24838 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 OCTOBER 6, 1998 22 24839 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 24840 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 . 24841 1 2 INDEX OF PROCEEDINGS 3 Page 4 NEIL TWOMEY 5 Continued Further Examination by Mr. Rinaldi...24842 6 Further Examination by Mr. Villa...............24919 7 Further Examination by Mr. Nickens.............24977 8 Further Examination by Mr. Eisenhart...........25027 9 Further Examination by Mr. Rinaldi.............25044 10 Further Examination by Mr. Eisenhart...........25047 11 BARRY MUNITZ 12 Examination by Mr. Rinaldi.....................25052 13 . 14 . 15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . 24842 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. Rinaldi, you may continue with your 6 redirect. 7 MR. RINALDI: Thank you, Your Honor. 8 9 CONTINUED FURTHER EXAMINATION 10 11 Q. (BY MR. RINALDI) When we broke the last 12 time, I was showing the witness two exhibits that 13 are new. They are Exhibits A14112 and A14113. 14 The first is a stipulation and consent to issuance 15 of a consent cease and desist order for 16 affirmative relief. That's A14112. That is dated 17 by Jonathan Fiechter on 12/17/95. 18 And I'm sorry. Excuse me. The witness 19 should have a binder, unless it was cannibalized 20 last night. 21 MR. RINALDI: Does the Court have 22 copies of those two exhibits? I'll tender another 24843 1 set. 2 Q. (BY MR. RINALDI) Mr. Twomey, were you 3 aware that the OTS had reached a resolution of the 4 net worth maintenance claim that you originally -- 5 a net worth maintenance claim against United 6 Financial Group in about 1995? 7 A. No, not particularly. 8 Q. Would you take a look at Exhibit A14112 9 and, in particular, look at Paragraph 8. And this 10 recites the factual basis for a settlement that 11 was later entered into between UFG and the OTS. 12 And would you read that Paragraph 8 to yourself? 13 A. Okay. Is it Roman Numeral VIII or -- 14 Q. No. Paragraph 8 on Page 7. This would 15 be Exhibit A14112. It's the stipulation of 16 consent to issuance of a consent cease and desist 17 order for affirmative relief. 18 A. (Witness reviews the document.) Okay. 19 I've read Paragraph 7. 20 Q. I'm sorry. Paragraph 8 on Page 7 that 21 carries over to Page 8. 22 A. I'm sorry. (Witness reviews the 24844 1 document.) 2 MR. RINALDI: And while he's reading 3 that, Your Honor, I would move the admission of 4 A14112 and A14113. The other one, A14113, may 5 have been admitted under a different number. 6 MR. VILLA: No objection, Your Honor. 7 THE COURT: Received. 8 A. Okay. I've finished Paragraph 8. 9 Q. (BY MR. RINALDI) Now, it makes 10 reference in Paragraph 8 to a May 13th demand 11 letter that was made by a supervisory agent at the 12 Federal Home Loan Bank of Dallas to UFG, that they 13 should indicate what steps would be taken to 14 infuse capital into USAT. 15 Do you know who the supervisory agent 16 that made that demand was? 17 A. That would be me. 18 Q. And that's the letter that we've seen 19 previously dated May 13th where you directed them 20 to take those steps? 21 A. Yes. 22 Q. Secondly, on the next page, it makes 24845 1 reference to a December 8 letter from a 2 supervisory agent demanding that UFG infuse equity 3 capital into USAT. 4 Do you see that? 5 A. Yes. 6 Q. Was that also a letter that you sent to 7 UFG? 8 A. Yes. 9 Q. And turning, then, to A14113, Page 3, 10 Paragraph 1, it indicates that as a consequence of 11 those demands, ultimately -- it reads, "UFG 12 entered into a settlement"; and pursuant to the 13 settlement, UFG was directed to pay to the FDIC as 14 receiver for USAT the sum of $9,450,000 which was 15 the settlement amount for resolving the net worth 16 maintenance claims that had been asserted by you 17 back in May and December of 1988. 18 Does it appear, sir, that your demand 19 to infuse capital was a futile gesture as 20 Mr. Villa suggested in his direct-examination? 21 A. Not for $9 million, no. 22 Q. Does it appear that the demand you made 24846 1 was solely for the purpose of mollifying 2 influential Congressmen? 3 A. No. 4 Q. I would like to turn to another subject 5 now. 6 MR. BLANKENSTEIN: Your Honor, just to 7 clarify the record, I'm informed that A14113 is 8 already in evidence as B3660. 9 THE COURT: Okay. We'll leave them 10 both in the record since they have been marked and 11 received. Thank you for cross-referencing. 12 Q. (BY MR. RINALDI) Now, you may recall 13 that on cross-examination, Mr. Villa asked you to 14 review a reference in the fifth enclosure to the 15 1988 Southwest examination report in which it was 16 reported by Ms. Bese or Ms. Bese's staff that 17 there was an unrealized loss in the 18 mortgage-backed portfolio based on the market 19 value of the mortgage-backed securities and the 20 hedges and that that loss was in excess of 21 $200 million. 22 Do you recall that? 24847 1 A. Yes. 2 Q. Okay. I would like to ask you a few 3 questions about your understanding of the losses 4 in the mortgage-backed security portfolio reported 5 in that 1988 exam. 6 First of all, would you turn to 7 Exhibit B4287? It's at Tab 1850. And this is the 8 Federal Home Loan Bank regulatory handbook. And 9 this is the section that deals with 10 risk-controlled arbitrage. 11 And do you recall I showed this to you 12 on direct-examination? 13 A. Yes. 14 Q. And in particular, I pointed out to you 15 the third paragraph down on Page 450.1, which is 16 the fourth page in the document. And it describes 17 there a risk-controlled arbitrage. And I believe 18 on direct-examination, you testified that the 19 risk-controlled arbitrage that's described here 20 using mortgage-backed securities and reverse repos 21 was the kind of risk-controlled arbitrage that you 22 understood USAT was involved in. 24848 1 Do you recall that? 2 A. Yes. 3 Q. Now, as you go down in the -- the 4 description, it says, "The short-term liability of 5 the reverse repos is synthetically extended using 6 interest rate swaps, futures, caps, collars, et 7 cetera, so that the effective maturity of the 8 asset and the funding source are reasonably 9 matched." 10 Do you see that? 11 A. Yes. 12 Q. What is your understanding that that 13 refers to? 14 A. The hedging basically of the liability 15 side of the risk-controlled arbitrage to guard -- 16 since the liability is relatively short-term, as 17 interest rates move up and down, it will adjust; 18 and that affects the spread between the 19 mortgage-backs and the cost of the liabilities. 20 Q. And when you say "the liabilities," 21 you're talking about the reverse repos? 22 A. Yes. 24849 1 Q. And so, you understood that USAT's 2 mortgage-backed security portfolio would consist 3 of mortgage-backed securities, reverse repos, and 4 hedges? 5 A. Yes. For the risk-controlled 6 arbitrage, yes. 7 Q. And if one wants to value the 8 risk-controlled arbitrage portfolio, do you have 9 to value each of those elements? 10 A. Yes. 11 Q. And if you know one of the elements but 12 not -- if you know the value of the mortgage-backs 13 but you don't know the value of the hedges, can 14 you value the entire portfolio? 15 A. No. 16 Q. Now, I was curious about something you 17 had said on direct-examination. This is at 18 Page 23902 -- 19 MR. VILLA: Excuse me. Direct or 20 cross? 21 MR. RINALDI: It was on direct. It was 22 Page 23902 of his direct-examination. 24850 1 MR. VILLA: I believe, Your Honor, the 2 custom is on redirect, he only asks questions 3 about my cross, not his direct. 4 MR. RINALDI: Your Honor, he made a 5 statement on redirect that I believe is germane to 6 Mr. Villa's cross; and I simply want to have him 7 elaborate on what he meant by that because it goes 8 directly to a whole line of questions that 9 Mr. Villa propounded that I thought sort of 10 muddied the record. 11 THE COURT: All right. 12 Q. (BY MR. RINALDI) Mr. Twomey, I'm 13 handing you a document that is Page 23902 of your 14 testimony; and I would direct your attention to 15 Page 23902 and Lines 13 through 21. I would just 16 ask if you could read those lines into the record. 17 A. Starting with the answer? 18 Q. Well, start with the question. 19 MR. VILLA: Your Honor, really, I 20 object. It's really unnecessary for him to 21 re-read -- we are hearing the direct over again, 22 but to hear it read over begin is beyond the pale. 24851 1 MR. RINALDI: I'm afraid if he doesn't 2 read it, the Court won't have an inkling as to 3 what it says. I have two copies. 4 THE COURT: Well, it's in the record; 5 so, he's going to read what's already there. 6 Q. (BY MR. RINALDI) Have you taken a look 7 at that, Mr. Twomey? 8 MR. RINALDI: I won't have him read it, 9 sir. 10 Q. (BY MR. RINALDI) Lines 13 through 21. 11 A. Yes. 12 Q. Okay. Now, you state there that you're 13 basically trying to stay in a neutral position so 14 that you're neutral to interest rate movements. 15 What did you mean by that? 16 A. Well, going back even earlier into the 17 Eighties, the -- a lot of savings and loans and 18 thrifts were caught with long-term fixed asset 19 mortgages. And when interest rates were going up 20 rapidly, they were paying for CD money sometimes 21 more than they were getting on the yield. And 22 with a risk-controlled arbitrage, what you're 24852 1 trying to do is maintain that positive spread 2 between -- you have the yield on the 3 mortgage-backed securities, and you have the cost 4 of the repos. And again, since the 5 mortgage-backed securities -- you know, you have 6 the coupons. You have a set yield coming out of 7 them. If interest rates start to move, you want 8 to be able to manage that interest rate move on 9 your repos; namely, the cost of funds. And by 10 hedging it with interest rate swaps and the like, 11 even though the gap between -- the spread between 12 your mortgage-backed security yield and the cost 13 of your repos may fluctuate. But relatively, what 14 you're trying to do in a perfect world is keep -- 15 if you start off with a 2 percent or 3 percent 16 spread, in a perfect world, you would like to keep 17 that. What you want to do is always maintain some 18 type of positive spread. The only way you can 19 really do that is actively manage the cost of the 20 repos. 21 Q. What about the value of the 22 mortgage-backs and the hedges? Do they fluctuate 24853 1 over time with interest rate changes? 2 A. Definitely. 3 Q. Now, if there's a slight increase in 4 interest rates, what would happen, as understand 5 it, to the value of the mortgage-backs? 6 A. They would probably drop slightly. 7 Q. And if a portfolio is properly hedged, 8 would you expect that there would be an offsetting 9 increase in value on the hedge side of the 10 transaction? 11 A. Yeah, the -- if interest rates have 12 risen and you've hedged and the value of the 13 hedges has increased, that helps compensate for 14 some of the decline in the mortgage-backed 15 security value because you have lengthened out the 16 repos, the cost of repos. You can maintain that 17 spread. 18 Q. So that in a well-managed 19 risk-controlled arbitrage, you expect losses or 20 gains on the mortgage-back side to be offset by 21 losses or gains on the hedge side? 22 A. Yeah. Yeah, in values, to maintain 24854 1 again the cost of the spread. 2 Q. Now, if I want to mark a portfolio to 3 market and figure out where I stand at a point in 4 time with respect to the mortgage-backs and the 5 hedges, how do I do that? 6 A. Well, for the mortgage-backs, you could 7 get market quotes; and you can -- using such 8 things as Bloomberg, you can feed in the basic 9 information and get the current market value as of 10 a set time of every mortgage-backed security you 11 have because they are on the balance sheet. The 12 thing is on the hedges, they are not on the 13 balance sheet. You have to -- you have to value 14 what -- the possible cash flows and how the 15 different values have changed. It's a little 16 tougher. 17 Q. Have you ever had occasion to try to 18 value a swap? Do you know how to apply the 19 calculations that are necessary to value a swap? 20 A. No, I haven't had occasion to do that. 21 Q. That wasn't something you did in your 22 duties as a supervisory agent? 24855 1 A. No. 2 Q. Now, I would like you to take a look at 3 Mister -- I'm sorry -- Ms. Bese's fifth 4 examination interim report, which is the one that 5 Mr. Berner -- I'm sorry -- Mr. Villa directed you 6 to. And particularly -- this is Exhibit B2699, 7 and it's Tab 1863. And I would direct you to 8 Page OW154228. 9 Now, if you look at the 10 next-to-the-last paragraph on the page and, in 11 particular, the bottom half of the paragraph, it 12 reads, "However, by June 30th, 1987, interest 13 rates had started to rise. Short-term borrowing 14 costs had already begun to increase and the spread 15 between the assets and liabilities to decrease." 16 Then it says, "In addition, the interest rate 17 swaps that had been established at the higher 18 rates were negatively impacting the income from 19 the MBS portfolio. The unrealized losses, based 20 on the market value of the MBS and the hedges at 21 that date, was in excess of $200,000,000." 22 Now, does it appear that what Mister -- 24856 1 Ms. Bese was doing or citing here was a portfolio 2 value based upon the MBS and the offsetting 3 hedges? 4 A. Yes. 5 Q. And in a well-managed portfolio, would 6 you anticipate that those would offset each other? 7 A. Materially, yes. 8 Q. And in this case, they didn't? 9 A. No. 10 Q. Now, Mr. Villa showed you a number of 11 documents that seemed to indicate that there were 12 large losses in the mortgage-backed security 13 portfolio as indicated by the 10Q; and I would 14 like you to take a look at those. I believe the 15 first one in that series would be A3040. This is 16 the 10Q for, of all dates, June 30th, 1987. 17 If you would turn to Page 7, there's a 18 chart. And on the chart, it indicates at 19 Paragraph 3 -- this is Note 3 to the United 20 Financial Group, Inc. notes of unaudited 21 consolidated financial statement. It sets out 22 some valuations for the mortgage-backed 24857 1 securities. 2 Do you see that? 3 A. Yes. 4 Q. Let's focus on June 30th, 1987. Now, 5 it gives a market value of $3,544,877. 6 Do you see that? 7 A. Yes. 8 Q. And then next to that, it has the 9 carrying value. What would that be? 10 A. That's the historic purchase price. 11 That's what they were purchased at. 12 Q. So, the value of these mortgage-backs 13 had apparently declined over time, had they not? 14 A. Market value, yes. 15 Q. Okay. Would you have expected that 16 that was the result of an interest rate increase 17 that caused the mortgage-backs to decrease in 18 value? 19 A. Yes. 20 Q. Now, where in this calculation are the 21 hedges figured in that would offset the losses on 22 the mortgage-backed securities? 24858 1 A. They are not. 2 Q. So, this is only half of the equation 3 for the portfolio; isn't that correct? 4 A. Strictly the mortgage-backs. 5 Q. And unless you know what the value of 6 the hedges is that offset the mortgage-backs, this 7 doesn't tell you what the value of the portfolio 8 is or whether it has losses or gains, does it? 9 A. No. 10 Q. So, as a supervisory agent, if you 11 had -- let me ask you this: Was it your practice 12 to review the 10Qs? 13 A. Yeah, we would review them but not in 14 excruciating detail. 15 Q. And if you had reviewed this 10Q, could 16 you have told from this information whether there 17 was a loss in the mortgage-backed security 18 portfolio, including both the mortgage-backs and 19 the hedges? 20 A. No. 21 Q. Let's take a look at the next document, 22 3041. Again, it's at Page 7. This is Tab 1903. 24859 1 And again, the numbers on the mark-to-market 2 losses that are referenced here, do they include 3 the offsetting hedges? 4 A. No. 5 Q. And is the same true with respect to 6 all of the -- well, let's look at them all. A3042 7 at Page 3, I think you'll find that that's 8 Tab 1904. If you turn to Page 3 and you go down 9 under "assets," about the fifth line down, it 10 indicates a market value of mortgage-backed 11 securities. 12 Do you see that? 13 A. Yes, I do. 14 Q. And for 1988, the value is higher than 15 the March 31st, 1988 -- I mean lower than the 16 March 31st, 1988 carrying value, correct? 17 A. Yes. 18 Q. So, there was a loss as of March 31st, 19 1988? 20 A. Yes. 21 Q. Take a look at the -- I'm sorry. Let's 22 look at the next document, which is A3043. This 24860 1 is the fourth 10Q that was shown to you by 2 Mr. Villa. And again, this is Tab 1905. And on 3 the same Page 3, it again shows you both the 4 market and the carrying value of the MBS. 5 Now, do these numbers that I've just 6 shown you on Exhibit A3042 and A3043 include any 7 value for the hedges? 8 A. No. 9 Q. Now, you said that hedges are off the 10 balance sheet. What did you mean by that? 11 A. The purchase of futures, options, and 12 other synthetic hedging is -- the actual 13 fluctuation in their value isn't shown on the 14 balance sheet. They are considered off-balance 15 sheet items. 16 Q. And once again, by looking at any of 17 these 10Qs, could you have determined what the 18 loss or gain in the overall portfolio, the 19 mortgage-backed security risk-controlled arbitrage 20 portfolio was at USAT? 21 A. No. 22 Q. Now, I believe that Mr. Villa also 24861 1 showed you a 10K which would be Tab 79, A3023; and 2 I direct your attention to Page 40 of that 3 document. 4 A. (Witness reviews the document.) Okay. 5 Q. And again, if you go down about the 6 sixth line under "assets," it states a market 7 value for the mortgage-backed securities as of the 8 end of 1987. And it indicates there that there is 9 again a loss at the end of 1987 because the market 10 value is less than the carrying value, correct? 11 A. Correct. 12 Q. But again, this doesn't include hedges, 13 does it? 14 A. No. 15 Q. Now, take a look at the values for 16 1986. Do you see that the carrying value is 17 $2,697,419? 18 A. Yes. 19 Q. And if we look at the market value, 20 it's 2 million -- I'm sorry -- $2,725,517,000. 21 Do you see that? 22 A. Yes. 24862 1 Q. So, in fact, at the end of 1986, there 2 was a gain in the mortgage-backed portfolio, 3 wasn't there? 4 A. In market value, yes. 5 Q. But those are only the mortgage-backed 6 securities; and they don't include the hedges, do 7 they, sir? 8 A. No. 9 Q. When one holds a mortgage-backed 10 security portfolio in a risk-controlled arbitrage, 11 it's expected that the value of the mortgage-backs 12 alone with fluctuate with interest rate 13 fluctuations; is that fair? 14 A. Yes. 15 Q. Now, turn to Page 54 in the same 16 document. 17 A. (Witness complies.) 18 Q. And under Note 10, it describes certain 19 hedges. 20 Do you see that? 21 A. Yes. 22 Q. And at this point in time, it indicates 24863 1 in the first two paragraphs that there were over a 2 billion dollars in swaps, were there not? 3 A. Yes. 4 Q. And by looking at the information 5 that's provided here, can you ascertain what the 6 value of those swaps were as hedging devices? 7 A. No. 8 Q. Now, as the supervisory agent in terms 9 of trying to ascertain what the value of a 10 mortgage-backed risk-controlled arbitrage 11 portfolio was such as the one maintained by USAT, 12 would you rely upon the representations that were 13 made to you by the officers of USAT as to the 14 value of the portfolio? 15 A. Yes. 16 Q. And do you recall that you were told by 17 Mr. Berner in 1987 that the mortgage-backed 18 security portfolio was a successful portfolio? 19 A. Well, I don't recall him saying that 20 exactly; but I do know my impression from their 21 representations was that it was successful and had 22 a positive spread. 24864 1 Q. Did you feel that it was a profitable 2 area of business? 3 A. Yes. 4 Q. And do you recall that in about the 5 middle of 1987, Mr. Berner approached the Bank 6 Board and made a proposal that USAT should be 7 allowed to engage in securities transactions on 8 behalf of other thrifts? 9 A. Yes. 10 Q. And what was the nature of that 11 proposal, sir? 12 A. Well, again, using the expertise that 13 USAT had, they thought they could help other 14 troubled institutions in the Texas area manage 15 their portfolios better. 16 Q. And when you say "manage their 17 portfolios," what was the nature of the business 18 that they were contemplating undertaking on behalf 19 of other thrifts? 20 A. Primarily their, you know, investment 21 portfolios, mortgage-backed securities, 22 investments. 24865 1 Q. And in connection with their 2 approaching the Bank Board about assisting other 3 thrifts, was it your impression that they were 4 doing a good job in managing their own portfolio? 5 A. Yes. 6 Q. Take a look at Exhibit A14065. I'm 7 sorry. It's the next one in your book, and you've 8 just run out of pages. 9 MR. VILLA: Excuse me. Do you have the 10 tab number? 11 MR. RINALDI: I'm sorry. Tab 1494. 12 Q. (BY MR. RINALDI) Take a moment to 13 review the document, please. 14 A. (Witness reviews the document.) Okay. 15 Q. Do you recognize that document, sir? 16 A. Well, it refreshes my memory. I don't 17 remember it particularly. But it basically 18 alludes to what you were talking to before about 19 their representations to manage assets at other 20 institutions. 21 Q. Okay. In the first paragraph there, 22 Mr. Berner represents to you that United Savings 24866 1 Association has been able to implement a program 2 of successful investments in mortgage-backed 3 securities. 4 Do you see that? 5 A. Yes. 6 Q. Was that your understanding, that they 7 had implemented a successful program of 8 mortgage-backed securities in a risk-controlled 9 arbitrage setting? 10 A. Yes. 11 Q. And as you go down further, he goes on 12 and says in the third paragraph -- he makes 13 reference to offering these services to other 14 institutions and that they could be potentially 15 profitable areas of business which will help 16 offset the enormous losses generated by the Texas 17 economy. 18 Do you see that? 19 A. Yes. 20 Q. Was it your understanding at this point 21 in time that the risk-controlled arbitrage program 22 implemented by USAT with respect to 24867 1 mortgage-backed securities was a profitable area 2 of business? 3 A. Yes. 4 Q. Did you believe that it was offsetting 5 losses generated by the Texas economy that USAT 6 was suffering? 7 A. Yes. 8 Q. Now, the date on this letter, however, 9 is June 16th, 1987. 10 Do you see that? 11 A. Yes. 12 Q. Now, what was the date that Mister -- 13 or Ms. Bese cited in Exhibit -- I mean Interim 14 Report No. 5, sir, as the date when there were 15 200-million-dollar losses in the mortgage-backed 16 portfolio? 17 Do you recall that? 18 A. No, I would have to go back and look at 19 that. 20 Q. Why don't you go back and take a look 21 at what the date was that she cited. 22 A. (Witness reviews the document.) 24868 1 Q. This is Exhibit B2699, and it appears 2 at Tab 1863. And we're looking at, again, 3 Page OW154228. 4 Are you there, sir? 5 A. Yes. 6 Q. And can you tell the Court what the 7 date is that she cites as the date upon which 8 unrealized losses based on market value of MBS and 9 hedges was in excess of $200 million? 10 A. June 30th, 1987. 11 Q. So, in other words, barely two weeks 12 after Mr. Berner wrote you a letter telling you 13 that this was successful, there were, according to 14 Ms. Bese's Interim Report No. 5, $200 million in 15 losses in the portfolio, correct? 16 A. Yes. 17 Q. Did you consider that to be a success? 18 A. No. 19 Q. Did you consider that to be a 20 profitable area of business for USAT? 21 A. No. 22 Q. Now, let's turn to the next document in 24869 1 your book and see if maybe Ms. Bese didn't make a 2 mistake or whether Mr. Berner was mistaken in his 3 representations to you. 4 The next document is -- 5 MR. NICKENS: Your Honor, I object. 6 It's enough that we have leading questions, but 7 then we have comments before the leading questions 8 to try to make their case. I object to those kind 9 of comments. 10 We have no idea what Mr. Twomey's 11 testimony might be in the absence of the prodding 12 by Mr. Rinaldi, but we certainly shouldn't have to 13 endure his telling us what the evidence is going 14 to be before he asks the witness the question. 15 THE COURT: Would you curtail the 16 commentary? 17 MR. RINALDI: Certainly, Your Honor. I 18 got carried away by the moment. 19 Q. (BY MR. RINALDI) Tab 1319. A1447 is 20 the exhibit. These are the minutes of the 21 investment committee. This is for June 11th, 22 1987. 24870 1 Do you see that? That would be shortly 2 before the date that Mr. Berner wrote you the 3 letter on June 16th, 1987, telling you that the 4 portfolio with mortgage-backed securities was a 5 success. 6 And let's take a look at US3005864. 7 It's about 20 -- it's the 15th page into the 8 document. It's US3005864. 9 Do you see that? It's a sensitivity 10 summary. 11 Do you see that? 12 A. Yes. 13 Q. This purports to be a sensitivity 14 summary for the mortgage-backed security 15 risk-controlled arbitrage portfolio. And on the 16 top, they indicate the mortgage-backs; and further 17 down, they talk about the hedges. 18 Do you see that? 19 A. Yes. 20 Q. Then at the bottom in the middle, it 21 nets them out if there's no interest change. If 22 there's no interest change, what was the value of 24871 1 the portfolio according to USAT's own summary -- I 2 mean sensitivity summary on or about June 11th, 3 1987? 4 A. Basically negative all the time. 5 Q. Well, how much was it if there were no 6 interest rate change, hedges plus MBS? 7 A. Well, I'd say 199,623 if I'm reading 8 from the right line. 9 Q. Then if you add in the swaps and caps, 10 what's the total of all down at the bottom? 11 A. 245,417. 12 Q. And that's million dollars? 13 A. Yes. 14 Q. $245 million in losses? 15 A. Yes. 16 Q. Did you consider that to be a success? 17 A. No. 18 Q. Did you consider it to be a profitable 19 area of business for USAT? 20 A. No. 21 Q. Now, let's look to make sure nothing 22 changed to the investment committee minutes of 24872 1 June 16th, 1987, which is the following week. 2 This is Tab 1320, and it's Exhibit A1448. I would 3 like to direct your attention to US3005917. This 4 is another sensitivity summary for the same 5 portfolio but a week later or five days later. 6 Do you see that? 7 A. I have it. 8 Q. And had the value or the total value of 9 the mortgage-backed portfolio changed between June 10 the 11th and June the 16th, sir? 11 A. It indicates there's a change because 12 now the total loss at the bottom with swaps and 13 caps is now 228,497. 14 Q. So, that's a 28-million-dollar loss? 15 A. Yes. 16 Q. This would have been on the same date 17 that Mr. Berner wrote to you and told you that 18 USAT, quote, "has been able to implement a program 19 of successful investments in mortgage-backed 20 securities"; is that correct? 21 A. Yes. 22 Q. After you received Mr. Berner's letter, 24873 1 did you continue to believe throughout 1987 and 2 into '88 that the mortgage-backed security 3 portfolio was a successful enterprise? 4 A. Yes. 5 MR. VILLA: Your Honor, I'm not going 6 to get up on every leading question; but when they 7 get that bad, I do have to object. Nobody should 8 be limited by leading questions in this case. I 9 object. 10 MR. RINALDI: Fine. I'll rephrase the 11 question. 12 Q. (BY MR. RINALDI) Sir, would you take a 13 look at Exhibit B2182. It's Tab 1921. This is 14 the next document in your book; and it was shown 15 to you, I believe, on cross-examination by 16 Mr. Villa. And would you also at the same time 17 look at the following document, which is Tab 1861. 18 And it's A11160. 19 So, we have B2182 and A11160. Take a 20 moment to look at those while people get copies, 21 and then I have a question. 22 A. (Witness reviews the documents.) 24874 1 Q. Do you have B -- 2 A. I have the internal memorandum dated 3 May 27th, 1988. 4 Q. And is there one before it dated May 5 the 5th, which is B2182? 6 A. Yes, I found it. 7 Q. Okay. Now, I believe you testified in 8 response to Mr. Villa's questioning on 9 cross-examination with respect to this document 10 that this was a document that was prepared by you 11 and Ms. Baugh with respect to USAT. 12 Do you recall that? 13 A. Yes. 14 Q. Now, I would like to direct your 15 attention to the third sentence in the 16 paragraph -- first numbered paragraph or the 17 second paragraph in the document. It says, 18 "United has postured itself as a non-traditional 19 institution focusing heavily on the investment and 20 mortgage-backed securities areas which have 21 generally been quite successful." 22 Do you see that? 24875 1 A. Yes. 2 Q. What did you mean when you said in your 3 memo that the mortgage-backed security areas had 4 been generally quite successful? 5 A. Just basically that it was our 6 impression that the risk-controlled arbitrage had 7 been working out quite well; and other than the 8 1987 stock market, it overall had been doing 9 pretty well. 10 Q. Okay. Did you continue to believe that 11 throughout May when you wrote the next memo which 12 is Tab 1861, Exhibit A11160? 13 A. Yes. 14 Q. And again, you state that it has been 15 generally quite successful? 16 A. Yes. 17 Q. Did there come a time in 1988 when you 18 learned that there were substantial losses in the 19 mortgage-backed security portfolio that you had 20 previously been unaware of? 21 A. Yes. Basically, from the 1988 exam, 22 Southwest Plan examination of the institution. 24876 1 Q. Now, Mr. Nickens showed you a number of 2 documents where there were mortgage-backs being 3 sold off at a loss; and then I believe they showed 4 some hedges being sold off at a loss. And they 5 were probably in the November time frame. 6 Do you recall those documents? 7 A. Yes. 8 Q. When you sold off those securities or 9 participated in the process by which those were 10 sold off, were you aware at that point in time 11 that there may be losses in the mortgage-back 12 portfolio? 13 A. Are you talking more in the 14 risk-controlled arbitrage as a whole? 15 Q. Yes. 16 A. No, not generally. 17 Q. Was the -- when was the first time that 18 you actually saw a valuation for the portfolio of 19 the mortgage-backed securities and the offsetting 20 hedges? 21 A. Not until the examiners had a 22 discussion with us regarding that subject. 24877 1 Q. And that would have been at what time? 2 A. Sometime in December of 1988. 3 Q. Now, you said the examiners had a 4 discussion with you. Are you telling me that 5 prior to actually receiving Interim Report No. 5, 6 you discussed that subject with the examiners? 7 A. I can't be specific, but we had -- we 8 had ongoing discussions with the examiners, you 9 know, as far as even routinely, what time we're 10 scheduling the interim report, what's going to be 11 in the interim report, what it pertained to, and 12 who should be at the meeting. 13 So, we had a general view of what, you 14 know, the examiners were going to tell us. 15 Q. Now, I would like to move on to a 16 different subject right now, sir. 17 As the supervisory agent, what was your 18 role with respect to USAT and USAT's setting of a 19 strategic strategy or business plan for conducting 20 its business? 