10748 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 12-16-97 22 10749 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 SCOTT SCHWARTZ, Esquire 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 10750 1 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO., CHARLES HURWITZ, AND MAXXAM, INC.: 2 JACKS C. NICKENS, Esquire 3 of: Clements, O'Neill, Pierce & Nickens 1000 Louisiana Street, Suite 1800 4 Houston, Texas 77002 (713) 654-7608 5 ON BEHALF OF JENARD M. GROSS: 6 PAUL BLANKENSTEIN, Esquire 7 MARK A. PERRY, Esquire of: Gibson, Dunn & Crutcher 8 1050 Connecticut Avenue, N.W. Washington, D.C. 20036-5303 9 (202) 955-8500 10 ON BEHALF OF BERNER, CROW, MUNITZ AND HUEBSCH: 11 JOHN K. VILLA, Esquire MARY CLARK, Esquire (Not present) 12 PAUL DUEFFERT, Esquire of: Williams & Connolly 13 725 Twelfth Street, N.W. Washington, D.C. 20005 14 (202) 434-5000 15 OTS COURT: 16 HONORABLE ARTHUR L. SHIPE Administrative Law Judge 17 Office of Financial Institutions Adjudication 1700 G Street, N.W., 6th Floor 18 Washington, D.C. 20552 Jerry Langdon, Judge Shipe's Clerk 19 REPORTED BY: 20 Ms. Marcy Clark, CSR 21 Ms. Shauna Foreman, CSR 22 10751 1 2 EXAMINATION INDEX 3 Page 4 JOHN STONE 5 Continued Examination by Mr. Leiman.....10753 6 Cross-Examination by Mr. Villa..........10817 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 10752 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. 5 Mr. Leiman. 6 MR. LEIMAN: Your Honor, as a 7 preliminary matter, I was going over the 8 transcript last night. Page 10682, a letter was 9 changed. It makes a difference. The word on Line 10 12 should be "expansive" rather than "expensive," 11 and I'd like the record to reflect that change. 12 THE COURT: All right. Would you state 13 the page. 14 MR. LEIMAN: Yes, sir. It was 15 Page 10682, Line 12. Change the word "expensive" 16 to "expansive." 17 THE COURT: I gather respondents have 18 no disagreement with that? 19 MR. BLANKENSTEIN: No, Your Honor. 20 MR. VILLA: No, Your Honor. 21 22 10753 1 2 CONTINUED EXAMINATION 3 4 5 Q. (BY MR. LEIMAN) Good morning, 6 Mr. Stone. 7 A. Good morning, Mr. Leiman. 8 MR. LEIMAN: May I continue, Your 9 Honor? 10 THE COURT: Yes, you may. 11 MR. LEIMAN: Thank you. 12 Q. (BY MR. LEIMAN) Before we broke 13 yesterday for the evening, I had provided you with 14 a copy of the Appraisal Associates of Austin 15 appraisal which should be Exhibit T7701 at Tab 16 734. 17 A. I have T7701, Tab 734. 18 Q. And what we were talking about in this 19 regard had to do with underwriting functions and 20 in that, specifically the importance or 21 significance of appraisals. 22 Do you remember your -- our discussion 10754 1 about that? 2 A. Yes, I do. 3 Q. Okay. Have you seen the Appraisal 4 Associates of Austin appraisal? 5 A. Yes, I have. 6 Q. In what context did you see it, 7 Mr. Stone? 8 A. I don't recall at what stage of my 9 document review, whether it was in my initial 10 stage, the exhibits I explained as RE1 through 11 101, or if it was subsequent to my report in the 12 file review I did afterwards. 13 Q. Did you look at it? 14 A. Yes, I did. 15 Q. You didn't read the whole report, did 16 you? 17 A. No, I didn't. 18 Q. Okay. Was there any part of the report 19 that was significant to you? 20 A. Several parts. 21 Q. What were they? 22 A. One, the value listed in the summary 10755 1 cover letter was listed 37,500,000. 2 Q. That would be on the page marked KM67? 3 A. Yes, at the very bottom of that page. 4 Q. Why would it be -- why was that 5 significant to you? 6 A. For several reasons. One, that it is 7 listed as an appraisal for a subdivision as if it 8 were completed, according to the first paragraph 9 of that same letter. And it was dated June 11th, 10 1986. Before we ended yesterday, we had looked at 11 a document, namely Exhibit T7590, dated June 2nd 12 of 1986, approving the Norwood loan. And in that 13 document, on the third page, the approval document 14 indicated that a new R-41B appraisal is being 15 prepared by Rex Bolin which should indicate a 16 value of the raw land around $30 million and the 17 value of the tract fully developed at $45 million. 18 This document, Appraisal Associates of 19 Austin, dated some nine days after that approval 20 and the approval predicated on an appraisal not 21 then prepared with an indicated value of 22 45 million stands at odds with that statement. 10756 1 That appraisal was to be prepared by a Mr. Rex 2 Bolin. This appraisal, by a different appraiser, 3 lists a substantially lower value on that 4 property, which obviously raised questions in my 5 mind about both the statement in the approval and 6 the approval itself and led me to search further 7 for a possible explanation, which I did. 8 Q. Were there any other points in 9 connection with this appraisal that were 10 significant to you? 11 A. There were points relating to this 12 proposal that were significant to me. I'm not 13 saying within the body of the appraisal itself. 14 Q. T7029. This was previously admitted at 15 Tab 698. 16 Have you seen T7029 in connection with 17 your preparation for testifying? 18 A. Yes, I have. 19 Q. This is the Rex Bolin appraisal with an 20 "as of" date of June 5, 1986, with a transmittal 21 letter of July 22, 1986. Right? 22 A. Correct. 10757 1 Q. How did this play in your thinking? 2 A. Well, it raised the question to me of 3 two appraisals on the same property of 4 approximately the same date with a wide variance 5 in their summary value estimate. Yet, I saw no 6 mention in any of the bank's records of the 7 earlier appraisal at a much lower value by the 8 Appraisal Associates of Austin. And I saw further 9 evidence that the institution may, in fact, never 10 had seen the Appraisal Associates of Austin 11 appraisal, yet they funded the cost of that 12 appraisal through the loan proceeds on the loan. 13 Q. Do you have T7801 in front of you? 14 A. Previously? Is that from yesterday? 15 Q. Yes. 16 A. I have the documents that were left on 17 the witness stand from yesterday, but I do not see 18 a T7801. 19 MR. LEIMAN: The witness is correct, 20 Your Honor. It is not here. 21 22 10758 1 (Whereupon the witness was 2 handed the exhibit.) 3 4 A. Yes, I have that document now before 5 me. 6 Q. (BY MR. LEIMAN) You looked at this 7 yesterday. Do you remember this particular 8 document, Mr. Stone? 9 A. Yes, I do. 10 Q. Okay. Do you remember your testimony 11 on it? 12 A. I recall my summary conclusions on it, 13 yes. 14 Q. All right. Now, if you would, look at 15 T7017, which is Tab 683. Let me give that to you, 16 Mr. Stone. 17 A. Yes, I recall this document. 18 Q. This is a May 8th letter from David 19 Graham to Jeff Minch. Why do you recall this 20 letter? 21 A. Well, I incorporated it in my report 22 that has been submitted before this court as 10759 1 evidence of my opinion of the impropriety of two 2 things. One, informing an appraiser before they 3 have completed their work of the amount they need 4 to come up with to justify a loan. As this letter 5 states in the second paragraph, "He needs to try 6 to arrive at an R-41B value of 47 million plus, if 7 at all possible." 8 Secondly, the point being made that 9 this instruction is being provided by the lender 10 through the borrower, having the borrower 11 communicate and indicating the borrower already 12 has communicated with the appraiser, which again 13 in my opinion is not appropriate and destroys the 14 intended value of an appraiser -- appraisal. 15 Q. Mr. Stone, look back at the Appraisal 16 Associates of Austin appraisal, which is T7701, 17 Tab 734. Tell me to whom this appraisal was 18 directed. 19 A. It, likewise, is directed to 20 Mr. Jeffrey Minch, the same individual that the 21 previous exhibit was addressed to. Mr. Jeffrey 22 Minch being the borrower. 10760 1 Q. In your reading of the testimony and 2 review of other -- and review of documents, were 3 you able to determine who paid for this particular 4 appraisal? 5 A. Yes. In Mr. Minch's testimony, he was 6 asked the question: "And you subsequently went 7 out to Appraisal Associates of Austin and 8 requested that they perform an appraisal. Who 9 paid for the appraisal?" 10 "The venture did." 11 "This was from funds that were provided 12 by United?" 13 Answer, "Yes." 14 Q. Would you have expected, if you had 15 been underwriting this loan, that Mr. Minch would 16 have shared this with you as an underwriter at 17 United Savings? 18 A. At a minimum -- I would have insisted 19 that had it come to me as lender. But at a 20 minimum, had it gone to the borrower, I would have 21 expected -- and particularly since I paid for 22 it -- insisted that I receive a copy. 10761 1 Q. What page of the transcript were you 2 reading from in Mr. Minch's testimony? 3 A. It's page -- it is Page 6566. 4 Q. T7008 at Tab 663. Mr. Stone, this is a 5 December 21st, 1984 senior loan committee approval 6 in connection with the 95-acre property that's 7 come to be known as the Norwood property in 8 Austin, Texas. 9 Have you seen this document before? 10 A. Yes, I did. 11 Q. And in what context? 12 A. In reviewing documents relevant to the 13 Norwood loan that was ultimately approved in 1986. 14 Q. Did the document play a part in forming 15 your opinion in connection with this case? 16 A. Yes, it did. 17 Q. How? 18 A. The second page of the document under 19 the heading "appraisal" states that at the time 20 this approval was being sought and, in fact, was 21 received, USAT nor the approving officials had 22 before them a completed written appraisal but, 10762 1 instead, relied on a verbal. 2 They did, however, as a condition to 3 that approval, as stated on the last page, subject 4 the condition that closing would be subject to 5 review and approval of a final appraisal report. 6 My review beyond this document did not 7 evidence that that review and approval, in fact, 8 was done. I'm not saying that it wasn't done. I 9 am saying I saw no evidence in the bank's records. 10 And, in fact, the actual condition I'm referring 11 to in this approval assigned no responsibility to 12 any particular individual to, in fact, conduct 13 that required review and approval. 14 Q. Look at T7010, please. It's Tab 670. 15 A. (Witness reviews the document.) 16 Q. Mr. Stone, I've handed up to you T7010, 17 which is a senior loan committee approval dated 18 December 16th, 1985. And this is a loan renewal 19 as well as an increase in an existing loan of 20 $18.2 million with an increase of $2.8 million. 21 Have you seen this document before? 22 A. Yes, I have. 10763 1 Q. Did you use it in preparing your -- for 2 testimony today as well as in connection with your 3 opinion? 4 A. I reviewed it for preparing my report 5 and may have looked at it subsequent to that time, 6 yes. 7 Q. Did you note here, if you would, in the 8 guarantor section the joint and several liability 9 of Thomas Gordon, Stephen Block, Frank Krasovec, 10 and Jeffrey Minch? Do you see that? 11 A. Yes, I do. 12 Q. Do you happen to know if this 13 particular loan was ever paid off? 14 A. My recall of this loan, which is the 15 second extension on the 1984 loan -- the origin of 16 this particular loan -- my recall of this is that 17 it was rolled into the Norwood loan approved in 18 June of 1986 which, at the time of rolling into 19 that new loan, was delinquent. 20 Q. Which loan was delinquent, Mr. Stone? 21 A. This particular loan. 22 Q. You should have in front of you T7590. 10764 1 Do you have that document? 2 A. Not that I see. 3 Q. Do you see 7020 there? 4 Mr. Blankenstein mentioned yesterday that 7590 5 might not have been admitted but 7020 was. 6 A. I don't see 7020 either. 7 Q. Here, Mr. Stone. Tab 687. Mr. Stone, 8 is the document I just handed you with the June 2, 9 1986 senior loan committee approval the loan that 10 you referred to that would have been made to 11 replace the previous loan on the Norwood property 12 which we saw at T7010? 13 A. It appears to be. That was a 14 December 1985 approval for six months, and this 15 appears to be the carry-over, if you will, of that 16 particular loan. 17 Q. I'd like to ask you to tell me if you 18 reviewed the guaranties in connection with the 19 June 2nd, 1986 loan, Mr. Stone. 20 A. Pardon me? 21 Q. Did you -- 22 A. May I have -- 10765 1 Q. Did you look at the guaranty section in 2 this loan approval? 3 A. In this loan approval, yes, I did. 4 Q. Okay. And did you notice any 5 difference between this loan and the previous loan 6 that it succeeded? 7 A. Yes, I did. 8 Q. What is the difference? 9 A. The December '85 approval document 10 indicated that Mr. Krasovec and Mr. Minch were 11 jointly and severally liable for that loan. I 12 don't recall it being limited, as it is for this 13 particular approval, to the top 25 percent of 14 principal balance and 100 percent of all interest 15 cost. 16 Q. Take a look at T7010 again. And do you 17 see, in addition to Mr. Krasovec and Mr. Minch 18 being jointly and severally liable, any other 19 people jointly and severally liable? 20 A. Yes. 21 Q. Who are they? 22 A. Mr. Thomas Gordon, Mr. Stephen Block. 10766 1 Q. Did Block and Gordon guaranty the 2 June 2nd, 1986 loan? 3 A. Not according to the approval document 4 before me, no. 5 Q. T7595. 6 A. Yes, I have that document. 7 Q. What is T7595? 8 A. T7595 is the minutes of the board of 9 directors meeting of United Savings at 10 August 14th, 1986. 11 Q. Have you seen this document before? 12 A. Yes, I have. 13 Q. When did you see it? 14 A. In my initial review of documents early 15 this year. 16 Q. Is it signed by anybody? 17 A. This document is signed by the 18 secretary of the meeting, Mr. Berner. 19 Q. Were you able to determine when the 20 immediately preceding board of directors meeting 21 was -- 22 A. Yes. 10767 1 Q. -- prior to this August 14th, 1986 2 meeting? 3 A. Yes. The second paragraph indicates an 4 approval of the minutes of a meeting of May 8th, 5 1986, some three months prior, consistent with 6 other board of directors meetings that we have 7 reviewed earlier at an earlier date, indicating 8 that the board was meeting on a quarterly basis. 9 Q. All right. Now, Mr. Stone, have you 10 read through this entire document, all of the 11 minutes that are listed here from August 14th, 12 1986, prior to today? 13 A. Yes. Yes, I have. 14 Q. And where would I find in here approval 15 of the 9.4-million-dollar real estate investment 16 that was made by United Financial Corporation in 17 connection with the Norwood project? Is that 18 here? 19 A. It's been a while since I've read it; 20 but my recall in just leafing through it, I do not 21 see that approval. 22 Q. Would you have expected to see that 10768 1 approval in here, given the fact that there was a 2 2 and a half-million-dollar limitation that we saw 3 yesterday in the board of directors policies for 4 real estate investments? 5 A. Yes, I would have. 6 Q. What does it suggest to you, the fact 7 that it's not in here? 8 A. That either the policy was not adhered 9 to or that there was an interpretation of the 10 definition of "prior ratification" that is unknown 11 to me. 12 Q. Let's take a look at T7021, please. 13 This would be at Tab 688. 14 Mr. Stone, this is the real estate 15 investment committee minutes from June 2, 1986, in 16 connection with a 9.4-million-dollar contribution 17 made by UFC, an entity related to United Savings 18 Association of Texas. 19 Have you seen this document before in 20 connection with preparing for your testimony? 21 A. I have seen this document before. 22 Q. Do you see in this document anywhere an 10769 1 interpretation of the ratification provision you 2 just mentioned for any indication as to why this 3 would not have gone to the board of directors? 4 A. I see no mention of any further 5 approvals required beyond this committee. 6 Q. Could we have T7802, please? 7 Mr. Stone, I've handed you T7802. It's a copy of 8 the State of Texas examination dated as of 9 10-31-84. 10 MR. VILLA: Your Honor, we have a 11 better copy of this in which much of the 12 handwriting can be seen. Rather than do a 13 substitution, may we give it to the parties now? 14 MR. LEIMAN: I'd appreciate that, 15 Mr. Villa. Thank you. 16 MR. VILLA: This one carries 17 Exhibit No. B3955. 18 MR. LEIMAN: Your Honor, I think 19 Mr. Villa's absolutely right. I'd prefer to 20 substitute the improved copy, B3955, and withdraw 21 T7802. 22 THE COURT: All right. Received. 10770 1 Q. (BY MR. LEIMAN) Have you seen this 2 report of examination, Mr. Stone? 3 A. Yes, I did. I reviewed this document. 4 Q. Okay. And did you review it in 5 connection with forming an opinion related to your 6 engagement? 7 A. Yes, I did. 8 Q. The first thing I'd like to do, 9 Mr. Stone, is direct you to the flowchart on the 10 fourth page of the exhibit, please. 11 Mr. Stone, is it consistent with your 12 understanding of the structure of United Financial 13 Group that United Financial Group, Inc. was the 14 holding company of United Savings Association of 15 Texas shown in this flowchart directly below it? 16 A. Yes, it was. 17 Q. And directly below United Savings 18 Association of Texas, United Financial 19 Corporation, which we saw making a 20 9.4-million-dollar contribution, was an entity 21 that was a subsidiary of United Savings 22 Association of Texas? 10771 1 A. That's correct. 2 Q. Is there any significance to the fact 3 that the 9.4-million-dollar contribution in 4 connection with the Norwood property that we saw 5 on June 2, 1986, would have come from United 6 Financial Corporation instead of directly from 7 United Savings Association of Texas? 8 A. Well, United Financial Corporation 9 being a subsidiary of -- wholly-owned subsidiary 10 of United Savings possibly had more flexibility 11 regulatory wise. I am not certain of that. As 12 I've stated before, I'm not that familiar with the 13 Federal Home Loan Bank nor FSLIC rules and 14 regulations. From my perspective, I would look at 15 it as merely an extension of United Savings and 16 having the same financial impact. 17 Q. Looking at the left-hand corner of this 18 particular flowchart, we see the statement that 19 all subsidiaries are 100 percent owned. 20 Do you see that? 21 A. Yes, I do. 22 Q. Is that consistent with your 10772 1 understanding of the structure? 2 A. Of United Financial Corporation, I 3 believe that was the case. And perhaps the same 4 case with USAT being wholly owned by 5 United Financial Group. 6 Q. If you would, turn to the 19th page of 7 the exhibit. There is a listing there of the -- 8 it's labeled in what you have in front of you as 9 CN154595. 10 A. Pardon me. Is that Page 8A at the 11 bottom? 12 Q. Yes, sir. 13 A. Okay. 14 Q. Yesterday, I confused you with my -- 15 one of my questions in connection with Mr. Hurwitz 16 and Barry Munitz. If you would, look with me at 17 the sixth name down from the top of this page 18 below C.E. Bentley. 19 Do you see that? 20 A. Barry Munitz? 21 Q. Yeah. 22 A. Yes, I do. 10773 1 Q. All right. Does that suggest to you 2 that Mr. Munitz was on the board of directors of 3 United Savings? 4 A. Yes, it does. 5 Q. All right. Now, Mr. Stone, let's turn 6 to another page. Under "real estate owned," which 7 would appear at Page 11 in the report which is 8 CN154598. 9 A. Yes. 10 Q. Do you see here at the bottom of the 11 page the reference to, "However, on the positive 12 side, on 12-27-84 Couch Mortgage Company purchased 13 over 30 REO units from USAT totaling approximately 14 $2.45 million and the association expects very 15 soon to sell Couch two commercial REOs for $2.9 16 million." 17 Do you see that? 18 A. I see that. Let me reread it, if I 19 may. 20 Q. Sure. 21 A. (Witness reviews the document.) Yes, I 22 see that. 10774 1 Q. Where would the -- you're familiar with 2 state examinations as well as with federal 3 examinations of financial institutions, aren't 4 you? 5 A. Generally, yes. 6 Q. Where would the state examiners have 7 gotten the information regarding Couch Mortgage 8 Company to put into this report? 9 A. Well, just based on this statement that 10 Couch Mortgage Company purchased over 30 real 11 estate owned units from USAT for 2,450,000, that 12 information would be right from the books and 13 records of United Savings. 14 Q. And what about the prospective sale? 15 A. It's stated "The association expects 16 very soon to sell." That would indicate to me 17 there is either something in the files, letters of 18 intent or whatever, or an oral statement of that 19 fact to the examiners by an officer or employee of 20 United Savings. 21 Q. Turn to the next page, please. Looking 22 at the Atrium Residence Company property and the 10775 1 Atrium Residence Company Property II, the 2 paragraph below that, did you -- did you consider 3 these two properties and the treatment by the 4 Texas Savings and Loan Department in connection 5 with your report? 6 A. Not as such. I did observe the very 7 last paragraph -- 8 Q. What about that? 9 A. -- on that page. It states, if I may 10 quote, "Neither property was appraised at 11 acquisition," parenthetically saying "a violation 12 of Section 5.15," and that "According to executive 13 vice president David Graham an appraisal has been 14 ordered, and it is anticipated that loss reserves 15 will be established." 16 And that was particularly noteworthy to 17 me that the bank, USAT, and its board had been 18 alerted to a violation of -- I assume Section 5.15 19 is state law -- and the fact that they did not 20 have an appraisal in hand when the loans were made 21 and, in my opinion, should have taken the 22 necessary steps not just to correct the violation 10776 1 of law in future transactions but to appreciate 2 the value of an appraisal or appraisals for what 3 they are intended. 4 Q. Do you see the last line of this 5 paragraph that you're referring to? 6 A. Yes. 7 Q. What do you understand this to mean 8 when Mr. Graham further stated that "USAT's been 9 unable to enforce the borrower's loan guaranties 10 because of a sharp decrease in the borrower's net 11 worth"? 12 A. I understood that to be what I had seen 13 in other situations in the southwest in this time 14 frame of being frequently -- when loans were made 15 based on real estate and the guaranties of the 16 borrowers obtained, in many cases, the borrowers 17 were heavily involved in real estate and their net 18 worths were predominantly centered in real estate 19 holdings. Consequently, the underlying value of 20 the property that you have a lien on declines. 21 And that's not unusual but indicative of the real 22 estate market in the same area, that you have the 10777 1 double whammy that your collateral declines in 2 value and the guarantor's net worth also declines 3 at the same time. 4 Q. Would you have expected a fact like 5 this to have been made aware -- provided to the 6 board of directors of United Savings? 7 A. Well, first of all, I would have 8 expected that they would have that acumen -- 9 business acumen without being so advised. This is 10 a report that they are charged with reading. And 11 if any one individual did not understand it, this 12 should have highlighted it for them so that they 13 did, in fact, understand it. 14 Q. Would you have expected them to take 15 some action in connection with this kind of a 16 situation? 17 A. Yes, definitely. As I say, for two 18 reasons. One, it violated what I think is state 19 law. And two, it is telling the board that loan 20 loss reserves have to be set up on this particular 21 credit and there wasn't an appraisal on the loan 22 when it was made. I believe that should be very 10778 1 meaningful to the board. 2 Q. Should the board have adjusted its 3 policies in connection with what you've described 4 as the impact of declines in borrowers' net 5 worths? 6 MR. VILLA: Your Honor, I object to 7 this line of questioning. If you read the 8 document, it's clear that they are talking about 9 getting an appraisal at acquisition, which means 10 at the time they took the loans back, not at the 11 time the loans were made. And I suspect very 12 strongly that Mr. Stone does not know what Section 13 5.15 of the Texas law is. 14 Consequently, this is all totally 15 irrelevant and it's quite misleading in the record 16 because it has nothing to do with acquisition 17 appraisals -- I'm sorry -- appraisals at the time 18 of the loan which are reflected in the text of 19 this. So -- 20 THE COURT: That's the way I understand 21 it. It seems to me it's referring to when the 22 property was foreclosed and taken back rather than 10779 1 when the loan was extended in the first instance. 2 Presumably, there is a regulation that requires an 3 appraisal to be made when the property is 4 reacquired or acquired. 5 THE WITNESS: I need, perhaps, to read 6 all of it, Your Honor. 7 THE COURT: Why don't you start up 8 where it says "1"? 9 THE WITNESS: "Neither property was 10 appraised at acquisition." The point is 11 acquisition -- 12 THE COURT: The second sentence -- 13 THE WITNESS: At the time the loan was 14 made? 15 THE COURT: I think so. 16 MR. VILLA: I believe the second 17 sentence after the number 1 refers to the 18 existence of an appraisal at the time the loan was 19 made at 6-30-82. Acquisition has to be talking 20 about the time that the property is taken back 21 into REO. 22 This is the vice of litigating loans 10780 1 that are not in the case, Your Honor. I move that 2 we just move on to deal with the Norwood and 3 Park 410 loans. 4 THE COURT: Sustained. Let's move on. 5 Q. (BY MR. LEIMAN) A7006. It's a 6 Peat Marwick work paper. 7 MR. LEIMAN: Let's skip that, Your 8 Honor, because I think we've pulled the wrong 9 document. We pulled a T document. T7793. 10 Q. (BY MR. LEIMAN) Mr. Stone -- 11 MR. BLANKENSTEIN: Mr. Leiman, before 12 you continue, we don't have a copy of 7793. 13 MR. SCHWARTZ: Tab 988. 14 Q. (BY MR. LEIMAN) Mr. Stone, let me ask 15 you a question following up on the judge's ruling, 16 if I might. 17 What is the significance of having an 18 appraisal as to knowing -- in connection with real 19 estate owned and as that relates to 20 mark-to-market? 