street. 17 You know, the analysts who -- 18 Q. For the investment bankers? The 19 analysts for the investment bankers? 20 A. And others. 21 Q. Did you hear it from anyone other than 22 the analysts or investment bankers who had sold 14011 1 you the swaps and the mortgage-backed securities? 2 A. I believe we did. I don't know. 3 Q. Can you name anyone? 4 A. I can't name anybody specific. 5 Q. Look at the size of the portfolio. It 6 says, "MBS, USAT, 1,000,001,750." 7 Do you see that? 8 MR. VILLA: 705. 9 MR. NICKENS: 1,001,705,000. Right? 10 A. I see that number. 11 Q. (BY MR. GUIDO) Okay. Is that your 12 understanding of the size of the MBS arbitrage 13 portfolios at USAT at the time? 14 A. That is at October 31, 1986? 15 Q. Correct. That's your understanding? 16 A. That's what this report says. I have 17 no reason to argue with it. 18 Q. Now, I would like to move to Tab 353, 19 which is A1422. These are the minutes of 20 December 15th, 1986, of the investment committee. 21 It says at Page 1, "Ms. Sandy Laurenson then 22 presented her review of the mortgage-backed 14012 1 securities portfolio. The report prepared by 2 Ms. Laurenson was ordered attached to the meeting. 3 Ms. Laurenson's report was discussed in detail." 4 Do you see that? 5 A. I see that. 6 Q. Then if you'll flip over to US35157 7 which are the activities reported in the 8 mortgage-backed security portfolios. 9 Do you see that? 10 A. I see that. 11 Q. Do you the entity that says 12 "investment"? 13 A. I see that. 14 Q. Is that what was typically referred to 15 as Joe's portfolio? 16 A. That, I don't recall. It could be. I 17 just don't know. 18 Q. Then it says "MBS sub." Is that 19 United MBS? 20 A. I guess so. I can't -- I can't tell. 21 Q. Let's go through some of these 22 transactions and see if it can help us. The first 14013 1 ones are a Freddie Mac 9 and a half and a 2 principal of (24). Does that mean that it was 3 sold? 4 A. I guess so because the presence would 5 indicate a negative. 6 Q. Then the Freddie Mac 8 and a half that 7 shows 24.3, a positive number, does that reflect a 8 purchase? 9 A. I would guess so. 10 Q. Then there's a column that says "swap 11 and gain." In this case, it's 2.9375. 12 Do you see that? 13 A. Yes, I see that. 14 Q. Do you know what that refers to? 15 A. It would probably be the gain on the 16 transaction. 17 Q. Then it has market yield and says 18 "(.15)." 19 Do you see that? 20 A. I see that. 21 Q. Does that refer to a decline in the 22 market yield between what was sold and purchased? 14014 1 A. That could be very true, yes. It could 2 be. 3 Q. Then it shows accounting numbers; and 4 it shows a positive number of $705,000. 5 Do you see that? 6 A. Yes. 7 Q. Does that refresh your recollection 8 that sales were made out of the mortgage-backed 9 securities portfolio at USAT in 1986 in order to 10 generate gains? 11 A. There were -- I don't know what this 12 whole column means, the extreme right-hand. 13 Q. What do you mean you don't know what it 14 means? 15 A. I don't know what accounting dollars 16 means. 17 Q. Did you ever know? 18 A. I don't know. I don't know now for 19 sure. 20 Q. What does accounting dollars usually 21 mean? 22 A. I would guess it was -- I can't -- 14015 1 MR. VILLA: Objection. This is just 2 rank speculation: What does accounting dollars 3 usually mean? 4 He said he doesn't know what it means. 5 This witness is so cooperative, he's littering the 6 record with all kinds of speculation on a Friday 7 afternoon. 8 THE COURT: Mr. Guido? 9 Q. (BY MR. GUIDO) You were the executive 10 vice president -- 11 MR. VILLA: Executive vice president in 12 charge of investments. 13 Q. (BY MR. GUIDO) -- were you not? 14 A. Yes. 15 Q. You've had a great deal of experience 16 reviewing financial sheets, have you not? 17 A. I've had some experience; and most of 18 it in equities, Mr. Guido. 19 Q. But you are familiar with accounting 20 records, are you not? 21 A. Somewhat. 22 Q. If there's a column that says 14016 1 "accounting dollars," what does it mean, 2 Mr. Huebsch? 3 A. Mr. Guido, I have one problem here. I 4 can't -- I don't know what the difference is 5 between the swap gain and the accounting dollars. 6 Q. Is that because you don't know what the 7 swap gain means? 8 A. That could be, too. 9 Q. All right. When you see a column that 10 says "accounting dollars," doesn't it usually mean 11 accounting gain or loss? 12 A. I don't know. It could be. I don't 13 know. 14 Q. Have you ever seen anything that says 15 "accounting dollars" that didn't mean accounting 16 gain or loss? 17 A. I don't know. I don't know. 18 Q. You don't know? 19 A. I don't know. 20 Q. How many years have you been looking at 21 financial statements, Mr. Huebsch? 22 A. Only 40, Mr. Guido. 14017 1 Q. Okay. And you sat on this committee. 2 Right? 3 A. Right. 4 Q. Let's go back and take a look at -- 5 let's go take a look at some other documents. 6 THE COURT: We'll take a short recess. 7 8 (Whereupon a short break was taken.) 9 10 THE COURT: Be seated, please. We'll 11 be back on the record. 12 Mr. Guido, you may continue. 13 Q. (BY MR. GUIDO) When we broke, we were 14 discussing Exhibit A1422 and Page 3 of the report 15 which is at 5157. 16 A. Could you give me those numbers again? 17 Q. 515 -- 353 is the tab number. A1422 is 18 the exhibit number. 19 THE COURT: What page are you on? 20 MR. GUIDO: I'm on Page 5157, 21 Your Honor, the activities under "Investment 22 committee meeting, December 15, 1986," Page 3. 14018 1 THE COURT: Thank you. 2 Q. (BY MR. GUIDO) Do you have -- look at 3 the bottom right-hand corner, Mr. Huebsch. Do you 4 have Bates stamp US3005157 in front of you? 5 A. Now I do. 6 Q. Thank you. 7 Remember we were talking about the 8 transaction where there were Freddie Mac 9 and a 9 halfs at 24 million that were sold and Freddie Mac 10 8 and a halfs for 24.3 that were purchased? 11 A. I see that. 12 Q. And then it has various transactions 13 that were described in the investment portfolio. 14 Do you see that? 15 A. Further transactions, right. 16 Q. Additional transactions. 17 A. Yes, I see those. 18 Q. Then it shows the principal AMPs. 19 Right? And the numbers in parens are reductions 20 in the principal amount reflecting sales and the 21 positive figures are numbers that reflect 22 purchases; is that correct? 14019 1 A. I would guess so. 2 Q. Okay. And then there's a column called 3 "swap and gain." You don't understand what that 4 refers to? 5 A. I believe it's a point difference 6 between the two. 7 Q. What do you mean "a point difference 8 between the two"? From the size of the 9 portfolios? 10 A. No. 11 Q. The point difference between the price 12 paid as opposed to the price received? 13 A. That might be. I'm not sure. I think 14 that's something to do with it. 15 Q. Then it has a column called "market 16 yield." 17 Do you see that? 18 A. I see that. 19 Q. And those are positive or negative 20 numbers reflecting -- if there's a sale of one 21 security for another, it will have the 22 differential either as a positive or negative 14020 1 number: Negative numbers being those surrounded 2 by parentheses, positive numbers being those that 3 are not? 4 A. I would guess so. 5 Q. Then there are transactions that are 6 just outright purchases that just have the 7 interest rates -- 8 A. I see that. 9 Q. -- or outright sales, and it has the 10 straight interest rate then. Right? 11 A. I see that. 12 Q. It's with the matched transactions that 13 there's a differential figure, sometimes in a 14 positive number and sometimes in a negative 15 number? 16 A. I see that. 17 Q. Then it has a column called "accounting 18 dollar." That's the column which you don't know 19 what it means; is that right? 20 A. I'm struggling with it. 21 Q. Why don't you indulge me and just 22 assume that that means accounting gain. Okay? 14021 1 A. Fine. Fine. 2 Q. Is that fair? 3 A. Fine. 4 Q. For the purposes of these questions. 5 I'll clarify that factually in the record at some 6 other time. 7 Now, let's take the first transaction. 8 Freddie Mac 9 and a halfs are sold, $24 million 9 worth of principal. Freddie Mac 8 and a halfs are 10 purchased, 24.3. Shows a reduction in market 11 yield of .15 percent. Right? 12 A. Right. 13 Q. Shows an accounting gain of $705,000. 14 Right? 15 A. I see that. 16 Q. Is that transaction done to generate a 17 gain? 18 A. A gain was, you know, realized. 19 Q. Was it done to generate an increase in 20 the yield? 21 A. Not the market yield. 22 Q. Pardon? 14022 1 A. Not the market yield. I notice that on 2 the reinvestment in the 8 and a halfs, there was 3 more money put in. So, maybe the yield was the 4 same. 5 In other words, as you would expect, a 6 larger principal amount of 8 and a halfs could be 7 bought when you sold -- with the proceeds from the 8 sale of a 9 and a half sale. Actually, maybe the 9 cash flow yield was the same. 10 Q. Well -- 11 A. Do you see what I mean? I can't tell, 12 but it's an observation. 13 Q. Well, let's take your observation, 14 Mr. Huebsch. You wrote a performance report -- I 15 mean a performance bonus plan that you submitted 16 to both Mr. Hurwitz and Mr. Munitz. Right? 17 A. Right. 18 Q. And one of those figures in that bonus 19 plan that the bonus was based upon is the impact 20 on the yield, right, in that: The net interest 21 spread? 