16272 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 24, 1998 22 16273 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 16274 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 16275 1 2 INDEX OF PROCEEDINGS 3 4 MICHAEL CROW 5 Continued Examination by Mr. Nickens....16276 6 Examination by Mr. Blankenstein.........16428 7 Examination by Mr. Eisenhart............16447 8 Further Examination by Mr. Schwartz.....16454 9 . 10 . 11 . 12 . 13 . 14 . 15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . 16276 1 2 P-R-O-C-E-E-D-I-N-G-S 3 (9:00 a.m.) 4 THE COURT: Be seated, please. The 5 hearing will come to order. 6 Unless there are preliminary matters, 7 we will proceed with the examination of the 8 witness. 9 Mr. Nickens. 10 MR. NICKENS: Thank you, Your Honor. 11 12 CONTINUED EXAMINATION 13 14 Q. (BY MR. NICKENS) Mr. Crow, when we 15 took our recess yesterday, we were talking about 16 the composition of Joe's portfolio. And I would 17 like to ask you about just a few more documents 18 about this issue, and then we'll move on to 19 something else. 20 A. Okay. 21 Q. Would you take a look at Exhibit -- 22 it's A1419 and, in particular, the last two pages, 16277 1 which are -- should be a memo from Mr. Williams to 2 Mr. Gross, Mr. Williams, and yourself? 3 A. Yes, sir. 4 MR. GUIDO: Do you have a tab number on 5 that document? 6 MR. NICKENS: It's Tab No. 350. 7 Q. (BY MR. NICKENS) Do you recall that 8 Mr. Guido questioned you about this exhibit? And 9 there's a reference to the second page of "Based 10 on our portfolio at October 31, 1986, the 11 estimated net spread on the MBS arbitrage 12 excluding the new MBS subsidiary AMP is negative 13 .99." 14 A. Yes, sir, I see that. 15 Q. And you told Mr. Guido that the numbers 16 there reflected probably what was Joe's portfolio 17 and other MBS assets? 18 A. That is correct. 19 Q. Now, let me ask you to look at a 20 document that we have labeled as B3945. It's not 21 yet in evidence. I believe I mentioned it 22 yesterday, but it's not yet in evidence. 16278 1 MR. GUIDO: Your Honor, we do not have 2 the document, and it and eight others are on a 3 list that I got last evening from Mr. Nickens that 4 are also not on Mr. Nickens' exhibit list. I 5 object to the introduction of this document and 6 the other seven documents because they have not 7 been produced to the OTS in a timely manner. 8 MR. NICKENS: I don't know what he's 9 talking about, Your Honor. If we could take them 10 up as they come along, maybe we could address it. 11 This document was passed out yesterday to the OTS; 12 so, if this is one of the eight, we can knock that 13 one down right away. 14 MR. GUIDO: Your Honor, I don't believe 15 it is one of the eight. I had a conversation with 16 Mr. Nickens' secretary yesterday in which I 17 specifically asked for these documents, and I 18 haven't received the documents as yet. 19 MR. NICKENS: Your Honor, this is 20 the -- 21 THE COURT: Well, we have 22 Exhibit B3945. I'm not sure -- 16279 1 MR. GUIDO: As admitted, Your Honor. 2 THE COURT: It hasn't been offered yet. 3 It was identified. 4 MR. GUIDO: I now have the document. 5 MR. NICKENS: Let's see if we could 6 proceed, Your Honor. 7 THE COURT: Yeah. I think this 8 document has been available before. I'm not sure 9 what arrangements you have about receiving 10 exhibits before they are to be used, but it seems 11 to me heretofore that the parties have worked that 12 out. 13 MR. NICKENS: Your Honor, the last -- a 14 day ago or yesterday morning, I gave Mr. Guido my 15 best estimate of the documents that I was going to 16 use. I amended that last night, and we 17 transmitted it to him. As far as I know, that 18 list is accurate with what I intend to use today. 19 So, he's had at least overnight notice and more 20 than that for most of the documents. 21 MR. GUIDO: Your Honor, that is 22 patently incorrect. There are documents that are 16280 1 on this list that I expressly asked Mr. Nickens' 2 secretary for because they are not on the exhibit 3 list, Your Honor; and they are not exhibits that 4 have been previously exchanged between the 5 parties. We'll proceed document by document if 6 that's the way you wish to proceed. 7 THE COURT: All right. 8 MR. NICKENS: Let me say that, with 9 regard to that, I had a conversation with 10 Mr. Guido last night where he did not mention any, 11 quote, "missing documents." But let's address 12 them as they come up. 13 Q. (BY MR. NICKENS) Mr. Crow, can you 14 identify Exhibit B3945 as a draft of the exhibit 15 that is in evidence and is attached to A1419? 16 A. Yes, sir. This appears to be Bruce 17 Williams's draft of the memo that finally came out 18 as of November 24th. 19 Q. And if you will turn to Page US 20 300504 -- do you have that in front of you? 21 A. I do, yes. 22 Q. Do you see that there's listed there 16281 1 the elements of the number that is listed as the 2 MBS portfolio in the memo at 1,127,651? 3 A. Yes, sir, I do. 4 Q. And tell the Court what those 5 numbers -- what comprise that number. 6 A. That includes the -- what's called the 7 USAT Treasury portfolio, which would be general 8 mortgage-backs. That would include collateral in 9 the DARTs subsidiary or subsidiaries. 10 Investments, 756 million, I'm not quite sure I can 11 isolate what's in that number exactly. And then 12 the Series E bond would be mortgage-backs. I 13 believe those were the Ginnie Maes that 14 collateralized that Series E bond. 15 Q. Was the MBS in the treasury portfolio 16 risk-controlled arbitrage? 17 A. No, sir. 18 Q. Was the MBS owned in connection with 19 collateral for the Series E bond risk-controlled 20 arbitrage? 21 A. No, sir. 22 Q. And those two together are about 16282 1 $250 million of this 1.1 billion? 2 A. That is correct. 3 Q. And that clearly is not part of Joe's 4 portfolio? 5 A. No, sir, not at all. 6 Q. And to the extent we could identify it, 7 Joe's portfolio would be, you believe, in that 8 number of investments? 9 A. I believe it would be, yes, sir. 10 MR. NICKENS: Your Honor, we offer 11 Exhibit B3945. 12 MR. GUIDO: No objection, Your Honor. 13 THE COURT: Received. 14 Q. (BY MR. NICKENS) Now, Mr. Crow, let me 15 ask you to look at Exhibit A13005, which can be 16 found at Tab 1122 and which has been discussed at 17 various times in the record as Smith Breeden's 18 analysis of mortgage-backed securities, interest 19 rates, caps, swaps, and collars. 20 Do you have that document in front of 21 you? 22 A. Yes, sir, I do. 16283 1 Q. Let me ask you to turn over to the 2 fifth page, which is -- it's got a Bates 3 No. 001677 and it's paginated No. 4. 4 A. Okay. 5 Q. What is the amount of the mortgage 6 pools that is indicated Smith Breeden was 7 analyzing on this date in June of 1986? 8 A. The number indicated as book value 9 which would be the -- I believe the far left-hand 10 number at the top is mortgage-backed pools of 11 1,907,241,000. 12 Q. By virtue of the size of that number, 13 must it have included the CMO collateral that USAT 14 owned? 15 A. Yes, sir. I think they would have been 16 looking at a macro basis. So, I believe it -- 17 given the size of that number, it's a safe 18 conclusion to include the CMO collateral. 19 Q. Is that number Joe's portfolio? 20 A. Well, no. That's much bigger than 21 Joe's portfolio. I'm -- Joe's portfolio probably 22 is included in there, but it would be a relatively 16284 1 small part. 2 Q. And an analysis of those 3 mortgage-backed securities, although that might 4 include Joe's portfolio, would be directed toward 5 the whole? 6 A. Yes, the whole universe of the 7 1.9 billion. 8 Q. And in particular, if you look at the 9 conclusions under discussion on Page 11, these 10 would have been the conclusions of discussion of 11 the 1.9 billion that Smith Breeden was then 12 looking at? 13 A. Yes, sir. 14 Q. And not isolated to Joe's portfolio? 15 A. No, sir. 16 Q. Now, let me ask you to look at another 17 document with regard to this issue, which is 18 Exhibit A10631 at Tab 572. This is a document 19 that Mr. Guido asked you about. Mr. Crow, I want 20 to focus your attention with regard to this issue 21 of the composition of Joe's portfolio to 22 Page No. OW002928. 16285 1 A. Okay. 2 Q. That document says as of 8/31/85, 3 correct? 4 A. It does. 5 Q. And that was a few months after the 6 formation of Joe's portfolio? 7 A. Yes. 8 Q. And what does it indicate -- can you 9 tell us if it appears that this is a statement of 10 the composition of Joe's portfolio as of that 11 date? 12 A. Given my memory of the size, it does 13 appear so. 14 Q. What is the total amount of the current 15 face of the securities indicated as of that date? 16 A. Just a little over $470 million. 17 Q. And that's consistent with your 18 recollection of Joe's portfolio, that it was 19 around $500 million? 20 A. Yes, sir, it is. 21 Q. If you could look over at the 22 composition of the portfolio of Fannie Mae 12 and 16286 1 a halfs and 13s, Freddie Mac 12s, Freddie Mac 13s, 2 Ginnie Mae GPMs of 12 and a quarter and 3 Ginnie Mae 13s -- do you see that? 4 A. I do. 5 Q. If you look at the average price, 6 Mr. Crow, would that indicate whether those 7 securities were bought as premium securities or 8 discount securities or both? 9 A. You mean if you took a weighted average 10 of all these securities? 11 Q. Well, just individually, what does it 12 indicate to you? 13 A. Okay. It indicates -- like, the first 14 one, the Fannie Mae 12 and a halfs, were purchased 15 at a slight premium. And conversely, the 16 Freddie Mac 12s were purchased at a slight 17 discount. So, there's both premiums and discounts 18 in this. 19 Q. Now, from an accounting point of view, 20 did the book price change from month to month on 21 securities that had been bought either at a 22 discount or at a premium? 16287 1 A. The book price? 2 Q. Yes, sir. 3 A. Yes, sir. Effectively, it would 4 because we would amortize or accrete the premium 5 or discount for accounting purposes. 6 Q. Tell the judge how that works. 7 A. Well, in the case -- let's just take 8 the first one, the Fannie Mae 12 and a halfs, 9 where the institution paid 101.209. The 10 institution paid a premium of roughly one and a 11 quarter points for that bond. And for accounting 12 purposes, you would spread that premium into -- 13 basically, as a reduction of income over the 14 estimated life of that bond. 15 Q. Now, how would you come up with the 16 estimated life of the bond, Mr. Crow? 17 A. The best I remember, we would take -- 18 we would do it on a quarterly basis. And for 19 accounting purposes, we would use estimated CPRs 20 and book the premium amortization or the discount 21 accretion based on that estimate for the next 22 quarter. And then we would look at it at the end 16288 1 of the next quarter and make an adjustment. 2 Q. You would estimate it for the quarter. 3 And then if your quarter's actual experience 4 turned out to be different from that, you would 5 make an adjustment? 6 A. That is correct. 7 Q. Now, you mentioned the term CPR. That 8 was a prepayment speed or estimate? 9 A. Yes, sir. That -- that means constant 10 prepay rate. 11 Q. Now, how did you go about estimating 12 what that CPR would be when you were looking into 13 the future? 14 A. We would take the -- the best 15 information available, which typically was from 16 the various Wall Street brokerage firms, their 17 estimates of what prepayment were going to be. 18 Q. Now, could you compare the state of 19 prepayment modeling on mortgage-backed securities 20 in, let's say, 1985 at the time that Joe's 21 portfolio was put together with what it is today? 22 A. Well, comparing the -- those two dates, 16289 1 basically, we've advanced quite a lot in terms of 2 prepay rate assumptions and how those are modeled. 3 And there's been a great deal of research done on 4 it. 5 During the 1985 time frame, I believe, 6 it was common to use FHA/VA prepayment books. And 7 today, prepay type work is done on fairly 8 sophisticated computers. There's something called 9 the Bloomberg machine. 10 Q. And back in 1985, at the time Joe's 11 portfolio was being put together and managed, what 12 was the principal basis for these yield tables 13 that you found in the books published by the VA 14 and others? 15 A. Historical experience. 16 Q. And do you recall we had a discussion 17 where Mr. Guido asked you about the rolldown that 18 occurred in the early part of 1986? 19 A. Yes, sir. 20 Q. What do you recall with regard to 21 prepayments in that time frame? 22 A. During the rolldown? 16290 1 Q. The -- what you learned about 2 prepayments as a result of the experience in that 3 time frame where the rolldown was conducted. 4 A. That the actual prepayment rates were 5 far in excess of what any of the Wall Street firms 6 or, to my knowledge, any of the experts had 7 forecasted. 8 Q. Now, let me ask you, turning to the 9 subject about prepayments, to look at a document 10 Mr. Guido asked you about which is B377 at 11 Tab 242. 12 Do you have that document in front of 13 you? 14 A. Yes, sir, I do. 15 Q. Is this the Salomon Brothers 16 presentation dated October 24, 1984, that was part 17 of the basis on which Joe's portfolio was put 18 together? 19 A. Yes, it is. 20 Q. Now, we're not going to go through the 21 entire document, Mr. Crow. But was it -- was it 22 Salomon Brothers' recommendation that 16291 1 risk-controlled arbitrage using MBS was a 2 conservative way for an S&L to grow? 3 A. Yes, sir. I would -- I would -- from 4 my independent memory, I would use the word 5 "reasonable" and "conservative." 6 Q. Now, Mr. Guido asked you some questions 7 about Page No. CN253042, which is Page 3 of the 8 description of restructuring alternatives. 9 A. Yes, sir. 10 Q. I'm going to ask you -- he asked you to 11 read the first paragraph under "high coupon 12 mortgage securities"? 13 A. Yes, sir. 14 Q. And I would just ask you to go to the 15 next page and read the next two paragraphs to 16 yourself. 17 A. Okay. 18 MR. GUIDO: Which page are we on? 19 MR. NICKENS: Well, it goes from 253042 20 to 253043. 21 Q. (BY MR. NICKENS) I would like for you 22 to read the entire section dealing with high 16292 1 coupon mortgage securities. 2 A. Read the entire section? 3 Q. Yeah, the three paragraphs. 4 A. Okay. (Witness reviews the document.) 5 Yes, sir, I've read those. 6 Q. Is it indicating there, Mr. Crow, that 7 Salomon Brothers is indicating there may be an 8 investment opportunity in high coupon mortgage 9 securities? 10 A. Yes, sir. 11 Q. And having to do with the shape, at 12 that point, of the yield curve and the spread of 13 those particular securities to the treasury yield 14 curve, correct? 15 A. That is correct. 16 Q. Now, let me ask you to turn back -- 17 this is coming forward in the document, I should 18 say, to Page No. CN253028. And it's a document 19 entitled "buy assets," and I want to focus your 20 attention on the portion that says "mortgage 21 securities." 22 A. Okay. 16293 1 Q. Do you see there's listed there 2 approximately 500 million of a Ginnie Mae 223F 3 current coupon and some Fannie Mae and 4 Freddie Mac 8s that together comprise about 5 500 million? 6 A. Well, I see the Ginnie Maes, which 7 would be 500 million; and then the two -- the two 8 8 coupons would be 250 each. 9 Q. And what were the relative yields of -- 10 well, that's a -- do you know what the 11 Ginnie Mae 223 was? Well, it says that the yield 12 was 13.4 percent. 13 A. Yes, sir, I see that. 14 Q. And that would indicate that the -- if 15 those are current coupon, that the coupon is 16 somewhere around 13 and a half? 17 A. That would indicate that to me, yes, 18 sir. 19 Q. And what were the relative yields of 20 these three securities over a range of about 21 550 basis points? 22 A. I -- 16294 1 Q. There's a column called "yield at 2 10/19/84." 3 A. The yield at 10/19/84, they were all in 4 the range of -- the lowest is 13.10 and the 5 highest is 13.40. 6 Q. And how did the average lives of those 7 securities, over a 550 basis point range, compare? 8 A. Just eyeballing it, it looks like a 9 weighted average life of nine and a half years. 10 Q. And, Mr. Crow, in order to make an 11 estimate of average life, one has to make a 12 prepayment assumption on mortgage-backed 13 securities? 14 A. Yes, sir. 15 Q. And what would this range indicate to 16 you was Salomon Brothers' prepayment assumption 17 with regard to these various securities? 18 A. It's not specifically identified as it 19 relates to the Ginnie Mae, but the -- the 20 Fannie Mae and the Freddie Mac is 6 percent. And 21 given that the average life of the Ginnie Mae is 22 longer, if I'm not mistaken, it would have assumed 16295 1 a lower CPR rate. 2 Q. In any event, quite close together in 3 order to produce an average life that close? 4 A. Yes, sir, absolutely. 5 Q. Now, let me ask you to turn over a 6 couple of pages to what is entitled -- it's 7 Page 8, CN253030; and it's a pro forma income 8 analysis. 9 A. Yes, sir. 10 Q. Does it indicate a calculation of 11 duration of these Ginnie Mae 13 and a halfs and 12 the Fannie Mae and Freddie Mac 8s? 13 A. It does. 14 Q. And it compares them 4.8 to 5.6? 15 A. Yes, sir. 16 Q. To make a duration analysis, do you 17 have to make a prepayment assumption? 18 A. Yes, sir. 19 Q. And for these durations to be this 20 close, what must one conclude about the assumption 21 of the prepayment -- the prepayment assumptions 22 that went into these calculations for 16296 1 Ginnie Mae 13 and a halfs and Fannie Mae 8s? 2 A. I would conclude that the prepay 3 assumptions were very close. 4 Q. Now, let me ask you to look at a 5 document that is Exhibit B963. It has not yet 6 been received into evidence. 7 Can you identify B963 for us, Mr. Crow? 8 A. Yes, sir. This is a memo that I wrote 9 to Jenard Gross and Gerry Williams, May 1st, 1986, 10 giving an update about CMOs. 11 MR. NICKENS: Your Honor, we offer 12 Exhibit B963. 13 MR. GUIDO: No objection, Your Honor. 14 THE COURT: Received. 15 Q. (BY MR. NICKENS) Now, Mr. Crow, what 16 were you -- what was the concern that led to this 17 memorandum? 18 A. As best as I remember, United Savings 19 had issued three series of CMO bonds that were 20 collateralized by mortgage-backed securities; and 21 basically, what United kept is the residual, 22 the -- from that issue. And all other things 16297 1 being equal, the longer that residual stays 2 outstanding -- in expressed a different way, the 3 lower the prepay rate, the better off the 4 institution is. 5 Q. Now, when had USAT bought the 6 mortgage-backed securities as collateral for these 7 CMOs? 8 A. I'm not positive, but I think it was in 9 the '85 time frame. It was certainly '84 or '85 10 or early '86. 11 Q. I think we'll see another page here 12 that may help you with that. 13 A. Okay. 14 Q. But anyway, that's your recollection? 15 A. Yes, sir. 16 Q. Now, this is coming -- this is in the 17 midst of the rolldown? 18 A. The time frame would be roughly the 19 same, yes, sir. 20 Q. And had USAT begun to observe 21 unexpectedly high prepayments? 22 A. Yes, sir. 16298 1 Q. And were you in the process of 2 evaluating whether or not you needed to hedge your 3 CMOs? 4 A. I remember that, yes. 5 Q. And was that one of the reasons that 6 Smith Breeden was hired? 7 A. Yes, sir, it was. 8 Q. Now, and you've indicated in your memo, 9 looking at the last sentence of the first 10 paragraph, "I have attached as Exhibit 2 the 11 latest prepayment speed projections from Morgan 12 Stanley which are indicative of that found from 13 the Wall Street firms." The next paragraph, "On 14 the other hand, if the prepayment speeds presented 15 by Smith Breeden Associates prove to be correct, 16 the results will be much worse than we have 17 anticipated." Then you go on to analyze in the 18 next paragraph -- to present your analysis of the 19 comparison of those prepayment assumptions -- 20 A. Yes, sir. 21 Q. -- and the effects on the CMOs? 22 A. That's correct. 16299 1 Q. And you conclude, "Smith Breeden's 2 projections are radically different than any I 3 have been able to find"; is that correct? 4 A. Yes, sir. I remember Smith Breeden's 5 prepay assumptions were well above all of the 6 Wall Street dealers; and we tried to get 7 Goldman Sachs, Merrill Lynch, you know, all of the 8 big respected names. 9 Q. If you would, turn to Exhibit 1 and 10 explain to the Court what you were trying to 11 demonstrate to Mr. Gross and Mr. Gerry Williams. 12 A. What I was trying to demonstrate is 13 that if you focus on the last two columns of the 14 schedule, those are CPR numbers or prepay rates, I 15 believe. And you can see that the prepay rates 16 for the various pieces of collateral, 17 Smith Breeden is generally significantly higher 18 than Morgan Stanley. And I had indicated Morgan 19 Stanley seemed to be pretty indicative of what all 20 the Wall Street firms were saying. 21 Q. In any event, you were doing an 22 industry-wide survey to check out your prepayment 16300 1 assumptions on your CMOs? 2 A. That's correct. 3 Q. And if we can turn over to -- by the 4 way, do you know whether these particular 5 securities at that time were premium, discount, or 6 current coupon? 7 A. You know, just -- if it was in the same 8 time frame as the last schedule you showed me -- 9 Q. Yes, sir. 10 A. I guess I can't ask you that question. 11 Q. You don't know from looking at this 12 document? 13 A. No, I -- no, I really don't. I suspect 14 they are discount, but I can't say. Discount or 15 close to current coupon. 16 Q. Let me ask you to look at the 17 Page US -- it's up at the top -- 3015350, which is 18 entitled "Morgan Stanley mortgage-backed 19 securities research, MBS market analysis as of 20 four/18/86." 21 A. Okay. 22 Q. And do you see there an analysis under 16301 1 "Ginnie Mae," "Freddie Mac," "Fannie Mae," 30- and 2 15-year CPRs over a wide range of coupons? 