6195 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 10-31-97 22 6196 1 A-P-P-E-A-R-A-N-C-E-S 2 ON BEHALF OF THE AGENCY: 3 KENNETH J. GUIDO, Esquire Special Enforcement Counsel 4 PAUL LEIMAN, Esquire (Not present) SCOTT SCHWARTZ, Esquire (Not present) 5 BRUCE RINALDI, Esquire RICHARD STEARNS, Esquire (Not present) 6 and BRYAN VEIS, Esquire (Not present) of: Office of Thrift Supervision 7 Department of the Treasury 1700 G Street, N.W. 8 Washington, D.C. 20552 (202) 906-7395 9 ON BEHALF OF RESPONDENT MAXXAM, INC.: 10 FRANK J. EISENHART, Esquire 11 of: Dechert, Price & Rhoads 1500 K Street, N.W. 12 Washington, D.C. 20005-1208 (202) 626-3306 16 13 DALE A. HEAD (in-house) 14 Managing Counsel MAXXAM, Inc. 15 5847 San Felipe, Suite 2600 Houston, Texas 77057 16 (713) 267-3668 17 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO. AND CHARLES HURWITZ: 18 RICHARD P. KEETON, Esquire 19 KATHLEEN KOPP, Esquire (Not present) of: Mayor, Day, Caldwell & Keeton 20 1900 NationsBank Center, 700 Louisiana Houston, Texas 77002 21 (713) 225-7013 22 6197 1 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO., CHARLES HURWITZ, AND MAXXAM, INC.: 2 JACKS C. NICKENS, Esquire 3 of: Clements, O'Neill, Pierce & Nickens 1000 Louisiana Street, Suite 1800 4 Houston, Texas 77002 (713) 654-7608 5 ON BEHALF OF JENARD M. GROSS: 6 PAUL BLANKENSTEIN, Esquire 7 MARK A. PERRY, Esquire (Not present) of: Gibson, Dunn & Crutcher 8 1050 Connecticut Avenue, N.W. Washington, D.C. 20036-5303 9 (202) 955-8500 10 ON BEHALF OF BERNER, CROW, MUNITZ AND HUEBSCH: 11 JOHN K. VILLA, Esquire MARY CLARK, Esquire 12 PAUL DUEFFERT, Esquire (Not present) of: Williams & Connolly 13 725 Twelfth Street, N.W. Washington, D.C. 20005 14 (202) 434-5000 15 OTS COURT: 16 HONORABLE ARTHUR L. SHIPE Administrative Law Judge 17 Office of Financial Institutions Adjudication 1700 G Street, N.W., 6th Floor 18 Washington, D.C. 20552 Jerry Langdon, Judge Shipe's Clerk 19 REPORTED BY: 20 Ms. Marcy Clark, CSR 21 Ms. Shauna Foreman, CSR 22 6198 1 2 EXAMINATION INDEX 3 Page 4 GERALD WILLIAMS 5 Cross-Examination by Mr. Villa..............6200 6 Cross-Examination by Mr. Blankenstein.......6304 7 Redirect-Examination by Mr. Guido...........6311 8 Redirect-Examination by Mr. Rinaldi.........6399 9 Recross-Examination by Mr. Nickens..........6427 10 Recross-Examination by Mr. Blankenstein.....6431 11 Cross-Examination by Mr. Eisenhart..........6434 12 Cross-Examination by Mr. Keeton.............6437 13 Further Redirect-Examination by Mr. Guido...6438 14 Further Recross-Examination by Mr. Nickens..6442 15 Further Redirect-Examination by Mr. Guido...6443 16 17 18 19 20 21 22 6199 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:00 a.m.) 3 THE COURT: Be seated, please. The 4 hearing will come to order. I believe at this 5 time, we're going to have cross-examination of 6 Mr. Williams. 7 MR. VILLA: That's correct, Your Honor. 8 THE COURT: The witness has been sworn 9 and remains under oath. 10 THE WITNESS: Yes, Your Honor. 11 THE COURT: Mr. Villa. 12 MR. VILLA: Thank you, Your Honor. In 13 an attempt to speed up the proceedings, I have 14 copies for Mr. Langdon and for the Court and for 15 the witness of a book of documents that are going 16 to be used. I'll give the documents loosely to 17 you if that's okay, Mr. Guido, as I use them if 18 they have been previously put into evidence. 19 20 21 22 6200 1 2 CROSS-EXAMINATION 3 4 5 Q. (BY MR. VILLA) Good morning, 6 Mr. Williams. 7 A. Good morning. 8 Q. Mr. Williams, are you trained as an 9 accountant? 10 A. I was trained as an accountant, yes. 11 Q. And did you receive a professional 12 license as a certified public accountant? 13 A. I did, yes. 14 Q. Have you worked for a public accounting 15 firm in your career? 16 A. At the beginning of my career, yes, I 17 did. 18 Q. Which one was that? 19 A. That was Price Waterhouse & Company. 20 Q. How many years did you work for Price 21 Waterhouse? 22 A. I worked for Price Waterhouse about 6201 1 five years. 2 Q. Where? 3 A. In Columbus, Ohio. 4 Q. Is that where you're from? 5 A. That's where I spent most of my life, 6 yes. 7 Q. I'd like you to take a few minutes and 8 tell us about your banking background other than 9 at USAT. 10 Now, have you held a position at First 11 City Bank here in Houston? 12 A. I did work for First City 13 Bancorporation. 14 Q. First City Bancorporation? 15 A. Which was the parent of the bank, yes. 16 Q. It's a holding company? 17 A. Holding company, correct. 18 Q. At the time you were at First City 19 Bancorporation here in Houston, how did it rank 20 among the banks in Houston? 21 A. Well, it was -- it ranged close with 22 Texas Commerce as the largest at that time. 6202 1 Q. How many years were you employed by 2 First City? 3 A. Ten. 4 Q. Can you tell me the various positions 5 you held at First City in those ten years? 6 A. Yes. I was the chief financial 7 officer. I joined the company in 1972, stayed ten 8 years through the middle of '81, and I was the 9 chief financial officer for, I think, eight and a 10 half years of that, from the beginning. And then 11 we promoted someone else to that position in my 12 last year and a half there. 13 Q. Were you an executive vice president? 14 A. I was. I was a senior vice president 15 first. Then I got promoted. 16 Q. What were your responsibilities at 17 First City? I may use "First City," although we 18 know we're talking about the holding company. 19 A. Yes. And I had some responsibilities 20 with the bank but -- at that time; but at the 21 parent company, I was responsible for the 22 accounting activities. They reported through me; 6203 1 the budgeting, the planning aspects of it. The 2 audit group reported to me. And some of these 3 were added as we went on. I later became 4 responsible for the computer operations, the 5 operational side of the house, of the bank. I 6 became -- I was responsible for the Wall Street 7 work. And by that, I mean the invest -- it was a 8 public corporation, shareholder relations and the 9 like. 10 Q. As chief financial officer, did you set 11 accounting policy for the corporation? 12 A. Yes. 13 Q. And did you meet from time to time with 14 outside auditors? 15 A. Yes. 16 Q. Now, jumping ahead in time to your 17 current position, do you currently hold a position 18 as an executive officer of a large bank? 19 A. Yes. Of Huntington Bancshares in 20 Columbus. 21 Q. In Columbus, Ohio? 22 A. In Columbus, Ohio. 6204 1 Q. How does it rank among the largest 2 banks in the United States? 3 A. It's $26 billion. It's about 34th or 4 5th in size, much better than that in 5 profitability; but in total assets, it's about 6 34th or 5th. 7 Q. Did you -- can you remember what United 8 Savings was at the time you left in early 1987 9 roughly? 10 A. I think it was six -- 5, 6 billion, in 11 that range. 12 Q. So, it's a number of multiples the size 13 of United Savings; is that right? 14 A. Yes. 15 Q. Is it referred to as a large regional 16 bank? Is that what you would call it? 17 A. It is. It's -- we bank in contiguous 18 states around Ohio and in Florida. 19 Q. When did you join Huntington? Can I -- 20 "Huntington" is a shorthand name for it? 21 A. That's correct. 22 Q. When did you join Huntington? 6205 1 A. In early '89. I've been there eight 2 and a half years. 3 Q. What's your current position there? 4 A. Executive vice president. 5 Q. What are your duties at Huntington? 6 A. They are similar to what I had at First 7 City. I'm responsible for the planning, the 8 accounting, the long-range planning of it. I do 9 some acquisition work, and I failed to mention 10 that at First City. I did that as well part of 11 the time, the latter years that I was there. 12 I'm -- I am also responsible again for the 13 Wall Street work and long-term financing for the 14 corporation, those kind of responsibilities. 15 Q. You're in a tier of executive vice 16 presidents at Huntington; is that right? 17 A. Yes. There are a half dozen of us. 18 Q. Above your tier, how many other senior 19 officers are there? 20 A. Well, there are probably four. There 21 are two vice chairmen. I report to a president, 22 and there is a chairman of the board. 6206 1 Q. Now, do you recall, sir -- and let's 2 focus back on United. 3 Do you recall, sir, approximately what 4 date you joined United Financial Group and United 5 Savings Association of Texas? 6 A. I joined in August of '83. Left in 7 December of '86. 8 Q. And who was the person who actually 9 hired you? 10 A. A man named Coles, Jim Coles, who was 11 chairman at that time. 12 Q. But you interviewed with other people 13 prior to that time; is that right? 14 A. I interviewed with three or four 15 people, yes. 16 Q. When you joined United Financial Group, 17 did you sign an employment contract? 18 A. I did. 19 Q. Now, are employment contracts for 20 senior executive officers regularly disclosed in 21 proxy statements? 22 A. Correct. 6207 1 Q. And yours was described in the proxy 2 statement, wasn't it, sir? 3 A. Yes. 4 Q. Let me ask you to look the first tab in 5 the book that's in front of you which is the 1984 6 proxy statement. It's A3011. 7 Do you see that, sir? 8 A. Yes. 9 MR. VILLA: I move the 1984 proxy 10 statement, A3011, into evidence. 11 MR. GUIDO: No objection, Your Honor. 12 THE COURT: Received. 13 Q. (BY MR. VILLA) Let me direct your 14 attention to Page 9 of this document. You see 15 that? 16 A. I have it. 17 Q. And going down under "employment 18 contract," the second full paragraph -- and let me 19 read this. Quote, "On September 1, 1983, the 20 company entered into an employment agreement with 21 Gerald Williams for a term of three years with a 22 base salary of $200,000. The agreement includes a 6208 1 provision requiring the company to pay a lump 2 sum -- in a lump sum the amount owed under the 3 agreement during the remaining term thereof in the 4 event of a termination of Mr. Williams' employment 5 or a change in his responsibilities." 6 Do you see that, sir? 7 A. Yes. Yes, I do. 8 Q. And does that accurately summarize your 9 employment contract when you were hired? 10 A. It is correct. 11 Q. And was it your understanding that you 12 had the right to be paid for the full term of your 13 contract if you were terminated or your 14 responsibilities were changed? 15 A. Yes. 16 Q. So, under this contract, as you 17 understood it, you could receive up to three years 18 of severance; is that right? 19 A. That's correct. 20 Q. Do you recall, sir, whether your 21 employment contract was described in all of the 22 proxy statements while you were there? 6209 1 A. I think they had to be. I just -- I'm 2 sure they were. 3 Q. Okay. Let's look at the next entry in 4 the book that's in front of you which is the 1986 5 proxy statement which has been marked as A3013. 6 It appears at Tab 88. 7 A. I have it. 8 Q. And let me direct your attention to 9 Page 10. 10 Do you see that? 11 A. Yes. 12 Q. At the top -- I won't bother to read it 13 again; but, again, there is a description of your 14 employment contract, isn't there, sir? 15 A. There is. 16 Q. Do you recall, sir, whether your 17 employment contract was typically described in 18 business plans that United sent, from time to 19 time, to the regulators? 20 A. Yes, I believe it was. I can't recall 21 the specific incidents, but they knew of it. 22 Q. I'll send it to you later or I'll show 6210 1 it to you later in this examination, sir. 2 Do you recall, Mr. Williams, whether 3 any regulator ever expressed any criticism to you 4 about the length of your contract? 5 A. No one ever did. 6 Q. Did any regulator ever tell you that 7 the contract was unsafe and unsound because it was 8 three years in length? 9 A. No. No one. 10 Q. Did any regulator ever tell you that 11 the contract was unsafe and unsound because, under 12 it, you could receive up to three years of 13 severance? 14 A. No, sir. 15 Q. Now, when you left United at the end of 16 1986, did you actually receive severance? 17 A. Yes. Yes, I did. I didn't receive 18 three years, but I received what I was due. 19 Q. And how many months of severance was 20 that, sir? 21 A. I believe it was 20 months. 22 Q. You've never been criticized for that, 6211 1 have you, sir? 2 A. No, sir. Mr. Twomey told me it was 3 fine when I left. He told me he had approved it. 4 Q. Now, at the time you joined United, 5 there had recently been a merger; isn't that 6 right, sir? 7 A. That's correct. 8 Q. Can you describe the merger? 9 A. Yes, I can. The -- it happened a year 10 before I arrived. In fact, that's the -- I was 11 led to believe that was one of the reasons -- the 12 main reason I was brought into the company. 13 United bought old Houston First, another savings 14 and loan; and the two were put together. But 15 there was a lot of duplication that had existed 16 and a lot of sorting out that needed to be done on 17 the operational side, the financial side. And 18 Mr. Coles, Mr. Bentley, and others felt that I had 19 the talents to help them straighten it up; so, I 20 was brought in. 21 Q. Approximately how big were the two 22 associations that merged? 6212 1 A. I think, collectively, they were at 2 that time close to 2 and a half, 3 billion. I 3 believe that's the approximate size. 4 Q. Do you recall, sir, what the financial 5 health was of the two thrifts prior to the merger 6 in general terms? We'll look specifically. 7 A. Well, we always felt that United was -- 8 while weak -- was -- on its own was in much better 9 shape than Houston First was which was -- we use 10 the term "borderline cripple." 11 Q. Let's start with United. Let's talk 12 about its earnings and whether it lost money in 13 the years before the merger. 14 Do you remember whether it did, sir? 15 A. I do not recall. 16 Q. Okay. Let me direct your attention to 17 the next entry in your book which is A3018. It's 18 the 1982 10K for United Financial Group which is 19 already in evidence as Tab 140. 20 Do you see that in front of you? 21 A. I have it. 22 Q. Is this one of the documents you would 6213 1 have reviewed at the time you joined United? 2 A. Yes, it would have been. 3 Q. Now, can you turn to Page 17 of the 4 1982 10K? 5 A. I have it. 6 Q. Can you tell by looking at this 7 document, which is selected financial data, what 8 the after-tax profit or loss was for United for 9 the years 1981 and 1982? 10 A. Yes. In the middle of the page, it 11 shows a loss for both '82 and '81. 12 Q. And the loss for 1982 is? 13 A. 18 million 570. 14 Q. And the loss for 1981 is? 15 A. 12 million 402. 16 Q. And these are after tax? 17 A. Yes. 18 Q. So, before tax -- what would the 19 before-tax losses be under these circumstances? 20 A. Well, we'd have to look at Page 26. In 21 the middle of the page, I see it's 24 million 296 22 income before continuing operations, before any 6214 1 federal tax. 2 Q. So, for 1982, it would have been a 3 24-million-dollar loss; and for 1981, it would 4 have been a 25-million-dollar loss. Is that 5 correct? 6 A. That's correct, based on Page 26. 7 Q. So, the healthier of the two 8 institutions lost $50 million in the prior -- two 9 years prior to the merger; is that right? 10 A. Yes. 11 Q. Now, let me direct your attention to 12 Page 2 of the 1982 10K which, I believe on this 13 Bates stamp, is CN025444. 14 Do you see that? 15 A. The same 10K, you're talking about? 16 Q. Yes, sir. The same document. 17 A. Yes. 18 Q. Do you see that, sir? 19 A. I have Page 2. 20 Q. Can you tell from that whether United 21 had approximately $1 billion in fixed rate home 22 loans where it says -- 6215 1 A. Yes. 2 Q. -- conventional fixed rate is 862 and 3 FHA -- 4 A. Yeah. 862, right. 5 Q. And then FHA insured and VA guaranteed 6 loans and certificates is 134; is that right? 7 A. That's correct. 8 Q. So, that's approximately a billion 9 dollars in fixed rate loans? 10 A. That's correct. 11 Q. Prior to this time, thrifts had 12 traditionally carried, primarily, investments in 13 fixed rate home loans; isn't that right? 14 A. Right. 15 Q. By 1983, had it become clear that a 16 portfolio primarily composed of fixed rate home 17 loans presented a very high interest rate risk for 18 financial institutions? 19 A. That's correct. 20 Q. So, looking solely at United, you would 21 not call it a healthy institution prior to the 22 merger; is that right? 6216 1 A. No, it was not. 2 Q. It lost a lot of money in the prior two 3 years, and its portfolio was filled with home 4 loans that had a substantial interest rate risk? 5 A. That's correct. 6 Q. Now, let's shift our focus to Houston 7 First American. That's a thrift that was 8 purchased; is that right, sir? 9 A. Yes. 10 Q. Now, can you determine from the work 11 that you did after you joined United whether 12 adequate due diligence had been performed on the 13 financial condition of Houston First American 14 prior to the merger? 15 A. Well, when I joined the company, I 16 asked Mr. Coles what due diligence had been done. 17 And he told me that, really, none had been done; 18 that he felt that he had known Ms. Grigsby and 19 that whatever they did was only minimal. 20 Effectively, no due diligence had been performed 21 on Houston First. 22 Q. And Ms. Grigsby is Mary Grigsby? 6217 1 A. Mary Grigsby, who had been chairman of 2 the -- of Houston First prior to the merger. 3 Q. And do you know whether Mary Grigsby 4 then became a director of the Federal Home Loan 5 Bank Board? 6 A. Yes, she did, subsequent to that or 7 close to that time. 8 Q. She, in fact, resigned from Houston 9 First American to go on to the Federal Home Loan 10 Bank Board in Washington, D.C.? 11 A. That's correct. 12 Q. She was one of the three directors? 13 A. One of three directors. 14 Q. As far as you know, none of the 15 respondents in this case negotiated the merger, 16 did they, sir? 17 A. No, not that I know of. It was before 18 my time. 19 Q. And none of the respondents in this 20 case performed any of the due diligence on the 21 merger? 22 A. Not that I know of. 6218 1 Q. In fact, the respondents joined United 2 after the merger was negotiated; isn't that right? 3 A. Yes. 4 Q. Now, there were a number of problems 5 that resulted from the merger? Operational 6 problems, sir? 7 A. Yes. 8 Q. Before you go through some of these 9 problems, let me ask you for your assessment as 10 the chief operating officer -- and that's the 11 position you ultimately took. Right? 12 A. That's correct. 13 Q. Let me ask you for your assessment of 14 the extent to which the merger impacted United's 15 ultimate chance for survival. 16 A. Well, my view is that it was going to 17 be precarious going forward; and I think it was 18 shared by others. The combined banks had to -- 19 combined institutions had an enormous amount of 20 goodwill on its books, goodwill being an 21 intangible that had to be amortized over the 22 life -- a certain life, which would impact 6219 1 earnings. And it needed almost a perfect economy 2 to come out and be healthy and, plus -- but we 3 were saddled with all of the operational problems: 4 Duplicate products, branches that overlapped, 5 systems that wouldn't talk to each other. So, we 6 had just a lot of things going against us from the 7 beginning. 8 Q. And these were problems that you and 9 the other respondents inherited when you joined 10 United. Right? 11 A. That's correct. 12 Q. They weren't of your making. Right? 13 A. No. They were there as a result of the 14 merger, as a result of the economy, all the 15 factors of the thrifts themselves. 16 Q. Now, some of the responsibilities you 17 had at United was correcting the operational 18 problems that resulted from the merger; isn't that 19 right, sir? 20 A. Certainly. 21 Q. And did you say that the thrifts had 22 compatible or incompatible computer systems? 6220 1 A. Oh, they were totally incompatible. 2 They were different. Houston First had an 3 in-house system which was antiquated. United was 4 using an outside service. They had to be brought 5 together. That's one of the things I was asked to 6 do. 7 Q. Was that a problem for the accounting 8 and financial people? 9 A. It was. I mean, it was a big problem. 10 Q. How would you characterize the quality 11 of the financial records when you arrived in 1983? 12 A. They were in sad shape. We were -- a 13 lot of things were antiquated. They were 14 consolidating by hand on long worksheets that 15 would spread out across this table. There was 16 no -- it was just difficult. 17 Q. As a result of the problems that you 18 encountered, did you undertake to hire any 19 additional staff? 20 A. I did. We brought a number of people 21 in. 22 Q. Was one of those individuals Michael 6221 1 Crow? 2 A. That's correct. I brought Michael in. 3 Q. How had you known Mike Crow? 4 A. We had been colleagues at First City. 5 Mike did not work directly for me at First. I 6 joined First City, as I said, in '72. Mike had 7 already been there. He was working with a man who 8 was doing acquisition work. That's about the time 9 that banks in Texas were starting to buy other 10 banks, and Mike was on that staff. Later, he 11 joined me and became controller of the lead bank 12 unit of First City. 13 Q. Of First City? 14 A. Of First City. 15 Q. So, how long had you worked with him 16 not directly but in the same offices? 17 A. Well, we were together ten years at 18 First City. 19 Q. And were you the person who reached out 20 and contacted him initially for this job at 21 United? 22 A. Oh, absolutely, I did. 6222 1 Q. It wasn't Charles Hurwitz, was it? 2 A. No. I knew Mike. I don't think 3 Mr. Hurwitz knew him. 4 Q. You wouldn't say Mike Crow was 5 handpicked by Charles Hurwitz? 6 A. Oh, absolutely not. 7 Q. And you made the decision to contact 8 and finally to hire Mike Crow? 9 A. I did. And I had him interview other 10 people. He interviewed with Dr. Munitz and 11 perhaps Mr. Hurwitz -- I can't remember -- and 12 certainly Mr. Bentley and Mr. Coles, I think. I 13 simply can't recall whether Coles was still there 14 or not. 15 Q. And what position did Mike Crow 16 ultimately take at United? 17 A. We hired him as the chief financial 18 officer. 19 Q. And you devoted your time primarily to 20 operational issues. Right? 21 A. I did. 22 Q. And what issues did you assign to 6223 1 Mr. Crow? 2 A. Well, all the financial activities: 3 The accounting, budgeting, the planning, those 4 kind of things. 5 Q. You were personally familiar with that 6 kind of -- 7 A. Familiar -- 8 Q. -- function. Right? 9 A. I had to devote my time -- I failed to 10 mention earlier the mortgage operation, too; and I 11 was responsible for the servicing. We had had two 12 servicing units brought together, servicing of 13 mortgage -- single-family home loans. And I was 14 spending time on that, as well. But Mike -- we 15 assigned him as chief financial officer to do some 16 of the activities that I described that I do today 17 at Huntington. 18 Q. If you'll turn to the next entry in 19 your book, this is Exhibit A10546. It's a 20 memorandum dated October 25, 1984, from you to the 21 executive committee. 22 Do you see that, sir? 6224 1 A. I have it. 2 Q. And I believe it's Tab 171, and I think 3 Mr. Guido talked to you about it. 4 A. Okay. 5 Q. Let me direct your attention to the 6 underlined line in the middle of the "operations" 7 section where it says, quote, "The big problem is 8 the company's inefficiency and the total disarray 9 of our loan files and documents that are 10 fundamental to the business." 11 Do you see that? 12 A. Absolutely. 13 Q. Now, those problems weren't caused by 14 the respondents; is that correct, sir? 15 A. That's what we inherited. 16 Q. That's what you inherited? 17 A. Correct. 18 Q. And that was the job that you undertook 19 to solve. Right? 20 A. Yes. 21 Q. Now, you started to tell us that as a 22 result of the merger between United and Houston 6225 1 First American, United -- goodwill went up 2 dramatically. 3 Do you recall that? 4 A. That's correct, as a result of the 5 merger. 6 Q. As a result of the merger. Can you 7 explain to the Court in layman's terms why 8 goodwill would be placed on a balance sheet or the 9 circumstances? And then we'll go through the 10 effect on United's balance sheet. 11 A. Yes. Goodwill -- and it happens all 12 the time when one buys -- when one company buys 13 for value the net assets of a company. More than 14 the net assets on the company's books, the net 15 equity. And it comes under what's called purchase 16 accounting. That contrasts the pooling accounting 17 where no goodwill is created and all the assets 18 and liabilities of the acquired company come 19 forward. 20 In this case, the United case, purchase 21 accounting was employed. It had to be. And the 22 price that was paid far exceeded the net book 6226 1 value of Houston First's equity; and, therefore, a 2 large amount of goodwill was placed on the books. 3 This results in an intangible asset that has to be 4 amortized against the income statement over 5 certain lives. I can't recall. Maybe 15 to 25 6 years in the case of United. But it's a heavy 7 impact. It was a substantial amount in 8 relationship to the assets of the combined 9 companies. 10 Q. So, would another way of describing 11 goodwill be the difference between acquisition 12 price of a company and its fair market value? 13 A. That's what I attempted to say, yes. 14 Q. Okay. I'm trying to -- 15 A. Sure. 16 Q. -- say it in layman's terms. 17 A. Sure. 18 Q. So, that's -- 19 A. Sorry. That's correct. 