Document 260-9
Filed 02/05/2008
Page 1 of 13
Michael Edward Finn
June 9, 1999
Jersey City, New Jersey
Page 1 to Page 265
CONDENSED TRANSCRIPT AND CONCORDANCE
PREPARED BY:
ALDERSON REPORTING CO. INC. 111114th St, N.W 4th Floor Washington, DC 20005 Phone: 1-800-FOR-DEPO FAX: 1-800-367-3310
Case 1:93-cv-00531-LAS
BSA
Document 260-9
Michael Edward Finn
Filed 02/05/2008
June 9,1999
Page 2 of 13
XMAX{4/4)
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Page 13 He stated that he has BIl understanding of accounting, BIld I think your questions are more in the nature of asking for BIl expert opinion. Q I am not asking for your expert opinion, I am trying to understBnd the way you understood BIld viewed BIld perceived a thrift balBIlce sheet which you were reviewing in the course of your job, and which obviously was central to your job, as well as this asset of goodwilL I am asking to underslBIld if you are asked to compare it in your mind how you think about it, not what's expertly correct from an accounting perspective, and what the PhD's in accounting would say, but how you understBnd it, if you see a patent on a balance sheet, it's an intBngible asset, do you see that as something that's different from BIl intBngible, like goodwill? A I wouldn~ - I don~ know how patents are treated. I have never corne across it on a thrift balBIlce sheet. Q What about goodwill, where BIl acquirer pays in cash more money thBIl the book Page 14 value of an acquired thrift, have you ever seen that before? A Yes. Q And that's called goodwill on a balBIlce sheet? A Correct. Q And that's essentially what supervisory goodwill was called on a balBIlce sheet? MS. FRANK: Objection, these are asked and answered. Hets already given you his definitiou of goodwill BIld supervisory Goodwill. Q You CBIl still BIlswer. A As I mentioned before, goodwill is goodwill. Supervisory goodwill just designated as a point in time within the thrift industry. It was specific, I guess you could call it a regulatory accounting principle, as opposed to a generally accepted accounting principle, but goodwill was goodwill. It was the difference between the value of the assets BIld the price that was paid, or the value of the institution and the price that
Page 15 was paid. (2) MS. FRANK: Counsel, before we go (3) further, there is one preliminary thing I (4) forgot to say at the beginning of the (5) deposition. (6) The government's position is that (7) this deposition should be treated as (6l attorney only work product for purposes of (9) the litigation. I just wBIlted to get that no} on the record. that thatls the government's (11) position. (l2) MR.HUME: I am not sure I (13) under.tBIld that point. It was made in a (14) prior deposition. (15) MS. FRANK: With respect to the (16) treatment, what - the use of the (17) deposition and that its use is similar to (IB} attorney only product, so that it is not (19) released out to the pUblic. (20) That's my understanding, without (21) discussion and agreement of the parties. (22) MRHUME: My understBnding is that (23) it is a deposition that's an out of court (24) statement under oath, that would be (25) admissible in court for all the stBndard
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Page 16 reasons that would allow out ofcoUIt statements under oath to be admissible under the stBndard rule of Court of Federal Claims BIld the Federal Rules of Evidence. rm not saying that1s inconsistent with what you are saying, I'm saying I WBIlt my understanding to be on the record. MS. FRANK: It's on the record. :MR. HUME: So I can continue? MS. FRANK: Yes. I meant to say that at the beginning beginning, BIld we running late because of the court reporter,
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Q Can you explain to me now just a few very general questions I have about the way you did - the way regulatory exams and supervision worked. There are a few terminology and concepts I wanted to understand at the outset. One of them is the concept ofa MACRO rating, CBIl you explain what that means? A The MACRO acrouym stBnds for management asset quality capital risk management and operating results. Itls similar to the CAML rating that
ALDERSON REPORTING COMPANY,INC.
Page 13 to Page 16
·
Case 1:93-cv-00531-LAS
BSA
Document 260-9
Michael Edward FInn
Filed 02/05/2008
June 9,1999
Page 3 of 13
XMAX(818)
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Page 33 GAAP would bave not allowed them to record the goodwilL I think it was just the time frame for anlOrtization that would have been different. Q What is your general recollection of the institution I alluded to earlier, Carteret Savings Bank? A A Morristown based $5 or $6 billion institution that was very much part of my caseload at that point in time. Q So you remember it quite well? MS. FRANK: Objection, that's not his testimony. Q It's a question. do you remember it quite well? A I remember vlll)' much of it. Not specifically in detail, but just in broad tenns of dealing with many people and issues. Q I am not trying to trap you on your memory, Ijust wanted to understand, we have some documents here that may refresh your recollection. But just siting here today, what is your earliest recollection of Carteret? A Being assigned that in my caseload circa 1989, and just trying to become familiar Page 34
Page 35
(1) mind are us as the primlll)' regulator and the FDIC. 121 '31
Q I'm sorry, individual regulators.
A With Carteret, the stream of people
'41 involved with Carteret during my tenure was Scott {51 B. Smith, who was the, I guess, team leader when
161 we were with the Federal Home Loan Bank, field 11/ manager when it became OTS.
