23053 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 17, 1998 22 23054 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 23055 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 . 23056 1 2 INDEX OF PROCEEDINGS 3 Page 4 GRAEF CRYSTAL 5 Continued Examination by Mr. Blankenstein23057 6 Examination by Mr. Villa................23104 7 Further Examination by Mr. Schwartz.....23163 8 Further Examination by Mr. Villa........23211 9 Further Examination by Mr. Blankenstein.23218 10 NEIL TWOMEY 11 Examination by Mr. Rinaldi..............23226 12 . 13 . 14 . 15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . 23057 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:00 a.m.) 3 THE COURT: Be seated, please. We'll 4 be on the record. 5 Mr. Blankenstein, you may continue. 6 MR. BLANKENSTEIN: Thank you, Your 7 Honor. 8 9 CONTINUED EXAMINATION 10 11 Q. (BY MR. BLANKENSTEIN) Good morning, 12 Mr. Crystal. How are you? 13 A. Fine. 14 Q. Yesterday, you testified at some length 15 and had some pretty tough things to say about the 16 report that Hewitt Associates did for United. 17 Do you remember that testimony? 18 A. I remember testifying about Hewitt. 19 Your word is "tough," not mine. 20 Q. Would you agree that Hewitt is a very 21 highly-regarded executive compensation firm? 22 A. Absolutely, yes. One of the best. 23058 1 Q. Would you rank Hewitt among the top 2 compensation consulting firms in the country? 3 A. Absolutely. 4 Q. And that was true back in 1988? 5 A. So far as I know, yes. I first 6 encountered them in the Seventies. They have 7 always been very high-quality. 8 Q. In your experience, was it typical for 9 a board of directors to seek advice on 10 compensation matters from firms like Hewitt? 11 A. It was typical of them to seek it 12 before they made the decisions that they made, 13 yes. 14 Q. So, companies like United often 15 retained consultants like Hewitt or your former 16 employer, Towers, Perrin, to review compensation 17 packages for senior executives; is that right? 18 A. Yes. 19 Q. You wouldn't fault United, would you, 20 for retaining Hewitt in this case? 21 A. My only fault would be the timing of 22 the retention; that is to say, the decisions were 23059 1 made and then they asked them to look at them. 2 Q. But you don't fault United for 3 retaining Hewitt? 4 A. Not per se, no. 5 Q. Was the report produced by Hewitt 6 typical of the type of report that many top 7 consulting firms would have produced? 8 A. I'm sorry. Try that again. 9 Q. Was the report that Hewitt produced, 10 was it typical of the type of report that any of 11 the top consulting firms would have produced for 12 United? 13 A. In general, yes, I would say so. 14 Q. So, if United had selected another 15 firm, it's likely they would have gotten much the 16 same advice? 17 A. I don't know that I could go that far. 18 I mean, it's a question of -- I mean, the problem 19 with the Hewitt report was that they really did 20 not grapple with the performance issues that 21 confronted the company at the time. Now, whether 22 others would not have either, I don't know. It's 23060 1 possible they would not have. I just don't know. 2 Q. Do you remember I asked you a question 3 like that at your deposition? 4 A. No. 5 Q. Do you still have your deposition in 6 front of you? 7 A. Yes, I do. I'm remarkably consistent. 8 I never read the deposition. I don't remember it. 9 Q. Why don't you turn to Page 245. 10 A. All right. Yes. 11 Q. And if you look at the answer starting 12 on Line 26, you say, "So, no. Probably if they 13 had picked another firm, I doubt they would have 14 received much different advice." 15 Do you remember that? 16 A. Yes. 17 Q. And if they had selected Towers, 18 Perrin, they would have probably gotten the same 19 advice they got from Hewitt; is that correct? 20 A. Yeah. I would affirm what I said, that 21 it's more likely than not that the report would 22 have been similar. I can't say every report would 23061 1 have been, but more likely than not it would have 2 been. 3 Q. And the reason -- you weren't available 4 in 1988, were you, to provide advice if they had 5 come to Towers, Perrin? 6 A. You mean personally? 7 Q. Personally. 8 A. In '88? No. But I would not have 9 taken the job in any case. 10 Q. So, if I understand you right, 11 Mr. Crystal, United received typical advice from 12 Hewitt of the compensation practices it asked 13 Hewitt to examine. Right? 14 A. I mean, I have to deal with rather the 15 substance versus the architecture. I mean, the 16 reports would have been probably very similar. 17 Whether they would have come up with the exact 18 substance of Hewitt, I can't tell you that. 19 Q. But didn't you tell me they would have 20 received the same advice? We're not talking about 21 the formatted paper of the document, are we? 22 A. Well, what I meant by that in the 23062 1 deposition is that in the essential of advice, 2 they would have received guidelines for salary and 3 for bonus and things like that. 4 Now, whether the numbers would have 5 been exactly the same or different or lower or 6 higher, that I can't tell you. They could be 7 higher. I'm just not sure. 8 Q. In 1988, you hadn't launched your 9 second career as a critic yet; is that right? 10 A. I would mark the beginning of that in 11 June '88 when I published my first article for 12 Fortune and the roof fell in, yes. 13 Q. Now, Mr. Crystal, before we turn to 14 your specific criticisms of the Hewitt report, 15 your fundamental quarrel with consulting companies 16 is your belief that those firms cannot do a fair 17 and effective job of putting together and 18 evaluating compensation packages; is that right? 19 A. No, it's not really right. 20 Q. It's not? Let's take a look at your 21 deposition at Page 120. And let's start with the 22 question that's posed at Line 20. 23063 1 A. Right. 2 Q. It says, "And Towers, Perrin. There 3 are compensation -- are there any compensation 4 firms that you think are fair and objective and do 5 a good job of putting together and/or evaluating 6 compensation packages?" 7 "I guess the short" -- and you answer, 8 "I guess the short form answer to that is no." 9 A. Right. 10 Q. Were you truthful at your deposition? 11 A. Yes. 12 Q. Are you changing your testimony? 13 A. No, because you didn't read the rest of 14 my response. 15 Q. But the answer to that question is 16 generally "no," is that -- 17 A. Well, if you want to redact one answer. 18 But if you permit me to turn the page, you will 19 note that I very explicitly went on to say that my 20 problem with it is that the consultants really -- 21 when you're talking about high-level executive 22 compensation, really need to report to the board 23064 1 of directors so that they understand that that's 2 their client, the shareholders of the board, not 3 the people who are going to benefit by their 4 recommendations. I believe that's quite clear on 5 the next page, if you'd care to read it. 6 Q. And do you think that the problem is an 7 economic bias that the consulting firms have that 8 they tend to want to please the senior executives 9 so they can get the next bit of business? 10 A. Well, I mean, the lawyers would 11 probably have absorbed their mother's milk that 12 you need to please the client more often than you 13 offend the client. And consultants have absorbed 14 the same message quite well. And that 15 structurally is the problem because the CEO who 16 has the ability to hire and to fire those people 17 then can be -- can influence a recommendation. 18 Now, I grant you in this case that it appeared 19 that the compensation committee hired Hewitt. 20 Q. When you were active with a consulting 21 business, did you tilt in favor of management or 22 did you try to be fair and objective? 23065 1 A. I always tried to be fair and 2 objective, but there were issues such as this sort 3 of thing. I mentioned to you earlier that I would 4 not have taken on this consulting assignment, and 5 I had the luxury because I had -- was the top 6 consultant in the United States for many years 7 during that period, I literally turned down 200 8 assignments during my last eight years. I even 9 kept a record of them. And I never wrote a 10 proposal in the last eight years of my career so 11 that I was in a position to salve my own 12 conscious, I really think, by taking on only 13 companies that I thought were tremendous 14 performers. Therefore, what I recommended to them 15 was in sync with their performance. 16 Now, occasionally, I got a client who 17 was a tremendous performer who then turned out to 18 go the other direction and I had problems. You 19 know, in that sense, I couldn't -- I wasn't -- I 20 had it easy. I wasn't challenged by having to 21 take on clients where you had these sorts of 22 issues evolve. Because it is very difficult to go 23066 1 back to a client and say, "Look. Here's the 2 structure. I think this is what -- here's the 3 market. I've measured it, done this, but you 4 can't pay this because your performance is so 5 bad." Well, there goes your client. And when you 6 have a consulting firm like Hewitt and Towers and 7 Wyatt where the big bread and butter business is 8 actuarial work, that if you can get that, you've 9 got a real annuity going for you. And so, that 10 doubly makes it more difficult to try to offend 11 the client. So -- 12 Q. You weren't the only honest man in the 13 consulting business, were you? 14 A. You know, I can't even tell you how 15 honest I was, to be truthful, because if I had 16 been confronted where I only had two clients and I 17 needed them desperately for my economic livelihood 18 and I got into a situation like this, I like to 19 believe that I would have said, "Get behind me. 20 I'm not going to do anything like that." But I 21 never was confronted with it. So, to be honest, I 22 hope I'd measure up; but I never had the test. 23067 1 Q. Did Hewitt only have two clients? 2 A. No. They had many clients. But of 3 course, an individual at Hewitt could have just a 4 few clients. 5 Q. Would you grant that there are other 6 consultants in the business who try to be fair and 7 objective who try and be professional? 8 A. I think they all try to be fair and 9 objective; but I think the issue here, as we were 10 talking about yesterday, you know -- you were 11 saying, well, is 760, for example, the limit? 12 766? What about -- you said in your testimony 13 820. Could you go that high? Well -- and I had 14 earlier taken a haircut from 599 to 500. Well, we 15 know from all this that, in effect, you can do all 16 the sophisticated statistical analysis but then 17 when you finally finish all that stuff, you have 18 to apply a certain amount of judgment to it. And 19 if pressed, you know, you have a certain zone that 20 you might be able to move a little bit further. 21 Someone said, "Well, add another 800,000." No, I 22 can't go there; but maybe I can go 60,000. 23068 1 So, it's more -- statistics informed by 2 Van Gogh impressionism, if you will. And so, we 3 have that same thing in all the firms. I mean, 4 they do a fair and honest job, but they also can 5 shade up to some degree. For example, the notion 6 of putting on a 15 percent premium is often done. 7 And then someone would say, "Well, should it be 8 done in this context?" I feel it shouldn't. 9 Apparently, they thought it was reasonable. 10 Q. You don't think that -- you believe 11 that they thought that added that 15 percent 12 premium because of some economic bias that they 13 had, that they are trying to curry further 14 business from United or were they trying to act 15 honestly and professionally in trying to give 16 United the best advice that they possibly could? 17 A. Well, I think many consulting firms 18 have all too easily adopted this premium posture. 19 And it's become almost sort of a marketing tool. 20 I mean, certainly you know that you're not going 21 to offend the client if you tell them you think 22 they should pay 15 percent above the market. And 23069 1 that seems to be the judgment. The problem with 2 all this is that you have the consulting firms 3 working with one client at a time. And let's say 4 each of them in their best judgment says "you 5 should pay 15 percent above the market." And they 6 are down in the jungles hacking away at the 7 underbrush and what -- to them, it makes sense in 8 that particular context to do that. 9 Meanwhile, I'm sitting up here in a 10 helicopter as a critic looking over the landscape 11 and I say, "Well, pardon me, but if all of you 12 down in the jungle are recommending 15 percent 13 more, we're never going to catch the data." And 14 next year when the surveys come out, people say, 15 "Oh, well, what do you know? I'm behind again" 16 and add some more and there goes the whole 17 run-away executive pay that we have today. 18 So, it's almost a benign process rather 19 than a malignant process. I don't say Hewitt's 20 out there trying to sell its soul in some way. 21 They are doing what they think is best, but they 22 are not paid to do -- to take a global view of the 23070 1 thing. They are paid to work with one client at a 2 time. And if that turns out to send the whole 3 system out of control, they say, "Well, there's 4 nothing we can do about it." 5 Q. And to provide that client with fair, 6 objective, and professional advice, correct? 7 A. Well, that's what they are known for, 8 yes. I mean, they try to do that. I do think 9 they try to do that. 10 Q. Let's turn to the specific criticisms 11 that you have of the Hewitt report. 12 Do you have the report in front of you, 13 sir? 14 A. No, I don't. Not today. 15 Q. It's Exhibit A14107. 16 A. Oh, I just don't have it. That's -- 17 A14107 is my -- 18 Q. Yes. I'm sorry. I misspoke. 19 A. I thought you said the Hewitt report. 20 Q. No. I wanted your report. 21 A. My report, I have. Sorry. 22 Q. And look on Page 7 of your report. 23071 1 A. Okay. 2 Q. And towards the bottom of the page, you 3 criticize Hewitt for implicitly sanctioning the 4 1987 bonuses and for implicitly sanctioning the 5 folding in of the 1987 bonuses into the base 6 salary for 1988; is that right? 7 A. Yes. Yes, I do. 8 Q. Wasn't it United's purpose in awarding 9 bonuses in 1987 and incorporating those bonuses 10 into the 1988 base salary an attempt to bring 11 compensation of the senior executives up to market 12 value? 13 A. I've heard from -- I mean, from the 14 documents, I've read various descriptions of what 15 this bonus plan is supposed to achieve. And I 16 certainly have, I believe, read different points 17 that there is some incentive aspect for 18 performance here, that if you get better 19 performance, you get a bigger bonus. I've also 20 read that bonuses -- or especially the fold in of 21 the bonus into the salary was an attempt to bring 22 pay levels up to competitive levels. But I find 23072 1 sort of -- I'm a little incredulous about that 2 because at the time these people didn't have a 3 clue of what the competitive levels were. They 4 took a guess. They said, "Well, 167,000." I 5 mean, even I'm not that accurate, 167,000. Not 6 166. Not 168. And it's like we're in a cockpit 7 where we've drawn black velvet drapes around and 8 we're just flying around blind and we hope we 9 don't hit something and then we'll hire a 10 consultant to see if we did hit something. 11 Q. Did you have a chance to review 12 Mr. Whatley's testimony in this case? 13 A. No, did not. 14 Q. If Mr. Whatley had testified that he 15 was generally familiar with what the market values 16 were in the thrift industry for executive salaries 17 and compensation and that he -- and that that 18 influenced the decisions to set these salary and 19 bonus figures, would that have an effect on your 20 opinion? 21 A. Well, I mean, if, in fact, it were a 22 true statement -- and it may be a true statement. 23073 1 But I would note that Mr. Whatley was the chief 2 executive officer at the time of a -- well, he was 3 chairman at the time and had earlier been chief 4 accountant of Kaneb Services, which I think is an 5 oil company if memory serves. I wonder whether 6 he -- where he would have absorbed this detailed 7 knowledge. 8 And I also, by the way, since you bring 9 up Mr. Whatley, would observe that he would 10 perhaps not be the greatest judge of performance 11 given that under his leadership during the 12 six-year period when he was chairman and CEO, that 13 at the time the S&P rose 133 percent, his returns 14 dropped 84 percent. 15 So, perhaps to him the level of 16 performance demonstrated by United was normal. 17 Q. Do you know whether Mr. Whatley was on 18 the board of First City Bank, one of the biggest 19 banks in Houston? 20 A. I don't know. 21 Q. You don't know that? 22 Would that be important to your 23074 1 assessment, to your opinion, if he, in fact, was a 2 member of the board of First City Bank? 3 A. Could I ask you whether he was a member 4 of the compensation committee of the board or just 5 the board? I mean -- 6 Q. Assume that he was a member of the 7 compensation committee, as well. 8 A. Well, if he were a member of the 9 compensation committee and if the compensation 10 committee was functioning as a compensation 11 committee should, he would have had various survey 12 materials brought to his attention. Whether he 13 absorbed them or not is something I can't answer, 14 but he would have had that. However, they would 15 have been survey materials, I'm sure, exclusively 16 devoted to commercial banks because -- I consulted 17 with a number of commercial banks, and never in my 18 experience did we ever look at the pay of thrifts 19 because they paid so low. We didn't want them in 20 our databases. 21 Q. Do you disagree with United's objective 22 of paying its executives at least competitive 23075 1 market-level compensation? 2 A. I do disagree with it, given the 3 circumstances in which they were at at the time 4 with their performance. I think it's an admirable 5 goal, but it wasn't the right time to be trying to 6 pay this sort of level of pay, in my opinion. 7 Q. So, you think they should have been 8 paying them below market compensation; is that 9 right? 10 A. I think that -- you might say, well, if 11 you do that, the good people will leave if there 12 are good people. I mean, the performance record 13 would raise a question of how many good people 14 there were. But let's -- 15 Q. Before -- you've said -- 16 A. Are you going to let me finish? 17 Q. Sure. I'll let you finish. I just 18 wanted -- 19 MR. SCHWARTZ: Let him finish the 20 answer to the question that's standing. 21 THE COURT: Finish your answer. 22 MR. SCHWARTZ: Thank you, Your Honor. 23076 1 A. But what -- you might say, "Well, if 2 you pay them below average" -- let's say we don't 3 have any money and let's say there are some good 4 people and we're out of here because across the 5 street they are paying more, we have to do 6 something. But I would object to the notion of 7 doing something that would drain the fixed cost -- 8 I mean drain the treasury of money which is sorely 9 needed at this point because already there are 55 10 holes in 6-foot diameter. I'm still not done. 11 And that I would think that you would turn to 12 these people and say, "Look. We will give you -- 13 we can't pay you a lot more cash. We don't have 14 the cash. But we'll give you a ton of stock 15 option shares. Maybe we'll even give you some 16 free shares if you stay with us for a period of 17 time and help us turn this around." But mostly, 18 option shares, I think, because that would align 19 you directly with the shareholders and there's no 20 charge to the earnings and there's no cash out. 21 There's no drain of cash from the company. And if 22 the stock goes from 69 cents back to $7, hey, 23077 1 you'll all be rich and you'll be glad you stayed 2 here. That, after all, is what Lee Iaccoca did 3 when he joined Chrysler. He came in for $1 a year 4 and a ton of option shares and he said, "I'll turn 5 the place around or I'll end up having wasted my 6 time for three years and made $3." 7 Q. (BY MR. BLANKENSTEIN) You think 8 Mr. Crow had the financial wherewithal that 9 Mr. Iaccoca had to take a 1-dollar salary? 10 A. I'm not -- I'm not sure and I never 11 would recommend that as a normal sort of approach, 12 but we're not talking about that. We could say 13 Mr. Crow -- the alternative is not a dollar. The 14 alternative is just we can't afford to give you 15 any more money than you're currently earning. 16 Q. Haven't you acknowledged in this case 17 at least that you may need to pay a lot more in 18 fixed compensation to retain talented executives 19 when a company is in trouble? 20 A. I certainly don't recall that. 21 Q. Well, let me show you what's been 22 marked as Exhibit B4295. 23078 1 Now, do you recognize this 2 Exhibit B4295, Mr. Crystal? 3 A. Yes, sir. 4 Q. And these are notes that you prepared 5 in connection with the assignment that you took 6 from OTS? 7 A. Yes, sir. 8 Q. And you jotted down thoughts that you 9 had about how to deal with the assignment, make 10 this evaluation, and prepare your report; is that 11 right? 12 A. Well, in the context of these notes, I 13 can see from the beginning of it that I had 14 already obtained the 17 proxy statements to which 15 I referred earlier. I had already done some 16 statistical analysis. I already had some results. 17 And so, I was sort of talking to myself 18 about what I had found and then trying to lay out 19 sort of the -- sort of things I would need to 20 cover in a report. So, I wouldn't call these 21 final conclusions; but I was fairly well along in 22 my analysis here. 23079 1 Q. And one of the things -- if you look at 2 the -- towards the bottom of the page, if you 3 count the fourth bullet point up. 4 A. Fourth from the bottom? 5 Q. Fourth up. And one of the things that 6 you said to yourself is "challenge Hewitt's report 7 where needs to be challenged. For example, it may 8 be necessary to pay a lot of fixed compensation to 9 retain talent in a troubled environment"; is that 10 right? 11 A. Uh-huh, yes. 12 Q. So, you recognize -- 13 MR. SCHWARTZ: Option of completeness, 14 Your Honor, if he would read the rest of the 15 sentence rather than just a clause. 16 MR. BLANKENSTEIN: Fine. 17 Q. (BY MR. BLANKENSTEIN) "But is it 18 necessary to pay a lot of" -- 19 MR. SCHWARTZ: It is. "But it is not 20 necessary." 21 Q. (BY MR. BLANKENSTEIN) "But it is not 22 necessary to pay a lot of fixed compensation to 23080 1 the very executives who were responsible for the 2 troubled environment"; is that right? 3 A. Yes. 4 Q. What study did you undertake to 5 determine whether or not any of the senior 6 executives at United were responsible for the 7 troubled environment? 8 A. I undertook no study. 9 MR. BLANKENSTEIN: Let me offer, Your 10 Honor, Exhibit B4295. 11 MR. SCHWARTZ: I'm sorry? 12 MR. BLANKENSTEIN: I've offered 13 Exhibit B4295. 14 MR. SCHWARTZ: No objection, Your 15 Honor. 16 THE COURT: Received. 17 Q. (BY MR. BLANKENSTEIN) Did you ever 18 consider what would have happened to United if the 19 key executives had all left at once? 20 A. No. I mean, I think that the 21 probability of that happening -- in fact, I would 22 immediately tell you you have some sort of legal 23081 1 conspiracy if that occurred. It won't happen. 2 I've never observed it to happen except when 3 people have conspired with each other. 4 Q. If -- what do you think would have 5 happened had the key executives -- not all of the 6 executives, but the key executives had left 7 because, under your proposal, salaries were frozen 8 below market levels? 9 A. I'm sorry. Could you try that again? 10 Q. What do you think would have happened 11 to United if, consistent with your proposal, 12 salary levels were fixed at below market 13 compensation and not all of the executives but the 14 key executives left United? 15 A. Well, presumably, you would have ended 16 up going to the outside and hiring people, 17 probably for more money than you were paying these 18 people. But it's like in a poker game. I'm 19 throwing away a 2 and hoping for an ace. 20 Q. And you don't know whether you're 21 throwing away a duece and hoping for an ace. You 22 may be throwing away an ace and buying a duece; is 23082 1 that right? 2 A. I'm looking at the performance and 3 saying "you can't have a very good hand here." 4 Q. But you told me you did no study at all 5 to determine whether any of the senior executives 6 were responsible for the performance of the 7 company; isn't that right? 8 A. No, I did no study. But let me put it 9 to you this way. If they are not responsible for 10 the performance of the company, what in Lord's 11 name are we doing paying them all this money? We 12 could get a ribbon clerk to do the job. You're 13 either responsible, in which case I'm paying you. 14 Or if you want to play the argument of 15 unresponsibility, then we get some GS-3. 16 Q. Did you consider whether there might be 17 other factors such as factors in the Texas economy 18 that may have affected the performance of United 19 more than anything the senior executives did or 20 didn't do? 21 A. Well, as I said to you yesterday, it's 22 the executives' ability to understand the 23083 1 devastating effects of macro economic events. 2 They don't seem to have as much understanding when 3 those same events work for them, but I keep coming 4 back to the notion that I'm merely judging them by 5 the standards they set for themselves, not my own 6 standards. They said "We're tying ourself to 7 growth and book value. We're tying ourselves to 8 growth in the marketplace." That didn't occur; 9 so, there is no reward. 10 Q. Can you answer my question which is: 11 Did you consider whether the effect -- the Texas 12 economy had a greater effect on United's 13 performance than anything that the senior 14 executives did or didn't do in performing their 15 duties? 16 MR. SCHWARTZ: Asked and answered, Your 17 Honor. 18 THE COURT: Well, let's have it again. 19 A. I guess the answer to that is I don't 20 know. I'm sure the Texas economy had an 21 influence. I'm sure the interest rate 22 environments had a influence. Whether it was the 23084 1 predominant -- whether it was 90/10 or 10/90 or 2 40/60, I don't know. I grant you there's some 3 influence. 4 Q. You don't know whether you 5 considered -- my question is: Did you consider 6 it? You don't know whether you considered it or 7 not? 8 A. I think in the back of my mind, I 9 understood that the -- there was a devastating 10 mess going on in Texas. I didn't consider it in 11 any detailed way. So, therefore, I can't tell you 12 what percentage I would assign. But certainly, 13 clearly, there's some influence, yes. 14 Q. You go on to criticize on Page 8 of 15 your report Hewitt for adding a premium -- 16 A. Yes. 17 Q. -- to industry level standards; is 18 that right? 19 A. Yes. 20 Q. Isn't it the case, Mr. Gross, that 21 some -- excuse me -- Mr. Crystal, that some of 22 United's senior executives, in particular 23085 1 Mr. Gross, Mr. Berner, and Mr. Crow, were 2 performing broader duties than normal and didn't 3 Hewitt, in its report, note that they were 4 performing these duties -- that the duties that 5 they were performing were beyond the scope of the 6 benchmarked industry peers and that a premium 7 above the market was justified on that ground? 8 A. Well, first of all, I have to reject 9 totally the argument that the CEO was performing 10 above the normal duties because the CEO is the 11 CEO. There is no bigger job. So, you can't have 12 broader duties. 13 Q. I'm asking you whether Hewitt, in its 14 report, noted that? 15 A. Well, if they noted it, I would have 16 challenged it. The CEO cannot have broader duties 17 than the CEO. That's like saying the president of 18 the United States has more responsibility than the 19 president of the United States. It's a 20 circulator, a totality. It cannot be. 21 Now, I'll grant you within an 22 organization, Mr. Berner, for example, has been 23086 1 alleged to have had a richer job -- not in pay but 2 richer in responsibilities -- than your typical 3 chief legal officer. And maybe that was so. But 4 in response to that, I would note that Hewitt did 5 not apply this premium selectively to the various 6 executives. They applied it to everybody. The 7 whole structure got 15 percent. The rain fell on 8 the just and the unjust alike. 9 Q. Do you remember what titles Mr. Gross 10 held in 1987 and 1988? 11 A. I believe it was the CEO of both UFG 12 and USAT. 13 Q. Was he also the president of USAT? 14 A. He might have been. 15 Q. And do you remember that he succeeded 16 someone -- a man called Gerry Williams who had 17 been the president of United up to -- up to early 18 1987? 19 A. I don't recall that, no. 20 Q. If we assume that Mr. Gross had 21 succeeded to the duties of Mr. Williams, as well, 22 would that have any effect on your analysis? 23087 1 A. So, if I understand, Mr. Gross was the 2 CEO -- chairman and then he took on the 3 president's duties additionally? 4 Q. Yes. 5 A. Okay. That -- the argument there -- 6 it's an interesting argument. There are people 7 who argue passionately that if you're chairman of 8 the board and you don't have a president or, as is 9 commonly called, a chief operating officer, that 10 your position is more demanding and responsible 11 than if you did have a chief operating officer. 12 That argument is almost always made by people who 13 are chairman of the boards who do not have a chief 14 operating officer. 15 However, to shed some light on that 16 statistically, I analyzed the practices of more 17 than 300 companies in the last six months. Not in 18 preparation for this, but just out of curiosity. 19 And the question I asked myself statistically is: 20 Is there any evidence that a CEO who does not have 21 a chief operating officer receives more pay than a 22 chief operating officer who does have a -- chief 23088 1 executive officer who does have a chief operating 2 officer, and the machine came back and said there 3 is no significant difference in the pay between 4 the two groups, that you don't have a premium 5 because you don't have a chief operating officer. 6 It may be you could say that's unjust, but that's 7 the way it works. 8 Q. Now, the fact that there was no 9 statistically different relationship between 10 performance in compensation didn't deter you at 11 all from giving Mr. Gross a performance haircut; 12 isn't that right? 13 A. You can certainly see, you know, 14 some -- some inconsistency here where you say, 15 well, if you're going to draw everything from the 16 market and the market chooses not to pay for 17 compensation -- I mean for performance, then 18 should you not pay for performance? Should you 19 take a different position? And this is where I 20 part company with a lot of people, I think, where 21 I say there is a higher moral ground here which is 22 that if you have declared yourself to be a pay for 23089 1 performance company by your plans, by the fact 2 that your stock is -- I mean your pay is indexed 3 to the stock price, it's indexed to the book 4 value, well, then if you fail in those goals, you 5 should not pay yourself money. You should not 6 turn around and say, "Well, in the good times, I 7 look at the data and I use the data. In the bad 8 times, I take a different argument." I say you 9 should look and say, "I don't care whether these 10 people pay for performance or don't pay for 11 performance. We're not going to pay for 12 performance." 13 And you know, think about this. If we 14 take this position, what that will mean is in the 15 bad times, yes, we'll be paying less than 16 statistically these companies seem to be paying. 17 But because the other companies don't seem to be 18 paying for performance or putting their money 19 where their mouth is in the good times, we're 20 going to pay a lot more than them because by 21 definite significance, they don't pay for 22 performance. 23090 1 So, we'll beat them on the good times. 2 We have a more volatile pay package, more oriented 3 performance. And I do think if you're going to do 4 that, you have to make it worthwhile for the 5 players to say when the good times come, there 6 will be a good pot of gold here, not just a normal 7 pot. We've got to give you an incentive to play 8 this more risky game. 9 Q. Aren't you being inconsistent when you 10 gave Mr. Gross a performance haircut even though 11 the statistics didn't justify it? But you say, 12 "Well, we're not going to give him any credit for 13 being the president because the statistics don't 14 justify it"? 15 A. It's a good -- a good argument. I 16 mean, I see your point and I think that 17 intellectually, I score one for you on that one. 18 Q. Oh, thank you, Mr. Crystal. 19 A. However, I would look at it this way. 20 You know, it's sort of the argument of saying 21 you've got a chairman -- excuse me. You have a 22 chairman of the board, chief executive, and he has 23091 1 no president and you have a chairman who has a 2 president. Well, if a person of a higher level 3 job takes on the duties of a person with a lower 4 level job, you know, it's arguable whether you've 5 increased his job. I mean, it's sort of like 6 saying "which is the more responsible job?" 7 Albert Einstein who does Albert Einstein work for 8 eight hours or Albert Einstein who does Albert 9 Einstein work for seven hours and then spends the 10 last hour sweeping out his office, a lower-level 11 job? Would you pay more for the second Albert 12 Einstein model than the first? Many people would 13 say, "No, I wouldn't pay more. I'd rather him 14 concentrate on the higher-level job that he 15 already has." I suppose some people would say, 16 "Yes, it's diminishing in some way but he has to 17 spend more hours and it will save the shareholders 18 some money." And I suppose if someone mounted 19 that argument, you'd have to pay some attention to 20 it. I mean, I think I'd want to really look at 21 the duties and say, "Well, I'd like the proof that 22 you're really working much harder because of the 23092 1 absence of this position." 2 Q. Well, didn't Wyatt in its report 3 suggest that -- 4 THE COURT: You're saying Wyatt? 5 Q. (BY MR. BLANKENSTEIN) Wyatt. In the 6 Wyatt report -- 7 THE COURT: I thought you didn't want 8 that discussed. 9 MR. BLANKENSTEIN: Your Honor, he did 10 review the Wyatt report. I'm asking him about 11 whether there was information in the Wyatt report 12 that he took into account. He said his criticisms 13 of the Wyatt report were no different than his 14 criticisms of the Hewitt report. 15 THE COURT: All right. 16 MR. SCHWARTZ: Your Honor, I am going 17 to state my objection on the record. I was 18 precluded from asking questions regarding the 19 Wyatt report, and I specifically indicated when I 20 was responding to the objection by 21 Mr. Blankenstein that Mister -- that Mr. Crystal 22 had identified Wyatt in his answer to a previous 23093 1 question. And I was precluded from asking those 2 questions, and I think that if it's good for the 3 goose, it's good for the gander. I have to live 4 with your sustaining his objection, and I think he 5 should have to live by the same rules. 6 THE COURT: All right. Sustained. 7 Q. (BY MR. BLANKENSTEIN) Let's go back to 8 your report. 9 A. Yes, sir. 10 Q. Since the Wyatt report seems to be out 11 of bounds, you say on Page 8 that you would not 12 have agreed to restructure United's compensation 13 package to provide for a higher fixed pay and a 14 lower -- and lesser performance-based incentives; 15 is that right? 16 A. That I would not agree or that. 17 Q. That you wouldn't agree to restructure 18 United's compensation package to have more in the 19 way of fixed pay and less in the way of 20 performance-based incentives? 21 A. Yes. 22 Q. And that's really the heart of your 23094 1 disagreement with Hewitt, isn't it? 2 A. That's certainly one of the areas of 3 disagreement with Hewitt. I mean, a 15 percent 4 premium is a disagreement. By the way, there's 5 another thing I would happen to note since you 6 bring up the Hewitt report is that I read it again 7 today and I can find absolutely no reference in 8 the Hewitt report to the loan forgiveness of 9 761,000 for Mr. Gross which occurred some seven 10 months before they wrote the report. 