8576 1 UNITED STATES OF AMERICA Before the 2 OFFICE OF THRIFT SUPERVISION DEPARTMENT OF THE TREASURY 3 In the Matter of: ) 4 ) UNITED SAVINGS ASSOCIATION OF ) 5 TEXAS, Houston, Texas, and ) ) 6 UNITED FINANCIAL GROUP, INC., ) Houston, Texas, a Savings ) 7 and Loan Holding Company ) ) OTS Order 8 MAXXAM, INC., Houston, Texas, ) No. AP 95-40 a Diversified Savings and ) Date: 9 Loan Holding Company ) Dec. 26, 1995 ) 10 FEDERATED DEVELOPMENT CO., ) a New York Business Trust, ) 11 ) CHARLES E. HURWITZ, ) 12 Institution-Affiliated Party ) and Present and Former Director ) 13 of United Savings Association ) of Texas, United Financial Group,) 14 and/or MAXXAM, Inc.; and ) ) 15 BARRY A. MUNITZ, JENARD M. GROSS,) ARTHUR S. BERNER, RONALD HUEBSCH,) 16 and MICHAEL CROW, Present and ) Former Directors and/or Officers ) 17 of United Savings Association of ) Texas, United Financial Group, ) 18 and/or MAXXAM, Inc., ) ) 19 Respondents. ) 20 21 TRIAL PROCEEDINGS FOR 12-3-97 22 8577 1 A-P-P-E-A-R-A-N-C-E-S 2 ON BEHALF OF THE AGENCY: 3 KENNETH J. GUIDO, Esquire Special Enforcement Counsel 4 PAUL LEIMAN, Esquire (Not present) SCOTT SCHWARTZ, Esquire (Not present) 5 BRUCE RINALDI, Esquire RICHARD STEARNS, Esquire (Not present) 6 and BRYAN VEIS, Esquire (Not Present) of: Office of Thrift Supervision 7 Department of the Treasury 1700 G Street, N.W. 8 Washington, D.C. 20552 (202) 906-7395 9 ON BEHALF OF RESPONDENT MAXXAM, INC.: 10 FRANK J. EISENHART, Esquire 11 of: Dechert, Price & Rhoads 1500 K Street, N.W. 12 Washington, D.C. 20005-1208 (202) 626-3306 16 13 DALE A. HEAD (in-house) 14 Managing Counsel MAXXAM, Inc. 15 5847 San Felipe, Suite 2600 Houston, Texas 77057 16 (713) 267-3668 17 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO. AND CHARLES HURWITZ: 18 RICHARD P. KEETON, Esquire 19 KATHLEEN KOPP, Esquire (Not present) of: Mayor, Day, Caldwell & Keeton 20 1900 NationsBank Center, 700 Louisiana Houston, Texas 77002 21 (713) 225-7013 22 8578 1 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO., CHARLES HURWITZ, AND MAXXAM, INC.: 2 JACKS C. NICKENS, Esquire 3 of: Clements, O'Neill, Pierce & Nickens 1000 Louisiana Street, Suite 1800 4 Houston, Texas 77002 (713) 654-7608 5 ON BEHALF OF JENARD M. GROSS: 6 PAUL BLANKENSTEIN, Esquire 7 MARK A. PERRY, Esquire (Not present) of: Gibson, Dunn & Crutcher 8 1050 Connecticut Avenue, N.W. Washington, D.C. 20036-5303 9 (202) 955-8500 10 ON BEHALF OF BERNER, CROW, MUNITZ AND HUEBSCH: 11 JOHN K. VILLA, Esquire MARY CLARK, Esquire 12 PAUL DUEFFERT, Esquire 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 8579 1 2 EXAMINATION INDEX 3 4 BRUCE WILLIAMS Page 5 Cont'd Examination by Mr. Guido..........8580 6 Cross-Examination by Ms. Clark...........8760 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 8580 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:00 a.m.) 3 THE COURT: Be seated, please. The 4 hearing will come to order. 5 Mr. Guido, you may continue with your 6 examination of Mr. Williams. 7 MR. GUIDO: Thank you, Your Honor. 8 9 CONTINUED EXAMINATION 10 11 12 Q. (BY MR. GUIDO) Mr. Williams, we 13 talked a little bit about the USAT Mortgage 14 Finance subsidiary. 15 Do you recall the creation of that 16 subsidiary in I think it was November of 1985? 17 A. I recall a subsidiary being created, 18 yes. 19 Q. Do you recall that it was also 20 collapsed in December of 1985? 21 A. I recall there was a collapse. I don't 22 remember exactly when; but December, January, 8581 1 somewhere in there. 2 Q. In that time period. Who made the 3 decision to create USAT Mortgage Finance? 4 A. I don't specifically remember that 5 there was an individual or who that individual may 6 have been. 7 Q. Was there any committee that made a 8 decision to create USAT Mortgage Finance? 9 A. There could have been. 10 Q. Did you participate in any committees 11 in which the creation of USAT Mortgage Finance was 12 discussed? 13 A. I could have been. 14 Q. Were you in any committee meetings 15 where the collapse of USAT Mortgage Finance was 16 discussed? 17 A. I could have been. I don't recall, 18 once again, all the meetings I went to. 19 Q. Do you recall whose idea it was to 20 create USAT Mortgage Finance? 21 A. I think I answered that a second ago. 22 Q. You don't know? 8582 1 A. I don't know. 2 Q. I'd like to show you a document that 3 has been marked as A1619. It's an asset/liability 4 committee minutes from October 25th, 1985. It's 5 Tab No. 501. I'll direct your attention to 6 Paragraph 2 of the memorandum. But before I ask 7 you any questions about that, I'm going to ask you 8 some questions about the asset/liability committee 9 itself. 10 This is a memorandum from you to 11 Mike Crow, Joe Phillips, Ron Huebsch, and Jim 12 Jackson. Were the five of you members of the 13 asset/liability committee? 14 A. I don't specifically know. I would 15 guess so. I mean, the membership changed over 16 time and who was a member at any point in time 17 specifically, I couldn't tell you. 18 Q. Were you the person designated to keep 19 the minutes of the asset/liability committee? 20 A. Not always, no. 21 Q. How was it decided who would keep the 22 minutes of the asset/liability committee? 8583 1 A. Somebody said, "You're going to keep 2 the minutes." So -- I mean, there wasn't a formal 3 decision process and a vote by the committee. It 4 was -- I guess it was assigned. 5 Q. Okay. Was it assigned to you as the 6 primary note-taker of those meetings? 7 A. I don't recall. 8 Q. Now, at this meeting on October 25th, 9 1985, it says "It was agreed it would be in our 10 best interest to move ahead with establishing a 11 new finance subsidiary. The mortgage-backed 12 securities would be purchased in USAT and passed 13 to the new subsidiary. The MBS would be funded 14 with reverse repos and hedged with swaps, caps, 15 and/or collars. An initial application to the 16 Federal Home Loan Bank would request permission 17 for up to 500 million in securities. A final 18 decision as to the security volume to be placed in 19 the subsidiary and actual hedging device used was 20 to be determined Monday, October 28th at the 21 scheduled executive committee meeting." 22 Does that refresh your recollection of 8584 1 who -- which committees made a decision to create 2 USAT Mortgage Finance? 3 A. I guess so if that's what it says in 4 the minutes. 5 Q. Do you have any reason to doubt the 6 accuracy of those minutes? 7 A. No, I don't. 8 Q. When you prepared the minutes of the 9 asset/liability committee meetings that you 10 prepared minutes for, did you attempt to 11 accurately reflect what transpired? 12 A. That was the goal, yes. 13 Q. Now, I'd like to show you Exhibit A620, 14 which is the set of minutes from 11-1-85. And 15 it's at Tab 502. 16 MR. NICKENS: For the record, I think 17 he meant 1620, A1620. 18 MR. GUIDO: A1620. I'm sorry. 19 Q. (BY MR. GUIDO) These are minutes also 20 prepared -- I'll also direct your attention to 21 Paragraph 2, the second paragraph of that. It 22 says, "A discussion of M. Crow's, quote, 8585 1 'short-term tactical planning' memo concluded that 2 we need to stay flexible in terms of year-end 3 planning. We have an opportunity to add up to 4 $400 million in liability growth by 12-31-85, but 5 this needs to be managed closely given the current 6 unknown status of the branch sales and financing 7 subsidiary." 8 Do you see that? 9 A. I see that. 10 Q. Do you recall discussions about the 11 need to be flexible with regard to the liability 12 growth limitation at USAT at year-end 1985? 13 A. I don't specifically recall any 14 discussions 12 years ago. 15 Q. Do you have any reason to doubt that 16 the discussions that are reflected in this 17 memorandum are accurate? 18 A. No, I don't believe so. 19 Q. I'd like to show you Exhibit A1621, 20 which is the asset/liability committee meeting 21 minutes of November 8th, 1985, which is at 22 Tab 503. That's November 8th, 1985. 8586 1 MR. NICKENS: November 12th. 2 Q. (BY MR. GUIDO) The meeting is 3 November 8th. The date of the memo is 4 November 12th. You see Item -- 5 A. I don't have a copy. 6 Q. I'm sorry. No. 3 in that memorandum. 7 It says "Financing subsidiary. A filing with the 8 Federal Home Loan Bank to establish a financing 9 subsidiary with 500 million of securities has been 10 requested (which is up from the 300 million 11 previously reported). It was projected that the 12 security should be settled in stages next week and 13 completed by Friday." 14 Do you see that reference? 15 A. I see that. 16 Q. Was a filing made with the Federal Home 17 Loan Bank to establish a financing subsidiary? 18 A. I couldn't tell you that. 19 Q. Is it your understanding that the 20 minutes are accurate, however? 21 A. They are accurate from the perspective 22 of what was discussed in the meeting, yes. 8587 1 Q. I'd like to show you Exhibit A622, 2 which is the minutes of the asset/liability 3 committee meeting held on November 15th, 1985. 4 The memo is dated November 20th. 5 MS. CLARK: I believe that's 1622, Your 6 Honor. 7 MR. GUIDO: Oh, A1622, Your Honor. 8 THE COURT: Thank you. 9 Q. (BY MR. GUIDO) I'd like to direct 10 your attention to Paragraph 3. It says "Financing 11 sub. The securities in USAT Mortgage Finance were 12 expected to be settled today. The final interest 13 rate swap documentation has not been completed 14 pending details of the final securities to be used 15 in the transaction. The final swap agreement was 16 to be completed before November 22, the expected 17 date of a final regulatory ruling on the financing 18 sub. Total securities in the subsidiary are 19 expected to be $500 million." 20 Did you participate in the preparation 21 of the documentation for the -- with regard to the 22 securities that were to be used in the 8588 1 transaction? 2 A. I'm not sure what documentation you're 3 referring to. 4 Q. It says "The final interest rate swap 5 documentation has not been completed." 6 Did you participate in the preparation 7 of the swap documentation? 8 A. I don't believe so, no. 9 Q. Do you know who did? 10 A. No, I do not. 11 Q. I'd like to direct your attention now 12 to A1623, which is the minutes of the 13 asset/liability committee of November 22nd, 1985. 14 I'll show you my copy of it. That's at Tab 505. 15 I'll have to look on with you in terms of this 16 document. 17 Paragraph 2 says "Year-end tactical 18 planning. The committee will continue to closely 19 monitor USAT's year-end balance sheet position. 20 The goal at year-end will be to show the largest 21 balance possible to use as a base for future 22 growth. The final year-end figure will depend on 8589 1 our regulatory net worth at that date (which will 2 be a function of both earnings and scheduled 3 items)." 4 Why was it important to have the 5 largest balance at year end 1985? 6 A. So that the following years you had the 7 flexibility you needed to operate because there 8 were liability growth restrictions. 9 Q. How were the liability growth 10 restrictions calculated? Do you recall? 11 A. No, I don't. 12 Q. Were they based on a percentage of the 13 previous quarters' liability position? 14 A. I said I don't recall. 15 Q. I'd like to direct your attention now 16 to Exhibit B690, which is at Tab 585. It's a 17 memorandum from Jim Pledger to distribution dated 18 December 11th, 1985. 19 MR. GUIDO: Your Honor, I have two 20 extra copies here. 21 Q. (BY MR. GUIDO) Who was Jim Pledger? 22 A. He was, I believe, legal counsel, 8590 1 in-house legal counsel for USAT. 2 Q. And do you recall receiving a copy of 3 this memorandum? 4 A. I don't recall receiving copies of many 5 memorandums. My name's on the back, so I assume I 6 did. 7 Q. Under "distribution," it lists Gross, 8 Williams, Munitz, Crow, Berner, Wolfe, Phillips, 9 and B. Williams. 10 Are you B. Williams? 11 A. Yes. 12 Q. Do you have any reason to doubt that 13 you received a copy of that memorandum? 14 A. I have no reason to doubt, no. 15 Q. Now, do you recall discussions about 16 the recent financing subsidiary regulations that 17 were adopted by the Federal Home Loan Bank Board 18 in December of 1985? 19 A. I can assume there were discussions. I 20 don't recall specifically discussions. 21 Q. Now, I'd like to direct your attention 22 to the second page of the memorandum where it 8591 1 talks about USAT Mortgage Finance. The bottom of 2 the last paragraph, it says "USAT Mortgage 3 Finance, Inc. The 500-million-dollar reverse 4 repurchase issuance made by USAT Mortgage Finance, 5 Inc. was completed before the effective date of 6 the regulations and would therefore be exempt at 7 the effective date. The securities issued in the 8 subsidiary were reverse repurchase agreements and 9 these agreements have a maturity of 60 to 90 days, 10 at which time the securities have to be renewed or 11 rolled over. This renewal or rollover will cause 12 the issuance to be treated as a new issuance under 13 Sections 563.13-2(b)(2). After such renewal, the 14 issuance will be tested for inclusion as part of 15 the net worth under Section 563.13-2(c). The two 16 tests are, one, the duration match test without 17 regard to swaps or hedges discussed previously 18 and, two, whether the proceeds were remitted in 19 exchange for a liability issued by the association 20 (which would be included in the association's net 21 worth)." 22 MR. NICKENS: Your Honor, my copy of 8592 1 the document says "in the association's total 2 liabilities." 3 THE COURT: That's what mine says. 4 MR. GUIDO: That's correct. I jumped. 5 Q. (BY MR. GUIDO) "Remitted in exchange 6 for a liability which would be included in the 7 association's total liabilities." 8 Now, is it your understanding that USAT 9 Mortgage Finance had to be dissolved because of 10 the adoption of the regulations that are addressed 11 in this memorandum? 12 A. Yes. 13 Q. And what was it about the regulations 14 that required the dissolution of USAT Mortgage 15 Finance? 16 A. I don't recall specifically other than 17 I believe it had something to do with the 18 liabilities being funded by reverse repo was a 19 renewing transaction and the transactions within 20 the sub, I think, had to be put in the sub and 21 basically locked in, self-liquidating type 22 transactions. I don't know the specifics; but 8593 1 generally, there was something wrong with the 2 funding side of the equation. 3 Q. And that the liabilities, for some 4 reason, didn't meet the standard under the test? 5 A. Right. 6 Q. Now, why were the assets sold, the 7 mortgage-backed securities sold instead of just 8 simply transferred to the books and records of 9 USAT? 10 A. I don't know what happened to the 11 assets. Without having notes and records and 12 minutes, I can't really tell you. 13 Q. I'd like to direct your attention to a 14 document dated January 10th, 1986, which is a Joe 15 Phillips memorandum to the files and it is at 16 Tab 571. And I think it is A10594. 17 Have you seen the document that is 18 marked as Exhibit A10594? I think you have one 19 that's marked as T5158, but it's the same 20 document. Have you ever seen that document 21 before? 22 A. I may have. 8594 1 Q. Did Mary Clark show you a copy of that 2 document when you met with her? 3 A. I don't believe so. 4 Q. Now, this document says, "In 5 November 1985, $500 million in mortgage-backed 6 securities were acquired and funded by reverse 7 repurchase agreements. Also, interest rate swaps, 8 caps, and collars totaling 535 million were put 9 into place to limit our exposure to interest rate 10 risk. The original purpose of the transaction was 11 to provide an income stream through a hedged 12 arbitrage transaction to avoid violation of the 13 growth regulation within the association. USAT 14 Mortgage Finance was formed as a wholly-owned 15 financing subsidiary of the association." 16 Do you understand those facts to be 17 true? 18 A. I believe so, yes. 19 Q. Now -- then it says, "Subsequent to the 20 formation of the finance subsidiary and 21 acquisition of the securities, the regulations 22 applicable to finance subsidiaries were amended. 8595 1 Such amendment disqualified USAT Mortgage Finance, 2 Inc. as a finance subsidiary and, accordingly, 3 such liability growth would have put the 4 association in violation of the growth regulation 5 for the quarter ended March 31, 1986. 6 Accordingly, 350 million in mortgage-backed 7 securities and related reverse agreements had to 8 be undone in order to avoid growth regulation 9 problems." 10 Do you see that? 11 A. I see that. 12 Q. Now, I'd like to show you a document 13 that has been marked as B892, which is a 14 memorandum to the file from Joe Phillips dated 15 March 25th, 1986. 16 MR. GUIDO: And I don't have the tab 17 number. 18 MR. NICKENS: 584. 19 Q. (BY MR. GUIDO) Which is another 20 memorandum to the file from Joe Phillips which 21 also addresses the USAT Mortgage Finance 22 subsidiary. 8596 1 Do you know why Joe Phillips wrote two 2 memoranda to the file addressing the same 3 question? 4 A. You'd have to ask Joe. I don't have 5 any idea why Joe writes memos to the file. 6 Q. Did you participate in any discussions 7 with the accountants regarding the proper 8 accounting for USAT Mortgage Finance's creation 9 and collapse? 10 A. I could have. I don't recall. 11 Q. At the time that the USAT Mortgage 12 Financing subsidiary was created and collapsed, 13 was it your understanding that gains on the sales 14 of mortgage-backed securities had to be recognized 15 for purposes of the income of USAT? 16 A. That would be my recollection of how 17 you would account for them. 18 Q. Do you recall that subsequent to 1985, 19 that the accountants raised a question about 20 whether or not that was a permissible way to 21 account for the sales of mortgage-backed 22 securities? 8597 1 A. They raised an issue similar to that, 2 but not that issue. 3 Q. What was the similar issue that they 4 raised? 5 A. Well, a sale is disposing of a security 6 and not subsequently replacing it. I think the 7 issue that came up -- and again, I don't remember 8 the exact timing -- was a roll-down of securities 9 where you sell a higher coupon and buy a lower 10 coupon security to replace it. So, that 11 transaction is different from what I deem to be a 12 sale or an outright sale. 13 Q. The -- and why is the latter not a sale 14 or why was it your understanding that it wasn't a 15 sale at the time? 16 A. Because at the time a transaction was 17 put on the books, an arbitrage transaction was put 18 on the books and Joe was rolling from, like I 19 said, a higher coupon to a lower coupon with the 20 intent of maintaining the arbitrage that he had by 21 just using the lower coupon security. So, his 22 intent was not to sell and take gains. His intent 8598 1 was to maintain a net interest spread. So, any 2 gain or loss that would have been -- would have 3 resulted from the sale of a higher coupon and 4 movement to a lower coupon was deferred and 5 amortized over the remaining life of the 6 mortgage-back. 7 Q. What was your understanding at the time 8 of how selling a higher coupon and purchasing a 9 lower coupon would result in maintaining the yield 10 on the spread? 11 A. I didn't understand your question. 12 Q. At the time, the end of 1985, the 13 beginning of 1986, what was your understanding of 14 how the spread would be maintained if Joe Phillips 15 was selling a higher coupon, let's say a 16 12 percent, and purchasing, let's say, a 17 10 percent? How was he supposed to maintain a 18 yield when he was purchasing something that was 19 going to return 2 percent less? 20 A. I think I just explained that. When 21 you sell the higher coupon, if there was a gain, 22 the gain would be deferred into the purchase price 8599 1 of the new lower coupon security and you would be 2 amortizing that over the remaining life of the 3 security. 4 Q. So that if you recognize the gain or 5 you defer the gain -- excuse me -- if you defer 6 the gain, it's your understanding that that would 7 preserve the yield on the mortgage-backed security 8 arbitrage that was put in place? 9 A. I didn't say it would preserve the 10 yield. I said it would maintain the yield. 11 Q. Well, how -- 12 A. You could have a more or less of a 13 yield than you had from the initial transaction. 14 So, you weren't guaranteed necessarily to result 15 in the same yield with a new security and the new 16 amortization of the deferred gain/loss. 17 Q. Was the objective an effort to maintain 18 as close as possible the yield that you would have 19 received if you had been able to keep the higher 20 coupon mortgage-backed security? 21 A. You would have to ask Joe Phillips 22 that; but my understanding is yes, it's to 8600 1 maintain an arbitrage and a net interest spread. 2 Q. Now, what was required -- 3 A. Excuse me. 4 Q. -- based on your understanding at that 5 time, the end of 1987, the beginning of 1986, in 6 order to get as close as possible to the previous 7 spread yield that you had had prior to the sale of 8 the mortgage-backed securities? 9 A. I think it's what I've just been 10 discussing, to defer the gains and losses related 11 to the roll-down transaction. 12 Q. Putting aside the accounting, what is 13 your understanding had to be done in terms of 14 managing the portfolio to maintain the yield as 15 closely as possible to the previous yields? 16 A. It's the same answer I just gave you. 17 I'm not sure what you're asking. 18 Q. Well, let me ask you this: Is it your 19 understanding that to maintain the yield, that 20 you -- that the manager had to invest not only the 21 return on principal from the sale but the gain on 22 the sale of the securities? 8601 1 A. I think that's what I said maybe. 2 Q. Well, you said "deferred." But I'm 3 talking about now what was done separate from the 4 accounting. 5 A. I don't understand your question. 6 Q. Let me rephrase the question. In terms 7 of managing the portfolio, was it your 8 understanding in order to maintain the yield as 9 closely as possible in a risk-controlled 10 arbitrage, that all of the proceeds that were 11 received from the securities that were sold had to 12 be reinvested in new securities at the lower 13 coupon? 14 A. Yes, I believe -- I believe I agree 15 with that statement. 16 Q. And was it your understanding that all 17 of the prepayments that had accrued had to be 18 reinvested in the lower coupon securities in order 19 to maintain the yield? 20 A. Not necessarily. It depended on -- 21 Q. Why not? 22 A. It depends on what the portfolio 8602 1 manager's strategy is, and that's a Joe Phillips 2 question. 3 Q. Well, what I'm asking you is: If your 4 goal is to maintain as close as possible the 5 spread between income earned and expenses paid, do 6 you have to invest all of the proceeds that were 7 received? 8 A. Depends on what the strategy is of the 9 portfolio manager. You can make a case for yes, 10 and you can make a case for no. 11 Q. Okay. 12 A. That's a portfolio manager's decision. 13 Q. Well, give me an example of a situation 14 where you do not invest all of the proceeds. 15 A. If you buy $100 million in 16 mortgage-backs and you hedge the liability that 17 funds those and the hedge is a declining amount of 18 hedge dollars, you don't keep 100 million fully 19 invested infinitely. You buy it expecting that 20 particular mortgage-back to pay down. And, as a 21 result, your liabilities pay down and the swaps or 22 whatever hedges you use against it have a 8603 1 declining balance, as well. 2 So, in that case, you wouldn't 3 necessarily keep $100 million invested forever. 4 That's a transaction put on with a 5 structure-defined amortization that you would 6 project. So, in that case, the answer would be 7 no. It depends on how you structure the 8 transaction. 9 Q. Did Joe Phillips reinvest all of the 10 proceeds that were received on the -- from the 11 prepayments of the mortgage-backed securities? 12 A. I can't tell you that. I have no idea. 13 Q. Now, I'd like to show you 14 Exhibit A5010, which is the performance report 15 of -- I think it's March -- 16 MR. GUIDO: It's the February 17 performance report, Your Honor. It is -- I have 18 it with a memorandum -- 19 20 (Discussion off the record.) 21 22 MR. GUIDO: Your Honor, I will withdraw 8604 1 my questions about this and we'll address this 2 question later. Apparently, I have a different 3 rendition of the performance report, and it may 4 not have the information on the document that you 5 have before you. 6 Q. (BY MR. GUIDO) I'd like to show you 7 A1624, if I may, which is the asset/liability 8 committee meeting minutes of January 14th, 1986. 9 MR. GUIDO: This is at Tab 506, Your 10 Honor. 11 Q. (BY MR. GUIDO) I'd like to address 12 your attention to Paragraph 4. It says "Due to 13 the excess liquidity generated by the year-end 14 security sales and equity arbitrage sales, we 15 should pull back on our deposit rates and match 16 Gibraltar." 17 I'd also like to direct your attention 18 to 2 that says "Liquidity remains unusually high 19 due to the year-end sales of securities and the 20 recent sale of equity arbitrage stocks. Bruce and 21 Mary Mims was to notify Ron and Joe on the volume 22 of liquidity securities that would be needed to 8605 1 replace those sold at year end." 2 I think you testified earlier about 3 what liquidity securities meant at USAT. 4 A. Uh-huh. (Witness nods head 5 affirmatively.) 6 Q. Can you tell us again what your 7 recollection is of what those liquidity securities 8 were? 9 A. It was a portfolio or portfolios of 10 mortgage-backs and treasury-type obligations that 11 were used to meet regulatory liquidity 12 requirements and short-term funding needs. 13 Q. Then the last sentence of the paragraph 14 says, "We have paid off most of our Federal Home 15 Loan Bank borrowings. So, those lines are now 16 available to meet our short-term funding 17 requirements." 18 A. Right. 19 Q. Do you see that? What are Federal Home 20 Loan Bank borrowings? 21 A. They are just what they say, Federal 22 Home Loan Bank borrowings. 8606 1 Q. Is it your understanding that those 2 counted toward the liability growth limitation at 3 USAT? 4 A. I don't know what the liability growth 5 limitations are exactly; so, I don't know what is 6 or isn't included. 7 Q. Did you know at the time? 8 A. At the time, I did. 9 Q. Who was responsible for determining 10 whether or not USAT kept within the liability 11 growth limitations at USAT? 12 A. Probably the asset/liability committee. 13 Q. And you sat on that committee? 14 A. I beg your pardon? 15 Q. You sat on that committee. Right? 16 A. Yes. 17 Q. Now, I'd like to direct your attention 18 to A1625, which are the asset/liability committee 19 minutes of January 31st, 1986. Item No. 2 says, 20 "it was" -- under "finance subsidiary," "It was 21 agreed that in February when the reverse repos and 22 the financing subsidiary roll, we should 8607 1 officially dissolve the entity and consolidate the 2 assets, liabilities, and swaps into USAT." 3 Do you see that? 4 A. I see that. 5 Q. Does that refresh your recollection of 6 the entity that authorized the dissolution of the 7 USAT Mortgage Finance subsidiary? 8 A. I didn't understand your question. 9 What entity authorized the dissolution? I 10 don't -- 11 Q. Which committee? You remember I asked 12 you who made the decision to dissolve the entity 13 and you said you didn't recall? 14 A. Well, right. I don't recall. It says 15 it was agreed that -- it doesn't say this 16 committee agreed to that. It says it was agreed. 17 So, I don't know that this committee made that 18 decision. 19 Q. Well, read the first sentence of the 20 memorandum. It says, "Based upon our January 31 21 asset/liability committee meeting, the following 22 items were discussed and agreed upon." 8608 1 Does that refresh your recollection of 2 who it was that agreed to dissolve the subsidiary? 3 A. I don't know necessarily that this body 4 of people made that decision. I think the 5 decision was made by the regulatory authorities, 6 and I don't know that this committee made that 7 decision to dissolve it. 8 Q. But this does reflect that someone at 9 USAT with the authority made the decision to 10 dissolve -- 11 A. Yes. 12 Q. -- the entity? 13 A. Yes. 14 Q. And to consolidate the assets, 15 liabilities, and swaps into USAT? 16 A. Yes. That decision was made. 17 Q. And it was made at some time prior to 18 January 31, 1986, or on that date by this 19 committee? 20 A. Yes. 21 Q. Okay. Now, it also says in Item No. 4, 22 "It was agreed investments would buy $100 million 8609 1 in mortgage-backed securities to match against the 2 100 million five-year collar which USAT owns as a 3 result of the partial dissolution of the finance 4 subsidiary in December of 1985." 5 Do you see that? 6 A. I see that. 7 Q. Now, this talks about partial 8 dissolution of the financing subsidiary in 9 December 1985. But under 2, it talks about that 10 "It was agreed that in February when the reverse 11 repos and the financing subsidiary roll, we should 12 officially dissolve the entity and consolidate the 13 assets, liabilities, and swaps into USAT." 14 Do you see that? 15 A. I see that. 16 Q. How can the subsidiary transfer the 17 assets, liabilities, and swaps into USAT if it had 18 already been partially dissolved? 19 A. Well, I think it was dissolved. They 20 were -- and again, without having all the books 21 and records in front of me, I can't tell you 22 specifically. But I think the subsidiary was 8610 1 dissolved. The assets, liabilities, and swaps 2 were rolled into USAT if they weren't already 3 there. And part of that group of assets, 4 liabilities, and swaps was then liquidated and 5 dissolved. 