22306 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 SEPTEMBER 2, 1998 22 22307 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 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 22308 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 . 22309 1 2 INDEX OF PROCEEDINGS 3 Page 4 KEVIN O'CONNELL 5 Continued Examination by Mr. Leiman.....22310 6 Further Examination by Mr. Dueffert.....22330 7 Further Examination by Mr. Leiman.......22349 8 LEONARD LAPIDUS 9 Examination by Mr. Veis.................22359 10 . 11 . 12 . 13 . 14 . 15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . 22310 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:00 a.m.) 3 THE COURT: Be seated, please. The 4 hearing will come to order. 5 Mr. Leiman, you have some more 6 redirect? 7 MR. LEIMAN: Yes, Your Honor. I have a 8 short period of redirect. 9 10 CONTINUED EXAMINATION 11 12 Q. (BY MR. LEIMAN) Good morning, 13 Mr. O'Connell. 14 A. Good morning. 15 Q. At the end of the day yesterday, we 16 were talking about the formal Home Loan Bank Board 17 Memorandum R-62. 18 A. That is correct. 19 Q. I read to you the following sentence: 20 "Directors who willingly allow others to make 21 major decisions affecting the future of the 22 corporation wholly without supervision or 22311 1 oversight may not depend on their lack of 2 knowledge for that ignorance itself is a breach of 3 fiduciary duty." 4 Do you remember that? 5 A. Yes. 6 Q. In your review of the exhibits and 7 testimony in this matter, did you reach an opinion 8 as to whether the senior loan committee and/or the 9 board of directors willingly allowed others to 10 make major decisions affecting the future of USAT 11 without supervision or oversight? 12 A. Yes. 13 Q. To whom did the SLC or the board of 14 directors give that power? 15 MR. DUEFFERT: Your Honor, objection to 16 the SLC. I don't think R-62 applies to the senior 17 loan committee. 18 MR. LEIMAN: Your Honor, it's a 19 delegation that -- respondents have argued that 20 the delegation seems to flow in several 21 directions. I think that what happened in this 22 case was -- and in fact, that was part of their 22312 1 cross-examination -- that the SLC somehow was 2 acting as an arm of the board of directors, if I 3 understand their argument. 4 THE COURT: All right. What's your 5 question again? 6 MR. LEIMAN: To whom did the SLC or the 7 board of directors give the power? 8 MR. DUEFFERT: What power are we 9 talking about, and for what purpose? I object. 10 THE COURT: I think you'd better take 11 one at a time. The board of directors -- 12 MR. LEIMAN: All right. I'll take them 13 separately. Fair enough, Your Honor. 14 A. The board of directors, through its 15 formal delegation, delegated major decision-making 16 power to the senior loan committee. 17 Q. (BY MR. LEIMAN) And to whom was the 18 power delegated by the senior loan committee? 19 A. Testimony of Messrs. Gross, Crow, 20 Williams indicated that they delegated to David 21 Graham almost all the important decision-making 22 duties in terms of underwriting, in terms of 22313 1 gathering the documents, in terms of reviewing the 2 overall underwriting documents, and preparation of 3 the underwriting documents. 4 Q. Would that have been contrary to R-62? 5 A. In my view, yes. 6 Q. Let's move on to something else. 7 We've talked about the board of 8 directors. Let's talk about underwriting. 9 Do you remember Mr. Dueffert asking you 10 about whether an appraisal that failed R-41B could 11 be relied upon by management? 12 A. Yes, I do. 13 Q. You responded, "It would have been 14 useful for management to have reviewed the 15 appraisal." 16 Now I'm going to ask you a follow-up 17 question to that. Okay? 18 A. Okay. 19 Q. Would it have been essential for USAT 20 management to have reviewed a copy of the 21 Love & Dugger 46-and-a-half-million-dollar 22 appraisal as of December 31, 1985 -- that's 22314 1 Tab 711 -- and maintained a copy of it in the 2 institution's files? 3 MR. DUEFFERT: Point of clarification. 4 Essential for what purpose? 5 MR. LEIMAN: Whether it would have been 6 essential in conformity with regulations in safe 7 and unsound practices, Your Honor. 8 THE COURT: All right. 9 A. Yes, absolutely. 10 Q. (BY MR. LEIMAN) Also, regarding 11 appraisals, did you see any evidence or testimony 12 that indicated that the Schulz 88-million-dollar 13 appraisal should not -- that's T7084 -- should not 14 have been relied upon? 15 A. For purposes of actually approving an 16 actual loan amount, yes, I saw ample evidence that 17 the Schulz appraisal should not have been relied 18 upon. 19 Q. What did you see, Mr. O'Connell? 20 A. If you'll recall, Mr. Leiman, on 21 Monday, we went through in some detail some of the 22 specific line items of the Schulz appraisal that 22315 1 indicate that -- above and beyond the fact that it 2 was an as-developed appraisal, that it took 3 essentially a future value of the property, and 4 based its valuation on this projected future 5 value. I believe we went through some specific 6 line items to indicate that the comparables in the 7 Schulz appraisal simply were not comparables. 8 Q. Did you read any testimony that would 9 have suggested that the Schulz appraisal should 10 not have been relied upon? 11 A. Yes. In addition to the actual 12 documents, there was some extensive testimony by 13 Mr. Charles White in terms of the manner in which 14 the joint venture dealt with Mr. Schulz, 15 Mr. White's understanding of how Mr. Schulz was 16 retained, and ultimately how Mr. Schulz came to 17 the numbers that he came to in the appraisal 18 report. 19 Q. Let me show you a portion of 20 Mr. White's testimony. 21 A. Okay. 22 Q. Mr. O'Connell, would you please turn to 22316 1 Page 7635? 2 A. 35? Okay. 3 Q. I'm going to ask you to read a couple 4 of paragraphs here. Would you please read 5 starting on 7365, Line 22 and read through Line 5 6 of 7636? 7 A. Okay. Line 22 is a -- is a second 8 paragraph of a question. Quote, "Why did 9 Mr. Graham want you to drop Love & Dugger?" 10 Answer, "Well, it was real clear by 11 this point that there would be -- United would be 12 unable to make the loan with an R-41B appraisal 13 from Love & Dugger." 14 Q. All right, sir. Now, would you please 15 skip down to Line 16 and read the question and 16 answer? 17 A. Okay. Question, "And what was the 18 desired result that is referred to here?" 19 Answer, "That would be the magic number 20 of the R-41B appraisal in that 90-million-dollar 21 range." 22 Q. All right, sir. Now, would you please 22317 1 read on Page 7637 Mr. Schwartz' question and the 2 answer to it by Mr. white? 3 A. Okay. Question, "(By Mr. Schwartz) 4 Mr. white, first of all, what was the number that 5 Mr. Graham told you that you would have to hit for 6 Mr. Schulz to reach an appraised value for the 7 property as developed in the 87 to 8 90-million-dollar range?" 9 Answer, "Well, I would need to push the 10 gross revenues to the 124-, 125-million-dollar 11 range." 12 Q. Mr. O'Connell, was that among the 13 testimony that you read that was instrumental in 14 forming your opinion? 15 A. In this courtroom, yes, that is 16 correct. 17 Q. All right. Let's move on. You said 18 something in your testimony to Mr. Dueffert I 19 wanted to clarify. 20 MR. LEIMAN: For reference to counsel, 21 I'm referring to Page 22205 starting at Line 9. 22 Q. (BY MR. LEIMAN) And this is what you 22318 1 stated. "Management of USAT itself kept using 2 as-is appraisals in their underwriting documents." 3 Is that what you meant to say? 4 A. No, it was not. 5 Q. What did you mean to say? 6 A. They actually were referencing as-is 7 appraisals in their underwriting document. 8 Q. Mr. O'Connell, in your testimony during 9 cross-examination, you talked to Mr. Dueffert 10 about the Love & Dugger 11 46-and-a-half-million-dollar appraisal as of 12 December '85. That's at T7143. 13 Do you remember that? 14 A. I don't remember the exhibit number 15 offhand; but yes, I do remember the question and 16 answer session, yes. 17 Q. I think you said that that 18 Love & Dugger appraisal failed to meet R-41B 19 requirements, and I believe you also said it was 20 not an appraisal that USAT should rely upon in 21 underwriting the 80-million-dollar Park 410 ADC 22 transaction? 22319 1 A. That is correct. 2 Q. Were you saying, Mr. O'Connell, that 3 the Love & Dugger appraisal did not need to be in 4 USAT's files? 5 A. No, not at all. I didn't say that at 6 all. 7 Q. Tell me what you were saying, what you 8 meant. 9 A. The Love & Dugger appraisal was made 10 for the joint venture. It was -- and the joint 11 venture, of course, was a partner of the 12 institution. 13 The Love & Dugger appraisal, made for 14 the joint venture and ordered on the basis by the 15 joint venture evidently for some business purpose, 16 indicated that the 80-million-dollar deal wasn't 17 doable. The joint venture appraisal said the 18 value wasn't there. We have a 47-million-dollar 19 appraised value. That is something that has to be 20 in the books and records. That is something that 21 the examiners have a right to see. That is 22 something, frankly, the auditors have a right to 22320 1 see. That is something that would be required for 2 an association to have a complete books and 3 records in their files. 4 Q. Is there a regulation that required 5 USAT to maintain complete records? 6 A. Well, it's actually within the books 7 and records regulation, yes. The 563.17 series. 8 Q. Let me show you the regulation. Is 9 this the one you're referring to, Mr. O'Connell, 10 here on paragraph -- Subparagraph C in 563.17-1? 11 A. Yes, that is correct. 12 MR. BLANKENSTEIN: Your Honor, does 13 Mr. Leiman have copies to share with us of the 14 regulation he's showing him? 15 MR. LEIMAN: I should think that by 16 this time -- I don't, but could I have him read 17 it? Would that be satisfactory, Your Honor, if he 18 reads that portion? It's only a paragraph of the 19 regulation. 