21 A. Once a property is foreclosed and 22 carried on the books of an institution as real 10781 1 estate owned, it is incumbent on the institution 2 to get periodic valuations in order not to carry 3 the property at an inflated value or a value for 4 more than it is worth. 5 Q. And in requiring that an appraisal be 6 ordered, would that be part of a process for 7 assuring that the property does not cause there to 8 be an inflated -- that the property not be carried 9 at an inflated value? 10 A. Yes, to either validate that the 11 property is being carried at an appropriate value 12 or to point out that it is being carried at an 13 inflated value and should be marked down 14 accordingly. 15 Q. Thank you, Mr. Stone. Let's take a 16 look at T7793. 17 Did you look at this in connection with 18 your opinion? 19 A. I don't recall seeing this at the time 20 I wrote my report. 21 Q. Did you see it afterward? 22 A. I have seen this document. 10782 1 Q. Was it instrumental in assisting you to 2 form your opinion? 3 MR. VILLA: Objection, Your Honor. He 4 said he didn't see it when he formed his opinion. 5 MR. LEIMAN: No, he didn't. He said he 6 didn't see it before he wrote his report. 7 I'm sorry, Your Honor. I should have 8 directed my comment to you. I apologize. 9 THE COURT: Well, is there a difference 10 between his opinion and his report? 11 MR. LEIMAN: Yes, Your Honor. I 12 believe there is. I think subsequent to preparing 13 his report, he has -- as he's testified yesterday, 14 he's reviewed a considerable numbers of documents 15 as well as testimony which he could not have had 16 available because we were not in trial. 17 THE COURT: All right. Denied. 18 A. The question? 19 THE COURT: Restate your question. 20 Q. (BY MR. LEIMAN) Mr. Stone, what's the 21 significance of this document to you in connection 22 with forming your opinion for testifying? 10783 1 A. The significance of this document was 2 that I recall it as being a document of Peat 3 Marwick Mitchell. I don't see that on the form, 4 but that's my memory of it. And it's dated 5 December of '86. And I had seen an earlier 6 document of that same entity, Peat Marwick 7 Mitchell, if I recall, in 1985 in a management 8 letter or communication to United Savings 9 indicating that more time and attention needed to 10 be devoted to the content and quality of the 11 appraisals that they had in their loan files. 12 So, the significance of it was to me 13 having been advised by Peat Marwick of a 14 deficiency in procedure, documentation -- that not 15 withstanding that, the same auditors did find yet 16 another exception in their opinion. 17 Q. T7571, please. Mr. Stone, I've handed 18 you T7571 which purports to be notes regarding 19 United Savings dated October 23, 1984, prepared by 20 or reporting with the name Jenard M. Gross at the 21 left-hand top of the page bearing Bates 22 No. OW013742 through 13744 -- 5. 10784 1 Do you see that? 2 A. Yes. 3 Q. Have you seen this document before? 4 A. Yes, I have. 5 Q. And where did you see it before? 6 A. I saw it before my report was prepared 7 and, in fact, quoted from the document on Page 6 8 of my report. 9 Q. Do you know who wrote it? 10 A. It was or is styled at the top of the 11 document "Jenard M. Gross." 12 Q. Have you ever had occasion to read 13 Jenard M. Gross' investigative transcript in 14 connection with this case? 15 A. Yes, I did. 16 Q. Do you know if he -- if this document 17 was mentioned? 18 A. I believe he did acknowledge the 19 document, yes. 20 Q. Why was this document significant in 21 connection with forming your opinion? 22 A. Because of the listing that Mr. Gross 10785 1 indicated would be -- what he felt would be 2 typical of the observations of examiners if they 3 had gone into USAT at the time this document was 4 prepared in 1984. And, as I said, I quoted 5 particularly Items 2 and 3, that "United was 6 making 100 percent loans and funding the interest 7 payments on risk deals. That is, real estate 8 deals where the developer has no equity in it at 9 all," which, again, was my conclusion on both the 10 Park 410 and the Norwood loans. 11 Likewise, Item 3, "United is going into 12 risky real estate ventures both as partner and as 13 sole developer. Therefore, they are getting into 14 areas that increase their chances for large 15 losses," which is, again, my conclusion as stated 16 in my report for, again, both of the two loans I 17 just mentioned. 18 Q. If you would, turn to the second page 19 of the exhibit. Specifically, I want you to look 20 at Paragraph No. 14. 21 A. Pardon me. Did you say Paragraph 14? 22 Q. Yes. 10786 1 A. Yes, I see that. 2 Q. What's Mr. Gross talking about here in 3 14? 4 A. To read it, "Many of the single-family 5 residential files are missing from the file room 6 and a number of these cannot be found." He is 7 indicating a lapse, if you will, in internal 8 controls. 9 Q. All right. And is that also true with 10 regard to 15 and 16? 11 A. To the extent files are scattered 12 throughout the districts as well as the home 13 office. 14 Q. What about 18? 15 A. Yes. 16 Q. Let's take a look back at 13. 900 17 commercial loans -- 18 A. Pardon me just a minute. (Witness 19 reviews the document.) 18 is a more significant 20 point than just files being missing. 21 Q. Why is that? 22 A. Well, taking it -- what it states, it 10787 1 says "There is no printout of loans by borrower's 2 name and address." I take it to be "interest 3 rate" that's cut off, but it appears to be 4 "interest rate on loan, maturity date, and 5 delinquency status." 6 If that is the case, that would be a 7 serious -- I have to emphasize -- very serious 8 deficiency. It's hard to comprehend, quite 9 frankly. 10 Q. Yesterday, you talked about some of the 11 basic documentation: Who, what, where kind of 12 documentation that should accompany any loan. 13 Would these be the kind of files that 14 Mr. Gross appears to be stating are missing from 15 the records of United Savings? 16 A. You mean in 14 and 15? 17 Q. As well as -- yes, and 18. 18 A. Well, 18 is not a file document. It's 19 a record of the institution of many, many loans, 20 not a document you would find in individual files 21 but a recap of all loans. 22 But yes, Nos. 14 and 15 would be 10788 1 examples of, obviously, missing documents. 2 Q. What about 13? 3 A. 13, as well, I think. Reading into it, 4 they have some files that are copies but they are 5 missing some original documents. The fact that a 6 document is original has more significance in some 7 documents than it does in others. 8 MR. LEIMAN: Your Honor, I move T7571 9 into the record if it hasn't already been 10 admitted. 11 MR. BLANKENSTEIN: No objection. 12 THE COURT: Received. 13 MR. LEIMAN: Your Honor, I also -- 14 apparently, I forgot to move B3955 -- that was the 15 Texas state examination -- into the record. I 16 don't know if you received it or not. 17 MR. VILLA: I believe you did move it 18 in. 19 THE COURT: I did receive it. 20 MR. VILLA: I thought so. 21 MR. LEIMAN: Thank you, Your Honor. 22 Q. (BY MR. LEIMAN) 7573, please. This 10789 1 October 24, 1984 document captioned "Solutions to 2 problems at United Savings" also appears to have 3 been authored by Jenard M. Gross. 4 Have you seen this document before, 5 Mr. Stone? 6 A. Yes, I have. 7 Q. When did you see it? 8 A. Early this year. It was one of the 9 documents included in RE1 to RE101. 10 Q. Do you know who wrote it? 11 A. It is typed at the top of the page, 12 "Jenard M. Gross." 13 Q. Do you know if this was mentioned in 14 Mr. Gross' investigative testimony? 15 A. There are three of these documents, to 16 my memory. I know that notes of Mr. Gross were 17 mentioned. To say that all three were mentioned, 18 I would have to re-review. 19 Q. What's the significance of this 20 document in forming your opinions? 21 A. Well, there are various things 22 mentioned within the document that would be of 10790 1 concern whether examining the institution or 2 supervising the institution. But relevant to the 3 Park 410 and Norwood loans, which is the main 4 thrust of my engagement, was Item No. 9. "More 5 time needs to be spent with large potential real 6 estate deals to examine them more thoroughly. For 7 instance, the other day, we sat around our table 8 and discussed all the bad loans, and the comments 9 were that one of them, while it was visible from 10 the freeway in Dallas, you had to go 4 miles to 11 get to it. Then others are bad locations and bad 12 people and all the different excuses in the 13 world." 14 The emphasis to me was the following 15 statements: "But with a 10- or 15-minute 16 presentation, we are approving 40-million-dollar 17 land deals which may end up being several 18 hundred-million-dollar developments. Certainly 19 there is not enough time in that time frame to 20 really determine if these are good ventures or bad 21 ventures. We don't want somebody sitting around 22 four years from now making the same comments about 10791 1 these deals." 2 Q. Why was that significant to you? 3 A. Particularly significant to me because 4 at the time this document was written, my memory 5 is Mr. Gross was a consultant to United Savings. 6 However, having made those two 7 statements that I just mentioned about only 8 spending 10 or 15 minutes and not spending enough 9 time to really determine if they are good or bad 10 ventures, Mr. Gross seemed to do just that when he 11 became in a senior official capacity at United 12 Savings. 13 This document was authored, according 14 to the document itself, October of 1984. Park 410 15 and Norwood, the ultimate loans, were approved in 16 1986 and had their origination, in Norwood's case, 17 in December of '84 and in Park 410, in March of 18 1985. 19 MR. LEIMAN: Your Honor, I move T7573 20 into evidence. 21 MR. BLANKENSTEIN: No objection. 22 THE COURT: Received. 10792 1 Q. (BY MR. LEIMAN) T7572, please. 2 Mr. Stone, T7572 which I just handed you is 3 labeled "Future programs of United Savings" dated 4 October 24, 1984, with the name Jenard M. Gross on 5 the upper left side of the document. 6 Do you see that? 7 A. Yes, I do. 8 Q. Did you read this before preparing your 9 written report? 10 A. Yes, I did. 11 Q. Was it significant in connection with 12 forming your opinion? Strike that. 13 Was it instrumental in forming your 14 opinion in connection with your report? 15 A. No. It was not -- it did not have a 16 direct bearing on the conclusions I reached -- 17 Q. Did it have any bearing -- 18 A. -- on Park 410 and Norwood. I didn't, 19 as a part of my engagement, look into motivation 20 or -- I just looked at the end result, the two 21 loans being made and the exceptions I took. When 22 I read this, it was of passing interest to me, 10793 1 particularly the last sentence. 2 Q. What's the last sentence? 3 A. "I think primarily we need to hit a 4 couple of home runs to create some large profits 5 to try to take the losses we need to take in the 6 rest of the portfolio and get our house in order 7 so we can get the bad behind us and move on a much 8 more positive note to try to increase earnings and 9 growth." 10 That, again, was of passing interest. 11 In fairness to Mr. Gross in his deposition, he 12 said that he meant by "hitting a couple of home 13 runs to create some large profits" that he meant 14 taking some gains that already existed on the 15 books of USAT. 16 However, the following part of "taking 17 losses we need to take" indicates to me, as well, 18 that he is acknowledging that USAT at the time 19 this was written had unrealized losses on their 20 books and to whatever extent those losses were 21 would be overstating their capital. 22 Q. In reading Mr. Gross' sworn testimony 10794 1 in the investigative stage of this case, you took 2 his testimony at face value; isn't that right? 3 A. I took all depositions at face value. 4 MR. LEIMAN: Your Honor, I move T7572 5 in. 6 MR. BLANKENSTEIN: Your Honor, the 7 witness has testified it was of passing interest 8 and not material to his opinion. I'm not sure 9 what the relevance is in those circumstances; but 10 other than that, I have no objection. 11 THE COURT: All right. Received. 12 MR. LEIMAN: Your Honor, I'm about to 13 move into another area. Perhaps it would be a 14 good time to break. 15 THE COURT: All right. We'll take a 16 short recess. 17 18 (A short break was taken 19 at 10:19 a.m.) 20 21 THE COURT: Be seated, please. 22 10795 1 (Discussion off the record.) 2 3 MR. SCHWARTZ: Back on the record. 4 Mr. Leiman. 5 MR. LEIMAN: Thank you, Your Honor. 6 (10:49 a.m.) 7 Q. (BY MR. LEIMAN) Just to complete the 8 last segment, we were able to get a copy of the 9 correct exhibit number, which is A7006, which is 10 Tab 987. I just have a couple of questions for 11 you, Mr. Stone, on this. 12 Did you review this document? 13 A. Yes, I did. 14 Q. And this January 31st, 1986 15 Peat Marwick letter, A7006 as its exhibit number, 16 is this what you referred to earlier in your 17 testimony? 18 A. Yes. I was wrong on the date. I 19 thought it was late 1985 but it is, in fact, dated 20 January the 31st, 1986. 21 Q. What struck you as being significant in 22 this letter? 10796 1 A. The second page of that document. 2 Q. And what in that regard? 3 A. First of all, to point out, this was 4 directed to the board of directors of United 5 Savings. The second page of that document at the 6 bottom indicates under the heading "appraisals," 7 "The review of loans receivable and real estate 8 acquired for development or sale revealed certain 9 deficiencies related to appraisals. We understand 10 that the association has initiated a review of 11 existing appraisals to determine compliance with 12 the applicable rules and regulations and 13 established procedures to determine compliance for 14 future appraisal reports." 15 Q. Why was that significant to you? 16 A. I had observed, in my review of 17 documents, what I felt were deficiencies regarding 18 appraisals. We had seen in the 1984 examination 19 by the state banking department deficiencies in 20 the receipt of appraisals and their content. And 21 then again, we see that comment here addressed to 22 the board of directors. Yet, in the document we 10797 1 saw previously, at least one exception. And that 2 exception being the largest loan ever made by the 3 institution of having deficiencies in it was 4 significant in my thinking. 5 Q. Mr. Stone, let's turn to T7222. The 6 way your report is structured, Mr. Stone, your 7 fifth conclusion prior to your overall conclusion 8 deals with the approval of the Park 410 and 9 failure to exercise due care in connection with 10 loans made to what you term affiliated parties of 11 USAT; is that right? 12 A. Yes. I refer to them as either 13 "insider" or, perhaps later, as "affiliated." 14 Q. I handed you T7222, which is a 15 March 31, 1988 letter, memorandum from Ken Gindy 16 to Stanley Rosenberg. 17 Have you seen this before? 18 A. Yes. If I recall, the copy that I saw 19 didn't have the handwritten notes on it. 20 Q. What was significant to you about this 21 memo? 22 A. The significance, first of all, is the 10798 1 fact that Mr. Rosenberg -- as I say, an insider by 2 my definition and a borrower -- received what was 3 styled on the bank's documents, closing documents, 4 as a 400,000-dollar fee. I think it actually said 5 "loan fee." And two years later, the law firm of 6 which he was a member still doesn't understand the 7 purpose of that fee some two years after the fee 8 was, in fact, paid by USAT out of the loan 9 proceeds for Park 410. 10 Q. Let's look at T7803. 11 A. Mr. Leiman, pardon me. 12 Q. Yes, sir. 13 A. I don't want any misunderstanding of my 14 answer. 15 Q. Did I cut you off again? Sorry. 16 A. This letter may indicate that the 17 partners referenced are not the partners of the 18 law firm necessarily. I'm not entirely clear, but 19 I think they may be referring to the partners 20 involved in the loan. 21 The main point being, in my mind, that 22 the $400,000 paid in loan proceeds to 10799 1 Mr. Rosenberg some two years prior, there still 2 seemed to be some question as to the purpose of 3 those fees. 4 Q. Mr. Stone, I've handed you T7803, which 5 is a May 25, 1990 document from Jeff Seidman to 6 Kenneth Levanthol & Company. 7 Have you seen this document before? 8 A. Yes, I have. 9 Q. And what part did it play in your 10 testimony here today? 11 A. Well, before seeing the document, I had 12 taken some exception to what I call a limited 13 guaranty. And I use "limited" in relation of risk 14 borne by borrower versus risk borne by the lending 15 institution. 16 This memorandum evidenced to me that 17 the guaranty may even be more limited than what I 18 thought. 19 Q. How would that relate to Mr. Rosenberg 20 as what you call him -- I believe you called him 21 an insider or affiliated party by your definition? 22 A. Well, this opinion, assuming that it is 10800 1 a correct opinion, could, depending on the 2 circumstances surrounding Park 410, result in a 3 guaranty being something less than I had seen 4 styled in other documents. Other documents 5 referred to a 25 percent guaranty ($20 million), 6 which would be 25 percent of an 80-million-dollar 7 loan. 8 This indicates the possibility that it 9 might not be to that extent. It may be something 10 less than that. And the fact that the loan was 11 approved and for other faults I found of not 12 receiving appropriate scrutiny because of his 13 insider relationship would just further reinforce 14 that, to me, that proper ordinary care was not 15 exercised in the extension of a loan -- pardon me 16 for repeating -- the largest loan ever made by the 17 institution that involved an insider. 18 Q. T7189. This is Tab 941. 19 MR. LEIMAN: Your Honor, I move T7803 20 into evidence. 21 MR. VILLA: Objection, Your Honor. It 22 refers to a number of attachments, apparently 10801 1 including the discussion that is referenced here 2 and, therefore, is an incomplete document. 3 So, since Mr. Seidman's going to be 4 here tomorrow, he can tell us what the opinion 5 was. I would object to its introduction now. If 6 they want to reoffer it through Mr. Seidman, they 7 can see whether they can get it in then as a 8 complete document with attachments. 9 MR. LEIMAN: Your Honor, this is what 10 this witness saw, and this is what he based his 11 opinion on. If there is an additional document 12 with attachments that Mr. Seidman has seen and 13 would like to sponsor or feels he can sponsor, it 14 should be left to him. However, this is what this 15 witness saw in connection with his opinion. 16 MR. VILLA: Your Honor, the fact that 17 they choose to give their witnesses incomplete 18 documents doesn't make them admissible. It's an 19 incomplete document on its face. He can choose to 20 read two lines out of every other page of a 21 document. That doesn't make that part of the 22 document admissible. 10802 1 It's an incomplete document. We object 2 to it on that ground. 3 THE COURT: All right. Well, since 4 Mr. Seidman is coming, I'm going to defer moving 5 it until his testimony. 6 Q. (BY MR. LEIMAN) T7189. This is a 7 March 6th, 1986 letter. It is directed to 8 Mr. Gindy, Kenneth Gindy, from Gibraltar Savings. 9 Do you see that? 10 A. Yes, I do. 11 Q. And did you use this letter in 12 connection with forming your opinion or in 13 connection with preparing for your testimony? 14 A. In preparing for my testimony. I did 15 not see this document when I wrote my report that 16 the Court has before it. 17 Q. How was it significant? 18 A. The significance was, in my opinion, of 19 the way the loan was fashioned by United Savings 20 because of the lack of equity, lack of 21 out-of-pocket funds from the borrowers, the 22 funding of the interest reserves, the very liberal 10803 1 terms on which the loan was granted. And I have 2 testified earlier that I was aware and still am 3 aware of some of the conditions that existed in 4 the State of Texas in the 1980s. I had some 5 experience with that, and I knew that lending 6 standards had, in fact, been driven down to some 7 degree. 8 This reinforced, to some extent, my 9 feeling that the terms that USAT ultimately 10 reached with Park 410 were very liberal, even by 11 those standards because this letter indicates -- 12 from Gibraltar, discussing a loan of a similar 13 amount, $80 million, that they would require 14 20 percent equity from the borrowers up front. 15 $16 million for an 80-million-dollar loan amount 16 in the form of cash, CD, or letter of credit. 17 It also listed an acceptable personal 18 guaranty of 100 percent of all losses up to an 19 amount equalling the sum of 25 percent of the 20 principal plus 100 percent of the interest in the 21 loan. And, in fact, they would even exact under 22 those terms a profit participation of 30 to 10804 1 40 percent. 2 The significance thereby being not all 3 lending institutions -- and there is evidence of 4 other institutions turning this loan down, as 5 well. This is the only institution I had the -- I 6 had evidence willing to make the loan under their 7 terms. Other institutions weren't making the type 8 of loan that we saw at Park 410. That was my 9 conclusion. 10 Q. T7560. 11 MR. VILLA: 7560 or 16? 12 MR. SCHWARTZ: 60. 13 MR. LEIMAN: Your Honor, let's move to 14 another document. Apparently, this -- we don't 15 have enough copies of this to go around right now. 16 Q. (BY MR. LEIMAN) Let's go to Tab 840, 17 which is Exhibit B3864. 18 Mr. Stone, have you seen this schedule 19 before which is Exhibit B3864? 20 A. Yes, I have. 21 Q. And did you use it in preparing for 22 your testimony? 10805 1 A. I reviewed it. 2 Q. Was there anything significant about 3 this document? 4 A. This combined with other documents, 5 yes. The loan fees are shown to be $400,000. 6 It's the third line from the bottom above the 7 total, which is an amount that I've seen on other 8 documents as payable to Mr. Rosenberg. 9 Q. All right. Could we have 7374, please? 10 MR. BLANKENSTEIN: Excuse me, 11 Mr. Leiman. I didn't hear the exhibit number. 12 MR. LEIMAN: 7374, Tab 957. 13 Q. (BY MR. LEIMAN) Mr. Stone, this is a 14 February 17th, 1988 letter with attachments from 15 Kenneth Gindy to Stanley Rosenberg. 16 You mentioned a couple minutes ago that 17 you believe that there was a loan fee payment made 18 to Stanley Rosenberg in connection with the 19 Park 410 loan. 20 Did you see this February 17th letter 21 in connection with preparing for your testimony? 22 A. Yes, I did. 10806 1 Q. Was it significant? What significance 2 did it have to you? 3 A. The significance was really related to 4 my feelings on the propriety of the loan in 5 relation to the insider relationship of 6 Mr. Rosenberg to USAT. 7 Q. Looking at the numbered paragraph 8 No. 1, does that confirm to you to whom the 9 loan -- 400,000-dollar payment was made that we 10 saw on the previous exhibit? 11 A. It confirms that it was paid to 12 Mr. Rosenberg under Check No. 666, yes. 13 Q. Look at the third paragraph from the 14 bottom of the page. "It is Charles Noel's opinion 15 that United is looking at the arrangements between 16 SDR and United." 17 Do you see that? 18 A. Yes, I do. 19 Q. "You have repeatedly referred to an 20 agreement between United and you which pre-dates 21 the present Park 410 transaction." 22 Do you see that sentence? 10807 1 A. Yes, I do. 2 Q. In preparing your opinion, you 3 indicated that it was significant that 4 Mr. Rosenberg was, as you put it, an affiliated 5 party. 6 A. Yes. 7 Q. Is this the kind of issue that could 8 arise in connection with the kinds of -- with 9 making a loan to what you consider to be an 10 insider? 11 MR. VILLA: Objection. I don't believe 12 he said "affiliated party." I think that was 13 Mr. Leiman's question. It misstates his prior 14 testimony. 15 MR. LEIMAN: Your Honor, in his report 16 he refers to affiliated parties on Page 3 of his 17 report in capital E. 18 THE COURT: All right. Objection 19 denied. 20 A. I'm sorry, Mr. Leiman. May I have the 21 question again? 22 Q. (BY MR. LEIMAN) Is the kind of 10808 1 problem that we're -- is the kind of issue that's 2 being addressed in this memo in the third 3 paragraph from the bottom the kind of issue to 4 which you were referring in your conclusion 5 regarding making loans to what you consider to be 6 affiliated parties of USAT? 7 A. That's part of the problem. By "part 8 of the problem," I mean, one, the scrutiny that 9 should be given to the actual loan itself because 10 there is an insider involved or whether the 11 institution should make the loan or not. 12 In addition, this is yet another issue. 13 And that is an insider receiving fees or 14 compensation out of the proceeds of the 15 institution with which they are affiliated without 16 disclosure, documentation, justification to that 17 very same institution. 18 Q. Let's go back to T7560. You should 19 have that in front of you, Mr. Stone. This is an 20 April 11th, 1986 letter to Stanley Rosenberg from 21 Noel Simpson. 22 Do you see that? 10809 1 A. Yes, I do. 2 Q. And it concerns the ongoing management 3 fees receivable by Gulf Management Resources? 4 A. Yes, it does. 5 Q. And it further delineates to whom such 6 fees will be paid? 7 A. Yes, it does. 8 Q. What significance, if any, did this 9 letter play in your -- in preparing for your 10 testimony? 11 A. The fees listed in this document and 12 indicated as coming from the amended and restated 13 Park 410 West Joint Venture indicate that Gulf 14 Management Resources is entitled to a quarterly 15 fee of $75,000, which obviously equates to 16 $300,000 a year, and that that fee is being paid 17 out of the proceeds of the Park 410 loan that is 18 being funded by the lender, United Savings. 19 This letter, Gulf Management Resources, 20 the recipient to be of that fee, in turn -- and 21 not part of that venture agreement nor as 22 disclosed to any -- in any document I saw to 10810 1 United Savings, the lender, has stated on the last 2 page that they are confirming an agreement to pay 3 Mr. Rosenberg "Promptly upon receipt by us of the 4 fees described above 25 percent of such fees as 5 received in consideration of the assistance 6 Mr. Rosenberg extended to them, Gulf Management 7 Resources" which, to anyone with an examiner 8 background, would be a red flag, a very bright red 9 flag. 10 Q. If we could, let's look at A2057, Tab 11 211. A2057, Tab 211? 