15536 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 21, 1998 22 15537 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 6 and BRYAN VEIS, Esquire of: Office of Thrift Supervision 7 Department of the Treasury 1700 G Street, N.W. 8 Washington, D.C. 20552 (202) 906-7395 9 ON BEHALF OF RESPONDENT MAXXAM, INC.: 10 FRANK J. EISENHART, Esquire 11 of: Dechert, Price & Rhoads 1500 K Street, N.W. 12 Washington, D.C. 20005-1208 (202) 626-3306 16 13 DALE A. HEAD (in-house) 14 Managing Counsel MAXXAM, Inc. 15 5847 San Felipe, Suite 2600 Houston, Texas 77057 16 (713) 267-3668 17 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO. AND CHARLES HURWITZ: 18 RICHARD P. KEETON, Esquire 19 KATHLEEN KOPP, Esquire of: Mayor, Day, Caldwell & Keeton 20 1900 NationsBank Center, 700 Louisiana Houston, Texas 77002 21 (713) 225-7013 22 15538 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 15539 1 2 INDEX OF PROCEEDINGS 3 Page 4 MICHAEL CROW 5 Continued Examination by Mr. Guido......15541 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 15540 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:00 a.m.) 3 THE COURT: Be seated, please. The 4 hearing will come to order. 5 Mr. Guido, you may continue with your 6 examination. 7 MR. GUIDO: Thank you, Your Honor. 8 THE COURT: How does your schedule look 9 now? How much time do you need for this witness? 10 MR. GUIDO: Your Honor, I hope to 11 finish by the end of the day. I don't know if 12 that will come to pass, given the pace that we've 13 been going at so far. I -- over the evening, I 14 took an effort to try and collapse things as much 15 as I could, Your Honor, to attempt to speed things 16 up, but I'm not so sure how it will go, given my 17 experience yesterday. 18 THE COURT: Let's proceed. 19 20 21 22 15541 1 2 CONTINUED EXAMINATION 3 4 Q. (BY MR. GUIDO) The -- when we left, 5 we were discussing the USAT Mortgage Finance 6 collapse. And I'd like to have you take a look at 7 the document that we discussed yesterday, A10557, 8 which is at Tab 1311. And I'd like to direct your 9 attention to the page Bates stamped 1675. 10 Do you see the reference to the sale of 11 the Ginnie Maes related to this Series D cash flow 12 bond? 13 A. Yes, sir, I do. 14 Q. And do you see -- and were those Ginnie 15 Maes the collateral for the cash flow bond? 16 A. I believe they were. 17 Q. Okay. Now, what is the usual 18 relationship between collateral and cash flow 19 bond? 20 A. A cash flow bond will have some type of 21 collateral and in the case of Ginnie Mae, Ginnie 22 Mae's about the highest quality instrument you can 15542 1 get because of its full faith and credit in the 2 U.S. Government. So, the over-collateralization 3 amount would be relatively small as opposed to -- 4 my memory is that some of the other cash flow 5 bonds had whole loans. So, the investor would 6 demand a very significant over-collateralization 7 amount. 8 Q. What do you mean by "a rather small 9 over-collateralization amount"? 105 percent? 10 A. I would -- I can't remember exactly, 11 but that would seem to be reasonable to me. 12 Q. So, was it reasonable to assume that 13 the outstanding balance on the bond was somewhere 14 around $180 million at that point in time? 15 A. I think it's a fair assumption to 16 assume that it would be in that neighborhood. 17 Q. And if no liabilities were incurred to 18 retire that debt, would that reduce the 19 liabilities by approximately $180 million at USAT? 20 A. Assuming USAT just had $180 million in 21 cash that they could retire the debt with, free 22 cash funded by equity, I think that's correct. 15543 1 Q. Okay. Or excess liquidity. Is that 2 another way of saying that? 3 A. Well, in my way of thinking, all of 4 your assets are liquidity, whether it's cash or 5 treasury bills, whatever, is funded by some type 6 of liability, either deposits or borrowings, 7 except in the case of real equity. 8 In real equity, that's not something 9 you have to pay back. 10 Q. Well, my question was: If you had 11 excess liquidity on the books which was already 12 funded with a liability and you used the excess 13 liquidity to pay down the Series D bond, 14 $180 million of the Series D bond, you haven't 15 increased your liabilities, have you? 16 A. I agree. 17 Q. Now, I'd like to direct your attention 18 to a document that has not been introduced into 19 the record. It's B665. This is a memorandum from 20 Bruce Williams to Jenard Gross, Mr. Williams, and 21 Mike Crow dated November 29th, 1985. And the 22 subject matter is the liability growth at USAT. 15544 1 Do you see the beginning paragraph? It 2 says "Based on our November 17th, 1985 strategic 3 planning meeting"? 4 A. Yes, sir. 5 MR. GUIDO: I'd like to move the 6 admission of B665 into the record, Your Honor. 7 MR. VILLA: No objection. 8 THE COURT: Received. 9 Q. (BY MR. GUIDO) Do you see the 10 reference to the strategic planning committee 11 there? 12 A. I do. 13 Q. And what was the strategic planning 14 committee again? 15 A. The strategic planning committee was a 16 committee that looked at -- typically looked at 17 longer term, big picture type issues as opposed to 18 day-to-day operations, stuff like branch sales, 19 sales of loan servicing, that sort of thing, kind 20 of strategic direction type items. 21 Q. Did it have any board members on it? 22 A. I believe -- you know, I get -- I 15545 1 remember who attended the meetings. As to who 2 were official members, I'm not sure. But 3 Mr. Hurwitz typically attended the meetings. I 4 think he was a board member of UFG. Dr. Munitz, I 5 think, was a board member of both USAT and UFG. 6 Gerry Williams was a member of the board of both 7 parties, I believe. Jenard Gross, if he were here 8 during this time -- I get confused when he came -- 9 but Jenard Gross, I believe, was on the board of 10 both entities. And I think that's all the board 11 members, I think. 12 Q. Now, this makes mention to the 13 strategic planning committee reached some 14 agreements with regard to 1986 liability growth 15 and it should fall within certain constraints. 16 Do you see that? 17 A. I see that. 18 Q. It says, "One of the objectives is to 19 maintain a minimum regulatory capital-to-asset 20 ratio of 4 percent." 21 Do you see that? 22 A. I do see that. 15546 1 Q. Now, what is the significance of the 2 4 percent? 3 A. I don't know. I just -- I don't 4 remember. I don't remember what the -- the 5 minimum or required was. I would assume the 6 4 percent is above the minimum requirement, but I 7 don't know that for a fact sitting here today. 8 Q. Well, is this setting a target for the 9 association? 10 A. It seems to me these items are talking 11 about goals, would be objectives or goals. 12 Q. Now, the second says, "Report a gradual 13 stable earnings record throughout the year." 14 Do you see that? 15 A. I do see that. 16 Q. Then it goes on to say, "This precludes 17 recognition of any large gains to build capital. 18 Any significant gains from sales of real estate, 19 branches, or loan servicing would be offset by 20 provisions for reserves." 21 Do you see that? 22 A. I do see that. 15547 1 Q. It says "Growth in 1986 would not be 2 supported by incremental debt capital." 3 A. I see that. 4 Q. What does that refer to? 5 A. I believe during this time frame or 6 certainly later, but during this time frame, we 7 may have been contemplating the issuance of 8 subordinated -- long-term subordinated debt 9 capital that was -- would count as capital for 10 regulatory purposes. And I think, later on, we 11 did, in fact, submit an application to do that. 12 Q. Now, look at the chart. Do you see the 13 chart at the bottom of the page? 14 A. Yes, sir. 15 Q. Well, we don't need to look at the 16 chart. Look at the second paragraph. "Assuming 17 we live within these guidelines, 1986 liability 18 growth will be limited to about 737 million 19 primarily due to the 4 percent regulatory capital 20 constraint." 21 Do you see that? 22 A. I do see that. 15548 1 Q. Is that $737 million in liability 2 growth sufficient to have absorbed the collapse of 3 USAT Mortgage Finance? 4 A. Yeah. As I recall, the USAT Mortgage 5 Finance was roughly 500 million. And if 6 management had decided to do nothing else, grow 7 any other area of the company but just in 8 isolation, I think the answer to your question is 9 yes, it would have been sufficient. 10 Q. Okay. Now, I'd like to hand you 11 Tab 1295, which is Exhibit 1590, which are the 12 notes or a packet of materials pertaining to that 13 strategic planning committee meeting of 14 November 17th, 1985. I particularly want to 15 direct your attention to the portion that 16 starts -- the handwritten notes that start at 17 US3008028. 18 THE COURT: Mr. Guido, does that 19 exhibit have a letter preceding? You said 1590 a 20 while ago. T1590? 21 MR. GUIDO: A1590, Your Honor. Excuse 22 me. 15549 1 THE COURT: Do you have another copy of 2 that exhibit? 3 MR. GUIDO: Your Honor, I do not. 4 MR. NICKENS: You can have my copy. 5 Q. (BY MR. GUIDO) Have you ever seen 6 this document before? 7 A. I don't remember seeing this. I most 8 likely attended this meeting. I can't be sure, 9 but I generally attended strategic planning 10 committee meetings. 11 Q. Starting on Page US3008028, do you 12 recognize the handwriting? 13 A. I think that is Bruce Williams' 14 handwriting. 15 Q. Do you recall whether at that meeting 16 there was a target of the profit for the fourth 17 quarter of 1985 established? 18 A. No, sir. I don't remember what was 19 discussed at this meeting at all or -- other than 20 what's written in these documents. 21 Q. Are you familiar with Bruce Williams' 22 handwriting? 15550 1 A. I worked with Bruce for quite some 2 time, both at First City and at United. So, just 3 through the process of elimination, a lot of the 4 other guys' writing, I couldn't read and I can 5 kind of read this; so, I think it's Bruce's. 6 Q. Well, look at US3008032. Do you see 7 halfway down the page where it says "CH"? 8 A. Where it says "CH. Need to avoid"? 9 Q. Yes. 10 A. Yes, sir, I do. 11 Q. Could you read those three bullet 12 points next to "CH"? 13 A. There's a bullet point. It says, "CH," 14 first bullet point, "Need to" -- I guess that's 15 "avoid quarterly losses." And then there's 16 several other bullet points that doesn't have "CH" 17 beside them. But then the next bullet point 18 says -- I apologize. I'm not sure I can -- I can 19 make out some of the words. 20 Q. Well, can you make out the "try to"? 21 A. Yes, that's what it looks like. 22 Q. Can you make out the next word? 15551 1 A. No, sir. I can make out the "gains." 2 Q. Can you make out "smooth out earnings"? 3 A. I can make that out. 4 Q. So, it says "try to" something "with 5 gains to smooth out earnings"? 6 A. That's the way I would read that. 7 Q. Okay. Then the next, it says -- what's 8 the next one? 9 A. "Goal-not show a quarterly loss in 10 '86." 11 Q. What is the next? 12 A. The next point, "what is" -- I guess -- 13 I don't know what that word is. 14 Q. Is that "realistic"? 15 A. I don't know, and I think the last 16 three words were "net income figure." 17 Q. And then what does it say after that? 18 A. The statement below those three bullet 19 points says "Try for 1.5 million/" -- it looks -- 20 "per quarter." 21 Q. Now, take a look at B665, the first 22 exhibit I gave you, which has the following 15552 1 constraints. 2 Is what you just read from the 3 November 17th, 1985 strategic planning committee 4 meetings minutes written by Bruce Williams 5 consistent with the three constraints that are in 6 B665: "One, maintain a minimum regulatory 7 capital-to-asset ratio of 4 percent; two, report 8 gradual, stable earnings record throughout the 9 year. This precludes recognition of any large 10 gains to build capital. Any significant gains 11 from sales of real estate branches or loan 12 servicing, et cetera, would be offset by 13 provisions for reserves. And three, growth in 14 1986 would not be supported by incremental debt 15 capital." 16 A. Okay. Let me kind of take them one at 17 a time. I see the quote in Mr. Williams' memo of 18 November 29th. I see clearly "maintain a minimum 19 regulatory capital through assets of 4 percent," 20 and I see that noted on the handwritten notes 21 here. 22 Q. Okay. 15553 1 A. Okay? The next one, I really -- I see 2 some of the same words, but I don't -- 3 Q. Well, take the second point in Bruce 4 Williams' memo, "report a gradual stable earnings 5 record throughout the year." 6 Isn't that consistent with smoothing 7 out earnings? 8 A. Yes, I believe it is. 9 Q. Okay. Is that consistent with trying 10 for 1.5 million per quarter net income? 11 A. I don't -- well, I don't see the 12 1.5 million in Mr. Williams' November 29th memo. 13 Q. It says "Report a gradual stable 14 earnings record throughout the year," does it not? 15 A. It does. 16 Q. And showing 1.5 million per quarter 17 would be consistent with that, wouldn't it? 18 A. To, quote, "Try for 1.5 million per 19 quarter" would seem to me to be consistent. 20 Q. Okay. Now, let's turn to the next page 21 of the handwritten notes in A1590. It's 22 US3008033. 15554 1 Do you see the note at the top of the 2 page? It says "Want fourth quarter 1985." 3 Do you see that? 4 A. I do. 5 Q. Can you read that for us into the 6 record? 7 A. I believe it says "Want fourth quarter 8 '85 at about 1.5 million. May report a loss for 9 the year." 10 Q. Now, let's take a look at A5010, which 11 is at Tab 557. 12 THE COURT: Mr. Guido, on this exhibit 13 we were just looking at, the notes that we were 14 going over, it did not seem to me on the face of 15 it to be in the same handwriting as we see in the 16 handwritten part. Is that -- 17 MR. GUIDO: You mean the notes that 18 start on -- 19 THE COURT: 8028 don't seem to me to be 20 in the same handwriting as the preceding page. 21 MR. GUIDO: Maybe I can clarify that 22 with some questions with the witness, Your Honor. 15555 1 Is the page that you're asking a 2 question about US3008027, Your Honor? The 3 handwritten chart? 4 THE COURT: Well, I have trouble 5 finding the page number, but that's the page -- 6 yes. Yes, you're right. 7 Q. (BY MR. GUIDO) Let's look at the 8 pages before 8028, Mr. Crow, and clarify the 9 record, if we can. Let's start at the very 10 beginning of the document. 11 A. This is the strategic -- 12 Q. Yeah. 13 A. Yes, sir. 14 Q. It says, "United Savings of Texas 1986 15 strategic planning meeting, November 17th, 1985." 16 A. It does, yes, sir. 17 Q. Does your copy have any handwriting on 18 that page? 19 A. It's got some checkmarks by the agenda 20 items, and then it's got up at the top right-hand 21 corner "BFW." 22 Q. Okay. Do you know whose handwriting 15556 1 that is? 2 A. I believe that to be Bruce Williams'. 3 Q. Okay. Now, let's go to US3008019, the 4 second page of the document. 5 Do you recognize the handwriting on 6 that? 7 A. I think that's Bruce's. 8 Q. Okay. Let's go to 8020. Do you see 9 the line that says "collateral level continues to 10 decline"? 11 A. Yes, sir. 12 Q. And you see that handwriting there? 13 A. Yes, sir. 14 Q. Do you recognize that? 15 A. Oh, that's a little small, but I would 16 guess that's Mr. Williams', Bruce. 17 Q. 8021. Do you see the circled 3 percent 18 and it says "should be 8 percent with 19 liquidity" -- 20 A. Yes, sir. 21 Q. -- "20 percent gross"? Whose 22 handwriting is that? 15557 1 A. That's Bruce Williams'. 2 Q. 8022,let's look at the handwriting on 3 the bottom of the page. There the two words 4 liability -- whose handwriting is that? 5 A. I believe that is probably Bruce 6 Williams'. 7 Q. Then look at 8023. There is an insert 8 on Item No. 3, "May use treasuries and reverse 9 repos at year end." 10 Do you see that? 11 A. I do. I believe that to be Bruce 12 Williams'. 13 Q. Let's go to the next page, 8024. Do 14 you see the written words "Get 15 percent direct 15 investment in securities investment approval"? 16 A. Yes, sir, I do. 17 Q. Whose handwriting is that? 18 A. I believe that to be Bruce Williams'. 19 Q. Okay. And look at the next page, 8025. 20 Whose handwriting is that where it has the various 21 listings at the bottom of the page? 22 A. I believe that to be Bruce Williams'. 15558 1 Q. Then look at the next page, 8026. 2 Whose handwriting is that on the page? 3 A. I believe that's Bruce Williams'. 4 Q. And then we get to this long page, 5 8027. Whose handwriting is that? 6 A. Well -- 7 Q. This is the page that the judge asked 8 the question about. 9 A. Well, my opinion is that that's still 10 Bruce Williams'; but I can't -- you know, I can -- 11 it's not a real clear copy. I can see why 12 you'd -- but it -- 13 Q. Look at the writing on the assumptions 14 at the bottom of the page. 15 MR. KEETON: Your Honor, this man is 16 not trained in handwriting, and we're going 17 through here, look at this, look at that. Anybody 18 can do this. I object to the line of questioning. 19 MS. CLARK: Your Honor, just to clarify 20 the record, Bruce Williams testified about this 21 document at some length. And it's my 22 recollection -- if we need to go back to the 15559 1 transcript -- but my recollection is that we asked 2 him about this page, and it was his opinion that 3 it was not his handwriting. But he did testify at 4 some considerable length about this document, and 5 I'm almost certain that he said this was not his 6 handwriting on the particular page you've asked 7 about. 8 THE COURT: Thank you. 9 Q. (BY MR. GUIDO) Well, I think we've 10 done the best that we can, Mr. Crow, to clarify 11 the record. Let's move on to the next document 12 that I've asked you to take a look at, and that 13 was A5010. 14 Do you see the figure on the first page 15 of that document? 16 A. Net income? 17 Q. The net income figure. 18 A. I do. 19 Q. And what does that show? 20 A. That appears to show the quarterly and 21 total year 1985 net income or net loss with the 22 zeros dropped. 15560 1 Q. And it shows $1.8 million. Right? 2 A. For the fourth quarter of 1985. 3 Q. Okay. Does it show anything with 4 regard to the income, the sources of the income, 5 that make up that 1.8-million-dollar profit? 6 A. (Witness reviews the document.) The 7 table at the bottom of that page in the far 8 left-hand set of numbers details -- or gives us a 9 summary of that figure. 10 Q. Do you see under "non-interest income," 11 "Gain on sales of securities"? 12 A. I do. 13 Q. And what does that show? 14 A. That shows 21.2 million. 15 Q. And now, take a look at the Bates stamp 16 1115 under "non-interest income" there. 17 Do you see that figure? 18 A. I do. 19 Q. And that shows the gains on sales of 20 securities totaling 21 million in the fourth 21 quarter, reflecting sales of the following. And 22 then it lists various categories. The first one 15561 1 says "Mortgage-backed securities, 12,504,000." 2 Do you see that? 3 A. I see that. 4 Q. Corporate securities of 6,223,000, and 5 liquidity securities of 2,509,000. 6 Do you see that? 7 A. I do. 8 Q. Then it says, "The gains on 9 mortgage-backed securities sales were largely 10 produced by the liquidation of 350 million of the 11 500 million financing subsidiary established in 12 late November." 13 Do you see that? 14 A. I do. 15 Q. And then it says, "The liquidation was 16 required due to new regulations adopted after the 17 subsidiary was established, which excluded it from 18 qualifying as a financing subsidiary." 19 A. I see that. 20 Q. Is that last sentence true? 21 A. I think it is. 22 Q. We just walked through various 15562 1 liability growth figures yesterday and this 2 morning. 3 Do you recall that? 4 A. I remember going through quite a few 5 liability growth figures, yes, sir. 6 Q. Okay. And we reviewed Mr. Pledger's 7 memorandum. 8 Do you recall that? 9 A. I do remember that, yes, sir. 10 Q. And we reviewed your report to the 11 asset/liability committee of about $400 million of 12 excess room to grow under the liability growth 13 standard in December of 1985. 14 Do you recall that? 15 A. I don't quite remember that, but -- I 16 don't remember all these numbers, but go ahead. 17 Q. Well, if those numbers are correct, was 18 it the liability growth regulations that forced 19 the liquidation of USAT Mortgage Finance; or was 20 it that the management of USAT determined that it 21 would rather invest its funds in a different way 22 and recognize the gains on the mortgage-backed 15563 1 securities that were held in USAT Mortgage 2 Finance? 3 A. The way I remember the process is after 4 the USAT Mortgage Finance subsidiary was formed in 5 total of, like, $500 million, that was done in 6 anticipation of certain regulatory treatment, 7 namely that the liabilities of that sub would not 8 be counted for liability growth requirements. 9 After -- and we reviewed Mr. Pledger's 10 memo. After it became apparent that, in fact, 11 they -- the liabilities would be counted, if not 12 at December 31st, certainly during the year of 13 1986, I think, as best I remember, we decided -- 14 and it's certainly my opinion -- to collapse the 15 sub. It doesn't meet the objectives for which it 16 was set up. And when I read this sentence, it 17 says, "The new regulations adopted after the 18 subsidiary was established which excluded it from 19 qualifying." I don't see a big inconsistency 20 there. 21 Q. Was there anything that precluded the 22 management from absorbing USAT Mortgage Finance 15564 1 assets and liabilities into USAT if it had chosen 2 to do so? 3 A. If it had chosen to do so and we had 4 managed our balance sheet accordingly, dropped 5 growth in certain areas and ignoring the capital 6 requirements and all that, I feel fairly confident 7 we could have shoved those assets into USAT, yes, 8 sir. 9 Q. So, you weren't obligated to liquidate 10 that. It was a business decision to liquidate 11 USAT Mortgage Finance? 12 A. I believe it's a fair statement to say 13 it was a business decision to collapse that sub 14 and sell a portion of the securities, shove a 15 portion of the securities back up into USAT 16 because the subsidiary wasn't going to cut it as 17 far as being exempt from -- being exempt from 18 consolidation for liability growth purposes. 19 Q. Was one of the reasons that you 20 structured the collapse of USAT Mortgage Finance 21 the way it was done in order to recognize the 9- 22 or 11-million-dollar gain? 15565 1 A. I don't remember that specifically, but 2 I -- and in -- you know, I didn't go to the 3 executive committee meetings. But I would be -- I 4 would fall out of my chair if it wasn't discussed. 5 I mean, I'm sure it was discussed as a factor. 6 You know, just as a normal course of business, we 7 always discussed, you know, potential gains and 8 potential losses. And this was clearly a -- you 9 know, this was a big transaction. 10 Q. Now, do you remember the swaps that 11 were mirrored? 12 A. I do. 13 Q. Why were they mirrored? 14 A. I don't remember exactly. I can give 15 you a pretty good guess. 16 Q. Whose idea was it to mirror them? 17 A. I don't remember whose idea. I know 18 that it was talked about -- I don't know whose 19 brain that came out of. I remember that it was 20 talked about by, I believe, Joe Phillips, myself, 21 Jim Wolfe, Bruce Williams, I think other members 22 of the investment committee. But in terms of who 15566 1 had that bright idea, I don't know. It possibly 2 might have come from a brokerage firm. 3 Q. You said the investment committee. 4 A. Yes, sir. 5 Q. What other members of the investment 6 committee were you referring to besides the 7 portfolio managers that you've just listed? 8 A. Probably -- I don't have that sharp of 9 a memory. Oh, and I'm sure I would have -- we 10 would have talked to Gerry Williams about that. 11 Q. What about Jenard Gross? 12 A. I can't really remember talking to 13 Jenard about that. That's -- that's the type of 14 thing that I -- during these days when 15 Mr. Williams was still here, that my modus 16 operandi would be to go talk to Gerry Williams and 17 then after the -- after the project was pretty 18 clean, then take it to Mr. Gross. 19 Q. What was the practical effect of the 20 mirror? 21 A. The practical effect, as best I 22 remember it and understand it, is that on the 15567 1 original swap, you would be -- net/net, you would 2 be paying a fixed rate. And the mirror 3 transaction was a swap, I think, with the Federal 4 Home Loan Bank; but I'm not sure, that we would be 5 receiving a fixed rate. So, it was to neutralize 6 the effect of the swap. 7 Q. Did it also have the effect, 8 accounting-wise, of not recognizing the gain by 9 selling the swap? 10 A. Well, if we had -- ignoring the mirror, 11 if we had just left the swap on the books, we 12 would not have recorded a loss. We would just 13 continue -- we would have continued to maintain 14 the fixed rate payments. 15 Q. Do you know what the regulations were 16 with regard to investments in swaps by savings and 17 loans that were applicable at that time as 18 promulgated by the Federal Home Loan Bank Board? 19 A. I can't remember today; but again, it's 20 the type of thing that I'm highly confident that I 21 would be -- was aware of it at that time and would 22 have certainly -- in these types of areas, we had 15568 1 Mr. Pledger and/or Mr. Berner looking over our 2 shoulder. 