23791 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 SEPTEMBER 23, 1998 22 23792 1 A-P-P-E-A-R-A-N-C-E-S 2 ON BEHALF OF THE AGENCY: 3 KENNETH J. GUIDO, Esquire Special Enforcement Counsel 4 PAUL LEIMAN, Esquire SCOTT SCHWARTZ, Esquire 5 BRUCE RINALDI, Esquire RICHARD STEARNS, Esquire 6 and BRYAN VEIS, Esquire 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 13 DALE A. HEAD (in-house) 14 Managing Counsel MAXXAM, Inc. 15 5847 San Felipe, Suite 2600 Houston, Texas 77057 16 (713) 267-3668 17 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO. AND CHARLES HURWITZ: 18 RICHARD P. KEETON, Esquire 19 KATHLEEN KOPP, Esquire of: Mayor, Day, Caldwell & Keeton 20 1900 NationsBank Center, 700 Louisiana Houston, Texas 77002 21 (713) 225-7013 22 23793 1 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO., CHARLES HURWITZ, AND MAXXAM, INC.: 2 JACKS C. NICKENS, Esquire 3 of: Clements, O'Neill, Pierce & Nickens 1000 Louisiana Street, Suite 1800 4 Houston, Texas 77002 (713) 654-7608 5 ON BEHALF OF JENARD M. GROSS: 6 PAUL BLANKENSTEIN, Esquire 7 MARK A. PERRY, Esquire of: Gibson, Dunn & Crutcher 8 1050 Connecticut Avenue, N.W. Washington, D.C. 20036-5303 9 (202) 955-8500 10 ON BEHALF OF BERNER, CROW, MUNITZ AND HUEBSCH: 11 JOHN K. VILLA, Esquire MARY CLARK, Esquire 12 PAUL DUEFFERT, Esquire of: Williams & Connolly 13 725 Twelfth Street, N.W. Washington, D.C. 20005 14 (202) 434-5000 15 OTS COURT: 16 HONORABLE ARTHUR L. SHIPE Administrative Law Judge 17 Office of Financial Institutions Adjudication 1700 G Street, N.W., 6th Floor 18 Washington, D.C. 20552 Jerry Langdon, Judge Shipe's Clerk 19 REPORTED BY: 20 Ms. Marcy Clark, CSR 21 Ms. Shauna Foreman, CSR 22 . 23794 1 2 INDEX OF PROCEEDINGS 3 Page 4 NEIL TWOMEY 5 Continued Examination by Mr. Nickens....23795 6 Examination by Mr. Villa................23992 7 . 8 . 9 . 10 . 11 . 12 . 13 . 14 . 15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . 23795 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:00 a.m.) 3 THE COURT: Be seated, please. We'll 4 be back on the record. 5 Mr. Nickens, you may continue with your 6 cross-examination. 7 MR. NICKENS: Thank you, Your Honor. 8 9 CONTINUED EXAMINATION 10 11 Q. (BY MR. NICKENS) Mr. Twomey, are you 12 prepared to resume your testimony? 13 A. Yes. 14 Q. Have you done anything -- 15 THE COURT: Excuse me. Would you 16 remove that? 17 THE WITNESS: I'm sorry. 18 Q. (BY MR. NICKENS) Have you done anything 19 overnight to prepare for your testimony? 20 A. No. 21 Q. Read any documents? 22 A. No. 23796 1 Q. Review your deposition? 2 A. No. 3 Q. Talk to anyone about what might come 4 up? 5 A. The only conversation I had was with 6 Mr. Villa. 7 Q. Now, yesterday we had sort of jumped 8 forward in time; and we were talking about the 9 time period in September of 1988 dealing with the 10 Pear II-B plan. 11 Do you recall that? 12 A. Yes. 13 Q. I would like to -- I don't think we've 14 explained what the Pear II-B issues were and how 15 that came about. So, I would like to step back, 16 if I might, and look at some of the decisions you 17 made about USAT concerning their supervisory 18 history. And if we could, I would like to start 19 out with a document that you have seen before at 20 Exhibit A11160, Tab 1861. And that is the 21 May 27th memo from Ginger Baugh to you concerning 22 United Savings Association of Texas and the 23797 1 Southwest Plan. I'm sorry. I misspoke. It's 2 from you and Ms. Baugh to the file. 3 I believe you've testified that you 4 helped prepare this document, correct? 5 A. Yes. 6 MR. RINALDI: Can you give us a date on 7 it? Is this the one I showed him yesterday, May 8 the 27th? 9 MR. NICKENS: 1988. 10 MR. RINALDI: Can you give me a moment? 11 Q. (BY MR. NICKENS) Now, Mr. Twomey, USAT 12 had been under very close scrutiny for a long 13 time, had they not? 14 A. Could you define "close scrutiny"? 15 Q. I'm using the term that is found in 16 probably 50 or 60 of your regulatory documents. 17 How would you define it? 18 A. We were monitoring their financial 19 reports and results. 20 Q. That's what you would define as "close 21 scrutiny"? 22 MR. RINALDI: He said it appeared in a 23798 1 bunch of documents that he drafted. If he could 2 show him a document where it appears, then perhaps 3 he could within the context of that document 4 define the term. 5 MR. NICKENS: Your Honor, I appreciate 6 the advice from Mr. Rinaldi; but I would prefer 7 not to stop here and go through 50 documents to 8 establish a point that we ought to be establish 9 from the testimony of the witness. 10 Q. (BY MR. NICKENS) Do you understand the 11 term "close scrutiny"? 12 A. I believe I've already answered the 13 question. Close scrutiny could include the review 14 of the -- the active review of all their financial 15 filings with us, review of all the correspondence 16 with us, trying to keep up to date with all the 17 recent activities as best we could. 18 Q. Well, what did it mean in connection 19 with USAT? 20 A. It meant, again, reviewing their TFRs, 21 reviewing the examination reports, reviewing all 22 the correspondence, reviewing any and all 23799 1 applications, honoring their requests for 2 meetings, you know, reacting to their -- anything 3 that they may want us to do or consider. 4 Q. And they were receiving close scrutiny 5 because of Mr. Hurwitz and the extent of their 6 junk bond activities? 7 A. Well -- 8 MR. RINALDI: Could we get -- 9 A. Could you point out the paragraph 10 you're reading that from? 11 MR. RINALDI: Could we get a time frame 12 on this, Your Honor? 13 MR. NICKENS: How about 1986, 1987, or 14 1988. 15 A. Well, you're referring to this memo. I 16 would like to see the document you're referring 17 to. 18 Q. (BY MR. NICKENS) I will give you 19 another document, Mr. Twomey. Could you look at 20 Exhibit A11084 and Exhibit A12187? 11084 is 21 Tab 11 -- 22 MR. RINALDI: Could you give us a date? 23800 1 MR. NICKENS: Your Honor, I would 2 appreciate it if we could -- 3 MR. RINALDI: Your Honor, here's the 4 problem. The tabs have not been brought up to 5 date. So, if he gives me a number, I have no idea 6 what that refers to. If he gives me a date, I can 7 probably locate it chronologically. That's all. 8 MR. NICKENS: If Mr. Rinaldi could 9 address his questions to the Court as I will try 10 to address the Court as well. And I will try to 11 give the information on a timely basis so we can 12 all have the documents in front of us. I would 13 prefer not to have my examination interrupted by 14 his questions directed to me. 15 THE COURT: All right. Let's wait a 16 little bit, Mr. Rinaldi, and see whether we can 17 identify the documents that are being identified. 18 Q. (BY MR. NICKENS) Now, Mr. Twomey, do 19 you have Exhibit 11084 in front of you? 20 A. Yes, I do, sir. 21 Q. Tell us what it is. 22 A. Again, this is a quarterly summary of 23801 1 USAT that was prepared for -- internally for the 2 staff, and attached to it is what we call an SSC. 3 Q. And this is something Mr. Rinaldi asked 4 you about yesterday? 5 A. I believe so, sir. 6 Q. And under the first paragraph on the 7 comments on the first page, there is a reference 8 to Mr. Hurwitz and a Congressional subcommittee 9 chaired by Congressman Dingell? 10 A. Yes. 11 Q. It goes on to say, "Therefore, United 12 has come under close scrutiny because of 13 Mr. Hurwitz and because of the extent of United's 14 junk bond activities." 15 Do you see that? 16 A. Yes. 17 Q. Now, is that close -- 18 MR. RINALDI: Excuse me. If it please 19 the Court, could I have the date of the document 20 so I can see what we're reading from? 21 THE COURT: Well, this is 22 Exhibit A11084; and it's dated October the 1st, 23802 1 1987. 2 MR. RINALDI: Thank you. 3 THE COURT: Do you have it, 4 Mr. Rinaldi? 5 MR. RINALDI: Yes, I do. I have it in 6 front of me. 7 THE COURT: All right. Proceed. 8 Q. (BY MR. NICKENS) Mr. Twomey, is the 9 close scrutiny referred to in the exhibit the 10 close scrutiny of the Bank Board; or was it 11 referring to the Congressional committee? 12 A. Referring to the Congressional 13 committee. 14 Q. And the Congressional committee was 15 looking at USAT because of their junk bond 16 activities? 17 A. Well, what the committee's 18 investigators told me is they were looking at 19 Mr. Hurwitz' connection with Mr. Milken, the junk 20 bond trades that were being made with Drexel, and 21 the possible use of USAT assets to help 22 Mr. Hurwitz acquire other entities. 23803 1 Q. And you looked into those issues at the 2 request of this Congressional committee, didn't 3 you? 4 A. Well, we -- if somebody from that 5 Congressional committee or another committee made 6 a request, we would act on it and give that 7 information and forward it up through channels 8 back to Washington and eventually to that 9 committee. 10 Q. Did you ever find any information to 11 support those claims? 12 A. They were asking for information on 13 what securities might they have at a certain time 14 and so forth. I wasn't investigating. I was just 15 getting information and passing it on. 16 Q. Wasn't the Southwest Plan examination 17 specifically directed toward those questions? 18 A. It wasn't specifically addressing those 19 questions. The Southwest Plan examination was to 20 get a determination of the capabilities of 21 management, the strength and weaknesses of the 22 institution primarily. 23804 1 Q. Well, did you ever find any information 2 to support the questions that you had been asked 3 to look into concerning this Congressional 4 investigation? 5 A. Well, we did get the information the 6 committee requested and forwarded it on; but it 7 was simply a matter of fact -- gathering facts and 8 giving it to the committee. We didn't do an 9 investigation. If we became aware of some type of 10 violation, we would have made a criminal referral. 11 Q. And that would have been included in 12 the documentation of the supervisory history, 13 correct? 14 A. It would have been noted someplace. 15 Q. Now, it's indicated in Exhibit A11084 16 that all information requested in relation to this 17 investigation is being relayed through the office 18 of Joe Selby. 19 A. That's right. 20 Q. Why was that? 21 A. Because he was the director of 22 regulatory affairs of the Federal Home Loan Bank 23805 1 of Dallas. 2 Q. Now, let me ask you to look at 3 Exhibit A12187, which purports to be a memo from 4 Jearlene Miller and Aaron Satterthwaite of 5 December 4th, 1987, to Mr. Barclay. 6 Do you have that in front of you? 7 A. Yes, I do, sir. 8 Q. It shows a copy to you? 9 A. Probably. Yes. 10 MR. NICKENS: Your Honor, we offer 11 Exhibit A12187. 12 MR. RINALDI: No objection, Your Honor. 13 THE COURT: Received. 14 Q. (BY MR. NICKENS) Now, on Page 3 of 15 Exhibit A12187 at the carryover paragraph in the 16 last two sentences, could you read that to 17 yourself? It's the one that starts out "Charles 18 Hurwitz." 19 A. (Witness reviews the document.) Okay. 20 Q. Now, there's again a reference to close 21 scrutiny. Is that the close scrutiny of the 22 Federal Home Loan Bank of Dallas or a reference to 23806 1 the Congressional committee? 2 A. A reference to the Congressional 3 committee. 4 Q. Was USAT under close scrutiny from the 5 Federal Home Loan Bank of Dallas because of these 6 Congressional inquiries? 7 A. We were concerned about USAT simply, 8 Your Honor, because of its financial condition. 9 Q. Well, was it under close scrutiny, 10 Mr. Twomey? 11 A. Your Honor, the institutions about this 12 time that were put in my caseload were put there 13 because they had significant problems. They 14 weren't put there because they were profitable, 15 had strong earnings and strong management. They 16 were put there because there were other concerns. 17 At that time, I had about 25 institutions. I had 18 four or five analysts. The idea was we could give 19 maximum attention as possible to each one of those 20 institutions. 21 Q. Well, does that -- 22 A. If you want to call that close 23807 1 scrutiny, you can call it close scrutiny. I just 2 call it routine monitoring of the institution 3 under what a supervisory agent should be doing 4 because it has problems. 5 Q. So, you would call it routine? 6 A. Because the institution has problems, 7 it's in my caseload. If the institution didn't 8 have problems, it wouldn't be my concern. 9 Q. And all of the institutions in your 10 caseload, at least after you were dealing with the 11 large institutions, were problem institutions, 12 correct? 13 A. Yes. They were all winners. 14 Q. What do you mean by that? 15 A. They all had a problem. 16 Q. And they were all receiving close 17 scrutiny? 18 A. To the best of our ability, we were 19 looking at all things and anything regarding them. 20 Q. That's part of the background to 21 Exhibit A11160, is it not? 22 A. Okay. So, you're back to the 23808 1 memorandum from myself and Ginger to the file 2 dated May 27th, '88? 3 Q. Yes, sir. That's where we were. 4 A. Okay, Mr. Nickens. 5 Q. At this point in time -- that is, May 6 of 1988 -- you thought well of USAT's management, 7 didn't you? 8 A. Compared to my other institutions, I 9 didn't have necessarily the same problems with 10 them as I did with some others, yes. 11 Q. Okay. And as Ms. Baugh wrote, 12 generally it was regarded that management was 13 motivated and skillful in their respective areas, 14 correct? 15 A. That's what the memo says. 16 Q. That was your assessment at the time, 17 wasn't it? 18 A. At the time. 19 Q. And the only criticism was that 20 management lacked a strong S&L type that could 21 provide leadership to operate USAT's parts more 22 cohesively? 23809 1 A. It was a continuing criticism, yes. 2 Q. But that was the criticism. They 3 needed a strong S&L type? 4 A. That was the obvious weakness. 5 Q. And USAT addressed that criticism by 6 hiring Mr. Connell? 7 A. No, I did not say that. 8 Q. Well, do you disagree with that 9 statement? 10 A. We asked USAT to hire in a strong CEO, 11 and I believe they found Mr. Connell. We had no 12 objections to his hiring. 13 Q. Well, Mr. Connell certainly fit the 14 bill for what you were asking for. Right? 15 A. I would say so, yes. 16 Q. And the Federal Home Loan Bank of 17 Dallas was pleased that USAT was able to hire 18 Mr. Connell? 19 A. Because he was a qualified manager. 20 Q. The answer to my question is "yes"? 21 A. Yes, because he was a qualified 22 manager. 23810 1 Q. Okay. Now, Ms. Baugh goes on to say in 2 the first paragraph -- and this was read to you by 3 Mr. Rinaldi; so, I wouldn't ask you to read it 4 entirely -- but "USAT has postured itself as a 5 nontraditional institution." 6 Do you see that sentence? 7 A. Yes. 8 Q. Now, you knew at this point in time 9 that USAT had substantial amounts of non-operating 10 income, correct? 11 A. That's what they were reporting in 12 their TFRs. 13 Q. Are you telling the Court that that was 14 the only source of information from which you knew 15 that USAT had non-operating income? 16 A. There were other sources. 17 Q. That's what I'm asking you, Mr. Twomey. 18 You, in response to my question, limited it to 19 TFRs. Are you telling the Court that your 20 information -- that is, the information of the 21 Federal Home Loan Bank of Dallas -- was limited to 22 the TFRs concerning their financial performance? 23811 1 A. The TFR is our primary source regarding 2 the financial status of the institution. We get 3 monthly TFRs and quarterly TFRs. We also rely on 4 the examination report. That is as a set date. 5 As of this time, there was an examination in 1986 6 and 1987. The financial information in those 7 reports are as of the day the examination started. 8 So, if Vivian's examination was available at this 9 time from the 1987 exam, it's 1987 financial data. 10 We were monitoring any -- all their TFRs that were 11 submitted to us. That was our primary source. 12 Q. But you had other sources? 13 A. Mr. Nickens, if Joe Selby walked down 14 to my office at this time and asked me what was 15 the net worth of the institution, I would go on my 16 computer in the office. I would pull up the last 17 monthly TFR available to me and read him the net 18 worth. 19 Q. Did you have other sources of 20 information concerning financial performance? 21 A. Mr. Nickens, I've already told you 22 there were other sources. 23812 1 Q. Now, this was just after you had 2 completed a full-scope examination; that is, you 3 prepared Exhibit A11160 just upon completion of a 4 full-scope examination, correct? 5 A. Yeah. I believe it had been delivered 6 to our office. 7 Q. And if you look at Paragraph D on the 8 second page, it specifically references completion 9 of a full-scope examination of United? 10 A. It says it should be available in early 11 June of 1988. 12 Q. All right. And a full-scope 13 examination is one that looks at all operations of 14 the institution, its subsidiaries, and its service 15 corporations? 16 A. We would call it a Type 10, but it's a 17 standard examination of an institution. 18 Q. And that would include looking at all 19 operations of the institution itself, its 20 subsidiaries, and its service corporations? 21 A. I wouldn't say every single nuance of 22 operations. I mean, the examiner-in-charge has to 23813 1 make some judgments regarding manhours and 2 resources. 3 Q. Do you recall what you said when you 4 asked -- you were asked that question by 5 Mr. Rinaldi? 6 A. No, but I'm sure you'll read it to me. 7 Q. Yes, sir. I would like to. Do we have 8 a copy of the transcript at Page 23248? 9 If you could turn to the question and 10 the answer starts on Page 23247. 11 12 (Discussion held off the record.) 13 14 THE COURT: Let's not have this 15 discussion back and forth. If there's a problem, 16 let's hear it. We don't need a discussion. 17 MR. RINALDI: I'm sorry, Your Honor. 18 Mr. Nickens handed a document to the witness that 19 he had not advised me he was going to use. I did 20 not have a copy of the transcript. His paralegal 21 was distributing copies to the other individuals 22 at the table. I asked if I could have a copy. 23814 1 I'm sorry if it interrupted the flow of the 2 examination. 3 THE COURT: All right, sir. Let's 4 proceed. 5 Q. (BY MR. NICKENS) Do you have Page 23247 6 and 8 in front of you? 7 A. 23347? 8 Q. 23347. 9 A. Sorry. I do now. 10 Q. Now, at the bottom of the page, 11 Line 21, you and Mr. Rinaldi are discussing this 12 very document. And he asked you: "And it 13 indicates that it's going to be a full-scope exam. 14 What is a full-scope exam?" 15 What was it that you said on -- last 16 week in response to Mr. Rinaldi's questions? 17 A. The answer, I believe, in 23248 is "We 18 look at all operations of the institution and the 19 subsidiary and service corporations," Mr. Nickens. 20 Q. Now, has something happened since last 21 week that would change your opinion as to what a 22 full-scope examination is? 23815 1 A. No. 2 Q. Now, in Exhibit A11160, you didn't say 3 anything about the exam not being complete, did 4 you? 5 A. Are we done with the transcript? 6 Q. Yes, sir. 7 A. Okay. I'm looking for that reference. 8 I believe what I read earlier was that the 9 examination should be ready for review in June of 10 '88. 11 Q. Well, sir, Paragraph D says, "Examiners 12 have completed a full-scope examination of United; 13 and the examination report should be available in 14 early June, 1988," correct? 15 A. That's what it says, sir. 16 Q. Did you say anything in there about it 17 not being complete, the examination not being 18 complete? 19 A. Well, Mr. Nickens, I don't think you 20 understand the process. What happens, 21 Your Honor -- 22 THE COURT: Well, we have a very narrow 23816 1 question. 2 A. Okay. The examination is still with 3 the examiners. They haven't completed the exam to 4 pass to me. I have the interims. I don't have 5 the document as of this time. 6 Q. Well, you did get the document shortly 7 thereafter if you didn't have it, didn't you? 8 A. Probably in June of '88, I got it. 9 Q. Because they transmitted it in June of 10 '88 to the institution. Right? 11 A. Well, if you say so. I have no doubt 12 that you have a letter that has a transmittal 13 where we did send it to the institution. That's 14 no problem. 15 Q. So, are you saying that the examination 16 wasn't complete? 17 A. The examiners had probably completed 18 the exam. It was being reviewed, typed, and 19 completed at that time. The exam had probably 20 not -- the reason it's worded this way in this 21 memo is we hadn't got the document yet, which is 22 the examination report. We had the interims which 23817 1 had been previously filed with us. 2 Q. Haven't you told this Court that 3 Ms. Carlton didn't complete her full-scope 4 examination of 1987? 5 A. What I said, I believe, was there were 6 certain areas where Ms. Carlton couldn't get the 7 information she needed and she relied on the CPAs 8 and their consultants. 9 Q. But she had completed a full-scope 10 examination? 11 A. She had done her best, yes. 12 Q. And I'll come back to those issues. 13 The two things that you have indicated that 14 would -- where she had not been able to do 15 everything she wanted was connected with her 16 conversations with the independent auditors; is 17 that right? 18 A. The best I can recall. 19 Q. Now, if we turn to the third page of 20 Exhibit A11160 at the top, there's a conversation 21 that -- there's a report there that Mr. Rinaldi 22 asked you about concerning United MBS. 23818 1 A. I see it. I read it. 2 Q. And basically, I believe you've 3 indicated that their operations were normal? 4 A. Basically, it indicates that's the 5 knowledge we had at the time, yes. 6 Q. Now, then you go on to conclude on the 7 last page that with some bolstering of senior 8 management and depending on the results of the 9 final examination report, we would recommend that 10 United be allowed to participate as an acquirer in 11 the Southwest Plan. That was your opinion at the 12 time, correct, Mr. Twomey? 13 A. Yes. 14 Q. And that remained your opinion through 15 the recommendation that you made concerning the 16 Pear II-B package, was it not? 17 A. I'm aware of the basics of the 18 Pear II-B package, but could you give me a time 19 frame? 20 Q. Well, we discussed yesterday a letter 21 from Mr. Patriarca to Mr. Lykos in which a phone 22 conversation with you is related concerning the 23819 1 Pear II-B package. 2 Do you recall that? 3 A. That could be one reference, yes. 4 Q. I'm asking you at least through that 5 phone conversation, you had retained an opinion 6 that USAT was suitable as an acquirer under the 7 Southwest Plan? 8 A. That's true because the Southwest Plan 9 examination hadn't started yet. 10 Q. And that was your conclusion despite 11 your knowledge that USAT had failed its minimum 12 net worth and was projected for insolvency within 13 12 to 14 months based upon their own calculations, 14 correct? 15 A. Yes. 16 Q. Now, the reference to an examination in 17 the last sentence that I just read you was the 18 results of the final examination report, correct? 19 A. You used the word "final." Could 20 you -- we have an '86, '87, and '88 exam. Are you 21 talking about the '87 exam? 22 Q. I'm asking you what you were referring 23820 1 to when you wrote your memo. Isn't it referring 2 to the nineteen -- 3 A. It should have been a reference to the 4 1987 examination that was being wound up and 5 delivered to my office. 6 Q. So, when you referred to a final 7 examination report, that's the 1987 examination 8 conducted by Ms. Carlton? 9 A. Yes. 10 Q. Now, can you explain to the Court what 11 the Pear II-B package was? 12 A. Well, I apologize, Your Honor. It's 13 been a little over 10 years. There was a group of 14 S&Ls in mid-Texas. Seguine Savings was one of 15 them. I can't remember the other small 16 institutions. They were down in the Valley, 17 around the San Antonio area, I believe. And there 18 were five or six, half a dozen small institutions. 19 I believe earlier on, the Pear package included 20 United. Somewhere along the line, they split it. 21 They held United out, and they had the smaller 22 institutions. And as a result of that, the 23821 1 smaller institutions were put in another package 2 and sold to Pacific Southwest which is a Pacific 3 Electric Wire company out of Taiwan that was the 4 acquirer. The United package was held out 5 separately, and that's the package that 6 Mr. Patriarca negotiated with potential acquirers. 7 That's the best I can recall. 8 Q. Didn't Mr. Patriarca negotiate both 9 packages after it was split? 10 A. I believe so, but I -- you know, I'm 11 not 100 percent on the smaller package. 12 Q. Let me ask you to look at a document, 13 Mr. Twomey, that has been marked as Exhibit B2095. 14 Can you identify that exhibit for the record, 15 Mr. Twomey? 16 A. Only by the heading. Preliminary 17 proposal for supervisory merger of certain 18 insolvent institutions into United (USAT) with 19 financial assistance from FSLIC; and it was dated 20 May 28th, 1988. 21 Q. You mean March 28th, 1988? 22 A. I'm sorry. March. Sorry, Mr. Nickens. 23822 1 March 28th, 1988. 2 Q. It indicates it was presented to the 3 Federal Home Loan Bank Board in Washington and the 4 Federal Home Loan Bank of Dallas. Right? 5 A. Yes. 6 Q. And if you look over to Page No. 1 -- 7 A. Tab 1 or after that? 8 Q. Page No. 1 which is at OW075741. 9 A. Yes. 10 Q. There's a list of institutions there? 11 A. Yes. 12 Q. Was that a list of institutions that 13 became essentially the Pear II-B package or what 14 was sometimes referred to as the Champion package? 15 A. I don't believe so. There are a lot of 16 institutions in here that were not in that -- the 17 acquisition of Pacific Southwest, which is the 18 Pear II-B, I believe. 19 Q. Didn't the Pear II-B package have about 20 20 institutions other than United? 21 A. I have no way of knowing, sir. I 22 wasn't involved at that time. 23823 1 Q. Well, we may come across some documents 2 that will help you on that, Mr. Twomey. 3 MR. NICKENS: Your Honor, we offer 4 B2095. 5 MR. RINALDI: Your Honor, I don't 6 believe he's identified the document. He read 7 from the front page. I don't think he's ever said 8 that he saw the document. I wouldn't object to 9 the entry of this document if it's offered through 10 someone that prepared it. This is clearly a USAT 11 document. We have Mr. Munitz coming up; and 12 clearly Mr. Munitz, who was effectively the head 13 of the place, can testify about this document. 14 There's no evidence he ever saw it. He 15 didn't testify he saw it, and all he did was read 16 from the front page. I'm not sure what the 17 relevance of this is with respect to this witness. 18 MR. NICKENS: This is a document that 19 went to the Federal Home Loan Bank of Dallas. 20 There will be further documentation concerning 21 this issue, and it was involving a proposal by an 22 institution that was under this person's direct 23824 1 supervisory authority and which he indicated he 2 had the responsibility for being the most 3 knowledgeable of. 4 THE COURT: All right. I'll receive 5 it. 6 MR. RINALDI: I don't think he's 7 testified to anything about this proposal. If, in 8 fact, about Nickens can lay a predicate for this 9 and he says he recalls what it is and he was 10 involved in it and he's seen it before, I wouldn't 11 have a problem with it. Thus far, he showed him a 12 document; and he read from the front. I have no 13 knowledge of whether he knows anything about this 14 proposal; and it's, like, maybe 80 pages thick. 15 THE WITNESS: Sir, normally if 16 something like this was coming in where the 17 institution is negotiating with FSLIC regarding 18 the Southwest Plan, it could have gone to the 19 Dallas office; but it would have gone to the 20 marketing group I mentioned in the previous 21 testimony in which Bud Gravette and Bob Brick were 22 handling it. They may have seen fit to send this 23825 1 to the supervisory agent's attention, but I don't 2 recall. Other people at the bank may have seen 3 it. I just don't recall. 4 THE COURT: Well, I'll receive the 5 document. 6 Q. (BY MR. NICKENS) You've indicated that 7 you didn't have a lot of information concerning 8 United Savings, Mr. Twomey. I would like to ask 9 you to turn over -- first of all -- 10 A. Mr. Nickens, could you define what you 11 mean, I didn't have a lot of information regarding 12 United Savings? One time, you tell me I have all 13 this information; and now you're saying I don't 14 have any information. 15 THE COURT: Let's just have the 16 question. You were going to refer to a page, 17 Mr. Nickens? 18 MR. NICKENS: Yes, Your Honor. 19 Q. (BY MR. NICKENS) I would like for to 20 you look in the document at Page -- it's labeled 21 76, and it's at OW075821? 22 A. 75821. I have it. 23826 1 Q. And do you see there a paragraph 2 labeled "mortgage-backed securities"? 3 A. Yes, I do. 4 Q. I would ask you to read that to 5 yourself. 6 A. (Witness reviews the document.) Yes, 7 I've read it. I haven't gone to the related 8 notes, but I've read this part. 9 Q. Were you unaware of the information 10 related under the paragraph "mortgage-backed 11 securities" at Page 76 of USAT's 1986 10K? 12 A. Well, I mean, this generally comports 13 to other things they had sent us regarding their 14 risk-controlled arbitrage program; so, it 15 generally comports with other information I have 16 at that time. 17 Q. So, you believe you would have been 18 aware of this information? 19 A. No. What I said is I didn't see this; 20 but this seems to be congruent to other 21 information we had from their business plans, 22 strategic plans, and other information they were 23827 1 supplying to the supervisory agent and also the 2 way the examiner-in-charge reported their 3 activities. 4 Q. Do you have any doubt that the Federal 5 Home Loan Bank of Dallas would have had this 6 information in March of 1988? 7 A. Somebody at the Federal Home Loan Bank 8 of Dallas received this report. 9 Q. Let me ask you to look over at Page 95 10 which is at OW075840. Do you see another 11 paragraph there entitled or labeled 12 "mortgage-backed securities"? 13 A. Yes, Mr. Nickens. 14 Q. Would you read those two paragraphs to 15 yourself? 16 A. (Witness reviews the document.) I 17 stopped at loans. I assume you didn't want me to 18 go any further. 19 Q. Yes, sir. You've read the two 20 paragraphs labeled "mortgage-backed securities" at 21 Page 95? 22 A. Yes. 23828 1 Q. And were you aware of this information 2 in March of 1988 concerning USAT? 3 A. Again, this has some specifics I'm not 4 really aware of at this time or can remember; but 5 again, it generally comports to everything else 6 they had told us at the time regarding their 7 risk-controlled arbitrage program. 8 Q. Included in that information was that 9 in 1986, they had shifted from higher coupon rate 10 to lower coupon rate mortgage-backed securities in 11 order to curtail the prepayment risk? 12 A. That's what this reads, yes, sir. 13 Q. And that was part of the information 14 that was consistent with the information that you 15 had concerning their mortgage-backed securities 16 risk-controlled arbitrage? 17 A. I don't recall that specific 18 information; but again, with a risk-controlled 19 arbitrage in declining rates, in order to balance 20 and maintain the portfolio, it is normal to sell 21 off the higher-yielding coupon securities because 22 prepayments are going to increase and then 23829 1 rebalance the portfolio with the purchase of 2 either lower coupons or pay off the repos. 