6 Q. Now, you testified that it was your 7 understanding that the assets and liabilities -- 8 some of the assets and liabilities were sold off 9 out of the USAT Mortgage Financing subsidiary 10 because of the liability growth limitation. 11 Is that a fair characterization of your 12 previous testimony? 13 A. Without having all of the financial 14 information in front of me, to the best of my 15 recollection, yes. But I don't specifically know 16 without seeing all the information related to the 17 transactions. 18 Q. Did USAT have sufficient room under the 19 liability growth limitation in the first quarter 20 of 1986 so that it did not need to sell 21 mortgage-backed securities and not -- and 22 liquidate the reverse repos so as not to avoid 8611 1 violating the liability growth limitation? 2 A. I have no idea. 3 Q. How would one ascertain whether or not 4 there was adequate room under the liability growth 5 limitation so that the assets and liabilities of 6 USAT Mortgage Finance would not have to be 7 dissolved? 8 A. One would have to go look at the books 9 and records and the information that was available 10 at that time. 11 Q. Do you recall we talked about 12 performance reports yesterday? 13 A. Yes. 14 Q. And in the performance reports, there 15 is a section on regulatory requirements. And one 16 of those is liability growth -- 17 A. Yes. 18 Q. -- limitations. And would that be one 19 of the documents that you would look to to 20 ascertain whether or not USAT had adequate room 21 under its liability growth limitations to 22 consolidate the assets and liabilities of USAT 8612 1 Mortgage Finance into the entity? 2 A. I don't know. I don't know what the 3 regulations are; so, I don't know if one number in 4 the performance report would tell you whether you 5 could add X number of millions of dollars of 6 liabilities. So, I don't -- I can't answer that 7 question. I don't know. 8 Q. But if the performance report said 9 "liability growth" and it says "liability growth 10 limitation" and "liabilities in the entity," could 11 you ascertain from the performance report whether 12 or not there was sufficient room under the 13 liability growth limitation to consolidate -- 14 A. You might be able to. I would have to 15 see the numbers and understand what the numbers 16 are. But I don't -- without having them in front 17 of me and having someone explain specifically what 18 they are again, once again, I can't really tell 19 you. 20 Q. Thank you. Now, I'd like to move on to 21 another subject: The sale and the purchase of 22 mortgage-backed securities from January through 8613 1 June of 1986. And the document I'd like you to 2 take a look at is A10631, which is at Tab 572, and 3 that is the document which is the spreadsheet that 4 Joe Phillips prepared. It is the second and the 5 third page of the exhibit, and it starts -- it's a 6 spreadsheet that goes left to right, and it starts 7 with the left-hand side in a chronological fashion 8 across the page. 9 In the first column, the first entry, I 10 think, is 12-'85. I think it says $50 million 11 worth of mortgage-backed securities were sold. 12 Do you see that column? 13 A. I see the column. 14 Q. And do you see the coupon of the 15 mortgage-backed securities that were sold? It 16 says 12.25 percent. 17 A. Okay. 18 Q. Do you see that? 19 A. Yes. 20 Q. And then look down and it shows you 21 what the mortgage-backed securities were that were 22 purchased to replace those that were sold. 8614 1 Do you see that? 2 A. Yes. 3 Q. And the coupon there is a 12 percent 4 coupon, is it not? 5 A. Yes. 6 Q. And then it says that -- and you see 7 the reference to CPR under the first -- the 8 mortgage-backs that were sold? 9 A. Yes. 10 Q. The -- do you know what a CPR is? 11 A. It's a reference to prepayment speed. 12 Q. Okay. And do you see that it says 13 5.16? 14 A. Yes. 15 Q. Okay. And then look at the one that 16 was purchased to replace it. You see it says 5? 17 A. Yes. 18 Q. Okay. Now, this was in December of 19 1985. At that time, was it your understanding 20 that gains on the sale of mortgage-backed 21 securities could be recognized for purposes of the 22 financial statements of USAT? 8615 1 A. I don't recall. 2 Q. You testified earlier that it was your 3 general understanding prior to the so-called 4 roll-down that the sale of mortgage-backed 5 securities could be recognized in the income 6 statements of USAT. 7 Do you recall that? 8 A. I said what? 9 Q. You testified earlier that prior to the 10 roll-down, it was your understanding that the 11 gains on the sales of mortgage-backed securities 12 by USAT could be recognized in the income 13 statements. 14 Do you recall that? 15 A. Not particularly, no. 16 Q. No? You don't recall that? 17 A. I mean, I recall our conversation about 18 the roll-down and the deferral of the gains, 19 but -- 20 Q. Well, the gains were recognized on the 21 sales of the mortgage-backed securities that were 22 sold as part of the dissolution of USAT Mortgage 8616 1 Finance, were they not? 2 A. I don't know. Without seeing the 3 financial books and records, I can't tell you. 4 Q. Okay. So, you don't know? You don't 5 recall? 6 A. (Witness shakes head negatively.) 7 Q. What is your understanding of the 8 purpose of a roll-down from one coupon to another 9 coupon? 10 A. Generally, it's to slow down or buy a 11 security that has a slower prepayment speed than 12 the one that you hold. 13 Q. And that -- how does one ascertain 14 whether it has a faster or slower prepayment 15 speed? 16 A. That's a judgment call. 17 Q. Does one look to the CPR to make that 18 determination? 19 A. That's an indicative measure, yes. 20 Q. Now, I'd like to show you another 21 document which has been marked as A1394. It's the 22 investment committee minutes of May 28th, 1986. 8617 1 Now, was it your understanding that the 2 mortgage-backed securities were sold as part of 3 the purported roll-down in order to avoid 4 acceleration of prepayment speeds in the coupons 5 that were held by USAT? 6 A. Roll-downs would have been, yes. But 7 there were also other types of trades and reasons 8 for trades. So, roll-downs -- and you'd have to 9 ask, once again, Joe Phillips. I don't 10 necessarily have the logic behind every trade he 11 made. But every -- or, excuse me, every 12 transaction. But there were transactions 13 generated that were put together for other than 14 roll-down purposes. So, every transaction didn't 15 fall into a coupon roll-down category; but Joe, I 16 think, would have to address that more than 17 myself. 18 Q. Well, take a look at Exhibit A1394, 19 Bates stamped US34765, that page. It has the 20 mortgage-backed securities as of April 30th, 1986. 21 A. Now, where is -- oh, this? Okay. 22 Q. Now, this is a meeting of the joint -- 8618 1 or a joint meeting the investment committees of 2 United Financial Group and United Savings 3 Association of Texas. 4 Were you a member of the investment 5 committee? 6 A. I believe I was. 7 Q. And if you look the first page of the 8 memorandum, it indicates that you presented a 9 mortgage-backed securities prepayment assumption 10 memorandum which had been recommended by the 11 asset/liability committee. 12 Do you see that reference? 13 A. I see that reference. 14 Q. So, you attended this meeting? 15 A. Yes. 16 Q. Now, do you know who prepared the 17 schedule that's at US34765? 18 A. No, I don't. I don't know whether this 19 came from Joe Phillips or the treasury department. 20 Q. Would the accounting department have 21 prepared such a document? 22 A. No. 8619 1 Q. So, it would either be the treasury 2 department or Joe Phillips? 3 A. Yes. 4 Q. How did Joe Phillips get the prepayment 5 figures that he relied upon at USAT? 6 A. You would have to ask Joe. 7 Q. Did you periodically develop a set of 8 figures on prepayments that you provided to Joe 9 Phillips? 10 A. No. 11 Q. No? 12 A. I prepared, such as on the following 13 page, a summary of prepayment speeds provided by 14 the various investment firms and made 15 recommendations as to what prepayment speeds to 16 use for accounting purposes, which would basically 17 determine how our discounts and premiums were 18 amortized. But Joe Phillips didn't necessarily 19 have to use these for pricing or his own analysis. 20 This was purely an accounting presentation. 21 Q. When you make reference to prepayment 22 speeds, are you talking about Page US34766? 8620 1 A. Yes. That's an example. 2 Q. Now -- well, let's go through that 3 chart. It has "agencies." Do you see that? 4 A. I see that. 5 Q. And then it has "coupons" and "price." 6 Where did you get the price? 7 A. I don't recall. But I would guess they 8 would be current market prices for those various 9 coupons. 10 Q. And then it says -- then you have three 11 entities: Morgan, Drexel, and Smith. 12 Is "Morgan" Morgan Stanley? 13 A. I believe so, yes. 14 Q. Is "Drexel" Drexel Burnham? 15 A. I believe so, yes. 16 Q. And is Smith -- who's that? 17 A. That would have, I believe, been Smith 18 Breeden at the time. 19 Q. This is May of 1986. Was Smith Breeden 20 a consultant to USAT at that time? 21 A. I couldn't tell you. I don't know. 22 Q. Then the last column says "actual three 8621 1 months' average." 2 Do you see that figure? 3 A. Yes. 4 Q. What does that refer to? 5 A. What the most recent three-month actual 6 experience has been for that particular coupon and 7 agency. 8 Q. And where did you get that information? 9 A. I don't recall. I don't know whether 10 that was industry information or whether that was 11 our own portfolio. I believe it was industry 12 information, though. 13 THE COURT: Excuse me. Could I 14 interrupt? Could that "Smith" be Smith Barney 15 instead of Smith Breeden? 16 THE WITNESS: It could have been Smith 17 Barney. Like I said, I don't know -- 18 THE COURT: More like Drexel than Smith 19 Breeden. 20 THE WITNESS: Right. But I know at one 21 point in time, we were using Smith Breeden as a 22 check against the investment banking firms to have 8622 1 kind of an independent -- someone that wasn't 2 actually selling securities doing it. But it 3 could have been Smith Barney. I don't recall. I 4 don't remember if we were in discussions or using 5 Smith Breeden at that point in time. 6 Q. (BY MR. GUIDO) Now, let's go back to 7 US34765. If you look under the treasury 8 portfolio, do you see down at the bottom a Freddie 9 Mac 12 and a half percent coupon? Do you see 10 that? 11 A. I see that. 12 Q. Now, in the roll-down, Joe Phillips was 13 selling 12 and a half's to 13 coupons and buying 14 lower coupons in order to ameliorate the effects 15 of prepayment speeds he claims. 16 Why were Freddie Mac 12 and a half's 17 maintained as late as April 30th, 1986, if the 18 purpose was to ameliorate the impact of prepayment 19 speeds? 20 A. That was not part of his arbitrage 21 portfolio. 22 Q. Wasn't he responsible for managing the 8623 1 treasury portfolio? 2 A. Yes. 3 Q. Weren't sales made out of the treasury 4 portfolio in 1986? 5 A. They may have been. I don't have 6 financial information in front of me to be able to 7 tell you that. 8 Q. If the records show -- the investment 9 committee records show that sales were made out of 10 the treasury portfolio, do you have any reason to 11 dispute their accuracy? 12 A. No, I don't. 13 Q. Was Joe Phillips responsible for 14 managing the treasury portfolio? 15 A. I wouldn't go so far as to say that, 16 no. 17 Q. Was -- you testified yesterday that Joe 18 Phillips was responsible for managing the 19 mortgage-backed security portfolio portion of the 20 treasury portfolio. 21 A. I think he was partially responsible. 22 I think before he could make a trade, it would be 8624 1 something that the investment committee would have 2 to look at and approve. So, was Joe responsible? 3 Yeah, he would make recommendations if he thought 4 he needed to. But generally, it wasn't part of 5 his arbitrage portfolio, which he clearly had much 6 more say so and influence in terms of transactions 7 that went through there. 8 Q. Did he have the authority to make sales 9 out of the investment portfolio prior to the 10 investment committee's approval? 11 A. At points in time, yes, I believe he 12 was. And once again, without having the time line 13 in front of me and all the documentation, I think 14 early on, the investment committee was not an 15 established, formal forum. And at that point, he 16 was creating and putting together his portfolio 17 without a formal investment committee existing, I 18 believe. But once again, I don't have any 19 information in front of me to be able to verify 20 that. 21 Q. Did he make any sales out of the 22 mortgage-backed security portfolio, the investment 8625 1 mortgage-backed security portfolio, prior to April 2 of 1986, when the investment committee was 3 created, without the approval of the appropriate 4 individuals of USAT? 5 MR. NICKENS: Your Honor, I object to 6 the form of that question -- 7 A. I couldn't tell you that. 8 MR. NICKENS: -- because it states that 9 the investment committee was created in 10 April 1986, which I do not believe to be supported 11 by the record. 12 MR. GUIDO: Your Honor, I disagree with 13 that. I think the record shows that the first set 14 of minutes -- 15 THE COURT: Well, we're trying to 16 elicit information from the witness. If he knows, 17 we'll get it from him. If he doesn't, we'll have 18 to go with what we have. I mean, you and 19 Mr. Nickens may -- 20 MR. GUIDO: Have a -- 21 THE COURT: -- disagree, but I don't 22 think -- 8626 1 MR. NICKENS: Your Honor, what I think 2 the records reflect is that the first formal 3 minutes which state explicitly that the committee 4 had been meeting prior to that time that they 5 decided to create minutes in that April 1986, but 6 Mr. Guido has taken that and stated that was the 7 creation of the committee, which I don't believe 8 to be factually accurate. 9 Q. (BY MR. GUIDO) Prior to the formal 10 adoption of minutes by the investment committee in 11 April of 1986, to amend my question to satisfy 12 Mr. Nickens, did Joe Phillips have the authority 13 to make sales out of the investment portfolio 14 without the prior approval of the appropriate 15 officials at USAT? 16 MS. CLARK: Objection. I think 17 Mr. Williams has already answered that question. 18 There is an implicit assumption in his question 19 that there were appropriate people who had to 20 approve first, and that's directly contrary to 21 what Mr. Williams just testified to. 22 THE COURT: Well, I suppose your 8627 1 question should read anyone at USAT, prior 2 approval by anyone. In other words, was he 3 managing the account prior -- 4 THE WITNESS: Joe was the portfolio 5 manager. What his required approval process was, 6 I can't tell you that. I don't know. He didn't 7 report to me; so, I don't know what -- 8 Q. (BY MR. GUIDO) But you do know that 9 with regard to the treasury portfolio, that he had 10 to get prior approval from the investment 11 committee before he made sales out of that 12 portfolio? 13 A. This was in later years. In earlier 14 years, I wasn't treasurer. I don't know what Joe 15 had authority to do. 16 Q. What do you mean by "later years"? 17 A. Well, once I became treasurer, as far 18 as I knew, then I knew the transactions generally 19 that went through and what was going on. So, I 20 can attest from that point forward, yes, he had to 21 get approval before he made any kind of 22 transactions in the treasury mortgage-backed 8628 1 security portfolio. Prior to that, I don't have 2 any idea. 3 Q. When he made sales out of the portfolio 4 as part of the purported roll-down that you 5 referred to at the beginning of 1986, were you the 6 treasurer? 7 A. I don't recall specifically when I 8 became treasurer and when he started his roll-down 9 program. 10 Q. Did -- I mean, did you know, prior to 11 Joe Phillips making sales in January through March 12 of 1986 out of the investment portfolio, that he 13 was making those trades? 14 A. You're asking me, I guess, a confusing 15 question because sales and roll-down and trades 16 are not the same thing. So, I don't understand 17 your question. 18 Q. Well, do you know whether or not 19 between January and February of 1986 Joe Phillips 20 made sales out of the investment portfolio and 21 purchased securities of lower coupons to replace 22 higher coupon securities that he sold? 8629 1 A. He may have, if that's what the records 2 show. I don't have the records in front of me to 3 be able to say "yes" or "no." 4 Q. You testified earlier about an 5 accounting issue coming up with regard to a 6 roll-down. 7 Do you recall that testimony? 8 A. Yes. 9 Q. When did that roll-down occur that you 10 referred to there? 11 A. In the first six months of 1986, I 12 believe, is when that issue arose. 13 Q. Take that time period. Did you know 14 that those transactions were occurring at the time 15 they were occurring? 16 A. I knew during that six-month period, 17 yes, that he was rolling down securities. 18 Q. During that six-month period of time, 19 did he have to get prior approval from the 20 investment committee or whatever the informal 21 group was that existed prior to that that 22 Mr. Nickens has referred to before he made any of 8630 1 those transactions? 2 A. I don't know that. 3 Q. And -- but it's your recollection that 4 he needed prior approval to make any sales out of 5 the treasury portfolio? 6 A. Generally, yeah, that should have 7 been -- 8 Q. But he did have the authority to make 9 the recommendations? 10 A. To make the recommendation, yes. 11 Q. Now, look at the top -- the top entry. 12 You can't see the word, but it's "DARTs" that's 13 partially obliterated there. 14 Do you see that portfolio? 15 A. Yes. 16 Q. You testified, I think, yesterday that 17 no sales could be made out of that portfolio 18 because of some restrictions, I believe? 19 A. I said I believe that to be the case. 20 Q. And what is it -- why is it that you 21 believe that to be the case? 22 A. I don't remember all the specifics of 8631 1 what the DARTs subsidiary consisted of, but that 2 was set up in a special-purpose subsidiary. And I 3 think the only transactions that could go through 4 there would be replacing the cash flow that came 5 off of the securities due to pay downs, principal 6 and interest. Other than that, that was pretty 7 much the limit of the transactions. 8 Q. So, it was your understanding -- 9 A. Once again, that's the best of my 10 recollection because I don't remember a whole lot 11 about that DARTs subsidiary. 12 Q. Now, I'd like to direct your attention 13 to a document that is already in the record dated 14 August 28th, 1986. It's the investment committee 15 minutes. It's Exhibit A1406. 16 MS. CLARK: Mr. Guido, would you 17 identify the document by Bates number, please? 18 MR. GUIDO: It's US34859, I think. 19 MS. CLARK: What's the last number? 20 MR. GUIDO: I have -- I think it's 4866 21 is the last part of the document. The document 22 that I've just given the witness also has some 8632 1 handwritten copies attached to it. 2 Does yours have the handwritten copies? 3 MS. CLARK: It does, and I'm just 4 trying to figure out whether that's -- 5 MR. GUIDO: I think that says 8-28 6 investment committee. It's the handwritten notes 7 it was prepared from. Those are separately Bates 8 stamped. I think that whoever compiled these from 9 the Dechert-Price firm put them -- the two 10 documents together because they deal with the same 11 issue. And it's -- the handwritten copies are 12 US310605 through US310608. 13 MS. CLARK: Your Honor, has the entire 14 document been admitted, including the separately 15 numbered notes? 16 THE COURT: Well, my copy has the 17 notes. So, if the Bench copy reflects the one 18 that's in the record, it does. 19 MS. CLARK: Okay. 20 Q. (BY MR. GUIDO) The -- I'd like to 21 direct your attention to the third page of the 22 exhibit, which is US34861. The second full 8633 1 paragraph says "Mr. Phillips noted that there was 2 only one mortgage-backed security transaction that 3 occurred during the prior two weeks which was a 4 value trade of 80-million-dollar Freddie Mac 9s to 5 50-million-dollar Fannie Mae 9s. The economic 6 result of this transaction was to increase the 7 yield on these securities by about 12 basis 8 points." 9 Do you see that? 10 A. I see that. 11 Q. What -- you made reference to a value 12 trade the other day, and this is another 13 reference. 14 Can you tell us what the term "value 15 trade" referred to at USAT? 16 A. I think it pretty well describes it 17 here. It's trading from one coupon to a similar 18 coupon, and due to the pricing of the two 19 securities on the buy and sell side, being able to 20 increase your yield on the resulting security. 21 Q. So that the purpose is to increase the 22 yield. Is that the coupon yield on the security? 8634 1 A. No. It would be the book yield. 2 Q. And that would be determined by the 3 price in relationship to the coupon? 4 A. It would be the coupon plus the premium 5 or discount that you paid for the security. 6 Q. So, this would be moving from a 7 security that had less of a premium than another 8 security that had a higher premium, or would it be 9 the other way around? 10 A. I don't know. 11 Q. Now, the next says, "Mr. Crow proposed 12 that until our new mortgage-backed securities 13 position was filled that we consider moving ahead 14 with approving mortgage-backed security value 15 trades that will improve the overall portfolio 16 position and yield. In the future, he proposed 17 that mortgage-backed securities trading be 18 accomplished through a committee consisting of 19 Mr. Crow, Mr. Phillips, Mr. Bruce Williams, and 20 Mr. Doug Hansen." 21 Do you recall sitting on such a 22 committee? 8635 1 A. Not specifically, no, but I remember a 2 group being formed for some period of time to 3 review those types of trades. 4 Q. And then look at the last sentence. 5 "The committee approved these procedures for 6 future trading in mortgage-backed securities, and 7 they were to be presented for final approval to 8 Mr. Jenard Gross before implementation." 9 Do you see that? 10 A. Yes. 11 Q. Is it your understanding that the 12 committee approved the creation of that committee 13 that's referred to there? 14 A. Basically, yes. 15 Q. How often did it meet? 16 A. As needed. Once again, I don't recall 17 meeting too frequently. I remember a few meetings 18 where we would meet with Joe Phillips, but I don't 19 think this committee had a real long life. 20 Q. When was the new mortgage-backed 21 security position filled at USAT? 22 A. I have no idea. 8636 1 Q. Was Sandy Laurenson the person that was 2 hired to fill that position? 3 A. I have no idea. Oh, that? Okay. From 4 a -- I was reading that to be a position meaning a 5 financial position. From a position meaning a 6 manager, yeah, I think Sandy Laurenson was hired. 7 Q. All right. Now -- and were those 8 decisions of that committee presented to 9 Mr. Jenard Gross before implementation? 10 A. Of which committee? 11 Q. Of the mortgage-backed securities 12 trading committee. 13 A. I don't recall. 14 Q. You don't recall? Then the next 15 paragraph says, "The committee also reviewed final 16 recommendations from the asset/liability committee 17 concerning approval for dollar roll transactions. 18 The proposal provided that the treasury department 19 would be given final approval authority for dollar 20 roll transactions recommended by the investment 21 committee. This relationship was deemed necessary 22 to ensure that all securities which were committed 8637 1 to dollar rolls were actually available for such 2 transactions." Then it says "Such recommendation 3 was approved." 4 Did the treasury department exercise 5 approval of authority over dollar roll 6 transactions that were undertaken at USAT? 7 A. I believe so, yes. 8 Q. What was a dollar roll transaction? 9 A. I think I discussed this yesterday. 10 It's just another form of reverse repo. And I 11 believe in a reverse repo transaction, you're 12 lending the securities and you get the specific 13 securities back that you lent for the financing. 14 In a dollar roll, you may lend -- or they may be 15 financing Ginnie Mae 9s, which the investment 16 banking firm basically borrows; but when the 17 financing rolls, you don't necessarily get back 18 the exact Ginnie Mae 9s you gave them. You may 19 get back a different group of Ginnie Mae 9s. 20 Q. Okay. Is a difference between a 21 reverse repo and a dollar roll that in a reverse 22 repo, you're dealing in identical securities and 8638 1 in dollar roll transactions, you are not? 2 A. Right. 3 Q. Okay. 4 A. Well, identical being specific 5 identification. Dollar rolls, they are -- they 6 have to be so similar that they are identical, but 7 they are not specifically the same securities. 8 Q. Now, did USAT, when it held these 9 mortgage-backed securities as part of the dollar 10 roll, trade those securities as part of its value 11 trading policy? 12 A. I don't have any idea. I can't tell 13 you that. 14 Q. Were the dollar rolls undertaken at 15 times other the date at which the dollar roll 16 transaction expired, the lending transaction 17 expired? 18 A. I don't understand that question. 19 Q. A dollar roll is similar to a reverse 20 repo, is it not? 21 A. Yes. 22 Q. Okay. It has a date that it is 8639 1 initiated and a date that it terminates. Right? 2 A. Yes. 3 Q. Okay. And at that point in time, you 4 can choose either to renew it at whatever the 5 interest rate is at that time or not? 6 A. Right. 7 Q. And just let it expire. Right? 8 A. Right. 9 Q. So, it has a beginning date and an 10 ending date in the transaction? 11 A. Yes. 12 Q. Were sales made of mortgage-backed 13 securities that were in those dollar roll 14 transactions by USAT prior to the expiration of 15 that time period I just referred to? 16 A. Could have been. 17 Q. Now, with regard to value trades, you 18 sat on this committee. What did you look to to 19 determine whether or not a value trade was 20 actually to the advantage of USAT? 21 A. There was -- and again, I don't 22 remember the exact format. But there was some 8640 1 analysis done that would indicate the yield of the 2 security you were selling versus the yield of the 3 security you were purchasing and whether there was 4 an increase, economic increase, in the 5 transaction. 6 Q. What determines the yield that is paid 7 on a given mortgage-backed security? 8 A. The basis in the security and 9 prepayment speed primarily. 10 Q. Take the example that's at the second 11 full paragraph. It says "Trading $800 million in 12 Freddie Mac 9s to 500-million-dollar Fannie Mae 13 9s." 14 Do you see that? 15 A. I see that. 16 MR. NICKENS: Your Honor, it says 17 80 million to 50 million. 18 MR. GUIDO: I'm sorry. 80 million to 19 50 million. 20 Q. (BY MR. GUIDO) It says "The economic 21 result of this transaction was to increase the 22 yield on these securities by about 12 basis 8641 1 points. 2 How do you know whether or not that 12 3 basis point differential isn't a reflection of 4 different prepayment speeds? 5 A. Part of it is. It's a judgment call. 6 THE COURT: We'll take a short recess. 7 8 (A short break was taken 9 at 10:21 a.m.) 10 11 THE COURT: Be seated, please. 12 (10:44 a.m.) 13 Q. (BY MR. GUIDO) I'd like to show you a 14 document that's been marked as B1231, which is the 15 September 22nd, 1986 memorandum from Doug Hansen 16 to Mike Crow, Joe Phillips, yourself, and the 17 investment committee regarding the mortgage-backed 18 securities trading committee. 19 MR. GUIDO: Ms. Clark, do you have this 20 as a two-page document? 21 MS. CLARK: I do, but the two pages are 22 identical. 8642 1 MR. GUIDO: Except that they have 2 different Bates stamps, and I think they are 3 different people's copies. I just wanted to 4 clarify that. 5 Q. (BY MR. GUIDO) I'd like to direct 6 your attention to the first page of B1231. The 7 memorandum says, "The committee met several times 8 during the week of September 15th to approve and 9 execute a trade from Freddie Mac 9 and a half's to 10 Freddie Mac 8 and a half's. Crow and Williams 11 were absent. Smith Breeden was consulted on the 12 trade." It says "The gain booked is $700,000. 13 The loss in spread income is 150,000 in the first 14 year. The implied capitalization rate is 15 21 percent." 16 Do you see that? 17 A. I see that. 18 Q. Do you recall receiving a copy of this 19 memorandum? 20 A. Not specifically, no. 21 Q. Pardon? 22 A. Not specifically, no. 8643 1 Q. Do you have any reason to dispute the 2 accuracy of the memorandum? 3 A. I have no way of being able to validate 4 or verify the accuracy of it. 5 Q. Now, you indicated that one of the 6 purposes of the value trades was to increase the 7 yield on the mortgage-backed securities that were 8 purchased to replace those that were sold, did you 9 not? 10 A. Yes. 11 Q. This indicates that the loss in spread 12 income is $150,000 in the first year. How does 13 this transaction fit within your definition of the 14 value trade? 15 A. Well, looking at this, I don't 16 understand necessarily this page because there is 17 a yield at the bottom of 9.39 and a yield at the 18 top of 9.33. But generally, you would look at the 19 yield of the security you bought -- and in this 20 case, you would have to take into consideration 21 the gain that was booked and what is that value in 22 the form of capital. When you add that back in to 8644 1 the security you bought, does that overall yield 2 exceed the yield of the security you sold. 3 Q. Well, looking at this transaction, if 4 you look at "market yield," it says 9.33 was the 5 yield of what was sold and 9.39 was the yield that 6 was purchased. 