20 Q. Okay. Let's look at the next entry in 21 your book which is Exhibit A3020 which is UFG's 22 form 10K for the 1984 calendar year. 6227 1 A. I have it. 2 Q. Do you have it in front of you? 3 A. I do. 4 MR. VILLA: Your Honor, I don't show 5 this as being in evidence; so, I move it into 6 evidence now. 7 MR. GUIDO: No objection, Your Honor. 8 THE COURT: Received. 9 Q. (BY MR. VILLA) Let me direct your 10 attention to Page 36, Note 11, of the 1984 10K. 11 A. Sorry, Mr. Villa. Page 36, did you 12 say? 13 Q. Page 36, yes. 14 A. Okay. 15 Q. Note 11. Do you see that in front of 16 you, sir? 17 A. I have it. 18 Q. Why don't you take a minute and read 19 the first full paragraph, and then we'll talk 20 about it. 21 A. Read it to myself? 22 Q. Read it to yourself, sir. 6228 1 A. Okay. 2 Q. Now, is that the transaction we've just 3 been talking about, the purchase -- actually, the 4 merger of Houston First American and 5 United Financial Group? 6 A. Yes. 7 Q. And under the circumstances, as set 8 forth in Note 11 of the financial statements 9 attached to the UFG Form 10K, we see that it was 10 accounted for by the purchase method. Right? 11 A. That's correct. 12 Q. And that's necessary for goodwill 13 treatment. Right? 14 A. Well, you get goodwill as a result of 15 it. If you purchase accounting, you're going to 16 have goodwill. 17 Q. I see. Now, can you determine from 18 this whether USAT paid about $38 million in stock 19 and other consideration for Houston First 20 American? You see those $23 million -- 21 A. Yes. 22 Q. -- $1.6 million, and 13.3? 6229 1 A. That's correct. 2 Q. You see that, sir? 3 A. Yes. 4 Q. So, it appears that United paid 5 approximately $38 million in stock for Houston 6 First American; is that right? 7 A. Right. 8 Q. And other consideration. Now, down a 9 little farther, about six lines down, it shows 10 that goodwill of 252,890,000 is being amortized on 11 a straight-line basis over 15 years. 12 Do you see that? 13 A. Yes. 14 Q. And that would be the goodwill that 15 went on United's books as a result of the merger? 16 A. Yes, and after all the mark-to-market 17 accounting adjustments that brought the two 18 companies going forward. 19 Q. So, according to my calculation, that 20 means that Houston First American's fair market 21 value was negative $214 million? 22 A. After -- 6230 1 Q. Does that sound -- 2 A. After the mark-to-market, yes. 3 Q. Right. Now, do the accounting rules 4 require amortization of goodwill? 5 A. Yes. 6 Q. And how does that occur? 7 A. Well, it's a -- 8 Q. Explain how it works through the income 9 statement and how it hits the balance sheet. 10 A. Well, it's already on the balance 11 sheet; and so, there is simply an amortization or 12 a write-off. It's like a depreciation of a fixed 13 asset. And you credit the -- you credit the asset 14 to reduce it, and you charge the income statement 15 which reduces profits. 16 Q. So, if we had $250 million of goodwill 17 and it had to be amortized at $15 million a year, 18 the level of goodwill would go down, say, around 19 $15 million a year; and that would be shown, 20 essentially, as an expense on the financial 21 statements? 22 A. That's correct. 6231 1 Q. Is that right? 2 A. Yes. 3 Q. So, every year, you're -- you have to 4 earn $15 million to come up to even; is that 5 right? 6 A. That's correct, to offset that. 7 Q. How do you think the -- in your 8 estimation as the chief operating officer -- the 9 goodwill impacted United's chances for survival? 10 A. Well, as I said earlier, it made it 11 precarious. We had to have a lot of things going 12 for us to overcome it. 13 Q. Do you understand the term "interest 14 rate gap"? 15 A. Yes. 16 Q. Can you explain what that means? 17 A. Gap is simply the relationship of the 18 interest rate risk between the assets and 19 liabilities on an institution's books, and if -- 20 because interest rates will move. If, for 21 example, in we were talking about, fixed rate 22 loans are on the books at, say, 7 percent and they 6232 1 never move, the interest rate, but the liability 2 cost from consumers are brought in and they keep 3 moving up to keep with the market, then we have a 4 gap. 5 Q. Do you recall what United's interest 6 rate gap was at the end of 1983? 7 A. I can't recall it without specifics. 8 Q. Let me direct your attention to the 9 next entry which is the 1983 Form 10K for United 10 Financial Group. It's at A3019, and it's been 11 entered into evidence at Tab 145. Let me direct 12 your attention to Page 19 of that document, if 13 you'll look at that. 14 A. I have it. 15 Q. Now, can you tell by looking at Page 19 16 of the 10K, Mr. Williams, what the interest rate 17 gap was for 12-month liabilities and assets for 18 United Financial Group at the end of 1983? 19 A. It's a billion 6. 20 Q. Negative $1.6 billion? 21 A. Yes. 22 Q. Can you explain to the Court the 6233 1 financial impact and the risks of a 2 1.6-billion-dollar negative 12-month interest rate 3 gap for an institution the size of United? 4 A. Well, it's -- it means -- as I said 5 before, the institution is very precarious based 6 on the movement in rates at that point in time. 7 It's negatively positioned. If rates move against 8 it, it'll simply be an additional impact on the 9 company's earnings. 10 Q. How vulnerable would an institution of 11 this size be to rising interest rates with a gap 12 of $1.6 billion? 13 A. Well, it's totally vulnerable because 14 of the size of the gap in relationship to the size 15 of the company. 16 Q. Do you recall, Mr. Williams, the 17 strength of the Texas economy during the time 18 period 1983 to 1985? 19 A. Well, it was -- it was not healthy. It 20 was a period of time when we had hoped that things 21 might change, but we were still having a lot of 22 foreclosures on home loans and the like. So, it 6234 1 was not -- it was not a healthy situation; and, of 2 course, it became worse. 3 Q. The Texas economy is significantly 4 impacted by the price of oil, isn't it, sir? 5 A. That's correct. 6 Q. And the price of oil had fallen sharply 7 in the 1980s, in the early 1980s? 8 A. Yes. I can't recall the time frames, 9 but the -- it affected -- did affect it. 10 Q. Do you recall, sir, whether the fall in 11 oil prices had a greater proportionate impact on 12 Houston than on the rest of Texas? 13 A. Well, we felt Houston was much more 14 vulnerable than the rest of Texas. 15 Q. And did the problems in the Houston 16 economy have a particular impact on USAT in its 17 attempt to turn around? 18 A. It did. 19 Q. And that's because a larger amount of 20 your business was then in Houston; isn't that 21 right? 22 A. That's correct. 6235 1 Q. Did you find that even homeowners were 2 defaulting on their mortgages? 3 A. Oh, they were, surely. 4 Q. Do you remember homeowners mailing in 5 their keys? 6 A. It actually happened. 7 Q. It wasn't just one, was it? 8 A. No. We would get them. Keys would be 9 mailed to me. 10 Q. And that's because the amount of the 11 mortgage exceeded the value of the house. Right? 12 A. Right. And the people were giving up. 13 They lost their jobs, and they were moving on. 14 Q. Had anything like this ever happened 15 before in your experience in banking: People 16 sending in keys to their homes? 17 A. Not to me, no, sir. 18 Q. Based upon this, did making more 19 single-family home loans in Houston appear to be a 20 wise strategic move? 21 A. No. We could not. In fact, we debated 22 many times whether or not to just shut down the 6236 1 whole mortgage operation itself on a retail basis. 2 Q. Mr. Williams, what is the wholesale 3 strategy? What does that term mean to you in 4 connection with the operations of United? 5 A. Well, the wholesale strategy meant two 6 things. One is that we would sell branches off 7 and -- for the right side of the -- the liability 8 side of the balance sheet -- not all of them, 9 because we were concerned about funding -- but 10 eliminate those that might duplicate the 11 operation. But secondly, instead of doing 12 single-family home loans on a retail basis, that 13 we would buy mortgage-backed securities and 14 take -- attempt to take the credit risk out of the 15 situation and deal with the interest rate risk. 16 Q. And was part of the wholesale strategy 17 activity such as going into high-yield bonds, as 18 well? 19 A. Yes, that's correct. 20 Q. And was the purchasing of equity 21 arbitrage Mr. Huebsch's -- Ron Huebsch's 22 operation? 6237 1 A. That's right. 2 Q. What's the money desk? Do you remember 3 the term "money desk"? 4 A. As I recall, the money desk was 5 Huebsch's operation. 6 Q. Do you remember Mr. Jackson? 7 A. Oh, the money desk from the liability 8 side, yes. That was -- that's what I described 9 earlier. That was buying money on a wholesale 10 basis to fund the institution. 11 Q. What do you mean "buying money on a 12 wholesale basis"? 13 A. Getting CDs in the public market, 14 certificates of deposit over a hundred thousand 15 dollars, and buying them from the money desk. 16 Q. So, essentially, what you do is you 17 close down the branches -- 18 A. Some of them. 19 Q. You close down and sell off some of the 20 branches, take those profits, and redeploy them 21 into more profitable activities? 22 A. That's correct. 6238 1 Q. And in order to fund the institution, 2 you funded through this money desk which buys the 3 certificates of deposit; is that right? 4 A. Yes, to supplement -- to supplement the 5 retail side. 6 Q. And that was also part of the wholesale 7 strategy; isn't that right? 8 A. Yes. 9 Q. Do you recall the discussions leading 10 up to the development of the wholesale strategy? 11 A. Well -- 12 Q. Not specifically word for word. Do you 13 recall when they occurred? 14 A. They -- yes. They occurred sometime in 15 '84, the early '84 time frame. We started to 16 discuss it, whether we should sell a lot of 17 branches, rebuild the capital of the organization 18 by doing so, and then move to the wholesale side 19 on the assets -- for assets in mortgage-backed 20 securities. So, there was a period of 21 discussions. Maybe they started in late '83. I 22 think it was early '84. But we then moved ahead 6239 1 toward the branch sale. 2 Q. Given the problems facing United in 3 1984 that we've -- some of which we've talked 4 about over the last 40 minutes, were you 5 personally in favor of the wholesale strategy? 6 A. Yes. I felt it made sense. 7 Q. Anybody force you to go into the 8 wholesale strategy? Charles Hurwitz? 9 A. No. We all -- we talked about it. We 10 debated it. But as I recall, myself, Bentley, we 11 all thought it made sense to do so. 12 Q. Do you recall, sir, whether the 13 wholesale strategy was disclosed in United's 14 public disclosures? 15 A. Well, I can't recall specifically. 16 Q. Well, I'll help you. 17 A. Okay. 18 Q. Look at the next tab, if you will, sir. 19 Before you, sir, should be Exhibit A3004 which is 20 United Financial Group's 1984 annual report. 21 Do you see that? 22 A. I have it. 6240 1 MR. VILLA: I don't show that as being 2 in evidence; so, I move it into evidence now. 3 MR. GUIDO: No objection, Your Honor. 4 Q. (BY MR. VILLA) Let me direct your 5 attention -- 6 THE COURT: Received. 7 Q. (BY MR. VILLA) -- to Page 3. And it 8 starts really with Bates stamp No. 27559. It goes 9 on for about four pages with an interruption for a 10 photograph. 11 Do you see that, sir? 12 A. I have it. 13 Q. Take a moment and look at the text. 14 Just scan your eyes over that. 15 A. Sure. I have it. 16 Q. Is that what you would -- do you want 17 to look at it further, sir? 18 A. No. That's fine. 19 Q. Is that -- in these pages, in the 20 opening section of United's annual report for 21 1984, is this a description of significant 22 portions of the wholesale strategy? 6241 1 A. Yes. We were trying to tell the 2 shareholders what we had done and what we were 3 trying to do going forward. 4 Q. Let me direct your attention to the 5 first full paragraph. 6 MR. GUIDO: Which page? 7 MR. VILLA: On Page 27559. 8 Q. (BY MR. VILLA) Do you see that? 9 A. I have it. 10 Q. And that's a letter that you would have 11 signed as the chief operating officer. Right? 12 A. Correct. 13 Q. Let me read it. Quote, "The 14 redirection of United Financial Group that began 15 in 1983 took on added significance in 1984. Major 16 steps were taken this past year to transform 17 United from predominantly a savings and loan 18 oriented company with a traditional emphasis on 19 mortgage lending and deposit gathering to one that 20 also operates as a merchant bank for its wholesale 21 customers. This redirection will allow United to 22 expand its real estate development activities in 6242 1 addition to participating in profitable new areas 2 of business. The strategy has already had a 3 positive impact on the company." 4 Do you see that? 5 A. Yes. 6 Q. And let me direct your attention now to 7 Page 27562, the last -- 8 A. I have it. 9 Q. The last paragraph on that page. And 10 I'll read that to you. Quote, "These strategies 11 have produced an essentially new United Financial 12 Group, one balanced by United's capability and 13 commitment to provide traditional deposit and 14 lending services. Today, United has reduced its 15 exposure to interest rate fluctuations and has 16 provided a long-term and stable earnings outlook 17 through a carefully planned program of 18 diversification." 19 Do you see that? 20 A. Surely. 21 Q. The wholesale strategy was set out in 22 your public disclosures, wasn't it, sir? 6243 1 A. It was. 2 Q. And did any regulator ever come to you 3 after it was set out like this and complain about 4 the wholesale strategy? 5 A. Not that I know of. 6 Q. Now, one important component of the 7 wholesale strategy is the sale of a number of 8 United's branches; is that right? 9 A. That's correct. 10 Q. Do you recall, sir, when United applied 11 to the federal regulators for approval of branch 12 sales? 13 A. We did. 14 Q. And about when was this? 15 A. It was in '84 sometime. We had 16 constant dialogue with them. 17 Q. What was the response from the federal 18 regulators? 19 A. They couldn't guarantee anything; but 20 they said, "Send us the application, and we will 21 act on it." They knew what we were doing. 22 Q. And finally, what decision did they 6244 1 make on your branch sale application? 2 A. They approved it. 3 Q. Now, one of United's primary concerns 4 was reducing its exposure to interest rates. 5 Right? 6 A. That's right. 7 Q. During this time period in particular? 8 A. Yes. 9 Q. Because of the problems that you had 10 inherited as a result of the merger. Right? 11 A. Correct. 12 Q. And that's the interest rate gap of 13 negative $1.6 billion we already saw? 14 A. That's correct. 15 Q. Was match funding high-yield bonds 16 again, certificates of deposit of similar 17 durations, one way of reducing United's interest 18 rate gap? 19 A. That's correct. 20 Q. And what it would do is it would reduce 21 reliance upon those fixed rate mortgages. Right? 22 A. That's right. They introduced a new 6245 1 element of assets matched. We could count on 2 interest rate spread. 3 Q. And it reduced that portion of the 4 institution's portfolio that was exposed to the 5 interest rate gap, as well? 6 A. That's right. 7 Q. Isn't that right? 8 A. Yes. 9 Q. Is that one of the reasons that United 10 went into high-yield bonds? 11 A. Yes, it is. 12 Q. Do you remember a man named Joe 13 Phillips? 14 A. I remember him, yes. 15 Q. Were you involved in the hiring of Joe 16 Phillips? 17 A. Yes, I was. 18 Q. Did you interview him? 19 A. I did. 20 Q. Mr. Hurwitz didn't hand pick him or 21 anybody else, as far as you know? 22 A. No. Nobody did. I -- we -- I believe 6246 1 he was at American General, and I forget how he 2 came to us. But as we did on any -- anybody we 3 hired, a series of us interviewed -- would 4 interview the person. 5 Q. Do you recall, sir, whether 6 Mr. Phillips was considering investment in 7 mortgage-backed securities structured arbitrage in 8 late 1984? 9 A. Probably correct. That's probably the 10 time frame we talked about. 11 Q. Do you recall whether United had 12 meetings with investment banks in late 1984 and 13 early 1985 and particularly with Salomon 14 Brothers -- 15 A. Oh, yes. 16 Q. -- regarding mortgage-backed 17 securities? 18 A. Yes, sir. 19 Q. Did you personally attend those 20 meetings? 21 A. I did. 22 Q. And did you hear the presentation from 6247 1 Salomon Brothers? 2 A. Yes, I did. 3 Q. Do you recall whether there was more 4 than one investment bank that made a presentation? 5 A. I believe Goldman made a presentation, 6 but they faded or dropped out of the picture. We 7 relied on Salomon going forward. 8 Q. Now, during your direct examination by 9 Mr. Guido, he showed you a letter dated July 12, 10 1985, concerning United's liability growth. 11 Do you remember that? 12 A. I remember. 13 Q. If you'll flip over -- I think we'll 14 probably jump one in your book -- and go to the 15 letter which is Exhibit A10566 which appears as 16 Tab 176. 17 Do you see that? 18 A. I have it. 19 Q. Now, he asked you to read -- look at 20 the document for a moment. He asked you to read 21 the first numbered paragraph on the first page. 22 A. Yes. 6248 1 Q. I think he may have asked you about it. 2 I'm not sure he asked you to read it. Would you 3 take a look -- take a second and look at it. 4 A. Point No. 1? 5 Q. Point No. 1. 6 A. Yes. 7 Q. Just look at that for a second. 8 A. Okay. 9 Q. And then he asked you whether the 10 $60 million of risk-controlled -- $60 million of 11 mortgage-backed securities and reverse repurchase 12 agreements were part of the risk-controlled 13 arbitrage purchased after the Salomon presentation 14 in October of 1984. 15 Do you remember that series of 16 questions? 17 A. Yes, right. 18 Q. He asked you that several times. 19 Remember that? 20 A. Yes. 21 Q. Let me direct your attention to the 22 sixth page of this document which bears Bates 6249 1 stamp No. 52885. 2 A. I have it. 3 Q. Do you see the heading "Program for 4 Matching Maturities and Controlling Interest Rate 5 Risk"? 6 A. I have it. I see it. 7 Q. And look over on 52886. Do you see 8 that? 9 A. Correct. 10 Q. And do you recognize that to be the 11 risk-controlled arbitrage? This is a 12 description -- discussion of the risk-controlled 13 arbitrage. 14 A. Yes. 15 Q. Now, there is a table on Page 52886 16 which shows the balances of investments in 17 corporate securities and mortgage-backed 18 securities. 19 Do you see that? 20 A. I do. 21 Q. I would like you to look at the entries 22 for 12-31-84 for the balance of mortgage-backed 6250 1 securities. 2 Do you see that? 3 A. Yes. 4 Q. And am I reading that correctly? The 5 number is zero? 6 A. That's right. 7 Q. Now, let's look down underneath that 8 where it says "reverse repos with interest rate 9 swaps." 10 Do you see that, sir? 11 A. That's zero. 12 Q. Also zero. Now, let's look at -- for 13 the balances at 3-31-85. Mortgage-backed 14 securities, balance is 127 million. Am I reading 15 that correctly? 16 A. That's correct. 17 Q. And reverse repos with interest rate 18 swaps balance is 116 million; is that right? 19 A. That's right. 20 Q. Does it appear to you from this 21 schedule, sir, that the first mortgage-backed 22 securities that were purchased for the structured 6251 1 arbitrage had to be sometime in the first quarter 2 of 1985? 3 A. That's right. 4 Q. And that's because that's the first 5 time the reverse repos and the mortgage-backed 6 securities show up on this schedule; is that 7 right? 8 A. That's correct. 9 Q. Now, that would mean that the 10 60-million-dollar number that Mr. Guido showed you 11 would have to be reverse repos and mortgage-backed 12 securities that were outside the risk-controlled 13 arbitrage. 14 Would you agree with me? 15 A. Yes. 16 Q. And they would have had to pre-date the 17 risk-controlled arbitrage. Right? 18 A. Right. 19 Q. Now, we could test this thesis by 20 looking back at the 1983 10K which is -- which 21 shows as of December 31, 1983, to see whether 22 there were substantial numbers of mortgage-backed 6252 1 securities and reverse repos at that time. Right? 2 A. Yes. 3 Q. Because Joe Phillips wasn't hired in 4 1983. He was hired in 1984? 5 A. That's correct. 6 Q. So, if there were reverse repos and MBS 7 at the end of 1983, we know they weren't in a 8 risk-controlled arbitrage? 9 A. That's right. 10 Q. All right. Now, let me direct your 11 attention back to A301 which is in the stack at 12 about the fourth tab. 13 3019. I misspoke. It's a 1983 10K. 14 A. Okay. I have it. 15 Q. Now, this is for the year ending 16 December 31, 1983. Right? 17 A. That's correct. 18 Q. And it will give us a snapshot as to 19 what the institution looked like at the end of 20 1983; is that right? 21 A. That's correct, yes. 22 Q. Now, I'd like you to go to Page 29 of 6253 1 this document -- 2 A. I have it. 3 Q. -- under "notes payable." 4 Do you see that, sir? 5 A. I do. 6 Q. Let's look at the second entry. I'll 7 read it, and you follow along and tell me if I'm 8 right. Quote, "Reverse repurchase agreements 9 weighted average rate of 9.74 percent and 10 9.45 percent due within 60 days secured by 11 mortgage-backed securities." 12 Do you see that? 13 A. I do. 14 Q. And do you see the number 156,745,000? 15 A. That's the number. 16 Q. Okay. Now, that confirms what you 17 concluded from looking at the earlier document 18 that, in fact, there were substantial numbers of 19 mortgage-backed securities outside the structured 20 arbitrage. Right? 21 A. That's right. 22 Q. In fact, at year end 1983, there was 6254 1 156 million of them. Right? 2 A. That's correct. 3 Q. And so, when Mr. Guido asked you all 4 those questions about that 60 million must have 5 been in the risk-controlled arbitrage, you hadn't 6 looked at these documents, had you, sir? 7 A. I did not recall them, no, sir. 8 Q. Now, let's go back to the 9 risk-controlled arbitrage. What did you 10 understand that the risk-controlled arbitrage was? 11 What was the purpose of the risk-controlled 12 arbitrage portfolio proposed by Salomon Brothers 13 and the other investment bankers? 14 A. Well, it would take -- it would 15 eliminate credit risk; and it would give us, going 16 forward, net interest income spread that would be 17 reliable within certain parameters that could be 18 counted upon. 19 Q. And was this -- there was an interest 20 rate spread that you understood that this -- that 21 the -- I'm sorry. 22 There was a degree of interest rate 6255 1 movement through which the risk-controlled 2 arbitrage would give you a reliable spread; is 3 that right? 4 A. Yes, that's correct. 5 Q. Do you recall the range? 6 A. I believe it was up to 200 -- move of 7 rates 200 basis points either way. 8 Q. And what was the basis for your 9 understanding of this -- now, I understand -- 10 you're not a portfolio manager in mortgage-backed 11 securities, are you, sir? 12 A. No. 13 Q. But you did sit through the 14 presentations by Salomon and the other investment 15 bankers? 16 A. That's correct. 17 Q. And what you're telling us is what you 18 understood from those presentations? 19 A. Yes. 20 Q. As far as you could tell, was your view 21 of the purpose of the risk-controlled arbitrage 22 and the interest rate range through which it would 6256 1 provide a positive spread consistent with the 2 views of the other directors and officers at 3 United at those meetings? 4 A. Oh, surely. 5 Q. Now, let's go back to Exhibit A10566 6 which is your July 12, 1985 letter. 7 A. Okay. I have it. 8 Q. Now, sir, you may not know this; but 9 the notice of charges alleges that this letter 10 contains a false statement in that it says or 11 suggests that the mortgage-backed securities 12 activity was reportedly designed to provide a 13 steady stream of earnings. 14 So, I'm going to ask you, sir: When 15 you signed this letter in July of 1985, did you 16 believe that the mortgage-backed securities 17 activity was designed to provide a steady stream 18 of earnings? 19 A. Well, yes, within the parameters we 20 talked about; that it would provide -- and by 21 "earnings," we mean net interest income. 22 Q. And did it appear to you that the other 6257 1 directors and officers shared your understanding? 2 A. Yes. 3 Q. Now, we started talking about Joe 4 Phillips. It's been said in this courtroom that 5 Mister -- that United -- actually, that the 6 respondents acted recklessly in putting 7 Mr. Phillips in charge of the mortgage-backed 8 securities portfolio. 9 So, I'm going to ask you what your 10 views were of Mr. Phillips' competence. 11 A. Well, we felt -- I felt he was 12 talented. Again, I'm not -- I wasn't an expert in 13 that field, but his resume looked strong. Others 14 who had much more intelligence on this matter felt 15 he was -- felt he had the qualifications for the 16 position. 17 Q. Did you have an opportunity to observe 18 Mr. Phillips while he was at United? 19 A. Yes. 20 Q. Were you present at meetings with the 21 investment bankers in which presentations were 22 made and he was also there? 6258 1 A. That's correct. 2 Q. Did he ask intelligent questions? 3 A. I felt he did. 4 Q. Did he appear to be knowledgeable about 5 the subject of mortgage-backed securities? 