5141 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 10-27-97 22 5142 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 (Not present) 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 CATHERINE BOTTICELLI, Esquire of: Dechert, Price & Rhoads 11 1500 K Street, N.W. Washington, D.C. 20005-1208 12 (202) 626-3306 13 DALE A. HEAD (in-house) Managing Counsel 14 MAXXAM, Inc. 5847 San Felipe, Suite 2600 15 Houston, Texas 77057 (713) 267-3668 16 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO. AND 17 CHARLES HURWITZ: 18 RICHARD P. KEETON, Esquire of: Mayor, Day, Caldwell & Keeton 19 1900 NationsBank Center, 700 Louisiana Houston, Texas 77002 20 (713) 225-7013 21 22 5143 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 5144 1 2 EXAMINATION INDEX 3 Page 4 JOSEPH PHILLIPS 5 Examination (Cont'd) by Mr. Guido........5145 6 Cross-Examination by Mr. Nickens.........5316 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 5145 1 P-R-O-C-E-E-D-I-N-G-S 2 (10:35 a.m.) 3 4 THE COURT: Be seated, please. The 5 hearing will come to order. Unless there are 6 preliminary matters, we will continue with the 7 examination of Mr. Phillips. 8 MR. GUIDO: Thank you, Your Honor. 9 10 EXAMINATION 11 12 Q. (BY MR. GUIDO) Mr. Phillips, when you 13 reported to Jerry Williams on your activities 14 prior to the creation of the investment committee, 15 did anyone accompany you when you met with 16 Mr. Williams? 17 A. Very often, it would be Ron Huebsch. 18 Q. Why did Mr. Huebsch attend with you 19 when you were reporting to Mr. Williams? 20 A. We consulted on many subjects, and we 21 executed most transactions -- virtually all 22 transactions in the trading room at the MCO 5146 1 building. And Mr. Huebsch had market inputs and 2 helpful comments on how certain transactions 3 should be undertaken. 4 Q. Now, when you met with Mr. Williams 5 with Mr. Huebsch, was that to report on what you 6 had been doing? This is prior to the investment 7 committee's creation. 8 A. It could either be to report or to 9 suggest certain strategies to complete things we 10 had already suggested and already started. 11 Q. Now, you indicated that your background 12 had been in managing high-yield corporate bond 13 portfolios. 14 Can you tell us what the risks were with 15 those portfolios? 16 A. The primary risk in high-yield 17 corporate bonds is credit risk, and it is also the 18 primary source of return from holding corporate 19 bonds, high-yield corporate bonds. 20 Q. Are high-yield corporate bonds as 21 volatile to changes in interest rates as 22 mortgage-backed securities? 5147 1 A. No, they are not. 2 Q. Did you have any experts available as 3 consultants to you in the 1984, 1985 time frame 4 when you put on the mortgage-backed security 5 risk-controlled arbitrage portfolio for USAT? 6 A. Yes, we did. 7 Q. Who were they? 8 A. They were individuals from specialized 9 departments of investment banking firms, 10 specialized departments that could discuss 11 interest rate swaps and other devices, as well as 12 people from the mortgage-backed securities trading 13 area. 14 Q. Did you eventually consult with Smith 15 Breeden to obtain advice from them regarding the 16 management of the risk-controlled arbitrage MBS 17 portfolio? 18 A. I did not personally, but the 19 association did retain Smith Breeden for that. 20 Q. When was that? 21 A. I believe it was in 1986. 22 Q. Was it sometime in June of 1986? 5148 1 A. I don't recall the date. 2 Q. Was it in the early part of the year 3 when you were selling mortgage-backed securities 4 of one coupon and purchasing mortgage-backed 5 securities of another coupon? 6 A. It could have been during that same 7 period. 8 Q. Did they advise you on what to do 9 during that period? 10 A. No, they did not. 11 Q. Now, in the 1985 time period, had you 12 retained a consultant such as Smith Breeden to 13 advise you on the management of the 14 risk-controlled arbitrage mortgage-backed security 15 portfolio at USAT? 16 A. No. 17 Q. Now, you indicated that you consulted 18 with representatives of the investment banking 19 firms? 20 A. Yes. 21 Q. Who were those individuals? 22 A. I don't recall the names of the 5149 1 individuals who were the specialists. Our 2 salesmen referred them to us and, in many cases, 3 they visited our offices and made presentations or 4 simply discussed how their products did work. 5 Q. Was one of those people Michael Waldman 6 from Salomon Brothers? 7 A. No, I don't think so. 8 Q. Was one of those people Scott Pinkus 9 from Morgan Stanley? 10 A. I met with Scott Pinkus, but I don't 11 recall whether it was in our offices or whether it 12 was in New York. But I had met him and visited 13 with him once or twice. 14 Q. And who is Mr. Pinkus? 15 A. Mr. Pinkus was a mortgage-backed 16 securities research analyst. I believe he was at 17 Morgan Stanley when I first met him. 18 Q. Okay. Do you know who Michael Waldman 19 was? 20 A. Michael Waldman also did research and 21 wrote on mortgage-backed securities, and he was 22 with Salomon Brothers. 5150 1 Q. Did you have access to their literature 2 in 1985? 3 A. Yes. 4 Q. And did you produce some of that 5 literature to the OTS in response to a subpoena 6 served upon you in the investigative phase of this 7 proceeding? 8 A. Yes, I did. 9 Q. Now, were they employed by the 10 investment banking firms that were selling 11 mortgage-backed securities to USAT? 12 A. Yes, they were. 13 Q. Now, did you have any -- in 1985 and 14 late '84, did you have a computer capability to 15 analyze the interest rate sensitivity of the 16 risk-controlled arbitrage mortgage-backed security 17 portfolio based on changes in interest rates? 18 A. We had the beginnings of systems that 19 are more available today. We had the Bloomberg 20 system and for a while, we had a proprietary 21 system that was provided by Drexel. 22 Q. And what information was input into 5151 1 that system to ascertain what the effect would be 2 of changes in interest rates on the 3 risk-controlled arbitrage portfolio? 4 A. The kind of inputs that systems like 5 that would accept would include a range of 6 interest rate curve shifts to be modeled, the 7 characteristics of the security or the portfolio 8 being modeled, and assumptions regarding the 9 response of prepayment to those shifts in interest 10 rates. 11 Q. Did it accept different prepayment 12 rates for different interest rate scenarios? 13 A. I believe that such systems would. 14 Q. Do you recall when you had access to 15 that system? 16 A. I believe it was 1985. 17 Q. Do you recall when in '85? 18 A. No, I don't. 19 Q. Who was responsible for maintaining 20 that system at USAT? 21 A. It was a modeling system on which to 22 simulate certain market results. It was not a 5152 1 system of transactions or anything that really 2 needed to be maintained. It was a system by which 3 you could make these assumptions and produce these 4 results. 5 You could also calculate certain numbers 6 that were needed for closing mortgage-backed 7 securities transactions: The accrued interest and 8 the amount of face value that was to be delivered 9 and things of that nature. But it was not a 10 system of transactions that needed actual 11 maintenance. So, I would use this; but there was 12 no maintenance to it. 13 Q. Was it a system that gave you a 14 conclusion with regard to what would happen if 15 interest rates moved 100 basis points either way? 16 A. It was a system that would give you -- 17 yes. What would happen -- however, it might not 18 at that time have made a clear link between 19 interest rate shifts and the effect on prepayment. 20 I believe the prepayment would have had to be 21 something you would have put in yourself. 22 Q. So that the system did not 5153 1 automatically include changes in prepayments based 2 on changes in interest rates? 3 A. I believe that it did not. 4 Q. Did the system provide you with a 5 calculation of what the yield was on the 6 portfolio? 7 A. Yes. Subject to all those inputs that 8 we mentioned earlier, it would give you a yield. 9 Q. Okay. Would it give you the yield on 10 the mortgage-backed securities? 11 A. Yes, it would. 12 Q. Would it give you the net yield on the 13 difference between what was earned on the 14 mortgage-backed securities or anticipated to be 15 earned on the mortgage-backed securities and what 16 was paid on the swaps? 17 A. This system was not a system to manage 18 the risk-controlled arbitrage. It was a system 19 solely for the analysis of mortgage-backed 20 securities. 21 Q. It was only a system that determined 22 what the yield might be on the mortgage-backed 5154 1 security standing alone? 2 A. That's correct. 3 Q. And it only calculated yield? 4 A. Well, a system like this might also 5 calculate price given yield. 6 Q. Now, what were you most interested in 7 looking at in 1985 in evaluating the performance 8 of the mortgage-backed securities? 9 A. We would have been interested in the 10 yield that we had earned and the yield that we 11 could expect subject to what might happen with 12 prepayments. 13 Q. Did you attempt to ascertain what the 14 market value effect would be on the 15 mortgage-backed securities? 16 A. If we did, it would have been 17 coincidental. It was not part of any analysis we 18 needed to conduct the management of the structure. 19 Q. Okay. What do you mean by that? 20 A. The market value at any given moment 21 would not have entered into any decisions to -- 22 that we undertook to manage the portfolio. It was 5155 1 a spread structure, and the maintenance and 2 preservation of that spread was our objective. 3 Q. And not to maintain the value -- the 4 market value of the portfolio? 5 A. That's correct. 6 Q. Why not? 7 A. Because we had created a structure that 8 would allow the securities to run off, allow us to 9 hold them to maturity or whatever their final 10 payment was. We had a structure to hedge the 11 short funding risk to carry those with. So, the 12 risks that we had identified as the important ones 13 and the risks from which we earned our return were 14 appropriately hedged and identified. 