8325 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 12-2-97 22 8326 1 A-P-P-E-A-R-A-N-C-E-S 2 ON BEHALF OF THE AGENCY: 3 KENNETH J. GUIDO, Esquire Special Enforcement Counsel 4 PAUL LEIMAN, Esquire (Not present) SCOTT SCHWARTZ, Esquire (Not present) 5 BRUCE RINALDI, Esquire RICHARD STEARNS, Esquire 6 and BRYAN VEIS, Esquire (Not Present) of: Office of Thrift Supervision 7 Department of the Treasury 1700 G Street, N.W. 8 Washington, D.C. 20552 (202) 906-7395 9 ON BEHALF OF RESPONDENT MAXXAM, INC.: 10 FRANK J. EISENHART, Esquire 11 of: Dechert, Price & Rhoads 1500 K Street, N.W. 12 Washington, D.C. 20005-1208 (202) 626-3306 16 13 DALE A. HEAD (in-house) 14 Managing Counsel MAXXAM, Inc. 15 5847 San Felipe, Suite 2600 Houston, Texas 77057 16 (713) 267-3668 17 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO. AND CHARLES HURWITZ: 18 RICHARD P. KEETON, Esquire 19 KATHLEEN KOPP, Esquire (Not present) of: Mayor, Day, Caldwell & Keeton 20 1900 NationsBank Center, 700 Louisiana Houston, Texas 77002 21 (713) 225-7013 22 8327 1 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO., CHARLES HURWITZ, AND MAXXAM, INC.: 2 JACKS C. NICKENS, Esquire 3 of: Clements, O'Neill, Pierce & Nickens 1000 Louisiana Street, Suite 1800 4 Houston, Texas 77002 (713) 654-7608 5 ON BEHALF OF JENARD M. GROSS: 6 PAUL BLANKENSTEIN, Esquire 7 MARK A. PERRY, Esquire (Not present) of: Gibson, Dunn & Crutcher 8 1050 Connecticut Avenue, N.W. Washington, D.C. 20036-5303 9 (202) 955-8500 10 ON BEHALF OF BERNER, CROW, MUNITZ AND HUEBSCH: 11 JOHN K. VILLA, Esquire MARY CLARK, Esquire 12 PAUL DUEFFERT, Esquire (Not present) of: Williams & Connolly 13 725 Twelfth Street, N.W. Washington, D.C. 20005 14 (202) 434-5000 15 OTS COURT: 16 HONORABLE ARTHUR L. SHIPE Administrative Law Judge 17 Office of Financial Institutions Adjudication 1700 G Street, N.W., 6th Floor 18 Washington, D.C. 20552 Jerry Langdon, Judge Shipe's Clerk 19 REPORTED BY: 20 Ms. Marcy Clark, CSR 21 Ms. Shauna Foreman, CSR 22 8328 1 2 EXAMINATION INDEX 3 4 BRUCE WILLIAMS 5 Page 6 Cont'd Examination by Mr. Guido..........8330 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 8329 1 P-R-O-C-E-E-D-I-N-G-S 2 (10:00 a.m.) 3 4 THE COURT: Be seated, please. The 5 hearing will come to order. 6 Are there any preliminary matters? 7 MR. GUIDO: Your Honor, one of the 8 issues that we discussed when we broke was the 9 question of the scheduling for next year. 10 THE COURT: Yes. 11 MR. GUIDO: We would like to -- the OTS 12 would like to address that at the end of today. 13 We've had some preliminary discussions with 14 opposing counsel and have some sense of schedule 15 and we may be able to firm that up this afternoon. 16 I know you indicated that you wanted to know as 17 early as possible so that you could adjust your 18 schedule as necessary with all of the other 19 demands on people's time. 20 So, we would like to address that at 21 the end of today, if we could. 22 MR. NICKENS: That's acceptable with 8330 1 us, Your Honor. 2 THE COURT: All right. If there are no 3 other matters, we will continue with the 4 examination of Mr. Williams. 5 6 CONTINUED EXAMINATION 7 8 MR. GUIDO: I believe when we left off, 9 we left off with Exhibit 5008, which was the 10 November, 1985 performance report, Your Honor. 11 Q. (BY MR. GUIDO) I would like to direct 12 your attention to the fourth page of the 13 performance report which -- see the section which 14 says "regulatory net worth/investments"? 15 A. Yes. 16 Q. And it says "At November 30, USAT's net 17 worth direct investment and securities investments 18 limits all fell within regulatory guidelines. A 19 summary of regulatory net worth and investments 20 are shown below in Schedule AE." 21 Then do you see where it says "net 22 worth regulatory limit, 163"? 8331 1 Do you see that? 2 A. I see that. 3 Q. Do you know what the reference to 4 regulatory limit is? 5 A. I mean, this was 12 years ago. So, I 6 don't remember specifically; but I guess that 7 would be what our regulatory requirement would be. 8 Q. So, that is the minimum regulatory net 9 worth requirement? 10 A. That would be my interpretation of 11 this, yes. 12 Q. Then it says "USAT 1130." 13 Do you see the figure there? 14 A. I see that. 15 Q. What does that refer to? 16 A. That would have been USAT's actual 17 regulatory net worth as of that day. 18 Q. Now, how does regulatory net worth 19 differ from GAAP net worth? 20 A. I could not tell you that. The 21 regulatory accounting was a whole different world. 22 Q. Okay. So that this figure, this 8332 1 regulatory net worth, isn't GAAP net worth which 2 we would find on a 10K or a 10Q? 3 A. I don't believe it would be, no. 4 Q. Then it says "available capacity." 5 Do you see that, the 17-million-dollar 6 figure? 7 A. I see that. 8 Q. What does that refer to? 9 A. Basically net worth over and above the 10 regulatory requirements as of that date. 11 Q. Now, with regard to the regulatory net 12 worth, what is the significance of the regulatory 13 net worth? 14 A. It was a benchmark net worth minimum 15 that the regulations defined the association 16 should target to meet. 17 Q. What were the consequences of not 18 meeting the minimum regulatory net worth at that 19 time? 20 A. I couldn't tell you. 21 Q. Did it involve heightened oversight by 22 the regulators? 8333 1 A. I couldn't tell you. 2 Q. Do you recall participating in any 3 discussions at that time regarding what the 4 consequences of not meeting the regulatory net 5 worth were? 6 A. Not specifically, no, I don't. 7 Q. Do you recall anything generally? 8 A. No, I don't. 9 Q. Do you recall whether or not anyone 10 told you that it might have an impact on the type 11 of investments that USAT would be able to make? 12 A. I recall that being one of the 13 implications, yes. 14 Q. Do you recall that another one of the 15 implications would be that there could be 16 limitations on the liability growth of the 17 institution going forward? 18 A. I know there were liability growth 19 limitations. I don't know what the exact tieback 20 to net worth was. 21 Q. Do you know whether or not it would 22 result in limitations on dividends that could be 8334 1 paid by USAT? 2 A. As I said before, I really don't know 3 what the general or specific implications of not 4 meeting the requirements were. 5 Q. You do recall that you may have had a 6 discussion on the type of investments that USAT 7 could make? 8 A. I know there were investment 9 limitations. So, yes, the two were tied together. 10 Q. Now, I would like to show you a 11 document that has been marked as 10597. I would 12 like to direct your attention -- 13 MR. GUIDO: Let me take just a minute, 14 Your Honor. Apparently the set that I have is out 15 of order. 16 THE COURT: All right. 17 Q. (BY MR. GUIDO) This is a memorandum 18 from Gerald Williams to Charles Hurwitz, Barry 19 Munitz, Jenard Gross dated January 21st, 1986 and 20 the subject is the investment department bonus 21 plan. It says "Due to the unique attributes of 22 United's investment department, we have been asked 8335 1 to approve a bonus program for that group 2 effective January 1, 1986. In that regard, I have 3 reviewed a preliminary proposal from Ron Huebsch 4 to Charles Hurwitz outlining his ideas for that 5 program." 6 Do you recall the discussion about the 7 bonus program for that the investment department 8 that was headed by Ron Huebsch? 9 A. No. 10 Q. Do you recall whether there were bonus 11 plans at USAT? 12 A. I wasn't party specifically to the 13 investment bonus plan. So, I have no idea what 14 was agreed to between management and the 15 investment group. 16 Q. Did you have a bonus plan for the 17 treasury department? 18 A. There were bonuses paid. There was not 19 a specific plan necessarily. 20 Q. Did you participate in the awarding of 21 the bonuses to the people that worked in your 22 department? 8336 1 A. Yes. 2 Q. Did you make recommendations regarding 3 those bonuses? 4 A. I believe I may have made a few. 5 Q. Do you recall whether or not there were 6 any performance-based bonuses that were paid at 7 USAT? 8 A. In my particular group -- I'm not real 9 sure how you're defining "performance." Yes, it 10 was based on performance, but it wasn't specific 11 investment performance because that wasn't their 12 function. 13 Q. What was it based upon? 14 A. How well they performed relative to 15 their job expectations, were they settling the 16 trades and balancing the books in terms of the 17 investment trades that were settled. Just general 18 overall performance relative to their job 19 expectations. 20 Q. Now, were there performance-based 21 standards for other departments at USAT? 22 A. There may have been, but I wasn't aware 8337 1 specifically of how everyone was evaluated 2 individually. 3 Q. How were checks paid by USAT, payroll 4 checks paid by USAT? 5 A. I believe they were direct deposit into 6 your checking account. 7 Q. Now, how did they get approved? How 8 were the direct deposits approved? 9 A. I do not have any idea. I didn't work 10 on the operations payroll side. 11 Q. So, the treasury department did not 12 handle any of the payroll? 13 A. No. 14 Q. Who did? 15 A. A woman named Fran Dean, I believe, was 16 over human resources at the time. 17 Q. And, so, human resources is the 18 department that paid the bonuses? 19 A. I believe so. 20 Q. So, the treasury didn't have any role 21 in the payment of bonuses? 22 A. Treasury primarily settled security 8338 1 trades and managed liquidity. 2 Q. What do you mean by "settled security 3 trades"? 4 A. When the investment department would 5 execute a trade, a trade ticket would come down to 6 the treasury department and they would get with 7 the parties involved in the trade and settle it in 8 terms of clearing it, paying for it, getting the 9 proceeds if there was a sale, or distributing cash 10 if there was a purchase. 11 Q. Take a look at the third paragraph down 12 in this memorandum. It says "The investment 13 department bonus plan would be similar to other 14 incentive plans at United. It would be integrated 15 into the company's overall performance and the key 16 measurement criteria would be from the monthly 17 performance report, specifically Schedule SF, Page 18 2 attached." 19 Do you see that reference? 20 A. I see that reference. 21 Q. Now, look at Bates stamp US894, which 22 is Page 2 of Schedule SF of the performance report 8339 1 for November 30th, 1985. 2 Do you see that page? 3 A. I see that page. 4 Q. Did you participate in the preparation 5 of the performance reports for USAT? 6 A. Yes, I did. 7 Q. And did you sign those reports? 8 A. I may have signed the cover memo that 9 went on those reports. I didn't individually sign 10 each page. 11 Q. Now, who all participated in the 12 preparation of the numbers, for example, on 13 Schedule SF Page 2? 14 A. SF Page 2 would have probably been my 15 group, the treasury group, corporate planning, 16 with the assistance of individuals from the 17 accounting department. 18 Q. Now, that shows various items under 19 "securities." 20 Do you see that column headed 21 "securities"? 22 A. Yes, I see that. 8340 1 Q. It has mortgage-backed securities, 2 corporate securities. It says "O/M and S/T 3 investments." 4 Do you see that? 5 A. I see that. 6 Q. And then it has basically the size of 7 the portfolios. 8 Do you see that total assets figure? 9 A. I see that. 10 Q. And then it has the liabilities. It 11 says "total sources of funds." 12 Do you see that item? 13 A. I see that. 14 Q. Then it moves down and talks about 15 profit contribution. 16 Do you see that? 17 A. I see that. 18 Q. Now, it talks about one item -- do you 19 see where it says "total from income"? 20 A. Yes. 21 Q. Then there's "interest expense." 22 Do you see that? 8341 1 A. Yes. 2 Q. Then it says "gain on sale of 3 securities." 4 Do you see that item? 5 A. I see that. 6 Q. Then it says "operating expenses" and 7 then "provisions for securities losses." 8 Do you see that? 9 A. I see that. 10 Q. Now, does this schedule include items 11 such as losses on the hedge items that were 12 maintained by USAT at that time? 13 A. I don't know how you're defining 14 "losses on hedge items." 15 Q. Well, does this include any 16 mark-to-market on off balance sheet items such as 17 hedges? 18 A. No. And it doesn't include 19 mark-to-market on assets, either. 20 Q. So, it doesn't include any 21 mark-to-market items? 22 A. No, it does not. 8342 1 Q. At this time, did USAT have an equity 2 arbitrage program? 3 A. It may have. 4 Q. Wasn't that mark-to-market? 5 A. Depending upon what stage of the 6 program. 7 Q. Okay. And what do you mean by 8 "depending on what stage of the program"? 9 A. I believe initially equities were put 10 on and gains and losses weren't recognized until 11 the transactions were closed. And later in the 12 program everything was mark-to-market on a monthly 13 basis. So, there was a change in the accounting. 14 Q. Do you recall when that change 15 occurred? 16 A. No, I do not. 17 Q. Now, I would like to direct your 18 attention to A10599. 19 MR. GUIDO: Your Honor, I would like to 20 move the admission of the last exhibit, 10597. 21 MS. CLARK: No objections. 22 Q. (BY MR. GUIDO) Exhibit 10599 is a 8343 1 memorandum from Jenard Gross to Gerald Williams 2 dated January 24th, 1986, with copies to Dr. Barry 3 Munitz and a copy to Charles Hurwitz. And this 4 makes reference to a Schedule SF Page 2 again, and 5 it's making reference to the bonus plan that's 6 addressed here. It says "SF" -- "Before I comment 7 on the investment department bonus plan, the type 8 of thing that I am especially interested in 9 looking at is Schedule SF, Page 2. He deals with 10 the profit contributions to the mortgage-backed 11 securities. In trying to determine the 12 profitability on the mortgage backed security" -- 13 "in trying to determine the profitable aspect, I 14 think first of all you need to know the rate of 15 pay-down on the mortgage-backed securities, 16 whether you are really earning this interest 17 income it is showing or whether the fact is that 18 the early payouts have cut into that income. And 19 then the second thing that you need to know is, 20 again, on the sale of securities whether these are 21 real sales or just window dressing sales." 22 Do you see that? 8344 1 A. I see that. 2 Q. Do you recall Jenard Gross raising a 3 question in January of '86 with regard to whether 4 the profits that were being recorded on the sales 5 of mortgage-backed securities for the year 1985 6 reflected the true performance of that portfolio? 7 A. No, I do not. 8 Q. You don't recall any questions being 9 raised with regard to whether the profits were 10 real or that they were just window dressing? 11 A. No, I do not recall. 12 Q. Did you have any discussions with 13 anyone at the time that you were at USAT with 14 regard to how to measure the performance of the 15 mortgage-backed securities portfolios? 16 A. There were discussions, yes. 17 Q. And in those discussions, were there 18 discussions with regard to whether you should take 19 into consideration the market value of swaps at 20 the time the mortgage-backed securities were sold 21 to measure the performance of the mortgage-backed 22 security portfolio? 8345 1 A. Not that I specifically remember, no. 2 Q. So, you don't recall any discussion of 3 whether or not the swaps performance had to be 4 included in the calculation of whether or not 5 profits had been realized on the mortgage-backed 6 securities that were sold? 7 A. Not specifically, no. 8 Q. Do you recall anything generally? 9 A. Not as you phrased the question, no. 10 I'm not really sure I understand the question. 11 But I don't believe so, so. 12 Q. Let me rephrase the question, then. An 13 answer to a question the witness doesn't 14 understand doesn't help any of us. 15 Did you have any discussions with 16 anyone at the time you were at USAT with regard to 17 how to account for the swaps that were used to 18 hedge the mortgage-backed securities portfolios? 19 A. There were discussions about how to 20 account for swaps, yes. 21 Q. Do you recall who you had those 22 discussions with? 8346 1 A. Oh, I'm sure we probably had 2 discussions with Peat Marwick periodically to make 3 sure that we were accounting for things according 4 to GAAP. 5 Q. Do you recall whether any questions 6 were ever raised with you of how or whether or not 7 you had a system to ascertain how the 8 mortgage-backed securities portfolios were 9 performing? 10 A. How are you defining "performing"? 11 Q. Whether or not they were profitable. 12 A. We had books and records and 13 performance reports that recorded that. 14 Q. You had performance reports, right? 15 A. Yes. 16 Q. And the performance reports essentially 17 recognized any realized gains or losses, did they 18 not? 19 A. They showed realized gains and losses, 20 yes. 21 Q. They did not show unrealized gains or 22 losses on hedged portfolios, did they? 8347 1 A. No, as well as any unrealized gains or 2 losses on assets or anything else. It was not a 3 mark-to-market accounting. 4 Q. So that the performance report didn't 5 reflect the performance of the portfolio by 6 marking it to market at any given point in time? 7 A. At any given time, there may have been 8 schedules in there that showed mark-to-market. 9 And there were schedules in the quarterly 10 financials that were put together in terms of 11 audited financials that showed mark-to-market. 12 So, periodically there were 13 mark-to-market schedules that showed information, 14 yes. 15 Q. Were there mark-to-market schedules 16 that showed swaps? 17 A. There may have been, yes. 18 Q. Do you recall what time period those 19 10Ks were -- 20 A. No. I wouldn't have put the 10Ks, 10Qs 21 or the accounting information together. 22 Q. I would like to show you Exhibit 8348 1 A10601. 2 MR. GUIDO: Your Honor, I would like to 3 move into evidence A10599 at this time. 4 MS. CLARK: No objection. 5 THE COURT: Received. 6 Q. (BY MR. GUIDO) This is a memorandum or 7 notes by Jenard Gross dated January 27th, 1986. 8 Do you recognize the handwriting on 9 that memorandum? 10 A. Which handwriting? 11 Q. The handwriting that says Jerry, Barry 12 something, and Mike. 13 A. No, I do not. 14 Q. Now, do you see nine lines down the 15 sentence that begins with "additionally"? 16 A. Okay. 17 Q. It says, "Additionally, I have asked 18 Jim Wolfe to come up with a program to continually 19 monitor. Additionally, the other thing we want to 20 do is we want Jim Wolfe to give us a memo back as 21 to what it will take to determine the way we are 22 going to get the program on mortgage-backed 8349 1 securities similar to the risk arbitrage stock so 2 that we will have an annual continuing idea of 3 exactly where we stand to yield." 4 Do you see that? 5 A. I see that. 6 Q. Does that reflect a view that the 7 performance reports don't indicate what the 8 performance of the mortgage-backed securities 9 portfolio was sufficient to satisfy Jenard Gross? 10 A. I do not know. I didn't write this 11 memo, and I'm not sure what he's referencing or 12 what his perspective is. 13 MR. GUIDO: I would like to move the 14 admission of Exhibit 10605. 15 MS. CLARK: No objection. 16 MR. GUIDO: Now. 17 Q. (BY MR. GUIDO) Now, I would like to 18 show you Exhibit A10603. This is a memorandum 19 dated January 29th, 1986 from Michael Crow to 20 Bruce Williams. 21 Do you recall receiving this 22 memorandum? 8350 1 A. I do. 2 Q. Okay. 3 A. I don't specifically. I assume I did. 4 My name is on it. 5 Q. It says, "Bruce, Jenard is wanting to 6 keep up with mortgage-backed securities 7 transactions in the future that we do for 8 arbitrage purposes on a deal-by-deal basis." 9 Do you see that? 10 A. I see that. 11 Q. Do you recall that issue coming up? 12 A. From reading this memo, I do. 13 Q. Do you have any independent 14 recollection? 15 A. (Witness shakes head negatively.) No. 16 Excuse me. 17 Q. And this doesn't refresh your 18 recollection that Jenard Gross felt that the 19 performance report wasn't providing adequate 20 information on the performance of the 21 mortgage-backed security portfolio? 22 A. I don't specifically remember that as 8351 1 you stated it, no. I think that's taking 2 liberties with what maybe this memo says. 3 Q. What do you mean it's taking liberties 4 with this memorandum? 5 A. Well, you said specifically Jenard 6 didn't think the performance report -- I'm not 7 real sure what the rest of your statement was. 8 I don't remember him saying exactly 9 that. So, no, I don't. 10 MR. GUIDO: I would like to move the 11 admission of 10603, Your Honor. 12 MS. CLARK: No objection. 13 Q. (BY MR. GUIDO) I would like to show 14 you Exhibit 10605, Mr. Williams. This is a 15 memorandum from Jenard Gross to Ron Huebsch and 16 Gerald Williams dated February 6th, 1986. I would 17 like you to review Paragraph 1 of that memorandum. 18 A. (Witness complies). 19 Q. Do you see the sentence that starts 20 "Let's suppose Ron bought a 15 percent junk bond 21 and matched it against a 12 and a half percent 22 long-term CD"? 8352 1 A. I see that sentence. 2 Q. Then it says "He now has a 250 basis 3 point spread. Suppose the bond goes up in value 4 because yields fall. We sell the bond for a 5 profit and, in the meantime, yields have gone to 6 the point that we now have junk bonds selling 7 typically at 14 percent yields and jumbo CDs 8 costing 11 and a half. On a new deal, we would 9 have a 250 basis point spread when we match. 10 However, against the existing CD (on which we are 11 open-ended), we only have a 150 basis point 12 spread. While we've got a profit, if you really 13 allocate it out we really don't have a profit." 14 Do you see that? 15 A. I see that. 16 Q. What is that making reference to? 17 A. It's making reference to a 18 hypothetical, as there could be many other 19 hypotheticals. 20 Q. And do you recall whether the issue 21 came up of whether junk bonds were sold because 22 rates had declined and that they were sold at a 8353 1 profit and that the purchase of a substitute bond 2 would narrow the yield? 3 A. I don't recall that. 4 Q. Okay. Did you at any time, as part of 5 the performance report, attempt to measure the 6 yields on the junk bond portfolio? 7 A. There was schedules put together 8 similar to the one we looked at earlier. 9 Q. Let's take a look at that. Which one 10 are you referring to? 11 A. That SF, although there were probably 12 schedules -- once again, I don't remember 13 specifically a point in time, but there were 14 schedules that were developed that took this 15 securities portfolio and broke it out into finer 16 detail so that we could look at the performance of 17 some of the other individual portfolios within the 18 securities column. 19 Q. Do you recall whether or not the junk 20 bonds were broken out that way? 21 A. I believe they were. 22 Q. Pardon? 8354 1 A. I believe they were. 2 Q. Now, you were making reference to a 3 schedule. 4 Can you tell us what schedule that was? 5 A. I'm sorry. I don't understand your 6 question. 7 Q. I thought that you said we had just 8 looked at a schedule. 9 A. Schedule SF. 10 Q. What exhibit is that? 11 A. A10597. 12 Q. Okay. Now, taking a look at that 13 exhibit, where on that does that show the yield 14 from the high yield bond portfolio? 15 A. It would be down at the bottom under 16 "yield rate summary" where it says "corporate 17 securities." 18 Q. And that shows a yield on the 19 mortgage-backed -- I mean on the junk bond 20 portfolio? 21 A. Of the corporate securities. 22 Q. Is that referring to the high yield 8355 1 bonds? 2 A. They would be contained within that 3 category, yes. 4 Q. Anything else contained in that 5 category? 6 A. There could have been. 7 Q. Is equity arbitrage -- 8 MR. NICKENS: Your Honor, I would ask 9 that he allow the witness to finish his answer. 10 A. Unless I have a specific listing with 11 securities ratings next to it, I don't know what 12 was in that category. 13 Q. (BY MR. GUIDO) So, you don't recall 14 what was -- 15 A. Not without a specific listing, I do 16 not. 17 Q. So, you don't know whether or not the 18 performance report that you just directed our 19 attention to included the yield that was earned on 20 the high yield bond portfolio? 21 A. It would have been included in there, 22 yes. 8356 1 Q. But there could have been other things 2 included in that? 3 A. Yes. 4 Q. So, there was no way to measure the 5 yield; is that your testimony? 6 A. I didn't say that, no. 7 Q. Well, where in that document would you 8 address our attention to to ascertain the yield on 9 the high yield bond portfolio itself? 10 A. I believe I said in some other 11 documents we broke out the securities column into 12 the individual portfolios. So, that would have 13 been available broken out in other documents. Not 14 necessarily in the monthly performance report, but 15 in other reports. 16 Q. Now, what other reports did you prepare 17 besides the monthly performance report? 18 A. I don't recall. 19 Q. Did you prepare a document called a 20 direct of proofness? 21 A. I don't recall that term, no. 22 Q. Did you ever prepare what was referred 8357 1 to as a consolidated transactions list? 2 A. I don't recall that term. You would 3 have to show it to me. I'm not sure what that 4 refers to. 5 Q. Did you participate in the preparation 6 of TFRs? 7 A. I don't know what a TFR is. 8 Q. A thrift financial report. 9 A. I don't believe so, so. 10 Q. Okay. What reports did you participate 11 in preparing on a monthly basis for the management 12 of USAT? 13 A. Other than the performance report, I 14 don't recall specifically all the reports we 15 produced on a monthly basis. 16 Q. But there were other reports that you 17 prepared? 18 A. I would imagine there were, yes. 19 Q. Did you transmit those reports to any 20 particular committee of USAT? 21 A. I don't recall the reports. So, I 22 can't answer that question. 8358 1 Q. Well, you don't recall -- let me ask 2 you this. You recall there were reports, right? 3 A. I recall I produced other reports. 4 Q. On a monthly basis? 5 A. Monthly, weekly. They could have been 6 daily. I produced other reports. 7 Q. And do you recall whether those reports 8 included a report on the yield on the high yield 9 bond portfolio? 10 A. I don't specifically recall what 11 reports I produced. 