15773 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 22, 1998 22 15774 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 15775 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 15776 1 2 INDEX OF PROCEEDINGS 3 Page 4 MICHAEL CROW 5 Continued Examination by Mr. Guido......15777 6 Examination by Mr. Villa................15908 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 15777 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, are you ready to proceed? 6 MR. GUIDO: Thank you, Your Honor. 7 8 CONTINUED EXAMINATION 9 10 Q. (BY MR. GUIDO) I would like to have 11 you take a look at a packet of documents, if I 12 might. It's at -- the first document is a 13 document dated September 4th, nineteen -- excuse 14 me. The first document is dated August 7th, 1986. 15 It's at Tab 182. It's A10658. It's a letter from 16 Mr. Berner to Mr. Borman, the Commissioner of the 17 Texas Savings and Loan Association. The second 18 document is at Tab 183; and it is a document dated 19 September 4th, 1986, from Art Berner to 20 Mr. Anderson at the Texas Savings and Loan 21 Commission, as well. 22 THE COURT: Do you have an exhibit 15778 1 number for that document? 2 MR. GUIDO: The first exhibit number, 3 Your Honor, is A10658; and the second exhibit 4 number, Your Honor, is A10664. 5 Q. (BY MR. GUIDO) Do you have those two 6 documents in front of you? 7 A. Yes, sir, I do. 8 Q. And the -- have you seen those 9 documents before? 10 A. Let's see. (Witness reviews the 11 documents.) I don't remember these, no, sir. I 12 may have, but I just -- I don't remember seeing 13 these. 14 Q. Do you remember the creation of United 15 MBS as a subsidiary of USAT in the latter part of 16 1986? 17 A. Yes, sir, I do. 18 Q. Okay. And did you do any preparatory 19 work for the creation of United MBS? 20 A. In terms of legal type work? 21 Q. Any kind of work. 22 A. I can't remember specifically what 15779 1 preparatory type work I did or my staff did; but 2 I'm highly confident we did, yes, sir. 3 Q. Did you participate in the selection of 4 Sandy Laurenson to manage USAT's mortgage-backed 5 securities portfolios? 6 A. Yes, sir. This was -- yes, sir, I did. 7 Q. What was your role in hiring Sandy 8 Laurenson? 9 A. I was instructed to call -- or 10 basically to kind of head up the recruiting 11 process. And so, what I did is I called various 12 investment banking firms. I remember calling, I 13 believe, First Boston specifically; and I called 14 others as to where do those firms -- you know, 15 "Who do you use in terms of a head hunter to 16 acquire mortgage-backed securities and hedging 17 type people?" And the name Higby Associates kept 18 coming up. And so, I contacted Higby Associates. 19 A representative from Higby came to United, 20 interviewed myself, and I believe -- I think he 21 also definitely talked to Dr. Munitz and probably 22 other executives. And it was kind of described 15780 1 what we were looking for in terms of 2 qualifications. 3 And so, we engaged Higby to bring us 4 candidates to fill the position of mortgage-backed 5 securities portfolio manager. 6 Q. Now, who was it from Higby that met 7 with you? 8 A. Jerry Straight. 9 Q. Can you spell his last name for the 10 record? 11 A. I believe it's S-T-R-A-I-G-H-T. 12 Q. Now, you said that he met with you and 13 Dr. Munitz and others to ascertain what your needs 14 were? 15 A. That's my memory, yes. Yes, sir. 16 Q. Do you recall who else besides you and 17 Dr. Munitz met with Mr. Straight? 18 A. I do not, no. I -- I strongly suspect 19 it was more than myself and Dr. Munitz, but I 20 don't remember who. 21 Q. Okay. Now, did Mr. Straight then send 22 you a packet of resumes to review? 15781 1 A. Periodically thereafter, after we had 2 engaged Mr. Straight, he would send resumes of 3 potential candidates for the mortgage-backed 4 securities portfolio manager; and I would 5 typically talk to him over the phone about those 6 candidates. 7 Q. What was the approximate size of the 8 mortgage-backed security portfolio when you 9 started your discussions with Mr. Straight at 10 Higby & Associates? 11 A. I really don't remember because I 12 get -- as I've said, I get the time line or exact 13 dates as to when confused. It was sizable. 14 Q. Did the portfolio essentially triple in 15 size after Sandy Laurenson was hired? 16 A. I don't know. I knew it grew 17 significantly after Sandy Laurenson was hired. As 18 to a magnitude, I don't remember. 19 Q. Now, when you received the resumes from 20 Mr. Straight, did you circulate them to people? 21 A. Yes, sir. If it looked like it was a 22 resume that -- that might be workable, a person 15782 1 that might be workable, certainly. 2 Q. Okay. And did you -- do you recall who 3 you circulated the resumes to? 4 A. I think I circulated them to Dr. Munitz 5 and Mr. Gross and Gerry Williams. 6 Q. What about Charles Hurwitz? 7 A. I don't think so, but I could have. 8 Q. Okay. 9 A. I just don't remember doing that. 10 Q. Did you circulate them to other members 11 of the investment committee? 12 A. I don't remember. 13 Q. Okay. Now, you then interviewed some 14 candidates, did you not? 15 A. Yes, sir. 16 Q. And Sandy Laurenson was one of those 17 candidates. Right? 18 A. She was, yes, sir. 19 Q. Did you arrange those interviews? 20 A. Myself and Mr. Straight arranged the 21 interviews and then -- inside United, I would 22 schedule the interviews, yes, sir. 15783 1 Q. And who did you schedule the interviews 2 with? 3 A. Certainly Gerald Williams, Jenard 4 Gross, Dr. Munitz. I'm sure I would have asked -- 5 if Mr. Hurwitz was available or was in town, I 6 would have asked him to interview her. And maybe 7 Ron Huebsch, but I just don't remember. 8 Q. Okay. Now, the United MBS was a 9 subsidiary that was set up about the time you 10 hired Sandy Laurenson. Right? 11 A. That was Sandy's sub, became known as 12 Sandy's sub, yes, sir. 13 Q. Why was it set up as a separate sub? 14 A. I don't know or -- I'm sure I knew at 15 the time. I don't remember now. 16 Q. Was it set up in order to allow for 17 growth of the institution without triggering any 18 liability growth violations? 19 A. I don't remember. 20 Q. Okay. 21 A. I mean, it may be in these documents. 22 Q. Take a look at the August 7th letter. 15784 1 It says, "United Savings Association of Texas is 2 seeking approval for the establishment of a new 3 service corporation subsidiary. The service 4 corporation subsidiary would be formed to invest 5 in mortgage-backed securities; e.g., securities 6 issued by Ginnie Mae, Fannie Mae, and Freddie Mac 7 and backed by single residential mortgages. It is 8 currently contemplated that such a subsidiary 9 would require approximately 500 million in 10 mortgage-backed securities, although this may 11 change as circumstances dictate." 12 Do you see that? 13 A. I do. 14 Q. Was the subsidiary set up because Sandy 15 Laurenson wanted to have a separate accounting 16 that she initiated at USAT as distinct from the 17 existing portfolio? 18 A. I don't remember why a -- I just don't 19 remember as to why it was done in a subsidiary as 20 opposed to just a cost center, responsibility 21 center, at United Savings. 22 Q. Now, take a look at the second 15785 1 paragraph. "The service corporation subsidiary 2 will acquire the mortgage-backed securities 3 through reverse repurchase transactions. As a 4 result, the subsidiary expects during our spread 5 between the rate received on the mortgage-backed 6 securities and the rate paid on the reverse 7 repurchase transactions." 8 What does that refer to? 9 MR. VILLA: What was your question? 10 MR. GUIDO: What does that refer to? 11 A. The way I read this sentence, it's 12 saying that the -- the subsidiary expects that the 13 yield on the mortgage-backed securities will be in 14 excess of the rate paid on the reverse repurchase 15 transactions used to fund those mortgage-backed 16 securities. 17 Q. (BY MR. GUIDO) Does that say that 18 sales will be made out of the portfolio to 19 generate gains to bolster quarterly profits? 20 A. No, sir, I don't see that. 21 Q. Do you see that anywhere in that 22 letter? 15786 1 A. (Witness reviews the document.) Let me 2 read it right quick here. 3 No, sir, I don't see those words 4 anywhere in the letter. 5 Q. Let's go to the next paragraph. It 6 says, "There are no supervisory problems which 7 would affect the ability of the association to 8 properly supervise and operate such a subsidiary 9 corporation. The association has adequate income 10 and reserves to support the proposed investment, 11 and the operations of the proposed subsidiary will 12 be clearly distinguishable from those of the 13 association. The subsidiary should be profitable 14 immediately and should continue to earn the spread 15 described above." 16 Do you see that paragraph? 17 A. I do see that. 18 Q. What is the reference that says "the 19 operations of the proposed subsidiary will be 20 clearly distinguishable from those of the 21 association"? 22 A. I don't know what that means. This was 15787 1 Mr. Berner's memo, and he was more on the 2 forefront in terms of the regulatory and legal 3 type issues. 4 Q. Well, you at this point in time were 5 designated to be Sandy Laurenson's supervisor, 6 were you not? 7 A. Yes, sir -- 8 MR. NICKENS: Your Honor, I object. I 9 don't believe Sandy Laurenson had been hired as of 10 August of '86. 11 Q. (BY MR. GUIDO) Had you been 12 designated to be the supervisor of Sandy 13 Laurenson? 14 A. That's the way it ended up. As to 15 when -- I don't remember when I was told that 16 Sandy -- who the -- the person we hired for 17 mortgage-backed securities was going to report to 18 me for administrative purposes. It certainly 19 might have been on the front end when we started 20 recruiting, or it might have been after Sandy 21 Laurenson arrived. I don't remember. But net/net 22 at the end of the day after she was hired, she 15788 1 reported to me for administrative purposes, yes, 2 sir. 3 Q. Now, did anyone else manage 4 mortgage-backed securities in United MBS besides 5 Sandy Laurenson in 1986? 6 A. After Sandy was hired, no. She would 7 have managed or had responsibility for all of the 8 mortgage-backed securities. 9 Q. Well, were any mortgage-backed 10 securities purchased for United MBS prior to Sandy 11 Laurenson arriving at USAT? 12 A. I don't remember that but -- I just 13 don't remember. 14 Q. Now, do you recall whether there were 15 regulations that required the operations of United 16 MBS to be kept distinct from the operations of 17 USAT? 18 A. No, sir, I don't remember whether I -- 19 you know, I certainly don't remember today; and I 20 don't know whether I would or would not have known 21 during this time period. I feel that if that were 22 the case, I would have -- you know, our legal 15789 1 staff was pretty much on top of these type issues. 2 Q. Well, who had the authority to approve 3 transactions that Sandy Laurenson initiated in 4 United MBS? 5 A. Who had the authority to approve her 6 trade tickets, for example? 7 Q. Uh-huh, or to approve the trades. 8 A. Okay. The overall authority of Sandy's 9 activity came from the investment committee. 10 Q. Did she have to obtain prior approval 11 from the investment committee before she initiated 12 any transaction? 13 A. In some cases, yes; but the more 14 typical case would be that the investment 15 committee would give Sandy a position limit 16 that -- for example, Ms. Laurenson could purchase 17 up to $100 million of a certain type of security. 18 And then it would be up to Ms. Laurenson to, you 19 know, do her research and pick the individual 20 securities within that limit and parameter. 21 Q. Did that also apply to hedges that she 22 put on? 15790 1 A. I don't remember exactly how that -- on 2 the hedge part of it, I remember that 3 Ms. Laurenson kept us apprised of what she was 4 doing in terms of hedging. As to whether the 5 investment committee had to give approval prior to 6 putting on hedges or it was -- she just reported 7 what she was doing, I don't remember. 8 Q. Was she required to accurately report 9 what she was doing? 10 A. Well, that was a requirement of all 11 members of management, including Ms. Laurenson, 12 that to, as best as humanly possible, accurately 13 report the activities that you're responsible for, 14 yes, sir. 15 Q. Did she ever inaccurately report any 16 transactions that she initiated on behalf of USAT 17 or United MBS? 18 A. I don't recall that, no, sir. 19 Q. Now, let's go to the second document 20 that's in front of you. That's a document dated 21 September 4th, 1986; and it's another letter from 22 Mr. Berner. It's at A10664. It says -- do you 15791 1 see the paragraph at the bottom where it talks 2 about United MBS on the first page? 3 A. Yes, sir, I do. 4 Q. It says, "United MBS Corporation will 5 acquire mortgage-backed securities by engaging in 6 reverse repurchase transactions. The 7 association" -- it says "my" -- "may further hedge 8 these acquisitions either directly or through 9 general hedges held by the association on a 10 consolidated basis. It is not expected that such 11 activities will create any direct, indirect, or 12 contingent liabilities for the association. 13 However, under repurchase transactions, broker 14 dealers may call for increases in collateral which 15 the subsidiary may not have the ability to 16 satisfy. In such event, the association would 17 have to supply such collateral, thus creating a 18 direct liability of the association to fulfill the 19 requirements of the subsidiary." 20 Do you see that? 21 A. I do see that. 22 Q. Does that anywhere say that sales were 15792 1 to be made out of United MBS to generate gains to 2 bolster quarterly profits? 3 A. No, sir. 4 Q. Anywhere in that letter does it say 5 that? 6 A. I haven't read the letter, but I'll 7 take your word for it. 8 Q. No. I would like you to read the 9 letter. 10 A. Okay. (Witness reviews the document.) 11 No, sir, Mr. Guido, I don't see where 12 those words are used in this letter. 13 Q. Now, do you see where it says, "It is 14 not expected that such activities will create any 15 direct, indirect, or contingent liabilities of the 16 association"? 17 A. I do. 18 Q. Do you know what that refers to? 19 A. Not really. I mean, I know what a 20 liability is in an accounting sense; but 21 Mr. Berner's, you know, again talking in legalese 22 type language to me. 15793 1 Q. Now, do you remember having discussions 2 with Mr. Berner about filing the application to 3 create United MBS? 4 A. I don't remember that, no. But I mean, 5 I -- the reason my memory is probably not sharp on 6 that is I talked to Mr. Berner, I mean, all the 7 time. 8 Q. Did you ever discuss with Mr. Berner 9 why he didn't file an application with the Federal 10 Home Loan Bank to create United MBS? 11 A. I don't remember any such discussion. 12 Q. Now, I would like to direct your 13 attention to the next -- the series of documents 14 starting with A13016, which is a letter dated 15 February 12th, 1987, from you to Mr. Koster, 16 vice president, Salomon Brothers, and a Document 17 A10741 dated April 30, 1987, from you to 18 Mr. Herbert L. Jacobson, chief financial officer, 19 Security Pacific Clearing and Services 20 Corporation. I think that's at Tab 878. Tab 879, 21 which is A1 -- 22 THE COURT: Is that the Exhibit 10741? 15794 1 MR. GUIDO: 10741, yes, Your Honor. 2 THE COURT: The next one. 3 MR. GUIDO: A10742 is at Tab 872, 4 Your Honor. 5 THE COURT: Okay. 6 MR. GUIDO: And T4443 is at Tab 881, 7 Your Honor. 8 Q. (BY MR. GUIDO) These letters are all 9 similar. So, I would like to just go through them 10 with you; and then I have some questions for you. 11 A. Yes, sir. 12 Q. Would you please review that packet of 13 exhibits that I have given you, which is A13016, 14 A10741, A10742, T4443. 15 A. (Witness reviews the documents.) Okay. 16 Q. Each of them says that "This letter 17 will serve as our commitment to maintain a 18 10 percent total capital-to-asset ratio within the 19 subsidiary." 20 Do you see that phrase? 21 A. I do. 22 Q. What is your understanding of the 15795 1 meaning of that phrase? 2 A. My understanding is that -- that we 3 were committing to maintain a 10 percent 4 capital-to-asset ratio in that subsidiary. This 5 was a -- all of these people that are addressed 6 are credit-type people, I believe, with various 7 investment banking firms. And they wanted some 8 type of comfort letter to that effect. 9 Q. What is your understanding it obligated 10 you to do? 11 A. It obligated us to maintain a 12 10 percent capital-to-asset ratio within that 13 subsidiary. 14 Q. Did it obligate you at times to infuse 15 capital into that subsidiary? 16 A. Well, we had an obligation to maintain 17 a 10 percent capital-to-asset ratio. So, if the 18 assets tripled, for example, it would seem that we 19 would have to increase the note, or however we did 20 it, to maintain that 10 percent capital ratio. 21 Q. Why did the -- why did you provide this 22 commitment to those people from those investment 15796 1 banking firms? 2 A. As best I recall, we -- myself and 3 Mr. Gross -- visited a number of these credit 4 people on various matters, including, I'm sure, 5 this -- this subsidiary. And one or more of these 6 individuals asked for this type letter. 7 Q. And did they tell you why they wanted 8 the letter? 9 A. If they did, I've forgotten it. I 10 don't know that they told us why. Typically, when 11 you talk to a credit person that's extending you 12 credit -- and they were extending us reverse repo 13 credit -- they don't always give you their 14 motivations as to why they want something. But 15 they may have told me. I just don't remember 16 today. 17 Q. What does -- how does one calculate the 18 10 percent total capital-to-asset ratio? 19 A. Well -- 20 Q. How was that to be calculated? 21 A. If there was a complicated or trick 22 definition of the computation during this time, I 15797 1 don't remember it. But sitting here today, just 2 looking at this letter, the way I would calculate 3 it is total capital divided by total assets and 4 that -- we're committing that that number will be 5 10 percent of ratio. 6 Q. How was the capital to be calculated? 7 A. I don't remember that, sir. 8 Q. What is capital, typically? 9 A. Capital, typically, would include stock 10 issue, stock issuance, retained earnings. It 11 oftentimes includes subordinated capital debt. It 12 could include preferred stock. And I've probably 13 left out some, but those are the ones that come to 14 mind. 15 Q. Does it also include an adjustment for 16 retained earnings or retained losses? 17 A. Yes, sir. 18 Q. Now, is another way of describing 19 capital that capital at United MBS was the value 20 of the assets less the liabilities? 21 A. Yeah. You would take your -- you would 22 have a -- you know, just visualizing the -- United 15798 1 MBS would have its own balance sheet and you would 2 have assets and you would have various items 3 classified as liabilities. And then you would 4 have various items classified as capital. And 5 capital is going to be assets minus liabilities. 6 And as we saw in one of these documents, sometimes 7 liabilities exceed assets. 8 Q. Well, let's take United MBS at 9 $500 million worth of mortgage-backed securities. 10 Under this, it would be required to have 11 $50 million worth of capital. Right? 12 A. Worth of total capital, that would be 13 my understanding, yes, sir. 14 Q. And what is your understanding of your 15 obligation under this letter if the market 16 value -- and let's assume that you have $490,000 17 worth of -- $450 million worth of liabilities. 18 So, you have $500 million worth of mortgage-backed 19 securities when you start and you have $50 million 20 worth of capital which is infused by USAT and you 21 have $450 million worth of reverse repos. 22 A. Okay. 15799 1 Q. What is your understanding of the 2 effect of this letter if the market value of the 3 mortgage-backed securities dropped to 4 $450 million? 5 MR. NICKENS: Your Honor, for purposes 6 of the hypothetical, are we assuming any change to 7 the balance sheet? Is it the balance sheet stays 8 the same but the market value changes? 9 Q. (BY MR. GUIDO) Exactly identical 10 other than the market value of the mortgage-backed 11 securities drops to $450 million. There's still 12 $450 million worth of repos on the balance sheet. 13 A. Well, in that case, if I'm 14 understanding the hypothetical, the reverse -- 15 you've got five -- in the original model, you have 16 500 million in mortgage-backs and 450 million in 17 reverse repo liabilities? 18 Q. Uh-huh. 19 A. As a practical matter, what would 20 happen is if the value of the mortgage-backed 21 securities decreased to 450 million, the lender or 22 the brokerage firms is (sic) going to require the 15800 1 same haircut. So, there would be some type of 2 adjustment on either the reverse repo amount or 3 the asset amount. In other words, we started out 4 with a model of -- try to put yourself in the 5 Salomon Brothers position and assume they did the 6 whole deal. They have lent United $450 million, 7 and they have $500 million worth of 8 mortgage-backed securities. If the value of those 9 mortgage-backed securities drops to 450, they are 10 going to do something. I mean, they are not going 11 to just continue to loan you 450 million. 12 Q. This letter authorizes you to put in 13 more money into United MBS or they reduce the line 14 of credit. Isn't that the practical effect of the 15 letter? 16 A. I'm not sure I follow it quiet that 17 far, Mr. Guido. It seems to me this letter is 18 a -- is a pretty simple commitment to maintain a 19 10 percent capital-to-asset ratio. 20 Q. If the market value drops to 450 and 21 there's $450 million worth of reverse repos 22 outstanding, what was your understanding of USAT's 15801 1 obligation at that time? 2 A. I can't answer that hypothetical 3 because it's -- it's not realistic. The real 4 situation is if they -- if Salomon Brothers 5 started out with $500 million worth of collateral 6 and $450 million worth of loan, from their 7 perspective -- they have loaned us money -- the 8 value of that collateral drops; and they mark this 9 stuff to market, I think, daily. They are not 10 still going to be loaning us 450; so, something is 11 going to give there. That's why I'm getting 12 confused. 13 Q. How do they reduce the reverse repo? 14 A. I don't know the mechanics, but I can 15 assure you of one thing: They would not loan one 16 hundred cents on the dollar on mortgage-backed 17 securities. 18 Q. So, they have a 450-million-dollar 19 reverse repo; and they now have $450 million worth 20 of mortgage-backed securities. Right? What are 21 they going to do? How are they going to get that 22 10 percent capital-to-asset ratio? 15802 1 A. Well, if -- okay. Now we've got 2 450 million in assets, and we've got $400 million 3 in reverse repos? 4 Q. $450 million worth of reverse repos 5 were outstanding at the outset. There were 6 $500 million worth of mortgage-backed securities. 7 In my hypothetical, the market value dropped and 8 you still have outstanding $450 million worth of 9 reverse repos. How are they going to reduce those 10 reverse repos? 11 A. That's not a real -- I can't answer 12 that question. It's -- I can -- you can take this 13 to the bank: They are not going to be loaning you 14 one hundred cents on the dollar. 15 Q. They are either going to liquidate the 16 portfolio and take their money, right, or USAT is 17 going to infuse more capital into United MBS. 18 Right? There are no other alternatives, Mr. Crow, 19 are there? 20 A. Well, if I have a -- if I had a pencil 21 and paper and a long time to think about it, maybe 22 I could come up with one; but I don't know. 15803 1 Q. Those are the only two alternatives, 2 aren't they, Mr. Crow, given the terms of this 3 letter? 4 MR. NICKENS: Your Honor, the witness 5 has said he doesn't know; and it's sort of a trick 6 question because the -- 7 MR. GUIDO: Here we go again, 8 Your Honor. 9 MR. NICKENS: The objection is it's a 10 trick question because this relates to the balance 11 sheet. And as Mr. Guido well knows, United MBS 12 was not a mark-to-market balance sheet. 13 Q. (BY MR. GUIDO) Does this letter 14 anywhere say that this 10 percent capital-to-asset 15 ratio was to be based upon initial cost of the 16 asset, Mr. Crow? 17 A. I don't see that it addresses that at 18 all. 19 Q. This letter, in your understanding, was 20 an effort to make sure that USAT always had at 21 risk 10 percent -- or United MBS had at risk 22 always 10 percent of whatever the market value was 15804 1 of the MBSs? 2 A. I can't reconstruct, Mr. Guido, what 3 was in my mind when I wrote this, as to whether we 4 were talking about book values or market values. 5 All I can see is that clearly in this letter, 6 we've made a commitment to maintain a 10 percent 7 capital-to-asset ratio within the subsidiary. 8 Q. And did not you just testify that the 9 investment bankers, in my hypothetical -- if the 10 value went down to $450 million in the 11 mortgage-backed securities, they would either 12 liquidate the mortgage-backed securities and pay 13 off the reverse repo or -- 14 A. I don't think I said that, Mr. Guido. 15 Q. Well, what did you say? 16 MR. KEETON: Your Honor, it was 17 Mr. Guido that said that. The witness denied 18 that. 19 THE COURT: All right. 20 Q. (BY MR. GUIDO) If this letter written 21 by you at the request of the investment banking 22 firms, are you saying that all they really cared 15805 1 about was the book value of the mortgage-backed 2 securities? 3 A. I'm not saying what they cared about. 