15 Q. Doesn't the prepayment risk refer to 16 the option of the borrower to prepay the 17 mortgages? 18 A. Yes, it does. 19 Q. So, how could you be so certain that 20 you could maintain the portfolio until your 21 expected life had expired if the purchaser had an 22 option to prepay? 5156 1 A. If the purchaser exercised his option 2 to prepay, the durations that we had calculated 3 for use in creating the match would change and we 4 would undertake to rebalance the portfolio to 5 bring that back in line. 6 Q. And you used the yield figures to 7 determine when to rebalance? 8 A. No. We would have used the durations. 9 Q. You would have used the durations? 10 A. That's correct. 11 Q. And that -- and how did you ascertain 12 the duration at any given point in time? 13 A. Well, we had the basis books that I 14 referred to before in which we could look up the 15 coupon of the issue, the approximate remaining 16 time to maturity, and the price or the yield, and 17 suggest a prepayment speed and get a duration from 18 these books. 19 Q. Did these books tell what you the 20 prepayment speeds would do based on how far the 21 coupon that you held was away from the par or the 22 current market? 5157 1 A. No, they did not. 2 Q. Who was the first vendor that you 3 purchased a risk-controlled arbitrage from? 4 A. I believe that it was from 5 Merrill-Lynch. 6 Q. And who was the salesman from 7 Merrill-Lynch again? 8 A. The salesman was Joe Schuler. 9 Q. Why did you purchase from 10 Merrill-Lynch? 11 A. I believe that at that time, they were 12 the first to line up all the pieces that it took 13 to put a transaction like this together. It 14 essentially took two or three different 15 departments of these firms to execute, almost 16 simultaneously, the transactions required to do 17 this. 18 Q. Who were the largest firms in terms of 19 business in marketing mortgage-backed securities 20 and risk-controlled arbitrages at the time? 21 A. Salomon Brothers was quite large. I 22 believe that Morgan Stanley, First Boston were 5158 1 also quite large. 2 Q. Now, didn't they also have the 3 capability of providing you with all three pieces 4 of risk-controlled arbitrage, the reverse repo, 5 the swaps, or caps or collars, and the 6 mortgage-backs themselves? 7 A. Yes. Any of them could. 8 Q. So, why did you pick Merrill-Lynch? 9 A. Well, they were among the first to show 10 us a complete package, brought experts down from 11 New York to discuss how the interest rate swaps 12 would work, and really just the first ones ready 13 to go. 14 Q. Now, had any of the other firms that 15 you just mentioned made presentations to you with 16 regard to what they were proposing prior to 17 purchasing the risk-controlled arbitrage from 18 Merrill-Lynch? 19 A. I don't recall that formal 20 presentations had taken place before this. All of 21 the salesmen in the mortgage-backed securities 22 business had presented structures like this at one 5159 1 point or another very early. 2 Q. Now, can you describe for us what the 3 basic structure was of the risk-controlled 4 arbitrage that you purchased from Merrill-Lynch? 5 A. The basic structure involved the 6 purchase of mortgage-backed securities financed 7 with a reverse repurchase agreement, which was a 8 short-term borrowing which could be quite short. 9 It could be from overnight to a couple of months. 10 And the spread created by the difference between 11 those two yields, the yield and the cost of the 12 short borrowing, would be reduced by the use of an 13 interest rate swap. And the interest rate swap 14 would have required the association to be a fixed 15 rate payer, and the fixed rate would essentially 16 offset the floating rate received, which 17 essentially created a longer term financing than 18 the reverse repo would have by itself. And we 19 used the face amounts, I believe, that were 20 equivalent. And we matched the duration of the 21 swap to the duration of the mortgage-backed 22 securities. 5160 1 Q. Your expected duration? 2 A. Yes, given the prepayment assumption. 3 Q. Now, what is this -- I've noticed in 4 some of the papers that we're going to go through 5 today, there is a thing called a CPR. 6 Can you tell us what a CPR is? 7 A. It is one of several prepayment 8 measurements. I believe that CPR was one of the 9 more common ones at that time, and it meant 10 constant prepayment rate. 11 Q. Okay. Now -- and is that how you 12 calculated the duration of the mortgage-backed 13 securities to match the duration of the swaps to 14 them? 15 A. We would use the CPR in the calculation 16 of duration, yes. 17 Q. Now, in terms of the mortgage-backed 18 securities that you purchased, were those 19 essentially purchased at par or a slight premium 20 to par? 21 A. Yes, they were. 22 Q. So, they were essentially at whatever 5161 1 the current market value was or close thereto? 2 A. They were near the current market rate 3 or slightly higher than the current market rate. 4 Q. And then in some cases, you paid a 5 premium for those? 6 A. Yes. 7 Q. Now, if you were pricing the security, 8 would 100 be par? Is that the way you would 9 define par? 10 A. Yes. 11 Q. Okay. And 101 would be a premium? 12 A. That's correct. 13 Q. 99 would be a discount? 14 A. Yes. 15 Q. Now, with regard to the swaps, when you 16 were paying the fixed rate on one end, the long 17 end, and receiving the variable rate, what would 18 happen if interest rates went down? 19 A. If interest rates went down, the rate 20 paid on the interest rate swap, of course, would 21 remain constant. It was a fixed rate for a term. 22 The rate on the reverse repurchase agreement might 5162 1 change depending on which end of the yield curve 2 did go down. If it went down, it would also fall. 3 The interest rate received on the interest rate 4 swap, also a variable rate, might also go down. 5 And the market price of the mortgage-backed 6 security would rise depending on how high the 7 coupon was and what the expected behavior of 8 prepayments might be after this market -- after 9 this market move. 10 Q. Put the mortgage-backed securities 11 aside. Would you end up paying more on the swap 12 if interest rates went down? 13 A. No, you would not. 14 Q. Why not? 15 A. Because we were the fixed payer of the 16 swap. And so, we paid a fixed rate for a term 17 certain just as if it was a borrowing. 18 Q. And you received a variable rate in 19 return. Right? 20 A. That's correct. 21 Q. And those two payments would net 22 themselves out to determine who it was and how 5163 1 much they had to pay the other party? 2 A. Yes, that's correct. 3 Q. So, if the rates went down -- if you 4 were a fixed rate and rates went down, the net 5 payment to whoever was the counter-party would 6 increase, would it not? Just looking at the swap. 7 A. Well, I'm not sure. I guess that's 8 correct, looking at the swap. If the floating 9 rate that we paid -- I'm sorry -- the floating 10 rate we received went down, the net amount would 11 be larger, that's correct. 12 Q. Now, I'd like you -- I'd like to move 13 to another subject. And this goes to sort of 14 later in 1986. 15 Will you take a look at Exhibit A1406 16 which is the investment committee minutes of 17 August 28th, 1986? And I direct your attention to 18 the third page of the document which is Bates 19 stamped US34861. 20 Do you see that page? 21 A. Yes. 22 Q. And look at the third paragraph from 5164 1 the bottom. It says "Mr. Crow proposed that until 2 our new mortgage-backed securities position was 3 filled that we consider moving ahead with 4 approving mortgage-backed security value trades 5 that will improve the overall portfolio position 6 and yield. In the future, he proposed that 7 mortgage-backed securities trading be accomplished 8 through a committee consisting of Mr. Crow, 9 Mr. Phillips, Mr. Bruce Williams, and Mr. Doug 10 Hansen. Mortgage-backed security trades would be 11 executed by a majority vote of the members of the 12 committee and the concurrence of Smith Breeden 13 Associates. Smith Breeden would be consulted on 14 each trade involving mortgage-backed securities 15 and the economics and reason for each trade would 16 be reported to the investment committee. The 17 committee approved these procedures for future 18 trading in mortgage-backed securities and they 19 were to be presented for final approval to 20 Mr. Jenard Gross before implementation." 21 Do you see that? 22 A. Yes. 5165 1 Q. Was such a policy adopted by the 2 investment committee? 3 A. Yes. A subcommittee of this group was 4 formed. 5 Q. And was Smith Breeden retained to be 6 consulted on trades involving mortgage-backed 7 securities and the economics and reason for each 8 trade? 9 A. We already had a business relationship 10 with Smith Breeden and I know that on at least one 11 occasion that I recall, we contacted them 12 regarding a proposed trade. 13 Q. Now, what is the reference to value 14 trades? 15 A. A value trade would have been one that 16 would have helped the portfolio in some small, 17 incremental way but would not be of the sort of 18 transaction that would constitute a significant 19 rebalancing of restructuring. 20 Q. Can you give us an example of such a 21 trade? 22 A. Very often, there would be intermarket 5166 1 opportunities to trade out of a similar security 2 issued by one agency into that of another to -- 3 because there might be some anomaly. These 4 securities might trade at a certain relationship 5 to each other, and that relationship might be out 6 of line. And we could execute that transaction, 7 in effect, buying a security cheaper than it might 8 ordinarily be available and sometime later have 9 the opportunity to reverse that and perhaps 10 improve the portfolio with that gain. 11 Q. What was the major factor that affected 12 the price of a mortgage-backed security at that 13 time? 14 A. Expected prepayment speeds would be the 15 most important factor. 