8189 1 UNITED STATES OF AMERICA Before the 2 OFFICE OF THRIFT SUPERVISION DEPARTMENT OF THE TREASURY 3 In the Matter of: ) 4 ) UNITED SAVINGS ASSOCIATION OF ) 5 TEXAS, Houston, Texas, and ) ) 6 UNITED FINANCIAL GROUP, INC., ) Houston, Texas, a Savings ) 7 and Loan Holding Company ) ) OTS Order 8 MAXXAM, INC., Houston, Texas, ) No. AP 95-40 a Diversified Savings and ) Date: 9 Loan Holding Company ) Dec. 26, 1995 ) 10 FEDERATED DEVELOPMENT CO., ) a New York Business Trust, ) 11 ) CHARLES E. HURWITZ, ) 12 Institution-Affiliated Party ) and Present and Former Director ) 13 of United Savings Association ) of Texas, United Financial Group,) 14 and/or MAXXAM, Inc.; and ) ) 15 BARRY A. MUNITZ, JENARD M. GROSS,) ARTHUR S. BERNER, RONALD HUEBSCH,) 16 and MICHAEL CROW, Present and ) Former Directors and/or Officers ) 17 of United Savings Association of ) Texas, United Financial Group, ) 18 and/or MAXXAM, Inc., ) ) 19 Respondents. ) 20 21 TRIAL PROCEEDINGS FOR 11-21-97 22 8190 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 of: Mayor, Day, Caldwell & Keeton 20 1900 NationsBank Center, 700 Louisiana Houston, Texas 77002 21 (713) 225-7013 22 8191 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 8192 1 2 EXAMINATION INDEX 3 Page 4 BRUCE WILLIAMS 5 Examination by Mr. Guido.................8193 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 8193 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. Mr. Guido. 5 MR. GUIDO: Yes, Your Honor. At this 6 time, the OTS would like to call Mr. Bruce 7 Williams as a witness. 8 9 10 BRUCE WILLIAMS, 11 12 called as a witness and having been first duly 13 sworn, testified as follows: 14 15 THE COURT: Be seated, please. 16 17 EXAMINATION 18 19 20 Q. (BY MR. GUIDO) Would you state your 21 full name for the record, please? 22 A. Bruce Williams. 8194 1 Q. Have you brought any materials with you 2 today that you've reviewed relating to this 3 matter? 4 A. No. 5 Q. The -- where do you reside? 6 A. My address? City, state? 7 Q. The city. 8 A. Houston. 9 Q. And what is your educational 10 background? 11 A. I have a BBA in accounting and an MBA 12 in business. 13 Q. An MBA? 14 A. Finance and accounting. 15 Q. From where? 16 A. Southern Methodist University. 17 Q. And can you tell us a little bit about 18 your employment history after graduation? 19 A. I initially worked at the old 20 Mercantile Bank in Dallas, went through their 21 credit training program. I worked about five 22 years subsequent to that at First City National 8195 1 Bank in the corporate planning and analysis 2 department. I then worked for about five years at 3 United Savings as manager of corporate planning 4 analysis and then treasurer. 5 Subsequent to that, I went back to 6 First City for a couple of years, worked in their 7 financial planning area, and for about the last 8 seven years, have worked at Texas Commerce Bank in 9 a number of capacities, including financial 10 planning and analysis and retail, finance, retail 11 marketing. 12 Q. Have you discussed your testimony with 13 any of the lawyers representing any of the parties 14 in this case? 15 A. Yes, I have. 16 Q. With whom? 17 A. Mary Clark primarily. 18 Q. When was that? 19 A. Over -- probably within the last couple 20 of weeks once or twice, and maybe within the last 21 six months once or twice. 22 Q. Have you reviewed any documents? 8196 1 A. Yes. 2 Q. What documents have you reviewed? 3 A. Numerous documents. I don't have a 4 list, nor do I remember specifically what 5 documents. 6 THE COURT: Sir, can you speak a little 7 louder, please? 8 A. I do not have a list, nor have I 9 memorized a list of specific documents which I 10 reviewed with them. 11 Q. (BY MR. GUIDO) Do you still have 12 those documents in your possession? 13 A. No, I do not. 14 Q. Where did you review those documents? 15 A. I beg your pardon? 16 Q. Where did you review those documents? 17 A. In their law offices here in Houston. 18 Q. And did you receive any documents from 19 the OTS in preparation for your testimony? 20 A. Within the last couple of weeks, I did, 21 yes. 22 Q. Do you recall what it is that you 8197 1 received from the OTS? 2 A. A copy of my deposition, and then a 3 copy of numerous other documents. 4 Q. Were those the exhibits to your 5 deposition? 6 A. I don't know. I did not have time to 7 go through each and every one of them. 8 Q. Did you review your deposition before 9 your testimony? 10 A. About half of it. 11 Q. Did you review any of the documents 12 that were sent to you by the OTS? 13 A. A few of them. 14 Q. Were you asked by the OTS to review 15 your deposition transcript and those documents 16 that were sent to you? 17 A. I may have. I don't recall. 18 Q. Now, I'd like to show you a document 19 that we've marked as Exhibit A10500, which is a 20 copy of what appears to be a resume. 21 Is that a resume that you prepared? 22 A. No, it's not a resume. It's a job 8198 1 description. 2 Q. A job description? And did you prepare 3 that job description? 4 A. I don't recall whether I did or someone 5 else did. 6 Q. And do you recall about what time it 7 was prepared? 8 A. No, I do not. 9 Q. Does the date at the top of the page 10 give you an indication of when that document was 11 prepared? 12 A. I guess I'm missing a date on my page 13 or I don't see a date. 14 Q. It has -- it looks like a fax date 15 number at the top of the page. 16 Do you see that? 17 A. I don't have any idea if that was the 18 date this was prepared or the date it was faxed. 19 Q. When did you first join USAT as an 20 employee? 21 A. I believe it was in 1984 sometime. 22 Q. And when did you leave? 8199 1 A. At the end of 1988. 2 Q. Was that after the place was closed 3 down? 4 A. I guess it was as it was closing down. 5 Q. And who asked you to leave? 6 A. Neil Twomey, I believe. I don't know 7 if that was his exact name or not. 8 Q. Did -- at the time you left, were there 9 people that reported to you that remained in the 10 employment of USAT or its successor? 11 A. I don't know that for sure. I wasn't 12 there to see the day after. 13 Q. Who reported to you just prior to the 14 closure of USAT by the OTS or the Federal Home 15 Loan Bank Board? 16 A. There was a woman named Mary Mims and 17 there was a guy named Russell McCann and then 18 there were numerous people below them. There was 19 also -- I think Kurt Schwenkel may have reported 20 to me and the group that reported to him. 21 Q. Now, with regard to Mary Mims, have you 22 spoken to Mary Mims since USAT was closed? 8200 1 A. Yes. 2 Q. Do you know where she's employed today? 3 A. I sure don't. 4 Q. When did you speak to her? 5 A. It's been years ago. 6 Q. Was it right after the closure? 7 A. Immediately after the closure, no, I 8 don't remember talking to her. 9 Q. Not after the closure? 10 A. At some point after the closure, yes. 11 Q. And do you recall where she was 12 employed at the time you spoke to her? 13 A. She was at United. 14 Q. And what about Mr. McCann? 15 A. I haven't spoken to him since -- 16 Q. Since you left? 17 A. -- the closure. 18 Q. Now, when you first joined USAT, who 19 was it that you spoke to that asked you to 20 consider employment with USAT? 21 A. I don't know that anybody asked me. I 22 think I may have approached them, but I don't 8201 1 remember the exact details. 2 Q. Who did you approach? 3 A. Mike Crow. 4 Q. And had you known Mike Crow before? 5 A. Yes. I had worked for him at First 6 City. 7 Q. After you approached Mike Crow, did you 8 interview with any other individuals prior to 9 joining USAT? 10 A. Yes. 11 Q. Who? 12 A. I don't recall the whole list. I know 13 I talked to Jerry Williams; but other than that, I 14 don't recall who else I talked with. 15 Q. Did you talk to Jenard Gross? 16 A. I don't believe so. 17 Q. Did you talk to Barry Munitz? 18 A. I don't believe so. 19 Q. Did you talk to Charles Hurwitz? 20 A. No. 21 Q. So, the only person you remember other 22 than Mr. Crow is Mr. Williams? 8202 1 A. That I specifically remember, yes. 2 Q. But you spoke to other people? 3 A. Yes. 4 Q. Who offered you your first position at 5 USAT? 6 A. It was either Mike Crow or the human 7 resources department. I don't recall specifically 8 who called with an offer. 9 Q. And what was the offer that was made to 10 you? 11 A. To take the position of manager of 12 financial planning and analysis. 13 Q. Was that a position that you had had 14 similar to the position at First City? 15 A. Yes. Well, First City, I guess, I was 16 assistant manager of that group. 17 Q. Who was the manager of that group? 18 A. A guy named Greg Sporak. 19 Q. And did he report to Mr. Crow? 20 A. Yes. 21 Q. Now, in 1984, what were your 22 responsibilities? 8203 1 A. I don't recall all of them, but 2 primarily to come in and create a department 3 within the S&L that focused on financial planning 4 analysis, budgeting, those type activities. 5 Q. Take a look at this job description. 6 Look under "corporate planning." Do you see that? 7 A. Uh-huh. (Witness nods head 8 affirmatively.) 9 Q. Take A, "Asset/liability model 10 implementation, management and reporting 11 (currently installing the Sendero model)," it 12 says. 13 With regard to asset/liability model 14 implementation, management and reporting, was that 15 your responsibility when you joined? 16 A. No. 17 Q. No? 18 A. It didn't exist. 19 Q. It didn't exist at the time. Let's -- 20 during what time period were you responsible for 21 asset/liability model implementation, management 22 and reporting? 8204 1 A. The description here implies the use of 2 a model and that was -- I don't remember 3 specifically when we moved to that. But, you 4 know, it may have been '86, '87. I really don't 5 remember when we started moving toward the use of 6 the Sendero model for that purpose. 7 Q. Do you recall reading your testimony 8 with -- when you started implementing the Sendero 9 model? 10 A. I may have. I don't recall 11 specifically reading that versus the other. 12 Q. Was the implementation of the Sendero 13 model in late '87 to early '88? 14 A. It could have been. I don't recall 15 specifically when that occurred. 16 Q. Look at B. It says "coordinating and 17 developing the annual budget and profit process." 18 Do you see that information? 19 A. Yes, I see that. 20 Q. During what time period did you have 21 that responsibility? 22 A. That was pretty much from the 8205 1 beginning. 2 Q. Okay. C, "Ongoing short and long-term 3 earnings forecast." 4 In what time period did you have that 5 responsibility? 6 A. I think that was pretty much from the 7 beginning, as well. 8 Q. D, "Financial analysis on major 9 projects such as branch sales and acquisition 10 analysis." 11 During what time period did you have 12 that responsibility? 13 A. From the beginning. 14 Q. And E, "Performance reporting for all 15 non-investment business segments/departments 16 (i.e., loan production, loan servicing, real 17 estate, et cetera)." 18 Do you see that? During what time 19 period did you have that responsibility? 20 A. That was from the beginning. 21 Q. Now, then there are entries under 22 "treasury." During what time period, take A, were 8206 1 you responsible for liquidity and cash management? 2 A. From the moment I became treasurer. 3 Q. And when was that? 4 A. I don't recall specifically. 5 Q. Was that as early as January of 1986? 6 A. It could have been then. 7 Q. When did you become a member of the 8 investment committee? 9 A. I don't recall that specifically. 10 Q. Take B, "Debt management of UFG, USAT, 11 and subsidiaries." 12 When did you become responsible for 13 that? 14 A. As part of the treasury function. 15 Q. Were you responsible for any of the 16 functions under treasury prior to becoming 17 officially designated the treasurer of the 18 organization of USAT? 19 A. K, once again, I don't know when I 20 became a member of the investment committee or the 21 strategic planning committee. So, I don't know 22 the exact timing of K. 8207 1 Q. Did you become a member of the 2 investment committee at the time it was first 3 organized? 4 A. I don't recall specifically. 5 Q. Did you become a member of the 6 strategic planning committee at the time it was 7 first formed? 8 A. I don't know that specifically. 9 Q. Do you know it generally? Do you have 10 a year? 11 A. No. 12 Q. You don't know a year? 13 A. (Witness shakes head negatively.) 14 Q. Do you know who the members of the 15 investment committee were? 16 A. I know it included the traders or the 17 portfolio managers. But other than that -- 18 Q. You don't know? You don't recall any 19 other name -- 20 A. Well, no. I recall some names, but 21 specifically I know that group was a member. 22 Q. Who else? 8208 1 A. I believe Jenard Gross was a member. 2 Art Berner was a member. Mike Crow was a member. 3 Jerry Williams, when he was there, I believe was a 4 member, but I'm not -- I don't remember that as 5 clearly as the other members. 6 Q. Anyone else? 7 A. That was an ongoing member of the 8 committee? Not that I specifically remember. 9 Q. Do you remember any people that 10 attended those meetings? 11 A. Other people attended, but not 12 regularly necessarily. 13 Q. But they did attend periodically? 14 A. Periodically, numerous people attended. 15 Q. Did anyone attend -- did Barry Munitz 16 attend that meeting? 17 A. He may have a few times. He was not a 18 regular member. 19 Q. What about Charles Hurwitz? 20 A. He may have a few times, but he was 21 also not regularly there. 