21 A. Well, as the supervisory agent, you are 22 responsible for -- that the institution complies 24878 1 with the rules and regulations of FSLIC and 2 basically overall isn't a risk to FSLIC because of 3 its actions or policies of that institution. 4 Q. Who was responsible for setting the 5 business plan for the institution and coming up 6 with a strategic plan for how it would be 7 operated? 8 A. The board of directors. 9 Q. Did you have any role in that? 10 A. No. 11 Q. If you determined that, in the course 12 of carrying out that strategy, there was a 13 regulatory violation, what was your obligation as 14 an SA? 15 A. We would ask the institution to cease 16 the activity, you know, depending on what it is. 17 We would ask them to cease it and then take 18 corrective action. 19 Q. In the absence of a regulatory 20 violation or some clear evidence of unsafe and 21 unsound conduct, was it your role to make 22 operational decisions with respect to how USAT was 24879 1 run? 2 A. No. 3 Q. And whose obligation was that? 4 A. The board of directors' and the 5 management of USAT. 6 Q. And once an overall operating strategy 7 was set by the board of USAT, who was responsible 8 for carrying out the strategy? 9 A. The management team of the institution 10 was responsible for carrying out the policies as 11 set by the board of directors. 12 Q. As the SA, was it your job to monitor 13 what management was doing? 14 A. Well, through examination oversight, we 15 would review for regulatory violations; but really 16 their own business plan and strategic plan was 17 again the responsibility of the board. 18 Q. Did the board have the responsibility 19 to monitor what management was doing? 20 A. Definitely. 21 Q. Now, Mr. Villa asked you a number of 22 questions about the wholesale strategy. And in 24880 1 one series of questions, he asked you a number of 2 compound questions; and it was not clear to me 3 what your response was at the end of those 4 questions. So, I would like to sort of parse it 5 out and see if I can't clarify in my own mind what 6 you may have understood with respect to your 7 response. 8 MR. VILLA: Your Honor, I object to 9 these mumblings. I mean, if he had objections to 10 the form of my questions, he could make the 11 objections at the time without going through this 12 "I'm trying to figure out in my own mind what you 13 were thinking." The man answered my questions, no 14 objections were made, and the statements are on 15 the record. This characterization of the other 16 lawyers' conduct as objecting to it -- 17 THE COURT: Mr. Rinaldi, can you just 18 ask the question? 19 MR. RINALDI: Sure. 20 Q. (BY MR. RINALDI) Mr. Villa asked you 21 whether Fannie Mae probably operates as the 22 biggest thrift in America. Is that true? Is 24881 1 Fannie Mae a thrift? 2 A. No. 3 Q. Then he goes on and says that -- and 4 the theory that had been adopted in the early 5 1980s and I think executed brilliantly by 6 Fannie Mae in 1982 was to grow out of the problem. 7 Do you recall that? 8 A. Yes. 9 Q. And he suggested that somehow growing 10 out of the problem was the strategy that USAT was 11 using. 12 MR. KEETON: Your Honor, I'm going to 13 object. How long do I have to sit here and hear 14 him speak instead of asking questions? This is no 15 more rebuttal questions than -- he's going back to 16 the direct. 17 MR. RINALDI: I didn't ask anything 18 about -- 19 MR. KEETON: He just made another 20 speech. 21 THE COURT: What's your question? 22 Q. (BY MR. RINALDI) Did you believe that 24882 1 the strategy that Mr. Villa described to you on 2 cross-examination regarding Fannie Mae that had 3 been so brilliantly carried out was analogous to 4 the strategy that was being undertaken by USAT 5 through its wholesale strategy? 6 A. No. 7 Q. Did Fannie Mae invest in junk bonds, to 8 your knowledge? 9 A. No. 10 Q. Was Fannie Mae involved in equity 11 arbitrage? 12 A. Not to my knowledge. 13 Q. Now, I have one -- Mr. Villa went 14 through a long presentation -- 15 THE COURT: Mr. Rinaldi. 16 MR. RINALDI: I'm sorry. 17 THE COURT: What's your question? 18 Q. (BY MR. RINALDI) Source of USAT's 19 earnings, sir. I would like to ask you some 20 questions about source of USAT's earnings. 21 Would you -- I'm afraid I've flipped 22 forward in my book. 24883 1 Would you take a look at A11154. This 2 is a memo that was shown to you by Mr. Villa. 3 It's Tab 1913. And I direct your attention to 4 OW158133. 5 A. Page 5 of this? 6 Q. Yes, it would be Page 5. It's the 7 second full paragraph, the last sentence. It 8 indicates there that USAT had $15.9 million in 9 income from the sale of investment securities in 10 1985. 11 Do you see that? Or am I reading from 12 the wrong place. I'm sorry. 13 It states that securities transactions 14 had resulted in 27.2 million in non-operating 15 gains. 16 Do you see that? 17 A. Okay. I found it. It's in the middle 18 of the page. Okay. "Income was bolstered by 19 security transactions." 20 Q. Right. This is a document that you and 21 Ginger Baugh prepared? 22 A. Right. 24884 1 Q. Now, when you sent this letter to 2 Mr. Green, what did you understand the securities 3 transactions were that you were referencing in 4 your memorandum there? 5 A. It would be the non-operating income on 6 securities coming off the -- probably the TFR. 7 Q. Could you tell specifically whether 8 that was non-operating income from sales that had 9 occurred in the mortgage-backed security portfolio 10 risk-controlled arbitrage? 11 A. No. By that line -- other sales of 12 securities are summed up in that line. 13 Q. And can you tell whether sales of 14 high-yield bonds out of the high-yield bond 15 portfolio, if they resulted in gains, would have 16 been included in that line? 17 A. That line would include anything from 18 the sale of common stock, sale of junk bonds, sale 19 of mortgage-backs, sale of U.S. treasuries. Any 20 type of investment would be included in that one 21 line, and it is not broken out on the TFR what it 22 pertains to as far as individual securities. 24885 1 Q. Okay. Now, Mr. Villa then showed you 2 another document which is T11011; and it's 3 Tab 256. Now, this is a memo that was sent to 4 Frank Haas from Joe Selby dated July 24th, 1986. 5 And in particular, turning your attention to 6 Page OW120673 -- 7 THE COURT: Is that in evidence? 8 MR. RINALDI: It should be in evidence 9 as Tab 256. It's A11011, and I believe it was put 10 in by Mister -- I think I may have another copy. 11 THE COURT: I believe you said T 12 before. 13 MR. RINALDI: I'm sorry, Your Honor. 14 It's A11011. 15 Q. (BY MR. RINALDI) And directing your 16 attention to the first -- well, it's the second -- 17 third sentence in the first paragraph at the top 18 of Page 7. There's a section there that 19 Mr. Villa, I believe, pointed out to you on 20 cross-examination. It reads that, "In 1985, a net 21 operating loss of 3.3 million was incurred before 22 income totaling 7.4 million from the sale of 24886 1 branches and 15.9 million on the sale of 2 investment securities." 3 Do you see that? 4 A. Yes. 5 Q. Now, do you know what the source of the 6 income from the investment securities sales that 7 are referenced there was? I mean, do you know 8 what -- how they were generated? 9 A. Again, it would be the sale of anything 10 from mortgage-backs to equity securities to junk 11 bonds to U.S. treasuries. 12 Q. Now, if it had been from the sale of 13 mortgage-backs, was it your understanding -- what 14 was your understanding in July of 1986 as to why 15 there would be sales out of the mortgage-backed 16 security risk-controlled arbitrage portfolio? 17 A. To perform maintenance on the 18 portfolio. If there was shifts in interest rates, 19 interest rates were declining; and particularly 20 during this period of time, beginning of 1986 21 down, had been declining, you would sell off to 22 higher-yielding coupons. 24887 1 Q. And are those kinds of sales consistent 2 with the maintenance of a mortgage-backed security 3 risk-controlled arbitrage portfolio? 4 A. Yes. 5 Q. And they are the natural consequence of 6 rebalancing? 7 A. Yes. 8 Q. Now, in addition, if those gains had 9 been as a result of sales of high-yield bonds, 10 what was your understanding in July of 1986 as to 11 why USAT would have been selling high-yield bonds? 12 A. Again, as part of their arbitrage on 13 the high-yield bond portfolio, they still 14 performed credit analysis on those bonds. And if 15 a bond would have a drop-off in its credit, the 16 institution, USAT, could sell it; or in some 17 cases, there might be redemptions. 18 Q. And was that consistent with a -- an 19 investment portfolio of a high-yield bond 20 arbitrage? 21 A. Yes. 22 Q. Now, another document was shown to you 24888 1 by Mr. Villa on direct-examination which was 2 Vivian Carlton's 1986 examination report. It's 3 Tab 982, and it's Exhibit A11042. 4 A. Okay. 5 Q. Now, I would like to direct your 6 attention to OW089685. I think it's Page 25 of 7 the report. 8 A. Okay. 9 Q. And if you look at the -- under 10 "operating results," the second paragraph down, 11 the second sentence, I believe, was -- Mr. Villa 12 had asked you some questions about it. It reads, 13 "98 percent of non-operating income was derived 14 from the sale of MBS and equity securities 15 totaling $48,593,000 and $30,155,000." 16 So, it would appear from this reference 17 that there were $48 million in mortgage-backed 18 security sales that were reported by Ms. Carlton 19 in her 1986 exam. 20 Do you see that? 21 A. Yes. 22 Q. A moment ago, you mentioned something 24889 1 about interest rates declining. 2 What were you making reference to? 3 A. Just generally between January of 1986 4 to June of 1986, there was a general decline in 5 market rates. 6 Q. And do you recall whether, in 7 connection with the decline in market rates, USAT 8 undertook any kind of rebalancing activity with 9 respect to its risk-controlled arbitrage 10 mortgage-backed security portfolio? 11 A. It should be. 12 Q. Do you recall specifically having read 13 that they did anything? 14 A. It was my understanding they were in 15 the risk-controlled arbitrage. I don't remember 16 anything independent saying they weren't doing it. 17 Q. Okay. Let's take a look at the next 18 document, which is Tab 184; and it's A10663. And 19 this is the -- the business plan for -- do you 20 have it in your book, sir? 21 A. Yes. 22 Q. This is the business plan for United 24890 1 Savings Association of Texas, and I would like you 2 to keep your finger on the page where it reports 3 the $48 million in MBS sales in the exam report. 4 And then just flip over to the business plan; and 5 this is Tab 184, A10663. And in particular, I 6 would like you to go to OW005471. 7 A. Okay. Page 4 on the bottom? 8 Q. Yes. And I would like you to take a 9 look at the -- under "structured arbitrage 10 program." If you go down to the second paragraph 11 beginning at the -- looks to be the third 12 sentence, it starts out "as interest rates have 13 fallen." 14 Do you see that? 15 A. Yes. In the middle of the paragraph, 16 yes. 17 Q. Right. That's under "structured 18 arbitrage program." It reads, "As interest rates 19 have fallen since the latter part of 1985, 20 prepayments on mortgage-backed securities 21 purchased in the program have accelerated, 22 requiring the association to dispose of certain 24891 1 mortgage-backed securities and to reinvest the 2 proceeds at lower yields. Therefore, in 1986, the 3 association sold higher coupon mortgage-backed 4 securities that are more likely to prepay and 5 purchased lower coupon mortgage-backed securities. 6 These transactions produced gains on sales of 7 mortgage-backed securities during the first six 8 months of 1986 totaling 38.9 million." 9 Do you see that? 10 A. Yes. 11 Q. Does that refresh your recollection 12 that in the -- in 1986, interest rates were 13 falling? 14 A. Yes. 15 Q. And that in response to the fall in 16 interest rates, mortgage-backs of high coupons 17 were sold and lower coupon mortgage-backs were 18 purchased by USAT? 19 A. Yes. 20 Q. Now, does that kind of activity which 21 generated a gain that's described in this 22 paragraph reflect that the gains from the sales 24892 1 out of the mortgage-backed security 2 risk-controlled arbitrage in 1986 were the natural 3 result of an ordinary rebalancing of the 4 mortgage-backed security portfolio? 5 A. Yes. 6 Q. And what was the purpose of that 7 rebalancing? 8 A. Again, because higher yielding coupons 9 would be pre-paying at a rapid rate, to rebalance 10 the portfolio, you would sell those and either 11 retire repo money or buy market -- more market 12 MBSs. 13 Q. And how -- is that an appropriate 14 activity to engage in to deal with prepayments? 15 A. Yes. 16 Q. Now, I would like you to take a look at 17 the -- and does that appear, then, to indicate the 18 reason why Vivian Carlton in her 1986 exam 19 reported that there were gains on sales of the 20 mortgage-backed security portfolio? 21 A. Yes. 22 Q. And gains of that nature would be 24893 1 consistent with a risk-controlled arbitrage 2 mortgage-backed security portfolio? 3 A. Yes. 4 Q. Now, let's take a look at 5 Exhibit B2095. It's at Tab 1884. This is a 6 document -- I'm sorry. You don't have it. It's 7 so big, I didn't put it in the book. This is a 8 document that Mr. Nickens showed you, and I just 9 have one or two questions. 10 Now, sir, Mr. Nickens directed you to 11 Page OW075840. I believe it's Page 95, if that's 12 of any help. 13 A. Yes. I'm there. 14 Q. Okay. And there is a paragraph -- it's 15 the second paragraph under the title 16 "mortgage-backed securities," and I believe that 17 Mr. Nickens pointed you to this paragraph. And in 18 it, it indicates that there was $71.7 million in 19 gains in 1986 from the sale of mortgage-backed 20 securities. 21 Do you see that? 22 A. Yes. 24894 1 Q. And it states in the second sentence of 2 that paragraph -- strike that. I'll go back. It 3 says that there had been sales of mortgage-backed 4 securities in 1986. And it goes on and says, 5 "This increased activity during a period of 6 falling interest rates reflects in part the 7 company's shifting from higher coupon rate to 8 lower coupon rate mortgage-backed securities in 9 order to curtail a prepayment risk. These 10 transactions produced gains on sales of 11 mortgage-backed securities during 1986 totaling 12 $71.7 million." 13 What was your understanding of what it 14 means to curtail prepayment risk? 15 A. Again, higher yielding coupon 16 mortgage-backed securities have a tendency to 17 prepay faster in a dropping interest rate market. 18 As mortgage rates would come down, people would 19 probably come in and prepay their, if possible, 20 double-digit mortgage rates and bring them down to 21 single digits. There's a higher tendency of that 22 happening during drops in interest rates. 24895 1 Q. That creates a risk for a 2 mortgage-backed risk-controlled arbitrage 3 portfolio? 4 A. It creates a risk, but you can handle 5 it through the maintenance of the portfolio by 6 selling those off. 7 Q. Does the risk that's described in this 8 paragraph that resulted in $71 million worth of 9 gains in 1986 reflect that such gains were the 10 natural rebalancing of the portfolio to curtail 11 the prepayment risk? 12 A. Yes. 13 Q. You weren't alarmed by the fact that 14 there were those kinds of gains in the 15 mortgage-backed portfolio? 16 A. No. 17 Q. Now, Mr. Villa then showed you a 18 document, which is the next one in your book; and 19 it's Tab 888. It's A1223. This is a document 20 that is titled "United Savings Association 21 restructuring proposal" dated May the 29th, 1987. 22 A. Okay. 24896 1 Q. You may recall that previously we had a 2 blow-up of it. I don't see it here. 3 And I believe you were directed to the 4 first two sentences in the second paragraph by 5 Mr. Villa. And they read, "Throughout 1986 and 6 the first quarter of 1987, interest rates were 7 generally declining. During this interest rate 8 decline, USAT was able to generate substantial 9 gain on the sales of corporate investments and 10 mortgage-backed securities." 11 Do you see that? 12 A. Yes. 13 Q. Did you understand that the purpose of 14 the sales that are referred to there in that 15 paragraph had resulted from gains to adjust the 16 portfolio of mortgage-backed securities to curtail 17 prepayment risk? 18 A. That was my understanding, it was part 19 of the risk-controlled arbitrage maintenance of 20 those portfolios. 21 Q. But I've shown you two previous 22 documents. One was a 1986 10K that indicated that 24897 1 there were sales in 1986 to curtail prepayment 2 risk. 3 A. Right. 4 Q. Well -- and I've also shown you the 5 business plan which was dated August 29th, 1986, 6 which also said that in 1986, there were sales to 7 curtail prepayment risks. 8 Does it appear that the sales that are 9 being described here in the restructuring proposal 10 are the same sales that were referenced in the 11 business plan in the 1986 10K? 12 A. Same type of sales. 13 Q. Did you understand when you received 14 this document that the sales being referred to 15 here were sales that were made for the purpose of 16 generating gains in order to meet USAT's capital 17 requirements? 18 A. I believe that we -- I viewed the sales 19 coming out of their risk-controlled arbitrage 20 portfolios as their normal maintenance of those 21 portfolios. 22 Q. And that was the purpose for the sales, 24898 1 to maintain the portfolio? 2 A. Yes. 3 Q. It wasn't to generate gains as far as 4 you understood it? 5 A. True. 6 Q. And did you have the same understanding 7 with respect to the high-yield bond portfolios? 8 A. Yes. 9 Q. So, in other words, the sales out of 10 those portfolios -- 11 MR. EISENHART: Your Honor, I'm going 12 to object to this. I didn't ask Mr. Twomey any 13 questions on cross-examination concerning gains on 14 high-yield bonds. I had a whole section that I 15 planned to do and never did it. I elected not to 16 do it. He's going beyond the scope. 17 MR. RINALDI: Your Honor, it says right 18 here in the very sentence I read that Mr. Villa 19 showed him that most of USAT's position is -- 20 there are significant gains in asset sales -- I'm 21 sorry. I'm reading from the wrong page. 22 During an interest rate decline, we've 24899 1 been able to show substantial gains on corporate 2 investments and mortgage-backed securities. This 3 is the very sentence that Mr. Villa showed him, 4 and I'm asking him what his understanding was of 5 the purpose for the sales that resulted in those 6 gains. 7 THE COURT: All right. Can you answer? 8 A. Again, it -- the way I viewed it, it 9 was simply their maintenance of their 10 risk-controlled arbitrage and the balancing of the 11 mortgage-backed securities portfolio because of 12 interest rate movements and other needs to 13 maintain the junk bond portfolio that necessitated 14 the various sales to rebalance the portfolio and 15 maintain the risk-controlled arbitrage. 16 Q. (BY MR. RINALDI) Would you take a look 17 at the next document, which is A12169? It's 18 Tab 1876. This is a letter that you received, 19 again, from Mr. Berner. This is dated 20 February 11th, 1987. I direct your attention to 21 OW151992. I believe it's the fourth page into the 22 document. And if you look down to -- the 24900 1 paragraph above Roman Numeral IV, do you see that? 2 A. Yes. 3 Q. It says in the second sentence, "In 4 fact, for the most part, United's high-yield bond 5 portfolio is designed to be an investment and not 6 a trading portfolio so that long-term holdings are 7 the expectation upon acquisition." 8 Do you see that? 9 A. Yes. 10 Q. And was that consistent with your 11 understanding of the purpose for the high-yield 12 bond portfolio? 13 A. Yes. 14 Q. Now, I have a few more questions with 15 respect to Mr. Eisenhart's examination; and then I 16 will be finished. 17 MR. RINALDI: If you would like, we can 18 take a break now or I can finish it up now. 19 THE COURT: Why don't you finish it. 20 MR. RINALDI: Okay. 21 Q. (BY MR. RINALDI) Now, Mr. Twomey, in 22 response to -- strike that. 24901 1 Yesterday Mr. Eisenhart asked you a 2 number of questions that related to the put/call 3 option. 4 A. Yes. 5 Q. And Mr. Eisenhart pointed out to you 6 that MCO had in several of its filings made a -- 7 had described the put/call option in greater 8 detail. And I believe on the 10K, there may have 9 been a copy of the actual put/call option. 10 A. Yes. 11 Q. Do you know whether USAT -- I'm sorry. 12 Do you know whether MCO ever provided 13 its 10K with the copy of the put/call option to 14 the Federal Home Loan Bank Board? 15 A. No. 16 Q. Was it the policy of the Federal Home 17 Loan Bank Board to rely upon the submissions of 18 the institution for information regarding the 19 institution? 20 A. Generally, yes. 21 Q. Was it unusual for the Bank Board to go 22 to the SEC and seek to obtain SEC filings? 24902 1 A. In my opinion, yes. 2 Q. If you wanted to obtain an SEC filing 3 for UFG, how would you have done it? 4 A. I would have probably called Art Berner 5 and asked him to send me a copy of it. 6 Q. Now, in the case of the put/call 7 option, USAT submitted various materials that 8 referenced the option; and I think we've seen 9 them. Now, one of them would have been the 10 business plan, which I think you have right in 11 front of you. Why don't we take a look at the 12 business plan. 13 In particular -- do you find the page 14 that's marked there with -- 15 MR. EISENHART: Your Honor, might we 16 know the exhibit number of that? 17 MR. RINALDI: Sure. It's Tab 184, 18 A10663. It should be in Volume II, and it's the 19 third document from the end. 20 A. I have it. 21 Q. (BY MR. RINALDI) And in particular, if 22 you look at OW005485, it describes the put/call 24903 1 option there. 2 A. (Witness reviews the document.) I see 3 it at the top of Page 18. 4 Q. I think we've discussed previously the 5 description that's given in that document doesn't 6 indicate that there was a letter of credit or an 7 indemnification? 8 A. That's correct. 9 Q. In reviewing the ownership of USAT 10 or -- strike that. 11 Do you recall that you asked Ms. Baugh 12 to review the ownership of UFG at some point in 13 time? 14 A. Yes. 15 Q. And she prepared a document for you? 16 A. A memo, yes. 17 Q. Would you expect that Ms. Baugh would 18 have utilized documents which were in her file to 19 determine the ownership of UFG? 20 A. Yes. 21 Q. And do you recall that the business 22 plan had been submitted to Ms. Baugh in the middle 24904 1 of 1986? 2 A. Yes. 3 Q. And it describes the put/call option? 4 A. Yes. 5 Q. Now, in your view, is it likely that 6 that was the source of the information that 7 Ms. Baugh used? 8 MR. EISENHART: Your Honor, I'm going 9 to object to the leading question. In his view? 10 I mean, he's putting the answer into Mr. Twomey's 11 mouth. 12 THE COURT: All right. Sustained. 13 Q. (BY MR. RINALDI) Now, Mr. Twomey, I 14 would like to show you a copy of what was 15 previously marked as B33 -- 3774. We do have a 16 bit of a problem here, though, because I don't 17 know if it's been given a tab number yet. Has it? 18 THE COURT: What's the exhibit number? 19 MR. RINALDI: It's B3774 -- actually, 20 B3775. I'm sorry. It's Tab 285. 21 THE COURT: Is it one exhibit or two? 22 MR. RINALDI: One is the cover memo. 24905 1 And the exhibit I'm interested in is the report, 2 and it is B3775. I think B3774 is probably the 3 cover memo or the cover sheet. I'm interested 4 more in the body of the report. 5 Q. (BY MR. RINALDI) We're pretty much 6 finished with these books; so, you can close them. 7 This was shown to you yesterday. I would like you 8 to take a look at it right now, and I just have a 9 couple of questions regarding it. 10 A. (Witness reviews the document.) 11 Q. Now, in particular, would you take a 12 look at Page OW156338? I know this isn't a very 13 good copy, but I think it's legible. I would like 14 to read to you a portion of the report that was 15 identified yesterday from Ms. Bese's work papers 16 of the 1988 examination. 17 Are you on OW156338? 18 A. Yes, I am. 19 Q. And do you see the sentence that's -- 20 the sixth line down, there's a sentence that 21 begins "a weekly, monthly." 22 Do you see that? 24906 1 A. Yes. 2 Q. I'm going to read a portion of this and 3 ask you a couple of questions about it. It says, 4 "A weekly or monthly mark-to-market on the 5 association's books is strongly recommended. 6 There is price risk associated with the portfolio 7 at all times. These non-blue chip issues in this 8 portfolio are such that any negative news, even if 9 minor, can and does cause an overreaction in 10 prices. The association has experienced some 11 sharp downturns in individual portfolio values 12 during the past year with E-II Holding Company 13 bonds dropping from 12,277,000 value on May 31st, 14 1988, to 10,626,000 or 13.46 percent during the 15 following month and CONSECO bonds dropping from 16 11,438,000 on July 31st, 1988, to 10,660,000 or by 17 6.8 percent during the following month. While the 18 September 30th, 1988 portfolio book value is only 19 $11,162,000 or 2.085 percent below the current 20 market, the entire junk bond program in itself is 21 high risk and volatile with constant portfolio 22 turnover and should be marked to market on the 24907 1 books at least monthly." 2 Do you see that? 3 A. Yes. 4 Q. Now, the description of the junk bond 5 portfolio of USAT that's described there, is that 6 consistent with your own views of junk bond 7 portfolios? It indicates there is price risk. 8 A. Well, junk bonds -- 9 MR. KEETON: Your Honor, why doesn't 10 Mr. Rinaldi just tell him the answer. I mean, he 11 asked the question. The witness studies it. And 12 so, he points him to something specific. 13 MR. RINALDI: I'll ask him the 14 question. 15 MR. KEETON: No. Just tell him the 16 answer. 17 THE COURT: Let's have the answer to 18 the first question. 19 A. Well, junk bonds, because they are 20 subordinated business loans, tend to be more 21 reactive toward good or bad news, either things 22 happening in the market or things happening in 24908 1 that particular company. In this case, where the 2 examiner seems to be indicating instead of 3 carrying this as an investment portfolio, it 4 should be carrying as a trading portfolio because 5 he's asking for the portfolio to be marked to 6 market on the institution's books on a monthly 7 basis, he's viewing that there's much more 8 volatility in there than one would expect. 9 Q. (BY MR. RINALDI) Do you view this as a 10 positive or a negative comment? 11 A. I would be concerned by this comment if 12 I had read it at the time. 13 Q. It wasn't put in the exam report, 14 though? 15 A. No. 16 Q. Now, can we turn to the last page of 17 the document -- well, I think this is -- I think 18 in the interest of time, I'll just move on. 19 Mr. Twomey, I would like you to take a 20 look at what's been marked as Exhibit B3819. It's 21 Tab 590. This is the report that Mr. Eisenhart 22 showed you yesterday. 24909 1 Do you see that? 2 A. Yes. 3 Q. And prior to its -- just to make sure I 4 understood what you said yesterday, had you ever 5 seen this document before it was shown to you by 6 Mr. Eisenhart? 7 A. Not that I can recall. 8 Q. Is this a supervisory directive that 9 would have been circulated to supervisory agents 10 for purposes of their oversight of institutions? 11 A. I don't believe so. 12 Q. Okay. Now, if you would take a look at 13 Pages 12 through 15, you'll see that the author 14 sets out a number of different options. Just leaf 15 through that. These are options that the Federal 16 Home Loan Bank Board might consider taking in 17 dealing with the question of junk bond holdings by 18 insured institutions. 19 Do you see that? 20 A. Yes. 21 Q. Do you know whether -- which, if any of 22 these options, were adopted by the Bank Board as 24910 1 their policy? 2 A. No, I don't recall -- I'm up to 3 Option 4, but -- (witness reviews the document.) 4 No. The only option I see in there that kind of 5 indirectly was adopted is that originally when we 6 had the first asset classification regulation, it 7 only covered loans. And later, it was expanded to 8 include all assets. 9 But for the first year, 1986, when it 10 was first implemented, it was strictly loans only. 11 And later on, they expanded it to include other 12 assets which, if they include all assets, then it 13 would have included the junk bonds and other 14 investments. That's the only option I see that 15 would have been indirectly adopted. 16 Q. Does this appear to be an advocacy 17 paper for consideration by the board? 18 A. I haven't reviewed the entire document; 19 but the tenor by the writer, I would say appears 20 positive. But he's also pointing to negatives, 21 pluses, and minuses to different courses here. 22 Q. You worked at the Federal Home Loan 24911 1 Bank Board. From time to time, did the members of 2 the board request input regarding options that 3 might be available to them with respect to various 4 facets of the savings and loan industry? 5 A. Yes. 6 Q. And were papers of this nature 7 necessarily then the operating guidelines of the 8 Federal Home Loan Bank Board? 9 MR. EISENHART: Your Honor, I'm going 10 to object. He's just trying to introduce his own 11 characterization of the report here. The witness 12 has told us what he knows about it. 13 THE COURT: Sustained. 14 Q. (BY MR. RINALDI) Do you know whether 15 these were operating guidelines that the Federal 16 Home Loan Bank Board followed? 17 MR. EISENHART: Your Honor, that's the 18 same question. I believe you just sustained the 19 objection. 20 THE COURT: Sustained. 21 MR. RINALDI: I would like to show you 22 one last document, and then we'll -- do you know 24912 1 whether -- well, let me ask you this: Who was 2 William J. Schilling. 3 A. Bill Schilling, he was the director of 4 OES probably 1983 to 1985. I'm guessing. 5 Q. When you say "OES," what is that? 6 A. Office of Examination Services, which 7 was a section of the Federal Home Loan Bank Board 8 in Washington. 9 Q. And what was the role or function of 10 OES? 11 A. It was oversight over examination 12 process and supervision. 13 Q. And how did they carry out that 14 oversight function just generally? 15 A. When OES still existed back then, there 16 was a director of OES; and there was a regional 17 director who would be responsible for two or three 18 districts. And as examination reports, issues 19 were being raised, they would be forwarded to that 20 regional director; and he had a staff of analysts 21 and so forth. And any issues that he thought 22 should be resolved, he would bring to the director 24913 1 of the OES. 2 Q. Did the OES issue guidelines to 3 examiners? 4 A. Yes. 5 Q. I would like to hand you a copy of 6 what's been marked as A4114. This is a memorandum 7 that appears to have been prepared by Mr. Berner 8 to Mr. Steve Wadell. But what I'm interest in 9 is -- it has attached to it what appears to be 10 legal research, a portion of which is referenced 11 in the body of the memorandum. This is a 12 memorandum dated July 12th, 1988. And in 13 particular, I would direct your attention to the 14 third paragraph -- I mean the third page of the 15 document, and there is a -- it starts off 16 "citation" and it says, "Date: August 27th, 17 1984." 