3 A. Yes, sir, I do. 4 Q. And do you see one that's indicated as 5 being the benchmark? 6 MR. GUIDO: Which page are you on? 7 A. That would be the -- looks like -- 8 that's really hard -- is that the 8 and a half? 9 It's hard to read. 10 Q. (BY MR. NICKENS) Yes, sir, I believe 11 that's correct. In the Ginnie Mae -- the 12 Ginnie Mae 8 and a half, the first column -- 13 A. Yes, sir. 14 Q. -- what did that benchmark indicate, if 15 you know? 16 A. The benchmark -- I'm not positive, but 17 I think that would be the current coupon or 18 roughly the current coupon. 19 Q. Now -- and this is as 4/18/86? 20 A. Yes, sir. 21 MR. GUIDO: I'm sorry. I don't see the 22 reference to benchmark in my copy. 16302 1 MR. NICKENS: It's under the column 2 "DEMRK 4/18/86." 3 A. It's BEMRK. 4 MR. GUIDO: Thank you. 5 Q. (BY MR. NICKENS) Now, let me ask you 6 to turn over to Exhibit 3 of this exhibit, which 7 is at Page US3015352, a couple pages more. 8 A. Yes, sir. 9 Q. Can you identify that as your 10 memorandum of April 11th, 1986, again to Mr. Gross 11 and Mr. Gerry Williams about your summary of the 12 CMO Series 1 through 3? 13 A. Yes, sir. 14 Q. And you have a discussion there about 15 pricing speed? 16 A. Let's see. Yes, I do. 17 Q. Explain to the Court what pricing speed 18 meant and means. 19 A. Pricing speed -- and let's just take 20 the CMO issuance. As CMO bonds are issued, 21 there's an official, quote, "pricing speed" that 22 is placed on the prospectus and so forth; and that 16303 1 is the speed that yields are calculated off of and 2 so forth. It's the speed that appears reasonable 3 at the time the security is issued. But, of 4 course, as interest rates move up and down, the 5 pricing speed is -- all that tells us is what 6 their best estimate was at the time the securities 7 were issued. 8 Q. On mortgage-backed securities, in order 9 to come up with a price, you have to make a 10 prepayment assumption? 11 A. You do. 12 Q. And that price is the one that 13 investment bankers use to sell the security into 14 the marketplace? 15 A. That is correct. 16 Q. And he provides his prepayment 17 assumption or pricing speed so people can 18 evaluate, in purchasing the security, whether or 19 not they think the price is reasonable and, 20 therefore, the prepayment speed is reasonable? 21 A. That's correct. 22 Q. And, of course, if you think it's 16304 1 unreasonable, then you don't buy the security. 2 Right? 3 A. Right. 4 Q. But if the investment banker is 5 successful in marketing it into the marketplace at 6 that pricing speed, it implies that the 7 marketplace has evaluated that pricing speed, as 8 well? 9 A. Yeah. Typically, in the real world, 10 the pricing speed is very indicative of what the 11 current thinking is of the speed of that 12 collateral. 13 Q. Let's look at -- if we can get some 14 more information concerning what pricing speeds 15 were in this time frame. 16 The second paragraph of your memo of 17 April 11. You say there, Mr. Crow, "A critical 18 element of concern is that the, quote, 'pricing 19 speed' will not be our actual experience. Should 20 interest rates persist at current levels or 21 decline, it is probable that CMO Series 1 will 22 prepay materially faster than the 7 and a half 16305 1 percent constant prepayment rate used in pricing 2 of the bonds." 3 Do you see that? 4 A. I do. 5 Q. Now, what does that indicate to you was 6 the pricing speed that was used in connection with 7 the sales of these bonds? 8 A. 7 and a half percent. 9 Q. Now, you go on, "This is primarily 10 because of the overall drop in interest rates from 11 the pricing date." 12 Now, what is the date indicating? 13 A. January 30th, 1986. 14 Q. You go on to say, "To current levels. 15 The yield on our thirty-year governments has 16 declined by approximately 160 percent." 17 Do you see that? 18 A. I do. 19 Q. I asked you earlier about the date of 20 CMOs. Does this help you with regard to placing 21 the date? 22 A. Yes, sir, it does. 16306 1 Q. And the pricing speed used in the end 2 of January 1986 for these current coupon 3 securities was 7 and a half percent? 4 A. That is correct. 5 Q. And in April and May of 1986, you're 6 evaluating whether that is a correct pricing 7 speed? 8 A. Well, I was evaluating whether the 9 pricing speed doesn't change, period. But after 10 the fact, you've got to look at what is really 11 going to happen. In other words, the pricing 12 speed is a fixed number that's on the prospectus 13 when the bonds are issued. As opinions change, 14 you've got to evaluate, you know, that pricing 15 speed as -- is -- may not be indicative of what's 16 really going to happen. 17 Q. Let me ask you to look at the 18 next-to-last paragraph on the page, the last 19 sentence where you relate that very concept. It 20 starts out, "CMO Series 1, if priced today, would 21 be sold at a 12 percent CPR, again, according to 22 Salomon Brothers' trading department"? 16307 1 A. Yes, sir. 2 Q. So, in April of 1986, Salomon Brothers 3 is telling you that the -- that by that date, you 4 would have a 12 percent CPR and you had assumed a 5 7 and a half CPR on January 30th, 1986? 6 A. That is correct. And when I -- let me 7 be clear. When we say "I assumed" or "we 8 assumed," that's Salomon Brothers assumed because, 9 really, what happened is that there was 10 mortgage-backed securities collateral and Salomon 11 Brothers was selling out CMO securities 12 collateralized by those mortgage-backed 13 securities. So, Salomon Brothers was making 14 representations to their investors that were 15 buying the CMOs; and their best representation at 16 the time of issuance was 7 and a half. 17 Q. And people bought them on that basis? 18 A. Yes, sir. 19 Q. And by April 11th, they were telling 20 you that it now had gone to 12? 21 A. Yes, if we issued the same type deal 22 today, the pricing speeds would be roughly 12. 16308 1 Q. Let me ask you to turn the page and 2 look -- this is at US3015303 dated 4/10/86. Tell 3 the Court what you were intending or trying to 4 express in Exhibit 1. 5 A. It's been a long time, Mr. Nickens. 6 Q. I understand. 7 A. It appears to me I was trying to convey 8 to Mr. Gross and Mr. Williams that under these 9 assumptions, this would be our net income and 10 return on assets, year by year. 11 Q. It reflected the pricing speed for each 12 of issuances during this period? 13 A. That is correct. 14 Q. And that's in the column, the fifth 15 column down on the upper half of the graph? 16 A. Yes. It says "pricing speed." And, 17 for example, the first one is 7.5 CPR. The next 18 one is 110 PSA, which converts to roughly 6.5 CPR. 19 It's just another way to express prepayment 20 speeds. 21 Q. Prepayments on CMOs were expressed as 22 PSA? 16309 1 A. Yes, sir. 2 Q. And whereas for a period of time, 3 meaning today, mortgage-backed securities 4 themselves are expressed as CPRs? 5 A. Exactly. But they both referred to the 6 velocity of prepayments. 7 Q. And it is your recollection that 8 roughly 110 percent PSA would be what CPR? 9 A. I know that 100 PSA equals 6 CPR after 10 a period of time. So, 150 PSA would equal 9 CPR. 11 So, 110 PSA would equal somewhere around -- 12 between, you know, around 6 and a half to 7 CPR. 13 Q. It's not a test, Mr. Crow. But if you 14 look at the next page, you'll see the same CMOs 15 expressed as CPRs. 16 A. Yes, sir. 17 Q. And it indicates 7 and a half, 6.6, and 18 9.0? 19 A. Yes, sir. I see that. 20 Q. That was the pricing speed. And the 21 projection at that point in time was what? 22 A. The projection listed in the -- I guess 16310 1 the second column of numbers for CMO 1 was 12 CPR, 2 for CMO 2 was 8.4 CPR, and for CMO 3 was 6 CPR. 3 Q. And the footnotes indicate where you 4 got that information? 5 A. Yes, sir. 6 Q. And where was that? 7 A. In Item No. 1, it was Salomon Brothers. 8 Item No. 2 was Drexel Burnham. Item No. 3 was 9 Salomon Brothers again. 10 Q. All of this being an effort to evaluate 11 whether you needed to change or alter your 12 prepayment assumptions on the CMOs -- 13 A. That is correct. 14 Q. -- in the midst of the prepayment 15 environment that existed during the rolldown? 16 A. That is correct. 17 Q. Now, let me ask you to look at another 18 document that is in the record as A10649, located 19 at Tab 187. Mr. Guido asked you about this 20 document, Mr. Crow, and it was -- I think it's 21 been identified as your summary of the 22 Smith Breeden presentation dated July 3rd, 1986? 16311 1 A. Yes, sir. 2 Q. And do you the see the first topic is 3 the "CMO analysis"? 4 A. Yes, sir, I do. 5 Q. And just above, you described what 6 Smith Breeden had been asked to do? 7 A. Yes, sir, I do. I see that. 8 Q. So, despite the fact that 9 Smith Breeden, you had earlier identified, had 10 radically higher prepayment assumptions, you hired 11 them to evaluate your CMOs? 12 A. Yes, sir, I did. 13 Q. And you see your comment in the middle 14 of the page, "The following comments relate to 15 attachments that follow. Schedule 1 presents 16 Smith Breeden's best guess as to the prepayment 17 speed on our collateral underlying the CMO 18 series." 19 Do you see that? 20 A. I do see that. 21 Q. And this is in July of 1986, correct? 22 A. Yes, it is. 16312 1 Q. Now, did you also hire another 2 investment banker to evaluate your CMOs and the 3 prepayment assumptions there? 4 A. Yes. We asked them to look at it. I 5 can't, off the tip of my tongue -- it might have 6 been Goldman Sachs. It was one of the big 7 investment banking firms. 8 Q. Turn to the next page, and you'll see 9 the third bullet point paragraph. 10 A. Yes, sir. 11 Q. That indicates that Goldman Sachs had 12 suggested a hedge vehicle for the CMOs? 13 A. This is at the bullet point at the 14 bottom of the page, Mr. Nickens? 15 Q. No. I'm sorry. It's at the top, the 16 third bullet point, starts out "Schedule 6." 17 A. Okay. Yes, sir. Yes, sir, I see that. 18 Q. You had hired Goldman Sachs to evaluate 19 whether you needed to hedge your CMO position, 20 correct? 21 A. We did, yes. 22 Q. And they had made a representation. 16313 1 You were asking Smith Breeden to evaluate their 2 recommendation? 3 A. That's correct. 4 Q. All of this depended upon, essentially, 5 prepayment assumptions? 6 A. That was the guts of the analysis, yes, 7 sir. 8 Q. Now, you indicated in your memo that 9 Schedule 1 reflected Smith Breeden's best guess as 10 to prepayment speeds of your collateral which was 11 put out in the first quarter of 1986 or was 12 purchased in the first quarter of 1986. And what 13 does that Schedule 1 show? 14 A. Schedule 1 shows the various series of 15 CMO Series 1, 2, and 3; and it shows an annualized 16 prepay rate that, I believe, they were estimated. 17 Q. And this was whose estimate? 18 A. I believe this is Smith Breeden. 19 Q. What was the range of those prepayment 20 rates, say, on the CMO Series 1? 21 A. On Series 1, just taking the average 22 figures in year one, it was 15 percent. In year 16314 1 two, 18 and a half percent. In year three, 2 20 percent. 3 Q. And it was -- 4 A. And it was somewhat lower on the other 5 series. 6 Q. Did the marketplace -- the 7 mortgage-backed securities marketplace accurately 8 predict the prepayment rates that were experienced 9 on current coupon MBS in the first half of 1986? 10 A. No, sir. 11 Q. Explain to the Court what happened 12 during that period with regard to the market on 13 mortgage-backed securities and the prepayment 14 assumptions that underlay those -- the pricing of 15 those securities. 16 A. Interest rates had fallen 17 significantly, and the prepay rates -- even 18 ignoring interest rates, the prepay rates that 19 were experienced, given a decline of 100 or 20 200 basis points, had been in excess of what the 21 Wall Street firms and all the so-called experts 22 had anticipated. And there were -- you know, 16315 1 there were various reasons. I can't remember all 2 of them. Certainly, interest rates were the very 3 major part of it; but during this time, I think -- 4 during this time period, we had the first of the 5 advertisements of "come in and refinance your 6 home" and situations where -- you know, 7 encouraging people and educating the public, so to 8 speak, that it would be advantageous for Joe 9 homeowner to go from a 12 percent mortgage to a 10 9 percent mortgage. I think there were some 11 lenders that were actually willing to roll in the 12 cost of the fees to refinance into the new loan. 13 You know, it was a change in the world. 14 Q. For whatever reason, the estimates 15 turned out to be radically below the actual 16 experience for that period? 17 A. Yes, sir. 18 Q. Those were not USAT's estimates, were 19 they? 20 A. No, sir. We -- we relied on the Wall 21 Street brokers, the Wall Street research firms, 22 Smith Breeden. And then, you know, we had -- for 16316 1 accounting purposes, we had to come up with our 2 own number; but our numbers were derived from 3 those various sources. 4 Q. Mr. Crow, was USAT the only company 5 that experienced problems as a result of this 6 market environment investing in mortgage-backed 7 securities? 8 A. No, sir. I think -- not at all. It 9 was a very, very, very common problem in, you 10 know, many, many financial institutions. 11 Q. Okay. Mr. Crow, I would like to turn 12 to another subject. Mr. Guido asked you questions 13 for an extended period of time about USAT Mortgage 14 Finance, and that was the subsidiary that was 15 formed after the investment in Joe's portfolio and 16 then was collapsed a few months later prior to the 17 end of the year 1985. 18 A. Yes, sir. 19 Q. Now -- and by "collapse," I mean a 20 portion of the securities that had been purchased 21 were sold prior to year end 1985. 22 Do you recall that? 16317 1 A. That is correct. 2 Q. Now, you indicated, in response to 3 questions by Mr. Guido, that the decision to sell 4 those securities was a business judgment that USAT 5 reached. 6 Do you recall that? 7 A. I do. 8 Q. Now, what was the nature of the problem 9 on which you were exercising business judgment? 10 A. The reason for setting up the sub in 11 the first place was to establish a portfolio of 12 mortgage-backed securities that would produce a 13 net interest income stream. And this subsidiary, 14 under a proposed set of regulations as we 15 understood them at the time, had a very good 16 chance of being exempt from the -- or not being 17 included for purposes of liability growth. And 18 that was the basis the sub was set up. 19 After the final regulations came out -- 20 and they came out much later than we had hoped. I 21 think the actual, final regulation didn't come out 22 until, like, December -- you know, fairly well 16318 1 into December. It made it apparent that the 2 subsidiary was simply not going to achieve that 3 objective. In other words, it was going to be 4 accounted for liability growth purposes, whether 5 it was December 31st or March 31st or at some such 6 date. So, it no longer met the objective that it 7 was set up for. 8 Q. The subsidiary failed its business 9 objective? 10 A. Yes, sir. 11 Q. And it was that business judgment that 12 you exercised -- that USAT exercised in collapsing 13 the subsidiary and folding it back into the 14 institution? 15 A. Yes, sir. 16 Q. Now, do you recall the specifics of 17 what it was about the regulations that caused it 18 to fail, Mr. Crow? 19 A. No, I don't. I -- I do not. I 20 remember getting Mr. Pledger's memo and myself and 21 Gerry Williams talking about it and saying, "Well, 22 these regulations seem to be quite different than 16319 1 what we had anticipated." But in terms of any 2 recollection of -- of -- of the difference between 3 the proposal and the final, no, sir, I don't 4 remember. 5 Q. Now, if you wanted to find out what the 6 differences were or if there were differences, how 7 would you go about doing that? 8 A. What I would do is take the proposed 9 set of regulations, I guess, that we were basing 10 our analyses on and you would put that down on the 11 table and you would take the final regulation and 12 compare the two. 13 Q. And let me go back a little bit and 14 talk about the environment in which you were 15 making these business judgments and making these 16 decisions. 17 Had there been a problem with regard to 18 USAT's liability growth that had been -- that was 19 being discussed with the Federal Home Loan Bank at 20 that very time? 21 A. I remember that very distinctly. 22 Q. Explain to the Court what that was, 16320 1 what occurred, and what was the background to the 2 decisions you were making with regard to USAT 3 Mortgage Finance. 4 A. There had been an exchange of letters, 5 I believe. Gerry Williams was kind of leading the 6 charge on this. But basically, as best I can 7 reconstruct it in my mind, the Federal Home Loan 8 Bank had told us that we had exceeded the growth 9 limitation in some quarters in the prior -- in a 10 few prior quarters. And Mr. Williams wrote back 11 and relayed some conversations that the 12 institution had had with one of the authorities 13 there. And to make a long story short, all that I 14 believe was required was a board resolution that 15 United would not exceed -- I think the number was 16 4.6 billion. If I'm not -- it was 3.6 or 17 4.6 billion as of 12/31 -- I guess '86. And, so, 18 from my perspective, it was burned into my brain 19 that for Mr. Williams and all of the other people 20 at the highest level on the totem pole, that we 21 weren't going to exceed that total. And if we 22 did, my head would be on a platter. 16321 1 Q. Was that a number that was just easy to 2 calculate, or were there various -- various things 3 that occurred that affected that number? 4 A. It's pretty tough to -- I know some of 5 the -- Gerry Williams and I certainly understood 6 it crystal clear that it's -- in a large financial 7 institution, it is exceedingly difficult to peg 8 your total assets number, your total deposit 9 number, your total liability numbers because 10 things just happen. We had had this experience at 11 First City. And if you've got a target that you 12 can't go over, I'm going to make sure we come in 13 under because the -- the consequences of going 14 over, from my perspective, seemed pretty severe. 15 And things just happen. A big deposit comes in 16 you don't expect, some loan funds that somebody 17 forgot to tell -- you know, just a communication 18 problem. And it's like, "Oh, my God." We're 19 funding this loan on December 28th; and so, we 20 have to boost our liabilities to raise that money. 21 Somebody forgot to get the word to a deposit on 22 the money desk if that was in existence at the 16322 1 time. And they get a tremendously great deal on a 2 block of 10 or $20 million in deposits, and they 3 take the deposits in. And, you know, they just 4 didn't get the word. In a big organization, 5 sometimes communications problems exist. 6 Q. Now, Mr. Crow, I'm going to refer 7 you -- I'm not going to go through these documents 8 one by one, but you mentioned the exchange with 9 the regulators during this time frame with regard 10 to liability growth. And I've put in front of you 11 Exhibits T4101 at Tab 850, Exhibit A10566 at 12 Tab 176, Exhibit A10568 at Tab 177 -- 13 MR. GUIDO: 68? 14 MR. NICKENS: 68, yes, sir. 15 Q. (BY MR. NICKENS) -- Exhibit A10573 at 16 Tab 851, Exhibit A10575 at Tab 178, Exhibit A10577 17 at Tab 179, and Exhibit A1108 at Tab 131. 18 Do you have those particular documents 19 in front of you? 20 A. Which one do you want me to look at 21 first? 22 Q. Well, I'm just going to ask you -- 16323 1 those are the correspondence that you referenced 2 between USAT and -- except for the last one -- and 3 the Federal Home Loan Bank with regard to 4 liability growth -- 5 MR. GUIDO: Could counsel hold up with 6 his question until we pull the documents, 7 Your Honor? 8 THE COURT: All right. 9 A. Yes, sir. 10 Q. (BY MR. NICKENS) I've just got a few 11 questions with regard to this. These are 12 documents that have been introduced in the record 13 and have been gone over with other people, 14 Mr. Crow. But I would refer you to A10573. 15 A. Yes, sir. 16 Q. Is that the initial response of the 17 Federal Home Loan Bank Board asking that USAT 18 enter into a supervisory agreement concerning its 19 violation or alleged violation of liability growth 20 in prior quarters? 21 A. Yes, sir, it is. 22 Q. If you look at the next document, which 16324 1 is A10575, that was Mr. Williams' response to 2 Mr. Green with regard to that letter. 3 A. (Witness reviews the document.) Yes, 4 sir. 5 Q. And how did he -- and reading the first 6 line of the second paragraph of the letter, how 7 did Mr. Williams characterize Mr. Anderson's 8 letter? 9 A. This -- as a bombshell. 10 Q. And is that consistent with your 11 recollection? 12 A. Yes, sir. I remember the bombshell 13 letter. 14 Q. And then the next document is A10577 in 15 response to Mr. Williams' letter. The Bank Board 16 said, "We'll withdraw the supervisory letter but 17 we will require you to have a board resolution 18 that you would not exceed a specific amount of 19 liability growth as of 12/31/86"? 20 A. Yes, sir, I remember that. 21 Q. And what is Exhibit A1108? 22 A. That is the minutes of the board of 16325 1 directors of November 14th, 1985. 2 Q. In which the board of directors entered 3 into a specific resolution that the institution 4 would not violate liability growth limitations at 5 the end of 1986? 6 A. I haven't found that language. 7 Q. It starts at the bottom of Page 7. 8 A. Okay. Yes, sir. That is the 9 resolution. 10 Q. And if you could look over at Page 8 on 11 the conclusion of this portion, it says -- this is 12 the third full paragraph on Page 8 -- "Following 13 the adoption of this resolution, each member of 14 the board signed the regulation; and this executed 15 resolution will be submitted promptly to the 16 Federal Home Loan Bank of Dallas." 