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Meyer, as 1 mentioned, EIC I" the 1989RussellTom O'Rourke I believe was the EIC exam, '" of the next two exllIt\s and very actively involved
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John Griffin, who is a supervisory agent when we were with the Federal Home Loan Bank (14 ) and was the AD on the case when we came here to 115) OTS. (16) Joe Kehoe, I believe was another (11) Assistant Director who had limited involvement (18J with Carteret, at a time when John's caseload had (19) shifted. (20) Q John Griffin's? (21) A Yes. Because of its scope of (22) operation and size, obviously senior management at (23) OTS and the FHLB was party to many discussions on (24) Carteret, including Mike Simone, Bob Albanese, (25) Angelo Vigna, and then our regional coWlsel's area
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111 would be involved as welL ,21
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From the FDIC primlll)' contacts in
(31 that time as especially strong, weak, trOUbled, 141 not troubled? 15/
131 dealing with Carteret would have been Bill
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MS. FRANK: Objection as to form. A My recollection at that time was there was an ongoing examination, I believe it was being perfonned by Russell Meyer, which had adverse findings. So at that point we knew that there were issues - that it was an institution that was going to warrant concern. I dont recall what the exam rating was prior to Russell, Russell Meyers examination, and I dont even recall what his rating was, but that's about the time frame. Q Were there any particular regulators that you remember as having worked on Carteret or having special knowledge of Carteret at any time? MS. FRANK: Objection as to fonn. Are you talking within OTS? A Q Could have been - no, I mean generally, government regulators that spring to your mind when I mention the institution Carteret? A The regulators that would come to
Pollack, review examiner based office '" and Dan aDeon. I dont know whatout of thewas at his title in time, I" that pointFDIC. but he was a senior regulator (71 with the
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191 Nick Ketcha became involved at the FDIC as well.
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Q When do you remember stopping work on Carteret? A I dont know specifically. It's a '91 to '92 range. I know I was involved in '91, I couldn't tell you if! was involved in 1992, because r was taking on field examination assignments outside of Carteret at that point. Q Can you just explain again, you may have already done so, exactly what the distinction is between the work you were doing as a supervisory analyst and as a field examiner, is that the correct tenn? A Yes. When we were at the Federal Home Loan Bank we were split into two groups, supervision and examinations.
Page 33 to Page 36
ALDERSON REPORTING COMPANY, INC.
Case 1:93-cv-00531-LAS
&SA
Document 260-9
Michael Edward finn
Filed 02/05/2008
June 9, 1999
Page 4 of 13
XMAX(11N1J
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Page 41 they acquired Carteret, they signed on with an agreement that, in short, they would keep the capital above a certain level. So, there was a sense of support that we expected out of them based on that agreement. So their ability to make good on that agreement was important to us. Q Do you recall how much AmBase paid for Carteret? A I don~.
Q Would you have been likely to have known that at the time? A Yes, I would have. Q So at tha time, do you recall when AmBase acquired Carteret, in what year? A I helieve it was 1987. Q And you would have known that when you started - you would have known the year it was acquired - just let me tell you it was 1988. A Oksy. Q And you would have certainly known at least the basic details of that acquisition when you started working on Carteret, is that correct?
Page 43 regulatory framework would have been. (2) It would make sense if it caused (31 them to he undercapitalized, the dividends would (4) he restricted, but I don~ recall a specific lSI regulatory framework. (6) Q So you would have started working at (71 Carteret right around the time that FlRREA was (8) either about to he passed or right after it was (9) passed? (10) A Correct. (ll) Q Do you remember any general change (12) in regulatory attitude as a result of the passage (13) ofFIRREA? {Ul MS. FRANK: Objection, vague. (15) A Not a change in attitude, no, I (16) don~ recall a change in attitude. A change in (17) volume of work, but not in attitude. {l8) Q Do you rememher thinking that one of (19) the major impacts ofFIRREA was its impact on the (20) treatment of supervisory goodwill? (211 MS. FRANK: Objection as to form. (22) A I do recall supervisory goodwill as (23) heing one of the - one of the major components of (24) FIRREA in terms of its impact on tha thrift (2S) industry.
/11
Page 42 MS. FRANK: Objection as to form. ") (2) A I wouldn~ have known ,.nen I fJrst (31 assumed the caseload, it was something I would (4) have hecome aware of most likely reading through 'Si the examination reports, which would have talked 161 about the arrangements. 17) Q And at that time you then would have (8) known how much they paid, as you testified
191 (101
(11)
earlier?
A Correct. Q Do you rememher thinking that AmBase had paid tao much for Carteret? MS. FRANK: Objection as to form. No, I don~ remember thinking that. A Q Or that they had made a really stupid investment? A No, I don~ rememher thinking that.
(12)
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Page 44 Q And so the concept of supervisory (2) goodwill would have been a concept you were (31 familiar with even hefore FlRREA was passed? (4) A I was familiar with supervisory (5) goodwill from the first month that I was working (6) at OTS, hecause it was slightly different from the (7) accounting that you would learn in college. (8) You knew supervisory goodwill was on 191 thrift balance sheets. (10) The impact was not - in 1986, you (11) know, we didn~ know FlRREA was coming, so when (12) FIRREA came, I was aware of how much goodwill was (13) out there and what the potential impact was. (14) Q Was it considered to he a suspact
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MS. FRANK: Objection, vague. A Goodwill is an asset that if there is a high concentration, would cause general regulatory concern, hecause of its non-earning and intangible nature. Suspact asset, I mean I don~ know what you mean by that. Q I guess I mean was there a general consensus it was basically worthless? MS. FRANK: Objection, vague.