18 Do you see that? 19 A. Yes. 20 Q. Do you -- take a moment to read this 21 document -- just read down to the end where it 22 says "end of document," about two-thirds down the 24914 1 page; and then I have a couple of questions I 2 would like to ask you. 3 A. (Witness reviews the document.) 4 THE COURT: Are you going to offer this 5 document? 6 MR. RINALDI: I am, Your Honor. 7 MR. VILLA: Your Honor, this document 8 wasn't on their list; so, it's just going to take 9 me a moment to review it. 10 A. Okay. 11 Q. (BY MR. RINALDI) Have you read it? 12 A. Yes. 13 MR. RINALDI: Is there any objection to 14 the document at this point? 15 MR. VILLA: Sir, I've not seen the 16 document before; so, I'm trying to determine 17 whether the attachments were supposed to be 18 attached originally. 19 MR. NICKENS: Your Honor, there's no 20 Bates numbers; so, would somebody indicate the 21 source of the document? 22 THE COURT: Mr. Rinaldi. 24915 1 MR. RINALDI: I believe it -- well, it 2 came from one of our files. 3 THE COURT: We'll take a short recess. 4 5 (Whereupon, a short break was taken 6 from 10:39 a.m. to 11:01 a.m.) 7 8 THE COURT: Be seated, please. We'll 9 be back on the record. 10 At the recess, we were looking at the 11 document A14114. I think the question was whether 12 the Federal Home Loan Bank Board document was a 13 part of the memorandum from Mr. Berner. Has that 14 been determined? 15 MR. VILLA: No objection to its 16 introduction, Your Honor. 17 THE COURT: All right. 18 Q. (BY MR. RINALDI) Mr. Twomey, I'm not 19 really interested in the memorandum as such but 20 the attachment. And directing your attention to 21 the third page of the document which is a -- 22 purports to be a memo dated August 27th, 1984; and 24916 1 the addressee is the OES professional staff and 2 the author is William J. Schilling. 3 Do you see that? 4 A. Yes. 5 Q. Do you recognize this kind of document 6 as something that was disseminated at the Federal 7 Home Loan Bank Board? 8 A. On the examination side, yes. 9 Q. Why were these kinds of documents sent 10 out? 11 A. To give guidance to the examiners 12 regarding issues that had been raised. 13 Q. Do they have an official title? Do you 14 know? 15 A. Usually, they are what we call R 16 memorandums. 17 Q. What is an R memorandum? What's the 18 purpose of it? 19 A. It's a further explanation of an 20 existing reg or an expansion of a regulatory 21 definition regarding an activity. 22 Q. Are these kinds of memoranda the 24917 1 official position of the Federal Home Loan Bank 2 Board? 3 A. Yes. They used to send out from time 4 to time R and T memorandums. T is for technical 5 memorandums. 6 Q. Who would these kind of memoranda be 7 distributed to? 8 A. Well, it would originate with the 9 director of OES; and it would go out to the 10 district directors of examinations, 12 districts 11 at this time around the country. And then they 12 would be handed out to the examiners. The 13 district director of each district was then 14 obligated to send it on to the head of 15 examinations of each state. 16 Q. Were these also disseminated to savings 17 and loans? 18 A. Well, the R and T memorandums would be 19 incorporated into the supervisory guide and 20 referenced as such. 21 Q. And in the first paragraph, it talks 22 about associations not being prohibited from 24918 1 investing in junk bonds. 2 Is that consistent with your 3 understanding of the regulations? 4 A. Yes. 5 Q. It goes on and says, "It's risky since 6 low rated bonds not only reflect interest rate 7 action. They also rise and fall on the most 8 recent facets of the company's news as do stocks." 9 Is that the views of the Bank Board? 10 A. Well, since this is their memorandum, 11 it would be. And Bill Schilling was the director 12 of OES at the time that this was issued. 13 Q. In the second paragraph, it talks about 14 exercising extreme prudence and being especially 15 careful in underwriting practices and that failure 16 to exercise demonstrable caution is a unsafe and 17 unsound practice if one doesn't exercise 18 demonstrable caution in underwriting junk bonds. 19 Was that your understanding of the Bank 20 Board's rules regarding safety and soundness? 21 A. Yes. 22 MR. RINALDI: I have no further 24919 1 questions for this witness. 2 THE COURT: You have some recross? 3 MR. VILLA: I do, Your Honor. 4 5 FURTHER EXAMINATION 6 7 Q. (BY MR. VILLA) Good morning, 8 Mr. Twomey. Mr. Twomey, you were asked a number 9 of questions. 10 Now, before I get to that, would you 11 tell us again what your undergraduate degree is 12 in? 13 A. Bachelor of Business Administration, 14 Accounting. 15 Q. Do you have a home loan? Do you have a 16 home loan, a mortgage loan? 17 A. I had a mortgage loan, yes. 18 Q. And you have put your money in bank 19 accounts from time to time; is that right? 20 A. Yes. 21 Q. You're able to calculate interest 22 rates, like 5 percent on $100 is $5? 24920 1 A. Yes. 2 Q. Mr. Rinaldi asked you whether you were 3 able to calculate from the 10K the degree to which 4 the interest rate swaps were showing a positive or 5 negative amount. 6 Do you remember that question? 7 A. Yes. 8 Q. And you said you weren't able to do it. 9 He showed you the page of the 10K, and you said 10 you were unable to do it. 11 Do you remember that? It was about 35 12 minutes ago. 13 A. The way I remember the question is had 14 I done the calculation on interest rate swaps, and 15 I believe I said "no." 16 Q. Well, the way I recall it -- and we'll 17 have to look at the record -- is were you able to 18 determine from that -- I'll tell you what. Why 19 don't we take a look at the 10Ks that were 20 submitted to you and that you would have reviewed 21 to see the degree of difficulty that it would have 22 taken you to calculate whether or not the interest 24921 1 rate swaps were showing a mark-to-market gain of 2 $200 million or more to offset the mark-to-market 3 losses in the MBS. 4 Why don't we start off with 5 Exhibit A3022, which is Tab 719. This is the 6 year-end 1986 10K. 7 Do you have that before you, sir? 8 A. I have the 10K. 9 Q. I would direct your attention to 10 Page 54. Do you see interest rate exchange 11 agreements? 12 A. Yes. 13 Q. Now, the first paragraph shows -- we'll 14 just deal with the first exchange agreement. We 15 could go through them all, but we'll see sum 16 summary numbers later. The first number is 17 1,079,000,000 nominal principal amount of 18 liabilities. 19 Do you see that? 20 A. Yes. 21 Q. And they were paying 10.9 -- 22 10.88 percent. USAT was paying 10.88 percent. 24922 1 Do you see that? 2 A. Yes. 3 Q. And they were receiving 6.03 percent? 4 A. Yes. 5 Q. So, as I -- you know, I don't have an 6 undergraduate degree in accounting, but it looks 7 like the spread is about 4.85 percent. Right? 8 A. Yes. 9 Q. And a 4.85 percent spread on a billion 10 dollars, can you calculate that for me in your 11 head roughly? 12 A. About 40 million. 13 Q. Now, that would -- just looking at that 14 paragraph, you would see that the interest rate 15 swaps were losing $40 million a year, a year, on 16 that date. Right? 17 A. Uh-huh. Yes. 18 Q. And we just did that in the course of 19 about 45 seconds. Right? 20 A. Yes. 21 Q. Okay. Let's take a look at the 1987 22 10K, which is Exhibit A3023 in evidence at Tab 79. 24923 1 I would like to direct your attention back to 2 Page 54 of that document under "hedging programs." 3 I believe this is the exact provision that 4 Mr. Rinaldi showed you that you either couldn't or 5 didn't analyze to determine whether or not the 6 hedges showed a 200-million-dollar mark-to-market 7 gain to offset the MBS 200 mark-to-market loss. 8 Let's look at the first paragraph. 9 We're dealing with the notional amount of 10 $946,350,000. Right? 11 A. Yes. 12 Q. It's in the first paragraph. And they 13 are paying 10.98 percent on that, and they are 14 receiving 7.72 percent? 15 A. I believe so. 16 Q. So, the spread is a little over 3 17 percent on nearly a billion dollars. Right? 18 A. Yes. 19 Q. So, they would have lost $30 million, 20 roughly, on those interest rate swaps every year. 21 Right? 22 A. On an annual basis, yes. 24924 1 Q. On an annual basis. 2 Now, sir -- and that took us another 45 3 seconds or so. Would you agree with that? 4 A. Within a minute. 5 Q. Now, sir, I would like you to direct 6 your attention to Exhibit 468 -- I'm sorry -- 7 Tab 468, which is Exhibit A6022. And I'll 8 identify that as the 1987 examination report 9 prepared by Ms. Bese as of November 16, 1987. I'm 10 sorry. I misspoke. Vivian Carlton's examination 11 report of November 16, 1987. I'll direct your 12 attention to Page 19. 13 MR. RINALDI: Is this the one dated 14 July 28th, 1988? 15 MR. VILLA: This is as of November 16, 16 1987. 17 MR. RINALDI: I'm sorry. What page? 18 MR. VILLA: Page 19 under "hedging 19 caps, collars, and interest rate swaps." 20 Q. (BY MR. VILLA) Do you see that, sir? 21 A. Yes. 22 Q. Now, does the first paragraph indicate 24925 1 to you that USAT experienced a net loss of 2 approximately $40,145,000 in its interest rate 3 swaps, caps, and collar agreements? 4 A. Yes. 5 Q. So, would it be fair to say that if you 6 had spent about three minutes and 30 seconds 7 looking at either the 10Ks or the examination 8 reports, you would have known that the interest 9 rate swaps were dramatically underwater. If you 10 had spent about three minutes 30 seconds, you 11 could have figured that out, couldn't you? 12 A. The interest rate swaps, yes. 13 Q. So, your testimony that somehow you 14 knew that the mortgage-backed securities were two 15 to $300 million underwater but you thought the 16 swaps were two to $300 million on the plus side 17 and it balanced it out, that wouldn't be fair, 18 would it, given the documents that had been sent 19 to you by USAT, USAT and Vivian Carlton? 20 A. No. 21 Q. How about interest rate swaps, caps, 22 and collars? 24926 1 A. The way I recall it, there were other 2 hedging instruments that the institution was 3 using. There were caps, collars, futures 4 contracts. Some derivative instruments were also 5 being used. 6 Q. That's all described in the following 7 paragraphs, isn't it, sir, under "interest rates 8 swaps, caps, and collars"? 9 MR. RINALDI: Which paragraph are you 10 referring to? 11 MR. VILLA: In Ms. Carlton's 12 examination report. 13 A. (Witness reviews the document.) 14 Q. (BY MR. VILLA) It refers to financial 15 futures, option activity? 16 A. Yes. 17 Q. Now, sir, so, if you had spent three 18 minutes and 30 seconds looking at the public 19 filings and the examination reports that were sent 20 to you, you would have known that the interest 21 rate swaps, in fact, increased the mark-to-market 22 loss on an annual basis of at least $40 million 24927 1 and -- I'm sorry -- on an income basis of 2 $40 million; and if you marked them to market, it 3 would be even more than that. Right? 4 A. If you're going to limit it to the 5 interest rate swaps, based on what was in the 6 financials of the institution, they have a 7 synopsis there; and you could extrapolate that 8 information. 9 However, when you're looking at a 10 risk-controlled arbitrage and you're looking at 11 the different ways both sides are being hedged, 12 you have to sit down; and you have to look at the 13 duration of each. You have certain liabilities 14 that are matched against certain assets. You have 15 certain hedges against certain liabilities against 16 certain hedges. You have a matrix that you have 17 to lay out; and you understand, first of all, what 18 was intended to happen. And then, of course, you 19 look at the reality situation because of what 20 happened in the market and how values fluctuate. 21 Q. The reality of the situation was that 22 you knew that the mortgage-backed securities 24928 1 portfolio, considering both the MBS and the swaps, 2 were two to $300 million underwater from the 3 documents that were sitting right on your desk, 4 didn't you, sir? 5 A. If you want to look at simply the 6 market value of the MBS portfolio and you want to 7 look at the financial notes that -- at least the 8 couple that you've highlighted here, there's an 9 indication of loss on both of them. Again, if you 10 want to look at a risk-controlled arbitrage that 11 at that time I was being told had a positive 12 spread, you would have to lay out the whole matrix 13 of the whole thing and what had actually happened 14 in it from time to time. And the representation 15 to me was that this was a relatively solid, 16 well-performing program and it had a positive 17 spread. 18 Q. Sir, you knew exactly what the 19 mark-to-market loss was in this, didn't you? 20 A. Again, if you're talking about the MBSs 21 or you want to go down any individual interest 22 rate swap, you can calculate and determine what 24929 1 the loss was at that time as of that set date of 2 6/30, either 1986 or 1987. 3 Q. Let's take the interest rate swaps and 4 the mortgage-backed securities and put them over 5 to one side. Okay? 6 Now, the mortgage-backed securities -- 7 let's assume a mark-to-market loss was 8 $351 million and the interest rate swaps were 9 losing $40 million a year. So, let's put those 10 over to one side. 11 Were you aware of some asset in the 12 mortgage-backed securities portfolio or in the 13 hedges that had a mark-to-market gain unrealized 14 of $300 million or more? 15 A. Again, I didn't take the entire 16 risk-controlled arbitrage program; and it wasn't 17 done for me where it was entirely laid out to see 18 what the give and take would be because of market 19 pressures. Again, the only thing that was being 20 represented to me by the management of the 21 institution was there was a positive spread. That 22 was my belief through the time I supervised the 24930 1 institution. 2 Q. There was a positive spread, wasn't 3 there? 4 A. That's what was reported to me. 5 Q. You can still have a positive spread 6 and a loss on mark-to-market, can't you? 7 A. You can have a loss on mark-to-market 8 portfolio. 9 Q. Now understand it, don't you, sir? 10 A. Again, because of fluctuations of 11 values can change. But the whole point of the 12 risk-controlled arbitrage program was to maintain 13 a positive spread; namely, they are earning 14 between their -- the yield on the cost of the 15 liabilities and the yield of the assets is a 16 positive income stream coming out of the 17 risk-controlled arbitrage at all times. 18 Q. Right. If it does that, it's a 19 successful portfolio. Right? 20 A. Yes. 21 Q. That's exactly what they told you. It 22 was a successful portfolio because it had a 24931 1 positive interest stream; but they also told you 2 in their public filings that it had a negative 3 mark-to-market, didn't they, sir? 4 A. They told me in the public filings that 5 the MBSs were below mark -- below the historical 6 costs; namely, there was a market loss. 7 Q. They also told you the interest rate 8 swaps were below it, too, didn't they, sir? 9 A. As you pointed out. 10 Q. Now, Mr. Rinaldi showed you some 11 sensitivity analysis from the investment committee 12 minutes which revealed what the mark-to-market 13 loss was considering both the assets and the 14 liabilities. 15 Do you remember that? 16 A. Yes. 17 Q. And has anything happened since I 18 examined you on -- I guess it was two weeks ago in 19 which you said it would have been customary for 20 the federal examiners to look at investment 21 committee minutes. 22 Has your view on that issue changed? 24932 1 A. No. 2 Q. So, the federal examiners would have 3 looked at those investment committee minutes and 4 seen exactly what Mr. Rinaldi showed you as the 5 revelation of what the mark-to-market loss was? 6 A. I would assume they would have 7 requested the investment committee minutes and 8 reviewed them. 9 Q. Now, Mr. Rinaldi said that as of 10 Ms. Bese's memorandum -- Ms. Bese's memorandum, 11 Exhibit B2699, pointed out that the mark-to-market 12 loss on the assets and liabilities in the 13 mortgage-backed securities portfolio as of 6/30/87 14 she reported as $213.7 million. 15 Do you remember that? 16 A. Yes. 17 Q. Do you remember what the 10Q was that 18 we calculated out, the liability that was reported 19 to you in the document that was sent to you for 20 the time period ending 6/30/87? 21 A. What liability? 22 Q. I'm sorry. 24933 1 Do you recall, sir, what the 10Q 2 revealed as to the mark-to-market loss in the 3 mortgage-backed securities for the quarter ending 4 6/30/87, the same one that Ms. Bese discovered at 5 the end of the year, 1988? 6 A. The one you reviewed earlier with me 7 was again the MBS portfolio versus the market 8 value for that portfolio at that time; and I don't 9 remember the exact range because it went from 10 negative 150 to, as you said, negative 350 at 11 different times. 12 Q. It would be -- you wouldn't dispute me, 13 then, if I told you that Exhibit 1902, that the 14 mark-to-market loss was $167 million on the assets 15 side? 16 A. Right. 17 Q. If you took into consideration losing 18 at least $40 million a year on the swap side, that 19 would end up about, what, 167 and 40, $207 20 million, within 5 percent of her number, isn't it, 21 sir? 22 A. Yeah. But, you know, you're 24934 1 categorizing the swaps as it's locked in. You 2 have a LIBOR index swap, and what would be 3 happening is interest rates changed. The 4 difference between the interest rate swap, that 5 40-million-dollar difference, could go up or it 6 could go down. What they are doing, they are 7 giving you at this particular time, the average 8 has been this from X to now. But the next week or 9 the next month, because of changes in interest 10 rates, that 40 million could grow or it could be 11 dropped if you extrapolate it out for an annual 12 basis. 13 Q. So, you are pretty familiar with 14 interest rate swaps; is that right? 15 A. You said I could calculate my mortgage 16 rate. 17 Q. Now, sir, do you recall that you were 18 asked some questions about whether the board was 19 responsible for the strategic plan of USAT or 20 whether the supervisors were? Do you remember 21 Mr. Rinaldi asked you questions about that? 22 A. Yes. 24935 1 Q. Now, we've talked a little bit about 2 the wholesale strategy when I questioned you. 3 Do you remember that? 4 A. Yes. 5 Q. And the wholesale strategy was based 6 upon the elimination of the branch system so they 7 wouldn't be taking in deposits at a retail level 8 and they wouldn't be making consumer and home 9 loans. Right? 10 A. You're saying not making home loans. I 11 think you're talking a shift where predominantly 12 they were making home loans and going to the 13 wholesale strategy where they would still be 14 making some home loans. 15 Q. But selling off the branch system, you 16 dramatically reduce your ability to make home 17 loans ordinarily? 18 A. Ordinarily, but not emphatically. 19 Q. Now, sir, the question that was asked 20 to you is: Whose responsibility was it to direct 21 United -- and I think we probably both agree that 22 it was the responsibility of the directors to 24936 1 direct the strategy of United. 2 My question to you, sir, is: If the 3 Federal Home Loan Bank of Dallas believed that 4 USAT's strategy as laid out to them in the 5 mid-1980s didn't make sense, couldn't they have 6 just stopped approving the branch sales or not 7 approved any branch sales at all? 8 A. No. If we had a problem with the 9 strategy, we would have -- we possibly could have 10 turned down an application, but we would have 11 questioned it when we reviewed the business plans 12 normally. 13 Q. We didn't see any questioning of it in 14 the business plans, did we, sir? 15 A. No. 16 Q. If you wanted to put a stop to it, all 17 you had to do was say, "No more branch sales"; and 18 USAT couldn't have moved over to the wholesale 19 strategy. Right? 20 A. Well, in fact, we would have approved 21 the branch sales; and then USAT could have gone 22 into a shrinkage mode and shrunk down the 24937 1 institution rather than getting into this 2 wholesale strategy. 3 Q. 1987, you told us that you recommended 4 to the Regulatory Review Committee that it imposed 5 a supervisory agreement on USAT. 6 Do you remember that? 7 A. Yes. 8 Q. Another way that you could have changed 9 the direction of USAT would have been to actually 10 have imposed that supervisory agreement and 11 limited their ability to do, for example, equity 12 arbitrage, junk bonds and, indeed, even 13 mortgage-backed securities. Right? 14 A. Now you're talking about a rogatory 15 process, and you're talking some shortcuts. A 16 supervisory agreement is a voluntary agreement 17 that the institution can enter into. 18 Now, if the institution declines to 19 enter a supervisory agreement, then the course of 20 action is go for a cease and desist and then 21 impose. It's not as clean or effective as a 22 supervisory agreement, but it could take place. 24938 1 The trouble with that process, it's very 2 time-consuming; and we're talking a number of 3 months before it can actually be imposed. 4 Q. In your experience as a supervisory 5 agent in Texas during this time period, ordinarily 6 when you presented supervisory agreements, the 7 institutions agreed to them rather than going to 8 cease and desist orders; isn't that right? 9 A. They imposed various operating 10 restrictions, depending on the institution. As 11 part of that, we would negotiate, you know, 12 efficient ways for the institution to operate 13 within the restraints of the agreement. 14 Q. So, another way that you could have 15 effected the strategic direction of USAT, if you 16 thought that it was going off the rails, would 17 have been to demand that they execute a 18 supervisory agreement in the spring of 1987 rather 19 than offering them the option of having their junk 20 bonds reviewed by Prudential-Bache and their books 21 and records approved by Grant Thornton; isn't that 22 right? 24939 1 A. Well, the truth is, whether it be 2 Merrill Lynch or Pru-Bache or Grant Thornton, 3 those things were still going to happen. The 4 thing is without going for a supervisory 5 agreement, we effectively got the type of reports 6 and definitely got the Grant Thornton auditors to 7 go in and review their systems, books, and 8 records, which is what basically we were requiring 9 in the first place. 10 Q. Now, sir, you were shown a copy of the 11 UFG cease and desist order in connection with the 12 order for affirmative relief. That's 13 Exhibit A14113 that Mr. Rinaldi introduced, I 14 think, today. 15 Do you remember that? 16 A. Yes. 17 Q. And you were asked, sir, whether or not 18 the fact that UFG was ultimately able to pay 19 $9.5 million to settle that claim indicated that 20 your demand was futile. 21 Do you remember those questions? 22 A. Yes. 24940 1 Q. Now, sir, at the time the demand was 2 made at the end of 1988, do you recall that USAT 3 was between two and $300 million below its 4 regulatory capital limits? 5 A. Yes. 6 Q. And the issue was whether or not making 7 such a demand would result in the implosion -- I 8 think that was your word -- of UFG. 9 Do you remember that? 10 A. What I recall was when you put the 11 question to me regarding particularly the December 12 letter, I was hoping that any and all assets that 13 could be, in a sense, liquidated could be sent 14 down to at least offset some of the losses at 15 USAT. 16 So, if UFG had $10 lying around, it 17 really should be at least sent down and used as an 18 offset against USAT's losses. In this case, they 19 are talking -- they are coming up with 9 million. 20 That probably pales to the billion-dollar loss, 21 but 9 million to me is still a lot of money. 22 Q. Do you know whether the bankruptcy laws 24941 1 changed as a result of FIREA and gave the federal 2 government an additional and superior claim in the 3 bankruptcy proceedings which allowed them to 4 recover a much higher percentage of UFG's assets 5 than was the case in 1988? 6 A. FIREA changed a lot of statutes, but I 7 don't know them all. 8 Q. Why don't you take a look at Page 2 of 9 the exhibit that's before you, the second 10 "whereas" clause. 11 Do you see that, Exhibit A14113? 12 A. "Whereas an involuntary petition"? 13 Q. Right. Do you see, sir, that, in fact, 14 it was -- UFG was catapulted into bankruptcy and 15 it was only out of that bankruptcy proceeding that 16 the money was paid? 17 A. Yes. 18 Q. You don't know whether the bankruptcy 19 laws changed in 1989 that gave the federal 20 government a superior claim to all other creditors 21 for net worth maintenance claims? You don't know 22 that one way or the other? 24942 1 A. No, not specifically. 2 Q. Now, Mr. Twomey, you were asked a 3 number of questions about the S memo, 4 Exhibit T8142. We're not going to look at it just 5 yet. We will look at it before we're done. 6 In response to questions from 7 Mr. Rinaldi in your direct-examination, you 8 testified that you assisted in the preparation of 9 the memo. 10 Do you remember that? 11 A. Yes. 12 Q. Then in my cross-examination -- you 13 didn't state that Marc Dunn had drafted the memo, 14 did you, sir? 15 A. I don't recall. 16 Q. Then we -- then you went on to explain 17 a number of conclusions that you reached in the 18 S memo in response to Mr. Rinaldi's first set of 19 questions. 20 Do you remember that? 21 A. Regarding the insolvency of USAT, yes. 22 Q. In my cross-examination, I pointed out 24943 1 to you that the S memo said that you received the 2 February 11, 1988 contracts on June 2, 1988. 3 Do you remember that? 4 A. Yes. 5 Q. And then in your redirect-examination 6 by Mr. Rinaldi, you testified for the first time 7 that it was Marc Dunn who drafted the S memo. 8 Do you remember that, sir? 9 A. Yes. 10 Q. Well, who was it? Was it you or 11 Marc Dunn? 12 A. The supervisory analyst is the person 13 who prepares the S memo. Then I would review it, 14 make corrections, make changes as I see fit. Then 15 together the memo is then sent up to the next 16 level of supervision; and, of course, it's 17 reviewed again and again and again. And finally, 18 it would go to Billy Wood, I believe, at that 19 time; and then from Billy Wood, then it would be 20 transmitted to Washington. 21 Q. So, you would have had -- we're not 22 hearing you testify that Marc Dunn made this 24944 1 mistake because he was a new supervisory analyst 2 and you didn't have an opportunity to review it. 3 In fact, you did review it? 4 A. I did review it. 5 Q. And this was the largest or second 6 largest thrift in Texas at the time. Right? 7 A. Second. 8 Q. By the way, sir, the memo refers to, I 9 think we saw, contracts dated February 11, 1988. 10 Do you remember that? 11 A. Yes. 12 Q. Do you know of any other contracts 13 besides the USAT contracts that are dated 14 February 11, 1988? 15 A. I can't recall. 16 Q. So, there's no way he could have mixed 17 up the names, UFG and USAT, because he actually -- 18 he or you -- actually pulled the date off the 19 contracts and that allows us to tell that it was 20 the USAT contract? 21 A. I very much doubt that Mr. Dunn went 22 back to the original contracts to obtain the 24945 1 information. He was probably preparing the stuff 2 for the S memo from other summaries that had been 3 prepared before. 4 Q. Now, Mr. Rinaldi suggested to you that 5 the text of the October 27, 1988 letter, which is 6 B2487, that you sent to the board of directors of 7 USAT somehow indicated that you had made a 8 supervisory exception for Mr. Connell's contract. 9 Do you remember that? 10 MR. RINALDI: I object. That wasn't 11 the testimony. That wasn't my question. 12 MR. VILLA: I'll be happy to restate 13 it. 14 Q. (BY MR. VILLA) Let's take a look at the 15 October 27, 1988 memo. I think it was pointed out 16 to you in your examination that the first 17 paragraph on Page 1 of Exhibit B2487 only requires 18 60-day notice to be given to Arthur Berner, 19 Michael Crow, James Gray, James Jackson, James 20 Wolfe, and Bruce Williams; that the term of their 21 contract will not be extended beyond December 31, 22 1988. 24946 1 Do you see that, sir? 2 A. Yes. 3 Q. Do you recall it was also pointed out 4 to you that Larry Connell's name is not in there? 5 A. Absolutely. 6 Q. Let's see if we can figure out why. 7 Let's take a look at, for example -- the 8 interesting thing is it says because the term of 9 their employment contracts will not be extended 10 beyond December 31, 1988, as provided in 11 Paragraph 2 of the contracts. I happen to have 12 Mr. Berner's February 22 -- February 11, 1988 13 contract. 14 Do you see that before you, sir? This 15 is Pages 1 and 2 of Exhibit T8043. 16 A. Mind if I join you? 17 Q. Certainly. Do you see what the term of 18 his contract is and when it expires, his 19 February 11, 1988 contract? 20 A. Well, underneath this agreement, it 21 ends on December 31, 1988. 22 Q. It ends on December 31st, 1988, 24947 1 unless -- and it extends automatically for one 2 additional year unless notice is given no less 3 than 60 days prior to December 31. Right? 4 A. Right. 5 Q. So, you had to give notice more than 60 6 days before December 31, 1988, under Mr. Berner's 7 February 11, 1988 USAT contract or it would 8 automatically roll over. Right? 9 A. Yes. 10 Q. And your letter of October 27, 1988, 11 directs that such notice be given. Right? 12 A. Yes. 13 Q. Now, let's look at Mr. Connell's 14 contract and see what Mr. Connell's contract says. 15 I would ask you to look at Exhibit B2313, which is 16 Tab 485. This is the Beverly Isaiah-Burmudez memo 17 to you dated July 15, 1988. And attached to it is 18 the Connell contract that you were sent by 19 Mr. Berner. 20 And let's -- do you have that before 21 you, sir? 22 A. Okay. 24948 1 Q. I would like to ask you to turn to 2 Bates stamp -- it's actually Imaging Page No. 3 OW155393. It's about 10 pages into the document. 4 A. I'm there. 5 Q. Under "term." Now, do we agree that 6 this is the Connell contract? 7 A. I don't have any problem with that. 8 Q. The Bates stamp OW155392 indicates it's 9 the Connell contract. Right? 10 A. Exactly. 11 Q. Look at the term of the Connell 12 contract. When does it expire, sir? 13 A. 1990. 14 Q. And notice has to be given prior to 15 December 31, 1990. Right? 16 A. Yes. 17 Q. Doesn't that explain why Mr. Connell's 18 name is not in Paragraph 1 on the 60-day notice? 19 A. No. 20 Q. No? 21 Now, you were asked a number of 22 questions about whether or not Art Berner asked 24949 1 you, "Hey, what do you think of the Connell 2 contract?" His questions were -- every time he 3 met you, you were shown a number of memoranda in 4 July and August. And the question was: Did he 5 ask you about the Connell contract? 6 Do you remember those questions, sir, 7 that Mr. Rinaldi asked you? 8 A. He pointed out there was an absence of 9 discussion regarding the Connell contract. 10 Q. Let's see if we can figure out what the 11 understanding was between you and Mr. Berner as to 12 whose obligation it was to come forward with any 13 statement about problems in the Connell contract. 