3734 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 10-20-97 22 3735 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 RICHARD STEARNS, Esquire 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 3736 1 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO., CHARLES HURWITZ, AND MAXXAM, INC.: 2 JACKS C. NICKENS, Esquire 3 of: Clements, O'Neill, Pierce & Nickens 1000 Louisiana Street, Suite 1800 4 Houston, Texas 77002 (713) 654-7608 5 ON BEHALF OF JENARD M. GROSS: 6 PAUL BLANKENSTEIN, Esquire 7 MARK A. PERRY, Esquire of: Gibson, Dunn & Crutcher 8 1050 Connecticut Avenue, N.W. Washington, D.C. 20036-5303 9 (202) 955-8500 10 ON BEHALF OF BERNER, CROW, MUNITZ AND HUEBSCH: 11 JOHN K. VILLA, Esquire MARY CLARK, Esquire 12 PAUL DUEFFERT, Esquire of: Williams & Connolly 13 725 Twelfth Street, N.W. Washington, D.C. 20005 14 (202) 434-5000 15 OTS COURT: 16 HONORABLE ARTHUR L. SHIPE Administrative Law Judge 17 Office of Financial Institutions Adjudication 1700 G Street, N.W., 6th Floor 18 Washington, D.C. 20552 Jerry Langdon, Judge Shipe's Clerk 19 REPORTED BY: 20 Ms. Marcy Clark, CSR 21 Ms. Shauna Foreman, CSR 22 3737 1 2 EXAMINATION INDEX 3 Page 4 SANDRA ORR 5 Examination by Mr. Guido.................3738 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 3738 1 P-R-O-C-E-E-D-I-N-G-S 2 (10:00 a.m.) 3 THE COURT: Be seated, please. The 4 hearing will come to order. Mr. Guido. 5 MR. GUIDO: Yes, Your Honor. At this 6 time, we would like to call Sandra Orr, Your 7 Honor. 8 9 SANDRA ORR, 10 11 called as a witness and having been first duly 12 sworn, testified as follows: 13 THE COURT: Be seated, please. 14 15 EXAMINATION 16 17 Q. (BY MR. GUIDO) Would you state your 18 full name for the record, please? 19 A. Sandra Smith Orr. 20 Q. And in the past, have you been known as 21 Sandra Laurenson? 22 A. Yes. 3739 1 Q. All right. Where are you employed? 2 A. Coastal Bank. 3 Q. Pardon? 4 A. Coastal Bank. 5 Q. And what is your responsibilities at 6 Coastal Bank? 7 A. I run all of the asset investments that 8 are mortgage-backed whole loans securities. 9 Q. Now, were you employed by United 10 Savings Association of Texas at any time? 11 A. Yes. 12 Q. What was the time period? 13 A. It was fall of '86 through -- I'm not 14 sure what the ending date was. 15 Q. Was it the -- was it the end of 1987? 16 A. That's possible. I don't remember. 17 Q. Okay. I'd like to hand you a document 18 we've marked as Exhibit No. A10517, which is a 19 copy of your resume. It was an exhibit in the 20 administrative proceeding. 21 Do you recognize that as a copy of your 22 resume? 3740 1 A. Sure. 2 Q. Okay. 3 MR. GUIDO: I'd move the admission of 4 A10517, Your Honor. 5 MR. NICKENS: No objection. 6 THE COURT: Received. 7 Q. (BY MR. GUIDO) Your resume indicates 8 your education. When did you graduate from 9 college? 10 A. It would be January of '77. 11 Q. And what college was that? 12 A. Wellesley College. 13 Q. And what was the degree? 14 A. Bachelor of arts, I think. 15 Q. Now, did you get a degree after you got 16 your BA at Wellesley? 17 A. Yes. From MIT. 18 MR. NICKENS: Your Honor, may I ask 19 that Mr. Guido move back just a bit? I can't see 20 the witness at all. 21 MR. GUIDO: Is that better? 22 MR. NICKENS: Yes. Thank you. 3741 1 Q. (BY MR. GUIDO) And what was the 2 degree that you received from MIT? 3 A. Master's of science, I believe it was, 4 with a concentration in finance and economics. 5 Q. Was that -- how many years did you 6 attend MIT? 7 A. It's a one-year program. It was for 8 people with business experience. I'd had a number 9 of years of calculus prior to that, and they 10 qualified you based on that. 11 Q. So, between college and the time you 12 spent at MIT, you were working for whom? 13 A. For Liberty Mutual and for Cargill, 14 Incorporated. 15 Q. After you graduated from MIT, where did 16 you go to work? 17 A. MCI. 18 Q. And what was your position at MCI? 19 A. Financial analyst, basically. 20 Q. And then after you left MCI, where were 21 you employed? 22 A. Freddie Mac. 3742 1 Q. And what was the time period that you 2 were employed at Freddie Mac? 3 A. I don't know exactly. You'll have to 4 refresh my memory. 5 Q. Will you take a look at the resume, 6 please? 7 A. Okay. 8 Q. The resume says November 1982 through 9 June 1984, Federal Home Loan Mortgage Corporation. 10 A. It says '85. 11 Q. June '85? 12 A. Yes. 13 Q. Does that refresh your recollection? 14 A. It's on the paper. It must be true. 15 Q. Now, what was your responsibilities at 16 Freddie Mac? 17 A. Freddie Mac would purchase whole loans 18 for securitization, and I would hedge them. I 19 would be involved in the pricing on the security 20 and the design process of the security. And then 21 I would be involved in acquiring the inventory to 22 support the security issuance and protect the 3743 1 company from risk in that interim period. 2 Q. And how long was that interim period 3 usually? 4 A. It could be a year. 5 Q. Could it be as short as a month? 6 A. Probably not a month, no. 7 Q. Okay. What would be the shortest time 8 period? 9 A. I'd say two months. 10 Q. Two months to a year? 11 A. Yeah. 12 Q. And what instruments did you use to 13 protect Freddie Mac during that interim period of 14 time that it held whole loans? 15 A. Largely treasuries, futures, options. 16 Q. Did you trade those portfolios while 17 you were hedging them? 18 A. Pretty much, yeah, we did. 19 Q. You bought and sold the whole loans? 20 A. Bought and sold the hedge instruments. 21 Q. Oh, the hedge instruments. So, you 22 bought and sold which hedge instruments? 3744 1 A. It depended on what the security 2 issuance was. If it was something that was 3 strictly a Fannie Mae or a Freddie Mac, short 4 hedge position, we'd trade that or else we would 5 trade treasuries if we were hedging a CMO or we 6 would trade Eurodollar options if we were hedging 7 a repo financing or we'd trade Eurodollar futures 8 if we were hedging repo financing. It depended on 9 what we were hedging. 10 Q. Now, what do you mean by "trade"? 11 A. Well, I mean put a buy position on or 12 put a sell position on, depending on what the 13 needs of the hedge were. 14 Q. And what was the purpose of the buy 15 position? 16 A. To adjust the hedge. 17 Q. Okay. Now, your resume says you traded 18 cash treasury, futures, options, and swap markets 19 to lock in mortgage financing costs. 20 Is that what you mean when you refer to 21 traded the instruments? 22 A. Yeah. 3745 1 Q. Now, subsequent to that, you went to 2 work for another company? 3 A. Subsequent to Freddie Mac, I went to 4 work for Salomon Brothers. 5 Q. Okay. And what did you do at Salomon 6 Brothers? 7 A. Basically, the same kinds of things 8 with a sales element added. 9 Q. Now, you were deposed by the OTS in 10 this proceeding, were you not? 11 A. Yes. 12 Q. Have you met with anyone from the OTS 13 subsequent to your deposition? 14 A. Not that I know of. 15 Q. Have you met with any of the lawyers or 16 any of the -- anyone representing any of the 17 parties in this proceeding subsequent to your 18 deposition? 19 A. Yes. I met with the defense lawyers. 20 Q. You met with the defense lawyers. And 21 when was that? 22 A. Yesterday. 3746 1 Q. Did they provide you with any 2 documents? 3 A. They have provided me with two box of 4 investment committee minutes from United. 5 Q. Have you had an opportunity to review 6 those investment committee minutes? 7 A. No. 8 Q. Now, have you ever reviewed the 9 transcript of the deposition that was taken of you 10 by the OTS? 11 A. Yes. 12 Q. And when did you review that? 13 A. Right now. I'm looking at it. 14 Q. Okay. You have a copy of the 15 deposition with you today? 16 A. Yes. 17 Q. And have you had an opportunity to 18 review the exhibits that were introduced in that 19 deposition? 20 A. No, other than in the deposition 21 itself. 22 Q. Now, who approached you about joining 3747 1 USAT? 2 A. Either Mike Crow or Barry Munitz. I 3 mean, it was a headhunter. It was a headhunter 4 that was hired by Mike Crow or Barry Munitz. 5 Q. And who is Barry Munitz? 6 A. Charles Hurwitz' right-hand man is what 7 I would say. 8 Q. And who is Michael Crow? 9 A. The CFO of United. 10 Q. And who interviewed you for your 11 position at USAT? 12 A. Oh, I think everybody in top management 13 did. I can't remember. My impression was that I 14 talked to everybody. 15 Q. Did Jenard Gross interview you? 16 A. I believe so. 17 Q. Did Michael Crow interview you? 18 A. He certainly did. 19 Q. Did Gerald Williams interview you? 20 A. I don't know about that. 21 Q. Pardon? 22 A. I don't remember. 3748 1 Q. Okay. Did Charles Hurwitz interview 2 you? 3 A. I don't remember that specifically. 4 Q. Now, did you speak to anyone about your 5 discussions with USAT at the time you were 6 considering joining USAT? 7 A. Several people. 8 Q. And who were those people? 9 A. The investment banker for United that 10 was working with Salomon Brothers and Lou Ranieri. 11 Q. Who was the investment banker? 12 A. Don't remember his name. 13 Q. And what did you tell Mr. Ranieri? 14 A. I told Ranieri that United Savings had 15 approached me because it was one of our clients at 16 Salomon Brothers, you know, and I was curious 17 about what he thought about them. 18 Q. Did he tell you what he thought? 19 A. He thought that they would be gone in a 20 year to a year and a half. 21 Q. Did he tell you they were on the verge 22 of collapse? 3749 1 A. Yes. 2 Q. Did he tell you why? 3 A. Real estate problems in Texas. 4 Q. Did he make any recommendations to you 5 with regard to your arrangement -- your proposed 6 arrangement with USAT? 7 A. He mentioned that I should get a 8 guaranteed contract if I decided to do anything 9 along that line. 10 Q. I'd like to have -- show you what we 11 have marked as Exhibit A10669. A10669 is a letter 12 dated September 19th, 1986, from Gerald Williams 13 to you. 14 Do you recognize that as the offer of 15 employment with United Savings Association that 16 was sent to you? 17 A. Yes. 18 Q. And will you look at -- 19 MR. GUIDO: Your Honor, I'd like to 20 move the admission of A10669. 21 MR. NICKENS: No objection, Your Honor. 22 THE COURT: Received. 3750 1 Q. (BY MR. GUIDO) And look at Page 2 of 2 the letter. It says -- on Item 5 it says "United 3 agrees that your salary plus bonus from the period 4 January 1, 1987, to January 1, 1989, will be no 5 less than $600,000." 6 And then Item 6, it says "United will 7 arrange to guarantee its obligations under this 8 agreement in a manner acceptable to you." Do you 9 see that? 10 A. Uh-huh. (Witness nods head 11 affirmatively.) 12 Q. Was that the guarantee that you were 13 recommended by Mr. Ranieri to obtain? 14 A. Uh-huh. (Witness nods head 15 affirmatively.) 16 THE COURT: Yes? Would you speak up? 17 A. Yes. Yes. 18 Q. (BY MR. GUIDO) Look at Items 2 and 3 19 on the first page of the letter. Item 2 says 20 "Based on your performance during the period 21 ending December 31, 1987, you will be eligible to 22 for an increase in base salary for the year 3751 1 commencing January 1, 1988, and ending 2 December 31, 1988." 3 And then item 3 says "Based upon your 4 performance during the period from the time you 5 commenced work through December 31, '87, you will 6 be eligible for a bonus to be paid on or about 7 January 1, 1988. You will also be eligible to be 8 paid a bonus based upon your performance during 9 the 1988 calendar year." Do you see those 10 paragraphs? 11 A. Yes. 12 Q. What is the performance that's referred 13 to in those paragraphs? 14 A. I don't know. 15 Q. You don't know? 16 A. (Witness shakes head negatively.) 17 Q. Was it performance based on profits 18 earned for the institution? 19 A. I don't remember. 20 Q. You don't remember? Did you ever 21 receive a bonus? 22 A. I don't remember. 3752 1 Q. Did you ever receive a salary increase? 2 A. I don't remember. 3 Q. Were you paid any severance benefits 4 when you left USAT? 5 A. I don't -- what you mean by "severance 6 benefits." My contract was restated, so -- 7 Q. What do you mean by "restated"? 8 A. They restated the contract to basically 9 make up what they hadn't paid me already of this 10 contract even though I was no longer employed 11 there. 12 Q. And how did they make it up? 13 A. Through subsequent cash payments. 14 Q. And for how long of a period of time 15 did you receive those subsequent cash payments? 16 A. I don't remember. 17 Q. Now, what were you told about USAT's 18 mortgage-backed security portfolio at the time you 19 were first employed by USAT? 20 A. First employed by USAT, I believe I was 21 told that they had a portfolio of Ginnie Mae 12s 22 that was hedged with interest rate swaps with a 3753 1 set rate of 11 percent and that the portfolio was 2 losing money big time because the Ginnie Mae 12s 3 had disappeared, run off, prepaid. 4 Q. What did they tell you about the 5 portfolio losing money big time? What did that 6 mean? 7 A. That the assets no longer existed to 8 support the interest rate swap payments that they 9 were contractually obligated to make. 10 Q. Did they indicate to you how far the -- 11 or how large the differential was between the 12 income stream and the expenses in that portfolio? 13 A. I don't believe they ever indicated it 14 to me. It was -- I mean, the second that I got 15 there, I started running mark-to-markets on the 16 portfolio. So, whatever the first report is that 17 you have would be the information that I would 18 have had on that portfolio. 19 Q. Okay. So, you ran your own analysis of 20 that portfolio after you joined USAT? 21 A. Sure. 22 Q. Now, did they indicate to you what they 3754 1 had done with that portfolio that resulted in that 2 negative spread that they described to you between 3 income and expenses? 4 MR. KEETON: Your Honor, I want to 5 object to this swinging "they." Find out who is 6 talking to her and who is telling her. 7 MR. GUIDO: Excuse me. The management 8 of USAT. 9 MR. KEETON: That's not specific 10 enough, Your Honor. 11 MR. GUIDO: Your Honor, I think it's 12 plenty specific for our purposes now. I will 13 address the specific individuals as we go through 14 this; but for purposes of these questions, I think 15 that that is sufficient. 16 MR. KEETON: I object to the form then, 17 Your Honor. Management doesn't speak. People 18 speak. 19 THE COURT: Why don't you ask her if 20 anyone spoke to her about it? 21 Q. (BY MR. GUIDO) Did anyone ever 22 explain to you what had happened with that 3755 1 portfolio that resulted in the -- in the locked-in 2 negative spread? 3 A. My guess is that any number of people 4 probably explained it. 5 Q. Did -- 6 A. But it was very clear with one 7 explanation what happened. It was not a difficult 8 problem to get your mind around, so... 9 Q. Now, did anyone tell you why that 10 spread became locked in negatively? 11 A. As I said, it was immediately apparent 12 to anybody who lived through the Ginnie Mae rate 13 declines what had happened. 14 Q. Now, what did they do with that 15 portfolio that locked in the spread? 16 A. I don't know what you keep saying about 17 "locked in the spread." Obviously, there was no 18 locked-in spread-in spread ever. There never had 19 been a locked-in spread. 20 Q. Well, what had they done to create the 21 negative spread? 22 A. They had bought, let's say, X amount of 3756 1 Ginnie Mae 12s and an equal amount of -- they had 2 contractually obligated to pay 11 percent, I 3 believe it was, on interest rate swaps. It may 4 have been 10 or something else. But they had 5 agreed to an equal amount of a fixed payment. The 6 asset prepaid disappeared. There was no income 7 stream to support the contractually obligated 8 fixed payment that was ongoing for the space of 9 however many years they contracted to do it. 10 Q. Did they purchase anything to replace 11 the mortgage-backed securities that prepaid? 12 A. I'm not sure exactly what they did. I 13 have anecdotal evidence that they rolled down in 14 coupon. I don't remember specifically being told 15 what coupon it was or how much they did of it. 16 Q. But did anyone ever tell you that they 17 rolled down the portfolio to lower coupons when 18 interest rates declined? 19 A. Somebody told me that. I don't know 20 how much was done of it or what coupons were 21 rolled to specifically. 22 Q. Did anyone tell you at what point in 3757 1 the rate decline the roll-down occurred? 2 A. No. 3 Q. Did you ever try to ascertain? 4 A. No. I saw the balances that were on 5 the books when I got there. That was my only 6 concern. Going back in the past to figure out why 7 had it gotten there or anything else really wasn't 8 an issue. It was operating from that point 9 forward that I was concerned about. 10 Q. Now, when you got there, what 11 mortgage-backed securities did you find in that -- 12 what coupon mortgage-backed securities did you 13 find in that portfolio? 14 A. I don't remember. I'd have to see 15 documents of investment committee minutes. 16 Q. Did you do any roll-down of that 17 portfolio after you arrived? 18 A. I don't remember. 19 Q. In your deposition, you were asked this 20 question on Page 52 of your deposition. "There 21 was no roll-down while you were there according to 22 USAT? Right?" 3758 1 Answer, "While I was there, there was 2 none." 3 Does that refresh your recollection? 4 MR. NICKENS: Your Honor, could we have 5 line references? 6 MR. GUIDO: It's Line 25 on Page 52. 7 Question: "There was no roll-down while you were 8 there?" 9 Answer, "Right. While I was there, 10 there was none." 11 A. I don't know if the question referred 12 to the existing portfolio when I arrived or if it 13 referred to securities that I bought after I 14 arrived. That wasn't -- you'll have to clarify 15 that for me. 16 Q. (BY MR. GUIDO) So, you don't know 17 whether or not you engaged in any roll-down to 18 reposition the portfolio after you arrived? 19 A. Which portfolio? The old existing 20 portfolio? 21 Q. The USAT portfolio. 22 A. I don't believe I did. I have no 3759 1 recollection of that at this point in time. 2 Q. Now, with regard to the United MBS 3 portfolio, did you engage in any roll-down to 4 reposition that portfolio because of a decline in 5 interest rates? 6 A. I don't know that I did it to do -- to 7 react to a decline in interest rates. I did move 8 between coupons to get relative value. So, I 9 rolled up or down at any point in time, not 10 necessarily in reaction to a downward rate move. 11 Q. What do you mean by "selling one 12 portfolio and buying another for purposes of 13 increasing relative value"? 14 A. Selling one security or one coupon and 15 buying another for relative value purposes? If 16 there is a short position by a dealer in a 17 security because of a CMO issue, it becomes 18 extremely expensive in the market. And if we 19 happen to have that in inventory as an investor, 20 then it makes sense to sell that particular 21 security and buy a replacement that's not 22 significantly different in terms of yield but does 3760 1 give you benefits in terms of earnings at the 2 sale. And the way that you analyze that is 3 looking at the dollar roll market to see what the 4 rolls are on the relative coupons. 5 Q. Now, taking -- moving between a 6 different coupon to another, can you give us an 7 example of -- 8 A. If a CMO is being done with Fannie Mae 9 9 and a half's and it's not being done with 10 Freddie Mac 9 and a half's, then you may sell the 11 Fannie Mae 9 and a half's to Wall Street because 12 they need them for a CMO and you might buy the 13 Freddie Mac 9 and a half's and be relatively 14 indifferent between your assets on the books at 15 that point and yet you've taken a gain which is 16 added to capital. 17 Q. So, the market value of one was priced 18 higher than the market value of another because of 19 a special demand? 20 A. Yes. It's intrinsically out of line. 21 Q. Now, were there any other type 22 transactions that you engaged in to enhance 3761 1 relative value? 2 A. Not that I remember. 3 Q. Did you sell one coupon of the same 4 issuer and purchase a different coupon from the 5 same issuer? 6 A. Probably so, yes. 7 Q. Do you recall a discussion in your 8 deposition about wash sales? 9 A. You -- I think you gave me a memo that 10 talked about wash sales and you asked what it was 11 in the context of and I didn't remember. 12 Q. Let me direct your attention to Page 48 13 of your deposition, Ms. Orr. 14 A. I only have 47 pages. 15 Q. You only have 47 pages in your 16 deposition? 17 A. Yes. Right. 18 Q. Who gave you that transcript of your 19 deposition? 20 A. I believe it was the defense attorneys. 21 Q. I have a copy of the deposition here if 22 you'd like to look. Look at Page 48. 3762 1 A. Okay. 2 Q. Look at Line 12. I'm sorry. Look 3 at -- 4 MR. NICKENS: Your Honor, he's not 5 impeaching the witness. He hasn't asked her a 6 question to indicate that it's any different than 7 what she testified to. It's an improper use of 8 the deposition. He has not asked her the question 9 that would allow him to impeach her. 10 Q. (BY MR. GUIDO) Did you ever have any 11 discussions -- 12 THE COURT: Well, wait. Are you 13 withdrawing that question? 14 MR. GUIDO: I'm withdrawing the 15 question, Your Honor. I'll approach it in a 16 different way. 17 Q. (BY MR. GUIDO) Did you ever have any 18 discussions while you were at USAT with any of the 19 accountants regarding whether or not the portfolio 20 would have to be mark-to-market? 