22 Q. Were you the secretary for the 8209 1 investment committee at any time? 2 A. I may have been periodically. I 3 think -- and once again, it depends on what year 4 and what time. I think generally, Art Berner may 5 have been secretary. When he wasn't there, I may 6 have taken his place in terms of taking notes. 7 But ongoing, that wasn't one of my functions. 8 Q. Did you review any of the investment 9 committee minutes prior to your testimony today? 10 A. Not that I specifically recall. I 11 mean, I may have. There was a stack of documents 12 5 inches deep. So, I looked at some of them, not 13 all of them. And I don't recall specifically what 14 I reviewed. 15 Q. Did you, at any time in your employment 16 with USAT, ascertain that particular investment 17 committee minutes were inaccurate? 18 A. I may have. I don't recall. 19 Q. You don't recall? Did one of your 20 responsibilities at USAT include the development 21 of budgets? 22 A. Yes. 8210 1 Q. Tell us about the budget preparation 2 process. Who did you consult when you prepared 3 the budgets? 4 A. It would involve consulting with each 5 of the line managers, whether it was consumer 6 lending, real estate lending, mortgage lending, 7 investment portfolio, operations, human resources, 8 pretty much across the board, manager levels 9 within the organization. 10 Q. Now, was your responsibility for the 11 budgeting process a responsibility that predated 12 you becoming the treasurer? 13 A. Yeah. I think I mentioned that was 14 part of my corporate planning function when I 15 first started. 16 Q. Well, did that include preparing 17 budgets for the investment department? 18 A. It involved that. I didn't necessarily 19 prepare them myself, but it involved coordinating 20 and working with the managers there to prepare a 21 budget, yes. 22 Q. Now, who were the members of the 8211 1 investment department at the time you were 2 preparing budgets? 3 A. It varied. The same people worked 4 there the whole five years I was there. So -- 5 Q. Well, let's take mortgage-backed 6 securities. At the outset, who is it that you 7 dealt with in preparing budgets for 8 mortgage-backed securities? 9 A. Probably Ron Huebsch and Joe Phillips. 10 Q. And who did you consult with in 11 preparing budgets after Joe Phillips left? 12 A. Whoever took over immediately after 13 him. I don't remember. I guess maybe Sandy 14 Laurenson. 15 Q. She succeeded him, didn't she? 16 A. If she did, that's who I worked with. 17 Q. And after Sandy Laurenson left, who did 18 you consult with with regard to developing the 19 budgets for mortgage-backed securities? 20 A. Whoever succeeded Sandy. 21 Q. Was that Dominic Bruno? 22 A. If that was who succeeded her, yes, 8212 1 that would have been Dominic. 2 Q. Do you recall any other managers of the 3 mortgage-backed security portfolio that you dealt 4 with in terms of the budget process other than 5 those three individual? 6 A. Not specifically, but it could have 7 involved other people. 8 Q. Who during the time that Joe Phillips 9 was employed at USAT was primarily responsible for 10 managing the mortgage-backed security portfolio? 11 A. Joe Phillips. 12 Q. During the period of time that Sandy 13 Laurenson was at USAT, who was primarily 14 responsible for managing the mortgage-backed 15 security portfolio? 16 A. Sandy, I guess. 17 Q. During the -- 18 A. When you say "primarily," I don't know 19 how you're defining "primarily responsible." So, 20 if I'm interpreting your question right, I would 21 say Sandy. 22 Q. Okay. Now, when Dominic Bruno was 8213 1 there, who was primarily responsible for managing 2 the mortgage-backed security portfolio? 3 A. I would imagine Dominic Bruno. 4 Q. Did you ever give any instructions to 5 those three individual on what they should do with 6 those portfolios? 7 A. I don't believe generally I gave 8 instructions to them on what to do with their 9 portfolios, no. 10 Q. You never told them how to manage their 11 portfolio? 12 A. I may have had opinions, but I wasn't 13 the manager of the portfolio. So, they certainly 14 weren't mandated by anything I ever said as to 15 whether or not to make a trade. 16 Q. They never made a trade at your 17 direction? 18 A. It was their portfolios. I don't 19 believe so. 20 Q. And you never gave them directions? 21 A. As an individual, no. 22 Q. As a member of any committee? 8214 1 A. I think the investment committee had 2 overall oversight of the portfolios. 3 Q. And you were a member of the investment 4 committee? 5 A. Yes. 6 Q. So, to that extent, you gave them 7 instructions? 8 A. The committee gave them instructions. 9 Q. You don't recall ever transmitting 10 instructions individually to any of those 11 individuals? 12 A. Not as an individual, no. 13 Q. Did you ever transmit instructions that 14 you believed were -- you were directed to transmit 15 to them by other individuals or other committees? 16 A. That could have happened. 17 Q. Now, with regard to high-yield bonds, 18 were you responsible for developing the budgets 19 for high-yield bond portfolios? 20 A. I worked with the manager on developing 21 a budget. I did not develop the budget. 22 Q. And who was -- who were the people that 8215 1 managed that portfolio that you discussed the 2 budget process with? 3 A. Initially, probably Joe Phillips and 4 Ron Huebsch and later, I don't even recall who was 5 managing that portfolio. 6 Q. After Joe Phillips left, did Gene 7 Stoddart take over that responsibility? 8 A. Right. 9 Q. And did he continue that responsibility 10 until the end? 11 A. I believe so. 12 Q. Okay. And did he work with Ron Huebsch 13 in doing that? 14 A. On developing the budget? 15 Q. Uh-huh. 16 A. I don't have any idea. 17 Q. Did you consult with Ron Huebsch with 18 regard to the budget for high-yield bonds? 19 A. In the later years, I'm not sure that I 20 did. I don't know -- I think Gene Stoddart was 21 the manager, and Gene did not report to Ron. So, 22 at that stage, Gene was the manager. So, I would 8216 1 have worked with him on that. 2 Q. Now, who did he -- who did Gene 3 Stoddart report to? 4 A. I believe it was Mike Crow. 5 Q. Do you know why the change from him 6 reporting or Phillips reporting to Huebsch and 7 then Stoddart reporting to Crow? 8 A. No, I do not. 9 Q. Who was responsible for managing the 10 equity arbitrage portfolio at USAT? 11 A. Ron. 12 Q. All during the time that you were 13 there? 14 A. I believe so. 15 Q. Okay. Did you develop budgets for that 16 equity arbitrage portfolio? 17 A. Yes. 18 Q. And did you consult with Ron Huebsch? 19 A. Yes. 20 Q. Did you consult with anyone else? 21 A. I consulted with numerous people during 22 the budgeting process. So, yes. 8217 1 Q. Now, did you discuss budgets for any 2 other investment divisions of USAT? 3 A. I'm not sure I understand your 4 question. 5 Q. Did you prepare a budget for any other 6 divisions that made investments for USAT? 7 A. We prepared budgets for every division 8 within USAT. So, if I haven't covered any or we 9 haven't covered any, the answer is yes. 10 Q. Now, did you prepare any budgets for 11 commercial real estate investments? 12 A. Yes. 13 Q. With whom did you consult in preparing 14 those budgets? 15 A. Whoever was managing the area. I 16 believe it was -- I don't even recall their names. 17 There was Gem Childress and someone else that 18 managed real estate at that time. 19 Q. Now, after you prepared the budgets for 20 each of these entities, what did you do then? 21 A. There was a review process and I guess 22 multiple iterations of the budget to come up with 8218 1 a final agreed-upon budget that management 2 believed they wanted to approve. 3 Q. What was the review process? 4 A. I don't remember specifically. I would 5 guess -- and guess there was -- there were a 6 series of meetings where management of the 7 association would meet, look at the budgets, and 8 make revisions or make recommendations for 9 revisions. And once again, it would just be an 10 interim process. 11 Q. What do you mean, "the management"? 12 A. Management? 13 Q. Who were the management that you 14 referred to? 15 A. The line managers and above. 16 Q. Okay. Now, what about above? Were 17 there committees that reviewed the document? 18 A. I don't know that there were formal 19 committees. I mean, there wasn't a budget review 20 committee. 21 Q. Was it a common group of individuals? 22 A. In the early stages of the review 8219 1 process, it would have included myself and 2 Mike Crow and probably the line managers 3 primarily. 4 Q. The first point in developing the 5 budget. Now, after that line level preparation of 6 the budget and the review, did the budget go 7 anywhere else for review? 8 A. Again, I don't remember specific 9 details. But I would assume there was a 10 presentation to executive management or the board, 11 which I didn't ever go to board meetings; but 12 there would have had to have been a presentation 13 to the board of "Here's the budget" and going 14 through that approval process. 15 Q. Did the budget have a specific name? 16 A. It's called a budget. I'm not real 17 sure -- 18 Q. How often did you prepare it? 19 A. Annually, we would go through a 20 detailed level budget review and then, through the 21 years, there would be ongoing kind of analysis 22 comparisons to the budget. 8220 1 Q. Now, when you say that it went to the 2 board or some comparable entity, did that include 3 the executive committee? 4 A. I wasn't there. I don't recall. But I 5 would have -- I would guess so, but I don't know 6 specifically. 7 Q. Well, did you make the presentation to 8 whatever the board level committee was? 9 A. No. 10 Q. No? Who did? 11 A. I don't recall doing that. Probably 12 Mike Crow. 13 Q. Did you review the budgets with the 14 investment committee prior to their adoption? 15 A. I don't specifically remember having a 16 budget meeting with the investment committee. 17 Q. What about the strategic planning 18 committee? 19 A. The strategic planning committee would 20 have been aware of the budget. Again, I don't 21 remember the frequency of the meeting of the 22 strategic planning committee when it was formed 8221 1 and the details of how that would have come 2 together so. 3 Q. Did Doug Hansen have any role in the 4 budget process? 5 A. Such as? 6 Q. Participating in its review or 7 development. 8 A. He may have been in those meetings. 9 Probably would have been. 10 Q. In the review? 11 A. But I don't specifically remember. 12 Q. Do you recall whether or not Barry 13 Munitz was ever in any of those meetings? 14 A. He may have been, but I don't think he 15 was a regular participant in the budget review 16 meetings. 17 Q. What about Jenard Gross? 18 A. He may have been in the later stages of 19 the budget review process, but not the early 20 review process. 21 Q. What about Charles Hurwitz? 22 A. I don't know. 8222 1 Q. Now, were these budgets prepared for 2 USAT or were these budgets prepared for United 3 Financial Group? 4 A. Both. 5 Q. And were these budgets prepared for 6 subsidiaries of either of them? 7 A. I don't know whether the budget -- or I 8 don't recall whether the budget was specifically 9 prepared at a subsidiary level or just at a 10 consolidated USAT level. The budget would have 11 included the subsidiaries. 12 Q. Now, you indicated that you had 13 responsibility, as well, for performance 14 reporting. 15 Do you recall that testimony? It's 16 Item E under "corporate planning." 17 A. My E says "Accounting for all 18 investment securities." 19 Q. I'm sorry. E under "corporate 20 planning." 21 A. Oh, okay. 22 Q. Did that -- that says "performance 8223 1 reporting for all non-business 2 segments/departments." 3 Do you see that? 4 A. Uh-huh. (Witness nods head 5 affirmatively.) 6 Q. And then under "treasury," it -- at F, 7 it says "performance reporting for all major 8 investment departments." 9 Do you see that? 10 A. Uh-huh. (Witness nods head 11 affirmatively.) 12 Q. So, at some point in time, your 13 responsibility shifted from reporting -- 14 performance reporting for non-investment 15 departments to performance reporting for all major 16 investment departments? 17 A. No. 18 Q. No? 19 A. Corporate planning reported to me. So, 20 it included both of them. 21 Q. Okay. But prior to you becoming the 22 treasurer, were you responsible for performance 8224 1 reporting for all major investment departments? 2 A. I probably put together a total 3 association and total company performance report 4 that would have included everything. So -- 5 Q. From the very beginning? 6 A. From the very beginning. 7 Q. So that your responsibilities at USAT 8 from the time you first joined USAT until the time 9 you left included performance reporting for all 10 non-investment business segments/departments and 11 major investment departments? 12 A. Yes. And I guess you need to clarify 13 what you mean by "performance reporting." 14 Q. Preparation of performance reports. 15 A. Which would include what? 16 Q. Whatever the performance reports were. 17 A. Okay. 18 Q. I mean, it's your term. 19 A. Do you want to leave it -- 20 Q. Right. 21 A. This is a very generic job description. 22 So, you're trying to get more specific than the 8225 1 job description implies. 2 Q. No, I'm not trying to get more 3 specific -- 4 MR. NICKENS: Your Honor, I ask -- 5 MR. KEETON: Your Honor, he's stepped 6 on the witness' answers about five times here in 7 the last minute. 8 MR. GUIDO: I apologize, Your Honor. I 9 will refrain from doing so in the future. 10 Q. (BY MR. GUIDO) Did the performance 11 reports that you prepared include reports that 12 were prepared on a quarterly basis for the board 13 of directors? 