22 A. Right. 14023 1 Q. So, as a portfolio manager, you had an 2 interest in making sure you showed whatever the 3 greatest figure would be. Right? 4 A. Let me put it this way: We took that 5 spread and felt that portfolio managers should be 6 rewarded or compensated for maintaining the 7 spread. If there were sales, it would somehow 8 have to be adjusted. 9 Q. Would you expect portfolio managers to 10 go around and put the lesser of two figures if 11 they could adjust the yield in a performance 12 report to the managers if their performance were 13 based on yield? 14 A. Our portfolio managers were basically 15 honest. 16 Q. So, the likelihood that there's any -- 17 that this .15 underestimates the benefit in yield, 18 this negative figure is highly unlikely, isn't it, 19 Mr. Huebsch? 20 A. I'm just observing that there was more 21 than 24 million even of 8 and a half, Freddie 8 22 and a halfs. 14024 1 Q. This report was prepared by the 2 portfolio manager. She's testified about that. 3 A. I assume it was prepared by the 4 portfolio manager. 5 Q. You've read her testimony, haven't you? 6 A. I've read some of it. 7 Q. She explained what these figures are. 8 Do you recall that? 9 A. You know, she may have. I don't 10 remember that part. It was, you know, a massive 11 amount of testimony. 12 Q. You don't have any reason to dispute 13 the effect her estimation of the .15 being a 14 negative yield? 15 A. No, I don't. I just made that 16 observation. 17 Q. Why did you make that observation then 18 if you don't have any reason to doubt her 19 credibility? 20 MR. VILLA: Objection, Your Honor. He 21 said he doesn't know what she said. Mr. Guido is 22 doubting his observation of what he said. 14025 1 THE COURT: I'll sustain the objection. 2 Do you have another question? 3 MR. GUIDO: Yes, sir. I'll move to the 4 next item. 5 Q. (BY MR. GUIDO) That shows Freddie Mac 9 6 and a halfs, 12.3 in principal being sold, Freddie 7 Mac 8 and a half, 12.4 being purchased. It shows 8 a reduction in yield of .25 percent and an 9 accounting gain of 734,000? 10 A. I see that. 11 Q. Next one shows a Freddie Mac 9 and a 12 half being sold, a Fannie Mae 9 being sold, each 13 of them being $25 million which shows a pick-up of 14 a yield of .43. 15 Do you see that? 16 MR. VILLA: I believe it's a 17 Fannie Mae 9 being purchased. 18 MR. GUIDO: Purchased. 19 A. Yes, I see that. 20 Q. (BY MR. GUIDO) Market yield .43 21 pick-up. 22 Do you see that? 14026 1 A. I see that. 2 Q. An accounting gain of $367,302? 3 A. I see that. 4 Q. Then it shows a purchase of an FBC 5 Trust 4? 6 MR. NICKENS: It's 6. I'm sorry. It's 7 a "6." 8 MR. GUIDO: 6. I'm sorry. 9 A. I see that. 10 Q. (BY MR. GUIDO) And a market yield of 11 13.5 percent. Do you know what that refers to? 12 A. No. I'm astounded by that yield 13 number. I don't know what that is. 14 Q. Then it shows a sale of Freddie Mac 15 8 percent puts, $100 million face value. Correct? 16 A. I see that. 17 Q. Okay. And it shows a market yield of 18 8.67 for an accounting gain of 171,875,000. (sic) 19 Do you see that? 20 A. I see that. 21 Q. Then it shows other transactions -- I 22 won't go through all of them. It shows other 14027 1 transactions that result in a sale of one security 2 replaced with another with an effect on the yield 3 which is negative with an accounting gain. Right? 4 A. Uh-huh. (Witness nods head 5 affirmatively.) There are a couple in here, there 6 was a yield -- yield pick-up. Three with a yield 7 decrease, and two with a yield pick-up. 8 Q. Okay. Fine. But this shows there are 9 how many transactions here where there's a sale of 10 one security being replaced with another with a 11 decrease in the market yield? How many 12 transactions? 13 A. It looks like five. 14 Q. Okay. And each of them shows an 15 accounting gain. Right? 16 A. That's right. 17 Q. Were those transactions, looking at 18 this report, transactions that were made for the 19 purposes of generating accounting gains? 20 MR. EISENHART: Your Honor, I assume 21 this question also incorporates Mr. Guido's 22 hypothetical definition for the last column. 14028 1 THE COURT: I assume. 2 MR. GUIDO: I asked the witness to 3 assume for purposes of my question, Mr. Eisenhart, 4 that accounting dollars meant accounting gains. 5 MR. EISENHART: That was quite some 6 time ago, Your Honor; and I wanted to make sure 7 the question was clear. 8 MR. GUIDO: Glad you're still with us. 9 A. It is clear as I read this that 10 accounting gains were made. 11 Q. (BY MR. GUIDO) Okay. And does it 12 indicate there whether there was any purpose other 13 than accounting gains for making those 14 transactions? 15 A. I cannot tell from this document. 16 Q. Okay. So, there is no other purpose 17 that's expressed in that document? 18 In that document. That's all I'm 19 talking about. 20 A. In this document, there is no other 21 purpose. 22 Q. Now, I would like to move to the next 14029 1 document, which is T354, which is A1423. 2 MR. VILLA: What's the tab number, sir? 3 MR. GUIDO: Tab 354. 4 Q. (BY MR. GUIDO) This is the report of 5 the investment committee of December 22nd. And on 6 the first page, it says in the third paragraph, 7 "Ms. Sandy Laurenson then presented a report 8 covering the mortgage-backed securities portfolio. 9 Her report was ordered attached to the minutes of 10 the meeting. Ms. Laurenson reviewed in detail a 11 proposed new investment and cost of funds ARMs, 12 (COF-ARMs) which, after full discussion, 13 Ms. Laurenson was authorized to acquire for 14 approximately $3 million worth of COF-ARMs. 15 Ms. Laurenson went through an action 16 recommendation list; and after full discussion, 17 those actions were approved." 18 Now, I would like to direct your 19 attention to the page that has the heading Page 2, 20 "Investment committee meeting, December 22nd, 1986 21 - Activities." 22 THE COURT: What's the Bates stamp 14030 1 number on the bottom -- 2 THE WITNESS: 03005182. 3 Q. (BY MR. GUIDO) This is another one of 4 those charts just like we've looked at. It shows 5 various transactions. The first one shows Freddie 6 Mac 8 percent put, 100 sold. 7 Do you see that? 8 A. Yes. 9 Q. It's $100 million worth of notional 10 amount? 11 A. 100 million. Right. 12 Q. It shows an accounting gain of 156,250? 13 A. I see that. 14 Q. Then we have Freddie Mac 9s being sold 15 at 3.3 million for Freddie Mac 9 and a half for 16 3.3 million. The market yield pick-up, I presume 17 that's .33 percent? 18 A. Uh-huh. (Witness nods head 19 affirmatively.) 20 Q. For a 75-million-dollar profit. Right? 21 A. 75,000. 22 MR. GUIDO: 75,000. I'm sorry. 14031 1 Q. (BY MR. GUIDO) Then we have Freddie 2 Mac 9s, $25 million being sold, and Fannie Mae 9s 3 being purchased, 25 million, for a negative yield 4 of 0.06. 5 Do you see that? 6 A. I see that. 7 Q. Then we have Freddie Mac 9 and a halfs 8 of $40 million being sold in exchange for Freddie 9 Mac 8 and a halfs for a market yield of a negative 10 .43 percent. 11 Do you see that? 12 A. I see that. 13 Q. With an accounting gain of $725,000. 14 Do you see that? 15 A. I see that. 16 Q. And the DARTs and AMPs shows a Freddie 17 Mac 8 and a half for 25 million being sold for a 18 Fannie Mae 9 and a quarter, 2.9 million, for a 19 pick-up of .40 percent in yield. Right? 20 A. Right. 21 Q. With an 88-million-dollar gain. 22 Do you see that? 14032 1 A. 88,000. 2 Q. Then we have Fannie Mae 9s, 48.8, for 3 Ginnie Mae 9s at 48.5 with a negative yield 4 pick-up of minus .02 percent. 5 Do you see that? 6 A. I see that. 7 Q. And a gain of $1.88 million, correct? 8 A. I see that. 9 Q. Now, does that indicate that there were 10 trades that were made for the purpose of 11 generating gains out of the mortgage-backed 12 security portfolios at USAT? 13 MR. NICKENS: Your Honor, may I suggest 14 the witness might want to look at the next page in 15 considering that question? 16 THE COURT: I think it should also be 17 pointed out the first page indicates that he was 18 not present at this meeting. 19 MR. NICKENS: Yes, Your Honor. 20 A. At least for the DARTs and AMPs, she 21 looks like she was moving to higher coupons. They 22 are both yield pick-ups. 14033 1 Q. (BY MR. GUIDO) Pardon? 2 A. They are both yield pick-ups. 3 Q. I mean, one of them -- in the DARTs and 4 the AMPs, there are two yield pick-ups; and then 5 there is one where there is a yield decline that 6 generated an accounting profit. Right? 7 A. Yeah. I think when you can move from a 8 Fannie Mae to a Ginnie Mae with such a small 9 decline in yield, it's probably a worthwhile 10 trade. 11 Q. For reasons other than the accounting 12 gain? 13 A. Yeah. I mean, a Ginnie Mae is, you 14 know, generally considered a much stronger 15 security. 16 Q. Are there trades on this page -- 17 MR. VILLA: Perhaps I could hear the 18 end of his answer. 19 A. It was viewed as a lot stronger credit, 20 a Ginnie Mae over a Fannie Mae. 21 Q. (BY MR. GUIDO) We've looked at a number 22 of pages here -- 14034 1 A. Well, I've just made that comment. 2 Q. -- a number of transactions at the end 3 of 1986, November and December of 1986. And does 4 that refresh your recollection that sales were 5 made out of the mortgage-backed security portfolio 6 in the end of 1986 in order to generate accounting 7 gains? 