Document 147
Filed 11/01/2006
Page 1 of 3
IN THE UNITED STATES COURT OF FEDERAL CLAIMS NORTHEAST SAVINGS, F.A.
Plaintif6
v.
1 1
Civil Action No. 92-550C Judge Williams
UNITED STATES OF AMERICA,
Defindanf.
1
PLAINTIFF'S RESPONSE TO DEFENDANT'S MOTION TO DEISGNATE DEPOSITION TESTIMONY OF MESSRS. BRENNER, FISCHBECK. AND O'KEEFE
Plaintiff Northeast Savings, F.A. ("Northeast") hereby respectfully responds to Defendant's Motion to Designate Deposition Testimony of Messrs. Brenner, Fischbeck, and O'Keefe ("Motion"). While Northeast notes that Defendant has not specified the rules or legal principles which it believes justify the admission of the deposition testimony it has designated, Northeast does not object to the admission of the deposition testimony of Mr. Brenner under RCFC 32(a)(3)(E), or to the admission of the deposition testimony of Mr. O'Keefe under RCFC 32(a)(3)(E) and Rule 801 of the Federal Rules of Evidence, provided that the Court also admits some additional excerpts from the Brenner and O'Keefe depositions that are needed to place the testimony designated by the Government into context. In particular, Northeast has identified the following testimony "which ought in fairness . . . be considered," RCFC 32(a)(4), with the testimony designated by the Government: Albert Brenner 24:3 - 25:8; 25:14 - 27:12; 27:22 - 28:17; 38:3 - 41:14; 54:18 55:18; 85:2 - 88:19; 138:8 - 138:15; 139:22 - 141:5; 145:13 146:15; 154:22 - 157:4; 167:21 - 169:l; 169:9- 170:9; 176:5 -
Case 1:92-cv-00550-MCW
Document 147
Filed 11/01/2006
Page 2 of 3
221 :21 (excerpt attached hereto at Tab 1) Kevin O'Keefe 23:4 - 24:2; 27:22 -28:6; 33:15 - 33:20; 58:2 - 58:14; 62:19
1 13:l - 113:14 (excerpt attached hereto at Tab 2) Finally, with respect to Defendant's request to designate portions of Mr. Fischbeck's deposition testimony, as discussed at trial on Monday, October 30, and consistent with the Court's ruling regarding Northeast's motion to designate the deposition testimony of Thomas Kovac, Northeast's position is that since Mr. Fischbeck has testified at trial, Defendant needs to renew its motion to designate Mr. Fischbeck's testimony, at which time Northeast will review the designations in light of the trial testimony and determine whether it will object to any designations as cumulative under Rule 403 of the Federal Rules of Evidence
Respectfully submitted, stCharles J. Cooper Charles J. Cooper & PLLC COOPER KIRK, 555 Eleventh Street, N.W., Suite 750 Washington, D.C. 20004 (202) 220-9600 (202) 220-9601 (fax) Counsel of Record Of Counsel: Michael W. Kirk Vincent J. Colatriano David H. Thompson David Lehn COOPER KIRK, & PLLC 555 Eleventh Street, N.W., Suite 750 Washington, D.C. 20004 (202) 220-9600 (202) 220-9601 (fax) Dated: November 1,2006
Case 1:92-cv-00550-MCW
Document 147
Filed 11/01/2006
Page 3 of 3
CERTIFICATE OF SERVICE
I hereby certify that on this 1st day of November, 2006, copies of the foregoing Plaintiff s Response to Defendant's Notice of Deposition Testimony Counter- and Cross-designations of Messrs. Burke, Moriarty, Riccobono, Ryan and Ware were filed electronically. Notice of this filing will be sent by operation of the Court's electronic filing system to all parties indicated on the electronic filing receipt. Parties may access this through the Court's system.
ld Charles J. Cooper
Charles J. Cooper COOPER KIRK, & PLLC 555 Eleventh Street NW Suite 750 Washington, DC 20004 (202) 220-9600 (202) 220-9601 (fax) [email protected]
Case 1:92-cv-00550-MCW
Document 147-2
Filed 11/01/2006
Page 1 of 19
TAB 1 PLAINTIFF'S RESPONSE TO DEFENDANT'S MOTION TO DEISGNATE DEPOSITION TESTIMONY OF MESSRS. BRENNER, FISCHBECK, AND O'KEEFE
Case 1:92-cv-00550-MCW
Document 147-2
Filed 11/01/2006
Page 2 of 19
In The Matter Of:
NORTHEAST SAVINGS, EA. u. UNITED STATES OFAMERICA
ALBERTJ BRENNER February 28,2003
BETA REPORTING G VTDEOGRAPHYSERVTCES PI0 SEWNTEENTH STREET N W SUITE 200 WASHINGTOS DC USA 20006 (202) 638-2400 FAX: (202) 833-3030
Original Fik AABRENNR.mT 228 Pages Min-U4cnpt@File ID: 3 183255520
W r Index included with this Min-U-Scripb od
:J
Case 1:92-cv-00550-MCW NORTHEAST SAVINGS, F.A. V . UNITED STATES OF AMERICA
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Document 147-2
Filed 11/01/2006
Page 3 of 19 BRENNER ALBERT J.
