3529 1 UNITED STATES OF AMERICA Before the 2 OFFICE OF THRIFT SUPERVISION DEPARTMENT OF THE TREASURY 3 In the Matter of: ) 4 ) UNITED SAVING 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 10-17-97 22 3530 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 BRUCE RINALDI, Esquire (Not present) RICHARD STEARNS, Esquire (Not present) 5 and BRYAN VEIS, Esquire of: Office of Thrift Supervision 6 Department of the Treasury 1700 G Street, N.W. 7 Washington, D.C. 20552 (202) 906-7395 8 ON BEHALF OF RESPONDENT MAXXAM, INC.: 9 FRANK J. EISENHART, Esquire 10 of: Dechert, Price & Rhoads 1500 K Street, N.W. 11 Washington, D.C. 20005-1208 (202) 626-3306 16 12 DALE A. HEAD (in-house) 13 Managing Counsel MAXXAM, Inc. 14 5847 San Felipe, Suite 2600 Houston, Texas 77057 15 (713) 267-3668 16 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO. AND CHARLES HURWITZ: 17 RICHARD P. KEETON, Esquire 18 of: Mayor, Day, Caldwell & Keeton 1900 NationsBank Center, 700 Louisiana 19 Houston, Texas 77002 (713) 225-7013 20 21 22 3531 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 (Not present) 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 (Not present) 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 3532 1 2 EXAMINATION INDEX 3 Page 4 JOEL HARGETT 5 Cont'd Examination by Mr. Guido..........3533 6 Cross-Examination by Mr. Nickens.........3619 7 Cross-Examination by Mr. Eisenhart.......3706 8 Redirect-Examination by Mr. Guido........3719 9 10 11 12 13 14 15 16 17 18 19 20 21 22 3533 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. I believe the direct 5 examination of Mr. Hargett was complete. 6 Did you have some more documents, 7 Mr. Guido, that you were going to -- 8 MR. GUIDO: Yes, Your Honor. What we 9 were going to do is bring Mr. Hargett back to 10 introduce the documents and explain the documents 11 that he relied upon for the maturity matching 12 credit. 13 THE COURT: All right. 14 MR. GUIDO: Mr. Hargett. 15 16 EXAMINATION 17 18 19 Q. (BY MR. GUIDO) Now, Mr. Hargett, did 20 you prepare a schedule of the interest rate caps 21 that were in USAT's UMBS portfolio in preparation 22 of your expert report? 3534 1 A. Yes, I did. 2 Q. Is A11019 that schedule? 3 A. Yes, it is. And it's -- there's also 4 additional schedules in my expert report. 5 MR. GUIDO: I move the admission of 6 A11019, Your Honor. 7 MR. NICKENS: No objection. 8 THE COURT: Received. 9 Q. (BY MR. GUIDO) Now, looking at this 10 schedule, Mr. Hargett, can you tell the Court 11 which of the cap numbers you addressed in your 12 portion of your report that addressed the transfer 13 of the caps from UMBS to USAT? 14 A. Yes. If you look in the second column, 15 the heading is called "cap number." And those 16 numbers there are USAT's own referencing system 17 for how the caps are assigned internally. And if 18 you look down at -- it starts at 1 and it goes 19 through 39, and there's a couple with an extra A 20 in it such as 2 and 2A. The caps that are subject 21 to the transfer are on Page 75 of my expert 22 report, and they are numbers 1 through 16 plus 2A, 3535 1 3A, 4A, and 13A. 2 Q. Now, are there any USAT memoranda that 3 you relied upon to conclude that the caps should 4 not have been included in USAT's TFR for purposes 5 of calculating the maturity matching credit? 6 A. Yes, there are. 7 MR. GUIDO: Your Honor, at this time, 8 I'd like to give the witness and the Court a 9 packet of materials that Mr. Hargett relied upon. 10 And I will be introducing them as he explains 11 those materials. And I think they are in the 12 order in which he will explain them to the Court. 13 Q. (BY MR. GUIDO) Starting off with the 14 document at the top, Mr. Hargett, can you explain 15 what that document is? 16 A. It's a memo dated February 18th, 1987, 17 from Bruce Williams to the investment committee. 18 And it's reviewing what their maturity matching 19 credit is projected to be as of June 30th, 1987. 20 The memo explains in the 1st sentence that, at 21 that time, they are only going to receive a 22 49-million-dollar credit out of a possible credit 3536 1 of 99 million. 2 In the third paragraph, it explains 3 that in the second sentence -- it says "Because 4 our near-term earnings outlook is not extremely 5 favorable and the capital note issuance is 6 unlikely, the maturity matching is our most 7 successful" -- 8 THE COURT: Wait a minute. You said -- 9 I don't think you read that correctly. Continue. 10 A. I'll start over. It says "Because our 11 near-term earnings outlook is not extremely 12 favorable and the capital note issuance is 13 unlikely, the maturity" -- I'm sorry -- "the 14 matching credit is our most accessible source of 15 capital." And then it says "Therefore, prior to 16 the quarter end, we may have to restructure our 17 assets and liabilities to increase our matching 18 credit and to maintain minimum net worth -- 19 minimum regulatory net worth." 20 Q. Now, what did you conclude from that 21 memorandum, Mr. Hargett? 22 A. That they are aware of the issue with 3537 1 respect to maturity matching credit as early as 2 February 18th, 1987. Then the last sentence of 3 this memo states that the asset liability 4 committee will develop a proposal by mid-March 5 which will outline a number of alternatives for 6 quarter end restructuring. 7 Q. Now, were there any other documents -- 8 MR. NICKENS: Your Honor, are you going 9 to offer -- 10 MR. GUIDO: I'm sorry. 11 Q. (BY MR. GUIDO) This that you just 12 read from, Mr. Hargett, is Exhibit T5120? 13 A. Correct. 14 MR. GUIDO: I move the admission of 15 Exhibit T5120, Your Honor. 16 MR. NICKENS: Your Honor, I have an 17 objection to this exhibit in that it, like many of 18 the others that I see here, have been highlighted. 19 And I believe fairly certainly this was 20 highlighted by either attorneys for the FDIC or 21 the OTS or perhaps Mr. Hargett but not at the 22 time. 3538 1 I would -- I have no objection to a 2 clean document and we can substitute one. I do 3 have an objection to documents coming in with the 4 attorneys' highlighting. 5 MR. GUIDO: Your Honor, I don't know 6 the source of any of the highlighting on some of 7 these documents. These are the documents -- the 8 only documents that we have. If respondents have 9 a clean copy, I have no objection to substitution 10 of a clean document. But I haven't been able 11 to -- we were not able to find such a document. 12 These are the documents that we -- as we received 13 them and, therefore, we're introducing them that 14 way. We will stipulate that any of the markings 15 on them have nothing to do with the respondents, 16 if that will help clarify the matter. But we will 17 agree to substitution if there are clean copies of 18 the documents. 19 MR. NICKENS: Fine, Your Honor. If we 20 can't find one, then there's not much we can do, 21 but I believe that we'll be able to locate one 22 that doesn't have this -- these markings. 3539 1 THE COURT: All right. I'll receive it 2 subject to the furnishing of a clean copy. 3 Q. (BY MR. GUIDO) Now, the second 4 document in that packet, is that a document that 5 you also relied upon for your conclusion that they 6 should not have included in USAT's TFR the caps 7 for purposes of calculating the maturity matching 8 credit? 9 A. Yes, it is. 10 Q. Can you tell us what the significance 11 of that document is -- was to you? 12 A. This memo that's dated February 23rd, 13 1987, from Bruce Williams again discusses the 14 maturity matching credit issue. And it explains 15 that they are anticipating possibly net losses 16 and/or an increase in scheduled items in the next 17 upcoming months. And as we talked about 18 yesterday, an increase in scheduled items would 19 lead to a higher capital requirement. And it says 20 again, the last paragraph, that "The asset 21 liability committee will develop a proposal by 22 mid-March which will outline a number of 3540 1 alternatives for March 31, 1987, restructuring." 2 And then in parentheses, it says "which 3 establishes the September 30th, 1987, credit 4 amount to optimize the matching credit." And 5 again, that's consistent with how the regulation 6 worked. What your situation was as of March 31 7 was what determined what your credit would be for 8 September 30th, 1987. This memo is also, again, 9 right about the time when UMBS is starting to grow 10 on the asset side. 11 Q. Now, what was the significance of the 12 March 31, 1987, date for the maturity matching 13 credit to be applicable in September 30, 1987? 14 A. Again, at that time, you received a 15 credit of up to 2 percent of your liabilities 16 which reduced your capital requirement. But in 17 determining what your credit should be because of 18 reporting deadlines, you used the gap analysis 19 from six months earlier. That was as documented 20 in the regulation and that's what the regulation 21 allowed to allow for the data to be collected, but 22 you're doing it as of that date six months 3541 1 earlier. 2 MR. GUIDO: Move the admission of 3 Exhibit T5121, Your Honor, with the same agreement 4 that if we can find a copy that is clean, we will 5 agree to its substitution. 6 MR. NICKENS: No objection on that 7 basis, Your Honor. 8 THE COURT: Received. 9 Q. (BY MR. GUIDO) Now, did you rely upon 10 any other document for your conclusion that the 11 USAT should not have included in its TFR for 12 purposes of calculating the maturity matching 13 credit the caps? 14 A. Yes. In the time sequence of events, 15 the next memo is one that was introduced 16 yesterday, a strategic planning memo. 17 Q. Is that 5124? 18 A. I don't see it in these folders up 19 here. 20 MR. NICKENS: Is that the March 2nd 21 memorandum? 22 THE WITNESS: Yes, it is. 3542 1 MR. GUIDO: I have it as 5122. Your 2 Honor, the copy that I have is T5122 and I assume 3 that that's the correct number. 4 Q. (BY MR. GUIDO) Is that the memorandum 5 you read from yesterday, the quote about the 6 maturity matching credit? 7 A. Yes, it is. And this is the memo or 8 the prior two memos have both discussed developing 9 a proposal by mid-March for looking at 10 restructuring issues. And this appears to be the 11 memo that was prepared in relationship to that 12 plan. 13 Q. And is that another memorandum that you 14 relied upon for your conclusion that the caps were 15 improperly assigned to USAT for purposes of 16 calculating the maturity matching credit? 17 A. Yes, it is. 18 Q. Now, the next document in the packet -- 19 I'm sorry. You wanted to finish your answer with 20 regard to 5122? 21 A. It's something I relied upon, and 22 there's a couple things that are noteworthy on 3543 1 this document. It's dated -- 2 MR. NICKENS: Your Honor, we are 3 supposed to go by question and answer. I guess 4 the witness could volunteer information, but I 5 have no idea what he's going to say when I don't 6 hear a question. 7 THE COURT: All right. Let's have a 8 question. 9 Q. (BY MR. GUIDO) Is there anything in 10 that document that you believe is significant for 11 your conclusion that the USAT should not have 12 included the caps in the calculation of its 13 maturity matching credit? 14 A. Yes. In the context of the prior two 15 memos that are dated in February talking about 16 developing a plan, this memo is dated March 2nd. 17 Now, at that time of March 2nd, UMBS has recently 18 had a dramatic increase in assets as we talked 19 about yesterday. As depicted in the chart, it's 20 gone from basically no assets at September '86 to 21 in just basically five months later, as of 22 February '87, it's over 900 million in assets. 3544 1 Now, at that time, the assets are growing. And at 2 that time, they have no caps contracted for as of 3 that point related to anything. The caps are 4 not -- have not been contracted for. But it's 5 apparent if you compare this number that is in 6 this document of March 2nd, 1987 -- 7 Q. What exhibit number is that? 8 A. This is the T5122. If you look at some 9 of the strategies, one of the specific strategies 10 that they are considering is the United MBS caps 11 even though they have yet to be contracted for and 12 they are contemplating, is what the line says on 13 the last page, to move United MBS caps to USAT. 14 All right? 15 So, they are contemplating moving them 16 before they are even contracted for. So, this 17 infers to me that they obviously know that they 18 are contemplating contracting these contracts 19 because they are talking about moving them even 20 though they have yet to be contracted. Okay? 21 Because the contract dates we're going to see are 22 basically on or about March 16th is when they 3545 1 start. All right? And this number, by the way, 2 of the 360, that ties exactly to the notional 3 amount of the first wave of caps that were later 4 contracted for basically about two weeks later. 5 Q. Is that when you make reference to the 6 caps that are in the United MBS portfolio, is that 7 in the Schedule A11022, Page No. 6? 8 A. I'm sorry. I misunderstood that 9 question. 10 Q. You make reference to a schedule when 11 you say that there's a schedule that shows that 12 the caps were assigned or intended to be used as a 13 hedging device for the United MBS portfolio. 14 When you refer to a schedule, are you 15 referring to 1118, Page 6? 16 A. Yes. That's one of the schedules. And 17 then again, that's the compilation out of the 18 Coopers database that was prepared, it's my 19 understanding, at the direction of the 20 respondents. That number is listed as of 21 March 31, 1987. It says 360. 22 Q. Now, I'd like to move on to the next 3546 1 time sequence, if I may. And the next document in 2 the packet that you have is a memorandum from 3 Mike Crow to Jenard Gross dated March 26, 1987, 4 and it is Exhibit T5123. 5 MR. GUIDO: I'd like to move the 6 admission of T5123, Your Honor. 7 MR. NICKENS: No objection. 8 THE COURT: Received. 9 A. This memo is dated -- 10 Q. (BY MR. GUIDO) May I ask the 11 question, please? 12 A. I was just trying to identify it. 13 Q. Mr. Nickens would like to hear the 14 question before the answer. 15 The -- what is the significance of this 16 document for your conclusion that USAT should not 17 have included the caps in its TFR for purposes of 18 calculating the maturity matching credit? 19 A. This memo is dated March 16th, 1987; 20 and it's from Mike Crow. And it says "The five 21 most important things that I'm working 22 on-March 1987." And he lists the five items. 3547 1 No. 5 says "Analysis of and reconfiguration of the 2 association's balance sheet to maximize the 3 maturity matching credit and insurance meeting 4 regulatory capital." This, again, just indicated 5 to me that this was a critical issue at this time 6 based on their own internal documents. 7 Item No. 1 also indicates that he is 8 working with credit analysts on Wall Street to 9 ensure continuance of reverse repo credit lines to 10 allow continued expansion of United MBS. Because 11 during this time period, as we talked about 12 yesterday, this is when United MBS is growing 13 rapidly, ultimately up to approximately 1.7 14 billion in assets by the end of April 1987. 15 Q. Now, turn to the next document which is 16 T5125. It's a memorandum from Bruce Williams to 17 Jenard Gross and Mike Crow dated June 17th, 1987. 18 And the subject is "Management Information Update 19 Disclosure/Exposure of United MBS Accounting." 20 In the first full paragraph, it says 21 "Although we have discussed the structure of 22 United MBS in numerous forms -- executive 3548 1 committee, investment committee, strategic 2 planning committee, et cetera, I think it's 3 important we have a complete understanding of the 4 major accounting exposure we have for this 5 subsidiary. By management approval, 320 million 6 in variable rate mortgage-backed securities and 7 710 million of interest rate caps were transferred 8 from United MBS to USAT for maturity matching 9 credit purposes." 10 Was that one of the documents that you 11 relied upon for your conclusion that USAT should 12 not have included in its TFR for purposes of 13 calculating the maturity matching credit the caps 14 that you have identified at the outset of your 15 testimony today? 16 A. Yes, it is. 17 Q. Now, it goes on to say "USAT has 18 maximized its maturity matching credit using, 19 quote, 'mirrors,' close quote. Since United MBS's 20 assets are not included in the calculation, USAT 21 is, quote, 'borrowing hedges,' close quote, to 22 take advantage of a regulatory loop hole. USAT's 3549 1 real interest rate exposure on a consolidated 2 basis has not been reduced." 3 Do you see that -- 4 A. Yes, I do. 5 Q. -- paragraph? Do you know what is 6 referred to by the sentence "USAT's real interest 7 rate exposure on a consolidated basis has not been 8 reduced"? 9 MR. NICKENS: Your Honor, I object to 10 the form of the question that way. If he wants to 11 say what his understanding is perhaps, but not 12 what it -- what other people's understanding -- 13 Q. (BY MR. GUIDO) Can you tell us what 14 your understanding is? 15 A. Yes. The sentence is written in the 16 context of talking about transfers of both 17 adjustable rate mortgages and these caps. And it 18 just says basically before and after the transfer 19 on a consolidated basis, we're in exactly the same 20 position with respect to interest rate risk. But 21 if you look at my analysis, it's also showing that 22 through that transfer, they're substantially 3550 1 increasing their maturity matching credit, which 2 is reducing their regulatory capital despite the 3 fact that, as the sentence says, before and after 4 the transfer, their interest rate exposure on a 5 consolidated basis is no different. 6 Q. Now, the next bullet says "The 7 investment bankers that provide reverse repo lines 8 were given comfort that United MBS was an MBS 9 risk-controlled arbitrage subsidiary. In fact, it 10 is basically 1.6 billion of unhedged MBS because 11 of the assets and hedges transferred to USAT. 12 Thus, with a rapid increase in interest rates, we 13 could see a negative net interest spread and 14 operating losses in United MBS. This would be 15 difficult to explain to Wall Street." 16 You have a schedule in 11018 that sets 17 out the portfolio as you understood it when you 18 were reviewing the general ledger of United MBS, 19 and you reconciled that with the Coopers and 20 Lybrand work that was done for the respondents. 21 What did that show you in terms of the exposure of 22 United MBS to changes in interest rates? 3551 1 MR. NICKENS: Your Honor, could we 2 identify the document that he is referring to? 3 MR. GUIDO: It's 11018, Page 6. Excuse 4 me. 5 MR. NICKENS: You mean 022 perhaps? 6 MR. GUIDO: I'm sorry. 11022, Page 6. 7 Q. (BY MR. GUIDO) Are the caps that are 8 being discussed in the June 17th, 1987, memorandum 9 T5125 included on that schedule which is Page 6 of 10 Exhibit 11022? 11 A. Yes, they are. There's a little bit of 12 a timing difference because the caps that were 13 transferred include caps that were contracted for 14 in April. And so, to -- it's basically -- in the 15 Coopers database, it's the April balance but in my 16 analysis, it's the same number as of March because 17 they transferred it as if they existed as of 18 March. In both cases, they are 910 million. 19 So, to clarify that for the record, 20 Page 6 of that exhibit for April '87 says 21 910 million. If you look at my expert report, 22 Page 75, it also says 910 million as the number 3552 1 of ---dollar amount of caps that I analyzed as 2 being transferred. 3 MR. GUIDO: Now, I'd like to move the 4 admission of T5125 subject to the same 5 understanding that if we can find a clean copy, we 6 will substitute that for this document. 7 MR. NICKENS: No objection on that 8 basis. 9 THE COURT: Received. 10 Q. (BY MR. GUIDO) Now, the last 11 paragraph of that memorandum says "In USAT's 12 movement to come clean, our options are, one, do 13 nothing and continue to use mirrors to disguise 14 our gap." 15 Do you see that sentence? 16 A. Yes, I do. 17 Q. The September -- did the September 30, 18 1987, TFR include a calculation of the maturity 19 matching credit utilizing the caps? 20 MR. NICKENS: Your Honor, may I -- is 21 he talking about the amended TFR or the original 22 TFR? 3553 1 THE COURT: Can you clarify? 2 Q. (BY MR. GUIDO) Let's start with the 3 original TFR. 4 A. Again, there's a six-month lag issue. 5 The TFR that's relevant for whether the caps are 6 in or out is initially the March 31, 1987, TFR 7 which is just simply calculating your gap. Within 8 that TFR, initially, the caps are not included in 9 that TFR. 10 Q. Okay. And an amendment was filed 11 including the caps in the TFR? 12 A. An amendment was filed adjusting the 13 amount of hedges, and I have gone back and 14 identified to reconcile exactly what was included 15 in that amendment. And that amendment basically 16 transfers these caps that are summarized on Page 17 75 in my report. 18 Q. Now, in the September 30, 1987, TFR 19 report, was the compliance with regulatory capital 20 calculated utilizing the benefit of the caps to 21 lower the maturity matching credit? 22 A. Yes, it was. That's summarized in my 3554 1 report, as well, in a couple places including Page 2 77. 3 Q. Now, was the -- subsequent to September 4 in subsequent TFRs, were the caps that you've 5 testified about also utilized to increase the 6 maturity matching credit in order to reduce the 7 regulatory capital requirement? 8 A. Yes, they were. I have examined 9 documents through September 30th, 1987, as well as 10 through December 31st, 1988, showing that that 11 did, in fact, continue on. The caps remained to 12 be included in the regulatory capital calculation 13 to reduce the maturity matching credit. 14 Q. Now, the second bullet that's on the 15 second page says "As another option, unwind the 16 asset and hedge transfers between United MBS and 17 USAT and purchase about $1 billion of hedges 18 specifically for USAT. This would cost about 19 12 million in additional interest expense per 20 year. If USAT did not replace the instruments 21 transferred to United MBS, USAT would lose its 22 maturity matching credit and fall below minimum 3555 1 required regulatory net worth." 2 Do you agree with that conclusion that 3 if the caps were on the books assigned to United 4 MBS, USAT would lose its maturity matching credit 5 and fall below the minimum required regulatory net 6 worth. 7 MR. NICKENS: Your Honor, the document 8 doesn't say "the caps." It says "the asset and 9 hedged transfers" and then says "the instruments 10 transfer." So, it would include both the ARMs and 11 the caps. And so, he's not correctly summarizing 12 the document. 13 MR. GUIDO: Your Honor, with that 14 modification, I'll rephrase the question. 