7 Do you see that? 8 A. Yes. 9 Q. Okay. But it has the impact of a loss 10 in spread income of 150,000 in the first year. 11 Do you see that? 12 A. Yes. 13 Q. Now -- so, when you look at yields, the 14 effects on yields, you're not taking into 15 consideration the impact that the swap may have on 16 that transaction, are you? 17 A. I didn't understand your question. 18 Q. When you looked at yield enhancement as 19 part of your yield trading, you did not take into 20 consideration what the impact was of the hedging 21 instruments on those transactions, did you? 22 A. No. In this particular case, we are 8645 1 looking at the security that is being traded, not 2 the funding or any other piece of the transaction. 3 There may or may not have been a swap tied to this 4 security. So -- 5 Q. Now, in the yield transactions you 6 looked to, did you take into consideration the 7 impact of the hedging instrument on the 8 transaction? 9 A. The hedging instrument wasn't involved 10 as part of the trade; so, no. 11 Q. Now, I'd like to direct your attention 12 to Exhibit A1411, which is investment committee 13 minutes of December 1st, 1986. 14 MR. GUIDO: I'm sorry. October 1st, 15 1986, Your Honor. 16 Q. (BY MR. GUIDO) Look at the fourth 17 paragraph down. It says, "Mr. Phillips 18 recommended the sale of a portion of the liquidity 19 and mortgage-backed securities portfolios to 20 recognize profits which were recently created by 21 the market rally." 22 Do you see that? 8646 1 A. Yes. 2 Q. Now, the liquidity portfolio is a 3 treasury portfolio, is it not? 4 A. Liquidity portfolio existed primarily 5 of treasuries and mortgage-backs. 6 Q. But it was denominated as a treasury 7 portfolio on the May 28th report that we looked at 8 just previous to this? 9 A. Yes. 10 Q. That's what I mean by "treasury." 11 A. Yes. 12 Q. I don't mean treasury notes or bonds. 13 I'm talking about USAT's treasury. And that that 14 portfolio consisted of treasury notes or bonds and 15 mortgage-backed securities is your recollection? 16 A. Right. And I mean, just reading this, 17 for a time there were evidently some corporate 18 high-grade corporate securities that were 19 qualifying or in there, also. 20 Q. Okay. Now -- and here, it's Joe 21 Phillips making a recommendation that there be 22 sales out of that portfolio? 8647 1 A. Yes. 2 Q. Okay. And then he also says out of the 3 mortgage-backed securities portfolio. 4 Is that a reference to the treasury 5 portfolio. 6 MR. NICKENS: Your Honor, I believe it 7 says "mortgage-backed securities portfolios," 8 plural. 9 Q. (BY MR. GUIDO) Excuse me. 10 Portfolios. Do you know what that refers to? 11 A. No, I do not. 12 Q. Now, there were only four portfolios 13 that you've testified about at USAT. One was the 14 treasury portfolio of mortgage-backs and other 15 treasury instruments. The other was the 16 investment portfolio. The third was the DARTs and 17 the ARPS, and the fourth was the CMOs. Right? 18 A. Those were the four broad categories 19 that I can think of, yes. 20 Q. And this is a recommendation that there 21 be sales out of those mortgage-backed securities 22 portfolios? 8648 1 A. "Portfolios" is what it says. 2 Q. Portfolios, plural. I'm sorry. 3 A. That's what it says. 4 Q. Now, with regard to the sales out of 5 those portfolios, it says "To recognize profits 6 which were recently created by the market rally." 7 Do you see that? 8 A. I see that. 9 Q. In 1986, was Joe Phillips making sales 10 out of the mortgage-backed security portfolios in 11 order to capture profits which were created by a 12 decline in interest rates? 13 A. According to what this says, there were 14 some transactions recommended, yes. 15 Q. This says, "Also" -- in the last 16 sentence of that paragraph -- "after discussions, 17 the asset sales were approved." 18 Do you see that? 19 A. I see that. 20 Q. So, this was a recommendation to make 21 sales out of the mortgage-backed securities 22 portfolios to recognize profits generated by a 8649 1 decline in interest rates and it was approved by 2 the investment committee? 3 A. Is that a question or a statement? 4 Q. Is that correct? 5 A. That's what the minutes reflect. 6 Q. And you attended this meeting, did you 7 not? 8 A. Yes, I believe I did. 9 Q. Now, my question for you is: Were 10 sales made out of mortgage-backed securities 11 portfolios at USAT in order to generate profits in 12 1986? 13 A. Based on what these minutes reflect and 14 assuming the minutes are correct, the answer would 15 be "yes." 16 Q. Now, I'd like to show you another 17 document, which is Exhibit T4310. And I think 18 it's a memorandum from you to Jenard Gross, Gerald 19 Williams, Michael Crow dated November 24th, 1986, 20 and I think it is at Tab 188. 21 And I'd also like to show you a 22 document that's stamped as T4213, which is a 8650 1 memorandum from you to Jenard Gross, Gerald 2 Williams, and Michael Crow. Oh, excuse me. This 3 is a memorandum from you to Jenard Gross, 4 Jerry Williams, Mike Crow dated November 24th, 5 1986. The subject, "Review of MBS swap arbitrage 6 activities." 7 Do you see that? 8 MS. CLARK: Mr. Guido, are you 9 describing 4310? 10 MR. GUIDO: 4310. 11 Q. (BY MR. GUIDO) Is that your initials 12 on that page? 13 A. Yes. 14 Q. Okay. Do you recall seeing this 15 document recently? 16 A. I don't recall seeing this recently, 17 no. 18 Q. Now, it says that "Since the inception 19 of the mortgage-backed securities arbitrage 20 program, the association has recognized 21 approximately $67 million in gains on sales 22 through October 1986." 8651 1 Do you see that? 2 A. I see that. 3 Q. Do you have any reason to doubt the 4 accuracy of that statement? 5 A. I don't believe so. 6 Q. Okay. Now, it also says, "When 7 combined with current unrealized gains, the MBS 8 arbitrage program has provided about $75 million 9 in total gains compared to the interest rate swap 10 mark-to-market loss of $122 million." 11 Do you see that? 12 MR. NICKENS: Your Honor, in -- I would 13 like the sentence that was omitted be read for the 14 record so that we have a complete statement as to 15 what the -- 16 MR. GUIDO: That sentence, Your Honor, 17 is "These gains are largely attributable to the 18 MBS roll-down program from high coupon to current 19 coupon security." 20 Q. (BY MR. GUIDO) Do you see those 21 sentences? 22 A. Yes. 8652 1 Q. So, this shows that the total gains in 2 the MBS portfolio were $79 million as of 3 November 24th, 1986. 4 Do you see that? 5 A. Yes. 6 Q. And it says "The interest rate swap 7 mark-to-market 11-1986 was a negative 8 $122 million." 9 Do you see that? 10 A. Yes. 11 Q. Did you make any effort to ascertain 12 why it was that those losses were incurred by 13 USAT? 14 A. They weren't incurred. 15 Q. Why were they not incurred? 16 A. That's just a mark-to-market notation. 17 Q. So, they weren't incurred in the 18 financial statements? 19 A. Correct. 20 Q. But they existed in the portfolio? 21 A. On that particular day, yes. 22 Q. Now, with regard to that loss, that 8653 1 resulted in a net loss, if you mark-to-market the 2 swaps as of that date, of 11-1986. Right? 3 A. I think that's what was said, yes. 4 Q. Now, why were the losses on the swaps 5 deferred and not recognized? 6 A. Because the accounting practice was to 7 book things at book value. There were gains and 8 losses on every single asset on the books, not 9 just the swaps. And you didn't mark the whole 10 balance sheet to market every month end. So, 11 these were no different than all the other assets 12 and liabilities on the books. 13 Q. Now, the swaps were hedges, were they 14 not? 15 A. Yes. 16 Q. What did they hedge? 17 A. Liabilities. 18 Q. And what were the liabilities that they 19 hedged? 20 A. Liabilities on the balance sheet. 21 Q. Well, these swaps were part of the 22 mortgage-backed security arbitrage program. 8654 1 Can you identify the liabilities or 2 assets that they hedged? 3 A. I don't know that these were just the 4 ones in that program. But generally, the ones 5 related to the arbitrage programs were hedging 6 reverse repo type financings. 7 Q. Let's take the swaps that hedged the 8 reverse repo financings. Were those deferred? 9 Were those losses, if they existed, were they 10 deferred? 11 A. There were losses. They were recorded 12 on the books at book value just like all the other 13 assets and liabilities on the books. 14 Q. And there were no losses recognized 15 when the mortgage-backed securities that were part 16 of the mortgage-backed security arbitrage program 17 were sold? 18 A. When a transaction resulted in a sale, 19 at that point in time, whatever the accounting 20 guidelines are, you have to recognize, whether 21 it's recognizing the gain or deferring them. 22 Q. Now, let's take the mortgage-backed 8655 1 security arbitrage program, the one that you've 2 described as the investment portfolio. 3 What happened to the reverse repos when 4 your mortgage-backed securities were sold? 5 A. They were paid off. 6 Q. And that was the liability. Right? 7 A. That was a liability. 8 Q. That was a liability that was used to 9 finance the purchase of the mortgage-backed 10 securities. Right? 11 A. I'm confused as to whether you're 12 talking about a roll-down or a sale. 13 Q. I'm talking about a sale. 14 A. An outright sale, the liability could 15 go away, yes. 16 Q. Now, what happens in a roll-down 17 different than a sale? Isn't it sold? 18 A. Just the liability -- it's a roll-down 19 and the liability is renewed. 20 Q. So, the liability is sold, isn't it, 21 when you sell the mortgage-backed securities as 22 part of a roll-down? 8656 1 A. You can call it whatever you would 2 like. It's renewed. And if you want specifically 3 what is it called, you would have to go to 4 accounting guidelines and ask an accounting firm. 5 Q. I'm just trying to ascertain your 6 understanding of what happened with the 7 transaction first. 8 A. I believe I said on a roll-down, the 9 liability was viewed as a renewal. 10 Q. So, let's take it step by step. You 11 have $500 million worth of mortgage-backed 12 securities. Okay? They are financed with a 13 reverse repo. Okay? You sell the mortgage-backed 14 securities. What happens to the reverse repo? 15 A. The reverse repo generally gets paid 16 off. 17 Q. So, it's sold? 18 A. It gets paid off. If you want to call 19 it sold, you can call it sold. 20 Q. It's paid off? 21 A. (Witness nods head affirmatively.) 22 Q. Now, the swaps were designated as a 8657 1 hedge for that reverse repo, were they not? 2 A. I don't know. You're making up the 3 theoretical transaction. So, you tell me. 4 Q. Well, at USAT, what were the swaps that 5 were put on on the risk-controlled arbitrage 6 program? 7 A. There is -- well, I don't know if these 8 are all related to the risk-controlled arbitrage 9 program or whether some are related to the DARTs, 10 some are general liability hedges. I don't have 11 that information in front of me to make the 12 determination and answer the questions you're 13 trying to get me to answer. 14 Q. Well, let's go back to this memorandum. 15 Okay? You wrote this memorandum. Right? 16 A. I believe I did. 17 Q. What were you talking about in terms of 18 swaps? 19 A. I don't know. 20 Q. You don't know? 21 A. Unless I go back and look at all the 22 books and records and -- I don't know what this is 8658 1 referencing. 2 Q. Well, it has a bunch of swaps that are 3 listed there on that page. Do you see those? 4 A. I see those. 5 Q. And it has various dates in which they 6 were put on. Right? 7 A. No. 8 Q. Or the dates that they expired. Right? 9 A. Yes. 10 Q. Can you tell from that what they apply 11 to? 12 A. Absolutely not. 13 Q. So, you don't know whether or not these 14 swaps that are referred to here are in 15 relationship to the mortgage-backed security 16 arbitrage program? 17 A. They are related -- I don't know what 18 they are related to. They could be related to 19 virtually anything the association had. Without 20 having the books and records in front of me and 21 reconciliation, I don't know what this represents 22 11 or 12 years later. 8659 1 Q. Well, let's -- I mean, you don't 2 dispute the accuracy of this document, do you? 3 A. I make mistakes. There could be errors 4 in this document. So, generally, no, I wouldn't 5 dispute the accuracy. 6 Q. Well, then let's look at the last 7 sentence of the first paragraph. "When combined 8 with current unrealized gains of 12 million, the 9 MBS arbitrage program has provided about 10 $70 million in total gains compared to the 11 interest rate swap mark-to-market loss of 12 122 million." 13 Do you see that? 14 A. I see that. 15 Q. Doesn't that say that the swaps are in 16 relationship to the MBS arbitrage program? 17 A. That's what that would imply. 18 Q. Okay. Now, my question was: If you 19 sell the mortgage-backed securities and you pay 20 off the reverse repo and the swap hedges the 21 reverse repo, what did you do accounting-wise with 22 regard to the swap? 8660 1 A. Whatever Peat Marwick told us to do. 2 Q. Now, did Peat Marwick sign USAT's 10K? 3 A. I don't know. I didn't work in the 4 accounting department. 5 Q. Was Peat Marwick primarily responsible 6 for the financial statements of USAT? 7 A. I think USAT was responsible for USAT's 8 financial statements. 9 Q. And you were the treasurer of USAT. 10 Right? 11 A. I was the treasurer, yes. 12 Q. Did you review any of the 10Ks? 13 A. No. 14 Q. Did you approve of any of the material 15 that went in the 10Ks? 16 A. I don't believe so. Generally, that 17 was the accounting function. 18 Q. Did you prepare any of the materials 19 that went into the 10Ks? 20 A. Could have, but I don't have a 21 recollection. Once again, that was generally the 22 accounting group that put that together and signed 8661 1 off on that. 2 Q. I'd like to show you a document we've 3 marked as T4333? 4 THE COURT: Mr. Guido, could I 5 interrupt you and see if we can get the witness to 6 explain this table here at the bottom? 7 MR. GUIDO: Yes, sir. 8 THE COURT: The various lines. Could 9 you -- net interest rate, swap expense, current 10 rates, what are those figures there? 11 THE WITNESS: I believe the current 12 rates are the -- is basically the expense -- the 13 net expense of the transactions when you net the 14 variable and the fixed part of the swap. So, we 15 would be paying somebody a fixed rate and we would 16 be receiving a variable rate from whoever the 17 counter-party was, and that's just the 18 differential between those two rates. So, 19 that's -- 20 THE COURT: So, that's $44 million 21 there is the difference between your -- 22 THE WITNESS: Right. On $866 million 8662 1 of swap volume. 2 THE COURT: And what are these 3 "increased/decreased" columns? 4 THE WITNESS: That would be if 5 short-term rates went up 100 basis points, our net 6 cost would go down $9 million because the fixed 7 amount that we pay out is fixed. The floating 8 amount that we receive would actually increase 9 because rates increased. It was typically tied to 10 LIBOR, for instance. So, if rates went up 100 11 basis points, that LIBOR rate that is the index 12 that determines the amount of money we receive 13 would go up. So, we would get more money on the 14 receiving side. So, it would reduce our net 15 expense. 16 THE COURT: All right. Thank you. 17 Excuse me, Mr. Guido. You may continue. 18 Q. (BY MR. GUIDO) The -- maybe further 19 clarification is necessary, Your Honor, of the 20 document. Turn to Page 2 of the document. It 21 says "Based on our portfolio of October 31, '86, 22 the estimated net spread on the MBS arbitrage, 8663 1 excluding the new MBS subsidiary and AMPs, is 2 negative .99 percent and is summarized below." 3 And it has MBS-USAT 1,001,750,000 as the volume. 4 Do you see that? 5 A. 1,001,750 -- are you talking about the 6 first line? 7 Q. The first line. 8 A. The 1 billion 1 -- yes. 9 Q. And that makes reference to the MBS 10 arbitrage at USAT. Right? 11 A. I believe that's what that is. 12 Q. Then it mentions DARTs. Do you see 13 that? 14 A. I see that. 15 Q. And that's $125 million. Do you see 16 that? 17 A. Yes. 18 Q. Why did you include DARTs within the 19 MBS arbitrage? 20 A. I didn't. I broke it out as a separate 21 line. 22 Q. Well, it says "Based on our portfolio 8664 1 of October 31, 1986, the estimated net spread on 2 the MBS arbitrage, excluding the new MBS 3 subsidiary and AMPs, is negative .99 percent and 4 is summarized below." 5 Do you see that? 6 A. I see that. 7 Q. Was the DART a hedged portfolio? 8 A. I don't recall. 9 Q. Reading this, is it fair to assume that 10 you believed at the time you wrote that that the 11 DARTs were a hedged portfolio? 12 A. No. 13 Q. No? Why not? 14 A. Because I don't have the information 15 here to come to that conclusion. I don't know 16 what specific hedges were tied to the DARTs. So, 17 we may or may not have had hedges related to that. 18 Q. What do you understand an arbitrage to 19 be? 20 A. It is an asset and a liability put 21 together to generate a net interest spread. 22 Q. And with regard to MBSs, did that make 8665 1 reference to something that had a hedge so that 2 the durations were matched more closely than if 3 you used short-term liabilities? 4 A. Not in all cases. 5 Q. So, the way you used the term 6 "arbitrage" does not include any effort to match 7 the durations of assets and liabilities? 8 A. I don't believe I said that. 9 Q. That's what I heard. 10 A. You said "didn't include any effort." 11 I said in every case -- 12 Q. What did you mean when you used the 13 term "MBS arbitrage" here? 14 A. I don't know. I wrote this thing 11 15 years ago; so, it looks like I was looking at 16 basically most of the mortgage-backs outside of 17 the treasury portfolio and -- 18 Q. Pardon? 19 A. It looks like I was referencing the 20 mortgage-backs outside of the treasury portfolio 21 and whatever I excluded here. I don't 22 specifically remember. 8666 1 Q. All right. So -- well, it says 2 "Excluding the new MBS subsidiary and AMPs" is the 3 exclusion here. 4 Are you saying that this also excludes 5 the treasury portfolio? 6 A. It could have included or excluded 7 them. I don't have the work papers behind it to 8 be able to answer that for you. 9 Q. But if those work papers indicated that 10 the treasury portfolio was part of that 11 1,001,750,000-dollar figure, you wouldn't dispute 12 the fact that you included it in the 13 characterization of an MBS arbitrage, would you? 14 A. Not in this particular memo. 15 Q. Okay. Now, this shows that there was a 16 negative spread of .99 percent in the portfolio 17 that you're addressing here, the MBS arbitrage 18 portfolio, which had an annualized net loss of 19 $11,164,000. Right? 20 A. That's what this says, yes. 21 Q. Did you make any effort to ascertain 22 what the causes of those losses were while you 8667 1 were at USAT? 2 A. I'm sure at times there were 3 discussions of that, but -- 4 Q. I'd like to show you a document that 5 we've marked as T4333, which is a memorandum from 6 Jenard Gross to Michael Crow, Charles Hurwitz, 7 Barry Munitz dated January 22nd, 1987. This is in 8 reference to the bond man. 9 MS. CLARK: Mr. Guido, could you 10 provide a copy to us since it's not included in 11 your pull list? 12 MR. GUIDO: I think it's included in 13 the record. 14 MS. CLARK: Thank you. 15 Q. (BY MR. GUIDO) Look at the very last 16 paragraph of that first page of that document. It 17 says -- well, look at the next-to-the-last 18 paragraph to put that in context. "We are" -- I 19 think it's -- "in the process of looking to add 20 200 million worth of additional bonds. Even 21 though the market is moving, we are looking at 22 missing a good part of the profit potential. In 8668 1 fact, we have already missed a good part of it as 2 the spread between junks and treasuries have 3 narrowed. On the other hand, part of the problem 4 we are faced with today is the fact that we really 5 rushed into our existing portfolio without the 6 advice on the shape of the CD maturity stream 7 against the shape of the bond stream. The end 8 result is that we are having a lot of bonds called 9 away, but we are not having the CDs rolling off 10 because they are longer term. Just like our swaps 11 were not designed properly and didn't give any 12 thought to the possibility of prepayments, that's 13 how we got killed in the mortgage-backed security 14 area." 15 Do you see that? 16 A. I see that. 17 Q. Do you agree with that assessment of 18 Mr. Gross that the swaps that were purchased by 19 USAT for part of the mortgage-backed security 20 program were not designed properly? 21 A. Generally, no. 22 Q. Why not? 8669 1 A. Because I think some of the swaps were 2 probably not designed properly; but as a global 3 statement, I don't think all of them fall in that 4 category. 5 Q. But you do agree that some of them were 6 not designed properly? 7 A. I think "designed" is the wrong word. 8 But some of them were not probably put on and 9 matched against the liabilities and assets they 10 were related to hedge exactly right in the 11 beginning of the program. 12 Q. Well, would you characterize them as 13 being mismatched? 14 A. You could say that, but I think 15 hindsight is very easy to come back and second 16 guess they were mismatched. I think when they 17 were put on the books, you have one set of 18 assumptions and scenarios and rate environment and 19 things change. So, it's easy to look back and 20 criticize that type of thing. 21 Q. Well, you can say something just didn't 22 work out. Right? You had certain expectations 8670 1 and they just didn't work out. Right? 2 A. Right. 3 Q. This says they weren't designed 4 properly. And you said you disagree with that in 5 part but you agree with it in part. And I'm 6 trying to find out what it is that you agree with 7 with regard to that statement and what it is you 8 disagree with. 9 A. Well, I don't know what Jenard is -- 10 I'm not going to try to interpret Jenard's 11 thoughts. So, it's difficult for me to make 12 judgment calls on what Jenard is trying to portray 13 or convey, communicate. So, I don't want to 14 speculate based on what's on this piece of paper. 15 This is Jenard's memo, not mine. So -- 16 Q. I understand. I just asked you whether 17 or not you agreed with him, and you said in part 18 yes and in part no. Now I want to find out what 19 you think. 20 So, how do you believe they were not 21 designed properly? 22 A. I don't think design -- I don't 8671 1 understand the word "designed." You'll have to 2 tell me what you're defining -- what does that 3 mean? 4 Q. You're the one who said that you agreed 5 in part and disagreed in part. I didn't -- 6 MR. NICKENS: Your Honor, I object. We 7 all heard what he said, and he said he didn't 8 agree with the word "designed." He thought that 9 was not the proper description. And now Mr. Guido 10 has given it back to him as if he had said 11 something different than that. I object to the 12 form of the question. 13 THE COURT: All right. Restate your 14 question. 15 Q. (BY MR. GUIDO) Do you believe that 16 the swaps that were purchased had the improper 17 maturity for the assets and liabilities that they 18 were designed to match? 19 A. In some cases, but only from the 20 perspective of being able to second guess and look 21 back. 22 Q. Did USAT have any tools to measure what 8672 1 swaps would properly match the durations of its 2 mortgage-backed security portfolio? 3 A. I think the traders had duration models 4 and tools to evaluate that type of thing. 5 MS. CLARK: Your Honor, could we get a 6 clarification about what time frame Mr. Guido is 7 asking about? We've had considerable testimony in 8 the Court about how the tools evolved over time. 9 And I think in order to get a meaningful answer, 10 we should have specification of what time frame 11 he's asking about. 12 MR. GUIDO: As of January 22nd, 1987, 13 the date of the memorandum. 14 A. I believe there were tools available, 15 yes. 16 Q. (BY MR. GUIDO) Now, prior to 17 June 17th, 1986, when you wrote your memorandum 18 which is Bates stamped -- or Exhibit T4310 -- I'm 19 sorry -- that's November 24th, 1986. Were tools 20 available to USAT at that time? 21 A. I don't know what was available at that 22 specific date. 8673 1 Q. Okay. And what about on January 1st, 2 1986? 3 A. I don't know what tools were available 4 back then. 5 Q. I'd like to move on to another 6 document, if I may. 7 MR. GUIDO: I have a document that has 8 two numbers, Ms. Clark. One is A10643 and the 9 other is T4213. It's June 17th. It's this 10 analysis of the investment -- 11 12 (Discussion off the record.) 13 14 MR. NICKENS: 186, Tab 186. 15 MS. CLARK: Which one? 16 Q. (BY MR. GUIDO) It's a memorandum 17 dated June 17th, 1986, from Bruce Williams to 18 Jenard Gross, Jerry Williams, and Mike Crow, 19 A10643. 20 Is that your initials on that document? 21 A. Appears to be, yes. 22 Q. And is that your handwriting in the 8674 1 upper right-hand corner? 2 A. No, it is not. 3 Q. Do you know whose handwriting that is? 4 A. I believe it looks like Mike Crow's. 5 Q. And does that say "Question: Capital 6 room to add MBSs"? 7 A. That's what it looks like. Mine's kind 8 of cut off; so, I can't really tell what that 9 second word is. 10 Q. Now, do you recall preparing this 11 memorandum? 12 A. No. 13 Q. Have you reviewed this memorandum 14 recently? 15 A. No. 16 Q. Did Ms. Clark show you a copy of this 17 memorandum? 18 A. I don't believe so. 19 Q. Now, look at A. It says, "The net 20 interest spread in April and May was .67 percent 21 and .03 percent, respectively. However, a portion 22 of this weak performance was due to our total 8675 1 hedge position exceeding our MBS investments by 93 2 million and 57 million respectively." 3 Do you see that? 4 A. I see that. 5 Q. Is that one of the reasons for the 6 losses in the MBS portfolios that you discuss in 7 your November memorandum which is Exhibit T4310? 8 A. I don't know. I mean, I don't know 9 what's on Schedule SF. So, I don't know how 10 Schedule SF relates to this. I mean, these are 11 put together in two different time periods. It 12 could be referencing two different things. I 13 don't know. 14 Q. Well, let's just -- this makes 15 reference to "Investments: MBS arbitrage 16 activities." 17 Do you see that reference in the first 18 paragraph? 19 A. I see that. 20 Q. What do you think that refers to? 21 A. Could be anything. I don't know. 22 Without seeing Schedule SF, I don't know what -- 8676 1 Q. Well, does it include treasuries? 2 A. I believe I said I don't know without 3 seeing Schedule SF what it includes or excludes. 4 Q. Well, let's take -- it does refer to 5 MBS arbitrage activities of some type at USAT, 6 does it not? 7 A. I believe so, yes. 8 Q. Now, it says, "The net interest spread 9 in April and May was .67 and .03 respectively." 10 Then it says, "However, a portion of this weak 11 performance was due to our total hedged position 12 exceeding our MBS investments by 93 million to 13 57 million respectively." 14 Do you see that? 15 A. Yes. 16 Q. Now, at that time, was the duration of 17 the hedge instruments mismatched with the MBSs 18 that were being hedged? 19 A. I can't tell you that. 20 Q. Now, take a look at Page 2. Do you see 21 the section that says "in summary"? 22 A. Yes. 8677 1 Q. It says, "The portfolio is overhedged, 2 which is reducing the net spread." Right? 3 A. That's what it says. 4 Q. Is a portfolio overhedged when the 5 hedged position exceeds the MBS investments? 6 A. Not necessarily. 7 Q. Pardon? 8 A. Not necessarily. 9 Q. Why not? 10 A. Because without being able to look at 11 the duration of those two instruments, you can't 12 just take the principal value and compare the two, 13 I don't believe. 14 Q. Do you agree or disagree with the 15 sentence in the summary that says "The portfolio 16 is overhedged, which is reducing the net spread"? 17 A. I think for this particular time 18 period, for these two months, yes, that's what 19 this is saying. 20 Q. And then do you agree with the second 21 sentence? "We are mismatched on the floating side 22 of the transaction." 8678 1 A. I'm not sure I even understand that 2 anymore. 3 Q. What do you mean? 4 A. Well, I don't know what the second 5 point means. 6 Q. Do you have any reason to doubt the 7 accuracy of this statement? 8 A. Without understanding its meaning, no. 9 Q. Now, look at the last paragraph. "I 10 believe the month end portfolio yield analysis is 11 the beginning of developing a useful tool to 12 monitor the trend in the portfolio and should be 13 expanded to include all MBSs." 14 Do you see that? 15 A. I do. 16 Q. What was the month end portfolio yield 17 analysis that's being referred to there? 18 A. I don't know. 19 Q. You don't know? 20 A. I do not recall what it would look like 21 or even what it is. 22 Q. That isn't the Schedule SF, then? 8679 1 A. I don't know. I don't know what SF 2 looks like. 3 Q. Now, let's shift to another topic, 4 which is the United MBS portfolio. And I'd like 5 to direct your attention to Exhibit A1641, which 6 is a memorandum from you to Mr. Crow, 7 Mr. Phillips, Mr. Jackson, and Ms. Laurenson dated 8 10-3-86. 9 MR. GUIDO: Do we have a tab number on 10 that? 11 MR. NICKENS: Tab 523. 12 Q. (BY MR. GUIDO) 1641 is a copy of the 13 investment committee minutes or asset/liability 14 committee minutes of October 6th, 1986. 15 Is that your initials on the -- 16 A. I believe they are. 17 MS. CLARK: Just a correction. It's 18 the minutes of October 3rd, 1986. 19 MR. GUIDO: Oh, excuse me. And the 20 memorandum is dated October 6th, 1986. 