21 A. The old portfolio or the new portfolio? 22 Q. Yes. The old portfolio. 3763 1 A. No. I don't think there was -- it was 2 a concern at all. They had already done that at 3 that point, I believe. They had already adjusted 4 all the books before I got there. So, no, they 5 weren't concerned about it going forward, I don't 6 believe, to the best of my recollection at this 7 minute. 8 Q. Did anyone ever discuss with you when 9 gains on the sale and repurchase of 10 mortgage-backed securities would be treated as a 11 gain for accounting purposes? 12 A. Yes. I think that was always an 13 underlying concern of ours, you know, the wash 14 sale treatment, that we were -- it was an 15 awareness that when we were doing the relative 16 value trading that we did want to realize the 17 benefit of it to capital. Yes, we did desire 18 that; but I don't remember specific discussions 19 with specific people. 20 Q. Do you recall the discussion of the 21 concept of wash sales in that context? 22 A. I knew the term "wash sales" prior to 3764 1 going to United. 2 Q. Can you tell us what your understanding 3 of the term "wash sale" is? 4 A. You cannot buy and sell an exact 5 duplicate security and realize the gain because it 6 is, in essence, putting the security back on your 7 book. 8 Q. And what was your understanding at USAT 9 that would make for a difference in securities so 10 that you could recognize the gain? 11 A. At the time the accounting rules were, 12 my understanding -- and at this point, I don't 13 remember what they were, but I assume it was a 14 different coupon, a different maturity. 15 Q. Okay. And a different issuer? 16 A. Different issuer possibly, yes. 17 Q. And did it matter whether or not there 18 was a time spread between the sale and the 19 repurchase of the security? 20 A. I don't believe it did, but that's the 21 best of my recollection. 22 Q. Now, do you recall discussions of the 3765 1 concept of wash sales at the investment committee 2 meetings? 3 A. No. 4 Q. You don't remember or they didn't 5 happen? 6 A. I don't remember. 7 Q. Do you recall who you had conversations 8 with at USAT about that? 9 A. No, I don't remember. 10 Q. Why was that issue significant for 11 USAT? 12 A. My impression -- and I had no direct 13 evidence of it because I was not made continuously 14 aware of the capital levels of the institution. 15 But we were tight on capital. The real estate 16 market had -- was bottoming out. They were taking 17 a lot of real estate losses, roughly 5 percent of 18 the mortgage -- the whole loan mortgage portfolio 19 was in foreclosure, which was extraordinarily 20 high. I heard all that from various sources. So, 21 I knew the institution was in trouble given that 22 Lou Ranieri told me that we had only a year or two 3766 1 left to live. So, I knew that we were in dire 2 straits. So, it was important to realize earnings 3 which would go directly into capital. 4 Q. Now, did you realize that on your own 5 or did people tell you that at USAT? 6 A. I can't read other people's minds, but 7 I am sure that everybody there had an awareness of 8 this including me. It did not require discussion. 9 Q. Did anyone authorize you to take -- 10 make these value trades, I think as you referred 11 to them, to generate accounting gains in the 12 portfolio? 13 A. The investment committee, yes. 14 Q. Now, was that in an effort to maximize 15 the accounting return on the mortgage-backed 16 security portfolio? 17 A. No. It was an effort to maximize the 18 economic value of the security portfolio and the 19 institution as a whole. 20 Q. Now, when you did these value trades, 21 how did you ascertain whether the security was 22 overvalued that you were selling? 3767 1 A. I'd look at the dollar roll market in 2 which the securities' financing rates were 3 reflected. And if they seemed out of line, that 4 would be the first clue. If I knew that one of 5 the dealers was doing a CMO with a specific coupon 6 and we had that coupon, then I would look at that 7 coupon in relation to any other coupon I could buy 8 and see if it made sense to swap out of it. I'd 9 use the Bloomberg swap model to analyze the two 10 coupons in question and run the analysis. 11 Q. What was the Bloomberg swap model? 12 A. It enables you to see at a horizon date 13 what the sale of, say, a Fannie Mae 8 and a half 14 versus the purchase of a Fannie Mae 9 does to you 15 yield-wise and valuewise. 16 Q. Now, what are the variables that affect 17 the value of a mortgage-backed security? 18 A. The prepayment rate, which is the rate 19 that the mortgage -- the mortgages in the pool 20 pay-down in excess of the normal amortization. 21 Q. And what is it that determines the 22 prepayment rate for a specific pool of 3768 1 mortgage-backed securities? 2 A. I don't think anybody really knows that 3 at this point. They are still refining that. 4 Q. Did you ever examine the pool of 5 mortgage-backed securities that you were selling 6 that you ascertained were overvalued to determine 7 what the characteristics of that pool of 8 mortgage-backed securities was? 9 A. I don't remember; but, of course, that 10 would be an element in any analysis. 11 Q. And did you -- you don't remember doing 12 it, though? 13 A. I don't remember doing it. 14 Q. Did you make any effort to ascertain 15 what the characteristics were of the pool of 16 mortgage-backed securities that you bought to 17 replace the one that you thought was overvalued? 18 A. That would be normal analysis, but I 19 don't remember specifically any instances of it. 20 Q. Do prepayment speeds alter between time 21 periods for a specific mortgage-backed security 22 pool? 3769 1 A. Certainly. 2 Q. Do those prepayment speeds change at 3 different speeds between different pools? 4 A. Certainly. 5 Q. When you engaged in your value trades, 6 did you attempt to ascertain whether or not the 7 difference between the value was determined by 8 prepayment -- differences in prepayment speeds? 9 A. That would be a part of any normal 10 analysis, yes. I don't remember specifically 11 doing it. 12 Q. Now, did you use what's referred to as 13 an OAS model at the time you were at USAT to value 14 mortgage-backed security pools? 15 A. The OAS models that came out early on 16 and, in fact, even nowadays, are full of variables 17 that reflect individual trader's views of the 18 world. They vary between investment houses 19 significantly on any given security. Traders did 20 not even use them when they first came out. I 21 certainly would look at them but basically ignored 22 them because they were in such a primitive state, 3770 1 the OAS models, when I was at United. 2 Q. Now, what models did you use to value 3 the mortgage-backed securities that you were 4 trading under this value trading strategy? 5 A. I'd use the prices off of Bloomberg, 6 and I'd use the prepayment projections from 7 dealers. 8 Q. Now, did those prepayment projections 9 differ among dealers? 10 A. Yes, they did. 11 Q. And did those different projections 12 result in different estimates of the value of the 13 mortgage-backed securities portfolios that you 14 were trading? 15 A. Yeah. They would indicate different 16 values, but most of them would be -- would 17 indicate a pretty clear sell signal on one of the 18 two securities. 19 Q. Now, how did you arrive at the 20 prepayment rate or assumption that you were using 21 to value the mortgage-backed securities portfolios 22 that you were selling because you thought they 3771 1 were overvalued? 2 A. I was on the phone eight hours a day 3 with all of the Wall Street houses talking to 4 their best traders. I would get information that 5 way primarily. Secondarily, by the research which 6 was already a week or two weeks late by the time I 7 got it in the mail. But secondarily from that 8 source. 9 Q. Who at USAT made the decision to select 10 one prepayment assumption to value -- 11 A. Me. 12 Q. You did? 13 A. Yeah. 14 Q. And how did you do that? 15 A. By talking to the dealers eight hours a 16 day, by reading their research, by talking to 17 economists who were predicting where interest 18 rates were moving and seeing if that fit with the 19 prepayment assumptions. 20 Q. Now, after surveying all these people 21 and reading the literature and looking at 22 Bloomberg, how did you ascertain what rate to use 3772 1 for the prepayment figure that you would assume in 2 valuing a security? 3 A. It's sort of like deciding what 4 question to ask of a witness. You use your best 5 judgment. 6 Q. I'd like to direct your attention to 7 Page 38 of your deposition. Look at Line 16. You 8 were asked the question: "Now, when that 9 happened, how did you ascertain what rate to use 10 for a prepayment figure to go into that model?" 11 A. Uh-huh. 12 Q. Can you tell us what your answer was? 13 A. "My best guess, given all of the inputs 14 that I had received." 15 Q. Is that still your view today? 16 A. Yeah. 17 MR. NICKENS: Your Honor, we have a 18 rule in Texas and I don't know if it applies to 19 this proceeding of optional completeness -- that 20 is, where a portion of the deposition is read, if 21 a related portion is also relevant at that point 22 in time, it can be read into the record. There is 3773 1 a question and answer that clarifies the witness' 2 answer that he has just made. I'm just asking 3 Your Honor about which rules. I would like to 4 read that question and answer, but I understand 5 that those rules are not applicable in this 6 proceeding. 7 MR. GUIDO: Your Honor, I think that 8 that can be addressed in cross-examination. I 9 think that's the appropriate time to do it. But I 10 don't -- I mean, I don't mind including the entire 11 deposition in the record if counsel has no 12 objection. 13 THE COURT: Well, I think it provides a 14 better context if you do it this way. So, why 15 don't you read what you think is relevant. 16 MR. NICKENS: At line -- Page 38, the 17 same page, Line 6, the witness was asked, "Did you 18 ever survey the brokerage firms to get their views 19 of what they thought it was?" And she answered, 20 "Sure, continuously." 21 Q. (BY MR. GUIDO) Now, did anyone 22 discuss with you when you joined USAT what their 3774 1 views were with regard to the structure of the 2 USAT mortgage-backed security portfolio prior to 3 your joining USAT? 4 A. Prior to my joining? I don't recall. 5 I don't believe so. 6 Q. Let me hand you what I've had marked as 7 Exhibit T4333. It's January 22nd, 1987. And I'd 8 like to direct your attention to the first two 9 paragraphs. It says "One of the reasons why I've 10 been so concerned about getting a competent bond 11 man on board shows up at the investment committee 12 meetings on a weekly basis. If you compare the 13 type of information Sandy presents to the 14 committee with the information we get on the 15 stocks and bonds, you can see the dramatic 16 difference in the presentation. With Sandy, you 17 have market information, occasional charts, 18 spreads, discussion, explanation of overall 19 spreads on a factual statistical basis. On the 20 other ones, we just get some broad generalizations 21 without necessary factual backup." 22 Now, when you made your presentations, 3775 1 did you explain to the investment committee all of 2 the reasons for the decisions that you had made in 3 the mortgage-backed security portfolio? 4 A. I don't think it would be possible to 5 explain all the reasons that I did anything at any 6 given point in time, but I explained as best as I 7 could the primary reasons. 8 Q. And when you made those presentations, 9 were there discussions regarding the proposals or 10 the decisions that you had made? 11 A. I don't remember. 12 Q. Was Michael Crow one of the members of 13 the investment committee? 14 A. Yes. 15 Q. Was Jenard Gross one of the members of 16 the investment committee? 17 A. Yes. 18 Q. Was Bruce Williams one of the members 19 of the investment committee? 20 A. Yes. 21 Q. Was Ron Heubsch one of the members of 22 the investment committee? 3776 1 A. Yes. 2 Q. Was Barry Munitz one of the members of 3 the investment committee? 4 A. Yes. 5 Q. Was Charles Hurwitz one of the members 6 of the investment committee? 7 A. Yes. I mean, he attended the meetings. 8 Let me put it that way. I don't know if they 9 specifically had an organizational chart where 10 they indicated "this is the investment committee." 11 I don't believe I ever saw anything like that. 12 But those were the people that were in attendance 13 on a fairly regular basis. 14 Q. And did they participate in the 15 discussions on a regular basis? 16 A. Yes. 17 Q. Now, look at the last paragraph on the 18 first page of this memorandum. It says "On the 19 other hand, part of the problem we are faced with 20 today is the fact that we really rushed into our 21 existing portfolio without the advice of the shape 22 of the CD maturity stream against the shape of the 3777 1 bond stream." 2 Do you see that sentence? 3 A. Uh-huh. (Witness nods head 4 affirmatively.) 5 Q. Now, is that making reference to junk 6 bonds? 7 A. I can't tell. 8 Q. Okay. 9 A. I never could tell with Jenard's memos. 10 Q. Well, look at a couple of paragraphs 11 up. It refers to double B bonds. 12 A. I assume he's talking about the junks. 13 Q. Now, it says, next sentence, "The end 14 result is that we are having a lot of bonds called 15 away but we are not having the CDs rolling off 16 because they are longer term." Then the sentence 17 appears, "Just like our swaps were not designed 18 properly and didn't give any thought to the 19 possibility of prepayments. That's how we got 20 killed in the mortgage-backed security area." 21 Do you see that? 22 A. Uh-huh, yes. 3778 1 Q. Did anyone ever tell you that they had 2 gotten killed in the mortgage-backed security area 3 in the USAT portfolio? 4 A. I don't recall that. I don't remember 5 those specific words being said to me. However, 6 as I said, anybody that knew what the trade was 7 that they had on by the time I got there saw the 8 results. It was not a difficult thing to 9 understand. 10 Q. Now, did you participate in any 11 meetings with representatives of Smith Breeden 12 when they made presentations to USAT regarding 13 mortgage-backed securities? 14 A. I know that I was in one. I don't know 15 if I was in more than that. 16 Q. Did you ever see an analysis that Smith 17 Breeden had done of the USAT mortgage-backed 18 security portfolio prior to your arrival? 19 A. Prior to my arrival, of the existing 20 portfolio? 21 Q. Of the existing portfolio. 22 A. I may have. I'm not sure. I don't 3779 1 remember. 2 Q. I'd like to show you a document that 3 we've marked as Exhibit T4222. It's a memorandum 4 dated July 3, 1986, from Michael Crow to 5 Jenard Gross and Jerry Williams. The subject: 6 Summary of Smith Breeden presentation. 7 MR. GUIDO: I move the admission of 8 4222 and also 4333, Your Honor. 9 MR. NICKENS: Is 4333 in? No objection 10 to 4333 or no objection, Your Honor, to 4222, 11 although I will point out that this memorandum is 12 several months prior to the time that Ms. Orr was 13 employed at USAT. 14 THE COURT: Received. 15 Q. (BY MR. GUIDO) Look at Page 2 of 16 Exhibit 4222, Ms. Orr. And it says at the very 17 bottom of the page -- it's Bates stamped US252. 18 It says "Schedule C presents an analysis of the 19 changes in value of the structured arbitrage 20 program with a given change in interest rates. 21 Similar to the overall conclusions of Goldman 22 Sachs' analysis, we appear to lose in the overall 3780 1 structured arbitrage portfolio in both increasing 2 and decreasing rate environments with the 3 exception of a modest decline in rates (a decline 4 of a hundred basis points)." 5 Do you see that sentence? 6 A. Uh-huh. (Witness nods head 7 affirmatively.) Yes. 8 Q. Did anyone provide you with that 9 information when you joined USAT regarding the 10 situation with regard to USAT's mortgage-backed 11 security portfolio at the time? 12 A. I don't recall. However, that is the 13 nature of a mortgage-backed security portfolio 14 because you are short convexity. If you have 15 moves outside of a hundred basis point range, it 16 is likely you will be hurt either direction. 17 Q. Did anyone ever discuss with you the 18 fact that the market value of that mortgage-backed 19 security portfolio was negative with no change in 20 interest rates? 21 A. I said that I valued the portfolio when 22 I got there, you know, as soon as I could. So, I 3781 1 knew that myself. I didn't need to see it from 2 anybody else. I knew what the structure of the 3 portfolio was. I heard it anecdotally. I knew 4 what it was on the books. And so, yes, I knew it 5 marked at a loss. Nobody had to tell me that. 6 Q. Did you discuss with anyone 7 alternatives of what to do with that portfolio? 8 A. After my point of hire or before? 9 Q. After. 10 A. Yes. I don't remember specific 11 conversations with specific people. But again, 12 it's one of those overriding things that every day 13 and night you're living with. You understand that 14 you want to increase the earnings of the company 15 by narrowing the negative spread in the existing 16 assets versus the liabilities. 17 Q. Look at Page 2 -- Bates stamped 263 of 18 that -- US263 of that memorandum. You see the 19 schedule that's on that page? 20 A. Yes. 21 MR. NICKENS: Your Honor, I -- on my 22 copy, I can't identify by Bates number. If there 3782 1 would be some other way to identify -- 2 MR. GUIDO: Do you have the OWO number? 3 MR. NICKENS: I do. 4 MR. GUIDO: It's OWO1139. You may not 5 have another copy of it. 6 MR. NICKENS: Mine doesn't go that far. 7 Q. (BY MR. GUIDO) Now, if you look at 8 the schedule, you see under the base case -- it's 9 slightly difficult to read, but it seems to say 10 that there is a negative $58,034,000 value in that 11 portfolio at the time this analysis was done. It 12 was May 30, 1986. Do you see that figure? 13 A. Yes. 14 Q. And then it indicates that it was -- 15 A. Was it '86 or '84 on the date? 16 Q. The date is 1986. 17 A. Okay. 18 Q. Smith Breeden didn't do any work for 19 USAT in 1984, did it? 20 A. I don't know. 21 Q. Did USAT have any mortgage-backed 22 securities in 1984? 3783 1 A. I don't know. 2 Q. Okay. Now, looking at that figure, it 3 shows that the near-term T bond futures price 4 is -- I think is 94 at the top. Do you see that? 5 A. Right. 6 Q. And then it says -- as an interest 7 rate, it seems to say 6.9 with a one-year treasury 8 rate. You see that figure? 9 A. Yes. 10 Q. And then to the left, interest rates 11 decline and to the right interest rates increase. 12 Do you see that? 13 A. Yes. 14 Q. Now, that indicates with a hundred 15 basis point move, that the -- down, that there 16 would be a 51-million-dollar loss to that 17 portfolio which would be essentially a gain if 18 interest rates went down. Right? 19 A. Yes. 20 Q. And then it would be -- if there was an 21 interest rate move of 1 percent up, there would be 22 an 82-million-dollar loss so that there would be a 3784 1 loss if interest rates went up in that portfolio 2 in that range? 3 A. Yes. 4 Q. Now, when you did your sensitivity 5 analyses, when did you first start doing them at 6 USAT? 7 A. I don't remember. 8 Q. Would the investment committee minutes 9 reflect when you first started? 10 A. I may have done some prior to that that 11 just didn't appear in the minutes. 12 Q. Now, I'd like to show you Exhibit T4213 13 if I may. 14 MR. NICKENS: The date? 15 MR. GUIDO: June 17th, 1986. 16 Q. (BY MR. GUIDO) This memo purports to 17 be an analysis of the investments in the MBS 18 arbitrage portfolio at USAT written by Bruce 19 Williams. 20 Who was Bruce Williams? What was his 21 role? 22 A. He was the treasurer. 3785 1 Q. And did he periodically do analyses of 2 the mortgage-backed security portfolios? 3 A. Yes, because I believe later on, he 4 ended up running the asset liability management 5 model for the whole institution. So, he was 6 always interested in that. 7 Q. Now, I want to direct your attention to 8 Paragraph C and ask you if you can explain some of 9 this to us. It says "Analysis of the arbitraged 10 spread shows we have a negative fixed spread and a 11 positive floating spread which is just the 12 opposite of the expected results. The fixed 13 spread difference between the MBS yield and fixed 14 rate paid on interest rate swaps is negative and 15 reflects the yield loss during a rapidly falling 16 rate environment in coupon roll-down efforts." 17 Do you know what it means with regard 18 to the fixed spread between the MBS yield and the 19 fixed rate paid on interest rate swaps as 20 negative? 21 A. Yeah. 22 Q. Okay. Can you tell us what that means? 3786 1 A. At that point, let's say if you put on 2 the quote, unquote, "risk-controlled arb" with a 3 hundred million of an 11 percent fixed swap versus 4 a hundred million of a Ginnie Mae 12 asset and 5 half of the Ginnie Mae 12s pay off, then you would 6 have a much reduced spread from what you thought 7 you originally put on. And if it paid down 8 enough, it would become negative. So, that's what 9 he was referring to. 10 Q. Now, look at the last sentence -- I 11 mean, the last paragraph. See the paragraph that 12 says "A review of our portfolio indicates a 13 continued concentration of FHLMC 9 percent MBSs." 14 Do you see that? 15 A. Yes. 16 Q. So, that that was a -- so that that's 17 what basically was on in that portfolio and they 18 had an 11 percent swap fixed cost? 19 A. Right. 