4 I don't remember why they asked for it, the 5 circumstances of it. I see the letter. I see 6 what it says. It seems pretty clear. But I can't 7 reconstruct for you in the detail you seem to be 8 wanting me to do. I just can't do it. 9 Q. Well, you said it seems pretty clear. 10 Let me take the hypothetical again, and I'll ask 11 you a very simple question based on the 12 hypothetical. 13 If you have mortgage-backed securities 14 that you put on of $500 million. $50 million is 15 infused by USAT into United MBS, and they are 16 funded with $450 million worth of reverse repos. 17 A. Okay. 18 Q. What -- under the terms of this letter, 19 what would happen if the value of the 20 mortgage-backed securities declined from 21 $500 million to $450 million? What is your 22 understanding of what would happen under the terms 15806 1 of that letter? 2 A. I don't know because I don't see here 3 where we're talking about mark-to-market or book 4 values. 5 Q. So, you don't know what would happen 6 under that letter? 7 A. No. In your hypothetical, I don't 8 know. I probably knew then, but I don't know now. 9 Q. Now, let's go to Exhibit A -- excuse 10 me -- B1565 and T4362, which are not in the 11 record. The first is a letter dated April 14th, 12 1987, from Mr. Berner to Mr. Anderson regarding a 13 telephone conversation of April 14th, 1987. And 14 the second is a letter from Mr. Anderson back to 15 Mr. Berner of April 21st, 1987. The first is 16 B1565. The second is T4362. 17 MR. GUIDO: I move the admission of 18 both of those documents, Your Honor. 19 MR. NICKENS: No objection, Your Honor. 20 THE COURT: Received. 21 Q. (BY MR. GUIDO) Now, have you had an 22 opportunity to review both of those letters? 15807 1 A. Yes, sir, I have. 2 Q. Okay. It says, in the April 14th 3 letter, "Dear Mr. Anderson, pursuant to our 4 telephone conversation of April 14th, 1987, it is 5 my understanding that the Texas Savings and Loan 6 Department has no objection to United Savings 7 Association of Texas guaranteeing the obligations 8 of United MBS Corporation. As we discussed, 9 persons issuing reverse repo and settling 10 securities often require the guarantee of the 11 parent corporation. Please be advised that United 12 will attempt to not guarantee these obligations 13 but we wish the authority to do so if needed. I 14 would like confirmation of my understanding at 15 your earliest convenience." 16 Do you see that? 17 A. I do see that. 18 Q. Then turn to the letter from 19 Mr. Anderson to Mr. Berner. It says, "Confirming 20 our telephone conversation and your letter of 21 April 14th, 1987, this department will take no 22 objections to the association guaranteeing the 15808 1 obligations of United MBS Corporation, the 2 association's wholly-owned subsidiary, if 3 requested by securities firms as part of the 4 settlement of securities transactions and the 5 issuance of reverse repurchase agreements." 6 Do you see that? 7 A. I do see that. 8 Q. Now, both of these talk about 9 guaranteeing the obligations of United MBS 10 Corporation. 11 Do you see that? 12 A. I do. 13 Q. Do the documents that you signed where 14 you commit to maintain the 10 percent total 15 capital-to-asset ratio within this subsidiary, is 16 it your understanding that that has the practical 17 effect of guaranteeing the obligations of United 18 MBS? 19 A. I don't know. I'm not an attorney. 20 You know, it seems to me in Mr. Berner's letter, 21 he says, "Please be advised that United will 22 attempt to not guarantee these obligations. I'm 15809 1 not an expert on guarantees. But I saw a few at 2 First City, and they were -- they seemed to me to 3 be lengthy legalese type language argued over by a 4 bunch of lawyers. And this is a -- this is a 5 pretty straightforward two-paragraph letter. So, 6 the short answer is, Mr. Guido, I don't know. 7 Q. Well, your letter that says, "We commit 8 to maintain a 10 percent total capital-to-asset 9 ratio within the subsidiary, that" -- 10 MR. NICKENS: Your Honor, which letter? 11 We have letters both before and after Mr. Berner's 12 letter. Which letter is Mr. Guido referring to? 13 MR. GUIDO: I'm referring to all of 14 them. The phrase appears in all of them. The 15 witness has already testified to that. 16 MR. NICKENS: This is a new question, 17 Your Honor, referring to a letter. I would like 18 the record to reflect, as, I guess, it now does, 19 that he's referring to all of them, some of which 20 are dated before Mr. Berner's letter and some of 21 which are dated after. 22 A. Which letter do you want me to direct 15810 1 my attention to, Mr. Guido? 2 Q. (BY MR. GUIDO) Well, take the Salomon 3 letter dated February 12th, 1987, A13016, or take 4 the April -- 5 A. How about the Morgan Stanley letter? 6 Is that okay? I have that in my hand. I'll find 7 the other one. 8 Q. I thought you testified the same phrase 9 appeared in all letters, Mr. Crow. 10 A. My review, if I did a proper review, it 11 seemed to me to have the same phraseology, yes, 12 sir. 13 Q. Both before and after? 14 A. I've got the Salomon Brothers letter in 15 my hand. 16 Q. Okay. Were the letters that you wrote 17 committing to maintain the 10 percent of total 18 capital-to-asset ratio, were those written in 19 response to requests from the issuers of the 20 reverse repurchase agreements? 21 A. They were written in response to a 22 request from the credit people at, in this 15811 1 example, Salomon Brothers. 2 Q. And it was a commitment to maintain 3 total capital at a certain level. Right? 4 A. That is correct. 5 Q. And it -- and you don't know whether or 6 not the total capital ratio was to be calculated 7 using market value or using some other book value? 8 A. No, sir, I do not. I don't remember. 9 Q. You don't remember one way or the 10 other? 11 A. Right. 12 Q. Did reverse repurchase lenders require 13 overcollateralization of their reverse repurchase 14 agreements that they entered into with United MBS? 15 A. Yes, they did. 16 Q. And what was that -- I think that's 17 referred to as a haircut? 18 A. Yes, sir. 19 Q. And what was that typically? 20 A. Typically, the best I remember, 3 to 21 5 percent. And then if conditions got highly 22 volatile, that haircut would go up to a higher 15812 1 number. But just for round numbers, 5 percent 2 wouldn't be a bad number. 3 Q. And how high did it go? 4 A. I don't know. But I remember it went 5 up whenever market conditions became very, very 6 volatile, such as after the stock market crash in 7 '87 and financial markets started zigzagging 8 pretty widely. They sometimes raise their 9 haircuts. 10 Q. And were there times when United MBS 11 was obligated to post additional collateral for 12 the reverse repurchase agreements? 13 A. I don't remember specifically; but just 14 as a matter of general course, I'm -- I'm quite 15 sure there were times. 16 Q. Okay. And were there times that USAT 17 infused additional -- additional assets into 18 United MBS because of collateral calls on United 19 MBS by the issuers of reverse repurchase 20 agreements? 21 A. I don't remember whether there were or 22 not. We -- I just don't know. The records are 15813 1 whatever they reflect. We -- we have -- we may 2 have put enough in there to cover it, but I don't 3 know. 4 Q. Now, I would like to show you two other 5 documents. One is A10746, which is a memo from 6 you to Bruce Williams and Chuck Doolittle dated 7 May 20th, 1987. And the other is a document that 8 I've marked as A13029, which is dated 9 September 25th from you to Mike Crow and Art 10 Berner. 11 MR. GUIDO: It's from Mike Crow to Art 12 Berner and Bruce Williams. 13 MR. NICKENS: You said from you to Mike 14 Crow. 15 MR. GUIDO: Okay. 16 A. Were there two letters, Mr. Guido? 17 Q. (BY MR. GUIDO) There are two 18 documents. The document marked A13029 has Kestral 19 236, and it says something "Crow" something. 20 MR. GUIDO: That's my handwriting, 21 Your Honor, to specify where I found the document 22 in the files. The Kestral documents were the 15814 1 subsequent production of documents or pulls of 2 documents by the respondents from the USAT files 3 that were stored in the Kestral warehouse and was 4 found subsequent to the production of exhibits in 5 this list. I wrote that on this document for 6 identification purposes. 7 I would like to move the admission of 8 A10746 and A13029. 9 MR. NICKENS: 10746 is in, Your Honor, 10 at Tab 880; and we have no objection to A13029. 11 THE COURT: Received. 12 Q. (BY MR. GUIDO) Have you had an 13 opportunity to review both of those documents? 14 A. Yes, sir, I have. 15 Q. Now, the memo from you to Bruce 16 Williams and Chuck Doolittle says, "Concerning the 17 United MBS financial statements, Chuck, would you 18 please see that someone sends these statements to 19 all of our credit people on Wall Street? I think 20 Gary Jacobson may take care of this, but please 21 check with him to be sure. If he cannot find 22 anyone who is doing it, we need to establish an 15815 1 ongoing procedure to mail these statements monthly 2 to all of our reverse repo creditors related to 3 United MBS." 4 Do you see that? 5 A. I do see that. 6 Q. What financial statements is that 7 making reference to? 8 A. I really don't remember, but I suspect 9 it would be a balance sheet and maybe an -- 10 probably an income statement of that subsidiary. 11 Q. Were monthly balance sheets and income 12 statements of that subsidiary produced? 13 A. I don't remember but -- and I don't 14 remember the exact circumstances of that note, but 15 that's the way I would interpret this. 16 Q. Why did the people at Wall Street want 17 monthly statements of United MBS? 18 A. Because they were extending to United 19 and United MBS major credit lines in the form of 20 reverse repurchase agreements, and it was no 21 secret that Texas thrifts were under pressure 22 during this time period. And so, I think the 15816 1 credit people were just doing their due diligence 2 and just monitoring the situation. But I can't -- 3 that's a bit of speculation on my part. I can't 4 say what was in their mind or why they asked for 5 it. 6 Q. All right. Well, were they concerned 7 that United MBS might not have the capital to 8 satisfy collateral calls? 9 A. I don't know. 10 Q. Now -- then it says, "Bruce, please add 11 to your job description ensuring that the 12 capital-to-asset ratio of the sub remains at 13 10 percent or above. We have committed to the 14 analysts that we would maintain at least this 15 ratio." 16 Do you see that? 17 A. I do see that. 18 Q. Do you know how Bruce Williams was to 19 ensure that the capital-to-asset ratio of the sub 20 remained at 10 percent or above? 21 A. No, sir, I really don't. Bruce was 22 a -- a pretty resourceful and intelligent person, 15817 1 and I just wanted to be sure that somebody like 2 that was monitoring this issue. But as to what 3 details he took to perform this function, I don't 4 know. 5 Q. You were the CFO. Right? 6 A. That is correct. 7 Q. What was his obligation if there was a 8 collateral call by one of the reverse repo 9 lenders? 10 A. What was Bruce's obligation? 11 Q. Uh-huh. What was he to do? 12 A. Well, I could -- I don't remember, but 13 if there's a -- as a general practical matter, if 14 there's a collateral call, you can put up more 15 collateral; or you can sell some of the 16 securities. 17 Q. What is the effect of a collateral call 18 on the capital-to-asset ratio, or what would have 19 been the effect of a collateral on the 20 capital-to-asset ratio of United MBS? 21 A. Let's see. Well, I guess it would 22 depend on whether we were talking about market 15818 1 values or book values. 2 Q. And why is that? 3 A. If we were talking about market values 4 and there was a collateral call, I guess we would 5 just simply be getting back up to that 6 500-million-dollar number and we would still have 7 the $50 million in capital. So, we would have the 8 10 percent capital ratio. 9 Q. If you're talking about book value? Is 10 that what you just said? Or capital -- I mean 11 market value? 12 A. I get confused in all these 13 hypotheticals. Would you please restate the 14 question? 15 Q. If there were a collateral call of 16 whatever the haircut was, what would have been 17 Mr. Williams' responsibility to ensure the 18 capital-to-asset ratio of United MBS, based on 19 that memorandum that you wrote to him on May 20th, 20 1987? 21 A. The answer, sitting here today, is I 22 don't know. I'm a hundred percent sure that I 15819 1 would have known at the time -- 2 Q. But you don't know now? 3 A. -- because it would have been real 4 clear in my mind. 5 Q. Now, let's move on to another topic. I 6 want to show you another set of documents. 7 The first document is T5120. It's 8 dated February 18th, 1987, from Bruce Williams to 9 the investment committee regarding the maturity 10 matching credit. 11 The second is T5121, which is at 12 Tab 298. It's a letter from Bruce Williams to 13 Jenard Gross and Mike Crow dated February 23rd, 14 1987. 15 The third is a March 26th, 1987 memo 16 from Mike Crow to Jenard Gross. "The five most 17 important things I am working on," March 1987, 18 and -- 19 MR. VILLA: Is there a number on that 20 document? 21 MR. GUIDO: T5123. The next one is 22 T5125, which is at Tab 302; and it's a memo from 15820 1 Bruce Williams to Mike Crow and Jenard Gross. 2 Q. (BY MR. GUIDO) I would like you to 3 review all four documents, if you would. 4 A. You want me to read them or just kind 5 of glance at them? 6 Q. Let me walk you through them, I guess. 7 T5120, it's at Tab 297. It's a memo from Bruce 8 Williams to the investment committee dated 9 February 18th, 1987. 10 Have you seen that document before? 11 A. It looks familiar. I think I may have 12 seen it related to my deposition, but I -- I don't 13 remember seeing it recently. 14 Q. Have you seen it in preparation for 15 your testimony in this proceeding? 16 A. I don't remember it, but I -- you know, 17 I may have seen it and gotten it. I just -- it 18 seems to me I haven't seen this one for a long 19 time -- 20 Q. Okay. 21 A. -- but I'm not sure. 22 Q. Take a look at the underlined 15821 1 paragraph, the third paragraph. Do you see the 2 underlining? It says, "Because our near-term 3 earnings outlook is not extremely favorable and 4 the capital note issuance is unlikely, the 5 matching credit is our most accessible source of 6 capital. Therefore, prior to quarter end, we may 7 have to restructure our assets and liabilities to 8 increase our matching credit to maintain minimum 9 regulatory net worth." 10 Do you see that? 11 A. Yes, sir, I do. 12 Q. Do you know what that refers to? 13 A. I remember the general subject, 14 certainly. The maturity matching credit was a new 15 regulation, and we -- we studied that regulation 16 and tried to arrange our financial affairs to make 17 sure that we got all of the maturity matching 18 credit that we were entitled to. So, that's my 19 memory of the general subject. 20 Q. Okay. Did that entail restructuring 21 assets and liabilities on the books of USAT and 22 its various subsidiaries? 15822 1 A. I believe, yes. I think we ended up -- 2 at the end of the day, I believe we transferred 3 some adjustable rate mortgage-backed securities 4 from, if I'm not mistaken, Sandy's sub to the 5 parent. 6 Q. Did you transfer anything else? 7 A. I remember in the deposition, we talked 8 about caps but -- 9 Q. Do you recall your testimony in that 10 deposition about transferring the caps? 11 A. No, sir, I really don't. I think I 12 said I didn't -- I don't recall the exact 13 testimony, but I think it was probably to the 14 effect I don't know whether the caps were or were 15 not transferred. 16 Q. All right. Let's take a look at the 17 next document, which is T5121. It's 18 February 23rd, 1987. It's a memo from Bruce 19 Williams to Jenard Gross and Mike Crow. 20 Do you see that? 21 A. I do. 22 Q. And that is entitled "Minimum required 15823 1 regulatory net worth." 2 A. Right. 3 Q. And it talks about the -- "Based on our 4 year-end maturity matching credit, USAT should 5 receive a benefit of about $40 million at June 30, 6 1987. When this is combined with our January 30, 7 1987 actual results, it indicates we will have 8 only about 32 million excess net worth before 9 adjusting for February through June results (i.e., 10 net losses, increases in scheduled items, and 11 direct investments, et cetera.)" 12 Do you see that? 13 A. I do. 14 Q. Now, do you recall that the maturity 15 matching credit was an important factor for USAT 16 in the spring of 1987 in order to meet its minimum 17 regulatory net worth requirements? 18 A. I don't remember the exact timing, but 19 I certainly agree with the statement it was an 20 important element of USAT's net worth position. 21 Q. Take a look at T5123, Tab 300. It's a 22 memo from you to Jenard Gross dated March 26, 15824 1 1987. Doesn't that, in fact, say that analysis of 2 and reconfiguration of the association's balance 3 sheet to maximize the maturity matching credit and 4 ensure meeting regulatory capital was one of the 5 five most important things you were working on in 6 March of 1987? 7 A. That's what this says, yes, sir. 8 Q. Do you have any reason to dispute the 9 accuracy of that memorandum? 10 A. No, sir, I don't remember it; but that 11 is my signature there. 12 Q. Now, let's turn to T5125, which is at 13 Tab 302. This is a memo from Bruce Williams to 14 you and Jenard Gross dated June 17th, 1987. 15 Do you see that? 16 A. Yes, sir, I do. 17 Q. Okay. This memorandum says, "Although 18 we have discussed the structure of United MBS in 19 numerous forms -- executive committee, investment 20 committee, strategic planning committee, et 21 cetera -- I think it is important you have a 22 complete understanding of the major accounting 15825 1 exposure we have for the subsidiary." 2 Do you see that? 3 A. I do. 4 Q. It says, "By management approval, 5 320 million of variable rate mortgage-backed 6 securities and" -- then it has another "and" -- 7 "710 million of interest rate caps were 8 transferred from United MBS to USAT for maturity 9 matching credit purposes." 10 Do you see that? 11 A. I do see that. 12 Q. Now, were the 320 million of variable 13 rate mortgage-backed securities transferred? 14 A. That's consistent with my memory. I 15 thought it was 350 million, but somewhere in that 16 neighborhood. 17 Q. Then it says, "710 million of interest 18 rate caps were transferred from United MBS to 19 USAT." 20 Is that consistent with your 21 recollection? 22 A. Going back that far, I don't remember 15826 1 whether it was or wasn't. I probably, when I got 2 this, just read it. I've seen subsequent 3 documents that indicate to me the caps were not 4 transferred. 5 Q. What were those documents? 6 A. Mr. Hargett's testimony. 7 Q. What was it in Mr. Hargett's testimony 8 that you reviewed? 9 A. Well, I read his -- his testimony, and 10 it's been -- it's been a few weeks ago. But 11 Mr. Hargett, I believe, said that the caps were on 12 the general ledger of United Savings Association 13 and that the -- they were not on the general 14 ledger of United MBS or Sandy's sub, whatever the 15 technical name is, and that the cap agreements 16 that he had reviewed were in the name of United 17 Savings Association. 18 So, to me, if you're looking at a sub 19 and an actual transfer, you know, my opinion would 20 be there had not been a transfer. 21 Q. Did you see anything other than 22 Mr. Hargett's testimony that led you to that 15827 1 conclusion? 2 A. The only thing I looked at other than 3 that is I looked at some of the cap agreements 4 themselves. I certainly didn't look at all of 5 them. I'm sure I didn't look at all of them. I 6 don't think I did. 7 Q. Did you look at anything other than 8 Mr. Hargett's testimony and exhibits that have 9 been previously admitted in this proceeding? 10 A. No, sir. I don't have any other -- I 11 mean, the only stuff I've got from United is the 12 stuff that either you've shown me or my counsel 13 showed me. 14 Q. Well, did you -- this is a very 15 important question. 16 Did you look at anything to reach the 17 conclusion that you have a question about who 18 owned the caps other than exhibits that are in the 19 testimony or Mr. Hargett's testimony? Anything 20 else? 21 MR. NICKENS: Your Honor, the witness 22 would have no way of knowing what has been 15828 1 admitted as exhibits. 2 MR. GUIDO: If he knows. 3 THE COURT: The question is whether he 4 looked at them. 5 MR. GUIDO: The question was whether he 6 looked at anything, to his knowledge, other than 7 Mr. Hargett's testimony and documents that have 8 been previously admitted in this proceeding. 9 That's my only question. 10 A. Okay. All of the -- other than 11 Mr. Hargett's testimony, the only thing that I 12 looked at would have had these little legalese 13 type -- 14 Q. (BY MR. GUIDO) Tabs on them? 15 A. Yes, sir. The US so-and-so and, I 16 guess, the Bates stamped type stuff. 17 Q. So, you don't know whether or not your 18 opinion is based on documents in addition to 19 Mr. Hargett's testimony and exhibits that have 20 been introduced in this proceeding? 21 THE COURT: I think the objection is 22 well taken. How would he know what exhibits have 15829 1 been received in this proceeding? 2 MR. GUIDO: If he knows. I mean, he 3 may have been told, Your Honor. 4 THE WITNESS: Well, I guess I really 5 wouldn't know. The fact -- I mean, I don't know 6 whether -- I had assumed that all of this -- this 7 Bates stamped type stuff had been admitted. That 8 certainly may be incorrect. Whenever the -- 9 either Mr. Guido or my own counsel gives me 10 something, it always seems to have this type stuff 11 on it. So, I don't factually know whether it had 12 been admitted or not. 13 Q. (BY MR. GUIDO) Now, you testified 14 that there were two things that led you to 15 question the accuracy of the statement of whether 16 710 million of interest rate caps were transferred 17 from United MBS to USAT. 18 Do you see that? 19 A. Yes, sir. 20 Q. And one of those was that there was a 21 general ledger that was shown to Mr. Hargett; and 22 your understanding was that it showed that the 15830 1 caps were on the books of USAT. Right? 2 A. That was my understanding of what 3 Mr. Hargett's testimony was. 4 Q. Okay. Now, did USAT, at times, make 5 purchases of instruments for the benefit of its 6 subsidiaries? 7 A. Well, I would phrase it like this, that 8 certainly there would be times when contracts 9 would be entered into or purchases would be made 10 at the USAT level. And for internal performance 11 tracking purposes, we would assign it to a various 12 sub. Yes, sir, that certainly happened. 13 Q. And was one of the ways that you 14 assigned that to an entity was through an 15 intercompany receivable? 16 A. I don't think so. I think an 17 intercompany receivable would be a real -- what I 18 would call a real hard accounting entry where -- 19 we saw an example in compensation where you're 20 going to take some compensation expense from 21 United Financial Group and you're going to give a 22 credit to United Savings. It would be a real hard 15831 1 entry in the general ledger. Most of the 2 assignments or the allocations that I was talking 3 about would be for performance tracking type 4 purposes. 5 Q. Well, with regard to -- after you 6 looked at Mr. Hargett's testimony and you 7 concluded from that that the caps were on the 8 books -- the general ledger of USAT, did you make 9 any effort to see whether or not there was an 10 intercompany receivable that indicated that the 11 financial responsibility for those caps belonged 12 to United MBS? 13 A. No, sir. I didn't look at that at all. 14 Q. You didn't? 15 A. No, sir, I did not. 16 Q. Did you look at any trade tickets that 17 indicated that the caps had been purchased for the 18 account of United MBS? 19 A. I've looked at trade tickets. I don't 20 remember getting into that, no. 21 Q. Okay. 22 A. But I've looked at trade tickets in 15832 1 preparation for this testimony as to -- 2 Q. And did you see trade tickets that 3 dealt with the purchases of the caps? 4 A. I think I did. 5 Q. Okay. And were those authorized by 6 you? 7 A. I don't remember. 8 Q. Okay. Did those indicate that the caps 9 had been purchased for the account of United MBS? 10 A. No, sir. I just -- I don't remember. 11 I looked at trade tickets and some of them were 12 United Savings. Some of them were United MBS. We 13 were -- I was looking more for the purpose of 14 certain transactions. 15 Q. What do you mean you were looking for 16 the purpose of certain transactions? 17 A. As to accounting purpose. I mean, it's 18 difficult for me to -- to characterize what -- 19 MR. NICKENS: Your Honor, a gentleman 20 in a blue shirt and shorts just said he was sorry. 21 I assume he was referring to the electrical storm 22 we're getting. 15833 1 A. I've looked at, in the process of the 2 deposition, stuff and preparation for this 3 testimony. I literally have seen, I suspect, 4 thousands of pages. A lot of the stuff the 5 lawyers put in front of me, they get mad at me 6 because I don't read it all. So -- but -- I've 7 tried to prepare as much as I can, but I've got to 8 work, so -- 9 Q. (BY MR. GUIDO) Did you ever sign a 10 trade ticket as the person authorizing the 11 transaction that you knew to be false? 12 A. No, sir. 13 Q. Did you ever sign a trade ticket that 14 you knew assigned a financial instrument to one 15 entity of the USAT group of companies when you 16 knew it belonged in the account of another entity? 17 A. Could you run that question by me 18 again, please? 19 Q. Did you ever authorize a trade ticket 20 that assigned a financial instrument to one of the 21 USAT entities when, in reality, it was purchased 22 for another USAT entity? 