6 A. Yes, sir. 7 Q. Did it appear to you that the only 8 knowledge that Mr. Phillips got about 9 mortgage-backed securities portfolios was reading 10 promotional literature distributed by investment 11 banking firms that were peddling mortgage-backed 12 securities? Did that appear to you to be the 13 case? 14 A. No. He may have done those things, but 15 I thought he -- he was knowledgeable in what he 16 did. 17 Q. Would you have permitted Mr. Phillips 18 to establish an MBS structured arbitrage portfolio 19 if you believed that all he was doing was reading, 20 quote, "promotional literature" that was being 21 distributed by the investment banking firms that 22 were peddling MBS? 6259 1 A. No, sir. 2 Q. Was it reckless, in your judgment, to 3 put Mr. Phillips in as the portfolio manager? 4 A. No. 5 Q. Now, attached to the document we're now 6 looking at, the July 12, 1985 letter, is a 7 description of United's corporate strategy. 8 Do you see that? Why don't you flip 9 over a couple of pages. This copy is not ideal; 10 so, you'll have to look at the top of the page. I 11 think it says "United Savings Corporate Strategy." 12 A. I have it, yes. 13 Q. Look at the second page of the 14 corporate strategy which is Bates stamped 15 No. 52883. 16 Do you see that? 17 A. Yes, I do. 18 Q. And do you see a description there of 19 the mortgage-backed securities? 20 A. Correct. 21 Q. And it also discusses the corporate 22 securities portfolio on Page 52887. 6260 1 Do you see that, looking over a couple 2 more pages? 3 A. Yes. 4 Q. And look at Page 52888. Do you see 5 that? 6 A. Yes. 7 Q. And the first full paragraph reads, 8 quote -- and this -- we're talking about corporate 9 securities. This is high-yield bonds. Right? 10 A. Okay. 11 Q. "In addition to the net interest margin 12 benefit provided by the corporate securities 13 portfolio, from time to time, opportunities exist 14 for gains on sales of selected securities. 15 Through the six months ended June 30, 1985, gains 16 on sales of corporate securities totaled 17 $3.7 million." 18 Do you see that, sir? 19 A. I do. 20 Q. Did any regulator ever call you, after 21 you sent this corporate strategy, objecting to 22 this description of the United corporate 6261 1 securities portfolio and its intended operation? 2 A. No, sir. 3 Q. Now, this document, this corporate 4 strategy -- and I'm not going to take you through 5 all of it. This multi-page corporate strategy 6 simply describes the wholesale strategy, doesn't 7 it? 8 A. It does. 9 Q. Now, let's go back to Page 52883 up at 10 the top. 11 Do you see that? 12 A. I do. 13 Q. This is -- where it says "real 14 estate" -- 15 A. I do. I see it. 16 Q. Let me read to you what it says about 17 real estate. Quote, "Joint venture activity, land 18 development, and project management have 19 consistently been areas of strong performance for 20 United. New ventures in 1985 are expected to be 21 in more diverse geographic areas with a reduced 22 but strong presence in Houston. More emphasis 6262 1 will be placed in the high-growth areas of Dallas, 2 Fort Worth, San Antonio, Austin, and select 3 out-of-state regions." 4 Do you see that, sir? 5 A. Absolutely. I see it. 6 Q. Does this refresh your recollection, 7 sir, that in United's corporate strategy that was 8 sent to the regulators in July of 1985, that it 9 specifically told them that it intended to do 10 joint venture and land development activity in 11 high-growth areas? 12 A. That's correct. 13 Q. And two of the cities which are 14 described in your strategy as high-growth areas 15 are San Antonio and Austin. Right? 16 A. That's correct, yes. 17 Q. Did the regulators ever contact you 18 after receiving this and tell you San Antonio and 19 Austin are not appropriate places to do land 20 development and joint ventures? 21 A. They did not call me, no. 22 Q. In the mid-1980s, did you understand 6263 1 that San Antonio and Austin were more economically 2 stable than Houston? 3 A. Yes. There was -- we did feel that. 4 It had not been hit -- they were not hit as badly 5 as Houston at that time. 6 Q. And why was that? 7 A. Again, because of the oil economy. 8 They were not as dependent upon it. 9 MR. GUIDO: At this point in time, I 10 would like to interject an objection. This line 11 of questioning goes beyond direct. There were no 12 questions about real estate that were asked on 13 direct, and I object to this line of questioning 14 for that reason. 15 MR. VILLA: Your Honor, I'm inquiring 16 of the witness about a document that Mr. Guido put 17 in evidence. It may not be the lines that he put 18 in evidence, but I can't imagine how he's going to 19 be able to object to me inquiring about documents 20 that he placed in evidence. 21 THE COURT: All right. I'll deny the 22 objection. 6264 1 MR. GUIDO: Your Honor, could I have a 2 clarification then? I am not prepared to 3 cross-examine this witness about real estate. 4 Mr. Rinaldi has been working with Mr. Leiman, and 5 he would be prepared to do so. I would ask your 6 permission that we be able to split the 7 cross-examination of these questions of this 8 witness on real estate with Mr. Rinaldi doing the 9 cross-examination; and then I would do the 10 redirect on the remainder of this testimony, if 11 that's acceptable to you. 12 MR. VILLA: Your Honor, my inquiry 13 about real estate -- Mr. Stearns and I had had a 14 conversation before, about two weeks ago about 15 this. And I said that I would have about ten 16 minutes on real estate and -- basically, at a 17 macro level. As you know, I'm not handling the 18 real estate case for our side either; but our view 19 has always been one witness, one lawyer. And 20 under the circumstances, making Mr. Williams be 21 cross-examined by multiple people seems 22 inappropriate. I suggest we take it up at the 6265 1 end. I think my real estate examination is 2 relatively simple, and it will not be an 3 imposition on anybody to talk about the question 4 of whether or not they disclosed basic questions 5 about their strategy and Mr. Williams' role on the 6 loan committee for Mr. Guido to handle. 7 MR. GUIDO: Your Honor, it seems to 8 me -- 9 THE COURT: Well, I'll see where you're 10 going on this real estate business; but my 11 intention would be that if you raise the issue, 12 I'll let Mr. Rinaldi handle the redirect. 13 Q. (BY MR. VILLA) Who are Gem Childress 14 and David Graham? 15 A. They were the real estate experts at 16 United and lending experts on construction and 17 commercial projects. 18 Q. Were they at United when you arrived? 19 A. Yes, they were. 20 Q. Mr. Hurwitz had nothing to do with 21 hiring them, as far as you know? 22 A. No. They were there. 6266 1 Q. Have you ever heard the term "pockets 2 of prosperity" or "pockets of opportunity" used by 3 Mr. Graham and Mr. Childress? 4 A. I believe so. 5 Q. How was it used? 6 A. That there were just certain areas that 7 perhaps would be -- that would be found where a 8 real estate venture of some type would be 9 profitable to the institution. 10 Q. Did you view -- did you view Austin 11 and -- strike that. 12 Did you view parts of Austin and 13 San Antonio as pockets of prosperity during the 14 mid-1980s? 15 A. Well, we -- we felt that there perhaps 16 were situations where United could make loans in 17 certain instances in those particular markets. At 18 least, that's what was brought to the real estate 19 committee. 20 Q. Well, let me direct your attention now 21 to the next tab which is A10575 which is a letter 22 of October 28, 1985, marked as Tab 178. 6267 1 Do you see that? 2 A. I have it. 3 Q. It also has an attachment to it, 4 doesn't it, sir? 5 A. Yes. 6 Q. Let me direct your attention to the 7 second paragraph of this attachment. Now, this is 8 something that's been sent to the regulators. 9 Right? 10 A. That's correct. 11 Q. In fact, this copy has a "received" 12 stamp from supervision administration. 13 Do you see that? 14 A. I do. 15 Q. Quote, "As you noted" -- the Bates 16 stamp number is CN052908. Quote, "As you noted, 17 the association has relied heavily upon profits 18 from branch sales and real estate profits in the 19 recent past for earnings. Obviously, these 20 profits will not go on forever and this is the 21 reason for our desire to add additional 22 mortgage-backed securities." 6268 1 Do you see that, sir? 2 A. That's correct. 3 Q. Is this consistent with your 4 recollection that United was telling the 5 regulators that it was selling off its appreciated 6 assets to maintain earnings? 7 A. I'm sorry. Could you ask that again? 8 Q. Is this consistent -- there was no 9 attempt to hide from the regulators -- 10 A. I'm sorry. No. 11 Q. -- sir, the fact that you were selling 12 off appreciated assets to maintain earnings? 13 MR. GUIDO: Objection. That's not what 14 this sentence says. This sentence says "branch 15 sales and real estate profits." It does not say 16 "appreciated assets," Mr. Villa; and you are 17 putting words in the witness' mouth. 18 MR. VILLA: This is cross-examination, 19 Your Honor. 20 THE COURT: All right. Continue. 21 Denied. 22 Q. (BY MR. VILLA) There is no secret 6269 1 that United was selling off appreciated assets in 2 order to maintain earnings, was there, sir? 3 A. No, sir. 4 Q. And there was no attempt to mislead the 5 regulators about the source of United's earnings 6 either? 7 A. No. 8 Q. Now, look at Exhibit B to the 9 October 28, 1985 letter which is the business 10 plan. And it's Bates stamp No. CN052913. 11 Do you see that? 12 A. Yes, I do. 13 Q. The first full sentence reads, quote, 14 "Management has formulated a business plan to 15 transform United into a more diversified financial 16 institution which compliments our existing 17 strengths and customer base," close quote. 18 Do you see that? 19 A. I have it. 20 Q. And that's another reference to the 21 wholesale strategy, isn't it? 22 A. That's true. 6270 1 Q. And again, you didn't get any 2 criticisms from the regulators after sending them 3 this business plan, did you, sir? 4 A. No, sir. 5 Q. Now, who was United's auditor during 6 the time period that you were there? Outside 7 auditor. 8 A. Peat Marwick. 9 Q. Let me direct your attention to the 10 time period in June of 1986. Do you recall, sir, 11 whether there was a controversy over whether 12 United must recognize a profit on the sale of the 13 mortgage-backed securities from what we've been 14 calling Joe's portfolio? 15 A. Yes. 16 Q. Let me ask you to turn to the next tab 17 in your materials which is A116; and it is the 18 United Savings Association of Texas board report 19 for August 14, 1986. 20 Do you see that, sir? 21 A. I have it. 22 MR. VILLA: I move this into evidence, 6271 1 Your Honor. 2 MR. GUIDO: No objection, Your Honor. 3 THE COURT: Received. 4 Q. (BY MR. VILLA) Let me direct your 5 attention to Page 1 which is -- of the performance 6 report which is K004848. 7 MR. GUIDO: I'm sorry. What number? 8 MR. VILLA: K004848. 9 A. I have it. 10 Q. (BY MR. VILLA) And you would have 11 been involved in the preparation or review of the 12 performance report; is that right? 13 A. Yes, sir. 14 Q. Let me direct your attention to the 15 second and third paragraphs, and let me read them. 16 Quote, "A change in accounting treatment caused a 17 restatement of earnings for the first quarter. It 18 resulted from a change in recording gains on the 19 sale of mortgage-backed securities and increased 20 net income in the first quarter by $25.2 million. 21 The net income previously reported for the first 22 quarter was based on the treatment of deferring 6272 1 gains from the sale of mortgage-backs and rolling 2 them into the basis of the newly-purchased 3 securities. In June, it was determined that 4 proper accounting would be to recognize 5 gains/losses at the time of sale, thus requiring a 6 restatement of first quarter earnings." 7 Do you see that, sir? 8 A. I do. 9 Q. Now, sir, let me ask you: Do you 10 recall what United's initial position was as to 11 whether or not it should recognize gain on the 12 sales of the mortgage-backed securities from Joe's 13 portfolio which resulted from the roll-down and 14 dropping interest rates? 15 A. Well, we felt that they should be 16 deferred. Of course, we talked to Peat Marwick 17 about that because there was no change in the 18 liability side; and, therefore, they would be 19 deferred. But Peat Marwick came back, as I 20 recall, after discussing this with their New York 21 office and said, "You have to make this change, 22 and we'll have to restate the first quarter." 6273 1 Q. Now, when you talked to Peat Marwick, 2 which office of Peat Marwick did you talk to 3 initially? 4 A. Well, we talked to the local -- the 5 Houston office. That's who we would deal with. 6 Q. And you reported your first quarter 7 earnings based upon your discussions with the 8 Houston office; is that right? 9 A. Yes. 10 Q. And sometime during the second quarter, 11 you heard from the New York office; is that right? 12 A. Well, they did. 13 Q. Oh. Peat Marwick heard from their 14 New York office? 15 A. Yes, right. We wouldn't deal with 16 their New York office. We dealt with the Houston 17 office; and they came back and said, "We were 18 wrong." 19 Q. Do you recall personally having any 20 meetings with Peat Marwick auditors? 21 A. Surely. 22 Q. Can you describe those meetings, the 6274 1 positions that United took in those meetings? 2 A. Well, we were distressed that they made 3 us change. The fact that -- it's embarrassing to 4 make a change like this because we had the 5 assurance the first time that they were correct 6 and, like in all major accounting matters, we 7 would clear it with them in advance. 8 Q. Were you arguing during those meetings 9 that the income should be recognized or not 10 recognized? 11 A. No. It -- we recognized it should be 12 deferred because that was the original position. 13 Q. And Peat Marwick was telling you that 14 it had to be recognized; is that right? 15 A. After they came back from the New York 16 meeting, yes. 17 Q. And the final result of that was that 18 Peat Marwick's view prevailed -- 19 A. Well, it would have to. 20 Q. -- or they wouldn't certify your 21 financial statements? 22 A. Well, that's right. They said we were 6275 1 wrong. So, we made this change; and, of course, 2 that's what we were saying here in this August 8th 3 letter. 4 Q. And it prevailed over your objections? 5 A. Yes. 6 Q. Did Mike Crow report to you, sir? 7 A. Yes, he did. 8 Q. Was he directly involved in accounting 9 issues? 10 A. Oh, very much so. He is -- as chief 11 financial officer, that was one of his main 12 responsibilities. 13 Q. You would only come in at the highest 14 levels of accounting policies for United; is that 15 right? 16 A. That's correct. 17 Q. You would give the highest level policy 18 direction to United's accounting staff? 19 A. That's correct. 20 Q. Would you attend important meetings of 21 Peat Marwick? 22 A. I would attend some. I would talk to 6276 1 the partners and see them, but Mike would handle 2 the day-to-day or -- if there were day-to-day 3 meetings with them, he and his staff. 4 Q. There has been an allegation in this 5 case that, quote, "The respondents misrepresented 6 their activities to outside auditors," close 7 quote. 8 Let me ask you, sir: Did United 9 misrepresent its activities to the outside 10 auditors? 11 A. No. I consider that a preposterous 12 allegation. 13 Q. You wouldn't permit that, sir, would 14 you? 15 A. Never. Never. Would not happen. 16 Q. How long have you known Mike Crow? 17 A. Since 1972. 18 Q. Do you think he would permit it, based 19 upon your observation of him? 20 A. I wouldn't have hired him had I felt 21 like that. 22 Q. Did you ever make any effort to hire -- 6277 1 hide from the auditors the extent of trading in 2 the mortgage-backed securities portfolios? 3 A. No. 4 Q. In fact, the trading activity is 5 obvious if you go and look at the portfolio. 6 Right? 7 A. That's correct. 8 Q. And the mortgage-backed securities 9 portfolios were extremely large? 10 A. That's right. 11 Q. Peat Marwick devoted substantial 12 attention to them, based upon your observation? 13 A. They did. Crow would have constant 14 meetings with them. 15 Q. Now, you left on -- according to 16 records I've seen -- January 2nd, 1987, but in any 17 event, at the end of the year 1986. Right? 18 A. Yes. That may be official record, but 19 I actually -- Christmas/New Year's week was when I 20 stopped working there. 21 Q. So, you would have been there through 22 the period covered by United's 1986 10K? 6278 1 A. Yes, but not involved in the 2 preparation or the results. 3 Q. Not involved in its preparation. Let 4 me show you United's 1986 10K which is 5 Exhibit A3022 which is already in evidence. 6 Do you have it in front of you, the 7 next tab? 8 A. I have it. 9 Q. There has been some suggestion in this 10 case that United did not disclose the impact of 11 the interest rate swaps. So, I'll ask you to turn 12 to Page 54, Footnote 10 of the 10K. 13 Do you see that, sir? 14 A. I'm not quite with you. What page? 15 I'm sorry. 16 Q. Page 54. There is a Bates stamp number 17 of OFD12900. There's so many numbers on these 18 pages. 19 MR. GUIDO: 12900? 20 MR. VILLA: I think so, yeah. There is 21 also CN771197 and Page 54. 22 A. I'm out of sequence. I'm sorry. The 6279 1 pages don't go. 2 Q. (BY MR. VILLA) This copy, the pages 3 are mixed? May I? 4 A. Yeah. 5 Q. Do you have it before you now, sir? 6 A. Yes. 7 Q. Interest rate exchange agreements, 8 those are interest rate swaps. Right? It's 9 another name for interest rate swaps; is that 10 right? 11 A. Yes, that's correct. 12 Q. So, they are described in the 10K? 13 A. Right. 14 Q. Is that right? 15 A. That's correct. 16 Q. Did you ever hear anyone say that "We 17 should try to hide or fail to disclose the 18 interest rate swaps"? 19 A. No, sir. 20 Q. Now, as a result of the fall in 21 interest rates in late 1985 and early 1986 and the 22 restatement of income in June of 1986, did the 6280 1 spread on the mortgage-backed securities drop or 2 become negative? Do you remember that? 3 A. I can't recall the specifics, but that 4 would have been the result. 5 Q. And do you recall whether USAT 6 disclosed that to its regulators? 7 Let me show you some documents. 8 A. I need a document, yes. 9 Q. Okay. It's been alleged in this case 10 that once USAT realized that the rapid drop in 11 interest rates would reduce the spread or make it 12 become negative, it did not correct any prior 13 statements. So, I'm going to ask you to look at 14 the next document which is A10663 which is the 15 business plan that Mr. Guido showed you. 16 A. Yes. 17 MR. VILLA: Your Honor, I'm informed 18 that the 1986 10K, Exhibit A3022, has not been 19 entered. I find that hard to believe, but I'm 20 usually wrong when I make these judgments. So, I 21 move it into evidence, Your Honor. 22 MR. GUIDO: No objection. 6281 1 THE COURT: That's A3022? 2 MR. VILLA: Correct. 3 THE COURT: All right. Received. 4 Q. (BY MR. VILLA) Let's turn back to the 5 business plan. And this has been introduced at 6 Tab 184. This is the business plan that was sent 7 to the regulators in August of 1986. Mr. Guido 8 asked you a number of questions about this 9 document. 10 Do you recall that? 11 A. Yes. 12 Q. Turn to Page OW005471. On the 13 right-hand side, it says K006775. It's about five 14 pages from the front. 15 A. I have it. 16 Q. Do you see the entry that says 17 "structured arbitrage program"? 18 A. I do. 19 Q. Let me ask you, sir -- in the second 20 full paragraph, can you see that? 21 A. I do. 22 Q. I believe you were asked a little bit 6282 1 about mortgage-backed securities in this, but the 2 following sentence wasn't read to you. I'll read 3 it to you. It's the second sentence in the second 4 full paragraph on this page. It says, quote, 5 "During periods of rapidly changing interest 6 rates, the interest rate spread on the structured 7 arbitrage program can be reduced or become 8 negative." 9 Do you see that? 10 A. I do. 11 Q. And then it goes on to discuss what 12 happens with the fall in interest rates since the 13 latter part of 1985. 14 Do you see that, sir? 15 A. I do, yes. 16 Q. Does that accurately reflect what you 17 understood had happened to the spread on the 18 mortgage-backed securities portfolio when interest 19 rates began rapidly falling? 20 A. Yes, sir. 21 Q. Is this statement in this 22 document/business plan sent to the regulators, in 6283 1 your judgment, consistent or inconsistent with the 2 allegation that United failed to correct any 3 misstatements in its earlier letters about what 4 would happen to the spread on the MBS 5 risk-controlled arbitrage? 6 A. No. It's consistent with what we tried 7 to tell them. 8 Q. Now, let me ask you to turn to Page 12 9 of this document which bears Bates stamp 10 No. K006783. 11 A. Okay. 12 Q. Do you see at the top the employment 13 contracts? 14 A. Yes. I have it. 15 Q. Do you remember I asked you a question 16 at the beginning of your examination as to whether 17 or not United disclosed your employment contracts 18 also in business plans? 19 A. Right. 20 Q. And you can see by looking at this that 21 it did disclose it in business plans; isn't that 22 right, sir? 6284 1 A. That's correct. 2 Q. Mr. Guido asked you a number of 3 questions about representations to the regulators 4 regarding United's plans to hedge securities in 5 its new subsidiary. 6 Do you remember that? 7 A. That's correct. 8 Q. Let me ask you to direct your attention 9 to the next tab in your book, which is a 10 September 4, 1986 letter. It carries No. A10664, 11 and it's Tab No. 183. This is the document that 12 Mr. Guido used to question you about the 13 representations to the regulators about the degree 14 of hedging in the mortgage-backed securities 15 portfolio. 16 Do you remember that, sir? 17 A. Yes. 18 Q. Let me direct your attention to the 19 paragraph at the bottom of the page, and let me 20 read the first two sentences which I believe are 21 the same sentences that he read. Quote, "United 22 MBS Corporation will acquire mortgage-backed 6285 1 securities by engaging in reverse repurchase 2 transactions. The association" -- it says "my" 3 but I think it means "may" -- "further hedge these 4 acquisitions either directly or through general 5 hedges held by the association on a consolidated 6 basis." 7 Do you see that? 8 A. I do. 9 Q. Now, this is the United MBS subsidiary 10 we're talking about; isn't that correct? 11 A. That's correct. 12 Q. Now, as I see this document, it says, 13 "The association may further hedge these 14 acquisitions." 15 Do you see that, sir? 16 A. I do. 17 Q. You don't see anything there that says 18 they will further hedge these acquisitions, do 19 you, sir? 20 A. No. 21 Q. Now, it also says on this document that 22 they may do it either directly or through general 6286 1 hedges held by the association. 2 Do you see that? 3 A. That's correct. 4 Q. Now, "the association" is a reference 5 to United Savings Association of Texas; is that 6 right? 7 A. That's correct, surely. 8 Q. So, the hedges that are referred to in 9 here, as you read this document, would be -- could 10 be held at the association level; is that right? 11 A. That's true. 12 Q. Do you know of any contrary 13 representations made to the regulators besides 14 those set forth in here about where the hedges -- 15 the extent of hedging for the United MBS 16 subsidiary or where the hedges would be held? 17 A. No, sir. 18 Q. Do you recall, Mr. Williams, whether, 19 in the latter half of 1985, USAT established and 20 shortly thereafter collapsed a subsidiary known as 21 United Mortgage Finance? 22 A. Yes, I recall. 6287 1 Q. And what do you recall about the 2 reasons for collapsing United Mortgage Finance? 3 A. It's sketchy, but I believe it had to 4 do with the liability limits on the subsidiary. 5 Q. Do you recall anything about a 6 regulatory change? 7 A. Well, there may have been, yes, that 8 led to that. 9 Q. Which -- now we're looking at the time 10 period -- basically the fourth quarter of 1985. 11 Which inside lawyer at UFG or USAT was 12 most familiar with thrift regulations in the 13 fourth quarter of 1985? 14 A. Well, Jim Pledger was always the most 15 familiar. I can't recall when Jim left, but Jim 16 was certainly the most knowledgeable on S&L 17 regulations. 18 Q. Art Berner had just joined United in 19 October of 1985, hadn't he? 20 A. That's correct, and Art was more 21 involved in corporate matters. 22 Q. And he hadn't come from a thrift 6288 1 regulatory background, had he, sir? 2 A. No, sir. 3 Q. So, during this time period, who do you 4 believe that United's management would have gone 5 to for advice on thrift regulatory issues? And 6 that's the fourth quarter of 1985. 7 A. Mr. Pledger. 8 Q. Do you know, after Mr. Pledger left 9 United Savings Association of Texas, what position 10 he took? 11 A. He became the commissioner of the 12 Texas S&L. 13 Q. Do you recall, sir, that there came a 14 time when United hired Sandy Laurenson from 15 Salomon Brothers to take over its MBS portfolio? 16 A. She came late in my tenure. I think it 17 was in the fourth quarter of 1986, I believe. 18 Q. Did you believe that she was adequately 19 qualified for the position of portfolio manager? 20 A. Yes. 21 Q. Did you -- did USAT also hire 22 consultants to work with her? 6289 1 A. Yes. We had a number of consultants. 2 Q. Do you recall, for example, the 3 consulting firm of Smith Breeden from Chapel Hill, 4 North Carolina? 