3 Q. Was it your understanding in December 4 of 1985 that USAT could invest in swaps for 5 investment purposes? 6 A. Well, I don't think a swap is an 7 investment. A swap is a contract to exchange 8 interest rate payments. So, it doesn't go on your 9 balance sheet as a, quote, "investment." But it's 10 my understanding that -- that savings and loans 11 could enter into interest rate swaps. 12 Q. For what purposes? 13 A. I don't remember. I probably knew 14 then, but I don't know now. 15 Q. Well, why -- I mean, one of your 16 options was to just keep the swap. Right? 17 A. It was. 18 Q. Was a reason you didn't do so because 19 the regulations prohibited the use of swaps for 20 anything other than reducing interest rate risk? 21 A. Well, I suspect -- the direct answer to 22 your question is I don't know. But I'd be willing 15569 1 to bet that during this time period we still had a 2 gap position. In other words, our 3 interest-sensitive liabilities exceeded our 4 interest-sensitive assets. So, if we wanted to 5 keep the swap under those constraints, I guess we 6 could have. 7 Q. Well, if that were the case, assume 8 that, what would have been the practical effect on 9 that gap if you had put on the mirrored swap? 10 A. If that were the case, it would lower 11 your gap. It would narrow that gap position. 12 Q. So, it would end up -- if you had a gap 13 and it was hedged by the swap that was initially 14 purchased through USAT Mortgage Finance, the 15 effect of the mirror would be to increase the gap. 16 Right? 17 A. The effect of the mirror would be to, 18 in that particular one transaction taken in 19 isolation, would be -- would immunize that swap, 20 and it would no longer act as a net fixed rate 21 payment. 22 Q. Well, if that were the case, the 15570 1 mirrored swap wasn't put on to reduce the interest 2 rate risk of the association, was it? 3 Assume you had a gap and assume that 4 the initial swap would carry the interest rate 5 risk because of that gap. 6 Wasn't the practical effect of the 7 mirror to increase the interest rate risk to the 8 association? 9 A. Well, it seemed to me that you had -- 10 I'm not sure that's correct because you had 11 $350 million of mortgage-backed securities that 12 had been sold. They had gone away. They were no 13 longer in existence as far as USAT goes. So, 14 unless -- so, it seemed reasonable to get rid of 15 the macro hedge that had been designed to control 16 that block of interest rate risk. 17 Q. So, now you're saying, well, there 18 wasn't any gap, that the swap could be assigned to 19 reduce the interest rate risk to it? 20 A. No, sir, I'm not saying that at all. 21 I'm saying -- I was trying -- it seemed to me we 22 were getting into hypotheticals. 15571 1 Q. Well -- but your hypothetical, 2 Mr. Crow, that I was following up, you said -- 3 MR. VILLA: Objection. It's your 4 hypothetical. I mean, you've hypothesized 5 regulations and asked him to assume the 6 regulations. Now you're asking him to apply 7 regulations from 13 years ago in an 8 extraordinarily complicated area. The least you 9 could do is acknowledge that it's your 10 hypothetical. 11 MR. GUIDO: Thank you for -- 12 THE COURT: All right. Restate the 13 question. 14 Q. (BY MR. GUIDO) Mr. Crow, you 15 suggested, did you not, that the swap that was 16 originally in place that was mirrored had the 17 effect of reducing the interest rate risk to the 18 association, did you not? 19 THE COURT: I don't think that question 20 is very clear. 21 A. I don't -- if I said that, I think I 22 misspoke. 15572 1 Q. (BY MR. GUIDO) Were you not trying to 2 suggest that that swap that was initially to 3 hedge, the $350 million of mortgage-backed 4 securities that were sold out of USAT Mortgage 5 Finance, had the effect of reducing the interest 6 rate risk to the association after the 7 $350 million of mortgage-backed securities had 8 been sold? You're not suggesting that, are you? 9 A. Could you repeat that? I'm -- I 10 couldn't quite follow that. 11 Q. Are you suggesting that the swap that 12 was initially purchased to hedge the $350 million 13 of mortgage-backed securities that were sold had 14 the effect of reducing the interest rate risk to 15 the association after the sale of the $350 million 16 of mortgage-backed securities? 17 A. Yeah, I would suggest that under 18 exactly -- and let me explain. We had 19 $350 million of mortgage-backs. I don't remember 20 the exact numbers, but let's assume we had 21 $350 million of interest rate swaps. The 22 mortgage-backed securities are sold. They are 15573 1 gone. Now you've got a 350-million-dollar swap. 2 If you do nothing else, then you've got that 3 $350 million of swaps left; and that would close 4 the gap. But for whatever reason -- and I can't 5 remember all the reasons -- we opted to take the 6 position, well, we put these swaps on to -- you 7 know, in our minds, to kind of match off against 8 the mortgage-backs. The mortgage-backs are gone. 9 They are sold. So, let's immunize the effect of 10 that swap. That's what I'm trying to convey. 11 Q. Did you initially intend to keep the 12 swaps to hedge other interest rate risk in the 13 association? 14 A. I simply -- I don't remember -- I don't 15 remember our thought process. I kind of remember 16 what happened, but I don't remember the Step 1, 2, 17 3 of what we thought about. 18 Q. Well, why did you put on the mirror? 19 A. I can't really remember exactly why. I 20 remember or I think I know the net effect of it. 21 It seems to still make sense to me. 22 Q. And that was what? 15574 1 A. We had 350 -- well, we had more than 2 350 million; but we're just dealing with 3 350 million. 4 We had 350 million of mortgage-backed 5 securities in a finance sub. The sub was 6 collapsed. That 350 million was sold and went 7 away. We were left with the 350-million-dollar 8 hedge. Apparently, a decision was made, of which 9 I'm sure I was part of, that we didn't want that 10 350-million-dollar interest rate swap hedge left 11 out there. So, we mirrored the swap. It was a 12 business decision. I guess we could have -- you 13 know, we certainly could have done other things. 14 We could have just left -- we didn't have to 15 mirror the swap. We could have used it to hedge 16 the overall gap. But we made a business decision 17 to use the mirror. 18 Q. Why didn't you just sell the swap? 19 A. I don't remember specifically. I 20 remember, generally, we looked at -- I can't 21 remember specifically as to this one swap. But I 22 remember, generally, we looked at interest rate 15575 1 swaps and paying the counter-parties to get out of 2 them. That was, you know, a fairly common topic 3 of discussion. 4 Q. And you decided not to do so because 5 you didn't want to bear that cost; isn't that 6 correct? 7 A. Well, it had a front-end cost. And 8 certainly if it produced a big loss when interest 9 rates were at a certain level, I'm sure that was a 10 strong consideration. I mean, I can't remember 11 exactly; but I'm pretty darn sure that was a 12 strong consideration. 13 Q. Well, let's take a look at Tab 1310, 14 which we talked about, which is B697, which is the 15 memorandum that discusses exactly that question. 16 MR. VILLA: Your Honor, really, this is 17 the third time through the same document. We 18 wonder why we stay here year after year. You'd 19 think we could go through one document just once 20 with this witness. I object. It's just 21 repetitive questioning. 22 THE COURT: I know we had this document 15576 1 yesterday, but what's your point now, Mr. Guido? 2 MR. GUIDO: Your Honor, the point is 3 that the reason they didn't sell the swap and they 4 adopted a mirror was, as expressed in this 5 memorandum, the decision was made that they didn't 6 want to recognize the loss. 7 THE COURT: Well, you've covered that 8 point several times. I don't know how many times 9 you want to go over it. 10 MR. GUIDO: The witness still hasn't 11 testified that that was the purpose. He says that 12 he remembers it being discussed. And what I'm 13 asking him is: Does this document reflect the 14 decision-making process that resulted in not 15 selling that swap? 16 A. Okay. 17 Q. (BY MR. GUIDO) Does this document 18 reflect the decision-making process that led up to 19 not selling the swap but, instead, purchasing a 20 mirror? 21 A. It seems to me this document is talking 22 about the results after it happened, Mr. Guido. I 15577 1 don't deny at all -- my only point, sir, was that 2 we had various options. One was to just leave the 3 swap on and not mirror it. We had an option to -- 4 we don't sell swaps. We go to the 5 counter-parties, and you negotiate. The swap 6 market during those days weren't -- was not a 7 liquid-type market. You have to go to your 8 counter-party and negotiate to get out of the 9 contract. And during those circumstances, 10 sometimes the other party wants to be a real jerk 11 about it and they hold you up. That's a 12 possibility. 13 I have no doubt in my mind that a 14 possibility was -- or that a very big reason was 15 that to get out of the swap contract, someone 16 realized or someone had computed that it was going 17 to create approximately, you know, a big loss. I 18 don't deny we would not have wanted to take that 19 loss. 20 Q. Okay. 21 A. I mean, that's kind of my memory, that, 22 you know, we were trying to, I think, you know, 15578 1 take gains, improve core earnings as much as we 2 could, and avoid losses. 3 Q. All right. Now, let's -- 4 A. But I can't give you chapter and verse 5 of the reasoning behind the objectives of the 6 mirror swap. 7 Q. Let me move on to the next question. 8 A. Okay. 9 Q. And that is why didn't you recognize 10 the loss on the swap when you offset it with the 11 mirror? 12 A. Because that's not proper accounting. 13 Q. And why isn't that proper accounting? 14 A. That isn't what the accounting rule 15 books say you're supposed to do. 16 Q. What were the accounting rule books at 17 the time? What did they say at the time? 18 A. I can't tell you exactly what they 19 said; but generically, interest rate swaps were 20 accounted for as macro hedges. And unless they 21 were extinguished, a gain or loss was not to be 22 recognized, period. 15579 1 Q. That's your understanding of the 2 literature? 3 MR. VILLA: I'm sorry. I can't hear 4 your question. 5 Q. (BY MR. GUIDO) That's your 6 understanding of the literature at the time? 7 A. That's my understanding of the -- of 8 the rules at the time. And, you know, if I'm 9 wrong, the process was -- I'm fairly confident I'm 10 right on that one. But if -- you know, we weren't 11 infallible. I was a CPA. I had people that 12 worked for me that were CPAs. And if we had a 13 matter that appeared to be pretty complex or 14 pretty hairy, we brought Peat Marwick in, which 15 obviously is -- they are -- you know, they look at 16 FASBs and APBs all day long. So, they should be 17 more expert than we are. And if I had a real 18 question, I'd call Arthur Andersen. 19 Q. Well, let me take you through your 20 general understanding. 21 A. Okay. 22 Q. You say that swaps that are macro 15580 1 hedges should be accounted for in a certain way. 2 Did you look to any literature yourself 3 to ascertain what the accounting would be for 4 macro hedges? 5 A. During that time period, yeah, I had -- 6 I had the rule books or the FASBs and the APBs, 7 the AICPA type documentation, in my office and a 8 more complete set was kept in Mr. Wolfe's office 9 because he was kind of the -- I kind of -- you 10 know, I -- I was a CPA, but I was kind of -- you 11 know, I didn't hold myself out to be -- I didn't 12 spend all my time or my full-time agonizing over 13 the accounting rules. 14 Q. What were the rules -- 15 A. I looked to Mr. Wolfe to help me on 16 that. 17 Q. What were the rules for futures 18 contracts on macro -- so-called macro hedges? 19 MR. VILLA: I'm sorry. I couldn't hear 20 the question. 21 Q. (BY MR. GUIDO) What were the rules 22 for the accounting for futures contracts that were 15581 1 denominated as macro, M-A-C-R-O hedges? 2 A. I don't know. I'm confused by your 3 question because I think exchanged traded futures, 4 I remember we got involved in that with Sandy's 5 sub, which clearly happens later. But those were 6 considered to be micro hedges. And as -- 7 THE COURT: Which were? 8 THE WITNESS: The futures were micro, 9 M-I-C-R-O, as opposed to the macro. 10 Q. (BY MR. GUIDO) I'm asking you in 11 December of 1985, what did the literature say 12 about accounting for futures contracts that were 13 denominated as macro, M-A-C-R-O, hedges? 14 A. I don't know. 15 Q. Did you ever know? 16 A. I don't know whether I ever knew 17 because interest rate swaps weren't futures. But 18 I -- I mean, I simply can't say whether I knew or 19 didn't know. I don't know. I'm sure -- I'm sure 20 I -- I tried to read the rules and the new rules 21 as they came out. But unless we were dealing with 22 them, I probably didn't, you know, really try to 15582 1 have it stick in my mind. 2 Q. I want to show you the literature for 3 FAS 80. 4 A. Okay. 5 Q. Which is A13035. 6 MR. GUIDO: I don't have a tab number, 7 but I think it may have been introduced in the 8 record previously. 9 THE COURT: Would you restate that, 10 please? 11 MR. GUIDO: It's A13035. It's FAS 80, 12 the statement of financial accounting standards 13 No. 80, accounting for futures contracts, Your 14 Honor. And it's issued August 1984. 15 Your Honor, I -- Your Honor, the 16 document I just presented has my handwriting on 17 it. I think I probably have to withdraw the 18 document because it would be inappropriate to use. 19 I'll do this in a different way, if I 20 may. 21 Q. (BY MR. GUIDO) Is it your 22 recollection that FAS 80 provided, for futures 15583 1 contracts, that if the futures contracts did not 2 meet the criteria to be denominated a micro hedge, 3 the gain or loss on that futures contract had to 4 be recognized in the period in which the market 5 price reflected that loss or gain? 6 A. Yeah. My -- I'm not sure it was 7 FASB 80, but it probably was because before you 8 took it away from me, I saw that it dealt with 9 exchanged traded futures contracts. So, I'm sure 10 that's the guidance we used. But during the 11 period of Sandy's sub, we used futures contracts 12 for hedges. And if those futures contracts -- we 13 used them, excuse me, as micro hedges, and that 14 required a lot of requirements. The one that I 15 can think of was correlation analyses. And if you 16 did not meet the requirements for a micro, 17 M-I-C-R-O, hedge, it would fall over into macro. 18 And I think you would have to recognize a gain or 19 loss in the period, yes, sir. 20 Q. Okay. So, it would be fair to say that 21 if it were not a micro hedge, a change in the 22 market value of the futures contract had to be 15584 1 recognized as a gain or loss in the period in 2 which the change in market price occurred? 3 A. As it relates to futures, that's -- 4 that's consistent with my memory, yes, sir. 5 Q. Now, why didn't you apply the same 6 standard for the swaps? 7 A. Well, because it's a different 8 standard, Mr. Guido. It's -- an interest rate 9 swap is an interest rate swap, and an interest 10 rate future is an interest rate future. You get 11 the rule book that deals with the instrument 12 you're looking at. 13 Q. And what is your understanding of the 14 rule book with regard to accounting for swaps? 15 What was the rule book that you recall looking to 16 in December of 1985? 17 A. The way we accounted for them, I 18 recall -- and, you know, I'll certainly grant you 19 this is a complicated area that I did have to 20 study on in the mid-Eighties and I had to check 21 with Peat Marwick and I think I called Arthur 22 Andersen to make sure I understood because I still 15585 1 had some buddies there. 2 But my understanding was an interest 3 rate swap, when it was entered into, you just 4 record the various cash flows during the period 5 they occurred. If you're paying fixed, you record 6 as an expense that fixed rate payment. If you're 7 receiving variable, you record as a credit that 8 variable rate payment. And that's it, period, 9 until and if that swap is extinguished. And if 10 that swap is extinguished, then you record a gain 11 or loss. 12 Q. What was the swap macro hedging? 13 A. What was it hedging? 14 Q. Yeah. You called it a macro, 15 M-A-C-R-O, hedge. What was it hedging? 16 A. Generically, it would be hedging 17 interest rate risk. 18 Q. Caused by what? 19 A. The nature of thrifts. Thrifts, 20 without any -- during the early Eighties, you 21 know, the traditional thrift model, you had a 22 bunch of fixed rate mortgage loans, and you had a 15586 1 gob of variable rate liabilities. 2 So, if interest rates went up, you get 3 wiped out. And the industry almost got wiped out 4 in the early Eighties. 5 Q. You didn't answer my question, 6 Mr. Crow. 7 A. I'll try. 8 MR. NICKENS: Your Honor, I'll object 9 to that comment. It's not necessary for Mr. Guido 10 to make a comment about the witness' testimony, 11 and it's inappropriate, and I object to it. 12 THE COURT: All right. Let's have the 13 next question. 14 Q. (BY MR. GUIDO) Why -- why was -- were 15 the swaps that were mirrored initially purchased? 16 What was the specific reason for their purchase? 17 A. The specific reason for the purchase of 18 the swaps that were mirrored, if my memory is 19 correct, was to control the interest rate risk 20 associated with the purchase of mortgage-backed 21 securities in the finance sub that was collapsed. 22 Q. So, the $350 million worth of 15587 1 mortgage-backed securities were part of what 2 created the interest rate risk. Right? 3 A. Yes. 4 Q. Okay. And it was because their 5 duration, however you define that term, was 6 different than the reverse repos which funded 7 their purchase. Right? 8 A. That created the interest rate risk, 9 the incremental interest rate -- 10 Q. And when you sold the $350 million 11 worth of mortgage-backed securities, what happened 12 to the reverse repurchase agreements underlying 13 those transactions? 14 A. They went away. 15 Q. They didn't exist? 16 A. No, sir. 17 Q. They were terminated? 18 A. They went away, yes, sir. 19 Q. Now, what is your understanding of how 20 you account for a swap at that time if the 21 instruments that it was hedging were terminated? 22 A. Nothing. Nothing happens. 15588 1 Q. Okay. 2 A. If it's a macro hedge, that's my 3 understanding. 4 Q. Okay. Now, let's move on to another 5 topic. Let's go take a look at the rolldown, the 6 so-called rolldown that occurred in 1986. I want 7 to show you Tab 572, which is A10631. 8 9 (Discussion held off the record.) 10 11 Q. (BY MR. GUIDO) This is a spreadsheet 12 that Mr. Phillips testified in terms of the first 13 three pages, which is what I want to direct your 14 attention to. 15 A. Okay. 16 Q. And this goes to the whole question of 17 the rolldown that occurred. And the way the sheet 18 works is that the second page of the exhibit is 19 really the right-hand side of a spreadsheet. It 20 starts with the third page of the document, the 21 exhibit. Okay? 22 A. Okay. I've got -- my third page, 15589 1 Mr. Guido, is -- looks like corporate bonds, if 2 I'm not -- 3 Q. Well, let's use the imaging numbers. 4 You see those little bar codes on them? 5 A. Yes, sir. 6 Q. Okay. The -- the two pages that I want 7 you to look at are OW002923 and OW002922. 8 A. Okay. I've got those. 9 Q. Those two. The first number is the 10 left-hand side of the spreadsheet, and the second 11 is the right-hand side of the spreadsheet. 12 A. Okay. 13 Q. The way Mr. Phillips described it 14 previously. 15 Now, these show various transactions 16 going across the document. 17 Are you going to rearrange the 18 document? 19 A. Well, it's upside down. I'm probably 20 committing a crime, but I was going to get them 21 right side up. 22 Q. All right. 15590 1 A. Okay. 2 Q. We'll put it back together the way the 3 record shows it. 4 A. Thank you. 5 Q. If that will help you. 6 A. Yes, sir. 7 Q. Now, this shows various transactions 8 going from left to right, and I think you them in 9 reverse order. 10 A. Okay. 11 Q. Now, do you see how that -- the sheets 12 go? Because the totals are on the right-hand side 13 of the document. 14 A. Yes. 15 Q. Now, this shows various transactions at 16 the top which Mr. Phillips described as sales and 17 various transactions at the bottom which he 18 described as purchases. 19 Do you see in the far left-hand column, 20 various descriptions -- it says "MBS swap 21 analysis" and then the next entry says "held 22 bond." 15591 1 Do you see that? 2 A. I do. 3 Q. And he testified that that down through 4 the -- the heading "purchased bond" or up to 5 "purchased bond" is a description of the bond that 6 was sold. 7 A. Okay. 8 Q. And then the one below that says 9 "purchased bond," the bonds that were purchased. 10 That was his testimony. 11 A. Okay. 12 Q. Now, it shows a gain column. Do you 13 see under "held bonds," under "BEY," it says 14 "realized gain"? 15 A. I don't -- I see the BE -- oh, I do see 16 that, yes, sir. 17 Q. Okay. Then you read across that. Do 18 you see where -- the column that says 12/85, it 19 says 3,124,000. 3,124,000, the first entry at 20 12/85. Do you see -- 21 A. Oh, 3,124,000. I do see that. 22 Q. Take that line and follow that line 15592 1 through. It shows various gains on sales of 2 mortgage-backed securities. 3 Do you see that? 4 A. I do see that. 5 Q. And follow that all the way over to the 6 "total" line. 7 A. Okay. 8 Q. And that shows 32,118,000, does it not? 9 A. Yes, sir. 10 Q. Now, those gains, are those 11 approximately the gains that you recall occurred 12 in the so-called rolldown strategy? 13 A. I don't remember the exact numbers. I 14 remember the gains that we tried to defer were 15 sizable. But if that's what Mr. Phillips said, I 16 have to reason to dispute it. 17 Q. Okay. Now, those gains, how were they 18 accounted for? 19 A. They were accounted for, until we had 20 to restate earnings, in that the gains were, in 21 simplistic terms, rolled into the basis of the 22 newly-purchased security. And that gain would be 15593 1 amortized or spread over the life of that new 2 security, and the net effect would be to bolster 3 the yield of that new security or -- so as to 4 better maintain the spread of the arbitrage. 5 Q. Now, how did you do that 6 accounting-wise? Did you -- how did you adjust 7 the basis? 8 A. As best I remember -- and I could -- 9 well, here's what I remember. And Mr. Wolfe could 10 give you the chapter and verse details. 11 But when you had a gain of, like, let's 12 just say $2 million on a particular security and 13 you simultaneously or roughly simultaneously buy 14 the new security, you take that 2-million-dollar 15 real block of money or block of gain. It would be 16 set up on the balance sheet, and that gain would 17 be converted to income based on the life of the 18 newly-purchased security. So, if the 19 newly-purchased security was ten years -- we had 20 assumed it was going to be a 10-year-type 21 secured -- you would take one-tenth each year of 22 that $2 million and record it into income. And 15594 1 so, that would boost the yield on that 2 newly-purchased security. 3 Q. Now, did you set up a discount account? 4 Is that how you did it? 5 A. You know, I'm not -- I'm not sure. 6 That's pretty much the extent of my memory on 7 that. 8 Q. You don't recall whether or not you set 9 up a discount account for them? 10 A. I don't remember the exact mechanics, 11 no, sir. 12 Q. Do you recall what the basis was for 13 amortizing that discount? 14 A. I don't remember exactly, but I'd be 15 surprised if it wasn't -- the basis we booked a 16 lot of our mortgage-back stuff was on CPR numbers, 17 and we'd do it on a quarterly basis. And then 18 if -- and then adjust the CPR numbers each 19 quarter. 20 Q. Why didn't you recognize the gain? Why 21 did you roll it into the -- either a discount or 22 into the basis of the newly-acquired 15595 1 mortgage-backed security? 2 A. Because we studied the problem 3 internally, and it seemed to us or to me and to 4 the CPA gurus we had running around United that if 5 you're buying a security in an arbitrage and 6 you're automatically turning around and 7 reinvesting in another security, that it made a 8 lot of sense to defer that gain and so as to 9 maintain the integrity of the spread. And we went 10 to Peat Marwick, and they agreed with that 11 treatment. 12 Q. Now, did you also defer the gains for 13 purposes of regulatory accounting? 14 A. I think so. 15 Q. And is that similar to what you did 16 with USAT Mortgage Finance? 17 A. No, sir. On USAT Mortgage Finance, we 18 recognized the gain -- 19 Q. I'm sorry. 20 A. -- at that time, at the time the 21 securities were sold. 22 Q. I'm sorry. My question may have been 15596 1 misleading. 2 Did you also, for USAT Mortgage 3 Finance, recognize the gains for regulatory 4 purposes? 5 A. Yes, sir. Yes. The -- whatever 6 treatment -- in this area, whatever treatment we 7 used for gap purposes would flow straight through 8 to the regulatory reports. 