20 Q. And is that what that paragraph refers 21 to when it says a negative -- 22 A. I believe so. I can't read his mind. 3787 1 It was before I was there. 2 Q. Okay. But that's your understanding of 3 the portfolio at the time you were there? 4 A. No. 5 Q. Now, look at the next paragraph and 6 this is the one I wanted to ask you about. It 7 says "The positive floating spread difference 8 between the reverse repo rate paid and the 9 floating rate received on interest rate swaps is 10 largely due to falling rates and unmatched 11 maturities." 12 Do you know what that refers to? 13 A. No. 14 Q. How does the floating spread create a 15 problem in a mortgage-backed security portfolio 16 hedged with swaps? 17 A. It doesn't create that much of a 18 problem. The only thing that I can think that he 19 might be referring to was on an interest rate 20 swap, you're generally receiving a three-month 21 LIBOR rate when you're paying a fixed rate. So, 22 your offset is a floating three-month rate. And 3788 1 on the borrowing against the mortgages, the repo 2 rate is a one-month rate. So, you might have a 3 slight mismatch there, but not much of one. 4 It's -- 5 Q. Turn to the second page. See where it 6 says "in summary" on the second page? 7 A. Yes. 8 Q. And it asks -- makes two points. It 9 says "The portfolio's overhedged, which is 10 reducing the net spread." Do you see that? 11 A. Yes. 12 Q. Is that what you were referring to? 13 A. No. That's not what I'm referring to. 14 Q. And then the next bullet says "We are 15 mismatched on the floating side of the 16 transaction." Do you see that? 17 A. Yes. 18 Q. Is that what you're referring to? 19 A. That's what I'm referring to on the 20 floating side. 21 Q. Now, were you asked to explore 22 alternatives of what to do with the existing 3789 1 risk-controlled arbitrage portfolio at USAT when 2 you joined? 3 A. I don't have any specific recollection 4 of that other than the inherent knowledge that we 5 all had that something needed to be done. I'd 6 like to show you a document that we've marked as 7 Exhibit T4252. 8 MR. NICKENS: Your Honor, I would ask 9 if Mr. Guido can give me the date. 10 MR. GUIDO: September 23rd, 1986. It's 11 a memo from Mike Crow to the investment committee 12 regarding the attached draft proposal on interest 13 rates. 14 MR. NICKENS: The problem is, Your 15 Honor, that Mr. Guido gave me these document pulls 16 which are about this high and, in order to be able 17 to find them, I had to organize them by date. So, 18 I don't have them organized by number but I think 19 I can find them if he gives me the date. 20 THE COURT: Will you accommodate 21 Mr. Nickens? 22 MR. GUIDO: I will. In fact, I have an 3790 1 extra copy and I'll give him a copy as I move 2 along. 3 MR. NICKENS: September? 4 MR. GUIDO: September 23rd, 1986. Your 5 Honor, I'd like to move the admission of 6 Exhibit T4213, the June 17th memorandum from Bruce 7 Williams to Jenard Gross, Jerry Williams, and 8 Mike Crow and also move the admission of T4252, 9 the Mike Crow memo to the investment committee 10 dated September 23rd, 1986. 11 MR. NICKENS: With regard to T4213, 12 Your Honor, I am told that it has been admitted 13 previously and for some reason, I don't have the 14 September 23rd, 1986, memo. No objection, Your 15 Honor. 16 THE COURT: To -- 17 MR. NICKENS: To 4252. 18 THE COURT: Received. And the other, 19 T4213, has been admitted under that number at some 20 time? 21 MR. NICKENS: A different number. The 22 other number, Your Honor, is A10643. 3791 1 THE COURT: Same document? 2 MR. NICKENS: Yes, sir. 3 THE COURT: Well, I'm not quite sure 4 how to handle this. I want to make a record. You 5 have this document now identified. Do you want to 6 put them both in? 7 MR. GUIDO: Your Honor, I think 8 probably because we discussed the document with 9 regard to the T4213 number, I think that we should 10 leave the document in that place and let the 11 record show that it has two numbers, which 12 Mr. Nickens has just done. 13 THE COURT: Well, we've made a record 14 on that. All right. Proceed. 15 Q. (BY MR. GUIDO) Now, this is a 16 memorandum dated September 23rd, 1986, to the 17 investment committee. 18 Do you recall ever seeing this 19 memorandum? 20 A. No. 21 Q. Do you recall having any discussions at 22 USAT regarding Merrill-Lynch's analysis of the 3792 1 interest rate swap situation at USAT? 2 A. No. 3 Q. Did you ever have any discussions with 4 anyone regarding what to do about the USAT 5 mortgage-backed security portfolio? 6 A. I don't remember specific discussions 7 with specific people; but it was always on our 8 mind, "What do we do about the existing negative 9 spread?" 10 Q. Well, did you ever discuss just 11 liquidating that portfolio? 12 A. At that point, we couldn't take the hit 13 to capital to do that. 14 Q. What do you mean you couldn't take the 15 hit to capital? 16 A. I mean the portfolio was marking down 17 $54 million. In one of the documents you showed 18 me, we didn't have the $54 million in capital to 19 take that loss. 20 Q. Now, did you ever discuss the use of 21 mirror swaps to mitigate the impact of further 22 declines in the interest rates having a negative 3793 1 impact on the swaps in that portfolio? 2 A. I don't remember. All that means is 3 that you're locking in your loss in spread. 4 Q. So, you don't recall considering that 5 as an option? 6 A. No. 7 Q. Do you recall considering what the cost 8 would be of offsetting swaps? 9 A. No, I don't recall even contemplating 10 that option. 11 Q. Did you ever discuss with anyone taking 12 the profits that had been earned on the roll-down 13 strategy in the sale of MBSs and using those funds 14 to buy down a portion of the swaps? 15 A. I don't recall. 16 Q. Now, look at the last paragraph of the 17 cover memorandum. And it's talking about the 18 strategy that's to alleviate the damaging effects 19 of the current swap positions and it says "Both 20 ourselves and Merrill-Lynch are going to check the 21 accounting for such a transaction. It is possible 22 this could be construed to be an extinguishment of 3794 1 debt which would require booking a loss up front 2 similar to Option 1 in the attached memo which is 3 obviously unworkable." 4 Do you see that? 5 A. Yes. 6 Q. And that is -- why was that obviously 7 unworkable? 8 A. We didn't have excess capital to take 9 hits like that. 10 Q. Okay. Was this something that was 11 discussed in the investment committee? 12 A. You keep asking me about that. I don't 13 have any knowledge of specific discussions with 14 specific people about any of these issues. 15 Q. Now, was your role at USAT a 16 responsibility to be the manager of its 17 mortgage-backed security portfolios? 18 A. That's how I viewed it. 19 Q. Okay. And did that include all of the 20 mortgage-backed securities? 21 A. That's how I viewed it. 22 Q. And did that include the 3795 1 mortgage-backed securities that were in USAT's own 2 portfolio? 3 A. That's how I viewed it. 4 Q. Did that include USAT's mortgage-backed 5 securities that were in what was called United 6 MBS? 7 A. Yes. 8 Q. Did that include USAT's mortgage-backed 9 securities which were in other port -- other 10 subsidiaries' portfolios? 11 A. Yes. 12 Q. And what were those other subsidiaries? 13 A. I don't remember the specific names of 14 them. 15 Q. Were they set up for specific purposes? 16 A. I'm sure they were if they were 17 subsidiaries. 18 Q. Now, did you participate in the 19 establishment of United MBS? 20 A. I don't remember. 21 Q. Okay. Did you advocate the creation of 22 United MBS? 3796 1 A. I don't think that would have been 2 something I would have advocated necessarily 3 because I was not into the legalities or the 4 accounting of whether something was in a 5 subsidiary or in a parent at that point. 6 Mike Crow was much better informed on those 7 issues. 8 Q. Were you -- did you report to 9 Mike Crow? 10 A. Yes. 11 Q. And did you also report to the 12 investment committee? 13 A. No. I was not -- my performance was 14 not judged by them. 15 Q. In other words, he evaluated your 16 performance? 17 A. Yes. 18 Q. Okay. But in terms of the reporting on 19 what you were doing, did you also report to the 20 investment committee? 21 A. I made them aware of my activities on a 22 weekly basis. 3797 1 Q. And were you also a member of the 2 investment committee? 3 A. I don't know that I was counted as a 4 member. I was present at all of the meetings. 5 Q. And did you participate in the 6 discussions at the investment committee? 7 A. Yes, I did. 8 Q. Now, do you recall why the United MBS 9 portfolio was created in a separate subsidiary? 10 A. No. 11 Q. Did you have any discussions with 12 brokerage firms regarding the purpose of the 13 United MBS mortgage-backed security portfolio? 14 A. I don't remember. 15 THE COURT: We'll take a short recess. 16 17 (A short break was taken 18 from 11:15 a.m. to 11:37 a.m.) 19 20 THE COURT: Be seated, please. We'll 21 be back on the record. 22 Mr. Guido, you may continue with your 3798 1 examination of the witness. 2 MR. GUIDO: Thank you, Your Honor. 3 (11:37 a.m.) 4 Q. (BY MR. GUIDO) At this point in time, 5 I'd like to show you a document that I've marked 6 as T4277. It's a letter from Michael Crow to 7 Mr. Steven Peers dated October 20, 1986. 8 A. Steven Peers was the investment banker 9 for United and was one of the two people that 10 contacted me about -- 11 Q. I also wanted to show you a document 12 that is marked as T4264, which is the same letter, 13 unsigned rendition of the letter, that was sent to 14 a number of other people. And I want to ask you a 15 couple of questions about these documents? 16 THE COURT: Before we go on, could you 17 just give me one more time the number of the 18 exhibit that was admitted which is also marked 19 T42 -- 20 MR. NICKENS: Yes, Your Honor. Our 21 records indicate that that is A10643. 22 MR. GUIDO: And the document reference 3799 1 was T4213 earlier today. 2 THE COURT: Yes. Proceed. Excuse me. 3 I just didn't get that. 4 MR. GUIDO: Thank you, Your Honor. I'd 5 like to move the admission of Exhibit 4277 and 6 4264, Your Honor. 7 MR. NICKENS: No objection. 8 THE COURT: Received. 9 Q. (BY MR. GUIDO) Now, let's start 10 with -- Exhibit 4 -- the text of the letters that 11 are in the packet 4264, are those identical to the 12 text of the letter that's signed by Michael Crow 13 in Exhibit T4277? 14 A. The print is different. 15 Q. Pardon? 16 A. The print is a different font. 17 Q. But other than that, the text is the 18 same? Did you work on preparing this letter to 19 these representatives in various investment 20 banking firms? 21 A. I don't remember. 22 Q. Okay. Now, this makes reference to 3800 1 United MBS. 2 Is that the subsidiary that was 3 established for the purpose of managing a 4 mortgage-backed security arbitrage portfolio at 5 USAT? 6 A. Yes. 7 Q. And is that a subsidiary that was to be 8 capitalized at 10 percent by USAT? 9 A. That's what it says in the letter. I 10 have no recollection. 11 Q. Okay. And look at the second sentence 12 in the second paragraph. It says -- through the 13 end of the paragraph, it says "The primary 14 activities of this subsidiary will involve 15 investments in mortgage-backed securities funded 16 with reverse repurchase agreements. It is planned 17 that the arbitrage portfolio will be substantially 18 hedged utilizing a combination of futures, 19 options, and interest rate swaps." 20 Was that your understanding of what the 21 portfolio was to do? 22 A. Yes. 3801 1 Q. Pardon? 2 A. Yes. 3 Q. Now, do you recall any discussions in 4 the investment committee that you had with any 5 individuals regarding the relationship that the 6 size of the mortgage-backed security portfolio had 7 at USAT to the qualified thrift lender test? 8 A. No, I don't recall. 9 Q. I'd like to hand you a document we've 10 marked as T4246. It's a memorandum from Doug 11 Hansen to Charles Hurwitz, Jenard Gross, Barry 12 Munitz, Jerry Williams, Mike Crow, Art Berner, 13 Bruce Williams, Jim Wolfe regarding growth and 14 capital strategy next six months. 15 THE COURT: Can you give us a date? 16 MR. GUIDO: The date is September -- 17 it's either 6 or the 8th, Your Honor. It's hard 18 to read the document. 19 THE WITNESS: I can't read it. 20 Q. (BY MR. GUIDO) I'd like to direct 21 your attention to the third page of the 22 memorandum? 3802 1 MR. NICKENS: Your Honor, was the 2 document offered? 3 MR. GUIDO: No, not yet. If you want 4 me -- I will offer -- 5 MR. NICKENS: I have no objection to 6 the document, Your Honor, except that like in 7 other instances, there are certain highlighting, 8 underlining that I believe to be attorneys for the 9 OTS or FDIC that I object to and would like to 10 have a clean copy for the record. But other than 11 that, I don't object to this. 12 MR. GUIDO: Your Honor, I think that 13 counsel has misspoke. The copy that I was able to 14 provide is a clean copy. 15 MR. NICKENS: Fine. My copy has those 16 markings on it. 17 THE COURT: All right. T4246 is 18 received. 19 MR. GUIDO: We would also offer 4277 20 and 4264, the letters from Michael Crow to the 21 investment bankers. 22 THE COURT: I believe they are already 3803 1 received. 2 MR. GUIDO: Okay. Thank you, Your 3 Honor. 4 Q. (BY MR. GUIDO) Now, I'd like to 5 direct your attention to Page 3 of the memorandum, 6 Ms. Orr. And it's addressing the shrinkage of 7 United Savings and it's Point 2 that I want to 8 direct your attention to. It says "United's 9 limitation of shrinking is the non-thrift assets. 10 Real estate, preferred stock, high-yield bonds, 11 equity arbitrage, and goodwill make up 1.62 12 billion at the end of the year." 13 Do you see that? 14 A. Yes. 15 Q. Do you recall whether you participated 16 in any discussions regarding the significance of 17 the size of the mortgage-backed securities 18 portfolio for maintaining USAT's investments in 19 preferred stock, real estate, high-yield bonds, 20 equity arbitrage? 21 A. No. 22 Q. And this memorandum doesn't refresh 3804 1 your recollection? 2 A. No. 3 Q. Now, were you the person designated to 4 open accounts with the brokerage firms that are 5 referred to in Exhibits No. T4277 and 4264 that 6 Mr. Crow wrote describing the United MBS 7 portfolio? 8 A. I don't remember specifically opening 9 accounts, but that probably would have been my 10 function. 11 Q. Do you recall any discussions with 12 those brokerage firms regarding their willingness 13 to extend credit to United MBS? 14 A. No, I don't. 15 Q. Do you recall any discussions with 16 those brokerage houses regarding the need for a 17 commitment to maintain the capital of UMBS by 18 USAT? 19 A. No, I don't. 20 Q. Now, I'd like to show you two documents 21 that have already been introduced into the record, 22 Ms. Orr. One of them is A11022 and the other is 3805 1 A11027. 2 MR. GUIDO: And for the Court's 3 convenience, I have -- I had extra copies, Your 4 Honor. 5 THE COURT: I have them. 6 Q. (BY MR. GUIDO) I'd like to direct 7 your attention to Page 6 of A11022, Ms. Orr. This 8 is a chart that depicts the growth of the 9 mortgage-backed security portfolio of USAT over 10 time. And I guess my first question is: Did you 11 determine the size that the United MBS 12 mortgage-backed security portfolio should be? 13 A. No. 14 Q. Who did that? 15 A. I remember Jenard Gross asking me that 16 it be 3 billion by March '87 quarter end. 17 Q. By March '87 quarter end? 18 A. Uh-huh. So, he obviously had some 19 number in mind. 20 Q. Now, did you have discussions with the 21 investment committee in which they set portfolio 22 size for you? 3806 1 A. I don't remember specific discussions, 2 but every trade was reviewed by them. So, I 3 assume that they had some maximum size that they 4 wanted to be, also. 5 Q. Do you recall when you had that 6 conversation with Mr. Jenard Gross when you said 7 that he wanted the portfolio to be $3 billion by 8 March of '87? 9 A. It was in various investment committee 10 meetings. I don't remember the dates. It was a 11 repeated thing. 12 Q. So, it's your understanding your 13 authorization was to -- by the investment 14 committee was to take the portfolio to $3 billion? 15 A. I don't know that that was my 16 understanding of the authorization of investment 17 committee. It was what Jenard desired. 18 Q. Did you, before you made purchases in 19 the United MBS portfolio of mortgage-backed 20 securities, obtain the approval of the investment 21 committee? 22 A. I can't recall if it was prior to or 3807 1 post. 2 Q. But you either sought authorization 3 before the investment committee meeting or sought 4 their approval for the transaction after it 5 occurred? 6 A. My recollection was that in advance of 7 any substantial swaps, value trades, additions to 8 the portfolio, that I'd review it with Mike Crow. 9 Bruce would inevitably be involved because 10 everything that Mike did involved Bruce. And 11 possibly Jenard's approval. But definitely 12 Mike Crow beforehand would have been informed. 13 Q. Now, when you say "Bruce," you mean 14 Bruce Williams? 15 A. Yes. 16 Q. Now, the portfolio at March 1987, the 17 mortgage-backed security portfolio, indicates was 18 approximately $1.274 million. Does that conform 19 to your recollection? 20 A. I can't testify to the accuracy of any 21 of these numbers. 22 Q. So, you have no reason to dispute the 3808 1 accuracy of any of these numbers? 2 A. On the asset side, I have no reason. 3 Q. Okay. And let's take a look at the 4 interest rate cap side. Do you have any reason to 5 dispute the accuracy of the cap size as reflected? 6 A. Yes, I do. 7 Q. Okay. Where? 8 A. If this is -- well, the cap -- if this 9 is caps alone -- 10 Q. This is just caps. 11 A. This may be accurate, but I'm not sure. 12 But it is not the total hedge position by any 13 stretch. 14 Q. All right. Now, were there other 15 hedges that were on the portfolio, to your 16 understanding? 17 A. Yes. We used all sorts of hedges: 18 Eurodollar options, futures, Eurodollar futures, 19 swaps. 20 Q. Would you take a look at -- I think 21 it's -- this is that page where we've had trouble 22 with, but I think it's Page 58. It -- 3809 1 THE COURT: What exhibit? 2 MR. GUIDO: It's on Exhibit A11027, 3 Your Honor. Did we ascertain that this is 4 Page 58, Mr. Nickens, subsequent to our -- 5 MR. NICKENS: I think I recall 6 Mr. Hargett saying that he thought that was 7 Page 58, but it is -- and the subsequent page does 8 appear to be 59. 9 Q. (BY MR. GUIDO) Now, you see the -- 10 this purports, also, to be a depiction of the 11 United MBS portfolio over time and it shows 12 various instruments under "identified liability 13 hedges." Do you see those? 14 A. Yes. 15 Q. And that's under -- are those the 16 contracts that you're referring to that were also, 17 in your estimation, hedge instruments for the 18 United MBS mortgage-backed securities portfolio? 19 A. Yes. 20 Q. And those were placed on that portfolio 21 to hedge the interest rate risk? 22 A. Right. 3810 1 Q. And are -- look at the Eurodollar 2 futures. Can you describe what those Eurodollar 3 futures were? 4 A. Yes. They are short positions in 5 Chicago Mercantile Exchange three months 6 Eurodollar futures. 7 Q. And what do you mean by "short 8 position"? 9 A. We would sell the futures contract 10 which would protect us from the upward move in 11 rates on our financing. 12 Q. So, you were purchasing protection from 13 an upward movement in interest rates? 14 A. We were selling futures. 15 Q. And what would happen to that futures 16 position if there was a downward move in interest 17 rates? 18 A. It would lose money and the asset would 19 gain value. 20 Q. Now, there's also reference to options 21 contracts. Do you see those references? 22 A. Yes. 3811 1 Q. Can you tell us what those refer to? 2 A. My best guess is that they were 3 Eurodollar puts, that they were put options 4 purchased on the Chicago Mercantile Exchange on 5 Eurodollar futures. 6 Q. Okay. And what would be the effect, if 7 interest rates rose, to the value of those 8 contracts? 9 A. A put contract picks up value if the 10 value of the contract goes down. The value of the 11 contract goes down when interest rates rise. So, 12 these pick up value when interest rates rise. 13 That's protecting your financing cost. 14 Q. And that's with regard to the variable 15 rate interests that were paid on the reverse 16 repos? 17 A. Yes. 18 Q. Now, how did you ascertain the extent 19 to which the United MBS portfolio should be 20 hedged? 21 A. The United MBS portfolio would be 22 subsidiary -- 3812 1 Q. Pardon? 2 A. You're saying subsidiary? 3 Q. The subsidiary. 4 A. Just the spread requirements that they 5 needed from it determined the amount of hedge that 6 you could place on it. 7 Q. What do you mean by "the spread 8 requirements"? 9 A. There was a certain amount of spread 10 that was expected from the subsidiary, and I can't 11 at this point say exactly what it was. I don't 12 recall. But in order to get something relatively 13 assured in a range close to what they expected as 14 a spread, you could only put on so much of a 15 hedge. 16 Q. And why was that? 17 A. Because if you fully hedge, you have 18 zero spread except for the credit risk spread. 19 Q. And except for the prepayment risk. 20 Right? 21 A. Well, no. You can hedge that out. You 22 can do your entire hedge with options and spend 3813 1 away all the spread. 2 Q. Now, how did the caps operate? What 3 did they protect against? 