17 Do you see that? 18 A. Yes, sir. 19 Q. Did the fact that the board and each 20 member individually had been required to sign the 21 regulation saying the institution would not 22 violate liability growth limitation affect your 16326 1 judgment with regard to how you were doing your 2 year-end tactical planning? 3 A. Absolutely. It was made -- you know, 4 Mr. Williams, my boss, and I would have understood 5 this anyway. If the board makes this kind of 6 commitment, the CFO better -- better make -- make 7 real sure it's carried out. 8 Q. Now, I want to ask you about 9 Exhibit A10574 at Tab 570. 10 A. (Witness reviews the document.) 11 Q. Mr. Guido questioned you about this 12 document. 13 Do you recall that, Mr. Crow? 14 A. Yes, sir. 15 Q. Now, you described there the key 16 elements of qualifying financing subs; and 17 Mr. Guido asked you a number of questions about 18 this. 19 A. Yes, sir. 20 Q. Are these the old regs, the proposed 21 regs, or the new regs as they were enacted; or do 22 you know? 16327 1 A. I don't know. 2 Q. And you asked you earlier how you would 3 find out. You would go to the regs and 4 publications and see what they were? 5 A. Yes, sir. 6 Q. Now, I want to ask you to look at 7 Exhibit A1620, which is at Tab 502, again a 8 document Mr. Guido asked you about. 9 Do you see the second paragraph under 10 numbered Paragraph 2 about a discussion of 11 M. Crow's short-term tactical planning memo? 12 A. Yes, sir, I do. 13 Q. Do you recall asking to see that memo 14 during your direct-examination in response to 15 questions from Mr. Guido about asking to look at 16 the memo? 17 A. I -- it's not clear. Mr. Guido asked 18 me so many questions. I don't remember him asking 19 me that. 20 Q. Fair enough. 21 Let me ask you to look at 22 Exhibit B4263, B649, and B4257. 16328 1 Mr. Crow, can you identify for the 2 Court and record what exhibits -- you probably 3 can't until you get it. Right? 4 A. No, sir. 5 Q. Okay -- Exhibits B4263, B649, and B4257 6 are? 7 A. I don't know that I -- oh, yes, sir. 8 Yes. This was something that I started with -- as 9 best of my memory -- I started with to communicate 10 with Gerry Williams, and then we started talking 11 about it in the ALCO committee as was indicated in 12 the minutes. And it was basically my attempt to 13 just -- we had a lot of things going on during 14 this time period, and it was my attempt to -- as a 15 communication device. There were just a number of 16 different projects and a number of different 17 events happening and that sort of thing. 18 Q. Is this what one would call a decision 19 tree? 20 A. Yes, sir. 21 MR. NICKENS: Your Honor, we offer -- 22 Q. (BY MR. NICKENS) This is one of the 16329 1 documents that you prepared? 2 A. I think I personally did this stuff. 3 MR. NICKENS: Your Honor, we offer 4 B4263, B649, and B4257. 5 MR. GUIDO: Your Honor, for the reasons 6 I stated at the outset, I object to all documents, 7 Exhibit B649. If the witness would like to 8 testify in more detail about what these documents 9 are -- 10 THE COURT: I can't hear you. 11 MR. GUIDO: The documents have not 12 previously been produced, Your Honor. They are 13 not on any exhibit list; and I just received them 14 just now, Your Honor. These are the documents 15 that I had asked for before. We have talked to 16 Your Honor repeatedly and objected repeatedly to 17 the strategy of producing a document in the 18 hearing when counsel knows they are going to use 19 it beforehand. This is another example of that. 20 The witness has testified that these 21 appear to be decision trees, but he doesn't know. 22 We have no idea of the authenticity of these 16330 1 documents, B4263 and B4257, Your Honor. 2 MR. NICKENS: Your Honor, I have not 3 been involved directly in this. I am told that 4 these documents were produced to Mr. Guido on 5 Tuesday in a package of all the other, quote, "new 6 exhibits." These documents bear CN numbers so 7 that they have been produced and in the possession 8 of the OTS Enforcement during all this period. 9 The witness has identified them. The witness 10 asked to see them in his direct-examination, and 11 Mr. Guido didn't give them to him. And we offer 12 them. 13 THE COURT: All right. I believe that 14 the witness stated he had prepared these; so, I 15 think there's a foundation for them. Whether they 16 were previously furnished seems to be disputed, 17 but I'll receive them. 18 Q. (BY MR. NICKENS) Now, Mr. Crow, this 19 is the decision tree with regard to year-end 20 tactical planning with two updates dated 21 November 8th and December 4th? 22 A. Yes, sir. 16331 1 Q. Is it fair to say that in doing that 2 year-end tactical planning, you had a lot of 3 interrelated things going on? 4 A. Absolutely. That's fair to say. 5 Q. And you were trying to reach judgments 6 on a whole variety of possible actions that -- 7 into which the question of the qualification of 8 the subsidiary was important? 9 A. Yes, sir. 10 Q. And let me -- let me refer you to your 11 last update, Update No. 2, December 4th, 1985, 12 Exhibit 4257. You have listed "contingency." 13 Could you just read for the Court what the 14 contingency was you were considering at that 15 particular point in time? 16 A. Yes, sir. Under "contingency" -- and 17 this has to do with the financing sub of roughly 18 500 million. Quote, "The contingency is the 19 Federal Home Loan Bank has not adopted final 20 regulations on financing subs and the timing of 21 such adoption is unclear. For short-term planning 22 purposes, it is assumed there is no contingency." 16332 1 Q. And almost exactly one week later, that 2 was turned on its head? 3 A. Yes, sir. 4 Q. By the information that was conveyed to 5 you by Mr. Pledger and is in the record -- I'm not 6 going to show you it to you, Mr. Crow, so we can 7 move a along; but it is in the record at 8 Exhibit B690, Tab 585. 9 Now, was it just how did the other regs 10 interrelate with regard to a decision about 11 liability growth? 12 A. Well, I would have to really go back 13 and study these; but I know that we were thinking 14 about capital during this time period. There was 15 also a -- I know some of the earlier renditions -- 16 down here, I see a proposed branch sale that's 17 floating around. And those are the two things 18 that I've spotted. 19 Q. Let me ask you to look at Exhibit A1623 20 at Tab 505. And at the same time, I would ask 21 that we pull A1620 at Tab 502. 22 A. Okay. 16333 1 MR. GUIDO: What's the tab number? 2 MR. NICKENS: 505. 502 and 505. 3 Q. (BY MR. NICKENS) Mr. Crow, 502, I 4 believe we discussed earlier, is the 5 asset/liability committee minutes dated 6 November 6th of a meeting that occurred on 7 November 1, 1985? 8 A. Let's see. 9 Q. Let me just hand it to you. 10 A. Okay. 11 Q. Do you see there that you indicated 12 that the -- 13 A. The short-term tactical planning memo, 14 yes, sir. 15 Q. And you were indicating that you had an 16 opportunity to add up to 400 million in liability 17 growth but this needs to be managed closely, given 18 the current unknown status of the branch sales and 19 financing subsidiary? 20 A. I see that. 21 Q. And let me ask you to look at A1623, 22 which are the minutes of a meeting of 16334 1 November 22nd dated December 2nd, 1985. 2 A. Yes, sir. 3 Q. And if you look at the last sentence of 4 Paragraph 2 -- 5 A. Yes, sir. 6 Q. -- it indicates that the calculation 7 that you had to make would depend upon regulatory 8 net worth at year end -- 9 A. Yes. 10 Q. -- which would be a function both of 11 earnings and scheduled items? 12 A. Yes, sir. 13 Q. So, you would have to have a handle on 14 all of those items in order to make sure that you 15 did not violate the limit that had been given to 16 you and that had been reflected in a resolution by 17 the board of directors; is that right? 18 A. That's the way -- you know, I can't 19 remember independently how all these intricate 20 parts fit together; but that's the way I read that 21 paragraph, yes, sir. 22 Q. At the same time, you wanted to have 16335 1 the largest growth that you could because that 2 would be a basis for future growth? 3 A. Yes, sir, I do remember that. 4 Q. Now, let me ask you to look at a 5 Document A1219. 6 Can you identify A1219 as the minutes 7 of the meeting of the executive committee of 8 United Savings Association of Texas of 9 December 12th, 1985? 10 A. Yes, sir, it is. 11 MR. NICKENS: Your Honor, we offer 12 Exhibit A1219. 13 MR. GUIDO: No objection, Your Honor. 14 THE COURT: Received. 15 Q. (BY MR. NICKENS) Now, if you recall, 16 Mr. Guido asked you questions about whether or not 17 certain documents reflected any consideration of 18 the liability growth limitations as the reasons 19 for having to sell securities at year-end 1985? 20 A. Yes, sir, I remember that. 21 Q. And he showed you a document that was 22 an agenda item for this meeting and questioned you 16336 1 about whether there was anything in there about a 2 discussion about the liability growth? 3 A. Right. 4 Q. Let me ask you to go to the second page 5 and look at the next-to-last paragraph. Look at 6 the minutes of the meeting. 7 A. Yes, sir. 8 Q. Does it say there that "The committee 9 discussed the new financing subsidiary regulations 10 and possible alternatives. After full discussion, 11 it was decided that Mr. Berner should keep in 12 daily contact with Washington representatives to 13 determine the status of the effective date of such 14 regulations, and a decision on the company's 15 course of action would be made by the executive 16 committee as soon as possible"? 17 A. I see that, yes, sir. 18 Q. Now, do the minutes of the meeting of 19 the executive committee on December 12th, 1985, 20 indicate that the executive committee and the 21 institution was considering what to do with regard 22 to this new development with regard to the regs? 16337 1 A. Absolutely. 2 Q. Now, let me ask you -- I'm just going 3 to ask you -- 4 MR. NICKENS: Your Honor, it's about 5 10:30. And I'm acutely aware of the fact that I 6 told you I would be finished about this time, and 7 it's clear that I am not. I have some documents 8 that, in order to complete this part of the 9 examination, that I similarly want to enter into 10 evidence. It would probably be well for us to 11 spend part of the break discussing that with 12 Mr. Guido in light of the objections we have 13 heard. It would be my current estimate that I 14 would probably go right up to the lunch break. 15 THE COURT: All right. We'll take a 16 short recess. 17 18 (Whereupon, a short break was taken 19 from 10:29 a.m. to 10:54.) 20 21 THE COURT: Be seated, please. 22 MR. GUIDO: Your Honor, before we 16338 1 proceed, I have two preliminary matters. The 2 first is I would like to apologize to the Court, 3 Mr. Nickens, Mr. Nickens' secretary, and my 4 paralegal. I misconstrued a conversation that I 5 had with them about that; and the documents were 6 in a binder underneath my feet, Your Honor. I 7 misunderstood the conversation. I want to 8 apologize to all of you for that. The second is 9 that some of us have reservations for the flight 10 this evening, and we would like to know whether or 11 not we need to change those reservations to a 12 later reservation. 13 So, if you could give us some 14 indication of when you are planning to adjourn 15 today, that would be helpful. 16 THE COURT: All right. Mr. Nickens, 17 you're going to go to noon; is that correct? 18 MR. NICKENS: Yes, Your Honor. I might 19 be a few minutes past noon, but I believe that 20 schedule -- I believe we may have another 21 20 minutes, perhaps, or so; is that correct? 22 MR. BLANKENSTEIN: I have about 16339 1 20 minutes of questions. 2 MR. EISENHART: I might have about ten. 3 MR. NICKENS: So, it would look like 4 that we would go into the early afternoon to 5 finish his cross. 6 THE COURT: How long do you think your 7 redirect will be? 8 MR. GUIDO: I think Mr. Rinaldi has an 9 hour and a half, maybe two hours. Mr. Schwartz 10 looks like 15 to 20 minutes, Your Honor. And I 11 think I have quite a bit for this witness on the 12 mortgage-backed securities and high-yield bond 13 trading in light of what Mr. Nickens and Mr. Villa 14 have raised with this witness. 15 THE COURT: All right. What's your 16 proposal? 17 MR. GUIDO: Well, I don't have a 18 proposal, Your Honor, if we want to go later or 19 quit early. In either case, our redirect will go 20 beyond today. I would suggest it would probably 21 be wise if it's sometime shortly after the 22 afternoon break that Mr. Rinaldi is finished -- 16340 1 that that might be a good time for us to break. 2 THE COURT: All right. 3 MR. GUIDO: Otherwise, I can start the 4 redirect on the other issues, if that's your 5 preference. 6 MR. NICKENS: I think it would be 7 useful to see Mr. Guido's redirect on the real 8 estate case, Your Honor. 9 MR. GUIDO: I will attempt to do that, 10 Your Honor. 11 MR. NICKENS: We have no objection to 12 people being able to make their reservations. I 13 say that lightheartedly, but I do think it would 14 be fun. But, you know, whatever works out is 15 satisfactory with us. Obviously, we would like to 16 get this witness finished. He's been here a very 17 long time. It is clear that it's not going to be 18 done before Monday. 19 THE COURT: Well, I have no objection 20 to giving you time this evening. If Mr. Rinaldi 21 is through early, we'll adjourn at that time. 22 MR. GUIDO: Thank you, Your Honor. 16341 1 THE COURT: Mr. Nickens. 2 Q. (BY MR. NICKENS) Mr. Crow, I put in 3 front of you a series of exhibits: Exhibit B623, 4 Exhibit B4253, Exhibit B4254, Exhibit B4255, and 5 Exhibit B4266. 6 Do you see those? 7 A. Yes, sir, I do. 8 MR. NICKENS: I misspoke, Your Honor. 9 It's Exhibit B4256, not 66. 10 Q. (BY MR. NICKENS) Mr. Crow, can you 11 identify these exhibits as a series of 12 communications between USAT and the Texas Savings 13 and Loan Department and the Federal Home Loan Bank 14 of Dallas with regard to setting up what became 15 USAT Mortgage Finance? 16 A. (Witness reviews the documents.) Yes, 17 sir. These are all communications from USAT to 18 the -- appears to be the state regulators setting 19 up the subsidiary. 20 Q. And if you see at the back of 623, 21 communications with the -- Mr. Green, the 22 principal supervisory agent at the Federal Home 16342 1 Loan Bank Board. 2 A. Okay. 3 Q. Very last page. 4 A. Yes, sir. Yes, sir, I do. 5 Q. And Exhibit 4254 is similarly a 6 communication with the Bank Board? 7 A. (Witness reviews the document.) Yes. 8 I missed that. 9 Q. These are just the incorporation papers 10 and dealing with things like a name change and the 11 fact that you increased the proposed investment 12 from 300 million to 500 million at some point? 13 A. That is correct. 14 MR. NICKENS: Your Honor, we offer 15 B623, B4253, B4254, and B4256. 16 MR. GUIDO: No objection, Your Honor. 17 THE COURT: Received. 18 Q. (BY MR. NICKENS) Mr. Crow, Mr. Guido 19 asked you some questions about calculating the 20 liability growth limitations. And in connection 21 with that, I would like to ask you to look at 22 Exhibit A10582, which may be found at Tab 1131, 16343 1 Exhibit B665 at Tab 1391, and Exhibit A13032 at 2 Tab 1170 and Exhibit A114 at Tab 1047A. 3 A. I've got some of those out. 4 MR. GUIDO: Are these documents that we 5 have previously discussed today? 6 MR. NICKENS: No. These documents have 7 not been discussed today. 8 9 (Discussion held off the record.) 10 11 Q. (BY MR. NICKENS) Mr. Crow, do you have 12 in front of you A10582 which is your memo of 13 November 8 -- Mr. Wolfe's memo to you of 14 November 8th, 1985? 15 A. I do. 16 Q. Do you see there that Mr. Wolfe had 17 calculated the maximum allowed liability growth 18 for various time frames? 19 A. Yes. 20 Q. And that the 4.680 was pursuant to the 21 requirements of the Federal Home Loan Bank Board? 22 A. Yes, sir. 16344 1 Q. Now, do you see that if the institution 2 grew that maximum allowed amount, how much 3 liability growth would it be allowed in the first 4 quarter of 1986? 5 A. The way I read this, the institution 6 could have gone to 4.752 billion, which is 7 72 million in growth. 8 Q. Now, you notice that each quarter, 9 you've got a larger and then a much smaller number 10 for liability growth. 11 Why was that relationship there under 12 the regs? 13 A. You know, I really don't remember how 14 all that worked. 15 Q. You indicate in Footnote 1 that it 16 involved a calculation about two consecutive 17 quarters? 18 A. Oh, yes, sir. 19 Q. So that if you grew a lot in one 20 quarter, you could grow very little in the 21 following quarter? 22 A. Yes. That's correct. 16345 1 Q. Now, Mr. Guido asked you about a 2 document that is Exhibit B665, Tab 1391, which is 3 a memo from Bruce Williams to Mr. Gross, Mr. Gerry 4 Williams, and yourself dated November 29th, 1985. 5 Do you have that document in front of 6 you? 7 A. I do. 8 Q. And he had focused your attention on 9 the calculation of maximum growth maintaining 10 4 percent capital at 737 million there at the 11 bottom of the page. 12 Do you recall that? 13 A. I do. 14 Q. For what time frame was that 15 737 million calculation? 16 A. It looks like that is the time frame 17 from October of '85 to December of '86. 18 Q. Would Mr. Williams' calculation tell 19 you what the limitation was for December 31, 1985? 20 A. No, sir. 21 Q. March 31, 1986? 22 A. No, sir. 16346 1 Q. This is a cumulative number for five 2 quarters. Right? 3 A. Yes, sir. 4 Q. And those liability growth regulations 5 related to quarterly figures? 6 A. It did. 7 Q. So, would this number tell you whether 8 or not -- how much you could grow at the end of 9 those quarterly figures? 10 A. No. No, I think Bruce was taking a 11 more macro, big-picture type approach. 12 Q. Let's look at what the actual 13 experience was. If you could, look at 14 Exhibit A13032 and look at the third page. It's 15 difficult to read, Mr. Crow. But on the right 16 side, do you see there's been a calculation of 17 regulatory liabilities as of December 31, 1985? 18 A. I do. 19 Q. And can you tell us what that number 20 is? 21 A. It's 4,569,116,000. 22 Q. And that was about $110 million under 16347 1 the limit that the Bank Board had set for you? 2 A. That is correct. 3 Q. And if you had not sold the 4 $350 million of assets and associated -- 5 extinguished the associated repos in USAT Mortgage 6 Finance, would you have been in excess of that 7 number? 8 A. Yes, sir. 9 Q. And let me ask you to look at the -- at 10 Exhibit A114. This is one that -- we've had some 11 confusion about this number, but A114 at 12 Tab 1047A. That's the packet -- that is a board 13 of directors meeting package for the board 14 members. Right? 15 A. Yes, sir, it is. 16 Q. And it includes, as is typically the 17 case, a performance report? 18 A. It does. 19 Q. And can you find the page in the 20 performance report relating to regulatory 21 compliance, Page 2, which bears the Bates 22 No. K004738. 16348 1 A. Yes, sir, I'm there. 2 Q. And does that indicate what your 3 regulatory liabilities were on March 31, 1986? 4 A. Yes, sir, it does. 5 Q. And what were they? 6 A. They were 4,650,105,000. 7 Q. And how much were you actually under 8 the limitation based upon what actually occurred 9 on that date? 10 A. 102,107,000. 11 Q. And if the $500 million of 12 securities -- actually, you did take into that 13 number about $150 million of liabilities 14 associated with USAT Mortgage Finance, did you 15 not? 16 A. Yes, sir. 17 Q. If you had had an additional 350, would 18 you have been in violation of the liability growth 19 limitations on that date based upon what actually 20 occurred? 21 A. Yes, sir. 22 Q. Now, I want to ask you just a few 16349 1 questions, Mr. Crow, about United MBS, a 2 completely different subject. That was the 3 subsidiary that was set up and through which Sandy 4 Laurenson organized her arbitrage program. 5 Do you recall that? 6 A. Yes, sir, I do. 7 Q. Now, you've indicated that there were 8 difference between Sandy's portfolio and those 9 that had been set up as Joe's portfolio in USAT 10 Mortgage Finance? 11 A. Yes, sir. 12 Q. But were both of those spread income 13 programs? 14 A. Yes, sir. Both of the objectives of 15 the portfolios were net interest income or -- 16 another word is spread income. 17 Q. And in terms of its objective -- that 18 is, of spread income -- how did USAT -- excuse 19 me -- United MBS perform? 20 A. I believe the spread was -- was 21 certainly positive throughout my tenure. 22 Q. Let me ask you to look at two 16350 1 documents: A5028 and A5039, which is at Tab 1273. 2 I don't have the tab number for 5028. 3 MR. NICKENS: 883? Thank you. 4 Q. (BY MR. NICKENS) Do you have those two 5 documents in front of you, Mr. Crow? 6 A. Yes, sir, I do. 7 Q. Focusing for a moment on A5028, can you 8 identify that as the December 1987 performance 9 report for United Financial Group? 10 A. Yes, it is. 11 Q. Can you turn to Page SB2, which is the 12 performance report year-to-date for United MBS 13 Corporation? I don't have a Bates number on my 14 document. 15 A. SB? 16 Q. SB2, yes. 17 A. Okay. 18 MR. NICKENS: SB2. 19 A. Yes, sir. I have that schedule in 20 front of me. 21 Q. (BY MR. NICKENS) And in terms of its 22 spread, what was its spread for the year for 16351 1 United MBS? 2 A. This is -- yes, this is December 3 year-to-date. And expressed in dollars, the net 4 interest income is 16,324,000; and expressed as a 5 percentage, it is 1.63 percent. 6 Q. And there's another column there, "net 7 income below net interest income" -- 8 A. Yes, sir. 9 Q. -- of $23 million? 10 A. Yes. 22,890,000. 