February 28,2003
that 1141Shawmut expressed in acquiring Northeast 1151 grew out our the knowledge they acquired 1161 of the institution through their acquisition 1171 of branchesthat Northeast sold to Shawmut I I ~ several months ptiorto the start I of the 1191exploration of a full merger. NorIml were the theast Iz11 with the terms of the
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1221 A:
I can't speak for the
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1 whowoul would know about that issue 1
1
at
investors 121 at that paint. 131Q: Do you know who were the investors 141 of Northeast ptior to that, prior to Shawmut 61 coming into the picture at all?Can you 161tell me the type of person who was an i71 investor in Northeast, person or ral institution? 191A: Any comments I'd make on that 1101 would be entirely speculative on my
partion of that meeting wery month. 1131A: No,Iattendedregularlybutnot[141 necessarily every board meeting. 1151Q: Of the meetingsthat you attended 1161 what are the percentages where you were 1171 invited to stay for the whole
meetinn? v
llal A: I think it might probably be best
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be many items for dis cussion 121 remaining after my presentation.Andthe 131invitation to remain was essentially an 141invitationto remain then and have lunch el with the directorsat the conclusionofthe 161meeting. The meetings usually ended with a nl luncheon. la] Q: I see.And what types of matters 191 did you report to the board on? Page 21 IIOI A: I repartedona mutinebasis on1111 111 A: The individual who served in that 121 capacity for was a woman by the matters having to do with interest rate risk 1121 policy measurement and I also name of 131 Charlene Fischler. reported on a 1131less regular basis in 141 Q: What committees did you serve on presenting the 1141 institution's annual al when you were at Northeast? business plan. 1 1 A: There was a retail management 171 6 1151 9:Yourtitle,at least according to 1161 committee and 1 don't know in fact if it some of the documents we'd seen, was had la) a - actually had a formal title. l senior 1171 vice president for financial served 191 on that committee.And there planning. Is [la] that correct? was - we had IIOI what was - each month at the close of the 1111books for 1191A: As I said, there wasn't any formal rzol thatI'maware of.Functional titles the month we had an earnings j121 meeting where we would reviewthe 1131 we 1211 ended up or descriptive titles Page 19 preliminary financial statements for the we ended 1221 up taggingon to our formal title just so 111 Q: And do you know who they were? 1141 institution at that mint and made sure that 1151we hadallsonof looseends 121A: I could not recall off Page 24 tied upand 1 It61 regularly anendedthose 131 9: I obviously don't expect you to 141 meetings. I I I that people would have some sense of name wery investor,just the large ones what it 121 was we did. 1171Q: Any other committees? 151that you recall. 131Q: And one of the things you did is r41 1181A: Not that I can recall. 161A: I may not have been precise in (71 work,I take it, on the annual business 151 saying that there there were large 181 1191Q: Did you ever attend meetings of plans? institutional investors that took posi- 1201 the board of directors? 161A: That's correct. tions 191in the company's stock after the 1211A: Yes. 1 1 0: What sort of work did you do? Did 7 merger with 1101 Shawmut was an1221Q: Did YOU attend them routinely? 181you draft the plans?Were you the one nounced in a typical w a y that 1111 might in 191 charge of formulating the plans? occur at a point where arbiudgrrs 1121 Page 22 1101 A: I was not in charge of formulating come in and purchase stock beouse it 1111 the plans. The institution worked 1131micallymdesata discount tothe: 141 111 A: Yes. 121 Q: Did you attend the entire meeting with a [I;] combined, if you will,bottorn acq"&itionptice.Andthe arbswillcome 131or did you just anend a portion ofthe 1151in and take large positions in the up, topdown 1131 approach to con141 meeting where you would make a suuctingplansandIwas1141 responsiblestock 1161 hoping to earn that spread. those and the people in my 1151 d e p 117 he large institutional investors 1181 repan? then that I was - that I bad corn 151A: I would just attend that portion 161 anmentforassemblingtheindividual1161 department operating budgetsthat p e e munication 1191 with were those instit- of the meeting where I made a repon utionalinvestors. Iml Prior to the acquis although would occasionally be invited Pie 1171 would draft. We distributed the ition or to the 1211announcement of the to 181 stay for the remainder of the forms, if I I ~ IYOU will, and the act& directions to 1191individuals and how to merger, however, I'd 1221 have to say l'm meeting. complete their rml operating budgets. actually not aware that 191 - Q: Did the board meet once a month? 1211We assembled those, put them all 1221 1101 A: Yes. Page 20 together, presented the assembled re111 there were any large institutional 1111 Q:And you attended at least a 1121 sults to
111 necessarily
it. it.Now,you said 131 that you worked in investorrelations and in 141 that capacity you communicated with the 151 investors. Is that fair? 161A: Yes. 171Q: Can you tell me about who were the la] shareholders of Northeast? Were thev lame 191 institutional investors? ~~~, . Were they small 1101 investors?Were they exceDtionallv rich 1111 individuals?Just give me your impression. 1121 A: I honestly don't think I can 1131 provide you with a reliable impression on 1141 that. I should point out that my stintin 1151being responsible forinvestor relations was 1161 - again, occurred at the end of mv career 1171 and my involvement in 'that function wai 11al relatively brief. 1191Q: Do you know if there were large pol institutional investors? 1211 A: Yes,l'm aware that there were 1221 some, yes.