4 A. It's the same sort of deal where they 5 protect the financing cost from going up. They 6 cap the financing cost, the reverse repo rate. 7 Q. Now, what were the needs of USAT that 8 affected the amount of spread that it expected you 9 to earn on the United MBS portfolio? 10 A. The residential portfolio, the 11 residential loan portfolio, was foreclosing at a 12 very high rate. Goodwill was no longer allowed to 13 be counted as a capital asset by the OTS, I 14 believe, at that point. So that all of the 15 goodwill spent on the acquisition was eliminated. 16 Q. When did OTS come into existence? 17 A. I'm not aware. 18 Q. Was OTS in existence when you were at 19 USAT? 20 A. I believe so. 21 Q. The -- so, one of the factors that 22 affected the instructions that you were given in 3814 1 terms of the amount of spread that you should aim 2 for was the fact that there were losses in the 3 real estate portfolio? 4 A. Yes. 5 Q. And what was it that was expected of 6 you with regard to the spread to compensate for 7 those real estate losses? 8 A. I've already stated I don't remember 9 the exact number. 10 Q. Who gave you that number? 11 A. I'm not -- I don't recall. I'm not 12 sure. 13 Q. Did the investment committee give it to 14 you? 15 A. It would have been somebody who was on 16 the investment committee, but I don't recall who 17 it was specifically. 18 Q. You were asked to obtain a certain 19 spread in light of the fact that there were real 20 estate losses? 21 A. I'm not sure it was ever stated with 22 that chain of reasoning. It was simply if wear 3815 1 doing our junk bonds at 350 basis points over 2 treasuries and we're doing our other assets, the 3 equity arb is earning us a 500 basis point spread. 4 Mortgage securities, given their placement in the 5 risk structure of assets, should get 250 basis 6 points, something along those lines. It would 7 have been that generic. 8 Q. Were you also instructed to engage in 9 the value trading, the switching from one coupon 10 to the other or one issuer of mortgage-backed 11 securities -- 12 A. No, I was not instructed by anybody on 13 that. I came up with the ideas, and they approved 14 them. 15 Q. Okay. You recommended it to them and 16 they approved it? 17 A. Yes. 18 Q. And they did that at the investment 19 committee? 20 A. I am not sure, as I said before, 21 exactly who the final approval was. I believe 22 there were trade tickets with signatures on them. 3816 1 I considered that to be the approval. 2 Q. Now, look at Exhibit A11022 again. 3 A. Yes. 4 Q. You see in October through December, 5 the size of the cap portfolio on Page 6? The 6 numbers are on the bottom right-hand corner. 7 A. On Page 6? Yes. 8 Q. You see the size of the portfolio 9 between September and December of 1986? 10 A. September and December of 1986? 11 Q. '87. Excuse me. You see at 12 September 1987, it shows the portfolio of caps to 13 be $1.2 billion? 14 A. Yes, I do. 15 Q. And then October, it goes down to 600? 16 A. Yes. 17 Q. It stays down to 600 through November? 18 A. Yes. 19 Q. And then it goes back up to 1.18? Do 20 you see that? 21 A. Right. 22 Q. Can you tell us how -- why that 3817 1 happened? 2 A. I don't recall. I do know that there 3 was an event in there, which was the crash of the 4 market, and there were extreme interest rate 5 movements during that period, extreme volatility. 6 We may have adjusted the cap position accordingly 7 to take advantage of that. 8 Q. The -- I'd like to show you a packet of 9 materials which have been marked as 10 Exhibits A1470, A1471, A1472, A1477, A1478. Those 11 are minutes of the investment committee or 12 subcommittee thereof. A1470 is the investment 13 committee minutes of October 23. A1471 are the 14 investment committee minutes of October 28th. 15 A1472 are the investment committee minutes or 16 subcommittee thereof of October 29th. A1477 are 17 the investment committee minutes of November 19th, 18 1987. A1478 are the investment committee minutes 19 of November 25th, 1987. And A1479, which I guess 20 I omitted to mention, are the investment committee 21 minutes of December 4th, 1987. 22 MR. GUIDO: I'd like to move the 3818 1 admission of these investment committee minutes, 2 Your Honor. 3 MR. NICKENS: No objection, Your Honor. 4 It's 1470, 71, 72, 77, 78, and 79? 5 MR. GUIDO: That's correct. 6 THE COURT: Received. 7 Q. (BY MR. GUIDO) Now, the October 23 8 minutes, 1470, do you see the second paragraph on 9 the first page? It says "Ms. Sandy Laurenson 10 reported on the mortgage-backed securities 11 portfolio. Her report was ordered attached to the 12 minutes of the meeting. She noted that she did 13 not believe that over the next year and one half, 14 we would see a ten and a half long bond." Do you 15 see that? 16 A. Right. 17 Q. Did you customarily make predictions 18 about the direction of interest rates to the 19 investment committee? 20 A. Every week, we had a so-called expert 21 testify basically over the phone from one of the 22 brokerage houses as to where they thought rates 3819 1 were going. And I was simply probably parroting 2 what they said. 3 Q. Okay. Now, why was it that you 4 reported to the committee the direction that you 5 thought interest rates were going? 6 A. Actually, it's a regulation now in the 7 operation of banks. I don't believe it was a 8 regular back then, but they have found it to be a 9 good idea for the board to be informed of 10 anticipated rate moves and anticipated events 11 concerning interest rates. So, I was probably 12 responding a little bit early to what would become 13 a regulation. 14 Q. Okay. Now, on the meeting on 15 October 28th, the meeting doesn't indicate -- the 16 minutes don't indicate that -- excuse me. In the 17 second paragraph, it says "Mr. Falconi, with the 18 able assistance of Ms. Laurenson, reported on the 19 mortgage-backed securities portfolio." And that 20 the report was ordered attached to the minutes of 21 the meeting. Do you see that? 22 A. I don't see it; but if you're reading 3820 1 off of it, I assume it must be there. 2 Q. It's the second full paragraph on 3 A1471, the second document in the packet that I 4 gave you. 5 A. Okay. Yes. It's not in there. It 6 says "while stocks are selling." 7 Q. You're still in -- why don't we take 8 this clip off of here? This is a packet of 9 materials. 10 A. Oh, you want 1471? 11 Q. 1471. 12 A. Okay. 13 Q. Who is Mr. Falconi? 14 A. He was my assistant. 15 Q. Okay. And did he participate in the 16 meetings with you of the investment committee on a 17 regular basis? 18 A. I don't recall. 19 Q. Now, where in this document do we find 20 the report that you made to the investment 21 committee? 22 MR. NICKENS: Your Honor, may I ask 3821 1 which document? Is it 1470 or 71? 2 MR. GUIDO: We're on 1471. I'm sorry. 3 A. My report, it would have been this 4 market review treasury market and the mortgage 5 market and the economic indicators events. The 6 mark-to-market on all of the mortgage assets, that 7 would have been all my input. 8 Q. (BY MR. GUIDO) Now, look at Page 4. 9 Do you see that? And it's Bates stamped 3 -- 10 US36646. 11 A. Yes. 12 Q. All right. See the paragraph that says 13 "The dollar roll market is essentially, quote, 'on 14 hold temporarily.' Short rates have come down 15 significantly. Cash equivalent instruments such 16 as reverse repos are a temporary parking place for 17 stock market money. However, no one thinks this 18 cash will stay there for a prolonged period so it 19 is risky for an MBS trading desk to attempt to 20 value the carry and, therefore, the drop right 21 now." 22 Do you see that? 3822 1 A. Yes. 2 Q. Then it says "Volatility will remain 3 high over the next week so mortgages will remain 4 wide to treasuries." Do you see that? 5 A. Right. 6 Q. Now, what did you mean that "it is 7 risky for an MBS trading desk to attempt to value 8 the carry and, therefore, the drop right now"? 9 A. I have no idea what I meant at that 10 point in time. 11 Q. Is the drop referring to the stock 12 market drop? 13 A. No. The drop's referring to the dollar 14 roll market. It's the amount that you can pick up 15 on a dollar roll market by selling an asset in the 16 forward month and buying it back in the latter 17 month. 18 Q. And was that because the stock market 19 money had moved because of a drop in the stock 20 markets to the dollar roll market? 21 A. If that's what it says there, which is 22 what it does, I guess that's what it meant. 3823 1 Q. Okay. So, you were recommending at 2 that point in time to stay out of the dollar roll 3 market because of the drop in the stock market 4 prices the previous day? 5 A. I probably couldn't find a dollar roll 6 at that point that was at a lower rate than what 7 repo rates were at. 8 Q. Now, look at Exhibit A1472. It says 9 "The subcommittee meeting of the investment 10 committee was held on October 29th." 11 Do you see that reference? 12 A. Yes. 13 Q. And it says that "Present were 14 Mr. Gross, Mr. Berner, Mike Crow," and that you 15 attended via telephone. Do you recall that? 16 A. That's what it says, yes. I don't 17 recall it. 18 Q. You don't recall? 19 A. No. It was 12 years ago. 20 Q. It says "After a full discussion of the 21 revised interest rate outlook following the 22 precipitous decline in equity prices and 3824 1 precipitous rise in interest rate volatility, it 2 was determined that USAT would reduce its interest 3 rate cap position." 4 Do you see that? 5 A. Yes. 6 Q. Okay. Now, why was that decided? 7 A. In light of the stock market crash and 8 the bond yields going very quickly to 10 percent 9 caps just were trading at sky-high volatilities 10 way in excess of the normal 23 percent type rates 11 that you used to see in that time period. 12 So, we probably took advantage of that 13 to adjust the hedges thinking that if we sold 14 caps, we could replace it basically with a cheaper 15 hedge, something like an interest rate swap or 16 something along those lines. 17 Q. So that you made a decision to sell 18 because they were in the money substantially. Is 19 that a fair characterization? 20 A. Not only were they in the money, but 21 volatility relationships were out of whack. So, 22 that would make sense. 3825 1 Q. Now, what happened with that volatility 2 in that increase in the long bond rate to the 3 value of the mortgage backs that were in the USAT 4 portfolio? 5 A. It would decrease. 6 Q. And was that decrease of the same 7 magnitude as the increase in the interest rate 8 caps that were sold? 9 A. I have no idea. 10 Q. Now, was anything bought at that time 11 to replace the protection that the caps had 12 furnished to the mortgage-backed security 13 portfolio? 14 A. I'm not sure. I don't remember. 15 Q. Well, look -- I think you testified 16 that the -- Page 58 of A11027 you believe 17 reflected the portfolio of mortgage-backed 18 securities in USAT and the covered hedges. Do you 19 see any increase in those hedges during that time 20 period to offset the decrease in the caps? 21 A. This column says the mortgage-backed 22 securities. The other column says the interest 3826 1 rate caps. On this same page, there are no 2 interest rate swaps. There are no Eurodollar 3 futures. There are no Eurodollar caps. 4 Q. No. I'm sorry. I'm showing you this 5 larger document at Page 58. 6 A. Okay. 7 Q. Do you see any change in the size of 8 the Eurodollar futures portfolio during that time 9 period? 10 A. No, I don't. 11 Q. Do you see any changes in the 12 Eurodollar options? 13 A. No, I don't. 14 Q. Do you see any changes in the -- 15 A. The swaps? 16 Q. -- swaps? 17 A. I'll have to look at that. This -- 18 does this include the swaps that were previously 19 allocated to Joe's portfolio? 20 Q. No. 21 A. No. 22 Q. This is only what's allocated to the 3827 1 United MBS portfolio. You don't see any increase 2 in any of these instruments during that time 3 period, do you? 4 A. No, I don't. But at that point, we may 5 have decided to look at the institution as a whole 6 and allocate some of those swaps mentally to this 7 portfolio. I'm not sure. Also, there is nothing 8 in this listing of assets that shows how many of 9 the loans are adjustable rate. We did own 10 significant ARM positions which would not have 11 required hedge. So, I can't reconstruct the 12 hedged/unhedged position going back that far. 13 Q. I mean, the minutes don't show any 14 change in the portfolios -- 15 A. Okay. 16 Q. -- in the investment committees between 17 October 23rd and December 5th other than the sale 18 and repurchase of the caps, do they? 19 MR. NICKENS: Your Honor, she hasn't 20 looked at all the minutes and that's an unfair 21 question about what the minutes might reflect. If 22 he wants to ask her to assume that and that we can 3828 1 then verify it later, but there is no way that she 2 could testify this many years as to what the 3 minutes reflect. 4 Q. (BY MR. GUIDO) Did counsel for 5 respondents provide you with investment committee 6 minutes over the weekend? 7 A. No. 8 Q. So, you haven't looked at the minutes? 9 A. They provided them to me a long time 10 period ago and I have not examined them in great 11 detail, no. There are two whole notebooks about 4 12 inches thick of the investment committee minutes, 13 and I could not possibly retain every sentence in 14 them. 15 Q. Well, do you recall whether or not 16 anything was added to the portfolio to provide the 17 protection the caps provided -- 18 A. No, I don't. 19 Q. -- during that time period? 20 A. It was 12 years ago. 21 Q. Now, look at Exhibit A1477 and look at 22 the seventh paragraph down. It says 3829 1 "Ms. Laurenson noted that she engaged in an 2 interest-only swap transaction, swapping 3 400 million of 9 percent interest only for 4 8 and a half. She noted that the yield increased 5 by approximately 100 basis points as a result of 6 the swap." 7 Now, when you make reference to swaps 8 in this context, are you talking about exchanging 9 one coupon for another? 10 A. Yes. 11 Q. And you're not talking about a swap to 12 duration match the portfolio, are you? 13 A. No. 14 Q. Okay. And is this one of those value 15 enhancement transactions that you described -- 16 A. I assume so. 17 Q. -- to us previously? I'm sorry? 18 A. I assume so. 19 Q. And the -- look at the next paragraph. 20 "She also noted that she sold covered calls of 21 Fannie Mae 9 and a half and Freddie Mac 10s. And 22 then she stated that she might desire to reacquire 3830 1 the hedges if they were selling at a good price. 2 The committee determined that until Mr. Crow had 3 fully resolved the accounting issues on this 4 transaction, the calls would not be approved to be 5 reacquired." 6 Do you see that? 7 A. Yes. 8 Q. Now, what did the covered calls and 9 what -- 10 A. I don't know. And given who was taking 11 the minutes, Art -- that paragraph doesn't make 12 sense to me. I didn't check the minutes to read 13 them to make sure that they made any kind of sense 14 in the mortgage-backed world, but he must have 15 thought I said something to that effect. I don't 16 know what it means. 17 Q. Did you -- was it your practice not to 18 review the investment committee minutes -- 19 A. It wasn't my practice. It just wasn't 20 an issue of importance to me at the time. I was 21 busy doing other things. 22 Q. Now, look at A1478. You see the third 3831 1 paragraph down? It says "Ms. Sandy Laurenson then 2 reported on the mortgage-backed securities 3 portfolio. Her report was ordered attached to the 4 minutes of the meeting. She suggested that it 5 would be necessary to buy back caps in early 6 December to hedge the mortgage-backed security 7 portfolio. She noted that this was due to the 8 change in her outlook on interest rates. After 9 full discussion, the committee approved the 10 acquisition of 620 million of caps. She also 11 reported that there was a swap transaction of 12 approximately 20 million interest-only strips." 13 Do you see that paragraph? 14 A. Yes, I see it. 15 Q. Let's take the first part of it. 16 A. Okay. 17 Q. Is that "necessary to buy back the caps 18 in early December" a reference to the caps that 19 had been sold on October 29th? 20 A. I don't know. It was 12 years ago. 21 Q. Okay. If the record showed that those 22 were the only caps that were sold, would it be 3832 1 fair to assume that this reference is to 2 repurchasing the caps that had been sold on 3 October 29th? 4 A. Yes, it would be fair. 5 Q. Do you have any reason to -- any 6 information that would dispute that fact? 7 A. Just that I cannot check your numbers 8 independently. That's all. 9 Q. Well, if you add -- the next sentence 10 says "She also reported that there was a swap 11 transaction of approximately 20 million 12 interest-only strips." 13 Do you see that? 14 A. Yes. 15 Q. Is that another reference to the 16 exchange of one coupon to another or shifting from 17 one issuer to another? 18 A. I would assume so, but I don't know 19 that for a fact. 20 Q. All right. 21 MR. GUIDO: Your Honor, I'm finished 22 with this segment of the questioning. This might 3833 1 be a good time to recess for lunch if -- 2 THE COURT: All right. We'll adjourn 3 until 2:00 o'clock. 4 5 (Luncheon recess taken at 12:21 p.m.) 6 7 THE COURT: Be seated, please. We'll 8 be back on the record. Mr. Guido, you may 9 continue with your examination. 10 (2:04 p.m.) 11 MR. GUIDO: Thank you, Your Honor. 12 Q. (BY MR. GUIDO) When we left off, 13 Ms. Orr, you were talking about the caps that had 14 been sold and repurchased. During the period of 15 time that the caps had been sold, if no other 16 hedging instrument had been obtained during that 17 period of time, would the interest rate risk have 18 been greater for USAT at that time? 19 A. It depends on how the entire 20 institution was balanced, which I don't know. 21 Q. Well, assume that there were no other 22 changes in the portfolio. If the caps had been 3834 1 sold, no other instruments were put on, nothing 2 else was done to the portfolio, would the interest 3 rate risk have increased or decreased? 4 A. I'm not sure because I don't know where 5 it stood before the caps were sold. Included in 6 Joe's portfolio, you had a lot of swaps that had 7 no assets against them and you had a lot of other 8 assets that I have no idea -- I have no idea how 9 many of the assets were adjustable rate mortgages. 10 So, I can't answer that. 11 Q. Now, I'd like to hand you Exhibit T4258 12 which is a memo from Mike Crow to Jenard Gross and 13 Gerald Williams dated -- regarding "discussion 14 points 4th quarter 1986 earnings." 15 Look at the second paragraph of that 16 memorandum. It says "4th quarter 1986 results are 17 projected to show a significant loss unless a 18 miracle happens in equity arbitrage, increased 19 values in our bond portfolios, or an unexpected 20 sale of real estate at a profit." 21 Do you see that? 22 A. Yes. 3835 1 Q. Is that making reference to the 2 severity of the problem that you referred to that 3 was caused by the losses in the real estate? 4 A. Yes, I assume so. 5 Q. Now, I'd like to give you a packet of 6 exhibits which are also investment committee 7 minutes. These are the investment committee 8 minutes from October 8th through December 22nd, 9 1986. They are Exhibits A1412 for October 8th. 10 Exhibit A1413 for October 10th. A1414 for 11 October 22nd. A1415 for October 31st. A1416 for 12 November 5th. A1417 for November 12th. A1418 for 13 November 19th. A1419 for November 25th. A1421 14 for December 3rd. A1421 for December 4th. A1422 15 for December 15th. And A1423 for December 22nd. 16 I move the admission of these exhibits, 17 Your Honor. 18 MR. NICKENS: Your Honor, I have no 19 objection, although I need to get these copies. 20 But I do believe Mr. Guido read 1421 twice. 21 THE COURT: Well, let me ask you, are 22 these numbered consecutively from 1412 through 3836 1 1423? 2 MR. GUIDO: Yes, Your Honor. Did I -- 3 THE COURT: There are no -- 4 MR. GUIDO: There is no gap in these. 5 These are the investment committee minutes from 6 10-8-86 through 12-22-86. 7 THE COURT: 1412 through 1423 is 8 received. 9 Q. (BY MR. GUIDO) Now, I'd like you to 10 take a look the first Exhibit 1412 in that packet 11 that I just gave you, Ms. Orr. And look at the 12 second page of the exhibit. It's Bates stamped 13 US3010551. 14 It says at the top "Ms. Laurenson then 15 discussed the association's mortgage-backed 16 securities. She presented a proposal regarding 17 mortgage-backed security trading policy. Such 18 policy was fully discussed and unanimously 19 approved by the investment committee. It was 20 ordered that such proposal would be presented to 21 the board of directors for their approval." 22 Do you see that? 3837 1 A. Yes. 2 Q. And then look at the next page. It 3 has -- it looks like it's a three-page document 4 that's Bates stamped US3010560 through 010562. 5 Is that the trading policy that you 6 discussed earlier that you had proposed to the 7 institution? It's in Exhibit 1412, which is the 8 first one in the packet. It starts at the second 9 page with the quote that I read from the minutes 10 at the top of the paragraph. 11 A. Right. 12 Q. And then the next three pages after 13 that are the investment policy. 14 A. I have this. I don't have it. 15 Q. I'm sorry. Look at -- it's Bates 16 stamped in your set, 34917. 