21 Q. (BY MR. GUIDO) Look at Item No. 3 22 there. It says, "A mortgage-backed securities 8680 1 arbitrage update. It was noted that a new 2 subsidiary had been established and capitalized at 3 $100 million to be utilized for Sandy Laurenson's 4 new mortgage-backed securities arbitrage 5 activities. It was agreed that beginning next 6 week, we would work with Smith Breeden on 7 contacting the investment bankers and getting 8 approval for new lines of credit to support these 9 activities. One open issue which was to be 10 resolved next week was whether the 11 100-million-dollar advance to support the 12 arbitrages would have to be included for both 13 direct investment and consolidated liability 14 growth. Jim Wolfe indicated that the regulators 15 required a consistent accounting method, whereas 16 Bob Pozen said we could consolidate for direct 17 investments and not for liability growth." 18 Do you see that? 19 A. I see that. 20 Q. Do you recall the issue coming up of 21 whether or not the entity had to be consolidated 22 consistently for direct investments and liability 8681 1 growth? 2 A. Just based on this memo. 3 Q. Do you recall whether or not any 4 attempt was made to contact the regulators to 5 resolve that issue? 6 A. You would have to ask Jim Wolfe about 7 that. 8 Q. Now, it makes reference to arbitrage 9 activities with regard to United MBS' activities. 10 Do you see that? 11 A. Where in particular other than -- 12 Q. Take a look in the first paragraph of 13 3. It says on the fourth -- third line down, it 14 says "for Sandy Laurenson's new mortgage-backed 15 securities arbitrage activities." 16 Do you see that? 17 A. Yes. 18 Q. What was that in reference to? 19 A. I think it was in reference to the 20 activities that would be taking place in that 21 subsidiary which was going to be managed by Sandy 22 Laurenson. 8682 1 Q. And what does the term "arbitrage" 2 refer to as used in that memorandum? 3 A. The purchase of assets and liabilities 4 to generate a net interest spread. 5 Q. Does it contemplate a hedge instrument 6 to attempt to match the duration of the assets and 7 liabilities? 8 A. May or may not. 9 Q. So, your use of the term "arbitrage" 10 did not make reference to transactions that were 11 hedged as opposed to unhedged transactions? 12 A. They were transactions to generate a 13 net interest spread. 14 Q. And was it your understanding at the 15 time that you were at USAT that USAT had an 16 obligation to minimize the mismatch between assets 17 and liabilities durations? 18 A. I think they had to manage interest 19 rate risk. How you measure that, manage that 20 is -- I don't know exactly how you define that, 21 but that's what I would -- 22 Q. Were you obligated to manage it or 8683 1 minimize it? 2 A. Manage it, I believe. 3 Q. Now, let's take a look at the packet of 4 letters or series of letters, excuse me, that were 5 sent to the investment banking firms regarding 6 United Mortgage Finance. They are at Tab -- it's 7 under two -- the same packet is under two numbers, 8 I think. A10683 and T4264. They are all dated 9 10-20-1986. 10 I want to show you the Tab 185 which is 11 Exhibit A10683. And look at the second paragraph 12 of that letter. It says "The subsidiary will be 13 capitalized at 10 percent through contributions 14 and advances from USAT which will be subordinated 15 to other debt such as reverse repos. The primary 16 activities of the subsidiary will involve 17 investments in mortgage-backed securities funded 18 with reverse repurchase agreements. It is planned 19 that the arbitrage portfolio will be substantially 20 hedged utilizing a combination of futures, 21 options, and interest rate swaps." 22 Do you see that paragraph? 8684 1 A. Yes. 2 Q. Is that your understanding of what the 3 United MBS portfolio was to be? 4 A. I think as of October 20th, 1986, it 5 is, yes. 6 Q. And I'd like to direct your attention 7 now to Exhibit T4361, which is a letter dated 8 April 30, 1987, to Herbert L. Jacobson, the chief 9 financial officer of Security Pacific Clearing and 10 Services Corporation. It is also A10741. 11 12 (Discussion off the record.) 13 14 MR. GUIDO: Your Honor, apparently the 15 box of copies of these exhibits have not been 16 brought down. 17 18 (Mr. Rinaldi enters.) 19 20 Q. (BY MR. GUIDO) I'd like to show you 21 Exhibit A10741, which is a letter from Michael 22 Crow to Mr. Jacobson at Security Pacific Clearing 8685 1 and Services Corporation. 2 MR. NICKENS: It's also T4361. 3 MR. GUIDO: This is also T4361. 4 Q. (BY MR. GUIDO) Now, this letter says, 5 "Mr. Herbert, this letter will serve as 6 verification of United Savings' commitment to 7 maintain capital in United MBS Corporation 8 equivalent to at least 10 percent of total 9 assets." And it has inserted in handwriting 10 before capital and after maintain "total." And 11 then after capital, it says "(total stockholders 12 equity plus subordinated note payable to parent)." 13 Do you see that? 14 A. I see that. 15 Q. Do you recall such a letter being sent 16 to the Security Pacific Clearing and Services 17 Corporation? 18 A. No. 19 Q. Do you recall the issue of USAT's 20 commitment to maintain the capital in United MBS 21 to at least 10 percent of total assets? 22 A. It seems like there was a target of 8686 1 10 percent. 2 Q. And who set that target? 3 A. I don't know. 4 Q. Do you know what the Security Pacific 5 Clearing and Services Corporation is? 6 A. No, I do not. 7 Q. Were you asked by Mr. Crow to add to 8 your job description that United MBS' capital be 9 maintained at 10 percent of total assets? 10 A. I don't recall that being a separate 11 job function, no. 12 Q. I'd like to show you -- 13 THE COURT: Would you repeat that, 14 please? 15 THE WITNESS: I don't recall it being a 16 separate specified job function. 17 Q. (BY MR. GUIDO) I'd like to show you 18 another document which is A10742, which is a 19 similar letter sent to Randy Hoffman at Morgan 20 Stanley. This letter does not have the written 21 insertions. It says "This letter will serve as 22 verification of United Savings' commitment to 8687 1 maintain capital in United MBS Corporation 2 equivalent to at least 10 percent of total 3 assets." 4 Do you see that? 5 A. I see that. 6 Q. Do you know who Mr. Randy Hoffman was? 7 A. No, I do not. 8 Q. Did you have any responsibility, 9 forgetting whether or not it was in your formal 10 job description, to ensure that the capital of 11 United MBS Corporation was maintained at least at 12 10 percent of the total assets? 13 A. I don't recall having done that, no. 14 Q. I'd like to show you Exhibit A10746, 15 which is a memorandum dated May 20, 1987, from 16 Michael Crow to you and to a Chuck Doolittle. 17 This memorandum says, "Concerning the 18 United MBS financial statements, Chuck, would you 19 please see that someone sends these statements to 20 all of our credit people on Wall Street? I think 21 Gary Jacobson will take care of this, but please 22 check with him to be sure. If you cannot find 8688 1 anyone who's doing it, we need to establish an 2 ongoing procedure to mail these statements monthly 3 to all of our reverse repo creditors related to 4 United MBS." 5 Then it says "Bruce, please add to your 6 job description ensuring that the capital to asset 7 ratio of this sub remains at 10 percent or above. 8 We have committed to the analysts that we will 9 maintain at least this ratio. M. Crow." 10 Do you see that? 11 A. I see that. 12 Q. Does that refresh your recollection 13 that your job description included maintaining the 14 capital asset ratio of United MBS at 10 percent of 15 assets or above? 16 A. No. 17 Q. No? 18 A. I mean, I see it. And I assume I may 19 have done that, but I don't recall doing that. 20 Q. Do you have any reason to doubt the 21 accuracy that you were asked to do so? 22 A. No. 8689 1 Q. And do you have any reason to believe 2 that you didn't do so? 3 A. Just that I don't recall doing it. 4 Q. Okay. Do you recall whether or not you 5 made any transfers of funds from USAT to United 6 MBS because of collateral calls of United MBS? 7 A. Not specifically. It could have 8 happened, but I don't specifically remember. Once 9 again, without seeing books and records, I don't 10 know what transactions you may be referring to. 11 Q. Who would allocate funds -- who had the 12 responsibility for allocating funds between the 13 various subsidiaries and USAT? 14 A. I don't know. I couldn't tell you 15 that. 16 Q. Pardon? 17 A. I do not know. 18 Q. Did anyone besides the people in the 19 treasury department initiate transactions to 20 allocate funds between any of the USAT related 21 entities? 22 A. Sure. 8690 1 Q. Pardon? 2 A. Yes. 3 Q. Okay. Who? 4 A. The accounting department, people that 5 make general ledger entries. I mean, I can't give 6 you a list of the names but numerous people had 7 access to the books and records and made entries 8 into the books and records. 9 Q. Did people outside of 10 finance/administration have access to the books 11 and records in a way that they could enter 12 transactions into the books and records? 13 A. You would have to ask Jim Wolfe that. 14 I don't have knowledge of that. 15 MR. GUIDO: I'd like to move into 16 evidence, Your Honor, Exhibits A10741, A10742, 17 A10746. 18 MS. CLARK: No objection. 19 THE COURT: Received. 20 Q. (BY MR. GUIDO) I'd like to show you 21 now another document which is stamped as 22 Exhibit T4443. It's a letter from Michael Crow to 8691 1 Michael Criscito, PaineWebber credit department, 2 dated February 23rd, 1988. 3 Who was Michael Criscito? 4 A. I don't know. 5 Q. And this here says "This letter will 6 serve as verification of United Savings' 7 commitment to maintain total capital (total 8 stockholders' equity plus subordinated note 9 payable to parent) in United MBS Corporation 10 equivalent to at least 10 percent of total 11 assets." 12 Do you see that? 13 A. Yes. 14 Q. Was PaineWebber one of the entities 15 that provided funding to United MBS to purchase 16 mortgage-backed securities? 17 A. They may have been. 18 Q. Was Morgan Stanley one of those 19 entities? 20 A. They may have been. 21 MR. GUIDO: I'd like to move the 22 admission of T4443, Your Honor. 8692 1 MS. CLARK: No objection. 2 THE COURT: Received. 3 Q. (BY MR. GUIDO) I'd like to -- 4 MS. CLARK: Your Honor, I'd just like 5 to note for the record these documents are not 6 Bates stamped and there is no indication that they 7 were originally together in the books and records 8 of USAT. But with that clarification, no 9 objection. 10 MR. GUIDO: I think that the second and 11 third pages are a subordinated note agreement, and 12 I think that that's what's referred to in the text 13 of the letter. And I think that that would 14 indicate that they likely went together to this 15 entity. 16 Do you have any objection to them being 17 included? 18 MS. CLARK: No objection to them being 19 received as they are. 20 THE COURT: All right. Thank you. 21 Q. (BY MR. GUIDO) I'd like to direct 22 your attention now to the investment committee 8693 1 minutes of January 14th, 1987, which is at A -- 2 it's Exhibit A1425. It's the investment committee 3 minutes, and it's Tab 356. 4 I'd like to direct your attention to 5 the Bates stamp pages US35209 and 5210. Do you 6 recognize the format for those pages? 7 A. No. 8 Q. Did the -- those state at the top, 9 starting at Page 5210, it says "MBS pending sales 10 13 Jan '87." 11 Do you see that? 12 MR. NICKENS: I believe it says 13 "pending transactions." 14 MR. GUIDO: MBS pending transactions. 15 MR. NICKENS: You said "pending sales." 16 MR. GUIDO: I'm sorry. "Pending 17 transactions." Excuse me. 13 Jan 1987. 18 Q. (BY MR. GUIDO) Do you see that? 19 A. Yes. 20 Q. And then it says "sales" in the middle 21 of the page at the top. 22 Do you see that? 8694 1 A. Yes. 2 Q. Then look at US35211. 3 A. Okay. 4 Q. It says in the left, "portfolio 5 agency," and then in the middle of the top of the 6 page, it says "purchases." 7 Do you see that? 8 A. Yes. 9 Q. Now, it has -- and see where it says 10 "portfolio" and then "agency"? It says -- on the 11 page that deals with sales, taking a look at the 12 page back, it says "DARTs." 13 Do you see that? 14 A. Yes. 15 Q. And then look at the page that says 16 "purchases." It says "DARTs." 17 Do you see that? 18 A. I do. 19 Q. Was Sandy Laurenson engaged in selling 20 and repurchasing mortgage-backed securities out of 21 the DART portfolio in order to generate gains? 22 A. I don't know. Without being able to 8695 1 look at minutes of investment committees and books 2 and records, I don't know what this represents. 3 Q. The -- you don't have any reason to 4 dispute the accuracy of this document, do you? 5 A. I don't know what it is, so I can't 6 attest to that. 7 Q. Look at the beginning of the first page 8 of the exhibit. 9 A. What page are you on? 10 Q. The first page of the entire exhibit. 11 Go to the first page. It says in the second 12 paragraph, Ms. Sandy Laurenson reported on the 13 mortgage-backed securities portfolio. She 14 presented a report which she went over in detail. 15 The report was ordered attached to the minutes of 16 the meeting. After full discussion of the 17 portfolio, the following resolutions were 18 adopted." Then it has attached to it various 19 documents which have been described as Sandy 20 Laurenson's report to the investment committee 21 from previous testimony. 22 Now, what I'm asking you about are 8696 1 these two pages of that report. Did Sandy 2 Laurenson periodically report to the investment 3 committee on purchases and sales that she was 4 making out of the mortgage-backed securities 5 portfolio? 6 A. I would have to look at the investment 7 committee meeting minutes. I can't tell you that 8 from looking at this. 9 Q. Well, this says "minutes of the 10 investment committee." 11 Do you see that? 12 A. I see that. 13 Q. Now -- 14 A. If it reports it in the minutes, then 15 it probably happened. That's all I can attest to. 16 I can't answer your global question. 17 Q. I'm sorry. I don't understand -- 18 A. You're asking a global question. All I 19 can tell you is what I see in the minutes. 20 Q. Okay. 21 A. So, other than what you're asking me 22 about this specific document, I can't attest to 8697 1 what went on the week before or after this. 2 Q. Okay. Let's just take this week. All 3 right? Let's just use this. This says, "Sales 4 were made out of the DARTs portfolio and purchases 5 were made," does it not? 6 A. I don't know what this exhibit 7 represents. This could have been year-to-date 8 historical. I have no idea what this exhibit 9 represents. So, I don't know what that means. 10 Q. Well -- 11 A. You'll have to ask Sandy what this 12 represents. I do not know what this represents. 13 Q. You don't know what this represents? 14 A. I think I've said that, yes. 15 Q. So -- but you don't have any reason to 16 dispute the accuracy of this document? 17 A. I have no way of knowing. I did not 18 put this together, and I don't know what it 19 represents. So -- 20 Q. Well, if this document accurately 21 reflects that sales were made out of the DART 22 portfolio and purchases were made, were you aware 8698 1 of that? 2 A. Without having all the details around 3 me, no. 4 Q. You don't know? 5 A. I don't know. 6 Q. I'd like to direct your attention now 7 to the minutes of the investment committee of 8 February 18th, 1987, and it's Exhibit A1430. 9 10 (Discussion off the record.) 11 12 MR. GUIDO: Your Honor, could I request 13 that we adjourn for lunch now? There is 14 apparently something wrong with the order of the 15 documents that I have. I have a document that's 16 marked 1430 and it says February 17th, 1987. But 17 it's -- it shows that Dominic Bruno was there, and 18 I know Dominic Bruno wasn't at USAT on 19 February 17th, 1987. 20 THE COURT: All right. We'll adjourn 21 until 1:30. 22 8699 1 (Luncheon recess taken at 11:58 a.m.) 2 3 THE COURT: Be seated, please. Back on 4 the record. Mr. Guido. 5 (1:33 p.m.) 6 Q. (BY MR. GUIDO) Yes. I'd like to 7 direct your attention to Exhibit A5010, which is 8 the packet of materials which were the performance 9 reports for the fourth quarter of 1985 and total 10 1985 performance and also the performance report 11 for February of 1986 that have been introduced in 12 the record at Tab 557. I'd like to direct your 13 attention to the Bates stamp number US1676, which 14 is in that document that I just handed you. 15 A. What was the number? I'm sorry. 16 Q. It's Bates stamp 1676. This is the 17 document that I originally was going to ask you 18 questions about, and Ms. Clark and I were confused 19 about what actually had been included in the 20 record. And there is just -- 21 THE COURT: What's the docket number, 22 Mr. Guido, please? 8700 1 MR. GUIDO: It's Tab 557. It's 2 Exhibit A5010, Your Honor. 3 THE COURT: Thank you. Okay. I have 4 it. Thank you. 5 Q. (BY MR. GUIDO) And do you see this -- 6 this was just to finish up a line of questions 7 that I had to terminate and said I would come back 8 to, Your Honor, and it deals with the question of 9 the collapse and the need for selling the 10 mortgage-backed securities of the USAT Mortgage 11 Finance. 12 Q. (BY MR. GUIDO) Look at the -- see the 13 section called "regulatory compliance" -- 14 A. Yes. 15 Q. -- in that report? Did you prepare the 16 regulatory compliance portions of the performance 17 reports? 18 A. I may have put them together. I didn't 19 necessarily develop the numbers that went in the 20 tables. 21 Q. Okay. Did people within the treasury 22 department develop the numbers that went in the 8701 1 tables? 2 A. Probably not. I mean, they may -- we 3 may have produced some of them, such as 4 securities, but most of the things that dealt with 5 regulatory type numbers came from the accounting 6 department because there was a separate set of 7 books for regulatory purposes. 8 Q. Oh, okay. 9 A. And they maintained those. 10 Q. Okay. Well, take a look at the 11 figures. It says that "liability growth." See 12 that? It says "actual 1-31-86." 13 Do you know what "actual" refers to? 14 A. Other than what it says, no. 15 Q. It says whatever the actual size of the 16 liabilities were at that date? 17 A. That appears to be the size of the 18 liabilities as of that date. 19 Q. And then look at the far right-hand 20 corner. It says "the regulatory limit." 21 Do you see that? 22 A. Yes. 8702 1 Q. Do you know what that refers to? 2 A. No, I don't. I mean, other than the 3 obvious, I don't know if it refers to the prior 4 year end or the future quarter or what time period 5 it makes reference to. So, I don't -- I don't 6 know specifically what it means. 7 Q. Well, it says "regulatory compliance." 8 So, is it fair to assume that it means the 9 regulatory limit that was in force at the time of 10 the preparation of this document? 11 A. Could be. 12 Q. Now, the liability for 1-31-86 shows 13 $4,430,000,000, does it not? 14 A. That's what's on my paper. 15 Q. And the regulatory limit shows 16 $4,752,000,000. Right? 17 A. That's what I see, yes. 18 Q. Do you have any reason to dispute the 19 accuracy of those figures? 20 A. I have no way of being able to attest 21 to those figures. I don't know where they came 22 from or the work papers behind them; so, I really 8703 1 couldn't tell you. 2 Q. Did anyone ever ask you when you were 3 at USAT in January or February of 1987 if you 4 would ascertain whether there were alternatives 5 other than selling the mortgage-backed securities 6 that were part of the USAT Mortgage Finance 7 portfolio in order to comply with various Federal 8 Home Loan Bank Board regulations? 9 A. Nobody ever asked me that. 10 Q. I'd like to? 11 A. They may have, but I don't recall it. 12 Q. I'd like to now move on to -- back to 13 the 1987 time period where we were before we broke 14 for lunch. And I'd like to show you Exhibit 15 A1431, which is the February 28th, 1987 investment 16 committee minutes. 17 MR. GUIDO: Your Honor, I was just 18 informed that there is a document that I 19 overlooked moving into evidence. That was the 20 document that was marked T4443, which is the 21 letter to PaineWebber, credit department from 22 Michael Crow dated February 23rd, 1988. I'd like 8704 1 to move that admission at this time. 2 MS. CLARK: No objection. 3 THE COURT: Received. I have it marked 4 as having been received. I'll receive it again. 5 MS. CLARK: Does 1431 have a tab 6 number? 7 MR. EISENHART: It's 381. 8 Q. (BY MR. GUIDO) I direct your 9 attention to the second full paragraph. It says 10 "Mr. Bruce Williams presented a memorandum 11 relating to the strategies connected with the 12 trading and investment accounts in high-yield 13 corporate bonds and mortgage-backed securities. 14 After full discussion, those strategies were 15 unanimously adopted." 16 Do you see that reference? 17 A. I do. 18 Q. And I'd like you to turn to Bates stamp 19 US3005340.001, which is the third page in in the 20 exhibit. 21 Do you see that? 22 A. I see that. 8705 1 Q. Did you prepare that document? 2 A. I don't recall whether I did or not. 3 Q. Do you recall working with anyone in 4 preparing the document? 5 A. In some form or fashion, I probably did 6 work with someone on putting something like this 7 together. 8 Q. Do you recall who it was that you 9 worked with? 10 A. No, I do not. 11 Q. I'd like to also show you a document 12 that's marked Exhibit B1495 which has at the 13 heading "United Financial Group, Inc. high-yield 14 corporate securities statement of strategies and 15 objectives." 16 Do you recognize the document that I 17 have marked as Exhibit B1495? 18 A. No. I mean, I see it. But as with 19 most of what you've given me, I don't recall it 20 specifically. 21 Q. Okay. Take a look at the first page of 22 Exhibit A1431 again. It says, "Bruce Williams 8706 1 presented a memorandum relating to the strategies 2 connected with the trading and investment accounts 3 in high-yield corporate bonds and mortgage-backed 4 securities." And then when you turn to the third 5 page, it says "United Financial Group Inc. 6 mortgage-backed securities statement of strategies 7 and objectives." 8 Do you see that? 9 A. I do. 10 Q. Did you work with Jim Wolfe on those 11 statements of strategies and objectives? 12 A. I think a minute ago, I said I didn't 13 recall who I worked with or who prepared this 14 formally. 15 Q. Do you recall making a presentation to 16 the investment committee regarding a statement of 17 strategies and objectives? 18 A. I think if it was in the minutes of the 19 meeting, I probably did. But I don't specifically 20 recall that, no. 21 Q. Do you generally recall? 22 A. Other than reading the minutes of the 8707 1 meeting, no. 2 Q. And on Exhibit B1495, it says up it in 3 the right-hand corner "adopted by investment 4 committee on 2-18-87." 5 Do you have any reason to dispute the 6 accuracy of that statement? 7 A. No. I think that's part of the 2-18 8 minutes. 9 Q. What was the purpose for adopting these 10 strategies and objectives? 11 A. I believe it was just to formalize the 12 overall investment strategy of the organization. 13 I don't remember what the genesis of the request 14 was or why it came up. 15 Q. Do you recall whether or not this came 16 up because the Peat Marwick accountants had raised 17 questions regarding USAT's intentions with regard 18 to its mortgage-backed securities and its 19 high-yield corporate securities? 20 A. It could have been. 21 Q. But you don't recall? 22 A. No. 8708 1 Q. Now, I'd like to show you Exhibit A1426 2 which has previously been introduced. It's the 3 January 21st, 1987 minutes of the investment 4 committee. I'd like to direct your attention to 5 Page US35224. This is, again, one of those 6 reports from Sandy Laurenson to the investment 7 committee. And it says on 5224 under "sensitivity 8 analysis," do you see that section? 9 A. The circled section? 10 Q. Do you have a circle around that one? 11 You shouldn't. Apparently, someone marked this 12 while I wasn't here. But the document that's been 13 introduced in the record I do not believe has a 14 circle around it. This is an extra copy that I 15 have given to the witness. 16 It says "The MBS portfolio, when 17 combined with the interest rate swaps, are 18 favorably positioned for further rate declines." 19 Do you see that sentence? 20 A. I do. 21 Q. Do you recall that Sandy Laurenson 22 structured -- whether Sandy Laurenson structured 8709 1 the mortgage-backed securities portfolios at the 2 beginning of 1985 to take advantage of declining 3 interest rates? 4 A. I don't think Sandy was here in 1985. 5 Q. I'm sorry. 1987. Excuse me. 6 A. I don't know. 7 THE COURT: Ms. Clark, you had -- 8 MS. CLARK: I did. Mr. Guido misspoke, 9 but he corrected himself. 10 THE COURT: Okay. 11 Q. (BY MR. GUIDO) You don't recall? 12 A. No. 13 Q. If the minutes would indicate that she 14 had done so, do you have any reason to believe 15 that they are not correct? 16 A. I have no basis for it. 17 Q. Now, I'd like to show you also in this 18 exhibit or direct your attention in this exhibit 19 to the sensitivity analysis, which I think is on 20 the following page of that document. It's headed 21 "liquidation value MBS portfolio." 22 Do you see that? 8710 1 A. Yes, I do. 2 Q. Do you recall receiving sensitivity 3 analyses or liquidation value reports periodically 4 as a member of the investment committee? 5 A. To the extent that they are reflected 6 in the minutes, yes, I would have gotten them. 7 Q. Now, this shows that with yields 8 unchanged, the liquidation value of the portfolios 9 is a negative 100,597,000. Is that not correct? 10 A. That's what this exhibit shows. 11 Q. Okay. I'd like to now direct your 12 attention to Exhibit A1441, which is the May 5th, 13 1987 investment committee minutes and direct your 14 attention to -- 15 MS. CLARK: Mr. Guido, could you 16 identify it further? We were not provided with 17 that on our pull list. 18 MR. GUIDO: A1441. 19 MS. CLARK: Tab? 20 MR. GUIDO: Oh, the tab? 21 MR. EISENHART: 368. 22 MR. GUIDO: 368, I think, may be the 8711 1 number. 2 Q. (BY MR. GUIDO) Now, Exhibit A1441 has 3 the sensitivity report for May 5th, 1987. And 4 that shows a total negative value of the 5 mortgage-backed security portfolios of 6 197,690,000. 7 Do you see that figure? 8 A. I see it. 9 Q. And that is almost twice what the 10 figure was in the January 21st liquidation report, 11 is it not? 12 A. I believe so. 13 Q. Do you know why that occurred? 14 A. I do not. 15 Q. Was that because interest rates had 16 increased during that time period when Sandy 17 Laurenson was favorably positioning the portfolio 18 for a decline in interest rates? 19 A. I don't know what interest rates did 20 during that time. 21 Q. Now, I'd like to show you 22 Exhibit A1472, which is a set of subcommittee of 8712 1 the investment committee minutes dated 2 October 29th, 1987. What was the subcommittee of 3 the investment committee of USAT? 4 A. I don't recall. 5 Q. Do you recall -- 6 A. I guess it says "a subcommittee." It 7 doesn't say "the subcommittee." So -- 8 Q. Were there various subcommittees of the 9 investment committee of USAT? 10 A. There may have been one or two. I 11 don't recall specifically if there were or not. 12 Q. What happened on October 29th, 1987 13 that prompted the sale of the caps that were used 14 to hedge the United Mortgage Finance portfolio? 15 A. I have no idea. 16 Q. Have you ever heard of a thing called 17 the stock market crash of 1987? 18 A. Uh-huh. (Witness nods head 19 affirmatively.) 20 Q. Was that on October 29th, 1987? 21 A. May have been. 22 Q. You don't know? 8713 1 A. (Witness shakes head negatively.) No. 2 I don't know why it would have affected -- or how 3 it would have affected caps or the position of the 4 company. So, I -- those two days may be the same, 5 but I don't know that there is any relationship 6 with this transaction and the stock market 7 decline. 8 Q. Well, look at the paragraph on the 9 first page. It says, "After full discussion of 10 the revised interest rate outlook following the 11 precipitous decline in equity prices and 12 precipitous rise in interest rate volatility, it 13 was determined that USAT would reduce its interest 14 rate cap position." 15 Do you see that? 16 A. I see that. 17 Q. Is a cap an options contract? 18 A. I believe it is -- 19 Q. What happens -- 20 A. -- a form of an options contract. 21 Q. What happens to the value or the 22 premium of an options contract when volatility 8714 1 increases? 2 MS. CLARK: Your Honor, I believe 3 Mr. Guido interrupted his answer. 4 A. I'm not a trader. I don't know. 5 Q. (BY MR. GUIDO) You don't know? 6 THE COURT: Did you have more to add? 7 THE WITNESS: No. I think that's it. 8 Thank you. 9 Q. (BY MR. GUIDO) I'd like to now have 10 you take a look at Exhibit A1479, which is the 11 investment committee minutes of December 5th, 12 1987. 13 MS. CLARK: The record should reflect 14 that's December 4th. 15 Q. (BY MR. GUIDO) I'd like to direct 16 your attention to Bates stamp 36814. I'm sorry. 17 6811. I misread my own handwriting. Up at the 18 top of 6811, there is another sensitivity analysis 19 which is a little more difficult to read than the 20 others. But it shows that under an unchanged 21 interest rate scenario, that the losses in the 22 mark-to-market for the mortgage-backed security 8715 1 portfolio at USAT or portfolios at USAT was a 2 negative 281,842,000. 3 Do you see that figure? 4 A. I do. 5 Q. Do you know why the figure increased 6 from the May 5th, 1987 figure of approximately 7 197 million to 281 million? 8 A. I do not. 9 Q. Now, I'd like to direct your attention 10 to Exhibit T4342. 11 12 (Discussion off the record.) 