9 Q. Now, I want to show you a document 10 which has been identified as B1344. It's a 11 document that the respondents have put on their 12 exhibit list, and it's a little difficult to read. 13 But I'm going to direct your attention to 14 CN263552. 15 Have you found that page? 16 A. No, sir, I have not. It's CN -- what 17 was that number again, please? 18 Q. 263552. 19 A. Okay. I'm there. 20 Q. With regard to the mortgage-backed 21 securities that were part of the rolldown, okay? 22 A. Yes, sir. 15597 1 Q. There came a time when you were 2 required to restate those, and you were required 3 to recognize the gain. 4 Do you recall that? 5 A. It's burned into my memory. 6 Q. Okay. And were you told that you had 7 to restate at that time because the securities 8 that were rolled into it were not substantially 9 identical to the securities that had been sold? 10 A. I don't remember the exact reason we 11 were told we had to restate. I don't remember 12 that, but I don't -- 13 Q. You were just told you had to restate? 14 A. Well, no, sir. I'm sure -- we had 15 vigorous -- extremely vigorous discussions on the 16 arguments pro and con as to what the right 17 accounting was. And I'm sure at the time, I knew 18 what Peat Marwick's reasoning was. I just -- I 19 don't remember what that is today. 20 Q. Well, do you recall whether the 21 transactions that are listed on this exhibit that 22 I showed you, the Joe Phillips transactions, were 15598 1 sales and purchases of substantially identical 2 securities? 3 A. No, sir. I recall the rolldown to be 4 the sale of a higher coupon security and the 5 purchase of typically a lower coupon security that 6 would have a fairly -- you know, have certainly a 7 different coupon level by more than, say, a 8 quarter or half a point or half a percentage. 9 Q. Okay. So, that wouldn't have been an 10 identical or substantially similar security? 11 A. The rolldown? 12 Q. Right. 13 A. No, sir, they would not. 14 Q. Now, take a look at this Page CN362552. 15 Do you see where it says "571.16, 16 mortgage-backed securities transaction"? 17 A. I do. 18 Q. Okay. And it says, "General. The 19 accounting treatment described in this section for 20 reverse repurchase agreements, dollar repurchase 21 agreements, dollar reverse repurchase agreements 22 with rolldowns or (sic) extensions." 15599 1 Do you see that at the beginning? 2 MR. VILLA: "With rollovers or 3 extensions"? 4 MR. GUIDO: "With rollover." 5 MR. VILLA: "Rollover." 6 A. I do. I see that section. 7 Q. (BY MR. GUIDO) That's Section 1. 8 Then look at Section 2, A2. Do you see it says, 9 "The accounting treatment for mortgage-backed 10 securities transactions depends on whether the 11 transactions are, in substance, sales and 12 purchases of securities, financing transactions, 13 or rollover of forward commitments to purchase 14 securities"? 15 Do you see that? 16 A. I do. 17 Q. Then it goes on. "When the security to 18 be repurchased is not either identical to or 19 substantially the same as the security sold, the 20 transaction is considered to be a sale and 21 purchase and not a financing transaction." 22 Do you see that? 15600 1 A. I see that. 2 Q. "The difference is crucial since a sale 3 and purchase requires recognition of gain or loss 4 upon initiation of the transaction. A financing 5 does not." 6 Does that regulation say that gains 7 must be recognized for regulatory purposes? 8 A. Can I read the first part of it again, 9 please? (Witness reviews the document.) 10 Could you repeat that question, please? 11 Q. Does this paragraph essentially say 12 that the regulations require the recognition of 13 the gains on the rollover transactions? 14 A. No, sir, it doesn't say that to me at 15 all because it's talking about dollar roll 16 transactions and it seems to be making the 17 distinction in a dollar roll transaction and these 18 types of transactions that are listed in 19 Section 1, there's some fairly specific 20 requirements that must be met in order for it to 21 be a financing transaction as opposed to a sale 22 and repurchase. 15601 1 So, as I read this, it's talking about 2 a different subject. 3 THE COURT: We'll take a short recess. 4 (Whereupon a short break was taken from 5 10:34 a.m. to 10:57 a.m.) 6 7 THE COURT: Be seated, please. We'll 8 be back on the record. 9 Mr. Guido, you may continue with your 10 examination. 11 MR. GUIDO: Thank you. 12 Q. (BY MR. GUIDO) I was showing you 13 571.16, Paragraph 2, which says "The accounting 14 treatment for mortgage-backed securities 15 transactions depends on whether the transactions 16 are, in substance, sales and purchases of 17 securities, financing transactions, or the 18 rollover of forward commitments to purchase 19 securities." 20 And it's this sentence that I want to 21 direct your attention to. "When the security to 22 be repurchased is not either identical to or 15602 1 substantially the same as the security sold, the 2 transaction is considered to be a sale and 3 purchase and not a financing transaction. The 4 differentiation is critical since a sale and 5 purchase requires recognition of gain or loss upon 6 initiation of the transaction. A financing does 7 not." 8 A. I see that. 9 Q. Now, were the rollover transactions 10 rollovers into either an identical or 11 substantially the same security as that that was 12 sold? 13 MR. NICKENS: Your Honor, is he asking 14 about the rolldown? 15 MR. GUIDO: The rolldown. 16 MR. NICKENS: He said "rollover." 17 MR. GUIDO: I'm sorry. 18 Q. (BY MR. GUIDO) In the rolldown that 19 Joe Phillips did in the beginning of 1986, was 20 that the sale and a repurchase of an identical or 21 substantially the same security as that sold? 22 A. No, it was not. 15603 1 Q. Okay. And does this provision require, 2 therefore, that the gain be recognized? 3 A. No, it does not. 4 Q. Why not? 5 A. Because we're talking about dollar 6 rolls here, sir. We're talking about financing 7 transactions. We're talking about dollar rolls. 8 Q. Now, I'd like to direct your attention 9 to a document that I've put in front of you. It 10 is A -- I mean, excuse me, T41 -- B819, Tab 586. 11 I'm sorry. A lot of -- 12 MR. NICKENS: Your Honor, we've just 13 been referring to B1344. Is that going to be 14 offered? 15 MR. GUIDO: I move B1344 into the 16 record, Your Honor. B1344. Excuse me, 17 Mr. Nickens. 18 MR. VILLA: No objection. 19 THE COURT: Received. 20 Q. (BY MR. GUIDO) Now, B819 at Tab 586 21 is a conversion of Rick Millinor's handwritten 22 memorandum dated January 31, '86, typewritten 15604 1 form. 2 Have you ever seen this memorandum 3 before? 4 A. I've seen this in -- I guess it was the 5 last few days, yes, sir. 6 Q. Do you see, it says -- see the 7 description in Paragraph 2, it says "Although 8 United matches up their securities with their 9 swaps on a macro basis, no specific identification 10 exists between any single security or group of 11 securities and any single swap agreement"? 12 A. I see that. 13 Q. And then it goes on, "They are free to 14 trade the securities included in the swap program 15 without violating the swap agreements"? 16 A. Yes, sir. 17 Q. Do you see that? "Because the forced 18 sale of securities left an imbalance between the 19 securities portfolio and the swap agreements, 20 United entered into a mirror swap that offset the 21 imbalance position." 22 A. I see that. 15605 1 Q. And then it goes on, "Because United 2 was close to their regulatory growth limits, they 3 didn't have the option of simply buying more 4 securities at the S&L level to cure the 5 imbalance." 6 Do you see that? 7 A. I see that. 8 Q. Now, that phrase, "they didn't have the 9 option of simply buying more securities at the S&L 10 level to cure the imbalance," was that true or 11 false? 12 A. At this point in time, I don't know. I 13 think we hypothesized in one of your questions, 14 had we -- well, I guess my simple answer is I 15 don't know. 16 Q. But you did testify that it was a 17 business decision of whether or not to collapse 18 USAT Mortgage Finance and not absorb the 19 $350 million into USAT was a business decision, 20 did you not? 21 A. Oh, yes, sir. 22 Q. Now -- then it goes on in next 15606 1 paragraph, "After learning of these transactions, 2 I felt that some accounting questions existed as 3 to the proper treatment for GAAP. I talked to 4 Walter Erickson and Walter Schuetze about this 5 topic and learned the following." 6 Do you see that? 7 A. I do. 8 Q. Do you know who Walter Erickson and 9 Walter Schuetze are? 10 A. I've never met them, but I believe they 11 are some of the -- I believe they were 12 Peat Marwick partners. 13 Q. And were they technical people that 14 were relied upon by people in the field for 15 opinions on accounting issues? 16 A. I think they were pretty high up. As 17 to what their characterization would be, I don't 18 know. 19 Q. All right. Then see Point No. 1? It 20 says, "Under no circumstance would GAAP require 21 (or even permit) the deferral on the gain of sale 22 of securities, whether in a swap program or not." 15607 1 Do you see that? 2 A. I do see that. 3 Q. Is that eventually what happened after 4 June of 1986 with regard to the rolldown when you 5 deferred the gains? You weren't permitted to do 6 so and you had to change the accounting? 7 A. You mean after the restatement of 8 earnings? 9 Q. Yeah. After or just prior to the 10 restatement of the earnings, did the restatement 11 of the earnings come about because Peat Marwick 12 essentially told you the substance that's in this 13 Subparagraph 1: "Under no circumstances would 14 GAAP require (or even permit) the deferral of the 15 gain on sale of securities, whether in a swap 16 program or not"? 17 A. I'm not sure of the context; but yes, I 18 think Peat Marwick came through and told us we 19 needed to take the gains. But I'm not sure that's 20 what Mr. Millinor is talking about here. 21 Q. Now, why did you defer the gains in the 22 course of the rolldown? 15608 1 A. Because we thought it was the proper 2 accounting, and Peat Marwick agreed with that 3 accounting. 4 Q. Do you recall the discussion that we 5 had regarding the November 17 board of directors 6 meeting? I mean special strategic planning 7 committee meeting, the November 17th meeting? 8 A. That Bruce Williams had written -- 9 Q. He had written a summary of that 10 meeting. 11 A. Yes, sir, I do. 12 Q. Which is B665. You have that in front 13 of you, don't you? 14 A. I do have that, sir. 15 Q. Do you see Point 2? It says "Report a 16 gradual stable earnings record throughout the 17 year. This precludes recognition of any large 18 gains to build capital"? 19 A. Yes, sir. 20 Q. Was the decision made to defer the 21 gains in the course of the rolldown because of 22 this -- what he refers to as a "constraint to 15609 1 report a gradual stable earnings record throughout 2 the year. This precludes recognition of any large 3 gains to build capital"? 4 A. Well, that is pretty inconsistent with 5 my memory because if -- it would seem to me if we 6 wanted to -- in this particular instance, if we 7 wanted to pump earnings as relates to the 8 rolldown, we would not have deferred the gain. 9 And that would have allowed flexibility to make 10 reserves for problem real estate, et cetera. 11 Q. Is it -- 12 A. We did the deferral accounting method 13 because we thought it was right. I still think 14 it's right today. 15 Q. The -- except that the accountants 16 required you to restate it. Right? 17 A. Well, they agreed with us for a while. 18 But yes, sir. When you face a 500-pound gorilla, 19 you give up. 20 Q. Now, with regard to the deferral, you 21 said that you didn't recognize gains to pump up 22 capital. Right? 15610 1 A. I said -- well, what I was attempting 2 to say is if our objective had been -- perhaps I 3 misunderstood your statement. But I understood 4 your statement said wasn't the purpose of the 5 deferral accounting to not take those gains so 6 that we could report steady earnings throughout 7 the year. 8 Q. No. 9 A. Maybe I misunderstood your statement. 10 Q. I asked you whether or not you did not 11 take the gains because the policy in those two 12 sentences set out in Paragraph 2 on Exhibit B665, 13 and it's "Report a gradual stable earnings record 14 throughout the year. This precludes recognition 15 of any large gains to build capital." That's two 16 sentences I read you, not one. 17 A. Absolutely not. I mean, we got the 18 accounting like we thought it ought to be, and I 19 didn't care what anybody said, whether it was 20 Jenard Gross, Gerry Williams, or Charles Hurwitz. 21 I mean, we got the accounting like we thought it 22 ought to be, sir. We didn't change the accounting 15611 1 to meet some policy from the strategic planning 2 committee. 3 Q. So, you didn't -- what you're saying is 4 you didn't have an intent -- what I think is 5 referred to as intent-driven accounting policy? 6 A. Where does it say that? 7 Q. No. I'm just trying to understand what 8 you've just said. 9 You didn't defer the gains for some 10 policy reason. You're telling us that you did it 11 for some accounting reason? 12 A. Well, yeah. We did it to get the 13 accounting correct as we understood it. 14 Q. And -- 15 A. We didn't -- let me be clear. 16 Mr. Wolfe and I did not massage the accounting to 17 suit some strategic planning committee or anybody 18 else. 19 Q. Now, I just read you a provision from 20 12 CFR; and I just read you a sentence from 21 Mr. Millinor's memorandum dated January 31st, 22 1986, both of which say, as I read them, the gains 15612 1 must be recognized. 2 A. Well, let me, if I -- 3 MR. NICKENS: Your Honor, I don't know 4 if there is a question. I do object to that. I 5 mean, Mr. Guido's reading of it is irrelevant. 6 Neither situation applies to the one he's asking 7 about. But certainly, his reading of it is not 8 relevant to any of the proceedings. But there is 9 no question pending. 10 THE COURT: All right. What's your 11 question, Mr. Guido? 12 Q. (BY MR. GUIDO) When you read the 13 literal words in that Subparagraph 1 in the Rick 14 Millinor provision, doesn't it say gains -- it 15 says, "Under no circumstances would GAAP require 16 (or even permit) the deferral of gains on the sale 17 of securities, whether in a swap program or not." 18 The literal words. 19 A. Should I read this document or -- I 20 will read the literal words back to you, if that's 21 what you want. 22 Q. The literal words of that paragraph, 15613 1 that Subparagraph 1, what do the literal words of 2 that paragraph say to you? 3 A. Well, let me read the document then, 4 sir. 5 Q. All right. Read the document. 6 A. (Witness reviews the document.) 7 MR. NICKENS: Your Honor, while the 8 witness is reading, could I confirm that B655 was 9 offered and received? 10 THE COURT: I thought I received it 11 earlier. 12 A. (Witness reviews the document.) 13 Would you please repeat your last 14 question? 15 Q. (BY MR. GUIDO) If you read that 16 Subparagraph 1 that I just read to you, does that 17 say under no circumstances that you are to defer 18 the gains on sale of securities? 19 A. That's what that statement says. And 20 what Mr. Millinor is talking about, I believe, is 21 the collapse of the sub because in the last 22 paragraph -- if you start on the last paragraph on 15614 1 that page, given the facts and circumstances as -- 2 "It does not appear to me that we have any firm 3 rules that would require any 1985 loss recognition 4 to offset United's 1985 gain. United understands 5 the economic reasoning for doing so. However, it 6 has agreed to start offsetting all such gains of 7 1986 so that their spreads will not be distorted." 8 So, I can't tell you what was in 9 Mr. Millinor's mind. But it seems to me when he's 10 talking about this, he's talking about the 11 collapse of United MBS or that sub that was 12 collapsed. He is not talking about the rolldown. 13 And this reference to, quote, "start offsetting 14 such gains in '86 so their spreads will not be 15 distorted," you know, that seems more descriptive 16 of the rolldown to me. I can't be sure. 17 Q. What does the term "under no 18 circumstances" mean to you, Mr. Crow? 19 A. "Under no circumstances" means to me, I 20 guess, no possibility. 21 Q. Okay. No circumstance, no set of 22 facts. 15615 1 Is that fair? 2 A. That's what "under no circumstance" 3 would mean to me. 4 Q. So, that sentence that I read to you 5 about the deferral of gains would not be permitted 6 under GAAP is saying it doesn't matter what the 7 circumstances are. It doesn't matter what the 8 facts are, isn't it -- 9 MR. NICKENS: Your Honor, he's merely 10 arguing with the witness at this point. The 11 witness has made it absolutely clear what his 12 understanding was. Mr. Millinor has testified as 13 to what was in his brain at the time when he wrote 14 these words, which is inconsistent with what 15 Mr. Guido is now suggesting. But the witness has 16 made it clear. He's just arguing with him. 17 THE COURT: All right. Can we move on? 18 MR. GUIDO: We can move on, Your Honor. 19 Q. (BY MR. GUIDO) Let's go to the last 20 sentence that you've now brought to the Court's 21 attention. It says, "United understands the 22 economic reasoning for doing so and has agreed to 15616 1 start offsetting all such gains in 1986 so that 2 their spreads will not be distorted." 3 Do you see that? 4 A. I do see that. 5 Q. Now, is that limited to a non-rolldown 6 situation? 7 A. I can't really say, but I would 8 assume -- I would assume that if we had another 9 situation, under my understanding and Peat 10 Marwick's understanding of the rules at this time, 11 that if we had another situation where we just 12 sold 500 million of mortgage-backed securities and 13 didn't replace them, didn't do any rolldown or any 14 replacement, that we -- I don't see how we have 15 used deferral gain there. 16 Q. Well, does this say anything about 17 deferring gains in this sentence? 18 A. No, sir. I don't believe he uses those 19 words. I guess I was using -- I was assuming that 20 from the words, quote, off -- quote, "Start 21 offsetting all such gains in 1986 so that their 22 spreads will not be distorted." And I can't think 15617 1 of any circumstances that would create that 2 condition other than a deferral of gain. 3 Q. What? Create a distortion? 4 A. No, sir. So that -- well, so that 5 their spread will be maintained and not -- not be 6 distorted. 7 Q. Well, this says, as I read the last 8 sentence, after the "and," it says "has agreed" -- 9 and I presume it's referring to USAT. Right? 10 "Has agreed to start offsetting all 11 such gains in 1986 so that their spreads will not 12 be distorted." 13 Do you see that? 14 A. I do see that. 15 Q. And isn't that making reference to -- 16 that you recognize the losses on the swap side if 17 you're going to recognize the gains on the gains 18 side. Right? 19 A. Would you please run that by me again? 20 Q. Isn't this saying "United understands 21 the economic reasoning for doing so, however, and 22 United has agreed to start offsetting all such 15618 1 gains in 1986 so that their spreads will not be 2 distorted." 3 Do you see that? 4 A. I do see that. 5 Q. Okay. Is that making reference to 6 recognizing the losses on the swap side to offset 7 the gains on the MBS side if MBSs are sold for 8 gains and gains are recognized? 9 A. That's a bigger jump than I can make. 10 I don't agree with that at all. 11 Q. Okay. And, in fact, when you restated 12 in June of 1986 and recognized the gains from the 13 rolldown, the so-called rolldown, you did not 14 recognize the losses on the swap side? 15 A. That's correct. 16 Q. And what was the accounting 17 justification for doing so? 18 A. The accounting justification was 19 following the accounting rules in existence at the 20 time. 21 Q. And what do you understand those 22 accounting rules to be? 15619 1 A. That the -- when you enter into an 2 interest rate swap contract, you record it 3 basically on a cash basis. You receive, 4 typically, the variable rate, and you pay the 5 fixed rate. And that's it, period, end of report, 6 unless you extinguish that swap, unless you go to 7 the counter-party and say, "Federal Home Loan 8 Bank, I'd like to -- I'd like to write you a check 9 and get out of this swap contract." Then at that 10 time, you record -- if there was a gain, you'd 11 record a gain. If there was a loss, you'd record 12 a loss. 13 Q. So, you're telling me at that point in 14 time, if you went to the Federal Home Loan Bank 15 Board or whoever the counter-party was and said, 16 "Here's a check. I want to get out of this swap," 17 and you did buy futures contracts to do the hedge, 18 that you recognize the loss or the gain on that 19 swap transaction at that point in time, even 20 though you've kept the reverse repos and you've 21 kept the mortgage-backed securities? 22 A. Could you -- that reference to futures 15620 1 confused me. 2 Could you repeat that again, please? 3 Q. If you decided that you didn't want the 4 swap anymore, you wanted to use futures contracts 5 or you wanted to use caps or collars so you bought 6 out the swap by going to the counter-party. You 7 paid $10 million. 8 Are you telling me that the literature 9 at that point in time required you to recognize 10 the loss, that $10 million, and not amortize it 11 over the remaining life of the mortgage-backed 12 securities in the reverse repos? 13 A. I think if you extinguished an interest 14 rate swap, I believe you would be -- you would be 15 required to record it at that time. 16 Q. All right. Let me give you a document 17 that's marked as A10543, which is a memorandum 18 dated July 2nd, 1984, R59. It's from William J. 19 Schilling to OES Professional Staff, and it says, 20 "This memorandum discusses the appropriate 21 regulatory accounting for sales or other 22 dispositions of interest rate swap positions by 15621 1 insured institutions." This is July 2nd, 1984, a 2 memorandum from Mr. Schilling to the OES 3 Professional Staff. 4 Do you know what the significance of 5 regulatory bulletins were when you were at USAT? 6 A. That we would receive them and 7 certainly pay attention to them. 8 Q. Did you feel obligated to comply with 9 them? 10 A. Yes. 11 Q. Huh? 12 A. Yes, sir. 13 Q. Okay. They were the body of law that 14 controlled how you managed USAT? 15 MR. VILLA: Objection. It's a legal 16 conclusion. He just said as a practical matter, 17 they tried to comply with them. 18 THE COURT: All right. I'll sustain 19 the objection. 20 Q. (BY MR. GUIDO) Did you feel obligated 21 to comply with them? 22 A. I viewed these to be the -- you know, 15622 1 the accounting rules -- these types of things to 2 be the accounting rules. And, you know, in most 3 parts -- for the most part, they agreed with GAAP 4 or generally-accepted accounting principles. 5 Q. Well, did you recognize the losses on 6 the swaps when you collapsed USAT Mortgage 7 Finance? 8 A. No, sir. 9 Q. For GAAP and RAP purposes, you did not 10 recognize the loss. Right? 11 A. Did not. 12 Q. Now, with regard to the restatement 13 during the -- after the rolldown, did you 14 recognize the losses on the swaps for RAP 15 purposes? 16 A. No, sir. 17 Q. This says, "An interest rate swap is an 18 exchange of interest payment obligation between 19 two parties. For an example, an insured 20 institution may agree to pay ABC Company an 21 11 percent fixed rate of interest on $25 million. 22 This amount is typically termed the notional 15623 1 principal amount for a period of ten years. In 2 exchange, ABC Company agrees to pay the insured 3 institution a floating rate of interest equal to 4 1 percent above the prevailing 90-day treasury 5 bill rate on $25 million for a period of ten 6 years." 7 Is that similar to the swaps that were 8 purchased by USAT? 9 A. Yes, sir, it is. 10 Q. And it says, "An institution may 11 benefit from this transaction in a number of 12 ways." Then it lists three ways. "The 13 institution may be able to transform variable rate 14 funds to fixed rate -- fixed interest rate that is 15 otherwise unavailable; (2), the institution may be 16 able to reduce its interest rate risk exposure by 17 matching the maturities of liabilities and assets 18 (use the fixed rate funds to originate fixed rate 19 loans for a similar term); (3)" -- 20 MR. NICKENS: Your Honor, if we're 21 going to read the entire document, we would ask 22 that it be offered -- I have an objection, and if 15624 1 we're going to read it into the record -- 2 MR. GUIDO: Oh, okay, Your Honor. I'm 3 sorry. I offer A10543. 4 MR. NICKENS: Your Honor, I note that 5 the document appears to have a missing page. I 6 don't know whether, in fact, there's a missing 7 page. But if you look at the second page of the 8 document, it is labeled Page 3. Now, the imaging 9 references are consecutive but, internally, there 10 would appear to be a missing page and I would like 11 to have the authenticity of the document 12 established in order that we can know what the 13 entire discussion is if there is another page. 14 MR. GUIDO: Your Honor, I've always 15 been under the assumption that there were two 16 pages. Mr. Nickens has pointed out something that 17 I was unaware of. There are only two points that 18 I am going to make from this document, and both of 19 them are self-contained on both of the pages. 