12 MR. BLANKENSTEIN: It would be helpful, 13 Mr. Leiman, if you would announced the tab number 14 earlier so we would be able to get the document 15 and expedite the examination. 16 Q. (BY MR. LEIMAN) Let me ask you, 17 Mr. Stone -- you said it would have been a red 18 flag to an examiner in connection with the fees 19 that we were just talking about a minute ago. 20 Why would it be a red flag? 21 A. I think I said a bright red flag 22 because the receipt of fees by an insider for any 10811 1 loan made by the institution -- if you will, their 2 inside -- is totally inappropriate. There can be 3 perhaps some arrangements that can be explained, 4 can be rationalized, and can be deemed 5 appropriate. But on the surface, it demands a lot 6 of explanation to, in fact, qualify as being 7 acceptable. 8 In addition of the insider getting the 9 fee, it involves a loan in which he personally has 10 an interest and in which the institution for which 11 he is an insider is paying through the extension 12 of the loan. That is what I meant by a red flag. 13 MR. LEIMAN: Your Honor, I move T7560 14 into evidence. 15 MR. VILLA: No objection. 16 THE COURT: Received. 17 Q. (BY MR. LEIMAN) A few minutes ago, 18 Mr. Stone, I handed you A2057, which is Tab 211. 19 A. Yes. 20 Q. Turn to the last page of this document, 21 please. Do you see a reference there to Stanley 22 D. Rosenberg? 10812 1 A. Yes, I do. 2 Q. All right. Have you seen this report 3 of MCO Holdings prior to today? 4 A. Yes, I have. 5 Q. Were you aware of the fact that 6 Mr. Stanley Rosenberg was on the board of 7 directors of MCO Holdings in 1986? 8 A. Yes. Yes, I was. 9 MR. LEIMAN: If I could have a minute, 10 Your Honor. 11 12 (Discussion off the record.) 13 14 Q. (BY MR. LEIMAN) One or two more 15 questions, Mr. Stone. 16 Having reviewed the materials that 17 we've reviewed over the past day and a half, what 18 is your observation and conclusion with regard to 19 the overall -- with regard to the safety and 20 soundness underwriting of this institution? 21 A. The conclusions that I reached in my 22 expert report remain unchanged and, in fact, to a 10813 1 certain extent, the documents I have seen have 2 been further validated. 3 One thing that I didn't point out that 4 I've learned over the last two days that should 5 have been apparent to me was the similarity of the 6 very two loans that I reviewed in one of the 7 secondary problems I had with the credits, and 8 that being the fashion in which they were placed 9 on United Savings' books. 10 In both cases of Park 410 and Norwood, 11 not only did the institution not have appraisals 12 at the time the loans were made but in both cases, 13 in Park 410 with the Love & Dugger appraisal, they 14 had an appraisal that wouldn't justify the loan. 15 So, they obtained another appraisal which, in the 16 documents we've seen, to me clearly indicate that 17 in the second appraisal, the appraiser was told 18 what number to come up with to justify them making 19 the loan they wanted to make. 20 The exact same thing happened with the 21 Norwood loan. There was an appraisal that USAT 22 funded, disbursed in their loan proceeds -- that 10814 1 being the one -- the appraisal from Appraisal 2 Associates of Austin that they may or may not have 3 seen but that in any event did not support the 4 Norwood loan. Nonetheless, they sought another 5 appraiser as they did in Park 410, told them the 6 amount of money -- or told them the amount of 7 appraisal they needed, and they received it. 8 Those two points, while not germane to 9 my findings of -- it was too large a loan to make 10 if the loans had been perfect, given the financial 11 condition -- indicate to me a validation of my 12 statement that I believe the institution, insofar 13 as these two loans and the boards of -- the board 14 of directors and the lending officers, acted with 15 reckless disregard and put United Savings at 16 considerable risk in the granting of these two 17 large credits. 18 Q. One final question, Mr. Stone. You've 19 pointed us to a series of patterns in -- financial 20 patterns that you had observed. You wrote them up 21 in your report specifically related to foreclosed 22 real estate. You also related patterns regarding 10815 1 the future prospects. 2 Were there -- was your statement just 3 now in connection with yet another pattern 4 regarding the appraisal issue? 5 A. I'm sorry, Mr. Leiman. I got lost on 6 the "foreclosed" portion. May I have the question 7 back? I don't -- 8 Q. Let me just ask you a shorter question. 9 Is there a pattern that you're identifying here 10 with regard to appraisals? 11 A. Yes. In both the Park 410 and the 12 Norwood, the pattern of, if you will, appraisal 13 shopping to justify a loan that you want to make 14 and you want merely an appraisal to justify your 15 position, not necessarily one that indicates 16 value. 17 Q. And what is the safety and soundness 18 implication of that? 19 A. The safety and soundness implications 20 are loans that are being made by an institution 21 that are not justified on the value of the 22 collateral but nonetheless seek and obtain, 10816 1 supposedly, documentation that says the collateral 2 is of some support. In other words, with the 3 knowledge or at least an indication that the loan 4 may be imprudent based on an appraisal that has 5 been received, Love & Dugger, or an appraisal that 6 has been paid for, whether or not received -- they 7 should have known about it. They paid for it 8 through the loan proceeds. Instead of saying "We 9 might be at risk should we proceed with these 10 loans because of these appraisals," they put them 11 to the side and went to two new appraisers and 12 told them the value which, to me, is very, very 13 much an unsafe and unsound practice. 14 MR. LEIMAN: Your Honor, I have no 15 further questions at this time for this witness. 16 THE COURT: Mr. Villa, 17 cross-examination? 18 MR. VILLA: Oh, a few questions, Your 19 Honor. 20 21 22 10817 1 2 CROSS-EXAMINATION 3 4 (11:28 a.m.) 5 Q. (BY MR. VILLA) Good morning, 6 Mr. Stone. 7 A. Good morning. 8 Q. My name is John Villa. I represent 9 four of the respondents in this case: Arthur 10 Berner, Michael Crow, Ron Huebsch, and Dr. Barry 11 Munitz. I'm going to be asking you a few 12 questions over the next half day or so. 13 Mr. Stone, you were telling us a little 14 bit about your background and you said that there 15 came a time when the FDIC became involved with the 16 examination or enforcement of thrifts. 17 Do you remember telling us that in 18 connection with Mr. Leiman's early questions? 19 A. Yes, I recall. 20 Q. Was that in connection with FIREA where 21 the FDIC got backup enforcement authority over 22 thrifts? 10818 1 A. Yes. In answer to your question, it 2 was FIREA; but memory -- I believe we had directed 3 examination authority shortly before that period. 4 Q. Directed examination authority? 5 A. We started examining savings and loan 6 institutions, to the best of my memory, in 1988 -- 7 late 1988. And again, if my memory serves me 8 right -- I'm not saying it is -- I thought FIREA 9 came after that point in time. But I may be 10 wrong. My memory may not be serving me correctly. 11 Q. FIREA, I think, is August 9, 1989. So, 12 you thought you were examining thrifts prior to 13 FIREA? 14 A. Yes. 15 Q. But you didn't personally become 16 involved in any examination of a thrift during 17 that time period; is that right, sir? 18 A. As associate director, I would have -- 19 by "personally involved," being on site? 20 Q. Yes, sir. 21 A. Oh, no. Obviously not in my position. 22 But I was involved with them, yes. 10819 1 Q. You had ultimate authority over 2 examinations, right, or did you? 3 A. As associate director, I could have 4 changed or had a large influence in changing any 5 conclusion that our examiners drew regarding a 6 particular savings and loan. I believe my 7 authority at that time, though, would be limited. 8 I would have to discuss that with the director of 9 the division of supervision, a job to which I 10 later succeeded to. 11 Q. Now, you told us a little bit about the 12 work that you did with mutual savings banks in -- 13 is it New York? Is that right, sir? 14 A. Yes. 15 Q. Now, mutual savings banks were examined 16 by the FDIC; is that right? 17 A. Correct. 18 Q. Did they operate under the regulations 19 of the Federal Home Loan Bank Board or the 20 regulations of the FDIC? 21 A. Both, in some cases. Mutual savings 22 banks -- it wasn't just New York. It was New 10820 1 Jersey, as well. The initial mutual savings banks 2 in 1934 up until the mid-Eighties were supervised 3 by both the Federal Deposit Insurance Corporation 4 as its primary federal regulator and the state 5 chartering authority, New York and New Jersey that 6 issued the charter. 7 In the 1980s, certain mutual savings 8 banks applied for and received federal charters. 9 Such institutions as Dime Savings Bank. For a 10 period of time, consequently, they were supervised 11 by the Federal Home Loan Bank of New York and the 12 FDIC because they -- those institutions could 13 elect to take FSLIC insurance or stay with the 14 FDIC. When they stayed with the FDIC, they 15 actually had two federal supervisors: The Federal 16 Home Loan Bank of New York and the FDIC. 17 So, we had in New York at that time, in 18 the Eighties, joint responsibility with the 19 Federal Home Loan Bank over those federal savings 20 banks and those federal savings banks had to 21 follow the laws and regulations of the Federal 22 Home Loan Bank Board and the regulations, laws as 10821 1 pertain to FDIC-insured institutions. 2 Q. So, in terms of the knowledge you have, 3 are you familiar with the various provisions of 4 the Federal Home Loan Bank Board's regulations as 5 they existed in 1986? For example, affiliated 6 persons. 7 A. No, sir. I haven't said that I am at 8 this time. 9 Q. You told us a little bit about the 10 failure rates of financial institutions and that 11 during the early nineteen -- late 1980s or early 12 1990s the rates were -- or failure of banks were 13 eight to ten a week. 14 Do you remember that you talked about 15 that, sir? 16 A. I don't recall I said late Eighties, 17 early Nineties. When we had a failure rate that 18 approximated that amount from week to week, I 19 think was more in '86, '87. A lot of small banks 20 failing in the Midwest. 21 Q. And now the failure rate of financial 22 institutions is what? 10822 1 A. I think the FDIC has had one failure 2 this year. 3 Q. Is one of the factors that's 4 contributed to that the decline in interest rates? 5 A. That's been a large factor. 6 Q. In fact, financial institutions benefit 7 when interest rates are low; isn't that right, 8 sir? 9 A. Not necessarily. 10 Q. Isn't it true that most financial 11 institutions, and particularly thrifts, have 12 assets that don't readjust as quickly as their 13 liabilities? 14 A. That was true in the Eighties except 15 for institutions that took on long-term 16 liabilities. That's the reason I answered "not 17 necessarily." There are some institutions that 18 have arranged long-term liabilities and they are, 19 in fact, adversely affected by a downturn in 20 rates. 21 But more recently, if we're talking 22 then and now, the thrift institutions are 10823 1 available or are -- have available to them assets 2 that do reprice -- for example, variable rate 3 loans -- more so than they did in the 1980s. 4 Q. And that was a problem with many of the 5 thrifts in the early 1980s, wasn't it? They had 6 loans that were long-term, fixed-rate loans that 7 didn't reprice as fast as the cost of funds. 8 Right? 9 A. Correct. I testified to that interest 10 rate imbalance, I believe. 11 Q. Now, you've talked to us a little bit 12 today about the general issue of safety and 13 soundness, today and yesterday, and whether or not 14 the two loans in question, the Park 410 loan and 15 the Norwood loan, are unsafe and unsound; is that 16 right? That's been the substance of your 17 testimony, directed toward the issue of safety and 18 soundness? 19 A. Yes. I will agree to that. 20 Q. On the separate question of whether or 21 not you are giving an opinion that any of the 22 respondents in this case exhibited reckless 10824 1 disregard for laws, regulations, or orders of the 2 Federal Home Loan Bank Board, you found no such 3 evidence of that; isn't that right, sir? And if 4 you come up with a law, regulation, or order, 5 could you give me the citation to it? 6 A. May I have the question read back to 7 me, please? 8 THE COURT: Reporter, would you read 9 the question? 10 11 (Whereupon the requested portion 12 was read back by the reporter.) 13 14 MR. LEIMAN: Your Honor, I'm going to 15 object to the question as calling for a legal 16 conclusion. 17 THE COURT: Denied. 18 A. Mr. Villa, I'm asking -- you're asking 19 on the respondents individually, not USAT as an 20 institution? Am I correct? 21 Q. (BY MR. VILLA) That's correct. 22 A. No, sir. I cannot say for the 10825 1 respondents you mentioned that they individually 2 violated, to my knowledge, laws, regulations, or 3 orders of the Federal Home Loan Bank. That wasn't 4 a part of my report. 5 Q. Sir, with respect to United Savings 6 Association of Texas, can you cite to me any 7 Federal Home Loan Bank Board law, regulation, or 8 order that you found that it had violated during 9 this time period? And again, give me the citation 10 if you find such a -- if your opinion is that such 11 a violation existed. 12 A. As I understand it, the appraisal 13 requirements of R-41B are incorporated in a 14 regulation of the Federal Home Loan Bank. And if 15 my memory serves me right, it is 563.17. 16 There have been various opinions 17 rendered in the documents that I have seen, 18 including that of OTS or past Federal Home Loan 19 Bank/FSLIC officials, that USAT did not conform in 20 several instances with R-41B. 21 Q. Any other provision besides R-41B, sir? 22 A. There may have been other violations 10826 1 listed in the exam reports by the Federal Home 2 Loan Bank or the state authority; but in my 3 review, I did not spend much time other than 4 looking through the reports as it affected 5 Park 410 and Norwood. 6 So, I -- there may be such citations in 7 there that I don't recall. It wasn't the focus of 8 my attention. 9 Q. In connection with the opinion that 10 you're giving to this Court, are you giving any 11 opinion on the question of whether or not these 12 appraisals conform to R-41B, or are you simply 13 mouthing the opinions that the other experts have 14 provided? 15 A. I'm not giving my opinion as to whether 16 the appraisals in question violated R-41B. I am 17 merely reciting that in my review of documents, I 18 saw that OTS officials and other individuals have 19 said that, in their opinion, R-41B was, in fact, 20 not followed. 21 Q. But you're not an appraiser. Right? 22 A. No, I'm not. 10827 1 Q. And you're not here to give us opinions 2 on appraisals either. Right? 3 A. Not on the content of the appraisals, 4 but I do feel qualified to respond on the 5 appropriate use and consideration and intent of 6 appraisals as they affect the safety and soundness 7 of financial institutions. 8 Q. Now, with respect to the various 9 citations to possible violations of law, 10 regulations existing in examination reports, do I 11 understand correctly, sir, that you're not 12 offering any opinion as to any of those to this 13 Court. You simply are noting the fact that there 14 may be things in examination reports you can't now 15 recall; is that right? 16 A. Yes. To the extent there are 17 citations -- violations of law or regulation in 18 those examination reports, I am not giving the 19 opinion that those citations are, in fact, 20 correct. 21 Q. Now, I read with interest your 22 deposition about what goes into determining safety 10828 1 and soundness and I thought maybe I'd try to get 2 your understanding of the various factors. 3 Is one factor that you would take into 4 consideration in making a decision as to whether 5 an action is unsafe and unsound the overall 6 condition of the association at the time? 7 A. Yes. 8 Q. Is another factor you would take into 9 consideration the economic conditions in the 10 region at the time? 11 A. Yes. 12 Q. And is another factor that should be 13 taken into consideration the capabilities and 14 track record of management with similar 15 transactions? 16 A. Yes. 17 Q. Would yet another factor to be taken 18 into consideration be the degree of risk in a 19 particular transaction? 20 A. Most definitely. 21 Q. Another factor that you would take into 22 consideration is whether or not there are any 10829 1 governing laws or regulations; is that right? 2 MR. LEIMAN: Objection. Governing laws 3 or regulations of what, Your Honor? It's an 4 unclear question. Governing laws or regulations 5 concerning what? 6 THE COURT: All right. I'll sustain 7 the objection. 8 Q. (BY MR. VILLA) Is another factor 9 you'd take into consideration any laws or 10 regulations that affect the operations of a 11 financial institution? 12 A. Please read back the question. I'm 13 sorry. 14 15 (Whereupon the requested portion 16 was read back by the reporter.) 17 18 A. Yes. 19 Q. (BY MR. VILLA) Now, sir, are there 20 any other factors you can recall that you would 21 consider in deciding whether a particular 22 transaction was unsafe and unsound? 10830 1 A. There are other factors. That is not a 2 complete listing if you're referring to the 3 previous questions you have asked me. 4 Q. Okay. What are they, sir? 5 A. It might aid me in my answer if we're 6 going to go through a lengthy checklist that I 7 start with your checklist. If you wouldn't mind 8 rather than me trying to memorize previous 9 questions. 10 Q. Well, I'll be happy to do that. Maybe 11 you should just come up with your checklist and 12 we'll see if we've already gotten it, though. 13 That might be easier? 14 A. All right. 15 Q. The overall condition of the 16 association, the economic conditions in the 17 region, degrees of risk in the transaction, the 18 capabilities and track record of prior management, 19 and laws and regulations affecting the operation 20 of the institution. 21 Those are the ones we've got so far, 22 and we're looking to see if there are any new 10831 1 ones. 2 A. The one unsafe and unsound area you 3 haven't covered would be extensions of credit to 4 members of the official family, insiders if you 5 will. The extension of credit to an individual or 6 a group of individuals that are dependent -- and 7 similar sources of repayment that would 8 constitute -- would be sufficiently large enough 9 to constitute a concentration of credit. 10 Now, you did mention risk but there are 11 various listings of risk that an institution can 12 engage in that would constitute unsafe and 13 unsound. 14 Q. So, the first one we can call 15 generically a conflicts-type concern and the 16 second one a concentration concern. Right? 17 A. Correct. 18 Q. Any others, sir? 19 A. There are -- the operation of an 20 institution with inadequate routines and controls 21 over its operation is an unsafe and unsound 22 practice. 10832 1 Q. I think I'm actually looking for 2 factors you would take into consideration every 3 time you look at it, not what might be a practice 4 in a particular circumstance. 5 What are the factors you look at when 6 you're trying to decide whether something is 7 unsafe and unsound? 8 A. The -- first of all, start off with 9 violations of laws and regulations. Violations of 10 laws and regulations, in and of themselves, are 11 unsafe and unsound practices. They may or may not 12 lead to the institution being in an unsafe and 13 unsound condition. 14 Q. Okay. So, you've added official family 15 concentrations and violations of laws and 16 regulations. Any other factors? 17 MR. LEIMAN: Misstates his testimony, 18 Your Honor. He also said "routines and controls." 19 A. Internal routines and controls, yes. 20 The lack of supervision of the 21 institution by its board of directors. And 22 "supervision" is intended to include establishment 10833 1 of sound policies, dissemination of those policies 2 to all affected staff, and the regular monitoring 3 of those policies to assure the board that, in 4 fact, they are being adhered. 5 Q. (BY MR. VILLA) Any other factors, 6 sir? 7 A. The lacking of the appropriate 8 monitoring of the board's policies. The 9 violations, if you will, of the non-director 10 officers, the line officers in the institution, 11 not properly safeguarding the institution through 12 their lending activities. Improper documentation 13 of major decisions by the board of directors. 14 Improper documentation of transactions affecting 15 the institution -- 16 Q. At the risk of -- 17 A. -- by officers. 18 Q. At the risk of interrupting you, sir, I 19 actually wasn't asking for a list of everything 20 that could be unsafe and unsound. I was 21 looking -- asking about the factors that one 22 considers, the factors that would be universally 10834 1 applicable when you look at an institution. 2 Things like capabilities of management. Things 3 like the condition of the association. We could 4 go on with a list of unsafe and unsound practices 5 for quite a while. What I'm looking for are the 6 factors that you look at. 7 A. I thought that's what I was answering. 8 Those are the factors. Those are the areas. It's 9 an exhaustive list. Yes, the economics as you've 10 mentioned of the area being served is an important 11 factor. If the economy is unstable, you would 12 expect more caution. But there is any host -- we 13 could go on with this list forever and ever. 14 We're not communicating apparently. I 15 think I'm answering your question, and you're 16 telling me that I'm not. So, perhaps you could 17 better phrase your question. 18 Q. I think I've done it about as well as I 19 can. But let me ask you this question, sir: 20 Isn't it a fact that unsafe and unsound 21 practices -- strike that. 22 Isn't it a fact that what is regarded 10835 1 as unsafe and unsound -- strike that. 2 Isn't it a fact that practices which 3 were at one point considered safe and sound can 4 then later be regarded as unsafe and unsound? 5 A. Your question is really too broad for 6 me to answer for example. 7 Q. Let me try to make it a little narrower 8 then. 9 In the late nineteen -- up until the 10 perhaps mid-1970s, it was commonplace for all 11 thrifts to have most or all of their portfolios in 12 single-family, long-term, fixed-rate mortgages; 13 isn't that right, sir? 14 A. Correct. I didn't know if you said all 15 thrifts; but predominantly all thrifts, yes. 16 Q. And that was not regarded as unsafe and 17 unsound at that point in time, was it? 18 A. No, sir. It was not. 19 Q. Now, today, sir, if you were a 20 regulator and you found a financial institution 21 that had all or almost all of its assets in 22 long-term, fixed-rate mortgages, would you regard 10836 1 that as being a safe and sound condition? 2 MR. LEIMAN: Object to the question as 3 being an incomplete hypothetical. 4 Is this the only factor that's being 5 considered? 6 THE COURT: Well, I believe the witness 7 may answer. 8 A. Today, yes, I would. But there are 9 extenuating reasons and explanation of why today 10 and why not in the Seventies, for example. 11 Q. (BY MR. VILLA) Sure. Today we know a 12 lot more about interest rate risk than we did in 13 the Seventies; isn't that right? 14 A. Not just that. For example, in the 15 northeast, the -- by law, the state-chartered 16 institutions -- New York could not make a variable 17 rate mortgage. By law, the institution had a 18 usury ceiling up until 1978 that would not permit 19 it to charge more than 8 percent on a mortgage. 20 It was our opinion that the 21 institutions were hampered by law and we didn't 22 hold them accountable, particularly since thrift 10837 1 institutions, for years, adequately served their 2 markets and met the housing needs of the country 3 and had never been seen what happened beginning in 4 1979 with such a rapid increase in interest rates. 5 We're saying now, "You have seen it. The 6 regulators didn't see it either, but now you have. 7 So, now you have ample evidence that it's a risk 8 to you." So -- 9 Q. So -- 10 A. -- that explains it. 11 Q. The answer is, sir, even if the laws 12 weren't there, even if the laws did not require 13 those associations to put essentially non-variable 14 rate mortgages on their books and even if the laws 15 did not have a usury cap, the fact of the matter 16 is what we've learned between the 1970s and today 17 would inform us in defining what is unsafe and 18 unsound. Right? 19 A. Only in the specific example you're 20 giving me of lending long and borrowing short. 21 No, it doesn't redefine "unsafe and unsound" for 22 all purposes. 10838 1 Q. No, sir. I'm not trying to redefine 2 unsafe and unsound. What I'm saying is what we 3 thought 20 years ago was not an unsafe and unsound 4 practice -- let me say this. 5 Put it this way: In 1967, you were an 6 examiner. Right? 7 A. Yes, I was. 8 Q. You could have looked at a financial 9 institution in 1967 and said, "Well, this 10 financial institution has got all long-term, 11 fixed-rate mortgages. It's not unsafe and 12 unsound." 13 That would have been a reasonable thing 14 for an examiner to have concluded in 1967, isn't 15 it? 16 A. If there are no other problems with the 17 institution, yes. 18 Q. And then today if we were to look at 19 that examination report, we'd say, "My Lord. We 20 can't understand how that person could have come 21 to such a conclusion" but that's because we've 22 learned something since 1967, isn't it, sir? 10839 1 A. That is correct. 2 Q. Do you have an opinion, sir, whether it 3 would be considered unsafe or unsound today for a 4 financial institution to operate without any 5 tangible capital? 