24355 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 25, 1998 22 24356 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 24357 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 24358 1 2 INDEX OF PROCEEDINGS 3 Page 4 NEIL TWOMEY 5 Continued Examination by Mr. Villa......24359 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 24359 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:00 a.m.) 3 THE COURT: Be seated, please. The 4 hearing will come to order. 5 Mr. Villa, you may continue with your 6 cross-examination. 7 MR. VILLA: Thank you, Your Honor. 8 9 CONTINUED EXAMINATION 10 11 Q. (BY MR. VILLA) Good morning, 12 Mr. Twomey. 13 A. Good morning, Mr. Villa. 14 Q. I have been accused sometimes of going 15 so fast I leave things out of context. So, let me 16 give you the context for today's examination. 17 The first day, we examined how much you 18 remembered during the course of your deposition. 19 Yesterday, we compared your trial testimony to the 20 evidentiary record which had been established in 21 this case. And today, we're going to examine the 22 contemporaneously-prepared documents from the 24360 1 Federal Home Loan Bank of Dallas which you either 2 would have prepared or received or reviewed 3 regarding the conduct of United. Okay? So, if I 4 look like I'm going back over some old ground, 5 we're looking at the same issue from a third 6 perspective. 7 Do you understand, sir? 8 A. Yes. 9 Q. Now, sir, when you sent a memorandum to 10 your superiors, was it your practice to review all 11 relevant documents to assure yourself that the 12 memorandum was correct? 13 A. Well, if I questioned something in the 14 document, I would ask the analyst to check it out 15 or I'd check it out. 16 Q. And the -- 17 A. So, I was reasonably assured that it 18 was accurate. 19 Q. Now, the first issue we're going to 20 examine is the causes of the problems at United. 21 You began as a supervisory agent on December 2nd, 22 1985. Right? 24361 1 A. Yes, sir. 2 Q. And shortly after you began, you 3 directed all of your supervisory analysts to 4 review all of the associations under your 5 supervision; isn't that right? 6 A. Yes. 7 Q. And they prepared detailed analyses of 8 those institutions for your high-level review with 9 your superiors. 10 Do you remember that? 11 A. Well, I call it -- instead of a detail, 12 my -- if you said a detailed review, I would be 13 talking about multi pages. We prepared a summary 14 to highlight -- basically so we could have -- so 15 we could report to our superiors what the 16 outstanding issues were on each institution as we 17 knew it at that time. 18 Q. And you wouldn't call that a detailed 19 breakdown of the strengths and weaknesses of every 20 institution for which you were responsible? 21 Would you agree with that 22 characterization? 24362 1 A. It would probably be more -- it would 2 probably be more detailed on the weaknesses than 3 it would be on the strengths. 4 Q. Okay. But a detailed analysis of the 5 weaknesses of the institutions for which you were 6 responsible? 7 A. As best I can recall, yes. 8 Q. Now, I'd like you to turn to 9 Exhibit A11153, which should be the first document 10 in Volume I. It's Tab 1870. It's a memo from you 11 and Ginger Baugh to Roy Green dated January 9, 12 1986. 13 Do you have that before you, sir? 14 A. Yes, I do. 15 Q. Let me direct your attention to Page 2 16 under "scheduled items." 17 Do you have that, sir? 18 A. Yes, I do. 19 Q. Now, it says, quote, "The soft real 20 estate market in Texas during the past several 21 years has resulted in an increased level of slow 22 loans experienced by the association." Right? 24363 1 A. Yes. 2 Q. Can you tell us what a slow loan is? 3 A. A slow loan would be a loan that's 4 behind in payments, contractual debt service, yes. 5 Q. Delinquent? 6 A. Delinquent, yes. 7 Q. So, in early January 1986, it was your 8 conclusion as the supervisory agent that United's 9 delinquent loans were caused by the soft real 10 estate market in Texas. 11 Would that be fair? 12 A. Well, I would have been relying, since 13 I was -- since I was pretty new to Texas, 14 principally on other information such as what was 15 in the application that this relates to. I'm 16 sure -- I don't disagree that the real estate 17 market generally in Texas was slowing down at that 18 time. But any specific knowledge I would have 19 had, I would have gained from basically looking at 20 this application and looking at other things in 21 general. 22 Q. But you wouldn't have put this in the 24364 1 memorandum unless you had satisfied yourself it 2 was accurate. You told me that less than two 3 minutes ago? 4 A. I wouldn't have disagreed with it based 5 on what I knew at the time. 6 Q. And the source of your information 7 would come from the -- any application that was 8 being submitted. Right? 9 A. Obviously, that would be one source. 10 Q. And the knowledge of the other 11 supervisory staff with whom you were working. 12 Right? Ms. Baugh, for example, was a co-author of 13 the memo with you? 14 A. Yeah, I would rely on that. 15 Q. And the information you got from the 16 review of the other 89 thrifts that you were then 17 undertaking a detailed review of their weaknesses, 18 which is what you did in December and January of 19 1986. Right? 20 A. Yes. 21 Q. Now, about six months later, this 22 analysis that we just looked at, this observation 24365 1 shall we say, was in connection with an 2 application for an increase in direct investments. 3 Right? 4 A. Yes. 5 Q. About six months later, the supervisory 6 staff was again called upon to evaluate USAT's 7 application to issue subordinated debt. 8 Do you remember that, sir? 9 A. Yes. 10 Q. And I'd like you to look in Volume II 11 and is, I believe, the green book. Am I right? 12 It's the red tab, and look at Exhibit A11011. 13 It's a July 24, 1986 memo from Joe Selby. 14 Do you have that before you, sir? 15 A. Yes, I do. 16 Q. Now, do you remember I questioned you 17 about this memorandum in the course of your 18 deposition? Not the cover memo but the actual 19 memo that Mr. Selby sent to Mr. Cox? 20 A. Yes. 21 Q. And this memorandum dealt with the 22 subordinated debt application. Right? 24366 1 A. Yes. 2 Q. In the ordinary course, Mr. Selby would 3 get the information for this memo from the 4 supervisory staff including you? 5 A. Yes. 6 Q. And you would have read it before you 7 would forward it to Mr. Selby? 8 A. Yes. 9 Q. Now, let's look at your views as to the 10 causes of USAT's problems in July of 1986. And 11 let's look particularly at the supervisory 12 analysis that begins on Page 7. It starts on 13 Page 7, and it goes over to Page 8 and 9. 14 Do you see that, sir? 15 A. Yes, I do. 16 Q. Let me direct your attention to the top 17 of Page 8, the first full paragraph, the paragraph 18 that begins, quote, "Moreover, in light of the 19 depressed economy in Texas, the high level of 20 scheduled items is not surprising," close quote. 21 Do you see that? 22 A. Yes. 24367 1 Q. And that would be an indication that 2 the problems that USAT was encountering with 3 respect to its loan portfolios were at that point 4 not surprising in view of the problems in the 5 Texas economy and particularly Houston. Right? 6 A. Yes. 7 Q. And a scheduled item is an asset such 8 as a real estate loan or even an investment that's 9 been criticized by the examiners. Right? 10 A. Up until this time, it still would have 11 been a delinquent loan. The new classification 12 reg really hasn't been applied yet. 13 Q. It would have been adopted but not 14 implemented fully? 15 A. Well, it was adopted; but it just 16 hadn't come through the pipeline. 17 Q. Right. It had been adopted in early 18 '86 and it was filtering in with the ongoing 19 examinations. Let me direct your attention to the 20 first sentence on the top -- first sentence of the 21 first full paragraph on Page 8. No. I'm sorry. 22 We're going to go to page -- another page. 24368 1 Well, before we do that, let's talk 2 about the question of the -- what a thrift is 3 supposed to do. Weren't there guidelines that 4 thrifts were supposed to lend within their 5 geographic areas? 6 A. Generally, within their state or 7 immediate lending area, under CRA, they had to 8 define what their normal lending area was for 9 other reasons. But generally, the -- within 10 locations where they had branches and also -- 11 usually within the state. 12 Q. Right. The theory was that a thrift 13 was more likely to understand the economic 14 conditions in its region where it had its 15 headquarters and its operations than if it were to 16 be -- have its offices, for example, in Boston and 17 be lending on projects in Texas. Right? 18 A. True. 19 Q. And if the geographic areas were 20 themselves suffering from economic downturn, 21 particularly in the real estate market, that would 22 impact on the thrifts; isn't that right, sir? 24369 1 A. Yes. 2 Q. And that is unless the thrifts could 3 figure out some way to invest outside their 4 geographic area and not be criticized by the 5 regulators. Right? 6 A. Well, if they had already been 7 investing in their geographic areas and there was 8 a negative economic impact, then they would 9 already be feeling the effects. And if they were 10 going to come up with a new strategy, it still 11 would take some time before that strategy could 12 probably offset the already existing -- I don't 13 remember -- the loans or long-term assets already 14 existing on the books. 15 Q. Right. But in terms of where you put 16 your new money and you got certain assets out 17 there -- and let's assume that they are troubled 18 because of the economy, the regional real estate 19 economy -- you have to figure out some way to 20 generate new income to offset the losses that 21 you're sustaining. And the general rule is that 22 the thrift would lend within the same regional 24370 1 area. Right? 2 A. Well, from my experience, if the 3 economy is declining and there is a lack of good 4 credit out there where you can get new loans, you 5 basically shut down your lending operations. 6 Q. Or you figure out a way to -- right. 7 You shut down your lending operations and you 8 devote your resources to other means of making 9 money besides regional real estate lending. 10 Right? 11 A. Or you can shrink. 12 Q. You can shrink; but if you're losing 13 money, shrinking doesn't help you, does it? 14 A. But putting on more bad assets doesn't 15 help you either. 16 Q. Well, that depends on where you put 17 your assets. If you restructure in a different 18 way, you might make enough money to offset the 19 losses. Right? 20 A. Yes. 21 Q. Now, you thought it was a good idea for 22 USAT to do just that, to compensate for the losses 24371 1 that they were incurring in the real estate 2 economy by going into other -- going into other 3 areas of investment in July of 1986; isn't that 4 right, Mr. Twomey? 5 A. Yes. 6 Q. And if we look at Page 7 of the exhibit 7 we were just looking at -- and this is Mr. Selby's 8 memo, the paragraph just above "supervisory 9 analysis" says, quote, "The association has 10 greatly expanded its securities activities in 11 order to compensate for the problems in its loan 12 portfolio resulting from the current depressed 13 economy in Houston and in the entire Texas market. 14 To its credit, the association has thus far 15 profited from the investments to the extent that 16 earnings on securities transactions have offset 17 severe net operating losses." 18 And that, in fact, was the prevailing 19 opinion in the Federal Home Loan Bank of Dallas 20 from Mr. Selby down to Ginger Baugh, that this 21 redirection to compensate for the loan problems 22 was a good idea. Right? 24372 1 A. Yes. 2 Q. And let me show you a -- do you recall 3 Liz Beasley? 4 A. Yes. Liz was a supervisory agent, 5 application agent, while I was at the Federal Home 6 Loan Bank of Dallas during that time. 7 Q. Let me ask you to look at 8 Exhibit A11080, which should be the next document 9 in your book. 10 MR. RINALDI: Tab? 11 MR. VILLA: It's not in evidence yet. 12 Q. (BY MR. VILLA) Do you have that 13 before you, sir? 14 A. Yes. 15 Q. Is that a -- identify that as a 16 documents from the files of the Federal Home Loan 17 Bank of Dallas produced to us in connection with 18 the United materials. 19 MR. VILLA: Your Honor, I move 20 Exhibit A11080 into evidence. 21 MR. RINALDI: I don't think I have any 22 objection, but let's see if he can identify it. 24373 1 MR. VILLA: I'm sorry. I didn't hear 2 the Court's ruling. 3 THE COURT: I thought Mr. Rinaldi said 4 that he didn't have any objection unless -- until 5 it was identified, and I was going to wait until 6 the witness identified the document. 7 MR. VILLA: I'm sorry. 8 Q. (BY MR. VILLA) Do you recognize this 9 as a document relating to the supervision of 10 United while you were the supervisory agent? 11 A. Well, it has information on United. It 12 has Liz Beasley's name penciled in, special 13 project. I don't have a problem with saying it 14 probably might have come from the supervisory 15 files. As you can see, it's kind of bad at the 16 top. I don't see a to who/from who date. But 17 again, it's -- I think generally if you look -- 18 probably in 1987, it's some type of summary of 19 information regarding United. 20 Q. And from time to time, sir, were the 21 supervisory staff called upon to summarize the 22 association for applications agents? 24374 1 A. They would ask our input as they would 2 be processing applications, and it could take the 3 form of a long memo or it could be a short memo. 4 It just depended on what the application was and 5 what the request for information was. 6 MR. VILLA: Your Honor, I move A11080. 7 MR. RINALDI: No objection. 8 THE COURT: Received. 9 Q. (BY MR. VILLA) And do you recall the 10 special project that Ms. Beasley was working on in 11 August of 1987? There is a reference in the upper 12 right-hand corner, "for Liz Beasley, special 13 project." 14 A. No, I don't recall what special project 15 that might be. 16 Q. Let me direct your attention to the 17 third full paragraph, and I'll read the line. It 18 says, quote, "In 1985 and 1986, increases in 19 problem assets resulted from the continuing 20 depressed economic conditions in Texas and 21 particularly in Houston. Houston's economy has 22 been largely based on the energy industry for many 24375 1 years and has been severely impacted by the 2 downturn in that industry following the decline in 3 oil prices." 4 Do you see that, sir? 5 A. Yes. 6 Q. And would that be a fair summary of 7 where you thought the Houston real estate and 8 economic markets were in mid-1987? 9 A. Yes. 10 Q. Let me direct your attention, sir, to 11 Exhibit A11093. This is a copy of a summary for 12 the Regulatory Review Committee dated March 9, 13 1988. 14 Do you see that, sir? 15 A. Yes. 16 Q. Does your name appear in the upper 17 right-hand corner? 18 A. Yes. 19 Q. And do you recall that you were 20 questioned at some length about this during the 21 course of your deposition? 22 A. Not particularly, but probably I was. 24376 1 Q. And the three people who would 2 typically review a submission before it went to 3 the Regulatory Review Committee would be you, your 4 analyst, and the head of the supervisory group. 5 Right? 6 A. Yes. 7 MR. VILLA: Your Honor, I move A11093 8 into evidence. 9 MR. RINALDI: No objection, Your Honor. 10 THE COURT: Received. 11 Q. (BY MR. VILLA) I have a blowup of 12 this document for our convenience in looking at 13 the -- we'll be looking at various parts of it. 14 But while that's being brought in, let me direct 15 your attention to the sentence "pertinent 16 background." 17 It says, quote, "United has 18 historically been a residential mortgage lender. 19 The decline in the economy in Houston in recent 20 years has caused problem loans and REO to increase 21 significantly from 1.3 percent of assets at the 22 July 23, 1983 examination to 10.6 percent of 24377 1 assets at the May 27, 1986 exam." 2 Do you see that, sir? 3 A. Yes. 4 Q. And that would be an accurate statement 5 as to what the cause of the REO was; that is to 6 say, the decline in the Houston economy. Right? 7 A. It would definitely be one of the 8 causes, yes. 9 Q. Well, the other cause -- let's see if 10 you address the other cause. Now I can put up the 11 document. 12 The other cause of REO could be 13 underwriting deficiencies or imprudent operating 14 practices. Right? 15 A. Yes. 16 Q. And if you'll look at Page 2 of the 17 document, you'll see it says "qualifications for 18 capital forbearance." And the first issue that 19 you are to address is "failure to meet minimum 20 capital requirements is due to adverse economic 21 conditions." 22 And the response by the parties who 24378 1 prepared this document, which I assume includes 2 you, says "United meets this condition. As 3 previously discussed, United has been -- has 4 traditionally been a conventional one-to-four 5 family residential lender." And then it goes on. 6 "The adverse economic conditions in Texas have 7 caused broad-based unemployment and declining real 8 estate values, which have led to increased loan 9 delinquencies and foreclosures. This has been 10 especially true in Houston, Texas, as a result of 11 the depressed energy sector. Substantially all of 12 United's REO, delinquent loans, and real estate 13 investments are in the State of Texas, 14 predominantly in Houston." Right? 15 A. Yes. 16 Q. So, we have identified one -- one 17 source of the REO. And the other potential source 18 would be imprudent underwriting practices and 19 underwriting deficiencies, and you address that in 20 the last sentence. Right? 21 A. Yes. 22 Q. It says, quote, "In addition, we have 24379 1 no indications that United's problem assets are 2 attributable to underwriting deficiencies or 3 imprudent operating practices." Right, sir? 4 A. That's true. 5 Q. And that would be the conclusion that 6 was drawn in 1988 regarding the condition of 7 United and the cause of the condition. Right? 8 A. Yes. 9 Q. Now, sir, this was in connection with 10 an application for capital forbearance. And 11 that's -- can you explain to us generally what a 12 capital forbearance application is? 13 A. Generally, if an institution wasn't 14 meeting its regulatory capital, they would file 15 basically a capital plan where, for a time, they 16 wouldn't meet the normal capital requirement. But 17 under a plan over time, they would, you know, 18 build their capital back up. Usually, a two-year 19 period, if I remember right. 20 Q. Now, sir, finally, let's take a look 21 at -- we start at the beginning of this time 22 period, January 9, 1986, which is I think 24380 1 virtually the first memorandum with which you've 2 been involved. And now we're going to go 3 essentially to the last memorandum, which is 4 T8142, which is -- should be the S memo. And that 5 is the brown tab in Volume I. It's in evidence at 6 Tab 1450. 7 And if you'd take a look at Page 2 of 8 the document. It should be about the fifth 9 document in that book that you've got before you, 10 sir. And the number is T8142 in evidence at 11 Tab 1450. 12 A. Yes. 13 Q. And if you'll look at Page 2 of the 14 document, the conclusion on the analysis of United 15 and the grounds for appointment of a receiver on 16 Page 2, the end of the carryover paragraph is, 17 quote, "There is no reasonable prospect that 18 United can halt or reverse its deteriorating 19 financial condition without a recovery in the 20 Houston residential real estate market or without 21 FSLIC assistance." Right? 22 A. Yes. 24381 1 Q. So, that merely reinforces the 2 significance of the Houston real estate market to 3 the overall viability of United; isn't that right, 4 sir? 5 A. It had an effect. 6 Q. So, let me take this down. We're going 7 to address -- we're going to go through the same 8 documents looking at different issues, and I'm 9 going to write the issues down as we look at them. 10 So, one is cause of problems we've addressed now. 11 Now we're going to look at some of the 12 documents with a different focus. We're going to 13 look at them now in connection with what USAT's 14 business plan was as explained to the Federal Home 15 Loan Bank of Dallas to address the cause of its 16 problems. 17 Now, I'm going to direct your attention 18 back to the time period, the beginning, 1986 when 19 you arrived. Let's look at some of the business 20 plans that United was submitting. 21 Before I do that, you've used the word, 22 I believe -- I didn't check on it, but I think 24382 1 you've used the word "wholesale strategy." 2 Do you understand what the wholesale 3 strategy is? 4 A. I've used that term? 5 Q. I believe it was used. Let me ask you, 6 sir: In connection with this case, we have come 7 to use the word "wholesale strategy" to mean the 8 restructuring of United away from portfolio home 9 lending to investments in securities activities, 10 real estate joint ventures, merchant banking, and 11 to change their deposit gathering from primarily a 12 branch system to one that uses primarily a money 13 desk. 14 Does that sound like a reasonable 15 description of what you might regard as a 16 wholesale strategy for a financial institution, 17 moving from a retail to a wholesale operation? 18 A. Well, if you want to use that 19 description for here on United, I don't have a 20 problem with it. 21 Q. Do you recall hearing a strategy like 22 that discussed from time to time? 24383 1 A. Yes. 2 Q. Let me ask you to take a look at a 3 letter dated November 6, 1985. It's Tab 642 -- 4 I'm sorry -- B642, Tab 1871. It's probably the 5 next document -- it's the second-to-the-last 6 document in the green book. 7 MR. VILLA: Would you like the numbers 8 again, sir? It's B642, Tab 1871. 9 Q. (BY MR. VILLA) I think Mr. Rinaldi 10 showed you this document. 11 A. Yes, he did. 12 Q. Let's direct your attention to pages -- 13 if you go into the document at Page OW152417, do 14 you see the proposed business plan there? 15 A. Yes. 16 Q. And would you read through 417 through 17 419? 18 A. (Witness reviews the document.) Okay. 19 Q. Now, that is a short form, but it is a 20 form of a business plan, isn't it, sir? 21 A. Yes. 22 Q. And it's submitted in connection with a 24384 1 direct investment application. Right? 2 A. Yes. 3 Q. And would you agree with me that it 4 describes the wholesale strategy as you and I have 5 talked about it over the last five minutes? 6 A. Yes. 7 Q. And part of the strategy -- indeed, an 8 essential part of a wholesale strategy is the sale 9 of branches, isn't it, sir? 10 Well, I don't know if you have to find 11 it there. Let's just talk about the theory of -- 12 A. Well, they were selling branches at 13 this time or they had already sold some branches 14 at this time. And it shrunk back the number of 15 branches they originally had. 16 Q. Right. 17 A. So, that's, again, no problem. 18 Q. And you'd have to -- if you were going 19 to move from primarily a retail operation where 20 you were gathering deposits from people who walked 21 in off the street and making a lot of small 22 consumer and home loans to a wholesale operation 24385 1 where you were gathering deposits through a money 2 desk and putting your assets out in either 3 investment securities or large real estate loans 4 or joint ventures, it wouldn't make sense to have 5 this very expensive branch system. Right? 6 A. If you made the determination the 7 branch system wasn't effective in raising deposits 8 and you then wanted to sell it, that's a business 9 decision. I think they have already sold some 10 branches at this time, if I recall. And they 11 already were shifting to more of a money desk 12 operation. But that's simply a business decision. 13 Q. Correct. 14 A. And they sold more branches later, and 15 they went basically to a money desk operation in 16 '88. 17 Q. Right. But what I'm saying is when you 18 have a retail -- when you have essentially a 19 retail financial institution, it depends upon 20 deposit gathering at the retail level from the 21 public, and it puts out a large volume of its 22 assets, a large percentage of its assets to the 24386 1 same people who are branch customers in terms of 2 consumer loans and home loans. Right? That's 3 essentially what's called retail banking. Right? 4 A. The normal retail banking for a normal 5 thrift would be a number of branches. They gather 6 deposits. And then basically, the same people, 7 they make credit loans to those people. However, 8 there are situations that have occurred where you 9 have a -- basically, a money desk operation where 10 they are pulling in money; and using MOCs, which 11 is mortgage origination centers, you still could 12 be making loans to the retail public but not 13 through a typical branch system. 14 Q. Right. And the problem during this 15 period of time is that the branch system tended to 16 be quite expensive to maintain relative to the 17 total amount of income that you would derive from 18 that. Right? 19 A. I won't disagree. I just don't know at 20 this point. 21 Q. Okay. So, you would agree with me that 22 in most instances, a switch from a retail 24387 1 system -- a retail banking strategy to a wholesale 2 banking strategy in most circumstances would 3 involve the sale of the branches. Right? 4 A. In most cases, if that's the business 5 decision and you've got an efficient money desk 6 operation, you make a business decision on what's 7 the cheapest way to raise money. 8 Q. And do you recall that from time to 9 time, there were comparisons of the cost of USAT's 10 ability to raise money and they were, in fact, 11 found -- the Federal Home Loan Bank of Dallas 12 found that they were able to raise money more 13 cheaply through the money desk than through the 14 branch system? 15 A. I remember we knew that they had a very 16 efficient money desk. So, they were able to keep 17 their costs down through the money desk. 18 Q. Now, every branch sale had to be 19 approved by the Federal Home Loan Bank of Dallas. 20 Right, Mr. Twomey? 21 A. Yes. 22 Q. Now, let me show you what's been marked 24388 1 as B696, which should be the next document in your 2 green book. Is that a memorandum from David 3 Bradley to Roy Green dated December 15, 1985? 4 A. Yes. 5 Q. Involving United Savings? 6 A. Yes. 7 Q. And this would have been one of the 8 documents generated while you were a newly 9 ensconced supervisory agent at the Federal Home 10 Loan Bank of Dallas with responsibility for 11 United. Right? 12 A. Yes. 13 MR. VILLA: Your Honor, I move B696 14 into evidence. 15 MR. RINALDI: No objection. 16 THE COURT: Received. 17 Q. (BY MR. VILLA) Now, this is a review 18 of the -- of a branch sale application by United 19 Savings. Right? 20 A. Yes. 21 Q. And let me direct your attention to the 22 analysis that is being adopted for this review. 24389 1 And this is particularly on Page 4 of the branch 2 sale application. It's the last paragraph above 3 the supervisory analysis and comments. 