20 MR. DUEFFERT: I think it would be 21 helpful for us to see context. 22 THE COURT: You don't have a copy? 22321 1 MR. LEIMAN: I think it's right there. 2 Isn't that that gray book, Mr. Dueffert? Why 3 don't you read the portion of the regulation -- 4 MR. DUEFFERT: If we could just have an 5 exhibit number, we could probably find the copies. 6 I believe it's an admitted exhibit. 7 MR. LEIMAN: Your Honor, I would submit 8 we should take judicial notice of the regulations 9 in this case. 10 THE COURT: Well, we just need a 11 number. It may be in as Exhibit B87. 12 MR. SCHWARTZ: I think, Your Honor, 13 that that is the 1987 -- that's the 1987 edition, 14 although the history does not indicate that it was 15 amended. 16 17 (Discussion held off the record.) 18 19 Q. (BY MR. LEIMAN) Mr. O'Connell, we'll 20 come back to that particular regulation. Okay? 21 A. Okay. 22 Q. All right. Let's move on. 22322 1 Was the 1986 80-million-dollar Park 410 2 transaction structured as an ADC loan? 3 A. Yes. That was how it was structured on 4 the association's books, yes. 5 Q. All right. Was the 1986 6 39.4-million-dollar Norwood transaction structured 7 as an ADC loan? 8 A. In part. As I recollect, the structure 9 was a 30-million-dollar ADC loan and a 10 9.4-million-dollar equity infusion from an 11 association affiliate. 12 Q. Were ADC loans permitted by the Federal 13 Home Loan Bank Board regulations in 1986? 14 A. Oh, sure. 15 Q. Were ADC loans encouraged by the 16 Federal Home Loan Bank Board in 1986? 17 A. No. 18 Q. Let me show you what's previously been 19 marked as Exhibit B3969. 20 MR. SCHWARTZ: Tab 1541. 21 MR. LEIMAN: For the record, Your 22 Honor, we think it's Tab 1541. 22323 1 Q. (BY MR. LEIMAN) Do you have a copy of 2 that in front of you? 3 A. I'm not -- 4 Q. I'll provide you a copy of that 5 exhibit, Mr. O'Connell. 6 Would you please turn to Page 3 of the 7 exhibit? And what I'd like you to do -- 8 A. Okay. That is -- you're talking about 9 at the top, Page 53277? Is that what you're 10 referring to? 11 Q. Yes. That's the third page, 12 Mr. O'Connell. I'd like you to start reading -- 13 in the first full paragraph, please read down 14 about -- 15 A. Of which column? 16 Q. Sorry. The second column. I'd like 17 you to read down about six or seven sentences. 18 Read that for us, please. 19 MR. KEETON: Your Honor, could we ask 20 the witness to cut out the commas and the periods 21 and the question marks? It's making a very 22 strange record. The ladies don't know whether to 22324 1 write that in or out. No other witness I've ever 2 been in in any other trial has ever done it that 3 way. Could he please read what he's been asked to 4 read? 5 THE COURT: Could you do that? 6 THE WITNESS: Certainly. I apologize. 7 That may make it easier. 8 A. The first paragraph talking about where 9 it says "the board"? 10 Q. (BY MR. LEIMAN) Yes, sir. 11 A. Okay. "The board believes the current 12 procedures are demonstrably inadequate for certain 13 assets. ADC loans and similar loans and 14 investments have long been recognized as 15 relatively risky assets. These assets are often 16 characterized by very low or nonexistent borrower 17 equity in the project, high fee income, the 18 payment of interest through an interest reserve, 19 and equity kickers that give the lender a 20 percentage of any profit. Many problem ADC loans 21 are improperly reported by thrifts to the board as 22 loans when, under proper accounting principles, 22325 1 they are, in economic substance, direct 2 investments. Because of the absence of any 3 substantial borrower equity, the lender must 4 generally depend upon the success of the 5 underlying project to receive payment of the 6 principal and interest on an ADC loan. The 7 absence of borrower equity also increases the 8 incentive for a borrower to walk away from a 9 failing project absent a firm personal guarantee 10 backed by significant assets. All of these 11 factors make ADC loans and similar investments far 12 riskier than conventional thrift investments." 13 Q. Thank you, Mr. O'Connell. I have a 14 question for you now. 15 What are the key safety factors in safe 16 and sound underwriting with regard to ADC 17 transactions? 18 A. Well, principally -- in fact, if you 19 want to review the entire preamble of this, you'd 20 be talking about valuation of the property. You 21 have to make sure there is a valuation of the 22 underlying property since that is the first and 22326 1 primary source of repayment for the loan. 2 You would also be looking for borrower 3 equity because to the extent that there is equity 4 in the project, you have a buffer between the 5 potential loss of the institution and any market 6 decline or any adverse conditions that might 7 result. 8 And the third is a question of debt 9 service. To the extent that a borrower can 10 actually show an independent source of cash flow 11 to make debt service, then that's an indication of 12 borrower strength. It shows again that the 13 property has an independent source of funds to 14 support the loan. 15 Q. You mentioned the term -- the first 16 factor, No. 1, was valuation. Right? 17 A. That is correct. 18 Q. Is that like an appraisal? Is that a 19 form of valuation? 20 A. Yes. That is -- what we required for 21 ADC loans is an appraisal, yes. 22 Q. All right. First, was there a useful 22327 1 appraisal relied upon in underwriting the Park 410 2 transaction? 3 A. No, there was not. 4 Q. Okay. That's the first fact that was 5 not. 6 Second, was interest on the 1986 7 Park 410 transaction paid automatically by USAT 8 through an interest reserve, or was it paid from a 9 source outside the thrift? 10 A. It was paid entirely through the 11 interest reserve on the -- from the thrift itself. 12 Q. All right. Third factor you mentioned 13 was debt service. I'm sorry. Equity. 14 Did the borrowers in the Park 410 15 transaction have an equity interest in the 16 property? 17 A. No. They had no actual equity in the 18 original document. They had an equity interest. 19 They actually owned the actual joint venture. But 20 they had no initial equity in the project, no. 21 Q. Let's look at whether the three 22 underwriting safety factors were present regarding 22328 1 the 1986 Norwood transaction. Okay? 2 A. Okay. 3 Q. Norwood. First, was there a useful 4 appraisal relied upon in underwriting the Norwood 5 transaction? 6 A. No, there was not. 7 Q. Do you say that for the reasons that we 8 discussed during your direct-examination by me? 9 A. Yes. Again, as you may recall, we went 10 through some specific line items with the Bolin 11 appraisal to indicate why the valuation could not 12 be relied upon. 13 Q. The second factor was: Was interest on 14 the 1986 Norwood transaction paid automatically by 15 USAT through an interest reserve, or was it paid 16 from a source outside the thrift? 17 A. Again, all funds for the interest 18 payments came from inside the thrift. 19 Q. Third factor. Was there borrower 20 equity in the Norwood project? 21 A. Yes, as a matter of fact. 22 Q. Did that equity come from a source 22329 1 outside the thrift? 2 A. No. It was actually provided by a 3 thrift affiliate. I believe it was United 4 Financial Corporation. 5 Q. Based upon your answers and what you've 6 just said, do you have an opinion as to whether 7 the underwriting for the 1986 Park 410 ADC loan 8 met reasonable standards of safety and soundness? 9 A. Yes, I do have an opinion. 10 Q. What is that opinion? 11 A. That the underwriting of that 12 transaction recklessly violated safe and sound 13 lending principles and was in violation of 14 applicable regulations regarding loan 15 underwriting. 16 Q. All right. Based on your testimony 17 this morning, do you have an opinion as to whether 18 the underwriting of the 1986 Norwood ADC loan met 19 reasonable standards of safety and soundness? 20 A. Again, yes, I have an opinion. 21 Q. Do you have such an opinion? 22 A. Yes. 22330 1 Q. What's your opinion? 2 A. Again, that the underwriting of that 3 transaction recklessly disregarded safe and sound 4 investment principles and violated underwriting 5 regulations as laid out in the books and records 6 of the regulations. 7 MR. LEIMAN: Your Honor, I have no 8 additional questions at this time for the witness. 9 Thank you, Mr. O'Connell. 10 THE COURT: Is there any recross? 11 MR. DUEFFERT: A little bit, Your 12 Honor. Not much. 13 THE COURT: All right. 14 MR. LEIMAN: I'm sorry. I didn't hear. 15 MR. DUEFFERT: I said a little bit. 16 17 FURTHER EXAMINATION 18 19 Q. (BY MR. DUEFFERT) Let's talk about 20 three things. No. 1, Charles White. 21 A. Okay. 22 Q. You've cited some testimony by 22331 1 Mr. white regarding moving numbers around on a pro 2 forma. Right? 3 A. That is correct, yes. 4 Q. Did you do anything to verify his 5 claims, the fact that they made sense, before 6 accepting them as being credible? 7 A. Well, yes. As a matter of fact, I 8 double checked on the Schulz appraisal, checked 9 the undiscounted numbers, and they were, in fact, 10 in the 120-million-dollar range. In fact, I think 11 something over $120 million. 12 Q. Did you -- Mr. white said that he was 13 moving numbers into subsequent periods, correct, 14 on the pro formas? 15 A. I don't recall him using that exact 16 phrase; but yes, that is what he would have to do 17 on a Lotus spreadsheet, yes. 18 Q. Have you run the numbers to see what 19 difference the changes identified by Mr. white 20 actually made on the pro formas? 21 A. You mean have I independently tested it 22 on my own Lotus or Excel spreadsheet, no, I have 22332 1 not. 2 Q. Whether or not on a Lotus or Excel 3 spreadsheet, have you run the numbers? 4 A. No, I have not. 5 Q. Have you determined if any of the 6 changes determined by Mr. White were even material 7 to the outcome? 