3 Q. And they reported, as well, that such 4 sales and repurchases had resulted in a reduction 5 in the yield or the spread in this case? 6 A. Well, as I previously had said, that 7 spread can change from time to time. It's not 8 static. It can go up. It can go down. If they 9 were rebalancing the portfolio trying to maintain 10 the risk-controlled arbitrage, it would flex a 11 little bit. 12 Q. And that would be a natural and 13 expected result of the activities that they 14 described in their public filings, correct? 15 A. Well, I'm just going to stay with this 16 document. They filed a lot of public filings, and 17 you might be referring to something I'm not aware 18 of. 19 Q. Certainly as a result of this document, 20 one who read it would be aware of the fact that 21 there had been a reduction of yield because of the 22 rolldown activities? 23830 1 A. When you talk about a group of 2 mortgage-backed securities, each security 3 basically has a weighted average coupon. That's 4 the interest rate or yield. And, obviously, if 5 you have a bunch of 10s, a bunch of 9s, and a 6 bunch of 8s, interest rates are dropping; so, you 7 sell all your 10s and buy 7s. If they were all 8 even, you would have in that group of 10s, 9s, and 9 8s initially a yield of 9 percent. If you sell 10 all your 10s and now you buy 7s, your interest 11 rate yield has dropped to 8 percent. 12 Now, independent of that, you have your 13 spread. If interest rates are dropping, then when 14 you roll over your short-term borrowings, your 15 interest rates should drop. So, basically, even 16 though the spread may narrow for a time, as you 17 borrow again on the short-term borrowings, the 18 yield should come back into what you reasonable 19 expect. 20 Q. As to those two portions of the 21 portfolio, it would simply depend on the shape of 22 the yield curve. Right? 23831 1 A. There's a lot of different things you 2 have to consider. But that's the reason why you 3 have experts managing the portfolio. That's their 4 jobs. 5 Q. Now, if you have used swaps to hedge 6 certain risk in the risk-controlled arbitrage, 7 what would be the effect on your spread of 8 declining rates? 9 A. Well, again, you're using interest rate 10 swaps to lock in a particular interest rate. And 11 you may have -- if interest rates are dropping and 12 you're in a swap, you may have a loss that you 13 then have to defer over the next term when you 14 borrow again. So, the first six months, your 15 borrowing costs are 8 percent. The next six 16 months, interest rates dropped; so, it's not 7. 17 Because you wanted to lock in, that interest rate 18 wouldn't go up. So, what ends up happening is now 19 you exit the swaps. Now you have a loss. What 20 you do is you defer the cost of that loss over to 21 the next thing. So, it's constantly readjusting 22 as to where you might be. 23832 1 Q. But the normal and expected result of 2 declining rates on such a risk-controlled 3 arbitrage -- that is, one using swaps -- would be 4 a decrease in your spread? 5 A. If you're simply using interest rate 6 swaps to hedge on the liability side, that could 7 definitely happen. 8 Q. That was something you were aware of at 9 the time, correct? You knew how it worked, didn't 10 you? 11 A. I had an understanding of how a 12 risk-controlled arbitrage should work, yes. 13 Q. Let's look over at Page 100 of 14 Exhibit B2095 which is at OW075845. Do you see 15 there a discussion of non-interest income? 16 A. At the very top of the page there? 17 Q. Yes, sir. 18 A. (Witness reviews the document.) 19 Q. Were you aware of this information, 20 Mr. Twomey, in March or April of 1988? 21 A. Generally. But I didn't have this 22 level of specifics the way it's spelled out right 23833 1 here that I can recall right now. 2 Q. But it was consistent with the 3 information that you did have, correct? 4 A. Again, there's a lot of specifics in 5 here; and it generally comports to what I knew. 6 To tell you the truth, I forgot about Castle & 7 Cooke and that trouble. This is -- again, what 8 they sent in is what they sent in. It generally 9 comports to what I knew at the time. 10 Q. And they specifically broke out by line 11 item the gain on sale of mortgage-backed 12 securities and loans? 13 A. In 1986 and in 1985. 14 Q. Well, it shows both. Right? 15 A. Yes, I believe so. 16 Q. And if you could -- of course, the 17 Federal Home Loan Bank of Dallas was aware of this 18 specific information, correct? 19 A. Well, you're talking from this 20 document? 21 Q. Yes, sir. 22 A. Again, when they were doing the 23834 1 Southwest plans, there is a very high level of 2 secrecy regarding the packages, who they were 3 negotiating with. And we had a marketing group in 4 Dallas; and it was FSLIC in Washington at this 5 time, March 1988. Other than if they made an 6 inquiry to us and used some reasonable deduction 7 to figure out what they were getting at, you 8 really didn't have the level of detail about who 9 they were talking to, the packages they were 10 dealing with, et cetera. If someone made a 11 submission for FSLIC assistance, it's not 12 something generally that we would be immediately 13 aware of. Over time, we would probably find out 14 but not the next day. 15 Q. Mr. Twomey, didn't you just a few 16 minutes ago in relationship to another paragraph 17 tell us that the Federal Home Loan Bank of Dallas 18 had that information, that they clearly would have 19 had this document? 20 A. Sir -- 21 Q. Did you say that or not? 22 A. This is what I'm going to tell you 23835 1 right now, Mr. Nickens. There was a level of 2 secrecy regarding the packages the way the 3 Southwest Plan was being pulled together. How the 4 packages were being put together was all done, the 5 best I can remember, by Mr. Bud Gravette. Later, 6 they had this marketing group, so-called marketing 7 group to help work with Mr. Gravette in talking to 8 potential acquirers and so forth. 9 And in Washington, the real 10 negotiations occurred regarding any FSLIC 11 assistance package. So, if there was 12 conversations or submissions made to this group 13 even if they were at the Dallas bank, it doesn't 14 mean that I would be immediately totally informed 15 about what was going on. I would probably find 16 out later on by happenstance. And sometimes when 17 I would be talking to Mr. Berner, he would tell me 18 they have done something like this. But it 19 doesn't mean that somebody came flying over to my 20 office and threw it down on my desk and asked my 21 opinion. 22 Q. Sir, I was asking you about the Federal 23836 1 Home Loan Bank of Dallas and -- 2 A. I responded to your question, 3 Mr. Nickens. 4 Q. I thought you told us earlier that the 5 Federal Home Loan Bank of Dallas had that 6 information. 7 A. I was referring to this group. 8 Q. You aren't telling us they had one page 9 and didn't have another page. Right? 10 A. Mr. Nickens, if USAT/UFG/MAXXAM made 11 this type of submission, it wouldn't go through 12 me. It may have gone to the Federal Home Loan 13 Bank of Dallas, but it would have gone to the 14 group that was working on the Southwest Plan. 15 They would have probably also made it to the FSLIC 16 group up in Washington who was handling the 17 negotiations at the time. 18 Q. Sir, I'm asking you about the Federal 19 Home Loan Bank of Dallas. 20 A. I've responded. 21 Q. Would the Federal Home Loan Bank of 22 Dallas have the information reflected on Page 100, 23837 1 B2095? 2 MR. RINALDI: Your Honor, I have an 3 objection here. Mr. Nickens has shown Mr. Twomey 4 a document that includes the 10K for 1986. And 5 unfortunately, Mr. Twomey's responded to the 6 question of did they have this document which is 7 B2095; and he's clearly said that that wouldn't 8 necessarily have gone to him. 9 Now, I think that Mr. Nickens is at 10 cross purposes because he's really asking him did 11 he have the 10K from 1986 which dates way back to 12 March of 1986. 13 So, I think for clarity's sake, I 14 showed him the 10K; and it was put into evidence 15 earlier. If the question is did he have the 16 information in the 10K, he ought to make that 17 clear. Alternately, if he's asking about this 18 document, then he ought to make that clear. It's 19 confusing at this point. 20 MR. NICKENS: Your Honor, I asked the 21 witness on another paragraph that might not have 22 been quite as sensitive as this particular 23838 1 information whether or not the Federal Home Loan 2 Bank of Dallas had that information. He said 3 sure, of course they would have had it. It shows 4 it from the front page. 5 When we get into an area where he has 6 indicated he didn't have certain information, now 7 he wants to back off of that. I don't think that 8 he is indicating that they would have had one page 9 and not another page. 10 MR. RINALDI: I don't think that was 11 his testimony, Mr. Nickens. 12 THE COURT: We have the testimony so 13 far. Let's move on. You've asked him about this. 14 He said this particular document may not have come 15 to him or whatever; so, that's his answer. There 16 are other people involved who may have had it. 17 MR. NICKENS: The implication of his 18 testimony on direct was that he didn't have 19 certain information, and he has implied that USAT 20 didn't make that information available. Our point 21 is to show -- I will show this kind of information 22 was in his hands at a later time. The point of 23839 1 this examination is to show it wasn't hidden from 2 anyone. It was send to the Federal Home Loan Bank 3 in Washington as well as the Federal Home Loan 4 Bank in Dallas. 5 THE COURT: That's consistent with his 6 testimony. 7 MR. NICKENS: Let me move on, then, 8 Your Honor. 9 Q. (BY MR. NICKENS) Let me ask you to look 10 over at Page 117, Mr. Twomey. 11 A. I'm on the page, sir. 12 Q. Now, there's a discussion there in 13 Paragraph 10 dealing with interest rate exchange 14 agreements. 15 A. Yes. 16 Q. Did you tell us yesterday that you were 17 not aware that USAT had swap agreements that had a 18 mark-to-market loss? 19 A. I'm trying to remember what document 20 that was in context with. Well, again, as we 21 talked about earlier, if you have a declining 22 interest rate scenario and you have interest rate 23840 1 swaps against those short-term liabilities, as you 2 read earlier or pointed out to me, that in 1986, 3 there's declining interest rates, it would be 4 reasonable to assume that if they had interest 5 rate swaps against those repos, they would have 6 incurred a market loss. The idea then is that 7 loss is deferred over the term of the next repo 8 you put in as long as you continue with the 9 risk-controlled arbitrage. 10 Q. Were you aware or not aware in -- prior 11 to December of 1988 of the mark-to-market losses 12 in swap agreements entered into by USAT? 13 A. Now you're talking about the interim 14 report from December of 1988? 15 Q. Yes, sir. 16 A. That's what is in that report. 17 Q. And that was the first time you learned 18 of that? 19 A. Well, I would have to go back to the 20 document. But basically, the way I remember it, 21 these were an accumulation of interest rate losses 22 that were deferred, I believe. 23841 1 Q. Sir, were you aware or not aware, prior 2 to the Southwest Plan interim examinations, of the 3 swap mark-to-market losses on contracts entered 4 into by USAT? 5 A. As I previously mentioned to you, 6 Mr. Nickens, if the interest rates are dropping 7 and you've set up a swap to hedge, you are going 8 to have a loss which as long as you continue with 9 the risk-controlled arbitrage, you deferred it at 10 that time; but you recognize it over the next 11 period of time when you get into your new repo. 12 So, since interest rates don't remain static -- 13 they go up, they go down, interest rates are doing 14 that all the time -- there would be losses. There 15 would be gains. But I would consider it part of 16 the normal maintenance of the risk-controlled 17 arbitrage. 18 So, yes there were gains; and yes, 19 there were losses. And I would generally be aware 20 of those. 21 Q. And you were aware of that prior to any 22 report in December 1988, weren't you? 23842 1 A. I believe the report in 1988 was 2 pointing out that there was an accumulation of 3 losses due to interest rate swaps. 4 Q. Can I ask you to look at 5 Exhibit A14073, Tab 1502? Mr. Twomey, Tab 1502, 6 Exhibit A14073, is your letter of July 28th, 1988, 7 transmitting the 1987 examination to the board of 8 directors of United Savings Association of Texas? 9 A. I believe so. I thought you said I did 10 this in June of '88. 11 Q. I may have said that. Obviously, it is 12 July. You're the one who said you had it in June. 13 Right? 14 A. No. I said we were going to receive it 15 in June. 16 Q. Well, when did you receive it? 17 A. The other report that was a memo to the 18 file from Ginger and myself made reference that we 19 should receive the report in June of '88. I don't 20 remember the exact date I received it. 21 Q. Okay. Now, with regard to the issue 22 about swaps, could you look over at Page 19 of 23843 1 your examination, which is at OW077142? 2 A. (Witness reviews the document.) Okay. 3 And there is a schedule at basically the middle of 4 the page? 5 Q. At the bottom of the page, there's a 6 paragraph "hedging caps, collars, and interest 7 rate swaps"? 8 A. Yes. 9 Q. And does it indicate the association 10 experienced a net loss of $40,145,000 under its 11 interest rate swaps, caps, and collar agreements? 12 A. Yes, it does. 13 Q. So, you were aware of the extent of 14 their losses on these hedging instruments? 15 A. Yeah. I'm aware -- you're refreshing 16 my memory, because I haven't looked at this in a 17 long time, on Page 19 regarding the net loss of 18 over $40 million regarding its interest rate 19 swaps, caps, and collar agreements as it relates 20 to their hedging strategies, yes. 21 Q. Now, sir, are you telling us that you 22 testified as to what you knew and didn't know in 23844 1 December of 1988 and you had not reviewed your 2 1987 examination? 3 A. I had looked at the 1987 examination 4 some time ago. As you can see, it's a multi-page 5 document for me to remember every detail from it. 6 I believe at this time, the way this is being 7 written, is there is only a few positions in here 8 that Vivian referred to as being speculative. And 9 then I would assume that the rest of these, namely 10 the bulk of the 40 million, had to do with their 11 hedging activities; and it simply would not be 12 abnormal for an institution to have a gain in one 13 other part of its portfolio to offset the 14 $40 million of interest rate swaps because of the 15 movement of interest rates. 16 Q. We can agree you were aware of the 17 swaps and their economic position as of the time 18 of this report? 19 A. Since I received this examination 20 report in June of 1988, then I would have been 21 aware of this comment inside the report. 22 Q. Let me ask you to look at Page 21 23845 1 concerning another comment. And I would ask you 2 to read the third full paragraph under "operating 3 results" which starts out "As shown on the 4 comparative financial statements for the current 5 examination report." 6 A. (Witness reviews the document.) Yes, I 7 see it. 8 Q. And specifically, do you see that it 9 was written there that "The association" -- this 10 is the third line -- "The association continues to 11 rely primarily on non-operating income to bolster 12 its earnings and create a positive net income or 13 reduce the adverse impact of its non-earning 14 assets. The non-operating income is derived 15 primarily from gains on investment securities, 16 corporate bonds, mortgage-backed securities, and 17 financial futures; i.e., speculations and loan 18 sales"? 19 A. Yes, I see that. 20 Q. You were aware of this information when 21 you sent it as a result of the examination to 22 United Savings, correct? 23846 1 A. Yes. 2 Q. So, you were aware that USAT had 3 non-operating income to bolster its earnings and 4 create a positive net income or reduce the adverse 5 impact of non-operating assets? 6 A. That's what that sentence reads. 7 Q. And you were aware of it? 8 A. I'm aware of that sentence. 9 Q. Now, returning to Exhibit B2095, do you 10 see at Page 134 -- 11 A. So, we're still on that submission to 12 FSLIC? 13 Q. Yes, sir. And to the Dallas bank. 14 A. I'm glad you included that. 15 Q. I was just reading what it says on the 16 front, Mr. Twomey. 17 A. So did I. 135? 18 Q. 134. Do you see there a reference to 19 Drexel Burnham's ownership interest in UFG? 20 A. On the Table 1? 21 Q. Yes, sir. The third item under the 22 chart or the table. 23847 1 A. Yes. 2 Q. Now, do you see in Footnote 6 which is 3 referenced on the next page a description of the 4 Drexel option? 5 A. Yes, I do. I read Footnote No. 6. 6 Q. And this was sent to the Federal Home 7 Loan Bank Board in Washington? 8 A. This entire package? 9 Q. Yes, sir. 10 A. If that's what the cover sheet reads, I 11 assume it went to the Federal Home Loan Bank Board 12 in Washington. 13 Q. And that's who you would have sent this 14 information to, to Ms. Julie Williams, as you 15 testified yesterday if you had known about the 16 indemnification provision in the Drexel option? 17 A. If I became aware of it, I would have 18 made an inquiry of Julie Williams, yes. 19 Q. And she was a part of the staff of the 20 Federal Home Loan Bank Board in Washington? 21 A. She was in charge of the securities 22 division of the Office of General Counsel at the 23848 1 Federal Home Loan Bank Board in Washington, but 2 she was not part of FSLIC. 3 Q. Let me ask you to look at Page 167. 4 Now, you indicated in your testimony that you did 5 not find out that USAT owned mortgage-backed 6 securities at a mark-to-market loss of some 7 $200 million until mid-December 1988, correct? 8 A. I have to stop you for a second, 9 Mr. Nickens. 10 Q. You're still looking for the page? 11 A. Well, I go from 161 and then the next 12 page is 200. 13 THE COURT: Yeah. This document is not 14 exactly paginated -- 15 A. It starts with a 10Q? 16 Q. (BY MR. NICKENS) Can you find OW075914? 17 A. 14? 18 Q. 914, right. 19 A. I basically start -- leaving off at 20 907, and then I jump to 949. Approximately 42 21 pages in between. 22 Q. Well, let me -- do you have a complete 23849 1 copy or -- I'm told that the pages may be out of 2 order. 3 A. Let me try to handle that. Okay. 4 Later on is -- I believe I have -- what's the page 5 you're looking for? 6 Q. The page number is 167, and the imaging 7 number is 79514. 8 A. I found it. It's the financial -- 9 UFG's notes of the financials starting off with 10 notes to financial, No. 3, mortgage-backed 11 securities? 12 Q. Yes, sir. 13 A. Okay. 14 Q. Do you see there they list Ginnie Mae, 15 Freddie Mac, and Fannie Mae securities as of 16 December 31, 1986, and as of September 30, 1987? 17 A. Yes, I see that. 18 Q. And there is -- they have a carrying 19 value column and a market value column? 20 A. Yes, I see that. 21 Q. And what is the difference in September 22 of 1987? 23850 1 A. Okay. September 30th, 1987, total 2 carrying value -- it's going to be billions -- 3 3.6 billion approximately as compared to a market 4 value -- basically 3,250,000. 5 Q. So, they reported the market value and 6 indicated in excess of a 200-million-dollar market 7 loss -- mark-to-market loss in those portfolios? 8 A. Yes, they did. 9 Q. And that's what came to you as a big 10 surprise in December of 1988? 11 A. Yeah, I was surprised in '88 when I 12 heard about it. 13 Q. Now, Mr. Twomey, I would like to come 14 forward in time. We were talking about the 15 Pear II-B package when we started on this. I'm 16 going to ask you to look at Exhibit B2404, which 17 is your memo of 9/15/88 to George Barclay. 18 Can you identify Exhibit B2404 as a 19 memorandum prepared by you and Marc Dunn dated 20 September 15th, 1988, to Mr. Barclay? 21 A. Yes. 22 MR. NICKENS: Your Honor, we offer 23851 1 B2404. 2 MR. RINALDI: No objection, Your Honor. 3 THE COURT: Received. 4 Q. (BY MR. NICKENS) Now, if you could look 5 at Page 4. And I'm under the numbered Paragraph 3 6 called "Recommendations and Action Plan." I would 7 like you to read the third paragraph to yourself 8 that starts out "United filed a capital 9 forbearance application." 10 A. (Witness reviews the document.) Okay. 11 Yes, I finished the paragraph, Mr. Nickens. 12 Q. And in particular, you state in -- this 13 is a document that you helped prepare? 14 A. Yes, it is. 15 Q. And you specifically initialed it? 16 A. Yes. Well, actually, I helped prepare 17 it. It looks like somebody initialed it for me, 18 but that's okay. 19 Q. Those are not your initials? 20 A. They are not, but it's still a document 21 coming from my office. 22 Q. And with regard to the paragraph I 23852 1 asked you to read at the bottom, it says, "In 2 addition, a plan to assist FSLIC and/or FADA by 3 managing assets is currently being reviewed in 4 Washington. Last, United has filed a plan with 5 this office and FSLIC to acquire 20 institutions 6 through the Southwest Plan. Reportedly, United's 7 presentation to officials at the Bank Board on 8 September 9th, 1988, was well-conceived." 9 Do you see that? 10 A. Yes. 11 Q. Now, was that the Pear II-B proposed 12 acquisition or package? 13 A. Well, when I looked at the document 14 that was submitted to the Bank Board and to the 15 Federal Home Loan Bank of Dallas -- we were 16 talking about previously, there were 20 17 institutions. 18 Based on what I know what happened, 19 that's not my -- what I later on knew was in the 20 Pear II-B package. So, all I can tell you there's 21 20 institutions in there. A lot of those 22 institutions were in this other package. You 23853 1 referred to it as a Champion package. I never 2 heard it referred to that way before because I was 3 also supervisory agent on Champion, and I would 4 have had a lot of problems with that one. And 5 again, I can't go on with your rendering that this 6 is the Pear II-B package because I don't remember 7 it that way at all. 8 Q. Isn't this the same day that you had 9 the conversation we discussed yesterday with 10 Kathleen McNulty concerning the Pear II-B plan? 11 A. It probably -- it's in September of 12 1988. It could be that very date for all I 13 remember right now. 14 Q. Can you suggest any other package that 15 this document might be describing? 16 A. Well, Mr. Nickens, let's go back to 17 this for a second. "In addition, a plan to assist 18 FSLIC and/or FADA in managing assets is currently 19 under review in Washington. Last, United has 20 filed a plan with this office and FSLIC to acquire 21 20 institutions through the Southwest Plan. 22 Reportedly, United's presentation to the officials 23854 1 at the Bank Board" -- that's Washington -- "on 2 September 9th, 1988, was well-conceived." That 3 probably should be "received." Again, this is 4 United's plan. 5 I may be missing it, but I don't see 6 Pear II in here or B or something on that range. 7 I think you're talking apples and oranges. This 8 is their plan where they were making their 9 submission for FSLIC to help them acquire those 20 10 institutions that they list. 11 What I'm telling you is that when 12 Pear II-B or Pear II -- I mean, they kept changing 13 some of the names; so, I can't be 100 percent this 14 is what it was called. They even had packages 15 called WREN and others. You had a list in the 16 front page where that was a table -- Franklin 17 Savings, Credit Bank, Champion -- and they went to 18 other packages. In fact, Franklin and Credit Bank 19 were resolved on September 30th, 1988; and that's 20 who bought -- Dedman's group bought it. Champion 21 was purchased ultimately by a group headed up by 22 Pulte Homes. So, I mean, there's -- you know, you 23855 1 have Bank United's idea where Pear II about -- and 2 I, much later, you know, would find out what's in 3 a package. 4 Q. Sir, I'm asking you about your 5 memoranda, what it referred to. 6 A. It referred to probably information 7 that -- let's see. 8 Q. Are you telling us you don't know? 9 A. Sir, I'm trying to respond to your 10 question. 11 Q. Was this Pear II-B or not? 12 A. Not to be. 13 Q. It does have a certain ring to it. 14 A. Your Exhibit B2095 which was USAT's 15 submission to the Federal Home Loan Bank Board and 16 to the Federal Home Loan Bank of Dallas as what's 17 on the top page was made March 28th, 1988. 18 Sometime between there and the time that this memo 19 was written, we became aware that 20 USAT/UFG/MAXXAM/MCO were all talking to FSLIC 21 about getting into the Southwest Plan. All this 22 tells me is that we became aware that on 23856 1 September 9th, United made a presentation -- I'm 2 assuming that's USAT, UFG, MCO -- I don't care -- 3 had made that presentation to representatives of 4 the Bank Board. We probably found out there were 5 20 institutions in their proposal to make an 6 acquisition, but that's the extent of it. 7 Q. So, you don't know -- you can't be any 8 more precise as to what this presentation related 9 to? 10 A. I wasn't at the presentation. 11 Q. You did get a report on it, though, 12 didn't you? 13 A. I may have got something in writing, 14 and I may have got an oral discussion. Somebody 15 would probably have made me aware. At the same 16 time, we were having ongoing discussions with Art 17 Berner; and Berner was supposed to keep me 18 informed as to what was going on. Many times, I 19 found out about their discussions with FSLIC 20 people before the FSLIC people would tell me. 21 Q. But you clearly found out this 22 information from someone at the Bank Board, didn't 23857 1 you? 2 A. I would say that would be reasonable to 3 deduce simply because somebody had to tell us it 4 was well received, okay? In fact -- but was -- 5 could I tell you absolutely, definitively, 6 positively that it was, you know, Danny Wall for 7 the Federal Home Loan Bank Board who called me and 8 told me personally or Mr. Whyte or somebody like 9 that, you know, I cannot, or was it somebody from 10 United who called me up after the meeting and 11 said, "Hey, it really went well. We really think 12 we made some points with these guys," I don't 13 know. 14 Q. But you do know that in September of 15 1988, you were still recommending USAT as an 16 acquirer in the Southwest Plan, correct? 17 A. Based on the information we had at the 18 time, we were still saying that USAT could be an 19 acquirer. 20 Q. But you were saying that Mr. Hurwitz 21 could not participate in any such acquisition, 22 correct? 23858 1 A. Sir, I don't know what I said regarding 2 Mr. Hurwitz. I don't really recall, you know. I 3 may have. I may not have. I just don't recall. 4 Q. It didn't have anything to do with 5 management's handling of their securities 6 portfolios, did it? 7 A. At that particular time, sir, we 8 were -- based on Pru-Bache, based on John Scott 9 and everything else, we reasonable expected that 10 they had experts, the right system, and everything 11 in running their junk bond portfolio and 12 Mr. Huebsch doing their equity trading. I had 13 never heard a report on any one of those groups 14 that lead me to believe that they were behaving in 15 an unsafe and unsound manner. All I ever heard 16 was they're doing the right thing. They were the 17 best out there. That's what my so-called experts 18 told me. Pru-Bache said they were following 19 policies and procedures. My examiners found a few 20 things regarding speculative hedging in the 1987 21 examination and they weren't following prescribed 22 methods of reporting to the board the way it 23859 1 should be reported to the board as per 563.17 and 2 there were things like that. But were they so 3 material that we said management couldn't do their 4 job right? We had concerns over REO because they 5 couldn't shoot straight in that area and 6 appraisals and so on. We wanted a top-notch 7 manager down there because that person would bring 8 in the right people, straighten up the 9 institution, cure the deficiencies going forward. 10 With the right manager in there augmenting the 11 staff, then USAT could be part of the 12 Southwest Plan. 13 Q. And that was your recommendation in 14 September of 1988? 15 A. I believe so. 16 Q. And your feelings about that didn't 17 have any -- your recommendation didn't have 18 anything to do with the handling of the 19 mortgage-backed securities or the junk bond 20 portfolios at that point in time? 21 A. Again, do I have to do this rendering 22 one more time? We felt they had the experts in 23860 1 those key areas -- 2 Q. I would like to avoid that, Mr. Twomey. 3 A. Then don't ask the same question. 4 MR. RINALDI: Your Honor, he asked this 5 question about three times. I think Mr. Twomey 6 went through a lengthy explanation, and I think he 7 made it clear he felt they were managing the 8 portfolios appropriately, especially -- 9 MR. NICKENS: Your Honor, I'm entitled 10 to a simple answer about whether they were 11 considering that at that point in time or not. I 12 would like the answer to my question. 13 THE COURT: All right. Restate your 14 question. 15 Q. (BY MR. NICKENS) Sir, did your 16 recommendation concerning the Pear II-B plan and 17 USAT's participation in the Southwest Plan have 18 anything to do -- in September of 1988, you made a 19 recommendation concerning USAT's participation as 20 an acquirer in the Southwest Plan, correct? 21 A. Yes. 22 Q. And that recommendation had nothing to 23861 1 do with their handling of their securities 2 portfolios? 3 A. Well, kind of reverse it around. I 4 think from May through the September memo, we were 5 consistently saying if they got a senior 6 qualified, top-notch manager in there to fix their 7 problems, they would be acceptable to go in the 8 Southwest Plan. One of the strengths that we 9 looked at at USAT was that we thought -- I thought 10 at that time they had the experts, the systems on 11 site to manage mortgage-backed securities, to 12 manage their junk bond portfolio, and manage their 13 equities. That's what I thought. 14 Q. All right. And that was -- 15 A. That was the strengths that they had. 16 If you want to call it middle to senior management 17 level, people handling those portfolios, I had no 18 qualms about. 19 Q. So, that was a positive with regard to 20 your recommendation? 21 A. That was a positive. 22 Q. And you at that point were not -- were 23862 1 not giving them a demerit for the compensation 2 issues, were you? 3 A. In September of 1988, I wasn't aware of 4 all the new contracts that came out in interim 5 reports going on and on and on. That was a 6 surprise to me. 7 Q. And so, we can establish, can we not, 8 that your recommendation in September didn't have 9 anything to do with compensation? 10 A. I wasn't thinking of compensation at 11 the time we wrote this. 12 Q. And so, therefore, it couldn't have had 13 anything to do with compensation? 14 A. Mr. Nickens, we had previously 15 requested from the institution to get all their 16 employment contracts. Then we refined it to get 17 all the employment contracts coming from the 18 holding company. We did that around May or early 19 June 1988. As far as I knew, I had all the 20 information that was currently going on there 21 regarding compensation. I had now -- as you 22 pointed out, I had the examination report from 23863 1 1987 that I had now transmitted to the board of 2 directors. And in that examination report, there 3 is a page in there regarding compensation, how 4 much in fees the directors get, what is the 5 compensation packages of the key officers. That's 6 what I knew at the time. 7 Q. I'm trying to establish for the record 8 in a very direct way whether or not in September 9 of 1988 there was anything about compensation that 10 was affecting your recommendations concerning 11 USAT's participation in the Southwest Plan as an 12 acquirer. 