17 Do you recognize that as the investment 18 policy that you proposed to the investment 19 committee of USAT? 20 A. It looks like the way I would do that, 21 yeah. 22 Q. Okay. Now, it says "It shall be the 3838 1 policy of United Savings Association of Texas to 2 undertake trading activities related to the 3 mortgage-backed securities investment portfolio 4 trading operation from time to time in order to 5 enhance the profitability of the association." 6 Do you see that? 7 A. Yes. 8 Q. And is that your understanding of the 9 trading policy that you proposed and was adopted 10 by the investment committee on October 8th, 1986? 11 A. Yes. 12 Q. Was that policy, to your knowledge, 13 subsequently adopted by the board of United 14 Savings Association of Texas? 15 A. I have no idea. 16 Q. Now, I'd like you to take a look at the 17 document that we have marked as A1413. And I 18 direct your attention to Bates stamp US34938. 19 Is that an example of the value trades 20 that you testified to where there's a shift from 21 one coupon to another coupon? 22 A. Yes. 3839 1 Q. And is that the analysis that you 2 presented to the investment committee? 3 A. I don't remember if I did it or who did 4 it or, you know -- I don't remember preparing 5 this, but I assume that would be my job so... 6 Q. Now, working through this analysis, do 7 you see the -- it says "the type," and that's the 8 issuer, FHLMC; is that right? 9 A. Right. 10 Q. And then it says "coupon." It was a 11 9 percent coupon sold and a 9 and a half bought. 12 Do you see that? 13 A. Yes. 14 Q. And then it says "par." What does that 15 refer to? 16 A. The par amount of the bond. 17 Q. And so, is that the amount that was 18 paid for the bonds? 19 A. No. 20 Q. No? What is that? 21 A. That's the face amount of the bond. 22 Q. Okay. And then it says "the basis." 3840 1 What does that refer to? 2 A. The book value. 3 Q. Okay. Was that the cost value? 4 A. No. It would be the amortized cost 5 value. 6 Q. Okay. And then it has "price." Do you 7 see the price figure? 8 A. Yes. 9 Q. And that's the price that the one bond 10 was sold at and the other was purchased at? 11 A. Right. 12 Q. And then it has "the remaining 13 maturity." Do you see that? 14 A. Yes. 15 Q. And then it says "CPR." What is that? 16 A. The constant prepayment rate. 17 Q. And then it says "bond equivalent 18 yield," and it's 9.26 to 9.28. Do you see that? 19 A. Yes. 20 Q. Then what is the reference to the 21 impact on -- where it says "annualized impact of 22 MBS trade, one on yield, gain, loss." What does 3841 1 that refer to? 2 A. I don't know. 3 Q. Then it makes reference to "leverage 4 gain loss." Do you know what that refers to? 5 A. No. 6 Q. Was anyone else managing the portfolio 7 at this time besides you? 8 A. No. 9 Q. You just don't recall what that -- 10 A. I just don't recall that way of looking 11 at it. 12 Q. Now, I'd like you to take a look at 13 A1414. Would you take a look at Bates stamp 14 US3004953. It's a proposed transaction there. 15 Do you see that? 16 A. Yes. 17 Q. That one says "Fannie May strip MBS 11 18 and a half coupon/9 and a half Ginnie Mae GPM." 19 What does that refer to? 20 A. Graduated payment mortgage. 21 Q. Okay. And it says "Buy 50 million for 22 110.5 and reversed for three months at 6 percent." 3842 1 And then it has a sell and a buy and a buy. 2 Do you see that? 3 A. Yes. 4 Q. Can you describe that transaction? 5 A. You're buying an asset and you're 6 hedging, by selling Eurodollar futures, the 7 financing. 8 Q. Now, was that done to enhance the 9 profitability of the association? 10 A. October 22nd, yes. It was done to 11 acquire assets. 12 Q. Now, I'd like you to take a look at -- 13 flip over to 1416 which is the November 5th -- 14 A. Excuse me. I don't know that that 15 transaction was done. 16 Q. Okay. A1416, which is two over, and 17 look at the second page Bates stamped US35033, 18 third paragraph down. "Ms. Sandy Laurenson then 19 discussed the association's mortgage-backed 20 securities portfolio. She presented her report 21 which was ordered attached to the minutes of the 22 meeting. She discussed her view of the current 3843 1 market position and also reviewed the transactions 2 which she had conducted during the past week 3 resulting in profits to the association. She 4 stated that she had purchased 57 million of 5 mortgage-backed securities in the mortgage-backed 6 securities subsidiary." Then it says that her 7 report is attached thereto. 8 I'd like you to turn over to Page 5047, 9 which is the fold-out, long sheet of paper on that 10 document. It talks about summaries of swaps to 11 take profits. 12 Are those the transactions where one 13 security is sold and another security is purchased 14 because, in your view, one was overvalued and the 15 other was undervalued relatively? 16 A. Yes. 17 Q. And can you describe that transaction? 18 A. I sold Freddie Mac 9 and a half's and I 19 bought Freddie Mac 9s. I suppose in equal 20 amounts. I can't imagine that I'd buy in equal 21 odd lots like that; but at any rate, I don't know 22 how much of each was done. It's not -- I don't 3844 1 think that is necessarily showing on this. 2 Q. Now, what is the purpose of the column 3 "accounting gain"? 4 A. That would just be purely the book 5 price versus the sale price times the face of the 6 trade. 7 Q. Why was that significant to the 8 investment committee? 9 A. Well, because we certainly didn't want 10 to do something that would cause losses and reduce 11 our capital if we were in a precarious capital 12 case. 13 Q. And was it the investment committee's 14 understanding that you were to seek accounting 15 gains? 16 A. I don't think so, but I certainly was 17 not supposed to take a loss. 18 Q. You don't recall whether or not you 19 were instructed to engage in transactions that 20 would increase the profitability to the 21 institution? 22 A. I don't recall anybody telling me 3845 1 specifically to do that, no. 2 Q. Well, the policy that we looked at, it 3 said that you were to engage in trading policy to 4 increase the profitability to the association, 5 were you not? 6 A. I was supposed to add income to the 7 association through either net interest spread or 8 through value trades. I was not supposed to 9 subtract from the profitability of the 10 institution. That was certainly not the goal. 11 They did not hire me to lose money. 12 Q. Now, the last column says "economic 13 value." What does that column refer to? 14 A. They may have had their own paradigm, 15 whatever that means, for evaluating whether 16 something was good over a certain period of time 17 or not that involved their cost of equity or 18 involved some other factors that I can't remember 19 at this point. That is my best guess at that. It 20 has something to do with the amount of yield that 21 would be either lost or gained versus the amount 22 of capital that would be added to the association 3846 1 versus going through outside capital sources. 2 Q. Was this a summary sheet that you 3 developed the program for? 4 A. Probably. I'm not sure. I don't 5 remember. I would guess yes. 6 Q. Now, is the economic value the yield 7 column multiplied by one of the other columns? 8 A. No. 9 Q. No? Well, is it -- what are the 10 components of the economic value? 11 A. I can't state at this time. It's been 12 12 years. 13 Q. Does this sheet anywhere explain what 14 the effect of the transaction is on the interest 15 rate risk that the association would face? 16 A. No. 17 Q. Now, look at Exhibit A1417. Look at 18 Bates stamp US3010347. 19 A. Yes. 20 Q. It has various goals. Do you see that? 21 A. Yes. 22 Q. And it says "Investment. Maintain 3847 1 current yield levels on assets, use opportunities 2 to take profits and swap to higher yielding 3 securities. Use opportunities to shorten swap 4 maturities. Take fee income and reduce swap 5 yields by writing puts on five- to ten-year 6 treasuries." 7 Do you see that? 8 A. Uh-huh. (Witness nods head 9 affirmatively.) 10 Q. Is that your understanding of what the 11 goals were at that time? 12 A. I don't remember. I mean, if it's 13 written down here, that must have been what I 14 proposed as being goals at least. 15 Q. Okay. Did -- do you recall whether or 16 not you suggested any goals that were rejected by 17 the investment committee? 18 A. No. I don't recall. I don't know if 19 these were even put into use. 20 Q. Anywhere does that say "reduce the 21 interest rate risk to the association"? 22 A. Well, inherently, it would because if 3848 1 you're maintaining the current yield levels on the 2 assets and then you're using opportunities to take 3 gains and swap to higher yielding securities at 4 the same time, which is generally physically 5 impossible but, you know, a desirable goal 6 certainly, then you are widening your spread and 7 you are increasing ongoing earning income and 8 thereby reducing the risk of the institution. So, 9 yes. 10 Q. What you're saying is that the goal was 11 to reduce the interest rate risk exposure to the 12 institution by widening the net interest margin. 13 Is that what you're saying? 14 A. Yes. Yes. 15 Q. Now -- then it says "MBS subsidiary. 16 Buy high coupon FHLMCs, 10s, and 12s and hedge 17 assets and financing for one to two years. Earn 18 an annual ROI of 12.5 percent." 19 Do you see that? 20 A. Yes. 21 Q. Does that refresh your recollection of 22 what the spread was that you were expected to earn 3849 1 on the United MBS subsidiary? 2 A. No, because that was my suggestion. I 3 don't know that that was their suggestion or whose 4 suggestion that was. However, this again, I don't 5 remember this ever coming to pass. I'm not sure 6 that we ever bought Freddie -- anything as high as 7 a Freddie Mac 12 because I don't think that coupon 8 was available at that point very soon thereafter. 9 Q. And did you ever adopt the plan to hold 10 the MBS portfolio in United MBS for a one- to 11 two-year period of time? 12 A. I don't know. I don't remember. 13 Q. Now, I'd like you to turn over to A1419 14 that's dated 11-25-86. And I'll direct your 15 attention to the last two pages of that exhibit. 16 It's Bates stamped US35112 and 5113. It's a 17 memorandum from Bruce Williams to Jenard Gross, 18 Jerry Williams, and Mike Crow dated November 24th, 19 1986. And it's an analysis of the mortgage-backed 20 securities program at USAT from its inception 21 through that date which overlaps to a certain 22 extent with your management of that portfolio. 3850 1 Do you ever remember seeing that 2 memorandum? 3 A. No. 4 Q. Does that memorandum indicate that 5 there were gains that were taken out of the USAT 6 mortgage-backed security portfolio of $67 million? 7 A. This memo indicates that, yes. 8 Q. And does it indicate that there were 9 unrecognized gains at 11-19-86 of $12 million in 10 that portfolio? 11 A. Yes. This memo indicates that. 12 Q. And does it indicate that the interest 13 rate swaps that were affiliated with that 14 portfolio mark-to-market generated a loss of 15 $122 million? 16 A. Yes. This memo indicates that. 17 Q. Now, what did you do in managing this 18 portfolio to attempt to ameliorate the negative 19 consequences of what had happened to that 20 portfolio prior to your arrival? 21 A. The only thing you can do if you are 22 not willing to bite the bullet and take losses, 3851 1 which we could not at that point, is increase the 2 size of the assets. 3 Q. And how did you increase the size of 4 the assets in that portfolio? 5 A. We bought mortgage-backed securities. 6 Q. And were those mortgage-backed 7 securities bought to be part of that portfolio or 8 were they -- 9 A. I don't know if they were bought to be 10 part of that portfolio. I don't remember how they 11 were allocated. 12 Q. But you were just instructed to buy 13 more mortgage-backed securities to ameliorate the 14 effect of that portfolio? 15 A. I don't remember anybody ever 16 instructing me to do that but it was the only 17 obvious solution and I don't remember specifically 18 them being assigned to that portfolio or whether 19 it was part of the subsidiary or whatever. But we 20 did need more earning assets on the books. 21 Q. Was one of the other things that you 22 did was engage in the value trading to generate 3852 1 profits to offset the losses that were being 2 incurred because of the swap positions that had 3 been put on that initial USAT portfolio? 4 A. Not necessarily with the goal of making 5 profits but with the goal of enhancing spread and 6 increasing capital, if there was a trade-off that 7 could be made there. 8 Q. Now, turn to Exhibit 1421. Take a look 9 at the second page of that -- at the top of the 10 page, it says "Ms. Sandy Laurenson then discussed 11 the association's mortgage-backed security 12 position. A detailed report prepared by her was 13 ordered attached to the minutes of the meeting. 14 Ms. Laurenson discussed the report at length. She 15 noted that she was looking to take some profit 16 from the association's AMPs and DART mortgage 17 portfolio with the possibility of replacing the 18 collateral with treasury bills for a short time 19 and then reacquiring whole pools of 20 mortgage-backed securities at a later date. 21 Ms. Laurenson then discussed the possibility of 22 selling puts in order to create artificial dollar 3853 1 rolls. This proposed discussion was -- 2 transaction was discussed in detail and the 3 investment committee determined that if Mr. Crow 4 could be satisfied on the risk factor, the 5 committee would approve this transaction. 6 Ms. Laurenson then discussed the potential 7 purchase of CMO residuals. After full discussion 8 of a proposed acquisition, it was determined that 9 Ms. Laurenson was authorized to acquire CMO 10 residuals in the First Boston transaction up to 11 approximately $15 million." 12 Do you see those references? 13 A. Yes. 14 Q. What was the reference to the AMPs and 15 DART mortgage portfolios? 16 A. Those were the preferred stock 17 portfolios, I believe. 18 Q. And those were in two -- 19 A. Subsidiaries. 20 Q. -- subsidiaries? And then, what is 21 the risk factor that was referred to with regard 22 to the dollar rolls? 3854 1 A. I'm sure it was some sort of accounting 2 treatment on the -- on the idea of selling puts to 3 create an artificial dollar roll. It would be 4 very complicated accounting, and I'm sure that 5 Mike Crow had to call Peat Marwick immediately and 6 get approved the way he did everything else. 7 Q. Now, will you take a look at page Bates 8 stamped US35130? You see the reference at the top 9 of the page there that says "activities"? 10 A. Yes. 11 Q. Is that the activities for the last 12 period between investment committees? 13 A. I don't know. 14 Q. Well, when you prepared these activity 15 reports, was it for periods longer than the period 16 between the two investment committees? 17 A. I don't remember. 18 Q. Now, see where it says "roll reverse 19 repo funding MBS subsidiary"? 20 A. Yes. 21 Q. And then it says "closed Eurodollar 22 futures hedge for 101 percent hedge 3855 1 effectiveness"? 2 A. Yes. 3 Q. Look at Page 58 of Exhibit 11027 again. 4 Is that the reference to the hedges that are 5 described on Page 58 of Exhibit 11027? 6 A. I don't know if they relate to the same 7 thing or not. I don't know. 8 Q. You don't know? 9 A. You prepared these numbers and this 10 exhibit. I don't know if any of them are right. 11 Q. All right. Then let's take a look at 12 the portfolio. You see the reference to the 13 portfolios? It makes reference -- I'm sorry. 14 Back on Page 35130 in the other exhibit. 15 A. This one? 16 Q. Yes. 17 A. Okay. 18 Q. Looking at the portfolio transactions. 19 Are those swap transactions that you referred to 20 as increasing the yield or the value of the 21 portfolios? 22 A. I don't know. I haven't had time to 3856 1 look at each number on here. 2 Q. They have purchases and sales under the 3 column principal, do they not? 4 A. Right. 5 Q. And they are grouped together, are they 6 not, for purposes of the yield? 7 A. Yes. 8 Q. Okay. Or the gain. Are those swap 9 transactions as you have used those terms? 10 A. They are swap transactions. I'm trying 11 to figure out whether they are of relative value 12 gains or not. In terms of not impairing the yield 13 and increasing value, okay. Yes, that would be 14 what I would describe that as. 15 Q. Now, take the first group, the DARTs. 16 That was that preferred stock subsidiary you 17 referred to a few minutes ago? 18 A. Yes. 19 Q. Okay. And that there's a swap-dollar 20 gain of .29. Do you see that? 21 A. Yes. 22 Q. What does that refer to? 3857 1 A. I assume that's the difference in price 2 in par and price. 3 Q. And if it's .29, it means $290,000? 4 A. No. That's in dollar price. 5 Q. Pardon? 6 A. That's in dollar price. 7 Q. $.29? 8 A. 29 cents on however many million was 9 swapped -- 10 Q. Okay. 11 A. -- would yield those accounting gains. 12 Q. Oh, okay. And then it says "market 13 yield, .15." Do you see that? 14 A. Yes. 15 Q. Is that the increase in the yield on 16 the security? 17 A. I assume so. I can't tell that from 18 this. 19 Q. And then it has a column "accounting 20 profits," and that's the profits on the sale of 21 the two that were sold in exchange for those that 22 were purchased. You see that? 3858 1 A. Right. 2 Q. Now, the next one, it says 3 "investments." You see that? 4 A. Yes. 5 Q. Is that the investment portfolio in 6 USAT? Is that what investment refers to? 7 A. Yes. 8 Q. And that's a sale of FHLMC 9 and a half 9 TBA for FNMA 9. You see that? 10 A. Yes. 11 Q. Okay. And there's a swap gain of 12 1.4375? 13 A. Points. 14 Q. Points. And then there's a market 15 yield of negative .15? 16 A. Right. 17 Q. Does that mean that the yield was less 18 than what was acquired than what was sold? 19 A. I don't know because I can't see the 20 yields, the raw yields there to check that. I -- 21 Q. Well, you indicated that the positive 22 figure that we just discussed was an increase in 3859 1 the yield. 2 Isn't it fair to assume that a negative 3 number is a reduction in the yield? 4 A. That's fair to assume. 5 Q. Ask then it has the accounting profits 6 of 1,715,625. Do you see that? 7 A. Yes. 8 Q. Is there anywhere in this piece of 9 paper where we can see an analysis that was done 10 on the impact that these transactions would have 11 on the interest rate risk that the association 12 would have to bear? 13 A. No. 14 Q. Now -- 15 A. And let me explain that a little bit. 16 I had one piece of the organization. I did not 17 control the whole loan residential portfolio. I 18 did not control the junk bond portfolio. I did 19 not control the equity arbitrage portfolio. I did 20 not control the commercial loan portfolio. I had 21 one piece of the institution. So, the overall 22 interest rate risk was really not my area. 3860 1 Q. But was the interest rate risk in the 2 mortgage-backed securities portfolio your 3 responsibility? 4 A. In relation to how they were doing 5 things in other areas, as I was told by other 6 people, yes. 7 Q. I'm sorry. I don't understand what you 8 mean by that. Would you explain that? 9 A. If I knew -- if I happened to know that 10 somebody else was doing something in another area 11 that would affect my area, then I would respond 12 appropriately, yes. 13 Q. Were you concerned about what you were 14 doing in your own area for the interest rate risks 15 of the institution in your portfolio? 16 A. Yes. 17 Q. Now, look back -- 18 A. That was why I measured it in the up 19 and down 200 basis point case every week. 20 Q. All right. I was going to turn to 21 that. I think this is one where we find one that 22 was done -- look at Bates stamp US3005137. This 3861 1 is the December 4th, 1986, minutes. This is a 2 chart of return patterns that you did. 3 Is this what is referred to as a 4 sensitivity analysis? 5 A. Yes. It was a very basic try at that. 6 I think it was probably the first one that I did 7 if it was in December. 8 Q. December 1986. Now, this broke out 9 various portfolios. One was "Investment MBS." 10 Was that the investment in 11 mortgage-backed securities that were in the USAT 12 portfolio? 13 A. Yes. 14 Q. And then there's one called the "MBS 15 sub." Is that United MBS? 16 A. Yes. 17 Q. And then there's the "DARTs and AMPs 18 collateral" and "DART and AMPs debt." 19 Were those the separate subsidiaries, 20 one for DARTs and one for AMPs, funded with 21 preferred stock? 22 A. Yes. 3862 1 Q. And then there was a treasury 2 portfolio. Was that also a portfolio in USAT? 3 A. Yes. 4 Q. And then there are the swaps. Were 5 those the swaps that were originally purchased as 6 part of the USAT portfolio? 7 A. Yes. 8 Q. Now -- and then that takes market value 9 with zero change in interest rates and it shows 10 the portfolio as of December 5th, 1986, at a 11 negative value of $120,059,000; is that correct? 12 MR. NICKENS: I object, Your Honor. 13 He's reading the swaps line, not the overall -- 14 MR. GUIDO: I'm sorry. 88 million 486. 15 Excuse me, Your Honor. 16 Q. (BY MR. GUIDO) Is that correct? 17 A. Yes. 18 Q. And that if interest rates went down 19 100 basis points, the figure would go up to 20 $105,666,000? 21 A. Yes. No. A hundred -- 108 million 22 603. 3863 1 Q. No. I said if they went down 100 basis 2 points. For some reason this chart's the 3 opposite? 4 A. 105 million 666, right. 5 Q. This is the one chart that seems to be 6 reversed. Then if interest rates went up, that 7 88 million would become 116 million 294? 8 A. Yes. 9 Q. So that the -- so either way the 10 interest rates moved, the amount if they moved was 11 a hundred basis points, the loss would increase 12 from 88 to 105 or from 88 to 116? 