20 MR. NICKENS: Self -- I mean, that's 21 the whole point of having another page. Maybe 22 there isn't another page. But if there is, we 15625 1 certainly want to know what it says in order to 2 understand Pages 1 and 3. 3 MR. GUIDO: Your Honor, I'm sorry. I 4 didn't get to finish. I can wait until after 5 lunch to question the witness about this document. 6 THE COURT: Well, since this is an 7 official document from the Federal Home Loan Bank 8 Board, it looks like there should be -- it should 9 be available somewhere, isn't it? 10 MR. GUIDO: Yeah, Your Honor. I can 11 check at noon and have it faxed if there is 12 another page to the document. It is my 13 understanding that there were only two pages to 14 the document, but I -- I could be incorrect. 15 Q. (BY MR. GUIDO) Mr. Crow, is it your 16 understanding that the Bank Board in 1985 and 17 early 1986 took the position that swaps were to be 18 accounted for in accordance with its regulations 19 under the accounting for futures contracts? 20 A. No. That isn't my understanding at 21 all. 22 Q. We'll return to this when we come back. 15626 1 I'd like to direct your attention to 2 another document, and that is the -- Tab 860, 3 which is A10609. 4 A. What was that again, please? 5 Q. It's A10609, and I think it's dated 6 February 20th, 1986. This is a memorandum from 7 you to Jenard Gross and Gerry Williams dated 8 February 20th, 1986. And it's addressing the net 9 worth requirement. 10 It says, "From our latest track of 11 regulatory requirements dated February 18th, 1986, 12 it is obvious we are getting much closer in terms 13 of excess net worth." 14 Do you see that? 15 A. I do. 16 Q. Then it goes on to discuss that issue, 17 and it concludes in that paragraph by saying 18 "Therefore, our excess net worth is $12 million." 19 Do you see that? 20 A. I see that. 21 Q. Then it goes on to say, "Unless 22 scheduled items decrease, we will have to moderate 15627 1 balance sheet growth to live within the required 2 net worth level." 3 Do you see that? 4 A. I do. 5 Q. "As our report indicates, however, 6 total liabilities of mid-February were 140 million 7 below the December level so we have some room to 8 grow there. This will be largely absorbed by the 9 transfer of the assets and liabilities of the 10 financing sub to USAT." 11 Do you see that? 12 A. I see that. 13 Q. And it's making reference to the 14 liability growth issue. I'd like to now direct 15 your attention to a document which is 114, A114, 16 which is in the exhibits that have been previously 17 admitted. And this is, I think, a May 1986 18 investment committee minutes. 19 MR. GUIDO: What's the tab number? 20 MR. NICKENS: 1047A. 21 22 15628 1 (Discussion held off the record.) 2 3 MR. NICKENS: It may be at 1114. 4 MR. GUIDO: Tab 1114? 5 MR. NICKENS: Your Honor, this is a 6 document we discussed yesterday. It was in the 7 record as A114. It is on our copies A1114. 8 MR. GUIDO: And at what tab? 9 MR. NICKENS: Tab 1047A. 10 MR. SCHWARTZ: 1047A is not here. 11 MR. NICKENS: We did this yesterday, 12 but I'll be happy to -- 13 MR. GUIDO: We must have put it in the 14 wrong place. 15 MR. NICKENS: This is the one that I 16 took out of my notebook, just as I'm doing now, 17 and we gave to the witness. 18 MR. GUIDO: Apparently, it's missing 19 from the formal records file. 20 Q. (BY MR. GUIDO) I want to direct your 21 attention to the portion of that document that 22 starts at Bates stamp K4678. 15629 1 Have you found K4678? 2 A. Yes, sir, I have. 3 Q. Which is the performance report for the 4 first quarter of 1986. Right? 5 A. It is. 6 Q. Okay. Now, I want to direct your 7 attention to the fourth page of that performance 8 report. It's K4681. And I want to direct -- see 9 the non-interest income? 10 A. Okay. 11 Q. It says, "Gain on the sale of corporate 12 securities totaled 8.8 million, net of 2 million 13 provision for possibility future losses. Large 14 gains were recognized during the quarter on the 15 sale of SCI Holding debenture (2.2 million gain) 16 And the retirement of the Series D cash flow bond 17 collateralized with Ginnie Mae securities which 18 provided a 1.9 million net gain." 19 Do you see that? 20 A. I see that. 21 Q. It's making reference again to those 22 Series D cash flow bonds, is it not? 15630 1 A. Yes, it is. 2 Q. And I think we talked about something 3 in the range of $180 million with regard to that 4 transaction. Right? 5 A. That was a number that you had said was 6 right, and I take your word for it. 7 Q. All right. 8 A. I don't argue with you. 9 Q. Okay. Now, look at the first page of 10 the performance report: K4678. 11 Do you remember we talked about gains 12 on the sale of various securities? 13 A. Yes, sir. 14 Q. Okay. And do you see where that 15 carries over on the third -- the first quarter 16 1986 in the report? 17 A. The number of 8.8 million? 18 Q. Uh-huh. 19 A. Yes, sir. 20 Q. Do you see where that carries over? 21 A. I do. 22 Q. And what does that -- when you total 15631 1 that up and the other items in that column, what 2 does that show you the net income to be at that 3 time period? 4 A. The net income for the first quarter of 5 1986 was 2.1 million. 6 Q. Okay. Do you remember the 30 million 7 plus gains on the rolldown that we identified when 8 we looked at Joe Phillips' spreadsheet? 9 A. I remember in that -- a number in that 10 magnitude, yes, sir. 11 Q. Were those gains not recognized because 12 there was no need to do so in order to meet the 13 targets that were set by the November 1985 14 strategic planning committee? 15 A. Absolutely not. As I tried to explain, 16 we didn't jack around with the accounting that 17 way, Mr. Guido. 18 MR. VILLA: Your Honor, for the record, 19 this is the second time through the same document 20 reading the same lines. As a matter of fact, we 21 went through the same procedure of trying to find 22 the document. He's now asked the witness the same 15632 1 question six times as to whether the reason for 2 deferring the gain on the rolldown was to 3 accommodate some earnings goal. 4 I merely object on the grounds that the 5 witness has been up here for six days. When you 6 ask him about the same document two or three times 7 and the same lines -- we've even got it 8 underlined. We knew what he was going to say -- 9 and then you ask him the same question six 10 different times, it takes forever. It's simply 11 repetitive questioning and you're wearing down 12 this witness sending three questioners up here 13 doing this. This is what we objected to, and it's 14 shown now in spades as Mr. Guido just goes back 15 through the same thing time and time again. You 16 see he's trying to wear down the witness by asking 17 him the same question six different times. 18 I object to it. It's abusive 19 questioning. It's overly extended, and it's 20 pointless. I object to the question because it 21 seems repetitive. 22 THE COURT: It does seem repetitive. 15633 1 MR. GUIDO: Okay, Your Honor. 2 Q. (BY MR. GUIDO) I'd like to move now 3 to the -- another set of documents that pertain to 4 activity after the so-called rolldown. And the 5 first document I would like to direct your 6 attention to is the -- a document that is in the 7 record at Tab 863, 10623. And I'd also like you 8 to look at A10625, which is an April 21, 1986 memo 9 from you to Dr. Barry Munitz. And I don't have 10 the tab number on that. 11 MR. BLANKENSTEIN: Mr. Guido, that last 12 exhibit, can you repeat the -- can you identify it 13 again, please? 14 MR. GUIDO: Pardon? 15 MR. BLANKENSTEIN: Can you identify 16 that last exhibit? 17 MR. GUIDO: It's A10625. It's dated 18 April 21, 1986. It's from Mike Crow to Barry 19 Munitz, and the subject is revenue enhancement. 20 What's the tab number? 21 MR. BLANKENSTEIN: 1202. 22 MR. NICKENS: It's in as a "T" number. 15634 1 MR. GUIDO: Oh, I'm sorry. It's in at 2 T4190. 3 THE COURT: You're also using the 4 number 10625 for that? 5 MR. GUIDO: I'm sorry. I had it as 6 10625, Your Honor. It just has multiple numbers. 7 But it's in as T4190, Your Honor. 8 Q. (BY MR. GUIDO) I'd like to start 9 first with A10623, if I may. 10 Now, do you have A10623 in front of 11 you, Mr. Crow? 12 A. Yes, sir, I do. 13 Q. And it's a memorandum from Doug Hansen 14 to Jenard Gross, Barry Munitz, Gerry Williams, 15 Mike Crow, yourself, Art Berner, and Bruce 16 Williams regarding Mustang Island follow-up, 17 April 17th, 1986. 18 What was the reference to Mustang 19 Island? 20 A. I think the -- that's a reference to a 21 strategic planning committee that occurred at that 22 location. 15635 1 Q. Now, look at Item No. 4. Do you see, 2 it says "Profit targets. Our goal has been to 3 show small quarter-to-quarter earnings increases. 4 If we took larger write-offs each quarter, 5 however, we could make a quick payback by paying 6 off debt at an initial loss. The most important 7 thing is to show some profits each quarter, not 8 necessarily increasing profits. Need to trade 9 this off versus creditmatch and the state, who 10 would like to see increasing profits." 11 Do you see that? 12 A. Yes, sir, I see that. 13 Q. Now, that's similar to the policies 14 that were set up by the strategic planning 15 committee in November of 1985, is it not, with 16 regard to showing a steady earnings of profits 17 over time? 18 A. That we wanted -- I don't remember the 19 specific document, but it was -- I do remember the 20 objective that, since we were a public company, 21 just like it was at First City, we wanted to have 22 a smoother progression of quarterly numbers. We 15636 1 didn't want one quarter to be a huge gain, the 2 next quarter to be a huge loss, and a seesaw 3 effect. 4 So, that's -- I don't know about the 5 exact words, but it's consistent with my memory. 6 Q. Okay. Was it also a time period when 7 you were putting together a public offering for a 8 subordinated debt at USAT? 9 A. I don't know whether this was the 10 specific time period, but I definitely remember we 11 were putting together -- attempting to have an 12 offering for a capital debt issue, yes, sir. 13 Q. I want you to take a look at a Document 14 10634 at Tab 180. 15 Do you have the document? 16 A. Yes, sir. Is that it? 17 Q. This is a letter dated May 9th, 1986, 18 from Mr. Berner to -- is it Mr. Halverson (sic)? 19 A. To Mr. James Halberson. 20 Q. And what is that document addressing? 21 A. I don't remember seeing this. It 22 appears that it's a letter to this gentleman 15637 1 thanking him for a meeting between himself and 2 Dr. Munitz, Mr. Gross, Gerry Williams, and I guess 3 it's Art Berner and officials of the Federal Home 4 Loan Bank. And it appears to outline various 5 items. 6 Q. Is it making reference to subordinated 7 debt issuance? 8 A. Help me out here. Where in the -- 9 Q. Look at the first paragraph of the 10 document. 11 A. Oh, yes, sir. I'm sorry. Yes. It 12 makes reference to senior subordinated note 13 application. 14 Q. So, does that refresh your recollection 15 that there was a subordinated debt issuance 16 contemplated by USAT in the spring of 1986? 17 A. Yes. 18 Q. Now -- I mean, you indicated that one 19 of the things that you wanted to do when we were 20 looking at A10623 is to have sort of a steady 21 quarter-to-quarter earnings level or slight growth 22 in the earnings. 15638 1 Do you recall that? 2 A. Yes, sir. That was my objective 3 from -- and I think Gerry Williams' objective from 4 the day I set foot in United. So, it wasn't 5 limited just to this time period. 6 Q. Now, the -- was the purpose for that in 7 this time period in order to show those steady 8 earnings in the financial statements to accompany 9 the subordinated debt issuance or prospectus? 10 A. I don't remember that discussion. I 11 don't, no, sir. 12 Q. Now, take a look at Item No. 6 in 13 A10623. Go back to the Mustang Island follow-up 14 memo. The second page, 85. See paragraph 6? It 15 says, "Timing of gains." It says, "While the 16 branch sales and the Weingarten sales are expected 17 to occur second quarter, we should plan for them 18 to occur third quarter. We should look -- we 19 could see how the second quarter looks without 20 these gains." Okay? 21 A. I see that. 22 Q. Now, did USAT time gains to even out 15639 1 earnings from quarter to quarter? 2 A. We tried to, sure. 3 Q. Now, I'd like to direct your attention 4 to -- 5 A. I might expand that answer. Sometimes 6 it just wasn't possible. A transaction wouldn't 7 close in a particular quarter, whatever. But 8 that -- we certainly attempted to, yes, sir. 9 Q. Okay. Now, let's look at the Document 10 T4190, the micro memo to Dr. Barry Munitz dated 11 April 21, 1986. And that says -- Item No. 3 -- 12 "In the foreseeable future, continue to take 13 extraordinary profits from asset sales, loan 14 servicing, loan sales, bonds, branches, et cetera, 15 in order to provide some level of modest 16 profitability. The bulk of the gains, however, 17 should be used to bolster reserves and take losses 18 to dispose of REO and related problem assets as 19 quickly as possible." 20 Do you see that? 21 A. I do. 22 Q. And that was your -- your signature on 15640 1 that memorandum? 2 A. It is. 3 Q. Okay. Now, this is April of 1986. Do 4 you see the reference to bonds there? 5 A. Which -- 6 Q. In that Paragraph 3. 7 A. Yes, sir, I do. 8 Q. What does that refer to? 9 A. I can't be sure, but I'm assuming that 10 that would include all of our investment 11 securities. 12 Q. Mortgage-backed securities and 13 high-yield bonds? 14 A. I don't -- I can't say whether I would 15 have made a distinction. It certainly would 16 include high-yield bonds. As to whether it would 17 include mortgage-backed securities, I don't know. 18 It certainly may. 19 Q. Let me show you another document. It's 20 dated April 24th, 1986. It's at Tab -- I think 21 it's Tab 565. It's T4192. Look at the -- this is 22 a memorandum from you to Jenard Gross and Gerald 15641 1 Williams. 2 It says, "In the spirit of 'bad news to 3 the top,' this is something I'm sure you're aware 4 of but I thought I would remind you. It appears 5 that several of the gains that we had counted on 6 to bolster second quarter profits may be 7 deferred/not occur: (1), branch sale to Merabank; 8 (2), consumer loan to Security Pacific; (3), sale 9 of Weingarten stock." 10 Is that what you were referring to 11 about how sometimes it wasn't always possible to 12 time gains to effect quarterly results? 13 A. Yes, sir. These would be examples 14 of -- we would anticipate transactions, but you 15 just can't forecast with certainty the time frame 16 they are going to close. 17 Q. Now -- 18 A. Or, you know, sometimes we would 19 anticipate a transaction and it would never 20 happen. For example, this -- we attempted to sell 21 our consumer loans, and we just could not get it 22 done. 15642 1 Q. Look at the last paragraph. It says, 2 "I am unaware of any significant opportunities to 3 take additional bond profits (as we did in the 4 first quarter) or any pending real estate sales 5 which would produce a profit." 6 What's the reference to bond profits 7 there? 8 A. I can't be specific, but I would assume 9 that it would be selling investment securities and 10 recording a capital gain. 11 Q. And what do you include in investment 12 securities? 13 A. Certainly, high-yield bonds. When it 14 got to mortgage-backed securities, it was a bit 15 more complicated. But on a macro basis, I would 16 say the bond portfolio would include high-yield 17 bonds, mortgage-backed securities, treasury 18 securities, and that's all I can think of. 19 Q. Now, let me show you a document which 20 is A10641. It's at Tab 866. It's a memorandum 21 from you dated June 11th, 1986, to Jim Wolfe and 22 Bruce Williams. 15643 1 It says, "At the request of several 2 important parties, would you please begin thinking 3 about third quarter profits?" 4 Do you see that? 5 A. I do see that. 6 Q. Who were you referring to when you say 7 "several important parties"? 8 A. I can't be sure. I don't remember 9 this, but they would be the individuals on the 10 totem pole above me which would include 11 Gerry Williams, Jenard Gross, Barry Munitz, 12 Charles Hurwitz. 13 Q. Now, let's take a look at Tab 867, 14 which is A10645. 15 MR. NICKENS: Your Honor, that's also 16 T4215. 17 THE COURT: Thank you. 18 Q. (BY MR. GUIDO) This is a memorandum 19 dated June 23rd from Mike Crow to Jenard Gross 20 regarding third and fourth quarter '86 income 21 planning. It says, "Non-operating gains will be 22 necessary to report profits for the third and 15644 1 fourth quarter unless there is an extraordinary 2 and unexpected turnaround in the level of 3 scheduled items." 4 Do you see that? 5 A. I do. 6 Q. And then it has various options. 7 Do you see that? 8 A. Yes, sir, I do. Well -- oh, I do see 9 the options, yes, sir. 10 Q. Now, did you regularly provide such 11 reports to Mr. Gross, Mr. Munitz, and Mr. Williams 12 on what the alternatives were in terms of income 13 planning for various quarters at USAT? 14 A. I don't know whether regularly -- I 15 mean, I tried to keep them apprised, and we tried 16 to communicate as to what our alternatives were. 17 So, it certainly wasn't a rare occurrence, this 18 type of exercise. 19 Q. Did it usually happen -- I mean, did 20 you do planning for one to two quarters ahead and 21 set out the options for Mr. Gross, Mr. Munitz, and 22 Mr. Williams? 15645 1 A. I don't really remember. I'm sure, you 2 know, their desire would be if I could do it 3 accurately, to plan out as far as possible. But 4 the real accurate answer is I don't remember. 5 Q. Did anything happen around the middle 6 of 1986 that required greater emphasis by USAT on 7 non-operating income in order to meet its targets 8 of income in net worth? 9 A. It's hard for me to be specific as to a 10 date, but certainly during this time period the 11 level of scheduled items, non-accruing loans, 12 foreclosed real estate was accelerating and 13 growing and growing. And that was choking us 14 down. 15 Q. Was this a period of time when the 16 Federal Home Loan Bank Board supervisory staff and 17 examiners were beginning to demand write-downs on 18 real estate at USAT? 19 A. I think the -- I think the mid-1986 20 examination that we would have got the results of 21 in early '87, I think, there were some 22 disagreements as to reserve levels that we talked 15646 1 about the other day about the differences in 2 capital. So, I recall that. 3 Q. Now, let's look at another document. 4 It's Tab 378. I think it's at Tab 1102. It's 5 dated July 14th. It's a Doug Hansen memo 6 regarding strategy for the next 18 months. And 7 I'd also like to direct your attention to T4246, 8 which is a memo from Doug Hansen, "Growth and 9 capital strategy next six months," dated 10 September 8th, 1986. I don't have the tab number 11 for that. 12 A. Do I have that second one up here? 13 Q. No. 14 MR. GUIDO: J.C., what's the tab 15 number? 16 MR. NICKENS: Tab 335, I'm told. 17 MR. GUIDO: I guess while we're looking 18 for this, A10666, which is the strategy meeting of 19 September 15th, 1986. 20 MR. NICKENS: Tab 870. 21 THE COURT: We'll adjourn until 1:30. 22 15647 1 (A luncheon recess was taken from 2 11:52 a.m. to 1:36 p.m.) 3 4 THE COURT: Be seated, please. We'll 5 be back on the record. 6 Mr. Guido, you may continue. 7 MR. GUIDO: Your Honor, before we 8 broke, Mr. Nickens had an objection to one of the 9 documents, and I said that I would contact 10 Washington and see if they could find out what the 11 correct rendition was. It turns out that the 12 document was a three-page document, as Mr. Nickens 13 suspected. And I have a copy of it which I've 14 marked as A10543. 15 I'd like to renew our motion to admit 16 A10543, which is the full three pages of the 17 document, Your Honor. 18 MR. NICKENS: Your Honor, I would and 19 that it be marked as 10543A to distinguish it from 20 the two-page document which apparently was used in 21 some of the depositions in the case and, as we 22 indicated, has a consecutive imaging number. 15648 1 We have no objection to the document, 2 although we would point out for the record that 3 there is no -- there is no evidence to indicate 4 that this document came from or was located in the 5 files of United. It apparently was used in a 6 deposition and was then, therefore, marked -- 7 imaged and then marked with this exhibit label as 8 we prepared for trial. There is no US number or 9 CN number or other designation that would indicate 10 that its source was anything other than the use of 11 it in one of the administrative depositions. With 12 that understanding, we have no objection. 13 THE COURT: All right. Let's mark that 14 10543A. 15 MR. GUIDO: Thank you, Your Honor. 16 THE COURT: And received. 17 Q. (BY MR. GUIDO) Do you recall that I 18 asked you the other day whether your 19 responsibilities as the CFO was to ensure that the 20 books and records of USAT were kept in accordance 21 with regulatory requirements? 22 A. I recall that question. 15649 1 Q. And does that -- and do you recall what 2 your answer was? 3 A. Not exactly, but -- 4 Q. Well, what do you perceive your 5 responsibilities to have been as the CFO with 6 regard to maintaining books and records in 7 accordance with regulatory requirements? 8 A. My responsibility would have been to do 9 the best that's humanly possible to abide by the 10 regulatory accounting rules, to have systems and 11 procedures in place, and to have qualified 12 personnel in place to make that happen. 13 Q. Now, did you review TFRs before they 14 were filed by USAT? 15 A. I did not. That was typically -- they 16 were typically prepared by Mr. Chuck Doolittle's 17 staff, and Mr. Doolittle was a CPA. And then, I 18 believe that Mr. Wolfe reviewed those TFRs. 19 Q. And who did Mr. Doolittle report to? 20 A. Mr. Doolittle reported to Jim Wolfe. 21 Q. And who did Jim Wolfe report to? 22 A. Reported to me. 15650 1 Q. And were you as the CFO responsible for 2 the accuracy of the books and records maintained 3 by USAT in accordance with regulatory standards? 4 MR. VILLA: Excuse me. I can't hear 5 you, sir. 6 Q. (BY MR. GUIDO) Were you, as the CFO, 7 responsible for maintaining the books and records 8 in accordance with regulatory standards? 9 A. I would -- yes. 10 Q. Okay. And were you responsible for the 11 accuracy of the thrift financial reports that were 12 filed with the Federal Home Loan Bank Board? 13 MR. VILLA: Objection, Your Honor. 14 He's kind of characterizing the answer of the 15 witness. I think the witness has accurately told 16 us what his role was with respect to the TFRs. 17 Is he asking him a legal conclusion, 18 whether he's going to be held legally responsible 19 for an error? He has told us what his answer is. 20 I object. The questions been asked and 21 answered twice, actually three times if you count 22 the days before when he asked and answered it. 15651 1 MR. GUIDO: I never asked the question 2 prior to today of whether or not this witness was 3 responsible for the accuracy of thrift financial 4 reports, Your Honor. 5 THE COURT: All right. I'll deny the 6 objection. 7 MR. GUIDO: Pardon? 8 THE COURT: I deny the objection. You 9 may answer. 10 A. My responsibility as I saw it -- I 11 don't know what the law is, but my responsibility 12 as I saw it was to have good systems and controls 13 in place, have good personnel in place, have good 14 procedures in place for review, for preparation of 15 the various regulatory reports such as the TFR, 16 and to make sure that they were accurate as much 17 as is humanly possible. And I won't sit here and 18 tell you that no mistakes were ever made, just 19 like I won't say that no mistakes were ever made 20 in the financial statements. You know, that's not 21 humanly possible. 22 Q. (BY MR. GUIDO) Did you participate in 15652 1 the decision to defer the losses on the swaps that 2 were used to hedge the mortgage-backed security 3 portfolio at USAT when the matched -- the mirror 4 swap was placed? 5 A. Well, I certainly participated in the 6 decision for the accounting as it relates to the 7 interest rate swaps. 8 Q. Okay. 9 A. And I don't -- as we discussed this 10 morning, my understanding of the rules is that 11 unless there is a disposition, there's not a loss. 12 Q. Now -- 13 A. From an accounting standpoint. 14 Q. I just asked you whether or not you 15 participated in the decision, Mr. Crow. 16 Is your answer "yes" or "no"? 17 A. My answer is that certainly I 18 participated in the mirror swap. I participated 19 in the accounting for the swaps, participated in 20 United -- the sub that was collapsed, yes, sir. 21 Q. Now, with regard to the restatement, 22 remember the restatement of the rolldown and the 15653 1 recognition of the gains in the rolldown? 2 A. I do. 3 Q. When that decision was made, was a 4 decision made to defer the losses on the swaps? 5 A. I -- the reason I'm stammering around a 6 bit is the -- my memory is that the accounting for 7 the swaps was fairly clear and that unless you 8 disposed of the swap, a loss wasn't going to be 9 recognized or a gain wasn't going to be 10 recognized. 11 Q. Did you have any discussions at the 12 time that you restated the gains on the rolldown 13 securities, the mortgage-backed securities, part 14 of Joe Phillips' rolldown, did you have any 15 discussions at that time on how to account for the 16 swaps that had been purchased simultaneously with 17 the placement of the reverse repos and the 18 mortgage-backed securities? 