11 Now, I would submit to you if Hewitt 12 did not know about that, their whole report is 13 worthless. And if they did know about it, why 14 didn't they talk about it? 15 Q. Well, let's deal with the objections 16 that you have in your report that you stated in 17 your report, not the ones that you came up with 18 last night. Okay? 19 It's your belief that when a company is 20 in trouble, the compensation package should have a 21 much smaller fixed compensation component and a 22 much larger percentage should be 23095 1 performance-based, principally in stock options. 2 Right? 3 A. That's the way I would have done it, 4 yes. 5 Q. Now, you note in your report on 6 Page 8 -- and it's the third bullet point -- that 7 Hewitt points out that in the financial services 8 industry, a more conservative approach is taken, 9 having more fixed pay and less performance-based 10 incentives and that tendency is more pronounced in 11 times of trouble, when a company is in economic 12 trouble; is that right? 13 A. That's what they say, yes. 14 Q. All right. Now -- well, while you 15 quarrel with the culture that produces that 16 result, you don't challenge the accuracy of 17 Hewitt's observation; isn't that right? 18 A. No, I don't challenge it. However, I 19 think it's an overdrawn generalization. I 20 wouldn't be at all surprised that when a company 21 gets into a mild amount of trouble, that there's a 22 tendency to try to protect the executives from too 23096 1 much of a downturn and that sort of thing. But I 2 would submit to you -- and I can't prove it to 3 you -- but that if you went and looked at 4 companies similarly situated to this company that 5 were in a headlong plunge into the abyss, that I 6 don't think you would find them increasing their 7 fixed cost. 8 Q. Now, you say here that perhaps what 9 Hewitt has found in the financial service industry 10 is true. Right? 11 A. Yes. 12 Q. That's what you say in your report? 13 A. Yes. 14 Q. And you didn't study to challenge what 15 Hewitt's conclusion was in that area based on its 16 investigation. Right? 17 A. No, I did not. 18 Q. You thought, however, that what United 19 should have done is to attract risk-taking 20 executives, to put together a package that would 21 have a relatively low fixed compensation component 22 and that the executives would get their reward 23097 1 through stock options; is that right? 2 A. That's the way I would have tried to 3 structure it, yes. 4 Q. Your ideal CEO for United was a 5 risk-taker, someone who's looking for a serious 6 upside if he could turn the company around; is 7 that right? 8 A. Yes. Big, big upside. 9 Q. But haven't you recognized, 10 Mr. Crystal, that most executives are fairly risk 11 averse and that not many executives would turn out 12 and accept the type of pay package that you would 13 put together? 14 A. No, not many would. But like the 15 Marines, we only need a few good men. One will do 16 it. If you get someone -- wimps need not apply. 17 We need someone who thinks. Now, you don't want 18 someone who's so dumb that he looks at this and 19 says, "I'm a risk-taker" but he doesn't understand 20 there's no way you're going to turn this around. 21 Now, it turns out maybe no one's going to take it 22 because they say this institution is too far gone 23098 1 to be saved. But if that's the case, we don't 2 need to talk about any of these compensation 3 programs, do we? 4 Q. Mr. Crystal, did you conduct a study to 5 determine whether there would have been any thrift 6 executive who would have accepted the type of 7 compensation package that you would have put 8 together? 9 A. No, I did not. 10 Q. So, you don't know whether there was 11 anyone who would have come forward to pick up the 12 flag at United and charge forward the way you 13 would want them to charge forward; is that right? 14 A. No. But as a believer in free markets, 15 I would say, "Well, it's worth a try." It's not 16 going to take that long to find out. If you don't 17 get any resumes in the mail in the next week or 18 ten days, then pragmatically, we're going to have 19 to do something different. 20 Q. Now, the risk-taking type of executive 21 that you would prefer, someone looking for a 22 serious upside, isn't that someone who's also more 23099 1 likely to manage United on a more risky basis even 2 within the constraints of federal regulation than 3 an executive whose compensation is fixed? 4 MR. SCHWARTZ: Your Honor, I think this 5 goes outside the scope of his qualification as an 6 expert. 7 THE COURT: Well, we'll hear whether it 8 is or not. 9 Do you have an answer? 10 A. I certainly grant you that if -- you 11 know, if you hired me at a very low salary, said, 12 "Look, we can't pay you roughly more than $300,000 13 a year and we're going to give you 2 million in 14 option shares and a chance to be very rich," one 15 of the strategies that might occur to me would be 16 to take some very risky decisions perhaps with the 17 investment portfolio or something like that. 18 However, first of all, I assume I'm 19 going to play by the rules of federal regulation 20 and I'm not going to depart from that, whatever 21 those rules are, and I'm not an expert in that. 22 But the other thing is there are other 23100 1 things that can be done to either decrease the 2 cost. We may need to do some layoffs. We may 3 need to close some offices. We may need to, you 4 know, take steps of automation, whatever, that 5 could perhaps decrease the cost. 6 And of course, there's always the 7 thought of trying to increase the revenues. I'm 8 not sure -- I don't know enough about the industry 9 to do that, but I grant you that it certainly 10 would occur to any normal person if you were 11 eliciting all the things I could do to turn this 12 around, some of them might involve a considerable 13 risk. 14 Q. (BY MR. BLANKENSTEIN) Do you have any 15 sense as to whether the federal regulators would 16 have been comfortable with a group of executives 17 running United who were more prone to take risks 18 in order to achieve the financial rewards that 19 below fixed pay type performance incentive pay 20 proposal that you prefer? 21 A. Well -- 22 MR. SCHWARTZ: Objection, Your Honor. 23101 1 Calls for speculation, and also it's outside the 2 scope of his qualifications as an expert. 3 THE COURT: Denied. 4 THE WITNESS: I'm sorry? 5 THE COURT: You may answer. 6 THE WITNESS: Sorry. Excuse me, Your 7 Honor. 8 Would you read the question again? I'm 9 sorry. 10 Q. (BY MR. BLANKENSTEIN) Well, do you know 11 whether the federal regulators would have been 12 comfortable with a group of executives who were 13 operating under a pay package system that made 14 them more prone to take risks in order to achieve 15 the financial rewards that that system created? 16 A. Well, in answering this, I may 17 demonstrate a level of naivete that will make the 18 objection actually a valid one, that I don't know 19 what I'm talking about. But I would assume that 20 if you stay within the envelope of federal 21 regulations and, you know, you keep away from the 22 fence officially where you're not seen to be 23102 1 climbing it every night, that the federal 2 regulators have nothing to say about what you're 3 doing because, by definition, you've met the 4 regulations. As I say, that may demonstrate a 5 level of naivete that shows that I never should 6 have been allowed to answer the question. I don't 7 know whether that -- 8 Q. So, you don't think -- well, would the 9 reaction of the federal regulators to the type of 10 proposal that you wanted to put -- that you 11 believed should have been put on the table, would 12 that be something that would affect your opinion 13 on this as to what sort of pay package or 14 structure of the pay package United should have 15 had? 16 A. Well -- 17 MR. SCHWARTZ: Your Honor, may I 18 request a continuing objection to the line of 19 questioning where he's asking about what the 20 demands of federal regulators were? 21 THE COURT: You may, yes. But it seems 22 to me it's a very relevant inquiry. 23103 1 MR. BLANKENSTEIN: Thank you, Your 2 Honor. 3 A. Again, could I just ask you to rephrase 4 it? I'm sorry. 5 Q. (BY MR. BLANKENSTEIN) Well, do you 6 think that how the federal regulators would have 7 reacted to the type of pay package you wanted to 8 put on the table, would that be information that 9 would be valuable to you in forming your opinion 10 in this case? 11 A. Well, I mean, I think it comes down to 12 this: If the federal regulators are going to 13 object to incorporating bonuses and paying bonuses 14 and forgiving loans and all this and then they -- 15 and they won't let you come up with a high risk, 16 high reward pay package, well, then they can't 17 have it both ways. It's one way or the other. 18 Q. My question was a simple one. Would 19 that very action have been important to you in 20 formulating your opinion in this case? 21 A. Well, it would have been important to 22 me to the extent that they don't like something 23104 1 I'm recommending, I'd have the clout to back it 2 up, yes. I mean, I'm a realist. 3 Q. Did you make any effort at all to 4 determine how the federal regulators would have 5 reacted to the type of pay package you put on the 6 table? 7 A. No. I mean, that would be an exercise 8 in archaeology. We're talking about something 9 that happened 12 years ago. 10 MR. BLANKENSTEIN: I have no further 11 questions of this witness. 12 THE COURT: Mr. Villa, you have some 13 questions? 14 MR. VILLA: I do, Your Honor. Maybe 15 ten minutes. 16 THE COURT: All right. 17 18 EXAMINATION 19 20 Q. (BY MR. VILLA) Good morning, 21 Mr. Crystal. 22 A. Yes, sir. 23105 1 Q. Did you make -- strike that. 2 In preparation for your testimony, you 3 reviewed the testimony of Mr. Berner. That's what 4 you told us yesterday. Right? 5 A. Yes, briefly. I mean, I skimmed it. 6 It was very long. I read some parts in detail, 7 though. 8 Q. In reviewing the testimony of 9 Mr. Berner, did you happen to review the portion 10 of the testimony in which he discussed the 11 reaction of the federal regulators to any officer 12 turnover at United and the fact that the federal 13 regulators were extremely critical of officer 14 turnover? 15 Do you recall that, sir? 16 A. I don't recall reading it. I mean, I 17 may have. I just don't recall it. 18 Q. So, you don't recall at Page 19818 -- 19 MR. SCHWARTZ: Do you want to give him 20 a copy of the transcript? 21 Q. (BY MR. VILLA) I'm just going to read 22 you a quote from the transcript. At Page 19818, 23106 1 the testimony -- actually, the exhibits that are 2 read into the record where it says "The examiners 3 have noted the report of the continuing turnover 4 in management and directors since the last federal 5 examination of May 27, 1986." 6 A. I'm sorry. I'm just not quite there 7 yet. I'm not used to these types of documents. 8 Just one second. 19818. 9 Q. It's in the lower left-hand corner of 10 the page. 11 A. (Witness reviews the document.) 12 THE COURT: Would you give the page 13 number again? 14 MR. VILLA: I'm sorry, Your Honor. 15 19818. 16 THE COURT: Thank you. 17 MR. VILLA: It starts at Line 7. 18 A. This is a -- this is Mr. Berner's trial 19 testimony? 20 Q. (BY MR. VILLA) This is his trial 21 testimony in which he testified at some length 22 about the criticisms in the federal examination 23107 1 reports of employee -- of officer turnover during 2 the year 1988. 3 Do you remember that now, sir? 4 A. Well, I see it now, yes, right. 5 Q. Now, sir, your idea was "Let's 6 implement this new compensation plan and it's high 7 risk high reward. And if the people who were 8 there today, if they don't want to take it, they 9 can just all walk out and we'll see if we can get 10 somebody else in here, a few good men." Right? 11 That's your theory? 12 A. That would be the implication, yes. 13 Q. And recommending this Crystal plan, did 14 you take into consideration that United was 15 receiving criticism from its examiners because it 16 had excessive officer turnover and they wanted 17 them to keep their officers? Did you take that 18 into consideration, sir? 19 A. No, sir. 20 Q. You didn't even know about it, did you, 21 sir? 22 A. I probably didn't, no. 23108 1 Q. I figured that. 2 Now, sir, in talking about your -- in 3 your testimony today, you made some disparaging 4 remarks about my clients. I represent four of the 5 former officers. You have called them -- I think 6 in your testimony you've likened them to felons. 7 You've likened what they have done to triple 8 murder, rats leaving a sinking ship. Today you 9 called them a duece, and you were trying to get 10 them -- hoping they would trade them for an ace. 11 Do you remember all those comments? 12 A. Well, I didn't necessarily direct them 13 at your clients. But if you feel the shoe fits, I 14 guess you're going to take it that way. 15 Q. I'm not saying the shoe fits, sir. 16 A. I don't know enough to use these -- 17 apply these labels to people. Like if I say a 18 triple murder is like triple murder of the 19 repricing, I don't know who exactly made the 20 decision to do that. But I'll grant you I do 21 engage in a certain amount of hyperbole and 22 metaphors. And so, I think you have to get a 23109 1 baseline on me and then you're all right. 2 Q. Now, sir, you are basically engaging in 3 hyperbole and metaphor at the expense of my 4 clients, some of the senior management of USAT, 5 because you feel that USAT failed -- fared poorly 6 and, consequently, management must have failed in 7 its job. Right? 8 A. I'm not sure that management -- you 9 could even argue that management fails in its job. 10 I'm merely saying that management hooked its star 11 to macro economic measures of performance and 12 said, "That's how we're going to be rewarded" and 13 then the measures failed. And I just simply say, 14 well, you know, if you were thinking about 15 something different, if you wanted to index your 16 options to the Texas thrift stocks or you wanted 17 to say our growth in book value should be relative 18 to that of other Texas thrifts where we, in fact, 19 had negative growth could have caused us to get 20 big bonuses because we didn't drop as much as they 21 did, most economists would have applauded you for 22 doing that. They would say yeah, that's the way 23110 1 you should pay people. Hardly anyone does. And 2 I'm merely saying if you hook your star to macro 3 economics, then, you know, you live by the sword, 4 you die by the sword. 5 Q. Well, sir, you, as we've talked about 6 just a moment ago, you read Mr. Berner's 7 testimony. So, let's take a look at the evidence 8 in the record that you read regarding the 9 performance of management. And in doing that, 10 sir, we're going to read the evaluations of 11 management by the supervisory agent who's the 12 principal regulator for United Savings Association 13 of Texas, Neil Twomey. We're going to read the 14 testimony regarding the views of Mr. George 15 Barclay, who is the senior regulator for this 16 entire region of the United States and we're going 17 to read the testimony or the evidence that relates 18 to the views of the examiners. And let's see 19 whether you remember that and whether that made 20 any -- played any part in your consideration of 21 calling my -- the people I represent a duece in a 22 pack of cards. 23111 1 Would you turn to Page 19624. It 2 starts on 23 and goes to 24, and I'll read it for 3 you. 4 Did you take into consideration the 5 following comment? Quote, "Neil told me that he 6 thought our middle management was excellent," Neil 7 being the supervisory agent. 8 A. I'm sorry. What page? 9 Q. 19623 at the bottom. It starts at the 10 bottom of 23, and what I'm reading is just the 11 carryover on 24. "Neil, who's the supervisory 12 agent, told me that he thought our middle 13 management was excellent and our accounting and 14 financial staff is extremely solid. Perhaps we 15 should tell Jim Wolfe this. And although top 16 management lacks some S&L experience, Dallas was 17 basically pleased." 18 Did you take that into account when you 19 made your judgments about the management of United 20 Savings, sir? 21 A. My response to that is that that's 22 certainly a valid input, but I'm looking at this 23112 1 from the standpoint of the shareholders of the 2 company. 3 Q. I asked you a question, whether you 4 took it into account. I don't want you to explain 5 yet. Let's just ask whether you took it into 6 account. Then if you took it into account, I'll 7 see how it affected your judgment. 8 Now, sir, did you take it into account 9 in making the criticisms of the people I 10 represent? 11 A. No, not in any fundamental way. 12 Q. Thank you, sir. 13 MR. SCHWARTZ: Your Honor, I think he 14 should be able to explain his answer. 15 MR. VILLA: He should give his answer 16 first. 17 THE COURT: Do you want to explain? 18 A. Yes. Again, I may be -- stand accused 19 of naivete, but I do not think the federal 20 regulators have as one of their primary purposes 21 to maximize the shareholder returns of the 22 institution. Rather, they have as their primary 23113 1 purpose to preserve the safety and soundness of 2 the institution. 3 So, in this case, they wouldn't and 4 shouldn't be concerned about -- about the 5 shareholders' interest. I'm approaching this from 6 a shareholder's standpoint of saying that, again, 7 these people made a pact with the shareholders 8 that they would take rewards under certain 9 circumstances and the circumstances did not obtain 10 and now they should not have the rewards. Again, 11 their bet and they lost. 12 Q. (BY MR. VILLA) I'd like you to turn to 13 Page 19686. 14 A. 19686. Okay. 15 Q. And it's at Line 17. Did you take into 16 consideration the following views of the 17 supervisory agent? Quote, "He said that 18 Jenard Gross was considered in the highest esteem. 19 Twomey also said that the Dallas Bank was 20 concerned about the operating management at 21 United. He said that Jenard Gross was considered 22 in the highest esteem and that the other members 23114 1 of United's management team were also thought of 2 highly. However, he said that the senior 3 management of the Dallas Bank was concerned that 4 there was no strong S&L-type between Gross and 5 this other management. He suggested we consider 6 looking for an EVP level chief operating officer." 7 Did you take that into consideration? 8 A. Doesn't this fall under the category of 9 hearsay? I mean, he's telling me -- 10 Q. Just one lawyer here, sir. 11 A. If it was true, you know, I didn't take 12 it into consideration. But my question is I'm 13 hearing this from somebody else about Mr. Twomey. 14 THE COURT: So, if it's hearsay, you 15 wouldn't have considered it? 16 THE WITNESS: Well, I mean, if this was 17 important to me, the first thing I would have said 18 is Mr. Berner is in an obvious conflict of 19 interest when it comes to these issues because his 20 own pay is at stake. 21 So, I then would have gotten out the 22 trial testimony of Mr. Twomey to see whether he 23115 1 affirmed whether this was true. But again, my 2 answer here is that, let's grant it is true and 3 that Mr. Twomey thinks the management is 4 wonderful. And if that's so, I keep saying, what 5 am I doing here? I mean, why am I testifying for 6 the government if they think the management is 7 wonderful? It's sort of a disconnect. 8 Q. (BY MR. VILLA) Well, let's turn now to 9 Page 19748. 10 A. Yes, sir. Do you have that in front of 11 you, sir? 12 A. Yes, I do. 13 Q. Now, this is a reference to Mr. George 14 Barclay, who's the senior regulator for this 15 entire region of America. 16 A. Right, uh-huh. 17 Q. This is a quote from a memo of a 18 conversation that Mr. Barclay had with the senior 19 management of United. Quote, "Mr. Barclay stated 20 that it was his understanding that FSLIC was 21 intrigued with the understanding of a real estate 22 deal and that the report was generally good on 23116 1 United's management." 2 Do you see that, sir? 3 A. I do see that. 4 Q. Now, did you take that into 5 consideration when you made the criticisms of the 6 management of United's performance? Did you take 7 that view into consideration, sir? 8 A. No, I didn't take it into 9 consideration. Once again, I find it a little 10 bit -- even if I looked at it, it's a little bit 11 ambiguous that, yes, he seems to be quite enamored 12 by real estate deals and that the report was 13 generally good on United's management. Is that 14 the real estate report? 15 Q. Excuse me, sir. If you didn't take it 16 into consideration, I don't think there's any 17 reason for you to comment on it now. 18 A. Okay. 19 Q. Let's turn now to Page 19821. And 20 let's look at Line 15. And this is a quote from 21 the examination report. It says, quote, "USAT's 22 current management consists of seven executive 23117 1 vice presidents, 12 senior vice presidents, and 54 2 vice presidents. This group appears to be 3 motivated and skillful in their respective areas," 4 close quote. 5 Do you see that? 6 A. Uh-huh. (Witness nods head 7 affirmatively.) 8 Q. Now, sir, did you take that into 9 consideration when you made the disparaging 10 comments about the management of United Savings 11 Association of Texas? 12 A. No, I did not. 13 Q. Now, sir, in your view, your view of 14 management, the issue with management is 15 performance. Right? Performance, that's the 16 issue. Right? 17 A. The issue is more fundamental than 18 that. I think you should be judged by the 19 standards you set for yourself as long as the 20 standards bear some resemblance to what the 21 shareholders want and they are reasonable 22 standards. And whatever they are, then you should 23118 1 be judged by them. 2 Q. What we've read here, these statements, 3 these favorable statements about the management of 4 United, that doesn't change your conclusions about 5 whether or not United's management performed? 6 A. Well, let me put it to you this way. 7 Q. Give me a "yes" or "no" and then 8 explain your answer. 9 A. Wait a minute. Ask me the question 10 again, please. 11 Q. Does what I have told you, what I have 12 read you here today, change your opinion on the 13 question of whether or not United's management was 14 performing properly? Give me an answer "yes" or 15 "no" and then explain it. 16 MR. SCHWARTZ: Objection, Your Honor. 17 Mr. Villa's gone to some length to demonstrate 18 that Mr. Crystal didn't take into account 19 Mr. Berner's opinions of what Mr. Twomey may or 20 may not have said. Now he's asking him to draw a 21 conclusion based on that complete assumption. 22 MR. VILLA: That's exactly what I'm 23119 1 doing. 2 MR. SCHWARTZ: And I think that's an 3 improper hypothetical. 4 THE COURT: All right. 5 MR. VILLA: In trial tactics, that's 6 absolutely proper. He's an expert. It's a 7 hypothetical. If he had done his homework and 8 read this, he could have answered the question 9 directly but he didn't. 10 MR. SCHWARTZ: Objection, Your Honor. 11 I'm going to move to strike counsel's comments as 12 far as what Mr. Crystal -- 13 THE COURT: All right. Let's have an 14 answer. 15 MR. SCHWARTZ: I'm going to move to 16 strike counsel's comments concerning what 17 Mr. Crystal did. 18 THE COURT: All right. 19 Q. (BY MR. VILLA) Mr. Crystal. 20 A. Could you ask me the question again? 21 Q. Yes, sir. Let's assume that you had 22 read all that and let's further assume that all 23120 1 those views are accepted by the Court as being a 2 truthful and accurate rendition of what the 3 regulators were saying at the time. 4 Would that change your view as to the 5 performance of United's management? 6 A. Well, it would certainly buttress the 7 view that -- when you have regulators making these 8 statements -- that the macro economic events which 9 befell this organization were of much more 10 importance than perhaps I would have earlier 11 thought because, in effect, you have the 12 regulators saying these people are good performers 13 pretty much, that sort of statement. And yet, you 14 see that the stock returns and all other 15 indicators going down. So, that's the sort of 16 environment where you might expect to see some 17 very heavy macro economic events. 18 And so, from that, one could say, well, 19 to the extent that's really true -- and let's 20 say -- let's say you were given all the time you 21 needed to decide whether these -- who was to blame 22 for this debacle. You know, was it the officers 23121 1 themselves? Was it the macro economic events, the 2 stock market crash? What percentage liability 3 would you assign to each? It might well be that 4 if I had all the time, I would come back and say, 5 you know, actually, these people aren't dueces. 6 You know, maybe there's even some picture cards 7 here. You know, they just had a real bad time of 8 it. 9 But having said that, I'd turn around 10 and say, but again, they hitched their star to 11 macro economic events. And when those macro 12 economic events went against them, they took 13 actions which, in my mind, did not make them 14 exactly strong role models for fair play because 15 they didn't take their lumps. They didn't take 16 their lumps. They merely said, somehow now we've 17 got our punch pile, wash basin up. It's not our 18 fault. It's Alan Greenspan's fault. It's the 19 Texas economy's fault. The punch pile act was not 20 regarded highly in the scriptures. 21 Q. Your analogies are perhaps a little 22 tart for the situation, too? 23122 1 A. Probably. 2 Q. Probably. Now, sir, so, is the answer 3 to my question yes, it would have changed your 4 view? You know, I asked you questions -- 5 A. As to performance, yes. 6 Q. As to performance, yes. Okay. 7 A. Certainly -- I mean, obviously, these 8 people know more about what's going on than I 9 would have just looking at documents. So, I would 10 say yeah, there's some people outside who seem to 11 think these people are doing a good job. And, 12 therefore, if you -- if you're being commissioned 13 to say did these people perform or not perform, 14 you need to take that into account. 15 Q. Now, sir, you raised an interesting 16 question, which is the macro economic climate. 17 Could you give him a copy of T8142? And it's in 18 evidence at Tab 1450. 19 Sir, I've placed before you what's 20 called the S memo in this case. It's the 21 memorandum by which the federal regulators placed 22 United Savings into receivership. Unfortunately, 23123 1 you said you didn't have an opportunity to learn 2 much about the macro economic climate. 3 A. Yes. 4 Q. So, I'd like to direct your attention 5 to Page 14 of this document under "condition of 6 the industry." 7 Do you see that, sir? 8 A. Page 14? Okay. This is at the bottom. 9 Yes, I do see it. 10 Q. Flip over to Page 15, which is the 11 condition of the industry in Texas. 12 A. Uh-huh. 13 Q. Do you see that, sir? 14 A. "The State of Texas had 281 15 institutions"? 16 Q. Yes. It says, quote, "The State of 17 Texas had 281 institutions of which 134 or 18 37.01 percent reported insolvency as of 19 September 30, 1987. Assets of the insolvent 20 institutions totaled $37.1 billion for 21 37.6 percent of the total assets of $98.7 billion 22 for the state. As of September 30, 1988, 105 or 23124 1 40.3 percent of the total 244 institutions 2 reported insolvency. Due to the increased number 3 of insolvent institutions, assets of these 4 institutions increased to $43.7 billion as of 5 September 30, 1988, or 43 percent of the total 6 assets of $108.5 billion for Texas. For Texas 7 institutions, total regulatory capital of negative 8 $4.8 billion or negative 4.66 percent of total 9 liabilities as of September 30, 1987 increased to 10 negative $6.1 billion or a negative 5.3 percent of 11 total liabilities as of September 30, 1988." 12 Do you see that, sir? 13 A. Yes. 14 Q. Now, assuming that the federal 15 regulators did have a fairly accurate view of the 16 macro economic conditions in Texas, which was what 17 led me to show -- your answer which led me to show 18 you this, is it possible, sir, that United's 19 performance was, in fact, attributable to a 20 catastrophic situation in Texas in which all the 21 Texas banks and thrifts were decimated? Is it 22 possible, sir? 23125 1 A. No, it's not possible because the 2 median institution in these statistics was viable. 3 I mean, you know, I recognize your aggregate 4 negative net worth. I know how we got it there. 5 Obviously, what that says to me is those that 6 failed were awfully big. But the majority of the 7 institutions were not failing their capital 8 according to these statistics, which means there 9 were some good people around, really good people 10 around. And in an economic environment such as 11 you described, they must have been geniuses. 12 Q. Sir, when an institution fails -- do 13 you know, sir, fewer institutions in 1987 -- in 14 1988 than 1987? 15 A. Could you give me that cite? I don't 16 quite -- they had 281 institutions, yes, out of 17 705. I'm not sure I see where you're -- 18 Q. Okay. The State of Texas had 281 19 institutions as of September 30, 1987. 20 Do you see the first line? 21 A. Yeah. 22 Q. About halfway down, it goes to 23126 1 September 30, 1988. There were -- 2 A. 244. 3 Q. 244. 4 A. Yeah. 5 Q. Now, this is -- have you ever heard -- 6 I'm trying to remember. You probably know the 7 word. It's kind of a loser bias. When the 8 institution fails, when it goes below zero, it 9 drops off and goes into receivership and all we 10 have left are the few that are surviving and they 11 are all going into receivership. 12 Now, sir, is it possible that what we 13 are seeing here is that the savings and loan 14 industry of Texas is going down into receivership 15 through the mid-1980s -- perhaps you heard about 16 it -- and that the few remaining ones, some of 17 them are still above water. 18 Is that possible, sir? 19 A. Well, there's still remaining 244. And 20 only 105 of those are reporting insolvency. Now, 21 if I increase the 105 by the difference between 22 244 and 281 -- so, I'm going to get about 142 -- 23127 1 I'm going to get up to about half of the 2 institutions are insolvent. But the point is, you 3 know, I take from that great comfort. There's 4 some people out there who knew how to run a 5 savings and loan in Texas in a beleaguered 6 economy. Apparently not -- they weren't working 7 for this company, but they were working for 8 others. 9 Q. How many of the ten largest savings and 10 loans in Texas survived without federal assistance 11 or a merger during the years 1985 through 1990? 12 A. I have no idea. I'm really responding 13 to your selected statistics, which I assume are 14 the best statistics you've got to show me. 15 Q. Sir, would you be surprised if the 16 answer was one? 17 A. That one survived? 18 Q. One out of the top ten. 19 A. I wouldn't actually be surprised 20 because I'll tell you what. I'm very learned in 21 numbers. And because I'm seeing an aggregate of 22 all the institutions had a net worth of negative 23128 1 6.1 billion, as I said you to earlier in my 2 response, that had to mean that the ones that went 3 down -- you know, the bigger they are, the harder 4 they fell. It was the big ones who went down. 5 So, maybe if you want to compare USAT to just the 6 big ones, maybe there's something to talk about 7 there. 8 Q. Now, sir, you were at some point 9 employed by Forbes Magazine. Right? You've told 10 us about that. 11 A. Forbes? Fortune. 12 Q. I bet you read the competitors, too. 13 You read the competitors, Forbes? Did you read 14 Forbes Magazine? 15 A. Very rarely. I mean, I had one article 16 published in Forbes, but I don't actually read 17 business stuff. I find it terribly boring. 18 Q. We're handing you what's been marked 19 Exhibit B2299, which is in evidence at Tab 1696. 20 This is an article from Forbes Magazine right -- 21 dead set in the middle of this period, July 11, 22 1988. And it's an article that was introduced 23129 1 during the testimony of Art Berner. And, in fact, 2 we read the same lines in the Berner testimony 3 that I've got here that you skimmed that I'm about 4 to read to you, sir. 5 A. Okay. 6 Q. Now, if you look down in the middle of 7 the second column -- 8 A. Is this the first page? 9 Q. First page. The bottom of the second 10 column. There is a quote that's attributed to 11 Mr. George Barclay, the president of the whole 12 region here. 13 A. Yes. 14 Q. And the quote is, "In Texas, everything 15 is relative. You can have well-run, well-managed 16 institutions down here with negative net worth. 17 Even if you have zero percent capital on a 18 relative basis, you may be okay." 19 Do you see that, sir? 20 A. Yes, sir. 21 Q. Does that change your view as to 22 whether or not -- first of all, did you take that 23130 1 into consideration in drawing any of your 2 conclusions? 3 A. No. 4 Q. And does that change your view at all 5 with respect to the performance of United's 6 management? 7 A. I think here I have to put -- I'm 8 really going beyond any knowledge base that I 9 think I have. I mean, I see him pointing to one 10 measure of performance and making a statement. 11 And it may be quite true, and I don't know if 12 there are others. I'm just beyond my depth -- I'm 13 sorry -- to answer the question. 14 MR. VILLA: Your Honor. I have about 15 five more minutes. If the Court will indulge me, 16 I will finish right now. 17 THE COURT: All right. 18 MR. VILLA: I know that I've gone well 19 beyond my ten minutes. 20 Q. (BY MR. VILLA) Now, sir, in your 21 transcript yesterday -- and we've got Page 22084 22 of your transcript. I think -- I'm sure I got the 23131 1 number wrong. 22824 of your transcript. I'll 2 just read you the question and the answer and then 3 we'll talk about it. This is a question that was 4 asked to you by Mr. Schwartz. 5 Question, "Was the fact that you 6 considered the company" -- 7 MR. SCHWARTZ: Counsel, what line are 8 you looking at? What line? 9 MR. VILLA: Line 3. 10 MR. SCHWARTZ: Yes, sir. 11 Q. (BY MR. VILLA) Question, "Was the fact 12 that you considered the company was in extremis 13 crucial to your analysis?" 14 Answer, "Yes." 15 Do you recall that, sir? 16 A. Yes, sir. 17 Q. And you defined "in extremis" as a 18 person so close to death as to render his chances 19 of resuming viability as being very low. 20 Do you remember that? 21 A. Yes, I do. 22 Q. In fact, you made some reference to 23132 1 potential analogies to medicine. Right? 2 A. That was -- 3 Q. Etiology could have come from medical. 4 Right? 5 A. Yes. 6 Q. In extremis, moribund, you had some 7 Latin words in there? 8 A. Yes. 9 Q. Lawyers aren't the only ones who know 10 Latin words. Right, sir? 11 Now, in extremis, moribund, they talk 12 about people who die. Right? 13 A. Uh-huh. (Witness nods head 14 affirmatively.) 15 Q. The opposite of somebody who dies is 16 somebody who survives, a survivor. Right? 17 A. Uh-huh. (Witness nods head 18 affirmatively.) 19 Q. Now, Mr. Crystal, if the Court finds as 20 a fact in this case that at the time that these 21 employment arrangements were entered into that you 22 criticized that the board and the management of 23133 1 USAT reasonably believed that they were going to 2 be survivors, that USAT was going to be a 3 survivor, that would eliminate the crucial basis 4 for your analysis, wouldn't you agree, sir? 5 A. No, I would not agree. 6 Q. It was a crucial basis for your 7 analysis when Mr. Schwartz asked you the question. 8 But when I asked you whether, if the Court finds 9 that they are not in extremis, that they are not 10 in extremis, it's no longer a crucial basis? 11 A. No. I think my answer here, as I think 12 I probably said yesterday, is that the idea of 13 rewarding on the comma, as the expression is used, 14 to say we're going to reward you ahead of time is 15 puzzling to me. If people reasonably believed 16 that we are going to go into the Southwest Plan, 17 that meant they thought there was good probability 18 of that. Then it wouldn't have been so untoward, 19 I think, to say to them, "Look. There's a good 20 possibility -- we all believe there is a good 21 possibility and we're going to set forth certain 22 incentives. And if this happens, then, you know, 23134 1 we're going to be able to give you some money 2 under circumstances where we have saved the 3 institution." But we're not going to give you 4 money in advance of that because even if you 5 reasonably believed it was going to happen, I 6 didn't hear you tell me that people thought it was 7 100 percent sure. 8 Q. Well, is it possible -- let's start off 9 with the question -- there's really two issues 10 here. 11 First of all, are you withdrawing your 12 answer to the question that Mr. Schwartz asked you 13 that it's crucial to your opinions in this case 14 that United was in extremis? Are you changing 15 your testimony on that be point? 