Page 41 to Page 44
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Q Were you aware of AmBase's
dependence on dividends from Carteret to help pay down and service debt in AmBase? A Yes, I was. Q And you were aware of the fact that those dividends would not be available after the passage ofFlRREA? A I don~ recall spacifically what the
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ALDERSON REPORTING COMPANY,INC.
Case 1:93-cv-00531-LAS
BSA
Document 260-9
Michael Edward Finn
Filed 02/05/2008
June 9,1999
Page 5 of 13
XMAX(12112)
Page 45 The witness can testify as to his recollection, but he's not - I will leave 12) it at that. 131 Q That's all I am asking you for. i41 A I don~ recall it in my recollection 151 16) as being worthless. It was an asset that had - the 11) 161 value was not strongly supported in all cases, and
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(1) (2)
Q Yes, my question was do you remember
191
was cause for a concern..
Whether or not it needed to be written off as worthless, I don't recall that being the case. Q Do you remember thinking, or other people thinking or stating that wow, as a result of FIRREA some of these banks are really going to get whopped upside the head?
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MS. FRANK: Objection as to fonn,
compound and vague. A People at OTS had an understanding that supervisory goodwill was going to negatively impact many institutions. Q And some would be more sensitive than others, right? A Depending upon the level of goodwill relative to capital. Page 46
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institutions that were put out of business or taken over by government regulators as a result of 141 tIieir loss of goodwill? 151 A Okay, and as I stated, I do recall (6) institutions that were taken over because of their 171 loss of goodwill. 181 In terms of with Carteret, I do 191 recall them being taken taken over by the RTC, but (10) not necessarily strictly because of their loss of 111) goodwill. 1121 Q Do you remember when they were taken (13) over? (14) A December '92, I believe it was. 1151 Q Is that from memory, or something (161 that's been refreshed recently? (17) A I think it was mentioned yesterday, 1181 because] wouldn't have recalled that. (19) Q I would like to maybe show you some (2.01 documents that may refresh your memory about that 1211 time period. (22) MR. HUME: ] would like to mark this (23) as AmBase Finn Exhibit 1. (241 (The above described document was 1251 marked AmBase Finn Exhibit I for
131
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Q Do you remember Carteret
particularly as one that would be especially sensitive to that? A ] don~ recall at the enactment of FIRREA exactly what Carteret's goodwill position was relative to capital. I know goodwill was a significant asset at Carteret. so itls likely it was a significant impact, but] don~ know what its capital level was at the time they started with that. Q In your experience, do yOll remember any banks that were completely put out of business as a result of the loss of goodwill? A Put out of business, as in taken over by the RTC? Q Essentially, yes. A Yes,] do do recall banks being taken over by the RTC. Q Would Carteret be one of those banks? A If] can just clarify the question, because I don't recall exactly what you had asked. ] do recall banks being taken over by the RTC, but are you saying specifically because of goodwill?
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Page 48 identification, as of this date.) Q] am not going to ask you to read the entire 1989 ROE, but if you look at Page 47. MS. FRANK: Counsel, can we just have a second to look at the whole document and see what it is? MR. HUME: Sure. Okay. Q Let's turn to Page 46 and look down to the bottom, and you can read to yourself the paragraph underneath paragraph A, tangible capital, and then maybe read over to Page 47. Read down the page, ifyoll would like to familiarize yourself, refresh your memory. A Okay. Q Having reviewed that briefly, do you recollect being involved in the ~9 exam? A] don't recall specifically whether or not I did field work on that examination. I know I visited the exam site for meetings and discussions, but I don't recall specifically whether or not I performed field work on that assignment. Q Right, but you may have been mvolved in the traditional supervisory analyst role?
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ALDERSON REPORTING COMPANY,INC.
Page 45 to Page 48
·
Case 1:93-cv-00531-LAS
BSA
Document 260-9
Michael Edwa rd Finn
Filed 02/05/2008
June 9,1999
Page 6 of 13
XMAX(18118)
Page 69 A I think the periods were different, 131 but yes, the nwnbers do look different. 131 Q Right, I am not asking for an exact 14} comparison, because they are from slightly 15) different time periods, but they both are capital 16) calculations under FIRREA inunediately after i 7) passage or soon after the passage of the new (8) requirements. 19) Having reviewed this docwnent, what (10) are you remembering about whether or not Carteret (lll was thro'Ml out of compliance by the passage of (131 FIRREA? (131 MS. FRANK: Objection as to form. (14) A Looking at the December 31,1989 (15) presentation by Carla O'Connor, they show (16) compliance with tangible - they show compliance (17) with core and they show compliance with risk based (18) capital as well. (19) Q And yet they were extremely out of (2Q) compliance under the Report of Examination. (211 How do you explain that discrepancy? (22) MS. FRANK: Objection as to form. (231 A I havent compared the two (24) documents. (25) Ifyau want, I can compare the
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Page 71 concern right around the passage of the legislation?