19 A. The mirror swap? 20 Q. No. The swaps that were purchased -- 21 A. Oh. 22 Q. -- that went with the reverse repos 15654 1 and the mortgage-backed securities that were part 2 of the rolldown. 3 A. Oh, I'm sure we discussed that 4 extensively. I don't have specific memory, but 5 I'm sure that that would have been an area that we 6 would have discussed and studied intently inside. 7 And then I can't be sure, but we probably would 8 have consulted Peat Marwick. 9 Q. Okay. But you participated in whatever 10 discussions there were and whatever decisions were 11 made with regard to how to account for those swaps 12 that accompanied the assets and liabilities that 13 were part of the rolldown? 14 A. Well, now, wait a minute. That were 15 part of the rolldown. Well, I -- just as a 16 generic statement, a global statement, I generally 17 participated in discussions having to do with 18 accounting for things like swaps and, you know, 19 Mr. Wolfe and I had an office next to each other 20 and we talked all the time. So, I'm sure I 21 participated in it. 22 Q. Well, were there any specific 15655 1 discussions about how to account for the swaps at 2 the time you restated the gains on the 3 mortgage-backed securities that had been sold as 4 part of the rolldown? 5 A. I don't remember exactly, but I would 6 imagine -- I suspect there were because that 7 restatement turned what I understood to be the 8 accounting rules upside down. So, I'm sure we 9 probably looked at a number of things. 10 Q. Okay. Now, I've given you A10543A, 11 which is R59. 12 Have you ever seen this document 13 before? 14 A. I've -- I don't remember seeing it from 15 United. I've seen it over the last few months, I 16 guess. 17 Q. Did you see it in a two-page or a 18 three-page rendition? 19 A. The two-page. 20 Q. So, you've never seen the three-page 21 rendition before? 22 A. No, sir, I have not. 15656 1 Q. Look at the first page where it has the 2 description of the three ways that an institution 3 may benefit from a swap transaction. 4 A. Yes, sir. 5 Q. And it says, "These transactions have 6 but one of two purposes: To fix an interest rate 7 on a deposit base which is used to fund fixed rate 8 loans, a matched swap." 9 Do you see that definition? 10 A. I see that. 11 Q. Okay. Now, let's flip over to Page 2 12 of that document. Do you see where it says "sale 13 of a matched swap due to disposition of asset"? 14 A. Yes, I do see that. 15 Q. Would you please read both of those 16 paragraphs, the one that says "in some cases" and 17 then the accounting for that? 18 A. Yes, sir. It says -- 19 Q. No. You don't have to read it into the 20 record. Just read it to yourself. 21 A. Yes, sir. Okay. (Witness reviews the 22 document.) And you want me to read Page 3, as 15657 1 well? 2 Q. No. Under that one section that says 3 "sale of matched swap due to disposition of 4 asset." 5 A. I do see that. 6 Q. Now, do you know what in the 7 next-to-the-last line -- it says -- talks about an 8 adjustment of the gain or loss on the disposition 9 of the matched asset -- means? 10 A. It would appear there that this 11 document is talking about netting a gain or loss 12 against the gain or loss on the sale of the asset. 13 Q. Okay. A gain or loss on the swap 14 against the gain or loss on the sale of the asset. 15 Right? 16 A. When a swap position has been disposed 17 of, yes, sir. 18 Q. Is this position different than the 19 accounting that you utilized with regard to the 20 accounting for the swap when you collapsed USAT 21 Mortgage Finance? 22 A. Absolutely. 15658 1 Q. It's different? 2 A. It's different. 3 Q. Does this differ from the accounting 4 that you applied for the swaps that were purchased 5 as part of the arbitrage program that Joe Phillips 6 had initiated and partially rolled down in the 7 beginning of 1986? 8 A. Yes, sir, because, as I recall, all of 9 our swaps -- if my memory is correct, all of our 10 swaps were accounted for as macro hedges. 11 Q. And they weren't -- you didn't adjust 12 the gain on the sale of the mortgage-backed 13 securities when you restated and recognized the 14 gain? 15 A. Well, no, sir, because we didn't 16 dispose of the swaps. I mean, that's what it 17 seems to me this is talking about. 18 Q. It says the swap position is closed, 19 doesn't it? 20 A. Well -- 21 MR. NICKENS: Could we get the 22 reference? It says several things. The first -- 15659 1 MR. GUIDO: The last paragraph under 2 "accounting," Mr. Nickens. 3 A. Let's see. Where were you pointing me 4 to, Mr. Guido? 5 Q. (BY MR. GUIDO) Under the accounting. 6 It says, "When a swap position has been closed as 7 a result of the disposition (planned or otherwise) 8 of the matched asset position, the gain or loss 9 associated with the sale of the swap position 10 should be treated as an adjustment of the gain or 11 loss on the disposition of the matched asset." 12 A. I do see that. 13 Q. And your position is this isn't 14 inconsistent with the accounting for the swaps 15 that were related to the arbitrage that was rolled 16 down by Joe Phillips? 17 A. Not at all because the swaps weren't 18 disposed of. 19 Q. So, you think that there needs to be a 20 disposition of the swap? 21 A. Well, I think the -- as best I 22 remember -- and I don't remember chapter and verse 15660 1 of all of this; but as best I remember, we got 2 the -- the only time it became a question is the 3 mirror swap. We got it like we thought 4 internally -- myself, Wolfe, and our CPA guys -- 5 and we consulted with Peat Marwick and they agreed 6 that that was not a disposition. 7 Q. That the mirror wasn't a disposition? 8 A. That's my memory, that is correct. 9 Q. Did you ever look at the regulations of 10 the Federal Home Loan Bank to ascertain what 11 constituted a disposition under its regulations 12 prior to filing the TFR? 13 A. I can't remember specifically. I 14 remember Wolfe -- excuse me. Mr. Wolfe was always 15 looking at the regulations, and I look at them 16 from time to time. But as to whether I looked at 17 it in this particular instance, I don't know. 18 Q. I'd like to hand you an excerpt from 19 12 CFR 1463-4. 20 Have you ever seen this regulation 21 before? 22 A. I don't remember whether I have or have 15661 1 not. 2 Q. Look at the last paragraph. It says, 3 "Accounting for the disposition of an unmatched 4 swap position" -- 5 MR. EISENHART: Your Honor, may we know 6 the exhibit number for this? Ours doesn't have an 7 exhibit number with ours. 8 MR. GUIDO: I gave -- it's a copy of 9 the regulations. I didn't give it an exhibit 10 number. I'm sorry. 11 MR. EISENHART: Thank you. 12 Q. (BY MR. GUIDO) Now, you see the 13 accounting -- the last page of Exhibit A10543? 14 A. Yes, sir. 15 Q. And that talks about accounting for the 16 disposition of unmatched swap positions? 17 A. It does. 18 Q. Now, were the swap positions, using the 19 language of the R59, were they matched or 20 unmatched transactions? 21 A. These swap positions were macro hedges; 22 so, they would be unmatched. 15662 1 Q. For GAAP purposes. Right? 2 A. Well, for -- I guess for all purposes. 3 Q. Take a look at -- 4 A. Except as it relates to performance 5 tracking, internal performance tracking. 6 Q. Well, let's take a look at the 7 next-to-the-last paragraph on A10543, Page 1, R59. 8 A. Let's see. 9 Q. The one in your right hand. Now, flip 10 back to the first page. Remember, I asked you 11 about the definition of a matched swap? It says, 12 "To fix an interest rate on a deposit base which 13 is sued to fund fixed rate loans." 14 Do you see that? 15 A. No, sir. I'm a little lost here. 16 Q. Next-to-the-last paragraph on Page 1. 17 A. Oh, I do see that. 18 Q. Okay. That doesn't make any 19 distinction between micro and macro, does it? 20 A. It does not. 21 Q. And when you look at R59 in the last 22 paragraph, it says that swaps should be accounted 15663 1 for in accordance with what? 2 A. This memo? 3 Q. Uh-huh. 4 A. It says, "The accounting treatment set 5 forth in 12 CFR 563.17-4(g)(2) relating to gains 6 and losses on interest rate futures transactions 7 would be appropriate for treatment for gains and 8 losses associated with the disposition of an 9 unmatched interest rate swap transaction." 10 Q. Okay. So, the first paragraph that we 11 read on the accounting treatment dealt with 12 matched swap positions. Right? It says "Sale of 13 matched swap due to disposition of assets." You 14 said that accounting that was adopted with regard 15 to accounting for the swaps and the sale of USAT 16 mortgage to finance the swaps was not consistent 17 with that paragraph, correct? 18 A. Yes. The -- I don't believe the swaps 19 were matched, or so-called micro hedges. 20 Q. So, they were unmatched, in your view? 21 A. They were macro hedges. 22 Q. Okay. So, using the vernacular of R59, 15664 1 is that matched or unmatched or do you know? 2 A. R59. 3 Q. Does it use the term "micro" or "macro" 4 in any way in that memo? 5 A. No, sir, it does not. 6 Q. Now, look at 12 CFR 563.17 where it 7 says "futures transactions." 8 A. Yes, sir. 9 Q. See under the definitions on the first 10 page, it says "offset"? 11 A. I see that. 12 Q. Okay. It says, "To cancel an 13 obligation to make or take delivery of a financial 14 instrument under a financial futures contract." 15 Do you see that? 16 A. I do see that. 17 Q. It says, "A futures contract to 18 purchase a financial instrument is offset by a 19 futures contract to sell a financial instrument of 20 the same type for the same delivery month." 21 A. I see that. 22 Q. "A futures contract to sell a financial 15665 1 instrument is offset by a futures contract to 2 purchase a financial instrument of the same type 3 for the same delivery month." 4 Do you see that? 5 A. I see that. 6 Q. Is that a match transaction? Or let me 7 rephrase the question. 8 Is that a mirror transaction that 9 that's discussing there? 10 MR. NICKENS: We're talking about 11 futures? 12 MR. GUIDO: Yeah. 13 A. I don't -- well, I guess I'm a bit 14 confused if we're talking about -- is it a mirror 15 swap position? 16 Q. (BY MR. GUIDO) No. Is this 17 discussion of futures contracts when it uses the 18 term "offset" essentially discussing a mirror 19 futures contract having the effect of closing out 20 or resulting in the sale of the initial futures 21 contract position? 22 A. Well, let me reread it again and study. 15666 1 I've never had experience with mirroring futures 2 contracts. (Witness reviews the document.) 3 It appears to me, Mr. Guido, in No. 5, 4 as it relates to futures, that the term offset -- 5 they are describing what an offset would be. 6 Q. And is that essentially a mirror as you 7 use the term with regard to a swap contract? 8 A. Well, no, sir. 9 Q. Okay. Let's go on. We were going 10 through a bunch of documents that dealt with what 11 the status of USAT was at the time in post-June of 12 1986. And I want to show you a document which is 13 at Tab 378, and it's B1102. This is a July 14th 14 memo from Doug Hansen to Jenard Gross regarding 15 the strategy for the next 18 months. 16 Have you ever seen this document 17 before? 18 A. I think I have. This was the Doug 19 Hansen "if I were king" memo, yes. 20 Q. The what? "If I were king" memo? 21 A. Yes, sir. He makes reference in his 22 first paragraph to -- 15667 1 Q. When did you see this? Did you see 2 this memo when you were at USAT? 3 A. I think I saw this in my -- I don't 4 remember seeing it at USAT. I think I saw it in 5 my deposition or -- it's been a long time since 6 I've seen it in my -- the attorneys have put a 7 paper blizzard to me. So, I've seen it at some 8 point either at the deposition or prior to this 9 testimony. 10 Q. See in the paragraph under "capital," 11 the first page of the document? 12 A. Yes, sir. 13 Q. It says, "Capital is going to be king 14 over the next few years." 15 Do you see that? 16 A. Yes, sir, as best I can make it out. 17 Q. Okay. It says, "We might consider 18 having a long-run target of building capital even 19 above the raised regulatory minimum to lower risk 20 and increase ability to take advantage of 21 opportunities." 22 Then it says, "In the short run, our 15668 1 dwindling capital in our largest problem." 2 Do you see that? 3 A. I do see that. 4 Q. Was that your view of the condition of 5 USAT in July of 1986? 6 A. Sir, if we get to a specific date or a 7 particular time period, I can't -- I don't 8 remember what my view was. 9 Q. Okay. 10 A. I knew that -- just generically during 11 this time frame and in 1987, I knew that capital 12 was a precious item because we were working on a 13 subcapital debt and were going to have a capital 14 debt issue, and we were going to have to pay some 15 outrageous rate of interest to raise capital 16 15 percent plus, I believe. So, I knew it was a 17 big deal. 18 Q. Okay. Now, let's take a look at Tab 19 335, which is T4246. This is a Doug Hansen memo 20 to a number of people, including you, dated 21 September 8th, 1986. 22 A. Yes, sir. 15669 1 Q. Do you have that? 2 A. I have that. 3 Q. Okay. Do you recall receiving this 4 memorandum when you were at USAT? 5 A. No, sir, I don't remember it. 6 Q. Do you have any reason to dispute the 7 fact that you received it? 8 A. No, sir. 9 Q. Okay. Now, take a look at -- under 10 "conclusions," A, "United probably has enough 11 capital to avoid a supervisory letter if scheduled 12 items do not exceed" -- I think it's 400 million. 13 Do you see that? 14 A. Yes, sir. It's either 400 or 480, 15 whichever number. 16 Q. All right. And then Item No. 2 under 17 that, it says, "The danger point is 12/86, the 18 last time our required net worth will be 19 calculated under the old rules." 20 Do you see that? 21 A. I do. 22 Q. Is that your understanding of the 15670 1 status of things in September of 1986 at USAT? 2 A. Again -- 3 MR. VILLA: 1986? 4 MR. GUIDO: Yeah. In September of 5 1986. 6 A. Again, I don't remember what I thought, 7 you know, during this particular time period just 8 other than my generic statement about capital was 9 a big deal. 10 Q. (BY MR. GUIDO) Now, this makes 11 mention to a supervisory letter, to avoid a 12 supervisory letter. 13 Do you see that? 14 A. I do. 15 Q. Do you know what a supervisory letter 16 is? 17 A. I know it's not good, but I really 18 don't. I -- I know -- it's a letter that you -- 19 that the board of directors gets from the 20 regulatory authorities. And past that, as to what 21 it does, I really don't remember. 22 Q. Does it have the effect of limiting 15671 1 direct investments? 2 A. I don't know. 3 Q. Does it have the effect of limiting 4 investments in high-yield bonds? 5 A. I don't know. 6 Q. Does it have the effect of limiting 7 equity arbitrage activities? 8 A. I just don't remember. You know, it -- 9 Q. Now, look at Bates stamp US468 in that 10 document. 11 MR. NICKENS: 468? 12 MR. GUIDO: US468. I think that's that 13 document. 14 MR. VILLA: It's OW. 15 MR. NICKENS: Our documents do not have 16 a US number on them. 17 MR. GUIDO: Okay. Well, let's -- 18 Q. (BY MR. GUIDO) Then just turn to the 19 next-to-the-last page of the document. 20 A. Okay. 21 Q. See them mention of Smith Breeden 22 senior management meeting will be Monday, 15672 1 September 15th, from 3 to 9:00 p.m.? 2 A. I do. 3 Q. And then you see under it, "Attending: 4 Hurwitz, Gross, Munitz, B. Williams, Berner, 5 Crow" -- it must be G. Williams -- "B. Williams, 6 Wolfe, Huebsch," and others. 7 Do you see that? 8 A. I do. 9 Q. Do you recall attending a presentation 10 by Smith Breeden sometime in September of 1985 -- 11 '86? 12 A. I don't remember the date or the time 13 frame, but I certainly remember attending a big 14 Smith Breeden Association presentation, yes, sir. 15 Q. And do you see mentioned there that 16 some members of the staff were going to North 17 Carolina to meet with the people of Smith Breeden? 18 A. Yes, sir, I do. 19 Q. Did those people go? 20 A. I remember that a group from United -- 21 and I believe it was accountants and financial 22 analyst types -- went to North Carolina at least 15673 1 once, maybe more than once. 2 Q. Did they go to assist in preparation of 3 Exhibit A10666, which is at Tab 870? 4 A. That's -- I don't remember it that way, 5 but that seems to be what Mr. Hansen is indicating 6 in his Point No. 3. 7 Q. Okay. 8 A. The trip that I remember was more along 9 the lines of a trip to determine if the 10 transactions Smith Breeden were recommending made 11 sense to us economically and from an accounting 12 standpoint. 13 Q. Well, let's go to Tab 870, which is 14 A10666. 15 A. Okay. 16 Q. And look at Page 9 of the document. I 17 have it as US2061. 18 Do you have US Bates stamped numbers on 19 your copy? 20 A. I do. 21 Q. Okay. Take a look under 22 "recommendations" at the top. 15674 1 Do you see that? 2 A. Yes, sir, I do. 3 Q. And it says, "Take gains on portfolio 4 to offset operating losses." 5 Do you see that? 6 A. I do. 7 Q. And do you know what portfolio that's 8 referring to? 9 A. I do not. 10 Q. Did Smith Breeden manage any portfolios 11 for USAT other than mortgage-backed securities 12 portfolios? 13 A. Well -- 14 MR. NICKENS: Your Honor, I object to 15 the question. He's implying that they managed any 16 mortgage-backed securities portfolio at USAT. I 17 don't think there's any such evidence. 18 MR. GUIDO: Your Honor, I'll rephrase 19 the question. I think Mr. Nickens is correct. 20 Q. (BY MR. GUIDO) Did Smith provide 21 advice on how to make investments in any 22 particular portfolio other than a mortgage-backed 15675 1 security portfolio? 2 A. Not that I remember. I think they gave 3 us advice, as best I recall, on the overall 4 interest rate risk of the association and then the 5 mortgage-backed securities area. 6 Q. They didn't make any recommendations to 7 you about restructuring any other part of the 8 portfolio other than the mortgage-backed 9 securities, did they? 10 A. I don't remember them getting into 11 stuff like the high-yield bonds or equity 12 arbitrage or anything like that at all. 13 Q. Now, I'd like to direct your attention 14 to the next document, which is September 22nd, 15 1986. It's a Doug Hansen memo. It's T4250 at Tab 16 871, and it lists you as a recipient of the 17 memorandum, as well. 18 Do you see that? 19 A. I do. 20 Q. Now, this says -- it makes reference to 21 strategic management committee meeting of 22 September 22nd, 1986. 15676 1 Do you see that? 2 A. I do. 3 Q. Do you recall attending such a meeting? 4 A. No, sir, not a -- you know, I couldn't 5 remember a specific meeting, but I attended many 6 strategic planning committee meetings. 7 Q. Now, have you ever seen this document 8 before? 9 A. I don't remember ever seeing this. 10 But, you know, again, I've been -- I've had a 11 blizzard of documents. But I don't remember ever 12 seeing this one, no, sir. 13 Q. Okay. Now, look at the page Bates 14 stamped US2072. It says, "Our actual net worth 15 will be the same as or below required net worth at 16 the end of the third and fourth quarter unless 17 action is taken." 18 Do you see that under "earnings and 19 equity" -- 20 A. I do see that. 21 Q. -- for growth strategy? 22 "We need earnings and good net worth in 15677 1 the third quarter as we still will be bargaining 2 with the examiners and looking for a capital note 3 issue." 4 Do you see that? 5 A. I see that. 6 Q. Do you know what the reference to 7 bargaining with the examiners is about? 8 A. I can't be specific, but I know -- I 9 think during this time period, we were -- took a 10 different view concerning the subject of general 11 versus specific reserves. 12 Q. What was the consequence of the 13 regulators' view of that issue for USAT? 14 A. I believe -- it may not have been in 15 your examination; but in an earlier examination, 16 we had a regulatory compliance schedule. And one 17 of the items that the examiners took a different 18 view than management did at that time was in 19 general versus specific reserves. The point being 20 if it were a specific reserve, it did not get 21 counted in net worth, I believe. And if it was a 22 general reserve, it did get counted in net worth, 15678 1 if I'm explaining this correctly. It's been a 2 long time. 3 Q. And what were -- what was USAT 4 advocating? 5 A. I think we -- we took the view that 6 our -- a number of our reserves were general. And 7 the lead examiner, Ms. Carlton, took a different 8 view. And so, as the financial officer, I wanted 9 to make sure to report that to the board and 10 whoever else wanted to see it. 11 Q. Okay. Now, this makes reference in 12 this paragraph again to looking for a capital note 13 issue. 14 Do you see that? 15 A. Which item is that? 16 Q. It's under "earnings and growth 17 strategy." I read you the bullet. "We need 18 earnings and good net worth in the third quarter 19 as we still will be bargaining with the examiners 20 and looking for a capital note issue." 21 Is that that subordinated debt issue 22 that I asked you about earlier today? 15679 1 A. I strongly suspect it is. 2 Q. Now -- 3 A. I -- I think we were talking about and 4 hoping for a capital note issue over an extended 5 period of time. I mean, that discussion might 6 have started -- I can't say this for a fact, but 7 it might have started way before this time period, 8 like in '85, but -- 9 Q. Now, let's go to US2073, the same 10 document, the blizzard of numbers. I know. 11 A. I thought I was trying to get through 12 with one. 13 Q. We're trying. US2073. Look down the 14 various bullet points, and it's about halfway down 15 through the bullet points. Do you see where it 16 says "quarter end actions"? It's under the entry 17 "First Boston." 18 A. Yes, sir. 19 Q. It says, "Quarter end actions will be 20 considered next Monday. We should take all MBS 21 and liquidity portfolio gains, monitor equity 22 arbitrage results, alert Joe as to the possibility 15680 1 of taking junk bond gains, and track the profit 2 and capital positions closely." 3 Do you see that? 4 A. I do. 5 Q. Do you recall that that was a decision 6 made by the strategic planning committee on 7 September 22nd, 1986? 8 A. No, sir. I don't remember that one at 9 all. That is sounds pretty -- that sounds pretty 10 wild. 11 Q. What do you mean, "pretty wild"? 12 A. Well, from a literal reading of this, 13 it -- and Mr. Hansen wrote a lot of memos. From a 14 literal reading of this, it sounds like we would 15 go in and take every gain out of the mortgage -- 16 anything that was appreciated above book out of 17 the mortgage-backed securities liquidity 18 portfolio, and that's what we would go do. And I 19 don't -- that's not consistent with my memory at 20 all. 21 Q. Why is it -- what is it about it that's 22 not consistent with your memory? 15681 1 A. I don't remember us ever going and 2 saying, "Let's just go take anything for a gain in 3 the portfolio and go sell it and" -- how do I put 4 this -- "to heck with the economic results." 5 Q. Did you -- I'm talking about September. 6 Is it your view that this is sort of a 7 wild remark because it's talking about just taking 8 all gains and not looking at the earnings targets 9 that were established in November of 1985 of 10 maintaining stable earnings over a period of time? 11 A. I'd better reread this again. 12 Could you repeat that last question, 13 please? 14 Q. Is your comment that this is sort of a 15 wild idea because it wasn't geared to the earnings 16 targets that were established in November of 1985 17 by the strategic planning committee? 18 A. No, it wasn't directed to that area. 19 It was directed to the -- I don't recall any 20 direction being given at United to the effect of 21 all deck chairs overboard that have a gain. In 22 other words, I don't remember ever receiving an 15682 1 order or giving an order of "Go out and look in 2 the portfolio. Anything that has a gain, make a 3 list of it and we're going to go sell it." 4 Q. Well, let's look at Tab 567, which I 5 think is the T4251 or A672. It's a memo from you 6 to Jenard Gross and Gerry Williams dated 7 September 23, 1986. This is admitted as T4251, 8 Mr. Crow. 9 It says, "The attached schedule 10 presents our best estimate of gains that will be 11 needed for quarterly earnings. We are proceeding 12 with taking these gains." 13 Do you see that? 14 A. I do see that. 15 Q. Now, this is a memo from you to 16 Jenard Gross saying that we are -- "These are our 17 best estimates of the gains that would be needed 18 for quarterly earnings." 19 Do you see that? 20 A. I do see that. 21 Q. Were instructions given to portfolio 22 managers of the mortgage-backed securities and the 15683 1 high-yield bond portfolio to make sales to 2 generate gains to bolster quarterly earnings? 3 A. In the -- the distinction -- before I 4 answer that, the distinction I was trying to make 5 between this and the last document is it seemed to 6 me the last document said "Let's just go take all 7 gains." 8 So, could you repeat your last 9 question? 10 Q. This document says, "The attached 11 schedule presents our best estimate of gains that 12 will be needed for quarterly earnings." 