16 A. No, not at all. 17 Q. Okay. 18 A. I believe it was in extremis. I 19 believe like some people who are close to dying, 20 they think there's some possible salvation out 21 there. 22 Q. I see. Okay. 23135 1 A. And if it came, then we could do 2 something; but we don't have the money now. 3 That's what I think I keep saying. 4 Q. Is there a distinction between the 5 senior people at United, knowing of the 6 possibility -- indeed, the statements that they 7 are going to be a survivor and the perception of 8 the junior and mid-level executives and even some 9 of the senior executives that they might not be? 10 Can you admit that that could happen? 11 A. Well, I've lost you totally on the 12 question. I'm sorry. 13 Q. Let's look at -- let's look at a 14 different issue now. Let's look at the same 15 issue. 16 Do you know, sir -- did you note in the 17 testimony of Mr. Berner the fact that he testified 18 probably a dozen different times about statements 19 and representations made to him by the federal 20 regulators that United would be a survivor? 21 Do you remember seeing that? 22 A. I do remember seeing different 23136 1 statements that -- yes. 2 Q. Well, let's take a look at a couple of 3 them here. And I do promise to get you off in 4 three more minutes. 5 Let's look at Page 19620. It starts at 6 the bottom. 7 A. I have it, yes. 8 Q. And there, it says, quote, "Twomey told 9 me that United would be -- will be a major 10 factor" -- it goes over to 21 -- "will be a major 11 factor in the process." 12 A. Yes. 13 Q. "United will be a survivor, but we can 14 expect that during the first quarter of 1988, we 15 will be requested or told to take on one or more 16 additional institutions." 17 Do you recall reading that, sir? 18 A. I think I do recall reading that. 19 Q. You do recall that? 20 A. Uh-huh. (Witness nods head 21 affirmatively.) 22 Q. Let me direct your attention to 23137 1 Page 19818. 2 A. 19818, you say? 3 Q. I think we'll skip that. Hold on. 4 Let's go to Page 19740. 5 A. Okay. 6 Q. And in there is described -- you can 7 look at 740 and 741 and actually 742. In there, 8 it's described Houston Chronicle articles that 9 were published during this time period saying that 10 United is expected to be a survivor. It's going 11 to go into the Southwest Plan and it may be the, 12 quote, "lead institution into which smaller 13 institutions and thrifts may be put." 14 A. I'm sorry. I'm not quite sure where 15 you are. 16 Q. Well, it starts off with the 17 description of articles. It starts on 19740, 18 Line 4. And then the quotes from the articles are 19 on 41 and 42. 20 A. I see, yes. Oh, I'm sorry. I got it 21 mixed up with Hewitt here. I couldn't figure that 22 out. Okay. It came from Hewitt. Okay. (Witness 23138 1 reviews the document.) Okay. 2 Q. Do you see that, sir? 3 A. Yes, I see it. 4 Q. Do you recall that in making your 5 judgment that United was in extremis, moribund, on 6 the verge of death with virtually no chance of 7 survival, did you take into consideration the fact 8 that even the popular press, the Houston 9 Chronicle, was writing articles about how United 10 was going to be a survivor? 11 A. I guess I didn't give a lot of credence 12 to it because I know the outcome of this drama. 13 The institution died. 14 Q. If we knew the outcome of everything, 15 sir, we'd all be rich, wouldn't we? 16 A. That's right. But if I try to put 17 myself back in that time frame, if you ask me 18 that, you say yes, certainly there are people -- 19 you read me statements that there's some optimism 20 of a favorable resolution here. But I still come 21 back to saying that we could have handled that 22 from a compensation design standpoint by 23139 1 structuring rewards that when the ship comes in, 2 that's when we get the brass band out and the 3 ladies with the carnation lei around them and 4 we'll have a great celebration. But not until the 5 ship shows up. 6 Q. You know, I was interested -- you know, 7 you say it's easier for you to make these 8 judgments because you know now what happened. 9 When these people were making the 10 decisions, did they have the opportunity of ten 11 years' hindsight? 12 A. No. Obviously, they didn't. They 13 certainly had some evidence here to have some 14 optimism. I can't tell you what was in their real 15 hearts. Maybe I can tell you in some ways because 16 they seem to be very concerned about severance 17 arrangements, for example. That doesn't -- and 18 employment contracts, protection. That doesn't 19 suggest to me people who are -- who are not 20 worried about some terrible event happening to 21 them. On the contrary. It suggests to me people 22 who, even after reading the Houston Chronicle, are 23140 1 looking in the mirror and saying, "Hey, this thing 2 can go belly up yet and I'd better take some steps 3 to protect myself." 4 Q. Do you have life insurance? 5 A. No. I don't need it. I'm 64 years 6 old. 7 Q. Do you have disability? 8 A. Medical insurance. 9 Q. I'm sure you hope nothing terrible will 10 happen to you, but you do take protection. You do 11 protect yourself and your family, don't you, sir? 12 A. Yes, as much as I can, sure. 13 Q. Let's look at Page 19781. This will be 14 the last document, the last one I'll show you. 15 MR. SCHWARTZ: Page again. 16 MR. VILLA: 19781. 17 A. Right. I have it. 18 Q. (BY MR. VILLA) Line 13. This is a 19 reference to Neil Twomey, the supervisory agent. 20 "Neil flatly stated that after we had hired 21 Connell, we would have, quote, 'satisfied all of 22 the requirements that the Federal Home Loan Bank 23141 1 of Dallas had concerning United,' close quote, and 2 that United would be -- would have no impediments 3 to participating in the Southwest Plan." 4 Do you see that, sir? 5 A. Yes, I see it. 6 Q. Do you remember reading that in 7 reaching your judgments that United was in 8 extremis, moribund, and had no chance to survive? 9 A. Well, I think you're dealing with two 10 issues here. I mean, United was in extremis in 11 terms of its financial statements. Now, whether 12 there was -- just like the patient on the 13 heart/lung machines, whether there's some 14 possibility that we're going to save the patient 15 is stated here, yes, we're in extremis. There is 16 no question of that in my mind. But it does look 17 like maybe there's some procedure that could save 18 this patient. But once again, I would suggest to 19 you that if the people involved, the executives, 20 really believe that in their deepest hearts, they 21 wouldn't be bothering about severance pay. They 22 would say, "How about a million option shares? 23142 1 Let's really load up here because this stock's 2 going to turn and here's our chance to make 3 money." All their behavior suggests that deep 4 down in their hearts, they were looking for the 5 ship to sink. 6 Q. Maybe, sir, they had families that they 7 just couldn't risk everything. Maybe they just 8 couldn't throw the dice. Right? 9 A. Well, but see -- but again -- 10 Q. Isn't that a possibility, sir? 11 A. It's a possibility. But by your using 12 the analogy of throwing the dice, you've admitted 13 that the probabilities there could go against 14 them. It wasn't so all-fired optimistic as you 15 suggest. You could have come up with a 16 combination that wouldn't have been a loser. 17 So -- 18 Q. So, sir, the world is divided into 19 people who are willing to take these risks and the 20 rest of the executives -- and you have told us 21 that thrift executives, bank executives, by and 22 large and historically have not been big 23143 1 risk-takers. Right? 2 A. No, they haven't historically. 3 Q. Okay. And under the circumstances, 4 though, you think what the management and the 5 board of United should have done is to push down 6 fixed salaries, hold out a large carrot at the end 7 of it, and say to the management, "We hope you-all 8 take it. And if you don't and you-all leave, 9 well, we hope we can be able to get other people 10 to fill in for you quick." Right? That's 11 basically what your recommendation would have been 12 had you been hired, Graef Crystal, as consultant 13 extraordinaire. Right? 14 A. I would have directed that strategy to 15 upper management. I wouldn't have tried that 16 strategy with the bottom management; but I would 17 have said to them, "We are at a time when we don't 18 have the cash to pay you. We have to take some 19 steps to protect the financial viability of this 20 institution. But we want to give you a chance to 21 recover and then some. And you know the Houston 22 Chronicle says that it's a slam dunk. We're going 23144 1 to save this institution. So, the probabilities 2 are extremely low that anything's going to happen; 3 so, take a bet with us. Take a chance." You 4 know, as I say, not everybody's going to all quit 5 at once or we're going to have a different trial. 6 Q. Right. If everybody quits at once, 7 then the institution fails immediately? 8 A. Then there will be a trial for 9 conspiracy. It can't happen without people 10 talking to -- 11 Q. I was interested in your statement that 12 they don't have the money to pay it. Do you know 13 what United's -- how United compared to its peer 14 group in terms of the percentage of its revenues 15 that were devoted to employee compensation? 16 A. No, sir, I don't. 17 Q. Would it surprise you if they were at 18 the absolute bottom -- that is to say, they were 19 at the lowest point of their peer group? They 20 paid less on employee compensation than the other 21 major thrifts in Texas. Would that surprise you, 22 sir, either on the basis of revenues or assets? 23145 1 That comes as a complete surprise to you, doesn't 2 it, sir? 3 A. Mildly surprising. But of course, 4 that's an overall statistic for all the employees 5 which doesn't speak to the issues that I'm 6 addressing which is the pay of the top five or six 7 or ten people. You know, that could merely say 8 that, you know, we have made some economies here 9 but we've made them out of the hide of the 10 lower-level employees. 11 Q. Or it could mean that they took ten 12 jobs and broke them down into seven. Right? 13 A. Could be. 14 Q. At the higher levels. Right? 15 A. Again, your statistics, I don't believe 16 was refined to the higher level. So, I don't know 17 that we can say that. 18 Q. No. You gave as one hypothesis the 19 reason that they are wrenching it out of the hide 20 of the lower-level employees. And another equally 21 reasonable hypothesis is that there are fewer 22 senior people doing the same jobs of more senior 23146 1 people at other institutions; isn't that right? 2 A. I submit to you that's a far less 3 reasonable hypothesis than my hypothesis for the 4 simple reason that the senior payroll, as in most 5 institutions, is a relatively small fraction of 6 the total. 7 So, if you give me a total number and 8 tell me that they are way below, then it has to be 9 coming out of the ordinary employees which doesn't 10 necessarily mean they are underpaid. It could 11 mean great efficiency, that we're operating with 12 far fewer employees, which is very nice to know. 13 But it couldn't likely come from the top because 14 even if you cut them to zero, you're not going to 15 drop your overall payrolls as a result of revenues 16 from the medium down to the bottom. It can't 17 happen. 18 MR. VILLA: No further questions. 19 THE COURT: Any other questions from 20 respondents? 21 MR. EISENHART: I have no questions, 22 Your Honor. 23147 1 MR. KEETON: No, Your Honor. 2 THE COURT: Could I ask you a few 3 questions? 4 THE WITNESS: Yes, sir. 5 THE COURT: One pertains to your study 6 of shareholder interest and its correlation to 7 profits. You said from '88 to '94. 8 Does this -- 9 THE WITNESS: This was in relation to 10 holdings of outside directors, I believe, sir? 11 THE COURT: Yes, something like that. 12 THE WITNESS: Yes, uh-huh. 13 THE COURT: So, your conclusion was 14 that there's no correlation between the 15 shareholders' interests and the profits of the 16 corporation? 17 THE WITNESS: Not quite, sir. I think 18 the issue here was the statement that's made by a 19 number of people that if outside directors own 20 substantial shares of stock, you know, they will 21 mind the store better because, you know, aside 22 from never looking at the stock pages, they will 23148 1 be looking very frequently because they own a slug 2 of stock. And, therefore, that if they see 3 performance going downhill, they will start to 4 monitor more closely and they will be in there 5 asking the hard questions. And the theory 6 conclusion is that they will remove a 7 non-performing CEO far faster than a board where 8 everyone owns ten shares and it's just a symbolic 9 share level. That's the argument. And it seems 10 to make economic sense. But when I looked at some 11 statistics of 15 high-performing companies and 15 12 extremely low and then I compared the holdings of 13 the outside directors, I couldn't really make 14 any -- you know, get any music out of that 15 relationship at all. And I think part of it is 16 that the outside directors, even though they may 17 own -- someone could own two or $300,000 of shares 18 but in the context of some of their net worth, it 19 isn't all that high a percentage. 20 THE COURT: So, does it matter whether 21 a board member owns shares in the company or not? 22 THE WITNESS: Well, as I say, some 23149 1 people do believe; but I don't find any evidence 2 for that. And now the -- and I don't mean, by the 3 way, to say I have done the most definitive 4 studies in the world. I did one. And you know, 5 you could say, "Listen. I'm going to give you 6 another 30 companies and maybe you'll find 7 something different." 8 But I do take some interest in a study 9 that the Conference Board in the New York Research 10 Institution just issued where a professor, I 11 think, from the University of Indiana -- but I'm 12 not positive -- studied 79 scholarly papers on 13 this subject of what is the relationship between 14 the shareholdings of CEOs and their subsequent 15 performance or what is the relationship between 16 the shareholdings of outside directors and their 17 subsequent performance. And this person who 18 reviewed the 79 studies concluded that while there 19 were some studies that did show a relationship, 20 there were enough, like mine, that just couldn't 21 make this thing dance, that she concluded there 22 just was no credible evidence on balance to show 23150 1 this. And just to give you an example, you know, 2 I did a study just recently and there it flipped 3 the other way. I looked at CEO shareholdings -- 4 and I've done this a number of times with CEOs as 5 opposed to boards. And most studies do not show a 6 relationship. This study -- I looked at the 7 shareholdings of CEOs. I think it was the end of 8 '96. And I related their performance for the 9 following 15 months because that's all I had at 10 the time of data. A small time period. It may or 11 may not be constructive. That showed a 12 significant relationship between the size of the 13 CEO shareholdings and the future performance of 14 the company. But it was a relationship, although 15 statistically significant, it was so modest that 16 it would take 15 times the shareholdings to get 17 you from a median performance level to the 75th 18 percentile. And as I said in my news letter, you 19 know, you may be dealing with a drug that has some 20 motivational qualities. But, you know, the nature 21 of it seems to be that, you know, if you're going 22 to take an injection and when they tell you to 23151 1 pull down your drawers for the injection, don't 2 turn around because the needle's going to be 3 brought in on a forklift. I mean, this is just -- 4 this drug is not hair triggered. It takes huge 5 quantities. Maybe it works. Maybe it doesn't 6 work. But it's the thing that constantly goes on 7 in this field. There are people who believe that 8 money really does motivate these senior 9 executives. If I give you a 10 million share 10 option, by -- 11 THE COURT: You don't believe that? 12 THE WITNESS: I find that I don't 13 because I don't see the evidence. For example, I 14 did a study recently of five, 600 CEOs. I went 15 back several years and I looked -- I think it was 16 five years -- and looked at their stock options. 17 And I said I notice that some CEOs didn't get any 18 options at all. Some got options of 100,000 19 shares and some got an option on 10 million shares 20 and they were all in between. And I said to 21 myself, "Well, if options really motivate 22 performance, would it not be reasonable to presume 23152 1 that from" -- let's say going forward over the 2 next five years, say '93 to '98, that the ones who 3 had the biggest options would outperform the ones 4 who had no options of a smaller size, not one for 5 one correlation but at least something where you 6 could see the trend line going in that direction? 7 And the machine comes back and says "no 8 correlation." 9 In fact, there is a negative 10 correlation if the option gets big enough, huge 11 options, there is a negative correlation with 12 future performance because the cost has 13 overwhelmed any benefit you might have gotten. 14 I mean, I think the issue here comes 15 down to we know that money motivates lower-level 16 employees. If you're working for McDonald's, 17 you're going to work twice as hard to get more 18 money because you desperately need money. We know 19 that younger people who are trying to pay for a 20 house, to educate their children, can certainly be 21 turned on by incentives. But when we get up to 22 people who are in their 50s, who are already 23153 1 working as hard as they can -- no one ever accused 2 these senior executives of sloth. They are 3 already working very hard. They are already 4 working as smart as they can. And if you're 5 working as smart as you can and as hard as you can 6 and you have a very high net worth already, is 7 your head going to be turned by this incentive? 8 The answer from the data is "not very likely." 9 THE COURT: I thought your theory was 10 that compensation should be based on performance. 11 Right? 12 THE WITNESS: Yes, but -- 13 THE COURT: How do you measure 14 performance? I thought that was profits. 15 THE WITNESS: I'd like to frame the 16 difference, Your Honor, between the people -- the 17 capital punishment argument. There are people who 18 believe that capital punishment, the threat 19 therefore motivates and that a would-be killer who 20 is about to plunge his knife into the victim's 21 back will drop his knife to the ground and say, 22 "My God, I could go to the chair for this." 23154 1 And there are many other people in 2 society who also favor capital punishment but who 3 say, "Oh, come on. They are not going to -- 4 that's not going to happen. It's not going to 5 stop someone from murdering." And you say, "Why 6 do you want it?" Why do I want it? I want it 7 because if someone murders, I want him to fry and 8 the higher the amperage, the better. And it's 9 sort of a base vengeance motivate. 10 And in that sense, people are saying of 11 these CEOs, "Look, if you want to ride up with a 12 stock price, fine. We get money. You get money. 13 We like that arrangement." But if it falls, you 14 know, when we're hanging from the tree, we want to 15 look over and see you dangling in the wind right 16 next to us. We don't want to see you reprice your 17 options, that sort of thing. Maybe this won't 18 motivate anything, but it's your call. You want 19 to pay a fixed level of pay, fine. Pay a fixed 20 level of pay. That's what they do in Japan 21 mostly. That's what they do in Germany mostly. 22 In the good years you get about the same as you 23155 1 get in the bad years. But in America, there is a 2 belief that, "Boy, we want to have a real variance 3 here." And if you want to play that game, then 4 you must play the game. You know, you live by the 5 sword, you die by the sword. 6 THE COURT: So, you would see no 7 problem in tying salaries to what you call micro 8 events for the price of oil or the Dow or 9 something like that? 10 THE WITNESS: I'm sorry. I didn't 11 quite -- 12 THE COURT: Well, I understood you to 13 say you could have corporate compensation based on 14 what you call micro events. 15 THE WITNESS: I think I meant macro. 16 THE COURT: Okay. Macro events. Okay. 17 Say, the price of oil or the Dow or something like 18 this? 19 THE WITNESS: Well, no, not quite that. 20 It's the sort of thing -- for example, there has 21 been a big debate going on in economic circles in 22 the sense that many, many executives, as you 23156 1 yourself have probably read, have made just 2 millions and millions of dollars from stock 3 options in these last four or five years because 4 up until the last few weeks, the market was just 5 going nowhere but up. 6 And some of the economists have 7 noted -- they say, well, does it make sense for 8 someone to make $30 million from exercising stock 9 options, say, when it turns out that, yes, the 10 performance of the company, the stock price grew 11 70 percent but the stock price of the S&P 500 grew 12 110 percent or if it's not the S&P 500, let's say 13 it's a panel of 20 companies in the same industry. 14 That you went up, but you underperformed the 15 market. And why should we give you a reward for 16 that? 17 Now, other people say you should give a 18 reward because the price went up. That's the 19 social conditions, the contractual conditions. 20 But the economists would say no. What we would 21 prefer to do ask to give you an option -- let's 22 say today's price is $50 a share and we'll say 23157 1 your initial strike price, the price you just pay 2 to exercise this option, is $50 a share. Now, if 3 next year the S&P 500 or industry group, their 4 stock prices go up 10 percent, your strike price 5 goes to 55. And you can't make any money unless 6 you can beat the industry group. But by the same 7 token, we want to be fair. If the industry -- if 8 the S&P drops 10 percent, then we'll lower your 9 strike price to 45. 10 So, what we're trying to do here is a 11 different way of rewarding. We're trying to 12 reward you not for absolute performance but for 13 performance relative to your industry group, if 14 that's what you want, or the overall American 15 economy as measured by the S&P 500 and you can get 16 rewarded on that basis. 17 Very few CEOs choose to do that. They 18 like the system they have. But the system they 19 have requires, if you're playing the game fairly, 20 that when those absolute numbers turn against you, 21 you can't turn around then and all of a sudden 22 trot out all these macro economic events that you 23158 1 didn't notice before. You know, it's Alan 2 Greenspan, it's Bill Clinton, it's Monica 3 Lewinksy, it's the Asian prices, it's the Russian 4 ruble, it's oil prices, whatever it is. You say 5 if you want to be intellectually honest, you want 6 that argument, we'll give it to you. That's 7 called indexing. 8 Then on the upside, if it turns out 9 that Alan Greenspan did the right thing, that the 10 Russian ruble recovers, the oil prices recover and 11 the market goes way up, then don't expect to get a 12 lot of money under those circumstances. 13 THE COURT: Does it matter to you 14 whether the compensation is set by outside 15 directors or whether it's the board, the insiders? 16 THE WITNESS: It certainly does make a 17 difference that the compensation is approved by 18 outside earrings who don't have any demonstrable 19 ties to the company such as here, the company's 20 outside counsel or investment banker or you're 21 somewhere where you're receiving more than just 22 directors' fees and your fortunes are sort of tied 23159 1 to the company. If you have outside directors, 2 the presumption is you have independents. And I 3 know in many legal cases that in derivative 4 actions, this is constantly the argument because 5 the board wraps itself in the business judgment 6 rule and they say, "Hey, we have independent 7 directors. They thought about this. They did 8 this. And, therefore, it is reasonable." 9 But the problem with that logic is that 10 almost every company has a panel of outside 11 directors and if you bought that, you'd have to 12 conclude that every CEO somebody reasonably paid, 13 that it's just as reasonable to pay Warren Buffett 14 100,000, which is what he gets, and it's also just 15 as reasonable to pay Charles Wang, the CEO of 16 Computer Associates, $1.1 billion for three years 17 of work. 18 THE COURT: What's the alternative to 19 that? 20 THE WITNESS: What is the alternative 21 to what, sir? 22 THE COURT: To having outside directors 23160 1 set the compensation. Somebody has to set it. 2 THE WITNESS: Oh, yes. Absolutely so. 3 I think the alternative is to have the -- 4 remember, the outside directors meet -- as I say, 5 a compensation committee meets a few times a year. 6 They are given a certain amount of information. A 7 lot of it is exceedingly complex. You get into 8 mathematical present value models and all this 9 stuff. They aren't asked to spend much time on 10 the subject and, obligingly, they don't. 11 My own prescription is to have the 12 compensation committee have its own consultant who 13 has no ties to the management, who -- and let the 14 management have their own consultant. Remember, 15 this is potentially an adversarial situation here 16 where the CEO and the top people want as much 17 money as they can. You can't blame them for that. 18 But on the other hand, you have people who are 19 supposed to be representing the shareholders who 20 should be pushing back and if you have -- you 21 know, as you know yourself, sir, if you have an 22 arm's length situation where you have vigorous 23161 1 arm's length bargaining and informed buyers and 2 informed sellers, you have a valid basis for an 3 agreement. 4 And my concern is that in many cases, 5 the compensation committee is not well served 6 because they don't have people working for them. 7 Almost universally, the consultant is hired by the 8 CEO. No recommendations are permitted to go to 9 the compensation committee until the CEO is 10 satisfied with the compensation consultant's 11 report. And if he isn't, they will find another 12 compensation consultant. And besides that, the 13 compensation consultant is looking for further 14 business in the case of Hewitt and Wyatt and 15 Towers Perrin, my former employer. The biggest 16 portion of the profits come from actuarial work. 17 They want that nice, long-term "we'll value your 18 pension plan forever for a 2-million-dollar fee" 19 and that sort of thing. So that I'd much prefer 20 to have the board have advice where people can sit 21 there and say, "Look, we do understand all this 22 and we've looked at this and looked at this and 23162 1 now here's a different view." 2 Now, if after you have that and you 3 talked to the management, you want to do it, then 4 of course it's your decision. But at least it's 5 an informed decision. I submit to you it's not 6 very informed the way things work today. 7 THE COURT: Thank you. We'll take a 8 short recess. 9 10 (Whereupon, a short break was taken 11 from 10:45 a.m. to 11:10 a.m.) 12 13 THE COURT: Be seated, please. We'll 14 be back on the record. 15 I believe the cross of Mr. Crystal is 16 completed. Mr. Schwartz, you have some redirect? 17 MR. SCHWARTZ: I do, Your Honor. 18 THE COURT: All right. 19 . 20 . 21 . 22 . 23163 1 2 FURTHER EXAMINATION 3 4 Q. (BY MR. SCHWARTZ) Mr. Crystal, were you 5 at any time denied access to material that you 6 felt you needed in order to make your analysis? 7 A. No, sir. 8 Q. Was your analysis based on your 9 independent review of the documents and testimony? 10 A. Yes, sir. 11 Q. And would you briefly describe the 12 documents and testimony you reviewed in connection 13 with making your analysis? 14 A. Are you referring to internal documents 15 or external? 16 Q. Whatever you used to -- whatever you 17 used to make your analysis that you felt you 18 needed in order to draw your conclusions. 19 A. Well, from an external standpoint, I 20 looked at the 17 companies, the proxy statements. 21 I drew performance data on them from Standard & 22 Poors' compustat, their size and performance 23164 1 statistics that are not in the proxy statement. 2 So, I drew the data that I needed to 3 analyze their pay package. I relied on 4 mathematical models like the Black-Scholes pricing 5 model and all those things. 6 So, on the company's side, I looked at 7 similar material: Proxy statements that are 8 publicly issued. I looked at the 10K reports 9 showing the revenues and profits of the company. 10 I looked at various board minutes that were given 11 to me of various events relating to compensation, 12 schedules of bonus payments, schedules of salary, 13 the schedule that showed the bonus, for example, 14 being incorporated into the salary, some 15 information on the performance unit plan. The 16 repricings I got from the proxy statements 17 themselves. 18 And more recently, I skimmed 19 Mr. Berner's testimony; but I don't recall that I 20 did anything other than that. 21 Q. Now, Mr. Blankenstein yesterday asked 22 you some questions regarding Mr. Gross' 23165 1 resignation and whether severance would be 2 warranted if he had been fired for other than 3 cause. And in your answer, you referred to a 4 constructive discharge? 5 A. Yes. 6 Q. What did you mean in your testimony 7 regarding that? 8 A. Well, you know, it's strange for me to 9 be educating lawyers on a legal term. But in this 10 field, "constructive discharge" is meant to be -- 11 to refer to a situation where the person has not 12 been officially fired. That is to say, the 13 company brings him in and says, "You're through. 14 Get out," but rather a climate of events or a 15 pattern of events has occurred which is tantamount 16 to him being fired. And in most contemporary 17 thinking, those events include, for example, the 18 executive has had his job responsibilities 19 diminished, although he may have the same title, 20 that his pay has been cut, that he's been forced 21 to move to a new location. Those are the three 22 most important things. 23166 1 So, the point is "You didn't fire me; 2 but for all practical purposes, did you fire me. 3 So, I'm invoking the right to receive benefits as 4 if I had been fired." That's what I mean by 5 constructive discharge. Now, in the case of this 6 company, there were specific definitions of I 7 believe what that meant. 8 Q. And what did you find in looking at 9 those -- you're referring to the contracts? 10 A. Yes. 11 Q. What did you find in looking at those 12 contracts? 13 A. Well, the way I reason this out is it 14 seemed to me quite clear that if Mr. Gross had 15 resigned -- that is to say, went out under his own 16 steam and there were no constructive discharge 17 issues involved, if that's so, then he would not 18 then have been entitled to any severance pay. 19 I also read that if there was an issue 20 of constructive discharge, there could be 21 benefits. But the way I read it is the benefits 22 would only be available to Mr. Gross following a 23167 1 change of control so that even though there was a 2 constructive discharge, if you didn't have a 3 preceding change of control, still the chute 4 wouldn't open and the benefits would not come out. 5 And then the issue then devolves around 6 what is a change of control. And I don't remember 7 the exact definition. It involved within the 8 preceding 24 months of the date of the agreement 9 or the subsequent 24 months, that there would be a 10 change in the composition of the board. And I 11 don't remember the exact mathematical algorithm 12 that was used there, but that issue tends to get 13 resolved one of two ways. That is to say, one 14 reading of it could be that there was a change of 15 control in existence as defined when the agreement 16 was consummated. 17 Q. What do you mean? 18 A. Well, that, in fact, the day I wrote 19 the agreement, if you then read what we wrote, we 20 say, "By God, there is a change of control right 21 this minute." You know, it's been in existence 22 for some months. 23168 1 Q. Does that make any sense? 2 A. Well, to me, that would be a sham sort 3 of transaction because if that was the case, why 4 wouldn't you just say straight out that, "Hey, 5 we're giving this to you"? Why go through all 6 this contorted reasoning? Why not just say, 7 "Look, if you have a constructive discharge, it's 8 definitely payable right now." We don't have to 9 have all this gobbledy-gook about change of 10 control. 11 The other reading of that would be that 12 no, a change of control had not occurred at the 13 time Mr. Gross resigned, in which case then it 14 would be clear to me that he would not have been 15 entitled to any benefits under his severance 16 agreement. 17 Q. Now, you were asked some questions 18 concerning the Hewitt report. 19 Did the recommendations of Hewitt 20 include consideration of performance of the 21 company? 22 A. Well -- 23169 1 Q. And I'm talking about the 2 recommendations in connection with setting the pay 3 ranges, if you will. 4 A. Insofar as Hewitt was recommending that 5 for this position, here is a market range of -- 6 here's our recommended range of salary or salary 7 and bonus, there was absolutely no recognition 8 given to the performance of the company. On the 9 contrary, Hewitt added a 15 percent premium to the 10 market data it was looking at from the outside 11 world. 12 Q. Well, would that -- would considering 13 those factors be important in developing the pay 14 ranges? 15 A. Well, I think they would be. I mean, I 16 think the issue here -- there's two issues, one of 17 which rarely comes up. But I think it came up 18 here. 19 One is the issue of ability to pay. I 20 remember one time in my long career that one 21 CEO -- I presented a report that somewhat was like 22 Hewitt in the sense that "here is the market data 23170 1 and here is what you should be doing" and he said, 2 "This is useless to me because we can't afford 3 this, plain and simple." He said, you know, "It's 4 lovely to know what's out there." It's like, "I 5 love to see -- I like to look in the windows of 6 Neiman Marcus, but I can only afford to go to 7 K-Mart this year." And so, what are you doing? 8 What are you telling me? And he was rather 9 irritated by it. 10 And in this case, I missed the whole 11 thing because I never really thought about that in 12 my long career, that was I think the only case 13 I've ever had of a client where ability to pay was 14 a serious issue. But in this case, I think 15 ability to be pay arguably was an issue. 16 And the second issue I would bring up 17 is that let's say ability to pay is not an issue. 18 So, then you look at the Hewitt report. I would 19 still have expected to see -- to see them say, 20 "Look, here are some market ranges and maybe we're 21 going to add 15 percent." They were quite clear 22 about that. They didn't hide it. But I would 23171 1 expect to see some further disclaimers of saying, 2 "Now, when it comes time to decide whether you 3 want to pay this market range, you do need to look 4 at the performance of the company. And if the 5 performance is really terrible, why, we would 6 assume you would want to pay substantially below 7 that range. But fair is fair. If you have a 8 great year or a series of years, you'd want to pay 9 above it." 10 They didn't really comment on that 11 particularly. About the only time they -- the 12 only nod they gave to performance was in the area 13 of the incentives, and they noted that they had 14 all sort of failed because of obvious past 15 performance difficulties and that, therefore, 16 maybe we ought to consider so-called, quote, 17 "transitionary," unquote, alternatives. 18 Q. I think -- the question that I had 19 asked you was: Is it an important thing for them 20 to have considered? Is your answer yes, that it 21 was and then with the explanation that you gave? 22 A. Well, you phrased that, I believe, in 23172 1 the context of the salary and bonus ranges. 2 Q. Correct. 3 A. And it was not important to consider it 4 in coming up with a range that purported to 5 describe the market. 