15 Q. (BY MR. GUIDO) If the transfers, 16 okay, were put back or assigned back to United 17 MBS, would USAT lose its maturity matching credit 18 and fall below minimum required regulatory 19 net-worth? 20 A. Yes. As laid out in my report, among 21 other places on Page 77, had that occurred, they 22 would have fallen below the minimum net-worth 3556 1 requirement as of September 30th, 1987. 2 Q. Now, were all of the caps that were on 3 or assigned to United MBS transferred to USAT for 4 purposes of the maturity matching credit? 5 A. Yes, with this explanation. As of the 6 end of April, there was 910 million of caps on the 7 books. For a cap to be used for maturity matching 8 credit purposes, it has to be in the money. So, 9 an analysis was performed of all caps contracted 10 through April 30th. And of the amount that was in 11 the money, those were the ones that were 12 transferred, which equals $790 million. So, there 13 was 910 million in total and 790 were basically in 14 the money and those are the ones that were 15 utilized. And again, those are caps as of 16 April 30th, even though the transfer date is as of 17 March 31st. 18 Q. Now, were there internal schedules that 19 you relied upon to identify the caps that were 20 transferred? 21 A. Yes, there were. 22 Q. And was there documentation that you 3557 1 were able to find regarding the relationship 2 between USAT or United MBS and the brokers that -- 3 who were the counter-parties to those transactions 4 that you found? 5 A. For the caps that are in question, I 6 have examined some contracts and some trade 7 tickets. 8 Q. And did you find all of the contracts? 9 A. I personally did not. 10 Q. Did you find contracts that were 11 signed? 12 A. In some cases of the caps that I'm 13 discussing, some of them are signed. 14 Q. Did you find trade tickets for the 15 categories of assets that you believe were 16 transferred? 17 A. Yes, I did. I found two types of trade 18 tickets. One was when these transactions were 19 initially acquired in March and April of 1987, I 20 found those trade tickets. But as we discussed 21 yesterday, there was caps that were sold in 22 October of 1987. Some of these same caps were the 3558 1 ones that were sold in October '87. I also found 2 the trade tickets related to the sale of these 3 caps in October '87. 4 Q. Now, with regard to the contracts, are 5 those in Exhibit T5106? 6 A. Yes, they are. 7 Q. And is this for the caps that were 8 initially purchased, or does this also include the 9 replacement caps after the sale and repurchase in 10 October? 11 A. This document is essentially the ones 12 that I'm aware of for the initial acquisition of 13 the caps that are in question. 14 MR. GUIDO: Well, I'd like to move the 15 admission of T5106, Your Honor. 16 MR. NICKENS: No objection, Your Honor. 17 THE COURT: Received. 18 MR. GUIDO: Thank you, Mr. Nickens. 19 These also have circles on some of the pages, Your 20 Honor. And they have some handwriting. And so, 21 I'd like to indicate which ones of those -- if you 22 go back to the March 10th, 1987, document, there's 3559 1 a reference at the bottom. It has a phone number 2 next to the name William Doty, and he doesn't 3 trade caps. I believe that that was on the 4 document as it was in the files of the 5 association. In addition, if you look at the 6 document with Chase dated November 20th, about 7 two-thirds of the way through the packet you will 8 see that there are also some notations on that. I 9 don't believe that those were added any time 10 subsequent to this being in USAT's files. 11 However -- 12 MR. NICKENS: Your Honor, I mean, I 13 don't dispute that, I don't guess. But first of 14 all, these are not Bates numbered documents. And 15 for Mr. Guido to simply testify at this point, I 16 think, is improper. I have not objected to the 17 documents and for whatever evidentiary worth they 18 have, but for him to go further and say that these 19 were on the documents as they appeared in the 20 files, I just don't think that's evidence. 21 MR. GUIDO: If there is no objection to 22 this document with the notations on it, I will 3560 1 cease my description of the documents, Your Honor. 2 Q. (BY MR. GUIDO) These documents 3 include all of the contracts that you were able to 4 find in a review of the USAT's files after it was 5 placed into receivership, Mr. Hargett? 6 A. Yes. These are the ones that I was 7 able to find. The other ones very well may be out 8 there, but these are the ones that I was able to 9 find. 10 THE COURT: Now, when you say "these 11 documents," what are you referring to? 12 MR. GUIDO: I'm talking about T5106, 13 Your Honor. And I'd like to move the admission of 14 T5106. 15 THE COURT: I believe they have already 16 been received. 17 Q. (BY MR. GUIDO) And did you use those 18 documents to identify the caps that you examined 19 to ascertain whether or not they were properly 20 assigned to USAT for purposes of calculating the 21 maturity matching credit? 22 A. Yes, I did consider these documents. 3561 1 Q. Now, some of these documents say that 2 the contract is between USAT and the 3 counter-party. It doesn't say they are between 4 United MBS and the counter-party, do they not? 5 A. That's correct. 6 Q. What significance do you draw from that 7 for your purposes of your conclusion? 8 A. It is one piece of evidence that I 9 considered in looking at all of the documents that 10 are present as to who owned these caps. 11 Q. Now, you also said that you looked at 12 trade tickets. Are those trade tickets included 13 in the packet of documents marked T5047? 14 A. Yes, they are. 15 MR. GUIDO: I'd like to move the 16 admission of T5047, Your Honor. 17 MR. NICKENS: No objection, Your Honor. 18 Again, I think there are certain markings on here, 19 but no objection. 20 THE COURT: Received. 21 Q. (BY MR. GUIDO) Now, these documents 22 were documents that you reviewed in reaching your 3562 1 conclusion that the caps had been initially 2 assigned to United MBS, Mr. Hargett? 3 A. Yes, they are. 4 Q. And what is it about these documents 5 that led you to that conclusion? 6 A. A couple of things. The caps that are 7 in question, again, as summarized on my schedule 8 from the contracts, as well as their own internal 9 documents, the contracts were all done between 10 April and -- March and April of 1987, the 11 contracts we just looked at. 12 If you look at the seventh page in, top 13 left-hand corner, it says "Trade date 3-16-87. 14 Settlement date, 3-23-87." And then handwritten 15 at the top, it says "MBS Cap No. 1," and it shows 16 information relating to that cap. This cap has a 17 notation as far as what account it's for, and it 18 says "for the account of" and then it's listed as 19 United Savings Association of Texas. There is a 20 block. And then there is a liquidity block, a 21 retail match block, and a portfolio block. And 22 then they have added in "other" and they have 3563 1 marked "other" and marked it as United MBS sub. 2 This is one of the trade tickets for one of the 3 caps in question when it's initially being 4 acquired. 5 Q. Let's take the first page. What cap 6 number does that pertain to? 7 A. The fifth -- the page I just referred 8 you to, that's one of the initial transactions. I 9 mentioned that the caps in question were then -- a 10 portion of them were sold in October of '87. 11 Okay? 12 So, when those caps were sold, there is 13 also a trade ticket when they are sold. These are 14 the trade tickets to some of those caps that are 15 being sold. And in this case, it says Cap No. 15 16 down in the special remarks. That's one of the 17 ones in question. And again, if you look at the 18 sale, what it's identifying it as, it checks off a 19 block, and it says "United MBS sub." 20 Q. Then the second -- what cap did that 21 pertain to, the second page of the document? 22 A. It's labeled No. 15. 3564 1 Q. Were there different reset dates in Cap 2 15? 3 A. No. I believe that one of these two 4 are not Cap 15. I believe it's actually Cap 5 either 2 or 2A. You can match it up by the dollar 6 amounts. 7 Q. Okay. Now, does that also indicate 8 that it was for the account of United MBS sub? 9 A. It does. 10 Q. Then the third page, what cap does that 11 refer to? 12 A. This one refers to 2 and, again, this 13 information is consistent with my schedule here. 14 And again, it says "United MBS sub." And this is 15 when it's being sold on October 30th. 16 Q. Now, this is -- it says "for the 17 account of United MBS sub"; is that correct? 18 A. That's what it says. 19 Q. Okay. And the next page, that's for 20 cap number what? 21 A. It says Cap No. 9. 22 Q. And does that also say it's for the 3565 1 account of United MBS sub? 2 A. It does. 3 Q. And -- 4 A. And again, the sale date is 5 October 30th, 1987. These are some of the sales 6 we talked about yesterday. 7 Q. Now, the other -- the next page says 8 Cap No. 10, does it not? 9 A. That's correct. 10 Q. And does it say for what account? 11 A. It says it's for the United MBS sub. 12 Q. Okay. And the next page is for which 13 cap? 14 A. 13A. 15 Q. And does it say for what account? 16 A. It says for the United MBS sub. 17 Q. Now, the next page is a buy. We've 18 been looking at sell so far. Right? Now, there's 19 a buy ticket. And does that indicate what cap it 20 pertains to? 21 A. Yes. In the top corner, it says "MBS 22 Cap No. 1." And again, this is one of the -- this 3566 1 is the buy ticket for that cap initially whereas 2 the other ones today have been the subsequent 3 sale. 4 Q. Okay. Does it say whose account? 5 A. Yes, it does. 6 Q. And whose account does it say it's for? 7 A. It says it's United MBS sub. 8 Q. Now, the next is another one of the 9 sells and which cap does that say it's for? 10 A. Actually, this one says 2A. 11 Q. Okay. And which account does it say 12 it's for? 13 A. United MBS sub. 14 Q. The next document is another sell, and 15 which cap does that say it pertains to? 16 A. This one says it's Cap No. 1. 17 Q. Does it say for which account? 18 A. It does. 19 Q. And which account does it say? 20 A. It says "United MBS sub." 21 Q. Okay. The next one says which cap? 22 A. It's Cap No. 13. 3567 1 Q. And does it say for which account? 2 A. It says "For United MBS sub." 3 Q. The next one is which cap? 4 A. Cap No. 14. 5 Q. Does it say for which account? 6 A. It says "for United MBS sub." 7 Q. And the last one says for what 8 account -- what cap? 9 A. No. 16. 10 Q. And does it say for what account? 11 A. United MBS sub. 12 Q. Are those documents that you relied 13 upon to conclude that the caps were initially 14 intended for United MBS? 15 A. Yes. That's some of the documents that 16 I considered. 17 Q. Now, were there other documents that 18 you relied upon for that conclusion beyond those 19 trade tickets? 20 A. Yes, there are. There are internal 21 documents, schedules that summarize the caps in 22 question. 3568 1 Q. Okay. Will you look at T5074? Do you 2 have that in front of you, Mr. Hargett? 3 A. Yes, I do. 4 Q. And that is a memorandum from Jenny 5 Whyte to Bruce Williams and it has attached a 6 handwritten schedule. 7 MR. GUIDO: I move the admission of 8 T5074, Your Honor. 9 MR. NICKENS: No objection. 10 THE COURT: Received. 11 Q. (BY MR. GUIDO) That -- what about 12 that document do you believe supports your 13 conclusion that the caps were assigned to United 14 MBS? 15 A. The memo is dated October 19th, 1987. 16 And again, from their internal references, two of 17 the caps that are in question are No. 14 and 15. 18 And here, it's labeling Cap No. 14 and 15 as UMBS 19 caps. 20 Q. Now, look at T5076, Mr. Hargett. That 21 is another internal memorandum: October 15th, 22 1987, from Jenny Whyte, W-h-y-t-e, to Bruce 3569 1 Williams. 2 MR. GUIDO: I move the admission of 3 that document, Your Honor. 4 MR. NICKENS: No objection, Your Honor. 5 THE COURT: Received. 6 Q. (BY MR. GUIDO) What about that 7 document led you to conclude that the caps were 8 initially assigned to United MBS, Mr. Hargett? 9 A. Again, it's very similar to the prior 10 document. It's dated October 15th, 1987. And 11 it's after the transfer has occurred and it's 12 labeling Cap No. 16, one of the ones in question 13 as UMBS. 14 Q. Now, those documents are internal 15 memoranda at USAT and UMBS? 16 A. That's correct. 17 Q. Now, T5035, I direct your attention to 18 that document, Mr. Hargett. Can you tell us what 19 that document is? 20 A. This is an internal schedule that's 21 labeled United MBS interest rate caps, and it says 22 6-30-88. So, this would be the caps in existence 3570 1 as of that date and it lists -- starts listing 2 them out. And keep in mind of the caps that we 3 originally had -- 1 through 16 plus 2A, 3A, 4A, 4 and 13A that were in question -- some of those 5 have been sold by this date. But you can see a 6 lot of numbers that are below 16 that are listed. 7 And so, even as -- even on this date, June 30th, 8 1988, they are still listing them as United MBS 9 caps. And this is well after the transfer. 10 Q. Now, is this a schedule internal to 11 USAT? 12 A. Yes, it is. 13 MR. GUIDO: I move the admission of 14 5035. 15 MR. NICKENS: Absolutely no objection, 16 Your Honor. 17 THE COURT: Received. 18 Q. (BY MR. GUIDO) T5036, Mr. Hargett, I 19 direct your attention to that document. 20 A. It's very similar. It says "United MBS 21 interest rate caps." It's dated July 31st, 1988, 22 and you'll see at the top, again, some of the caps 3571 1 in question being listed as well as a couple of 2 them at the bottom, the last two, 4 and 4A. 3 MR. GUIDO: I move the admission of 4 5036, Your Honor. 5 MR. NICKENS: No objection. 6 THE COURT: Received. 7 Q. (BY MR. GUIDO) Now, I direct your 8 attention, Mr. Hargett, to Exhibit A11024. Is 9 11 -- A11024 a packet of internal schedules from 10 United Savings Association of Texas? 11 A. Yes, it is. I believe these were 12 Exhibit 20 to my deposition. 13 MR. NICKENS: My copy has Exhibit 21. 14 THE WITNESS: It may be 21. 15 MR. GUIDO: I move the admission of 16 these documents, Your Honor. 17 MR. NICKENS: I have no objection, Your 18 Honor. My exhibit has a number A11025 as opposed 19 to 24. Have we already assigned a number to 24? 20 I just want to make sure we don't have two numbers 21 assigned to different -- or to the same document. 22 I can just change my copy to 24. 3572 1 THE COURT: All right. Exhibit A11024 2 is received. 3 Q. (BY MR. GUIDO) Now, the packet of 4 materials 11024, those are -- what are those 5 documents, Mr. Hargett? 6 A. These are similar to the exhibits that 7 we just looked at. They are, again, internal 8 schedules summarizing the caps. And there's a 9 label attached to each individual one of them. We 10 can walk through them. There are various dates. 11 They say "United MBS." And again, if you look 12 down the schedule, particularly like as an 13 example, the second one, you'll see the caps that 14 are in question and they just kind of go date by 15 date. They are not really in a logical order. 16 Q. And what is it about the labeling of 17 the caps that led you to conclude that the USAT 18 accounting department had assigned the caps to 19 United MBS? 20 A. Again, the schedules are labeled 21 "United MBS interest rate caps." And for the most 22 part, there's a couple different ones. But the 3573 1 cap numbers that are below 16, those are the caps 2 that were transferred on the 3-31-87 TFR to USAT 3 from UMBS. And here, they are being listed as 4 UMBS. And I believe the earliest one -- it's 5 quite a ways into the back -- is April 30th, 1987. 6 And that particular schedule -- it's the next to 7 the last one. It has -- the first page is listed 8 as "United Savings swaps, caps, and collars." 9 Okay? 10 So, we've discussed that United, USAT, 11 had swaps and it lists all the swaps. But we also 12 discussed that United Savings had one cap back 13 from the United Mortgage Finance transaction way 14 back in 1985. And if you look at this schedule on 15 Page 2 of it, you'll see there is a section down 16 there for caps and collars and it has that one cap 17 listed as being USAT. And when you flip to the 18 very next page, it says "United MBS interest rate 19 caps," and it has these caps listed, 1 through 16. 20 And again, you'll see that number there, 21 910 million, which is consistent with the Coopers 22 database and the caps that I've analyzed as being 3574 1 transferred. 2 Q. Now, did you do anything to confirm 3 that the transfer that was reflected in the Bruce 4 Williams memo which is marked as T5125 had 5 actually taken place? 6 A. Yes, I did. 7 Q. Now, what documents did you look to in 8 this packet of documents to ascertain that fact? 9 A. There's an exhibit that is T5103. 10 Q. Are there any others? 11 A. Yes. T5114. 12 Q. Any others? 13 A. And T5104. 14 Q. And any others? 15 A. Those are the primary three documents 16 in addition to my report and the analysis that's 17 in there that compares those documents with my -- 18 with my analysis. 19 Q. Now, let's start with T5103. Can you 20 tell the Court what that document is? 21 A. Yes. This is a document out of the 22 audit work papers out of Peat Marwick, and it's 3575 1 analyzing. It's entitled "NW calculation 2 support," and it's my belief that that stands for 3 net-worth calculation support. There's several 4 schedules and, on the third schedule, the third 5 piece of paper to it, the second heading of it 6 says "adjusted gap" and there is a one-year -- 7 one-year CUM column and a one- to three-year CUM 8 column. And it's my belief, being familiar with 9 the regulation and analyzing this piece of paper, 10 that this is, in effect, the maturity matching 11 credit calculation as of this date being looked 12 at. 13 MR. GUIDO: I'd like to move the 14 admission of Exhibit T5103, Your Honor. 15 MR. NICKENS: Your Honor, this is -- 16 document is largely illegible to me. Again, I 17 have no objection to the extent that we can read 18 it, but I would ask that we have an opportunity to 19 either find the original or something that was 20 more legible. 21 THE COURT: It's not very legible. Is 22 there a better document someplace? 3576 1 MR. GUIDO: Your Honor, we do not have 2 a better document. We will attempt to ascertain 3 whether or not Peat Marwick has the originals and 4 can provide us with a better copy. We have not 5 been able to find one so far. 6 THE COURT: All right. Received 7 subject to that. 8 Q. (BY MR. GUIDO) Now, what page should 9 we look to to see what the calculations are with 10 regard to the net-worth maintenance -- excuse 11 me -- the net-worth obligation of USAT? 12 A. If you look to the third page of the 13 document -- 14 Q. Is that the page that has the -- what 15 you just referred to as the one-year CUM and the 16 one- to three-year CUM columns? 17 A. That's correct. And on the labels on 18 the left-hand side, the second line down says 19 "adjustments" and then it says "impact of hedging 20 (caps)." And then below that, it shows two pieces 21 of information. It says "original report," which 22 would refer to the original TFR, and then it says 3577 1 "amended report" which would refer to the amended 2 TFR. And if you look, as an example, in the 3 one-year gap, it starts off with 861,350,000 and 4 then the second number becomes 1,531,350. 5 MR. NICKENS: I believe, Your Honor, if 6 my eyes are correct, that's a negative 1,531,350. 7 THE WITNESS: Yes, it is. That's 8 correct. 9 Q. (BY MR. GUIDO) Now -- and what does 10 it say with regard to the one- to three-year CUM? 11 A. It starts off with 759,350,000 and then 12 for the amended report, it's negative 13 1,219,000,000 -- I'm sorry -- 1,219,350. And 14 actually, this information has the zeros 15 truncated. So, as an example, that -- the first 16 number that says 861, that's actually 861 million. 17 Q. Now -- now, what is the significance of 18 that document for your conclusion that the caps 19 had transferred? 20 A. This report -- this document is showing 21 that the TFR was amended, and it's underneath a 22 label called impact of hedging caps. That 3578 1 suggested something; but I wanted to see whether 2 or not I could determine if, in fact, the caps in 3 question were transferred. The Bruce Williams 4 memo said that they were, but that wasn't -- that 5 wasn't enough evidence. I wanted to see whether 6 or not they were actually transferred. 7 Q. Now, where in your report is the 8 reference to this schedule? 9 A. If you look at Page 72 of my report, 10 this is where I've gone back and identified the 11 instruments that are out there at that time 12 with -- again, 33187 is what you're supposed to be 13 looking at. But to make this work, I've got to 14 include the transactions in April that are caps. 15 But this summarizes the items that are out there 16 and it determines what categories they would fit 17 in, the one-year gap or the three-year gap. And I 18 come down with the information I'm about to show 19 you that with the information that I've done, you 20 would get 1,531,350 and that is the same number 21 that is in the one-year gap column. 22 Now, the next column, the three-year 3579 1 gap, has 312 million. And what that number 2 represents with the way mine is formatted, it 3 represents the mathematical difference between the 4 one-year column and the three-year column. And 5 so, if you take the 1,531,350, subtract 312, you 6 do, indeed, get the one- to three-year number of 7 1,219 -- 1,219,350. 8 Now, that's what 72 summarizes. But as 9 you can see on Page 72 of my report, there's two 10 components that have to be included. One is the 11 swaps. There is no problem there. The swaps are 12 USAT swaps. They definitely should be included 13 for maturity matching credit purposes. But you 14 have to include 790 million of interest rate caps 15 to get to that number. If you -- 16 Q. To get to which number, Mr. Hargett? 17 A. To get to the 1,531,350, which is the 18 number they reflected on the amendment as being 19 the adjusted hedges that are accounting for 20 maturity matching credit purposes. 21 MR. NICKENS: Your Honor, I object to 22 that answer. It is the number reflected on this 3580 1 accounting sheet. I believe the evidence will 2 show, at least as far as I know, that this 3 supposed original TFR doesn't exist in 4 Mr. Hargett's files. So, when he refers to what 5 was on the original one, he's actually referring 6 to the number that is on T5103. 7 THE COURT: So, what's your objection? 8 MR. NICKENS: Your Honor, he referred 9 to the original TFR as opposed to this document, 10 which is where the number actually appears. 11 Q. (BY MR. GUIDO) Mr. Hargett, is it 12 your understanding that the exhibit that you've 13 just been reading from, the work paper 5103, is 14 the work papers of the accountants for USAT doing 15 the calculation for the maturity matching credit? 