11 Q. And that -- you notice that it's 12 outlined in fixed hedge, fixed unhedged, and 13 Arbitrage 2, and then the ARMs? 14 A. Yes, sir. 15 Q. What did that relate to, if you know or 16 recall, Mr. Crow? 17 A. I really can't explain the various 18 categories of the portfolios. I do remember we 19 had just some ARM securities in there, adjustable 20 rate mortgage-backs. So, I understand that 21 column. I'm sure I understood them at the time. 22 I just can't reconstruct it today. 16352 1 Q. And in terms of spread income for the 2 year, Arb 2 performed the best; and the ARMs 3 performed the worst in that comparison? 4 A. In terms of net interest income? 5 Q. Net interest spread. 6 A. Oh, net interest spread. Yes. Arb 2 7 is 3.02 percent in terms of spread, and the ARMs 8 are .25 percent. 9 Q. Now, that's not 1987 where Sandy's 10 activities made the institution $23 million with a 11 net spread of 1.63 percent, correct? 12 A. That is correct. 13 Q. Let's look at 1988. That's 14 Exhibit A5039 at Tab 1273. If you would, look at 15 the same schedule, which is SB2. The institution 16 was taken over in December of 1988. So, this is 17 the last performance report prepared by the 18 existing management? 19 A. That is correct. 20 Q. And if you can look at -- let's see. 21 Do you have a performance report relating just to 22 Sandy's portfolio? 16353 1 A. I believe that is on Schedule SB2, and 2 there's a category -- the columns are USAT and 3 then UMBS. 4 Q. And is the performance of United MBS a 5 positive spread? 6 A. Yes, sir, it is. 7 Q. In what amount? 8 A. In terms of a percentage, it is a .53 9 percent; and expressed in terms of dollars, the 10 net interest income is 8,501,000. 11 Q. Now, the -- there's a negative spread 12 for the USAT number; is that correct? 13 A. That is correct. 14 Q. Was that spread substantially 15 influenced by the sale in October of 1988 of 16 various assets ordered by the regulators? 17 A. I can't be sure whether it was October, 18 but it was certainly during that -- that fourth 19 quarter time frame. There were substantial -- 20 very substantial sales of mortgage-backs out of 21 those portfolios. 22 Q. And if we wanted to find out what the 16354 1 performance was prior to that time, we would 2 determine the date, go look at the performance 3 report before and the performance report 4 thereafter? 5 A. Yes, sir, that's how you would do it. 6 Q. Now, I want to ask you, Mr. Crow, a few 7 questions about maturity matching credit and 8 claims concerning that matter. 9 Mr. Guido asked you some questions 10 about the supposed transfer of caps from United 11 MBS to USAT for maturity matching credit purposes. 12 A. Yes, sir. 13 Q. And I don't want to -- if we can avoid 14 reopening that issue -- it will be decided at some 15 point. 16 I want to ask you some questions 17 referencing Mr. Bruce Williams' memo dated 18 June 17th, 1987, Exhibit T5125 at Tab 302. 19 Mr. Crow, my understanding is that you 20 don't recall a transfer; is that correct? A 21 transfer of caps? 22 A. I think it's safe to say I don't know 16355 1 whether caps were transferred or not. And we had 2 the discussion that I have looked at subsequent 3 documents, and I would love to not talk about that 4 anymore unless I have to. 5 Q. Okay. I have a very limited number of 6 questions, if you could indulge me just for a few 7 minutes. 8 A. Yes, sir. 9 Q. You reviewed Mr. Hargett's testimony 10 and concluded, based upon that, that there was no 11 cap transfers as far as you could tell? 12 A. In my opinion as an accountant, in 13 looking at Mr. Hargett's testimony, I would 14 conclude there had not been a transfer. 15 Q. We're talking about a transfer of 16 ownership from United MBS to USAT? 17 A. Yes. What I'm talking about is making 18 a transfer from one sub to the parent. 19 Q. Now, who is Mr. Hargett? 20 A. He was one of the OTS's experts. 21 Q. Is he particularly -- he dealt with the 22 issue of damages and, in fact, this particular 16356 1 issue: Maturity matching credit? 2 A. You know, I really don't -- he seemed 3 to be an expert in the area of -- or seemed to be 4 looking at the maturity matching credit issue. 5 Q. But Mr. Hargett was the OTS's expert? 6 A. Yes, sir. Right. 7 Q. Now, it is true that USAT, for internal 8 tracking purposes, assigned assets or liabilities 9 to its subs, correct? 10 A. That is correct. 11 Q. So, would one expect to find internal 12 tracking documents reflecting that assignment? 13 A. Absolutely. 14 Q. Was the -- was an assignment for 15 internal tracking purposes the same as for 16 ownership? 17 A. No, sir. 18 Q. Now, putting aside the question of 19 whether there was a transfer of the caps, 20 Mr. Crow, there was a transfer of ARMs, correct? 21 A. Yes, sir. 22 Q. And USAT exchanged some fixed rate 16357 1 securities for adjustable rate securities, did 2 they not? 3 A. I believe that's what happened, yes, 4 sir. 5 Q. And what was the purpose of the ARMs 6 transfer? 7 A. The purpose was to -- we had studied 8 the maturity matching credit regulation, and the 9 purpose was to make sure we got all the credit we 10 were entitled to under the regulation. 11 Q. Is it your understanding that the 12 purpose of the credit was to encourage regulated 13 institutions to purchase things such as adjustable 14 rate mortgages and hedging instruments to reduce 15 gap? 16 A. That would be my overall understanding 17 of the -- that seemed, to me, to be the objective 18 of the regulation. 19 Q. And was -- and USAT followed that 20 encouragement? 21 A. We attempted to, yes, have our affairs 22 managed such that if we were entitled to a 16358 1 maturity matching credit, that, you know, we tried 2 to get there, yes, sir. 3 Q. Now, from a financial planning point of 4 view, did USAT always operate on a consolidated 5 basis? 6 A. From financial planning, yes, sir. 7 Q. In other words, it didn't matter that 8 you had these subsidiaries for the basic financial 9 purposes? 10 A. Exactly, that's correct. 11 Q. Now, do you know of any reason that you 12 could not have transferred -- or there was any 13 regulatory reason to prevent you from transferring 14 the ARMs from United MBS to USAT? 15 A. No, sir. 16 Q. Similarly, do you know of any reason 17 that, had it occurred, that you could not have 18 transferred the caps, had they been owned by 19 United MBS, to USAT? 20 A. No, sir. That's why -- 21 Q. Now, with regard to Mr. Williams' memo, 22 there's a reference there to mirrors. 16359 1 Do you see that? 2 A. Let's see. Where is that in this memo, 3 Mister -- I will find it. 4 Q. Do you see the first bullet point? 5 A. I do. 6 Q. "USAT has maximized its maturity 7 matching credit using mirrors." Now, that didn't 8 have anything to do with the mirror swap, did it? 9 A. No, I don't think so. 10 Q. "Since United MBS's assets are not 11 included in the calculation, USAT is 'borrowing 12 hedges' to take advantage of a regulatory 13 loophole. USAT's real interest rate exposure on a 14 consolidated basis has not been reduced." 15 A. Yes. 16 Q. Now, reading that paragraph, how do you 17 interpret Mr. Williams' use of mirrors? 18 A. Well, I've seen this memo quite a few 19 times. I can't exactly say what was in 20 Mr. Williams' mind. I assume he testified. It's 21 basically Bruce Bruce's memo to management of 22 "Let's not fool ourselves"; that our overall hedge 16360 1 position or gap position on a consolidated basis 2 hadn't changed. 3 Q. Your regulatory capital was going to 4 increase by virtue of this credit. Right? 5 A. The maturity matching credit had the 6 effect of that, yes. 7 Q. And so, for regulatory purposes, you 8 would look like that you had added capital? 9 A. You would look like that -- it would 10 look like you exceeded -- if you didn't have the 11 maturity matching credit, you would exceed -- your 12 actual capital would exceed your required capital 13 by a lesser amount. 14 Q. And -- but, in fact, the institution 15 hadn't changed at all. It was the same one it had 16 been before the transfer of the ARMs as it was 17 afterwards? 18 A. Yes, sir. On a consolidated basis, 19 absolutely. 20 Q. Mr. Williams is reminding management 21 that, you know, "Don't think something great has 22 happened. In fact, we're the same institution 16361 1 that we were before"? 2 A. Yes, sir. Mr. Williams was a fairly 3 blunt "glass is half empty" type guy, I guess, as 4 well. 5 Q. Okay. Now, let me ask you some 6 questions about sales of appreciated assets. I'm 7 going to start by asking you about some documents 8 that are at Exhibit B4197 at Tab 1189, 9 Exhibit B1380 at Tab 1001, Exhibit B4157 at 10 Tab 1191, Exhibit B1389 at Tab 1002, Exhibit B4211 11 at Tab 1190, and Exhibit B1555 at Tab 1013. 12 Mr. Crow, when you get to look at 13 these, you'll see it's some more of the accounting 14 work papers. 15 A. (Witness reviews the documents.) 16 Q. Mr. Crow, do you have Exhibit B4197 in 17 front of you? 18 A. Yes, sir, I do. 19 Q. Can you identify that as -- well, it 20 has been previously identified as Peat Marwick 21 work papers involving the 9/30/86 quarterly 22 review. 16362 1 A. Yes. The September 30th, '86 review. 2 Q. How frequently did Peat Marwick review 3 USAT's books and records? 4 A. The best I remember, it -- unless there 5 was a special request -- and sometimes we would 6 ask them to come in and look at a certain item and 7 review it for us for control purposes -- they 8 would come in twice on a preliminary basis to do 9 what's called preliminary audit work, and then 10 they would come in after the books were closed to 11 do their final audit work. 12 Q. Now, you've been questioned at length 13 about whether USAT sold appreciated assets for 14 reporting purposes? 15 A. Yes, sir. 16 Q. Now, let me ask you to look over at 17 Page KPMG 026345 under "examination of standard 18 areas." 19 Do you have that page? 20 A. I've got "general environment." Maybe 21 I'm on the wrong page. 22 Q. Well, it's at the top. 16363 1 A. Yes, excuse me. 2 Q. I want to bring your attention to the 3 No. 3 item and if you could read along with me. 4 "Mortgage-backed security activity: As in the 5 past, very active. United sold entire portfolio 6 9/86. Recorded gain on trade date basis. See 7 X-50s." 8 Do you see that? 9 A. I do. 10 Q. And then under "investment securities 11 activity," it says, "Very active. Sales at end of 12 third quarter to boost third quarter earnings. 13 See X-19s." 14 Do you see that? 15 A. Yes, sir, I do. 16 Q. Now, where did -- do you know where 17 Peat Marwick obtained their information for 18 purposes of conducting their audit; in particular, 19 the information such as reflected in the notes 20 that I read to you? 21 A. I can't be specific as to where they 22 got this information; but, in general, the only 16364 1 two places they could get it would be 2 conversations with management, being told that, 3 and, two, the actual financial records of USAT. 4 Q. Now -- 5 A. You know, the minutes and all that sort 6 of stuff. 7 Q. Now, it says, "Sales at end of third 8 quarter to boost third quarter earnings under 9 investment securities activity." 10 A. Yes, sir. 11 Q. Now, were your investment portfolios 12 marked to market? 13 A. No, sir, with the exception of that 14 small trading account in Sandy's portfolio and 15 then, obviously, the equity arbitrage portfolio. 16 Q. But the junk bond portfolio and the 17 mortgage-backed securities portfolio, with the 18 exception you noted, were never mark-to-market? 19 A. No, sir. 20 Q. Were they mark-to-market shortly after 21 September of 1986, this quarterly review? 22 A. No, sir. They were never 16365 1 mark-to-market. 2 Q. Now, do you conclude that the sales 3 activity and the conclusions reflected here did 4 not require mark-to-market under the rules then 5 applicable? 6 A. I certainly concluded it. My staff 7 certainly concluded that. And, obviously, 8 Peat Marwick concluded that. 9 Q. Now, let me ask you to look at 10 Exhibit -- along the same -- B1380. 11 A. (Witness reviews the document.) 12 Q. And I would refer you to 13 Page KPMG USAT 0355 under mortgage-backed 14 securities December 31, 1986. Now, this is the 15 next quarter; but it is the year-end audit, 16 correct? 17 A. That is correct. 18 Q. Now, it says, "Under trade date sales 19 and purchases." Do you have the same page? 20 A. Yes, sir. Where it starts out "United 21 has a significant amount"? 22 Q. "United has a significant amount of 16366 1 securities purchases and sales that straddle month 2 end," and then it goes on to list that. Right? 3 A. Yes, sir. 4 Q. Then at the bottom, it's got, "Yield 5 analyses on mortgage-backed securities." 6 Do you see that? 7 A. I do. 8 Q. Now, did Peat Marwick audited your 9 prepayment assumptions? 10 A. Absolutely. 11 Q. Was any issue ever raised about whether 12 or not you had used an improper prepayment 13 assumption in your mortgage-backed securities 14 portfolios with Peat Marwick? 15 A. Not that I remember, no. 16 Q. Now, let me ask you to turn over to 17 Page KPMG USAT 0359. 18 MR. GUIDO: 03 what? 19 MR. NICKENS: 0359. 20 Q. (BY MR. NICKENS) An issue has been 21 raised about whether you kept track of the market 22 prices of your mortgage-backed securities, 16367 1 correct? 2 You were asked by Mr. Guido about that? 3 A. Yes, sir. 4 Q. Does this document reflect year-end 5 market prices for mortgage-backed securities? 6 A. I believe this would be the work paper, 7 yes. Yeah, we were required in our financials to 8 disclose the mark-to-market in all the years that 9 I can remember while I was at United. 10 Q. And that reminds me, Mr. Crow -- we 11 discussed earlier about the performance of United 12 MBS and demonstrated that it maintained a positive 13 spread during its existence. 14 Do you recall that? 15 A. I do. 16 Q. And do you recall that Mr. Guido showed 17 you a number of sensitivity analyses that 18 indicated on a mark-to-market basis, the 19 mortgage-backed securities portfolios had negative 20 value? 21 A. Yes, sir. 22 Q. Now, again, was that -- these were not 16368 1 mark-to-market portfolios, correct? 2 A. That's correct. They were not 3 mark-to-market. 4 Q. Now, does it surprise you that you 5 would find that those portfolios, spread income 6 portfolios, could have a negative market value? 7 A. Not at all. 8 Q. And why is that? 9 A. I have seen -- I was at First City, 10 which was the largest commercial bank in Houston. 11 And during some period in the Seventies, the prime 12 rate got up to, you know, in the high, high teens, 13 I mean, like 18, 19 percent; and all other 14 interest rates were extremely high. And the 15 market value of our portfolios at First City and 16 all other major commercial banks that I'm aware of 17 at the time looked horrible. If you looked at 18 them on a mark-to-market basis, it was -- it was a 19 very, very substantial loss relative to the book 20 value. When I say "loss," that's just a snapshot 21 in time. 22 Q. In fact, if you had looked at the 16369 1 mortgage-backed securities portfolios, the assets 2 in the period where interest rates went down in 3 1986, you would have seen substantial positive 4 values. Right? 5 A. Yes, sir, right. Yeah. It's just a 6 function of interest rates. And on a portfolio 7 that's accounted for as an investment portfolio, 8 certainly during the time period of these rules, 9 the only appropriate treatment was to disclose the 10 mark-to-market in the footnotes to the financial 11 statements. And then at one time, I think we made 12 a dual disclosure. I think we disclosed it in the 13 footnotes as well as on the face of the balance 14 sheet. 15 Q. Now, returning to Exhibit B1380, 16 Mr. Crow, let me ask you to look over at 17 Page 0356, KPMG USAT 0356. Let me ask you to look 18 down at that note at the bottom of the page. 19 A. Yes, sir. 20 Q. If you could read along with me. If I 21 read it incorrectly, please stop me. "USAT has 22 had a lot of activity in their MBS portfolio 16370 1 during the year, trading both for gains and an 2 attempt to better match the maturities of related 3 liabilities. In conjunction with this degree of 4 trading, they have been buying larger pools that 5 are wireable as opposed to Ginnie Mae pools which 6 are in physical form. The original yield on the 7 portfolio has decreased due to falling interest 8 rates throughout this period." 9 Do you see that? 10 A. I do. 11 Q. Now, where would Peat Marwick have 12 gotten the information for them to reach the 13 conclusion that you had been trading both for 14 gains and an attempt to better match the 15 maturities and related liabilities? 16 A. They would have discussed that -- 17 again, it would be fundamentally the same answer. 18 They would discuss that certainly with the 19 portfolio manager and probably myself, Mr. Wolfe, 20 Mr. Carlson, basically the personnel of United. 21 And being an auditor, you just don't blindly take 22 somebody's word for it. You go dig into it and 16371 1 look at records. 2 Q. And the digging would involve the 3 records? 4 A. Yes, sir. 5 Q. The base records were things like the 6 investment committee minutes? 7 A. The investment committee minutes would 8 certainly be one, yes. 9 Q. Now, let me ask you to look over at 10 Page -- the next page, Page 357. And if you could 11 read along with me -- I will try to read this with 12 some help. "Decrease in Ginnie Mae pools due to, 13 No. 1, pay-off" -- 14 MR. GUIDO: Which paragraph are you 15 reading? 16 MR. NICKENS: The very top of the page. 17 It has a number 1 circled. 18 Q. (BY MR. NICKENS) "Decrease in 19 Ginnie Mae pools due to, No. 1, pay-off of 20 Series D cash flow bond which was collateralized 21 by Ginnie Mae pools and, No. 2, their desire to 22 get" -- and I can't read that word -- "from 16372 1 physical form mortgage-backed securities." 2 A. "Get away." 3 Q. "Get away from." Thank you. "Decrease 4 appears reasonable. USAT sold these remaining 5 pools in September for October settlement; so, no 6 Ginnie Maes are expected at year end." 7 Do you see that? 8 A. Yes, sir, I do. 9 Q. So, Peat Marwick was actually auditing 10 from which mortgage-backed portfolios that sales 11 were made and gains were realized? 12 A. Yes, sir. 13 Q. In this case, we're talking about the 14 Series D cash flow bond? 15 A. That's correct. 16 Q. Was that a part of any arbitrage 17 program? 18 A. No. The Series D cash flow bond, I 19 believe, had to do with the Independent American 20 branch sale. 21 Q. Now, if you were looking at Joe's 22 portfolio and its performance and evaluating that 16373 1 performance, would you have to go back and look at 2 what sales were made from the portfolio as opposed 3 to what sales may have been made out of other 4 portfolios? 5 A. Certainly, yes. If you wanted to 6 evaluate Joe's portfolio, you would have to do 7 that. 8 Q. Let me ask you to look at Exhibit B4157 9 at Tab 1191. 10 Do you have that document? 11 MR. GUIDO: 4157? 12 MR. NICKENS: 57. 13 A. Yes, sir, I've got that. 14 Q. (BY MR. NICKENS) Is this additional 15 year-end 1986 audit work papers dealing with 16 revenues? 17 A. Yes, sir, it is. 18 Q. Let me ask you to turn over to 19 Paragraph 22 on Page KPMG 0628. 20 Do you have that? 21 A. Paragraph 22? 22 Q. Yes, sir. 16374 1 A. Yes, sir, I do. 2 Q. And it indicates that "Although the 3 majority of investment securities were purchased 4 to match brokered deposits, it appears the 5 association will sell securities if there is an 6 opportunity to recognize a gain. In the current 7 year, the association has recognized a 8 considerable amount of gain from these 9 securities." And it goes on to indicate what it 10 is going -- the audit procedures that it will look 11 into, including determining the propriety of the 12 gain/loss recognition. 13 Do you see that? 14 A. I do see that. 15 Q. Now, is there any question in your mind 16 that Peat Marwick was aware of the fact that you 17 were selling securities when you recognized an 18 opportunity -- opportunity to recognize a gain 19 from the high-yield bond portfolio? 20 MR. GUIDO: Objection. It 21 mischaracterizes the document. The document as it 22 appears -- there's a document in the record which 16375 1 Bruce Williams testified to in which he told the 2 auditors that the high-yield bond portfolio was 3 not traded, Your Honor. 4 MR. NICKENS: Well, that's exactly our 5 point, Your Honor. It was not a trading portfolio 6 for accounting purposes but that all of the 7 activity in the portfolio was well-known to the 8 accountants. That's precisely the exercise we're 9 going through, to prove that it was known to the 10 accountants exactly what was going on and they, 11 nevertheless, concluded it was not a trading 12 portfolio for accounting purposes. 13 THE COURT: What's your question to the 14 witness? 15 MR. NICKENS: I've forgotten, but I'll 16 try another one. 17 Q. (BY MR. NICKENS) We've read 18 Paragraph 22, Mr. Crow. 19 A. Yes, sir. 20 Q. Were the accountants aware, to your 21 certain knowledge, that you were selling 22 securities out of the junk bond portfolio when 16376 1 there was an opportunity to recognize a gain? 2 A. They were aware of that. And this 3 certainly indicates to me -- because when we're 4 talking about matched brokered deposits, to my 5 memory, we were only talking about junk bonds. 6 There were no matched brokered deposits having to 7 do with other portfolios. 8 Q. This indicates that this was noted and, 9 as we indicated before, although it's very faint 10 there, was reviewed by the accounting team? 11 A. Oh, yes, sir. This is an audit 12 program. And basically, what happens is the 13 person does the work, does the audit work. Then 14 the manager reviews it, and then the partner 15 reviews it. 16 Q. This is in December of 1986? 