13 My question is: Were the portfolio 14 managers of the high-yield bond portfolio and the 15 mortgage-backed securities portfolio instructed to 16 take gains out of their portfolios in order to 17 bolster quarterly profits? 18 A. In the case of high-yield bonds, sure, 19 yes. In the case of mortgage-backed securities, 20 it's a bit more complicated because there were -- 21 some of those portfolios, we didn't touch. But if 22 you just take mortgage-backed securities in 15684 1 aggregate, including those held for general 2 purposes at United, yes, sales were made to take 3 gains. We certainly looked at the economics of 4 it. The answer -- the short answer to your 5 question is yes. 6 Q. Okay. Which mortgage-backed securities 7 portfolios are you saying that sales were not made 8 out of in order to generate gains to bolster 9 quarterly profits? 10 A. Well, you're going to have to help me 11 on that one because I can't -- I remember there 12 were some; but I can't, as I sit here today, give 13 you the various portfolios. I remember there were 14 certain of Sandy's portfolios that we certainly -- 15 there was the hedged arbitrage portfolios with 16 futures and options and all that stuff. And we, 17 as best I remember, didn't tinker with that. 18 Q. What do you mean "tinker with that"? 19 A. There were no sales for profitability 20 purposes. Or I say there were no sales. I don't 21 know that. But we tended to not do that. 22 The CMO portfolios, I think there 15685 1 was -- I don't think there were any gains taken 2 out of that, but I can't -- I would have to have 3 some help in documentation on this. 4 Q. Remember the 188-million-dollar CMO 5 that we discussed, the Series D CMO? 6 A. That was cash flow bond. 7 Q. That was not a CMO? 8 A. No, sir. 9 Q. Okay. So, you're treating that as 10 something different for purposes of this answer? 11 A. Oh, yes, sir. 12 Q. Any other portfolios that you think 13 that sales were not made out of to generate gains 14 to bolster quarterly profits? 15 A. Well, I just can't remember. 16 Q. Now, look at Page 2 of this exhibit. 17 See where it says, "gains to alleviate deficit"? 18 One of them is liquidity. 19 A. Yes, sir. 20 Q. Do you see that? 21 A. Yes, sir. 22 Q. Was one of the mortgage-backed 15686 1 securities portfolios that USAT had -- was one of 2 the portfolios it had that included 3 mortgage-backed securities a liquidity portfolio? 4 A. I think it was. 5 Q. Okay. 6 A. That's the best -- I think that 7 included mortgage-backed securities, but I'm not 8 sure. That might have been treasury-type 9 securities. 10 Q. All right. And then you see the 11 Freddie Mac stock. That's the stock. Right? 12 A. Yes, sir. 13 Q. And then you've got mortgage-backed 14 securities. 15 Do you see that? 16 A. I do see that. 17 Q. Okay. What portfolio was that? 18 A. I can't -- I don't know from looking at 19 this. 20 Q. Now, let's turn to another document, 21 Tab 872, which is T4258. It's a memo from you to 22 Jenard Gross and Gerald Williams dated October 1, 15687 1 1986. 2 Do you see that? 3 A. I do see that. 4 Q. Is that your handwriting? 5 A. It's my signature. 6 Q. Okay. Then look at the second 7 paragraph. It says, "Fourth quarter 1986 results 8 are projected to show a significant loss unless a 9 miracle happens in equity arbitrage, increased 10 values in our bond portfolios, or an unexpected 11 sale of real estate at a profit. As you are 12 aware, we utilized most of our asset gains in 13 prior quarters." 14 A. I see that. 15 Q. What does that reference to, "as you 16 are aware, we have (sic) utilized most of our 17 asset gains in prior quarters"? 18 A. I don't remember this exact memo, but 19 what I would interpret that is throughout this 20 entire time period, we were selling appreciated 21 assets because our core earnings were very, very 22 weak. And I suspect very strongly that I'm trying 15688 1 to convey to these -- to my bosses that the 2 cupboard is running a little bare. There just 3 isn't -- you know, there's not a wide array of 4 appreciated assets available. 5 Q. Okay. Now, look at the next document. 6 It's Tab 566, which is T4302. This memo is from 7 you to Bruce Williams dated November 13th, 1986, 8 and it makes reference to a discussion at the 9 investment committee of selling junk bonds for 10 profits for purposes of quarterly gains. 11 Do you see that? 12 A. I do. 13 Q. Do you recall writing this memorandum 14 to Bruce Williams? 15 A. No, sir, I really don't. 16 Q. Have you ever seen it before? 17 A. I've seen it recently, yes. 18 Q. Have you seen it recently in 19 conjunction with another memorandum to Art Berner 20 regarding adoption of the high-yield bond policy? 21 A. Well, if I did, I don't remember it. I 22 just saw it just -- I think I just saw it 15689 1 stand-alone, that it was the "impassioned plea" 2 note. 3 Q. Did you ever tell the auditors that 4 USAT was making sales out of its high-yield bond 5 portfolio in order to generate gains to bolster 6 quarterly profits? 7 A. I can't remember exactly what -- you 8 know, my exact conversations with the auditors, if 9 I -- I mean, I told them about sales. I told them 10 about what we were doing. And it was as plain 11 as -- as plain as daylight when one looked at the 12 investment committee minutes and looked at the 13 trade tickets and looked at the funds flow 14 statements that sales were being made out of the 15 high-yield bond portfolio at quarter end, and they 16 tended to be profits. 17 Q. Do you recall telling the auditors that 18 the sales that were being made out of the 19 high-yield bond portfolio were not done for 20 trading purposes? 21 A. I probably -- I don't remember 22 specifically, but I think we took the -- that our 15690 1 accounting was that the investment portfolio -- or 2 the high-yield bond portfolio specifically is what 3 we're talking about -- was an investment 4 portfolio. It wasn't a trading portfolio. And I 5 remember having numerous discussions with 6 Peat Marwick, you know, over the years on that 7 subject, yes, sir. 8 Q. Are sales made out of a portfolio in 9 order to generate quarterly gains to bolster 10 profits consistent with the intent required to 11 have an investment portfolio classified as an 12 investment portfolio for accounting purposes? 13 A. Yes. I think it would meet the 14 accounting rules during -- in existence during 15 this time period, absolutely. 16 Q. Okay. Now, let's go to Document 17 A10726, which is February 20th, 1987, a memo from 18 you to Jenard Gross. 19 A. Which exhibit is that, Mr. Guido? 20 Q. It's a new exhibit, new document. 21 A. Thank you. 22 MR. GUIDO: This is one of those 15691 1 documents, Your Honor, which has someone's 2 comments -- it's already been -- I don't have it 3 as a tab number, Your Honor. 4 MR. NICKENS: 874. 5 MR. GUIDO: This is one of those 6 documents that I think there was a question about 7 circled in the highlighted portions of it. Your 8 Honor, we've never been able to -- or we haven't 9 been -- to this date, haven't been able to find a 10 document that doesn't have the markings on it. 11 MR. NICKENS: Your Honor, there's not 12 much question about how they got there; but we 13 haven't been able to find a clean one, so that's 14 okay. 15 THE COURT: All right. 16 MR. NICKENS: These are the markings by 17 some of the lawyers involved in this case at some 18 point in time, Your Honor. 19 THE COURT: It's in evidence -- 20 MR. GUIDO: Pardon, Your Honor? 21 THE COURT: I say the document is in 22 evidence as it is; so -- 15692 1 MR. GUIDO: Right, your Honor, but I 2 think we have stipulated that the markings were 3 not to be part of the record and we both 4 stipulated to that. 5 MR. NICKENS: And we tried to get clean 6 copies and we in many instances have been able to 7 substitute clean copies, but this is one where we 8 have not found a copy without the markings. 9 Q. (BY MR. GUIDO) Now, this is 10 February 20th, 1987, Mr. Crow. It says, "USAT 11 will need between 18 and 20 million in equity 12 arbitrage profits in bond gains for the months of 13 February, March in order to break even for the 14 quarter." 15 Do you see that? 16 A. I do. 17 Q. And then it goes on and says, "In 18 February, we have booked approximately 7.5 million 19 in profits for mortgage-backed securities gains 20 and have reported approximately 3.0 million in 21 equity arbitrage profits net cost of carry." 22 Do you see that? 15693 1 A. Yes, sir, I see that. 2 Q. And then, "With the target of junk bond 3 gains at 5 to 7.5 million, we should fall 4 comfortably within the range of required gains 5 necessary to break even." 6 Do you see that? 7 A. I do. 8 Q. And does that document reflect that 9 gains were being taken out of the high-yield bond 10 portfolio in order to generate profits to bolster 11 the quarterly profits of USAT at that time? 12 A. I can't remember specifically this 13 memo, but that's certainly the way I would read 14 the memo. 15 Q. Okay. Now, the -- why was it that 16 sales were being made out of the high-yield bond 17 portfolio in order to generate quarterly profits? 18 A. Because our core earnings at United 19 Savings were very weak. And as the time line 20 moved on and scheduled items and foreclosed real 21 estate and non-accruing loans became a bigger and 22 bigger and bigger problem, it made the generation 15694 1 of core earnings -- I won't say impossible, but 2 very, very difficult when you couple that with a 3 big goodwill number, as well. 4 And so, that -- if you didn't have core 5 earnings and if you were going to report -- you 6 know, have some type of performance, then you'd 7 take bond profits or take some kind of profits. 8 Q. Was one of the problems with the core 9 earnings the drag on earnings that was created by 10 the swaps that were on the portfolio after the Joe 11 Phillips rolldown? 12 A. Yeah. It wasn't a major -- it wasn't 13 the major -- the major items are the ones that 14 I've mentioned. But certainly, had we been 15 clairvoyant or known that interest rates were 16 going to go down instead of -- that interest rates 17 were going to go down, we wouldn't do any swaps. 18 But in answer to your question, yes, I think the 19 interest rate swaps provided a drag on earnings. 20 Q. Okay. I'm talking about as of February 21 of 1987. 22 A. Yes, sir, I think that's a fair 15695 1 statement. 2 Q. Do you have Tab 189, T4311 in front of 3 you? 4 A. T -- which one? 5 Q. T4311, Tab 189. It's a November 24th, 6 1986 memo from Gerald Williams to Charles Hurwitz, 7 Jenard Gross, and Barry Munitz. 8 A. Yes, sir, I do. 9 Q. Okay. And do you see the "CC" on the 10 second page has your name mentioned? 11 A. Yes, sir. 12 Q. Do you recall receiving this 13 memorandum? 14 A. No, sir. I remember the subject of the 15 so-called running rate. 16 Q. Well, let's look. "Attached is an 17 analysis from Kurt Schwenkel to me regarding USAT 18 running rate. I believe this summary deserves 19 your utmost attention. In essence, Kurt points 20 out that the association's base operation is 21 losing at a rate of $77 million a year, up from 22 40 million in 1985. While the individual 15696 1 allocations can be questioned, the overall 2 operating results were confirmed by October's 3 results which reflected the 7.2-million-dollar 4 loss." 5 Do you see that? 6 A. I do see that. 7 Q. And then it goes on. "The writing next 8 to the monthly numbers product line income 9 statement is the annual effect of the September 10 numbers. The most dramatic observation is that 11 primarily as a result of selling the 12 mortgage-backed securities in June, the net 13 interest spread on the total assets classified as 14 investments is now in a negative position, 15 including the cost of swaps. Due to a decline in 16 interest rates, the interest rate swaps, caps, and 17 collars are now costing us about $42 million 18 annually." 19 Do you see that? 20 A. I do see that. 21 Q. That's more than 50 percent of the 22 total 77-million-dollar negative earnings at USAT 15697 1 at that time, is it not? 2 A. Now, let's see. (Witness reviews the 3 document.) 4 Yes, sir. If you take 42 million, it's 5 more than 50 percent of 77. I've got to say this 6 surprises me, but -- I mean, this isn't quite the 7 way I remember it; but the numbers are whatever 8 the numbers are. 9 Q. Now, you remember you said that no one 10 should be surprised if USAT was making sales out 11 of its mortgage-backed securities portfolio in 12 order to generate gains to bolster quarterly 13 profits? 14 MR. NICKENS: Your Honor, I think the 15 discussion had to do with high-yield bonds. 16 THE COURT: I didn't recall that 17 statement, myself. You can ask him that. 18 MR. GUIDO: I'll ask him the question. 19 Q. (BY MR. GUIDO) Did you state in 20 response to one of my questions that no one should 21 be surprised if USAT had made sales out of its 22 mortgage-backed securities portfolio in order to 15698 1 generate gains to bolster quarterly profits? 2 A. "Surprised," you mean after the fact? 3 Q. I mean -- 4 A. Well, I don't see how one could be 5 surprised. It's plastered all over the investment 6 committee minutes. It's disclosed in our 7 performance reports. It's disclosed in our 10Ks 8 and 10Qs. It's disclosed in discussion of 9 non-interest income. 10 I don't quite see how anybody could be 11 surprised that there were capital gains taken from 12 mortgage-backed securities. 13 Q. Well, let's look at some of the 14 investment committee minutes. That might be a 15 good place for us to start. 16 A. Okay. 17 Q. Let's take a look at Tabs 350 through 18 Tabs 353, which are A1419, A1420, A1422. 19, 20, 19 22. 20 Do you see -- do you have A1419 in 21 front of you? 22 A. Yes, sir. 15699 1 Q. It says, "A meeting of the investment 2 committee was held on November 25th." 3 Do you see that? 4 A. I do. 5 Q. And it talks about the people who were 6 present. And in the second paragraph, it says, 7 "Mr. Ron Huebsch discussed the association's 8 high-yield bond portfolio. He presented a report 9 which was ordered attached to the minutes of the 10 meeting. He noted that currently, the portfolio 11 had a loss of approximately $1.7 million." Okay? 12 A. Yes, sir. 13 Q. Now, let's turn to -- we have to use 14 the Bates stamp numbers because I don't see any 15 pagination here. It says US3010308, I think. 16 A. Okay. 17 Q. Do you see that page says "United 18 Savings Association of Texas, Non-liquidity 19 Securities Holdings." 20 Do you see that? 21 A. I do. 22 Q. And that has two pages in it. 15700 1 Do you see that? 2 A. Yes, sir. 3 Q. And then US3010310 has a sell list on 4 it. 5 Do you see that? 6 A. I do see that. 7 Q. Okay. And the first one is Adelphia, 8 4 million par. Adelphia Comm. 13. 9 Do you see that? 10 A. I do see that. 11 Q. And then A -- US3010311, it talks about 12 retail matched buy lists. 13 Do you see that? 14 A. Yes, sir. 15 Q. Now, anywhere in that paragraph that I 16 read you where Ron Huebsch discussed the portfolio 17 and US3010308 through 010311, do you see the 18 purposes for any of those transactions stated 19 there? 20 A. The purpose? 21 Q. Yeah, the purpose. 22 A. No, sir. I don't see where it says 15701 1 "purpose" anywhere on here. 2 Q. Okay. Now, let's go to -- 3 MR. NICKENS: Well, you're just talking 4 about the parts that he referred to? 5 MR. GUIDO: Just the four pages and the 6 one paragraph that I referred to. 7 Q. (BY MR. GUIDO) Then go to US3010312. 8 THE COURT: What's the exhibit number, 9 Mr. Guido? 10 MR. GUIDO: A1419, Your Honor. 11 THE COURT: That's the one we just had. 12 THE WITNESS: What was that page number 13 again, please? 14 MR. GUIDO: A301312 through -- I mean, 15 excuse me, US3010312 through US3010315. 16 A. Okay. 17 Q. (BY MR. GUIDO) Do you see anything in 18 there about the purposes of any of the 19 transactions that are listed there? 20 MR. VILLA: Could you give us the page 21 numbers again, sir? 22 MR. GUIDO: US3010312 through 010315. 15702 1 A. (Witness reviews the document.) Okay. 2 What was -- 3 Q. (BY MR. GUIDO) Do those pages 4 anywhere indicate what the purpose of these 5 transactions were? 6 A. I don't see "purpose," the word -- you 7 know, a description of the purpose anywhere in 8 these pages. I bluntly didn't study the last two 9 because I -- they are hard to read. But I'll take 10 your word for it if it doesn't say "purpose." 11 Q. Let's go to US3010306, the first page 12 of the minutes again. Stay with that exhibit. 13 A. Yes, sir. 14 Q. Look at the very last paragraph. It 15 says, "It was noted that the portfolio was 16 approximately 515 million. Mr. Huebsch presented 17 a list of possible, quote, 'sales candidates,' 18 unquote, which was ordered attached to the minutes 19 of the meeting. After full discussion of these 20 candidates, it was determined that the association 21 should, in order to adjust the portfolio, sell 22 such bonds as soon as possible. Mr. Huebsch then 15703 1 provided a retail matched buy list which was 2 ordered attached to the minutes of the meeting. 3 It was determined that if there was room in the 4 portfolio, he should present those issues on the 5 list which he thought were most beneficial for 6 possible acquisition." 7 And then it says, "After full 8 discussion, it was also determined that Messrs. 9 Crow, Bruce Williams, Terry Dorsey, and Stabell 10 would prepare an historical profit, yield and 11 spread analysis on the association's high-yield 12 securities portfolio." 13 Do you see that? 14 A. I do. 15 Q. Does that anywhere say that those 16 high-yield bonds that are being referred to there 17 were sold in order to generate gains to bolster 18 quarterly profits? 19 A. I certainly don't see those words. 20 Q. Now, let's take a look at the reference 21 to Ms. Laurenson on the second page of the 22 document. "Ms. Laurenson then" -- second 15704 1 paragraph -- "then presented a report on the -- 2 her report was ordered attached to the minutes of 3 the meeting. The report was discussed at great 4 length, including the current trading in the 5 portfolio in order to adjust the portfolio for 6 market gains and losses." 7 Do you see that? 8 A. I do. 9 Q. And what does that refer to? 10 A. I really -- I don't know. 11 Q. Okay. Now, then it says, 12 "Ms. Laurenson also distributed a report on the 13 current yield and a report which showed what the 14 yields would be if rates were up 50 basis points." 15 Do you see that? 16 A. I do. 17 Q. Then it says, "A lengthy discussion was 18 had on the effect of interest rate changes on the 19 portfolio and it was determined that in view of 20 the desire to adjust the portfolio it would be 21 appropriate to take profits from the AMPs 22 mortgage-backed securities collateralizing the 15705 1 DARTs and AMPs issues while keeping yield at an 2 appropriately high spread." 3 Does that say that sales were made out 4 of the mortgage-backed securities portfolio in 5 order to generate gains to bolster quarterly 6 profits? 7 A. No, sir, it does not. 8 Q. Let's go to the last two pages of the 9 exhibit, which are US3005112, which is a 10 memorandum from Bruce Williams to Jenard Gross, 11 Gerry Williams, Mike Crow dated November 24th, 12 1986. 13 Have you ever seen that memorandum 14 before? 15 A. Yes, sir, I have. 16 Q. Okay. Have you seen that document 17 recently? 18 A. I've seen it in the last month or so 19 or -- and I think I saw it in my deposition. 20 Q. Now, it says, "Since the inception of 21 the mortgage-backed securities arbitrage program, 22 the association has recognized approximately 15706 1 $67 million in gains on sales through 2 October 1986." And then it goes on. 3 Does that document anywhere say that 4 the gains on the sales of the mortgage-backed 5 securities portfolio were made or were obtained in 6 order to bolster quarterly profits? 7 A. I haven't carefully read it; but I 8 don't remember those words being used in there, 9 no, sir. 10 Q. Okay. Now, let's switch to A1422, 11 which is 353. 12 MR. GUIDO: I'll skip over one of the 13 documents, Your Honor. 14 Q. (BY MR. GUIDO) Now, look at the first 15 page of the document, US3005150. It says, 16 "Mr. Huebsch began the meeting by describing the 17 current status of the high-yield bond portfolio." 18 Do you see that paragraph? 19 A. I do, yes, sir. 20 Q. Okay. And then it goes through a 21 description, and it has in -- the third paragraph 22 says, "A report by Mr. Huebsch was ordered 15707 1 attached to the minutes of the meeting." 2 Do you see that? 3 A. I do. 4 Q. Then it says, "A discussion was had 5 concerning the desirability of retaining bonds in 6 certain communications-oriented companies." 7 Do you see that? 8 A. I do. 9 Q. Now, take a look at US3005152 through 10 005154. Anywhere in those pages does it say sales 11 were made out of the high-yield bond portfolio in 12 order to generate gains to bolster profits at 13 quarter's end? 14 A. No, sir. The closest -- I don't see 15 those words. The closest is down at the very 16 bottom of 5154 where I guess Mr. Huebsch is 17 talking about total profits during the fourth 18 quarter, and there's some numbers down there. 19 Q. Okay. 20 A. But in answer to your question, I don't 21 see the words you're requesting. 22 Q. Okay. Now, let's go to US3005155 15708 1 through US3005164. 2 A. Have I got those? 3 Q. It's still the same exhibit. 4 A. Oh, I'm sorry. It was -- could you 5 repeat those numbers again, please? 6 Q. It's US3005155, which says "Investment 7 committee meeting, December 15th, 1986" at the 8 top. 9 A. Yes, sir. 10 Q. Okay. And then it goes through 11 US3005164. 12 A. Okay. 13 Q. I'm going to walk you through these 14 pages. Okay? 15 A. Okay. 16 Q. These are the mortgage-backed 17 securities portion of your report. 18 A. Okay. 19 Q. It talks about -- you see in the first 20 page, it talks about market review. It talks 21 about this week's economic indicators. Then it 22 has "activities" on US3005157, Page 3 of those -- 15709 1 of the report on mortgage-backed securities. 2 Anywhere does that report tell you that 3 sales were made out of the mortgage-backed 4 securities portfolios in order to generate gains 5 to bolster quarterly profits? 6 A. On 5157? 7 Q. Yeah. 8 A. I don't see on the schedule where it 9 says the purpose or objective, no, sir. 10 Q. Okay. Now, let's take a look at the 11 next page, 005158 where it talks about portfolio 12 performance. 13 Anywhere does that say that sales were 14 made out of the mortgage-backed securities 15 portfolio in order to generate gains to bolster 16 quarterly profits? 17 A. I don't see those words, no, sir. 18 Q. Okay. Take a look at US3005159. 19 Anywhere do you see that sales were made out of 20 the mortgage-backed securities portfolios at USAT 21 in order to generate gains to bolster quarterly 22 profits? 15710 1 A. I don't see that language, no, sir. 2 Q. Take a look at US3005160 through 3 005164. 4 Anywhere do you see in those pages that 5 sales were made out of USAT's mortgage-backed 6 securities portfolio in order to generate gains to 7 bolster quarterly profits? 8 A. I -- I don't see that, Mr. Guido. 9 Q. Okay. Now, look at US3005161. See 10 where it says "sales pending"? 11 A. Yes, sir. 12 Q. Okay. And it says -- I think it says 13 December 10th -- "As of December 10th, 1986, 14 pending transactions." 15 Do you see that? 16 A. I do. 17 Q. And it shows transactions in the DARTs. 18 Do you see that? 19 A. I do. 20 Q. And do you know what the DARTs refer 21 to? 22 A. That is Dutch auction rate preferred 15711 1 stock. 2 Q. Is that a subsidiary of USAT? 3 A. Yes, it is. 4 Q. Okay. 5 A. Was. 6 Q. And was it one of USAT's 7 mortgage-backed security portfolios? 8 A. It was a -- yes. It was 9 mortgage-backed securities that were used to 10 collateralize the issuance of Dutch auction rate 11 preferred stock, and another brokerage firm called 12 them AMPs. So, it was DARTs and AMPs. 13 Q. Okay. Then see the next -- it says 14 "treasury portfolio"? It doesn't have an entry 15 there. See where it says "treasury"? 16 A. Yes, sir. 17 Q. Was that another of USAT's 18 mortgage-backed security portfolios? 19 A. I think there were mortgage-backed 20 securities in the treasury area. 21 Q. Okay. And then see where it says 22 "investments"? 15712 1 A. Yes, sir. 2 Q. What's that refer to? 3 A. I really -- I don't know. I can't 4 remember the breakdown of the various portfolios. 5 Obviously, they are mortgage-back security pools. 6 Q. But you don't see anything on that page 7 that indicates that sales were made for the 8 purposes of generating gains to bolster quarterly 9 profits, do you? 10 A. I don't see that, no, sir. 11 THE COURT: Mr. Guido, we'll take a 12 short recess. 13 14 (Whereupon a short break was taken from 15 3:09 p.m. to 3:25 p.m.) 16 17 THE COURT: Be seated, please. We'll 18 be back on the record. 19 Mr. Guido, you may continue. 20 Q. (BY MR. GUIDO) I'd like you now to 21 take a look at Tab 355, A1424, which are the 22 minutes of the investment committee of January 5, 15713 1 1987. 2 A. 1425 (sic)? 3 Q. Yes, sir. 4 A. Okay. 5 Q. Look at the fourth paragraph in those 6 minutes. It says, "Ms. Sandy Laurenson then 7 reported on the mortgage-backed securities 8 portfolio. Her report which she had prepared was 9 ordered attached to the minutes of the meeting. 10 Her report was then discussed in detail, including 11 her proposed plans which, after full discussion, 12 were unanimously approved." 