12 Q. Now, looking at the next paragraph of 13 that report, of that memorandum. It says, "The 14 other problem that we are running into, suppose we 15 have bought a mortgage-backed security pool of 100 16 million. It consists of 20 or 30 pools....or 17 however many pools are in it....and let's say that 18 we bought it at a spread of 115 basis points. We 19 also bought it on the basis that 1.6 of the bonds 20 would run off the first year. Suppose instead 3.2 21 percent of the bonds run off the first year 22 because rates on these 12 and a halfs have now 8359 1 gone down to 11 and a half or 11 and you get the 2 money in and you can't put it back out at the same 3 rate that you originally set up the spread on. 4 You are not really making 115 basis points. You 5 are only making 105. It seems to me that we 6 should have to be dialed in before we determine 7 whether there's profitability in the department." 8 MR. NICKENS: That actually reads "It 9 seems that that should have to be dialed in" 10 rather than, as read, "it seems that we should 11 have to be dialed in." 12 MR. GUIDO: I'm sorry. I have to 13 correct Mr. Nickens. "It seems to me that that 14 should have to be dialed in before we determine 15 whether there is profitability in the department." 16 Is that accurate? 17 MR. NICKENS: I think we have it right. 18 Q. (BY MR. GUIDO) "Everybody tells me it 19 is very complicated and you really can't tell what 20 you're doing." 21 Do you see that sentence? 22 A. I see that. 8360 1 Q. Do you know what the hypothetical is 2 referring to? 3 A. I can read it, yes. 4 Q. And basically is that hypothetical 5 saying that you sell a 12 and a half and you buy 6 an 11 or 11 and a half and therefore your spread 7 has been reduced? 8 A. Not necessarily. 9 Q. No? What do you think that 10 hypothetical refers to? 11 A. I think that's what he's saying, but 12 there are many other hypotheticals. It all 13 depends on how the transaction is structured as to 14 whether you would come out with the spreads he's 15 talking about. So, if it's fully hedged or not 16 hedged, depending upon what type of instruments 17 you hedge it with, depending upon whether you 18 reinvest. So, it is a hypothetical among an 19 unlimited number of different hypotheticals. 20 Taken out of context, I don't know how much 21 meaning it has. 22 Q. Well, let's deal with the sentence 8361 1 then, "Everyone tells me that it is very 2 complicated." 3 Do you agree with that? 4 A. What is "it"? 5 Q. Referring to whether there's 6 profitability in that transaction. 7 A. It is complicated, yes. I agree with 8 that. 9 Q. Then he says "And you really can't tell 10 what you are doing." 11 Do you see that sentence? 12 A. I see that sentence. 13 Q. Do you agree with that? 14 A. No. 15 Q. Why not? 16 A. Because I think you can tell what 17 you're doing. 18 Q. You can? 19 A. Once again, depending upon what it is. 20 I didn't write this memo so I can't interpret what 21 necessarily these sentences -- and what it refers 22 to in all cases. So, it's hard for me to comment 8362 1 on what Jenard is thinking as he's writing this. 2 Q. Let me switch a little bit for a 3 second. 4 You sat on the investment committee, 5 did you not? 6 A. Yes, I did. 7 Q. Sandy Laurenson made presentations to 8 the investment committee, did she not? 9 A. Yes, she did. 10 Q. You asked a number of questions, did 11 you not? 12 A. Periodically, yes. 13 Q. Some of those she didn't appreciate, 14 did she? 15 A. She may have. 16 Q. Did she indicate displeasure with your 17 questioning of her at any time in those investment 18 committee meetings? 19 A. Yes. 20 Q. Were your questions designed to 21 ascertain whether what was actually going to 22 happen or what had happened to the mortgage-backed 8363 1 security portfolio that she managed? 2 A. No. 3 Q. No? What were your questions that you 4 asked? 5 A. They were more oriented toward specific 6 investment proposals that she was making at the 7 time. 8 Q. And it was at your -- when you were 9 attempting to ascertain what the effect of those 10 investments would be on USAT financially? 11 A. They may have been at times on the 12 effect at USAT, or they may have been about the 13 specific investment. 14 Q. Whether or not the investment would be 15 profitable or not, right? 16 A. Not necessarily whether or not it would 17 be profitable. What the risks were, exactly what 18 the investment was. 19 Q. Did you find that some of those 20 transactions were rather complex? 21 A. At times, I think some of them were 22 complex, yes. 8364 1 Q. Did you ever express the opinion that 2 you thought that you really can't tell how that 3 investment would perform? 4 A. I don't recall specifically saying 5 that, no. 6 Q. Did you ever express skepticism of the 7 assessment of how the investment would perform? 8 A. As a personal opinion, I may have 9 expressed skepticism as to how an individual 10 development may perform. But that was one opinion 11 of many. 12 Q. Now, what do you have to know to 13 ascertain whether the spread would be the 105 or 14 the 115 that Jenard Gross is referring to in this 15 example. 16 What would you have to know? 17 A. You have to know a lot. 18 Q. Like what? 19 A. The specific security, how it was held, 20 you would have to look at it over a period of 21 time, not just a point in time. I mean, you would 22 need to know a long, long list of variable 8365 1 factors. It's not as simple as if you buy a 2 security, if you sell it and then replace it, this 3 is your spread. 4 Q. Did the performance reports that you 5 prepared that set out yields on mortgage-backed 6 securities include an assessment of all of those 7 variables? 8 A. I don't recall. You would have to show 9 me a series of performance reports. I mean, the 10 performance report didn't take this exact form 11 every month it was produced the five years I was 12 there. 13 Q. Let's take this one as an example. 14 Does this report assess all of those variables 15 that you say are very complex that go into 16 ascertaining how the portfolio would perform? 17 A. Not necessarily in this particular 18 column on this particular page, no. 19 Q. Now, do you recall whether Jenard Gross 20 had raised, on a number of occasions, questions 21 about whether the investment department knew how 22 the mortgage-backed securities portfolio was 8366 1 performing? 2 A. I'm not sure I understand your 3 question. I don't understand your question. 4 Q. I'll move to Page 2 of the exhibit and 5 maybe when we get through this list of documents 6 you may be able to answer the question. 7 After the sentence that talks about 8 "Everybody tells me that it is very complicated 9 and you really can't tell what you are doing" -- 10 A. Where does it say that now? 11 Q. Back on the bottom of Page 1. I'm 12 sorry. Then it starts up, "Well, if you can't 13 tell what you are doing, how do you ever" -- I 14 think it's "ever," not "every" -- "know....did 15 you, in fact, get 115 basis point spread or did 16 you get no spread?" 17 And then it picks up and goes to the 18 next page. "You may take some profits in these 19 pools. In other words, you may sell some of the 20 mortgage-backed securities at a profit because of 21 market factors, which is great. But afterwards, 22 you may be getting a stream of income, which is 8367 1 less than what you anticipated. If that is the 2 case, you really are not making that profit. You 3 are making less than the profit. If you have to 4 then replace 12 and a halfs with 11 and a halfs 5 and, still have to match it up with the same swaps 6 that you originally had on, it appears to me that 7 you have worsened your position." 8 Do you see that? 9 A. I see that. 10 MS. CLARK: Your Honor, Mr. Guido added 11 an extra point in the last line of the first page. 12 I don't think the word "point" is in the document. 13 MR. GUIDO: I'm sorry. The 115 basis 14 spread and I added "point"? I'm sorry. 15 Q. (BY MR. GUIDO) Now, this is talking 16 about the problem of selling a mortgage-backed 17 security because it's profitable, it has an 18 unrealized gain in it, and buying a lower coupon 19 mortgage-backed security; is that correct? 20 Is that your understanding of that 21 sentence? 22 A. Not necessarily, no. 8368 1 Q. Well, it says if you sell a 12 and a 2 half and replace it with an 11 and a half -- do 3 you see that? 4 A. I see that. 5 Q. It says that you're going to make a 6 profit in selling the 12 and a half. 7 Do you see that? 8 A. I see that. 9 Q. Now, how can you make a profit on a 12 10 and a half without interest rates going down? 11 A. It could be a value trade. 12 Q. Okay. Now, what is a value trade? 13 A. Where the -- again, I don't know if I 14 can give you an exact definition because it's been 15 a lot of years, but it's basically the total 16 return of an 11 and a half may be more attractive 17 than the total return of a 12 and a half depending 18 upon what the prices and market conditions are at 19 the time. It also may -- you know, the pricing 20 also has a lot to do with prepayment speeds at the 21 time. There's many factors that affect pricing 22 other than just movement of interest rates. 8369 1 Q. Is the determination of whether a value 2 trade should be undertaken because it will 3 increase yield a simple calculation? 4 A. I guess it could be fairly simple, 5 depending upon how it's analyzed, but it could be 6 fairly simple. 7 Q. And how can it be very simple? I mean, 8 what do you have to know to know whether or not 9 purchasing one security in the -- 10 A. Well, you have to be able to analyze 11 the security. 12 Q. All right. How do you analyze the 13 security to ascertain whether or not one is more 14 valuable than the other in terms of yield? 15 A. You basically have to take each 16 security, lay it down, run it under some 17 assumptions in terms of prepayment spreads, 18 estimating any flow that it will throw off 19 relative to the security that you hold. 20 Q. How does one ascertain prepayment 21 speeds? 22 A. That is a judgmental decision. 8370 1 Q. What do you mean, "a judgmental 2 decision"? 3 A. Prepayment speeds are not necessarily 4 predictable down to the inth degree. Prepayment 5 speeds or mortgage-backs prepay under different -- 6 in different ways under different interest rate 7 scenarios. 8 So, if you have high coupon mortgages 9 underlying the mortgage-backs and rates fall well 10 below the rates of the mortgages, they are going 11 to prepay faster than the current coupon mortgages 12 would. So, you have to go in, basically analyze 13 the mortgages, look at prepayment speeds, and make 14 projections as to what you think future prepayment 15 speeds would be. 16 Q. And what do you look to to ascertain 17 whether or not going forward you have an accurate 18 perception of prepayment speeds? 19 A. It's something you have to constantly 20 monitor. You look at historical information and 21 how other mortgage-backs have reacted under 22 similar rate scenarios. 8371 1 Q. Now, with regard to the last sentence 2 of the paragraph you just read, "If you have to 3 then replace 12 and a halfs with 11 and a halfs 4 and still have to match it up with the same swaps 5 that you originally had on, it appears to me you 6 have worsened your position." 7 Do you see that? 8 A. I see that. 9 Q. What does that refer to? 10 A. That refers to his hypothetical. 11 Again, I didn't write this. I don't know what 12 Jenard is thinking. It appears as though he would 13 assume you would buy dollar for dollar for the 14 amount of mortgage-backs, which again wouldn't 15 necessarily be what would occur in a normal trade. 16 So, based on his hypothetical, this is 17 what would happen. 18 Q. Because the interest rates on the swaps 19 are fixed, is that what the premise is? 20 A. I didn't write the memo. So, I'm not 21 real sure what his premise is. 22 Q. Well, did you ever encounter a 8372 1 situation at USAT where mortgage-backed securities 2 were sold at a profit, lower coupons were 3 purchased, and it was done so that at some point 4 in time the yield on the mortgage-backed 5 securities in relationship to the liabilities of 6 the swaps had turned negative? 7 A. In particular cases, that may have 8 happened, yes. 9 Q. And do you recall whether or not it 10 happened to such an extent that the yield had 11 become negative by 2 percent on the 12 mortgage-backed security portfolio at USAT? 13 A. Without having any financial 14 information in front of me reflecting that, I 15 can't specifically remember any numbers, no. 16 Q. You don't ever remember doing any 17 memoranda where you analyzed the portfolio and 18 indicated what the financial impact of the 19 negative spread was in the mortgage-backed 20 security portfolio at USAT? 21 A. I wrote lots of memos. That may have 22 been in one of them certainly. 8373 1 Q. You reviewed memoranda, did you not, 2 before -- sometime before your testimony recently? 3 A. I briefly reviewed some things; but I 4 certainly didn't go through every single one of 5 them in detail, no. 6 Q. Do you recall at the outset of your 7 testimony I asked you whether or not you had 8 reviewed any materials? 9 A. Yes, I do. 10 Q. And I asked you whether or not I had 11 sent you any materials. 12 Do you recall that? 13 A. I recall that. 14 Q. Did you -- I think you testified that 15 you glanced at some of those materials? 16 A. That's correct. 17 Q. Why didn't you look at those materials? 18 A. Because right now, I'm under an immense 19 amount of pressure at work; and basically that's 20 my priority in life. 21 Q. Now, do you recall that I asked to meet 22 with you before your testimony and you told me you 8374 1 were going to be out of town? 2 A. I do recall that, yes. 3 Q. And where were you going? 4 A. I was going to go to St. Louis and 5 New York. 6 Q. And did you go? 7 A. No, I did not. 8 Q. Why not? 9 A. Because the meetings were delayed. 10 Q. Did you make any effort to contact me 11 to chat with me before your testimony? 12 A. No, I did not. I think we spoke 13 before, a couple years ago, in an all-day 14 deposition. 15 Q. Did I send you that deposition? 16 A. Yes. I believe that was in the 17 package. 18 Q. Did you review that deposition prior to 19 your testimony here? 20 A. I reviewed a few pages of it. Not the 21 entire deposition, no. 22 Q. Is that because your priorities are 8375 1 elsewhere? 2 A. At this very moment, yes, sir. 3 Q. I would like to show you 4 Exhibit A10609. 5 THE COURT: We'll take a short recess. 6 7 (Short break.) 8 9 THE COURT: Be seated, please. Back on 10 the record. Mr. Guido, you may continue. 11 MR. GUIDO: Your Honor, I would like to 12 move into evidence Exhibit A10605 and 13 Exhibit A10609, which is the previous exhibit and 14 the present exhibit. 15 MS. CLARK: No objection. 16 THE COURT: Received. 17 Q. (BY MR. GUIDO) I would like to direct 18 your attention to Exhibit A10609. It is a 19 memorandum from Mike Crow to Jenard Gross and 20 Jerry Williams. "From our latest tracking of 21 regulatory requirements (dated February 18, 1986) 22 it is obvious we are getting much closer in terms 8376 1 of excess net worth." 2 Was one of the functions of the 3 treasury department to track the regulatory 4 requirements of net worth? 5 A. No, no. 6 Q. Now, remember the performance report 7 that you looked to and that we discussed earlier, 8 the November performance report -- 9 A. Yes. 10 Q. -- which had regulatory requirements in 11 there? 12 A. Yes. 13 Q. And you signed that report, did you 14 not -- 15 A. Yes. 16 Q. -- or the cover memorandum? 17 Did treasury prepare the schedule that 18 had the regulatory net worth calculation on it? 19 A. As I mentioned, I wrote the memo to 20 that report. Many of the pages within the 21 performance report were developed by departments 22 other than mine, primarily the accounting 8377 1 department. 2 Q. And who headed the accounting 3 department? 4 A. Jim Wolfe. 5 Q. Did he head the accounting department 6 at all times that you were at USAT? 7 A. No. 8 Q. During what periods of time did he not 9 head it up? 10 A. When I first got there, Jim Wolfe 11 wasn't there. He started some period of time 12 after I started. I don't know exactly when. 13 Q. But from the time he started until the 14 time you left, which was December of 1988, was he 15 the head of the accounting department? 16 A. Yes, he was, I believe. 17 Q. Was he the head of the accounting 18 department as early as 1985? 19 A. If he was there in 1985, he was head of 20 the accounting department. 21 Q. Now, the next sentence says, "This is a 22 function of the increase in scheduled items from 8378 1 the year-end level of 177 million to 185 million 2 at mid-February." 3 Do you see that sentence? 4 A. I see that sentence. 5 MS. CLARK: Your Honor, it says 6 "$171 million," for the record. 7 MR. GUIDO: I'm sorry. 8 Q. (BY MR. GUIDO) Do you know what the 9 reference to scheduled items is? 10 A. No, I do not. 11 Q. Do you know whether or not the term 12 "scheduled items" was used at USAT? 13 A. I believe it was. I think it was a 14 regulatory term. 15 Q. All right. And did it refer to items 16 that reserves needed to be set up for? 17 A. I think I said before I don't know 18 exactly what the term was. So, I do not know. 19 Q. Okay. Then the last sentence says, in 20 that paragraph, "Therefore, our excess net worth 21 approximates $12 million." 22 Do you know what that refers to? 8379 1 A. I didn't write the memo. So, 2 specifically, no. But my general understanding 3 would be it was our net worth over and above 4 whatever the regulatory requirement would have 5 been. 6 Q. So, it's the amount in excess of the 7 regulatory minimum net worth requirement? 8 A. I believe so, yes. 9 Q. It's not the amount above zero net 10 worth? 11 A. I didn't write this; so, I don't know 12 what he's specifically referring to. 13 Q. Now, look at the next paragraph. It 14 says, "Unless scheduled items decrease, we will 15 have to moderate balance sheet growth to live 16 within the required regulatory net worth level." 17 Then it says, "As the report indicates, however, 18 total liabilities at mid-February were 141 million 19 below the December level. So, we have some room 20 to grow there. This will be largely absorbed by 21 the transfer of assets and liabilities of the 22 financing sub to USAT." 8380 1 Do you see that? 2 A. I see that. 3 Q. Do you know what the reference to the 4 financing sub is? 5 A. Without documents, no. I think there 6 were a number of subs of the association. So, 7 specifically, no. 8 Q. Do you recall the creation and the 9 collapse of an entity called USAT Mortgage Finance 10 at the end of 1985? 11 A. Yes. 12 Q. And do you recall that the question 13 arose with regard to how to handle the assets and 14 liabilities of that sub, what to do with them when 15 it was collapsed? 16 A. I recall that being an issue, yes. 17 Q. Do you recall one of the questions was 18 whether or not its assets and liabilities would be 19 transferred to USAT? 20 A. I believe that was an issue, yes. 21 Q. Do you recall that one of the issues 22 was whether or not its assets and liabilities 8381 1 would be disposed of as opposed to being 2 transferred to USAT? 3 A. I believe that was an issue, as well, 4 yes. 5 Q. Now, I would like to direct your 6 attention to A10612, if I may. This is a 7 memorandum from Jenard Gross to Mike Crow, Ron 8 Huebsch, Charles Hurwitz, Barry Munitz, Jerry 9 Williams, and Jim Wolfe dated February 28th, 1986. 10 MS. CLARK: Mr. Guido, is that a 11 one-page exhibit? 12 MR. GUIDO: I have one page. 13 Q. (BY MR. GUIDO) And it's regarding the 14 December 1985 perform -- 15 A. I'm sorry. Am I supposed to have one 16 page or two pages? 17 MR. GUIDO: I have one page. 18 THE COURT: Well, I have two pages. 19 THE WITNESS: I have two pages. 20 MR. GUIDO: Your Honor, the document 21 that I am marking is a one-page document. The 22 second one is an inadvertently attached to this. 8382 1 It may have to have a second exhibit number. It 2 is not part of this document, as I recall. 3 I would like to move A10612 into 4 evidence, Your Honor. It's the one-page document. 5 MS. CLARK: No objection. 6 THE COURT: Received. 7 Q. (BY MR. GUIDO) Now, it starts, "Here 8 is my question.........On the sale of securities, 9 where we booked a 30-million-dollar gain for the 10 year, I realize that a lot of this was selling the 11 mortgage-backed securities and junk bonds." It 12 says, "In one case, taking the gain on the 13 mortgage-backed securities (8 or 9 million) and 14 the offsetting loss would be spread over several 15 years. This is not truly a gain." 16 Do you recall the issue coming up with 17 regard to the collapse of United Mortgage Finance 18 with regard to booking the gains on the 19 mortgage-backed securities and deferring the gains 20 to the swaps? 21 A. I recall we dissolved the subsidiary. 22 I don't specifically recall all the pieces of the 8383 1 transaction. 2 Q. So, you don't recall any questions 3 coming up with regard to whether or not you could 4 book the gains on the mortgage-backed securities 5 and defer the losses on the swaps with regard to 6 the collapse of USAT Mortgage Finance? 7 A. That may have happened. I don't 8 specifically recall. 9 Q. Do you generally recall? 10 A. Without looking at the books and 11 records and seeing what happened to that 12 subsidiary, I can't tell you specifically what 13 happened to that subsidiary, other than I believe 14 it was dissolved. 15 Q. Do you recall ever seeing any 16 memorandum that Joe Phillips wrote to the files 17 explaining what happened with the collapse of that 18 subsidiary? 19 A. I may have. There were lots of memos 20 written in the five years I was there. So, I 21 don't specifically remember any of them. 22 Q. Do you recall reviewing any such 8384 1 materials recently? 2 A. I may have. 3 Q. Now, let's go down to six lines from 4 the bottom. It says, "The question in my mind now 5 is, how much of these are honest to goodness 6 profits? How much profit merely for book purposes 7 that we had to reinvest at lower interest rates? 8 Then, we can really tell what we did in that 9 category. Over how many years do we spread the 10 loss on the swaps on that mortgage-backed security 11 in December and what was the exact amount of it?" 12 Do you see those sentences? 13 A. I see those sentences. 14 Q. Does that refresh your recollection 15 with regard to the accounting for the collapse of 16 USAT Mortgage Finance? 17 A. No. 18 Q. No. 19 A. He's mixing and referring to gains on 20 both corporate securities and mortgage-backs, and 21 I don't think this specifically addresses, other 22 than the mention of mortgage-backs, in the very -- 8385 1 or second to last line, the other sentences -- I'm 2 not sure if he's specifically talking about 3 mortgage-backs, corporates, or the combination of 4 the two. 5 Q. All right. Let me direct your 6 attention to A10615. This is a memorandum from 7 Mike Crow to Gerald Williams dated March 18th, 8 1986. It's an answer to attached memorandum. The 9 attachment is a memorandum from Jenard Gross dated 10 February 19th, 1986, to Ron Huebsch, Charles 11 Hurwitz, Barry Munitz, Joe Phillips, and Jerry 12 Williams. The cover memo shows it's CC'd to you. 13 Do you recall receiving this 14 memorandum? 15 A. Not specifically, no. 16 Q. Do you recall generally receiving it? 17 A. As I said before, I was there five 18 years and received numerous memos. So, I don't 19 specifically recall, memo by memo, items that came 20 across my desk. 21 Q. Do you have any reason to believe you 22 did not receive a copy of this memorandum? 8386 1 A. No, I do not. 2 Q. Do you have any reason to dispute the 3 accuracy of what's stated in this memorandum? 4 MS. CLARK: Your Honor, I object to 5 that question. He hasn't identified it as a 6 document he recalls, and he hasn't given him time 7 to read it. 8 THE COURT: Sustained. 9 A. Do you have some specific paragraph 10 you're referring to? I didn't write this memo. 11 Q. (BY MR. GUIDO) My question is: Do you 12 have any reason to dispute the accuracy of 13 anything that's in this memorandum? 14 A. I guess I would need to take a minute 15 to read it. (Witness reviews the exhibit.) 16 MS. CLARK: Your Honor, I believe you 17 sustained the objection to that question. 18 Mr. Guido should have a more specific question. 19 THE COURT: I think we did have a 20 question as to whether he has any reason to doubt 21 the accuracy -- 22 MR. GUIDO: That's correct, Your Honor. 8387 1 That's my question. 2 THE COURT: All right. He can answer 3 that. 4 A. I don't believe I have any reason to 5 doubt the accuracy of -- my understanding of what 6 Mike is referring to, no. 7 Q. (BY MR. GUIDO) Okay. Now, let's do 8 this item by item. Question 1, I think, on Page 2 9 of the memo seems to -- or Item 1 says -- or the 10 question seems to be, "I wonder if you can 11 determine or if anybody else can determine where 12 we now stand as far as an annual income stream 13 from the mortgage backed and the swaps." 14 Item 1, Mike Crows memo says, "We do 15 know where we stand in terms of mortgage-backed 16 securities and the related spread per the 17 performance report, Schedule SF. This is on an 18 overall total portfolio basis. This analysis does 19 not attempt to segregate mortgage-backed 20 securities by block or purchase date nor measure 21 against any original targets." 22 Do you see that? 8388 1 A. I see that. 2 Q. Is that your understanding of the 3 situation as it existed at that time at USAT? 4 A. If that's what it says, I assume that 5 that is the way it is. I can't attest. This is a 6 point in time. I don't know where we were in the 7 evolution of monitoring and reporting on 8 mortgage-backs as of March 18th, 1986. 9 Q. Then it says -- Item 2 on the Gross 10 memorandum says, "Also, what sort of a spread do 11 we now have compared to what we were originally 12 shooting for?" 13 Item 2 on the Crow memorandum says, "We 14 have never tracked mortgage-backed securities by 15 block measuring original targets as to spread 16 versus actual results. I believe Joe Phillips has 17 the original targets, but I do not believe that 18 Joe keeps up with mortgage-backed securities 19 results versus those original targets." 20 Do you see that? 21 A. I see that. 22 Q. Was that your understanding of the 8389 1 situation at that time at USAT? 2 A. At that particular time, the first 3 sentence, yes. The second sentence, as Mike says, 4 "I believe." I don't think Mike knows what Joe 5 tracks. 6 Q. Do you have any reason to dispute that 7 belief? 8 A. I have no reason to be able to confirm 9 or dispute it. I don't know. 10 Q. Item 3 -- looking at Item 3. "Do we 11 currently have on hand any accounting techniques 12 to know what we have done to date on the ones that 13 we have rolled down and what we will do in the 14 future on the ones that we have now acquired?" 