Free Motion in Limine - District Court of Federal Claims - federal

Case 1:93-cv-00531-LAS

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00001 1 IN THE UNITED STATES COURT OF FEDERAL CLAIMS 2 ) ) )WINSTAR-RELATED CASES ) ) ) ) ) ) )

)

3 PLAINTIFFS IN ALL 4 AT THE COURT, 5 6 vs. Plaintiffs,

) Case No. 90-8C, et al. )AMERICA, )

7 THE UNITED STATES OF 8 9 10 11 12 )

Defendant.

)-------------------------------------------------------

DEPOSITION UPON ORAL EXAMINATION OF:

HORACE BRENT BEESLEY

13 ------------------------------------------------------14 TAKEN AT: 15 DATE: 185 South State Street, Suite 500 Salt Lake City, Utah

July 26, 1999

16 REPORTED BY: Susette M. Snider, CSR, RPR 17 18 19 20 21 22 23 24 25

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00004 1 2 3 4 5 6 7 8 9 EXAMINATION PROCEEDINGS

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Monday, July 26, 1999; 9:52 a.m.

HORACE BRENT BEESLEY, called as a witness, having been first duly sworn, was examined and testified as follows:

10 BY MR. FOUNTAIN: 11 Q Mr. Beesley, good morning. Could you

12 state your full name for the record, please. 13 A It's Horace, H-o-r-a-c-e, Brent

14 Beesley, B-e-e-s-l-e-y. 15 Q And could we have your present home and

16 business addresses? 17 A My home address is 1492

18 K-r-i-s-t-i-a-n-n-a Circle, Salt Lake City, Utah. 19 My business address is 95 East Tabernacle Street, 20 St. George, Utah 84770. 21 Q And again, Mr. Beesley, I'm Edwin

22 Fountain. I'm with the law firm of Jones, Day, 23 Reavis & Pogue in Washington, D.C. I represent 24 Anchor Savings Bank in its goodwill suit against 25 the United States.

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00049 1 changes in accounting that allowed institutions 2 more flexibility in restructuring, including 3 appraised equity capital and the deferral of losses 4 on the sale of mortgages. 5 Q I'm going to come back later, and we'll

6 explore purchase accounting and goodwill. But for 7 now, can you explain to me what were the changes in 8 policy with respect to purchase accounting in 9 thrift mergers? 10 A Well, I'm not -- I'm not absolutely

11 clear at this point what the prior policies were. 12 But at some point we allowed the acquirer in a 13 purchase-accounting-type transaction to amortize 14 the goodwill over a period of up to, I believe, 40 15 years and to create the discount on the mortgages 16 acquired over the life of the mortgages. And like 17 I say, I'm not exactly sure how that differed from 18 what was being done previously, but I assume that 19 previously those were more closely aligned so that 20 the amortization of the discount and the accretion 21 of the income were more aligned. 22 After the change in policy, it would

23 allow the mergers to occur and for income to be 24 generated for book purposes in the early years, and 25 then there would be offsetting losses occur in the

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00050 1 outer years. And that was a significant inducement 2 for mergers as many managers were looking for ways 3 to buy time during this crisis, and so was the 4 FSLIC. So there was a convergence there of 5 interests in finding a way to buy time. 6 And these mergers were instrumental in

7 giving institutions greater income than they would 8 have otherwise had and thereby helping them through 9 this period. 10 Q And you're referring both to the

11 acquiring institution in addition to the acquired 12 institution in talking about greater income; is 13 that right? 14 A Well, the -- the greater income would

15 occur to the resulting institution. In fact, there 16 were ideas being explored as to how you could have 17 this same effect without going through a merger, 18 because in order to get this benefit, you needed to 19 have a merger, and so that's probably one of the 20 great driving forces for the consolidation that 21 occurred during that time. But as I say, there was 22 even discussions on if there were any ways in which 23 you could have this benefit without having to do a 24 merger, and my recollection is that nothing came of 25 that.