6 A. It's always been unsafe and unsound for 7 an institution to operate without intangible 8 capital -- without tangible capital. Let me 9 correct myself. 10 Q. Now, I'd like to ask you a few 11 questions about your background, sir. 12 You're currently retired from a career 13 of federal employment with the FDIC; is that 14 right? 15 A. That's correct. 16 Q. And you are not familiar with the 17 generally-accepted practices in the thrift 18 industry in the mid-1980s as to what loans were 19 deemed excessive in size; isn't that right, sir? 20 A. What loans are deemed excessive in size 21 for the purposes of making a decision as to safety 22 and soundness has not changed. 10840 1 Q. You know, I asked -- what I asked you 2 is your familiarity, sir, with what were 3 generally-accepted practices in the thrift 4 industry in the mid-1980s as to what loans were 5 deemed excessive in size. 6 I'm asking you: Did you know or do you 7 as you sit here now know what was 8 generally-accepted thrift practices in the 9 mid-1980s regarding excessiveness of loans? 10 MR. LEIMAN: That's been answered, Your 11 Honor. The witness has already answered the 12 question. 13 THE COURT: Well, let's answer it 14 again. 15 A. Pardon me, Counsel. What body 16 determines what is a generally-accepted thrift 17 practice? The problem institutions that are doing 18 it? 19 Q. (BY MR. VILLA) Do you not understand 20 the word "generally-accepted practice"? 21 A. I know what "generally-accepted" is as 22 far as accounting procedures and the body that 10841 1 formulates it. But I'm not -- generally-accepted 2 thrift practices. By all thrifts throughout the 3 country? By -- 4 Q. Well -- 5 A. -- a group you select? 6 Q. I think the reason we use the word 7 "generally accepted" so it won't be deemed to be 8 universally accepted. Generally accepted are 9 terms like, I believe -- generally-accepted 10 standards of prudent operation is the classic 11 definition of unsafe and unsound practice, isn't 12 it, sir? 13 A. Yes. But generally-accepted accounting 14 practices are universal, at least in this country. 15 So, I'm not -- 16 Q. Well, why don't we work off the 17 definition of unsafe and unsound practices? The 18 classic definition of unsafe and unsound practices 19 is generally-accepted standards of prudent 20 operation; isn't that right? 21 A. The question again, please? 22 MR. VILLA: Could you read it back to 10842 1 him? 2 3 (Whereupon the requested portion 4 was read back by the reporter.) 5 6 A. There is a disconnect, I believe, in 7 the logic. 8 Q. (BY MR. VILLA) Why don't you answer 9 my question and then tell me what my disconnective 10 logic is? 11 A. A generally-accepted thrift practice, 12 if that means a large number of institutions are 13 conducting a similar practice, that number of 14 thrift institutions do not define nor have any 15 authority to define for supervisory purposes what 16 is safe and sound merely because of the fact they 17 are doing it. 18 THE COURT: We'll adjourn until 1:30. 19 20 (Luncheon recess taken at 12:05 p.m.) 21 22 THE COURT: Be seated, please. We'll 10843 1 be back on the record. 2 Mr. Villa, you may continue with your 3 cross-examination. 4 MR. VILLA: Thank you, Your Honor. 5 (1:32 p.m.) 6 Q. (BY MR. VILLA) Mr. Stone, when we 7 were talking before the break, we were talking 8 about what generally-accepted practices were among 9 thrifts in Texas. 10 Do you remember we were talking about 11 that, sir? 12 A. I recall that. 13 Q. Now, sir, during the course of your 14 work, you came to realize that the time period 15 that we're looking at is essentially 1983 through, 16 say, 1987 or perhaps 1988 in this case. Right? 17 That's when the substantive events occurred? 18 A. Slight difference. I looked primarily 19 1984 through mid-1986. 20 Q. Okay. That's fine. 21 A. As far as looking at the records of 22 USAT. 10844 1 Q. Right. Now, sir, during the time 2 period 1984 through mid-1986, were your duties 3 requiring you to work with any Texas savings and 4 loans? That is to say, work with the board of 5 directors with any Texas savings and loans or 6 their officers or employees? 7 A. No, it was not. 8 Q. Sir, were you reviewing any, for 9 example, board minutes or loan committee minutes 10 from any Texas savings and loans? 11 A. No, I was not. 12 Q. Were you, sir, familiar with what was 13 customary in lending committees in Texas savings 14 and loans in the mid-1980s? 15 A. No, I was not. 16 Q. And you're not familiar, sir, with what 17 was customary with respect to the size of 18 delegations of lending authority. For example, 19 from boards of directors to senior lending 20 committees. Isn't that right, sir? 21 A. That is correct. 22 Q. Do you know whether it was unusual for 10845 1 thrifts in that region -- and I'll expand it 2 beyond Texas to say Oklahoma, Arkansas, 3 Louisiana -- to have a loan committee on which no 4 outside director sat? 5 A. No, I do not know that. 6 Q. Do you know, sir, whether the Federal 7 Home Loan Bank -- the Federal Home Loan Bank 8 Board, in the 1980s, defined underwriting 9 standards for thrifts? 10 A. I don't believe any federal regulator 11 did; but if any did, it would have been in the 12 Federal Home Loan Bank. 13 Q. And why is that? Why do you say if 14 anyone did, it would have been in the Federal Home 15 Loan Bank? 16 A. Because in my experience dealing with 17 all of the regulators -- and I was told it was 18 historical. And by that, I mean the Controller of 19 the Currency, the Federal Reserve, and the Office 20 of Thrift Supervision -- I found that Federal Home 21 Loan Bank, FSLIC, had many more memoranda to their 22 institutions, much more proceduralized, I will 10846 1 say, than the other three federal bank regulatory 2 agencies. 3 Q. Did that mean that the other bank 4 regulatory agencies didn't deal with the same 5 topics as the Federal Home Loan Bank Board? 6 A. It would be hard to envision different 7 topics when it comes to lending. Different types 8 of lending perhaps, but the bank agencies looked 9 at all types of lending. 10 Q. So, the Bank Board and the bank 11 agencies would look at the same issues in lending, 12 but the Bank Board would use memoranda and rules 13 more often than the others; is that right? 14 A. Rules, procedural requirements, 15 operating guidelines. It was much more oriented 16 to that than were the bank regulatory agencies. 17 The bank regulatory agencies, for example -- 18 federal bank regulatory agencies didn't define 19 underwriting standards that policed and supervised 20 individual banks' standards. But it did not issue 21 standard guidelines, with the exception of the 22 Controller of the Currency that issued their own 10847 1 legal lending limits, just maximum loans that can 2 be made. 3 Q. Now, if the other banking agencies -- 4 this would include the FDIC that you're most 5 familiar with. Right? 6 A. Yes. 7 Q. The other agencies didn't issue these 8 guidelines and procedures like the Federal Home 9 Loan Bank Board. 10 Did they regulate their institutions 11 through their general safety and soundness powers? 12 A. Yes, they did. 13 Q. So, we're not saying that the FDIC 14 wouldn't have authority to prohibit, for example, 15 concentrations. But it might do so through its 16 general power to prohibit unsafe and unsound 17 practices; is that right? 18 A. That's a very fair statement. 19 Q. And that's what you're most familiar 20 with in terms of your personal career in 21 regulation -- is that right, sir -- because you've 22 been with the FDIC? 10848 1 A. Yes. 2 Q. Now, in preparing your report today -- 3 strike that. 4 In preparing your report in this case 5 and giving your opinion over the last two days, 6 you didn't rely, I gather, on the regulations of 7 the Federal Home Loan Bank Board or the FSLIC as 8 they existed in 1986; isn't that right? 9 A. Yes. I've answered previously to that 10 fact. 11 Q. In fact, did you even read them? Did 12 you read them, sir? 13 A. The outstanding regulations and laws? 14 Q. The applicable regulations, if there 15 are any. 16 A. No. No, I did not do that. 17 Q. Now, I think when you testified 18 yesterday and when your report was introduced, we 19 talked a little bit about a change you made in 20 your report with respect to guaranties. 21 Do you remember that, sir? 22 A. I do recall that. 10849 1 Q. And you said you had found -- I'm not 2 sure if you said there was a mistake in your 3 report or you had -- I guess you said there was a 4 substantive change in your report and you wanted 5 to delete a sentence. 6 Do you remember that? 7 A. Yes, I do. 8 Q. Can you explain to me what the original 9 intent of the report was and then how it changed 10 on the issue of guaranties? 11 A. Yes. Just for the record, I don't 12 believe I said as matter of factly that it was a 13 substantive change. I believe I said I have some 14 typos and some more substantive change being 15 relative to typos. I don't regard the change I 16 made on guaranties as substantive to my basic 17 conclusions that I reached in that report. 18 Q. Let me see if I understand it. Let's 19 do one thing at a time. 20 Was the change on guaranties a 21 typographical change, or was it substantive 22 insofar as it dealt with guaranties? 10850 1 A. Neither. I said -- my exact wording, I 2 believe, was I have some typos and some more 3 substantive changes, meaning more substantive than 4 a typo. 5 Q. I believe what you said -- just so we 6 get it straight -- it's on Page 10609 of the 7 transcript -- is -- Page 6, Item 3, near the 8 bottom, second paragraph starting with "the 9 principles involved." "My interpretation of that 10 guaranty is not correct for reasons that we can go 11 into later. I subsequently determined that that 12 was incorrect," close quote. 13 Now, let's see if I can understand. 14 What was your original interpretation of the 15 guaranty that you were referring to there that you 16 concluded was incorrect? 17 A. My original interpretation was based on 18 my experience with the definition of "top 19 25 percent guaranty." My experience was more to 20 commercial lending where a guarantor of an 21 unsecured credit, for example, would request that 22 they would, yes, put a guaranty -- their personal 10851 1 guaranty on the credit but they didn't want to be 2 on the credit until the last penny was paid. 3 So, consequently, they would get the 4 top 25 percent with the implication, as the loan 5 is paid down to 75 percent of balance or after 6 that is done, the guarantor would be released 7 which from time to time led to problems on the 8 guaranty to the extent the borrower didn't pay and 9 some other type of asset was offered in 10 satisfaction or partial satisfaction as to the 11 deficiency balance. 12 That being in my mind partially led me 13 to that interpretation and perhaps other things I 14 may have read. But shortly afterwards, I realized 15 that I could well have been wrong in that 16 interpretation and that's why I offered it as a 17 change as I began testimony yesterday. 18 Q. So, let me see if I understand. 19 There's two ways -- at least two ways of reading 20 this guaranty. One would be that the first dollar 21 loss incurred by the association -- let's say a 22 100-dollar loan -- the first dollar loss would be 10852 1 picked up by the guarantor. 2 And the other way of reading it, at 3 least a second way of reading it, would be that 4 the institution would have to suffer $75 of losses 5 before the guarantor would start paying; is that 6 right? 7 Have I expressed the two different 8 interpretations that you were grappling with? 9 A. If the court reporter could read that 10 back, I want to make sure I understood you 11 correctly. 12 13 (Whereupon the requested portion 14 was read back by the reporter.) 15 16 A. I don't know that that's necessarily 17 the totality of the interpretations of what "top 18 25 percent guaranty" means. As you recall, I 19 believe there is a legal document where it was 20 even at issue in this particular instance as to 21 the principal balance as it may be from time to 22 time, whether that included principal after 10853 1 reduction of sale of collateral. In fact, I 2 believe that particular interpretation viewed that 3 guaranty in that fashion. 4 Q. (BY MR. VILLA) My question to you, 5 sir, is: What were you -- what interpretation 6 were you adopting when you prepared your report? 7 A. My own from my experience. 8 Q. And the interpretation from your 9 experience, as I understand it, was that the 10 institution would have to suffer a loss on 11 75 percent of the loan or thereabouts before the 12 guarantors would have to start paying; is that 13 right? 14 A. (Witness reviews the document.) I 15 think the best way to describe my interpretation, 16 even though it was in error at the time, was 17 exactly the way I stated -- I did state it in the 18 report. "Had USAT had to foreclose on a 19 fully-disbursed 80-million-dollar loan to Park 410 20 and had received 20 million, 25 percent of the 21 loan amount, for the property, USAT would have 22 lost 60 million and the guarantors would have 10854 1 incurred no liability." 2 Again, that was an improper 3 interpretation. An error, I should say, and I can 4 offer you no more than the fact that it was an 5 error and I have corrected it. 6 Q. There is no criticism directed at you, 7 sir. 8 A. I know. 9 Q. I'm just trying to figure out -- to 10 understand it. 11 Now, sir, you said when you made the 12 change in the report that it didn't -- I may not 13 be quoting you exactly but, in substance, it 14 didn't change the opinion -- the ultimate opinion 15 rendered in the report on safety and soundness; is 16 that right? 17 A. I believe I said it didn't change my 18 opinion that the guaranty was limited to the 19 guarantors and risk vis-a-vis the institution. 20 Q. I'm sorry. I didn't hear that. The 21 guaranty was limited -- 22 A. That the guaranty was, in fact, limited 10855 1 compared to the risk borne by USAT as lender. 2 Q. It was limited because it was a 3 percentage of the whole of the entire loss? 4 A. A small percentage of the whole, yes. 5 Q. Sir, when you looked at the guaranty 6 under the original interpretation that you adopted 7 when you prepared the report, what value -- what 8 financial value did you ascribe to those 9 guaranties in terms of the collateral for the 10 loan? How many dollars was that guaranty worth, 11 in your judgment? 12 A. I felt comfortable that the guaranty 13 was worth $10 million. 14 Q. At the time you drafted the report? 15 A. Yes. 16 Q. Now, at the time -- after you changed 17 it, after you changed the report, what value did 18 you ascribe to the guaranty? 19 A. Pardon me. The letters of credit for 20 $10 million I had never questioned and don't at 21 this point in time. The ability to realize on the 22 letters of credit was where I erred in this 10856 1 report. In other words, by removing the sentence 2 as I asked, I am saying that I do not question at 3 this point in time that the guaranties had a value 4 of $10 million. 5 Q. When you wrote the report, you didn't 6 question they had a value of $10 million. And 7 after you amended the report, you still gave the 8 same values to the guaranties; is that right? 9 A. No, no. That's not what I'm saying. 10 Q. I see. Why don't you just give me two 11 numbers so I can work from them? What was the 12 value of the guaranties as you drafted the report 13 and what was the value of the guaranties as you 14 amended the report so I can understand what the 15 financial difference is of this change? 16 A. When I drafted the report, I didn't 17 question the validity of the $10 million of letter 18 of credit as protection to the loan except for the 19 fact of would the institution be able to realize 20 them on them under this interpretation. There is 21 no question that the letters of credit were in 22 place. I didn't question that. 10857 1 Where I erred at that time was in this 2 sentence, this one sentence in my report that I 3 didn't feel in that interpretation they could 4 realize in the circumstance that I gave upon that 5 value. I have since said -- by taking that 6 sentence out, I have said they are still limited 7 guaranties -- I don't change my statement in that 8 regard -- limited to the extent of risk as opposed 9 to the lending institution. I am now saying I 10 know there was $10 million I felt comfortable with 11 that was available under the guaranties, secured 12 under the guaranties. I'm not questioning that. 13 Q. So, as I understand it, the change you 14 made was to reflect the fact that in the 15 post-amendment version of your report, USAT would 16 not only have $10 million of collateral but would 17 be able to get to it, as well; is that right? 18 A. That it was collateral in hand as 19 opposed to a promise to pay, yes. 20 Q. And adding $10 million of collateral in 21 hand doesn't change your view as to whether or not 22 this is an unsafe and unsound loan; is that right, 10858 1 sir? 2 A. It doesn't change my view that the 3 guaranty was limited in granting an 4 80-million-dollar loan where the lender is at risk 5 $70 million and the partners -- the borrowers are 6 at risk $10 million. I'm saying that's 7 disproportionate and of limited value in relation 8 to the total of the loan to the lending 9 institution. 10 Q. Isn't 25 percent of $80 million 11 20 million? 12 A. Yes, it is. 13 Q. And what basis did you have for coming 14 to the conclusion that the guarantors were not at 15 risk for the full $20 million pursuant to the 16 calculation we just did? 17 A. The question that was raised in 18 documents that I saw as to the interpretation of 19 the guaranty -- again, that I referred to 20 earlier -- 21 Q. The document that I objected to and 22 wasn't introduced in evidence in this case? Is 10859 1 that the one? 2 A. I don't recall if you objected. 3 Q. Okay. 4 A. If you did, I apologize. 5 Q. That's okay. That's fine. You're 6 entitled to answer with respect to that. 7 So, do I understand correctly you 8 assumed that the analysis -- if we can call it 9 analysis -- in that document, was somehow accurate 10 and, thus, limited the exposure of the guarantors 11 to $10 million, the letter of credit, and you 12 based your analysis and opinion on that? 13 A. No, I did not. I said it raised in my 14 mind the fact that the extent of the guaranties, 15 the value of the guaranties, was in question. It 16 was subject to some interpretation. But in any 17 event, what I concluded saying was even if the 18 guaranties, the top 25 percent, had been 19 interpreted and factually proven to be of full 20 value even at 20 million, it still was 21 disproportionate of borrower versus lender risk. 22 It was a limited guaranty. 10860 1 Q. In making your judgment about whether 2 or not these loans -- in particular the Park 410 3 loan -- was an unsafe and unsound practice, does 4 the amount of collateral available to the lender 5 play any role in your analysis? 6 A. Please read that back. 7 8 (Whereupon the requested portion 9 was read back by the reporter.) 10 11 A. It plays some role, but I think I have 12 testified, sometime within the last two days, I 13 would have concern for a loan of $80 million in 14 USAT given its then financial condition and its 15 known future prospects had the loan been 16 guaranteed by a government bond. 17 Q. (BY MR. VILLA) And can we assume for 18 the purposes of this that a government bond would 19 eliminate all risk of repayment. Right? 20 A. Not necessarily. Depending on the 21 maturity of the bond primarily. 22 Q. Well, sir, if we had -- strike that. 10861 1 Do I understand the substance of your 2 testimony is that it's not the value of the 3 collateral that's the paramount factor in your 4 analysis but, rather, the size of the loan 5 relative to the association and its then existing 6 prospects? 7 A. It is both. 8 Q. It's the value of the collateral? 9 A. Yes. 10 Q. Didn't you testify in your deposition 11 that if the property was worth 100 -- the 12 appraised property was worth $160 million, you'd 13 still find this an unsafe and unsound loan? 14 A. For an 80-million-dollar loan in USAT, 15 yes. It would be less -- obviously be less of a 16 concern to me than an 80-million-dollar unsecured 17 loan. 18 What I am saying is an 19 80-million-dollar loan that is predicated on the 20 value of one piece of property that has no equity 21 on the part of the borrower that is -- interest is 22 pre-funded, not coming from the borrowers, they 10862 1 have no commitment to pay in the interest 2 obligations -- the institution is funding itself 3 in that regard -- and with a limited guaranty is 4 much too large of a credit for an institution in 5 the financial condition of USAT at that time. 6 Q. Well, in the analysis that you gave us 7 in your deposition, didn't you tell us repeatedly 8 that the issue was the size of the loan? "It was 9 the size of the loan. Everything else was 10 secondary." 11 Do you still hold to that view? 12 A. Yes, I do. 13 Q. And the factors you have just described 14 about the nature of the loan, those are typical 15 factors for an ADC loan, aren't they, sir? The 16 fact that they -- that it's 100 percent lent by 17 the association, that the borrowers have little or 18 no cash equity, that the interest is funded by the 19 association, that there is very little risk of 20 default because, through the term of the loan, the 21 association is lending the money to pay the 22 interest. 10863 1 That's a classic ADC loan, isn't it, 2 sir? 3 A. I'd refrain from saying it's a classic 4 ADC loan. ADC loans, just by definition, are 5 loans where -- the acquisition, development, 6 construction of a property. That definition does 7 not imply what the underwriting standards are that 8 employed or employ -- yes, there were many loans 9 like this made in the industry; but this is not an 10 average or classic ADC loan. 11 Q. Well, didn't the bank -- let's go back. 12 In 1983, as a result of Garn-St. Germain, didn't 13 the Bank Board adopt regulations that permitted 14 loans like this like we've just been talking 15 about? 16 A. Through lack of prohibition, yes. 17 Q. And didn't there come a time in 1985, 18 sir, where the volume of ADC loans of the 19 manner -- with the characteristics that we've just 20 described were so large that the Federal Home Loan 21 Bank Board had to issue a policy statement to the 22 entire industry as to whether or not those loans 10864 1 should be characterized as a loan or an investment 2 and, in doing so, they laid out the very 3 characteristics that you find offensive in this 4 document. 5 Isn't that a fact, sir? 6 A. I cannot attest to that. 7 Q. One moment, sir. Maybe we can help 8 you. 9 Now, sir, I'm showing you what is -- 10 it's already been discussed in this case. I 11 believe it has an exhibit sticker. Let me show it 12 to everybody to start off with so they understand. 13 12 CFR 571.17. "Accounting for acquisition, 14 development, and construction loans." 15 Do you see that, sir, Exhibit B4171? 16 A. I see the heading. 17 Q. Let me put it up here. 18 Now, sir, I'd like to direct your 19 attention -- this is the 1986 version of the Code 20 of Federal Regulations. We've talked about it in 21 this courtroom. So, all the lawyers are familiar 22 with it. 571.17, accounting for acquisition 10865 1 development, and construction loans. They talk 2 about the loans and they say "These ADC 3 transactions are usually structured so that the 4 lender participates in the expected residual 5 profit on the ultimate sale or use of the 6 property. Expected residual profit is the amount 7 of profit" -- and then it goes on. 8 And then it talks about "These ADC 9 arrangements usually have most of the following 10 characteristics." And then it describes just the 11 issues that you've been critical of, doesn't it, 12 sir? 13 MR. LEIMAN: Your Honor, I'm going to 14 object to the use of 571. Part 571 is a policy 15 statement and is not a regulation. If Mr. Villa 16 was going to be complete in this, he would have 17 shown you the beginning of this section which 18 states unequivocally it is a policy statement. 19 And I object to this being called a regulation or 20 dealing with it as such. 21 THE COURT: Well, it says it's a CFR. 22 That, in my view, is a regulation. 10866 1 Do you have something else? 2 MR. LEIMAN: Your Honor, if I may show 3 you -- may I have your Code of Federal 4 Regulations, Mr. Villa? 5 MR. VILLA: Your Honor, it's a policy 6 statement on accounting that comes out in the Code 7 of Federal Regulations. Just like the conflicts 8 rules. And Your Honor, the point -- the point of 9 this is not to argue whether it's a regulation or 10 a policy statement. 11 Their expert witness who's testified 12 that ADC loans of this structure are 13 objectionable, I'm asking him whether he knows 14 that, in fact, the entire industry had loans like 15 this with these characteristics. Whether it's a 16 policy statement or a regulation seems irrelevant 17 to that. 18 MR. LEIMAN: Your Honor, we don't need 19 a 5-by-3-foot blowup of this policy statement in 20 order to determine whether or not he knows 21 anything about whether the industry generally had 22 this kind of an ADC loan, by and large. This is a 10867 1 policy statement. It is not a regulation. 2 THE COURT: All right. 3 MR. LEIMAN: It's misleading to use. 4 THE COURT: For purposes of discussion, 5 let's assume it's a policy statement. 6 Mr. Villa, you may continue. 7 Q. (BY MR. VILLA) Sir, I'm going to ask 8 you, sir, if you were to express an opinion on 9 whether a loan that had these characteristics set 10 out from 1 to 6 and had no other problems, no 11 conflict of interest, no delegation problems, 12 nothing else -- okay -- just these 13 characteristics. 14 Would a loan like that, in your 15 judgment, be unsafe and unsound. 16 MR. LEIMAN: Object to the question. 17 As a matter of policy? Is that the question? 18 THE COURT: I'm not sure I understand 19 your objection. 