17 A. Yes, sir. 18 Q. And for the record, Peat Marwick did 19 not require you to mark-to-market your junk bond 20 portfolio after this date? 21 A. No, sir. 22 Q. Let me ask you to look at 16377 1 Exhibit B1389. 2 A. (Witness reviews the document.) 3 Q. Now, this is a work paper dealing with 4 reverse repurchase agreements, the reverse 5 repos -- do you see that -- as of December 31, 6 1986? 7 A. Yes, sir, I do. 8 Q. And beginning the second sentence, it 9 says, "United has been very active in their 10 portfolio management of the mortgage-backed 11 securities/reverse repo arbitrage and has been 12 moving the securities almost monthly in order to 13 obtain the most favorable spread between the rate 14 on the securities and the rate on the underlying 15 repo." 16 Do you see that? 17 A. I do. 18 Q. Now, does that indicate to you that the 19 accountants were aware of the fact that USAT was 20 engaged in its mortgage-backed securities 21 portfolio in something called value trades? 22 A. It certainly indicates that they were 16378 1 aware that we were engaged in -- in significant 2 moving around, significant transactions. 3 Q. For the purpose of obtaining the most 4 favorable spread on the -- 5 A. Yes, sir. I missed that. That would 6 seem to be a value trade. 7 Q. And it also could be a dollar roll? 8 A. I think that could be a dollar roll. 9 Q. Dollar rolls reduced your financing 10 costs? 11 A. Yes. 12 Q. And this was a specific audit item for 13 the year-end audit by Peat Marwick? 14 A. Yes, sir. 15 Q. Did they require you to mark-to-market 16 your mortgage-backed securities portfolios after 17 this date? 18 A. No, sir. 19 Q. Now, let me ask you to look at 20 Exhibit B1355, (sic) which is the quarterly review 21 for 3/31/87. It's Tab 1013. It's 1555. 22 MR. NICKENS: I misspoke, Your Honor. 16379 1 Q. (BY MR. NICKENS) Do you have 2 Exhibit B1555 in front of you, Mr. Crow? 3 A. Yes, sir, I do. 4 Q. This is the next quarter's review? 5 A. Yes. It looks like we're -- that the 6 auditors are looking at 3/31/87. 7 Q. All right. Let me ask you to look over 8 at Page KPMG 0765 and, under No. 6, "sale of 9 loans." 10 Now, was there a time frame when, for 11 certain purposes, the Federal Home Loan Bank 12 required that mortgage-backed securities be 13 included in loans? 14 A. Yes, sir. 15 Q. And with regard to that paragraph, it 16 says, "Gains from sale of loans primarily due to 17 market opportunities available to roll" -- "to 18 sell mortgage-backed securities." 19 Do you see that? 20 A. Yes, sir, I do. 21 Q. "The market was in the right direction 22 in fourth quarter of '86 and first quarter of '87 16380 1 resulting in the indicated gains reasonable and 2 consistent with our knowledge of the market." 3 Do you see that? 4 A. I do. 5 Q. Now, from what sources would the 6 accountants obtain information such as reflected 7 on Exhibit 0765 about your trading activities? 8 A. They would have first talked to the 9 portfolio managers and probably Mr. Wolfe and 10 myself and the other accountants, and then they 11 would follow that up with their own detailed 12 review. 13 Q. And with regard to the next paragraph, 14 H, it says, "Sale of securities. Situations 15 similar to sale of loans. See explanation above. 16 Gains are consistent with our knowledge of the 17 market." 18 Do you see that? 19 A. I do. 20 Q. Now, this indicates that the 21 accountants had concluded that you were selling 22 mortgage-backed securities due to market 16381 1 opportunities, does it not? 2 A. It does. 3 Q. Did they, based upon that knowledge and 4 information, ever require you to mark your 5 mortgage-backed securities portfolios to market? 6 A. No, sir. 7 Q. Now, did they ever require you to mark 8 your junk bond portfolios based upon this 9 information as reflected in their work papers? 10 A. No, sir. 11 Q. Now, let me ask you to look at 12 Exhibit B4211, which is at Tab 1190. Now, these 13 are investment committee minutes of August 28th, 14 1986, that came from the work papers of 15 Peat Marwick. 16 Do you see where it's indicated that 17 there's sort of shadows across some of the 18 writing? 19 A. Yes. That would be where, I guess, it 20 was highlighted and then Xeroxed. 21 Q. And if you look over at the third page, 22 the minutes are actually, what, stapled or pasted 16382 1 onto the work paper? 2 A. Yes, sir. This would be a typical 3 accountant's work paper where they would take a 4 client-prepared memo and then they would paste 5 that on and then write their own notes and do 6 audit work. 7 Q. And if we look at the second full 8 paragraph, it says, "Mr. Phillips noted that there 9 was only one mortgage-backed security transaction 10 that occurred during the prior two weeks which was 11 a value trade of 80 million Freddie Mac 9s to 12 50 million Fannie Mae 9s. The economic result of 13 this transaction was to increase the yield on 14 these securities by about 12 basis points." Then 15 it goes on to say in the beginning of the next 16 paragraph, "Mr. Crow proposed that until our new 17 mortgage-backed securities position was filled, 18 that we consider moving ahead with approving 19 mortgage-backed security values trade that would 20 improve the overall portfolio position and yield." 21 Do you see that? 22 A. Yes, I do. 16383 1 Q. Now, does that indicate to you that the 2 Peat Marwick, in auditing your papers, had noted 3 that you were engaged in value trades in your 4 mortgage-backed securities portfolios? 5 A. Oh, they absolutely knew that. I mean, 6 they knew this stuff. 7 Q. And they would have had the opportunity 8 to observe every trade that you made and all of 9 the documentation related to that trade? 10 A. Yes, sir. 11 Q. And they did not thereafter ever 12 require you to mark-to-market your mortgage-backed 13 securities portfolios? 14 A. No, sir. 15 MR. NICKENS: Your Honor, I still have 16 a little bit more; but this is a convenient 17 stopping point with regard to getting this 18 finished up in about 30 minutes. 19 THE COURT: All right. We'll adjourn 20 until 1:30. 21 22 . 16384 1 (Whereupon, a lunch break was taken 2 from 11:54 a.m. to 1:34 p.m.) 3 4 THE COURT: Be seated, please. We'll 5 be back on the record. 6 Mr. Nickens. 7 MR. NICKENS: Thank you, Your Honor. 8 Q. (BY MR. NICKENS) Mr. Crow, when we took 9 our lunch recess, I was asking you some questions 10 about USAT's sale of appreciated assets for 11 reporting purposes and other purposes. Before we 12 resume that discussion, could you look at 13 Exhibit B1162? 14 A. (Witness complies.) Yes, sir. 15 Q. For the record, would you identify 16 that? 17 A. This is a performance report that is 18 addressed to the attention of the board of 19 directors. And the subject is kind of muddled on 20 my copy, but it -- it must relate to the 21 performance as of June 30th, '86. 22 Q. Do you recall that Peat Marwick -- 16385 1 MR. NICKENS: Your Honor, we offer 2 B1162. 3 MR. GUIDO: No objection, Your Honor. 4 THE COURT: Received. 5 Q. (BY MR. NICKENS) Do you recall, 6 Mr. Crow, that at some point in the summer of 7 1986, Peat Marwick notified you that they had 8 changed their accounting treatment for sales that 9 had been made out of the mortgage-backed 10 securities portfolio? 11 A. Yes, sir, I do. 12 Q. And when did you receive that 13 information? 14 A. I'm not exactly sure when. It was 15 certainly -- I believe it was in the May/June type 16 time frame. I just don't remember exactly when. 17 Q. Is there any indication in the document 18 itself as to when you would have received that 19 information? And I'll draw your attention to -- 20 THE COURT: You may be referring to the 21 third paragraph that says in June -- 22 MR. NICKENS: Yes, Your Honor, we were. 16386 1 Thank you very much. 2 A. Yes, sir. 3 Q. (BY MR. NICKENS) Does that refresh your 4 recollection as to when you received that 5 information? 6 A. Yes, sir. It certainly must have been 7 prior to the -- as I recall the events, it was 8 certainly after the first quarter results were 9 presented but before the second quarter results 10 were presented -- 11 Q. Now -- 12 A. -- in terms of SEC reporting. 13 Q. At the time you were accounting for 14 those rolldown sales as you have described by 15 rolling them into the basis of the newly purchased 16 securities. Right? 17 A. That is correct. 18 Q. It would not have any gains in the 19 portfolio? 20 A. In the current period, no. 21 Q. Could you have made any -- with that 22 accounting treatment -- any sales out of the 16387 1 mortgage-backed securities portfolios -- the 2 arbitrage portfolios, for the purposes of 3 recognizing gains during that period? 4 A. Not during this -- not during the 5 period prior to the accounting change, no, in the 6 arbitrage portfolio. 7 Q. Okay. Now, let me, if we can, return 8 to the subject of sales of appreciated assets. 9 And I would ask that you look at Exhibit B4064, 10 Tab 1005, I think. 11 A. Right. 12 Q. Mr. Crow, before the recess, we had 13 gone through the accounting documents to see the 14 accounting work papers as to some of the 15 conclusions that had been reached by the 16 accountants and how they had organized data from 17 other resources; is that correct? 18 A. That is correct. 19 Q. Now, Mr. Guido, during his 20 direct-examination of you, took you through some 21 investment committee minutes dealing with the 22 subject of sales of appreciated securities. 16388 1 Do you recall that? 2 A. Yes, I do. 3 Q. I'm going to ask you to look at some 4 additional minutes; and we may go back to a few 5 that he asked you about, as well. 6 A. Okay. 7 Q. And these minutes are taken from the 8 files of the accountants indicating their review 9 of the investment committee minutes. 10 Can you see that? 11 A. I see it's got the KPMG statement down 12 there, and it's got their initials indicating 13 review. 14 Q. And the first document I've asked you 15 to look at deals with the fourth quarter minutes, 16 October 1986, correct? 17 A. Dated October 1st, '86, yes. 18 Q. Now, let me ask you to look at the 19 first page of the minutes, which is KPMG 035469. 20 Do you have that? 21 A. Yes, I do. 22 Q. And in particular, I would ask that you 16389 1 read to yourself the fourth paragraph of that 2 first page dealing with "Mr. Phillips 3 recommended." 4 A. (Witness reviews the document.) Yes, 5 sir. I've read that. 6 Q. All right. Is your -- do you note the 7 highlighting on the document from the accountant's 8 work papers? 9 A. I can see that it's shaded, especially 10 where it says "Mr. Phillips recommended the sale." 11 Yes, sir, I note that. 12 Q. And it indicates that the sale was to 13 recognize profits? 14 A. Yes, sir, which were recently created 15 by the market rally. 16 Q. Now, from an accountant's point of 17 view, would you regard that as an indication of 18 purpose? 19 A. Well, I would want to -- you know, it 20 certainly is an item that I would take -- and I 21 would gather all of these type statements and then 22 go talk to people and determine the purpose. 16390 1 Q. The sale was to recognize profits. 2 Right? 3 A. Oh, certainly. 4 Q. And is that document, that page of the 5 document, initialed by two of the auditors? 6 A. Yes, sir. Typically, the "B" up at the 7 top would be the -- the worker type guy that 8 the -- the senior accountant probably. And the 9 one in the lower right-hand corner is the more 10 senior CPA. 11 Q. Now, why was it important in this time 12 frame with regard to portfolios that were not 13 marked to market to audit the sales activity 14 within the -- within the portfolio? 15 A. Well, the accountants would have been 16 alert to transactions to determine that the 17 objectives of the portfolio were consistent with 18 the behavior that was being displayed. And 19 they -- you know, that gets to purpose. 20 Q. Was there an issue in that time frame 21 in the accounting about investment versus 22 mark-to-market treatment? 16391 1 A. Well, during this time period, there 2 were only two categories, period. 3 Q. And what were those categories? 4 A. One was a trading account; and a 5 trading account had a pretty clear definition, 6 that that was a -- an account of securities that 7 were purchased with the intent of holding them for 8 a short period of, like, weeks with the 9 anticipation of a market move. 10 Q. And what was the other category? 11 A. And the way it worked, if it didn't 12 fall into a trading account, it fell into the 13 investment account, which was accounted for at 14 cost. 15 Q. Now, did that mean that if you had an 16 investment account, that you couldn't make sales 17 out of the account in order to recognize profits? 18 A. No, sir. 19 Q. Did that mean -- what did it mean when 20 you made sales out of the accounts to recognize 21 profits? 22 A. I'm not sure I quite understand your 16392 1 question. 2 Q. What would that information lead to as 3 far as the auditing process? 4 A. The auditing process would certainly -- 5 without getting into the nuts and bolts, they 6 would look at these transactions for a number of 7 reasons, to trace it through the income statement 8 and make sure we're recording income correctly. 9 But they would also -- if the accountants saw that 10 we were purchasing, in the investment portfolio, 11 large blocks of securities and, two days later, 12 trading them out if they appreciated, certainly 13 that's the type thing they would be looking for. 14 Q. And in your experience, what would they 15 do once they observed -- they had taken together 16 the documentation and made the notations as to 17 what they observed? 18 A. Typically, they would discuss with -- 19 you know, they would review the minutes. They 20 would have various discussions with United 21 personnel, including myself. And then they would 22 do detailed audit work getting into the -- you 16393 1 know, significantly behind these type statements. 2 I mean, they would go into the -- the bowels of 3 the organization and dig into it. 4 Q. Now, in any event, in this particular 5 case, we see that the accountants highlighted the 6 particular reference to "a sale of a portion of 7 liquidity in the mortgage-backed securities 8 portfolios to recognize profits which were 9 recently created by the market rally"? 10 A. Yes, sir. 11 Q. Now, let me ask you to turn over to 12 KPMG 3584. I marked it with a little flag on your 13 copy. 14 A. 3584? 15 Q. I'm sorry. 3580. 16 A. Okay. 17 MR. GUIDO: 35 what? 18 MR. NICKENS: KPMG 3580. 19 A. Okay. 20 Q. (BY MR. NICKENS) And could you read to 21 yourself the second and third paragraphs -- first 22 of all, do you note again some highlighting on the 16394 1 accountant's review of your investment committee 2 minutes? 3 A. I see shadows at the end of the second 4 paragraph where it starts, quote, "to take profits 5 in the securities"; and it appears the shadows end 6 there. 7 Q. Then could you read to yourself the 8 second and third paragraphs? 9 A. Yes, sir. (Witness reviews the 10 document.) Yes, sir, I've read those. 11 Q. Is this the kind of notation in the 12 minutes, Mr. Crow, in your experience, that would 13 catch the attention of the accountants? 14 A. Certainly. 15 Q. And what kind of questions would it 16 lead to? 17 A. The same type of questions. You know, 18 whenever you see this type of language, you would 19 say, "Well" -- the auditor would say, "What's 20 going on here?" And they would want to satisfy 21 themselves that we're not talking about a trading 22 account type activity. 16395 1 You know, in the ultimate experience 2 stream, again, if you had a situation where, in 3 the investment account, you were purchasing 4 securities and flipping them over in a week, then 5 that would lead to serious questions. 6 Q. In this case, they highlighted the 7 language around "she would be attempting to take 8 profits in the securities"? 9 A. Yes, sir. 10 Q. Now, in these discussions with 11 accountants, Mr. Crow, did you disclose that you 12 were taking profits in various of the 13 mortgage-backed securities portfolios and the 14 high-yield bond portfolio? 15 A. Yes, sir. 16 Q. And, of course, they did not cause you 17 to mark-to-market your -- either of those 18 portfolios at any time. We've established that. 19 A. No, sir. Both -- you know, we reached 20 our own judgments. Both our inside CPAs and then 21 certainly Peat Marwick audited our conclusions, 22 but neither sets of accountants felt that that was 16396 1 even a close call. 2 Q. Now, you mentioned the fact that the 3 critical issue was the intent at the time that you 4 purchased the security? 5 A. Yes, sir. 6 Q. And in order to be a trading portfolio, 7 it had to be with the intent to resell the 8 security if market conditions allowed? 9 A. Well, I think the technical definition 10 of trading is it's almost like -- it's almost like 11 acting as a dealer. It doesn't have to be, but it 12 commonly referred to as acting like a dealer. 13 You're purchasing those securities with the intent 14 to sell those securities within short order, 15 within a period of weeks, anticipating, hopefully, 16 favorable market moves. 17 Q. Now, did USAT purchase securities for 18 its mortgage-backed securities arbitrage 19 portfolios -- Joe's portfolio and USAT Mortgage 20 Finance -- for the purpose of reselling those 21 securities for gains? 22 A. No, sir. 16397 1 Q. Now -- but you did sell securities out 2 of those portfolios that led to recognized gains? 3 A. Absolutely. 4 Q. And was that activity disclosed to the 5 accountants? 6 A. Yes, sir. 7 Q. Was that activity disclosed in your 8 investment committee minutes? 9 A. Yes, sir. 10 Q. Now, let me ask you to look at 11 Exhibit B4065 at Tab 1006. And in particular, I'm 12 going to ask you to look at Page 3522. 13 A. Okay. I'm there. 14 Q. And this document reflects the 15 accountant's review of your minutes for November 16 1986, similar to the one we looked at for October 17 of 1986. Right? 18 MR. GUIDO: You said 35522? 19 MR. NICKENS: Let me get the witness' 20 answer. 21 Q. (BY MR. NICKENS) Is that correct? 22 A. Yes, sir. It's got the KPMG stamp down 16398 1 at the bottom. 2 MR. NICKENS: The page number is 35522? 3 Q. (BY MR. NICKENS) Now, let me ask you, 4 Mr. Crow, to look at the first two paragraphs of 5 Page 35522, which are the minutes -- investment 6 committee minutes of November 5, 1986. 7 A. Yes, sir, I see that. 8 Q. Let's focus on the first paragraph. 9 What are you being asked to do there? 10 A. Where it starts with "Mr. Stabell"? 11 Q. No, sir. It was requested by the 12 investment committee. 13 A. Oh, okay. That would be one of the -- 14 this request would lead to some of the notes and 15 memos that we've seen in this proceeding about how 16 much we need in profits or bond profits or special 17 gains to report some type of targeted quarterly 18 earnings. 19 Q. You're being asked to tell the members 20 of the investment committee what your financial 21 position is going to be before December 1, 22 correct? 16399 1 A. Yes, sir. 2 Q. So that a decision can be made on the 3 possible sale of high-yield corporate securities? 4 A. That is correct. 5 Q. And this is a document reviewed by your 6 auditors, correct? 7 A. Yes, sir. 8 Q. And then it goes on to say in the next 9 paragraph -- you can just read that to yourself. 10 A. (Witness reviews the document.) Yes, 11 sir. I've read that. 12 Q. It indicates that she reported that she 13 reviewed the transactions that she had reviewed in 14 the past week resulting in profits to the 15 association. 16 Do you see that? It's about five lines 17 down, four or five lines down. 18 A. Yes, sir, I do see that. 19 Q. Now, is this the sort of disclosure 20 that you have described that leads to the 21 questions by the accountants as to what your 22 intent is? 16400 1 A. Well, sure, yeah. I mean, we were -- 2 yeah, we were not hiding our -- what we were 3 doing, absolutely. 4 Q. Let me ask you to go over to Page KPMG 5 035536. 6 Do you see that document? 7 A. Yes, sir, I do. 8 Q. It is entitled, "Summary of swaps to 9 take profits"? 10 A. Yes, sir. 11 Q. Now, to an auditor, would that kind of 12 information, in your experience, be significant? 13 A. Yes, sir. That would -- you know, it 14 doesn't say purpose or intent on the schedule, but 15 that would be -- to an auditor, that would come -- 16 I mean, you certainly could reach that conclusion, 17 that the intent was swaps to take profits. 18 Q. And you note on this page that 19 Ms. Laurenson had in a column for accounting gain? 20 A. Yes, sir, I do. 21 Q. And a column for yield and economic 22 value? 16401 1 A. Yes, sir. 2 Q. And this is for review by the 3 investment committee and, as a disclosure 4 document, to the accountants? 5 A. That is correct. 6 Q. By the way, do you know if these same 7 investment committee minutes were available and 8 reviewed by the examiners? 9 A. I believe they were. I can't promise 10 that, but I certainly believe that the examiners 11 reviewed the minutes of the investment committee, 12 yes, sir. 13 Q. In each of these instances of the 14 summary of swaps to take profits, the accounting 15 gain exceeds the economic value? 16 A. That is correct. 17 Q. And in one instance, it indicates you 18 have a decrease in yield from the transaction? 19 A. Yes, it does. 20 Q. Now, let me ask you to go over to 21 Page 35559. Do you have the document there 22 entitled "Mortgage-backed securities portfolio"? 16402 1 A. Yes, sir, I do. 2 Q. And goals for each segment of the 3 portfolio under the "investment portfolio," do you 4 see that? 5 A. I do. 6 Q. And what is written -- if you could 7 just read the first sentence. 8 A. Yes, sir. Under the investment? 9 Q. Yes, sir. 10 A. "Maintain current yield levels on 11 assets." 12 Q. And then the next sentence? 13 A. "Use opportunities to take profits and 14 swap to higher yielding securities." 15 Q. And are there some notations on your 16 copy to the right, very faintly there, of some 17 numbers? 