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00069 1 interest rates were to fall and the fair market 2 value of these loans was greater than what they 3 were shown on the books at the time of the 4 acquisition, then those loans were then sold, there 5 would also be a very large income amount 6 recognized. And that income could be taken 7 immediately. 8 So purchase accounting, in short,

9 allowed the goodwill to be amortized over 40 years 10 and the income to be accreted over the life of the 11 mortgage which could be substantially shortened if 12 the loan were sold or prepaid. If it simply was 13 paid off over its contractual life, then that 14 income would be accreted over a longer period, up 15 to -- conceivably maybe even up to 30 years. 16 Q And you testified previously that the

17 income boost, if you will, created by the 18 difference between the accretion and the 19 amortization that you've just described, allowed 20 thrifts in the early 1980s to buy time? 21 A Yeah. It -- it -- to the extent they

22 had income or to the extent they had less loss than 23 they would have otherwise had, their capital, their 24 book capital or regulatory capital, would be 25 diminished at a lesser rate or perhaps even

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00070 1 increased, and therefore, their standing relative 2 to the regulators would be increased and their 3 potential for failure would be diminished. So even 4 though there might not be any economic change -- I 5 mean obviously if you take two institutions, 6 institution A and B, and merge them together, the 7 economics -- the real economics of the two are the 8 same after the merger as they were before. But 9 from an accounting standpoint in a regulatory 10 capital standpoint, the outcome is substantially 11 different than if they had not gone through this 12 process. 13 Q In the early 1980s while you were

14 director of the FSLIC, the bank board permitted 15 goodwill to be counted as an asset for purposes of 16 determining a thrift's capital; is that right? 17 18 A Q Yes. And that was so even though the

19 goodwill was a nonearning asset? 20 21 A Q That's correct. Was there a policy justification at

22 that time, in the early 1980s, for including 23 goodwill in assets for purposes of calculating 24 regulatory capital even though the goodwill was a 25 nonearning asset?

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00071 1 2

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MR. HUGHES: Objection, form. THE WITNESS: Yes, I believe there

3 was. I think the -- the policy justification was, 4 is that it -- it allowed the industry to, as I said 5 before, buy time, which means to slow its slide 6 into insolvency and with the hope and expectation 7 that interest rates would moderate and that the 8 industry could then move forward. And it reduced 9 the cost of assistance to the FSLIC. It 10 facilitated mergers and consolidations which had 11 benefits beyond goodwill. I mean to the extent you 12 can reduce overhead, reduce redundancy in the 13 branch network, increase efficiencies, economies of 14 scale and so forth. 15 So I think there were several reasons

16 why at that time the bank board considered it 17 appropriate to allow goodwill to be considered as 18 an asset, even though it was a nonearning asset. 19 Q (By Mr. Fountain) Now, over time the

20 amortization of the goodwill would become an annual 21 expense; is that right? 22 23 A Q That's right. And how did the regulators at the time

24 of approving these mergers anticipate that the 25 surviving institution would be able to carry that

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00072 1 expense in the out years? 2 A

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They anticipated that the mortgages

3 which were underwater would have been paid off or 4 substantially reduced and that those funds could 5 then be lent out again at higher rates, that 6 interest rates would likely moderate because they 7 were at such far greater levels than historic 8 levels, historic norms, and that the profits that 9 would be generated in normal operating 10 circumstances, together with growth that might 11 reasonably occur, would be sufficient to carry the 12 drag that would be associated with the write-off of 13 goodwill in the out years. 14 Q And would the growth and profitability

15 that were anticipated also include the benefits of 16 whatever synergies and economies of scale that 17 might result from the merger? 18 19 MR. HUGHES: Objection, form. THE WITNESS: Well, I -- I'm not sure

20 that it was always as well thought out as to 21 calculate each of those benefits individually, but 22 we believed that there was an overall benefit of 23 some degree associated with consolidation, 24 particularly if it was in-market consolidation. 25 And I don't know what weight was given to that