14 A. I don't recall. 15 Q. Did the performance reports you 16 prepared include performance reports that you 17 prepared monthly for management? 18 A. Yes. It would have been a comparison 19 of actual results to budgeted results. 20 Q. Now, as the treasurer, under E it says 21 that you were responsible for accounting for all 22 investment securities. 8226 1 Do you see that? 2 A. Uh-huh. (Witness nods head 3 affirmatively.) 4 Q. Now, what did that refer to? 5 A. That would refer to settling the trades 6 that the portfolio managers made and making the 7 monthly accruals into the books and records for 8 interest income, interest expense. 9 Q. Gains on sales? 10 A. As well as losses, right. 11 Q. Did that include a valuation of the 12 market value of the investment securities? 13 A. E did not, no. E was purely an 14 accounting function. 15 Q. Did any of these functions include the 16 evaluation of the market value of the investment 17 securities? 18 A. G may have included some of that. 19 Q. Pardon? 20 A. G may have included some of that. 21 Q. Now, did you have any responsibility 22 for managing any portfolios at USAT? 8227 1 A. Yes, indirectly. As treasurer, we had 2 a treasury portfolio which included primarily 3 treasury type securities, non-mortgage-backed type 4 securities that we used for liquidity purposes, to 5 meet liquidity requirements. There was also a 6 portfolio -- and I don't recall the amount -- of 7 mortgage-backed securities that may have been in 8 the hundred-million-dollar range that were owned 9 outright that I used for liquidity. I didn't 10 specifically manage the mortgage piece of the 11 portfolio, nor did I manage the treasury 12 portfolio. So, I was not making trades, nor did I 13 ever buy or sell any of those. But those were set 14 aside for treasury to manage from a liquidity 15 standpoint and funding standpoint. 16 Q. What do you mean, "from a liquidity 17 standpoint"? 18 A. Well, there was regulatory liquidity 19 requirements that we had to meet. There was also 20 periodic funding requirements that were needed. 21 So, those were available to use as collateral for 22 funding from Federal Home Loan Bank or to use as 8228 1 reverse repo as a source of funding, depending on 2 what was needed. 3 Q. Were those portfolios managed to have a 4 ready pool of liquid assets that could be 5 converted to other purposes? Is that what you 6 mean by "liquidity portfolio"? 7 A. The intent was not to convert them to 8 anything. The intent was to have them there as a 9 source of collateral for borrowing to meet 10 liquidity requirements. 11 Q. And why was it determined that you 12 needed them there for a source of collateral in 13 case you needed to do any borrowing? 14 A. I think it would be imprudent not to 15 have a source of liquidity in any operation. So, 16 that was basically there because if rates moved, 17 if funding requirements for investments were 18 needed, it was there as an option to use. 19 Q. And what was included within that 20 liquidity portfolio again? 21 A. There was a portfolio of treasury and 22 treasury securities, treasury notes, and then 8229 1 there was a portfolio of mortgage-backed 2 securities, I believe. 3 Q. What was the total size of the combined 4 portfolio? 5 A. I don't recall. 6 Q. What was the size of the 7 mortgage-backed security portion of it? 8 A. I think I already told you I don't 9 recall specifically. 10 Q. Was it more than a hundred million? 11 A. It could have been. 12 Q. And you used the figure a hundred 13 million earlier, and that's why I asked. 14 A. Right. And I said I was unsure of 15 that. 16 Q. But it's your understanding it was 17 somewhere around a hundred million? 18 A. Somewhere around there. 19 Q. Did you participate in any discussions 20 with regard to how to manage that mortgage-backed 21 security portfolio? 22 A. Which portfolio? 8230 1 Q. The treasury portfolio that you talked 2 about. 3 A. Excuse me. I could have. 4 Q. Did you have any outside consultant 5 that you discussed the mortgage-backed security 6 treasury portfolio with? 7 A. Not that I recall, but it probably 8 would have been included in any overall analysis 9 of mortgage-backed securities. Nobody -- I don't 10 know if I specifically looked at that piece and 11 did any specific analysis on that piece, that I 12 recall. 13 Q. Did you actively trade that portfolio? 14 A. I didn't trade. I was not a manager of 15 the portfolio. So, no, I did not. 16 Q. So, you didn't -- I thought you said 17 that you were responsible for that portfolio. 18 A. I was responsible for it in terms of 19 its liquidity purposes. I think I said I was not 20 the manager of the portfolio, nor did I ever 21 execute a buy and sell trade on that portfolio. 22 Q. Did you ever direct that a buy or sale 8231 1 be made in that portfolio? 2 A. Not that I specifically remember. 3 Q. Did you ever direct a trade to be made 4 in that portfolio for liquidity purposes? 5 A. Not a trade. I would have used it for 6 borrowing purposes, but that would not -- to 7 pledge it as collateral; but not as a trade, no. 8 Q. Who was responsible for managing that 9 portfolio to make sure it didn't dissipate? 10 A. Which portfolio? 11 Q. The mortgage-backed security treasury 12 portfolio. 13 A. Generally, the mortgage portfolio 14 manager. 15 Q. And who was responsible for protecting 16 that against interest rate risk? 17 A. That was an overall investment 18 committee decision. The investment committee 19 looked at the association as a whole, not 20 necessarily specific little pieces in every case. 21 So, there weren't micro hedges on every asset on 22 the books. 8232 1 Q. There were purchases in the 2 mortgage-backed security portfolio, however, that 3 were matched against certain hedging instruments, 4 were there not? 5 A. Which portfolio are you speaking of? 6 Q. Any of them. 7 A. There could have been, yes. 8 Q. There could have been or there were? 9 A. There were, in specific instances, 10 matched funding or liability hedges or asset 11 hedges in some cases. 12 Q. And did that include for the 13 mortgage-backed security treasury portfolio that 14 you just testified about? 15 A. I don't believe so, but I don't 16 specifically remember whether there were micro 17 hedges on those particular securities. 18 Q. Did you ever attend any meetings in 19 which the risks associated with holding 20 mortgage-backed securities were discussed with 21 outside consultants? 22 A. Yes. 8233 1 Q. When? 2 A. I don't recall. 3 Q. Was one of those the Smith Breeden 4 Company? 5 A. Yes. 6 Q. What was your position at USAT at that 7 time? 8 A. I don't recall. It was either 9 corporate planning manager or treasurer, or a 10 combination of the two. 11 Q. Now, look at Item J. It says "Assist 12 in capital market activities such as issuance of 13 adjustable rate preferred stock, CMOs, 14 collateralized mortgage obligations, branch sales, 15 et cetera." 16 Do you see that? 17 A. I do. 18 Q. What does that refer to? 19 A. It refers to what it says. I'm not 20 real sure how to clarify what it says. 21 Q. Well, let me ask you some questions to 22 clarify for me. 8234 1 A. Okay. 2 Q. And that is, did that include to assist 3 in the issuance of adjustable rate preferred 4 stock? 5 A. Yes. 6 Q. And was that done? 7 A. The issuance of adjustable -- I believe 8 we did that, yes. 9 Q. And was that done in a subsidiary? 10 A. I believe so. 11 Q. Do you recall what that subsidiary's 12 name was? 13 A. No, I do not. 14 Q. Is that what's referred to as ARPS? 15 A. Yes, among many names. But that's -- 16 Q. There is also another term in the 17 papers that I'll be showing you. It's a term 18 called DARTs. 19 Do you recall that term? 20 A. Uh-huh. 21 Q. What does that refer to? 22 A. If I recall, it's the same thing as 8235 1 ARPS. 2 Q. So, in other words, DARTs and ARPS 3 are -- 4 A. Adjustable rate preferred stock. 5 Q. And then there is a reference to 6 collateralized mortgage obligations. 7 What were the activities with regard to 8 collateralized mortgage obligations that you 9 assisted in in capital market activities? 10 A. I think we had a subsidiary, I believe, 11 that issued some CMOs. 12 Q. Can you explain how it did that? 13 A. I don't specifically remember how it 14 did that. 15 Q. Well, in general. I mean, they did 16 make a number of issuances through that 17 subsidiary, did they not, at USAT? 18 A. Yes. 19 Q. Now, were those collateral mortgage 20 obligations issuances that were sold by USAT or 21 its subsidiary? 22 A. I don't understand. 8236 1 Q. Were the collateral mortgage 2 obligations purchased by USAT, were they sold by 3 USAT? 4 A. The collateral mortgage obligations are 5 the debt that was issued. So, we didn't purchase 6 or issue debt. I guess maybe we issued debt. 7 Q. Okay. So, you issued those CMOs? 8 A. Yes. 9 Q. And did you purchase anything in those 10 subsidiaries? 11 A. There would have been a purchase of 12 mortgage backs that were used to collateralize 13 those. 14 Q. To collateralize the debt that was 15 issued? 16 A. Right. 17 Q. Now, did you have any responsibility 18 for budgeting for those subsidiaries? 19 A. That would have been included as part 20 of the overall budgeting for the company, yes. 21 Q. And did you have any responsibility for 22 managing the mortgage-backed securities portfolios 8237 1 in those CMO subsidiaries? 2 A. I don't recall. I really -- I am not 3 sure you could manage those mortgage-backed 4 securities. 5 Q. What do you mean by that? 6 A. I think -- and again, I don't recall 7 the structure of the subsidiary. But I think the 8 liquidation of the mortgage backs paid off the 9 debt, and that was a non-managed subsidiary. But 10 I don't recall. My recollection of what a CMO is 11 is once it's set up, it's there and it's 12 self-liquidating and that's it. 13 Q. So, it can't be traded to generate 14 realized gains; is that right? 15 A. I said I don't recall. My recollection 16 is that it was set up as a self-contained entity, 17 and there was no transactions that could be 18 performed to create a loss or a gain. 19 Q. Now, with regard to the DARTs and the 20 ARPS subsidiaries, how were those structured? 21 A. I remember they were in a separate 22 subsidiary; but other than that, I don't recall 8238 1 the exact mechanics of how they worked. 2 Q. Were those available -- were 3 mortgage-backed securities in those subsidiaries 4 available to be traded? 5 A. I don't recall. 6 Q. Now, why do you say that it's your 7 understanding that the CMO subsidiaries were 8 structured in such a way that there couldn't be 9 any trading in those portfolios? 10 MR. NICKENS: Your Honor, I think he 11 said he didn't recall. He said they were 12 self-contained was his recollection. 13 Q. (BY MR. GUIDO) You may answer the 14 question. 15 A. I didn't understand the question. I 16 thought I answered it. 17 THE COURT: Restate your question. 18 MR. GUIDO: Pardon? 19 THE COURT: Restate your question. 20 Q. (BY MR. GUIDO) Did -- what was it 21 about those CMO subsidiaries that led you to say 22 that you didn't think that those portfolios of 8239 1 mortgage-backed securities could be traded? 2 A. It was just my recollection that they 3 were in a separate subsidiary and they were a 4 self-liquidating entity. That's my recollection 5 of the characteristics and feature of it. I don't 6 recall whether the mortgage backs were available 7 to be managed, touched, traded, or whatever. 8 Q. But it's your understanding that they 9 were not -- 10 A. It's my recollection. 11 Q. -- available to be managed, touched, 12 traded, or sold for gains or loss? 13 A. That's my recollection. 14 Q. Now, I'd like to show you a document 15 that I've marked as Exhibit T -- excuse me. 16 MR. GUIDO: Your Honor. I'd like to 17 move into evidence Exhibit 10500. 18 MS. CLARK: No objection, Your Honor. 19 THE COURT: All right. Exhibit A10500 20 is received. 21 Q. (BY MR. GUIDO) Now, I'd like to show 22 you Exhibit T4092 which has previously been 8240 1 introduced, and I don't have the tab number for 2 that. It is a memo dated May 1st, 1985 from 3 Michael Crow to Charles Hurwitz, Barry Munitz, 4 Jenard Gross, and Jerry Williams. 5 MS. CLARK: Mr. Guido, could you 6 identify your version by Bates stamp number? 7 MR. GUIDO: I'm sorry. I have it by 8 OW008095. 9 MS. CLARK: Is it a two-page document? 10 MR. GUIDO: No. It's a multi-page 11 document. It goes to 008099. 12 MS. CLARK: Your Honor, I think the 13 exhibit that's been proffered has some markings on 14 it which appear to have been added by litigation 15 counsel at some point in this investigation. 16 MR. GUIDO: Well, Your Honor, it's my 17 understanding that that may not necessarily be the 18 case, that the markings on this document may be 19 the markings of Mr. Jenard Gross. I at this point 20 am not offering the document for any of the 21 markings on the document. So with that, I'd like 22 to proceed. When we get to Mr. Gross, we'll be 8241 1 happy to discuss the markings with him. 2 MS. CLARK: No objection with that 3 understanding, Your Honor. 4 THE COURT: All right. Received. 5 MR. GUIDO: It's also my understanding 6 that the document's already previously been 7 admitted in exactly this form. 8 THE COURT: Well, it seems we have two 9 numbers. One is A10560, and the other is T4092. 10 Has it been received as -- 11 MR. GUIDO: I think the document has 12 previously been received into evidence, Your 13 Honor. I don't have the tab number. If 14 Mary Clark has the tab number, it must have been 15 introduced. If not, I offer it as T4092. 