13 A. Yes. 14 Q. Now, I'd like to have you take a look 15 at the Exhibit A1422 which is December 15th, 1986. 16 And direct your attention to Bates stamp 17 US3005157. 18 This is another activity report with 19 regard to the activities in the mortgage-backed 20 security portfolio, is it not? 21 A. Yes. 22 Q. And it has under investment -- you see 3864 1 "portfolio investment"? 2 A. Yes. 3 Q. It has a series of transactions, seven 4 transactions, where a package of mortgage-backed 5 securities are sold and a package are then 6 purchased. 7 Do you see those? 8 A. Yes. 9 Q. Are those the swap transactions that 10 you've -- that are similar to the swap 11 transactions that you've described previously in 12 order to increase the profitability to the 13 association by either increasing yield or by 14 recognizing gain off of the transaction? 15 A. Yes. 16 Q. Okay. Now, do those transactions 17 indicate what the market yield and the gain on the 18 swap would be or was? 19 A. Yes, they do. 20 Q. Okay. Do they also indicate what the 21 realized accounting gain was? 22 A. Yes, they do. 3865 1 Q. Do they indicate what the effect of any 2 of those transactions would be on the interest 3 rate risk of the association? 4 A. They would indicate it in next week's 5 up and down 100 basis point analysis, yes, in 6 another point in time. 7 Q. But the sheet presented to the 8 investment committee for decision didn't present 9 the effect on the interest rate risk of those 10 trades? 11 A. No. 12 Q. Okay. And then, it shows a buildup in 13 the MBS sub; and that's United MBS, is it not? 14 A. Yes. 15 Q. I'd like you to turn to the last 16 exhibit in this packet which is Exhibit 122286 and 17 direct your attention to the -- 18 A. I don't have it. We're in the 14 -- 19 Q. 1423. I'm sorry. 20 A. Okay. 1423. 21 Q. I'd like to direct your attention to 22 Page No. US35182. That's another activity report 3866 1 that you presented to the investment committee, is 2 it not? 3 A. Yes. 4 Q. Okay. And that shows additional sales 5 and repurchase transactions to generate a gain? 6 A. Not to generate a gain necessarily. I 7 mean, it was to generate capital or to enhance 8 spread or create a gain if that resulted. 9 Q. Well, let me take you to one of those 10 transactions. See the DARTs and AMPs portfolio? 11 A. Uh-huh. (Witness nods head 12 affirmatively.) 13 Q. See the Fannie May 9 sold and the 14 Ginnie Mae 9 bought? 15 A. Yes. 16 Q. And you see that the swap dollar gain 17 is a negative figure? 18 A. Yes. 19 Q. Do you see the market yield figure as a 20 negative figure? 21 A. Yes. 22 Q. Do you see the accounting gain is a 3867 1 positive figure? 2 A. How could the accounting gain be 3 positive if the swap dollar gain was negative? I 4 don't understand the swap dollar gain, then, in 5 that case. 6 Q. I have no idea. I'm just pointing out 7 what's on this sheet of paper. 8 A. Okay. Well, I'd have to find out what 9 the swap dollar gain was because it's obviously 10 not -- 11 Q. So, you think the swap dollar gain had 12 to be a positive? 13 A. Either that or that was the market. In 14 other words, that was the market price on the 9s 15 versus the market price on the 9 Ginnies versus 16 Fannies. 17 Q. Isn't that what the swap gain referred 18 to, the difference between the two? 19 A. Yeah, but you're not -- it's different. 20 It doesn't have to do with the accounting gain. 21 Q. The accounting gain and swap gain can 22 be different, can they not? 3868 1 A. Right. 2 Q. So, this showed an accounting gain of 3 1.885 million but a swap gain of minus .625? 4 A. So, really, the swap gain is 5 meaningless, quite frankly, to your analysis. 6 Q. Does this show any effect of an 7 analysis on the interest rate risk of the 8 association of any of these transactions? 9 A. No. That would appear in the -- in the 10 whole entire portfolio, which was done weekly. 11 Q. And that would be done the next week; 12 is that correct? 13 A. It was probably in this one right here, 14 the 5187 exhibit. There was also a page that 15 would go up and down a hundred, I believe. And 16 again, at this point in time, I don't know how 17 early on it was in our analysis of the rate 18 sensitivity. I don't know what reports were 19 included in the package versus just done by us. 20 So -- but we were always aware what the effect of 21 these relative value trades would be on the 22 interest rate risk. 3869 1 MR. GUIDO: At this point in time, I'd 2 like to move the admission of another set of the 3 investment committee minutes. 4 These, Your Honor, are for the time 5 period January 5th, 1987, through May 5th of 1987. 6 They are Exhibits A1424 through A1441 with the 7 exception of the number A1430, which I was either 8 unable to find the investment committee minutes 9 for or they didn't exist. And the numbers that 10 were placed on these by the person who was jointly 11 assigned responsibility for doing so just omitted 12 a number. 13 MR. NICKENS: What was the ending 14 number? 15 MR. GUIDO: 1441. 16 MR. NICKENS: Your Honor, it's just 17 going to take me a moment to pull all these. I've 18 managed to find all but two of them, Your Honor. 19 I don't have any objections to these exhibits. 20 THE COURT: All right. Exhibit A1424 21 through A1441 are received with the exception of 22 A1430. 3870 1 MR. GUIDO: Okay, Mr. Nickens? 2 MR. NICKENS: Yes, Your Honor. 3 THE COURT: All right. Proceed. 4 Q. (BY MR. GUIDO) On Page 1 of the 5 document, Ms. Orr, it says "You then reported on 6 the mortgage-backed securities portfolio and a 7 copy of your report was attached." 8 Would you take a look at Bates stamp 9 35194 which is a couple pages into the report. 10 You see the section that says "plan for the 11 portfolio"? 12 A. Yes. 13 Q. And there under the investment 14 portfolio, see the second entry that says 15 "actively swap coupons within the 98 to 102 price 16 range to increase yield, right puts on cheap 17 mortgages drop FHLMC 8s to generate fee income." 18 Do you see that? 19 A. Yes. 20 Q. And is the swap of the coupons the 21 shift from one coupon to another in order to 22 increase yields? 3871 1 A. I assume so. 2 Q. Then look under "DARTs and AMPs." It 3 says "Buy quarter coupons to replace more valuable 4 collateral." 5 What's a quarter coupon? 6 A. It's a coupon that's between a half and 7 an integral coupon -- 9 and a quarter, 9 and three 8 quarters, 10 and a quarter, 10 and three quarters. 9 Q. Why the reference to quarter coupon? 10 A. They were cheap. 11 Q. Now, are those transactions 12 transactions that were designed to generate 13 profits to the institution? 14 A. It said "yield." I don't know. They 15 may have accidentally generated some profits. 16 Q. Pardon? I'm sorry. 17 A. They may have accidentally generated 18 some profits. I don't know. It said in the 19 language "generate yield." 20 Q. Now, look at Exhibit 1425. And look at 21 the first page. It says "Ms. Sandy Laurenson 22 reported on the mortgage-backed securities 3872 1 portfolio. She presented a report which she went 2 over in detail. The report was ordered attached 3 to the minutes of the meeting. After full 4 discussion of the portfolio, the following 5 resolutions were unanimously adopted: That the 6 association increase the maximum amount of puts it 7 would trade to 150 million and further resolve 8 that 100 million in Fannie May ARM, 115 million 9 Ginnie Mae 50-year gnomes, and 80 million in GPMS 10 securities be approved for acquisition by United 11 MBS Corporation." 12 Do you see that? 13 A. Yes. 14 Q. Now, see the reference to the -- the 15 first reference to the association increase the 16 maximum amount of puts it would trade to 17 $150 million? 18 A. Yes. 19 Q. Was there a speculative portfolio at 20 USAT? 21 A. No. There was one, but that didn't 22 involve it. 3873 1 Q. That's not what this is? 2 A. No, not at all. 3 Q. What did these puts refer to? 4 A. We wanted to acquire assets. Jenard 5 was pressuring me to acquire, by the end of March, 6 a certain amount of assets. And that is a very 7 good way to acquire assets, is to write puts 8 because you're taking the fee income. And then if 9 the market moves against you, you end up with the 10 asset. But if it doesn't move against you, you 11 take the fee income and you can buy the assets in 12 addition. 13 Q. Now, it says "Ms. Laurenson was also 14 asked to prepare a presentation to show what would 15 happen if her mortgage-backed security subsidiary 16 was at 1 billion or 2 billion and the repo lines 17 were withdrawn." 18 Do you see that reference? 19 A. Yes. 20 Q. Was there a question at that time about 21 whether the repo lines might be withdrawn? 22 A. Given the condition of United, the 3874 1 minute that I walked in the door, there was a 2 question about repo lines being withdrawn. 3 Q. And so, was it difficult to find 4 lenders who would extend credit to United or UMBS 5 on the repo lines? 6 A. I don't remember it being much of a 7 problem, no. 8 Q. And why was it an issue at this point 9 in time? 10 A. Because I imagine, from my guess -- and 11 this is just a guess -- that Jenard may have been 12 concerned. I don't know. 13 Q. Then it says you and Bruce Williams 14 will work on a contingency plan to be presented to 15 the investment committee. 16 Do you see that? 17 A. Yeah. 18 Q. Did you work on such a plan? 19 A. I don't remember. 20 Q. And is that Bruce Williams, the 21 treasurer, that you referred to previously? 22 A. Yes. 3875 1 Q. Now, look at Page 5203 of that set of 2 minutes. Is that part of your report to the 3 committee? 4 A. Yes. 5 Q. Now, you see where it says activities? 6 A. Yes. 7 Q. It says "Profits on put writing in last 8 weeks Ginnie Mae speculation sum to 602,563 9 realized." 10 Do you see that? 11 A. Yes. 12 Q. And then it talks about some -- 13 A. The Ginnie Maes were in the trading 14 account. That was the one speculative account. 15 Q. That was the one -- 16 A. That was the trading account. 17 Q. The Ginnie Maes were in that trading 18 account? 19 A. Yes. 20 Q. How large was that trading account? 21 A. I don't know. I don't remember. 22 Q. Now, look at the activity report on the 3876 1 next page. Activity through January 13th. You 2 see that? 3 A. Yes. 4 Q. That's another series of those swap 5 transactions that you've described previously, is 6 it not? 7 A. Yes. 8 Q. Now -- 9 A. It's a mix. Some of them are swaps. 10 Some of them are outright put sales. Some of them 11 are -- it's all the transactions. 12 Q. Okay. Now, when it says "investment," 13 those are transactions in the investment account, 14 not the speculative account? 15 A. Yes. 16 Q. Now, those transactions -- 17 A. Well, actually, that's not true. In 18 the investment, it just means the parent and that 19 could have been the trading account. The Ginnie 20 Mae 8s, I believe, were in the trading account 21 so... 22 Q. Do you recall for how long a period of 3877 1 time the trading account -- I mean the trading 2 account or speculative account existed? 3 A. No. 4 Q. It says under that Ginnie Mae 8, it 5 says "traded several times." 6 Do you know what that refers to? 7 A. I imagine I did several transactions. 8 Q. In that week buying and selling of 9 Ginnie Mae -- 10 A. I assume so. 11 Q. Pardon? 12 A. I assume so. 13 Q. Now, looking at the transactions with 14 brackets around them, were those swap 15 transactions -- one is being sold and another is 16 being bought? 17 A. Yes. 18 Q. And was that to generate an increased 19 yield or a gain in the portfolio? 20 A. Either one, yes. 21 Q. Anywhere on this does it show what 22 impact these particular transactions had on the 3878 1 interest rate risk to the association? 2 A. No. It would show up in any analysis 3 that was done on the entire portfolio. 4 Q. Okay. Turn to the document that's 5 marked as Exhibit No. A1426. It's January 1, 6 1986. 7 MR. NICKENS: Your Honor, I believe 8 it's January 21, 1987. 9 MR. GUIDO: I'm sorry. January 21, 10 1987. I've been reading too many numbers. 11 Q. (BY MR. GUIDO) The -- look at Page 12 US35223. 13 Do you see that page? 14 A. Yes. 15 Q. And it's describing activity again in 16 that portfolio, is it not? 17 A. Yes. 18 Q. Okay. And it is a continuation of the 19 description of activities on the previous 20 Page 5222, is it not? 21 A. There are no -- well, okay. That's 22 verbal and this is numerical, yes. 3879 1 Q. Okay. Now, looking at that, it talks 2 about the investment portfolio and the spec 3 investment portfolio. 4 Is the spec investment portfolio what 5 you've previously described as a speculative 6 portfolio? 7 A. Yes. And I was wrong. The puts were 8 in there, I assume. I mean, I'm not sure. You 9 know, I guess they were in there from this paper. 10 Q. Were instruments reassigned between 11 various portfolios at different times when you 12 managed the USAT mortgage-backed security 13 portfolio? 14 A. Periodically, yes, depending on the 15 needs of the organization. 16 Q. Remember the caps that we talked about 17 that had been sold and repurchased? 18 A. Yes. 19 Q. Were those ever reassigned to any other 20 portfolio? 21 A. I don't remember. 22 Q. Take a look at these transactions. 3880 1 Look at the -- those with the brackets under the 2 investment portfolio. 3 Do you see those? 4 A. Yes. 5 Q. Are those two transactions that are 6 referred to there, the first two transactions with 7 the brackets around them, are those swap 8 transactions to generate a gain? 9 A. Not necessarily to generate a gain. It 10 may have just been because it was better risk 11 wise. Different payment delay on a Freddie Mac 12 versus a Fannie Mae. I don't know what the entire 13 logic was at this point in time. 14 Q. Is there anything in this sheet that 15 would indicate what the effect that would have on 16 the interest rate risk of the association? 17 A. No. But at this point in time, I 18 believe we were working on a risk assessment model 19 with Walter Muller that would involve all of that. 20 Q. Okay. Is this the first month that 21 Walter Muller started working with you in 22 developing a sensitivity analysis? 3881 1 A. I'm not sure exactly when we started on 2 that. 3 Q. But it was sometime in early -- 4 A. Sometime early on. 5 Q. Early 1987? 6 A. Yeah. 7 Q. Now, look at the page that says 8 US35224. You see that? 9 A. Yes. 10 Q. And look at what it says under 11 "sensitivity analysis." "The MBS portfolio when 12 combined with the interest rate swaps are 13 favorably positioned for further rate declines. 14 Currently, the unrealized net loss stands at 15 100 million (26 million MBS gain against 16 127 million swap loss). With 100 basis point 17 decline in market rates, the MBS portfolio would 18 nearly triple in value to 72 million while the 19 swap would deteriorate to a loss of 160 million 20 for a net loss of 89 million. If rates were to 21 rise 100 basis points, the MBS portfolio would 22 lose over 80 million of its current value to an 3882 1 unrealized loss of 55 million, far in excess of 2 the appreciation of the swap position, to a 3 93 million loss for net loss of 148 million." 4 And turn to the next page. That's a -- 5 it says "liquidation value." Is that a 6 sensitivity analysis -- 7 A. Yes. 8 Q. -- of what would happen to the 9 portfolio? 10 A. Yes. 11 Q. Now, remember when we were looking at 12 the -- that sensitivity analysis back in December? 13 We were looking at it where it was relatively 14 equally balanced, the portfolio was. It would 15 lose more if interest rates moved in either 16 direction. Do you remember that? 17 A. It would lose more either direction, 18 right. 19 Q. But it was balanced. I mean, it was 20 pretty much the same? 21 A. If you say so. I don't remember that. 22 Q. Well, what happened to the portfolio in 3883 1 this time frame to result in this shift from 2 emphasis to a balanced portfolio to one that was 3 favorably positioned for further interest rate 4 declines? 5 A. It could be anything. The yield curve 6 changes shape and affects those things 7 dramatically. 8 Q. Did you do anything to cause that to 9 happen? 10 A. I don't know. It depends on -- you 11 know, I'd have to look at everything: The yield 12 curve, the individual assets. 13 Q. Do you know whether or not any of those 14 trades to increase value had an impact? 15 A. I couldn't tell you that. I haven't 16 analyzed it. 17 Q. Well, when -- did you analyze it at the 18 time? 19 A. I might have. I don't know. You know, 20 there are no documents here except for this and 21 the other one. 22 Q. Well, you did say that the sensitivity 3884 1 analysis is what we should look to to assess what 2 the impact was of those value trades, didn't you? 3 A. No. I don't think I said that. 4 Q. You don't think you said that? 5 A. Did I say that? 6 Q. That's what I thought I heard you say. 7 A. I didn't say that was how I -- you 8 would assess the value trades. I said you have a 9 trade-off of increasing capital. You have a 10 trade-off of increasing yield. You've got a 11 number of factors that are also considered in 12 addition to the interest rate risk and the 13 additional sensitivity. There are three different 14 things that you consider in a value trade. 15 Q. When I asked you about where I could 16 find on those sheets of paper where you evaluated 17 the impact of those trades on the interest rate 18 risk of the association, you told me to look to 19 the sensitivity analysis, did you not? 20 A. A sensitivity analysis on those 21 individual trades was not on that piece of paper. 22 I told you to get the sensitivity analysis which 3885 1 was run periodically. I don't know -- I don't see 2 the weekly sensitivity analysis which -- this is 3 not the weekly one that was run. I don't know -- 4 Q. Well, I mean, it is the same date as 5 the investment committee meeting and the 6 investment committee meeting met weekly, did it 7 not? 8 A. Right. 9 Q. So, this is the sensitivity analysis 10 that you were directing me to, wasn't it? 11 A. Do you have the previous week's and the 12 trades that were done in the previous week? 13 Q. I'm just asking you -- 14 A. Sensitivity analysis you have in the 15 previous week? 16 Q. Wait a minute. You testified, as I 17 recall -- and correct me if I'm wrong -- that if I 18 wanted to find out what the impact of those value 19 trades were on the portfolio, that I should look 20 to the weekly sensitivity analysis, did you not? 21 A. As one aspect. As one aspect, as I 22 just said. One aspect of three. 3886 1 Q. Now, let me direct you back to the 2 paragraph on Page 5224. It says "The MBS 3 portfolio, when combined with the interest rate 4 swaps, are favorably positioned for further rate 5 decline." 6 Do you recall discussing that with the 7 investment committee after you notified them of 8 that fact? 9 A. No. It was 12 years ago. 10 THE COURT: Excuse me. I didn't hear 11 the last -- 12 THE WITNESS: It was 12 years ago. 13 Q. (BY MR. GUIDO) Now, look at the 14 minutes for the next investment committee meeting, 15 which was January 28th. And on the second page, 16 it says you again reported on the status of the 17 mortgage-backed securities portfolio. And I 18 direct your attention to Page Bates stamped 19 US35262. It refers to MBS portfolio activity. 20 Do you see that? 21 A. Yeah. 22 Q. That shows also some of those swap 3887 1 transactions that you've referred to, does it not? 2 A. Yes, among other things. 3 Q. Okay. And those are delineated by the 4 brackets; is that correct? 5 A. Yes. 6 Q. And those were done to increase either 7 a swap gain or a market yield; is that correct? 8 A. Yes. 9 Q. Where do I find an analysis of what the 10 impact of those transactions was on the interest 11 rate risk to the association? 12 A. It would be in the overall portfolio 13 analysis of interest rate risk which, again, I 14 don't know if we were up and running at this point 15 with the weekly model or not. 16 Q. Okay. Take a look at Bates stamp 5285. 17 Do you see that? 18 A. 52 what? 19 Q. Bates stamp 5265. Excuse me. 20 A. Okay. 21 Q. Is that a sensitivity analysis? 22 A. Yes. 3888 1 Q. Okay. Now, let's take a look at the 2 one for the previous month which is Bates stamped 3 5225. Can you take a look at that? 4 A. If you are going to compare them, I 5 don't even need to turn to it. I'm going to say 6 the yield curve is totally different at this point 7 in time. I can't tell how much of it's that have 8 changes in the portfolio. 9 Q. Okay. So, the yield curves started 10 changing in January of 1987? 11 A. It changes every day. It's changing 12 right now even as we speak. 13 Q. I understand that, but how do you know 14 it changes between January 21st and January 27th, 15 1988? 16 A. Because rates aren't constant. 17 Q. Are you saying you're speculating that 18 it changed or you know that 12 years ago between 19 January 21st and January 28th, the yield curve 20 changed? That's all I'm trying to ascertain? 21 A. Okay. I'll say at every point on the 22 yield curve it changed. I'll say that. 3889 1 Q. And before looking at the figures, you 2 can say that what these figures are now going to 3 show, whatever that yield curve did is reflected 4 in these figures. Is that what you're saying? 5 A. Whatever the yield curve did is 6 reflected in these figures. However, I can't say 7 that that's all of the effect because I don't 8 know. That was 12 years ago. 9 Q. So, you don't know what the effect was 10 of those swap transactions on the interest rate 11 risk sensitivity of the association back in 12 January 21st, 1987? 