18 A. Yes, sir, there are. 19 Q. Now, this "use opportunities to take 20 profits," is that the kind of information that 21 would lead to, in your experience, questions from 22 the auditors as to the purpose of the trade? 16403 1 A. Absolutely. 2 Q. And it would lead to these discussions 3 that you have described concerning that -- your 4 intent in acquiring the securities? 5 A. Yes, sir. 6 Q. Now, Mr. Crow, maybe we can -- because 7 you acquire a security without the intent to trade 8 it, does that mean that you may not -- may not 9 decide to sell it at a later time? 10 A. No, sir, it doesn't mean that at all. 11 My -- my experience during this time period and my 12 prior experience at First City was those were the 13 rules in effect at the time. If it wasn't 14 traded -- excuse me. 15 If it wasn't a trading account under 16 the technical definition of a trading account, 17 then it fell over into the investment account. 18 And the investment account was reported at cost. 19 It was not marked to market. The mark-to-market 20 was disclosed in the financial statements, but 21 those were the rules. 22 Q. Now, let me ask you to look over at 16404 1 Page 35581. Do you see there that in the 2 investment committee minutes, a chart was prepared 3 indicating unrealized gains and losses on the 4 United MBS portfolio and related hedging 5 portfolios? 6 A. Yes, I do. 7 Q. And it's broken down by various 8 categories? 9 A. Yes. 10 Q. That information was made available to 11 the accountants and auditors? 12 A. Yes, sir. It's got the -- I know it 13 was, and it's also got the KPMG stamp at the 14 bottom. 15 Q. Let me ask you to look over at 16 KPMG 35606. It should be on that -- 17 A. 606, right. I've got it, the 18 handwritten sheet. 19 Q. It indicates portfolio activity for the 20 week? 21 A. Yes, sir. 22 Q. And it says, "Took profits of 3 and a 16405 1 half million in USAT's portfolio"? 2 A. Yes, sir. 3 Q. And it has a column for gains and 4 incremental economic yield? 5 A. Yes, sir. 6 Q. And it indicates the book yield in some 7 cases, a declining yield. Right? 8 A. It does. 9 Q. Was all of this information made 10 available to the auditors and examiners? 11 A. Yes, sir. 12 Q. Now, is this the sort of information 13 that would lead to auditing questions about the 14 purposes of the trades? 15 A. This -- well, certainly, yes, sir. 16 Q. Now, let me ask you to turn over to 17 Page 35624. There you wrote in the third 18 paragraph on Ms. Laurenson's report that "The 19 report was discussed at great length, including 20 the current trading in the portfolio, in order to 21 adjust the portfolio foreclosure market gains and 22 losses." 16406 1 A. Yes, sir. I see that. 2 Q. Then a couple paragraphs down, "A 3 lengthy discussion was had in the effect of 4 interest rate changes on the portfolio; and it was 5 determined that in view of the desire to adjust 6 the portfolio, it would be appropriate to take 7 profits from the AMPs -- mortgage-backed 8 securities collateralizing the DARTs and AMPs 9 issues while keeping yield at an appropriately 10 high spread." 11 Do you see that? 12 A. I do. 13 Q. Now, is this the sort of information 14 that leads to discussions with the accountants as 15 to what your intent was when you acquired the 16 securities since you are deciding to sell them for 17 a profit? 18 A. Yes, sir, it does. 19 Q. Now, let me ask you to turn over to 20 Page 35630. Do you see there under next week's 21 plan? 22 A. Yes, sir. 16407 1 Q. It says, "Continue to take profits 2 primarily in the investment portfolio"? 3 A. Yes, sir. 4 Q. Is that the kind of disclosure that led 5 to scenarios as to what your intent was when you 6 acquired the securities and whether or not you 7 were conducting a trading activity? 8 A. Yes, sir. 9 Q. Now, particularly, look at the footnote 10 and on P&L highlights. You disclose there that 11 there were unrealized gains of 9.0 million in the 12 DARTs and subs. Those were not arbitrage 13 portfolios, were they? 14 A. No, they were not. 15 Q. "However, trading activity in these 16 portfolios is curtailed by, (A) the lack of access 17 to pool-specific information (which is maintained 18 in Delaware), and (B) indenture related 19 restrictions on trades (whole pool and 20 overcollateralization, et cetera.)" 21 Do you see that? 22 A. I do. 16408 1 Q. Then in Footnote No. 2, Ms. Laurenson 2 writes for the committee and for the examination 3 by auditors and examiners, "Unrealized gains of 4 close to 14 million exist in the USAT investment 5 portfolio. Taking gains today, however, would 6 result in a lowered yield on the remaining 7 portfolio. The decision has to be made whether or 8 not this income is more valuable now, in a lump 9 sum, or would benefit the company more as part of 10 a larger, ongoing interest income stream." 11 Now, was that issue debated within 12 USAT -- that is, the circumstances under which one 13 should sell appreciated assets that were producing 14 income? 15 A. Yes, sir. That was a -- that was 16 basically part of our culture, that, you know, if 17 we had appreciated assets such as Ms. Laurenson is 18 disclosing here, there would be a discussion as to 19 the economics of that and whether it was more 20 advantageous to take the profit or to not take the 21 profit. 22 Q. And that decision-making process was 16409 1 contained, among other places, in your investment 2 committee minutes as is evidenced here? 3 A. That is correct. 4 Q. Now, let me ask you to look at 5 Exhibit B4067 at Tab 1007. This is the minutes of 6 the investment committee for December 1986 as 7 reviewed by the independent auditors, 8 Peat Marwick? 9 A. Yes, sir. It's got the KPMG stamp down 10 there. 11 Q. This is the month in which you had been 12 instructed to provide a statement of the financial 13 situation so that you could decide whether it was 14 going to be necessary to take profits out of the 15 high-yield bond program? 16 A. Yes, sir. I think I was supposed to 17 have that by December 1st. 18 Q. If you would like at Page 35658 on the 19 next-to-the-last paragraph, it indicates that 20 Mr. Huebsch presented a report on the bond sales 21 program? 22 A. Yes, sir. 16410 1 Q. And was that -- then if you look on the 2 next page, do you see Peat Marwick highlighting on 3 Page 35659? 4 A. Yeah. I see the shading where it 5 indicates that it's been Xeroxed from a 6 highlighted copy. 7 Q. What is the shaded portion, from the 8 Peat Marwick review, of your investment committee 9 minutes? 10 A. The shading that I see is in the second 11 paragraph where she noted that she was looking to 12 take some profit for the association AMPs and 13 DARTs -- excuse me -- DART mortgage portfolio with 14 the possibility of replacing the collateral with 15 Treasury bills for a short time and then 16 reacquiring whole pools of mortgage-backed 17 securities at a later date. 18 Q. Is this the sort of information that 19 would catch the eye of an auditor -- 20 A. Yes, sir. 21 Q. -- and, apparently, did catch the eye 22 of an auditor in this case -- 16411 1 A. Yes, sir. 2 Q. -- and led to the discussions that you 3 have indicated that you had concerning your 4 intent? 5 A. Yes, sir. 6 Q. Now, let me ask you to look at 7 Page 35665. Now, this is a document that 8 Mr. Guido showed you in your -- in his 9 direct-examination. Do you recall you focused on 10 the bottom half of the page, "total profits made 11 during program"? 12 A. I do remember that handwriting, that 13 handwritten portion, yes, sir. 14 Q. You indicated that that was the sort of 15 thing that might indicate some notion of purpose 16 to an auditor or accountant? 17 A. Yes, sir. That would -- yes, sir. 18 Q. Now, let's look at what the program 19 was. Can you look at the top of the page? Again, 20 you've been instructed to come up with the 21 financial position of the company to determine 22 whether it was necessary to take profits out of 16412 1 the high-yield bond portfolio, correct? 2 A. That is correct. 3 Q. And what does it say at the top of this 4 page concerning the program that you referenced at 5 the bottom? 6 A. The title of the schedule is "fourth 7 quarter retail matched profits," and then the next 8 line is -- which apparently has been highlighted 9 by, I guess, Peat Marwick -- "profits taken before 10 quarter end program on sale of." And then it 11 lists various securities. 12 Q. And then what is the title of the next 13 paragraph? 14 A. "Profits from quarter end program and 15 then (started November 26, 1986)." 16 Q. Now, is this the kind of information 17 that leads to discussions with the accountants as 18 to what your -- the intent of your investment 19 portfolios are? 20 A. Yes, sir. 21 Q. And did you disclose in the course of 22 these discussions the fact that you were taking 16413 1 profits for gains in order to bolster quarter-end 2 profits? 3 A. Yes, sir. This is pretty plain here. 4 Q. Now, let me ask you to look at the next 5 document, which is -- or Page -- KPMG 35667. This 6 is the format that we have seen several times 7 before, is it not, Mr. Crow? 8 A. Yes, it is. 9 Q. It indicates you're disclosing the 10 market yield on the trade, the accounting profits, 11 and what's here called swap dollars gain? 12 A. Yes, sir. 13 Q. And in some instances, you have trades 14 that produce a decrease in yield and substantial 15 accounting profits? 16 A. Yes, we do. 17 Q. And is this the kind of information 18 that leads to questions from the accountants as to 19 what your investment objectives and purposes are? 20 A. Yes, it is. 21 Q. Let me ask you to look at Page 35668 22 under "portfolio performance." 16414 1 Do you see that? 2 A. Yes, I do. 3 Q. Now, for several months now, you have 4 been discussing the possibility of selling for 5 gains out of the DARTs and AMP portfolios. Right? 6 A. Yes, sir. 7 Q. It's reported there that steps had been 8 taken to take advantage of current market 9 conditions as $18 million of Freddie Macs were 10 sold for a gain of 650,000 and replaced with 11 20 million of Ginnie Maes and Freddie Macs. 12 A. Yes, sir, I see that. 13 Q. Let me ask you to look over to 14 Page 35701. Do you see there again Ms. Laurenson 15 is reporting swaps and gain, market yield, and 16 accounting gains. Right? 17 A. Yes, sir. 18 Q. Including some instances where there is 19 a decline in yield? 20 A. Yes, sir. 21 Q. Now, it doesn't say anywhere what the 22 purpose of these transactions are, does it, 16415 1 Mr. Crow? 2 A. No, sir, it does not. 3 Q. Is this the kind of information that 4 accountants look at in the audit process in order 5 to determine whether or not they should cause your 6 portfolios to be mark-to-market? 7 A. Absolutely. I mean, you know, they may 8 not -- a document may not have the exact words on 9 it, but this is the type of document that an 10 auditor would pick up. And, you know, it clearly 11 says "accounting" -- a column for accounting, 12 presumably gains. And they would pick that up and 13 talk to people and do an investigation. 14 Q. And -- okay. Now, on the next page, 15 35702, under "portfolio performance," do you see 16 that it is disclosed if we -- that there are gains 17 possible in the DARTs and AMPs portfolio? It 18 says, "If we choose to take these gains and 19 temporarily replace approximate MBS" -- again, a 20 discussion about the thought processes that 21 concerned the management of these portfolios? 22 A. Yes, sir, that those portfolios had an 16416 1 unrealized gain of 9.9 million and we are 2 contemplating -- I don't remember -- you know, 3 obviously, I don't remember the specific 4 transaction; but it's obvious we're contemplating 5 whether it's advantageous to take the gain or not 6 take the gain. 7 Q. And KPMG 35724, is this another chart 8 similar to the ones we've seen before on a weekly 9 basis reporting on accounting gains and market 10 yield with various transactions? 11 A. Yes, sir, it is. 12 Q. Is that the sort of information that 13 the accountants focus on with regard to doing 14 their job? 15 A. Certainly. 16 Q. Let me ask you to look at 17 Exhibit B4103. This is January 1987. 18 Do you see the same kind of chart at 19 KPMG 044170? 20 A. Yes, sir. It's the same type of format 21 with the column "accounting gain." 22 Q. Do you see a similar chart at 16417 1 KPMG 044199? 2 A. Yes, sir, I do. 3 Q. Do you see a similar chart over at 4 KPMG 44236? 5 A. 44236? 6 Q. Yes, sir. 7 A. Oh, yes, sir. 8 Q. Same format that you had been reporting 9 on since Ms. Laurenson arrived. Right? 10 A. Yes, sir, in terms of the accounting 11 gain over on the far right-hand column. 12 Q. You're reporting the market yield, 13 whether it's a plus or minus, at the same time? 14 A. That is correct. 15 Q. And what kind of inference does that 16 lead to, in your experience, in the audit process? 17 A. It would lead to the inference that 18 we're flowing accounting gains through the income 19 statement. 20 Q. And lead to a discussion about what the 21 purpose was of that particular trade and whether 22 or not it was in an investment portfolio? 16418 1 A. Yes, sir. 2 Q. Now, let me ask you to look at 3 KPMG 44225, which is written in the text of the 4 investment committee minutes. 5 MR. GUIDO: What's that page again? 6 MR. NICKENS: 44225. 7 A. Okay. I'm there. 8 Q. (BY MR. NICKENS) You have a statement 9 in the third bullet point about DARTs and AMPs. 10 "We swapped coupons and took 2.16 million in 11 profits" which we've talked about the DARTs and 12 AMPs, if not every week, very frequently over are 13 the last several months. Right? 14 A. That is correct. 15 Q. And in the investment portfolio, you're 16 stating that you had sold some mortgages which 17 have the effect of realizing economic profits 18 without yield reduction? 19 A. Yes, sir. 20 Q. Now, let me ask you to look at 21 Exhibit B4105, which is for the month of February 22 from the accountant's work paper, a review of your 16419 1 investment committee minutes. 2 A. (Witness reviews the document.) 3 Q. Do you see, at Page 44254, the same 4 kind of chart -- 5 MR. GUIDO: Can you hold on one second? 6 We still haven't found the document. Is that 7 Tab 1175? 8 MR. NICKENS: Tab 1194. Thank you. 9 A. What was the question? 10 Q. (BY MR. NICKENS) Is that the same kind 11 of chart that we had seen and has been in 12 existence ever since Ms. Laurenson came to the 13 institution? 14 A. Yes, sir. 15 Q. This is a format that she had adopted 16 for reporting purposes and was put in the 17 investment committee minutes? 18 A. Yes, sir. 19 Q. And it included a statement of the 20 accounting gain and market yield for every trade? 21 A. It did. 22 Q. And let me ask you to look over to 16420 1 Page 44329. 2 Do you see there a discussion of 3 activities -- 4 A. Yes, sir, I do. 5 Q. -- including swapping Freddie Mac 9 and 6 a halfs for Fannie Mae 9 and a halfs to pick up a 7 20 point -- basis point yield? 8 A. Right. 9 Q. Do you see down at the bottom under 10 "P&L comments"? 11 A. Yes, sir. 12 Q. It indicates that you had 12.2 million 13 in realized gains in spite of the fact that 14 3 million in profits were taken out of the 15 investment portfolio on a swap? 16 A. Let me reread that. 17 THE COURT: I think you read 18 "realized." 19 A. Yeah. In unrealized gains. 20 MR. NICKENS: Did I say "unrealized"? 21 I meant "realized." 22 A. Yeah. To me, it says the total 16421 1 mortgage-backed securities portfolio gained 2 .9 million to end the week up 12.2 million 3 unrealized gains in spite of the fact that 4 3 million in profits were taken out of the 5 investment portfolio on a swap. 6 Q. (BY MR. NICKENS) And, again, is this 7 the sort of information that, in your experience, 8 catches the eye of the accountants and leads to 9 their questions as to the nature of your activity 10 in a portfolio? 11 A. Yes, sir. 12 Q. And, in fact, did -- in this instance, 13 we have seen that you had discussions with the 14 accountants on a continuing basis about your 15 objectives and activities in the portfolios, 16 correct? 17 A. Yes, sir. We talked about it often. 18 Q. And we looked at, before lunch, the 19 conclusions they had drawn after such review and 20 such discussions with you? 21 A. Yes, sir. 22 Q. Now, let me ask you, just to complete 16422 1 this, if you would confirm for us that KPMG 44431 2 is yet another one of Ms. Laurenson's formatted 3 reports. 4 A. Yes, sir. With the accounting gain 5 column on it, yes, sir. 6 Q. Let me ask you to look over at the 7 minutes or the Peat Marwick's review of the 8 minutes for February 1987, which is at 9 Exhibit B4106, Tab 1195. 10 A. (Witness reviews the document.) 11 Q. Do you see at Page 44496 one of these 12 charts that we've been discussing? 13 A. Yes, sir, with the KPMG sticker down at 14 the bottom and the "accounting gain" column. 15 Q. And in some instances, you're showing 16 an accounting gain and a loss of yield? 17 A. Yes, sir, we are. 18 Q. And this is the sort of information 19 that leads to these discussions that you've 20 indicated with the accountants? 21 A. Yes. This and -- you know, they didn't 22 only look at our investment committee minutes; but 16423 1 certainly, this was a key area that they would 2 inspect. 3 Q. Now, there's no reference here to 4 any -- well, let me -- a trade can have more than 5 one purpose or objective, can it not, Mr. Crow? 6 A. Certainly. 7 Q. And there's no statement in here as -- 8 that says "purpose." Right? 9 A. That is correct. 10 Q. But it puts out the facts of the trade? 11 A. It certainly does. 12 Q. And in these instances where you've got 13 a loss of yield and an accounting gain, what is 14 the -- what is the inference to the suspicious 15 mind of the auditor who is paid to have that 16 suspicious mind in looking at this kind of 17 information? 18 A. If you've got a -- typically, in the 19 mind of a CPA/auditor, if you've got a loss of 20 yield and a similar average life or duration, 21 whichever one you want to use, the strong 22 inference would be that you took it to book an 16424 1 accounting gain. That's a very strong inference. 2 Q. Then let me ask you to confirm that at 3 Page 44536 of Exhibit 4106, we have a similar 4 document in the investment committee minutes of 5 the activity in the mortgage-backed securities 6 portfolio. 7 MR. GUIDO: What's that page again? 8 MR. NICKENS: KPMG 044536. 9 A. Yes, sir, the same basic type schedule. 10 Q. (BY MR. NICKENS) And lastly in this 11 group, would you look at Exhibit B4093 which are 12 the investment committee minutes of March 1987 as 13 reviewed by the accountants? 14 A. (Witness reviews the document.) 15 Q. Do you see the same type of chart at 16 44639? 17 A. Yes. That's for the week ended 18 March 16th. 19 Q. Again, there's no statement on these 20 pages that "here's the purpose of the trade," is 21 there? 22 A. No, sir, there is not. 16425 1 Q. But you've got disclosed all of the 2 information concerning the economic impact of the 3 trade? 4 A. Yes, sir. 5 Q. And in many instances here, you've got 6 a decline in yield and an accounting gain? 7 A. Yes, you do. 8 Q. And -- 9 A. And in answer to the prior question, I 10 would say -- I would back that answer up a little 11 bit. I would say you don't have all of the 12 information here, but you've got a very good 13 summary of information so that an interested 14 person could go determine the facts. 15 Q. They could go back to the trade tickets 16 and any other reporting disclosure documents. 17 They could go talk to the person that was 18 responsible for doing the trade and get the 19 rationale for the trade? 20 A. Absolutely. 21 Q. And they continued to advise you that 22 you needed to state what the purpose or rationale 16426 1 for the trade was? 2 A. Yes, sir. I think that was referred to 3 in a memo from Mr. Parsons. 4 Q. And finally, if you could look at 5 KPMG 44724, here it is in April of '87, similar 6 reporting format? 7 A. Yes, sir. 8 Q. And, similarly, at 44745? 9 A. Yes, sir, the same type schedule. 10 Q. Now, you've indicated that in the 11 high-yield bond portfolio, there were times where 12 you, at quarter end, took gains for reporting 13 purposes? 14 A. Yes, sir. 15 Q. And was that disclosed to the 16 accountants? 17 A. Yes, sir. 18 Q. Did you try to hide in any way the 19 purposes or objectives of these various trades 20 that we've gone over in your dealings with the 21 accountants? 22 A. No, I did not. And neither -- neither 16427 1 myself nor my people -- I just -- I can't imagine 2 it, no, sir. 3 Q. This very same information was audited 4 by Peat Marwick and audited by the federal 5 examiners? 6 A. Certainly, it was audited by 7 Peat Marwick; and I'm very -- you know, I can't 8 factually say by the federal examiners; but I know 9 they got the minutes. So, you know, I'm not as 10 familiar with their process. 11 Q. Did you keep anything from the auditors 12 in order to try to keep them from marking your 13 portfolios to market? 14 A. No, sir. No. We were -- you know, if 15 we -- if we were trying to hide something, we 16 wouldn't be putting, you know, out these kind of 17 investment committee minutes. I wouldn't be 18 putting out the kind of memos that we've seen in 19 this proceeding. My reading file was open to the 20 auditors. I know they reviewed it. The answer is 21 no. 22 Q. Now, I asked you specifically about the 16428 1 high-yield bond portfolio. Is the same true of 2 the mortgage-backed securities portfolio; that is, 3 you documented, as best you could, the intent and 4 rationale of the trades as well as their economic 5 results? 6 A. Yes, sir. 7 Q. And set those out there knowing that 8 the auditors and probably the examiners would be 9 looking at them? 10 A. Yes, sir. 11 Q. Did you -- Peat Marwick never marked 12 your investment portfolios to market, did they? 13 A. No, sir. 14 Q. Was that, to your certain knowledge, 15 based upon full and fair disclosure of the facts 16 necessary for them to reach that opinion? 