8 A. Gains were certainly realized. There 9 may be other motivations. 10 Q. Are there -- does this refresh your 11 recollection that there were transactions -- sales 12 that were made out of the portfolio for the 13 purpose of generating accounting gains? 14 MR. EISENHART: Objection. Asked and 15 answered. 16 THE COURT: Denied. 17 A. I have some -- a Fannie Mae to a Ginnie 18 Mae trade was -- while it created a profit, this 19 was a very small drop in yield for the improvement 20 in credit you would get. 21 Q. (BY MR. GUIDO) Well, I'm asking you -- 22 you know, I took you through trade reports for a 14035 1 number of meetings. I'm not talking about that 2 particular trade. It's only been an hour or so. 3 My question for you is -- I know it's 4 late on Friday. 5 My question is: Does this refresh your 6 recollection that sales were made out of the 7 mortgage-backed security portfolios at USAT in 8 order to generate gains? That's all I'm asking. 9 A. There were sales. 10 Q. For that purpose? 11 A. Yes. 12 MR. GUIDO: Your Honor, I would like to 13 move to Exhibit A1425. This is Tab 356. 14 Q. (BY MR. GUIDO) Do you have Exhibit 1425 15 in front of you? 16 A. Yes, I do. 17 Q. This is a joint meeting of the 18 investment committee of January 14th. The text 19 says January 12th. It says, "All members of the 20 committee were present." 21 A. I see that. 22 Q. It says, "Ms. Sandy Laurenson reported 14036 1 on the mortgage-backed securities portfolio. She 2 presented her report which she went over in 3 detail. Her report was ordered attached to the 4 minutes of the meeting." 5 Do you see that? 6 A. I see that. 7 Q. Now I would like to direct your 8 attention to the page that's Bates stamped 9 US3005204. 10 Do you see that? 11 A. I see that. 12 Q. You see under "investments," it says, 13 "Freddie Mac 8 puts, 100 million, and 150 million 14 principal" -- 15 A. Right. 16 Q. Okay -- "were sold." Right? Look at 17 the far right-hand column. What does that column 18 say? 19 A. It says "accounting gain." 20 Q. This one has a word after the dollar 21 sign, doesn't it? 22 A. Yes. 14037 1 Q. This one says "accounting gain"? 2 A. I see that. 3 Q. Does that help clarify in your mind 4 what the earlier -- 5 A. We're moving -- getting clearer and 6 clearer. 7 Q. Sandy's reports are getting more clear? 8 Does that indicate that those puts were sold in 9 order to generate a gain? 10 MR. KEETON: Your Honor, I object. I 11 object to all the others. There is nothing about 12 "intent" on this piece of paper. It only 13 represents a transaction -- results of a 14 transaction. And yet, he twists his questions to 15 this witness to go to an intent basis as opposed 16 to a result basis. So, I object to the form of 17 the question. 18 THE COURT: Well -- 19 MR. GUIDO: Does this -- 20 THE COURT: Will you restate your 21 question? 22 Q. (BY MR. GUIDO) Does this indicate to 14038 1 you any purpose other than to generate an 2 accounting gain? 3 MR. KEETON: Your Honor, I object to 4 that because it doesn't indicate any purpose 5 either. It's the same objection I just made. 6 He's assuming his own answer. 7 THE COURT: Well, it doesn't indicate 8 any purpose. This sheet doesn't indicate a 9 purpose for the trade. It shows the result. 10 MR. GUIDO: That's one of the 11 questions, Your Honor, that I guess I'm asking the 12 witness. 13 Q. (BY MR. GUIDO) Does it show any 14 purpose? 15 A. This does not show any purpose. 16 Q. Does it indicate any -- 17 A. But there may have been. 18 Q. Does it indicate any impact other than 19 the generation of an accounting gain? 20 MR. VILLA: Your Honor, I would ask him 21 to do it transaction by transaction. He tried to 22 do that on the Fannie Maes and Ginnie Maes and got 14039 1 cut off. If he wants to ask him whether it has 2 any effect other than the common gain, I think 3 he's going to have to go through transactions to 4 do that rather than give him a whole sheet of 5 transactions. 6 MR. GUIDO: Mr. Villa, I was asking a 7 specific question about Freddie Mac 8 puts. I 8 think you misunderstood. I was only asking about 9 one transaction. 10 If you'd listen to the question, you 11 wouldn't have to make the objection. 12 MR. VILLA: I hang on every question 13 you ask. 14 MR. GUIDO: Thank you. 15 A. As I reviewed Ms. Laurenson's testimony 16 several weeks ago, she used -- when she was trying 17 to acquire assets, she would frequently short puts 18 as a way of, you know, acquiring them at 19 cheaper -- at a cheaper value and to get -- and 20 acquire the premium on the puts. It was a device 21 that she used. Now, if she made a profit on 22 them -- but this was a device for acquiring assets 14040 1 which had the incidental way of -- it could create 2 a profit. 3 Q. (BY MR. GUIDO) That was a put writing 4 program that she had. 5 Do you recall that? 6 A. Yes, yes. 7 Q. And that was in the speculative 8 account, was it not? 9 A. I don't know what account it was in. I 10 know that it's a device she used. 11 Q. So, you could be confused between an 12 investment account and a speculative put writing 13 account. Right? 14 A. I could be. 15 Q. Is there anything on this sheet of 16 paper that indicates an effect of the sale of the 17 Freddie Mac 8 puts other than to generate an 18 accounting gain? 19 A. I cannot -- I cannot see anything else 20 except that on this sheet. 21 Q. Then it says, "Ginnie Mae 8s traded 22 several times." 14041 1 Do you see that? 2 A. I see that. 3 Q. For a 304,688-dollar accounting gain? 4 A. I see that. 5 Q. Does it indicate for any other 6 purpose -- 7 MR. KEETON: Your Honor, I'm going to 8 object every time he says, "Does this indicate 9 anything other than that purpose?" The sheet 10 shows what it shows. If this witness knows, 11 that's one thing. The purpose is different than 12 what the effect of the transaction was. 13 Q. (BY MR. GUIDO) Does it show, 14 Mr. Huebsch, other than the generation of an 15 accounting gain? 16 A. This piece of paper does not. As I 17 said before, we should have the tickets where it 18 gives the rationale. 19 Q. Did you ever review any trade tickets 20 for the mortgage-backed securities trades that 21 Sandy Laurenson did? 22 A. I may have occasionally. 14042 1 Q. Did you ever see anything on there 2 where it made reference to purposes -- 3 A. I don't recall now. But I do recall 4 every trade ticket for fixed income, whether it 5 was junk bonds, mortgage-backed securities, had a 6 box in there; and the portfolio manager should 7 write the rationale for the trade. 8 Q. Well, did Sandy Laurenson write in on 9 those trade tickets the purpose of the trades, to 10 your knowledge? 11 A. I don't -- I don't know. I reviewed 12 probably very few of them. They would have -- 13 Q. Do you recall ever seeing any of the 14 trade tickets that she filled out where she put 15 the purpose on those trade tickets? 16 A. I cannot recall now. 17 Q. Now, I would like to take you through 18 the rest of the transactions on that page. There 19 are a number of trades of one coupon or one 20 security for another security. 21 Do you see that? 22 A. I see them bracketed here, uh-huh. 14043 1 Q. And it shows there are some market 2 yield increases. Right? 3 A. Well, most of them do. 4 Q. And it shows -- when you look at the 5 Freddie Mac 9 and a halfs, the $50 million, do you 6 see that in the middle of the page? 7 A. Right. 8 Q. It shows an accounting gain of 9 $1,235,367, correct? 10 A. I see that. 11 Q. And it shows a market yield decline of 12 .21 percent. 13 Do you see that? 14 A. I see that. 15 Q. Does that reflect any other impact 16 other than the generation of an accounting gain on 17 that transaction? 18 A. The impact is, you know, to move money 19 to a lower coupon, plus you get an accounting 20 gain. 21 Q. Do you know what the accounting rules 22 were that the -- was required before USAT could 14044 1 recognize a gain on the sale of one 2 mortgage-backed security and the purchase of 3 another? 4 A. No, I don't. 5 Q. Have you ever heard that it required a 6 move of at least 50 basis points in the coupon 7 value? 8 A. No, I'm not familiar with that. 9 Q. Did you ever hear that it required 10 moving from one issuer like Fannie Mae to Freddie 11 Mac? 12 A. No, I'm not aware of those accounting 13 rules. 14 Q. So, you don't know what the accounting 15 rules were? 16 A. No, I don't. 17 Q. Now, I would like to move to the next 18 exhibit, which is A1426 which is Tab 357. 19 THE COURT: Mr. Guido, how are you 20 doing on your time? Are you going to finish 21 today? 22 MR. GUIDO: No, Your Honor, I'm not. I 14045 1 have probably a good part of Monday and maybe part 2 of Tuesday. 3 MR. NICKENS: Your Honor, my comment is 4 we have told the OTS some time ago that 5 Mr. Huebsch has a family vacation involving his 6 children and grandchildren that requires that he 7 leave on a flight, I believe, at 4:00 o'clock on 8 Tuesday. 9 Three days were scheduled and provided 10 for to complete the examination. As early as 11 before our break, Mr. Guido indicated to me that 12 he thought he would be finished by noon on Monday 13 which would, of course, allow us the time. 14 Now for some reason, he's expanded that 15 estimate to say he might go into Tuesday knowing 16 that Mr. Huebsch has this family vacation planned. 