16 A. It's not them doing the calculation. 17 It's them reviewing the calculation that's been 18 done. 19 Q. And confirming that calculation? 20 A. To the extent that this is considered 21 confirming it, it's analyzing the calculation. 22 MR. NICKENS: Your Honor, my objection 3581 1 is simply to the accuracy of the testimony. In 2 his deposition, he said that he didn't have the 3 original TFR. And so, I want to make sure that 4 we're accurate as to the record as to what he is 5 testifying about. 6 MR. GUIDO: I think the witness has 7 testified that he's relied on this document. 8 Hasn't mentioned anything about the original TFR, 9 Your Honor. 10 THE COURT: All right. I think we've 11 made a record on that. 12 Q. (BY MR. GUIDO) Now, look at 13 Exhibit T5114. Can you tell us what that is, 14 Mr. Hargett? 15 A. I wasn't finished explaining this one. 16 But if you want to move on -- 17 Q. I want to move on to T5114. 18 A. All right. T5114 is a thrift financial 19 report that is for the quarter of March '87 for 20 USAT, and there's a date. In the far left-hand 21 side about the fifth line down, it says "Edit as 22 of 8-14-87." Based on my experience in dealing 3582 1 with TFRs, that's the date that this data was 2 effectively clean or no changes happened to this 3 data after that date. 4 If you flip through to Page -- it's 5 labeled on the top right-hand corner -- Page 17, 6 this is essentially the schedule that is 7 summarizing the gap. Now, you've got to work with 8 it to get to the one-year column because, if 9 you'll notice, the columns for this piece of 10 paper, there is a six-month or less column and 11 then there's also a six months to one-year column. 12 MR. GUIDO: Your Honor, at this point 13 in time, I'd like to move the admission of T5114. 14 MR. NICKENS: No objection. 15 THE COURT: Received. 16 A. So, on that Page 17, if you look down 17 to the next-to-the-last line, it says "impact of 18 hedging" and then there's those two numbers. 19 1,586,350 in the six-month column and then 20 55 million going the other direction in the next 21 column. And if you combine those two numbers, you 22 get back to the 1,351,350 that's in both my report 3583 1 and in the Peat Marwick work paper. 2 Q. Do you mean 1 million, five hundred -- 3 A. I'm sorry. 1,531,350. 4 Q. Now, what is the -- and this is the 5 March 1987 TFR? 6 A. Yes. This is the March 1987 TFR as 7 finally reflected. 8 Q. Now, if you turn to Exhibit 5104, can 9 you tell us what that packet of materials is? 10 A. This is excerpts out of their 11 performance reports. Within their performance 12 reports, there are schedules that deal with the 13 maturity matching credit. 14 Q. Okay. Now, let's identify the pages. 15 The first page is for the March 31st, 1987, 16 performance report? 17 A. That's correct. 18 Q. Okay. And the second page is also for 19 the March 31st, 1987, performance report? 20 A. I'm sorry. Say that again, please. 21 Q. The second page is for the March 31st, 22 1987, performance report? 3584 1 A. Right. The first two pages, the black 2 piece of paper that just is labeled and then the 3 second one that has numbers on it. 4 Q. Now, the second two pieces of paper, 5 one's plain and the other one says April 30th. 6 Is that for the April 30th performance 7 report? 8 A. Yes, it is. 9 Q. And then there's another blank paper. 10 Then there's a document that says "performance 11 report April 30, 1987, Bruce Williams" and then it 12 has a page attached to that. 13 Is that for the April 1987 performance 14 report? 15 A. Yes. Both of those are. The 1st one 16 is a draft and the second one is the final one. 17 Q. Okay. And then there's another piece 18 of paper that says "performance report, 19 September 1987, Bruce Williams" and it has 20 attached to it a page. 21 Is that the -- from the September 30, 22 1987, performance report? 3585 1 A. Yes, it is. 2 Q. Now, what about these documents led you 3 to conclude that USAT had reassigned the swaps 4 from United MBS to USAT? 5 A. I believe you meant caps. 6 Q. Caps. Excuse me. 7 A. If you look at the very first one which 8 is as of March 31st, 1987, and you go down to near 9 the bottom, there's a line item that says "impact 10 of hedging underneath rate sensitive liabilities." 11 And in the one-year column, it's 861 million. 12 That's the same number that appears back in that 13 Peat Marwick work paper as being in the, quote, 14 original report for the one-year column. 15 Q. And what exhibit number are you talking 16 about, the Peat Marwick work paper? 17 A. The Peat Marwick work paper is 18 Exhibit T5103. And that number represents 19 essentially the interest rate swaps that were in 20 existence at that time. And as I've already 21 indicated, the interest rate swaps were, in fact, 22 USAT transactions and there's no problem including 3586 1 them for the purposes of maturity matching credit. 2 Q. Now, turn to the page that has the 3 handwriting on it. It's an April 30th page from 4 the performance report; is that correct? 5 A. That's correct. 6 Q. Now, is this the final and these are 7 subsequent notations or is this a draft, to your 8 knowledge? 9 A. Based on the numbers that are there, 10 this would be a draft. 11 Q. Now, can you tell us what this draft 12 reflects? 13 A. If you, first of all, look at the 14 headings, this is as of April 30th but it has two 15 columns. It has a current month column and it has 16 a prior month column. Let's first look at the 17 prior month column, which would basically be 18 March 31, and if you go down to that same line 19 underneath "rate sensitivity liabilities impact of 20 hedging," it's showing the same numbers: 986 is 21 for the one-year and the 759 for the three-year 22 that the March 31 document showed. All right? 3587 1 But when you look at the calculation for April, 2 now it's moving up to 1 million, 651 and 879 for 3 the one and three-year gaps respectively, and then 4 there's some handwritten comments. And these 5 items are marked and there's some comments on the 6 page. 7 Q. Now, what is the significance of that 8 document for your conclusion that USAT reassigned 9 the caps from United MBS to USAT for purposes of 10 maximizing the maturity matching credit? 11 A. These numbers are consistent with the 12 numbers that I've analyzed in my report; and this 13 is showing that as of April 30th, 1987, these caps 14 were being transferred for maturity matching 15 credit purposes to USAT's records. 16 Q. Now, look at the next rendition of the 17 April 30, 1987, performance report. Does that 18 show that the prior month had the $861 million in 19 one-year gap? 20 A. No, it does not. 21 Q. What does it show? 22 A. For the prior month which, again, is 3588 1 March 31, it's now showing 1531 as of the one-year 2 column and 1219 as of the three-year column. And 3 again, those adjusted numbers are consistent with 4 my analysis on Page 72 and it's consistent with 5 the Peat Marwick work paper summarizing the 6 information in Exhibit T5103. 7 Q. Now, there's a footnote at the bottom. 8 It says "Restated to reflect $520 million of 9 interest rate caps purchased in March and settled 10 in April and reclassification of 58 million in 11 escrow deposits. 12 Ignoring the "and reclassification of 13 58 million in escrow deposits," what does your 14 understanding of the word "restated" mean as used 15 in this report? 16 A. Essentially, they are going back and 17 retroactively adjusting the March 3 data as if 18 that's the way it always was. 19 Q. Now, let's turn to the September 30, 20 1987, performance report excerpts. What does this 21 document reflect? 22 A. This document just shows, again -- 3589 1 there's a time lag. The March 31, '87, maturity 2 matching calculation impacts the September 30th, 3 1987, calculation and I've seen that information 4 in the TFR. I also wanted to see, since there was 5 a source of information internally, the 6 performance reports, if that information was 7 consistent. 8 So, once all of this is settled out as 9 of September 30th, 1987, the numbers presented 10 here are consistent with the numbers in the TFR 11 which are summarized on Page 77 in my report. 12 So, this led me to believe that this 13 performance report was, in fact, discussing and 14 analyzing the same issue that I was looking at in 15 the TFRs. 16 Q. Now, look at this on the September 30, 17 1987, performance report. Do you see where it has 18 "net-worth calculation of the net-worth 19 requirement" and it discusses the maturity 20 matching credit? Do you see that? 21 A. That's correct. 22 Q. And it says $100,146,000. Do you see 3590 1 that figure? 2 A. Yes, I do. 3 Q. Does that figure -- is that the figure 4 that was the figure that was calculated utilizing 5 the caps that were initially assigned to United 6 MBS? 7 A. Among other things, it does include the 8 caps. 9 Q. Now, are there any other documents that 10 you relied upon to ascertain that the caps had 11 been utilized by USAT to maximize its maturity 12 matching credit? 13 A. Yes, I did. This is -- 14 Q. Is one of those documents T5118? 15 A. Yes, it is. T5118. 16 Q. And what is T5118? 17 A. This is the thrift financial report 18 that is prepared as of September 30th, 1987. 19 MR. GUIDO: I move the admission of 20 T5118, Your Honor. And I think I omitted to move 21 the admission of T5104, which I do at this time. 22 MR. NICKENS: No objection to either 3591 1 document. 2 THE COURT: Received. 3 Q. (BY MR. GUIDO) Now, what about T5118 4 supports your conclusion that the caps initially 5 assigned to United MBS had been transferred to 6 USAT for purposes of the maturity matching credit? 7 A. If you go to Page 39 of this document 8 as labeled on the top right-hand corner, the very 9 bottom of the piece of paper, there's two labels. 10 One says "one-year cumulative hedged gap six 11 months prior to the close of this quarter," and 12 then there's two numbers listed. One per 13 institution, one per Federal Home Loan Bank. Both 14 of them say negative 8.13. And then there's a 15 similar number for the three-year gap and they 16 both say negative 793. 17 On Page 79 of my report, I went back 18 and used the information to determine how those 19 percentages were calculated, and that's reflected 20 on Page 79 of my report. So, this confirmed -- 21 helped confirm that the caps were, indeed, 22 utilized as one of the items to help lower the 3592 1 maturity matching credit or increase the maturity 2 matching credit calculation. 3 Q. Now, turn to Exhibit T5084, 4 Mr. Hargett. Can you tell us what that packet of 5 materials is? 6 A. As we discussed yesterday, some of 7 these caps in question, the ones that are numbered 8 below 16, were sold in October of 1987. 9 Subsequent caps were repurchased in December of 10 1987. These are some of the agreements related to 11 that subsequent acquisition of caps in December of 12 '87. They are generally numbered between -- 13 internally as Cap No. 24 through 29. 14 Q. Now, what about the -- 15 MR. GUIDO: First of all, Your Honor, I 16 move to admit T5084. 17 MR. NICKENS: Your Honor, this is 18 apparently a composite exhibit of several 19 different things which I have not seen before. 20 And I would like an opportunity to review it. 21 MR. GUIDO: Your Honor, this might be a 22 good time to take a break if it's at your 3593 1 convenience. 2 THE COURT: All right. We'll take a 3 short recess. 4 5 (A break was taken at 10:20 a.m.) 6 7 THE COURT: We'll be back on the 8 record. Mr. Guido. 9 MR. GUIDO: Thank you, Your Honor. 10 I was informed during the recess that 11 Exhibit T5122, I had overlooked moving its 12 admission into the record. That's the March 2nd, 13 1987, strategic planning committee agenda and I'd 14 at this time like to move the admission of that 15 document. 16 MR. NICKENS: No objection, Your Honor. 17 THE COURT: Received. 18 (10:47 a.m.) 19 Q. (BY MR. GUIDO) Now, Mr. Hargett, were 20 the -- were some of the caps that you've testified 21 about that had been reassigned from United MBS to 22 USAT for purposes of matching -- maximizing the 3594 1 maturity matching credit subsequently sold? 2 A. Yes. We've discussed that. Some of 3 them were sold in October of 1987. 4 Q. And were caps subsequently repurchased 5 to replace the caps that had been sold? 6 A. Yes. Different caps were subsequently 7 purchased that you could view as basically 8 replacing the prior ones. 9 Q. Now, when we broke, we were looking at 10 the packet of materials T5084. 11 MR. GUIDO: At this time, I'd again 12 like to move the admission of that packet of 13 materials. 14 MR. NICKENS: No objection, Your Honor. 15 THE COURT: Received. 16 Q. (BY MR. GUIDO) Now, take the first 17 two pages of that packet. What cap does that 18 refer to? 19 A. This refers to Cap No. 24 on their 20 internal references. 21 Q. Was that one of the caps that was 22 repurchased to replace the caps that had been 3595 1 reassigned to USAT? 2 A. Yes. This is one of the ones that was 3 acquired in December. 4 Q. And what are the next two pages, the 5 two handwritten pages? Can you tell us what those 6 are? 7 A. That is essentially their internal 8 ledgers where they track whether or not payments 9 are being received on the caps as they go into the 10 money so that that income can be accounted for. 11 Q. So that those two pages are the 12 tracking of the revenues from the caps that go 13 into the money? 14 A. The revenues, if any. 15 Q. Okay. Then the fourth page, is that -- 16 what is that document? 17 A. This is the trade ticket related to 18 this particular cap. 19 Q. And this particular cap is Cap No. 24? 20 A. That's correct. 21 Q. And for whose account does that 22 indicate that it was purchased for? 3596 1 A. Again, the -- for the account of -- 2 there's a handwritten note that says -- it looks 3 like it says "UTD-MBS" and there's an X by that 4 block. 5 Q. What do you understand that to refer 6 to? 7 A. I believe that to represent United MBS. 8 Q. Now, the next is a fax sheet dated 9 12-7. What does that refer to? 10 A. It's really related to this same cap, 11 the first few pages are. It's just an additional 12 copy. It has some markups that appears to be a 13 draft. 14 Q. So, it's the specifics of the cap 15 agreement, a draft of that? 16 A. That's correct. That's what I 17 understand it to be. 18 Q. Now, I'd like to direct your attention 19 to Exhibit 5085 and ask you what that document is. 20 A. This is information, again, on one of 21 the caps that was purchased in December '87; and 22 it's similar type information -- the internal 3597 1 accrual worksheet, trade ticket, confirm. 2 Q. Now, turn to the -- take the first 3 page. What does that refer to? 4 A. Again, similar to the other document we 5 just saw, it summarizes the income, if any, 6 received over time if the cap ever goes into the 7 money. 8 Q. And that is a document that was 9 internal to USAT? 10 A. That's correct. 11 Q. Then take the second page of that 12 document. Is that another one of those confirms 13 that you've testified about previously? 14 A. The second one's a trade ticket related 15 to that transaction. 16 Q. And what cap does that refer to? 17 A. This would be No. 25. 18 Q. And what account does that document say 19 it was for? 20 A. The same line is added where there is 21 an X and it says "United MBS." 22 Q. And then the letter dated December 7th, 3598 1 1987, is that another confirm? 2 A. This would be the contract confirmation 3 relating to this particular cap, Cap No. 25. 4 Q. And was Cap No. 25 another one of those 5 caps that was bought to replace the caps that had 6 previously been sold? 7 A. I think that's a fair characterization. 8 Q. And is that one of the caps that 9 replaced the caps that had been reassigned to 10 USAT? 11 A. Yes. 12 Q. And what is the next page? It looks 13 like one page of the December 7th confirm again. 14 Is that -- what is that document? 15 A. Are you referring to the one that has a 16 Bates stamp number at the bottom UNS00210234? 17 Q. No. I'm looking at two pages after 18 that which is a letter addressed to Ms. Sandy 19 Lawrenson dated December 7th, 1985. It says Cap 20 25, but it only appears to be part of the -- of 21 the original -- 22 A. This was another document that was 3599 1 found in the file. It was all pulled together. 2 Q. Now, what is the last page of that 3 packet of materials? 4 A. This again is an accrual worksheet 5 related to -- this particular one, it's very 6 similar to the first page. This one is shifted 7 and some of the numbers are cut off. 8 MR. GUIDO: And I'd like to move the 9 admission of T5085, Your Honor. 10 MR. NICKENS: No objection. 11 THE COURT: Received. 12 Q. (BY MR. GUIDO) Now, I'd like to 13 direct your attention, Mr. Hargett, to 14 Exhibit T5074. Can you tell us what that document 15 is? 16 A. I'm not with you. 17 Q. You don't have -- did I say -- T5059. 18 I'm sorry. 19 A. This is a confirmation of Cap No. 25 20 being sold in February of '89. 21 Q. Now, was February '89 after they were 22 in position of receivership? 3600 1 A. Yes. It was about a month afterward. 2 Q. And this relates to a cap that was 3 bought to replace one of the caps that had been 4 reassigned to USAT? 5 A. Yes, it does. 6 Q. And look at T5086. 7 A. This is a contract and the accrual 8 worksheet related to Cap No. 26. 9 Q. Okay. Was Cap No. 26 another one of 10 those caps that had been reassigned to USAT for 11 purposes of the maturity matching credit? 12 MR. NICKENS: Your Honor, I think the 13 evidence clearly is that it was not. The witness 14 has said that it was Caps 1 through 16. I think 15 Mr. Guido is confused that this is -- I think he 16 meant to ask him about whether this was a 17 replacement. 18 Q. (BY MR. GUIDO) I'm sorry. Was this a 19 replacement for one of the caps that had been 20 reassigned to USAT and, also, sold in October of 21 1987? 22 A. Yes. This would be a replacement. The 3601 1 contract date is December '87. 2 MR. GUIDO: I'd like to move the 3 admission of Exhibit T5059 and Exhibit T5086, Your 4 Honor. 5 MR. NICKENS: No objection. 6 THE COURT: Received. 7 Q. (BY MR. GUIDO) And T5087, can you 8 tell us what that document is, Mr. Hargett? 9 A. It's essentially the same thing as we 10 just discussed, but it's for Cap No. 27. It's a 11 contract and the accrual worksheet. 12 Q. Was Cap No. 27 one of those caps that 13 was repurchased to replace the caps that had been 14 reassigned to USAT and also sold in October of 15 1987? 16 A. I wouldn't use the word "repurchased." 17 It was purchased and it replaced would be a way 18 you would characterize it, but the caps that were 19 sold are gone. 20 MR. GUIDO: I move the admission of 21 T5087, Your Honor. 22 MR. NICKENS: No objection. 3602 1 THE COURT: Received. 2 Q. (BY MR. GUIDO) And can you tell us 3 what T5088 is, Mr. Hargett? 4 A. It's very similar. It's Cap No. 28, 5 which is one of the caps that was acquired in 6 December '87. It's the contract as well as the 7 accrual worksheet. 8 Q. Is this one of the caps that was bought 9 to replace one of the caps that was sold in 1987 10 that had been reassigned to USAT? 11 A. I think that's a fair characterization. 12 MR. GUIDO: I move the admission of 13 Exhibit T5088, Your Honor. 14 MR. NICKENS: No objection. 15 THE COURT: Received. 16 Q. (BY MR. GUIDO) Can you till us what 17 T5089 is, Mr. Hargett? 18 A. It's essentially the same thing. It's 19 the last of the caps that was acquired in December 20 of '87. It's Cap No. 29, and it's the contract as 21 well as the accrual worksheet. 22 Q. And that is for one of the caps that 3603 1 was bought to replace the caps that had been 2 reassigned to USAT and had been sold in October of 3 1987? 4 A. That's correct. 5 MR. GUIDO: I move the admission of 6 T5089, Your Honor. 7 MR. NICKENS: No objection. 8 THE COURT: Received. 9 Q. (BY MR. GUIDO) Now, I would like to 10 show you Exhibit B1797, Mr. Hargett. Can you tell 11 us what Exhibit B1797 is, Mr. Hargett? 12 A. Yes. It's a memo dated October 19th, 13 1987, that's entitled -- subject is "UMBS Cap 14 Agreements." It's to Sandy Lawrenson from Jenny 15 Whyte, and the first line says "In order to 16 complete the files of the UMBS cap agreements, I 17 require a copy of the summary of terms for the 18 caps indicated on the attached sheet." And then 19 the attached sheet is a listing of caps. 20 Q. Now, take a look at that list of caps. 21 It has the cap numbers in the left-hand column, 22 does it not? 3604 1 A. That's correct. 2 Q. Okay. And which caps are the caps that 3 were initially assigned to United MBS and then 4 reassigned to USAT? 5 A. As of March 31, that would be Caps 1 6 through 16 plus the labels 2A, 3A, 4A, and 13A. 7 Q. Now, which of those -- 8 MR. GUIDO: I move the admission of 9 Exhibit B1797, Your Honor. 10 MR. NICKENS: No objection. 11 THE COURT: Received. 12 Q. (BY MR. GUIDO) Now, look the first -- 13 excuse me. Look at Exhibit T5038 which appears to 14 be some sort of a work paper. Can you tell us 15 what that document is? 16 A. Yes. This is out of the Peat Marwick 17 work papers and on Page 2, it's essentially a 18 hedge gap calculation as of December 31st, 1987. 19 And it lists the swaps and the caps that are being 20 considered for that calculation. 21 Q. What is the significance of the caps 22 that were included for that calculation? 3605 1 A. Well, this is after the caps that were 2 acquired in December have come back -- you know, 3 effectively replaced the ones that were sold, 4 which are essentially Cap Nos. 24 through 29, and 5 we've reviewed those contracts. And the contracts 6 speak for themselves. The majority of them are 7 dated -- are in the name of USAT. There is one 8 that's in the name of United MBS; and regardless 9 of how the contracts are labeled, they are all 10 being included in this gap calculation. 11 Q. Okay. Now -- and this is the gap 12 calculation to calculate the maturity matching 13 credit in December of 1987? 14 A. It would be for doing the hedge gap as 15 of December 31st, 1987, that's correct, which is 16 used for maturity matching credit purposes. 17 Q. And for what month would the maturity 18 matching credit be effective by this calculation? 19 A. This calculation would roll forward six 20 months to June 30th, 1988. 21 Q. Now, these agreements, a number of 22 these agreements, these contracts, are with United 3606 1 Savings Association of Texas and signed by United 2 Savings Association of Texas; is that correct? 3 A. That's correct. 4 Q. And you are contending that despite 5 that fact, that those are -- have been improperly 6 assigned to USAT for purposes of the maturity 7 matching credit? 8 A. That's correct. 