13 A. At that time, the only compensation I 14 knew is what I've just rendered to you. I wasn't 15 thinking that compensation was a problem. I 16 wasn't thinking that employment contracts were a 17 problem. I didn't know -- you see, I was 18 expecting anything that was going to come out, 19 anything new, that Mr. Berner would tell me. 20 Q. The answer to my question is: No, it 21 did not influence your recommendation? 22 A. Because at that time Mr. Berner didn't 23864 1 tell me. 2 Q. Whatever the reason, the answer is 3 "no." Right? 4 A. No. 5 Q. I'm afraid there is an ambiguity there 6 in your answer, Mr. Twomey. 7 Did the compensation issues affect the 8 recommendation that you made in September 1988 9 concerning USAT's participation in the 10 Southwest Plan? 11 A. Since I didn't know the compensations 12 were an issue, no, they didn't have an impact on 13 the memo. 14 Q. Thank you. 15 MR. NICKENS: Your Honor, I'm ready to 16 pass on to another subject. This might be a good 17 time to take a break. 18 THE COURT: All right. We'll take a 19 short recess. 20 21 (Whereupon, a short break was taken 22 from 10:30 a.m. to 10:55 a.m.) 23865 1 THE COURT: Be seated, please. We'll 2 be back on the record. 3 Mr. Nickens, you may continue. 4 MR. NICKENS: Thank you, Your Honor. 5 Q. (BY MR. NICKENS) Mr. Twomey, I would 6 like to go back in time to pick up something I 7 intended to ask you and ask you to look at 8 Exhibit B1855 at Tab 1682 which is a memorandum 9 that Mr. Rinaldi asked you about in the beginning 10 parts of your examination from -- it's a 11 memorandum from Mr. Berner to Mr. Hurwitz and 12 others dated November 18th, 1987. 13 Do you have that document? 14 A. Yes, I do. 15 Q. Let me ask you to focus your attention 16 on the second page, numbered Paragraph 5. It's 17 about seven or eight lines down where it starts 18 "he noted" where it's written "he" referencing 19 you, "noted that it would have made and would 20 continue to make his life easier if Charles 21 Hurwitz had never heard of redwood trees but that, 22 basically, the Dallas bank considered Charles to 23866 1 be a smart businessman and that it was important 2 to have smart business people running Texas 3 thrifts at this time." 4 What was the reference to redwood 5 trees? 6 A. Probably Pacific Lumber, which was a 7 company that Mr. Hurwitz, through one of his 8 corporations, acquired prior to 1986 sometime, I 9 imagine. 10 Q. Was that part of these Congressional 11 inquiries you were receiving concerning 12 Mr. Hurwitz' activities? 13 A. Primarily regarding Pacific Lumber, not 14 really the redwood trees, even though I was aware 15 that Pacific Lumber owned vast properties where 16 redwood trees could be harvested from. The real 17 issue there was twofold of the way the transaction 18 occurred: How he actually funded the purchase of 19 Pacific Lumber and -- let me think. I can't 20 remember the second point right now. I'll think 21 of it later. 22 Q. So, when you were saying it would have 23867 1 made your life easier if Charles Hurwitz had never 2 heard of redwoods -- 3 A. I remember the second point. They had 4 a pension fund for the employees of Pacific Lumber 5 Company, and it was overfunded. And when 6 Mr. Hurwitz acquired Pacific Lumber, he, for lack 7 of a better word, liquidated the pension fund to 8 realize the profits and substituted a new pension 9 fund. And there had been Congressional inquiries 10 regarding that. The real reference here had to do 11 with Pacific Lumber, the acquisition of that 12 particular company. 13 Q. And the opposition of certain 14 environmental groups to that acquisition? 15 A. No. 16 Q. Didn't have anything to do with that? 17 A. I -- the primary inquiries that I was 18 receiving at the time dealt with the way he 19 acquired it, how he funded the acquisition, and 20 later at some time, I can remember some inquiries 21 from a Senate committee regarding the pension 22 fund. 23868 1 THE COURT: Why would they be asking 2 you that? 3 THE WITNESS: Well, because I was 4 the -- well, it would come down the line. Because 5 I was the supervisory agent of USAT, USAT was 6 controlled by the holding company; and Mr. Hurwitz 7 controlled the holding company as they saw it. 8 Therefore, there was some insinuations, as I said 9 earlier, that somehow Mr. Hurwitz had used insured 10 deposit money or assets of USAT in some way to 11 purchase -- help purchase Pacific Lumber. 12 Particularly, there was a bridge financing. 13 Between the time the deal was going through and 14 the time the junk bonds that Mr. Hurwitz, the best 15 I can recall, used to purchase it, there was a 16 period of time where maybe some people saw it 17 coming from Washington. That's the Congressional 18 side that -- how Mr. Hurwitz had possibly used 19 assets, securities, and used them as collateral to 20 fund some type of bridge loan; but we had no 21 evidence of that sort. 22 THE COURT: Thank you. Excuse me, 23869 1 Mr. Nickens. 2 Q. (BY MR. NICKENS) Mr. Twomey, wasn't it 3 that there were people who believed that if you 4 could create enough trouble in the regulatory area 5 for USAT, that it might induce a sale of Pacific 6 Lumber to someone else? 7 MR. RINALDI: I'm going to object, 8 Your Honor. It's calling for him to testify about 9 other people's beliefs, and he's not even telling 10 us who those people are. If he could make the 11 question somewhat more intelligible and not 12 require an elaboration on people's beliefs, I 13 would have no objection. 14 Q. (BY MR. NICKENS) Didn't it come to your 15 attention that one of the purposes of these 16 inquiries was to try to force a sale of Pacific 17 Lumber? 18 A. To who? I mean, you're bringing up a 19 matter that I'm not aware of. 20 Q. Well, you don't know? Wasn't that 21 similar to what had happened with Castle & Cooke? 22 A. Well, Castle & Cooke predates me, and 23870 1 I -- 2 Q. You're the one that brought it up 3 earlier today. 4 A. Well, it just reminded me of it. 5 Somehow, Mr. Hurwitz' interest had got into a 6 percentage ownership of Castle & Cooke and hadn't 7 properly disclosed it. Part of the settlement on 8 that, they had to sell their shares. Again, that 9 happened prior to my arrival, as best I can 10 remember it. 11 Q. Well, did you not become aware that 12 politically important people who opposed the sale 13 of Castle & Cooke had solicited the bank -- 14 certain Congressional committees having to do with 15 bank regulatory matters? 16 A. The only Congressional committees that 17 indirectly or directly contacted me that I can 18 recall Metzenbaum, the senator from Ohio's 19 committee -- I'm not sure what his committee name 20 is -- Dingell's committee -- and I don't remember 21 the committee's name right now. Staffers from the 22 committees contacted me. Their whole focus was in 23871 1 junk bonds, trades involving Milken, trades 2 involving other institutions that were heavily 3 involved with Drexel in junk bonds, parking of 4 securities, et cetera, et cetera, et cetera. I 5 don't recall that I had any focus on any 6 environmental concerns over the redwoods being 7 addressed to me. It may have. But I know at a 8 later date, from what I read in the paper, it 9 seems like a number of environmentalists were 10 pushing for some type of deal; but that is well 11 after I left as a supervisory agent. 12 Q. Did the comments in Mr. Berner's memo 13 accurately reflect your views of Mr. Hurwitz as a 14 businessman? 15 A. Yes. 16 Q. Then let me ask you to move 17 chronologically forward, if we can, Mr. Twomey, to 18 Exhibit 11165, which is at Tab 1858. I believe 19 this is the very first document that Mr. Rinaldi 20 asked you about. It is a letter from you 21 addressed to Mr. Herb Held, regional director of 22 MAD and FSLIC. 23872 1 Do you have that letter? 2 A. Yes. I have it in front of me. 3 Q. It's A11165? 4 A. That's what -- yes, that's penciled in 5 at the bottom. 6 Q. This is a letter by which you were 7 preparing United for transfer to FSLIC? 8 A. I was recommending the transfer of USAT 9 to become what we designate as a FSLIC case. 10 Q. And that was a part of sort of the 11 standard operating procedure at that point in time 12 in preparing an institution for receivership? 13 A. Yes. I think I previously testified 14 FSLIC wouldn't take any action on an institution 15 unless it was actually assigned to them or 16 transferred to them. 17 Q. And this, in terms of your work, was 18 part of the standard operating procedure of the 19 times? 20 A. FSLIC wouldn't take any action unless I 21 made the recommendation. 22 Q. But there wasn't anything sort of the 23873 1 out of the ordinary other than the fact that you 2 were preparing the institution for receivership? 3 A. I guess not. 4 Q. Now, as a part of this, there was a 5 consent agreement that you required or asked the 6 board of directors of USAT to enter into? 7 A. Yes. 8 Q. And, again, that was part of preparing 9 the institution for receivership? 10 A. Well, by signing the consent agreement, 11 the board of directors agreed to any merger, 12 acquisition, sale -- basically anything FSLIC 13 decided in its best interests to do, the board of 14 directors basically agreed they would follow. 15 Q. And if you'll look over at the second 16 page of Exhibit A11165 on the third paragraph that 17 starts out "On November 7th," it references that 18 consent agreement? 19 A. Yes. 20 Q. And it included the orderly reduction 21 of dollar rolls, repurchase agreements, junk 22 bonds, equity arbitrage securities, and interest 23874 1 rate swaps? 2 A. Yes. 3 Q. You were requiring the institution to 4 sell those financial instruments as a part of 5 preparing it for receivership, correct? 6 A. Well, I believe I was asking the 7 institution through the consent agreement to come 8 up with a business plan. What we were basically 9 trying to do is limit any activity that might be 10 risky and, in the future, cause any -- any future 11 loss. The bottom line here is that we were 12 envisioning that sometime before the end of the 13 year, the institution would be placed -- would 14 receive some type of FSLIC action. It could be 15 placed in receivership. It could be infused 16 capital. What we were trying to do is basically 17 get to a standstill, try to limit all new 18 business, try to limit all new loans, just hold 19 the line until the institution could be acted on 20 by FSLIC. 21 Q. And part of that was the orderly 22 reduction and liquidation of certain financial 23875 1 instruments, correct? 2 A. Well, again, part of the consent 3 agreement is I normally would have asked for a 4 business plan; and they would spell out exactly 5 how they were proceeding on that area. 6 Q. And, of course, you knew -- before you 7 asked for such a liquidation, you knew the effect, 8 did you not, of such liquidation? 9 A. Well, again, I would probably wait 10 until I saw what was in their business plan before 11 I may concede to what they were asking to do or if 12 I felt they were going in the wrong direction, I 13 may direct them to correct something. 14 Q. Okay. Let me ask you to -- 15 A. I think you should focus on the word 16 "orderly." It wasn't just shut it down, close it 17 off, this is the end of life as we know it, and we 18 turn off the lights on December 1st. The word 19 "orderly" meant we wanted them to tell us how to 20 limit activities and basically hold the line until 21 FSLIC acted. 22 Q. Let me ask you to look at 23876 1 Exhibit A11110. Excuse me. 11110. Four 1s. 2 11110. 3 Mr. Twomey, can you identify 4 Exhibit A11110 as a memo from you to Mr. Barclay 5 dated September 29, 1988? 6 A. Yes. 7 MR. NICKENS: Your Honor, we offer 8 Exhibit A11110. 9 MR. RINALDI: No objection, Your Honor. 10 THE COURT: Received. 11 Q. (BY MR. NICKENS) Now, that is your 12 initials on this memorandum? 13 A. This is my initials. 14 Q. Okay. And the first paragraph 15 indicates that "United's chief financial officer, 16 Michael Crow, informed me this morning that 17 Michael Patriarca of the San Francisco Bank has 18 recommended that United sell $1 billion in 19 underwater MBSs prior to the anticipated 20 receivership. This would result in a 70- to 21 110-million-dollar loss to the association." 22 Do you see that? 23877 1 A. Yes, I do. 2 Q. And you prepared this memorandum on or 3 about September 29th, 1988? 4 A. A memo is a memo. 5 Q. Well -- 6 A. I prepared it. I initialed it. 7 Q. At or about that date, correct? 8 A. I usually -- the same day I write them 9 is the same day I initial them normally. 10 Q. I certainly recognize, Mr. Twomey, you 11 may not recall this; but I'm asking you if we can 12 establish for the record that it was in the normal 13 routine then to prepare -- to date it at about the 14 time you prepared it, correct? 15 A. I'll accede to that. 16 Q. And you don't have any reason to 17 believe that the date that you prepared it might 18 be different from the one that's reflected on the 19 document. Right? 20 A. I don't believe so. 21 Q. Now, you've testified you did not know 22 about the mark-to-market losses in the 23878 1 mortgage-backed securities until you were informed 2 of that on December 19th, 1988; is that correct? 3 A. Well, what I said is I was surprised 4 regarding the mark-to-market -- what was in the 5 examiner's fifth interim report dated 6 December 1988. 7 Q. But, in fact, you had written at the 8 end of September that on a sale of $1 billion, 9 they were facing a possible loss of -- a 70- to 10 110-million-dollar loss, correct? 11 A. Based on what -- I have no reason to 12 refute what's in this memo. If Michael Crow 13 called me on September 29th and told me that 14 Patriarca from the Federal Home Loan Bank of 15 San Francisco had called him and made this 16 request, you know, and if Mike Crow felt that this 17 would result in them realizing a 70- to 18 110-million-dollar loss because they were selling 19 underwater MBSs, I have no reason to question 20 these numbers. 21 Q. Well, you were certainly aware that 22 they had mark-to-market losses in the 23879 1 mortgage-backed securities portfolio based on this 2 memo, correct? 3 A. Yeah. Normally, when -- with a loan, 4 sir, if you put a loan on your books or you put a 5 mortgage-backed security on your books or you put 6 a security on your books, you mark it at your 7 historic cost because you're anticipating holding 8 it until the end of duration, okay, until it 9 matures. Then what happens with a thrift is as 10 values move up and down, you don't normally go 11 back in and mark-to-market the portfolio and 12 adjust your net worth or earnings because of 13 market fluctuations. If they had purchased a 14 billion dollars of mortgage-backed securities and 15 because interest rates rose and now they are 16 underwater, they would still be showing on their 17 books a billion dollars even though they might be 18 worth $890 million. 19 Q. The issue we're examining is what you 20 knew and when you knew it. 21 A. I was trying to help you clarify. 22 Q. You were aware of mark-to-market -- 23880 1 substantial mark-to-market losses in the 2 mortgage-backed securities portfolio at least by 3 September 29th, 1988? 4 A. By what's in this memo, what Mr. Mike 5 Crow told me, this is what I was aware of at that 6 particular date, at that time, at that moment. 7 Q. And you were also aware, were you not, 8 through a similar process of mark-to-market losses 9 in the swaps? 10 A. I assume you're referring back to 11 Vivian's 1987 examination report. 12 Q. Well, any other information. You were 13 looking at an orderly reduction, liquidation of 14 certain financial instruments. 15 A. Okay. The -- when you talk about the 16 interest rate swap, I'm referring back to what you 17 pointed out was in Vivian's examination report 18 this morning. 19 Q. Yes, sir. 20 A. I think you pointed out before that the 21 consent agreement was signed -- what was the date 22 in November? 23881 1 Q. November. I don't know the exact date. 2 A. Okay. This memo is in September. 3 Q. And you're getting it -- 4 A. So, you're telling me that we had 5 already directed them to liquidate in September 6 when the consent agreement is dated November? 7 Q. No, sir. I'm asking you about your 8 preparations to deliver USAT -- 9 A. Well, this memo points out that 10 Mr. Patriarca had made the request directly to 11 USAT. 12 Q. Yes, sir. 13 A. Okay. So, now you're telling me I told 14 somebody to tell Mr. Patriarca to tell Mike 15 Crow -- 16 Q. No, sir. We're exploring what you knew 17 and when you knew it. Let me ask you to look at 18 another document. 19 A. Mr. Nickens -- 20 THE COURT: There's no question 21 pending. 22 Q. (BY MR. NICKENS) A11111. 23882 1 MR. NICKENS: Your Honor, I believe 2 this will be the maximum extent of 1s that we can 3 get on the documents. 4 Q. (BY MR. NICKENS) Exhibit A11111 5 purports to be a memorandum from you to 6 Mr. Barclay dated October 4th, 1988. 7 Can you identify it as such, 8 Mr. Twomey? 9 A. I can, but I would like to have a 10 chance to read it. 11 Q. You can read it while we're taking care 12 of our business. 13 MR. NICKENS: Your Honor, I would offer 14 A11111. 15 THE COURT: Received. 16 A. (Witness reviews the exhibit.) Okay, 17 I've read the memo. 18 Q. (BY MR. NICKENS) You were aware in 19 October of 1988 that USAT had swap positions which 20 were substantially underwater on a mark-to-market 21 basis? 22 A. Based on what Mike Crow told me at this 23883 1 time, yes. 2 Q. Well, this is Terry Smith, correct? 3 A. Well, Mike Crow verified it. 4 Q. Well, you indicate in your memo that 5 Mr. Smith informed you of this swap transaction, 6 correct? 7 A. Yeah. But the way I remember it is 8 United had contacted Mr. Smith to exit from these 9 swaps. 10 Q. And it indicates that it would cost 11 $48 million or create a 48-million-dollar loss to 12 the institution? 13 A. Well, I'll -- on the third line, my 14 copy is kind of -- I was trying to read someplace 15 else in the document. I can see barely a 5. I 16 can see a dollar sign. I assume that means 45 or 17 48. That's fine. 18 Q. Okay. So, you were aware of the 19 underwater swaps in October? 20 A. Well, I was aware that if United went 21 ahead with this reversal, this would be a loss to 22 the institution as they told us. 23884 1 Q. You were aware of it not only from 2 Mr. Crow and Mr. Terry Smith, but you were aware 3 of it from the fact that a substantial number of 4 these swaps, the counterparty was the Federal Home 5 Loan Bank of Dallas. Right? 6 A. I'm sure that United entered into the 7 swap transactions depending on what the market was 8 with various people and the Federal Home Loan Bank 9 of Dallas' corporate side might have offered the 10 best rates at the time. 11 Q. Now, there was no surprise concerning 12 USAT's swap position in December of 1988, was 13 there? 14 A. As I said before, I believe that's the 15 December of 1988 interim report. I was surprised 16 about what was in that report. 17 Q. Didn't have anything to do with swaps, 18 though, did it? 19 A. I previously testified I was surprised 20 about what was in that report. 21 Q. Now, you indicate in your memorandum 22 that "Of great" -- this is the last paragraph. 23885 1 "Of greater concern to us is the spectre of 2 dealers pulling repo lines as United's 'dumping' 3 gains publicity (particularly the junk bonds)." 4 Now, have you previously indicated that 5 that was a concern of USAT's? 6 A. I think, really, the rest of that 7 paragraph is what I'm talking about with greater 8 concern. Obviously, United already had publicity 9 regarding their junk bonds. Again, this isn't the 10 best copy. With 2 billion, I would say -- I 11 cannot read this. "2,045,000,000 in reverse repo 12 agreements which have been funding operations and 13 liquidity, United runs the risk of severe 14 liquidity problems if these lines are pulled." 15 This gets back to what I mentioned, that if the 16 repo money dried up, the institution would have a 17 severe liquidity crisis and we would have to act 18 to avoid a run on the institution. 19 Q. And you already were aware of the fact 20 that they had booked an 11-million-dollar loss for 21 the sale of part of its junk bond portfolio, 22 correct? 23886 1 A. That's what it says in here someplace, 2 I believe. Yeah, the second paragraph, 3 "Reportedly, United has already booked $11 million 4 of losses from the sale of part of its junk bond 5 portfolio." 6 Q. And it's in your memo with regard to 7 the MBS again, correct? 8 A. The September 29th memo? 9 Q. Yes, sir. 10 A. Yes. 11 Q. Okay. Mr. Twomey, I would like to ask 12 you some more questions about what you knew and 13 when in your direct testimony. 14 You testified that it was unsafe and 15 unsound for a risk-controlled arbitrage using 16 mortgage-backed securities to recognize gains on 17 sales of MBS in order to create regulatory capital 18 while deferring losses on the corresponding 19 hedges. 20 Do you recall that? 21 A. Yes. 22 Q. And that is your opinion? 23887 1 A. Yes. 2 Q. Now, when did you develop that opinion? 3 A. The exact date? 4 Q. No, sir. Did you have that opinion 5 while you were a supervisory -- an SA for USAT? 6 A. Yes. 7 Q. That's not an opinion that you have 8 developed recently? 9 A. Not that I can recall. 10 Q. Let me ask you to look at a document, 11 Exhibit B2055 which can be found at Tab 231. 12 Now, Mr. Twomey, this is an article 13 that is in evidence authored by Mr. Scott and 14 Mr. Smith and to which is attached an article by 15 Mr. Hjerpe. 16 Do you see that? 17 A. Yes. 18 Q. Now, this was published in the Savings 19 Institution in March of 1988. 20 Now, did you have access to information 21 of this kind when you were developing your opinion 22 that if you sold MBS in a risk-controlled 23888 1 arbitrage, you had to also liquidate the swaps? 2 A. I don't recall seeing this document. 3 In fact, I'm having a hard time figuring out -- 4 March of '88? 5 Q. Yes, sir. I will tell you that other 6 evidence has established that date. It is 7 difficult to read. 8 A. Okay. Well, you know, obviously I know 9 Mr. Scott. I know Mr. Smith, and I knew Ed Hjerpe 10 was in charge of, I thought, policy or economic 11 policy at the Federal Home Loan Bank Board in 12 Washington. I'm aware that Ed had a -- had a 13 discussion on risk-controlled arbitrage that he 14 published in '87. I don't recall seeing this in 15 '88, though. 16 Q. Well, did you consider this when you 17 were developing this opinion, that when one sells 18 the mortgage-backs, that you should liquidate the 19 swaps and that, indeed, it is an unsafe and 20 unsound practice not to do so? 21 A. Well, this was some article that was in 22 Savings Institution. I don't really recall the 23889 1 magazine. I'm assuming it's a magazine. I just 2 don't recall seeing this article. 3 Q. Let's look at what it said in 4 relationship to the opinion you've expressed. I 5 would refer you to Mr. Hjerpe's article; and on my 6 copy, it's F36. It's the third page over in the 7 document. And if you would look at the right-hand 8 column at the very bottom, there's a paragraph. 9 The last paragraph starts out "nonetheless." 10 Are we in the same place? 11 A. About six lines, yes. 12 Q. It says -- excuse me. Turn to the next 13 page. I picked the wrong spot. Again, it's the 14 last two paragraphs. 15 A. On the first, second, or third column? 16 Q. On the third column on the right side, 17 the last two paragraphs. It starts out "If 18 prepayment speeds." 19 A. Yes. 20 Q. And it says in the next sentence, 21 "Should rates move down and the mortgage balance 22 begin to prepay, the mortgage securities should be 23890 1 rolled into lower coupons." 2 Now, that's what USAT did. Right? 3 A. I don't know that for a fact, that they 4 did that all the time. 5 Q. You haven't heard about the rolldown? 6 A. I heard about a lot of things. I mean, 7 what year? What time? What place? What amount? 8 Q. Well, look at the next sentence. "The 9 alternative is to partially unwind swaps to reach 10 the desired short funding." 11 A. Yes. 12 Q. "The latter rebalancing strategy is 13 much more costly than rolling down coupons because 14 a payment will be required to unwind the swap. By 15 rolling down coupons, the capital gain will help 16 offset the cost of reduced interest income on the 17 assets." Right? 18 A. That's what it says. 19 Q. "if interest rates rise, the desired 20 rebalancing strategy for an underhedged position 21 is to add swaps instead of rolling up coupons." 22 Do you see that? 23891 1 A. Yes. 2 Q. Now, Mr. Hjerpe, you said, was the head 3 of policy at the Federal Home Loan Bank Board? 4 A. Let me go back. I thought it was 5 policy. This article refers to him as the 6 financial economist. He was probably the chief 7 economist at that time. 8 Q. It says, "Rolling up coupons would 9 require the immediate recognition of a capital 10 loss. Adding swaps will reduce the expected 11 spread because the average fixed rate paid is now 12 higher." 13 Do you see that? 14 A. Yes, I do. 15 Q. Isn't that directly -- isn't that -- 16 isn't Mr. Hjerpe describing what is good practice 17 in the management of a mortgage-backed securities 18 portfolio using risk-controlled arbitrage? 19 A. Well, my reading of this, he's talking 20 about different options. You could consider this. 21 You could consider that. This is the result. 22 This is the effect and going on through. 23892 1 Q. And the practice he is recommending, 2 you have told this Court, was an unsafe and 3 unsound practice, correct? 4 A. Again, I cannot agree with your 5 rendering of this excerpt from this particular 6 article which I don't recall ever reading. 7 Q. Isn't it the case, sir, that you have 8 developed this opinion in the last few months in 9 connection with your preparation for testimony in 10 this case? 11 A. I wouldn't say that. 12 Q. You didn't have any such opinion at the 13 time in 1988, did you? 14 A. From about 1988 to a few years ago, I 15 probably haven't thought too much about 16 risk-controlled arbitrage because they weren't 17 coming -- had nothing to do with me. Prior to 18 '88, I had to think about risk-controlled 19 arbitrage. I had to think about hedging. I had 20 to think about FASB 80 and the facts and 21 correlations, when you recognize gains and losses. 22 Q. Did you have the opinion you've 23893 1 expressed to this Court about safety and soundness 2 in disposing of swaps in a declining interest rate 3 market in 1987? 4 A. What I think I said to the Court, we 5 were talking about the repos and we were talking 6 about the mortgage-backed securities. And I 7 believe what I may have said is if you are 8 liquidating the higher coupon MBSs because they 9 had a potential of high prepayment, then you could 10 purchase lower yielding or market -- at that time 11 probably market yielding coupons which would tend 12 to be lower or, at the same time, you could 13 liquidate a portion of your repo -- money that you 14 would offset against it. It's all part of what I 15 believe is just managing the risk-controlled 16 arbitrage. 17 Part of that would then be if you had 18 swaps against certain repos and so forth and so 19 on, you would have to exit out of them. It's a 20 little bit of a domino because you have to do this 21 if you do this. It's one thing and then another. 22 You have to be there to walk this through. 23894 1 Q. How could it be it's an unsafe and 2 unsound practice according to you and Mr. Hjerpe 3 says just the opposite? 4 A. I believe what Mr. Hjerpe said in the 5 article was you could buy lower coupons -- and 6 this is the effect of doing that -- or you can 7 unwind basically the repos and hedges and other 8 things that go along with the liability side, the 9 borrowed money side. 10 Q. You don't read his article as being 11 critical because of the extraordinary cost 12 associated with liquidating the swaps? 13 A. I think he recognizes the fact that -- 14 it's the same thing, Mr. Nickens, if you have a CD 15 at NationsBank. You get it at market rate today. 16 If that's 5 and a half percent on your CD and 17 interest rates suddenly go way up next year and 18 we're back up to 7 and 8 percent and you're not 19 happy with the fact that you're locked in at two 20 years at 5 and a half percent, when you go in and 21 redeem that CD, you pay a penalty. It's the same 22 thing with interest rate swaps. 23895 1 Q. Your testimony is you don't believe 2 your position is inconsistent with that of 3 Mr. Hjerpe? 4 A. As far as -- you're taking snibits out 5 of this particular article, and I don't see where 6 I'm inconsistent. 7 Q. Well, could you offer us any 8 contemporaneous literature to support your 9 position? 10 A. I'm not really aware in the 1990s, 11 especially the late 1990s -- 12 Q. I'm talking about contemporaneous in 13 1986. 14 A. There were other articles regarding 15 risk-controlled arbitrage put out by Wall Street, 16 CPAs. 17 Q. I'm asking you if there's anyplace you 18 can refer us to that would support the opinion 19 expressed in this courtroom by you that it was 20 unsafe and unsound to not sell the swaps or 21 otherwise liquidate. 22 MR. RINALDI: Objection, Your Honor. 23896 1 That's not the opinion he expressed. He has 2 misrepresented the opinion that I asked him about 3 earlier. 4 MR. NICKENS: Then let's look at it. 5 Q. (BY MR. NICKENS) Would you look at 6 Page 23724 of your testimony? 7 A. I have March 17th. Is that it? 8 Q. It would be September 22nd. 9 THE COURT: Could you state the page 10 again, please? 11 MR. NICKENS: It's at Page 23724, which 12 is the testimony from yesterday. 13 THE COURT: Thank you. 14 A. Okay. 23724? 15 Q. (BY MR. NICKENS) Yes. At Line 2, you 16 were asked, "Now, in a mortgage-backed securities 17 risk-controlled arbitrage portfolio, is the 18 practice of recognizing gains on the sale of MBS 19 to increase regulatory capital while deferring the 20 losses on the corresponding hedges a practice 21 which is inconsistent with principles of safety 22 and soundness." 23897 1 And you said? 2 A. "Yes." 3 Q. Don't you see -- do you tell this Court 4 that your testimony is consistent with the 5 published opinion of Mr. Hjerpe? 6 A. My testimony is consistent with what my 7 understanding of a risk-controlled arbitrage is. 8 If you sell the mortgage-backed securities and you 9 get the cash, you don't keep the repos on the 10 books because you bought the repos to buy the 11 mortgage-backed securities. So, when you exit out 12 or you're winding down or you liquidate, that's 13 the time to get rid of the liabilities. If they 14 are hedged with some type of interest rate swap, 15 you recognize that, the gain or loss, in effect of 16 exiting out of the repos and terminating the 17 swaps. That's my understanding. 18 Q. Mr. Twomey, is your opinion consistent 19 or inconsistent with that expressed by Mr. Hjerpe? 20 A. Based on the small part that I read, I 21 would say "yes." All he's doing is pointing out 22 alternatives, options, considerations. 23898 1 Q. You're telling the Court that the two 2 opinions are consistent? 