15834 1 A. Well, I guess the short answer is, 2 Mr. Guido, I wouldn't authorize trade tickets that 3 were false or misleading. I wouldn't do that. 4 I'm not in the -- no, sir. That's an absolute 5 positively "no." 6 MR. GUIDO: Your Honor, this might be a 7 good time to take a break, if we might. 8 THE COURT: How much more do you have? 9 MR. GUIDO: I probably have another 45 10 minutes to an hour with this witness, Your Honor. 11 THE COURT: All right. We'll take a 12 short recess. 13 14 (Whereupon, a short break was taken 15 from 10:33 a.m. to 10:55 a.m.) 16 17 THE COURT: Be seated, please. We'll 18 be back on the record. 19 Mr. Guido, you may continue. 20 MR. GUIDO: Thank you, Your Honor. 21 I would like to have the witness take a 22 look at Exhibit A1434, which is at Tab 361. 15835 1 A. (Witness reviews the document.) 2 Q. (BY MR. GUIDO) That is the minutes of 3 an investment committee dated March 18th, 1987. 4 And will you take a look at US 3005498, which is 5 the MBS portfolio activity for March 11th through 6 March 16th. 7 A. (Witness complies.) 8 Q. Do you have that? 9 A. Yes, sir, I do. 10 Q. Do you see the entry under "OTC," 11 "three-month LIBOR caps"? 12 A. Yes, sir, I do. 13 Q. About $350 million? 14 A. Yes, sir, I do. 15 Q. Does that indicate positively to you 16 that that was purchased? 17 A. That's the way I would interpret that, 18 yes, sir. 19 Q. And what does United MBS refer to? 20 A. I believe that's Sandy's sub. 21 Q. Now, you testified that the investment 22 committee was the entity that had the 15836 1 responsibility for -- the ultimate responsibility 2 of what was purchased and what was sold on behalf 3 of USAT and its entities. 4 Do you recall that testimony? 5 A. The investment committee had 6 responsibility for monitoring the portfolio and 7 position -- and sustaining position limits and 8 overall policy under which Ms. Laurenson was to 9 operate. 10 Q. What was the purpose of the investment 11 committee minutes? 12 A. Well, I never thought about it. I 13 guess it was to record what went on so that 14 members of the committee and auditors and 15 examiners and whoever else who wanted to look 16 at -- see what was happening could review them. 17 Q. Was that so they could ascertain 18 whether or not the activities had been authorized 19 appropriately? 20 A. Yes, sir. I believe at some point in 21 time, we had a separate sheet that the treasury 22 department was responsible for preparing that gave 15837 1 the overall aggregate position limits and the 2 actual positions to report and monitor to the 3 committee if we had, you know, violated any 4 internal limit. 5 Q. Okay. I would like you to take a look 6 at a document, which is B1797. It's a memo dated 7 October 19th from Jenny Whyte to Sandy Laurenson 8 regarding UMBS cap agreements. I think it's 9 Tab 320 or 321. 10 Have you ever seen this document 11 before? 12 A. I don't remember seeing this one, no, 13 sir. 14 Q. Okay. Who's Jenny Whyte? 15 A. I don't remember her; but from looking 16 at this document, I guess -- it says she was in 17 the treasury department. 18 Q. Do you see the CC down there to Mike 19 Crow? 20 A. Yes, sir, I do. 21 Q. It indicates that you received this 22 document. Do you ever recall receiving a report 15838 1 that inaccurately described the entity that owned 2 cap agreements at USAT for UMBS? 3 A. That inaccurately owned the caps? 4 Q. Yeah. 5 A. No, sir. I can't say that I have. 6 Most of my focus would have probably been on the 7 performance tracking area, but no. The answer -- 8 the direct answer to your question is I don't 9 remember that, no. 10 Q. Now, I would like you to look at T5047, 11 which is at Tab 304. 12 MR. GUIDO: Tab 304 wasn't on the list 13 of exhibits. Does somebody have another copy so 14 that I can show the witness? 15 MR. NICKENS: Yeah. 16 Q. (BY MR. GUIDO) These are a packet of 17 trade tickets that have been previously introduced 18 into the record. 19 Have you seen these trade tickets 20 before? 21 A. I don't know. 22 Q. Okay. Well, you based your testimony 15839 1 that there may be something inaccurate in the 2 Bruce Williams memo about the transfer of caps. 3 Do you recall that? You said that you 4 saw something that indicated to you that that 5 might not be accurate. 6 Do you recall that testimony? 7 A. That's correct. 8 Q. Now, was there anything you saw other 9 than a purported journal entry? 10 MR. NICKENS: Your Honor, I don't 11 believe he testified that he saw a purported 12 journal entry. 13 A. No, sir. I -- the reason I had some 14 doubt in my mind about whether the caps were or 15 were not transferred is Mr. Hargett's testimony. 16 And then I looked at some of the interest rate cap 17 agreements, and they were in the name of United 18 Savings. I didn't do any exhaustive study. 19 Q. (BY MR. GUIDO) And you didn't attempt 20 to ascertain whether or not there was an 21 intercompany receivable for those cap agreements 22 between USAT and UMBS which you think were in the 15840 1 name of USAT? 2 A. I did not look at that, no, sir. 3 Q. Take a look at these trade tickets. 4 A. (Witness complies.) 5 Q. For whose account do these trade 6 tickets indicate those caps belong to? 7 A. As best as I remember how this works -- 8 and it's been a long time. But you would look to 9 determine on whose books it was placed -- I think 10 that number Journal 19021184 is most likely a 11 general ledger number. I could be mistaken, but I 12 think -- 13 Q. Well, the trade ticket says at the top 14 in clear language, does it not, Mr. Crow, "for the 15 account of"; and then it has listings of accounts, 16 does it not? 17 A. Certainly. 18 Q. And what does it show on these trade 19 tickets for which account these caps were held? 20 A. It shows, Mr. Guido, I believe in all 21 cases, for the account of United MBS sub. 22 However, the people filling out the trade ticket 15841 1 are interested in performance tracking. They are 2 not accountants. If you're asking me what general 3 ledger or what entity it was booked in, then that 4 would be, I believe, this -- these numbers down 5 here. 6 Q. Are you telling me that the trade -- 7 the person -- the trader that is buying something 8 for the account of one entity and it's approved by 9 somebody -- in this case, it was Ron Huebsch. 10 Right? He was executive vice president for 11 investments? 12 A. He was. 13 Q. And he says it's for the account of 14 United MBS sub. 15 That wasn't intended for the account of 16 United MBS sub? 17 A. Well, what I'm trying to convey is that 18 Mr. Falconi -- the practical matter is Mr. Huebsch 19 would have just been approving the transaction as 20 being a reasonable transaction to enter into. He 21 would not focus on nor care, probably, what 22 responsibility center or how it was allocated, et 15842 1 cetera. 2 Mr. Falconi, being Ms. Laurenson's 3 assistant, focused on performance tracking, the 4 performance report tables that judge their 5 portfolio performance. And we engaged in macro 6 hedging; so, hedges very well may be at the USAT 7 level, for tracking purposes, allocated to this 8 sub. 9 What I'm trying to explain, if your 10 question is where was it booked and in which 11 general ledger it was booked in, I think you would 12 look at these numbers. 13 Q. So, you're telling me that USAT kept a 14 set of books for one purpose and then another set 15 of books for a different purpose? 16 MR. VILLA: Objection. That really 17 mischaracterizes his testimony. 18 THE COURT: Denied. 19 A. No, sir. That's not what I'm saying at 20 all. I'm saying we had general ledgers that had 21 the integrity of those companies, and they were 22 properly accounted for. But it's been my 15843 1 experience at this company and at my prior company 2 and at various banks I dealt with in the holding 3 company at First City, that for performance 4 tracking purposes, it's not uncommon at all to 5 allocate or to assign items from one sub to a 6 portfolio in another area, so -- 7 Q. (BY MR. GUIDO) What's the purpose of 8 having a separate entity under Federal Home Loan 9 Bank Board regulations? 10 A. I probably knew at the time. I can't 11 define it today. 12 Q. Why would an entity be created at USAT 13 to hold a separate set of mortgage-backed 14 securities? Do you remember USAT Mortgage 15 Finance? 16 A. Yes, sir. I remember -- I remember 17 back in the stack of memos somewhere here that you 18 showed me -- I believe one of them said we 19 would -- we may or may not hedge the portfolio, 20 and the hedges may be at the United Savings level 21 or they may be in the direct sub level. So, I 22 don't -- I don't see any inconsistency. I -- 15844 1 Q. Now, let's go back to this packet of 2 trade tickets. Okay? 3 A. Okay. 4 Q. See at the top, it says "for the 5 account of." Okay? 6 A. I do see that. 7 Q. It doesn't say for tracking performance 8 purposes. It says "for the account of." Right? 9 A. That's what it says. 10 Q. Then it has an RC number. 11 Do you see that? 12 A. I do. 13 Q. What are those RC numbers? 14 A. Those would relate to responsibility 15 centers or cost centers. 16 Q. For accounting purposes. Right? 17 A. Yes, for tracking purposes. Cost 18 centers or responsibility centers are for tracking 19 purposes. 20 Q. Isn't one of the purposes of a cost 21 center to be able to track what entity owns what? 22 A. I guess. I don't think of them in 15845 1 those terms but -- I think of -- if you want to 2 know what entity owns what, you look at the 3 general ledgers; and you look at the general 4 ledger numbers. 5 Q. But you testified that in the general 6 ledger, there are intercompany receivables that 7 appear in that ledger. Right? 8 A. As it relates to compensation. 9 Q. Okay. And there were intercompany 10 receivables between USAT and its related entities 11 for other purposes, were there not? 12 A. I have no doubt that that's correct. I 13 haven't looked into it. 14 Q. And one of those intercompany 15 receivables could have been for the cap 16 agreements, could it not? 17 A. I suppose it's possible, yes, sir. 18 Q. And did you make an effort to ascertain 19 whether or not there was an intercompany 20 receivable between USAT and United MBS that 21 pertained to the cap agreements? 22 MR. NICKENS: Your Honor, that's about 15846 1 the fourth time this question has been asked. If 2 Mr. Guido has an intercompany transfer he would 3 like to question the witness about, he could show 4 it to him. He's asked him now about four times 5 about whether he made an effort to look for 6 intercompany transfers, and the answer -- the 7 record has been consistently that he did not. 8 THE COURT: What's your question? 9 MR. GUIDO: That's my question, 10 Your Honor. 11 THE COURT: Did you look for it? 12 A. Could you repeat the question, please? 13 Q. (BY MR. GUIDO) Can you look to see 14 whether or not there were any intercompany 15 receivables pertaining to the cap agreements after 16 you were shown a general ledger entry which you 17 believe showed that the caps belonged to USAT? 18 MR. NICKENS: Your Honor, I have to 19 object to that because there's been no testimony 20 that he was shown a general ledger entry. 21 A. No, sir. Let me repeat if I've -- if 22 I've misconstrued something here. What I looked 15847 1 at was Mr. Hargett's report. Mr. Hargett, as best 2 I read his report, concluded that the caps that 3 we're talking about here were on the general 4 ledger of United Savings Association. I think 5 Mr. Hargett said he looked on the United MBS 6 general ledger and they weren't on that general 7 ledger. 8 And then the only other thing I did was 9 I looked at some of the interest rate swap 10 agreements. They appeared to be in the name of 11 United Savings. And I believe Mr. Hargett's 12 testified that they were in the name of United 13 Savings. 14 Q. Okay. So, you basically -- 15 A. And that's as far as I went. I didn't 16 do an investigation -- you know, I just stopped 17 there. 18 Q. Do you recall what the date was of the 19 general ledger that you recall Mr. Hargett 20 testifying about? 21 A. No, sir. 22 Q. Okay. Was it before or after 15848 1 June 17th, 1987, the date of the Bruce Williams 2 memo to you and Jenard Gross: T5125? 3 A. I don't remember. I don't know. 4 Q. So, you don't know whether or not the 5 discussion in that transcript dealt with the 6 general ledger as it existed before or after the 7 purported transfer that's in T5125? 8 A. No. When I read Mr. Hargett's 9 testimony, I thought he was talking about the -- 10 whether a transfer had or had not occurred. And I 11 remember the reason it got my attention is I 12 remember in my deposition that we -- I was 13 questioned on that subject at length. And, you 14 know, I can't -- I told you about as far as I 15 went. 16 Q. Okay. Let's move on. I would like to 17 show you a document that we've marked as A14081, 18 which is a packet of materials from the 19 examination report or the examination work papers 20 of the Federal Home Loan Bank Board. This is a 21 memorandum that says, "United Financial Group, 22 Inc. investment policy dated 5/26/1986." And it 15849 1 has handwritten comments in there. It says, "Per 2 a discussion with CFO Michael Crow at 11/24/1987, 3 United's investment policy has not changed in any 4 way from the date of this stated policy. All 5 items of the policy remain in effect and are 6 adhered to by all concerned parties," initialed by 7 one of the examiners JCP and also initialed by 8 Vivian Carlton. 9 MR. GUIDO: I move the admission of 10 Exhibit A14081, Your Honor. 11 MR. NICKENS: Your Honor, this document 12 was not indicated as one of the documents we might 13 use with Mr. Crow. I would like to have the 14 opportunity to review the document before we have 15 an objection or not. 16 MR. GUIDO: The document has an imaging 17 number, OW180957, Your Honor. 18 MR. NICKENS: That simply means that it 19 was in the files of the OTS that were made 20 available to us. So, it could have been a 21 document -- I'm not saying, but it could have been 22 a document originated by the OTS and put in their 15850 1 files. I would like an opportunity for someone at 2 our -- this document was not provided to us ahead 3 of time along with the others, and I would just 4 like five minutes or whatever it takes to have 5 read the document so that we know what it is. 6 MR. GUIDO: Your Honor, I can move to 7 another document while counsel is reviewing that. 8 It's Tab 568, which is A10690. 9 MR. NICKENS: Your Honor, I'm informed 10 that we've had a chance to look at this. It's 11 from the exam work papers; and based upon that, we 12 have no objection to the document. 13 THE COURT: All right. Exhibit A14081 14 is received. 15 Q. (BY MR. GUIDO) Would you please 16 review the investment policy? See the paragraph 17 that says, "The objective of this investment 18 policy is to manage and control the company's 19 resources through the most effective asset mix and 20 funding sources to provide for optimal and stable 21 earnings within constraints of prudent risk 22 management, a strong liquidity position, and an 15851 1 adequate capital base"? 2 A. Yes, sir, I see that. 3 Q. And do you see that there's a note 4 there that you informed the examiners on 5 November 24th, 1987, that this policy had not 6 changed in any way from the date of the document 7 which is 5/27/86? 8 A. I see that. 9 Q. Does this document anywhere indicate 10 that sales were or could be made out of the 11 high-yield bond and mortgage-backed securities 12 portfolios to generate gains to bolster quarterly 13 profits? 14 A. (Witness reviews the document.) No, 15 Mr. Guido, I don't see those words in this 16 document. 17 Q. Do you see anything in that document 18 that raises an implication that sales were made 19 out of the high-yield bond portfolio or the 20 mortgage-backed security portfolio to generate 21 gains to bolster quarterly profits? 22 A. Well, it would seem to me that in the 15852 1 objective, it says to, quote, "provide for optimal 2 and stable earnings within constraints of prudent 3 risk management." That certainly could include 4 security sales for purposes of taking profits. 5 Then in the last statement, it says, quote, 6 "adequate capital base." But in direct answer to 7 your question, I don't see those words. 8 Q. Did you ever tell the examiners that 9 you were making sales out of the mortgage-backed 10 security and high-yield bond portfolios to 11 generate gains to bolster quarterly profits? 12 A. If you take the word "quarterly" out of 13 it, I certainly believe the answer is yes. 14 Q. You personally did that? 15 A. I have a vague recollection of that, 16 yes, sir. 17 Q. To whom? 18 A. To Vivian Carlton. 19 Q. When? 20 A. I said it was a vague recollection, 21 Mr. Guido. I don't -- I can't say when. 22 Q. If you take quarterly profits out of 15853 1 it, I think, is what you said; is that right? 2 A. No, sir. I said if you take the 3 number -- if you take the statement "quarterly" 4 out of the equation, if you just -- let me be 5 clear. What I believe -- I believe that I had a 6 conversation with Ms. Carlton -- it could have 7 been with Mr. Twomey -- that United was taking 8 profits from a number of places, including its 9 portfolios, in order to bolster earnings. 10 Q. For the express purpose of bolstering 11 earnings? 12 A. Yes, sir, absolutely. 13 Q. Not for other purposes that had an 14 incidental effect of boosting earnings? 15 A. I don't understand that last question. 16 Q. Well, did you tell them that you were 17 taking -- that there were gains that had been 18 taken that were incidental to sales that were made 19 out of the investment portfolios for other 20 purposes? 21 A. I guess I don't understand that 22 question. I don't understand your question. 15854 1 Q. Do you understand the distinction 2 between taking gains for the purpose of bolstering 3 profits and taking gains for other purposes that 4 have the effect of generating profits? 5 A. I understand that distinction. 6 Q. Now, which of the two do you recall 7 telling? Either Vivian Carlton or Neil Twomey? 8 A. The first. 9 Q. And what is that? 10 A. That we were taking gains in a number 11 of items, including the investment portfolios, to 12 bolster profits. And I can't recall a specific 13 discussion, but part of our financial records were 14 we had in our budget a planned gain on sale of 15 securities. I mean, it was in the budget. 16 Q. Well, what securities did USAT own? 17 A. What securities did USAT own? 18 Q. Yeah. 19 A. USAT owned equity securities. USAT 20 owned high-yield bonds. USAT owned 21 mortgage-backed securities and mortgage-backed 22 securities derivatives. And USAT owned Treasury 15855 1 securities. And I don't remember any more but -- 2 but I think that's it. 3 Q. Now, you testified that the equity 4 securities were securities that you definitely 5 were making sales out of to generate gains; is 6 that correct? 7 A. Well, we didn't have to make sales out 8 of them. It was a -- the equity securities were a 9 mark-to-market trading portfolio. 10 Q. Why was it a mark-to-market trading 11 portfolio? What was it that made it a 12 mark-to-market trading portfolio? 13 A. Because it met the definition of a 14 trading account, and that was the proper 15 accounting. 16 Q. What was the definition as you 17 understood it? 18 A. A trading account during this time 19 period was defined as an account where the 20 objective was to invest in a security for the 21 purpose of a market gain and dispose of that 22 security typically in a short time period, 15856 1 typically in an amount of weeks. 2 Q. Did you tell Mr. Twomey and Ms. Vivian 3 that that's what you were doing with the equity 4 arbitrage portfolio? 5 A. No. I didn't tell them that at all. 6 No, sir, I didn't tell them that because the 7 equity arbitrage portfolio was a mark-to-market 8 portfolio; and it had the effect of whether we 9 sold the security or kept the security. It had no 10 effect on our earnings whatsoever because it was 11 mark-to-market. 12 Q. I just want to be clear. Is it your 13 testimony that you told Vivian Carlton or Neil 14 Twomey in at least one conversation that you made 15 sales out of the high-yield bond portfolio in 16 order to generate gains? 17 A. I don't think I limited it to the 18 high-yield bond portfolio, sir. I said out of -- 19 the crux of the conversation was that we, United, 20 had made sales out of our asset portfolios, 21 including loan sales, branch sales, loan servicing 22 sales; and we sold out of our bond portfolios for 15857 1 the purpose of bolstering earnings. And I'm quite 2 confident that conversation occurred. I have no 3 doubt. 4 Q. Okay. Let's take a look at Tab -- 5 A. I would add -- well, I'll just stop 6 there. 7 Q. Okay. Now, does that statement appear, 8 in your recollection of the conversation, anywhere 9 in A14081? 10 A. Well, again, in the "objective" 11 section, I don't see those words; but when you 12 read it, it says, quote, "to provide for optimal 13 and stable earnings within constraints of prudent 14 risk management." That seems to me to be 15 certainly very, very consistent with what we were 16 telling everyone in the conversation I just 17 related to you. 18 Q. Take a look at Tab 910, Exhibit B1410. 19 Do you remember we talked about your -- I think we 20 talked about the mortgage-backed securities 21 statement of strategies and objectives, and we 22 also talked about the investment versus trading 15858 1 memorandum. 2 Do you recall that at the end of 3 yesterday afternoon? 4 A. Yes, sir, I do. 5 Q. Now, take a look back in here under -- 6 I think it's KPMG 024417. That says, "United 7 Financial Group high-yield corporate securities - 8 statement of strategies and objectives." There it 9 says, "Investment portfolio. The objective of the 10 portfolio will be to invest in a diversified group 11 of corporate debt securities which will generate a 12 long-term positive net interest spread over the 13 life of the investment. The securities will be 14 funded with a combination of short- and long-term 15 liability sources which will maximize the net 16 interest spread while maintaining prudent interest 17 rate risk exposure." 18 Do you see that? 19 A. Yes. 20 Q. It says, "It is management's intent to 21 hold each security on a long-term basis; however, 22 sales of such securities may be executed from time 15859 1 to time to" -- then it lists a number of things. 2 THE COURT: Mr. Guido, I don't think we 3 need to read all that. 4 MR. GUIDO: Okay. Fine, Your Honor. 5 Q. (BY MR. GUIDO) See that category? 6 Anywhere does that say that sales were to be made 7 out of the high-yield bond portfolio in order to 8 generate gains to bolster quarterly profits? 9 A. No, sir. I don't see those words in 10 that category at all. 11 Q. All right. I would like to now show 12 you a document which has been marked as A10690, 13 which is a memo from you to Art Berner dated 14 November 7th, 1986. It says, "Please arrange to 15 have the attached policy adopted at the investment 16 committee." 17 THE COURT: Have you read this 18 document? 19 THE WITNESS: Yes, sir, I have. 20 THE COURT: What's your question, 21 Mr. Guido? 22 Q. (BY MR. GUIDO) Anywhere in that 15860 1 document does it say that sales were to be made 2 out of the high-yield bond portfolio in order to 3 generate gains to bolster quarterly profits? 4 A. No, sir, I do not see those words. 5 Q. Now, the memorandum -- let's go back to 6 the memorandum, the January 5th memorandum, 7 Exhibit B1410, Tab 910. This is a copy of the 8 advice that we discussed last evening that was 9 given by Joe Parsons to you regarding investment 10 versus trading account. 11 Do you recall that? 12 A. I do. 13 Q. I would like to direct your attention 14 to the last page of that document. 15 A. The last page of Mr. Parson's memo. 16 Q. His memo, which is KPMG 024415, do you 17 see that? 18 A. Yes, sir. 19 Q. It says, "PM's recommendation. In 20 order to document the propriety of the accounting 21 treatment for the junk bond and mortgage-backed 22 securities portfolios, we would recommend: (1) a 15861 1 clear statement of strategy" -- 2 THE COURT: Mr. Guido, let the witness 3 read that. 4 MR. GUIDO: Okay. 5 A. (Witness reviews the document.) Yes, 6 sir. I've read this. 7 Q. (BY MR. GUIDO) Now, it talks about 8 documentation requirements. 9 Do you see that? 10 A. I do. 11 Q. It talks about documentations relating 12 to purchases should be expanded such that it 13 includes a statement as to the intent of 14 management. 15 Do you see that? 16 A. I do. 17 Q. Was that done? 18 A. I don't remember the specifics of 19 whether this and the other things were done. I 20 remember this memo; and I remember Mr. Wolfe and 21 Mr. Williams, Bruce Williams, and Russell McCann 22 and I got together and had numerous meetings and 15862 1 discussions to address the need for documentation 2 and the suggestions that Peat Marwick were making. 3 Q. Discussions with whom? 4 A. Between myself, Russell McCann, Jim 5 Wolfe, and Bruce Williams. 6 Q. So, you remember having discussions. 7 Do you remember whether or not you 8 adopted the documentation suggestion relating to 9 purchases that are set out in Bullet No. 2 on 10 Page 3 of Exhibit B1410? 11 A. No, sir, I don't remember specifically 12 what we did to address Joe Parson's memo. But I 13 remember we did meet, did address it. But as to 14 what we did, I don't remember. I mean, we 15 didn't -- I didn't -- you know, I was looking 16 for -- when I got a memo from Peat Marwick, I paid 17 attention to it; and we tried to address these 18 things. 