A Listen-
MS. FRANK: Objection as to form. A Capital "vas a concern around the (6) passage of the legislation at Carteret. (7) Q Would it impact a thriftts or an ,,) institution's capital rating and overall MACRO (9) rating if its capital were barely in compliance as (10) opposed to substantially in compliance? (111 MS. FRANK: Objection as to form; (12) vague. (131 A It could have a very great impact on (14) the rating. (15) Generally. if you were not within (16) capital compliance I don't believe you could (17) receive a 3 exam rating. (19) But if you were substantially or (19) excessively out of capital compliance. you would (20) probably not be able to receive a 4 rating, you (21) would probably be given a 5, if the viability of (22) the institution's capital seemed like it was in (23) threat of an imminent failure. (24) Q Doesn't it help your overall rating (25) if you are substantially in compliance, so that
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Page 70 periods and try to do a calculation as to why they are different. Q It's Page 46 to 48.
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MS. FRANK: I would like to caution the witness that it's his recollection of \tVhat the differences are; the documents speak for themselves. If you have any recollection,
though, ofwhat difference, any recollection that would answer the (11) question, then you should answer. (12) A I dontrecall. <131 Q So, at this point you do not recall (14) whether FIRREA made Carteret fallout of (15) compliance under the capital requirements under (16) FIRREA? 117) A Looking at this docwnent, it brings (18) back a memory that they did marginally comply (19) based upon their own calculations as of December
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But my specific recollection as to whether or not as of the enactment ofFIRREA they were thrown out ofcapitaI compliance. I don't.
Page 72 you have a large cushion to absorb future losses? (2) MS. FRANK: Objection as to form. (3) A Capital - the adeqlUlCy of capital (4) is very important. and it would help your rating, (5) but you could have a 25 percent intangible capital (6, ratio and still be rated a 3 if management was (7) crooked or there were other issues at hand. there (8) were other issues at hand that would cause us (9) concern about the operating ofthe institution. (10) So capital doesn't necessarily save (11) the rating. but it would have a big impact on (12) alleviating it. (1)) Q I understand all of these five (1" factors contribute to the overall analysis, but (15) isn't the ultimate concern in the base line thrust (16) of all of the work that you are doing is to assess (17) the security of the risk that the insurance fund (19) has in this institution? (19) MS. FRANK: Objection as to fonn. (20) Q Isn't that the mandate of the
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recall. Q Do you remember it being an area of
MS. FRANK: Objection as to form. A There are two areas. If you talk about the broad concept of what we are here to do, yes. it's to protect the insurance fund.
Page 69 to Page 72
ALDERSON REPORTING COMPANY, INC.
Case 1:93-cv-00531-LAS
BSA
Document 260-9
MIchael Edward Finn
Filed 02/05/2008
June9,1999
Page 7 of 13
XMAX(3lilS5)
·
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Q Really? You think it will not impact the price for an asset you will get if you ore forced to sell it? A If you have a willing buyer and a willing seller, you are going to get market value, you should get market value for it. If you are selling in a depressed environment you might not be able to get the highest market value you would hope to get for it. Q If you are forced to sell assets in order to meet your capital requirements and assets that you would not otherwise sell, isn!t it true that you are likely to have to take a hit on the price that you get? MS. FRANK: Objection as to fonn. A You are going to be able to sell an asset or liability at market value when you go to sell it. It's going to be determined by what the market condition is at the time you are selling. Q Right, but if you have to sell an asset by a certain deadline in time and you have no ability to wait beyond that time, isn~ that
Page 139 Q Maybe he does, maybe he doesn\. (2) Let's assume that.he doesn't. (3) Would it affect the price that you (41 could get? (5) A There would be a liquidity premium (61 to sell a house within 30 days, because typically (1) it would take 60 days to get financing, so yes, (" typically that would have some depression in the (91 price because of the liquidity premium. (10) Q Do you not remember thinking that (ll) with respect to Carteret's sale of its branches it (12) was going to have to sell them off cheaply in (13) order to generate the cash and the capital to (14) maintain it's capital compliance? (15) MS. FRANK: Objection as to form. (161 A I donhecall them having to sell (11) them off cheaply. (18) I remember them using that as a (19) strategy to come into capital compliance, but I (20) dont know what you are getting at with selling I'll them cheaply. (22) Q Do you remember them deciding to (23) sell the assets because of their need for capital (24) compliance? (25) A The assets or the liabilities?
11)
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Page 138 going to affect your ability to get the price you (2, really want and the price you really deserve? 131 MS. FRANK: Objection, vague. (') A My response is still it depends upon (5) the market conditions at the time. because the (6) market is going to dictate the price and the value (11 that somebody is willing to pay for it. (8) Q So the market works in abstract and (9) is independent from the particular position of the (10) seller, is that your testimony? (11) In other words. the real estate (12) market is what it is today in New Jersey. (13) Your house being on the sale market (14) will not affect it, is that correct? (15) A No. If everybody's house is on the (16) market, it's going to depress prices. (11) Q I didnhay everybody's house. 11" I said - here is my hypothetical (19) question for you. (20) You have to sell your house in the (21) next 30 days. (22) Is it going to affect your ability (23) to get a good price for that? (24) A Does the buyer know the specifics 1251 about whether it has to be sold?