16 MR. NICKENS: It has been received, 17 Your Honor. And T4092 is three copies of the 18 document, at least the copies that have been 19 provided to us. 20 MR. GUIDO: Well, the only copy that I 21 have has Bates stamp OW008095, and it goes through 22 OW08099. 8242 1 MR. NICKENS: May I ask what is the 2 number at which it has been admitted? A10560 at 3 Tab 1474. 4 THE COURT: And that exhibit does not 5 have the encircled marking as the other one. It 6 does have the note on the front of it. So, you're 7 not offering T -- 8 MR. GUIDO: I'm not offering T4092. If 9 A10560 includes all of the pages that I've just 10 read, Your Honor, I'm not offering a new document. 11 Is that acceptable, Ms. Clark? 12 MS. CLARK: What document are we 13 offering now? 14 MR. GUIDO: I'm not offering. The 15 document is already in the record. 16 MS. CLARK: Thank you. 17 Q. (BY MR. GUIDO) Have you had an 18 opportunity to glance at the document while we've 19 been discussing it? 20 A. Which piece in particular? No. 21 Q. The document is A10560. Let me write 22 on your copy so you know what I'm referring to. 8243 1 The -- did you ever attend any planning meetings 2 in which a business plan or mission statement was 3 discussed for USAT and UFG? 4 A. I may have. I don't recall 5 specifically. 6 Q. Do you recall ever attending any such 7 meetings in 1985? 8 A. I don't recall specifically. 9 Q. Do you ever recall attending anything 10 called the Sandpiper Retreat? 11 A. Yes. 12 Q. When was that? 13 A. I don't recall. 14 Q. What was discussed at the Sandpiper 15 Retreat? 16 A. If I remember, it was more of a 17 strategic planning retreat to kind of brainstorm 18 and come up with ideas. 19 Q. Were there any outside representatives 20 at that retreat? 21 A. There may have been, but I don't 22 specifically remember. 8244 1 Q. Do you remember the name David 2 Nierenberg? 3 A. Not particularly. 4 Q. Did you ever attend any meetings where 5 he participated in discussions about business 6 planning for USAT? 7 A. I may have. I don't remember the name 8 or the person. 9 Q. Now, do you recall any -- attending any 10 strategic planning committee meetings where a 11 mission statement for USAT or UFG was discussed? 12 A. Not specifically, no. It may have been 13 discussed, but I don't specifically remember that. 14 Q. Take a look at the second page of this 15 memorandum, A10560. And look at the list of 16 activities that are referred to on that page. The 17 first one says "Real estate and real estate joint 18 ventures, essentially the same functions we have 19 today." 20 Is it your recollection that the real 21 estate and real estate joint venture activities 22 are something that UFG and USAT was doing in May 8245 1 of 1985? 2 A. I believe we had those activities, yes. 3 Q. And then it says "Merchant banking. 4 Financing activities with profit participation on 5 the part of United." 6 Do you see that? 7 A. I see that. 8 Q. Did USAT have those activities at that 9 time? 10 A. I don't know. To be quite honest, I 11 don't understand what merchant banking is. 12 Q. Did merchant banking ever get off the 13 ground at USAT? 14 A. I don't know what the term means 15 specifically. 16 Q. Then it says "Venture capital, 17 investment and startup situations." 18 Do you see that entry? 19 A. Yes. 20 Q. Did you do any accounting for any 21 venture capital division of USAT? 22 A. I don't know if there was a venture 8246 1 capital division, but we may have made a few 2 investments into venture capital type activities. 3 Q. Do you recall any examples? 4 A. Not specifically. 5 Q. Was one of those investment in a cab 6 company in Houston? 7 A. We may have invested in a company that 8 had partial or full ownership in a cab company, I 9 believe, or that may have -- I remember something 10 related to a cab company. 11 Q. Was that done through a venture capital 12 group at USAT? 13 A. How are you defining the "group"? 14 Q. I'm not. I mean, was there a venture 15 capital group? 16 A. I'm not sure how you're defining "a 17 group." 18 Q. Was there some individual who had 19 responsibility for searching out venture capital 20 investments? 21 A. There may have been an individual there 22 for a while whose partial responsibility was that. 8247 1 Q. Do you recall who that was? 2 A. No, I don't. I think his name -- for 3 some reason, I remember a Terry something, but 4 there was someone -- 5 Q. Terry Dorsey? 6 A. That may have been the person. 7 Q. Then it says "Marketable securities. 8 Investment in non-hostile takeover situations that 9 offer the potential of significant returns." 10 Do you see that? 11 A. I see that. 12 Q. Is that the reference to the equity 13 arbitrage? 14 A. It's my interpretation of what that 15 refers to, yes. 16 Q. And then it says "Investment of fixed 17 and floating rate investments for a spread." 18 Do you see that? 19 A. I see that. 20 Q. What is your understanding that that 21 refers to at USAT? 22 A. That would refer to everything from 8248 1 mortgage-backed securities to high-yield 2 securities. 3 Q. Anything beside those two? 4 A. Could have been. But generally, I 5 think that's what that focus is on. 6 Q. Then it says "Commercial construction 7 lending." 8 Was that something that USAT was 9 involved in in May of 1985? 10 A. I don't specifically know. I wasn't 11 that involved in the real estate side of the 12 business. I was not specifically involved in the 13 real estate activities. I do not recall other 14 than being involved in working with them on the 15 budget. So, I cannot answer that yes or no. 16 Q. Who was responsible for managing 17 commercial construction lending at USAT? 18 A. I don't know where that would have 19 fallen. 20 Q. Would that have included Mr. Graham, I 21 think is his name? 22 A. I don't recall where it fell. 8249 1 Q. Now, the next refers to "Syndication 2 activities of special situations. Perhaps problem 3 situations which leveraged the company's 4 entrepreneurial abilities to structure complex 5 transactions and bring them to market." 6 Do you know what that refers to? 7 A. Not specifically, no. 8 Q. Do you know generally what it refers 9 to? 10 A. No. To me, it's somewhat like merchant 11 banking. It's somewhat nebulous in terms of what 12 it means. I couldn't tell you. 13 THE COURT: We'll take a short recess. 14 15 (A short break was taken 16 at 10:02 a.m.) 17 : 18 THE COURT: Be seated, please. Back on 19 the record. Mr. Guido. 20 MR. GUIDO: Thank you, Your Honor. 21 (10:27 a.m.) 22 Q. (BY MR. GUIDO) Did you ever hear of 8250 1 the term "wholesale strategy" with regard to USAT 2 while you were there? 3 A. With regard to USAT what? 4 Q. While you were at USAT? 5 A. Yes. 6 Q. And do you recall what that referred 7 to? 8 A. Generally referred to emphasizing what 9 was classified as wholesale type transactions as 10 opposed to retail type. And "transaction" is 11 probably the wrong word, but -- rather than a 12 retail strategy, it was a wholesale strategy. I'm 13 not real sure how to clarify that for you. 14 Q. Let's take it in pieces. Did that 15 involve the sales of branches in reliance on 16 broker deposits? 17 A. It may have, yes. 18 Q. Did it? 19 A. Generally, yes. 20 Q. And did that involve the cutting back 21 on the making of single-family residential loans? 22 A. Did what? 8251 1 Q. Did the wholesale strategy include 2 cutting back on the making of single-family 3 residential loans? 4 A. Well, if you just are saying if the 5 institution went to a total wholesale strategy, 6 yes, that would probably involve that. If you're 7 saying a wholesale versus a retail, they are not 8 mutually exclusive and you can have both. So -- 9 Q. Well, did it entail a reduction in the 10 issuance of single-family loans? 11 A. I think the strategy did; but at the 12 time, there was a reason for that. 13 Q. I'm not making any judgment about it. 14 I'm just asking you a question of what it meant at 15 USAT at the time. And did that include -- the 16 wholesale strategy include an increase in 17 investment banking type activities? 18 A. It included an increase in investments 19 in such things as mortgage backs and high-yield 20 securities. 21 Q. And equity arbitrage corporate 22 securities activity? 8252 1 A. Yes. 2 Q. Did that include -- the wholesale 3 strategy include greater reliance upon brokered 4 deposits at USAT? 5 A. A wholesale strategy would rely on 6 that, yes. 7 Q. Did it at USAT? 8 A. Well, like I say, to me, there are two 9 strategies. You can have a retail strategy and a 10 wholesale strategy. And having a wholesale 11 strategy doesn't mean that your retail strategy is 12 any different from what you currently have. So, a 13 wholesale strategy would incrementally you may 14 invest in mortgage backs and high-yield 15 securities. It doesn't mean on the retail side 16 you do anything different. I think you would be 17 looking at what is your retail strategy. The two 18 weren't necessarily one and the same. You can 19 look at the business in pieces. 20 Q. Did USAT adopt a strategy that placed 21 greater reliance on wholesale activities than it 22 had prior to its purchase -- or prior to your 8253 1 employment? 2 A. That was my impression, yes. 3 Q. And did that include greater emphasis 4 on mortgage-backed securities, high-yield bond 5 purchases, and equity arbitrage activities that 6 had occurred prior to your employment? 7 A. Yes. 8 Q. When you met with Michael Crow prior to 9 being hired, did you discuss with him the 10 investment activities at USAT? 11 A. I don't recall specifically talking 12 about that. 13 Q. What kind of things did you talk about? 14 A. Well, we talked about what the 15 organization had just been through, that they had 16 just merged two S&Ls, talked about the financial 17 condition of the organization and just kind of 18 general activities within the organization. 19 Q. Did he talk about new activities that 20 were going to be engaged in by the organization? 21 A. Not specifically that I can remember. 22 Q. Did he discuss with you anything about 8254 1 a shift in emphasis in its activities from retail 2 to wholesale activities? 3 A. No. 4 Q. I'd like to show you a document that 5 I've marked as Exhibit 4101 which is a July 3rd, 6 1985 memo from -- letter from James Pledger to 7 Mr. Robert Bonchek, Federal Home Loan Bank of 8 Dallas. 9 MR. GUIDO: And I'd like to move the 10 admission of this document. It's my understanding 11 it has not previously been admitted. 12 MS. CLARK: No objection. 13 THE COURT: All right. T4101 is 14 received. 15 Q. (BY MR. GUIDO) Now, have you ever see 16 this letter before? 17 A. Not that I recall, no. 18 Q. Do you know who Robert Bonchek is or 19 was? 20 A. Never heard of the name before. 21 Q. Do you know who James Pledger was? 22 A. Yes, I did know James Pledger. 8255 1 Q. And who was he at the time? 2 A. At the time, it says he was senior vice 3 president, general counsel, and secretary. 4 Q. Is that your recollection of what his 5 position was? 6 A. That's my recollection, yes. 7 Q. Now, this discusses liability growth at 8 USAT. Do you recall that there was an issue that 9 was raised by the Federal Home Loan Bank regarding 10 liability growth at USAT? 11 A. There probably was. I don't 12 specifically remember. I mean, I did not work 13 directly with the Federal Home Loan Bank. I know 14 liability growth was always an issue because it 15 was a moving target in terms of what the 16 regulations were. But I did not specifically work 17 or interact with Federal Home Loan Bank on this. 18 Q. Do you recall what the regulations were 19 that defined the extent of liability growth that 20 was allowed at a savings and loan at the time? 21 A. Not at this time, no. Like I said, my 22 recollection was it was a moving target. So, it 8256 1 was something that changed frequently. So, I 2 don't specifically. 3 Q. Did it go up or down? What do you 4 mean, "a change"? 5 A. Meaning that the regulations and what 6 was required of a savings institution changed 7 periodically. 8 Q. You mean the regulations were changed 9 periodically or that there was an escalator for -- 10 A. The regulations changed periodically. 11 Q. Now, look at the fourth paragraph. The 12 letter is discussing growth at USAT in 1985 and it 13 says "As I advised Allen, the primary reason for 14 the increase in liabilities was reversed 15 repurchase agreements used to purchase 16 mortgage-backed securities. The interest rates on 17 the securities are fully hedged, and there is no 18 gap exposure from these investments. They have 19 been purchased based on a clear investment plan of 20 the association and have a positive impact on the 21 association's financial condition." 22 Do you see that? 8257 1 A. I see that. 2 Q. Do you recall whether in 1985 3 mortgage-backed securities had been purchased 4 financed with reverse repurchase agreements? 5 A. I'm sure some times during the year -- 6 sometime during the year that activity occurred. 7 I don't specifically -- I can't specifically 8 address any one transaction. 9 Q. In the middle of 1985 or the spring of 10 1985, do you recall that there was an increase in 11 the size of the mortgage-backed security 12 portfolio? 13 A. There was probably an increase 14 throughout the year. I don't specifically 15 remember any transactions, nor without having 16 access to books and records, do I remember levels. 17 Q. Now, do you recall what the 18 mortgage-backed securities portfolios were at 19 USAT? 20 A. Not specifically. I mean, I know they 21 were different segments of portfolios; but I 22 couldn't give you a list of them today. 