17 A. Yes, sir, it is. 18 MR. NICKENS: That's all I have, 19 Your Honor. 20 THE COURT: Mr. Blankenstein? 21 MR. BLANKENSTEIN: Yes, sir, thank you. 22 16429 1 EXAMINATION 2 3 Q. (BY MR. BLANKENSTEIN) Good afternoon, 4 Mr. Crow. 5 A. Good afternoon. 6 Q. By my count, you've been on the stand 7 for about eight full days. That's the record so 8 far in this case. I suspect it's not one you set 9 out to achieve; is that correct? 10 A. Right. 11 Q. As you know, I represent Jenard Gross, 12 another one of the respondents in this case. I'll 13 ask you some questions about your association with 14 Mr. Gross while you were both at USAT, if that's 15 all right with you. 16 A. Okay. 17 Q. If I heard your testimony correctly, 18 you were already the chief financial officer of 19 USAT when Mr. Gross arrived; is that correct? 20 A. That is correct. 21 Q. And although it might seem a long time, 22 maybe even a lifetime ago, do you remember 16430 1 Mr. Rinaldi asking you some questions about 2 Mr. Gross' background? 3 A. I remember Mr. Rinaldi -- well, one of 4 the OTS lawyers asking me about the background of 5 various people, I think, related to the real 6 estate committee. 7 Q. And do you remember him asking you 8 about Mr. Gross, and you said that Mr. Gross -- 9 you viewed Mr. Gross' as a real estate expert, but 10 you thought he had served on the board of a 11 savings and loan. 12 Do you remember that? 13 A. Oh, I do remember that, yes. 14 Q. Let me show you something to refresh 15 your recollection, perhaps, about the extent of 16 Mr. Gross' background before he joined USAT. I'm 17 going to show you what's already in evidence as 18 Twomey 21, which is Tab 91. I think Mr. Villa 19 showed you this, and you reviewed some resumes 20 with Mr. Villa. 21 Do you remember that? 22 A. Yes, sir, I do. 16431 1 Q. And this is the August 29th, 1986 2 business plan that Mr. Berner furnished to Neil 3 Twomey at the Dallas bank; is that right? 4 MR. SCHWARTZ: Objection, Your Honor. 5 I think the cover letter is dated August 29th. 6 The business plan is dated August 28th. 7 MR. BLANKENSTEIN: Thank you for that 8 correction, Mr. Schwartz. I appreciate it. 9 A. Yes, this appears to be the business 10 plan of August 28th, 1986. 11 Q. (BY MR. BLANKENSTEIN) I had put a flag 12 at about two-thirds of the way back which is the 13 beginning of Appendix 1, and those were the 14 resumes that were attached to the business plan; 15 is that right? 16 A. Yes, sir. 17 Q. The first one is Mr. Gross' resume; is 18 that right? 19 A. That's the one I've got in front of me, 20 yes, sir. 21 Q. And it shows, under "experience," a 22 listing for Mr. Gross at the Republic Bank of 16432 1 Spring Branch. 2 Do you see that? 3 A. I do. 4 Q. It shows he served on the executive 5 committee of that bank? 6 A. Yes, sir. 7 Q. The investment committee? 8 A. Yes, sir. 9 Q. The loan committee? 10 A. Yes. 11 Q. And that he was on the board of 12 directors, as well? 13 A. That is correct. 14 Q. And the next listing shows that he was 15 chairman of the board of Gulf Coast Savings 16 Association? 17 A. Yes. 18 Q. And if you -- if you read down about 19 two-thirds of the way, it shows also that he was 20 the director of the Central National Bank of 21 Houston. 22 Do you see that? 16433 1 A. Yes, sir. 2 Q. And about two listings under that, it 3 shows that he was the director of the Robstown 4 Savings and Loan Association, as well? 5 A. Yes, sir, I see that. 6 Q. Does that refresh your recollection 7 that Mr. Gross had a fair amount of experience in 8 financial institutions before he joined USAT in 9 February of 1985? 10 A. Yes, sir, it certainly appears so. 11 Q. If you remember, when Mr. Rinaldi was 12 asking you those questions last week, he also 13 asked you questions about whether Mr. Berner had 14 experience in banking, whether Mr. Munitz did, and 15 whether Mr. Huebsch did. 16 Do you remember that? 17 A. Yes, sir, I do. 18 Q. And I think you answered with respect 19 to each of those individuals that you didn't 20 know -- 21 A. Yes, sir. 22 Q. -- or that you didn't remember that 16434 1 they did; is that right? 2 A. I think I said I didn't -- it's been so 3 long. It was either I don't remember or I don't 4 know. 5 Q. And after that, do you remember 6 Mr. Rinaldi tried to get you to agree that you 7 were the only member of USAT senior management 8 team that had banking experience prior to coming 9 to USAT? 10 A. Yes, sir, I believe so. 11 Q. And you pointed out that that wasn't 12 right because Mr. Williams had banking experience, 13 as well; is that right? 14 A. Right. 15 Q. And that's Gerry Williams? 16 A. Yes. 17 Q. And he had that banking experience at 18 First City Bank? 19 A. That is correct. 20 Q. And can you describe that experience? 21 A. Gerald Williams had been chief 22 financial officer and one of the highest 16435 1 executives at First City. He later -- I forget 2 exactly what his title was, but it was above chief 3 financial officer. 4 Q. If you take a look at those resumes and 5 you turn to the next one in line, you'll see 6 Mr. Williams' resume. 7 A. (Witness reviews the document.) 8 Q. Do you see that? 9 A. Yes. 10 Q. He was the executive vice president of 11 First City; is that right? 12 A. Right, yeah. That does refresh my 13 memory. 14 Q. And he had substantial responsibilities 15 for the day-to-day operations of that institution? 16 A. That is correct. 17 Q. After you pointed out to Mr. Rinaldi 18 that Mr. Williams had this extensive experience, 19 he tried to get you to say that after Mr. Williams 20 left in 1987, you were the only one at senior 21 management levels at least that had any banking 22 experience; is that right? 16436 1 A. I remember that, yes. 2 Q. And I think you said to him that you 3 were the only one, off the top of your head? 4 A. Yes, sir. 5 Q. And we've looked now and we've seen 6 that Mr. Gross had some experience, as well. Let 7 me show you something else that may refresh your 8 recollection further about Mr. Gross' experience 9 in 1988. 10 Let me show you his deposition. This 11 is Mr. Gross' deposition that was taken, I 12 believe, in May of 1997. 13 Do you have that in front of you, sir? 14 A. I do, yes, sir. 15 Q. And do you know who was asking 16 Mr. Gross those questions? Can you take a look at 17 the first page? 18 A. Let's see. Mr. Rinaldi. 19 Q. And if you turn to Page 12, do you see 20 about on Line 7, Mr. Rinaldi asks a question, 21 "Now, had you any prior experience in the 22 operations of a savings and loan?" 16437 1 MR. SCHWARTZ: Excuse me. Is this to 2 refresh Mr. Gross' recollection? 3 MR. BLANKENSTEIN: This is to refresh 4 Mr. Crow's recollection. 5 Q. (BY MR. BLANKENSTEIN) And Mr. Gross 6 then lists many of the positions that we've gone 7 through that were listed on his resume; is that 8 right? 9 A. Yes, sir, he does. 10 Q. And if you look on Page 13, does 11 Mr. Gross also list that he served on the Federal 12 Reserve Bank in Houston? 13 A. Yes, sir, it does. 14 Q. Do you think that service on the 15 Federal Reserve Bank in Houston -- I think he says 16 from 1986 to 1992. 17 A. That is correct. 18 Q. Do you think that service on the 19 Federal Reserve Bank in Houston qualifies as 20 banking experience? 21 A. Absolutely, yeah. After reviewing 22 Mr. Gross' resume, obviously, he had banking 16438 1 experience. 2 Q. You weren't the only one. You weren't 3 all alone, were you? 4 A. I know now I was not alone. 5 Q. Mr. Williams was still -- Mr. Gerry 6 Williams was still at USAT when Mr. Gross arrived? 7 A. Yes, he was. 8 Q. And Mr. Williams was the president? 9 A. That is correct. 10 Q. And he continued to serve as the 11 president until about January of 1987; is that 12 right? Is that consistent with your recollection? 13 A. Yes, it is. 14 Q. And during the time that both Mr. Gross 15 and Mr. Williams served, Mr. Williams still 16 exercised substantial authority in the operations 17 of USAT; is that right? 18 A. Absolutely. 19 Q. Now, while Mr. Gross was on the top of 20 the totem pole, Mr. Williams was right close to 21 him. Wasn't that right? 22 A. Yes, sir. 16439 1 Q. And is it right that they divided up 2 the -- their supervision of the operations to best 3 reflect their experience, with Mr. Gross focusing 4 on the real estate operations and Mr. Williams 5 focusing on the day-to-day operations of the 6 institution; is that right? 7 A. That's a very fair characterization. 8 Mr. Williams took care of all of the 9 administrative stuff and Mr. Gross focused on real 10 estate type matters. 11 Q. And when Mr. Williams was president, 12 you reported to Mr. Williams and not to Mr. Gross 13 directly; is that right? 14 A. That is correct. 15 Q. And did the investment department also 16 report to Mr. Williams directly? 17 A. I think the investment department did 18 report to Mr. Williams. 19 Q. And did Mr. Williams usually take the 20 lead in dealing with the regulators, in responding 21 to the regulators? I think we've seen an example 22 of that in connection with the liability growth 16440 1 issue; is that right? 2 A. Oh, certainly while -- yes. My memory 3 is while Mr. Williams was still there comparing 4 him to Mr. Gross, Mr. Williams took more of the -- 5 had much more interface with the regulators than 6 did Mr. Gross. 7 Q. And while you didn't deal -- report 8 directly to Mr. Gross, you did have an opportunity 9 to observe him firsthand on the real estate 10 committee and the senior loan committee; is that 11 right? 12 A. Yes, sir, I did. 13 Q. And I think you testified that 14 Mr. Gross was an active and intense questioner and 15 he asked penetrating questions during those 16 meetings? 17 A. Yes, sir. And that -- that would not 18 be limited to just those committees. That was 19 just his mode of operation, yes, sir. 20 Q. Can you describe for the Court what 21 type of information Mr. Gross was trying to elicit 22 by his questions? 16441 1 A. It could be a variety of -- of things. 2 Mr. Gross would talk about -- and these are just 3 examples. Mr. Gross would question the logic of a 4 presentation. Mr. Gross would question the -- 5 perhaps the principals that were involved. 6 Mr. Gross was familiar with a lot of the real 7 estate people in Texas. So, he would know them or 8 know of them. Mr. Gross would -- I remember 9 asking about a -- if we were looking at a loan or 10 a project in a certain geographic area, "Well, you 11 know, I know George Hansen over -- and he owns a 12 project that's 2 or 3 miles down the road. Have 13 you checked with him to see how that project is 14 going?" Mr. Gross was pretty picky in terms of 15 numbers and that sort of thing. So, he would -- I 16 don't know if this is a descriptive term, but he 17 would tend to pick things to pieces. 18 Q. Would it be fair to say that Mr. Gross 19 was trying to get all the key information out on 20 the table so the members of the committee could 21 make a reasonable judgment as to whether or not to 22 approve a particular investment? 16442 1 A. That's very fair. 2 Q. Was that his approach with non-real 3 estate matters, as well? 4 A. That was -- I could give that 5 description of Mr. Gross in most every -- in most 6 of my dealings with Mr. Gross; that if Mr. Gross 7 was involved in it, he was -- he was -- he was a 8 true hands-on CEO. He would get his hands dirty 9 and delve into the details. 10 Q. On a number of occasions in that 11 connection, you referred to Mr. Gross as the boss; 12 is that right? 13 A. Yes, sir. 14 Q. And that's not because he bears an 15 uncanny resemblance to Bruce Springstein but -- 16 A. Yes. He was in charge. 17 Q. As you said, he was a hands-on 18 executive; is that right? 19 A. Yes, sir. 20 Q. USAT wasn't a one-man show while he was 21 there. Right? 22 A. No. We operated as -- you know, the 16443 1 people operated as a team; and we had our 2 particular areas of strength. And, you know, you 3 couldn't be an expert in all areas; so, Mr. Gross 4 was -- you know, he was the overall coordinator. 5 Q. In that connection, in coordinating the 6 operations, he relied on the various members of 7 the senior management team to take responsibility, 8 to handle issues that would come up in their areas 9 of responsibility; is that right? 10 A. Certainly, sure. 11 Q. For example, Mr. Pledger and then 12 Mr. Berner were responsible for addressing legal 13 and regulatory matters; is that right? 14 A. Yes, sir. 15 Q. At least in the first instance? 16 A. Yes. Well, I viewed -- absolutely. 17 Q. And USAT's compliance with the 18 accounting rules, that fell within your area of 19 responsibility; is that right? 20 A. Mr. Gross would have relied upon me to 21 make sure we were doing that properly. 22 Q. Did you believe that -- do you believe 16444 1 that USAT's management team did a good job in 2 running the operation in trying times? 3 A. Yes, sir, I do. 4 Q. Did they work hard? 5 A. Yes, sir, absolutely. 6 Q. Did that include yourself? 7 A. Yes. I worked very hard. Mr. Williams 8 worked hard. Mr. Gross worked hard. He was 9 not -- you know, he wasn't the type of CEO that 10 came in and read the paper and looked out the 11 window and talked about strategic plans. He was, 12 you know, down getting his hands dirty. 13 Q. Did Mr. Berner work hard, as well? 14 A. Absolutely. 15 Q. He put in long hours? 16 A. Yes, sir, absolutely. 17 Q. Do you remember Mr. Villa asking you 18 whether you ever met -- massaged the accounting at 19 USAT to accommodate senior management. You 20 categorically denied that and said you would never 21 do it. 22 Do I remember your testimony right? 16445 1 A. Yes, sir. 2 Q. Just to complete the record, did 3 Mr. Gross or anybody else at USAT ever ask you to 4 massage the accounting? 5 A. No. That request never came. 6 Q. Did Mr. Gross and yourself and the rest 7 of the management team at USAT try to operate 8 within accounting rules and the regulatory rules 9 as best as you could find out what they were? 10 A. Yes, sir. 11 Q. Now, I think Mr. Villa showed you a 12 memo that started out "bad news to the top." 13 Do you remember that? 14 A. Yes, sir, I do. 15 Q. And that was -- I think you explained 16 Mr. Gross' policy of not hiding that information 17 or problems in the institution, to bring that out 18 so that people could address it; is that right? 19 A. That is correct. 20 Q. Did that same policy reflect how USAT 21 dealt with its outside auditors and the federal 22 regulators? 16446 1 A. Yes, sir, it did. I mean, we just 2 didn't -- didn't hide things. It was -- I 3 remember numerous conversations with outside 4 parties, and they were fairly blunt and pretty -- 5 you know, very open. 6 Q. Never tried to hide anything? 7 A. No, sir. 8 Q. A few final questions, Mr. Crow. 9 You worked closely with Mr. Gross for a 10 number of years while you were at USAT; is that 11 right? 12 A. Yes, sir, I did. 13 Q. Did you form some impressions of 14 Mr. Gross as a CEO? 15 A. Yes, sir, I did. 16 Q. Could you tell the Court what those 17 impressions are? 18 A. Mr. Gross, in my opinion, is, you know, 19 of the highest integrity. He's extremely smart. 20 He is very hard-working, very tenacious; and he 21 can be a little arrogant. 22 Q. But if he called you up today, 16447 1 Mr. Crow, and offered you a job, would you take 2 it? 3 A. Yes, sir, without a doubt. 4 MR. BLANKENSTEIN: No further 5 questions, Your Honor. Thank you very much, 6 Mr. Crow. 7 THE COURT: Mr. Eisenhart? 8 9 EXAMINATION 10 11 Q. (BY MR. EISENHART) Good afternoon, 12 Mr. Crow. I have just a very few questions for 13 you on behalf of my client, MAXXAM. 14 I would like to ask you to take a look 15 for a second at a document which you were shown 16 before, and this is Exhibit T8089. It's at 17 Tab 1380. And rather than have you fish through 18 that pile, I have an extra copy of it for you. 19 Mr. Rinaldi showed you this document 20 early on in your testimony; and this is a memo by 21 Mr. Berner dated July 6, 1988, concerning a 22 meeting with the Federal Home Loan Bank of Dallas. 16448 1 Do you remember seeing that? 2 A. Yes, sir, I do. 3 Q. Now, when Mr. Rinaldi showed you that 4 document, he made rather a large point of the fact 5 that a copy of that went to Mr. Hurwitz at a time 6 when Mr. Hurwitz was no longer on the board of 7 UFG. 8 Do you recall that? 9 A. I don't, but I'll take your word for 10 it. 11 Q. Well, the record will reflect what was 12 said. 13 I would like you to turn to the second 14 page of that document, if you would. 15 MR. RINALDI: Which exhibit number? 16 MR. EISENHART: T8089. It's at 17 Tab 1380. 18 Q. (BY MR. EISENHART) On the second page 19 of the document, there is a reference to the 20 Southwest Plan, is there not? 21 A. Yes. 22 Q. As a matter of fact, if you read down 16449 1 the various paragraphs, the entire second page is 2 a discussion about the Southwest Plan and various 3 conversations that people at USAT were having 4 concerning the institution's participation in that 5 plan; is that correct? 6 A. Yes, sir. 7 Q. Now, were you aware that in the summer 8 of 1988, MAXXAM Corporation, of which Mr. Hurwitz 9 was the chairman, was actively engaged in a plan 10 to perhaps recapitalize United as part of the 11 Southwest Plan? 12 A. Yes, sir, I was very aware of that. 13 Q. And would it seem natural, therefore, 14 that with MAXXAM and Mr. Hurwitz very much 15 interested in the Southwest Plan effort, that 16 people at United would keep them informed on 17 matters pertaining to it? 18 A. That seems logical to me. 19 Q. I would like to have you take a look at 20 a second document. This is Exhibit B2610, and 21 it's at Tab 1283. Again, I have a copy of it for 22 you so you won't have to hunt through your stack. 16450 1 A. Thank you. 2 Q. Now, this is a -- this is a memorandum 3 concerning the meeting that you had with the 4 Federal Home Loan Bank Board people on 5 December 16th, 1988. And you were shown this 6 earlier in your testimony; is that correct? 7 A. Yes, sir, it is. 8 Q. Now, this is quite a detailed 9 memorandum you made of this discussion, was it 10 not? 11 A. Yes, it was. 12 Q. And I think you testified that in 13 December 1988, you were beginning to feel somewhat 14 uncomfortable about possible conflicts between 15 your duties as an officer of USAT and your service 16 on the board of UFG because of the potential sale; 17 is that correct? 18 A. Yes. That had to do with my 19 resignation from the board of UFG. 20 Q. Now, by the time you wrote this memo 21 and you had this meeting in mid-December 1988, had 22 it become apparent to you that the Ranieri Wilson 16451 1 group was the leading candidate to take over USAT 2 and do the refinancing? 3 A. Yes, sir, it had. 4 Q. Did it appear to you that they had the 5 inside track, so to speak, in their dealings with 6 the Federal Home Loan Bank Board on this subject? 7 A. I don't remember exactly what I thought 8 in this time period; but I knew that Ranieri 9 Wilson was in our offices physically, 10 representatives of that company. And I knew that 11 they were having extensive interface with the 12 Federal Home Loan Bank as reflected in this memo. 13 Q. I think you said that in terms of this 14 issue of selling bonds, both high-yield bonds and 15 mortgage-backed securities, that they seemed to be 16 taking the lead on this and deciding what assets 17 ought to be sold? 18 A. In this particular instance -- let's 19 see. Let me refer to this. Yes. On Page 2 of 20 this memo -- I can't remember chapter and verse of 21 this meeting. I certainly remember the meeting. 22 But referring to the memo, it was a 16452 1 meeting with the regulatory authorities and 2 Mr. Connell and representatives from Merrill 3 Lynch; and the meeting was turned over to Scott 4 Shea, who was a senior official with Ranieri 5 Wilson. And he discussed that, you know, it was 6 an important, quote -- it was an important part of 7 the deal that securities in question be liquidated 8 prior to closing. 9 Q. And I think you said in your testimony 10 earlier that Mr. Shea or the others at Ranieri 11 Wilson seemed to be deciding which assets would 12 then be sold -- would be sold and you would then 13 be directed by officials from the Federal Home 14 Loan Bank Board to make those sales. 15 Is that the way it occurred? 16 A. I would take my direction from the 17 officials of the Federal Home Loan Bank, yes, sir. 18 Q. But did they seem to be passing along 19 the directions that they were being given, in 20 turn, by Ranieri Wilson? 21 A. It's -- 22 MR. GUIDO: Your Honor, this is calling 16453 1 for pure speculation. It's asking the witness to 2 read somebody's mind. 3 MR. EISENHART: I'll withdraw the 4 question, Your Honor. 5 Q. (BY MR. EISENHART) Mr. Crow, did you 6 and others at United Savings have reservations 7 about the wisdom of selling these assets under the 8 circumstances in which you were being told to sell 9 them in 1988? 10 A. Absolutely. 11 MR. EISENHART: Thank you. That's all 12 I have. 13 THE COURT: We'll take a short recess. 14 15 (Whereupon, a short break was taken 16 from 2:54 p.m. to 3:28 p.m.) 17 18 THE COURT: Be seated, please. We'll 19 be back on the record. 20 I believe the cross of Mr. Crow is 21 completed? 22 MR. VILLA: Yes, Your Honor. Before we 16454 1 start, I wanted to inquire. We were supposed to 2 be served with a brief this afternoon. 3 MR. GUIDO: We have the brief. We will 4 file it this afternoon. 5 MR. VILLA: Thank you. 6 THE COURT: Mr. Schwartz, you may 7 redirect. 8 9 FURTHER EXAMINATION 10 11 Q. (BY MR. SCHWARTZ) Mr. Crow, Mr. Villa 12 asked you a series of questions during his 13 examination pointing out that the REO and 14 foreclosure problems that USAT was experiencing in 15 the '84 to '86 time frame were primarily with home 16 loans. 