4 It begins with the sentence, "If 5 opportunity costs are considered, the transactions 6 unfavorably" -- I'm sorry. Let me start again. 7 "If opportunity costs are considered, the 8 transaction unfavorably impacts the current 9 earnings picture of United. However, United will 10 realize an immediate gain of $6,549,000. And 11 after the result of writing down goodwill of 12 approximately $2,039,000, United will be 13 restricted -- United will be restricted with the 14 use of the gain or increase in net worth and will 15 not be able to upstream the gain to its 16 shareholders in the form of dividends." And then 17 the next sentence is the one that I'm interested 18 in. It says, "The increase in net worth will 19 provide United added time to restructure and 20 increase profitability." 21 Do you see that, sir? 22 A. Yes. 24390 1 Q. Then it continues. "Additionally, the 2 purchase will not result in increased risk to 3 FSLIC," et cetera, and "approval is recommended." 4 Right? 5 A. Yes. 6 Q. Now -- so, this analysis involves the 7 sale of assets which will reduce current earnings. 8 Right? That's the supervisory analysis -- 9 conclusion that's reached? 10 A. Yes. 11 Q. And it's approved anyway by the Federal 12 Home Loan Bank of Dallas for the reason that it 13 will result in a gain for United? 14 A. Yes. 15 Q. And that gain will give United an 16 opportunity to increase its net worth so it will 17 have, quote, "added time to restructure and 18 increase profitability." Right? 19 A. Yes. 20 Q. And is the restructuring program that 21 United is talking about at this time the 22 transition from a retail to a wholesale strategy? 24391 1 A. Yes. 2 Q. So, in December of 1985, the logic of 3 the Federal Home Loan Bank is "we will permit 4 United to sell assets that reduce current earnings 5 because it will generate a gain which will bolster 6 its net worth and allow it time to restructure 7 into the wholesale strategy." Right? 8 A. That's what the memo says. 9 Q. Let me ask you, sir, to look back at 10 the first document in Volume I, A11153, which is 11 the January 9, 1986 memo. And if you'd turn to 12 Pages 5 through 6 of that memo. 13 Do you remember about three minutes 14 ago, four minutes ago, I showed you the business 15 plan that had been submitted on November 6, 1985? 16 Do you remember that? 17 A. Yes. 18 Q. And that's the business plan that is 19 being evaluated in this memorandum deciding on 20 whether or not to grant the direct investment 21 application; isn't that right? 22 A. Yes. 24392 1 Q. And could you read for me the first 2 sentence under No. 7, "business plan"? 3 A. "The association's business plan 4 submitted in conjunction with this application 5 appears reasonable." 6 Q. And that was the conclusion that the 7 Federal Home Loan Bank had in nineteen -- in at 8 least January of 1986 about the switch from a 9 retail to a wholesale strategy, that given 10 United's problems and the cause of their problems 11 as we've gone through, the switch from a retail to 12 a wholesale strategy was a reasonable one. Right? 13 A. Yes. 14 Q. Now, I'd like to direct your attention 15 to Page 6 of that same memorandum under the second 16 full paragraph. It reads, quote, "In addition, 17 the association intends to increase its joint 18 venture activity, land development, and project 19 management in high-growth areas of Dallas, Fort 20 Worth, San Antonio, Austin, and select 21 out-of-state regions." 22 MR. RINALDI: I'm sorry. Which 24393 1 document are you reading from? 2 MR. VILLA: The same document, next 3 page. 4 Q. (BY MR. VILLA) Do you see that, sir? 5 A. Yes. 6 Q. Now, this would have been prepared at a 7 time when you had been -- you had gotten your 8 analyses by your various supervisory agents of all 9 of the thrifts in your caseload. Right? 10 A. Yes. 11 Q. And you told us yesterday -- no. I 12 think you told us two days ago that the thrifts in 13 your caseload were primarily from three cities: 14 Houston, Austin, and San Antonio. Right? 15 A. Yes. 16 Q. And we've already established that 17 the -- in general, the financial health of the 18 thrift would reflect the financial health of the 19 regional real estate economy. Isn't that also 20 true? 21 A. Yes. 22 Q. So, at least in January of 1986, you 24394 1 would have had to come to the conclusion that the 2 areas involved here, including San Antonio and 3 Austin, certainly appeared to be high-growth areas 4 relative to the rest of Texas; isn't that right? 5 A. Relative to Houston, yes. 6 Q. In fact, it's your memorandum that 7 describes them as high-growth areas. Right? 8 A. Yes. 9 Q. And the reason for that was, going back 10 to the issue of "cause of problems," you knew that 11 San Antonio and Austin were not as impacted by the 12 real estate -- by the oil shocks that hit large 13 parts of Texas in '82 and then again in '86? 14 A. Not as bad probably, but -- not as bad 15 as Houston got hit, yes. 16 Q. Now, let's look again at Mr. Selby's 17 memorandum dated July 24, 1986. It's a red tab in 18 Volume II of your book. It is A11011, Tab 256. 19 And if you'll turn to Page 7. 20 A. (Witness complies.) 21 Q. Well, I'll tell you what. We've gone 22 over that. It's the same line that we talked 24395 1 about before. It's the fact that USAT is moving 2 to essentially a wholesale strategy and into 3 investments to compensate for the problems in the 4 Texas economy. 5 And that was viewed at the time as a 6 wise move. Right? 7 A. It was looked at as a sound move, yes. 8 Q. As a sound move. 9 Now, in connection with the 10 subordinated debt application that was finally 11 sent to -- forwarded to Washington, you requested 12 a detailed three-year business plan. 13 Do you remember that? 14 A. No, but it would have been normal -- 15 standard operations at that time. 16 Q. Okay. Let me show you what -- we have 17 another binder for you, and you're going to see a 18 letter hopefully dated July 1, 1986, which is 19 Exhibit B1084, Tab 1645. 20 Do you have that before you, sir? 21 A. Okay. Give me that -- is it the first 22 document? 24396 1 Q. It should be the first document. 2 A. Okay. July 1st, 1986 letter to 3 Mr. Berner. 4 Q. And is that a request to Mr. Berner for 5 a three-year business plan, the second paragraph? 6 A. Yeah. 7 Q. And if you'll look at the document, the 8 next document after that, A10663 in evidence at 9 Tab 184, although they don't -- the document that 10 was introduced was not the Bates stamped copy -- 11 I'm sorry -- the received copy from the Federal 12 Home Loan Bank of Dallas that I used in your 13 deposition, does it appear to be the business plan 14 that was submitted in response to your letter? 15 A. It probably is. 16 Q. And do you recall, sir, that this 17 business plan was reviewed both in Washington and 18 in Dallas in connection with the subordinated debt 19 application? 20 A. It probably was. I just don't remember 21 it at the time. 22 Q. But the practice at the time would have 24397 1 been to -- if a business plan had been 2 requested -- and I think your letter said that it 3 had to be submitted for your review and approval, 4 for your review -- for the supervisory agent's 5 review and approval, that, in fact, you would have 6 received it, reviewed it, and approved it. Right? 7 A. Yes. 8 Q. Now, ultimately, the subordinated debt 9 application was rejected for problems arising out 10 of the Couch loans. 11 Do you remember that, sir? 12 A. I knew it was rejected. I don't 13 remember all the reasons. 14 Q. Okay. Now, let's focus on the issue of 15 how far back in time the Federal Home Loan Bank of 16 Dallas knew of the wholesale strategy. 17 I'm going to ask you to look at 18 Exhibit B11 -- I'm sorry -- Exhibit B1007. It's 19 the purple tab in Volume I. It's a memo from 20 Ginger Baugh to the file dated May 29, 1986. And 21 I think you were examined about it -- you were 22 examined about it by Mr. Rinaldi and then by 24398 1 Mr. Nickens. 2 A. Yes. 3 MR. VILLA: It's Exhibit B1007 in 4 evidence at Tab 1872. It's the second-to-the-last 5 document in Volume I. 6 A. I have it. 7 Q. (BY MR. VILLA) Now, let's take a look 8 at the question -- I realize you weren't there in 9 1983 and 1984. You first came in 1985. Right? 10 A. Right. 11 Q. But Ms. Baugh had been the supervisory 12 analyst from probably -- how many years before you 13 came? Do you remember? 14 A. I don't know when Ms. Baugh arrived. 15 Q. But she had been there for a number of 16 years before you came. Right? 17 A. I honestly don't know when she started. 18 Q. Let me direct your attention to the 19 paragraph entitled "issues discussed" on 20 Exhibit B1007. And this is a memo that's being 21 drafted in May of 1986. It says, quote, "United's 22 operating strategy. Two years ago, the 24399 1 association initiated an overall strategic plan, 2 including the following." And it goes through and 3 essentially describes the core of the wholesale 4 strategy. Right? 5 A. Yes. 6 Q. And does that refresh your recollection 7 that when you arrived at USAT in late 1985, that, 8 in fact, the wholesale strategy had been 9 implemented for at least several years? It wasn't 10 something that you came up with for the first time 11 or that you approved for the first time. Right? 12 A. It's really my recollection that while 13 I was there, they were still converting from, if 14 you want to call it a retail strategy to the 15 wholesale strategy because I believe during that 16 time, they were materially increasing their 17 investments in mortgage-backed securities and junk 18 bonds all the time during 1986 and 1987 at least. 19 Q. Right. And they had sold off -- 20 A. So, they were migrating out of one 21 strategy into the other strategy. 22 Q. Right. They had sold off a number of 24400 1 their branches, but there continued to be smaller 2 branch sales in 1986 and even into 1987. Right? 3 A. Yes. 4 Q. Let me explore with you the notion of 5 growing out of the problem. 6 Have you ever heard of the notion 7 "growing out of the problem" as a business 8 strategy? 9 A. Yes. 10 Q. And is the notion or the business 11 strategy of growing out of the problem one in 12 which a financial institution particularly, if it 13 has a portfolio of assets that are troubled and 14 are assets because they are carried on the books 15 at some value above their cost, above their true 16 market value -- for example, home loans. 17 Didn't -- let's start one piece at a time. 18 If a financial institution owned home 19 loans at, say, 7 percent and the prevailing market 20 rate of interest was 10 percent, those home loans 21 could not be sold for par, could they? 22 A. No. 24401 1 Q. If you sold those assets, you'd have to 2 take -- you'd have to sell them at a deep discount 3 to par. Right? 4 A. Yes. 5 Q. Now, under the Federal Home Loan Bank 6 Board then-existing regulations in the 1980s, 7 thrifts were not required to write down the value 8 of those home loans on their books; isn't that 9 right? 10 A. That's right. 11 Q. So, they were carrying large quantities 12 of home loans on their books that were not worth 13 the value that had been attributed to them in the 14 financial statements, correct? 15 A. That's right. They are not worth their 16 liquidation value. 17 Q. In addition, those home loans were 18 sometimes receiving rates of interest that were at 19 or below the cost of funds because the cost of 20 funds had gone up. Right? 21 A. Yes. 22 Q. So, you had this portfolio of home 24402 1 loans over here that was either costing you money 2 or not making any money but you couldn't sell them 3 without taking a huge hit to your capital. Right? 4 A. Yes. 5 Q. And the theory that had been adopted in 6 the early 1980s and I think executed brilliantly 7 by Fannie Mae for the first time in 1982 was to 8 grow out of the problem, to dramatically increase 9 the rest of the size of the institution to try to 10 put on another portfolio of high-earning assets 11 and utilize the income from those assets to offset 12 the losses that were being experienced as a result 13 of this portfolio of underwater and money-losing 14 home loans. Right? 15 A. Yes. 16 Q. And that was a business strategy that a 17 number of financial institutions tried in the 18 1980s with mixed success; isn't that right? 19 A. Yes. 20 Q. And when we talk about some of them 21 worked, Fannie Mae probably that operates as the 22 biggest thrift in America pulled it off 24403 1 brilliantly. Others failed; isn't that right? 2 A. Yes. 3 Q. And what we were seeing here was that 4 business strategy being executed by United through 5 their restructuring. They were trying to put 6 their new money that they were bringing in into a 7 larger portfolio of investment securities and 8 other high-earning assets to, as Mr. Selby said in 9 his memo, compensate for the losses that they were 10 incurring in their real estate lending as a result 11 of the Houston economy? 12 A. Yes. 13 Q. And that is what we call the wholesale 14 strategy. And at the time, the prevailing wisdom 15 was that that was a sensible way to deal with an 16 otherwise intractable problem for the thrifts. 17 Right? 18 A. Growing out of your problems? 19 Q. Growing out of your problem was 20 something that many people talked about and many 21 thrifts tried? 22 A. Okay. Let me -- there, if you're going 24404 1 to start saying that that was an okay process for 2 every institution to do, I cannot readily agree 3 with that because you can only grow based on what 4 you're planning to do, what new investments you're 5 trying to get into. If you're getting into areas 6 you don't have expertise, the risk of growing is 7 greater than even staying the same. 8 At the same time, you're talking about 9 yes, there was a lot of prevailing talk about 10 growing out of your problems. There was also a 11 number of institutions that shrank because if they 12 continued to go out there and offer -- to get 13 deposit money in and pay 12, 13 percent for CDs 14 and at the same time the loans -- they couldn't 15 offer enough loans out there to make -- you know, 16 to cover their -- to have a proper interest rate 17 margin. Some simply got out of the market. They 18 stopped -- they let their loans start paying off 19 by themselves, and they started shrinking down. 20 And by shrinking down, their net worth as a 21 percentage of their assets would actually increase 22 and it would also cover their -- their situation. 24405 1 Again, you're talking -- it was most serious 2 between 1979 and 1983 when we had the most reverse 3 on interest rates. We had underwater portfolios 4 in a lot of thrifts in the country. 5 Q. But other thrifts throughout the 1980s 6 and particularly in Texas were suffering from the 7 same problem because they not only had the 8 interest rate mismatch but they had the problem 9 that home loans, which had traditionally had 10 almost an insignificant default rate, were now 11 suffering very large defaults, particularly in 12 Houston. Right? 13 A. What I saw at the time was there was an 14 increase in defaults, mostly because of 15 unemployment. But the real problem, '79 through 16 '83, as I saw it was simply that interest rates -- 17 the market interest rates were so high that if you 18 continued offering to get CD money in, that you 19 were losing on a day-to-day basis. If your 20 earning portfolio was making 9 percent and your 21 liability portfolio was costing you 11 percent or 22 12 percent, you basically had an operating loss 24406 1 already. 2 It wasn't that the assets were bad. It 3 was just based on the market, they were long-term 4 assets. There was -- creditwise, they were good 5 assets. Valuewise, they were under water. And 6 the default rate, from what I remember, wasn't 7 really that bad for delinquencies. It's just that 8 you had this imbalance when it came to your P&L 9 statement. 10 Q. Correct. And that was the problem from 11 '79 to '83, but Texas had the dual problem because 12 it also began experiencing defaults in home loans. 13 Right? 14 A. Yes. As you previously mentioned in 15 Houston because of the decline in oil. 16 Q. So, what we're trying to establish is 17 that the notion of growing out of your problem and 18 establishing a portfolio of high income-earning 19 assets to offset the losses that you're sustaining 20 in your primarily residential real estate 21 portfolio was a strategy, a business strategy, 22 that was talked about and attempted with varying 24407 1 degrees of success by many financial institutions 2 during this time period? 3 A. That's true. 4 Q. And what we saw with United's strategy 5 of the wholesale strategy was a derivative of 6 that. Right? 7 A. Well, the strategy that I'm aware of is 8 that, as you call it, wholesale banking. They 9 were switching to that. And primarily, it was 10 going to be mortgage-backed securities. It was 11 going to be the junk bonds, and it was going to be 12 the equities. And that's principally what I was 13 aware of. It also mentions merchant banking, 14 which I really don't remember. And I probably 15 think that they did very little of it, but it's 16 just basically -- I don't recall it coming up; so, 17 I'm assuming that maybe it's something they looked 18 at and it wasn't there so they didn't get into it 19 wholesale. 20 Q. Now, I'd like you to take a look at 21 Exhibit A11070, which is -- 22 A. Red, green, or blue? 24408 1 Q. It's the third document in the blue 2 book. Now, I apologize for having to move you 3 around between books so much. It's frustrating 4 for us all, but there's really no alternative. 5 This is a memorandum from Ginger Baugh 6 to you dated September 30, 1985 -- I'm sorry -- 7 1986, regarding United. 8 Do you see that, sir? 9 A. Yes. 10 MR. VILLA: Your Honor, I move A11070 11 into evidence. 12 MR. RINALDI: No objection, Your Honor. 13 THE COURT: Received. 14 Q. (BY MR. VILLA) Let me first direct 15 your attention to the fourth full paragraph where 16 it reads, quote, "The weighted average cost of 17 funds for the 15 branches is estimated at 18 8.473 percent. United's money desk raises capital 19 at rates ranging from 6.20 percent to 20 7.20 percent." 21 Do you see that, sir? 22 A. Yes. 24409 1 Q. And this is Ginger Baugh's analysis of 2 a branch sale application by United, and this 3 demonstrates -- actually confirms what you were 4 telling us a little earlier, that you knew that 5 United was quite efficient at raising money 6 through their money desk. Right? 7 A. Yes. 8 Q. And, in fact, they were nearly 200 9 basis points below the cost that they would raise 10 it through their branch system. Right? 11 A. Yes. 12 Q. Now, it's the second paragraph I wanted 13 to focus you on. It reads, "At the time of 14 United's merger with Houston First Savings in 15 April 1983, United had 58 branches and Houston 16 First had 36 branches. Since that time, United 17 has sold, merged, or closed 59 branch offices and 18 will consider additional sales or closings in 19 Houston, McAllen, and Harlingen. The overall plan 20 to consolidate the branch network and to eliminate 21 inefficiencies is consistent with United's plans 22 as described with this office since 1983 or 1984." 24410 1 Do you see that? 2 A. Yes. 3 Q. And that would confirm this notion that 4 United had been describing this business plan to 5 the Federal Home Loan Bank of Dallas going back to 6 1983 or 1984, even prior to your arrival. Right? 7 A. Yes. 8 Q. So, let me -- we're going to leave the 9 second issue. The first was the cause of the 10 problems. The second was business plan. I'm not 11 going to get an "A" in penmanship, I see. 12 Let's turn to the third question, which 13 is the source of United's earnings as the 14 regulators understood it. 15 A couple of minutes ago, we looked at 16 Exhibit B696. It was the -- it's the last 17 document in the green book. It's the memorandum 18 from David Bradley to Roy Green in connection with 19 the branch sale application dated December 1985. 20 Do you have that before you? 21 A. Yes. 22 Q. And if you take a look at that 24411 1 document, you can see that the basic analysis, 2 going back to that Page 4 that we looked at, was 3 that United -- the source of earnings -- strike 4 that -- that the transaction there involved an 5 asset sale to increase United's net worth. Right? 6 A. Yes. 7 MR. RINALDI: I'm sorry. What page are 8 we on? 9 MR. VILLA: We're on Page 4, sir, just 10 above "supervisory analysis and comments." 11 Q. (BY MR. VILLA) And that was regarded 12 as a decision to be fostered because it was, in 13 fact, the reason that the Federal Home Loan Bank 14 approved the branch sale application. Right? 15 A. It was one of the reasons, yes. 16 Q. Now, let's look at your January 9, 1986 17 memo to Roy Green. It's the first document in 18 Volume I, the red book. It's A11153, Tab 1870. 19 And I'd like you to look at Page 3 of 20 the document. Do you have it under "operating 21 results"? 22 A. Yes. 24412 1 Q. And do you see about ten lines down, in 2 "operating results," it says, quote, "Activities 3 resulting in net profits during 1984 and 1985 have 4 been non-operating items. Particularly, branch 5 office sales and sales of direct investments." 6 Right? 7 A. Yes. 8 Q. And that would indicate that beginning 9 in 1984 with the wholesale strategy which started 10 during that time period, United had been selling 11 assets to offset its operating losses and generate 12 gains in order to maintain profits. Right? 13 A. Yes. 14 Q. And that would have been no surprise to 15 anybody who had looked at even the first memo in 16 your file, your supervisory file of United; isn't 17 that right, sir? 18 A. Yes. 19 Q. Let's look at Exhibit A11060, which is 20 the fourth document in the blue book, sir. It 21 should be a letter from you to Terry Cronan dated 22 April 12, 1986. And enclosed is an association 24413 1 summary as of February 28, 1986. 2 Do you see that, sir? 3 A. Yes. 4 Q. Now, this is the blue book. It's the 5 fifth -- the fourth document in. 6 A. I've got it. 7 Q. A11060. And it was Exhibit 12 in your 8 deposition. Do you remember we talked about it 9 briefly and Mr. Cronan? 10 A. I don't recall it, but I have no 11 problem with that. 12 MR. VILLA: Your Honor, I move A11060 13 into evidence. 14 MR. RINALDI: No objection, Your Honor. 15 THE COURT: Received. 16 Q. (BY MR. VILLA) And this is a summary 17 that you would have sent to another supervisory 18 agent in Pittsburgh, I think; isn't that right, 19 sir? 20 A. Yes. 21 Q. At the Federal Home Loan Bank of 22 Pittsburgh. Right? 24414 1 A. Yes. 2 Q. Let me ask you to look at the first 3 sentence of your summary, which is Page 2, where 4 it says, "United's level of ADC loans is 5 significantly lower than peer." 6 Do you see that? 7 A. Yes. 8 Q. Did the Federal Home Loan Bank of 9 Dallas monitor the level of ADC loans of the 10 thrifts under its supervision on a peer group 11 basis to see who was making excessive numbers of 12 ADC loans or high numbers of ADC loans relative to 13 the other institutions in the area? 14 A. I would say we were monitoring the 15 level of ADC loans, but I don't know if we did it 16 by peer group. 17 Q. There was some concern, beginning at 18 least at this time, that some people may be 19 putting -- some financial institutions may be 20 investing too much in ADC lending. Right? 21 A. Yes. 22 Q. And to United's credit, its ADC loans 24415 1 were significantly lower than its peer group as 2 you and Ms. Baugh would have determined by looking 3 at their financials; is that right? 4 A. Thrift financial report. 5 Q. Let me direct your attention to the 6 second page where there's a summary of United's 7 operations. And No. 1 -- well, I might as well 8 read it because it really does summarize United as 9 a picture during this time period. "Low-yielding 10 assets resulting in losses." No. 2, "United's 11 cost of funds." But it's No. 3 that I'm most 12 interested in. No. 3 is "Positive operating 13 results for the last two quarters of 1988 were 14 achieved primarily through -- 1985 were achieved 15 primarily through non-operating income. Both 16 quarters yielded $23.6 million in gains on 17 investments sold, $1.9 million in loans sold, and 18 $7.4 million in the sale of the association's 19 office building. Use of such on-traditional 20 sources boosted net income for year end 1985 21 to" -- and I think what's intended is 22 "$10,964,000." 24416 1 Do you see that? 2 A. Yes. 3 Q. So, you were asked -- I believe you 4 told us in your deposition that there was some 5 thought during this time period that an 6 examination team from the Federal Home Loan Bank 7 of Pittsburgh might have to be detailed to look at 8 United's examination, and you were asked to 9 summarize United's operations for supervisory 10 agent in Pittsburgh. 11 Do you remember that? 12 A. Yes. 13 Q. And if you were asked to summarize 14 United's operations in a paragraph which you did, 15 it would be -- one of the things you would say is 16 that they were selling assets to boost net income. 17 Right? 18 A. What I said in the memo is fine with 19 me. 20 Q. And that was, in fact, well-known for 21 United during this time period -- as United's 22 business strategy during this time period. Right? 24417 1 A. If you're talking about their wholesale 2 strategy, this is what they reported in their TFRs 3 and this is what we reported in the summary and 4 this is what we sent to Pittsburgh, in this memo. 5 Q. Now, let's look at your memo of May 23, 6 1986, to Mr. Roy Green, which is Exhibit A11154. 7 It should be the next document in your book. It's 8 not in evidence yet. 9 A. In the same book? 10 Q. In that same book you were just looking 11 at, sir. So, it should be about the fifth 12 document in. 13 A. Okay. 14 Q. Do you have it before you, sir? 15 A. Yes. The May 23rd, 1986 memo? 16 Q. Right. 17 MR. VILLA: Your Honor, I move 18 Exhibit A11154 into evidence. 19 MR. RINALDI: No objection. 20 THE COURT: Received. 21 Q. (BY MR. VILLA) Now, let's turn to 22 Page 5 under "operating results." And look at the 24418 1 second full paragraph. 2 Now, this is your memo and Ginger 3 Baugh's memo to Roy Green. "For the year ended 4 December 31, 1985, United earned a net profit of 5 $10.96 million. However, the association incurred 6 a net operating loss before extraordinary items 7 and taxes of $12.5 million. Net income was 8 bolstered by securities transactions which netted 9 $27.2 million of non-operating gains." 10 Do you see that, sir? 11 A. Yes. 12 Q. Did you choose the word "bolstered" in 13 there, or do you think Ms. Baugh did? 14 A. Well, I'm on the memo. I don't have a 15 problem with the word "bolster" because if they 16 hadn't had those operating gains -- non-operating 17 gains, then they would have had a net loss for the 18 same period. 