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Page 140 Are we talking about the branches? Q Right, and branches would involve both, I am talking about both branch sales and asset sales? MS. FRANK: Objection as to form. A I'm sorry, could you repeat the question before I asked to clariJY. Q I will try to claritY it for you. Do you remember Carteret's strategy of selling both branches and assets throughout the post-FlRREA period as something which was undertaken in order to help it meet capital requirements? A I do recall that that was their broad strategy. Q Do you therefore recall that absent problems with its capital requirements, Carteret would not have undertaken that strategy? MS. FRANK: Objection as to fonn. A I don~ know what strategy they would have undertaken if they were healthy, I would be speculating. Q Do you remember the issue of the use of real estate seIVice corporations to foreclose on real estate assets by Carteret?
Page 137 to Page 140
ALDERSON REPORTING COMPANY,INC.
Case 1:93-cv-00531-LAS
B"
Document 260-9
Michael Edward Finn
Filed 02/05/2008
June 9,1999
Page 8 of 13
XMAX(41141)
·
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and written off to deplete capital? A It's not written off, you set up a set - it wculd aJrect your eanlings, so it wculd reduce capital, but it's much different from a loss classification. Q Itls a reserve against a future loss rather than a loss in this period, that's the difference, right? A Correct. And also GVA's are added back in for regulatory capital calculations. So you don~ actoally have a dollar for dollar hit when you are establishing a GVA, whereas if you classified an asset loss and you were required to write it off, you would dollar for dollar take a hit to capital. Q And the GVA is added back to regulatory capital for all three purposes? A Not for tangible, not for core, but for risk based it is. Q One for one? A Up to I at that basis points of risk weighted assets. Q And you remembered that was the case at this time as well?
Page 162 A I don~ recall, I don~ know if they achieved that maximum or if they had more than the maximum. Q So even though you don~ remember why they would have used - Carteret would have used 6 percent GVA and 10 percent GVA, is it correct from your earlier testimony that that difference would rellect a difference in the way evaluated Carteret's assets? A Not a difference in the way we evaluated the assets, a difference in time, because over a year you have more loss experience history and economic factors change, market conditions change. It's not - you are not at the same point of time with the same exact portfolio, so itls not a difference in methodology, it's a difference in time and considerations regarding what period you are in. Q Are you familiar with conseIVatorship accounting? A No, I am not. Q Do you remember whether Carteret followed the recommendation to writeoff the $77 million?
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A M I mentioned before, I don~ recall which exam it was associated with, but there was a - in the September cBlendar quarter ofone of the years I know they didn~ fully reserve as they were instructed, but it could have been associated with the 1989 or '90 exam. Q Do you remember anything about clearing Carteret for entering into the brokerage service business? A Vaguely. Q Do you remember it being an issue of
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particular controversy or relevance to its capital
health? MS. FRANK: Objection, compound. A I don~ really recall any great detail about it. MR.HUME: Let's mark this AmBase Finn 8. (The above described document was marked AmBase Finn Exhibit 8 for identification, as ofthis date.) Q If you could just review this document. A Do you want me to go through the entire document?
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issue any better? A I recollect the Wall Street Financial Services name. I recollect there being a relationship with Gruntal, and side from what I am reading on the paper, I didn~ really recall any of the individual factors. Q Was it unusual for thrift institutions to offer brokerage services through wholly owned subsidiaries? A I don~ know how many institutions did that. I think I may have been involved in two or three in my experience, so it wasn't wmeard of, but I don~ know approximately how many did. Q Do you remember being involved in the creation of a regulatory plan for Carteret around the end ofl990, beginning ofl991 ? A That would be something I will do on an ongoing basis with my caseload on an institution. It would not be surprising, I don~ recall it specifically.
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ALDERSON REPORTING COMPANY, INC.
Case 1:93-cv-00531-LAS
BSA
Document 260-9
Michael Edward Finn
Filed 02/05/2008
June 9,1999
Page 9 of 13
XMAX(43M3)
·
Page 169
{ll Carteret?
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A Yes, I testified I did do field work on several exams. never - I never ran the exam. but did work while I was an analyst. I mentioned that I was doing a
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transition between analytical and field work. (7) Q Right, sorry, I guess I meant after {81 that switch to pure field work did you do field {91 work then on Carteret? (10) A Yes. I think I participated in the (11) last exam, which probably would have been the '91
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exam.
Q I think the '92 would have been the
last one? A Maybe I didn~ participate in that, then, because I think by '92 I was doing other work. Q Just having read this, can I ask you in your O'WJ1 words, based on your refreshed recollection from this document, to tell me what you think the role of capital compliance had in the general demise of Carteret? MS. FRANK: Objection as to fonn. A I'm sorry would you read back the question. Page 170 (The question requested was read back by the reporter.) A When you talk about demise, you talk about failure, or the institution being taken over, I am asswning? Q Yes, that's correct, I would say when I use the word demise, I mean the institution's loss of independent viability separate from supervisory control. which is ultimately consummated in a conservatorship. I mean in other words. I am introducing it as a concept that in a spectrum, that demise begins when the regulators are basically telling you what to do, and ends, or is consummated when they actually physically put it in conservatorship. A Okay. Q So I am using it, I guess, in that broad sense. A Capital was defmitely a big component of the demise, as you tenn it, of Carteret, as well as the unsafe and unsound conditions that existed in the lending function, which again resulted in tremendous losses \WUch impaired capital.