8258 1 Q. Let's work from most recent. Do you 2 recall that there were mortgage-backed security 3 portfolios in United MBS? 4 A. Yes. 5 Q. Do you recall the size of the 6 portfolio? 7 A. It varied. 8 Q. Do you recall whether or not it ever 9 reached something approximating $2 billion? 10 A. I have no idea. 11 Q. Now, was there also an entity called 12 United Mortgage Finance that held mortgage-backed 13 securities that existed between November and 14 December of 1985? 15 A. There might have been. I don't 16 remember specifically the name of each and every 17 subsidiary of the company. 18 Q. Well, do you remember a finance 19 subsidiary that was set up in November of 1985 and 20 collapsed in December of '85? 21 A. I remember there was a subsidiary, yes. 22 Q. And do you recall any of the 8259 1 circumstances surrounding the creation or the 2 collapse of that subsidiary? 3 A. My recollection -- and once again, this 4 is to the best of my memory -- was that it was a 5 special-purpose subsidiary that was set up to 6 allow for the purchase of mortgage-backed 7 securities and related funding and hedging that 8 would not necessarily be included as part of the 9 measurement in liability growth. And subsequent 10 to the establishment of the subsidiary, there was 11 a ruling -- I'm not real sure where it came 12 from -- that basically said the way the sub was 13 structured, it would not qualify for this 14 treatment. 15 Q. Now, I'd like to show you a document 16 that we've marked as A10573. It is an 17 October 22nd, 1985 letter to the Federal Home Loan 18 Bank Board -- from the Federal Home Loan Bank 19 Board signed by Jack Anderson, the supervisory 20 agent. 21 MR. GUIDO: Your Honor, I move the 22 admission of A10573. 8260 1 MS. CLARK: No objection. 2 THE COURT: Received. 3 Q. (BY MR. GUIDO) I direct your 4 attention to the paragraph that's numbered No. 1 5 at the bottom part of the first page. It says 6 "The institution's liabilities at December 31, 7 1985, shall not exceed 4 billion 600 -- 8 4,624,046,000 and the institution shall be in full 9 compliance with the liability growth regulation 10 for all two consecutive quarters ending subsequent 11 to December 31, 1985." 12 Do you see that paragraph? 13 A. I see that. 14 Q. Do you recall that the Federal Home 15 Loan Bank Board had notified USAT in 1985, October 16 of 1985, that it was in violation of the liability 17 growth regulations? 18 A. No. Like I said, I did not receive or 19 interact with the Federal Home Loan Bank Board and 20 have never seen this memo before. So, 21 specifically, no. 22 Q. Well, you were responsible for 8261 1 developing the budget for the association, were 2 you not? 3 A. Uh-huh. (Witness nods head 4 affirmatively.) 5 Q. And that included budgeting for 6 regulatory compliance, did it not? 7 A. It would have included that as part of 8 the budget. 9 Q. And do you recall being informed that 10 the regulators had determined that the liability 11 growth regulation had been violated by USAT? 12 A. I don't specifically recall that. 13 Q. Do you recall generally? 14 A. No. I mean, I was not involved in 15 interactions with regulatory entities. So, 16 specifically, no. 17 Q. Do you recall anyone telling you that 18 the liability growth regulation had been violated? 19 A. At some point, had we violated it, it 20 would have been communicated to me. I would have 21 heard about it. But I don't specifically remember 22 an instance or a communication where that was -- 8262 1 Q. Do you recall -- 2 A. -- mentioned. 3 Q. -- anyone notifying you that the 4 liability growth regulation had been violated in 5 1985? 6 MS. CLARK: Your Honor, he's answered 7 this question twice now. 8 THE COURT: Sustained. 9 A. No, not specifically. 10 Q. (BY MR. GUIDO) Do you recall 11 generally? 12 A. Generally, no. 13 Q. So, you don't recall one way or the 14 other? 15 A. No. 16 Q. Now, did you have any responsibility 17 for preparing any business plans for USAT or 18 generating any of the figures for any business 19 plans for USAT? 20 A. I probably would have been involved in 21 generating some business figures, yes, depending 22 upon -- 8263 1 Q. I'd like to show you a document that's 2 been marked as T4123. It's a letter dated 3 October 28th, 1985, and it is also A10575, which 4 has previously been admitted as Tab 178. 5 MR. GUIDO: I'll show you the 10575 6 rendition, Your Honor. 7 Q. (BY MR. GUIDO) Now, I want to direct 8 your attention to the application that's attached 9 to that which has a Bates stamp No. CN052908 at 10 the beginning page of that. 11 Do you see that liability growth 12 application attached to it with that Bates stamp? 13 A. This? 14 Q. Yes. 15 A. Yes, I see that. 16 Q. Now, turn to the second page of that 17 application, which is CN052909. Do you see those 18 figures and those charts? 19 A. Uh-huh. (Witness nods head 20 affirmatively.) 21 Q. Did you provide those figures? 22 A. I don't recall whether I did or the 8264 1 accounting department did. 2 Q. Now, what was the difference between 3 your department and the accounting department? 4 A. My department generally was involved in 5 the activities which were described over here 6 which didn't involve, basically, the general 7 ledger other than making entries for securities 8 transactions, didn't involve balancing the books 9 and records, looking at what total assets, total 10 liabilities were, just everything related to 11 accounting functions. Mine was more financial, 12 financial forecasting, budgeting, financial 13 analysis type things. 14 Q. So, you didn't have any responsibility 15 for accounting? 16 A. Other than the accounting for the 17 security transactions. 18 Q. And that didn't entail making entries 19 in the general ledger? 20 A. I think I said it did make -- we did. 21 We made the entries for settling accounting -- I 22 mean investment transactions. 8265 1 Q. Did it include the preparation of any 2 balance sheets? 3 A. For the institution, no. That was an 4 accounting function. 5 Q. Did it include the preparation of any 6 income statements? 7 A. No. That was an accounting function. 8 It may have included management performance type 9 reporting which would look at bits and pieces of 10 the overall institution. But the overall 11 recording of income for the total institution, the 12 subsidiaries, preparing balance sheets, income 13 statements was an accounting function. 14 Q. Who was responsible for the accounting? 15 A. Jim Wolfe and his department. 16 Q. At all times that you were at USAT? 17 A. To the best of my knowledge, yes. 18 Q. Now -- so, either you or Jim Wolfe 19 would have provided these figures on Exhibit 20 A10575, Bates stamp CN052904? 21 A. Probably, yes. And it could have been 22 somebody that worked for either of us, as well. 8266 1 So -- but one of our two areas would have been 2 involved in it. 3 Q. Did the accounting department have 4 responsibility for budgeting? 5 A. No. 6 Q. Did they have responsibility for 7 developing pro formas for performance in the 8 future? 9 A. Periodically, I think they got involved 10 in the liability growth type issues and the pro 11 formas related to that because that dealt much 12 more with regulatory accounting type issues as 13 opposed to generally accepted accounting issues. 14 So, they were much more versed on what the 15 regulations were and how things were accounted 16 for. 17 Q. Take a look at Bates stamp CN0052915 18 which is the next -- the fourth page from the end 19 of that packet which we've marked as 20 Exhibit No. A10575. 21 MS. CLARK: Could Mr. Guido just 22 describe what he's asking about because our Bates 8267 1 numbers are different since you gave us a 2 different -- 3 MR. GUIDO: I'm asking about Exhibit C 4 that's at the end of the document. 5 Q. (BY MR. GUIDO) Do you see where it 6 says "interest rate swap summary"? 7 A. Yes. 8 Q. This looks like it's an example of a 9 transaction, does it not? 10 A. That's what it appears to be, yes. 11 Q. Now, did you prepare that example? 12 A. I don't recall whether I did or whether 13 this would have come out of the investments area 14 from the portfolio manager. I don't recall who 15 prepared this. 16 Q. Did you participate in the preparation 17 of any background material to be submitted to the 18 regulators at any time that you were at USAT? 19 A. I could have, yes. 20 Q. Did you? 21 A. I don't recall. I put together 22 numerous schedules. I don't know -- like I said, 8268 1 I was not directly involved with communications to 2 the regulatory authorities nor what final packages 3 included or excluded. So, had I put together a 4 schedule and someone inserted it in or used it as 5 part of a package, yes, that could have occurred. 6 But I was not involved in the direct development 7 of that type of communication. So, the answer is 8 I do not know. 9 Q. Well, I mean, did anyone ever come to 10 you and say, "Well, we need to make this 11 submission and we need this information. Will you 12 pull it together for us?" 13 A. That could have happened. I don't 14 specifically remember, no. 15 Q. But that was included in your job 16 description? 17 A. My job description, other than what was 18 on here, is whatever I was asked to do, pretty 19 much. So, if I was asked to prepare financial 20 information, I would go gather it and help provide 21 it to the team of people working on it. So, my 22 job description wasn't as simple as this piece of 8269 1 paper here. So, it could have included many 2 things. 3 Q. I'm just asking you whether it did. I 4 mean, do you ever recall any instance where 5 someone came to you and said, "Look. We have to 6 make a submission to the regulators. We're a 7 highly-regulated entity. We need to make a 8 submission. Will you pull together these figures 9 for us?" 10 A. My answer is it's over 10 years ago. I 11 don't specifically remember an instance like that, 12 but it very well could have happened. 13 Q. Now, did you ever participate in the 14 preparation of business plans for USAT? 15 A. And how are you defining -- I don't 16 know -- 17 Q. A plan. 18 A. I worked on the budget. So, that I 19 defined as a business plan. Once a year we would 20 do a budget. 21 Q. Did you ever participate in the 22 development of business plans that were to go to 8270 1 the board of directors for its review and its 2 approval? 3 A. Like I said, we put together the budget 4 every year and that ultimately went to the board 5 and was approved. 6 Q. Now, did the budget that you prepared 7 that went to the board include text as well as 8 figures to be presented to the board? 9 A. It may have. I did not put together 10 the final presentation that went to the board. 11 So, I don't know what was presented to the board 12 specifically. 13 Q. I'd like to show you a document that's 14 previously been introduced as A10663. It is a 15 draft -- a letter from -- memo from Art Berner to 16 various members of the USAT staff, including 17 yourself, dated August 29th, 1986. 18 Do you recall receiving that document? 19 A. Not specifically. My name's on it so I 20 must have. 21 Q. Do you recall whether you developed any 22 of the numerical figures that are part of that 8271 1 report? 2 A. Do you want me to go through this page 3 by page and look at it? I don't specifically 4 recall. I mean, I developed lots of numbers 5 during the years I was there. So, do you want me 6 to go through this page by page? 7 Q. Well, let's take a look at Page 29. 8 Let's just pick a page. Page 29. 9 A. Okay. 10 Q. Do you see that chart there? 11 A. Yes. 12 Q. Did that chart come from the treasury 13 department or the accounting department? 14 A. That would have likely come from the 15 accounting department. 16 Q. Did the accounting department keep 17 accounts based on the days of a certificate of 18 deposit? 19 A. I don't recall. 20 Q. Did the accounting department have 21 access to a database that was separate than the 22 database that you had access to? 8272 1 A. I don't know what you're calling a 2 database. So, I'm not sure what you're -- 3 Q. The financial books and records. 4 A. There was only one financial books and 5 records. 6 Q. And what was that? 7 A. General ledger and everything that the 8 accounting department maintained, pretty much. 9 Q. Okay. And did you have access to that 10 data? 11 A. I think everybody had access to it. 12 Q. Were you able to make entries in that 13 database? 14 A. The only entries -- I specifically 15 didn't make entries. My group made entries for 16 investment activities in terms of settling trades. 17 Q. And that was for mortgage-backed 18 securities, equity arbitrage, and high-yield 19 bonds? 20 A. And hedging activities. 21 Q. And hedging activities? 22 A. And we also made entries for -- I guess 8273 1 at UFG, there was various activities of their debt 2 service that we would make entries for. 3 Q. Did it make any entries with regard to 4 intercompany transactions? 5 MR. NICKENS: Did he say "intra" or 6 "inter"? 7 A. Either/or. I don't specifically 8 remember, no. I mean, if it was part of settling 9 a trade, yes. 10 Q. (BY MR. GUIDO) So, if there was a 11 transaction that involved the shifting of assets 12 or liabilities with regard to mortgage backs, for 13 example, from one subsidiary to USAT or USAT to a 14 subsidiary, your group would have made that entry? 15 A. If there was a trade ticket that came 16 through, we would have settled the trade and made 17 the entries, yes. 18 Q. Did you ever initiate any trade tickets 19 in those portfolios? 