19 Q. Right. And given the choice as to 20 whether or not to have a net loss for the 21 institution for the time period or to sell assets 22 to generate gains, if it might give them some time 24419 1 to restructure, it might make more sense to sell 2 the assets and make the gains and give them time 3 to restructure. 4 Wouldn't you agree? 5 A. It depends on the original investment 6 decision. 7 Q. It depends on what original investment 8 decision? 9 A. If you make a mortgage loan to an 10 individual and you're putting it on your books for 11 a term of 25 years, you're also making a decision 12 at that time, are you going to fund that 13 particular asset or are you going to sell it into 14 the market? 15 So, depending on what you're going to 16 do with that asset, how long you're going to 17 retain it, and how you're going to pay for it, 18 that's basically your investment decision, what 19 you're going to do when you make the transaction. 20 Many institutions now continue to make 21 and originate loans. But six, seven months down 22 the loan, they package up the loans and they sell 24420 1 them to Freddie Mac and Fannie Mae. They are 2 basically -- those -- what they are then 3 realizing, they might have servicing income and so 4 forth from those assets when they sell them, 5 basically a mortgage banking operation. 6 Q. They are an origination operation? 7 A. They are an origination operation. So, 8 if an outfit like that was making a loan, it's not 9 retaining the loan. Therefore, it can fund it 10 basically with short-term liabilities. Now, if 11 you're deciding that you are going to keep that 12 loan on your books for five years, you may then go 13 to an outfit like the Federal Home Loan Bank and 14 match fund it with a similar term duration. And 15 there's even advances now that amortize down or 16 accrete down and prepayment penalties are inside. 17 But you basically make a decision because a 18 problem that occurred in the early -- late 1970s 19 and the early 1980s as you've described is an 20 underwater portfolio and, simply, you have 21 long-term assets. You have short-term 22 liabilities. And obviously, the liabilities 24421 1 reprice to get new liabilities. They go up or 2 down. And as market rates go up or down, if you 3 have long-term assets on your books, the value of 4 those assets can go up or down. 5 Now, if you make an investment decision 6 that they are long-term assets, you're putting 7 them in as an investment, then for S&L purposes, 8 accounting back then, you didn't mark them to 9 market every particular period. But if you put 10 them into a trading portfolio such as simply stock 11 and securities which were -- you're making a 12 decision that you're really only going to keep 13 them for a short time, then you should be marking 14 them mark-to-market. 15 So, when you say they are selling 16 securities or they are selling investments or they 17 are selling loans, okay, it depends again what was 18 their decision to get into those loans and what 19 was the prevailing accounting at the time and what 20 also were the prevailing regulations at that time. 21 So, it's not as simple as I bought -- I 22 sold an asset. It's what is it intended to do. 24422 1 What are you going to do with the proceeds? 2 Again, it also incorporates into their business 3 plan. 4 So, you just don't simply say, "Okay. 5 Our old office building, the land is now worth ten 6 times what we paid for it. We're going to sell 7 the office building and then, therefore, we can 8 move in the cheaper quarters and moving costs and 9 everything, you look at the whole stuff, we'll 10 better than break even. We're going to make money 11 on this deal." 12 Now, at the same time, when you make 13 that investment decision, you've already decided a 14 selling position. You've already decided "I'm 15 going to do this and I'm going to do this" all the 16 way down so you've got the whole thing mapped out. 17 Q. I've forgot what my question was, sir. 18 Let's deal with the issue of what your knowledge 19 was of United's activities in May of 1986. 20 Would it be fair to say that you 21 understood that they were selling their assets to 22 bolster their income which would maintain their 24423 1 net worth? 2 A. I knew they had non-operating income, 3 yes. 4 Q. And that would come from securities 5 transactions. Right? 6 A. Yes. 7 Q. Now, let's look at Mr. Selby's memo 8 dated July 24, 1986. It's the red tab in 9 Volume II. It's A11011, Tab 256. And look at 10 Page 7. It's the green book. 11 Let me direct your attention to Page 7. 12 And the first ten lines first discusses the net 13 income requirement and identifies net operating 14 losses for '84 and a gain on the sale of branches. 15 And then it says, quote, "In 1985, a net operating 16 loss of 3.3 million was incurred before income 17 totaling 7.4 million from the sale of branches and 18 15.9 million on the sale of investment securities. 19 Net operating losses for the first two quarters of 20 1986 totaled $33.6 million. However, net income, 21 including gains on non-operating income items" -- 22 sorry -- "non-operating items primarily in this 24424 1 investment activities totaled 8.6 million for the 2 six-month period." 3 Do you see that? 4 A. Yes. 5 Q. And that would be consistent with the 6 strategy of selling assets to generate gains to 7 offset the operating losses. 8 That's what you would expect to see. 9 Right? His description of what was going on? 10 A. Well, I think it's just, you know, what 11 was in the financial reports we're just repeating 12 here. 13 Q. And it's pretty obvious when you look 14 at the financial reports exactly what the source 15 of their income is, isn't it, sir? 16 A. Well, the primary source is still their 17 normal income. And what you're talking about is 18 as an enhancement -- 19 Q. Oh, I see what you're saying. 20 A. You've got an operating loss versus an 21 operating gain. And what I'm saying is, you know, 22 if you look at it, the majority of their income is 24425 1 still coming from normal earning income. 2 Q. From interest income? 3 A. But that alone wouldn't be enough to 4 offset normal expenses and operating expenses. 5 So, the only way they are reporting in this period 6 of time is a positive income is they had these 7 sales of assets, branches, and other items and 8 securities; and this is where they came out with a 9 positive net. 10 Q. Thank you. 11 MR. VILLA: Your Honor, is this a good 12 time to take a recess? 13 THE COURT: All right. We'll take a 14 short recess. 15 16 (Whereupon, a short break was taken 17 from 10:23 a.m. to 10:45 a.m.) 18 19 THE COURT: Be seated, please. Back on 20 the record. 21 Mr. Villa. 22 MR. VILLA: Thank you, Your Honor. 24426 1 Q. (BY MR. VILLA) Mr. Twomey, the fact 2 that USAT was maintaining its net worth from the 3 sales of assets was specifically noted in every 4 examination report, wasn't it? 5 A. I believe so. 6 Q. And, in fact, if you take a look at the 7 May 27, 1986 exam report, which should be the next 8 document in your book, probably open in front of 9 you -- 10 A. It is. 11 Q. It's A11042. It's the blue book, 12 probably the seventh or eighth document. 13 MR. RINALDI: Is there a tab? 14 MR. VILLA: A11042, Tab 982. 15 Q. (BY MR. VILLA) And turn to Page 25 16 under "operating resulting." The second paragraph 17 relates, "Non-operating income is comprised of 18 gains on loan sales, sales of branches, 19 mortgage-backed securities (MBS), corporate bonds, 20 and equity securities. 98 percent of 21 non-operating income was derived from the sale of 22 MBS and equity securities, totaling $48,593,000 24427 1 and $30,155,000 for the quarters ending March 31, 2 1986, and June 30, 1986 respectively." Right? 3 A. Yes. 4 MR. RINALDI: What page are you on, 5 John? 6 MR. VILLA: It's Page 25, and it has 7 Imaging No. OW089685 under "operating resulting." 8 Q. (BY MR. VILLA) Now, when you received 9 this from Ms. -- we say Ms. Carlton, but it's an 10 examination team of which Ms. Carlton was the 11 examiner-in-charge. Right? 12 A. Yes. 13 Q. This came as no surprise to you. 14 Right? 15 A. It mirrors what's in the thrift 16 financial reports. 17 Q. And let me ask you to look at 18 Exhibit A11073 at Tab 1877, which is the next 19 document. I believe this is a document that 20 Mr. Rinaldi asked you about, and I'd like to 21 direct you to another -- I don't believe he asked 22 you about this sentence, although he may have. 24428 1 It's the last sentence at the end of 2 the first full paragraph. Quote, "Net profits 3 which occurred during eight of the past ten 4 quarters were due to gains realized on branch 5 sales, the sale of United's office building, loan 6 sales, and securities transactions." Right? 7 A. Yes. 8 Q. Finally, let me ask you to look at 9 Exhibit A12235. It's Tab 888. It's the next 10 document in your book, and we have a larger one 11 for you to take a look at. 12 Now, sir, this is a United Savings 13 Association of Texas restructuring proposal. And 14 the word "Ginger" in the upper -- dated May 29, 15 1987. Right? 16 A. Yes. 17 Q. And the word -- name "Ginger" in the 18 upper right-hand corner is in your handwriting. 19 Right? 20 A. Probably. 21 Q. Probably? 22 A. Yeah. 24429 1 Q. I think in your deposition, you were 2 able to identify it; but you think it's in your 3 handwriting, don't you? 4 A. Yes. 5 Q. And would that indicate to you that you 6 had received this document from United Savings and 7 then at some point later, passed it along to 8 Ginger Baugh? 9 A. Yes. 10 Q. Now, let me look at various aspects of 11 this. 12 Do you remember -- well, we've been 13 talking about -- we've been talking about the 14 issue of United explaining in its TFRs and in its 15 other financial reports and the examiners 16 observing that it was selling appreciated assets 17 for gains to bolster net worth. 18 That's what we've been talking about 19 over the last 15 minutes or so. Right? 20 A. Yes. 21 Q. That's the general subject. 22 Do you recall there came a time in May 24430 1 of 1987 when United advised you that -- kind of 2 summarized what had happened over the past year 3 and a half and actually did a pro forma by taking 4 the asset -- the gains from asset sales, dropping 5 it out of its income to show you exactly where it 6 would have been if it hadn't been able to sell all 7 of its appreciated assets for gains to bolster net 8 worth? 9 Do you remember this being done and 10 being submitted to you sometime in the middle of 11 1987? 12 A. I don't particularly recall it, but I 13 have no problem with recognizing it was received. 14 Q. And it's the kind of thing that was 15 submitted to you from time to time by United. 16 Right? The kind of submission? 17 A. Well, it's a submission from United. I 18 don't know if they would keep sending 19 restructuring proposals, but this is similar to 20 what we would be receiving and other submissions 21 related to business plans, et cetera, et cetera. 22 Q. And directing your attention -- we've 24431 1 already had considerable testimony on this showing 2 how the sales of mortgage-backs and other 3 investment securities were displayed on the pro 4 forma; so, I won't ask you about that. But I will 5 ask you to take a look at this line on the second 6 page where United advises you, quote, "Most of the 7 above-water assets have been liquidated and the 8 remaining assets would not generate a significant 9 profit upon sale." 10 Do you remember, sir, realizing at some 11 point in the mid-part of 1987 or shortly 12 thereafter that United's sale of appreciated 13 assets was going to be coming to an end because it 14 had sold all that it had and it had no more to 15 sell in order to maintain its net worth? 16 Do you remember that? 17 A. No, I don't. 18 Q. That doesn't come as a surprise to you, 19 though, does it, given the financial condition in 20 general of thrifts in Texas? 21 A. Well, let's stay with United. I don't 22 recall this; but, you know, if they made the 24432 1 statement, I don't have a problem with it. 2 Regarding other S&Ls in Texas, they had different 3 problems than what United had. 4 Q. Right. But do you recall that there 5 came a time, whether you can tell us the exact 6 date, where you realized or read in a document, 7 indeed, that United's asset sales were soon to 8 come to an end because they had sold off all of 9 their appreciated assets for gains and they had 10 very little left to sell? 11 A. Again, I don't recall reading this 12 statement in this particular document. It's 13 basically my recollection that they still had 14 non-operating gains even through '87, but maybe 15 I'm wrong. 16 Q. So, when you received this document, 17 you didn't focus on this line? Is that what 18 you're saying? 19 A. I don't remember reading the line. I 20 may have read the line. I don't know if I 21 attached any significance to the line. If I was 22 reading that line, I would be thinking more of 24433 1 office buildings, branches, types of investments 2 that way. Those are assets. I don't know if I'd 3 necessarily be thinking of some type of marketable 4 security. 5 Q. Let's go back to the first sentence -- 6 first paragraph and see what they were talking 7 about when they used the word "assets." 8 "For the past few years, regulatory net 9 income has been maintained through gains on sales 10 of loans and loan servicing, securities gains, 11 branch sale gains, and other non-recurring 12 activities." 13 Do you see that, sir? 14 A. Yes. 15 Q. And then it says, "Throughout 1986 and 16 the first quarter of 1987, interest rates were 17 generally declining. During this interest rate 18 decline, USAT was able to generate substantial 19 gains on sales of corporate investments and 20 mortgage-backed securities. Exhibit in the 21 attached package" -- and then it goes to drop it 22 out. 24434 1 Does that refresh your recollection 2 that, in fact, when they were talking about assets 3 in connection with this submission to you it 4 wasn't gain on the sales of branches but, in fact, 5 sales of mortgage-backed securities that they were 6 able to accrue a gain on because of, apparently, 7 the condition of the market? 8 A. I don't remember reading the document. 9 I don't remember what I thought when I read the 10 document, what I thought of that particular line, 11 and how I related it to the current condition of 12 USAT or what USAT was going to do. 13 Q. Would you agree with me, sir, that it 14 would not be fair to criticize the people at 15 United for failing to tell you that they were 16 generating gains on the sales of corporate and 17 mortgage-backed securities when, in fact, they 18 were submitting documents that said those words 19 precisely to you? 20 A. They were reporting in the TFR that 21 they had gains on investments. And several places 22 in the examinations, it broke down what was 24435 1 mortgage-backed securities, what was investments. 2 You've read those this morning. 3 But, you know, generally, if interest 4 rates are declining -- again, the coupon 5 securities that you've already bought, you bought 6 at market. Now, if market is declining, then -- 7 basically, interest rates move from 9 to 7, you've 8 got market gains on those investment securities or 9 mortgage-backed securities or even on your loan 10 portfolio. 11 So, as they were managing their 12 portfolio, they would normally be selling MBSs, 13 maybe even selling some junk bonds, and definitely 14 selling some equities and they would have gains. 15 So, I don't have a problem with that. 16 Q. No. My question to you, sir, is -- you 17 tell us you can't now remember receiving this 18 restructuring proposal which I think you'd have to 19 agree has your handwriting on it and was produced 20 from the supervisory files of the Federal Home 21 Loan Bank of Dallas. But does -- the document 22 expressly tells the recipient that USAT was able 24436 1 to generate substantial gains on the sales of 2 corporate -- gains on sales of corporate 3 investment and mortgage-backed securities. 4 My question to you, sir, is: Do you 5 think it is fair to criticize or, indeed, sue my 6 clients for failing to tell you those things when 7 the document was sent to you? 8 A. Well, this all hinges, A, I don't have 9 a problem saying we received the document. B, I 10 probably read it at the time. But C, the 11 particular line that you're referencing over here 12 regarding no more sale of assets because they had 13 been exhausted as far as above-market assets, I 14 don't know if I would attach the same significance 15 you seem to be applying. And my -- my thing here 16 is if I was reading that line, I might be thinking 17 of other assets than simply only mortgage-backed 18 securities, only loans on their books, only junk 19 bonds, only equity securities. There are 20 servicing rights. We've already been talking 21 about branch sales. There's other assets that 22 they might have been talking about. I don't know 24437 1 when you say "assets," you mean everything on that 2 side of the balance sheet. And I just don't -- I 3 wouldn't have attached the same significance that 4 you're attaching to it. 5 Q. I didn't attach any significance to it. 6 I read you words from the document, sir. 7 My question to you -- this -- the 8 reason you can't remember this document, 9 Mr. Twomey, is that there's nothing in here that 10 was surprising to you. Right? You knew for years 11 prior to this, a year and a half prior to this, 12 that USAT was selling above-water assets, 13 including mortgage-backed securities, to generate 14 gains to maintain their net worth. 15 And the reason you can't remember this 16 document, which would otherwise be surprising, is 17 because this was known to the Federal Home Loan 18 Bank of Dallas for years; isn't that right, sir? 19 A. I don't see anything in here that is 20 surprising. I agree with that because basically 21 my understanding of the way USAT was being 22 operated is repeated in the document. 24438 1 John, does this not -- there wasn't -- 2 if I read this today, based on what I knew in '86 3 or '87, I'd say, "Okay. This is what they are 4 doing." They are enhancing their bottom line 5 because they are having other asset sales. And 6 again, they are breaking them down into different 7 things, but they are primarily from the sale of 8 MBSs, other investments, and equities. And 9 that's -- I don't have a problem with that. I 10 think that's what our general understanding was 11 from the TFRs. 12 Q. Thank you. Let's look at the next 13 document, which is A11080. It's the Liz Beasley 14 memorandum. You have to go back to the green 15 volume. And it's the fourth document from the 16 end. It was introduced earlier, I believe. 17 A. 11080? 18 Q. 11080. 19 A. Okay. Liz Beasley? 20 Q. Yes, sir. And the last paragraph which 21 was written shortly -- this document at least 22 bears a date on the top of 8/7/87. 24439 1 The last paragraph of the document, 2 which appears to have been written shortly after 3 or is dated shortly after the restructuring 4 proposal, says, quote, "Offsetting the 5 115-million-dollar loan loss provisions in real 6 estate write-downs during 1986 were the gains 7 realized on sales of mortgage-backed securities 8 and the gains on the sale of investment 9 securities. During 1984, United began to expand 10 its equity investments portfolio and has since 11 increased the portfolio of investment securities 12 from 318.6 million to 1.2 billion at December 31, 13 1986. Reported gains on the sale of investment 14 securities totaled $94.5 million and $37.9 million 15 in 1986 and 1985 respectively." Right? 16 A. Yes. 17 Q. And this was the -- this was 18 information that was most likely provided by 19 Ms. Beasley to you and/or Ms. Baugh. Right? 20 A. Probably. 21 Q. Let me ask you to look at the -- 22 Ms. Carlton would prepare interim examination 24440 1 reports, wouldn't she, sir, in connection with her 2 two -- well, all of the examiners, federal 3 examiners, provide -- prepare interim examination 4 reports. Right? 5 A. Yeah. We had guidelines for that, yes. 6 Q. And they would send them to you from 7 time to time during the course of the examination? 8 A. Yes. 9 Q. I would like you to look at A14069, 10 which is in evidence at Tab 1496. 11 A. In what binder? 12 Q. It's in the blue binder, and it's the 13 yellow tab. 14 Do you have that before you, sir? 15 A. Yes, I do. 16 Q. And if you look at "financial 17 analysis," look at -- it's the Bates range -- the 18 imaging number in the lower right-hand corner 19 should be OW128895 under "financial analysis." 20 A. Okay. 21 Q. It provides that -- you know, there was 22 an issue we just talked about briefly yesterday 24441 1 about where the source of these gains were from 2 asset sales, whether they might be from branches 3 or loan servicing or investment securities and 4 mortgage-backed securities. And that's the point 5 you raised when I talked to you about the 6 restructuring proposal. 7 Here, I think we are able to see some 8 information on that subject. 9 MR. RINALDI: What page are we on? 10 MR. VILLA: Bates range OW128895. 11 Q. (BY MR. VILLA) Starting with the 12 paragraph under "financial analysis," the second 13 line, "Although USAT has remained marginally 14 profitable, this profitability has been maintained 15 by generating significant amounts of non-operating 16 income. Non-operating income for the last five 17 quarters ending September 30, 1987, amounted to 18 $129,191,000. This income is comprised 19 principally of gains on sales of mortgage-backed 20 securities, gains on sales of investment 21 securities, gains on sales of futures contracts, 22 and loan sales. These four categories amount to 24442 1 $126,086,000 or 97.6 percent of total 2 non-operating income for these five quarters." 3 Right? 4 A. Right. 5 Q. Now -- so, in thinking back about USAT, 6 you knew that they were living off gains on the 7 sales of appreciated assets. But you pointed out 8 that it could be other assets such as branches and 9 loan servicing. But when you received 10 Ms. Carlton's memo on January 15, 1988, she was 11 able to break it down for you and tell you how 12 much of it actually came from the gains on the 13 sale of mortgage-backed securities. Right? 14 A. Right. 15 Q. And that's consistent with your 16 recollection, isn't it, that the primary source of 17 the non-operating income was gains on the sale of 18 mortgage-backed securities? 19 A. Well, definitely at this time. 20 Q. Now, would you turn to the next 21 document, which is A11039, which is Tab 1282. 22 This is a portion of the work papers from 24443 1 Ms. Carlton's examination. 2 Now, I know that you talked to us from 3 time to time over the past couple of days about 4 your discussions with Ms. Carlton, about the 5 things that she found out in her examination. 6 Right? 7 A. Yes. 8 Q. I don't know whether you can read the 9 last line here. Can you read the last line on the 10 first page? Let me read it to you. It's also 11 reprinted in another page of the document. So, 12 we'll go to it there if you can't read it on the 13 last line of the first page. 14 I've looked at it carefully, and I 15 believe it says, "He also acknowledges" -- this is 16 reference to Jenard Gross. "He also acknowledged 17 that USAT was living off of non-operating income 18 since 1985." 19 Can you see that, sir? Not really, 20 huh? 21 A. Well, not too well; but I don't have a 22 problem with your rendering. 24444 1 Q. Well, you can go a little deeper in the 2 document to Bates range OW129275, which is the 3 interview of Mike Crow. 4 You know Mike Crow. Right? 5 A. Yes. 6 Q. And if you look on the interview of 7 Mike Crow on May 2nd, 1988, above -- under C, 8 "performance," the first line under C, 9 "performance" reads, "Spoke candidly about USAT's 10 reliance on non-operating income since 1985." 11 Do you see that, sir? 12 A. Yes. 13 Q. Now, did you have discussions with 14 Vivian Carlton in which she told you about the 15 candor of the USAT executives in explaining to her 16 how they had been -- how USAT had been relying 17 upon non-operating income for, at this point, over 18 three years? 19 Do you remember her telling you that? 20 A. No, but it's also what I knew at the 21 time. 22 Q. Now, just to complete the picture, 24445 1 let's look at the November 1987 federal 2 examination report which was sent to USAT on 3 July 28, 1988. That's Exhibit A6022. It's the 4 first document in the -- in the green book. 5 A6022. 6 MR. RINALDI: What's the tab? 7 MR. VILLA: Tab 468. 8 MR. RINALDI: This was the '87 exam? 9 Q. (BY MR. VILLA) This is the '87 10 examination which was sent to you by the 11 federal -- sent -- I'm sorry -- sent by you to the 12 association on July 28, 1988. 13 Do you have that before you, sir? 14 A. Yes. 15 Q. It probably means little to you, but 16 the word "bolster" has become an important word in 17 this case. And so, whenever I see that the 18 federal regulators are using the word "bolster" to 19 describe what United is doing, it becomes of some 20 interest to us all. So, I'd like you to direct 21 your attention to Page 21 under "operating 22 results." 24446 1 Do you have that before you? 2 A. Yes. 3 Q. The third paragraph under "operating 4 results" reads, quote, "As shown on the 5 comparative financial statements for the current 6 examination report, as well as being cited in the 7 preceding May 27, 1986 examination report, the 8 association continues to rely primarily on 9 non-operating income to bolster its earnings and 10 create a positive net income or reduce the adverse 11 impact of its non-earning assets. The 12 non-operating income is derived primarily from 13 gains on investment securities (corporate bonds, 14 mortgage-backed securities, and financial futures, 15 i.e., speculations and loan sales)." 16 Do you see that? 17 A. Yes. 18 Q. And that would be consistent with what 19 you had known from the beginning, which was that 20 United was bolstering its earnings and then 21 ultimately its net worth through the sales of 22 investment securities, including mortgage-backed 24447 1 securities. Right? 2 A. Yes. 3 Q. So, let me -- I'm about to change 4 subjects. Source of earnings, No. 3. 5 Now we're going to the question of 6 capital deficiency. It's alleged in Paragraph 28 7 of the Notice of Charges that in order to maintain 8 the appearance of substantial net worth when, in 9 fact, USAT's net worth failed to meet the minimum 10 regulatory requirements, USAT -- and then it goes 11 on to say USAT did a number of things. 12 And so, I thought I would examine with 13 you, sir, what the Federal Home Loan Bank of 14 Dallas knew about USAT's net worth and when it 15 knew it. And I'm going to start off with A11055. 16 It's Tab 1869. If you go back to the blue book, 17 it's the next document. 18 Do you have before you a periodic 19 summary of USAT as of December 12, 1985? 20 A. Association summary, yes. 21 Q. Yes. I'm sorry. An association 22 summary. 24448 1 And the document looks as though it was 2 prepared at some point after the end of the year, 3 since they show various net worth numbers. 