121Q: They approved
~ I shareholders.They approved I
.,
1 the institution? 1131 A: The institution had a separate 1141 investors relations department for a number1151ofyearsthatwasa-sortofa subset,if1161 youwill.The individualwho ran the 1171department and who was in the department 11a1essentially reported to the treasurer of the 1191institution at that time. And that person 1201 might possibly be able to provide that son I ~ I I of information or some impression. 1221Q: DOyou knowwho that person is?
characterbe this as sayinn that the presentations that I hade were frecluentlv I ~ I Ischeduled near to or virtklly at the end of lzz] the meeting so that when - there would not
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Case 1:92-cv-00550-MCW ALBERT J. BRENNER February 28,2003
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Document 147-2
Filed 11/01/2006 Page 4 of 19 v. NORTHEAST SAVINGS, F.A. UNITED STATES OF AMERICA
1211 A: Well,I believe wholesale b a n k i i 1221 is ina way designed to provide the
objectives of the Federal Home Loan Bank 131 system. And that is to, understanding that (41 there will be times in which certain regions 151of the country will have a greater loan 161 demand than could be funded with the nl deposits generated in that region and in CI other times there will be regions that will 191 have a greater deposit supply than will have 1101demand for loans originating in that region, 1111 the bank system has a Page 28 mechanismwhereby 1121 institutions can either acquire funds 1131 through the 111 new management wanted to take before FIRREA 121 impacted their desires wholesale market rather than 1141 directly from retail customers but through or wishes. 1151 intermediarv o r a a h t i o n s either 1 1 A: Again I'm going to add this caveat 3 through 1161 ~ e d e nHome LoanBank the l 141on it.1didsimulationsatthat timeor151 ltself or t h n ) u ~ h other innitutions (171 was involved indoing simulationsand 161 and likewise thire's a 1181mechanism for look - and exploringalternatives.Iwas them providing a supply of 1191credit to 171 not, however, privy to conversations oraanktions and noi doine it 1201 dire either at the board level or with ctG but doing it through, again, the 1211 executive 191 management in terms of more general market and particularly ~whattheirgeneral rlol objectiveswerein the 1221 mortgage bank security market Page 26 stirring it. I know from 1111interactions and Nonheast 111 initially are based more on my i m with George Rudand that he was 1121 pressions '21 of that direction as an Page 31 to steertheinstitution 1131 employee and are not 131 informed that back to basics and he felt that a simpler 111 did participate in that. through would not have been '41 1141form simpler method of operating 121 Q : I takeitNortheast had both 131retail informed through actual conversations the 1151institution in the sense of stream- liabilities that would be retail 141 d e p with executive management lining 1161 and my observations 1611 couldmake laterin was goingproducts makebusiness lines osits. Is that correct? to 1171 for a my employment where in 171 f a n I was institution, r A: That's right. a privyto some of those 181conversations. 161 Q: And in addition it hadwholesale 171 1181Q: By back to basics what exactly do 191 So with that by way of a large llol liabilities? you mean? qualiiication I would say that the dire1 1A: It did, yes. 8 1201A: Well, one perhaps would better ction 1111 of the institution and the strategic plans 1121 of the institution ask 1211 George that but unfortunately [91 Q : When Northeast in its documents when I went there in 1986 1131or '87 as he's not here 1221 to ask. My under- IIOI talks about wholesale liabilitieswhat 1111 exactly is it referring to? the case may be was that the 1141 or- standing of what he meant ganization had ambitions for estab 1121A: My underswndingofwhat that ,131 Page 29 lishing 1151a national presence for thewould referto would be essentiallyallof mselves in 1161 selected business units. I11 by that was essenriallyfocusing the 121 1141those funding sources not generated One of those units 1171 would be the institution on being very good at doing through 1151 its own branch system. one 131 or several things rather than mortgage business. - 1161 And then I take it would that also Q: rls~That strategywasreviewedwhen 1191 trying to do a 141 whole lot of things. I 1171be the same onthe asset side?Like 1181 think it would be 151fair