20 A. To my knowledge, no. I was not a 21 portfolio manager. 22 Q. Did you participate in any calculations 8274 1 regarding compliance with capital levels by USAT 2 that were imposed by the Federal Home Loan Bank? 3 A. I may have been. 4 Q. Do you recall whether or not you 5 participated in any transactions of moving assets 6 or liabilities or hedging instruments from the 7 books of one entity to another in order to meet 8 capital requirements? 9 A. Did I participate? I'm not real sure 10 how you -- 11 Q. Did you initiate a transaction to do 12 so? 13 A. I did not initiate, no. 14 Q. Did you execute any transactions? 15 A. I settled trades that were instituted 16 by portfolio managers. 17 Q. Now, when you say you "settled trades," 18 what does that mean? 19 A. That means someone decides to buy or 20 sell a security and they fill out a trade ticket 21 and it gets sent down to the treasury department 22 and the treasury department works with the parties 8275 1 involved in settling the trade that the portfolio 2 manager initiated. 3 Q. Now, who specifically worked for you in 4 your group at USAT? 5 A. I think I told you at the beginning, 6 Mary Mims worked for me. Russell McCann worked 7 for me. And they had -- Mary Mims had a group of 8 people below her that settled most of the trades. 9 Russell McCann may have had one or two people 10 working for him, and Kurt Schwenkel primarily 11 coordinated the budget and financial analysis. 12 Q. What was Mr. Schwenkel's background? 13 A. He had worked at First City with me. 14 Q. Doing what? 15 A. Financial planning analysis, 16 asset/liability management. 17 Q. And what about Mr. McCann? 18 A. He had worked at -- I don't remember 19 the name of a brokerage firm, but he had worked at 20 a brokerage firm prior to coming to United. 21 Q. What was his academic background? 22 A. He had a CPA and an undergraduate 8276 1 degree in accounting from somewhere. I don't 2 remember specifically where. 3 Q. Who was responsible within your group 4 for determining whether or not transactions -- or 5 how transactions were to be accounted for in the 6 books and records of USAT? 7 A. I think that was pretty much directed 8 by generally-accepted accounting principles. It 9 wasn't -- there wasn't a whole lot of leeway on 10 our side in terms of how we booked a transaction. 11 I mean, it was pretty clear cut. 12 Q. Well, who was responsible for reading 13 the literature to determine what the clear cut 14 answer was? 15 A. All of us. 16 Q. All of you? Mary Mims, Mr. McCann, 17 Mr. Schwenkel, and yourself? 18 A. Not -- Kurt Schwenkel wouldn't -- he 19 was more involved in the, like I said, corporate 20 planning and analyses, not on the treasury side in 21 terms of settling securities. He would not have 22 been. 8277 1 Q. Did you have accounting literature 2 available to you in your office? 3 A. In my office? No. 4 Q. Where did you have it available to you? 5 A. No where in particular. 6 Q. Did you have any accounting literature 7 in your offices? 8 A. We had some and then we had access, 9 whenever we had questions, to the people at 10 Peat Marwick. We could go to them for advice if 11 we ever had questions about how to record 12 transactions. 13 Q. Do you recall who it was at 14 Peat Marwick that you had access to? 15 A. It varied. Rick Millinor was there. 16 There was a guy -- I don't remember his last name, 17 something -- Joe Parsons may have been there. But 18 depending on what who was on staff at Peat. 19 Q. Jerry Clayburn? 20 A. I didn't ever really act directly with 21 Jerry Clayburn, but he may have been in one or 22 more very high-level type discussions. 8278 1 Q. Anyone else? 2 A. Like I said, that's all I recall. 3 There may have been other people. 4 Q. Did you ever attend any meetings with 5 the accountants from Peat Marwick? 6 A. I'm sure there were times when I was in 7 meetings with them, yes. 8 Q. Did you ever attend any meetings with 9 any examiners from the Federal Home Loan Bank 10 Board? 11 A. There may have been one or two; but 12 generally, no. 13 Q. Do you recall what the context was? 14 A. Not specifically, no. 15 Q. What about generally? 16 A. Not generally, no. 17 Q. Were those in the context of 18 examinations? 19 A. They must have been or they wouldn't 20 have been there. 21 Q. Pardon? 22 A. They must have been or they wouldn't 8279 1 have been there. I'm not real sure why they were 2 there most of the time when they were there, 3 unless it was examinations. 4 Q. I'd like to show you a document that 5 has been marked as A1394, and it is Tab 531. It 6 is the minutes of the investment committee of 7 May 28th, 1986. 8 I direct your attention to the third 9 paragraph of the minutes. It says "Mr. Williams, 10 Bruce Williams, presented a mortgage-backed 11 securities prepayment assumption memorandum which 12 had been recommended by the asset/liability 13 committee." 14 Do you see that? 15 A. Uh-huh. (Witness nods head 16 affirmatively.) 17 Q. Who was the asset/liability committee? 18 A. To be quite honest, I don't recall. I 19 mean, my guess is it was a committee of -- and I 20 don't remember who was on it; but basically, a 21 committee that reviewed the asset/liability 22 position of the institution periodically in terms 8280 1 of what the gap exposure was. 2 Q. What do you mean, "the gap exposure"? 3 A. Interest rate risk exposure. 4 Q. So, it's your understanding that it was 5 a committee that was set up to evaluate interest 6 rate risk to the institution? 7 A. Yes. 8 Q. Now, look at the page that's Bates 9 stamped US-3004762, May 27, 1986. MBS -- 10 "Subject: MBS prepayment speed assumptions." 11 Do you see that? 12 A. Yes. 13 Q. Do you see those initials there? 14 A. Yes. 15 Q. Are those yours? 16 A. Yes. 17 Q. Did you prepare this document? 18 A. It looks like I probably would have, 19 yes. 20 Q. Now, where did you get the information 21 for that document? 22 A. Which information specifically? 8281 1 Q. The information that says "prepayment 2 assumptions." It's on US3004763. 3 A. It would have come from the sources 4 indicated. So, the columns labeled "Morgan" would 5 have come from Morgan Stanley. "Drexel" would 6 have come from Drexel, and I believe "Smith" would 7 have been Smith Breeden. 8 Q. Now, why did you as opposed to the 9 investment department have the MBS prepayment 10 assumptions from these entities? 11 A. They got these, as well. The reason I 12 would have prepared these is because the 13 mortgage-back that we had on the books had to be 14 reviewed periodically in terms of prepayment speed 15 we were incurring because each mortgage-backed had 16 either a premium or a discount. And how you 17 amortize that premium or discount has a direct 18 impact on the income that hits the association. 19 So, as part of the treasury 20 department's group or part of our responsibility 21 was to go in and periodically look at the 22 prepayment speed and make sure they were 8282 1 reasonable and make sure that Peat Marwick felt 2 comfortable that we were amortizing premiums and 3 discounts at a reasonable rate. 4 Q. So that the prepayment speeds were used 5 by your unit to ascertain how much of a premium or 6 discount should be amortized into the books and 7 records of USAT? 8 A. Right. 9 Q. And so, the prepayment speeds that were 10 selected had an impact on the amount of profit or 11 loss that was shown on the income statements of 12 USAT? 13 A. Yes. 14 Q. Now, take a look at these prepayment 15 speeds here. And starting with -- just take the 16 first one, the Ginnie Mae 8 coupon price 92.12. 17 Do you see that? 18 A. I see that. 19 Q. Now, each of them has an estimated CPR 20 and then there is a "BEY" next to each of them. 21 Do you see that? 22 A. I see that. 8283 1 Q. Can you tell us what "CPR" refers to? 2 A. CPR is prepayment speed. 3 Q. And what is "BEY"? 4 A. Bond equivalent yield. 5 Q. What does that mean? 6 A. It basically says if you were to buy a 7 Ginnie Mae 8 at a price of 92 with a CPR of 6, 8 you'd get a bond equivalent yield of 9.57 percent. 9 Q. So, that's basically just a calculation 10 based on the first three columns? 11 A. Right. Based on amortizing the 12 discount over the life of the security based on 13 that prepayment speed. 14 Q. And then you have over here in the far 15 right-hand corner, you see it says "actual three 16 months" -- do you see that -- "average"? 17 A. Uh-huh. 18 Q. What does that refer to? 19 A. I don't recall. 20 Q. Is that -- well, is that making 21 reference to the coupon? 22 A. I think what that is making reference 8284 1 to is what the actual prepayment speed for that 2 security has been over the past three months. 3 These are forecasts that we got from these 4 companies going forward. So, all that is is a 5 reference point for the last three months. 6 Prepayment speeds 4.7 and Morgan is projecting, 7 going forward, it would be 6. 8 Q. Now, where did you get the actual 9 figures for the last three months? 10 A. I don't recall specifically. But there 11 were generally -- or there were general industry 12 publications that had actual prepayment speeds for 13 coupons for mortgage backs of, once again, various 14 agencies and coupons so they would have come from 15 publicly-available information. 16 Q. So, the actual three-month figures that 17 are here aren't figures that came from 18 mortgage-backed securities that you specifically 19 held and did a calculation based on those? 20 A. Right. This would have been industry 21 information. 22 Q. Did you ever do calculations based on 8285 1 the actual prepayment speeds of the 2 mortgage-backed securities that you held at USAT? 3 A. Yeah. No. I think we looked at ours 4 and compared them to these periodically. I 5 don't -- once again, don't remember specifics, but 6 we did look at ours. 7 Q. Where did you get the figures for the 8 specific mortgage-backed securities that USAT held 9 in its portfolio? 10 A. They would have come out of our 11 accounting system. 12 Q. And how would the accounting system 13 have generated the information to explain the 14 prepayment speeds? 15 A. Well, we had a separate accounting 16 system for mortgage backs. And the information in 17 terms of, you know, when you bought the mortgage 18 back and the principal at the time you bought it 19 versus the principal at any point in time you 20 could back into what the prepayment speed had been 21 during the interim period. 22 Q. Now -- so, it was from whatever the 8286 1 entry was in the general ledger with regard to 2 payment -- 3 A. Well, not necessarily the general 4 ledger but in the mortgage-backed securities 5 accounting system. It was a separate module that 6 accounted for the mortgage backs. 7 Q. Now, what were the -- what was the 8 information that was entered into that database? 9 A. Everything about the trade and the 10 particular security. I can't specifically tell 11 you every single data field that was there for 12 each security. 13 Q. Let's put aside trades. Let's just 14 talk about the entries that were made in that 15 system for those mortgage-backed securities that 16 were held by USAT, excluding the purchases and 17 sales of those securities. 18 What were the fields that were -- 19 A. I just said I don't specifically 20 remember what every field in the record layout 21 would be, but it would include the agency, the 22 CUSIP number, the coupon, the principal, the 8287 1 discount, prepayment speed, historical payments 2 of -- I mean, there was a long data field that 3 would go with each record, and I can't tell you 4 specifically what the system maintained for each 5 security. 6 Q. From whom did the individuals who made 7 the entries in that field get the information with 8 regard to payments, for example? 9 A. It would come as part of -- when you 10 own a mortgage-backed security, you would get 11 notification each month. Here's your principal 12 and interest payment on that mortgage-backed 13 security. That would come from the servicing 14 entity. 15 Q. Okay. And -- 16 A. So, Ginnie Mae, Freddie Mac, Fannie Mae 17 would send us that information for each security 18 we owned every month and it would be entered into 19 the system. 20 Q. And were those -- was that information 21 that you would get monthly described in the 22 prospectuses that went with the mortgage-backed 8288 1 securities that you purchased -- 2 A. You didn't get a prospectus with a 3 mortgage-backed security. 4 Q. Was there anything that you received 5 from, let's say, Ginnie Mae that described what 6 its obligations were to you or USAT as a purchaser 7 of Ginnie Maes? 8 A. On each particular trade? 9 Q. Yeah. 10 A. No, there was not. 11 Q. Or on the pool that was purchased? 12 A. No, there was not. 13 Q. So, there was no document that defined 14 its obligations? 15 A. The industry defined the obligations. 16 So, there was -- the industry defined what a 17 Ginnie Mae was and what its characteristics were. 18 So, everybody that is buying Ginnie Maes in the 19 market does not get a Ginnie Mae prospectus every 20 time they buy a security. Ginnie Mae, by 21 definition, says these are the characteristics of 22 a security and this is everything that goes with 8289 1 it. So, every transaction that takes place with 2 Ginnie Mae, they are secondary transactions. We 3 are not buying from Ginnie Mae. Ginnie Mae 4 originally issues them. After that, transaction 5 between entities occur with no intervention by 6 Ginnie Mae. So, there isn't a prospectus that 7 goes with each transaction. 8 Q. But was there a prospectus that was 9 issued by Ginnie Mae that defined its 10 responsibilities at the time those Ginnie Maes 11 were issued and purchased? 