13 14 MR. GUIDO: Excuse me, Your Honor. I 15 was using the wrong set of numbers. It's T5120, 16 and it is a memorandum dated February 18th, 1987, 17 memo from Bruce Williams to the investment 18 committee. The subject, the maturity matching 19 credit. 20 Q. (BY MR. GUIDO) Do you recognize this 21 as a memorandum that you had prepared and sent to 22 the investment committee of USAT? 8716 1 A. Since it has my name on it, I would 2 assume so. 3 Q. The -- I want to direct your attention 4 to the second sentence in the third paragraph. It 5 says, "Because our near-term earnings outlook is 6 not extremely favorable and the capital note 7 issuance is unlikely, the matching credit is our 8 most accessible source of capital. Therefore, 9 prior to quarter end, we may have to restructure 10 our assets and liabilities to increase our 11 matching credit to maintain minimum regulatory net 12 worth." 13 Do you see that? 14 A. I do. 15 Q. Do you recall writing that to the 16 investment committee and making that 17 recommendation? 18 A. No. 19 Q. Do you recall that the maturity 20 matching credit had become a mechanism for USAT to 21 ensure that it was satisfying the regulatory 22 minimum capital requirements in 1987? 8717 1 A. I believe it was part of the capital 2 requirement calculation. So, that would come into 3 play, yes. 4 Q. I'd like to now show you Exhibit T5121, 5 which is a memorandum from you to Jenard Gross and 6 Mike Crow dated February 23rd, 1987. This also 7 has as the subject matter the minimum required 8 regulatory net worth. 9 Is that your initials next to your 10 name? 11 A. Yes, they are. 12 Q. And this says, "Based upon our year end 13 maturity matching credit, USAT should receive a 14 benefit of about $40 million at June 30, 1987. 15 When this is combined with our January 30, 1987 16 actual results, it indicates we would have only 17 about $32 million excess net worth before 18 adjusting for February through June results. 19 I.e., net losses, increases in scheduled items, 20 and direct investments." 21 Do you see that? 22 A. I see that. 8718 1 Q. Do you recall those facts to be 2 correct? 3 A. I assume because they are documented 4 here, they probably are. 5 Q. Now, the last paragraph says "The 6 asset/liability committee will develop a proposal 7 by mid-March which will outline a number of 8 alternatives for March 31, 1987 restructuring 9 which establishes the September 30, 1987 credit 10 amount to optimize the matching credit." 11 Do you see that? 12 A. I see that. 13 Q. Do you recall writing that to Mr. Gross 14 and Mr. Crow? 15 A. No, I don't recall writing it, but -- 16 Q. Do you see in the upper right-hand 17 corner, it says "destroy after reading"? 18 A. Yes. 19 Q. Why does it say that? 20 A. Probably because some of the 21 assumptions made on the exhibit on the next page 22 in terms of combinations of scheduled items and 8719 1 losses are purely hypothetical and this isn't the 2 kind of document that should probably be floating 3 around within the association. 4 Q. Well, did Mr. Gross and Mr. Crow have a 5 propensity to have documents floating around the 6 association? 7 A. I don't have any idea. 8 Q. Who was it that you felt shouldn't see 9 the document? 10 A. Anybody other than these two people. 11 Q. Would that include the examiners? 12 A. I think I said anybody other than those 13 two people. 14 Q. And I asked you: Did that include the 15 examiners? 16 A. If they are not one of those two 17 people, it did. 18 Q. Now, I'd like to direct your attention 19 to Exhibit T5125, which is a memorandum from you 20 to Jenard Gross and Mike Crow again, dated 21 June 17th, 1987. This memorandum uses the term 22 "mirrors." 8720 1 Do you see that in the bullet point, 2 the first bullet point here? 3 A. Yes, I do. 4 Q. And this is the memorandum that 5 Mr. Nickens had corrected me in the opening 6 argument that I had mischaracterized. I think he 7 said that I had used the term "smoke and mirrors" 8 as opposed to mirrors. Let the record show that 9 the term that's used here is "mirrors," not "smoke 10 and mirrors." 11 It says, "Although we have discussed 12 the structure of United MBS in numerous forums 13 (Executive committee, investment committee, 14 strategic planning committee, et cetera), I think 15 it's important we have a complete understanding of 16 the major accounting exposure we have for the 17 subsidiary. By management approval, $320 million 18 of variable rate mortgage-backed securities 19 and" -- it's and repeated -- "710 million of 20 interest rate caps were transferred from United 21 MBS to USAT for maturity matching credit 22 purposes." 8721 1 Do you see that? 2 A. I see that. 3 Q. Is that statement correct? 4 A. I don't think it is. 5 Q. Why not? 6 A. I don't know, but it's my understanding 7 that factually, some of the numbers in there and 8 the assumptions in there may be incorrect and that 9 some of the interest rate caps were not 10 transferred. They were in USAT to begin with. 11 And so, factually, that sentence may not be 12 correct. 13 Q. How did you learn that? 14 A. It was, I believe, one of the 15 discussions I had with Mary Clark. 16 Q. So, you got that information from 17 Mary Clark? 18 A. That particular piece of information. 19 Q. And what did she specifically tell you? 20 A. She didn't specifically tell me 21 anything. She showed me a document or two related 22 to, I believe, a series of caps and which entities 8722 1 they were in. 2 Q. And which what? 3 A. Which entities, which subsidiaries. 4 Q. Can you describe the documents? 5 A. No, I can't. 6 Q. But she showed you a series of 7 documents that you believe reflected that they 8 were in one entity and not another? 9 A. That they were in an entity other than 10 what I had thought when I had written this memo. 11 Q. Now, I've asked you a number of 12 questions in the course of your testimony and 13 asking you about documents. And you say, "Look, I 14 can't confirm or deny any of that because I can't 15 remember." 16 What is it about the document that 17 Mary Clark showed you that all of a sudden you now 18 believe those facts are true? 19 A. I'm not saying they are true. All I'm 20 saying is they bring into question the facts that 21 are in this memo. 22 Q. Oh, okay. 8723 1 A. I'm not saying this is -- without, once 2 again, having a complete set of books and records, 3 I don't know. All I'm saying -- 4 Q. So, you're not saying that these facts 5 are untrue to your knowledge? 6 A. I'm saying that they come into 7 question. 8 Q. Now, this is a memo you prepared 9 June 17th, 1987. Right? 10 A. That's what date says, yes. 11 Q. And those transfers occurred sometime 12 around March of 1987. Right? 13 A. I don't know. 14 Q. Well, the previous memorandum we talked 15 about was restructuring for March to take 16 advantage of the maturity matching credit for 17 September, did we not? 18 A. That doesn't necessarily mean it 19 relates to what is here. Without, once again, 20 having all the facts laid out in front of me and 21 the books and records, I don't know if those are 22 the same transactions or the same pieces of 8724 1 information being discussed in those two separate 2 memos. 3 Q. And you don't know whether or not the 4 documents that Mary Clark showed you dealt with 5 the same series of transactions or the same caps 6 that are being discussed in this memorandum, do 7 you? 8 A. Not without having a complete set, no. 9 Q. Now, it says "USAT has maximized its 10 maturity matching credit using mirrors." 11 Do you see that? 12 A. I see that. 13 Q. What do you mean by "mirrors" there? 14 A. Basically, there were -- at least from 15 my perspective -- and this was a memo written from 16 my perspective and no other, which is why it has 17 "confidential." There were a number of different 18 reporting methodologies. There was regulatory 19 reporting. There was GAAP, generally-accepted 20 accounting principles. There was portfolio 21 management reporting. 22 So, there were a number of different 8725 1 ways to report the numbers depending upon the 2 management need and the management information. 3 And as a result, assets, liabilities, swaps were 4 in different locations within the organization. 5 And to pull together reports, depending upon what 6 the specific need was, you had to go to different 7 sources and pull different pieces of information. 8 Q. Are you saying you can just take some 9 asset that's over here, move it over here for 10 another purpose -- 11 A. I would say if you wanted to look at 12 mortgage-backed securities that Sandy Laurenson 13 managed, you would have to take some information 14 from subsidiary records, United MBS, you would 15 take some information from the association, and 16 you would have to combine it and put it together 17 in a report somewhere else. 18 So, depending upon what the management 19 need and the management reporting was for a piece 20 of the business or a portfolio within the 21 consolidated entity, you would have to pull 22 information from different sources. 8726 1 Q. Well, what was the regulatory loophole 2 that you're addressing there? 3 A. Basically, maximizing -- I believe 4 maximizing maturity matching credit. 5 Q. Did you get advice from any of the 6 lawyers for USAT on whether you were properly 7 interpreting the regulations to ascertain if there 8 was a loophole? 9 A. Before we executed a trade, there would 10 have been a review by someone to make sure it 11 was -- 12 Q. Do you recall? I'm not asking you to 13 speculate. I'm asking you -- 14 A. No, I don't recall. 15 Q. You don't recall whether or not -- 16 A. No. 17 Q. -- it was consolidated? Do you know 18 what the regulation was that you're referring to 19 there? 20 A. Just the maturity matching credit. I 21 don't know specifically line and verse a 22 regulation, no. 8727 1 Q. Okay. 2 A. Once again, this was my interpretation. 3 I was clearly not the in-house expert on what 4 regulations were and what we could or couldn't do. 5 This was kind of a sit down, brainstorm, 6 thought-type memo. 7 Q. Well, the transaction did take place. 8 The transfer that you're describing did take 9 place, didn't it? 10 MS. CLARK: Mr. Guido -- 11 Q. (BY MR. GUIDO) Whatever the term 12 "transfer" refers to. 13 MS. CLARK: I object. Mr. Guido is 14 very familiar with the fact that his own expert 15 has come in and testified that there was no 16 transfer. And he's -- I think that question is 17 improper and misleading to the witness. 18 MR. GUIDO: Well, Your Honor, I don't 19 think that the witness has testified to that. 20 This witness has written a memorandum that says 21 that the caps were transferred from United MBS to 22 USAT for maturity matching credit purposes. I'm 8728 1 trying to ascertain how he's using the term 2 "transfer." 3 MS. CLARK: I object to the question. 4 It's misleading. Mr. Guido knows that his own 5 expert has confirmed that the caps were on the 6 books and records of USAT throughout. They were 7 purchased through USAT. They were never anywhere 8 other than the general ledger. This witness has 9 said he doesn't know whether the memo was accurate 10 or not, and he's suggesting to this witness that 11 the transfer occurred. And it's contrary to his 12 own testimony. 13 MR. GUIDO: Let me add another document 14 to the record, Your Honor. I think it will help 15 Ms. Clark with her misunderstanding of the facts. 16 Q. (BY MR. GUIDO) It's Exhibit B1797. 17 It's dated October 19th, 1987, from Jenny Whyte, 18 treasury, to Sandy Laurenson. It's regarding 19 United MBS caps. 20 MR. GUIDO: I'd like to move its 21 admission. I don't think it -- it may have 22 previously been admitted, but I'm not sure. 8729 1 MS. CLARK: What number is that, 2 Mr. Guido? 3 MR. GUIDO: B1797. 4 MR. NICKENS: Tab 320. 5 Q. (BY MR. GUIDO) Who is Jenny Whyte? 6 A. I believe she was someone that worked 7 in the treasury operations area. 8 Q. Did she report to you? 9 A. She reported probably to Ted Grove or 10 Mary Mims, who reported to myself. 11 Q. Okay. And did she -- it says a copy of 12 this memorandum went to you. 13 Do you see that? 14 A. I see that. 15 Q. Do you have any reason to dispute the 16 accuracy of the document? 17 A. I have no basis for being able to tell 18 one way or another. 19 Q. Okay. And the document discusses 20 various cap agreements, does it not, or lists cap 21 agreements? 22 A. Looks like it's a list of cap 8730 1 agreements. 2 Q. And it lists on US34273 at the heading, 3 it says "United MBS cap rate reset dates," does it 4 not? 5 A. "Reset dates," yes. 6 Q. What does "United MBS" refer to? 7 A. It's the name of a subsidiary. 8 Q. And what was that subsidiary? 9 A. United MBS. 10 Q. Is that the same subsidiary that's 11 referred to in your memorandum of June 17th, '87, 12 which is Exhibit T4125? 13 A. In which line? 14 Q. It says, "Interest rate caps were 15 transferred from United MBS to USAT for maturity 16 matching purposes." 17 A. I think United MBS and United MBS are 18 probably the same. 19 Q. The same entity? Okay. Now, how were 20 you using the term "transferred" in the memorandum 21 that is marked as Exhibit T5125? 22 A. I don't know. 8731 1 Q. You don't know? Is it fair to say that 2 it at least included that it was allocated by the 3 treasury department? 4 A. I think that's -- we could say that. 5 Q. We could at least say that much, even 6 if we don't know who owned them in a legal sense? 7 A. Well, it could have been allocated; but 8 allocated where, I do not know. It wasn't 9 necessarily allocated to United MBS. 10 Q. Well, it says it was transferred from. 11 So, it must have been previously at least 12 allocated to United MBS? 13 A. I don't know that. 14 Q. You don't know that? 15 A. I think other documents have shown 16 factually there may be a problem with that 17 statement. So, I don't know that. 18 Q. Okay. Now -- but you do agree that the 19 term at least includes allocated. Right? 20 A. Allocated somewhere, yes. 21 Q. Okay. From somewhere. Right? And 22 this says "from United MBS"? 8732 1 A. When I say "allocated," I mean those 2 caps were allocated somewhere within the 3 organization. Not from, to anything. They were 4 allocated with some transaction or there could 5 have been a general hedge. I have no idea where 6 they were allocated. 7 Q. Well, the memorandum says "By 8 management approval, $710 million of interest rate 9 caps were transferred from United MBS." 10 Do you see that? 11 A. I think so. 12 Q. It meant that they at least must have 13 been allocated to UMBS prior to being transferred 14 from them, does it? 15 A. No, it does not. 16 Q. What does that mean? 17 A. I don't know what it means. Factually, 18 the information contained in that line may not be 19 correct. So, sometimes people make errors. And 20 when I was writing this information or writing 21 this memo, I may not have had my facts together 22 when I put it in paper or on paper. 8733 1 Q. So, you're now saying that 12 years 2 later, although you can't remember anything else, 3 that now you believe that something you remember 4 you can't -- is not accurate that you wrote 12 5 years ago? 6 MR. NICKENS: Your Honor -- 7 A. All I can say is I've seen a document 8 that shows contrary. 9 Q. (BY MR. GUIDO) Now, it says that 10 you've used mirrors. Okay? And you talk about a 11 regulatory loophole. What was it that was the 12 regulatory loophole? 13 A. I think I just said that a few minutes 14 ago. The maturity -- using the maturity matching 15 credit. 16 Q. Was a regulatory loophole? 17 A. Those are my words and my 18 interpretation. 19 Q. And what happened when you allocated 20 those caps to USAT to the risk profile of United 21 MBS? 22 A. I don't know because I don't know where 8734 1 those caps were originally allocated or assigned 2 or belonged to. 3 Q. Now, look at the next bullet. It says, 4 "The investment bankers that provide reverse repo 5 lines were given comfort that United MBS was an 6 MBS risk-controlled arbitrage subsidiary. In 7 fact, it is basically 1.6 billion of unhedged MBS 8 because of the assets and hedges transferred to 9 USAT. 10 What happened to the risk profile as a 11 consequence of the transaction that you're 12 describing in that June 17th, 1987 memo, to the 13 risk profile of United MBS? 14 A. I don't know. All I can tell you is 15 from Point 2, it would have implied an increase. 16 But based on what we've talked about before 17 regarding the first paragraph, if the first 18 paragraph is incorrect or factually incorrect, 19 Bullet Point 2 isn't necessarily correct. 20 Q. Because they may never have been there 21 in the first place. Is that what you're saying? 22 A. I don't know where they were. 8735 1 Q. Okay. So, all we have to rely upon is 2 not your recollection but the various documents 3 that exist and we have to sort through those 4 documents. Is that what you're saying? 5 A. I believe there has been 10 years to go 6 through those documents, yes. I have not had -- 7 or I have not gone through those documents; so, I 8 don't know. 9 Q. Now, I'd like to move on to another 10 subject. 11 MR. GUIDO: Oh, excuse me, Your Honor. 12 I'd like to move on to another subject. 13 Q. (BY MR. GUIDO) And that is, I'd like 14 to direct your attention to Exhibit A5017, which 15 is the December 1986 performance report. And I'd 16 also like you to take a look at Exhibit A5028, 17 which is the fourth quarter 1987 performance 18 report. It's dated February 4th, 1988. And it's 19 a memo from Mike Crow to the board of directors. 20 MR. GUIDO: I don't know whether or not 21 the second document has been introduced as yet. 22 MR. NICKENS: What was it? 8736 1 MR. GUIDO: I don't think it has. 2 MR. EISENHART: Could we have the 3 exhibit number for the second document? 4 MR. GUIDO: A5028. 5 Q. (BY MR. GUIDO) I'd like you to take a 6 look at the document that has the Exhibit 5017 and 7 direct your attention to the schedule which is DJ 8 that is included in that document. It's headed 9 "Gain on sale of investment security." 10 Have you found that page? 11 A. I believe so. 12 Q. Now, it shows that for the month of 13 December 1986, the current month, that there were 14 a total sales made of investment securities of 15 988,454,000. 16 Do you see that? 17 A. I do. 18 Q. And of those, it shows that 172 million 19 499 was in sales of Fannie Mae mortgage-backed 20 securities. 21 Do you see that? 22 A. I do. 8737 1 Q. And 613,755,000 were sales of Freddie 2 Mac mortgage-backed securities. 3 Do you see that? 4 A. I do. 5 Q. And $48 million of Ginnie Mae 6 mortgage-backed securities were sold. 7 Do you see that? 8 A. Yes, I do. 9 Q. And then it shows that the total gain 10 on those sales was 14,498,000. 11 Do you see that? 12 A. Yes, I do. 13 Q. What I'd like -- 14 MR. EISENHART: Your Honor, that last 15 question, as phrased, I think is very confusing 16 because Mr. Guido used the term "those sales" 17 which I think in the record will reflect back to 18 the three he just detailed rather than to the 19 entire list. 20 MR. GUIDO: I'm sorry. I will clarify 21 it for you, Mr. Eisenhart. 22 Q. (BY MR. GUIDO) The "those" that I was 8738 1 referring to were all of the sales of the 2 investment securities. And why don't we clarify 3 the record even further? 4 Of the 14,498,000, there were losses 5 and gains, right? And that column, the 6 14,498,000, is a net figure; is that right? 7 A. Yes. 8 Q. Okay. And that the gains on the Fannie 9 Mae mortgage-backed securities totaled 3,555,000. 10 Right? 11 A. Yes. 12 Q. And that the gains on the Freddie Macs 13 totaled 12,543,000. Right? 14 A. Yes. 15 Q. And the gains on the Ginnie Maes were 16 150,000. Right? 17 A. Yes. 18 Q. And what does that -- what do those 19 three figures total up to? 20 A. You're asking me? 21 Q. Uh-huh. 22 A. You'd have to give me a calculator. 8739 1 15, $16 million. 2 Q. Approximately? 3 A. Plus or minus. 4 Q. So, it was more than the 14 million 5 498. Right? 6 A. Yes. 7 Q. Now, the -- I'd like you to turn and 8 look now at Exhibit 5028, which is the 9 December 1987 performance report. Just direct 10 your attention to the first page. You see where 11 the entry under "non-interest income" appears? It 12 says "Gain on sale of security" -- 13 A. I'm not following you. I'm not on 14 5028. 15 Q. I'm sorry. 16 A. The first page? 17 Q. The first page of the memorandum from 18 Ron Carlson to Jenard Gross and Mike Crow dated 19 February 3rd, 1988. 20 Do you see that page? 21 A. Yes. 22 Q. Okay. And that sets out the 8740 1 performance for the month of December and for the 2 year 1987, does it not? 3 A. I believe that's what this represents. 4 Q. And see the entry under "non-interest 5 income" that says "gain on sale of securities"? 6 A. Yes. 7 Q. And you see the 1987 actual figure 8 $54 million? 9 A. Yes. 10 Q. And that -- the gain on sale of 11 securities includes what, in your understanding? 12 A. I don't have a list of what that 13 includes. 14 Q. Well, does that include the high-yield 15 bond portfolio sales? 16 A. It could. 17 Q. And does it include the mortgage-backed 18 security sales? 19 A. It could. 20 Q. And did it include the equity arbitrage 21 sales? 22 A. I don't know. Probably not because 8741 1 equity arbitrage is broken out separately. 2 Q. Do you recall that you testified 3 earlier the other day that the reference to sale 4 of securities in these performance reports refer, 5 to your recollection, primarily to mortgage-backed 6 securities and high-yield bond sales? 7 A. Generally, yes. 8 Q. Now, I'd like to direct your attention 9 to another exhibit, and it is Exhibit A10745. 10 MR. GUIDO: And prior to doing so, I'd 11 like to move the admission of Exhibit B1495 and 12 A5028. 13 MS. CLARK: No objection. 14 THE COURT: That was B1495 and what 15 else? 16 MR. GUIDO: And A5028, Your Honor. 17 THE COURT: Received. 18 Q. (BY MR. GUIDO) Have you had an 19 opportunity to review A10745? 20 A. The first page, I have. 21 Q. Is that your initials next to your 22 name? 8742 1 A. Yes. 2 Q. And this is a memo dated May 19th, 3 1987, from you to Mike Crow referring to USAT 4 operating earnings after spin-off of real estate. 5 Do you see that? 6 A. I see that. 7 Q. And then it says, "As the attached 8 analysis indicates, even after spin-off of 9 400 million of real estate owned and real estate, 10 USAT will continue to report an operating loss of 11 about $35 million annually. The primary reasons 12 are" -- and then Point 2, "The association has 13 extracted most of the gains from its earnings 14 asset base, which has reduced the net interest 15 spread to about .68 percent. Because in excess of 16 40 percent of USAT assets consist of 17 mortgage-backed securities, this spread could 18 deteriorate in a volatile interest rate 19 environment." 20 Do you see that? 21 A. I see that. 22 Q. Do you recall writing that? 8743 1 A. No. 2 Q. Do you have any reason to believe that 3 it isn't true? 4 A. That what isn't true? 5 Q. The statement that's contained in that 6 point that says the association has extracted most 7 of its gains? 8 A. No. 9 Q. I'd like to direct your attention now 10 to another exhibit, which is Exhibit T4403, which 11 is a memorandum from you to the strategic planning 12 committee dated October 14th, 1987. And the 13 subject is UFG, Inc. mark-to-market valuations. 14 MR. GUIDO: I'd like to move the 15 admission of A10745, Your Honor. 16 MS. CLARK: No objection. 17 Q. (BY MR. GUIDO) Is that your initials 18 next to your name on the first page? 19 A. Yes, it is. 20 Q. And do you recall ever seeing this 21 document? 22 A. Not specifically. 8744 1 Q. Is this a document that you reviewed 2 with Mary Clark? 3 A. I don't believe so, no. 4 Q. Now, it says "Attached is a preliminary 5 mark-to-market valuation of UFG, Inc. based upon 6 the interest rate level in mid-September. As the 7 following table indicates, after adjusting for the 8 mark-to-market valuations, the company's net worth 9 falls to a negative position." 10 Do you see that? 11 A. Yes. 12 Q. And it shows the balances at 7-31. 13 Where did you get the mark-to-market adjustment 14 figures? 15 A. I don't know without having files and 16 work papers. 17 Q. Looking -- take a look at the second 18 paragraph. It says "The major component of the 19 mark-to-market adjustments were goodwill and MBS 20 as summarized below." 21 Do you see that? 22 A. I see that. 8745 1 Q. They it says "Mortgage-backed 2 securities and hedges, negative $314 million." 3 Do you see that? 4 A. I do. 5 Q. Did you take that figure from one of 6 the sensitivity analyses that were done? 7 A. I think I said without my files and 8 work papers, I do not know where these numbers 9 came from. 10 Q. Well, let's turn to the next page. 11 Maybe the next page will help you. 12 A. Okay. 13 Q. The top paragraph says, "Relative to 14 the Smith Breeden review in September 1986, the 15 negative mark-to-market adjustment has increased 16 about 50 million as summarized below and in detail 17 on Exhibit 2." It says "Smith Breeden, negative 18 $554 million." 19 Do you see that? 20 A. I see that. 21 Q. Do you recall Smith Breeden doing a 22 mark-to-market analysis sometime in September of 8746 1 1986 at USAT? 2 A. Not specifically. They very well could 3 have done one; but I don't specifically remember, 4 no. 5 Q. And then there are some adjustments to 6 those figures. 7 Do you see those? 8 A. I see that. 9 Q. Do you recall where you got the 10 information for the adjustments? 11 A. I do not. 12 Q. Then let's jump down two paragraphs. 13 Do you remember I asked you whether you knew why 14 the losses in the investment committee minutes in 15 the mark-to-market that was done as either a 16 liquidation valuation or a sensitivity analysis by 17 Sandy Laurenson had jumped from 100 million to -- 18 in January of 1987 to 197 million in May of 1987 19 and then in December of '87 to about 281 million 20 and you said you didn't know. 21 Do you recall that? 22 A. Yes. 8747 1 Q. Does the next paragraph refresh your 2 recollection of why those losses started at 3 100 million, jumped to 197 million in May, and 4 then to 281 million in December of 1987? 5 A. No. 6 Q. This says "The increased losses in MBS 7 and investment securities were largely 8 attributable to a rise in interest rates and gains 9 on sales of securities taken out of the 10 portfolios." 11 Do you see that? 12 A. I see that. 13 Q. What does that refer to? 14 A. That refers to the documents that I was 15 using as a basis for this memo. 16 Q. And that those documents explained the 17 reasons for the increased losses in the 18 mortgage-backed securities and investment 19 securities portfolios? 20 A. No. They would break out by balance 21 sheet category what the net changes were. 22 Q. They didn't tell you why those losses 8748 1 occurred. They just showed you what a figure was, 2 didn't they? 3 A. Right. They just show what a figure 4 was. They don't explain -- 5 Q. This says "The increased losses in MBS 6 and investment securities were largely 7 attributable to a rise in interest rates and gains 8 on sales of securities." 9 Those seem to be causes for those 10 losses. 11 A. Well, this refers to securities. It 12 doesn't refer to mortgage-backs. 13 Q. Oh, okay. So, you don't think that the 14 gains on sales of the mortgage-backed securities 15 is included in that sentence? 16 A. I don't know what is included in that 17 sentence. I do not have the work papers that were 18 used to develop this information; so, I cannot 19 tell you specifically the components of that. 20 Q. Well, you didn't send in a memorandum 21 to the strategic planning committee that you knew 22 was ambiguous, did you? 8749 1 A. I may have. 2 Q. You may have done that deliberately? 3 A. No. It says "sales of securities." 4 That, by definition, is -- today, I can't tell you 5 whether those are corporate securities or 6 mortgage-backs or treasuries or what those are. 7 Q. Well, let's take off -- drop off the 8 "on gains of sales of securities." Okay? Taken 9 out of the portfolios. Just put that aside. 10 A. Okay. 11 Q. Were there more than one security 12 portfolio? 13 A. I think you've seen other exhibits. 14 There were -- the portfolios were broken out into 15 different components. 16 Q. Besides mortgage-backed securities? 17 A. Well, there is corporate securities. 18 There is treasury securities. 19 Q. What do you mean by "treasury 20 securities"? 21 A. There is something we've called a 22 liquidity portfolio where we have treasury 8750 1 securities. 2 Q. And you -- and you also have 3 mortgage-backed securities in there. Right? 4 A. There are mortgage-backed securities 5 that are in the treasury portion of the 6 mortgage-back portfolio. 7 Q. Right. Let's just drop off the "and" 8 to the rest of the sentence. Okay? It says "The 9 increased losses in MBS and investment securities 10 were largely attributable to a rise in interest 11 rates." 12 That rise in interest rates isn't 13 qualified by particular portfolios, is it? It 14 refers to both mortgage-backed securities and 15 investment securities, does it not? 16 A. Right. Right. 17 Q. So, it's fair to assume that one of the 18 reasons for the losses was a rise in interest 19 rates? 20 A. I think that's what this says. 21 Q. Okay. 22 THE COURT: Mr. Guido, how much more 8751 1 are you going to have? 2 MR. GUIDO: I'm just finishing this 3 exhibit and one more exhibit, Your Honor, and then 4 I'm ready to take a break and -- I'm finished with 5 the witness. 6 THE COURT: How much more are you going 7 to have with the witness? 8 MR. GUIDO: I have one more exhibit 9 after this exhibit, Your Honor. 10 THE COURT: All right. 11 MR. GUIDO: One, maybe two. But I 12 think there is just one more left in this packet. 13 Yes. There is one more exhibit, Your Honor. 