14 Let me direct your attention first to 15 Exhibit B1377, which is T -- I'm sorry -- 16 Tab 1377, which is T8081. T8081, Tab 1377. 17 Do you have that, sir? 18 A. Yes. 19 Q. And is that a memorandum of a 20 conversation that Mr. Berner had with you on 21 June 29, 1988? 22 A. Yes. 24950 1 Q. And the end of the first full paragraph 2 reads, "Neil said that approval was not required." 3 This is in reference to the Connell contract. 4 "Neil said that approval was not required, but he 5 would strongly suggest that I forward a copy to 6 him so that he could review it. If he saw a major 7 problem, he would let me know; and if he did not, 8 he would brief George Barclay on the contract. 9 Do you see that, sir? 10 A. Yes. 11 Q. That does accurately reflect what your 12 understanding was with Mr. Berner? 13 A. Yes. I requested him to send me a copy 14 of the contract. 15 Q. And you also said that if you saw a 16 major problem, major violation, you would get back 17 to him, didn't you, sir? 18 A. I said -- I think his language is "the 19 major problem." I don't recall saying that, but I 20 don't have a problem with that representation. 21 Q. By saying you don't have a problem with 22 that representation, does that mean that you agree 24951 1 with the factual statement as set forth in 2 Mr. Berner's memorandum? 3 A. I probably said something on the line 4 that if I saw a problem, I would let him know; if 5 there was something that we found in the contract 6 that we felt was a problem. That was about it. I 7 don't recall exactly what I said because of the 8 passage of time. You know, if you want to spend 9 more time talking about it, go ahead. 10 Q. Well, sir, do you dispute the 11 characterization that Mr. Berner has in here of 12 his conversation with you 10 years ago? 13 A. Sir, I don't recall the conversation 14 specifically. I can't really dispute it or 15 confirm it because I just don't remember it 16 exactly. 17 Q. Well, let's look at Exhibit A11031, 18 Tab 467. It's a letter from Arthur Berner to you 19 dated June 30, 1988. And it encloses the Connell 20 contract? 21 A. I have it in front of me. 22 Q. And the second sentence -- the entire 24952 1 letter says, "As discussed, I am enclosing a copy 2 of the employment contract we will be entering 3 with Larry Connell. I would appreciate your 4 reviewing this agreement and letting me know if 5 you see any major problems." Right? 6 A. Right. 7 Q. And does that refresh your recollection 8 that that was the agreement that you had with 9 Mr. Berner, that you were going to review it and 10 tell him if there were any major problems? 11 A. Well, the facts are that I sent the 12 contract to the legal department. I had them 13 review it. They had some, you know, technical 14 problems with the contract. We reviewed the 15 contract internally; and at that point, somewhere 16 along the line, USAT and Connell entered into the 17 contract sometime after this date. That's 18 basically all I recall. 19 Q. Well, you were asked whether Mr. Berner 20 had reminded you about the existence of the 21 contract and inquired about it. Why don't we look 22 at Exhibit T8089, Tab 1380, which is a memorandum 24953 1 of a meeting that he had with you and others on 2 July 5, 1988. 3 Do you have that before you, sir? 4 A. Yes. 5 Q. And does the third full paragraph -- 6 this is a meeting at the Federal Home Loan Bank 7 Board in the presence of Mr. Barclay and others. 8 And the third full paragraph reads, "I mentioned 9 in the meeting that I had forwarded a copy of the 10 contract to Neil Twomey. Neil stated that since 11 he had been out of the office for the last few 12 days, he had not gone through his in-box and, 13 therefore, had not reviewed the contract? 14 A. Yes. 15 Q. He did remind you of it, didn't he? 16 A. At this meeting. 17 Q. And subsequent to this meeting, you 18 then sent the contract forward to your legal 19 department and received an analysis of it? 20 A. From Beverly Bermudez, yes. 21 Q. So, we've just seen at least three 22 instances in which he talked to you, wrote to you, 24954 1 and reminded you that he sent you the Connell 2 contract. Right? 3 A. Well, on or around June 30th, 1988, 4 yes. 5 Q. Now, sir, you told us about the 6 decision you made to dismiss Mr. Crow and 7 Mr. Berner. Right? 8 A. Yes. 9 Q. And at least the December 15, 1988 memo 10 that you wrote on their dismissal talked about 11 events going back to the Norwood loan and the 12 Park 410 loan and others. 13 Do you remember that? 14 A. I remember you pointing them out. 15 Q. Let's see what happened to the other 16 people that you were -- that were involved in 17 those. 18 Do you remember Gerry Williams? 19 A. Yes. 20 Q. He was the president of USAT from 1983 21 until January 1, 1987. Right? 22 A. Yes. 24955 1 Q. He was there from the change from the 2 retail to the wholesale strategy? 3 A. Well, yes. If it started in 1984 and 4 1985, yes. 5 Q. He was there through the decision to 6 invest in junk bonds, equity arbitrage, and 7 mortgage-backed securities that you've talked 8 about? 9 A. Yes. 10 Q. He was there through the rolldown? He 11 was present during the rolldown? 12 A. Describe to me what you mean by 13 "rolldown." 14 Q. I thought I listened to your 15 description about how the mortgage-backed 16 securities portfolios were supposed to be 17 readjusted when interest rates fell, and you 18 testified how you recalled the interest rate 19 falling in the first half of 1986? 20 A. I remember. 21 Q. Mr. Gerry Williams was president during 22 the rolldown, wasn't he, sir? 24956 1 A. I believe he was president of USAT at 2 that time, 1986, yes. 3 Q. He was there through the decisions to 4 approve the Park 410 and Norwood loans, right, in 5 1986? 6 A. He was the president, yes. 7 Q. Unlike Mr. Berner, he was actually on 8 the senior loan committee; and he approved the 9 Park 410 and Norwood loans, didn't he? 10 A. I don't recall exactly that he was 11 there. I'll take your representation that he was 12 on the committee. 13 Q. Why don't we take a look at the two 14 loan approvals. Remember, we looked at the loan 15 approvals to see whether you had given for one of 16 the reasons firing Art Berner was that he had 17 approved the Park 410 and Norwood loans. 18 Let's take a look to see if Gerry 19 Williams was actually the person who had approved 20 the loans. Let's look at T7020, which is the loan 21 committee approval; and it's in evidence at 22 Tab 687 on the Norwood loan. 24957 1 Would you look at the last page of that 2 and tell me whether you see the initials or 3 signature G.R. Williams in the upper right-hand 4 corner of the senior loan committee action 5 approval? 6 A. Yes, I do. 7 Q. Okay. Now, let me also show you what's 8 been marked as T70 -- I'm sorry -- T7670 which is 9 in evidence at Tab 654, which is the final 10 approval of the Park 410 loan. 11 Do you have that? 12 A. Yes. 13 Q. And would you look at the approval on 14 that loan and let me ask you: Did -- do you see 15 the signature of Gerald R. Williams approving that 16 loan? 17 A. Yes. 18 Q. So, you fired Mr. Berner for approving 19 the two loans; and Mr. Williams was actually the 20 man who approved them. 21 Do you see that, sir? 22 A. I see Mr. Williams was on the loan 24958 1 committee when these loans were approved, yes. 2 Q. Do you recall, sir, you were shown a 3 number of letters in 1985 about representations 4 that were made to the Federal Home Loan Bank Board 5 about USAT's business plans? 6 Do you remember that? Mr. Rinaldi 7 showed them to you. 8 A. Yes. I think they were attached to 9 various applications at the time. 10 Q. Do you remember who signed those 11 letters, sir? 12 A. I don't remember the exact signature on 13 the cover letter. 14 Q. Gerald Williams, wasn't it? 15 A. Usually, it's the president or the 16 chairman of the board or CEO. 17 Q. Do you recall Mr. Williams had a 18 three-year contract and received severance of over 19 $400,000 when he left? 20 A. I don't recall his terms, but I do 21 remember that he left sometime in 1987. 22 Q. Well, he's testified in this proceeding 24959 1 that he had a discussion with you and you said 2 that you had personally approved his severance 3 package of over $400,000. 4 You don't recall that? 5 A. I don't recall it. 6 Q. After he left, after doing all these 7 things, you approved him to run Franklin Savings 8 of Austin, didn't you? 9 A. I believe he was a state agent 10 appointed by the State Savings and Loan 11 Commissioner there. I don't recall him managing 12 Franklin Savings. 13 Q. Well, let's talk about the person who 14 was the state commissioner. Do you remember Gem 15 Childress? 16 A. Again, I think he was a state agent on 17 another institution in Austin. 18 Q. Gem Childress was the man who was 19 deeply involved in actually underwriting the 20 Park 410 and Norwood loans, wasn't he? 21 A. If that's your representation, that's 22 no problem with me. 24960 1 Q. Do you recall that he was one of the 2 two people who were the head of the real estate 3 department? 4 A. I recall something like that, yes. 5 Q. And Mr. Childress, after underwriting 6 these loans, was a state-appointed supervisory 7 agent for Texas Bank Savings in Conroe, Texas, 8 right, an institution under your personal 9 supervision? 10 A. Conroe, Texas? 11 Q. Yes, sir. 12 A. What was the name of the bank again? 13 Q. Texas State Savings. I was the lawyer 14 on the case. I'm surprised you don't remember it. 15 A. Sorry. I don't. 16 Q. Do you remember Mr. Gem Childress? 17 A. Gem Childress, because he had a funny 18 first name, had been the state agent at a number 19 of state chartered institutions. I recall one. I 20 didn't recall that one. 21 Q. So, Mister -- the president, 22 Mr. Williams, went on either to -- he testified in 24961 1 this case about his necessity of getting your 2 approval to run Franklin Savings. You don't 3 recall that. 4 Mr. Childress, who was the person who 5 underwrote the loans, went on to become a state 6 supervisory agent in charge of institutions. 7 Right? Is that right? 8 A. Well, let's clarify. I don't remember 9 Gerald Williams being a state supervisory agent, 10 per se. I don't have a problem if he represents 11 that. But, Your Honor, the Commissioner of 12 Savings and Loans for the State of Texas, it's -- 13 he picks who he wants as state agents at a 14 particular institution. They sign an agreement 15 with the State similar to what we call a 16 supervisory agreement. Part of that is he gets to 17 put a person in there to oversee the activities. 18 He doesn't manage the institution. He just looks 19 at their decisions. It's really the same as the 20 State Savings and Loan Commissioner who picks 21 these individuals and assigns them to different 22 institutions. Sometimes he switches then around, 24962 1 and he did that a number of times. 2 If Gem Childress was appointed at a 3 couple of state chartered savings banks, it was 4 the commissioner at the time who would appoint 5 him. If Gerry Williams was at a particular 6 institution like Franklin Savings Association in 7 Austin, Texas, then it would be again the 8 Commissioner of Savings And loans that would, you 9 know, pick him and install him into that position. 10 Q. (BY MR. VILLA) You concurred that 11 Mr. Gerry Williams would be appropriate as the CEO 12 of Franklin Savings. Right? 13 Do you remember that? 14 A. Now you're talking about something 15 different. There was an executive search in the 16 end of 1986. That particular institution, the 17 CEO, had resigned; and two or three candidates had 18 been designated as possible. And Gerry Williams 19 could have been one of them. Obviously, he just 20 left another job at that same time. 21 Q. Let me direct your attention to 22 Page 775 of the deposition you gave in the 24963 1 Franklin Savings case. 2 A. 1992, yes. 3 Q. Your recollection may have been a 4 little fresher then. 5 A. Can you give me the page and help me 6 out? 7 Q. Page 775, Line 3. QUESTION: "Okay. 8 And this letter is written on January 13. And 9 then we've seen by Exhibit 172 that by letter of 10 January 23, you and the Commissioner of the 11 Savings and Loan Department concurred in the 12 replacement of Mr. Matlock -- I mean, the 13 replacement of Mr. Sullivan as the CEO of Franklin 14 Savings; is that correct?" 15 ANSWER: "I believe we concurred that 16 either Joe Matlock or Jerry Williams would be an 17 acceptable CEO for the institution." 18 Do you see that, sir? 19 A. I see that. 20 Q. Does it refresh your recollection that 21 you concurred that Gerry Williams, the man that's 22 done all the things we've just described, would be 24964 1 appropriate as the CEO of Franklin Savings? 2 A. Well, Mr. Villa, you start talking 3 about, you know, that I appointed him and I made 4 him the president. That didn't happen. Joe 5 Matlock the board of directors picked to be the 6 president of the institution. What was being put 7 in front of the state commissioner who had 8 responsibility and myself as SA is whether these 9 people were knowledgeable of any of these things. 10 Matlock came from commercial banking, and 11 Mr. Williams had again -- I thought you said he 12 left the end of 1987 from -- 13 Q. 1986? 14 A. 1986. He was now probably looking for 15 another employment opportunity, and he was a CEO 16 from a large institution. Again, knowing that -- 17 knowing nothing negative about the person at the 18 time, I don't think we would take any supervisory 19 objection to either candidate. 20 Q. Mr. Pledger left USAT in 1986 to become 21 the Texas Savings and Loan Commissioner. Right? 22 A. I think there was an interim period 24965 1 there. 2 Q. He held another position at the Texas 3 Savings and Loan Department and then became 4 commissioner. Right? 5 A. I'm not sure of the year. It might 6 have been '87 or '88. 7 Q. And then Larry Connell, Larry Connell 8 was an experienced person, as well. Right? 9 A. Yes. 10 Q. Do you think Larry Connell should have 11 known that these employment contracts he was 12 offering were unsafe and unsound? 13 A. Well, if he had reviewed the contracts, 14 he probably would have found the same technical 15 violations that Beverly Bermudez found since he's 16 an attorney, I believe. 17 Q. But Mr. Connell has -- you approved him 18 to run San Jacinto, and we've heard about his 19 stellar career since then. Right? 20 A. Yes, I did approve him. The board of 21 directors of San Jacinto picked him, and we 22 concurred. 24966 1 Q. Now, all these people have -- who were 2 involved in the activities of USAT have gone on to 3 these other careers, running institutions with 4 your approval, running regulatory agencies, but 5 Mr. Berner and Mr. Crow were dismissed. Right? 6 A. Yes. 7 Q. And your testimony is still that you 8 didn't single out Mr. Berner and Mr. Crow for 9 special treatment because they objected to your 10 directions to sell USAT assets to clean up the 11 association for Mr. Ranieri? 12 A. That's correct. 13 Q. Now, you testified a number of times, 14 Mr. Twomey, just how busy you were in December of 15 1988? 16 A. That's true. 17 Q. You were so busy that you allowed 18 documents to go forward to the Federal Home Loan 19 Bank Board members with these errors? 20 A. Well, if I knew of them at the time, I 21 would have corrected them. 22 Q. All right. Now, Mr. Rinaldi brought to 24967 1 our attention the fact that under the consent 2 agreement, you could discharge officers by just 3 snapping your fingers. Right? 4 A. That's true. 5 Q. You didn't have to give a reason? 6 A. That's true. 7 Q. And you also testified that it was 8 commonplace for management to be replaced in an 9 institution that went into receivership. Right? 10 A. That's true. 11 Q. In any event, Mr. Ranieri could have 12 fired them any time he wanted. Right? 13 A. I believe so, yes. 14 Q. I think we've established there was no 15 reason -- it was not necessary to prepare these 16 memoranda if the only purpose was to discharge 17 Mr. Berner and Mr. Crow. 18 Would you agree with me, sir? 19 A. No. I was taking actions I deemed 20 appropriate at the time, given the events and the 21 time frames that I was operating under. 22 Q. Well, sir, you agreed with Mr. Rinaldi 24968 1 at great length and you just agreed with me that 2 there was no reason that you had to prepare these 3 memoranda to dismiss Mr. Crow and Mr. Berner 4 because you could have done it in the snap of a 5 finger. Right? 6 A. I had the authority with the consent 7 agreement to take such an action. 8 Q. Isn't the only conceivable reason that 9 you wrote this memo as a basis to provide support 10 for the ultimate disqualification of MAXXAM? 11 A. No. 12 Q. Isn't -- when the meeting occurred on 13 December 30, 1988, with the Federal Home Loan Bank 14 Board, isn't the reason that you gave to 15 disqualify MAXXAM your criticisms of these 16 individuals. Right? 17 A. Again, I don't recall everything that I 18 said at that meeting; and I'm talking about the 19 interim meeting when the board adjourned or 20 whatever the technical term was. What I remember 21 discussing was the operating results based on what 22 we've been able to find out through the three 24969 1 examinations, the two '86, '87, and the ongoing 2 Southwest Plan examination. That's what I recall. 3 Q. I'm talking about the transcript we 4 have of what you said on December 30, 1988, to the 5 Federal Home Loan Bank Board. Didn't you give as 6 the reason that MAXXAM should be disqualified was 7 because of your criticisms of USAT's management 8 and the fact that Mr. Hurwitz had hand picked 9 them? 10 Isn't that the reason you gave? 11 A. We were definitely critical of MAXXAM's 12 management because of the operating results. 13 Q. You meant USAT's management, didn't 14 you? 15 A. I'm sorry? 16 Q. Isn't that the reason you gave? 17 A. We probably pointed out that the 18 institution had continued to lose money; and we 19 weren't happy with the results, causing the 20 institution to go materially insolvent. 21 Q. There is no other reason to have 22 prepared that memo, based upon your testimony in 24970 1 response to Mr. Rinaldi and to me, other than 2 putting something in the file that was critical of 3 USAT management because you could have fired them 4 anytime you wanted. Right? 5 A. Well, I guess because of the -- I was 6 causing their terminations through the 7 receivership process. 8 Q. Finally, sir, you've testified at 9 considerable length on how troubled you were that 10 Mr. Berner did not send you the USAT contracts, 11 the February 11, 1988 USAT contracts. 12 Do you remember you told Mr. Rinaldi 13 that? 14 MR. RINALDI: Your Honor, I have to 15 object. That's an utter misrepresentation of the 16 facts. He has said he didn't know about the 17 July 1 contract or the February 11th one. The 18 contract that's in question is the July 1st one 19 that included salary increases. To now go back to 20 the February 11th one is just muddling the record. 21 MR. VILLA: Do you agree with that? 22 THE COURT: If that's an objection, I 24971 1 deny it. We've heard a lot about the February 11 2 contract. 3 Q. (BY MR. VILLA) The question I have for 4 you, sir -- you've testified -- maybe I've been 5 misunderstanding some of the testimony, but the 6 question that I understood that you answered in 7 response to other questions from Mr. Rinaldi was 8 that you had not been told about certain USAT 9 contracts. 10 Do you remember that, sir? 11 A. Yes. 12 Q. Now, in the -- I'm going to ask you to 13 look at the December 15, 1988 reasons for 14 dismissal of Mr. Berner and Mr. Crow and the 15 S memorandum. And I'm going to ask you, sir: Is 16 there anything in there that gives as the reason 17 for dismissing these people the fact that you 18 weren't told about those contracts? Is there 19 anything in there? 20 A. Well, the S memo deals with the grounds 21 for receivership. 22 Q. Why don't you just answer the question, 24972 1 and then you can explain what the memos are. 2 MR. RINALDI: Your Honor, he's 3 answering the question; and Mr. Villa, because he 4 doesn't like the answer, is interfering. 5 THE COURT: The question is whether 6 there was something in these memoranda. I think 7 he can answer whether there is or isn't. 8 A. As it pertains to the new July 1st 9 contracts that they entered into and boosted their 10 salaries and other benefits, I don't remember any 11 particular thing covered in the S memorandum 12 because the S memorandum was there primarily to 13 discuss that the institution had a negative net 14 worth and had to be put into receivership. 15 In regards to, as you call it, the 16 December 15th memo, there was Section E regarding 17 excessive compensation, self interest of executive 18 management, which in my mind is -- we're talking 19 about the employment contracts, and it relates to 20 the fact they entered into new contracts in the 21 summer of 1988. 22 Q. Okay. I'm not -- I'm afraid I'm not 24973 1 communicating with you, sir. I'm asking you the 2 question: Is there anything -- we looked at your 3 memos, all the reasons you gave, some that you 4 could defend and some you couldn't as to the 5 reasons for firing Mr. Berner and Mr. Crow. 6 My question is: Is there anything in 7 either one of those memos that you prepared in 8 December of 1988 that says that they failed to 9 send you these contracts? 10 A. No. The S memo again deals with the 11 position of the institution. The December 15th 12 memo is a collection or summary of different 13 deficiencies noted, and it only talks about 14 excessive compensation. It doesn't reference that 15 the contracts weren't sent to us as they modified 16 them or entered into new ones, whatever the case 17 may be. 18 Q. Wouldn't it be fair to say, sir, that 19 in December of 1988, you were looking for any 20 conceivable basis for justifying dismissing these 21 two people and you did not write down that Art 22 Berner failed to send me these contracts? Isn't 24974 1 that right, sir? 2 A. No. 3 Q. You would agree with me, sir, there's 4 not a word in either one of those memos that 5 suggests that he failed to send you those 6 contracts. Right? 7 A. No, there's not a description saying 8 that Mr. Berner, after he increased the salary and 9 benefits, failed to send me the contract for 10 review. 11 MR. VILLA: Thank you. I have no 12 further questions. 13 THE COURT: Let me ask you a question, 14 Mr. Twomey. It has to do with the hiring of 15 Mr. Connell, and I understood he was hired because 16 you thought the association needed an experienced 17 S&L man. My question is: Did you consider that 18 to be a replacement of Mr. Gross? 19 THE WITNESS: No. 20 THE COURT: How did Mr. Connell -- 21 THE WITNESS: Mr. Gross basically I 22 thought would stay on as chairman. We looked at 24975 1 Larry Connell to become the chief executive 2 officer and to make changes in management and beef 3 up the management staff. Gerald Gross (sic), I 4 don't think there's ever an indication that he was 5 going to leave the institution, but I just assumed 6 he was going to stay on as chairman of the board. 7 THE COURT: Well, who would outrank 8 whom then? 9 THE WITNESS: In truth, we really 10 wanted Connell to run the institution. 11 THE COURT: If I see statements in some 12 of these documents stating that Mr. Gross 13 continues to be involved in the management, I 14 shouldn't take that as criticism? 15 THE WITNESS: Well, I have to be 16 honest. I kind of envisioned a kind of transition 17 period. You just don't walk in and run everything 18 the first day. You have to get to know the 19 institution. 20 With the Southwest Plan and the 21 possibility of United, the management being there, 22 we really looked at Connell to be running the 24976 1 institution and making the decisions of the 2 day-to-day basis regarding staff and business 3 practices. 4 THE COURT: So, what would be the role 5 of Mr. Gross at that point? 6 THE WITNESS: Diminishing as time went 7 on. We had no problem with him staying on the 8 board. We wanted somebody in there who could 9 recognize the strengths and weaknesses of the 10 management team with the realities of the business 11 world and the business plan and then start filling 12 in those holes and bringing in people to -- if 13 there was a problem in a particular area of 14 management -- their money desk was well-run. But 15 if he saw he needed a better person, we felt that 16 Larry Connell would be making those changes. 17 THE COURT: And he hadn't seen to fit 18 to dismiss Mr. Crow or Williams or Berner? 19 THE WITNESS: Well, he didn't; but I 20 don't -- you know, I recall the chairman left in 21 November of 1988 down there; but I'm not sure -- 22 again, with the insolvency and everything else 24977 1 going on, I don't know what Mr. Connell was 2 anticipating doing. 3 THE COURT: Thank you. 4 Mr. Nickens? 5 MR. NICKENS: Your Honor, I will have 6 some questions. 7 THE COURT: All right. We'll adjourn 8 until 1:30. 9 10 (Whereupon, a lunch break was taken 11 from 12:10 p.m. to 1:40 p.m.) 12 13 THE COURT: Be seated, please. The 14 hearing will come to order. 15 Mr. Nickens, you have some recross? 16 MR. NICKENS: I do, Your Honor. 17 18 FURTHER EXAMINATION 19 20 Q. (BY MR. NICKENS) Mr. Twomey, I have 21 some questions I would like to ask you about your 22 prior testimony. I would like to start with some 24978 1 testimony that you gave both yesterday and today 2 concerning the source of information that the 3 Federal Home Loan Bank of Dallas had concerning 4 the Drexel option. 5 Do you recall that yesterday 6 Mr. Eisenhart asked you questions concerning that 7 subject and pointed out to you the similarity of 8 language between certain supervisory documents in 9 your files and the language in UFG's 10K? 10 Do you recall that? 11 A. Yes, I do. 12 Q. And based upon that information, you 13 said that it was possible that Ms. Baugh had been 14 reviewing the 10K at the time that she prepared 15 that -- those supervisory memoranda, correct? 16 A. Yes. 17 Q. And Mr. Eisenhart further pointed out 18 to you that the 10K had as an exhibit the actual 19 Drexel option. 20 Do you recall that? 21 A. It's listed as an exhibit to that 10K. 22 Q. Now, did you appreciate the 24979 1 significance of the fact that that 10K and that 2 option agreement would be in the files of the 3 Federal Home Loan Bank of Dallas as far as the 4 issues in this case? 5 MR. RINALDI: Your Honor, just to make 6 the record clear, I believe you said the UFG 10K. 7 Did you mean that? 8 MR. NICKENS: Whatever I said, it 9 should have been the UFG 10K. 10 MR. RINALDI: It's the MCO 10K that he 11 showed him. 12 MR. NICKENS: Well, then, I apologize 13 to the Court. 14 Q. (BY MR. NICKENS) You know the 10K we're 15 talking about better than I do apparently. 16 A. I remember the 10K you are talking 17 about. There was an exhibit to the 10K that 18 described the stock option agreement, and I am 19 confused on which 10K it is now. I was assuming 20 that you were talking about a UFG 10K. 21 Q. Okay. I'm corrected that it's the MCO 22 10K. 24980 1 MR. EISENHART: Your Honor, it was the 2 MCO 10K that I showed Mr. Twomey. 3 Q. (BY MR. NICKENS) Did you appreciate, 4 when you gave that testimony, the significance of 5 the fact that the 10K and the Drexel option could 6 be found in the files of the Federal Home Loan 7 Bank of Dallas? 8 A. Now, the UFG 10K would be there because 9 either through the holding company annual report 10 or other requests, we probably had copies of 11 certain SEC documents like 10Ks and 10Qs of the 12 USAT holding company. I'm not so sure about 13 MAXXAM's. 14 Q. Well, let's focus -- Mr. Eisenhart 15 showed you the MCO 10K, and I made a mistake. You 16 were testifying about the 10K that was in front of 17 you, correct? 18 A. The MCO 10K, yes, sir. 19 Q. Yes, sir. What I'm asking you is 20 whether you appreciated at the time the 21 significance of your testimony concerning the 22 possibility that the 10K and, therefore, the 24981 1 Drexel option was in the files of the Federal Home 2 Loan Bank of Dallas. 3 A. No, I didn't believe -- I probably 4 still don't believe that the MCO 10K was there. 5 The language you're referring to regarding the 6 simple descriptions of the put and call is 7 basically the three or four one-liner that I think 8 I've seen consistently in a lot of documents. And 9 if it's been described in different filings, it's 10 usually been described the same way, you know, 11 with the trigger dates in 1988. 12 So, I mean, I took it -- I'm trying to 13 remember every 10K now that's been put in front of 14 me -- that that was the MCO 10K. There was an 15 exhibit to it regarding the put/call option 16 agreement. I cannot tell you honestly that I know 17 or can remember that an MCO 10K was filed with us. 18 Q. And the person best in a position to 19 know that would be Ms. Ginger Baugh, correct? 20 A. Well, the real thing that would come up 21 is why would we have MCO's 10K in the first place. 22 Q. Sir, the question is: Who would be the 24982 1 person best in a position to know what Ms. Baugh 2 was writing from? 3 A. Well, from her memo, it would be 4 Ms. Baugh. 5 Q. Okay. And my question is: You 6 understand the significance, do you not, to the 7 claims made in this case that if the 10K and the 8 exhibit thereto -- that is, the agreement 9 itself -- was in the files of the Federal Home 10 Loan Bank of Dallas, no one could claim that they 11 weren't put on notice of any of the terms, however 12 remote or unimportant, of that agreement? 13 Were you not aware of that? 14 A. Well, basically, since I'm unaware of 15 all the particulars that were in that put/call 16 option agreement and I'm not aware that the MCO 17 10K was at the Federal Home Loan Bank of Dallas, 18 I -- I don't want to give an opinion about 19 something I didn't know about or wasn't aware of 20 at the time. 21 Q. The question is whether you were aware 22 of the significance of the possibility of that 24983 1 document being in the files of the Federal Home 2 Loan Bank of Dallas to the issues in this case. 3 Did no one tell you about that? 4 A. The only thing I can tell you about -- 5 my understanding of the put/call option was -- my 6 understanding was simply what was basically in 7 Ginger's memo that we referred to earlier in my 8 testimony, cross-examination, or whatever. I 9 think it's popped up so many times, I forget. 10 Q. Now, in -- have you ever made an effort 11 to find -- now, today you came in and said that it 12 would be highly unusual to have requested 13 information from the SEC, correct? 14 A. It wasn't a standard practice. 15 Q. And you were basically trying to 16 introduce some doubt as to whether or not 17 Ms. Baugh reviewed the MCO 10K? 18 A. No. I was responding to a question 19 saying, you know, the normal way for us to get 20 ahold of SEC type documents was to contact the 21 institution and ask them to send them to us. 22 Q. Did you understand the import of the 24984 1 question to be to introduce some doubt as to your 2 earlier testimony about the possibility that 3 Ms. Baugh was reviewing the MCO 10K? 4 A. No. I was answering questions that our 5 usual practice was to request those types of 6 documents from the institution itself. 