15 Item 3, "Finance/Administration was 16 unaware" -- this is in the Crow memorandum -- 17 "unaware that we were rolling down coupons in 18 mortgage-backed securities" with quotes around the 19 phrase "rolling down." "Therefore, we did not 20 analyze projected resulting spreads from the newly 21 rolled down positions. This was done by Joe 22 Phillips since they were involved in the actual 8390 1 planning and execution of the roll-downs." 2 Do you know what's referenced to in the 3 -- to the rolled down transactions? 4 A. I assume that would have been referring 5 to rolling down from higher coupon securities to 6 lower coupon securities to compensate for increase 7 in prepayment speeds on the higher coupon 8 securities. 9 Q. Well, look at the sentence that says 10 "finance/administration." Was the treasury 11 department in finance/administration? 12 A. That would have fallen under that 13 umbrella, yes. 14 Q. "The finance/administration department 15 was unaware that we were rolling down on 16 mortgage-backed securities." 17 Do you see that? 18 A. I see that. 19 Q. Was that an accurate statement? 20 A. At that very point in time, it may have 21 been, yes. 22 Q. Do you recall that there were sales of 8391 1 mortgage-backed securities in January and February 2 of 1986 and that lower coupon securities were 3 purchased? 4 A. Yes. As part of that roll-down, that 5 involved selling and buying securities. 6 Q. When did you learn of that series of 7 transactions in January and February of 1986? 8 A. Which series of transactions? 9 Q. The sales of higher coupon 10 mortgage-backed securities and lower coupon 11 mortgage-backed securities. 12 A. I don't remember, other than as they 13 were happening. I don't specifically have a date 14 in mind that I could recall. 15 Q. Well, was it before or after the 16 transactions? 17 A. I don't recall. 18 Q. Do you have any reason to dispute that 19 finance/administration was unaware that we were 20 rolling down coupons in mortgage-backed 21 securities? 22 A. Well, it depends on what specifically 8392 1 that is referring to and the point in time that 2 was referring to. 3 Q. Is there any roll-down of securities 4 that you know of at USAT other than in January and 5 February of 1986 prior to March of 1986? 6 A. I would imagine Joe probably had done 7 that earlier, yes, after he put on the first 8 arbitrage transaction. 9 Q. But you don't know? 10 A. I don't know specifically, no. 11 Q. Now, take a look at Item No. 4. "If 12 not, is the system that Bruce Williams is looking 13 at and plans to install going to get the job done 14 or do we need something else?" 15 Do you know what that reference is to? 16 A. Now, where is that? This is on 17 Jenard's memo. 18 Q. It's Item 4 on the Gross memo. It 19 says, "If not, is the system that Bruce Williams 20 is looking at and plans to install going to get 21 the job done or do we need something else?" 22 Then look at Item 4 on the first page. 8393 1 It says, "The mortgage-backed securities system 2 will not automatically perform the functions that 3 are desired. It will provide a very detailed and 4 sophisticated accounting system for keeping up 5 with mortgage-backed securities that will allow us 6 to be operationally efficient and provide data for 7 analysis purposes." 8 A. So, I think that answers the question. 9 Q. What was the system that you were 10 looking at? 11 A. I don't remember the exact name of it, 12 but basically it was a mortgage-backed securities 13 accounting system. 14 Q. And did it have a way of analyzing the 15 value of the swaps that were part of the 16 mortgage-backed securities? 17 A. Swaps weren't part of mortgage-backed 18 securities. 19 Q. The swaps weren't part of the system 20 that you looked at? 21 A. No. It was a mortgage-backed 22 securities accounting system. 8394 1 Q. It did not look at the spread between 2 the swaps and the mortgage-backed securities? 3 A. No. It was an accounting system. 4 Basically, it did accruals, accounted for 5 transactions. 6 Q. Then the last item, 5, says, "Can 7 Salomon Brothers solve our problems, or what do to 8 know where we are at." 9 MR. GUIDO: Did I get that correct? 10 MR. NICKENS: That's what it says. 11 Q. (BY MR. GUIDO) Do you see that 12 question? 13 A. Yes. 14 Q. Item 5 says, "We have worked with 15 Salomon Brothers and know they cannot solve our 16 problem." 17 Do you know what that refers to? 18 A. I certainly do not. 19 Q. Well, let's go back to the first 20 question. "I wonder if you can determine or if 21 anyone else can determine where we now stand as 22 far as an annual income stream from the 8395 1 mortgage-backed and the swaps." 2 Do you see that? 3 A. Yes. 4 Q. And you just testified that the 5 accounting system that you were looking to didn't 6 measure the effect of swaps with regard to the 7 mortgage-backed securities accounting program you 8 were looking at, right? 9 A. The accounting system I was referring 10 to is just an accounting system. It is not a 11 financial management reporting system, which is 12 what Jenard, I think, is asking for here. 13 Q. And at least as of March 18th, 1986, 14 there was not a financial management system in 15 place at USAT to ascertain how the mortgage-backed 16 security portfolios were performing in 17 relationship to the swaps? 18 A. Joe Phillips may have been maintaining 19 one. 20 Q. But finance/administration did not? 21 A. Apparently not, according to this, at 22 this stage. 8396 1 Q. Now, I would like you to take a look at 2 Exhibit A10623. 3 MR. GUIDO: I don't recall whether or 4 not I moved into evidence A10615, but I do at this 5 time, Your Honor. 6 MS. CLARK: No objection. 7 THE COURT: Received. 8 Q. (BY MR. GUIDO) A10623, Mr. Williams, 9 is a memorandum from Doug Hansen regarding Mustang 10 Island follow-up dated April 17th, 1986, to Jenard 11 Gross, Barry Munitz, Jerry Williams, Mike Crow, 12 Art Berner, and yourself, Bruce Williams. 13 Do you know what the reference to the 14 Mustang Island follow-up is? 15 A. It was an off-site kind of 16 brainstorming session. 17 Q. And what was the purpose of the 18 brainstorming session? 19 A. To talk and discuss ideas on where the 20 institution should head in terms of strategically 21 what business we should be in, what businesses 22 were making money, which ones weren't, and just a 8397 1 general kind of brainstorming idea to come up with 2 our thoughts and direction. 3 Q. Do you recall attending that 4 brainstorming session? 5 A. Yes, I do. 6 Q. Now, do you recall receiving this 7 memorandum? 8 A. I don't recall specifically receiving 9 memorandums. I would assume I did get this, but a 10 lot of paper crossed my desk. 11 Q. Do you have any reason to dispute that 12 you received the memorandum? 13 A. No, I did not. 14 Q. Item No. 2 says, "Service Corporation 15 CMO: Also known as the Berner/Posum Black Magic 16 Hole." Then it says, "We could register 17 $4 billion plus in CMOs in a service corporation 18 not limited to 30 percent of assets. The equity 19 of the sub is consolidated, so it does not count 20 as direct investment. The assets are not counted 21 under the growth regulations, however. GAP assets 22 would grow. CMOs would act as an interest rate 8398 1 hedge to the rest of the association. Issues are: 2 How much do we want to register? How much do we 3 want to do? What are the real risks? Is now a 4 good time to do it?" 5 Do you recall reference to the 6 Berner/Posum Black Magic Hole? 7 A. Other than this particular reference, 8 no, I don't. 9 Q. Do you ever recall hearing the phrase 10 before? 11 A. Well, apparently, I read this at one 12 time. But now, I don't -- 13 Q. Do you have any reason to dispute the 14 accuracy of this paragraph? 15 A. I can neither confirm nor deny because 16 I don't recall all the regulatory requirements in 17 reporting back then. They were very confusing, 18 complex, and changing. 19 Do I know that Doug Hansen had his 20 facts correct? No, I do not. 21 Q. No. 3 says "Swaps: Now that mortgages 22 have prepaid, we have an excess of long-term swaps 8399 1 which are unmatched and are expensive. We should 2 take this into consideration when matching new 3 assets. Maybe we will not have to raise as much 4 brokered funds because we already have excess 5 swaps in place." 6 Do you see that? 7 A. I see that. 8 Q. Do you recall whether at this time that 9 there were long-term swaps which were unmatched at 10 USAT? 11 A. I don't specifically remember, but we 12 probably had swaps that were general hedges for 13 the association. 14 Q. So, you don't know what that's 15 referring to? 16 A. When I say -- well, "unmatched" would 17 have probably referred to weren't specifically 18 matched to anything. They were general hedges for 19 the association. 20 Q. Now, look at Item No. 4. "Profit 21 targets: Our goal has been to show small 22 quarter-to-quarter earnings increases. If we took 8400 1 larger write-offs each quarter, however, we could 2 make a quick payback by paying off debt at an 3 initial loss. The most important thing is to show 4 some profits each quarter, not necessarily 5 increasing profits. Need to trade this off versus 6 creditmatch and the state, who would like to see 7 increasing profits." 8 Do you see that paragraph? 9 A. I see that. 10 Q. Do you recall whether the profit 11 targets were the profit targets that were set by 12 the people at the brainstorming session on Mustang 13 Island -- 14 A. I do recall what the targets were -- 15 Q. -- or the targets were set -- 16 A. I don't know that we set any specific 17 targets. Like I said, this was a brainstorming 18 session. 19 Q. So, these were essentially issues that 20 were raised at the Mustang Island meeting to be 21 taken back and to be considered by you-all in the 22 course of your operations; is that correct? 8401 1 A. Generally, yes. 2 Q. Now, look at Item No. 6, "Timing of 3 gains." It says "While the branch sales and the 4 Weingarten sales are expected to occur second 5 quarter, we should plan for them to occur third 6 quarter. We should see how the second quarter 7 looks without these gains." 8 Do you see that? 9 A. I see that. 10 Q. Is that one of the issues that was 11 raised for consideration at the Mustang Island 12 follow-up? 13 A. I believe it was since it was on this 14 list, yes. 15 Q. Now, did you have any discussions with 16 anyone with regard to the responses to the issues 17 that were raised in this memorandum? 18 A. I may have. I don't specifically 19 remember. 20 Q. I would like to direct your attention 21 to A10628. A10628 is a Mike Crow memorandum to 22 Doug Hansen dated April 22nd, 1986, "Subject: 8402 1 Mustang Island Follow-up - your memo of 4-17-86" 2 which we've just been looking at. 3 MR. GUIDO: I would like to move into 4 evidence A10628, Your Honor, and A10623, which 5 we've just discussed. 6 MS. CLARK: No objection. 7 THE COURT: Received. 8 Q. (BY MR. GUIDO) Now, this is Mike 9 Crow's response to the Doug Hansen memorandum. 10 Do you recall Mike Crow consulting with 11 you with regard to the preparation of this 12 memorandum? 13 A. Not specifically, no. 14 Q. Do you recall him doing so generally? 15 A. No, I do not. 16 Q. Now, take a look at Item No. 5. It 17 says "high priority." It says "Analysis already 18 done and presented to Gross/G.R. Williams." It 19 says "Mike Crow/Bruce Williams recommended that we 20 pay off Olney, and Independent American B and C 21 with the gains from Series E bond collateral." 22 Does that refresh your recollection 8403 1 that you were consulted in preparation of this 2 memorandum? 3 A. No. 4 Q. Look at item number -- 5 A. Coming back to that, we may have 6 discussed it; but I discussed things all the time 7 with Mike Crow. He didn't say, "Get with me, 8 discuss this in preparation of this memorandum." 9 So, you're asking me do I specifically remember 10 discussing things to prepare this memorandum. My 11 answer is no, I do not. It doesn't mean I didn't 12 discuss these items with numerous people on 13 different occasions. 14 Q. Well, take Item No. 6. Let's start 15 with Item No. 6. The question or the Item No. 6 16 was the timing of gains. It says "While the 17 branch sales and the Weingarten sales are expected 18 to occur second quarter, we should plan for these 19 to occur third quarter. We should see how the 20 second quarter looks without these gains." 21 And then Mike Crow's response is, 22 without any special gains, the second quarter will 8404 1 be grim." 2 Where did he get these answers if not 3 from you? 4 A. There's a whole accounting department 5 that would have these answers. 6 Q. So, Jim Wolfe? 7 A. He very well could have. Could have 8 gotten it from Doug Hansen. A number of different 9 people. He could have done it himself. 10 Q. Why is that? How could he have done it 11 himself? 12 A. He could sit down and pull information 13 from various financial reports and make 14 projections himself on a piece of paper. It's 15 very simple. 16 Q. Did he have the ability himself to pull 17 up information from the computerized accounting 18 system? 19 A. It's nothing but a general ledger with 20 debits and credits. He had access to monthly 21 financial reports such as those we've looked at. 22 He had access to all kinds of memorandum that was 8405 1 sent. He had access to all types of information. 2 Q. So, he could have calculated what the 3 second quarter would have looked like himself 4 without consulting -- 5 A. Absolutely. Could have come from a 6 number of sources. 7 Q. Now, Item No. 4, do you recall -- Item 8 No. 4 was profit targets. Do you recall the 9 statement that "our goal has been to show small 10 quarter-to-quarter earnings increases"? Do you 11 recall that? 12 A. I recall it from reading it right here, 13 yes. 14 Q. Okay. Now, Mike Crow's response was, 15 "High priority. Will be discussed in the 16 strategic planning committee." 17 Do you see that? 18 A. I see that. 19 Q. What was the strategic planning 20 committee? 21 A. It was a group of -- I don't remember 22 the exact membership, but I suppose it would have 8406 1 included at least the people that are on this 2 exhibit, A10623. There may have been some other 3 individuals on it. 4 Q. Was Charles Hurwitz one of the -- 5 A. I don't recall. 6 Q. Do you recall ever attending a 7 strategic planning committee meeting where Charles 8 Hurwitz didn't attend? 9 A. I don't recall the strategic planning 10 meeting in general. It was 12 years ago, and I 11 went to lots of meetings. I don't specifically 12 recall too many of them. 13 Q. All right. I would like to direct your 14 attention to another exhibit, which is at Tab 565, 15 and it's T4192 dated April 24th, 1986. The 16 April 24th memorandum, T4192, says "In the spirit 17 of bad news to the top, this is something I'm sure 18 you're aware of but I thought I would remind you. 19 It appears that several of the gains that we had 20 counted on to bolster second quarter profits may 21 be deferred/not occur. One, branch sale to 22 Merabank; two, consumer loan to Security Pacific; 8407 1 three, sale of Weingarten stock." 2 Do you recall that in April that Mike 3 Crow had determined that the sales that had been 4 counted on to bolster second quarter profits might 5 not occur? 6 A. No. 7 Q. Do you have any reason to dispute the 8 accuracy of that paragraph? 9 A. I don't have any reason to dispute 10 what's here. I didn't write it, nor do I know 11 what the source of information was. 12 Q. I would like to show you Exhibit 13 A10637, which is a memorandum from Mike Crow to 14 Charles Hurwitz, Barry Munitz, Jenard Gross, and 15 Bruce Williams regarding alternative uses of bond 16 gains. 17 MR. GUIDO: I would like to move the 18 admission of Exhibit A10637, Your Honor. 19 MS. CLARK: No objection. 20 THE COURT: Received. 21 Q. (BY MR. GUIDO) A10637 makes reference 22 to the payoff of an Olney bond, and the subject 8408 1 matter of the memorandum is "alternative uses of 2 bond gains." 3 The first paragraph says "A portfolio 4 of mortgage-backed securities held for general 5 purposes (not part of the structured arbitrage 6 program) was recently sold, producing a gain of 7 approximately 3.5 million. Since quarterly 8 earnings will be adequate because of the sale of 9 Weingarten Realty stock and equity arbitrage 10 profits, a decision needs to be made as to the 11 disposition of this gain. In a recent meeting, we 12 suggested that the Olney bond be called in order 13 to improve future period operational 14 profitability. This memo will summarize other 15 possible uses of the gain." 16 Were mortgage-backed securities held by 17 USAT in May of 1986 for general purposes, not part 18 of the structured arbitrage program? 19 A. If it's in this memo, I would have no 20 reason to doubt it. 21 Q. Do you remember you testified the other 22 day about the various portfolios that were at USAT 8409 1 and you talked about the DARTs and the AMPs, do 2 you remember that discussion? 3 A. Right. 4 Q. Were any efforts made to minimize the 5 interest rate risk to USAT by holding the 6 mortgage-backed securities that were part of the 7 DARTs and AMPs program? 8 A. There may have been. I don't 9 specifically know without looking at books and 10 records and financials. 11 Q. Well, did USAT hold any mortgage-backed 12 securities in which the interest rate risks in the 13 time period 1985 through June of 1986 were not 14 protected from interest rate risks? 15 A. There were specific hedges and there 16 were general hedges for the association. So, some 17 mortgage-backs had specific hedges. Some part of 18 the institution on the asset side had general 19 hedges. There were not necessarily one for one 20 hedges for every asset on the books of the 21 association. 22 So, were there mortgage-backs on the 8410 1 books of the association that didn't have hedges? 2 Yes. Were there general hedges on the books that 3 didn't have assets to them? Yes. 4 Q. Were there any hedges on the books of 5 USAT that were not protected by a general hedge or 6 a rising hedge? 7 A. I can't answer that. By definition, a 8 general hedge is not a specific asset. So, I 9 don't have an answer for that. 10 Q. Did any of the hedges that USAT had on 11 its books to protect against rising interest rates 12 having a negative impact on the mortgage-backed 13 security portfolio constitute an asset hedge? 14 THE COURT: Would you repeat that? 15 Q. (BY MR. GUIDO) Would USAT -- let's 16 take the time period before June 30, 1986. 17 A. I can't tell you by time period. So, I 18 don't recall each month of the year back then what 19 we had on our books and what we didn't have on our 20 books. So, when you say prior to a specific date, 21 I cannot tell you. 22 Q. Prior to the creation of United MBS. 8411 1 Can you separate United MBS from the other 2 portfolios in your mind? 3 A. Timewise, no, I cannot. 4 Q. Just in terms of what the portfolio 5 was. 6 A. Without seeing financials, I can't tell 7 you. 8 Q. Putting United MBS aside, just talk 9 about USAT. 10 Did USAT have any asset hedges in place 11 for its mortgage-backed security portfolio? 12 A. It may have. 13 Q. It may have. And also it may not have. 14 Is that what your testimony is? 15 A. It may or may not have. Swaps and 16 hedges in general were liability hedges, not asset 17 hedges. So, when you say "Did we have asset 18 hedges on the books," it would have been unusual 19 to have assets hedges on the books. 20 Q. I only asked the question to clarify 21 because when we were talking about hedges you said 22 there were asset hedges and they were general and 8412 1 specific, and I just wanted to clarify your 2 testimony. The swaps that you had on your books 3 that were specific hedges were liability hedges, 4 in your view; is that correct? 5 A. They were liability hedges that were 6 matched with assets. 7 Q. Because the liabilities were purchased 8 at the same time the mortgage-backed securities 9 were purchased? 10 A. Not necessarily exactly the same time, 11 no. 12 Q. Now, look at the memorandum, A10637 13 again. 14 Was it the practice in May of 1986 to 15 sell mortgage-backed securities to generate 16 realized gains? 17 A. What are you referring to specifically? 18 Q. It says "A portfolio of mortgage-backed 19 securities held for general purposes (not part of 20 the structured arbitrage program) was recently 21 sold." 22 My question was: Was it a general 8413 1 practice to sell mortgage-backed securities to 2 realize gains that were embedded in those 3 portfolios? 4 MS. CLARK: That's not what the 5 document says. 6 A. I don't know specifically what's behind 7 this transaction. So, without seeing the 8 investment committee minutes or a trade ticket, I 9 can't tell you the reason, logic, or purpose of 10 that transaction. 11 Q. I'd like to show you Exhibit 10641. 12 THE COURT: Do you have another copy of 13 that? 14 MR. GUIDO: I'm sorry, Your Honor. 15 THE WITNESS: I have an extra copy. 16 MR. GUIDO: Thank you. 17 THE COURT: Thank you. 18 Q. (BY MR. GUIDO) This is a memorandum 19 from Mike Crow to Jim Wolfe and Bruce Williams 20 dated June 11th, 1986. 21 Do you recall receiving this 22 memorandum? 8414 1 A. If it has a date and my name on it, I 2 assume I got it. But I don't recall specifically 3 receiving this. 4 MR. GUIDO: Your Honor, I would like to 5 move the admission of A10641. The underlining, I 6 don't know how that got on there. If we can find 7 the substitute for that -- 8 MS. CLARK: No objection. 9 THE COURT: Received. 10 Q. (BY MR. GUIDO) Do you recall being 11 asked to again thinking about third quarter 12 profits and how to ensure profitability? 13 A. I don't specifically recall, but I 14 guess we would have talked about those kind of 15 things on a quarterly basis, yes. 16 Q. And do you recall what it is that you 17 were asked to look to to ensure profitability? 18 A. I don't think there was anything 19 specifically mentioned here. It was just "Start 20 thinking about profitability for the quarter." 21 Q. Well, this is June 11th, right, and 22 you're planning for the quarter ending 8415 1 September 30, right? 2 A. Correct. 3 Q. Okay. So, what -- do you recall what 4 sort of things you looked to over -- what are we 5 talking about, a 90- to 100-day time period to 6 ascertain how you were going to ensure 7 profitability that far in the future? 8 A. I would think we would start doing 9 preliminary forecasting of what earnings looked 10 like and given whatever other known transactions 11 might occur during that period. 12 Q. Were you asked to identify transactions 13 that might potentially generate a gain, if needed? 14 A. Generally, no. I think, you know, 120 15 to 90 days in advance, given the volatility of 16 interest rates back then, that wasn't a very 17 feasible thing to do because you had no idea where 18 the market would be during the next three to four 19 months. 20 Q. Now, was planning for profitability 21 something that was done closer to the end of the 22 quarter in the 100 days that are reflected by this 8416 1 memorandum? 2 A. I think it was something that was done 3 during the quarter. And as you got closer to 4 quarter end, things became more certain. 5 Q. Now, if you -- 6 THE COURT: Had you finished your 7 answer? 8 A. Well, I think, generally, yes. As you 9 got closer to quarter end, things became more 10 certain and you had more actual results to look 11 at. So, generally there were probably discussions 12 close to quarter end. 13 Q. (BY MR. GUIDO) All right. I would 14 like to direct your attention now to 15 Exhibit T4215, which is a memorandum dated 16 June 23rd, 1986, from Mike Crow to Jenard Gross, 17 Barry Munitz, and Jerry Williams, "Subject: Third 18 and fourth quarter 1986 income planning." 19 MR. GUIDO: I would like to move the 20 admission of T4215, Your Honor. 21 MS. CLARK: No objections. 22 THE COURT: Well, the document I have 8417 1 is not numbered that. It says A10645. 2 MR. GUIDO: I'm sorry, Your Honor. 3 It's the same document. I'll address it as 4 A10645, Your Honor, and I move A10645 into 5 evidence unless it's previously been introduced. 6 MS. CLARK: Your Honor, A10645 is one 7 of these documents that appears to have been 8 marked up by litigation counsel along the way. As 9 long as the markings can be ignored, no objections 10 to its admission. 11 MR. GUIDO: No objection, Your Honor. 12 I didn't notice the markings on the second page. 13 We move the admission of A10645, and we will 14 substitute a document without the markings on it 15 if we can find one. 16 MS. CLARK: T4215 is the same document 17 without any markings, if you want to use that. 18 MR. GUIDO: We will get a substitute 19 for 10645. We will take the 4215 and provide you 20 with copies, Your Honor, without the markings on 21 it. 22 THE COURT: All right. Let's proceed. 8418 1 And when you get that document, we'll receive it 2 at that time. You can continue questioning the 3 witness on this document without its receipt. 4 MR. GUIDO: Thank you, Your Honor. 5 Q. (BY MR. GUIDO) Do you see -- the first 6 sentence says "Non-operating gains will be 7 necessary to report profits for the third and 8 fourth quarters." 9 Do you see that? 10 A. I see that. 11 MR. NICKENS: Well, Your Honor, I would 12 ask that the complete sentence be read. 13 MR. GUIDO: I'm sorry. "Unless there's 14 an extraordinary and unexpected turnaround in the 15 level of scheduled items." I thought there was a 16 period there. 17 Q. (BY MR. GUIDO) Do you recall whether 18 non-operating gains were necessary to report 19 profits for the third and fourth quarters of 1986 20 unless there was an extraordinary turnaround in 21 the level of scheduled items? 22 A. No. 8419 1 Q. Do you have any reason to dispute the 2 accuracy of that sentence? 3 A. I don't have the information necessary 4 to make that judgment. 5 Q. So, you don't know one way or the 6 other? 7 A. No. 8 Q. Okay. Now, the memorandum discusses 9 various options, and I would like to direct your 10 attention to those options. Option No. 2. It 11 says "Sell USAT's Ginnie Mae portfolio held for 12 general purposes (outside of structured arbitrage 13 and cash flow bonds). Sale would involve $23.3 14 million of securities and would result in a gain 15 of approximately $1.3 million." 16 Then it says "Advantages. Generates 17 book earnings with a minimal amount of effort. 18 Disadvantages. Ongoing profitability would be 19 diminished. Current 23.3 million portfolio Ginnie 20 Mae securities yield on a book basis 11.22 percent 21 and a comparable reinvestment would yield to 22 approximately 9.60 percent. Therefore, a net 8420 1 interest income would decline by the yield 2 differential times the outstanding balance, 3 (approximately 300,000 per year)." 