3 A. I'm telling what my opinion is. You 4 can have your own opinion. 5 Q. Yes, sir. But your sworn testimony is 6 that they are consistent? 7 A. I've already answered the question. 8 Q. Now, let's turn to a different subject 9 about what you knew or didn't know. 10 You testified, Mr. Twomey, that you 11 were unaware of the Smith Breeden analysis; is 12 that correct? 13 A. I believe what I testified, I knew that 14 Smith Breeden was -- basically, what I could 15 recall is Smith Breeden was somewhere involved; 16 but I don't recall -- I don't think there was a 17 particular analysis or a particular internal 18 report at USAT. I just don't recall seeing it at 19 this time or at the time I was asked about it. 20 Q. Let me ask you to look at 21 Exhibit B1183. 22 A. Do I have it? 23899 1 Q. This may have been something that I 2 pulled out this morning. Tab 1292. 3 Do you have Exhibit B1183, Mr. Twomey? 4 A. Pencil copy on top, it seems? 5 Q. Yes. 6 A. Okay. 7 Q. And I will tell you that these 8 documents have been identified as memorandum from 9 the 1986 exam work papers. 10 A. Okay. 11 Q. And let me ask you then to look over at 12 Page -- it's Page 2 of the July 28th, 1986 ALCO 13 minutes from the exam work papers bearing the 14 number OW120924. 15 A. (Witness reviews the document.) 16 Q. Do you see -- could you read numbered 17 Paragraph 4 for us? Read it to yourself. 18 A. On the next page? 19 Q. I'm sorry. It's OW120924, the second 20 page of the July 28th, 1986 ALCO minutes. Do you 21 see numbered Paragraph 4 at the top of the page? 22 A. I'm there now. 23900 1 Q. Just read that to yourself. 2 A. (Witness reviews the document.) Yes, 3 I've read both paragraphs. 4 Q. Now, this is the very same information 5 that you testified yesterday would have changed 6 the way you were looking at the RCA or the MBS. 7 Right? 8 A. I believe what I was being shown 9 yesterday at the time was a Smith Breeden report 10 that was internal to USAT. I just basically said 11 that I think I was aware that Smith Breeden was 12 involved with USAT helping them with their 13 portfolio. I don't remember seeing that report 14 before; and quite honestly, I have not reviewed 15 their ALCO minutes before either. 16 Q. Well, this indicates certainly that the 17 examiners looked at it, correct? 18 A. If you tell me that this is part of the 19 examiner's work papers, okay, they are part of the 20 examiner's work papers from their 1986 or part of 21 the 1987 exam. 22 Q. This is the very bullet point -- 23901 1 A. Probably the '87 exam. 2 Q. -- the very bullet point that 3 Mr. Rinaldi referenced you to from the 4 Smith Breeden report? 5 A. The same point basically without the 6 detail or the -- you know, the document that he 7 had shown to me. But the broad point they were 8 making is contained in those ALCO minutes, yes. 9 Q. Isn't it the case that with a 10 risk-controlled arbitrage, that with interest rate 11 movements, your spread tends to deteriorate 12 whether they go up or down? 13 A. Actually, I would agree with that. I 14 think if interest rates were going up for the 15 short-term or going down for the short-term, it 16 should probably narrow. 17 Q. That is a characteristic of a 18 risk-controlled arbitrage, is it not? 19 A. I would generally say that. There 20 might be an exception, but I can't think of one. 21 Q. Are you telling us that that 22 information would have changed your attitude 23902 1 toward USAT's risk-controlled arbitrage? 2 A. Well, based on what I saw in that 3 Smith Breeden document, it looked as if on that 4 presentation that if -- and, obviously, interest 5 rates don't stay the same. Whichever way USAT's 6 risk-controlled arbitrage is being managed, it 7 would lose money. If interest rates went up, it 8 would lose money. If they went down, it would 9 lose money based on what I read from that 10 particular page of that particular report. 11 Q. Isn't that characteristic of a 12 risk-controlled arbitrage? 13 A. Well, in my opinion, if a 14 risk-controlled arbitrage is being properly 15 managed, as I said, in times of interest rate 16 fluctuations, I would agree with you there is a 17 narrowing. Basically, what you would gain on one 18 side, you would lose on the other. You're 19 basically trying to stay in a neutral position; 20 so, you're neutral to interest rate movements. 21 Q. That's where you try to be, correct? 22 A. That's where it should be. 23903 1 Q. Let me ask you to -- well, by 2 mid-December, you had changed your attitude toward 3 USAT's management; is that correct? 4 A. Mid-December of 1988? 5 Q. Yes, sir. 6 A. Yes. 7 Q. You had a very different attitude than 8 you had had prior to that time? 9 A. Prior to September of '88. After 10 September of '88, my opinion changed. 11 Q. In order to recommend them for 12 participation as an acquirer in the 13 Southwest Plan, you had to have a positive 14 attitude with management, correct? 15 A. I would say yes. 16 Q. And your testimony is that for -- as a 17 result of the Southwest Plan examination, you 18 changed your mind? 19 A. Yes. 20 Q. Because you became aware of some 21 information that you had not previously been aware 22 of; is that right? 23904 1 A. Right. 2 Q. And that new information supposedly 3 included some information about employment 4 contracts and certain aspects of the investment 5 portfolios. Right? 6 A. Actually, going up to the beginning of 7 December, it was really on the employment 8 contracts. By the time we got the last -- that 9 interim report before the end of the year, things 10 had already been in motion. There was, quote, a 11 life of their own. And that really didn't have 12 any significant impact on anything. 13 Q. Right. You have gone back and looked 14 at those interim reports, haven't you? 15 A. Yes, I have. 16 Q. And you noted that the first one 17 dealing with mortgage-backed securities is dated 18 December 19th, correct? 19 A. Yes, I know that. 20 Q. And you wrote your report recommending 21 the termination of the employment of Mr. Berner 22 and Mr. Williams and Mr. Crow and Mr. Munitz on 23905 1 December 15th? 2 A. I will agree with what you say. 3 Q. So that the mortgage-backed securities 4 didn't have anything to do with your change in at 5 attitude toward the management of USAT? 6 A. The way I recall it is because the 7 information came out regarding the employment 8 contracts, et cetera, I had changed my opinion; 9 and if I wrote a memo on the 15th, it probably 10 would have reflected that opinion. 11 Q. This stuff about the mortgage-backed 12 securities is something that you developed in an 13 effort -- to use an overused word -- bolster your 14 recommendation? 15 A. What recommendation? 16 Q. The recommendation that these four 17 individuals should be fired and not allowed to 18 participate in the banking business in the United 19 States? 20 A. Well, it might refresh my memory. 21 Could I look at that exhibit? 22 Q. Let me get that for you. I'm referring 23906 1 to Exhibit T8145, Tab 1865? 2 MR. RINALDI: T what? 3 MR. NICKENS: T8145. 4 Q. (BY MR. NICKENS) Do you have T8145 in 5 front of you, Mr. Twomey? 6 A. Yes, and I see two memorandums. 7 Q. And attached is a management assessment 8 report dated December 15th, correct? 9 A. Yes. A fairly long memo to Bob Brick. 10 Q. From you and Mr. Dunn? 11 A. That's right. 12 Q. And you address in Paragraph D some 13 comments about mortgage-backed securities. 14 A. Let me get there, please. (Witness 15 reviews the document.) Yes, I've read it. 16 Q. And let me -- while we're at it, why 17 don't we get Exhibit B2699 in front of you, which 18 is the Bese report. Now, Enclosure 8 of 19 Exhibit B2699 is Mr. Lapidus' report with regard 20 to mortgage-backed securities. 21 A. Okay. The December report? 22 Q. Yes, sir. And you know that that 23907 1 report was not sent to Ms. Bese until 2 January 20th, correct? 3 MR. RINALDI: Objection. Never mind. 4 A. I don't know when she received it, 5 honestly. 6 Q. (BY MR. NICKENS) Well, was the report 7 back dated? 8 A. No. 9 Q. Well, it's dated January 19th, 1989, 10 correct? 11 A. I see that on the front page, yes. 12 Q. And so, it could not have contained 13 a -- as such, a report sent to her on the 20th, 14 could it? 15 A. The 20th of January? 16 Q. Yes. 17 A. Well, her top memo to me says 18 January 19th, 1989. 19 Q. Yes, sir. 20 A. If you're saying that something in here 21 was actually completed on January 20th or sent to 22 her on January 20th, 1989, I can't explain why 23908 1 there's a difference in dates. 2 Q. Let's look at the interim reports and, 3 more particularly, the one dealing with anything 4 about the securities portfolios, which is at -- 5 well, let's just go through them. 6 The first one, Enclosure 1, is dated 7 September 28th; and it deals with management 8 evaluation, asset classification, and the MACRO 9 ratings that have been discussed by you and 10 Mr. Rinaldi, correct? 11 A. Yes. Give me a minute. I'm trying to 12 find that particular one. Do you have a page? 13 Q. Yes, sir. The first page of 14 Enclosure 1 is at OW154207. 15 A. Okay. I have it. Enclosure 1. 16 Q. And then -- that doesn't have anything 17 to do with the securities portfolios, does it? 18 A. No. It was her first routine report to 19 us. 20 Q. And Mr. Lapidus wasn't even on site 21 until after Thanksgiving, correct? 22 A. I'm not aware when he arrived. 23909 1 Q. And then on October 17th, we have 2 Enclosure No. 2 which deals with the employment 3 agreements primarily, correct? 4 A. Yes. 5 Q. And then Enclosure No. 3, which is 6 dated November 9th, 1988, has a comment on 7 compensation; and then it has a brief comment on 8 equity arbitrage which says that it's been 9 profitable and it looks like they have adequate 10 policies and procedures, correct? 11 A. Yes. 12 Q. Then Enclosure No. 4 is November 29th. 13 This is the fourth interim report. And it records 14 the fact that Mr. Gross has been -- has resigned 15 and deals with a few other issues not including 16 securities, correct? 17 A. Correct. 18 Q. And then December 19th at Page OW154227 19 has some comments about mortgage-backed 20 securities, correct? 21 A. I think I lost you. Give me that OW 22 number again. 23910 1 Q. OW154227. 2 A. All right. At the bottom of the page, 3 mortgage-backed securities. 4 Q. But this was after you had already 5 prepared your memorandum recommending that the 6 employment of the four individuals be terminated? 7 A. Hold on. I think the memorandum you're 8 referring to was dated December 21st, 1988. 9 Q. Yes, sir. But the next page, which is 10 your memorandum -- 11 A. This is my memorandum. 12 Q. The next page where you discuss the 13 reasons are dated December 15th, correct? 14 A. Yes. 15 Q. Okay. 16 A. Which is an attached memo that we had 17 sent to Bob Brick. 18 Q. And you don't refer anywhere in there 19 in the first page to the interim report, do you? 20 A. In the first page? If it doesn't say 21 "interim report," I guess I didn't refer to the 22 interim report. 23911 1 Q. You had made up your mind by 2 December 15th concerning the continued employment 3 of these individuals, correct? And if you want, 4 you can look over at your recommendations on the 5 December 15th memo? 6 A. I'm looking there now. Well, my 7 recommendation again seems to be concentrated 8 primarily on the employment issues, the 9 termination of above-side employment contracts at 10 the time of receivership, immediate dismissal of 11 Mr. Michael Crow, Bruce Williams, Arthur Berner, 12 the return of approximately 600,000 which 13 represents 75 percent of the 1988 special bonus to 14 United from a trust account at Texas Commerce 15 Bank, and the payment of $13.9 million referencing 16 a federal income tax refund from United to UFG. 17 Q. But it could not have been relying on 18 the interim report that came four days later. 19 Right? 20 A. Well, not anything that was 21 specifically in that interim report probably. 22 Q. And, in fact, you told us that Ms. Bese 23912 1 wasn't there the last two weeks of December, 2 correct? 3 A. What I recall is shortly before 4 Christmas, we had a meeting. We had another 5 interim report with Ms. Bese which I assume is the 6 December 19th interim report. At that point in 7 time, she was going on vacation and wouldn't be 8 back until sometime in January. 9 Q. Well, you told us she was gone the last 10 two weeks of December. 11 A. Well, if she goes on vacation, she's 12 not working at USAT; so, she's gone. 13 Q. Do you know what day of the week 14 December 19th, 1988, was? 15 A. I'll make a guess it's a Thursday or a 16 Friday. 17 Q. It happens to be a Monday. 18 A. Okay. 19 Q. You're guessing Thursday or Friday 20 because you're guessing that might be a time when 21 somebody might start a vacation. Right? 22 A. Or leave to fly back to Seattle. 23913 1 Q. Not a Monday? 2 A. I couldn't tell you what day of the 3 week December 19, 1960 was. Normally, people 4 start vacations that coincide with the beginning 5 of another week. Again, Ms. Bese was getting 6 married, and she might have had some other plans 7 that I'm not aware of. 8 Q. Now, let's took at what you wrote about 9 mortgage-backed securities in your memorandum 10 that's attached to T8145. 11 A. Again, you're referring to the 12 December 12th -- 13 Q. No, the December 15th memorandum. 14 A. Okay. Let's see. 15 Q. At the end of the first paragraph, you 16 write, "Effective 8/28/86, Messrs. Williams and 17 Crow were given MBS trading authority as half of 18 the four-member committee and individually, as 19 well." Right? 20 A. That's what's in the memo. 21 Q. Now, how long did that committee last? 22 A. I don't know. 23914 1 Q. That's the USAT mortgage-backed 2 securities trading committee? 3 A. Well, my reading of this might lead 4 someone to, you know, deduce that this is how the 5 committee was made up and at that time effective 6 August 28, '86, that it was probably continuing on 7 to the present date. 8 Q. You were implying that because they are 9 half of this committee, that they have 10 responsibility -- special responsibility for the 11 MBS, correct? 12 A. I can't find any fault with that 13 generally. They are developing investment 14 strategies, making investment decisions, and 15 participating in the daily operation of United and 16 its investment related subsidiaries. So, I guess 17 the investment committee is directing their 18 investments. 19 Q. Well, we're talking about the committee 20 that was given MBS trading authority on behalf -- 21 as half of a four-member committee. 22 A. Okay. 23915 1 Q. Now, you say you can't find any fault 2 with that. Right? 3 A. My reading of this, if that's what it 4 says, then I have no reason to doubt it. Do you? 5 Q. If that committee was in existence for 6 only three months or so, would you find some fault 7 with how you wrote it? 8 A. That I guess our source of information 9 made a mistake and was incorrect. But that's why 10 we have examiners out there, to help us get the 11 right information. 12 Q. Well, this is no small matter, is it, 13 Mr. Twomey? 14 A. Is it -- if -- we rely on information 15 that we received to help put together these 16 memorandums. 17 Q. You're recommending the termination 18 from a FSLIC-supported institution of these four 19 individuals. Right? 20 A. Because there was an employment 21 contract situation that arose that was discouraged 22 by examiners in the Southwest Plan examination of 23916 1 1988 that we weren't aware of. 2 Q. If you want to limit your justification 3 for firing them to the compensation plans, we may 4 not have to discuss what you wrote about 5 mortgage-backed securities. 6 What are you relying on? 7 A. I'm telling you primarily the reason 8 they were being terminated was the employment 9 contracts. 10 Q. Don't you think it would be unfair to 11 comment on them as you have here as being on a 12 four-member committee if the committee was only in 13 existence for three months? 14 A. I don't know why you're bringing it up, 15 but I'm telling you again the reason they were 16 fired wasn't the fact that they were on a 17 committee for three or four months or a committee 18 for three or four years. The reason we were 19 asking for the termination is they had these huge 20 contracts and we think they were appropriate. 21 Q. Now, Mr. Crow's entire career and 22 livelihood had been associated with the banking 23917 1 industry. Right? 2 A. I assume so. 3 Q. And you knew you were effectively 4 putting an end to that -- 5 A. Did he execute an employment 6 contract -- 7 Q. -- when you wrote this memorandum? 8 A. Did he execute the employment contract? 9 I didn't execute the employment contract. He 10 executed it. 11 Q. What you were relying on was the 12 employment contract in order to terminate his 13 career in the banking industry? 14 A. Mr. Nickens, I just thought those 15 employment contracts were totally inappropriate. 16 Q. You weren't relying on anything about 17 the mortgage-backed securities, were you? 18 A. The best I can remember at the time, 19 that was my primary consideration. If it came to 20 light later that he may have made inappropriate 21 decisions, that was going to be FSLIC's 22 responsibility long after I had no more 23918 1 responsibility for USAT. 2 MR. NICKENS: Your Honor, this might be 3 an appropriate place to take a lunch. 4 THE COURT: All right. We'll adjourn 5 until 1:30. 6 7 (Whereupon, a lunch break was taken 8 from 12:02 p.m. to 1:35 p.m.) 9 10 THE COURT: Be seated, please. We'll 11 be back on the record. 12 Mr. Nickens, you may continue with your 13 cross-examination. 14 MR. NICKENS: Thank you, Your Honor. 15 Q. (BY MR. NICKENS) Mr. Twomey, when we 16 took our lunch break, we were discussing 17 Exhibit T8145 and, more specifically, your 18 December 15th, 1988 memo which is attached to that 19 exhibit. 20 A. Okay. 21 Q. I would like to go back to the comments 22 that we were looking at concerning mortgage-backed 23919 1 securities. 2 Do you have your document? 3 A. I'm digging it out. Just one moment. 4 I have it. 5 Q. It should be the fourth page of the 6 document, Paragraph D, "Mortgage-backed securities 7 activity." 8 A. Okay. 9 Q. Did you write this section? 10 A. Hang on, please. I may have messed up 11 combining different ones together. I have a board 12 briefing summary. I have a Donna Guthrie memo. 13 That's what's inside T -- 14 Q. It's Tab 1865. 15 16 (Discussion held off the record.) 17 18 A. Okay. The December 15th, 1988 19 memorandum, yes. 20 Q. (BY MR. NICKENS) Yes, sir. We're 21 looking at Paragraph D on the third page of the 22 exhibit. 23920 1 My question is: Did you write this 2 section? 3 A. Well, my initials are on the front of 4 the memorandum. I probably in some way helped 5 write it. I just don't remember right now. 6 Q. Now, we have talked about the first 7 paragraph dealing with the mortgage-backed 8 securities committee. And in the second 9 paragraph, you reference an example of poor 10 judgment. 11 A. The paragraph where it starts off 12 "examiner's initial review"? 13 Q. Yes, sir. About halfway through the 14 paragraph, you say, "For example, one of the 15 reasons cited by Mike Crow in his 10/30/86 16 memorandum to the investment committee for 17 terminating the services of Smith Breeden was 18 their, quote, 'failure to suggest specific 19 transactions that will make us money,'" close 20 quote. 21 A. I see that. 22 Q. I would like to put in front of you the 23921 1 Smith Breeden memorandum that you were referring 2 to which can be found at Exhibit A1415, Tab 346, 3 the minutes of the investment committee of 4 October 31, 1986. 5 Do you have that document? 6 A. Okay. The October 31st, 1986 meeting? 7 Q. Yes, sir. If you'll turn over to Bates 8 No. US3010376, I believe you'll find Mr. Crow's 9 memorandum. 10 A. (Witness reviews the document.) 11 Q. Now, do you think your comment about 12 the reasons for terminating the services of 13 Smith Breeden was a fair comment on his 14 memorandum? 15 A. Well, I can't tell you exactly where we 16 got the information to incorporate this section 17 into this memo. It's just been too long. So, 18 whether we had this in front of us or had a 19 summary about it or had something else, some type 20 of oral discussion with one of the examiners about 21 it, I just don't recall. 22 Q. Well, if you look at his memorandum, he 23922 1 gives four specific reasons for why the 2 relationship had been disappointing, correct? 3 A. That's true. 4 Q. And up above, he talks about the 5 frustrations with a clash of cultures. Right? 6 A. I see that phrase. 7 Q. And your memo focuses on one part of 8 Item No. 2. 9 A. I see that. 10 Q. Do you think that was a fair summary of 11 the reasons that he gave for terminating the 12 relationship? 13 A. I don't -- you know, because I don't 14 remember what we had available when the 15 December 15th memo was put together, I just don't 16 really have an opinion about -- you know, if you 17 want to turn around and say this is his memo, 18 okay. I don't recall seeing his memo at the time. 19 I don't recall our source for putting this section 20 in the December 15th memo. And until I could 21 clarify that in my mind, you know, I don't really 22 wish to offer an opinion one way or the other. 23923 1 Q. Well, don't you believe that he 2 documented substantial reasons for terminating the 3 relationship? 4 A. I don't wish to give an opinion on it. 5 Q. Didn't you give an opinion when you 6 wrote this up in the memorandum that you used to 7 terminate these individuals? 8 A. If I have an opinion as incorporated in 9 this memo, that's what it was at the time. What 10 my thought process and detail and all my source 11 documents to put this memo together, I just don't 12 right now recall. 13 Q. And you don't even know if you reviewed 14 the memo at the time that you prepared your 15 memorandum? 16 A. Again, if you're talking about Crow's 17 October 30th, 1986 memo, I don't recall. 18 Q. Well, let's look at some of the other 19 examples that you gave. You refer to a 6/17/86 20 memorandum from Bruce Williams? 21 A. That's what's incorporated in the 22 December 15th memo, yes. 23924 1 Q. Yes, sir. We're just going paragraph 2 by paragraph. 3 And did you read that memorandum? 4 A. I don't recall reading it. 5 Q. And do you know if the transaction 6 discussed there was done? 7 A. Again, I don't know about where our 8 source was when we prepared this memorandum. 9 Obviously, we had sources. Obviously, we relied 10 on them to put the information together. What 11 they were 10 years later, I just don't remember. 12 Q. And you didn't document those sources? 13 A. Why? Do you want footnotes? 14 Q. Sir, I would just like to know so that 15 we could recreate the thinking that led to 16 Mr. Crow's and Mr. Berner's, Mr. Williams' and 17 Mr. Munitz' firing. 18 A. Fine. 19 Q. So, do you know of any such 20 documentation? 21 A. No, I don't know of any line-by-line, 22 footnote-by-footnote documentation where this 23925 1 document might be supported. It's been too many 2 years, and that just wasn't our practice. What 3 was in the files at that time is probably what we 4 relied on. 5 Q. Would it have been important to know 6 whether the transaction that was discussed by 7 Mr. Williams was done or not in determining 8 whether or not it was a sanctionable offense? 9 A. Again, I don't wish to offer an 10 opinion. I mean, we relied on information that we 11 had. It's been too many years to tell you exactly 12 what that information was. Obviously, we had a 13 source; and because there's some detail in here 14 that just would not be in the normal file, this is 15 obviously information we might have received from 16 the examiners in some way. Other than that, I 17 can't recall. 18 Q. The only other possibility would have 19 been Mr. Lapidus, correct? 20 A. That is obviously a possibility. 21 Q. Mr. Lapidus had been barely on the job 22 for two weeks? 23926 1 A. Again, I'm not aware of when 2 Mr. Lapidus started his job as part of the 3 examination at USAT. 4 Q. He said it was on the Monday following 5 Thanksgiving that he arrived in Houston. 6 A. I don't have any way to confirm or deny 7 that. 8 Q. Let's look at the second paragraph. 9 You refer to an 11/24/86 memorandum. 10 By the way, do you know whether or not 11 the 6/17/86 memorandum is in the work papers? 12 A. I have no way of knowing. 13 Q. And do you know whether it was ever 14 criticized by any of the examiners who looked at 15 it, other than your criticism? 16 A. Sir, when you're working on the 17 examination, you may come up with a situation that 18 you may think is something for noncompliance or 19 safety and soundness; and in the course of the 20 examination, you research it. And then you make 21 an assessment of whether it's really some type of 22 violation, some type of concern, something that 23927 1 should be noted in the exam. I don't have access 2 to the work papers. I don't know what's in the 3 work papers. I don't know if they looked at this 4 at this particular time in 1988 and then later 5 might have decided, "Well, gee. In view of other 6 things, it's not a material item." 7 But it's a matter of an examination. 8 You look at something. You try to understand it. 9 If you understand it and it's not a problem, you 10 pass on it. If you look at it initially, you may 11 think it's a problem; but until you resolve it, 12 you go on. 13 This examination wasn't finished until 14 sometime in 1989. Perhaps at this point in time, 15 the examiner had a concern; and perhaps he was 16 very adamant that he might be right. I have no 17 way of knowing, no way of guessing, no way of 18 directing you to any documents. 19 Q. Your theory is that Mr. Lapidus was 20 adamant that this 6/17/86 memorandum displayed 21 poor and questionable judgment? 22 A. Sir, you're putting words in my mouth. 23928 1 I didn't say that. I said I didn't know the 2 source. I don't know where it came from. There 3 obviously is a source. There's detail here that 4 normally we wouldn't have. 5 Q. Now, you have testified that your 6 practice is to review all of the relevant 7 documents before sending out your memorandum, is 8 it not? 9 A. I would hope so. 10 Q. But you don't know whether you did in 11 this case? 12 A. I obviously looked at some documents. 13 We had information. What I'm trying to tell you 14 right now 10 years later is I don't remember what 15 those documents were. I don't know what the 16 source of the documents was. I don't know if it 17 was based on an oral communication with the 18 examiners or something in writing or an E-mail or 19 whatever. I do not recall what the source of this 20 detailed information is that you're referring to. 21 Q. Sort of makes it difficult with the 22 passage of time, doesn't it, Mr. Twomey, because 23929 1 you don't remember? 2 A. If I remember, I would tell you. 3 Q. And you're trying to justify your 4 position in response to my questions, and you have 5 a difficulty because so much time has passed. 6 Right? 7 A. My only difficulty is remembering the 8 source documents, and I'm not justifying to you. 9 Q. You can support the actions you took as 10 reflected on the memorandum of December 15th with 11 regard to the mortgage-backed securities? 12 A. Sir, I no longer work at the regulatory 13 affairs department or the OTS. And what records 14 they may have or what they might have that 15 would -- would have been in the supervisory files 16 at that time regarding this memorandum, I don't 17 have access to or control of or basically right 18 now remember. 19 Q. Let's look at Item No. 2 that you cited 20 as an example of poor and questionable judgment. 21 You say there "Mr. Williams wrote a memorandum 22 indicating that the spread on 10/1/86 was a minus 23930 1 1.46 with hedges and without hedges it was 2.61 2 positive." 3 Do you see that? 4 A. Yes, I do. 5 Q. Now, you don't -- what you record is 6 the fact that the spread has gone negative, 7 correct? 8 A. The memo is the memo, sir. 9 Q. And you say that reflects poor and 10 questionable judgment? 11 A. These were examples, and they were 12 incorporated into the memo based on information we 13 had at the time. 14 Q. Don't you think it would call for some 15 explanation as to why this situation reflected 16 poor judgment? 17 A. Sir, all I can say is that we had 18 documents available to us at the time. They were 19 the source of the memo. I don't recall what they 20 were, how we got them, who gave them to me. It's 21 been 10 years, and I just don't remember. 22 Q. Well, on the face of it, do you see 23931 1 anything here that would reflect poor or 2 questionable judgment? 3 A. The memo is the memo. The state of 4 mind that I had when I wrote it is reflected in 5 the memo. And right now, I'm not changing 6 anything. 7 Q. Could you point out to us where there's 8 some reflection of poor and questionable judgment 9 in Item No. 2? 10 A. Sir, the memo is the memo. This is the 11 way it was written. You can do all the pointing 12 you want. 13 Q. Let's look at Item No. 3. That's 14 the -- 15 A. I don't have an Item 3. 16 Q. Well, it's the item on Page 4 which is 17 OW028477, that first -- the first paragraph below 18 the one-sentence paragraph above. 19 A. (Witness reviews the document.) Okay. 20 Q. That's exactly the situation that we 21 talked about in connection with Mr. Hjerpe's 22 article. Right? 23932 1 A. Again, Mr. Hjerpe's article that I read 2 this morning, the snibit that I read was talking 3 about different options, different scenarios that 4 might occur with changes in interest rates. The 5 examiner is noting that when the interest rates 6 were falling, mortgage-backed securities were 7 sold. However, he noted that when the interest 8 rates were rising, a similar strategy wasn't being 9 followed. 10 Q. Mr. Hjerpe says you shouldn't follow 11 that strategy. Right? That is, selling when 12 rates rise? 13 A. I'm not going to opine on what 14 Mr. Hjerpe may have meant, said, or anything in 15 his article. Again, this is an article that I 16 don't recall ever reading. 17 Q. Now, when was it that interest rates 18 fell that led to the rolldown? 19 A. Well, in 1986, there was a dramatic 20 drop in interest rates from January to June that I 21 do recall. 22 Q. When was it that interest rates rose 23933 1 that is referenced here in your memorandum? 2 A. There probably was several different 3 cycles of interest rates going up and down. I 4 don't recall specifically. 5 Q. Didn't most of the institutions under 6 your supervision that owned mortgage-backed 7 securities have mark-to-market losses in those 8 portfolios after April of 1987? 9 A. I think most of the institutions other 10 than United were carrying these as investments, 11 and than meant they booked them at their historic 12 cost. And they weren't making a -- they weren't 13 including them in the trading portfolio; 14 therefore, they weren't marking them 15 mark-to-market on a quarterly basis or monthly 16 basis. 17 Q. So, if they had -- in terms of looking 18 at their market value, they would have reflected a 19 loss in value after April of 1987? 20 A. Sir, if I had the United States 21 Treasury, the interest rates went up, the value of 22 the Treasury would go down. If I had the United 23934 1 States Treasury and market rates would go down, 2 then the value of the bond would go up. That's 3 what happens. Interest rates go up. Interest 4 rates go down. It's a continuous cycle of 5 interest rates. 