6 Q. I see. 7 A. But what you didn't do is go beyond it 8 and say, "Now, can you afford to do" -- you know, 9 "Here's the merchandise. Have you got some money 10 to pay for it? Well, if you don't, we better talk 11 about that." 12 Q. Well, then let me ask you a more 13 general question. 14 Is what a consultant -- any consultant 15 produces for a client based on what the guidelines 16 are that they are given by the client? 17 A. Yes. Well, the -- it is -- it often is 18 the case -- and it was certainly the case here -- 19 that one of the early steps in a study like this 20 is to interview a number of the senior executives, 21 sometimes to interview some of the outside 22 directors, but rarely. But to interview the 23173 1 senior executives to learn more about the current 2 environment, the challenges, their perceptions, 3 indeed their appetite for taking on risk or not 4 taking on risk. You know, to get some sense of 5 what they see as the objectives of their own 6 program. 7 Now, whether the consultant merely apes 8 that back and says, "Here's what they said they 9 wanted and now we're going to give you exactly 10 what you wanted" or whether the consultant screams 11 at them to some degree or even taking issue with 12 them in some cases is another matter. 13 Some go further. Some merely say, 14 "Here's what you said you wanted. We're value 15 neutral here. You wanted this, this, and this. 16 Here's our recommendation." 17 Q. Did you see any indication that Hewitt, 18 in its preparation of its report, considered in 19 reaching its conclusions the performance of the 20 company? 21 A. Not in its conclusions regarding here's 22 a range of salary that seems appropriate -- or not 23174 1 appropriate, but here's a range -- here's the 2 competitive environment. Here's the competitive 3 environment for salary and bonus. No, they didn't 4 take that into account at all. 5 Q. Mr. Villa had asked you some questions 6 concerning the -- Mr. Berner's statements of what 7 he believes the regulators said or meant in their 8 comments. 9 Do you recall that? 10 A. Yes. 11 Q. I'm going to hand you what's been 12 marked as Exhibit T8061, marked at Tab 426. And 13 I'm going to refer you -- first of all, have you 14 seen this document before? 15 A. Yes, I have. 16 Q. Okay. This is the summary results of 17 executive interviews dated April 26, 1988, by 18 Hewitt. 19 Would you turn to the very first page? 20 A. Yes. 21 Q. And there is a section in the middle 22 called "financial situation." 23175 1 A. The very first page seems to be a 2 listing of -- 3 Q. Page No. 1. It's H0127. 4 A. Roman I. Okay. I see it. 5 Q. Okay. Do you see reference there to 6 "financial situation"? 7 A. Yes, sir, I do. 8 Q. Okay. And the third bullet item 9 indicates "cannot be economically revived without 10 government assistance." 11 Do you see that? 12 A. Yes. 13 Q. Okay. When Mr. Villa was asking you 14 questions about the application of the Southwest 15 Plan and perhaps some day maybe, if God willing, 16 things happen and that they are accepted into this 17 plan and what have you, should that factor have 18 been considered by Hewitt in their ranges? In 19 other words -- I don't know if my question is 20 clear. 21 Does the fact that the institution -- 22 strike that. 23176 1 I want you to turn back a couple 2 pages -- 3 A. Okay. 4 Q. -- to Roman Numeral I. 5 A. Okay. 6 Q. Hewitt prepared this material based on 7 interviews with whom? 8 A. With the management, it says here. 9 Q. And that included Mr. Munitz. It 10 included Mr. Berner, didn't it? 11 A. Yes, it did. 12 Q. And do the statements on Page 1 13 indicate that management of the institution, 14 Page 1, Arabic 1, indicate that management of the 15 institution, based on Hewitt's interviews, knew 16 that this institution could not survive without 17 government assistance? 18 A. It's quite clear that that's what 19 Hewitt's perception is because the whole thing -- 20 this whole document comes under the title Summary 21 Results of Executive Interviews. 22 Q. And that's in April of 1988, correct? 23177 1 A. Yes. So, I presume what Hewitt's 2 doing, if the title is correct, is they are 3 playing back to the company their understanding of 4 the environment in this case, some general issues, 5 as they term it, which they learned from the 6 company, that they did not get this from their own 7 independent investigation. I assume that because 8 if they did, it wouldn't be a result from an 9 executive interview. 10 Q. Is that the normal practice of the way 11 things are done in the industry, the way Hewitt 12 and Towers, Perrin and other companies do their 13 work? 14 A. One of the inputs would be we talk to 15 the executives. We get lots of data from the 16 outside. We read financial documents. We get 17 literature out. I mean, if we were doing a whole 18 study, for example, in fairness to Mr. Villa, we 19 would have found the Houston Chronicle articles 20 and read that sort of stuff, too. 21 Q. Okay. Mr. Villa read to you some 22 portions of Mr. Berner's transcript. 23178 1 Do you recall that? 2 A. Yes. 3 Q. And in -- he read you a portion of 4 Page 19620 and 21. And I think you may have that 5 in front of you. 6 A. I think I still do, yes. Yes, I have 7 it. 8 Q. Okay. Down at the bottom, it says -- 9 the question is -- it says here that "Twomey told 10 me" -- this is Mr. Berner stating what he believes 11 or he interprets Mr. Twomey's statement to be -- 12 "told me that United will be the survivor." 13 Then he goes on starting on Line 2 of 14 Page 19621. And he says, "But we can expect that 15 during the first quarter of 1988, we will be 16 either requested or told to take on one or more 17 additional institutions." 18 Do you see that? 19 A. Yes, I do. 20 Q. Did that happen in the first quarter of 21 1988, to your knowledge? 22 A. I don't know the answer to that. I'm 23179 1 sorry. 2 Q. If it didn't happen when -- if it 3 didn't happen at that time, if that didn't happen, 4 would that give management some reason to believe 5 that there is a question about whether or not they 6 were going to be in the Southwest Plan or have 7 some future viability? 8 A. I guess the only way I could answer 9 that would be to say that, you know, to the extent 10 that the -- the taking on of one or more 11 additional institutions, as he says, would be 12 vital and integral to becoming part of the 13 Southwest Plan and you knew that that was a very 14 serious milestone along the way and it didn't 15 happen, I would assume alarm bells would go off 16 that, you know, we're not on track here and maybe 17 this whole thing isn't going to happen. But -- 18 Q. It would certainly give management 19 pause, correct? 20 A. That be is certainly integral to 21 getting into this plan. If it was a small item 22 that didn't occur, I guess you would say no, it's 23180 1 not important. 2 Q. With that explanation, it would give 3 management pause. Is that fair? 4 A. With that explanation, yes. 5 Q. Okay. Well, let me ask you this: Does 6 it appear from what you've looked at that 7 management believed that USAT would not survive 8 without assistance from the government? 9 A. Well, in this deposition -- 10 Q. Not just this. This plus -- 11 A. Starting with this. This, of course, 12 relates to a conversation which took place in 13 November of '87. You know, quite a bit earlier. 14 Now, in -- sometime before I think it 15 was June -- excuse me. Sometime before 16 April 26th. So, in the next four months, five 17 months or so, Hewitt appeared on the scene, tapped 18 into the thinking of these executives, and 19 produced an obviously more gloomy assessment of 20 what the executives were feeling than Mr. Berner 21 did back in November of '87. I mean, it seems 22 quite apparent to me that during this period of 23181 1 time things were not looking as good as they did 2 earlier. 3 Q. I asked you earlier if what a 4 consultant produces is based on the guidelines 5 that they are given by the client. 6 Do you remember I asked you that? 7 A. Yes. 8 Q. Okay. If those guidelines that were 9 given to the consultant failed to include a 10 request that the consultant consider the 11 performance of the company -- are you with me? 12 A. Uh-huh. (Witness nods head 13 affirmatively.) 14 Q. Is that relevant? 15 A. Well, I think it is relevant; but 16 there's still -- there's still a chance to recover 17 from that sort of error, if you will, which is to 18 say that even if the client did not state that to 19 be one of its objectives, to pay low for low 20 performance or to take account of our ability to 21 pay, one would be assume that as Hewitt or any 22 other consultant was poring through all these 23182 1 inputs, they would -- they would discover this 2 amazingly large and growing series of losses and 3 memoranda and things like that that would suggest 4 that this organization is in very serious trouble. 5 And then I presume if I were doing it, I would be 6 right back to the company and saying, well, before 7 we go any further, I guess the first thing I'd be 8 worried about is I'd probably submit my bill 9 instantly and try to be paid in advance. But 10 following that, I would be saying seriously, you 11 know, "How much room do you have to take maneuvers 12 here?" Because it doesn't do me any good to, you 13 know, drive a Rolls Royce into a poor part of town 14 just to make the natives angry. 15 And so, you know, I'd want to talk 16 about what is the ability to pay? You know, what 17 is your attitude about low pay for low 18 performance? Because, you know, under the 19 circumstances, it's going to be hard to come up 20 with some arguments why you should be paid highly. 21 Let's talk about that further. 22 Q. So, is your answer that it is relevant? 23183 1 A. Oh, absolutely relevant, yes. 2 Q. And what about if they neglected to 3 inform Hewitt concerning the loan forgiveness? 4 A. Well, I mean, the whole discussion over 5 the last two days with Mr. Blankenstein in his 6 insightful cross-examination has made it clear, as 7 he did in the deposition, that if you were to 8 remove that 761 from off the table and if you were 9 only to be looking at size of pay package without 10 regard to qualitative aspects and circumstances in 11 which the institution found itself, then you'd 12 have to conclude that while the pay was generous, 13 what was left, it did not rise to the level of 14 being unreasonable. 15 So, therefore, the 761 really is -- you 16 know, you throw that on. And if you throw it on 17 the scale and it stays on the scale, all the 18 springs fly up. 19 Q. And based on your knowledge and 20 experience, is that a reasonable view of the 21 world -- 22 A. Well -- 23184 1 Q. -- to proceed in that way? 2 A. Hewitt should have known about this. I 3 mean, we don't know at this point whether -- 4 Q. I'm talking about what Mr. 5 Blankenstein -- you mentioned Mr. Blankenstein 6 removing the loan forgiveness from consideration 7 and not asking for consideration of performance in 8 assessment of a reasonable salary. 9 I'm asking you: Is that a reasonable 10 view of the world in executive pay, based on your 11 knowledge and experience? 12 A. Well, I'm not disagreeing with 13 Mr. Blankenstein. Assuming he can carry the day 14 with an argument that says, look, there is 15 severance, offsetting severance here. And hey, 16 one thing is about the same as the other. And he 17 had a valid right and claim to the severance and 18 that whether or not you should have had it, he had 19 it coming. Well, then, it's hard to say you're 20 going to count that. 21 Q. What about performance? 22 A. Well, once again, you know, you can go 23185 1 back before that and say should you have -- should 2 you have negotiated severance agreements at that 3 time? Probably you should not have, although to 4 say that you never have any severance -- let's say 5 you had no agreement at all and you threw somebody 6 out, surely you'd give them a few months of pay 7 anyway. 8 And probably, we certainly should not 9 have been talking about loan forgiveness when 10 we're trying to collect on loans. I mean, we 11 shouldn't have done a lot of things. But if you 12 turn around and say "these things were done" and 13 now, clearly, you can argue that Mr. Gross was 14 entitled to the severance, and therefore, he gave 15 it up in return for something else, well, then you 16 clearly -- 17 Q. I'm talking about -- 18 A. -- narrow the conversation on the 19 table. 20 Q. I'm talking about the agreement where 21 they gave him a minimum bonus to pay off his 22 principal. Okay? 23186 1 A. Yes. 2 Q. That fact, that aspect of his 3 compensation package, that he was given an amount 4 of money to pay off the principal or that it would 5 be forgiven, however that worked out, that's what 6 I'm talking about. Not the severance at the end. 7 And my question for you is whether or not you saw 8 any evidence that Hewitt was apprised of that. 9 A. Oh, no. There's no mention in the 10 report of Hewitt about this loan agreement that I 11 could find. And I looked at it twice. I hope I 12 didn't miss it. 13 Q. Is that relevant? Would that factor of 14 compensation have been relevant to Hewitt's 15 analysis? 16 A. Oh, it would be very important to 17 Hewitt because at the time, when Hewitt did the 18 report, Mr. Gross had not resigned. So, the issue 19 of whether there was an offset from severance 20 wasn't even on the table at that point. And 21 presumably Hewitt was writing a report addressed 22 to an ongoing institution, not one where Mr. Gross 23187 1 was leaving at any point in time. 2 So, from that standpoint, Hewitt should 3 have known that, hey, there is an additional piece 4 of compensation that's been given to this 5 executive. It's 761,000. In fairness, if you 6 assume an ongoing environment, it's not 761,000 7 all in one year. It's 76,000 per year for each of 8 the next ten years. But you'd need to add that in 9 when you're starting to talk about what Mr. Gross 10 has now. You'd want to look not just at his 11 458,000 salary and his 20,000 director's fees and 12 possibly a bonus but you put in this, too, or at 13 least one-tenth of it. Now, they didn't do it. I 14 don't know why they didn't do it. 15 Q. Did you see any evidence that 16 Mr. Whatley set the compensation at USAT or that 17 he signed off on amounts and compensation 18 practices that were designed by others? 19 A. Well, if I -- obviously, I'm not privy 20 to the oral conversations that went on. 21 Q. What did you see? 22 A. But what I saw, the documents I looked 23188 1 at strongly suggested, as is the case in most 2 companies, that the proposing party was the 3 executives involved. Here's their 4 recommendations. And I saw Mr. Whatley's 5 signature, and I don't recall seeing any change in 6 those recommendations being made by Mr. Whatley. 7 Now, that could be evidence that -- of 8 a rubber stamp. It could also be evidence that he 9 agreed with it and thought it was a wonderful 10 thing to do. 11 Q. In your experience reviewing perhaps 12 the thousands of companies that you've reviewed, 13 is it a reasonable business practice to document 14 the considerations of the related compensation? 15 A. Because this is such a sensitive issue, 16 when egos are involved and all that, it often is 17 the case that there are oral conversations and 18 that -- so that if there is some resistance from 19 the compensation committee, it may not be 20 documented in a -- memorialized in a piece of 21 paper. But rather, it's a conversation of "Hey, 22 that's pushing it. Can you cut that down?" We 23189 1 negotiate and finally say, "Okay. Good. We've 2 got an agreement. Write it up, and I'll sign it." 3 So, in that case, you might find 4 possibly the same evidentiary pattern. 5 Q. What about in an environment where the 6 performance of the company is abysmal -- and I 7 think you testified that the focus of management 8 should be on reducing fixed costs. 9 A. Yes. Yes, I did. 10 Q. In those circumstances, would it 11 justify documenting the considerations of the 12 compensation committee when it's considering 13 raising salaries under those circumstances? 14 A. I suppose you could argue that to the 15 extent you're going to take actions which would 16 appear to be counter-intuitive to outside 17 observers, that the need for greater documentation 18 arises, that you really want to put in rationale 19 and say in the compensation committee notes, that 20 you know, we looked at -- we didn't look just at 21 the 118-million-dollar loss, folks. We did look 22 at it, but we looked at these other mitigating 23190 1 factors and we came up with certain 2 recommendations and we think that on balance, this 3 is a fair way to do it. I think the compensation 4 committee would be at pains to document it more 5 fully if they knew that an outside audience would 6 raise their eyebrows quite often. 7 Q. When Mr. Villa asked you some questions 8 regarding -- I think he called it the Crystal plan 9 of reducing fixed salary -- fixing salaries at a 10 lower level or what have you, were you looking at 11 that in conjunction with additional compensations 12 on the incentive side, or were you looking just at 13 reducing salaries, period, for the sake of 14 reducing salaries? 15 A. Oh, no. 16 Q. What did you mean by that? 17 A. For sure I was thinking of a package 18 where you would have to say to people, "look" -- 19 first of all, I might argue that you can't 20 increase the salaries. Whether we could get away 21 with decreasing them is something else again. 22 There might be tremendous resistance to going that 23191 1 far. I'd probably try it, at least symbolically, 2 maybe 10 percent or something so that we could say 3 to the troops, "We gave first and we're all 4 pulling in our belts" and that sort of thing. 5 But at the same time, having given them 6 the harsh medicine, I would have turned around and 7 said but we have to have -- we have to have an 8 ending where the hero goes into the sunset and the 9 swelling music and all of that. 10 And the ending is that if we can turned 11 this around, if we can get in the Southwest Plan, 12 if the stock price recovers, in this case, it 13 didn't have to recover a lot because we have 14 options at 69 cents a share. If we can do that, 15 hang on, there is a good outcome here. But of 16 course, if the Southwest Plan fails and we go into 17 the drink, well, then, you're going to wish you 18 had left the company earlier. 19 Q. Let me ask you this: Based on your 20 knowledge and experience, is it an unreasonable 21 compensation practice to put the cart before the 22 horse, so to speak, and raise salaries and do 23192 1 other kinds of bonus arrangements and packages in 2 anticipation of some unknown event that may or may 3 not have occurred? 4 A. Oh, yes. I think it's very 5 unreasonable because you have to ask yourself the 6 question -- you say if you knew the event wasn't 7 going to occur and you say to yourself, "Well, if 8 I knew it, I wouldn't do it," and then you do it 9 anyway, you then are confronted with how do you -- 10 the question of how do you get the money back if 11 what you hoped wouldn't happen happens. The whole 12 thing falls apart. Executives do not like to 13 write checks back to the company. It's a practice 14 they resist stoutly. 15 Q. And was it a reasonable assumption, if 16 you will -- was it a reasonable practice for 17 Hewitt to have added a premium to the salary and 18 bonus structure of the proposed ranges when the 19 condition of thrifts in Texas in general and USAT 20 in particular was so abysmal? And if you'll 21 recall, Mr. Villa read you a statement from a 22 portion of the S memo. He didn't show you the 23193 1 whole S memo, which is a very large document, just 2 a portion of it. 3 A. I believe it was unreasonable for 4 Hewitt to add that premium. Their executive 5 interviews seemed to suggest strongly that they 6 knew that the organization, as they put it, could 7 not survive without government assistance. So, 8 they knew things were very bad. And then to turn 9 around, as I say, and to start giving the Neiman 10 Marcus catalog to people who could only afford to 11 shop out of the Sears Roebuck catalog doesn't seem 12 to make any sense. And I would think that Hewitt 13 would resist the notion which they got from the 14 executives themselves that we need to be a cut 15 above. And, in effect, go back to them and say, 16 "You may need to be a cut above, but can you be a 17 cut above? Can you afford this? Doesn't this 18 seem to be the wrong time to be taking this 19 action?" 20 Q. Isn't it an unreasonable compensation 21 practice to ignore those factors? 22 A. I think it is. 23194 1 Q. Mr. Blankenstein and Mr. Villa both 2 asked you some questions about risk-takers in 3 connection with lowering or freezing salary and 4 moving to higher incentive packages. 5 Do you recall that? 6 A. Yes. 7 Q. Isn't that the very risk that the 8 senior executives took in the original philosophy 9 that they came into the employment structure with 10 under which they received units in a performance 11 unit plan, stock options, free stock, all three 12 elements of the stool that you talked about? 13 There's bonuses and salary and then the long-term 14 incentives was the third leg of the stool? 15 A. Yes. 16 Q. And then under that third leg of stool, 17 there's three others? 18 A. Yes. 19 Q. Isn't that the very risk that these 20 senior executives took when they came in? 21 MR. VILLA: Your Honor, there's got to 22 be some limit to leading. The question goes on 23195 1 for two minutes. Objection to leading. It's his 2 own witness. 3 THE COURT: All right. Well, we've 4 had -- let's have the answer. 5 A. The -- I think, you know, if you did -- 6 if you looked at Mr. Gross, for example, a few 7 years before what happened happened, you would 8 have concluded he was a risk-taker because he 9 had -- he thought he had a low salary. And my 10 evidence suggests he probably did have a salary 11 that was below the market, his salary alone. He 12 had stock options. He had a performance unit plan 13 which required some minimum threshold of 14 performance before he got any money and certainly 15 suggested he get no money if he didn't perform. 16 Even more important, he had taken, I presume -- 17 nobody put a gun to his head. He borrowed money 18 from the company with the full expectation at that 19 time that he was going to have to pay that loan 20 back. It was a full recourse note. 21 So, at that point, you'd look and say, 22 "Hey, this is a risk-taking environment." Now, it 23196 1 turns out that the risk didn't work and the 2 performance went downhill. Now, at that point, 3 this is where I part company because I would say 4 philosophically that, you know, you made your bed. 5 Now here you are. The numbers are not in your 6 favor. So, you're going to have to sit there 7 paying off this loan and you're not going to get a 8 bonus and these things are going to happen because 9 that was part of the deal. 10 Q. (BY MR. SCHWARTZ) Mr. Villa asked you 11 some questions, also, regarding regulators' 12 criticism of officer turnover. 13 Do you recall that? 14 A. Yes. 15 Q. Did you see any indication that there 16 was any turnover in the -- in the most senior 17 executive officers of the institution? 18 A. I don't think I did because I seem to 19 keep seeing the same names over and over again. 20 Of course, there could have been other names I 21 didn't see. But Mr. Munitz and Mr. Berner and 22 Mr. Crow and Mr. Gross, I mean, these names I've 23197 1 almost learned by heart at this point. 2 Q. Do you know whether -- he also read you 3 portions of, again, these statements by Mr. Berner 4 of his recollections or interpretations of things 5 that he says Mr. Twomey said to him. 6 Do you know whether Mr. Twomey or 7 others -- Mr. Barclay I think he referred to in 8 another document -- at the time Mr. Berner wrote 9 his comments knew all of the facts concerning 10 United Savings and its operations? 11 A. I would have no idea. 12 Q. And the judge asked you some questions 13 concerning the stock ownership of outside 14 directors. 15 Do you recall that? 16 A. Yes, sir. 17 Q. Do you believe that because Mr. Whatley 18 owned shares, that he acted independently? 19 A. Well, as I said yesterday, if you're 20 going to buy the notion that owning lots of shares 21 is going to make you a better director and one 22 quicker to take action, good or bad, when things 23198 1 happen, Mr. Whatley would turn out -- appear to be 2 an outlier in that statistical data set because 3 here's a person who owned at one point owned 4 shares approaching 300,000 in value. And if this 5 theory as set forth by various professors, 6 including Professor Ellison, among others -- if 7 this theory is true, then you would expect, as 8 Mr. Whatley's shareholdings declined in value, 9 that he would be on the phone. "Let's have a 10 meeting. Let's have lunch. What's going on 11 here?" 12 And then at some point, he might have 13 literally reared back and fired Mr. Gross and 14 brought in a whole new management in a means to 15 save his own shareholdings because that's how his 16 motivation works. 17 But, in fact, here we seem to watch a 18 person watch passively his shareholdings decline 19 in value from 300,000, about that, to about 20 25,000. And he took no action whatsoever. And, 21 in fact, the actions he did take far from firing 22 people were increasing -- aimed at increasing 23199 1 their pay. 2 So, if your theory is correct, you 3 couldn't prove it by Mr. Whatley, I don't think. 4 Q. I'm going to hand you the 1988 proxy 5 statement, Exhibit A3015, at Tab 94. 6 A. Okay. 7 Q. Now, you gave some testimony concerning 8 the payment of -- the indebtedness of management. 9 If you turn to Page 16, there is some discussion 10 there concerning indebtedness of management. 11 Do you see that? 12 A. Yes. 13 Q. And you gave some testimony that I 14 wanted to clarify concerning the prime rate 15 payment of interest by the -- by these officers. 16 A. Uh-huh. (Witness nods head 17 affirmatively.) 18 Q. What were you referring to in 19 connection with that? Is this the page of the 20 proxy statement that you were referring to? 21 A. I think I was actually looking at the 22 1989 proxy, but it's probably in here somewhere 23200 1 else. Let's see if it is. Just a second. 2 (Witness reviews the document.) Yes. Up above, 3 about three paragraphs down, there is a paragraph 4 starting with the words "in addition." 5 Q. Yes. 6 A. And further down, it says that -- it 7 says, "such loans," referring to the 761,000, "are 8 secured by the shares acquired by such officers 9 bear interest at the prime rate in effect from 10 time to time and are repayable on January 1st, 11 1994." And then it refers you to the paragraph 12 below to which you referred earlier. 13 Q. Okay. And when you looked at this -- 14 the information from this proxy statement, were 15 you able to determine whether or not Mr. Gross or 16 Mr. Crow were paying interest out of their own 17 pocket, so to speak? 18 A. No. Far from it. I mean, I read 19 that -- I assume an ordinary shareholder would 20 read it the same way -- that we, the institution, 21 have made a loan to this gentleman and we are a 22 lending institution but we are making him pay a 23201 1 full prime rate of interest. So, it doesn't look 2 like he's got any deal here. Presumably, he might 3 have gone to any bank in Texas or wherever and 4 gotten approximately the same deal. 5 In the earlier Page 15, there is a 6 table that -- there is a header here that says 7 "cash payments made under company's bonus plan 8 from January 1st, '87, to March 18th, 1988." 9 That's the second-from-the-last data item. And 10 under Mr. Jenard M. Gross, it says $235,000. 11 Now, we know later, from later reading, 12 that that consists of 167,000 of so-called bonus 13 and 68,000 of interest forgiveness. But there's 14 no tieback to the shareholders. I mean, this is a 15 statement that doesn't say, for example, he will 16 be paying prime rate interest; but folks, we're 17 giving him the money to pay it. I find that a 18 glaring omission -- I, as a shareholder -- in 19 trying to evaluate the pay of management. 20 Because, you know, in essence, what I thought was 21 a risky transaction has had a considerable amount 22 of its risk involved. I mean, a considerable 23202 1 amount of its risk washed out because I don't have 2 to pay any interest now. 3 Q. Was the -- based on your knowledge and 4 experience, was the size of the 1987 bonus paid to 5 the senior executives in January of 1988 6 excessive? 7 MR. VILLA: I'll object, Your Honor. 8 Again, this goes -- there has been no testimony 9 about excessive bonuses to anybody in this case 10 except Mr. Gross. So, I object. And I don't 11 believe there's anything in his report that talks 12 about excessive bonuses. As a matter of fact, in 13 his report, he went out of his way to say he could 14 reach no conclusions about the compensation to the 15 individuals other than Mr. Gross. This goes 16 beyond his report and certainly beyond any direct 17 or cross-examination. 18 MR. SCHWARTZ: That's not true, Your 19 Honor. His report refers in numerous places in 20 the plural, to the senior executives in plural. 21 And he states that there was quantitative data 22 concerning the salaries of senior executives in 23203 1 the plural. 2 MR. VILLA: I'm sorry, Your Honor. I 3 couldn't hear the ruling. 4 THE COURT: I haven't ruled yet. 5 MR. SCHWARTZ: We can ask the witness 6 if that is his understanding of his own report. 7 MR. VILLA: Your Honor, the very point 8 he made yesterday when I got up and argued the 9 Motion in Limine was, you know, Mr. Crystal has 10 not testified about how much anybody other than 11 Mr. Gross got but the structure of the contracts. 12 And I said, hey, that's not fair. His report 13 didn't go to anything beyond Jenard Gross. I got 14 overruled, but he at least ought to stick by his 15 last characterization of what Mr. Crystal has 16 testified to. "How much" is clearly beyond his 17 testimony. 18 THE COURT: All right. I'll sustain 19 the objection. 20 MR. SCHWARTZ: All right. Well, Your 21 Honor, the -- I'm going to change the question in 22 response to your ruling consistent with what you 23204 1 ruled yesterday, which was that I could ask about 2 the how factor, not the how much, which is what 3 Mr. Villa has objected to. 4 Q. (BY MR. SCHWARTZ) Was the payment, the 5 compensation practice of paying the senior 6 executives bonuses in January 1988 for 1987 7 excessive and did it constitute an unreasonable 8 compensation practice given the condition of the 9 company? 10 MR. VILLA: Same objection. 11 THE COURT: Sustained. I don't think 12 there is any difference. You asked him was it 13 excessive, and that's the -- 14 MR. SCHWARTZ: You're right, Your 15 Honor. I was reading from my notes, and I did 16 state that. I'm going to cross that out. I 17 apologize. 18 Q. (BY MR. SCHWARTZ) Was the compensation 19 practice of paying bonuses to the senior 20 executives in January 1988 an unreasonable 21 compensation practice given the condition of the 22 company? 23205 1 A. I think it was, but not from the issue 2 of competitiveness because, as Mr. Villa said, I 3 didn't study that for these people other than 4 Mr. Gross. But from the -- from the standpoint of 5 giving someone a bonus that was larger than the 6 bonus they had the year before in the face of a 7 loss that was also larger, some three times 8 larger, that that did not make any sense to me. 9 Now, I'm not so naive as to know that 10 in many, many companies, I mean, getting a CEO's 11 bonus down to zero is approximately as easy as 12 putting a stake in Count Dracula's heart. I mean, 13 it's very difficult to do. Robert Allen, the 14 chairman of AT&T, managed to lose $6 billion in a 15 single year. And yet, the board sort of lost its 16 heart. They cut his bonus from 2.3 million to 17 1.5 million. My taste would have been to cut it 18 to zero, and I know that doesn't happen. 19 But on the other hand, you could argue 20 directionally, leaving aside the amount, what is 21 the direction of the bonus, the change in the 22 bonus? That the change in the bonus -- it just 23206 1 puzzles me how it could get larger when the loss 2 got deeper, that it ought to have gone the other 3 way. Maybe it shouldn't have gone all the way to 4 zero, but it should not go up. That would be my 5 objection there. Just from a logic standpoint, I 6 can't see how it happened. 7 Q. And does that objection to that 8 compensation practice apply equally to the other 9 senior executives who received bonuses in January 10 of 1988? 11 A. It would with the condition that there 12 could be some circumstance that would cause a 13 particular person's bonus to go up. Not, for 14 example, Mr. Gross because his performance is 15 measured by the overall institution. But let's 16 take Mr. Berner. Suppose he had scored some huge 17 legal triumph where the board said, you know, in 18 effect, we're cutting your bonus but then we're 19 giving you back some and even more than we cut 20 because did you this fantastic job that is not 21 related to the financial numbers here. And I 22 could see that possibly happening. 23207 1 Q. Based on your knowledge and experience, 2 was the payment of special bonuses in April of 3 1988 an unreasonable compensation practice? 4 That's the 75/25 split. 5 A. Well, certainly -- it depends on how 6 you're going to characterize the bonus. If you're 7 characterizing it as a bonus for performance, it 8 was clearly unreasonable because not only did you 9 not know what the performance was going to be for 10 the ensuing nine months of the year but you did 11 know that the performance for the first three 12 months was terrible. 13 Now, if you're talking about for some 14 other reason, that we have to hold people -- I 15 guess you could talk about it but, there again, we 16 get that fixed cost problem. 17 Q. How did you interpret it based on what 18 you reviewed? 19 A. Well, I don't know that anybody -- any 20 of the records show any serious discussion about 21 how this is a bonus for performance. I think this 22 was just, you know, we're piling up some extra 23208 1 money and we'd better do it fast because we might 2 lose it later. That seemed to be what I was 3 reading. 4 Q. Is that a reasonable -- is that an 5 unreasonable compensation practice, in your 6 judgment request? 7 A. I think it's very self-serving. 8 Therefore, unreasonable. 9 Q. Was the retroactive increase of 10 salaries in April 1988 in an amount equal to the 11 1987 bonus amount paid in January 1988 an 12 unreasonable compensation practice? 13 A. Yes. In fact, I think that's perhaps 14 the most unreasonable of all the practices because 15 you increase your fixed cost. And I know that the 16 argument was being made at that point that we are 17 trying to meet the competition. Our pay is below 18 the levels of the competition. But, you know, in 19 the Hewitt report, what Hewitt ended up doing was 20 comparing the salary of Mr. Gross, for example, 21 after the inclusion of this 167,000, to not the 22 salary of other companies but the salary and the 23209 1 bonus. 2 So, it was almost that they were 3 saying, well, we want a salary that, in effect, 4 embeds a competitive bonus level in the salary and 5 then we'll go on to get bonuses on top of that 6 which, of course, would send the pay package way, 7 way too high. 8 And a lot of the discussions seemed -- 9 we need to do this to be competitive almost buys 10 into the notion that -- it does buy into the 11 notion that if everyone else is paying 300,000 12 base and 150 bonus, well, then we have to pay 450 13 or else we're not competitive. 14 Now, if it's true that nobody ever cuts 15 their bonuses for bad performance and they don't 16 raise it for good performance such that the bonus 17 is nothing more than extra salary in disguise, 18 that's a fine argument. But if there is some 19 performance orientation somewhere out there, then 20 I don't think that works. 21 Q. Was entering into severance packages 22 for the senior executives of UFG and USAT, given 23210 1 the condition of the company at the time those 2 contracts were entered into, an unreasonable 3 compensation practice? 4 A. Yes, I believe it was. 5 MR. BLANKENSTEIN: Your Honor, I'm 6 going to object. Mr. Schwartz is essentially 7 doing his direct-examination all over again. 