7 Q. So, you weren't considering the effect 8 or impact of your testimony when you made those 9 answers? 10 A. I was basically recalling the way 11 things were done regarding that type of document. 12 Q. Have you made any effort on this issue 13 to talk to Ms. Baugh about her recollection? 14 A. No. 15 Q. Were you made aware of the fact that 16 Ms. Baugh's deposition was taken in this case? 17 A. I probably heard somewhere along the 18 line that her deposition was taken, but that's 19 about it. 20 Q. Now, in these meetings that you had 21 with Mr. Rinaldi, did he ever make you aware of 22 her testimony concerning what she reviewed 24985 1 concerning this issue? 2 A. No. 3 Q. Let me ask you to look at a document. 4 It is just the front page and a few selected pages 5 from the deposition of Ms. Baugh. 6 Do you see the front page indicates 7 it's Ms. Baugh's deposition, Volume II, May 13th, 8 1997? 9 A. Yes, I do. 10 Q. Would you turn to the second page and 11 see who appeared on that date for her testimony? 12 A. Yes. 13 Q. And who was there on behalf of the OTS? 14 A. Bruce Rinaldi. 15 Q. And on behalf of MAXXAM, Mr. Eisenhart? 16 A. Yes. 17 Q. And Ms. Peck? 18 A. Sorry. Yes. 19 Q. And then Ms. Clark on behalf of other 20 respondents? 21 A. Yes. 22 Q. Now, let me ask you to look over, 24986 1 Mr. Twomey, to Page 365. 2 A. Yes. I'm there. 3 Q. And at Line 20, do you see there that 4 there were marked Exhibits 57 and 58? 5 A. Yes. 6 Q. And Mr. Rinaldi made a comment of which 7 is 57 and which is 58? 8 A. Yes. 9 Q. And then there's a reference to the 10 Pages 57 -- Exhibits 57 and 58; and the witness 11 says, "Okay. These are all in my handwriting," 12 correct? 13 A. Yes. 14 Q. Now -- 15 MR. RINALDI: What line are you on? 16 MR. VILLA: 366, Line 5. 17 MR. RINALDI: Thank you. 18 Q. (BY MR. NICKENS) Now, I'm going to show 19 you Exhibit 57, which we have also marked -- which 20 has also been marked in this case as A12180. 21 Sir, do you have that in front of you? 22 A. Yes, I do. 24987 1 Q. And do you see there the source of the 2 information about the MCO option which is about 3 halfway down the page? 4 A. Yes. 5 Q. And what is it? 6 A. Well, it says "9/15/83 letter, 12/31/85 7 10K," and "FS" something and then "MCO." 8 Q. Doesn't that say "10K for MCO"? 9 A. It could be read that way. 10 Q. Now -- and if -- let's look at 11 Ms. Baugh's testimony concerning Exhibit 57. 12 Do you have any other way to read that 13 as the fact that that -- the source of that 14 information was the MCO 10K ? 15 A. No. I believe she's referencing 16 different source reports, and it would appear that 17 this says "10K" and you say "for MCO." 18 Q. Yes, sir. 19 A. That's the -- you know, that's one -- 20 that's one way it could be read. 21 Q. Let's go back to her deposition at 22 Page 366 after she said "These are all in my 24988 1 handwriting." 2 Down at Line 18, she is asked, "Do you 3 have any recollection of the purpose for which you 4 prepared the document that we have marked as 5 Exhibit 57?" 6 And her testimony was, "It appears to 7 be just notes that I've taken and marked out most 8 of it, possibly for the purpose of transferring to 9 some other more formal document." 10 That would be consistent with what we 11 were talking about, about having taken that from 12 the 10K, correct? 13 A. Yes. 14 Q. And if we go over to Page 367, she's 15 asked specifically about the information 16 concerning MCO's share ownership. This is 17 starting at Line 18. And she says that it's the 18 9/15/83 letter. Right? 19 MR. RINALDI: What line are you on? 20 MR. NICKENS: Line 24. 21 Q. (BY MR. NICKENS) Then at Line 25, she 22 says, "The next point would have come -- no. The 24989 1 next two points would have come from the MCO 10K 2 as of 12/31/85 showing MCO's ownership and a 3 slightly different percentage. Again, that would 4 have been based on what they provided. I would 5 have just been documenting what was captured in 6 their own document." 7 Then it goes on down at the bottom of 8 the page, Line 15, quote, "MCO owns options to buy 9 300 shares common on July 1, '88, to July 31, '88, 10 acquired on 12 of '85," end quote. 11 And the question is, "Where did you get 12 that information?" 13 And she says, "Based purely on the 14 document that I see, I would assume that it came 15 from MCO's 10K dated 12/31/85." 16 Do you see that? 17 A. Yes. 18 Q. Now, this testimony of Ms. Baugh was 19 not ever related to you? 20 A. No. 21 Q. And you got on the stand and said you 22 thought it was unlikely that you had the MCO 10K 24990 1 without ever knowing that Ms. Baugh had testified 2 that she reviewed the MCO 10K? 3 A. If I don't recall seeing the MCO 10K, 4 then I don't recall seeing the MCO 10K. 5 Q. Well, you see her testimony, do you 6 not? 7 A. My testimony? 8 Q. Her testimony. 9 A. I see her testimony. 10 Q. And you see that Mr. Rinaldi was there? 11 A. I see he was there. 12 Q. Right. He hadn't told you, after 13 eliciting this testimony from you, that it was 14 highly unlikely that the MCO 10K was in the files 15 of the Federal Home Loan Bank of Dallas, that 16 Ms. Baugh had given this testimony? 17 A. No. Mr. Rinaldi didn't tell me 18 anything about Ms. Baugh's testimony or 19 deposition. 20 Q. Would you like to change your testimony 21 about the likelihood of the source of the 22 information for the -- Ms. Baugh's memoranda? 24991 1 A. I've already answered. I said the way 2 I recalled it, we would normally have the 10Ks of 3 the holding company. I don't recall MCO's 4 filings. If Ms. Baugh's -- after she reviewed the 5 document, if she can recall, then she's doing a 6 better job than me. 7 Q. She has a contemporaneous document to 8 help her, doesn't she? 9 A. Her notes, yes. 10 Q. Is there any doubt in your mind at this 11 point that she reviewed the MCO 10K? 12 A. Her testimony is her testimony. As 13 I've answered, I just don't recall seeing it. 14 Q. I'm asking whether you want to try to 15 introduce any other doubt into the record as to 16 the source of the that information. 17 A. Well, again, I responded based on what 18 I knew at the time. 19 Q. Or what you had been told. Right? 20 A. No. 21 Q. Now, I would like to ask you some 22 questions concerning your testimony that you don't 24992 1 recall -- 2 MR. NICKENS: Your Honor, I would like 3 to move into evidence Exhibit A12180. 4 MR. RINALDI: No objection, Your Honor. 5 THE COURT: Received. 6 Q. (BY MR. NICKENS) Now, I would like to 7 ask you some questions concerning your testimony 8 with regard to your participation in the 9 Southwest Plan issues and particularly your 10 recollection that you never passed on MAXXAM as an 11 acquirer. 12 Do you recall Mr. Eisenhart asking you 13 some questions along those lines? 14 A. Yes. 15 Q. And, in fact, the Federal Home Loan 16 Bank of Dallas did approve MAXXAM as an eligible 17 acquirer, did they not? 18 A. I believe so. 19 Q. And so, your testimony that you didn't 20 recall them passing as an eligible acquirer is 21 incorrect? 22 A. I think your question first was did we 24993 1 turn down MAXXAM. The way I recall it, we 2 approved USAT for participation in the 3 Southwest Plan. 4 Q. Well, let me ask you to look at 5 Page 24657 of your testimony from Monday. If it's 6 okay with the Court, I'll just show you my copy. 7 MR. RINALDI: What is the -- 8 MR. NICKENS: It's Page 24657. 9 Q. (BY MR. NICKENS) Do you see on Page 657 10 that you testified that you didn't recall an 11 opinion -- this is at Line 6 -- an opinion or memo 12 regarding MAXXAM that way and then down on 13 Page 658 at Line 7, you said, "I don't believe we 14 passed on MAXXAM. I don't think anybody directed 15 or asked us to give them our views on MAXXAM in 16 1988. The only time MAXXAM or Mr. Hurwitz' name 17 might have come up as far as potential acquirers 18 of the USAT package would have been on 19 December 30th"? 20 Do you see that? 21 A. Yes. 22 Q. Now, do you now recall that that's 24994 1 incorrect? 2 A. Well, what I recall is we did 3 Southwest Plan assessments regarding USAT's 4 participation in the Southwest Plan. 5 Q. Sir, I'm asking you -- 6 A. I guess I just don't recall a document 7 approving MAXXAM. But again, I wouldn't have a 8 problem with us approving MAXXAM as an acquirer 9 during 1988. 10 Q. Well, let me show you a document that 11 has been marked as Exhibit B4344. Can you 12 identify B4344 as a letter signed by Mr. Barclay, 13 principal supervisory agent, to Mr. Lykos with 14 attachments that include a proposal evaluation and 15 your memo of December 15th, 1988? 16 A. Yes. 17 MR. NICKENS: Your Honor, we offer 18 B4344. 19 MR. RINALDI: No objection, Your Honor. 20 THE COURT: Received. 21 Q. (BY MR. NICKENS) Now, of course, this 22 is before December 30th, correct? 24995 1 A. Yes. 2 Q. And what Mr. Barclay states is that 3 "MAXXAM may be a potentially eligible acquirer for 4 United Savings Association of Texas but the Dallas 5 bank is unable to recommend MAXXAM at this time 6 because the availability of the proposed cash 7 infusion is questionable. Furthermore, MAXXAM's 8 proposed management includes senior executives 9 currently having positions at United that are 10 unacceptable to supervision." 11 Do you see that? 12 A. Yes. 13 Q. What role did you have in preparing 14 this letter? 15 A. None. 16 Q. Have you ever seen this letter before 17 today? 18 A. No. 19 Q. Wasn't it the first thing discussed at 20 the meeting of December 30th that you participated 21 in by telephone? 22 A. I don't recall it. 24996 1 Q. What participation did you have in 2 preparing the proposal evaluation? 3 A. You mean there's an attachment on this? 4 Q. Yes, sir. The second page is the first 5 attachment. 6 A. None that I can recall. 7 Q. Well, let me ask you to -- obviously, 8 you prepared the second attachment? 9 A. The December 15th memorandum, yes. 10 Q. And you simply don't have a 11 recollection concerning any role in the proposal 12 evaluation? 13 A. Didn't participate in it the best that 14 I can recall. 15 Q. Well, I want to make sure that we have 16 a clear record here, Mr. Twomey. 17 Do you recall or do you want the record 18 to reflect that you did not participate in the 19 preparation of this memorandum? 20 A. As far as I can recall, the cover 21 letter and the second document I really don't 22 recall participating in the preparation of. 24997 1 Q. That means you may have or you may not 2 have. That's where the record is, isn't it? 3 A. Well, considering it's 10 years ago, I 4 mean, we had a separate group that worked on 5 marketing for the Southwest Plan; and they handled 6 all the correspondence to Washington. And -- but 7 I don't recall participating in the -- the cover 8 letter signed by George Barclay or the proposed 9 evaluation -- proposal evaluation attached. 10 Q. Now, you indicated to Mr. Villa and 11 Mr. Rinaldi earlier today that the only purpose of 12 your 12/15 memo was to serve as the basis for 13 firing the USAT executives there, correct? 14 A. I mean, the memo itself says it's an 15 update on the management assessment at USAT. From 16 time to time, we were required to furnish that to 17 the marketing group which Bob Brick headed up. 18 That's why this memo is directed to Bob Brick. 19 Q. But on 12/29/1988, it was used as a 20 basis for conveying your -- your inability -- that 21 is, the inability of the Federal Home Loan Bank of 22 Dallas to recommend MAXXAM despite the fact that 24998 1 they could not declare them an ineligible 2 acquirer. Right? 3 A. I could tell you about the second memo 4 attached. But I really don't recall the cover 5 memo, this; and this is the first time I recall 6 seeing this letter. So, I really -- I cannot 7 recall. 8 Q. Well, you do know it was the very first 9 thing discussed in that meeting of December 30th, 10 wasn't it? 11 A. Mr. Nickens, I don't remember 12 everything that was discussed in that meeting on 13 December 30th. 14 Q. Of course not, but I showed you the 15 transcript of the proceeding. 16 Did you not read it? 17 A. Did I read the entire transcript? No. 18 I read the section I thought I was being pointed 19 to, and right now I couldn't remember -- if you 20 highlighted it and stuck it from in front of me, 21 that would be the only way I could recall it right 22 now. 24999 1 Q. Let's focus on Exhibit B4344. There 2 are two reasons given for your inability to 3 recommend MAXXAM, correct? 4 A. The letter says, "The Dallas bank is 5 unable to recommend MAXXAM at this time because 6 the availability of the proposed cash infusion is 7 questionable. Furthermore, MAXXAM's proposed 8 management includes senior executives currently 9 having positions with United that are unacceptable 10 to supervision." 11 Q. And without your recommendation 12 concerning firing Mr. Berner and Mr. Crow and 13 Mr. Williams, Mr. Munitz, the only reason the bank 14 would have had would be the availability of the 15 proposed cash infusion is questionable. Right? 16 A. Again, I'm not the author of this 17 letter. 18 Q. That's the only reason expressed. Can 19 you read anything else in there? 20 A. They questioned MAXXAM's proposal. 21 That's all I can say. 22 Q. Well, it says, "The cash infusion is 25000 1 questionable." Don't forget that the next page is 2 an analysis of the proposal. 3 A. Which again, until today, I haven't 4 seen. 5 Q. I'm just saying if you're trying to put 6 in additional reasons to the cash infusion being 7 questionable, you've got to take into account that 8 there is a document that's the next page. 9 Do you want to say that there were some 10 other reasons? 11 A. Again, I didn't write this letter. 12 Q. Now, there's nothing in here about 13 Mr. Hurwitz, is there? 14 A. Well, not on the cover sheet. 15 Q. Now, the truth of the matter is that 16 Mr. Hurwitz' money was just as green as 17 Mr. Ranieri's money, wasn't it? 18 A. A dollar is a dollar. 19 Q. There wasn't any real question about 20 whether or not the cash was going to be available 21 to do that transaction, was there? 22 A. Again, I didn't write this letter. So, 25001 1 I'm not really familiar with they are talking 2 about, this cash -- excuse me -- proposed cash 3 infusion is questionable. I'm not -- again, I 4 don't know the source of that; and I'm not going 5 to speculate. 6 Q. Now, Mr. Rinaldi asked you a few 7 questions concerning a document that is in the 8 record as Exhibit B4341 at Tab 1896. 9 THE COURT: We don't seem to have that 10 number in the record. 11 MR. NICKENS: 4331. I apologize, 12 Your Honor. 13 Q. (BY MR. NICKENS) Do you have 14 Exhibit B4331 in front of you, Mr. Twomey? 15 A. Yes, I do. 16 Q. This is a document that yesterday you 17 told Mr. Rinaldi you don't know who sent it to 18 you? 19 MR. RINALDI: 4321? 20 MR. NICKENS: 4331. 21 A. I don't recall because I didn't see 22 anything -- if there was a name on the bottom or 25002 1 if there was a memoranda at the top saying who 2 sent it to me, it would help. But I don't recall. 3 Q. (BY MR. NICKENS) Let me show you. At 4 Page 24806, you were asked, "Do you know who sent 5 it to you?" 6 And you said, "(Reviewing the document) 7 No." 8 And then -- that's at Line 2. Then at 9 Line 4, "Whoever sent it to you, after they sent 10 it to you, passed it along to Ginger Baugh?" 11 And you said, "Yes"? 12 A. Yes. 13 Q. "And that's your handwriting at the 14 bottom?" 15 And you answered "yes"? 16 A. Yes. 17 Q. Am I mistaken, or is the memo signed by 18 Ginger Baugh? 19 A. I'm not sure whether that's Ginger's 20 handwriting. It's not my handwriting. 21 Q. So, when you said the handwriting at 22 the bottom was yours, you meant all of it except 25003 1 where it is signed "Ginger"? 2 A. Actually, when I looked at it, I 3 thought it was all mine. 4 Q. I see. Now that you've looked at it a 5 little more closely, you see it is not your 6 handwriting where it is written or signed 7 "Ginger"? 8 A. Yes. 9 Q. Now, doesn't the document indicate to 10 you that Ginger Baugh signed it and sent it to 11 you? 12 A. It could be. I'm just not sure. 13 Q. So, you were incorrect when you said 14 that the -- the handwriting at the bottom was 15 yours? 16 A. Now that I look at it, there's 17 definitely a difference to the one "set up 18 appointment, Randy German"; and I may have a 19 second group. That's mine. When I originally 20 looked at this, I thought I wrote "Ginger" again; 21 but I'm mistaken. 22 Q. Don't you think it's a fair inference 25004 1 that Ms. Baugh sent you this document? 2 A. Possibly. 3 Q. Now, Mr. Rinaldi asked you about the 4 phrase "delivered the bank" and said something to 5 the effect that that was a clever little phrase. 6 Do you recall that? 7 A. I think he was referring to you. 8 Q. Yes, he did. He referred to me and to 9 Mr. Villa as having come up with a clever little 10 phrase, "deliver the bank." 11 Do you recall what the source was of 12 the phrase "deliver the bank"? 13 A. I believe you pointed to some document 14 regarding some interview taken sometime after 15 1988, but I forget the source. 16 Q. Well, you were the person being 17 interviewed; and I'll refer you to Exhibit 4326 at 18 Tab 1889. 19 MR. RINALDI: Which page, Mr. Nickens? 20 MR. NICKENS: Just a second. 21 Q. (BY MR. NICKENS) Do you see on Page 3 22 in the second full paragraph in quotes are the 25005 1 words "magically" and "delivered"? Do you see 2 that? 3 MR. RINALDI: How far down? 4 MR. NICKENS: It's about two-thirds of 5 the way down the page. 6 MR. RINALDI: In the second full 7 paragraph? 8 Q. (BY MR. NICKENS) Do you see that, 9 Mr. Twomey? 10 A. Yes. 11 Q. Now -- and this is your interview by 12 Ms. Echols in October of 1990, correct? 13 A. That's what the cover memo says. 14 Q. And you're the source of the term 15 "deliver the bank," aren't you? 16 A. Well, I see the word "delivered." I 17 don't see "the" and I don't see "the bank." I 18 don't see "delivered the bank" together. 19 Q. So, you're denying you're the source of 20 the term "deliver the bank"? 21 A. Frankly, I don't care because in this 22 situation, Mr. Nickens, we were talking about 25006 1 Gibraltar/First Texas. And Gibraltar/First Texas 2 was cooperating with supervision and the 3 regulators; and they knew the institution had 4 already been, in a sense, targeted for one 5 acquirer. And they were working with -- with the 6 regulators regarding that, and a technical issue 7 came up. And the most painless way to solve that 8 problem was to take a write-down of the 9 institution's goodwill. And by that painless -- 10 if you want to use that term -- but by that 11 maneuver, the institution, because of the strange 12 accounting of First Texas and Gibraltar in kind of 13 a ladder subsidiary system where one institution 14 was insolvent because it was also recognizing the 15 losses of the second institution, now the 16 underlying institution would also be technically 17 insolvent and, therefore, you could put the 18 institution into receivership according to the 19 rules and regulations that were then in effect at 20 the time. 21 Q. What you did is you made a solvent 22 institution insolvent with the stroke of a pen, 25007 1 correct, in order to facilitate delivering the 2 bank? 3 A. What we did is we directed the 4 institution to write down a useless asset that 5 caused the institution to become insolvent and, 6 therefore, it was placed into receivership. 7 Q. And their accountants had refused to do 8 that? 9 A. I don't recall that. But even if they 10 did refuse to do it or they had a problem with 11 that, underneath the consent agreement, we could 12 direct it. 13 Q. Well, in fact, it's addressed in the 14 memo just above that as, "Twomey put it. They 15 didn't. We did." Right? 16 A. Well, the institution didn't book it by 17 themselves. 18 Q. All right. When you talk about it 19 being painless, I guess that sort of depends on 20 whose ox is gored. Right? 21 A. The two institutions together were 22 insolvent. It's a matter of the way they were 25008 1 structured because of the way they were set up 2 originally in the 1980s. 3 What was happening here, if I can keep 4 the order right, First Texas was underneath First 5 Gibraltar. Every loss First Gibraltar had had of 6 its own was being reflected on its books. Also, 7 any losses First Texas had was being reflected on 8 its books because the two institutions really were 9 being operated as one. We looked at them as one. 10 We viewed First Texas and First Gibraltar as one 11 institution, a 10-billion-dollar institution that, 12 on a whole, was insolvent. 13 Q. Sir, I don't want to get too far off on 14 this. But is it your view that it was painless to 15 the shareholders and bondholders whose investment 16 was made worthless by your action? 17 A. Well, the shareholders of the two 18 institutions were sitting above them; and they 19 were -- 20 Q. How about those bondholders -- 21 A. Hold on. May I finish? Those 22 shareholders already had a negative institution. 25009 1 Their holding company was already reporting 2 negative net worth. 3 Q. Isn't the reason the accountants didn't 4 want to write it down was because the board of 5 directors felt they had a fiduciary duty to the 6 bondholders whose investment was to be wiped out 7 by your action? 8 A. In the case of First Texas/First 9 Gibraltar, I don't recall all the discussions that 10 were going on in or around mid-December 1988. 11 MR. RINALDI: Your Honor, just for the 12 record, this has gone on now for 15 minutes about 13 Texas/First Gibraltar. It has nothing to do with 14 this case. It started from an interview where the 15 word "delivered" was written. 16 Mr. Nickens has gone ad nauseam into 17 what was meant by the word "delivered." It seems 18 we are really just going into collateral issues, 19 that Texas/First Gibraltar isn't an issue in this 20 case. 21 THE COURT: Well, I agree we've 22 probably pursued this far enough; but you did 25010 1 raise the issue on your redirect about delivering 2 the bank. 3 MR. RINALDI: I couldn't agree more, 4 Your Honor. We've gone into 15 minutes of what he 5 may or may not have meant. Now we're talking 6 about what impact did it have on the shareholders 7 of Texas/First Gibraltar if they did something 8 with respect to that institution. 9 MR. NICKENS: Your Honor, my 10 examination is finished, although I do think it 11 was the witness who introduced the issue of it 12 being painless. But I have finished my questions 13 on that subject. 14 THE COURT: All right. Let's move on. 15 Q. (BY MR. NICKENS) Now, Mr. Twomey, 16 you've testified that it was not necessary to 17 dismiss Mr. Crow and Mr. Berner in order to 18 deliver the bank to Mr. Ranieri. 19 Did I understand that correctly? 20 A. As usual, you're phrasing it in a very 21 unique way. If the institution was sold by FSLIC 22 to any acquirer, I'm sure that acquirer would make 25011 1 their own decisions regarding the management team, 2 who they retained and who they brought in. 3 Q. Well, you must think I sit home late at 4 night and make these things up. 5 Let me ask you to look at Page 24828. 6 Do you see the source of my question at Line 13? 7 A. Okay. "So, given the fact, it was 8 necessary" -- 9 Q. "That fact." 10 A. -- "that fact, was it necessary for you 11 to dismiss Mr. Crow and Mr. Berner in order for 12 Mr. Ranieri to get the bank?" 13 "No." 14 Q. Now, that's Mr. Rinaldi's question. 15 Right? 16 A. Yes. 17 Q. Now, without the management criticism, 18 there really wouldn't have been anything on which 19 you could have based a recommendation to award 20 this bank to Mr. Ranieri, was there? 21 A. So now I'm making the decision for the 22 Bank Board. Okay. 25012 1 I think the institution was materially 2 insolvent. Now, if the Bank Board made its 3 determination who the institution should be sold 4 to underneath the Southwest Plan -- we would 5 provide from time to time management assessments 6 and other information as we were requested or 7 directed. 8 Q. Weren't you pressured to find something 9 wrong with USAT management in order to be able to 10 deliver the bank to Ranieri? 11 A. No. 12 Q. Weren't issues of pressure raised at 13 the time of the December 30th, 1988 hearing or 14 meeting? 15 A. Well, I'm guessing. Who's applying the 16 pressure? 17 Q. Well, let me hand you, again, a 18 document, Exhibit B1944, which is a Steptoe 19 Johnson report. The judge has ruled on this. I 20 want to ask you to look at something and see if it 21 refreshes your recollection about pressure. 22 A. Okay. 25013 1 Q. If you could go over to Footnote 114, 2 which is on Page VII -- 3 A. Okay. Footnote 114. 4 Q. Do you see there that two OGC attorneys 5 expressed the view -- 6 MR. RINALDI: Excuse me, Your Honor. 7 This is the same objection that Mr. Nickens raised 8 before. This is a document that Your Honor said 9 was inadmissible because there was no sponsoring 10 witness. You may recall I stood up once and 11 started to read from the document, and Mr. Nickens 12 admonished me. His problem was I was reading from 13 a document that wasn't in evidence. There was no 14 certainty that after I read from that document, 15 that that document would be admitted. 16 At that point, we then stopped. We 17 determined the admissibilty. In this case, we've 18 already had a lengthy colloquy and determined that 19 this is an inadmissible document. 20 Now after being told it is 21 inadmissible, Mr. Nickens is doing what he 22 admonished me not to do, reading portions of the 25014 1 document into the record and infecting the record 2 with a document that has not been sponsored. 3 We know it came from Steptoe & Johnson, 4 and we have no one to authenticate its 5 authenticity. It strikes me as totally 6 inappropriate for him to be reading portions of 7 the document into the record. 8 MR. NICKENS: The difference, 9 Your Honor, is that the witness has said that he 10 does not have a recollection of any such pressure. 11 I'm asking him whether a review of this 12 information will refresh his recollection. 13 THE COURT: All right. Let's have him 14 read it off the record and see if it refreshes his 15 recollection. 16 Q. (BY MR. NICKENS) I'm asking you to read 17 Footnote No. 114 at Exhibit VII that starts out 18 "two OGC attorneys." 19 A. (Witness reviews the document.) I've 20 read the footnote. 21 Q. Does that refresh your recollection 22 that, in fact, the Dallas bank was pressured into 25015 1 finding or not being able to recommend MAXXAM with 2 the effect of delivering the bank to Mr. Ranieri? 3 A. No. 4 Q. Does it refresh your recollection that 5 Mr. Barclay stated for the record that prior to 6 that meeting, he had not had conversations with 7 Mr. Lykos, Mr. Root, or anyone else from FSLIC? 8 MR. RINALDI: Excuse me. I think, once 9 again, Mr. Nickens is introducing information from 10 the exhibit into the -- into the record. It seems 11 to me that if he doesn't refresh his recollection, 12 he's now simply doing a back door way of putting 13 in information that's otherwise inadmissible. 14 THE COURT: All right. I'll sustain 15 the objection. 16 Q. (BY MR. NICKENS) Did you have any 17 conversations with anyone at FSLIC prior to that 18 December 30th meeting concerning the 19 recommendation that was made on December 29th? 20 A. No. 21 Q. Wasn't it important to have at least 22 the appearance of two bidders? 25016 1 A. I don't know. 2 Q. Well, you were delivering a bank to 3 Mr. Ranieri who would have been, in the absence of 4 the MAXXAM bid, the only bidder. Correct? 5 A. You start off that I'm delivering the 6 bank to Mr. Ranieri. 7 FSLIC was conducting its own bidding 8 process. Michael Patriarca was the catalyst for 9 that or the coordinator for that. Sometime in 10 December of 1988, we were told that Ranieri was 11 the one they were primarily negotiating with -- 12 Q. Early December, correct, Mr. Twomey? 13 A. Anywhere from December 1st to 14 December 15th. Pick a date. I'm not sure. 15 Q. With Mr. Rinaldi, you said it was 16 before December 15th. That was yesterday, 17 correct? 18 A. Between December 1 and December 15. I 19 don't really recall the exact date. Will you give 20 me the range? 21 Q. I'm questioning you about why you want 22 to say to me December 1st through December 15th 25017 1 when asked yesterday by Mr. Rinaldi you said it 2 was before December 15th. 3 A. It was in December. It was before the 4 15th most likely, but it was after December 1st. 5 Q. Okay. Now, don't you think it would 6 have been important -- this was -- you've 7 indicated earlier today this was the second 8 largest institution in Texas. Right? 9 A. Yeah. 10 Q. Somewhere around five to $6 billion? 11 A. Yes. 12 Q. And you were going to have a bidding 13 process on which there was only one eligible 14 bidder? 15 A. Again, you're using the word "I was 16 having a bidding process" -- 17 Q. The Federal Home Loan Bank Board was 18 conducting a bidding process for the second 19 largest bank in Texas in which they had only one 20 bidder. 21 THE COURT: What's the question? 22 MR. NICKENS: Well, the question, 25018 1 Your Honor, is: Wouldn't it be important to have 2 the appearance of two bidders in such a situation? 3 A. Mr. Nickens, I don't know if it's 4 important to have one, two, three, four bidders. 5 That was FSLIC's decision. It was their bidding 6 process. It was the way they structured the 7 transactions, not me. 8 Q. (BY MR. NICKENS) Had there been 9 criticism for the bidding process on the 10 Southwest Plan? 11 A. There was criticism regarding the 12 Southwest Plan early on. There was criticism 13 after the December deals were announced. 14 Q. Now, earlier today you were asked some 15 questions about mortgage-backed securities; and I 16 have just a few questions on the subject. Let me 17 ask you to look at Exhibits A1 -- 11111 and 11110, 18 which are at Tabs 1886 and 1887. 19 A. A1110? 20 Q. Right. And 11. 21 A. Got them both. 22 Q. These are documents that I asked you 25019 1 about; and you testified in response to some 2 questions by Mr. Rinaldi concerning these issues, 3 as well. Both of these documents make it 4 absolutely clear that you knew about the market 5 value of the swaps -- Mister -- let me put it this 6 way: Mr. Villa asked you some questions about 7 what you would have known had you read the 8 documents that were in your files, correct? 9 A. He was pointing out the particular 10 financial statements contained in the SEC 11 documents, yes. 12 Q. You didn't recall whether you had read 13 them. Right? 14 A. I guess I don't recall what I read 10 15 years ago. 16 Q. All right. This is a document -- 17 A11111 is one that you authored and initialed and 18 sent to Mr. Barclay, correct? 19 A. Yes. 20 Q. And it's absolutely clear that you knew 21 the market value of the swaps on the date of your 22 memo, correct? 25020 1 A. Well, I had a range of a 70- to 2 110-million-dollar loss; and I imagine I got that 3 information from Michael Crow. And I had no 4 reason to doubt it. 5 Q. Well, you testified that your -- you 6 were surprised to find that the mortgage-backed 7 securities were at a 200-million-dollar loss. And 8 then on redirect, you testified, "Well, I may have 9 known about the value of the assets; but I didn't 10 know about the swaps." 