17 Do you recall that? 18 A. Yes, sir. 19 Q. He asked you the cause of that. I 20 think you said it was the downturn in the energy 21 industry, for the most part? 22 A. The downturn in the energy industry and 16455 1 the loss of jobs and the cycle that that creates, 2 yes, sir. 3 Q. Right, the cycle. He asked you to 4 describe the problem; and I think that you said -- 5 described a typical case where someone was losing 6 their job in the energy industry, for example. 7 And if an opportunity for work arose -- I think 8 you gave the example of Birmingham -- that they 9 would mail in their keys and walk the loan? 10 A. Yes. 11 Q. You do recall that? 12 A. I do. 13 Q. You may not recall the answer to this 14 question. But if that were the case and people 15 were moving out of the area, for whom were the 16 Park 410 people building shopping areas and office 17 centers? 18 A. Well, I don't quite -- would you repeat 19 that question, please? 20 Q. Sure. You just described a cycle where 21 people were losing their jobs and moving out of 22 the area in that exact time frame of 1984 and 1986 16456 1 when the Park 410 and Norwood loans were approved. 2 My question to you is: For whom were 3 the developers building these -- who would shop at 4 shopping malls? People are losing their jobs, a 5 downturn in the economic. For whom were you 6 building shopping centers? 7 A. I guess I was referring -- when 8 Mr. Villa was asking me those questions, I was 9 focusing in my mind more on Houston. But it 10 doesn't mean that in well-located tracts of 11 property, in other geographic areas such as 12 San Antonio and Austin, that those are not going 13 to be viable projects. 14 Q. I'm not sure I understand your answer. 15 A. Could you ask the question again? 16 Q. If people are losing their jobs in that 17 same time frame and there's a cycle associated 18 with that that you described which would include 19 diminished income, less spending money -- 20 A. Right -- 21 Q. -- people are going to have less 22 opportunity to go shopping, for example. So, for 16457 1 whom are the developers building shopping centers? 2 Who are the customers? Go ahead and answer the 3 question if you can. 4 A. Okay. I think I would make some 5 distinction between Houston and San Antonio -- 6 excuse me -- San Antonio and Austin. 7 Q. Anything else? 8 A. No, sir. 9 Q. Okay. And if you recall, Mr. Villa 10 also showed you the February 1984 auditors letter 11 indicating that United had weaknesses in internal 12 controls. 13 Do you recall that? 14 A. Yes, sir, I do. 15 Q. And he asked you what that meant, and I 16 think you said that a criticism of internal 17 controls is a really big deal? 18 A. Yes, sir. 19 Q. So, when you got a criticism from the 20 auditors, is that something that you set out to 21 fix? 22 A. If it were -- you're always going to -- 16458 1 it's common in every audit that you're going to 2 have criticisms. I mean, that's just the nature 3 of audits. I've been on audits where I was told I 4 couldn't leave the job until I came up with a 5 criticism. That's the nature of audits. 6 But the type of criticism that 7 Mr. Villa pointed my attention to was a material 8 weakness in internal controls. And that is a 9 severe criticism and must be fixed. But 10 certainly, other criticisms we would attempt to 11 address certainly. 12 Q. So, if there was a criticism, you 13 wouldn't ignore it? 14 A. No. 15 Q. You would try to fix it as quickly as 16 possible? 17 A. We would certainly address it. 18 Q. And I hand you Exhibit A7006 at 19 Tab 987. That's the January 31, '86 letter from 20 your auditors, Peat, Marwick, Mitchell, correct? 21 A. Yes, sir, it is. 22 Q. And that's for the period ended 16459 1 December 31, 1985. Right? 2 A. It is. 3 Q. Okay. If you turn to Page 2, you see a 4 comment there with respect to appraisals? 5 A. Yes, sir, I see that section. 6 Q. And it indicates that the association 7 represented to its auditors at that time or prior 8 to that letter that it had initiated a review of 9 existing appraisals to determine compliance with 10 applicable rules and regulations and established 11 procedures to determine compliance for future 12 appraisal reports. Right? 13 A. Let me read that paragraph. (Witness 14 reviews the document.) Yes, sir. I see that. 15 Q. Okay. I hand you what's been marked as 16 Exhibit T7793 at Tab 988. 17 MR. VILLA: 988? 18 MR. SCHWARTZ: 988. 19 Q. (BY MR. SCHWARTZ) Now, that's a 20 Peat Marwick auditor's work paper identifying 21 questions/comments on large loans for the period 22 December 31, 1986, correct? 16460 1 A. Well, I'm looking for the 2 KPMG statement, you know, deal down at the bottom. 3 Q. I don't know that it has one. It's my 4 understanding that in prior testimony, some 5 witnesses identified it as a Peat Marwick work 6 paper. 7 A. Okay. 8 Q. That work paper specifically questions 9 the Park 410 appraisal and the appraiser's 10 methods; is that correct? 11 A. Well, let me read it. (Witness reviews 12 the document.) Assuming this is a Peat Marwick 13 work paper, it certainly has some comments on the 14 appraisal. And it seems to have to do with 15 performing net realizable value work. 16 Q. It criticizes the appraiser's 17 calculation methods, does it not? 18 A. Well, in the first paragraph -- please 19 take me through this, if you would. 20 Q. Okay. I don't have a copy of it in 21 front of me. Let me change the question. Perhaps 22 the word I'm using is troubling you, the word 16461 1 "criticize." 2 Does it question the appraiser's 3 methodology? 4 A. I think it would -- they are making 5 comments about the appraisal. And in the last 6 paragraph, they are saying, quote, "We would 7 recommend that United perform an NRV" -- which is 8 net realizable value -- "on the project using 9 reasonable appreciation assumptions and sell-out 10 period." 11 Q. So, Peat Marwick had raised a question 12 about the appraisal, correct? 13 A. Certainly. They raised questions 14 about -- this would be in the ordinary course of 15 business, yes. They raised questions, as we've 16 seen, in the investment area about a lot of 17 things. 18 Q. I'm through with that. 19 Mr. Villa also asked you if it was your 20 job as a member of the senior loan committee, I 21 think, to look for newspapers articles or 22 municipal studies concerning growth trends in 16462 1 Austin or San Antonio. 2 Do you remember that? 3 A. Yes. 4 Q. You said that was not your function? 5 A. I didn't view it as my function, no. 6 Q. What did you mean by that? 7 A. I didn't view it as my function. I 8 don't know how else to answer the question. 9 Q. Did you -- was there somebody else that 10 you expected to do that kind of -- that kind of 11 research? 12 A. The real estate staff, yes, sir. 13 Q. And I think when I showed you the 14 articles and the studies, you testified that you 15 didn't recall ever seeing those studies or 16 articles before I showed them to you; is that 17 right? 18 A. I don't remember all of the series of 19 studies, but I -- 20 Q. We walked through it -- if I can 21 refresh your recollection, we walked through it; 22 and there were maps of hotels and competing areas 16463 1 that were there and some office parks that were in 2 the same vicinity of the Norwood project, if you 3 recall? 4 A. Right. 5 Q. Okay. 6 A. And the question was. 7 Q. And the question is: Before I showed 8 those to you, do you recall ever seeing those? 9 A. I don't -- no, I don't remember whether 10 I saw them or didn't see them. 11 Q. Okay. You testified just now that you 12 thought it was the function of the real estate 13 department to go out and do that kind of research. 14 And my question for you is: Is that an 15 assumption that you made, that the real estate 16 department was doing that kind of work? 17 A. I think we were talking about clipping 18 real estate articles out of the newspaper, weren't 19 we? 20 Q. Well, okay. We can break it down then. 21 There were some questions that I asked you about 22 newspaper articles -- 16464 1 A. Yes, sir. 2 Q. -- and there were some other questions 3 that I asked you about the municipal studies by 4 the City of Austin, the growth report. 5 A. Okay. 6 Q. Did you not view it the real estate 7 department's jobs to -- or did you assume that the 8 real estate department would be looking at 9 newspaper articles in the community where projects 10 were being developed? 11 A. No, sir. I wouldn't necessarily make 12 that assumption. I would -- as a member of the 13 committee, I would view it to be the real estate 14 department's responsibility to gather and 15 assimilate and analyze appropriate information. 16 That -- and that may or may not include newspaper 17 articles. 18 Q. And/or -- or along the same logic, 19 growth reports from the city or municipality 20 studies? 21 A. Certainly. Whatever -- you know, I 22 think we went through the resumes of the real 16465 1 estate people, and we had some pretty experienced 2 people in that area. And they would assimilate 3 the information and what -- you know, they were 4 professionals. 5 Q. Well, the resumes certainly didn't 6 indicate that they researched municipal studies. 7 I didn't see that in there. 8 A. No, sir. I don't remember seeing those 9 words in the resume either. 10 Q. I didn't think they were that specific. 11 A. No, they weren't. 12 Q. So, then, is it your assumption that 13 that's what the real estate did, that the real 14 estate department looked into that kind of 15 research? 16 A. Looked into -- 17 Q. Municipal studies, any kind of news 18 articles that they felt were appropriate. 19 A. I guess that I was trying to look at it 20 more globally. It was my assumption and my 21 expectation that they would look into and gather 22 the relevant information that was appropriate for 16466 1 that loan or that real estate project. And that 2 might include municipal studies. It might include 3 newspaper articles. You know, it -- but I, you 4 know, certainly don't have a memory of whether 5 they clipped newspaper articles or they didn't. 6 Q. And is that an assumption that you're 7 making, that that's what they did? 8 MR. VILLA: Excuse me, Your Honor, 9 what's what they did? He's asking one set of 10 questions and getting a different set of answers, 11 and then he asks: Did you assume that's what they 12 did? I can't figure out what that is reference 13 to. 14 Q. (BY MR. SCHWARTZ) Did you understand 15 the question? 16 A. No. 17 Q. That refers to reviewing municipal 18 studies, any kind of newspaper information, any 19 other appropriate information from a municipality 20 or area where a real estate project was being 21 considered to be developed in. 22 A. It was my understanding that they were 16467 1 looking at the appropriate information for the 2 area where the real estate project was being 3 considered or the real estate loan. 4 Q. My question to you: Is that an 5 assumption that you're making that that's what 6 they did? 7 A. Well, I don't know quite how to answer 8 that because I can't say that I did a detailed 9 review of what they looked at and what they didn't 10 look at. So, I suppose that I did assume that 11 Mr. Graham and Mr. Childress and Mr. Chilton and 12 the other senior managers in the real estate area 13 would supervise their staff accordingly. So, no. 14 I didn't do an independent review as to whether -- 15 you know, a junior level or whoever in the real 16 estate department, what they were gathering. 17 Q. You're assuming that they did what you 18 think -- what you have identified as their job? 19 A. I'm assuming that the management of the 20 real estate department -- Graham, Childress, and 21 Chilton -- supervised their employees in an 22 appropriate manner. And I depended upon them to 16468 1 do that. 2 Q. And you relied on that, on your 3 assumption that they did those jobs, correct? 4 A. Maybe we're not communicating. But 5 just as, I think, Graham and Childress would 6 assume that I supervised the junior accountants, 7 they didn't do an independent review of what the 8 junior accountants were doing. So, they assumed 9 that I was doing my job. I guess I assumed they 10 were doing their job. 11 Q. Well, I don't know if that's a perfect 12 analogy. Graham and Childress were not 13 necessarily on the investment committee or 14 something where they would have occasion to ask 15 those kinds of questions. 16 You were on the senior loan committee. 17 Is it your assumption that at the time, they were 18 doing their job and reviewing that kind of 19 information? 20 A. It was my observation that they were 21 doing a professional job because the -- the 22 presentations and the information presented, while 16469 1 I can't quote it chapter and verse, certainly 2 seemed to be appropriate and certainly seemed to 3 be well done. 4 Q. But I think you testified that you 5 don't recall them presenting the information that 6 I discussed with you in my direct-examination 7 regarding the municipality studies and those 8 newspaper articles that we looked at; is that 9 correct? 10 A. Oh, right. I don't remember whether 11 those things were or were not studied and 12 reviewed. No, sir, I just don't remember. 13 Q. And so, when you voted to approve the 14 Park 410 loan and the Norwood loan, you were 15 basically relying on what you assumed was the 16 appropriate work of the real estate department. 17 Is that a fair statement? 18 A. Well, when I voted to approve those two 19 loans, I was -- I would characterize it like this. 20 I was relying on the -- certainly, I relied on the 21 real estate expertise of others at United; and I 22 also relied upon my common sense. And I could 16470 1 read documents as well as anyone else, and I 2 looked at what was provided. 3 Q. Okay. And the -- just to refresh your 4 recollection, I'm just looking at the dates. If 5 you want to pull them, they are Exhibit T7670 at 6 Tab 654 and T7084 at Tab 709. The first is with 7 respect to the Park 410 loan. That was approved 8 on the senior loan committee on March 17th, 1986, 9 correct? 10 MR. VILLA: Just one second, sir. 11 A. Yes. 12 MR. VILLA: Which one are you on now? 13 654 or 709? 14 MR. SCHWARTZ: Well, I just used the 15 first one, the 7670, Tab 654, to refresh his 16 recollection as to the date the senior loan 17 committee approved the loan. And now I'm going to 18 refer him to Tab 709 to refresh his recollection 19 that the appraisal is dated March 19th, 1986. 20 Q. (BY MR. SCHWARTZ) Correct. 21 A. Yes, sir. I see the two dates. 22 Q. And that's all. I'm done with those 16471 1 two documents. 2 And the Norwood loan -- Tab 687, 3 Exhibit T7020, and Exhibit T7029, Tab 698. And 4 the Norwood loan was approved by the senior loan 5 committee on June 2nd, 1986, correct? 6 A. Yes, sir, I see that. 7 Q. And if you look at the letter of the 8 second page of the appraisal, you'll see it's 9 dated July 22nd, 1986, correct? 10 A. (Witness reviews the document.) 11 Q. Up at the top of the second page there, 12 sir. 13 A. Yes, sir, I see that date. I see a 14 date on the cover page of this document down at 15 the bottom that says June 5th, 1986. 16 Q. That's the "as of" date of the 17 appraisal, correct? 18 A. Okay. 19 Q. That's the date they were assuming the 20 valuation was -- 21 A. Yeah. 22 Q. That also happens to be after the date 16472 1 of the senior loan committee, correct? 2 A. Yes, sir, it is. 3 Q. Okay. So, the appraisal is dated 4 July 22nd. 5 Did we get that? 6 A. Yes. Mr. Bolin's letter to David 7 Graham is dated July 22nd, right. 8 Q. Would you turn back to Exhibit A7006, 9 which was the January 31, 1986 Peat Marwick 10 letter? 11 A. Okay. 12 MR. VILLA: What's that tab number 13 again, sir? 14 MR. SCHWARTZ: 987. 15 MR. VILLA: Thank you. 16 Q. (BY MR. SCHWARTZ) The second page 17 there. 18 A. Yes, sir, I see that. 19 Q. And there's criticism of the appraisal 20 practices of United Savings? 21 A. I see that the -- well, I see the 22 criticism. It says that -- it appears that, 16473 1 quote, "We understand that the association has 2 initiated a review of existing appraisals to 3 determine compliance with applicable rules and 4 regulations and established procedures to 5 determine compliance for future appraisal 6 reports," yes. 7 Q. What did you do to correct that 8 criticism? 9 A. I have no memory of that. I don't 10 know. 11 Q. Okay. 12 MR. SCHWARTZ: Nothing further. 13 MR. RINALDI: If it would please the 14 Court, most of the questions I have will come out 15 of the three volumes that I gave to the witness 16 the other day. 17 Do we know where those volumes are? I 18 believe I gave the Court a set of volumes. 19 20 FURTHER EXAMINATION 21 22 Q. (BY MR. RINALDI) Do you have those 16474 1 three binders in front of you, sir? 2 A. Yes, sir, I do. 3 Q. I'm handing up to you a copy of 4 Exhibit B2646. This was one that Mr. Villa showed 5 to you yesterday, and I thought I would get this 6 out of the way first. 7 MR. RINALDI: Before we start, 8 Your Honor, I have probably -- probably an hour 9 and a half of redirect with this witness. 10 So, if you have some sense of how long 11 you would like me to go, I would be happy to go as 12 long as the Court deems appropriate. 13 THE COURT: Well, unless you have some 14 objection, I think maybe we should wait to start 15 until Monday. 16 MR. RINALDI: I have no objection to 17 doing it that way. 18 THE COURT: All right. We'll adjourn 19 to 10:00 o'clock on Monday. 20 MR. GUIDO: Your Honor, before we leave 21 the record, I would like to -- Your Honor, we 22 raised the question of the appropriateness of our 16475 1 use of certain submissions that were made by 2 counsel to the respondents to the FDIC and whether 3 or not we were entitled to use them. Counsel 4 objected to that. The Court set up a briefing 5 schedule for us to file briefs on that issue. We 6 are not, in this paper, moving the admission of 7 the documents, Your Honor. We're asking for a 8 ruling on their admissibility. So, what we have 9 done is provided you with a memorandum of law on 10 that issue that you requested from us. 11 In addition -- well, separate from that 12 are the documents that are documents that are at 13 issue, plus two other documents for your review. 14 One document for your review, in addition to the 15 letters that are at issue, is the letter from the 16 FDIC to counsel for Mr. Crow listing the questions 17 for him to answer which we thought would be 18 essential for your review. 19 In addition, we have put in the expert 20 report from Mr. Pratt, the expert, in which he 21 details what it is that he relied upon for that 22 expert. We've put all of that in a separate 16476 1 packet. And on the top of it, we have put the 2 memorandum of law for you, and we have copies for 3 counsel. I wanted to let you know what was in 4 that packet and in the cover memo and how we've 5 organized that, Your Honor. 6 MR. VILLA: Your Honor, I assume that 7 if the Court doesn't grant their motion that the 8 documents that are in controversy will not become 9 a part of this record because I think the whole 10 purpose of this is to try to keep the record free 11 of settlement discussions. And consequently -- 12 apparently, the documents which they are tendering 13 to you -- which I don't see any point in tendering 14 them at this point -- I think those documents 15 ought not to be received for any purpose until we 16 resolve the issue of whether or not it's 17 appropriate. 18 MR. GUIDO: That's why I raise the 19 issue of the way the documents are produced. The 20 documents are produced with the memorandum of law 21 as the cover. I think it's -- Tab No. 1 in the 22 packet is the letter from the FDIC to counsel 16477 1 setting out the questions that are asked of the 2 previous law firm for Mr. Crow. And I think Tab 3 No. 7 is Mr. Pratt's report. Those two documents, 4 I don't think there's any question about the 5 appropriateness of the Court reviewing those. I 6 put the other documents in there so you could 7 decide whether or not you wanted to review those 8 if you thought they were necessary to make a 9 determination on the -- on the privilege issue. 10 I would point out that with regard 11 to -- I think it's four letters from Mr. Villa's 12 law firm on behalf of Mr. Crow that they very 13 clearly state that they are part of settlement 14 discussions so that there isn't any question 15 about -- about that so that you have that 16 information if you choose not to review the 17 documents. But we put the entire packet of 18 documents in the folders so that you had it in 19 case, after reading the memorandum and hearing 20 what Mr. Villa has to say about whether or not 21 it's appropriate for those to be reviewed at this 22 time, that you had them before you if you chose to 16478 1 review them. I wanted to let you know that I 2 produced the documents in such a way so that if 3 Mr. Villa has an objection to you even reviewing 4 the documents, those four letters plus the letter 5 from the Carrington Coleman law firm, that you 6 could decide that after hearing from Mr. Villa. 7 That's the way we produced the exhibits 8 that are attached, and I wanted to let you know 9 that's what we've done. 10 THE COURT: In response to Mr. Villa's 11 inquiry, if I decide that these are inadmissible 12 settlement negotiations, they will be returned and 13 they will not be part of the record. 14 MR. VILLA: Thank you, Your Honor. 15 MR. GUIDO: Thank you, Your Honor. 16 THE COURT: We'll adjourn until 17 10:00 o'clock Monday. 18 19 (Whereupon at 3:46 p.m. 20 the proceedings were recessed.) 21 . 22 . 16479 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 24th 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 . 16480 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 24th 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