5 A. Yes. 6 Q. What did they do? 7 A. Well, they reviewed the portfolios. 8 They were a sounding board, gave advice. We 9 bounced ideas off of them. They ran models for 10 us. 11 Q. How about Walter Muller? Do you recall 12 Walter Muller? 13 A. Yes. A professor, I believe. 14 Q. Did you believe, sir, that United had 15 hired qualified personnel to manage its 16 mortgage-backed securities portfolios while you 17 were there? 18 A. I do. 19 MR. VILLA: Your Honor, we've gone an 20 hour and 25 minutes. I have about another 21 30 minutes of my examination. Perhaps we should 22 break. 6290 1 THE COURT: All right. We'll take a 2 short recess. 3 4 (A short break was taken 5 at 10:22 a.m.) 6 7 THE COURT: Be seated, please. We'll 8 be back on the record. 9 Mr. Villa, you may proceed. 10 MR. VILLA: Thank you, Your Honor. 11 (10:44 a.m.) 12 Q. (BY MR. VILLA) Mr. Williams, were you 13 on the investment committee? 14 A. Yes, I was. 15 Q. Can you describe an investment 16 committee meeting? 17 A. Yes, I can. There would be ideas 18 brought before the committee for perhaps new 19 transactions to be discussed. There would be 20 discussions of previous transactions that had been 21 made, a general review of the market, thoughts 22 from members of the committee about what might be 6291 1 taking place. And then if there were proposals 2 for new investments, they would -- a case would be 3 made for them, and then they would be voted upon. 4 Q. Did any one person dominate the 5 meetings? 6 A. No. Well, the people who would make 7 the proposal, Huebsch would or Phillips perhaps, 8 because they would run -- it would basically be 9 their meeting, and others would be sitting there. 10 Q. And each one of the portfolios -- 11 equity arbitrage, mortgage-backed securities, and 12 junk bonds -- had its own manager? 13 A. Yes. 14 Q. How were decisions made? 15 A. Well, after a presentation would be 16 made, if a new proposal was on the agenda, Huebsch 17 would ask or Phillips would ask any comments and 18 ask for approval. 19 Q. Was it a collegial -- I mean, was it by 20 kind of consensus? 21 A. Yes. Yes. If someone objected, they 22 would say so for any reason. 6292 1 Q. Was there what you would call open 2 debate about the wisdom of various proposed 3 actions? 4 A. Yes. 5 Q. Was every recommendation by a portfolio 6 manager approved? 7 A. I don't believe so. As I recall, we 8 would table them. We would say, "This is not the 9 time to do something like this" or -- but I can't 10 remember ever -- every meeting was unanimous. 11 Q. You saw the minutes of the investment 12 committee afterwards, didn't you, sir? 13 A. Yes. 14 Q. Were the minutes, in your judgment, an 15 accurate reflection of the substance of the 16 meeting? 17 A. Yes. 18 Q. Did you ever hear anybody say, "Let's 19 leave something out of the meeting minutes"? 20 A. Not while I was there. 21 Q. And you know that the investment 22 committee minutes were reviewed regularly by the 6293 1 outside auditors. Right? 2 A. That's correct. 3 Q. And they were also reviewed regularly 4 by the Federal Home Loan Bank of Dallas examiners. 5 Right? 6 A. Yes. 7 Q. Now, it's been said in this courtroom 8 that United decided to purchase more 9 mortgage-backed securities in mid-1986 because 10 they had no way to continue to operate a 11 qualified -- no -- operate as a qualified thrift 12 under the qualified thrift lender test except by 13 holding mortgage-backed securities if they wanted 14 to continue to invest in junk bonds. Okay? 15 Did you hear that? 16 A. I heard what you said. 17 Q. Now, sir, you were deeply involved in 18 United's operations in mid-1986? 19 A. That's correct. 20 Q. Sir, was the reason that United bought 21 more mortgage-backed securities in 1986 so that it 22 could continue to buy junk bonds? 6294 1 A. No, sir. 2 Q. And you know that because you were -- 3 you were yourself involved in the decision making. 4 Right? 5 A. That's correct. 6 Q. Now, as the economic conditions in 7 Texas worsened, United sold off a number of its 8 appreciated assets for gains; isn't that right? 9 A. That's true. 10 Q. It sold off its branch system? 11 A. Well, the big -- that was back at the 12 end of '84 when the main branch sale was made, and 13 I believe we made a few smaller ones subsequent to 14 that. 15 Q. Did it sell off its loan servicing, 16 sir? 17 A. We sold packages of servicing. I 18 believe the servicing -- we were still in the 19 servicing business when I left. 20 Q. Did United sell off some of its real 21 estate? 22 A. I believe we sold some real estate 6295 1 packages, yes. 2 Q. This wasn't a secret from the 3 regulators, was it, sir? 4 A. No, sir. 5 Q. Was this part of any plan to mislead 6 the regulators into believing United was meeting 7 its minimum regulatory capital requirements? 8 A. No, sir. 9 Q. Was this part of a plan to stave off 10 the regulators from United? 11 A. No, sir. 12 Q. Was this part of a plan to keep United 13 alive so it could buy more Drexel junk bonds? 14 A. No, sir. 15 Q. Was there anybody you worked with at 16 United who you believed was not doing his best to 17 help United survive? 18 A. No, sir. 19 Q. And would you include in that group 20 Mike Crow? 21 A. Surely. 22 Q. And would you include in that group 6296 1 Art Berner? 2 A. Yes, sir. 3 Q. And Ron Huebsch? 4 A. Yes, sir. 5 Q. Barry Munitz? 6 A. Yes, sir. 7 Q. And Charles Hurwitz? 8 A. Yes, sir. 9 Q. And finally, Jenard Gross? 10 A. Yes, sir. 11 Q. In the years that you had worked with 12 the respondents, did you ever see them do anything 13 that you would characterize as reckless? 14 A. No, sir. 15 Q. Did you ever see them do anything that 16 you would characterize as a breach of their duty 17 to United? 18 A. No, sir. 19 Q. Did they work long hours? 20 A. Yes. 21 Q. And did they appear to you to be 22 committed to the success of United? 6297 1 A. They were. 2 Q. Mr. Williams, up until the time you 3 left and beyond, you believed that United would 4 survive, didn't you, sir? 5 A. I did. 6 Q. In fact, you essentially put your life 7 savings in to buy United stock, didn't you, sir? 8 A. Well, I did. I bought a lot of stock 9 when I arrived. 10 Q. How much money did you lose in the 11 stock of UFG? 12 A. I hate to admit that in this court; but 13 I lost $450,000. 14 Q. And that was essentially your life 15 savings at the time? 16 A. That was a big piece of it. 17 Q. When you participated in decisions such 18 as approving loans, whose money did you think you 19 were putting at risk? 20 A. I always felt it was my own. I treated 21 it like the company's was my own. 22 Q. When you participated in decisions such 6298 1 as going back into mortgage-backed securities or 2 going into mortgage-backed securities, whose money 3 did you think you were putting at risk? 4 A. I always felt I was at risk and the 5 other shareholders. 6 Q. You weren't trying to victimize United, 7 were you, sir? 8 A. I did everything I could to help it. 9 Q. And as far as you could tell, the other 10 people who were working at United felt the same 11 way? 12 A. Yes. 13 Q. Now, you left United in early -- in 14 either late 1986 or early 1987; is that right? 15 A. End of '86, yes. I was not there in 16 '87. 17 Q. Mr. Guido showed you a memo, which I 18 won't bother to show you, about running rates that 19 you prepared in November of 1986. 20 Do you recall seeing that? 21 A. I do. 22 Q. You don't believe you were fired for 6299 1 writing that memo, do you, sir? 2 A. No, sir. 3 Q. Now, the team of the most-senior 4 executives at United when you left were Jenard 5 Gross, Art Berner, Mike Crow, and, to a lesser 6 extent, Barry Munitz. Right? 7 A. Yes. 8 Q. And when you left, no one was hired to 9 replace you; isn't that right? 10 A. No. In fact, I was told that -- 11 Dr. Munitz told me I would not be replaced, that 12 Mr. Gross would just take both titles. It was 13 appropriate that he do so, and I agreed with him. 14 Q. Now, the work that you had been 15 performing was simply picked up by the other 16 members of senior management? 17 A. Yes, as I was told it was. 18 Q. Would you think it might be fair at 19 some point to raise their salaries to reflect this 20 additional work? 21 A. Well, when anybody gets promoted, you 22 give them more money, if they are taking on more 6300 1 responsibilities. 2 Q. When you left United at the end of 3 1986, did you do any work for any other savings 4 and loan associations in Texas? 5 A. Oh, a number of them, yes. I thought I 6 testified earlier that I had my own -- formed a 7 little company and worked with both troubled and 8 untroubled savings and loans in the state. 9 Q. What was the time period in which you 10 did this work? 11 A. Essentially, two years. A little over 12 two years. All of '87, '88, and early '89. 13 Q. And what was the nature of the work you 14 actually did? 15 A. I did a number of things. I worked -- 16 the job was created by the regulators asking me to 17 help with other institutions that were having 18 trouble. And I did that, but that spawned off 19 into other areas of institutions that were in 20 reasonably good health at the time but wanted to 21 stay that way. 22 I also worked with investors that were 6301 1 looking to buy institutions, as well. So -- and I 2 helped out with other institutions in the 3 Southwest Plan as that government activity had 4 picked up. 5 Q. Did any of your work require approval 6 by the federal regulators? Did you personally 7 have to be approved to perform that work? 8 A. Yes, I did. 9 Q. And in some cases, was the contracting 10 party for your work actually the Federal Home Loan 11 Bank of Dallas? 12 A. Well, they approved -- they didn't pay 13 me. I was not on the payroll of the Federal Home 14 Loan Bank or the Texas Savings and Loan League or 15 Texas Savings and Loan, but I -- but they had to 16 approve my going into these thrifts that were 17 under supervision. 18 Q. And you needed the specific approval of 19 certain federal regulators and federal supervisory 20 people. Right? 21 A. In some cases, I had contracts. 22 Q. Do you recall any of the names of the 6302 1 people who had to approve your contracts? 2 A. Well, yes. It was mostly through 3 Mr. Selby's group at that time and Neil Twomey, 4 who worked for him, and I think Mr. Thomas and, of 5 course, the commissioner. I didn't have contracts 6 with the commissioner's office, but I couldn't -- 7 I had to have their approval to go in. 8 Q. So, you needed the -- this is Mr. Neil 9 Twomey who was the supervisory agent for United? 10 A. Yes, but he was doing other things. He 11 worked specifically on another thrift that I 12 worked with. 13 Q. The same Neil Twomey who was the 14 supervisory agent for United was also the person 15 who had to approve your work on other troubled 16 thrifts after you left United; is that right? 17 A. If he was involved with them, yes. As 18 it happened, he was involved with one that I was 19 asked to go in to help with. 20 Q. Did Mr. Twomey ever disapprove you on 21 the ground that your employment contracts with 22 United had been unsafe or unsound? 6303 1 A. No. 2 Q. Did Mr. Twomey ever disapprove you on 3 the ground that you had mismanaged United during 4 the tenure 1983 to the end of 1986? 5 A. No. 6 Q. Did he ever accuse you of 7 mismanagement? 8 A. Never. 9 Q. Did he ever say anything negative about 10 the operations of United during that time 11 period -- 12 A. No, sir. 13 Q. -- to you? 14 A. No. 15 Q. Thank you. 16 MR. VILLA: No further questions. 17 THE COURT: Do any of the respondents 18 have -- 19 MR. BLANKENSTEIN: I have a few 20 questions, Your Honor. 21 THE COURT: All right. 22 Mr. Blankenstein. 6304 1 2 CROSS-EXAMINATION 3 4 (10:55 a.m.) 5 Q. (BY MR. BLANKENSTEIN) Good morning, 6 Mr. Williams. 7 A. Good morning. 8 Q. I represent Jenard Gross in these 9 proceedings. 10 Mr. Williams, if I remember your direct 11 testimony correctly, you were president of USAT 12 when Mr. Gross was named chief executive officer 13 and chairman of the board of directors; is that 14 correct? 15 A. That's correct. 16 Q. And Mr. Gross was -- formally joined 17 USAT in February of 1985; is that correct? 18 A. Officially, yes. 19 Q. And you left at the end of 1986; is 20 that correct? 21 A. That's correct. 22 Q. So, if I did the arithmetic right, you 6305 1 worked with Mr. Gross for about two years? 2 A. That's correct. 3 Q. Did you report directly to Mr. Gross 4 during that time? 5 A. Directly to him. 6 Q. Did you and Mr. Gross divide up the 7 responsibilities for managing USAT during that 8 time? 9 A. Yes. Essentially, I kept what I was 10 doing before he arrived; and he picked up the real 11 estate activities and everything else that -- the 12 asset side of the business. 13 Q. So, would it fair to say that subject 14 to Mr. Gross' general oversight, you were the 15 operational side of USAT while Mr. Gross focused 16 on the real estate? 17 A. Yes, day to day; but we were in 18 constant dialogue. I mean, I let him know what I 19 was doing. He wanted to know, and he should know. 20 He was my boss. 21 Q. How would you describe your working 22 relationship with Mr. Gross? 6306 1 A. It was positive, open. He was -- he 2 always listened. He asked good questions. I 3 found him penetrating and a good individual to 4 work with. 5 Q. Did you serve together with Mr. Gross 6 on various committees? 7 A. Yes. He was on -- that's correct, yes. 8 Q. Did you serve with him on the executive 9 committee? 10 A. Yes, I did. 11 Q. The investment committee? 12 A. Yes. 13 Q. The senior loan committee? 14 A. Yes. 15 Q. Would it be fair to say that you worked 16 closely with Mr. Gross during that two-year period 17 of time? 18 A. Oh, absolutely. 19 Q. How would you characterize Mr. Gross' 20 management style based on your observations during 21 that time? 22 A. Well, he was very direct. He was 6307 1 penetrating. He took copious notes. He would -- 2 and he would follow up on them. I mean, he was 3 hands-on. 4 Q. Would you call him an active CEO? 5 A. Yes. 6 Q. Based on your observations of 7 Mr. Gross, would you characterize him as his own 8 man or someone who was dominated by USAT's board 9 of directors or UFG's board of directors? 10 A. No. He was his own man. He was very 11 smart. 12 Q. Mr. Gross wasn't dominated by 13 Mr. Hurwitz; is that right? 14 A. No. He would talk to Mr. Hurwitz. I 15 think Mr. Hurwitz would defer to him many times. 16 Q. During the time you worked with 17 Mr. Gross, did you ever come to believe that 18 Mr. Hurwitz influenced Mr. Gross to have USAT 19 engage in some activity that would benefit 20 Mr. Hurwitz personally or USAT or Mr. Hurwitz' 21 company, MAXXAM, and not USAT? 22 A. I never observed anything like that. 6308 1 Q. Did you find Mr. Gross to be honest and 2 trustworthy? 3 A. Yes, sir. 4 Q. Did you ever know Mr. Gross to mislead 5 the federal regulators about anything that USAT 6 was doing? 7 A. No. The contrary. Mr. Gross always 8 wanted to make sure we were making the right 9 contact, making trips to Dallas to visit with 10 them. 11 Q. Did you ever find that Mr. Gross, in 12 managing USAT, acted with disregard of any of the 13 federal regulations or rules of the federal 14 regulators? 15 A. No, sir. 16 Q. Did you find Mr. Gross to be someone 17 who wanted to keep USAT within the scope of the 18 appropriate rules and regulations? 19 A. Yes, he did. 20 Q. Although I think you said real estate 21 was not your principal area of concern, you did 22 serve with Mr. Gross on the senior loan committee; 6309 1 is that right? 2 A. That's correct. We would defer to his 3 judgment because we felt that he was quite 4 knowledgeable on these matters. 5 Q. How would you characterize Mr. Gross' 6 approach to making real estate loans? 7 A. Well, he put the two -- we mentioned 8 earlier -- Childress and Graham reported to him, 9 and he was very penetrating in his questions and 10 analysis of the two whenever they had a proposal. 11 Q. Is it fair to say that Mr. Gross 12 stressed the thorough review before USAT would 13 undertake any real estate loan or make any 14 investment in real estate? 15 A. Yes. 16 Q. I think you spoke a little bit with 17 Mr. Villa with respect to the economic environment 18 that you faced at USAT while you were there. On a 19 scale of 1 to 10 with 1 being the most favorable 20 and 10 being the least favorable, how would you 21 rate the overall economic environment in which 22 USAT operated while he was its president? 6310 1 A. Well, it probably moved. I don't think 2 it was ever better than 5 and probably moved 3 toward 8 or 9, maybe 10. It's all hindsight, of 4 course; but it was very difficult by the time I 5 left. 6 Q. At the time, did you believe that you 7 and Mr. Gross and the other senior managers of 8 USAT, including the respondents, were doing the 9 best they could under difficult circumstances? 10 A. Very much so. 11 Q. Did you think that you did anything 12 wrong in trying to meet the challenges posed by 13 those economic conditions? 14 A. No. 15 Q. Did you think that the respondents did 16 anything wrong? 17 A. No. 18 Q. Now, with the benefit of ten years 19 of -- to reflect on what happened and in face of 20 the OTS charges in this case, do you still believe 21 that the respondents -- Mr. Gross, the others, and 22 yourself -- did the best you could to deal with 6311 1 the problems facing USAT? 2 A. I felt we had the smartest people to 3 deal with some very difficult situations. 4 Q. Do you still believe that you and 5 Mr. Gross and the other respondents didn't do 6 anything wrong? 7 A. No, sir. 8 MR. BLANKENSTEIN: I have no other 9 questions. 10 THE COURT: Any other questions over 11 here? 12 MR. KEETON: No, Your Honor. 13 MR. EISENHART: No questions, 14 Your Honor. 15 THE COURT: Redirect, Mr. Guido? 16 MR. GUIDO: Thank you, Your Honor. 17 18 REDIRECT-EXAMINATION 19 20 (11:01 a.m.) 21 Q. (BY MR. GUIDO) Mr. Williams, you 22 testified about the financial condition of UFG at 6312 1 the outset of your cross-examination. 2 Do you recall that? 3 A. Yes, sir. 4 Q. And you said that it was a merger that 5 made UFG or USAT less financially viable? 6 A. That was our opinion, yes, sir. 7 Q. And what was that institution? 8 A. The Houston First -- I'm sorry. You 9 asked about the merger? 10 Q. What was that institution, the 11 institution that made UFG less financially -- 12 A. The acquisition of Houston First. 13 Q. And were there any -- and you testified 14 that there was stock that changed hands; is that 15 right? 16 A. Well, yes. Common stock was issued 17 for -- to the shareholders of -- and preferred 18 stock issued for -- to the shareholders of Houston 19 First. 20 Q. Okay. Who received the preferred 21 shares? 22 A. Whoever owned them. 6313 1 Q. Do you recall who that was? 2 A. No. 3 Q. Do you recall who received the common 4 stock? 5 A. Well, for -- whoever the common 6 shareholders were, it would have been at that 7 time. 8 Q. Do you recall who they were? 9 A. No, sir. 10 Q. So, you don't know who received the 11 stock? 12 A. Not specifically, no. 13 Q. Now, did you discuss your testimony 14 today with anyone prior to giving your testimony? 15 A. No, sir. I'm sorry. The testimony -- 16 Q. Your testimony today. 17 A. No. 18 Q. Did you discuss that testimony with 19 anyone prior to your testimony today? 20 A. No. I met not with -- only with -- 21 just reading depositions and things like that that 22 you gave me and also -- 6314 1 Q. Did you discuss your testimony with 2 anyone prior to your cross-examination, subsequent 3 to your direct testimony? 4 A. No. No. 5 Q. Now, you indicated that the financial 6 condition of UFG was precarious? 7 A. That's correct. That's a term I used. 8 Q. Is that a fair characterization? 9 A. That's the word I used, yes. 10 Q. Did you ever discuss that with 11 Mr. Hurwitz at the time you first went to work at 12 USAT? 13 A. I did. I said to Charles -- I said, 14 "This is going to be a tough road to hoe here with 15 what we have." 16 And he said, "Jerry, I know that. But 17 I think that we can make it work." And that's 18 when I invested alongside of him. 19 Q. Okay. Now, did you receive any loans 20 to purchase any stock? 21 A. Well, I did. And I think I testified 22 to that last time, the stock that came from that 6315 1 one shareholder. I was one of the five or six 2 individuals that received a loan from UFG to 3 purchase the shares. 4 Q. Do you recall how great that loan was? 5 A. Yes. It was $192,000. That was part 6 of the loss I described earlier. 7 Q. Okay. Now, you testified on direct 8 that you asked to meet with Mr. Hurwitz after you 9 were told by Mr. Munitz you were to be fired. 10 Do you recall that? 11 A. Oh, I did, yes. 12 MR. KEETON: Excuse me, Your Honor. I 13 did not hear the question. Would the court 14 reporter read the question back? 15 THE COURT: Can you restate the 16 question? 17 MR. GUIDO: I'll just restate the 18 question. 19 MR. KEETON: Don't swallow it. 20 Q. (BY MR. GUIDO) You testified on 21 direct that you met with Mr. Hurwitz at your 22 request after you were told by Mr. Munitz you were 6316 1 to be fired. 2 Do you recall that? 3 A. Oh, I did, sure. 4 Q. And you testified that you wanted to 5 hear from Mr. Hurwitz what Mr. Munitz had said so 6 that you could get it straight from Mr. Hurwitz? 7 A. I didn't doubt Dr. Munitz. I just felt 8 that after working for him for -- and for the 9 company for a little over three years, that I just 10 would like to see Charles Hurwitz and just visit 11 with him a little bit about it all. 12 Q. Did you ask him anything at that 13 meeting when you met with Mr. Hurwitz? 14 A. We talked about everything. In fact, I 15 asked him -- I said, "Do you think you're going to 16 be better off without me gone?" It was not an 17 acrimonious meeting or anything like that. 18 He said, "Jerry, this is probably 19 right. What you've done for me and for the 20 company is all you can do. You probably do need 21 to move on." 22 And I really didn't disagree. I did 6317 1 ask him about the stock investment, though -- 2 Q. What about the stock investment? 3 A. -- that I had made. I asked him -- I 4 thought that it was appropriate that he probably 5 take me out of that as a result of it being -- 6 going into it and especially since the stock had 7 gone down. And that was the only thing I asked 8 him to do. 9 Q. So, what did you specifically ask him 10 to do? 11 MR. VILLA: Objection, Your Honor. 12 He's cross-examining the witness about his own 13 direct. The purpose of redirect is to elicit 14 additional questions about my cross-examination, 15 which was very short. I don't think the purpose 16 of redirect is to ask him further questions on 17 topics that he examined in his direct. We're 18 trying to get Mr. Williams out. 19 Ordinarily, I wouldn't make an 20 objection. But Mr. Guido's very skilled, and I'm 21 sure that he can limit his examination to my 22 cross. 6318 1 MR. GUIDO: Your Honor, I -- 2 THE COURT: Well, we'll hear it. Let's 3 proceed. 4 MR. GUIDO: I think this goes to the 5 compensation question he was asked questions about 6 on cross. 7 Q. (BY MR. GUIDO) You asked him to take 8 you out of the stock. What do you mean by that? 9 A. Well, I simply said, "Charles, I've 10 borrowed $192,000 from the company and that's" -- 11 and I think at that time, the stock was $7 a 12 share. It probably had half that at that time. 13 And I asked to be made whole. I asked not to lose 14 that if possible, if we could work that out. 15 Q. Did you ask him to forgive the debt? 16 A. I didn't ask him to forgive the debt 17 specifically. I asked him to -- actually, I was 18 hoping that he would simply make arrangements and 19 buy the stock back, which would satisfy the debt. 20 Q. Which would have then paid off the 21 debt? 22 A. Yeah, right. 6319 1 Q. And what did he say to you then? 2 A. He did not really answer specifically. 3 He said, "Dr. Munitz will work out your 4 settlement, and we'll be fair to you on your 5 contract." 6 Q. Did they buy back the stock? 7 A. No. 8 Q. Now, when did you first -- when were 9 you first approached with the idea to purchase 10 high-yield bonds? 11 A. Gosh. The '84 time frame, as I recall. 12 Q. Who approached you? 13 A. Well, that came up in one of the 14 executive committees, as I recall -- I can't 15 remember -- that it might be a good idea to do 16 that. 17 Q. Who raised the high-yield bonds at that 18 executive committee meeting? 19 A. It would have been Hurwitz or Phillips 20 or in the committee -- I just can't recall 21 specifically, but -- 22 Q. Were high-yield bonds purchased prior 6320 1 to Joe Phillips being hired at USAT? 2 A. I can't recall. I mean, the facts 3 would be what they are. I can't remember when we 4 did that the first time. 5 Q. If the facts were that they were 6 purchased prior to Joe Phillips being hired, would 7 Joe Phillips have been the one to have initiated 8 those purchases? 9 A. No, of course not. 10 Q. Now, do you recall whose idea it was to 11 invest in high-yield bonds? 12 A. I'm going to guess it was Mr. Hurwitz'. 13 Q. Did you have any experience with 14 high-yield bonds prior to it being raised with you 15 at USAT? 16 A. No. 17 Q. Did you have any experience in 18 evaluating the risks with high-yield bonds? 19 A. No, sir. 20 Q. Who was responsible, prior to Joe 21 Phillips coming to USAT, for purchasing the 22 high-yield bonds that were in USAT's portfolio? 