13 A. Not sitting here today, I don't, no. 14 Q. From these documents, can you tell 15 today? 16 A. From these documents can I tell today? 17 No. Some of it may have been yield curve shift. 18 Q. Did you attempt when you engaged in 19 those swap transactions to ascertain what the 20 effect was on the interest rate risk to United 21 Savings Association? 22 A. Yes. 3890 1 Q. Did you do a calculation? 2 A. I don't know whether we did a 3 calculation at this point. But we were aware of 4 what we were doing, yes. 5 Q. Do you see anything in those investment 6 committee minutes that reflect that? 7 A. The overall portfolio risk measurement 8 is in there, yes. 9 Q. But not -- you can't, using that 10 sensitivity analysis, isolate the effect of those 11 swap transactions, can you? 12 A. No. 13 Q. Now, I'd like you to move to 14 Exhibit 1428 which is February 4th, 1987, Ms. Orr. 15 A. Yes. 16 Q. Did you also give a report in that 17 meeting? 18 A. Did I what? 19 Q. Did you also make a report to the 20 committee at that meeting on your MBS portfolio 21 activity? Is that reflected on Page 5270 and the 22 following pages? 3891 1 A. Yes. 2 Q. Now, take a look at Page 5273. 3 A. Yes. 4 Q. Under "investments," it has the sale of 5 FHLMC 8 and a half's and the purchase of 9s. Do 6 you see that? 7 A. Right. 8 Q. And it shows an accounting gain of 9 $404,000. It doesn't show any swap gain. It 10 shows an increase in market yield of .07 percent, 11 does it not? 12 A. Yes. 13 Q. Anywhere does it show the effect of 14 that transaction on the interest rate risk of the 15 association? 16 A. No. There may be a typo in that, also, 17 because the numbers should match approximately, I 18 would think, if it was a swap. In other words, 19 that may have been just an outright sale. 20 Q. All right. Now, let's take a look at 21 Exhibit A1429, February 11th, 1987. Did you also 22 make a report to the committee on that date? 3892 1 A. It says that I did. 2 Q. Pardon? 3 A. It says that I did. 4 Q. Okay. Now, take a look at Bates stamp 5 US35310. Does that show the activity that was 6 undertaken the previous week in the various 7 portfolios listed on the left-hand column? 8 A. I assume it was over the space of a 9 week. 10 Q. Now, were any of those transactions the 11 swap transactions that you've described to us 12 previously? 13 A. I don't know. They aren't brackets, 14 but you can call them swaps if you want. 15 Q. And were those designed to either 16 generate a swap gain, market yield, or accounting 17 gain? 18 A. Yes. 19 Q. Okay. Do those transactions indicate 20 whether or not there was a valuation of the impact 21 of the changes on the interest rate risk to the 22 portfolio? 3893 1 A. Not on this piece of paper, no. 2 Q. Okay. I'd like to hand you -- have you 3 look at Exhibit 1431 which are the minutes of 4 February 18th, 1987. Now, inserted in this packet 5 of materials with a different Bates stamp than any 6 that I've ever seen before is a document that's 7 called "United Financial Group, Inc. 8 mortgage-backed securities statement of strategies 9 and objectives." 10 MR. GUIDO: Does anyone -- I have a 11 question for counsel. Does anyone know why this 12 is not in the same type as all of the other 13 numbers, Bates stamp numbers? This was -- these 14 documents were produced by respondents' counsel. 15 Do you know, Mr. Griffith? 16 MR. GRIFFITH: I don't know what you're 17 talking about. 18 MR. NICKENS: Your Honor, I don't think 19 it's proper to address questions to other counsel 20 at this time. We have a stipulation as to the 21 source of the numbers and we will investigate that 22 and report to the Court accordingly. You know, 3894 1 all that I can see is that these particular 2 numbers are in a larger font and have added to 3 them three digits. I don't personally know the 4 reasons for that, but we'll look into it and I'm 5 sure that someone will be able to explain that to 6 the satisfaction of the Court. 7 THE COURT: We'll take a short recess. 8 9 (A short break was taken 10 at 3:23 p.m.) 11 12 THE COURT: Be seated, please. We're 13 back on the record. Mr. Guido, you may continue. 14 MR. GUIDO: Yes, Your Honor. I would 15 like to withdraw Exhibit 1431, Exhibit 1432. They 16 appear to be compilations that don't conform to 17 the records that I have of those documents. We 18 had had an arrangement where we were jointly 19 assigned different responsibilities and I had 20 assumed that these documents reflect the documents 21 that we all had had. It turns out that the 22 March 2nd and February 18th exhibits do not 3895 1 conform to the set that I have. And so, at this 2 point, I would like to withdraw those two 3 documents. 4 MR. NICKENS: What I would propose, 5 Your Honor, is that Mr. Guido introduce his set so 6 that we now will have for the record whatever 7 differences there may be between the two. And 8 when we can get those issues reconciled, there 9 will be some answer in the record. I don't even 10 know what differences he's talking about. 11 MR. GUIDO: Your Honor, mine have my 12 written questions for the witnesses and comments 13 on them and I do not feel comfortable sharing that 14 with opposing counsel. For my purposes, I do not 15 have to use these documents. I can skip over this 16 portion. It is -- 17 THE COURT: Where are your written 18 comments? On the copies? 19 MR. GUIDO: On the copies, Your Honor. 20 THE COURT: Well, how would the 21 respondents' counsel have that copy? Doesn't he 22 have a copy? 3896 1 MR. GUIDO: No. He just asked me for a 2 copy. Here in Houston, I do not have another set 3 other than my working set. Our arrangements were 4 that we would have -- the A set of documents would 5 be down here when we all arrived down here. My 6 set is my working set, and I thought that the A 7 set conformed to that. But for purposes of my 8 questioning of this witness, I do not need A1431 9 or 32. It is cumulative of the line of 10 questioning that I've been proceeding with. 11 THE COURT: Well, Mr. Nickens, don't 12 you have a copy of that. 13 MR. NICKENS: Yes, Your Honor. I have 14 1431 or I thought I did. I've been looking for it 15 and I have 1342 and I just don't -- I don't know 16 what he's talking about about a nonconforming 17 copy. 18 THE COURT: Well, I have copies. I 19 don't know who doesn't have a copy. Why are 20 you -- 21 MR. GUIDO: Your Honor, what I'm saying 22 is that if you look at -- let's take the document 3897 1 we were just looking at with the different 2 numbers. This document -- 3 THE COURT: You're talking 1431 -- 4 A1431? 5 MR. GUIDO: A1431. The problem with 6 A1431, if you look the first three pages -- two 7 pages of the document, it is US3004340. My set 8 starts at 005339 and it goes to 53340. Then for 9 some reason, there is another document that's 10 attached to this document. The numbering on the 11 document that is attached does not conform to the 12 numbering of the document that I have. The 13 document that I have runs through with the same 14 small typeface through 4384. The document that's 15 attached deals with entirely different subject 16 matter than the document that I was going to ask 17 questions off of. It's my understanding that the 18 document that I was going to ask questions of was 19 a document that was one of the original documents. 20 It was taken from the files of USAT. This 21 document appears to be someone's attempt, albeit 22 probably in good faith, to reconstruct what they 3898 1 thought was the set of minutes of that meeting. 2 It does not conform to what I understand the 3 minutes to be of that investment committee meeting 4 and the attachments to it. 5 THE COURT: So, you're saying that this 6 document, 14 -- A1431, beyond where the large US 7 numbers start, does not belong to those minutes? 8 Is that what you're saying? 9 MR. GUIDO: The only thing that belongs 10 to those minutes apparently, Your Honor, is one 11 copy of the statement of strategies and 12 objectives. But it appears that it was taken from 13 a different place. 14 MR. NICKENS: There are imaging numbers 15 on this these documents that are consecutive 16 which, if I understand the process correctly, 17 meant that they were imaged from the documents 18 produced to us by the OTS. 19 MR. GUIDO: But there is no imaging on 20 the first two documents. The question is whether 21 or not these documents go together, Mr. Nickens. 22 MR. NICKENS: I understand the 3899 1 question. I don't know -- I don't have the answer 2 to it. But as far as this -- this -- the 3 documents that begin US3005340.001 through 045 4 apparently went together. Whether they went with 5 this or not would require further investigation. 6 THE COURT: All right. Well, these two 7 exhibits, A1431 and A1432, were received. I think 8 I've received them. 9 MR. GUIDO: They were received, Your 10 Honor. 11 THE COURT: And so, you now want to 12 withdraw them? 13 MR. GUIDO: That's correct, Your Honor. 14 THE COURT: All right. Withdrawn. 15 MR. GUIDO: Thank you, Your Honor. 16 Your Honor, the same problem with 17 Exhibit 1433. I'd like to be able to take a 18 minimum to check the rest of these documents 19 because this document also doesn't conform to it. 20 It has a bunch of documents that have been added 21 to it dealing with junk bond purchases and it 22 has -- it does have the mortgage-backed security 3900 1 material in it but in a different order. 2 THE COURT: So, you're asking to 3 withdraw A1433? 4 MR. GUIDO: Yes, Your Honor. 5 THE COURT: Withdrawn. 6 (3:53 p.m.) 7 Q. (BY MR. GUIDO) Ms. Orr, I'd like you 8 to take a look at A1434 which is the minutes of 9 the investment committee of United Financial Group 10 and United Savings Association of Texas dated 11 March 18th of 1987. As other minutes have 12 referred to an investment committee of 13 United Financial Group and United Savings 14 Association of Texas, was there one committee -- 15 investment committee for both entities or was it a 16 joint committee or what? 17 A. I only went to one meeting a week. 18 Q. Okay. So, you never went to two 19 separate meetings? You always attended one 20 meeting? 21 A. Yes. 22 Q. I'd like you to take a look at the 3901 1 US35498 which is the fourth page from the back of 2 that packet of materials. 3 A. Yes. 4 Q. Now, look at the transactions under 5 "United MBS." Are those what you've referred to 6 as swap transactions? 7 A. Some of them are. 8 Q. Some of them are? Which ones? 9 A. The ones that would match in amounts, I 10 would guess. 11 Q. I'm talking about the United MBS -- 12 A. Oh, the United MBS, no. Those aren't 13 swaps. 14 Q. Those are just purchases and sales? 15 A. Right. 16 Q. And it's not an attempt to gain a yield 17 by swapping one yield for another yield? 18 A. I don't know at this point in time. I 19 don't know what it reflected. 20 Q. Now, look at the USAT transactions down 21 below. Are those transactions transactions that 22 you've characterized as swap transactions? 3902 1 A. I don't know. 2 Q. You don't know? They are purchases and 3 sales. Right? 4 A. Yeah. 5 Q. And there's a recordation of the 6 accounting gain in those transactions, is there 7 not? 8 A. Yes. 9 Q. And there's a column called "yield 10 pickup." Is that the yield that was earned on 11 either what was bought or sold, or is that the 12 difference between two yields? 13 A. No. That would be the yield. 14 Q. Okay. So, that isn't one of those 15 yield gains from a swap transaction? 16 A. I don't know. It may have been a yield 17 gain. 18 Q. You don't know which one of these is 19 swaps? 20 A. I don't know which -- 21 Q. But there is no effort in this activity 22 report to indicate a gain or loss on the swap 3903 1 yield? 2 A. No. I don't see one. 3 Q. Is there any effort to ascertain what 4 the interest rate risk was that was either created 5 or mitigated by any of these transactions to USAT? 6 A. I don't know. It may have been in the 7 verbal write-up. I was noticing in some of the 8 verbal write-ups in earlier ones that there was an 9 explanation of what it did to the interest rate 10 risk. So, I have to go back through and look at 11 every page now. 12 Q. Take a look at 5495. Does that tell 13 you anything about the impact on the interest rate 14 risk? 15 A. Yeah. 16 Q. Pardon? 17 A. Yes, it does. 18 Q. Okay. And it's the liquidation value 19 of the MBS portfolio; is that correct? 20 A. Yes. 21 Q. Ask what does it tell you about the 22 impact of those particular trades on the interest 3904 1 rate sensitivity of the association? 2 A. You can't separate out those individual 3 trades because I assume this is after the effect 4 of the trades. 5 Q. Okay. So, you can't use that for that 6 purpose. Now, taking a look at that, does that 7 indicate that the portfolio is positioned for an 8 interest rate decline? 9 A. No. 10 Q. No? Why not? 11 A. It doesn't say anything about it. 12 Q. I understand that, but -- I mean, let's 13 go back to -- what was that? The February 14 meeting? The January 25th meeting. Do you recall 15 that comment there? 16 A. That it was positioned for an interest 17 rate decline? 18 Q. "The MBS portfolio combined with 19 interest rate swaps are favorably positioned for 20 further rate decline." 21 Do you remember that? 22 A. Yeah. 3905 1 Q. Ask that was January 21, 1987? 2 A. Yes. 3 Q. It's A1426. Do you recall that? 4 A. Yes. 5 Q. And the sensitivity there was that the 6 yield unchanged was a negative 100,597,000. If 7 interest rates declined, it was by 100 basis 8 points, the net loss would decline to 89,025,000. 9 If the yields went up 100 basis points, the 10 increase would be a hundred -- the loss would 11 be -- would increase to 147 million 793. 12 Is it fair to conclude that as of 13 March 16th that the portfolio was still favorably 14 positioned for an interest rate decline? 15 A. What did rates do in between the two 16 time periods? I don't know. You haven't 17 indicated that in any way. And I can't tell what 18 happens down 100 basis points in rates from this 19 chart. So, I don't know. 20 Q. So, you don't know? 21 A. No. 22 Q. So, you can't tell whether or not that 3906 1 portfolio, the United MBS portfolio as of 2 March 16th, 1987, was favorably positioned for 3 interest rate declines? 4 A. There is no evidence on this sheet that 5 it is or not either way. 6 Q. Well, it does indicate that the losses 7 in the portfolio would go down to 69 million from 8 91 and that they -- if interest rates went up -- 9 A. This is the sheet I have. There is no 10 indication of rates going down at all. It says 11 "yields unchanged and yields up 100 basis points." 12 Q. Well, you don't have the decline? 13 A. No. 14 MR. NICKENS: She's looking at the next 15 page. 16 Q. (BY MR. GUIDO) I'm sorry. I thought 17 you told you 5495. 18 A. Okay. So, yes. This is better off in 19 a down rate scenario. 20 Q. So, it's favorably positioned for a 21 decline in interest rates? 22 A. Yes. 3907 1 Q. Let's move to March 25th. Look at 2 Page 5510. 3 A. Yes. 4 Q. It talks about the plans for the week. 5 It talks about "selling at a profit 100 million of 6 Fannie May 8 and a half's that were put to us and 7 write more one-week puts." 8 Was that in the investment portfolio or 9 in the -- 10 A. It showed up in the trading account in 11 one of the previous sessions. So, I suppose it 12 was in the trading account. 13 Q. Take a look at the Bates stamp 5515. 14 A. Yes. 15 Q. Okay. Does that show that there were 16 swap trades to increase yield or a gain on the 17 sale and repurchase of mortgage-backed securities? 18 A. Yes. 19 Q. Okay. And does that show that -- what 20 the accounting gain would be from the 21 transactions? 22 A. Yes. 3908 1 Q. Does it indicate what the effect would 2 be on the interest rate risk to the association of 3 any of those trades? 4 A. Well, on the previous page, it looks 5 like it does indicate the change on the week. 6 Q. So, how would I tell what the impact of 7 these trades were -- 8 A. You can't. 9 Q. -- on the interest rate yield? 10 A. You can't because there was a yield 11 curve move in between the two times. But it does 12 appear that we had an improvement in the down 100 13 situation and an improvement in the unchanged mark 14 and an improvement or, actually, a worsening in 15 the up 100 basis point mark. So, there must have 16 been a yield curve change to make it that much 17 different. 18 Q. Now, let's take a look at Exhibit No. 19 1436. That's April 1st, 1987. Take a look at 20 Page 5538. You see that page? 21 A. Yes. 22 Q. That's a portfolio activity for March 3909 1 23rd through March 30th, 1987; is that right? 2 A. Yes. 3 Q. Okay. Does that show the swap 4 transactions to generate profits for the 5 association? 6 A. Or to give yield pickup, yes. 7 Q. And does it show the accounting 8 gains -- 9 A. Yes. 10 Q. -- reflected? 11 A. It does. 12 Q. Does it anywhere indicate what the 13 impact of those trades are on the interest rate 14 risk of the association? 15 A. In the package? I don't know. I 16 haven't looked through the whole package yet. 17 Yes. 5545. 18 Q. 5545? 19 A. Yes. 20 Q. And what does that show? 21 A. It shows an unchanged case of down 22 124 million. 3910 1 Q. And why does that show the impact of 2 these trades on the portfolio? 3 A. Well, it's one element of many in the 4 portfolio. 5 Q. But you indicated that this sensitivity 6 analysis included many variables so you couldn't 7 isolate what the impact was of these swap 8 trades -- 9 A. Right. 10 Q. -- by looking at the sensitivity? 11 A. I can't isolate it, but it's in there. 12 Q. It's in there, but you can't tell -- 13 A. Right. 14 Q. -- from that? 15 A. How much is yield curve shift, how much 16 is rates just changing, how much is additions. 17 Q. Changes in prepayment speeds, any -- 18 A. No. It could be any number of things. 19 Q. So, you can't tell? 20 A. Right. 21 Q. Look at the minutes of April 8th. 22 Going back to the minutes of April 1st and looking 3911 1 at that sensitivity analysis, it shows $124 2 million negative figure with yields unchanged, 3 $86 million with yields down 100 basis points, 136 4 negative with yields up 100 basis points. 5 Is that portfolio favorably positioned 6 for a rate decline? 7 A. If you have less of a loss in a rate 8 decline, yes. I didn't hear what you said. 9 Q. Now, during that time period, did -- 10 what was your anticipation about the direction of 11 interest rates? 12 A. It varied week to week. 13 Q. Did you think that the trend in 14 interest rates would be decreasing or increasing 15 during that time period? 16 A. It varied week to week. 17 Q. So, you didn't know? 18 A. No. Nobody does. 19 Q. And you didn't have any views? 20 A. No. 21 Q. But you had a portfolio that was 22 favorably positioned for interest rates going one 3912 1 direction as opposed to another, did you not? 2 A. It was slightly -- it was slightly 3 bullish, but that's true of almost any mortgage 4 portfolio. It's positioned so you're better off 5 maybe down 50 basis points, down 75. But outside 6 of that change, you're short convexity. It's like 7 being short a treasury bond. You lose money if 8 there are significant bottle rate changes because 9 you're short convexity. You're short an option. 10 Q. Well, is 100 basis points a large move? 11 A. It is in mortgage securities. You're 12 talking about 30-year instruments. 13 Q. But you indicated back in January 21st 14 that with a 100 basis point move, that -- 15 downward, that the institution was favorably 16 positioned. I think those are your words, aren't 17 they? 18 A. At that point in time, that was what 19 the sensitivity analysis showed at those levels of 20 prepayments, at those levels of rates, at that 21 shape of the yield curve at that point in time. 22 Q. And that degree of hedging that you had 3913 1 on the portfolio. Right? 2 A. At that point in time, right. 3 Q. Okay. Now, let's look at the minutes 4 of April 8th. The second page. It's Bates 5 stamped 5569. It says "Ms. Laurenson then 6 presented an interest rate forecast from numerous 7 economists that was ordered attached to the 8 minutes. After a lengthy discussion, it was 9 agreed that the consensus was interest rates over 10 the next year would be moving in an upward 11 direction. As a result, it was agreed that the 12 association should begin lengthening the liability 13 structure and using various hedges to continue to 14 reduce gap." 15 Was there -- 16 MR. NICKENS: Reduce the gap. 17 MR. GUIDO: The gap. Excuse me. 18 Q. (BY MR. GUIDO) Was there interest 19 rate gap that existed prior to that time? 20 A. There was the minute I walked in the 21 door. 22 Q. Now, I thought that you said that when 3914 1 we talked about the USAT portfolio back in 2 November, that it was positioned so that it 3 would -- it would have about the same impact if 4 interest rates moved 100 basis points up or 100 5 basis points down. 6 A. I don't know. Is that the measurement 7 you showed me on a certain date? Is that what 8 you're referring to? 9 Q. You don't recall? 10 A. If that's what you're -- 11 Q. Yeah. That's what I'm talking about. 12 A. Is the sensitivity up and down a 13 hundred billion somewhat balanced back in a 14 certain period prior, yeah. 15 Q. In November 1986. Right? 