4 At the end of the second paragraph, it 5 says, "As of December 31, 1985, United was in 6 compliance." 7 Do you see that? 8 A. Yes. 9 Q. So, somebody prepared this 10 retrospectively as of 12/12/85. Right? 11 A. Yes. 12 Q. Now, I'm particularly interested in the 13 question of regulatory net worth. 14 Do you see what the regulatory net 15 worth is on there? 16 A. 186,629,000. 17 Q. And that's $629,000? 18 A. Yes. 19 Q. And under regulatory accounting 20 practices which were in effect in 1985, regulatory 21 net worth would include goodwill, wouldn't it, 22 sir? 24449 1 A. That's right. 2 Q. And there is a goodwill number 3 reflected on Exhibit A11055, as well. Right? 4 A. Yes. 5 Q. And the goodwill is $252,575,000? 6 A. Yes. 7 Q. So, as I recall GAAP accounting -- and 8 you probably know it better than I do -- for GAAP 9 accounting, you'd probably reduce the net worth by 10 the amount of the goodwill. Right? 11 A. No. 12 Q. For a bank? Would a bank be able to 13 count its goodwill in its capital? 14 A. The goodwill is actually shown as an 15 asset on the books under FASB 72. 16 Q. I understand that. But is the 17 difference between RAP capital at the time and 18 what we commonly call tangible net worth the 19 goodwill numbers? 20 A. No. What happens, at the time -- and 21 I'm just going to make an assumption here. At the 22 time that United was acquired, it created 24450 1 goodwill. And basically, they marked certain 2 assets to the current market. And because -- if 3 the assets are under the market value, that 4 difference is basically added up and becomes the 5 goodwill number. And then over -- it depends on 6 when the transaction happened. But original 7 accounting for this would allow them to write off 8 the goodwill over 40 years. And I think when 9 FAS 72 came out, they shortened it to 25 years. 10 But it really shows up as an asset on their books. 11 And what ends up happening is every year, the 12 CPAs, when they review the books, they make the 13 determination of how much should be written off. 14 Usually, it was on a 25-year basis or a 40-year 15 basis unless there was a change of business with a 16 question of continuing operations. 17 Q. Goodwill is amortized ordinarily as an 18 asset over a period of time as determined by 19 generally-accepted accounting principles as they 20 may be amended by the regulatory pronouncements of 21 the agency involved. Right? 22 A. No. GAAP is GAAP. If -- you can have 24451 1 GAAP goodwill, and then you could have something 2 called supervisory goodwill which is instead of 3 writing it off as fast as GAAP is required, you 4 could actually have a slower write-down which then 5 creates supervisory goodwill. Then that would be 6 reported in here as a separate item for RAP 7 purposes. GAAP, they wouldn't care about it. 8 Q. Well, let's -- do you understand the 9 concept of tangible net worth? 10 A. Well, there's several -- you know, 11 tangible net worth is used several different ways. 12 Q. Isn't tangible net worth commonly 13 understood to be GAAP net worth minus goodwill? 14 A. I don't know if I'd use that 15 definition. I just haven't -- 16 Q. Why don't you look on Exhibit A11055. 17 And this document was produced to us from the 18 examination -- from the supervisory work papers -- 19 I'm sorry -- from the supervisory files just as it 20 is here. And somebody wrote "Net worth, 21 186,629,000" and circled that and the goodwill 22 number and wrote the observation next to it, "no 24452 1 tangible net worth." 2 Do you see that? 3 A. Yes. 4 Q. Do you know whether that's in your 5 handwriting? 6 A. No, I don't think that's my 7 handwriting. 8 Q. You don't think it's your handwriting? 9 Would you agree with me, sir, that on 10 the day you walked into the association, because 11 of the relationship between the net worth as 12 reported and the amount of goodwill, United had no 13 tangible net worth? 14 A. If you want to use this definition that 15 you're applying where you take their GAAP goodwill 16 and you subtract off their -- if you take their 17 net worth and simply subtract off their goodwill 18 number, if that's the definition you want to 19 apply, yes. 20 Q. And I believe when we asked -- when we 21 went through it in your deposition, that's the 22 conclusion you reached. 24453 1 Does that sound familiar? 2 A. I don't recall what I said. I'm just 3 doing what I recall today. But I don't have a 4 problem with it. I mean, your definition -- you 5 know, if you take A, subtract B, your result is 6 going to be C. 7 Q. Well, isn't the definition I used a 8 commonly-accepted definition of tangible net 9 worth? 10 A. I don't have a problem with your 11 definition, John. It's just there's RAP net 12 worth. There's GAAP net worth. And during this 13 time -- and probably the reason that that 14 handwriting is on there, it was a big -- when all 15 these reviews were being done, we were looking at 16 how big goodwill was versus their net worth. 17 And basically, that was one of the 18 primary questions being asked when we had -- this 19 is basically, I think, a document that came out of 20 that initial review of all the institutions. And 21 that was one of the questions that we were being 22 asked at that time. I don't have a problem with 24454 1 the way you've described it. 2 Q. Would you agree with me, sir, that at 3 the time you began, USAT had under the definition 4 I have described of tangible net worth, it had 5 negative $66 million in tangible net worth? 6 A. I agree. 7 Q. Now, let's look at B1161, which is in 8 evidence at Tab 784. Let's skip over that one. 9 We'll go to the next one. 10 We'll look at A11011, which is in 11 evidence at Tab 256. It's in the green binder, 12 the red tab. 13 Is this -- do you have before you the 14 Joe Selby memo to Frank Haas? 15 A. Now, I do. 16 Q. If you look at Page 1 and the carryover 17 to Page 2, it's on the background of United. It 18 says, quote, "At March 31, 1986, the regulatory 19 net worth of United was $190.2 million or 20 3.93 percent of total assets of $4.8 billion. The 21 association initially exceeded the March 31 net 22 worth requirement of $185.3 million by 24455 1 4.8 million. However, examiners have identified 2 additional scheduled items, the inclusion of which 3 would result in United failing its net worth 4 requirement by approximately $20 million." 5 Do you see that, sir? 6 MR. RINALDI: Sir, are you reading from 7 OW120668? 8 MR. VILLA: 667 and the carryover, 668. 9 At the bottom of OW120667 and the carryover, 668. 10 Q. (BY MR. VILLA) Now, sir, is that 11 consistent with your recollection that shortly 12 after Ms. Carlton began her First Federal 13 examination of United in May of 1986 that the 14 Federal Home Loan Bank of Dallas concluded that 15 USAT was at least $20 million below its regulatory 16 net worth? 17 A. Well, I'll go with -- again, we had a 18 discussion regarding this memo before, whether it 19 was a draft or not. But aside from that, it says 20 "The inclusion of which would result in United 21 failing its net worth requirement by approximately 22 $20 million." 24456 1 Q. Let's start off with the first thing he 2 said. What are you talking about draft? This 3 document -- you and I have never discussed whether 4 this document is a draft. It's been introduced 5 into evidence in this case. 6 A. I'm sorry. I thought we had -- I 7 thought I looked at this one during my deposition, 8 and I had a problem with the dates because I saw 9 some typos in it. And I couldn't tell you whether 10 or not this was sent by Joe to Frank Haas. It may 11 have been sent later in a cleaned-up version. I 12 just didn't know. 13 Q. Fortunately, we've been able to 14 independently authenticate it and introduce it 15 into evidence here. So, let's take out the 16 question of whether or not you remember it's a 17 draft or not. 18 MR. RINALDI: Wait a second. The cover 19 letter says it's a draft. 20 MR. VILLA: Your Honor, I'm not going 21 to engage in colloquy with -- 22 MR. RINALDI: Your Honor, he's just 24457 1 misrepresented what's in the record. The cover 2 letter makes reference to the fact that this is a 3 draft. 4 THE COURT: All right. Let's go on. 5 Q. (BY MR. VILLA) Now, sir, does this 6 refresh your recollection that in nineteen -- in 7 July of 1986, that the Federal Home Loan Bank of 8 Dallas had concluded that United was below its 9 minimum regulatory net worth by approximately 10 $20 million for the quarter ending March 31, 1986? 11 A. Well, what I read here is "however" -- 12 Q. Sir, I didn't ask what you read. I 13 asked what your recollection was. 14 A. My recollection is that due to the 15 examination report, we felt that the net worth of 16 United, when they account for the specific and 17 general reserves and due to the scheduled items, 18 would be below its net worth requirement. 19 Q. And I'm prepared to take you through, 20 sir, on a quarter-by-quarter basis almost every 21 quarter from March 31, 1986, until United closed 22 at the end of 1988. But maybe we can save some 24458 1 time if I ask you this question. 2 Sir, do you recall that it was the 3 conclusion of the Federal Home Loan Bank of Dallas 4 that beginning on March 31, 1986, and for all 5 periods after that, United was below its 6 regulatory net worth limits? 7 Do you recall that or not? 8 A. Based on the 1986 examination report, 9 the findings were that the institution was failing 10 its net worth requirement because of the scheduled 11 items and other matters, but primarily because of 12 the increase in problem assets and the reserves 13 resulting from that. 14 That was our opinion at the time 15 that -- when we wrote the examination report and 16 we sent the letter to management. I'm not sure 17 about March. But, I mean, when the examination 18 report was being worked on. 19 Q. Well, perhaps we won't save any time. 20 Let's look, sir, to your memo to the Regulatory 21 Review Committee of March 25, 1987, which is 22 A11073 in evidence at Tab 1877. 24459 1 A. Book? 2 Q. Blue book, eighth document. And could 3 you turn to Page 2, which has an Imaging 4 No. 152879? 5 A. Yes. 6 Q. Fourth paragraph, quote, "United's 7 examination report as of May 27, 1986, is 8 currently being reviewed. The report discloses 9 criticized assets totaling 540.7 million or 10 11.2 percent total assets and 136 percent of net 11 worth. As a result of the increase of scheduled 12 items, the association failed to meet its minimum 13 net worth requirement as of June 30, 1986, by 14 approximately $10.5 million or 4.58 percent of net 15 worth. Specific reserves requested by the 16 examiners would increase the deficiency to 14.4 or 17 6.3 percent of net income." I think they mean net 18 worth. 19 Do you see that, sir? 20 A. Yes. 21 Q. So, the conclusion reached for the 22 quarter -- the second quarter of 1986 was that 24460 1 United was $10.5 million below its net worth. 2 Right? 3 A. Yes. 4 Q. And if the disputed items were 5 included, it would go even farther below its net 6 worth, down to $14.4 million. Right? 7 A. Yes. 8 Q. Now, sir, let me ask you the question 9 again. 10 Do you recall that for the quarter 11 ending March 31, 1986, and for every quarter after 12 that until the time United closed, it was the 13 conclusion of the Federal Home Loan Bank of Dallas 14 that USAT was below its regulatory net worth? 15 A. Yes. 16 Q. Thank you. 17 Now we've moved on from Topic No. 4, 18 which is capital deficient. 19 Now, sir, you didn't make supervisory 20 policy for the Federal Home Loan Bank of Dallas; 21 is that right? 22 A. That's right. 24461 1 Q. And during a two-year period from 2 approximately April 1986 to April 1988, the head 3 of regulatory affairs was Joe Selby. Right? 4 A. Right. 5 Q. And below him, Craig Stirnweis, Walter 6 Faulk, perhaps an intermediate supervisory agent, 7 and then you. Right? 8 A. Right. 9 Q. Then sometime in mid-1987, Mr. Selby 10 reported to Roy Green, who was the principal 11 supervisory agent? 12 A. Right. 13 Q. And also known as the president of the 14 bank? 15 A. Right. 16 Q. And Mr. Green left sometime in 1987 to 17 take a job in California, and he was replaced by 18 George Barclay on an interim basis and then 19 finally as a permanent president and PSA of the 20 bank. Right? 21 A. Yes. 22 Q. So, they would make policy as to what 24462 1 the supervisory approach would be to various 2 financial institutions and in general. Right? 3 A. Yes. 4 Q. Let me show you a document which is 5 marked as A11088, and it's been introduced into 6 evidence at Tab 1764. 7 MR. RINALDI: A110? 8 MR. VILLA: It's the same binder, five 9 documents deeper. And it's A11088. It's in 10 evidence at Tab 1764. 11 A. Got it. 12 Q. (BY MR. VILLA) Do you have that 13 before you, sir? 14 A. Yes. A handwritten page. 15 Q. And these have been identified in this 16 case as the handwritten notes of Ginger Baugh of a 17 meeting of October 30, 1987. 18 Let me direct your attention to the 19 third page. Does it show you present at the 20 meeting? Do you see that, sir? 21 A. Yes. 22 Q. Do you remember meeting with 24463 1 representatives of USAT shortly after the 1987 2 stock market crash in which they brought to your 3 attention their concerns about the impact of the 4 stock market crash on their financial strength? 5 A. Yes. 6 Q. Do you remember that meeting? 7 Let me direct your attention to Page 3 8 of that document, in the middle of Page 3, where 9 it's purporting to describe Mr. Selby's views just 10 below the star where it says, quote, "He is more 11 worried about earnings than NW." 12 Do you see that? Do you see a star on 13 the left-hand side? 14 A. Before the line. Okay. Go ahead. 15 Q. You see where it says "He is more 16 worried about earnings than NW"? 17 A. Uh-huh. (Witness nods head 18 affirmatively.) 19 Q. Do you recall, sir, that the views of 20 Mr. Selby, who was then making policy for the 21 Federal Home Loan Bank of Dallas, was that his 22 earnings were earnings more than net worth? 24464 1 A. I'm sure he was concerned about 2 earnings and net worth. I don't recall him saying 3 this at the meeting. 4 Q. Are you sure he was concerned about net 5 worth? Is that right? 6 A. Absolutely. 7 Q. Wasn't it true that everybody at the 8 Federal Home Loan Bank of Dallas thought that all 9 the major S&Ls were insolvent? 10 A. Eventually, most of them were 11 insolvent. 12 Q. Right at this time, didn't they believe 13 that the major S&Ls were all insolvent and, in 14 fact, that it was only regulatory accounting 15 principles that allowed them to continue reporting 16 positive capital at all. Right? 17 A. Okay. Apples and oranges. You have 18 GAAP basis and RAP basis. We stay in RAP. Okay? 19 A number of institutions were failing their net 20 worth at this time. And eventually, they would go 21 into insolvency. I can't give you a number as of 22 maybe October, November, or December of 1987; but 24465 1 I don't have -- I don't have a problem with saying 2 there were a number of institutions that were 3 insolvent or going to be insolvent. 4 Q. All right. Let's take a look at the 5 next document in your book, which is 6 Exhibit B1810, which has been received into 7 evidence at Tab 1761. 8 Do you have that before you, sir? 9 A. Yes. 10 Q. And this is a memorandum dated 11 October 23, 1987, from Art Berner to a number of 12 people regarding a meeting with you. Right? 13 Do you see that? 14 A. Yes. 15 Q. In fact, I asked you questions about 16 this at your deposition. You may remember that. 17 Do you recall that? 18 A. Barely. 19 Q. Let me direct your attention to the 20 second full paragraph under "FADA real estate 21 preferred stock proposals." About halfway through 22 the paragraph -- first, it says -- you're talking 24466 1 about the proposal had great merit. Let me back 2 up for a second. 3 Do you remember that USAT was not just 4 trying to pursue the Southwest Plan? It, in fact, 5 had what's called a FADA FSLIC proposal that it 6 was pursuing fairly vigorously from late 1987 7 through early 1988. 8 Do you remember that, sir? 9 A. Yes. 10 Q. And it was only when the Southwest Plan 11 became more active in May of 1988 that it began 12 switching over to the pursuit of the Southwest 13 Plan proposal. 14 Do you remember that? 15 A. Actually, FADA kind of died so... 16 Q. Let me direct your attention then to 17 the line that's about five lines down in the memo 18 of October 23 reporting what you said. It says, 19 quote, "Neil told me that the people at the Dallas 20 Bank felt that, in fact, virtually all of the 21 large S&Ls were effectively, quote, 'insolvent.'" 22 Do you see that? 24467 1 A. Yes, I do. 2 Q. And that would be consistent with the 3 notion that because most of the S&Ls were allowed, 4 under RAP accounting principles, not to recognize 5 the big losses in those home loan portfolios we 6 talked about if they had to liquidate them and not 7 to recognize -- and to be able to carry goodwill 8 on their books in ways that other institutions 9 might not, they were able to report positive 10 regulatory capital. But most people thought that 11 they were, quote, "effectively insolvent"; isn't 12 that right, sir? 13 A. Well, I have a problem with the way 14 you're categorizing RAP. Back in the early 1980s, 15 the Federal Home Loan Bank Board allowed 16 institutions to take certain RAP versus GAAP 17 benefits, such as appraised equity capital and 18 deferral of losses on sales. There may have been 19 a couple others. I just can't recall them. 20 That's primarily the RAP versus GAAP differences. 21 And if you throw in supervisory goodwill, that 22 would be a RAP versus GAAP difference. But under 24468 1 GAAP and RAP, regular goodwill is still an asset. 2 So, I don't have a problem with the 3 line or the rendering here where Berner says I say 4 effectively, they are going insolvent. 5 Q. It's just my explanation of it that's 6 off the mark for you? 7 A. That's what happened. 8 Q. Okay. 9 A. But I wouldn't put it down to strictly, 10 well, on GAAP, they aren't, or RAP, they are, one 11 way or the other. Effectively insolvent is almost 12 an historical fact. The institutions were losing 13 money, and they were going to go insolvent. 14 Q. And when I asked you earlier about the 15 views of Mr. Selby and the significance he 16 attached to capital or net worth, you said you 17 were sure that he attached considerable 18 significance to them or words to that effect. 19 And my point in pointing this to your 20 attention is: Wasn't it generally believed at the 21 Federal Home Loan Bank of Dallas that all of these 22 large associations were insolvent and it was only 24469 1 by regulatory accounting principles that they were 2 able to continue at all? Isn't that right? 3 A. No. I think we were looking at them 4 even with the regulatory accounting principles, 5 that they were insolvent. 6 Q. Oh, I see. You thought they were all 7 insolvent? 8 A. They were all on that -- a number of 9 institutions were going to be insolvent under RAP 10 principles as well as GAAP. 11 Q. And is that why Mr. Selby was more 12 concerned about earnings than net worth, because 13 nobody had any net worth. Right? 14 A. No. I'm not going to guess what 15 Mr. Selby might have been thinking or somebody was 16 commenting about what he was thinking. I know 17 that I'd be concerned about positive earnings, 18 that I'd be concerned about net worth. And I also 19 at the time was concerned about liquidity. But, I 20 mean, I don't know how to tell you what Joe Selby 21 was thinking when he might have said that or 22 referred to it. I'm sure he just thought of -- 24470 1 you know, if a place had a net worth problem but 2 had positive earnings, maybe it could earn itself 3 out of this situation or increase its net worth 4 over time versus an institution that had -- was 5 insolvent and continued to lose money. Obviously, 6 it isn't going to turn itself around over time. 7 Q. Well, there came a time -- let's try to 8 figure out the relative significance of net worth 9 in the supervisory scheme of the Federal Home Loan 10 Bank of Dallas in this time period. 11 Mr. Selby eventually was, how shall we 12 say, invited to leave the Federal Home Loan Bank 13 of Dallas in about May of nineteen -- late April 14 of 1988. Right? 15 A. May 1988, yes. 16 Q. And at that point, the person who was 17 the most senior supervisory agent, the person who 18 was setting supervisory policy for the Federal 19 Home Loan Bank of Dallas, was George Barclay. 20 Do you agree with that? 21 A. He was the PSA then. 22 Q. And Mr. Barclay asserted his authority 24471 1 with more vigor after Joe Selby left; isn't that 2 right? 3 A. Well, I don't know about more vigor; 4 but he was the PSA after -- he was the PSA before 5 Joe Selby left, and he was the PSA after Joe Selby 6 left. 7 Q. Well, let's look at Exhibit B2299, 8 which is an article that was in evidence at 9 Tab 1696, which should be the next document in 10 your book. It's an article that was published in 11 Forbes in July of 1988. And it recounts the views 12 of Mr. Barclay and the importance that he placed 13 on regulatory capital and net worth. 14 If you look in the middle of the -- the 15 middle column, about an inch from the bottom, it 16 says -- 17 MR. RINALDI: Is this the first page? 18 MR. VILLA: The first page, sir. 19 Q. (BY MR. VILLA) "In Texas, everything 20 is relative. You can have well-run, well-managed 21 institutions down here with negative net worth. 22 Even if you have zero percent capital on a 24472 1 relative basis, you may be okay." 2 Do you see that, sir? 3 A. Yes. 4 Q. And that was the view of the individual 5 who was setting supervisory policy for the Federal 6 Home Loan Bank of Dallas in 1988; isn't that 7 right? 8 A. Well, that's a view that he expressed 9 in this article, yes. 10 Q. And you could have a well-run 11 institution in Texas in 1988 with negative net 12 worth or zero percent capital. Right? You 13 wouldn't dispute Mr. Barclay on something like 14 that, would you, sir? 15 A. Well, you could have a well-run 16 institution -- I have a problem with if you were a 17 well-capitalized, well-run institution, how do you 18 become a well-run, undercapitalized institution? 19 But there were instances where we institute what 20 we called a management consignment program where 21 we removed the directors and we removed all the 22 management and installed new people. And at that 24473 1 time, we probably would think it wasn't well 2 managed though zero capitalized. But the idea was 3 to, you know, stabilize the institution and try to 4 make it better over time. 5 Q. Well, I'm not talking -- I'm sorry. 6 A. There were other instances where we 7 asked a management team to leave and bring an 8 entire new management team in to try and help 9 correct the institution. And even in some of 10 those instances, it didn't work out because the 11 problems were too large and too overwhelming. 12 So, I mean, I know what -- I see what 13 Mr. Barclay said in this article. And obviously, 14 our greater concern would be an undercapitalized, 15 ill-run institution versus a zero capitalized, 16 well-run institution. It just depends on how we 17 were viewing management and how they were dealing 18 with the problems. 19 Q. Well, I understand there are a number 20 of different alternatives that could be -- that 21 could develop or occur. 22 My question is: Would you agree with 24474 1 the conclusions that Mr. Barclay drew in this 2 article -- strike that. 3 Mr. Barclay's views on the significance 4 of net worth in evaluating an institution were, in 5 the relative scheme of things, determinative of 6 supervisory policy at the Federal Home Loan Bank 7 of Dallas, wouldn't you say? He set the policy? 8 A. He oversaw the policy and how it was 9 applied, yes. 10 Q. He set policy. Right? 11 A. Yes. 12 Q. And he followed -- 13 A. He set policy. Policy was basically 14 what was in the regulations, and that gave us our 15 guidance. Additional policy -- additions to that, 16 he could add, yes. 17 Q. Well, we're going to change to another 18 topic, sir. Let me just write the fifth issue 19 that we have now addressed. "Attitude re net 20 worth." 21 Now, sir, we resolved fairly quickly 22 that the Federal Home Loan Bank of Dallas was 24475 1 below its minimum regulatory net worth from -- 2 strike that -- that the Federal Home Loan Bank -- 3 strike that. 4 We resolved in our discussion a couple 5 minutes ago that the Federal Home Loan Bank of 6 Dallas had concluded that USAT was below its 7 regulatory net worth for the quarter ending 8 March 31, 1986, and for every quarter thereafter. 9 Right? 10 A. Yes. 11 Q. Would you agree with me, sir, that you 12 and other people at the Federal Home Loan Bank of 13 Dallas often referred to UFG as a shell holding 14 company? 15 A. Yes. 16 Q. And a shell holding company is one 17 where substantially all of the assets, 18 liabilities, and revenues are represented by the 19 thrift and the thrift subsidiaries. Right? 20 A. Yes. 21 Q. Now, on May 13, 1988, you sent a letter 22 to the board of directors of United Financial 24476 1 Group regarding the net worth maintenance 2 agreement, didn't you, sir? 3 A. Yes. 4 Q. Let's take a look at that letter. I 5 think it is Exhibit T2013 at Tab 71. It's the 6 gray tab in Volume II. 7 Do you have it before you? And this is 8 the green notebook, gray tab. 9 THE COURT: Would you state the exhibit 10 number again, please? 11 MR. VILLA: It is T2013, and it's 12 Tab 71. 13 Q. (BY MR. VILLA) Now, we have discussed 14 before that this is not a direction from the 15 supervisory agent to infuse capital into USAT. 16 It's, in fact, a request for a description of what 17 UFGI intends to do. 18 You would agree with that description. 19 Right? 20 A. Yes. 21 Q. Is this the -- is this the first 22 occasion on which you recall asking United 24477 1 Financial Group's board to advise you of the steps 2 they were going to take? 3 A. Yes, I believe. 4 Q. Do you recall, sir, that your letter 5 was sent within several days of the time that a 6 number of powerful politicians wrote the chairman 7 of the Federal Home Loan Bank of Dallas -- I'm 8 sorry -- the chairman of the Federal Home Loan 9 Bank Board in Washington, Danny Wall, and asked 10 him why no action was being taken to require UFG 11 to infuse capital into USAT? 12 Do you recall that that's what prompted 13 this letter after more than two years of knowledge 14 that USAT was below its minimum regulatory net 15 worth? 16 A. No. 17 Q. Now, it is true that the position of 18 the Federal Home Loan Bank of Dallas was -- and 19 their conclusion was that USAT had been below its 20 minimum regulatory net worth from March 31, 1986, 21 until May 12, 1988, and no letter like this had 22 been written, correct? 24478 1 A. Correct. 2 Q. And it was written on this day for what 3 reason, sir? What reason can you give us that you 4 selected the day March -- May 13, 1988, to write 5 this document? 