4 Do you see that reference? 5 A. I see that. 6 Q. Do you know what that's making 7 reference to? 8 A. Other than what I have just read, no. 9 Q. You don't recall what the transaction 10 is that's being referred to? 11 A. No, I do not. 12 Q. Do you have any reason to dispute the 13 accuracy of the proposed transaction? 14 A. I don't necessarily agree with it, 15 but -- 16 Q. What do you mean you don't necessarily 17 agree with it? 18 A. For instance, it says "net interest 19 income would decline by the outstanding balance 20 300,000 per year." That factually isn't correct. 21 Q. Why not? 22 A. Because you wouldn't have the balance 8421 1 outstanding for the full year. The rates have 2 fallen. The prepayment speeds on something that 3 had 11 and a half percent coupon would be 4 extremely high. So, the net interest impact the 5 first year could be 100 to 150,000 as opposed to 6 300,000. 7 Q. This is an example where you have to be 8 very careful in assessing what the impact of 9 prepayments are? 10 A. Right. This is just kind of global 11 thinking. It isn't, I don't think, necessarily 12 meant to be taken out of context like it is. 13 Q. Now, if you don't recall, how do you 14 know that the 300,000 doesn't take into 15 consideration prepayments? 16 A. Because he said he takes the 17 differential times the outstanding balance. And I 18 don't necessarily know that, but that's the kind 19 of thing when you say "Do I factually know this to 20 be correct or not," I don't know. I don't 21 necessarily agree with the way it's calculated. 22 Q. But you don't know what the outstanding 8422 1 balance is that's referred to. So, you don't know 2 whether you agree with it or disagree with it, do 3 you? 4 A. That's exactly right. 5 Q. Now, take a look at Option No. 4. 6 A. If you take the differential times the 7 balance, I think that's what you come back to. 8 Q. So, that's why you say that you 9 disagree with it, because you sat here and you 10 multiplied the yield against the size of the 11 portfolio and you came out with 300,000 per year 12 for the first year? 13 A. If you take the difference between 1122 14 and 960 times the 23.3 million. 15 Q. And you were able to come up with that 16 figure of 300,000 per year in your head in that 17 minute and a half? 18 A. Just what it looks like to me. 19 Q. Now, Option No. 4. "Sell a substantial 20 part or all of the fixed rate junk bond portfolio 21 and reinvest the proceeds at current yields. 22 Advantages. At current market prices (4-30-86), a 8423 1 gain of approximately 17.9 million could be 2 recognized from the sale of junk bonds. (The 3 investment department is currently determining the 4 mark-to-market as of May 30, 1986). 5 Disadvantages. Materially reduces ongoing 6 earnings in future periods. Currently our junk 7 bond fixed rate portfolio has a yield of 8 approximately 14 percent and current rates on junk 9 bonds are ranging 12 and a half to 13 and a half. 10 Since these bonds are funded by fixed rate, 11 long-term CDs with an average rate of 11.48 12 percent, a reduction in spread income from the 13 portfolio would result, as summarized below." 14 And then there's figures that indicate 15 what the impact would be on the annual income 16 stream under the actual category through five 17 months of '86, 10.9 million and under the pro 18 forma, 6.4 million. 19 Do you see those figures? 20 A. I see those. 21 Q. Now, do you know whether fixed rate 22 junk bond portfolio was contemplated to be sold to 8424 1 bolster profits for the third and fourth quarter 2 of 1986? 3 A. As I said before, I don't recall 4 specifically third and fourth quarter 1986 5 anything. 6 Q. Do you have any reason to dispute the 7 accuracy of this memorandum? 8 A. I don't know. I don't have any reason 9 to, nor do I -- I don't know. 10 THE COURT: We will recess until 2:00. 11 12 (Luncheon recess taken at 12:30 p.m.) 13 14 THE COURT: Be seated, please. Back on 15 the record. 16 Mr. Guido, you may continue with your 17 examination. 18 (2:02 p.m.) 19 MR. GUIDO: Your Honor, thank you. I 20 have a substitute. I think it's for A10645, which 21 was also marked as T4215. We'd like to substitute 22 that for the record, Your Honor, and mark it as 8425 1 10645, Your Honor. 2 MS. CLARK: Mr. Guido, may I just have 3 a copy of what you handed him? 4 THE COURT: All right. A10645. 5 MR. GUIDO: 10645, Your Honor. 6 Q. (BY MR. GUIDO) Now, I'd like to hand 7 you Exhibit 4219, Mr. Williams, which is a memo 8 from Mr. Crow to Mr. Hurwitz, Gross, Mr. Munitz 9 dated June 26th, 1986. And the subject is 10 "Earnings power meeting 9:00 a.m. Friday." 11 MR. GUIDO: I'd like to move the 12 Exhibit T4219 into evidence, Your Honor. 13 MS. CLARK: No objections, Your Honor. 14 Mr. Guido, could you give us the Bates 15 number on that? 16 MR. GUIDO: It's OW011863 -- this is 17 the imaging number -- through OW011865 or US422 18 through US424. 19 THE COURT: All right. Received. 20 MR. GUIDO: Is there an objection? 21 MS. CLARK: There is no objection. 22 Q. (BY MR. GUIDO) Now, this is a 8426 1 memorandum to Charles Hurwitz, Jenard Gross, Barry 2 Munitz, Jerry Williams, and Art Berner. And the 3 subject is an earnings power meeting. 4 Do you know what an earnings power 5 meeting is or was at USAT? 6 A. Do not. 7 Q. Did you ever attend any meetings in 8 which earnings were discussed at USAT? 9 A. I'm sure I attended meetings where 10 earnings were discussed, yes. 11 Q. But you don't recall any such meetings? 12 A. No, not specifically, I do not. 13 Q. Now, the memorandum says "Attached are 14 two schedules that attempt to segregate earnings 15 performance between operating and non-recurring 16 items. While there may be disagreement as to what 17 is operating and non-operating, a definitive 18 conclusion can be drawn from the schedules. That 19 is, with the company's present structure, 20 operating earnings are significantly negative 21 without an extraordinary earnings boost on a 22 monthly basis. For the first five months of 1986, 8427 1 the association has a net loss of approximately 2 4.5 million per month, excluding extraordinary 3 gains. This figure excludes any provision for 4 loan losses." 5 Now, take a look at the schedules. 6 Look at the one that's Bates stamped US423, the 7 second page of the memorandum. 8 A. Okay. 9 Q. See where it says at the bottom "Notes: 10 Figures extracted from Schedule AB of the monthly 11 performance report"? Do you see that reference? 12 A. I see that. 13 Q. Now -- then it has various items. 14 First is net interest income. Then it says 15 "profit contribution from real estate fees and 16 service charges." 17 Do you know what the reference to real 18 estate profit contribution was? 19 A. Not specifically, other than -- 20 Q. Do you know generally? 21 A. -- other than what it says. 22 Q. You don't recall? 8428 1 A. It could be a number of things but I 2 don't specifically know the answer to that, no. 3 Q. Do you know what the reference to fees 4 and service charges were? 5 A. Other than what it says, no. I mean, 6 it's fees and service charges that the institution 7 collects on a monthly basis. 8 Q. What sort of fees did USAT charge its 9 customers? 10 A. I don't specifically remember. 11 Q. Did it charge fees for loans? 12 A. There may have been fees on loans. 13 There may have been fees on deposit accounts. 14 There may have been fees on selling traveller's 15 checks in a branch. There were a list of fees -- 16 a long list of fees. 17 Q. So, there were a large number of fees 18 that were charged by USAT? 19 A. For various activities, yes. 20 Q. Okay. Besides those you mentioned, can 21 you recall any others? 22 A. No. 8429 1 Q. Then it says "operating expenses." 2 Do you know what operating expenses 3 referred to at USAT? 4 A. Pretty much what general operating 5 expenses are for any company, which is salaries, 6 benefits, building expense, equipment, data 7 processing. 8 Q. Heating, air conditioning, 9 electricity -- 10 A. Yes. 11 Q. -- those kinds of costs? Then it 12 says -- there is this item "goodwill 13 amortization." 14 You see that item? 15 A. I see that item. 16 Q. What does that refer to? 17 A. The amortization of goodwill related 18 to -- primarily to the merger of United Savings 19 and whatever other institution it merged with. 20 Q. Okay. Was it -- 21 A. Prior to. 22 Q. -- goodwill that was generated through 8430 1 the purchase accounting that was applicable at 2 that time? 3 A. Yes. 4 Q. And this is the figure that's amortized 5 out over the time period that the goodwill was 6 required to be amortized? 7 A. Yes. 8 Q. And from that, there is the operating 9 earnings that are developed; is that correct? 10 A. That's what this schedule shows. 11 Q. Now, the second -- Schedule 2 at US424, 12 this carries over the operating earnings net from 13 the previous page. And then it has various profit 14 contributions. 15 Do you see those? 16 A. I see those. 17 Q. One of them is equity arbitrage. I 18 think you testified about equity arbitrage the 19 first day of your testimony. 20 Was that the investment in corporate 21 equity securities that was made by USAT? 22 A. Yes. 8431 1 Q. And then there is this item, merchant 2 banking. 3 Do you know what that refers to? 4 A. Not specifically other than the one 5 transaction that, I guess, has been mentioned in 6 the other memos. 7 Q. And what was that transaction? 8 A. I believe it was an investment in 9 Weingarten Realty. 10 Q. Now, why was Weingarten Realty a 11 merchant banking transaction as opposed to an 12 equity arbitrage transaction? 13 A. Equity arbitrage transactions were 14 primarily investments in companies that were in 15 the process of being taken over. So, they were 16 very short-term investments. They were 17 liquidated, typically, when the company was taken 18 over by another company. Weingarten Realty, I 19 think, was more of a long-term investment. It 20 wasn't intended to be an equity arbitrage. 21 Q. Was it intended to be an acquisition of 22 Weingarten? 8432 1 A. I was not involved in the investment of 2 that. I have no idea what the original intent 3 was. 4 Q. Then it has an item "gain on sale of 5 securities." I think you testified about what 6 that meant earlier, and you said that that's a 7 gain on sale of high-yield bonds or 8 mortgage-backed securities? 9 A. The net of it is, yes. There is gains 10 and losses netted together. 11 Q. Well, that's what this is, the gains 12 and losses netted? 13 A. Right. 14 Q. So that in May, it shows a negative 15 924. That meant that there were net losses on the 16 sales of high-yield bonds and mortgage-backed 17 securities in May? 18 A. That's how I would interpret this. 19 Q. And then the figures without the 20 parens, for example, March, it shows 6,557,000 21 with no parens around it. That's a positive net 22 figure? 8433 1 A. (Witness nods head affirmatively.) 2 Yes. 3 Q. Now, there is some handwriting on this 4 document. 5 Do you know whose handwriting that is? 6 A. It looks like Mike Crow's. 7 Q. Now, there are some items here that 8 make -- there is a 1985 column. 9 Do you see that 1985 column that's 10 written in? 11 A. I see that. 12 Q. And there are various items that are 13 written in there. It says "gain on sale of 14 loans." 15 What does the reference to "sale of 16 loans" refer to? 17 A. I don't recall. 18 Q. I mean, did USAT sell packages of 19 mortgages, single-family mortgages, during the 20 time period that you were the treasurer of USAT? 21 A. Could have been. I don't recall. 22 Q. You don't recall? 8434 1 A. (Witness shakes head negatively.) 2 Q. There is also a "gain on sale of 3 servicings." 4 Does that refer to a sale of servicing 5 rights? 6 A. Yes. 7 Q. And then it says "gain on sale of 8 branches." 9 Is that the sale of various branch 10 offices and the deposits that accompany those 11 offices? 12 A. I would think so, yes. 13 Q. Now, I'd like to direct your attention 14 to -- 15 MR. GUIDO: Well, I'd like to move 4219 16 into evidence if I haven't done so already. 17 MS. CLARK: I believe you have, but no 18 objection. 19 THE COURT: It has been received. 20 MR. GUIDO: Thank you, Your Honor. 21 Q. (BY MR. GUIDO) I'd like to show you 22 now a document that has been marked as T4226, 8435 1 which is a memo from Mike Crow to Jenard Gross, 2 Barry Munitz, and Jerry Williams dated July 14th, 3 1986, with copies to Art Berner and to Bruce 4 Williams. 5 THE COURT: Who did you say the 6 document was to? 7 MR. GUIDO: It was from Mike Crow to 8 Jenard Gross, Barry Munitz, and G.R. Williams, 9 Your Honor, with copies to Art Berner and Bruce 10 Williams. The CCs are on US418, which is Page 4 11 of the document, Your Honor. 12 THE COURT: All right. Thank you. 13 Q. (BY MR. GUIDO) Do you recall 14 receiving this document, Mr. Williams? 15 A. I don't specifically recall receiving 16 too many documents, but my name is on it so I 17 assume I did. 18 Q. Pardon? 19 A. I don't recall receiving every document 20 during the five years I was there. My name is on 21 this document; so, I assume I did receive it. 22 Q. Now, look at Page 2 of the document. 8436 1 I'm sorry. Look at the bottom of Page 1. It says 2 "United's real problems in producing adequate 3 financial performance fall into two areas." Last 4 paragraph. "First, United has little 5 income-producing capacity outside of investment 6 securities, financing subs, and other 7 investment-related activities. Loan production 8 and related loan fees are lethargic. Our more 9 profitable portfolios are shrinking, such as the 10 consumer loan portfolio and higher yielding 11 mortgage loans. The new areas of potential are 12 producing nothing in the current period 13 (reinsurance company, venture capital, real estate 14 merchant banking, et cetera). Second, the cost of 15 carry-on assets which do not produce earnings in 16 the current period has become untenable. The 17 combination of our real estate investment 18 portfolio and foreclosed and non-accruing loans 19 has become such a burden that the company cannot 20 operate without extraordinary gains." 21 Do you see that paragraph? 22 A. I see that. 8437 1 Q. Is that your recollection of the 2 situation as of July of 1986 at USAT? 3 A. In general terms, yeah. Basically, the 4 core S&L business was not producing money. "Core 5 S&L" meaning the traditional S&L mortgage loan 6 originations and holding them on the books. So, 7 yes. 8 Q. Then it says "The need to attack these 9 two problems becomes more intense when one 10 considers the following factors: One, United does 11 not have a major amount of, quote, special gain, 12 close quote, opportunities left. It is easy to 13 envision a quarter/year when the bond market is 14 weak, equity arbitrage is non-existent and/or 15 losing money, and items such as Weingarten stock 16 are gone." 17 Do you see that paragraph? 18 A. I see that paragraph. 19 Q. Do you recall whether or not that was 20 the situation that faced USAT in July of 1986? 21 A. No, I don't. 22 Q. You don't? Do you have any reason to 8438 1 dispute the accuracy of this statement? 2 A. Without having the facts to look at, I 3 have no reason to say it's right or wrong. I 4 don't have the information I need to make a 5 judgment. 6 Q. Now -- then it says, two, the company 7 has a number of items which are likely to become 8 problems in the future which we have pushed over 9 in the corner for the time being. Examples 10 include the Warwick Towers (we are likely to get 11 back Warwick loans when our three-year options run 12 out), the Sandpiper condos, which are classified 13 as real estate investment instead of REO, 14 Independent American stock, and numerous lobby 15 restructurings where we have, quote, bought time, 16 close quote, period. While it was beneficial to 17 defer these problems, in the long run these will 18 likely result in a financial drain." 19 Is it your understanding that that was 20 the situation as of July of 1986 at USAT? 21 A. No. 22 Q. No, it was not? 8439 1 A. It was not -- I don't have the facts or 2 information I need to form -- 3 Q. So, you don't have any information to 4 form an opinion either way? 5 A. Not especially on real estate. I 6 really had nothing to do with real estate. 7 Q. So, you don't know anything about 8 Warwick Towers? 9 A. I know the name. 10 Q. Do you know anything about the 11 Sandpiper condos? 12 A. I know the name. 13 Q. Do you have any reason to dispute the 14 accuracy of that paragraph? 15 A. I don't have information to be able to 16 make that -- come to any conclusion on that 17 paragraph. 18 Q. Now, I'd like to direct -- 19 MR. GUIDO: I'd like to move the 20 admission of T4226, Your Honor. 21 MS. CLARK: No objection. 22 THE COURT: Received. 8440 1 Q. (BY MR. GUIDO) Now, I'd like to show 2 you Exhibit T4225, which has also been marked as 3 T5028. It's a memo dated July 14th, 1986, from 4 Doug Hansen to Jenard Gross regarding strategy for 5 the next 14 months. 6 MR. GUIDO: I'm not sure, Your Honor, 7 whether this has been introduced and it has a 8 docket number. 9 MS. CLARK: I believe that it was 10 admitted as B1102 at Tab 378. 11 MR. GUIDO: B1102? 12 MS. CLARK: I believe so. 13 Q. (BY MR. GUIDO) I'd like you to take a 14 look at the document that has been marked as 15 B1102. It's a memorandum dated July 14th, 1986, 16 from Doug Hansen to Jenard Gross. I'd like to 17 address your attention to the heading that says 18 "capital." 19 Do you see that on the first page which 20 is Bates stamped US425? It says "Capital is going 21 to be king over the next few years. You might 22 consider having a long-run target of building 8441 1 capital even above the raised regulatory minute to 2 lower risks and increase ability to take advantage 3 of opportunities/in the short run, our dwindling 4 capital is our largest problem." 5 Do you agree that that was the 6 situation that USAT faced in July of 1986? 7 A. Without having information in front of 8 me, financial information, I really have no idea. 9 I assume if Doug said it was, it was. But I can't 10 verify or validate that statement without having 11 the information I need in front of me to come to a 12 conclusion. This is Doug Hansen's memo. This is 13 Doug Hansen's perspective. So, I can't validate 14 what he's saying without having a whole set of 15 books and financials in front of me. 16 Q. Well, you just testified that -- in 17 reference to Exhibit T4219 -- that United does not 18 have a major amount of special gain opportunities 19 left. It is he's easy to envision a quarter year 20 when the bond market is weak, equity arbitrage is 21 non-existent and losing money, and items such as 22 Weingarten stock are gone." 8442 1 Okay. Do you remember that? 2 A. I didn't testify to that. That was 3 what was in the document. 4 Q. Well, then let's take a look at 4219, 5 the previous paragraph, which discusses United's 6 real problems. 7 A. Okay. You'll have to show me what 8 document you're looking at because I'm not up with 9 you right now. 10 Q. T4226. "United's real problems," take 11 a look at that paragraph. 12 A. And I think I said without having the 13 information in front of me, I can't validate or 14 verify any of that. I did not write this memo, 15 nor do I know what information was used to put it 16 together. So, when you say was that true, it's 17 what Mike Crow said. 18 Q. So, you don't have any information to 19 verify the accuracy or inaccuracy of that 20 paragraph, as well? 21 A. I don't have information to be able to 22 pass judgment on it one way or the other. 8443 1 Q. Now, let's take a look at Exhibit T4225 2 again, US429? 3 THE COURT: Mr. Guido, that's in the 4 record as B1102. I thought -- 5 MR. GUIDO: I'm sorry. B1102, Your 6 Honor. 7 Q. (BY MR. GUIDO) Look at US429. Do you 8 see the paragraph there that talks about 9 diminished opportunities to realize a gain on 10 sale? It says "Our stock of unrealized gains is 11 running low. We should quantify how much we have 12 left, make plans to realize them on demand if 13 possible, construct worse case scenarios to see 14 how much we might need, and then ration our use of 15 these gains so we do not waste them." 16 Do you see that? 17 A. I see that. 18 Q. Is that the situation as you recall it 19 at USAT as of July of 1986? 20 A. That is Doug Hansen's perspective of 21 the situation. 22 Q. Do you have any reason to dispute the 8444 1 accuracy of his perspective? 2 A. I have no reason to be able to even 3 pass judgment on it without having the context 4 under which it was created and the financial 5 information to draw a conclusion. 6 Q. Now, look at the next section. You see 7 it says "interest rate sensitivity"? It says 8 "Smith Breeden will soon tell us our true interest 9 rate sensitivity and the cost of fixing it. I 10 guess we are net long interest rates, although the 11 recent drop in long-term rates has not seemed to 12 help us too much. I suspect the cost of matching 13 the whole institution will be impossible for us to 14 pay at this time. If we shrink, we probably will 15 be running off long-term assets and short-term 16 liabilities: This should improve the situation. 17 Meanwhile, the rate movement is in the right 18 direction." 19 Do you see that paragraph? 20 A. I see that paragraph. 21 Q. Do you agree with the assessment that's 22 in that paragraph? 8445 1 A. I have no facts to be able to come to 2 any conclusion. 3 Q. Now, let me ask you a few questions 4 about some of the terms that are used. It makes 5 reference to Smith Breeden. 6 Do you know what Smith Breeden refers 7 to? 8 A. That was a consulting firm that, at the 9 time, I think, was working with institutions on 10 interest rate risk management. 11 Q. Okay. And were they working with USAT 12 on interest rate risk management at the time? 13 A. I don't know at what time; but we 14 worked with them at one time, yes. 15 Q. But you don't recall what they were 16 working on? 17 A. They were working on interest rate risk 18 management. 19 Q. And what do you mean by "interest rate 20 risk management"? 21 A. Basically, managing the financial 22 institution's interest rate risk exposure as well 8446 1 as -- I guess one of the other things we worked on 2 was investment earning opportunities, arbitrage 3 opportunities. So, it brought in a different 4 perspective to look at not only what we had on the 5 books but other opportunities. 6 Q. So, they were brought in not only to 7 give you an assessment of where things stood at 8 USAT in terms of interest rate sensitivity, but 9 they were also brought in to give you an 10 assessment of various investment opportunities. 11 Is that fair? 12 A. They were brought in to discuss those 13 things. 14 Q. Now, I'd like to direct your attention 15 to a document that's already in the record. It's 16 T4246. It's at Tab 355. It's dated 9-8-86 and 17 it's also a Doug Hansen memorandum? 18 MS. CLARK: Mr. Guido, could you repeat 19 that exhibit number? 20 MR. GUIDO: 4246 is what I have. It's 21 dated September 6th or 8th, 1986 from Doug Hansen. 22 It's the one that says "growth and capital 8447 1 strategy, next six months." 2 MR. NICKENS: That's at Tab 335. 3 MR. GUIDO: I'm sorry. Tab 335, Your 4 Honor. 5 Q. (BY MR. GUIDO) Now, I'd like to 6 direct your attention to the first paragraph of 7 this memorandum. It says "This memo summarizes 8 the current thinking on a number of questions. An 9 action list is included at the end. I think we 10 should start soon to discuss the thoughts and 11 observations as a group." And then it's directed 12 to Charles Hurwitz, Jenard Gross, Barry Munitz, 13 Jerry Williams, Mike Crow, Art Berner, Bruce 14 Williams, and Jim Wolfe. 15 Do you recall receiving this 16 memorandum? 17 A. No. But my name's on it; so, I assume 18 I did. 19 MR. NICKENS: Your Honor, it may be 20 immaterial but, for the record, I think what the 21 document says is that "I think we should meet soon 22 to discuss these thoughts and observations as a 8448 1 group" rather than "start soon." 2 MR. GUIDO: I have no objection with 3 that correction of my misreading of the document, 4 Your Honor. 5 THE COURT: All right. 6 Q. (BY MR. GUIDO) Now -- it raises a 7 number of questions, and there are terms in there 8 I would like to discuss with you. It says, "A, do 9 we have enough capital to avoid a supervisory 10 letter?" 11 Do you see the reference to supervisory 12 letter? 13 A. I see. 14 Q. What is a supervisory letter? 15 A. I can only guess that it's a letter 16 from the S&L regulators that an institution might 17 receive if they fall below capital requirements or 18 violate some kind of regulatory requirement. 19 Q. So, it's the notice that there is 20 either a violation of a capital level or some 21 other violation is your understanding? 22 A. That's my understanding. 8449 1 Q. And then it says "B, will we meet the 2 thrift test?" 3 Do you see that? 4 A. I see that. 5 Q. Do you know what "thrift test" refers 6 to? 7 A. Specifically, no. Generally, I think 8 it was, once again, a regulatory requirement that 9 X percent of the assets of the institution have to 10 be invested in something called qualifying assets, 11 which I'm not real sure what the definition of 12 that was. 13 Q. Were whole real estate loans included 14 within that definition? 15 A. I believe they were. 16 Q. Were mortgage-backed securities 17 included within that definition? 18 A. I believe they were. 19 Q. Okay. Were high-yield bonds included 20 within that definition? 21 A. I don't know what else was included in 22 the definition. 8450 1 Q. But those two you know were included? 2 A. I do not know they were. I can only 3 speculate they were. 4 Q. Then C says "Can we" -- and I think 5 this is "get the maturity matching credit in 6 1987?" 7 Do you see that? 8 A. I see that. 9 Q. Do you know what the reference to 10 maturity matching credit is? 11 A. It's another regulation that had to do 12 with interest rate risk. 13 Q. What do you mean it had to do with 14 interest rate risk? 15 A. Well, there was a definition of what an 16 institution's asset/liability gap could be and 17 that if it fell within certain ranges -- and I 18 don't remember the specific regulations -- you 19 could get equity capital credit for it maybe. I 20 really don't specifically recall the exact -- 21 Q. Let me -- 22 A. -- regulations or how it was used. 8451 1 But basically it was another regulatory -- 2 Q. Let me give you another hypothetical 3 just to sort of clarify your testimony. Let's say 4 that you had a capital requirement of 6 percent. 