12 A. I'm sure there probably was, but we 13 didn't get it because we didn't buy it from Ginnie 14 Mae. 15 Q. But you received periodically from 16 Ginnie Mae certain information with a transmittal 17 of money, did you not? 18 A. We received information about each pool 19 we opened and what the prinicpal and interest 20 payment was by pool. 21 Q. Okay. Now, did you ever go back to 22 review the prospectuses that Ginnie Mae had issued 8290 1 that defined its obligations in terms of providing 2 information to USAT? 3 MS. CLARK: Your Honor, I believe the 4 witness has already testified that he was unaware 5 of those prospectuses. 6 A. Ginnie Mae did not issue a prospectus 7 about each security that they serviced. 8 Q. (BY MR. GUIDO) But did Ginnie Mae 9 have any publication that defined its rights and 10 obligations under those mortgage-backed 11 securities? 12 A. I'm sure they did. I don't know what 13 Ginnie Mae issued every day, or what Freddie Mac 14 or Fannie Mae issued every day. 15 Q. Well, they provided you with 16 information periodically, did they not on -- 17 A. They didn't personally send me a 18 letter, no. 19 Q. Well, they sent USAT something that 20 indicated what -- 21 A. No, they did not personally send USAT 22 anything. Ginnie Mae has no idea who owns these 8291 1 securities once they are issued. And so, they 2 don't send out a prospectus. They have no idea 3 who owns these securities. We had no 4 communications with Ginnie Mae. We bought these 5 securities on the secondary market. 6 Q. And you received payments at some point 7 in time, did you not? 8 A. Yes. 9 Q. From whom? 10 A. From Ginnie Mae, Fannie Mae, Freddie 11 Mac or whoever was the servicing entity. 12 Q. Now, the servicing entity provided you 13 with information and -- provided you with 14 information on interest earned. Right? 15 A. The principal and interest earned on 16 that particular security. 17 Q. Anything else? 18 A. You know, there was a CUSIP number, 19 there was a date. I'm sure it said "Ginnie Mae" 20 on it. There were probably a lot of other fields 21 related to the payment, yes, but -- 22 Q. Did it have prepayment speed in it? 8292 1 A. No. 2 Q. Now, based on the information that you 3 got from the servicing agency -- whether Ginnie 4 Mae, Fannie Mae, or Freddie Mac -- did you do a 5 calculation of the actual prepayment speed? 6 A. I think I said earlier when you were 7 asking that, the answer is yes. We would 8 periodically go in and look security by security 9 at what the original purchase was, what current 10 principal was, what the assumed prepayment speed 11 was in the interim. 12 Q. And you would base your calculation of 13 prepayment speeds on the information that you had 14 available to you at that time? 15 A. We didn't base it on anything. We 16 backed into what the implied prepayment speed was. 17 Q. Do you recall what time period was 18 covered by the information that you would get from 19 Ginnie Mae at any particular time? 20 A. I don't understand the question or what 21 information you're referring to. 22 Q. Let's say on January 1st, 1986 you 8293 1 receive something from Ginnie Mae that describes 2 to you the amount of interest, the amount of 3 principal, and maybe some other information and a 4 transmittal of money, I presume. You would get 5 that. 6 A. (Witness nods head affirmatively.) 7 Q. Do you know what time period that 8 information covered? 9 A. Every month, we got a payment. It was 10 a monthly payment. 11 Q. Do you know what the delay time is for 12 processing that information and transmitting it to 13 you? 14 A. I do not specifically know. It was a 15 month or two typically. 16 Q. So, it was 30 to 60 days? 17 A. Depending upon the agency, yes. I know 18 it varied by agency within a month. 19 Q. Okay. For one of the agencies, was it 20 as great as 75 days? 21 A. I don't recall specifically. 22 Q. But it was 30 to 60 days -- 8294 1 A. Generally. 2 Q. Now, look at the following page, which 3 is US3004764. It says "MBSs as of 4-30-1986." 4 Is that your happened writing at the 5 top of the page? 6 A. It appears as though it is, yes. 7 Q. Now, are these all of the 8 mortgage-backed securities that were held at that 9 point in time? 10 A. I do not know. 11 Q. Do you see the entries under the 12 categories that says CMO3, CMO2, CMO1? 13 A. Uh-huh. (Witness nods head 14 affirmatively.) 15 Q. Are those the collateral mortgage 16 obligations or the securities underlying the 17 collateral mortgage obligations that you referred 18 to were in that separate subsidiary? 19 A. I believe they are. 20 Q. Now, look at the next page. Look at 21 the bottom three entries there which are a little 22 hard to see because they look like they were cut 8295 1 off by a Post-It note or something. But it has 2 three entries there -- one for Fannie Mae 11s, one 3 for Ginnie Mae 11.15, and one for Ginnie Mae 4 10.5s. Looking back at the previous page, are 5 those the mortgage backs that were part of those 6 CMO subsidiaries that you testified to? 7 A. I believe they are the same as the 8 previous page, yes. 9 Q. Now, at the top of the page, there is 10 something that -- it looks like it's DARTs or AMPs 11 at the top that's also been cut off. 12 Do you see that? 13 A. Yes. 14 Q. Is that -- looking at that portfolio, 15 is that what you under the DARTs and AMPs 16 portfolio to have included? 17 A. You know, I can't read it just like you 18 can't read it. So, I don't know. 19 Q. Now, look at the next one down. It 20 says "CFBE." Do you see that entry? 21 A. (Witness nods head affirmatively.) 22 Q. Do you know what that refers to? 8296 1 A. That was cash flow bond that I think 2 was part of the -- and once again, I think was 3 part of the transaction of the merger of the two 4 S&Ls whenever that occurred. It occurred prior to 5 me getting there. That was part of that 6 transaction, I believe. 7 Q. Okay. And then do you see where it 8 references to treasury? 9 A. Yes. 10 Q. What does that refer to? 11 A. That's the treasury liquidity portfolio 12 referred to. 13 Q. And then there is a reference to 14 investment portfolio. Do you see that? 15 A. I see it, yes. 16 Q. Now, who was responsible for managing 17 the mortgage-backed securities under the first 18 category, which I believe are DARTs, at the top 19 there for the Ginnie Maes, the total $110,524,034? 20 MS. CLARK: Your Honor, is he asking 21 him to assume that that's the DARTs portfolio for 22 the purpose of the question? 8297 1 MR. GUIDO: That's what I'm asking him 2 to assume. 3 A. If it's the DARTs portfolio, the 4 mortgage-backed securities manager would have been 5 the person. 6 Q. (BY MR. GUIDO) And during the time 7 that Joe Phillips was the manager of the 8 portfolio, he would have been the manager of that 9 mortgage-backed security portfolio? 10 A. If he was there during this time frame, 11 yes. 12 Q. And with regard to this CFBE, the 13 mortgage-backed securities that are part of that 14 portfolio, who would have been responsible for 15 managing those mortgage-backed securities? 16 A. Quite literally, nobody. That was a 17 locked-in, collateralized borrowing that was, once 18 again, self-liquidating. So as those paid down, 19 principal and interest payments, I believe, went 20 directly to the underlying debt. And so, that was 21 just a self-liquidating transaction. 22 Q. Now, what about the treasury portfolio, 8298 1 the 158,929,000? 2 A. To the extent at that there were any 3 buy or sell type transactions, the mortgage-backed 4 securities manager. 5 Q. And that would have been Joe Phillips 6 at the time he was there? 7 A. If he was there then, yes. 8 Q. And what about the investment 9 portfolio? 10 A. That would have been whoever the 11 mortgage-backed securities manager at the time 12 would have been. 13 Q. During the time Joe Phillips was there, 14 that would have been Joe Phillips? 15 A. Yes. 16 Q. Okay. Now, the three transactions at 17 the bottom, the CMO transactions, who would have 18 been responsible for managing that portfolio? 19 A. That would have been nobody. Those 20 were, I believe, those self-liquidating 21 transactions that were in the sub. They were 22 locked up. As they paid down, they paid off the 8299 1 debt. 2 Q. Now, then the last -- the next page 3 makes reference to mortgage market review. What 4 does that refer to? 5 A. It looks very much like the page we 6 looked at before. It's the same information as 7 before. 8 Q. Well, the numbers are different, aren't 9 they? Take a look at the Ginnie Mae 8 coupon. 10 The price is different, isn't it? 11 A. Right. Actually, the date of the 12 report is different; so, that would have been a 13 different day, same type information. 14 Q. Okay. 15 A. One was dated the 27th. One is dated 16 the 28th. 17 Q. But this is basically the same sort of 18 information that you had developed on the -- 19 A. For this other exhibit. 20 Q. -- the other exhibit. It's just a 21 different date? 22 A. Looks like that's what it is, yes. 8300 1 Q. Now, look at the last page, the hedge 2 costs. What does that refer to? 3 A. It appears as though those would be the 4 costs of -- market costs of hedges as of that day. 5 So, for instance, to go buy a five-year swap, you 6 would be paying 8.49 percent. 7 Q. That isn't the actual cost of those 8 swaps that were in the portfolio of USAT? 9 A. Right. I say "right." I don't know 10 specifically, but it looks as though -- and this 11 is something I guess we would have looked at 12 periodically as part of our investments as what is 13 the current cost of hedging out in the market 14 today. I don't believe these to be the cost of 15 our current hedges. 16 Q. I mean the cost of your current hedges 17 were somewhere around 11 and a half percent at 18 this time, were they not? 19 A. I have no idea what the costs were. 20 Q. But the hedges were put on when 21 interest rates were much higher than in May 1986, 22 were they not? 8301 1 A. There were a series of hedges put on. 2 So specifically, I can't say that all were 3 anything. 4 Q. How would one ascertain what the cost 5 of the hedges were at May of 1986 that were on the 6 books of USAT at that time? 7 A. Someone would have to pull the 8 information together. 9 Q. From where? 10 A. From general ledger, from treasury 11 system. I mean, I don't specifically know. I 12 can't tell you. 13 Q. Financial statements? 14 A. Well, they would be summarized in the 15 financial statements. But each and every 16 individual hedge on the books is not listed in the 17 financial statements individually. 18 Q. Did you participate in any of the 19 discussions leading up to the decision to purchase 20 mortgage-backed securities? 21 A. You're going to have to clarify that 22 question. 8302 1 Q. Did you attend any presentations, for 2 example, from any investment banking firms 3 regarding the purchase of mortgage-backed 4 securities by USAT? 5 A. Yes. 6 Q. Do you recall with whom? 7 A. No. I mean, it occurred over the whole 8 time I was there. So, it wasn't just one meeting. 9 Q. Now, take the initial decisions or the 10 initial buildup of the portfolio in -- up to, 11 let's say, June of 1985. 12 Do you recall any of those 13 presentations? 14 A. I was not there when, I guess, that was 15 initiated. 16 Q. Well -- 17 A. And if I was, I wasn't in those 18 meetings and involved in those meetings. When I 19 first got there, I guess my initial 20 responsibilities were just getting my hands around 21 the organization, finishing up the budgeting 22 process that was there. And so, I was not 8303 1 involved in investment activities initially after 2 getting there. 3 Q. So, how large was the mortgage-backed 4 security portfolio at USAT when you first attended 5 any of these meetings where presentations were 6 made about the portfolio? 7 A. I have no idea. I don't have the books 8 and records memorized by day; so, I don't have any 9 idea. 10 Q. Well, I mean, you did -- take a look at 11 this exhibit, which is May of 1986. Let's take 12 that date. 13 A. Okay. 14 Q. As of that time, would you have 15 attended any meetings where presentations were 16 made about the desirability of investing in 17 mortgage-backed securities? 18 A. As of 1986, yes, by then I would have 19 been involved and been in some meetings. 20 Q. Okay. Do you recall any of those 21 meetings? 22 A. Not specifically or generally, no. 8304 1 Q. Do you recall whether or not any of 2 those meetings were with representatives from 3 Salomon Brothers? 4 A. Yes. There were meetings with pretty 5 much all the investment bankers. 6 Q. Okay. And did you attend most of those 7 meetings with the investment bankers? 8 A. Some of those meetings. 9 Q. Okay. 10 A. I don't know how many there were. So, 11 I can't say most. 12 Q. Now, as of May of 1986, had you 13 participated in any discussions about finding a 14 substitute for Joe Phillips' management of the 15 mortgage-backed -- for Joe Phillips' management of 16 the mortgage-backed security portfolio? 17 A. I don't recall. 18 Q. I'd like to show you -- 19 A. That's really, I guess, not a decision 20 that I would have made. That is a higher level 21 management decision. That wouldn't have been a 22 decision I would have ever directly been involved 8305 1 in or made. 2 Q. Would that have been a decision that 3 was made by the investment committee? 4 A. I don't think it would have been an 5 item on the investment committee agenda, no. 6 Q. I'd like to show you a document that 7 we've marked as Exhibit A10567, which is an 8 August 21st, 1985 memorandum to you from Michael 9 Crow. 10 MR. GUIDO: I'd like to move the 11 admission of Exhibit A10567, Your Honor. 