14 Q. (BY MR. GUIDO) Now, let's move on to 15 that next exhibit, which is T4422, which is a 16 memorandum to the strategic planning committee 17 from Michael Crow dated December 10th, 1987. 18 MR. GUIDO: And I'd also at this point 19 in time, Your Honor, like to move into evidence 20 T4403. 21 MS. CLARK: No objection. 22 THE COURT: Received. 8752 1 Q. (BY MR. GUIDO) T4422 is a memorandum 2 from Mike Crow to the strategic planning committee 3 dated December 10th, 1987. And my first question 4 is: Have you seen this document before? 5 A. I may have sometime in my life, but I 6 haven't seen it recently. 7 Q. Were you a participant in strategic 8 planning committee meetings? 9 A. I may have been. 10 Q. Do you recall discussions in strategic 11 planning committees regarding the performance of 12 USAT and its subsidiaries? 13 A. I don't specifically remember 14 discussions concerning that, but I would guess 15 those would have been included in any meetings or 16 discussions we would have had, yes. 17 Q. Okay. Now, in this memorandum, it sets 18 out, first, the background. It says "As a result 19 of deliberations during the year 1983 and the 20 successful year end 1984 branch sale which created 21 significant capital, United embarked upon a, 22 quote, 'wholesale strategy,' close quote. These 8753 1 activities included equities, junk bonds, MBSs, 2 Bank United, real estate merchant banking lending, 3 venture capital, et cetera." 4 Do you see that? 5 A. I see that. 6 Q. Do you recall those facts having 7 occurred in 1983, 1984? 8 A. I wasn't there in 1983. I don't know 9 when I started in -- 10 Q. Now, this says that -- and look at the 11 next-to-the-last paragraph, the last two lines 12 where it's talking about year end 1984. You were 13 there in year end 1984, were you not? 14 A. I don't know. I may have been. 15 Q. Okay. It says "The investment 16 activities have been confined to modest 17 mortgage-backed securities portfolio and treasury 18 issues. The liability structure was conservative 19 with virtually no broker deposits, branch deposits 20 of 2.3 billion, and reverse repos totaling only 21 $59 million." 22 Do you see that? 8754 1 A. I see that. 2 Q. Does that accurately describe the 3 investment activities and the liability structure 4 of USAT when you first joined it? 5 A. I don't know. 6 Q. You don't? 7 A. No. 8 Q. You just don't recall? 9 A. I do not recall, no. 10 Q. All right. And then it says, "Results. 11 The results of the wholesale strategy over the 12 past three years have not been good. Clearly, the 13 collapse of real estate values in Texas and the 14 accompanying severe asset quality problems have 15 hampered the strategy. However, one cannot escape 16 the fact that irrespective of the market-created 17 asset quality problems, many of the major 18 activities as part of the wholesale activity have 19 been disappointing." 20 Do you see that? 21 A. I do. 22 Q. Do you agree with that statement? 8755 1 A. I don't have information to be able to 2 form an opinion at this point in time. When was 3 this? 4 Q. Now, take a look at -- look at the junk 5 bond paragraph. It says "Junk bonds over the 6 three-year period have averaged 418 million and 7 have resulted in net profits of 20 million." 8 Do you see that? 9 A. I see. 10 Q. And then it says "The net annualized 11 rate of return on assets was 1.87 percent." 12 Do you see that? 13 A. I see that. 14 Q. "As in all figures within this report, 15 returns and profit quotations are given net of 16 mark-to-market adjustments on the underlying 17 portfolio." 18 Do you see that? 19 A. I see that. 20 Q. Do you know what the value of that junk 21 bond portfolio was at the date of this memorandum? 22 A. I do not. 8756 1 Q. Do you know what interest rates had 2 done at the end of 1987? 3 A. I do not. 4 Q. Now -- then let's move down to the 5 second-to-the-last bullet point. It says "United 6 engaged in an original mortgage-backed securities 7 arbitrage program (often called 'Joe's portfolio') 8 which has averaged approximately 672 million over 9 the three-year period 1985 through the current 10 date. Over this period, the portfolio has lost 11 $57 million, producing an annualized return on 12 assets of minus 2.67 percent." 13 Do you see that? 14 A. I see that. 15 Q. Is that statement accurate? 16 A. I have no way of being able to tell you 17 one way or the other. 18 Q. Does that figure include mark-to-market 19 losses? 20 A. I think you read up at the very top 21 that it did; so, I would assume that it does. I 22 do not know because I didn't put the numbers 8757 1 together, nor do I have the work papers to 2 understand where it came from. 3 Q. Okay. Then look at the last. It says 4 "United MBS Corporation was formed in 1987 and for 5 the year averaged total assets of 1.5 billion. 6 Counting mark-to-market losses, the activities 7 lost 96 million for a negative return of minus 8 5.99 percent." 9 Do you see that figure? 10 A. I see that. 11 Q. Now, these figures show results 12 different than those performance reports we just 13 looked at, do they not? 14 A. I believe so. 15 Q. Why is that? 16 A. Because this includes mark-to-market 17 type adjustments. 18 Q. Now, when did you leave USAT? 19 A. The end of 1988. 20 Q. And why did you leave? 21 A. I was asked to. 22 Q. Who asked you to leave? 8758 1 A. That's a good question. I don't know. 2 Q. Well, who specifically transmitted a 3 message to you that you should leave? 4 A. It was Kevin or Neil Twomey. 5 Q. Kevin who? I'm sorry. 6 A. Somebody Twomey. 7 Q. Neil Twomey, I think, is his name. 8 A. Probably. 9 Q. And did he tell you why? 10 A. No, he did not. 11 MR. GUIDO: Your Honor, at this point 12 in time, I'd like to move into evidence T4422 13 which I omitted to move into evidence. 14 MS. CLARK: No objection. 15 THE COURT: Received. 16 Q. (BY MR. GUIDO) Now, where did you go 17 to work after you left USAT? 18 A. First City National Bank. 19 Q. And how soon after you left USAT did 20 you go to work there? 21 A. I don't recall. 22 Q. What was your position there when you 8759 1 assumed a job there? 2 A. I don't even recall that. It was a 3 vice president in the financial planning and 4 analysis group. 5 Q. And how long did you stay there? 6 A. A year or two maybe. 7 Q. Okay. And then what did you do? 8 A. I moved to Texas Commerce Bank. 9 Q. And to what position did you move? 10 A. Similar capacity. 11 Q. Okay. And what is your position at 12 Texas Commerce Bank today? 13 A. I'm the manager of deposit and 14 investment products within the retail marketing 15 group. 16 MR. GUIDO: No further questions, Your 17 Honor. 18 THE COURT: We'll take a short recess. 19 20 (A short break was taken 21 at 2:48 p.m.) 22 8760 1 THE COURT: Be seated, please. We'll 2 be back on the record. I believe the direct 3 examination is completed. 4 MR. GUIDO: That's correct, Your Honor. 5 THE COURT: And Ms. Clark, you're going 6 to cross examine? 7 MS. CLARK: Yes, I am, Your Honor. 8 THE COURT: Proceed. 9 10 CROSS-EXAMINATION 11 12 (3:13 p.m.) 13 Q. (BY MS. CLARK) Mr. Williams, 14 Mr. Guido asked you a number of questions about 15 United's reliance on non-operating income and, in 16 particular, the sales of securities in order to 17 show a profit. 18 Do you remember those questions? 19 A. I remember some questions. 20 Q. Do you remember ever having a 21 discussion of that issue with the regulators? 22 A. I personally don't remember. 8761 1 Generally, I didn't go to meetings with 2 regulators. 3 Q. I'm going to ask you to look at a 4 document that we have marked as Exhibit B4001. 5 This document is a memorandum to -- 6 MR. GUIDO: Your Honor, I object. Any 7 questions to him on this line is going beyond the 8 scope of direct. It's asking this witness 9 questions about USAT's relationship with 10 regulators, and there were no questions asked of 11 this witness with regard to the relationship with 12 regulators. 13 And in addition to that objection, I 14 object to the fact that we haven't received any 15 documents that pertain to a new subject prior to 16 the documents being introduced at this hearing. 17 Mr. Villa did the same thing, as I recall, a few 18 weeks ago with documents. He gave the Court a 19 packet of documents. He gave Mr. Langdon a packet 20 of documents. He gave the witness a packet of 21 documents and then rushed through those documents. 22 I believe that that prejudices the OTS' ability to 8762 1 prepare redirect or cross in this case. And we 2 believe that we're entitled to the documents 3 before they are given to the witness at the 4 hearing or at least notice of what the documents 5 are so we can pull them from our set of the 6 exhibits so that we can be prepared. 7 For that reason, I object to this line 8 of questions, Your Honor. I believe it is 9 patently unfair and deliberately done so, Your 10 Honor. 11 MS. CLARK: May I address those in 12 turn, please? This document is going -- it 13 relates to an issue on which Mr. Guido has 14 questioned this witness at considerable length, 15 which is the question of United's reliance on 16 non-operating income. As to the question of 17 whether he's entitled to receive all of our 18 cross-examination documents prior to the time we 19 begin cross-examination, that is not the 20 arrangement and has not been the arrangement since 21 the beginning of the trial. We are providing him 22 copies of the documents now, and he has them in 8763 1 place. 2 Mr. Nickens can speak more to the 3 arrangements that have been in place. But this is 4 customary. We have never had any arrangements 5 whatsoever to provide him the documents the day 6 before. 7 MR. GUIDO: Your Honor, I'd like to 8 make one point. I'd like Ms. Clark to describe to 9 the Court what statement this witness made that 10 she's cross-examining him about because she 11 believes the statement is erroneous. That's what 12 cross-examination is about, Your Honor, and 13 Ms. Clark is going into a whole new area. And I 14 think it will be very clear when she answers the 15 question of what statement this witness is being 16 asked to clarify or she's attempting to impeach 17 because that's what cross-examination is about, 18 Your Honor. 19 We have over and over again sat and 20 listened to questions that are direct under the 21 guise of cross-examination, albeit for purposes of 22 accommodating the witnesses. But I believe, Your 8764 1 Honor, that it's being done to prejudice the OTS' 2 ability to prepare for the witness', I believe, 3 direct examination, Your Honor. 4 And so, therefore, I vehemently object 5 to this line of questions and the introduction of 6 this exhibit that the respondents are repeatedly 7 dropping exhibits on the table of the OTS right 8 before the questions are being asked. There is no 9 opportunity to review the documents. This one is 10 only a three-page document. When Mr. Villa did 11 it, Your Honor, we were dealing with 10Ks and 12 10Qs. There were an enormous number of questions 13 that could have been asked on redirect based on 14 that had we been given an opportunity under the 15 ordinary procedures to have the documents 16 beforehand and be able to review the questions 17 that are asked at that time. I do not believe 18 that this document, nor the questions that 19 Ms. Clark is about to ask about this document, 20 have anything to do with anything that this 21 witness testified except very tangentially. But 22 this document is not being introduced to challenge 8765 1 anything that this witness had to say today, Your 2 Honor. 3 MR. NICKENS: Your Honor, we're ten 4 weeks into the trial and these procedures have 5 been well established for a long time. It is true 6 that the OTS chose to supply us, prior to their 7 examinations, with a list of documents that they 8 might use so that we could copy them for our own 9 use -- this came up in the very first week -- as 10 opposed to supplying us with five copies for all 11 the counsel here. This is the procedure that we 12 have followed for nine weeks, and it can't 13 possibly be a surprise to Mr. Guido that we would 14 continue to follow the same procedures. 15 With regard to the examination of the 16 witness, No. 1, he's here to provide whatever 17 information that he has concerning the issues that 18 have been brought by the OTS in the notice of 19 charges. Ms. Clark can address this more 20 directly, but I believe that this document goes 21 precisely to a large number of questions having to 22 do with Mr. Guido's -- Mr. Guido's questions 8766 1 concerning the reliance on sales of assets in 2 order to improve the profitability of the 3 institution. And, indeed, he did ask him 4 questions about the examiners. He asked him in 5 particular whether he had a document that he 6 intended to keep from the examiners. But in any 7 event, we ought to get his testimony. 8 Now, what Your Honor doesn't know at 9 this point is that the witness has informed 10 Mr. Guido that he can't come back tomorrow. And, 11 therefore, he had given us this time and the OTS 12 has taken up basically all of that time with the 13 direct examination, leaving us with only a few 14 hours to try to conduct our cross-examination. 15 MR. GUIDO: Well, Your Honor, nothing 16 the witness has ever said to me said he couldn't 17 come back at another point in time. I questioned 18 the witness about what I had to question the 19 witness about. If the witness chose to have other 20 priorities, as he's testified about, so be it. He 21 can come back at a later point in time, Your 22 Honor. But I believe I'm entitled to ask the 8767 1 witness, since he's under subpoena, the questions 2 that I believe that I'm entitled to ask and need 3 to ask him to demonstrate our case. But that has 4 nothing to do, Your Honor, with the fact that this 5 memorandum has nothing to do with impeaching this 6 witness' testimony about anything he's testified 7 today, Your Honor. And that is what I object to. 8 I have objected to it from the very beginning. I 9 have objected to the procedure. Mr. Nickens seems 10 to say, well, apparently, you know, I snuckered 11 the OTS and, therefore -- I've been able to get 12 away with it this long. Let me get away with it 13 longer. 14 Your Honor, I vehemently object to this 15 procedure, and we believe that it is prejudicing 16 the OTS' ability to prepare its response to what 17 it believes is direct testimony. 18 THE COURT: Well, one difficulty here 19 is it seems to me the witness is not provided a 20 great deal of information. I mean, any documents 21 shown to him would almost be to refresh his 22 recollection because he has not been able to give 8768 1 us any testimony of substance about much of 2 anything. It seems to me you're showing him 3 documents and he says he doesn't remember or can't 4 verify them without further pieces of paper. 5 MR. GUIDO: Well, Your Honor, this is 6 not a record of this client's operations at USAT, 7 which is what he says he would have to have to do 8 that. This is an interoffice memorandum of the 9 OTS. This has nothing to do with anything that 10 will refresh this witness' memory based on his 11 testimony today, Your Honor. And we believe that 12 this is being done intentionally to bring in a new 13 subject matter, and that is what the regulators 14 knew or didn't know about what USAT was doing, not 15 any questions that I asked this witness about what 16 USAT was doing. 17 THE COURT: Well, in view of what's 18 been said about the availability of the witness, 19 I'd like to proceed. I'm going to allow this 20 document to be used. If you think that it's 21 important, you may examine these documents and 22 bring the witness back and have your own questions 8769 1 about them. 2 MR. GUIDO: Your Honor -- 3 THE COURT: Yes. 4 MR. GUIDO: -- as a compromise, I would 5 like to have the documents that are being used to 6 get direct testimony from witnesses in 7 cross-examination. That's all I ask for at this 8 point in time. Since you've denied my motion and 9 allowed the admission of the documents, I think 10 counsel should be required to provide documents 11 that are covering new subject matters prior to 12 them being used in the hearing, just as I have 13 been religiously providing them to opposing 14 counsel. If that isn't the procedure, the 15 reciprocal providing of documents, it seems that 16 the proceeding is a very unfair proceeding to the 17 OTS. 18 MS. CLARK: Your Honor, this is 19 cross-examination. I'm exploring an issue that 20 was opened up by Mr. Guido's questions about 21 reliance on non-operating income, about hiding 22 things from the examiners. This document cannot 8770 1 possibly be a surprise to Mr. Guido. He produced 2 it to us. It is from the files of the Federal 3 Home Loan Bank of Dallas. It is not a surprise 4 document to Mr. Guido. We have spent over two 5 days having this witness questioned largely about 6 documents he's -- he has not been party to and 7 events he hasn't been party to. This relates to a 8 meeting which this witness attended, and I'd like 9 to use the document to refresh his recollection 10 about it. I would like to proceed. We have 11 limited time available. 12 MR. GUIDO: Your Honor, we have a 13 standing objection to the use of all of these 14 documents. 15 Q. (BY MS. CLARK) As I said, this is a 16 document to the file by Ginger Baugh that was 17 produced by the Federal Home Loan Bank of Dallas 18 through OTS enforcement counsel. It's been so 19 stipulated by OTS. 20 During this colloquy, have you had a 21 chance to look at the document, Mr. Williams? 22 A. I've looked at some of it, yes. 8771 1 Q. Okay. The last page of the document 2 appears to be a list of individuals and their 3 positions and their associations. 4 Did you sign this list? 5 A. That's my signature on the back, yes. 6 Q. Okay. Bruce Williams. And who are the 7 other individuals on the list? Do you recall? 8 A. Jeff Gray was real estate manager. 9 David Graham worked in real estate. Joe Phillips 10 worked in investments. Mike Crow was my 11 supervisor. Art Berner was our legal counsel. 12 And Neil Twomey was a Federal Home Loan Bank 13 representative, I believe, as was Ginger Baugh. 14 Q. The document relates to a meeting that 15 was held at the Federal Home Loan Bank. 16 Do you recall attending a meeting with 17 these individuals as reflected in this document? 18 A. No, I do not. 19 Q. Okay. I'm going to ask you to focus, 20 if you -- do you recall ever attending a meeting 21 with the Federal Home Loan Bank people? 22 A. I may have attended one or two meetings 8772 1 related to compliance-type issues, but I really 2 don't recall specifics. And once again, 3 generally, I didn't meet with the regulators or 4 the examiners or that type of group unless there 5 may have been questions related to how we booked 6 securities. So, I really don't recall meeting 7 with them. 8 Q. In this memo, Ginger Baugh describes 9 issues discussed at this meeting. And I would 10 like you to focus, if you would, on the second 11 page and on the issues discussed in the second 12 full paragraph and the third full paragraph. 13 The second full paragraph says, 14 "Supervisory Agent Twomey stated his concern with 15 the net operating losses in the association. He 16 discussed the fact that United has been depending 17 on gains from securities transactions and branch 18 sales to show net profit." 19 Do you see that? 20 A. Yes, I do. 21 Q. Do you recall ever discussing with the 22 regulators directly the fact that United has been 8773 1 depending on gains from securities transactions 2 and branch sales to show net profit? 3 A. I do not. 4 Q. Would you have any reason to dispute 5 the accuracy of Ginger Baugh's memorandum 6 concerning this meeting with respect to what Neil 7 Twomey stated in that regard? 8 A. I don't. I don't have any recollection 9 of the meeting. So, I have no way to really have 10 an opinion on that. 11 Q. The next paragraph says, "According to 12 Mr. Crow, income from securities transactions 13 should not be considered extraordinary, as United 14 has made them a part of its ordinary operations." 15 Do you see that? 16 A. Yes, I do. 17 Q. Do you recall Mike Crow ever taking the 18 position that income from securities transactions 19 should not be considered extraordinary in 20 discussions with the regulators? 21 A. I don't specifically recall him taking 22 that position, although it doesn't sound unusual. 8774 1 But I don't specifically remember any 2 conversations related to that. 3 Q. And again, would you have any reason to 4 dispute the accuracy of Ginger Baugh's memorandum 5 concerning what Mike Crow told the regulators 6 concerning USAT's income from securities 7 transactions being a part of ordinary operations? 8 A. No. 9 Q. As far as you know, did USAT make any 10 effort to keep the regulators from finding out 11 about its securities sales? 12 A. To my knowledge, no. I think there was 13 an ongoing effort made to provide reports both to 14 the state and Federal Home Loan Bank on investment 15 activities. 16 Q. I'd like to show you what's been 17 previously marked as Exhibit B591, and it was 18 admitted and it is found at Tab 582. 19 Would you take a moment to review this 20 document, please? 21 A. (Witness reviews the exhibit.) 22 MS. CLARK: I offer Exhibit B4001. 8775 1 MR. GUIDO: I object to the 2 introduction of that exhibit, Your Honor. 3 THE COURT: Received. 4 Q. (BY MS. CLARK) Now, do you recall 5 being involved in the preparation of the United 6 Savings Association growth plan that was submitted 7 to the regulators in September 1985? 8 A. Not specifically, but I may have been 9 involved in pulling together some of these 10 numbers. I couldn't identify which ones 11 particularly; but in all likelihood, I was 12 involved, at least on the edge, in putting some of 13 this together. 14 Q. Look at A10634 if you would, please. 15 That is previously admitted in at Tab 180. This 16 is a letter from USAT's in-house counsel to 17 Mr. Halverson at the Federal Home Loan Bank in 18 Dallas in May of 1986 concerning a meeting to 19 discuss USAT's senior subordinated debt 20 application. 21 Do you recall that USAT had submitted 22 an application to issue a senior subordinated 8776 1 note? 2 A. I don't remember specifically an 3 application. I know we were looking into issuing 4 senior subordinated notes of some kind; so, there 5 would have been paperwork related to it. 6 Q. And I'd like you to turn over, if you 7 would, to the description of the corporate bond 8 strategy on Pages 2 and 3. And in particular, if 9 you would look at the top of Page 3 where it 10 describes for the benefit of the regulators the 11 objectives for USAT's investment decisions in the 12 corporate bond area. 13 Do the corporate bonds refer to 14 high-yield or junk bonds? 15 A. Yes, generally, they do. 16 Q. And do you see that the first objective 17 described is security of the association's 18 principal? 19 A. Yes. 20 Q. And the second is the maintenance of 21 interest rate spread? 22 A. Yes. 8777 1 Q. And the third is possible capital 2 appreciation? 3 A. Yes. 4 Q. How do you interpret the third 5 objective that is described in this letter to the 6 regulators concerning USAT's management of its 7 corporate bond portfolio? 8 A. That part of the results of investing 9 and maintaining this type of portfolio would 10 result in gains recognized on various 11 transactions. 12 Q. Going down to the third paragraph below 13 the numbered items, do you see that in this letter 14 to the regulators, Mr. Berner described the fact 15 that the investment in corporate high-yield bonds 16 had provided a recognized -- 17 MR. GUIDO: Which paragraph are you 18 referring to? 19 MS. CLARK: It's the fourth full 20 paragraph on Page 3 of the document. 21 MR. GUIDO: The one that starts "As set 22 forth in Exhibit A"? 8778 1 MS. CLARK: Yes. 2 Q. (BY MS. CLARK) Do you see that 3 Mr. Berner described in this letter to the 4 regulators that the investment in high-yield bonds 5 had provided a recognized profit of $27.2 million 6 since 1984 and as of April 30, 1986, the 7 association had an unrecognized gain of 8 approximately $11.6 million? 9 A. Yes. 10 Q. And that that gain was in addition to 11 the built-in interest rate spread of approximately 12 2.50 percent which the association has maintained 13 between the corporate debt and the matched 14 certificates of deposits? 15 A. Yes. 16 Q. And again, did you ever have the 17 impression that USAT was attempting in any form or 18 fashion to hide from the regulators the gains that 19 were being recognized in the high-yield or junk 20 bond portfolio? 21 A. Absolutely not. 22 Q. Take a look at Exhibit A10663. I 8779 1 believe Mr. Guido has already questioned you about 2 that document. It's the United Savings 3 Association of Texas business plan as of 4 August 29, 1986. And if you would, take a look 5 at -- 6 MR. GUIDO: What tab number is that? I 7 don't think it was addressed with the witness. I 8 think it was on the list of potential exhibits 9 that I gave you, Ms. Clark, but it was not on 10 the -- discussed with the witness. So, I think 11 your script is incorrect. You can go on. 12 MS. CLARK: I am mistaken in that 13 event, Mr. Guido. But I believe it was previously 14 admitted and is at Tab 184. 15 MR. GUIDO: Oh, I know that. 16 Q. (BY MS. CLARK) And I would like you 17 to look, if you would, at Page 27. First looking 18 the first page, this is a memorandum from Art 19 Berner to a number of people who are listed. And 20 he says in the memorandum, "Enclosed is a copy of 21 the business plan forwarded to the Federal Home 22 Loan Bank of Dallas. I have also included 8780 1 assumptions, method of calculation which was not 2 provided to the Federal Home Loan Bank. If you 3 have any questions, please feel free to contact 4 me." 5 Do you see that? 6 A. I see that. 7 Q. Okay. So, this is a copy of a business 8 plan that was sent to the Federal Home Loan Bank 9 of Dallas. If you would, please, look at Page 27 10 under "acquisition of capital." 11 Do you see under that heading the 12 business plan states that "Deposits are the major 13 source of the association's funds for lending and 14 other purposes. In addition to savings deposits, 15 the association derives funds from loan 16 repayments, proceeds of sales of loans, and loan 17 participations, Federal Home Loan Bank advances 18 and other borrowings, real estate sales, and sales 19 of investment securities." 20 Do you see that? 21 A. Yes, I do. 22 Q. And how do you interpret the term 8781 1 "investment securities" as used in this business 2 plan that was submitted to the regulators? 3 A. I don't know specifically what that 4 might include. My guess would be mortgage-backs 5 and corporate securities, which were our primary 6 investment securities. 7 Q. Mr. Guido asked about a memorandum that 8 you wrote on May 19th, 1987. The number is 9 A10745, and the subject of the memorandum was USAT 10 operating earnings after spin-off of real estate. 11 Do you have that document in front of 12 you? 13 A. I believe it's this one. 14 Q. Yes. He asked you about a paragraph in 15 that document which states, "The association has 16 extracted most of the gains from its earning asset 17 base which has reduced the net interest spread to 18 about .68 percent." 19 Do you recall that? 20 A. Yes. 21 Q. Now, did you work on a possible idea of 22 spinning off USAT's problem real estate assets as 8782 1 a way of restructuring the company to allow it to 2 achieve profitability? 3 A. I was involved in a project that looked 4 at a scenario similar or something like that, yes. 5 Q. Okay. I'd like to ask you to look at a 6 document previously marked as Exhibit A12235. 7 MR. GUIDO: Do you have the tab number 8 on it? 9 MS. CLARK: No. 10 MR. GUIDO: It hasn't been admitted? 11 Q. (BY MS. CLARK) Mr. Williams, this is 12 a copy of a document that was produced to us by 13 the OTS from the files of the Federal Home Loan 14 Bank of Dallas. It has been identified as such, 15 so stipulated. It's entitled "United Savings 16 Association Restructuring Proposal May 29, 1987." 17 Do you see the word "Ginger" written in 18 the upper right-hand corner? 19 A. Yes, I do. 20 Q. Do you recall -- take a moment, if you 21 would, and familiarize yourself with the subject 22 matter of the document. 8783 1 A. (Witness reviews the exhibit.) Okay. 2 Q. Does this appear to relate to a 3 possible spin-off of problem real estate assets? 4 A. I believe that's what the project was, 5 yes. 6 Q. And do you recall working on this 7 particular document? 8 A. I probably, as I was looking through 9 here, worked on some of the financial modeling. 10 Not the bulk of the package, no. But there were a 11 few pages that I probably worked on in terms of 12 just pro forma modeling. 13 Q. Do you remember what the basic idea of 14 this real estate spin-off was? 15 A. I believe it was to spin off the 16 problem real estate. To whom or what, I don't 17 recall. And the remaining institution, the core 18 S&L, would have improved earnings as a result of 19 it and wouldn't have the drag from the cost of 20 carry and the foreclosure losses and everything 21 that goes with the problem real estate. 22 Q. And do you recall whether this proposal 8784 1 required regulatory approval? 2 A. I don't specifically recall that, no. 3 That would have been more of an Art Berner 4 coordination than myself. 5 Q. Turn to the third page, if you would. 6 Do you see where it says "USAT finds itself in a 7 vicious trap. Due to the decline in real estate 8 values securing the loan portfolio, USAT is faced 9 with an unprecedented volume of foreclosed 10 properties and troubled loans"? 