20 MR. LEIMAN: Well, is he asking him if 21 it's a violation of safety and soundness as a 22 matter of policy in accordance with this policy 10868 1 statement or as a matter of law as safety and 2 soundness has been interpreted in the courts by 3 and large without the benefit necessarily of a 4 regulation or a policy statement. 5 MR. VILLA: This is just entering with 6 my examination, truthfully. This witness is being 7 offered as an expert on underwriting practices and 8 now I've asked him whether the classic testify 9 anything of an ADC loan is, in his judgment, 10 unsafe and unsound. Mr. Leiman doesn't want him 11 to answer that question. I submit he ought to be 12 directed to answer it. 13 MR. LEIMAN: Your Honor, that is not 14 my -- the nature of my objection. I think the 15 question is utterly unfair because it 16 mischaracterizes exactly what the nature of the 17 inquiry is. The question is not whether or not 18 all ADC loans are unsafe and unsound. The 19 question is whether this ADC loan was unsafe and 20 unsound with regard to Park 410. I don't see -- I 21 do not understand the nature of Mr. Villa's going 22 into the separate elements that are set out in an 10869 1 accounting standard that's a policy statement. 2 THE COURT: Well, I think it relates to 3 his testimony. I'll deny your objection. 4 Q. (BY MR. VILLA) Sir, assuming that you 5 were to examine a loan that had these 6 characteristics and no other problems -- no 7 conflicts problems, no delegation problems, no 8 concentration problems -- just these 9 characteristics, would you regard that loan as 10 unsafe and unsound? 11 A. Let me get a little closer, please. 12 Q. I thought I blew it up big enough. 13 A. (Witness reviews the document.) 14 MR. LEIMAN: Your Honor, may I state a 15 further objection? 16 MR. VILLA: Your Honor -- 17 MR. LEIMAN: Let me state a further 18 objection, if I might, Your Honor. 19 MR. VILLA: We're going to interrupt 20 the witness' answering of the question. 21 MR. LEIMAN: The witness can read while 22 I talk. Let me say this, Your Honor. If he's 10870 1 going to show him this partial list of this policy 2 statement, he ought to be able to see all of the 3 policy statement in its full -- in its full text, 4 the balance of which is here and behind this sign 5 board. 6 THE COURT: Well, you can show him 7 that. Let's just take this question. 8 A. This isn't the front page or the front 9 part of this? 10 Q. (BY MR. VILLA) This is the end of it. 11 My question relates to Nos. 1 through 6. 12 A. I realize that, but I need to know the 13 context. 14 Q. That's fine. I just wanted to make 15 sure you understood my question, sir. 16 A. I believe I do. (Witness reviews the 17 document.) 18 Q. Let me put this back up. 19 A. This is part of the salient point, I 20 think, of the entire document. As I read this, 21 this merely addresses an accounting treatment for 22 certain types of loans. In fact, it even 10871 1 describes the fact that while it may be structured 2 as a loan, the risk is more borne by the 3 institution. And it's saying in these cases where 4 these types of facts exist, this type of 5 transaction cannot be recorded and accounted for 6 as a loan because the risk is on the part of the 7 lending institution. Conversely, it goes on to 8 say -- 9 Q. Sir, I understand what the regulation 10 says. I'm asking you whether the loan described 11 in the regulation is unsafe and unsound. We know 12 what the regulation says. Let's deal with the 13 issue of whether the loan described in the 14 regulation is unsafe and unsound. 15 A. I'll agree with No. 1. 16 Q. What do you mean by "I agree with it"? 17 A. To that extent. "The borrower has 18 title to, but little or no equity in, the 19 underlying property that exists." 20 Q. Sir, I'm not asking you if you agree or 21 disagree with different portions of it. 22 A. I thought you asked me 1 through 6. 10872 1 Q. You've passed judgment on a loan and 2 told us a loan, the Park 410 loan, is unsafe and 3 unsound. 4 A. Correct. 5 Q. Now I'm asking you to pass judgment on 6 a loan described in 1 through 6. Is it unsafe or 7 unsound? 8 A. I'm taking 1 through 6 as it applies to 9 Park 410. 10 Q. A loan. No, sir. Don't -- do you not 11 understand my question, sir? 12 A. Apparently not. 13 Q. Why don't you resume your seat? The 14 question that I'm directing you to answer, asking 15 you to answer is if a loan -- not the Park 410 16 loan, but another loan -- is described by those 17 six structural characteristics and has no other 18 problems, is such a loan in your opinion unsafe or 19 unsound? 20 MR. LEIMAN: Your Honor, I'm going to 21 object to it as an incomplete hypothetical. 22 THE COURT: Denied. Let's see if we 10873 1 can get an answer. 2 A. In answer to your question, Mr. Villa, 3 reading the six factors and trying to save the 4 time of the Court without analyzing each and every 5 word of each sentence, yes, those six factors or 6 six characteristics to me describes situations 7 that are unsafe and unsound. 8 Q. (BY MR. VILLA) You know what? I knew 9 a bank regulator would say that, sir, because a 10 bank regulator's view of the ADC lending that the 11 entire thrift industry was doing in the mid-1980s 12 was that it was unsafe and unsound. Right? 13 A. If drawn in that fashion or in the 14 fashion of Park 410 or Norwood, yes. 15 Q. So, if this had come out with you as 16 the regulator, sir, it wouldn't have said 17 "Accounting for acquisition, development, and 18 construction loans." It would have said, "The 19 following loan is unsafe and unsound and we don't 20 have to worry about the accounting of it"; isn't 21 that right? I'll withdraw the question. 22 Is this an example, sir, as you were 10874 1 starting to tell us just before the lunch break 2 where something might be a generally-accepted 3 policy but, to you, it's not acceptable? 4 A. No. This is a policy statement, as I 5 understand it. I said -- what you were saying was 6 a generally-accepted thrift practice. 7 Q. Oh. You're correct. You are 8 absolutely correct. I misspoke. 9 Is this an example in which ADC lending 10 was a generally-accepted thrift practice and, in 11 fact, was so well accepted that the Federal Home 12 Loan Bank Board had to put out a regulation on 13 exactly how to account for it, yet you regard such 14 loans as, per se, unsafe and unsound? 15 A. I do regard such loans as unsafe and 16 unsound. 17 Q. Now, sir, let's turn to the issue of 18 the amount of the delegation to the senior loan 19 committee. 20 We all agree, sir, don't we, that the 21 delegation to the senior loan committee in this 22 case wasn't adopted in order to accommodate the 10875 1 Park 410 loan. Right? 2 A. I said that was my opinion, yes. 3 Q. Right. Because it was adopted for the 4 first time in August of 1984. Right? 5 A. If not before. That was the first time 6 I saw it. 7 Q. And at the time of the adoption, sir, 8 Mr. Gross, Mr. Crow, and Mr. Hurwitz were not 9 members of the board of USAT; isn't that right? 10 A. I know Mr. Gross was not in 1984. As 11 to the exact time that Mr. Crow -- if he became a 12 member, I don't know. Mr. Hurwitz, I don't think, 13 became a member of USAT. 14 Q. Only Dr. Munitz was even on the USAT 15 board during this time period? Does Dr. Munitz 16 ring a bell? 17 A. I know Dr. Munitz was on the board. As 18 to the exact time periods, I cannot attest to. 19 Q. Now, the general counsel and corporate 20 secretary of USAT at the time that this delegation 21 was enacted was Jim Pledger. Right? 22 A. If you say so. 10876 1 Q. We won't do it as I say so. Why don't 2 we get the board of directors meeting minutes of 3 August 29, 1984, which is Exhibit A1098? They are 4 already in evidence as Tab 792. 5 Do you have them before you, sir? 6 A. Yes, I do. 7 Q. Let me direct your attention to Page 2. 8 This is the -- right down at the bottom, the 9 second page of the exhibit. 10 A. Yes. 11 Q. This is the 70-million-dollar 12 delegation. Right? 13 A. Yes, it is. 14 Q. Can you tell from the last page of this 15 exhibit who was the chairman of this meeting? 16 A. It's indicated to be James L. Pledger. 17 Q. And I may have misdirected you. The 18 right-hand side of the last page would suggest 19 that Mr. C.E. Bentley is the chairman of the 20 meeting. Am I right? 21 A. Yes. 22 Q. And the left-hand side would show that 10877 1 Mr. Pledger is the secretary. Right? 2 A. Correct. 3 Q. Now, Mr. C.E. Bentley is not a 4 respondent in this case. You know that. Right? 5 A. From what I understand. 6 Q. Do you know whether Mr. Bentley was an 7 experienced thrift executive, sir, from the 8 reading that you have done of the transcript in 9 this case? 10 A. I don't recall the extent of his 11 qualifications. 12 Q. How about Mr. Pledger? Do you know 13 whether, from the reading you've done in this 14 case, Mr. Pledger was knowledgeable about thrift 15 regulatory issues? 16 A. No. As of August 29th, 1984, I don't 17 know, nor after for that matter, the extent. 18 Q. Do you know what position Mr. Pledger 19 took after he left United Savings Association of 20 Texas? 21 A. If I recall, he became an official at 22 the banking department or -- pardon me -- the 10878 1 Savings and Loan Department for the State of 2 Texas. 3 Q. The commissioner of the Texas Savings 4 and Loan Department? 5 A. I don't know whether it was 6 commissioner or superintendent. 7 Q. Now, sir, do you think that the board 8 members of United Savings Association of Texas in 9 August of 1984 could draw some comfort from the 10 fact that two knowledgeable and experienced thrift 11 officers were involved in the meeting in deciding 12 this delegation? Do you think they can draw 13 comfort from the fact that Mr. Bentley and 14 Mr. Pledger were involved in this meeting and 15 their judgment as to whether or not to approve 16 this 70-million-dollar delegation? 17 A. Using your terms, they should not have 18 deferred to anyone else's judgment. They should 19 have made their own independent judgment. But 20 again, I've already testified I don't recall the 21 extent of Mr. Bentley's experience. And at that 22 point in time, even though he may subsequently 10879 1 have become an official with the Savings and Loan 2 Department of the State of Texas as commissioner, 3 I do not know his qualifications at the time he 4 was serving as secretary. 5 Q. Now, of the respondents in this case, 6 the only one who was a director of USAT at the 7 time of the delegation was Dr. Munitz. 8 Do you know what Dr. Munitz' background 9 is, sir? 10 A. Not specifically, no. 11 Q. Would it refresh your recollection that 12 he was a Ph.D. in comparative literature at 13 Princeton and had left academia about two years 14 prior to this -- to the vote on the 15 70-million-dollar delegation? Do you remember 16 reading that at any point? 17 A. No, I don't. 18 Q. Now, isn't a person -- isn't a director 19 with that background entitled to rely upon senior 20 experienced thrift officers in making decisions as 21 a director on thrift regulatory issues? 22 A. The extent of reliance would be the 10880 1 main question. In other words -- and I can't 2 recall the occupation of each of the board members 3 at that time. Assuming they were businessmen, 4 it's essentially the same decision a businessman 5 would go through in investing their own funds for 6 their business or their own personal funds on 7 their own behalf. And the basics of 8 concentration, of exposure is the same, whether 9 it's for a business or for an individual or for a 10 financial institution. The degree of reliance 11 is -- would be the issue I would raise. If they 12 totally accepted without question or without 13 thought, I would say that that was not in 14 fulfillment of their duties. 15 Q. We're not talking about concentrations. 16 We're talking about the issue of whether the 17 delegation was excessive. It's a somewhat 18 different issue, isn't it, sir? 19 A. It's the same issue. 20 Q. It's the same issue? 21 A. Yes. The delegation, as well as 22 sending a message to staff that you can make loans 10881 1 of $70 million and you don't even have to come to 2 us, the board of directors, that are charged with 3 properly supervising this institution under safe 4 and sound principles. 5 Q. Is that what you find problematic about 6 this delegation, is that it sends a message to 7 staff about the size of loans it can make? 8 A. It's the combination. One, it's too 9 large of a loan for the institution to make at any 10 level. And two, the board is saying "It can be 11 done without the collective judgment, group 12 judgment, of the senior-most authority at USAT." 13 Q. Now, this delegation was reapproved in 14 February of 1985. Right? 15 A. Yes, it was. 16 Q. That's Exhibit A1102, which is already 17 in evidence at Tab 128. I'd like to direct your 18 attention to Page 9. That's the 70-million-dollar 19 delegation, isn't it, sir? 20 A. Yes, I see that. 21 Q. It's word for word what the other one 22 was, right, the August 1984? 10882 1 A. Yes, it is. 2 Q. Now, let's look at the first page, 3 second full paragraph, and see who was the 4 chairman of the meeting and who served as the 5 secretary. 6 A. Mr. Bentley served as chairman. 7 Mr. James Pledger served as secretary. 8 Q. And if we look at the last page, again 9 we see that the -- Mr. Pledger was secretary and 10 Mr. Bentley was chairman. Right? 11 A. That's what it shows, yes. 12 Q. Let me now direct your attention -- let 13 me -- between August of 1984 and February of 1985, 14 you have no basis for believing that any 15 delegation came up that approached $70 million; 16 isn't that right? 17 A. Based on the information I had 18 available for my review, that's correct. 19 Q. All right. The next document, sir, I'm 20 going to show you is the February 13, 1986 USAT 21 board minutes, which is Exhibit A1110 at Tab 133. 22 It's in evidence. 10883 1 I'd like to direct your attention to 2 Page 8, Paragraph C. You see the 3 70-million-dollar delegation again, don't you, 4 sir? 5 A. Yes, I do. 6 Q. And again, it's word for word? 7 A. Yes, it appears to be. 8 Q. And once again from the first page, 9 second paragraph, now Mr. Gross is the chairman 10 but Mr. Pledger is again the secretary of the 11 meeting. Right? 12 A. I would assume so. These minutes 13 aren't signed, but I assume that this -- these 14 were the correct minutes at the time. 15 Q. And let me direct your attention to 16 Page 4 of this document which shows the officers 17 of United Savings Association of Texas. 18 Who does it show down at the bottom as 19 the general counsel? 20 A. General counsel is listed as James L. 21 Pledger. 22 Q. Now, you know that the Park 410 10884 1 transaction was considered at a meeting of May 8, 2 1986. Right? 3 A. The 10-million-dollar portion of it, 4 yes. 5 Q. Let me show you Exhibit A1113, which 6 has been introduced in evidence as tab -- at Tab 7 655. These are the minutes of the USAT board on 8 May 8, 1986. 9 On the first full page, the end of the 10 first paragraph, we see who's the secretary again. 11 Mr. Pledger. Right? 12 A. That's indicated, yes. 13 Q. And look at the back of the document. 14 You can see who is responsible for preparing it by 15 looking at the initials at the bottom. 16 Do you see the initials? 17 A. The last page of the -- 18 Q. Second -- the second-to-last and the 19 last page both bear a word processing code, JLP. 20 Right? Do you see it in the bottom left? 21 A. Yes, they do. These are the minutes. 22 These two are -- these are -- 10885 1 Q. I think these are the minutes we found 2 so far. 3 A. It is "JLP." 4 Q. And it appears to you to be James 5 Pledger. Right? 6 A. Well, if not, a coincidence. 7 Q. If not, a coincidence. And so, would 8 you conclude from what you've looked at that at 9 all the meetings in which this delegation was 10 considered and adopted and at the meeting at which 11 the delegation was, in fact, applied, James L. 12 Pledger was the lawyer for USAT and the secretary 13 of the meeting. Right? 14 A. Yes. 15 Q. Now, sir, the board of directors 16 ultimately ratified the senior loan committee's 17 action on the 70-million-dollar portion of the 18 loan and approved an additional $10 million. 19 Right? 20 A. That's a fair statement, yes. 21 Q. And the vote was nine to one; isn't 22 that right, sir? 10886 1 A. It shows that all members were present 2 except Dr. LeMaistre. I don't know how many 3 directors then were there, but the vote was 4 apparently all in favor for those present other 5 than Dr. LeMaistre and one dissenting opinion. 6 Q. I believe we previously established 7 that the directors voting in favor of the loan 8 were Dr. Duckett, Mr. Keltner, Mr. Silverman, 9 Mr. Sterling, Mr. Whatley, Mr. Gross, Dr. Munitz, 10 Dr. Kozmetsky, and Mr. Jerry Williams. 11 Does that sound right to you? 12 A. Again, I don't know. It's not 13 mentioned in the minutes. The minutes aren't 14 signed. I have no idea who was there. 15 Q. Now, I heard you quote from Mr. White's 16 testimony yesterday, and I know that the OTS has 17 provided you with some testimony. We've also had 18 testimony in this courtroom from three of the 19 directors who voted in favor of the loan: James 20 Whatley, Gerald Williams, and Dr. Kozmetsky. 21 My question to you, sir, is: Have you 22 seen any sworn testimony in this case from any 10887 1 director that he would have voted differently if 2 the entire 80-million-dollar loan had been 3 presented to the board rather than, in your 4 judgment, just the 10 million? 5 A. I have seen no testimony to that 6 effect, no, sir. 7 Q. Now, sir, you know that the OTS took a 8 number of administrative depositions, don't you, 9 sir? 10 A. Yes, they did. 11 Q. Have you seen any administrative 12 testimony from any of the directors that they 13 deposed at that time indicating to you that if the 14 entire 80-million-dollar loan had been presented 15 to the board of directors in the first instance, 16 that their vote would have been any different than 17 the nine to one vote in favor of the loan that we 18 now know they cast? 19 A. No, I haven't seen that. 20 Q. Now, you know that the Park 410 loan 21 has resulted in some losses for USAT. Right? 22 A. Yes. I don't know the exact extent of 10888 1 the losses, but I understand there was a loss 2 involved. 3 Q. And has it been your experience as a 4 bank regulator and a person who approves 5 litigation decisions that when that happens, 6 people try to distance themselves from 7 loss-causing decisions? You've seen it, haven't 8 you, sir? 9 A. I've seen probably that more often, but 10 I have seen people readily acknowledge and admit 11 their -- 12 Q. Participation? 13 A. -- participation with some regret, 14 yes. 15 Q. So, even though this loan has resulted 16 in a substantial loss and litigation, not one of 17 these directors, based upon the testimony you've 18 seen, has come in and said that "If I had been 19 presented with the entire loan, I would have had 20 any different vote than the vote I cast in favor 21 of Park 410"; isn't that right, sir? 22 A. Would you please read that back? 10889 1 (Whereupon the requested portion 2 was read back by the reporter.) 3 4 MR. LEIMAN: I'm going to object to the 5 question, Your Honor. I don't think the witness 6 has -- an adequate foundation has been laid as to 7 whether or not this witness has even seen any of 8 this testimony or read it. 9 THE COURT: Well, he can tell us if 10 that's the case. 11 THE WITNESS: I may be corrected, but I 12 do not recall reading either depositions or 13 testimony of any of the directors. I may be wrong 14 in that statement. There is a listing of 15 everything that I reviewed, both depositions and 16 testimony. So, if I have erred, it's just the 17 time of day. I do not recall. 18 Q. (BY MR. VILLA) Do you recall seeing 19 any document in these -- how many boxes of loan 20 files did you look at, sir? 21 A. Actually in the lateral files, 22 somewhere between 20 and 25 lateral file drawers. 10890 1 Q. Sir, did you see any document in those 2 20 to 25 lateral file drawers which would indicate 3 that any of the directors would have voted 4 differently on the Park 410 loan had the entire 5 80-million-dollar loan been presented to them 6 rather than the 10-million-dollar portion of it? 7 A. No. I don't even know of that question 8 being raised. No, I did not. 9 Q. Now, you told us, sir, at various 10 points today that the Park 410 loan was subject to 11 criticism and your report refers to Mr. Rosenberg 12 as a member of USAT's official family. 13 Do you remember -- 14 A. Yes, I do. 15 Q. And in your testimony yesterday, you 16 referred to USAT's official family. And when 17 asked by Mr. Leiman what it meant, you referred to 18 USAT's loan committee. 19 Do you remember that? 20 A. I don't, but the members of that 21 committee would be part of the official family. 22 Q. Let me ask you, sir: Would you define 10891 1 the term "official family" for me as you've used 2 it in this case? 3 A. I've used it to the same or 4 synonymously with "insider." "Insider" being any 5 person who carries an official title of director, 6 an officer, employee of the institution, of the 7 institution's holding company, or any higher tier 8 level associated with the holding company. 9 Q. Okay. Now, sir, what law or 10 regulation, by citation, can you tell me contains 11 that definition? 12 A. It's no law or regulation I'm aware of. 13 It's prudence and sound governance, in my opinion. 14 Q. The last part of the definition was "or 15 any higher tier" -- I think "company." 16 A. Entity. 17 Q. Entity. That's fine. "Associated with 18 the holding company." 19 Now, my question to you, sir, is: If a 20 bank director or officer wanted to know how to 21 apply the concept "any higher tiered entity 22 associated with the holding company," where would 10892 1 he go? Who would he call? Is there a hot line? 2 Is there a John Stone hot line where you call and 3 figure out what that term means and how it's 4 applied? 5 A. It's not near that complex. The 6 director of USAT, senior lending officer, should 7 be aware of the officials -- am I interrupting? 8 I'm sorry. 9 Q. I'm sorry. I'm looking for my 10 regulations that I borrowed. 11 And I apologize to you, sir. I 12 interrupted your answer. 13 A. Perhaps it would help if you read back 14 my answer where I stopped. 15 16 (Whereupon the requested portion 17 was read back by the reporter.) 18 19 A. Board of directors of USAT and its 20 senior officials should be aware of the officers 21 and directors of their holding company and major 22 stockholders in order to properly administer the 10893 1 affairs of USAT to assure themselves that people 2 in a position to wield influence over board 3 members, officers does not abuse or in any way get 4 preferred treatment as a result of that position. 5 There are ample -- there's ample evidence in my 6 mind that there were people, not in the confines 7 of just USAT's little official family, that played 8 a role nonetheless in the affairs of USAT, namely 9 Mr. Hurwitz. He sat in on board meetings, 10 seconded motions, but he's not a board member. 11 Q. Sir, there is a definition that applies 12 to affiliates and affiliated persons in both the 13 insurance regulations and the holding company 14 regulations that govern permissible transactions 15 with people that some might regard as insiders. 16 My question to you is: Why didn't you 17 use the then existing regulations? 18 A. Regulations go, to varying degrees, by 19 regulation so far, but sometimes they are limited. 20 They do not -- regulations in and of themselves do 21 not cover the realm of safety and soundness or 22 prudence or good business decisions. You can't 10894 1 regulate judgment. 2 So, while there are definitions, I will 3 concede, that define for regulatory purposes what 4 insiders are and what restrictions are placed, 5 that does not mean that someone outside of those 6 regulations or those definitions cannot wield 7 influence or potentially wield influence over an 8 institution and effect decisions made by that 9 institution and even receive preferential 10 treatment. 11 Q. But in determining who fits into this 12 group that you regard as the official family, 13 there is no way that a director or officer of a 14 thrift can go to any book, any regulation, any 15 T or R memorandum and figure out what it means to 16 be associated with a -- let me see if I can get 17 the words again -- any higher tier entity 18 associated with the holding company. 19 The term "any higher tier entity 20 associated with the holding company," how does 21 anybody figure out what that means, apart from 22 calling you? 10895 1 A. Mr. Rosenberg's insider status, by my 2 definition, was not lost on one of the most 3 critical persons involved in these transactions, 4 namely Mr. Graham. 5 THE COURT: Excuse me. I didn't hear 6 the beginning of that. 7 THE WITNESS: Mr. Rosenberg's influence 8 and inside position, if you will, Your Honor, was 9 not lost on Mr. Graham, perhaps the principal 10 player or one of the principal players in both of 11 these loan transactions. Mr. Graham, in sworn 12 deposition, said that he was well aware of 13 Mr. Rosenberg's very close relationship and common 14 business ventures with Mr. Hurwitz. 15 So, rather than me implying that in 16 every situation under, as you referred to it, my 17 definition of "insider," no, I wouldn't expect in 18 normal other situations that an officer of an 19 institution would necessarily know all of the 20 officers or major stockholders in a multi-tier 21 organization above and through the holding 22 company. But if the knowledge comes to him right 10896 1 in front of his face of such a party that is 2 frequently involved with the institution, is known 3 to have a relationship with a very influential 4 person that is having a major say in the 5 activities of that institution, then I'm saying 6 it's readily apparent. He doesn't have to call 7 Stone's hot line, as you call it, or anyone else. 8 It's in front of his nose. 9 Q. Now, you're not understanding my 10 question. My question is: Assume for the moment 11 that Mr. Graham knew everything that you regard as 12 questionable about Mr. Rosenberg's relationship 13 with Charles Hurwitz or anybody else. 14 How is he to know that that is a 15 prohibited activity when it isn't covered by the 16 regulations? 