16 A. Yeah. 17 Q. And then January 21st, 1987, you had a 18 sensitivity analysis that showed that there would 19 be a loss if interest rates went up and it was 20 about 50 percent, 25 to 50 percent, and there 21 would be a gain in the value of the portfolio 22 although it would still be negative of something 3915 1 comparable to that if interest rates went down. 2 And you characterized that, did you not, as being 3 favorably positioned for an interest rate decline. 4 Right? 5 A. Yes. 6 Q. Now, in April 8th, you report to the 7 committee that the economists are now saying that 8 interest rates are going to go up. Right? 9 A. Yes. 10 Q. And you're suggesting that steps be 11 taken to protect the portfolio from an interest 12 rate rise? 13 A. I don't show that that's my suggestion 14 necessarily. 15 Q. So, you were not suggesting that at the 16 time? 17 A. I don't know. It may have been 18 somebody else thinking that we needed to extend 19 liabilities. 20 Q. Well, at the time interest -- when you 21 gave that January 21st report on interest rate 22 sensitivity and you reported to the investment 3916 1 committee that the portfolio was favorably 2 positioned for an interest rate decline, did 3 anyone tell you at that point in time you'd better 4 rebalance that portfolio to make it less interest 5 rate sensitive? 6 A. No. I mean, not necessarily, no. I 7 don't remember. 8 Q. You never did anything with that 9 portfolio that the investment committee had not 10 received notice about and either approved or had 11 acquiesced after the fact, did you? 12 A. No. 13 Q. There was one instance, wasn't there, 14 when you had a dispute with Bruce Williams about 15 an unauthorized trade? Do you recall that? 16 A. I remember there was one instance where 17 I think they made me buy some ARMs that I didn't 18 really particularly want to buy to get maturity 19 matching credit. 20 Q. So, there became a dispute about 21 whether or not that had been authorized by I think 22 it was the September 22nd, 1987, minutes? Do you 3917 1 recall? 2 A. I think that that was actually a 3 running joke that appeared in the official 4 documents, quite frankly. 5 Q. Okay. You think it was just -- 6 A. Banter. 7 Q. The three of you bantering back and 8 forth by writing memoranda? 9 A. Yes. 10 Q. But I raise that because -- I just want 11 to establish that in your view, you didn't do 12 anything that hadn't been approved by the 13 investment committee? 14 A. No. 15 Q. Now, it says then you presented a 16 report. And it says "A written report was ordered 17 attached to the minutes of the meeting." And then 18 it goes on, "In order to hedge the portfolio in a 19 raising rate environment, various strategies were 20 discussed, including the purchase of high coupon 21 principal-only securities, interest-only 22 securities, interest rate caps, and put 3918 1 protection. After a lengthy discussion, the 2 committee approved the purchase of up to 3 50 million high coupon principal-only 4 mortgage-backed securities to hedge the arbitrage 5 one portfolio, to purchase interest-only 6 mortgage-backed securities as a replacement for 7 the mortgage-backed securities in the investment 8 portfolio, and to purchase up a hundred million of 9 interest rate caps to hedge the preferred stock 10 subsidiaries." 11 Do you see that? 12 A. Yes. 13 Q. Now, were those transactions 14 consummated? 15 A. I have no idea. 16 Q. Okay. Did you present an interest rate 17 sensitivity analysis to the committee for this 18 meeting? 19 A. It was 11 years ago. I have no idea. 20 Q. Take a look at US35594. 21 A. Yes. 22 Q. Okay. Is that your handwriting? 3919 1 A. Yes. 2 Q. Okay. And is that an interest rate 3 sensitivity analysis? 4 A. Yes. 5 Q. Okay. And does it show that the 6 portfolio was 129,930,000 in a negative? 7 A. Yes. 8 Q. And no change interest rate scenario? 9 A. Yes. 10 Q. And that the losses would go up to 11 194,972,000 with an increase of a hundred basis 12 points? 13 A. Yes. 14 Q. And that there would -- the loss would, 15 say, decline to 121 million 716 at that time? 16 A. Yes. 17 Q. I'd like to jump ahead to April 22nd, 18 1987. That's Exhibit 1439. The fourth paragraph 19 says "Ms. Sandy Laurenson then discussed the 20 mortgage-backed securities portfolio. At this 21 time, a representative of Goldman Sachs was put in 22 contact with the committee by way of a conference 3920 1 telephone call to discuss interest rate 2 movements." 3 Do you see that? 4 A. No. 5 Q. 1439. 6 A. 1439. Okay. Yes. 7 Q. Do you see that? 8 A. Yes. 9 Q. Who was the representative from Goldman 10 Sachs? 11 A. I have no idea. 12 Q. And did you arrange for that person to 13 be included in the conference call? 14 A. I assume so. 15 Q. Okay. And what had happened to 16 interest rates at that time? 17 A. I have no idea. 18 Q. Now, it then says, a couple paragraphs 19 down, "Ms. Laurenson reported on the portfolio and 20 the portfolio's performance. A lengthy discussion 21 was held among the members of the committee 22 concerning the strategy and tactics in dealing 3921 1 with the portfolio. It was noted that the effect 2 of the recent treasury bill movements and shifts 3 in the portfolio has had a distinct mark-to-market 4 decline of the portfolio and the committee was 5 attempting to determine the economic effect of 6 this mark-to-market result." 7 Do you see that? 8 A. Yes. 9 Q. Did you do an interest rate sensitivity 10 analysis for this meeting? 11 A. I don't know. I'll have to look 12 through the meeting. 13 Q. Take a look at US35655. 14 A. Yes. 15 Q. What does that show happened to the 16 portfolio? 17 A. It's marking down 197 million in the 18 unchanged case. 19 Q. Now, when you started, the negative 20 figure was $122 million, was it not? 21 A. When I started? 22 Q. Yeah. When you took over the portfolio 3922 1 at USAT when it had previously been managed by Joe 2 Phillips, it had a negative value of 122 million? 3 A. I don't remember. I mean, you can say 4 that. 5 Q. Now, when you gave your report on 6 January 21st and you said that it was favorably 7 disposed or positioned for an interest rate 8 decline, what was the loss in the portfolio at 9 that time? 10 A. Tell me. I don't know. 11 Q. About $100 million, wasn't it? 12 A. If you say so. 13 Q. What happened to interest rates between 14 January 21st, 1987, and April 22nd, 1987, to 15 create a mark-to-market loss of $197 million as 16 opposed to 100? 17 A. I don't know. How many assets did we 18 have? Do you know that? Like over a billion, 19 wasn't it? Something like that? We added a 20 billion in assets. Okay? So, that affects the 21 entire analysis slightly. 22 Q. Well, let me ask you: Arb 1 and Arb 2, 3923 1 those were in USAT Mortgage Finance, were they 2 not? 3 MR. NICKENS: Your Honor, I don't think 4 that's correct. USAT Mortgage Finance was the one 5 that was -- 6 MR. GUIDO: Oh, excuse me. 7 MR. NICKENS: -- existed for a short 8 period of time, and he's talking -- 9 MR. GUIDO: United MBS. Excuse me. I 10 misspoke, Mr. Nickens. United MBS. 11 Q. (BY MR. GUIDO) The Arb 1 and Arb 2 12 were the United MBS portfolio? 13 A. I don't know. 14 Q. You don't know? 15 A. I don't remember. 16 Q. You don't remember? 17 A. No. 18 Q. The documents, if they reflect Arb 1 19 and Arb 2 being the United MBS portfolio, you 20 wouldn't disagree with that, would you? 21 A. No, I wouldn't disagree. I just don't 22 remember. 3924 1 Q. Now, this showed that the combined Arb 2 1 and Arb 2, which I believe was the United MBS 3 portfolio with a zero change in interest rates as 4 of April 22nd, 1987, were $53 million negative 5 value? 6 A. Yeah. 7 Q. What happened to interest rates between 8 January 21st and April 22nd, 1987, to make that 9 happen? 10 A. I don't know, but you also have to look 11 at what the shape of the yield curve did because 12 we were financing with repo, which is a short-term 13 instrument. 14 Q. Now, isn't one of the purposes of 15 hedges to protect against changes in the yield 16 curve? 17 A. Changes in the yield curve? No. They 18 can't always do that. 19 Q. Pardon? 20 A. No, they can't always do that. No. 21 Q. But did interest rates increase or 22 decrease in this time period? 3925 1 A. I don't know, and I don't know what the 2 shape of the yield curve did either. 3 Q. Did interest rates between 4 January 21st, 1987, and April 22nd, 1987, increase 5 more than one and a half -- 150 basis points? 6 A. You obviously know so share it with me, 7 please, and also what the yield curve did because 8 I don't know. I've told you three times I don't 9 know. 10 Q. Okay. 11 A. I don't remember. 12 Q. Now, remember that memorandum that I 13 showed you that talked about the discussion points 14 for the fourth quarter 1986 earnings? Let me 15 quote it to you again. It's Exhibit T4258. It 16 says "Fourth quarter 1986 results are projected to 17 show a significant loss unless a miracle happens 18 in equity arbitrage, increased values in our bond 19 portfolios, or an unexpected sale of real estate 20 at a profit." 21 Was the USAT mortgage-backed securities 22 portfolios positioned for a favorable rate or 3926 1 favorable results if there was an interest rate 2 decline in order to increase values in the 3 mortgage-backed bond portfolios by a change in 4 interest rates? 5 A. Okay. This is, I think, the fourth 6 time I've tried to answer this. At the point of 7 time it was measured in a parallel shift of the 8 yield curve which never occurs, never occurs, when 9 you say "I will move rates down by 100 basis 10 points for a 30-year all the way down to the three 11 months' part of the curve 100 basis points in your 12 scenario analysis," yeah, I'm sure that every 13 calculation that we did at that point was right in 14 a parallel shift of the yield curve. 15 Q. So that the calculations that were made 16 at that point in time by you -- 17 A. With the speeds. 18 Q. -- and shared with the investment 19 committee assumed that there would be a favorable 20 result to the institution if there was a decline 21 in interest rates? 22 A. A parallel shift of 100 basis points 3927 1 with CPRs, as stated in the assumptions of the way 2 we ran the model, which are all significant 3 variables. 4 Q. And you don't know today what the 5 changes in interest rates were between 6 January 1987 and April of 1987? 7 A. No. Please tell me. 8 Q. What do you think that the results 9 reflected in that sensitivity chart show? 10 A. I have no idea because I said we added, 11 what, about a billion in assets roughly in that 12 period? If you can tell me what the assets were 13 in each case that we added, whether they were 14 adjustable rate mortgages, whether they were ARMs 15 that at one point in time had some kind of 16 maturity matching credit associated with them and 17 then it was withdrawn by the OTS and so they 18 declined immediately in value by 5 points, if you 19 can tell me all of those things about the assets, 20 then I will tell you how we ended up with that 21 mark. 22 Q. Well, what is the purpose of a 3928 1 sensitivity analysis if it's not to take the 2 portfolio as a whole and to show you what happens 3 if there's a 100 basis point decline or a 100 4 basis point increase? Isn't that what that 5 sensitivity analysis is designed to do? 6 A. 100 basis point parallel shift in the 7 yield curve with the speed assumptions that you 8 use initially, yes. 9 Q. Okay. All right. And that set of 10 assumptions that you put into that showed to you 11 that the portfolio was favorably positioned for a 12 decline in interest rates? 13 A. A 100 basis point parallel shift in the 14 yield curve with the speed assumptions that we put 15 into the model at that time, yes. 16 Q. Would it -- 17 A. And the existing asset base that we had 18 which was almost a billion smaller? I don't know. 19 You tell me. 20 Q. Would it surprise you if interest rates 21 on mortgage-backed -- 30-year mortgage-backed 22 securities increased from 8 percent to around 3929 1 10 percent during that time period? 2 A. No, it wouldn't. Given the effect of 3 the mark, no, it wouldn't. 4 Q. Okay. Was the mark-to-market figures 5 that were shown as of that date affected by an 6 increase in interest rates? 7 A. Certainly, among many other things. 8 Q. Okay. Now, I'd like you to go back and 9 look at -- I think it is the December 5th, one of 10 the first packets of exhibits that we looked at. 11 A. I've got December 4th of '86. 12 Q. Okay. December 4th. 13 A. Of '86? Is that what you want? 14 Q. December 4th of 1986? No. I'm sorry. 15 It was December of -- 16 A. Of '87? 17 Q. It was when we were talking about that 18 cap transaction. 19 MR. NICKENS: Your Honor, I don't think 20 we got to December of '87 in the investment 21 committee minutes. 22 MR. GUIDO: I thought that that's when 3930 1 the -- 2 MR. NICKENS: The last one you asked 3 about was May 5. 4 MR. GUIDO: No. When I talked about 5 the sale and repurchase of the caps, 6 Mr. Nickens -- 7 THE COURT: We'll be off the record for 8 a moment. 9 10 (Discussion off the record.) 11 12 MR. GUIDO: It's Exhibit A1479. 13 Q. (BY MR. GUIDO) Will you take a look 14 at Bates stamp 6811 on Exhibit 1479, please? 15 A. Yes. 16 Q. Is that the sensitivity analysis for 17 the mortgage-backed security portfolio as of that 18 date? 19 A. Yes. 20 Q. And what does that show? 21 A. It shows negative 281 million in the 22 unchanged. 3931 1 Q. And did you say 281 million? 2 A. Yes. 3 Q. I'd like to hand you Exhibit A1470 4 which was October 23rd, 1987, and ask you if 5 that -- the Bates stamp on that one is 6621? 6 MR. NICKENS: What is the 7 exhibit number? 8 THE WITNESS: Exhibit No. A1470. 9 Q. (BY MR. GUIDO) And what does that 10 show the mark-to-market with no change in interest 11 rates? 12 A. Net down 294,889,000. 13 Q. Now, what happened to interest rates 14 between January of 1987 and October of 1987? 15 A. I would guess they went up would be my 16 guess. 17 Q. Didn't they go up quite a bit? 18 A. It was -- around the stock market 19 crash, long bond went to about 10 percent, yeah. 20 Q. So that interest rates went up quite a 21 bit. In fact, they went up so high that they 22 precipitated or they were the partial cause of the 3932 1 stock market crash in October of 1987, were they 2 not? 3 A. Yes. 4 Q. So, interest rates all during that year 5 had been increasing, had they not? 6 A. Yes. 7 Q. And USAT held the portfolio that was 8 favorably positive for a declining interest rate? 9 A. Mildly declining, yes. 10 Q. Why was that? 11 A. Because if we had held one that was 12 perfectly hedged in up and down rate scenarios, we 13 would have had no interest rate spread on the 14 portfolio. 15 Q. Was the portfolio positioned favorably 16 for a rate decline because the investment 17 committee had concluded that interest rates were 18 likely to decline? 19 A. No, I don't think so. 20 Q. If the minutes indicate that the 21 projections were for a declining interest rate, 22 would it be fair to assume that the investment 3933 1 committee had concluded that it favorably posited 2 itself to benefit from that interest rate decline? 3 A. Not necessarily, no. 4 Q. And why not necessarily? 5 A. Because they were risk adverse. I 6 mean, they wanted to be risk neutral totally but 7 knew they couldn't be because it's impossible to 8 be perfectly hedged. 9 Q. Well, I mean, on January 21st, you 10 reported to the investment committee that they 11 were favorably positioned for an interest rate 12 decline. And the sensitivity analysis that 13 accompanied that on Bates stamp 5225 from those 14 minutes shows that if interest rates go up 100 15 basis points, their loss of 100 million would 16 increase by 50 percent to 150. If interest rates 17 went down, that they would benefit by $11 million. 18 Right? 19 MR. NICKENS: Your Honor, this is about 20 the seventh or eighth time we've covered this 21 point. You know, we've gone repeatedly back to 22 this over and over again. 3934 1 THE COURT: Well, we'll have one more 2 time. 3 MR. GUIDO: Thank you, Your Honor. 4 Q. (BY MR. GUIDO) If the investment 5 committee was risk adverse as you say -- 6 A. Yes. 7 Q. -- wouldn't it have directed you to 8 reposition that portfolio to avoid that 50 percent 9 increase in the loss in that net portfolio because 10 it was out of balance? 11 A. No. 12 Q. Why not? 13 A. A, because you're assuming a 200 basis 14 point parallel shift in the yield curve. You're 15 assuming that CPRs are going to move the way that 16 we think they will in that scenario. There are a 17 lot of assumptions that go into it. 18 Secondly, they had a desired spread 19 that they wanted to make. And to further hedge 20 that portfolio, it would have been a diminution of 21 the spread and they were not willing to do that. 22 They are a portfolio-carrying 3935 1 institution. They had the ability to carry a 2 portfolio. They are not a mark-to-market 3 institution. They are not a Wall Street firm. 4 And they did not view themselves that way. They 5 did not particularly care that the mark-to-market 6 loss was a certain number versus losing spread. 7 They were more concerned about maintaining spread. 8 Q. And they were concerned about 9 maintaining spread because they needed a spread of 10 a certain amount to fill the deficit that has been 11 created by real estate losses. 12 Is that your testimony? 13 A. They needed a spread to continue to 14 make money to add to their capital base like any 15 other company. 16 Q. I mean, you at the outset said they 17 wanted a spread of a certain amount in order to 18 generate gains sufficient to offset real estate 19 losses. 20 Do you recall that testimony? 21 A. I recall that I said that was one 22 aspect of the problems that they were having at 3936 1 United. Everybody knew. It was never 2 specifically stated, "Let's do this mortgage 3 portfolio to cover real estate losses," I don't 4 believe. It was just a factor -- one of many 5 factors that made them want to buy more assets. 6 The swaps that were at a fixed rate liability they 7 had on the books needed to be covered. There were 8 many things they needed to cover. 9 Q. And was one of the things that they 10 wanted to do was to incur a certain risk in order 11 to maintain a spread of a certain amount to help 12 offset the losses from the real estate portfolios? 13 A. No. They didn't want to incur a 14 certain amount of risk. Nobody does. But they 15 wanted to maintain a spread that demanded risk. 16 Q. Okay. So, they were willing to accept 17 that risk in order to generate a spread to help 18 offset the real estate losses. 19 Is that your testimony? 20 A. No. They were willing to -- they were 21 not willing to diminish the spread that existed in 22 the portfolio. For whatever reasons, they did not 3937 1 want to diminish the spread that existed in the 2 portfolio. That is what my testimony is. 3 Q. Now, did you leave USAT at the end of 4 1987? 5 A. I'm not sure. Tell me. 6 Q. Why did you leave USAT? 7 A. Gross insubordination to Jenard Gross. 8 Q. And what was the gross insubordination? 9 A. He had a meeting where he was 10 suggesting we find ways to cut copier use to save 11 money, and I suggested an alternative savings of 12 money. 13 Q. And what was the alternative? 14 A. That all the executives get rid of 15 their company cars and their company phones. 16 Q. And why was that? 17 A. It was a savings of money that would 18 have been significantly more than the savings on 19 the copier, the extra paper we were using. 20 Q. Now, did you in your management of that 21 portfolio, the United MBS portfolio, distinguish 22 in your analysis between USAT investment 3938 1 portfolios, United MBS, the treasury portfolio in 2 terms of the overall risk analysis that you did of 3 that portfolio? 4 A. I ran them separately up and down 100 5 basis points, it appears, in the documentation. 6 Q. And did you also aggregate those 7 portfolios? 8 A. Yes. I have a total line at the 9 bottom. 10 Q. And did you transfer assets between 11 those portfolios? 12 A. I did not. Mike Crow was responsible 13 for doing the accounting. 14 Q. So that when you bought or sold 15 mortgage-backed securities, you felt you were just 16 doing it for USAT? 17 A. No. I would allocate them initially at 18 purchase to different portfolios, depending on 19 what I thought the purpose was at the time of 20 purchase. 21 Q. Did you reallocate them among various 22 portfolios at any subsequent time? 3939 1 A. I did not. Mike Crow may have because 2 he was the accountant. 3 Q. Okay. You don't recall having done so 4 yourself? 5 A. How could I? I didn't have the GL in 6 front of me. 7 Q. Pardon? 8 A. I didn't have the general ledger. 9 Q. Okay. So that if there were any 10 allocations that were made among portfolios, that 11 would have been done by someone else? 12 A. An accountant, yes. 13 Q. But when you made the purchases, did 14 you make an initial allocation to the portfolio? 15 A. I indicated on the trade ticket which 16 portfolio I thought it should go in. Whether it 17 actually went in there or not, I have no idea. 18 Q. So that the trade tickets that were 19 filled out would indicate your view of whether or 20 not something belonged in one portfolio or 21 another? 22 A. Yes. 3940 1 MR. GUIDO: No further questions, Your 2 Honor. 3 THE COURT: We'll adjourn until 4 9:00 o'clock tomorrow. 5 6 (Whereupon at 5:40 p.m. 7 the proceedings were recessed.) 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 3941 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 20th 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 3942 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 20th 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