6 A. I don't know why I picked that day. 7 It's just -- I don't know if there was some other 8 discussions regarding -- running up to this. But 9 the only reason I can recall now for asking for 10 this plan from the UFG board would have been that 11 as of December 31st, 1987, USAT itself reported it 12 was below its net worth requirements. 13 Q. Let me show you several letters that 14 were produced to us from the supervisory files. 15 And the first one is Exhibit B2156, which was 16 introduced, I think, yesterday into evidence at 17 Tab 1892. It's the orange tab in Volume I. 18 Do you have that before you, sir? 19 A. Yes. 20 Q. It's the red book, orange tab. 21 Now, are these the questions for the 22 record that were sent from Senator Robert Byrd to 24479 1 Chairman Danny Wall? It states the date of them 2 is April 25, 1988. 3 Do you see that, sir? 4 A. Yes. 5 Q. Now, do you recall, sir, that -- I 6 think you told the Court in response to a question 7 by Mr. Rinaldi and further questioning by the 8 Court that there was considerable -- strike that. 9 You told the Court about the enactment 10 of FIREA in 1989. 11 Do you remember that? Do you remember 12 the enactment of FIREA in 1989? 13 A. Yeah. 14 Q. And do you remember for a period of 15 years before that, bank regulation legislation had 16 been trying to work its way through Congress and 17 involved in that was an attempted recapitalization 18 of FSLIC. 19 Do you remember that, sir? 20 A. Well, there were various legislations. 21 You have the Garn-St. Germain Act. You have CEBA. 22 But I can recall as early as 1986, there was a 24480 1 proposal to recapitalize FSLIC for about 2 $25 billion. 3 Q. And there was no effective 4 recapitalization really until FIREA in 1989. 5 Right? 6 A. No. There was a -- I can't remember 7 the name of the legislation, but they did pass 8 something that recapitalized FSLIC through the 9 issue of bonds for in excess of $10 billion. I'm 10 not sure how much. It's around that range. And 11 that happened in nineteen -- either 1987 -- 1987, 12 I'd say. I'm not sure. CEBA -- it was a little 13 after CEBA. 14 Q. But the big recapitalization occurred 15 at the end of several years of negotiations and 16 legislative wrangling, and it resulted in FIREA in 17 1989. Right? 18 A. Well, it was President Bush addressing 19 the thrift crisis after he came into office, yes. 20 Q. And do you recall, sir, that the 21 Federal Home Loan Bank Board was trying, during 22 this time period -- in fact, you've already told 24481 1 us that it was trying to get the recapitalization. 2 It had gotten $10 billion which was effectively a 3 stop gap for the losses that had subsequently 4 occurred in 1987. And it was trying to get 5 legislation through Congress in '88 to get 6 recapitalized in its entirety. 7 Do you remember that? 8 A. No. There may have been legislative 9 initiatives, but I don't recall them right now. 10 Q. Well, certainly FIREA, which was 11 comprehensive banking legislation when it was 12 enacted in August of 1989, you would agree with me 13 was the result of substantial prior submissions by 14 the Federal Home Loan Bank Board as to what they 15 needed. Right? 16 A. No, because FIREA was basically a plan 17 that the FDIC came up with and that Mister -- 18 President Bush announced in February of 1989 to 19 address the thrift crisis as I recall it. In 20 between February 1989 until it was enacted by the 21 signature of the President in August of 1989, it 22 was then being debated or the legislation process 24482 1 was going through. But that's -- that's what I 2 recall. 3 Q. I have some documents that will help 4 you understand this. Let's start off with the 5 question of do you know whether the support of a 6 person like the majority leader of the Senate 7 would be significant to new -- new legislation in 8 the banking area? 9 Do you have any views on that issue? 10 A. Well, I'm sure that a key member of the 11 Senate or the key member of Congress and the 12 majority party is very important to any 13 legislation. 14 Q. Let's go, sir, to the questions that 15 Senator Byrd, who was then the majority leader, 16 sent to Danny Wall on April 25, 1988. And that's 17 Exhibit B2156. And let's look at Page 2 and then 18 Page 3. 19 At the bottom of Page 2, it says, "In 20 its 10K, UFGI states that when UFGI became a 21 holding company, it agreed to maintain USAT's 22 capital above the minimum FSLIC requirements. 24483 1 However, UFGI does not have sufficient" -- I'm 2 sorry -- "does not now have sufficient assets to 3 contribute to maintain USAT above its minimum 4 capital requirements. In light of Mr. Hurwitz' 5 chairmanship and part ownership of UFGI, would the 6 granting of forbearance by FHLB on the capital 7 requirements for UFGI assist Mr. Hurwitz either 8 directly or indirectly in his attempt to gain 9 control of Kaiser?" 10 Now, let's go to the last page and the 11 second-to-the-last paragraph. This question is 12 posed by the majority leader. Quote, "When did 13 the FHLB first notify UFGI or USAT that it failed 14 to meet its minimum capital requirements? When 15 did the FHLB notify USAT or UFGI that it exceeded 16 federal requirements for broker deposits?" 17 Do you see that? 18 A. Yes. 19 Q. Now, sir, these letters -- this memo, 20 I'm sorry. These questions were directed to 21 the -- these questions were directed to Danny Wall 22 who was the chairman of the Federal Home Loan Bank 24484 1 Board in Washington. And I think yesterday, we 2 saw how these questions had been sent by Mr. Wall 3 to Mr. Barclay. And Mr. Barclay had responded in 4 a letter that is dated May 16, 1988. And it 5 should be Exhibit B2193 in evidence at Tab 1893. 6 A. I see it. 7 Q. Now, sir -- and this is the one where 8 you're shown as receiving a copy of the document. 9 Right? 10 A. Yes. 11 Q. And you would have been aware of this 12 document since it involved some fairly high-level 13 people prior to the date that it was sent, 14 wouldn't you, sir? 15 A. Definitely. 16 Q. And you would have known that the 17 majority leader of the Senate was asking when UFG 18 had been notified of the fact that USAT was below 19 its net worth. Right? 20 A. Yes. 21 Q. So, three days before the letter went 22 out from George Barclay reporting on what occurred 24485 1 is the time that you sent your first letter to UFG 2 asking -- notifying them of the obligations under 3 the net worth maintenance agreement and asking 4 them what they are going to do; isn't that right, 5 sir? 6 A. Yes. 7 Q. And you waited two years and two months 8 after it had been below its minimum regulatory net 9 worth to send this letter to a shell holding 10 company. Right? 11 A. On the basis of your timing, as you 12 noted earlier in '86, the bank concluded that they 13 were below their minimum regulatory net worth. 14 And as I recall it, it was the end of 1987, 15 probably December of 1987, they reported they were 16 failing their net worth. I think -- well, strike 17 that. 18 USAT knew it was failing its net worth 19 at least by the end of 1997. And since many of 20 the people who -- many of the directors and common 21 officers between the two had been UFG, and my 22 sending the letter is simply a formality. And 24486 1 even if you want to say it might have been 2 prompted, the question in the faxed thing that I 3 see here is that "when did the Federal Home Loan 4 Bank first notify UFG and USAT that it was failing 5 its minimum regulatory net worth requirement?" 6 Well, already by this letter, okay, USAT knew it. 7 UFG should have known it. But because of the net 8 worth maintenance agreement, that probably was a 9 catalyst for sending this letter. 10 Q. The reason you sent this letter to a 11 shell holding company after waiting two years and 12 two months was because a powerful senator 13 intervened and the senator was important and the 14 senator wanted to know what you were doing. And 15 that's the reason you sent the May 13, 1988 16 letter; isn't that right, sir? 17 A. I don't -- I don't agree with you that 18 it was a strictly cause and effect. I think at 19 the same time we were putting together this 20 letter, I felt that UFG already knew that USAT was 21 not meeting its net worth requirements. 22 Q. I didn't ask you all those things. I 24487 1 asked you what prompted it. 2 A. And I said -- so, I probably in 3 conjunction of responding to this letter and 4 everything else, it was -- I thought it was a good 5 idea to send this letter to UFG at the same time. 6 Q. The reason you thought it was a good 7 idea to send the letter is because you had been 8 given some directions that you'd better send this 9 letter to keep Senator Byrd happy; isn't that 10 right? 11 A. I don't recall anybody giving me those 12 direct directions. 13 Q. Well, you're smart enough not to get 14 those direct directions because the point is 15 pretty clear from Senator Byrd's questions, isn't 16 it, sir? 17 A. He's definitely asked a question of 18 "Has the Federal Home Loan Bank notified USAT and 19 UFG of their net worth deficiency?" 20 Q. The reason you hadn't done it for the 21 last two years and two months is because you 22 didn't seem much point to sending a letter like 24488 1 this to a shell holding company. But now you're 2 prepared to do it because you want to make sure 3 that political criticism of the Federal Home Loan 4 Bank Board is at a minimum. 5 Wouldn't you agree that that's the 6 reason, sir? 7 A. No. 8 Q. So, what your testimony is now was it 9 prompted -- was sending the first of these two 10 letters prompted by political intervention by 11 Senator Byrd or was it not or was it a 12 coincidence? Just tell me, was it a coincidence 13 or was it prompted by Senator Byrd? 14 A. I don't think me sending the letter in 15 1988 was a mere coincidence. However, when we're 16 preparing information like this to be sent to 17 Washington -- and it could be Senator Byrd or 18 Congressman Byrd, it doesn't matter -- you have a 19 chance to look at the file and you have a chance 20 to look, "Oh, this is what we did. This is what 21 we didn't do. You clean it up." And it was 22 probably nothing more than, "Okay. We haven't 24489 1 asked or requested a plan from the holding 2 company. Let's do it." If it looks good on the 3 record, if you want to look at it that way, fine. 4 But we hadn't -- at this time, from the time USAT 5 reported it was failing its net worth, which was 6 the end of December 1987 to this point, we hadn't 7 talked to the holding company, I believe. So, 8 this is the first time we did it. 9 Q. You were influenced by political 10 pressure in your supervision of United Savings, 11 weren't you, sir? 12 A. I disagree. 13 Q. You wouldn't have sent that letter if 14 Senator Byrd hadn't asked those questions because 15 there was absolutely no point in sending that 16 letter; isn't that right? 17 A. I probably wouldn't have sent the 18 letter until -- because I had sent similar letters 19 in other instances when, at the time, there was 20 basically going to be a FSLIC action and there was 21 some type of holding company. And it didn't 22 matter whether it was a so-called shell holding 24490 1 company or unitary holding company, which is much 2 more active and has other divisions. Normally, 3 before we -- you know, we take a supervisory 4 action such as a FSLIC receivership, we would send 5 out a demand letter to the institution asking them 6 to recapitalize based on the net worth maintenance 7 agreement. This letter wasn't a demand for 8 recapitalization. It was a request for a plan of 9 recapitalization. 10 Q. I know. It was papering the file, 11 wasn't it, sir? 12 A. It was an obvious letter that should be 13 sent, and it was sent at that time. And if it 14 should have been sent earlier, January 1st, 1988, 15 then it should have been sent earlier. 16 Q. It was papering the file to insulate 17 you and others from criticism by powerful 18 politicians that you were acting in a way that 19 frankly made no sense since it was a shell holding 20 company. Right? 21 A. You're asking two questions. Do you 22 want to break them up, please? 24491 1 Q. That's okay. We'll go at them one at a 2 time. 3 Let me show you what's been marked as 4 Twomey Exhibit 61. It's -- I'm sorry. It's 5 B2224. It's -- 6 THE COURT: Mr. Villa, how much more do 7 you have? 8 MR. VILLA: Your Honor, on this line, I 9 probably have 20 minutes. 10 Do you want me to complete it then? 11 THE COURT: Yes. 12 Q. (BY MR. VILLA) Let me show you what's 13 marked as Exhibit B2224, Tab 1695. It's in the 14 blue book. It's Art Berner's memorandum of a 15 conversation that he had with you on June 3rd, 16 1988, regarding your letter of May 13th that we 17 just looked at. 18 Do you have it before you, sir? 19 A. Yes, I do. 20 Q. Let me direct your attention to Page 3, 21 and I'd like you to read the words under "UFGI" -- 22 I'm sorry. Page 3. I'd like to read the words to 24492 1 you that Mr. Berner attributes to you, the second 2 full paragraph. Quote, "Neil said that once he 3 received my response" -- and that's the response 4 to the May 13 letter -- "he would, as a matter of 5 course, respond by making a, quote, 'official,' 6 close quote, demand to UFG to infuse sufficient 7 capital. He said, however, that it would be a pro 8 forma requirement since he knew there was no way 9 that UFG could put sufficient capital down and, 10 quote, 'if UFG didn't, what could I do,'" close 11 quote. 12 Do you see that? 13 A. Yes. 14 Q. Do you recall this conversation with 15 Mr. Berner? 16 A. Yes. 17 Q. You do? 18 A. I'm reading it now. When you're 19 putting a bunch of other stuff in front of me, 20 there's a recall. Okay? I do recall -- I don't 21 recall the exact words, but I recall basically the 22 intent and the discussion, yes. 24493 1 Q. Let me focus on the term "official 2 demand to UFG to infuse sufficient capital." 3 Do you see those? 4 A. Yes. 5 Q. So, the first letter went out on 6 May 13, 1988, for whatever reason, asking for a 7 plan. And then sometime between the time that 8 letter went out, at some future point, a, quote, 9 "official demand to infuse capital" was going to 10 be made. Right? 11 A. If the plan they submitted to us was 12 insufficient, then the next step would be normally 13 an official request, a demand. 14 Q. Now, during this time period, UFG had 15 told the Federal Home Loan Bank of Dallas that it 16 had an opportunity to pay off its holding company 17 debt at a large discount. 18 Do you remember that, sir? PennCorp 19 debt? 20 A. I remember I thought it was -- they 21 made an application regarding it. It was approved 22 because it was a cost benefit to it. I'm not sure 24494 1 of the timing. 2 Q. Let me ask you to look at the next 3 document, Exhibit T2012, Tab 74. And this is a 4 letter from Art Berner to George Barclay dated 5 May 5, 1988. And it is the proposal to pay off 6 the holding company debt at a deep discount. 7 Do you see that, sir? 8 A. Yes. 9 Q. Now, do you recall that in connection 10 with this application, UFG explained that it had 11 long-term liabilities and it had assets and that 12 unless it was able to pay off its debt at a 13 discount, it was going to default on its debt? 14 Do you remember that? 15 A. Yes. 16 Q. And the results of a default on the 17 debt would be catastrophic. It would involve 18 potentially pulling the repo lines. It would 19 involve a loss of -- a net operating loss of $140 20 some million. It would involve cross defaults on 21 all of its debt. 22 A. It would have been an implosion. 24495 1 Q. Implosion, correct. 2 And the Federal Home Loan Bank of 3 Dallas considered this. It considered this, and 4 it concluded that -- if you look at the next 5 exhibit, A11104. This is the consideration of it. 6 It concluded that it would make no 7 sense to have an implosion of UFG. And, 8 therefore, it approved the payoff of the PennCorp 9 debt at a discount. Right? 10 A. Yes. 11 Q. And Exhibit A11104 is, in fact, the 12 memo that was prepared by the supervisory agents 13 in applications approving the PennCorp debt being 14 paid off at a discount. Right? 15 A. Yes. 16 Q. And a copy of it was sent to you, I 17 believe? 18 A. Yes. 19 Q. And your views are under "other" on the 20 third page. 21 Do you see that? 22 A. Let me back up. 24496 1 Q. Under the word "other," it says 2 "Supervisory Agent Neil Twomey expressed no 3 objection to the proposal." Right? 4 A. That's right. 5 MR. VILLA: Your Honor, I move A11104 6 into evidence. 7 MR. RINALDI: No objection, Your Honor. 8 THE COURT: Received. 9 Q. (BY MR. VILLA) Now, I'd like you to 10 take a look in particular at page -- there is an 11 analysis of this, the supervisory analysis 12 where -- and it begins on the second page of the 13 document. It goes through, and it explains how 14 UFG has cash and securities of $34 million and 15 debt obligations of $54 million. And it's going 16 to pay off these debt obligations at a discount. 17 Do you see that? It's the first 18 paragraph under "supervisory analysis." 19 A. Yes. 20 Q. But what I'd like to focus your 21 attention on is the first full paragraph on Page 3 22 on the analysis that -- the basis of the decision 24497 1 where it says, four lines down, "To the extent 2 that the holding company debt is eliminated, its 3 ability to serve as a source of financial strength 4 to its insured subsidiary is increased. Due to 5 the excess of UFGI's debt over its projected 6 ability to repay this debt, UFGI poses a risk to 7 USAT rather than serving as a source of financial 8 strength." Right? 9 Do you see that? 10 A. Yes. 11 Q. And you agreed with that? Right? You 12 agreed with that analysis? 13 A. Yeah. If we didn't act, there would be 14 a severe problem or if we didn't approve it, there 15 would be a severe problem. 16 Q. And, in fact, I think if you go back 17 one document and look at your -- the memo of Art 18 Berner's conversation, several documents, and look 19 at the memo of Art Berner's conversation with you 20 on the UFGI debt repayment -- and this is 21 Exhibit B2224. On Page 2, you're quoted as 22 saying -- it says, quote, "Neil said he thought 24498 1 the time to strike was now." That's in quotes. 2 "And that it made good sense to him to pay off the 3 debt at discounted values. I said that we agreed 4 but that we needed to act quickly since we had 5 been told there was a June 30 deadline." 6 Do you see that, sir? 7 A. Yes. 8 Q. Now -- and as we see in this -- at the 9 conclusion of this, the Federal Home Loan Bank of 10 Dallas approved the payoff of the PennCorp debt. 11 Right? 12 A. Yes. 13 Q. And the analysis that they came up with 14 was very similar to the analysis that Mr. Berner 15 had described, which was "There will be an 16 implosion. There will be an implosion if we cause 17 the PennCorp debt -- if we don't relieve the 18 pressure on the holding company of its debt 19 obligations." Right? It would go into default. 20 Right? 21 A. Yes. 22 Q. And the notion was UFG is more of a 24499 1 risk to USAT than it is of benefit because it is a 2 shell holding company. What does it have? Right? 3 A. Well, it's more of a risk since this 4 situation isn't resolved, yes. 5 Q. And even after the situation was 6 resolved, do you know that UFG's net worth was 7 probably -- was either between the positive 8 $1.8 million and a negative $2 million at the end 9 of the year? 10 A. Well, I thought it was positive; but 11 again, 1 or $2 million. 12 Q. So, either way, UFG is not much in a 13 position to do anything to help USAT at the end of 14 1988. 15 Wouldn't you agree, sir? 16 A. By itself, it's a shell holding company 17 with limited assets. 18 Q. And the risk is that if USAT defaults, 19 it will be financial ruin for UFG and possibly for 20 USAT, as well. Right? 21 A. Yes. 22 Q. And if you look at the next document in 24500 1 the book, it's Exhibit B2252. It's a letter dated 2 June 24, 1988, from Jearlene Miller to Arthur 3 Berner with a copy to you approving the payoff of 4 the PennCorp debt. Right? 5 A. Yes. 6 MR. VILLA: I move B2252 into evidence. 7 MR. RINALDI: No objection. 8 MR. VILLA: I'm sorry. It's already in 9 evidence. I misspoke. It's in evidence at 10 Tab 680. 11 Q. (BY MR. VILLA) Now, sir, do you 12 recall, Mr. Twomey, that Mr. Berner's analysis 13 that he sent to the Federal Home Loan Bank of 14 Dallas in May of 1988, May 5, 1988, said that 15 there were two ways that UFG could be -- could 16 result in this, in your words, implosion? He said 17 there's two ways that this could happen. 18 One way is if you don't let us pay off 19 the PennCorp debt at a discount, and the second 20 way is if the Federal Home Loan Bank of Dallas 21 makes an official demand on us to infuse capital 22 into USAT. 24501 1 Do you remember that? 2 A. I really remember the first one. 3 Q. Well, let's look back at T2012, which 4 is Mr. Berner's letter, and see what he explained 5 to you. It's about three documents earlier. 6 A. Okay. I'm there. 7 Q. And look at Page 2 at the top. It 8 says, quote, "Thus, it is likely that UFG will 9 default on some of its debt obligations by 1991." 10 And that's talking about the pay out issue, if you 11 don't relieve it. 12 A. Right. 13 Q. Then he says, "Moreover, immediate 14 default will result if UFG is required to 15 contribute significant assets to USAT to augment 16 USAT's regulatory capital." Right? 17 A. Yes. 18 Q. So, what he's saying is there is one of 19 two ways of causing this implosion at UFG. And 20 one of them is if you don't allow us to pay off 21 the PennCorp debt at a discount, and the second 22 one is if you direct us to infuse significant 24502 1 assets into USAT. Right? 2 That's what he's saying? 3 A. That's what he's saying. 4 Q. And it makes absolute sense, doesn't 5 it? If you direct UFG to infuse its assets into 6 USAT, it's going to cause UFG to implode. Right? 7 In your words. 8 A. Well, I use the word "implosion" 9 basically when you talked about the initial 10 transaction if the debt was retired, and that's 11 basically what we agreed to and that's basically 12 what was approved. 13 I don't readily agree with Art's 14 description of, you know, a demand letter or that. 15 You're raising too many "ifs" in here because at 16 this point in time, we hadn't asked or demanded 17 that they augment a net worth maintenance 18 agreement. 19 What we had done is asked for a plan 20 and statement. I was aware that USAT, UFG, or 21 whoever involving USAT or United was at the same 22 time talking to Washington negotiating with 24503 1 Washington, trying to get into the Southwest Plan 2 and trying to get USAT capitalized. All this was 3 happening at the same time the May 13th letter was 4 sent. The first Southwest Plan assessments were 5 developed. And this was ongoing, including the 6 time Larry Connell was hired. 7 So, you have different avenues of 8 things happening here and you're kind of going 9 down. Okay. If UFG takes every asset it has -- 10 Q. Do you remember my question? 11 A. -- and dumps it in on a demand letter 12 to USAT, then UFG will cease to exist. And if 13 that was their plan, then that would be it. We 14 asked them for a plan. 15 Q. Do you remember my question? 16 A. You asked me if I agreed with Art 17 Berner's language that -- when you use the word 18 "implosion" regarding that. 19 If we didn't act on the initial 20 retirement of debt and then that if we issued a 21 demand letter to UFG to recapitalize USAT, that's 22 the question you asked. 24504 1 And I said I agree with the first. And 2 the latter, we had -- I just don't agree with 3 Art's rendering of that, of what was being 4 discussed. 5 Q. Are you saying that if you directed 6 USAT -- UFG to take its assets and infuse it into 7 USAT, that it would not cause an implosion of UFG? 8 It would not cause defaults on the remaining debt? 9 It would not cause a change of control and loss of 10 the net operating losses? All those things would 11 happen if UFG took all of its assets and put it 12 into USAT, wouldn't it, sir? 13 A. Sir, at that time, I was asking for a 14 plan. I asked them to act. 15 Q. I'm not arguing about what you were 16 doing in May. 17 A. Well, you're putting in "what if." And 18 I'm just saying that's not what happened at the 19 time. All we asked for was a plan. We didn't -- 20 we didn't ask him to blow up and cause the same 21 type of implosion that we talked about with the 22 retirement of the debt. 24505 1 Q. Right. 2 A. But we didn't request it. 3 Q. Right. That's exactly right. You 4 didn't request it for seven months, from May until 5 December 8, 1988. 6 On December 8, 1988, you sent the 7 letter that would cause the implosion of UFG. And 8 the reason you sent it to a shell holding company 9 who had zero assets with USAT showing a 10 380-million-dollar number below its regulatory net 11 worth was because you decided, in early 12 December 1988, that Mr. Ranieri was going to get 13 the institution. Right? 14 A. No. 15 Q. And you decided that the competing 16 bidders were MAXXAM and UFG, supported by UFG. 17 And the way to disqualify UFG was to send this 18 pointless official demand letter to a shell 19 holding company and cause an implosion. 20 Isn't that why you sent the December 8 21 letter? 22 A. No. 24506 1 Q. Is there any other point in the world 2 to send a letter to a company that has almost zero 3 net worth and direct them to send -- to infuse 4 their capital into a savings and loan association 5 that is reporting it's $380 million below its 6 regulatory net worth? 7 Is there any other point in it other 8 than causing, in your words, an implosion of UFG? 9 A. My description of "implosion" had to do 10 with the retirement of the debt. You're using my 11 language now inappropriately. We sent the letter 12 on the basis of the institution was going to be 13 placed in receivership, we assumed, at the end of 14 the month. There was an existing net worth 15 maintenance obligation from UFG to USAT. And 16 that's all -- the only reason we sent the letter. 17 Now, what they could realistically do, 18 I don't know. But if they could send $1 from UFG 19 down to USAT, you know, that's maybe $1 less that 20 FSLIC would have to pay out. That was the 21 rationale for the letter. 22 Q. In your deposition, you told me that 24507 1 you had a large, complicated caseload and you get 2 to things when you get around to it. 3 Do you remember that it? 4 A. I definitely had a large, complicated 5 caseload. 6 Q. It wasn't a large, complicated 7 caseload, and there was no point of sending this 8 letter. 9 Wasn't this letter prompted, like the 10 first net worth letter, not for any substantial 11 business reason but to respond to other concerns, 12 whether it's Congressional pressure or your 13 conclusion that in the first week of December, as 14 you have now testified in response to Mr. Nickens' 15 questions, is when you understood that Ranieri had 16 won the bidding and there was no longer a reason 17 to have UFG around so let's implode it? 18 Isn't that what the whole UFG net worth 19 maintenance case is that the OTS is bringing here? 20 Isn't that it, sir? 21 A. No. 22 MR. VILLA: Your Honor, I'm done with 24508 1 this line of questioning. 