13 Do you see that? 14 A. Yes, sir. 15 Q. Does that anywhere say that sales were 16 made out of the high-yield bond -- I mean the 17 mortgage-backed security portfolio to generate 18 gains to bolster quarterly profits? 19 A. No, sir, I don't see those words. 20 Q. Now, when you keep answering my 21 question, you keep saying "No, sir, I don't see 22 those words." 15714 1 What do you mean when you say, "No, 2 sir, I don't see those words." 3 A. I thought that was the question you 4 were asking me: Do you see anywhere in this 5 paragraph where it says were gains taken for 6 quarterly profit purposes? 7 Q. Well, have you inferred from any of the 8 paragraphs which you've given that response to 9 that the purposes were to generate gains to 10 bolster quarterly profits? 11 A. Well, some of the schedules we've 12 looked at during this stack had some accounting 13 gain and stuff like that. And if I were an 14 auditor or an examiner, I would certainly take 15 these statements and these schedules and go talk 16 to someone and, you know, find out what's going 17 on. 18 Q. Did you ever receive a memo from the 19 auditors that told you what you needed to do to 20 properly describe what the purposes of sales were 21 out of the investment portfolios at USAT? 22 A. As you've phrased the question, I don't 15715 1 remember that. I remember receiving a Joe Parsons 2 memo, and it seemed to me to be more of a trading 3 versus investment issue. But maybe we're talking 4 about two different things. 5 Q. Well, did that memorandum include in it 6 advice to USAT on what it should put in its 7 investment committee minutes so that the auditors 8 could ascertain what the purposes of the 9 transactions were? 10 A. I don't remember. I'd have to look at 11 the memo. 12 Q. Okay. We'll get to it. 13 A. Okay. 14 Q. Let's go to January 5th, 1987 again. 15 See where it says "Mr. Huebsch then discussed the 16 high-yield bond portfolio"? 17 A. Yes, sir. 18 Q. Look at that paragraph. Anywhere in 19 that paragraph does it say what the purposes of 20 the transactions were? 21 A. I don't see anywhere in this paragraph 22 a statement of purpose, no, sir. 15716 1 Q. Now, look at the next page. I'm sorry. 2 Ignore the equity arbitrage report on the next 3 three pages. The next deals with -- it says 4 "Investment committee meeting, January 5th, 1987," 5 and it is US3005194. And do you see -- under 6 "activities," do you see that? 7 A. No, sir. I'm lost. 8 Q. Okay. 9 A. It's still in this same document? 10 Q. It's still in the same document. It's, 11 I think, the fifth page in, thereabouts. 12 A. Okay. And it's No. 204? 13 Q. You may have different numbers than I 14 have. You're on a different document than I am. 15 A. Oh. 16 Q. 355. Excuse me. 17 A. Okay. 18 Q. The far right-hand corner, US3005194. 19 Do you see that? 20 A. I do. 21 Q. See under "activities"? It says, "I 22 purchased 10 million of the" -- I purchased 15717 1 $10 million of the Dean Witter floating rate CMO 2 residual to yield 13.75 percent." 3 Do you see that in the middle of the 4 page under "activities"? 5 A. Oh. I do see that. 6 Q. Does that anywhere say what the purpose 7 of the transaction was? 8 A. The purpose of this purchase? 9 Q. Uh-huh. 10 A. No, sir. I don't see it. 11 Q. Now, let's move down. Do you see "plan 12 for the portfolio"? 13 A. Yes, sir. 14 Q. It says, "Buy up to 100 million of 15 Freddie Mac 8 and a halfs for three-month forward 16 delivery. Purchase them in the daily Freddie Mac 17 auctions and take advantage of the excessive drop 18 in the deferred deliveries." 19 Do you see that? 20 A. I see that. 21 Q. It says, "Use these to replace 22 portfolio runoff." 15718 1 A. Yes, sir. 2 Q. Does that state what the purpose of the 3 transaction was? 4 A. I guess in this case, it would -- I 5 would interpret that to be the purpose. 6 Q. Now, the next one says, "Actively swap 7 coupons within the 98 to 102 price range to 8 increase yield. Write puts on cheap mortgages 9 dropped Freddie Mac 8s to generate fee income." 10 Do you see that? 11 A. I do. 12 Q. Take the first sentence. Does that say 13 that those actively swapped -- actively swapped 14 coupons was done in order to generate gains to 15 bolster quarterly profits? 16 A. No, sir, I don't see that. 17 Q. Okay. And then see this "write puts on 18 cheap mortgages to generate fee income." 19 Do you see that? 20 A. I do see that. 21 Q. Was that part of the put writing 22 program that was referred to as a speculative 15719 1 program at USAT? 2 A. I don't think so. I don't think that 3 was part of the speculative trading account 4 portfolio that was set up at one time. 5 Q. What was it? Do you know? 6 A. I'll stand -- the documents say 7 whatever they say, but it seemed to me we were 8 trading treasury futures and Ginnie Mae 8-type 9 instruments, puts or calls, something like that. 10 But I don't take that one to the bank. It's 11 whatever was in that portfolio. 12 Q. You did at USAT, sometime in January or 13 late 1986, establish a speculative account for 14 mortgage-backed securities related instruments. 15 Right? 16 A. Yes, sir, we did. I'm not sure of the 17 time frame, but we did do that. 18 Q. And that included a put writing 19 program, did it not? 20 A. I just don't remember that. I mean, it 21 may have. I just -- I can't visualize exactly 22 what was in that account. 15720 1 Q. Was there a put writing program to -- 2 at USAT with regard to mortgage-backed securities 3 in late 1986 and early 1987? 4 A. Other than what's on this document, I 5 don't have an independent memory of that. 6 Q. Okay. All right. Anywhere does that 7 say, under "plan for the portfolio," that sales 8 are to be made out of the portfolio in order to 9 generate gains to bolster quarterly profits? 10 A. I don't see that, no, sir. 11 Q. Now, let's look at Tab 356, which is 12 A1425. First of all, I want to direct your 13 attention to the third page of the document. It's 14 US3005203. See under "activities," it says, 15 "Profits on put writing and last week's Ginnie Mae 16 speculation" -- I can't read the next word -- "to 17 $601,563 realized. We had our first purchase of 18 15-year securities which are particularly 19 attractive for the MBS subsidiary. We purchased 20 additional 25 million of floating rate CMO 21 residual from Goldman Sachs, bringing our total 22 residual position to" -- I think it's 85 million 15721 1 or 65 million. "See attached." 2 Do you see that? 3 A. I do see that. 4 Q. Does that refresh your recollection 5 that there was a put writing program at USAT that 6 was part of its speculative portfolio? 7 A. No, sir, other -- not other than what's 8 on this page. 9 Q. Okay. Now, let me ask you this: What 10 is the purpose of writing a put? What is it that 11 the writer of the put, the seller of the put, is 12 hoping to happen? 13 A. Well, this gets a bit confusing to me. 14 If you're writing a put, I think -- I think you're 15 hoping the price goes down. But I -- I guess the 16 real answer is as we sit here today, I can't say. 17 I don't know. 18 Q. So, you don't know -- what if you're 19 buying a put? Do you know what that does? 20 A. I don't know. I'm sure I knew then, 21 but I can't say I do now. 22 Q. Let's take stocks. Okay? All right? 15722 1 A. Okay. 2 Q. You own a stock. Pardon me. Strike 3 that. Let's make it a little more simple for you. 4 A. Okay. 5 Q. You don't own anything and you buy a 6 put. You buy a put. You pay me $100 to put 7 something to me at your option. Okay? That's 8 what you're doing when you're buying a put. 9 A. Right. 10 Q. What are you betting will happen with 11 that market price of that stock? 12 A. Well, if I -- if I can put it to you at 13 a predetermined price -- is that how this works? 14 Q. Uh-huh. 15 A. Then I guess I hope that the price of 16 the stock goes way down. 17 Q. Okay. 18 A. Because I can buy it and deliver to you 19 and make a profit on the spread. 20 Q. And what am I betting that stock price 21 will do? 22 A. I guess in your example, you're hoping 15723 1 that the put expires worthless, I guess. Like I 2 said, I don't profess to understand this area. 3 Q. So, I hope that the -- 4 A. I never -- 5 Q. So, you don't know? 6 A. No, sir. I don't know. 7 Q. Okay. The -- let's go to the next page 8 of the document, US3005204. It says "Activity 9 through January 13th." 10 Do you see that? 11 A. I do see that. 12 Q. And it lists various portfolios. Do 13 you know what this chart is showing? 14 A. I can't explain it today, but I think 15 this was Sandy's report on her activity for the 16 week, given the various items that -- the various 17 transactions. 18 Q. Anywhere does this sheet say the 19 mortgage-backed securities were being sold in 20 order to generate gains to bolster quarterly 21 profits? 22 A. I don't see those words, no, sir. 15724 1 Q. Then look at the entry there on the 2 first page. See where it talks about 3 Ms. Laurenson also reported on the mortgage-backed 4 security portfolio? 5 A. Are we -- yes, sir, on the second 6 paragraph of the first page? 7 Q. Yes. 8 A. Yes, sir, I see that. 9 Q. And look -- and also the third 10 paragraph. Do you see that? 11 Anywhere does that say that sales were 12 made out of the mortgage-backed security portfolio 13 in order to generate gains to bolster quarterly 14 profits? 15 A. I don't see that, no, sir. 16 Q. Let's go to the next exhibit, A1426, 17 January 21st, 1987, which is at Tab 357. 18 Do you see the second and third 19 paragraph there where it refers to Ms. Laurenson? 20 A. I do. 21 Q. Does anywhere that say that sales were 22 made out of the mortgage-backed secure portfolio 15725 1 in order to generate gains to bolster quarterly 2 profits? 3 A. I don't see that, no, sir. 4 Q. Okay. Look at US3005223. It's another 5 one of those activity reports in the 6 mortgage-backed security portfolio, is it not? 7 A. It appears to be, yes, sir. 8 Q. Anywhere does that say that sales were 9 made out of the mortgage-backed security portfolio 10 in order to generate gains to bolster quarterly 11 profits? 12 A. I don't see those words, no, sir. 13 Q. Now, look at the next page, US3005224. 14 5224. 15 A. Okay. 16 Q. See the sensitivity analysis that's 17 described there? 18 A. Yes, sir. 19 Q. It says, "The MBS portfolio, when 20 combined with the interest rate swaps, are 21 favorably positioned for further rate declines." 22 Do you see that? 15726 1 A. I do. 2 Q. It goes on, "Currently the unrealized 3 net loss stands at 101 million ($26 million MBS 4 gain against $127 million swap loss.)" 5 Do you see that? 6 A. I do. 7 Q. "With a 100 basis point decline in 8 market rates, the MBS portfolio would nearly 9 triple in value to 72 million while the swaps 10 would deteriorate to a loss of $161 million for a 11 net loss of $89 million." 12 Do you see that? 13 A. I do. 14 Q. "If rates would rise 100 basis points, 15 the MBS portfolio would lose over 80 million of 16 its current face value to an unrealized loss of 17 155 million, far in excess of the appreciation of 18 the swap position to 93 million loss for a net 19 loss of 148 million." 20 So, it was basically -- if the rates go 21 down 100 basis points, the loss of 101 million 22 total would be reduced at a minus 89 million. 15727 1 Right? 2 A. I'm not sure I quite follow all that. 3 Q. Why don't we just switch to the next 4 page. It makes it easier. 5 A. Okay. 6 Q. US3005225. That's the sensitivity 7 analysis that that text is taken from. 8 A. Okay. 9 Q. Just look at the net liquidation value. 10 Do you see if yields go down 100 basis 11 points, the necessary loss will be 89 million? 12 A. The mark-to-market, yes. 13 Q. And if the yield is unchanged, the 14 mark-to-market is 100 million. 15 Do you see that? 16 A. I see that. 17 Q. And if the yields go up 100, the 18 negative value goes up to 147 million. 19 Do you see that? 20 A. I see that. 21 Q. Now, Ms. Laurenson said in her report 22 the MBS portfolio, when combined with the interest 15728 1 rate swaps, were favorably positioned for further 2 rate decline." 3 Do you see that? 4 A. In the prior page? 5 Q. Yeah. 6 A. Yes, sir, I see that. 7 Q. Now, look back on Page 1, the second 8 paragraph, the third sentence. It says, "She 9 presented" -- "a full discussion of the 10 portfolio's interest rate sensitivity took place 11 showing the effect of the mortgage securities 12 portfolio of increases and decreases in interest 13 rates." 14 Do you see that? 15 A. I see that. 16 Q. Do you recall that discussion? 17 A. No, sir, I don't recall the discussion. 18 Q. Do you recall that Sandy Laurenson at 19 one point in time reported that the 20 mortgage-backed security portfolio was favorably 21 positioned for a rate decline? 22 A. I don't remember that. I have no 15729 1 reason to dispute that she gave this report, but I 2 just don't have any memory of it. 3 Q. How long had you served on the 4 investment committee by the time January 21st, 5 '87, came around? 6 A. You'll probably have to help me there. 7 I don't really know. I started on the investment 8 committee -- I really don't remember. 9 Q. Were you on it from the beginning of 10 its formation? 11 A. I don't know. I mean, it's whatever 12 the record reflects. I'm not -- I just don't 13 remember when I started being a member -- 14 Q. Had you been on it at least six months 15 by January 1987? 16 A. Yes, sir. 17 Q. And you had been the CFO of the 18 institution for how long by then? 19 A. For -- well, since January 1st of '84. 20 Q. Now, was one of the responsibilities of 21 an officer and director of USAT to take steps to 22 minimize its interest rate risk? 15730 1 A. Well, I was a -- I was not a director 2 of USAT, and I think it was -- I viewed it as my 3 responsibility to monitor interest rate risk and 4 manage interest rate risk. That's how I would 5 characterize it. 6 Q. Well, does managing interest rate risk 7 include positioning the portfolio to take 8 advantage of interest rate declines? 9 A. Well, maybe we're reading different 10 things here, Mr. Guido. I'm viewing this 11 liquidation value as a mark-to-market information 12 vehicle to the investment committee. It's not 13 a -- it's not a spread analysis. It's a 14 mark-to-market exercise, and I would -- I don't 15 know this for a fact, but I would suspect strongly 16 that most any mortgage-backed securities portfolio 17 that was designed to generate a net interest 18 spread is going to look worse when rates go up and 19 is going to look better when rates go down on a 20 mark-to-market basis. So, I don't -- 21 Q. How do you know that? 22 A. How do I know that? 15731 1 Q. Yeah. How do you know that? 2 A. That's the way it works. 3 Q. It is? 4 A. Well, I think it is because -- well, 5 I'll try to explain. If your -- we had hedges on 6 to control our interest rate expense. We didn't 7 have hedges on, I don't think, to control market 8 values. And I would think on rising rates, your 9 market value is going to go down. That's just 10 what I remember. But Ms. Laurenson was the expert 11 in this area. I wasn't. 12 Q. But you're saying that the typical 13 mortgage-backed security portfolio, arbitrage 14 portfolio, is positioned to -- so that it will end 15 up losing money if rates go up and making money if 16 rates go down? 17 A. I didn't say that at all, sir. 18 Q. No? 19 A. No, sir. 20 Q. Well, you said that this was -- 21 A. I said -- 22 Q. -- not atypical, I think, this 15732 1 liquidation value chart at US35225, did you not, 2 or did I misunderstand you? 3 A. Well, I was focusing in on the fact 4 that this was a mark-to-market view of the 5 portfolio. And this portfolio was not run as a 6 total return portfolio. 7 Q. Well, what do you mean by it wasn't run 8 as a total return portfolio? Didn't you care? 9 A. Why sure, we cared. 10 Q. Isn't -- I mean, isn't it essential 11 that the ultimate test of value of an investment 12 is what your total return is, not any particular 13 yield in any particular slice of time? 14 A. Well, Mr. Guido, I'm unaware of any -- 15 all I can tell you is what I remember. And I'm 16 not aware of any major bank or any major thrift in 17 the country that managed a significant part of 18 their investment portfolio on a total return 19 basis, sir. It was managed on a spread basis. 20 Q. And how many -- 21 A. I think. But again, that's my memory. 22 Q. How many thrifts have you been involved 15733 1 with? 2 A. One. 3 Q. All right. How many banks? 4 A. One. 5 Q. Did you ever look at the portfolios of 6 any other institutions? 7 A. I haven't done an independent study, 8 no. 9 Q. Have you ever reviewed the documents 10 they did to evaluate the performance of their 11 portfolios? 12 A. No, sir, as I -- as I've tried to 13 explain, Ms. Laurenson was the expert in this 14 area. I was not. I'm just -- if you'll restate 15 your question, I'll try to answer it directly. 16 Q. I thought you answered it. 17 Look at Tab 187, A10649, which you 18 don't have in front of you. 19 Was Smith Breeden one of the experts 20 that you relied upon to provide you advice? 21 A. Smith Breeden was one of the consulting 22 firms that we listened to, yes, sir. 15734 1 Q. And did you have them do studies? 2 A. I think they did do a study, and they 3 did a study of our -- as best I remember, it was 4 an interest rate risk kind of liquidation value 5 study? 6 Q. Did you not, in fact, write a memo 7 summarizing the results of that presentation to 8 Jenard Gross and Gerry Williams? 9 A. I probably did, if you've asked me that 10 question. 11 Q. And there is probably a copy of that 12 sitting in front of you right under your hands, 13 isn't there, Mr. Crow? 14 A. Sure enough, it is. 15 Q. Now, look at that document. That is a 16 document that summarizes the work that USAT had 17 Smith Breeden do for it, does it not? 18 A. It -- yes. It says "A summary of Smith 19 Breeden presentation." 20 Q. And it includes an analysis of the 21 mortgage-backed securities portfolios at 22 US3007273, does it not? 15735 1 A. I see that, yes. 2 Q. What is the significance of USAT 3 managing its portfolio, as I think you've said, a 4 yield portfolio as opposed to a total return 5 portfolio? 6 A. Well, a spread portfolio as opposed to 7 a total return portfolio. 8 Q. Okay. What's the significance of the 9 difference? 10 A. Well, banks and thrifts typically 11 manage their portfolios to generate a net interest 12 spread, and a money manager typically would manage 13 a portfolio based on total return. And typically, 14 the money manager, I believe, would be marking to 15 market each month or each quarter. And so, it's a 16 quite different approach. 17 Q. Was the equity arbitrage portfolio at 18 USAT, using your term, a total return portfolio? 19 A. Yes, sir. 20 Q. Okay. And was that because it was a 21 portfolio that was intended to generate its 22 profits by recognizing and taking unrealized gains 15736 1 when they occurred? 2 A. I think the -- I think the -- I don't 3 remember the exact thinking when the equity 4 arbitrage portfolio was set up. But just by the 5 nature of it, equities, you're typically not going 6 to earn much of an interest rate on dividend or -- 7 and so, you know, there's not going to be any, 8 quote, 'spread' from your normal dividend 9 payments. 10 And it was further recognized that that 11 portfolio was going to be flipped over a lot. In 12 other words, Mr. Huebsch might buy a security 13 Monday; and if the conditions of the deal looked 14 different or he had made a big profit, he might 15 sell that security by Tuesday. 16 Q. And how does that differ from a 17 spread -- portfolio managed for its spread? 18 A. Well, the spread portfolio is accounted 19 for as -- on a cost basis, and it is not marked to 20 market. And the objective -- the overall 21 objective is to earn an interest rate spread. 22 Q. As opposed to generating gains by the 15737 1 sales of the securities? 2 A. As opposed to, you know, quickly 3 flipping out of the securities to generate capital 4 gains. 5 Q. Or generate recognized gains. Is that 6 what you mean by "capital gains"? 7 A. Well, yes. And then there would be 8 gains -- gains or losses whenever the portfolio 9 was marked to market at month end. 10 Q. Now, you testified that sales were made 11 out of the mortgage-backed securities portfolio to 12 generate gains to bolster quarterly profits. 13 Right? 14 A. On an aggregate basis, and we didn't 15 just haphazardly do it. We looked at the 16 economics of it. But yes, that's what I testified 17 to. 18 Q. Were sales made out of the 19 mortgage-backed securities portfolios for any 20 other purposes? 21 A. Sure. 22 Q. Okay. What were those other purposes? 15738 1 A. Well, I probably can't think of them 2 all now; but one was we would -- or 3 Ms. Laurenson -- and I'm focusing on 4 Ms. Laurenson. But there would be trades to 5 potentially enhance the yield. There would be 6 trades to maybe -- you know, if the yield were the 7 same but you could move from a Fannie Mae to a 8 Ginnie Mae, which is a better credit, that might 9 be one trade. 10 There might be a trade even if the 11 yield declines and you could significantly reduce 12 the average life, your spread to treasury might be 13 beneficial. So, that might be another example. 14 These are the -- those are the only ones that come 15 to mind. 16 Q. Were there also things called dollar 17 rolls? 18 A. Yes, sir, there were. 19 Q. What were those transactions? 20 A. Those transactions were -- to the best 21 of my memory, were financing transactions that 22 basically lowered the cost of funds. And you had 15739 1 to -- there were special rules. You had to be 2 real careful so that it wouldn't be accounted for 3 as a sale and a repurchase. The objective was for 4 it to be a financing transaction. 5 Q. Were gains recognized on dollar roll 6 transactions at USAT for accounting purposes? 7 A. Well, if I'm understanding -- my 8 understanding of dollar rolls was that it was a 9 somewhat similar transaction to a reverse repo 10 with some exceptions. And on a reverse repo, you 11 put your security up to, say, Salomon Brothers. 12 And at the end of the term of the security, you 13 got exactly the same security back. And on a 14 dollar roll, you gave your securities -- your 15 security to Salomon Brothers, and they could 16 deliver back in the form of TBA mortgage-backs -- 17 in other words, it would be the same coupon, it 18 would be the same agency, but it might be a bunch 19 of -- it would be a different pool or pools, most 20 likely. 21 Q. For accounting purposes, what is your 22 understanding of what the literature required with 15740 1 regard to gain or deferral of any profits that 2 were made on a dollar roll? 3 A. I don't know. 4 Q. Do you know whether or not gains were 5 recognized on the dollar rolls at USAT, accounting 6 gains were recognized? 7 A. No, sir, I don't know. 8 Q. Okay. Now, you indicated that one of 9 the -- one of the trades would be switching from 10 Ginnie Maes to Fannie Maes or back because of a 11 credit risk. 12 What's the credit risk? They are both 13 guaranteed by agencies of the federal government, 14 aren't they? 15 A. Yes, sir. But if you could find an 16 instance where you could find a Fannie Mae 9 with 17 the same weighted average maturity and the same 18 weighted average coupon of the underlying loans 19 and you had a Ginnie Mae 9 with the same weighted 20 average coupon and the same weighted average 21 maturity, then you would tend to probably swap the 22 Fannie Mae for the Ginnie Mae because the Ginnie 15741 1 Mae is a full faith and credit of the US 2 government instrument and Fannie Mae is just a -- 3 is a guaranty by an agency of the federal 4 government. And the Ginnie Mae, in most time 5 periods, is more valuable. Where did you hear 6 this? 7 MR. VILLA: It's just a point of law, 8 Your Honor. It's called a government-sponsored 9 enterprise, a GSE, that most of us lawyers know. 10 MR. GUIDO: He said that -- the witness 11 I think testified that trades were made at USAT 12 for this purpose. 13 Q. (BY MR. GUIDO) And what I'm trying to 14 find out is where you learned this. 15 A. Where I learned -- 16 Q. Yeah. Where you learned what Mr. Villa 17 has just testified to? Where did you learn this 18 is what I want to know. That was my question. 19 A. I can't specifically say. I've known 20 it for a heck of a long time because the relevant 21 point, the reason it drilled it through my head, 22 is that there was some kind of regulation that 15742 1 came from somewhere that said that Ginnie Mae 2 securities are zero risk weight on the books of a 3 thrift and Fannie Mae and Freddie Mac are 4 20 percent risk weight. 5 Q. Where did you learn that? 6 A. I don't know, Mr. Guido, where I 7 learned that. But I think it's true. 8 Q. Were trades made by Sandy Laurenson for 9 that purpose? 10 A. Oh, I can't say that for a fact, no, 11 sir. I was trying to give you -- when you asked 12 me -- perhaps I misunderstood your question. I 13 think you said -- 14 Q. I was asking -- let me rephrase the 15 question. 16 A. Okay. 17 Q. And I do think you misunderstood my 18 question. 19 A. I probably did. 20 Q. I'm not asking you anything about 21 hypotheticals. I asked you whether or not at 22 USAT, were there purposes for trades -- sales of 15743 1 mortgage-backed security for purposes other than 2 to make those sales to generate gains to bolster 3 profits? That was my question. 