19 Q. Look at the next one. It says, 20 "Documentation relating to sales on significant 21 gains should be expanded such that it includes a 22 statement as to the intent and strategy supporting 15863 1 the sale." 2 Do you see that? 3 A. Yes, sir, I do. 4 Q. Do you remember me asking you a number 5 of questions about the investment committee 6 minutes, whether or not you could tell whether or 7 not the purpose of the sale was to generate gains 8 to bolster quarterly profits? 9 A. I do. 10 Q. You said you couldn't tell. Right? 11 MR. NICKENS: Your Honor, he directed 12 him to specific pages, not the entire investment 13 committee minutes. 14 Q. (BY MR. GUIDO) Do you remember I 15 directed you to specific pages? 16 A. On the specific pages that you directed 17 me to, I didn't see a statement of purpose, no, 18 sir. 19 Q. Okay. Was a decision made by you not 20 to adopt the recommendations that were suggested 21 by Peat Marwick? 22 A. No, I don't remember any such decision. 15864 1 It's possible I may not have bought off on some of 2 the recommendations, but I don't remember that. 3 Q. Well, do you know why the investment 4 committee minutes that we went through that 5 post-date this memorandum don't contain the 6 documentation that was suggested by Peat Marwick? 7 A. Well, I don't know why. I've got a 8 guess, that I would assume you would -- you know, 9 I got a -- a limited view of the universe. 10 Q. Pardon? 11 A. You addressed me to specific sections 12 of those documents. 13 Q. Right. 14 A. Yes, sir. 15 Q. You saw specific sections of the 16 documents -- 17 A. That you directed my attention to. 18 Q. Do you have any -- do you have any 19 understanding of why it didn't include the 20 documentation that was suggested by Peat Marwick? 21 A. Well, you're -- I'm not trying to be 22 smart, but you're trying to prove a point. And I 15865 1 would assume you're not going to show me some 2 section that -- that -- that would indicate a 3 purpose, sir. I was looking at what you gave me, 4 and what you gave me didn't indicate a purpose. 5 Q. All right. And so that in terms of the 6 lack of documentation that was reflected there, 7 you're saying it's because I selectively gave you 8 documents? Is that what you're saying? 9 A. Well, I'll put it like this. I didn't 10 go through a thorough review of all of the 11 investment committee minutes. And before I could 12 reach a conclusion that we did or did not adopt 13 such a recommendation, that's what I would want to 14 do, sir. 15 Q. Well, did you adopt the recommendation 16 on documentation for the purposes of purchases and 17 the purposes of sales that were recommended by 18 Peat Marwick? 19 A. The items listed on Page 3? 20 Q. That's correct. 21 A. I don't remember whether we -- what we 22 specifically did. I tried to relate to you a 15866 1 sense that -- you know, I didn't get this memo and 2 say, "Oh, gee. This is interesting," and pitch it 3 aside. We -- I recall very distinctly having 4 meetings with the individuals I mentioned; and 5 specifically, Russell McCann was responsible 6 for -- you know, I viewed Mr. McCann as a person 7 who was to work on documentation, work on 8 correlation analyses, and basically track around 9 after Sandy Laurenson and make sure we had things 10 documented correctly. 11 Q. And were the investment committee 12 minutes structured in such a way, based on your 13 recollection, to include the documentation that 14 was required by Peat Marwick on Page 3 of that 15 exhibit? 16 A. I don't remember, sir. 17 Q. Now, do you remember when I showed you 18 a memo by Gerald Williams yesterday and you said 19 that you were surprised at the yearly cost of the 20 swaps at the USAT level? 21 Do you recall that testimony? 22 A. Yes, I remember seeing a number, and it 15867 1 looked pretty large to me. But that was just my 2 offhand comment. 3 Q. Do you recall that we looked at a 4 memorandum that you wrote with regard to the 5 Smith Breeden presentation in the middle of 1986? 6 A. I do remember talking about the 7 Smith Breeden presentation. 8 Q. That is A10649, which is at Tab 157. 9 Tab 187. I'm sorry. Tab 187, A10649. 10 THE COURT: What is the exhibit number, 11 Mr. Guido? 12 MR. GUIDO: A10649. It's a Mike Crow 13 memo to Jenard Gross and Gerry Williams dated 14 July 3rd, 1986. 15 THE COURT: Thank you. 16 Q. (BY MR. GUIDO) Do you see that? 17 A. I have that memo, yes, sir. 18 Q. And do you see that -- look under the 19 Bates on US3007274. Look at that page number. 20 A. Yes, sir, I'm there. 21 Q. Okay. Do you see where it shows a -- 22 looks like a positive figure of about 28 million 15868 1 for the mortgage pools? 2 A. I do. 3 Q. Do you see where it has a negative 4 number of about 86 million for the swaps, caps, 5 and collars? 6 A. Yes, sir, I see that. 7 Q. And do you see the total of about 8 58 million? 9 A. Yes, sir. 10 Q. The negative figure of 58 million? 11 A. Negative 58, yes. 12 Q. Prior to the Smith Breeden 13 presentation, were you aware of what the status 14 was of the mortgage-backed securities portfolio in 15 terms of its market value? 16 A. I don't remember whether I was or was 17 not. I think we had to -- I'm pretty darn sure we 18 had to disclose in the financial statements, in 19 the notes to the financial statements, the 20 mark-to-market value of our investment securities, 21 including mortgage-backs. So, I think I must have 22 been aware. 15869 1 Q. Well, did you disclose in those 2 financial statements the mark-to-market on the 3 swaps, caps, and collars? 4 A. I don't know. I don't know. We can 5 look at the financials. I just don't remember. 6 Q. So, it's -- whatever the financial 7 statements say, you're willing to accept? 8 A. Yes, sir. 9 Q. Now -- 10 A. You know, we reported in the notes to 11 the financial statements -- the thing that I 12 remember is the mark-to-market on the 13 mortgage-backed securities. And when it -- when 14 it turned negative, we put it on the face of the 15 balance sheet as well as the footnotes. But I 16 don't remember whether we put the swap 17 mark-to-market, so to speak, in the footnotes or 18 not. 19 Q. When you put the mark-to-market loss on 20 the mortgage-backed securities on the face of the 21 balance sheet, that wasn't done in a way that 22 followed through to what net worth was, was it? 15870 1 A. Could you -- I don't quite you 2 understand your question. 3 Q. Let me rephrase the question. 4 When -- you said when the losses, 5 unrealized losses, existed in the mortgage-backed 6 securities, it's listed on the footnotes and on 7 the face of the balance sheet. 8 Do you recall that testimony? 9 A. Yes, sir. 10 Q. What did you mean by that? 11 A. Well, in -- the best of my memory, in, 12 like, '85 and '86, the mark-to-market on the bond 13 portfolios were positive. In other words, the 14 market value was in excess of the book value. And 15 my memory is that in '87, that went negative, 16 turned upside down. And so, we put the -- a 17 notation on the face of the balance sheet by the 18 "investment securities" line, market value of 19 investment securities, and listed the number 20 there. And then I think we also disclosed it in 21 the footnote so that -- you know, a guy reading 22 the balance sheet would say, well, book value, 15871 1 you've got $2 billion of securities but the market 2 value is only worth 18 billion or whatever it was. 3 Q. And when you're discussing the 1987 4 financials, are you talking about the December 31, 5 1987 10K for UFG? 6 A. I don't remember exactly when we did 7 that. It very well may be. Seems to me it was 8 '87. I guess it must have been '87 because I 9 didn't make it to do the '88. 10 Q. Was that before or after accounting or 11 SEC requirements required something -- a 12 disclosure greater than in the footnotes? 13 A. I don't remember a specific reasoning 14 for doing that, sir. 15 Q. Now, I would like to direct your 16 attention to a Document A1419, which is at 17 Tab 350. It's the November 25th, 1986 minutes of 18 the investment committee. 19 A. (Witness reviews the document.) Okay. 20 Q. Do you have that? 21 A. Yes, sir, I do. 22 Q. I would like to direct your attention 15872 1 to the last two pages of the document, the Bruce 2 Williams memo of November 24th, 1986. 3 A. Okay. 4 Q. See on the first page of this 5 memorandum, it says, "Interest rate swap 6 mark-to-market at 11/19/86 of $122 million"? 7 A. I see that. 8 Q. Do you know why that increased from the 9 $86 million that is in your July 3rd, 1986 10 memorandum? 11 A. Factually, I don't remember. But I 12 just -- intuitively, interest rates must have 13 shifted. Interest rates must have moved. 14 Q. Now, were sales made out of the 15 mortgage-backed securities portfolio after the 16 initial Joe Phillips rolldown that occurred 17 between January and the end of March of 1986? 18 A. Were sales made out of the 19 mortgage-backed securities portfolio after the 20 rolldown? 21 Q. Uh-huh. 22 A. Yes. 15873 1 Q. Okay. In 1986? 2 A. Okay. I thought you just meant for all 3 time. If you limit me to 1986, I don't know. 4 Q. Now, look at the second page of Bruce 5 Williams' document. Do you see -- it says, "Based 6 on our portfolio of October 31, '86, the estimated 7 net spread on the MBS arbitrage, excluding the new 8 MBS subsidiary and AMPs, is negative .99 percent." 9 Do you see that? 10 A. I do see that. 11 Q. Do you know how that came about? 12 A. Well, I've got a good idea. The -- 13 the -- the portfolio that Mister -- I guess that 14 Bruce is talking about in this memo is 15 1.1 billion, and that would have included Joe's 16 portfolio. So, there will be Joe's portfolio in 17 there and then some other stuff. But I do 18 remember that as it relates to Joe's portfolio, 19 the spread, without giving any benefit -- that the 20 earnings restatement caused to basically increase 21 capital. Without giving any benefit to that, just 22 the raw net spread, I think, went negative. 15874 1 Q. Is that because the coupons that were 2 purchased to substitute for those that were sold 3 were significantly lower than those that had 4 previously been sold? 5 A. I don't -- that isn't the way I would 6 explain it, no, sir. 7 Q. How would you explain it? How come the 8 spread went negative? 9 A. Just in Joe's portfolio -- and this 10 includes more than Joe's portfolio. But just in 11 Joe's portfolio, in my words, the portfolio went 12 negative because it started out with 13 mortgage-backed securities with coupons and let's 14 just say yields of 13 percent, let's say. You had 15 interest rate swaps that were entered into that 16 had a cost rate of roughly, just to use an 17 example, 12 percent. And those two items were 18 roughly duration matched; so, therefore, you had a 19 1 percent spread. When interest rates declined 20 rapidly and, more specifically, prepayment rates 21 exploded, the asset base shrunk and, all of a 22 sudden, the 13 percent coupons that you had or the 15875 1 13 percent yields were shrinking dramatically. 2 And another way to express that is the duration 3 is -- is decreasing. So, you had a longer 4 duration on the liabilities type side and a 5 shorter duration on the asset side. So, the 6 rolldown, you know, attempted to lengthen that 7 duration back out. And the net effect of all that 8 is the yield was lowered. 9 Q. Okay. Well, maybe we can follow up 10 with that with another question. 11 A. Okay. 12 Q. That is -- take a look at your memo 13 summarizing the Smith Breeden presentation back at 14 US3007273. 15 Do you remember the three figures that 16 I gave you? 17 MR. GUIDO: It's Exhibit A10649. 18 A. (Witness reviews the document.) 19 Q. (BY MR. GUIDO) Do you see where it 20 shows "mortgage pools, 28 million positive figure 21 approximately under the base" page? 22 A. Yes, sir. I guess they are talking 15876 1 about mark-to-market here. Yeah, it's a 2 liquidation basis. 3 Q. Then it says 86 million negative for 4 the swaps, caps, and collars? 5 A. Yes, sir. 6 Q. Then you have a total negative figure 7 of 58 million. 8 Do you see that? 9 A. I do see that. 10 Q. Now, take a look at Bruce Williams's 11 memo, okay, on the first page. See where it says, 12 "MBS gains unrecognized at 11/19/86: 12 million." 13 Do you see that on the first page? 14 A. I do. 15 Q. That's -- then it shows interest rate 16 swap mark-to-market of a minus 122? 17 A. I see that. 18 Q. That gives you a minus of 110, doesn't 19 it, in terms of market value or liquidation value? 20 A. From -- I didn't quite follow you 21 there, Mr. Guido. 22 Q. If you take the unrecognized gains, 15877 1 $12 million -- 2 A. Okay. 3 Q. -- and subtract that from the loss on 4 the interest rate swaps, 122 -- do you see that? 5 A. I see that. 6 Q. Then you have a minus 110 million. 7 Right? 8 A. I would get the same number subtracting 9 those two figures. 10 Q. That's between -- so, the two dates, if 11 you look back on your summary of the Smith Breeden 12 analysis, that was as of May 30th, 1986. Right? 13 A. It appears to be, yes, sir. 14 Q. And that shows a net negative figure of 15 58 million. 16 Do you see that? 17 A. That's what it shows, yes. 18 Q. And if you look at the Bruce Williams 19 memo, that's a negative 110. Right? 20 A. I see -- yeah. 21 Q. Do you know what happened in the 22 interim period of time to make that net loss 15878 1 figure increase? 2 MR. NICKENS: Your Honor, I have an 3 objection. We're comparing -- the question asks 4 the witness to compare and suggests that they are 5 comparable, and what we're do dealing with is a 6 collection of some apples and oranges with a 7 different collection of apples and oranges. For 8 example, Mr. Williams' memo refers to a total 9 portfolio of a billion one and the memo he's 10 reviewing shows a portfolio of a billion nine. 11 There's 800 million of unexplained assets that 12 he's asking him to compare. They are not 13 comparable without some further information. 14 THE COURT: Well, the question was 15 whether he could account for the difference. 16 MR. GUIDO: That's correct, Your Honor. 17 That was my question. 18 THE COURT: All right. 19 A. Well, believe it or not, before 20 Mr. Nickens' objection, I was going to say it 21 looks to me that the assets that Smith Breeden has 22 picked up is a more global presentation of 15879 1 1.9 billion and Mr. Williams picked up 2 1.1 billion. So, I'm -- I'm not sure I could 3 compare the two. 4 Q. (BY MR. GUIDO) When you testified 5 that sales were made out of the mortgage-backed 6 security portfolio in order to generate gains to 7 bolster quarterly profits, what quarters were you 8 referring to? 9 A. I can't -- can't give you specific 10 quarters. I just -- I don't -- I don't know. 11 Q. Was it more than one quarter? 12 A. Yes, sir. 13 Q. Was it more than two quarters? 14 A. I can't really accurately answer that. 15 I don't know. 16 Q. Okay. It was a number of quarters, 17 though, was it not? 18 A. I think it was certainly more than one. 19 Q. Now, you testified that you managed the 20 portfolio, a member of the investment committee, 21 to achieve certain objectives. 22 Do you recall that testimony? 15880 1 A. No, sir, I don't. 2 Q. Okay. Let me ask you the question. 3 What was the objective in managing 4 USAT's mortgage-backed securities portfolio? 5 A. Well, the -- the management of the 6 portfolio would have been the portfolio manager 7 which would have been, in most of the cases we're 8 discussing, Sandy Laurenson. And the objective as 9 I saw it, ignoring these -- the trading account, 10 the overall objective was spread income. 11 Q. And what happened to the spread during 12 the period of time that USAT held a 13 mortgage-backed security portfolio at the USAT 14 level? 15 A. Ignoring Sandy's sub? 16 Q. Ignoring Sandy's sub. 17 A. The spread on Joe's portfolio went down 18 dramatically. 19 Q. Okay. Do you recall what it was when 20 it was a positive spread? 21 A. No, sir, I really do not. The number 22 1 percent sticks in my mind; but as to whether 15881 1 that's accurate or not, I don't know. 2 Q. Did it eventually go to a negative 3 2 percent? 4 A. I don't remember. 5 Q. If the documents would show that it 6 went to a negative 2 percent, would you have any 7 reason to dispute the accuracy? 8 A. Well, didn't this Bruce Williams memo 9 we were looking at address that? 10 Q. Well, it said as of November 19th, it 11 went to minus .99. 12 A. Okay. But it seemed to me that you've 13 got to give some credit to the capital that was 14 raised. I think that was Bruce's bottom-line 15 conclusion. But in terms of the specific answer 16 to your question, I don't remember where the 17 spread went. 18 Q. Okay. But it did turn negative? 19 A. I think the -- the spread, without any 20 benefit of adding back in the benefit of the 21 capital created, certainly turned negative, yes, 22 sir. 15882 1 Q. What were the gains used for that were 2 generated out of the sales of the mortgage-backed 3 securities at USAT? 4 A. I can't -- that's a very, very 5 difficult question to answer because in a large 6 financial institution, a gain is booked and, let's 7 say -- for whatever reason. Let's say we sold 8 Weingarten Realty stock and we made $20 million 9 and, therefore, that increased capital by 10 20 million. I've never had -- we didn't track how 11 that 20 million would be used. It just went into 12 the capital pool. And that's the way I've always 13 known financial institutions to do it, not 14 specifically identify that this sliver of capital 15 is going to be used for this, and this for another 16 purpose. 17 Q. Well, let's look at Tab 564, A5017, 18 which is the performance report for December 1986. 19 Look at the fourth page of the exhibit, which is 20 the cover page of the December 1986 performance 21 report from Kurt Schwenkel to Jenard Gross and 22 Mike Crow dated February 6th, 1987. 15883 1 Do you see that? 2 A. I do. 3 Q. Look under "total 1986." Do you see 4 where it says "gain on sales of securities of 5 $817 million"? 6 A. I see that. 7 Q. Look at the net income figure for the 8 entire institution at that time. What's that 9 show? 10 A. The net income period for the year 1986 11 was a net loss of 36.3 million. 12 Q. Doesn't it follow from that that the 13 $81.7 million had the effect of reducing losses 14 that had been incurred by other operations at 15 USAT? 16 A. I think we can certainly agree with 17 that, Mr. Guido. It's -- that's the reason we 18 configured our income statements this way, so that 19 it showed pretty clearly that core earnings were 20 pretty bad and that you had all this non-interest 21 income stuff, gain on sales of securities, gain on 22 sale of branches, et cetera, that, you know, 15884 1 were -- were -- were keeping the earnings up as 2 best we could. 3 Q. Now, USAT did various sensitivity 4 analyses or liquidation analyses of its portfolio, 5 one of which was in the -- was done by 6 Smith Breeden. 7 Do you recall that? 8 A. Yes, I remember the Smith Breeden. I 9 think they used the word "liquidation." And then 10 I think Sandy Laurenson -- it wasn't a total 11 company approach; but certainly for her 12 portfolios, she presented mark-to-market weekly, I 13 believe. 14 Q. And did she do that for the old Joe's 15 portfolio, as well? 16 A. I think so. 17 Q. All right. I would like to direct your 18 attention to A1464, which are the minutes of the 19 investment committee of September 30, 1987. 20 THE COURT: What part of that document 21 are you referring to, Mr. Guido? 22 MR. GUIDO: Your Honor, it's US3006494, 15885 1 which is the sensitivity analysis as of 2 September 30, 1987. 3 MR. BLANKENSTEIN: Mr. Guido, can you 4 give us that page number again? 5 MR. GUIDO: US3006494. 6 Q. (BY MR. GUIDO) Do you see that 7 sensitivity analysis? 8 A. Yes, sir, I do. 9 Q. Now, that shows, for the USAT-related 10 entities, a net loss mark-to-market of 11 $286,890,000 as of that date. It shows that 12 the -- 13 MR. NICKENS: Your Honor, I'm not 14 following. 15 THE COURT: Where is that figure? 16 MR. GUIDO: It's the very last line. 17 It's the "net total all" line. 18 MR. NICKENS: This one? 19 MR. GUIDO: Yeah. 20 Q. (BY MR. GUIDO) That's taking all 21 assets and all hedges. Right, Mr. Crow? 22 A. Yes, sir. It appears to be -- assuming 15886 1 this is all of our hedges, it appears to be taking 2 assets and hedges and arriving at a bottom-line 3 number. 4 Q. 286 million. Do you see that? 5 A. I do see that. 6 Q. And it shows total all, 373 million, 7 going up. If interest rates go up 100 percent, 8 the net loss would increase to negative 373. 9 Do you see that? 10 A. I do. 11 Q. If interest rates went down 100 basis 12 points, it showed the net loss would reduce to 13 about $223 million. 14 Do you see that? 15 A. I do see that. 16 Q. Are all of those figures significantly 17 higher than the net worth of USAT in 1987? 18 A. Well, let's see. I really don't 19 remember, but I'm -- I'm sure they are if you 20 asked me that question. 21 Q. And are those numbers significantly 22 higher than the numbers that were in the 15887 1 Smith Breeden report as of July -- I think it was 2 May 20th of 1986 that you have in your July 3rd 3 memorandum which is Exhibit A10649? 4 A. Yes, sir. I remember they were higher. 5 And the asset values, you know, were -- I think 6 the Smith Breeden document was referring to about 7 a billion nine or so. And this is referring to 8 roughly 3.1 billion in assets. 9 Q. Now, the May -- the June 3rd memorandum 10 that you wrote summarizing the Smith Breeden 11 report, that was after the rolldown that Joe 12 Phillips had engaged in, was it not? 13 A. I believe it was, yes, sir. 14 Q. Okay. Now, what happened between that 15 time period and September 30th, 1987, to have 16 caused the increased losses on the mark-to-market 17 value of the institution's holdings of 18 mortgage-backed securities and related hedge 19 instruments? 20 MR. NICKENS: Just for the record, I 21 object. He's comparing two very different 22 portfolios. 15888 1 THE COURT: Denied. 2 Q. (BY MR. GUIDO) What happened? 3 A. Could you repeat that question, please? 4 Q. What happened between the time you 5 wrote your memorandum summarizing the 6 Smith Breeden report which was after the rolldown 7 and September 30, 1987, to have created this 8 increase in mark-to-market losses? 9 A. I can't say factually but -- because I 10 don't know, but I suspect interest rates must have 11 moved. 12 Q. Well, if you had hedges on that were 13 designed to protect against interest rate moves, 14 shouldn't the effect have been minimal? 15 A. Not at all. 16 Q. Why not? 17 A. Because the hedges were designed to 18 hedge an interest rate expense number. They were 19 not designed to hedge asset values. 20 Q. So, are you telling me that you put 21 hedges on and you put them on only to hedge an 22 interest rate and not to protect the market value 15889 1 of the financial instruments? 2 A. There may have been minor exceptions to 3 that rule; but for the most part, our hedges were 4 designed to hedge an interest expense level, an 5 interest rate expense level, so as to create a 6 stream of net interest income because if you hedge 7 both the interest rate expense level, which you 8 kind of have to because you have a huge gap -- you 9 have long-term mortgage-backed securities funded 10 by 30-day liabilities. So, you've got to close 11 that gap or at least hedge it. And if you also 12 hedge asset values, there's -- there's not going 13 to be any spread. It would be out of the box. It 14 would probably be less than zero because you've 15 got no risk. You would have an agency credit; so, 16 you don't have any credit risk. So, I don't -- 17 Q. Let's take a look at T4364 at Tab 877. 18 This is a memo to Charles Hurwitz, Jenard Gross, 19 Barry Munitz, and Art Berner. Do you see -- it 20 says, "Attached are a few overview comments 21 related to the strategic planning committee 22 Monday." It says, "Michael Crow." Is that your 15890 1 handwriting? 2 A. Yes, sir, it is. 3 Q. And is the document that's attached to 4 that the -- dated 5/1/1987 a document that you 5 provided to those individuals? 6 A. I either wrote this or it was written 7 under my direction. 8 Q. Okay. Now, take a look at the very 9 last page. 10 A. (Witness complies.) 11 MR. GUIDO: It's OW011375, the imaging 12 number. 13 MR. NICKENS: Not on our copies. 14 MR. GUIDO: OW011622 in the document 15 that's in the record. 16 Q. (BY MR. GUIDO) Do you see that page? 17 A. The last page? 18 Q. The very last page of the exhibit. 19 It's OW011375 in the document that's in the 20 record. 21 MR. GUIDO: The reason that the imaging 22 numbers are this way is that the document appeared 15891 1 in a number of different places in the OTS's 2 production of documents. Sometimes one of us have 3 one rendition of the document; and other times, we 4 have others. 5 Q. (BY MR. GUIDO) See the Bullet Point 6 No. 1, "Interest rate risk of mortgage-backs is 7 very high and to achieve significant spreads 8 cannot be hedged away." 9 Do you see that? 10 A. I do see that. 11 Q. Now, was one of the reasons that there 12 were the losses in the mark-to-market is because 13 USAT attempted to achieve spreads greater than 14 100 basis points on its mortgage-backed security 15 portfolio? 16 A. No, sir. I think the reason it had 17 mark-to-market losses is that there was never -- 18 for the most part -- at least, I can't remember 19 any big hedges for -- on the asset side that 20 hedged the asset values. 21 So, as interest rates went up and down, 22 the mark-to-market of that portfolio would follow. 15892 1 Q. So, what your testimony is is that the 2 reason that that occurred, the losses occurred, 3 was that USAT made no effort to hedge the asset 4 value in the mortgage-backed security portfolio? 5 MR. NICKENS: Your Honor, I would ask 6 what losses? Is he talking about the unrealized 7 losses on the mark-to-market or some other losses? 