16 Q. And did you attempt to ascertain 17 whether or not it was expected prepayment speeds 18 that was affecting the price of the 19 mortgage-backed security that you were trading 20 into or out of? 21 A. Yes. But quite often, they would be 22 similar coupons and over reasonable periods of 5167 1 time, similar coupons might be expected to have 2 similar prepayment behavior. My recollection is 3 that the most frequent sort of value trade was 4 that between -- between different agencies such as 5 Freddie Mac or Fannie Mae and having relationships 6 that were, given by their different 7 characteristics, somewhat out of line and the 8 opportunity to trade with that. 9 Q. Now, when you say that the 10 characteristics of the prepayments were similar, 11 did you attempt to calculate that or did you 12 assume that to be the case? 13 A. We wouldn't have examined the 14 individual pools that were being suggested. We 15 wouldn't even know what they were until 16 settlement. But we understood the differences in 17 their characteristics might include the delay of 18 the first payment from time of ownership that 19 would cause some difference in price that was a 20 reasonably permanent difference. And we 21 understood that certain agencies at that time 22 had -- all the loans were assumable and that those 5168 1 had different prepayment characteristics. But in 2 these cases, we didn't find these to be the most 3 important characteristics because we thought the 4 securities were reasonably similar. 5 Q. I'd like you to now explain to us other 6 examples of value trades. You said the most 7 common was going from one issuer -- Fannie Mae to 8 Freddie Mac or Freddie Mac to Fannie Mae. 9 Were there other types of value trades? 10 A. I think I would include the opportunity 11 to do a dollar roll as a sort of value trade, 12 although not a trade on the security but a trade 13 against the short-term borrowing rate. We could 14 always -- I should say quite often improve the 15 performance of the portfolio by improving the 16 short-term rate that we were financing at by using 17 a dollar roll. 18 Q. Can you explain to the Court what you 19 mean by "using a dollar roll to enhance the 20 yield"? 21 A. A dollar roll was a kind of transaction 22 that was proposed by a bond dealer who, quite 5169 1 often, come settlement date did not have the 2 securities to deliver. In that case, we'd be 3 willing to purchase securities from others to 4 effect his delivery at a somewhat higher price 5 than the market would dictate. And there would be 6 a time at which that transaction would be reversed 7 and at an advantageous price. And the net effect 8 to the person executing it would be to have paid a 9 short-term rate once all these flows were netted 10 out. And that short-term rate effectively paid 11 would quite often be lower than the reverse repo 12 rates. 13 Q. So, was that transaction a transaction 14 that you expected to benefit off the price that 15 was paid for the security as opposed to the price 16 that you would receive when you took it back? 17 A. Well, with the dollar roll, the net 18 effect was to compare to the financing rate that 19 was paid carrying mortgage-backed securities. The 20 price that was paid and the price that was 21 received, when unwound, was calculated precisely 22 to generate this rate. It was known at the outset 5170 1 and, when the coupon flows were included and the 2 prices were paid and the time period calculated, 3 the net result was a financing raid, not a gain or 4 a loss. And I believe that subject to observing 5 the accounting rules in effect, the transaction 6 would have been counted as a financing and not a 7 sale and repurchase. 8 Q. Now, with regard to that transaction, 9 did you assume that there wouldn't be any change 10 in the market value of the mortgage-backed 11 securities that were subject to the dollar roll? 12 A. There was no such assumption, but the 13 forward price that we would pay to unwind the 14 transaction was fixed in advance. 15 Q. So that if the mortgage-backs changed 16 in price, it would have an effect on the 17 profitability of the transaction? Market value 18 changed. 19 A. No, because the purpose of the 20 transaction had nothing to do with the market 21 value but only to do with the financing rate that 22 was synthesized out of these flows. So, the 5171 1 market value would not have mattered. 2 Q. And it didn't matter to you because of 3 the same reasons. You said your focus was on 4 yield and not market value; is that correct? 5 A. That's correct. 6 Q. Now, look at Exhibit A1409 which are 7 the minutes of the investment committee of 8 United Financial Group and United Savings 9 Association of Texas dated September 18th, 1986. 10 Do you have Exhibit 1409 before you? 11 A. Yes. 12 Q. Okay. Look the first paragraph. It 13 says "A meeting of the investment committee was 14 held on September 18th, 1986. Present were 15 Mr. Hurwitz, Mr. Gross, Mr. B. Williams, 16 Mr. Phillips, Mr. Jacobson, and Mr. Hansen." 17 Do you see that? 18 A. Yes. 19 Q. Now, it says it's the investment 20 committee of United Final Group. Was Mr. Gross a 21 member of -- 22 MR. NICKENS: Your Honor, I object. It 5172 1 says "The minutes of the investment committee of 2 United Financial Group and United Savings 3 Association of Texas." It's both. 4 MR. GUIDO: I'm sorry, Your Honor. I'm 5 sorry. I misspoke. 6 THE COURT: All right. We can hear the 7 record. Let's proceed. 8 Q. (BY MR. GUIDO) It says "A meeting of 9 the investment committee was held on 10 September 18th, 1986. Present were Mr. Hurwitz, 11 Mr. Gross" -- I think I said B. Williams, but I 12 think that that's a G. Williams -- "Mr. Phillips, 13 Mr. Jacobson, and Mr. Hansen. Mr. Hansen acted as 14 secretary." 15 Was Mr. Hurwitz a member of the 16 United Financial Group investment committee? 17 A. I don't know about the United Financial 18 Group committee. I don't think I was a member of 19 it, didn't conduct any business for it. I don't 20 believe that Mr. Hurwitz was a member of any of 21 these committees. 22 Q. But you wouldn't dispute the corporate 5173 1 records if they indicated that he was a member of 2 the United Financial Group investment committee, 3 would you? 4 A. I would not. 5 Q. Now, when you made reports to 6 committees, investment committees, did you make a 7 report to one committee or two committees or more 8 than one? 9 A. I made a report to one meeting. 10 Q. Okay. And it was described to you as 11 the investment committee? 12 A. Yes. 13 Q. Now, at this meeting, turn to Page 2. 14 And see the fourth paragraph from the bottom on 15 Page 2 which is Bates stamped 3 -- US34884? 16 A. Yes. 17 Q. It says "The committee reviewed the 18 minutes of the mortgage-backed security trading 19 committee for the week. All transactions were 20 approved. The committee then discussed the 21 implicit cost of capital calculation made when a 22 trade is made which improves the association from 5174 1 an economic perspective and allows a book gain but 2 lowers ongoing book spread income. The committee 3 then debated the optimal degree to which United 4 should specify characteristics of particular 5 mortgage pools when trading these securities." 6 Do you see that? 7 A. Yes. 8 Q. Okay. Now, what is the reference to 9 "book gain" in that paragraph? 10 A. A book gain would have been the gain 11 realized with the difference between the price at 12 which a security was sold and the book value at 13 which it was held. 14 Q. Okay. And then it says "The committee 15 then debated the optimal degree to which United 16 should specify characteristics of particular 17 mortgage pools when trading these securities." 18 Do you know what that refers to? 19 A. Well, I don't remember seeing these 20 minutes for quite a long time, if ever. But it 21 would have included such characteristics as their 22 coupons, prepayments, expected prepayment speeds, 5175 1 and, of course, the agencies issuing them. 2 Q. Now, the -- turn to the next page of 3 that packet of materials. 4 Do you see that? 5 A. Yes. 6 Q. Now, the rest of the report, it deals 7 with equity arbitrage; is that correct? 8 A. This packet of minutes includes 9 attachments for securities transactions, 10 recommendations. They appear to be regarding 11 high-yield bonds. 12 Q. Now, turn to Exhibit A1410. Do you 13 have A1410 in front of you? 14 A. Yes. 15 Q. That's the minutes of September 24th of 16 the investment committee of United Financial Group 17 and United Savings Association of Texas. 18 Do you see that? 19 A. Yes. 20 Q. Now, look at the fourth paragraph down. 21 It says "Mr. Phillips then reported on the 22 mortgage-backed securities portfolio. He stated 5176 1 that the association had sold some mortgage-backed 2 securities and had profited to the extent of 3 approximately $1.4 million." 4 Do you see that? 5 A. Yes. 6 Q. Now, what do you mean -- what does the 7 term "profited" in that context mean? 8 A. This would have referred to the book 9 gain that you asked me about earlier. 10 Q. Okay. Now, turn to Exhibit A1411, 11 which are the minutes of the investment committee 12 of United Financial Group and United Savings 13 Association of Texas of October 1, 1986. 14 A. I don't believe I have 1411. 15 Q. Why don't you just read along with me? 16 It says in the fourth paragraph, "Mr. Phillips 17 recommended the sale of a portion of the liquidity 18 and mortgage-backed securities portfolios to 19 recognize profits which were recently created by 20 the market rally." 21 Do you see that sentence? 22 A. Yes. 5177 1 Q. Then it says a few sentences down, 2 "After discussions, the asset sales were approved 3 and it was agreed the asset liability committee 4 would develop a recommendation for restructuring 5 the liquidity portfolio." 