9 Q. And why is that? 10 A. On the balance of the evidence that we 11 just went through, including their own internal 12 memo describing what's going on, it clearly 13 indicates that these items are being transferred. 14 MR. NICKENS: Your Honor, it's not for 15 the witness to determine the balance of the 16 evidence. That is for the Court. 17 THE COURT: Well, he's referring to the 18 exhibits in that response. Let's confine it. 19 A. In my opinion, that's what this 20 information indicates. Essentially, the UMBS 21 assets and liabilities are not on the TFR and 22 those assets, as of March, April, are up to 3607 1 approximately $1.7 billion. 2 So, those assets are not being put in 3 the thrift financial report for the purposes of 4 calculating your hedge gap. The assets are left 5 off. The liabilities are left off. But the caps 6 associated with those assets which are an "off 7 balance sheet" transaction are being transferred 8 onto that balance sheet. And even though your 9 measurement date is March 31, 1987, caps that 10 don't even exist as of March 31, 1987, are being 11 transferred onto that balance sheet as of -- or on 12 that hedge gap calculation as of March 31, 1987. 13 Q. (BY MR. GUIDO) Why couldn't the UMBS 14 caps, the caps that were assigned to UMBS, be used 15 to calculate USAT's maturity matching credit while 16 they were held at the United MBS level? 17 A. The balance of the documents that I've 18 seen indicate that United MBS was an arbitrage 19 activity. 20 Q. Now, look at Exhibit No. T5127. That's 21 a letter from Michael Crow to Mr. Joe Selby, 22 executive vice president of regulatory affairs, 3608 1 Federal Home Loan Bank of Dallas. 2 MR. GUIDO: I move the admission of 3 T5127. 4 MR. NICKENS: Your Honor, I have this 5 objection. I note that this document -- two of 6 the three pages bear Bates numbers but the page in 7 the middle bears -- does not bear the Bates 8 number, which would indicate that either someone 9 failed to properly do it or a page has been 10 substituted. I don't know which. I haven't had a 11 chance to look at the document. But I would 12 object to it in this form until we can make some 13 verification of its authenticity. 14 THE COURT: All right. I'll defer 15 receipt of that until you can satisfy Mr. Nickens 16 as to who it belongs to. Maybe the witness can 17 tell us. 18 Q. (BY MR. GUIDO) Mr. Hargett, can you 19 tell us why the Bates stamps -- there's no Bates 20 stamp on the second page but there is on the 21 third? 22 A. I cannot. It looks like there's a 3609 1 missing number between the two sequences. This is 2 how I received it. 3 Q. Okay. Does this letter indicate to you 4 whether or not United MBS Corporation was -- does 5 this indicate to you the purposes for which United 6 MBS Corporation was created? 7 MR. NICKENS: Your Honor, since the 8 document has not been received, are these 9 questions going to be conditioned upon its receipt 10 or -- normally, you wouldn't question a person 11 about a document that has not been received. 12 MR. GUIDO: Your Honor, this document 13 has been available to counsel for many months. It 14 was in the packet of documents that was produced 15 prior to this witness' deposition. This question 16 has never come up before in -- prior to this point 17 in time. We've indicated in a number of instances 18 that we were going to use Mr. Hargett as an expert 19 witness and we were going to rely upon the 20 documentation to support his report. We believe 21 that we should be allowed to move the admission of 22 this document. 3610 1 THE COURT: Well, I'm looking at the 2 cover letter and it refers to schedule reconciling 3 United's balance sheet. 4 Is there any question that the next 5 page is not what it referred to in the letter? 6 MR. NICKENS: Your Honor, I simply 7 don't know. I simply don't know. It is certainly 8 suspicious that the Bates number is not there. 9 And as Mr. Guido knows, there are tens of 10 thousands of documents and it is simply not 11 possible to have reviewed every one of them. I 12 just simply noted as he handed it to me today that 13 it is not in sequence. It could be a totally 14 innocent matter or it might not be. 15 MR. GUIDO: Well, let's walk through 16 the document, Your Honor, with the witness. Okay? 17 First -- 18 MR. NICKENS: Your Honor -- 19 MR. GUIDO: I have yet to describe the 20 document, Mr. Nickens. 21 MR. NICKENS: Okay. 22 Q. (BY MR. GUIDO) The Bates stamp on the 3611 1 first page is 14284, is it not? 2 A. That's correct. 3 Q. Okay. And the Bates stamp on the last 4 page is 14286; is that correct? 5 A. That's correct. 6 Q. Okay. And the first page, the Judge 7 has pointed out, makes reference to a schedule 8 reconciling United's balance sheet, does it not? 9 A. Reconciling it between effectively 10 regulatory accounting principles and GAAP. 11 Q. Okay. And look at the page in between 12 that doesn't have a Bates stamp. At the bottom, 13 what does it say at the bottom of that page, 14 Mr. Hargett? 15 A. It says "see next page for footnotes." 16 Q. Okay. Now, look -- tell me where the 17 footnotes are on this page, the footnotes on the 18 schedule. 19 A. Like, for example, the first word is 20 "assets." It says Footnote 1. 21 Q. Okay. Does that conform to the 22 Footnote 1 on Bates stamp 14286? 3612 1 A. I would agree with that 2 characterization. 3 Q. Okay. Now, look at Footnote 2. It 4 says "RAP to GAAP adjustments." 5 Does that conform to Footnote 2 on 6 14286? Are those the same subject matter? Are 7 those the same subject matters, Mr. Hargett? 8 A. Yes. And, in fact, you can actually 9 reconcile the number that's in Footnote 2 back to 10 the data that's in column and labeled RAP to GAAP 11 adjustments that has the Footnote 2. In other 12 words, there's 116 million mentioned in the 13 footnote, and I can show you what the 116 is. 14 Q. Okay. Look at the Footnote 3 on the 15 schedule. It says "reclasses." Do you see that? 16 A. Yes, I do. 17 Q. Is the topic matter in Footnote 3 on 18 14286 the same topic? 19 A. Yes, it is. 20 MR. GUIDO: I move the admission of 21 Exhibit T5127, Your Honor. 22 MR. NICKENS: Your Honor, I maintain my 3613 1 objection. You might take his testimony subject 2 to further verification. I am told that these 3 numbers that are on here are not numbers that are 4 familiar to our system. We simply don't know the 5 source of this document. We ought to be able to 6 find it in some other form. It's addressed to 7 Mr. Selby. It's from Mr. Crow. I don't know 8 where this document has come from. 9 MR. EISENHART: Your Honor, if I may, 10 documents produced in discovery in this case 11 either have a bar code label on them or they have 12 some letter prefix before the Bates stamp numbers 13 to indicate the source. This document has 14 neither. 15 MR. GUIDO: Well, Your Honor, all of 16 Mr. Hargett's documents have been made available 17 to counsel for the other side. If they haven't 18 put an imaging number on it, that isn't the 19 responsibility of the OTS. This document is on 20 the letterhead of United Savings Association of 21 Texas. The first objection was that the three 22 pages didn't fit together. I think we have now 3614 1 demonstrated adequately that the three pages do go 2 together, and it appears to be, inadvertently, a 3 Bates stamp number was not put on to the second 4 document, Your Honor. We think that this document 5 is reasonably reliable. It's signed by Michael 6 Crow and I think we have a number of other 7 documents here that have his signature, Your 8 Honor. And it seems to me that under the standard 9 that this document is admissible. 10 MR. NICKENS: There's certainly no 11 question as to the first page, but the second 12 page -- 13 THE COURT: Well, it's my conclusion 14 that the second page fits the other two pages. 15 I'll receive the document. 16 MR. GUIDO: Thank you, Your Honor. 17 Q. (BY MR. GUIDO) Now, what is it 18 about -- that you concluded from T5127 that 19 supports your conclusion that the caps were 20 initially assigned to United MBS? 21 A. There's a sentence about three 22 sentences in that says "United MBS Corporation is 3615 1 involved exclusively in mortgage-backed securities 2 arbitrage activities." 3 Q. Now -- and look back at Exhibit T5125, 4 a different exhibit. It's one of the first 5 exhibits that we looked at today. The Bruce 6 Williams memo to Jenard Gross and Mike Crow. 7 Do you see that memorandum? 8 A. Yes, I do. 9 Q. Does that also make mention to what the 10 portfolio at United MBS was intended to be? 11 A. Yes, it does. 12 Q. And is that in the second bullet on the 13 first page? 14 A. Yes, it is. 15 Q. And is that sentence "The investment 16 bankers who provide reverse repo lines were given 17 comfort that United MBS was an MBS risk-controlled 18 arbitrage subsidiary"? 19 A. That's what the sentence says. 20 Q. Okay. Are the assets of service 21 corporations included in the TFR? 22 A. It depends. There's rules governing 3616 1 how that works. 2 Q. Okay. Were the assets and liabilities 3 of United MBS included in the TFR filed by USAT? 4 A. With respect to the calculation of 5 maturity matching credit, they were not. 6 Q. But beginning at some point in time, 7 you were testifying that they were -- that the 8 caps were included in the calculation of the 9 maturity matching credit in the TFR filed by USAT? 10 A. That's correct. 11 MR. NICKENS: Objection. Leading. 12 THE COURT: Denied. 13 Q. (BY MR. GUIDO) After the transfer or 14 the reassignment of the caps to USAT from United 15 MBS, was the United MBS portfolio a hedged 16 portfolio? 17 A. On the balance, no. 18 Q. Was the transfer of the United MBS caps 19 to USAT consistent with the representation that 20 Mr. Williams states in his June 17th, 1987, letter 21 to Jenard Gross and Mike Crow that the investment 22 bankers that provide reverse repo lines were given 3617 1 comfort that United MBS was an MBS risk-controlled 2 arbitrage subsidiary? 3 A. My analysis, as I've described, 4 including identifying the caps, analyzing whether 5 or not they are in or out of the money, 6 reconciling that data to the TFR and the 7 performance reports is consistent with his memo. 8 The only difference is he notes that there are 9 710 million of caps that are transferred. I have 10 there being 910 million that were analyzed for in 11 the money and 790 actually being transferred. 12 Q. Do you know why the assets and 13 liabilities of United MBS were not included within 14 the TFR for purposes of computing the capital 15 requirements? 16 A. There's regulations that govern that 17 describing when you can exempt things, including 18 whether or not what the level of interest rate 19 risk is. 20 Q. Okay. So that whether you include them 21 or exclude them depends upon the level of interest 22 rate risk in that subsidiary? 3618 1 MR. NICKENS: Your Honor, he said there 2 are regs. Is he going to testify as to what the 3 regs are as an expert on the regulations? 4 THE COURT: Restate your question. 5 MR. GUIDO: Yes, Your Honor. 6 Q. (BY MR. GUIDO) Is it your 7 understanding that whether something is 8 included -- a subsidiary's assets and liabilities 9 are included in the calculation of the capital 10 requirements of the parent savings association 11 dependent upon whether or not the extent to which 12 there was an interest rate risk embedded in that 13 subsidiary's portfolio? 14 A. That's one of the exceptions. There 15 are others. 16 MR. GUIDO: Your Honor, I have no 17 further questions. 18 THE COURT: Mr. Nickens, are you going 19 to cross-examine? 20 MR. NICKENS: I am, Your Honor. 21 THE COURT: I believe that Exhibit 5038 22 was not moved into evidence. 3619 1 MR. GUIDO: Your Honor, I move 5038 2 into evidence. 3 MR. NICKENS: Which one is that, Your 4 Honor? 5 MR. GUIDO: Second to the last. 6 MR. NICKENS: No objection, Your Honor. 7 THE COURT: Received. 8 MR. NICKENS: I will also say for the 9 record that with regard to our discussion on 5127, 10 we were able to locate a similar document as 11 Exhibit B1973 which do bear appropriate discovery 12 numbers and, although in a slightly different 13 order, appear to be the same pages. 14 THE COURT: Thank you. 15 16 CROSS-EXAMINATION 17 18 (11:22 a.m.) 19 Q. (BY MR. NICKENS) Mr. Hargett, now, it 20 is your theory that certain caps were transferred 21 from United MBS to USAT. Is that it? 22 A. That's the conclusion I reached from my 3620 1 analysis. 2 Q. Okay. Now, when did this transfer 3 occur? 4 A. For which purpose? 5 Q. When? On what date did the transfer 6 occur? 7 A. If you look at the performance reports 8 that we walked through, according to the 9 performance reports, it's happening sometime 10 between March 31, 1987, and April 30th, 1987. 11 Q. Sorry. 12 A. If you look at the thrift financial 13 report, it's happening sometime between when it 14 was initially filed, which would have been in 15 April of 1987, and that date on the thrift 16 financial report which is clean with no further 17 edits which is August 14th, 1987. 18 Q. Well, under your theory, what is the 19 date of the transfer? 20 A. I've described it as best I can. 21 Q. So, there's a range of dates on which 22 the transfer could have occurred under your 3621 1 theory? 2 A. That's correct in that you only 3 calculate your gap once a quarter. So, you 4 calculate your gap at March 31 and you calculate 5 it at June 30th. 6 Q. Now, what is the range now -- so, 7 there's no specific date that you can tell us that 8 any transfer occurred? 9 A. That's correct. 10 Q. So, what is the range on which you say 11 that this transfer occurred? 12 A. For the performance reports, it's 13 occurring between the time that the March 31 14 performance report is prepared and the April 30th 15 performance report is prepared, in that 16 approximately one-month window. 17 For the thrift financial report, the 18 report dated March 31st, 1987, would have been due 19 20 days after that date. Now, my experience is 20 that most people file it pretty close to the due 21 date, which would be April 20th, 1987. So, it's 22 sometime between April 20th, 1987, and the 3622 1 August 14th, 1987, date is when the transfer 2 occurred. 3 Q. Okay. So, it was after -- it was not 4 before April 20th, this alleged transfer occurred? 5 A. I think what I said it's whenever the 6 thrift financial report was first filed, and it's 7 due on April 20th. If they filed it early or -- 8 let's say, for example, they filed it on 9 April 10th. Then it could be April 10th. My 10 experience is that it's usually filed shortly 11 before the due date. 12 Q. Now, the transfer is from United MBS to 13 USAT. Right? 14 A. That's correct. 15 Q. And have you theorized any subsequent 16 transfer of these caps? 17 A. I'm not sure I understand your 18 question. 19 Q. Well, did they -- after the date that 20 you theorize they were transferred to USAT, were 21 they transferred back or to any other entity by 22 your theory? 3623 1 A. Based on the documents I've seen, once 2 they are transferred, they have stayed there for 3 maturity matching credit purposes to the extent of 4 the periods that I've analyzed. 5 Q. So -- now, are we talking about a 6 transfer of ownership or something else? 7 A. We're talking about a transfer for how 8 you calculate your maturity matching credit. 9 Q. Are you saying that USAT -- that United 10 MBS ever owned these caps? 11 A. The balance of the evidence that I've 12 seen suggests that they were always assigned to 13 UMBS. 14 Q. Sir, the question is: Who owned them 15 under your theory? 16 A. From a legal perspective? Is that what 17 you're asking? 18 Q. Well, I would like your understanding 19 as to ownership of the caps. 20 A. From a legal perspective looking at the 21 contract, which is addressed to an outside 22 third-party, the majority of them are addressed to 3624 1 or signed by USAT to the third-party brokers. 2 Q. So, is your conclusion that USAT always 3 owned the caps? 4 A. No. 5 Q. Well, then who owned them at what 6 points in time? 7 A. I indicated that the majority of them 8 were in that form that I just described where the 9 contract or the commitment is between USAT and the 10 brokers. They are all not that way. 11 Q. Well, let's see. You went through the 12 group -- it's 5106. T5106. These are all the 13 original contracts that you were able to find. 14 Right? 15 A. That's correct. 16 Q. And are there any in here between the 17 cap counter-party and anyone other than United 18 Savings of Texas? 19 A. Yes, there are. 20 Q. Where? 21 A. It's the last group. The cover letter 22 is on Chase letterhead dated November 20th, 1987. 3625 1 This would be Cap No. 13A. 2 Q. Was that among the group that you said 3 was transferred? 4 A. Yes, it is. 5 Q. Now, this says -- if I read this letter 6 correctly, it's talking about the sale of a cap by 7 Chase to United Savings. 8 A. That's what the cover letter says, 9 that's correct. 10 Q. And then the contract has marked 11 through United Savings. It says United MBS 12 Corporation? 13 A. That's correct. 14 Q. And the date is November of 1987? 15 A. The contract, where it's marked 16 through, is dated April 16th, 1987. 17 Q. Could you point out that date for me? 18 A. I'd be happy to. If you go back to the 19 Chase letterhead. 20 Q. Yes, sir. November of '87. 21 A. And you look at the very next page, the 22 first line says "This interest rate cap agreement 3626 1 is made as of April 16th, 1987, between" -- and 2 there's basically Chase and, as you indicated, 3 it's United Savings Association of Texas which has 4 been marked out and marked in to be United MBS 5 Corporation, and this document is ultimately 6 signed in the back on Page 8 by Chase and then 7 also it's been marked out there, as well, and 8 substituted in United MBS and it's signed by Sandy 9 Lawrenson. 10 Q. And do you know when that mark-through 11 occurred? 12 A. I do not know specifically. 13 Q. Other than this incident, is there any 14 other contract between any entity other than 15 United Savings with regard to the ones that you 16 say were, quote, "transferred"? 17 A. I haven't -- I do not have all the 18 contracts. Of the ones I've reviewed, this is the 19 only one that actually says "United MBS." The 20 rest of them are either addressed to or signed by 21 or asking for a confirmation that it's a USAT 22 transaction. 3627 1 Q. Yes, sir. And as far as -- now, these 2 caps provided for the -- they provided for the 3 payment of money, didn't they? 4 A. That's correct. 5 Q. And you have looked at where the money 6 went, haven't you? 7 A. Yes, I have. 8 Q. And where did you look to get that 9 information? 10 A. The records of USAT, including the 11 summary agreements and the USAT general ledger. 12 Q. You looked at the USAT general ledger 13 to determine where the money for -- with regard to 14 the payments made under these contracts were made. 15 Right? 16 A. Both paid and received, that's correct. 17 Q. And what did you find out? 18 A. I'm not sure I understand your 19 question. 20 Q. Well, to whom -- first of all, who paid 21 for the caps? 22 A. The money that was funded to acquire 3628 1 the caps was recorded in the general ledger of 2 USAT. 3 Q. So, do you conclude from that that USAT 4 paid for them? 5 A. On the substance of the dollar funding, 6 that's what it appears to be. 7 Q. And not United MBS? 8 A. That's correct. 9 Q. And when payments were due from the 10 counter-party under the cap contract, to whom were 11 those payments made? 12 A. I'm not certain who they were addressed 13 to. But when the payments came in, they were 14 recorded in the USAT general ledger. 15 Q. So, looking at the general ledger of 16 USAT, the payments for the caps were made by USAT 17 and the payments that were due under the caps were 18 made to USAT? 19 A. I'm sorry. That was a long sentence. 20 Can you repeat it? I'll be happy to answer it. 21 Q. Yeah. Let me ask you to look at your 22 Schedule A11019. 3629 1 A. Okay. 2 Q. Do you see some numbers that you've put 3 down there of summary of premiums paid by month 4 down on the left-hand side of the page? 5 A. Yes, I do. 6 Q. At the bottom. 7 A. Yes, I do. 8 Q. And to whom were those premiums paid? 9 A. The premiums were paid to the 10 counter-party brokers such as the names listed in 11 the first left-hand column. 12 Q. By whom? 13 A. The payments are reflected in the 14 general ledger of USAT. 15 Q. And so, your conclusion would be that 16 USAT made the payments? 17 A. USAT financed the payments. That's the 18 conclusion, yes. And they were recorded in the 19 USAT general ledger, that's right. 20 Q. Why do you use that word "finance"? I 21 mean, you go to the general ledger and you see an 22 accounting entry that says a payment was made. 3630 1 And when I asked you whether they paid for them, 2 you tell me they financed them. Why do you tell 3 me they financed them? 4 A. There's also an intercompany account 5 between USAT and United MBS. 6 Q. Yes, sir. And were they in that 7 account? 8 A. Well, they would not appear in that 9 account for the payment going out the door because 10 that's between parties. These premiums are going 11 to an outside party. So, they could never be in 12 that account, at least as far as the initial 13 recording of them. 14 Q. So, they were not in that account? 15 A. They would never be in that account. 16 Q. So, why did you mention it? 17 A. I mentioned it simply because after the 18 money goes out the door to the brokers from 19 apparently USAT funds, it may or may not have been 20 reflected as an intercompany transfer. 21 Q. Wouldn't that ordinarily appear on the 22 books of United MBS, such a transfer? 3631 1 A. There was money going back and forth 2 related to many things. 3 Q. Sir, you looked at these accounts very 4 carefully, didn't you? 5 A. I did not study all things in the 6 transfer. I'm not -- all I'm trying to say is the 7 payment was going into the general ledger of USAT 8 and that's as far as I've taken it. That's where 9 it was ultimately recorded. The premiums went 10 into the general ledger of USAT. 11 Q. And United MBS had a general ledger. 12 Right? 13 A. They absolutely did. 14 Q. And no such premiums appear in their 15 general ledger? 16 A. That's correct. 17 Q. And so, a statement to the effect that 18 they were in the general ledger of United MBS 19 would be incorrect? 20 A. I don't believe that I said that. 21 Q. Sir, I didn't suggest you did. 22 A. Okay. 3632 1 Q. It was said in the opening statements 2 in this case. 3 A. That the premium is recorded in the 4 general ledger of UMBS, that's not correct. 5 Q. Now, with regard to -- you have here 6 the summary of sales proceeds by month and year, 7 also. Right? 8 A. That's right. 9 Q. Now, that indicates when the caps were 10 sold in October and in other months indicated. 