8 MR. GUIDO: That's correct. The 9 mark-to-market losses, Your Honor. 10 A. I guess, Mr. Guido, my experience at 11 First City and then followed at United, that banks 12 and thrifts simply had large investment portfolios 13 and they attempted to hedge the interest rate risk 14 associated with that. But they did not get in and 15 attempt to -- at least in my experience, attempt 16 to hedge the market value of the assets because it 17 was -- the objective was spread income and that 18 portfolio was going to be held for quite some 19 time. 20 Q. (BY MR. GUIDO) Now, the portfolios at 21 the predecessor bank -- what was the name of that 22 bank again? 15893 1 A. First City. 2 Q. First City. Those weren't 3 mortgage-backed securities, were they? 4 A. I think, for the most part, not. I 5 don't even know whether we had any mortgage-backs 6 because mortgage-backs were a pretty new 7 instrument. We might have had a few. 8 Q. Now -- 9 A. But certainly we had a massive 10 portfolio of other types of securities that would 11 behave similarly. 12 Q. All right. But at the bank, the 13 predominant securities were what type of 14 securities? 15 A. Government agency securities, Fannie -- 16 Federal Home Loan Bank, you know, any type of 17 government agency securities. Treasury 18 securities. Municipal securities. I believe we 19 had some corporate securities. 20 Q. Did those securities have the same 21 interest rate risk due to prepayments that 22 mortgage-backed securities had? 15894 1 A. Typically, they did not have options -- 2 many of them had call risk which, in effect, would 3 be an option. So, we did hold callable 4 securities, a lot of callable securities. So, 5 that's a -- it's not the same, but it's in the -- 6 they are cousins. 7 Q. But did the portfolio at the bank have 8 the magnitude of interest rate risk because of 9 prepayment options or cousins similar to USAT? 10 A. In terms of mark-to-market, it very 11 likely might have had more mark-to-market risk -- 12 Q. Well, the -- 13 A. -- but -- because the durations, you 14 know, tended to be a little longer. 15 Q. When interest rates moved -- 16 A. Yes, sir. 17 Q. -- in the mortgage-backed securities 18 market and they went down dramatically and went 19 back up -- 20 A. Yes, sir. 21 Q. -- what was the impact on the 22 portfolio? Did it recover? 15895 1 A. At United? 2 Q. Uh-huh. 3 A. Mark-to-market, when the -- just 4 ignoring everything else -- I mean, I can't quote 5 you chapter and verse. But I strongly suspect 6 when interest rates went down, the mark-to-market 7 of the investment portfolio, just looking at Joe's 8 portfolio, the mortgage-backed securities, I 9 strongly suspect that they went up in value. And 10 as interest rates went back up, they would go down 11 in value. 12 Q. Well, let's just take a look at the 13 sensitivity chart in A1464. It's the large 14 exhibit you have. It should be right -- 15 A. This one, yes, sir. 16 Q. Look at, again, US3006494. It's the 17 sensitivity analysis. 18 Do you see that? 19 A. I do. 20 Q. Okay. Now, do you know what the 21 various portfolios were at USAT? 22 A. I have a vague idea, yes, sir. 15896 1 Q. Okay. Which ones of those assets were 2 at the USAT level that you refer to as Joe's 3 portfolio? 4 A. I can't answer that question. 5 Q. All right. Let's go back to the very 6 last exhibit then. If you can't answer that 7 question, I have no further questions for you on 8 that document. 9 A. Okay. 10 Q. Take a look at the memo that you wrote 11 to Charles Hurwitz and Jenard Gross. The last 12 page again, Point 2, it says, "An almost black box 13 lack of understanding of these securities. This 14 area is very complex and is obviously not mastered 15 by the Wall Street firms. It is naive to think 16 UFG is on a parody level of understanding with 17 Wall Street." 18 Do you see that? 19 A. I do see that. 20 Q. Was it your view as of May 1st, 1986, 21 that USAT didn't understand -- the management of 22 USAT did not understand how mortgage-backed 15897 1 securities operated? 2 MR. NICKENS: Your Honor, the document 3 says 1987. 4 MR. GUIDO: I'm sorry. 1987. 5 5/1/1987. 6 A. As we've seen in many of my memos, 7 Mr. Guido, I tended to put things in a fairly 8 stark -- "the glass is half -- half empty instead 9 of half full" type language. But, yes, I think I 10 would conclude that -- you know, if you just want 11 to stack up the expertise that somebody like 12 Salomon Brothers would have with 40 Ph.D.s and 15 13 computers, I don't think there's any financial 14 institution in the country that could match that. 15 So, that would be my view. And it would, for the 16 most part, still be my view today. 17 Q. Would you give $3 billion to Michael 18 Crow, Charles Hurwitz, Jenard Gross, Barry Munitz 19 and Art Berner to oversee the mortgage-backed 20 securities arbitrage portfolio today? 21 A. Without a portfolio manager that was 22 experienced, no way. 15898 1 Q. With a portfolio manager that was 2 experienced? 3 A. Yes, sir, I would. 4 Q. Okay. 5 A. If I hired a -- I thought Ms. Laurenson 6 was highly, highly qualified. We had Dr. Mueller, 7 who was a Ph.D. who had worked for Freddie Mac. 8 We had Smith Breeden looking over our shoulders. 9 I personally, you know, gave the portfolio to 10 other research people from time to time. And so, 11 the answer is yes. Under those circumstances, 12 yes, I would. 13 Q. The portfolio lost -- the USAT 14 mortgage-backed security portfolio lost hundreds 15 of millions of dollars. 16 Do you know that? 17 A. No, I don't know that. 18 Q. So, you don't know that it lost -- that 19 the various portfolios lost hundreds of millions 20 of dollars? 21 A. No, sir. Are we talking about Sandy's 22 sub now? 15899 1 Q. I'm talking about all of the 2 mortgage-backed securities portfolios. 3 A. No, sir, I don't know that. 4 Q. At any point in time, did you ever do 5 an analysis of the mortgage-backed securities 6 portfolio to ascertain how they performed? 7 A. Yes, sir. 8 Q. Do you recall when that was? 9 A. Not exactly, but we did that 10 frequently. 11 Q. And did you do something to that effect 12 toward the end of 1987? 13 A. I don't remember, but I -- I've got a 14 feeling you're fixing to show me one. 15 Q. If I can find it, I'll show it to you. 16 It's the document that is submitted as part of the 17 December 1986 -- T4422, which is part of a packet 18 of materials that deal with strategic planning. 19 It is dated December 10th, 1987. 20 Do you have T4422 in front of you? 21 A. I do. 22 Q. Is that dated December 10th, 1987? 15900 1 A. Yes, sir, it is. 2 Q. It is from you to the strategic 3 planning committee? 4 A. Yes, sir, it is. 5 Q. Now, have you seen this document 6 before? 7 A. Yes, sir, I have. 8 Q. When did you last see this document? 9 A. It's been -- it's been awhile ago. But 10 I remember this from the deposition, and I've 11 certainly seen it since the deposition. 12 Q. Okay. Now, this is a memorandum that 13 you prepared. 14 Do you know why you prepared it? 15 A. I don't really remember why I prepared 16 it, whether somebody asked me to prepare it or I 17 just thought it was a good idea. 18 Q. Okay. Now, look at the first page of 19 the memo. It says, "Attached is a summary of the 20 results of United's restructuring program during 21 the last four years." 22 Do you see that? 15901 1 A. Let's see. I'm a little -- oh, the 2 cover memo? 3 Q. Yes. 4 A. Yes, sir, I see that. 5 Q. What does it refer to when it's talking 6 about United's restructuring program? 7 A. I think that would have to do with all 8 of the, you know, things like mortgage-backed 9 securities and high-yield bonds and equity 10 arbitrage, things like that. 11 Q. Does that include the changes that were 12 in your memorandum -- I think it was May 1985 -- 13 regarding the mission statement that was an 14 outcome of a retreat that the strategic planning 15 group held? 16 A. I would have to look at them, but I 17 think that -- that document, if I remember the 18 right one, was carried forward, yes. 19 Q. That was part of the restructuring 20 that's referred to in this T4422 document? 21 A. I don't remember specifically; but I 22 suspect so, yes. 15902 1 Q. Okay. Now, look at the memo. It talks 2 about where things stood as of the year 1983 and 3 after the 1984 branch sale. 4 Do you see that? 5 A. I do. 6 Q. It says that "United appeared to be in 7 a position to take advantage of a wholesale 8 strategy because of a number of things that 9 existed at that time." Right? 10 A. Yes. In that first paragraph? 11 Q. Uh-huh. 12 A. Yes, I see that. 13 Q. Does that paragraph accurately describe 14 your understanding of the financial condition of 15 USAT at the time it embarked on its restructuring 16 program? 17 A. I guess so. 18 Q. Okay. Now, then, see under "results"? 19 It says, "The results of the wholesale strategy 20 over the past three years have not been good." 21 Do you see that? 22 A. I do see that. 15903 1 Q. "Clearly, the collapse of real estate 2 values in Texas and the accompanying severe asset 3 quality problems have hampered the strategy." 4 Do you see that? 5 A. I do. 6 Q. "However, one cannot escape the fact 7 that irrespective of the market-created asset 8 quality problems, many of the major activities as 9 part of the wholesale activity have been 10 disappointing." 11 Do you see that? 12 A. I do see that. 13 Q. Now, one of those that it addresses, 14 the last two paragraphs, are the mortgage-backed 15 securities portfolios. 16 Do you see that? 17 A. The last two bullet points on that 18 page? 19 Q. Yes. 20 A. Yes, sir, I do see that. 21 Q. See it says, "United engaged in an 22 original mortgage-backed securities arbitrage 15904 1 program, often called Joe's portfolio, which has 2 averaged approximately 620 million over the 3 three-year period" -- 4 MR. RINALDI: 672 million. 5 Q. (BY MR. GUIDO) -- "672 million over 6 the period '85 through the current date. Over 7 this period, the portfolio has lost 57 million 8 producing an annualized return on assets of minus 9 2.67 percent"? 10 A. I see that. 11 Q. Do you know why those losses occurred? 12 A. Well, I would caution you. I don't -- 13 the 57 million, it probably includes 14 mark-to-market stuff. But in any case, the losses 15 or the going to a negative spread was back to the 16 explanation of the decline in interest rates 17 and -- and the -- that the swaps were long 18 duration and that your assets started melting 19 around -- excuse me -- melting away. And you had 20 to do something; so, we did the rolldown. 21 Q. Did you ever have any discussions with 22 anyone at USAT about your view that Joe Phillips 15905 1 waited too long to start the rolldown? 2 A. Not -- no, sir, I don't believe I did. 3 Q. Did you ever have any discussions with 4 anyone at USAT that Joe Phillips had waited too 5 long? 6 A. No, sir, I don't remember that coming 7 up. 8 Q. Did Joe Phillips wait too long for the 9 rolldown? 10 A. I don't know. And I don't -- quite 11 frankly, even with the benefit of hindsight, I'm 12 not sure I would be qualified to say. I'm not -- 13 you know, I've never managed a portfolio of 14 mortgage-backed securities. 15 Q. Now, look at the last paragraph. It 16 says, "United MBS Corporation was formed in 1987 17 and for the year averaged total assets of 18 1.5 billion. Counting mark-to-market losses, the 19 activity has lost 96 million for a negative return 20 of minus 5.99 percent." 21 Do you know why those losses occurred? 22 A. Well, they weren't -- again, they 15906 1 weren't -- this was on a mark-to-market basis. 2 And as I remember this memo, we're talking 3 December of 1987, shortly after the October 1987 4 stock market crash. So, I was not in a real rosy 5 mood during those time periods. 6 Q. Sir -- 7 A. And so, I think I wrote this memo to 8 communicate to people, you know, in a fairly stark 9 basis on the mark-to-market, if you look at it, 10 here's the way it is. But the fact is on an 11 investment portfolio -- on a spread portfolio, 12 bottom line, if interest rates are real high or 13 relatively high when you look at it, it's going to 14 look pretty bad. And if interest rates are 15 relatively low when you look at it, it certainly 16 might look pretty good. 17 Q. I thought you said that there were 18 hedges that were put on the mortgage-backed 19 security portfolio to protect against rising 20 interest rates. 21 A. Certainly, in the case of Joe Phillips' 22 portfolio, that is -- that is correct as it 15907 1 relates to the interest expense, yes, sir. 2 Q. What about for United MBS? 3 A. United MBS, Ms. Laurenson used a 4 variety of hedging vehicles: Futures, options, 5 caps. It was hedged on a different basis. 6 Q. Was it hedged to protect against rising 7 interest rates? 8 A. It was hedged to control the interest 9 expense figure to help the integrity of the 10 spread. From my memory, it was not hedged as to 11 asset values. 12 MR. GUIDO: No further questions, 13 Your Honor. 14 THE COURT: All right. We'll adjourn 15 until 2:00. 16 17 (Whereupon, a lunch break was taken 18 from 12:43 p.m. to 2:04 p.m.) 19 20 THE COURT: Be seated, please. We'll 21 be back on the record. I believe at the noon 22 recess, the direct-examination of Mr. Crow was 15908 1 complete. 2 Mr. Villa, are you going to cross? 3 MR. VILLA: Yes, Your Honor. I'll try 4 to keep it under six days. 5 6 EXAMINATION 7 8 Q. (BY MR. VILLA) Good afternoon, 9 Mr. Crow. 10 A. Good afternoon. 11 Q. We've known each other for quite 12 awhile, haven't we, sir? 13 A. More than I would have liked. 14 Q. Well, I don't know exactly how to take 15 that, Mr. Crow. 16 Mr. Crow, how old are you? 17 A. 51. 18 Q. Are you married? 19 A. Yes. 20 Q. Have you lived all your life in Texas? 21 A. Substantially all my life, yes. 22 Q. You have one daughter? 15909 1 A. I do. 2 Q. And where does she live? 3 A. Denver. 4 Q. Did I hear you're now a grandfather? 5 A. Yes, I am. 6 Q. Now, Mr. Crow, you had described to us 7 the progression of jobs you had from time to time, 8 particularly at First City Bank. Right? 9 A. Yes. 10 Q. How did First City National Bank 11 compare to the other Houston commercial banks at 12 the time that you left and at the time you were 13 working there? 14 A. Okay. At the time I was working there 15 and throughout the entire time, I think when I 16 left, it was the largest commercial bank in 17 Houston and second or third largest in Texas. As 18 I recall, when I left First City it was roughly -- 19 the lead bank was about 7 and a half billion, and 20 the holding company was around 15 billion in asset 21 size. 22 Q. Now, you told us you joined First City; 15910 1 and I think you gave us an entry level position; 2 is that right? 3 A. Yes, I did. 4 Q. And what was that position? 5 A. It was -- the job title was senior 6 acquisitions analyst. 7 Q. And what were your responsibilities 8 there? 9 A. My responsibilities during that time 10 period, First City Bank Corporation was the 11 holding company. And, basically, we were in the 12 business of acquiring other banks. And my job was 13 to be a number cruncher, if you will, to provide 14 analyses for the executives that were going to 15 negotiate a proposed transaction with the 16 prospective acquiree. 17 Q. So, in that job, did you have an 18 opportunity to look at the balance sheets of a 19 number of banks? 20 A. Yes, I did. And then after -- 21 typically, after a tentative deal would be 22 arranged, I would be part of a team that would go 15911 1 in and do a purchase investigation of the bank. 2 And I would look at the -- look at the balance 3 sheet, income statement, and various other 4 figures. And, of course, we had loan review 5 people, as well, that would look at the loan side. 6 Q. And through that job, would you learn 7 how, for example, investment portfolios were 8 handled by other banks? 9 A. Yes, I would. 10 Q. And how other banks booked income? 11 A. Yes. 12 Q. In fact, those were all essential to 13 your understanding of whether or not First City 14 ought to purchase such a bank; isn't that right? 15 A. Yes. As part of the purchase 16 investigation, what you were really looking for 17 were any obviously -- any bad loans. That was on 18 the loan side. But any -- I would call it funny 19 money type of accounting that -- where, you know, 20 they were inappropriately pumping earnings in one 21 year to make themselves look better. 22 Q. Now, sir, you told us that you became 15912 1 the chief financial officer of First City; is that 2 right? 3 A. Yes, sir. 4 Q. How old were you when you became the 5 chief financial officer? 6 A. 34. 7 Q. And did you become an executive 8 vice president at First City? 9 A. I did. 10 Q. How old were you when you became 11 executive vice president? 12 A. 35. 13 Q. Can you give us some idea generally 14 about the progression of accountants through major 15 financial institutions? Is it usual or unusual 16 for a 34-year-old to become the chief financial 17 officer of the largest bank in a city like Houston 18 or one of the largest in Texas? 19 A. It was a little unusual. Mostly, you 20 know -- I guess the typical CFO would be in the 21 mid-40s type age range. 22 Q. When you were made executive 15913 1 vice president of First City Bank at the age of 2 35, do you recall whether your age at the time was 3 younger than anybody else that had been elevated 4 to that position? 5 A. That's my memory, that there had -- I 6 always got kidded about that. 7 Q. Got kidded about what? 8 A. Well, the older guys -- the other 9 executive VPs would call me "Junior." So, I 10 remember that fairly distinctly. 11 Q. Now, you joined United in January of 12 1984; is that right, sir? 13 A. I did, yes, sir. 14 Q. Who recruited you to that position? 15 A. Gerry Williams. 16 Q. And how had you known Gerry Williams? 17 A. I had met or I had worked with Gerry 18 Williams for 10 plus years at First City. And I 19 had worked either around or for Gerry Williams 20 directly or traveled with him on, you know, 21 numerous occasions. So, we got to know each other 22 quite well. There were times where I was 15914 1 reporting to a competing executive with Gerry and, 2 you know -- so, it was -- you know, we knew each 3 other very, very well in a number of different 4 circumstances. 5 Q. Prior to being contacted by Gerry 6 Williams, had you been looking to leave First 7 City? 8 A. No, sir, not at all. 9 Q. Had you been approached by anybody else 10 while you were in the -- let's say in the year or 11 two prior to the time you left First City and 12 joined United, had you been approached by any 13 other banks or head hunters? 14 A. Yeah, sure. 15 Q. What had been your response to those 16 approaches? 17 A. To decline. I did look into some of 18 those opportunities. And, you know, things run in 19 cycles. And during -- certainly during the late 20 Seventies and real early Eighties, Texas bank 21 holding companies were viewed to be really pretty 22 good institutions and leaders, et cetera. And, of 15915 1 course, the oil debacle that this state had 2 changed all that. But during the time period that 3 Texas bank holding companies were very, very 4 successful, then a lot of people seek you out. 5 Q. Well, why did you leave First City to 6 go to United? 7 A. I really -- I had always liked Gerry 8 Williams a lot, and the opportunity that he 9 described and the other people I interviewed with 10 described at United appeared to be almost a bullet 11 point on my -- what I considered to be my 12 strength. 13 Q. What was that? First of all, how did 14 he describe the situation at United; and how did 15 it match your strengths in your judgment? 16 A. I had been -- I had had various jobs at 17 First City; and my strength, as I viewed it, was 18 to go into problem areas and change them and do 19 fix-it type exercises. And after it got up and 20 running, you know, I tended to want to do another 21 fix-it type exercise, like a problem bank that had 22 their accounting or systems all messed up. I 15916 1 liked that sort of activity. And Mr. Williams 2 explained that my primary objective at United was 3 that, that United had fairly severe problems in 4 financial accounting, financial reporting, 5 operations, and -- and data processing. And, you 6 know, it's -- you -- I had always wanted to be 7 where whatever I had to offer was -- was valuable 8 to the company. 9 Q. Now, as of the time that Mr. Williams 10 contacted you to consider coming to United, had 11 you had any prior contact with Charles Hurwitz? 12 A. I didn't -- it perhaps shows my 13 ignorance, but I did not know who Mr. Hurwitz was. 14 I don't believe I had ever heard of the man. 15 Q. Was there anyone at United other than 16 Gerry Williams that you knew when you arrived, 17 apart from the people that you interviewed with? 18 A. Yes, sir. I found out after I talked 19 with Gerry Williams that Mr. Whatley, Jim Whatley, 20 was on the board of United; and I had met 21 Mr. Whatley as a director of First City. And so, 22 that -- that was while I had no, you know, 15917 1 day-to-day activity with Mr. Whatley. That was 2 a -- certainly on the -- a strong plus side for me 3 going to United because I thought pretty highly of 4 Mr. Whatley. 5 Q. What, in general, is your opinion of 6 both Mr. Williams and Mr. Whatley as businessmen 7 and as bankers? 8 A. Very high integrity, no-nonsense, 9 hard-nosed, successful business people. 10 Q. Now, are you today a personal friend of 11 Charles Hurwitz'? 12 A. No, sir. 13 Q. What was the first time you met him? 14 A. I met Mr. Hurwitz after I had 15 interviewed with Gerald Williams a couple of 16 times. Gerry asked me to interview, I believe, 17 Sonny Bentley and Dr. Munitz and Mr. Hurwitz. And 18 that's the first time I had met Mr. Hurwitz. 19 Q. Now, we have heard that you left United 20 Financial Group -- you were dismissed from USAT at 21 the end of 1988 and left United Financial Group in 22 early 1989. From that time until today, excluding 15918 1 any time you may have bumped into Mr. Hurwitz in 2 the courtroom, how many times have you talked to 3 him either in person or over the phone? 4 A. Twice, that I remember. I think it's 5 two times. 6 Q. What were the circumstances generally? 7 A. I ran into Mr. Hurwitz at a -- my wife 8 and I were at a movie theatre and ran into 9 Mr. Hurwitz and thought it was kind of funny. He 10 had tennis shoes on. He didn't always dress in a 11 dark suit. And then -- the second time was about 12 probably a couple of years ago. I ran into 13 Mr. Hurwitz at a restaurant and on both occasions 14 just explained pleasantries, you know, like a 15 five-minute conversation. And my conversations 16 with Mr. Hurwitz always tended to -- you know, we 17 talked about the bond market or stock market or 18 something like that, just small talk. 19 Q. And you don't do business with Charles 20 Hurwitz or any of his companies today; is that 21 right? 22 A. No, sir. 15919 1 Q. Now, you began employment at USAT in 2 early 1984; is that right? 3 A. That is correct. 4 Q. Who did you report to? 5 A. Gerry Williams. 6 Q. And I know there may be difference over 7 the five-year time period that you worked at 8 United. When I talk about United, unless I 9 specify otherwise, I'm talking about United 10 Savings Association. When I talk about the 11 holding company, I almost always refer to it as 12 United Financial Group or UFG. If I make a 13 mistake, I'm sure somebody will point that out to 14 me. 15 When you were -- let's see. Looking at 16 that five-year time period, can you tell us, for 17 example, what a typical workday and work week were 18 like for you? 19 A. In the early -- early years, like in 20 1984, '85, and carried over probably pretty much 21 into '86, it was like get in around 7:30 and go 22 home about 7:00 or 7:30 and typically worked on 15920 1 Saturday from, you know, 9:00 to 4:00, something 2 like that. You know, sometimes there were special 3 projects that we would work on; and we would have 4 to work real hard. Like if we had a public 5 offering or something like that, we would work 6 real hard; and that's kind of typical. It was -- 7 it was fairly intense. There was a lot going on. 8 Q. Did you attend many scheduled meetings 9 during a typical work week? 10 A. Yes, sir, I did. 11 Q. Could you estimate for the Court how 12 many scheduled meetings you would attend during a 13 typical work week? 14 A. Oh, that's pretty tough. 15 Q. Let's go through the committees. Do 16 you remember the different committees you were on? 17 A. I do. Let's see. We had the real 18 estate committee, the loan committee, the 19 asset/liability committee, the investment 20 committee, whenever that was formed. We had the 21 computer conversion committee. We had the -- 22 Gerry Williams had something he called a group 15921 1 managers meeting which, you know, I went to. 2 There was the operations committee. There was 3 something called the general services committee. 4 And that's what I can remember of scheduled 5 meetings. And then I would have -- you know, I 6 would have staff meetings. I had various areas 7 reporting to me. And at least once a week, we 8 would have sit-down type activities of myself and 9 the three or four key people in that department to 10 just talk about what was going on, problems, 11 projects. If -- you know, any big fires that were 12 brewing or if somebody was mad and fixing to quit, 13 that sort of thing. 14 Q. And there were other meetings that 15 we've heard about that the OTS has raised. For 16 example, you would attend many board meetings at 17 least after the first couple of years; isn't that 18 right, sir? 19 A. Oh, yes, sir. I think I started 20 attending board meetings fairly early on at 21 United. I can't specify a time period. 