6 Can you tell us what the reference to 7 "liquidity portfolio" is there? 8 A. The liquidity portfolio was that amount 9 of funds that were held with a minimum credit 10 rating and a maximum band of maturities. 11 Basically if they were to be held in corporate 12 securities, I believe they had to be of single A 13 credit quality and no more than, I believe, three 14 years. 15 Q. Okay. What sort of securities were in 16 that liquidity portfolio? 17 A. They were short-term, high-grade 18 corporate bonds. 19 Q. Now -- and it makes reference to the 20 mortgage-backed securities portfolio. Is that 21 making reference to the investment portfolio of 22 mortgage-backed securities that you managed? 5178 1 A. Yes. 2 Q. And was that a risk-controlled 3 arbitrage as you understood it? 4 A. Yes. It probably was. 5 Q. Okay. Now, I'd like for you to take a 6 look at the performance report of December 1986, 7 which is A5017, and direct your attention to the 8 Chart DI of that. I'm sorry. DJ. Excuse me. 9 That has the heading "Gain on Sale of Investment 10 Securities." 11 Do you see that? 12 A. Yes. 13 Q. And it has -- see the column that says 14 "current month"? The chart that says "current 15 month"? 16 A. Yes, I do. 17 Q. Then it has listed Fannie Mae, 18 172,499,000 with a gain of 3,555,000. 19 Do you see that? 20 A. Yes. 21 Q. Then it has Freddie Mac 613,755 for a 22 gain of $12,543,000? 5179 1 A. I believe all these numbers are in 2 thousands. 3 Q. Pardon? 4 A. I believe all these numbers in 5 thousands. 6 Q. These are all in thousands? Okay. 7 Excuse me. So, that means that it's 613,755,000? 8 A. Yes. 9 Q. And it's 12,543,000 terms of profit for 10 the Freddie Macs? 11 A. That's correct. 12 Q. And then for the Ginnie Maes, it is 13 48 million and a profit of 150,000. 14 Do you see that? 15 A. Yes. 16 Q. Now, are those the transactions that 17 you just referred to or we just referred to in 18 terms of the value trades to enhance yield or to 19 generate book profits? 20 MR. NICKENS: Your Honor, I don't know 21 what -- this is the -- we're talking about the 22 current month? 5180 1 MR. GUIDO: It says current month. 2 A. I wasn't there at this time; so, I 3 couldn't be sure. 4 Q. (BY MR. GUIDO) Okay. Now, during the 5 time you were there, there were sales out of the 6 mortgage-backed security portfolio that you 7 managed that generated book gains, was there not? 8 A. Yes, that's correct. 9 Q. Do you have any idea what the magnitude 10 was? 11 A. No, I don't. 12 Q. Was it somewhere at least as high as 13 $67 million? 14 A. It could have been that high, yes. 15 Q. And it could have been higher, could it 16 not? 17 A. Yes. 18 Q. Now, do you recall on Friday when I 19 showed you the bottom part of this chart? I asked 20 you whether the figures for March, June, 21 September, and December reflected an increase in 22 the sales from the investment securities of USAT 5181 1 to generate book profits just prior to the filing 2 of the required financial statements at quarter's 3 end. 4 A. It shows higher gains were taken, yes. 5 Q. And did that figure, that increased 6 figure, reflect what you recall was the emphasis 7 on selling securities for a gain at quarter's end 8 in order to generate book gains? 9 MR. NICKENS: Your Honor, we have 10 already covered this and the witness testified 11 that he did not recall these quarterly matters. 12 So, now he's going back and purporting to review 13 testimony that the witness said that he did not 14 recall as if it were a fact and he had testified 15 to it. 16 MR. GUIDO: I think the witness 17 testified, Your Honor, that when I showed him this 18 material, it refreshed his recollection. And I am 19 about to show him another document that will 20 reflect this, as well, which he's also seen. The 21 questions I asked him before were with regard to 22 junk bonds. I'm now asking the questions with 5182 1 regard to mortgage-backed securities; so, it is 2 not duplication of what I had done. 3 MR. NICKENS: My objection, Your Honor, 4 is that he now says that he was summarizing 5 testimony about junk bonds to apply to 6 mortgage-backed securities. My objection is to 7 the erroneous summarization of the prior testimony 8 and giving it to the witness as if that is what he 9 had said before and asking that as a basis for his 10 answer to this question. 11 THE COURT: Well, my question was: 12 Were you referring to a document in the last 13 series of questions? 14 MR. GUIDO: Yes, Your Honor. I was 15 referring to the figures that are shown in Exhibit 16 -- I have to find the beginning of the document -- 17 5017, A5017, Your Honor. And it's the DJ chart. 18 It's toward the end. It's about two thirds of the 19 way in the packet and it's headed 20 "United Financial Group, Inc., Gain on Sale of 21 Investment Securities, December 31, 1986, in 22 Thousands." 5183 1 MR. NICKENS: And the witness testified 2 he wasn't there so he couldn't possibly remember 3 them. 4 THE COURT: Well, that was his 5 testimony. So, what's your question, Mr. Guido? 6 Q. (BY MR. GUIDO) Do you recall being 7 asked to make sales out of the mortgage-backed 8 security portfolio in order to generate gains at 9 quarter's end in order to have those gains 10 reflected in the financial statements? 11 A. I do not. 12 Q. Now, do you recall receiving 13 instructions to make sales out of the 14 mortgage-backed security portfolio in order to 15 generate gains? 16 A. No. 17 Q. You do not? Did you make sales out of 18 the mortgage-backed security portfolio in order to 19 generate book gains? 20 A. No, not in order to generate gains. 21 Q. Now, you just testified with regard to 22 one of these trades where you made a 5184 1 recommendation to "make sales out of the 2 mortgage-backed security portfolio to recognize 3 profits which were recently created by the market 4 rally." That's Exhibit A1411, and it's the 5 investment committee minutes of October 1st. 6 Do you recall that? 7 A. Yes. 8 Q. Now, isn't that a recommendation to 9 make sales out of the mortgage-backed security 10 portfolio to recognize profits which were created 11 by a market rally? 12 MR. NICKENS: Your Honor, I object to 13 the form of the question in this regard: The 14 document says "mortgage-backed securities 15 portfolios," plural. Mr. Guido has consistently 16 ignored that and asked the witness about 17 portfolio, singular. 18 THE COURT: All right. Well, let's 19 clarify that. 20 Q. (BY MR. GUIDO) Mr. Phillips, did you 21 have responsibility for managing the 22 mortgage-backed security portfolios at USAT? 5185 1 A. I had responsibility for managing those 2 that were -- that I accumulated and ran versus the 3 structure we discussed, yes. 4 Q. Those that you ran pursuant to the 5 structure that we just discussed? 6 A. Yes. 7 Q. And that is what's known as a 8 risk-controlled arbitrage, is it not? 9 A. Yes. 10 Q. Is your reference here to anything 11 other than the risk-controlled arbitrage on these 12 minutes of October 1st, 1986? 13 MR. NICKENS: Your Honor, it's not his 14 reference. These are the minutes of the 15 investment committee. It would be appropriate to 16 ask him what portfolios he thinks may be 17 referenced here. But then to say that it is his 18 puts it -- casts it in a different light and I 19 think an erroneous light. 20 Q. (BY MR. GUIDO) Mr. Phillips, did you 21 ever make any recommendations to do something that 22 to the portfolio that you were not responsible 5186 1 for? 2 A. No, I did not. 3 Q. Now, will you look at Exhibit A1411 4 again? It's the October 1st minutes. 5 A. I believe that's the one you brought to 6 me. 7 Q. Okay. It says "Mr. Phillips 8 recommended the sale of a portion of the liquidity 9 and mortgage-backed securities portfolios to 10 recognize profits which were recently created by 11 the market rally." 12 Do you see that? 13 A. Yes, I do. 14 Q. Is that a recommendation to make a sale 15 out of the mortgage-backed security portfolio to 16 generate book profits? 17 A. It is characterized in those minutes as 18 a recommendation for sale to generate profits. 19 However, I believe that any such sale would have 20 also contemplated some reinvestment in securities 21 to keep that structure intact. 22 Q. The risk-controlled arbitrage structure 5187 1 intact? 2 A. Yes. 3 Q. Now, did you ever conclude at any time 4 that the risk-controlled arbitrage portfolio that 5 you had set up had been damaged beyond repair? 6 A. We did conclude at some point that 7 continuing to rebalance it would not yield us any 8 more benefit and that it was not something that we 9 would undertake to do in a large way anymore. 10 Q. And was that prior to the point in time 11 where you adopted the policy to engage in value 12 trades? 13 A. It could have been about the same time. 14 Q. Okay. Now, was the decision that was 15 made to engage in value trades made, in part, 16 because the investment committee and you had 17 concluded that the risk-controlled arbitrage 18 portfolio could not be salvaged by rebalancing? 19 A. I do recall that at some point, we knew 20 that continued rebalancing would not provide any 21 further benefit and that the value trades, when 22 taken incrementally, would provide small benefits 5188 1 in trades that would not have significant 2 restructuring or rebalancing effects. 3 Q. Were the value trades undertaken to 4 ameliorate the damage that had been caused by the 5 failure of the risk-controlled arbitrage 6 portfolio? 7 A. We realized, of course, that the size 8 of these trades would be relatively small and 9 their benefit would be relatively small. So, 10 while there would be net benefits, we did not 11 expect that, when taken together, these would 12 offset the effects on the spread in the 13 risk-controlled arbitrage which had diminished. 14 Q. But were the value trades an attempt to 15 ameliorate some of the damaging effects of the 16 failure of the risk-controlled arbitrage? 