6 Q. You have cited that very phenomenon as 7 sufficient evidence that these two people should 8 be fired? 9 A. Again, I don't remember the exact 10 information available to us at the time that we 11 created this memorandum. It's probably true that 12 we were having discussions with the examiners; and 13 as they were finding things, they were relaying 14 them to us. And they were incorporated into this. 15 I do not recall the source. 16 Q. Well, if Mr. Lapidus later decided that 17 this wasn't a problem and didn't write it up in 18 his report? Do you at least feel sorry that you 19 took this action on wrong information? 20 A. As I said to you this morning, sir, the 21 primary reason for these people to be removed was 22 their employment contracts. 23935 1 Q. You don't feel any remorse? 2 A. I said the primary reason that we asked 3 for them to be removed was the history with the 4 employment contracts, and that's the primary 5 reason. 6 Q. Mr. Twomey, only you know whether you 7 feel remorse. 8 A. I don't feel remorseful. 9 Q. Look at the next paragraph. Now, did 10 you question Crow and Williams about these 11 practices? 12 A. Okay. One more time. Again, the 13 source of the document, I do not remember. I 14 don't remember if it was in writing. I don't 15 remember if it was -- 16 THE COURT: Can you just answer his 17 question? 18 THE WITNESS: I'll try, sir. 19 THE COURT: Pardon? 20 THE WITNESS: I'll try, sir. 21 Q. (BY MR. NICKENS) Did you interview 22 these gentlemen that led to this report? 23936 1 A. No. 2 Q. Do you know who did? 3 A. I do not recall. 4 Q. Why did you include this in your 5 memorandum? 6 A. I do not recall. 7 Q. Was it to try to make them look bad? 8 A. No. 9 Q. You're implying there that they were 10 asked a question and they didn't respond. Right? 11 A. Well, the way I read it is somebody has 12 questioned them regarding these activities 13 specifically. And their response is that in 1986, 14 their office was located outside the main 15 building; therefore, away from the trading room. 16 Q. Now, in the next paragraph, the last 17 paragraph of this section, you state, "It is 18 apparent from the activity review that the 19 investment committee is preoccupied with any 20 transaction that will make us money and not with 21 how it fits United's overall objectives." 22 Now, do you think the examples that you 23937 1 gave above fit that conclusion? 2 A. Again, I do not recall my thought 3 process at the time to put this altogether. The 4 memo is the memo, and I'll stand by the memo. 5 Q. We've just read the whole paragraph, 6 and I'm asking you whether you think the reasons 7 given support the conclusion that you've written. 8 A. Unless I could review all the 9 information I had at the time. 10 Q. You couldn't make an opinion on that? 11 A. I decline to give an opinion. 12 Q. Why do you decline to give an opinion? 13 A. I just don't feel I have to. 14 Q. Well, what is wrong exactly with an 15 attitude of trying to do transactions that make us 16 money? 17 A. Are you talking regarding with their 18 risk-controlled arbitrage, that they were trying 19 to maintain a positive spread? Nothing. 20 Q. Okay. Now, let's see if we can turn -- 21 by the way, when you wrote this memorandum, 22 December 15th, 1988, was it your expectation that 23938 1 Mr. Ranieri would be awarded United Savings? 2 A. I don't recall the exact date that we 3 were informed that Mr. Ranieri was the successful 4 bidder. It had to be sometime between maybe -- 5 after the first 3rd of December of 1988 going 6 forward. But it could have been earlier, but I 7 don't recall. 8 Q. Well, in fact, you had already begun to 9 negotiate with him an operating agreement, hadn't 10 you? 11 A. No. I had -- Mister -- the Ranieri 12 group had two people who were negotiating the 13 operating agreement with myself and Deborah 14 Jenkins who was the head of our legal counsel. 15 Q. So, you had negotiations with 16 representatives of the Ranieri group concerning 17 the operating agreement? 18 A. That's a correct answer. 19 Q. And that was in the first week of 20 December, wasn't it? 21 A. It may have been. I just don't recall. 22 Q. Now, that was based upon some 23939 1 indication that you had that Mr. Ranieri was going 2 to be the successful bidder, correct? 3 A. I was being told that the primary 4 person that they were now negotiating with was 5 Ranieri, Ranieri's group, Hyperion Partners, I 6 believe, and to get ready. If the bid was 7 accepted and the transaction did occur, we had to 8 have an operating agreement in place prior to 9 that. 10 Q. Now, would you say that your knowledge 11 that Mr. Ranieri was to be awarded the institution 12 might have influenced your evaluation as reflected 13 in your December 15th memo? 14 A. No. 15 Q. Didn't you have to have reasons before 16 you could fire somebody? 17 A. I think if you will go back to the -- 18 maybe it's the December 23rd memo -- well, we're 19 talking here at the time of the receivership -- 20 sorry -- December 21st; and it's T8145, the memo 21 going up to people with FSLIC. This was to 22 terminate these three individuals at the time of 23940 1 the FSLIC receivership. 2 Under the consent merger agreement, I 3 could have directed the board of directors to 4 terminate these individuals. I had the same 5 power. 6 Q. Well, you had recommended them as an 7 acquirer institution in September; and sometime in 8 the first week of December, you find out that the 9 institution is to be awarded to Mr. Ranieri. 10 Right? 11 A. I have no problem with that. Who 12 knows? Could have been late November, early 13 December. 14 Q. And you're having negotiations with 15 Ranieri's representatives over an operating 16 agreement and the other details of their takeover, 17 correct? 18 A. That's incorrect. 19 Q. Well -- and you -- in the first part of 20 December, you weren't doing that? 21 A. No. In your description of the 22 discussions with the representatives of the 23941 1 Ranieri group. 2 Q. And wasn't it -- didn't you have to 3 have some reasons to discredit the management -- 4 the current management of USAT, knowing that 5 MAXXAM was making a bid on the institution? 6 A. No. 7 Q. So, you say that that knowledge about 8 being awarded to Ranieri didn't affect in any way 9 your conclusions and recommendations as reflected 10 in the December 15th memo? 11 A. That's right. 12 Q. Now, during that month of 13 December 1988, did you order the sale of 14 substantially all the mortgage-backed securities 15 portfolio? 16 A. I don't recall it that way. Similar to 17 the memorandum that we referred to earlier on 18 September 28th, 29th of 1988 where Mike Patriarka 19 had told Mike Crow to sell about a billion dollars 20 worth of low coupon mortgage-backs, later, based 21 on the negotiations that were going on, there were 22 further directions that came out regarding to 23942 1 balance their portfolio to meet the DBL test, the 2 domestic building and loan test, I believe it was 3 called. Because an institution under that IRS 4 particular DBL test had to be qualified. I 5 believe it was 60 percent of their assets had to 6 be related assets. There came some instructions 7 that certain assets should be sold to ensure the 8 institution would be a qualified DBL. I don't 9 recall the entire portfolio being sold, but what I 10 recall, there were substantial material sales that 11 were being directed. 12 Q. Well, Mr. Ranieri wanted them sold, 13 didn't he? 14 A. I was taking my directions from 15 Mr. Patriarca. 16 Q. Is that -- do you mean -- the question 17 is: Is that what Mr. Ranieri wanted? 18 A. I don't know. 19 Q. Assets such as mortgage-backed 20 securities wouldn't normally be covered assets, 21 would they? 22 A. It depends on the particular FSLIC 23943 1 agreement. There were different types of 2 negotiations, yes. 3 Q. The normal policy would be they were 4 not covered assets. Right? 5 A. Well, you see, sir, a covered asset in 6 a normal FSLIC agreement would be a situation -- 7 because it's not earning market rates, the FSLIC 8 would guarantee you a return on that particular 9 assets. When you dispose of that asset, you would 10 also get some type of a guarantee against 11 principal loss. 12 Q. With marketable securities such as 13 mortgage-backed securities, the normal procedure 14 would have been that it would have been reflected 15 in goodwill on the new institution. Right? 16 A. Yes, I believe so. 17 Q. And Mr. Ranieri didn't want that, did 18 he? 19 A. I don't know what Mr. Ranieri wanted. 20 Q. And what was eventually worked out was 21 that they were covered for a period of 120 days? 22 A. I recall something regarding that, yes. 23944 1 Q. And that was after you had ordered the 2 institution to sell the securities and they had 3 refused. Right? 4 A. I don't recall. I recall that there 5 were some assets they were directed to sell toward 6 the end of 1988, and I believe they did sell those 7 assets. 8 Q. Isn't what happened is you made an oral 9 order that they sell the assets and they said, 10 "We're not going to do it unless you give it to us 11 in writing"? 12 A. Yeah. They wanted -- they called me up 13 and said, "You need to put that in writing" 14 because they wanted to protect themselves. 15 Q. And you further said, "No. You've got 16 to ask me." Right? 17 A. I don't recall what I said. But I'm 18 sure they did ask me, and I'm sure I put it in 19 writing and then I sent it to them. 20 Q. Now, sir, at the time the S memorandum 21 was written, was it your expectation that the 22 institution would be awarded to the Ranieri group? 23945 1 A. Help me out. What's the date of the 2 S memorandum? I just don't remember. 3 Q. December 20th. 4 A. Yes. At that time, FSLIC was actively 5 negotiating with Ranieri. So, I think it was 6 reasonable to believe that they were going to be 7 the successful bidder. 8 Q. Let me ask you to look at Exhibit T4532 9 at Tab 1290. 10 THE COURT: Is that in evidence? 11 MR. NICKENS: Yes, Your Honor. This is 12 the memorandum from Mr. Ranieri -- I said T4532 at 13 1290 -- Mr. Ranieri to Stuart Root. B4532. 14 15 (Discussion held off the record.) 16 17 MR. GUIDO: It's T. 18 Q. (BY MR. NICKENS) You have T4532? 19 A. Yes, I do have T4532. 20 Q. Did you -- have you ever seen a copy of 21 this memorandum? 22 A. No. 23946 1 Q. And -- okay. You assumed, did you not, 2 that Mr. Ranieri's bid was less than MAXXAM's bid; 3 that is, less costly to the government? 4 A. When did I assume that? 5 Q. During the time that you were 6 negotiating with the Ranieri representatives. 7 A. I had -- at the time I was talking to 8 the Ranieri representatives strictly on the 9 operating agreement which had nothing to do with 10 the FSLIC agreement, I was unaware of how much any 11 bid was. 12 Q. Didn't you tell the -- when you were 13 interviewed by the Steptoe & Johnson 14 representatives, didn't you tell them that you 15 assumed that the Ranieri bid was less costly? 16 A. What I recall telling Steptoe & Johnson 17 was there was a discussion regarding the two bids 18 on the very last day before the receivership. The 19 day of the receivership, in fact. It might have 20 been that. I was on a conference call, and I 21 heard a discussion. That was the first time that 22 I heard anything about this bid versus that bid or 23947 1 anything else. 2 Q. Well, what happened was that at 3 4:00 o'clock on December 30, 1988, you found out 4 that the MAXXAM bid was still being considered, 5 didn't you? 6 A. I'm not sure about the time, but it was 7 very late in that afternoon. And during a board 8 discussion, somebody from the Office of General 9 Counsel was describing the bids; and they referred 10 to the MAXXAM bid. 11 Q. And there was a discussion -- you were 12 on a conference call with the meeting of the 13 Federal Home Loan Bank Board, correct? 14 A. Yes. 15 Q. Participating in the meeting? 16 A. No. I was just listening to the 17 meeting. I'm not a member of the board. 18 Q. You didn't participate in the meeting? 19 A. At a point in time, Mr. Barclay asked 20 me to talk about USAT and their examinations. I'm 21 not sure if that was part of the meeting. All I 22 know is then the meeting was adjourned, and then 23948 1 Stuart Root came back on the line on a separate 2 call to me and asked me to go over the USAT 3 examinations that were already on file with the 4 Federal Home Loan Bank Board in Washington. I 5 assumed at that point, because of what they were 6 talking about, somebody was reading from the '86 7 and '87 examination reports. 8 Q. Didn't you make a presentation at that 9 meeting of the Federal Home Loan Bank Board? 10 A. My recollection, sir, is that they 11 somehow adjourned the meeting or stopped the 12 meeting. People from the Office of General 13 Counsel and people from FSLIC -- I don't even 14 remember who now -- then got on a call with me and 15 asked me to talk about the examination reports and 16 what had been found out basically in the '86 and 17 '87 examinations. 18 Q. Sir, I would like to ask you to look at 19 a document we have marked as Exhibit B4326. 20 MR. NICKENS: For the record, 21 Exhibit B4326 is a file memorandum by Elizabeth B. 22 Echols of an interview with Neil Twomey dated 23949 1 October 26, 1990. 2 Q. (BY MR. NICKENS) Was Ms. Echols the 3 person that reviewed you for Steptoe & Johnson? 4 A. I don't recall. 5 Q. Let me ask you to turn over to Page 7 6 where it says "United." 7 Do you see at the bottom of the first 8 paragraph, it says, "He just assumed that Ranieri 9 was the highest bidder"? 10 A. Hold on. Page 7? 11 Q. Where it's discussing United. 12 A. Sorry. Okay. United is at the top of 13 the page, yes. 14 Q. Okay. 15 A. Okay. I've read that first paragraph. 16 Q. Does that refresh your recollection 17 that that was your assumption? 18 A. Honestly, it was my assumption during 19 most of December of 1988. 20 Q. And you told Ms. Echols that the Dallas 21 bank had been negotiating an operating agreement 22 with Lewis Ranieri since early December? 23950 1 A. That's what I recall. 2 Q. And you found out at 4:00 o'clock on 3 December 30th that the Hurwitz entities were still 4 being considered as a bidder? 5 A. At that time or near that time, yes. 6 Q. And you indicate down at the bottom 7 that the Bank Board called on December 30th and 8 had you recount his knowledge of problems 9 involving Hurwitz? 10 A. Help me out. You're in the last 11 paragraph? 12 Q. On the first page. It's the last three 13 lines. 14 A. Okay. I see that. 15 Q. Do you see on the next page -- the 16 first full paragraph on Page 8 where he stated 17 that he had a lot of contact with Kathleen McNulty 18 at the San Francisco Bank and it was natural for 19 her to ask his opinion of MAXXAM? Do you see 20 that? 21 A. Yes. 22 Q. That's the same Kathleen McNulty that 23951 1 you told us yesterday that you had -- that you 2 copied papers for? 3 A. That's right. 4 Q. You say he added there was no way that 5 he would recommend MAXXAM? 6 A. I don't recall if I said it exactly 7 that way. Again, this is their memorandum, not 8 mine. 9 Q. And -- 10 A. I think the next paragraph goes on to 11 say, "Twomey stated the primary concern regarding 12 Hurwitz was with the management team that Hurwitz 13 had installed at United." 14 Q. For example, Jared Gross (sic). Right? 15 A. Again, this is her memorandum. 16 Q. In fact, you had absolutely no problem 17 with Mr. Gross, did you? 18 A. I personally liked the man. I thought 19 he was a gentleman. 20 Q. And what happened -- isn't what 21 happened, Mr. Twomey, is that you found out at the 22 last minute that MAXXAM's bid was still being 23952 1 considered. Right? 2 A. December 30th, late in the afternoon, I 3 heard that MAXXAM -- they had to discuss all 4 outstanding bids. As I can recall, MAXXAM and the 5 Ranieri's group bids were being discussed. 6 Q. And that created a ticklish problem, 7 didn't it? 8 A. Again, this is the Bank Board's 9 decision, but go ahead. 10 Q. The problem being that you also found 11 out that their bid was $100 million less costly 12 than Mr. Ranieri's bid, didn't you? 13 A. I don't recall that, but it was less 14 costly than Ranieri's bid. 15 Q. And that created a problem because you 16 had put memoranda in the file recommending that 17 the management of the company with the lowest bid 18 be fired? 19 A. That says something about their 20 management, doesn't it? 21 Q. That says something about the 22 memorandum. 23953 1 A. It says something about their 2 management, sir. 3 Q. Did that create a problem for you? 4 A. Not at all. 5 Q. What would have happened if the Bank 6 Board would have chosen the MAXXAM bid? 7 A. Then I would have submitted that those 8 people didn't participate in the management of the 9 new United. 10 Q. So, the institution with the lowest 11 bid, the least costly bid, chosen to continue 12 would be without four key members of their 13 management? 14 A. Well, they had done such an excellent 15 job destroying USAT, I didn't want to see them 16 destroying a FSLIC institution recapitalized. 17 Q. So, you got on the phone on 18 December 30th; and you trashed the management of 19 USAT, didn't you? 20 A. Based on the operating results, they 21 pretty much trashed themselves, sir. 22 Q. You didn't trash them during that 23954 1 meeting? 2 A. I pointed out the deficiencies that 3 were noted in the two exams in '86 and '87, and I 4 may have talked about the contracts. I don't 5 remember. But I know primarily we talked about 6 the '86 exam, the deficiencies on the books and 7 records, the deficiencies on appraisals, the 8 deficiencies on other activities noted in the 9 exam. We talked about the '87 exam and the 10 deficiencies that were noted there. I felt that 11 if I had time, the information that Brenda Bese 12 was putting together would be even more 13 persuasive; but I didn't have that information at 14 the time. 15 Q. And what you did was make -- well, were 16 the reasons that you gave to the board similar to 17 the reasons that you put in your memorandum of 18 December 15th? 19 A. What I said on a telephone conference 20 call -- and I don't believe it was to the board. 21 I think it was to other representatives up there 22 from OGC and from FSLIC. They asked me -- George 23955 1 Barclay, the principal supervisory agent, asked me 2 to discuss the examination reports that we had. 3 And to the best I could do in a very short period 4 of time, I noted the problem that had been noted 5 in those examination reports. And at the end of 6 that, that was it. They went back and had their 7 meeting and made a vote, and then they gave the 8 bid to Ranieri. 9 Q. Are you aware of the fact that there's 10 a transcript of the proceeding of this Bank Board 11 meeting? 12 A. There would normally be a transcript of 13 that meeting. 14 Q. Have you seen the transcript? 15 A. Never. 16 Q. Let me ask you to look at 17 Exhibit B2669. Turn over to Page 19. Do you see 18 where you are first mentioned as speaking at the 19 meeting? 20 A. Can you give me that page again? 21 Q. Page 19. Now, you and Mr. Barclay had 22 been on the call for the entire meeting, had you 23956 1 not? 2 A. I believe so, but I'm not sure when we 3 dialed in. 4 Q. And they called on you to make a 5 comment about MAXXAM? 6 A. Let me back up a little bit. 7 Q. At the top of the page, Page 19, 8 Mr. Barclay is quoted as saying, "The fact that I 9 believe, and Neil Twomey is on the line, we were 10 terminating a number of those people, I believe, 11 today; is that correct, Neil?" 12 You said, "Yes, George, that's correct. 13 We are terminating three of their people today." 14 A. That's correct. 15 Q. "And for a cause. And I also feel very 16 strongly that Tom Lykos' argument or point of 17 view, that it would be contrary to proper 18 procedure for an owner who's a 25 percent 19 participant on the ownership side that caused this 20 problem to come out with 100 percent ownership of 21 a viable institution brought about by FSLIC 22 assistance." 23957 1 Then there's some more discussion, 2 correct? 3 A. Yes. 4 Q. And then the debate was over whether or 5 not the board had to take the least costly bid, 6 correct? 7 A. There was a debate going on, but I 8 don't remember the specifics. 9 Q. And there was a recess taken, correct? 10 A. I remember they took a recess about 11 this time. 12 Q. And the purpose of the recess was for 13 you to go document the fact that MAXXAM would not 14 be considered as an eligible acquirer? 15 A. No. What I remember -- again, I've 16 never seen these minutes -- is we basically got on 17 another conference call with the Washington 18 staff -- George in one location, myself in another 19 location -- and talked about the prior examination 20 reports. That's what I recall. 21 Now, we may have talked about other 22 things. I just don't -- you know, I just don't 23958 1 recall what was discussed. 2 Q. You needed some -- they needed some 3 further documentation that MAXXAM was not 4 eligible -- an eligible bidder. Right? 5 A. You could take it that way. 6 Q. And your comments are made at Page 21. 7 A. I see my comments starting on 8 Page 21 -- I cannot give you a line number -- 9 where it says "Mr. Twomey." And then it ends on 10 the next page at the top of 22. 11 Q. These are just sort of general comments 12 about things had not gone well under their 13 management? 14 A. I would say so. 15 Q. Then over at Page 28 at the bottom of 16 the page, what you did was said they were 17 ineligible because of Mr. Hurwitz' influence? 18 A. Let me see. (Witness reviews the 19 document.) Okay. I read the first -- up to the 20 top of Page 29. Do you want me to read further? 21 Q. Well, to the end of your comment, and 22 then we'll get to Mr. Barclay. 23959 1 A. Well, I'll stop there. 2 Q. That had totally to do with 3 Mr. Hurwitz, correct? That comment. 4 A. Well, it had to do with Mr. Hurwitz, 5 the senior management at USAT, and my basic 6 understanding that, you know, Mr. Hurwitz had a 7 great say in who would be senior management at 8 USAT. 9 Q. And this is consistent with what you 10 had told Mr. Patriarca's office earlier about the 11 Pear II-B application. Right? 12 A. Are you talking about that memorandum 13 that somebody else prepared regarding -- 14 Q. The September 9th memorandum that we 15 discussed last week. 16 A. I think my testimony when we discussed 17 that is there was a beginning sentence, a middle 18 sentence, and an ending sentence. And I said I 19 could recall making something similar to the 20 middle sentence, but I didn't recall if I was the 21 source of the first or the ending sentence in that 22 memorandum. 23960 1 Q. And then Mr. Barclay had to remind you 2 "Maybe we should say something about cherry 3 picking profits." 4 A. Okay. 5 Q. Now, you talk about cashing in profits 6 here, Mr. Twomey. Right? 7 A. Yes, I do. 8 Q. And you didn't have that criticism in 9 any of the examinations that had been performed, 10 did you? 11 A. Well, no completed examinations. But 12 we had -- we did have examiners on site, and they 13 were giving us information. 14 Q. Okay. Where did this come from? 15 You're saying this came from Mr. Lapidus? 16 A. Well, I'm not saying Mr. Lapidus; but 17 it came from the examiners. 18 Q. Well, who other than Mr. Lapidus? 19 Wasn't he the only person working on the 20 securities aspect of the -- I'm talking about the 21 mortgage-backed securities aspect of the 22 Southwest Plan examination. 23961 1 A. When it came to that particular 2 examination, I primarily interfaced with Brenda 3 Bese, who was the examiner-in-charge. The 4 examiner-in-charge is the normal person who will 5 summarize any particular concerns regarding an 6 examination. It's her report. It's her signature 7 that goes on it. 8 Q. Now, on Page 30 toward the bottom, you 9 mention the compensation. 10 A. Yes. 11 Q. And Mister -- on Page 32, Mr. Root said 12 that he never would have condoned these 13 discussions -- that is, discussions with MAXXAM 14 about bidding -- "had I understood that there were 15 these problems having to do with the management 16 acceptability to the Dallas bank or the management 17 acceptability generally for purposes of this being 18 an offer that had to be acceptable to the 19 corporation." 20 Do you see that? 21 A. I see it. 22 Q. In fact, you had certified MAXXAM as an 23962 1 eligible acquirer, didn't you? 2 A. Early on, we did. 3 Q. And for purposes of this bid, you did 4 also, didn't you? 5 A. Well, when we certified them earlier, 6 this is what -- this is the bidding process. This 7 is where Mr. Patriarca got involved, and this is 8 where Mr. Hurwitz and his group had ongoing 9 discussions with Mr. Patriarca in the fall of 10 1988. 11 Q. You were dismayed to find out that 12 MAXXAM was the least costly bid to the government, 13 weren't you? 14 A. No, sir. 15 Q. Now -- 16 MR. NICKENS: Your Honor, we offer 17 B2669. 18 MR. RINALDI: No objection. 19 THE COURT: Received. 20 MR. NICKENS: Your Honor, we would also 21 offer B4326, the interview notes. 22 MR. RINALDI: No objection, Your Honor. 23963 1 THE COURT: Received. 2 Q. (BY MR. NICKENS) Now, Mr. Twomey, did 3 you have discussions with representatives of the 4 Ranieri group in December of 1988. 5 A. I believe -- yeah. I've already 6 testified I did, yes. 7 Q. And did you testify differently at the 8 time of your deposition? 9 A. I don't recall what I said in the 10 deposition. But what I recall here today is 11 because of the operating agreement that was 12 supposed to be imposed on the new United if the 13 FSLIC deal went through, we had discussions 14 regarding that in December of 1988. 15 Q. Let me ask you to look at Page 745 of 16 your deposition. 17 A. Is there a particular volume I should 18 look at? 19 Q. It's Volume IV. 20 A. And the page again? 21 Q. 745. Are you there? 22 A. Yes. Hold on. I want to back up to 23964 1 see the preceding page first. 2 Q. I'm going to focus on Line 4 where you 3 were asked the following question: "Do you recall 4 ever recall meeting with United in the presence of 5 representatives of Ranieri Wilson?" 6 And you answered, "No, not prior to the 7 receivership." 8 "Do you recall meeting with 9 representatives of Ranieri Wilson prior to the 10 receivership?" 11 You answered, "No, I did not meet with 12 representatives of Ranieri Wilson prior to the 13 receivership, to the best of my knowledge." 14 Now, that wasn't correct, was it? 15 A. That actually is correct, sir. 16 Q. Are you telling us that your 17 communications were by telephone? 18 A. All communications with them at that 19 time were by telephone. 20 Q. So, at the time you answered this 21 question, you were making that distinction? 22 A. I'm meeting with you here today. Okay? 23965 1 THE COURT: Well, let's just answer the 2 question. 3 A. Yes, I am making that distinction. At 4 least that's the way I understood the question was 5 being asked, if I had a physical meeting with the 6 individuals. 7 Q. (BY MR. NICKENS) So, you answered that 8 question because you didn't physically have a 9 face-to-face meeting. Is that what you're telling 10 us? 11 A. "Do you recall meeting with" -- okay. 12 No. 7, I believe you're referring to, "Do you 13 recall meeting with representatives of Ranieri 14 Wilson prior to receivership?" 15 I was taking the meeting to mean 16 personal meeting with the representatives. 17 Q. You're telling us you didn't have any 18 face-to-face meetings with the representatives of 19 Ranieri Wilson in December of 1988? 20 A. I don't recall meeting with them. What 21 I recall is strictly on the operating agreement, 22 telephone discussions, sometimes at 3:00 and 23966 1 4:00 a.m. in the morning working with this and 2 other deals. We had many deals we were trying to 3 help structure as far as the operating agreements; 4 and they were very long, detailed, back and forth, 5 faxing documents left and right. And we were 6 working -- most people in my group at that time 7 were working 20, sometimes longer, hour days. 8 Q. All of which you had in mind when you 9 got the question from Mr. Villa? 10 A. My idea was -- what I could recall at 11 that time and this time because I don't feel -- I 12 don't know of any reason to change it -- is that 13 all my conversations were with two people at 14 Ranieri's group -- there's only two people I can 15 recall talking to telephonically -- they were all 16 done by telephone. If I did meet them, I just 17 don't recall because the only thing I was focusing 18 in on was the operating agreement that we were 19 negotiating with them as potential acquirers. 20 Q. Hadn't you consulted with Mr. Ranieri 21 previously about USAT's mortgage-backed securities 22 portfolio? 23967 1 A. I don't recall. I mean, if you have 2 something that can refresh my memory, I'm glad to 3 look at it. Honestly, I just don't recall that. 4 Q. Wasn't he sort of a private source 5 prior to USAT becoming a candidate for 6 receivership? 7 A. Again, I don't recall ever meeting 8 Mr. Ranieri, Lou Ranieri until after the 9 receivership. 10 Q. Let me ask you to look at a document, 11 Exhibit B1007 at Tab 1872. This is way back in 12 1986, Mr. Twomey. I want to ask you to look over 13 to the last paragraph above "future actions" on 14 the second page. 15 A. Okay. I see the reference to Lou 16 Ranieri. 17 Q. And he was a back channel source? 18 A. He wasn't mine. 19 Q. Well, he was being asked to comment; 20 and he commented negatively concerning their 21 securities portfolios? 22 A. Again, I mean, this is a file memo. 23968 1 I'm just looking at who attended the meeting. I 2 see -- from the bank, I see Mr. Halverson. I see 3 Ginger Baugh. I see where I was CC'd on the memo. 4 But quite honestly, I never focused on this; and I 5 didn't know Mr. Ranieri prior to the receivership. 6 I didn't know any of his people, at least that I 7 can recall, remember, or any other way you want to 8 put it. If he was a back channel -- it mentions 9 Lou Roy in here. Maybe Lou Roy knew him. Maybe 10 he knew them. I don't know. 11 Q. Well, if you look at the first page of 12 Exhibit B1007 at the bottom of the paragraph 13 entitled "Purpose," do you see a sentence there, 14 "Concern heightened when Lou Roy received 15 information from a private source which indicated 16 that United's securities transactions and 17 portfolios should receive our attention"? 18 A. Yes, I see that. And I think I read it 19 another time when this memo was brought up prior 20 to this. 21 Q. That was Mr. Ranieri, wasn't it? 22 A. I have no way of telling you who that 23969 1 source is. 2 Q. Now, Mr. Ranieri is the same Lewis 3 Ranieri that has been made somewhat famous by the 4 publication of a book called Liar's Poker? 5 A. That and Greasy Cheeseburgers, yes. 6 Q. It's recounted in that book how 7 Mr. Ranieri created this market and sold huge 8 amounts of mortgage-backed securities to the S&L 9 industry? 10 A. I believe that's what's in the book, 11 yes. 12 Q. Okay. 13 A. I read the book a number of years ago. 14 I haven't read it recently. 15 Q. So, Mr. Ranieri sold the securities or 16 some of the securities and the ideas to USAT and 17 others, right, through Salomon Brothers? 18 A. If USAT bought from Salomon Brothers 19 while Mr. Ranieri was there -- and I think he was 20 vice chairman at one point or director of this 21 group at another point -- based on what I read in 22 the book, he probably bought it. And at the same 23970 1 time, if they bought a US Treasury in the 1980s, 2 Ronald Reagan was president at the same time. 3 Q. And then he criticized some of the 4 institutions through a private source? 