22 Q. And you attended some strategic 15922 1 planning committee meetings? 2 A. Yes, sir, I did. 3 Q. So, I figured out -- and I'll be 4 corrected by you, I'm sure, if I'm wrong. But if 5 you average ten scheduled meetings a week over 6 five years, that comes out to 2600 meetings. 7 Does that sound about right? 8 A. I'll -- 9 Q. You'll rely on your lawyer for that? 10 A. Looks like Mr. Guido -- I assume you 11 can add. I would say it was safe -- in all 12 seriousness, even backing that number down, it 13 would have to be at least 1800; and then it's 14 probably, to be safe, 1800 to 3000, somewhere in 15 that area. 16 Q. And you chaired some of those meetings? 17 A. Yes, sir. 18 Q. And at many of the other meetings, the 19 issues were the focus of your attention? 20 A. Absolutely. 21 Q. Now, in terms of your main focus of 22 your work, some of the meetings were involved in 15923 1 your main focus. Others were, like, real estate 2 lending and real estate investment. Right? 3 A. That is correct. 4 Q. And was real estate lending and 5 investment the main focus of your work while you 6 were at USAT? 7 A. No, sir. 8 Q. What was your role on the real estate 9 lending and investment committees? 10 A. My role as I saw it and as I tried to 11 explain -- Gerry Williams was not the kind of 12 philosophical kind of guy to come in and say, 13 "Here's your role." It was just, "Here's your 14 list of committees. Go do it." 15 But my role, as I saw it, was to 16 provide a different quantitative viewpoint to the 17 real estate investment committee and the senior 18 loan committee. I think Gerry Williams, the 19 chairman at the time, Sonny Bentley, and certainly 20 everyone else were fairly familiar with my 21 background. 22 Q. Well, thinking back over the role that 15924 1 you played on the real estate committees -- and 2 I'll bunch them together because I know in your 3 testimony, you said you had a hard time 4 distinguishing between them. 5 Is it fair to say that, today, you 6 cannot recall the difference between a specific 7 real estate loan or real estate investment? 8 A. No, sir, not at all. 9 Q. Tell the Court why not. 10 A. Because when you get to specific 11 meetings -- I attended a lot of meetings and a lot 12 of committees. And my memory for better or worse 13 is if I, you know, had been from the ground up 14 grinding around in the numbers and been part of 15 the process of building the project, that's the 16 type of thing I remember. Or if there was a huge 17 problem with it or it was tremendously successful 18 like the Independent American branch sale, I tend 19 to remember things like that. But outside of 20 those three categories, I tend to be -- after the 21 passage of time, I just don't remember. 22 Q. Now, who was the general counsel of 15925 1 United Savings when you arrived? 2 A. Jim Pledger. 3 Q. Do you have an opinion of Mr. Pledger's 4 knowledge of federal and state regulations 5 governing savings and loans? 6 A. I didn't do an investigation of his 7 credentials at all, but Mr. Bentley followed me. 8 He was a -- I think the word he used was a Cracker 9 Jack regulatory lawyer. And from my observation 10 and just working with Mr. Pledger, he seemed to be 11 very aware of the -- of the area of regulatory 12 law, and he's moved on to be State -- I think his 13 title is State Savings and Loan Commissioner; or I 14 think he's the head guy, whatever his title is. 15 So -- 16 Q. For the State of Texas? 17 A. Yes, sir. 18 Q. Mr. Berner was not employed by USAT at 19 the time you arrived; isn't that right, sir? 20 A. That's correct. 21 Q. Was Mr. Gross an employee or an officer 22 of USAT at the time you arrived? 15926 1 A. No. 2 Q. And did he have any affiliation with 3 USAT that you recall? 4 A. At the time I arrived? 5 Q. Yes. 6 A. No, sir. I didn't know Mr. Gross. To 7 my knowledge, he had no affiliation. 8 Q. How about Ron Huebsch? Did he have a 9 position with United at the time you arrived? 10 A. I really don't know. I just don't 11 know. 12 Q. Was he performing any work for United 13 when you arrived? 14 A. You mean like in the first couple of 15 months? 16 Q. Right. 17 A. I don't know. I just don't know, 18 Mr. Villa. 19 Q. What is the first memory you have of 20 Ron Huebsch? 21 A. The first memory I have of Ron Huebsch 22 is -- I was involved with the interview process of 15927 1 Joe Phillips, and I remember Mr. Huebsch during 2 that time frame. And I -- you know, I certainly 3 may have met Mr. Huebsch before that and been 4 exposed to him. I just -- but the first time it 5 kind of pegs with my memory is the Joe Phillips 6 hiring. 7 Q. Can you try to tell us roughly when 8 that occurred, either by -- I know accountants 9 think in terms of quarters or month of the year or 10 year. I'll just say the first time you remember 11 him being actively involved with United. 12 A. I may be off, but it seems to me that 13 it was -- wasn't Joe Phillips hired, like, in late 14 '84? 15 Q. Unfortunately, I can't answer 16 questions. 17 A. Well, Mr. Phillips was hired, I am 18 quite confident, sometime in the year 1984 or '85. 19 Q. And it's in connection with that that 20 you first remember Mr. Huebsch's involvement? 21 A. Right. 22 Q. What was Dr. Munitz' position at United 15928 1 and UFG? 2 A. Well, Dr. Munitz was -- I think 3 Dr. Munitz was vice chairman of the board. That's 4 the title I remember. And Dr. Munitz was high up 5 on the totem pole that we talked about. He 6 certainly was higher than me. I believe he was on 7 the executive committees, and I believe -- you 8 know, from my observation, Dr. Munitz got involved 9 in strategic planning type issues, regulatory 10 Southwest Plan type issues, human resources type 11 issues in the form of hiring and firing and 12 compensation and bonus plans and all that sort of 13 stuff, and seemed to have kind of a liaison effect 14 with the board. But that's my memory. 15 Q. How often did you meet with Dr. Munitz 16 while you were working at United? How frequently, 17 I should say. 18 A. That's hard for me to characterize. It 19 was -- if I were working on something like a 20 strategic planning committee or working on 21 something that nobody else wanted to do and I had 22 been assigned and I needed help, Dr. Munitz would 15929 1 help me. And I might go a week and see him every 2 day, and then I wouldn't see him for three weeks. 3 So, in terms of an average, it was probably once a 4 week, twice a week. That's really hard to 5 characterize. 6 Q. Now, I would like to try to focus you 7 on the financial condition of United at the time 8 that you arrived. So, I'm going -- we have 9 notebooks -- I think most of these documents are 10 in evidence. One or two may not be in evidence 11 yet, but we have notebooks just to make it easier. 12 We have loose documents for you, I think, not in a 13 notebook. 14 15 (Discussion held off the record.) 16 17 Q. (BY MR. VILLA) Let me give you the 18 tab numbers. Let me direct your attention to the 19 first document, which is a 1983 10K which is 20 A3019, Tab 145. 21 Do you have that in front of you, sir? 22 A. I do. 15930 1 Q. Now, that's already been introduced in 2 evidence. Let's try to paint a picture of what 3 United looked like at the time you arrived. And 4 this Form 10K for the year ending December 31st, 5 1983, is what United looked like pretty much on 6 the day you arrived; is that right, sir? 7 A. That is correct. 8 Q. In a financial sense? 9 A. In terms of the financial condition, 10 yes, it would give a good summary. 11 Q. On Page 1, I would like you to take a 12 look under "savings and loan operations." 13 Do you see that? 14 A. I do. 15 Q. I'm not sure it's paginated as Page 1. 16 It's the first page of text. It says it's got 90 17 branches; is that right? 18 A. I see that, yes, sir. 19 Q. Is that your recollection of the size 20 of the association before the sale to Independent 21 American? 22 A. I knew we had, you know, somewhere in 15931 1 the -- 80 to 100 branches. It was a lot of 2 branches. 3 Q. And the asset size shown there is 4 $3.5 billion. Do you see that in the middle of 5 the page just above "savings and loan operations"? 6 A. Yes, sir, I do see that. 7 Q. Now, let's look at Page 2 for the size 8 of the loan portfolio. What is the total loan 9 portfolio, sir? 10 A. The total loan portfolio at the end of 11 1983 was 2,812,000,000. 12 Q. How much of that was home loans? 13 A. You would take home loan related 14 assets. You would take the 2,578,000,000 there 15 and deduct commercial and construction. So, 16 roughly 2.1 billion. 17 Q. And the commercial and construction 18 loans were 467 million; is that right? 19 A. That is correct. 20 Q. So, the home loans on commercial and 21 construction were about four to one at that point? 22 A. That's correct. 15932 1 Q. Now, you heard Mr. Schwartz ask you a 2 number of questions about the problems in USAT's 3 loan portfolio and the buildup of REO, real estate 4 owned. 5 Do you remember those questions, sir? 6 A. I do. 7 Q. Now, I'm going to use, as a dividing 8 point, the Tax Reform Act of 1986. Okay? 9 A. Okay. 10 Q. Which was -- I think we can agree which 11 was in the latter half of 1986. 12 What kind of loans were -- strike that. 13 If you looked at the composition of 14 USAT's REO, real estate owned, foreclosed loans, 15 slow loans, things like that in the time period 16 from when you arrived until the Tax Reform Act of 17 1986, can you tell me what you recall as to the 18 composition of that portfolio? 19 A. What I recall is that the bulk of that 20 problem was single-family residential home loans. 21 Q. And you lived in Houston; so, I think 22 you can tell us. 15933 1 Why were the number of residential 2 single-family home loans on United's books going 3 up? 4 A. Basically, it had to do with the energy 5 industry; and the number of jobs went down 6 precipitously. And a lot of people were having to 7 move out of the area. Real estate values, 8 especially in the single-family residential area, 9 were tumbling. And a loan that had been made in 10 the late Seventies or early Eighties which 11 appeared to be a safe loan at 80 percent 12 loan-to-value ratio -- all of a sudden, housing 13 values were down -- in some neighborhoods -- down 14 to the 60 percent area. And if a guy had lost his 15 job and he found a job in, let's just say 16 Birmingham, had to leave and he couldn't sell his 17 house, he would just walk the loan. That's -- 18 that's kind of a capsule of what I remember. 19 That's not a sophisticated analysis, but that's 20 the way I remember it. 21 Q. Can you explain to the Court what 22 scheduled items are? 15934 1 A. Scheduled items in an overall sense are 2 just problem assets. They are nonaccruing loans. 3 They are loans that are delinquent by quite some 4 margin. In other words, they are either 5 nonaccruing now or they are fixing to be 6 nonaccruing. 7 Q. Would you look at Pages 5 and 6 of the 8 10K and tell us how scheduled loans -- scheduled 9 items had changed over the year 1983 from the 10 beginning to the end of 1983. 11 A. It looks like at year end 1982, total 12 scheduled items were 31,740,000; and as of year 13 end 1983, they were 53,170,000. 14 Q. So, they essentially doubled in a year? 15 A. Not quite doubled, but they had gone up 16 a lot. 17 Q. Now, I would like to direct your 18 attention to Page 13. And let's talk about the 19 net income, net income trends, and the net income 20 of USAT from 1981 through 1983. Now, USAT at this 21 point was the result of a merger of two 22 associations; isn't that right, sir? 15935 1 A. That is correct. 2 Q. Houston First American and the old 3 United Savings. Right? 4 A. That's correct. 5 Q. Let's take a look at -- on Page 13. 6 Can you tell us what the net income for the year 7 1981 was? 8 A. For the year 1981, the net loss was 9 12.4 million. 10 Q. And for 1982? 11 A. It was 18.5 million. 12 Q. And for 1983? 13 A. It was a loss of 1.6 million. 14 Q. Now, those are all before tax numbers. 15 Right? 16 A. That's correct. 17 Q. Turn to Page 14 and tell me -- 18 A. Well, I think there was a tax benefit. 19 Q. They are after tax. Right? Look at 20 Page 14 and tell us what the loss was before 21 income taxes. 22 A. Since we're in a loss position, there 15936 1 was a -- it's kind of flipped on its head because 2 there was a tax benefit. 3 Q. So, looking at the years 1981, '82, and 4 '83 from Page 14 of the 10K, what was United 5 reporting in terms of its profit and loss? 6 A. In terms of loss before income taxes? 7 Q. Yes, sir. 8 A. In the year 1981, it was a 9 25.2-million-dollar loss. The year 1982, a 10 24.3-million-dollar loss. The year 1983, a 11 3.9-million-dollar loss. 12 Q. Let me direct your attention to Page 18 13 of the 10K and ask you to tell us whether you can 14 determine from that page in the year 1983 what the 15 goodwill amortization was for United. 16 A. In the year 1983, goodwill amortization 17 was $12.8 million. 18 Q. And now I want to direct your attention 19 to Page 22, which is the financial statements. 20 For the year 1983, how much goodwill did United 21 count in its assets? 22 A. As of December 31st, '83, it was 15937 1 275,347,000. 2 Q. Do you know, sir, whether -- do you 3 know the relationship between United's regulatory 4 net worth and its goodwill? Let me restate the 5 question. 6 Do you know whether United's regulatory 7 net worth was greater or less than its goodwill? 8 A. As of this date, I really don't know or 9 don't remember. I'm sure I knew at the time. I 10 know what GAAP net worth is. 11 Q. What's the GAAP net worth? 12 A. The GAAP net worth is 68,788,000. 13 Q. Let me direct your attention, sir, to 14 Page 19. Let's talk about the GAAP position of 15 United. Page 19. For the 1983 12-month GAAP of 16 United, what is it, sir? 17 A. The 12-month gap of United was 18 1,647,000,000. 19 Q. What is the exposure of a 20 3.5-billion-dollar financial institution that has 21 a negative 1.647 million -- negative 22 1.647-billion-dollar 12-month gap. What's going 15938 1 to happen to that in a rising interest rate 2 market? 3 A. The net interest income is going to go 4 down very, very dramatically in a rising interest 5 rate scenario. 6 Q. Can you give us some sense of how 7 exposed that institution is to a rising interest 8 rate market? 9 A. It's hard for me to put a number on it. 10 But you could see from this table -- basically, 11 this table is telling you -- as of the end of 12 1983, you had $914 million of rate-sensitive 13 assets. In other words, we're going to have an 14 opportunity to reprice. And you had 2,561,000,000 15 of rate sensitive liabilities that were going to 16 reprice. So, if rates go up, you have -- you've 17 got a big problem. Net interest income is going 18 to go down very, very dramatically; and that's -- 19 that was -- this is kind of the traditional 20 savings and loan problem that was in 1981 and '82. 21 Q. And that's the kind of problem that 22 showed the net losses in the years 1981, '82 that 15939 1 we saw, the 24-million-dollar net losses. Right? 2 A. I would suspect strongly that's what 3 the root cause of those losses were. 4 Q. And another rise in interest rates 5 would have a similar effect on United; isn't that 6 right, sir? 7 A. That would be my conclusion, yes, sir. 8 Q. Now, you told us, sir, that you were 9 hired to address accounting problems; isn't that 10 right? 11 A. Accounting -- well, it was accounting 12 and financial systems and computer systems and 13 operations, yes, sir. 14 Q. Let me show you what's been marked as 15 Exhibit A-7002. It should be the next document in 16 your book. It's a Peat Marwick management letter 17 of February 1984. 18 Do you see that document, sir? 19 A. I sure do. 20 Q. And would you have seen that document 21 when you were working at United? 22 A. Yes, I would. 15940 1 MR. VILLA: We move it into evidence, 2 Your Honor. 3 MR. GUIDO: No objection, Your Honor. 4 THE COURT: Received. 5 Q. (BY MR. VILLA) Let me direct your 6 attention, sir, to the second paragraph. We're 7 not going to read it into evidence, but would you 8 read the second paragraph of the first page of the 9 letter? Just read it to yourself quickly. 10 A. Okay. (Witness reviews the document.) 11 Yes, sir. 12 Q. Can you explain to the Court what 13 Peat Marwick is describing in that paragraph? 14 A. What my understanding -- in a 15 management letter, when a CPA firm uses the words 16 "material weakness in internal controls" and -- 17 excuse me -- "in internal accounting controls," 18 they are trying to convey that you've got -- that 19 there's a serious, serious problem here and that 20 the systems and procedures and whatever, 21 personnel -- it all rolls into a big ball -- are 22 not sufficient to provide, No. 1, timely and 15941 1 accurate financial information, and No. 2, 2 controls that would prevent defalcations, you 3 know, a big financial institution is wiring money 4 all over here and hither and -- I don't know. And 5 if you've got a material weakness in internal 6 controls, you could have a situation pretty easily 7 where a couple of million bucks is wired to Joe 8 Blow and he's in Brazil for two weeks before you 9 even know it. 10 Q. How serious is this criticism by an 11 independent auditor? 12 A. It's very serious. I mean, it's the 13 kind of thing that -- you know, I'll put it like 14 this. If you're the CFO and you have been the -- 15 let's say I had been the CFO for 1981, 1982, 1983. 16 If you get this kind of letter, you get fired. 17 They get a new CFO. 18 Q. In your time at -- had you ever seen 19 any criticism like this of First City or any of 20 the banks ever associated with First City? 21 A. No, sir, I had not. 22 Q. At your time at Arthur Andersen, had 15942 1 you ever been involved in an audit of a 2 corporation that had an internal weakness in 3 internal controls? 4 A. Not that I remember. 5 Q. Let's look at the cause of the 6 weakness. It's addressed, I think, on the page in 7 the ensuing exhibit but, in particular, Page 5. I 8 believe you've reviewed this prior to your 9 testimony; isn't that right, sir? 10 A. I've seen this quite a few times. 11 Q. Can you tell me, after having reviewed 12 this document and based upon your own 13 recollection, what was the cause of the criticism 14 of United's internal controls and financial 15 problems? 16 A. Just in layman's terms without getting 17 into all the complicated language, in my 18 discussions with Peat Marwick, it was that you had 19 a situation where you had Houston First American 20 Savings and you had old United; and neither of 21 them were particularly strong in terms of controls 22 and systems and accounting. And then they were 15943 1 merged and put together. And so, you had a 2 situation that was compounded in its complexity; 3 and it -- when you put them together, you just had 4 a -- in some cases, this is a pretty non-technical 5 term; but it was a screwed-up mess. You had -- 6 you know, we were mailing late payments to people 7 that were paying their payments on time. We were 8 not mailing late payments to people that weren't 9 paying. A customer would come into a branch and, 10 you know, want to make a deposit and then the poor 11 teller says, "Well, okay." Then she gets on the 12 phone, calls the home office and, you know, "Well, 13 I'm not sure we can accept this deposit"; and, you 14 know, sure enough, the person had a valid deposit 15 account. So, it was a -- it was just a pretty bad 16 situation. And I recall -- I recall my first 17 board meeting bringing numbers to the board, and 18 they chuckled as to whether these numbers would be 19 revised. You know, "How many times are we going 20 to revise them?" 21 My attitude was, "Well, we're not going 22 to revise them. These are the numbers." So, it 15944 1 was a -- it was a pretty serious problem. 2 Q. To what extent did you devote your 3 first several years at United to addressing this 4 and related problems in internal controls and data 5 processing? 6 A. That was the primary focus of my 7 efforts. I knew that when I was hired, and that 8 didn't change. 9 Q. And this was in addition to the normal 10 duties of a chief financial officer of a 11 3.5-billion-dollar financial institution. Right? 12 A. Yes, sir. 13 Q. Now, when you arrived at United, did 14 you find a financial budgeting system there? 15 A. Gerry Williams was just trying to 16 install a financial budgeting system but wasn't 17 getting much of anywhere or -- he was trying; and 18 so, we worked on it together. Prior to that time, 19 I don't think there had been one at all. 20 Q. Can you tell us what the significance 21 is of having a 3.5-billion-dollar financial 22 institution without a financial budgeting system? 15945 1 A. It's highly unusual. I don't -- 2 Q. Have you ever heard of it before? 3 A. I've never heard of it before. Because 4 the budget, you know, people poo-poo'd the budget; 5 but it's kind of a -- it's an opportunity for 6 management, at least once a year, to sit down with 7 their subordinates and talk about the plans for 8 the year in a fairly detailed format and maybe -- 9 I'm just making this up, but maybe the guy in 10 consumer lending got it in his head that he's 11 going to go hire 50 new officers and expand the 12 consumer loan portfolio by $100 million. 13 So, the budget is a vehicle to where 14 the very senior top guys can say, "Whoa, wait a 15 minute. We don't want to expand consumer loans. 16 We don't want to hire 50 people." So, it's a 17 communication device, plus it becomes a tracking 18 device. So, it's -- it's just part of good 19 financial management. 20 Q. And did you devote a substantial 21 portion of your time in the first several years to 22 improving financial budgeting? 15946 1 A. Yes. It was much less than this other 2 stuff we've been talking about because I -- we 3 hired Bruce Williams to head the financial 4 budgeting and planning area. And he -- 5 Mr. Williams and I had worked together before, and 6 I knew what Mr. Williams could do. 7 Q. Now, sir, would you compare for us the 8 sophistication of First City Bank to United 9 Savings in terms of its internal controls and 10 financial management? 11 A. Well, First City would be a -- First 12 City had really good systems, and what leads to 13 good systems is a stable organization over a 14 longer period of time and the investment of a lot 15 of dollars in systems and procedures and so forth. 16 And so, First City had very, very good systems, 17 good procedures. It was pretty smooth-running. 18 United was -- was kind of in the dark 19 ages, and that's not being critical. It's just 20 whenever you have an organization and, you know, 21 you have merger after merger and they are slapped 22 together, that just leads to this sort of thing. 15947 1 Q. By the way, did First City fail? 2 A. Yes, it did. 3 Q. Now, sir, Mr. Schwartz asked you about 4 why you were placed on the senior loan committee; 5 and I've asked you that today. And I think you've 6 told us that Mr. Gerry Williams didn't give you 7 any choice about what committees to serve on; is 8 that right? 9 A. Well, I didn't object; but it wasn't -- 10 Gerry and I didn't have philosophical discussions. 11 I mean, it was just, you know, the kind of 12 discussion, "Here's the committee. It's at 13 10:00 o'clock on Tuesday." So, I wrote that down 14 and showed up at 10:00 o'clock on Tuesday. 15 Q. You didn't ask to be put on any of the 16 real estate committees; is that right? 17 A. No, sir. 18 Q. Do you believe you were put on any of 19 those committees because of your real estate 20 expertise? 21 A. No, sir. 22 Q. Was there any time that you were on one 15948 1 of those committees when the CEO of USAT was not 2 also on the committee? 3 A. No, sir. 4 Q. And that would include Mr. Bentley and 5 Mr. Gross? 6 A. That is correct. 7 Q. Were they aware that you didn't have a 8 real estate background, sir? 9 A. Certainly. Mister -- Mr. Bentley 10 interviewed me before I was hired. And I remember 11 when Mr. Gross was a consultant, he came around; 12 and, as best I remember, it was kind of, you know, 13 "what's your background" type stuff. And I had 14 gathered that Mr. Gross was somebody to pay 15 attention to. So, it was kind of a -- it wasn't a 16 job interview, but it was -- I think Mr. Gross was 17 pretty familiar with my background. 18 Q. Now, Mr. Schwartz showed you some board 19 of directors meeting minutes that appointed you to 20 the senior loan committee and the real estate 21 committee. 22 Do you remember that during his 15949 1 examination? 2 A. Yes, sir, I do. 3 Q. Did you, as an officer, feel that 4 serving on these committees was voluntary after 5 the board appointed you to them? 6 A. I guess I didn't think about it; but, 7 no, I suppose not. I didn't think it was real 8 voluntary when he told me to show up. 9 Q. Did anyone tell you your responsibility 10 on that committee was to collect newspaper 11 articles on the real estate market in various 12 cities? 13 A. No, sir. 14 Q. Did anybody tell you your 15 responsibility was to analyze appraisal reports -- 16 A. No, sir. 17 Q. Did anyone tell you that your 18 responsibility was to collect studies performed by 19 various municipalities on growth projections? 20 A. No, sir. 21 Q. Whose responsibility, sir, was it to 22 review and summarize information like that for the 15950 1 committee? 2 A. I believe the primary responsibility 3 would be David Graham and Gem Childress and their 4 staff. It would be the real estate people. 5 Q. Did you rely upon those individuals to 6 review and summarize the relevant information for 7 you? 8 A. Yes, I did. 9 Q. Now, Mr. Schwartz asked you about a 10 number of documents relating to real estate. 