6321 1 A. It would have had -- 2 MR. VILLA: Your Honor, I object. He's 3 testified quite clearly he doesn't remember 4 anything about this, and now he's -- this is the 5 tantamount to asking for utter speculation from 6 this witness. 7 MR. GUIDO: This witness was asked a 8 lot of questions -- 9 THE COURT: I'll deny the objection. 10 You may answer. 11 A. I can't recall when Huebsch became 12 involved, as well; but it would have been Huebsch 13 then. If Huebsch preceded Phillips, then he would 14 have been involved at that time. 15 Q. (BY MR. GUIDO) All right. And you 16 testified that you interviewed Joe Phillips for 17 the job? 18 A. I was one of many, yes. 19 Q. Do you recall how he came to your 20 attention? 21 A. He had been, I recall, at American 22 General; and someone had said they knew of him. 6322 1 And I can't recall who that was. I'd only be 2 guessing. 3 Q. Was it Ron Huebsch? 4 A. It may have been. 5 Q. Was it Charles Hurwitz? 6 A. It may have been. I did not know him, 7 but he came to our attention. 8 Q. But you don't know how he came to your 9 attention? 10 A. No. 11 Q. Now, who was responsible for managing 12 the high-yield bond portfolio after Joe Phillips 13 was hired? 14 A. Well, after Phillips was hired, it was 15 Phillips and Huebsch. 16 Q. Now, who did Joe Phillips report to? 17 A. He reported initially, I think, to 18 Crow. And then, I believe, he was directly under 19 Huebsch's responsibility, though, once Huebsch 20 became involved. 21 Q. Did Joe Phillips report directly to you 22 on his management of the high-yield bond 6323 1 portfolio? 2 A. He didn't really report to me directly. 3 He -- administratively, I was involved with him; 4 but not from the standpoint of what he did and the 5 investments he made. Those went through the 6 committee or through Mr. Huebsch. 7 Q. Did you have any experience with 8 high-yield bonds that would have qualified you to 9 supervise his activities? 10 A. No, not at all. 11 Q. Now, do you recall when the investment 12 committee was created? 13 A. I don't recall the specific date. 14 Q. Do you recall why it was created? 15 A. Well, because of the wholesale 16 strategy. If we were going to be involved in 17 investments, we felt it prudent to have an 18 investment committee and review these things. 19 Q. And had you had any experience prior to 20 the creation of the investment committee with 21 equity arbitrage investments? 22 A. Oh, no. 6324 1 Q. Had Michael Crow? 2 A. No, sir. 3 Q. Had Bruce Williams? 4 A. I doubt it, no. 5 Q. Had Jenard Gross? 6 A. Well, I can't answer about Mr. Gross. 7 I don't know what -- 8 Q. Had Charles Hurwitz? 9 A. I think so. 10 Q. Had Ron Huebsch? 11 A. Yes. 12 Q. Had Joe Phillips? 13 A. I don't know. 14 Q. Did you have any discussions with 15 anyone about the risks inherent in high-yield 16 bonds at or about the time that USAT began to 17 invest in high-yield bonds? 18 A. Oh, we did, yes. That was part of 19 committee discussion, what could go wrong and -- 20 Q. Which committee? 21 A. The investment committee or, if it 22 hadn't been formed, then the executive committee. 6325 1 At least the meetings of people that were there. 2 Q. Did you ever raise questions about the 3 riskiness of high-yield bonds as investments? 4 A. Sure. We all did. 5 Q. And what were your questions? 6 A. Well, the questions were could they -- 7 the credit quality of them. If things went bad, 8 you know, in some ways, it's like -- could they 9 be, like, a bad loan that would go bad. So, not 10 being familiar with them, we all raised questions 11 about them. 12 Q. Did anyone compare them with commercial 13 paper? 14 A. That may have been raised, yes. 15 Q. Had you ever been involved in 16 underwriting commercial paper? 17 A. No, sir. 18 Q. Had Mr. Gross? 19 A. I suspect not. I don't think he was. 20 Q. Had Mr. Crow? 21 A. No. 22 Q. Had Mr. Bruce Williams? 6326 1 A. No. 2 Q. Had Mr. Huebsch? 3 A. Yes. He would be involved. 4 Q. Had Mr. Hurwitz? 5 A. Yes. Mr. Hurwitz would. 6 Q. Did you ever question the advisability 7 of investing in high-yield bonds in light of 8 Drexel's predominant position in the high-yield 9 bond market? 10 A. That question came from me and from 11 others, as well. But others were -- it was not 12 only Drexel that was involved in high-yield bonds. 13 Other investment banking firms were also -- 14 Q. Answer my question. My question is: 15 Did you ever raise the question? 16 A. I don't recall. 17 Q. You don't recall that you ever raised a 18 question of whether or not it was advisable to 19 invest in high-yield bonds in light of the fact 20 that Drexel was -- 21 MR. KEETON: Your Honor, could you take 22 three "I don't recalls" -- the witness answered 6327 1 the question. 2 MR. GUIDO: He's answered the question 3 two different ways, Your Honor. 4 MR. KEETON: No, he didn't. 5 THE COURT: All right. I'll deny the 6 objection. Restate your question. 7 Q. (BY MR. GUIDO) Did you ever raise a 8 question about the advisability of investing in 9 high-yield bonds in light of Drexel's predominant 10 position in their market? 11 A. I don't recall that. 12 Q. Did you, at the time that USAT was 13 investing in high-yield bonds, know the percentage 14 of high-yield bonds that were purchased from 15 Drexel? 16 A. Yes, we had reports. 17 Q. Okay. And do you recall what those 18 percentages were? 19 A. No. They were high, but I don't recall 20 them. 21 Q. Did you know at that time that you were 22 receiving those reports that Drexel had 6328 1 underwritten the issuance of high-yield bonds for 2 MCO or MAXXAM Group, Inc.? 3 A. If I did, I can't recall it. It may 4 have been there. 5 Q. Do you recall discussing it? 6 A. No. 7 Q. Do you recall ever raising a question 8 about it? 9 A. I don't recall that. 10 Q. Now, is it your testimony you don't 11 recall or you didn't know at the time? 12 A. That I don't recall raising the 13 question. 14 Q. Okay. Did you know at the time? 15 A. I may have. It didn't cross my mind as 16 an issue. 17 Q. Now, in 1984 when the mortgage-backed 18 securities were purchased, do you recall who 19 suggested that there be investments in 20 mortgage-backed securities? 21 A. It was all part of the wholesale 22 strategy that we all talked about collectively, 6329 1 that we would exit some retail side and move 2 into -- into mortgage-backed securities. 3 Q. Now, you participated in the Sandpiper 4 meeting where the wholesale strategy was evolved? 5 A. I was there. 6 Q. And do you recall who made the proposal 7 for the wholesale strategy? 8 A. It was -- it was collective. It was 9 not -- we had all been talking about it. I don't 10 think the Sandpiper was a specific time where, all 11 of a sudden, the company decided to go one 12 different way. There had been discussions before 13 leading to the branch sale, leading to investment 14 in wholesale securities, and the like. 15 Q. Well, Mr. Bentley testified that he 16 initiated branch sales. Do you recall -- 17 A. Yes. 18 Q. -- that he did that? 19 MR. VILLA: Objection. I think it's 20 inappropriate to tell witnesses about what other 21 witnesses testified. If you do that, we'll be 22 re-reading this whole record to Mr. Williams. 6330 1 THE COURT: Restate your question. 2 Q. (BY MR. GUIDO) The branch sales were 3 initiated by Mr. Bentley, were they not? 4 A. Well, they were; but we all -- 5 remember, all this was fluid. We had different 6 people batting ideas around on what to do. 7 Q. And you had different people coming 8 in -- 9 A. Yes. 10 Q. -- to manage the institution, didn't 11 you? 12 A. We did. 13 Q. And you had people leaving? 14 A. We did. 15 Q. And the '84 time frame would you 16 characterize as a transition time frame? 17 A. Yes. 18 Q. And was the wholesale strategy a 19 culmination of the transition? 20 A. I'd say so. 21 Q. Now, when the decision was made to 22 initially invest in mortgage-backed securities, 6331 1 did anyone discuss that in the context of the 2 qualified thrift lender test? 3 A. Yes. That was always a concern, that 4 we had to make sure we were a qualified thrift 5 lender. 6 Q. Okay. And you were selling off 7 branches at the time, weren't you? 8 A. We were selling off branches, and we 9 were ceasing to -- on the retail side of making 10 home loans, as well, or at least cutting back. 11 Q. Were there any investments that you 12 could make to satisfy the qualified thrift lender 13 test once you were cutting back on branches and 14 cutting back on making -- 15 A. Mortgage-backed securities, yes. 16 Q. Anything else? 17 A. I can't recall. 18 Q. So, the -- so, you were aware 19 of discussions of the need to purchase 20 mortgage-backed securities in order to satisfy the 21 qualified thrift lender test? 22 A. Well, that wasn't the only reason we 6332 1 did that, as I said. That's always in your mind, 2 but the mortgage-backed security strategy was 3 to -- was to create a profit stream that would 4 hopefully be reliable. 5 Q. Well, if you didn't have the 6 mortgage-backed securities, you couldn't maintain 7 the thrift charter, could you? 8 A. Well, that's true. We knew that, 9 that's right. 10 Q. And did Mr. Gross know that? 11 A. Mr. Gross? 12 Q. Uh-huh. 13 A. Sure. 14 Q. Okay. Did Mr. Crow know that? 15 A. We all knew it. 16 Q. Okay. Did Mr. Huebsch know that? 17 A. He knew it. 18 Q. Did Mr. Hurwitz know that? 19 A. He knew it. 20 Q. Now, you testified on cross-examination 21 that one of the things that you were attempting to 22 do was to reduce the gap by going into this 6333 1 wholesale strategy. 2 Was one of the objectives to purchase 3 mortgage-backed securities that were hedged 4 against the interest rate gap? 5 A. Yes. 6 Q. Now, when -- you testified on 7 cross-examination about various aspects of 8 portfolios, and I think that there was about 9 $127 million that you testified about that was 10 outside of the so-called Joe's portfolio. 11 Was that a -- 12 MR. NICKENS: Your Honor, I object. 13 That's simply not accurate. The 14 127-million-dollar figure is the amount in Joe's 15 portfolio at the end of March 31 or at March 31, 16 1985. 17 MR. GUIDO: I misunderstood the 18 testimony, Your Honor. Excuse me. 19 Q. (BY MR. GUIDO) You testified, I 20 think, that there was $60 million in the portfolio 21 at December 31, 1984. 22 Do you recall that testimony? 6334 1 A. Yes. 2 Q. Okay. And was it your testimony that 3 that was not part of Joe's portfolio? 4 A. Well, I guess it had been there before 5 Joe arrived. 6 Q. So, it was there before he arrived in 7 late 1984? 8 A. I think that's correct. 9 Q. Okay. Was that a portfolio that was 10 hedged against interest rate risk? 11 A. Well, as I believe we saw in the 12 document at the end of '83 -- I can't recall what 13 I just looked at here. I can't recall 14 specifically the numbers that are related to it, 15 but it was prior to Joe coming. 16 Q. Did you have a mortgage-backed security 17 portfolio that was not hedged against interest 18 rate risk? 19 A. As I recall, the -- I think everything 20 was hedged, as we saw. 21 Q. So that your testimony about having 22 hedged portfolios in the mortgage-backed 6335 1 securities is that -- it's your understanding that 2 they were all hedged portfolios? 3 A. Best as I can remember. 4 Q. And is it your understanding they were 5 hedged with swaps? 6 A. Yes. 7 Q. And caps later on? 8 A. I believe -- yes, caps were used from 9 time to time; but I can't recall how and when. 10 Q. Now, who managed the mortgage-backed 11 security portfolios in 1985? 12 A. Huebsch and Phillips. 13 Q. Did Bruce Williams manage -- 14 A. Well, Bruce was very much involved in 15 it, too, working with Mike, yes. 16 Q. Was there a treasury portfolio in 1985? 17 A. Treasury portfolio? 18 Q. Yeah. Treasury portfolio of 19 mortgage-backed securities. 20 A. Well, I can't recall that term; but 21 Bruce may have had a portfolio that -- working in 22 hand with Huebsch -- that they used. I can't 6336 1 recall it. 2 Q. Okay. But it's your understanding that 3 the managers of the portfolios were Huebsch, one. 4 Right? 5 A. Yeah. And Phillips, but working with 6 Bruce and Mike to make just -- on the numbers 7 side. 8 Q. But in terms of managing the portfolio 9 in terms of maintaining the spread, whose 10 responsibility was that? 11 A. Huebsch and Phillips. 12 Q. Anyone else? 13 A. Well, Crow was involved and his staff. 14 Q. But did Crow have a portfolio separate 15 from Huebsch and Phillips? 16 A. No. 17 Q. Now, who supervised Joe Phillips prior 18 to the creation of the investment committee? 19 A. Well, Huebsch did; but, again, I can't 20 recall the time frame between the two of them. 21 But day to day, Crow may have dealt with him if 22 Huebsch came later. 6337 1 Q. Did you? 2 A. No. 3 Q. Had you had any experience with 4 supervising anyone managing a mortgage-backed 5 security risk-controlled arbitrage? 6 A. No. 7 Q. Did you make any decisions with regard 8 to that portfolio? 9 A. Only from the committee standpoint and 10 ask questions regarding it to see if it was 11 appropriate and proper. 12 Q. Now, you testified today about the 13 initial decision to purchase mortgage-backed 14 securities. 15 Do you recall that testimony? 16 A. Yes. 17 Q. Now, what was your role in that 18 decision-making process? 19 A. To raise -- to raise questions, to see 20 if it's appropriate, to see what kind of earnings 21 we could count on, to see if -- see if they fit. 22 Q. Now, you testified that one of the 6338 1 investment companies was Salomon Brothers that 2 made a presentation? 3 A. That's correct. 4 Q. And you testified that one of them was 5 Goldman Sachs? 6 A. I believe Goldman made a presentation, 7 as well. 8 Q. Did anyone else make a presentation? 9 A. Well, we had visits from Merrill later 10 on after the strategy was started based on 11 Salomon's presentation. But subsequent to that, 12 we were dealing with First Boston, Merrill-Lynch, 13 and others. 14 Q. Okay. But I'm talking about -- I'm 15 focusing on the initial decision. 16 A. Yes. It was essentially a Salomon -- 17 working with Salomon based on their 18 recommendations. 19 Q. Now, do you recall what Salomon 20 recommended? 21 A. Well, I can't recall the specifics; but 22 it was to move into a risk arbitrage program that 6339 1 was -- that was hedged and that would bring us a 2 steady stream of earnings within certain 3 parameters. 4 Q. And do you recall whether they 5 discussed with you the parameters of the risk? 6 A. Yes. As I recall, it was based on 7 about a 200 basis point swing that could be 8 counted on; that the spread would be maintained as 9 long as interest rates didn't move outside of that 10 range; that the earnings stream could be 11 protected. 12 Q. Do you recall what type of 13 mortgage-backed security they were talking about 14 when they were talking about that 200 basis point 15 range? 16 A. I can't recall specifics. I may have 17 but -- 18 Q. Now, when you talk about a range, you 19 mean plus or minus 100 points or plus or minus 20 200 points? 21 A. 200 basis points. That interest rates 22 would -- that net interest income could be 6340 1 depended upon within that time frame of a 200 2 basis point swing, if rates didn't move outside of 3 the 200 basis points. 4 Q. Well, I mean, a 200 basis point 5 swing -- some people refer to 100 minus, 100 plus. 6 Is that what you're talking about? 7 A. Well, we had both. We had both a 8 100 basis point move up or down or a 200 basis 9 point up or down. 10 Q. And it's your understanding that they 11 were advising you that you could maintain the 12 spread with 200 basis points up, 200 basis points 13 down? 14 A. Yes. 15 Q. Do you recall what coupon they were 16 talking about that that would have -- 17 A. I don't recall interest rates at that 18 time, no. 19 Q. But -- did they make a written 20 presentation? Do you recall? 21 A. Yes. I recall we had a -- they had a 22 presentation, I think, with slides; and they gave 6341 1 us a book. 2 Q. And it had basically a presentation in 3 that book? 4 A. Yes. 5 Q. Do you recall whether or not that 6 presentation was discussing discount coupon 7 mortgage-backed securities? 8 A. They could have been included it. I 9 just can't recall the specifics of it. 10 Q. Do you know the significance of the 11 purchase of discount mortgage-backed securities, 12 purchasing discount mortgage-backed securities as 13 opposed to buying at-the-money mortgage-backed 14 securities? 15 A. You mean at par value? 16 Q. Yeah. 17 A. I believe so. If you buy a discount, 18 you know, you're essentially amortizing -- 19 amortizing the discount into the interest rate 20 stream. 21 Q. Any others? 22 A. Perhaps, but I'm not sure specifically. 6342 1 Q. Now, what role did the investment 2 committee play in supervising the activities of 3 Joe Phillips and Ron Huebsch in 1985 with regard 4 to the management of the mortgage-backed security 5 portfolio? 6 A. Well, as I thought I said earlier, the 7 committee would ask questions specifically, not 8 only about new proposals but how things were 9 behaving that we had purchased earlier and -- and 10 how the market was and was it the time to do 11 additional securities. 12 So, the committee was far-ranging in 13 discussions. It wasn't just there to do new 14 transactions, but it would ask questions about the 15 presentations that were made. 16 Q. Did the company exist in 1985? 17 A. Well, I can't remember specifically 18 when it was formed. But if it wasn't official 19 then, there were those of us who would gather to 20 discuss things. 21 Q. Did those who would gather to discuss 22 things include Ron Huebsch and Joe Phillips? 6343 1 A. Yes. 2 Q. Did it include Barry Munitz? 3 A. Sure. 4 Q. Did it include Jenard Gross? 5 A. Yes. 6 Q. Did it include Michael Crow? 7 A. Yes. 8 Q. Did it include Charles Hurwitz? 9 A. It did. 10 Q. Now, when you discussed the 11 mortgage-backed security risk-controlled arbitrage 12 in '85 with the Salomon Brothers people, did they 13 discuss with you the need to rebalance that 14 portfolio as interest rates changed one direction 15 or another? 16 A. Yes. They would raise those points, 17 that markets were fluid and we had to adapt to 18 those. 19 Q. Did they tell you how you had to adapt 20 to those? 21 A. I guess there were various options 22 that -- that you would do to change out the 6344 1 portfolio and -- or rehedge. 2 Q. Did they tell you when you had to 3 consider doing that? 4 A. They had time frames. I can't recall 5 them. 6 Q. You don't recall the time frame? 7 A. No. 8 Q. Do you recall the magnitudes of the 9 changes in which they said you needed to do that? 10 A. I can't recall the specifics, but they 11 were there for us to see. 12 Q. But you don't recall? 13 A. I do not. 14 Q. Do you recall what the difference was 15 at that point in time in prepayment rates for a 16 discount mortgage-backed security as opposed to an 17 at-the-money mortgage-backed security? 18 A. I don't recall that, no, sir. 19 Q. Do you recall the difference between 20 premium versus at-the-money? 21 A. I do not. 22 Q. Were you told that at the time? 6345 1 A. I don't recall that we were told, but I 2 would imagine it was a topic. 3 Q. Do you know how prepayments changed in 4 reaction to a reduction in interest rates? 5 A. Not specifically. 6 Q. Do you -- 7 A. But I mean, if interest rates moved, 8 the prepayment risk can accelerate dramatically. 9 I mean, if rates come down, people will pay off 10 their loan. 11 Q. Did you understand that at the time? 12 A. Sure. 13 Q. Now, after the risk-controlled 14 arbitrage was structured in 1985, who monitored 15 its performance in 1985? 16 A. Huebsch, Phillips, Crow, Bruce 17 Williams, all of them. 18 Q. Did you? 19 A. Not directly, no. 20 Q. Did you receive any reports from them? 21 A. Sure. We got reports on a monthly 22 basis and also through the investment committee. 6346 1 Q. What were those reports? 2 A. Just how we were doing. And I can't 3 recall the specifics of them but the presentation 4 reports that were made to the committee. 5 Q. Did those reports tell you what the 6 yield was on the mortgage-backed securities that 7 were held in that portfolio? 8 A. Yes. 9 Q. Did they tell you what the market value 10 of that portfolio was? 11 A. Yes. 12 Q. Are you sure of that? 13 A. Well, I'm not sure. I can't recall all 14 the specifics that were on those reports at that 15 point in time, but there were just discussions of 16 what was taking place. 17 Q. Was when Smith Breeden made its 18 presentation in July of 1986 the first time you 19 had ever seen a market valuation of the 20 risk-controlled arbitrage portfolio? 21 A. That might be, yes. 22 Q. Now, what was done in 1985 to rebalance 6347 1 the risk controlled arbitrage portfolio in light 2 of changes in interest rates? 3 A. Well, as I recall, I think we -- 4 MR. NICKENS: He's asking about 1985, 5 Your Honor? 6 MR. GUIDO: 1985. 7 MR. NICKENS: Rebalancing in 1985? 8 MR. GUIDO: That's what I said, 9 Mr. Nickens. 10 A. I can't recall specifically what we 11 did. We may have purchased additional securities 12 at the time. I don't recall what -- 13 Q. (BY MR. GUIDO) Do you recall any 14 discussions about rebalancing in 1985? 15 A. They are vague. They were in the 16 committee minutes. Our committees, we discussed 17 that. I can't recall specifically what we talked 18 about. 19 Q. Well, what were the committees that 20 were in existence at that time? 21 A. Well, I don't recall. If there wasn't 22 an official committee, it was the same people we 6348 1 mentioned that would meet. 2 Q. So, if there was no committee, there 3 were no minutes? 4 A. Well, I don't recall. Maybe for the 5 executive committee, but I don't know. 6 Q. Who was on the executive committee? 7 A. At the savings and loan, it would be 8 Gross, myself, Munitz, Bentley. 9 Q. And if it was UFG, it would include 10 Charles Hurwitz. Right? 11 A. It would. 12 Q. Did the committee ever meet other than 13 jointly? 14 A. I can't tell you that. I only met -- 15 if I was there, I was there. I can't -- I don't 16 know. 17 Q. Now, whose responsibility was it to 18 measure the performance of the risk-controlled 19 arbitrage? 20 A. Huebsch and Phillips with assistance 21 from Crow and Bruce Williams. 22 Q. Now, do you recall sales being made out 6349 1 of the risk-controlled arbitrage portfolio in 2 January through March of 1986 which has been 3 characterized as a roll-down strategy? 4 A. Yes. 5 Q. Did you have any discussions with 6 anyone prior to that roll-down strategy? 7 A. I just -- 8 MR. VILLA: Objection. Discussions 9 with anybody prior to 1986? 10 MR. GUIDO: Prior to the roll-down 11 strategy in 1986. 12 MR. VILLA: About the roll-down? 13 MR. GUIDO: About the roll-down. 14 A. I can't recall these meetings that long 15 ago. We did a collegial decision based on the 16 intelligence we had at the time. 17 Q. (BY MR. GUIDO) Do you recall whether 18 or not there was a certain degree of panic? 19 A. There wasn't any panic. 20 Q. Pardon? 21 A. I don't think there was any panic. 22 Q. Do you recall how far interest rates 6350 1 had declined prior to the initiation of that 2 roll-down? 3 A. They moved down after the price of oil 4 dropped, as I recall. I can't remember how much 5 they dropped. I don't recall how many basis 6 points they dropped. I'd be guessing. 7 Q. Do you recall whether or not anyone 8 raised the question that the integrity of the 9 risk-controlled arbitrage had been broken because 10 of that decline in interest rates -- 11 A. I don't recall. 12 Q. -- prior to the roll-down? 13 A. No, sir. 14 Q. What was your expectation in 1985 about 15 the acceleration of the prepayments with a 16 200 basis point decline in interest rates? 17 A. Well, once -- if -- once interest rates 18 broke beyond 200 basis points, we knew that 19 prepayments would accelerate; and they did. 20 Q. And was that based on the presentation 21 that Salomon Brothers had given you? 22 A. Yes, because they said basically we'd 6351 1 be protected at a certain level within 200 basis 2 points but beyond that, as I recall, there were no 3 numbers that told specifically what could happen. 4 Q. Do you know what coupon of 5 mortgage-backed security they were talking about 6 when they were talking about that 200 basis point 7 lead? 8 A. I don't remember. 9 Q. Do you know whether or not the coupons 10 that they were talking about were the coupons that 11 you had actually purchased at USAT? 12 A. I just don't recall that specifically. 13 Q. Now, prior to the roll-down, what was 14 your understanding of the accounting that USAT was 15 obligated to undertake with regard to the 16 accounting for the sales of the mortgage-backed 17 securities? 18 A. That the -- that any gains would be 19 deferred and not taken into the income statement. 20 Q. Now, you have a CPA, don't you? 21 A. Yes. 22 Q. And you're aware of the tax code 6352 1 requirements on wash sales, are you not? 2 A. Not specifically. I'm not a tax man, 3 but I know of wash sales. 4 Q. And the -- does the accounting 5 literature and the IRS literature address the 6 question of people avoiding the recognition of 7 gains to avoid taxes? 8 A. I think that's right. But I -- today, 9 I hire a person to tell me that. I don't know 10 those numbers. 11 Q. I'm not asking about the numbers. I'm 12 just asking about the concept. 13 A. The concept, yes. 14 Q. So, prior to the roll-down, it was your 15 understanding that the literature was biased 16 toward requiring the recognition of gains? 