8 MR. SCHWARTZ: Your Honor, I'm merely 9 finished. I'm just wrapping up. This is just a 10 return to the basics of his testimony. 11 THE COURT: All right. 12 Q. (BY MR. SCHWARTZ) Was it an 13 unreasonable compensation practice for UFG to pay 14 off the interest and principal of the loans to 15 Mr. Gross and Mr. Crow given the condition of the 16 company? 17 A. I believe it was. 18 Q. Was it an unreasonable compensation 19 practice to reprice the stock options, not just 20 once but three times, under the circumstances 21 present at UFG? 22 A. I believe that options should not be 23211 1 repriced under any circumstances. 2 Q. And with respect to the opinions that 3 you've testified about today and yesterday, do you 4 hold those opinions with a reasonable degree of 5 certainty based on your knowledge and experience 6 as an expert in compensation analysis and 7 practices? 8 A. Yes, I do. 9 MR. SCHWARTZ: No further questions. 10 THE COURT: Is there any recross? 11 MR. VILLA: I have about three 12 questions. I was dangerous to say that. 13 14 FURTHER EXAMINATION 15 16 Q. (BY MR. VILLA) Mr. Crystal, you said 17 that you could not tell from looking at the proxy 18 statement that there had been an agreement from 19 United to fund or pay a certain amount to the -- 20 of interest in connection with the bonuses. And 21 we drew Mr. Crow into this, as well. 22 Do you remember that? 23212 1 A. Yes, sir. 2 Q. Did the OTS show you Exhibit 10.18 to 3 the 1987 10K. The proxy and the 10K went out 4 together. 5 Did they show the exhibit to the 10K 6 that includes the bonus agreement? 7 A. I don't recall seeing that. I only 8 recall seeing the proxy statement itself. 9 Q. Well, the proxy statement -- did they 10 tell you that when the 10K was put together, the 11 section of the 10K about management compensation 12 incorporates by reference the proxy statement and, 13 therefore, the two securities filings went out 14 together and that an exhibit to the 10K was, in 15 fact, this very bonus agreement? 16 Did they tell you that? 17 A. No, sir. 18 Q. So, when you couldn't tell by looking 19 at the face of the proxy statement that there was 20 an agreement to pay off interest, it was because 21 you weren't given all the materials; isn't that 22 right, sir? 23213 1 A. That's true. But it's also the case 2 that -- I mean, I know that any shareholder has a 3 right to get the 10K, but few avail themselves of 4 that right. So, your ordinary people who would 5 look at it would have missed it. 6 Now, I don't know why that the decision 7 was made to put it in a separate document and not 8 to disclose it forthrightly in the proxy. But 9 that is a problem, I think. Perhaps not a legal 10 problem because it's been disclosed, as you just 11 pointed out. It's just that the normal 12 shareholders would not have seen it. 13 Q. If the 10K and the proxy are sent out 14 together, why is it that somebody would see the 15 proxy and not the 10K? 16 A. Unless it's the most unusual 17 institution, the shareholders are not sent the 18 10K. They are sent the proxy only. The 10K is 19 filed with the SEC and is available to any 20 shareholder upon request, but almost never do they 21 send the 10K to the shareholders. But maybe this 22 institution did, in which case if they did and it 23214 1 was somewhere in there, then I would withdraw any 2 objections I would have. 3 Q. Now, you talked very briefly to 4 Mr. Schwartz about the Hewitt report, Exhibit -- 5 Tab 426. And it's T8061. 6 Do you recall that? 7 A. Well, I talked to him about the Hewitt 8 report, yes, sir. 9 Q. It's the one he just showed you today. 10 A. Oh, yes. This little one involving the 11 summary of the interviews? 12 Q. Right. 13 A. Right. I have that here. 14 Q. And you were perplexed in your 15 discussion of the Hewitt report, why Hewitt would 16 use comparables over the 7-billion-dollar range. 17 Remember, you were critical of the comparables in 18 the Hewitt report, the final Hewitt report? 19 A. With reference to the thrifts. Not 20 that they used institutions that were bigger 21 because I would submit to you you cannot find just 22 everybody at 7 billion. There's only maybe one or 23215 1 two companies. So, you end up having to take a 2 range. And then use -- but when you do that sort 3 of range, the first thing you should do is to ask 4 yourself and then answer the question, "Is there 5 any systematic difference in pay among the higher 6 ones and the lower ones," in which case I'm going 7 to draw a regression trend line through my dots 8 and read it at 7 billion which means, by 9 definition, I'm going to get a market rate that's 10 lower than the average. 11 Now, Hewitt just simply took the 12 average. And since there does seem to be a 13 relationship between the size of the institution 14 and the pay, if that relationship obtains here and 15 I didn't have enough information to validate it 16 because I didn't have the individual data points, 17 then you would conclude that Hewitt overstated the 18 average by some degree. I just don't know how 19 much. 20 Q. Did you note the comments in the Hewitt 21 report that the assets -- not the Hewitt report, 22 the document that Mr. Schwartz just showed you -- 23216 1 that while the assets are currently at 2 $7.2 billion, they may increase to 11 to 3 12 billion after the failed thrift asset 4 distribution? 5 Would that explain to you why Hewitt 6 might be looking at a slightly -- might be moving 7 its peer group up a little bit because the 8 anticipation was going to be that it was -- that 9 USAT was going to acquire other assets? 10 MR. SCHWARTZ: I'm sorry. Where are 11 you reading from? 12 MR. VILLA: It's the document you 13 showed him, the same page you showed him. Bates 14 stamp H0127. 15 MR. SCHWARTZ: The one where "assets 16 currently may increase"? Is that what you're 17 referring to? 18 THE WITNESS: Yes. "May increase." 19 MR. SCHWARTZ: Okay. 20 Q. (BY MR. VILLA) Would that explain, sir, 21 why Hewitt, trying to do their job forthrightly, 22 might be looking at a peer group somewhat up the 23217 1 scale? 2 A. I don't have the Hewitt report in front 3 of me, but I think probably that the average of 4 their institutions was somewhere around 5 12 billion, was it not? I think it was passively 6 in that territory. So, yes, it would tend to 7 explain why they might have done it. 8 The only thing I would raise, the 9 question here if I were at Hewitt would be to say, 10 "Well, you say this is going to happen. How 11 likely is this going to happen? Is this something 12 we can bank on, so to speak? It's happening in 13 the next quarter? For example, we've already 14 acquired a company and we just haven't 15 consolidated yet, but it's coming. The deal is 16 signed? Or is this one of those more iffy 17 things?" I would think what I would also do, in 18 fairness to -- even, if they told me this, I would 19 go ahead and pick the bigger group as Hewitt did. 20 I would run those regression lines. And I would 21 read them at 7 billion. I would read them at 22 11 billion. And I'd see how much difference there 23218 1 was. 2 Now, if it turned out that the 3 difference was 10 percent or something like that, 4 I think I probably would just go on and forget it. 5 If it was a great big difference, though, I mean 6 pragmatically, if you say, well, 7 billion, 7 300,000 and at 12 billion, it's 550,000, then I 8 would go back to the company with some more 9 searching questions about the likelihood of these 10 revenues or assets coming. 11 MR. VILLA: Thank you, sir. 12 MR. BLANKENSTEIN: Just a few 13 questions, Your Honor. 14 15 FURTHER EXAMINATION 16 17 Q. (BY MR. BLANKENSTEIN) The special bonus 18 in 1988, it was to be paid in two parts; is that 19 right? 20 A. Uh-huh. (Witness nods head 21 affirmatively.) 22 Q. One was paid in April of 1988 and the 23219 1 other was delayed; is that right? 2 A. Yes. 3 Q. Are you familiar with the term "golden 4 handcuff"? 5 A. Yes. 6 Q. Can you describe what that is? 7 A. It is commonly applied to an 8 arrangement whereby money is sort of given in one 9 sense, in the sense I tell you it's there, but I'm 10 not giving it to you until certain conditions are 11 met. And the conditions almost always pertain to 12 you must remain with the company for a certain 13 period of time. And if you quit prior to the time 14 that we specified, then you lose the amount that 15 was put away for you. 16 Q. What was the condition on the receipt 17 of the 75 percent portion of the special bonus? 18 A. I honestly don't remember, but I think 19 it was that you must be here through the end of 20 the fiscal year or something like that. 21 Q. January 1989? 22 A. I think that's what I recall, yes. 23220 1 Q. And is that -- was that special bonus 2 plan a golden handcuff, as you understand what the 3 term golden handcuff is? 4 A. That would be certainly of that 5 variety, yes. 6 Q. And golden handcuffs are often used to 7 retain key executives, incentivize them to stay 8 with an institution? 9 A. They were -- they used to be used much 10 more frequently. For example, General Motors 11 always paid the bonuses in five installments. So, 12 if you got a 50,000-dollar bonus, you only got 13 10,000 now and you had to earn the rest by staying 14 four years. 15 But more recently, golden handcuffs 16 have sort of gotten a bad name, or even back then. 17 Many executives got mad about the notion that -- 18 it's almost like "I have to earn this money twice. 19 First I perform, and then you tell me you won't 20 give it to me." 21 Q. So, the executives were upset? 22 A. They were upset. They would rather, in 23221 1 effect, have forward-looking incentives as opposed 2 to "I'm giving you the money, but you can't have 3 it." But nevertheless, companies have tended to 4 use these arrangements, and often in cases where 5 the company is not doing so well. 6 Q. Like United wasn't doing well? 7 A. Well, maybe not that badly; but, you 8 know, where they are modestly underperforming. 9 Q. Now, did I understand you to tell 10 Mr. Schwartz that the Hewitt report didn't make 11 reference to United's performance? Its economic 12 performance or its current situation. 13 MR. SCHWARTZ: Excuse me. That 14 misstates -- that misstates the discussion. I did 15 not say "make reference to." And Mr. Blankenstein 16 is confusing the question and twisting it, and I 17 think that's unfair. 18 THE COURT: Well, the record will have 19 to speak for itself. 20 What is your position? 21 THE WITNESS: Well, no. I think -- as 22 I remember the question, it was addressed very 23222 1 specifically to those charts that said, "Here's a 2 market rate of salary, a market rate of salary and 3 bonus." And certainly in that area, there was no 4 thought given by Hewitt to the performance of USAT 5 because they were providing outside data. But 6 later on in the report, there is evidence that 7 Hewitt knew that the performance of the company 8 was poor. Well, of course, we know it from the 9 interviews. And they were suggesting various 10 sorts of repair work, if you will, on the 11 incentive programs so that executives might get 12 some more money for doing something because at 13 that point, the incentives looked to be dead. 14 Q. (BY MR. BLANKENSTEIN) Wasn't one of the 15 objectives that Hewitt was given by United to 16 develop a competitive compensation package to 17 attract and retain the best possible management? 18 A. I don't know that it said -- does it 19 say "best possible management"? I don't know. 20 But to attract and retain and motivate are like 21 mantras. You see them in every report. That's 22 the objective. 23223 1 Q. And did they -- do you remember whether 2 the report made reference that they should do so, 3 recognizing the existence of a fragile economic 4 situation? 5 A. Could you possibly refresh me where 6 that -- 7 Q. Sure. I'll show you Page 9 of the 8 Hewitt report, which is Exhibit A11030. 9 A. Oh, okay. That's that very same one. 10 Q. And don't they make reference there to 11 attract and retain the best possible management 12 recognizing the existence of a fragile economic 13 environment? 14 A. Yes. They say that -- that's the 15 objectives of the company. 16 Q. Right. 17 A. They say that's UFG's. And then they 18 turn right around and tell you that we have to 19 have a cut above the competitive. So, I mean, 20 that seems like a disconnect to me. 21 Q. And if you'll turn to Page 7, the 22 report provides an overview of Hewitt's situation, 23224 1 doesn't it? 2 A. Uh-huh, yes. 3 Q. And among other things, it says, "UFG 4 has performed well relative to other Texas thrifts 5 and financial institutions"; is that right? 6 A. Is the statement correct? 7 Q. No. Is that what it says? 8 A. That's what it says. 9 Q. And you never examined the accuracy of 10 that statement, correct? 11 A. No, I never examined the accuracy of 12 it. But I believe in Mr. Villa's questions and 13 statistics, certainly this institution, by the 14 time this report was being written, was in the 15 tank. 16 Q. But you never -- you never examined the 17 relative -- 18 A. Performance. 19 Q. -- performance of USAT against other 20 Texas thrifts? 21 A. Texas thrifts, you're saying? 22 Q. Right. 23225 1 A. To the extent there were Texas thrifts 2 in my 17 companies, there were a few I'm sure I 3 looked at in that sense. But I did not look at 4 all the Texas thrifts. For example, the group 5 that Mr. Villa showed me which showed that the 6 majority of them were not failing. 7 Q. Well, you didn't examine it; is that 8 right? 9 A. I didn't examine it. 10 Q. Thank you. 11 MR. BLANKENSTEIN: No further 12 questions. 13 THE COURT: All right. Thank you, 14 Mr. Crystal. You may step down. 15 We'll take a recess until 1:45. 16 17 (Whereupon, a lunch break was taken 18 from 12:11 p.m. to 1:50 p.m.) 19 20 THE COURT: Be seated, please. We'll 21 be back on the record. 22 Mr. Rinaldi, are you the sponsoring 23226 1 attorney this afternoon? 2 MR. RINALDI: I am, Your Honor. We 3 would call as the next witness Neil Twomey. 4 THE COURT: Would you take the oath, 5 please. 6 NEIL TWOMEY, 7 was called as a witness and, having been first 8 duly sworn, testified as follows: 9 EXAMINATION 10 11 THE COURT: Be seated, please. 12 Q. (BY MR. RINALDI) Would you state your 13 full name for the record, sir. 14 A. Cornelius John Twomey. 15 Q. How are you presently employed, 16 Mr. Twomey? 17 A. I'm working for the Federal Home Loan 18 Bank of Dallas. 19 Q. Is that in any way related to the 20 Office of Thrift Supervision? 21 A. No. 22 Q. Formerly, what was the relationship 23227 1 between the Federal Home Loan Bank? 2 A. Prior to FIREA, the Federal Home Loan 3 Bank operated as part of the regulatory apparatus 4 for the Federal Home Loan Bank system. 5 Q. And then when FIREA was passed, what 6 occurred? 7 A. Basically, the corporate banking side 8 of the Federal Home Loan Bank moved over on one 9 side; and the whole regulatory apparatus and the 10 supervision of the savings and loan industry moved 11 to OTS. 12 Q. Now, can you briefly enumerate for the 13 Court your educational experience, sir? 14 A. Yes. I grew up in the Boston, 15 Massachusetts. Went to grammar school, high 16 school in that area. I went to college at the 17 University of Notre Dame. I graduated in 1973 18 with a degree in accounting. The same year I 19 started as a field examiner for the Federal Home 20 Loan Bank Board, Boston office; and I worked for 21 the Federal Home Loan Bank Boston office until 22 July of 1985. 23228 1 At that time, the examination functions 2 of the Federal Home Loan Bank Board examiners was 3 transferred to the Federal Home Loan Banks; and I 4 became an employee of the Federal Home Loan Bank 5 of Austin. And I stayed in that position until 6 December of 1985. 7 At that point, I took a position as a 8 supervisory agent for FSLIC with the Federal Home 9 Loan Bank of Dallas; and I started there on 10 December 2nd, 1985. 11 Q. Now, prior to your separating the 12 position with FSLIC in Dallas, how many years 13 experience had you had as an examiner? 14 A. Approximately 12 years as a field 15 examiner. 16 Q. And you started off at an entry level 17 position? 18 A. Yes, I did, sir. 19 Q. Did you work your way up then? 20 A. I worked up to the level of senior 21 examiner. At the same time, I was also working on 22 various special projects in Washington, D.C. for 23229 1 the Federal Home Loan Bank Board. 2 Q. Can you briefly explain to the Court 3 what the nature of those special projects were? 4 A. In 1981, I was designated by the Bank 5 Board as an accounting associate; and I would go 6 Washington, D.C. to work on their SEC filings. 7 The various S&Ls that were stock chartered would 8 be filing their 10Ks, 10Qs with the Federal Home 9 Loan Bank Board. They created a backlog, and they 10 asked me to help them clear it up. I did the same 11 thing in 1983 for another four or five months. 12 Then later on, I was picked by the Bank 13 Board as what they call a senior coordinator. In 14 1984, the Bank Board needed to create a senior 15 examination school in which advanced techniques of 16 examining analytical skills needed to be upgraded 17 for our senior examiners. And I was a coordinator 18 of that for 1983, 1984; and I also taught at their 19 new examiner training school in 1985. 20 Q. In connection with your duties as a 21 coordinator for the examination school, did you 22 also have duties as a -- an instructor? 23230 1 A. Yes, I also taught. 2 Q. After you joined the Federal Home Loan 3 Bank of Dallas, what position did you initially 4 assume? 5 A. I was a supervisory agent, what 6 sometimes is commonly referred to as a line agent, 7 meaning I had a case load of active institutions. 8 I had approximately 90 institutions assigned to me 9 day one. 10 Q. And how -- what is the relationship 11 that exists between the supervisory agent on the 12 one hand and examiners who actually perform the 13 examinations of savings and loans? 14 A. Okay. In 1985, the examiners were run 15 by the district director who had responsibility 16 for all examination functions. They would conduct 17 routine examinations on the various S&Ls. When 18 they finished their examination, they would 19 prepare an examination report. When the 20 examination report was completed by their staff, 21 they would then transfer it to the supervisory 22 agent who would review it. If there was any 23231 1 supervisory action that should be taken for 2 deficiencies or technical violations of the rules 3 and regulations of the Federal Home Loan Bank 4 Board or the FSLIC, then the supervisory agent 5 would then direct the institution to take 6 corrective action. 7 THE COURT: This district director, he 8 was also an employee of the Dallas bank? 9 THE WITNESS: In the latter part of 10 1985, he was, sir. 11 Q. (BY MR. RINALDI) Now, in connection 12 with the conduct of an examination at any one 13 institution that was under your supervision, were 14 you responsible for directing the actual 15 examination? 16 A. No. 17 Q. What would the relationship be? 18 A. At the time the district director or 19 one of the assistant district directors would 20 schedule an examination, he would ask the 21 supervisory agent for his input regarding the 22 scope of the examination. So, if we had a special 23232 1 interest or a certain area that we wanted reviewed 2 or beyond the routine scope, then we could ask the 3 district director to add it to the scope; and then 4 the EIC and the field examiner conducting the 5 examination would include that area as part of 6 their examination. 7 Q. During the course of the ongoing 8 examination, were you in a position to direct the 9 examiners? 10 A. Because some of the examinations at 11 that time became quite lengthy, we would have 12 discussions with the field managers and the 13 examiner-in-charge. And we may get involved or 14 ask them to do additional testing. 15 Q. But they weren't under your direct 16 supervision? 17 A. No. At this time, it would have to be 18 all requests. 19 Q. Now, when you first joined the Federal 20 Home Loan Bank Board, you indicated that you had 21 90 institutions that you were in charge of 22 supervision? 23233 1 A. Approximately. 2 Q. So, you then had to review the 3 examination reports that came in with respect to 4 all 90 institutions? 5 A. Yes. But thankfully, not all 90 showed 6 up at the same time. 7 Q. In connection with carrying out your 8 duties as supervisory agent, did you have 9 assistants? 10 A. Yes. I had what we call regulatory 11 analysts or supervisory analysts, and I -- at 12 least four, sometimes as many as six were assigned 13 to me at different times. They were responsible 14 for reviewing the various correspondence and 15 reports coming in from the different institutions. 16 If there was an important material issue, they 17 would bring it to my attention. 18 Q. So, if an application of some sort were 19 sent in to you as the supervisory agent, would you 20 review the application first and then pass it on 21 to the analyst; or would it be the other way 22 around? 23234 1 A. Actually, I would probably just review 2 the application in a very cursory way and then 3 pass it to the analyst for them to start 4 processing. 5 Q. Now, you described the examination 6 function as being somewhat separate from the 7 supervisory function. 8 Was there also a group that dealt 9 specifically with -- with applications at this 10 point in time? 11 A. Not in 1985. The supervisory analysts 12 also did the application work. 13 Q. Okay. Now, did there come a point in 14 time after you joined the Federal Home Loan Bank 15 of Dallas when the nature of the institutions you 16 were supervising changed? 17 A. Well, the Federal Home Loan Bank of 18 Dallas was constantly increasing their staff 19 levels; and there were basically three 20 reorganizations while I was there. 21 Q. And in connection with those 22 reorganizations, did the nature of the -- well, 23235 1 let me ask you this: Those 90 institutions that 2 you started out supervising, were they large 3 institutions or smaller institutions; or did they 4 run the gamut? 5 A. They actually ran the gamut. 6 Q. Did there come a point in time when the 7 nature of the institutions you supervised changed? 8 A. Yes. 9 Q. Can you describe that for the Court? 10 A. In April of nineteen -- April 1st, 11 1987, the staff reorganized the caseloads. We had 12 more supervisory agents, and they were splitting 13 up -- instead of 90, you might have 40 or so. And 14 for a time, I only had 40 institutions, for about 15 a three-month period. 16 Then approximately August 1st, they 17 moved me from that part of the caseload and put me 18 into what we call a large troubled thrifts group. 19 And I was with that group until the middle of 1988 20 and then was redesignated as the large thrift 21 group. Originally, I still -- in the trouble 22 group, I still had about 40 institutions. When it 23236 1 became the large thrift group, I had about 25 2 institutions. 3 Q. Now, throughout this period of time -- 4 that is, when you first joined the institution and 5 then your caseload went down to 40 and then 25 6 institutions -- did you always have responsibility 7 for supervision of United Savings Association of 8 Texas? 9 A. Yeah, from the time I arrived until 10 the -- until it went into receivership on 11 December 30th, 1988. 12 Q. Again for the record, what was the date 13 of your actual arrival? 14 A. December 2nd, 1985. 15 Q. Okay. When you arrived, what was the 16 hierarchy at the Federal Home Loan Bank of Dallas 17 in terms of the persons that were above you? 18 A. I was a member of three supervisory 19 agent groups which happened to be called "super 20 B." Above me, starting in January of 1986, was 21 Jim Halverson. He was my immediate supervisor. 22 And above him was Lou Roy, who was in charge of 23237 1 all regulatory supervision. And above Mr. Roy, 2 who was an executive VP at the bank, was the 3 president; and that would have been Roy Green at 4 the time. 5 Q. Okay. Now, did your supervisor, 6 Mr. Halverson, come to change over time? 7 A. In the first reorganization I mentioned 8 on April 1st, 1987, Mr. Halverson moved to another 9 group; and Danny Thomas, I believe, became the 10 head of my group. 11 Q. Okay. All right. Now, is there -- we 12 see periodically the term "principal supervisory 13 agent." 14 Who was the principal supervisory 15 agent, or what is the principal supervisory agent? 16 A. The principal supervisory agent is the 17 head regulator of the district, and that 18 encompasses Texas. He's also the president of the 19 Federal Home Loan Bank. 20 Q. So, in the 1985 time frame when you 21 started your supervision of USAT or the end of 22 '85, the beginning of '86, that would have been 23238 1 Roy Green? 2 A. Yes, sir. 3 Q. Did the principal supervisory agent 4 then change over time? 5 A. In August of 1987, Mr. Green resigned. 6 I believe that's the date. And in the -- shortly 7 after that, George Barclay was made interim 8 president and PSA. Later in 1987, toward the end, 9 he was made the permanent PSA and president of 10 Federal Home Loan Bank of Dallas. 11 Q. Now, from time to time as we go through 12 the documents, we will hear the name Mr. Selby 13 mentioned. 14 Where did Mr. Selby fit into the 15 hierarchy we just talked about? 16 A. In May of 1986, the Federal Home Loan 17 Bank was expanding its staff; and it hired 18 Mr. Selby to run supervision. At that time, 19 Mr. Lou Roy left; and, basically, Mr. Selby 20 assumed his position as the head of regulatory 21 affairs. 22 Q. And Mr. Selby would have initially 23239 1 served under Mr. Green and later Mr. Barclay? 2 A. Yes. 3 Q. And Mr. Selby then would have 4 supervised initially Mr. Halverson and Mr. Thomas? 5 A. Yes. 6 Q. And then below Mr. Halverson and 7 Mr. Thomas was you? 8 A. Yes. 9 Q. And below that were -- 10 A. My analysts. 11 Q. And so forth. Okay. 12 You indicated that the analysts 13 initially handled the applications. Did that 14 change? 15 A. Again, April 1st, 1987, we separated 16 out a separate group of analysts and supervisory 17 agents just to handle applications. 18 Q. Now, you indicated that the Federal 19 Home Loan Bank of Dallas had been going through a 20 number of reorganizations. 21 What was the circumstance of the 22 Federal Home Loan Bank of Dallas prior to your 23240 1 arrival or at about the point in time that you 2 arrived there in terms of staffing? 3 A. It was constantly growing the staff or 4 the number of analysts. My position as the 5 supervisory agent was newly created. And Jack 6 Anderson had been covering my caseload from 7 September until the time I arrived, and then he 8 went back to his own caseload. 9 Q. Now, prior to your arrival, who would 10 have been responsible for the supervision of 11 United Savings Association of Texas? 12 A. As best I can remember, Carol Ondrake 13 would have been in charge of supervision of United 14 between June '84 to June '86. I think that's when 15 she left the Federal Home Loan Bank of Dallas. 16 I'm not sure how it would fit in from the time 17 that I arrived other than I knew Jack Anderson had 18 it for a couple of months. 19 Q. Did she then report to Mr. Roy prior to 20 your arrival? 21 A. Yes. She reported directly to Lou Roy. 22 Q. Now, in connection with the 23241 1 examinations that were going on in Texas at that 2 point in time, was there a shortage of examiners 3 at about the time you had arrived? 4 A. In 1985, there was a shortage of 5 examiners. 6 Q. Can you sort of describe for the Court 7 the circumstances that existed with respect to 8 examinations at that point in time? 9 A. From 1982 through 1985, the overall 10 number of examiners nationwide declined from over 11 a thousand down to 700. And at the same time, in 12 Texas, Florida, and California, the examinations 13 were becoming much more complex because the number 14 of institutions were growing and the number of 15 large institutions were increasing and the number 16 of complex transactions they were investing in was 17 increasing. 18 So, instead of examiners going in and 19 looking at an institution in two or three weeks 20 and leaving, they were now staying two and three 21 months. We had less people, we had longer exams, 22 and it was creating a shortage. The time between 23242 1 one exam and another was increasingly 2 dramatically. 3 Q. Did there come a point in time when the 4 Bank Board attempted to augment its examination 5 staff with persons other than examiners? 6 A. Yes. In March of 1986 in Texas, we had 7 outside examiners from our agency -- I mean from 8 other districts -- Boston, New York, Chicago -- 9 come to Texas to the United States with exams. At 10 the same time, we engaged a number of CPA firms to 11 do examinations at various institutions. 12 Q. Now, did the shortage of -- what was 13 the reason for the shortage of examiners in Texas? 14 A. Again, the number of institutions was 15 growing, the size was growing, and we just didn't 16 have enough people to go around and do all the 17 institutions in a timely manner. 18 Q. Did there come a point in time when 19 Texas was able to catch up with the shortage of 20 examiners? 21 A. Over the period from '85 through '88, 22 we dramatically increased our staff; and I don't 23243 1 think it was really until '88 that we had staffing 2 commensurate with the problems. 3 Q. Would that have been the beginning of 4 '88 or later in the year? 5 A. Beginning of '88. 6 Q. Now, you indicated that you supervised 7 USAT from the beginning. 8 Did there come a point in time when it 9 became apparent to you that USAT was not going to 10 survive without some form of assistance from the 11 FSLIC? 12 A. I don't remember exactly when I might 13 have come to that determination; but based on its 14 operating results even in 1986, if they didn't 15 correct the situation, they were going to spiral 16 into insolvency based on what was happening at 17 that point. 18 Q. In 1988, did you have occasion then to 19 ultimately write to the FSLIC and recommend that 20 USAT be placed into receivership? 21 A. Yes. 22 Q. Would you open the book that's in front 23244 1 of you and take a look at what's been previously 2 marked as Exhibit A11165? 3 A. Okay. 4 Q. Do you recognize this document, sir? 5 A. Yes, I do. 6 Q. And can you describe for the Court what 7 it is? 8 A. This is the transfer letter where we 9 recommend transfer to FSLIC deeming United a FSLIC 10 case. And the reason for that is at this time, we 11 felt that the institution couldn't cure its own 12 problems; and the only way it was going to be 13 resolved was when the infusion of FSLIC money. 14 Q. And is that your signature that appears 15 on the second page? 16 A. Yes. 17 MR. RINALDI: Your Honor, we would move 18 the admission of A11165. 19 MR. VILLA: No objection. 20 THE COURT: Received. 21 Q. (BY MR. RINALDI) Now, in the first 22 paragraph, it talks about you recommended a 23245 1 transfer. 2 Do you see that? 3 A. Yes, I do. 4 Q. And do you recall what the basis was 5 upon which the transfer was being recommended? 6 A. The institution was reporting 7 insolvency. 8 Q. Okay. In the second paragraph, it 9 reports in the second sentence, "As of 10 September 30th, 1988, the association reported 11 total assets and net worth of 4,646,000" -- I'm 12 sorry -- "$4,646,240,000 and negative 13 $203 million." 14 Do you see that? 15 A. Yes, I do. 16 Q. And it was a result of that insolvency, 17 the negative value of the institution, that it was 18 recommended that it be turned over to the FSLIC 19 for resolution? 20 A. Yes. 21 Q. Now, at the bottom of the page, it 22 makes reference to something called a 23246 1 Southwest Plan examination on United having begun 2 on September 7th, 1988. We're going to talk more 3 about the Southwest Plan examination. 4 Can you just describe for the Court 5 briefly what that was? 6 A. In late 1987, the Federal Home Loan 7 Bank Board and the Federal Home Loan Bank of 8 Dallas had organized what they called the Texas 9 plan, which was the -- there was so many insolvent 10 S&Ls in the Texas area that we were going to, with 11 FSLIC assistance, merge them together and then 12 recapitalize them with outside buyers infusing 13 capital and with FSLIC guarantees to cover the new 14 buyers from losses. And later on, it became 15 what's called the Southwest Plan. They changed 16 the name. 17 In May of 1988, the first two 18 institutions to go through receiverships 19 involving -- a number of institutions went through 20 receivership. But two acquirers came in. Coastal 21 and Southwest Savings in Dallas -- Coastal Bank 22 here in Houston -- were the first two acquirers. 23247 1 There was a lot of criticism that they were the 2 first two acquirers because one of them was also a 3 member of our board of directors in Dallas. 4 So, at that time, the Federal Home Loan 5 Bank Board brought in examiners from Chicago to 6 run what we called Southwest Plan examinations. 7 What was going to happen then is examiners from 8 around the country would come in and review 9 institutions that were going to be acquired or 10 wanted to be acquirers regarding their overall 11 safety and soundness and competency of their 12 management; and that way, the Bank Board would be 13 able to say we had independent overview of what 14 the competency of these institutions are to be 15 involved in the Southwest Plan. 16 Q. And the reference in this document to 17 the Southwest examination was an examination to 18 determine whether USAT was a suitable candidate to 19 become an acquirer under the Southwest Plan? 20 A. Basically, yes. 21 Q. And it indicates that it's going to be 22 a full scope exam. What is a full scope exam? 23248 1 A. We look at all operations of the 2 institution and its subsidiaries and service 3 corporations. 4 Q. Now, in order to put USAT into 5 receivership, did you first have to have the 6 approval of the board of USAT? 7 A. In United's case, we requested and 8 received a consent agreement where the board of 9 directors of United consented to have the 10 institution put into receivership. 11 Q. If you turn to the next page, you'll 12 see the second full paragraph talks about on 13 November 7, 1988, the board had executed a consent 14 decree? 15 A. Yes, that's correct. 16 Q. As part of that consent decree, had 17 they then agreed that they could be placed into 18 receivership? 19 A. Yes. 20 Q. Now, prior to placing -- as a result of 21 your recommendation to Mr. Held, was USAT then 22 subsequently placed into receivership? 23249 1 A. Yes, it was. 2 Q. In connection with placing it into 3 receivership, did you assist in the preparation of 4 a memorandum recommending that the receivership go 5 forward, what is sometimes referred to as an S 6 memo? 7 A. Supervisory history memo, yes, I did. 8 Q. Well, take a look at the next document 9 in your book, which is T8142; and it's at 10 Tab 1450. 11 Do you recognize that document, sir? 12 A. Yes. It's commonly referred to as the 13 S memorandum. 14 Q. Okay. Describe for the Court what the 15 purpose of the S memorandum was. 16 A. It provides Washington the supervisory 17 history of the institution. We commonly start 18 with the time the current people who control the 19 institution acquired control and walk it up to all 20 significant supervisory situations that have 21 occurred. And we also spell out the situation now 22 that the institution may find itself in, the 23250 1 reasons for those problems. And basically, in 2 this case, Billy Wood -- and the initials here are 3 for George M. Barclay, who is the PSA -- they are 4 now sending that on to the Federal Home Loan Bank 5 Board as our recommendation that United Savings 6 Association of Texas be put into receivership. 7 Q. Okay. Now, if you turn to the last 8 page, there's a rather impressive array of 9 individuals who received copies of this thing. At 10 the bottom it starts with Mark Dunn. 11 Was he your supervisory analyst at the 12 time that this was prepared? 13 A. Yes. Mr. Dunn was the analyst for the 14 case. 15 Q. And prior to Mister -- just so we know, 16 prior to Mr. Dunn serving as your supervisory 17 analyst, who had been the supervisory analyst with 18 respect to United Savings Association of Texas? 19 A. Ginger Baugh until about August of 20 1988. 21 Q. So, most of the period of time that you 22 supervised USAT, Ms. Baugh would have been the 23251 1 analyst? 