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00077 1 earnings and return on capital. To the extent you 2 have a negative spread, which was the situation in 3 the early '80s, leverage can be a detrimental 4 situation. But under normal operating conditions, 5 leverage allows institutions to make a relatively 6 narrow spread on their assets relative to their 7 liabilities and yet still have a reasonable return 8 on their capital. 9 Q And to the extent that the addition of

10 goodwill as an asset results in an increase in the 11 institution's capital, that increased capital can 12 be leveraged in the way you just described? 13 14 15 Q MR. HUGHES: Objection, form. THE WITNESS: Yes. (By Mr. Fountain) In recommending

16 supervisory mergers involving goodwill for approval 17 by the bank board, did the FSLIC expect that the 18 surviving institution could leverage the goodwill 19 generated from the transaction to hold more income 20 producing assets? 21 22 MR. HUGHES: Objection, form. THE WITNESS: Well, we would expect --

23 I think we had every expectation that the goodwill 24 would count as an asset which would, by the 25 formula, result in capital being there that would

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00078 1 be leveraged, yes. 2 Q

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(By Mr. Fountain) Rather than tax your

3 memory more than I might already have done, 4 Mr. Beesley, let me have the reporter mark what 5 we'll call Beesley Common Exhibit 1, a document 6 that is Bates numbered OGC036 0001 through 0006 7 that purports to be a February 2, 1982 memo from H. 8 Brent Beesley and D. James Croft and Thomas P. 9 Vartanian to Supervisory Agents, OES staff, FSLIC 10 staff and OGC staff. 11 12 13 Q (A discussion was held off the record.) (Beesley Common Exhibit 1 was marked.) (By Mr. Fountain) Mr. Beesley, I'll

14 hand you what the reporter has marked as Beesley 15 Common Exhibit 1. I'll ask you to look over the 16 document briefly, and then I'll direct your 17 attention to some specific portions of it. 18 19 A Q Okay. And at any time as I show you

20 documents, Mr. Beesley, and ask you questions about 21 specific portions, by all means if you want to read 22 more of it to get context, do so. 23 But to begin with, the subject line of

24 Beesley Common 1 is titled"Guidelines & Procedures 25 For the Resolution of Supervisory Cases." Do you

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00094 1 goodwill? 2 A I don't think there's a huge

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3 difference. There are probably some subtle 4 differences, but, in effect, it would probably be 5 pretty close, with one exception, the -- in a 6 liquidation you would pay out the depositors, so 7 you would know that its the face value of the 8 deposits, whereas in the computation of goodwill, 9 you might have -- for example, if you had some 10 deposits that were long-term, fixed-rate deposits, 11 they may have a value in a goodwill computation 12 that's different than their book value. 13 Q And what did the viability analysis

14 measure? 15 A Well, its -- it measured whether or not

16 the acquiring institution, or the combined 17 institution is a better way of saying it, would 18 continue throughout the period of the analysis to 19 maintain at least its minimum capital requirements, 20 and -- and that was the definition of viability. I 21 don't remember exactly what that period of time 22 was, and I don't remember exactly what capital 23 requirements were used. But the theory was they 24 wouldn't fail their regulatory capital requirements 25 during the period that was examined.

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00095 1 Q

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Do you recall whether the period

2 examined was at least 10 years? 3 A Seems to me it would have been. I

4 just -- I don't remember, but I'd be very surprised 5 if it weren't at least 10 years. It would be 6 spelled out in the memorandum. 7 Q Was it a requirement that the

8 institution -- that the combined institution be 9 projected to be viable over the period examined in 10 order for the bank board to approve a merger? 11 12 A Q Yes. And I take it that you never -- you

13 never recommended a merger to the bank board when 14 viability was not projected for the period 15 examined? 16 17 A Q No, I don't think I did. And what sorts of assumptions went into