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Page 171 They are all - most of the issue is related to capital, whether it be supervisory goodwill or the unsafe and unsound conditions that the institution was in. Q So, in a sense it all kind of ties in together all of these concerns in a way? A I think that they all drove the capital number down. A I think that was all that was mentioned as part of this memo. Q If you were asked to what extent did the loss of the ability to use supervisory goodwill cause the demise of Carteret, what would your answer be? MS. FRANK: Objection as to fonn. A If I can qualify it pre-injunction, it played maybe half the role, because it was one of the factors that drove capital down. But there were, you know, as you can see from the exam report, many, many other issues in Carteret that we felt were unsafe and unsound condition. in terms of lending, poor policies and procedures, inadequate asset loan review and other areas that we were very concerned with. So it was a combination of things.
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Page 172 Post the injunction when we gave {ll them credit as the court ordered for the {31 regulatory capital for supervisory goodwill, the {41 concerns that we expressed were 100 percent {51 non-supervisory goodwill related, and again most (61 of those related with asset quality, operating (7) losses. poor loan review and the like. {Sl Q 1bat seems reasonable to me. 19) To what extent does the answer get (10) complicated when you think causation sort of more (11) narrowly and say, well, what happened to Carteret (12) because it was out of compliance, what was it (13) forced to do, and how did that serve to escalate (14) or at least to change the nature of its financial (15) and capital position after FlRREA? (l6) MS. FRANK: Objection, vague and (17) ambiguous. (18) Q Would you like me to clarify the (19) question'! (20) A Well - no, because I think I can (21) answer the capital noncompliance causes a series (22) of actions from the regulatory perspective, and (23) one of those being to submit a capital plan (24) showing how you are going to come back into (25) capital compliance.
{ll
ALDERSON REPORTING COMPANY, INC.
Page 169 to Page 172
Case 1:93-cv-00531-LAS
BSA
Document 260-9
Michael Edward Finn
Filed 02/05/2008
June 9,1999
Page 10 of 13
XMAX(44/44)
(1) (2) (3)
Page 173 So at that point in time that was
the main vehicle for creating a supeJ.Visory
restraint on the institution. They could choose how to operate (5 J within the confines of that capital plan, but they (6) would somehow have to demonstrate as part of the (7) capital plan that they would achieve capital (8) compliance. (9) So that becomes the restraint. (10) Q That becomes kind of the operating (11) goal, is to bring themselves back into compliance, (12) so to speak? (13) A And it also puts them within certain (14) parameters, because Wlder a capital plan, growth (15) is limited, dividend - I think there are dividend (16) restrictions, and you can get waivers from some of (m these, but there are limitations as part of that (18) process on what they could do, beyond just (19) bringing their capital back up to speed. (20) So it's an operating restriction as (21) well. (22) So that was the main impact, I (23) believe. (24) Q If we can flip back to the second (25) page here of the regulatory plan.
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Page 175 losses, occurred around this time at Carteret and {z} oilier institutions because the real estate market (3) was driving down extremely quicldy, so you had (4) what had been generating assets, that were (5) generating income, that all of a sudden became (6) nonperforming and were being foreclosed upon (7) within a year, where typically you would have a (8) much longer workout period, but people were (9) walking away from properties. (10) So this does happen, and again, it's (11) not typical to see a net interest margin go (lZ) negative, itls very unusual, and that was a unique (13) time in the thrift industry, back in the early, (14) early '80s. (1') Q I understand that, but I guess if (16) if a loan is nonperfonning and it's nonperfonning (17) in the strictest sense, in the sense that the (lS) borrower is just not paying the interest, is (19) defaulted, so ifs at least a doubtful and maybe a (20) loss asset, it will not generate interest income (21) for the lender, isn't that correct? (22) A That is correct. (231 Q I guess the only pointI am trying (2') to ask you about is even though they had (25) significantly large loan loss provisions, they
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Page 174 Look at it just down the line here, you see, take any of the quarters will basically have the same dynamic here, I won't: ask you about them all, interest income will be greater than interest expense, and will equal net interest margin, then you will have a provision for loan loss that at least reduces that margin or possibly as in the third quarter of 1990 makes it a negative. Is it at all curious that you have such large provisions for loan losses when you are still generating positive earnings on your net interest, on your net interest margin? MS. FRANK: Objection as to form. A No, it's not. I think typically the only time in my experience in the thrift industry when you saw negative net interest margin was back in the early '80s, when you had a deregulation of the liability side of the balance sheet and interest rates drove up in excess of20 percent. There you actually had a ftippage where your cost of funds exceeded your interest income. But this again, provision for loan
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Page 176 still had on their performing loans enough interest to cover the interest expense that they had. I don't want to make too much of this, I am sort of making a simplistic point here. Given that, doesn~ that sort of highlight what a provision for loan loss is, which is that it is a conservative accounting mechanism to help cushion the institution against future losses? MS. FRANK: Objection as to form. A Provision for loan losses is made up of two things, it's actual losses and it's general valuation allowances, general valuation allowances are a provision against future potential losses. Losses or specific reserves, specific valuation as they are also called would be actual writedowns of assets. So that is an immediate pennanent impairment as opposed to a reserve for future losses. SO rm not sure what's in these numbers, but it1s a combination. Q I guess the point 1 am trying to ask you about, Mr. Firm, is that at least with respect
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---------------;;;-====:;:===;;-;-;;;:;-----------;:=~==::-:;:;;; ALDERSON REPORTING COMPANY, INC. Page 173 to Page 176
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Case 1:93-cv-00531-LAS
BSA
Document 260-9
Michael Edward Finn
Filed 02/05/2008
June 9,1999
Page 11 of 13
XMAX{48/48)
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Page 189 your same asset size. or would you rather shrink because it's more financially advantageous to remove if it was a high interest environment some high cost fund,? So you still have a business
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decision in that matter.