2 THE COURT: We'll adjourn until 3 2:00 o'clock. 4 5 (Whereupon, a lunch break was taken 6 from 12:25 p.m. to 2:05 p.m.) 7 8 THE COURT: Be seated, please. We'll 9 be back on the record. 10 Mr. Villa. 11 MR. VILLA: Thank you. 12 Q. (BY MR. VILLA) Mr. Twomey, when we 13 left off, we had just discussed what had prompted 14 your May 13, 1988 letter to United Financial Group 15 asking for the submission of a plan. 16 Do you remember that? 17 A. Yes. 18 Q. And I'd like to take a moment and 19 review the December 20, 1988 S memo, which is 20 Exhibit T8142, Tab 1450. It's, I think, the third 21 document in the red book. 22 A. It's already been opened to it. 24509 1 Q. Would you turn to Page 10 of the 2 document involving capital forbearance? 3 Do you see that, sir? 4 A. Yes, I see the section. 5 Q. The third -- and this is -- this memo 6 is a series of descriptions, supposedly 7 supervisory history, of United Savings. Right? 8 A. Yes. 9 Q. Now, looking at Page 10 of T8142, it 10 describes the May 13, 1988 letter that we had just 11 discussed. It says, quote, "On May 13, 1988, UFG 12 was directed by the supervisory agent to infuse 13 additional equity capital into United which failed 14 to meet its December 31, 1987 minimum regulatory 15 capital requirement." 16 Do you see that? 17 A. Yes. 18 Q. Now, the description of the May 13, 19 1988 letter was not accurate, was it, sir? 20 A. No. The actual letter was not 21 reflected by that sentence. 22 Q. So, now we have two mistakes in the S 24510 1 memo, don't we? 2 A. I'm glad you're keeping count. 3 Q. And this mistake reflected extremely 4 adversely on my clients, didn't it, sir, by 5 suggesting that they had not responded to your 6 letter of May 13, 1988, when, in fact, your letter 7 had not acted -- had not asked them to infuse 8 capital, correct? 9 A. Well, in regards to the way the S memo 10 is laid out, this is in the miscellaneous section. 11 I think that the critical issue in the S memo was 12 the institution was insolvent. 13 Q. So, you didn't pay much attention to 14 this? 15 A. No, sir. That is not what I said. I 16 said this is in the miscellaneous section. I 17 would like to also note that it was included -- 18 the May 13th letter -- as an exhibit to the S 19 memo. So, it wasn't a -- it was, as you call it, 20 an error; but it wasn't in any way trying to 21 mislead somebody in the sense we -- it was an 22 honest mistake the way this sentence is 24511 1 structured. But we did include the same letter as 2 an exhibit to the S memo. 3 Q. You may characterize it as an error. 4 But are you sure you want to characterize it as an 5 honest mistake, sir? 6 A. Yes, John. I would categorize it as an 7 honest mistake. 8 Q. You can read that May 13, 1988 letter 9 and say that it was a direction to anybody to 10 infuse capital? 11 A. No. It was a request for a plan. 12 That's what the letter says. 13 Q. Is there anything in there that's 14 ambiguous, sir? 15 A. In the letter? 16 Q. Yes. 17 A. No. 18 Q. Did you forget about the letter when 19 you wrote this? You actually had it attached to 20 the S memo, didn't you? 21 A. That's what I just said. It is 22 attached to the S memo. 24512 1 Q. If you had the letter in your hand, how 2 could anybody in good faith describe the letter as 3 a direction to infuse capital? There isn't 4 anything in that letter that suggests that, is 5 there, sir? 6 A. No. 7 Q. This was part of the December papering 8 of the file, wasn't it, sir? 9 A. No. 10 Q. Now, sir, in February of 1988, the 11 Federal Home Loan Bank Board received an 12 application for capital forbearance from USAT, 13 didn't they? 14 A. Yes, they did. 15 Q. And if you'll look to B2020, Tab 1406, 16 it's about a little more than halfway through the 17 blue volume. You'll see the request for capital 18 forbearance. 19 Do you recognize that, sir, as the 20 request for capital forbearance that United filed 21 in February of 1988? 22 A. Yes. 24513 1 Q. Now, if you'll look at Page 20 -- 2 Page 25 of the document, it has Imaging 3 No. OW091246. If you pull that out, it should be 4 a spreadsheet that shows United's projected loss 5 on a quarter-by-quarter basis. 6 MR. RINALDI: Could you give me that 7 again? 8 MR. VILLA: Imaging No. OW091246. It's 9 also marked as Page 25 of the exhibit. 10 MR. RINALDI: Thank you. 11 Q. (BY MR. VILLA) Do you have that 12 before you, sir? 13 A. I believe so. 14 Q. And can you see about the fifth line 15 from the bottom what the net operating income is 16 projected for the year 1988 on a 17 quarter-by-quarter basis? 18 A. Yes. 19 Q. And the projections are roughly losing 20 $28 million a quarter. Right? 21 A. Yes. 22 Q. Now, a copy of this memo was sent to 24514 1 you and resulted in the RRC memo that we've 2 already seen, A11093. Right? I believe we have 3 A11093 up there. Let's just display it. 4 MR. VILLA: Excuse me, Mr. Farley. Do 5 we have it blown up? I believe we do. 6 Q. (BY MR. VILLA) And it's this memo to 7 the Regulatory Review Committee of March 9, 1988, 8 an analysis of United's capital forbearance 9 application, correct? 10 A. Yes. 11 Q. Now, after the capital forbearance 12 application was sent to the Regulatory Review 13 Committee, a decision was made to defer acting on 14 the application. 15 Do you recall that, sir? 16 A. Yes. 17 Q. And if you look at the next document in 18 your book, it should be Exhibit B2081. 19 A. Color? 20 Q. It's in your blue book. Exhibit B2081. 21 It's not in evidence yet. 22 Is that a letter dated March 16, 1988, 24515 1 from you to Mr. Berner? 2 A. Yes, it is. 3 Q. And does it indicate that -- 4 MR. VILLA: Your Honor, I move 5 Exhibit B2081 into evidence. 6 MR. RINALDI: I have no objection. 7 THE COURT: Received. 8 Q. (BY MR. VILLA) Now, you're signing 9 this letter under, quote, "specific authority 10 delegated by George M. Barclay." Right? 11 Do you see that down at the bottom? 12 A. Yes. 13 Q. So, I take it that you were responsible 14 for the capital forbearance application under this 15 specific delegated authority. Right? 16 A. I really can't recall why it's 17 structured this way. This would be unusual to 18 have a letter going out and then underneath it 19 "under specific authority delegated by the PSA." 20 I don't recall in a sense how it would go from the 21 RRC to structuring a letter this way. The letter 22 itself reiterates what the recommendations or the 24516 1 action taken by the RRC, but I -- this is not -- 2 normally, you just sign it as a supervisory agent 3 on the usual matters. 4 I don't know why we added this extra 5 information onto the letter. And there has to be 6 a reason, but I just don't recall it. 7 Q. Well, let's deal first with the 8 question of whether you were responsible for 9 handling this application. 10 Does it appear to you from the fact 11 that you are stating under your signature that 12 you're under specific authority delegated by 13 George Barclay that you are responsible for the 14 handling of this application? Is there any doubt 15 in your mind about that, sir? 16 A. I do have a doubt. I just don't -- I 17 just don't recall why this additional phrase was 18 added to the letter. I just -- there's probably a 19 rationale, a reason why it was done that way. I 20 don't recall -- this is special, and I don't 21 recall why it's special. And I don't want to 22 guess either. 24517 1 Q. Would you have put that you were under 2 specific authority delegated by George M. Barclay 3 if you had not been given that authority by 4 George Barclay? 5 A. There has to be a reason why that's 6 added. I don't remember why. It is not normal. 7 Q. That's not my question, sir. My 8 question is: Would you have written letters 9 representing that you had the specific authority 10 delegated by George M. Barclay if you did not, in 11 fact, have such authority? 12 A. No, I would not do that unless there 13 was expressed direction or permission given by the 14 PSA to do this. 15 Q. Okay. So, because you know you 16 wouldn't write letters that had flagrant 17 misstatements in it, can't you tell that you had 18 been given authority by Mr. Barclay to handle this 19 capital forbearance application? 20 A. Mr. Villa, I just don't want to guess. 21 I don't -- this is unusual. I don't remember it. 22 I don't know the rationale why it was done this 24518 1 way. I remember the capital forbearance being put 2 in abeyance -- application put in abeyance until 3 the results of the exam. Other than that, I just 4 don't know. 5 Q. Do you remember the capital forbearance 6 being put in abeyance? 7 A. There was -- again, I just don't really 8 recall. And I guess I'm just not going to guess 9 either. I'm trying to put it together. I just 10 don't recall. I thought this was an application 11 we took to the RRC. And again, I'm only guessing 12 at this point. 13 Q. But when I took your deposition, you 14 couldn't recall the outcome -- couldn't even 15 recall the outcome of the capital forbearance 16 application, could you? 17 Do you remember that? 18 A. I remember. 19 Q. Page 638, Lines 7 through 10 of your 20 deposition. 21 A. Well, John, if I couldn't remember in 22 the deposition, I don't remember now. But what 24519 1 page is it? 2 Q. Page 638, Lines 7 through 10. 3 Question, "Do you recall what happened to the 4 forbearance application, the capital forbearance 5 application that United had filed?" 6 Answer, "No, I don't." 7 Pretty much ambiguous about that. But 8 would it be fair to say that in 1997 when I took 9 your deposition, you couldn't recall what had 10 happened to the capital forbearance application? 11 A. Yes. 12 Q. And now you're telling me you do recall 13 what happened to it? 14 A. I may have been trying to read that 15 RRC. I thought that RRC had to do with the 16 capital forbearance application. 17 Q. What RRC, sir, are you pointing to? 18 Are you talking about the -- 19 A. The summary for regulatory review. The 20 only time you give something to the RRC is when 21 you're requesting an action. I didn't open that 22 page. And honestly, I can't see it very well from 24520 1 here. 2 Q. I'll try and get the last page for you. 3 Well, if somehow you gathered from reviewing this 4 recommendation what had occurred, I'd be 5 interested in finding out. 6 Did you say that by reviewing this 7 recommendation to the RRC, you could tell that it 8 had been held in abeyance? 9 A. No. Honestly right now, John -- I 10 can't even see that board but -- 11 Q. I see. I'm going to bring it out a 12 bit. The recommendation and action plan on 13 Page 3 -- can you see it better now? 14 A. That's good. That's good. 15 Q. It says, "Based on our review of the 16 application, it is recommended that United's 17 application for capital forbearance be approved." 18 Do you see that? Then it goes on. 19 Right? 20 A. Okay. Honestly, it's -- I don't recall 21 that particular RRC, but that's fine. 22 Q. So, in your deposition, you didn't 24521 1 recall how the capital forbearance application had 2 been handled. And now, you think that your 3 recommendation had been to hold it in abeyance 4 until you were shown your recommendation which 5 shows that you had recommended approving it. 6 Right? 7 A. Well, John, I'll correct the record. I 8 was -- as I said, I really didn't recall in the 9 deposition unless there was an RRC out here that 10 could enlighten me. I was trying to read that, 11 and I misread it. I thought I was reading 12 something about holding in abeyance. 13 Q. Okay. That's fine. 14 A. If the RRC said we're going to consider 15 their -- it is recommended that United's 16 application for capital forbearance be approved, 17 okay, that was a recommendation to the RRC. 18 Q. Okay. And now we've seen 19 Exhibit B2081, which is your letter in which it 20 indicates that the application is going to be held 21 in abeyance until the examination is completed. 22 Right? It's the last line of the second 24522 1 paragraph. 2 A. Yes, I see that. 3 Q. Okay. Now, on April 1, 1988 -- let's 4 put this in context. We're dealing with the 5 examination that Ms. Carlton and her staff were 6 conducting in the -- at the end of 1987 and the 7 beginning of 1988. Right? 8 A. Yes. 9 Q. The '87 exam? 10 A. Yes. 11 Q. And by April 1, 1988, you had received 12 several -- indeed, maybe all of the interim 13 reports on that examination. 14 Does that sound right? 15 A. Should, yes. 16 Q. And I'd like you to look at 17 Exhibit A11159. It should be the next document in 18 your book in evidence at Tab 1859. 19 Do you have that, sir? 20 A. Yes. I'm reading it. 21 Q. And is this a memo from you and 22 Ginger Baugh to Danny Thomas and Jim Satterfield 24523 1 dated April 1, 1988, recounting a telephone 2 conversation you had with FSLIC? 3 A. Yes, it does. It appears so. 4 Q. Now, let's look at the third full 5 paragraph. It says, quote, "Neil advised them 6 that our recently-completed examination at United 7 uncovered no major violations except that United 8 has failed its regulatory capital requirement as 9 of 12/31/87 and 3/31/88 due to classified assets, 10 indicated losses on REO, and a return of a portion 11 of general reserves to specific reserves." And 12 then it goes on. 13 Do you see that? 14 A. Yes. 15 Q. So, we have in March of 1988, you 16 recommend granting the capital forbearance. 17 Apparently, the Regulatory Review Committee or you 18 or both of you concluded that the application had 19 to be held in abeyance pending the outcome of the 20 pending examination. Right? 21 A. Right. 22 Q. The first indication of the outcome of 24524 1 the pending examination comes about two or three 2 weeks later in which you tell them that there were 3 no major violations. You tell the people at FSLIC 4 that there are no major violations; is that 5 correct? 6 A. That's what's in the memo. 7 Q. Now, let me ask you to turn to 8 Exhibit T8089. It's a memorandum. It's in 9 evidence at Tab 1380. It's a memorandum of a 10 conversation that Arthur Berner -- I'm sorry -- a 11 meeting that Arthur Berner and several other -- 12 strike that. 13 It's a memorandum dated July 6, 1988, 14 of a meeting that Arthur Berner had with you and 15 others at the Federal Home Loan Bank of Dallas 16 including George Barclay in which Mr. Jenard Gross 17 was also in attendance. 18 Do you see that before you? 19 A. Yes. 20 Q. And in the fifth line down, fifth 21 paragraph down, it describes Mr. Gross asking you 22 a question about the examination. And it reads, 24525 1 quote, "Specifically, he wanted to know whether or 2 not the final results of the Dallas examination 3 had shown anything unusual." Then it says, 4 "Mr. Twomey stated that the examination did not 5 create any surprises and that the final 6 examination report had been forwarded to 7 Washington." 8 Do you see that, sir? 9 A. Yes. 10 Q. So, that means that you would have 11 received the report by that date, July 5th, 1988, 12 had reviewed it, approved it, and sent it to 13 Washington. Right? 14 A. Yes. 15 Q. Now, during this time period, sir, 16 hadn't the other major publicly-held thrifts in 17 Houston all been granted capital forbearances? 18 Well, let me ask you this: Was capital 19 forbearance granted for Franklin, Ben Franklin? 20 A. Wasn't my shop. 21 Q. How about Commonwealth Savings? Is 22 that yours? 24526 1 A. Wasn't my shop. 2 Q. Well, then perhaps you ought to look at 3 Exhibit B2195. It's the next tab. It's the next 4 entry in your book. It's not in evidence yet. 5 Do you see an article from the Houston 6 Chronicle dated May 17, 1988? 7 A. Yes. 8 MR. VILLA: Your Honor, I move B2195 9 into evidence. 10 MR. RINALDI: I'm waiting to get a 11 copy. Thank you. 12 No objection, Your Honor. 13 THE COURT: Received. 14 Q. (BY MR. VILLA) Now, can you tell, 15 sir, by looking at the first column under 16 Mr. Steinmetz' name, the author's name, third full 17 paragraph -- let me see if this refreshes your 18 recollection. "Ben Franklin is the second big 19 Houston thrift to win capital forbearance. 20 Commonwealth Savings Association won a one-year 21 exemption last year. Houston's third 22 publicly-owned thrift, United Savings Association, 24527 1 has an application pending and expects a decision 2 this fall." 3 Do you see that, sir? 4 A. Yes. 5 Q. And does that refresh your recollection 6 that of the three big publicly-held thrifts in 7 Houston, the other two had already received 8 capital forbearances? 9 Does that seem right to you? 10 A. I don't have a problem with the other 11 two receiving capital forbearance. I just didn't 12 know it nor recall it now. 13 Q. Okay. Now, during this time period, 14 you received contacts from a number of very 15 influential politicians about whether the Federal 16 Home Loan Bank of Dallas should be granting a 17 capital forbearance to USAT, didn't you? 18 A. Personally, no. 19 Q. Yes, sir. Personally. 20 A. No. 21 Q. Or through their staffs. That's right. 22 I've got to be very, very literal. I'm not 24528 1 suggesting that Senator Byrd, Congressman Dingell, 2 Cecil Andrus, or any of the rest called you 3 personally. But they do contact people through 4 their staffs. 5 Did you receive contact, sir, from 6 powerful Congressmen specifically on the question 7 of whether or not you should grant capital 8 forbearance to United Savings Association of Texas 9 in the time period May through July 1988? 10 A. I don't recall any. But if there is 11 any Congressional inquiries, they normally are 12 filtered down from the bank board to the PSA to 13 the regulatory affairs office and we respond. 14 Q. Let me ask you to turn and look at what 15 the next document is in your file. It's 16 Exhibit B2180. It should be a letter dated May 5, 17 1988, from governor Cecil Andrus of Idaho. 18 A. Yes. 19 Q. Directed to Danny Wall with respect to 20 United Financial Group and USAT. 21 Do you see that, sir? 22 A. Yes. 24529 1 MR. VILLA: Your Honor, I move 2 Exhibit B2180 into evidence. 3 MR. RINALDI: No objection, Your Honor. 4 THE COURT: Received. 5 Q. (BY MR. VILLA) Now, you can take a 6 look at the letter. The second paragraph 7 references -- it says, "In its 10K for the fiscal 8 year ended December 31, 1987, UFGI reported that 9 the Federal Home Loan Bank was conducting an 10 examination of USAT and that USAT recognizes it 11 failed to meet federal requirements applicable to 12 savings and loans. USAT has filed an application 13 for capital forbearance with the Federal Home Loan 14 Bank Dallas requesting that USAT not be required 15 to comply with federal regulations pertaining 16 to" -- and No. 1 is "the maintenance of USAT's 17 capital above the minimum requirement established 18 by the FSLIC." 19 Do you see that? 20 A. Yes. 21 Q. And then it goes on and talks about his 22 concerns. And then if you'd turn to the second 24530 1 page, the last two paragraphs on the second page 2 read as follows, quote, "To address these 3 concerns, I write you with a single, very specific 4 question. If the FHLB grants forbearance to USAT 5 and UFGI, would that not mean that the federal 6 government would be subsidizing or providing 7 financial guarantees directly or indirectly to 8 Mr. Hurwitz and his takeover activities? In other 9 words, if you grant forbearance, are you not 10 allowing Mr. Hurwitz to direct resources away from 11 shoring up his banking activities and thereby 12 permitting him to direct these resources to an 13 acquisition effort that may not be in the best 14 interest of the company's employees and retirees 15 in north Idaho?" 16 Do you see that, sir? 17 A. Yes. 18 Q. And Governor Andrus copies the 19 Whitehouse and a number of prominent Congressmen, 20 do you see that, as well as the Securities and 21 Exchange Commission? 22 A. Yes. 24531 1 Q. Do you remember, sir, it being brought 2 to your attention by Chairman Wall that he was 3 getting letters from the governor of Idaho asking 4 specifically why you would grant the pending 5 capital forbearance application for USAT? Do you 6 remember Governor Andrus' letter being brought to 7 your attention? 8 A. I remember the governor's letter. Not 9 the letter itself, but I remember the inquiry. 10 And because of Kaiser Tech, there was an 11 acquisition of Kaiser or Kaiser Tech at the time, 12 and Mr. Hurwitz was the acquirer. And that's 13 about it. I knew there was an inquiry. I thought 14 the inquiry had to do with USAT's assets being 15 used to facilitate the Kaiser Tech acquisition. 16 Q. I see. And now by looking at this 17 letter, you realize that the inquiry had, in the 18 words of the governor, "a single, very specific 19 question," close quote, and that is whether or not 20 you should grant the pending capital forbearance. 21 Does that refresh your recollection as 22 to what Governor Andrus was, in fact, focusing his 24532 1 attention on? 2 A. I don't recall seeing the letter at the 3 time. 4 Q. As the supervisory agent with primary 5 responsibility for UFG, wouldn't this have been 6 brought to your attention? 7 A. It should have been. 8 Q. Now, if you'll look at Exhibit B2156. 9 It's the orange tab in, I believe, the red volume 10 in front of you, Volume I. It is the list of 11 questions from the Senate majority leader. 12 Do you have that before you, sir? 13 A. Yes. 14 Q. It's about the -- if you look on 15 Page 2, about halfway down, do you see the 16 question that's a little farther -- I think it's 17 about -- the last full paragraph. 18 A. It starts off "in its 10K"? 19 Q. "In its 10K, UFGI states that when UFGI 20 became a holding company, it agreed to maintain 21 USAT's capital above the minimum FSLIC 22 requirements. However, UFGI does not now have 24533 1 sufficient assets to contribute to maintain USAT 2 above its minimum capital requirements. In light 3 of Mr. Hurwitz' chairmanship and part ownership of 4 UFGI, will the granting of forbearance by FHLB on 5 the capital requirements for UFGI assist 6 Mr. Hurwitz either directly or indirectly in its 7 attempt to gain control of Kaiser?" 8 The next paragraph is "Will the 9 granting of forbearance on any or all of UFGI's 10 requests have the effect of putting the federal 11 government in the position of encouraging or 12 assisting the savings and loan association in its 13 arbitrage or takeover activities?" 14 Do you see those questions, sir? 15 A. Yes. 16 Q. Did you get the point of those 17 questions? 18 A. I understand the questions, yes. 19 Q. Did you get the point that Senator Byrd 20 may not have wanted that application for capital 21 forbearance granted? 22 A. Well, I took it that the senator was 24534 1 asking a question and wanted a response from the 2 regulatory agency. 3 Q. You saw no -- no suggestion in there 4 that perhaps the forbearance ought not to be 5 granted? Nothing in there that would suggest that 6 to you; is that right? 7 A. Well, I mean, the senator is part of 8 the legislative branch of the government. I 9 didn't know he had become the regulator of the S&L 10 industry. 11 Q. You know sorry? 12 A. I didn't know he had become the top 13 regulator of the S&L industry. 14 Are you telling me he was issuing an 15 order? 16 Q. I'm sorry. You probably didn't hear my 17 question. I asked you, sir, whether you could 18 discern from this question what the -- what point 19 the senator was trying to make with Chairman Wall 20 as to whether or not he, Senator Byrd, would like 21 to see this application for forbearance granted. 22 Did. 24535 1 You see any suggestion in there on that 2 point? 3 A. I didn't write this. This is something 4 that was written probably for the Senator and 5 directed to Danny Wall's attention. All I -- all 6 I would end up doing, if it ever filtered down to 7 me, was we prepared a response to it. I'm not 8 here to interpret anything where -- if he's got a 9 question mark, I answered the question. That's 10 all. 11 Q. You're here to explain your actions, 12 sir. And my question to you is: Couldn't you 13 tell, when you got this letter, that the Senator 14 majority leader was telling Chairman Wall he did 15 not want that capital forbearance granted? Isn't 16 that obvious, sir? 17 A. I don't read it into the letter. 18 Q. Okay. You don't read it in there. 19 Now, sir, let's look at Exhibit B2320, 20 which is Tab 1702. It's in the blue book, the 21 next document after the one we have previously 22 been looking at. 24536 1 A. Okay. 2 Q. Do you have before you, sir, a 3 memorandum dated July 20, 1988, from Arthur S. 4 Berner regarding a meeting with you and others? 5 Have you seen that, sir? Do you have 6 it before you? 7 A. Yes. 8 Q. I'd like to direct your attention to 9 the second full paragraph. It reads as follows, 10 "Prior to the meeting, I had informally talked 11 with Neil about the utilization of Westheimer 12 Securities. He told me that he felt it would not 13 be prudent for us to use Westheimer Securities at 14 this time since there continued to be inquiries 15 from the Dingell committee concerning Hurwitz' 16 role at United Savings. He said that he had had 17 some discussions concerning our forbearance 18 application and why the Dallas Bank would consider 19 giving forbearance to United in light of Charles 20 Hurwitz' ownership. Neil thought, therefore, that 21 it would possibly provide Dingell with some 22 ammunition, although he recognized that it would 24537 1 be a cost savings for United to use Westheimer 2 Securities." 3 Do you see that, sir? 4 A. Yes. 5 Q. And you had a number of conversations 6 with members of Congressman Dingell's staff 7 specifically on the question of whether or not it 8 would be a good idea for you to grant capital 9 forbearance to USAT; isn't that right? 10 A. I don't recall that type of 11 conversation. 12 Q. Do you recall, sir, whether John 13 Dingell, when the democrats had control of 14 Congress, was regarded as a powerful politician 15 who was in a critical position to effect banking 16 legislation? 17 A. I know he was a chairman of that 18 particular committee and a senior member of 19 Congress. That's about it. 20 Q. Let me ask you to turn to 21 Exhibit B4289. It's an article from the 22 Washington Post dated April 24, 1988, about three 24538 1 months prior to that telephone call or meeting 2 that we were just discussing. 3 It's entitled "Key to bank 4 deregulation: Dingell's help." 5 Do you see that, sir? 6 A. Yes. 7 MR. VILLA: Your Honor, I move 8 Exhibit B4289 into evidence. 9 MR. RINALDI: No objection. 10 THE COURT: Received. 11 Q. (BY MR. VILLA) Do you recall now, 12 sir, after looking at this -- and you may take a 13 look at it in any detail you like -- that 14 Congressman Dingell's committee and his particular 15 views were seen as the key to getting the new 16 banking legislation passed? 17 Does that refresh your recollection on 18 that issue? 19 A. No. 20 Q. Let me ask you to turn into the 21 document to the last page of that exhibit at the 22 top of the left-hand column. It was an awkward 24539 1 way to copy it the way we found it in the 2 microfiche. 