5 A. Are you talking about what was in 6 Liar's Poker, the book? 7 Q. I'm talking about this memorandum, 8 Exhibit B1007. 9 A. You keep shifting around. I think I've 10 already commented. I don't know who the source -- 11 I did not attend the meeting. I don't know who 12 the source is, period. 13 Q. Then he buys the institution with 14 government assistance at a cost of $100 million 15 more than MAXXAM's bid because you criticized 16 management for how they handled the 17 mortgage-backed securities portfolios. 18 Is that what happened? 19 A. That's a far reach, isn't it? 20 Q. I don't know. What do you think? 21 A. I think you're reaching. 22 Q. Are you familiar with the term "deliver 23971 1 the bank"? 2 A. No. 3 Q. You've never used that phrase? 4 A. I don't see why. Probably not in the 5 last -- not in the Nineties anyways. 6 Q. But you were delivering banks in the 7 Eighties, weren't you? 8 A. Well, actually, sir, I didn't supervise 9 thrifts; and they were called S&Ls. 10 Q. But the phrase was "deliver the bank," 11 wasn't it? 12 A. Whose phrase? 13 Q. Your phrase. 14 A. I may have used that term. I may have 15 used a lot of other terms, too; but I don't 16 presently recall them. 17 Q. Well, were you comfortable or 18 uncomfortable with that part of your job 19 responsibilities? 20 A. Well, as a supervisory agent, line 21 agent in Dallas, I don't deliver banks. I 22 supervise S&Ls for the FSLIC. I did at that time. 23972 1 Q. Well, if you were prepared to deliver 2 the bank and management resisted to do what was 3 necessary to deliver the bank, you had certain 4 powers, didn't you? 5 A. If an institution, an S&L, had signed a 6 merger consent agreement, commonly referred to as 7 a consent agreement, they would definitely -- 8 there is definitely clauses in there where we 9 could direct the board of directors to terminate 10 certain management. 11 Q. You could, for example, force the 12 thrift to sell certain securities that would 13 produce actual rather than unrealized losses? 14 A. Well, to be honest with you, I wouldn't 15 do that on my own. If there was some direction by 16 FSLIC or FSLIC representatives that that was in 17 the best interest of the FSLIC and we had a 18 consent agreement, we would go ahead and make that 19 type of direction. 20 Q. You could, for example, force the 21 thrift -- force decisions that would unfavorably 22 alter the financial statements? 23973 1 A. Well, you're not being exactly precise. 2 If an institution sold an asset and it was a loss, 3 that would negatively impact their financial 4 statements. 5 Q. Well, did you ever do anything like 6 that in the course of delivering the bank? 7 A. I could say that since I never 8 delivered a bank, I never did anything like that. 9 Q. Let me ask you to look again at 10 Exhibit 4326. 11 THE COURT: Would you give the letter, 12 please? 13 MR. NICKENS: It's B4326, Mr. Twomey's 14 interview notes. 15 A. Any particular page? 16 Q. (BY MR. NICKENS) Yes, sir. Do you see 17 there's a discussion there under Pear I of the 18 First Texas/Gibraltar matter? 19 MR. RINALDI: What page? 20 MR. NICKENS: Page 1. 21 A. Okay. 22 Q. (BY MR. NICKENS) You wanted -- the Bank 23974 1 Board wanted to combine First Texas and Gibraltar. 2 Right? 3 A. Actually, they were already operating 4 as one institution anyway. They were under the 5 same holding company. 6 Q. There was a bit of a problem in that 7 Gibraltar wasn't insolvent, correct? 8 A. Well, what you had, you had a tiered 9 situation. And Gibraltar was the bank underneath 10 First Texas, and First Texas was underneath the 11 holding company. Because First Texas, as I 12 remember it, owned Gibraltar, the losses that 13 Gibraltar would be recognizing would then impact 14 First Texas' books. And because First Texas 15 already had its own problems, it was now 16 getting -- because it was recognizing Gibraltar on 17 an equity basis, any loss from Gibraltar also 18 impacted the net worth of First Texas. 19 Q. Would you look at Page 2 of 20 Exhibit B4326? 21 A. Page 2? 22 Q. Page 2, the paragraph that carries over 23975 1 to Page 3. "According to Twomey, by 2 November 1988, First Texas was insolvent while 3 Gibraltar was not. First Texas/Gibraltar could 4 not proceed with a FSLIC transaction if only one 5 of the institutions was insolvent. The Bank 6 Board, therefore, needed to write down Gibraltar's 7 assets so it would be insolvent. However, since 8 Gibraltar had approximately $200 million in net 9 worth, simply writing down the assets would not 10 cause Gibraltar to become insolvent." 11 Do you see that? 12 A. Yes. 13 Q. Is that accurate? 14 A. Again, it's my -- I remember that 15 Gibraltar was not insolvent at that time. 16 Q. It goes on to say, "Twomey thought that 17 it would be a good idea for First Texas/Gibraltar 18 to write off a portion of its goodwill. Twomey 19 stated that the purchase of Gibraltar by First 20 Texas created a huge amount of goodwill on their 21 books that was worth nothing. He described the 22 situation as fragile, to say the least. Twomey 23976 1 stated that under General Accounting Principles, 2 goodwill should be analyzed by an accountant on a 3 regular basis, and written down if it was not 4 still worth the amount stated on the books. 5 Twomey stated that Gibraltar's accountant had not 6 done this. As Twomey put it, they didn't, we 7 did." 8 A. That's right. 9 Q. There were bond holders out there that 10 got wiped out because of that decision. Right? 11 A. I don't have -- if they were equity 12 holders or bond holders and both institutions were 13 insolvent and both were put into receivership, 14 their value definitely declined. 15 Q. The next paragraph, "Twomey stated that 16 Gibraltar could have written off 90 percent of 17 their goodwill. Instead, he directed them to 18 write off half of their goodwill. This resulted 19 in a 250-million-dollar write-off - the right 20 amount to throw them into insolvency. First 21 Texas/Gibraltar was effectively insolvent and 22 could be delivered." 23977 1 Do you see that? 2 A. Yes. 3 Q. Is that what happened? 4 A. The best I remember, yes. 5 Q. Now, the techniques were essentially 6 the same for USAT in delivering the bank to 7 Mr. Ranieri? 8 A. No. 9 Q. Let me ask you to look at 10 Exhibit B2667. 11 By the way, does it cost money to 12 prepare one of these bids? A lot of effort goes 13 into making a bid for an institution the size of 14 United and the Pear II-B package? 15 A. I imagine there's some costs associated 16 with that: Legal, attorneys, accountants, yes. 17 Q. Models have to be set up, financial 18 analysis done, things of that nature? 19 A. I assume so. 20 Q. I want to show you Exhibit B2667, which 21 is a letter dated December 30th, 1988, from 22 Mr. Lykos to Mr. Hurwitz. And do you see -- it 23978 1 says, "This letter responds to your October 31, 2 1988 proposal regarding the acquisition of United 3 Savings Association of Texas. The institution on 4 which you bid was part of a larger group of 5 insolvent institutions that constitutes one of the 6 groups in the Southwest Plan. Representatives of 7 Federal Savings and Loan Insurance Corporation, 8 FSLIC's Southwest Plan and the Federal Home Loan 9 Bank of Dallas have evaluated your proposal and 10 have determined that it is less advantageous to 11 the FSLIC than other proposals we have received 12 and pursued. Therefore, another bidder has been 13 selected to acquire the Southwest Plan package of 14 insolvent thrifts that contains United Savings 15 Association of Texas." 16 Now, is that an accurate description of 17 what happened at the board meeting of 18 December 30th? 19 MR. RINALDI: Your Honor, we've sat 20 patiently by; and we've sort of gone far afield. 21 But you may recall about three weeks ago in this 22 very same proceeding the question arose in the 23979 1 context of Mr. Villa examining Mr. Berner and he 2 pulled out a document that Michael Salomon had 3 written and he listed for Mr. Berner that, in 4 fact, wasn't the MAXXAM bid a better bid than the 5 Ranieri or the Hyperion bid. At that point in 6 time, no objection was made and the document came 7 in. Subsequent to that, Mr. Guido came in and 8 indicated to the Court that he thought that that 9 was an inappropriate document to place into the 10 record. And he pointed out to the Court that very 11 recently, MAXXAM had filed a lawsuit that had gone 12 to the 5th Circuit. And in that lawsuit, it 13 alleged that it had a better bid than the Ranieri 14 bid and that the Bank Board had acted 15 inappropriately by awarding the thrift to Ranieri 16 as opposed to MAXXAM. 17 At the conclusion of the -- that piece 18 of litigation, the 5th Circuit rejected the 19 petition of MAXXAM and concluded that they were 20 way out of time and that the Bank Board had acted 21 appropriately in granting the application -- or in 22 awarding the thrift to the Hyperion group. 23980 1 Now, the reason I bring this up is 2 because during the course of that entire colloquy, 3 Mr. Villa argued vehemently that all of this was 4 relevant but for one purpose, to show the bona 5 fides of Arthur Berner, that Mr. Berner had acted 6 appropriately and that Mr. Berner, when he went to 7 Neil Twomey and said to him, "I want you to order 8 me to sell off this $100 million in assets because 9 I think it may result in a loss," that he wasn't 10 doing that for any self-serving reason but that he 11 was doing that because he felt it was 12 inappropriate to do that. 13 In any event, at that point in time, 14 Mr. Guido argued to the Court we're going down the 15 road of whose bid was better and why the Hyperion 16 group as opposed to the MAXXAM group was 17 ultimately awarded USAT. 18 And this is what the Court ruled at the 19 end of that entire long colloquy that took place 20 on August the 27th, 1998. Your Honor stated, 21 "Well, I am concerned that we're opening up a lot 22 of issues here that don't belong in this case. I 23981 1 think, though, we have 2668 in evidence; and I'm 2 not inclined to strike it at this point. I'll 3 receive" -- that's the document of Michael Salomon 4 where he talks about analyzing the two bids at the 5 end of December of 1988. Then you go on and 6 state, "I'll receive the documents that Mr. Guido 7 is offering." 8 Mr. Guido offered the petition of 9 MAXXAM to the 5th Circuit saying that the 10 institution was improperly awarded to Ranieri and 11 should have been properly given to MAXXAM. In 12 addition to that, there were some amendments to 13 that petition; and then there was the final order 14 of the 5th Circuit. The Court then says, "I will 15 receive the documents that Mr. Guido has offered, 16 and those documents are now in evidence at T9010 17 through 9013." Then you go on to state, "But I 18 don't want to litigate who had the best offer and 19 that sort of thing. It just doesn't seem to me 20 like it's raised by the Notice. There are a lot 21 of information here that I might be curious about, 22 but I don't believe it belongs in this case. I'll 23982 1 receive all of these documents." 2 The point of all this, Your Honor, is 3 we filed a Notice of Charges; and in the Notice of 4 Charges, we set out certain activities that 5 occurred in the period of 1985, '86, and '87 6 regarding real estate investments, regarding the 7 management of their high-yield bond portfolio, 8 regarding their employment practices that occurred 9 in 1988. 10 Now we're coming down to the end of 11 1988, and we're going into the whole question of 12 why did Ranieri not get the bid as opposed to -- 13 did MAXXAM not get the bid and why was it granted 14 to Ranieri. I would submit to you that in the 15 context of this litigation, No. 1, it's 16 irrelevant. No. 2 and more importantly, the 17 5th Circuit has already heard the petition of 18 MAXXAM. I will tell the Court that they submitted 19 many of the same documents that these individuals 20 have identified as documents that they want to put 21 forth in this proceeding today, and they were 22 submitted in support of their petition. And after 23983 1 considering that petition and the documents 2 associated with that petition before the Court, 3 the 5th Circuit ruled that MAXXAM had no cause of 4 action, that they were out of time, and that the 5 Bank Board had not acted inappropriately in 6 granting the -- in awarding the thrift to Ranieri. 7 Since the 5th Circuit has already ruled 8 on that subject, it seems that even if that 9 subject were relevant to these proceedings, they 10 are estopped to go into it at this time. I would 11 suggest that this is going way beyond the pale of 12 anything we put on in our direct case, and it has 13 nothing to do with the question of whether the 14 respondents properly operated the thrift during 15 the years of 1986 -- '85 through 1988. 16 MR. NICKENS: Your Honor, I'll be 17 disappointed in myself if the relevance of this 18 information to this proceeding is not obvious. 19 What we are trying is the actions of Mr. Twomey; 20 and what has become apparent is that Mr. Twomey, 21 while recommending MAXXAM for one acquisition, 22 United, did not feel that Mr. Hurwitz should 23984 1 participate in that. That information was never 2 conveyed to Mr. Hurwitz. Then Mr. Twomey learns 3 that the Bank Board has selected Mr. Ranieri to 4 receive this institution, and he frankly papers 5 the file with a bunch of criticisms that have now 6 become the basis for this proceeding that we are 7 here 10 years later about. And this is 8 questioning those conclusions and those statements 9 that Mr. Twomey put in the record to justify the 10 award of this institution to Mr. Ranieri on the 11 basis of a -- it really doesn't matter. That's 12 what this is all about. 13 Frankly, I have five minutes remaining 14 on my part of the examination; but the relevance 15 of this goes to the heart of the entire matter. 16 MR. VILLA: And since my name was 17 invoked, I'll say for 60 seconds the issue of 18 Mr. Twomey's motive in criticizing my clients 19 after three years of favorable statements is 20 absolutely essential to my defense, Your Honor. 21 And he is offering the motive here today that he 22 can't find all of the documents that support this 23985 1 December 15 memo and, therefore, he can't defend 2 it. And we are offering an alternative motive for 3 him which the Court will ultimately rule as to 4 whether or not which one is truthful. So, it is, 5 in fact, essential to us. 6 THE COURT: All right. I'm going to 7 deny your motion. 8 Are you offering this document? 9 MR. NICKENS: Yes, Your Honor. I would 10 offer B2667. 11 THE COURT: Received. 12 We'll take a short recess. 13 14 (Whereupon, a short break was taken 15 from 3:01 p.m. to 3:25 p.m.) 16 17 THE COURT: Be seated, please. We'll 18 be back on the record. 19 Mr. Nickens, you may continue. 20 MR. NICKENS: Thank you, Your Honor. 21 Q. (BY MR. NICKENS) Mr. Twomey, when we 22 took our afternoon recess, I was asking you a 23986 1 question about Exhibit B2667, which has just been 2 received into evidence. 3 My question was: Looking at the first 4 paragraph, does the description there accurately 5 describe what you know about the meeting of 6 December 30th, 1988? 7 A. I guess, generally, it does. I 8 probably wouldn't have written it this way. 9 Again, I'm not the author of the letter either. 10 Q. Well, MAXXAM's bid was essentially 11 disqualified at the meeting, wasn't it? 12 A. Well, the last paragraph says, "If you 13 remain interested in participating in the 14 Southwest Plan and would like to be informed of 15 opportunities to submit proposals in the future, 16 please contact the undersigned within seven days 17 of the date of this letter." 18 Q. That certainly doesn't imply that 19 MAXXAM was disqualified, does it? 20 A. Not to me. 21 Q. It sounds like they were being invited 22 to go to the expense and trouble of preparing 23987 1 additional bids when, based upon this proceeding, 2 they could never be awarded such a bid, could 3 they? 4 A. I don't know that, sir. 5 Q. Let me ask you to look at a document 6 that we have marked as B1944. 7 MR. RINALDI: Your Honor, before the 8 witness looks at the document, this is the 9 particular document I was objecting to. It occurs 10 sometime well after the failure of the 11 institution; and it's a report on 1988 12 FSLIC-assisted transactions under the 13 Southwest Plan, Volume II. It's apparently a 14 draft, and I don't know who -- other than 15 Steptoe & Johnson is the individuals that prepared 16 it. It purports to be -- I've read through it -- 17 a report or a compilation of things that occurred 18 during the Southwest Plan process, but I don't 19 know who wrote it or how it was undertaken. And 20 I -- to my knowledge or to the best of my 21 knowledge, I'm not certain that Mr. Twomey has 22 ever seen this document. In fact, the 23988 1 representation in the petition made by MAXXAM if 2 memory serves me correct was that they didn't even 3 discover it until sometime very recently. It was 4 at that point in time when they discovered this 5 document that Mr. Hurwitz and MAXXAM came to the 6 conclusion that they may have inappropriately been 7 denied an opportunity to participate in the 8 acquisition of USAT. And on that basis, they 9 filed their petition with the 5th Circuit which 10 was denied. And in pertinent part, as I said, the 11 5th Circuit said that the reliefs sought by MAXXAM 12 in this appeal are unavailable and that the 13 Federal Home Loan Bank Board committed no error in 14 denying MAXXAM's bid. 15 I submit this report was generated by 16 someone who is not in Court today, that I don't 17 believe Mr. Twomey can authenticate it, that it is 18 irrelevant to these proceedings, particularly 19 since it is months after the event as far as I can 20 tell from reading the document. 21 MR. NICKENS: Your Honor, yesterday I 22 asked the witness whether he had been interviewed 23989 1 by Steptoe & Johnson; and he said he had. And he 2 testified he had received a draft report of their 3 report and that he indicated that his information 4 was quoted in the report indicating that he had 5 read the report. And this is the report or what I 6 believe to be the report, and I want to ask him if 7 that is the case. 8 THE COURT: Well, I don't believe 9 that's foundation to receive the document. 10 MR. NICKENS: Can I ask him whether he 11 has read this document? 12 THE COURT: You can ask him that 13 question. 14 Q. (BY MR. NICKENS) Mr. Twomey, is 15 Exhibit B1944 the report that you told us 16 yesterday that Steptoe & Johnson sent you? 17 A. If I remember right, there is a 18 Volume I and a Volume II. I know I've looked at 19 one of the volumes. I'm not sure which. And I 20 remember somebody had asked me if I had the entire 21 report one time, and I know I could only find one 22 volume for them. And I'm not sure which one it is 23990 1 because I have not looked at that document. I 2 don't know even know if I still have it. It has 3 been six, seven, eight years. 4 Q. Did the draft that you were sent deal 5 with USAT? 6 A. I don't remember because I just don't 7 remember if it was Volume I or Volume II. I just 8 remember I didn't have a complete set and -- 9 Q. You indicated yesterday that the volume 10 that you reviewed contained references to your 11 interview. Now, you were interviewed on 12 San Jacinto and United, correct? 13 A. I remember I was interviewed by let's 14 just say Steptoe & Johnson, if that's right; and 15 that happened sometime in 1991 or '92. I know 16 later I saw a draft of this report, but I'm not 17 sure whether it was Volume I or Volume II. That's 18 the best I can do. 19 I know that, you know, they came out. 20 They asked about various institutions that were on 21 my old caseload. This is after I had left OTS. 22 And they asked about different institutions, what 23991 1 was going on with them; and I don't remember the 2 details of our discussions. 3 Q. You were interviewed on only two 4 institutions, two -- 5 A. Well, again, I've been interviewed so 6 many times on so many different institutions, at 7 this late date it's hard to keep it exactly 8 straight. I remember Steptoe & Johnson came out 9 to California where I was currently working, and I 10 think it was them. I think it was in '92 or '91 11 that they sat down, and we spent a couple of hours 12 in my office out there. And they asked me some 13 questions, and then they went away. And sometime 14 later, I gained access to one of the volumes. But 15 as I remember it, I don't have both volumes or did 16 at that time. And that was about it. 17 But it's -- would have been years since 18 I've laid eyes on either Volume I or Volume II. 19 Q. Do you still have it? 20 A. I really don't know. I couldn't put my 21 hands on it right now or today or tomorrow. 22 MR. NICKENS: Your Honor, recognizing 23992 1 what you said for the record, I will offer 2 Exhibit B1944. 3 THE COURT: I will sustain the 4 objection. 5 MR. NICKENS: Your Honor, for the 6 record, I would go ahead and make a proffer of the 7 document so it's there, although it is not 8 received. And with that, I have no further 9 questions of Mr. Twomey. 10 THE COURT: All right. 11 Mr. Villa, you may cross examine. 12 MR. VILLA: Thank you, Your Honor. 13 14 EXAMINATION 15 16 Q. (BY MR. VILLA) Good afternoon, 17 Mr. Twomey. We have met before, haven't we? 18 A. Yes, John, we have met before. 19 Q. Now, Mr. Twomey, I was a little 20 embarrassed in Court today when I realized that my 21 question to you in the deposition as to whether or 22 not you had had any contact with Mr. Ranieri had 23993 1 apparently been just a little too specific. 2 I had asked you whether you had met 3 with Mr. Ranieri, and you answered you hadn't met 4 with Mr. Ranieri or his representatives. But, in 5 fact, you had had a number of telephone 6 discussions with them. 7 Do you remember that? 8 A. I remember your question. We read it 9 out of the deposition. I believe I answered your 10 question truthfully at the time. 11 Q. I had no hint that, in fact, there were 12 a number of telephone conversations; so, I didn't 13 follow-up on it. 14 Let me ask you about another question 15 that I asked in the deposition that you answered a 16 little differently here today. It was clear that 17 Mr. Nickens was onto what happened at the meeting 18 before the Federal Home Loan Bank Board and the 19 FSLIC on December 30th, 1988. So, when he began 20 asking you questions about it, you described a 21 little at a time your role in that meeting. 22 Now, sir, in the deposition, I asked 23994 1 you the following question at Page 719: QUESTION: 2 "Do you know, sir, whether or not Mr. Hurwitz' 3 involvement in the proposed Southwest Plan 4 acquisition essentially negated it?" 5 ANSWER: "All I know is Hurwitz and his 6 group had put a bid in through FSLIC sometime 7 probably in December of 1988. We were advised who 8 the winning bid was, and we didn't have any 9 involvement in that FSLIC decision." 10 Now, sir, was that a truthful answer? 11 A. Yes, I believe so. 12 Q. Is it as truthful as the testimony 13 you're giving here today, sir? 14 A. Yes, I believe so. 15 Q. Were you making an effort in the 16 deposition to obscure your role in the decision 17 making, pushing the institution to Ranieri, hoping 18 that I would not find the transcript? 19 A. No. 20 Q. Now, sir, Exhibit T8145 were the 21 reasons -- remember that, your December 15, 1988 22 memo -- the reasons that you gave for causing the 23995 1 dismissal of my clients. 2 You've seen that memo in some detail. 3 Right? 4 A. Yes. 5 Q. And there are reasons lettered A, B, C, 6 D, and E. E is compensation? 7 A. Yes. 8 Q. From December 15, 1988, the date that 9 that memo was written, through Mr. Rinaldi's 10 questioning of you, which appears at Transcript 11 Page 23385 to 386, you said that all of these 12 different reasons justified the firing of my 13 clients. Right? 14 A. Is that something I said today or -- 15 I'm -- 16 Q. Would you like me to read you your 17 testimony? 18 A. I would like to see it, if that's 19 possible. 20 Q. I believe -- 21 MR. VILLA: Does he have his testimony 22 up there? 23996 1 A. What date is it? 2 Q. (BY MR. VILLA) I don't know. I think 3 it's Day 2. I'll read it for those of us who 4 don't have the transcript. 5 MR. RINALDI: Could you give us the 6 page number, John? 7 MR. VILLA: Yes. Page 23386. 8 Q. (BY MR. VILLA) It starts on Page 23385, 9 Line 17. 10 QUESTION: "When you received Interim 11 Report No. 5, had you previously been aware that 12 there existed an unrealized loss of $200 million 13 in the mortgage-backed portfolio at USAT?" 14 ANSWER: "No, no." 15 QUESTION -- this is Mr. Rinaldi -- 16 "Prior to receiving this report from Ms. Bese, had 17 it been your general impression that the 18 mortgage-backed security risk-controlled arbitrage 19 at United had been financially successful?" 20 ANSWER: "Yes." 21 QUESTION by Mr. Rinaldi: "Were you 22 surprised when you learned this?" 23997 1 ANSWER: "The facts in this report, 2 yes." 3 QUESTION: "And were those facts ones 4 which influenced your ultimate decision on whether 5 Mr. Crow or" -- I'm sorry -- "Mr. Berner or 6 Mr. Crow or the existing management of USAT were 7 suitable to participate as -- continue to 8 participate as management of USAT?" 9 ANSWER: "Yes, it had an impact on my 10 decision." 11 Do you see that in the transcript, sir? 12 A. Yes, I do, John. 13 Q. Now, after Mister -- after Mr. Nickens 14 spent about an hour and a half taking you through 15 your reasons based upon mortgage-backed 16 securities, you told us that you now based your 17 decision on firing these individuals upon the 18 compensation issues. 19 Do you remember that, sir? 20 A. Yes, I do. 21 Q. Would it be fair to say that you made 22 the decision at about 11:45 this morning as to 23998 1 what was in your mind in December 1988? Would 2 that be fair to say? 3 A. No. 4 Q. Didn't you change the reasons, sir, 5 when you realized that you could not defend 6 anything that was said in the mortgage-backed 7 securities? Isn't that the reason you now try to 8 place everything on compensation and Reasons A, B, 9 C, and D in the memo terminating my client's 10 careers are no longer of any significance to you. 11 Right? 12 A. No, that wasn't my testimony. 13 Q. Now, let me pick up on a point that you 14 made with Mr. Nickens. I think Mr. Nickens said 15 to you, "Do you feel bad about ending Michael 16 Crow's banking career?" 17 And you shot back at him, "Well, did he 18 sign the contract?" 19 Do you remember that comment, sir? 20 A. Yes, I do. 21 Q. And you said the contract was totally 22 inappropriate. Right? 23999 1 A. I believe I said to him that Mister -- 2 "Did Mike Crow execute the contract?" And I 3 probably did say I didn't believe the contract was 4 appropriate. 5 Q. And so, he got what he deserved in your 6 view. Right? 7 A. I think based on what he did, my 8 actions were appropriate. 9 Q. By the way, did Larry Connell sign 10 substantially an identical contract, Mr. Twomey? 11 A. His contract had a sign-on bonus and 12 severance agreement, yes. 13 Q. Every other section of his contract, 14 apart from the question of how much money he 15 received, which was more than Mike Crow received, 16 was exactly the same, wasn't it, sir? 17 A. Well, he was being brought in as the 18 president of USAT. 19 Q. Did you understand my question? I 20 asked you about the form of the two contracts, 21 sir. 22 A. They are similar. 24000 1 Q. Now, you allowed Larry Connell to stay, 2 didn't you? I didn't see him being dismissed. 3 Right? 4 A. No, he wasn't dismissed at that time. 5 Q. And you approved him to go into 6 San Jacinto later. Right? 7 A. Yes, I did. 8 Q. And now Larry Connell is the senior 9 advisor to the Department of Treasury of the 10 United States Government, isn't he, sir? 11 A. I'm not aware of that. If you say so, 12 that's fine with me. 13 Q. You've seen Mike Crow since USAT 14 failed, haven't you? 15 A. One time, May 1992, that I recall. 16 Q. He was an exhibitor at a convention, 17 wasn't he? 18 A. Yes. Financial Management Society in 19 Orlando, Florida. 20 Q. Now, Mr. Twomey, prior to your 21 deposition in this case, you reviewed four boxes 22 of files for two days. 24001 1 Do you remember that? 2 A. Yes. 3 Q. And you claimed in your testimony to 4 Mr. Nickens that they weren't supervisory files 5 but examination work papers. 6 Do you remember that, sir? 7 A. I remember that comment. 8 Q. Do you remember that during the 9 deposition itself, I asked the OTS lawyers to see 10 the documents in your presence and they refused to 11 let me see the documents? And Mr. Rinaldi then 12 described the documents on the record. 13 Why don't you turn to Page 219 of your 14 deposition. Maybe we can clear up whether or not 15 they are supervisory documents or not. It starts 16 at Page 219. For people that don't have a 17 transcript, I'm going to burden them with reading 18 the question and the answer. 19 A. Which volume? 20 Q. This is Volume II. 21 QUESTION, Page 219, Line 6: "I would 22 make a request that the OTS advise us of the 24002 1 documents that he, four boxes of documents he used 2 to refresh his memory for the purpose of 3 testifying. I think under the federal rules, 4 you're required to show us that; and I would like 5 to see those documents." 6 Response from Mr. Rinaldi: "First of 7 all, I think that showing you the documents that 8 we asked him to look at would be revealing work 9 product privilege, but putting that aside, John, 10 he's already testified that he took two days to 11 look at four boxes. You may cross examine him on 12 this, but I believe I can represent fairly to you 13 today that he basically reviewed these in a very 14 cursory fashion just so that he would not be 15 totally unfamiliar with supervision of an 16 institution, and it occurred some years ago. You 17 should ask him to what extent he actually read 18 individual documents or whether he basically 19 skimmed the contents of the boxes. I personally 20 couldn't have got through more than a fraction of 21 one box if I had read every document. I believe I 22 also said that the documents were generally -- not 24003 1 generally. They were the supervisory documents 2 that pertained to the subject matters of the 3 Notice of Charges." 4 Do you see that, sir? 5 A. Yes, I do. 6 Q. And does that refresh your recollection 7 that the documents that Mr. Rinaldi and his 8 co-counsel put together and showed you were, in 9 fact, the supervisory documents and not the 10 examination work papers? 11 Does that refresh your recollection, 12 sir? 13 A. No. Because my recollection is that 14 the primary documents at that time I looked 15 through were the loan work papers regarding loans 16 that were subject to comment in the 1986 and 1987 17 examinations. Those are the documents I can 18 remember looking at that I recall today as what I 19 was reviewing at that time because that's 20 basically where I was pointed at. "Look at 21 these." Again, with four boxes, I would look at 22 them and move on. 24004 1 Q. Were you looking at the same four boxes 2 that Mr. Rinaldi put together for you, sir? 3 A. I don't know who put them together, but 4 they were the boxes that were supplied to me. 5 Q. Are you trying to suggest to the Court 6 that if your testimony differs here than it did in 7 the deposition, that, in fact, you've seen 8 supervisory files that the OTS provided you prior 9 to your deposition? Isn't that what you're trying 10 to do, sir? 11 A. No. I'm telling you that the documents 12 they asked me to concentrate on were the loan work 13 papers, and that's what I concentrated on. There 14 were files there, but I didn't spend as much time 15 going through those. 