11 Is that the sense of it? 12 A. No. What I believe in response to 13 Mr. Villa's questions early on regarding the 14 financial statements that were contained in the 15 SEC documents that I -- it showed that there were 16 market losses at various times at different ranges 17 regarding the mortgage-backed securities. And 18 regarding Mr. Rinaldi's questions, I believe we 19 were talking about you just couldn't look at those 20 strictly alone. You had to understand the whole 21 matrix of what the whole risk-controlled arbitrage 22 was doing because you might have gains over here. 25021 1 You might have losses over there. 2 And, again, because of the purchase of 3 mortgage-backed securities, you are supposed to be 4 duration matching. There's a whole gamut of stuff 5 you have to understand of what the values are. 6 Q. So, you aren't claiming you didn't know 7 what the values were of the swaps? 8 A. Well, I think I testified this morning 9 after Mr. Villa's arithmetic examples that if you 10 multiply each one out, you can come up with an 11 estimation as of that certain date of whether they 12 had a negative or positive effect. 13 Q. Whatever you may or may not have known 14 or recall, you're not telling this Court that the 15 Federal Home Loan Bank of Dallas didn't know the 16 value of the swaps, are you? 17 A. Well, we knew they definitely did have 18 some swaps that were underwater, yes. 19 Q. And, indeed, the Federal Home Loan Bank 20 of Dallas was a counter-party on a significant 21 number of them, weren't they? 22 A. There was a number of swaps at the 25022 1 Federal Home Loan Bank; and there were a number of 2 swaps with other institutions, yes. 3 Q. And let me ask you to look at 4 Exhibit A1427 at Tab 358. Mr. Twomey, this has 5 been previously identified and discussed as the 6 minutes of the investment committee of UFG and 7 USAT dated January 28th, 1987. And I want to ask 8 you to look over at Page US3005265. 9 A. (Witness reviews the document.) Okay. 10 MR. RINALDI: I'm sorry. 65? 11 MR. NICKENS: 265. 12 Q. (BY MR. NICKENS) Does it show a 13 liquidation of MBS portfolio, January 28th, 1987? 14 A. Yes. 15 Q. And these are in the investment 16 committee minutes? 17 A. Yes. 18 Q. And these are the things you've told 19 the Court that the examiners routinely look at? 20 A. They should review them, yes. 21 Q. And it discloses the market value both 22 unchanged and up a hundred basis points and down a 25023 1 hundred basis points for the entire 2 mortgage-backed securities positions, correct? 3 A. It appears so, yes. 4 Q. Do you know how often this was included 5 in the investment committee minutes? 6 A. No. 7 Q. Would it surprise you to know that USAT 8 did a daily mark-to-market -- 9 A. No. 10 Q. -- and that it was included in their 11 investment committee minutes virtually every week 12 after this date? Would that surprise you? 13 A. No. 14 Q. Would it surprise you, then, that your 15 examiners wouldn't have known about the 16 mark-to-market position of the mortgage-backed 17 securities portfolios? 18 A. It would depend on how the 19 examiner-in-charge set up that particular phase of 20 the examination, and I don't have any knowledge of 21 that. 22 Q. The people that had the responsibility 25024 1 for looking at this were the examiners, correct? 2 A. Yes. 3 Q. And you presume they did their job, 4 don't you? 5 A. Yes. 6 Q. And, in fact, what they reported to you 7 was that the mortgage-backed securities 8 investments were a success. Right? 9 A. Are you talking about the 1987 exam 10 report? 11 Q. Yes, sir. 12 A. Yes. 13 Q. And if we go back and look at the exam, 14 which is Exhibit B2699, Tab 1863 -- I'm not going 15 to go into it. But you do recall there's a 16 discussion there about United MBS and how it had 17 about $37 million of income for 1987? 18 MR. RINALDI: This is the '87 exam? 19 MR. NICKENS: I'm sorry. No wonder I 20 couldn't find it. 21 Q. (BY MR. NICKENS) It's Exhibit A14073 at 22 Tab 1502 at Page 28. 25025 1 A. Okay. 2 Q. They reported that it was successful. 3 Right? 4 A. Yes, they did. 5 Q. That's because they were judging it on 6 the basis of it being a spread strategy, spread 7 income strategy. Right? 8 A. Well, that's the whole basis for their 9 risk-controlled arbitrage. 10 Q. That's right. And your testimony has 11 been with regard to a mark-to-market portfolio, 12 correct? 13 A. I believe my testimony is of -- from 14 the inception, I believe they were operating a 15 risk-controlled arbitrage and they were generating 16 a positive spread. And that was -- and I believed 17 that up until late December of 1988. 18 Q. And have you been given any information 19 to indicate that the spread, at least on United 20 MBS, was positive up until this institution was 21 taken down? 22 A. Again, until the examiners raised 25026 1 questions about it, I thought it was positive for 2 '86, '87, '88. 3 Q. And even in that exam -- that is, the 4 1988 Southwest Plan exam -- did they report to you 5 that the spread was negative or not positive? 6 A. Well, the 1988 exam was cut short 7 because of the receivership. So, in what they 8 delivered to us, I don't think it references or 9 describes this. 10 Q. Now, was any analysis done to 11 determine -- or has it been done, to your 12 knowledge, to determine what would have happened 13 if that portfolio had not been liquidated and it 14 was allowed to be continued to be managed on the 15 basis of a spread portfolio? 16 A. Not to my knowledge. 17 Q. It hasn't come to your attention that 18 over a period of about four years, that portfolio 19 would have made about $300 million instead of 20 losing about $300 million for the government? 21 A. There's many investments that could be 22 underwater today; and if you had the ability to 25027 1 hold them at a loss, that may come back based on 2 what happens to interest rates. From the period 3 of 1989 to the period of 1993 -- now, in 1993, we 4 had a dramatic reduction in interest rates. So, 5 when market rates -- in fact, some mortgage rates 6 were at 6 and a half at that time. If the coupons 7 on these securities were even an average of 8, 8 they would be in the money at that period of time. 9 Q. These spread portfolio strategies, the 10 idea is to hold them, realizing that there will be 11 mark-to-market changes on those portfolios? 12 A. Yes. 13 MR. NICKENS: That's all I have, 14 Your Honor. 15 THE COURT: Mr. Eisenhart. 16 MR. EISENHART: I have just a few 17 questions, Your Honor. Thank you. 18 19 FURTHER EXAMINATION 20 21 Q. (BY MR. EISENHART) Mr. Twomey, one of 22 the documents Mr. Rinaldi showed you this morning 25028 1 is one that we talked about yesterday. It's 2 Exhibit B3775 at Tab 285. 3 Do you have that in front of you? 4 A. Somewhere in here I probably do. It's 5 those exam work papers? 6 Q. There it is. 7 A. Okay. I have every other document. 8 Q. Okay. This is the draft write-up of 9 the examination that was never performed. Do you 10 remember we talked about this yesterday, the 11 examination of the high-yield bonds in 1988? 12 A. Yes. 13 Q. And Mr. Rinaldi pointed you to some 14 language this morning that talked about the risk 15 associated with the portfolio, and I think what he 16 pointed out to you began on Page OW156338 and 17 continued over to the following page. 18 A. Yes. 19 Q. And he -- the part he had you read 20 talked about how some of these bonds had fallen in 21 value as a result of the October 1987 stock market 22 crash. I think there was some reference to 25029 1 specific issues in there. 2 A. I don't remember the '87 crash; but 3 they did have date specifics, that as of May 31st, 4 1988, and July 31st, 1988, and September 30th, 5 1988. 6 Q. Okay. You're correct. The examples he 7 gave were in '88. I want you to turn to the next 8 page, which is 156340. 9 Mr. Rinaldi had stopped with the 10 preceding page. I just want to have us read 11 together this next page. We'll skip the first 12 line, which I find to be illegible. I don't know 13 if you can read it or not. I certainly can't. 14 It says, "Issues owned September 30, 15 1987" -- now, that would be a month before the 16 market crash. Right? 17 A. Yes. 18 Q. -- "fell only 3.72 percent during the 19 market crash of October 1987; and these losses 20 were recovered by February 29th, 1988, helped 21 along by lower interest rates. Thus, junk bonds 22 reacted much more favorably to the crash than did 25030 1 the equity arbitrage portfolio made up exclusively 2 of stocks." 3 Did I read that correctly? 4 A. Yeah. 5 Q. Was that consistent with your 6 observations and experience of how the high-yield 7 bonds weathered the October '87 market crash? 8 A. Yes. 9 Q. Now, going back to the part that 10 Mr. Rinaldi focused you on this morning, it seemed 11 to me there were two points he was making. One 12 was that the high-yield bonds were risky; and the 13 other is that because there is some price 14 volatility, they ought to be marked to market on a 15 monthly basis. Those were the two points I took 16 out of it. 17 Would you agree with that? 18 A. Yes. 19 Q. In terms of the riskiness, I think you 20 agreed with me yesterday that whatever risk there 21 is in high-yield bonds is, at least in theory, 22 compensated by the return you get on those bonds, 25031 1 is it not? 2 A. The only reason you want a 15, 3 16 percent return is because it's more risky than 4 buying U.S. treasuries at 5 and a half. 5 Q. We saw yesterday that, in fact, this 6 portfolio had been quite profitable over the 7 years. Right? 8 A. That's true. 9 Q. Would you agree with me that to the 10 extent the association was taking on risk, it was 11 being compensated for that risk by the return it 12 made? 13 A. Yes, but you're also forgetting that 14 you need to have proper credit underwriting. The 15 one thing that bothered me about this write-up is 16 the examiner is suggesting or recommending that 17 this portfolio be marked to market. And if he was 18 making that type of recommendation to me, I would 19 want to have more specifics about where he sees 20 the additional risk since, traditionally, these 21 are held at historic cost and he was already in a 22 risk-controlled arbitrage program. 25032 1 Q. We're going to talk to the 2 mark-to-market aspect in just a second. 3 With respect to things like the credit 4 underwriting, would you agree with me that 5 everybody who had looked at that portfolio over 6 the years had concluded that it was well-managed 7 and well-run and that included the underwriting? 8 A. Yes. It had the solid expertise, it 9 had good policies, and it had the systems to do 10 the analysis. 11 Q. Let's talk for a second about the 12 mark-to-market because that was the second comment 13 that Mr. Rinaldi focused you on. 14 The examiner thought it ought to be 15 done on a weekly or monthly basis? 16 A. I think at least monthly. 17 Q. Okay. Are you aware that beginning in 18 about the middle of 1986, the Federal Home Loan 19 Bank of Dallas received on a monthly basis copies 20 of letters sent by United Savings to the Texas 21 Commissioner giving details on the high-yield 22 bonds? 25033 1 A. Yes. 2 Q. I want you to take a look for a moment 3 at Exhibit B1148, which is Tab 258. 4 Now, this exhibit is a letter from Joe 5 Phillips, the vice president of investments at 6 United, to Mr. L.A. Anderson, the Deputy 7 Commissioner of the Texas S&L Department. And 8 this is, in fact, one of those monthly letters. 9 Do you recognize it as such? 10 A. Yes. 11 Q. You see a copy was sent to Ginger 12 Baugh? 13 A. Yes. 14 Q. Would you turn to the -- I guess it's 15 the fourth page of the exhibit. Do you see at the 16 top it says, "Enclosure II"? 17 A. Yes. 18 Q. Does that appear to be a computer 19 printout listing the high-yield bond holdings as 20 of June 1986? 21 A. It's definitely some type of printout, 22 yes. 25034 1 Q. Those appear to be high-yield bonds, if 2 you would look at the coupon rates? 3 A. Yes. 4 Q. Look at the far right-hand column. 5 What do you see? 6 A. "Unrealized gain/loss." 7 Q. Mark-to-market. Right? 8 A. Well, the market column is separate; 9 but that's the net, if you want to go by that. 10 Q. So, they were doing mark-to-market on a 11 monthly basis, were they not? 12 A. Yes. 13 Q. And you were getting it? 14 A. It was coming to the office, yes. 15 Q. Mr. Rinaldi also asked you some 16 questions concerning gains and your knowledge of 17 gains in the high-yield bond portfolio. I would 18 like to ask you to take a look at the outset at 19 Exhibit A1388, which is at Tab 525. 20 Now, these are minutes of the 21 investment committee of USAT; and actually, I 22 believe this -- these particular minutes -- you 25035 1 can't see it on the first page -- well, yes. 2 You'll see that's a meeting on April 24th, 1986. 3 I believe this was actually the first meeting of 4 the USAT investment committee. 5 You've seen these minutes from time to 6 time, have you not, Mr. Twomey? 7 A. Since I've probably seen every other 8 document in the last few days, probably. 9 Q. You saw investment committee minutes 10 from USAT, did you not? 11 A. Yes. 12 MR. RINALDI: Can we just clarify that? 13 Are you talking about during this proceeding or 14 during the period of time he was serving as the 15 supervisory agent? 16 MR. EISENHART: I meant during the 17 period of time he was serving as the supervisory 18 agent. 19 A. I meant during this proceeding. 20 Q. (BY MR. EISENHART) Well, did you see 21 investment committee minutes during the time you 22 were the supervisory agent, as well? 25036 1 A. No, I don't recall. 2 Q. But examiners saw them? 3 A. Examiners could have the opportunity to 4 look at them, yes. 5 Q. I want you to go down to the 6 next-to-the-last paragraph on the first page of 7 the investment committee minutes. And actually, 8 if you look at the discussion somewhat above that 9 paragraph, you'll see that they are talking about 10 corporate debt instruments and high-yield bonds. 11 Is that the case? 12 A. Yes. 13 Q. Next-to-the-last paragraph, they say, 14 "The committee then discussed the appropriate 15 guidelines for investments. It was determined 16 that the association should have as its primary 17 goals the following in the order noted." 18 What's Goal No. 3? 19 A. Capital appreciation. 20 Q. You understand what capital 21 appreciation means, don't you? 22 A. Yes. 25037 1 Q. And if you're going to realize benefit 2 from capital appreciation in a high-yield bond 3 portfolio, what do you have to do with the bond? 4 A. Well, you're also jumping ahead. The 5 first point was protection of capital. Second was 6 spread between the interest to be received from 7 the corporate debt entity and also the 8 association's cost of funds. The third here would 9 be -- oh, yeah -- it would be nice to earn a 10 little more money at the end. 11 Q. You buy a high-yield bond. That's a 12 debt instrument, correct? 13 A. Yes. 14 Q. And you're going to get a rate of 15 return on that instrument? 16 A. Yes, until it matures. 17 Q. As long as you hold that bond, that 18 coupon is going to return interest to you 19 periodically, correct? 20 A. Yes. 21 Q. You hold the bond until maturity. What 22 happens then? 25038 1 A. You get your principal back. 2 Q. Now, if something has happened to 3 interest rates during the period of time you hold 4 that bond and the price of the bond has gone up, 5 you have realized capital appreciation, have you 6 not? 7 A. Unrealized, yes. 8 Q. What do you have to do to take 9 advantage of that capital appreciation? 10 A. Well, there's really two things. What 11 you now have is an enhanced yield which would 12 offset other costs such as increase in your cost 13 of funds, or you could sell that security and 14 basically then book a profit. 15 Q. Would you agree with me, Mr. Twomey, 16 that if you have a high-yield bond portfolio that 17 lists as one of its objectives capital 18 appreciation, that you can expect to have sales 19 out of that portfolio from time to time to reap 20 capital gains? 21 A. That's your reading of it. I thought 22 the reason they had risk-controlled arbitrage for 25039 1 the junk bonds was to maintain a positive spread. 2 Q. I'll try it again. 3 Would you take a look at Exhibit A10634 4 which is at Tab 180? 5 MR. RINALDI: I'm sorry. Tab 180? 6 MR. EISENHART: Tab 180, 7 Exhibit A10634. 8 Q. (BY MR. EISENHART) Now, Mr. Twomey, 9 this is a letter from Mr. Arthur Berner to 10 Mr. James Halverson, an analyst at the Federal 11 Home Loan Bank Board, dated May 9th, 1986. A copy 12 of this letter was sent to you, was it not? 13 A. Actually, Mr. Jim Halverson was the 14 supervisory agent. 15 Q. So, Mr. Berner had the title wrong? 16 A. Yes. 17 Q. Okay. And if you turn to Page 3 of the 18 letter, it refers to certain guidelines 19 established by the investment committee for their 20 investment decisions in high-yield bonds. And it 21 mentions again capital appreciation, does it not? 22 A. Yes, as the third item. 25040 1 Q. All right. And if you go down to about 2 the middle of that page, you'll see a paragraph 3 that starts out "as set forth on Exhibit A." 4 Do you see what I'm referring to? 5 A. Yes. 6 Q. It says, "The investment in corporate 7 high-yield bonds has provided a recognized profit 8 of $27.2 million since 1984 at an unrecognized 9 gain of about 11.6 million. This gain is in 10 addition to the built-in interest rate spread of 11 approximately 2.5 percent." They go on to say, 12 "As a result of this spread plus capital 13 appreciation, the association has been able to 14 increase its net worth through the implementation 15 of this investment program." 16 Would you take from that letter that 17 there are going to be sales from time to time to 18 realize capital gains? 19 A. Starting off on Page 2, "The 20 association has implemented a program of investing 21 in corporate bonds in order to maintain an 22 interest rate spread between high-yield corporate 25041 1 bonds and duration matched long-term certificates 2 of deposit. By building in this matched spread, 3 the association has been able to increase its 4 capital and profitability through what we believe 5 is a balanced portfolio." 6 Sounds to me like they are talking 7 about their risk-controlled arbitrage. It looks 8 like this is -- their objectives are to maintain 9 the principal, not lose money. The second thing 10 is to maintain a positive spread. The third thing 11 is we would like to have a profit at the end of 12 the day. They wouldn't list that they wanted to 13 have a loss. 14 Q. Would you take from that letter that 15 there are going to be sales from time to time out 16 of the high-yield bond portfolio to realize 17 capital gains? 18 A. My take would be that they have a 19 risk-controlled arbitrage program -- 20 Q. You can answer "yes" or "no" to that 21 question. 22 A. If they have gains or losses, it's 25042 1 simply because they are maintaining the portfolio 2 underneath that RCA. 3 Q. All right. I'll have you now take a 4 look at Exhibit A12164, I believe at Tab 1875. 5 Now, Exhibit A12164, Mr. Twomey, is a 6 letter from Arthur Berner to you dated 7 December 18th, 1986. It's talking about the 8 high-yield bond portfolio, is it not? 9 A. Yes. That's the title of the letter. 10 Q. Okay. Turn to the second page of the 11 letter, second paragraph. He says, "Since 12 inception in late 1984 through September 30, 1986, 13 United has realized earnings on the accumulated 14 spread income of the high-yield bond portfolio of 15 approximately $12.8 million and has realized 16 market gains from such portfolio in excess of 17 $42 million." 18 Do you take it from this letter, 19 Mr. Twomey, that there are going to be sales out 20 of the high-yield bond portfolio from time to time 21 to realize capital gains? 22 A. Again, the only thing I say here is 25043 1 that, you know, these are sales that occurred 2 prior to September 30th, 1986. And it was my 3 understanding, particularly because of the 4 dramatic drop in interest rates during the first 5 half of 1986, they would be maintaining their 6 portfolio. And they were obviously -- they might 7 have reason to rebalance it, and that might cause 8 them to sell. If market rates had dropped, then 9 those higher coupons -- whatever credit decision 10 they made to sell would probably result in a 11 profit. 12 Q. So, you're telling me, Mr. Twomey, that 13 you can look at a letter that reports spread 14 income of $12.8 million and realized market gains 15 of $42 million and you can look me in the eye and 16 tell me that you never thought they were going to 17 take capital gains out of that portfolio? 18 Is that what you want this Court to 19 believe? 20 A. I'm looking you in the eye, and I'm 21 saying "yeah." 22 MR. EISENHART: Okay. I have no other 25044 1 questions, Mr. Twomey. 2 MR. RINALDI: Your Honor, perhaps this 3 might be an appropriate time to take the recess 4 for the afternoon. I think I could finish up with 5 a few questions with Mr. Twomey. 6 THE COURT: All right. We'll take a 7 short recess. 8 MR. RINALDI: Thank you. 9 10 (Whereupon, a short break was taken 11 from 2:54 p.m. to 3:20 p.m.) 12 13 THE COURT: Be seated, please. We'll 14 be back on the record. 15 Mr. Rinaldi, you have some redirect? 16 MR. RINALDI: Yes, I do. 17 18 FURTHER EXAMINATION 19 20 Q. (BY MR. RINALDI) Mr. Twomey, I believe 21 the last document that Mister -- or nearly the 22 last document that Mr. Eisenhart showed you was a 25045 1 letter dated May 9, 1986, to Mr. James Halverson 2 that was written by Arthur Berner. I think it's 3 A10634 and Tab 180. It should be there in front 4 of you. 5 A. It is. 6 Q. And would you please turn to the fourth 7 page of that document and read the last paragraph 8 or the concluding paragraph at the bottom of that 9 page which then trails over to the top of Page 5? 10 THE COURT: Could you give the number 11 again? 12 MR. RINALDI: Sure. It's A10634. 13 THE COURT: Thank you. 14 A. (Witness reviews the document.) Yes, 15 I've read it. 16 Q. (BY MR. RINALDI) Okay. Did you 17 understand by that paragraph that USAT was not 18 engaging in interest rate speculation with respect 19 to its portfolios of investment securities? 20 A. Yes. 21 Q. Does that indicate to you that it was 22 not the intention of USAT to sell mortgage-backed 25046 1 securities in order to generate gains to increase 2 its capital? 3 A. Yes. 4 Q. Would you look at the next document 5 that's been set before you. This is 6 Exhibit B1042, and it's at Tab 232. 7 A. I have it. 8 Q. This is a document that's dated five 9 weeks after the Halverson letter approximately. 10 It's dated June the 12th, 1986. 11 Do you see that? 12 A. Yes. 13 Q. And this is the memo that Mr. Scott 14 wrote to you regarding his review of the 15 high-yield bond portfolio at USAT, correct? 16 A. Yes. 17 Q. And if we look in the second full 18 paragraph, Mr. Scott reports in the fourth 19 sentence, I believe, that begins with the word 20 "while" -- it says, "While the portfolio does 21 require certain adjustments to keep the durations 22 matched, the management of the bond portfolio does 25047 1 not involve bond swapping to pick up yields or 2 premature selling to capture capital gains 3 currently unrealized." 4 Do you see that? 5 A. Yes. 6 Q. Did you understand by that that they 7 had told Mr. Scott that they were not selling 8 high-yield bonds in order to capture gains to -- 9 A. Yes. 10 MR. RINALDI: I have no further 11 questions for the witness, Your Honor. 12 MR. EISENHART: Your Honor, I have one 13 or two questions for this witness based simply on 14 the last document that Mr. Rinaldi showed him. 15 THE COURT: All right. 16 17 FURTHER EXAMINATION 18 19 Q. (BY MR. EISENHART) Mr. Twomey, 20 Dr. Scott says in his memo to you that the 21 management of the bond portfolio does not involve 22 bond swapping to pick up yields or premature 25048 1 selling to capture capital gains currently 2 unrealized. 3 Do you understand the word "premature" 4 as Dr. Scott uses it in this memo? 5 A. Well, mostly, when you buy a security 6 in this, you're buying it for a set duration. So, 7 if you're selling it prematurely, you're selling 8 it before the estimated duration of the security. 9 Q. You're taking a very literal meaning of 10 "premature" meaning prior to maturity. Right? 11 A. Just responding to your question, but 12 yes. 13 Q. If there was going to be no selling in 14 the portfolio prior to maturity, doesn't that mean 15 there will never be any selling? 16 A. No. I think the way I view it is for 17 credit reasons and for other reasons, there might 18 be maintenance of the portfolio that would cause 19 you to have to sell certain securities to maintain 20 the proper risk-controlled arbitrage. 21 Q. Would you agree with me that if he's 22 using "premature" in the sense that you just 25049 1 described it -- i.e., prior to maturity -- that 2 sentence quite literally means there will not be 3 sales out of the portfolio? 4 A. As it says here, there will not be 5 selling in the portfolio prior to maturity. 6 Q. No selling prior to maturity? 7 A. Well, you're saying "no" as if there 8 will never be any sales. What it's saying here is 9 that the portfolio does require certain 10 adjustments to keep durations matched. Management 11 of the bond portfolio does not involve bond 12 swapping to pick up yields or premature selling to 13 capture capital gains currently unrealized. 14 Q. You're telling me, then, as you read 15 that phrase what you think it means is there will 16 never be any selling prior to maturity to capture 17 a capital gain. Is that what you're telling us? 18 A. Well, the sentence is -- I'm tired. 19 From my reading of that sentence, it appears that 20 John Scott is telling me that the institution is 21 maintaining a risk-controlled arbitrage and they 22 are not sweeping the accounts just to pick up 25050 1 unrealized gains on certain bonds in an arbitrary 2 manner. 3 Q. Well, isn't it a fact, Mr. Twomey, that 4 as we sit here and look at this some 12 years 5 later, it is very difficult to tell exactly what 6 Dr. Scott means by his use of the term "premature 7 selling"? 8 A. Well, from your first question, I gave 9 you my -- my interpretation of it. 10 Q. But as you sit here, you can't really 11 say that that's how he intended to use the term, 12 can you? 13 A. No. I'm not going to say how he 14 intended to use it. I can tell you how I read it. 15 MR. EISENHART: I have no further 16 questions. 17 MR. RINALDI: I have no further 18 questions. 19 THE COURT: Thank you, Mr. Twomey. You 20 may step down. 21 Do you have another witness, 22 Mr. Rinaldi? 25051 1 MR. RINALDI: We do, Your Honor. We 2 would call as our next witness Mister -- I'm 3 sorry -- Dr. Barry Munitz. 4 THE COURT: Would you take the oath, 5 please, sir. 6 . 7 . 8 . 9 . 10 . 11 . 12 . 13 . 14 . 15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . 25052 1 BARRY MUNITZ, 2 was called as a witness and, having been first 3 duly sworn, testified as follows: 4 EXAMINATION 5 6 Q. (BY MR. RINALDI) Would you state your 7 full name for the record, sir. 8 A. Barry, B-A-R-R-Y, Allen, A-L-L-E-N, 9 Munitz, M-U-N-I-T-Z. 10 Q. Now, Mr. Munitz, can you describe for 11 the Court just very briefly your educational 12 background? 13 A. Born and raised in Brooklyn, New York. 14 Went to Brooklyn College for a Bachelor's Degree 15 in Classics and Comparative Literature. Went then 16 to Princeton University for a Master's and a Ph.D. 17 in Comparative Literature. 18 Basically, that's the outline of my 19 educational background. 20 Q. So, you obtained a master's? 21 A. A master's and a Ph.D. from Princeton. 22 Q. That would explain the doctorate. 25053 1 A. Yes. 2 Q. After you obtained your doctorate at 3 Princeton, what line of business did you begin to 4 engage in? 5 A. Basically from there, most of my life 6 was academic. I went from Princeton to teach at 7 the University of California at Berkley to teach 8 literature, worked part-time for the president of 9 the university there. 10 Then I went to the University of 11 Illinois in Chicago basically looking for a campus 12 like Brooklyn College where I had gone to school, 13 stayed to be the vice president of the University 14 of Illinois. 15 Then came to Houston in 1976 to be the 16 chancellor of the University of Houston. 1982 to 17 1991, took a detour into the "for profit" side and 18 then came back in 1991 as the chancellor of the 19 California State University system. 20 And then since appointed in July of 21 1997, started serving, January 1998, as the 22 president and chief executive officer of the 25054 1 J. Paul Getty Trust. 2 Q. Now, I'm more interested in the period 3 before you took your detour into private industry. 4 What had been the nature of your work 5 at the Illinois campus and the Houston campus in 6 educational administration? 7 A. Basically at the University of 8 Illinois, I was the academic vice president of the 9 system which meant the traditional rural campus at 10 Champagne Urbana. The big urban campus was a Navy 11 pier then called Chicago Circle and the big 12 medical center. Those three campuses were 13 coordinated by a system holding company. I was 14 the academic officer of that holding company. So, 15 basically my responsibilities were the shaping of 16 academic policy, the setting of priorities, 17 probably most critically the hiring of people, 18 faculty, administrators, working with the 19 governing board, working with the state 20 legislature on budgets and other bills that would 21 have affected the University of Illinois. 22 When I came to the University of 25055 1 Houston, it was much like the Chicago campus, 2 growing urban older students, part-time students, 3 really second-opportunity students which was the 4 place I felt most strongly about. I came first as 5 the vice president and dean of faculties, and then 6 I was named chancellor of the main campus. They 7 had a big urban campus. 8 And then Victoria and Clear Lake. 9 Again there as the chief executive officer of the 10 main campus, my responsibilities would have been 11 people, administrative process, student criteria, 12 alumni, development, fund raising, resource 13 allocation, governing board interaction. 14 Q. Now, there came a time, then, after you 15 had served at Houston for some time that you left 16 academia and went into the private sector; is that 17 correct? 18 A. Yes, sir. 19 Q. Now, prior to your entry into the 20 private sector, had you had any educational or 21 professional experience in the area of finance? 22 A. I didn't have educational experience. 25056 1 I was serving -- for example, when I was a 2 chancellor at the University of Houston, I was a 3 member of the Charter Bank board here in Houston. 4 I had consulted with several corporate boards on 5 questions, mostly of board evaluation, chief 6 executive evaluation, compensation, but not -- I 7 think what you would mean by traditional finance. 8 That wasn't my degree and wasn't my 9 responsibility. 10 Q. Now, when you say you had consulted 11 with respect to boards, what was the nature of the 12 consulting work that you had done for boards? 