3 It says, "With the staff of 150, his 4 committee is among the largest and most powerful 5 in Congress." 6 Do you see that, sir? Top left-hand 7 corner under "business activities will be 8 regulated." Last page. 9 A. I see the sentence. 10 Q. Did anybody from the Federal Home Loan 11 Bank Board in Washington talk to you about the 12 importance of Congressman Dingell in the pending 13 banking legislation and the fact that he was the 14 key to it? Did anybody bring that to your 15 attention? 16 A. No. 17 Q. How about his -- how about his staff 18 members? When they talked to you about the 19 capital forbearance application, did they bring to 20 your attention at all the fact that Congressman 21 Dingell was the key to getting through whatever 22 legislation was being offered then by the 24540 1 administration? 2 A. First, nobody -- I can recall nobody 3 from Dingell's staff talking to me about a capital 4 forbearance application. And on top of that, I 5 don't remember anybody from Dingell's staff, when 6 they talked to me, talking about -- when they were 7 making their information requests mentioning how 8 powerful they are. 9 Q. Well, we just looked at a memo in which 10 you were recounting discussions from staff 11 Congressional -- it says here, quote -- said that 12 he had had some discussion -- the prior sentence 13 refers to "inquiries from Dingell committee 14 concerning Hurwitz' role at United." And then it 15 says, "He had had some discussions concerning our 16 forbearance application, why the Dallas Bank would 17 consider giving forbearance to United in view of 18 Charles Hurwitz' ownership." And then it goes -- 19 the next sentence involves the Dingell committee 20 again and giving them further ammunition. 21 Are you telling us that you didn't have 22 discussions with Mr. Chessom of Congressman 24541 1 Dingell's committee about whether or not it would 2 be a good idea to grant the capital forbearance 3 application for USAT? 4 A. No. What I recall is that Jack Chessom 5 had other requests for information regarding USAT. 6 Q. He had other requests for information, 7 and what were those other requests? 8 A. Basically, he had a request regarding 9 junk bond purchases, how long they might have been 10 held at USAT, and were there any other 11 relationships, I believe, with other savings and 12 loans. I think he mentioned two. And again, it 13 had to deal primarily with the junk bond 14 activities. 15 Q. So, who was it that was contacting you, 16 sir, if it wasn't Dingell's staff? Was it Senator 17 Metzenbaum? 18 A. I just don't recall. All I recall is 19 that member of Dingell's staff contacting me with 20 several inquiries regarding junk bonds, and that's 21 principally what I remember. 22 Q. How about Brian McTigue? Did you ever 24542 1 deal with Brian McTigue? 2 A. I think he was also on that same 3 committee. 4 Q. You ever have any communications with 5 him about USAT? 6 A. Regarding USAT, yeah. He had, I 7 believe, the same type of request Jack Chessom 8 would have. In fact, I think he succeeded him or 9 something. One person left. One person came. 10 I'm not sure of the succession. 11 Q. So, as you're sitting here today, you 12 can't remember which Congressional -- which 13 Congressional staffers were calling you about the 14 capital forbearance application. But you can say 15 with some assurance that it be wasn't members of 16 Congressman Dingell's committee. 17 Is that what you're telling us? 18 A. No. I -- okay. Maybe I didn't make 19 myself clear. I believe -- you mentioned McTigue. 20 I haven't thought of his name in a long time, and 21 Jack Chessom. I thought they are members of 22 Congressman Dingell's committee. 24543 1 Q. But you just told me, if I understood 2 you correctly, that they did not talk to you about 3 the capital forbearance application. 4 A. I don't recall that they did. 5 Q. You can recall all these other fingers 6 that they talked to you about, but not capital 7 forbearance application; is that right? 8 A. The only thing I recall that they had 9 inquiries about were junk bonds, whether certain 10 issues were being currently held by USAT, and 11 whether there was some activity trading junk bonds 12 with two other thrifts. 13 Q. Do you recall, sir, Mr. Dingell's 14 reputation in Washington as being one of the most 15 powerful men in House of Representatives? 16 A. He was a key Congressman, head of a 17 major committee. That's about all I can recall. 18 Q. Do you remember him being referred to 19 as one of the most feared and effective members of 20 Congress? 21 A. I think that was in one of the articles 22 you showed me. 24544 1 Q. You would agree with those 2 characterizations of Congressman Dingell when he 3 was the head of the subcommittee, I think, on 4 operations, independent agencies of the House 5 commerce committee, I believe. Remember, he used 6 to terrorize independent agencies? 7 A. I can remember several times on C-Span 8 where he was doing something just like that, yes. 9 Q. Now, let's look at the S memo, which is 10 Tab 1450, T8142. It's a brown tab in Volume I, 11 which is the red book there. I'd like you to turn 12 to Page 8. 13 Let me direct you to the second full 14 paragraph. "On April 25, 1988, questions were 15 submitted by Senator Robert C. Byrd of the 16 Committee on Appropriations, Subcommittee on HUD 17 and Independent Agencies, to Chairman Danny Wall 18 based on the aforementioned testimony." And it's 19 referencing Mr. Hurwitz. "These questions were 20 forwarded to the Federal Home Loan Bank of Dallas, 21 responses prepared, and returned on May 16, 1988, 22 under the principal supervisory agent's signature 24545 1 to Ms. Nancy Lytle of the Office of General 2 Counsel. Basically, the inquiries are the 3 recurring concern that the granting of 4 forbearances to UFG or United (specifically 5 capital forbearance, a waiver of the broker 6 deposits limitation, or a waiver of the 7 loans-to-one-borrower regulation) would have the 8 effect of placing the federal government in the 9 position of encouraging or assisting United, 10 Mr. Hurwitz, or his company in their takeover or 11 arbitrage activities)." 12 And then the next paragraph describes 13 what the prepared response was in which the agency 14 denied that the granting of any forbearances would 15 put the government in a position of assisting 16 Mr. Hurwitz. 17 Do you see that, sir? 18 A. Yes. 19 Q. Now, you were involved in the 20 preparation of this S memo. I'm going to ask you, 21 sir, when they say that there was recurring 22 concern, inquiries had the recurring concern in 24546 1 reference to Congressional inquiries, which 2 Congressional inquiries had the recurring concern 3 that it would be a -- it would be -- strike that. 4 Which Congressional inquiries expressed 5 the recurring concern about granting a capital 6 forbearance to United or UFG? 7 A. The only ones that I'm aware of are the 8 ones you've pointed out to me today, and that was 9 where Senator Byrd made inquiries and the governor 10 of the State of Idaho made inquiries. I don't 11 recall any others at this present time. 12 Q. Now, the date of your memo about -- the 13 date of the memo about your call with Arthur 14 Berner was July 20, 1988. 15 Do you recall that? 16 A. No. Is there a tab for it or 17 something? 18 Q. If you look in the blue book under 19 B2320, the fifth-to-the-last document. 20 Do you see the memo? 21 A. Tab 1702 or something? 22 Q. Tab 1702, B2320. 24547 1 A. I see a July 20, 1988 memorandum by 2 Art Berner. 3 Q. And it reflects a conversation you had 4 with him on July 19th. 5 Do you see that? 6 A. Yes. 7 Q. Just to bring this to a conclusion, 8 would you look at what's been marked as B2341? 9 It's the second-to-the-last document in that book. 10 It hasn't yet been introduced. 11 Is that a letter from you dated 12 July 29, 1988, ten days after the conversation, to 13 Arthur Berner with respect to their request for 14 capital forbearance? 15 Is that what it is, sir? 16 A. Yes. 17 MR. VILLA: Your Honor, I move 18 Exhibit B2341 into evidence. 19 MR. RINALDI: No objection, Your Honor. 20 THE COURT: Received. 21 Q. (BY MR. VILLA) And sir, you're 22 writing this under the specific authority 24548 1 delegated by George M. Barclay. Right? 2 A. Right. 3 Q. And during this time period, wasn't the 4 Regulatory Review Committee dissolved? 5 A. I believe so. 6 Q. And you direct United to withdraw its 7 capital forbearance application. Right? 8 A. (Witness reviews the document.) 9 Q. Is that correct, sir? 10 A. I was looking for where you came up 11 with the direct. What I see is "Therefore, the 12 application is being withdrawn and returned to the 13 institution in order to complete the necessary 14 revisions." 15 Q. Well, isn't -- I mean, historically, 16 hasn't the Federal Home Loan Bank of Dallas, when 17 it does not want to grant an application, it 18 advises the applicant that their application is 19 being withdrawn and returns it to them? Didn't 20 you do that in other cases with respect to USAT 21 and other institutions here? 22 A. I thought normally, we'd either reject 24549 1 an application, approve the application, or deem 2 the application approved. If they missed the time 3 frame, in some cases, institutions would withdraw 4 the application themselves. 5 Q. With respect to the subordinated debt 6 application, didn't you request that USAT withdraw 7 its application? 8 Do you remember that in January of 9 1987, a letter requesting that USAT withdraw its 10 application for subordinated debt? 11 A. Wasn't that more in line that the 12 negotiations regarding the new net worth 13 maintenance agreement had not gone through? 14 Q. Sir, do you recall that the Couch 15 Mortgage problem came up with respect to the sub 16 debt application and Joe Selby directed Gerald 17 Williams to withdraw the application? 18 Do you recall that or not? It's in our 19 record; so, we have the record of this proceeding. 20 A. I don't mind rendering -- I just 21 independently couldn't remember, and I knew the 22 application was withdrawn. I just didn't know -- 24550 1 but I thought the reason it was withdrawn is 2 because the failure of the negotiations regarding 3 the sub debt. You know, as far as an alternative 4 net worth maintenance. 5 Q. Now, sir, this letter that we're 6 looking at, Exhibit B2341, you give the reasons 7 why the application is being withdrawn and 8 returned. It doesn't say anybody is asking for it 9 to be withdrawn and returned. You're giving 10 reasons why it's being withdrawn and returned. 11 Isn't it clear to you, sir, it's your 12 decision here? You are rejecting the application 13 and sending it back, and you are giving your 14 reasons in the first paragraph. 15 Do you deny that? 16 A. No. The reasons are in the first 17 paragraph. However, if I point you to the bottom 18 of the letter again, there seems to be an 19 expressed -- this letter is different because 20 again it has that language "supervisory agent 21 under the specific authority delegated by George 22 M. Barclay, PSA." 24551 1 Again, there is a reason this is here. 2 I don't remember why the letter is structured this 3 way. Other applications we approve, other letters 4 we send out do not have this. And actually, in 5 most cases, it's the PSA that approves direct 6 investment applications, you know, growth 7 applications, and so forth. Now, I don't remember 8 why it's structured this way. 9 Q. I didn't ask you why it was structured 10 that way, sir. My question to you is: Isn't it 11 clear that the party making the decision is you 12 denying the application, not USAT saying they want 13 to have it withdrawn? 14 A. This is my letter to Art Berner for 15 United regarding capital forbearances. And -- 16 Q. Can you answer my question? I 17 understand what the letter is. 18 A. My letter says, "Therefore, the 19 application is being withdrawn and returned to the 20 institution in order to complete the necessary 21 revisions." And the revisions that are discussed 22 are in the first paragraph. 24552 1 Q. Sir, it was your decision. You're a 2 stand-up guy. Take responsibility. 3 You turned down the application, didn't 4 you? 5 A. Again, I don't recall, prior to this 6 letter going out, what the internal discussion may 7 have been at the Federal Home Loan Bank of Dallas. 8 Q. It says "specific delegated authority." 9 There is no place to run, sir. You made the 10 decision. 11 A. I'm not running. I signed the letter. 12 Q. You made the decision, and you returned 13 it, didn't you? 14 A. Again, I don't recall the internal 15 discussions prior to this letter being issued by 16 the Federal Home Loan Bank of Dallas which I 17 signed under the specific authority of the PSA. I 18 don't recall. The letter was sent. And it 19 basically says you may -- you know, you may submit 20 the application with the necessary revisions. 21 Q. You don't want to take responsibility 22 for the letter, sir, because you realize that the 24553 1 Congressional concerns about granting the capital 2 forbearance have now all come to light. Isn't 3 that fact? 4 A. No. 5 Q. When you were given your letter that 6 United's financial position has weakened as the 7 reason for it, do you see that? 8 A. Yes. 9 Q. United told you in their application 10 that they were losing $110 million a year. And 11 you wait five months to act on their letter, and 12 then you come to the realization that their 13 financial position has weakened from the time they 14 made the application. 15 Is that about a summary of the basis on 16 which you turned down this application, sir? 17 A. I believe the basis for asking for the 18 revisions are in the first paragraph. 19 Q. Do you deny, sir, that Congressional 20 pressure affected your supervision of United 21 during the year 1988? 22 Do you deny that fact? 24554 1 A. I don't recall the Congressional 2 pressure you're alluding to. 3 Q. Why don't you just give me an answer 4 under oath. 5 Do you deny that Congressional pressure 6 affected your supervision of United during the 7 year 1988? 8 A. I don't recall the Congressional 9 pressure that you're alluding to, period. 10 Q. Did any Congressional pressure affect 11 your supervision of United during the year 1988? 12 A. Congressional inquiries caused me to 13 ask additional questions, be concerned that if 14 something was to happen at United, go back to that 15 prior memo where Art is talking regarding -- I 16 don't remember the relationship between that 17 investment company and Hurwitz. But if that was 18 an affiliated party and somehow they were doing 19 business with United, quite frankly, I was very 20 happy to tell in most cases -- all the cases I can 21 remember that the junk bond activity that the 22 Dingell committee thought was running through 24555 1 United, we had no evidence of. 2 Q. So, in looking at this letter, B2341, 3 your judgment is either USAT asked to withdraw its 4 capital forbearance application that it had been 5 pushing for five months or, alternatively, 6 somebody else directed you to sign it; but you 7 didn't do it. 8 Is that about where we come down on the 9 question of whose responsibility it was? 10 A. I signed the letter, but I don't 11 remember the internal discussion prior to this 12 letter going out. 13 Q. Now, sir, let's go back to Mr. Berner's 14 memo and this discussion of Westheimer Securities 15 because you just raised that. That's 16 Exhibit B2320, Tab 1702. It's the sixth from the 17 back of this document. 18 Do you see it? 19 A. Yes. 20 Q. It's the second full paragraph. And 21 particularly, the last sentence where it says, 22 "Neil thought, therefore, that it would provide -- 24556 1 possibly provide Dingell with some ammunition, 2 although he recognized that it would be a cost 3 savings for United to use Westheimer Securities." 4 Do you see that? 5 A. Yes, sir. 6 Q. So, here, United is proposing a 7 transaction that would save them money. And 8 you're telling Mr. Berner, "Don't do it because 9 the Congressional pressure is too hot and it would 10 give them more ammunition." 11 Isn't that about the sum of it, sir? 12 A. I don't remember the particular 13 transaction, but that is the sum of it. 14 Q. Do you think that it is appropriate for 15 a supervisory agent to try to affect the 16 operations of a thrift and to suggest to them that 17 they not pursue cost-saving operations because of 18 the Congressional pressure that is being focused 19 upon you? 20 Do you think that's appropriate, sir, 21 as a supervisory agent? 22 A. I know I haven't answered the question. 24557 1 But the bottom line here is I was just advising 2 Art of a concern, that despite whatever 3 cost-saving measure might have resulted from that 4 particular transaction which I don't recall, there 5 might be other concerns raised or whatever they 6 are. I don't recall. I don't remember the 7 transaction; so, I can't really even guess on the 8 particulars. 9 Q. Do you remember that in the fall of 10 1988, that the Federal Home Loan Bank of Dallas 11 was extremely sensitive to public relations and 12 adverse publicity? 13 Do you remember that, sir? That it was 14 so sensitive that it was willing to expose the 15 taxpayers to greater financial losses in order to 16 avoid adverse public relations? 17 A. Well, due to the S&L problem in Texas, 18 there was more public sensitivity because of all 19 the news articles. But I can't agree with the 20 last part, that we put the taxpayer or the FSLIC 21 at harm. 22 Q. Let me show you what's been marked as 24558 1 Exhibit A11163. It's a document you were shown in 2 your deposition. It's a memorandum from Jon Scott 3 to George Barclay dated October 27, 1988. And it 4 says something like -- in the upper right-hand 5 corner -- "Denise, copy cover letter only to Ken 6 and Marc." And underneath, it's signed "Neil." 7 Do you see that, sir? 8 A. Yes. 9 Q. And is that your signature? 10 A. That's my name, my initials, yes. 11 MR. VILLA: Your Honor, I move A11163 12 into evidence. 13 MR. RINALDI: No objection. 14 THE COURT: Received. 15 Q. (BY MR. VILLA) Now, sir, we've looked 16 at this before. Take a look at this and tell me 17 whether, sir, Jon Scott, one of the vice 18 presidents of the then Federal Home Loan Bank of 19 Dallas, is recommending to George Barclay, the 20 president of the Federal Home Loan Bank of Dallas, 21 that the government should cover or guarantee the 22 value of junk bonds for acquirers in the Southwest 24559 1 Plan because of a concern -- and it's in the 2 second full paragraph -- that after the 3 acquisition occurred, the market might go down. 4 The acquirers would suffer a loss, and it would be 5 a public relations catastrophe for the Federal 6 Home Loan Bank of Dallas. 7 Do you see that? 8 A. Yes, I do. 9 Q. The concern there that Mr. Scott is 10 expressing is if we don't give a guarantee to the 11 acquirer, the acquirer might buy this asset, then 12 hold it too long, not sell it. The market would 13 go down. The acquirer would suffer a loss, and 14 the new acquiring institution might go out of 15 business. And then everybody would look at the 16 Federal Home Loan Bank of Dallas and say, "You've 17 blown it again," and it would be a public 18 relations catastrophe. 19 That's exactly what he's saying, isn't 20 it, sir? 21 A. He's alluding to the fact that there is 22 a dramatic drop in market prices for junk bonds, 24560 1 that no matter -- basically, the infused capital 2 could be wiped out on the newly-acquired 3 institutions once the FSLIC deals go through. 4 Q. And then the newly-acquired 5 institutions from people like Mr. Ranieri -- in 6 fact, United is specifically mentioned -- might go 7 belly up and it would be a public relations 8 catastrophe for your regulatory team because it 9 would look like you blew it again. And this time, 10 you can't point to the Texas S&L crisis. To avoid 11 that, what he says is, "Let's go and guarantee 12 more of their assets, put the government dollars 13 behind them so we won't have a PR catastrophe for 14 our supervisory group here." 15 Isn't that what he's saying? 16 A. I believe he's addressing this to 17 George Barclay so George can deal with this issue 18 in Washington. 19 Q. And that's what he's suggesting -- 20 that's exactly what he's suggesting that George 21 Barclay do. Right? 22 A. I think he -- at this time, Jon Scott 24561 1 wasn't on the corporate side of the bank. He was 2 the head of capital markets. And basically, the 3 top examiner for capital markets in the district. 4 And he's advising the PSA of a concern. That's 5 all. 6 Q. Is there any other reasonable 7 interpretation of this document that you'd like to 8 offer the Court? 9 A. As far as I see, he's just advising the 10 PSA of a problem that could happen. 11 Q. And the problem is that the public 12 relations for your group of supervisors might turn 13 bad if the acquirers for these institutions 14 suffered a loss because of their own judgments on 15 whether or not to hold the junk bonds. Right? 16 A. I mean, he's basically saying junk 17 bonds go down, then the value goes down. They are 18 mark-to-market and that would be reflected. I 19 don't have a problem with what he's saying. It's 20 a concern, and he's raising it to the right person 21 at the bank who can raise it with the right people 22 in Washington. 24562 1 Q. Sir, when you did the supervision of 2 United and the other big thrifts in Texas, 3 particularly in late 1988, you had your finger to 4 the wind, didn't you? You wanted to know which 5 way the wind blew: Congressional winds, public 6 relations winds? The supervision be damned. The 7 taxpayers' money be damned. 8 That's what you were doing right here, 9 isn't it? 10 A. That's what I'm doing right here? 11 Q. Okay. That's what Mr. Scott is 12 suggesting right here. Right? 13 A. No. I don't see it that way. 14 Q. Well, maybe we see it different. 15 Now, sir -- Your Honor, I have about 25 16 minutes in my last series of questions. 17 Would the Court prefer I do it now or 18 take a break? 19 THE COURT: We'll take a recess. 20 MR. VILLA: Thank you. 21 22 24563 1 (Whereupon, a short break was taken 2 from 3:11 p.m. to 3:35 p.m.) 3 4 THE COURT: Be seated, please. We'll 5 be back on the record. 6 Mr. Villa, you may continue. 7 MR. VILLA: Thank you, Your Honor. 8 Q. (BY MR. VILLA) Mr. Twomey, you were 9 USAT's supervisory agent for a little over three 10 years. Right? 11 A. Right. 12 Q. And you would agree with me that once 13 you became familiar with USAT in December of 1985, 14 there was nobody at the Federal Home Loan Bank 15 Board who was better qualified to express an 16 opinion on the view of the capability of 17 management than you are. Right? 18 A. Yes. 19 Q. And you received information from time 20 to time over the three years and one month that 21 you were the supervisory agent for USAT on those 22 topics that I have set up -- that I have written 24564 1 on the board after we went through the Federal 2 Home Loan Bank Board's -- Federal Home Loan Bank 3 of Dallas' supervision of USAT; that is to say, 4 the cause of USAT's problems, USAT's business 5 plans, the source of earnings for USAT, and 6 whether or not USAT was capital deficient. Right? 7 You would receive information and input 8 on those four issues during that three-year time 9 period. Right? 10 A. Yes. 11 Q. Now, in connection with the 12 applications that were submitted to the Federal 13 Home Loan Bank of Dallas from time to time, you'd 14 be required to evaluate the applications and to 15 evaluate management, as well. Right? 16 A. Yes. 17 Q. I'd like you to look first at 18 Exhibit A1101, Tab 256. It's the -- A11011, 19 Tab 256. It's the red tab in Volume II, and it is 20 the memorandum from Mr. Selby, which is the green 21 book. 22 A. Memo to Frank Haas? 24565 1 Q. Yes, sir. I'd like you to turn to 2 Page 8 of that, would you, please? 3 A. Page 8. 4 Q. Down at the bottom, it says, quote, 5 "There is no indication that the institution does 6 not qualify on the basis of its management. The 7 management of United is considered to be 8 acceptable in as much as United is routinely 9 approached regarding the utilization of its 10 present management for management contracts with 11 problem institutions. It should be noted that 12 many of the current senior management team of 13 United and UFG are also the senior management of 14 MCO and Federated." 15 Do you see that? 16 A. Yes. 17 Q. Now, you told us, I think, in response 18 to a question I had about George Barclay and his 19 view of net worth about management consignment 20 agreements. Right, where one institution would 21 manage another? 22 A. Yes. 24566 1 Q. And is that what's referred to in the 2 first two paragraphs of this memo by Mr. Selby? 3 A. The first two paragraphs? 4 Q. First two lines -- first two sentences 5 of the paragraph I just read to you, that United's 6 management was being regularly approached -- 7 routinely approached to run other institutions. 8 Is that what's being referred to? 9 A. It would only be the MCO program, MCO, 10 management consignment program. 11 Q. MCP? 12 A. MCP, yes. 13 Q. It's the MCP program. We'll talk about 14 MCO in a second. 15 So, the first two sentences of that 16 paragraph are referring to the fact that United 17 was so well thought of that their management was 18 routinely approached to run other problem 19 institutions, at least as of mid-1986. Right? 20 A. They were considered, yes. 21 Q. What does "approached" mean? Wouldn't 22 a natural reading of the word "approach" mean that 24567 1 they were being asked to do it? 2 A. No. I think it was more of a bidding 3 process at that time. 4 Q. Oh, I see. So, they would find the 5 well-qualified management, put out problem 6 institutions for them to bid on management 7 contracts, and the lowest bid would win and that 8 institution would then manage the problem thrift? 9 A. No. I don't -- I don't readily recall 10 exactly the way it worked. I had two institutions 11 that were already in that program when I started 12 with the Federal Home Loan Bank. I really don't 13 recall -- beginning in 1986 and onward, I don't 14 recall any more MCP programs. But they could have 15 been approached in prior years, 1985 and 1984. I 16 just don't know. 17 Q. I see. In the last sentence, "It 18 should be noted that many of the current senior 19 management team of United and UFG are also the 20 senior management of MCO and Federated." 21 Do you see that? 22 A. Yes. 24568 1 Q. So, that was well-known at the Federal 2 Home Loan Bank of Dallas during this time period. 3 Would you agree? 4 A. Yes. 5 Q. And I see no objection to that. I 6 don't see any criticism that they are sharing 7 current management with Federated and MCO. Right? 8 A. I don't see a criticism. 9 Q. And if you had been critical of that 10 fact, you would have made sure it was in there. 