8 A. Actually, yes. They would be for the 9 very simple reason that to the extent you change 10 the overall gross numbers, that changes the 11 overall base from which you then discount to 12 present value. So, yes, of course they would be 13 material. 14 Q. Schulz' appraisal used a 12 or 15 13 percent discount factor, correct? 16 A. That is correct, yes. 17 Q. You haven't checked to see if moving 18 sales to subsequent periods would make an 19 appraisal value, based on a 12 or 13 percent 20 discount factor, go up or down, have you? 21 A. Oh, I don't need to. It's 22 self-obvious. It's part of basic mathematics. 22333 1 It's part of basic present value analysis. 2 Q. If the appreciation factor is less than 3 12 percent in the pro forma, postponing sales into 4 subsequent periods would make the discounted 5 present value go down rather than up. Right? 6 A. That is correct, yes. 7 Q. Assume that you do what Mr. White says 8 he does, shifting the periods of projected sales 9 into the future. Assume that would make the net 10 present value of the gross sell-out go down by 11 more than $2 million. 12 Would that make any difference to your 13 analysis? 14 MR. LEIMAN: Your Honor, could I have a 15 reference to the transcript page that Mr. Dueffert 16 is referring to and what he's reading from? 17 MR. DUEFFERT: I'm not reading from 18 anything, but I'm referring to Mr. White's 19 description of what he did at transcript 20 Page 7644. 21 MR. LEIMAN: Okay. 22 A. Right. 22334 1 Q. (BY MR. DUEFFERT) Assume with me, 2 Mr. O'Connell, that because Schulz used a 12 and a 3 half or 13 percent discount factor in his 4 appraisal -- 5 A. Okay. 6 Q. -- that Mr. White's pushing of 7 numbers, as he alleges, into subsequent periods 8 makes the discounted present value of the gross 9 sell-out go down by $2 million. 10 A. If that is all he did. But as 7644 11 notes, Counselor, you're forgetting the fact that 12 he has, as I believe the phrase is, we have the 13 increased bump. The fact of the matter is he was 14 increasing the sales price, the projected sales 15 prices, for the purpose of offsetting the 16 discounted value. 17 But you're right. In and of itself, 18 without that, quote, "bump," if he did nothing 19 more than take the exact same number and spread it 20 out to subsequent periods, you're right. That 21 would lead to a lesser value when you present 22 value it. 22335 1 Q. You don't have an analysis to offer, do 2 you, of the mathematical effects of doing what 3 Mr. White says he did? 4 MR. LEIMAN: Asked and answered, Your 5 Honor. 6 THE COURT: Denied. 7 A. I was going to say I think I answered 8 that. 9 THE COURT: Could you answer it? 10 THE WITNESS: The answer is "no." 11 Q. (BY MR. DUEFFERT) Could we take another 12 look at the Federal Register page you just read? 13 It's B3969 at Tab 1541. 14 A. Okay. I've got it in front of me. 15 Q. First, this statement was not 16 reproduced in the Code of Federal Regulations as 17 the official policy statement of the Federal Home 18 Loan Bank Board with regard to ADC loans, was it? 19 A. That is my understanding, that in 20 general, the preambles are not made part of the 21 actual regulation book, yes, that is correct. 22 Q. And one wouldn't look to 12 CFR 22336 1 Section 371.17 for that, correct? 2 MR. SCHWARTZ: 371? 3 Q. (BY MR. DUEFFERT) I'm sorry. 571.17. 4 A. Back up. Actually, there are three 5 sections here that are addressed in the -- in the 6 final rule. It would be 561, 563, and 571. I'm 7 just reading from the first page. So, there would 8 be three sections that the changes in the 9 regulations here would affect. 10 Q. Once again, however, what we're looking 11 at now is not the official policy statement of the 12 Federal Home Loan Bank Board, correct? 13 A. Frankly, I would disagree with that. I 14 would think that the preamble to a regulation that 15 is about to be in effect is a clear policy 16 statement by the Bank Board indicating "Here's the 17 policy. This is why we're doing it, and here's 18 the formal regulation." I mean, that's -- if you 19 have a different interpretation, fine. But that's 20 the way I've always interpreted it. 21 Q. Well, let's take a look at this first. 22 A. Okay. 22337 1 Q. Page 27 -- 53277. There is a 2 discussion of a troubled thrift and its 3 skyrocketing assets. 4 A. Is that the very last -- 5 Q. I believe in the third column is a 6 discussion of Empire, I believe. Right? 7 A. Right. It starts with the phrase "In 8 one case, the institution's assets skyrocketed"? 9 Q. Right. 10 A. Okay. 11 Q. It says, "By December 1983, its 12 construction loans were over 80 percent of its 13 total loan portfolio." 14 A. Correct. 15 Q. In the center column, it talks about 16 the absence of borrower equity. 17 A. That is correct. 18 Q. Increasing the incentive for borrowers 19 to walk away. 20 A. Also correct. 21 Q. Also in that column, there is a quote, 22 "Many problem ADC loans are improperly reported by 22338 1 thrifts to the board as loans when, under proper 2 accounting principles, they are in economic 3 substance direct investments," correct? 4 A. That is correct. 5 Q. With United yesterday, we saw, did we 6 not, that United had a small portfolio relatively 7 of ADC loans, correct? 8 A. Relative to the thrifts. I would say 9 overall, 4 percent is a moderate amount. But 10 relative to those Texas thrifts, certainly it was 11 small. 12 Q. We also saw that with regard to 13 Park 410, United required $10 million in letters 14 of credit as collateral, correct? 15 A. That is correct, yes. 16 Q. And we also saw yesterday that with 17 regard to Norwood and with regard to certain loan 18 fees, United chose to defer rather than 19 immediately recognize fees and interest and chose 20 to record Norwood as a direct investment. Right? 21 A. That is the record that you showed us, 22 although I don't recall us discussing specifically 22339 1 about the fees. If we did, we did. But I don't 2 specifically recall addressing that. I thought we 3 primarily had addressed the issue of the direct 4 investment reporting. 5 Q. United deferred the 900,000-dollar fee 6 on the Norwood loan, did it not? 7 A. I believe so, yes. But I should note, 8 Counselor, that it is only self-evident because if 9 they had booked the fees, they would have charged 10 themselves. Remember, United as the joint venture 11 paid the fees. So, any fees they paid, they would 12 have had to bill their affiliate, which is one 13 reason I didn't criticize the fees in my opinion 14 because I knew it was a wash transaction. 15 Q. You're saying -- you implied about a 16 minute ago that United was trying to maximize the 17 amount of immediate fees it would recognize for 18 purposes of interest income, did you not? 19 A. When did I imply that a minute ago or a 20 few minutes ago? I specifically -- forget what 21 you think I'm implying, Counselor. What I said 22 was -- and what's in the opinion -- is that I very 22340 1 much criticized the 1984 transaction in which they 2 did, indeed, book fees. And I did, indeed, 3 criticize the Park 410. But because of the 4 structure of the 1986 transaction where UFC put up 5 9 and a half million, I did not criticize the fee 6 structure in that because, as I say, it would have 7 been a wash. United was effectively paying 8 itself. 9 Q. Mr. O'Connell, you're familiar with 12 10 CFR 371 -- 12 CFR 371.17? 11 MR. BLANKENSTEIN: 571. 12 MR. DUEFFERT: Thank you. 13 Q. (BY MR. DUEFFERT) 571.17? 14 A. Yes. 15 Q. And it presents a list of factors for 16 deciding how to book or record an ADC transaction 17 as a loan versus an investment. Right? 18 A. That is correct, yes. 19 Q. And this is Exhibit B4117, correct? 20 A. Yes, that is correct. 21 Q. Located at Tab 1048A. And you have 22 just criticized United's accounting or recording 22341 1 of the 1984 Block loan, correct? 2 A. That is correct, yes. 3 Q. And did I hear you also just now 4 criticized United's recording of the Park 410 loan 5 in 1986? 6 A. Well, yes. That's also stated in the 7 opinion, yes. 8 Q. You are saying that as part of your 9 report, that you are saying that the Park 410 loan 10 in 1986 was incorrectly recorded? 11 A. As an ADC loan as opposed to what it 12 was in substance, a direct investment, yes. 13 Q. Under this policy statement which was 14 in the Code of Federal Regulations, the Federal 15 Home Loan Bank Board presented, did it not, a list 16 of factors that should be weighed in determining 17 whether an ADC transaction should be recorded as a 18 loan or as an investment. Right? 19 A. That is correct, yes. 20 Q. And this is the regulation that you -- 21 or policy statement that you purport to have 22 relied upon for purposes of your evaluation? 22342 1 A. Yes. 2 Q. As I read it, there's only one hard 3 figure in this policy statement. If you look at 4 the bottom of the second column, Page 2 of the 5 exhibit, it says, "If, after considering all of 6 the factors associated with a particular 7 arrangement, the risks and rewards are deemed to 8 be similar to those of an investment in real 9 estate, the following guidance is to be followed." 10 A. Okay. 11 Q. It goes on to the next column. "One, 12 if the lender will receive a majority of the 13 expected residual profit from the project." It 14 goes on to suggest that the project should be 15 booked in accordance with various policy 16 statements. 17 A. That is correct. 18 Q. "Two, if the lender has less than a 19 majority participation in the expected residual 20 profit, t entire arrangement may be, in essence, a 21 real estate joint venture." 22 Then it refers to another FASB 22343 1 statement or several of them, correct? 2 A. Correct. 3 Q. Finally, "If the risks and rewards are 4 deemed to be similar to those of a loan, interest 5 should be recognized as income as specified in the 6 loan agreement," correct? 7 A. That is correct. 8 Q. As I read those factors, the key 9 determination is whether the lender will receive a 10 majority of the expected residual profit from the 11 project, correct? 