16 Q. Did you correct Mr. Rinaldi's 17 description of the documents? Do you see that 18 anyplace in the text? 19 A. Again, I don't disagree with 20 Mr. Rinaldi's rendering. I don't know if it was 21 my place to make corrections. 22 Q. Now, prior to the deposition, you 24005 1 spent -- this is the depo -- you spent time 2 talking to at least three OTS lawyers. Right? 3 A. Yes. 4 Q. And I deposed you for four days. 5 Right? Three and a half? 6 A. Three and three quarters. 7 Q. At your deposition, I showed you 85 8 exhibits. 9 Do you remember that? 10 A. An awful lot of documents. 11 Q. During the deposition, you were 12 represented by two OTS lawyers at all times; and 13 they claimed that they were your lawyer. Right? 14 They said they were representing you. 15 Do you remember that? 16 A. If it's in here, it's in here. If 17 that's what they said, that's what they said. 18 Q. Let's go ahead and take a look and see 19 what they said. 20 MR. RINALDI: Can we have a page, 21 Mr. Villa? 22 MR. VILLA: Page 6. 24006 1 Q. (BY MR. VILLA) QUESTION: "Are you 2 represented by counsel today, sir?" 3 ANSWER: "I'm not represented by 4 personal counsel." 5 QUESTION: "Who does represent you in 6 matters pertaining to the OTS and former Federal 7 Home Loan Bank?" 8 "Here the attorneys from OTS represent 9 me." 10 Do you see that? 11 A. Yes. 12 Q. Does that refresh your recollection 13 that they represented you at the deposition? 14 A. What I thought what I said was they 15 were representing the interests of the OTS and as 16 a successor to the old Federal Home Loan Bank 17 Board in matters pertaining to my deposition. 18 Q. So, when you say, quote, "Here the 19 attorneys from the OTS represent me," close quote, 20 you don't mean "me." 21 Is that what you're saying? 22 A. Since I'm not a lawyer, maybe I didn't 24007 1 put it as -- in the properly legalese. I have 2 been told that at such matters, that these 3 attorneys do not personally represent me. They 4 represent the interests of the OTS as the 5 successor to anything to do with the old Bank 6 Board, the FSLIC, or the Federal Home Loan Bank of 7 Dallas. 8 Q. Now, during the deposition, Mr. Twomey, 9 one of the two lawyers, Mr. Paul Leiman, who we're 10 all familiar with here, told you every time I gave 11 you a document -- even if you had read it before, 12 he told you to read the entire document. 13 Do you remember that? 14 A. Yes. 15 Q. And I got so annoyed that I made the 16 court reporter stop and time the reading of every 17 document because whether or not you had read it 18 before, he had you read the entire document. And 19 I finally got upset when I handed you a 200-page 20 Texas savings and loan examination report to ask 21 you one question, and he told you to read the 22 entire document. 24008 1 Do you remember that, sir? 2 A. Not specifically but generally, yes. 3 Q. And we had to stop the deposition each 4 time so you could read the document before I asked 5 you any questions. Right? 6 A. I remember that we were stopped a 7 number of times, and you were timing how long it 8 would take me to read a document. 9 Q. Now, in preparation for trial -- in 10 preparing for your deposition, you reviewed four 11 boxes of documents, nature unknown apparently. 12 You met with three OTS lawyers. And then during 13 the course of the deposition, you reviewed 85 14 exhibits, many of which have shown up here today, 15 and took the time to read them before I could ask 16 you a question. Right? 17 A. I did my best, yes. 18 Q. And in preparation for this testimony, 19 you've looked at six or seven binders; and you've 20 met with the OTS attorneys on three occasions and 21 once by telephone. Right? No. 22 Several times by telephone. You spoke 24009 1 to them several times by telephone. Right? 2 A. Yes. 3 Q. Didn't you answer many of my questions 4 in the deposition dramatically differently than 5 the testimony you gave to Mr. Rinaldi for a day 6 and a half? Didn't you, sir? 7 A. Many of the documents that you showed 8 me I hadn't seen in years and, at this time, 9 didn't spark a recollection. But since that time, 10 which is March 17th, 1997, because I have sat down 11 with the OTS attorneys, they have gone through the 12 documents again. And I had -- I have a better 13 feeling now how the individual documents fit into 14 the matrix of how things happened. 15 At the time of the deposition, even 16 though I read the document the best I can and as 17 fast as I could, I answered the questions the best 18 I could at that time and from what I could recall. 19 Q. Let's see how you answered some of the 20 same questions that Mr. Rinaldi asked you. 21 In your direct testimony, you explained 22 your thinking -- remember the January 9, 1986 memo 24010 1 on the direct investment? Mr. Rinaldi showed it 2 to you in his direct. 3 A. Yes, but it would probably help if I 4 could see it here. 5 Q. While we're getting out the book to 6 assist you, sir, I gave you the documents in 7 chronological order, didn't I, in your deposition? 8 A. I don't recall; but if you say so, 9 that's okay. 10 Q. We're providing you, for your benefit, 11 the documents that I'm referring to now. Let's 12 start off with the first one, which is the 13 January 6, 1986 memorandum which is A11153 in 14 evidence at Tab 1870. 15 Do you see that document in front of 16 you? 17 A. Yes. 18 Q. Now, sir, that involves the memo on the 19 direct investment application. 20 Do you remember that? 21 A. Yes, it does. 22 Q. Now, in your direct testimony, you 24011 1 explained your thinking about this memo. And you 2 devoted seven pages of your testimony in your 3 response to Mr. Rinaldi to explain your thinking. 4 That's Pages 23529 to 36. You don't have to look 5 at it. We're going to look at your deposition. I 6 think we remember your explanation of what your 7 thinking was. 8 Let's go to what you said in your 9 deposition about the same document. I showed you 10 the same document which was marked as Twomey 11 Exhibit 8. Why don't you turn to Page 90 of your 12 deposition. And for those people who don't have a 13 copy, I'll read the questions and answers. This 14 was Twomey Exhibit No. 8, same document. 15 QUESTION: "You agree with all the 16 statements in Exhibit No. 8, don't you?" 17 ANSWER: "I don't remember what I 18 agreed with in 1986 when this document was 19 prepared." 20 QUESTION: Does the document reflect 21 your views on January 9, 1986, on the subject set 22 forth in the document?" 24012 1 ANSWER: "I don't remember what my 2 views were in January of 1986." 3 QUESTION: "Now, sir, if you had 4 believed in January of 1986 that the business plan 5 that United had submitted was unreasonable, would 6 you have told Mr. Green in this memo that it, 7 quote, 'appears reasonable,' close quote?" 8 ANSWER: "Again, I don't remember what 9 I was thinking about USAT in January 1988 when 10 this memorandum was prepared." 11 QUESTION: "1986?" 12 ANSWER: "1986. I'm sorry." 13 QUESTION: "I asked you whether you 14 would tell Mr. Green that the business plan of 15 United appears reasonable if you believe to the 16 contrary." 17 ANSWER: "Again, I don't remember what 18 I would have told Mr. Green in 1986 regarding 19 USAT's business plan." 20 QUESTION: "Was it your practice to 21 mislead Mr. Green?" 22 ANSWER: "In what way?" 24013 1 QUESTION: "Were there any ways in 2 which you mislead Mr. Green?" 3 ANSWER: "Could you be more specific?" 4 QUESTION: Did you ever mislead 5 Mr. Green with respect to your knowledge with 6 respect to USAT?" 7 ANSWER: "I don't recall." 8 QUESTION: "You may mislead Mr. Green 9 with respect to USAT? That's a possibility?" 10 ANSWER: "I don't recall." 11 Then down on Page 93, QUESTION -- I 12 asked you again -- "From reading this memorandum, 13 you can't determine what your state of mind was in 14 January of 1986; is that right?" 15 ANSWER: "I don't remember United's 16 business plan, and I don't remember what I was 17 thinking in January of 1986." 18 Do you see that, sir? 19 A. Yes. 20 Q. So, in direct -- in response to the 21 direct questions of Mr. Rinaldi, you gave us a 22 very good explanation of what you were thinking 24014 1 and the concerns you had with respect to United. 2 But when I asked you questions after 3 having read the entire document, you couldn't 4 remember what you were thinking in January of 5 1986. You couldn't even remember whether the 6 document reflected your views in January of 1986? 7 A. I said I couldn't remember what my 8 thinking was at that point in time in the 9 deposition. 10 Q. That's the way you conducted yourself 11 throughout the deposition, wasn't it, sir? Either 12 you could not recall the 85 documents I showed you 13 or you were prepared to say under oath that you 14 couldn't recall the documents? 15 A. No, sir. I think I basically said to a 16 lot of documents that I hadn't seen for some time 17 is if there's a document by me or to me, I didn't 18 have any problem with recognizing that that 19 happened. Either we sent the document because we 20 signed it or initialed it or if a document was 21 sent to us and was stamped by our office, then we 22 received it. 24015 1 Your question was what was the thought 2 process in the documents that we initiated. And 3 at that time when we looked at this January 9th, 4 1986 memo, I didn't remember everything that lead 5 up to it. 6 However, prior to this testimony, the 7 OTS attorneys have shown me the original 8 application, I think, which came in this August of 9 1985. I don't remember the exact date, plus there 10 was supplemental information that was delivered 11 sometime in November of 1985 that I arrived at the 12 Federal Home Loan Bank of Dallas as supervisory 13 agent on December 2nd. 14 And then between that time and 15 January 6, we processed the application; and based 16 on discussions that I had with Ginger, we prepared 17 this memorandum to Mr. Green, the PSA. 18 Q. Now, you said, first of all, you 19 wouldn't have remembered the document unless you 20 authored it or received it and it had a date stamp 21 on it. 22 Why don't you take a look at the 24016 1 document, the January 9, 1986 document that's 2 before you. Who does it say it's from? 3 A. The January 1986 memo? 4 Q. Yes. 5 A. It's from Neil Twomey and Ginger Baugh 6 to Roy Green. 7 Q. And can you tell me whether there's a 8 stamp up in the right-hand corner that looks like 9 a "received" stamp? 10 A. Yes. It is a partial, but it looks 11 like it's a regulatory -- well, I can't read it 12 all. It references the Federal Home Loan Bank 13 Board 9th District. And it looks approximately on 14 January 16th and some time of the day, but I'm not 15 sure of that. 16 Q. Now, are you telling me, sir, that the 17 reason you couldn't answer my questions was 18 because Mr. Rinaldi showed you the August 20, 1985 19 application; and is there some suggestion in there 20 that I didn't show you that same application in 21 the deposition, sir? 22 A. You might have shown it, but I was 24017 1 unable to put it in the context of how everything 2 was put together at the time. You asked me this 3 question about the document. I did my best to 4 answer you at the deposition. 5 When this document was shown to me 6 during the trial, I had now been able to look at 7 other documents and see how everything fit 8 together and how everything was being put together 9 at the time and had a better understanding of what 10 was said in this document and refreshed my memory. 11 Q. In fact, it was Exhibit 9 in your 12 deposition. I handed it to you; isn't that right? 13 Do you remember looking at it, sir? 14 A. Yes. 15 Q. What you said was, quote, "I don't 16 recall what the business plan looked like relative 17 to that memorandum of January 9, 1986. If you 18 purport that this is it, I have no way of knowing 19 one way or the other it is or it is not." 20 In fact, I showed you the same 21 documents that Mr. Rinaldi did; and you gave him 22 answers that explained your reasoning, what you 24018 1 were thinking, the various competing factors. And 2 when I asked you, your answer is you couldn't 3 think of what you were thinking about in January 4 of 1986. 5 A. At the time of the deposition, I 6 answered truthfully. At the time of my testimony 7 here, I answered truthfully. 8 Q. Now, in your trial testimony here, sir, 9 you described a series of meetings from March 20, 10 1986, to May 21, 1986, that spans 42 pages of the 11 transcript of this trial that begin with the Art 12 Berner/Bob Pozen meeting; and they include a 13 number of meetings about USAT and junk bonds and 14 all of the rest of that. 15 In your deposition, I asked you what 16 was the first recollection you had of USAT; and 17 you testified that it was, quote, "after the start 18 of the 1986 examination of USAT," close quote. 19 That's Page 107 lines 8 through 9. Then you 20 elaborated by saying, quote, "I said I couldn't 21 recall until the examination that United had come 22 up as a topic that I had to get involved with," 24019 1 Page 107, Lines 21 to 108, Line 1. 2 Q. The exam began on May 27, 1986? 3 A. That's right. 4 Q. You spend 40 pages of the transcript in 5 this case describing events for Mr. Rinaldi which, 6 when I questioned you about them, you couldn't 7 even remember that they existed; isn't that right? 8 A. I answered in the deposition that the 9 first significant issue that I can recall was 10 regarding Couch Mortgage, and there are many 11 meetings and many memos that are probably floating 12 around about meetings that might be regarding 13 United that I just didn't recall. 14 Q. Now, in your trial testimony, you were 15 shown Exhibit B4001. I think it's probably the 16 next exhibit that's up there. Do you have it 17 before you? That's in evidence at Tab 887. It's 18 a memo from Ginger Baugh to the file. It's 19 Exhibit B4001. It's Tab 887. It's a Ginger Baugh 20 memorandum of a meeting that occurred on May 21, 21 1986. 22 You -- Mr. Rinaldi questioned you about 24020 1 this. He drew your attention to the third full 2 paragraph, and I'll read the paragraph. It says, 3 "SA Twomey stated that he is aware of the fact 4 that the current economy (low interest rates, low 5 inflation) is conducive to relatively safe 6 investing in high-yield bonds. However, if and 7 when rates begin to go back up, the same 8 investments will be risky." 9 Mr. Rinaldi asked you questions about 10 that, and you were asked to explain what you meant 11 by the statement that the current economy is 12 conducive to safe investing in high-yield bonds. 13 You explained to the Court falling interest rates 14 can cause company's profits to increase and the 15 bonds are called and you get paid back the 16 principal. That's at Page 23586 through 587 of 17 the transcript of this proceeding. 18 In the deposition, I showed you exactly 19 the same document; and I read you exactly the same 20 words. And here's what you said. Quote, "I don't 21 remember what my context was at the time," close 22 quote and quote, "Probably numerous things, but I 24021 1 can't remember right now," close quote. That's 2 Depo Page 172, Line 19, through Page 173, Line -- 3 A. I remember that. 4 Q. What is it that you learned in your 5 meetings with the OTS lawyers that helped you 6 understand the riskiness or lack of riskiness of 7 high-yield bonds in May of 1986? 8 A. Well, what I can recall from the 9 deposition is -- 10 Q. You didn't hear my question. My 11 question is: You gave one answer in 1997 when I 12 took your deposition. You gave another answer in 13 the courtroom to Mr. Rinaldi's questions. 14 My question to you is, sir: What did 15 you learn from the OTS between the dates of the 16 two series of questions that helped you understand 17 the riskiness or lack of riskiness of high-yield 18 bonds? 19 A. Okay. May I answer it? When I was 20 asked that question by you, I still don't remember 21 the context of why I said that at that time at 22 that meeting or what was in my mind. However, 24022 1 when I discussed that during the testimony, I gave 2 an example of a generic example of if interest 3 rates are falling, then the -- and a corporation 4 that may have issued junk bonds is less likely to 5 default because of a favorable interest rate 6 environment. I think I even mentioned that 7 there's a high probability that if interest rates 8 continue to fall, then those junk bonds or 9 securities could be called. I believe what you 10 asked me was -- or the way I thought you were 11 asking that question at the deposition was when -- 12 this was at this time in the meeting or what I was 13 thinking when this was said or whatever. And I 14 think the answer I gave in testimony was basically 15 an explanation of why an issue of junk bonds might 16 be less risky in a falling rate environment. 17 Q. You see, we probably misunderstood you, 18 sir, because the question that was posed to you on 19 Page 23586, Line 14, was QUESTION: "And what was 20 your concern as reflected in that paragraph?" 21 We in the courtroom thought that you 22 were testifying from your own recollection. And 24023 1 now we learn that, in fact, you're just talking 2 about general principles of high-yield bonds. 3 Perhaps you should have made these 4 things clear in your testifying. We thought that 5 you were testifying from your recollection, sir. 6 The truth is you don't remember what 7 you were thinking in 1986; is that right? 8 A. I don't remember in what context, 9 particularly this memo -- I gave what I thought 10 was a generic example that explained why junk 11 bonds might be less risky from what I know today 12 in a falling rate environment. 13 Q. How many generic answers did you give 14 to Mr. Rinaldi? Were you testifying about the 15 USAT case or generically? 16 A. I think I was saying -- based on what I 17 knew about junk bonds and the way they were issued 18 with a high-rate coupon yield on the bonds, that 19 if interest rates were falling, they became less 20 risky because there was a strong likelihood that 21 those bonds would be redeemed. I wasn't talking 22 about a particular junk bonds that USAT held in 24024 1 1986. 2 Q. Now, sir, you were shown an exhibit -- 3 you can take a look at the next one. It should 4 probably be B1739. It's a memo about the 5 ownership of United from Ginger Baugh to you and 6 Danny Thomas which she's initialed. 7 Do you have that before you? 8 A. Yes, I do. 9 Q. It's Tab 1523. And Mr. Rinaldi asked 10 you, "What was the reason for requesting it," 11 close quote. And you gave him an explanation that 12 ran two and a half pages. That's Page 23679 13 through 23681. 14 In your deposition, I showed you the 15 same document; and I asked you, quote, "Do you 16 know why you asked Ginger Baugh for the 17 information regarding the ownership of United," 18 close quote. And you answered, quote, "I don't 19 remember why I would have asked Ginger," close 20 quote. That's Depo 34, Lines 3 through 8. 21 Was that a generic answer or a specific 22 answer there? 24025 1 A. That was a specific answer. 2 Q. In response to a number of direct 3 questions from Mr. Rinaldi, you explained the 4 reasons why you had asked John Scott to review 5 USAT's junk bond portfolio. Do you recall those? 6 You told us all the concerns you had and how it 7 lead you to asking John Scott to go to USAT. 8 That's at Pages 23600 through 04 of your 9 testimony. 10 In your deposition, I handed you the 11 same document. I asked you why you sent this 12 memorandum to Mr. Scott in June of 1986 requesting 13 him to take the steps described in the deposition. 14 And your answer was, quote, "I don't remember the 15 specific reasons why," close quote, 16 Deposition 176, Lines 11 through 14. 17 What did you learn in your meetings 18 with the OTS lawyers that allowed you to now 19 understand what the reasons were for your 20 conversations with John Scott in 1986? 21 A. I had looked at other documents that 22 surround that memo prior to it. 24026 1 Q. You've looked at other documents? Were 2 those documents in the four boxes of documents 3 that the OTS provided you prior to your testimony? 4 A. No. 5 Q. No? They gave you four boxes of 6 documents, and they didn't give you those 7 documents? 8 A. I don't recall what was in those boxes. 9 Obviously, I didn't focus on a complete set in 10 chronological order of what was there. In fact, I 11 don't believe much, if any, type of chronological 12 order was in those boxes. 13 Q. In your trial testimony, you were shown 14 a memorandum of a meeting in August of 1987 in 15 which there was a discussion about giving verbal 16 comfort to Wall Street and the statement that you 17 wouldn't take action, you would give verbal 18 comfort. That's at Pages 23646 through 53. And 19 you explained to the Court the issue had come up 20 about brokers on Wall Street and what your 21 thinking was and why you offered to give verbal 22 comfort and all of that. 24027 1 Do you remember that, sir? 2 A. Yes. 3 Q. In your deposition, I asked you about 4 the same meeting; and I showed you the same 5 document. Let's look at Page 297, Line 16, and 6 see what you said there. Same document. 7 QUESTION: "Mr. Twomey, I've handed you 8 what's been marked as Exhibit No. 31. It's a 9 memorandum to the file from Ginger Baugh dated 10 August 10, 1987, regarding a meeting on 11 August 7th. I would ask if you can take a -- if 12 you can take a look at it." 13 There's parens, "(Witness reviews 14 document.)" 15 "Have you had an opportunity to read 16 it?" 17 ANSWER: "Yes." 18 QUESTION: "Let me direct your 19 attention to... . 20 "Does that refresh your recollection 21 that a meeting was held on August 7, 1987, at the 22 request of United to discuss issues involving 24028 1 United?" 2 ANSWER: "Not specifically." 3 QUESTION: "Let me direct your 4 attention to the fourth paragraph on Page 1. It 5 reads as follows: 'United stated that the reason 6 for the emphasis on this subject is Wall Street's 7 discomfort with capital deficiencies. 8 Prudential-Bache, for example, is questioning 9 whether to complete United's proposed offering 10 with respect to the proposed branch sale. Neil 11 offered to meet personally with any brokers and 12 give regulatory feedback, verbal comfort on 13 United's part. Neil stated that he would have to 14 discuss with legal possibilities of written 15 comfort letter.' Do you see that?" 16 ANSWER: "Yes." 17 "Do you recall -- strike that. Does 18 that refresh your recollection that United asked 19 for a meeting with you in August of 1987?" 20 ANSWER: "No. I'm sorry. I just don't 21 remember the specific meeting." 22 QUESTION: "Do you recall United 24029 1 telling you that capital deficiencies were causing 2 problems with its brokers on Wall Street?" 3 ANSWER: "No. I'm sorry. I just don't 4 remember that meeting or that issue." 5 QUESTION: "Do you recall offering to 6 give verbal comfort and regulatory feedback to the 7 brokers on United's part?" 8 ANSWER: "No. I don't remember the 9 meeting, I don't remember the issue, and I don't 10 remember the offer specifically." 11 Do you see that, sir? 12 A. Yes, I do. 13 Q. Now, in response to Mr. Rinaldi's 14 questions, you offered this explanation about what 15 was going through your head at that time was 16 liquidity and this was what was going to happen on 17 Wall Street and the repo lines. 18 When I asked you the question, you 19 didn't remember the issue, did you, sir? 20 A. No, I didn't remember the issue at the 21 time. 22 Q. In response to Mr. Rinaldi's questions 24030 1 devoting considerable time to -- you spent a lot 2 of time explaining your thoughts with respect to 3 the May 27, 1988 Southwest Plan memo. Do you 4 remember that memo? It's Exhibit A11160 in 5 evidence at Tab 1861. 6 Do you see it before you now, sir? It 7 should be the next document. 8 A. May 27th, '88? 9 Q. Yes, sir. 10 A. I have it. 11 Q. You explained what your thinking was. 12 You explained that, really, your thinking 13 incorporated some high level of comfort that you 14 had about the mortgage-backed securities 15 portfolio; and you didn't know that there was a 16 200-million-dollar loss and you thought the 17 portfolio was good and you went through all of 18 these things. 19 Do you recall that? That's at 20 Pages 23395 to 403 of the transcript, eight pages 21 of the transcript. 22 MR. RINALDI: What are those pages 24031 1 again? 2 MR. VILLA: 23395 to 23403. 3 Q. (BY MR. VILLA) In your deposition when 4 I showed you this document, you said, quote, "I 5 don't particularly recall this one," close quote, 6 Page 581, Lines 18 through 20. 7 Then I asked you what you were thinking 8 about USAT; and you said, quote, "I don't recall 9 what I was thinking about United's management team 10 in May of 1988," close quote, Page 527, Lines 5 11 through 8. 12 Now, what is it, sir, that you learned 13 in talking to the OTS lawyers that helped you now 14 remember all the concerns that were going through 15 your mind in May of 1988 about United's management 16 team with respect to a document that when you were 17 shown it and read it, you couldn't even recall? 18 What did they tell you that helped you remember 19 that for the purposes of your testimony here? 20 A. They didn't tell me anything that I can 21 recall. I have now had access to other 22 supervisory documents which I reviewed, and that 24032 1 refreshed my memory. 2 Q. What do you mean you had access to 3 them? Was somebody denying you access to the 4 supervisory documents beforehand? Is that what 5 you're suggesting? 6 A. I don't have access to supervisory 7 documents. The only documents that I get are the 8 ones that OTS attorneys have sent me. They have 9 sent me different volumes, different binders of 10 those documents. 11 Q. In your direct testimony, you devoted 12 considerable time to describing the compensation 13 study that your staff performed. You told us how 14 they canvassed all the supervisory agents and 15 analysts and two dozen Texas thrifts with assets 16 over $1 billion. You told us that USAT was 17 comparable to all but two or three of them in the 18 survey. 23357 through 359, 23364 -- 19 A. I recall my testimony. 20 Q. When I asked you about it in your 21 deposition, you said, quote, "We may have reviewed 22 compensation levels at other large institutions in 24033 1 Texas and California, but I generally don't 2 remember that we did specifically for United," 3 close quote, Page 737, Line 21, through 738, 4 Line 2 of your deposition. 5 A. Can you hold for a second, Mr. Villa? 6 What pages were those? 7 Q. Page 737, Line 21. Do you see that, 8 sir. Did I correctly read it for you? 9 A. You correctly read what's in the 10 transcript. 11 Q. Now, did they show you -- between the 12 time you testified in your deposition and the time 13 you testified at trial, did they show you this 14 compensation study that you had done? 15 A. What I was recalling at the time of the 16 deposition is another matter where we had gone out 17 and -- if you want to use canvas, that's fine -- 18 but we put together information regarding 19 compensation levels at other thrifts in Texas, and 20 we made some inquiries to some of the SAs out in 21 California regarding -- you know, they were 22 limited to a limited number of billion-dollar 24034 1 institutions in Texas experience to get a feel of 2 larger institutions, the 10 billion and so. 3 When I was answering this question, I 4 was actually thinking of another time that we had 5 put together some information to look at the 6 compensation levels of a thrift in Texas. 7 Honestly, that's the way I was responding to this 8 question. 9 I guess at that time, I wasn't thinking 10 that -- one, we probably used the information 11 later on United. I didn't recall it at the time. 12 I was focused only on another institution. That's 13 the reason we did this. And I remember some 14 additional work we had to do in putting together 15 some numbers. That's what I thought of when you 16 asked the question. 17 Q. I asked you about United. I didn't ask 18 you whether you did anything in California or 19 Texas, did I? 20 A. Sir, when you asked the question, my 21 mind focused on a certain answer regarding another 22 institution. You asked the right question. I was 24035 1 thinking of something else. I'm sorry, but that's 2 the way my mind was working. I was thinking about 3 another compensation study that we did 4 approximately at the same time, and that's what I 5 was focusing on. I didn't remember at the time of 6 the deposition what we had done regarding United, 7 you know, in the fall of 1988 regarding some type 8 of compensation study. What I was thinking of is 9 another situation that first occurred to me. And 10 I -- that's all I can really say. I was thinking 11 of -- when you asked the question, I thought of an 12 answer. This is the answer I gave you, but what I 13 was really thinking of was another institution. 14 Q. Did you forget that you did a 15 compensation study of United, or did your mind 16 just wander. Which was it? 17 A. I didn't recall that we had done a 18 compensation study at United. When you asked me 19 the question, you showed me the document. I just 20 did not recall that we had done it at the time of 21 the deposition. 22 When you asked the question, I was 24036 1 thinking of another problem case at the time, you 2 know, regarding what we had to do to get the 3 information. Particularly, we had to go outside 4 the district to get reasonable comps; and that's 5 why we were talking to California. 6 Q. Now, I didn't see anything in any of 7 the documents which indicated a study of the 8 specificity that you told us about in the trial 9 here, this calling all these different analysts 10 and the agents and checking 24 and getting six and 11 doing comparisons of financial information. 12 Did you see any document in all of 13 these seven binders that the OTS has sent to you 14 that indicates such a compensation study had been 15 done ever? 16 A. No. I honestly don't recall a specific 17 document that resulted from that, no. 18 Q. In your direct testimony, you were 19 asked whether you recalled attending the USAT 20 board meeting at which the consent agreement was 21 executed. And you said in response to 22 Mr. Rinaldi's question, Page 23455, quote, "Yes, I 24037 1 do." Then you testified about the board meeting 2 where the consent agreement was approved. 3 In your deposition at Page 724, 4 Line 12, through 725, Line 2, you ought to take a 5 look at this one. This is a good one. I asked 6 you whether you recalled the meeting; and you 7 said, "No, I don't." I asked you whether you 8 recalled attending that board of directors 9 meeting; and you said, "No, not specifically." I 10 asked you whether you remembered anything about 11 the meeting; and you said, "No." So, I didn't ask 12 you any more questions about the subject. 13 Do you recall now, sir, something about 14 that meeting? And if you do, how is it that you 15 learned it between the time of your deposition 16 testimony and the time of your trial testimony? 