17 A. I'm not saying it was prohibited by 18 regulation. I'm saying Mr. Graham should have 19 known that in dealing with someone with that 20 extent of influence, that loan fees to such 21 person, loans to that person with no equity on the 22 part of that individual, no obligation to fund 10897 1 interest payments -- 2 Q. Like that up there? 3 A. Limited guaranty -- much like that. In 4 fact, this loan, I assume, carried this type of 5 accounting. All this is is just an accounting 6 treatment. That is not a blessing at all of that 7 type of transaction. There are pronouncements 8 such as these, at least at the FDIC, on which you 9 do in criminal situations, but that doesn't mean 10 they are blessing the crime. But I'm digressing 11 since you pointed me in that direction. 12 Again, that is my answer. It was -- it 13 was or should have been apparent to the board of 14 directors. It was apparent to Mr. Graham because 15 he acknowledged such in his sworn deposition that 16 Mr. Rosenberg had strong ties to Mr. Hurwitz and 17 Mr. Hurwitz had a large say in the activities of 18 USAT. 19 MR. VILLA: Your Honor, I'm about to go 20 into an area that's going to take me almost half 21 an hour. Perhaps this is a good time to take a 22 break. 10898 1 THE COURT: All right. We'll take a 2 short recess. 3 4 (A short break was taken 5 at 2:46 p.m.) 6 7 THE COURT: Be seated, please. We'll 8 be back on the record. 9 Mr. Villa. 10 MR. VILLA: Thank you, Your Honor. 11 (3:13 p.m.) 12 Q. (BY MR. VILLA) Mr. Stone, as I 13 understand your testimony yesterday, you believe 14 that one of the reasons that Park 410 and Norwood 15 loans were excessive is that, in your words, the 16 capital protection was on the decline. 17 Do you remember saying that, sir? 18 A. Not in so many words but close to it, 19 that the net operating earnings of the institution 20 had been negative for the past two years. 21 Q. Don't you recall, sir, saying that the 22 capital protection was on the decline and then 10899 1 Mr. Leiman then got up and said to you, "What do 2 you mean 'capital protection on the decline'?" 3 And that's when you got up and you made that 4 little chart there. It's Page 10666 of the 5 transcript. It's right in the middle of the page. 6 And you're answering a question and you 7 say, "To indicate the likelihood that capital 8 protection in USAT was on decline, offering less 9 protection and a higher concentration to the 10 institution in the Park 410 and Norwood 11 transaction." 12 Question from Mr. Leiman. "You used 13 the word 'capital protection on the decline.' 14 What do you mean by that?" 15 Answer, "I had asked during a break for 16 a flip chart. I best can explain it if I have the 17 use of that. The question being -- do you want me 18 to rephrase it or restate it?" And then you go on 19 and make that drawing that's behind you. 20 Does that refresh your recollection, 21 sir, of our discussion of capital protection being 22 on the decline? 10900 1 A. Yes, it does. 2 Q. Then for a period of about 45 minutes 3 you walked us through USAT's quarterly reports to 4 discuss various indicators of USAT's financial 5 condition. Right? 6 A. Yes, I did. 7 Q. And on Page 4 of your report, you have 8 a chart of foreclosed real estate and it's for 9 nine quarters. It starts on -- at the beginning 10 of 1984, the four quarters of '84, the four 11 quarters of '85, and the first quarter of 1986. 12 Right? 13 A. Yes, it does. 14 Q. And your chart of foreclosed real 15 estate shows that the foreclosed real estate 16 increased by $105 million over those nine 17 quarters. Right? 18 A. Yes, it does. 19 Q. And you explained to us during your 20 testimony, sir, that the reason you selected 21 foreclosed assets, which is Line 310 of the 22 quarterly financial reports, was because, in your 10901 1 words, as an analyst it's one number that you look 2 at to try to see a trend. Right? 3 A. One number, yes. 4 Q. All right. And you used the trend line 5 in foreclosed assets to show the Court, at 6 Mr. Leiman's behest, that USAT's board of 7 directors should have known that its capital 8 protection was on the decline. Right? That was 9 the whole point of that exercise, wasn't it, sir? 10 A. Please, if I may have the question back 11 to make sure I'm answering correctly. 12 Q. You used the trend line in foreclosed 13 real estate to show that USAT's board of directors 14 should have known that its capital protection was 15 on the decline. Right? 16 A. That was one small part of my coming to 17 the conclusion that USAT's board of directors 18 should have known that the trend of the 19 institution and its earnings was not -- that it 20 would be augmenting capital through income. It 21 was actually losing money through -- on an 22 operating basis and indications were -- one of the 10902 1 reasons you lose money on an operating basis, one 2 of many, is that you have non-earning assets or 3 non-accruing assets. And one of such assets, as 4 an example, was that foreclosed properties were on 5 the increase, which is an additional indicator, 6 possible indicator that real estate conditions are 7 deteriorating. 8 Q. Didn't you talk about loss absorbing 9 capacity of the institution, the fact that equity 10 is key to understanding the loss absorbing 11 capacity of the institution in your report? 12 A. Yes, I did. 13 Q. And the idea was that the more equity 14 you have, the more ability you have to sustain 15 losses. Right? 16 A. Yes. That's a fair statement. 17 Q. And this chart that you drew -- let's 18 pull it out because we're going to look at it. I 19 was very interested in it because of the number 20 that you were using on this chart to illustrate, 21 which was net worth going down. Nothing here 22 about earnings. This is net worth. Right? 10903 1 A. I think when I drew the circle around 2 net worth and put the arrow down, it was if net 3 worth declines, there is less of a buffer or a 4 cushion for the protection of the liabilities, 5 which is comprised mainly of depositors' funds. 6 Q. Your report and about 45 minutes of 7 your testimony was devoted to talking about 8 foreclosed assets. And my question to you, sir, 9 is: Have you done an analysis of the composition 10 of the foreclosed real estate on the quarterly 11 financial reports to see what kind of real estate 12 it is? 13 A. I did not do an analysis of that. I 14 did see other information in my review to indicate 15 that it was predominantly single-family 16 residential and perhaps as many as 2,000 different 17 properties. 18 Q. So, if I were to tell you that I've 19 looked at Lines 170 and 180 of all of the 20 quarterly financial reports that you looked at and 21 testified about, Lines 170 and 180 of Section F 22 entitled "supplemental data," and it shows that 10904 1 74 percent of all of this foreclosed real estate 2 is residential, that would come as no surprise to 3 you, would it, sir? 4 A. Based on my previous answer, no. 5 Q. So, do you know, sir, whether the total 6 of the foreclosed real estate during those nine 7 quarters was about $240 million? Does that sound 8 right? 9 A. I'm sorry? 10 Q. The total of the foreclosed real estate 11 during those nine quarters was $240 million. Does 12 that sound right to you, sir? 13 A. I'm not sure what you're saying. Are 14 you saying the gross amount of foreclosures over 15 nine quarters was a total of $240 million? 16 Q. Yes, sir. Does that sound right from 17 your review of the quarterly financials? 18 A. I did not review them in that regard. 19 THE COURT: Mr. Villa, is that the sum 20 of these figures he has here? 21 MR. VILLA: The sum of the figures -- 22 no, Your Honor. I went through -- I think these 10905 1 are the nets because they bring in foreclosed real 2 estate and then they sell things out. And 3 whatever is net is what they end up carrying. So, 4 that is not the sum of these figures. These 5 figures can be summed from Lines 170 and 180 of 6 the quarterly financial reports, Schedule F, which 7 breaks down residential and non-residential real 8 estate. 9 A. It's the balance as of that date of 10 what they have at that particular time on their 11 books. 12 Q. (BY MR. VILLA) So, let's look, for 13 example, at Exhibit T4003, the March 1984 -- I'm 14 sorry. A4003, the March 1984 quarterly financial 15 which appears at Tab 10024. 16 Do you have that before you, sir? 17 A. I have March 31st, '84, Exhibit A4003. 18 Q. Would you turn to the fourth page from 19 the back? It should say "Schedule F, supplemental 20 data" up there. 21 A. Yes, I see that. 22 Q. Now, do you see under "mortgages 10906 1 foreclosed" about 4 inches down on the left-hand 2 column? 3 A. Yes, I do. 4 Q. And you see residential and 5 non-residential. Residential in this case is 9.5 6 million roughly and non-residential is 192,000? 7 A. Yes, I do. 8 Q. And that appears in every quarterly 9 financial. Right? Not those numbers, but those 10 lines? 11 A. I believe Section F is a regular 12 schedule. 13 Q. Now, as to the composition of the real 14 estate that's actually owned by United in the 15 spring of 1986 at the time these loans were made, 16 did you do an analysis to see of this $122 million 17 that shows up in your report on Page 4, what the 18 composition of that was? 19 A. No, I did not consider that relevant to 20 my analysis. 21 Q. You didn't consider it relevant to your 22 analysis, sir? 10907 1 A. No, I didn't, for the purpose I was 2 using the schedule -- the schedule, to me, 3 indicating foreclosed properties of any kind. 4 Foreclosed properties on a balance sheet are one 5 of the least desirable asset balances, perhaps 6 other than goodwill, that you can have, whether it 7 be commercial, residential, regardless. 8 Q. I'd like to ask you to take a look at 9 what's been marked as T7502, which is the state 10 examination report that appears at Tab 977. 11 I'd like to direct your attention to 12 Page Texas S&L 230 under "real estate owned." 13 Do you have that before you, sir? 14 A. Yes, I do. 15 Q. Let me read the lines. "According to 16 association records, real estate owned consisting 17 of approximately 2,000 parcels was composed of 18 $97,835,893 in one to four family dwellings, 19 $23,912,543 in apartments, $1,428,594 in office 20 buildings, and $2,882,406 in land for an aggregate 21 of $126,059,436 at the examination date." 22 Do you see that, sir? 10908 1 A. Yes, I do. 2 Q. Now, this examination date was 3 essentially 30 days after the last TFR that you 4 looked at in your report. Right? It's an "as of" 5 date April 30, 1986. 6 A. I may have -- my report listed the last 7 day in March, yes. 8 Q. Right. In fact, did you look -- we'll 9 find out you did look at other TFRs, but the last 10 date that's reflected in your report is an "as of" 11 date 3-31-86 which appears on Page -- it doesn't 12 appear, but it's -- Page 4 of the report shows 13 what the foreclosed real estate is as of that 14 date. Right? 15 A. That's correct. 16 Q. It's $122 million as of 3-31-86? 17 A. Correct. 18 Q. And as of 4-30-86, which is one month 19 later, it's gone up about 3 and a half million 20 dollars or thereabouts, $4 million. So, it sounds 21 like we're in the same ballpark. Right? 22 A. Correct. 10909 1 Q. Now, sir, from the numbers that I have 2 just read, it appears that there are several 3 thousand parcels. So, wouldn't you agree with me 4 that if there are several thousand parcels and the 5 total is $126 million, we don't have many 6 Park 410s in there. Right? 7 A. I believe I responded to that earlier, 8 that it was predominantly single-family and about 9 2,000 parcels, yes. 10 Q. All right. According to my analysis, 11 77.6 percent of it is one to four family, 12 18.9 percent is in apartments, and office 13 buildings, vacant land, and the rest is 14 3.5 percent. 15 During this time period -- during this 16 nine-month time period, Mr. Stone, USAT was making 17 very few new home loans; isn't that right? 18 A. Nine-month time frame -- 19 Q. Nine quarters. If I said nine months, 20 I misspoke. The nine quarters that you're 21 describing in your report. 22 A. I'd have to refer to those documents. 10910 1 It is logical based on other things that I've read 2 in my documents, but I'd really have to look at 3 those reports to answer affirmatively to that 4 question. 5 Q. Well, you read -- according to your 6 response to Mr. Leiman's questions, you read the 7 securities files by USAT. Right? I'm sorry. 8 United Financial Group. 9 Is that right, sir? 10 A. Some of them, yes. 11 Q. And you saw the annual reports that 12 United Financial filed in 1984 in which it said it 13 was transforming itself into a wholesale company 14 and it was diversifying itself away from home 15 loans into other lines of business. 16 Do you recall seeing those, sir? 17 A. Most likely, I did. I don't 18 specifically recall at this point in time. 19 Q. The portfolio that we're seeing here of 20 foreclosed real estate being primarily comprised 21 of home loans is essentially the run off of the 22 old home loan portfolio that USAT inherited, isn't 10911 1 it, sir? 2 A. Inherited? Pardon me. 3 Q. Well, perhaps you don't know as much as 4 we do about the history of USAT. 5 Do you know, sir, that USAT was the 6 result of a merger that occurred in 1983 between 7 two savings and loan associations in Texas? 8 A. I believe that to be the case, yes. 9 Q. And the savings and loan associations 10 were primarily, prior to that time, making home 11 loans. Right? 12 A. I accept that. 13 Q. And in 1984, USAT adopted what was 14 entitled or has been denominated as the wholesale 15 strategy, moving away from home loans into such 16 other things as securities activities, equity 17 arbitrage, and the like. 18 You've read things to that effect, 19 haven't you, sir? 20 A. Yes. And to the extent they sold their 21 branches, consistent with that approach. 22 Q. And if we're seeing these very 10912 1 substantial foreclosed real estate losses showing 2 up at United and they are primarily single-family 3 home loans, isn't it clear, sir, that they are 4 coming from the old portfolio that USAT inherited 5 from its prior management, the pre-merger 6 management? 7 A. Oh, I wasn't trying to attribute the 8 volume of foreclosures to the management. My 9 point was solely being made on the future earnings 10 of the institution. I laid no blame, if you will, 11 on the fact that those foreclosures were 12 increasing. My point was the fact that they were 13 increasing through those last nine quarterly 14 periods didn't portend well for the earnings of 15 the institution in the near term future. 16 Q. Sir, if you're trying to determine as a 17 director what trend line you ought to use to 18 examine what the future of the association is 19 going to be like and whether you're going to have 20 more capital, don't you think it's not fair to 21 look at the old portfolio when you're not making 22 any more home loans when, in fact, the new 10913 1 portfolio is not showing those kind of losses? 2 A. Not in this case. The focus should 3 have been on "What is our sustainability? What is 4 our viability? What are our prospects in the near 5 term for augmenting our capital through income?" 6 And what I am saying is the near-term 7 prospects with one indicator being that they have 8 been operating at a net operating loss for the 9 past two and a half years. They also have an 10 indicator that foreclosed assets are increasing, 11 increasing the drag on earnings, going forward for 12 the near-term future, plus the message it sends on 13 what is happening in real estate period, whether 14 it be residential or its real estate. And real 15 estate conditions, by their own regulatory 16 filings, were having a negative impact, including 17 the carry on loans on properties in development 18 and other non-accruing loans. But they didn't 19 attribute it just to the old residential 20 portfolio. 21 Q. But we know it's from the old 22 residential portfolio now that we've examined the 10914 1 old residential portfolio, and any suggestion by 2 reading those 10Qs to say that it reflects upon 3 commercial real estate would be inaccurate based 4 upon what we now know; isn't that right? 5 A. No, I don't believe so. I'd have to 6 have the filings back. They actually did make a 7 statement in attributing or describing their 8 reduction in earnings, among other things, the 9 cost of carry for real estate investments and real 10 estate under development. 11 I'll stand corrected if -- we can clear 12 it up by showing me the -- in fact, I think I have 13 in my notes the exact date of that filing. 14 Q. We'll look at some of your notes before 15 we're done here, sir. 16 Your discussion yesterday began with an 17 elaborate discussion of the foreclosed real 18 estate, and then you turned to an analysis of the 19 Schedule D, the income section of the thrift 20 report. 21 Do you remember that, sir? 22 A. Yes, I do. 10915 1 Q. And what you did was you took the net 2 operating income which is, I think -- I'm sorry -- 3 net income which is Line 810, and you deducted 4 from it the non-operating income numbers on Lines 5 200 through 280. You did that for us each month 6 to show how it flipped operating income -- how it 7 changed net income for the association every month 8 or nearly every quarter from positive to negative. 9 Do you remember that, sir? 10 A. Yes, I did. 11 Q. So, you took the net income number and 12 you reduced it by the operating -- I'm sorry. You 13 took the net income number and you reduced it by 14 the non-operating income number. Right? 15 A. More specifically, I think I said in 16 most cases from the profit on the sale of assets, 17 which I described as a non-recurring source of 18 income. 19 Q. You didn't -- you didn't make the 20 adjustment, though, sir, for the non-operating 21 expenses, did you? 22 A. No, sir, I did not intentionally. 10916 1 Q. Now, if there were securities and other 2 operations here that generated money -- I'm 3 sorry -- that generated revenues through 4 mortgage-backed securities and otherwise, wouldn't 5 they have associated expenses? 6 A. May I have the question again, please? 7 8 (Whereupon the requested portion 9 was read back by the reporter.) 10 11 A. Yes, they would. I'd expect to see 12 that as an operating expense. 13 Q. (BY MR. VILLA) You'd expect to see 14 the income in the non-operating expense -- I'm 15 sorry -- the income in non-operating income but 16 the expense in operating expenses? You wouldn't 17 correspond the income and the expense lines on 18 this report. Is that what you're telling me? 19 A. Again, income on mortgage-backed 20 securities would be treated as interest income, 21 which is an operating income item. Overhead 22 expenses associated with a mortgage-backed 10917 1 security investment program would be appropriately 2 carried in operating expenses, neither one of 3 which figured into my computation of non-operating 4 income. I only deducted profit on the sale of 5 assets. 6 Q. Sir, on the March 31, 1986 quarterly 7 financial report, there is $23 million of the 8 amended quarterly financial report. There is 9 $23 million of income on the non-operating income 10 side under "investment securities." 11 A. I recall that. 12 Q. Have you learned what the roll-down is? 13 Do you understand what the roll-down is, sir? 14 A. Not to memory. It wasn't a part of my 15 report. 16 Q. So, if I were to tell you that there 17 was income from the mortgage-backed securities 18 operations and it showed up in the non-operating 19 income side of this, your supposition that income 20 from the securities operations going into the 21 operating income side would be wrong; isn't that 22 right, sir? 10918 1 MR. LEIMAN: Your Honor, before the 2 witness is forced to answer this question based 3 upon Mr. Villa's statement, I think it would be 4 useful to allow the witness to actually have the 5 document that Mr. Villa is reading from since it 6 is one of the TFRs that he used. 7 MR. VILLA: He remembers it. But if 8 he'd like to pull it out, that's fine. 9 Q. (BY MR. VILLA) I have a feeling it's 10 not going to make much difference to you. 11 You don't know what the roll-down is; 12 is that right? 13 A. I would like to see the report. 14 Q. Okay. It's A4012. It's a 15 March 1986 -- it's Tab 1023, the March 1986 16 quarterly financial statement as amended 8-8-86. 17 And if you turn four pages back, five pages back, 18 to Section D, "income," down to Line 230. 19 A. The one I am looking at is still 20 April 28th, but I don't know that that number 21 changes. Five pages back? 22 Q. It probably will change, sir. May I 10919 1 assist you? Investment securities, $23 million. 2 A. Right. But that's not the last amended 3 version, but I assume it's the same. This was 4 amended twice for whatever reason. This is 5 still -- 6 Q. It's the 4-28-86. You're right. And 7 there is another one yet. 8 A. August 8th, which -- maybe it's in 9 here. I don't know. Let me look. 10 Q. That's fine. My question to you, sir, 11 is: You just assumed when I asked you the 12 question that income from mortgage-backed 13 securities operations would go into interest 14 income. If it goes into non-operating income on 15 this side, don't you think that the non-operating 16 expenses ought to be taken into consideration when 17 you determine what United's long-term prospects 18 are? 19 A. No. First of all, I didn't assume. 20 There were documents indicating as one of the 21 reasons for the revision -- take that back. 22 Interest on mortgage-backed securities 10920 1 is -- held in portfolio is reported in operating 2 income as interest income. Securities -- if 3 mortgage-backed securities are sold -- and this is 4 reflected on profit -- on sale of investment 5 securities -- sale of, not interest income, not 6 recurring income -- it appropriately is a 7 non-operating income item. 8 Secondly, I don't see on the 9 non-operating expense side anything that to me 10 would indicate the overhead that is associated 11 with the program that you were mentioning. 12 Q. So, you didn't add up the expenses on 13 the non-operating income side -- I'm sorry. You 14 didn't add up the non-operating expenses on these 15 TFRs; is that right? 16 A. For a reason, yes. 17 Q. If I told you there were $38 million, 18 you wouldn't know whether that's right or wrong, 19 correct? 20 A. Well, the document you've handed me 21 would add up to no more than 10 million unless 22 I've got an illegible copy. 10921 1 Q. Right. There are nine quarters, 2 though. 3 A. I thought we were talking about the 4 statement that was in front of me. 5 Q. I'm talking about the nine quarters. 6 The nine quarters, non-operating expense of 7 $38 million. 8 A. Oh, that wouldn't necessarily surprise 9 me. I would verify it. But that's -- before we 10 make a point of that, let's look. Under 11 "non-operating expense," the very first item is 12 "provision for losses on sale of foreclosed real 13 estate." In that case, it's the largest item in 14 that category in this particular quarter: 15 $3 million. 16 As an analyst, to say I am going to say 17 that that's something non-recurring and a one-time 18 event or an unusual event when I see foreclosed 19 properties going from 17 million to 20 million to 20 36 million to 37 million to 48 million, 21 63 million, 79 million, 90 million, 122, I don't 22 think I would say that that is a non-recurring 10922 1 event. 2 So, if that number trend totally the 3 opposite. Had that hundred -- 4 Q. If that number what? 5 A. -- then in March gone down the opposite 6 way down to 17 million, I would have given them 7 credit and said, no, they have almost got these 8 problems behind them. The losses -- they are 9 there are not that many more losses to be taken. 10 But when the trend is this way, I consider that 11 tantamount to a operating loss. They have got a 12 lot of assets to dispose of yet. 13 All right. The next line is "other 14 repossessed property." Again, the same thing but 15 there is nothing in that category. "Other real 16 estate owned." Same -- not that far removed from 17 foreclosed property. It is other real estate 18 owned that's not used for -- 19 Q. Which side are you on? Are you on the 20 income or the expense side now? 21 A. Well, you've focused me on the 22 non-operating expense side -- 10923 1 Q. Okay. Fine. 2 A. -- and asked why I didn't add that back 3 into income, and I am explaining line by line. 4 Q. I understand. What I said is if you 5 took out -- if you took the net income number and 6 you dropped out the operating income number from 7 it, wouldn't it also be fair to drop out the 8 non-operating expense number from it? That's the 9 question I asked you. 10 A. That's what I'm answering. 11 Q. I see. 12 A. And I'm saying -- let me repeat -- the 13 reason I didn't add back to income the 14 non-operating expense is, as I just explained in 15 this particular document you gave me, $3,500,000, 16 the largest item in non-operating expense, is 17 provision for losses and losses on sale for 18 foreclosed real estate. I'm saying I don't regard 19 that as a non-recurring item when foreclosed real 20 estate -- 21 Q. Oh, I see? 22 A. -- is on the up kick. Had this trend 10924 1 been reversed, you would have been correct. I'd 2 say "all right." I don't see this continuing 3 because they have almost eliminated their 4 foreclosed properties. The same on other real 5 estate. The same on losses on the sale of loans. 6 Q. I see. So, you're saying that -- 7 you're not arguing that the expenses and income 8 ought to be matched up. It's just that you say 9 "Well, on the income side, I'm not sure you're 10 going to have recurring non-operating income and I 11 think you're going to have recurring non-operating 12 expense." So, I'm just going to take half of it 13 off in order to show what the trend is. Right? 