12 A. That is your interpretation. But, in 13 fact, if you look at the preceding -- if you look 14 at the preceding paragraph on the second page when 15 it says, quote, "If after considering all of the 16 factors associated with a particular 17 arrangement" -- and my reading is you have to go 18 and look at the, roughly, six factors that are 19 stated -- that are stated ahead of that. 20 Q. Sir, would you read that entire 21 paragraph that you just referred to into the 22 record? 22344 1 A. Sure. "If, after considering all of 2 the factors associated with a particular 3 arrangement, the risks and rewards are deemed to 4 be similar to those of an investment in real 5 estate, the following guidance is to be followed." 6 Q. The word "investment," is there 7 significance to that word in that paragraph in 8 your mind, sir? 9 A. Yes. 10 Q. So, even if, on the basis of the 11 preceding factors, you believe it looks like an 12 investment, you still have to go to the next list 13 of factors, correct? 14 A. That is correct. 15 Q. And the single hard test is whether the 16 lender will receive a majority of the expected 17 residual profit from the project. Right? 18 A. That is one of the hard tests. 19 Q. What other hard test is in that second 20 column I just pointed you to? 21 A. Well, the second column is "If a lender 22 has less than a majority participation, the 22345 1 expected residual profit, the entire arrangement 2 may be, in essence, a real estate joint venture." 3 Q. But the hard trigger is whether or not 4 the lender has a majority or not of the residual 5 profit participation. Right? 6 A. For that one paragraph, yes. 7 Q. Right? 8 A. Right. 9 Q. 50 percent. Right? 10 A. That is correct. 11 Q. Mr. O'Connell, what was United's profit 12 participation or participation in the expected 13 residual profits of the 1984 Block loan? 14 A. My recollection is it was 15 approximately -- it was less than 50 percent. I 16 shouldn't really guess. 17 Q. You don't know, do you? 18 A. Not offhand. I'd rather look at the 19 actual document. 20 Q. It's not in your report, is it? 21 A. No, it is not. 22 Q. Would it refresh your memory if I 22346 1 suggested to you that their expected residual 2 profit participation in the 1984 Block loan was 3 zero? 4 MR. LEIMAN: Your Honor, I'm going to 5 object to the entire line of questioning. It's 6 well beyond the scope of my very brief 7 redirect-examination. We're going back to the 8 cross-examination that Mr. Dueffert did yesterday. 9 We're wasting time. 10 MR. DUEFFERT: Your Honor, I have three 11 more questions. 12 THE COURT: All right. Denied. 13 Q. (BY MR. DUEFFERT) Will you dispute, as 14 you sit here today, that United had no profit 15 participation in the 1984 Block loan? 16 A. That's my current recollection, yes. 17 Q. Now, let's move on to the Park 410 loan 18 of 1986. 19 A. Okay. 20 Q. What was United's profit participation, 21 also sometimes called an equity kicker, in the 22 1986 Park 410 loan? 22347 1 A. Again, my recollection is it was less 2 than 50 percent. 3 Q. You can't tell me? 4 A. Again, instead of relying on 5 recollection, I'd rather go to the actual 6 document. 7 Q. You can't tell me? 8 A. No. 9 Q. Would it refresh your recollection if I 10 told you their profit participation was 11 25 percent? 12 A. That sounds about right, yes. 13 Q. Two more questions, sir. 14 A. Okay. 15 Q. First, looking at your report, can you 16 point me anywhere in it where you discuss the fact 17 that the contemporaneous regulation of the Federal 18 Home Loan Bank Board or policy statement that 19 governed this area had a trigger based on the 20 majority of the expected profit -- residual profit 21 from the project? Try it again. 22 A. Okay. Right. 22348 1 Q. Do you disclose anywhere in your 2 report -- 3 A. Oh, I see. Okay. 4 Q. -- that this is a factor? 5 A. No, I did not. 6 Q. Last question. 7 Can you point me to anywhere in your 8 report where you advise me and the Court of the 9 simple fact that United had a 25 percent profit 10 participation in the Park 410 loan? 11 A. Again, no, that is not in the report. 12 MR. DUEFFERT: No further questions. 13 THE COURT: Any other respondents have 14 recross? 15 MR. BLANKENSTEIN: None. 16 MR. EISENHART: I have none, Your 17 Honor. 18 THE COURT: Redirect? 19 MR. LEIMAN: I just have one question, 20 Your Honor, a single question. 21 . 22 . 22349 1 2 FURTHER EXAMINATION 3 4 Q. (BY MR. LEIMAN) Are the factors that 5 Mr. Dueffert referred to in the exhibit you have 6 in front of you, B4171, are they meant to be 7 applied mechanically or are they meant to be 8 applied in good faith by the thrift and its 9 management? 10 A. Obviously, they are to be applied in 11 total by the thrift and its management. And 12 particularly, if you recall, Mr. Leiman, in 13 yesterday's redirect, we discussed a document in 14 which there was a checklist for the Norwood 15 transaction of 1984 in which either Peat Marwick 16 or the internal auditors or the internal staff 17 actually had a checklist of six out of the seven 18 categories where it actually indicated that the 19 property was a direct investment. 20 So, it is supposed to be applied in 21 good faith and exercise good and fair judgment on 22 the part of the management. 22350 1 MR. LEIMAN: Nothing further. 2 THE COURT: Thank you, Mr. O'Connell. 3 You may step down. We'll take a short recess. 4 5 (Whereupon, a short break was taken 6 from 9:46 a.m. to 10:10 a.m.) 7 8 THE COURT: Be seated, please. We'll 9 be back on the record. 10 MR. NICKENS: Your Honor, before we 11 begin Mr. Lapidus' testimony, there are a couple 12 of issues we'd like to discuss with the Court. 13 Last week, we had a discussion about 14 scheduling, and you asked us to confer and report 15 to you before the recess as to where we stood on 16 the overall scheduling issue. 17 We have had some discussions, but we 18 have not been able to reach any accommodation or 19 agreement between our two respective positions 20 with regard to scheduling. 21 The respondents are -- have all 22 individually made both personal and professional 22351 1 plans based upon the assumption that this 2 proceeding would be -- this part of the proceeding 3 anyway would be concluded on the October 16th date 4 or thereabouts. And we simply can't move those in 5 such a way that we could conclude the proceeding 6 on any schedule that does not include a recess. 7 We are prepared -- we've checked with 8 everybody's schedules -- prepared to come back -- 9 to recess and come back in February for the final 10 session which, including rebuttal, we believe 11 should not be more than ten weeks. We are 12 estimating eight to ten weeks, but ten weeks on 13 the safe side. 14 My understanding of the OTS's position 15 is that we should simply continue. And we are not 16 in a position to do that in such a way that we 17 could complete the case. 18 The first direct conflict, although it 19 is one that I have where a case was set on 20 December 2nd based upon the representation that I 21 would be given approximately a month to prepare 22 for that case. Now, I could do it in something 22352 1 shorter than that, but I can't do anything that 2 would make this thing work. 3 That's where we are on that issue. 4 MR. GUIDO: I think that Mr. Nickens 5 has correctly indicated where we stand on that 6 issue. We tried to figure out a way of adjusting 7 witnesses and doing various things, Your Honor, to 8 abbreviate it. And we wouldn't come to a mutually 9 agreeable format on how to go forward with regard 10 to the witnesses, Your Honor. 11 For that reason, the OTS will complete 12 its direct testimony by the 16th, the way we 13 project it at the present time. And we believe 14 that we should continue and finish it, given 15 breaks for the holidays, Your Honor. 16 I have discussed this matter with my 17 colleagues in Washington, and our position is that 18 we should just press ahead and get the testimony 19 portion of this proceeding over and start focusing 20 on the briefing part and the proposed findings of 21 fact, Your Honor. 22 And as a consequence, we could not come 22353 1 to an understanding with the respondents on how we 2 should proceed. They take the position that for 3 scheduling reasons they can't start again until 4 February, Your Honor. We take the position that 5 we believe we should press on and complete this 6 matter, Your Honor. 7 THE COURT: Well, it seems to me we do 8 need some recess. And then there is the matter of 9 the holidays. I -- my view is that February -- if 10 we can start in February and complete it, that 11 that's what we should do. I have other matters I 12 also have to take care of, proceedings I have to 13 complete and so on, and I'd like to do that before 14 the end of the year. And I just think that's 15 probably the best solution. 16 MR. NICKENS: Thank you, Your Honor. 17 THE COURT: Do you have a date in 18 February? 19 MR. NICKENS: We will come up with one, 20 Your Honor. It will be the early part of 21 February. Mr. Villa has a trial and 22 Mr. Blankenstein has a trial in February, but we 22354 1 will give you a schedule that completes this thing 2 in February and into the early part of March. We 3 can do that during the recess. 4 MR. GUIDO: Your Honor, the second 5 matter pertains to the motion that was filed by 6 the respondents with regard to documents that the 7 FDIC -- we had sent to the FDIC and they claimed 8 privilege over. We have a letter that we received 9 from the FDIC this morning which I'd like to pass 10 up to the Court. I've already given that to 11 Mr. Nickens. 12 Apparently, the respondents had also 13 filed a motion to compel those documents before 14 Judge Hughes and the FDIC enforcement action. 15 THE COURT: Does that embrace all of 16 them that are at issue here? 17 MR. GUIDO: Your Honor -- 18 MR. NICKENS: This did, Your Honor. It 19 was all the same documents. 