12 MS. CLARK: No objection. 13 THE COURT: Received. 14 Q. (BY MR. GUIDO) This is a memorandum 15 dated August 21, 1985, from Mike Crow to you. 16 Do you recall receiving this 17 memorandum? 18 A. Not specifically. I'm sure I did. 19 Q. Do you recall discussing with Mr. Crow 20 the need to do a presentation to Mr. Hurwitz on 21 why USAT can't make money? 22 A. Do I -- not specifically, but I'm sure 8306 1 we did what was in this memo, I would guess. I 2 can't say I'm sure, but -- 3 Q. Well -- 4 A. My guess is we followed through and we 5 put together a presentation as outlined here. 6 Q. Do you have any reason to doubt that it 7 occurred? 8 A. No. I have no reason to doubt that. 9 Q. Now, was USAT in the middle of 1985 10 having problems developing profits from various 11 product lines? 12 A. We may have. This is a memo out of 13 five years I was there. So, without having a line 14 of books and records and income statements in 15 front of me, I can't really tell you. 16 Q. I'd like to show you a document that 17 we've marked as A10576, which is a memo from 18 Mr. Crow to Mr. Gross responding to various notes. 19 And it's dated 10-29-85. 20 MR. GUIDO: I'd like to move the 21 admission of A10576, Your Honor. 22 MS. CLARK: No objection. 8307 1 THE COURT: Received. 2 Q. (BY MR. GUIDO) Look at Item No. 3. 3 It says "Our net worth requirement for regulatory 4 purposes is measured against USAT regulatory 5 figures. At August 31st, regulatory net worth was 6 184 million. As a percent of assets, that amount 7 is 4.3 percent and was in excess of the required 8 regulatory net worth by $44 million." 9 Do you see that? 10 A. I see that. 11 Q. Okay. And then look at the attachment 12 to it dated October 14th, 1985. It says "notes" 13 and it says "Jenard Gross." 14 A. Uh-huh. (Witness nods head 15 affirmatively.) 16 Q. Do you recall periodically receiving 17 copies of Mr. Gross' notes regarding the 18 performance reports that were prepared at USAT? 19 A. Yes. 20 Q. Did they have a title or a name that 21 they were referred to generically inside the 22 organization? 8308 1 A. This just says "Jenard Gross" and 2 "notes." 3 Q. Did they have -- was there a term that 4 was used to describe them? 5 A. Yes, there was. 6 Q. What was the term? 7 A. Jenard-o-grams. 8 Q. Jenard-o-grams? And why was it -- why 9 were they referred to as Jenard-o-grams? 10 A. Basically, Jenard would get the 11 performance report and a dictaphone and read 12 through it and make comments as to points or 13 highlights or things he wanted someone to look 14 into, and they were just pretty much typed as is. 15 Q. And then they were sent around to 16 various individuals to respond to. Right? 17 A. Yes. 18 Q. And that happened periodically, did it 19 not? 20 A. It happened fairly regularly, yes. I 21 mean, he actively read it and was constantly 22 reviewing the financials, yes. 8309 1 Q. And he made comments on operations 2 based on the performance report, did he not? 3 A. Yes. 4 Q. Now, I'd like to show you a document 5 that we've had marked as A10585. It's a 6 performance report dated 11-26-1985. 7 Is that your initials at the top of the 8 page of that document? 9 A. Yes. 10 Q. And the subject matter, October 1985 11 performance. Do you see that? 12 A. I see that. 13 Q. And it's dated November 26th, 1985. At 14 the time that that document was prepared, were you 15 the treasurer of USAT? 16 A. I don't recall. 17 Q. Did you prepare performance reports 18 prior to the time you were treasurer of USAT? 19 A. I don't recall. I mean, if you -- 20 Q. Pardon? 21 A. I don't recall. If you find copies of 22 these with my name on it, yes, I did. But I don't 8310 1 specifically remember datewise when I started 2 writing this versus what my title was at the 3 association. 4 Q. Let's take a look -- 5 MR. GUIDO: I'd like to move the 6 admission of A10585, Your Honor. 7 MS. CLARK: No objection, Your Honor. 8 THE COURT: Received. 9 Q. (BY MR. GUIDO) Now, look at the table 10 that's there. It has "October" and then 11 "year-to-date." I presume "year-to-date" means 12 through October of that year? 13 A. Yes. 14 Q. And it has "actual" and then it has a 15 column "B/(W) plan." 16 Do you see that? 17 A. I see that. 18 Q. Now, what does the term "actual" refer 19 to? 20 A. I'm not sure how to clarify what that 21 means other than that's what actually went through 22 the books and records as income for the period. 8311 1 Q. What had actually transpired? 2 A. Yes. 3 Q. And then -- 4 A. Based -- and I believe based on GAAP, 5 not necessarily on RAAP. 6 Q. So, this is on GAAP accounting -- 7 A. Yes. 8 Q. -- it's your understanding? And then 9 it has "B/(W) plan." 10 Do you see that? 11 A. I see that. 12 Q. What does that refer to? 13 A. It refers to better/worse than plan. 14 Q. And then it has -- so that the better 15 would be a number without parentheses around it 16 and worse would be -- or the paren around it is 17 worse and, without that, it's better than plan. 18 Is that what it means? 19 A. Yes. 20 Q. So, these are figures -- deviations 21 from some plan in this column B/W? 22 A. Right. 8312 1 Q. And who -- are those the plans that you 2 testified about earlier that you prepared? 3 A. Yes. 4 Q. Then if you go down the left-hand side, 5 it says "base net interest income." 6 Do you see that? 7 A. I see that. 8 Q. What does that refer to? 9 A. That is net interest income excluding a 10 number of items that might normally be included in 11 net interest income. 12 Q. For example, the cost of carry on real 13 estate foreclosed and the cost of carry on 14 non-accruals. So, those would be excluded from 15 the base net interest income? 16 A. In this particular schedule, they would 17 be, yes. 18 Q. And then it says "net interest income." 19 Do you see that column? 20 A. That row, yes. 21 Q. That row. Okay. Now, that is base net 22 interest income adjusted for real estate 8313 1 foreclosed and non-accruals? 2 A. Yes. 3 Q. Now, why were real estate foreclosed 4 and non-accruals separated out from base net 5 interest income? 6 A. Because we wanted to highlight the drag 7 on earnings of those two particular activities. 8 Q. Then it has "non-interest income." 9 Do you see that? 10 A. I see that. 11 Q. Okay. And the first entry is "equity 12 arbitrage." Do you see that? 13 A. I see that. 14 Q. Is that the purchase of the corporate 15 securities that you testified about earlier? 16 A. You're going to need to clarify your 17 question. 18 Q. Is that -- the equity arbitrage, is 19 that the purchase of corporate stock that was made 20 by USAT -- 21 A. Corporate equities, but not corporate 22 debt. 8314 1 Q. Okay. Corporate equities? 2 A. Yes. 3 Q. So, equities refers to purchase of 4 corporate equities? 5 A. Yes. 6 Q. And then "merchant banking," do you see 7 that? 8 A. I see that. 9 Q. And is that that nebulous term that 10 you've never been able to define? 11 A. Yes. 12 Q. Now, it was defined for purposes of 13 financial statements, was it not? 14 A. Uh-huh. Well, it was defined in this 15 case as probably a particular transaction. 16 Q. Okay. And then it has "real estate 17 income." 18 Do you see that column? 19 A. I see that. 20 Q. What does that refer to? 21 A. I don't recall. I would guess it would 22 be gains on sales -- gains and losses on sales of 8315 1 real estate and the cost of carry onto related 2 real estate activities. 3 Q. Then the next entry says "gains on 4 loans and sale of servicing." 5 Do you see that? 6 A. I see that. 7 Q. What does that refer to? 8 A. Just what it says, gains on loans and 9 sale of servicing. 10 Q. What does "servicing" refer to, just to 11 clarify the record? 12 A. Mortgage servicing. 13 Q. So, in other words, the right to 14 service something was being sold here? 15 A. Right. 16 Q. And then it says "gains on sales of 17 securities." 18 Do you see that? 19 A. I see that. 20 Q. What does that refer to? 21 A. Just what it says. It actually ought 22 to be net gains. But net gains on sales of 8316 1 securities, whether they were mortgage backs or 2 high-yield securities, they would have gone 3 through that line. 4 Q. So, that line covers mortgage backs and 5 high-yield bond? 6 A. Yes. 7 Q. And it excludes the equity securities? 8 A. Yes. 9 Q. Then there is an item called "other 10 income." 11 Do you know what that refers to? 12 A. No, I do not. 13 Q. And then it has "total non-interest 14 income." Now -- then there is this item "income 15 before non-interest expense." 16 What does that refer to? Is that the 17 combination of the net interest income and the 18 non-interest income? 19 A. Yes, it is. 20 Q. And then you have non-interest expenses 21 that are listed there. 22 Do you see those? 8317 1 A. I see those. 2 Q. And it has the FSLIC premium operating 3 expense, goodwill amortization, and provision for 4 losses. 5 Do you see that? 6 A. I see those. 7 Q. Where do the costs of the reverse 8 repurchase agreements that were used to fund the 9 purchases of mortgage-backed securities appear? 10 In which of these lines? 11 A. In base net interest income. 12 Q. And does the base net interest income 13 also include the interest earned off the 14 mortgage-backed securities that were financed by 15 those reverse repos? 16 A. Among other things, yes. 17 Q. Does the cost of the reverse repos, if 18 they were hedged by a swap instrument, are those 19 adjusted before the inclusion in the base net 20 interest income figure? 21 A. The base net interest income would have 22 included the cost of the hedges. 8318 1 Q. Okay. Now, take a look at the Bates 2 stamp US0001068, which is Page 4 of the 3 performance report. 4 A. Okay. 5 Q. The -- this is dated November 26th and 6 it's for the period ending October 31st. Do you 7 see the figure "excess net worth"? 8 A. I see it. 9 Q. And does that show a decline from the 10 previous figures that you testified about in 11 Exhibit A10576? 12 A. I have no idea what you're referencing 13 so I can't tell you. 14 Q. Well, see the 22-million-dollar figure 15 here? 16 A. Yeah. I see that. 17 Q. And is that the figure that you 18 calculated as of November 26th, 1985, to be the 19 net worth of USAT at that point? 20 A. That would have been the figure I would 21 have gotten from the accounting group as to what 22 our net worth was, right. 8319 1 Q. Now, let's go through where you got the 2 source of the information for this document? 3 MS. CLARK: Your Honor, just a 4 clarification. I'm sorry. I believe he asked 5 whether it was a figure as of November 26th, and 6 the chart shows October 31. 7 MR. GUIDO: No. I think I did clarify 8 that. I said the document was prepared 9 November 26th, Ms. Clark, and I said it was for 10 the period ending October 31, 1985. 11 MR. KEETON: Next question. 12 Q. (BY MR. GUIDO) Is the figure 13 22 million that appears on that page that I just 14 showed you for the period ending October 31st, 15 1985? 16 A. According to this page, yes, that's 17 what it's referring to. 18 Q. Thank you. Now, this document at the 19 last page of the document, 001073, is a memorandum 20 from Mike Crow to the board of directors and 21 attaching this performance report. 22 Is it your understanding that monthly 8320 1 performance reports were regularly provided to the 2 members of the board of directors of USAT? 3 A. I don't have any idea. 4 Q. Now, going back to Page 1 -- look back 5 at Page 1. Where did the information for that 6 income statement come from? 7 A. It would have come from the accounting 8 department. 9 Q. Now, take a look at Page 2, the text at 10 the top of the page that talks about net interest 11 income. Who wrote that? 12 A. I did. 13 Q. And where did you get the information 14 that's included in there? 15 A. From the accounting books and records. 16 Q. Take a look at Page 4, going back to 17 the October 31 calculation of excess net worth. 18 Where did you get the information on 19 the regulatory net worth requirement that's on 20 that chart? 21 A. That would have come from the 22 accounting group. 8321 1 Q. And that was Mr. Wolfe's group? 2 A. Yes. 3 Q. And then there are these consolidated 4 statements that are attached to it? 5 A. Right. 6 Q. Is that information that you obtained 7 from the accounting group? 8 A. Yes. 9 Q. Now, I'd like to direct your attention 10 to a document that's already been in the record. 11 It is A5008. It's at Tab 555, and I think it's 12 dated 11-20-1985. 13 THE COURT: Mr. Guido, before we start 14 on a new document, I believe we should adjourn. 15 MR. GUIDO: Your Honor, no objection, 16 Your Honor. We all have an early flight to catch, 17 and this may be an appropriate time to adjourn. 18 We need to raise a question of scheduling. 19 THE WITNESS: I have a scheduling 20 question in that I've just now been provided 21 information before we started when we're supposed 22 to reschedule a return, and I'm not sure I'll be 8322 1 available then due to some work commitments. 2 THE COURT: Well, you'll have to work 3 that out with counsel. We'll adjourn until 4 December the 2nd at 10:00 a.m. 5 MR. GUIDO: Thank you, Your Honor. 6 7 (Whereupon at 11:48 a.m. 8 the proceedings were recessed.) 9 10 11 12 13 14 15 16 17 18 19 20 21 22 8323 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 21st day of 17 November, 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 8324 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 21st day of 18 November, 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