17 A. I don't recall that we considered it 18 that way. We considered that we had a portfolio 19 of securities that exposed us to market 20 opportunities and that in the ordinary course of 21 active management, we might undertake some of 22 these transactions that would be of benefit. 5189 1 Q. Now, I'd like you to take a look at 2 Exhibit A5014 which are the -- which is the 3 performance report of September 1986. I direct 4 your attention to the page that says "DJ." 5 Do you see that page? 6 A. Yes. 7 Q. Now, that page has the current month's 8 gains on sales of investment securities. Do you 9 see that? 10 A. Yes. 11 Q. And it shows Ginnie Maes, $21 million 12 in amount for a gain of $1,675,000. 13 Do you see that? 14 A. Yes. 15 Q. And it has Fannie Maes in the amount of 16 264,100,000 for a gain of 3,033,000. 17 Do you see that? 18 A. Yes. 19 Q. Then it has Freddie Macs, $110 million 20 in amount for a gain of 2,848,000. 21 Do you see that? 22 A. Yes. 5190 1 Q. And look at the year-to-date figures. 2 Do you see the month of September has 14 million 3 504? 4 Do you see that? 5 A. Yes. 6 Q. What were the reasons for those sales 7 that are reflected in that performance report? 8 A. I don't know at this time. This much 9 later, it looks as if it was a quarter end. Looks 10 as if some securities were sold to realize gains. 11 Q. Okay. Now, I'd like to direct your 12 attention to a document that I showed you with 13 regard to the high-yield bonds and that's T4251. 14 It's dated September 23rd, 1986. It's a memo from 15 Mike Crow to Jenard Gross and Jerry Williams. And 16 it says "The attached schedule presents our best 17 estimate of gains that will be needed for 18 quarterly earnings. We are proceeding with taking 19 these gains" is what that document says. 20 Do you have that document in front of 21 you? 22 A. Yes. 5191 1 Q. And it says "We are proceeding with 2 taking these gains." 3 Do you see that on the first page? 4 A. Yes. 5 Q. Then it has "gains to alleviate 6 deficit" on the second page. 7 Do you see that? 8 A. Yes. 9 Q. And it says "mortgage-backed 10 securities, 1.9." 11 Do you see that? 12 A. Yes. 13 Q. Now, were you ever given a target 14 figure to achieve in terms of gains on sales from 15 the mortgage-backed security portfolio at the time 16 you were at USAT? 17 MR. NICKENS: Your Honor, the witness 18 has testified that he was never given any such 19 instructions. 20 THE COURT: Well, let's hear the answer 21 from the witness. 22 A. I don't recall any target for gains of 5192 1 mortgage backs. Only for corporate bonds. 2 Q. (BY MR. GUIDO) Okay. But you do 3 recall being told or authorized to engage in value 4 trades to either generate gains or to increase the 5 yield in the mortgage-backed security portfolio? 6 MR. NICKENS: Your Honor, he's 7 expressly testified that it was to increase yield 8 and now -- and he said that it was not to realize 9 gains. And now Mr. Guido has expressed a question 10 that says "or" which should elicit a yes answer 11 but create a false impression in the record. And 12 I suggest that's quite deliberate. 13 MR. GUIDO: Your Honor, there is 14 nothing inappropriate about the question. It is a 15 question. 16 THE COURT: Restate the question. 17 MR. GUIDO: And I do think that 18 Mr. Nickens should refrain from trying to affect 19 this witness' testimony. I'm asking him the 20 questions after showing him documents that show 21 that the institution thought it was engaged in 22 sales of mortgage-backed securities to generate 5193 1 profits at quarter's end. 2 MR. NICKENS: Your Honor, that's -- 3 MR. GUIDO: I just want this witness, 4 after having refreshed his memory, to answer my 5 question. 6 MR. NICKENS: I object to the question. 7 I object to questioning the witness that misstates 8 his testimony, then tries to put in an "or" to get 9 something different in the record. I do object to 10 that. I do not agree with Mr. Guido's 11 characterization of the record or this witness' 12 testimony as to mortgage-backed securities. He 13 couldn't have been plainer when asked a direct 14 question about whether he was ever asked to 15 realize gains out of those portfolios. And he 16 said "no." 17 MR. GUIDO: I think his response was he 18 never was given a specific target, Your Honor. 19 THE COURT: All right. I think you'd 20 better restate your question. 21 Q. (BY MR. GUIDO) Does this document 22 refresh your recollection of whether or not you 5194 1 were ever authorized to make sales out of the 2 mortgage-backed securities portfolio in order to 3 generate reported gains? 4 A. No, it does not. 5 Q. It does not? So that this document, as 6 far as you know, doesn't reflect your 7 understanding of what you were doing with regard 8 to the mortgage-backed security portfolio at the 9 time? 10 MR. NICKENS: Object to the form of the 11 question, Your Honor. 12 THE COURT: You may answer. Is there 13 some discrepancy between the document and your 14 recollection? 15 THE WITNESS: Yes. This document does 16 not reflect my understanding of the management of 17 the portfolio. 18 MR. NICKENS: Your Honor, may I? 19 What's happened here is that there was a 20 restatement of earnings required by the 21 accountants as a result -- 22 MR. GUIDO: Your Honor, I object to 5195 1 Mr. Nickens trying to coach this witness on future 2 questions. 3 MR. NICKENS: I am not trying to coach 4 this witness on anything. We've gotten his plain 5 testimony, and I don't think that we should allow 6 Mr. Guido to -- when he knows the answer to these 7 things. He is trying to create, deliberately, a 8 false impression. He knows that this was a 9 restatement of the earnings that occurred as a 10 result of the accountants required and not a bunch 11 of sales for gains. 12 THE COURT: Well, I think you'll have 13 to bring that out in some other matter. Let's 14 have questioning by Mr. Guido. 15 MR. GUIDO: Thank you, Your Honor. 16 Your Honor, I would like to have 17 marked -- it was part of my packet of documents 18 that were part of the September 24th minutes which 19 were A1410. It was not in the packet that the 20 witness had, and I presume it wasn't in the packet 21 that you had. It's Bates stamped US310802, Bates 22 stamp. I'd like to have that marked as 1410A. It 5196 1 is a memorandum dated September 22nd from Doug 2 Hansen to Mike Crow, Joe Phillips, Bruce Williams, 3 investment committee regarding mortgage-backed 4 security trading committee. 5 MR. NICKENS: Your Honor, we weren't 6 provided with a copy of this; but if you give me a 7 moment, I think I can find it in another set. 8 MR. GUIDO: I have copies here for you, 9 Mr. Nickens. 10 THE COURT: Is that in under another 11 exhibit number? 12 MR. GUIDO: No, it's not. It was 13 attached to my set of T1410, as I recall. But it 14 has not been admitted and it was not part of the 15 Exhibit 1410. It may have been part of some other 16 exhibit. 17 THE COURT: It appears to be in as 18 B1231. 19 MR. NICKENS: Yes, Your Honor. It's at 20 Tab 342. And I think that's T4250. 21 MR. GUIDO: I have no idea. I don't 22 recall seeing the document before. 5197 1 MR. NICKENS: This is the same 2 document. Right? 3 MR. GUIDO: Yes, it is. 4 MR. NICKENS: It's at Tab 342 and, if I 5 read this correctly, at T4250. 6 THE COURT: Well, the document is 7 already in. Let's refer to it by its number and 8 forget about T -- the T1410A. 9 MR. BLANKENSTEIN: It's not the same 10 document, Your Honor. 11 MR. NICKENS: B1231 -- 12 MR. GUIDO: I don't think it's been 13 admitted. 14 MR. NICKENS: Yes, it has. 15 MR. LANGDON: It's in evidence. 16 THE COURT: I show it as having been 17 received on 10-21. 18 MR. NICKENS: Okay, Your Honor. There 19 is -- the data Mr. Guido is now referencing is 20 different than Exhibit 342 or Tab 342. And I 21 believe the reason is that it's a similar memo 22 from Mr. Hansen of the same date but -- and we had 5198 1 misidentified it, apparently, because of that 2 confusion. 3 THE COURT: Well, it seems to have the 4 same Bates stamp down there. 5 MR. NICKENS: The Bates stamp on -- 6 Your Honor, on Exhibit T4250 is US2070 and this is 7 US3010602. 8 THE COURT: Let's be off the record for 9 a minute. 10 11 (Discussion off the record.) 12 13 THE COURT: As discussed off the 14 record, it appears that the exhibit that has been 15 offered as T1410A is already in the record as 16 Exhibit B1231. And we'll refer to it by the 17 latter number. 18 Q. (BY MR. GUIDO) Now, have you had an 19 opportunity to review B1231, Mr. Phillips? 20 A. Yes. 21 Q. Now, it says "The committee met several 22 times during the week of September 15th to approve 5199 1 and execute a trade from Freddie Mac 9 and a 2 half's to Freddie Mac 8 and a half's. Crow and 3 Williams were absent. Smith Breeden was consulted 4 on the trade." 5 Do you see that? 6 A. Yes. 7 Q. Do you recall that trade? 8 A. No. 9 Q. Then it says "The gain booked is 10 $700,000. The loss in spread income is 150,000 in 11 the first year." 12 Do you see that? 13 A. Yes. 14 Q. Now, is that a trade that increased the 15 yield on the mortgage-backed security? 16 A. No, it is not. 17 Q. Okay. Is that a trade that increased 18 the book gain? 19 A. It is a trade that created a book gain, 20 yes. 21 Q. Now, this is by -- this is minutes of 22 the mortgage-backed security trading committee, is 5200 1 it not? 2 A. Yes. 3 Q. And you sat on that committee. Right? 4 A. Yes. 5 Q. And that's the committee that was 6 established by the minutes of July 23, 1986, which 7 is Exhibit A1402, is it not? 8 A. Yes. 9 Q. My question for you is: Were sales 10 made of mortgage-backed securities out of the 11 risk-controlled arbitrage to generate book gains? 12 A. No. 13 Q. Does your recollection of that fact 14 conform to the description of this trade that's 15 recorded on B1231? 