11 Right? 12 A. That's correct, a variety of months. 13 Q. And where did you get that information? 14 A. There's footnotes describing it. It's 15 from sale work papers, internal memorandum. They 16 are all -- all the references are listed on this 17 next page. 18 Q. Did you check the general ledger of 19 USAT? 20 A. Yes. They were also compared to the 21 general ledger of USAT, as well. This particular 22 document, the source is as listed. 3633 1 Q. And what you found was that these sales 2 proceeds were paid to USAT, correct? 3 A. Actually, I think I looked at my 4 footnotes wrong. I apologize. You're referring 5 me to Exhibit A11019. 6 Q. Yes, sir. 7 A. I'm also looking at Page 47 and 48 of 8 my report. And I -- all that I did, as best that 9 I can look at this, is that for the proceeds which 10 is Footnote D, I might have obtained them from 11 those work papers. So, I don't believe that I 12 traced those back to the general ledger; but the 13 presumption is they are in the general ledger. 14 Q. So, the contracts indicate, with the 15 one exception you have mentioned, that the caps 16 were contracted with USAT? 17 A. The legal agreements say USAT. 18 Q. And the payments for the contracts were 19 made by USAT? 20 A. The payments were recorded in the 21 general ledger of USAT. I haven't gone back and 22 vouched any checks is all I'm trying to say. 3634 1 Q. And the payments made pursuant to the 2 contracts were made to USAT? 3 A. Made from the brokers to USAT -- 4 Q. Or vice versa? 5 A. When the payments were received, they 6 were recorded in the general ledger of USAT. 7 That's what I verified. 8 Q. And when they were sold, the proceeds 9 were posted in the general ledger of USAT? 10 A. That's correct. 11 Q. And -- now, from that balance of the 12 evidence, what conclusion would you draw as to who 13 owned the caps? 14 A. Again, you're using the word "owned." 15 In legal form or how were they viewed internally 16 from a substance standpoint? 17 Q. Sir, I didn't intend it in any legal 18 sense. I mean, it is a commonly used word to talk 19 about who owns things. Right? 20 A. Sure. In the accounting records of 21 institutions, the substance over the form is a 22 very critical question and is often looked at in 3635 1 many, many issues. As an example, repurchase 2 agreements are very relevant to this trans -- 3 relevant to this proceeding. 4 Q. Sir, if you made a different -- if you 5 had made a different conclusion as to the 6 ownership of the caps, you can express it. I am 7 just asking you what conclusion had you reached as 8 to the ownership of the caps? 9 A. Whether you use the word "ownership" or 10 "assigned to," in substance, these caps were 11 United MBS's. 12 Q. Despite the fact that they were paid 13 for by USAT, they were contracted for by USAT, and 14 when they were sold the proceeds went to USAT, 15 that is your conclusion? 16 A. I don't believe all of them were 17 contracted for by USAT, but the majority of them 18 were. 19 Q. Was there any exception other than the 20 one that you have noted? 21 A. Yes. There's another one that relates 22 to the subsequent repurchase or the subsequent 3636 1 acquisition of caps that says United MBS. And we 2 talked about how even when it was acquired, it 3 continued to be reflected as a USAT cap for the 4 maturity matching credit. Again, at that time, 5 there were several acquired. One specifically for 6 United MBS. Some specifically labeled as USAT in 7 the contracts. But all of them were included, for 8 maturity matching credit purposes, regardless of 9 what the contract said. 10 Q. Well, for maturity matching credit 11 purposes, is it the ownership of the caps that 12 matters? 13 A. Again, when you move into maturity 14 matching credit, it's the substance of the 15 accounting records and the substance of the 16 transaction is very important, and I was trying to 17 give you an example about repurchase agreements. 18 The repurchase agreements say "buy and sell." And 19 if you looked at it from a legal perspective, you 20 would say "This security is being sold and then 21 this security is being purchased." And that's 22 what the legal contract says. But from an 3637 1 accounting perspective and in the accounting 2 records, they are not buys and sells. 3 Q. I'm asking about the regulations and 4 the maturity matching credit. Wouldn't -- isn't 5 that judged by ownership? 6 A. It's an accounting document to account 7 for transactions and report those transactions. 8 And in that -- in the thrift financial report, 9 there's information about substance over form on 10 many issues, not just, you know, something like 11 this; but the repurchase agreements, whether or 12 not an asset is classified as a loan as opposed to 13 direct ownership of real estate despite what the 14 legal forms say. All of that type of information 15 has to be considered in how you process your 16 accounting information. 17 Q. Sir, you relied on a lot of documents 18 that indicate that United MBS had -- that these 19 caps had been assigned to be United MBS. Right? 20 A. That's correct. 21 Q. And many of those documents occurred or 22 were generated after you say the transfer 3638 1 occurred. Right? 2 A. That's correct. After the transfer 3 from UMBS to USAT. 4 Q. Yes, sir. I want to get it exactly 5 straight. You say that it was transferred from 6 UMBS to United Savings. Right? 7 A. That's correct. 8 Q. And thereafter, the documentation 9 indicates that it was at United MBS? 10 A. On those schedules, it's indicating 11 that it's remaining at UMBS despite the fact that 12 it's been transferred prior to that date for 13 maturity matching credit purposes. In other 14 words, it's almost as if it's in both places. 15 Q. And you're using the fact that it was 16 at United MBS after it had been transferred to 17 USAT, by your lights, to support the conclusion 18 that it had been transferred? 19 A. I'm sorry. Can you repeat that? 20 Q. I'll try. Do you see the difficulty? 21 You're relying on documents that say that 22 ownership or whatever is United MBS after you say 3639 1 that it had been transferred to USAT. 2 A. That's exactly my point. That's very 3 significant to me. They continued to view these 4 caps as United MBS. But for one special report, 5 they have transferred them for USAT's records. 6 And it's very significant that in USAT's records 7 for that calculation, you do not include the 8 assets and liabilities of United MBS. 9 Q. Let me ask you -- 10 A. It's going both ways. You're basically 11 counting it twice. You're counting it as a UMBS 12 report on all these items after the transfer 13 consistently throughout and yet, on the other 14 report, you're showing them to belong to USAT. 15 They have them basically in two places. 16 Q. They are not counting them twice. They 17 are counting them for different purposes, aren't 18 they? 19 A. They are counting them for different 20 purposes. 21 Q. Yes, sir. 22 A. And the transfer is suggesting that it 3640 1 should not be in the USAT records. 2 Q. Despite -- well, I've covered that. 3 But if you had a risk-controlled arbitrage that 4 involved the ownership of MBS financed by reverse 5 repos and using caps as hedging vehicles, you 6 would like -- in order to understand the 7 performance of the risk-controlled arbitrage, you 8 would assign those in such a way that you could 9 make comparisons, wouldn't you? 10 MR. GUIDO: I object. The question is 11 overly vague. 12 THE COURT: Do you understand the 13 question? 14 THE WITNESS: As best I understand it, 15 I'd say that's a fair statement. 16 Q. (BY MR. NICKENS) For management 17 control purposes, you would want to be able to 18 compare -- in order to evaluate the performance of 19 the arbitrage, you would be wanting to look at the 20 income and costs of all elements of the arbitrage, 21 wouldn't you? 22 A. That sounds like a fair statement. 3641 1 Q. So, it wouldn't be at all surprising to 2 find that for those management control purposes, 3 you would assign the caps to United MBS? 4 A. That is sounds like a fair statement. 5 And UMBS has a separate general ledger. 6 Q. Even though the caps are owned by USAT? 7 A. Again, we're getting into the question 8 of a legal issue versus how you reflect something 9 from an accounting perspective. And from the 10 accounting perspective, you clearly look at 11 substance over form. 12 Q. Well, okay. Let's talk about 13 accounting. For accounting purposes, the caps 14 were accounted for in the general ledger of USAT. 15 Right? 16 A. That's how management recorded the 17 payments relating to these caps. 18 Q. Mr. Hargett, let me ask you just a few 19 questions on a different subject. And I would 20 like to refer, if you will, to Page 4 of your 21 charts at A11022. It's these charts. 22 Do you have Page 4 in front of you? 3642 1 A. Yes, I do. 2 Q. Now, is the column you've got there 3 "MBS risk-controlled arbitrage USAT only" intended 4 to represent Joe's portfolio as augmented by 5 United Mortgage Finance? 6 A. Are you referring to Column A or -- 7 Q. Column A. 8 A. Well, I wouldn't say "as augmented by 9 United Mortgage Finance," but that's the general 10 characterization of that portfolio. I believe 11 that's generally how it's been characterized. 12 It's the MBSs recorded at the USAT level with a 13 couple of exceptions. 14 Q. And is this the risk-controlled 15 arbitrage only? 16 A. That's how the column's been labeled, 17 that's correct. 18 Q. And is it intended to exclude all other 19 sources of MBS ownership by USAT? 20 A. I didn't prepare that label or that 21 report. And so, my understanding of looking at it 22 is that that's generally what it's doing. 3643 1 Q. I was under the impression that you had 2 adopted these numbers. 3 A. I think I indicated that they are 4 materially correct, consistent with the general 5 ledger, which is what I used. 6 Q. Now, did these numbers come from the 7 general ledgers or did they come from Coopers and 8 Lybrand report? 9 A. Okay. They came from the Coopers and 10 Lybrand report, and the Coopers and Lybrand report 11 refers to a source basically being the general 12 ledgers. They also have footnotes in there about 13 certain things that they included or excluded, and 14 I basically used the same general ledger for 15 preparing my numbers. 16 So, there are some variances over time 17 here and there from just classifying things 18 different and an error here or there. 19 Q. Is it intended that this compilation 20 include the mortgage-backed securities pledged to 21 the cash flow bond? 22 A. This data here does not have the cash 3644 1 flow bond as reflected in the Coopers data up 2 until the time that that bond was released as 3 collateral, which is in approximately June of '87. 4 And thereafter, it does include the 5 mortgage-backed security that had previously been 6 pledged as collateral to the mortgage-backed bond. 7 Q. Now, that -- those -- that collateral 8 was never part of any risk-controlled arbitrage, 9 was it? 10 A. Well, once the mortgage-backed bond 11 matured, that mortgage-backed security went back 12 into the portfolio. And from that point forward, 13 it's -- using Coopers' labels, it's underneath the 14 column "MBS risk-controlled arbitrage." 15 Q. Was it intended that this -- these 16 figures include the liquidity account? 17 A. What do you mean by "liquidity"? 18 Q. There was an MBS liquidity account. 19 You're familiar with that. Right? 20 A. Not off the top of my head as far as 21 that particular label, no. 22 Q. So, you wouldn't know one way or 3645 1 another as to that particular point whether it's 2 included here? 3 A. That sounds like a fair statement. 4 Q. How about the AMPs? Are they included? 5 A. Are you talking about the preferred 6 stock? 7 Q. It was part of the financing, yes, sir. 8 A. Those are recorded in the subsidiary 9 ledger. So, those would not be in here. 10 Q. And similarly as to the DARTs? 11 A. Those, again, were at a subsidiary 12 ledger and that's not what this general ledger is 13 based on what I understand you to be describing. 14 Q. Now, with regard to this column related 15 "interest rate swaps," how were they related? 16 A. There are various internal documents 17 showing the mortgage-backed security portfolios' 18 performance and the swaps' performance, including 19 the investment committee minutes over time and 20 various internal memos including some of which 21 were in my binders. That's how things were 22 described. 3646 1 Q. Is it your intention to represent to 2 the Court that this was the risk-controlled 3 arbitrage at these various times at the USAT 4 level? 5 A. For an overview, I plotted this data as 6 reported in the Coopers and Lybrand report after 7 verifying that the balances were materially 8 correct. 9 Q. Now, you refer to the Coopers and 10 Lybrand report. Which particular report is that? 11 A. It's Exhibit No. 3 to the Fabozzi 12 deposition is the copy that I received. 13 Q. Let me show you -- this is not that 14 exhibit, but it is exhibit -- oh, excuse me. This 15 is the wrong one. 16 I'll show you a document that I have 17 marked as Exhibit B3804, and can you tell me 18 whether that's the one you used? It may not be 19 complete. 20 A. For the numbers that we were just 21 talking about on that one page? 22 Q. Yes, sir. 3647 1 A. Well, this is labeled "UMBS" at the 2 top. So, it can't be this page. 3 Q. Well, let me ask you, then, to turn 4 over to Page 6 of your Exhibit 11022. And can you 5 tell there whether this was a document that you 6 relied upon? 7 MR. GUIDO: Your Honor, I object to the 8 question. I think the witness has said that he 9 did review the ledgers of each of the institutions 10 to ascertain what these figures were on 4 and 6 11 and that he reconciled that with the Coopers and 12 Lybrand report and that for purposes of his 13 testimony in summarizing the portfolios over time, 14 he took their numbers because he concluded that 15 they were not materially different. He did not 16 state that he exclusively relied upon the Coopers 17 and Lybrand report. And so, to that extent, I 18 think that the question is incorrect. 19 MR. NICKENS: Your Honor, I'm asking 20 the witness to identify for me the Coopers and 21 Lybrand reports that he referred to. I supplied 22 him with what I thought might be that version. If 3648 1 he has the report, I'd be happy to use that. But 2 I would like to identify for the record which 3 Coopers and Lybrand reports he says he relied upon 4 for these purposes. 5 MR. GUIDO: Well, Your Honor, I think 6 for purposes of doing so, I think counsel should 7 produce the exhibit from Mr. Fabozzi's deposition 8 which this witness testified he relied upon, not 9 some other document with some other number on it. 10 MR. NICKENS: I'll be happy to do so. 11 I didn't know until a few moments ago that that 12 was the document that he had relied upon. We can 13 certainly get that and make the requisite number 14 of copies if that will satisfy Mr. Guido and to 15 allow us to proceed. 16 THE COURT: All right. Let's do that 17 and let's recess until 1:30. 18 19 (Luncheon recess at 11:54 a.m.) 20 21 THE COURT: Be seated, please. We'll 22 be back on the record. The hearing will come to 3649 1 order. 2 Mr. Nickens, you may continue with your 3 cross-examination. 4 MR. NICKENS: Thank you, Your Honor. 5 (1:33 p.m.) 6 Q. (BY MR. NICKENS) Mr. Hargett, when we 7 took our lunch break, I was asking you some 8 questions about the series of charts that you 9 prepared that have been labeled as Exhibit A11022, 10 and I was asking you about the source of some of 11 those numbers and we were talking about the 12 Coopers and Lybrand report that you used. 13 Do you recall that? 14 A. Yes, I do. 15 Q. And you indicated that your source 16 was -- had been identified in the record as 17 Fabozzi Exhibit 3? 18 A. That's correct. 19 Q. And I have put in front of you -- 20 MR. GUIDO: Your Honor, again I object 21 to the question. The witness did not testify that 22 Fabozzi 3 was the source of his exhibit. He 3650 1 testified that he had reviewed the ledger and he 2 had come up with figures which were comparable to 3 the figures that are in the Fabozzi report. In 4 order to avoid any dispute about those figures, he 5 said he adopted those figures for purposes of the 6 report. 7 Q. (BY MR. NICKENS) Are your figures 8 identical to the ones in the Fabozzi 3? 9 A. No, they are not. 10 Q. In what ways do they differ? 11 A. As an example, they are both coming 12 from the underlying general ledger. My report is, 13 and this document is stated to be coming from 14 that. And as one example, if you go to Page -- I 15 believe it's 11, you'll see the MBS residual line. 16 And if you look at the very last number for 17 December 31st, 1987, it's $84 million. And then 18 if you jump to the next page which says Page 14, 19 at January -- 20 THE COURT: Excuse me. Which document 21 are you referring to? 22 MR. NICKENS: Your Honor, let me offer 3651 1 the document. We have numbered Fabozzi Exhibit 3 2 as Exhibit A11027, and we would offer it. 3 MR. GUIDO: No objection, Your Honor. 4 THE COURT: Received. 5 Q. (BY MR. NICKENS) Okay, Mr. Hargett. 6 You were at Page 11 and indicating that in the 7 last column, 12-31-87, in the row dealing with 8 what? 9 A. MBS residuals. You'll see a number 10 there that's 84,644,729. 11 Q. And that's the next-to-the-last one in 12 the first group of account numbers or accounts. 13 Right? 14 A. That's correct. And if you look 15 backwards from that date, you'll see it basically 16 has been in the 80- to 90-million-dollar range for 17 several months. And when you jump forward to the 18 next page, which is Page 14 -- this is one month 19 later, January 31st, 1988 -- for that line, it 20 shows 277,000. And then when you jump forward to 21 February, it shows 277,000. But when you jump 22 forward to March, it's back to 82 million and then 3652 1 it kind of stays at 82 million thereafter. 2 It's my view that the wrong general 3 ledger amounts been listed there for those two 4 months. It shows up as a slight blip on the chart 5 at that time period. I don't think it's material. 6 I just -- that's an example of where I just felt 7 like I wanted to present the data and say it's 8 materially correct. 9 Q. Were there any other errors or 10 differences that you found? 11 A. With respect to the interest rate caps, 12 as we've discussed, they are not in the general 13 ledger. There is a different source for those. 14 And it's my opinion we basically used, in 15 substance, the same source. It's the internal 16 documents of USAT and UMBS. I mentioned in some 17 cases I've looked at the contracts. I'm not 18 certain as to whether they did or not. 19 With that being said, looking at Page 20 58, they show total interest rate caps about 21 halfway down the page as of March 31st, 1987, at 22 360 million. There is also another page in the 3653 1 back that combines the UMBS and the USAT caps, and 2 it basically has essentially the same data but it 3 also has the 25 million from way back at United 4 Mortgage Finance. 5 Based on my review, that's the amount 6 of caps that were settled prior to March 31. 7 There were some other caps that were contracted 8 for in March and settled in April, and I have 9 included those as being March contracts. 10 Q. Any other exceptions that you'd like to 11 inform us of? 12 A. My main purpose was to make sure it 13 looked generally consistent, and those are the two 14 that I can recall. Again, I'm comfortable that 15 it's materially depicting what it's attempting to 16 do. 17 Q. Now, going back to your chart -- and 18 let's go back to Page 4 of Exhibit 1022 -- I'd 19 asked you some questions about the swaps. 20 What was your understanding of how the 21 swaps were related to the MBS? 22 A. There was a buildup in the 3654 1 mortgage-backed securities portfolio during '85 2 and essentially during that same time period, 3 there was a buildup of interest rate caps used to 4 hedge -- 5 Q. Caps or swaps? 6 A. I'm sorry. I misspoke. Swaps used to 7 hedge the mortgage-backed security portfolio of 8 USAT. 9 Q. And what would be the purpose of 10 excluding the other MBS owned by USAT from this 11 chart? 12 A. The label says "MBS risk-controlled 13 arbitrage USAT only." That's essentially what it 14 says. 15 Q. Well, in doing your damage analysis, 16 you did not make such an effort, did you? 17 A. In which part of my damage analysis? 18 Q. Well, in terms of coming up with your 19 loss figures, you didn't try to limit it to USAT 20 risk-controlled arbitrage only? 21 A. For certain portions of it, that's 22 correct. 3655 1 Q. And you looked at the MBS owned by USAT 2 from whatever source or used for whatever purpose? 3 A. As an example in calculating the amount 4 of mortgage-backed securities that were earning a 5 spread, that's correct. 6 Q. Now, if these numbers are correct, on 7 March 31, 1986, how much mortgage-backed 8 securities did -- was in the risk-controlled 9 arbitrage? 10 MR. GUIDO: What was that date again? 11 MR. NICKENS: March 31, 1986. 12 Q. (BY MR. NICKENS) This is month end. 13 Right? 14 A. That's correct. About $688 million. 15 Q. And what were the swaps? 16 A. $849 million. 17 Q. And so, the arbitrage was overswapped? 18 A. In the context of that simple analysis 19 without bringing in other factors, that's correct, 20 if you just simply looked at those two numbers. 21 Q. And then in December of 1986, there was 22 approximately a billion in MBS and about 3656 1 850 million of swaps? 2 A. That's correct. 3 Q. Now, did you ever see any evidence 4 that -- well, let me -- and then in mid-1986, the 5 portfolio was at about 909 million in MBS with 849 6 of swaps? 7 MR. GUIDO: What year was that again? 8 MR. NICKENS: This was in June of '86. 9 A. Those numbers are correct as depicted 10 here. 11 Q. (BY MR. NICKENS) And so, the period 12 of the roll-down was what? From December '85 to 13 June of '86? 14 A. What dates did you say again? 15 Q. December of '85 to June of '86. 16 A. I'm aware of the roll-down issue and 17 it's discussed in various documents. I don't know 18 that I've really analyzed exactly its time frame. 19 Q. Well, if that's approximately correct, 20 your figures would indicate that the MBS portfolio 21 grew by some $300 million in that period? 22 A. Between -- 3657 1 Q. December of '85 and June of '86. 2 A. Between December of '85 and June of 3 '86, approximately $300 million, that's correct, 4 the MBS increased by. 5 Q. Now, if we could turn to Page 6, this 6 is a similar calculation for United MBS, correct? 7 MR. GUIDO: What's the calculation 8 you're referring to, Counselor? 9 MR. NICKENS: Similar to the one on 10 Page 4. 