17 I believe it is extremely unfair, particularly 18 given the repetitive nature of the examination, to 19 have him miss that vacation or have to come back 20 after this kind of examination. 21 We would very much like to have some 22 reasonable expectation of the completion of his 14046 1 examination so that he could make his trip. There 2 is nothing that has happened in the last hour and 3 a half that could possibly cause Mr. Guido to 4 expand his estimate a full day. 5 MR. GUIDO: Your Honor, I think that 6 Mr. Nickens has only given you part of the story. 7 We've always, in discussing this witness from the 8 very beginning, said that we had a target of three 9 to five days. This witness is -- 10 THE COURT: Well, I've heard three 11 days. I haven't heard five. 12 MR. GUIDO: Mr. Nickens and I have been 13 talking about five days, Your Honor. We did not 14 anticipate having to go through this in this 15 detail with this witness. What we did not expect 16 is his approach to responding to our questions 17 which we believe has required us to go through 18 these documents in much finer detail than we ever 19 thought we would have to. 20 We were very surprised at the 21 reluctance of the witness and his counsel with 22 regard to what we believe would have been very 14047 1 easy answers to the questions that have been 2 referred to as a mantra, Your Honor, particularly 3 in light of Sandy Laurenson's testimony about what 4 she did with this portfolio, particularly in light 5 of this witness' testimony that he's reviewed that 6 testimony. 7 Sandy Laurenson was very forthcoming in 8 a number of respects about what the purposes were 9 for a number of these transactions during that 10 period of time. And we're very surprised that 11 this witness has not seen to readily accept her 12 characterizations of these purposes of these 13 transactions. 14 So, that is what's caused this problem. 15 I had told Mr. Nickens all along that this could 16 go as far as Tuesday evening, depending on this 17 witness' cooperation in responding to the 18 questions. I have found this witness to be very 19 uncooperative in terms of his responses to the 20 questions. Therefore, I have found it necessary 21 to go into detail with these questions. 22 Mr. Nickens has known from day one when he and I 14048 1 worked out a schedule that we thought would 2 accommodate everyone's interest that this witness 3 might be here for three to five days. 4 MR. VILLA: That's not true. It was 5 three days. I think the comments about 6 Mr. Huebsch -- the Court has sat here and listened 7 to the repetitive questioning. We have heard some 8 questions about how many times Mr. Jerry Williams 9 has overseen a mortgage-backed securities 10 portfolio. You almost wonder whether they handed 11 him the wrong book and he asked the questions on 12 Friday that he asked on Thursday and Wednesday. 13 Mr. Huebsch is not agreeing to 14 statements over which he would have no reason to 15 know. He's asked him about transactions that as 16 the Court properly observed, he wasn't even at the 17 investment committee. 18 Mr. Guido is not happy with the 19 answers; so, now he's going to take the time to 20 ruin his vacation. We told him he had a family 21 reunion. He's going to be with his children and 22 grandchildren in Maine on Tuesday night. This is 14049 1 the first time we've heard it was five days. I 2 think he's abusing this person. 3 This person has been extremely patient. 4 He's been patient to the point of answering 5 questions and speculating, frankly, on things he 6 couldn't reasonably know to try to help Mr. Guido. 7 For him to make implications that this witness has 8 been uncooperative is unfair. 9 Whatever comments he wants to make 10 about me, fine. It's not true, but I have a tough 11 skin. Nothing about Mr. Huebsch justifies him 12 doing that. I think he ought to be required to 13 finish his questioning. 14 This is exactly the reason why we don't 15 want three questioners up. I can just imagine the 16 difficulty we're going to have. Most of the 17 documents they have asked him about he's never 18 seen. 19 MR. NICKENS: Your Honor, Mr. Guido 20 made a comment about being surprised. As late as 21 lunch, after the lunch break, Mr. Guido indicated 22 to me that he would finish the mortgage-backed 14050 1 securities examination today anticipating perhaps 2 getting away early to catch a plane and that he 3 would finish with his entire examination, he 4 estimated, by noon on Monday. That was what was 5 said at lunch. 6 After the last break, I made a proposal 7 to Mr. Guido about how we might be able to 8 accommodate that; and he said he basically didn't 9 want to discuss it because he was unhappy with the 10 response to a question about the accounting 11 dollars. Now, if that's the one thread upon which 12 Mr. Guido's comments are based, it's just unfair. 13 If the estimate was at lunch that we could be 14 completed with an early termination of today by 15 noon on Monday, that should still apply. 16 THE COURT: I think, Mr. Guido, you 17 should plan on finishing your direct by noon on 18 Monday. I believe you can do that. 19 MR. GUIDO: Well, Your Honor, I'm not 20 so sure that it can be done. If I am not 21 finished, I am going to put on the record that I 22 do believe that I have had difficulty with this 14051 1 witness; and I do believe -- and I used that 2 example with Mr. Nickens about this witness saying 3 "I don't understand what that last column means" 4 when it's very clear the next document explains 5 what that document means. And counsel is urging 6 the witness to obscure that document. I've had to 7 deal with that over and over again with this 8 witness with counsel trying to coach this witness 9 to obfuscate the record. And I, Your Honor, have 10 said and I told Mr. Nickens that I hoped to get 11 finished by noon on Monday. 12 If I have problems with this witness, I 13 have two other subject matter areas to go through 14 with this witness that deals with very important 15 issues that pertain to this case. Given my 16 experience with this witness and this line of 17 documents and with the high-yield bond documents, 18 all I'm saying is I may not be able to finish by 19 noon on Monday. I will put on the record that I'm 20 unable to finish and why I believe so. I am going 21 to try to finish. I have told Mr. Nickens and 22 Mr. Villa that I would try and finish this witness 14052 1 in three days, but I've told Mr. Nickens and I've 2 never had discussions with Mr. Villa about 3 scheduling because I've made it clear I will only 4 deal with one lawyer on the other side about 5 scheduling because of the confusion in the past. 6 I've made it clear over and over again 7 that my hope was to finish within three days but 8 that I believe if we had difficulty, it could go 9 as far as five days, Your Honor. I have not tried 10 to conceal anything from anybody. This is not 11 retribution. This is trying to present the facts 12 as I understand the facts to be reflected in the 13 record, to make sure that every respondent 14 responds to every question that I believe is 15 material to the issues in this case, Your Honor. 16 I do hope to finish by noon on Monday, but I 17 cannot guarantee it. That's why I said this could 18 go for part of Tuesday. 19 THE COURT: Well, I hope you can. And 20 in any case, Mr. Huebsch will be released for his 21 vacation; and we'll have to take him later. 22 MR. GUIDO: That's fine with me, 14053 1 Your Honor; but I am intending to try and finish. 2 Just because I indicate that I'm trying to do 3 something, I don't believe that I have to be 4 locked into something if counsel decides to take 5 advantage of my commitment to lock in a shorter 6 period of time. That's what I believe has been 7 happening repeatedly in this proceeding, and I 8 believe it's my obligation in representing the OTS 9 to make that point clear and to fully present its 10 side of the issues in this proceeding. 11 THE COURT: All right. Proceed. 12 Q. (BY MR. GUIDO) We're at the investment 13 committee minutes of January 21st, 1987, 14 Mr. Huebsch. It says, "The meeting of the 15 investment committee was held on January 21, 1987. 16 All members of the committee were present." 17 Do you see that? 18 A. Why. 19 Q. "Ms. Sandy Laurenson reported on the 20 mortgage-backed securities portfolio. She 21 presented a report which was ordered attached to 22 the minutes of the meeting. A full discussion of 14054 1 the portfolio's interest rate sensitivity took 2 place showing the effect on the mortgage-backed 3 securities portfolio of increases and decreases in 4 interest rates. Ms. Laurenson also discussed the 5 results of her put program. It was determined 6 that the program would be reduced in size to a 7 maximum of $100 million." 8 Now, I want to direct your attention to 9 some of what she said in the report. If you go to 10 US3005222, it says, "Investment committee meeting 11 January 24, 1987 market review"? 12 A. I see that. 13 Q. It has various reports. And look under 14 "activities." It says, "Realize profits in the 15 speculative put writing program exceeded 16 1.87 million over one and a quarter months." 17 Does that refresh your recollection 18 that the put writing program that you were 19 referring to was in the speculative account? 