20 MR. GUIDO: And, Your Honor, the court 21 has ruled on those documents. And the FDIC has 22 asked me to present to the Court its views with 22355 1 regard to that. And that is that it will not be 2 taking any locutory appeal with regard to the 3 documents that Judge Hughes ordered to be 4 produced, and it will be producing those documents 5 to Mr. Nickens today according to the schedule. 6 And I think that the letter indicates they will 7 try to get to them -- the materials to them this 8 morning, Your Honor. 9 And then with regard to notes that they 10 took, discussions that they had had with 11 Mr. Lapidus, Judge Hughes ruled that those 12 documents not be produced. And they told me that 13 it's their view that that issue has now been 14 mooted by that -- the judge's order in that case. 15 And I said that I would present their views to 16 Your Honor and Mister -- 17 THE COURT: You're saying "they" now. 18 Is that the respondents here or -- 19 MR. GUIDO: They, the FDIC. I don't 20 know what the respondents' views are on that, Your 21 Honor. I have had discussions with them, but I 22 would rather Mr. Nickens express the respondents' 22356 1 views to the Court. 2 MR. NICKENS: Your Honor, we're 3 studying the effect of the judge's order. And for 4 purposes of this proceeding, if we feel like we 5 are legally entitled to the documents in light of 6 that ruling, we will file a new motion or 7 otherwise not file a motion. 8 So, for purposes of briefing and your 9 consideration, the motion that we filed with you 10 is either moot or withdrawn; and we will file a 11 new motion after considering the effect of this 12 and after having had a chance to see the documents 13 that have been ordered to be produced which we 14 have not yet seen. 15 And that raises the somewhat broader 16 issue of Mr. Lapidus' testimony and our schedule 17 for today, if I could raise that with you. We 18 will not be able to complete -- apart from these 19 document issues, not be able to complete 20 Mr. Lapidus' testimony today. We had 21 originally -- I had originally estimated that it 22 would be about two days. I think we could do 22357 1 somewhat less than that, but we're not going to be 2 able to complete him today, particularly in light 3 of the fact that I will, at lunch, presumably see 4 some more documents that might go to his 5 testimony. That's further reason why we will not 6 be able to finish today. 7 Mr. Veis has indicated that his direct 8 testimony will take approximately three to four 9 hours, and my cross an equal amount, possibly a 10 bit more in light of the nature of his testimony. 11 What we're asking the Court to do is to 12 go ahead and have his direct and then go ahead and 13 do our recess. There is also a personal element 14 to this. You probably have witnessed the fact 15 that I have been having some respiratory problems 16 of some nature or another. I have been assured by 17 the doctor that I will not make anyone else sick 18 by my presence, but I am not sure that I can 19 comfortably talk for extended periods of time. 20 And so, all of that together comes 21 to -- I'm asking and the respondents are asking 22 that we go ahead and get Mr. Lapidus' direct 22358 1 finished and then resume after the recess and 2 complete his testimony thereafter. 3 THE COURT: I gather there is no 4 opposition to that? 5 MR. GUIDO: Your Honor, we don't -- 6 we've said that we should just press ahead. And 7 we are not in a position to object to it, although 8 we do think that breaking up direct and 9 cross-examination creates problems. We understand 10 the scheduling problem, Your Honor. 11 THE COURT: All right. We'll adjourn 12 when Mr. Veis is through. 13 Sir, would you take the oath, please? 14 15 LEONARD LAPIDUS, 16 17 called as a witness and having been first duly 18 sworn, testified as follows: 19 20 THE COURT: Be seated, please. 21 Mr. Veis. 22 MR. VEIS: Good morning, Your Honor. 22359 1 Thank you. 2 3 EXAMINATION 4 5 Q. (BY MR. VEIS) Would you please state 6 your name for the record? 7 A. My name is Leonard Nathan Lapidus. 8 Q. And who is your employer, Mr. Lapidus? 9 A. I work for the Office of Thrift 10 Supervision and Department of the Treasury. 11 Q. And what is your position with the 12 Office of Thrift Supervision? 13 A. I am a field examiner. 14 Q. Now, if you would, please, can you 15 describe briefly your educational background for 16 the Court? 17 A. I graduated in 1979 from Ohio State 18 with a major in finance and marketing and a minor 19 in accounting. 20 Q. Did you seek employment after your 21 graduation from college? 22 A. Yes, I did. I held several jobs. 22360 1 Q. Why don't we start with the first one. 2 You graduated in 1979. 3 Where did you go to work then? 4 A. I went to work at -- it was kind of a 5 retail store, department store as a manager 6 trainee for a couple of months. 7 And after that, I went to work for 8 Leader Mortgage in their mortgage loan collection 9 department. 10 Q. And how long did you work at Leader 11 Mortgage? 12 A. About eight months or so. 13 Q. So, I take it in 1980? 14 A. Roughly. I then tried a brief stint as 15 an insurance salesman, and I went to work for 16 National City. It's a large bank in Cleveland. 17 Q. I'm sorry? 18 A. National City. 19 Q. Is that a bank? 20 A. It's a large bank in Cleveland. 21 Q. And what did you do for National City 22 Bank? 22361 1 A. I was working in their installment loan 2 collection department, and I was trying to apply 3 to get into their management trainee program. 4 Q. Now, did there come a time when you 5 left National City Bank? 6 A. Yes. I had taken the civil service 7 test and had received several forms from different 8 government agencies and one of them was the 9 Federal Home Loan Bank Board, which was the 10 predecessor to the OTS. 11 Q. And did you then go to work for the 12 Federal Home Loan Bank Board? 13 A. Yes. I believe in May of '81, I began 14 working for the Federal Home Loan Bank Board. And 15 I worked for -- basically, I've worked for them 16 since. There's been -- the OTS is the third name 17 change or second name change. 18 Q. Now, was there a particular place that 19 you -- a particular district of the Federal Home 20 Loan Bank Board that you went to work for? 21 A. Yes. I worked in the Chicago district. 22 Q. And have you always worked in the 22362 1 Chicago district? 2 A. I -- 3 Q. Barring name changes. 4 A. Well, I worked in the Chicago district 5 until it became the central region. And then I 6 moved from Chicago back to Cleveland, which is 7 where I was raised. 8 Q. And you now work for -- do you now work 9 for the OTS in Cleveland? 10 A. Right. Central region. 11 Q. Now, if you would, please, describe the 12 training that you received as an examiner. 13 A. Well, in addition to being trained in 14 the field basically, we -- there's -- you are 15 required to take one or two courses a year in 16 various areas. 17 Q. Now, is there a school called new 18 examiner school? 19 A. Yes. That's usually the first one you 20 take. Then after that, there's an intermediate 21 examiners school. 22 Q. Have you taken the intermediate 22363 1 examiners school? 2 A. Yes, I have. 3 Q. Have you taken any other courses in 4 connection with your work as an examiner? 5 A. I've taken a variety of courses. I've 6 taken appraisal and -- two different appraisal 7 courses. I've taken a course called FIFO, 8 financial instruments, futures, and options. 9 Q. Now, when did you take the FIFO course? 10 A. I'm not sure. I think in '83 or '84. 11 Q. Was there any particular effect on your 12 job responsibilities after you took the FIFO 13 course? 14 A. Well, sometime in there -- I'm not sure 15 if it was even before or after I took the 16 course -- I had been approached by Larry Kenney. 17 Q. And who is Larry Kenney? 18 A. He is now the Chicago regional capital 19 market specialist. 20 Q. And what did Mr. Kenney approach you 21 about? 22 A. And he asked me if I wanted to 22364 1 specialize in capital markets and that, in 2 addition to training me in the field, I would -- 3 you know, he would help me in those areas where I 4 needed help. 5 Q. So, Mr. Kenney was sort of a mentor? 6 A. Yes, he was. 7 Q. Now, what did being a capital markets 8 specialist involve? 9 A. Well, basically, from an examination 10 standpoint, we specialize in the examination of 11 institutions where they had investments or -- in 12 mortgage-backed securities, treasuries, junk 13 bonds, agency securities, a variety of hedging. 14 In the early years, options were a really big 15 issue and eventually swaps and the other types of 16 derivative securities became an issue as time went 17 on in the institution. 18 Q. Did the FIFO district also have other 19 kinds of specialists during the 1980s? 20 A. Yes, we did. We had trust specialists. 21 We had white collar crime specialists. We had a 22 commercial real estate specialist. I was an 22365 1 alternative for commercial real estate, but that 2 was not my main area of work. My main area was in 3 capital markets. 4 Q. Well, now, let's talk a little bit 5 about capital markets. Were there any other 6 courses that you took that would relate to your 7 responsibilities in dealing with capital markets 8 or financial instruments? 9 A. Well, I took a course outside the 10 regular system at the Chicago -- I think it was 11 the Chicago Option Exchange is where it was given. 12 Q. What was that course on? 13 A. It was a course on -- on options, 14 mainly on calls and puts. And they had -- one of 15 the people from one of the houses came in and 16 taught the course. 17 Q. Have you taken any courses on 18 securities? 19 A. I took a course from the National 20 Securities Examiners -- I can't remember the 21 exact -- 22 Q. National Association of Securities 22366 1 Dealers, the NASD? 2 A. Yeah. I took that for a couple days. 3 I've taken an advanced capital markets class, 4 emerging issues which dealt mainly with capital 5 market issues. And I also taught with Larry 6 Kenney. We taught a district-wide class and 7 basically an advanced FIFO class. 