5 Let's take it as a hypothetical. By "maturity 6 matching credit," do you mean that there would be, 7 like, a 2 percent credit or up to a 2 percent 8 credit taken off of that capital requirement 9 because the interest rate sensitivity was not as 10 great as an institution that was required to have 11 a 6 percent capital? 12 A. I believe that was generally what the 13 guidelines were, but I don't specifically -- 14 Q. That's your understanding, isn't it? 15 A. Well, it could have been. You could 16 give me another hypothetical and I would probably 17 agree with that, too. I don't specifically 18 remember. 19 Q. Do you recall when you were deposed 20 being asked about the maturity matching credit? 21 A. Not specifically. 22 Q. Now -- then let's go through some of 8452 1 the conclusions. Look at -- on Page US463 -- the 2 A section where it says "United probably has 3 enough capital to avoid a supervisory letter if 4 scheduled items do not exceed $400,000." 5 Do you see that reference? 6 A. I see that. 7 Q. Do you agree with that statement? 8 A. I have no idea. These are Doug 9 Hansen's conclusions and Doug Hansen's facts and 10 figures. So, I have nothing available to me that 11 will allow me to come to any conclusion. 12 Q. Okay. See Item 2. "The danger point 13 is 12-'86, the last time our required net worth 14 will be calculated under the old rules." 15 Do you see that? 16 A. I see that. 17 Q. Do you agree with that statement? 18 A. I think my answer is the same as the 19 first question. I don't have any basis -- 20 Q. You have to reason to dispute the 21 accuracy of the statement or -- 22 MR. KEETON: Your Honor, is the witness 8453 1 going to give the answer or is Mr. Guido going to 2 give the answer? 3 A. I have no basis for coming to a 4 conclusion either way. 5 Q. (BY MR. GUIDO) Okay. Now, see Item 6 No. B on Page 2 of the document which is US464? 7 It says "United will meet the thrift test at year 8 end." 9 Do you agree with that statement? 10 A. That's Doug Hansen's conclusion. I 11 have no basis for being able to come to a 12 conclusion one way or the other. 13 Q. And look at Item C. "United should be 14 able to receive most of the maturity matching 15 credit in 1987." 16 Do you agree with that statement? 17 A. I think -- I give you the same answer 18 I've given you before. I have no basis for being 19 able to come to a conclusion one way or the other. 20 These are Doug Hansen's conclusions. 21 Q. Look at Page US465 and look at Item 22 No. 6 under the maturity matching credit. It 8454 1 says, "Other ways to reduce the gap are under 2 investigation as a matter of high priority." 3 Do you see that? 4 A. I see that. 5 Q. And look at Item 5. "A proposed change 6 in the method United uses to account for swaps and 7 caps on the Federal Home Loan Bank Board report 8 should reduce these gaps into the 15 to 25 percent 9 range." 10 Do you see that reference? 11 A. I see that reference. 12 Q. Do you know what that refers to? 13 A. I do not. 14 Q. Do you ever remember writing a 15 memorandum where you discussed what USAT had done 16 with its caps that were owned by United MBS? 17 MR. NICKENS: Your Honor, I object to 18 the form of that question because of the dispute 19 over who owned those caps, which is well known to 20 Mr. Guido. He is suggesting a fact -- 21 MR. GUIDO: I only made reference to 22 accounting for them. I didn't say anything about 8455 1 owning them in my question. I'll rephrase the 2 question to make it clear. 3 Q. (BY MR. GUIDO) Do you ever remember 4 writing a memorandum about the allocation of the 5 caps from United MBS to USAT on USAT's or United 6 MBS' books? 7 A. I wrote lots of memos. I don't 8 remember each and every one of them. 9 Q. Do you recall -- 10 A. No, I don't. 11 Q. -- being asked questions about such a 12 memorandum at your deposition? 13 A. I got asked lots of questions about 14 caps, collars, hedges, everything during my 15 deposition. So, if that was -- 16 Q. You don't recall, when you perused it 17 and the exhibits that I sent to you, seeing a 18 memorandum in there that you wrote with regard to 19 the allocation of the caps between United MBS and 20 USAT? 21 A. Not that I specifically focused on, no. 22 Q. Was that because it wasn't a priority 8456 1 of yours? 2 A. Yes. 3 Q. Now, you also testified, I think, at 4 the beginning of your testimony that you reviewed 5 documents that Mary Clark had made available to 6 you? 7 A. Yes. 8 Q. Okay. Where did you review those 9 documents? 10 A. In the offices of Mayor, Day, I 11 believe. 12 Q. And how voluminous were those 13 documents? 14 A. They were not that voluminous. 15 Q. An inch thick, 2 inches thick? 16 A. I beg your pardon? 17 Q. An inch thick? 18 A. I don't remember them being an inch 19 thick, no. It was mostly question and answer as 20 opposed to going through piles of documents. 21 Q. What do you mean, "question and 22 answer"? 8457 1 A. Well, they would ask questions about 2 specific events and maybe show me a memo and ask a 3 few questions about it. But I didn't sit down and 4 go through a stack of documents. 5 Q. Did they ever show you a memorandum 6 where you had used the term "mirrors" with regard 7 to the maturity matching credit? 8 A. I believe that was a memo I looked at, 9 yes. 10 Q. Did they show you any other memoranda 11 besides that memorandum? 12 A. I think I said yes, there were numerous 13 memos they showed me. 14 Q. But you said that it wasn't a stack of 15 memoranda beyond 1 inch thick? 16 A. I don't believe it was, no. 17 Q. Now do you recall writing a memorandum 18 about the allocation of caps between United MBS 19 and USAT -- 20 A. Like I said, I wrote a lot of memos. 21 So, I'm sure I did. I don't specifically -- I 22 could have written ten memos about that very 8458 1 subject. So, when you say did I write a memo, I 2 wrote lots of memos. 3 Q. I'm asking you specifically about the 4 memorandum you just testified about looking at. 5 A. If you have a copy of it and it was 6 that memo that you're referring to, yes, I have 7 seen that memo. 8 Q. Now, do you recall having had 9 discussions while you were at USAT about 10 allocating caps between United MBS and USAT for 11 the purposes of maximizing the maturity matching 12 credit? 13 A. I don't recall specific conversations, 14 but those may and probably did occur. 15 Q. Now, let's take a look at Item No. D. 16 It says "It will be difficult for United to shrink 17 below 4 billion without incurring significant 18 costs." 19 Look at Item No. 1. "Shrinking thrift 20 assets will be possible as soon as Texas approves 21 our application for a service corporation (two to 22 three weeks). Mortgage-backed securities can be 8459 1 sold and repurchased in the sub subject to 2 collateral and dollar roll constraints. Up to 3 750 million could be moved over time through 1987, 4 assuming gains are achievable." 5 Do you see that reference? 6 A. I see that. 7 Q. Do you agree with that -- the accuracy 8 of that statement? 9 A. I have no basis for coming to any 10 conclusion on anything in this memo we've 11 discussed so far. 12 Q. And so, you don't have any reason to 13 confirm or deny the accuracy of that statement? 14 A. Absolutely not. 15 Q. Okay. Item No. 2 says "United's 16 limitation of shrinking is the non-thrift assets. 17 Real estate, preferred stock, high-yield bonds, 18 equity arbitrage, and goodwill will make up 1.62 19 billion at the end of the year. This includes the 20 effects of" -- and it makes reference to items 21 above which I can't read. "To reduce below 1.6 22 billion level will be difficult or expensive. If 8460 1 it cannot be reduced, the minimum size for United 2 is $4.1 billion." 3 Do you see that? 4 A. I see that. 5 Q. Do you agree or disagree with that 6 statement? 7 A. Don't have the information necessary to 8 come to any conclusion. 9 Q. Why would the non-thrift assets at USAT 10 have been an impediment or limitation to its 11 shrinking in size to meet capital requirements? 12 A. Well, if the institution shrinks and 13 those become a larger percentage of the total 14 institution, at some point it can shrink no 15 farther. 16 Q. So, in other words, the non-thrift 17 qualifying assets impose a limitation on how far 18 an institution can shrink? 19 A. Could. 20 Q. Could. Now, let's take a look at 21 Exhibit A10666. Look at A10666. 22 Do you recall seeing this memorandum 8461 1 before? 2 A. Not specifically. 3 Q. Is this a memorandum that was prepared 4 by Smith Breeden for review by USAT personnel? 5 A. I don't know who prepared it. 6 MR. GUIDO: I'd like to move A10666 7 into evidence, Your Honor. 8 MS. CLARK: No objection. 9 THE COURT: Received. 10 Q. (BY MR. GUIDO) Take a look at Page 2 11 of that memorandum, Mr. Williams. 12 A. How do I tell what page? 13 MS. CLARK: Before you do, I believe 14 there are markings on this particular version of 15 the document that were put on by litigation 16 counsel. 17 MR. GUIDO: Your Honor, I don't know 18 who they were put on by but, in either case, I 19 move the admission of the document with the 20 understanding that those are not anything that we 21 are attempting to introduce into the record. 22 MR. NICKENS: Your Honor, I would also 8462 1 say, for the record, I believe there will be 2 evidence from other sources that this is, in fact, 3 a document generated by Smith Breeden which could 4 be important to the questions. The witness 5 indicated he did not know that. 6 MR. GUIDO: Your Honor, I'll stipulate 7 that this was produced by Smith Breeden, if 8 Mr. Nickens agrees to that fact, and other 9 witnesses will testify about the document. 10 Q. (BY MR. GUIDO) Take a look at -- 11 THE COURT: All right. The document is 12 received subject to the qualification that the 13 markings are not part of the substance of the 14 exhibit. 15 Q. (BY MR. GUIDO) Now, I'd like to 16 direct your attention to the second page of the 17 memorandum, which is the third page of the 18 exhibit. And it is US205. 19 Do you see the reference to 20 mortgage-backed securities in that first entry 21 there under "assets"? 22 A. The second entry, yes. 8463 1 Q. The second entry. Excuse me. It says 2 mortgage-backed securities, 1,157,700,000. 3 Do you see that? 4 A. Yes. 5 Q. Is that your understanding of the size 6 of the mortgage-backed security portfolio at USAT 7 at the time? 8 A. I have no idea. I don't have a way to 9 confirm or validate anything on this page. 10 Q. Okay. Now, look at it. It says "gain 11 from book of $6.5 million." 12 Do you see that figure? 13 A. I see that. 14 Q. Is that figure accurate to your 15 understanding at that time? 16 A. I have no way of being able to validate 17 or attest to any of the numbers on this page. 18 Q. And then move down the page to where it 19 says -- under "liabilities," it says "reverse 20 repos, 6-'86," I think, $.2 million. 21 Do you see that? 22 A. I see that. 8464 1 Q. And then it says "a gain from book, 2 0.3." 3 Do you see that? 4 A. I see that. 5 Q. Is that figure accurate? 6 A. I have no way of being able to attest 7 to any of these numbers. 8 Q. And then look at the interest rate 9 swaps. 10 Do you see that entry? 11 A. I see that. 12 Q. It shows gain from book and has parens 13 around it of $122 million. 14 Do you see that? 15 A. I see that. 16 Q. Is that figure accurate? 17 A. It's the same as my previous answer. 18 Q. You have no basis to understand the 19 accuracy or inaccuracy of that statement? 20 A. That's correct. 21 Q. Did Mary Clark, when she showed you 22 documents and asked you questions, did she show 8465 1 you a memorandum that you prepared evaluating 2 mortgage-backed securities in 1986 that showed a 3 loss of $122 million in the swaps mark-to-market? 4 A. She may have. 5 Q. Do you recall whether she did? 6 A. I don't recall any of the memos we 7 looked at. I know we went over memos. And if you 8 could show me what you're referring to, I could 9 maybe say "yes" or "no." But I don't specifically 10 remember every document we went over. 11 Q. Do you recall how many documents you 12 went over with Mary Clark? 13 A. No, I do not. 14 Q. Do you recall when it was you went over 15 documents with her? 16 A. Probably the last time was a Sunday 17 afternoon. I was downtown working and took an 18 hour or two off to -- 19 Q. How long ago? 20 A. Two to three weeks or sometime prior to 21 me coming here and testifying. 22 Q. And do you recall whether or not she 8466 1 showed you documents that were prepared by people 2 other than you? 3 A. There may have been some documents. 4 Q. Did she show you documents that you 5 prepared? 6 A. Yes, I'm sure -- 7 Q. Did she show you an analysis that you 8 had done of the mortgage-backed security portfolio 9 at USAT? 10 A. She may have. Like I said, I produced 11 a lot of paper and a lot of memos. So, if you 12 have something specific in mind, you would have to 13 show it to me. 14 Q. You said that she showed you a stack of 15 papers that were no greater than an inch thick. 16 Right? 17 A. (Witness nods head affirmatively.) 18 Q. I'm asking you whether she showed you a 19 document that you prepared that was an analysis of 20 the performance of the mortgage-backed security 21 portfolio at USAT? 22 A. And the answer is I don't specifically 8467 1 remember -- 2 Q. Do you generally remember? 3 A. No. 4 MR. NICKENS: Your Honor, would he let 5 the witness finish his answer so that we can have 6 his testimony? 7 Q. (BY MR. GUIDO) I'm sorry? 8 A. No. 9 Q. Now, take a look at Page 9 of the 10 memorandum, which is the tenth page of the exhibit 11 or -- I think it's US2061. But for purposes of 12 the record, to make sure everything is clear, it's 13 CN053088. 14 Do you have that page? 15 A. If it's this page, I do. 16 Q. Okay. These are recommendations. Do 17 you see that? 18 A. I see it. 19 Q. It says "recommendations" at the top. 20 It says "immediate strategies." The first bullet 21 says "Take gains on portfolio to offset operating 22 losses." 8468 1 Do you recall whether or not Smith 2 Breeden gave USAT that advice? 3 A. If it's on this document and they 4 prepared this document, they did. 5 Q. But you don't have any independent 6 recollection of that? 7 A. (Witness shakes head negatively.) 8 Q. Do you have any -- 9 MR. NICKENS: Your Honor, may the 10 record reflect the witness shook his head "no" in 11 response to that question. 12 A. My general recollection was we didn't 13 agree with Smith Breeden's strategies and we 14 didn't employ Smith Breeden and Smith Breeden's 15 methodologies, recommendations, investments, et 16 cetera. 17 Q. (BY MR. GUIDO) Why didn't you agree 18 with Smith Breeden's strategies? 19 A. Personally, I didn't agree -- one, they 20 never -- they had a number of recommendations 21 which they could never or would never confirm in 22 terms of what the impact would actually be to the 8469 1 financial statements of the institution. I think 2 their approach was generally take positions and 3 let the market move and take gains out of 4 whichever side of the equation creates gains, 5 which we didn't agree with. Their whole 6 philosophy, I think, in general, I never was 7 comfortable with. 8 Q. Did you ever participate in a decision 9 to take gains out of the hedges in USAT's 10 portfolio? 11 A. Not that I recall. 12 Q. Did you ever participate in a decision 13 to take gains out of USAT's mortgage-backed 14 security portfolio? 15 A. I was in meetings where that was 16 probably discussed. 17 Q. Did you ever serve on a subcommittee of 18 the investment committee called the trading 19 committee? 20 A. I may have. I don't specifically 21 remember that -- 22 Q. You don't recall? 8470 1 A. -- committee, but there may have been a 2 committee like that. 3 Q. Do you recall who the members were? 4 A. No, I do not. 5 Q. Were the members you, Michael Crow, 6 whoever the manager of the mortgage-backed 7 security portfolio was, and Doug Hansen? 8 A. I think I said I don't remember -- 9 Q. You don't remember? 10 A. -- who the committee members were. 11 Q. But you wouldn't dispute investment -- 12 the accuracy of the investment committee minutes 13 if they said you were a member of such committee? 14 A. I wouldn't have any reason to dispute 15 that. 16 Q. Would you dispute the minutes of that 17 committee if they showed you participated in a 18 decision to take gains out of the mortgage-backed 19 security portfolio by selling them? 20 A. No. 21 Q. Would you dispute the accuracy of 22 investment committee minutes if they showed you 8471 1 participated in a decision, as a member of that 2 subcommittee, to take gains out of the hedges of 3 the mortgage-backed security portfolio? 4 A. No. 5 Q. Now, the text item says "Establish 6 economically offsetting positions which generate 7 accounting income if interest rates move." 8 Do you see that reference? 9 A. I see that. 10 Q. Is that what you're referring to that 11 you had trouble with, that Smith Breeden couldn't 12 satisfy you of how those transactions would play 13 out in the accounting records of USAT? 14 A. No. That was one of the points that I 15 didn't agree with in terms of their philosophy, 16 but that's not specifically what I was relating to 17 earlier in terms of the accounting for their 18 investment -- 19 Q. What was it about their accounting that 20 raised that question to you? 21 A. Their investment strategies included 22 quite a bit in the way of futures and options and 8472 1 their presentations tended to highlight those as 2 economic transactions and what happens 3 economically when rates move. And we never -- or 4 at least I couldn't, to my comfort level, get them 5 to translate that into what that means from an 6 accounting perspective and what hits the books and 7 records as opposed to theoretical economics. 8 Q. Did you take their proposals to 9 Peat Marwick and ask them for their views of what 10 the accounting treatment would be for the 11 transactions? 12 A. I don't recall. I don't know that I 13 would have been the one to take anything directly 14 to Peat Marwick. 15 Q. Did you participate in meetings with 16 Peat Marwick in discussing the accounting 17 treatment for the mortgage-backed security 18 portfolio? 19 A. Yes, periodically. 20 Q. And do you recall who it was you met 21 with there? 22 A. Not specifically. I don't recall the 8473 1 names of the individuals that -- 2 Q. Was one of those people Joe Parsons? 3 A. Joe would have been one of the people. 4 Q. Was one of those people Rick Millinor? 5 A. Periodically, Rick might have been in 6 some of the meetings, yes. 7 Q. Was one of those people Jerry Clayburn? 8 A. I don't recall being in meetings with 9 Jerry. There may have been one or two instances; 10 but generally, I don't remember meeting with 11 Jerry. 12 Q. I'd like to now show you Exhibit T4250, 13 which is a September 22nd, 1986 memorandum from 14 Doug Hansen to Charles Hurwitz, Jenard Gross, 15 Barry Munitz, Jerry Williams, Mike Crow, Art 16 Berner, Jim Jackson, and Bruce Williams. 17 MR. GUIDO: I'd like to move the 18 admission of T4250 into the record, Your Honor. 19 MS. CLARK: Mr. Guido, could you give 20 us the Bates numbers on that? 21 MR. GUIDO: The Bates number is US2070, 22 or it's Imaging No. OW012016. 8474 1 MS. CLARK: Through 2074? 2 MR. GUIDO: So, it's US2070 through 3 2074. Is that what you have? 4 MS. CLARK: No objection. 5 THE COURT: Received. 6 Q. (BY MR. GUIDO) Do you recall 7 receiving this memorandum, Mr. Williams? 8 A. Not specifically. But my name's on it, 9 so I assume I did. 10 Q. You don't have any reason to dispute 11 the fact that you did receive that document, do 12 you? 13 A. No. 14 Q. Now, this says "Strategic management 15 committee meeting, September 22nd, 1986." 16 Do you see that? 17 A. Yes. 18 Q. What was the strategic management 19 committee? 20 A. It was the same group, I think, we had 21 mentioned earlier or talked about related to that 22 Mustang Island committee. 8475 1 Q. It's the same as what's referred to as 2 the strategic planning committee? 3 A. I believe so. 4 Q. And these were the members of that 5 committee? 6 A. I can't verify that. 7 Q. Are these the people that attended 8 those meetings, to your knowledge? 9 A. Some of them did. Some of them didn't. 10 I don't recall if every one of them attended every 11 meeting or even any of them. 12 Q. Who is Jim Jackson? That's a name I 13 haven't seen before. 14 A. He was someone that -- I think he ran 15 our money desk or raised and managed the jumbo CD 16 portfolio. 17 Q. Now, I'd like to direct your attention 18 to the page that's Bates stamped US2072. See the 19 entry No. 31, earnings and growth strategy? 20 A. Yes. 21 Q. It says "Prospects for positive GAAP 22 and RAP earnings are poor in" -- I think it says 8476 1 6-'87 but -- do you see that? 2 A. I see that. 3 Q. And then it says "Our actual net worth 4 will be the same as or below required net worth at 5 the end of the third and fourth quarters unless 6 action is taken." 7 Do you see that? 8 A. Yes. 9 Q. It says "We need earnings and good net 10 worth in the third quarter as we still will be 11 bargaining with the examiners and looking for a 12 capital note issue." 13 Do you see that? 14 A. Yes. 15 Q. Then it says "There is a strong case 16 for taking portfolio gains in the third quarter in 17 order to shore up reserves in the capital 18 position." 19 Do you see that? 20 A. Yes. 21 Q. It says "Third quarter results need to 22 be close to those forecast in the regulatory 8477 1 business plan." 2 Do you see that? 3 A. Yes. 4 Q. Okay. Now, let me work back. I want 5 to ask you about some terms. Starting with the 6 regulatory business plan, do you know what that 7 refers to? 8 A. Other than a business plan that at 9 sometime must have been turned in as part of an 10 application or some form to the regulators. 11 Q. Did USAT submit business plans to the 12 regulators periodically? 13 A. They may have. I wasn't involved in 14 that; so, I wouldn't know specifically if they did 15 or the frequency. 16 Q. Did you participate in the preparation 17 of any of the figures which were described to you 18 as being included or to be included in business 19 plans? 20 A. (Witness shakes head negatively.) In 21 general GAAP business plans and regulatory 22 business plans, I don't specifically know what was 8478 1 included in those because I wasn't -- I didn't 2 participate in putting those together. 3 Q. That wasn't my question. My question 4 was: Were you asked to prepare any figures to be 5 included in any business plan? 6 A. In any business plan -- 7 Q. In any business plan -- 8 A. Yes. 9 Q. Pardon? 10 A. Yes. 11 Q. And did those include business plans 12 that you understood were to be delivered to the 13 regulators? 14 A. I don't recall. 15 Q. Now, it makes reference again -- if you 16 look back up, it's the third bullet point -- to a 17 capital note issue. 18 Do you see that reference? 19 A. Yes. 20 Q. Do you recall what that refers to? 21 A. Once again, depending upon the timing, 22 I think at one point we were working with or 8479 1 talking to some of the Wall Street firms regarding 2 issuing a capital debenture or capital note of 3 some kind. 4 Q. Was the capital note something that was 5 discussed with Drexel Burnham Lambert, or do you 6 know? 7 A. Could have been. I think we discussed 8 it with most of the Wall Street firms. 9 Q. But you don't know whether Drexel was 10 one of them? 11 A. Not specifically. 12 Q. Do you have any reason to dispute the 13 accuracy of any of those bullet points that I just 14 read into the record? 15 A. I don't have a basis for coming to a 16 conclusion, to be quite honest. 17 Q. Pardon? 18 A. I don't have any basis for coming to 19 any conclusion. 20 Q. One way or the other? 21 A. (Witness shakes head negatively.) 22 Q. Now, take a look at the 8480 1 next-to-the-last entry. It says "In order to 2 build up unrealized gains as insurance for the 3 future, we might consider doing something along 4 the lines of the Smith Breeden buy agency zeros, 5 sell broker zeros ideas. The gains would not have 6 to be realized unless" -- I think it's "needed." 7 Do you see that? 8 A. Uh-huh. (Witness nods head 9 affirmatively.) 10 Q. Is that the transactions that you're 11 referring to that you found objectionable because 12 you couldn't ascertain the accounting significance 13 of them? 14 A. Those were the type of transactions. 15 Q. Now, I'd like to direct your attention 16 now to Bates stamp 2073. I want to direct your 17 attention to the middle of that page. 18 You see where it says "First Boston"? 19 A. Yes. 20 Q. Okay. And then look at the bullet 21 right after that. It says "Quarter end actions 22 will be considered next Monday. We should take 8481 1 all MBS and liquidity portfolio gains, monitor 2 equity arbitrage results, alert Joe as to the 3 possibility of take junk bond gains, and track the 4 profit and capital positions closely." 5 Do you see that reference? 6 A. Yes. 7 Q. Do you recall that being recommended by 8 Mr. Hansen to the strategic planning committee? 9 A. Not specifically. But if it's there, I 10 guess he did. 11 Q. Okay. Now, look at the last page, 12 US2074. Look -- see the date -- I think that says 13 3-'86, suggested actions. It says, "Take 14 10 million security gains and junk MBS and 15 liquidity portfolio." 16 Do you see that? 17 A. Yes. 18 Q. Do you have any reason to dispute the 19 accuracy of that recommendation that was made? 20 A. I -- 21 Q. Let me rephrase it. 22 A. I really don't even understand what 8482 1 it's made in reference to. So, I can't make a 2 judgment on it. 3 Q. You don't have any information to 4 ascertain the accuracy or inaccuracy of whether -- 5 A. Excuse me. 6 Q. -- of whether that recommendation was 7 made? 8 A. No. 9 Q. Okay. Now, I'd like to address your 10 attention to a document that's already in the 11 record. It's a memo from Crow to Jenard Gross and 12 Gerald Williams dated September 23, 1986. And 13 it's at Tab 567. 14 MR. GUIDO: It's either T4251 in the 15 record or A10672, Your Honor. I have it as both 16 ways. It's in the record as 4251, Your Honor. 17 Q. (BY MR. GUIDO) This is a memo from 18 Mike Crow to Jenard Gross and Jerry Williams dated 19 September 23rd, 1986. 20 MS. CLARK: Bates numbers? 21 MR. GUIDO: I have US2075 and 2076 and 22 Imaging No. OW011294 through 11295. Is that the 8483 1 document? 2 MS. CLARK: Uh-huh. 3 Q. (BY MR. GUIDO) Do you recall I showed 4 you a memorandum from Mike Crow that talked about 5 we should start thinking about what needed to be 6 done to ensure profitability in the third and 7 fourth quarter of 1986? 