14 A. No. You're making it sound way too 15 casual. It's totally the opposite. I just told 16 you the rationale of why I did not add back losses 17 on sale of foreclosed properties or provisions for 18 losses because of this trend. I told you I would 19 have done that exactly as you say -- I would have 20 given them credit back into income if this 21 schedule and my report showed that they had 22 started out nine quarterly reports ago with 10925 1 $122 million and that had now shrunk to 17. I'd 2 say, "I think I'd better give them credit for that 3 because it looks like that's not going to be a 4 regular and recurring expense." 5 If anything, this evidences that it 6 will be, at least for the short term. They are 7 building the portfolio they have to dispose of. 8 They are not eliminating it. 9 Q. Well, sir, if we're examining the 10 question of capital -- we've talked about these 11 different trends to figure out how to look forward 12 or project the future of USAT's capital because 13 capital is, in your words, the loss-absorbing 14 cushion of the association. Right? 15 A. That's what I said, yes. 16 Q. And capital is the same thing as this 17 net worth. Are we agreed? "NW" is the same as 18 capital? 19 A. Yes, for the purposes of that 20 illustration. 21 Q. Well, given what appear to be the 22 issues about the other different characteristics 10926 1 of trend lines, I thought, inspired by your 2 graphs, that we might put up one of our own. 3 4 (Discussion off the record.) 5 6 Q. (BY MR. VILLA) Now, sir, you have, I 7 believe -- 8 MR. LEIMAN: Hold on, Mr. Villa. Hang 9 on a minute until I can get to a vantage point 10 where I might be able to join in. 11 Q. (BY MR. VILLA) You have, I believe -- 12 you prepared a little page where you scheduled 13 everything. I asked you for a copy of it. 14 Do you still have that page? 15 A. Yes, I do. 16 Q. Okay. Can you look at the fifth line 17 down on that page? What does that say? 18 A. RAP net worth. Regulatory accounting 19 net worth. 20 Q. That's the same thing as regulatory 21 capital? Can we agree on that? 22 A. Yes. 10927 1 Q. And I'd like you to read off on a 2 quarter-by-quarter basis, beginning with 3-84, 3 what the numbers are. 4 A. 150 million. 5 Q. Yes. 6 A. 158.5. 162.1. 208.6. 171.6. 176.2. 7 Q. Right. 8 A. 181 million. 181.0. 186.8. 9 Q. Right. 10 A. I haven't read off of mine. I believe 11 it's 215.3. 12 Q. And what's the last one? 13 A. 242.2. 14 Q. It's off my graph up here. Now, we 15 were talking about the trend lines. Now, sir, if 16 I were to -- instead of looking at all these 17 different foreclosed real estate numbers, taking 18 net income and dropping out of it only 19 non-operating income but not non-operating 20 expenses, if I were just to look at regulatory 21 capital numbers, wouldn't the trend look either 22 like that or like that (indicating); but it 10928 1 wouldn't be going straight down, would it, sir? 2 A. That's not the way to look at it, 3 though. That was my entire point. That's 4 illusory. 5 MR. LEIMAN: For the sake of the 6 clarity of the record, what's illusory? 7 MR. VILLA: You know, 8 cross-examination -- redirect begins when I finish 9 my cross. 10 MR. LEIMAN: Well, we don't want a 11 muddled record, do we, Mr. Villa? We want to be 12 sure that we know what the witness is talking 13 about since there are two charts up there. Isn't 14 that right? 15 MR. VILLA: Have a seat. 16 MR. LEIMAN: Your Honor, is that 17 correct? 18 THE COURT: Is what correct? We have 19 two charts, yes. 20 MR. LEIMAN: That's right. And the 21 witness did not disclose which chart he was 22 referring to. 10929 1 THE COURT: I thought he was referring 2 to Mr. Villa's chart, but I'll hear the witness. 3 Which is illusory? 4 THE WITNESS: I was going to ask -- 5 finish my answer. 6 THE COURT: Yes. 7 THE WITNESS: When Mr. Villa -- well, 8 is it Villa or Villa? 9 MR. VILLA: Villa. 10 THE WITNESS: When Mr. Villa read the 11 numbers and charted the capital -- he's kind of 12 obstructed it now, but this line is not a real 13 line. This chart went in this fashion right here. 14 So, let me just draw circles around his line so we 15 know the numbers I read off so that it's accurate. 16 I read off these numbers. 17 MR. VILLA: No, sir. Here's the 18 numbers you read off. I marked them beforehand. 19 One, two, three, four. This is for the sale -- 20 this is the sale of the branches. And then they 21 dividended out that capital so that it remained a 22 smooth line. Then it continued going right up 10930 1 here and then this is that sale of the so-called 2 roll-down that we talked about that brings it up 3 here. But the trend line is either like this, 4 taking out the sale of the branches which goes up 5 and then comes down or, if you consider the 6 roll-down, the trend is like this. The trend line 7 is not pointing toward the floor. 8 MR. LEIMAN: Your Honor, is there a 9 question or is this just Mr. Villa's testimony? 10 THE COURT: Well, let's hear the 11 witness' testimony at this point. 12 THE WITNESS: Maybe I can attempt to 13 get through the answer this time. This was, in 14 fact, the sale of the branches. And the branches 15 brought in, I think -- I'm doing this from 16 memory -- 76.8 million. And you said it came back 17 down here because of the dividends. My recall of 18 the dividends were that they were 37 and a half 19 million. Those don't balance in examiner terms. 20 Q. (BY MR. VILLA) I don't know what the 21 net of the branches were after goodwill. There 22 was a goodwill calculation -- 10931 1 A. Goodwill was roughly an additional $4 2 million. So, let's just see what the math is 3 here. 35 million. 4 So, again, this 76 million in branches 5 is not offset dollar for dollar for -- pardon 6 me -- for the dividends. The dividends are 7 substantially different than the gain. They don't 8 balance off, which was my point because I didn't 9 look just at this gross regulatory capital. 10 That's meaningless because you've got to go back 11 and say, "How did that capital line come in this 12 fashion?" Well, we know 76 came from sale of 13 branches. Now, unless they have -- and I'm 14 wrong -- thousands of branches, I don't think they 15 can count on selling more branches. And it's not 16 a sustainable income item. 17 Additionally -- and that's why I went 18 through it quarter by quarter. They had other 19 sales -- foreclosed assets, loans, some of which 20 were marked up from goodwill -- that kept this 21 trend line -- kept this capital at that level. It 22 wasn't based on their core earnings. They were 10932 1 losing money. It was pointed out in the state 2 examination report, even scheduled. This bank on 3 its core operations -- whether it's converting to 4 a new level of operations or not -- it's got 5 embedded operating losses. You can't say on one 6 day "I'm going to change my business" and expect 7 to be profitable the very next day because you've 8 got a multi-billion-dollar institution that is 9 still reflective of the old business. 10 Q. That's correct, sir. 11 A. And you've got that with you for a 12 while. 13 Q. Correct. That's the foreclosed real 14 estate that we've been talking about. Right? 15 A. Correct. But all I was saying is that 16 the board of directors, when they were looking at 17 making loans of $80 million in one case and loans 18 and investments of 39.4 million -- pardon me for 19 marking up your chart. You can mark mine up if 20 you want. But looking at those in relation to the 21 capital they had, which I say was totally 22 inadequate, the 225 -- 225.3 million, they were -- 10933 1 it was too large to that capital then in my 2 opinion. Way, way too large. And the fact they 3 were losing money on an operating basis, that 4 their capital had only got to this level because 5 of sale of branches, because of sale of loans, 6 because of sale of securities. Those aren't 7 sustainable. 8 Any bank that can show me that they can 9 out-guess the market and show sale of securities 10 and constantly make a profit, sale of loans -- 11 they can go out and package loans and constantly 12 make a profit -- I would be most aware of because 13 they are saying they are smarter than any other 14 investor. 15 Banks, because they have depositors' 16 money, are not meant to speculate the depositors' 17 funds with speculative types of investments, 18 whether it be on the securities side, 19 esoteric-type investments, or whether they be in 20 large loans over 50 percent of their capital with 21 the entire future on two single properties, two 22 single properties, gambling over 50 percent of 10934 1 this capital and the prospects for it are not good 2 in the short-term because they lack core operating 3 earnings. That was my point. 4 Q. Sir, do you know that United was in an 5 ongoing battle with its regulators to define what 6 its core operating earnings were? 7 A. There were issues related to accounting 8 treatment -- 9 Q. That's not what I'm talking about. Do 10 you recall that United was meeting with its 11 regulators and arguing with them about the issue 12 as to whether or not income from the sale of its 13 securities should be included in its core 14 operating earnings because United had transformed 15 itself from essentially a savings and loan doing 16 primarily residential real estate into one in 17 which it did substantial amounts, on a regular 18 basis, of securities transactions? 19 A. No. I did not review any materials 20 that gave me that knowledge. 21 Q. Now, sir, if you add back in the 22 future -- strike that. 10935 1 If you consider that United's future 2 was not in foreclosed -- was not in single-family 3 real estate but in the securities activities that 4 was generating, at least in some of these -- and I 5 haven't -- when I stopped I stopped on your third 6 3-86. The next one would go up here. Right? 7 A. Again, I don't know that. 8 Q. Well, you read it off. You read off 9 the number for June of 1986. 10 A. I thought you said projecting beyond 11 my -- 12 Q. No. Your number from June of 1986 13 continues rising. Right? What's June of 1986 RAP 14 net worth? 15 A. Well, this wouldn't be correct. I've 16 already -- it may be. 242.3. We had an amended 17 report. So, I need to look at it to confirm my 18 number. But your point being -- pardon me for 19 interrupting, but you just said that they had been 20 arguing with their regulators and were -- 21 Q. What I'm trying to say, sir, is that 22 the -- your analysis of the trends at United in 10936 1 the spring of 1986 was to inform United's 2 directorate about the future of the association. 3 And in trying to say what United's directorate 4 should have looked at to see the future of the 5 association, you selected certain criteria which 6 looked at the history of United and you didn't 7 look at the criteria which, at that point, in the 8 spring of 1986, was looking toward the future of 9 United, which is its operating -- its income from 10 its securities side of its operations which, while 11 definitionally is not operating income because of 12 the way that it's reported in TFRs, is, in fact, 13 what the directors could see when they are looking 14 at the future; isn't that right? 15 A. Well, I can't reconcile the fact that 16 you're saying -- I'm taking it at face -- 17 reconcile the fact that you're saying they are 18 transforming the institution into an entirely 19 different operation of investment securities. Am 20 I correct? You said that, Mr. Villa? 21 Q. Yes. 22 A. Why, then, did they invest 55 percent 10937 1 of their capital in two properties that have 2 nothing to do with investment securities? It 3 seems a little inconsistent to me. 4 Q. Well, sir -- 5 A. They are leaving only -- 6 Q. We can talk about the overall schedule 7 of it; but the annual report of United, the 1984 8 annual report, lays out the wholesale strategy. 9 And if you read it, it will discuss how United is 10 becoming a more diversified company. And I think 11 when you look at their financials, you'll see that 12 their growth is primarily on the marketable -- on 13 the security side of the activities. 14 And furthermore, when we talk about the 15 question of which way United's capital was 16 going -- and this is non-tangible capital -- it's 17 going up, isn't it, sir? 18 A. But Mr. Villa, you just said they are 19 becoming more diversified and, at the same time, 20 concentrated 55 percent of their capital in two 21 loans. That's the opposite of diversification. 22 That's concentration. That is totally the 10938 1 opposite of what you're saying. 2 Q. Okay. That's about what we're going to 3 turn to now, the issue of concentrations. 4 Sir, you talked to us a little bit 5 about tangible capital, and you reflected tangible 6 capital in your report, didn't you, sir? 7 A. Yes, I did. 8 Q. "Tangible capital" was not a term that 9 was used in the savings and loan industry; isn't 10 that right? 11 A. Oh, it was used constantly. 12 Q. I'm sorry. I misspoke. In 1986, 13 "tangible capital" was not a term that appeared in 14 the savings and loan regulations. 15 Wouldn't you agree? 16 A. In the regulations? I'm not sure what 17 you mean, "in the regulations." 18 Q. Well, when you try to determine the 19 financial strength of a -- strike that. 20 When you were looking at the regulatory 21 net worth of a thrift in 1986, there was no line 22 for tangible capital. Right? 10939 1 A. No, there was not. 2 Q. You agree with me? 3 A. On TFRs? 4 Q. Right. 5 A. No. You'd have to make that 6 calculation. 7 Q. And that's because for financial -- for 8 thrifts in 1986, they didn't recognize for 9 regulatory purposes tangible versus intangible 10 capital. Right? 11 A. It would be fair to say that they 12 recognized it but they ignored it for regulatory 13 accounting purposes. 14 Q. Ordinarily when you look at the 15 question of what a concentration is in your view 16 as a bank regulator, you've always looked at 17 tangible capital as the benchmark. Right? 18 A. Yes. 19 Q. Now, you testified twice yesterday, I 20 believe, that the maximum permissible safe and 21 sound loan was, in your opinion, for USAT in March 22 of 1986 about $20 million. 10940 1 Do you remember that, sir? 2 A. Yes, I do. 3 Q. And that was consistent with your 4 testimony in your deposition. 5 Do you remember you were asked about 6 that in your deposition? 7 A. Correct. 8 Q. And you told us yesterday and I think 9 in more detail at your deposition that the 10 analysis you used was that this was between 15 and 11 25 percent of unimpaired capital and unimpaired 12 surplus and that you moved it toward the low end 13 because I gather you don't like the quality of the 14 capital. 15 Does that sound about right? 16 A. I don't recall -- I don't recall using 17 the calculation 15 to 20 percent of unimpaired 18 capital and surplus. In fact -- I may have, but I 19 don't recall -- 20 Q. Isn't that, in fact, the analysis you 21 went through and you had 15 to 25 percent -- 22 A. -- unimpaired because it is impaired. 10941 1 But, no. It may have been even more arbitrary. 2 The rationale I used in coming up with 20 million, 3 knowing that they had no tangible capital but 4 again considering the fact that with the 5 government's blessing, the Federal Home Loan Bank 6 permitted a number of otherwise insolvent 7 institutions to be purchased and the purchaser to 8 defer the losses inherent in those institutions by 9 establishing goodwill. Goodwill was nothing -- 10 virtually nothing but air. It was just a 11 balance -- if you'll let me finish. 12 So -- and I even said -- I agreed to 13 some extent with that. So, rather than looking 14 back and saying, "Well, they had no tangible. 15 They shouldn't have loaned -- made any loans," I 16 put myself in the shoes of an analyst, as an 17 examiner, as an expert, if you will, at that point 18 in time in saying, "All right. This has been 19 government sanctioned and for a purpose. 20 Hopefully, it'll save the government money in the 21 disruption of closures. This is the largest 22 institution" -- or I think it was -- "the largest 10942 1 savings institution in Houston. What would be a 2 reasonable amount?" 3 I don't remember saying that it was 15 4 or 20 percent, but I did back in to a figure of 5 saying 20 million, to me, would have been an 6 amount that I think should have been a maximum 7 loan for USAT during the time period in question. 8 Q. And in your testimony yesterday, you 9 don't recall saying you were doing the analysis of 10 how big the delegation should be and you said, 11 "And I'm speaking off the top of my head now" -- 12 Page 10686 -- "speaking off the top of my head 13 now; but to the best of my memory, maximum loan 14 limits ranging on both sides from state to state 15 might be 20 percent of the bank's capital and 16 surplus -- unimpaired surplus positions as being a 17 maximum loan limit to any one borrower." 18 And then in your deposition at Page 89, 19 you were talking about it again and you said, "In 20 reviewing legal lending limits for the bulk of the 21 financial assets in the country, that being by far 22 more than savings and loans of all the states, 10943 1 you'll see the average lending limit is somewhere 2 between 15 and 20 percent of unimpaired capital 3 and surplus." 4 And then you apply it to the 5 190 million and you come up with, ballpark, a 6 20-million-dollar loan. 7 Does that refresh your recollection as 8 to the analysis you went through, sir? 9 A. Everything but the latter -- the latter 10 comment that I applied 15 to 20 percent. 11 I took much more into consideration, as 12 I just stated previously in my last answer, that I 13 looked at: The fact that capital was intangible. 14 But I took into account the conditions, the 15 government-sanctioned accounting. I don't recall 16 applying a percent. I just came up, considering 17 the size of the institution, with that 18 $20 million. 19 I don't think it was as precise as any 20 type of percentage calculation comparable to the 21 percentages that I used for state lending limits 22 and banking. 10944 1 Q. You say you don't think you went 2 through that analysis, the one we just read? 3 A. I went through the analysis, but I 4 don't recall saying 15 to 20 percent of any figure 5 of USAT in coming to 20 million. It perhaps 6 was -- it was more arbitrary than that. It was 7 just considering the institution, considering the 8 sanctions, considering the accounting convention 9 that was allowed at the time, I pulled that figure 10 out. 11 Q. Now, you did not look at the Bank Board 12 regulations involving loans to one borrower; is 13 that right? 14 A. I did subsequent to my report. It was 15 extremely liberal, if I recall. I mean, it's 16 virtually unlimited. Virtually unlimited as far 17 as the capital account, yes. 18 Q. Now, sir, I've got here the loans to 19 one borrower regulation; and I thought I'd put it 20 out. This is the first page so we can all see it. 21 It's 563.9-3, "Loans to one borrower." And this 22 is the aggregate loan limit. I don't know if you 10945 1 can see that, sir. 2 Can you see it now? 3 A. Fairly well. If I need to, I'll go 4 closer. 5 Q. Okay. Do you see 563.9-3(b)? This is 6 the limitation on a loan, aggregate loan to one 7 borrower? 8 A. Yes, I do. 9 Q. And it's equal to 10 percent of the 10 institution's withdrawable accounts or an amount 11 equal to the institution's net worth, whichever is 12 less. Right? 13 A. Yes, that's correct. I've seen that. 14 Q. And the net worth of this association 15 at the time was -- spring of 1986 -- was about 16 $215 million. We just saw that? 17 A. I believe in their last amendment, 18 that's what it was listed as. 19 Q. And would you agree with me, sir, that 20 if Park 410 loaned $80 million, then that would be 21 about 37 percent of its loans to one borrower 22 limit? 10946 1 A. I believe that's the exact percentage I 2 used. 3 Q. And the Norwood loan would be about 4 18 percent of its loans to one borrower limit? 5 A. Same number I used yesterday, yes, 6 correct. 7 Q. And so, the result -- now, if you look 8 at the Federal Home Loan Bank Board regulations, 9 you will see under the definition -- under the 10 loan limit for commercial loans an analysis that 11 was similar to the one -- even if you don't 12 remember that you said it -- that, in fact, we've 13 seen in both your deposition and your testimony 14 which is "15 percent of the bank's unimpaired 15 capital and unimpaired surplus, plus an additional 16 10 percent," which would take it to 25, "for loans 17 fully secured by readily marketable capital." 18 Do you see that? 19 A. I'm more puzzled about what you say I 20 didn't say, but I don't recall having quoted that 21 at all. 22 Q. That's the point, sir. 10947 1 A. Right. 2 Q. That's the point. The 15 to 25 percent 3 unimpaired capital and surplus formula appears in 4 the Bank Board regulations. It's under 5 "commercial loans." Right? 6 A. Right. 7 Q. That's a loan limit for commercial 8 loans? 9 A. Right. 10 Q. It defines outstanding commercial loans 11 as being "various types of loans except to the 12 extent secured by real estate." Right? 13 A. Yes, it does. 14 Q. So, under the Bank Board regulations, 15 there is a two-tiered lending limit. Right? 16 A. Apparently, there is. 17 Q. One of them is the 15 to 25 percent of 18 tangible -- 15 to 25 percent of capital and the 19 other is 100 percent of capital. Right? 20 A. Yes. 21 Q. Now, sir, the way you apply the unsafe 22 and unsound principle to this regulation is 10948 1 essentially -- what you've gone through in your 2 mind, you say -- and you're a commercial bank 3 regulator. This is the limit of unsafe and 4 unsound loans. Anything that exceeds the 5 commercial loan limit is, in your judgment, unsafe 6 and unsound. 7 So, you essentially take the aggregate 8 loan limit for real property loans and you mark 9 through it. Isn't that effectively what you're 10 doing? 11 A. No, that's not what I'm doing. 12 Q. Well, if you apply the unsafe and 13 unsound principle to every loan that exceeds 15 to 14 25 percent capital, then we don't need this 15 provision at all, this special provision that the 16 Federal Home Loan Bank Board enacted for loans 17 secured by real estate, do we, sir? 18 MR. LEIMAN: Your Honor, I object. It 19 wasn't his testimony that -- Mr. Villa's totally 20 mischaracterizing the record. 21 THE COURT: Well, he can answer the 22 question. 10949 1 MR. LEIMAN: Would you please -- could 2 I please have the question read if -- 3 THE COURT: No. Let's have the answer. 4 THE WITNESS: Your Honor, this, as I 5 said, I believe -- in my report -- I'll have to 6 refer back to it -- I didn't even know at the 7 time. I could have looked it up, what the loan 8 limits were for savings and loans. 9 What I was saying when I was saying 10 that was irrelevant, I was looking at the safety 11 and soundness considerations for an institution 12 in my opinion, and these allowances that were 13 allowed -- convention -- in other words, 14 accounting conventions that were allowed through 15 the Eighties and even the supervision, 16 unfortunately, by the regulators was all -- has 17 all since been found lacking. 18 I didn't take that with retrospect. 19 I'm just saying notwithstanding what law may allow 20 them to do -- I mean, laws allow commercial banks 21 to make up to 20 percent of their capital in any 22 one loan. It doesn't say it's safe and sound to 10950 1 do that. It said that's just the maximum limit. 2 So, notwithstanding the liberality that was 3 allowed them, I'm saying a director using good 4 business judgment would not tie up 55 percent of 5 the institution's capital and hang it on the 6 future of two undeveloped pieces of property that 7 the bank is putting all the money into. 8 That's all I'm saying. That was 9 allowed. They could go up presumably to 10 215.3 million in Park 410 and not violate this law 11 or violate this restriction. And anyone trying to 12 convince me that that would be safe and sound, 13 just because it was permitted by the loan to one 14 borrower limit, to me is absolutely ludicrous. 15 Q. (BY MR. VILLA) You think it's too 16 much of a concentration, don't you? 17 A. Yes. 18 Q. Now, sir, am I correct that commercial 19 banks don't have this two-tiered loan to one 20 borrower limit. Right? Commercial banks have one 21 limit that covers all of their loans? 22 A. No. That's -- for years, at least for 10951 1 state institutions, state-chartered, there would 2 be a distinction based on unsecured loans and 3 collateralized loans. 4 Q. I misspoke. It doesn't have a two-tier 5 limit based upon loans secured by real estate; is 6 that correct? 7 A. Two tiers for real estate? 8 Q. Okay. 9 A. I'm sorry. I can't follow what you're 10 asking. 11 Q. Do commercial banks allow -- strike 12 that. 13 Does the regulation of commercial banks 14 allow the banks to make much larger loans if the 15 security for the loans is real estate than if it 16 is other commercial loans? 17 MR. LEIMAN: Could I -- Your Honor, as 18 of what time frame are we talking about? 19 Q. (BY MR. VILLA) I don't think it makes 20 much difference, does it, sir, to your answer? 21 A. Laws vary by state; but states do allow 22 limits, as you say, on commercial loans, on 10952 1 secured loans. Most frequently, the highest limit 2 is on loans secured by government securities. But 3 there are some states that are obviously more 4 liberal than others. 5 Q. Now, sir, do you know whether there 6 is -- I think you've told us so far that you 7 disagree with anybody who lends more than is 8 essentially the commercial loan limit -- lends 9 beyond the commercial loan limit because, in your 10 judgment, it would be unsafe and unsound. Right? 11 A. And the commercial loan limit again, 12 Mr. Villa? 13 Q. 15 to 25 percent of unimpaired capital. 14 A. No, I won't agree to that. If I saw an 15 institution, the same time period, a savings and 16 loan institution with no goodwill, with adequate 17 capital with a sustained earnings stream, I'd have 18 a totally different view on that limit. I would 19 not be as restrictive as that. 20 Q. You'd allow thrifts to lend more than 21 banks? 22 A. At that point in time, the government 10953 1 was sanctioning it, yes. So, I took that into 2 consideration in coming up with that 3 20-million-dollar number. 