11 MR. GUIDO: Your Honor, I object to the 12 characterization of it as a calculation. I think 13 it's a compilation of figures that were drawn from 14 different sources. So, I object to the 15 characterization of this being the witness' 16 calculation. 17 THE COURT: Well, I don't see that for 18 these purposes there is a difference. Denied. 19 A. Yes. This is a similar calculation. 20 With respect to UMBS, it's the mortgage-backed 21 securities portfolio and the MBS caps. 22 Q. (BY MR. NICKENS) And the purpose is 3658 1 to represent the relative hedge position of the 2 portfolio. Right? 3 A. For these two instruments as strictly 4 an overview picture, UMBS did have some other 5 hedges at various points in time. As an example, 6 I can recall some Eurodollar futures that may have 7 produced 2 or $3 million of profits or losses in 8 1987, but that was fairly much a smaller piece. 9 Q. Well, in fact, you went over with 10 Mr. Guido some comparisons between the amount of 11 the mortgage-backed securities and the amount of 12 the caps. Right? 13 A. Yes. In the early '87 time frame, 14 that's right, we did. We covered several dates. 15 Q. And the suggestion was that the 16 portfolio was not hedged or severely underhedged. 17 Right? 18 A. I think I indicated that there was 19 about a billion dollars in difference between the 20 MBS and the caps, particularly in the February, 21 March, April of '87 time period. 22 Q. But the notion was to suggest that they 3659 1 were naked or unhedged at some period of time? 2 A. I don't think I said that. I can't 3 recall saying that. 4 Q. But you knew all along that there were 5 other hedges that you hadn't put on your chart, 6 didn't you? 7 A. I was aware of the fact that there was 8 some Eurodollar futures, et cetera, that when you 9 added up their total performance for 1987, they 10 equaled about $3 million despite the fact that 11 interest rates were increasing pretty 12 substantially during that time period. 13 Q. Could you look over to your source 14 document? And I marked it for you under -- for 15 United MBS. It's the second little tag. I can't 16 read the page. Have you found the page where it's 17 the source document? 18 A. Does it say Page 60 at the bottom of 19 it? 20 Q. I honestly can't read it. At the top, 21 it says "United MBS Corporation Controlled 22 Arbitrage UMBS Only." 3660 1 A. Then it says "notes" and it says "three 2 notes"? 3 Q. It's this page right here. Do you have 4 it? 5 A. Yes. 6 MR. GUIDO: How far are you into the 7 document? 8 9 (Discussion off the record.) 10 11 Q. (BY MR. NICKENS) Now, this is the 12 source page for Page 6 of your document, isn't it? 13 A. Yes, it is. 14 Q. And do you see down there at the 15 bottom, the other hedges? 16 A. It says "identify liability hedges" and 17 it has Eurodollar futures and some other items and 18 some numbers there, that's correct. 19 Q. And it's not $3 million, is it? 20 A. No. $3 million is the amount of gain 21 or loss that was recognized from that activity 22 during 1987. 3661 1 Q. Did you just overlook this portion of 2 the chart? 3 A. No, I did not. 4 Q. Well, did you think it was not 5 important to bring to the Court's attention that 6 in these months where you had put zero, there was 7 actually $180 million of hedging instruments? 8 A. I'm not certain that there was 9 $180 million of hedging instruments. If you look 10 at the footnote to that particular section -- 11 Q. Yes, sir? 12 A. It says "Footnote 3." 13 Q. Okay. 14 A. In Footnote 3 two pages later, it says 15 "Information obtained from Exhibit A to UMBS 16 statement of purpose accounting guidelines." 17 Q. Yes, sir. 18 A. And that document is attached to this 19 report. 20 Q. Yes, sir. 21 A. And that document has on it a date that 22 I believe to be December 30th, 1986, when this 3662 1 portfolio was initially being set up. I can't 2 ascertain how this activity -- I can't ascertain 3 whether or not that activity was actually 4 consummated or not or was it proposed. But again, 5 the purpose of my exhibit was mainly to show the 6 primary assets and the primary hedge. 7 Q. Weren't you indicating the hedge 8 position of United MBS during this period? 9 A. I don't believe that's what I was 10 attempting to do. I was trying to show the caps 11 that are on there. It's labeled as caps. It 12 doesn't say it's all hedges. It's labeled as 13 caps. 14 Q. Well, what did Coopers and Lybrand 15 identify it as? 16 A. They labeled them as "identified 17 liability hedges" with a footnote, as I've 18 mentioned, explaining what their source is. 19 Q. And it was in the range in those early 20 months of 170 something million going to total 21 of -- in June of about 450 million? 22 A. That's correct. 3663 1 Q. And you didn't think that was important 2 information to bring to the Court when you 3 prepared your chart? 4 A. I could not verify it. And as I've 5 indicated, from the general ledger, the amount of 6 gain or loss associated with that line is about 7 $3 million for the year. And in April 1987, there 8 was an enormous increase in interest rates and 9 there was also one in September. I don't believe 10 that that data is consistent with a 11 3-million-dollar gain for the year. So, I could 12 not verify that information as actually having 13 been incurred. I guess Coopers could explain if 14 they have been able to tie it back to verify that 15 it occurred or not because I can't do it. 16 Q. Well -- 17 A. And again, in my chart, I'm just trying 18 to depict the overall major hedge and the overall 19 major MBS activity. 20 Q. And you left off about 200 million of 21 what Coopers indicated was there? 22 A. I believe my schedule is labeled 3664 1 appropriately. There is no doubt that I did not 2 include the Eurodollar futures that are on Page 3 58, I believe it is, of this report. There is no 4 doubt that I did not include that. That was a 5 conscious decision. 6 Q. You knew what you were doing? 7 A. Absolutely. I knew that I was leaving 8 out those particular instruments. Again, because 9 that's not the purpose of what I was designing 10 this chart to do. 11 Q. Did you not think that that might leave 12 the wrong suggestion? 13 A. My objective was to get an overall flow 14 of what was happening in the two portfolios and, 15 as you know, a big section of my report deals with 16 the MBS caps. And so, that's how I chose to 17 present it. 18 Q. Let's turn to your calculation which is 19 at Page 57 and 58 of your report. And I'm going 20 to want to compare your chart that we were just 21 looking at, except why don't we turn over to Page 22 9? Those are the combined positions. Right? 3665 1 United MBS and USAT? 2 A. On Page 57? 3 Q. Well, on Page 9 of Exhibit 11022, I 4 want to be able to look at both. It's your 5 charts, Mr. Hargett. 6 A. And within those charts, which page? 7 Q. Page 9. Page 9 is where you have 8 combined the two portfolios, the USAT portfolio 9 and the United MBS portfolio. Right? 10 A. That's correct. 11 Q. And that's what you have represented as 12 your turn over as well, is it not? 13 A. No, that's not true. 14 Q. Let's look at the numbers. That's 15 March -- looking at Page 57, March 31, 1986, 16 correct? 17 MR. GUIDO: March of which year? 18 MR. NICKENS: 1986. 19 Q. (BY MR. NICKENS) That's what's on the 20 top half of Page 57. Right? 21 A. Of my report? 22 Q. Yes, sir. 3666 1 A. There's a balance there. That balance 2 is not comparable to these items that you've 3 referred me to on Page 9. 4 Q. It may be comparable. It's certainly 5 not the same? 6 A. No, it's not comparable is what I'm 7 saying. You have apples and oranges. 8 Q. Let's take -- the dates are the same, 9 aren't they? 10 A. The dates are the same, yes. 11 Q. And your number on Page 9 would 12 indicate that there was 687 million of MBS in the 13 risk-controlled arbitrage, right, in March of '86? 14 A. That data would indicate that combining 15 USAT and UMBS, there is a balance of approximately 16 that amount, that's correct. 17 Q. And United MBS hadn't even been created 18 as of that date? 19 A. That's correct. 20 Q. And the number you have down for the 21 beginning balance of MBS is 1 billion 202, 22 correct? 3667 1 A. That's correct. That turnover schedule 2 isn't labeled as being a risk-controlled arbitrage 3 turnover schedule. It's indicated to be the UFG 4 consolidated 10K which includes everything. 5 Q. Well, that's the point I'm trying to 6 illustrate for the Court. What you're measuring 7 in your turnover analysis is something pretty 8 substantially different than the risk-controlled 9 arbitrage. Right? 10 A. It has some of the CMO issuances in it, 11 as an example. 12 Q. Did they have any CMOs in March of '86? 13 A. I'm saying across -- across the entire 14 schedule that's on Page 57. 15 Q. Can we agree that they are very 16 different? 17 A. With respect to the balances, yes. 18 With respect to the beginning balance and the 19 ending balance, absolutely. 20 Q. So, when you're measuring turnover on 21 Page 57 and 58, you're measuring something quite 22 different than what you've indicated was the 3668 1 risk-controlled arbitrage? 2 A. Are the balance sheet balances as of 3 specific dates different? Absolutely. 4 Q. And very substantially different. 5 Right? 6 A. Yes. There's differences, absolutely, 7 as you move through time. 8 Q. If we go to June 30th, 1986, it's about 9 a billion dollars. You account for about twice as 10 much in your report. Right? 11 A. That's correct. 12 Q. So, can we agree that in your turnover 13 analysis, you're measuring something different 14 than what you're reporting to be the 15 risk-controlled arbitrage program? 16 A. It's different, but the purpose of 17 what's on Page 57 is to calculate a turnover 18 percentage. 19 Q. For something different than 20 risk-controlled arbitrage? 21 A. Yes. But if you look at the numbers, 22 the portfolios that are also included in there 3669 1 such as, over time, the CMO portfolio, those are 2 generally self-liquidating portfolios. So, you're 3 not going to have a lot of buys or sells 4 associated with them. So, if anything, by doing 5 it this approach on Page 57, you're inflating that 6 average balance so when you calculate your 7 turnover, you're actually understating your 8 turnover number. 9 Q. So, you had an opportunity to inflate 10 the turnover analysis and you didn't take it? 11 A. This -- this was the best available 12 data that I could put my hands on to have any idea 13 of what the turnover was looking like during this 14 period. And I've disclosed it as being the 10Q 15 and 10K of the UFG group. And the very next page 16 actually is able to discern that at the parent 17 level, UFG, that it's not materially impacting 18 these calculations. 19 Q. Sir, you expect us to accept that you 20 had an opportunity to make us look worse and you 21 let us off the hook? 22 A. That wasn't my objective at all. I was 3670 1 asked to compile these numbers, whichever way they 2 turned out, from the best available source I had 3 and this was my best available source. I didn't 4 have any view one way or the other as to what this 5 would do. 6 Q. Well, the truth of the matter is we do 7 not know, based upon your analysis, what the 8 turnover was in the risk-controlled arbitrage 9 program, do we? 10 A. If you try to isolate exclusively the 11 risk-controlled arbitrage, that is correct. But 12 if you look at these numbers -- 13 Q. It could be greater -- 14 MR. GUIDO: Objection, Your Honor. Let 15 the witness answer the question, please. 16 THE COURT: Proceed. 17 A. But if you look at these numbers and 18 look at what's included in these balances on Page 19 57 and you were able to find documents to take 20 those out, that's going to have the effect of 21 making these turnover numbers go up, not down. 22 Q. (BY MR. NICKENS) If you're right 3671 1 about what's in there. Right? 2 A. You can use the consolidating financial 3 statements of USAT -- and those are in my binders 4 and it breaks it down by entity -- and you can see 5 what is in these various entities that I've 6 described. You've mentioned the DARTs, the AMPs, 7 the CMOs. Those are all generally 8 self-liquidating portfolios. 9 Q. Sir, if that were the case, why didn't 10 you show us what the turnover was in the 11 risk-controlled arbitrage? If you knew what was 12 in there and in what amounts, why is it you didn't 13 give us the information as to what the turnover 14 was? 15 A. When I say what's in there, it gives 16 you the balance for those portfolios as of a 17 specific date and it's only available at year end. 18 That's the only time the auditors compile that 19 particular schedule. But it does not show you the 20 purchases and sales associated with those specific 21 portfolios. It only does that at a consolidated 22 level. 3672 1 Q. Now, with regard to these numbers, I 2 believe what you said you did is you took the -- 3 you took the beginning balance and the ending 4 balance, added the two, divided by -- added the 5 two together, divided by two, and then multiplied 6 by four? 7 A. That's not correct. 8 Q. I left out a step. I apologize. You 9 added the two and then you put the amount of the 10 sales as a numerator of a fraction in which the 11 denominator was the number that I've just 12 indicated. Then you multiplied by four? 13 A. That's correct, to get an annualized 14 turnover for a specific quarter. 15 Q. So that if we look at the first 16 quarter, March 31, 1986, the actual turnover in 17 that period is a little more than 50 percent? 18 A. If you do it without annualizing? Is 19 that what you're suggesting? 20 Q. Yes, sir. 21 A. Yeah. If you took the 214 percent and 22 divided it back by 4, you'd get a little over 3673 1 50 percent. 2 Q. And you'd do that in each one of these 3 quarters and then you would add it up and it would 4 be 245. Right? Or 2.45? 5 A. You couldn't do it that way because 6 each individual quarter has different balances and 7 you'd have to give effect to the weighting of that 8 quarter. In other words, as the portfolio grows, 9 you've got different weights assigned to each one. 10 And so, the total column, which is 245, uses all 11 the data available for the year. 12 Q. Well, if we divided these numbers by 4, 13 you don't think we would get pretty close to 245? 14 A. If you do, it's because the portfolios 15 are consistent. Are you saying take each of the 16 four numbers, divide each of them by four and then 17 add those individual numbers? 18 Q. Yes, sir. 19 A. I can do that for you. I'm not certain 20 if it would actually come close or not. It would 21 depend on how much activity was going on or, 22 basically, were the quarters consistent. 3674 1 Q. Well, in the fourth quarter, the actual 2 amount of turnover in that quarter was a little 3 less than .9. Right? 4 A. That's correct. 5 Q. And so, instead of suggesting that it 6 was 3 and a half, it's a little less than 1 in 7 that quarter? 8 A. For that one quarter without giving 9 effect to presenting the data on an annualized 10 basis. So, in one quarter, 90 percent of your 11 portfolio turned over. If you wanted to 12 characterize it that way, that's fine. I have 13 labeled those percentages "annualized securities 14 turnover rate." 15 Q. Now, how much of that turnover that you 16 have here is attributable to the roll-down? 17 A. I'm not certain specifically. My guess 18 would be that it's probably a big chunk of it. 19 Q. And you certainly don't have any views 20 as to whether the roll-down was an appropriate 21 response to the circumstances that they found 22 themselves in at the time? 3675 1 A. No. I have not analyzed that issue. 2 Q. And if it was an appropriate response, 3 then if you were trying to illustrate turnover for 4 some other purpose, you'd want to try to know what 5 it was, wouldn't you? 6 A. I'm sorry. I didn't quite follow that. 7 Q. Well, if you were -- if you had 8 determined that the roll-down was an appropriate 9 response and you -- to the conditions they found 10 themselves in at the time -- are you with me? 11 A. Yes. 12 Q. And you were trying to illustrate the 13 turnover for some improper purpose, you'd want to 14 take out the roll-down, wouldn't you? 15 A. If you accepted that the roll-down-down 16 was proper and you were trying to determine the 17 turnover that related to some other purpose, 18 whatever that might be, then, yes, the roll-down 19 number should come out if that's -- if your 20 purpose is different. 21 Q. You were just doing the arithmetic 22 calculations, weren't you, Mr. Hargett? 3676 1 A. I think that's what I've indicated. 2 Q. You were doing what you've been asked 3 to do by the OTS. Right? Actually, by the FDIC? 4 A. I was asked to calculate the turnover 5 based on the information available, and I don't 6 think I've represented in my depositions or in 7 this schedule that it's anything different than 8 that. 9 Q. But it was Mr. Manick representing the 10 FDIC that asked you to prepare these particular 11 calculations? 12 A. The original calculations were prepared 13 for the FDIC, that's correct. 14 Q. Now, if you have a period of time where 15 interest rates are volatile, you would expect to 16 see turnover in a risk-controlled arbitrage, would 17 you not? 18 MR. GUIDO: Objection, Your Honor. 19 This witness has not been qualified as an expert 20 on the question of how one manages risk-controlled 21 arbitrages or how they operate. 22 MR. NICKENS: He's given a turnover 3677 1 analysis, Your Honor, although he has indicated it 2 was simply an arithmetic measure. If he has an 3 opinion, I would think we should hear it. 4 THE COURT: All right. Denied. 5 A. I'm sorry. What? 6 THE COURT: Can you give us an opinion? 7 A. Would you mind just repeating the 8 question? 9 Q. (BY MR. NICKENS) In a period of 10 volatile interest rates where one might expect 11 rebalancing in a risk-controlled arbitrage, you 12 would expect to see turnover? 13 A. I can tell you that I haven't studied 14 risk-controlled arbitrages from the context of how 15 to manage them. 16 Q. So, you don't have an opinion on that 17 subject? 18 A. I really -- I don't think I do. 19 Q. Okay. What does this turnover analysis 20 tell us? 21 A. It tells you the annualized securities 22 turn over on a consolidated basis of USAT. 3678 1 Q. A lot of MBS? 2 A. Quarterly for the MBS portfolio and 3 also on an annual basis. 4 Q. You don't know whether it was 5 reasonable or not? 6 A. I would characterize that turnover 7 percentage as extensive, but -- 8 Q. But you don't know whether it was 9 reasonable or not? 10 A. I haven't been asked to determine 11 whether it was reasonable in the context of some 12 strategy. 13 Q. Let me ask you some questions about 14 your analysis of the sale of the caps. Now, 15 you've told the Court that you didn't find any 16 economic purpose to the sale of the caps. Is 17 that -- have I characterized that correctly? 18 A. I believe what I indicated is that I 19 could not discern any. There appear to be none. 20 It was an observation. It was not the primary 21 part of what my opinion was. My primary part of 22 the opinion in that area was that a gain was taken 3679 1 at a time when internal documents indicated that 2 they were looking for gains. And in the context 3 of when they were reacquired, there was a comment 4 made that we were trying to improve our maturity 5 matching credit but yet nothing happened. 6 So, that suggested all in the balance 7 that it was basically taking a gain that was 8 available at a time when the MBS portfolio no 9 longer had unrealized gains. But as a general 10 observation -- and that's all it is -- I couldn't 11 discern any economics behind it. 12 Q. But you don't have any opinion on gains 13 trading, do you? Let me remind you I asked in 14 your deposition and I was prohibited by counsel 15 for the OTS of asking you any questions on the 16 subject. 17 A. I was about to say I don't have -- from 18 a gains trading perspective, I don't have an 19 opinion. This is one transaction involving the 20 cap portfolio. And it's a gain that's being 21 recognized. I don't know that I would label that 22 gains trading. 3680 1 Q. Okay. And what you have told the Court 2 is that you have seen this situation where they 3 took a gain from selling an asset at a time when 4 other documents indicated that they needed gains 5 in order to be profitable. Does that pretty much 6 summarize it? 7 A. I believe it's the -- the document said 8 that they needed gains to keep their losses within 9 a reasonable range. 10 Q. Now, they bought the caps in March and 11 April at a price -- the ones they ended up 12 selling -- of approximately $12 million, correct? 13 A. That's correct. 14 Q. And they sold them in October for 15 $17 million? 16 A. That's correct. 17 Q. So, there was an economic gain on the 18 caps of $5 million from that transaction? 19 A. From that one portion, there would be 20 an economic gain of the 5 million plus any income 21 that had been received on those caps while they 22 were held. I could verify that for you, but it 3681 1 very well may even be larger. 2 Q. And then later in December, they bought 3 substantially the same -- you've pointed out the 4 differences and I'm not trying to gloss those 5 over -- but substantially the same caps for 6 $16 million? 7 A. Slightly less balance, slightly less 8 attractive, and they did pay 16 million. 9 Q. Now, you don't see an economic purpose 10 in those transactions? 11 A. I really have a difficult time seeing 12 it. If you wash out the 17 and the 16 million 13 that exchanges hands in basically one month, they 14 are sort of back to where they started but for a 15 slightly different balance with slightly less 16 attractive caps. 17 Q. Let's take the first step of it. The 18 first step of it is that they bought at 12 and 19 sold at 17. Surely you can see an economic 20 purpose there. 21 A. And I don't think I commented that 22 that's not an economic. If that was the entire 3682 1 transaction, that would clearly be an economic 2 benefit to the institution. 3 Q. That's sort of, you know, buy low, sell 4 high. Right? 5 A. I would love to be able to do that on a 6 regular basis. 7 Q. On a regular basis. I mean, there's no 8 question about that as far as the economics are 9 concerned? 10 A. That's correct. 11 Q. And it also turns out they were able to 12 take a 9-million-dollar accounting gain? 13 A. I believe it's about 8 million but, 14 correct, they booked an accounting gain from that 15 transaction when they were sold in October. 16 Q. And then at some point, they decided 17 they needed to repurchase them and they were able 18 to repurchase them at about the same price that 19 they had sold them for some months later? 