8 A. Yes. 9 Q. This is another memo from Mike Crow 10 dealing with a similar question. It says "The 11 attached schedule presents our best estimate of 12 gains that will be needed for quarterly earnings. 13 We are proceeding with taking these gains." 14 Do you see that reference? 15 A. Yes. 16 Q. Then look at the second page. It talks 17 about gains to alleviate deficit. It talks about 18 liquidity. 19 Do you see that reference? 20 A. Uh-huh. (Witness nods head 21 affirmatively.) 22 Q. 2.3. Do you know what the liquidity 8484 1 refers to? 2 A. Not specifically. There was a 3 portfolio of treasuries and mortgage-backed 4 securities that the treasury department used for 5 liquidity purposes. So, my guess is it's making 6 reference to one or both of those portfolios. 7 Q. Do you recall testifying about -- when 8 I showed you a chart of mortgage-backed securities 9 and it had "treasury" and you indicated that that 10 made reference to a liquidity portfolio? 11 A. Right. That was, like I said, mortgage 12 backs and treasuries in that portfolio. 13 Q. And was that treasury portfolio, was 14 that a portfolio that you utilized to get advances 15 from the Federal Home Loan Bank? 16 A. Or reverse repos. It was basically 17 available for collateral for borrowing, whether it 18 was for the Federal Home Loan Bank or reverse 19 repos or -- 20 Q. Who managed the interest rate risk for 21 that portfolio of mortgage-backed securities? 22 A. That was part of the overall 8485 1 association management umbrella. 2 Q. What do you mean, the management 3 umbrella? 4 A. Well, the association's interest rate 5 risk was managed partially at a micro level and 6 partially at a macro level. So, those would have 7 fallen under the -- kind of the general 8 association. So, if there were general hedges, 9 those general hedges would have been used to hedge 10 liabilities that fund all the other assets of the 11 association, whether they were mortgage-backs or 12 treasuries or consumer loans or home loans or 13 whatever the case may be. 14 Q. Okay. Who managed the interest rate 15 risk of that portfolio? 16 A. The interest rate risk of the portfolio 17 was not managed at that level. As I said, it was 18 managed from a total association level and the 19 total association's interest rate risk. 20 Q. Okay. Who managed the total interest 21 rate risk for the association? 22 A. I don't know that I could give you a 8486 1 specific answer on that. I think the investment 2 committee generally looked at it. My guess would 3 be the investment committee. 4 Q. The investment committee? Who was 5 responsible for initiating transactions to 6 rebalance the interest rate risk for the entire 7 association after the investment committee made a 8 decision? 9 A. It would have been one of the portfolio 10 traders. 11 Q. So, it would have been -- for 12 mortgage-backed securities, it would have been Joe 13 Phillips? 14 A. Joe or Sandy Laurenson. 15 Q. And after Sandy Laurenson, Dominic 16 Bruno? 17 A. Yes. 18 Q. Now, prior to the creation of the 19 investment committee, whose responsibility was it 20 to manage the interest rate risk for the 21 mortgage-backed securities as part of the total 22 interest rate risk of the association? 8487 1 A. I didn't understand your question. 2 Q. Prior to the creation of the investment 3 committee, whose responsibility was it to 4 ascertain what the overall risk was to the 5 association, including this liquidity portfolio of 6 mortgage-backed securities? 7 A. I don't think you can break out the 8 liquidity portfolio. But the overall interest 9 rate risk of the association ultimately, I guess, 10 fell with the board of directors. That was one of 11 the things I think they would look at. How it 12 trickled down from there, I don't know that I 13 could specifically tell that you one person had 14 responsibility for it. 15 Q. Who did the analysis for the investment 16 committee to give it the information so it could 17 evaluate the interest rate risk, including the 18 liquidity portfolio of mortgage-backed securities? 19 A. It varied over a period of time. I 20 think when I initially got there, I worked on part 21 of it in terms of trying to update it and get it 22 more specific. Eventually we bought an 8488 1 asset/liability model that was much better at that 2 in terms of providing asset/liability pricing 3 sensitivity analysis. 4 Q. Was that the thing you testified about 5 the first day as the Sendero model? 6 A. Yeah. That was a big piece of it, the 7 Sendero model. 8 Q. Prior to the Sendero model, what did 9 you have? 10 A. It was bits and pieces of information 11 pulled off different management systems, whether 12 it was general ledger or the deposit systems or 13 the loan systems. It was kind of ad hoc pulled 14 together. 15 Q. Now, you testified that you didn't 16 recall when the Sendero model had been adopted by 17 USAT. 18 Do you recall that? 19 A. No, but if that's what I said -- I 20 don't recall. 21 Q. Now, in your deposition, you were asked 22 the question about -- 8489 1 MR. NICKENS: Your Honor, I would like 2 page and -- 3 THE COURT: We'll take a short recess. 4 5 (A short break was taken 6 at 3:16 p.m.) 7 8 THE COURT: Be seated, please. Back on 9 the record. Mr. Guido. 10 (3:38 p.m.) 11 Q. (BY MR. GUIDO) Just before we took a 12 break, I was going to read you something from your 13 deposition and ask you whether that refreshes your 14 recollection. In the course of your deposition, 15 we were talking about your job description like we 16 were at the beginning. And I asked you a question 17 about the Sendero model. I want to read you some 18 of the questions and answers from that. 19 On Line 18 on Page 12 is where the 20 questioning starts. I think this will be 21 inclusive. I say "I am sorry" for probably 22 interrupting, as I have the habit of doing 8490 1 sometimes and I apologize for that. 2 "Let's go back to this job description. 3 Is this the job description of the job that you 4 discussed with Mr. Crow in 1984?" 5 Answer, "No." 6 Question, "No? And how does this -- 7 what does this job description that I have just 8 handed you?" 9 Answer, "This after I had been at 10 United -- and I don't remember the exact dates -- 11 maybe two years. This was the next position that 12 I filled. This was not the position that I filled 13 going into United. I think when I went in, David 14 Barrett may have had this position. So, this was 15 two to two and a half years after I started 16 working at United that I assumed the treasurer 17 position." 18 Question, "This was sometime in 1987, 19 1988?" 20 Answer, "Probably, yes. No. It was at 21 least 1987." 22 Question, "It talks about a thing 8491 1 called the Sendero model. And I don't think that 2 came about until 1988, did it?" 3 Answer, "Probably late 1987 through 4 1988." 5 Does that refresh your recollection of 6 when you first had access to the Sendero model? 7 A. Refreshes my memory in terms of what I 8 said I did during that discussion, but I don't 9 specifically remember without some documentation 10 showing me the year. 11 Q. Do you have any reason to doubt the 12 accuracy of your statement in your deposition of 13 May 18th, 1995, that I read? 14 A. No. 15 Q. Okay. Now, I'd like to go back to the 16 exhibit that we've been talking about, Exhibit 17 4251, and direct your attention to that liquidity 18 reference. You indicated that the liquidity 19 portfolio of mortgage-backs were included within 20 all of the assets of USAT to ascertain what the 21 interest rate risk was and that they were hedged 22 with some sort of a general hedge at the USAT 8492 1 level. 2 Is that a fair characterization? 3 A. No. 4 Q. No? Okay. How was that liquidity 5 portfolio hedged? 6 A. I said before it was not specifically 7 hedged. There were hedges at the total 8 association level. So, there was not a specific 9 match of assets and liabilities and hedges in 10 every case. There was some overall association of 11 interest rate risk management and hedges at that 12 level. 13 Q. Okay. And were those done with swaps? 14 A. I don't recall what they were. Could 15 have been swaps, caps, collars, a combination of 16 things. 17 Q. Now, how did you measure the effect of 18 the sale of the mortgage-backed securities from 19 the liquidity portfolio in the third quarter of 20 1986 to ascertain what the impact was on the 21 interest rate risk of USAT? 22 A. I don't recall specifically. 8493 1 Q. Well, what did you have available to 2 you if you didn't have the Sendero model in the 3 third quarter of 1986? 4 A. I think as I said before the break, 5 there was information pulled together from various 6 systems, whether it was the loan system, the 7 deposit system, the accounting records that was 8 manually pulled together and assimilated that was, 9 I believe, turned in both as part of the quarterly 10 regulatory reports and used internally. 11 Q. You mean the GAAP analysis? Is that 12 what it is that you're talking about doing? 13 A. Yes. That was probably it. I don't 14 remember what the exact label on it was, but -- 15 Q. In doing a GAAP analysis, does that 16 ascertain what the effect is of changes in 17 prepayment speeds? 18 A. No. It's a static position. 19 Q. Okay. It's just as the interest rates 20 are at that given point in time? 21 A. Right. 22 Q. Okay. So, it doesn't measure what the 8494 1 impact of changes in interest rates would be on 2 interest rate -- on prepayments? 3 A. Not that particular report, no. 4 Q. Now, the third item talks about sale, 5 mortgage-backed securities generating a 6 1.9-million-dollar gain. 7 Do you see that? 8 A. Yes. 9 Q. What's the reference to mortgage-backed 10 securities there? 11 A. I'm not sure I understand your 12 question. What's the -- 13 Q. Do those refer to mortgage-backed 14 securities in the liquidity portfolio or outside 15 of the liquidity portfolio? 16 A. I have no way of knowing. 17 Q. Do you have any reason to believe that 18 those were included within the liquidity 19 portfolio? 20 A. I have no way of knowing. 21 Q. Then it says "Junk bonds, 6.0 million." 22 Do you see that? 8495 1 A. Yes. 2 Q. What do junk bonds refer to? 3 A. High-yield corporate securities. 4 Q. Now, was it customary on a quarterly 5 basis to plan for gains from sales of assets in 6 order to meet certain profit targets or net worth 7 targets at USAT? 8 A. How do you define "customary"? 9 Q. Did it happen on a regular basis? 10 A. It happened. It wasn't -- I don't know 11 that it happened every quarter; but periodically, 12 it happened, yes. 13 Q. Did it happen most quarters between 14 December 1985 and December of 1987? 15 A. I can't tell you that. I don't have 16 any basis for remembering or recalling that. 17 Q. But you wouldn't dispute the accuracy 18 of the documents if they indicate that that 19 occurred? 20 A. I would have to see the documents, but 21 I have no reason to dispute documents someone else 22 put together. I'm not real sure what you're 8496 1 referencing; so, I can't really comment on that. 2 Q. Look at the next document, which is 3 T4258. It's a memorandum from Michael Crow to 4 Jenard Gross and Gerald Williams discussing -- it 5 says "Discussion points: Fourth quarter 1986 6 earnings." 7 A. I don't know that I have that. 8 Q. I have it right here. I have another 9 copy for you. I'm not so sure that this has been 10 in the record. 11 MR. GUIDO: I don't have a tab number 12 for it. So, I don't know if it's been introduced. 13 MS. CLARK: I don't think so. 14 MR. GUIDO: The judge has a copy of it. 15 So, I presume that it's already been introduced. 16 THE COURT: We show it as having been 17 received. 18 MR. GUIDO: Pardon, Your Honor? 19 THE COURT: We show it as having been 20 received. 21 MR. GUIDO: Thank you, Your Honor. In 22 fact, I think it may have been during 8497 1 Mr. Williams', Gerald Williams' testimony. 2 Q. (BY MR. GUIDO) I'd like to direct 3 your attention to the second paragraph of the 4 document. It says "Fourth quarter 1986 results 5 are projected to show a significant loss unless a 6 miracle happens in equity arbitrage, increased 7 values in our bond portfolios, or an unexpected 8 sale of real estate at a profit. As you are 9 aware, we have utilized most of our asset gains in 10 prior quarters." 11 Is that your recollection of the status 12 of the financial situation that USAT faced in the 13 fourth quarter of 1986? 14 A. I have no way of really making a 15 judgment call on that. 16 Q. Look at the attachment, the Schedule 1 17 that's attached. This is another one of those 18 schedules like we've looked at before. You see 19 where it says "Note: Figures extracted from 20 Schedule AB of the monthly performance report"? 21 A. Uh-huh, yes. 22 Q. Is the monthly performance report 8498 1 something that you participated in the 2 preparation? 3 A. Yes. 4 Q. Do you have any reason to doubt the 5 accuracy of any of the figures that are on that 6 schedule? 7 A. No, I don't believe so. 8 Q. Now, do you have any basis for doubting 9 the accuracy of the paragraph that I read to you 10 from Page 1 of the exhibit that says "Fourth 11 quarter 1986 results are expected to show a 12 significant loss unless a miracle happens," et 13 cetera? 14 A. Without having financial statements to 15 lay in front of me and look at, I have no way of 16 evaluating that statement. 17 Q. I'd like you to look at a document 18 that's also been included in the record. It's 19 T4302. It's dated 11-13-1986. And it's a 20 memorandum from Michael Crow to you, and it's at 21 Tab 566. 22 Do you recall receiving this 8499 1 memorandum? 2 A. Not specifically; but since it has my 3 name on it, I assume I did. 4 Q. It says, "We had a discussion at the 5 investment committee on selling junk bonds for 6 profits for purposes of quarterly earnings. Ron 7 Huebsch made an impassioned plea to get the word 8 now if we are going to need a lot of profits 9 because the market is favorable right now to 10 getting out of some bonds, taking a profit, and 11 having a chance of getting back into some 12 good-yielding stuff." 13 Do you see that reference? 14 A. Yes. 15 Q. Do you recall that discussion at the 16 investment committee meeting? 17 A. Not specifically. I mean, I don't 18 recall any specific discussions of any investment 19 committees, not just this one. 20 Q. Do you recall -- you said you testified 21 that you recall that periodically, there were 22 decisions made to take gains quarterly from assets 8500 1 in order to meet certain profit goals or net worth 2 goals. 3 Do you recall that testimony? 4 A. Yes. 5 Q. Were those discussions discussions that 6 were had at the investment committee meeting? 7 A. Some of them may have been. 8 Q. Now, why would you receive a 9 memorandum? You weren't the person who was 10 responsible for initiating trades in the junk bond 11 portfolio, were you? 12 A. No. 13 Q. Okay. What was your role? Why would 14 you receive this memorandum? 15 A. Well, I think if you look at the last 16 two sentences, it explains that. 17 Q. And is it the sentence that says "Would 18 you start pulling together what you think the 19 quarter will look like without extraordinary 20 gains?" Is that what it is? 21 A. Yes. It would be pulling together 22 projections, it looks like, for the rest of the 8501 1 year in terms of what our earnings might look 2 like. 3 Q. And did that also include a -- you 4 identifying assets that had unrealized gains that 5 could be realized? 6 A. I think it's asking to just pull 7 together what things would look like without 8 extraordinary gains. So, it would have been just 9 a normal run rate operation. 10 Q. Did you keep any records in the 11 treasury department that would indicate what the 12 market value was of the securities that were in 13 the high-yield bond portfolio? 14 A. There were records in the treasury 15 department. My guess is we didn't necessarily 16 produce them because I don't think we had access, 17 in all cases, to market quotes. So, the market 18 quotes would have more than likely come from the 19 trading area on those securities. 20 Q. In other words, those were documents 21 that were generated in another area, the 22 mark-to-market information? 8502 1 A. It could have been. It could have 2 been -- we could have generated them. They may 3 have provided us the market values, and we would 4 have put them in a spreadsheet and produced them. 5 I'm not real sure where they would have been 6 produced. 7 Q. I'd like to now have you take a look at 8 Exhibit T4304. Before I do that, I'm going to ask 9 you one question. 10 Do you see the reference halfway -- on 11 the right-hand side of the paragraph about two 12 thirds of the way down to Charles? Do you see 13 that? 14 A. Yes. 15 Q. Do you know who that refers to? 16 A. I would assume Charles Hurwitz, but -- 17 Q. Was there anyone else named Charles who 18 was involved in the management of USAT at that 19 time? 20 A. Well, I don't know if I agree with the 21 way you phrased your question; but I don't believe 22 so, no. 8503 1 Q. What is it you don't agree with the way 2 I phrased the question? 3 A. You said other Charles involved in the 4 management of USAT. I don't think, day to day, 5 Charles was really involved with the management of 6 USAT. So, I guess just that part of your phrase 7 in the question. 8 Q. Let me show you Exhibit T4304, which is 9 another Doug Hansen memo regarding the strategic 10 planning committee of November 17th, 1986. And it 11 has Charles Hurwitz as a recipient, Barry Munitz, 12 Jenard Gross, Jerry Williams, Mike Crow, Bruce 13 Williams, and Art Berner. 14 Now, this document indicates that 15 Charles Hurwitz received a memorandum regarding 16 the strategic planning committee, does it not? 17 A. Yes. 18 Q. Did he participate in the strategic 19 planning committee meetings? 20 A. He was in some of them, yes. 21 Q. And did he express his views at times 22 in those meetings? 8504 1 A. Periodically, yes. 2 Q. And then there is this name Barry 3 Munitz. 4 Do you see that? 5 A. Yes. 6 Q. Who is Barry Munitz? 7 A. He was an officer of the company. I 8 don't know what his specific title was. 9 Q. Would you describe Barry Munitz as 10 Charles Hurwitz' right-hand man? 11 A. I couldn't really come to that 12 conclusion or any conclusion. I don't know what 13 he did, other than he attended some of the 14 meetings. So, I couldn't -- 15 Q. Do you know how Barry Munitz became a 16 member of the strategic planning committee? 17 A. I don't know how I became a member of 18 the strategic planning committee, other than I was 19 told to show up one day. So -- 20 Q. Who told you to show up? 21 A. Probably Mike Crow. 22 Q. Okay. Do you know who Barry Munitz 8505 1 reported to? 2 A. Charles, the board. 3 Q. Did he report to any of those other 4 individuals on that list? Jenard Gross, for 5 example? 6 A. I don't believe so, no. 7 Q. Jerry Williams? 8 A. No. 9 Q. Mike Crow? 10 A. No. 11 Q. Art Berner? 12 A. I don't believe to Art either. 13 Q. You? 14 A. He didn't report to me. 15 Q. So, he either reported to the board or 16 to Charles Hurwitz. Right? 17 A. I believe so. 18 Q. Would you describe him as Charles 19 Hurwitz' right-hand man? 20 A. No. 21 Q. Why not? 22 A. I think I said earlier, functionally, 8506 1 I'm not real sure what he did. So, I couldn't 2 describe him as anything really. 3 Q. Well, what did he do in these strategic 4 planning committee meetings? 5 A. I think he contributed ideas, as did 6 the other members. 7 Q. Now, there is some handwriting on this 8 document. Do you know whose handwriting that is? 9 A. Looks like mine. 10 Q. So, the reference to "Kurt, for your 11 information. Please keep confidential. Bruce," 12 that's your handwriting? 13 A. Yes. 14 Q. Do you recall writing that? 15 A. No. 16 Q. Why do you say "please keep 17 confidential"? 18 A. I really -- I don't know. I mean, this 19 is one of those memos that Doug Hansen wrote 20 periodically and as far as I was concerned, it 21 wasn't something that we probably wanted to pass 22 around within the organization because in many 8507 1 cases, they were Doug Hansen's view of the world. 2 And so, it was basically to give him an update on 3 what had been discussed or what Doug Hansen was 4 thinking at the time. But it certainly wasn't 5 something to be passed around and distributed 6 within the organization. 7 Q. Who was Kurt? 8 A. Kurt Schwenkel, who worked for me and 9 was managing the corporate planning and analysis 10 area at the time. 11 Q. When did he start working for you? 12 A. I don't recall specifically. He had 13 worked for me in a previous job. 14 Q. Where was that? 15 A. At First City National Bank. 16 Q. And you brought him over after you 17 joined USAT? 18 A. Yes. 19 Q. Or you recruited him? 20 A. I recruited him. 21 Q. Now, let's take a look at some of the 22 items. Look at Item 8 on Page US751. It says 8508 1 "Growth: We want to grow to overcome our poor 2 ongoing earnings situation. This situation is 3 caused primarily by real estate but also by the 4 swaps." 5 Do you see that reference? 6 A. I do. 7 Q. Do you know what that refers to? 8 A. I have no idea. I mean, I can read and 9 I know what the words mean; but I don't know 10 specifically what Doug Hansen is referring to. 11 Q. Well, what is your understanding the 12 word "swaps" refers to? 13 A. Interest rate swaps. 14 Q. Hedge instruments? 15 A. I beg your pardon? 16 Q. Hedge instruments? Is that what it's 17 referring to? 18 A. Partially, yes. 19 Q. Why only partially? Why do you say 20 "partially"? 21 A. Well, because he's making a global 22 statement there and without, once again, 8509 1 understanding the underlying financial information 2 that he's drawing this conclusion from, I really 3 don't know specifically what he means. 4 Q. Did interest rate swaps become a 5 negative drain on earnings at USAT at any time you 6 were there? 7 A. I don't understand the question. 8 Q. Did interest rate swaps result in a 9 payment of moneys by USAT that was not recovered 10 by the instruments that they were hedging? 11 A. At times, there were some swaps whose 12 rate exceeded the yield on the asset that they 13 were related to, yes. 14 Q. And did that become a significant 15 figure at USAT at times? 16 A. I don't have the financial information 17 available in front of me to be able to come to 18 that conclusion. But I think having a negative 19 spread in and of itself doesn't tell the whole 20 story. So, in and of itself, a negative spread 21 isn't a horrible thing. 22 Q. Why not? 8510 1 A. Because in some cases, for instance, 2 the mortgage-backed securities that Joe was 3 managing, he rolled down out of high coupon 4 securities into lower coupon securities. And 5 rather than being able to defer gains, gains had 6 to be taken to earnings or equity. So, when you 7 looked at the pure yield on the assets relative to 8 the swaps, it was negative. But that didn't take 9 into consideration the economic value of the 10 equity sitting down in capital. So, just looking 11 at a pure spread comparison isn't always a valid 12 comparison to come to any kind of conclusion with. 13 Q. Did any of the gains that were taken 14 out of the mortgage-backed security portfolio ever 15 have a financial impact on USAT other than 16 minimizing a loss? 17 A. I don't understand that question. 18 Q. Did the gains that were realized on the 19 sale of mortgage-backed securities ever contribute 20 to the positive capital of USAT? 21 A. Yes. By definition, a gain goes into 22 capital. So, yes. 8511 1 Q. If USAT had a negative income in a 2 given quarter and it recognized gains on 3 mortgage-backed securities in that quarter, would 4 those gains have found their way into USAT's 5 capital? 6 A. Yes. 7 Q. How? 8 A. By definition, when you take a gain, it 9 makes its way to capital. 10 Q. It does? 11 A. According to the accounting I 12 understand, yes. 13 Q. Okay. Now, let's go to Item No. 9. It 14 says "Dollar rolls. Should we give up a 15 2.5 percent spread for trading flexibility? Sandy 16 should address." 17 Do you see that? 18 A. Yes. 19 Q. What is a dollar roll? 20 A. To be quite honest, I don't remember. 21 It was a form of reverse repo that was different 22 from a reverse repo funding. But I don't remember 8512 1 specifically why. And I guess now that I think 2 about it, my best recollection is when you do a 3 reverse repo, you pledge securities as collateral. 4 Sometimes you don't get those same securities 5 back. I think on a dollar roll, you maybe have to 6 get the specific same securities back. There was 7 some difference. It was just another form of 8 reverse repo, but I don't remember specifically 9 how it differed. 10 Q. Now, Item No. 10 says "The thrift test. 11 We must meet the test at the end of the year." 12 Do you see that? 13 A. Yes. 14 Q. Was it your understanding that the 15 qualified thrift lender test had to be satisfied 16 on a yearly basis and not a quarterly basis? 17 A. I don't recall specifically what the 18 regulations were regarding that. 19 Q. Okay. Look at Item No. 16 on the 20 second page. "1987 growth. Assuming a 21 500 million growth for the year, we would put 22 300 million into MBS to maintain the thrift test." 8513 1 Were mortgage-backed securities 2 purchased by USAT in order to meet the qualified 3 thrift lender test? 4 A. I have no idea. 5 Q. Do you have any reason to doubt that 6 that happened? 7 A. I don't have any reason or any 8 information to come to any conclusion. 9 Q. Look at 21. It says "MBS history. We 10 need an analysis of MBS history and the effect on 11 future returns." 12 Do you see that? 13 A. Yes. 14 Q. Now, this is November 17th, 1986. It's 15 almost a year and a half after the mortgage-backed 16 security portfolio was created by Joe Phillips. 17 Is that fair? 18 A. I guess. I mean, I don't know exactly 19 when Joe Phillips started his. If that's the date 20 that you have a record of starting is a year and a 21 half ago, okay. 22 Q. Assume that. 8514 1 A. Okay. 2 Q. Why was it a year and a half later that 3 you needed an analysis of the MBS history and the 4 effect on future returns? Why didn't you have it 5 prior to November of 1986? 6 A. I have no idea what that statement 7 refers to. So, I'm not real sure what Doug 8 Hansen's point is. 9 Q. Remember when I asked you about the 10 Jenard-o-gram in which he asked whether or not 11 various systems had been set up to evaluate 12 mortgage-backed securities at USAT? 13 A. Yes. 14 Q. And I think your testimony was that you 15 had a system that you could ascertain what the 16 value of the mortgage-backed securities were, but 17 you didn't have one that could ascertain what the 18 value was in relationship to the swaps. 