8 Q. FIFO being the -- 9 A. FIFO, financial instruments, futures, 10 and options. And my area was the nuts and bolts 11 of the examination process, and he dealt with the 12 more esoteric concepts. 13 Q. Are you talking about the nuts and 14 bolts of examining financial instruments? 15 A. Yes. And futures and options. We -- I 16 created a number of work papers for the course, 17 and those were to the examiners trying to give 18 them a basic understanding of what to look for. 19 And the idea was that they would -- with this 20 training, they would be able to handle the more -- 21 the simpler problems and they would be able to 22 recognize when the problems were beyond their 22367 1 scope and then they would call in myself or one of 2 the other people that specialized in that area. 3 Q. Now, have you taken any courses in 4 asset/liability management? 5 A. Yes, I did. I took an asset/liability 6 management class. I also took kind of related for 7 interest rate risk analysis for sensitivity and 8 such. I've taken classes basically from Sendero 9 when Sendero -- when the Federal Home Loan Bank 10 used Sendero as a model for measuring interest 11 rate risk. 12 Q. Now, you started, I take it, as a field 13 examiner. Right? 14 A. Yes. 15 Q. Now, did there come a time when you had 16 another position with the OTS? 17 A. Yes. At the end of I think 1989, 18 November or December '89, I had applied for a 19 position as a case manager. 20 Q. What's a case manager? 21 A. They replaced supervisory agents as -- 22 it was basically a name change. And I had been 22368 1 given that position or won that position, however 2 you want to call it, and I was a case manager for 3 over a year. 4 Q. Well, what were your responsibilities 5 as a case manager? 6 A. I had about 35 institutions that I 7 was -- that I was in charge of. I spent probably 8 the first five or six months working almost 9 exclusively on capital plans because of the FIREA 10 legislation. And during that time, I guess I 11 would say I handed several institutions over to 12 the RTC because they were unable to meet the 13 requirements. 14 Q. I think you said that you -- well, did 15 there come a time when you were no longer a case 16 manager? 17 A. Yes. They were downsizing. And 18 basically, I believe there were about 20 or so 19 case managers and field managers, and there were 20 only going to be 12 positions. And we heard there 21 were rumors there were going to be less than that. 22 And as a new case manager, I felt my 22369 1 odds of maintaining a position were slim. 2 Q. Were you the most junior or among the 3 most junior? 4 A. I probably was the most junior. And 5 there was -- because they had merged the districts 6 into regions, Cleveland was now in the central 7 region and there was an opportunity -- when I was 8 moving back into the field, instead of just going 9 into the field in Chicago, I went to the field in 10 Cleveland -- 11 Q. Now, Cleveland is your hometown. 12 Right? 13 A. Yes. That's where I was born and 14 raised, and I took advantage of that opportunity. 15 Q. So, in 1981, you moved back to 16 Cleveland and went back into the field? 17 A. Yes, I did. 18 Q. And you continue to be a field examiner 19 today? 20 A. Yes, I am. 21 Q. And do you have any professional 22 certifications? 22370 1 A. I'm -- I have a certification as an 2 FTR, federal thrift regulator. 3 Q. Now, I would like to go back to 1988, 4 if I could, and the work that you were doing at 5 that point. I gather that at that point, you had 6 been working as a specialist in capital markets 7 and financial instruments as an examiner for some 8 period of time; is that correct? 9 A. For about five or six years at that 10 point, I think. 11 Q. Now, if you would, just tell us again 12 what exactly that entailed in terms of your work 13 and your responsibility with respect to 14 examinations. 15 A. Well, while I was in charge on a number 16 of jobs, a lot of times my position was as an 17 assistant working on that particular area. If an 18 examiner or a supervisory personnel determined 19 there was a situation where they needed a 20 specialist, I would be called in; and I would 21 probably work -- sometimes I spent 50, 60, 22 70 percent of my time working on that, exclusively 22371 1 on reviewing financial instruments and different 2 types of hedging activities that institutions were 3 involved in. 4 Q. Would that include reviews of funding 5 mechanisms? 6 A. Yes. Oh, sorry. The -- all sides of 7 the balance sheet: The assets, the liabilities, 8 and the off balance sheet items. 9 Q. So, you would review, for example, 10 reverse repurchase agreements? 11 A. Yes, I would. And dollar rolls and 12 whatever other type of funding source that the 13 institution was using to finance their activities. 14 Q. Now, prior to 1988, had you done any 15 work in the Dallas region or district? 16 A. I had been in Dallas on -- I had been 17 in the Dallas district in '86 -- 18 Q. What was that? 19 A. -- in New Orleans doing an examination 20 of -- it's funny. I can remember the name of the 21 president, but I can't remember the name of the 22 institution. 22372 1 Q. But it was an institution in 2 New Orleans? 3 A. Yes, it was. We were there for about 4 three months. 5 And then in '88, I had been requested 6 to be the examiner-in-charge for a place called 7 AmeriCity. They had -- in Dallas. 8 Q. Do you recall what months of 1988 that 9 was? 10 A. I think July, August, September. 11 Probably July, August, September, October, 12 somewhere in that area. 13 Q. What was AmeriCity? 14 A. Well, there was a holding company. 15 There was two -- there were two thrifts. One was 16 in Dallas. The other was in New Mexico. There 17 were several service corporations. Some of them 18 were jointly owned by the two institutions. They 19 were involved in extremely sophisticated 20 activities regarding financial instruments. 21 Mainly, they had a variety of mortgage-backs and 22 derivative mortgage-backed securities. 22373 1 Q. And you were asked to be the 2 examiner-in-charge, correct? 3 A. Yes. 4 Q. Who asked you to be the 5 examiner-in-charge? 6 A. I believe it was Chet Biedron, who was 7 the -- and Larry Kenney. Chet Biedron I think at 8 the time was our head supervisory agent on the 9 supervision side of the Federal Home Loan Bank of 10 Chicago. 11 Q. Now, did they tell you why you were 12 being requested to be the examiner-in-charge for 13 AmeriCity? 14 A. They said that the institution was 15 heavily involved in securities transactions. They 16 had a very sophisticated program, and they needed 17 someone to be able to really look at it and 18 determine whether or not what they were doing was 19 within reasonable standards. 20 However, I told them that I did not 21 think it would be a good idea for me to be the EIC 22 of two jobs and to do that review. And I 22374 1 requested that they select two other people to be 2 the examiner-in-charge for those two jobs. And I 3 had a hand in selecting one of the EICs. The 4 other one, they turned down my request. 5 Q. Now, did you, in fact, go to AmeriCity 6 to work in the examination as an assistant? 7 A. Yes, I did. 8 Q. What did you do as an assistant? 9 A. I reviewed all the activities of the 10 institutions and their subsidiaries. I had a 11 number of conferences with the president and 12 the -- I think he was an executive vice president 13 who were involved with these transactions. 14 Q. And by "these transactions," are you 15 referring to the securities transactions? 16 A. Yes. They were buying and selling 17 mortgage-backed securities. They had purchased a 18 number of derivative mortgage-backed securities in 19 terms of having purchased interest-only securities 20 and principal-only securities. They had some 21 hedging, I believe, that they did. But for the 22 most part, they had a -- essentially a trading 22375 1 portfolio which they managed. 2 Q. And was this a safety and soundness 3 examination? 4 A. Yes. It was a safety and soundness 5 examination, but it was also tied into the 6 Southwest Plan, I think, because they were a 7 potential acquirer. 8 Q. And what did you determine with respect 9 to AmeriCity's management of its securities 10 portfolios? 11 MR. NICKENS: Your Honor, I don't 12 understand the relevance of AmeriCity's situation. 13 The background that he went there, made an 14 examination perhaps could be relevant; but the 15 results, you know, what was -- I just don't 16 understand the relevancy. 17 MR. VEIS: I was just trying to 18 complete the description of events. 19 THE COURT: Let's move on. 20 Q. (BY MR. VEIS) You finished the 21 AmeriCity examination? 22 A. Yes, I did. 22376 1 Q. In about August or September, I think 2 it was? 3 A. Probably sometime in September. 4 Q. And what then? Did you go home? 5 A. Yeah. I went back to Chicago. 6 Q. Now, did there come a time when you 7 were told you were going back to Texas? 8 A. Yes. I received a call from Larry 9 Kenney, I believe, telling me that there had been 10 a request that I go down to Houston to assist in 11 the examination of an institution. 12 Q. What institution was that? 13 A. United Savings Association of Texas. 14 Q. And approximately when was that? Do 15 you recall? 16 A. When was I told? 17 Q. When were you told that? 18 A. Sometime in November. 19 Q. Of 1988? 20 A. Of '88. 21 Q. Now -- and did you go then directly to 22 Houston from Chicago? 22377 1 A. After the Thanksgiving Day -- after 2 Thanksgiving weekend, I flew from Chicago to 3 Houston and went to USAT. 4 Q. Now, before we get to your arrival at 5 USAT, I'd like to go back to your conversation 6 with Larry Kenney. 