4 A. Okay. 5 Q. I asked you specifically about dollar 6 rolls. You've answered about dollar rolls. I 7 want to know, are there any other purposes for 8 sales of mortgage-backed securities out of USAT's 9 portfolios. And I'm using it in the plural sense. 10 A. The only one that I can think of off 11 the top of my head that I'm quite confident was 12 definitely made were so-called value trades to 13 improve yield. 14 Q. Okay. 15 A. The other two, I think, were done; but 16 I can't promise you that. I don't have a clear 17 memory of those. 18 Q. Now, with regard to the transactions 19 that occurred in the beginning of 1986, were those 20 done to increase yield or to generate gains to 21 bolster -- to bolster -- sales made to generate 22 gains to bolster quarterly profits? 15744 1 MR. VILLA: Your Honor, at the risk of 2 having him try to identify the transactions, this 3 witness has been on the stand going on six days 4 now, and I can see he's getting tired. We could 5 at least identify the transactions we're talking 6 about in early 1986. 7 Q. (BY MR. GUIDO) The sales that were 8 made by Joe Phillips in the exhibit that I showed 9 you which was on that spreadsheet between January 10 and March of 1986, were they made to increase 11 yield or were they made to generate gains to 12 bolster quarterly profits? 13 MR. NICKENS: Your Honor, this is the 14 objection. The question is unfair because the 15 witness said that he was focusing on the purpose 16 of the trades when Ms. Laurenson was there, which 17 is after October of 1986. And now Mr. Guido has 18 shifted back to the beginning of 1986 and is only 19 giving him two choices based upon his testimony 20 about the end of 1986. 21 If he would just ask him what the 22 purpose of the rolldown was, we could find out 15745 1 what the witness knows rather than this soundbyte 2 based upon a misconstruction of his earlier 3 testimony. 4 MR. GUIDO: Your Honor, I didn't ask 5 the witness anything about time periods when I 6 asked him the question. 7 MR. NICKENS: The witness responded, 8 Your Honor. He responded that he was focusing on 9 the time period for Ms. Laurenson. 10 THE COURT: And the last question 11 referred to early 1986; is that right? 12 MR. GUIDO: No, Your Honor. I didn't 13 ask anything in terms of a time frame. I asked 14 him what were the purposes for sales out of the 15 mortgage-backed security portfolios -- I used the 16 term plural and I made it clear to the witness -- 17 other than to generate gains to bolster profits. 18 I then pointed out to him that he 19 already answered the dollar rolls -- okay -- which 20 were designed to reduce funding costs. I asked 21 him whether or not there was anything else. And 22 he said yes, there was yield enhancement. 15746 1 I then went back to the time frame 2 January through March of 1986 and asked him 3 whether those sales were made for purposes of 4 enhancing the yield or were they made for purposes 5 of generating gains to bolster quarterly profits. 6 Now, if it turns out that there's some 7 other reason, then the witness can answer. But I 8 find it rather inappropriate for counsel to 9 continue to make these speaking objections in an 10 attempt to coach the witness' answers. I was just 11 building on what the witness had answered in terms 12 of the questions. 13 MR. NICKENS: Your Honor, again, that 14 accusation is thrown around here. My objection is 15 that the witness made it clear in response to 16 Mr. Guido's question that he was focusing on the 17 period from Sandy Laurenson. He gave three 18 examples of things that he could think of. And 19 now Mr. Guido, in framing the question, is saying, 20 "well, you have two choices. You can choose one 21 or the other," but he's changed the time frame. 22 That's not fair to the witness, and 15747 1 it's not an appropriate question in that 2 background. 3 THE COURT: All right. I gather we're 4 focusing on what's called Joe's -- 5 MR. GUIDO: Portfolio, rolldown. 6 THE COURT: That was rolled over in -- 7 MR. GUIDO: Rolled down, yes, Your 8 Honor. 9 THE COURT: Do you know why that was 10 done? 11 THE WITNESS: Yes, sir. 12 THE COURT: Why? 13 THE WITNESS: It was done because 14 prepayment rates had accelerated very 15 dramatically, and the portfolio started melting 16 away or the duration shortened up, to use the more 17 technical term, relative to the interest rate 18 swaps. And so, in order to help that problem or 19 fix that problem, sales of higher coupon 20 mortgage-backed securities were executed and lower 21 coupon mortgage-backed securities were purchased 22 to lengthen back out the duration of those assets 15748 1 to more closely approximate the swap duration. 2 And that's the best of my memory why it was done. 3 Q. (BY MR. GUIDO) Now, let's go to that 4 transaction. If the purpose of that transaction 5 was to match durations because of changes in 6 prepayment speeds, you would expect, wouldn't you, 7 that the securities that were purchased to replace 8 those that were sold would have a lower CPR, would 9 you not? 10 A. Generally, if you just take a slice in 11 time, generally -- not always, but most of the 12 time, a lower coupon mortgage-back is going to 13 have a lower CPR than a higher coupon 14 mortgage-back. 15 Q. But if you are attempting to rebalance 16 the portfolio for changes in prepayment speeds 17 because of a decline in interest rates, wouldn't 18 you -- would you expect to see replacement 19 securities with the same CPR as those that were 20 sold? 21 A. Well, I don't know specifically. I 22 wasn't involved with the rolldown. But just as a 15749 1 general proposition, I would expect to see lower 2 CPRs. You know, if you're going from a Fannie Mae 3 15 coupon to a Fannie Mae 10 coupon, I would 4 expect the 10 to have a lower CPR. 5 Q. Okay. Now, if you were doing a 6 rebalancing because of a reduction in interest 7 rates and acceleration of prepayments, would you 8 expect the replacement securities to have a lower 9 coupon than those that were sold? 10 A. Yeah, I would. But we're in an area 11 now that -- you know, during this -- certainly 12 during this time frame that Phillip -- 13 Mr. Phillips was pretty much on top of and seemed 14 to be, you know, driving the train and have the 15 expertise. 16 I didn't -- I mean, to be clear, I was 17 focused on getting internal control issues settled 18 and computer conversions and I wasn't thinking 19 about CPRs and mortgage-backed coupons. 20 Q. Let's go to Tab 368, 1429 now. 21 MR. VILLA: What was the "A" number, 22 sir? 15750 1 MR. GUIDO: A1429. Tab 368. 2 MR. NICKENS: 368 is -- 3 4 (Discussion held off the record.) 5 6 THE COURT: What is your exhibit 7 number? 8 MR. GUIDO: A1429, Your Honor. 9 February 11th, 1987. 10 Q. (BY MR. GUIDO) Do you have 11 February 11th, 1987 before you? 12 A. Yes, sir, I do. 13 Q. I'd like to direct your attention to 14 US3005310. 5310, which is the MBS portfolio 15 activity sheet. Do you see that? 16 A. I do see that. 17 Q. Anywhere on that sheet do you see 18 anything that indicates that sales were made for 19 purposes of generating gains to bolster quarterly 20 profits? 21 A. I don't see where it says that, no, 22 sir. 15751 1 Q. Let's go to A -- I have A1430, the 2 February 18th, 1987 investment committee minutes. 3 A. Have I got that, Mr. Guido? 4 Q. Pardon? 5 A. Have I got that? 6 Q. I don't have a tab number for it. 7 8 (Discussion held off the record.) 9 10 MR. VILLA: Isn't it February 17th, 11 1987, sir? 12 MR. GUIDO: It's February 17th, 1987. 13 MR. VILLA: He gave the wrong date. 14 MR. GUIDO: Mine says February 18th, 15 1987. 16 MR. VILLA: Can I see yours? Just 17 compare it to mine. 18 THE COURT: We have an exhibit, A1431, 19 which is minutes of the investment committee at 20 UFG and USAT, February 18, 1987. 21 Is that the document? 22 MR. GUIDO: Is that the one -- Your 15752 1 Honor, on the third page -- is that the one that 2 has US3005339, the Bates stamp on the first page? 3 THE COURT: Yes. 4 MR. GUIDO: Then it's A1431. 5 6 (Discussion held off the record.) 7 8 MR. NICKENS: This is the document that 9 Mr. Guido offered and then withdrew and then 10 offered again. That's the reason it's a little 11 bit out of order here. But I believe that is the 12 document. 13 MR. GUIDO: It's also the document 1430 14 that Mr. Villa and Mr. Nickens have -- says that 15 it is February 17th, 1987, is 1430. But in the 16 text, it says it's February 17th, 1988. 17 THE COURT: Well, the document I have 18 says at the top, February 18th, and the first line 19 says February 18th. 20 MR. GUIDO: Right, Your Honor. And on 21 the -- 22 MR. NICKENS: The reason for the 15753 1 confusion, Your Honor, is that there is a 2 Document 1430 that has a date on it of 3 February 17th, 1987. But if you read the first 4 line, it's clear that it's February 17th, 1988. 5 And it's been -- it's been at various times, 6 because of that error, placed in a series of 7 documents where it was not in the proper place. 8 MR. GUIDO: And has led to us being 9 confused, Your Honor, and we apologize to the 10 Court. 11 Q. (BY MR. GUIDO) Do you have the 12 February 18th, 1987 memorandum? 13 A. Yes, sir, I do. 14 Q. And do you have the -- it says that -- 15 see the second paragraph? It says, "Mr. Bruce 16 Williams presented a memorandum relating to the 17 strategies connected with the trading investment 18 accounts and high-yield corporate bond and 19 mortgage-backed securities"? 20 A. Yes, sir. 21 Q. And then if you look in three pages, 22 you see the mortgage-backed securities statements 15754 1 of strategies and objectives. 2 Do you see that? 3 A. I do see that. 4 Q. And it says that -- see under 5 "investment portfolios"? "The objectives of these 6 designated portfolios had been to invest in a 7 diversified group of MBSs." 8 Do you see that? 9 A. I do. 10 Q. And then look at the very last 11 sentence. "It is management's intent to maximize 12 the net interest spread." 13 Do you see that? 14 A. I do. 15 Q. And is that what you were referring to 16 when you said that the mortgage-backed security 17 portfolios were managed for a spread? 18 A. Well, yes. The objective of the 19 portfolio would be to net interest spread. I'm 20 not sure -- I'm not -- I would choose the word 21 "optimize" instead of "maximize," but whatever. 22 Q. Okay. And it says, "While maintaining 15755 1 prudent interest rate risk exposure." 2 Do you see that? 3 A. I do see that. 4 Q. Then it goes on and says, "It is 5 management's intent to hold each security on a 6 long-term basis." 7 Do you see that? 8 A. I do see that. 9 Q. However, "Sales may be executed from 10 time to time," and then it has a number of 11 objectives. 12 Do you see that? 13 A. I do. 14 Q. Anywhere does it say that sales will be 15 made out of USAT's mortgage-backed securities 16 portfolio to generate gains to bolster quarterly 17 profits? 18 A. No, sir. I don't see those words. 19 Q. Now, were sales made out of USAT's 20 mortgage-backed securities portfolios -- strike 21 that. Let me rephrase the question. 22 Were sales made out of USAT's hedges of 15756 1 its mortgage-backed securities portfolios in order 2 to generate gains to bolster quarterly profits? 3 A. I don't remember that. I guess the 4 answer is I don't specifically remember that from 5 the time. 6 Q. You don't remember that? 7 A. No, sir. 8 Q. I'd like you to take a look at another 9 set of documents now. And the first one is A1472, 10 which is at Tab 338. 11 Do you have US3006683? 12 A. Yes, sir, I do. 13 Q. Okay. It's the first page of the 14 exhibit. Right? 15 A. Yes, sir. 16 Q. Okay. It says, "The subcommittee 17 meeting of the investment committee was held on 18 October 29th, 1987. Members present were Messrs. 19 Jenard Gross, Art Berner, Mike Crow, and 20 Ms. Sandra Laurenson via telephone. After full 21 discussion of the revised interest rate outlook 22 following the precipitous decline in equity prices 15757 1 and precipitous rise in interest rate volatility, 2 it was determined that USAT would reduce its 3 interest cap position. After a unanimous vote, 4 Ms. Laurenson was given authorization to sell the 5 following caps." And then it lists the caps that 6 she was authorized to sell. 7 Do you recall that meeting? 8 A. I don't really recall it. It 9 certainly -- I see what it says here, yes, sir. 10 Q. This is right after the October 1987 11 crash. Right? 12 A. Yeah. I don't see a date. But from 13 the wording of it, it certainly probably is. 14 Q. And interest rates had gone up 15 substantially in that crash, had they not? 16 A. They moved. I had thought they went up 17 before the crash and then the fed moved in and 18 lowered the heck out of them, but I could be 19 mistaken. 20 Q. But do you recall what the reason for 21 the sale of the caps was? 22 A. No, sir, I really do not. It's obvious 15758 1 we -- I guess we sold these caps. That's what 2 this page says. 3 In terms of our thought process, other 4 than what it says here, I don't -- that isn't in 5 my mind. 6 Q. Well, it's approximately $610 million 7 worth of caps that were sold, isn't it? 8 A. Yes, sir. It appears to be. 9 Q. And that's a sizable percentage of the 10 portfolio at United MBS at the time, wasn't it? 11 MR. NICKENS: United MBS, Your Honor? 12 MR. GUIDO: That's what I said, United 13 MBS. 14 A. Well, I guess I looked at the world on 15 a consolidated basis. So -- 16 Q. (BY MR. GUIDO) Okay. Well, was the 17 combined portfolio about $3 billion? 18 A. Of mortgage-backs? 19 Q. Yes. 20 A. Yeah. That sound about right. 21 Q. And so, this was 20 percent of the size 22 of that portfolio, was it not? 15759 1 A. If you divided it out, I take your word 2 for it. 3 Q. Is that a sizable percentage? 4 A. Well, it's -- I mean, they are big 5 numbers, yes, sir. I don't know whether it's -- I 6 mean, I don't know how to characterize it other 7 than, you know, these are sizable dollar 8 transactions. 9 Q. Now, take a look at Tab 341, A1479, 10 which are the December 4th, 1987 minutes. 11 Do you see the third paragraph in 12 Exhibit 1479, US3006798? 13 A. I do. 14 Q. Okay. And see where it says, "Ms. 15 Sandra Laurenson then reported on the 16 mortgage-backed securities portfolio. Her report 17 was ordered attached to the minutes of the 18 meeting. She noted that she had acquired 19 490 million of caps and would be acquiring an 20 additional 30 million of three-year caps. She 21 also noted that she would be creating two-year 22 caps in the Euro dollars futures market." 15760 1 Do you see that? 2 A. I do see that. 3 Q. Do you know what the purpose of that 4 transaction was? 5 A. No, sir. 6 Q. Do you know -- 7 A. I probably knew at the time, but I 8 don't today. 9 Q. Was the purpose of the sale and the 10 repurchase of those caps a transaction that was 11 designed to generate an accounting profit? 12 A. That one, I can't -- I don't know. I'd 13 have to take -- I don't know. 14 Q. I'd like to direct your attention now 15 to Tab 296, B1783, which is a memo from you to 16 Jenard Gross dated October 1, 1987. 17 Do you recall writing this memorandum? 18 A. No, I really don't. 19 Q. Is that your signature by your name at 20 the top? 21 A. Yes, sir. That's my signature. 22 Q. Do you have any reason to doubt that 15761 1 you wrote this document? 2 A. No, sir. 3 Q. Okay. 4 A. Either -- either I wrote it or somebody 5 wrote it for me and I edited it would be the way 6 it would typically work. 7 Q. Now, it says on the subject of the bond 8 futures in the second paragraph -- do you see 9 that? 10 A. I do. 11 Q. "Which we sold approximately 45 days 12 ago and repurchased recently," do you see that? 13 A. I do. 14 Q. "We entered the transaction and 15 accounting for the transaction initially as a 16 hedge. Consistent with this method, any gain or 17 loss incurred on a periodic basis would not be 18 recognized in the current period but would, 19 instead, be delivered and rolled into the basis of 20 the hedged asset." 21 Do you see that? 22 A. I do see that. 15762 1 Q. And then it says, "Hedge accounting 2 assumes/implies that the hedge will be tied to 3 some other asset or liability and is utilized to 4 protect the move in rates prices of that asset or 5 liability." Okay? 6 A. Yes, sir. 7 Q. Do you see that? It says, "When we 8 closed out the futures positions approximately 30 9 days after entering the futures position, this 10 substantially tainted the argument of the futures 11 ever being a hedge at all." 12 Why was that? 13 A. If I could, let me read this. I need 14 to just take a -- 15 Q. Okay. 16 A. -- just a minute to -- (Witness 17 reviews the document.) Okay. 18 What was that question again, please? 19 Q. It says, "When we closed out the 20 futures positions approximately 30 days after 21 entering the futures position, this substantially 22 tainted the argument of the futures ever being a 15763 1 hedge at all." 2 What does that mean? What's that 3 referring to? 4 A. I think this relates to an exception 5 that we had picked up probably Russell McCann or 6 Jim Wolfe, that in this -- in Sandy's sub, when 7 you're dealing with futures, it's controlled by 8 this FASB 80. And there's a fairly precise set of 9 rules, correlation analyses, and the like. And I 10 think, however it took place, one of these 11 positions was lifted and sold or however you term 12 it and I was pretty steamed up about it and saying 13 that, "Well, we can't be going in here and 14 tinkering with this stuff." 15 Q. When did Sandy Laurenson take over the 16 portfolio at USAT? 17 A. I don't remember the real date. It 18 seems to me it was in '86. 19 Q. Was it before or after October 1st of 20 1986? 21 A. I think Sandy was here during this time 22 period. 15764 1 MR. NICKENS: This is a year later. 2 Q. (BY MR. GUIDO) This is 1987. So, she 3 would have been there for almost a year by then? 4 MR. GUIDO: Thank you, Mr. Nickens. 5 A. Yeah. I think Sandy was here during 6 this time period, yes, sir. 7 Q. (BY MR. GUIDO) And this is a 8 discussion relating to the so-called micro hedges? 9 A. This -- I interpret this would be a 10 discussion of a micro hedge, yes, sir. 11 Q. Well, turn to the next page, the 12 next-to-the-last paragraph. See the paragraph 13 that says, "In summary, the accounting for these 14 various instruments will follow our intent"? 15 A. Yes, sir. 16 Q. Where did you get that? 17 A. I don't know. 18 Q. Well, was there specific literature on 19 trading versus hedging that was applicable? 20 A. Well, there were specific rules in the 21 hedge accounting literature -- I think FASB 80 and 22 maybe other things. But it was -- it was a pretty 15765 1 precise and pretty hairy set of rules, and we 2 hired a guy named Russell McCann to keep up with 3 that. And -- yes, sir. 4 Q. I'm sorry to interrupt you. But I 5 mean, those were correlation analyses, were they 6 not? 7 A. That was part of it, yes, sir. 8 Q. There is nothing in FAS 80 that talks 9 about turnover, is there? 10 A. I don't know. I just don't know. 11 Q. Where did you get -- when you wrote 12 this memorandum and it talks about "In summary, 13 the accounting for these various instruments will 14 follow our intent. Specifically, if our intent is 15 to move in and out of futures, caps sales, et 16 cetera, as interest rates move and we perceive 17 opportunities exist, they will be accounted for as 18 trading instruments and marked to market." 19 Do you see that? 20 A. I do see that. 21 Q. Now, let me direct your attention to 22 Tab 897, which is A10716. This is a memorandum 15766 1 from you to Bruce Williams and Jim Wolfe regarding 2 attached memo from Peat Marwick on investment 3 versus trading accounting. 4 Do you see that? 5 A. I do. 6 Q. Does that refresh your recollection of 7 where you got the information for the paragraph 8 that says, "In summary, the accounting for these 9 various instruments will follow our intent"? 10 A. Well, not really because it seemed to 11 me this memo was talking about some specific hedge 12 accounting rules having to do with futures, and I 13 think this is talking about investment portfolios 14 versus trading portfolios, asset side. 15 Q. Do you think that there is a 16 distinction in terms of classifying something as a 17 trading versus investment portfolio if you're 18 looking at the assets as opposed to the hedges? 19 A. I don't know. I'm just trying to be 20 responsive to your question. Maybe ask -- 21 Q. Okay. So, this doesn't refresh your 22 recollection of where you got the information for 15767 1 the second-to-the-last paragraph, "In summary" -- 2 this starts, "In summary, the accounting for these 3 various instruments will follow our intent" in 4 B1783? 5 A. No, it really doesn't. I probably got 6 that -- well, the fact is I don't know where I got 7 that. I could tell you where I probably got it, 8 but I just don't know. 9 Q. Now, let's take a look at Tab 897. It 10 says, "Bruce, please take the lead in answering 11 the attached issues raised by Peat Marwick. I 12 believe we can make a decent case that while it is 13 our intent to hold securities long-term, the very 14 volatile markets which we have been experiencing 15 have created the necessity to do some portfolio 16 trading now." 17 Anywhere, does that discuss sales made 18 out of high-yield bond or mortgage-backed 19 securities portfolios to generate gains to bolster 20 quarterly profits? 21 A. In this paragraph? 22 Q. Yes. 15768 1 A. No, sir, I don't see that. 2 Q. Then it says, "Perhaps we should split 3 our mortgage-backs securities into two accounts. 4 One main account that would not be marked to 5 market and a small account which would be marked 6 to market." 7 Do you see that? 8 A. I do see that. 9 Q. Did that happen? 10 A. I think in the case of mortgage-backed 11 securities, we did establish a trading portfolio, 12 yes, sir. 13 Q. But not in the high-yield bond 14 portfolio? 15 A. Not that I remember, no, sir. 16 Q. Okay. Then it goes on, "For example, 17 the mortgage-backs that Sandy is currently 18 purchasing totalling about 100 million where we 19 are strictly speculating on the market should be 20 traded. We have no intent to hold that for the 21 term of the investment." 22 Then it goes on and it says, "A lot of 15769 1 the other stuff in the memo appears to me to 2 really be difficult to administer and very 3 non-productive. I think it is absolutely -- an 4 absolutely untenable position for us to 5 mark-to-market the whole portfolios. Our 6 portfolios will swing plus or minus 200 -- 7 MR. RINALDI: "Our profits," not 8 portfolios. 9 Q. (BY MR. GUIDO) "Our profits will 10 swing plus or minus 20 million just depending on 11 how the bond markets are doing, and that is 12 silly." 13 Do you see that? 14 A. I see that. 15 Q. Anywhere in this memorandum attached to 16 it does it say that you have to mark-to-market a 17 hold portfolio or an investment portfolio? 18 A. Does it say in my cover memo? 19 Q. No. Anywhere in the attached memo that 20 you're referring to say that an investment 21 portfolio has to be marked to market? 22 A. I guess I'd better read the memo. 15770 1 (Witness reviews the document.) 2 I vaguely remember this discussion, but 3 I don't. 4 THE COURT: Mr. Guido, how much more 5 time do you need? 6 MR. GUIDO: Your Honor, I probably have 7 about an hour and a half with this witness. 8 THE COURT: All right. We'll adjourn 9 until 9:00 o'clock tomorrow. 10 11 (Whereupon at 4:51 p.m. 12 the proceedings were recessed.) 13 14 15 16 17 18 19 20 21 22 15771 1 STATE OF TEXAS COUNTY OF HARRIS 2 REPORTER'S CERTIFICATION 3 TO THE TRIAL PROCEEDINGS 4 I, Marcy Clark, the undersigned Certified 5 Shorthand Reporter in and for the State of Texas, 6 certify that the facts stated in the foregoing 7 pages are true and correct to the best of my ability. 8 I further certify that I am neither 9 attorney nor counsel for, related to nor employed 10 by, any of the parties to the action in which this 11 testimony was taken and, further, I am not a 12 relative or employee of any counsel employed by 13 the parties hereto, or financially interested in 14 the action. 15 SUBSCRIBED AND SWORN TO under my hand 16 and seal of office on this the 21st day of July, 17 1998. 18 ____________________________ MARCY CLARK, CSR 19 Certified Shorthand Reporter In and for the State of Texas 20 Certification No. 4935 Expiration Date: 12-31-99 21 22 15772 1 STATE OF TEXAS COUNTY OF HARRIS 2 REPORTER'S CERTIFICATION 3 TO THE TRIAL PROCEEDINGS 4 I, Shauna Foreman, the undersigned 5 Certified Shorthand Reporter in and for the 6 State of Texas, certify that the facts stated 7 in the foregoing pages are true and correct 8 to the best of my ability. 9 I further certify that I am neither 10 attorney nor counsel for, related to nor employed 11 by, any of the parties to the action in which this 12 testimony was taken and, further, I am not a 13 relative or employee of any counsel employed by 14 the parties hereto, or financially interested in 15 the action. 16 SUBSCRIBED AND SWORN TO under my hand 17 and seal of office on this the 21st day of July, 18 1998. 19 _____________________________ SHAUNA FOREMAN, CSR 20 Certified Shorthand Reporter In and for the State of Texas 21 Certification No. 3786 Expiration Date: 12-31-98 22