20 A. We saw that in the prior document. 21 Q. The prior document, the puts were in 22 the investment accounts? 14055 1 A. I think they were. 2 Q. They weren't in the speculative 3 account? 4 MR. NICKENS: Your Honor, the prior 5 page of the document indicates otherwise. And 6 Mr. Guido's statements are not evidence, but it 7 suggests to the witness that that would be the 8 truth. The prior page, which was not discussed in 9 that very document which is at US5203 of 10 Exhibit 1425, discussed the profits on the put 11 writing in last week's Ginnie Mae speculation to 12 some 600,000. 13 THE COURT: So, you're suggesting that 14 the puts shown on Page 5204 were in the 15 speculative account? 16 MR. NICKENS: Yes, Your Honor. That's 17 what I'm suggesting based upon the evidentiary 18 record we have here even though they are written 19 down opposite a column that says "investment." 20 THE COURT: What's your question? 21 MR. GUIDO: Your Honor, all I wanted to 22 do is point out that the speculative put writing 14056 1 that's referred to here was a speculative put 2 writing program and that the document that we 3 looked at before had the sale of puts under an 4 investment account. Mr. Nickens can try and 5 clarify the record when he has an opportunity with 6 this witness. All I'm saying is that it showed 7 under the "investment account" -- that's all I was 8 asking this witness. 9 Q. (BY MR. GUIDO) Now, I would like to 10 direct your attention to the Page US30005224 of 11 Exhibit A1426. This is the January 21st, 1987 12 meeting. 13 Do you see under "sensitivity analysis" 14 what it says? 15 A. Uh-huh. (Witness nods head 16 affirmatively.) 17 Q. Says, "The MBS portfolio when combined 18 with the interest rate drops are favorably 19 positioned for further great declines." 20 Do you see that? 21 A. I see that. 22 Q. Then look to the next page. That has a 14057 1 liquidation value which is sometimes referred to 2 as a sensitivity analysis. 3 A. Okay. 4 Q. Is that statement, "The MBS portfolio 5 when combined with the interest rate swaps are 6 favorably positioned for further rate declines" 7 substantiated by that statement at US35225? 8 A. What I can determine from 3005225 is 9 that the portfolio would do better 100 basis 10 points down rather than 100 basis points up -- 11 Q. Okay. So that if -- 12 A. -- rereading this net liquidating value 13 column. 14 Q. Okay. Now, does that support the 15 statement that's made under "sensitivity 16 analysis": "The MBS portfolio when combined with 17 interest rate swaps are favorably positioned for 18 further rate declines"? 19 A. It would apparently be in agreement. 20 Q. And looking at the sensitivity analysis 21 of the liquidation value, what does it show would 22 happen if interest rates went up? 14058 1 A. That the liquidating value would 2 decline by $47 million to minus 148 million. 3 Q. So that with interest rates declining, 4 it would show a gain of approximately $11 million, 5 an improvement of $11 million. 6 If interest rates went up 100 basis 7 points, it would show a decline in value of 8 approximately $47 million? 9 A. That's what this page says. 10 Q. Now, look back at the first page. It 11 says, "A full discussion of the portfolio's 12 interest rate sensitivity took place showing the 13 effect of the mortgage-backed securities portfolio 14 of increases and decreases in interest rates." 15 Do you see that? 16 A. I see that. 17 Q. Do you recall -- it indicates that all 18 members of the committee were present. 19 A. Right. 20 Q. Do you recall any discussion about the 21 risks to the association by positioning the 22 portfolio favorably for an interest rate decline 14059 1 in January of 1987? 2 A. I am sure it was discussed. I can't 3 remember the -- how fully it was discussed, but I 4 presume it was discussed. 5 Q. And all of the information seems to be 6 available to the committee in this report? 7 A. Well, the committee -- the committee 8 obviously saw this sensitivity index here. 9 Q. Okay. Now, what was the committee's 10 responsibility when Sandy Laurenson came to it and 11 explained what the position of her portfolio was 12 and what the likely -- or what the effects would 13 be if interest rates moved in one direction or 14 another? 15 A. They would obviously, you know, ask her 16 questions about this. 17 Q. If they felt it was not a safe 18 practice, were they obligated to express 19 themselves? 20 A. Yes. 21 Q. Had they expressed themselves the 22 various times when they thought something was 14060 1 unsafe? 2 A. I can't recall. 3 Q. You don't recall any instances of that 4 happening? 5 A. (Witness shakes head negatively.) 6 Q. I would like to move to the next 7 document which is Tab 358, which is A1427. These 8 are the minutes of January 28th, 1987, of the 9 investment committee. It says, "A joint meeting 10 of the investment committee was held on 11 January 28th. The forum of the committee was 12 present." In the first paragraph, it indicates 13 you discussed in detail the current equities 14 portfolio. Then it says on the second page, 15 "Ms. Sandy Laurenson then reviewed the current 16 status of the mortgage-backed securities 17 portfolio. Her report was ordered attached to the 18 minutes of the meeting. During Ms. Laurenson's 19 report, Mr. Bruce Williams excused himself from 20 the meeting. After discussion of the report, the 21 committee approved the acquisition of up to 22 25 million in Fannie Mae strip securities." 14061 1 Do you see that? 2 A. I see that. 3 Q. Now, I would like you to direct your 4 attention to the report which starts at US35259. 5 A. Right. I have it. 6 Q. See under "P&L summary" under "DARTs 7 and AMPs"? 8 A. Uh-huh. (Witness nods head 9 affirmatively.) 10 Q. "We swapped coupons and took 11 2.16 million in profits"? 12 A. I see that. 13 Q. Now look at the second page of it. It 14 says -- under "sensitivity analysis," it says, 15 "The arbitrage sub is fairly well-balanced for a 16 portfolio of 709 million." 17 A. Excuse me. Where are we? 18 Q. Well, it's US -- it's the long page, 19 US3005260. 20 A. Okay. 21 Q. See where it says, under "sensitivity 22 analysis," "The arbitrage sub is fairly 14062 1 well-balanced for a portfolio of $709 million"? 2 A. I see that. 3 Q. Okay. Now, Sandy Laurenson's sub, 4 which was called United MBS, do you recall what 5 the size of that portfolio was? 6 A. I don't -- I don't recall its size. 7 Q. Do you recall how the portfolio was 8 created over time? 9 A. You mean from its starting point? 10 Q. Uh-huh. 11 A. I don't know what its -- the size at 12 its starting point was. 13 Q. Let's take a look at US3005278. It's 14 the liquidation value MBS portfolio for 15 February 4th, 1987. It's further back into the 16 document: 5278. 17 THE COURT: My document doesn't go that 18 far. 19 THE WITNESS: Nor does mine. 20 MR. GUIDO: I'm sorry, Your Honor. I 21 jumped into another document. It's 5265. Excuse 22 me. 14063 1 Q. (BY MR. GUIDO) Have you found that 2 page? 3 A. Yes, I have. 4 Q. Now, it says, "With yields unchanged, 5 it shows a net liquidation value for the entire 6 entities of 112,124,000 negative." 7 Do you see that? 8 A. I see that. 9 Q. "Of that 124,817,000 were losses in the 10 swaps." 11 Do you see that? 12 A. I see that. 13 Q. Then you move up, and you see that 14 column that says "arbitrage"? 15 A. Right. I see that. 16 Q. It says, "If yields are unchanged, it 17 has a positive increase of 1.263 million"? 18 A. I see that. 19 Q. Okay. And then if yields go down, it 20 shows that number decreasing to $745,000 positive. 21 Do you see that? 22 A. 745. 14064 1 Q. If interest rates go up, it shows that 2 the value would decrease something like 3 4.3 million to negative 3.171? 4 A. I see the negative 3.171. 5 Q. That's what the value would be? 6 A. Presumably, yes. 7 Q. Now, I would like to direct your 8 attention to the next document, which is 9 February 4th, 1987. 10 THE COURT: What exhibit number? 11 MR. GUIDO: That's Exhibit 1428, 12 Your Honor. I'm sorry. It's Tab 359. 13 Q. (BY MR. GUIDO) It says, "A meeting of 14 the investment committee was held on February 4, 15 1987. All members of the committee were present 16 with the exception of Mr. Hurwitz and Mr. Munitz." 17 It says in the first paragraph, "Mr. Ron Huebsch 18 noted that Mr. Dorsey was extremely active in the 19 high-yield bond portfolio and, therefore, felt he 20 should be elected a member of the committee. 21 After full discussion, Mr. Dorsey was elected to 22 the committee membership of the investment 14065 1 committee of United Financial Group, Inc., United 2 Savings Association of Texas." 3 Do you see that? 4 A. I see that. 5 Q. Is that this transition you were 6 testifying about? 7 A. Yes. 8 Q. It says, "Ms. Sandy Laurenson then 9 presented a report on the mortgage-backed 10 securities portfolio. Her report was ordered 11 attached to the minutes of the meeting." 12 I would like to then direct your 13 attention to the page that's headed "MBS portfolio 14 activity." It says US3005273. 15 Do you see that? 16 A. Yes, I have it. 17 Q. Look at the first entry. See under 18 "investments," it says, "Freddie Mac 8 and a 19 halfs, 56 million principal sold"? 20 A. Right. 21 Q. And a -- that had a market interest 22 rate of 8.50 percent? 