17 What did you look at that allowed you to remember 18 what occurred at the meeting? Remember, I showed 19 you the meeting minutes and you reviewed them? 20 A. Before I answer, could I look at the 21 pages of the testimony? I didn't write down all 22 the pages that you were just mentioning. What 24038 1 date -- I mean, there's several days here now. 2 Q. What is it -- 3 A. I want to see when Mr. Rinaldi showed 4 me the document regarding the board meeting where 5 the consent agreement was signed. I just wanted 6 to look at what my testimony was. You know, you 7 mentioned a number of pages; and I just wanted to 8 refresh -- 9 Q. It's Page 23455 of your testimony. 10 A. 23455. 11 Q. It starts up at the top. Line 3, 12 QUESTION: "Do you recall attending this board 13 meeting?" 14 ANSWER: "Yes, I do." 15 MR. RINALDI: Your Honor, I think you 16 have to go back over to the previous page. The 17 exhibit that he showed him wasn't the board 18 minute, it does not appear. It was Exhibit 78, 19 the consent agreement itself. So, maybe if you go 20 back and start on the previous page, because this 21 question implied that he was showing him the board 22 minutes. But if you read the whole thing, you see 24039 1 that the exhibit that he's showing him, which is 2 Page 723, Line 10, "Mr. Twomey, I've handed you 3 what's been marked as Twomey Exhibit 78. It's a 4 consent agreement." 5 Q. (BY MR. VILLA) Do you recall, sir, 6 attending the board meeting where the consent 7 agreement was approved? 8 A. Generally, yes. 9 Q. Now you do recall it? 10 A. Who was there -- I remember we had to 11 go there to get the consent agreement signed. 12 Q. And it was looking at the board minutes 13 that refreshed your recollection about this 14 meeting; is that right? 15 A. No, I didn't say that. 23455? 16 Q. Right. It starts at Line 3. Are you 17 testifying about the board meeting there, sir? 18 A. I'm trying to remember what I testified 19 to at the time. I remember the consent merger 20 agreement; and I remember it being signed, where 21 the board agreed to sign it in or around November 22 of 1988. 24040 1 Q. In your direct testimony, sir, I asked 2 you who made the decision not to ask -- I'm sorry. 3 Mr. Rinaldi asked you who made the decision not to 4 ask for a supervisory agreement for United. And 5 you identified the person who made the decision 6 was Joe Selby, and you gave insight into his 7 thinking. You said, quote, "The head of the 8 Regulatory Review Committee at the time was also 9 the head of regulatory affairs, Joe Selby." 10 Then you went on to explain what 11 Mr. Selby was concerned about. This is at 12 Pages 23263, Lines 4 through 11. 13 MR. RINALDI: You're making reference 14 now to not the consent agreement but to the early 15 period in 1986 after the -- I mean in '87 after 16 the '86 exam was complete? You were talking about 17 the -- 18 Q. (BY MR. VILLA) We're going through -- 19 for the edification of all involved, we're going 20 through a series of statements that you made in 21 the course of your examination appraising them to 22 your deposition. This one is who made the 24041 1 decision, who made the decision not to ask for a 2 supervisory agreement. 3 MR. RINALDI: In what period? Are we 4 talking about 1987? 5 Q. (BY MR. VILLA) Sir, do you remember in 6 your trial testimony in March or April of 1987, it 7 was your testimony that you had recommended a 8 supervisory agreement and that Joe Selby had 9 decided not to ask for a supervisory agreement and 10 you explained what Mr. Selby was concerned about 11 and what his thoughts were and how he said the 12 books and records weren't good enough for us to 13 know the condition of the association? 14 "Therefore, I'm not going to ask for a consent 15 agreement. I'm going to ask for third-party 16 independent audits of the association." 17 Do you remember that? 18 A. Yes. 19 Q. In your deposition, I asked you who 20 made the decision. And you said, quote, "I just 21 don't recall who did it," close quote, Page 355, 22 Lines 3 through 4. You testified in your direct 24042 1 examination, sir, that George Barclay was 2 interested in USAT's getting senior management. 3 Do you remember that in response to 4 Mr. Rinaldi's questions? 5 A. You're jumping ahead. First of all, 6 you're talking about the RRC document that was 7 submitted to the regulatory affairs group as a 8 result of the 1986 examination. 9 Q. Yes, sir. I'm not trying to take every 10 statement you made in your direct testimony and 11 compare it to your deposition because I've only 12 been given a certain amount of time for my 13 questions. So, what I've done is selected some of 14 them that have become more salient in this case. 15 So, I will be jumping around a little 16 bit depending on what the relevant issues were. 17 Yes, you're correct. I'm not moving forward a 18 little bit in time. I'm talking about the entire 19 time George Barclay was there. 20 A. But when you were talking about 21 regarding what my testimony was regarding the 22 recommendation for a supervisory agreement, you 24043 1 said "Isn't this your testimony?" or basically 2 your phrasing some type of question. 3 Then you went back to the deposition. 4 Well, you really didn't get that far. When you 5 were talking about that document, I mean, the best 6 thing I can tell you, Mr. Villa, is at the time 7 you probably showed me that document in my 8 deposition, I didn't remember exactly what 9 happened or why the decision was made not to go 10 ahead with the supervisory agreement. However, 11 again, because I sat down and I've had time to 12 review these documents and not the hectic pace 13 going through the deposition and the rapid going 14 back and forth and everything that was going on, 15 it came to me, after your March 17th, 1997 16 deposition when I was reviewing these documents, I 17 just -- it just came to me that Joe Selby had made 18 the decision and what his decision was. 19 And, you know, I remember I was pushing 20 for a supervisory agreement because I felt that 21 was necessary at the time. And then I got 22 overruled by Mr. Selby. That's what I recall. 24044 1 Q. When did this come to you, 2 approximately? 3 A. After the deposition. I mean, should I 4 say March 1st of 1988? I don't know. Quite 5 honestly, you know, when you sit down and you have 6 time and you're not being pressured to answer this 7 question, answer that question, move on, let's do 8 this, read this entire document, and keep going, 9 going, going in under four days, when I have the 10 time to sit back, I can properly recollect and 11 determine what's going on. I do a better job that 12 way. 13 However, it's my impression when I'm 14 being deposed, it's usually pretty much a pressure 15 situation. You're being asked to look at 16 something real quick. You give the best answer 17 you can, to be as truthful as you can and so 18 forth. I tried to do that. To the best of my 19 knowledge, I did do that. 20 However, when I have more time to sit 21 down and review the documents, other things became 22 apparent to me. I could refresh my memory of what 24045 1 is going on at the time. I can't -- it's not 2 100 percent, but it might be better than it was at 3 the time of the deposition. That's -- if you're 4 going to keep going through every document, all 80 5 of the exhibits and asking every question for 6 every time that I gave more information now or 7 during this trial, okay. 8 But it really is going to come down to 9 I did answer truthfully. I did the best I could 10 during the deposition. And what's happened now is 11 I've had more time to look at documents and see 12 how they all fit together and what was going on, 13 what was -- when applications were being 14 submitted, meetings were being requested, meeting 15 memos were being done, examinations were being 16 run, quarterly reports, SSCs, the whole gamut of 17 things that were involved at USAT and other 18 institutions at that time. 19 Q. During the course of a 792-page 20 deposition, you said the words "I don't recall" or 21 "I don't remember" 760 times. Are you saying 22 that's because you just couldn't put things in 24046 1 context? 2 A. No. What I said was during the 3 deposition, I did the best I could to answer your 4 questions as you put them to me. And I answered 5 truthfully every time. If I didn't recall a 6 document, I would say I didn't recall a document. 7 If it was sent to me or it was date stamped that 8 it was received by my office, I probably said, you 9 know, yes, that document was probably reviewed by 10 me; or if my initials are on it or my signature is 11 on it, that document was probably, you know, sent 12 by me. I just don't recall it. 13 You know, when you're talking a number 14 of years, you don't remember every memo you wrote 15 or every letter you wrote or every letter you 16 received. 17 Q. That's why we gave you the documents. 18 During one time during the course of the 19 deposition, you took the two examination reports 20 home to the hotel overnight to read -- 21 MR. RINALDI: Your Honor, I would like 22 to clarify for the record. During the course of 24047 1 the deposition, early on, Mr. Villa was concerned 2 about Mr. Twomey taking time to read documents. 3 This became an issue at the outset because as 4 Mr. Twomey has testified, he hadn't seen the 5 supervisory record at the time that he went to the 6 deposition. 7 In any event, I offered to Mr. Villa to 8 kindly provide us with copies of the exhibits that 9 he wanted to show to Mr. Twomey; and I asked 10 Mr. Villa if he would like Mr. Twomey to review 11 them over the evening break so that he would be 12 familiar with their contents and could fully 13 respond to them. And Mr. Villa then, in a very 14 pointed response, had showed Mr. Twomey a document 15 that, in fact, he had seen; and he asked 16 Mr. Twomey if his having prior seen that helped it 17 at all. And Mr. Twomey came back "It doesn't 18 appear to have." 19 And Mr. Villa made a tart remark as to 20 "I don't see any purpose as to giving you any 21 documents." 22 We made every effort to accommodate 24048 1 Mr. Villa and tried to give the documents to 2 Mr. Twomey so that he could review them and try to 3 answer to the best of his ability. Mr. Villa 4 refused. In light of the fact that he refused, 5 Mr. Twomey's recollection in many cases wasn't 6 particularly good because he hadn't seen the 7 things before. Frankly, I'm the one that's at 8 fault. I gave him the examination file rather 9 than the supervisory file. It was my oversight. 10 Q. (BY MR. VILLA) Now, sir, what I was 11 referring to, actually, was -- 12 MR. VILLA: By the way, the 13 recitation -- I won't bother to respond. I don't 14 see any point of doing that on the record. There 15 will be evidence of me sending notice of documents 16 over. I gave it to them, and they came back and 17 said they didn't have time to read them. What I 18 was timely focusing on was one in particular, and 19 that is the examination reports. 20 Q. (BY MR. VILLA) If you look at Page 208 21 of your testimony, the beginning of Day 2, you did 22 take the two examination reports back and look at 24049 1 them overnight. Those are Twomey Exhibit 2 and 2 Twomey Exhibit 3. 3 A. 208 of the deposition? 4 Q. 208 of the deposition, sir. Lines 6 5 through 10. 6 QUESTION: "Mr. Twomey, did you review 7 anything last night to refresh your memory for the 8 purpose of testifying?" 9 ANSWER: "Twomey Exhibit 2 and Twomey 10 Exhibit 3, and those were the two examination 11 reports." 12 So, I wanted to select one in response 13 to Mr. Rinaldi's comments, I wanted to select one 14 that you really had had a chance to sit down and 15 study. 16 Now, in the deposition, between days of 17 the deposition, you took home the two Vivian 18 Carlton reports. You told Mr. Nickens in response 19 to one of his questions that it had been a long 20 time since you had seen the examination report. 21 You said, quote, you had not read it in some time 22 before your trial testimony. 24050 1 So, here's an example where your 2 deposition testimony came directly after reading 3 the two examinations in detail and your trial 4 testimony came after not having read them in some 5 time. 6 Now, in your trial testimony, you told 7 us how she had been unable to do a review of 8 investment activities for either the '86 or '87 9 exams because of problems in books and records. 10 Do you remember that, sir? 11 A. Yes, I do. 12 Q. Now, I asked you questions that start 13 at Page 212, Line 1. This is right after you had 14 reviewed the two examination reports. 15 In response to the question of whether 16 you could recall conversations with Vivian Carlton 17 about the '86 exam, you said, "Not a specific 18 conversation," close quote. 19 Then I asked you -- going on to 20 Page 212 -- what subjects you recalled talking to 21 her about, even if you couldn't recall specific 22 conversations. 24051 1 And you said, quote, "Couch Mortgage." 2 Then I asked you whether you had 3 discussed any other subjects with her. 4 And you said, quote, "I don't recall 5 anything right now." 6 That was right after reviewing the two 7 examination reports overnight. Right? 8 A. Right. 9 Q. Then I asked you whether you recalled 10 having any general discussions with the examiners 11 about the condition of United through the middle 12 of March 1987. We're now going to Page 265 of 13 your deposition. And you testified that the only 14 subjects you could recall were, quote, 15 "calculation of required net worth," close quote, 16 and "classified assets," close quote, Page 265, 17 Lines 11 through 15. 18 So, your testimony here -- you started 19 talking about Ms. Carlton, and I got up twice and 20 objected. I said, "Look. I don't want to hear 21 what you think Ms. Carlton was thinking. Tell us 22 what you remember." 24052 1 And Mr. Rinaldi said, "Okay. Do you 2 remember talking to Ms. Carlton about the 1987 3 examination?" 4 And you said, "Yes, I do." Then you 5 started in telling us about your conversations 6 with Ms. Carlton about the 1987 exam. And you 7 told us how she told you they had problems with 8 books and records and she couldn't do -- 9 MR. RINALDI: Your Honor, I would like 10 to object at this point. We're having a lot of 11 testimony from Mr. Villa, and he testifies about 12 things that are in the deposition. I look at the 13 deposition, and there are all kinds of things he's 14 leaving out. He omits huge portions of the 15 deposition. He purports to account for things 16 that occurred on the stand. And then we get John 17 Villa's version of what Mr. Twomey testified to. 18 If Mr. Villa think there's been a 19 contradictory statement, the appropriate way to 20 approach it is not to give John Villa's version of 21 the testimony. Rather -- and Mr. Villa knows this 22 quite well -- the process is to put a statement 24053 1 before Mr. Twomey, ask Mr. Twomey to review the 2 statement, and then show him the transcript and 3 ask him is this consistent with it or 4 inconsistent. 5 All we're hearing now is John Villa's 6 testimony about what Mr. Twomey testified to. I 7 think it's utterly inappropriate. 8 Just a moment ago, he asked him about 9 the '86 exam, a conversation with Vivian Carlton. 10 "Why don't you tell everything you can recall 11 about that discussion about calculation of 12 required net worth in connection with the 1986 13 examination?" 14 He goes on. The answer, "There were 15 two areas. One was the base, calculating the base 16 for determining, I had better leave it at this, 17 their basis. There is an adjusted basis they were 18 using for calculated minimum net worth. And I 19 don't remember the particulars. The second was 20 the level of scheduled items and classified" -- 21 THE COURT: Go a little slower, 22 Mr. Rinaldi. 24054 1 MR. RINALDI: "And classified assets 2 increases the minimum net worth requirement. So, 3 by disagreeing with the classification of 4 scheduled items and classified assets, there's a 5 difference in how much net worth you have." 6 QUESTION: "So as to the first area, 7 your recollection involves some issue involving 8 the adjusted basis which would affect the 9 calculation of required net worth. Right?" 10 "Yes." 11 "Beyond that, you can't recall any 12 specifics?" 13 "Too long ago." 14 Then he goes on. The whole point of 15 this is he answered in express detail about the 16 net worth calculation that we talked about, the 17 fact of the issue of the write-downs that we 18 talked about. Mr. Villa glosses over all of that. 19 If he wants to impeach the witness, he ought to do 20 it in an appropriate fashion. He shouldn't do it 21 by testifying himself. 22 THE COURT: Well, I agree on the 24055 1 procedure that if we're going to compare the two, 2 we're going to have to take it transcript by 3 transcript and question by question. I know 4 you're trying to hurry along, but -- 5 MR. VILLA: Well, he made my point for 6 me, which was an excellent point. My point was 7 with respect to the 1986 examination report. He 8 testified on the stand here about investment 9 securities and that Vivian Carlton said she 10 couldn't do any analysis because of a books and 11 records problem of the investment securities. 12 In his testimony, I left out that 13 portion because it was not relevant; but he read 14 it and that exhausted everything. It becomes very 15 difficult, Your Honor, when a witness testifies 16 for six pages about an issue. 17 Ordinarily, trial counsel will 18 summarize the Court's recollection. "Do you 19 remember testifying that Vivian Carlton told you 20 about investment securities?" 21 Then we go to the other one. 22 Your Honor, on this one, I will read in extensive 24056 1 detail what his answer was with respect to the 2 1987 examination. 3 THE COURT: Are you reading from the 4 deposition? 5 MR. VILLA: From the deposition 6 transcript, Your Honor. 7 A. Could you give me the page? This is 8 the deposition? 9 Q. (BY MR. VILLA) Page 472, you were asked 10 by Mr. Rinaldi whether Vivian Carlton had a 11 problem completing the examination because of 12 problems with investment securities. The books 13 and records were inadequate. And you answered in 14 response to those questions, "Yes." 15 Now, let's start at Page 472. If you 16 want to read in detail what your answers are, 17 let's go through them. Page 472, Line 10. 18 QUESTION: "Do you recall having any 19 discussions with her about the results of her 20 examination, whether it's specifically with 21 respect to a written interim examination report or 22 not? This is the in the context of the 1987 exam, 24057 1 the one that began in November of 1987." 2 ANSWER: "No, I don't know. Today, I 3 just don't recall what discussions took place as a 4 result of her final examination report or interim 5 reports. Standard operating procedure would be 6 that she or her field manager would review with 7 the SA their classified asset list for the SA 8 sign-off or affirmation. Honestly, I don't even 9 recall when, where, and what the substance of that 10 was." 11 QUESTION: "Okay. Let's make sure 12 we've got the time right. I'm focusing on the 13 date that the 1987 exam was initiated which was 14 November 16, 1987, until basically July 28, 1988." 15 ANSWER: "Uh-huh." 16 QUESTION: "Which is the date that you 17 finally sent the examination to the association. 18 Do you recall having any discussions with Vivian 19 Carlton or any members of her examination staff 20 about United during that seven-and-a-half-month 21 period?" 22 "Objection." 24058 1 "Well, John, I don't recall a specific 2 meeting. But as I advised you, my practice would 3 be if I was in Houston and there was an 4 examination going on at any of my institutions, I 5 would try to make an effort to visit the exam team 6 and visit the EIC since United would be a longer 7 examination. From the time they started to the 8 time they finished, I was most likely able to drop 9 by and visit the staff. I just don't recall any 10 of the conversations. I'm sure there were 11 conversations. I just don't recall. As I said, 12 the standard back then, as best I can remember it, 13 required a supervisory agent to review the 14 examiner's findings and sign off on those 15 classified asset findings. And the examiner -- 16 the usual practice was at least the 17 examiner-in-charge, and the field manager would 18 come up and review the write-ups regarding 19 classified assets and tell you why they were 20 classified in a certain way and you would ask your 21 questions. If you agreed with the examiner's 22 findings, then you agree with the way they were 24059 1 classified and that would have been it. And then, 2 of course, those classified assets are then 3 incorporated in the final typed examination 4 report. And when it's done, everybody else has 5 reviewed it; and it is transferred to the 6 supervisory agent." 7 QUESTION: "Let's put to one side the 8 issue that may have happened with respect to 9 classified assets. Let me ask you to deal with 10 that first. Do you recall any discussions with 11 respect to classified assets from the time that 12 the 1987 examination process began on or about 13 November 16, 1987, until July 28, 1988, when it 14 was transmitted to the association?" 15 Then Mr. Leiman tries to instruct the 16 witness. And I asked him again. 17 His answer is, on the bottom of 18 Page 476, "Well, John, I specifically don't 19 remember the discussion." 20 QUESTION: "Okay." 21 "Since it was standard operating 22 procedure, I probably did." 24060 1 QUESTION: "I understand that." 2 "Unless I broke my leg and was out sick 3 for a number of weeks, I would have been there." 4 QUESTION: "I understand you perfectly. 5 You said that was the procedure. You ordinarily 6 would have followed it. But my question is now: 7 Did you remember any particular meeting? And the 8 answer is you can't. Right?" 9 ANSWER: "Nothing so far has brought it 10 back to mind, no." 11 And then finally, "Now, sir, putting to 12 one side any discussions that may have occurred 13 with respect to classified assets, do you recall 14 the substance of any other discussion you had with 15 Vivian Carlton or members of her examination staff 16 with respect to the 1987 examination? I know 17 you've told me you can't remember specific 18 meetings. Now I'm asking you substantively: Do 19 you remember any topics you talked to her about or 20 any member of her examination staff?" 21 ANSWER: "No, I presently can't 22 recall." 24061 1 Now, sir, that was after you had taken 2 the two examination reports home overnight. You 3 did not recall any discussions with Vivian Carlton 4 about whether or not she could complete the 5 examination because of books and records problems; 6 isn't that right? 7 A. The way I -- to answer the question is 8 simply this: When I was brought up prior to my 9 deposition, the OTS attorneys focused me on their 10 work papers regarding the loans, particularly 11 Park 410, some loans in Austin and some other 12 classified assets and their supporting documents. 13 When I read the examination reports as 14 a courtesy that night that I was in 15 Washington, D.C., I read the report; but I focused 16 on the classification of assets and the 17 discussions regarding the net worth. They are 18 very long reports, honestly. 19 What I was focusing on, because I 20 thought that this was the issue you would be 21 asking me about, how they were classified and so 22 forth. The discussion that you just read -- I'm 24062 1 focusing mostly on, okay, the procedure back then 2 was the examiner's classification of the assets. 3 They have to meet with the SA. The SA has to, you 4 know, bless their classifications. 5 That has a direct impact on the 6 institution's net worth because if we say there's 7 a loss or something substandard, it changes the 8 requirement level for their net worth. That's 9 what I was focusing on when I was answering these 10 questions. 11 Q. I asked you about any discussions you 12 had; and in response to that, you did not give me 13 any answers which suggested -- 14 A. John, you asked that question; and I 15 responded the way I recall it. Again, I was 16 focusing on the loan problems and the net worth 17 and the classification of assets. That's what I 18 was thinking of when I was answering your 19 question. You said all inclusive, anything else. 20 You did ask that question to me; and I did answer 21 the best I could because, honestly, I was focusing 22 on that. You said all, and that means if anything 24063 1 all inclusive. And I don't have any problem with 2 your -- the question. It's just that when I was 3 focusing on the examination reports, when I was 4 being asked to read the exam reports, I really 5 concentrated on the classification of assets, what 6 the discussions were, what the rationale was 7 because I thought that was the focus that would be 8 one of the focuses of the deposition. That's what 9 I looked at and spent more time on because since I 10 arrived prior to the deposition and I was asked to 11 look at documents, they didn't pull out a 12 mortgage-backed securities study or any type of 13 analysis related to mortgage-backed securities and 14 very little, if anything, on junk bonds or equity 15 arbitrage or anything else. 16 I mean, the first file I remember 17 picking up was Park 410, I think it's called. 18 It's a property in San Antonio. They asked me to 19 look at that. They asked me to look at the work 20 papers. I did what I was asked to do. When you 21 gave me the examination reports -- and I think 22 you'll admit they are pretty thick -- most of the 24064 1 examination reports have to do with asset 2 classification of different individual write-ups. 3 That night in between my first day and my second 4 day, I sat down; and I read those. 5 Now, face it. You know, I reviewed 6 what was in the report. I looked at every page. 7 Okay? Did I explore it ad nauseam and remember 8 every detail to every line? No, I didn't, John. 9 I'm sorry if that's what you expected. You also 10 gave me two thick reports and I was very tired and 11 I only had so many hours to read them. I answered 12 the questions as I was focusing on the asset 13 classifications. And that was back in 1986. In 14 1986 and 1987, when these exam reports were 15 received, we were still focused on the classified 16 assets, the effect on net worth, of course the 17 impact on their operations. 18 Q. Well, let me ask you one last question 19 in this line. It won't be just quite so focused 20 so that you wouldn't have to look at every 21 document in order to -- you wouldn't have to look 22 at every document in order to be able to answer 24065 1 it. One of the central issues in this case is 2 whether it was a good idea for USAT to go into 3 securities activities to compensate for problems 4 in its real estate portfolio resulting from the 5 current economy, and I asked you that question in 6 your deposition. 7 And your answer is at Page 194. This 8 is a core issue about the direction of United. 9 "Was it a good idea to take the wholesale plan 10 approach because of the problems in the real 11 estate economy?" 12 At Page 194 of the deposition, we can 13 see what your answer is on that. Line 15. 14 "Did you think it was a good idea for 15 United to have gone into securities activities to 16 compensate for the problems in its loan portfolio 17 resulting from the current depressed economy in 18 Houston and in the entire Texas market?" 19 ANSWER: "I don't wish to express an 20 opinion on that." 21 QUESTION: "You don't wish to express 22 an opinion?" 24066 1 ANSWER: "That's right." 2 QUESTION: "Why don't you want to 3 express an opinion?" 4 ANSWER: "And this I know because I've 5 seen Star Wars lately. This is a quote from Star 6 Wars, isn't it? A long time ago, institution far, 7 far away, too many years, can't remember all the 8 nuances that would affect a decision like that," 9 close quote. 10 Do you remember that, sir? 11 A. Yes. 12 Q. That didn't require a lot of individual 13 documents to look at. That was a question of the 14 basic strategy for what was either the largest or 15 second largest thrift in Texas that you were the 16 supervisory agent for closure over three years and 17 you couldn't answer that question because it had 18 too many nuances. Right? 19 A. Your question to me was: Was it a good 20 idea for the switch from basically the real estate 21 investments area to the securities investment 22 scenario? 24067 1 When you asked that question, I felt 2 that you would want to get into the economic -- 3 not economic -- the real estate markets of 4 Houston, San Antonio, Austin, and all the 5 ramifications of what was going on. And I just 6 don't remember all the details. I'm not an 7 economist. I don't know all the effects that were 8 going on in those markets. 9 For me 10 years later to make a 10 judgment -- you're asking for an opinion -- you're 11 asking for an opinion about, okay, the real estate 12 market in Texas is going down. Okay. Was it a 13 good decision for them to switch into that? And I 14 don't remember when the market fell, how bad -- I 15 know it was a bad depression real estate-wise. I 16 wouldn't -- you know, when you talk about when 17 United made this decision, you know, to go more on 18 securities, become a wholesale operation or 19 whatever else they wanted to do, I didn't want to 20 get into a discussion regarding what the economy 21 was in Houston at a set period of time, how many 22 delinquencies there were, what was happening in 24068 1 the market, what was happening to the cost per 2 square feet of building an office building. 3 Q. Did I ask you any of those questions? 4 A. You asked me my opinion. And to give 5 you my opinion, I would have to go into all that 6 which I don't feel like I'm an expert on the 7 economy of Texas at a set period of time, what was 8 happening in different metropolitan areas. 9 Q. Sir, you were the supervisory agent for 10 a number of the largest thrifts in San Antonio, 11 Austin, and Houston. You would have known the 12 state of the economy better than anybody in Texas. 13 Ten years later, I asked you one question about a 14 basic strategy, not a question that requires you 15 to look at documents overnight; and that question 16 you won't answer because it was far, far away and 17 a long time ago. 18 Today you come into court and give us 19 an explanation of what happened and what was wrong 20 with United -- 21 A. Did we talk about the real estate 22 market with regard to United? 24069 1 Q. No. But we will, sir. 2 A. If you were talking about real estate, 3 you are talking about making a shift from mortgage 4 loans originating in Texas to, I'll call it, a 5 wholesale strategy where you buy mortgage-backed 6 securities, you buy junk bonds, you buy equities. 7 Instead of originating three, $400 million of, 8 quote, $500 million of single-family loans every 9 year, now you buy securities. 10 Q. I know what it is, sir. I didn't ask 11 you a question about that. 12 THE COURT: All right. We'll adjourn 13 until 9:00 tomorrow. 14 15 (Whereupon at 4:57 p.m. 16 the proceedings were recessed.) 17 . 18 . 19 . 20 . 21 . 22 . 24070 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 23rd day of 17 September, 1998. 18 ____________________________ MARCY CLARK, CSR 19 Certified Shorthand Reporter In and for the State of Texas 20 Certification No. 4935 Expiration Date: 12-31-99 21 . 22 . 24071 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 23rd day of 18 September, 1998. 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