11 A. Yes. 12 Q. You said you didn't recall seeing them. 13 Do you remember that? 14 A. I remember there were a whole lot of 15 responses like that, yes. 16 Q. Do you know whether you saw them or 17 not? 18 A. I really don't know, no. I don't 19 recall. 20 Q. So, you could have seen them; and you 21 may not have seen them. Is that right? 22 MR. SCHWARTZ: What documents are we 15951 1 talking about? Which specific documents are you 2 talking about? 3 Q. (BY MR. VILLA) Do you recall 4 Mr. Schwartz showing you a number of documents in 5 the Park 410 and the Norwood loan? 6 A. Yes, sir, I do. I can't quote chapter 7 and verse which documents they were, but it was a 8 lot of documents and it was a lot of "I don't" -- 9 "I don't recall seeing them" or "I don't 10 remember." 11 Q. Would you expect that USAT's real 12 estate department would collect, review, and 13 summarize information for you, sir? 14 A. I would expect that, yes. 15 Q. So, the fact that you don't remember 16 reviewing any particular document or even that you 17 may not have seen it doesn't mean that the 18 information hadn't been considered by you; isn't 19 that right? 20 MR. SCHWARTZ: Are you summarizing -- 21 are you creating a mountain of all of the 22 documents that I showed him, even those he 15952 1 indicated he did see? 2 MR. VILLA: I think I asked the witness 3 a number of questions about the ones that he 4 didn't remember, sir. 5 MR. SCHWARTZ: If that's clear for you, 6 then that's fine. 7 MR. VILLA: I appreciate that. 8 A. Could you repeat that last question, 9 please? 10 Q. (BY MR. VILLA) Now, the fact that you 11 don't remember reviewing the documents or even 12 that you may not have seen them as a member of the 13 committee, does that mean that the information in 14 those documents wasn't considered by the 15 committee? 16 A. No. I may not have been part -- I just 17 may not remember, or maybe it was considered by 18 the real estate guys and summarized in some type 19 of summary. 20 Q. Now, I'm going to ask you to assume 21 something. I'm going to ask you to assume that 22 you would have to independently go out and collect 15953 1 and review all of the documents that Mr. Schwartz 2 showed you on each loan that was approved by the 3 real estate committees. 4 Would you assume that? 5 A. I'll try to assume that. 6 Q. And you would have had to analyze the 7 various appraisals that Mr. Schwartz showed you. 8 Can you assume that as well, sir? 9 A. Well, I would have to go learn how to 10 review appraisals. 11 Q. How much time would that have left you, 12 sir, to handle the computer conversion, improving 13 internal controls, implementing a financial 14 budgeting system, and issuing financial reports? 15 A. I can't give a number, but it wouldn't 16 have been enough time because that wasn't my 17 primary focus. And I'm sure if I had been doing 18 that, Gerry Williams would have come in and -- I 19 can't use the exact language. But it would be, 20 "What in the world are you doing? Are you crazy? 21 You know, your charter is to go address accounting 22 issues, internal controls, and computer 15954 1 conversions." 2 Q. You were asked by Mr. Schwartz the 3 credentials of the various individuals on the real 4 estate committee. 5 Do you remember those questions, sir? 6 A. Yes, sir, I do. 7 Q. And you said, I believe, that you may 8 have known but you had forgotten? 9 A. Yes, sir. 10 Q. Let me show you -- let me show you what 11 has been marked as -- I think it's marked as 12 Twomey 21, but it's also Tab 91 in evidence. 13 Do you see that, sir? 14 A. I have that, yes, sir. 15 Q. Is that a business plan of United 16 Savings Association that was submitted to the 17 Federal Home Loan Bank of Dallas? 18 A. Yes, it appears to be. 19 Q. It has the stamp "received" by the 20 Federal Home Loan Bank of Dallas. 21 Do you see that? 22 A. Yes, sir, I do. 15955 1 Q. Now, let me direct your attention -- in 2 the back of this business plan, there are a number 3 of resumes; and I'll give you the Bates stamp 4 number. It's 0W150678. 5 MR. GUIDO: Could you read that a 6 little more slowly, please? 7 MR. VILLA: 0W150678. 8 A. Okay. That's Mr. Childress' resume? 9 Q. (BY MR. VILLA) Yes. Why don't you 10 take a quick look at that and see if that 11 refreshes your recollection about Mr. Childress' 12 credentials in real estate. 13 A. (Witness reviews the document.) I 14 don't remember what his background was; but, yes, 15 this is his resume. It gives a sketch of his 16 background. 17 Q. He has an undergraduate degree in 18 finance and whatever it is, almost 20 years of 19 experience in real estate prior to 1985, '86 when 20 these loans were considered; Is that right, sir? 21 A. Yes. I see that he's got -- he was -- 22 I don't know exactly what he did at Exxon, but he 15956 1 seems to have a lot of real estate experience. 2 Q. Now, was Mr. Chilton also a member of 3 the real estate department? Raymond Chilton. 4 A. Oh, yes, definitely the real estate 5 department. I just don't know whether he was on 6 the loan committee or anything like that. 7 Q. Did he ever attend any loan committee 8 meetings? 9 A. Yes, sir. 10 Q. The next resume is that of Mr. Chilton, 11 isn't it, sir? 12 A. It is. 13 Q. I won't ask you to regurgitate the 14 whole resume, but it indicates he's got an 15 undergraduate degree in economics from Rice and an 16 MBA in finance. 17 Do you see that, sir? 18 A. I do. 19 Q. It appears he has about 20 years of 20 experience, perhaps a little bit less, in real 21 estate, a real estate consultant and other 22 positions; isn't that right, sir? 15957 1 A. Yeah. Looks like Mr. Chilton is almost 2 all real estate in various capacities for sure. 3 Q. Let's go a few pages deeper to Bates 4 stamp -- actually, it's Page 11 of the document 5 which starts OW150683. 6 Do you see Mr. Graham's background, 7 sir? 8 A. I do. 9 Q. And he's got an undergraduate degree in 10 architecture and an MBA in finance; is that right? 11 A. Yes, sir. 12 Q. And it looks like about 14 years of 13 experience in real estate; is that right, sir? 14 A. That is correct, yes, sir. 15 Q. Why don't we turn to Page 17, which is 16 Charles Patterson. 17 A. (Witness complies.) 18 Q. Now, did Mr. Patterson attend any of 19 the real estate lending committee or investment 20 committee meetings? 21 A. Yes, sir, he did. 22 Q. Can you tell me something about 15958 1 Mr. Patterson's background? Does this refresh 2 your recollection of his background, sir? 3 A. Yes, sir. From looking at this, 4 apparently, he's got a bachelor and a master's 5 degree from universities in Oklahoma. He had -- 6 looks like he's got pretty extensive real estate 7 experience and, I guess, had two tours of duty 8 through United Savings from 1975 through 1981. 9 And then presumably after this resume, he left 10 University Savings and came back to United 11 Savings. 12 Q. I'll stop there. There were a number 13 of individuals who attended these committee 14 meetings who had extensive experience in real 15 estate; isn't that right, sir? 16 A. Yes, sir. Yeah. I remember -- well, 17 we didn't go over it. But Jeff Gray, I certainly 18 remember him being very knowledgeable in real 19 estate. 20 Q. How about Mr. Phillip Breland? 21 A. I remember Mr. Breland. 22 Q. And did Mr. Graham and Childress have a 15959 1 staff? 2 A. Yes, sir. 3 Q. Let me ask you: Do you remember the 4 name of the officers on his staff? 5 A. There was a guy named Andy Bergeron. 6 There was a lady by the name of Karen Wynans that 7 I remember. That's pretty much it. There were a 8 lot of other people, but I just -- those are the 9 names that I remember. 10 Q. Sir, can you describe for us what a -- 11 I know you have a hard time remembering one 12 meeting from another of the real estate 13 committees, but try to describe for us what a 14 typical meeting of the real estate committees was 15 like. I know you can't distinguish actually 16 between investment and lending. Tell us what it 17 was like. 18 A. Typically, there would be an agenda; 19 and Mr. Gross would serve as the chairman. And 20 there would be, you know, five or six or four or 21 five different agenda items. And oftentimes, 22 several of those agenda items would just be 15960 1 various bullet point type reports like a status 2 report very quickly on a project, that we're 3 working on XYZ loan and we went out and met with 4 so and so in Midland, Texas, and then move on to 5 the next bullet point. So, there would be reports 6 of progress. Then, at times, there would be a 7 final presentation to be made to approve a loan or 8 approve a project that might have been discussed 9 at several prior meetings. And we would -- 10 typically, David Graham or Gem Childress would 11 lead that discussion; and we would go through a 12 bunch of papers. And they would use their colored 13 maps to show you where the project was or so 14 forth. And Mr. Gross would typically be the most 15 intense questioner. That's my memory. 16 Q. You were shown a number of agenda items 17 that showed a meeting that lasted for an hour and, 18 say, an hour and ten minutes or an hour and 30 19 minutes, whatever the time is, and four or five 20 items that were considered during that meeting. 21 Do you remember those exhibits that 22 Mr. Schwartz showed you? 15961 1 A. Vaguely, yes. 2 Q. Would it be fair to take the time of 3 the meeting and divide it equally among the number 4 of agenda items and conclude that 15 minutes or 5 12 minutes or whatever the proportionate share was 6 was spent on each item? 7 Would that be a fair way of determining 8 how much time the committee devoted to any 9 particular project? 10 A. No. You really couldn't tell the 11 amount of time spent on any particular project 12 because, like I said, several of those agenda 13 items may just be reports of -- and Graham and 14 Childress talked pretty fast. 15 They were always going out and meeting 16 with Jow Blow in Midland, Texas, and somebody in 17 Austin and, you know, outside meetings. It would 18 be a report to the committee of what they were 19 doing. So, those reports would tend to be very, 20 very quick, very short. 21 Some of the agenda items would take 22 some time. From time to time, there would be an 15962 1 agenda item of, you know, Graham and Childress 2 saying, "We're really having a hard time with 3 these guys. These borrowers want X, Y, and Z." 4 And then there would be a discussion of what 5 United was willing to do. 6 THE COURT: We'll take a short break. 7 8 (Whereupon a short break was taken from 9 3:15 p.m. to 3:36 p.m.) 10 11 THE COURT: Be seated, please. We'll 12 be back on the record. 13 Mr. Villa, you may continue. 14 MR. VILLA: Thank you. 15 Q. (BY MR. VILLA) Mr. Crow, when we 16 broke, I was asking you about the division of time 17 between various items, agenda items, that came up 18 at the meetings of the real estate committees. 19 Do you recall that, sir? 20 A. Yes, sir, I do. 21 Q. Can you tell us what types, 22 generically, or type of agenda item took the most 15963 1 time with the committee? 2 A. The most time that I remember would be 3 in two areas, maybe three. The first would be if 4 there were a new project or a new loan that was 5 going to be discussed, then that would typically 6 take quite some time to get the committee up to 7 speed on that loan or project. 8 Second, there would be some pretty 9 extensive -- if we were getting close to approving 10 a loan or project, maybe in two or three weeks or 11 so, then that would typically take a lot of time. 12 And then third and probably the -- you 13 know, the most time-consuming that I remember 14 would be the final what I'd call trigger pulling, 15 the actual approval process of, you know -- we 16 might have talked about this project for a while 17 over a series of meetings, but actually getting in 18 and saying yea or nay on the particular loan or 19 real estate project. 20 Q. On major projects, sir, would they 21 typically be presented for the first time, 22 reviewed, and approved all in one meeting? 15964 1 A. Not that I remember typically, and let 2 me be clear. I don't -- my memory of really any 3 specifics as to what went on is pretty hazy. But 4 just typically, no. It seemed like it would be 5 talked about at one meeting and then be carried 6 over to another. 7 Q. Now, sir, can you tell us who was the 8 most active questioner at the real estate 9 meetings? 10 A. Mr. Gross. 11 Q. Can you describe for us the way he 12 conducted himself at the meetings? 13 A. Well, Mr. Gross not only in these 14 meetings but in all meetings was -- Mr. Gross is a 15 smart -- very, very smart man, and he is a very 16 demanding individual. And he's a pretty impatient 17 individual. And he wants -- you know, his 18 questions are typically pretty penetrating. He 19 wants you to know what you're talking about and be 20 prepared or -- he's not Atilla the Hun or 21 anything, but he's -- I remember Mr. Gross to be a 22 very intense questioner, that if you're going to 15965 1 make a presentation, you'd best know what you're 2 talking about. 3 Q. Do you recall, sir, whether the real 4 estate committees approved every loan or 5 investment -- I'm sorry. 6 A. I might add one other thing. Mr. Gross 7 would -- Mr. Gross would ask questions from -- he 8 was, in my opinion, one of the smartest guys at 9 United, if not the smartest. But he would ask 10 questions from the weirdest angles you ever could 11 imagine. 12 So, you know, you'd think you'd have 13 all the questions a man could possibly ask and 14 Jenard would think of something else. And so, 15 he's a fairly intense individual. 16 Q. Now, would he make a presentation at 17 the meetings or would he do the questioning or 18 both? 19 A. No. Typically, he would not make the 20 presentation. 21 Q. The presentations were made by who? 22 A. By David Graham or Gem Childress or one 15966 1 of their staff. 2 Q. Now, do you recall, sir, whether the 3 committee approved every loan or investment that 4 was presented to it by the real estate department? 5 A. I really don't remember. I don't think 6 so, but I can't give you instances of turn-downs. 7 Q. Did they ever send the real estate 8 department back to renegotiate terms or improve 9 collateral or other similar matters? 10 A. Oh, yeah. That happened quite a lot 11 that -- typically, David Graham or Gem Childress 12 would give a progress report and we went out and 13 talked to the borrower and the borrower is 14 demanding "XYZ" terms. And the committee would 15 say -- you know, basically the committee would 16 give them guidance as to what was acceptable, what 17 might work, what might be acceptable. 18 And so, they would go back and 19 negotiate further. And if the parties could reach 20 a negotiated transaction, then that's the point, 21 you know, where it became an official proposal to 22 be studied in depth by the committee. 15967 1 Q. Sir, are you familiar with R-41B that 2 governs appraisals? 3 A. I've heard of it, yes, sir. 4 Q. Are you familiar enough with it to 5 apply it and determine whether an appraisal of an 6 ADC loan or property is in conformity with R-41B? 7 A. I would not be able to, no, sir. 8 Q. Tell me, how did the real estate 9 committee deal with appraisals? 10 A. The best I recall, obviously, we had 11 outside appraisers; and they -- Gem Childress and 12 David Graham had people on their staff that would 13 review the appraisals. 14 Q. And would you get some sort of report 15 at the committee meeting? 16 A. Yeah, typically, of the appraisal and 17 that it was satisfactory and that it met 18 whatever -- I knew there were some regulatory 19 requirements to be a satisfactory appraisal. And 20 then, of course, the numbers, you know. The 21 project appraised for X dollars as developed or X 22 dollars raw land or whatever. 15968 1 Q. Were there occasions on which the 2 committee's action to approve a loan was subject 3 to the receipt of a satisfactory appraisal? 4 A. Yes. 5 Q. And in those instances, did the 6 committee receive some oral report about the 7 appraiser's opinion? 8 A. Yeah. Typically, it was from David 9 or -- David Graham or Gem Childress, yes. 10 Q. And can you tell us what reasons were 11 typically given for not having a written appraisal 12 at the committee? 13 A. It's hard for me to characterize. I 14 remember some -- you know, just -- the guy hadn't 15 typed up all the paperwork, but that's the only 16 one I can think of off the top of my head. 17 Q. I'd like you to explain in general 18 terms the difference in accounting treatment 19 between the recognition of income for a real 20 estate loan versus a real estate investment. 21 A. In aggregate terms or just in -- on an 22 overall basis, a real estate loan would be 15969 1 accounted for as -- as what I'd call an earning 2 asset in that you record interest income on the 3 loan and you would record fees and there were 4 certain types of rules having to do with fee 5 recognition. 6 And then in my mind, a real estate 7 investment, typically, you did not record a great 8 deal of income during the current period. Whereas 9 the loan, you'd be earning interest or recording 10 interest each quarter or each month, the real 11 estate investment would be more of a cost of carry 12 type item. And you were -- you know, the 13 objective there, of course, was for that to be a 14 true investment; and it would be successful and 15 sell out. You'd make money. But it tended to be 16 further out and not as smooth of a stream. 17 Q. Was the distinction or the 18 classification between ADC loans -- acquisition, 19 development, and construction loans -- over here 20 and investments over here, was that distinction 21 clear always when you approved the transaction? 22 When I say "you," I mean the committee. 15970 1 A. It wasn't crystal clear. There were 2 rules as to what would count as a loan and what 3 would count as a real estate investment. But the 4 rules seemed, to me -- my memory at least is that 5 they were -- there was a lot of judgment in the 6 application of those loans or the application of 7 those rules. And if we -- Mr. Wolfe was pretty 8 well-versed in the rules. And there were 9 certainly times, if it were a close call and/or a 10 big project, that we would take it to Peat Marwick 11 and make sure they agreed. 12 Q. And was part of the Peat Marwick 13 auditing process to review the classification of 14 your real estate projects as loans or investments? 15 A. Absolutely. 16 Q. And are you an expert in that 17 distinction between real estate loans and real 18 estate investments? 19 A. No, sir. 20 Q. Who in your organization -- that is to 21 say United Savings -- was an expert on that issue? 22 A. Jim Wolfe. And then he had a lady, I 15971 1 believe, by the name of Jacque McCombs. And then 2 Chuck Doolittle, even though he was pretty heavily 3 involved in regulatory accounting, was pretty 4 stout on real estate accounting, as well. 5 Q. So, would it be fair to say that at the 6 time the committee approved a particular 7 transaction, they weren't sure how it was going to 8 be booked, as a loan or an investment? 9 A. I wouldn't -- I don't think I would 10 agree with that, no, sir. 11 Q. And they would -- would they -- 12 A. They would -- they would have -- Gem 13 and -- Gem Childress and David Graham would have a 14 pretty good idea of the rules, and it would be -- 15 we'd pretty well know how it was going to be 16 booked. You could never be lead pipe certain; but 17 we'd have a good idea, yes, sir. 18 Q. The ultimate decision, however, would 19 be the decision of Peat Marwick, is that right, on 20 the distinction between loan and investment? 21 A. Yeah. When push came to shove, if 22 there was a disagreement, then Peat Marwick's 15972 1 position would prevail because they -- you know, 2 they signed our audit opinion. 3 Q. Did anybody ever give as a factor in 4 approving a transaction that United would be able 5 to book an up-front fee? 6 A. I don't remember that type 7 conversation. 8 Q. And did you ever vote for a transaction 9 because of the up-front loan fees? 10 A. No, sir. 11 Q. Now, prior to the formation, we've 12 heard -- let's back up. We're going to change 13 gears here. We're going to look at the investment 14 committee. 15 Prior to the formation of the 16 investment committee in the spring of 1986, what 17 was your role in directing United's investments? 18 A. I didn't have a role in directing 19 United's investments. 20 Q. Did you participate in discussions 21 about the investments? 22 A. Sure, yes, sir. 15973 1 Q. Was that with other members of senior 2 management? 3 A. Typically, my role would have been the 4 type -- yes, would have been with Gerry Williams 5 and others. And I certainly participated in, 6 like, the Salomon Brothers presentation and other 7 2brokerage firm presentations as it relates to 8 mortgage-backed securities. I think I talked 9 with, you know, Joe Phillips from time to time; 10 but it was more of a financial analysis, 11 accounting, that sort of type area. It wasn't a 12 supervisory-type role. 13 Q. Did Joe Phillips ever report to you? 14 A. No, sir. 15 Q. How about Ron Huebsch? Did he ever 16 report to you? 17 A. No, sir. 18 Q. Prior to February of 1988, were you a 19 member of the board of directors of either USAT or 20 UFG? 21 A. No. 22 Q. Prior to February of 1988, were you a 15974 1 member of any board committees such as the 2 executive committee, the audit committee, 3 compensation committee of either board? 4 A. No, sir. 5 Q. Sir, what do you understand to be the 6 wholesale strategy? What does that term mean to 7 you? 8 A. The term meant to me that United would 9 move away from a large branch network on the 10 liabilities side, and on the asset would move away 11 from the booking of a lot of single-family 12 residential home loans. And instead of that, 13 would go more towards a strategy of fewer 14 branches, hopefully bigger branches, supplemented 15 with money desk deposit-raising capacity, other 16 financing arrangements on the liabilities side. 17 And on the asset side, items such as high-yield 18 bonds, mortgage-backed securities, equity 19 arbitrage, and this catch-all term "merchant 20 banking" which, you know, was -- to me, it was 21 stuff like Weingarten Realty. 22 Q. Do you recall, Mr. Crow, whether United 15975 1 was discussing the wholesale strategy -- whether 2 the members of management were discussing the 3 wholesale strategy when you arrived in early 1984? 4 A. I remember -- I think that when I 5 interviewed -- I can't relay the context of the 6 conversation, but I remember Dr. Munitz talking to 7 me about that and, basically, merchant banking and 8 that sort of stuff. So, it was -- the wholesale 9 strategy was being talked about the day I walked 10 in, as I remember. 11 Q. Did the -- did the fact that United was 12 moving toward a more diversified financial 13 institution play any role in your decision to 14 leave First City and join United? 15 A. Yes, sir, it did. 16 Q. And why? 17 A. Well, I didn't -- this was just my 18 personal opinion, that during this time period, 19 the traditional thrift model of making 20 single-family residential home loans in Houston, 21 predominantly Houston, generally in Texas, and 22 funding it with branch deposits with a big branch 15976 1 network just wasn't working. It hadn't worked in 2 the early Eighties, and the thrift industry had 3 had major red ink and the GAAP position was -- was 4 huge. 5 So, with that traditional thrift model, 6 as soon as interest rates went up, in my view, 7 United would -- would have been a sure goner. 8 Q. So, how did that affect your decision 9 to join United? 10 A. Well, I viewed the strategy that was 11 discussed or -- you know, what I understood 12 Gerry Williams to tell me, what I understood, you 13 know, Dr. Munitz to tell me, that we were going to 14 change -- that things were going to be changed 15 around and restructured. And I guess from my 16 perspective, I started looking and said, "Well, 17 Gerry Williams is a pretty solid guy. He's a 18 smart guy." And I did do some, you know, research 19 on Mr. Hurwitz. And you know, he seemed to have 20 made a lot of money in the past. And Dr. Munitz 21 seemed to be a very, very -- you know, seemed to 22 me to be a pretty smart person. So, what I heard 15977 1 made sense. 2 Q. Now, did USAT require -- strike that. 3 Is one significant part of the 4 wholesale strategy the elimination of the branch 5 network? 6 A. It was definitely one of the elements 7 of the wholesale strategy for a number of reasons. 8 Q. Why don't you explain those reasons 9 again. 10 A. The first reason and maybe the -- you 11 know, certainly the most important reason in my 12 opinion, was the first branch sale that occurred 13 at the end of 1984 created a premium on deposits 14 that were sold of 15 percent. And that branch 15 sale was to Independent American. And that 16 created a real gain and created real capital. And 17 that was a -- you know, a gain on the magnitude 18 of, like, $80 million, I think. That was Step 19 No. 1. 20 And Step No. 2, it seemed to me that -- 21 that you could more efficiently raise deposits if 22 you had fewer branches that were bigger. You 15978 1 know, close branches that were close to each other 2 or sell them, but have fewer branches that were 3 bigger branches. And then -- that's kind of what 4 I remember as the two primary reasons. You know, 5 and it vastly reduces operating expenses. 6 So, it raised capital and reduced 7 operating expenses. 8 Q. Now, sir, did United require approval 9 from the federal regulators to execute its branch 10 sale, the branch sale at the end of 1984 and the 11 branch sales that happened after that time? 12 A. Oh, yeah. We had to have a big, old, 13 thick branch sale application. And you -- it's my 14 understanding you had to have specific approval 15 from the Federal Home Loan Bank to sell branches. 