13 A. Basically, I would be brought in -- it 14 started more with colleagues and universities; and 15 then I met, from those colleagues and 16 universities, boards members who were corporate 17 executives and wanted the same kind of advice and 18 experience in their corporate setting. So, it 19 would be interviewing board members, interviewing 20 executives, talking about the administrative 21 process there, did they feel the right people were 22 in place, did they feel the decision-making 25057 1 process was timely, were they getting information 2 that they wanted. 3 Often if a chief executive was leaving, 4 I would give some guidance on the search process 5 for finding a new person. 6 Q. In connection with this consulting, you 7 were basically a consultant to the process of how 8 information disseminated within an organization? 9 A. I think it wouldn't have been all types 10 of information. It would have been much more 11 questions of governance, leadership. On the 12 academic side, much more complicated because there 13 were search processes; and many of them would be 14 media covered. 15 On the private side, it was much less 16 likely to be complex. Again, it would be what 17 kind of person are we looking for, what sort of 18 person do the other management people feel are 19 important to bring in, how do you check 20 references. 21 I think it surprised me and still does 22 how relatively undeveloped some of those processes 25058 1 are at many complex organizations. So, it would 2 have been basically that category. 3 Q. Now, you were doing this consulting 4 work at the same time as you were serving in your 5 position at Houston? 6 A. Well, most -- I was. In most instances 7 on the "not for profit" side with colleagues and 8 universities, it really would have been pro bono 9 work; or they would have paid my expenses back and 10 forth to help them. It was clear to the 11 University of Houston there was an advantage as 12 part of our networking and getting that done. If 13 I went and talked to a corporate board, it would 14 have been because either a member of my University 15 of Houston board members or alumni board had asked 16 if I could come and spend the day with them and 17 talk about their interests and their priorities, 18 originally while I was at the University of 19 Illinois and then at the University of Houston. 20 Q. And the corporate entities that you 21 would have consulted with were non-profit? 22 A. No, no. The corporate would have been 25059 1 for profit; and other colleagues and universities, 2 symphony, museum, Salvation Army would have been 3 on the "not for profit" side. 4 Q. Were you paid for this consultancy 5 work, or was it all pro bono? 6 A. On the "not for profit" side, it would 7 have been expenses. On the profit side, probably 8 it would have been somewhere between pro bono and 9 a favor. I would say on a rare occasion where it 10 was really coming in from the outside and looking 11 at a corporate bond situation, I would have been 12 paid as a daily consultant. 13 Q. And was this a -- an enterprise that 14 you would engage in periodically, or did you have 15 sort of a thriving practice of consulting with 16 corporations and non-profit corporations? 17 A. I think it was clearly on the engaged 18 periodically, not thriving practice side. 19 Q. Do you recall some of the corporate 20 enterprises that you would have consulted with? 21 A. One of the places that I wound up 22 spending a fair amount of time on and off -- and I 25060 1 couldn't give you the exact time because when I 2 left the University of Houston, I shifted 3 relationships with them as well -- was with 4 Charter Bank. 5 Q. What was the nature of your -- 6 A. There I spent a fair amount of time 7 interviewing key executives, helping with 8 transition in leadership at a number -- they were 9 going through a transformation and expansion so 10 that I was involved in both the evaluation, I 11 think, in one or more cases, the letting go of, 12 and in one or more cases, the bringing in of the 13 key management team and working with the chief 14 executive officer on identification of new 15 directors and how the board was working. 16 Q. What was Charter Bank? 17 A. It was a basic commercial bank here in 18 Houston. 19 Q. And when would you have done this work 20 for Charter Bank? 21 A. It would have been on and off between 22 the second half of the Seventies into the first 25061 1 half of the Eighties. 2 Q. Did you continue to do the work for 3 Charter Bank once you had become involved with 4 MCO? 5 A. Well, this is a while ago; and so, I'm 6 trying to -- what I remember, Mr. Rinaldi, vaguely 7 is when I went to MCO and Federated and took a 8 seat on the United Financial Group board, there 9 was a question about whether I could be both a 10 Charter Bank board member and a United Financial 11 Group board member. And I think ultimately there 12 was a legal opinion that I had to leave the 13 Charter Bank board. And so, I vaguely remember 14 that shift. 15 I can't tell you the exact time or the 16 nature of it. But it would have been -- I'm 17 fairly confident it was in that time period. 18 Q. Well, you indicated that there did come 19 a point in time when you joined the board of MCO. 20 Is that what you were referring to? 21 A. Well, I was mentioning specifically the 22 board of United Financial Group, but it would have 25062 1 come at the same time that I joined MCO and I was 2 on the board of MCO. 3 Q. All right. How was it that you came to 4 be involved with MCO and United Financial Group? 5 A. I'll try to keep it short, and you tell 6 me if you need more. Basically, for a year or two 7 before 1982 -- 1982 in the summer would have been 8 when the shift occurred -- for a variety of 9 reasons, most of them tied to being the chancellor 10 of the University of Houston, I had regular 11 conversation with people on the corporate side of 12 life in Houston. With many of them, I would argue 13 rather strongly about whether it was harder to run 14 a university or run a corporation. And amongst 15 the people with whom I would have that debate was 16 Charles Hurwitz. And toward -- probably going 17 into the late part of '81 into '82, that 18 conversation was more serious. I had always 19 thought that I could be a more effective 20 administrator in the "not for profit" sector if I 21 had a feel in a more direct way with what was 22 happening on the other side of the table. 25063 1 Frankly, I was also getting a little tired of 2 having my board members tell me if I ever made an 3 honest living and earned a payroll, I would 4 understand what they were up to. 5 I had the opportunity of talking to 6 Mr. Hurwitz and doing just that when his business 7 situation changed in '82, and that's when I 8 shifted over. 9 Q. How was it that you had known 10 Mr. Hurwitz prior to 1982? 11 A. Our spouses knew each other. So, we 12 would play tennis from time to time, the four of 13 us, and have a meal. I also -- in 1980, I had 14 been the victim of an armed robbery in my house 15 with some guests when my life was threatened and 16 they tried to set the house on fire. And as a 17 result of that, I was doing a lot of speech making 18 around the city about safety and public visibility 19 and wound up talking to him after a meeting at 20 some point about this issue. 21 So, a variety of different settings 22 brought us together. Plus, I also think at some 25064 1 point I was hoping to get some money from him for 2 the University of Houston. 3 Q. And how long, prior to your going to 4 work with Mr. Hurwitz at UFG and MAXXAM, had you 5 known him? 6 A. I'm going to say two or three years. I 7 could be off by a year, but I don't think by much 8 more than that. 9 Q. You said you played tennis with him and 10 met with him socially? 11 A. Yes. 12 Q. Was that a fairly frequent occurrence? 13 A. No. I don't play tennis fairly 14 frequently, period. So, if it was once every 15 three or four months, in that period, probably -- 16 that's probably a fair characterization. 17 Q. And how about the dinners? 18 A. Likewise. I included both of those 19 together. 20 Q. And did you also attend social 21 functions with Mr. Hurwitz and his wife? 22 A. I suspect only at this -- Houston, I'm 25065 1 reminded again today, is in some ways still a 2 pretty small town maybe just compared to 3 Los Angeles. I was chair of the Houston Grand 4 Opera board at that time, doing an awful lot of 5 basic work, again trying to bring the community 6 together for the University of Houston. So, I'm 7 sure that I would see him at those events. His 8 wife particularly was active in fund raising for 9 them. 10 Q. Now, I take it from your comments, 11 then, that there came a time when Mr. Hurwitz 12 suggested to you that there might be a place for 13 you at MCO? 14 A. Yes, sir. 15 Q. Tell us how that came about. 16 A. Well, I think it was related to this 17 ongoing debate about the relative challenge of 18 running a corporation and running a university. 19 And his presentation to me over -- was probably in 20 the six months or so before the shift occurred; 21 so, it would have been late '81 into '82. The 22 challenge was basically if I thought it was so 25066 1 much easier to do the corporate side, why didn't I 2 actually accept the challenge. We were very 3 different. Our backgrounds are very different. 4 Our areas of expertise are very different. 5 Essentially, what he said to me was "I know how to 6 do the financial side. I understand the deal 7 making and the fiscal transactions. It's not 8 something I would lean on you on." 9 I said that was a good thing. My 10 experience, in turn, was where he had much less 11 experience and much less desire to be, which was 12 the people, the searching process, the strategic 13 planning. 14 His suggestion to me was that -- I 15 believe it was just at the time he was getting not 16 just more involved with just United but also 17 Simplicity Patterns, that it was more than he 18 could handle himself. Would I consider coming on 19 board to take that non-physical side of the 20 responsibility. 21 Q. You said he was competent to handle the 22 financial side and he understood deals. 25067 1 Do you recall that? 2 A. Yes. That was my feel. When you 3 looked at both of us, if you were going to divide 4 up those responsibilities, it seemed pretty clear 5 to me on the financial and deal making side, you 6 would look to him; and on the people and 7 processing side, you would look to me. 8 Q. So, then you went to work at MCO, did 9 you not? 10 A. I took the presidency at -- roughly, it 11 would have been the same time that I became 12 president of Federated Development Company, 13 vice chairman of then called MCO, now MAXXAM, and 14 soon after that I was also a board member at 15 United Financial Group and United Savings. 16 Q. And was it your understanding that you 17 were going to handle the people and personnel side 18 of UFG? 19 A. Gosh, no. At that point, I was just 20 going on the board of UFG. There was an 21 administration and management team in place. The 22 UFG relationship at that time was just as a board 25068 1 member. 2 Q. Well, now, you said that Mr. Hurwitz 3 wanted you to come in and do some people side 4 or -- and he was competent to handle the deals and 5 the financial side. 6 What institutions were you making 7 reference to? 8 A. I was making reference to Federated 9 Development, to MCO, and to -- in that stage, to 10 Simplicity Patterns. 11 Q. Did you then -- what was the position 12 that you held at Federated? 13 A. I was the president of Federated 14 Development. 15 Q. And how many employees did Federated 16 Development Company have? This is 1982. 17 A. 1982? I think at that time, there was 18 a reinsurance company and some real estate. I'm 19 going to say 10 to 15. I could be off. It would 20 be on that order of magnitude. Federated was not 21 a large, complicated company at that time. 22 Q. Did your duties at Federated occupy 25069 1 your full time? 2 A. No. 3 Q. What percentage of your time would have 4 been devoted to Federated? 5 A. It would have really depended upon 6 the -- literally the month, the time of year. I 7 was spending a fair amount of time on the MCO 8 side, which was larger and -- much larger and more 9 complicated at that time. They had real estate 10 and gas and oil, geothermal, some other pieces. 11 So, it would have -- and probably for some time, 12 to come -- would have been divided literally on 13 timing the challenge, he or Bill Leone who was the 14 president of MCO would ask me to look at a certain 15 situation and I would shift or pick that piece up. 16 Q. Now, were you an employee of both MCO 17 and Federated at this point in time? 18 A. Yes, sir. 19 Q. And you received a salary from 20 Federated and another one from MCO? 21 A. I believe that it was -- that they 22 would again, depending upon the percentage of my 25070 1 time there, allocate it between them. But at one 2 time or another, I was probably paid by both of 3 them. 4 Q. And in addition to that, you worked as 5 a -- you were -- had a position with Simplicity 6 Patterns? 7 A. I was a board -- that was just as a 8 board member. But from time to time as a board 9 member, since they were just changing ownership as 10 the Hurwitz group became the majority 11 shareholders, I was spending some time there as a 12 board member talking to people about the 13 transition, listening to the process. 14 So, it would have taken some time; but 15 I would not have been paid by Simplicity other 16 than as a director. 17 Q. Okay. And at the point that you -- 18 that we're talking about here, did there come a 19 point in time when you became a member of the 20 board of United Financial Group? 21 A. Yes, sir. 22 Q. Okay. Can you tell the Court how that 25071 1 came about? 2 A. It would have about roughly, I think, 3 still in the 1982 period, so close to when I came 4 to Federated and to MCO. And I was asked by 5 Mr. Hurwitz and I think also Mr. Kozmetsky -- I 6 had known Mr. Kozmetsky. He was just finishing 7 his term as the dean of business at the University 8 of Texas. He and I had worked together while at 9 the University of Houston. 10 I was asked by MCO to assume a board 11 seat or I was in invited by MCO and by United 12 Financial Group. It's been a while. It's right 13 in that time period when I took that board seat. 14 Q. Well, you said a moment ago that 15 Mr. Hurwitz had asked you to sit on the board at 16 UFG. 17 A. I'm not sure I said that. If I did, 18 what I meant to say was the companies, both 19 Federated and MCO, where he was the chief 20 executive officer, both of them, those companies, 21 asked me, invited me -- the board invited me 22 because, ultimately, since it was a publicly held 25072 1 company, I had to be approved by the shareholders. 2 I was basically trying to answer your question of 3 when did I go on the board. 4 Q. My question to you is: Were it not for 5 the fact that Mr. Hurwitz was the controlling 6 shareholder of MCO and the controlling shareholder 7 of Federated, do you -- you would never have been 8 asked to sit on the board of UFG, would you? 9 A. Well, I would like to believe they 10 would have seen my quality individually; but I 11 think that's absolutely right. 12 Q. In fact, it's the fact that Mr. Hurwitz 13 was involved in the ownership of those companies 14 that you were put on the board, isn't it? 15 A. Yes, sir. 16 Q. And the very purpose of you being on 17 the board is so that you could represent the 18 interests of MCO and Federated, correct? 19 A. No, I'm not sure that that's right 20 because I took my board position very seriously 21 once I was there. 22 Q. When you sat on the board, was it your 25073 1 practice then to report back to Mr. Hurwitz, who 2 was a substantial shareholder in UFG, the 3 goings-on on the UFG board? 4 MR. KEETON: I object to the form. 5 Mr. Hurwitz wasn't a substantial shareholder. 6 MR. RINALDI: Strike that. 7 Q. (BY MR. RINALDI) Was it your practice 8 to report back to Mr. Hurwitz, whose companies 9 held substantial amounts of stock in UFG? Was it 10 your practice to report back to Mr. Hurwitz about 11 what was going on on UFG's board? 12 A. I really didn't have to do that because 13 Mr. Hurwitz was on UFG's board. 14 Q. Was he always on the board throughout 15 the period of time that you were on the board? 16 A. Up until about February of 1988, yes, 17 sir. 18 Q. So that when you went to the UFG board, 19 he was already there? 20 A. He was either already there or he came 21 roughly at the same period of time. He was 22 certainly there virtually all the time that I was 25074 1 there up until roughly February of '88. 2 Q. Now, when he appointed you to the 3 board -- 4 MR. KEETON: I object to the form. 5 Mr. Hurwitz didn't appoint him to the board. 6 Q. (BY MR. RINALDI) When you became a 7 member of the board of United Financial Group, did 8 you have any discussion with Mr. Hurwitz as to how 9 Federated and MCO had come to acquire an interest 10 in United Financial Group? 11 A. I'm sure that I did. I can recall at 12 least one conversation; and I suspect that there 13 were others, yes, sir. 14 Q. Can you tell us what Mr. Hurwitz might 15 have told you about the reasons for Federated and 16 MCO acquiring an interest in United Financial 17 Group? 18 A. Well, the two pieces that I recall 19 were -- I believe that at one point, he thought 20 that someone else was about to buy the company. 21 And it's a long time back, but I -- Mr. Ludwig -- 22 I think it was Mr. Ludwig -- was going to buy the 25075 1 company or made an offer to buy the company. 2 At first, Mr. Hurwitz' interest was in 3 buying stock basically in an arbitration, assuming 4 that he was buying it and then would sell it 5 fairly quickly. Once we got into the 6 conversation, the other was that he believed that 7 there was value. For whatever reason, he wound up 8 as the chair of two companies with a reasonable 9 amount of stock in the holding company, that he 10 believed that there was a solid economic future 11 for that institution. 12 Q. And did you ever discuss with 13 Mr. Hurwitz what he meant by a solid economic 14 future for the institution? 15 A. Well, more than at that initial period, 16 I'm assuming you mean, yes. 17 Q. What was it about UFG that Mr. Hurwitz 18 found so -- to be an interesting investment 19 opportunity? 20 A. Well, I think in general, since his own 21 background was financial, he felt that he 22 understood financial institutions. I sensed that 25076 1 there was more than passing commitment because it 2 was a Texas-based institution and he was a 3 Texas-raised person whereas MCO was basically 4 headquartered in California, that it was an 5 opportunity where economic conditions were 6 beginning to change. And he always struck me as a 7 person who was challenged by the opportunity to be 8 involved in a transformation and be able to be 9 just that much sharper and more creative and 10 thoughtful. And it seemed like for all of those 11 reasons -- I'm not saying this was just a 1982 12 conversation -- this was something of interest to 13 him. 14 Q. You say financial conditions were 15 changing. Were they changing for the better or 16 for the worse? 17 A. Well, I can't say specifically into 18 '82; but clearly in the '82, '3, '4 period in 19 Texas, they were beginning to change for the 20 worse. 21 Q. And Mr. Hurwitz saw this as an 22 opportunity to become involved in a savings and 25077 1 loan during a period when there was adverse 2 financial conditions? 3 A. Yes, sir. 4 Q. And why was he interested, as you 5 understood it, in getting involved in an 6 institution during adverse economic conditions? 7 A. Well, my experience in general is -- 8 and I'm thinking about several of my current board 9 members as well -- 10 Q. Well, I don't want you to guess. What 11 I want to know is what was your understanding 12 based on your conversations with Mr. Hurwitz. 13 A. Well, literally to that question, I 14 would have to answer I really don't know. 15 Q. So, he never explained to you why it 16 was in a downturn in the economy he was interested 17 in becoming involved in a savings and loan? 18 A. I think the general comment regarded 19 opportunity. 20 Q. And did he ever describe for you what 21 "opportunity" meant from his perspective? 22 A. Situations that many people consider 25078 1 overly complicated and headed for difficulty are 2 often perceived by other people as opportunities. 3 Q. Now, you mentioned a moment ago that 4 Mr. Hurwitz had acquired an interest in UFG as 5 part of an arbitrage. 6 Was that your word? 7 A. Yes, it was my word. I said I thought. 8 It's going back a long way. There is a 9 recollection somewhere in there of a purchase that 10 was supposed to close but didn't close. 11 Q. Was Mr. Hurwitz, through MCO and 12 Federated, involved in arbitrage in about 1982 13 when you became a member of the board of those 14 enterprises? 15 A. I don't remember what else he might 16 have been doing. I was just coming on board and 17 learning my way. I don't know. 18 Q. After you got on the board, did you 19 determine that, in fact, Mr. Hurwitz was involved 20 in arbitrage activity? 21 A. I just don't remember. 22 Q. Do you remember a fellow by the name of 25079 1 Mr. Huebsch? 2 A. Yes, sir. Ron Huebsch. 3 Q. Ron, right. 4 Did Mr. Huebsch manage an arbitrage 5 portfolio for Federated or MCO that you recall? 6 A. I think he ultimately was involved with 7 an arbitrage portfolio. I don't know the timing 8 of it. 9 Q. Did Mr. Hurwitz ever indicate to you 10 that he thought by entering into or by acquiring 11 an interest in United Financial Group, that one of 12 the potential benefits is that it could be used in 13 connection with his arbitrage activities? 14 A. Not to my recollection, no, sir. 15 Q. Now, when -- after you became a member 16 of the board of UFG, do you recall that one of the 17 first things that arose was the question of 18 whether -- I'm sorry -- the board of MCO -- strike 19 that. 20 Did you go on the boards of both MCO 21 and UFG at about the same time? 22 A. Roughly the same time. 25080 1 Q. Shortly after going onto the board of 2 MCO, do you recall that Mr. Hurwitz advised the 3 board that he thought it was useful for MCO to 4 acquire a larger interest in United Financial 5 Group? 6 A. Well, I don't know about the word 7 "useful"; but right in that time period, there was 8 discussion at the MCO board about achieving the 9 ability to buy a larger portion of the stock of 10 United Financial Group, yes, sir. 11 Q. Now, I know you were new to the board 12 at that point in time. But when those kinds of 13 proposals came before the board of MCO, was it the 14 practice of the board members to discuss the 15 potential acquisition of new stock? 16 A. That was -- as those would have been my 17 first couple of meetings, but it's certainly my 18 impression. 19 Q. And at those meetings, what were the 20 reasons that you recall that MCO was discussing 21 acquiring additional shares of United Financial 22 Group? 25081 1 A. Well, that's a long time. I don't 2 remember a great degree of specifics. I recall 3 generally comments about the state of the Texas 4 economy and belief in the potential of this 5 particular institution. 6 Q. And what was the basis for your belief 7 in the potential of this institution? I take it 8 by that, you mean UFG? 9 A. Yes. I don't think I referred to my 10 own belief. I was just coming in. I think you 11 asked me to try to characterize what I remembered 12 of their conversation. 13 Q. Now, would you take a look at the first 14 document in the book before you? And to 15 facilitate things, we've arrayed the documents in 16 order. And I'd ask you to take a look at what's 17 been previously marked as Exhibit T1012. It's 18 Tab 38. This is the board of directors meeting 19 minutes for September 16th, 1982. 20 Now, do you recognize this document, 21 sir? It's a heavily-redacted copy of the board 22 minutes of September 16th, 1982, of MCO Holdings. 25082 1 Do you see that? 2 A. Yes, I do, yes. 3 Q. And I think if you turn to about the 4 fourth or fifth page of the document, OW009360, it 5 makes reference to the fact that -- that Dr. Barry 6 Munitz has been invited to join the board of UFG. 7 Do you see that? 8 A. I do. 9 Q. Was this the first board meeting you 10 attended of MCO? 11 A. I might have attended an earlier 12 meeting, possibly as a guest. I think it's the 13 first meeting I would have attended as an official 14 member of the MCO board. 15 Q. Now, the first sentence there says, 16 "The chairman" -- was the chairman Mr. Hurwitz? 17 A. Yes, sir. 18 Q. It says, "The chairman next reported 19 that Federated Development Company (Federated) had 20 recently purchased shares of United Financial 21 Group, Inc., a Texas-based savings and loan." 22 Do you see that? 25083 1 A. I do. 2 Q. And do you know why -- you were also on 3 the board of Federated. Do you know why Federated 4 had acquired shares of UFG? 5 A. I don't at this point know anything 6 more than or different from my answer to your 7 question about the MCO motivation. I don't recall 8 anything distinct. 9 Q. In the next sentence, it talks about 10 "Mr. Hurwitz indicated that based upon his review 11 of UFG, it presented an interesting investment 12 opportunity to the corporation." And I think it 13 refers to United Financial Group. 14 Do you see that? 15 A. I do. 16 Q. Do you recall why Mr. Hurwitz thought 17 that United Financial Group was an interesting 18 investment opportunity? 19 A. Beyond my earlier answer, I don't. 20 Q. Okay. And at this meeting, I believe 21 it indicates that a vote was taken for MCO to 22 acquire up to 10 percent of the outstanding stock 25084 1 of United Financial Group. 2 Do you see that under the first 3 "resolve" paragraph down there? 4 A. Yes. 5 Q. So, at this point in time, do you 6 recall how much stock Federated owned in United 7 Financial Group? 8 A. No, I don't. Not at that point in 9 time, no. 10 Q. But MCO was going to acquire up to 11 10 percent themselves; is that correct? 12 A. That looks to be what this resolution 13 says, yes, sir. 14 Q. But you have no independent 15 recollection of that meeting other than that you 16 were there? 17 A. Oh, I remember the meeting. I just 18 would not have been able to recall the specific 19 number. 20 Q. Now, did there come a time when a 21 decision was made by MCO that it was going to 22 increase its ownership of United Financial Group 25085 1 to up to 24.9 percent of the outstanding shares of 2 UFG? 3 A. I think that -- I don't remember the 4 mix between the companies; but there came a time 5 when the reporting group, which would have been 6 both MCO and Federated and I believe also 7 Dr. Kozmetsky, collectively were going up to 24.9 8 or not past 24.9. I don't remember the exact 9 number, but I do remember the barrier. 10 Q. And the majority of those shares -- 11 although you said Dr. Kozmetsky, who sat on the 12 board of MCO -- is that accurate? 13 A. That is accurate. 14 Q. And was he trustee, also, of Federated? 15 A. He was at that time. 16 Q. What was his relationship to 17 Mr. Hurwitz? 18 A. He was -- as I mentioned earlier, he 19 had been the dean of the business school at the 20 University of Texas for about 16 years. He was a 21 trustee of Federated. Mr. Hurwitz was a trustee, 22 I believe, as early as that time of the Kozmetsky 25086 1 Family Foundation. 2 Q. And so, between Mr. Kozmetsky, 3 Federated, and MCO, they had acquired close to 4 24.9 percent of the shares of UFG? 5 A. At some point. 6 Q. Okay. Now, we see that on September 7 the 16th, 1982, MCO is going to acquire up to 8 10 percent of the shares. And now we see that the 9 holdings between MCO and Federated are going to go 10 up to 24.9 percent. 11 Do you recall any discussions during 12 this period of time -- 13 MR. VILLA: Excuse me, sir. 14 A. I'm sorry. I didn't see that second -- 15 MR. VILLA: Are you referencing a 16 document? 17 Q. (BY MR. RINALDI) I'm sorry. I thought 18 I had asked you did there come a time when MCO and 19 Federated determined that they wanted to go up to 20 24.9 percent and you had said "yes." 21 A. I was simply saying -- I just didn't 22 see that. 25087 1 Q. I'm sorry. My question to you is: 2 After -- at about the point in time that you 3 recall that MCO and Federated was going to 4 increase their holdings along with Mr. Kozmetsky 5 to 24.9 percent of UFG, do you recall any meetings 6 of the board at which the increased ownership of 7 MCO and Federated were discussed? 8 A. Which board? 9 Q. Either board, Federated or MCO. 10 A. Other than or in addition to this 11 meeting -- in addition to the September meeting? 12 Q. Yes. 13 A. I just want to be sure I'm following 14 you. 15 Q. At the September meeting, MCO had made 16 an initial decision to go up to 10 percent? 17 A. Correct. 18 Q. At that point in time, Federated owned 19 some shares, as well? 20 A. Correct. 21 Q. Collectively, do you recall how much 22 their ownership interest was? 25088 1 A. No. 2 Q. There came a time when they decided to 3 go up to 24.9 percent along with Mr. Kozmetsky, 4 correct? 5 A. Yes. 6 Q. Do you recall attending any meeting of 7 the board where the subject of going up to 8 24.9 percent was discussed? 9 A. I couldn't point you to the specific 10 date, but I'm fairly comfortable that there were 11 subsequent board conversations about the 12 ownership. 13 Q. Okay. And as a result of those board 14 conversations, they would have been both at the 15 Federated and the MCO level? 16 A. The conversations would have been at 17 both places. I'm not sure ultimately the actions 18 were, yes. 19 Q. Okay. As a result of your 20 participating in those board meetings, did you 21 come to an understanding as to why MCO and 22 Federated were interested in acquiring up to 25089 1 24.9 percent of the outstanding shares of UFG? 2 A. My sense was that it was consistent 3 with the sentence that you had read out, that it 4 wasn't a change of direction or feeling but that 5 it was this same perception of an interest 6 investment opportunity. 7 Q. And what does an interesting investment 8 opportunity mean to you? 9 A. Value. The chance to strengthen -- 10 since they were -- this was a publicly held 11 company, both MCO -- actually Federated as well at 12 that time so you had three publicly held 13 companies. 14 An interesting investment opportunity 15 means to me a set of circumstances where value can 16 be enhanced for shareholders and owners. 17 Q. Okay. Did you understand that 18 Federated and MCO were going to participate in any 19 way in enhancing the value of UFG for the 20 shareholders? 21 A. I think my sense was that whenever you 22 have thoughtful and strong shareholders, you have 25090 1 a chance to further enhance value. 2 Q. And did you view MCO and Federated as 3 thoughtful and strong shareholders? 4 A. I did. 5 Q. And did their thoughtful and strong 6 views represent the views of Mr. Hurwitz? 