19 Do you recall that? 20 A. I don't recall that specific response, 21 no. 22 Q. Well, when -- do you recall the memo 8515 1 that we discussed? I think it was earlier in the 2 year. 3 A. Yes. 4 Q. January, February of '86. Okay. And 5 Mike Crow's response was "We are developing an 6 accounting system." Okay? "But neither we nor 7 Salomon Brothers can answer your question the way 8 you've asked it, Mr. Gross." 9 Do you recall that? 10 A. Yes. 11 Q. Okay. Now, why is it November 17th, 12 1986, that Doug Hansen is writing, "We need an 13 analysis of MBS history and the effect on future 14 returns"? 15 A. You would have to ask Doug Hansen. I 16 don't understand that question or point of 17 reference that he's making. 18 Q. Let's take a look at Exhibit T4311. 19 It's a memorandum dated 11-24-1986 from Gerald 20 Williams to Charles Hurwitz, Jenard Gross, and 21 Barry Munitz. 22 MR. GUIDO: I think this has already 8516 1 been in the record. I don't know the tab number. 2 MR. NICKENS: Tab 189. 3 Q. (BY MR. GUIDO) This is a memorandum. 4 The subject is USAT running rate product line 5 profit and loss. Now, before I get into any of 6 the substance, I'd like to direct your attention 7 to the last three pages of this exhibit, which is 8 a document at OW011214 through OW011216. 9 MR. EISENHART: Counsel's not working 10 from the same exhibit we are, Your Honor. 11 MS. CLARK: Your Honor, we have a 12 two-page exhibit marked T4311. We apparently do 13 not have the same document that was previously 14 admitted or Mr. Guido has got a different one. 15 I'm not sure which is the correct one. 16 MR. GUIDO: Your Honor, I'd like to 17 have this document introduced as T4311A. 18 Apparently, the first document omitted the Kurt 19 Schwenkel attachment to it, which is the analysis 20 of the run rate. So, I would move to introduce 21 T4311A, which is T4311 with the three-page 22 attachment that I've just described. 8517 1 THE COURT: And how many pages is 2 the -- 3 MR. GUIDO: This total document, Your 4 Honor, is now two pages of a cover memo and then 5 there is a Kurt Schwenkel to Jerry Williams 6 attachment, which is three pages -- 7 MR. RINALDI: Four pages. 8 MR. GUIDO: Four pages that are 9 attached to it. 10 THE COURT: The copy that I have has 11 all that with it. 12 MS. CLARK: Your Honor, if we could 13 just be provided with a copy to follow along at 14 counsel's table here, I think we can proceed. 15 THE COURT: All right. 16 MR. GUIDO: We'll check the copy and 17 the record to make sure it has the four pages, 18 Your Honor. It's T4311. 19 MR. RINALDI: Are we calling this 20 T4311A or -- 21 MR. GUIDO: T4311. 22 THE COURT: I don't think it's 8518 1 necessary to mark another document because the one 2 that -- the bench copy I have has all that. 3 MR. GUIDO: Okay, Your Honor. We will 4 make sure that the copy that's in the files over 5 here also have the extra four pages. But it's 6 T4311. 7 MR. RINALDI: Okay. 8 Q. (BY MR. GUIDO) Now -- 9 MR. RINALDI: So that I'm clear, it 10 consists of a cover memo dated November 24th, 11 1986, from Gerald Williams and then attached to 12 that a memo dated November 18th, 1986, from Kurt 13 Schwenkel and Jay Van Ert to Jerry Williams? 14 MR. GUIDO: That's correct. And the 15 second memorandum -- 16 Q. (BY MR. GUIDO) I'd like to direct 17 your attention to the attachment. It has CC 18 Mike Crow and Bruce Williams on that document. 19 Do you see that? 20 A. Yes. 21 Q. Now, do you recall receiving the 22 memorandum dated November 18th, 1986, from Kurt 8519 1 Schwenkel? 2 A. Not specifically, but I assume I did. 3 Q. Now, I'd like to ask you some questions 4 about this document. Take a look at the second 5 page of Mr. Schwenkel's document, which is the 6 third-to-the-last page of the exhibit. It says 7 "Running rate NI" -- I think is what it is -- 8 "/loss by activity center." 9 Do you see that page? 10 A. Yes. 11 Q. Now, it has various activity centers, 12 and I'd like to direct your attention to those 13 activity centers. It says "equity arbitrage, 14 corporate securities, mortgage-backs, equity 15 investment and others, merchant banking, CMOs, 16 DARTs, securities, et cetera, and swap." 17 Do you see those? 18 A. Yes. 19 Q. What were the activity centers that's 20 referred to in that section? 21 A. Those were lines of business/investment 22 activities within the company. 8520 1 Q. Where in that list of activity centers 2 do you find the AMPs and the DARTs of that 3 subsidiary that you testified to the first day of 4 your testimony? 5 A. I think the line that says "DARTs." 6 Q. And where do you find the activities 7 that were the collateralized mortgage obligations 8 that you testified to on the first day of your 9 testimony? 10 A. The line that says "CMOs." 11 Q. Where do you find the liquidity 12 portfolio that you testified to on the first day 13 of your testimony as being part of the treasury 14 portfolio in this activity center? 15 A. I don't know specifically where they 16 are. They may be in with the mortgage-backs. 17 Q. Now, is there any other category that 18 they could be in? 19 A. Could be in "securities, et cetera." I 20 don't know specifically where those would fall. 21 Q. Now, look at -- see the reconciliation 22 on the right-hand side of that section? 8521 1 A. Yes. 2 Q. And then it talks about net income 3 reported, 7050. 4 Do you see that? 5 A. No. 6 Q. Under "reconciliation" on the 7 right-hand column. 8 A. Oh, 7051, yes. 9 Q. 7051. Excuse me. Does that figure 10 come from anywhere on this chart? 11 A. I don't know where that came from. 12 Q. What was the purpose of this chart? Is 13 this something that was customarily prepared at 14 USAT? 15 A. No. I think this was something that 16 maybe Jerry Williams had asked Kurt to pull 17 together, just a different way of looking at the 18 earnings of the company. 19 Q. Now, did you participate in setting up 20 this format? 21 A. I probably did not, no. 22 Q. No? 8522 1 A. Not at that -- I mean, it looks as 2 though Kurt worked directly with Jerry. 3 Q. Now, it has these reconciliations. Are 4 these reconciliations the gains from the sales 5 that are not included under "net income" on the 6 left-hand side of the page? 7 A. I don't know specifically what they 8 are. I mean, I can read the words; but I didn't 9 put this schedule together. So, I'm not real sure 10 what was taken, what was adjusted, and what these 11 numbers represent other than what I can read here. 12 Q. The -- so, you don't know what the 13 purpose of the document was to be able to 14 ascertain what this schedule means? 15 A. Not specifically, no. 16 Q. How about generally? 17 A. Generally, it's what the memo explains, 18 I guess. I haven't had a chance to read the whole 19 memo, but -- 20 Q. Well, let's go through the memo. Let's 21 do the cover memo first. 22 A. And which is the cover memo? 8523 1 Q. The memo from Gerald Williams to 2 Charles Hurwitz, Jenard Gross, Barry Munitz, 3 copies to Mike Crow, Doug Hansen, and you. 4 A. Okay. 5 Q. Do you recall receiving the cover 6 memorandum? 7 A. No, but I guess I did because my name 8 is CC'd. 9 Q. Okay. Now, look at the first 10 paragraph. It says "Attached is an analysis from 11 Kurt Schwenkel to me regarding the USAT running 12 rate. I believe this summary deserves our utmost 13 attention. In essence, Kurt points out that the 14 association's base operation is losing at a rate 15 of $77 million a year up from $40 million in 16 1985." 17 Do you see that? 18 A. Yes. 19 Q. Do you have any reason to dispute the 20 accuracy of that statement? 21 A. I didn't prepare the numbers, but I 22 don't have any reason to dispute them. 8524 1 Q. Okay. Then the second paragraph says, 2 "The writing next to the monthly numbers on the 3 product line income statement is the annual effect 4 of the September numbers." 5 Do you see that? 6 A. I see that. 7 Q. Take a look at the third-to-the-last 8 page. 9 Do you see the handwritten numbers that 10 say "12 months running rates" on it? 11 A. Yes. 12 Q. Do you know whose handwriting that is? 13 A. I do not. 14 Q. Now, then it says "The most dramatic 15 observation is that primarily as a result of 16 selling the mortgage-backed securities in June, 17 the net interest spread on the total assets 18 classified as investments is now in a negative 19 position (including the cost of swaps). Due to a 20 decline in interest rates, the interest rate 21 swaps, caps, and collars now cost us about 22 $42 million annually. The rest of the remaining 8525 1 problems relate to those we have already 2 discussed: The real estate department, REO 3 problems, and the carry of goodwill." 4 Do you see that? 5 A. Yes. 6 Q. Do you have any reason to dispute the 7 accuracy of that statement or those statements in 8 that paragraph? 9 A. Well, I think it is somewhat of a 10 misstatement. And once again, I didn't prepare 11 this document. So, I don't know what he's exactly 12 talking about related to selling mortgage-backed 13 securities in June. I guess my thought would be 14 that was the gain that the accountants came back 15 and made us take as a result of the roll-down 16 program Joe Phillips had. And that's an example 17 of why you can't just look at the net interest 18 spread, because gains have been taken out of those 19 securities, they are now down in capital, and they 20 have value to the company. 21 So, no, I don't disagree with the 22 statement; but there is more to it than what's 8526 1 spelled out here, I believe, if that's what the 2 June transaction is referring to. 3 Q. Well, just taking a look at the 4 mortgage-backed security portfolio -- and that's 5 what he's looking at here is you're looking at 6 what I think he calls them activity areas. Is 7 that what they are called? Activity centers? 8 A. Right. 9 Q. We're just looking at that activity 10 center right here. Right? 11 A. Without -- right. But that activity 12 center does not include the value of the gains 13 that were taken out of the portfolio as a result 14 of Peat Marwick coming back and saying "You need 15 to recognize those gains as opposed to deferring 16 them." 17 So, that is a pure accounting statement 18 with disregard to gains that are down in equity 19 and add value. 20 Q. Were sales made out of the 21 mortgage-backed security portfolio and gains 22 recognized in the June performance report of 1986 8527 1 that were not part of restatements ordered by 2 Peat Marwick? 3 A. I do not have information to be able to 4 tell you that. 5 Q. If the investment committee minutes 6 show that such gains were taken, do you have any 7 reason to dispute the accuracy of those investment 8 committee minutes? 9 A. I have no reason, no. 10 Q. Okay. So that this statement could be 11 accurate, to your knowledge? 12 A. It could be or couldn't be, to my 13 knowledge. You're right. 14 Q. But you indicated when you first -- 15 when I first read you this that the statement "The 16 most dramatic observation that is primarily as a 17 result of selling the mortgage-backed securities 18 in June" might be inaccurate? 19 A. If the June transaction is referring to 20 the Peat Marwick adjustment, yeah, I don't 21 necessarily agree with that statement. If the 22 June transaction is referring to some other gain, 8528 1 then it may be, in fact, true. 2 Q. Did Peat Marwick require a restatement 3 of the June financials, or was it of the April or 4 March 31st financials? 5 A. I don't recall when that took place. 6 Q. Now, do you have any reason to dispute 7 that due to the decline in interest rates, the 8 interest rate swaps, caps, and collars now cost 9 USAT about $42 million annually? 10 A. I don't have any reason to dispute 11 that. I don't know exactly what it means, but... 12 Q. Now, look at the first paragraph again 13 where it talks about that USAT is losing at a rate 14 of $77 million a year up from 40 million in 1985. 15 Do you see that? 16 A. Yes. 17 Q. Do you know what that was attributable, 18 to that increase? 19 A. No, I don't. 20 Q. Was that attributable primarily to the 21 drain that the swaps were causing because of the 22 decline in interest rates that were encountered by 8529 1 USAT? 2 A. I think I said I don't know. 3 Q. Now, I'd like to direct your attention 4 to the last part of the first page. It says 5 "Since the running rate number is so awesome in 6 itself and since a number of things are beyond our 7 control (e.g., the carry of goodwill and REO 8 problems), it is important that we continue to 9 push those things that will benefit the 10 association in the near term. In my opinion, they 11 are as follows: One, beginning January 1, add as 12 many mortgage-backed securities as Sandy Laurenson 13 can find (which would be hedged). This should be 14 done both within the liability growth limits of 15 the association as well as through our 16 newly-formed subsidiaries. The real tragedy here 17 would be if the investment bankers cut off our 18 credit." 19 Do you see that paragraph? 20 A. Yes. 21 Q. Now, do you know whether 22 mortgage-backed securities were purchased by Sandy 8530 1 Laurenson to add to USAT's and United MBS' 2 portfolios in 1987? 3 A. Without having information in front of 4 me to make that judgment, I can't tell you. 5 Q. You have no idea? 6 A. I don't know what Sandy's specific 7 activities were in 1987; so, I can't tell you. 8 Q. Would you have any reason to dispute 9 the accuracy of the investment committee minutes 10 if they reflected the purchases that were made by 11 Sandy Laurenson in 1987? 12 A. No. 13 Q. Then it says "The real tragedy here 14 would be if the investment bankers cut off our 15 credit." 16 Do you know what that refers to? 17 A. A lot of our securities were funded 18 with reverse repos through the various Wall Street 19 investment banking firms. And at some point, to 20 the extent that the association might have 21 earnings problems, they might not extend the 22 credit on the reverse repos that normally they 8531 1 would. 2 Q. Did USAT have earnings problems in 3 November of 1986? 4 A. I think up at the top it says we're 5 losing at a rate of $77 million a year. So, I 6 guess so. 7 Q. And you were losing at a rate of 8 $40 million a year in 1985. Right? 9 A. That's what this memo says. 10 Q. Do you recall whether or not the 11 reverse repo lenders were concerned about USAT's 12 financial condition? 13 A. I don't specifically remember anything, 14 no. 15 Q. Do you recall whether or not anyone 16 raised the question with USAT about its financial 17 condition with regard to financing reverse repos? 18 A. I'm sure it was raised, especially 19 later in -- probably 1988. But once again, I 20 don't remember any specifics related to that. 21 Q. Now, Item No. 2 says "Have Sandy 22 continue to seek ways to mitigate the cost of 8532 1 carry the interest rate swaps that now 2 approximates $42 million a year." 3 Do you see that? 4 A. Yes. 5 Q. Do you recall what that refers to? 6 A. No, I don't. You'd have to ask Sandy. 7 Q. Pardon? 8 A. You would need to ask Sandy. 9 Q. Uh-huh. I mean, you served on the 10 investment committee, did you not? 11 A. Yes. 12 Q. And Sandy Laurenson reported all of her 13 activities to the investment committee, did she 14 not? 15 A. Yes. 16 Q. And do you recall whether or not she 17 reported on gains that were taken periodically out 18 of the mortgage-backed security portfolios of USAT 19 and UMBS? 20 A. She reported on all activities of 21 mortgage-backed securities, gains as well as 22 losses. 8533 1 Q. Do you recall that she reported on 2 gains that were taken out of the mortgage-backed 3 security portfolios in USAT and UMBS was my 4 question? 5 A. I don't recall specifically Sandy 6 discussing anything. If it was in the minutes, it 7 was in the minutes and that's what she discussed. 8 But I can't specifically tell you at each and 9 every meeting what Sandy Laurenson discussed. 10 Q. Now, let me show you Exhibit T4320, 11 which is another Doug Hansen memo from the 12 strategic planning committee meeting notes of 13 December 17th, 1986. That is addressed to Charles 14 Hurwitz, Jenard Gross, Barry Munitz, 15 Jerry Williams, Mike Crow, Art Berner, and Bruce 16 Williams. It's at Tab 468. 17 MR. GUIDO: Ms. Clark, it's a one-page 18 document, as far as I understand. 19 MR. NICKENS: 569 is our tab reference. 20 MR. GUIDO: Sorry. 21 Your Honor, I apparently failed to move 22 into evidence T4304, which I'd like to do at this 8534 1 time which is -- 2 MS. CLARK: No objection. 3 THE COURT: T4304 is received. 4 MR. GUIDO: Thank you, Your Honor. 5 Q. (BY MR. GUIDO) Do you recall 6 receiving T4320? 7 A. Not specifically. But since my name is 8 on it, I assume I did. 9 Q. Now, look at Item No. 8. It says 10 "High-yield bonds. In quarter 1-'87, we should 11 grow with blank bonds 250 million phase in. Need 12 to look at blank and CD zeros. Need to decide 13 duration of funding. Economic spread to date has 14 been 323 basis points. This has been reduced to 15 228 on an accounting basis due to profit taking." 16 Do you see that? 17 A. Yes. 18 Q. Does that refresh your recollection 19 that the gains out of the high-yield bond 20 portfolio had the effect of reducing the yields on 21 that portfolio? 22 A. I mean, I can read the words here. So, 8535 1 I understand what they mean. I'm not sure I 2 understand your question. 3 Q. I asked you earlier whether the gains 4 that were taken out of the high-yield bond 5 portfolio had the effect of reducing the yield 6 going forward. 7 Do you recall that? 8 A. No. 9 Q. You don't recall that question? 10 A. (Witness shakes head negatively.) But 11 if you did and the numbers are accurate here, 12 that's what happened. 13 Q. Do you have any reason to dispute the 14 accuracy of this statement? 15 A. Without having any financial statements 16 in front of me, I have no way of forming an 17 opinion. 18 Q. Have you reviewed any financial 19 statements prior to your testimony today? 20 A. Not the financial statements that would 21 substantiate these types of numbers, no. 22 Q. Okay. Look at Item No. 9. "MBS. 8536 1 Should grow up to an additional 500 million in the 2 sub in 1987 with minimum" -- it looks like "108 3 basis point real spread. Economics spread to date 4 is 45 basis points. This will give an accounting 5 spread of" -- it looks like "108 basis points in 6 1987 due to profit taking." 7 Do you see that? 8 A. Yes. 9 Q. Do you know what that refers to? 10 A. No, I do not. 11 Q. Do you have any reason to dispute the 12 accuracy of that statement? 13 A. I have no basis to form an opinion of 14 that statement. 15 Q. Pardon? 16 A. I have no basis to form an opinion on 17 that statement. 18 Q. Now I'd like to have you take a look at 19 Exhibit A10726, which is the memorandum dated 20 February 20th, 1987, from Mike Crow to 21 Jenard Gross, which the subject is first quarter 22 1987 earnings. I don't think this document has 8537 1 been introduced into the record as yet. 2 MR. GUIDO: This document also has some 3 markings on it, and I will introduce this document 4 with the understanding that those documents are 5 not -- those markings are not being introduced as 6 part of the record. 7 MS. CLARK: No objection. 8 THE COURT: Received. 9 Q. (BY MR. GUIDO) Do you recall whether 10 or not you received a copy of this memorandum? 11 A. No, I do not. 12 Q. Take a look at the last two pages. 13 Those are Schedules 1 and 2 that are attached to 14 that. See the note, it says at the bottom 15 "Figures extracted from Schedule AB of the monthly 16 performance report" on the next-to-the-last page? 17 A. On the next-to-the-last page, yes, I 18 see that. 19 Q. You're the person that would have 20 supervised the preparation of the monthly 21 performance report? 22 A. I wrote the analytical cover memo for 8538 1 the monthly performance report. The actual 2 schedules, some of which I produced, some of which 3 came from accounting. 4 Q. Who sort of coordinated the assembly of 5 the monthly performance reports? 6 A. The financial planning and analysis 7 group. 8 Q. And who was that? 9 A. I did it at one time. Kurt Schwenkel 10 took it over from me when I hired him. 11 Q. And who did Kurt Schwenkel report to? 12 A. Me. 13 Q. Okay. So, it's either you or a person 14 who reported to you that pulled together the 15 material for the monthly performance report? 16 A. That would have assembled it, yes. 17 Q. Now, turning to the first page of the 18 exhibit, it says "USAT will need between 18 and 19 20 million in equity arbitrage profits and bond 20 gains for the months of February and March in 21 order to break even for the quarter." 22 Do you see that? 8539 1 A. Yes. 2 Q. Is that statement accurate? 3 A. I have no way of making a judgment on 4 that statement. 5 Q. Do you have any reason to dispute the 6 accuracy of the statement? 7 A. I have no basis for forming an opinion 8 on this statement. 9 Q. One way or the other? 10 A. One way or the other. 11 Q. Now, look at the second paragraph. "In 12 February, we have booked approximately 7.5 million 13 in profits for mortgage-backed security gains and 14 have recorded approximately $3.0 million in equity 15 arbitrage profits (net of cost of carry). With 16 the target for junk bond gains at 5.0 million to 17 7.5 million, we should fall comfortably within the 18 range of required gains necessary to break even." 19 Do you see that statement? 20 A. Yes. 21 Q. Is that statement accurate? 22 A. I have no basis for forming an opinion 8540 1 on it. 2 Q. Do you have any reason to assume that 3 it's not accurate? 4 A. I don't have the information or basis 5 to form an opinion one way or the other. 6 Q. Then the last paragraph says "My 7 suggestion is to stick with the 5- to 8 7.5-million-dollar target for junk bond gains and 9 continue to take mortgage-backed securities gains 10 as we can. Relook at the situation in early- to 11 mid-March and revise the targets if appropriate." 12 Does that reflect Mr. Crow's view that 13 gains should be taken out of the junk bond 14 portfolio and the mortgage-backed security 15 portfolio in order to meet net worth and income 16 targets for each quarter? 17 A. You would have to ask Mike Crow that. 18 Q. Reading the memorandum. You worked 19 with Mike Crow for how many years? 20 A. The five years I was there, but I 21 cannot put words into Mike Crow's mouth. So, your 22 interpretation of this is open just as it is to my 8541 1 interpretation of this. 2 Q. Some things just are facially clear. 3 And let me read you the first sentence, 4 Mr. Williams. It says, "USAT will need between 18 5 and 20 million in equity arbitrage profits and 6 bond gains for the month of February and March in 7 order to break even for the quarter." 8 What does "break even" refer to? 9 A. I can't even tell you that. 10 Q. You don't even know what "break even" 11 means? 12 A. Because there is GAAP accounting and 13 RAP accounting. So, I don't know which -- they 14 are different. You get different results. So, I 15 don't know specifically what he's even referring 16 to there. 17 Q. So, you don't know whether or not it's 18 talking about earnings at all? 19 A. Well, it's talking about earnings; but 20 whether it's talking about GAAP earnings or RAP 21 earnings, I don't know. Two different numbers. 22 Q. But is this talking about the need for 8542 1 profits from gains on sales of securities in order 2 to have the earnings break even for the quarter? 3 A. I believe that's what the words say, 4 yes. 5 Q. So, you don't dispute that if that's 6 what he's proposing? 7 A. That's what the words say, yes. 8 Q. Now, it talks about a target for junk 9 bond gains at 5 to 7.5 million. 10 Do you see that in the second 11 paragraph? 12 A. Yes. 13 Q. Okay. And it says "We should" -- "With 14 that, we should fall comfortably within the range 15 of required gains necessary to break even." 16 So, is that proposing sales of junk 17 bonds in order to meet an earnings break-even for 18 the quarter? 19 A. I don't know that it's proposing. It's 20 saying with the target, it would get you to break 21 even. You would have to ask Mike if this is a 22 proposal. It's a comment, to me. 8543 1 Q. Well, look at the last paragraph. I 2 mean, that's what I was asking about and 3 circuitously coming back to it. It says "My 4 suggestion is to stick with the 5 to 7.5 million 5 target for junk bonds." 6 That is Mike Crow making the 7 recommendation, isn't it? 8 A. That's what it says in the memo, yes. 9 Q. So, is it fair to assume from this 10 memorandum Mike Crow is proposing the sale of junk 11 bonds in order to meet quarterly targets for 12 earnings? 13 A. I think that's what the last two 14 sentences say, yes. 15 Q. Thank you. Now, let's move to the next 16 document, which is -- 17 MR. GUIDO: I'd like to move 10726 into 18 evidence, Your Honor. 19 THE COURT: I show it as already having 20 been received. 21 MR. GUIDO: I don't have a record of it 22 having already been in there. 8544 1 MS. CLARK: I believe you just offered 2 it, and it was received. 3 MR. GUIDO: I'm sorry. 4 Q. (BY MR. GUIDO) A10743 is a memorandum 5 dated March 6th, 1987, from Mike Crow to Bruce 6 Williams and Kurt Schwenkel, subject: Possible 7 moves to enhance capital position of USAT. 8 MR. NICKENS: Your Honor, I don't think 9 we have this on our pulls. Do we have it at 10 perhaps a different number than 10743? Oh, it's 11 10731. 12 MR. GUIDO: I'm sorry. 10731. It's 13 Exhibit 365 from the investigative phase, if that 14 helps. 15 MR. NICKENS: We have 10731. 16 Q. (BY MR. GUIDO) Is this a memorandum 17 from Mike Crow to Bruce Williams and Kurt 18 Schwenkel dated March 6th, 1987, subject: 19 Possible move to enhance capital position of USAT. 20 Do you recall receiving this 21 memorandum? 22 A. I don't specifically recall receiving 8545 1 this memorandum; but it has my name on it, so I 2 guess I did. 3 Q. You don't have any reason to dispute 4 that you received the memorandum? 5 A. No. 6 Q. It says "Please investigate the 7 following scenario. USAT arranges to place 8 $500 million of 'Joe Phillips' old portfolio' in 9 United MBS. This would be done prior to 3-31-87. 10 On the surface, it appears the net result would 11 be, one, a reduction in the gap position of USAT 12 by 500 million less assumed prepayments/payoffs; 13 two, shrinkage of the association's balance sheet 14 which would result in a lower base factor for 15 capital calculation (I believe we would receive 16 3 percent credit on 500 million, therefore, our 17 capital requirement would decline by 15 million). 