14066 1 A. Yes. 2 Q. Shows an accounting gain of 3 404,531,000? 4 A. I see that. 5 Q. Does that refresh your recollection 6 that sales were made out of the mortgage-backed 7 security portfolio in order to generate gains? 8 MR. KEETON: Your Honor, do I have to 9 object every time? There's nothing about purpose 10 in this sheet. 11 THE COURT: Well, he asked him whether 12 it shows that. So, let's get the witness' 13 statement. 14 MR. GUIDO: My question was does it 15 refresh his recollection as to whether sales were 16 made, Your Honor. 17 THE COURT: All right. 18 A. Yes, this indicates there was a gain on 19 the sale. 20 Q. (BY MR. GUIDO) Does it refresh your 21 recollection that during the period of early 1987, 22 sales were made out of the mortgage-backed 14067 1 securities portfolios in order to generate gains? 2 A. There were those gains taken. 3 Q. Were sales made for that purpose? 4 MR. EISENHART: Your Honor, is the 5 question: Were sales made generally for that 6 purpose, or was this sale made for that purpose? 7 Q. (BY MR. GUIDO) Were sales, any sales, 8 made for that purpose? 9 A. This would indicate that, you know, 10 profits arose from the sale. 11 Q. Did you have any discussions in the 12 investment committee from June of 1986 to July of 13 1987 in which you discussed sales out of the 14 mortgage-backed securities portfolio for the 15 purpose of generating gains? 16 A. There were -- as we saw from the 17 purposes from one investment committee meeting, 18 that sales could be made for that purpose. They 19 could be made to increase yield. These were -- I 20 guess we would call them -- the denomination was 21 value trades could be made, generally small trades 22 that incrementally added value to the portfolio, 14068 1 whether by gains or by increasing the income. 2 That was what I understood. Not -- that is what I 3 understood toward the end of the Smith Breeden 4 subcommittee as well as during Sandy's tenure, 5 that these types of trades could be made. They 6 were, you know, described to us as what -- as, you 7 know, intelligent portfolio management. 8 Q. Do you know what the term "gains 9 trading" means in the investment community? 10 A. I don't -- I don't use that term. 11 Q. Have you ever heard the term? 12 A. I may have heard the term. 13 Q. You may have heard the term? 14 A. I may have. 15 Q. You don't use the term? 16 A. I don't use the term. 17 Q. Do you know what the term "speculating 18 on the direction of interest rates" means? 19 A. I can -- I can visualize that, yes. 20 Q. And what do you visualize that to mean? 21 A. Well, it's when a trade is made in 22 anticipation of some movement in interest rates. 14069 1 Q. Or to take advantage of a move in 2 interest rates? 3 A. To take advantage of a movement up or 4 down in interest rates. 5 Q. Were sales made out of the 6 mortgage-backed securities portfolio to take 7 advantage of reductions in interest rates? 8 A. As I just said before, I believe the 9 subcommittee was running -- when Sandy Laurenson 10 was running things, that value trades, coupon 11 switches, moving from agency to agency, those kind 12 of trades were permitted. 13 Q. And were they made is my question. 14 A. Well, we've seen some evidence -- a 15 fair amount of evidence that they were made. 16 Q. And some of those were made for 17 purposes of increasing the yield. Right? 18 A. Yes. 19 Q. And others of those were made for 20 purposes of creating gains. Right? 21 A. Yes. 22 Q. Now, I would like to direct your 14070 1 attention to another document which is dated 2 February 18th, 1987; and that's the investment 3 committee minutes that are Exhibit A1430. 4 MR. GUIDO: Do you have the tab number 5 on that? 6 MR. NICKENS: Let's see. 7 MR. BLANKENSTEIN: There's not a tab. 8 MR. VILLA: It's not in evidence. 9 MR. GUIDO: It's not in evidence? I'm 10 pretty sure this is in evidence because this is 11 the one that has the statement of strategies and 12 objectives for mortgage-backed securities adopted 13 by the investment committee. I thought we 14 discussed that. 15 MR. NICKENS: We have a copy of 1430. 16 THE COURT: We don't have it. 17 MR. GUIDO: It is not in the record, 18 Your Honor. I'll come back to this. I'll move on 19 and complete this line. 20 Q. (BY MR. GUIDO) I would like to direct 21 your attention to A1434, which is Tab 361. These 22 are the minutes of the investment committee of 14071 1 March 18th. It says, "All members of the 2 committee were present with the exception of 3 Messrs. Crow and Hansen." It says, "Also present 4 was Mr. Mike Gill." 5 What was Mr. Gill's role? 6 A. Mr. Gill was a -- one of the junk bond 7 analysts that worked under the high-yield bond 8 portfolio manager. 9 Q. And when was he hired? 10 A. I can't -- I can't remember that. 11 Q. All right. Let me direct your 12 attention to the statement in the investment 13 committee minutes. It says, "Sandy Laurenson," on 14 Page 2, "then discussed the mortgage-backed 15 securities portfolio. She presented a report 16 which was ordered attached to the minutes of the 17 meeting." 18 Then I would like to direct your 19 attention to Bates stamp US3005498. 20 A. Yes, I have that. 21 Q. Do you see, under "United MBS," the 22 entries there? 14072 1 A. I see that. 2 Q. Okay. It shows purchases of 3 $100 million worth of Ginnie Mae 9 IOs? 4 A. Yes. 5 Q. Purchase of 9 and a half Ginnie Maes, 6 325 million? 7 A. I see that. 8 Q. Then it has the number of sales? 9 A. I see that. 10 Q. These aren't matched sales in any way. 11 These are just sales. Right? 12 A. I don't see -- I don't see any matched 13 sales there. 14 Q. And it shows the various accounting 15 consequences of those transactions. Right? 16 A. I see that in the extreme right-hand 17 column. 18 Q. Okay. And it shows a loss on the 19 Fannie Mae 10 and a halfs of 50 million, a gain on 20 the Freddie Mac -- 21 A. 50,000. 22 Q. Excuse me. Thank you. 50,000. 14073 1 Freddie Mac 10 and a halfs, a gain of 2 247. Fannie Mae 11s, a loss of 21 million. 3 Do you see that? 4 A. Thousand, yes. 5 Q. Thousand. Excuse me. 6 Fannie Mae 11 and a halfs, a gain of 7 67,000? 8 A. I see that. 9 Q. Then sales out of the speculative 10 account for gain? 11 A. I see those, too. 12 Q. Then sales out of USAT's portfolio for 13 gain. 14 Do you see that? 15 A. I see those. 16 Q. For total gains of 3,258,694. 17 Do you see that? 18 A. Yes. 19 Q. Is this another example of sales that 20 were made out of the mortgage-backed securities 21 portfolio in order to generate gains? 22 MR. VILLA: Objection. No evidence he 14074 1 knows what the purpose of these sales are. He 2 asked whether it refreshed his recollection or 3 whether he ever knew. 4 Q. (BY MR. GUIDO) Just asking if this is 5 another example, if you know. 6 THE COURT: I'll deny the objection. 7 Can you answer the question? 8 THE WITNESS: I can't. These are 9 not -- these don't appear to be the coupon trades 10 or the agency to agency trades we were seeing 11 before. So, I can't really answer. I mean, I'm 12 not -- I don't dispute that profits were made, but 13 I don't know the rationale for these trades. But 14 they did realize profits. 15 Q. (BY MR. GUIDO) Do you recall having any 16 discussions about what was required to be included 17 in the minutes of the investment committee? 18 A. As far as I know, we included all 19 transactions that each department did since the 20 prior -- 21 Q. Now, in your equity arbitrage reports, 22 okay, you indicated what the purposes of the 14075 1 transactions were, did you not? 2 A. Not -- no, we didn't. We had just one 3 single objective which everybody -- which was 4 well-understood. 5 Q. Okay. 6 A. And we didn't vary from that objective. 7 So -- like, on our trade tickets, we didn't 8 have -- we didn't even have a space for a, you 9 know, rationale of why we made the trade. We were 10 a singly -- you know, singly-focused -- 11 Q. A single-purpose investment -- 12 A. Yes. 13 Q. -- as opposed to the high-yield bonds 14 which had two focuses. Right? Yield: The 15 difference between cost of funds and the amount 16 earned? 17 A. Yeah, the spread. They work on a 18 spread basis. 19 Q. And generating gains. Right? 20 A. Well, from time to time, they generated 21 gains. 22 Q. And the mortgage-backed securities is 14076 1 the same way. Right? It had two objectives. One 2 is to generate a net interest yield, and the other 3 was to generate gains? 4 A. Well, by the doing of value trades. 5 Q. Did you ever have a discussion with 6 anyone at USAT about not putting in the purposes 7 of high-yield bond transactions in the investment 8 committee minutes? 9 A. Of not putting -- 10 Q. Of not putting in the purposes. 11 A. No. 12 Q. Did you ever have any discussions with 13 anyone about including the purposes for each of 14 the transactions? 15 A. Well, I believe that -- 16 Q. The high-yield bonds. That's all I'm 17 asking. 18 A. The high-yield bonds? The -- I don't 19 know whether there was a guide -- the -- the 20 guiding thing in the high-yield bonds was the 21 spread. From time to time, profits would be 22 taken. The guiding factor was the spread. And I 14077 1 think the investment committee knew that. I think 2 everybody there knew that. 3 Q. Now, I'm talking about the minutes. 