17 A. Well, no. I thought that the 18 requirement was that if those were sold, the gains 19 had to be deferred. 20 Q. The literature -- 21 A. Yeah. The accounting literature 22 required a -- you don't -- I'm answering you on an 6353 1 accounting basis. 2 Q. I know. I mean, you answered some 3 questions on cross-examination about your 4 understanding of the accounting literature. 5 A. That's right. 6 Q. And I'm just trying to probe your 7 understanding. 8 A. Yes. That the gains on the sale of 9 those securities had to be deferred. 10 Q. Now, I understand what you testified 11 about, this particular roll-down. I'm asking you 12 about your understanding of the literature prior 13 to December 31, 1985. 14 MR. VILLA: Objection. In point of 15 fact, he wasn't asked anything about any 16 literature. He was asked about the accounting for 17 the roll-down, period. 18 MR. GUIDO: And I'm probing when he 19 knew that, Your Honor. And I think I'm entitled 20 to -- 21 THE COURT: When he knew what? 22 MR. GUIDO: When he knew that the gains 6354 1 had to be deferred and how he knew that. 2 THE COURT: You can answer that. 3 A. I knew that, as I said earlier, at the 4 time that it happened by talking to Peat Marwick. 5 Q. (BY MR. GUIDO) Do you know when Peat 6 Marwick first reached its decision that the gain 7 had to be deferred? 8 A. Subsequent to the first quarter because 9 we had to restate the first quarter. 10 MR. NICKENS: I think, Your Honor, that 11 the witness had to have misunderstood the question 12 because he's saying when it had to be deferred, 13 not when it had to be recognized. 14 THE WITNESS: Okay. I'm sorry. 15 A. I don't recall. 16 Q. (BY MR. GUIDO) You don't recall when 17 it was, do you? 18 A. No, I don't. 19 Q. Now, prior to December of 1985, did the 20 literature state that unless a transaction was a 21 wash sale, the gain had to be recognized? 22 MR. NICKENS: Your Honor, first of all, 6355 1 identify what literature. I mean, literature is 2 anything. 3 MR. GUIDO: The accounting literature. 4 MR. NICKENS: And wash sales have 5 absolutely nothing to do with this transaction. 6 So, he's mixing two very distinct concepts and 7 then asking the witness about some indistinct idea 8 about literature. Are we talking about literature 9 on wash sales which really has nothing to do with 10 the issue that he's asking about? Are we asking 11 about the literature about the recognition of 12 gains? What -- I mean, it's a question that no 13 one could parse and respond to. 14 A. A wash sale, Mr. Guido, as I understand 15 it, is a tax -- income tax issue. And I know 16 nothing -- I don't know anything about income 17 taxes from a corporate side. Wash sales are dealt 18 with -- I have a tax department that deals with 19 wash sales, but I am not a tax expert. 20 Q. (BY MR. GUIDO) Wash sales are not an 21 accounting concept, as well? 22 A. A wash sale is a tax aspect where you 6356 1 will be taxed, as I recall, if you -- if you buy 2 something and sell something within a 30-day 3 period of time. 4 Q. Was it your understanding at 5 December 31st that under no circumstances would 6 GAAP require or even permit the deferral of a gain 7 on a sale of securities whether in a swap program 8 or not? 9 MR. NICKENS: What year, Your Honor? 10 Q. (BY MR. GUIDO) Prior to 11 December nineteen -- 31, 1985. 12 A. I simply recall that gains had to be 13 deferred, period. 14 Q. Prior to December 31, 1985? 15 A. I don't recall that that -- that date 16 doesn't mean anything to me, I'm sorry, from the 17 standpoint of that point in time. 18 Q. Do you know when the purported 19 roll-down started? 20 A. I can't recall. 21 Q. You don't recall? 22 A. I don't. 6357 1 Q. Do you recall how far interest rates 2 had declined when it first started? 3 MR. VILLA: Objection. Asked and 4 answered. 5 MR. NICKENS: This is going back over 6 the same material again. 7 THE COURT: All right. I'll sustain 8 the objection. 9 Q. (BY MR. GUIDO) Who initiated the 10 roll-down? 11 A. I believe it was -- came from -- to the 12 committee, and we felt that it should be done. 13 Q. It came to the committee. Which 14 committee? 15 A. The investment committee members. 16 Huebsch and Phillips would bring it to us, and 17 we'd decide it should be rolled down. 18 Q. Why did they tell you that the 19 securities should be sold? 20 A. I believe because of what happened with 21 interest rates. 22 Q. Did they tell you that the prepayments 6358 1 had increased? 2 A. Yes. 3 Q. Did they tell you the magnitude of the 4 increase? 5 A. They did, and I don't recall what that 6 was. 7 Q. Do you recall whether or not they told 8 you that the magnitude was somewhere to about 9 20 to 30 percent on some of the mortgage-backed 10 securities? 11 A. I don't recall that number. They may 12 have. 13 Q. Did they discuss with you holding 14 securities where the prepayments had increased? 15 A. I don't recall that specifically. 16 Q. Do you recall that generally? 17 A. May have been a topic. I can't recall 18 that far back. 19 Q. Now, would there have been a reason for 20 holding those when the prepayments had increased; 21 and did they tell you a reason for holding 22 mortgage-backed securities where the prepayments 6359 1 had already increased? 2 A. I don't recall it. 3 MR. VILLA: Objection. Asked and 4 answered. 5 THE COURT: Denied. Let's move on. He 6 answered it. 7 A. I don't recall, sir. 8 Q. (BY MR. GUIDO) Now, did you have 9 discussions with the engagement partner of 10 Peat Marwick, you personally, about the accounting 11 for the roll-down? Did you? 12 A. After the accounting was to be changed, 13 yes. 14 Q. Prior to that? 15 A. Prior to that, yes, I recall with 16 Crow -- not alone -- but making sure we were doing 17 it correctly. 18 Q. Do you recall when that was? 19 A. I don't recall. 20 Q. Was it before or after the first 21 quarter financial statements? 22 A. I just -- I think it was before because 6360 1 we wanted to make sure the first quarter was 2 stated correctly. 3 Q. So, it was prior to the preparation of 4 the first quarter's financials? 5 A. As I recall, yes. 6 Q. And do you recall what the engagement 7 partner told you? 8 A. Yes. As I thought I said earlier, that 9 those gains would be deferred. 10 Q. Okay. He told you that? 11 A. Yes. 12 Q. Did he tell you that prior to 13 December 31st, 1985? 14 A. I can't recall the date. 15 Q. Did you meet with him -- you said it 16 was before the first quarter financials were filed 17 and you did so to assure that they would be 18 accurate? 19 A. Yes. 20 Q. Okay. So, was your conversation with 21 him at or about the time the first quarter 22 financials were filed? 6361 1 A. In that time frame. 2 Q. Okay. Now, in that meeting, did anyone 3 ask him whether or not the national technical 4 partners agreed with that view? 5 A. I don't recall that. We just presumed 6 on dealing with national technical people, and we 7 take -- dealing with him, we expected that's been 8 done. 9 Q. Who was the person you spoke to? 10 A. Rick -- I can't remember his name. 11 Q. Millinor? 12 A. Millinor. 13 Q. Anyone else? 14 A. Well, his assistants. 15 Q. Is that Joe Parsons? 16 A. Joe Parsons would be there. 17 Q. Anyone else? 18 A. Well, we'd all be in the meeting: 19 Crow, Wolfe, and myself, a number of us. 20 Q. Did you ask him what the national 21 technical people's views were? 22 A. I don't recall doing that. 6362 1 Q. Do you recall the name Walter Erickson 2 coming up at that meeting -- 3 A. Mr. Erickson, I do remember his name, 4 yes. 5 Q. Coming up at that meeting? 6 MR. NICKENS: Your Honor, we haven't 7 even identified a meeting. He's asking about a 8 meeting. The witness is testifying about a 9 general recollection. He's never bothered to ask 10 him, you know, was there a specific meeting; but 11 then he asked a question about a specific meeting. 12 It's a very unfair question. 13 MR. GUIDO: Your Honor, I think the 14 witness just testified -- 15 THE COURT: All right. I'll deny the 16 objection. 17 MR. GUIDO: Pardon, Your Honor? 18 THE COURT: Objection is denied. 19 A. Mr. Erickson's name, we knew of him; 20 but I just don't recall specifically asking Rick 21 Millinor, "Is this Erickson's opinion?" 22 Quite honestly, I don't think it's 6363 1 appropriate to do so. We're dealing with the 2 local people, and they are qualified. I presume 3 they asked Erickson themselves. 4 Q. (BY MR. GUIDO) Have you ever had a 5 situation where you thought maybe the engagement 6 partner was wrong and you asked them to check 7 their views? 8 A. We do. That happens, but -- yeah. The 9 answer is yes. 10 Q. Now, did the name Walter Schulze come 11 up at that meeting? 12 MR. VILLA: Objection, Your Honor. I 13 don't think we have a meeting. 14 A. I don't recall. I know of that man's 15 name, but I don't recall -- I can't recall this 16 meeting 12 years ago. 17 Q. (BY MR. GUIDO) Now, the first quarter 18 financials, how did they treat the gains on the 19 sales of the mortgage-backed securities that were 20 a part of the purported roll-down between January 21 and March of 1986? 22 THE COURT: Would you keep your voice 6364 1 up, please? 2 MR. GUIDO: Pardon? I'm sorry. 3 THE COURT: Keep your voice up. 4 THE WITNESS: I heard you. 5 MR. GUIDO: I have to repeat it for the 6 other people in the room. 7 Q. (BY MR. GUIDO) How did USAT account 8 for the gains in the mortgage-backed security 9 sales that were made as part of the purported 10 roll-down between January and March of 1986? 11 A. The gains were deferred. 12 Q. Did you, after April, have any 13 discussions with anyone at Peat Marwick about the 14 accounting for those gains? 15 A. I don't recall. I thought the issue 16 had been settled. 17 Q. You did not have any discussions with 18 anyone? 19 A. I don't recall it, no. Once the issue 20 was settled, I thought it was settled. And we 21 reported first quarter, and we went about our 22 business. 6365 1 Q. Did anyone at USAT tell you that they 2 had had subsequent discussions with people at Peat 3 Marwick about that accounting decision? 4 A. They may have. I don't recall. 5 Q. Did anyone at USAT have discussions 6 with the people at Peat Marwick about that 7 accounting decision after the filing of the first 8 quarter financial statements? 9 A. Well, at some point in time in the 10 second quarter, I think it came up; but I don't 11 recall how we were notified by Millinor that we'd 12 have to make a change. So, I don't recall the 13 dynamics which led to that. 14 Q. Do you recall what Millinor told you 15 when he told you that you had to make a change? 16 A. Yes. 17 Q. What did he say? 18 A. He said that it came to light after 19 further reflection from their technical people 20 that we would -- that they were incorrect in their 21 advice to us and that we'd have to restate the 22 first quarter. 6366 1 Q. Did he indicate to you why the 2 technical people had initiated discussions about 3 the accounting that was reflected in the first 4 quarter financial statements? 5 A. I think they -- I don't recall 6 specifically. He simply said they did further 7 analysis and that led to their change. 8 Q. Did -- in the first quarter of 1986, 9 did you ever see an analysis that evaluated the 10 effect of the sales and the purported roll-down on 11 the integrity of the risk-controlled arbitrage? 12 A. I suspect I did. I remember seeing 13 reports all the time. 14 Q. You testified earlier that sometime in 15 June or July or later on, you saw the Smith 16 Breeden report? 17 A. Yes, I did see that. 18 Q. And prior to that, had you seen any 19 similar report? 20 A. I can't recall. Smith Breeden was the 21 most detailed one, as I recall. 22 Q. Now, when you entered into the 6367 1 risk-controlled arbitrage portfolio, did you ever 2 raise any questions about the need to hire a firm 3 similar to Smith Breeden to do the analyses of the 4 portfolio? 5 A. Yes. We felt we needed experts around. 6 This was a complex area; and we should have 7 experts to help us, to guide us. 8 Q. When did you first hire Smith Breeden? 9 A. I don't recall the exact date. That 10 time runs together. But the important thing, we 11 felt we needed somebody to -- some experts to help 12 us and to help us analyze the program. 13 Q. You initiated the first risk-controlled 14 arbitrage portfolios in either early '85 or late 15 1984. Right? 16 A. That's correct. 17 Q. And you hired Smith Breeden sometime in 18 late spring or the summer of 1986. Right? 19 A. If that's the time, yes. 20 Q. What did you do to get the expertise 21 between that time frame on managing that 22 portfolio? 6368 1 A. I think we were using Salomon Brothers 2 and investment bankers to help guide us. 3 Q. Now, was a decision made at or about 4 the time of the roll-down to look for someone 5 other than Joe Phillips to manage that portfolio? 6 A. Well, there was -- yes. A time came in 7 that led -- again, I'm confused on the timing -- 8 but that led -- that maybe we needed someone 9 stronger, and that's what led to Sandy Laurenson. 10 Q. Why did you conclude you needed someone 11 stronger than Joe Phillips? 12 A. Well, I think we just needed someone -- 13 that the market was fluid. There were more 14 technicalities in the market, and we felt we 15 needed somebody with Sandy's strength to come in. 16 Q. Did you do it because you knew that the 17 roll-down had occurred too late? 18 A. I don't recall that. I just felt -- I 19 think I recall that we just needed someone that -- 20 with her -- of her caliber to join the company. 21 Q. Did anyone ever say that you, in 22 essence, had been caught flat-footed with the 6369 1 decline in interest rates and the increase in 2 prepayments? 3 A. I don't recall that. 4 Q. Now, were instructions given to the 5 managers of the investment portfolio to look for 6 securities that could be sold in order to 7 recognize gains prior to a particular filing of a 8 quarterly report? 9 A. I don't recall that. 10 Q. You don't recall that? 11 A. I do not. 12 Q. You don't recall any discussions about 13 the need to make sales out of the high-yield bond 14 portfolios to generate gains prior to the filing 15 of the quarterly report? 16 A. Well, we were always looking for profit 17 increases; but I thought you were talking about 18 mortgage-backed securities. But we were always 19 talking about what could be sold, what were our 20 profit opportunities that existed in the company. 21 That was an ongoing dialogue. 22 Q. Were there standing instructions to the 6370 1 managers of the portfolios to make sales out of 2 those portfolios in order to generate reported 3 gains? 4 A. No. No, there were not. There were 5 discussions to find gains that would not hurt the 6 company ongoing. If gains could be taken without 7 hurting the overall program, we wanted to know 8 about them. 9 Q. What do you mean by "hurting the 10 company"? 11 A. Well, taking -- that would disrupt the 12 overall plan of the mortgage-backed securities 13 portfolio or other programs that would -- would 14 help later. We didn't want to hurt the company on 15 the long run to take advantage of short-term 16 gains, but we did want to take short-term gains if 17 we could. 18 Q. So, are you saying you didn't want to 19 sacrifice yield for current gains? Is that what 20 you're saying? 21 A. Yes. 22 Q. And -- but you did instruct people to 6371 1 make sales, at least out of the high-yield bond 2 portfolio, to generate gains? 3 A. Not make sales but look for 4 opportunities, and then we'd decide if a sale 5 should be made. 6 Q. Okay. And if a gain should be 7 recognized? 8 A. If it were appropriate to do so. 9 Q. And what were the criteria that you 10 used to determine whether or not it was 11 appropriate? 12 A. Just what I said earlier. It would be 13 inappropriate if it hurt the company going 14 forward. If we were too rash or it hurt the 15 company, we didn't want to take the gain. 16 Q. Well, if it resulted in a decrease in 17 the yield going forward, would that constitute 18 hurting the company? 19 A. It might, or it might not. We didn't 20 want to do something rash or large to disrupt the 21 program or to -- or to trigger other losses or 22 something like that. We didn't want to do so. We 6372 1 thought we did it on a prudent basis. 2 Q. Did the accountants ever ask you 3 whether or not you had authorized sales to be made 4 out of portfolios to generate reported gains prior 5 to the filing of a quarterly or annual financial 6 statement? 7 A. I don't recall. We were in dialogue 8 with the accountants all the time. 9 Q. You don't recall? 10 A. Specifically, no. 11 Q. Now, you're a CPA. Right? 12 A. I am. 13 Q. Do you know the term "gains trading"? 14 A. Yes. 15 Q. Do you know what the consequences of 16 that term are? 17 A. Well, I'm a CPA; but I'm not involved 18 in the trading specifically. So, I don't recall 19 that specifically. 20 Q. You don't recall that term? 21 A. No. 22 Q. You did indicate that you're familiar 6373 1 with the term? 2 A. Yes. 3 Q. What do you understand the term to 4 mean? 5 A. I would just simply guess. I don't 6 know the specifics of it. 7 Q. You don't know the specifics of the 8 term? 9 A. No, I don't. 10 Q. Does it mean selling in order to 11 recognize a profit reported in the financial 12 statements? 13 A. I don't know that the term -- I don't 14 relate that term to it, no. I mean, maybe it does 15 mean that. 16 Q. Do you know the difference between 17 trading versus investment in the accounting 18 literature? 19 A. Sure. 20 Q. And what is the definition of that 21 term? 22 MR. NICKENS: Your Honor, I would 6374 1 object if this is an effort to qualify this man as 2 an expert in the area. He's not been identified 3 as an expert witness in this area. He can 4 certainly give his understanding. But if this is 5 an effort to introduce some expert opinion on an 6 accounting issue that has never been identified in 7 the case, I would object. 8 MR. GUIDO: Your Honor, I'm only trying 9 to find out this man's understanding of the 10 difference in the accounting literature for 11 purposes of asking him questions about what 12 happened -- 13 THE COURT: I don't recall that was 14 your question, but let's hear his -- 15 A. Well, today, investment literature 16 continually has changed. But portfolios today, 17 they are in two ways. 18 Q. (BY MR. GUIDO) I'm not asking you 19 about today. I'm asking about in 1985, '86, 20 Mr. Williams. 21 A. Okay. As I recall at that time, 22 investments, if they were in the investment 6375 1 portfolio, they would still market costs, the 2 original costs that you -- that were paid for it. 3 If you had a trading portfolio, you would 4 mark-to-market. 5 Q. Okay. And what were the criteria to 6 determine whether or not something was a trading 7 versus investment portfolio at the time? 8 A. If it was classified as a trading -- if 9 we so determined that we were going to trade those 10 assets as the arbitrage program was, as an 11 example, that was mark-to-market. 12 Q. Now, what is your understanding that 13 the accounting literature set out as the standards 14 to make that determination? 15 A. That if it's a trading asset, it will 16 be mark-to-market, that if you -- 17 Q. My question was -- I understand the 18 difference between trading versus investment. I 19 think you've answered that already. 20 My question was: What is your 21 understanding of the criteria that's used to 22 classify something as a trading portfolio as 6376 1 opposed to an investment portfolio? 2 A. If it's going to be held. If it's 3 going to be held long term, then it's an 4 investment. 5 Q. And what did the literature, to your 6 understanding, say was the criteria to determine 7 whether or not it was going to be held? 8 A. Well, I can't recall the time frame 9 specifically at that time over it but -- 10 Q. So, you don't recall what the standards 11 were? 12 A. No. We knew what the trading assets 13 were, and we knew what the investment assets were. 14 Q. Was one of the standards the ability to 15 hold till maturity? 16 A. Yes. 17 Q. Okay. Was one of the standards intent 18 to hold till maturity? 19 A. Yes. 20 MR. NICKENS: Your Honor, all of 21 this goes far beyond the scope of any 22 cross-examination. The idea is that we're 6377 1 supposed to narrow the issues as we go along, and 2 now we're just expanding the issues again. I 3 object. I mean, I don't know for what purpose 4 this is; but it clearly goes beyond the scope of 5 Mr. Villa's questions. 6 MR. GUIDO: Your Honor, the question 7 goes to Mr. Villa's question: Did you 8 misrepresent anything to the accountants? 9 And what I'm trying to ascertain is what 10 this witness' understanding of the accountants' 11 standards are so that I can ask him some questions 12 about what was told to the accountants so that -- 13 MR. NICKENS: Then let's get to it, 14 Your Honor. 15 MR. GUIDO: -- so we can make a 16 determination as to whether or not he did make any 17 misrepresentations to the accountants. 18 A. We never knowingly made 19 misrepresentations to the accountants. We tried 20 diligently -- I mean, that's how I earn a living. 21 We do not lie to accountants. The literature was 22 complex. We met with the accountants 6378 1 continuously, almost perpetually; and it's a very, 2 very complex world. We did nothing to mislead 3 accountants. We filed -- 4 Q. (BY MR. GUIDO) Mr. Williams, did you 5 ever tell an accountant that you were making sales 6 out of the high-yield bond portfolio to generate 7 gains at quarter end to be reflected in the 8 financial statements? 9 A. I don't recall -- 10 Q. Yes or no? 11 A. I don't recall it. 12 MR. GUIDO: Your Honor, I think I'm 13 about to move into another area. This would be a 14 good time to take a break. 15 MR. GUIDO: Your Honor, this is an 16 obvious stall. I mean, let's finish this. 17 THE COURT: How much more time do you 18 have? 19 MR. GUIDO: Probably another hour, 20 Your Honor, hour and a half. 21 THE COURT: All right. We'll adjourn 22 until 1:30. 6379 1 (A lunch break was taken 2 at 12:01 p.m.) 3 4 THE COURT: Be seated, please. We'll 5 be back on the record. Mr. Guido, you may 6 continue with your redirect. 7 MR. GUIDO: Thank you, Your Honor. 8 Q. (BY MR. GUIDO) I'd like to show you a 9 document that's been introduced previously in this 10 proceeding as T4302. I have a memorandum dated 11 November 13th, 1986, to Bruce Williams from Mike 12 Crow. 13 MR. GUIDO: I have extra copies of 14 these, Your Honor, to speed up the process. 15 Q. (BY MR. GUIDO) Mr. Williams, this is 16 a document that's been introduced. And it says, 17 "We had a discussion at the investment committee 18 on selling junk bonds for profits for purposes of 19 quarterly earnings. Ron Huebsch made an 20 impassioned plea to get the word now that we're 21 going to need a lot profits because the market is 22 favorable right now to getting out of some bonds, 6380 1 taking a profit, and having a chance of getting 2 back into some good-yielding stuff." 3 Do you see that? 4 A. I see it, sure. 5 Q. And it says, "He is probably absolutely 6 correct. GRW and I stated that we would need 7 major amounts of profits because we cannot depend 8 on such things as a branch sale, loan servicing 9 sale, and consumer loan sale to pull us out of the 10 fire." 11 Do you see that? 12 A. I see it, sure. 13 Q. Does that reflect what occurred at that 14 investment committee meeting as referred to in 15 these notes? 16 A. I suspect so. 17 Q. Okay. 18 A. So, does that memo reflect that sales 19 were being made out of the junk bond portfolio to 20 generate profits for purposes of increasing 21 quarterly earnings? 22 A. Yes, sir. 6381 1 Q. Now, I'd like to show you investment 2 committee meeting minutes of September 3rd, 1986, 3 which is A1407 which has previously been admitted, 4 as well. And I'd direct your attention to the 5 second page of that document, the paragraph at the 6 top. It states, "Mr. Phillips then discussed the 7 association's mortgage-backed securities 8 portfolio. It was decided that a committee 9 consisting of Messrs. Phillips, Crow, Hansen, and 10 Bruce Williams (with the advice and consent of 11 Smith Breeden) would be empowered to make value 12 trades in the current portfolio without expanding 13 such portfolio." 14 Do you see that? 15 A. I do. 16 Q. Did you attend that meeting on 17 September 3rd, 1986? 18 A. I don't recall if I did or not. 19 Q. It says that all members of the 20 committee were present. 21 A. Then I was there. I just don't 22 remember it. 6382 1 Q. Do you recall the term "value trades" 2 in relationship to mortgage-backed securities at 3 USAT? 4 A. I recall the term. I'm not quite sure 5 what that means. 6 Q. Did it mean making sales to increase 7 the yield? 8 A. It could have. 9 Q. Did it mean to make sales to recognize 10 gains to increase reported profits? 11 A. I don't know that it did. 12 Q. Do you know one way or the other? 13 A. No, sir. 14 Q. Now, you testified earlier that no 15 sales were made out of the mortgage-backed 16 security portfolio to generate gains to increase 17 reported profits. 18 Do you recall that testimony? 19 MR. VILLA: Objection. I don't believe 20 he's testified to that. 21 A. I don't know, sir. 22 Q. (BY MR. GUIDO) Did you have any 6383 1 conversations with anyone about your testimony in 2 the break? 3 A. No. Didn't see anybody. 4 Q. Did you have any conversations with 5 anyone about the questions that were asked of you 6 during the break? 