I mean if they dido~ have cash and liquid assets which may have been a concern at Carteret and they had to borrow, then it would have been a financial hardship for them to borrow so that they could pay cash with the deposits. But if they were doing it as part of a business strategy to maintain size, then it's just a business decision. Q I think maybe I wasn~ very clear in my question. I didn~ really mean isn~ the fact that they had to borrow B hardship on the business. I meant that given a certain level of borrowing, and in this case let's agree that the reason for that increased level of borrowing was to fund the branch sales, isn~ it a hardship or a constraint on the bank that they also have to face a higher collateralization requirement?
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Page 191 A I remember ongoing liquidity reports that would come in through Bob Loskowski, but specific points of crisis or non-crisis. I don't recall. Q And Bob Loskowski was at Carteret or atOTS? A rrn sorry" he was at Carteret. I thought he was Treasurer or Assistant Treasurer. Q He would send liquidity reports to you? A ToOTS. I think typically I would review them. Q Why would liquidity have been a problem with respect to branch sales? I just don~ understand that. A Because you need cash, you are selling a liability, so somebody assumes that liability. You have to give them cash or some other form of compensation to accept that liability. MS. FRANK: I am going to object, I don~ think you have the foundation that this liquidity is related to branch sales. Q As to this issue of the need for increased FHLB advances during this 1990 to '91 Page 192 period, do you recollect any specific reason why Carteret needed it? A I don't specifically recall why. Q Can you look at the first page of this MOC I have given you, and I guess fue first twopages. If you just look, it's obviously an analysis ofliability, the ups and downs throughoutJanuary, February of1991. If you run along the total deposit line, if I'm reading it correctly, which please correct me if! am not, seems to be saying that in January and then again on each of the days featured here in February, the total deposits, total liabilities of Carteret went up. Am I reading it correctly? A Just from reading above. 1 me-an 1 don~ recall specifically how this report was set up, but it sounds like it's cumulative. Q Cumulative through January, right, for January, and then the daily for all the other ones. I'm not so interested in the amounts, but anyway A It says - the columns beginning
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Page 190 MS. FRANK: Objection as to form. (2) A To use FHLB advances, it would have 13) been a constrsint because they required a higher (4) level of col1ateralization based on their (5) condition. (6) Q I mean in a sense it sort of (1) highlights this question, which is that for the (8) bank to earn earnings, as in all of life, you have (9) to take risks, would you agree with that? (10) A Yes. (11) Q And that when you are constrained (12) against taking risks, it's harder to earn money? (13) MS. FRANK: Objection as to form. (14) Q I am not saying it's impossible to (15) earn money, I am saying it's impossible to earn (16) more money? (In A It's harder to eam it faster. (18) because you have to take more risk. (19) Q And if you are constrained against (20) taking that risk, then it's harder to do that? (21) A Which is - yes, the regulatory (22) framework that you deal with in an (23) undercapitalized institution. (24) Q Do you remember anything on this (25) issue ofliquidity problems faced by Carteret?
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ALDERSON REPORTING COMPANY, INC.
Page 189 to Page 192
·
Case 1:93-cv-00531-LAS
BSA
Document 260-9
Michael Edward Finn
Filed 02/05/2008
June 9,1999
Page 12 of 13
XMAA($31")
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Page 209 you cannot operate in a capital deficient position, and the regulation states how quickly you need to achieve compliance again under the tenns of the plan. Q So you don' think the institution would take the same course of action required under the capital directive if left to its own devices? MS. FRANK: Objection as to form. A An institution may choose to enhance income in many different ways to make themselves more profitable, or to generate improved dividend~ for the parent, it can do things for any number of reasons. But it doesn' necessarily - their interest io maintaioiog a high capital position is not necessarily going to reconcile with ours. Typically you would want to leverage your capital to the nth degree to maximize earnings. but that's not satisfactory from a regulatory and statutory perspective. So our interests don1 always agree with management. Q Do you think that your ioterasts do no always converge with management?