20 A. Six weeks later approximately, they 21 bought them for about the same price that they had 22 sold them for and again, slightly less balance in 3683 1 a slightly less attractive cap portfolio. 2 Q. Now, was there a major economic event 3 in this time frame? 4 A. Between the sale date and the purchase 5 date? 6 Q. Yes, sir. 7 A. Yes. I can think of one for sure. 8 Q. Stock market crash of October of 1987. 9 Right? 10 A. That would probably -- that happened at 11 about that time. 12 Q. Somebody suggested to me today that it 13 was exactly ten years ago. 14 A. Ten years ago. I think I saw that in 15 the paper. 16 Q. And -- 17 A. Let's hope it doesn't repeat itself. 18 Q. Now, can you see reasons why that event 19 might affect someone's analysis as to whether or 20 not it would have been a good time to sell the 21 swaps? Let me put it this way. Have you taken 22 into account when you reached your conclusion that 3684 1 there was no economic purpose the fact that the 2 stock market crash occurred in October of 1987? 3 A. The volatility of the markets had 4 increased at that point in time. As a general 5 proposition, when the volatility increased, option 6 values go up. So, the stock market crash was in 7 mid-October and by late October, they are selling 8 the caps. 9 Q. At a very good price? 10 A. I haven't analyzed the price. But 11 accepting what I said at face value, if the 12 volatility is increasing, that should be compared 13 to historical benchmarks generally making the 14 price -- I would say it was probably a good price 15 looking back in time from that point in time. 16 Q. I'd like to ask you some questions 17 about your report and specifically concerning some 18 of the comments in the report. Yesterday, we went 19 over a document, Exhibit B1783 which is at Tab 20 296. Do you have it up there perhaps? 21 MR. GUIDO: What exhibit is that? 22 MR. NICKENS: It's the Mike Crow to 3685 1 Jenard Gross memo of October 1, 1987, accounting 2 for hedges. 3 Q. (BY MR. NICKENS) Now, you quote this 4 document at page -- 5 THE COURT: Can you identify the number 6 on it? 7 MR. NICKENS: Yes, sir. It's B1783. 8 THE COURT: All right. Thank you. 9 Q. (BY MR. NICKENS) And in your report, 10 you quote it, Page 89. 11 A. I heard you mention yesterday in court 12 that I left out a word, and I went back and looked 13 and I did, indeed, leave out a word. 14 Q. That was just an oversight? 15 A. Yes, sir. I had no idea that that had 16 happened. The word that I left out, I believe, is 17 the word "anyway." Looking at it, you'd have to 18 explain to me the significance of the word I left 19 out but I did, indeed, leave out a word. 20 Q. And you prepared this report. Somebody 21 else didn't do it for you and you take full 22 responsibility for it? 3686 1 A. I take full responsibility for leaving 2 out that word. 3 Q. Now, let's look at the sense of this. 4 The document and the entire sentence, you left not 5 only the word out, you left the introductory 6 clause out. 7 A. Well, I've got a "dot, dot, dot" 8 indicating that it's a partial sentence. And I 9 was just trying to point out that they were 10 concerned about gain recognition during the 11 October time frame. So, that was the conscious 12 decision. That's the main thought I was trying to 13 portray in analyzing the caps. 14 Q. Now, let's read your sentence and then 15 let's read the sentence in the document. You say 16 "Mr. Crow indicated that with respect to whether 17 the gain should have been recognized on the 18 futures, quote, 'we needed the earnings in the 19 third quarter to keep our loss within the 15- to 20 25-million-dollar range,' close quote. 21 That's what you said. Right? 22 A. That's correct. 3687 1 Q. And you're suggesting there that 2 Mr. Crow is saying "We should recognize this gain 3 because we need the earnings." Isn't that what 4 you're saying? 5 THE COURT: Where are you quoting from 6 now? 7 MR. NICKENS: Your Honor, Page 89 of 8 the report and it's -- it's set off -- 9 THE COURT: That's A11018? 10 MR. NICKENS: Your Honor, I don't -- 11 THE COURT: Is that Mr. Hargett's 12 expert report? 13 MR. NICKENS: Yes, sir, it is. 14 MR. EISENHART: 11018, Your Honor. 15 MR. NICKENS: And it's at Page 89. 16 Q. (BY MR. NICKENS) Mr. Hargett, you 17 were indicating in this part of your report, 18 "Mr. Crow had made this decision in order to 19 recognize the gains" because they needed gains. 20 Right? 21 A. He lays out several reasons on why the 22 gain should be recognized, and then one final 3688 1 point he makes says "We needed the earnings to 2 keep our losses within that range." 3 Q. Well, let's see what he said. He says 4 "There was no reason to quarrel with this 5 conclusion due to expediency." Now, you left that 6 out. "We needed the earnings in the third quarter 7 anyway" -- and you left that out -- "to keep our 8 loss within the 15- to 25-million-dollar range." 9 A. I agree that I left out the word 10 "anyway," and I have got there in front of that 11 phrase an open quote, "dot, dot, dot" to indicate 12 it's not a complete sentence. I, again, was just 13 trying to point out that at this time frame, they 14 are concerned about their profitability. That's 15 what I was trying to do with that quote. 16 Q. Sir, don't you think what you've quoted 17 is materially different than what was expressed in 18 the full sentence? 19 A. I personally don't. I feel bad that I 20 left out that word, and I'll just -- I'll let the 21 Court decide if that's misleading. 22 Q. Would you agree that if you had had 3689 1 that word "anyway" in there, it would be a pretty 2 awkward sentence for what you were trying to 3 convey? Because then it would have said "We 4 needed the earnings in the third quarter to 5 keep" -- "we need the earnings in the third 6 quarter anyway to keep our loss within the 15- to 7 25-million-dollar range." 8 That might have encouraged someone to 9 go back and look at the reasons, wouldn't it? 10 A. I don't know what else to say. I have 11 explained it to you as best I can. I don't really 12 have anything else to add. 13 Q. Now, the rest of this memo is Mr. Crow 14 saying that he was against certain kinds of 15 trading that had been suggested by this event. 16 Right? 17 A. I'm not sure -- you'd have to help me 18 out with your characterization as to where he's 19 saying that. 20 Q. Well, we went through some of this 21 yesterday. And I don't propose to go back 22 entirely, although I will to the extent that you 3690 1 wish. But he goes on for some length thereafter 2 to discuss the fact that, "Okay. This has 3 happened. And we have to recognize this gain 4 because we didn't do all the things the 5 accountants require us to do to get hedge 6 accounting. And we haven't fought it very hard 7 because we needed the gains anyway." 8 Isn't that the sense of this? 9 A. Well, he does make other points on the 10 gain recognition that are listed above, including 11 that they were closed out approximately 30 days 12 after entering into positions. He makes a couple 13 different points. 14 Q. Then he goes on to say, you know, "This 15 is something that we could do, but I'm against it 16 because I think it would be speculative." 17 Isn't that the sense of this memo? 18 A. He lists two examples of things that he 19 would consider to be speculative. One is similar 20 futures transactions. And another is selling of 21 interest rate caps, but it's not the selling of 22 interest rate caps that we're talking about right 3691 1 now. It's an entirely different world. If that's 2 what's confusing -- I'm not sure if that's what 3 you're trying to drive at. 4 Q. Well, let me look at some other 5 examples of your quotations. 6 MR. NICKENS: Excuse me one second. 7 8 (Discussion off the record.) 9 10 Q. (BY MR. NICKENS) Let me ask you to 11 look over to Page 88 of your report. Are you at 12 Page 88? Let me catch up with you. 13 A. Yes, I am. 14 Q. And I want to ask you to look at 15 Exhibit A1465. 16 MR. NICKENS: Your Honor, A1465 is the 17 minutes of the investment committee of United 18 Savings Association of Texas, October 8th, 1987. 19 And we would offer them at this time. 20 MR. GUIDO: No objection, Your Honor. 21 THE COURT: Received. 22 MR. GUIDO: Is this the entire set of 3692 1 investment committee minutes or only that portion 2 that includes the mortgage-backed securities? 3 MR. NICKENS: This has something other 4 than mortgage-backed securities. Whether this is 5 all of them, I can't say. But it certainly 6 includes the equity arbitrage and the other 7 reports that were generally made there. 8 Q. (BY MR. NICKENS) And, Mr. Hargett, 9 we're going to be looking over at the last page of 10 Exhibit A1465 and Page 88. Now, at Page 88 in the 11 second bullet point, you said in your report 12 "Based upon review of the investment committee 13 minutes of October 8th, 1987, Sandy Lawrenson, 14 senior vice president and manager of MBS trading 15 and a member of the committee, had recommended the 16 sale of $400 million in caps, quote, 'to 17 redistribute front-end loaded negative gap and 18 mortgage investments,'" close quote. Right? 19 A. That's correct. 20 Q. And if we go over and look at what the 21 investment committee minutes state, they state 22 that with "bond market at blank" -- 3693 1 A. Can you tell me where you're at? 2 Q. I'm at No. 3, "Plans for next week." 3 No. 3. "With bond market at blank, sell 400 4 million, 11 percent caps to redistribute front-end 5 loaded negative gap in mortgage investments." 6 Now, you left out "with bond market at 7 blank" and the 11 percent. Right? 8 A. I started the quote at the word "to 9 redistribute." 10 Q. Well, doesn't this quotation indicate 11 to you that she was saying that if the bond market 12 got to a certain level, I would recommend selling 13 the 11 percent caps? 14 A. I think the document speaks for itself. 15 This is the only reference I could find that 16 talked about selling caps shortly before the caps 17 were actually sold in October -- on October 30th, 18 1987. 19 Q. Well, is it the fact -- is it that it's 20 the only one you could find that would justify 21 leaving out the qualification? 22 A. My point here is that when she's 3694 1 talking about contemplating a sale, she's 2 contemplating a sale for front-end loaded negative 3 gap. That, to me, is the key phrase. And so, 4 what I pointed out yesterday was once the sale 5 took place and the repurchase, it's not changing 6 the gap before and after the sale and repurchase 7 for maturity matching credit purposes. 8 Q. Well, what you said was "she had 9 recommended the sale for this purpose." Right? 10 And you had indicated that the recommendation was 11 deferred until a later date. Now, where did you 12 see that? It's at the front. I'm sorry. 13 A. It's at the front of what? I'm lost. 14 Q. It's at the front of Exhibit 1465. 15 You'll see "Ms. Sandy Lawrenson then reported on 16 the mortgage back security. Her report was 17 ordered attached to the minutes of the meeting. 18 She explained the plans for the next week and, 19 after full discussion, Nos. 1 and 2 were approved 20 by the committee but it was decided that No. 3 21 would be deferred for further study." 22 A. Okay. I see that. 3695 1 Q. And you didn't think it was important 2 to put in that it was deferred for further study, 3 merely that it was deferred? 4 A. Again, when I listed that quotation, I 5 was trying to focus on one -- the reason that they 6 are considering doing something like that related 7 to the redistribution of the front-end loaded 8 negative gap. 9 Q. And do you now see that it also related 10 to the performance of the bond market? 11 A. I can't tell. Is that a period or a 12 comma? I guess -- I guess that could be a fair 13 interpretation. Again, I was merely trying to 14 point out an instance where they were discussing 15 it. And I believe I go on to say right after 16 that -- let's see -- on the top of Page 89, I say 17 "it appears." You know, again, I'm qualifying it 18 somewhat in trying to say, you know, it's a little 19 bit uncertain and it appears that this is what's 20 happening. 21 Q. Well, you say "It appears that the 22 intent should have been to sell those one-year gap 3696 1 caps and replace them with three-year gap." 2 You're making an inference based upon 3 what you told the Court that she said? 4 A. I believe the point is explained as 5 best I can. 6 Q. Okay. Let's -- 7 A. If it's misleading, I apologize. 8 Q. Let's look over at Page 62, 62 of your 9 report. Now, here, you quote Mr. Williams in this 10 first paragraph on Page 62 which is Exhibit T5125. 11 I think Mr. Guido discussed this document with 12 you. 13 Do you have it in front of you? 14 A. Yes, I do. 15 Q. Now, in your report, you say 16 "Mr. Williams also indicated that USAT's options 17 were to either come clean or to, quote, 'do 18 nothing and continue to use mirrors to disguise 19 our gap,'" period. Right? That's what you say? 20 A. That's correct. 21 Q. And by the way you quote Mr. Williams, 22 you're suggesting that if he doesn't do something, 3697 1 he's decided not to come clean. Isn't that a fair 2 reading of what you've written? 3 A. I'm sorry. Say that again. 4 Q. Isn't what you have stated there that 5 if he decided to do nothing, he would have decided 6 not to come clean? 7 A. Yeah. I believe there would be a 8 better way of phrasing that as saying one of his 9 options was that because there is a second option 10 on the next page. 11 Q. Well, let's read what was actually said 12 in the memo T5125. It says "In USAT's movement to 13 come clean, our options are: Do nothing and 14 continue to use mirrors to disguise our gap." 15 Now, you see mirrors as referring to 16 the regulatory system, isn't it? 17 A. To use mirrors, yes. It was 18 essentially not reflecting the caps in a proper 19 way. 20 Q. Mr. Williams is saying that the 21 regulatory system allows us to do this, but let's 22 not fool ourselves. Our economic situation hasn't 3698 1 changed a whit. Isn't that what he's saying? 2 A. I guess you'll have to ask him what his 3 intent was. I believe this clearly indicates that 4 he's concerned about what has happened, as 5 described above. 6 Q. Well, he says "In USAT's movement to 7 come clean, our options are to do nothing or, two, 8 unwind the asset and hedge transfers between 9 United MBS and USAT and purchase" -- you read this 10 earlier. And then he goes on to say "I recommend 11 that this situation needs to be resolved by senior 12 management at the next executive or strategic 13 planning committee meeting." 14 Now, you left all of that out. Right? 15 A. I produced all these documents, and I'm 16 trying to explain the primary points as to what's 17 happening. And I think the document and my report 18 speaks for itself. I don't know what to say. 19 Q. Well, coming clean wasn't even one of 20 the options. That -- right? 21 A. I believe that the second bullet is 22 essentially the "coming clean" option. In other 3699 1 words, if you did -- to come clean would involve 2 unwinding the asset and hedge transfers and then 3 acquiring other hedges. It's the second bullet or 4 it's the bullet on the second page. 5 Q. Well, in other words, when you wrote 6 this, you had meant for people to when they read 7 "come clean" to think that you meant that he was 8 suggesting that they should unwind the asset and 9 hedge transfers between United MBS and USAT and 10 purchase about a billion of hedges specifically 11 for USAT, et cetera? 12 A. He states that as one option. 13 Q. And that's the option you're telling 14 the Court today was what you thought meant by 15 "coming clean"? 16 A. I would definitely say that doing 17 nothing and continuing to use mirrors to disguise 18 our gap is not coming clean. 19 Q. Well, I'm trying to -- I'm trying to 20 explore with you what your sense of correctness 21 is, Mr. Hargett. 22 Do you think what you've written is a 3700 1 fair representation of what Mr. Williams wrote? 2 A. He's describing two options. The two 3 options are listed. One is -- 4 Q. Sir, do you think it's fair? 5 A. I think that's for the Court to decide. 6 I think that this document shows what it shows. 7 He discussed two options, and I've generally 8 described those two options without quoting the 9 entire document. 10 Q. Let me ask you to look over to Page 90 11 of your report. I'm trying to find my place, 12 Mr. Hargett. I apologize. You state at your 13 second bullet point on Page 90 -- and let me refer 14 you to Exhibit A1477. 15 MR. NICKENS: Your Honor, A1477 is the 16 minutes of the investment committee of United 17 Savings Association of Texas, November 19th, 1987, 18 and we hereby offer it. 19 MR. GUIDO: No objection, Your Honor. 20 THE COURT: Received. 21 Q. (BY MR. NICKENS) Now, you state in 22 the first sentence -- in the first sentence of the 3701 1 second bullet point in your report "Based on a 2 review of the November 18th, 1987, investment 3 committee meeting minutes, Ms. Lawrenson stated 4 that she wanted to reacquire hedges if they were 5 selling at a good price." And let's see what the 6 minutes say. The only source of this is the 7 minutes. Right? 8 A. That looks correct. 9 Q. And if we go down to the third 10 paragraph from the bottom, I believe we'll find 11 the notation. "She also noted that she had sold 12 covered calls of Fannie Mae 9 and a half and 13 Freddie Mac 10. She stated that she might desire 14 to reacquire the hedges if they were selling at a 15 good price." 16 Now, you describe this as "reacquire 17 hedges" generically and she's talking about some 18 specific Fannie Mae 9 and a halfs and Freddie Mac 19 10s. Right? 20 A. That's correct. 21 Q. And she says "she might desire" -- and 22 you write "she wanted to"? 3702 1 A. Yeah. There is an "if" in both cases; 2 but, yes, there is a little bit of difference 3 there. 4 MR. NICKENS: Your Honor, might I 5 suggest our afternoon break? I'm going to move on 6 to another subject, if that's okay. 7 THE COURT: All right. We'll take a 8 short break. 9 10 (A break was taken at 2:43 p.m.) 11 12 THE COURT: Be seated, please. We'll 13 be back on the record. Mr. Nickens, you may 14 continue. 15 MR. NICKENS: Thank you, Your Honor. 16 (3:09 p.m.) 17 Q. (BY MR. NICKENS) Mr. Hargett, with 18 regard to the remainder of your report, it doesn't 19 relate specifically to risk-controlled arbitrage 20 any more than your turnover analysis did, does it? 21 A. With respect to USAT or UMBS? 22 Q. Well, UMBS was basically -- that was 3703 1 all their business was, risk-controlled arbitrage. 2 Right? 3 A. And that's contained as a separate 4 report, separate schedules and the like. 5 Q. With regard to USAT, your damage 6 analysis, loss analysis, relates to a whole 7 variety of MBS other than risk-controlled 8 arbitrage specifically? 9 A. It effectively relates to the 10 mortgage-backed securities that were held at the 11 USAT level as well as the mortgage-backed 12 securities at United Mortgage Finance for that 13 small period of time, and that's what I've done. 14 The documents indicate that a substantial majority 15 of their activity was, indeed, risk-controlled 16 arbitrage. 17 Q. You were performing a quantification of 18 a specific assignment that the OTS enforcement had 19 given you? 20 A. That's correct. 21 Q. And you weren't asked to relate that to 22 any particular theory of damages? 3704 1 A. Theory of damages? 2 Q. Or of loss. 3 A. As far as -- you mean like a liability 4 theory? 5 Q. Yes, sir. 6 A. That's correct. 7 Q. And so, there is no way to relate 8 directly to what you've done to any theory of 9 liability in the notice of charges? 10 A. I haven't undertaken that analysis. 11 Q. And would you be able to do it? 12 A. I have not done that. I did read the 13 notice of charges after it was filed, but I have 14 not done that. 15 MR. NICKENS: Your Honor, I'm going to 16 pass the witness at this time. 17 THE COURT: Could I ask you one 18 question? It refers to the last sentence in 19 your -- last two sentences in your report which is 20 A11018. 21 THE WITNESS: And which page? 22 THE COURT: Page 6. Not "other 3705 1 information" but immediately above that. 2 THE WITNESS: Yes, sir. 3 THE COURT: And it states "The deficit 4 calculation based on USAT's own data also does not 5 include the unrealized losses in the MBS 6 portfolio, losses on high-yield bonds, or other 7 losses which were not recognized." 8 And my question is the phrase "losses 9 on high-yield bonds," does that mean unrealized 10 losses or were they realized? 11 THE WITNESS: They were unrealized 12 losses at that time, basically December 30th, 13 1988, in the corporate bond portfolio as reflected 14 in the audit report of Arthur Andersen. 15 THE COURT: So, the word 16 "unrealized" -- 17 THE WITNESS: It -- 18 THE COURT: -- goes back and also 19 modifies losses on high-yield bonds? 20 THE WITNESS: Yes. There's unrealized 21 losses in the MBS portfolio. There's unrealized 22 losses in the high-yield bonds, and there's other 3706 1 losses -- as I mentioned yesterday, the losses on 2 the swaps when they were terminated, they weren't 3 recognized. 4 THE COURT: All right. Thank you. 5 Mr. Guido, do you have -- 6 MR. GUIDO: I think -- 7 MR. EISENHART: Your Honor, before 8 that, I have a couple of questions I would like to 9 ask Mr. Hargett on the subject of his calculation 10 of the capital deficit. 11 THE COURT: All right. 12 13 CROSS-EXAMINATION 14 15 16 Q. (BY MR. EISENHART) Mr. Hargett, I'd 17 like to talk to you for a moment about that aspect 18 of your report. I think it's Part 6 that talks 19 about that you have labeled USAT's net-worth 20 deficiency as of December 30, 1988. 21 In this report, you include, among 22 other things, an interest calculation, do you not? 3707 1 A. Yes, I do. 2 Q. And you calculate interest on what you 3 conclude to be the deficit from December 30, 1988? 4 A. Yes, I do. 5 Q. Were you told by OTS enforcement to do 6 such an interest calculation? 7 A. Yes, I was. 8 Q. And do you know of any rule, law, 9 statute, or other rule that entitles OTS to 10 interest? 11 A. That wasn't my purpose. I was just 12 merely performing the mathematical calculation. 13 Q. So, you were told to do it and you make 14 no judgments whatsoever as to their entitlement to 15 interest? 16 A. Yes, that's correct. 17 Q. Now, as I recall your direct testimony, 18 you said you used a T-bill rate to compute the 19 interest? 20 A. Yes. I averaged the six-month T-bill 21 rate for each month of the year and calculated an 22 average for the year. 3708 1 Q. Now, were you told to use that rate by 2 OTS enforcement? 