18 the viability analysis? 19 A Well, there would have been the key

20 assumption, which overarched all other assumptions, 21 was the level of interest rates going forward, and 22 we -- we worked hard to try to come up with that 23 guess. In hindsight there are better ways of doing 24 it than we did it. We might have used a variety of 25 interest rates to see if the viability would have

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00097 1 A

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I don't remember how that was

2 calculated, but -- but somehow we tried to be 3 uniform in terms of the assumptions so that we 4 could compare apples to apples. And I do think the 5 model changed from time to time. I know we've had 6 people look at the model from the outside just to 7 help us make sure that it was a reasonable model. 8 Any time you're trying to predict the future, 9 you've got to recognize the weaknesses. But that's 10 what we did. 11 Q You referred to a growth factor. Do

12 you recall whether there was a standard growth 13 factor plugged into each bid or was it tailored to 14 the particular bidding institution? 15 A I don't remember, but -- I don't

16 remember. I think it would have been standard, but 17 it may have been modified based on a business plan 18 or something. 19 Q You defined viability as maintaining

20 minimum capital over the -- over the period 21 examined? 22 A There may be a more sophisticated

23 definition in something, but that's the gist of it. 24 Q And by "minimum capital" you're

25 referring to the minimum capital ratios established

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00098 1 by the bank board's regulations? 2 3 A Q Yes.

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In performing viability analyses on

4 mergers where goodwill was generated, did the 5 viability analysis include the goodwill in the 6 calculation of capital for purposes of making the 7 determination whether the institution met its 8 minimum capital requirements? 9 10 A Q Yes. And did it assume amortization over

11 whatever period provided for by the application? 12 13 A Q Yes. And what was the source of the

14 information plugged into the viability analysis as 15 to the amount of goodwill and the time period of 16 amortization? 17 A Well, as to the time period, it would

18 have probably been the maximum time period allowed 19 by the bank board's policy, unless it were 20 specifically stated otherwise in the agreements. 21 And as to the amount of goodwill, unless at the 22 time of the analysis there had been an appraisal 23 done and all the work done to determine actual, it 24 would have been based on estimates, which we've 25 already discussed how those values were

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00099 1 ascertained. 2

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So this analysis was done I believe at

3 different times for different deals. I mean if 4 we're all ready to go to the bank board and all our 5 work has been done and the institution has already 6 done a thorough evaluation and so forth, I mean 7 maybe some of those assumptions would have been 8 used. If we're in the initial stages just trying 9 to figure out if something's available, there might 10 have been some rather gross assumptions made. 11 But we tried -- we would try to get it

12 as close to reality as possible in terms of the 13 evaluations used, and in most cases probably, I 14 would like to assume, at least, that the numbers we 15 used in our analysis were very close to the actual 16 numbers that were ultimately used in the 17 institution's books. There may be some variances, 18 but I mean that would have been the idea. 19 Q If there was an expectation that

20 goodwill would be excluded from the capital 21 calculation at some point within the time period 22 analyzed, would that be important to the viability 23 analysis? 24 25 MR. HUGHES: Objection, form. THE WITNESS: Yes, I think it would be

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00100 1 important. 2 Q

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(By Mr. Fountain) And at the time that

3 you were director of the FSLIC and recommending 4 mergers to the bank board for approval, did you 5 have the expectation that goodwill would be 6 excluded from the capital calculation within the 7 time periods analyzed for any of the mergers that 8 you recommended? 9 10 A Q No. Did the FSLIC ever establish loss

11 reserves? 12 A Yes, in the sense of -- when we did a

13 deal, we would establish a reserve for our expected 14 losses or outflows related to every deal, whether 15 we had cash out or not. 16 Q Based on the expected cost of

17 assistance in that particular deal? 18 19 A Q Yes. And did the FSLIC ever establish loss

20 reserves based on projected or potential failure of 21 the surviving institution resulting from the 22 supervisory merger? 23 A I don't think so. I mean I would -- I

24 would think not. We didn't expect them to fail. 25 Now, let me -- let me say in a

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