7 A. No. 8 Q. Now, were sales made out of USAT's 9 mortgage-backed security risk-controlled arbitrage 10 portfolio to enhance the yield on those 11 portfolios? 12 A. May have been. I can't recall all the 13 trades that we made. 14 Q. Were sales made out of USAT's 15 mortgage-backed security risk-controlled arbitrage 16 portfolios to generate reported gains? 17 A. May have been. 18 Q. You don't know? 19 A. I don't recall. I can't recall that 20 time specifically. 21 Q. I'd like to show you Exhibit A1409 22 dated September 18th, 1986. 6384 1 MR. GUIDO: This also, Your Honor, has 2 been admitted into evidence. 3 Q. (BY MR. GUIDO) I'd like to direct 4 your attention to the second page of the document, 5 Mr. Williams -- 6 A. Okay. 7 Q. -- which is -- look at the fourth 8 paragraph down. It says, "The committee reviewed 9 the minutes of the mortgage-backed security 10 trading committee for the week. All transactions 11 were approved. The committee then discussed the 12 implicit cost of capital calculation made when a 13 trade is made which improves the association from 14 an economic perspective and allows a book gain 15 that lowers ongoing book spread income." 16 A. I see it. 17 Q. Do you see that? 18 A. I sure do. 19 Q. Does that refresh your recollection of 20 whether or not sales were made out of the 21 mortgage-backed security portfolio to generate 22 reported gains? 6385 1 A. Yes. I had forgotten that. 2 Q. So, sales were made to generate 3 reported gains out of the mortgage-backed security 4 risk-controlled arbitrage portfolio? 5 A. This says so. 6 Q. Now, I'd like to show you Exhibit A1410 7 which is September 24th, 1986; and I'd ask you to 8 look at the first page of that document. I direct 9 your attention to the fourth paragraph. It says, 10 "Mr. Phillips then reported on the mortgage-backed 11 securities portfolio. He stated that the 12 association had sold some mortgage-backed 13 securities and had profited to the extent of 14 approximately $1.4 million." 15 Do you see that entry? 16 MR. NICKENS: Your Honor, he's not 17 giving us an opportunity to get the documents. I 18 would ask that we have at least a moment. And I 19 will point out that these are all documents that 20 were given to us as the pulls on the direct. And 21 Mr. Guido apparently decided that this was stuff 22 he wasn't going to use in direct, and now he is 6386 1 doing his direct over again. 2 MR. GUIDO: Your Honor, these documents 3 went in with Mr. Phillips. I'm sorry, but this 4 witness has testified about the lack of making 5 sales out of the mortgage-backed security 6 risk-controlled arbitrage portfolio to generate 7 gains. I'm just trying to refresh his 8 recollection. 9 MR. NICKENS: This stack of 10 documents -- this stack of documents right here 11 are the documents that were pulled at Mr. Guido's 12 request that he was going to use in the direct 13 that he didn't use, and the documents we're now 14 going through are those documents. He's going 15 back and redoing his direct. 16 MR. VILLA: Your Honor, we're simply 17 asking for a courtesy. When we bring on a 18 witness, even if they have used a document, we 19 give Mr. Guido an additional copy. You see us 20 each time. He goes through them so fast that it's 21 almost impossible for us to catch up with the 22 documents, and he does not give us a copy. We're 6387 1 simply asking for courtroom courtesy. 2 MR. GUIDO: I will slow down, 3 Your Honor. I'm sorry. 4 THE COURT: Does everybody have 5 Exhibit A1410? 6 THE WITNESS: All right, Mr. Guido. 7 Q. (BY MR. GUIDO) Do you see the 8 paragraph that says, "Mr. Phillips then reported 9 on the mortgage-backed securities portfolio"? 10 A. I see it. 11 Q. Does that refresh your recollection -- 12 A. It does. 13 Q. -- that sales were made out of the 14 mortgage-backed security portfolio to generate 15 reported gains? 16 MR. NICKENS: Objection, Your Honor. 17 It doesn't say that, and there's no indication as 18 to whether these securities were in the 19 mortgage-backed securities portfolio -- that is, 20 the risk-controlled arbitrage -- or whether they 21 were freely held. There is no such indication in 22 the document. 6388 1 MR. GUIDO: His testimony is his 2 testimony, Your Honor. I mean, if Mr. Nickens 3 wants to ask clarifying questions, he's perfectly 4 free to ask them -- 5 THE COURT: Next question. 6 Q. (BY MR. GUIDO) You did testify 7 earlier that the mortgage-backed security 8 portfolios, to your understanding, at USAT were 9 risk-controlled arbitrage portfolios, did you not? 10 MR. NICKENS: Objection, Your Honor. 11 That's not the evidence. 12 THE COURT: Well, let's hear what the 13 witness says. 14 MR. NICKENS: Well, he is misleading 15 the witness by -- 16 THE COURT: The witness -- 17 MR. NICKENS: He's purporting to 18 summarize his prior testimony; and he's doing it 19 incorrectly, Your Honor. That's an improper 20 question. 21 THE COURT: I don't think it is. Let's 22 have the answer. 6389 1 THE WITNESS: Say it again, please, 2 Mr. Guido. What was your question? 3 Q. (BY MR. GUIDO) You testified earlier 4 that the mortgage-backed securities that you were 5 testifying about that were in USAT's portfolio 6 were, as you understood it, hedged transactions, 7 did you not? 8 A. I did, the best I could recall. 9 Q. And it's your understanding that they 10 were part of a risk-controlled arbitrage. Right? 11 A. Yes. 12 Q. Now, I'd like to show you Exhibit 1411. 13 MR. NICKENS: I didn't hear the number. 14 THE COURT: 1411. 15 Q. (BY MR. GUIDO) October 11th, 1986. 16 It's the investment committee minutes. 17 A. I have it. 18 Q. Do you see the paragraph, the fourth 19 paragraph down: "Mr. Phillips recommended the 20 sale of a portion of the liquidity and 21 mortgage-backed securities portfolios to recognize 22 profits which were recently created by the market 6390 1 rally"? 2 A. I see it. 3 Q. Do you see that? 4 A. I do. 5 Q. Does that refresh your recollection 6 that sales were made out of the mortgage-backed 7 security risk-controlled arbitrage portfolio? 8 A. It does. I remember -- I see it now. 9 Q. Now, I'd like to show you another 10 document that has been admitted into evidence. 11 It's Exhibit T4251. 12 MR. GUIDO: I have two other copies, 13 Your Honor. 14 A. I have it. 15 Q. (BY MR. GUIDO) Does T4251 refresh 16 your recollection that sales were made out of the 17 mortgage-backed security risk-controlled arbitrage 18 portfolio to generate quarterly earnings? 19 A. Mortgage backs? 20 Q. Yes. 21 A. Yes. 22 Q. I'd like to show you a document that's 6391 1 dated January 21st, 1987. It's investment 2 committee minutes. 3 MR. GUIDO: It's Exhibit A1426 which 4 has also previously been admitted, Your Honor. 5 MR. VILLA: I'm sorry. What was the 6 date? 7 MR. GUIDO: January 21st, 1987. 8 MR. VILLA: '87 or '86? 9 MR. GUIDO: '87. 10 MR. VILLA: Is this after this witness 11 had left? 12 THE WITNESS: It is. I'm sorry. 13 Q. (BY MR. GUIDO) I have some questions 14 for you about your understanding of the portfolio 15 prior to your departure. 16 MR. NICKENS: We don't have the 17 document, Mr. Guido. 18 MR. GUIDO: I haven't done anything 19 with the document, Mr. Nickens. 20 THE WITNESS: I have it. 21 THE COURT: Are we ready, Mr. Nickens? 22 MR. NICKENS: We have it, Your Honor. 6392 1 THE COURT: All right. Proceed. 2 Q. (BY MR. GUIDO) I'd like to direct 3 your attention to the Bates stamp No. 5224 which 4 is about the fourth or fifth page of the document 5 under the heading "sensitivity analysis." I'd 6 direct your attention to the sentence under -- the 7 first sentence. It says, "The MBS portfolio when 8 combined with the interest rate swaps are 9 favorably positioned for further rate declines." 10 Do you see that? 11 A. I do. 12 Q. Now, during the time that you were at 13 USAT and you were on the investment committee, was 14 the portfolio ever favorably tilted toward 15 interest rate declines, to your knowledge? 16 A. Well, yes. Rates started to move down 17 in '86. 18 Q. I understand that the rates went down. 19 Let me ask you what your understanding of 20 "favorably positioned for further rate declines" 21 means in this sentence. 22 MR. NICKENS: Your Honor, I object. 6393 1 This is -- it's past the time he was there. He 2 might have some understanding about what it means 3 outside the sentence. But he couldn't possibly 4 know what the author of this document, about a 5 meeting he didn't attend, might have intended by 6 that comment. 7 Q. (BY MR. GUIDO) What is your 8 understanding of a risk-controlled arbitrage 9 portfolio in terms of how it's to be balanced for 10 a direction in interest rates, Mr. Williams? 11 A. Well, as we said before, if it's 12 matched within parameters, the interest rate 13 spread will be protected generally up and down 14 200 basis point movement. 15 Q. And so, they would be relatively equal 16 in terms of whatever the changes are, one way or 17 another? 18 A. That's correct. 19 Q. Okay. Now, if you had one that was 20 favorably positioned to gain money from one 21 direction as opposed to going the other, is that 22 your understanding of a risk-controlled arbitrage? 6394 1 A. No. If it's within 200 basis points, 2 as we had it, rates would move. You would still 3 be protected on the net interest rate spread. If 4 it moved without -- if it moved outside the 200 5 basis points, you could be hurt or helped. 6 Q. Let's just stay within the 200 basis 7 points. 8 A. Okay. 9 Q. Forget anything beyond the 200 basis 10 points in terms of these questions. 11 Is it your understanding that the 12 risk-controlled arbitrage was to be sort of 13 balanced in such a way that you don't benefit or 14 lose depending on the direction of interest rate 15 movements? 16 A. As a general rule, yes. 17 Q. And was it your understanding that the 18 portfolio was balanced in that way prior to your 19 departure? 20 A. Yes. 21 Q. Now, I'd like to hand you -- 22 MR. GUIDO: And I'd like to move the 6395 1 admission of T4197 which is a letter from Art 2 Berner to James Halverson dated May 9, 1986, 3 Your Honor. 4 MR. NICKENS: We don't have a copy of 5 the document, Your Honor. 6 Q. (BY MR. GUIDO) I'd like to direct 7 your -- 8 MR. GUIDO: I'd like to move the 9 admission of T4197, Your Honor. 10 MR. NICKENS: No objection. 11 THE COURT: Received. 12 Q. (BY MR. GUIDO) I'd like to direct 13 your attention to the second page of that document 14 under "corporate bond strategy," Mr. Williams. 15 A. I see it. 16 Q. It says, "The association has 17 implemented its program under investing in 18 corporate bonds in order to maintain an interest 19 rate spread between the high-yield corporate bonds 20 and duration matched long-term certificates of 21 deposit. By building in this matched spread, the 22 association has been able to increase its capital 6396 1 and profitability through what we believe to be a 2 balanced portfolio of corporate debt." 3 Do you see that sentence? 4 A. Surely. 5 Q. Now, look at Page 3, the top of Page 3. 6 It's referring to the committee, the investment 7 committee. It says, "For their examination in 8 deciding whether or not to make an investment, the 9 committee has established certain objectives for 10 all investment decisions: One, security of the 11 association's principal; two, maintenance of 12 interest rate spread; and three, possible capital 13 appreciation." 14 Do you see that? 15 A. Surely. 16 Q. Does that say anything about making 17 sales at quarter's end to generate accounting 18 gains? 19 A. Not specifically, no. 20 Q. Now, I'd like to show you a document 21 that we've marked A10690 which has previously been 22 admitted, I think, in the Phillips testimony. 6397 1 Have you had an opportunity to review 2 that document? 3 A. I have. 4 Q. Do you remember any discussions about 5 the accountants saying that USAT needed to adopt 6 on its record its policy as it relates to junk 7 bonds to avoid mark-to-market treatment? 8 A. Crow and I may have discussed it. I 9 can't recall it. He would have handled this. 10 Q. Was this prior to the time that you 11 left? 12 A. It is. He would have told me about it. 13 Q. Okay. Now, take a look at the policy 14 on the second page. It says, "It is the policy of 15 United Savings Association of Texas to invest in 16 corporate debt securities as market opportunities 17 exist. The objective of such investments is to 18 spread income over an extended period of time. In 19 general, the portfolio will be match funded with 20 long-term CDs." 21 Then it says, "Sales of such securities 22 will be executed from time to time as changes in 6398 1 the credit quality of a particular security 2 exists, an opportunity to upgrade credit with a 3 similar yield is present, to adjust the portfolio 4 for industry exposure, and other appropriate 5 reasons as may be approved by the investment 6 committee. The corporate bond portfolio is not a 7 trading account, however, and should not be 8 managed as a trading vehicle. Accordingly, it is 9 the policy of the association to record 10 investments at cost and establish reserves against 11 known or troubled losses in the portfolio. The 12 portfolio will be not mark-to-market on a periodic 13 basis since it is not a trading account." 14 Do you see that? 15 A. Surely. 16 Q. Does that say anything about the sale 17 of junk bonds to generate accounting gains at 18 quarterly end? 19 A. Not specifically, no. 20 MR. GUIDO: Your Honor, at this point 21 in time, I'd like to turn this over to Mr. Rinaldi 22 to ask questions about the real estate questions. 6399 1 THE COURT: Well, we didn't have very 2 many on that; so, I assume Mr. Rinaldi doesn't 3 have very many either. 4 MR. GUIDO: That's correct. 5 MR. NICKENS: We'd note for the record, 6 Your Honor, our objection to this procedure. In 7 addition to having the two lawyers, which you've 8 already indicated your wishes on that -- I'm just 9 doing this for the record -- but, also, that 10 Mr. Rinaldi was not their real estate person. 11 12 REDIRECT-EXAMINATION 13 14 (1:54 p.m.) 15 Q. (BY MR. RINALDI) Mr. Williams, you 16 were a member of the senior loan committee, were 17 you not? 18 A. Yes, sir. 19 Q. Can you describe for the Court what the 20 function of the senior loan committee was? 21 A. As credits were -- proposed credits 22 came before the committee for possible investment, 6400 1 the committee passed on the advisability of 2 proceeding with said investment or to reject them. 3 Q. Okay. When you talk about credit, 4 you're talking about loans? 5 A. Loans. I'm sorry. It's an 6 interchangeable term in the banking business. 7 Q. Okay. And approximately for what 8 period of time did you remain on the senior loan 9 committee? 10 A. The time I was there. 11 Q. Okay. And so, that would have been 12 from -- 13 A. August '83 till the end of '86. 14 Q. Okay. And did you also serve for a 15 period of time on the real estate and joint 16 venture committee? 17 A. I probably did. I can't recall if -- I 18 guess I did. I'm guessing here. I don't remember 19 that committee specifically. 20 Q. Let me -- 21 A. I need help. 22 Q. Let me show you what's been previously 6401 1 marked and admitted into evidence as Exhibit A1 -- 2 I mean 1110. 3 A. Okay. 4 MR. RINALDI: And I have a copy. This 5 was actually put into evidence yesterday. This 6 should be previously admitted. So, I only have 7 the one. Otherwise, I can pull one from here. 8 Q. (BY MR. RINALDI) These are the 9 minutes of the board of directors meetings for 10 February 13th, 1986. And if you'll turn to 11 Page 7, it indicates that -- I'm sorry. Page 15. 12 Do you see that you were a member -- 13 A. I'm a member. 14 Q. Okay. And do you recall what the 15 difference was between the real estate -- senior 16 loan committee and the real estate and joint 17 venture committees? 18 A. I believe this committee was formed 19 because there were some possibilities where the -- 20 where the association might have partners as 21 opposed to just making outright loans. And that's 22 why this committee was formed, as kind of an 6402 1 adjunct to the loan committee. 2 Q. And do you recall that the senior loan 3 committee had limitations on the size of the loans 4 that they could make? 5 A. Yes. 6 Q. Do you recall that they could not 7 approve a loan that was in excess of $70 million? 8 MR. VILLA: Objection. I limited -- my 9 questions on real estate were about six. It took 10 about 90 seconds, and they dealt with issues that 11 arose directly out of the document that Mr. Guido 12 put into evidence. 13 Are we going to open up the whole 14 question of the authority, the delegation, the 15 scope of delegation? Because if we are, we're 16 going to start getting out all these other 17 documents. We had a very narrow issue arising 18 directly out of the document that Mr. Guido put 19 into evidence: The corporate strategy on 20 July 11th, 1985. 21 I object to this line of questioning, 22 and I don't think we ought to be opening up real 6403 1 estate all over again. We can do it like we did 2 with Mr. Schwartz. We'll open up real estate. 3 But I suggest it's inappropriate with this 4 witness. 5 MR. RINALDI: Your Honor, he said that 6 he had approved loans on the basis of expert -- 7 the advice of experts at the -- real estate 8 experts that worked for the institution. I'm 9 simply asking him what loan committees he sat on, 10 and I'd like to go into who those experts were and 11 what the advice they gave him was. 12 THE COURT: That wasn't your question. 13 All right. You may ask him that. 14 Q. (BY MR. RINALDI) Now, you indicated 15 that you have an accountant's background. Do you 16 have any experience in underwriting real estate 17 loans? 18 A. No, sir. 19 Q. And when you joined the committee -- I 20 mean, since you joined the committee, have you 21 acquired any experience in underwriting? 22 A. No, sir. I'm not a real estate expert 6404 1 in any stretch of the imagination. 2 Q. Okay. And in passing on matters that 3 were brought before the senior loan committee, 4 were there other members of the board of directors 5 that also sat on the senior loan committee who are 6 knowledgeable about real estate loans? 7 A. Of course. Mr. Gross. Mr. Bentley 8 before him. 9 Q. Okay. And directing your attention to 10 specifically Mr. Gross, was he, in your mind, the 11 most knowledgeable member of the senior loan 12 committee with respect to real estate matters? 13 A. I'd say he and Childress and Graham 14 were almost interchangeable, and I relied on all 15 of them. They were all very intelligent and knew 16 and understood real estate. 17 Q. Okay. Now, when was -- when did 18 Mr. Gross join USAT? 19 A. In early 1985. 20 Q. And am I correct that he first -- prior 21 to his coming on as president, that he served in a 22 capacity as a consultant? 6405 1 A. That's correct, during sometime in 2 1984. 3 Q. And what was the nature of the 4 consultancy services that he provided? 5 A. In a general role, some way as a 6 sounding board. A lot on real estate matters, 7 areas of his own expertise. 8 Q. And isn't it true that they brought him 9 on because of his real estate expertise? 10 A. Yes. 11 Q. The purpose of their bringing him on 12 was to assist with the management of the real 13 estate portfolio of USAT, wasn't it? 14 A. Of course. He's very knowledgeable. 15 Q. And he was one of the persons that you 16 relied upon principally for making decisions at 17 the senior loan committee level, wasn't he? 18 A. That's correct. 19 Q. Now, earlier today, you testified that 20 you thought that San Antonio and Austin were more 21 economically stable -- I think that was the term 22 you used -- than Houston. 6406 1 Do you recall that? 2 A. I recall that. That was the general 3 feeling that we had -- had received collectively, 4 how that economy was behaving compared -- 5 Q. How did you come -- I'm sorry. How did 6 you come to that understanding, sir? 7 A. Through discussions primarily with 8 Graham and Childress on their views of what was 9 taking place across the state, Mr. Gross' 10 observations, and, I guess, some economic 11 information that we had received. 12 Q. Did you discuss that, also, with 13 Mr. Hurwitz? 14 A. Undoubtedly, he would have been in 15 meetings, yes. 16 Q. Was Mr. Hurwitz also knowledgeable on 17 the subject of real estate? 18 A. I don't think he had the expertise that 19 Mr. Gross, Graham, and Childress had. 20 Q. But my question is: Did you view him 21 as a person who was knowledgeable about the 22 subject of real estate investments? 6407 1 A. No, I didn't. 2 Q. Had he brought the Weingarten real 3 estate investment to the attention of USAT? 4 A. He did. 5 Q. And did he bring any other real estate 6 ventures or investments to the attention of USAT 7 that you're aware of? 8 A. He may have. Weingarten was an 9 excellent opportunity for the association. We did 10 well with it. 11 Q. Okay. And based on that experience, 12 did you view him, then, to be a source of 13 expertise with respect to real estate investments? 14 A. I viewed him as a source of expertise 15 in finding a situation that did well for the 16 association. 17 Q. Okay. And did he participate in the 18 meetings of the senior loan committee? 19 A. He would stop in. He would attend. 20 Q. Now, do you recall -- let me take -- 21 hand you a copy of what's been previously marked 22 as Exhibit T7569. This would be a 10K filed by 6408 1 United Financial Group for the period of the 2 quarter ending March 31st, 1985. And 3 specifically, I direct your attention to -- 4 MR. RINALDI: I'm sorry, Your Honor. 5 Did I give -- did I hand a copy up to the Court? 6 THE COURT: No. 7 MR. RINALDI: I'm sorry. That's why I 8 had an extra copy. 9 Q. (BY MR. RINALDI) In directing your 10 attention specifically to Page OW012963, do you 11 recognize that document, sir? 12 A. Yes, sir. 13 Q. Okay. And who would have prepared 14 this? 15 A. This would have been -- 10Qs were 16 prepared by Michael Crow and his staff. 17 Q. Is this something that you were 18 familiar with and would have reviewed in your 19 capacity as -- 20 A. Yes. 21 Q. Okay. 22 MR. RINALDI: Move to admit 6409 1 Exhibit T7569 if it's not previously admitted, 2 Your Honor. 3 MR. VILLA: No objection. 4 THE COURT: Received. 5 Q. (BY MR. RINALDI) Okay. Now, 6 directing your attention to the paragraph that 7 says, "Results of operation" -- and I'm going to 8 read the second sentence there. It says, "This 9 unfavorable change reflects an increase in the 10 provision of loan and real estate losses and a 11 decrease in the net interest margin of 4.2 and 12 2.3 million respectively. These changes are 13 primarily attributable to the continuing adverse 14 economic and real estate conditions primarily in 15 the Houston and Brownsville area which have 16 resulted in significant increases in foreclosures 17 and non-accruing loans." 18 Do you see that? 19 A. I do. 20 Q. Was it your understanding at about 21 March 31st that the weakening in the real estate 22 market was principally in the Houston area in the 6410 1 beginning of 1985? 2 A. That's what we were most concerned 3 about, yes. 4 Q. Okay. And what was the cause of that 5 weakening in the real estate market, as you 6 recall? 7 A. Houston was tied to the oil economy, 8 and that -- that affected real estate values when 9 it declined. 10 Q. And at or about this point in time, 11 didn't that adverse impact that was being felt in 12 real estate start to spread; or wasn't it 13 spreading to other parts of the state? 14 A. Oh, it was. 15 Q. And you were aware of that, weren't 16 you? 17 A. Sure. 18 Q. And among the parts of the state it 19 would have been spreading to would have included 20 Austin and San Antonio; is that correct? 21 A. The whole state, sure. 22 Q. So that by -- in the beginning of 1985, 6411 1 the entire state of Texas was experiencing 2 problems with adverse economic and real estate 3 conditions; is that correct? 4 A. Somewhat different degrees, sure. 5 Q. Okay. Well, let me hand you a copy now 6 of what's been marked as Exhibit T7563. This is a 7 10Q, as well. 8 A. You handed me two. 9 Q. I'm sorry. That's one of the extra 10 copies. 11 MR. VILLA: Is that in evidence? 12 MR. RINALDI: I'm not certain if it is. 13 MR. BLANKENSTEIN: What's the document 14 number, Mr. Rinaldi? 15 MR. RINALDI: I'm sorry. What? 16 MR. BLANKENSTEIN: The document number, 17 the exhibit number. 18 MR. RINALDI: It's T75 -- it looks like 19 a 68 or 63. 20 THE WITNESS: 63? 21 MR. RINALDI: T7568. 22 MR. VILLA: Your Honor, we don't have a 6412 1 copy of that document. 2 MR. RINALDI: Well, I would give you, 3 then, a copy of this document. Perhaps I can read 4 along with the witness as to one page. 5 Q. (BY MR. RINALDI) Directing your 6 attention to -- 7 MR. RINALDI: Jerry, I seem to be short 8 a document. Can I give the witness this copy? 9 I'm sorry. 10 Q. (BY MR. RINALDI) This is OW013004; 11 and, again -- I think it's about the fifth page 12 in. It talks about results of operations. 13 A. Okay. 14 Q. Okay. And that sentence again talks 15 about the net loss during the six months ended 16 June 30th, 1985. And then it says -- it says, 17 "These decreases are primarily attributed -- 18 attributable to the relatively weakened housing 19 and real estate markets in Houston and most of 20 Texas which have resulted in significant increases 21 in foreclosures and non-accruing loans and, in 22 turn, increased provisions for losses on loans and 6413 1 real estate acquired in settlement of loans." 2 Do you see that? 3 A. Absolutely. 