4 I'm not talking about what everybody knew. I'm 5 talking about discussions about whether or not you 6 discussed excluding from the minutes of the 7 investment committee whether the purpose of a 8 trade was to maintain a spread in the high-yield 9 bond or to generate a gain. 10 A. I don't think we purposely ever 11 excluded anything. 12 Q. Did you ever discuss, with regard to 13 the high-yield bonds, the need to include in the 14 investment committee minutes what the purpose of 15 the transaction was, whether it was to generate a 16 gain or to generate or preserve a spread? 17 A. I think it came up from time to time. 18 We saw one where they talked about gains in the 19 high-yield bond portfolio. We did see that. 20 Q. We saw it once. 21 A. Well, once that I recall seeing it 22 today. There may have been other -- 14078 1 Q. Do you recall discussing the need to 2 include in the investment committee minutes what 3 the purpose was for each of the trades in the 4 high-yield bonds, whether it was to generate a 5 spread or to generate a gain? 6 MR. NICKENS: Your Honor, there are two 7 questions there; and we don't know which one he's 8 answering. And we should know whether there is a 9 distinction to be drawn. 10 I object that there are two questions 11 before the witness. 12 THE COURT: Can you break it down? 13 Q. (BY MR. GUIDO) Did you discuss in the 14 investment committee the need to report the 15 purposes of each transaction? 16 A. I don't think there was any obligation 17 to report that; but on every trade ticket, there 18 was a rationale for the trade. It was required. 19 Q. By whom? 20 A. Just by -- it was a self-discipline, 21 you know, with the fixed-income people. 22 Q. Were there any policies adopted by the 14079 1 investment committee that recorded that? 2 A. I don't recall the policy on the junk 3 bond trades, whether -- what was specifically 4 required. It was a general understanding that 5 this was a spread account and the spread should be 6 maintained as best as possible; but I don't know 7 whether that was, you know, written down or not. 8 Q. The investment committee decisions, 9 aren't those the binding decisions with regard to 10 investments of USAT? 11 A. I mean, there were investments made by 12 USAT that happened outside of the investment 13 committee. But to your question on the 14 portfolios, almost everything had to go through 15 the investment committee. 16 Q. All right. I mean, you, with regard to 17 the equity arbitrage, had the discretion to make 18 trades without going to the committee but everyone 19 else had to go to the committee? 20 A. Because of my -- 21 Q. Right. So, the investment committee 22 was a decision-making body? 14080 1 A. Right. Now, on these smaller value 2 trades in the mortgage-backed securities, I can't 3 really remember. There was a general blanket 4 authority to make these. Both of them was the 5 subcommittee and one was Sandy Laurenson. 6 Q. Is $50 million small? 7 A. I think it was in relation to -- 8 50 million was small in relation to 2 billion. 9 Q. What about an aggregate amount of 10 trades of $603 million? 11 A. $603 million is a large trade, yes. 12 Q. What about an aggregate of over 13 800 million in one month? 14 A. Oh, the aggregate? 15 Q. Aggregate in one month. 16 A. Well, if that was broken up into a 17 whole bunch of value trades, I don't see anything 18 wrong with that level -- that volume level. 19 Q. What percentage of USAT's portfolio was 20 800 million in December of 1986, Mr. Huebsch? 21 A. I don't know. 22 Q. Remember we looked at the Bruce 14081 1 Williams report? You know, the November 14th 2 report? 3 Do you recall that figure? 4 A. No, I don't. 5 Q. You don't recall the figure of about a 6 billion dollars? 7 A. What was that. 8 Q. About a billion dollars. Remember, we 9 laughed about me getting the number wrong. It was 10 1,001,705,000. 11 A. I remember that. 12 Q. What percentage is 800 of that 13 1 million -- 14 MR. NICKENS: It is absolutely 15 unnecessary to have the witness testify to what 16 percentage 800,000 is of a billion. 17 THE COURT: Sustained. 18 Q. (BY MR. GUIDO) 800 million in one month 19 is a significant amount of transactions, isn't it? 20 A. Well, I think you have to look to the 21 size of the individual transaction. If there are 22 45 value trades, $50 million each, in that month, 14082 1 I don't think anybody should be concerned about 2 that. If it was one 800-million-dollar trade, I 3 think it probably should have gone all the way up 4 to the board of directors. 5 Q. So, what you're saying is that, from 6 your perspective, there's no need -- if it's an 7 aggregate of $800 million worth of transactions in 8 a billion-dollar portfolio in a month, there's no 9 need to put the purposes of those in if they are 10 smaller transactions? 11 A. If those trades were the ones that were 12 agreed upon or in the policy of the investment 13 committee, if they were in, quote -- all those 14 trades were, quote, "value trades," coupon to 15 coupon, agency to agency, and the coupons were 16 tight trades like 8 to 8 and a half, 8 and a half 17 to 9, a trade -- a 50-million-dollar trade from a 18 9 to a 14 or 14 to a 9, that would have -- that 19 would have been looked at as probably it should 20 not have been done. 21 Q. I'm talking about recordkeeping. You 22 keep talking about what you think is an 14083 1 appropriate set of transactions. I'm just talking 2 about, you know -- don't you think that the 3 investment committee minutes -- we talked about 4 the trade tickets requiring certain information. 5 A. Right. 6 Q. And what is it about the purposes that 7 you don't think need to be included in the 8 investment committee minutes? 9 MR. NICKENS: Your Honor, I object. 10 Mr. Guido has shown the witnesses -- this witness 11 and other witnesses selective pages from the 12 investment committee minutes and is implying that 13 there is no discussion of purpose. The very last 14 document that we talked about on the page before 15 has a discussion about purposes. 16 This came up with Ms. Laurenson, as 17 well. You'll recall she was questioned about a 18 single page; and at some point or another, she 19 realized that there were discussions in other 20 parts of those minutes. 21 Now, Mr. Guido is implying to this 22 witness and asking this question that there is no 14084 1 discussion about the purposes and asking him to 2 comment on whether that is correct or not when he 3 has shown him only selective pieces from these 4 documents. I object to that. It's unfair to the 5 witness, and it's unfair to the record. 6 MR. GUIDO: It's very hard for me to 7 respond to the objection, Your Honor, because I 8 have no idea what page Mr. Nickens is referring to 9 and which exhibit. 10 MR. NICKENS: This is but one example, 11 but it's Exhibit A1434, which is the one I believe 12 we were discussing, at Page 5497, which is the 13 last series of transactions that he asked this 14 witness to comment on without referring him to the 15 fact that there is a discussion on the page before 16 at US3005497 about what the portfolio manager was 17 doing. 18 The implication is just it's factually 19 wrong and unfair to the witness because now he's 20 implied to him, "Well, there isn't a discussion of 21 purposes. And now, Mr. Huebsch, don't you think 22 that would be improper?" That's where we are, and 14085 1 it's -- 2 MR. GUIDO: I think that Mr. Nickens' 3 example is a good illustration of the point I'm 4 trying to make, Your Honor. 5 Q. (BY MR. GUIDO) Let's take a look, 6 Mr. Huebsch, at US3005497. Under "activity 7 highlights," do you see that? 8 A. Right. 9 Q. It says, "Refinance purchases with a 10 total of 500 million Ginnie Mae 9 and a halfs for 11 the MBS subsidiary. These are hedged by a series 12 of OTC cap agreements to a five-year liquidation 13 horizon." 14 Do you see that? 15 A. Yes. 16 Q. Any explanation for what the purpose of 17 that transaction was? 18 A. I don't see a specific purpose here. 19 I'm talking about the minutes -- 20 MR. NICKENS: Your Honor, could he 21 finish his answer? 22 THE COURT: All right. 14086 1 A. I assume this was the buildup of United 2 MBS portfolio, but it doesn't say that here. 3 Q. (BY MR. GUIDO) It doesn't say that 4 here? 5 A. No. 6 Q. I'm just talking about the minutes. 7 "Two, we sold 100 million Fannie Mae 8 and a halfs 8 at a gain. The 8 and a halfs had been put to us 9 last week. We sold an additional hundred million 10 puts to expire Friday." 11 Do you see any explanation of the 12 purposes of those transactions in that entry? 13 A. Not in this entry. 14 Q. Now, look at "We created synthetic 15 Freddie Mac 9 and a halfs out of Fannie Mae 10s 16 and Fannie Mae 7 and a halfs." 17 Do you see any explanation of the 18 purposes of that transaction? 19 A. Not in this page in front of me. 20 Q. Then it says, "We started talking to 21 Dillon Reed. They will send us account papers for 22 investment committee approval." 14087 1 Do you see any indication of what the 2 purpose of that set of papers was? 3 A. Well, yes. Account papers means to 4 open accounts. 5 Q. So, you think that you can infer that 6 from that? 7 A. It's not a big jump. 8 Q. Okay. Can you tell from this entry 9 under "We sold 100 million Fannie Mae 8 and a 10 halfs at a gain" what the purpose of that 11 transaction was from that entry which Mr. Nickens 12 has used as an example here? 13 A. I can't see anything on this piece of 14 paper. 