7 What were you asked to do at USAT? 8 A. They -- I was told that they did not -- 9 that the Federal Home Loan Bank of Dallas did not 10 have a good handle on what the institution had 11 been doing in terms of its securities activities 12 and hedging and their risk-controlled arbitrage 13 and that I was -- they were asking that I go back, 14 instead of just looking for the review period, 15 which is basically from when the last exam was, I 16 was to go back as far as I could to track the 17 activity and review the minutes of the institution 18 to determine how the activities had been 19 established and who had -- who had approved these 20 activities. 21 Q. Now, were you told anything about prior 22 examinations? 22378 1 A. Just that the -- they did not have the 2 people who were specialists in that area to look 3 at it and that I should just look at it as an 4 independent review. 5 Q. Now, did you review prior examination 6 reports? 7 A. No, I did not. 8 Q. Now -- so, you flew to Houston. I take 9 it then you went to the institution? 10 A. Yes. I was -- I went to the 11 institution. I met the examiner-in-charge, Brenda 12 Bese. And I think she introduced me to whoever 13 was in the room with her at the time. And then 14 she took me upstairs and introduced me to Dominic 15 Bruno, and I was given a place to work on that 16 floor. 17 Q. After your arrival, what did you do to 18 begin your assignment? 19 A. Well, I started requesting information. 20 I had been told that I needed to go to this woman 21 to request board minutes and other committee 22 and -- other committee minutes. And I requested 22379 1 the information, and I was given board minutes to 2 review and executive committee minutes and 3 investment committee minutes. 4 Q. Were your requests written or oral? 5 A. As far as I know, remember, they were 6 oral. There may have been some written requests 7 along the way. 8 Q. Was the staff cooperative? 9 A. Yes, they were. What I asked for, I 10 was given. 11 Q. Were there any individuals who were 12 particularly cooperative? 13 A. Dominic Bruno was very helpful. He was 14 able to answer questions for the most part that I 15 had and was able to -- when I needed specific 16 information, he was able to get that rather 17 quickly for me. 18 Q. Did you ever speak with Michael Crow? 19 A. Yes. I met with him, I think, several 20 times. 21 Q. What about Bruce Williams? 22 A. I also met with him several times. 22380 1 Q. Did you meet more frequently with 2 Mr. Bruno than with Mr. Crow and Mr. Williams? 3 A. Yes. I probably talked to him at least 4 once a day, if not more. 5 Q. Now, did you attend any investment 6 committee meetings during the time you were at 7 USAT? 8 A. One that I remember. They invited me 9 to attend a meeting so that I could see how the 10 investment committee operated. 11 Q. Do you have any recollection of the 12 events at that meeting? 13 A. I don't -- the only thing I really 14 remember about that meeting is that they had some 15 kind of proposal to sell off a really large chunk 16 of their -- I don't know if it was securities or 17 hedging. But basically, they would have -- they 18 wanted to sell this off, and they would have taken 19 some losses. But they wanted me to approve what 20 they were doing, and I told -- 21 Q. I'm sorry. What did you say? 22 A. I told them that I am not authorized to 22381 1 approve their activities and that if they -- they 2 needed to make that decision, whether or not they 3 wanted to sell those securities. 4 Q. Now, is it within an examiner's 5 authority generally to approve transactions by an 6 institution that it's examining? 7 A. No. In fact, I don't think that would 8 ever be considered by any examiner, that they 9 would do that. 10 Q. Now, this was while you were at USAT. 11 Do you recall approximately when that 12 investment committee meeting was held? 13 A. Sometime in December. I think the 14 earlier part of the month. 15 Q. The earlier part? 16 A. Yeah. 17 Q. Now, do you know whether there had been 18 a prior detailed comprehensive review of the USAT 19 mortgage-backed securities portfolios? 20 A. I don't know if there was one prior to 21 mine. 22 Q. You're not aware of one, though, are 22382 1 you? 2 A. No. 3 Q. Your review was limited, I take it, to 4 the mortgage-backed securities portfolio? 5 A. I looked at the mortgage-backed 6 securities portfolio, the financing for that 7 portfolio, and the hedges that the institution 8 indicated were -- the off balance sheet hedges 9 that the institution indicated were hedges against 10 that portfolio. 11 Q. Did you review any other securities 12 activities? 13 A. No, I did not. 14 Q. Now, I'd like to talk specifically 15 about the areas that you reviewed. 16 Did you review asset/liability 17 activities? 18 A. As in interest rate risk management? 19 Q. Yes. 20 A. No, I did not. 21 Q. Did you review the management of 22 mortgage-backed securities and derivatives? 22383 1 A. Yes, I did. 2 Q. And did you review the liabilities that 3 financed the acquisition of those mortgage-backed 4 securities and derivatives? 5 A. Yes, I did. 6 Q. What kind of liabilities were those? 7 A. Well, the institution -- in addition to 8 the deposit base which funded a portion of it, the 9 institution used reverse repos and dollar rolls, 10 which are basically a short-term investment 11 product that -- where the broker will lend money 12 to the institution in exchange for holding the 13 asset -- the institution's assets as collateral. 14 In this case, the mortgage-backed securities. 15 Q. And I believe you just said a few 16 minutes ago that you also reviewed the hedging and 17 off balance sheet activities? 18 A. Yes, I did. 19 Q. In particular, what instruments are 20 involved in the activities that you reviewed? 21 A. Well, for the most part, the 22 institution used -- had swaps; but they also 22384 1 had -- they also had some calls and a collar and 2 some options, I think. 3 Q. Did they have futures? 4 A. Yeah. I think they had futures, too. 5 But they were mostly minor. 6 Q. I'm sorry. Did you mention caps? 7 MR. NICKENS: Your Honor, did he say 8 "calls"? 9 THE COURT: That's what I heard. I'm 10 not sure I understand that. 11 Q. (BY MR. VEIS) As in call options? 12 A. I'm sorry. I meant call options. 13 THE COURT: Thank you. 14 A. I think they had call options. 15 Q. (BY MR. VEIS) What about interest rate 16 caps? 17 A. Yes. I believe they did have an 18 interest rate cap. I think they also had an 19 interest rate collar. 20 Q. Now, I believe you also said you 21 reviewed -- you requested minutes of the board of 22 directors, the executive committee, and the 22385 1 investment committee; is that correct? 2 A. Yes, that's right. 3 Q. And did you review those documents, as 4 well? 5 A. Yes, I did. And for the investment 6 committee minutes where -- since they were weekly 7 meetings, I basically made copies of those minutes 8 I thought were appropriate rather than trying to 9 write down each item. 10 Q. You didn't copy all of them, did you? 11 A. No. I just copied parts. 12 Q. Now, I'd like to go back to your 13 request for information. 14 When you requested minutes, did you 15 specifically -- did you specify the committees 16 that you wanted to review? 17 A. I don't really recall if I did. I 18 probably would have asked them to give me those 19 minutes that were -- that applied to their 20 activities, which is why I ended up looking at 21 some of the executive committee minutes, because 22 either the board or the executive committee made 22386 1 those decisions before the investment committee 2 was formed. 3 Q. Did you ask them for any materials that 4 were relevant to your review of the 5 mortgage-backed securities activities? 6 A. I would have asked them. 7 Q. And that would include any minutes; is 8 that correct? 9 MR. NICKENS: Your Honor, I object to 10 the leading. The witness has indicated clearly he 11 doesn't remember. 12 Q. (BY MR. VEIS) Well, I notice you 13 haven't mentioned anything about asset/liability 14 committee minutes. 15 Did you receive any asset/liability 16 committee minutes? 17 A. No, I did not. 18 Q. Did anyone tell you that the 19 asset/liability committee minutes would be 20 relevant to your review of mortgage-backed 21 securities activities? 22 A. No, they did not. 22387 1 Q. Now, let me ask just how you went about 2 this review. You got all these materials. 3 What did you do next? 4 A. Well, I was actually doing several 5 things at once. In addition to reading through 6 the institution's minutes, I was also looking 7 through their monthly or their records, whatever 8 they had. They had records that showed what their 9 average balance and yields were on their 10 securities during the month. They had monthly 11 records on their various off balance sheet 12 activities, and they had the repurchase agreements 13 and dollar rolls. And I was looking at them -- as 14 I went along, looking at different aspects of the 15 institution trying to get a solid handle on what 16 they had done and when they had done it and how 17 they had progressed from the beginning which, I 18 think, was sometime in '85 until the present time 19 which -- at that time, the present time -- I cut 20 it off at September 30th because the 21 examination -- the financial information that they 22 were using for the report, as I understood it, was 22388 1 to be as of September 30th. 2 Q. Did anyone assist you in your review? 3 A. I had two assistants. I don't think 4 they were there the whole time. There was Randy 5 Kiner who was -- 6 Q. Who was Randy Kiner? 7 A. He is a Chicago examiner who was down 8 in Houston on another job. And I kind of borrowed 9 him for a couple weeks. And then the Dallas 10 people also sent me an examiner who they had hired 11 to be a securities specialist, and he worked with 12 me for a week or two, as well. 13 Q. Do you recall his name? 14 A. No, I don't. 15 Q. Mr. Lapidus, did you create any work 16 papers in connection with your review? 17 A. Yes, I did. 18 Q. I'd like you to look to your right at 19 that stack of trial exhibits and look at those. 20 They are Exhibits A14101, A141022, A14103, A14104, 21 and A14105. 22 Can you identify those exhibits as your 22389 1 work papers? 