11 Would you agree with me, sir? 12 A. Well, I probably wouldn't be putting it 13 in this type of memo. It would be carried -- if I 14 had a criticism of that relationship, I'd carry it 15 probably in another avenue. 16 Q. Aren't you evaluating management in 17 here? 18 A. Again, it's my understanding this is a 19 draft memo. You've said it's been submitted. I'm 20 just looking at what's here in front of me. 21 Q. Let's not argue about draft or not 22 draft. Okay? I think we've taken that out of the 24569 1 case. It's been admitted in this case because we 2 have independent evidence that it was sent. 3 Now, my question to you, sir, because 4 you testified in your deposition that you would 5 have reviewed this document and approved it before 6 it went to Mr. Selby and that you would have 7 agreed with it. 8 Now, my question to you, sir, is: If 9 you had had criticism of the relationship between 10 United and UFG, wouldn't you have put it in this 11 document? 12 A. Sitting here today, I don't know how 13 I'd be handling it back in 1986; but there is no 14 criticism in the language in the document before 15 me. 16 Q. I understand that. That, we can agree 17 on. 18 My question to you, sir, is: When you 19 draft a document for the head of supervision of 20 the Federal Home Loan Bank of Dallas, if you are 21 critical of the relationship between the senior 22 management team of United and UFG and the senior 24570 1 management of MCO and Federated, wouldn't you put 2 it in the document? 3 A. If I had a concern, I would have 4 expressed it in some manner or form, yes. 5 Q. You would have put it in the document, 6 wouldn't you, sir? 7 A. I don't know if I would have put it in 8 this document. I would have probably -- if I had 9 a concern, it would have been expressed some way, 10 some manner, some means, somehow. I'm not sure if 11 I even had that concern when this document was 12 prepared. 13 Also, as you say, this was sent. I 14 have problems with that when it's dated -- it has 15 a 2986 date. 16 Q. Sir, I asked you to assume this 17 document has been sent. 18 Can you do that for me? 19 MR. RINALDI: Well, that's not what -- 20 you said -- 21 A. I cannot assume this document was sent 22 with the obvious typos in it. 24571 1 MR. RINALDI: But you have said twice 2 on the record that this is a document that you 3 have evidence has been sent. And I object first, 4 sir, on the grounds that the cover memo that's 5 attached to it indicated that it was a draft and 6 that the draft was being submitted. But perhaps 7 I've misread the document. 8 MR. VILLA: Your Honor, Exhibit B1125 9 is a letter dated July 24, 1986. It's in evidence 10 at Tab 1519. 11 Q. (BY MR. VILLA) It's a letter from 12 you, Mr. Twomey, to Patrick Berbakos. 13 Do you see that, sir? 14 A. Yes. 15 Q. Let's look at the imaging numbers. You 16 see the date of July 24, 1986? What's the date on 17 this one? See the date is July 24, 1986? 18 A. I see the date on the memo and on 19 the -- 20 Q. And on the letter, as well. Right? 21 A. Yes. 22 Q. And do you see the imaging numbers, 24572 1 OW120678? 2 A. Yes. 3 Q. Do you see where this one starts and 4 see where it stops? It stops at 677. 5 A. 676. 6 Q. 676? The cover is 677, and they were 7 put in reverse order. And this is 678. 8 A. I see. 9 Q. Okay. 10 MR. RINALDI: I apologize, Mr. Villa. 11 I thought you were referring to a different cover 12 letter. It's on my document. 13 Q. (BY MR. VILLA) So, have we gotten the 14 draft issue resolved, sir? 15 A. You've explained Bates -- 16 Q. Thank you. 17 A. -- numbers to me. I still have a 18 problem that this memo in this form would go to 19 Joe Selby for signature to be sent to Washington. 20 Q. You don't think you would do work quite 21 that sloppy; is that right? 22 A. When you have a draft, you correct a 24573 1 draft before it goes out. A memo of this form -- 2 this memorandum for Joe Selby's signature could 3 have gone out. I just don't recall -- you know, 4 I'd like to see that document. But John -- okay. 5 Let's speed this up for argument's sake. Assume 6 that the language didn't change, that the document 7 that was actually sent to Patrick Berbakos. And 8 assume the language is the same as what we've been 9 referring to here at I think you said Page 8. 10 Q. If you had a problem with the 11 management of MCO and United, wouldn't you put it 12 in the document that you were giving to your 13 superior to send to Washington, sir? 14 A. Yes. 15 Q. Thank you. And you don't see anything 16 in this document that raises any criticism about 17 the fact that MCO and Federated are sharing 18 management with United and UFG, do you? 19 A. No. 20 Q. And from that, can you conclude, if you 21 followed the procedures that you were following at 22 the time, that you did not have a criticism of 24574 1 that relationship? 2 A. Yes. 3 Q. Now, sir, you would also receive -- as 4 the supervisory agent, you would also receive 5 input from the examination staff; is that right? 6 A. Yes, sir. 7 Q. And Ms. Carlton was the 8 examiner-in-charge of the '86 exam and the '87 9 exam. Right? 10 A. Yes. 11 Q. She expressed her views to you in 12 interim examination reports and in final 13 examination reports, as well. Right? 14 A. Yes. 15 Q. Let's look at A14069, Tab 1496. It's 16 the yellow tab in the blue book. 17 Let me direct your attention -- you 18 should have before you a memo dated January 15, 19 1988, from Vivian Carlton to you. 20 A. Yes. 21 Q. And it's an interim examination report? 22 A. Yes. 24575 1 Q. And this is about halfway through her 2 second federal examination of United. Right? 3 A. Yes. 4 Q. Let me direct your attention to 5 Page OW128897 where it has the evaluation of 6 management. 7 First of all, at the top, it says, 8 "USAT has experienced substantial turnover in key 9 personnel and directors since the preceding 10 examination. Of the 12 officers departing the 11 association, six were terminated and the remaining 12 six resigned." 13 Do you see that? 14 A. Yes. 15 Q. And do you recall that Ms. Carlton 16 brought to your attention that 12 officers had 17 departed the association since the conclusion of 18 the prior examination and that that was a matter 19 of concern to her? 20 A. Yes. 21 Q. Now, at the bottom of the management 22 paragraph, there is a line that says, quote, 24576 1 "Although the association appears to have a 2 capable management staff, they have not adopted a 3 formal written business plan." 4 Do you also see that? 5 A. Yes. 6 Q. And would you take that opinion into 7 consideration in reaching your judgments about 8 USAT's management, the view that Ms. Carlton has 9 that USAT has a capable management staff? 10 A. Yes. 11 Q. Let me ask you to look at 12 Exhibit A11093, and we're going to put it up for 13 you because it is the evaluation of the capital 14 forbearance application for which you'd been given 15 specific delegated authority. 16 And do you recall, sir, that one of the 17 issues that was under consideration that had to be 18 considered in a capital forbearance application is 19 whether the institution was well-managed? 20 Can you see that, sir, that one of the 21 issues is whether the institution was 22 well-managed? 24577 1 A. Yes. 2 Q. And this is the analysis in your 3 memorandum. "United marginally meets this 4 requirement. The institution has a wealth of 5 management expertise at all levels and in every 6 area. Operating expenses are very low compared to 7 the peer group in the State of Texas." 8 Do you see that sentence about 9 operating expenses? 10 A. Yes. 11 Q. And do you remember we went through 12 that Sheshunoff analysis yesterday comparing 13 United's operating expenses to the rest of the 14 large Texas thrifts? 15 Do you remember that? 16 A. Those were officers' compensation 17 expenses to income ratios, yes. 18 Q. Right. Total operating income? 19 A. Yes. 20 Q. And that would be consistent with the 21 observation you're making in this memorandum. 22 Right? 24578 1 A. Well, operating expenses to -- that's a 2 ratio called operations -- operating expenses to 3 average assets. So, it's slightly different. 4 Q. Slightly different. But you would 5 expect similar trends. Right? 6 A. Yeah. 7 Q. Next, "Dividends had not been paid to 8 shareholders since 1985." And that means USAT has 9 not dividended any money up to UFG since 1985. 10 Right? 11 A. Yes. 12 Q. "We have no indications of insider 13 abuse or conflicts of interest." Right? 14 A. Right. 15 Q. And that -- at this point in time, 16 you've told us that there have been all kinds of 17 Congressional inquiries and SEC inquiries 18 involving whether or not Mr. Hurwitz or any of his 19 colleagues are somehow abusing the institution. 20 And at this snapshot, March 9, 1988, you come to 21 the conclusion there are no indications of insider 22 abuse or conflicts of interest. Right? 24579 1 A. That was my opinion at the time. 2 Q. Then "Management seems very 3 knowledgeable regarding laws and regulations and 4 we have no reason to believe that any actions have 5 been taken solely for the purpose of qualifying 6 for capital forbearance." 7 That was your conclusion, as well? 8 A. Yes. 9 Q. Now -- then it goes on to criticize the 10 lack of savings and loan experience in the senior 11 management group. Right? 12 A. Yes. 13 Q. And it particularly states that in the 14 1986 examination report, "Examiners noted that 15 senior management seemed to lack a clear 16 understanding of the operations of the overall 17 institution and the same comments have been made 18 verbally during the current examination. Because 19 of this lack of cohesiveness, management was rated 20 4 based on the May 26, 1986 examination." 21 Do you see that? 22 A. Yeah. 24580 1 Q. Now, when you said that you downgraded 2 management from 3 to 4 for lack of cohesiveness, 3 what does "cohesiveness" mean in that context? 4 A. I don't recall. 5 Q. Now, the last paragraph says, "While we 6 do question senior management's general 7 understanding of the regulated industry, we 8 believe that the management in the various lower 9 levels at United are fully capable of implementing 10 and adhering to the capital plan presented with 11 this forbearance application." Right? 12 A. Yes. 13 Q. Now, this statement that there is 14 something lacking at the senior management levels 15 of United, savings and loan experience, that's the 16 hole in management that was addressed by the 17 hiring of Larry Connell. Right? 18 A. Yes. 19 Q. So, apart from that hole in management 20 which was addressed by Larry Connell -- strike 21 that. 22 Now, this evaluation was done in order 24581 1 to make a determination in March of 1986 -- '88 of 2 the capital forbearance; is that correct, sir? 3 A. Right. 4 Q. And this is an internal evaluation. It 5 wouldn't be sent to anybody else. So, you could 6 make it as candidly or critically as you wanted 7 to. Right? 8 A. Well, this is a recommendation going to 9 the RRC, which is a pretty expansive committee. 10 It covers the entire bank. 11 Q. Pretty expansive committee? 12 A. A number of managers and SAs are at 13 these committee meetings. 14 Q. Do you recall, sir, whether the views 15 that you expressed in this memorandum are 16 consistent with the views that you expressed to 17 Art Berner in a number of telephone calls from 18 March 1987 until rather late in the year 1988, 19 your views of management as expressed there? 20 A. I believe so. 21 Q. And so, if he has telephone calls in 22 his records or memoranda of telephone calls in 24582 1 which he's quoting you as expressing positive 2 views of management, that would be consistent with 3 the recollection of what you were telling him 4 during this time period? 5 A. Until the end of '88. 6 Q. Until the end of '88. 7 Now, the president of the Federal Home 8 Loan Bank of Dallas was George Barclay. Right? 9 A. At this time. 10 Q. At this time beginning in -- well -- 11 A. August 1988 -- 1987. Sorry. 12 Q. From August 1987 on. 13 And if he wanted information about the 14 management of a thrift, he didn't have firsthand 15 knowledge, did he? I mean, he would come to you 16 as the supervisory agent to ask you for your views 17 as to the management of the thrift? 18 A. He could, but normally he'd -- at this 19 time, he'd ask Joe Selby and it would come down 20 the normal channels. 21 Q. Okay. So, Mr. Barclay would ask 22 Mr. Selby who would ask Mr. Stirnweis who would 24583 1 ask Mr. Faulk who would ask you? 2 A. By that time, it was probably 3 Satterfield and then Danny Thomas, then me. 4 Q. I see. The source of the information 5 that Mr. Barclay would have about the evaluation 6 of management would be you through various 7 intermediate levels of the supervisory staff. 8 Would you agree with that? 9 A. Yes. 10 Q. I'd like to show you what's been marked 11 as Exhibit A11098. It's in evidence at Tab 1693. 12 It's the last document in the blue volume. 13 These are handwritten notes of 14 Ginger Baugh of a meeting on May 3, 1988. And do 15 you see that you're shown as being in attendance? 16 A. Yes. 17 Q. Looking at the third line of the notes, 18 these are -- it says -- the second line of the 19 notes reads as follows. Quote, "George B., FSLIC 20 is intrigued. We believe United has a good 21 management team but needs solid, hard-driving 22 experienced CEO." 24584 1 Do you see that? 2 A. Yes. 3 Q. Do you recall providing Mr. Barclay in 4 May of 1988 with the evaluation that United had a 5 good management team and what they were lacking 6 was a hard-driving financial CEO? 7 Would that be consistent with the kind 8 of advice you were giving him? 9 A. It would be consistent with comments 10 that were made like in this particular RRC. I 11 don't know of a particular, you know, specified 12 recommendation before this meeting. I'm sure he 13 referred to the quarterly review minutes and that 14 type of stuff. 15 Q. And would you sit down with him prior 16 to a meeting with outside individuals and brief 17 him on the association and the management he's 18 about to meet? 19 A. If he asked me. 20 Q. And at that point, he was the 21 highest-ranking person in the Federal Home Loan 22 Bank of Dallas. Right? 24585 1 A. Yes. 2 Q. And did you agree at that time with the 3 opinion that Mr. Barclay has indicated here that 4 he expressed about United's management, that they 5 had a good management team? 6 A. Absolutely. 7 Q. Now, we're going to switch away from 8 the capital forbearance application and look at 9 the Southwest Plan applications and the 10 evaluations. 11 Do you recall from time to time that 12 you were asked to provide analyses of the 13 management of the Southwest Plan potential 14 acquirers? Do you remember that? 15 A. Yes. 16 Q. And I'm going to show you what's been 17 marked as Exhibit B2182. It's a document produced 18 to us from the Federal Home Loan Bank of Dallas' 19 supervisory files. It's the blue book, and it's 20 about ten documents in. Tab 2182. I'm sorry. 21 Exhibit B2182. It's not been introduced into 22 evidence yet. 24586 1 And I've got a blowup of this document, 2 as well. And it shows you and Ms. Baugh as the 3 authors. 4 Do you see that, sir? 5 A. Yes. 6 MR. VILLA: Your Honor, I move 7 Exhibit B2182 into evidence. 8 MR. RINALDI: No objection. 9 THE COURT: Received. 10 Q. (BY MR. VILLA) Let's look, sir, at 11 the second paragraph on Page 1 where it says 12 "Generally, management is considered motivated and 13 skillful in their respective areas." Then it goes 14 on to say, "However, none of the 11 senior level 15 managers have strong S&L or banking backgrounds 16 and only four have any traditional banking and two 17 any S&L experience." Then it goes on to talk 18 about how United has postured itself. 19 Do you see that, sir? 20 A. Yes. 21 Q. And that was your evaluation of United 22 after having been its supervisory agent for, at 24587 1 this point, two and a half years. Right? 2 A. Right. 3 Q. That management is motivated and 4 skillful. Right? 5 A. Yes. 6 Q. But what they were missing -- what they 7 were missing is still this hard-driving financial 8 CEO. Right? 9 A. Yes. 10 Q. Now, there were a number of allegations 11 in this case about the conduct of the MBS 12 operations. 13 Do you know that? You're aware of 14 that. Right? 15 A. Yes. 16 Q. Look at Page 2 of this document. Now, 17 this is -- Paragraph E addresses the subsidiaries. 18 "Investments in service corporations totaled 472.6 19 million as of March 31, 1988. While United has a 20 number of wholly-owned service corporations, the 21 three most active are United Financial 22 Corporation, United Republic Reinsurance 24588 1 Corporation, and United MBS Corporation." 2 United MBS, of course, is the one who 3 could handle the mortgage-backed securities. 4 Right? 5 A. Right. 6 Q. "Management in these subsidiaries is 7 generally considered high-caliber and well-paid 8 for their respective expertise." 9 Do you see that, sir? 10 A. Yes. 11 Q. And that was your opinion after having 12 two and a half years of oversight of United, that 13 the management of the subsidiaries were regarded 14 as high caliber; but you also knew that they were 15 well-paid. Right? 16 A. That's the comment. 17 Q. And here, I notice -- the next 18 paragraph refers to, "Real estate activities 19 resulted in net losses of $2.7 million during 20 1987, and properties cash flowed at negative 21 $19.7 million in 1987. United's 12/31/87 10K 22 reports that United is actively trying to sell 24589 1 many of these properties, although selling in a 2 soft market may yield losses on investments." 3 Right? 4 A. Right. 5 Q. And that would confirm your testimony 6 from yesterday that, in fact, you and Ginger Baugh 7 were carefully looking at United's 10Ks. Right? 8 You were actually pulling information out of the 9 10K to include in your internal reports. Right, 10 sir? 11 A. We were referring to them as sources, 12 yes. 13 Q. And you certainly knew as a result of 14 this, the comment that they are well-paid for 15 their respective expertise, there is no doubt that 16 you would have looked at in the 10K the 17 information about salaries, bonuses, and the like. 18 Right? 19 A. It should have been referred to, yes. 20 Q. And let's look at the paragraph at the 21 bottom of Page 2 that carries over to Page 3. It 22 begins with "United MBS Corporation (United MBS) 24590 1 has total assets of approximately $1.6 billion 2 primarily in mortgage-backed securities, with no 3 apparent speculation involved." 4 Do you see that, sir? 5 A. Yeah. 6 Q. And what was the source of that 7 information? 8 A. Primarily the examination reports. 9 Q. Finally, under No. 5 -- perhaps not 10 finally. Under No. 5, we talk about the turnover 11 in senior management and directors. Right? 12 A. Yes. 13 Q. And this again recites the concern that 14 Ms. Carlton had expressed about the number -- the 15 fact that 12 officers had resigned or been 16 terminated; is that correct? 17 A. Yes. 18 Q. And does this memo reflect that USAT 19 was meeting its regulatory capital requirements? 20 Do you see on Page 1 what it says about 21 USAT meeting its regulatory capital requirements? 22 "Financial position." 24591 1 Can you tell me whether it meets its 2 regulatory capital requirements, sir? 3 A. (Witness reviews the document.) I 4 don't see it specifically mentioned here, but it 5 basically says that the total RAP regulatory 6 capital is 133,264, which is 2.68 percent of total 7 assets and 2.7 percent of total liabilities. And 8 generally, what I recall is net worth had to be at 9 least 3 percent of liabilities. So, it's under 10 3 percent. There's other calculations that go 11 along with that requirement; but rounded numbers, 12 it would be below it. 13 Q. So, it appeared to be below its 14 regulatory capital? 15 A. Yes. 16 Q. Do you see that it's projecting 17 insolvency within 12 to 14 months by its own 18 calculations? And that's Roman V, the last 19 sentence of Roman V. 20 A. Yes. 21 Q. There is no Roman IV, so don't look for 22 that. It goes from Roman III to Roman V. And 24592 1 let's look at Page 1 to see what its net loss was 2 for the year 1987. I think you can look down 3 here. 1987 total net loss under Roman II-B, can 4 you read that number for me? 5 A. I believe it's 185,673,000. 6 Q. So, it lost in the prior year 7 $185 million. Right? 8 A. Right. 9 Q. Let's look at I-B and see how much it 10 had lost in the first quarter. I believe there is 11 a number for this first quarter loss. It should 12 be -- here it is. 1988 first quarter net loss. 13 And can you read the number for me, sir? 14 A. The first quarter net loss is 15 24,051,000. 16 Q. Add to that, of course, the fact that 17 you knew during this time period there was a 18 200-million-dollar mark-to-market loss in the 19 mortgage-backed securities. Right? You had been 20 aware of that for some period of time. We 21 established that yesterday? 22 A. Through review of the 10Ks, yes. 24593 1 Q. Now, let's look at the top of Page 2. 2 This memo says, "United's operating income is 3 derived primarily from subsidiary service 4 corporation and finance subsidiaries." 5 Do you see that? 6 A. Yes. 7 Q. These -- "Those subsidiaries are 8 involved largely in junk bonds and other 9 investment securities activities. Non-operating 10 income is also primarily derived from sales of 11 investment securities. United is dependent on 12 these activities for earnings as it has a negative 13 interest spread averaging $3.2 million per month. 14 As the equity and bond markets have been volatile, 15 so have United's earnings." 16 Do you see that, sir? 17 A. Yes. 18 Q. And you were aware and reflected in 19 this memo the source of United's earnings. Right? 20 A. Yes. 21 Q. Now, let's try to keep these factors in 22 mind. One, it's below its minimum regulatory net 24594 1 worth. Two, it projects insolvency shortly. 2 Three, it lost $185 million in the prior calendar 3 year. Four, its earnings come primarily from the 4 sale of investment securities. Five, it is losing 5 $24 million a quarter. And six, which is not 6 reflected on there but which you've told us about, 7 the fact that it's got a 200-million-dollar 8 mark-to-market loss embedded in its 9 mortgage-backed securities portfolio. 10 Now, let's go to Roman III and see 11 whether this association with its problems that we 12 have listed here is one that you would recommend 13 being an acquirer for other associations in the 14 Southwest Plan. It talks about computer systems, 15 management, and it says, again, "with the addition 16 of a strong, experienced CEO, United may provide 17 the leadership" -- "the addition of a strong, 18 experienced CEO may provide the leadership to 19 ensure that every department of United operates 20 effectively. When and if a strong CEO is brought 21 in, United's senior management may be considered 22 more favorably." 24595 1 And finally, after these -- identifying 2 these six problems with the association, massive 3 losses, huge embedded mark-to-market problems, the 4 source of their earnings, losing $24 million a 5 quarter, insolvency projected in 12 to 14 months, 6 your conclusion is "With the addition of a 7 knowledgeable and strong CEO as noted, we believe 8 that United could acquire assets outside of its 9 primary geographic area and perhaps outside of the 10 9th district and continue to manage them 11 adequately." Right? 12 A. Yes. 13 Q. You're saying with the addition of one 14 person in their management structure, they are 15 going to be seen favorably as a Southwest Plan 16 acquirer; isn't that right? 17 A. Not just one person. The president, 18 the person who is going to control the entire 19 management team, yes. 20 Q. And they hired that person, didn't 21 they? 22 A. Mr. Connell, yes. 24596 1 Q. And you made a subsequent analysis on 2 May 27, 1988, which I won't show you but which 3 Mr. Rinaldi showed you which was after the 4 completion of the examination in which you reached 5 the same conclusions almost word for word as in 6 this one. 7 Do you recall that? 8 A. Yes. 9 Q. Now, after being the president of -- 10 I'm sorry. 11 After being the supervisory agent of 12 the association for two and a half years and 13 knowing all these facts about the association, you 14 were prepared to recommend USAT as an acquirer in 15 the Southwest Plan. Right? 16 A. Yes. 17 Q. And at the end of the year, you changed 18 your mind. And not only would you -- not only 19 would you not recommend USAT as an acquirer in the 20 Southwest Plan but because -- but you recommended 21 that the management team be dismissed; is that 22 right, sir? 24597 1 A. Yes. 2 Q. And what you're telling this Court is 3 that the reason you changed your mind in those 4 intervening five or six months was not because of 5 Congressional pressure, because of concerns about 6 public relations, because of the expectation that 7 Mr. Ranieri was going to get the association, but 8 because of facts like the ones that Mr. Nickens 9 and I questioned you about, the question of who 10 approved the loan, who approved the Park 410 and 11 Norwood loan, the questions that you put -- the 12 facts that you put in your December 15 memo? 13 That's what really motivated this complete 14 about-face after being the supervisory agent for 15 three years. 16 Is that what you're telling us? 17 A. I recommended their dismissal in the 18 memo to the FSLIC people responsible. That's what 19 I did. 20 Q. I know you did it. The question is: 21 Are you telling us that those facts that I submit 22 you could not defend when Mr. Nickens and I 24598 1 cross-examined you, that those facts that are 2 stated in your December 15 memo, that's the real 3 reason you made your about-face between the end of 4 May 1988 and the end of the year 1988? 5 Those are the real reasons, and it had 6 nothing to do with Congressional pressure, public 7 relations catastrophes, or the wish of delivering 8 this institution to Ranieri? Is that the 9 substance of your testimony, sir? 10 A. Yes. 11 MR. VILLA: I have no further questions 12 for you. 13 THE COURT: Do any of the other 14 respondents have questions? 15 MR. EISENHART: I have some questions, 16 Your Honor. I would expect my examination would 17 run somewhere around two to three hours. I would 18 certainly not finish this afternoon. 19 THE COURT: Well, Mr. Blankenstein, do 20 you have questions? 21 MR. BLANKENSTEIN: I have no questions, 22 Your Honor. 24599 1 MR. KEETON: I may have a few, 2 depending on what Mr. Eisenhart asks, Your Honor. 3 THE COURT: All right. Well, I think 4 we might as well not start. And we will adjourn 5 until I believe it's at 10:00 o'clock on the 5th 6 of October. 7 8 (Whereupon at 4:15 p.m. 9 the proceedings were recessed.) 10 11 12 13 14 15 16 17 18 19 20 21 22 24600 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 25th day of 17 September, 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 24601 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 25th day of 18 September, 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