15 Q. Thank you. 16 Now, I would like to move to the 17 Exhibit 1437, which is April 8th, 1987. It says, 18 "A meeting of the investment committee was held on 19 April 8, 1987. All members of the committee were 20 present with the exception of the secretary, Art 21 Berner." 22 Do you see that? 14088 1 A. I see that. 2 Q. Okay. And then at the top of the page 3 Bates stamped 5569, the second page, it has this 4 entry: "Ms. Laurenson then presented an interest 5 rate forecast from numerous economists that was 6 ordered attached to the minutes. After a lengthy 7 discussion, it was agreed that the consensus was 8 interest rates over the next year will be moving 9 in an upward direction. As a result, it was 10 agreed that the association should begin 11 lengthening the liability structure and using 12 various hedges to continue to reduce the gap." 13 Do you see that? 14 A. Right. 15 Q. Now, look at the sensitivity analysis 16 that's attached. 17 A. What page is that on? 18 Q. That is at US300594. What does that 19 show the net loss of the MBS portfolio to be with 20 interest rates unchanged? 21 A. I don't know whether to include this 22 last -- this last item. I can't make out what 14089 1 that is. 2 Q. Those puts? 3 A. Yeah. Okay. They are all puts? 4 Q. Uh-huh. Looks like they are all puts. 5 A. Yeah. Okay. The bottom line -- 6 Q. The very bottom line. 7 A. -- is 130,000,000. 8 Q. Rounded off? 9 A. Rounded off, right. 10 Q. Let's go back to US -- I mean A1426, 11 Tab 357, at Bates stamp 5225. 12 A. 357? 13 Q. It's Tab 357. It's Exhibit A1426. 14 A. Okay. I have it. 15 Q. Do you have that? 16 A. (Witness nods head affirmatively.) 17 Q. Look at the page Bates stamped 5225 on 18 Exhibit A1426. That's also a liquidation and 19 sensitivity analysis. 20 Do you see that? 21 A. I see that. 22 Q. With interest rate unchanged that shows 14090 1 net liquidation value of minus 100 million -- 2 A. Yes. 3 Q. -- which has now increased to minus 4 $130 million. 5 Do you see that? 6 A. Yes. 7 Q. Do you recall that on January 21st, 8 Sandy Laurenson presented that interest rate 9 sensitivity and explained that the portfolio was 10 favorably positioned for a rate decline? 11 Do you recall that? 12 A. I recall that, yes. 13 Q. With the sensitivity or liquidation 14 analysis showing a decline of 130 million and with 15 the comment in the minutes of A1437 which is dated 16 April 8, does it look like interest rates rose 17 instead of declining during that time period, 18 between January and April of 1987? 19 A. Hold it. I'm not getting that -- I'm 20 not getting -- I'm not getting that from this. 21 I'm getting that she is -- or the consensus was 22 that from here out, from April 8th out, that 14091 1 interest rates might rise. 2 Q. From April 8th, 1987 out, they might 3 rise? 4 A. Further into '87. 5 Q. So that that decline in value of the 6 portfolio you don't believe was attributable to an 7 increase in interest rates? 8 A. I see where you are. You're saying the 9 decline from January to April -- 10 Q. To April of '87 reflects a rise in 11 interest rates? 12 A. It could well be. I don't know. 13 Q. Okay. But at least as of April 8th, 14 the committee recognizes that it's faced with a 15 rising interest rate possibility? 16 A. That's the sense I'm getting from this 17 first paragraph. 18 Q. And look at the sensitivity analysis. 19 It shows that if there's a 100 basis point rise, 20 the sensitivity analysis, 5594, is the loss of an 21 increase from about 130 million to 194 million, an 22 increase of 64 million? 14092 1 Do you see that? 2 A. I see that. 3 Q. Now, let's look at the next paragraph 4 about the committee's response. 5 THE COURT: What page is that on? 6 MR. GUIDO: This is on 5569, 7 Your Honor, of Exhibit A1437. 8 THE COURT: Thank you. 9 Q. (BY MR. GUIDO) It says, "Ms. Laurenson 10 then presented her report on the mortgage-backed 11 securities portfolio and activity. Her written 12 report was ordered attached to the minutes of the 13 meeting. In order to hedge the portfolio in a 14 rising interest rate environment, various 15 strategies were discussed, including the purchase 16 of high coupon principal only securities, 17 interest-only securities, interest rate caps, and 18 put protection. After a lengthy discussion, the 19 committee approved the purchase of up to 20 50 million high-coupon principal-only 21 mortgage-backed securities to hedge the Arb 1 22 portfolio to purchase interest -- only 14093 1 mortgage-backed securities as a replacement for 2 mortgage-backed securities in the investment 3 portfolio and to purchase up to 100 million of 4 interest rate caps to hedge the preferred stock 5 subsidiaries." 6 Do you see that? 7 A. Uh-huh. (Witness nods head 8 affirmatively.) 9 Q. Then let's jump ahead to the 10 sensitivity analysis for April 22nd, 1987. 11 THE COURT: What exhibit is that? 12 MR. GUIDO: Your Honor, that is 13 Exhibit A14 -- either 38 or 39. It's Tab 366. 14 MR. NICKENS: 39. 15 MR. GUIDO: 39. 16 Q. (BY MR. GUIDO) Do you have that? 17 A. April 22nd, '87, yes. 18 THE COURT: Is that in the record? 19 MR. NICKENS: It is, Your Honor. 20 MR. GUIDO: Yes. It's at Tab 366, 21 Your Honor, 1439. It's the minutes of April 22nd, 22 1987. 14094 1 THE COURT: You may continue. 2 Q. (BY MR. GUIDO) What does that show in 3 terms of the sensitivity? It's at US3005655. 4 A. I have 197. 5 Q. So, it went up from 130 to 197? 6 A. Right. 7 Q. And the 197 is a figure that's 8 reflected in a 100 basis point move. Right? 9 A. No. That's zero. 10 Q. I understand. In the April 1st 11 scenario, that 197 figure reflected an increase of 12 100 basis points in interest rates? 13 A. From where -- right. There is a 14 194,971 figure in the April -- 15 Q. 1st or April 8th? 16 A. Yeah. 17 Q. April 8th sensitivity analysis, which 18 is Exhibit A1437. Right? 19 A. Yes, that's where I got it. 20 Q. Okay. That's the first mention of a 21 rising interest rate environment that we've seen 22 going through these investment committee minutes. 14095 1 Right? 2 A. That's right. 3 Q. It's talking about taking some action. 4 Then 14 days later, two weeks later, we see a loss 5 going from 130 million with unchanged interest 6 rates to 197 million. 7 Do you see that? 8 A. I see that. 9 Q. Why did that happen? 10 A. That -- this does not tell me why that 11 happened. 12 Q. Do you have any recollection? I mean, 13 it's a rather large loss in a two-week period of 14 time, Mr. Huebsch. 15 A. My guess would be that interest rates 16 rose. 17 Q. Was the investment committee 18 speculating on the direction of interest rates in 19 the early part of 1987? 20 A. Not that I'm aware of. 21 Q. You did have a discussion about 22 positioning the portfolio back on January 21, 14096 1 1987, did you not, about it being positioned for 2 declining interest rates. Right? 3 A. Yeah. As I recall, it was situated 4 for -- better situated for a decline. 5 Q. It was positive for a decline. Right? 6 A. Yeah. It was better situated. 7 Q. And you knew that if interest rates 8 moved up, that there would be a loss? 9 A. Well, a larger loss than if they moved 10 down. 11 Q. Right. I think the projection in 12 January was the loss would go from 100 million to 13 about 147 million. Right? 14 A. I believe that's true, yes. 15 Q. My question is: Did you have 16 discussions with members of the investment 17 committee or senior management about positioning 18 that portfolio to take advantage of declining 19 interest rates? 20 A. I don't recall what the discussion was; 21 but we always discussed, you know, interest rates. 22 Q. Well, this goes to my question of, you 14097 1 know, how complete these minutes are. Let's go 2 back to the minutes of January 21, 1987. That is 3 Exhibit A1426. You already had a loss of 4 $100 million in the mortgage-backed securities 5 portfolios, did you not? January 21, 1987? 6 A. That's what this indicates, yes. 7 Q. Okay. 8 A. That was a liquidating value in an 9 unchanged yield scenario. 10 Q. All right. And that showed that if 11 interest rates went up 100 basis points, that loss 12 would increase by about $47 million. Right? 13 A. That's correct. 14 Q. And that you were informed by the 15 manager of the portfolio that the MBS portfolio, 16 when combined with the interest rate swaps, are 17 favorably positioned for further rate declines. 18 Right? 19 MR. NICKENS: All of this is 20 repetitive. This is exactly the same question 21 that was put less than 30 minutes ago. 22 MR. GUIDO: This goes to my question 14098 1 about whether or not they were speculating on the 2 interest rates. 3 MR. NICKENS: Which question he has 4 answered not to his knowledge. So, now we're 5 going to take another run at it. I object that 6 it's repetitive. 7 MR. GUIDO: Your Honor, Mr. Nickens 8 suggests that the minutes are accurate. 9 MR. NICKENS: Your Honor, my suggestion 10 is Mr. Guido has mislead the witness and mislead 11 the Court by selectively taking these pages out. 12 These questions are repetitive. I object. 13 THE COURT: All right. We'll adjourn 14 until 9:00 o'clock on Monday. 15 MR. GUIDO: Thank you, Your Honor. 16 17 18 19 20 21 22