2 A. Yes. They are -- to the best of my 3 knowledge, they are my work papers from that 4 examination. 5 Q. And you have -- have you had an 6 opportunity to review those prior to testifying 7 today? 8 A. Yes, I have. 9 Q. Were those work papers prepared by you 10 or under your supervision in connection with your 11 responsibilities in examining the mortgage-backed 12 securities activities at United Savings 13 Association of Texas? 14 A. Yes, they were. 15 MR. VEIS: Your Honor, I move the 16 admission of Exhibits A14101, A14102, A14103, 17 A14104, and A14105. 18 MR. NICKENS: No objection, Your Honor. 19 THE COURT: Received. 20 Q. (BY MR. VEIS) Now, Mr. Lapidus, I'd 21 like to first direct your attention to 22 Exhibit A14102. 22390 1 Would you pull that, please? Now, you 2 have explained to us what these documents are. I 3 would like to very briefly run through this and 4 explain what the contents are without getting into 5 detail as to what you did with them. 6 Can you do that, please? If you would 7 start, say, at OW182409. Let me -- let me ask you 8 a question before we do that. 9 Would you take a look, please, at 10 OW182402 and OW -- well, just look at that one. 11 A. Okay. 12 Q. What is that? 13 A. That is a note that Brenda sent me. 14 Q. Brenda Bese? 15 A. Yes. 16 Q. Why did she send you that note? 17 A. The -- when I had returned to Chicago, 18 I had not yet completed writing the comments. In 19 fact, I had basically barely begun on them. And 20 it was anticipated that I would return to Houston 21 or Dallas to write those comments. However, it 22 was decided that I would write those comments in 22391 1 Chicago. And there were basically three packages 2 which were these work papers that were sent to my 3 house, and I worked on the comment at my house. 4 Q. Now, it also refers in this note from 5 Ms. Bese to time sheets at the bottom. 6 Do you see the bottom of Page 182402? 7 A. Yes. It says, "Please send time sheets 8 to the proper people." This might be my writing. 9 Q. There are some documents that relate 10 to -- that seem to be time sheets. 11 Do you see those? 12 A. Yes. 13 Q. Do they reflect work that you did at 14 USAT and also Mr. Kenney? 15 A. They are the time sheets from January 16 when I worked at my house or my condo, rather, and 17 then there is four hours in February, which I'm 18 not sure what I did then. And then the others -- 19 the one for Larry Kenney is for Friday, which was 20 January 20th, which is when he reviewed my 21 comments and -- through the E-mail and sent me 22 suggestions. 22392 1 Q. Now, while these documents are in the 2 work paper folder, they are not actually in the 3 work papers; is that right? 4 A. No, they are not. 5 Q. Now, the work papers start at OW182409? 6 A. Yes, they do. 7 Q. All right. Starting from there, would 8 you please explain just what it was that you put 9 into your work papers? 10 A. Well, the first sheet of paper is 11 basically just an index. And the next sheet is a 12 general index for this particular work paper 13 folder. And the first group of work papers was 14 the mortgage-backed securities consolidated 15 monthly spread analysis, and then there were swaps 16 and cost recaps, mortgage-backed security dollar 17 rolls for -- mortgage-backed securities purchased 18 by UMBS and USAT including trade tickets, and 19 examiners notes, investment committee minutes. 20 Q. Moving to the next page, USAT/UMBS 21 consolidated monthly spread. 22 Is that a document you prepared? 22393 1 A. Yes. 2 Q. How did you go about preparing that? 3 A. Well, I took the institution's monthly 4 reports that they had which had the average 5 balance for the month and the average -- and the 6 yield. And I took the information on the reverse 7 repos and the dollar rolls. And basically, what I 8 did is for each month when the information was 9 available, I put down the dollar amount and the 10 yields and the cost of the borrowings and 11 basically ran a -- did the total every month and 12 calculated the basis point spread for the reverse 13 repos and the dollar rolls to the mortgage-backed 14 securities. 15 Q. Now, does that continue through 16 OW182414? 17 A. Yes, it does. 18 Q. What is the next page, OW182415? 19 A. This is the institution's quarterly 20 cost of funds. As you can see by the -- for 21 example, like OW182414, for September, there were 22 $2.8 billion of mortgage-backed securities and 22394 1 about $2.1 billion in reverse repos and dollar 2 rolls. Obviously, they needed the deposit base of 3 the institution to fund the remainder of the 4 assets. 5 Q. Is that quarterly cost of funds -- I'm 6 sorry. 7 Does the quarterly cost of funds 8 reflected cost of funds from the deposit basis? 9 A. Yes, it does. And I can't remember 10 why, but I couldn't get anything better than 11 quarterly information on their cost of funds. 12 Q. And did you create -- did you prepare 13 OW182415 based on information the association 14 provided you? 15 A. Yes, I did. 16 Q. Let's move to OW182416, which is headed 17 "Average MBS held by month - USAT." It appears to 18 run through OW182424; is that correct? 19 A. Well, the -- actually, the monthly 20 average mortgage-backed securities and repos for 21 USAT runs through OW182419. And then there's 22 OW182420 is the monthly spreads for the three 22395 1 finance subs. And then OW182421 through 424 is 2 the basically similar run for United Mortgage-back 3 Security, which was USAT's service corporation. 4 Q. Now, did you prepare those pages based 5 on information provided by the association? 6 A. Yes, I did. 7 Q. Moving to OW182425 through, I believe, 8 OW182430, can you explain what those are, please? 9 A. This is a sheet prepared by the 10 institution. It's just a sample of one of 11 their -- of one of their reports. And it breaks 12 down the -- and has their GL account numbers. 13 Q. By that, you mean general ledger? 14 A. Yes. And they have dollar roll 15 reconciliations included in here and the 16 mortgage-backed security reconciliation for USAT. 17 And then it goes on to UMBS. I think it also 18 includes UMBS, too. 19 Q. Moving then to OW182431, what is 20 OW182431? 21 A. This is a sensitivity -- I wrote down 22 "9/30/88 sensitivity to rate changes." The date 22396 1 on the top of this sheet is October 3rd. This is 2 when they ran the September 30 information for me, 3 or that's when they ran the September 30 4 information. 5 It's basically the market value of the 6 mortgage-backed securities and derivatives and the 7 hedges. And the -- for the unchanged or basically 8 the current market value, it shows a total of 9 200 -- a total loss of 213.7 million. 10 Q. Now, is this a sensitivity analysis? 11 A. Yes, it is. It shows the sensitivity 12 to changes in rates for plus or minus 50 and 100 13 basis points. 14 Q. And in particular, what does it show 15 about the sensitivity of the mortgage-backed 16 securities portfolio as a whole, including hedges, 17 to changes in interest rates? 18 A. Well, basically, that the -- it shows a 19 couple things. First of all, as is typical with 20 mortgage-backed securities, there is an obvious 21 sensitivity to changes in interest rates. 22 Q. What do you mean by that? 22397 1 A. Well -- 2 MR. NICKENS: Your Honor, the 3 representation was made that this witness was not 4 going to testify as an expert in the case but to 5 testify about his findings as to the 1988 6 examination. I can't tell from the current 7 question and answer whether he is expressing some 8 current opinion or some opinion that he formed 9 back in 1988. 10 It's been expressly represented in two 11 different forms that he was not going to go beyond 12 what he had done in 1988 as reflected in his 13 report. And I -- I don't believe this sort of 14 thing we're just getting into is reflected in his 15 report. And so, I have an objection if we're 16 going beyond those parameters. 17 MR. VEIS: Your Honor, I'll move on. I 18 certainly agree that we have made representations 19 along the lines Mr. Nickens has stated, that he's 20 going to testify about what he did at USAT. 21 THE COURT: Would you speak a little 22 louder, Mr. Veis? 22398 1 MR. VEIS: I'm sorry. We have indeed 2 stated that he will testify about what he did at 3 USAT, and I will move on. 4 Q. (BY MR. VEIS) This is a work paper or 5 document included in your work papers, correct? 6 A. Yes. 7 Q. Now, moving to the next page, OW182432, 8 what does that note represent? 9 A. It's -- the little top section is a 10 summary of the daily mark-to-market and shows 11 unrealized gains and losses which -- of course, it 12 equals -- if you look at the prior sheet, it shows 13 that it equals the 184861 and -- 086. Sorry -- in 14 unrealized losses on the assets. And it also 15 shows a weekly trend summary running from December 16 of '87 through October 3rd of '88. And it shows 17 unrealized asset -- unrealized gains and losses on 18 assets/hedges, the book value for UMBS, USAT, and 19 other book value and total book value. 20 Q. And was this prepared by the 21 association? 22 A. Yes, it was. 22399 1 Q. Let me move to the next one. This is 2 OW182433. 3 What is this document? 4 A. This is a list of the finance sub 5 mortgage-backed securities that they held. It's 6 divided by coupon and by type in terms of the fact 7 that it's the various agencies: Freddie Mac, 8 Ginnie Mae, and Fannie Mae. 9 Q. Is this a document you prepared? 10 A. Yes, it is. 11 Q. What is the source of your information? 12 A. The institution's records. 13 Q. Directing your attention to the next 14 page, OW182434, is that the source of any 15 information you derived concerning the finance 16 sub's MBS portfolio? 17 A. Yes. I would say it is. 18 Q. Is that correct continuing on to 19 OW182440? 20 A. Well, this has the other assets of USAT 21 and UMBS probably. I'm sorry. How far did you 22 say to go? 22400 1 Q. Let's take it -- does this discuss the 2 assets of the -- of U