16 A. This transaction does certainly 17 generate a book gain. It also -- I see from 18 what's presented here, it also has a lower 19 prepayment rate. And at the time, that might have 20 been being an important part of the consideration, 21 as well. 22 Q. Is there any mention of prepayment 5201 1 rates in that memorandum? 2 A. No. 3 Q. Other than it just reflects it? 4 A. That's correct. 5 Q. It just records that a gain was booked 6 of 700,000 and there was a loss of spread income 7 of 150, doesn't it? 8 A. That's correct. 9 Q. Do you know why that trade was engaged 10 in? 11 A. No, I do not. 12 Q. Now, I'd like you to look at a document 13 that I've had marked as A10574 which is an 14 October 24th, 1985, memorandum from Mike Crow to 15 Gerald Williams regarding financing sub update. 16 MR. GUIDO: And I'd like to move the 17 admission of A10574, Your Honor. 18 MR. NICKENS: No objection, Your Honor. 19 THE COURT: Received. 20 Q. (BY MR. GUIDO) Do you recall when we 21 discussed the growth of the USAT mortgage-backed 22 security risk-controlled arbitrage portfolio, 5202 1 Mr. Phillips, that you testified about the 2 creation of an entity called United Mortgage 3 Finance? 4 A. Yes, I do. 5 Q. And that that was sometime in November 6 of 1985? 7 A. Yes. 8 Q. And how large did that portfolio 9 become? 10 A. I believe it was over $500 million. 11 Q. Exhibit A10574, is that a memorandum 12 regarding the creation of that subsidiary 13 corporation? 14 A. Yes, it is. 15 Q. Okay. And does that memorandum conform 16 to your understanding of the status of the 17 regulatory questions regarding the creation of 18 that finance subsidiary? 19 A. I don't recall the details that are in 20 here. I don't believe that this subject matter 21 area would have involved me. 22 Q. Do you recall participating in any 5203 1 discussions regarding the creation of that 2 subsidiary? 3 A. I recall participating in the 4 discussions for investing the assets of that 5 subsidiary. 6 Q. And do you recall discussions about 7 what type of mortgage-backed security portfolio 8 would be held by that subsidiary? 9 A. No. 10 Q. Was the original purpose of the 11 transaction to provide an income stream through a 12 hedged arbitrage portfolio? 13 A. Yes. It was -- the goal was to have a 14 similar structure as that we had in the 15 association itself. 16 Q. Now, that entity was subsequently 17 dissolved, was it not? 18 A. Yes. 19 Q. And was that because the assumptions 20 about the regulatory response turned out to be 21 incorrect? 22 A. Yes. 5204 1 Q. Now, I'd like to have you look at what 2 we have marked as Exhibit A10594, which is a memo 3 from you to the files dated January 10th, 1986, 4 and the subject being MBS sale. 5 MR. NICKENS: No objection. 6 MR. GUIDO: We move the admission of 7 the document, Your Honor. 8 THE COURT: You said no objection, 9 Mr. Nickens? 10 MR. NICKENS: No objection, Your Honor. 11 THE COURT: Received. 12 Q. (BY MR. GUIDO) Does the first 13 paragraph describe the structure of the portfolio 14 when United -- excuse me -- USAT Mortgage Finance 15 that was created in '85 and disbanded at the end 16 of '85? 17 A. Yes. 18 Q. And does the second paragraph, the 19 first two sentences, which say "Subsequent to the 20 formation of the finance subsidiary, an 21 acquisition of the securities, the regulations 22 applicable to finance subsidiaries were amended. 5205 1 Such amendment disqualified USAT Mortgage Finance 2 as a finance subsidiary and, accordingly, such 3 liability growth would have put the association in 4 violation of the growth regulation for the quarter 5 ended March 31, 1986." 6 Do you see that? 7 A. Yes. 8 Q. Where did you get that information? 9 A. It was told to me at the time that we 10 would have to collapse this structure by someone 11 who had conveyed this to me. I don't know who. 12 Q. You don't recall who? 13 A. It would be some senior officer of 14 United Savings. 15 Q. Now -- then, it says "Accordingly, 16 350 million in mortgage-backed securities and 17 related reverse repo agreements had to be undone 18 in order to avoid the growth regulation problems." 19 Do you see that? 20 A. Yes. 21 Q. Now, when you were told of the need to 22 collapse or to dissolve United Mortgage Finance, 5206 1 were you asked to look at alternatives for the use 2 of that portfolio in order to avoid violating the 3 growth regulations? 4 A. I don't recall that I was asked because 5 it would have -- the subject area would have been 6 outside my scope, dealing with the exact 7 conditions and how they might fit with the 8 regulation. I wouldn't have been involved with 9 that. 10 Q. But you had to get rid of $350 million 11 worth of securities, correct? 12 A. Yes. 13 Q. Now, you also managed another portfolio 14 called a high-yield bond portfolio. 15 Do you recall that? 16 A. Yes. 17 Q. Do you recall what the size of that 18 portfolio was at the time? 19 A. I believe that it got up to 20 $600 million. 21 Q. Did anyone ask you to explore the sale 22 of the -- some of the high-yield bond portfolio so 5207 1 that USAT could absorb this $350 million in 2 mortgage-backed securities? 3 A. I don't recall any such request. 4 Q. Was your testimony you don't recall or 5 it didn't happen? 6 MR. NICKENS: Your Honor, if he doesn't 7 recall, he doesn't know whether it happened. 8 MR. GUIDO: Well, I'm not -- it's not 9 clear to me what his response is, Mr. Nickens. 10 I'm trying to clarify it. 11 THE COURT: All right. Can you answer 12 the question? Denied. 13 THE WITNESS: I don't recall any such 14 request, Your Honor. 15 Q. (BY MR. GUIDO) Now, the next sentence 16 says "At that time, the decision was made, one, to 17 sell the mortgage-backed securities resulting in a 18 12.4 million-dollar gain, and, two, retain the 19 swaps and utilize them for general association 20 interest rate hedges rather than close them out 21 (USAT has had an existing general swap for several 22 years.)" 5208 1 Do you see that? 2 A. Yes. 3 Q. Now, who made that decision that you're 4 referring to there? 5 A. I believe this decision was made 6 collectively among senior officers of United 7 Savings. 8 Q. Do you recall who they were? 9 A. No, but these would be the sort of 10 decision I would expect to come from Mr. Crow, 11 Mr. Williams. 12 Q. What about Mr. Gross and Mr. Hurwitz? 13 A. I'm not sure this level of detail would 14 have been something that they would have become 15 engaged in. 16 Q. It then says "Subsequent to that 17 decision, a mirror swap was put in place." 18 Do you see that? 19 A. Yes. 20 Q. Whose idea was that? 21 A. I don't recall whose idea it was. 22 Q. Does this mean that the original 5209 1 decision to use them for general interest rate 2 protection had been discarded and a decision was 3 made to put on mirror swaps? 4 A. Yes. 5 Q. And you indicate that there was a 6 12.4-million-dollar gain on the mortgage-backed 7 securities. 8 Do you see that? 9 A. Yes. 10 Q. What was the loss on the swap side? 11 A. I don't know. 12 Q. Was it a comparable amount? 13 A. It's very likely there would have been 14 a loss of some amount because it essentially had 15 the offsetting effect. It was the opposite side 16 of the market. Whether it was the same amount, I 17 don't know because the market price response of 18 these two kinds of securities are not the same. 19 Q. All right. So -- and that's because of 20 the prepayment factor on the mortgage-backed 21 security side. Right? 22 A. Well, they each had different sorts of 5210 1 convexity profiles. And so, they would perform 2 differently when the markets moved. 3 Q. All right. But the loss was either 4 comparable or greater on the swap side, was it 5 not? 6 A. I don't know if it was or not. But it 7 would be a loss. 8 Q. Okay. And it would be comparable. 9 Would that be fair? 10 A. Yes. 11 Q. Now, the last paragraph says "In view 12 of the transactions which occurred relative to 13 USAT Mortgage Securities, it is United's position 14 that the transactions have been properly reflected 15 in its financial statements in accordance with 16 existing accounting literature." 17 Do you see that? 18 A. Yes. 19 Q. Now, how were they -- how were those 20 transactions accounted for in USAT's financial 21 statements? 22 A. Well, I know them to be accounted for 5211 1 only by what's given in the previous paragraphs. 2 A gain recognized the swap offset. 3 Q. Now, the gain of $12.4 million was 4 recognized. Right? 5 A. Yes. 6 Q. And because of the mirror swap on the 7 swap side, the losses on the swap were deferred, 8 were they not? 9 A. They were spread out over time, yes. 10 Q. Now, are you an accountant? 11 A. I am not. 12 Q. It says "In view of the transactions 13 which occurred relative to USAT Mortgage 14 Securities, it is United's position that the 15 transactions have been properly reflected in its 16 financial statements in accordance with accounting 17 literature." 18 Why are you making an accounting 19 conclusion in this memo to the file? 20 A. I had to have been advised of this. 21 Q. Okay. Were you told to write this 22 memorandum to the file? 5212 1 A. I don't know. 2 Q. You don't know? Did you ever discuss 3 this memorandum with anyone before you prepared 4 it? 5 A. I don't recall. It looks very 6 straightforward until that last paragraph. It 7 looks like something I would write in the ordinary 8 course. 9 Q. Did you ever in any other instance 10 reach conclusions on your own about the proper 11 accounting for a transaction? 12 A. No. 13 Q. Did somebody tell you to put that 14 paragraph in this memorandum? 15 A. If I put this here, I had to have been 16 advised that this was correct because I don't rule 17 on accounting. 18 Q. Why did you write this memorandum to 19 the file? 20 A. I don't recall now why I wrote it, but 21 it seemed that these transactions needed to be 22 memorialized. It was a very significant set of 5213 1 activities that were undertaken when this was 2 done, and it seemed it should be memorialized. I 3 don't know if I -- at this point, if I was told at 4 that time to write it for the file or not. 5 Q. Why was this a very significant 6 transaction that needed to be memorialized? 