2 A. Yes, she was. 3 Q. Then next on the list, who was Robert 4 Brick? 5 A. Robert Brick was running the 6 Southwest Plan marketing group. And they were 7 responsible for -- after group institutions were 8 put together, preparing the Federal Home Loan Bank 9 of Dallas's recommendations regarding the 10 potential acquirers. Whatever Washington would 11 ask us to do, his group would prepare. 12 Q. Were they then responsible for 13 overseeing in part the Southwest Plan 14 examinations? 15 A. No. 16 Q. Who would have been responsible for the 17 Southwest Plan examinations? 18 A. John Valek and Mr. Passarelli were the 19 two principals in charge of overseeing how the 20 Southwest Plan examinations were scheduled and 21 conducted. 22 Q. So, they were conducted totally 23252 1 separately from the Federal Home Loan Bank of 2 Dallas? 3 A. Yes. 4 Q. Okay. Now, turn, if you will, to 5 the -- well, to the first page of -- of the S 6 memo, and it makes a recommendation in the second 7 full paragraph there that FSLIC be appointed as a 8 receiver. 9 Do you see that? 10 A. Yes, I do. 11 Q. And it also goes on and talks about 12 USAT having consented to the appointment. 13 What were the grounds upon which the 14 appointment of the receiver was being recommended 15 at this time? 16 A. Principally, because of the insolvency 17 of the institution. 18 Q. Okay. And it indicates below that as 19 of October 31st, 1988, they had negative 20 regulatory capital of $272,791,000. 21 Do you see that? 22 A. Yes, I do. 23253 1 Q. What does it mean to have negative 2 regulatory capital? Does it mean they are that 3 amount below their minimum capital requirement? 4 A. No. The minimum capital requirement is 5 a positive number. What you're seeing there is 6 they are below zero, period. There's regulatory 7 accounting principles, and there's generally 8 accepted accounting principles. The regulatory 9 accounting principles at that time were a little 10 more forgiving and would allow them to count 11 certain things that, under GAAP, they were not 12 allowed to count. 13 Basically, on a RAP basis, they were 14 insolvent. 15 Q. If you turn to the next page, it 16 discusses the operating condition of USAT. If you 17 look at the first full sentence, it says, "United 18 has experienced operating losses of $10.4 million 19 per month with the 12 months ending September 30, 20 1988, caused primarily by increasing amounts of 21 non-earning assets." 22 Do you see that? 23254 1 A. Yes, I do. 2 Q. What does it mean when it indicates 3 there were operating losses of 10.4 million, sir? 4 A. Basically, what you're talking about on 5 operating income, you're talking about the normal 6 fee and interest income you receive on loans and 7 investments versus the cost of your liabilities 8 such as the deposit money and also borrowed money 9 that you may have had set up on your books. So, 10 basically, you have interest income; and you have 11 interest expense. And you net those two together, 12 and you have whether or not the institution 13 basically has operating income or negative 14 operating income. In this case, their expense or 15 their liabilities that they had incurred was much 16 higher than the yield on the earning assets. 17 Q. And it indicates here that the 18 operating losses on a monthly basis were 19 approximately $10 million. So, would that then 20 translate to about $120 million if that were 21 maintained over a year's period of time? 22 A. Simply put, yes. 23255 1 Q. If we go down further, it indicates 2 that net income per month has averaged a negative 3 37.2 million. 4 What is the difference between the 5 operating losses and the -- the negative net 6 income figure? 7 A. As the institution would sell assets, 8 they would be gains or losses. And primarily when 9 you deal with non-operating, you're talking about 10 one-time occurrences where the institution sells a 11 foreclosed real estate at a loss or it sells a 12 security at a loss or a security at a gain. And 13 what we call the thrift reports, TFR, thrift 14 financial reports, the institution will report the 15 non-operating gains and the non-operating losses. 16 And when you take the net income -- i.e., all 17 operating income, all non-operating income -- you 18 take all operating expenses and all non-operating 19 expenses, they are incurring, I think it says 20 here, a 37-million-dollar loss per month. 21 Q. So, if it persisted over a year's time, 22 it would have represented nearly $400 million a 23256 1 year? 2 A. At least. 3 Q. It was based, then, on this insolvency 4 that USAT was placed into receivership? 5 A. Yes. 6 Q. Okay. Now, if you turn to Page 3 of 7 the S memo, it starts "a discussion of the 8 supervisory history." And that supervisory 9 history begins with a discussion of the May 27th, 10 1986 regular examination. 11 Do you see that? 12 A. Yes, I do. 13 Q. Now, the first sentence I'm curious 14 about. It says, "United was initially assigned a 15 composite rating of 3 which was subsequently 16 downgraded to a 4 by the supervisory agent due to 17 supervisory concerns." 18 Do you see that? 19 A. Yes, I do. 20 Q. You were the supervisory agent at this 21 time. Were you the person that downgraded the 22 rating of the exam from a 3 to a 4 in 1986? 23257 1 A. Yes, I was. 2 Q. And can you describe for the Court the 3 reasons why you had undertaken that activity? 4 A. During the course of the examination, 5 the examiners were unable to determine the true 6 financial condition of the institution. The books 7 and records of the institution were in such a 8 state, we could not determine what total assets 9 were, total liabilities, or net worth. We found 10 their records inaccurate. And it is the 11 responsibility of the board of directors and the 12 management to maintain accurate records. And 13 because of that, we couldn't properly finish the 14 examination. 15 Q. Well, you couldn't finish the 16 examination; but why was it that you changed the 17 overall rating of the institution from a 3 to a 4? 18 A. Because again, I looked at -- this 19 primary downgrading was in management, and I 20 looked to the institution's management to properly 21 run the institution. And I felt because they 22 couldn't maintain proper books and records, that 23258 1 was a deficiency. 2 Q. Now, in the memo, it simply states that 3 there was a composite rating that was downgraded 4 from a 3 to a 4; but you just a moment ago -- 5 MR. VILLA: Actually, the memo has all 6 the reasons. He just didn't read it. 7 MR. RINALDI: I'm sorry? 8 MR. VILLA: The memo -- he says that 9 the memo just says there's a downgrading from a 3 10 to a 4. In fact, there's a whole paragraph that 11 sets out the reasons. 12 MR. RINALDI: You must have not heard 13 properly -- 14 THE COURT: All right. Restate your 15 question, Mr. Rinaldi. 16 Q. (BY MR. RINALDI) The memo states that 17 the composite rating was downgraded from a 3 to a 18 4. 19 In response to my question, I thought 20 you also said that you had downgraded the 21 management rating? 22 A. I believe so. 23259 1 Q. Which was it? Did you say you also 2 downgraded the management rating? 3 A. I believe so. 4 Q. Why had you downgraded the management 5 rating as well as the -- 6 A. Because the management is responsible 7 to maintain proper books and records of the 8 institution, and we felt they were not maintained 9 properly. 10 Q. In addition to books and records, it 11 makes reference to similar overdeficiencies. It 12 talks about the Couch Mortgage loans. 13 What were those? 14 A. There was a rather large investment 15 that Bank United had made during this period of 16 time when Bank United would foreclose on a 17 single-family home. Instead of -- instead of 18 transferring it onto its books and records as real 19 estate owned through foreclosure, they would swap 20 it with Couch Mortgage. Couch Mortgage would give 21 them, in a sense -- simply put, if their loan had 22 a book value of 30,000, then Couch would give them 23260 1 $60,000 worth of liens against Couch paper which 2 was secured by 1 to 4 single-family homes in the 3 general Houston area. 4 So, consequently, Bank United was never 5 showing REO foreclosed on its books. It was 6 showing an investment in Couch Mortgage. One time 7 I remember in a discussion with their group they 8 mentioned they didn't even have a staffed-up real 9 estate department because they had avoided REO by 10 entering into this transaction with Couch 11 Mortgage. 12 Q. Now, as Mr. Villa pointed out, there is 13 an entire list of deficiencies that related to the 14 '86 examination. Just take a look at that 15 paragraph and tell me if that accurately reflects 16 your recollection of the deficiencies that were 17 reported during the 1986 examination. 18 A. Yes, it does. 19 Q. Okay. Now, one of them in particular 20 which I think will probably come up later refers 21 to the question of reliance on non-operating 22 income to produce profits. 23261 1 Do you see that? It's about -- 2 A. Halfway down? 3 Q. Yeah. Do you know what that refers to, 4 the reliance upon non-operating income? 5 A. Again, on their operating income versus 6 operating expenses, they were operating at a loss. 7 And prior to this exam in 1986, the institution 8 had branch sales; and they also had sold some 9 mortgage-backed securities in 1985, I believe. 10 And this was the only reason that they were able 11 to show a positive overall net income, these 12 one-time transactions. 13 Q. Now, following the examination or the 14 completion of the examination, did you have 15 occasion to meet with the directors of USAT and to 16 discuss the results of the examination? 17 A. Yes, I believe I did. 18 Q. Okay. If you look at the first full 19 paragraph on the -- on Page 4 of the S memo, it 20 talks about a June 9th, 1987 meeting. 21 Do you see that? 22 A. Yes, I do. 23262 1 Q. Now, following the exam, was -- did a 2 question arise as to whether USAT should be given 3 any sort of supervisory agreement? 4 A. Yes. 5 Q. Okay. And can you explain to the Court 6 what you recall of that circumstance? 7 A. At that time at the Federal Home Loan 8 Bank of Dallas in the regulatory affairs group, 9 when an examination like this would come in and 10 some type of corrective action to address 11 deficiencies was warranted, we would to go to the 12 Regulatory Review Committee, RRC. At that time, 13 we had written up a recommendation for supervisory 14 agreement and had gone to the RRC and asked for 15 it. 16 Q. What is a supervisory agreement? 17 A. It basically is an agreement between 18 the regulatory and the thrift's board of directors 19 outlining how they had addressed the deficiencies 20 noted in the examination. It was an agreed-upon 21 course of action. 22 Q. Did the RRC accept your recommendation 23263 1 that they enter into a supervisory agreement? 2 A. No. 3 Q. And why was that? 4 A. The head of the RRC at that time was 5 also head of regulatory affairs: Joe Selby. He 6 was concerned that we couldn't tell him what total 7 assets, total liabilities, and net worth was. He 8 felt it would be more constructive that we engage 9 outside auditors to go in and review the books, 10 the records, and the systems of Bank United so we 11 could get accurate reports from them. 12 Q. And ultimately, what action was -- 13 course of action was decided that should be taken 14 by the Federal Home Loan Bank of Dallas with 15 respect to USAT? 16 A. Well, addressing the books and records 17 problem, we addressed that with the board of 18 directors; and they agreed to hire an outside CPA 19 firm. And that was Grant Thornton, and they came 20 in and did their review. 21 Q. Was there a reason that the board of 22 directors of USAT was adverse to being placed 23264 1 under a supervisory agreement? 2 A. At various times, they communicated to 3 me that because of a large portion of their 4 liabilities, their borrowed money, was repo money 5 coming from Wall Street, they were very sensitive 6 to the fact that UFG was a publicly reporting 7 company and that if they had to make a disclosure 8 they were under some type of supervisory 9 restrictions, it would adversely affect their 10 ability to raise money on Wall Street. 11 Q. And as a consequence of that, you 12 agreed in lieu of the supervisory agreement to 13 have the books and records reviewed by Grant 14 Thornton? 15 A. The board of directors at USAT agreed 16 to engage Grant Thornton to review their books and 17 records, and that was acceptable to us. 18 Q. Okay. And if you look -- and if you 19 look at the fourth full paragraph on Page 4, it 20 also talks about Prudential-Bache. 21 Do you see that? 22 A. Yes. 23265 1 Q. Was some action taken also with regard 2 to the review of the association's junk bond 3 trading activity? 4 A. Yes. During this whole period of time, 5 USAT had approximately a half billion dollars in 6 what was commonly referred to as junk bonds. And 7 we were concerned regarding those investments. 8 Junk bonds are low-rated bonds or not rated at 9 all, and they were basically subordinated business 10 loans. Your only basis to get repaid is the 11 financial worthiness of the company that issued 12 them. And you're basically last in line if 13 there's ever financial problems at the company 14 that issues them. 15 So, we were concerned with regard to 16 credit worthiness, the amount of trading that was 17 going on; and also at roughly half a billion, it 18 was a material asset to USAT. And similar to what 19 we did with, in a sense, Grant Thornton, we asked 20 to have an outside Wall Street firm come in and 21 review their trades, their practices, their 22 policies, the procedures, the personnel involved. 23266 1 Q. Now, directing your attention to about 2 halfway through the second paragraph on Page 4, it 3 says -- it talks about, "For the next several 4 months, United continued to fiercely contest the 5 regulatory capital failure based on its 6 disagreement with the examiner's classification of 7 several of its assets and that the loss reserves 8 being reported were general and not specific 9 reserves and, therefore, appropriately included 10 regulatory capital." 11 Do you see that? 12 A. Yes, I do. 13 Q. Did the examiner conclude that there 14 had been a regulatory capital failure with respect 15 to USAT during the '86 exam? 16 A. The 1986 exam? Yes, she did. 17 Q. And when it says that it had been 18 fiercely contested, do you recall what that 19 relates to? 20 A. Bank United refused to book the 21 reserves that would then have impaired their 22 capital, causing them to fail regulatory capital 23267 1 which would then automatically cause us to put 2 them under regulatory restrictions. 3 Q. Would the discussions of booking the 4 losses continue on for some period of time after 5 the completion of the 1986 examination in 1987? 6 A. It basically continued until December 7 of 1987. 8 Q. And what then occurred in December of 9 1987? 10 A. Bank United, on its own, because of its 11 deteriorating financial condition -- the thrift 12 financial report that they had filed with us 13 showed they had failed to maintain the minimum net 14 worth levels required by the rules of FSLIC. 15 Q. So, in essence, they ultimately 16 concurred in the assessment that they were failing 17 their net worth? 18 A. I don't say they concurred. It became 19 a moot point. They were now failing their 20 capital, and a simple multiplication and 21 subtraction showed they would be going into 22 insolvency somewhere in mid-1988. 23268 1 Q. Now you've confused me somewhat because 2 frequently when we're talking about United Savings 3 Association of Texas, you refer to it as Bank 4 United. 5 A. I'm sorry. 6 Q. Can you explain for the Court why you 7 refer to USAT as Bank United? 8 A. There is a Bank United in this town. 9 If I do that, it's because I'm speaking too fast 10 and I confuse the two. If I have said Bank 11 United, I'm referring to USAT. 12 Q. Is Bank United an entity that 13 ultimately resulted from the failure of USAT? 14 A. Bank United resulted from the purchase 15 of certain assets and liabilities from FSLIC, 16 which then they formed Bank United. 17 Q. And those were assets and liabilities 18 of USAT? 19 A. Yes, sir. Assets and certain 20 liabilities of USAT as a result of the 21 receivership on December 30th, 1988. 22 Q. And after that receivership and the 23269 1 creation of Bank United, were you then responsible 2 for the supervision of Bank United? 3 A. Yes, I was, until the time I left the 4 OTS. 5 Q. Okay. And we didn't go into that. 6 Perhaps it would make sense to at this point make 7 a short detour and ask you: When did you leave 8 the successor to the Federal Home Loan Bank of 9 Dallas? 10 A. Well, a trip down history lane. In 11 October of 1989 -- sorry. 12 In August of 1989, the president of the 13 United States, George Bush, signed what we refer 14 to as FIREA which was restructuring all the 15 regulatory apparatus dealing with savings and 16 loans. On October 9th, I believe, of 1989 -- 17 THE COURT: Are you sure about that? 18 THE WITNESS: Approximately. 19 A. October 9th, 1989, the Federal Home 20 Loan Bank Board ceased to exist; and the Office of 21 Thrift Supervision was created. And at that time, 22 the employees of the Federal Home Loan Bank system 23270 1 that were regulatory employees were transferred 2 from the Federal Home Loan Bank system, the 3 individual 12 banks, to the Office of Thrift 4 Supervision, which is an agency in the United 5 States Treasury Department. 6 I worked for the OTS from October of 7 1989 until July 20th of 1990 when I resigned my 8 position. 9 Q. (BY MR. RINALDI) And after you resigned 10 your position, did you then obtain some other 11 employment? 12 A. I went to work for American Real Estate 13 Group, which was a subsidiary of a holding -- 14 savings and loan holding company in California. 15 Q. And how long did you remain there? 16 A. Approximately -- I stayed there two 17 years. 18 Q. And after leaving that entity, where 19 did you go? 20 A. I took a position as a senior 21 vice president and chief operating officer of an 22 institution called Jefferson Federal Savings and 23271 1 Loan in Gretna, Louisiana; and I was there 2 approximately eight to nine months. 3 Q. After you left that institution, where 4 did you go? 5 A. I was hired by the Federal Home Loan 6 Bank of Dallas as vice president; and I started 7 there on January 1st, 1994. And I still hold that 8 position today. 9 Q. And you are still in the position of 10 vice president in what particular area? 11 A. I'm the Federal Home Loan Bank of 12 Dallas's compliance officer. 13 Q. Now, after the 1986 exam had been 14 completed and USAT had agreed to retain Grant 15 Thornton and Prudential-Bache to review their 16 respective activities, accounting and securities 17 activities or junk bond activities, did there come 18 a time when a subsequent examination was 19 commenced? 20 A. In the latter part of 1987, I believe 21 another examination started. 22 Q. Now, who was the examiner on the 23272 1 initial examination in 1986? 2 A. Vivian Carlton. 3 Q. Did Ms. Carlton then return to USAT to 4 conduct the 1987 examination, as well? 5 A. Yes, she did. 6 Q. Is it typical to have the same examiner 7 continue to do the same institutions, or was that 8 serendipitous? 9 A. The practice is the same examiner never 10 should conduct an examination three times in a 11 row, but it was allowable. 12 Q. In the last paragraph on Page 4, it 13 talks about the areas of concern with respect to 14 the 1987 examination. 15 Did there arise areas that were of 16 concern to the examiners in the 1987 exam? 17 A. Yes. 18 Q. And how would you describe it? 19 A. Well, the examiners as related here on 20 Page 4, they were -- were concerned about the 21 continuing turnover in management/directors from 22 the previous exam, lack of savings and loan 23273 1 operation. It notes that Larry Connell, a thrift 2 attorney, consultant, and CEO of another thrift, 3 had been hired. That was July 1st, 1988. 4 Q. Shortly after the exam began, was it 5 determined that the institution was in capital 6 failure? 7 A. Again, the institution -- after the 8 examination began, the institution filed its 9 thrift report as of December 31st, 1987; and they 10 showed they had failed to maintain their minimum 11 net worth. 12 Q. And then if we turn to the next page, 13 it indicates that -- well, did the condition of 14 USAT then continue to deteriorate throughout the 15 beginning of 1988? 16 A. Yes. 17 Q. And I notice that in the first full 18 paragraph, it indicates that by June 30th, 1988, 19 United was reporting insolvency on a RAP basis. 20 Do you see that? 21 A. Yes. 22 Q. It talks about it being due primarily 23274 1 to the estimate of $40 million of specific 2 reserves and losses in the portfolio. 3 What does that mean? 4 A. The institution was required to 5 quarterly review its -- its assets; and by that, 6 every asset would have to be reviewed. And it 7 would either pass, it's okay. 8 Substandard, there was some type of 9 deficiency noted in it. There was a credit 10 concern. There was a payment concern, or there 11 was an asset concern on the underlying security. 12 Doubtful was a greater degree of 13 concern, a continuing loss associated with that 14 asset. 15 Q. Now, you indicated that 16 Prudential-Bache was hired to review USAT's 17 corporate securities. 18 Do you recall that? 19 A. Yes, I do. 20 Q. Had Ms. Carlton had an opportunity to 21 review the investment securities activities at 22 USAT during the '86 examination? 23275 1 A. No, I don't believe she did. 2 Q. Was that because of the books and 3 records problem? 4 A. Yes. 5 Q. And during the 1987 examination, do you 6 recall whether Ms. Carlton had an opportunity to 7 review the investment activities of United Savings 8 Association of Texas with respect to investment 9 securities? 10 A. I believe she attempted to; but, again, 11 she had problems with the books and records. 12 Q. Now, in the third paragraph down, it 13 talks about instances related to hedging and other 14 securities transactions which had the appearance 15 of speculation. 16 Do you see that? 17 A. Yes, I do. 18 Q. Do you recall that during the 1987 19 examination, Ms. Carlton did raise a question 20 regarding whether the activities with respect to 21 hedging was being appropriately carried out? 22 A. Yes, I do. 23276 1 Q. What do you recall of that? 2 A. Basically, the FSLIC insurance 3 regulations required -- this is commonly referred 4 to as 563174 and 175 on futures and options 5 trading on which the institution has entered into 6 for hedging purposes, that they fully document to 7 the board of directors exactly what their 8 positions are, what assets are being hedged, 9 basically the whole rationale for why they were 10 entering into futures contracts or option 11 agreements. 12 She felt they weren't complying with 13 that, and she felt that they might have been 14 taking advantage of the market movements and 15 closing out a hedge position to book a gain for 16 the institution. 17 Q. Now, if you look further down the page, 18 it talks about the Southwest Plan examination. 19 Did there come a point in time when you 20 began to have discussions with USAT and its senior 21 management about USAT's possibly receiving 22 assistance from the federal government? 23277 1 A. Well, basically, those were discussions 2 initiated by USAT, its holding company, and 3 MAXXAM. Primarily, they were talking to 4 Washington, D.C. because any decision on FSLIC 5 assistance -- the final decision would be made by 6 the Federal Home Loan Bank Board in D.C. 7 Q. Would you turn to the next document in 8 your book, which is going to be B1855? And it's 9 Tab 1682. This is a memorandum that was prepared 10 by Arthur Berner, and it's regarding a meeting 11 with Neil Twomey. 12 In connection with your dealing with 13 USAT, was there any one person that you dealt with 14 more than anyone else regarding the supervision of 15 the institution? 16 A. I dealt with Arthur Berner, who was 17 their general counsel, almost constantly. He was 18 either calling me, you know, asking questions, 19 asking for meetings. Many of the discussions were 20 telephone conversations, et cetera. 21 Q. As a -- as a supervisory agent, is it 22 typical for you to deal with the general counsel; 23278 1 or is every institution a little different? 2 A. Every institution is a little bit 3 different. 4 Q. Now, directing your attention to the 5 first numbered paragraph, it talks about "The 6 Dallas bank is currently going through the process 7 of matching institutions." Maybe you could just 8 read the paragraph to yourself, and I would like 9 to ask you what was going on at this point in 10 time. 11 A. That paragraph again? 12 Q. Paragraph 1, numbered Paragraph 1. 13 A. (Witness reviews the document.) Okay. 14 I've read the paragraph. 15 Q. What does it mean when it says the 16 Dallas bank was in the process of matching 17 institutions? 18 A. This was the very beginning of the 19 so-called Texas plan/Southwest Plan. The Federal 20 Home Loan Bank of Dallas had hired a Mr. Gravette 21 who had experience, I believe, with the FDIC and 22 problems they had with savings banks in the 23279 1 New York City area. And he was developing a plan 2 in which a number of institutions' strengths and 3 weaknesses would be matched and where we could put 4 into receivership a number of the insolvent weak 5 institutions and match them with strong management 6 teams with good capital so those assets could be 7 properly and effectively managed and, thus, 8 limiting the loss exposure possible to FSLIC. 9 Q. Now, Mr. Berner about halfway through 10 that paragraph talks about "United will be a 11 survivor." 12 Did you tell Mr. Berner that, in your 13 opinion, United would be a survivor? 14 A. I don't recall using that exact 15 language. 16 Q. Okay. Do you know what he refers to or 17 what that would be making reference to when it 18 talks about being a survivor? 19 A. Well, a survivor would be one of the -- 20 would be basically the corporate entity that 21 survives the situation that Texas thrifts found 22 themselves in at that period of time. 23280 1 Q. Meaning it would go through 2 receivership and ultimately come out a different 3 entity? 4 A. Well, I wouldn't deem it to be a 5 survivor if it was put through receivership 6 because stockholders and anybody else that had an 7 equity interest in the institution would be wiped 8 out. It was a brand new corporation. 9 Q. Well, now, if you look at the third 10 paragraph down, it talks about Mr. Berner 11 discussing with you the possibility that United 12 would be going below its minimum regulatory net 13 worth either during 1987 or early 1988. 14 Do you see that? 15 A. Yes, I do. 16 Q. And what was the significance from 17 United's point of view of going below its minimum 18 regulatory net worth? 19 A. Well, two things: UFG, United's 20 holding company was a public company and would 21 have to report to its stockholders and investors 22 that they had a regulatory problem, mainly failing 23281 1 to meet the net worth requirement of their 2 subsidiary, USAT. 3 The other thing that would happen would 4 be we would put them under a supervisory operating 5 agreement, restricting their investments, calling 6 for special reports, and asking them to 7 immediately address any deficiencies, asking them 8 to file a capital plan on how USAT would be 9 recapitalized. 10 Under a capital plan, if you can work 11 out your problems in one or two years and get back 12 to capital compliance, that could be deemed 13 acceptable. All these regulatory requirements 14 would happen once they failed net worth levels. 15 Q. And given the fact that Mr. Berner was 16 at this point advising you they were likely to 17 fail their capital requirement, do you recall 18 whether at this point in time you had any views 19 one way or the other that it was likely that USAT 20 would be placed in receivership or not? 21 A. At that time, USAT was still reporting 22 solvency. It still had net worth. A vast amount 23282 1 of my remaining caseload was already insolvent. 2 There was always a possibility it could resurrect 3 itself and turn itself around. Of course, we were 4 concerned at that time that a large portion of its 5 liabilities were the repo money that it had 6 borrowed from Wall Street. If they reported they 7 had some type of capital problem and were under 8 regulatory restrictions, we were concerned that 9 Wall Street may pull their money out when it 10 matured. They wouldn't roll it over again. And 11 it would create a liquidity crisis at the 12 institution. It couldn't pay its bills. 13 Q. Paragraph 1 talks about a secret 14 process of attempting to match strengths of one 15 institution with the weaknesses of another? 16 A. Yes. 17 Q. Were you involved in that process? 18 A. No, I wasn't. 19 Q. In the next line, it says that "We can 20 expect that during the first quarter of 1988, we 21 will be either requested or told to take on one or 22 more additional institutions." 23283 1 Do you see that? 2 A. Yes, I do. 3 Q. Would you have had privy to the 4 information regarding the secret process in order 5 to advise Mr. Berner that USAT was likely to take 6 on institutions? 7 A. No. 8 Q. Do you recall advising Mr. Berner that, 9 in fact, you believed that USAT was going to have 10 to take on institutions? 11 A. Again, this was very early in the 12 so-called Texas Southwest Plan. For instance, the 13 first transaction underneath this plan didn't 14 occur until May of 1988. Mr. Bud Gravette was in 15 charge of this secret process and matrix, and we 16 didn't know any of the results. In fact, well 17 into the process, his groupings of institutions 18 were kept secret; and not too many people either 19 in Dallas or Washington knew the exact groupings. 20 Q. Then it goes on below -- 21 MR. KEETON: Excuse me, Mr. Rinaldi. 22 It's not responsive. The witness is not listening 23284 1 to the questions. He's answering his own 2 questions. There's a simple question posed. The 3 witness didn't come close to answering it. 4 THE COURT: Do you want to ask it 5 again, Mr. Rinaldi? 6 MR. RINALDI: Sure. 7 Q. (BY MR. RINALDI) Do you have 8 information available to you that would have put 9 you in a position to advise Mr. Berner one way or 10 the other whether USAT was going to be requested 11 or told to take on one or more additional 12 institutions? 13 A. Not specific information. 14 Q. Did you have any general information? 15 A. I had a general knowledge of the 16 process. 17 Q. And is that what you conveyed to 18 Mr. Berner in connection with your discussions? 19 A. I don't recall sitting here today what 20 I may have conveyed to Mr. Berner. I basically, 21 you know, remember what the process was at the 22 time; and I may have conveyed it to him. 23285 1 Q. Okay. Now, with respect to -- turning 2 to Paragraph 5 on the next page, it says, "Neil 3 told me that there was no question that United 4 would be a surviving institution. He stated that 5 we were too big to fail and that the institution 6 would not be allowed to fail." 7 Do you recall having a discussion with 8 Mr. Berner to that effect? 9 A. Yes. 10 Q. Okay. And did you, in fact, tell 11 Mr. Berner that United was too big to fail? 12 A. I may have put it that way. 13 Q. Okay. And what did you mean by that? 14 A. I was talking about a liquidity 15 situation. We wouldn't allow the institution to 16 undergo a liquidity crisis. 17 Q. And by "a liquidity crisis," what do 18 you mean? 19 A. If there was a shortage of funds to pay 20 current obligations; i.e., to pay the depositors 21 if the depositors were making withdrawals from the 22 institution. 23286 1 Q. So that if there had been a run on the 2 institution, FSLIC would have stepped in? 3 A. I was prepared to recommend to FSLIC 4 that we would move in and the bank would use 5 FSLIC-guaranteed money to infuse capital -- infuse 6 cash into the institution. 7 Q. Now, Paragraph 6 below that discusses 8 your communications with Mr. Berner. And it says, 9 "Neil and I promised to keep the lines of 10 communications open and going both ways and that 11 as he heard of any additional problems or 12 concerns, he would let me know so long as I let 13 him know of any problems at United. He noted that 14 during the current exam, their major going-in 15 concern was the level of reserves we had 16 maintained for RAP purposes." 17 Do you see that? 18 A. Yes, I do. 19 Q. Did you anticipate that Mr. Berner 20 would keep you apprised of the things that went on 21 that were of supervisory interest to United? 22 A. Yes, I did. 23287 1 Q. And in connection with -- did you also 2 promise to Mr. Berner to keep the lines of 3 communication open between you as the Bank Board 4 representative and USAT? 5 A. Yes. As the supervisory agent, yes. 6 Q. And did you do that over the ensuing 7 months? 8 A. I believe so. 9 Q. And in connection with the Texas plan 10 or the Southwest Plan, did you attempt to keep 11 Mr. Berner as currently apprised of information 12 that was available as possible? 13 A. Yes, we did. But, primarily, I felt it 14 was Mr. Berner who was keeping me apprised. He 15 seemed to have more knowledge going on later in 16 time about what was happening. 17 Q. And why would that have been, sir? 18 A. Well, all I can say is that I was aware 19 that MAXXAM at different times was negotiating or 20 trying to negotiate with FSLIC and trying to get 21 involved with the Southwest Plan. And he was 22 probably aware of what was MAXXAM was doing as it 23288 1 related to FSLIC. 2 Q. Okay. Now -- and so, he would provide 3 you updates of what was going on with respect to 4 MAXXAM's discussions with FSLIC? 5 A. In his discussions with me, he would 6 tell me what was going on. I think many times, he 7 assumed I already knew; and honestly, sometimes he 8 was telling me something I hadn't heard yet. 9 Q. As the supervisory agent, were you kept 10 currently apprised with what was going on with 11 respect to the Southwest Plan? 12 A. Just generally. 13 Q. In terms of any input, were you 14 contacted from time to time to seek your advice 15 regarding various institutions that might be under 16 your supervision? 17 A. Not really. The contacts from the 18 Southwest Plan group was primarily seeking 19 information regarding institutions that I was the 20 supervisory agent for. 21 Q. Now, directing your attention to the 22 next document in the book which is at B1910. This 23289 1 has not been previously admitted; but it's within 2 another, what do you call it, memorandum prepared 3 by Arthur Berner that was sent to Mr. Hurwitz, 4 Mr. Munitz, and Mr. Gross. And this relates to a 5 conversation a little over a month after the 6 previous one which was on November 18th. And he 7 indicates that he had a telephone conversation 8 with you. And it talks something about -- if you 9 look down to the third full paragraph, would you 10 just read that paragraph? And then I have a 11 couple of questions I wanted to ask you. 12 A. (Witness reviews the document.) Yes, 13 I've read the paragraph. 14 Q. Okay. Now, it talks here about mega 15 thrifts and that you had indicated to him that a 16 program was being finalized regarding a thrift in 17 Houston and another one in Dallas. 18 Do you know what that makes reference 19 to, sir? 20 A. Yes. Again, it's under the 21 Southwest Plan. Bud Gravette, who was the author 22 of that, had basically grouped institutions that 23290 1 would be put into receivership and matched them 2 with two surviving institutions, one in Dallas and 3 one in Houston. 4 Q. And you indicate -- or at least the 5 memo indicates that there was a lot of politicking 6 and political pressure being put on Mr. Gravette. 7 Do you recall what that makes reference 8 to? 9 A. I don't recall that I said that, but I 10 can assume from that time a lot of people were 11 calling Mr. Gravette to get their point of view. 12 Q. Then the final sentence there in that 13 paragraph, the third paragraph in the document, 14 says, "He said" -- that is, Neil Twomey -- "that 15 although United was considered one of the good 16 guys, we don't seem to be at this time in the 17 ballpark." 18 Do you see that? 19 A. Yes. 20 Q. Okay. Now, do you recall telling 21 Mr. Berner that you thought that United was a good 22 guy? 23291 1 A. I don't recall using that language. 