7 A. I don't know. I suppose again it would 8 depend on the issue and the time. 9 Q. Let me ask you this: If Mr. Hurwitz 10 had said to the board of Federated, "I think UFG 11 is a bad investment and I don't think that we 12 should be involved in further investments of UFG," 13 in your experience, would MCO or Federated have 14 gone forward and acquired additional shares of 15 UFG? 16 A. Well, you just switched companies on 17 me. If you meant to say if Mr. Hurwitz had said 18 one thing to the board of Federated, would MCO and 19 Federated have done something, I've lost your 20 track. 21 Q. Well, let's take them one at a time. 22 Was Mr. Hurwitz the controlling 25091 1 shareholder of MCO? 2 A. I don't know. I don't recall at 3 that -- what the division of share ownership was 4 at MCO at that time. 5 Q. Would he have been the largest single 6 shareholder? 7 A. I don't know. 8 Q. Did he wield a great deal of influence 9 in terms of board decisions? 10 A. He was the chief executive officer; and 11 in my experience, the chief executive officer of 12 any company wields meaningful influence. 13 Q. And if Mr. Hurwitz had gone to the 14 board of UFG -- of MCO and had indicated to the 15 board of MCO "I don't think we should acquire any 16 more shares of UFG," in your experience, would the 17 board have acceded to Mr. Hurwitz' views? 18 A. I don't know around that specific 19 instance. But if the question is were they always 20 of one mind, the answer is not at all. 21 Q. I understand that they weren't always 22 of one mind. But if Mr. Hurwitz was of one mind, 25092 1 would Mr. Hurwitz generally get his way on the MCO 2 board if he wanted something done? 3 A. Mr. Hurwitz was usually of one mind. 4 We'll start there. I think the MCO board, during 5 the years I was on it, had some very strong, very 6 opinionated, thoughtful, and experienced people. 7 And we would argue about critical issues. Often 8 his view would prevail, but periodically it would 9 not. 10 Q. Okay. Was the same true with respect 11 to Federated? 12 A. I think a little less true at Federated 13 because there was a much smaller board and he was 14 a much, in my recollection, larger proportional 15 shareholder of Federated. And then, ultimately, 16 it was privately owned. 17 Q. So, with all these strong personalities 18 on the MCO board, if any proposal were made to the 19 board, it would have been well-discussed, would it 20 not? 21 A. My sense is it would have been 22 well-discussed. 25093 1 Q. Okay. Take a look at the next document 2 that's dated December 15th, 1982. This is the 3 board of directors meeting for -- for MCO, and 4 it's approximately two months later. 5 MR. NICKENS: We need some numbers. 6 MR. RINALDI: It's T1032, and it's 7 Tab 40. 8 Q. (BY MR. RINALDI) And if you'll turn to 9 the second page in, take a moment to read that 10 paragraph; and then I have a couple of questions I 11 want to ask you about it. 12 A. This is Page 3 on the top -- called 13 Page 3 in the document? 14 Q. It says Page 3, and that is the -- I 15 believe to be -- again, this is one of those 16 heavily-redacted versions. But I'm interested in 17 the material that's contained on Page 3. 18 A. Okay. (Witness reviews the document.) 19 Okay. 20 Q. Now, this makes reference to a merger 21 of First American Financial of Texas and United 22 Financial Group. 25094 1 Do you see that? 2 A. I do. 3 Q. Do you recall that there came a time 4 when a proposed merger was proposed? And I think 5 actually in the middle of the paragraph, it makes 6 note of the fact that Mr. Munitz had noted that 7 UFG and First American Financial had entered into 8 a definitive agreement for the merger. 9 Do you see that? 10 A. Yes, sir. 11 Q. What do you recall of that? 12 A. Basically as it's described here, that 13 these were two thrift institutions of some 14 strength in Texas, some represented in different 15 areas in the state, if I'm remembering correctly; 16 that a proposal was made to put the two 17 institutions together with UFGI as the surviving 18 entity and that that was ultimately approved, that 19 merger was ultimately approved. 20 Q. In about the middle of the page, it 21 indicates that on December 15th, 1982, UFG -- I 22 mean MCO and Federated jointly owned about 25095 1 19 percent of the aggregate of UFG common stock. 2 Do you see that? 3 A. I do. 4 Q. Then it indicates that as a result of 5 the merger, that MCO had the opportunity to 6 acquire additional shares and the potential to 7 increase its ownership to 24.9 percent. 8 Do you see that? 9 A. Yeah. Less than 24.9. 10 Q. Right. How much less than are we 11 talking about? 24.7 or -- 12 A. All I know is what it says here. I was 13 simply saying that it said "owned less than 24.9." 14 Q. Do you recall that there was a reason 15 for not exceeding the 24.9 percent level? 16 A. Yes, sir. 17 Q. Okay. Would you explain to the Court 18 what that reason was? 19 A. My recollection is that at past 20 24.9 percent, there was a different definition of 21 a savings and loan holding company with 22 implications, amongst other things, for net worth 25096 1 maintenance. 2 Q. And ultimately, the resolution at the 3 bottom of the page of these minutes indicates that 4 the corporation was going to enter into a -- well, 5 Mr. Hurwitz had proposed at the top of the page 6 that the corporation purchase 603,448 shares of 7 common stock of First American Financial. 8 Do you see that? 9 A. I do. 10 Q. And as consistent with the 11 recommendation of the chairman, at the bottom 12 there's a resolution adopting the recommendation 13 of the chairman. 14 Do you see that? 15 A. I see Mr. Rosenberg making the motion, 16 and it's being adopted unanimously. 17 Q. So, ultimately, MCO decided -- after 18 considering the idea, they went ahead and voted to 19 acquire less than 24.9 percent of the outstanding 20 shares of UFG, correct? 21 A. Well, I think the resolution said what 22 they voted to do was purchase the 603,448 shares. 25097 1 Q. If the merger were to go forward, those 2 shares would then be converted; and they would end 3 up with approximately 24.9 percent of the 4 outstanding shares? 5 A. No, I don't see that it said -- I don't 6 see any reference of the number. In the text that 7 you asked me to read, it said on the one hand that 8 they might continue to collectively own less than 9 24.9. But it's not clear to me immediately upon 10 conversion of the 603, 448 what percentage they 11 would own. 12 Q. Maybe I'm getting ahead of myself. 13 At this particular board meeting, do 14 you recall any discussion by Mr. Hurwitz as to the 15 reasons why he was interested in obtaining a 16 larger interest in UFG or at least any discussions 17 other than what you've previously related? 18 A. More intense versions of what I had 19 previously related. 20 Q. It was an interest investment 21 opportunity? 22 A. Well, I think you see a reference here 25098 1 to the financial condition of First American 2 Financial, analysis of their business activities. 3 It would continue in that same direction, yes, 4 sir. 5 Q. Now, you indicated to me that 6 Mr. Hurwitz viewed himself as being very competent 7 in the area of financial deals and the operations 8 of corporations. 9 MR. KEETON: Your Honor, I'm going to 10 object. It may be that Mr. Hurwitz does. What 11 Dr. Munitz testified was that he thought 12 Mr. Hurwitz was competent in deals and finance, 13 not that Mr. Hurwitz walks around saying "I'm 14 competent in it." 15 Q. (BY MR. RINALDI) Perhaps I misspoke. 16 Did Mr. Hurwitz tell you when he hired you that he 17 felt he was competent to do the deals and the 18 financial side of the transactions? 19 A. I think what I was saying or trying to 20 convey was basically that distinction from my 21 perspective but not disagreed to by him. But it 22 was basically my reflection that there was a nice 25099 1 synergy in terms of the different areas of 2 expertise we had. 3 Q. Okay. And do you recall whether the 4 merger went through with First American and UFG? 5 A. I believe it did. 6 Q. As a consequence of that, do you recall 7 that the ownership of shares of MCO and Federated 8 in UFG increased? 9 A. I don't know -- I suspect that it 10 increased. Again, I don't know the exact numbers. 11 But I recall that it went through and that, over 12 time, there was that movement toward 24.9 percent. 13 Q. And take a look at the next document in 14 your book, which is T1036. And I believe that 15 this is a new document. 16 MR. RINALDI: Has T1036 not been 17 entered before? If we don't have a copy, then I 18 will simply skip on and -- 19 Q. (BY MR. RINALDI) Do you recall, 20 however, that there came a point in time when MCO 21 and Federated ultimately reached a level where 22 they could no longer acquire additional shares of 25100 1 UFG without becoming a holding company? 2 A. I think it was MCO, Federated, and 3 Dr. Kozmetsky altogether were close enough for us 4 to then submit an application to move past that 5 period. 6 Q. Okay. And did Dr. Kozmetsky own a 7 substantial block of stock in UFG, or was it a 8 fairly small one relative to Federated and MCO? 9 A. It was substantial to me. It probably 10 wasn't that substantial to Dr. Kozmetsky. 11 Relatively speaking, it might have been a couple 12 of percentage points. 13 Q. It probably would have been substantial 14 to most of the people in this room, I take it; but 15 it may not have been much to Dr. Kozmetsky. Okay. 16 And you indicated that there came a 17 point in time when the decision was made to file a 18 holding company application? 19 A. Yes, sir. 20 Q. And that would have been filed with the 21 Federal Home Loan Bank Board? 22 A. Yes, sir. 25101 1 Q. Now, prior to that time, what had been 2 your involvement with UFG? You had simply been a 3 board member and sat in on board meetings or -- 4 A. Tell me again that time. 5 Q. The filing is actually on June 29th, 6 1983. If you want, you can turn to the next page 7 in your book; and everybody else can grab the 8 document. It's T4040. It's Tab 13. 9 Does this appear to be the application 10 to become a holding company that you just made 11 reference to? It's a cover letter -- 12 A. Other than the fact that I don't know 13 why it's not signed, but it's -- it seems to be 14 the cover letter to the application. 15 Q. Okay. And then attached to the cover 16 letter is an application or what is referenced as 17 an application H-(e)-1. 18 Do you see that? 19 A. I do. 20 Q. And it purports to be an application 21 for approval of acquisition of one insured 22 institution directly or indirectly by a company 25102 1 other than a savings and loan holding company. 2 Does this appear to be the holding 3 company application that you were referring to? 4 A. I have no reason to believe that it is 5 not. 6 Q. Well, it's filed by MCO and Federated; 7 and it's with respect to UFG and United Savings 8 Association of Texas. 9 Do you see that? 10 A. I do. 11 Q. Okay. Now, prior to the filing of this 12 document on June 29th, 1983, had your involvement 13 with UFG simply been that of a director? 14 A. I was still -- I was by then a director 15 of both UFGI and USAT. So, I was a director of 16 both of those institutions. I want to be sure 17 that's clear. 18 And I also -- 19 Q. Continue. 20 A. I was just going to -- I think the 21 specific question was was my relationship any 22 different. And it was somewhat to the extent that 25103 1 with the merger, I was again given some of the 2 experience I had described to you earlier when you 3 were asking me about my background. I was helping 4 out in conversations regarding the aftermath of 5 the merger, the personnel issues, consolidation, 6 the branches, the evaluation of personnel, the 7 evolution of this newly-merged board where people 8 hadn't been board members together. So, by then, 9 the merger into the post-H-(e)-1 application, my 10 relationship to the institution was getting more 11 complex. 12 Q. Do you recall about when the merger 13 would have occurred, you arrived there -- it had 14 not occurred in December of 1982. And by June of 15 1983, the holding company application has been 16 approved. I take it the merger is somewhere in 17 there? 18 A. I mean, you know, I don't. I don't 19 know -- I can't tell you now the date. 20 Q. I'm not trying to hide the ball. I 21 just don't have enough copies of the exhibit to 22 pass out to people. 25104 1 A. I don't know whether it's before or 2 after, post-merger. 3 MR. KEETON: Just for clarity, 4 Mr. Rinaldi, you said the holding company 5 application had been approved by June of '83. 6 MR. RINALDI: I'm sorry. If I said 7 that, thank you for your correction. 8 Q. (BY MR. RINALDI) The filing of the 9 holding company application was June 29, 1983? 10 A. I don't recall the date of the merger. 11 Q. You said you took on new duties to 12 assist, and whenever that merger date is isn't 13 particularly important for my purposes. 14 What I would like to know is: How did 15 your duties change? Strike that. 16 Before we get to that, when you went on 17 the UFG board, did you also go on the USAT board? 18 A. I believe so. 19 Q. That would have been back in September 20 of 1982? 21 A. Roughly in that period. 22 Q. Now, had you had any prior experience 25105 1 with savings and loans? 2 A. I believe that as part of the Charter 3 Bank board responsibility, there had been 4 interaction with savings and loans in Texas. I 5 had not been a director or an officer of a savings 6 and loan before that. 7 Q. So, now you are a director of UFG, a 8 director of USAT. You are also a trustee of 9 Federated, a director of MCO, and then you are 10 also president of MCO? 11 A. No. I'm vice chairman of MCO and 12 president of Federated. 13 Q. And president of Federated. Okay. 14 And is the vice chairman an officerial 15 position at MCO? 16 A. I believe that it was. 17 Q. But at this point in time, you did not 18 have a position as an officer or an employee of 19 UFG or USAT? 20 A. That is correct. 21 Q. Now, moving forward to the June 29th, 22 1983 date that the holding company application was 25106 1 filed, did you still occupy those positions that 2 we've just identified; or had your positions 3 changed at all? 4 A. No. The positions you identified were 5 accurate for that date. 6 Q. Now, take a look at the application or 7 the cover letter of the application. And if you 8 look at the second paragraph, it makes reference 9 to the fact that MCO and Federated currently own 10 approximately 22.3 percent and 10 percent 11 respectively of the outstanding shares -- 12 A. I think 12 and 10. 13 Q. Right. So, they would have had a total 14 of 22.3. Right? 15 A. That's what it says. 16 Q. And whatever shares that were owned to 17 take you up to the 24-plus level would have been 18 those of Mr. Kozmetsky? 19 A. Yes, sir. 20 Q. Okay. Now, if you go down further in 21 the paragraph, it indicates that MCO was 22 interested in owning approximately 25 percent of 25107 1 the outstanding shares and Federated would retain 2 approximately 10 percent of the outstanding 3 shares. 4 Do you see that? 5 A. I do. 6 Q. So, as a result of this application, do 7 you recall that Federated and MCO were requesting 8 permission from the Bank Board to acquire up to 9 35 percent of the outstanding shares of UFG? 10 A. I'm not sure about result, but what I 11 recall is what you've just pointed me to, that 12 they were requesting permission under the 13 appropriate circumstances to go to 25 plus 10. 14 Q. Okay. Now, prior to the application 15 being filed by Richard Marlin on behalf of 16 Federated and MCO, did the board approve the 17 filing of the holding company application, the 18 board of MCO? 19 A. The board of MCO? I don't remember. 20 Q. Well, is that the kind of action that 21 Mr. Marlin or the officers of MCO and Federated 22 could have taken without board approval? 25108 1 A. Well, Mr. Bressler, who's referred to 2 on the -- in the application as one of the contact 3 points, was the general counsel of MCO. I just 4 don't remember the specific timing, discussion, 5 and approval. 6 Q. Okay. Now, if you turn to the third 7 page of this document, it indicates that you were 8 one of the individuals who received a copy of the 9 letter, although it says "without exhibit." 10 Do you see that? 11 A. Yes. 12 Q. Okay. Now, do you recall, prior to 13 filing the application, any discussions with 14 Mr. Hurwitz regarding the reasons why MCO and 15 Federated were now seeking to acquire up to 25 -- 16 35 percent collectively of UFG? 17 A. Those to which I had referred earlier 18 basically. 19 Q. Just still was an interesting 20 investment opportunity given the financial 21 circumstances in Texas? 22 A. Well -- and as I said, the conditions 25109 1 around it. It would have been, I suspect, a 2 longer conversation. It was characterized that 3 way because that was the characterization in the 4 minutes. But it would have been basically of the 5 sort that I had mentioned earlier. 6 Q. And based on those conversations, did 7 you formulate any clearer understanding of why it 8 is Mr. Hurwitz felt that this was a -- an 9 interesting investment opportunity? 10 A. Well, again, the circumstances that I 11 had referred to. 12 Q. Those being? 13 A. Economic conditions, financial 14 complexity, quality of leadership, potential 15 quality of leadership, Texas location, the role of 16 savings and loans, all of those. 17 Q. And did he have any discussions with 18 you regarding his plans with respect to the 19 operations of UFG were the holding company 20 application to be approved? 21 A. Well, I think the application was 22 basically to increase his shares as a shareholder. 25110 1 And, of course, he and I were both directors of 2 UFGI; so, I'm not sure what even conversation 3 about his plans for the operation of UFGI would 4 have meant. 5 Q. So, it was your understanding that 6 Mr. Hurwitz had no interest in being involved in 7 the operation of UFG. He just wanted to benefit 8 from the increase in the value of the shares? 9 A. Well, I don't think I said that he had 10 no interest. I think what I said was that I 11 didn't recall conversations about his plans for 12 operation. 13 Q. Did you understand that as a result of 14 Mr. Hurwitz and -- or MCO and Federated acquiring 15 up to 35 percent of the shares of UFG, that 16 Mr. Hurwitz contemplated taking a more active role 17 in the operation of UFG and USAT? 18 A. No, not necessarily. 19 Q. So, you had no understanding one way or 20 the other? 21 A. I basically -- my understanding in 22 looking at the application when it was originally 25111 1 put together was there was a desire to have a 2 larger portion of the outstanding shares. 3 Q. And you don't recall ever having any 4 conversation with Mr. Hurwitz as to why he wanted 5 to acquire, through Federated and MCO, a larger 6 percentage of the ownership of UFG? 7 A. I think that was the earlier question 8 that I answered. I thought the last question was 9 about his direct operational responsibility at 10 UFGI. Maybe I misunderstood you. 11 Q. Well, maybe I misunderstood you, sir. 12 When you discussed with him -- did you 13 have any discussions with him regarding the 14 holding company application? 15 A. Not that I recall specifically 16 regarding the application, other than the question 17 that I had mentioned earlier to the Court 18 regarding the question of its implications if it 19 were approved. 20 Q. So, you did discuss that with 21 Mr. Hurwitz, the implications if the holding 22 company application were approved? 25112 1 A. Yes. 2 Q. What were the nature of those 3 conversations? 4 A. Basically, they dealt with the net 5 worth maintenance requirements of a savings and 6 loan holding company. 7 Q. And prior to filing the holding company 8 application, were you aware that in order to 9 acquire more than 25 percent of the outstanding 10 shares of a savings and loan, a net worth 11 maintenance obligation might be imposed by the 12 Bank Board? 13 A. Might be imposed. I was aware that it 14 might be imposed, yes, sir. 15 Q. And you had discussions with 16 Mr. Hurwitz about that; is that correct? 17 A. Yes, sir. 18 Q. And what were the nature of those 19 discussions that you recall? 20 A. I think basically they were "I hope 21 you're also aware that if this application is 22 approved, the Bank Board might insist upon a net 25113 1 worth maintenance guarantee." 2 Q. Did he seem to be fully knowledgeable 3 with the fact that such a condition could be 4 imposed upon MCO and Federated as a condition of 5 their acquiring over 25 percent of the outstanding 6 shares of UFG? 7 A. It seemed to me that he was. 8 Q. Now, take a look at -- in the holding 9 company application, would you turn, please, to 10 Page 37? I think it's OW010501. 11 A. Okay. 12 Q. And if you look at the -- toward the 13 bottom of the page, it talks about MCO and 14 Federated believe that the financial services 15 industry is entering into a period of rapid 16 growth. 17 Do you see that? 18 A. Yes. 19 Q. And further down in that sentence, the 20 statement appears -- and this is the sixth line 21 from the bottom of the page. It says, "UFG and 22 USAT will benefit from MCO and Federated's 25114 1 experience in real estate development and sales as 2 well as MCO and Federated's investment expertise 3 in the financial markets." 4 Do you see that? 5 A. Yes. 6 Q. What was your understanding of what was 7 meant by that, that UFG and USAT would benefit 8 from MCO and Federated's expertise -- investment 9 expertise in the financial markets? 10 A. I'm not sure I can comment specifically 11 on that sentence. I haven't seen that for a long, 12 long time. 13 Q. Let me ask you this: As a director of 14 MCO and Federated, did you understand that MCO and 15 Federated had investment expertise in the 16 financial markets? 17 A. In 1983 when this was filed, in looking 18 at the materials, I'm assuming that I would have 19 understood that. 20 Q. And what was the nature of that 21 expertise, sir? 22 A. Well, Federated Development had a 25115 1 reinsurance company. You had earlier mentioned 2 Mr. Huebsch, who was one participant in the 3 investments related to that company. MCO had both 4 complex real estate and energy activities and 5 financial people there. And they also had access 6 to other types of expertise that weren't 7 necessarily employed by those two companies at the 8 moment but were knowledgeable consultants and 9 advisors depending upon the issue and the timing. 10 Q. I'm focusing principally, though, not 11 on the real estate side but the expertise in 12 investment -- 13 A. That was the question I was answering. 14 Q. MCO and Federated at this point in 15 time, were they involved in a lot of activity and 16 investments in the financial markets? 17 A. Again, I don't know what "a lot of" 18 would mean. 19 Q. Were they involved in activities in 20 investments in financial markets? 21 A. Yes. 22 Q. What were the nature of those 25116 1 activities? 2 A. Well, I think again -- I'm sorry. 3 Federated Development had a reinsurance company, 4 which basically is in the business of insurance on 5 the one side and the financial investment 6 management of its portfolio. 7 Q. Okay. 8 A. So, basically, that is an investment 9 activity. 10 Q. And how about MCO? 11 A. MCO, I would have to go back and 12 rethink all the pieces of current activities 13 there. So, I ought not to comment right now as to 14 specifically what they were doing then. 15 Q. Then in the next sentence, it says, 16 "MCO and Federated also anticipate that they will 17 be able to facilitate access to the capital 18 markets." 19 Do you see that? 20 A. Yes, I do see that. 21 Q. Did MCO and Federated have any special 22 access to the capital markets as you understood 25117 1 it? 2 A. I'm not sure what "special access" 3 would mean. I didn't see -- 4 Q. Would they -- I'm referring here to the 5 statement that says that they would anticipate 6 that they will be able to facilitate access to 7 capital markets. 8 What did you understand that to mean, 9 sir? 10 A. I'm not really certain right now what 11 specifically that referred to. 12 Q. All right. As a result of filing the 13 application, do you recall that the Federal Home 14 Loan Bank Board indicated that if they were to 15 grant the holding company application, that it 16 would be subject to certain conditions? 17 A. Yes, sir. 18 Q. And do you recall receiving a letter 19 from Jearlene Miller at the Federal Home Loan Bank 20 Board to that effect? 21 A. I don't know who it -- I recall the 22 company receiving a letter from someone at the 25118 1 Bank Board. 2 Q. Okay. As a result of that, do you 3 recall writing a letter back to them discussing 4 the subject of the conditions that the Bank Board 5 had proposed might be imposed if the holding 6 company application were approved? 7 A. Well, either I or a lawyer for the 8 company. 9 Q. Okay. Take a look at the next document 10 in your book, which is T1044 at Tab 4. And this 11 is -- I'm sorry. Tab 14. Take a moment to just 12 look at this letter, and then I have a couple of 13 questions for you. 14 A. (Witness reviews the document.) 15 Q. Now, is that your signature that 16 appears on the last page, sir? 17 A. Yes, I believe it is. 18 Q. Okay. And do you recall sending this 19 letter to Ms. Jearlene Miller? 20 A. No, but I have no reason to question 21 whether it was sent. I just don't recall at this 22 moment that particular letter. 25119 1 Q. Sure. Now, after the holding company 2 application was filed, did you become the 3 principal person involved with dealing with the 4 Federal Home Loan Bank Board regarding the holding 5 company application? 6 A. Well, I was one of the key people. 7 Several others, lawyers included -- and this 8 letter I think clearly drafted by a lawyer -- 9 would have been in that group, as well. But I was 10 one of the people more involved in the 11 conversation than most others. 12 Q. Well, at Federated Development Company, 13 were you the person that would have had the most 14 knowledge about the holding company application 15 process? 16 A. Other than the lawyers, yes. 17 Q. Fine. 18 And were the lawyers in-house, or were 19 they outside lawyers? 20 A. At Federated, they were outside 21 lawyers. At MCO, they were outside and inside. 22 Q. Okay. And at MCO, would you have been 25120 1 the principal contact person with respect to -- to 2 the holding company application? 3 A. Probably in that same sense, joined by 4 the lawyers, and that MCO -- since there were more 5 people and a more complex range of people, others 6 would have been involved, as well. 7 Q. And it indicates here in this letter 8 that you were advised by the Bank Board that they 9 were -- that that -- you state in the letter, "You 10 have informally indicated to us that the 11 acquisition portion of the H-(e)-1 application 12 would meet the conditions of Section 584.4(g)." 13 Do you see that? 14 A. Where are you? 15 Q. This is in the second full paragraph. 16 A. On the first page? 17 Q. First page, yeah. 18 A. Okay. 19 Q. Then it goes on and says, "Subsection 4 20 would require MCO and Federated to ensure that 21 USAT meet the minimum statutory reserve and net 22 worth requirements applicable to institutions 25121 1 insured for 20 years or more as set out in 563.13 2 of the regulations and were necessary to infuse 3 their pro rata portion of additional equity 4 capital in a form satisfactory to the supervisory 5 agent and sufficient to effect the compliance with 6 the requirements." 7 Do you see that? 8 A. I do. 9 Q. And what did you understand was the 10 condition that you had been advised would be 11 imposed if the holding company application were 12 granted, at least as regards Roman Numeral IV 13 there? 14 A. Well, the timing is again a little 15 uncertain in my mind. I know there was some 16 communication before a formal Bank Board 17 resolution and -- some considerable communication 18 subsequent to a formal Bank Board resolution. I 19 have a feeling that this exchange occurred before 20 the formal Bank Board resolution. I could be 21 wrong. 22 But I understood in general the 25122 1 reference, again, to be back to the net worth 2 maintenance requirements by some calculation. 3 Q. And it talks about a pro rata portion 4 of additional equity. Did you understand that if 5 you owned 35 percent of the shares of the thrift 6 or its holding company, that you would be 7 obligated to maintain its capital or 35 percent of 8 its capital? 9 A. I understood that that was one possible 10 interpretation and that it was fraught with 11 difficulty as to how one calculated that pro rata 12 portion at any one time. 13 Q. I notice on the next page, you make a 14 proposal of sorts under A and B there. 15 Do you see that? 16 A. Yeah. 17 Q. And can you explain to me what -- well, 18 do you recall making this proposal back to the 19 Bank Board? 20 A. Well, I'm not sure -- I haven't seen 21 what this is a response to. I don't know if it's 22 back to the Bank Board. As I said earlier, I 25123 1 don't know the sequence of letters. I recall the 2 general conversation about a possible pro rata or 3 other type of less than 100 percent net worth 4 requirement. 5 Q. And it's saying here under B that "MCO 6 and Federated will, where necessary, undertake to 7 infuse their pro rata portion of additional equity 8 capital sufficient to effect compliance with 9 requirements but only in the event that MCO or 10 Federated shall directly or indirectly acquire or 11 obtain control of more than 50 percent of the 12 stock"? 13 Do you see that? 14 A. I do see that. 15 Q. Were you suggesting to the Bank Board 16 that there would be no net worth obligation unless 17 MCO and Federated acquired more than 50 percent? 18 A. Again, this is a lawyer letter that I 19 haven't seen for almost exactly 15 years. So, 20 I -- I really can't say much more than what the 21 paragraph says. 22 Q. And even though these things were 25124 1 written by lawyers, you consulted with the 2 lawyers, didn't you? 3 A. Oh, I signed the letter and take 4 responsibility for it. 5 Q. Right. You understood at the time that 6 you signed the letter what it meant, correct? 7 A. Yes. I believe that in those past 8 15 years, there would have been a lot of 9 conversation that went into the writing of this 10 letter. I just can't recall now the specific 11 implications beyond this paragraph. 12 Q. Now, you indicated that there did come 13 a time when the Bank Board approved the 14 application. 15 Do you recall that? 16 A. Yes, I do recall an approval by the 17 Bank Board. 18 Q. And turn to the next document. 19 THE COURT: Mr. Rinaldi, we'll adjourn 20 until 9:00 tomorrow. 21 MR. RINALDI: Thank you. 22 25125 1 (Whereupon at 4:50 p.m. 2 the proceedings were recessed.) 3 . 4 . 5 . 6 . 7 . 8 . 9 . 10 . 11 . 12 . 13 . 14 . 15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . 25126 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 6th day of October, 17 1998. 18 ____________________________ MARCY CLARK, CSR 19 Certified Shorthand Reporter In and for the State of Texas 20 Certification No. 4935 Expiration Date: 12-31-99 21 . 22 . 25127 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 6th day of October, 18 1998. 19 _____________________________ SHAUNA FOREMAN, CSR 20 Certified Shorthand Reporter In and for the State of Texas 21 Certification No. 3786 Expiration Date: 12-31-98 22