7 A. It was a large transaction that 8 substantial portions of were reversed very shortly 9 after being done, and it seemed that there should 10 be a record of what happened. 11 Q. Why was that? Why should there be a 12 record of it? I mean, don't the financial 13 statements just show -- the general ledger just 14 show transactions? Why did you need to write a 15 memo to the file? 16 MR. NICKENS: Your Honor, there is 17 about three or four questions there and I'm 18 wondering which one he wants answered. 19 THE COURT: Let's take one at a time. 20 Q. (BY MR. GUIDO) Would the general 21 ledger reflect the transactions? 22 A. Yes. 5214 1 Q. Why was there a need to go beyond the 2 general ledger and write this memo to the file? 3 A. I believe even now that this 4 transaction was quite significant and different 5 from what we were doing. I don't recall whether I 6 was asked to write this for the file; but I still 7 believe that in trying to remember what happened, 8 this is helpful. 9 Q. Did it have a significant impact on the 10 financial statements of USAT? 11 A. I don't know. 12 Q. Do you recall whether there were any 13 questions raised at that time about whether or not 14 USAT would meet its regulatory capital 15 requirements? 16 A. No, I don't. 17 MR. GUIDO: Your Honor, it's five after 18 12:00. This might be a good to him to take a 19 break. 20 THE COURT: All right. We'll recess 21 until 1:30. 22 5215 1 (Luncheon recess taken at 12:06 p.m.) 2 3 THE COURT: Be seated, please. We'll 4 be back on the record. 5 Mr. Guido, you may continue. 6 MR. GUIDO: Thank you, Your Honor. 7 (1:34 p.m.) 8 Q. (BY MR. GUIDO) Mr. Phillips, will you 9 take a look at the document that is marked as 10 A11022 which is the draft and look at Page 4 of 11 that document, please? That is the chart of the 12 portfolio at the time. We've been talking about 13 United Mortgage Finance, and I have a few more 14 questions about that portfolio. 15 Look at the figure under MBS 16 risk-controlled arbitrage, Column A, as of 17 November 1984. Do you see the figure 653,973 in 18 that column? 19 A. I'm sorry. Where? 20 Q. Look under Column A for November 1985. 21 Was that the approximate size of the 22 risk-controlled arbitrage at the time 5216 1 A. I believe that it was. 2 Q. Okay. Then look at the Column B. It 3 says "USAT Mortgage Finance, $500 million." 4 Do you see that? 5 A. Yes. 6 Q. Okay. Was that the approximate size of 7 the original USAT Mortgage Finance portfolio? 8 A. Yes. 9 Q. Okay. And combined was about 1.153 10 billion? 11 A. Yes. 12 Q. Now, working down to March of 1986 I 13 think you testified that -- well, excuse me. 14 Let's back up to December of 1985. These are 15 month end figures. That shows 150,000 in USAT 16 Mortgage Finance. 17 Is 150,000 the remainder that was left 18 after you disposed of the $350 million in 19 mortgage-backed securities you testified about 20 before lunch? 21 A. Yes. This would be 150 million. 22 Q. 150 million. Excuse me. 5217 1 A. Yes. 2 Q. So that the combined size of the 3 portfolio was about $766 million? 4 A. Yes. 5 Q. Now, when you go down to -- through 6 March, the size of the 150 million that was left 7 after the sale of 350 decreases to zero. 8 Can you tell us why that happened 9 A. No, I cannot. 10 Q. Do you recall whether or not those were 11 disposed of, the 150 million were disposed of over 12 time? 13 A. It's my recollection that we had 14 collapsed a subsidiary and the assets were sold. 15 Q. Okay. The reason I ask that question, 16 if you look at April of '86, the difference 17 between March of '86 and April of '86 in Column A, 18 it shows the portfolio going from 687 million up 19 to 879 million. 20 Do you know why that was? 21 A. No, I don't. 22 Q. Now, looking at the Column A from 5218 1 April '86 through -- you left, I think, in October 2 of '86? 3 A. November. 4 Q. November. Looking at the size of the 5 portfolio, is that the approximate size of the 6 risk-controlled arbitrage portfolio during that 7 time period? 8 A. Up until November. 9 Q. November '86. 10 A. I don't really recall with any 11 precision the exact amount. I know that we had 12 accumulated securities up to 650 million or so, 13 and I don't remember how it might have grown. 14 Q. Okay. We'll get to the growth issue 15 when we talk about some other transactions. But 16 all you recall is the initial 650-million-dollar 17 acquisition? 18 A. Yes. 19 Q. Now, did you sell mortgage-backed 20 securities out of the risk-controlled arbitrage 21 portfolio in 1985? 22 A. I don't recall that we did in 1985. 5219 1 Q. Did you at any time in 1986, other than 2 the value trades that we've talked about this 3 morning? 4 A. Yes. We undertook a number of 5 rebalancing transactions during 1986. 6 Q. And do you recall the time period of 7 those transactions? 8 A. They took place from very early in the 9 year until some point, I believe, in the summer. 10 Q. Pardon? In the summer? 11 A. Yes. 12 Q. Did you prepare any schedule of those 13 trades? 14 A. Yes. I prepared a spreadsheet with 15 which to attract the dollar flows among these 16 blocks of securities. 17 Q. Would you take a look at what I have 18 had marked as Exhibit A10631 and particularly look 19 the first two pages of that which have imaging 20 Nos. OW02922 through OW02923. 21 Are those two pages the schedule that 22 you prepared of the mortgage-backed securities 5220 1 that you -- transactions that you've described as 2 rebalancing transactions? 3 A. Yes, they are. 4 Q. When did you prepare this document? 5 A. I believe that this document was 6 created over a period of time. As different 7 transactions were undertaken, they were added to 8 it. I don't know exactly when I started it. 9 Q. In what format was it created? What 10 form was it when you were, overtime, creating the 11 document? 12 A. This was prepared on a computer 13 spreadsheet. The second page is actually the 14 first page of it. 15 Q. So that -- 16 A. And the first page is the continuation. 17 Q. So, the way the document goes is you 18 would take the third page, put it face up, and 19 then you would paste on Page 2 to it -- 20 A. That's correct. 21 Q. -- in reverse order? Now, you -- did 22 you, in addition to generating this document in a 5221 1 computer, also sort of paste it up anywhere so 2 that you could trace the transactions? 3 A. Yes. This -- this form was not 4 necessarily the original document. I believe that 5 the columns were cut from hard copy documents and 6 pasted on to a sheet. I didn't format it in this 7 way. This is the way I assembled it. 8 Q. What do you mean, this is the way you 9 assembled it? 10 A. That is, I believe that subsequent 11 transactions may have been cut in this form and 12 pasted on here. I can't tell by looking at it 13 now, but I don't believe that when I was doing 14 this, my computer would print this all out in 15 these columns this way. 16 Q. So that, in other words, you initially 17 just printed out the transactions. Then you 18 pasted them together to show how they fit 19 together? 20 A. Yes. 21 Q. And you did that -- did anyone refer to 22 that in any way when you did it? 5222 1 A. Well, I was using it as a tool, and I 2 remember that Ron Huebsch may have referred to it 3 as something like paper dolls because it was all 4 cut out and repasted. 5 Q. Now, what was the purpose of preparing 6 this document? 7 A. The purpose was to see which bonds and 8 which coupons were sold and to see how the 9 proceeds were deployed into newer bonds at lower 10 coupons. 11 Q. So, was the purpose to see which 12 transactions fit together as part of the 13 rebalancing, the so-called rebalancing? 14 A. Yes. 15 Q. And this is a document that you created 16 contemporaneously with doing the so-called 17 rebalancing? 18 A. Yes. 19 Q. Now, look at OW02924 through OW02927. 20 Can you tell us what those documents are? 21 A. They are schedules that show 22 contribution from various investment activities. 5223 1 Q. Is that the format that was used with 2 the performance reports that I showed you that you 3 testified about earlier today? 4 A. Yes, they are. 5 Q. Is this a portion of the April 30, 1986 6 performance report? 7 A. By the annotations and by the form, it 8 looks like it is. 9 Q. Now, the last two pages, let's turn to 10 those. The second-to-the-last page is OW02928. 11 Can you tell us what that page is? 12 A. It's a listing of mortgage-backed 13 securities with the amount purchased, the amount 14 currently held, the amount paid down, and the 15 yield when it was purchased. 16 Q. Okay. Now, is that making reference to 17 the securities that were sold that are referred to 18 on Bates stamps OW02922 and 2923? 19 A. In some cases, they are the same coupon 20 and agency. So, they may well be the same ones. 21 Q. Do you recall seeing this document 22 before? 5224 1 A. Yes. I may have prepared this 2 document. 3 Q. And did you prepare this document at or 4 about the time that you prepared the spreadsheet 5 Bates stamps 2921 through 2922? 6 A. I don't remember. 7 Q. Now, the last page is OW02929. Can you 8 tell us what that is? 9 A. This is a handwritten schedule that 10 shows some listing of securities and interest rate 11 swaps. It looks as if it -- it looks as if it 12 shows the yield on the securities at the top 13 summarized. 14 Q. Is that in your handwriting? 15 A. Yes, it is. 16 Q. Did you prepare that at or about the 17 time that you prepared the schedule, which is 18 Bates stamp OW02921 and 2922? 