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Page 211 What is it that you don' understand about it? MS. FRANK: Well, we have a cover letter from Mr. Vigna and then Page J is a stipulation and consent to the issuance of a capital directive, that's unsigned, then we have a capital directive. A couple ofMR.HUME: Would you like to break it up ioto separate documents? MS. FRANK: Or just know exactly what it is, all that we've got here. MR.HUME: I think irs the enclosures of the letter. If there is more than one fax. MR. CARENZO: There is a fax encryption showing it's coming from the OTS. MS. FRANK: It looks to me like we have two capital directives, one that's dated and one that's undated, one thars signed and one that's unsigned. I'm not tryiog to be difficult, I am just trying to understand and I think it would help the witness, as well. Page 212 MR.HUME: I will do anything I can to help move this along. Let's go to Page T 041053, then there is a second fax cover sheet at T 041504. Let's rip that off and excise it from the exhibit. A I am extremely confused now, you are dealing with an unissued, unauthorized document, it was never signed by the Regional Director, so it could be just a draft product. Q I will stipulate that it's a draft product. I have no problem with that. All I want to ask you about on this draft product that's not signed by anyone is the liquidity requirements iotroduced io section 2.04. If you get out your other draft product from June of'9l, you will not fmd that provision at Section 2.04. MR. CARENZO: Fion 12. Q I am simply usiog the document to try to refresh your recollection. If you would rather not use it, I will simply ask you do you recollect the reason why a liquidity requirement was added to the
Page 209 to Page 212
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Page 210 Would it be fair to say that your 12) interests tend to be more short tenn in an attempt 131 to insure against any catastrophic loss or run on (41 the bank? MS. FRANK: Objection as to form. '51 (61 It's vague and it - when you say (7) your, are you referring to his personally? (8) Q You as a regulator, you, what is (9) your understandiog of the regulatory ioterest (10) which you describe as not wholly convergent with (11) the institution's? (12) A The regulatory iotent would be to (13) ensure capital compliance in the short term and (14) over the long term. (15) We don' necessarily do anything (16) extraordinary in the short term to ensure capital (17) compliance more than we do so in the long tenn. (18) Q Would you turn to the first page TO (19) 41496. (20) MS. FRANK: Counsel, I am tryiog to (21) figure out exactly what this document is. (22) MR.HUME: 11llsdocurnentisproduced (23) to us io this form by the govermnent. (24) I mean it's in a series of Bates (25/ nwnbers.
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ALDERSON REPORTING COMPANY, INC.
Case 1:93-cv-00531-LAS
BSA
Document 260-9
Michael Edward Finn
Filed 02/05/2008
June 9,1999
Page 13 of 13
XMAX(S8/S8)
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Page 221 Q Following up on that, do you recollect specific impact that Dick Bianco had when he joined Carteret? MS. FRANK: Objection, vague. A It was a new management team and philosophy. It was a turning of a comer from a management perspective. Not necessarily that that was the salvation, but it was - you moved from a Robert Walsh who was - who was defending the institution and fighting with the OTS to maintain the Temporary Restraining Order and its benefits and not necessarily trying to address our - to the degree of our concern the other issues at the bank, and Dick Bianco came in and tried to actually take a new approach with the OTS and work with OTS outside of the capital issues to deal with the institution's problems itself
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Page 223 A Writing down assets creates a need
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So, it is tied, but you don~ - you necessarily want to be writing down assets as a positive to looking to raise capital. The writing down of assets created a larger hole than existed, and precipitated the need for a capital infusion. But it wasn't necessarily a positive thing to say let's write these down and that will draw new capital in. It created a need for more capital. Q So you were never aware that it might help Carteret raise money on the capital markets by their ability to represent that the balance sheet they presented was rock solid? MS. FRANK: Objection as to form. A I was - I don't recall being aware that their writing down assets was going to make their balance sheet rock solid, or that that's what they were claiming as part of their capital
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prior management by OTS? MS. FRANK: Objection. He doesn~ speak for OTS, he can give his own view. Q Right, sony, by you? A By me it seemed like a positive
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Q Do you remember the amendment by Judge Bissel of his Preliminary Injunction Order that allowed Carteret to include an extra $IS
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Page 222 change. (2) Q And you testified earlier to the (3) writedown of certain assets by Mr. Moore who was (4) part of this new management with Dick Bianco. (5) Do you remember why he wrote down, (6) took a large writeolfin 1991 ? (7) A I believe their strategy was to (81 clean the balance sheet up, and they believed that (9) by setting more realistic values, they could move 1101 the assets faster and get back on to - get the (11) assets back on to an earnings status, by 112) liquidating them, by selling them.
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previously under GAAP? A Not specifically. I do recall it, but not specifically what the impact was or why they did it, why he did it. Q Do you recall the disclosure in 1991, it was in August of 199\, that Carteret had fallen out of compliance under both versions of FIRREA, meaning whether or not goodwill was counted? A I recall that did happen, yes. Q Do you recall it as a significant event? MS. FRANK: Objection, vague. A I believe it would have required certain actions that were prevented by the court order, so yes, it would have been significant because it would have now been a capital failure, even given the judge's rulings, and would have fallen back into the capital directive route and other operating restrictions. Q Do you recall whatled to them falling out of compliance under both versions? A No, I dont Q Do you remember the accelerated
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they perceived to be the market value at that point in time. Q Wasn~ part of what they were trying to do to raise capital in the market? A Yes, but! don~ know how that ties in with writing down assets to market value.
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Q Youdidnotatthattime,anddon~ now see any connection between \\1iting the assets down to market value and raising money on the capital markets? A WellMS. FRANK: Objection as to fonn.
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