2 Q. Okay. Did you consider United to be at 3 this point in time a good guy or a good 4 institution? 5 A. In comparison to the rest of my 6 caseload, it was still reporting solvency. It was 7 better than the majority. 8 Q. Then it says, "But we don't seem to be 9 at this time in the ballpark." 10 Do you see that? 11 A. Yes. 12 Q. Was United at that point in time being 13 considered as an acquirer or in the ballpark as an 14 acquirer under the Southwest Plan? 15 A. The only institutions that I knew were 16 involved at the time were the two acquirers and 17 the institutions, some of which were on my 18 caseload that were going to be put into 19 receivership. At that point in time, nothing was 20 being done with USAT. 21 Q. All right. Then if we look at the 22 fifth paragraph down, the first sentence says, 23292 1 "Neil said that if we wanted to be considered, we 2 had to get Gravette either very quickly and 3 suggested a meeting as soon as possible." 4 Do you see that? 5 A. Yes. 6 Q. Was it Mr. Gravette that was 7 responsible, then, for making decisions regarding 8 the Southwest Plan? 9 A. Mr. Gravette was the key person. 10 Q. Do you recall directing United to talk 11 to Mr. Gravette? 12 A. I don't recall this specific language; 13 but I probably advised him that if he wants to get 14 involved in the Southwest Plan, there was only one 15 person to talk to. That was Bud Gravette at that 16 time. 17 Q. Turn to the next page -- document in 18 your book, which is B2091. This was previously 19 admitted at Tab 1688. 20 MR. RINALDI: Your Honor, I would move 21 the admission of the previous document, which is 22 B1910. 23293 1 MR. VILLA: No objection. 2 THE COURT: Received. 3 Q. (BY MR. RINALDI) Now, this is three 4 months later; and this talks about, again, a 5 meeting with Neil Twomey. And this one is on 6 March 22nd, 1988. And directing your attention to 7 Roman Numeral II, Mr. Berner reports in his 8 memorandum, "I told Neil that United was also 9 upset about the fact that we seemed not to be a 10 player in the Southwest Plan." 11 Do you recall that in the early part of 12 1988, United was not being considered as a -- an 13 acquirer under the Southwest Plan? 14 A. At that point in time, I don't believe 15 United was considered an acquirer or acquiree 16 under the Southwest Plan. 17 Q. And do you recall having a discussion 18 with Mr. Berner where you expressed some concern 19 that they weren't being considered in that regard? 20 A. I don't remember this particular 21 meeting, but we had -- again, we had ongoing 22 conversations; and this subject probably did come 23294 1 up. 2 Q. Okay. Then below that, it says, "Neil 3 told me that United was not considered to be one 4 of the front runners in the initial wave in the 5 Southwest Plan." 6 Is that consistent with your 7 recollection, that United was not part of the 8 initial Southwest Plan? 9 A. Again, I knew the two institutions that 10 were going to be acquirers shortly; and neither 11 one was United. 12 Q. Now, if you turn to the next page, the 13 second full paragraph down, it again indicates 14 that you told Mr. Berner that if he -- that he 15 should contact Mr. Gravette in Washington. 16 Do you see that? 17 A. Yes. 18 Q. The second sentence says, "He said that 19 the main item of concern was management and that 20 the S&Ls were being brought in to rate their 21 management." 22 Do you see that? 23295 1 A. Yes. 2 Q. Was -- was the rating of management a 3 principal or primary concern in determining 4 whether an institution would become an acquirer 5 under the Southwest Plan? 6 A. Yes. It was a very strong concern. 7 Q. And in terms of rating management, how 8 was that going to be done or at least at this 9 point in time? 10 A. At that point in time, Mr. Gravette was 11 requesting information about the activities of 12 various S&Ls, how they conducted their business 13 and how profitable they might be in a certain 14 area. This was part of that matrix we discussed 15 earlier where he would take strengths of a 16 possible acquirer where they had excess management 17 capability in a certain area. Therefore, if you 18 took a 1-billion-dollar institution and merged 19 with four or five other institutions and it became 20 a 5-billion-dollar institution, they were capable 21 of managing a new 5-billion-dollar institution. 22 Q. In that regard, did you have any 23296 1 special knowledge or information regarding what 2 Mr. Gravette's thoughts were or where he was going 3 with this matching process? 4 A. No. I do not have specific information 5 regarding Bud's process. 6 Q. And Mr. Gravette was in 7 Washington, D.C. Is that it? 8 A. Mr. Gravette operated out of 9 Washington, D.C., and he also had an office at the 10 Federal Home Loan Bank of Dallas. 11 Q. Did you have occasion to talk with him? 12 A. We had conversations. I knew him 13 generally. And most of the time, he was asking 14 questions about institutions in my caseload. 15 Q. Did you have any -- I mean, were you 16 involved in the actual decision-making process as 17 to whether one institution or another would be 18 considered under the Southwest Plan? 19 A. No, not as far as the acquirers. But 20 at times, I would go to Mr. Gravette to ask him to 21 include -- that certain severely-insolvent 22 institutions in my caseload be part of the 23297 1 institutions that were going to be acquired and 2 put through a FSLIC resolution. 3 Q. Okay. Now, turn to the last page of 4 Document B2091. And in particular, the last 5 paragraph indicates that "The meeting concluded by 6 my stressing to Neil that if he had any concerns 7 (whether or not he thought I wanted to hear them), 8 I wanted him to explain and express them to me." 9 Do you see that? 10 A. Yes. 11 Q. And did you, consistent with 12 Mr. Berner's request, continue to communicate with 13 him all of your concerns as they arose with 14 respect to United? 15 A. Yeah. Based on what I knew at the 16 time, I did. 17 Q. Okay. Now, turn to the next document 18 in the book, which is A1159. This is a new 19 document. 20 And I'll ask you: Do you recognize 21 this document? 22 A. Yes, I do. 23298 1 Q. Okay. Now, there -- it appears to be a 2 memo from you to Danny Thomas and to Jim 3 Satterfield. 4 Who was Mr. Satterfield? 5 A. At that time in the organization, Danny 6 Thomas was my direct boss; and Jimmy Satterfield 7 was his direct boss. Then above that -- let me 8 check the date here. 9 At that time, Craig Sternweiss was 10 Mr. Satterfield's boss; and Joe Selby was 11 Mr. Sternweiss' boss. 12 Q. And did you prepare this memorandum for 13 Mr. Thomas and Mr. Satterfield? 14 A. Myself and Ginger Baugh prepared it. 15 Q. Okay. And directing your attention to 16 the second full paragraph of the memo, do you 17 recall what -- what it was that prompted the 18 sending of this memo to Danny Thomas and Jim 19 Satterfield? 20 A. Yes. It was called from the FSLIC 21 financial assistance group requesting information 22 on USAT. 23299 1 Q. Okay. And which individuals that are 2 listed in that paragraph were from the FSLIC 3 group? 4 A. Definitely Jim Meyer. I cannot read 5 the second name. Bill somebody. And I believe 6 Jim Wigand was, also. 7 Q. And they were requesting your input 8 regarding United's management, correct? 9 A. Yeah. They were requesting information 10 on USAT. 11 Q. And then in the last full paragraph, it 12 indicates generally your response regarding their 13 request. 14 Do you see that? 15 A. Yes. 16 Q. Okay. And it reads as follows. It 17 says, "The question was opposed regarding United's 18 relative need for open assistance, especially when 19 so many institutions are in need." It says, "Neil 20 indicated that we could not allow a 21 6-billion-dollar institution to fail." 22 What did you mean by that? 23300 1 A. At this time, we were concerned about 2 USAT's liquidity abilities; and if there was a 3 possible inability to roll over certain 4 liabilities, there possibly could be a run on the 5 institution. 6 Q. It goes on and says, "However, senior 7 management at the Dallas bank has little 8 confidence in the abilities of United's senior 9 management because of a lack of thrift and 10 financial management at the top levels of 11 management at United." 12 Do you see that? 13 A. Yes. 14 Q. Is that statement consistent with your 15 recollection of the views of the Federal Home Loan 16 Bank of Dallas regarding United's management in 17 about April of 1988? 18 A. Yes. 19 Q. And -- 20 MR. VILLA: Your Honor, I would request 21 that he read the next sentence. 22 MR. RINALDI: I was going to do that. 23301 1 Q. (BY MR. RINALDI) Then it indicates that 2 Neil remarked that we had continued to advise 3 United to hire a top-level thrift-type executive? 4 A. Yes. 5 Q. Had you been advising them that they 6 needed to hire a top-level thrift-type executive? 7 A. Yes, we had. 8 Q. And why was that? 9 A. We felt that a strong financial 10 institution senior manager was needed at USAT. 11 MR. RINALDI: And Your Honor, I would 12 move the admission of A11159. 13 MR. VILLA: No objection. 14 THE COURT: Received. 15 Q. (BY MR. RINALDI) Now, turning to the 16 next document in your book, which is A11160 -- 17 THE COURT: Mr. Rinaldi, we'll take a 18 short recess. 19 20 (Whereupon, a short break was taken 21 from 3:13 p.m. to 3:35 p.m.) 22 23302 1 THE COURT: Be seated, please. We'll 2 be back on the record. 3 Mr. Rinaldi, you may continue with your 4 examination. 5 MR. RINALDI: Thank you, Your Honor. 6 Q. (BY MR. RINALDI) Mr. Twomey, would you 7 turn to the next document in your book which 8 should be A11160. This document has not been 9 previously admitted. 10 Do you recognize that document, sir? 11 A. (Witness reviews the document.) Yes, I 12 do. 13 Q. And can you describe for the Court what 14 it is? 15 A. It's a document to the file. 16 Basically, it relates to generalization regarding 17 the management and -- of USAT and then, of course, 18 it refers to the general financial condition 19 around May 27th, 1988. 20 Q. Now, in the first full paragraph -- 21 MR. RINALDI: Your Honor, I move the 22 admission of A11160. 23303 1 MR. VILLA: No objection. 2 THE COURT: Received. 3 Q. (BY MR. RINALDI) Now, the first full 4 paragraph talks about pursuant to your request on 5 May 28th, 1988, pertaining to potential 6 entities -- strengths and weaknesses of potential 7 acquirers in the Southwest Plan. 8 Do you know who made a request to you 9 and Ms. Baugh regarding the strengths and 10 weaknesses of USAT? 11 A. Not specifically. Generally, it would 12 have been people either from FSLIC or from Bud 13 Gravette. 14 Q. Would it have been Mr. Brick? Do you 15 know? 16 A. Again, Mr. Brick was handling the 17 marketing. It probably was him. 18 Q. Now, directing your attention to the 19 last full page, the last sentence, there's a 20 recommendation there. And it indicates that 21 "Therefore, with some bolstering of senior 22 management and depending on the results of the 23304 1 financial examination report, we would recommend 2 that United be allowed to participate as an 3 acquirer in the Southwest Plan." 4 Do you see that? 5 A. Yes, I do. 6 Q. Is it fair, then, to say that at about 7 the end of May 1988, you were recommending that 8 United be allowed to participate as an acquirer, 9 provided that the outcome of the exam was 10 satisfactory and they also obtained some 11 additional senior management to assist them? 12 A. Yes. 13 Q. Okay. Now, turn to the next document 14 in your book. It's Tab 1695. This is 15 Document B2224. 16 A. Yes. 17 Q. Now, the third item down, as a result 18 of your admonition that they seek an executive 19 with senior level -- I mean, with S&L experience, 20 did USAT then undertake to -- to hire an 21 executive? 22 A. Yes, they did. 23305 1 Q. Okay. Can you describe what you recall 2 of that? 3 A. Again, for some time, we had been 4 stressing to USAT the need for a senior thrift or 5 financial executive that could strengthen their 6 overall senior management team. And during this 7 period of time, the summer of 1988, they were, I 8 assume, interviewing and conducting an executive 9 search to fill that position. And the position 10 would end up being the president of the 11 institution. 12 Q. And in that regard, if you take a look 13 at what's -- at the document before, which is 14 B2224, the third numbered paragraph or section of 15 the memo prepared by Mr. Berner regarding his 16 conversation with you on June 3rd, 1988, it talks 17 about an executive search; and it makes reference 18 to George Barclay. 19 Do you see that? 20 A. Yes. 21 Q. It also makes reference to questions 22 from Washington. 23306 1 Do you see that? 2 A. Yes. 3 Q. Was Mr. Barclay particularly interested 4 in the question of whether United was in the 5 process of acquiring executive personnel to 6 bolster their staff? 7 A. Yes. 8 Q. And was -- do you recall whether at 9 this point in time Washington had expressed some 10 interest in that, as well? 11 A. Yes. 12 Q. Yes, they had or -- 13 A. Yes, they had. 14 Q. Okay. Now, if you turn to the next 15 page, it talks about the Southwest Plan. In the 16 first paragraph, it says, "Neil said that for the 17 first time, people in Washington and Dallas were 18 talking about United's role in the Southwest Plan. 19 He took that as being an extremely positive sign 20 since, prior to this, United was not being 21 considered at all as a participant." 22 Do you see that? 23307 1 A. Yes. 2 Q. Is that consistent with your 3 recollection that up to about June of 1988, United 4 had not been considered as a participant in the 5 Southwest Plan? 6 A. Yes. 7 Q. Can you describe what you recall about 8 that, sir? 9 A. Up until May of 1988, Bud Gravette in 10 the way he was putting together the Southwest Plan 11 basically had not included any participation of 12 USAT at all. And after that time, after the first 13 two institutions were recapitalized with the FSLIC 14 assistance, now a number of other institutions and 15 a number of other groupings were being considered. 16 So, a wide range of different options were being 17 viewed by the FSLIC and Mr. Gravette as possible 18 groupings. 19 Q. If you turn a little further into the 20 document at Item 7, it talks about UFG's infusion 21 of capital into USAT. 22 Do you see that? Then if you'll read 23308 1 over to the next page, I have just a couple of 2 questions I wanted to ask you about that entry. 3 A. (Witness reviews the document.) Yes. 4 Q. Okay. Do you recall what that Item 7 5 is referring to there, sir? 6 A. In May of that year, I had sent a 7 request to UFG, the holding company, regarding how 8 they planned to -- or what they could do as far as 9 recapitalizing USAT and bringing it up to 10 regulatory compliance. 11 Q. Why did you send such a letter to UFG? 12 A. UFG had a net worth maintenance 13 agreement that they would maintain the capital of 14 USAT. 15 Q. Okay. What is a net worth maintenance 16 agreement, sir? 17 A. At the time that UFG acquired control 18 of USAT, the Federal Home Loan Bank Board required 19 them to sign a net worth maintenance agreement 20 where they promised to use the strengths of their 21 corporation to maintain USAT in a proper financial 22 condition. 23309 1 Q. Now, you said they required them to 2 sign a net worth maintenance agreement. Do you 3 recall whether this one was a stipulation or an 4 actual agreement? 5 A. I don't recall. It's been some time 6 since I've seen the document. 7 Q. But was it your understanding that 8 pursuant to that document, that UFG was obligated 9 to infuse capital into USAT? 10 A. UFG was obligated to maintain USAT at a 11 proper regulatory capital level. 12 Q. Was it your understanding that the 13 obligation to infuse capital was dependent upon 14 you as the supervisory agent to make a demand upon 15 UFG to so infuse capital? 16 A. No, it was not. The agreement already 17 existed. There was their obligation, to maintain 18 USAT's capital letter. My letter was basically 19 reminding them of that obligation. 20 Q. And after you sent the letter, you had 21 some conversations with Mr. Berner, I take it, 22 regarding that? 23310 1 A. Yes, I did. 2 Q. Okay. Did USAT get back to you after 3 you sent the letter? Do you recall? 4 A. I don't recall a formal response. All 5 I can recall right now is some conversations with 6 Mr. Berner. 7 Q. Then the last item on the page there, 8 "I promised Neil that I would continue to keep him 9 informed over and about all of the things going on 10 at United and that he should keep me informed 11 (which he does on a semi-regular basis) about 12 what's going on in Dallas concerning United." 13 Do you see that? 14 A. Yes, I do. 15 Q. Did you at this point in time, June of 16 1988, expect that Mr. Berner would keep you 17 advised about any matters that arose at USAT that 18 were of a supervisory nature? 19 A. I assumed he was going to keep me 20 informed about anything at USAT, the holding 21 company, and really regarding MAXXAM, too. 22 Q. Actually, it says here that he would 23311 1 keep you informed over and about all of the things 2 going on at United. 3 Do you see that? 4 A. Yes. 5 Q. Was it your understanding that he was 6 attempting to do that at this point in time? 7 A. Yes. 8 Q. Now, turn to the next document in this 9 sequence. It's B2249. Again, it appears to be a 10 memo by Mr. Berner regarding conversations that he 11 had on June the 21st, 1988, in a meeting with Tom 12 Lycos. 13 Now, who was Mr. Lycos? 14 A. I believe Mr. Lycos reported to Stuart 15 Root, who was the director of FSLIC at that time. 16 And Mr. Lycos had been designated as one of the 17 senior FSLIC officials responsible for the 18 Southwest Plan. 19 Q. Now, there's no indication that you 20 participated in this meeting. 21 Was it your understanding that USAT was 22 attempting to contact people in Washington 23312 1 independent of the Federal Home Loan Bank of 2 Dallas to urge their participation in the 3 Southwest Plan? 4 A. Yes. 5 Q. And as we go down further in the -- the 6 fifth paragraph, it starts out -- he said -- he 7 relates that Mr. Like Khosrow had said that the 8 most important items were management and the 9 ability to consolidate branches and reduce 10 operating expenses. 11 Do you see that? 12 A. Yes. 13 Q. And when subsequently the 14 Southwest Plan examinations were begun, did they 15 principally focus on the abilities of management? 16 A. Primarily, yes. 17 Q. Now, it says next -- the next sentence 18 below that or the third sentence in that 19 paragraph, "He said that we would be looking to 20 the Dallas bank to review our management and 21 operating abilities (and would touch base with Jim 22 Pledger) but that his shop was structuring deals." 23313 1 Do you see that? 2 A. Yes. 3 Q. Okay. Well, when it says his shop was 4 structuring deals, does that mean that Mr. Lycos 5 was the individual who was responsible for 6 structuring the Southwest Plan deals; or was that 7 your understanding? 8 A. At this particular point in time, he 9 was becoming more involved in the way the deals 10 would be structured and who would be involved. 11 Q. Was the Federal Home Loan Bank of 12 Dallas involved in the structuring process at this 13 point, or was it out of their hands? 14 A. Basically, by June 20th, 1988, it was 15 taken out of our hands. 16 Q. Okay. Now, was there something that 17 had occurred that caused the process to be taken 18 out of the hands of the Federal Home Loan Bank of 19 Dallas? 20 A. In May of 1988, the first two Southwest 21 Plan deals had been announced regarding Coastal 22 Bank and Southwest Savings of Dallas. There was a 23314 1 lot of criticism around the country and in 2 Washington regarding the way the deals were 3 structured and who they favored and the lack of a 4 bidding process; namely, why these institutions 5 received a good deal of FSLIC assistance to 6 resolve the problems of the acquired institutions 7 that had been placed into receivership. 8 At this point in time, they were going 9 through a transition. What was happening, 10 Washington was dictating that all the participants 11 in the Southwest Plan now would be examined by 12 groups of examiners from outside the Dallas or the 13 Texas area, such as Seattle, Chicago, Pittsburgh, 14 Boston. These examiners would be brought in and 15 coordinated by John Valek, who was a senior 16 examination official from Chicago; and he would 17 organize and conduct a series of examinations for 18 anybody who wanted to participate in the plan. 19 This way, there would be an independent assessment 20 free from the input of the Dallas people regarding 21 the merger. It wouldn't totally be a Dallas 22 opinion of management. It would be an opinion 23315 1 from outside people who had no connection with 2 these institutions. 3 Q. And after about May, then, did you have 4 any input in connection to the decision-making 5 process as to who would be included and who would 6 not be included in the Southwest Plan? 7 A. I had some input, but it was diminimus. 8 It was basically now the institutions who wanted 9 to become acquirers were talking to the key people 10 in Washington. Once they crossed that threshold 11 and Washington was interested in those 12 institutions, then Washington would start asking 13 questions regarding their examination and 14 regarding their financial condition. 15 Q. And it would be in response to those 16 questions that you would be involved? 17 A. Yes, if it involved my institutions. 18 Q. But you didn't have a vote one way or 19 the other as to whether a particular institution 20 would participate or not? 21 A. I would simply, upon request, supply 22 the information requested. 23316 1 MR. RINALDI: Your Honor, I move the 2 admission of Exhibit B2249. 3 MR. VILLA: No objection. 4 THE COURT: Received. 5 Q. (BY MR. RINALDI) The next document in 6 your book is another memo from Mr. Berner to 7 Charles Hurwitz and Barry Munitz and Jenard Gross 8 dated June the 30th, 1988. And in the -- in the 9 first paragraph, it makes reference to finalizing 10 an offer to hire Larry Connell. 11 Do you see that? 12 A. Yes, I do. 13 Q. Who was Mr. Connell? 14 A. Larry Connell was a thrift executive 15 who had already managed two problem thrifts for -- 16 in behalf of the Federal Home Loan Bank and FSLIC 17 in the Dallas area. He was also a -- had been a 18 thrift executive with Washington Mutual, I 19 believe, up in Seattle. And prior to that, he had 20 also been the head regulator for the national 21 credit unions in Washington, D.C. And prior to 22 that, he had been the BAN commissioner for the 23317 1 State of Connecticut. 2 Q. And did they -- and they ultimately 3 hired Mr. Connell? 4 A. USAT hired Connell. 5 Q. Mr. Berner represents that you stated 6 to him that -- "Neil flatly stated that after we 7 had hired Connell, we would have satisfied all the 8 requirements that the Federal Home Loan Bank of 9 Dallas had concerning United and that United would 10 have no impediments to participating in the 11 Southwest Plan." 12 Do you see that? 13 A. Yes, I do. 14 Q. Okay. Now, do you recall having a 15 conversation to this effect with Mr. Berner? 16 A. Well, I had a conversation regarding 17 the hiring of Larry Connell and the effect it 18 would have on our view of management, yes. 19 Q. Okay. And from the point of view of 20 being selected to participate in the 21 Southwest Plan, did you indicate to him that you 22 felt that there would be no further impediments to 23318 1 their being considered? 2 A. Basically, what I was referring to 3 there -- and I don't know if I used that exact 4 language -- is that they had met the basic 5 criteria that the Dallas bank had set; and, 6 therefore, it was now up to FSLIC, Tom Lycos, to 7 determine how they would fit in the 8 Southwest Plan. 9 Q. But there was no guarantee at this 10 point in time that they would even participate, 11 was there? 12 A. No. 13 Q. And then the final paragraph talks 14 about "Neil requested that I come to Dallas to 15 meet informally with him and two other Dallas bank 16 people." 17 Do you see that? It makes reference to 18 a good bank/bad bank scenario. 19 A. Yes. 20 Q. Do you know what that is referring to? 21 A. It's a structure upon a resolution of a 22 problem institution where, with government 23319 1 assistance, all the good assets in an institution 2 is moved into new Bank A. All the bad assets that 3 have some type of cloud over them -- they're 4 non-performing or there's something wrong with 5 them -- those assets are moved into bad Bank B. 6 Basically, a good bank then receives a 7 note to prop them up because they have -- even 8 though they have all the deposit liabilities, all 9 the savings accounts are still there. They don't 10 have as many assets. 11 So, in one sense, they are insolvent. 12 The government would put a note in there to prop 13 up the institution. Then the good bank would be 14 able to run the good assets and proceed pretty 15 much basically as a normal institution. 16 At the same time, the bad bank, you 17 take all your problem solvers, the real estate 18 people, the securities people that are needed; and 19 they would work on all the assets in the bad bank 20 and resolve those assets hopefully in a timely and 21 expedited manner at the least cost to the 22 government because, basically, the government now 23320 1 would be on the hook -- the FSLIC or the FDIC in 2 this case would be on the hook for the losses. 3 Eventually, after time, maybe five 4 years, the good bank would still exist; and the 5 bad bank would be a mere shadow. It would be a 6 corporate entity with no assets and very few 7 liabilities left. 8 Q. Was serious consideration being given 9 at this point in time to resolving institutions in 10 Texas using the good bank/bad bank format? 11 A. A number of institutions were asking 12 for that format, and they were asking for that 13 type of transactions involving the FSLIC. And, 14 again, this meeting probably had to do with giving 15 guidance to Berner about what FSLIC's attitudes 16 were to various work-out situations that would 17 require FSLIC assistance to resolve. 18 Q. And after requesting that he come to 19 Dallas to talk to you about the Southwest Plan, do 20 you recall whether you had a meeting shortly 21 thereafter? Why don't you turn to the next 22 document. 23321 1 A. Yeah. That would be better. 2 MR. RINALDI: And if I haven't done 3 this, I move the admission of B2274. 4 MR. VILLA: I know that exhibit is in 5 evidence in some number. I don't know whether 6 it's that number. It's in evidence as T8081, 7 Tab 1377. 8 MR. RINALDI: Thank you, Mr. Villa. 9 Q. (BY MR. RINALDI) Now, directing -- 10 directing your attention to B2296 which is another 11 Berner memo to Mr. Hurwitz and Mr. Munitz and 12 Mr. Gross and Mr. Crow, this one is dated July the 13 6th, 1988. If you turn to the second page, the 14 first full paragraph then talks about your 15 discussing the Southwest Plan in detail. It makes 16 reference to the fact that the Southwest Plan was 17 bogged down -- do you see that -- and that there 18 were an additional six negotiating teams brought 19 in from other areas of the country to negotiate 20 the Southwest Plan mergers. 21 Do you know what that's making 22 reference to? 23322 1 A. Yes. Approximately during this time 2 frame, so many people were requesting to 3 participate in the Southwest Plan to be an 4 acquirer, Washington was being overwhelmed. So, 5 they designated top regulators around the country 6 to, you know, conduct the negotiations, pick the 7 successful bidder, and negotiate the terms of the 8 FSLIC assistance regarding what element of the 9 Southwest Plan -- the Southwest Plan was broken 10 down into different groupings. 11 What would happen is certain bidders 12 would approach FSLIC to bid on a certain group of 13 thrifts that were insolvent. If that group was 14 assigned to the chief regulator out of Chicago or 15 it was assigned to the chief regulator out of 16 San Francisco. Then that group would then go to 17 that regulator and negotiate with them over the 18 terms. And he would then assess who had the 19 better offer, and he would basically designate and 20 let Tom Lycos know who was the leading bidder. 21 And then full negotiations with Washington would 22 take effect with regard to the FSLIC package. 23323 1 Q. Now, in connection with USAT, was there 2 ultimately an individual who was designated to 3 conduct the Southwest Plan negotiations vis-a-vis 4 USAT's participation? 5 A. Yes. Michael Patriarka, who was the 6 head of regulatory affairs in San Francisco, was 7 designated to negotiate in regard to USAT. 8 Q. And in connection with Mr. Patriarka's 9 negotiations, could you describe for the Court 10 what, if any, role you played? 11 A. At different times, Mike Patriarka 12 would contact my office and ask for copies of 13 documents and other materials; and we would 14 photocopy them and ship them out to him. 15 Q. Now, turn to the next document in your 16 book, which is B2377. This has previously been 17 admitted at Tab 1775. And again, this is one of 18 Mr. Berner's many memos to Mr. Gross and 19 Mr. Munitz and, this time, Larry Connell and Mike 20 Crow. It relates to a conversation that you had 21 on August the 23rd. It says, "One, he had just 22 signed a pre-examination request whereby we will 23324 1 be getting a team (he said probably from 2 Seattle)." 3 Do you see that? 4 A. Yes. 5 Q. Do you know what that refers to, that 6 you had just signed a pre-examination request? 7 A. It basically was a scope letter that 8 outlined the areas that the examiners should 9 review when they conduct the Southwest Plan 10 examination of USAT. 11 Q. Okay. Now, this scope letter would 12 have been submitted to who? 13 A. John Valek. 14 Q. And then Mr. Valek, would he have been 15 responsible for selecting a team of examiners to 16 examine USAT? 17 A. Mr. Valek was in charge of selecting 18 all the people and also designating which 19 institutions would be examined at what time. 20 Q. It says here that it was probably going 21 to be a group of examiners from Seattle. 22 Do you see that? 23325 1 A. Yes. 2 Q. Why were they bringing examiners in all 3 the way from Seattle to do this Texas exam? 4 A. Again, as I previously testified, the 5 Southwest Plan examinations were going to be 6 conducted with personnel from outside of Texas. 7 The EIC and the key people would be all from other 8 districts around the country. They could 9 independently come to their own assessments 10 regarding the institution, its management, and how 11 it was coping with the economic conditions in 12 Texas. 13 Q. Was a successful examination a 14 pre-condition to ultimately participating in the 15 Southwest Plan as an acquirer? 16 A. Yes. 17 Q. And in the next sentence, it makes 18 reference to the fact that they will be reviewing 19 management. 20 Do you see that? 21 A. Yes. 22 Q. And was that going to be one of the 23326 1 principal focuses of the examination by the 2 Seattle group? 3 A. Primary focus. 4 Q. Was there anything else that the 5 Seattle group was going to focus on that you 6 recall? 7 A. Again, it would review all the 8 operations of United. That way, they could better 9 assess how management was running the institution 10 by looking at the operating results. 11 Q. Was it going to look into securities 12 transactions that had not previously been reviewed 13 by Ms. Carlton in either the '86 or '87 exams? 14 A. Yes. 15 Q. And do you recall what they were going 16 to look at in particular? 17 A. Well, generally, they would be looking 18 at securities transactions regarding the junk bond 19 portfolio, the equity securities that were at 20 USAT, and also overlooking their risk-controlled 21 arbitrage regarding the mortgage-backed 22 securities. 23327 1 Q. And at this point in time, had anyone 2 at the Federal Home Loan Bank of Dallas reviewed 3 any of these investment portfolios other than the 4 hedging review that Ms. Carlton referred to in the 5 1987 exam? 6 A. John Scott, at my request, had reviewed 7 the policies and procedures regarding their junk 8 bond portfolio perhaps in '86. I'm not sure of 9 the date. And later, of course, Pru-Bache had 10 looked at the same portfolio. 11 Q. But had any examiner actually reviewed 12 the securities transactions that had been engaged 13 in by United Savings Association of Texas in 14 either the '86 or '87 exam with the one exception 15 of Vivian's review of the hedging? 16 A. Other than John Scott, no. 17 Q. Was Mr. Scott an examiner? 18 A. No. Mr. Scott was the head of what we 19 called the capital markets group, which provided 20 assistance to examiners regarding complex 21 financial instruments. 22 Q. Now, would you turn to the next 23328 1 document in your book which should be a memorandum 2 from an individual named Brenda Bese to yourself 3 dated January the 19th, 1989? 4 A. Yes. 5 MR. EISENHART: Your Honor, could 6 Mr. Rinaldi tell us the exhibit number? 7 MR. RINALDI: I'm going to do that, if 8 you'll give me a second. 9 Q. (BY MR. RINALDI) This is Exhibit B2699. 10 Do you recognize that document, sir? 11 A. Yes. It's Brenda Bese's examination 12 report of USAT. 13 Q. And when you say her examination 14 report, who was Brenda Bese? 15 A. Brenda Bese was a field examiner out of 16 the Federal Home Loan Bank of Seattle. She was 17 assigned as the examiner-in-charge to conduct the 18 examination of USAT in September of 1988 under the 19 Southwest Plan. 20 Q. Now, the cover memo here or the first 21 page of this lists a number of enclosures. 22 Do you see that? 23329 1 A. Yes. 2 Q. And it identifies the first five as 3 being interim reports. 4 Do you see that? 5 A. Yes. 6 Q. Generally, what -- was there ever a 7 final, formal exam report prepared? 8 A. This is the closest thing to it because 9 this report was received in January of 1989. And 10 what had happened, on December 30th, 1988, USAT 11 was placed into receivership. 12 So, normally, when the examination is 13 complete, the examiner-in-charge, the field 14 manager, would have a meeting with the key 15 management and directors of the institution they 16 had examined. But since USAT had been placed in 17 receivership, there was nobody to have that 18 meeting with. 19 Q. And this cover memo and the 20 attachments, do they then represent the results of 21 the Southwest Plan examination conducted in 1988 22 by Ms. Bese? 23330 1 A. It does. 2 MR. RINALDI: Your Honor, I would move 3 the admission of B2699. 4 MR. VILLA: Your Honor, this raises an 5 issue. As you recall, they had Ms. Bese on their 6 list of witnesses; and they pulled her from their 7 list of witnesses and said that they were going to 8 put in Mr. Lapidus because he was going to testify 9 to everything that Ms. Bese was going to testify 10 to. 11 Mr. Lapidus has testified to a very 12 narrow issue involving investment securities. And 13 now, without bringing Ms. Bese for purposes of 14 cross-examination like Ms. Carlton and like 15 Mr. Twomey, they seek to put in an inch of paper 16 absolutely contrary to the suggestion as to why 17 they were not bringing her and why they were going 18 to bring Mr. Lapidus. 19 This document is dated after all my 20 clients left the institution, not like other 21 examination reports that were sent to the 22 institution for the purpose of being responded to. 23331 1 I would think, ordinarily, it ought not to be 2 permitted anyway. It definitely should not be 3 permitted where they have made a calculated 4 decision not to bring Ms. Bese here. 5 I object to it, Your Honor. They know 6 they are trying to get it in here without bringing 7 the person here for cross-examination. It's a 8 strategic decision on their part, and I submit 9 that it should not be submitted. It's contrary to 10 the reason they were pulling Ms. Bese and bringing 11 Mr. Lapidus. 12 MR. RINALDI: Your Honor, I can only 13 say Mr. Villa's recitation of the pleadings in 14 this case are flawed. 