19 A. I believe I would have made this 20 somewhat earlier because it seems that to have 21 made it so much later when this other schedule was 22 created would have not been necessary. This looks 5225 1 like a very early calculation for me. 2 Q. For that schedule. Now, look at the 3 very last page, OW02930. Can you tell us what 4 that is? 5 A. It's a listing of interest rate swaps, 6 and it appears to be -- since it shows a loss, it 7 appears that it is a list of swaps that was put up 8 to offset some existing interest rate swaps, to 9 mirror them. 10 Q. So, this looks like what it would cost 11 to generate mirror swaps to offset other swaps? 12 A. Yes. 13 Q. When was this document prepared? 14 A. I believe that judging by the titles 15 here, Morgan/FHLB swaps, this would have been done 16 at the time that the finance subsidiary was being 17 unwound. 18 Q. Now, does this pertain to the finance 19 subsidiary or does it pertain to the purported 20 rebalancing that's reflected in 2922 through 2923? 21 A. This should pertain to the finance 22 subsidiary because that's where the offsetting 5226 1 swaps were confused. 2 MR. GUIDO: Now, I'd like to move the 3 admission of the packet of documents that I have 4 marked as Exhibit A10631, Your Honor. 5 MR. NICKENS: No objection, Your Honor. 6 THE COURT: Received. 7 Q. (BY MR. GUIDO) Now, let's go to the 8 schedule, 2922 and 2923, and start with 2923 which 9 has the description of the various entries on 10 there so that we can clarify the record of what's 11 on this document. It says in the far left-hand 12 corner at the top, "MBS Swap Analysis." 13 Do you see that? 14 A. Yes. 15 Q. What does that refer to? 16 A. It refers to the sale of one security 17 and the purchase of another. 18 Q. So that that's how the term "swap" is 19 being used? 20 A. Yes. 21 Q. Not in the sense of an interest rate 22 swap? 5227 1 A. That's correct. 2 Q. Now, the first says "SETL DT," and then 3 it goes across and there is -- looks like dates. 4 What does that refer to? 5 A. These would refer to settlement dates 6 of various transactions. 7 Q. And what does a settlement date refer 8 to? 9 A. It would be the point in time at which 10 securities would be delivered and funds exchanged 11 for them. 12 Q. Does that differ from what's called a 13 trade date? 14 A. Yes. 15 Q. Now, why did you use settlement date 16 and not trade date here? 17 A. I don't remember why at this time. 18 Q. Is settlement date the date that the 19 transaction -- the financial terms of the 20 transaction are finalized? 21 A. No. That would be the trade date. 22 Q. Now, it says "Held bond (dealer)." 5228 1 What does that refer to? 2 A. The held bond in this schedule would be 3 the bond that was originally held and was to be 4 sold. 5 Q. So, that's the dealer from which the 6 original bond was purchased? 7 A. Well, the dealer refers to the -- yes, 8 to the dealer from which it was purchased. 9 Q. Now, let's take -- see the column 10 12-85? It says "GS." What does that refer to? 11 A. Goldman Sachs. 12 Q. Then the next one, 2-18, says "FOB." 13 What does that refer to? 14 A. First Boston Corporation. 15 Q. Then the next one says "FOB." Then the 16 next one says "collar." What does that refer to? 17 Is there an institution named collar? 18 A. There was an interest rate collar as a 19 hedging device in place. These securities, 20 Freddie Mac 13s, were hedged by that collar or, I 21 should say, the attendant risks were hedged by 22 that collar. 5229 1 Q. Was that a PaineWebber transaction? 2 A. It very likely was. I believe the 3 original collar transactions were with 4 PaineWebber. 5 Q. Okay. And then the next one, 3-26, 6 says "MS." What does that refer to? 7 A. Morgan Stanley. 8 Q. Then the third says "collar," as well. 9 Is that also a PaineWebber transaction? 10 A. Very possibly. 11 Q. Then there is one at 3-18. It says 12 "PW." Do you know what that refers to? 13 A. That's PaineWebber. 14 Q. And then 3-21, it says "DBL." Who does 15 that refer to? 16 A. That's Drexel. 17 Q. And 3-26, it says "MS" again. Is that 18 Morgan Stanley again? 19 A. Yes. 20 Q. And then 2-26 says "GS." Is that 21 Goldman Sachs again? 22 A. Yes, it is. 5230 1 Q. And the next, "DBL" means Drexel 2 Burnham? 3 A. Yes. 4 Q. And what's "SMB" mean in the next one? 5 A. Smith Barney. 6 Q. Ask what's "SB" again? 7 A. Salomon Brothers. 8 Q. So, any time "DBL" is used, it means 9 Drexel Burnham? 10 A. Yes. 11 Q. And any time "GS" is used, it means 12 Goldman Sachs? 13 A. Yes. 14 Q. Now, let's go back down to the 15 descriptions of the issuances. It says "issuer." 16 Does that refer to the federal agency 17 that issued the mortgage-backed securities? 18 A. Yes. 19 Q. Ginnie Mae, GNMA is Ginnie Mae. FHLMC 20 means Freddie Mac? 21 A. Yes. 22 Q. FNMA means Fannie Mae? 5231 1 A. Yes. 2 Q. Now, then the next is "coupon." Is 3 that the interest rate on the face value of the 4 instrument, the mortgage-backed security that was 5 purchased? 6 A. Yes, it is. 7 Q. And then it says "current face." What 8 does that mean? 9 A. "Current face" would be the amount of 10 face value that was currently held. 11 Q. And would that differ from the face 12 value when the mortgage-backed security was 13 purchased? 14 A. Yes. 15 Q. And why is that? 16 A. From payments of principal, whether 17 scheduled or early. 18 Q. Okay. So, in other words, prepayments 19 or payments of principal would reduce the face 20 value of the mortgage-backed securities originally 21 purchased to some lower figure? 22 A. That's correct. 5232 1 Q. Now -- do you know what the magnitude 2 of the pay-down was on these mortgage-backed 3 securities that were part of this purported roll 4 down? 5 A. They got quite high. I don't know 6 exactly what they were at every point that we held 7 them, but they -- 8 Q. They were quite substantial? 9 A. They increased, yes. 10 Q. So that -- take the current face of 11 $50 million on this Ginnie Mae in the first 12 column. The original face could have been as high 13 as 75 million? 14 A. I don't know what the original face 15 was. I believe we showed the current CPR on here 16 of 5.16. It would suggest that the original face 17 was not that much more. 18 Q. Because it was held for less than a 19 year? Is that -- 20 A. Well, it hadn't -- it was held for a 21 short time and this rate was not that high. 22 Q. Now, the next says "purchase price." 5233 1 It says 95.84 using 12-85 as an example. 2 Is that the discount premium factor that 3 you and I discussed? 4 A. Yes. That's the purchase price as a 5 percent of par. 6 Q. Okay. And then it says "market value." 7 Do you see that? It says 102, which is a premium 8 to par. 9 Do you know what that refers to? 10 A. That would be the price at which we 11 sold it. 12 Q. Okay. So that that -- so, market value 13 is the price at which you sold that security? 14 A. Yes. 15 Q. And then "current CPR, 5.16," what is 16 that again? 17 A. That is -- 18 Q. CPR. 19 A. An annual rate of prepayment that this 20 security was experiencing. 21 Q. Called a constant prepayment rate? 22 A. Yes. 5234 1 Q. So, that's whatever the prepayment rate 2 was for that security? 3 A. Yes. 4 Q. Now, where did you get that 5 information? 6 A. This would have come from published 7 tables. 8 Q. Tables that were published to show what 9 the prepayment rate was with that particular 10 security? 11 A. Probably for that particular category 12 and coupon. 13 Q. Now, was that different than the tables 14 that you testified about earlier? 15 A. Those tables were used to calculate 16 yield and duration. They were not tables that 17 showed the actual prepayment speed of anything. 18 Q. Okay. So, what you looked at were 19 tables that would show or purported to show what 20 the actual prepayment speed was for this 21 particular security at this particular time? 22 A. Yes. 5235 1 Q. Now, who published those? 2 A. They were widely available from a 3 variety of securities dealers to publish 4 mortgage-backed securities newsletters. 5 Q. Do you know how they were compiled? 6 A. They would be compiled by taking the 7 principal factors which were presented each month 8 by the agencies as to the fraction of the 9 securities remaining outstanding and simply 10 calculating a rate of decline. 11 Q. Do you know how -- let's take Ginnie 12 Maes, for example. Do you know how Ginnie Mae 13 gathered that data? 14 A. Well, whoever administered the 15 securities and processed all the loans under them 16 had to compile these numbers. 17 Q. Now, did that data originate with 18 Ginnie Mae or did they get that data from mortgage 19 bankers who were servicing the pools of 20 mortgage-backed securities that were underlying 21 the mortgage-backed securities issued by Ginnie 22 Mae? 5236 1 A. These pools could have been 2 administered by trustees and outside parties that 3 would have had to report this, I suppose. 4 Q. Do you know what the delay time was 5 between the reporting of the information and the 6 date at which the information was gathered by 7 those outside entities? 8 A. No, I don't. 9 Q. Do you know what the time delay was 10 between the time that Ginnie Mae got that 11 information and the time that it was published? 12 A. No, I don't. 13 Q. Now, take Freddie Mac. Do you know how 14 Freddie Mac gathered the information that was used 15 to calculate the prepayment rates? 16 A. I do not. 17 Q. Were -- did Freddie Mac have outside 18 people servicing the mortgage-backed securities 19 that underlied the pools of mortgage-backed 20 securities that it held as underlying the 21 mortgage-backed securities at issue? 22 A. I'm not familiar with the 5237 1 administration of the securities themselves. I 2 just know that the factors were available at 3 the -- within the first week of every month. And 4 those would be the raw material for making the 5 computations. 6 Q. But you don't know the delay time 7 between when the material was first collected by 8 the person servicing the mortgage to when it 9 became public? 10 A. That's correct. I do not. 11 Q. And is that the same for Fannie Mae? 12 A. Yes. 13 Q. Could that be a significant delay if it 14 was as much as 45 days? 15 A. That would depend on the market, 16 whether prepayment rates had moved