4 Q. Was it your understanding then, sir, 5 that by the middle of 1985, that the problems with 6 respect to weakening housing and real estate 7 markets in Houston had spread to the entire state? 8 A. That's correct. 9 Q. And that would have included 10 San Antonio and Austin? 11 A. It would have. 12 Q. Now, do you recall a venture known as 13 Park 410 that was approved by the senior loan 14 committee? 15 A. I recall it. 16 Q. Okay. And what do you recall of that, 17 sir? 18 A. It was a property in San Antonio, 19 excellently located as we recall -- as I recall 20 near some of the freeways in that city. 21 MR. RINALDI: Your Honor, I'd like to 22 offer T7568. That's the 10Q. 6414 1 MR. VILLA: No objection. 2 THE COURT: Received. 3 Q. (BY MR. RINALDI) Now, do you recall 4 in about 1985 entering into a joint venture with a 5 Mr. Stanley Rosenberg for the purposes of 6 acquiring an interest in that property? 7 A. I do. 8 MR. VILLA: Your Honor, I'll renew my 9 objection. I'm sure you're tired of hearing it. 10 It's the third time. I knew once Mr. Rinaldi got 11 on his feet, we're not going to get down without 12 an extensive examination on real estate. 13 I remind the Court only that I asked 14 about six questions on real estate. Now we're 15 starting on Park 410 which is one loan that they 16 bring in and fill up the entire courtroom with. I 17 object, Your Honor. I think it's beyond the scope 18 of my cross-examination. 19 THE COURT: Well, it seems to me we're 20 going way beyond the scope of the cross; and I -- 21 MR. RINALDI: Well, Your Honor -- 22 THE COURT: -- customarily allow some 6415 1 of that. But I mean, how long are you going to be 2 on this? 3 MR. RINALDI: Probably about 15 4 minutes, if I may. Mr. Villa asked him about 5 pockets of opportunity. And he said, "Yes, we 6 invested in pockets of opportunity." 7 I'd like to know is this one of those 8 pockets of opportunity. 9 THE COURT: Well, why don't you ask him 10 that? 11 MR. RINALDI: Well, I'm going to do 12 that; but I wanted to make sure that he had some 13 baseline recollection of the transaction. 14 Q. (BY MR. RINALDI) Do you recall 15 that -- you mentioned that the institution, even 16 though Austin and -- that in the Austin and 17 San Antonio area, there were pockets of 18 opportunity? 19 A. Yes, sir. 20 Q. Okay. And how did you make a 21 determination -- well, was Park 410, in your view, 22 one of those, quote, "pockets of opportunity"? 6416 1 A. It was. 2 Q. Okay. And how did you, as a member of 3 the senior loan committee, come to the conclusion 4 that this was a pocket of opportunity that the 5 institution could take advantage of? 6 A. I relied on Gross and Childress and 7 Graham when they made a case for this particular 8 situation with the borrowers that were behind it. 9 Q. Okay. Now, one of the members of the 10 joint venture was an individual named Stanley 11 Rosenberg. 12 Do you recall that? 13 A. Yes, sir. 14 Q. Do you recall that Mr. Rosenberg was 15 also a member of the board of directors of 16 MCO Corporation? 17 MR. VILLA: Your Honor, the fourth 18 objection. I don't know what MCO Corporation has 19 to do with pockets of opportunity, but we're 20 getting into the Park 410 transaction again. It 21 has nothing to do with my examination, Your Honor. 22 THE COURT: Sustained. 6417 1 Q. (BY MR. RINALDI) How did you 2 determine, in terms of -- apart from your reliance 3 upon Mr. Gross, did you review appraisals or other 4 documentation with respect to investment in 5 Park 410? 6 A. We would ask questions about appraisals 7 and how they stood up and the underwriting status 8 on all credits. That's what the committee did. 9 Not just particularly this credit. 10 Q. All right. Let me show you a copy of 11 what's been previously admitted into evidence 12 yesterday. It's A1649. These are the minutes of 13 the senior loan committee at which Park 410 was 14 approved. 15 A. Do I need both? 16 Q. No. I'm sorry. I'm just handing you 17 one. 18 MR. RINALDI: I have a copy for the 19 Court. 20 Q. (BY MR. RINALDI) These are the 21 minutes of the senior loan committee dated 22 March 17th, 1986. And directing your attention to 6418 1 the second paragraph, it indicates there that 2 there was approval of an 80-million-dollar loan to 3 Park 410 Joint -- West Joint Venture on 427 acres. 4 And then it says, "The terms and conditions are 5 shown on the attached senior loan committee 6 sheet." 7 Do you see that? 8 A. I see it. 9 Q. And let me hand you what's been marked 10 previously as T7670, and tell me if you recognize 11 that document. 12 A. I have it. 13 Q. And does this appear, then, to be the 14 attachment that would have gone with the senior 15 loan committee minutes? 16 A. Yes. 17 Q. And this is the document that would 18 have approved the 80-million-dollar Park 410 West 19 loan? 20 A. That's correct. 21 Q. And I just wanted to -- it says under 22 "appraisals" -- do you see that? 6419 1 MR. VILLA: Your Honor, I move to 2 terminate his redirect-examination as beyond the 3 scope of direct for the reasons previously stated. 4 I don't see that there is any basis that he's 5 going to follow his undertakings as to the scope 6 of what his questioning is. He simply waits after 7 you rule for a couple questions and then moves 8 back to it. So, I move to terminate his further 9 examination. 10 MR. RINALDI: Your Honor, he indicated 11 that they relied upon Mr. Gross and upon 12 appraisals. And I was simply going to ask him 13 whether they had an appraisal before they made the 14 loan. 15 THE COURT: All right. You may 16 proceed. 17 Q. (BY MR. RINALDI) Directing your 18 attention to the bottom of that page, it indicates 19 that "Edward B. Schulz is presently completing a 20 detailed R-41B appraisal which will indicate a 21 present discounted economic value between 22 86 million and 90 million." 6420 1 Do you see that? 2 A. I see it, sure. 3 Q. Do you recall whether -- does it appear 4 that the loan committee -- the senior loan 5 committee did not have the appraisal from 6 Mr. Schulz before -- at the time they authorized 7 the loan? 8 A. Yes. It indicates that it was on its 9 way. 10 Q. Was it the practice of the senior loan 11 committee to make loans without having appraisals 12 before them? 13 MR. VILLA: Objection, Your Honor. The 14 practice of the senior loan committee is not at 15 issue here, and I didn't raise appraisals and 16 neither did Mr. Blankenstein. I renew my motion 17 to terminate his examination. 18 THE COURT: Denied. Can you answer? 19 A. No, sir. We always had appraisals, as 20 best as I could recall. There might have been 21 exceptions from time to time. If it was on its 22 way, Graham or Childress would tell us; and they 6421 1 would confirm that it had finally come in, if that 2 were the case. 3 Q. (BY MR. RINALDI) Now, directing your 4 attention -- well -- 5 MR. RINALDI: Let me offer T7670. 6 Q. (BY MR. RINALDI) Now, do you recall 7 there came a time when USAT entered into -- 8 MR. VILLA: Your Honor, I believe it's 9 already in evidence in the real estate case. 10 MR. RINALDI: I'm sorry. I apologize. 11 Q. (BY MR. RINALDI) Do you recall there 12 came a time when USAT or the senior loan committee 13 considered an investment in something known as 14 Norwood/United Park? 15 A. I remember it. 16 Q. Okay. And I'll hand you a copy of 17 what's previously been admitted yesterday as 18 T7020. This appears to be the United Savings and 19 Loan Association of Texas loan committee approval. 20 Do you see that? 21 MR. RINALDI: And I'll hand a copy up 22 to the Court. This was admitted yesterday by 6422 1 Mr. Graham. 2 Q. (BY MR. RINALDI) And turning your 3 attention to the last page of that document, does 4 that appear to be your signature on the approval? 5 A. That's mine. 6 Q. Okay. And directing your attention to 7 the second page of that document, it talks about 8 "recommended by David Graham and Jenard Gross." 9 Do you see that? 10 A. Sure. 11 Q. Did Mr. Gross and Mr. Graham recommend 12 to the senior loan committee that they enter into 13 the Norwood/United Park transaction? 14 A. Yes, they did. 15 Q. And did you rely upon the 16 recommendation of Mr. Gross and Mr. Graham in 17 approving the loan as a member of the senior loan 18 committee? 19 A. Yes, I did. 20 Q. Okay. And directing your attention 21 then to the next-to-the-last page where it says 22 "appraisals," do you see that? 6423 1 A. I see it. 2 Q. It says, "A new R-41B appraisal is 3 being prepared by Rex E. Bolin which should 4 indicate a value of the raw land around 30 million 5 and the value of the tract, fully developed, at 6 45 million." 7 Do you see that? 8 A. I read it, sure. 9 MR. VILLA: I believe it's 45 million 10 plus. 11 MR. RINALDI: I'm sorry. There is a 12 plus. I apologize. 13 Q. (BY MR. RINALDI) And then just for 14 completeness, it says, "Based upon 45 million, our 15 proposed loan would be 67 percent of value." 16 Do you see that? 17 A. I do. 18 Q. Did the loan committee approve the 19 Norwood/United Park loan prior to receiving the 20 actual appraisal? 21 A. Apparently so. I can't recall. But 22 just reading what it says here, it would have 6424 1 followed shortly. 2 Q. Okay. And, again, was it the policy of 3 the loan committee to make loans without first 4 receiving an appraisal on the property as to which 5 they are making a loan? 6 A. It was not policy. But if it were to 7 follow shortly and Graham and Childress assured us 8 that it was coming, I think loans were made on 9 that basis. 10 Q. And with respect to that, do you recall 11 what the largest loan USAT ever made while you 12 were there was to a single borrower? 13 A. It may have been the Park 410 loan. I 14 don't recall any others. 15 Q. Okay. 16 A. There may have been. 17 Q. You don't recall any others of that 18 magnitude? 19 A. I'd have to be refreshed. I'm sorry. 20 I don't. 21 Q. Do you recall any others of the 22 30-million-dollar magnitude such as the United -- 6425 1 Norwood/United Park loan? 2 A. No, sir. 3 Q. And did you consider both of these 4 investments or -- strike that. 5 Did you consider both of these loans to 6 be, quote, "pockets of opportunity"? 7 A. Yes, we did. 8 Q. And your conclusion in that regard was 9 based upon your reliance upon the representations 10 of Mr. Gross? 11 A. Yes, and Childress and the committee. 12 Q. Who else on the committee would have 13 made representations to you in that regard? 14 A. Well, I guess maybe if Childress had 15 been involved. I can't recall. But he would have 16 been the only one. 17 Q. Why don't you take a look and see if 18 Mr. Childress was involved on the senior loan 19 committee at all. 20 A. No, he was not. 21 Q. He was not a member of the senior loan 22 committee? 6426 1 A. No. He was on the real estate 2 committee, that's right. Those two. 3 Q. Well, let's look at the other people. 4 How about Mr. Crow? Did he have any real estate 5 lending experience? 6 A. No. 7 Q. Now, we talked about Mr. Graham. How 8 about Mr. Gray? 9 A. Oh, Gray was hired later, yes. Later, 10 that's right. He was a real estate man, that's 11 right. 12 Q. And then Mr. Gross? 13 A. That's right. 14 Q. Who's Mr. Patterson? 15 A. Mr. Patterson was head of our retail 16 mortgage operation. 17 Q. But is it fair to say that with respect 18 to the Norwood/United Park loan that we looked at 19 which was presented by Mr. Gross and Mr. Graham, 20 that as to that loan, you would have relied 21 primarily upon Mr. Gross and Mr. Graham? 22 A. That's fair. 6427 1 MR. RINALDI: I think that's all I 2 have, Your Honor. 3 THE COURT: Do you have recross? 4 5 RECROSS-EXAMINATION 6 7 (2:19 p.m.) 8 Q. (BY MR. NICKENS) Mr. Williams, a few 9 questions about mortgage-backed securities. Would 10 you look at Exhibit 3020 which you examined 11 earlier today which is the -- 12 A. Out of here? 13 Q. Yes, sir. You can look at mine. It's 14 the form 10K for year end 1984. And I want to 15 draw your attention to Page 29 which indicates 16 that as of December 31, 1984, the association had 17 reverse repurchase agreements secured by 18 $68,189,000 in mortgage-backed securities in 1984. 19 Do you see that? 20 A. I do. 21 Q. Now -- and do you see the corresponding 22 balance for the year end 1983? 6428 1 A. 156 million, right. 2 Q. And that's the very same number that 3 Mr. Villa referenced to you in Exhibit 3019 as 4 shown by reverse repurchase agreements secured by 5 mortgage-backed securities from the prior year? 6 A. Same number. 7 Q. Now, do you know what happened to that 8 approximately $70 million in mortgage-backed 9 securities? 10 A. I can't recall. 11 Q. But it's clear that that was not part 12 of any risk-controlled arbitrage, is it not, 13 Mr. Williams? 14 And let me refer you back to 15 Exhibit 10566 where you describe the 16 risk-controlled arbitrage and indicated that its 17 balance at 12-31-84 was zero. 18 A. That's right. 19 Q. So, there is about $80 million of 20 mortgage-backed securities for which we are 21 outside any risk-controlled arbitrage? 22 A. Yes, sir. 6429 1 Q. And do you know, also, that the 2 institution held risk-controlled arbitrage through 3 its DARTs program, through its AMPs program, and 4 in its treasury portfolio? 5 A. Yes. 6 Q. Okay. Now, in that light, let me show 7 you what Mr. Guido asked you about, T4197, where 8 there's certain purposes that sales would be 9 taken. 10 Do you see that? 11 A. I do. 12 Q. Now, it says possible capital 13 appreciation is No. 3. 14 A. That's correct. 15 Q. Now, as an accountant, a sale for gain, 16 what effect does it have on capital? 17 A. Well, if you have a gain, you increase 18 capital. You help it. 19 Q. So, that would be within the purposes 20 stated? Sales for gains would be within the 21 purposes stated and reported in this letter? 22 MR. GUIDO: Objection, Your Honor. I 6430 1 think that this section deals with the corporate 2 bond portfolio. Mr. Nickens is trying to use it 3 for the mortgage-backed security portfolio. 4 MR. NICKENS: Your Honor, I'm only 5 asking him about whether or not that term, the 6 sale for gain -- whether it's mortgage backs or 7 whether it's junk bonds -- would produce and be 8 within the terms of a possible capital 9 appreciation. I think the witness has answered 10 the question. 11 A. Yes. The answer is yes. 12 Q. (BY MR. NICKENS) Now, he asked you 13 about Exhibit T4251 which indicates a sale of 14 mortgage-backed securities of $1.9 million in 15 gains? 16 A. Yes. 17 Q. Do you have any idea where those 18 securities came from as -- with regard to what 19 accounts they came from? 20 A. I do not. 21 Q. And he asked you about Exhibit A10690 22 with regard to a policy statement which was 6431 1 enacted about the time you were leaving, and it 2 included approval of sales for other appropriate 3 reasons as may be approved by the investment 4 committee? 5 A. That's correct. 6 Q. Would that include the sale, if it were 7 deemed appropriate, for a gain? 8 A. Sure. The committee would have to 9 approve it. 10 MR. NICKENS: That's all I have, 11 Your Honor. I think Mr. Villa may have some 12 questions. 13 MR. BLANKENSTEIN: I have a few 14 questions, Your Honor. 15 THE COURT: Mr. Blankenstein. 16 17 RECROSS-EXAMINATION 18 19 (2:24 p.m.) 20 Q. (BY MR. BLANKENSTEIN) Mr. Guido, I 21 believe, asked you about your -- when you left -- 22 about your conversation with Mr. Hurwitz in which 6432 1 I think you testified that you asked whether UFG 2 would relieve you of your debt obligations in 3 connection with your purchase of stock by 4 repurchasing the stock; is that correct? 5 A. Well, I didn't talk to Mr. Hurwitz 6 directly about relieving me of the debt. I just 7 talked to him about -- indirectly I did by asking 8 about taking the stock back. 9 Q. Did you ask anybody to relieve you of 10 the debt as the result of the purchase of the 11 stock? 12 A. Talked to Dr. Munitz. 13 Q. And in that connection, did you suggest 14 to Dr. Munitz that you were willing to forego the 15 remainder of your contract payments which, I 16 believe, were about $404,000 in return for the 17 extinguishment of the debt? 18 A. No. No. We didn't do that. The 19 contract that was considered was separate. 20 Q. But you didn't offer to forego the 21 payment under the contract for extinguishment of 22 the debt, did you? 6433 1 A. No, I did not. 2 Q. If you could take a look at the -- it's 3 the 10Q for the first quarter of 1985. I think 4 it's T7565. I believe it's one of the documents 5 that Mr. Rinaldi showed you. 6 A. The first quarter? 7 Q. Yes. The first quarter. 8 A. I have it. 9 Q. And if you look on the page with regard 10 to operating results which is -- 11 A. Results of operations? 12 Q. -- results of operations. And I think 13 Mr. Rinaldi asked you about the weakening market 14 in the Houston and Brownsville area; is that 15 right? 16 A. That's correct. 17 Q. I'm not from Texas, but is Austin or 18 San Antonio within any -- either of those areas? 19 A. No. 20 Q. If you take a look at the 10Q for the 21 second quarter of 1985. 22 A. I have it. 6434 1 Q. Again, the results of operations. It 2 talks about weakening real estate markets in 3 Houston and most of Texas. Right? 4 A. Yes. 5 Q. Most, if I understand it right, doesn't 6 mean all of Texas; is that right? 7 A. That's correct. 8 Q. If Mr. Childress, Mr. Graham, and 9 Mr. Gross were of the view that there were still 10 pockets of opportunity in San Antonio and Austin, 11 you would agree with that, wouldn't you? 12 A. I would. 13 MR. BLANKENSTEIN: I have no further 14 questions, Your Honor. 15 THE COURT: Mr. Eisenhart? 16 MR. EISENHART: I just have one or two 17 questions. 18 19 CROSS-EXAMINATION 20 21 (2:27 p.m.) 22 Q. (BY MR. EISENHART) I'll ask them from 6435 1 here so you're not talking back into that corner 2 all the time, sir. 3 Mr. Guido asked you a number of 4 questions about the sales of high-yield bonds made 5 at ends of quarters or year end. When those sales 6 were made, would the gains from those sales be 7 recorded on the books and records of the company? 8 A. Surely. 9 Q. And those books and records were open 10 to inspection by your accountants, Peat Marwick? 11 A. Of course. We filed 10Qs, statements 12 with the SEC. 13 Q. They look at those on a regular basis, 14 do they not? 15 A. Of course. 16 Q. Did Peat Marwick ever raise with you an 17 issue that the sales of the high-yield bond 18 securities at year end or quarter end meant that 19 this was a trading portfolio that had to be 20 mark-to-market? 21 MR. GUIDO: I object to the question as 22 being overly vague. Is the reference due to him 6436 1 individually or to USAT? 2 Q. (BY MR. EISENHART) Let's start with 3 you individually, sir. 4 A. Well, only what we looked at earlier 5 when Peat Marwick suggested that our policy needed 6 to be changed on the -- on high-yield securities 7 in order to avoid mark-to-market portfolio. 8 Q. But other than that one policy that 9 they suggested that you implement -- and I gather 10 that was implemented, was it not? 11 A. It was. 12 Q. -- did Peat Marwick ever raise any 13 issue that this was a trading portfolio and that 14 USAT was going to have to mark-to-market, to your 15 knowledge? 16 A. Not to my knowledge. 17 Q. I have just one other question. 18 Mr. Rinaldi asked you a question about Weingarten 19 Realty and offered that as an example of 20 Mr. Hurwitz' real estate acumen. That was 21 actually an equity transaction, was it not? 22 A. It was. 6437 1 MR. EISENHART: Thank you. 2 MR. NICKENS: You Honor, I would like 3 to correct the record. It's been pointed out to 4 me that I may have misspoken with regard to a 5 question I asked about the DARTs, treasury, and 6 AMPs portfolios. And I may have said, though I 7 didn't intend to, that they contained 8 risk-controlled arbitrage. What I meant to say is 9 that they contained mortgage-backed securities. 10 So, I would like to make that correction on the 11 record. 12 MR. GUIDO: Your Honor, with regard 13 to -- 14 MR. KEETON: I have one question. 15 16 CROSS-EXAMINATION 17 18 (2:29 p.m.) 19 Q. (BY MR. KEETON) How much did the 20 institution make out of the Weingarten Realty 21 opportunity that Mr. Hurwitz brought to you? 22 A. As I recall, it was in one of these 6438 1 documents. I think we made 12 to $14 million or 2 something like that but -- 3 Q. Maybe 30? 4 A. Maybe 30. I just can't recall the 5 number. We did well with it. 6 Q. A lot of money? 7 A. Yes. 8 MR. KEETON: Thank you. 9 MR. GUIDO: Your Honor, I just have a 10 couple of questions about T4197 which Mr. Nickens 11 directed the witness to, the corporate bond 12 section. 13 THE WITNESS: Is that the 10Q, 14 Mr. Guido? 15 16 FURTHER REDIRECT-EXAMINATION 17 18 (2:29 p.m.) 19 Q. (BY MR. GUIDO) That's the May 9, 1986 20 letter from Mr. Berner to Mr. Halverson. I'd like 21 to direct your attention to Page 4 which has the 22 stamp 015621. 6439 1 A. I have it. 2 Q. Okay. This goes to the question of 3 mortgage-backed securities that were held by USAT. 4 Would you read the first paragraph which says, "As 5 you are aware, many savings and loan associations 6 throughout the country had their capital severely 7 impaired during the late 1970s and early Eighties 8 as a result of having fixed rate assets and 9 floating rate liabilities. In order to assure 10 itself they would no longer be subject to the 11 mismatch of assets and liabilities generally 12 called a gap, USAT has instituted a program of 13 utilizing Ginnie Mae, Fannie Mae, and Freddie Mac 14 securities to match its assets and liabilities in 15 this sophisticated government securities matched 16 investment program"? 17 Do you see that? 18 A. Surely. 19 Q. In light of that statement, were there 20 sizable portfolios of mortgage-backed securities 21 that were not hedged by either interest rate 22 swaps, caps, or collars at USAT? 6440 1 A. I don't recall the size, no. I don't 2 recall. 3 Q. Were there -- I mean, were there any 4 mortgage-backed security portfolios that were not 5 hedged? 6 MR. VILLA: Objection. Asked and 7 answered. 8 THE COURT: Denied. Do you know? 9 A. I don't recall. 10 Q. (BY MR. GUIDO) I mean, in light of 11 the concern about the mismatch, is it fair for us 12 to assume that you attempted to minimize the 13 interest rate gap? 14 A. We tried to. Did the best we could. 15 Q. And you wouldn't have had a large 16 mortgage-backed security portfolio unhedged if you 17 were trying to minimize the gap, would you? 18 A. No. 19 Q. Okay. Now, take a look at the last 20 paragraph there. It says, "While utilization of 21 these techniques has resulted in the association 22 not taking full advantage of the recent dramatic 6441 1 decline in interest rates, USAT's management 2 believes that USAT should not be in the interest 3 rate speculation business." 4 Do you see that? 5 A. That's correct. 6 Q. Do you recall discussing this letter 7 with Mr. Berner before it was sent? 8 A. We may have. I can't -- we were in 9 dialogue with Berner all the time. I can't recall 10 specifically. 11 Q. Well, did USAT believe that it 12 shouldn't be in the interest rate speculation 13 business? 14 A. Well, "speculation" is a strong term. 15 That's why we did the hedging, in the attempt to 16 narrow the spread or control the spread on 17 mortgage-backed securities. 18 Q. Let's go on to the next sentence. It 19 says, "Rather, management believes we should 20 protect our interest rate spread and reduce our 21 gap to the fullest extent possible in all interest 22 rate environments." 6442 1 Do you see that? 2 A. That's what I just said, yeah. 3 Q. So that it's your understanding that 4 the mortgage-backed security portfolios were 5 hedged to protect against interest rate movements? 6 A. The best we could. 7 MR. GUIDO: Thank you very much. No 8 further questions. 9 10 11 FURTHER RECROSS-EXAMINATION 12 13 (2:33 p.m.) 14 Q. (BY MR. NICKENS) Mr. Williams, when 15 you own $1.6 billion in whole loans, long-term 16 whole loans financed by short-term deposits, you 17 are necessarily in the interest rate speculation 18 business, aren't you? 19 A. Well, you inherited it. We inherited 20 it. That's what we tried to get out of. 21 Q. You were trying to improve the 22 situation -- 6443 1 A. Sure. 2 Q. -- through these various devices, but 3 you had started out being in the interest rate 4 speculation business? 5 A. As we talked about this morning. 6 MR. NICKENS: No further questions. 7 MR. GUIDO: Just one question, 8 Your Honor. 9 10 11 FURTHER REDIRECT-EXAMINATION 12 13 (2:33 p.m.) 14 Q. (BY MR. GUIDO) Did you attempt to 15 purchase interest rate swaps to protect that 16 mismatch when you arrived at USAT? 17 A. I don't recall that we did. 18 MR. GUIDO: Thank you. 19 THE COURT: I gather there are no more 20 questions. Thank you, Mr. Williams. You may step 21 down. 22 THE WITNESS: Thank you, Your Honor. 6444 1 MR. GUIDO: Your Honor, we have no 2 further witnesses for this week. 3 THE COURT: All right. Well, we'll 4 adjourn until November the 12th, I believe it is, 5 at 10:00 o'clock. 6 MR. GUIDO: Thank you, Your Honor. 7 THE COURT: Is there anything else that 8 should be considered? 9 MR. GUIDO: No, Your Honor. 10 MR. VILLA: No, Your Honor. 11 12 (Whereupon at 2:34 p.m. 13 the proceedings were recessed.) 14 15 16 17 18 19 20 21 22 6445 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 31st 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 6446 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 31st 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