11 Was that your understanding of one of 12 the basic structural problems of USAT during this 13 time period? 14 A. Once again, I don't specifically 15 remember. But based on this and this other memo, 16 exhibit we were looking at, I would say so, 17 Exhibit A10745 or whatever that you were 18 referencing just a moment ago. 19 Q. Turn to Page 2, if you would, please, 20 and look at the second full paragraph. In this 21 proposal which was provided to the regulators 22 concerning the real estate spin-off, there is a 8785 1 statement here that "USAT's financial position 2 today is that significant future gains from asset 3 sales are not available." 4 Do you see that? 5 A. Yes, I do. 6 Q. What does the next sentence say? 7 A. "Most of the 'above-water' assets have 8 been liquidated and remaining assets would not 9 generate a significant profit upon sale." 10 Q. Isn't that basically what you were 11 saying in your memorandum which we have marked as 12 Exhibit A10745 when you said that the association 13 had extracted most of the gains from its earning 14 asset base? 15 A. Yes. 16 Q. It's basically the same idea, is it 17 not? 18 A. Basically, yes. 19 Q. So, the sentence or the paragraph that 20 Mr. Guido questioned you about in your memorandum 21 to Mike Crow was essentially repeated in a 22 proposal that was submitted to the Federal Home 8786 1 Loan Bank Board concerning the same real estate 2 spin-off, correct? 3 A. Yes. 4 Q. And again, are you aware of any effort 5 by USAT to hide from the regulators the fact that, 6 as you said in your memo, the association had 7 extracted most of the gains from its earning asset 8 base? 9 A. Not to my knowledge, no. 10 Q. And, in fact, was it your understanding 11 that USAT was attempting to keep the regulators 12 fully advised of its financial condition during 13 the period that you were there? 14 A. As far as I ever knew or heard, yes. 15 Q. I'd like to go back for a moment to 16 your job at -- your current job at Texas Commerce 17 Bank. You indicated, I think, in your prior 18 testimony that you are now working in retail and 19 investment products? 20 A. I am deposit and investment product 21 manager, which is primarily involved in marketing 22 and product development. 8787 1 Q. How long have you been at Texas 2 Commerce? 3 A. I believe about seven years. Six to 4 seven years. 5 Q. How large an institution is Texas 6 Commerce? 7 A. It is 18 to $20 billion in assets. 8 Q. Do you know when you actually joined 9 United Savings? 10 A. I believe it was in 1984, but I don't 11 specifically remember. 12 Q. Okay. There have been a couple of 13 questions about when you joined and when you 14 changed jobs from being head of corporate planning 15 to when you were treasurer. I would like to ask 16 you to just look at Exhibit A10663, which is the 17 August 29, 1986 business plan again, at Page 10 18 and see if that refreshes your recollection. 19 MR. GUIDO: What page? 20 MR. RINALDI: Page 10. 21 Q. (BY MS. CLARK) That indicates that 22 you joined USAT and UFG in 1984, April 1984, and 8788 1 that you were elected senior vice president of the 2 association in September 1985. 3 Is that consistent with your 4 recollection? 5 A. Once again, that's fairly vague; but 6 that sounds reasonable. 7 Q. Okay. I'd like you to look, if you 8 would, at Exhibit A3021, which is the 10K filed by 9 the association for 1985. 10 MS. CLARK: In the meantime, I would 11 like to offer Exhibit A12235. 12 MR. GUIDO: Objection, Your Honor. 13 THE COURT: Received. 14 Q. (BY MS. CLARK) I'm not going to ask 15 you about that exhibit at this point except with 16 respect to the timing of your becoming treasurer 17 of the association since that issue has come up a 18 number of times during your testimony. If you 19 would, look at Page 20, please. 20 A. Page 20 of this? 21 Q. Of the 10K. 22 A. Oh, excuse me. Up at the top. I see 8789 1 it. 2 Q. Does that indicates when it was you 3 became treasurer of USAT? 4 A. Yes, it does. It says in March of 5 1985. 6 Q. And would you have any reason to 7 question whether that's accurate? 8 A. No, I would not. 9 Q. When you first joined USAT, I think you 10 testified that your job involved primarily 11 financial planning and analysis and budgeting; is 12 that correct? 13 A. Yes. 14 Q. And you had done basically the same 15 kind of work at First City National Bank before 16 joining USAT; is that correct? 17 A. Yes. 18 Q. How big a bank was First City at the 19 time? 20 A. I do not recall. 21 Q. Was it a larger or smaller institution 22 than United Savings? 8790 1 A. Significantly larger. 2 MS. CLARK: I'd like to offer A3021, 3 Your Honor. 4 MR. GUIDO: Objection for the same 5 reason, Your Honor. 6 MS. CLARK: I believe that's the 10K. 7 MR. GUIDO: Objection for the same 8 reason, Your Honor. 9 THE COURT: Well, that's got an awful 10 lot of material in it. And if you only put it in 11 for one purpose, to establish his position, it 12 seems to me that -- I'll sustain the objection. 13 Q. (BY MS. CLARK) How does the financial 14 planning and analysis function fit into the 15 management of the company? 16 A. Generally, it works with the different 17 line managers in coordinating the annual budgeting 18 process and working with them on monthly 19 performance reporting so that they have 20 information that would give some indication as to 21 the profitability or the performance of their line 22 of business. It would also be involved in -- I 8791 1 think we started trying to formalize 2 asset/liability reporting and monitoring, as well 3 as just kind of general analysis-type projects. 4 Q. Perhaps you can describe how it, in the 5 aggregate, assists the people who are making 6 decisions in the company. 7 What is the purpose of having financial 8 planning and analysis in the management of a 9 company? 10 A. Generally, to provide more information 11 than you get from a basic, let's say, 10K which 12 has a basic income statement and balance sheet. 13 It doesn't really break out or go into much detail 14 in terms of lines of business or, in the case we 15 have talked about before, we had taken the 16 mortgage-backed securities and broken them down 17 into different portfolios and periodically 18 reported on the performance of those portfolios as 19 independent portfolios as opposed to just one 20 number. 21 So, it basically provides more 22 financial information that management can use than 8792 1 just an overall global income statement and 2 balance sheet. 3 Q. And the information would be organized 4 differently than the way the information is 5 organized for other purposes; is that correct? 6 A. Yes. 7 Q. And those other purposes would be for 8 GAAP? 9 A. Generally RAP, regulatory accounting, 10 and generally-accepted accounting principle type 11 accounting, 10K accounting, which is just pretty 12 much a single income statement balance sheet 13 approach. 14 Q. What was the state of United's 15 financial planning and analysis function when you 16 arrived in 1984? 17 A. It really -- when I first started, it 18 wasn't operating well. That's why they brought me 19 in. At least a month or two before, the month 20 after I got there, numbers that they would report 21 each month -- I believe that they provided to the 22 board of directors tended to be incorrect and they 8793 1 would have to come back the following month and 2 make corrections. They had very little 3 information, I guess what I would call 4 management -- financial management information 5 that provided line managers any kind of 6 performance type information on how they were 7 doing relative to budget month to month. So, 8 there really wasn't a whole lot of credible 9 financial management information available at the 10 time other than just the basic income statement 11 and balance sheet, and even that wasn't correct 12 month to month. 13 Q. So, you were brought in specifically 14 for the purpose of creating good, workable 15 information systems in that regard; is that 16 correct? 17 A. That was part of my function. I think 18 Jim Wolfe was also brought in on the accounting 19 side to give credibility to the -- just the basic 20 books and records and making sure those were 21 correct month to month when they were closed and 22 there weren't subsequent restatements that tended 8794 1 to be happening. 2 Q. Did it appear to you when you arrived 3 that financial planning and analysis was 4 particularly important to the company at that 5 point? 6 A. It was because Jerry and Mike both came 7 from First City and they were used to the level of 8 financial information that was available there and 9 the concept of management by objective so that 10 each line manager had a series of budgets and 11 objectives that they needed to work toward and be 12 measured against through the year. And so, that 13 was important for them, to have that kind of 14 control and reporting in this environment, which 15 didn't exist at this time. 16 Q. Do you recall that when you arrived, 17 United had already decided to embark on a 18 strategic redirection? 19 A. I don't specifically remember when I 20 got there -- I know when I got there, I believe 21 Joe Phillips was there. And so, they were in the 22 process of making investments. But I don't 8795 1 specifically remember an event taking place. 2 Q. Do you recall during the period after 3 you arrived that there were discussions about a 4 strategic redirection of the company? 5 A. There were discussions. Once again, I 6 don't remember an event. My recollection, it was 7 more of an evolutionary thing that occurred over a 8 period of a year or two as -- you know, as time 9 went by. And basically we would do something 10 Jerry Williams referred to as shredding of the 11 balance sheet or stripping the balance sheet which 12 was taking the income statement and balance sheet 13 and trying, to the extent possible, to break it 14 down by line of business and by investment 15 category so he could understand which businesses 16 were making money, which ones weren't. As that 17 process evolved and people got more comfortable 18 with which pieces of the businesses were 19 generating profits, the wholesale strategy 20 evolved. 21 Q. What was your understanding of the 22 reason why United was going through this process 8796 1 of redirecting its lines of business? 2 A. Well, the core S&L business wasn't 3 making money. The real estate market was in 4 horrible shape. The general core S&L business 5 just wasn't making money. There wasn't a whole 6 lot of opportunity to go out and make home loans 7 that would be profitable because foreclosure rates 8 were, I guess, at historical highs. Consumer 9 loans weren't performing that well. So, there 10 really wasn't a whole lot of opportunity in the 11 core business to incrementally put assets on that 12 were profitable. 13 Q. Was the availability of capital a 14 constraint on United's ability to restructure 15 itself to pursue more profitable lines of 16 business? 17 A. Yes. Capital was always an important 18 issue. 19 Q. In general, was capital planning an 20 important part of the overall strategic planning 21 process? 22 A. It was part of it. I mean, I guess 8797 1 we've seen through many of these documents a lot 2 of references are made to capital and how to make 3 sure that we maintain adequate capital levels. 4 So, that was always on the back of, I guess, 5 everybody's mind and part of every discussion or 6 many discussions. 7 Q. Did you try to assess how to raise 8 capital most efficiently as part of your function 9 in financial planning and analysis? 10 A. Not specifically as part of my 11 function. I mean, I think it was one of the 12 topics that were discussed in meetings, whether it 13 was strategic planning or otherwise. But -- I 14 mean, that may have been a topic I covered, but I 15 don't specifically remember covering that myself 16 in that role. 17 Q. Let me ask you to look at a document 18 we've previously marked as Exhibit B3922. 19 MR. GUIDO: What tab number is that? 20 Q. (BY MS. CLARK) Do you recognize this 21 as a document that you authored, Mr. Williams? 22 A. I don't remember writing it. It's got 8798 1 my name on it, so I assume I did. 2 MS. CLARK: I offer this document, Your 3 Honor. 4 MR. GUIDO: Same objection, Your Honor. 5 THE COURT: Received. 6 Q. (BY MS. CLARK) Would you take a 7 moment to review the contents of the memorandum, 8 please? 9 A. (Witness reviews the document.) 10 Q. Do you see in this document you were 11 discussing the justification for issuing capital 12 notes at some point in the near future? 13 A. Yes. 14 Q. And that you were working with the 15 various investment bankers to examine other 16 alternatives? 17 A. Yes. 18 Q. Do you recall working with investment 19 bankers to examine the alternatives for raising 20 capital during the period that you were working at 21 USAT? 22 A. Not specifically about capital. I 8799 1 mean, we worked with the investment bankers on a 2 number of issues and opportunities. Capital would 3 have been one of them. I don't specifically 4 remember any meetings, but that certainly would 5 have been one of the topics covered over the 6 years. 7 Q. And how would you determine whether 8 raising capital notes at a particular cost would 9 be something that USAT should go ahead and do? 10 What would your analytic exercise be in 11 determining whether raising capital in one 12 particular way or another was an economically 13 advantageous thing to do? 14 A. In this scenario, once again, I 15 don't -- I guess there was an exhibit. So, I'm 16 not sure what we looked at. But I would assume we 17 would look at what the alternative investments 18 would be and would they return a profit that would 19 more than offset the cost of capital and still 20 provide a good return for the stockholders. 21 Q. There was an exhibit which is not 22 attached, unfortunately. Perhaps we'll just pass 8800 1 it for the moment. 2 Let's look again at T4246, a document 3 that Mr. Guido questioned you about. And I 4 believe it's at 335, Tab 335. 5 A. I'm sorry. What -- 6 Q. I'd like you to look at Point F of this 7 memorandum, please. 8 Did you find that? 9 A. Point F on the first page? 10 Q. I'm sorry. Point F. It's Bates 11 No. 8180. 12 A. Does it look like this? I don't have a 13 Bates stamp. 14 Q. Yes. If you would, please, review what 15 Mr. Hansen said under Point F. 16 A. (Witness reviews the document.) Okay. 17 Q. Do you see that Mr. Hansen is talking 18 about issuing $75 million of additional capital 19 notes in this memorandum? 20 A. I don't know that I can see the 21 75 million. 22 Q. It's under Point 4. "The extra cost of 8801 1 a 75-million-dollar note capital issue will 2 therefore be $2.5 million per year." 3 A. Oh, okay. 4 Q. "And for this cost, we receive the 5 benefits of increased regulatory capital." 6 A. Yes. 7 Q. "With the capital notes, our regulatory 8 capital could be as much as $300 million in 9 January 1987. Our required net worth could be as 10 low as $150 million." I have omitted 11 parentheticals there. "This should give us room 12 to grow for the next two years with minimal 13 profits." 14 Is this the sort of basic kind of 15 financial analysis that you would have to go 16 through to decide whether to raise capital at a 17 certain cost? 18 A. This would be a piece of the analysis, 19 I think, or those kinds of factors. Is it the 20 right time given what rates are doing in the 21 market? What would it mean to us from a capital 22 stand point? But you would also have to include, 8802 1 if you did get the capital, what would your 2 incremental investments be and what kind of return 3 would they provide? So, this would be a part of 4 that. 5 Q. Do you recall what Mr. Hansen's 6 background was? 7 A. No, I do not. 8 Q. Do you recall ever hearing that he had 9 an MBA? 10 A. I believe he did have an MBA and may 11 have come with a consulting background, but I 12 don't specifically remember what his background 13 was. 14 Q. Do you recall that USAT needed the 15 permission of the regulators in order to raise 16 additional capital by issuing capital notes or 17 debentures? 18 A. I don't specifically recall that; but I 19 know before an event like that could happen, it 20 would take regulatory approval. 21 Q. Do you know whether USAT ever applied 22 to the regulators for permission to raise 8803 1 additional capital through the issuance of a 2 capital note or a capital debenture? 3 A. I know the issue came up and that we 4 worked with investment banking firms conceptually. 5 I don't recall how far the process got in terms of 6 did we make applications? Did we actually commit 7 to the investment bankers? I don't recall that. 8 Q. Do you know whether -- I'm sorry. Do 9 you know whether USAT ever did issue a capital 10 note or a capital debenture? 11 A. I don't believe we did. 12 Q. And you don't know whether that's 13 because the regulators wouldn't permit it or 14 otherwise? 15 A. I don't recall. 16 Q. You talked about part of your job being 17 to analyze the various components of USAT's 18 business and that that was the same sort of 19 analysis that you had done at First City? 20 A. Yes. 21 Q. Is that something that you study in 22 business school? Is that part of the discipline 8804 1 of finance or business education? 2 A. I didn't particularly learn it in 3 school. It was, to me, more of a concept/cultural 4 thing that existed within First City and generally 5 the banking industry in terms of management by 6 objectives and budgeting down to a very low level 7 and measuring managers on budget relative to 8 performance. So, it was just something that was a 9 practice within the banking industry, I think. 10 Q. I think you mentioned the term 11 "shredding" the balance sheet or "stripping" the 12 balance sheet a few minutes ago. 13 A. Yes. 14 Q. What does that mean exactly? 15 A. That was something that I believe 16 started shortly after I arrived at the 17 institution. Once again, Jerry came from -- 18 Jerry Williams came from First City, and he 19 requested that we take the United balance sheet 20 and income statement and find a way to divide it 21 up into lines of businesses so that we could 22 understand which lines of businesses were 8805 1 contributing what to the bottom line. So, it 2 was -- it was mostly just taking the balance sheet 3 and income statement and trying to break it down 4 by consumer loan, mortgage loan, mortgage 5 originations, and the various lines of business. 6 Q. And why would you want to know that 7 information? 8 A. So that you could understand when you 9 look at the bottom line, what each line of 10 business is contributing, first, to the profits or 11 losses but, secondly, so you could start 12 developing management tools, management by 13 objective type information so that you could set 14 goals for the line managers. 15 Q. And this was something that 16 Jerry Williams was promoting within the 17 organization at the time you were there? 18 A. Yes. 19 Q. I'd like to ask you to look, if you 20 would, at Exhibit -- what we've previously marked 21 as Exhibit B3924. Can you identify this as a 22 memorandum from Mike Crow to you dated January 28, 8806 1 1986, concerning -- well, on the subject of 2 shredding the balance sheet? 3 A. That's what this looks like, yes. 4 MS. CLARK: We offer this exhibit, Your 5 Honor. 6 MR. GUIDO: Same objection, Your Honor. 7 THE COURT: Received. 8 Q. (BY MS. CLARK) In this memo, Mr. Crow 9 said "On the subject of shredding the balance 10 sheet, in the staff meeting Jenard said that in 11 terms of the floating rate junk bonds we have, 12 approximately $40 million, we should be matching 13 these off against 90-day deposits instead of 14 general funds." 15 Do you see that? 16 A. Yes, I do. 17 Q. Do you know what the significance of 18 matching of the junk bonds off against 90-day 19 deposits instead of general funds would be? 20 A. I don't recall specifically why he 21 requested this. Part of their shredding the 22 balance sheet was matching assets and liabilities, 8807 1 and it was more of an art than a science. So, you 2 have on one side of the balance sheet assets. The 3 other side, you have liabilities. And you had to 4 make many judgment calls on which liabilities you 5 assigned to fund which assets. And so, there were 6 frequently memos or requests to modify the 7 approach we were taking. 8 So, here, you know, it looks like he's 9 recommending that we modify the liabilities that 10 we were assigning, once again, internally for 11 management reporting that fund the high-yield 12 securities, to look at a 90-day deposit as opposed 13 to general funds. 14 Q. In what report would this matching take 15 place? Does this have anything to do with the 16 general ledger or the gap accounting function? 17 A. No. This is just an off-line 18 management information type report that we were 19 working with and developing. And, once again, it 20 was just an ad hoc evolutionary type report. 21 Q. And the purpose of the report was 22 internal management purposes, not accounting 8808 1 purposes or public financial reporting purposes? 2 A. Right, yes. 3 Q. And is that a good part of what you 4 were involved in in terms of the corporate 5 planning function? 6 A. Initially after I got there, it was 7 because Jerry wanted to get a handle around that 8 issue in particular. So, when I first got there, 9 I spent quite a bit of time attempting to do that. 10 Q. And the purpose for matching these 11 floating junk bonds off against 90-day deposits 12 instead of general funds would be in order to 13 provide a more accurate or realistic assessment of 14 the performance of the junk bonds? 15 A. Yes. 16 Q. Now, we established that you were 17 promoted to treasurer in March of 1985, correct? 18 A. Yes, ma'am, I believe that's what it 19 was. 20 Q. Mr. Guido reviewed your job description 21 with you, I believe, yesterday or perhaps it was 22 when you were here before. It was Exhibit 10663. 8809 1 No. Sorry. A10500. I'm not going to ask you to 2 look at it again. I will simply note that one of 3 the -- one of the functions that's listed under 4 the treasury function involves asset/liability 5 management. 6 Do you recall that that became one of 7 your new responsibilities when you were promoted 8 to treasurer of United? 9 A. Yes. 10 Q. And do you recall what asset/liability 11 management entailed? What did that involve? 12 A. Specifically, no. Generally, it 13 involves looking at the gap position of the 14 association, which is a static position, looking 15 at the maturities of the assets and liabilities 16 and how they match up. And it also involves 17 interest sensitivity type analysis, looking at 18 given changes in interest rates, what impact does 19 it have on the market value of assets and 20 liabilities and those types of things. 21 Q. Does asset/liability management have 22 something to do with managing the interest rate 8810 1 risk of the association? 2 A. Yes. 3 Q. So, was it part of your job as 4 treasurer to put into place systems that allowed 5 management to measure and to manage interest rate 6 risk? 7 A. Yes. 8 Q. What was being done in that regard when 9 you first arrived at USAT? Do you know? 10 A. Really, nothing. They didn't have much 11 that existed. 12 Q. Was gap analysis the basic tool that 13 was being used at that time? 14 A. They probably for -- and once again, 15 regulatory or 10K purposes had to be a very basic 16 gap analysis which would have looked at, for a 17 couple of different maturity periods, what the 18 interest rate or the maturity differentials were 19 between assets and liabilities, but that would 20 have been about it. Fairly basic. 21 Q. Without getting into the details of how 22 gap was calculated, what was the basic idea of the 8811 1 gap as a measure of interest rate risk? 2 A. It was primarily to indicate or show 3 interest rate risk or repricing risk. How many 4 liabilities do you have repricing relative to your 5 assets that repriced, let's say, within a one-year 6 period? So, if rates were to rise, you could get 7 a feeling for are your assets repricing more 8 quickly than your liabilities or vice versa and 9 what might happen to your net interest income 10 given a movement in interest rates. 11 Q. And why is that significant to a 12 financial institution? 13 A. Because net interest income is a key 14 part of earnings and just one of the general 15 pieces of the institution that need to be managed 16 closely. 17 Q. What did you do when you took over the 18 asset/liability function with respect to 19 developing the interest rate management tools at 20 USAT? 21 A. Initially, most of what we did was 22 fairly manual in terms of getting information from 8812 1 the various systems, whether it's deposit systems 2 and loan systems and putting together pretty 3 manual rudimentary reports. Eventually, it 4 involved in acquiring an asset liability model 5 that I think we've referred to as Sendero that was 6 much more sophisticated, particularly in regard to 7 being able to analyze mortgage-backed securities 8 and impact of prepayment speeds and interest rate 9 changes on that piece of the balance sheet. 10 Q. Do you recall that prior to the time 11 you got access to the Sendero model, that you 12 brought in various investment bankers and 13 consultants to assist you in assessing USAT's 14 position with respect to interest rate risk? 15 A. Once again, specifically, I don't 16 remember. But we had investment bankers in 17 frequently looking at those types of things. Not 18 only the association, but specific pieces of the 19 portfolio and performing modeling exercises. 20 Q. Do you recall that Goldman Sachs was 21 brought in to model the interest rate risk profile 22 of USAT? 8813 1 A. They would have been one of the firms 2 we dealt with. I don't specifically remember what 3 role they did or if they modeled that versus any 4 one of the other firms. 5 Q. Do you recall Salomon Brothers coming 6 in and doing that kind of exercise for you? 7 A. They may have. I know we worked with 8 Salomon a lot, as well. 9 Q. And I think there's already been 10 reference to Smith Breeden coming in and assisting 11 you with respect to asset/liability analysis -- 12 A. Yes. 13 Q. -- correct? 14 A. Yes. 15 Q. There's been a question about when you 16 first obtained access to the Sendero model. So, 17 I'd like to ask you to review a document we've 18 previously marked as Exhibit B4002 and see if it 19 refreshes your recollection in that regard. 20 Is this a letter to you from the 21 Sendero Corporation in February 1987? 22 A. It looks like it, yes. 8814 1 MS. CLARK: I'd like to offer this 2 document in evidence. 3 MR. GUIDO: Same objection, Your Honor. 4 THE COURT: Received. 5 Q. (BY MS. CLARK) Does this indicate 6 that you began to work with the Sendero Company in 7 or around February of 1987? 8 A. That's what this would indicate, yes. 9 Q. Now, what kind of information did the 10 Sendero model provide to you that was different 11 from the information that you had been receiving 12 from the various investment bankers and 13 consultants? 14 A. One -- once again, I don't remember 15 specifically what we got from the investment 16 bankers and consultants. But this allowed us to 17 make sure that we had the whole institution on the 18 model, that we were looking at the whole 19 institution. It also allowed us to independently 20 run models and scenarios as opposed to having to 21 rely on the investment banking firms and whatever 22 assumptions that they might build in their models. 8815 1 So, it really gave us more independence in terms 2 of being able to do it ourselves. 3 Q. Could you just give us a brief 4 description of what the Sendero model did? 5 A. Wow. I really -- I can tell you a 6 couple of things. I don't remember everything it 7 did. I know it allowed us to do forecast income 8 statements under different interest rate scenarios 9 and different prepayment speeds for the portfolio. 10 It allowed us to do interest sensitivity in terms 11 of mark-to-market. If rates move up or down 100 12 basis points, what happens to the market value of 13 the institution. And I don't really remember what 14 else. I mean, those were probably the two most 15 important features. 16 Q. Did it pertain to the entire 17 association or to discreet portfolios? 18 A. I believe we could do it at both 19 levels. I don't specifically remember, but it 20 seems like we could do it at pretty much any level 21 we wanted to. 22 Q. Did you consider the Sendero model to 8816 1 be the most advanced model available for your use 2 at that time? 3 A. At the time, it was, yes. And we spent 4 actually quite a bit of time with Sendero 5 developing the mortgage-backed module piece of the 6 model because there really wasn't a good model out 7 on the market that evaluated mortgage-backs. So, 8 we were actually kind of a test site that helped 9 them develop that and that was probably the most 10 important piece of this model. 11 Q. So, as far as you are aware, you and 12 the management team at United had gone out and 13 gotten the most advanced tool available to assist 14 you in the interest rate risk management function; 15 is that correct? 16 A. Yes. 17 Q. There's also been discussion of 18 sensitivity analyses. Are those kind of analyses 19 another tool that the management at USAT developed 20 to assist in managing the interest rate risk of 21 the association? Are you familiar with the term 22 "sensitivity analysis"? 8817 1 A. Yes. 2 Q. And is that another tool that you 3 developed and used to help you manage the interest 4 rate risk of the association? 