18 This latter point may really help us out for the 19 quarter ended 6-30-87 since we have a low maturity 20 matching credit at that date." 21 Do you recall discussing with Mike Crow 22 the shifting of mortgage-backed securities from 8546 1 the Joe Phillips old portfolio to United MBS? 2 A. No. I assumed we had a discussion 3 about this, but I don't remember specifically 4 discussing this. 5 Q. Then the next sentence says "This move 6 would impair our 60 percent thriftness test." 7 Do you see that? 8 A. Yes. 9 Q. Do you know why that would be? 10 A. Because you're moving qualifying 11 assets. 12 Q. Then it says "Perhaps we could elect to 13 make this move and add mortgage-backed securities 14 back into USAT, say, on 12-1-87 in order to meet 15 the 60 percent test. 16 Do you see that? 17 A. Yes. 18 Q. Do you remember my question of whether 19 or not the thriftiness or the qualified thrift 20 lender test had to be met quarterly or yearly? 21 A. Yes. 22 Q. Does this refresh your recollection of 8547 1 what that time frame was based on your 2 understanding? 3 A. No. I still don't know whether it had 4 to be quarterly or yearly. I don't know what the 5 regulation was. 6 Q. Now, the last paragraph says "There 7 would be a number of technical problems involved 8 with this move, but it probably is not that big a 9 deal. I do not believe we can transfer the 10 securities directly from USAT to the sub. We 11 would have to sell the securities and buy them 12 back at the sub level." 13 Do you see that? 14 A. Yes. 15 Q. Is that your understanding of what had 16 to be done if you were going to transfer 17 mortgage-backed securities from USAT to UMBS at 18 the time? 19 A. That's what Mike Crow was saying he 20 thought might have to be done. I don't know what 21 would have to be done or how the transaction could 22 be executed. 8548 1 Q. Then it says "We would also need to 2 inform our creditors on Wall Street, but I do not 3 believe they will have a big problem since they 4 are already extending reverse repo credit to USAT 5 for these securities and they would just simply be 6 giving credit to USAT/MBS." 7 Do you know what that refers to? 8 A. It just refers to the fact that reverse 9 repos would be with United MBS rather than USAT, 10 and I think it's pretty clear. 11 Q. Do you recall whether or not there 12 is -- a question ever arose with regard to whether 13 the reverse repo lenders for the mortgage-backed 14 securities that were included in the United MBS 15 portfolio were extending credit based on the 16 financial position of USAT and not solely United 17 MBS? 18 MR. NICKENS: Your Honor, before we 19 leave this document, there is one line and I would 20 ask that it be read into the record, which is 21 "Please get back to me with your plan of action or 22 tell me that this is a dumb idea." 8549 1 MR. GUIDO: No objection, Your Honor. 2 THE COURT: I think you'd better 3 restate your question. 4 Q. (BY MR. GUIDO) Do you recall whether 5 the question ever arose with regard to whether the 6 reverse repo lenders were willing to extend credit 7 for the purchase of United MBS -- for the purchase 8 of MBSs to be held by United MBS based on the 9 credit of USAT and not just the credit of the 10 United MBS? 11 A. I don't believe so. 12 Q. You don't believe so, or you don't have 13 any recollection one way or the other? 14 A. I don't have any recollection. 15 Q. Pardon? 16 A. I don't have any recollection. 17 Q. Do you have any -- if documents would 18 indicate that the reverse repo lenders had raised 19 a question, would you have any reason to doubt the 20 accuracy of those documents? 21 A. Depending upon who produced the 22 documents and what their source was, I may or may 8550 1 not. I don't know who prepared the documents or 2 what they are referring to. So... 3 Q. I'd like to direct your attention to 4 Exhibit A10624, which is a memorandum dated 5 4-21-87. It's a memorandum from Michael Crow to 6 Charles Hurwitz and Jenard Gross dated April 21st, 7 1987. 8 MR. GUIDO: I'd like to move the 9 admission of Exhibit A10624, Your Honor. 10 MS. CLARK: No objection. 11 THE COURT: Received. Did you move the 12 previous A10731? 13 MR. GUIDO: Apparently I have not, Your 14 Honor. I move 10731 into evidence. 15 MS. CLARK: No objection. 16 THE COURT: Received. 17 Q. (BY MR. GUIDO) Now, turning to 18 A10624, do you see the reference to a Ken Sullivan 19 in the first line there? 20 A. Yes. 21 Q. Who was Ken Sullivan? 22 A. I don't recall. I don't know that I 8551 1 know or ever heard the name Ken Sullivan. 2 Q. Did you ever attend any presentations 3 by investment bankers regarding mortgage-backed 4 securities at USAT? 5 A. Yes. I'm sure I did. 6 Q. And was one of those lenders Drexel 7 Burnham Lambert? 8 A. Could have been. I think we talked to 9 all of them. 10 Q. Pardon? 11 A. We pretty much talked to all of them, 12 so -- 13 Q. You don't recall, though? 14 A. Could have been any or all of them. 15 Q. Now, look at the Item No. 1 summarizing 16 the conversation with Ken Sullivan. It says "His 17 specific recommendations are as follows: Purchase 18 mortgage-backed securities and hedge the interest 19 rate risk using interest rate swaps up to 20 80 percent of the mortgage balance. Ken would 21 recommend coupon ranges of 9 to 9 and a half for 22 80 percent of the portfolio and 12 percent and up 8552 1 for 20 percent of the portfolio. When asked about 2 the trap we have been into before by adding 3 mortgages against interest rate swaps in the case 4 of potential rapid prepayments, Ken stated that 5 this was the reason for only an 80 percent hedge." 6 Do you see that? 7 A. Yes. 8 Q. Do you know what the reference to "the 9 trap we have been into before by adding mortgages 10 against interest rate swaps"? 11 A. You would have to ask Mike. I don't 12 know what he means by that term. 13 MR. GUIDO: I'd like to move to the 14 next -- 15 THE COURT: Mr. Guido, how much more -- 16 MR. GUIDO: I have one more document, 17 Your Honor, in this group and then I will be 18 finished with this group of documents. 19 THE COURT: All right. 20 Q. (BY MR. GUIDO) It's Document T4364, 21 which is a memorandum from Michael Crow to Charles 22 Hurwitz, Jenard Gross, Barry Munitz, and Art 8553 1 Berner. 2 MR. GUIDO: I move the admission of 3 T4364, Your Honor, which is a handwritten cover 4 memo and then it's a memo dated 5-1-87 with the 5 heading "United Financial Group restatement and 6 overview of the problem." 7 MS. CLARK: No objection. 8 THE COURT: Received. 9 Q. (BY MR. GUIDO) Did you ever see any 10 of the pages of this document before? 11 A. Not that I specifically remember, no. 12 Q. Was this one of the documents that 13 Mary Clark showed you when you reviewed documents 14 with her? 15 A. I don't believe I've seen this before, 16 no. 17 Q. Now, I'd like to direct your attention 18 to the page that has the imaging number on the 19 left-hand side on the bottom OW011373. 20 MR. NICKENS: Your Honor, our copies -- 21 we have several copies of this document. And if 22 we could identify it in a different way, it would 8554 1 help us follow along. For example, mine -- my 2 imaging number is 11620 through 24. If you just 3 give me another reference, I can -- 4 MR. KEETON: Is it a page? 5 THE COURT: We'll be off the record for 6 a moment. 7 8 (Discussion off the record.) 9 10 THE COURT: Back on the record. 11 Q. (BY MR. GUIDO) Take a look at the 12 second page of this packet of materials, which is 13 the first page of the memo that says 14 "United Financial Group, restatement and overview 15 of the problem." It has the date 5-1-87 at the 16 top. 17 The first paragraph says, "UFG cannot 18 attain operational profitability because of the 19 basic structural problem of an enormous position 20 in assets that earn no current return. This 21 results from a poor real estate market in the 1983 22 Houston First acquisition (the goodwill to 8555 1 acquired assets deposits ratio of this acquisition 2 was 22 percent)," close paren, period. 3 Do you see that? 4 A. Yes, I see that. 5 Q. Does that conform to your recollection 6 of the status of the situation in May of 1987 at 7 USAT? 8 A. I don't know that I have the financial 9 information in front of me to confirm one way or 10 the other. 11 Q. Okay. Do you have any reason to deny 12 the accuracy of this statement? 13 A. I don't believe so. 14 Q. Okay. Now, the -- look the first page 15 of the memo. It says "Attached are a few overview 16 comments related to this strategic planning 17 committee Monday." 18 Do you see that? 19 A. Yes. 20 Q. And is that the strategic planning 21 committee that you participated in its meetings? 22 A. I believe so. 8556 1 Q. Okay. Then let's take a look at the 2 very last page of the document, which is OW011375 3 on the document that I've moved to be introduced 4 into the record. And look at the discussion with 5 regard to growth. It says "The second 6 alternative, adding assets, has many problems. 7 First, our options for profitable growth appear 8 very limited by capital constraints and regulatory 9 realities. The alternative that is possible is 10 further expansion of United MBS. Among others, 11 the following issues have to be addressed before 12 expansion can take place: 1, interest rate risk 13 of mortgage-backs is very high and to achieve 14 significant spreads, cannot be hedged away. 15 Mark-to-market losses are a real possibility." 16 Do you see that reference? 17 A. Yes. 18 Q. Do you agree with that statement? 19 A. Yes. 20 Q. Okay. Then, 2, "An almost, quote, 21 black box lack of understanding of these 22 securities. This area is very complex and is 8557 1 obviously not mastered by the Wall Street firms. 2 It is naive to think UFG is on a parody level of 3 understanding with Wall Street." 4 Do you see that statement? 5 A. Yes. 6 Q. Do you agree with that statement? 7 A. Not necessarily. 8 Q. Why not? 9 A. I don't know that we weren't on parody 10 with Wall Street. I don't know that Wall Street 11 necessarily understood these securities. 12 Q. Well, let me ask you this question: 13 Take the first sentence. It says "The following 14 issues have to be addressed: An almost black box 15 lack of understanding of these securities." 16 Do you agree with that statement? 17 A. No. 18 Q. No? Why not? 19 A. Just my personal opinion. I don't 20 think it was as mysterious as black box. I think 21 they were very complex, but -- 22 Q. Well, let's take the second sentence. 8558 1 "This area is very complex and is obviously not 2 mastered by the Wall Street firms." 3 Do you agree with that statement? This 4 is as of May 1st, 1987. 5 A. Generally, yes. I mean, that's kind of 6 a very global statement; but ... 7 MR. GUIDO: Your Honor, I'm finished 8 with this segment for today and I'm ready to move 9 into a new subject matter or new area. 10 THE COURT: All right. There was 11 something said this morning about discussing 12 scheduling. Do you want to do that now? 13 MR. GUIDO: We can excuse the witness 14 for the day and start with him again at 9:00 a.m. 15 and then we'll discuss the schedule. 16 THE COURT: All right. 17 MR. GUIDO: Thank you. Your Honor, 18 here's my understanding of where matters stand: 19 That on February 27th, Mr. Nickens has a trial 20 that begins and will last between three and four 21 weeks. That will then carry over beyond a trial 22 date that Mr. Villa has that starts March 3rd, and 8559 1 that will go for six to eight weeks so that 2 Mr. Nickens is not available, given just trial 3 time, February 27th through approximately 4 March 10th and that Mr. Villa is not available 5 from March 3rd through April 15th. So that 6 February 27th, one or the other of them will not 7 be available through April 15th and that both of 8 them will not be available from March 3rd until 9 March 10th so that that period of time they both 10 have other commitments. 11 In addition, Mr. Villa has a trial 12 that's scheduled to start June 15th and run for 13 two to three weeks so that that would take it 14 through the first week in July, assuming that that 15 time schedule is adhered to. That leaves time, 16 depending on what happens with the first trial 17 that Mr. Villa has, between April 15th and 18 June 15th where there is a possible chunk of time 19 for us to reconvene. 20 In addition, there appears to be a 21 period of time from the beginning of February -- I 22 think it's February 2nd -- through the week of the 8560 1 19th of February where there is time available, 2 depending on other scheduling problems. 3 In January, it's not clear to me what 4 the status is in January, Your Honor. There are 5 depositions that are scheduled. I think that 6 Mr. Nickens and I talked about depositions that he 7 had that were scheduled for the 12th -- is that 8 right -- the week of the 12th? 9 MR. NICKENS: Your Honor, the 10 depositions are currently scheduled for the week 11 of the 5th, but there are ongoing discussions to 12 move it to the week of the 12th, which I believe 13 will be done in order to accommodate both the 14 witnesses who are coming back from the holidays 15 and, frankly, my own schedule so that I can 16 prepare during that week of the 5th for the 17 depositions that are to occur during the week of 18 the 12th. 19 MR. VILLA: Your Honor, let me make my 20 schedule in January clear. I have a deposition -- 21 multi-day deposition starting on the 8th of 22 January, which is the middle of the second week, 8561 1 and another deposition starting on the 21st of 2 January, which is the middle of the -- essentially 3 the fourth week, and another deposition that is 4 being scheduled now for the 27th of January. 5 In addition, while I think it may be 6 appropriate for me to make a few comments about 7 the timing of these trials, while I'm sure that 8 Mr. Guido has high regard for my trial skills, 9 finishing an eight-week trial, six- to eight-week 10 criminal jury trial and then jumping into some 11 additional time and moving to another trial, 12 another jury trial in Federal District Court, both 13 of which were moved to accommodate this case, is 14 more than one can reasonably ask. I have been -- 15 I think the respondents have been very patient at 16 the pace that the OTS has taken here. But by the 17 same token, I don't think that we should be 18 prejudiced by sitting back and allowing that to 19 occur so that they bump us up into other trials. 20 All of our trials were moved to accommodate this 21 case, and we have tried to accommodate this case. 22 But when this case runs as long as it has, to put 8562 1 us in the position where we are unable to fairly 2 prepare for either existing trials or for this one 3 is, I would submit, unfair. 4 I have contacted my opposing counsel 5 for the June 15th trial as I told the Court I 6 would. And I have asked him whether he would 7 agree to go with me to that federal judge to move 8 that trial so as to accommodate resuming this 9 trial several months earlier than it might 10 otherwise be able to be accommodated. And he has 11 agreed -- I'm sorry -- he is talking to his client 12 now. I spoke to him again this morning. 13 May I suggest, Your Honor, 14 respectfully, that we are going to be at 12 weeks 15 of this trial fairly soon. We have really no idea 16 when the OTS is going to complete their case. So, 17 trying to shoehorn in a week or two weeks or even 18 three weeks at this point which would have a 19 detrimental effect on the presentation of the 20 defense where we're really going to be put to our 21 burden doesn't make any sense. 22 THE COURT: I agree with that, and I 8563 1 was going to say that. I don't want to stick a 2 week or two in here and there. I'd like to have a 3 block of time that we could finish this thing. I 4 think that's more economical. I mean, the dates 5 you're suggesting runs all over stuff I have 6 scheduled which I said I would try to change. But 7 if it's only going to be for a week or so, I don't 8 think it makes any sense. 9 MR. GUIDO: Your Honor, it seems to 10 me -- depending on what happens in January, 11 because I think the schedules are still being set 12 there -- but it seems to me that putting January 13 aside because I haven't been able to get a handle 14 on January, it looks like there could be up to 15 three weeks from the last part of January through 16 February. Mr. Nickens' trial doesn't start until 17 the 27th. So, it seems to me that there is a 18 block there and then there is a block -- and I 19 don't know how much time you want to use, but 20 there is a block from April 15th through June 15th 21 that we could use to reconvene. 22 MR. NICKENS: Well, let me correct one 8564 1 impression there. My trial is scheduled to start 2 at any point in time beginning February 23rd. 3 It's on a two-week rolling docket. The judge has 4 given us a preferential setting; but if he has a 5 carry-over from his prior two-week docket, we 6 might not get started until the middle of that 7 week of the 23rd, or we might be called to trial 8 on the 20th and said that we are going to start on 9 the 23rd. I simply -- it's not an 10 earth-shattering case, although it's very 11 important to the client. But I couldn't be 12 subject to call in this case for the first two 13 weeks of February and reasonably prepare to go to 14 trial on February 23rd. 15 We've got discovery that has been moved 16 to accommodate our best estimates of what we were 17 having here, and the case will be tried. I do not 18 expect -- I know it will not settle, and I do not 19 expect it to be moved. And so, I simply am unable 20 to be available during January or February 21 consistent with the commitments I have made to my 22 client and to the Court in that case. I just 8565 1 can't do it. 2 THE COURT: Well, there is another OTS 3 case that I have beginning about the 18th of 4 February. And it's my understanding OTS doesn't 5 want that postponed. 6 MR. GUIDO: Your Honor, I have no idea 7 what the status of that matter is. I was just 8 told what the schedule was. Is that the Henderson 9 case? 10 THE COURT: Yes. 11 MR. GUIDO: I thought there might be 12 some flexibility there if we needed some 13 flexibility with that, depending on Your Honor's 14 schedule. 15 THE COURT: Well, it sounds like 16 respondents may have a conflict. My preference 17 would be, even if it's several months, that we set 18 aside the time that it takes to finish this case 19 and we go uninterrupted. I agree with Mr. Villa's 20 comments, that to stick a week in or two weeks in 21 here doesn't -- 22 MR. GUIDO: If that's the case, then 8566 1 we're talking sometime in July. I mean, if we -- 2 if that June 15th date is what we're talking 3 about, I think I need to discuss this with 4 Mr. Stearns and we may have to make a written 5 motion to you with regard to the schedule if 6 that's the case, because I don't think that 7 Mr. Stearns is going to be willing to agree to put 8 this off until July, if that's the case, Your 9 Honor. And I think we'll want to make a written 10 motion. 11 THE COURT: Well, as I understood, 12 there is some possibility that we could go in 13 June? 14 MR. VILLA: If I could move my June 15 trial, and I will undertake to and I have 16 undertaken to try and do that. I will say, you 17 know, again, we're in a situation where we are 18 working against a black box here. We don't even 19 know when the OTS -- how many more weeks that the 20 OTS expects to go. So, we don't know how big the 21 window is we're supposed to have to fill. If I 22 may I inquire of Mr. Guido while he's standing 8567 1 here how many more weeks the OTS case is expected 2 to take. 3 MR. GUIDO: Well, as I've indicated to 4 you, Mr. Villa, a lot of this depends on what we 5 have to do with regard to the supervisory people 6 or the examiners and what we had to do with the 7 respondents. Given this witness' testimony today, 8 I do think that Mr. Crow is probably going to be 9 on the stand for a great deal of time so that we 10 are looking probably at three weeks, anyway, in 11 terms of going forward, maybe four weeks, in terms 12 of us presenting our side of the case. 13 THE COURT: Is that beyond the 14 scheduled time now? 15 MR. GUIDO: Beyond the scheduled time 16 now, Your Honor. 17 MR. VILLA: See, Your Honor. We're at 18 16 weeks for the government -- for the OTS case. 19 And under the circumstances, 16 weeks for a direct 20 case is numbing to the mind, but it also has 21 the -- you'll have to give us a reasonable period 22 of time to respond to a case of that length. So, 8568 1 we're looking for a huge window of time. 2 MR. GUIDO: I raised an alternative 3 with opposing counsel, Your Honor, which we could 4 think about which would have the possibility of 5 shortening this. The respondents have indicated 6 that they have a great deal that they want to do 7 with the respondents and also with the supervisory 8 people. I'll need to raise this with Mr. Stearns 9 again, but one of the options would be for the 10 respondents to put on the examiners and the 11 respondents, with the agreement that they will do 12 so. If they don't do so, I would have the ability 13 to call those people myself, and that I would 14 restrict myself to cross-examination of those 15 individuals. At one point in time, counsel for 16 respondents had indicated that that was acceptable 17 to them. I don't know what the status is, and I 18 haven't been able to have a full discussion with 19 Mr. Stearns to see whether or not that's 20 acceptable to the OTS. But that is one way for us 21 to have an effective cutting back the amount of 22 time that's needed. 8569 1 MR. NICKENS: We did offer, and would 2 continue to offer to call the respondents in our 3 case and, in addition, to call Mr. Twomey. There 4 is some question about whether the two other 5 principal examiners would need to be called -- 6 that is, Ms. Carlton and Brenda Veis. 7 MR. VILLA: Ginger Baugh. 8 MR. NICKENS: Ginger Baugh. Excuse me. 9 But, you know, again, that's subject to 10 discussion. We do think that it would be 11 advantageous to everyone to at least get the 12 government's case closed so that we could then 13 reasonably estimate what our response would 14 require. At this point, it's like pulling on a 15 piece of string. We just don't know how long it 16 will go. 17 THE COURT: What is the problem -- 18 Mr. Guido has indicated a window in the beginning 19 of April. And that's a problem? 20 MR. NICKENS: Your Honor, we've run 21 into the possible problem that if Mr. Villa's 22 trial went the full length, that he would not 8570 1 be -- we could schedule it, but then we would run 2 the possibility that he wouldn't be finished 3 beginning in that April time frame. And in an 4 eight-week trial, jury trial, it inevitably occurs 5 that someone gets ill, someone's relative dies. 6 There are delays that we wouldn't want to cut it 7 that close. 8 MR. VILLA: I think we've seen the 9 example in this case. This was estimated to be an 10 eight-week case that we blocked out a 12-week 11 window for, and we're now looking at 16 weeks for 12 the OTS case. Presumably, the other case would be 13 more accurately estimated by the government. But 14 if it's not the case, we're going to have all 15 these people coming together. So, it would be my 16 suggestion -- my suggestion is that I report back 17 to the Court. I've called my opposing counsel 18 twice in the last 24 hours. I'll be prepared to 19 call him again to see whether I can get some 20 agreement to try to move the June trial. If we 21 could move the June trial, then we can schedule 22 this comfortably to accommodate the conclusion of 8571 1 the other -- the trials that Mr. Nickens and I 2 have and, consistent with the Court's docket, set 3 it sometime in, say, mid, late May, early June, 4 something like that and then we would have an idea 5 of the length of time we needed to try the case. 6 And I would also share Mr. Nickens' 7 response to Mr. Guido that he says that sometimes 8 we've agreed with that proposition. At all times, 9 we've agreed with that proposition. But it would 10 give us an opportunity to have a better 11 segmentation of the case and understand how long 12 their case is going to go, when it's over with, 13 and when ours is to start. 14 So, I think, nevertheless, if we accept 15 a proposal that Mr. Guido just made here, does 16 that mean their case would close before 17 December 19? And if it does, that will give us an 18 opportunity to estimate the length of our case. 19 MR. GUIDO: I'm not going to commit to 20 December 19th closing the case for the government. 21 THE COURT: All right. Well, let's 22 just defer it until Mr. Villa finds out what's 8572 1 available, and it looks to me like that's the date 2 we're looking at. 3 MR. GUIDO: I do have a proposal, Your 4 Honor, with regard to this. And I need to talk 5 about whether or not we're going to make a motion 6 with regard to anything before the Henderson 7 matter. And a lot of this depends on when the 8 discovery schedules are firmed up by opposing 9 counsel. But with regard to the May through June 10 window, which is a two-month window, the way I see 11 it, I don't see why we can't block out that period 12 of time with the understanding that we may have to 13 roll the date back if this six- to eight-week 14 trial that Mr. Villa's talking about goes the full 15 six weeks or beyond. I originally heard about 16 this as a six-week trial which may get extended 17 eight weeks because of the usual problems that you 18 have with jury trials. It is now going 12 weeks 19 and possibly much longer than that based on this. 20 But it seems to me that we could block out the 21 time between April 15th and June 14th tentatively 22 with the understanding that we may have to move 8573 1 the starting date back and continue -- 2 THE COURT: Back to when? 3 MR. GUIDO: Moving it forward, further 4 in the future, depending on what happens in 5 Mr. Villa's trial. But I'll talk more with 6 Mr. Stearns and with opposing counsel and 7 hopefully we can come up with something. 8 THE COURT: If this trial of 9 Mr. Villa's goes on June the 2nd, it seems to me 10 we are looking toward a later date. But I hope 11 that we can get that -- 12 MR. GUIDO: I think the date was 13 June 15th. 14 MR. VILLA: June 15th, Your Honor. But 15 nevertheless -- 16 MR. GUIDO: Which does leave eight 17 weeks in between the tentative closing of one 18 trial and the start of another trial. 19 THE COURT: We'll adjourn until 20 9:00 o'clock tomorrow morning. 21 (Whereupon at 5:09 p.m. 22 the proceedings were recessed.) 8574 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 2nd 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 8575 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 2nd 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