16 And I guess to -- on the other side, to probably 17 buy branches. 18 Q. Reflecting on the whole wholesale 19 strategy, not only the branch sale and the means 20 by which you financed United but also the 21 different types of businesses that United 22 ultimately went into, and looking at United from 15979 1 the time frame of 1984, not 1987 with the document 2 that Mr. Guido showed you after the stock market 3 crash, but in 1984 when United was contemplating 4 the wholesale strategy, did it make sense to you, 5 sir, as a business strategy for a thrift in 6 Houston? 7 A. Absolutely. 8 Q. Why? 9 A. Well, for a number of reasons. One, it 10 seemed to -- it seemed play on our strengths 11 instead of our weaknesses. And if you look at -- 12 if we -- if United looked at what it did well and 13 what it did poorly, it certainly did not do well 14 transaction processing. And I'm talking about 15 here a large number of loan servicing or, you 16 know, a large number of small deposit accounts. 17 The bottom line is we were just pretty 18 darn inefficient, and our cost of servicing a loan 19 was high. And so, instead of -- instead of, you 20 know, trying to get at least average in that area 21 and go down that road, it seemed to me to make 22 more sense to go a wholesale route that I think we 15980 1 had some expertise at. 2 Q. Now, was the wholesale strategy 3 described in any of United's public filings? 4 A. To the best of my memory, it was 5 described quite a few times. 6 Q. Let me direct your attention to what's 7 been marked as Exhibit A3004 and introduced in 8 evidence in this case at Tab 717. 9 Do you see that, the United Financial 10 Group 1984 annual report? 11 A. Yes, sir, I do. 12 Q. I'd like you to flip over to the letter 13 to the shareholders which begins on Page 3 as 14 "Strategy and Market Definition." It starts at 15 Page 4 and goes on for a couple of pages. 16 Do you see that, sir? 17 A. I do. 18 Q. Now, you read that before you came to 19 court, didn't you, sir? 20 A. I did. 21 Q. Is that a description, sir, of the 22 wholesale strategy? 15981 1 A. Yes, it is. It's a summary, but it 2 certainly is a description. 3 Q. It is a statement by United's 4 management and its board of directors as to where 5 United was going. Right? 6 A. That is correct. 7 Q. And this was filed with the Securities 8 and Exchange Commission in the spring of 1985; is 9 that right? 10 A. Let's see. I'm not sure of the exact 11 date, but it definitely was filed in early 1985. 12 Q. And do you recall, sir, whether it was 13 United's practice to send copies of its securities 14 filings to the federal regulators -- federal bank 15 regulators? Strike that. Federal thrift 16 regulators. 17 A. I believe that was our practice. 18 Q. And do you know from your own 19 experience whether or not any of those thrift 20 regulators had copies of them? 21 A. I can't say that I put copies of those 22 in the hands of, say, Mr. Twomey. So, I can't say 15982 1 that, no. 2 Q. Did you ever have discussions with him 3 about your annual reports or 10Ks or other 4 financial statements? 5 A. I had discussions with -- I can't -- I 6 would have discussions from time to time with 7 those people, and I can't really say it was 8 Mr. Twomey at all. It might have been 9 Ginger Baugh or, you know -- I'm a little fuzzy 10 there. For all I know, it might have been Vivian 11 Carlton. But from time to time, we would talk 12 about what was in the GAAP financial statements. 13 Q. Let me show you, sir, what's been 14 marked as Exhibit A -- 15 MR. VILLA: Your Honor, this isn't in 16 your book. A10575, which is in evidence at Tab 17 178. 18 MR. GUIDO: 178? 19 MR. VILLA: 178. It's a letter dated 20 October 28th, 1985, from Gerald Williams to 21 Roy Green. 22 Q. (BY MR. VILLA) Now, do you recall, 15983 1 Mr. Crow, that United would correspond from time 2 to time with the Federal Home Loan Bank of Dallas 3 with respect to various applications or issues 4 that arose between the bank and the Federal Home 5 Loan Bank? 6 A. Yes, sir, I do recall that. 7 Q. And in some of those circumstances, 8 United would be requested to or would offer to 9 provide a business plan telling the Federal Home 10 Loan Bank what it intended to do in the future? 11 A. I remember that, yes, sir. 12 Q. Let me direct your attention, sir, to 13 Bates stamp Page CN052913, which is about halfway 14 back in this document. 15 Do you see that? 16 A. I have that. 17 Q. And can you tell me what that is? 18 A. This is a so-called Exhibit B, and it's 19 United Savings Association of Texas business plan. 20 Q. And looking quickly at that business 21 plan -- we're not going to read it into the 22 record, but is this another description -- this 15984 1 one sent actually to the Federal Home Loan Bank of 2 Dallas -- about United's transformation of itself 3 from a typical thrift into a diversified financial 4 institution was going to go into a number of other 5 areas including mortgage-backed securities, joint 6 venture activity, merchant banking, and the like? 7 A. Yes. This is a summary description. 8 Q. Now, sir, do you recall meeting with 9 United's federal regulators at the Federal Home 10 Loan Bank of Dallas from time to time in the 11 months and years after the 10K that we've just 12 looked at, the 1985 10K, and the October 28, 1985 13 letter that we've just seen? 14 You met with the federal regulators 15 after these things were either made public or sent 16 to them, didn't you, sir? 17 A. Oh, from time to time afterwards, yes. 18 Yes, I did. 19 Q. Did any of them ever say to you that 20 they thought that the plan of diversification was 21 unreasonable? 22 A. No, sir. 15985 1 Q. What did they tell you about their 2 views of United's plan to diversify from a typical 3 thrift into one that relied significantly on other 4 types of business activities for its profits? 5 A. I can't -- Mr. Villa, I can't really 6 say what they told me specifically. But my memory 7 is they either told Mr. Gross or Mr. Berner or I 8 read it that the business plan appears reasonable. 9 And I certainly don't recall any criticism. You 10 know, I think I would have remembered the 11 criticism part that -- you know, I never remember 12 any statements to the effect that "We think your 13 business plan is imprudent or inappropriate," that 14 sort of thing. 15 Q. Let me direct your attention, sir, to 16 the 1984 10K, which is the next document, and it 17 is Exhibit A3020, Tab 716. 18 MR. GUIDO: Tab what? 19 MR. VILLA: 716. 20 Q. (BY MR. VILLA) Do you see that, sir? 21 A. I do. 22 Q. Now, you told us about the sale of 15986 1 branches to Independent American. 2 Is that reflected on Page 8 of the -- 3 A. Let's see. I guess it's reflected in 4 Page 1 because the number of our branches had gone 5 down to 64. 6 Q. And if you'll look at Page 8, it also 7 describes it. Right? Sale of branch offices? 8 A. Yes, it does. 9 Q. And is that what generated the gain 10 that we've talked about? 11 A. It certainly does. 12 Q. And the net income of United, if you 13 take a look at Page 13 -- now, we're looking at 14 your 1984. 15 The net income of United is what for 16 the year 1984? 17 A. Let's see. (Witness reviews the 18 document.) Net income of United for the year 1984 19 is 50,321,000. 20 Q. Okay. And now, let's look down in Item 21 No. 7. Do you see where under "management 22 discussion and analysis" just a little lower on 15987 1 that page, does it tell you what the net gain from 2 the sale of the branches to Independent American 3 was? 4 A. Yes, sir. In the second line, it says 5 the reason for this improvement or the improvement 6 in earnings was the net gain of 81.5 million 7 recognized on the sale of the branches. 8 Q. So, if you were to take away the sale 9 of the branches, United would have shown what kind 10 of profit or loss -- would have shown what profit 11 or loss for the year 1984? 12 A. In round numbers, $30 million. 13 Q. 30-million-dollar loss; isn't that 14 right, sir? 15 A. That is correct. 16 Q. Now, do you recall, sir, whether the 17 Houston economy was improving or not improving 18 during this time period? 19 A. My memory is that it was not improving. 20 It was getting worse. 21 Q. Let me direct your attention to Page 6. 22 Maybe you can tell us what happened to scheduled 15988 1 items for United. 2 A. Yes, sir. Scheduled items went from 3 the year end 1983, 53.17 million, to year end 4 1984, 106.4 million. 5 Q. So, they essentially doubled again; is 6 that right? 7 A. That is correct. 8 Q. And is one -- is one of the reasons 9 that you -- strike that. 10 Were you a big advocate, generally, of 11 making home loans in the year 1984? 12 A. No, sir. 13 Q. And is one of the reasons you were not 14 a big advocate of making home loans things such as 15 the increase in scheduled items here, sir? 16 A. Yes. I -- I viewed it as being -- you 17 know, if it kept growing, it was going to suck the 18 lifeblood out of the company. 19 Q. Now, in 1985, you were put on the ALCO 20 committee; is that right? Or actually, you 21 formed -- you probably formed the ALCO committee. 22 A. It was -- I don't remember the time 15989 1 frame, but I was definitely on the ALCO committee. 2 And I think I was one of the founding members. 3 Q. And you were devoting some of your time 4 to financial planning in 1985; isn't that also 5 right? 6 A. That is correct. 7 Q. Now, did Mr. Gross become more 8 prominent in USAT's operations about this time? 9 A. He certainly did. 10 Q. We've seen a memo here today -- I 11 believe it was today. It might have been 12 yesterday. They seem to run together in my 13 mind -- that says "In the spirit of bad news to 14 the top." 15 Do you remember that, sir? 16 A. Yes, sir, I do. 17 Q. What do you mean by that? 18 A. Well, Mr. Gross and Mr. Williams did 19 share quite a few attributes. And Mr. Gross 20 especially would give kind of a little speech, and 21 I think he -- this is what he lived by. "If 22 you've got a problem or you know of something bad, 15990 1 get it to the top," namely in his office, "as 2 quickly as possible." Or even if you think 3 something's bad, maybe -- you know, people have 4 different opinions. But he didn't want any little 5 problems held at lower levels and then, all of a 6 sudden, they grow to be big problems. 7 So, he was a guy that -- I mean, he 8 wanted a fairly direct, blunt communication to 9 him. And I have a vague memory of an officers' 10 meeting of, you know, probably 50 to 100 people. 11 And Mr. Gross said, you know, "If any of you guys 12 have any ideas, write me a letter." Or "If you've 13 got any problems, write me a letter." 14 And so, you know, he wanted open 15 communication. "If you've got a problem or 16 there's an issue, let's talk about it pretty 17 quick." 18 Q. What was your attitude, sir, on putting 19 in writing the financial problems of United? 20 A. Well, I -- I thought that's what I was 21 supposed to do and, you know -- I mean, it seems 22 to me that's appropriate, that I should give my 15991 1 opinion and it should be pretty blunt. And, you 2 know, I'm -- I've been accused of being a 3 pessimist in the past. But, you know, the way I 4 looked at it, Mr. Gross could take -- or whoever 5 at that top level of the totem pole could take my 6 input and they could take the marketing guys' 7 input and -- you know, the marketing guys 8 always -- "Oh, everything's going to be rosy." 9 So, you know, I felt like it was an 10 important role; and I didn't see anything wrong 11 with it. It seemed like the right thing to do. 12 Q. Did you make any attempt to hide 13 anything in these memos to Mr. Gross or to other 14 people in senior management? 15 A. Well, no, sir. No. My -- everything 16 that we've looked at have -- you know, it went 17 into a reading file. My secretary had a reading 18 file, and the auditors looked at it. I know the 19 auditors looked at it. So, it wasn't a big 20 secret. 21 Q. Did you believe you were doing anything 22 wrong in pointing out United's financial position 15992 1 if it was suffering from either adverse 2 consequences in the securities markets or goodwill 3 or real estate? 4 Was there anything wrong with doing 5 that in your judgment as a chief financial 6 officer? 7 A. No, sir, not at all. I would think it 8 would be wrong not to do that. You know, the 9 recipient of those memos might not agree with my 10 assessment; but I thought -- you know, I was the 11 guy at United that probably had the best -- the 12 best idea of what the numbers were and how the 13 numbers all fit together. And so, it seemed 14 appropriate for me to do that. 15 Q. Now, Mr. Crow, the OTS showed you a 16 number of documents which reflected that USAT was 17 attempting to generate relatively steady earnings 18 on a quarter-by-quarter basis. 19 Do you remember that, sir? 20 A. I do. 21 Q. Does that surprise you? 22 A. No, sir. 15993 1 Q. Based on your experience as an 2 accountant at Arthur Andersen and your experience 3 at First City, is this unusual? 4 A. No, sir. It's the -- it's the norm. 5 It's not unusual at all. 6 Q. Can you explain to the Court why a 7 public company would try to avoid a seesaw, as you 8 used the words I think in response to Mr. Guido's 9 question -- a seesaw in its quarterly earnings? 10 A. Well, within the accounting rules -- 11 and you've got -- you've always got to follow the 12 accounting rules obviously. But you don't want to 13 have a situation where you record a huge gain in 14 one quarter for whatever reason and then a huge 15 loss in the next quarter. 16 And to give an example, if, let's say, 17 management knew that some big transactions were 18 closing and you had a 40-million-dollar gain and 19 you've got a 40-million-dollar loss, it would be 20 desirable to have those fall in the same quarter 21 because if you report the 40-million-dollar gain, 22 for example, in the first quarter, then investors 15994 1 might get real excited and say, "My goodness. 2 Let's go out and buy this stock." And then the 3 next quarter, you report a 40-million-dollar loss 4 and it's like, "My goodness." You know, the guys 5 that bought the stock when they thought things 6 were going real rosy, they are mad. 7 And you know, you can flip it on its 8 head. It could be the other way around. But the 9 point is it's -- public companies, just that's the 10 way it's done, or at least that's my experience. 11 That's the way we did it at First City. That's 12 the way I saw it done at Arthur Andersen. I can't 13 say for a fact, but I suspect that's the way it's 14 done today. 15 Q. Would huge swings in profits -- and the 16 example you just gave us, assuming that all other 17 operations were the same, the swing in the profit 18 would be $80 million one quarter to another. 19 Right? 20 A. That is correct. 21 Q. If you didn't time or try to time the 22 two transactions to at least fall within the same 15995 1 reporting period. Right? 2 A. Right. That's -- you know, you -- 3 as -- that's just part of financial management. 4 You -- you know, it's not always possible; but you 5 try as best you can to do that. 6 Q. And one of the effects of failing to do 7 this would be -- I think you've suggested -- 8 turmoil in the equities markets of the stock of 9 the company involved. Right? 10 A. Yes, sir. 11 Q. Now, did United also have repo lines 12 outstanding? 13 A. Yes, sir. We had major repo lines, and 14 then we also -- you know, your quarterly -- 15 although United Financial Group's reports didn't 16 directly affect United Savings, they were reported 17 prominently in the newspaper. And it definitely 18 has an effect on your, you know, credit lines or 19 potential effect on your credit lines. It has an 20 effect on your depositors potentially. 21 Q. And it affects your depositors because 22 it may affect the rate that you have to pay for 15996 1 deposits; is that right? 2 A. Right. And, in fact, during this time 3 period or maybe a little later than we're talking 4 about here, there was something called a Texas 5 premium to be paid on deposit rates. And that was 6 simply the Texas thrifts were viewed to be in such 7 sad shape that they had to pay an increment above 8 the norm compared to the rest of the country to 9 raise deposits. 10 Q. Now, sir, the notice of charges alleges 11 that you, among others at USAT, deceived the 12 auditors. 13 Do you recall those claims? 14 A. Vividly. 15 Q. Do you recall what Gerry Williams said 16 about that in his testimony? 17 A. I think Mr. Williams used the word 18 "outrageous." 19 Q. Well, regardless of what word he used, 20 what's your reaction to the idea that you were 21 deceiving the independent auditors? 22 A. It's quite strong. If I -- I mean, 15997 1 it's absolutely ridiculous. I would not do that. 2 I did not do that. It's -- it's -- it's a stupid 3 allegation. I mean, I easily could have left to 4 go back into commercial banking. Why am I going 5 to be deceiving auditors? It -- it actually -- 6 this is not quite a proper term, but it burns me 7 up. 8 Q. Mr. Guido has suggested that you 9 massaged the accounting to accommodate the 10 strategic plan of more-senior management. 11 Did you ever do that, sir? 12 A. No, sir, I did not. 13 Q. If -- were the accounting on most major 14 transactions reviewed by the independent auditors 15 at United? 16 A. Yes, sir. 17 Q. And if there was a difference between 18 your accounting conclusion and theirs, which one 19 prevailed? 20 A. Ultimately, Peat Marwick. 21 Q. How often did you consult with 22 Peat Marwick on accounting issues? 15998 1 A. A lot, especially after the restatement 2 of earnings. 3 Q. Now, Mr. Crow, the OTS showed you a 4 number of documents which indicated that a 5 significant portion of USAT's income after 1985 6 came from the sale of assets. 7 Do you recall that? 8 A. I do. 9 Q. And that would include the sale of 10 branches? 11 A. Yes, sir. 12 Q. And that would include the sale of 13 loans and loan servicing? 14 A. Yes, sir. 15 Q. And that would include the sale of such 16 interests as Weingarten Realty? 17 A. Right. 18 Q. The sale of corporate securities? 19 A. Right. 20 Q. Was all of that disclosed to the 21 regulators and the auditors, Mr. Crow? 22 A. Yes, sir. 15999 1 Q. Do you recall meeting with the auditors 2 from time to time and discussing United's 3 operations and where it was getting its gains 4 from? 5 A. It was a -- yes, sir, I sure do. 6 Q. I'd like to ask you to turn your 7 attention to B1023, Tab 633 in evidence. It's a 8 memo dated June 2nd, 1986, from Ginger Baugh to 9 the file about a meeting that occurred on May 21, 10 1986, at which you were present. 11 Do you have that in front of you, sir? 12 A. I do. 13 Q. We've already looked at this document 14 for other purposes in this case, but I'd like to 15 direct your attention to the middle of Page 2 of 16 the document, and the second full paragraph -- and 17 I'm just going to read three sentences. 18 "Supervisory agent Twomey stated his concern with 19 the net operating losses in the association. He 20 discussed the fact that United has been depending 21 on gains from securities transactions and branch 22 sales to show net profits." 16000 1 Next sentence, "According to Mr. Crow, 2 income from securities transactions should not be 3 considered extraordinary as United has made them a 4 part of its ordinary operations." 5 Do you see that, sir? 6 A. I do. 7 Q. When you were talking about the fact 8 that you disclosed to the regulators that gains 9 from the sale of securities had been integrated 10 into United's operations and that you were not 11 misleading the regulators into believing where 12 your profits came from, is this one of the 13 meetings you were referring to? 14 A. That's one example, Mr. Villa. And, 15 you know, it's -- if you're -- we had in our 16 profit plan, our budget, gains on sales of 17 securities. And if you -- if you think that 18 process through, you know, if you're trying to 19 hide something, you certainly don't budget it. 20 Q. I'll show you one last document, sir, 21 in this line. This is in your files as A12235, 22 and it's in evidence at Tab 888. We have a blowup 16001 1 for the first three pages, and we're going to put 2 it up for your review and everybody else to see. 3 MR. GUIDO: What's the exhibit number 4 again? 5 MR. VILLA: 888. Oh, the A number? 6 12235. 7 8 (Discussion held off the record.) 9 10 Q. (BY MR. VILLA) Mr. Crow, do you 11 recognize Exhibit 12235? It's in your book, and 12 I've also had the first three pages blown up for 13 the review in the courtroom. 14 Do you see that, sir? 15 A. Yes, sir, I do. 16 Q. And was that something that you worked 17 on? 18 A. Yes, sir, it was. 19 Q. Can you tell me what it is? 20 A. It was basically -- during 1987, we had 21 several restructuring proposals. And I believe 22 this one had to do with a proposed spin-off of 16002 1 problem real estate. We were just struggling 2 with, you know, "How can we get some of these 3 non-accruing loans and problem real estate off the 4 books of the savings and loan" because we knew the 5 cost of carry was choking us. 6 Q. And do you recall that this document 7 was submitted to the Federal Home Loan Bank of 8 Dallas? 9 A. I do remember that. 10 Q. Look -- I'd like to direct your 11 attention to the first paragraph of the document. 12 Do you see that? 13 A. Yes, sir, I do. 14 Q. When you told Mr. Guido that you had on 15 occasion told the federal regulators that United 16 was maintaining itself through the sales of 17 appreciated assets including gains from the sale 18 of securities -- do you recall that testimony to 19 Mr. Guido? 20 A. Yes, sir, I do. 21 Q. Were you referring to entries such as 22 this one in the first paragraph where it says, 16003 1 "For the past few years, regulatory net income has 2 been maintained through gains on the sales of 3 loans and loan servicing, securities gains, branch 4 sale gains, and other non-recurring activities"? 5 A. That's an example of what I was trying 6 to convey to Mr. Guido. 7 Q. Do you recall, sir, preparing this 8 chart for the Federal Home Loan Bank of Dallas in 9 which you backed out of your income your profit on 10 the sale of investment securities? 11 A. Yes, sir. That's -- you know, being a 12 numbers guy, that's -- that is my handiwork there, 13 that little table, because, you know, I'm more 14 comfortable with numbers. And it seems to me to 15 pretty clearly depict that you've got regulatory 16 net income but if you backed out gains on sales 17 that, you know, we all know at some point it's 18 going to -- I mean, you can't have appreciated 19 assets forever to sell. 20 At some point, that's going to end. 21 And if you back all those items out, the loss is 22 pretty significant. 16004 1 Q. Finally, sir, let me direct your 2 attention to the paragraph on Page 2 where it says 3 "United's financial position today is that 4 significant future gains from asset sales are not 5 available. Most of the above-water assets have 6 been liquidated and the remaining assets would not 7 generate a significant profit upon sale." 8 Do you see that, sir? 9 A. I do. 10 Q. Now, sir, was there any attempt to hide 11 from the federal regulators the fact that United 12 was trying desperately to stay alive? 13 A. No, sir. No, sir. Not at all. If I 14 remember -- I mean, that was the stated objective. 15 It was -- it was publicly stated. I mean, I 16 remember Mr. Gross making this statement, "We want 17 to be the last kid on the block. We want to stay 18 alive and be restructured as part of the Southwest 19 Plan." 20 Q. Sir, what was happening to the thrift 21 industry in Texas in May of 1987? 22 A. The thrift industry in Texas was under 16005 1 intense pressure because the foreclosed real 2 estate and non-accruing loan problem became worse 3 and worse and worse. And the institutions, 4 including United, weren't that strong to start 5 with. So, it just became pretty bad. 6 Q. Now, sir, after this was submitted to 7 the Federal Home Loan Bank of Dallas, did you ever 8 get any calls or letters saying "We are surprised 9 about this," that "This is not something that we 10 expected"? That "We thought you were earning all 11 of these profits on a quarter-to-quarter basis 12 from single-family home loans"? 13 A. No, sir. I did not, and I don't think 14 we would have gotten such a call, but I can't 15 factually say. But I don't -- my memory is there 16 wouldn't have been any surprise to that kind of 17 statement. 18 Q. There wouldn't have been any surprise 19 by the Federal Home Loan Bank of Dallas because 20 they could see it in your financials. Right, sir? 21 A. Yes, sir. 22 Q. And they could see -- and you told them 16006 1 about it; isn't that right, sir? 2 A. Yes, sir. I personally reconfigured 3 the performance reports and the financial 4 statements to, as best we could, highlight on the 5 face of the income statement base net interest 6 income and coming down to special gains that were 7 being taken. And, you know -- I mean, if we were 8 trying to hide something, we did a real poor job 9 of hiding it. 10 MR. VILLA: Your Honor, I'm going to 11 move on to the employment now or compensation 12 area. I'm happy to start now, or if you'd like to 13 start tomorrow morning, I can do that, too. 14 THE COURT: Fine. We'll adjourn until 15 9:00 tomorrow. 16 17 (Whereupon at 4:34 p.m. 18 the proceedings were recessed.) 19 20 21 22 16007 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 22nd 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 16008 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 22nd 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