15 Ms. Bese, as Mr. Villa full well knows 16 because Mary Clark deposed Ms. Bese for three 17 days, has no recollection of anything about the 18 exam. She's a mother of three -- I think three, 19 perhaps only two small children, and indicated it 20 would work a hardship on her if she had to come 21 from Oregon. She said anyway she had no 22 recollection of the exam. 23332 1 And it was for that reason that we 2 suggested that we would call Mr. Lapidus to talk 3 about the specifics of one portion of the exam 4 which is Enclosure No. 8. We never represented to 5 the Court, however, that we were not going to move 6 to admit the remainder of the exam. And, indeed, 7 all of the enclosures in this exam were prepared 8 and sent to Mr. Twomey. Mr. Twomey would have 9 discussed the contents of those findings with 10 Ms. Bese. 11 And in addition to that, quite apart 12 from what Mr. Villa has represented, because it is 13 a report of examination, pursuant to 12 -- let me 14 see if I can find the regulatory section here -- 15 509.36A -- I'm sorry -- (c)(2) specifically states 16 that subject to the requirements of Paragraph A of 17 this section, any document, including a report of 18 examination, supervisory activity, inspection, or 19 visitation prepared by the appropriate office or 20 state regulatory agency is admissible either with 21 or without a sponsoring witness. 22 So, in sum, Your Honor, we didn't even 23333 1 have to call Mr. Lapidus to testify about his 2 portion of the examination. The entire exam is 3 admissible under the rules. We did bring him in 4 because we wanted to allow the opportunity for 5 them to -- Mr. Lapidus to testify as to what he 6 had done in the course of the exam. 7 In this particular instance, Ms. Bese 8 has no recollection, has indicated it would work a 9 hardship were she to come here. And there's 10 another who is fully familiar with this portion of 11 the exam, who is Mr. Twomey. Therefore, we are 12 moving to admit the examination record; and we 13 would then request the opportunity to discuss its 14 contents with Mr. Twomey. 15 MR. VILLA: To be brief, Your Honor, 16 whether or not it's admissible with or without a 17 sponsoring witness, it seems to me when they have 18 a witness and choose not to call her and claim 19 she's forgotten the events -- there are a lot of 20 people that have forgotten a lot of events in this 21 case, but that doesn't allow you to introduce 22 their testimony -- 23334 1 MR. RINALDI: We're not introducing her 2 testimony. 3 MR. VILLA: Excuse me. I misspoke. To 4 introduce their reports without their -- without 5 their presence. 6 MR. RINALDI: Then, Your Honor, if -- 7 THE COURT: One at a time, please. Are 8 you through, Mr. Villa? 9 MR. VILLA: I continue my objection, 10 particularly in the circumstance where they have 11 the witness and they choose not to bring her. 12 MR. RINALDI: Your Honor, since the 13 witness has been fully deposed on this subject and 14 had no recollection and bringing her here would 15 not further the understanding of the Court, I 16 would submit that if Mr. Villa would like to have 17 the witness' testimony submitted to the Court, we 18 will submit the deposition to the Court. The 19 woman has no independent recollection of what 20 occurred at the exam. This is clearly the best 21 evidence of what went on at the exam, and it's 22 clearly admissible under the rules. 23335 1 MR. VILLA: Your Honor, if we would be 2 permitted those portions of the deposition that we 3 believe are relevant because we did have an 4 opportunity to depose her, expecting her to 5 testify, by the way, we can introduce those 6 portions that we believe are relevant, then I 7 would withdraw my objection. 8 THE COURT: All right. That sounds 9 like a good solution. 10 You're quoting the rule. You're 11 interpreting that to say that the maker of such 12 documents need not be called? You can just put 13 them into the record? 14 MR. RINALDI: Yes, Your Honor, because 15 it's an official report prepared by the agency for 16 purpose of agency use. 17 THE COURT: So, you basically wouldn't 18 need any witnesses. You could just bring your 19 paper and put it in and nobody would need to be 20 cross-examined? 21 MR. RINALDI: If we wished to proceed 22 in that way, it would be appropriate. However, in 23336 1 this case, each of the persons who received this 2 report from Ms. Bese and who participated in the 3 final close-out meeting with the management of 4 Bank United -- 5 THE COURT: Well, I disagree with you 6 on your idea of evidence; but nevertheless, if we 7 can reach an arrangement whereby the deposition 8 will be put in and Mr. Twomey questioned on this 9 document, I'll receive the document. 10 MR. VILLA: Your Honor, if I may at 11 least clarify. My issue was if there are portions 12 of her deposition that went in -- 13 THE COURT: Yes. 14 MR. VILLA: Thank you, Your Honor. I 15 don't know -- her deposition was taken by 16 Ms. Clark. And if we want to put in portions to 17 cross-examine essentially certain parts of her 18 findings here, then we have the option of doing 19 it. We don't agree that the entire deposition 20 should come in. Is the -- 21 THE COURT: Well, if you're going to 22 put in parts of it, that almost opens the door to 23337 1 putting the rest of it in. 2 MR. VILLA: Well, Your Honor, under 3 that circumstance, my objection stands. My 4 objection stands as to whether or not it's 5 admissible. 6 MR. RINALDI: If Mr. Villa wishes to 7 designate portions of the deposition, he may do 8 so; and then after reviewing the portions he has 9 designated, we can designate additional portions 10 that need to be designated. In order to make the 11 information fully accurate, we could 12 cross-designate. And then together, we could 13 submit -- 14 THE COURT: All right. That's what 15 we'll do, and I'll receive the document. 16 MR. RINALDI: Thank you, Your Honor. 17 Q. (BY MR. RINALDI) Now, Mr. Twomey, after 18 Ms. Bese commenced her examination, did you have 19 occasion from time to time to receive updates on 20 the status of the examination from her? 21 A. Yes. Ms. Bese was required to every 22 few weeks make an interim report; and in 23338 1 conjunction with that, she would meet with the 2 senior people conducting the Southwest examination 3 and my staff at the Federal Home Loan Bank in 4 Dallas. 5 Q. At these meetings, what, if anything, 6 was discussed? 7 A. Basically, her findings to date were 8 reflected in these interim reports that were filed 9 with us and then filed with Washington. 10 Q. And did you have any input into areas 11 of examination as the examination began to evolve? 12 A. Essentially, this was Ms. Bese's 13 examination; but as she would bring forth 14 information and we would make inquiries or ask her 15 to explain her findings, it probably did open up 16 other areas where she was going to do more 17 analysis and conduct more fact finding. 18 Q. Now, in this case, you indicated that 19 the final exam report which is dated January 19, 20 1989, wasn't finally assembled until after United 21 Savings Association of Texas had been placed into 22 receivership; is that correct? 23339 1 A. That's correct. 2 Q. Now, what did the Bank Board decide to 3 do with regard to the examiner's view of the fact 4 that former management was no longer at USAT and, 5 indeed, USAT, as its former entity, did not exist? 6 A. Well, we formally closed out the exam 7 on our books and records. And we officially log 8 in the time the exam starts, what the scope of the 9 exam is, when the exam ends, who was assigned to 10 it, the number of man days it took to conduct the 11 exam. 12 When the examination is finished, its 13 ratings and everything are attached. A normal 14 case would have a supervisory -- a regulatory 15 action plan in it, what we plan to do next. 16 In this case, that wasn't necessary 17 because now the subject institution no longer 18 existed. But what we did at that time is we met 19 with FSLIC people who had resolved USAT and were 20 involved with working out the troubled assets and 21 Bank United's management, and we met with them. 22 And we made the results of this examination 23340 1 available to them so they could you understand on 2 a more timely basis the assets that they had just 3 purchased and what were some of the problems as 4 the examiners had seen it through a long 5 examination process. 6 Q. Now, in terms of presenting it to the 7 successor institution, do you recall -- did you 8 attend the meeting in which the final exam was 9 presented? 10 A. I believe I did. 11 Q. Do you recall who at Bank United was 12 present at the meeting? 13 A. Of Bank United was the senior 14 management. 15 Q. Were any of those senior management 16 former senior management of United Savings 17 Association of Texas? 18 A. I believe the only one would have been 19 Larry Connell. 20 Q. So that after United Savings 21 Association of Texas went into receivership, 22 Mr. Connell continued to serve as an officer at 23341 1 Bank United? 2 A. For a short period of time. 3 Q. You were the supervisor at Bank United 4 after the receivership? 5 A. Yes, I was. 6 Q. And approximately how long did 7 Mr. Connell remain on? 8 A. As best as I can recall, less than two 9 months. 10 Q. And do you know after Mr. Connell left 11 Bank United where he went? 12 A. Yes. He took a position as the 13 president of San Jacinto Savings here in Bellaire, 14 Texas. 15 Q. What was San Jacinto Savings? 16 A. San Jacinto Savings was a 17 6-billion-dollar thrift in the area that had 18 branches in the Dallas area and here in the 19 Houston area. 20 Q. And was it in the process of going 21 through a similar circumstance that USAT had gone 22 through during 1988? 23342 1 A. Yeah. San Jacinto Savings had various 2 asset problems, loan problems. It also had a 3 large portfolio of junk bonds and other 4 securities. And we felt that Mr. Connell's 5 expertise would be unique in helping solve the 6 problems over there. 7 Q. And when Mr. Connell went to 8 San Jacinto Savings Association, did he then 9 continue to operate with the same staff that had 10 operated San Jacinto previously? 11 A. No. Over a period of time, he brought 12 in basically a new staff to help assist him in 13 managing the institution. 14 Q. Did Mr. Connell have any difficulty 15 locating competent staff to -- 16 MR. VILLA: I object, Your Honor. They 17 said they are going to bring Mr. Connell. 18 THE COURT: Sustained. 19 MR. RINALDI: He's the supervisory 20 agent over San Jacinto Savings and Loan 21 Association. 22 THE COURT: Well, it seems to me you're 23343 1 asking this witness about the knowledge or 2 problems that somebody else had. 3 MR. RINALDI: I will move on, except 4 that he was the supervisory agent supervising -- 5 THE COURT: Well, that doesn't mean he 6 knows everything. 7 MR. RINALDI: All right. 8 Q. (BY MR. RINALDI) Mr. Connell, turn, if 9 you would, to Enclosure 1. 10 MR. VILLA: Mr. Twomey. 11 MR. RINALDI: I'm sorry. I tried to 12 slip that by you, John. I thought maybe I could 13 get in testimony from Mr. Connell that way. 14 Q. (BY MR. RINALDI) This is -- OW154207 15 would be the page number that Enclosure No. 1 16 begins at. 17 A. I have it. 18 Q. Okay. And do you recognize this 19 document, sir? It appears to be a memo that's 20 addressed to you. 21 A. Yes. 22 Q. And what is this? 23344 1 A. This is the first -- I believe this is 2 the first interim report by Brenda Bese regarding 3 her Southwest Plan examination of USAT. 4 Q. Okay. And it says in the first 5 sentence that "Test work will focus on whether the 6 management information systems provide accurate 7 and reliable information and if management's 8 capabilities are sufficient to undertake the 9 expansion as a candidate for the Southwest Plan." 10 Do you see that? 11 A. Yes. 12 Q. And does that reflect the scope of 13 Ms. Bese's exam or at least one object of her 14 exam? 15 A. It's the core issue of her exam. 16 Q. And then if you turn to the last page, 17 it makes reference to a tentative MACRO rating. 18 Do you see that? 19 A. Yes, I do. 20 Q. What is a MACRO rating, sir? 21 A. Similar to what the FDIC has, the CAMEL 22 ratings. It's an overall rating of the 23345 1 institution of 1 to 5, 1 being superior and 5 2 being a serious situation. 3 Q. At the outset of the exam, it indicates 4 she didn't assign any CAMEL ratings; is that 5 correct? 6 A. That's true. 7 Q. Now, directing your attention to the 8 second enclosure, do you recognize that document? 9 MR. VILLA: Could you give us the Bates 10 number? 11 MR. RINALDI: It's OW154209. 12 Q. (BY MR. RINALDI) It's Enclosure No. 2, 13 and it is entitled "Southwest Examination Interim 14 Report No. 2." 15 A. Yes, I recognize the document. 16 Q. And this was the second interim report 17 that was sent to you by Ms. Bese in connection 18 with the Southwest exam? 19 A. Yes. This is the second report where 20 she came in and met with the key officials of the 21 Dallas bank and discussed it. 22 Q. Okay. And what is the subject matter 23346 1 that's covered by -- by this report? 2 A. The employment contracts of certain 3 individuals -- certain senior officers at USAT. 4 Q. Now, in the first sentence of the memo, 5 it says, "United entered into employment contracts 6 with eight senior executives, the chairman of the 7 board, and chairman of the executive committee of 8 the board of directors on July 1st, 1988." 9 Do you see that? 10 A. Yes, I do. 11 Q. Now, prior to Ms. Bese commencing her 12 examination and your receiving this October 17th, 13 1988 memorandum, were you aware that United had 14 entered into employment contracts with a number of 15 its -- with eight senior executives? 16 A. As of July 1st, 1988? No. 17 Q. Okay. Now, you received this on 18 October 17th, 1988? 19 A. Yes. 20 Q. Would Ms. Bese have advised you at some 21 point prior to that that, in fact, she had 22 discovered that -- 23347 1 MR. VILLA: Objection. It's a little 2 leading. You can tell halfway through the 3 question. I think the proper question is did he 4 have a discussion with Ms. Bese. 5 THE COURT: Well, I don't know what the 6 question is going to be. Finish your question. 7 Q. (BY MR. RINALDI) Was your practice to 8 discuss -- in addition to receiving these interim 9 exams, was it your practice to discuss their 10 content prior to its admission? 11 A. I can't remember specifically if she 12 advised us prior to showing us the interim report, 13 but I remember she was deeply concerned about 14 finding these employment contracts and let it be 15 known they were going to be the subject of the 16 next interim report. 17 Q. Now, in the next paragraph down, it 18 talks about -- 19 MR. VILLA: Your Honor, I would like a 20 continuing line of objection. This is exactly why 21 we should have Ms. Bese here. He's here 22 testifying as to what she was deeply concerned 23348 1 about, the fact that she was surprised. This is 2 totally unfounded testimony from this witness. 3 MR. RINALDI: Your Honor, Ms. Bese is 4 on their witness list. They have every 5 opportunity to call Ms. Bese; and if they think 6 Mr. Twomey's representations regarding this 7 document are inaccurate, they can examine her on 8 that subject. As I have explained previously, 9 Ms. Bese had no recollection of what had gone on 10 at the examination. And they deposed her for 11 three full days. 12 Mr. Villa has indicated that he would 13 be in a position to designate those portions of 14 the deposition that are germane. If she were 15 here, it would not enhance this process one bit. 16 This is just a smoke screen by Mr. Villa. 17 MR. VILLA: Your Honor, it's a totally 18 improper question. He's asking the witness 19 questions to interpret Ms. Bese's level of 20 surprise and her deep concern. Your Honor, it's a 21 totally improper question. It should not be 22 admitted in any Court. It should specifically not 23349 1 be admitted when they don't bring Ms. Bese to come 2 in and explain what she was thinking. I move to 3 strike the answer, and I asked that they not ask 4 this witness what Ms. Bese was thinking and 5 Ms. Bese's level of surprise or concern. 6 MR. RINALDI: First of all, I did not 7 ask the witness what she was thinking. I said to 8 the witness: Did you have a conversation with 9 Ms. Bese? 10 He said yes, he thought he had had a 11 conversation with her prior to submitting the memo 12 and that she had expressed concern. There's 13 nothing about state of mind or thinking. It's 14 what she had said; and certainly what she said, he 15 is a competent witness to report upon. 16 MR. NICKENS: Your Honor, I would like 17 to join Mr. Villa's objection and move to strike 18 the response on the basis of the responsiveness of 19 the answer because the question was as Mr. Rinaldi 20 indicated; but the answer was she was deeply 21 concerned. And so, it was not responsive. If it 22 is the case that Ms. Bese has no recollection of 23350 1 what was in her own mind, it would be particularly 2 inappropriate to have someone else come in and say 3 what was in her mind. 4 THE COURT: I think this witness can 5 only testify as to what she said or expressed. I 6 don't think he can state that she was surprised, 7 unless she stated that. I think this witness can 8 testify as to what she said if he remembers it. 9 Q. (BY MR. RINALDI) Do you recall having a 10 conversation with Ms. Bese regarding the 11 employment contracts prior to her submitting 12 Enclosure No. 2 to you? 13 A. Yes. 14 Q. What do you recall of that 15 conversation, sir? 16 A. She advised me on the existence of the 17 contracts. 18 Q. And did she indicate to you that she 19 was concerned in any way about those contracts? 20 A. She indicated to me they were going to 21 be the subject matter of the next interim report 22 because it was important to the exam process. 23351 1 Q. Okay. Now, if you take a look at that 2 interim report that was submitted, it indicates on 3 the first -- the second page a list of -- strike 4 that. 5 It indicates on Page OW154209 the 6 compensation levels of the senior management of 7 USAT. 8 Do you see that? 9 A. Yes, I do. 10 Q. And was that the first time that you 11 learned what the base salaries of these 12 individuals were under the July 1st, 1988 13 contracts? 14 A. This is the first time I found out 15 about these new salaries -- these new base 16 salaries. 17 Q. If you turn to the second page, it 18 talks about the employment contracts contain 19 certain provisions for benefits to be paid upon 20 various types of terminations. And then it lists 21 as follows. 22 Do you see that? 23352 1 A. Yes. 2 Q. Were you aware, prior to receiving this 3 memo, that there were any termination benefits 4 being made available to United Savings Association 5 of Texas' senior executives? 6 A. Not that I can recall. 7 Q. And since you were unaware of the 8 contracts, were you also unaware as stated in the 9 next paragraph down that the employment contracts 10 provided for the equivalent of two times the 11 executive's annual salary as a severance 12 provision? 13 A. I was unaware of that. 14 Q. Now, below that, it makes reference to 15 the fact that United was not able to obtain 16 letters of credit. 17 Do you see that? 18 A. Yes. 19 Q. Do you recall what the letters of 20 credit referred to? 21 A. Well, only what was represented in the 22 report, that United, in conjunction with these 23353 1 contracts, was unable to get these letters of 2 credit. 3 Q. Do you recall that during your course 4 of supervising United, that it came to your 5 attention that United had taken or had placed 6 6 or -- strike that -- had deposited $6,612,980 into 7 an account at First City National Bank to secure 8 the severance benefits under the employment 9 contracts? 10 A. Yes. 11 Q. Was this the first time that you were 12 aware that United had done that? 13 A. Yes. 14 Q. Now, on the next page, it makes 15 reference to -- in the top paragraph -- the 1988 16 executive bonus plan which was entered into with 17 personnel in April of 1988. 18 Would you just read that paragraph to 19 yourself for a moment? And then I have a 20 question. 21 A. Sure. (Witness reviews the document.) 22 Okay. I've read it. 23354 1 Q. And had you been aware, prior to the 2 receipt of this memo, that United had entered into 3 a 1988 executive bonus plan that's described in 4 that paragraph? 5 A. No. 6 Q. And it says that the plan of -- this 7 bonus plan required that $939,920 of which 704,940 8 would be paid in January 1989. 9 Do you see that? 10 A. Yes. 11 Q. Did you know, prior to receiving this 12 memo, that money had been set aside in a trust to 13 fund those executive bonus plans? 14 A. No. 15 Q. Were you surprised when you received 16 this memorandum? 17 A. Very surprised. 18 Q. And why was that? 19 A. Well, first, in conjunction with their 20 request to become part of the Southwest Plan and a 21 request from Washington for information, I had 22 requested in May of 1988 copies of all existing 23355 1 employment agreements. And at that time, USAT 2 advised me that they did not have any but there 3 were several employment agreements with UFG to 4 certain employees at USAT. I subsequently 5 requested those employment contracts, and I 6 believe that they had been executed around October 7 of 1987. 8 Q. Now, if you go on in the memorandum, it 9 talks about recommendations. And it says that the 10 employment contracts be reviewed. 11 Do you see that? 12 A. Yes. 13 Q. Did Ms. Bese then continue her review 14 of the employment contracts in connection with the 15 Southwest examination, if you recall? 16 A. I can't recall. 17 Q. Okay. And then moving on, it talks 18 about -- in No. 4, it says, "The escrow agreement 19 will be reviewed for propriety." And then she 20 says, "It is questionable whether an association 21 in United's financial condition should be placing 22 6.6 million in assets in an escrow account for 10 23356 1 members of management." 2 Do you see that? 3 A. Yes, I do. 4 Q. When you received this memo, did you -- 5 and after you learned of its contents, did you 6 share Ms. Bese's view that placing $6.6 million in 7 assets in an escrow account for ten members of 8 management was a questionable practice? 9 A. It was my view it was questionable. 10 Q. Now, if you turn to the next page, it 11 talks about the -- in the third -- second full 12 paragraph, it begins, "The salaries for United 13 executives were compared to U.S. League 1988." 14 Do you see that? 15 A. Yes. 16 Q. Do you recall whether Ms. Bese made an 17 attempt to review the level of compensation that 18 was being paid under these employment contracts? 19 A. That's what the report reads. 20 Q. Okay. But do you have any independent 21 recollection that she attempted to review the 22 compensation levels? 23357 1 A. I don't recall other than the rendering 2 in here regarding her U.S. League data. I do 3 recall that we reviewed those compensation levels 4 compared to other large thrifts in Texas. 5 Q. Okay. When you say "we," who are you 6 making reference to, sir? 7 A. My staff. 8 Q. Okay. Now, what was the nature -- what 9 triggered your review of the compensation levels 10 under these contracts? 11 A. The receipt of this interim report. 12 Q. And so, what steps did you take 13 following the receipt of the interim report to 14 determine whether the compensation that was being 15 paid was reasonable? 16 THE WITNESS: At that time, Your Honor, 17 I was responsible for assets in Texas that 18 approximated 30 percent of all savings and loans 19 in the state. Consequently, I was in charge of 20 the supervision of several very large 21 institutions, including Gibraltar and First Texas. 22 Because of that, we had access to the examination 23358 1 materials that had been conducted on each of these 2 institutions. We could review each of the 3 salaries and compensation packages. Basically, we 4 went to the larger institutions, the institutions 5 over a billion dollars, and we took that 6 information out and we compared it to the 7 information that was contained in Ms. Bese's 8 interim report. And we did an analysis. 9 What we basically found, Your Honor, 10 was basically that these levels of compensation 11 were far in excess of anything anybody else was 12 receiving in the State of Texas. And First 13 Texas/Gibraltar at that time was approximately a 14 10-billion-dollar institution. Another 15 institution that was fairly large was San Jacinto 16 Savings which was a 6-billion -- 4- to 17 6-billion-dollar institution at that time. We 18 didn't see anything like this from the other 19 institutions. 20 MR. VILLA: Who is "we," just so we 21 have the record straight? It's a little difficult 22 sometimes, if the Court doesn't mind me asking 23359 1 that question. 2 MR. RINALDI: You can certainly clarify 3 that on cross-examination; and I think if you're 4 patient, Mr. Villa -- 5 THE COURT: Let's get it straight now. 6 A. "We" was my staff, my people, the 7 analysts that worked for me. I would request this 8 information from them. And since we had a 9 majority of the large thrifts, we had a pretty 10 good overview of all the salaries. And at the 11 same time, we made other inquiries of the other 12 supervisory agents in the large thrift group 13 regarding what their compensation was to the top 14 executives. And we put that altogether and we 15 reviewed it and then we compared it to this. 16 The "we" is the staff at the Federal 17 Home Loan Bank that I had direct control over. 18 Q. (BY MR. RINALDI) Would that have 19 included Marc Dunn? 20 A. Marc Dunn, yes. 21 Q. And who is Donna Guthrie? 22 A. Donna Guthrie is a district -- she's 23360 1 district counsel. She is an attorney at the 2 Federal Home Loan Bank and assists regulatory 3 affairs. 4 Q. And would she have also participated in 5 a review of the contracts? 6 A. We asked our legal department, our 7 regulatory legal department, to review these 8 contracts that we got copies of. 9 Q. So, in addition to reviewing whether 10 the compensation under the contracts was excessive 11 or was reasonable, you also requested that the 12 legal staff review the contracts for their legal 13 sufficiency? 14 A. Yes. 15 Q. And in particular, was there anything 16 they were looking for in terms of legal issues? 17 A. Compliance with Insurance Regulation 18 563.39 of FSLIC. 19 Q. What is 563.39 generally? 20 A. It's a regulation that basically says 21 that the -- you know, employment contracts should 22 be fair. They should be -- they should be safe 23361 1 and sound. Quote, "Basically, don't do harm to 2 the institution or cause harm." 3 Q. Now, after Ms. Bese prepared Interim 4 Exam No. 2, it indicates on Page OW154213 -- in 5 the second paragraph, it says, "An evaluation of 6 the effectiveness of management has not been 7 completed." 8 Do you see that? 9 A. Yes. 10 Q. Did she thereafter then proceed to 11 evaluate the effectiveness of management in 12 subsequent reports? 13 A. Again, this was the core reason for her 14 to be there and the ultimate goal of a 15 Southwest Plan examination. 16 Q. Okay. Now, take a look at the 17 tentative MACRO rating. After she discovered 18 these contracts, what rating did she give to 19 management? 20 A. Okay. This is on the next page? 21 Q. Yeah. It's at OW154214. 22 A. Okay. Again, this is her tentative 23362 1 assessment of management, capital quality -- asset 2 quality, capital adequacy, risk management, and 3 operating results. 4 Q. What rating did she give to management 5 after she had discovered the existence of the 6 contracts? 7 A. 3. 8 Q. Now, was that a good rating or a bad 9 rating; or how would you rate that? 10 A. Well, this is a tentative rating. I 11 don't think she's fully evaluated -- 12 Q. What does -- 13 A. I would read this as a tentative 14 rating. It's based on the information that she 15 has available to her at that moment. 16 MR. NICKENS: Your Honor, I don't 17 believe -- that's a nonresponsive answer. He was 18 asked whether that was a good rating or not, and 19 he didn't answer that question. 20 MR. VILLA: He doesn't want to answer 21 that question. 22 MR. RINALDI: I resent that implication 23363 1 to say -- 2 THE COURT: Well, let's get the answer. 3 MR. RINALDI: To say he doesn't want to 4 answer that question is simply hyperbole. 5 MR. NICKENS: The fact is he didn't 6 answer the question. We would like to get an 7 answer. 8 Q. (BY MR. RINALDI) Would you consider 9 that a good rating, a bad rating, a mediocre 10 rating, what? 11 A. 3 is an average rating. 12 Q. Okay. Do you recall whether after -- 13 in subsequent reports after Ms. Bese had had an 14 opportunity to review and evaluate the 15 effectiveness of management, whether her MACRO 16 rating with respect to management remained at that 17 3 or average level? 18 A. What I recall, the rating declined. 19 Q. Now, directing your attention then to 20 the next enclosure, which is Enclosure No. 3, 21 OW154215, did you also receive this interim report 22 from Ms. Bese? 23364 1 A. Yes, I did. 2 Q. And now in the third paragraph down, it 3 talks about "The compensation level of senior 4 executives appears high. Salary information is 5 being gathered for comparable Texas institutions 6 to ascertain if compensation is excessive. 7 Additionally, the reasonableness of combining the 8 prior base salary minimum and merit bonus is being 9 reviewed." 10 Do you see that? 11 A. Yes. 12 Q. Is that the review that you talked 13 about that was being conducted by your staff, or 14 did she independently conduct a separate review? 15 A. I don't remember -- I can't remember 16 specifically what review she conducted. I know we 17 conducted a review. 18 Q. Now, it makes reference to her 19 reviewing the reasonableness of combining the 20 prior base salary minimum and merit bonuses being 21 reviewed. 22 Do you know what that makes reference 23365 1 to, sir; or do you recall as you sit here today? 2 A. Well, what I recall is that the -- the 3 base salaries had increased significantly because 4 of the layering on of these bonuses; so, they had 5 a new, higher adjusted base salary. 6 Q. And after she had completed the 7 November 9th, 1988 interim exam, she also 8 presented another tentative MACRO rating. 9 Do you see that? 10 A. Yes. 11 Q. And the management rating has now been 12 reduced to a 4. Did you have any discussion with 13 her as to why she was reducing the rating to a 4? 14 A. I don't recall a discussion with her on 15 that. 16 Q. Okay. Turn to the next document, which 17 is OW154217. This is the fourth interim exam 18 report. 19 Now do you recall receiving this from 20 Ms. Bese? 21 A. Yes, I do. 22 Q. Okay. And it discusses the fact 23366 1 that -- in the first full paragraph -- that 2 "Management has closed the escrow account 3 established to meet the severance pay obligation 4 as required by the employment contracts. All 5 personnel with employment contracts signed an 6 agreement acknowledging the withdrawal of the 7 funds and indicated that this withdrawal is not a 8 breach of the employment contract." 9 Do you see that? 10 A. Yes. 11 Q. Do you know what that's making 12 reference to, sir? 13 A. I believe it's the 6-million-dollar 14 fund. It was retrieved and brought back into 15 USAT. 16 Q. What was the process by which that 17 6-million-dollar fund was retrieved? 18 A. Well, what I basically recall is that I 19 had conversations with USAT over this fund and 20 made demands on them to return it to the 21 institution. 22 Q. And after you made demands, they 23367 1 complied? 2 A. I guess they did. 3 Q. And turning to OW154220, this is the 4 fifth enclosure. 5 Do you recognize that document, sir? 6 A. Yes, I do. 7 Q. Now, it talks about the management 8 evaluation. By this time, do you recall Ms. Bese 9 was moving beyond the contracts and looking at 10 management's performance or their effectiveness as 11 management? Do you recall? 12 A. What I recall is generally before 13 Christmas of 1988, she had a detailed interim 14 report going to other areas of USAT's operations. 15 Q. Okay. Now, in the first sentence, she 16 states, "United Savings' board of directors and 17 management have not consistently operated the 18 association in a manner to protect the interest of 19 the stockholders or FSLIC fund." 20 Do you see that? 21 A. Yes. 22 Q. And then it -- do you recall why it is 23368 1 Ms. Bese felt that the management had not 2 consistently operated the association in a manner 3 to protect the interest of the stockholders? 4 MR. VILLA: Objection. 5 Q. (BY MR. RINALDI) Did you have any 6 discussions with Ms. Bese that you recall? 7 A. Well, Ms. Bese came to the Dallas bank 8 and presented this report to, again, the people 9 from the Southwest Plan and to myself and my 10 staff. And in this report, she -- she spelled out 11 several weaknesses, including the before-mentioned 12 employment contracts and bonus programs. She also 13 mentions in this report the poor loan 14 underwriting, inadequate investment decisions, and 15 exceptions in accounts between the holding company 16 and USAT were noted. 17 Q. Okay. And does this examination 18 report, to the best of your knowledge, reflect 19 Ms. Bese's determination or evaluation of 20 management at USAT as she determined in the 21 context of the 1988 Southwest examination report? 22 A. This reflects the interim report that 23369 1 she filed with me regarding her findings to date. 2 Q. Okay. Now, it says in the second 3 paragraph, "Jenard Gross, Michael Crow, and Art 4 Berner were the key management personnel involved 5 in making major decisions for all association 6 functions." 7 Do you see that? 8 A. The second paragraph, yes, sir. 9 Q. Is that observation or finding by 10 Ms. Bese consistent with prior observations that 11 you had made in your capacity as the supervisory 12 agent for USAT? 13 A. Yeah. The three individuals are some 14 of the key individuals running the institution. 15 Q. And it states that "These individuals 16 are all involved in all major committees: 17 Executive, investment, asset classification, and 18 senior loan. Their decisions have had a 19 significant negative impact on the viability of 20 the association." 21 Do you see that? 22 A. Yes, I do. 23370 1 Q. Do you know what she was referring to 2 when she indicated that their decisions had had a 3 significant negative impact on the viability of 4 the association? 5 A. The three individuals mentioned here 6 had been part of key management from the time I 7 was involved with supervising the institution. 8 So, from December of 1985 until it was placed in 9 receivership, USAT continued to lose money on an 10 operating basis and non-operating basis. Overall, 11 it kept spiraling down. I didn't see that they 12 had taken any steps that would have -- you know, 13 any plans that come up with something concrete as 14 a business plan to alleviate the situation and 15 correct the problems because all during this 16 period of time, we had the same regulatory 17 deficiencies noted in the exams: Lack of loan 18 underwriting standards, appraisal deficiencies, 19 books and records, et cetera, coming out of the 20 two prior exams that we mentioned here today. 21 I was aware that they were on the key 22 operating committees. I'm not sure -- I'll accept 23371 1 what's here today. I'm not sure exactly what all 2 committees they may have been on. But they 3 definitely were part of the key management group 4 running USAT. 5 THE COURT: All right. We'll adjourn 6 until 9:00 tomorrow. 7 MR. NICKENS: Your Honor, may I raise 8 one small scheduling issue before we adjourn? For 9 several weeks now, we've been informed that 10 Enforcement would probably take around two days 11 for testimony of the direct for Mr. Twomey. 12 At the last break, Mr. Rinaldi 13 indicated that that might be -- it might be only 14 about a day, that he might finish tomorrow 15 afternoon. I would ask that we get some more 16 definite estimate because it makes a difference as 17 to what we will be doing tonight as to whether he 18 will complete his examination tomorrow. 19 MR. RINALDI: It would be my desire to 20 try to finish by the end of the day tomorrow. I 21 think it unlikely that I would finish before the 22 end of the day tomorrow if that assuages your 23372 1 concerns. 2 MR. NICKENS: Your Honor, we've been 3 providing copies of documents and things of that 4 nature to the other side; and if we don't have to 5 do that tonight, I would much prefer that. But if 6 we do, I would like to know it now. 7 THE COURT: Can you do that from what 8 he said? 9 MR. VILLA: I think we can, Your Honor. 10 THE COURT: All right. 11 12 (Whereupon at 4:53 p.m. 13 the proceedings were recessed.) 14 . 15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . 23373 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 17th day of August, 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 . 23374 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 17th day of August, 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