3 A. I indicated that that was a combination 4 of a rate that I typically used, and Mr. Guido 5 indicated that that's what he wanted used, as 6 well. 7 Q. And did you look at any other rates or 8 did you make any determination as to whether that 9 was the appropriate rate to use? 10 A. No, I did not. 11 Q. So, that was simply an arbitrary 12 selection on your part that was approved by OTS 13 enforcement? 14 A. I have historically used it because 15 it's a low rate of interest and Mr. Guido wanted 16 that rate of interest used. So, the fact that 17 it's low, if you want to characterize that as 18 arbitrary, that's fine. 19 Q. But you didn't compare it to, say, the 20 legal grade of interest under Texas law or 21 anything like that? 22 A. No, I did not. 3709 1 Q. Now, in doing your interest 2 calculations or, indeed, in doing your net-worth 3 calculations, did you make any assumptions as to 4 when any of the respondents in this case ceased to 5 control United Savings Association of Texas? 6 A. No, I did not. It's a calculation of 7 the deficit at December '88. 8 Q. And in making your calculations, did 9 you ever look at the language of the resolution in 10 this case that contains the net-worth maintenance 11 condition? 12 A. No, I did not. 13 Q. Now, as I understand your 14 calculation -- actually, I think you actually 15 state this on Page 6 of your report. You made the 16 assumption that USAT's net-worth or regulatory 17 net-worth requirement did not change from November 18 to December 1988; is that correct? 19 A. The calculation of the requirement 20 itself, that's correct. 21 Q. And as I understand it, you found in 22 the thrift performance reports the number for 3710 1 November 1988 and I think that was, what, 2 $215 million? 3 A. It's the performance report prepared by 4 the savings and loan, yes. That was the last one 5 available. One was not prepared for -- at 6 December 31st, 1988, because the institution was 7 placed in receivership the day before. 8 Q. So, you simply assumed that the 9 calculation, had it been done as of December 30, 10 1988, would have produced the same number? 11 A. For the capital requirement side, 12 that's correct. 13 Q. Did you do anything to test the 14 validity of that assumption? 15 A. I generally looked back to see what 16 range their capital requirement was running at, 17 and I basically left it as is as of November 30th 18 and I think I state that pretty clearly. 19 Q. How far back did you look? 20 A. Well, as an example, elsewhere in my 21 report, the minimum net-worth requirement as 22 stated on Page 64 as of 3/'87, 6-30-87, and then 3711 1 9-30-87, of course, with or without the adjustment 2 for maturity matching credit, those numbers are 3 200, 219. And then for September 30th, '87, it's 4 either 183 or 252, you know, as reported versus 5 what I've recalculated. 6 Q. Well, isn't it a fact that the 7 net-worth -- that USAT's regulatory capital 8 requirement had decreased as of August 31st, 1988, 9 from $261 million to $215 million? 10 A. I don't recall that specifically. 11 MR. EISENHART: Your Honor, I would 12 like to offer Exhibits A5036 and A5037 which are, 13 respectively, United Financial Group, Inc.'s 14 performance reports for August and September 1988. 15 MR. GUIDO: Counsel, I haven't received 16 a copy of that report. 17 MR. EISENHART: Oh, I'm sorry. I'm 18 sorry, Your Honor. The numbers are 5036 and 5037. 19 I don't know whether the Office of Thrift 20 Supervision has any objection to these. 21 MR. GUIDO: No objection, Your Honor. 22 THE COURT: Received. 3712 1 Q. (BY MR. EISENHART) Mr. Hargett, I've 2 handed you the thrift performance reports for 3 August and September of 1988. I'll ask you in 4 each instance if you would -- if you would turn to 5 Page AE of the report. 6 Do you see the page I refer to? 7 A. Yes. I'm looking at it now. 8 Q. And Page AE sets forth, does it not, 9 the regulatory capital requirement for USAT as of 10 the end of August and the end of September? 11 A. Well, the August number has a footnote 12 by it that indicates that it's basically the 13 June 30th, 1988 number. Again, you typically file 14 that calculation once a quarter. But with that 15 caveat, I see it in the number as stated to be 16 $261 million. 17 Q. 261,495,000, correct? 18 A. That's correct. 19 Q. What is it as of September 30, 1988? 20 A. It is down to $215 million. 21 Q. So, as recently as three to four months 22 before you assumed that number would be unchanged, 3713 1 the number had decreased by as much as 2 $50 million; is that correct? 3 A. Are you suggesting it changed by -- the 4 difference is $46 million in one month? Is that 5 what you're suggesting? 6 Q. I'm suggesting, Mr. Hargett, that as of 7 the end of August, USAT's regulatory capital 8 requirement was $261,495,000 and as of the end of 9 September, it was $215,390,000. 10 A. And all I'm trying to point out is for 11 the August calculation, it's actually labeled 12 June 30th, 1988. So it's actually a three-month 13 window versus a one-month window. 14 Q. But it gives you a series of 15 adjustments that were made to the June 16 calculation, does it not? 17 A. Yeah. They are adding on several of 18 those items, that's correct. 19 Q. Right. 20 A. But the base calculation is going back 21 to the June data. 22 Q. They start with June and then they make 3714 1 a series of adjustments and then they reach a 2 number as of the end of August, do they not? 3 A. All I'm trying to say is it's not a 4 complete new calculation based on August data. 5 Q. And a month later, that number is about 6 $46 million less, isn't it? 7 A. That's correct. 8 Q. And despite that, you assumed without 9 doing any checking that there would be no change 10 between November and December? 11 A. I've explained what my calculation is. 12 I looked at it generally, and I've indicated to 13 you that that's what I used. I used the 14 November 30th data. 15 Q. That's the assumption you made? 16 A. That's correct. 17 Q. Now, you also expressed the net-worth 18 deficiency which you calculated as of December 30, 19 1988, in a range, did you not? 20 A. Yes, I did. 21 Q. And that range, as I understand it, is 22 necessary because you're not sure whether about 3715 1 $30 million in loan losses that were booked in 2 that month would have gone to general reserves or 3 specific reserves; is that correct? 4 A. That's correct. There was reserves 5 booked, and that reduces your capital. But 6 depending on what type of reserves they are, they 7 can be added back to capital oversimplified. 8 Q. If they are general reserves they go 9 into capital. If they are specific reserves, they 10 do not? 11 A. Right. So, I basically presented it 12 both ways because I was uncertain. There was no 13 information present as to what those reserves were 14 for. 15 Q. And Judge Shipe had asked you about 16 your further note that there were unrealized 17 losses in high-yield bonds and mortgage-backed 18 securities as of December 30, 1988, and you did 19 note that, correct? 20 A. Yes, I did. 21 Q. Now, as I understand it, what would 22 happen to those securities, the high-yield bonds 3716 1 and the mortgage-backed securities that had these 2 unrealized losses as of December 30, 1988, was 3 going to be determined by the people who took over 4 the institution after it was put into 5 receivership, wouldn't it? 6 A. Yeah. But there was a report -- what 7 I'm saying, though, there is a report that is 8 dated December 30th or 31st -- I actually can't 9 recall which -- 1988, basically right at that 10 date, that shows you the book value of the assets 11 on the institution's records as well as the market 12 value. And in these cases, the market value is 13 less and, therefore, at that moment, there is 14 unrealized losses. 15 Q. But whether those unrealized losses 16 ever occur or not is going to depend on the people 17 who wind up owning those assets after December 30, 18 isn't it? 19 A. Whoever owns them or whoever liquidates 20 them, that's correct. 21 Q. And the choices that they make with 22 respect to those bonds are going to be choices 3717 1 that are completely out of the control of the 2 respondents in this case, aren't they? 3 A. That sounds like a fair statement. 4 Q. Are you aware of the terms of the 5 assistance agreement that was given to the persons 6 who purchased the assets of USAT on December 30, 7 1988? 8 A. Just generally. 9 Q. Do you have any idea how the terms of 10 those assistance agreements may have impacted 11 those decisions on whether to hold the bonds, sell 12 the bonds? 13 A. I have not analyzed that issue, no. 14 Q. But that would make a big difference or 15 might make a big difference, might it not, as to 16 whether those losses were ever realized? 17 MR. GUIDO: Objection, Your Honor. 18 It's asking for pure speculation by a witness who 19 says he doesn't know anything about the assistance 20 agreement. 21 THE COURT: Sustained. 22 Q. (BY MR. EISENHART) Mr. Hargett, did 3718 1 you do an analysis of losses in the high-yield 2 bond portfolio similar to the one that you did in 3 the mortgage-backed securities area? 4 A. I did a little bit of work in the 5 high-yield bond area shortly after this expert 6 report was signed. 7 Q. But we're not going to see your 8 high-yield bond work in this case, are we? 9 A. If counsel would let me produce it, I'd 10 be happy to show what you I did. Or if he'll let 11 me describe it, I'll be happy to describe it for 12 you. 13 Q. But the work you've done was dropped 14 shortly after you started it, wasn't it? 15 A. I -- I think this is in the deposition. 16 You'd have to refer to it. But basically, shortly 17 after the report was filed, January 13th, I did an 18 initial analysis. I did not have enough documents 19 to be able to do the analysis the way I wanted to. 20 I had documentation problems. And I basically 21 said, "This can't go forward the way I'm trying to 22 do it." Essentially, I couldn't find information 3719 1 on the income of the bonds and which ones had 2 defaulted, if any. I tried to pull it off the 3 Bloomberg system, but I couldn't do that. 4 Q. So, your report, then, contains no 5 analysis of losses in the high-yield bond 6 portfolio? 7 A. That's absolutely right. 8 MR. EISENHART: That's all the 9 questions I have. Thank you, Mr. Hargett. 10 THE COURT: Any of the other 11 respondents have questions? 12 MS. CLARK: No, Your Honor. 13 MR. BLANKENSTEIN: No questions. 14 THE COURT: All right. Mr. Guido, 15 redirect? 16 17 REDIRECT-EXAMINATION 18 19 (3:28 p.m.) 20 Q. (BY MR. GUIDO) Mr. Hargett, you were 21 asked to prepare the Coopers and Lybrand printout 22 A11027 with the figures in the charts, Page 6 of 3720 1 the charts with regard to the profile of the 2 portfolio which was A11022. And I'd like to 3 direct your attention to both of those pages and 4 ask you some questions about those. 5 The line that Mr. Nickens pointed out 6 to you, the Eurodollar futures, they have 7 somewhere, I think, around 170 to $80 million in 8 them between 12-'86 and 3-'87. And then they go 9 down a little bit, but they stay above 10 $150 million over that time period. The time 11 period I'd like to direct your attention to, there 12 were about $170 million. 13 THE COURT: Mr. Guido, could you 14 restate the exhibit number you're looking at? 15 MR. GUIDO: I'm sorry. The 16 exhibit number is the large A11027 which is the 17 Coopers and Lybrand report, and it's at a page 18 that neither Mr. Nickens nor I nor anyone else in 19 the courtroom could read. 20 A. It appears to be Page 58. If you look 21 at the next one, it's 59. 22 MR. GUIDO: It's about 50 pages into 3721 1 that big document. 2 THE COURT: All right. Continue. 3 Excuse me. 4 MR. GUIDO: The figure, Your Honor, is 5 somewhere in the 170 million-dollar range. 6 Q. (BY MR. GUIDO) Mr. Hargett, if you 7 added that figure into the March 1987 figure on 8 Exhibit A11027, if you added that in or added that 9 to the caps, what would be the amount that that 10 would represent? 11 A. For which date? 12 Q. March 1987. It's Page 6. If you add 13 the $170 million to that 360, what do you get? 14 A. If you just merely add those two 15 numbers, you get 537. 16 Q. Okay. And if -- what was the size of 17 the mortgage-backed security portfolio at that 18 time? 19 A. It's $1.27 billion. 20 Q. Now, you indicated that you couldn't 21 verify the Eurodollar futures as being in the 22 United MBS portfolio as of the dates that are 3722 1 reflected in the Coopers and Lybrand report? 2 A. There was that type of activity during 3 1987. I could not verify those balances as of 4 these dates listed. 5 Q. Now, you were asked about the turnover 6 figures in your report; and you were asked how you 7 calculated those. Can you direct us to that page 8 again in your report that addresses that issue of 9 turnover? 10 A. Yes. It's Page 57. 11 Q. Now, you testified that you used all of 12 the mortgage-backed securities that were in USAT 13 for that figure. The figures that you used for 14 the turnover analysis included everything 15 including -- was it ARMs, DARTs? 16 A. They had several special-purpose 17 subsidiaries besides UMBS that had MBSs, and it 18 includes all of that. It's everything on a 19 consolidated basis all the way up to the holding 20 company, UFG. That being said, as indicated on 21 the next page, UFG only has a half a million 22 dollars of MBSs. 3723 1 Q. Now, taking those portfolios, can you 2 describe them for the Court? 3 A. There is, in 1986, some CMOs that are 4 issued. That's collateralized mortgage 5 obligations. And so, essentially, what USAT is 6 doing is taking some mortgage-backed securities 7 and putting them into a special-purpose 8 subsidiary. The cash flows of those 9 mortgage-backed securities are being reallocated 10 and then bonds are being sold to the public that 11 is collateralized by those mortgage-backed 12 securities. And it's typically done in lock step 13 fashion so that as cash flows come in on the 14 mortgage-backed securities, cash flows go out to 15 the bond holders holding the debt of that 16 particular entity. 17 So, when it's set up that way, there's 18 typically very little turnover in that type of 19 activity -- in that type of portfolio. They 20 issued, I believe, around -- I'm doing this off 21 memory -- around 6 or $700 million of outstanding 22 balance during that '86 -- '86 or '87 time frame. 3724 1 It's reflected in the audited financial statements 2 for '86 and '87. 3 Q. Why is it typically that there's very 4 little turnover in that portfolio, those type of 5 portfolios? 6 A. What you're selling -- you're selling 7 bonds to the public, and the prospectus lays out 8 the rules of the particular issuance involved. 9 And my experience is that CMOs typically are 10 basically self-liquidating. In other words, 11 you're reallocating the cash flows but you're 12 basically just passing through as payments come in 13 to the security holders. 14 Q. Well, take the March 31, 1986, figure 15 on Page 57 of your report. It says $1.2 million 16 and the Page 9 of your Exhibit 11022 shows what in 17 terms of the size of the mortgage-backed security 18 portfolio? 19 A. At March, it shows 687 million. 20 Q. Which is approximately half of that 21 $1.2 million, is it not? 22 A. Yeah. The 1.2 billion. 3725 1 Q. $1.2 billion. So, would the effect of 2 using the smaller figure, excluding the CMO 3 subsidiary portfolios, would that have increased 4 or decreased the annualized securities turnover 5 ratio 214 percent? 6 A. I was unable to do that calculation. 7 But based on understanding the nature of those 8 particular special-purpose subsidiaries, if you 9 strip them out, the turnover numbers would go up. 10 Q. Would they go up as high as twice that 11 size? 12 A. I really can't tell you. It would 13 clearly increase the numbers. 14 Q. Now, you were asked a number of 15 questions about quotations in your expert report 16 by Mr. Nickens. Do you recall those? 17 A. Yes, I do. 18 Q. And did you intend to mislead anyone 19 when you wrote those quotations? 20 A. No, I did not. 21 Q. Did you hide the sources of those 22 quotations? 3726 1 A. No, I did not. The documents that I 2 quoted from and used were all produced before my 3 deposition back in May in three banker's boxes of 4 documents. 5 Q. And so, you not only didn't hide those 6 documents, you produced those documents; is that 7 right? 8 A. That's correct. 9 Q. And you testified today and yesterday 10 regarding the quotations in those documents on 11 direct examination, did you not? 12 A. Yes. We walked through some of the 13 documents where the quotations were discussed 14 today. 15 Q. Do you believe that your use of those 16 quotations was intentionally misleading? 17 A. No. It was not intentionally 18 misleading. 19 Q. Now, I'm going to go to the maturity 20 matching credit issue to clarify a few things. 21 You used the term "gap position," I think, a 22 number of times when you were asked questions by 3727 1 Mr. Nickens. 2 What does "gap position" refer to? 3 A. In the context of the maturity matching 4 credit, the precise term would be your hedged gap. 5 Q. Okay. Now, what does "hedged gap" 6 mean? 7 A. Hedged gap essentially means to take 8 your assets and your liabilities and schedule them 9 out by their maturity or repricing to get a net 10 difference and then to factor in any hedging 11 activity to adjust that number so that the effect 12 of any "off balance sheet" hedging is considered 13 on your assets and liabilities. 14 Q. Now, does the hedge gap affect the 15 calculation of the maturity matching credit? 16 A. It absolutely does. It's essentially 17 the driving factor in determining how much 18 maturity matching credit you get. 19 Q. Why is that? 20 A. When the regulation was promulgated 21 that introduced this concept, it was issued in 22 August of '86 with an effective date of 3728 1 January 1st, 1987. And the regulators were trying 2 to reflect in how much capital an institution is 3 required to hold the interest rate risk profile of 4 that institution. So that if you had two 5 institutions with very similar assets on the 6 surface but they had markedly different interest 7 rate risk, one of them would have a higher capital 8 requirement. 9 Q. So, the maturity matching credit is a 10 reflection of how great the interest rate risk is 11 in the association? 12 A. That's correct. 13 Q. Now, at the United MBS level which 14 was -- I think you pointed out, there were a 15 couple of documents that refer to it as a 16 risk-controlled arbitrage -- what was the purpose 17 of the caps in that institution? 18 A. Oversimplified, the caps are a method 19 to modify the interest rate risk of UMBS. It's a 20 form of at least partial interest rate risk 21 protection. 22 Q. So that the purpose of the use of the 3729 1 caps was to hedge interest rate risk? 2 A. To hedge or to reduce their interest 3 rate risk. 4 Q. Do you recall Mr. Nickens asking you 5 whether or not the caps were being used for 6 different purposes in the thrift financial report 7 than they were being used in the United MBS 8 portfolio? 9 A. Yes, I do recall that. 10 Q. And do you believe that they were being 11 used for different purposes? 12 A. At a global level, one purpose is for 13 maturity matching credit purposes in that 14 calculation. And at the other level, it is to 15 modify the interest rate risk of United MBS. So, 16 at that level, the purposes are different. But if 17 you look at the impact of those purposes or what's 18 really going on, you have a situation where these 19 caps are being used to reduce the interest rate 20 risk of United MBS. But once they are 21 transferred, they are also being used to try to 22 reduce the interest rate risk of USAT exclusive of 3730 1 the operations of UMBS. 2 So, essentially, the caps are being 3 used to reduce the interest rate risk of both 4 entities in different formats. 5 Q. Do you recall using the term "double 6 counting" in response to one of Mr. Nickens' 7 questions? 8 A. I believe I may have, yes. 9 Q. And essentially what happened here was 10 that USAT is trying to double count the use of 11 those caps to minimize the interest rate risk? 12 A. To minimize the interest rate risk for 13 two different purposes. I think that would be a 14 fair characterization. On the USAT side, it's to 15 reduce it strictly for the purpose of obtaining a 16 maturity matching credit which lowers your 17 regulatory capital requirement. 18 MR. GUIDO: I have no further 19 questions, Your Honor. 20 THE COURT: Recross? 21 MR. NICKENS: Nothing further from us, 22 Your Honor. 3731 1 THE COURT: All right. Thank you, 2 Mr. Hargett. You may step down. Are there any 3 other matters before we adjourn? 4 MR. GUIDO: No, Your Honor. We will 5 start on Monday, and we have a list of witnesses 6 that we hope will be here next week. 7 THE COURT: Is there any reason we 8 shouldn't start at 9:00 or do you want to start at 9 10:00? 10 MR. GUIDO: 10:00 o'clock would be 11 easier for us, Your Honor, because we're going to 12 have to have people come from out of town. 13 THE COURT: All right. We'll adjourn 14 until 10:00 o'clock Monday morning. 15 16 (Whereupon at 4:43 p.m. 17 the proceedings were recessed.) 18 19 20 21 22 3732 1 STATE OF TEXAS COUNTY OF HARRIS 2 REPORTER'S CERTIFICATION 3 TO THE TRIAL PROCEEDINGS 4 I, Marcy Clark, the undersigned Certified 5 Shorthand Reporter in and for the State of Texas, 6 certify that the facts stated in the foregoing 7 pages are true and correct to the best of my ability. 8 I further certify that I am neither 9 attorney nor counsel for, related to nor employed 10 by, any of the parties to the action in which this 11 testimony was taken and, further, I am not a 12 relative or employee of any counsel employed by 13 the parties hereto, or financially interested in 14 the action. 15 SUBSCRIBED AND SWORN TO under my hand 16 and seal of office on this the 17th day of 17 October, 1997. 18 ____________________________ MARCY CLARK, CSR 19 Certified Shorthand Reporter In and for the State of Texas 20 Certification No. 4935 Expiration Date: 12-31-97 21 22 3733 1 STATE OF TEXAS COUNTY OF HARRIS 2 REPORTER'S CERTIFICATION 3 TO THE TRIAL PROCEEDINGS 4 I, Shauna Foreman, the undersigned 5 Certified Shorthand Reporter in and for the 6 State of Texas, certify that the facts stated 7 in the foregoing pages are true and correct 8 to the best of my ability. 9 I further certify that I am neither 10 attorney nor counsel for, related to nor employed 11 by, any of the parties to the action in which this 12 testimony was taken and, further, I am not a 13 relative or employee of any counsel employed by 14 the parties hereto, or financially interested in 15 the action. 16 SUBSCRIBED AND SWORN TO under my hand 17 and seal of office on this the 17th day of 18 October, 1997. 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