4 Q. Now, sir, you've told us that your 5 problem with the size of this loan is that it's a 6 concentration. We're talking about Park 410, and 7 we can add in Norwood if you like. 8 It's a concentration. Right? 9 A. Yes. 10 Q. Do you know, sir, whether the Federal 11 Home Loan Bank Board had a rule on concentrations? 12 A. Again, I don't know and it would have 13 been irrelevant to my analysis. 14 Q. It would have been irrelevant to your 15 analysis? 16 A. As far as the safety and soundness. 17 Again, as I stated earlier, the violation of a 18 rule in itself is unsafe and unsound. But other 19 transactions that don't violate any rule or 20 regulation or policy equally can be unsound. 21 Q. You told us, sir, I believe, in 22 response to some questions I asked you a little 10954 1 earlier that the Bank Board took a different 2 approach toward regulation than the banking 3 agencies. Right? 4 A. As far as the volume of -- 5 Q. Regulations. 6 A. Yes. 7 Q. The Bank Board took much more of a 8 rule-driven approach toward regulation whereas the 9 banking agencies looked more at unsafe and unsound 10 practices, more judgmental issues being applied; 11 isn't that right? Do you recall telling me that 12 at the beginning of my examination of you? 13 A. That's a little bit more into it than I 14 said, but I still would not disagree with it. 15 That's not the say the Federal Home Loan Bank 16 didn't look at safety and soundness. 17 Q. Now, sir, I've put up here a regulation 18 that does not directly apply. This is a 19 regulation that applies to federal associations. 20 Now, USAT was not a federal 21 association, was it, sir? 22 A. No. It was chartered by the State of 10955 1 Texas. 2 Q. So, it's under what we call the 3 insurance regs. Right? 4 A. I believe that's correct. 5 Q. This is not the insurance regs. This 6 is for federal associations. This is the 7 concentration rules for federal associations. And 8 the concentration rules for federal associations 9 in 12 CFR 545.36 is 2 percent of an association's 10 assets can be made to any one development, any one 11 development project, 2 percent of an association's 12 assets. 13 Do you see that, sir? 14 A. Yes. 15 Q. And if the assets of this association 16 were roughly $5,112,000 -- $5,112,000,000, would 17 you agree with me that the concentration rule as 18 applied on the -- to a federal association would 19 permit a loan of about $102 million to any one 20 project? 21 A. Just looking at it from here and 22 reading it, what you pointed out, it would -- it 10956 1 seems to -- pardon me. It seems that it would 2 appear -- 3 THE WITNESS: I'm getting tired, Your 4 Honor. 5 A. It would appear that that would allow 6 2 percent of an association's assets in one 7 development. In the case of USAT, 5.1 billion as 8 you said, it would be roughly 100 million. 9 However, that also tells me that if 10 USAT didn't have 215.3 million in capital but had 11 $1 in capital, they could still make that same 12 size loan. So, there is no measure in that 13 restriction against the capital of the 14 institution. So, I disagree with -- 15 Q. (BY MR. VILLA) That's a limit, 16 though. Right? 17 A. If you call it a limit. 18 Q. And I see the smile on your face. 19 That's the smile of a bank regulator looking at 20 the Bank Board's regulations in the 1980s, isn't 21 it? 22 A. No. I'm sympathetic to the position 10957 1 they were in. They couldn't base it on capital 2 because they had an industry that was extremely 3 sick. 4 Q. But you base your judgments on how big 5 our loans could be at USAT on capital, don't you, 6 sir? 7 A. Yes. From safety and soundness 8 reasons, the principal doesn't change regardless 9 of the situation or the governing regulations. 10 Q. You're sympathetic to the regulators 11 but perhaps not so much to the regulated. Isn't 12 that fair, sir, a fair statement -- 13 A. No, that's not the case. 14 Q. -- of your comments? 15 A. That's not the case at all. Again -- 16 Q. Now, sir -- 17 A. The board of directors of an 18 institution are charged with administering the 19 affairs of that institution in a safe and sound 20 and prudent manner. I am telling you regardless 21 of regulations, restrictions, whatever permitting, 22 it is not sound business judgment to invest over 10958 1 55 percent of an institution's assets -- its 2 capital in two parcels of land, raw land, 3 predicated solely on the future value of those 4 properties. There is nothing else really to back 5 them up but limited guaranties of a very small 6 amount, and the banks are funding the entire cost 7 of the project. They are even paying fees to the 8 borrowers themselves. They are paying salaries. 9 It's just -- it's business judgment. It's not 10 what is allowed. 11 Q. It's essentially an ADC loan, as we saw 12 in the first set of these boards, to the amount -- 13 or actually not -- to 37 percent of the amount 14 permitted by the loans to one borrower limit and 15 you find that to be unsafe and unsound. Right? 16 A. Without question. 17 Q. Now, sir, you told us yesterday, I 18 believe, that in your experience, the amount of 19 delegation from a board of directors to a senior 20 loan committee should be between 35 and 50 percent 21 of its maximum loan limit. 22 Do you remember that? 10959 1 A. I said that based on the best of my 2 memory -- and I was struggling -- that seemed like 3 a fair approximation from what I recall. 4 Q. Now, whether or not we agree with it, 5 we have now concluded, haven't we, that the 6 maximum loan limit for USAT is $215 million. That 7 is to say, its regulatory capital. Right? 8 A. What I read very quickly and you 9 pointed out, that's the case. 10 Q. And I've done the calculations. 35 to 11 50 percent of $215 million would mean that the 12 maximum delegation would be between 75 and 13 $108 million. 14 Does that sound correct in terms of the 15 numbers, sir? 16 A. Correct to the best I can say for it, 17 yes. 18 Q. Now, Mr. Stone, am I correct that you, 19 as a lifelong bank regulator, don't approve of 20 financial institutions operating without any 21 tangible capital? 22 A. As a generalized statement, that's a 10960 1 fair statement. 2 Q. And you don't approve of a financial 3 institution being able to lend 100 percent of its 4 regulatory capital to one borrower, even if the 5 capital were all tangible capital? 6 A. That is again a correct statement. 7 Q. You don't approve of ADC loans either, 8 do you, sir, as described in the Bank Board 9 regulations that we reviewed? 10 A. Well, you're mischaracterizing those 11 regulations. 12 MR. LEIMAN: Objection, Your Honor. 13 A. That regulation, if you permitted me to 14 read it all the way through, was not as you imply, 15 a regulation permitting. It was a regulation 16 restricting loans that met that definition in the 17 way that their income could be accounted for. It 18 went further to explain characteristics of a loan 19 versus an ADC. It did not -- in a policy that 20 says "This is how you account" -- "if you have one 21 of these loans, this is how you account for it. 22 So, we've described it so it must be okay. So, if 10961 1 we've described this and you have it, you're all 2 right." 3 It didn't say that. It was strictly a 4 policy statement, how to handle the accounting if 5 you had such a loan on your books. Not a 6 blessing, not a sanction. 7 Q. (BY MR. VILLA) The Bank Board 8 understood that the volume of its ADC lending was 9 so great that it had to adopt a specific policy 10 statement to deal with the accounting for it and 11 you think that there is some way implicit in that 12 that the Bank Board was critical of this ADC 13 lending? If they were critical of it, wouldn't 14 they just put out a regulation prohibiting it? 15 A. They probably -- they were constrained 16 from calling it unsafe and unsound because all of 17 their institutions -- not all of them, but a large 18 number of them would fall in that category. Why 19 they didn't do it at that time, I don't know. I'm 20 sure quite a few tax payers would want to know, as 21 well. 22 Q. Now, you know, Mr. Stone, that no 10962 1 federal or state examiner ever criticized the 2 Park 410 or Norwood loans because they were, 3 number one, excessive in size; two, excessive 4 given the future prospects of the association; or 5 three, the delegation was too large. 6 You know that. Right? 7 A. I totally disagree with those 8 examiners. 9 Q. Answer my question first. You know the 10 examiners did not make those criticisms? 11 A. I didn't see evidence -- 12 Q. You didn't see such criticisms; is that 13 right? 14 A. No, I didn't. 15 Q. And you said you totally disagree with 16 the examiners. Right? 17 A. If they didn't -- well, if they had an 18 opportunity to sufficiently review them in the 19 time frame involved. 20 Q. Some of these, as your testimony has 21 pointed out, are the largest and the second 22 largest loans in the association; isn't that 10963 1 right? 2 A. Yes. 3 Q. Now, we've gone over at the beginning 4 of the examination, my cross-examination of you 5 today, six or seven -- maybe as many as ten 6 different factors that one would look into in 7 safety and soundness. And they ran the gamut from 8 knowledge of the condition of the association to 9 knowledge about the management, economic 10 conditions, and other things. 11 Do you remember all those, sir? 12 A. Yes. I'm not saying it was complete 13 off the top of my head; but yes, I do recall 14 those. 15 Q. But there were many of them. Many of 16 the factors -- 17 A. And many more to add. 18 Q. Sir, if you were to compare yourself to 19 these bank board examiners who actually spent 20 months at United, isn't it clear, sir, that they 21 compare favorably to you on those criteria? That 22 is to say, they know more about the economic 10964 1 conditions of Texas. They know more about the 2 capabilities of management. They know more about 3 the overall condition of USAT. They know more 4 about all of the factors that we talked about that 5 go into defining safety and soundness, and they 6 are looking at it through 1986 eyes, not through 7 1997 eyes. 8 Isn't that true, sir? 9 MR. LEIMAN: Objection, Your Honor. It 10 calls for Mr. Stone to try and figure out what 11 these people knew more than 10 years ago. He 12 couldn't possibly know that. Mr. Villa knows 13 that, as well. There is no way for him to put 14 himself in their minds or know what they knew 15 about the market at the time. 16 Now, if he could ask what Mr. Stone 17 would have done, that's a different question. 18 MR. VILLA: He's already said he knows 19 nothing about it. We went through what he knew 20 about in the mid-1980s. I think I'm entitled to 21 an answer to that question. 22 THE COURT: All right. Objection 10965 1 denied. You may answer. 2 THE WITNESS: May I have the question 3 read back, please? 4 5 (Whereupon the requested portion 6 was read back by the reporter.) 7 8 A. No, sir. I don't agree with that. 9 Q. (BY MR. VILLA) Sir, you totally 10 disagree with the fact that these individuals -- 11 these examiners who looked at these loans didn't 12 classify them as unsafe and unsound for the 13 reasons that you put in your report. Right? 14 Isn't that what you said? You totally disagree 15 with the examiners? 16 A. That's a correct statement. 17 Q. You don't think these examiners were 18 corrupt, do you, sir? 19 A. I have no evidence of that. 20 Tremendously understaffed and didn't have enough 21 time. 22 Q. But if they looked at one thing in the 10966 1 association, you'd expect them to start with the 2 largest loans, wouldn't you, sir? 3 A. I only looked at the loans. In reading 4 other documents, there was evidence there was 5 another problem I wasn't asked to look at but was 6 called Couch Mortgage that at least was believed 7 at the time to have potential serious 8 ramifications. And I do recall in reading 9 Mr. Cool's testimony that he went into the 10 institution with two, maybe three assistants and 11 that the Federal Home Loan Bank examiners came 12 later but, if my memory serves me right, with only 13 a handful on their staff. Even -- no matter how 14 long they stayed, the duration, that is not a 15 sufficient staff to examine an institution of this 16 size. I'm not saying they were corrupt. I'm just 17 saying they were overwhelmed and, from all 18 appearances, distracted by what they thought was a 19 larger issue, this Couch Mortgage. But I'll defer 20 to other people and other parts of the testimony. 21 Q. Your analysis of this loan is you look 22 at the regulatory capital of the association, you 10967 1 look at its earnings trends, and you look at the 2 size of the loan. That takes about 40 seconds. 3 They had 17 examiners in there -- 17 people, 4 examiners and auditors, in there for a period 5 of -- I think it's 2800 hours over a period of 6 four months, and you tell me that they couldn't 7 look at those three things? 8 You know they looked at it, don't you, 9 sir? 10 A. The reason I think they did not look at 11 it is it's not in the examination -- I don't know 12 if they would have agreed with the same 13 terminology, but I think they would have agreed 14 had they had time to analyze Park 410 and 15 subsequently Norwood. 16 In fact, I think Norwood was classified 17 at some point in time -- and it may have been that 18 same exam. But had they had sufficient time to 19 look at Park 410 in some detail, I'm confident it 20 would have been classified by an examiner. 21 Q. Isn't the reason, sir, that the 22 examiners in 1986 and '88 -- '87 and '88, looked 10968 1 at these loans and don't reach the same 2 conclusions that you do about their excessive size 3 and the delegations, the other matters, isn't the 4 reason that the two of you come -- you on one side 5 and all the examiners on the other side -- isn't 6 the reason that they are applying different 7 standards than you are, sir, that they are 8 applying the standards that were in effect at the 9 time and you are applying standards of a bank 10 board -- I'm sorry -- a bank regulator looking at 11 safety and soundness principles 11 years later now 12 that we know what happened to Texas? 13 Isn't that the difference, sir? 14 A. No. I was particularly conscientious 15 in preparing this report to focus on my analysis 16 of the two loans at the time made. Safety and 17 soundness, I'll repeat again, principles do not 18 change over time. Risk is risk. It can be 19 aggravated in certain institutions, perhaps, that 20 are in weaker financial condition. You apply 21 perhaps a higher standard and expect more. But 22 safety and soundness principles do not change over 10969 1 time. Different types of instruments may come on 2 the scene that require a different type of 3 analysis, but risk is the same. Risk doesn't 4 change. 5 MR. VILLA: Thank you, Mr. Stone. 6 Thank you for answering my questions. You are a 7 distinguished bank regulator, sir; and nothing I 8 said was intended to suggest otherwise. 9 THE COURT: We'll adjourn until 10 9:00 o'clock tomorrow. 11 MR. RINALDI: Your Honor -- 12 THE COURT: Mr. Rinaldi. 13 MR. RINALDI: Yes. I just had one 14 point I wanted to raise. The parties have now all 15 submitted letters regarding their various 16 positions with respect to the continuation of the 17 hearing. I just wanted to inquire at this time 18 what -- where the Court would like to go from 19 here. 20 Do they require any further 21 submissions? To be perfectly honest, I think from 22 a planning standpoint -- and I haven't talked 10970 1 about this with any of the other counsel -- but I 2 think from a planning standpoint, it would be 3 helpful for us to have some sense of where we're 4 going in terms of a startup of this thing again so 5 that we can make arrangements for storage of 6 materials, things of that nature. 7 THE COURT: Yeah. Well, you put your 8 finger on an important part of the case. It is my 9 conclusion that I want to put it off until we can 10 conclude the proceeding. And I believe the 11 respondents, in view of the blocked-off time that 12 has been given to Enforcement here, that all of 13 us, myself included, are entitled to some time on 14 other matters before this thing goes on. And I 15 just think I'm going to wait until Mr. Villa is 16 ready, June or not, but I don't anticipate going 17 before then. 18 MR. RINALDI: I'm sorry. When you say 19 you don't anticipate going before then, is it the 20 Court's determination that it would be appropriate 21 to put this off to sometime in -- after the 22 summer? Because there is -- 10971 1 THE COURT: I'm thinking of the summer. 2 I know it's not -- it'll interfere with vacations; 3 but we may have to go during the summer, yes. 4 MR. RINALDI: I have no objection to it 5 one way or the other; but it was my understanding 6 that at about the middle of April, there was a 7 substantial hiatus between about April and June 8 that would have afforded a fairly large block of 9 time in which the parties could have proceeded 10 with this. And when I read Mr. Nickens' letter, 11 he indicated that while he was occupied in 12 February -- January, February, and parts of March, 13 that beyond that period, he was not. 14 The OTS is disposed to start as early 15 as possible. Clearly if January and February are 16 unacceptable, my question would be there is a 17 fairly large block of time before Mr. Villa's next 18 trial gets started in about -- I think he said the 19 15th of June; is that right? 20 MR. VILLA: The 15th of June is when my 21 trial starts. 22 MR. RINALDI: So, there would be almost 10972 1 a two-month period in there when certainly it 2 would be -- and I believe the Court indicated the 3 Court's schedule was freed up during that period 4 of time. 5 And so, I guess my question to the 6 Court would be: Is there any likelihood that we 7 would convene during that period of time which is 8 almost an eight-week block -- 9 THE COURT: I have a four-week hearing 10 scheduled during that time. And I indicated if 11 the parties would agree, I might postpone it. But 12 under the circumstances, I don't feel inclined -- 13 and the other agencies I feel have some claim to 14 my time, as well. 15 MR. RINALDI: I had been under the 16 impression, when you spoke of the four-week block, 17 that you were referring to the Henderson matter 18 which was in March or -- 19 THE COURT: The Henderson matter starts 20 in February -- 21 MR. RINALDI: February. 22 THE COURT: -- and is supposed to go 10973 1 four weeks. And I have another case that's 2 April 20th that's in San Diego, and that's 3 supposed to go four weeks. And it just seems to 4 me that I cannot segment this in between times, 5 and that's why I feel inclined that I'll just have 6 to put it off until everybody is free and has 7 adequate time to arrange their calendars to go. 8 And it just seems to me not practical to go in and 9 out with all these documents -- 10 MR. RINALDI: Well, let me then explore 11 one other area. Mr. Villa had indicated that he 12 had applied for an extension -- and perhaps I 13 misread your December 10th letter, but I looked at 14 it only an hour or so ago. You had made an 15 application for an extension of the trial date 16 that begins on June 15th; is that correct? 17 MR. VILLA: Your Honor, I think I 18 accurately reflected the fact that I sent a motion 19 in for a continuance. I checked at my office as 20 late as mid-afternoon yesterday. They hadn't 21 gotten any -- they had not gotten a response from 22 the Court on my motion. As soon as I get a 10974 1 response, I'll be happy to notify the Court by fax 2 and counsel. And that's the current status. It 3 hasn't changed since my letter of, I think, 4 yesterday. 5 MR. RINALDI: Mr. Villa, in applying 6 for that application for continuance, what length 7 of time were you seeking to continue the matter 8 for? I mean, was it your intention to try to 9 expand that -- to push that trial far enough 10 forward so that -- 11 MR. VILLA: To complete this trial. I 12 said that the case should be set at the time at 13 the convenience of the parties and the Court no 14 earlier than mid-October because I look at a 15 16-week block, figuring that it's going to start 16 sometime -- that if he grants my continuance, then 17 our case probably would start sometime in the 18 summer and run through the middle of the fall. 19 So, I think I said to start no earlier 20 than mid-October of this year -- of next year. 21 MR. HEAD: Your Honor, one thing for 22 some time we've been struggling with -- how long a 10975 1 block -- how big a block we need -- and that is to 2 get an estimate from the OTS as to how long until 3 they will conclude their part of the case. 4 THE COURT: Well, that was one thing 5 that was missing from Mr. Stearns' letter. I 6 didn't see that he stated what -- 7 MR. RINALDI: I think that our part of 8 the case can probably be completed, the 9 respondents and the regulators and all the other 10 witnesses, probably in three to four weeks. But 11 that doesn't include an estimate for the time that 12 would be taken on redirect -- I mean 13 cross-examination by the other parties so that 14 they would have to factor in whatever amount of 15 time they need for cross-examination of the 16 regulators and for cross-examining or I guess to 17 redirecting whatever the term would be for the 18 respondents. But as I see it, there aren't that 19 many more fact witnesses and there are only about 20 three regulators and then the respondents. And 21 the time we would take to examine those people is 22 probably between three and four weeks. What I was 10976 1 going to inquire about at this point, it sort of 2 follows up on what Mr. Villa just said. In the 3 event that Mr. Villa's continuance is granted, 4 would the Court be disposed then to move the 5 proceeding that's presently scheduled in San Diego 6 in April back and start in April and try to finish 7 the thing April, May, June -- 8 MR. VILLA: Your Honor, I'm sure that 9 Mr. Rinaldi didn't read my letter carefully. I 10 have a trial that starts on March 3rd and runs -- 11 and I can't remember if -- 12 MR. RINALDI: There is no date in your 13 letter, John, Mr. Villa. That's why -- 14 MR. VILLA: I think I previously 15 advised the Court. March 3rd. And I think it's 16 supposed to be five weeks is what the government 17 said their direct case was going to be. It's a 18 criminal trial. I don't know how long it's going 19 to last. While I think of myself as a good trial 20 lawyer, it is very difficult to try cases 21 back-to-back when all you do is fly from one place 22 to the next. Sometimes it does require 10977 1 preparation. 2 Secondly, it -- the idea is that you 3 don't know exactly when the trial is going to end. 4 So, I would -- I would suggest, Your Honor, that 5 we simply defer these resolutions on a 6 hypothetical basis until we have a little more 7 tangible evidence about where we're going and then 8 reschedule things on that basis. 9 MR. RINALDI: Well, if we use that 10 criteria, Mr. Villa, we won't know when your trial 11 is going to end until it ends and that will push 12 us into the April time frame and probably into the 13 latter part of April before we can even make a 14 determination. It would seem to me that if we can 15 make a determination of what you think is the 16 reasonable time frame for that trial, I guess my 17 inquiry here today would be at the conclusion of 18 that trial, after a hiatus, can we then consider 19 the possibility of restarting this proceeding? 20 And of course, that all turns on the further 21 question of can you get an extension of your 22 June 15th date. But then that would also 10978 1 implicate the issue of would the Court be disposed 2 to then moving back the proceeding that it has, I 3 guess, at the end of April and beginning of May. 4 My only purpose for raising the point 5 at this time, Your Honor, is to try to put in 6 place a mechanism where we can at least visit this 7 issue sooner rather than later. Obviously, it 8 seems to me that Mr. Villa's motion to the Court 9 may be a seminal issue in all of this. And I 10 don't know what his expectation is at this point 11 in time as to when the Court will respond. 12 Do you have any sense of that, 13 Mr. Villa? 14 MR. VILLA: I have not had much luck 15 telling judges when they should issue orders. 16 MR. NICKENS: Mr. Villa's letter did 17 suggest a status conference in the early part of 18 January to advise the Court about the status of 19 that matter and all these other matters, which I 20 think is what Mr. Rinaldi is referring to and it 21 seems a reasonable result in light of the holidays 22 and the fact that we're not likely to get a ruling 10979 1 on that matter, although we could so inform the 2 Court if we do, but we're not likely to before 3 that early January period. 4 THE COURT: Well, the best I can do is 5 say we're not going to go in January. My 6 inclination would be that it more or less depends 7 on Mr. Villa's success with the Court. If he has 8 to go during the summer, it seems to me then 9 we're -- I regret to say it, but I guess we're 10 all -- how long is that case supposed to -- 11 MR. VILLA: Two or three weeks maybe. 12 Couple weeks. No longer than that. 13 THE COURT: Then we'll start after 14 that. That's my inclination. 15 MR. RINALDI: And in the event that 16 Mr. Villa is successful in moving back his case, 17 the Court would be disposed towards considering an 18 earlier start date, I take it. 19 THE COURT: If he gets that postponed, 20 we'll start about the time that case was supposed 21 to start. 22 MR. KEETON: Early June. 10980 1 MR. NICKENS: June 15th, early June. 2 MR. VILLA: Thank you, Your Honor. 3 THE COURT: 9:00 o'clock tomorrow. 4 5 (Whereupon at 4:48 p.m. 6 the proceedings were recessed.) 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 10981 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 16th day of 17 December, 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 10982 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 16th day of 18 December, 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