5 A. That was part of the -- the outcome of 6 the Sendero model. The sensitivity analysis, not 7 only to what happens to our income statement under 8 different scenarios but also what happens to the 9 market value under different interest rate 10 scenarios. 11 Q. Is that also called scenario analysis? 12 A. That could be another name for it, yes. 13 Q. And this is another tool that USAT 14 developed and used while you were there to help 15 manage the interest rate risk of the association? 16 A. Yes. 17 Q. Were there other management tools that 18 you can recall developing in your function as the 19 treasurer handling the asset/liability management 20 of the association? 21 A. There may have been. I don't 22 specifically remember. I know the portfolio 8818 1 managers also had their own tools for analysis, as 2 well. 3 Q. When I asked you about the strategic 4 redirection of USAT, I believe you testified that 5 in your observation, this is a process that 6 evolved over time; is that correct? 7 A. Yes. 8 Q. So that the wholesale strategy was not 9 something that was decided and then simply 10 implemented. It was a process of evolution in 11 response to the experience that you had over time 12 with various business lines? 13 A. Actually, I probably need to qualify 14 that. When you say "the wholesale strategy," when 15 I initially got there, they were in the process of 16 putting some wholesale assets on the books. But 17 as a percent of the total balance sheet, it was 18 not significant. And I think what evolved is more 19 of a reliance on those assets as opposed to the 20 traditional S&L assets which, at the time, weren't 21 making money. 22 So, there were some wholesale assets on 8819 1 the books. I think what I was referring to in 2 terms of the evolution is more and more reliance 3 on those assets as opposed to real estate and 4 traditional home loans that evolved. 5 Q. Why did USAT rely more and more on 6 those new lines of business? 7 A. Because home loans, real estate were 8 not making money. Foreclosures were high. 9 Operating costs related to them and charge-offs 10 were extremely high. So, they weren't very 11 profitable lines of business. 12 Q. Did the entire senior management team 13 at USAT participate in the process of this 14 evolving business strategy? 15 MR. GUIDO: Objection. What do you 16 mean by "senior management"? I think that the 17 question is hopelessly vague, Your Honor, and I 18 think it's been asked as a leading question. I 19 haven't objected to leading questions on this 20 course of direct under the guise of 21 cross-examination, but I do think that the 22 questions now, when they start getting vague, 8820 1 talking about senior management, I think that 2 counsel should be required to expressly name 3 either committees or individuals or positions that 4 she's referring to. Otherwise, I think that the 5 question is too vague to be answered appropriately 6 in this forum and I object to the form of the 7 question, Your Honor. 8 THE COURT: Can you be more specific? 9 MS. CLARK: I was planning to. That 10 was just an opening question. I was going to have 11 a whole line of questions to specify it. 12 Q. (BY MS. CLARK) Did the members of -- 13 did the portfolio managers and the people at the 14 vice president and higher level all participate in 15 pulling together the information and discussing 16 the options that went into the evolution of the 17 business strategies that you've already testified 18 to? 19 A. Not all vice presidents did. I would 20 say most of the focus was or were members of the 21 strategic planning committee, the investment 22 committee, the portfolio managers, and then up 8821 1 through the board of directors, I guess, that 2 approved business plans and things. 3 Q. Did your management reporting function 4 play a role in the process of strategically 5 redirecting the business of United? 6 A. It would have provided supporting 7 information for meetings and discussions and 8 forecasts. So, yes. 9 Q. Did you attempt to determine how well 10 the old core savings and loan -- which is, I 11 believe, the term you've been using -- was 12 performing as compared to the new United? 13 A. That was one of the, I guess, ad hoc 14 type reports we pulled together as part of the 15 shredding the balance sheet of the different 16 lines. One approach we looked at was old United 17 versus new United. So, that was one of the 18 exercises we went through, yes. 19 Q. Why did you do that? 20 A. Once again, so we could understand 21 which areas were generating profits and which ones 22 were generating losses or what the general returns 8822 1 of the different lines of businesses were. 2 Q. And was there a reason why you wanted 3 to know how the different lines were doing and, in 4 particular, how the old lines were doing as 5 compared to the new lines? 6 A. My recollection was the old core S&L 7 was losing money because it had a lot of the 8 goodwill and the real estate and the foreclosed 9 home loans in it and that the incremental business 10 that had been put on was generally, in total, 11 profitable. So, it was just another view of the 12 association from that perspective. 13 Q. I'd like you to look at two exhibits 14 previously marked as B410 and B528, please. B410 15 is found at 577, Tab 577. 16 Can you identify Exhibit B410 as a 17 memorandum from Mike Crow to you? 18 A. Yes. 19 Q. And B528 is a memorandum from Mike Crow 20 to you and Jim Wolfe? 21 A. Yes. 22 MS. CLARK: I'd like to move the 8823 1 admission of Exhibit B528. 2 MR. GUIDO: Same objection, Your Honor. 3 THE COURT: Received. 4 MR. RINALDI: What is the tab number of 5 B410? 6 MS. CLARK: 577. 7 Q. (BY MS. CLARK) What was Mike Crow 8 asking for in the first of those two exhibits, 9 Exhibit B410? 10 A. It looks like a more formalization of 11 the reporting of the old United/new United 12 concept. 13 Q. And that was to go into the management 14 reports that you were working on? 15 A. That's what it looks like, yes, that it 16 would be included in the monthly management 17 performance reports. 18 Q. And that would be to provide 19 information that the managers could have available 20 when they made business decisions about the 21 direction of United? 22 A. Right. And so that they understood, 8824 1 once again, what new United was contributing 2 versus the core old United business. 3 Q. And how about 528? What was that 4 requesting? 5 A. (Witness reviews the document.) It 6 looks like it was asking for a segregation of 7 gains that were generated out of the new United 8 and making sure that they got credit for those 9 gains so that they weren't commingled. 10 Q. And again, is that for the purpose of 11 providing information to management about how well 12 the different lines of business are performing so 13 that the management would have full information in 14 making decisions about the direction of the 15 company? 16 A. Yes. It's just more of a refinement of 17 the report so that they would have more details. 18 Q. Do you recall when it was that you 19 first began preparing the monthly performance 20 reports that you've been asked about by Mr. Guido? 21 A. I really don't. Once again, I 22 really -- I didn't prepare all of that report. 8825 1 Mostly, what I did was prepare the cover memo. 2 And then there were typically a fairly decent 3 stack of financial statements that went with it. 4 So, most of what I did was just prepare the cover 5 memo, summarizing the results. 6 Q. But do you recall that that was part of 7 your job during the time before you were promoted 8 to treasurer of the association? 9 A. Yes. I don't specifically remember 10 when I started and when I may have stopped or who 11 I turned it over to, but that was one of the 12 functions that I did. 13 Q. Do you recall that at some point you 14 were asked to begin to include a formal product 15 line profitability analysis in your performance 16 reports? 17 A. I don't specifically recall that 18 request. 19 Q. Let me ask you to look at 20 Exhibit B3860, please. This is -- appears to be a 21 memorandum from Mike Crow to you dated 22 September 11, 1985. 8826 1 Can you identify that as a memorandum 2 that you received? 3 A. I don't specifically remember receiving 4 it; but it's got my name on it, so I assume I did. 5 MS. CLARK: I offer that in evidence, 6 Your Honor. 7 MR. GUIDO: Same objection, Your Honor. 8 THE COURT: Received. 9 Q. (BY MS. CLARK) Does this indicate 10 that Mr. Crow was requesting that you get a 11 product line P&L report prepared on a monthly 12 basis by January of 1986? 13 A. Yes. 14 Q. Does that -- is that consistent with 15 your recollection? 16 A. Yes. 17 Q. And did you do so? 18 A. I believe I did. I don't specifically 19 remember, but I assume I did. 20 Q. Do you recall that from time to time, 21 you were -- you or the people who worked for you 22 would prepare special analyses of particular 8827 1 portfolios' performance? 2 A. That was kind of one of our ongoing 3 functions, was preparing ad hoc analysis. That 4 did occur, yes. 5 Q. I'd like you to look at what we've 6 marked as Exhibit B3932. This is a memorandum 7 from Russ McCann to Bruce Williams and Gary 8 Jacobson. The typed date is February 23, 1986. 9 There is handwriting that crosses out February and 10 says "September" instead. 11 Is that your handwriting? 12 A. Yes, it is. 13 MS. CLARK: I offer Exhibit 3932, Your 14 Honor. 15 MR. GUIDO: Same objection, Your Honor. 16 THE COURT: Received. 17 Q. (BY MS. CLARK) Would you take a 18 moment and look at the document and familiarize 19 yourself with the contents? 20 A. (Witness reviews the document.) Okay. 21 Q. Was Russ McCann an individual in the 22 treasury department who work for you? 8828 1 A. Yes, he was. 2 Q. And was he -- was he performing an 3 analysis, a comparative analysis of the 4 performance of the corporate securities and equity 5 arbitrage functions in this memorandum? 6 A. That looks like that was the focus of 7 the memorandum, yes. 8 Q. And here would the corporate securities 9 be the high-yield or junk bonds? 10 A. Yes. Once again, to the best of my 11 knowledge. I assume that's what they are. 12 Q. Did he find that both portfolios had 13 been profitable? 14 A. It looks like, based on his analysis, 15 that's the conclusion he came to, yes. 16 Q. In fact, he found that they were well 17 above all the other major business activities 18 within USAT, didn't he? 19 A. That's the conclusion he comes to, yes. 20 Q. And is that consistent with your 21 recollection as of the date of this memorandum 22 concerning the performance of these portfolios? 8829 1 A. Once again, I can't specifically recall 2 where we were at this point in time. 3 Q. Do you see that Mr. McCann commented 4 about the different objectives of the two 5 portfolios on the top of Page 2? 6 A. Yes. 7 Q. How did he compare or contrast the 8 objectives of the two portfolios? 9 A. The -- he's basically saying the 10 corporate securities portfolio is more of a 11 longer-term objective generating a net interest 12 spread as part of the overall return whereas the 13 equity arbitrage is a short-term total return 14 objective type portfolio that I think would have 15 more turnover in it. But I guess he doesn't 16 really say that. But I think the equity is more 17 of a short-term total return objective as opposed 18 to an investment that's expected to generate net 19 interest income over the long term. 20 Q. Can you explain to the Court what a 21 "total return portfolio" means? 22 A. Total return would include 8830 1 mark-to-market, as well as -- so, we would have 2 realized gains as well as mark-to-market gains 3 included in the ongoing performance measurement. 4 Q. And that's contrasted in this 5 memorandum to the high-yield portfolio which was 6 primarily managed to generate a long-term net 7 interest spread, correct? 8 A. Yes. 9 Q. And is that consistent with your 10 understanding of the primary objectives of the two 11 portfolios? 12 A. That's the primary objective of the two 13 portfolios, yes, I believe that is the case. 14 Q. And again, what was the purpose of 15 doing this kind of profitability analysis of the 16 equity arbitrage in the corporate securities 17 portfolios? 18 A. It was, once again, one of those ad hoc 19 requests someone had made to go look at how the 20 different lines of businesses were performing. 21 So, someone had evidently requested that we look 22 at equity arbitrage and corporate securities 8831 1 specifically and compare them to some other 2 investment alternatives. 3 Q. And would it be your understanding that 4 the purpose of doing this would be to determine 5 how these new lines of business were really 6 performing so as to help management decide where 7 to put the company's resources? 8 A. Yes. That would be one of the primary 9 objectives that you would get out of something 10 like this. 11 Q. Did you ever see any indication that 12 lines of businesses were being pursued for any 13 ulterior motive rather than -- 14 MR. GUIDO: Objection. 15 Q. (BY MS. CLARK) -- rather than because 16 they had been determined to offer the most promise 17 of profitability for USAT? 18 MR. GUIDO: Objection to the form of 19 the question, Your Honor. "Ulterior" has 20 absolutely no relevance at all to any of the 21 issues that are in this case. If Ms. Clark wants 22 to focus on the allegations in the complaint, I 8832 1 think that's perfectly appropriate to do so. But 2 to use such a term, I think, is rather 3 prejudicial, one. And, two, is it doesn't advance 4 the matter one bit one way or the other, Your 5 Honor. I object to the form of the question. 6 THE COURT: The question included kind 7 of an alternative definition of "ulterior." Why 8 don't you just leave that out and ask the latter 9 part of your question? 10 MS. CLARK: Your Honor, I believe that 11 the ulterior motive is taken from one of the 12 theories in their complaint, but I'll be happy to 13 rephrase it. 14 Q. (BY MS. CLARK) Did you see any 15 indication that lines of businesses were being 16 pursued for any reason other than because they had 17 been determined to offer promise of profitability 18 to USAT? 19 A. No. 20 Q. And that would be true for equity 21 arbitrage and for high-yield bonds? 22 A. Yes. 8833 1 Q. You've mentioned that you were expected 2 to and did respond to ad hoc requests for analyses 3 of various parts of the business; is that correct? 4 A. Yes. 5 Q. And do you recall that Mr. Guido showed 6 you and asked you questions about various requests 7 from Jenard Gross which were characterized as 8 Jenard-o-grams? 9 A. Yes. 10 Q. Did these questions from Mr. Gross 11 sometimes have to do with what the economic 12 results of transactions were as to the extent they 13 might differ from the accounting or book results? 14 A. From the documents I remember looking 15 at, that was typically the point of his questions, 16 is trying to get a more clear picture other than 17 just the accounting results, of what they meant 18 and what else was behind them in terms of total 19 returns. 20 Q. Let me ask you to look at Exhibit B471, 21 please. Is this a memorandum from Mike Crow to 22 you and Jim Wolfe dated March 27, 1985? 8834 1 A. Yes, it is. 2 MS. CLARK: I offer this into evidence, 3 Your Honor. 4 MR. GUIDO: Same objection, Your Honor. 5 THE COURT: Received. 6 Q. (BY MS. CLARK) Would you take a 7 moment and familiarize yourself with the document? 8 A. (Witness reviews the document.) Okay. 9 Q. Now, in this memo, Mr. Crow is 10 essentially passing on a question from 11 Jenard Gross; is that right? 12 A. Yes. 13 Q. Okay. And Mr. Gross was questioning 14 the reporting on an apartment project, correct? 15 A. That's what it appears to be, yes. 16 Q. And the reporting that he's questioning 17 is the management reporting; is that right? 18 A. Yes. 19 Q. The internal management reporting, not 20 the GAAP or RAP financial statement reporting, 21 correct? 22 A. Correct. 8835 1 Q. And what do you understand Mr. Gross' 2 question to be here? 3 A. It looks like, once again, he wants to 4 modify the report related to real estate so that 5 it reflects more a true picture of what the 6 economics are of that particular investment. This 7 was something probably Jim Wolfe would have 8 handled more so than myself. I didn't tend to get 9 too involved in the accounting for real estate. 10 But that's what it looks like he's requesting. 11 I'm sorry. 12 Q. I'm sorry. Mr. Gross is saying that if 13 you're charging the losses on that project to 14 reserves in the internal management reporting that 15 you might not be getting the best information 16 concerning the real performance of that apartment 17 project? Is that the gist of it? 18 A. That's what I read into this, yes. 19 Q. And that even though that might be 20 appropriate for accounting purposes, he wanted it 21 reported differently for the internal management 22 reporting purposes; is that right? 8836 1 A. Right. To the extent possible, 2 Jenard -- I mean, generally -- and you can see in 3 most of his memos -- would prefer to have as much 4 as possible the actual performance of an 5 investment or an apartment complex reflected in 6 the management numbers he was seeing. So, he 7 didn't want things charged off to general reserves 8 or unallocated. He would prefer to have them 9 allocated to the specific investment so he could 10 see the true return on the investment. 11 Q. Now, Mr. Gross wasn't criticizing the 12 accounting, was he? 13 A. No. It was just -- once again, this 14 was an internal management reporting. So, it was 15 just a modification of the way the management 16 reporting was evolving so we could get a more 17 accurate understanding of how various investments 18 were performing. I don't believe it was a 19 criticism. 20 Q. Mr. Guido asked you about some of 21 Mr. Gross' questions about the mortgage-backed 22 securities and high-yield bond results. 8837 1 Do you recall that? 2 A. Yes. 3 Q. I'd like to show you Exhibit B3931. If 4 you would, look through the entire document. 5 There is a memorandum which is the last page of 6 the document from Jenard Gross to Bruce Williams. 7 And then the first page of the document is the 8 beginning of a three-page -- four-page, pardon me, 9 memorandum from you back to Jenard Gross. 10 Do you see that? 11 A. Yes. 12 Q. Okay. 13 MS. CLARK: I'll offer this exhibit in 14 evidence, Your Honor. 15 MR. GUIDO: Same objection, Your Honor. 16 THE COURT: Received. 17 Q. (BY MS. CLARK) Please take a moment 18 to review the document. 19 A. (Witness reviews the document.) Okay. 20 Q. Does this appear to be another example 21 of Mr. Gross asking a follow-up question on the 22 performance reports to get a better handle on the 8838 1 economic results of one of the lines of business? 2 A. Yes. 3 Q. And what was he asking about in his 4 memorandum to you, which is the last page of 5 Exhibit B3931? 6 A. I really don't know if I understand the 7 question as I sit here today, but it was just a 8 different way to look at the performance of the 9 portfolio as it was to date. He recognized that 10 we -- or that gains had been taken out of the 11 portfolio. And so, he couldn't really compare the 12 current net interest spread necessarily to our 13 target spread because some gains had been taken 14 out. And I think what he was asking is: Was that 15 trade-off beneficial? Should we have done it? 16 Are we better off or not? But he was just asking 17 for an analysis to kind of look at it from a 18 different perspective. 19 Q. And again, he doesn't appear to be 20 criticizing the accounting. He's asking for more 21 information that would allow him to assess how 22 well that portfolio is doing, correct? 8839 1 A. Correct. 2 Q. And what was your answer to his 3 question? 4 A. Somehow in the last paragraph, I said 5 that the gains taken out of the portfolio have 6 been beneficial when compared to the long-term 7 income impact. So, I think the trade-off between 8 the give-up in long-term income relative to the 9 gains taken out doesn't appear to have been 10 materially negative, I believe is what I'm 11 concluding. 12 Q. In the memo, don't you measure what the 13 postulated loss of income would be over the 10 14 years and just compare that, not even discounting 15 it to present value to the amount of the gains? 16 A. Yes. 17 Q. And the result of that was? 18 A. I'm not sure what the result was. I 19 need to look at this schedule for a few minutes to 20 understand exactly what it is. It's been a long 21 time. 22 Q. Go ahead and take a minute and see if 8840 1 you can see what numbers you were comparing. 2 Maybe you want to focus on the paragraph that 3 begins "assuming target spreads." 4 A. (Witness reviews the document.) 5 Q. Let me read that. "Assuming target 6 spreads of 2.75 percent and 2.50 percent, the 7 yield decline due to recognition of gains on 8 securities sales results in reduced income over a 9 10-year time horizon of $48 million and 10 $36 million respectively." 11 Do you see that? 12 A. Yes, I see that. 13 Q. And why would the numbers be different 14 depending on which target spread you assume? 15 A. Well, it would be comparing 2.75 versus 16 2.50. So, it would be a narrower spread relative 17 to the current spread that we're achieving. 18 Q. So, if you hadn't disposed of these 19 high-yield bonds and, instead, had kept them for 20 the 10-year period, if they -- if you assume they 21 would have earned a spread of 2.75 percent, what 22 you would have given up is $48 million, correct? 8841 1 A. In gross income, right. It would have 2 been less if you take the present value of that. 3 So, basically, the present value of 48 million 4 would have been less than the 46 that we've taken 5 in gains. So, we basically had a benefit by the 6 transactions and actions that had been taken. 7 Q. And assuming a more modest achievement 8 in spread, what you would have given up would have 9 been $36 million, correct? 10 A. Yes. 11 Q. And that is simply compared without 12 present valuing to the amount of the gains that 13 were realized when you disposed of those 14 securities instead of holding them, correct? 15 A. Correct. 16 Q. And that amount was what? 17 A. The gains taken out or recognized were 18 46 million compared to the 36 million. 19 Q. So, your conclusion as of January 28th, 20 1987, was that even ignoring the time value of 21 money, the sale of high-yield securities for gains 22 was more beneficial than leaving them on the books 8842 1 and collecting the income over 10 years, correct? 2 A. Yes. 3 Q. When you first started getting 4 questions from Mr. Gross, when these 5 Jenard-o-grams first started appearing, what was 6 your reaction? 7 A. I really don't recall. It was -- I 8 guess the memos were unique. They were different. 9 Q. Did you find them intimidating? 10 A. Oh, no. I think Jenard was a very 11 personable person. So, I didn't find it 12 intimidating at all. 13 Q. Did you get used to his management 14 style over time? 15 A. Yes, yes. 16 Q. And would you describe Mr. Gross' 17 management style as wanting to hear all the news 18 and not just the good news? 19 A. Yes. 20 Q. Mr. Gross was not personally an expert 21 in every line of business that United was involved 22 in, was he? 8843 1 A. No, he was not. 2 Q. Did he ask lots of questions and try to 3 inform himself at least to the level of having a 4 basic understanding of the various parts of the 5 business? 6 A. Yes. That was a lot of what his 7 monthly memos had to do with, was asking questions 8 and taking transactions and wanting to look at 9 them from a different perspective. So, he was 10 basically always asking lots of questions and 11 requesting follow-up analysis so we could look at 12 transactions in a different way. 13 Q. Just one more question and then I would 14 suggest -- will be moving on to another subject. 15 Would you say that the other members of 16 executive management were also interested in 17 hearing all the information, not just the good 18 news, to help them make the business decisions 19 that they had to make? 20 A. Yes, yes. 21 THE COURT: How much more do you have? 22 MS. CLARK: I have a considerable 8844 1 amount more. It's my hope that Mr. Williams will 2 be able to make himself available again before we 3 adjourn on December 19th. His -- what he has told 4 us is that he has a very pressing project at work 5 that requires him to go back to his regular job 6 tomorrow. But I believe he has indicated that he 7 will try to find time to come back. And I would 8 like to leave the cross-examination open and try 9 to accommodate his schedule if at all possible. 10 THE COURT: Are any of the other 11 respondents going to have questions for the 12 witness? 13 MR. EISENHART: Your Honor, I have 14 about half a dozen questions that I could ask, I 15 think, in about two minutes or less if you would 16 be inclined to do it now in view of the 17 uncertainty about when this witness will be back. 18 THE COURT: Mr. Nickens, are you going 19 to -- 20 MR. NICKENS: Your Honor, I don't 21 anticipate having any questions. And I would 22 request in light of the fact that rather than 8845 1 insisting on a subpoena and putting Mr. Williams 2 in a position of harming his employment, we would 3 just simply request that we be allowed to, 4 consistent with his schedule, bring him back at a 5 point in time where there is otherwise a hiatus in 6 our proceeding. 7 MS. CLARK: It would be basically the 8 same arrangement we had to enter into with 9 Mr. Williams, if that's -- 10 MR. NICKENS: Mr. Gerald Williams. 11 MS. CLARK: Gerald Williams, if that's 12 agreeable to the parties. 13 THE COURT: All right. Consistent with 14 Mr. Guido's objections, could you make available 15 to him the documents you're going to be using when 16 the witness comes back? 17 MS. CLARK: If the Court requires that 18 I do so, I will. 19 THE COURT: Yes, I would. 20 MR. NICKENS: Your Honor, we need to 21 have some understanding about going forward on 22 that basis. It is -- from the very beginning, it 8846 1 was the choice of the OTS to provide us with the 2 list of documents so that we could do the copying 3 and prepare those and have them available to us as 4 opposed to providing us with the five or six 5 copies that the different attorneys needed here. 6 That was their choice. 7 If our understanding going forward 8 is -- well, we're in the position, usually, of 9 responding to a large degree to what they put in. 10 And so, it is not always easy to plan ahead of 11 time exactly what's going to be used as opposed to 12 doing the direct. 13 But if your instruction is that we are 14 at least to make an effort to provide them with 15 the documents as much ahead of time as we can, we 16 will attempt to do that. That is not what we've 17 been doing for nine weeks. 18 THE COURT: I didn't mean to lay down a 19 general rule; but it just seems to me that since 20 the witness is coming back and there is some 21 continued cross in this situation, I see no reason 22 why they couldn't be made available. 8847 1 MS. CLARK: Your Honor, I will review 2 the documents that I had thought to use and at 3 some point prior to the resumption of his 4 testimony, I will provide Mr. Guido with my best 5 faith effort in giving him advance notice of the 6 documents. 7 THE COURT: We'll adjourn until 8 9:00 o'clock tomorrow. 9 MR. GUIDO: Your Honor, I would like to 10 raise something while the witness is still here in 11 terms of potential time before the break. It 12 looks like there is a possibility that this Friday 13 afternoon would be time that would be available 14 and possibly the end of the next week will be 15 available. But in terms of any other time, I'm 16 not so sure, given the schedule, that it would be 17 possible. And I just wanted to raise that with 18 the witness while he was still here so that we 19 could ascertain whether or not there is any 20 possibility of doing it during those time periods. 21 THE COURT: How much cross do you 22 expect to have? 8848 1 MR. GUIDO: Well, for redirect, it's 2 very dependent upon the cross. I think that 3 Ms. Clark at one time had told me two days and 4 then other times I've heard half a day. So, I 5 don't know. But in terms of redirect, it very 6 much -- 7 THE COURT: How much total? 8 MR. GUIDO: It very much depends on 9 what Ms. Clark has to ask the witness. As of 10 right now, I probably have maybe five to ten 11 minutes of redirect based on what I've heard 12 today. But I don't know what the rest of it is, 13 and I don't know how much longer she plans on 14 asking this witness questions. But it seems to me 15 that this Friday afternoon would be a good to him 16 for us to reconvene with the witness if we could 17 reconvene with him. 18 THE COURT: Mr. Williams, are you 19 available? 20 THE WITNESS: I'm not available the 21 rest of this week. 22 THE COURT: Well, you'll have to make 8849 1 arrangements with Mr. Williams -- 2 MS. CLARK: Thank you, Your Honor. 3 THE COURT: -- with the parties. 4 MR. GUIDO: Thank you, Your Honor. 5 MR. EISENHART: Your Honor, would you 6 prefer that I hold my half a dozen questions until 7 he comes back? 8 THE COURT: Yes. We'll adjourn. 9 10 (Whereupon at 5:02 p.m. 11 the proceedings were recessed.) 12 13 14 15 16 17 18 19 20 21 22 8850 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 3rd day of 17 December, 1997. 18 ____________________________ MARCY CLARK, CSR 19 Certified Shorthand Reporter In and for the State of Texas 20 Certification No. 4935 Expiration Date: 12-31-97 21 22 8851 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 3rd day of 18 December, 1997. 19 _____________________________ SHAUNA FOREMAN, CSR 20 Certified Shorthand Reporter In and for the State of Texas 21 Certification No. 3786 Expiration Date: 12-31-98 22