to say prwious wholesale assets, what would that refer there was a change in executive management 1201 of the institution and Geor- management had looked 161at Northeast to? geRudandwas 1211 broughtin.Iamaware Savings as if it had the 171 capacity to 1 1 ~ A: That I believe would be a fair lml 1 through my 1221 involvement in some essentially provide all of the 181 products characterization also, any earning asset and services of a regional bank and is1 work at that time that not 1211 generated through the instithad aspitations to do so. ution's own 1221 lending capabilities. Page 27 1 1101George - 1believe in my readof 1111 the situationis that Georgefelt that those 1x1 there was the exploration of a wide Page 32 ranee of 121. strateeic alternatives in - 1111 were overreaching ambitions and . - ~ . , 111Q : AndItakeitthenretailassetslzland now my 131 rrcollection is now that this that the 1131organizationwould be better liabilities would br the rerail deposits 131 served and the 1141 shareholders would wds in 1988:41 . Wermloredanumberof . . alternatives and I'd 1;) have to go back be better served by a 1151 business that the institution gcnrnted from its 141 and look at documents to 161refresh my Strategy that was more sharply 1161 foc- branches and the retail loans it generated 01in its branches? used on fewer products and services. memory on what all of those were. 161 A: Loans would not necessarily be 171 1171 Q: What does the term 'wholesale 171And then clearly in 1989 as a CI result banking" mean? I see it a lot in the 1191 generatedthrough the branches butyes. of the passage of the thrift bail-out 191bill 1181 therewas -the bankwasIwouldsay 1101 documents. Or "wholesale bank," what 181Q : How else would loans be generated? does 1201 it mean to you? essentiallyacting reactively, trying to be
my boss, reviewed what those as sembled (21 results were, saw whether they were 131 satisfictory, and then would schedule 141 meetings with individual department of 151 business unit managers to make adjusunents 161 Or seek adjusunents in those operating 171 plans to conformwith what the wishes of the 181 executive management of the company was. 191Q: Did the strategic direction of the 1101 company change in any way during the time 1111 you were there tiom the time you came in '86 1121 until '95? 1131 A: Yes. 1141 Q: Describe for me what the strategic 1151direction was when you first got there in 1161'86and then how it changed subsequentJy. 1171 A: I think it's important to note [Is1 that through my career at the bankIwas in 1191 different and varying positions as to my [ml contact with the executive management Of the I2lI O w h t i o n a n d therefore my comments about 1121 the svategic direction of the bank
1111as proactive as it could be in reacting to 1121the provisions andrequirements of F l u . 1131 Q : Tell me what was the strategic 1141 diredon that the new to r151 take the company into prior to the advent of 1161 FIRREA.1 think there was a change that had nothing to do with FIRREA when the new llal came in, that fair to say? 1191 Yes.Yes. A: 1201 Q: A change of direction? 1 2 A: ~ i g h t . ~ ~ 1221 Q: Tell me about that direction that
and
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BETA REPORTING (202) 638-2400
Case 1:92-cv-00550-MCW NORTHEAST SAVINGS, FA. V . UNITED STATES OF AMERICA
1 1 A: 1t's not uncommon for institutions 9 1101 to have a more centralized lending
Document 147-2
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Paae35
Page 5 of 19 BRENNER ALBERT J.
February 28,2003
~onent, 1131Q: We've talked about their retail 1141 111Q: Letme seeifIcouldborrowfrom121 facility 1111where consumer loanswould your expertise just to understand some 1iabilities.NowI'mtalkineaboutthrir~~~~ be generated more 1121withcontact with of ol these points a little better. Sup wholesaleliabilities.WhenNortheast;16; lending officers in a 1131central facility ~ o s i n 141Northeamwas go out onthe borrowed for its wholesale liabilities a to rather than through a 1141branch facility. & h o l ~ s a l e 1 5 1 m a r k e t a n d b ~ w l e t ' s swas 1171itpayingamarket priceforthose a~ SIWmillionon161 wholesalemrkct. the 1151Q: You have indicatedthat you worknni - ---. ..., liahiliries? . . And then it would VI take that $100 i d 1161withexecutive~from~hiwmuton 1191 A: Yes. millionand purchase la securitiesonthe valuation of 1171the institution? wholesale market with the 191 $100 1201 Q: And I take it on those occasions 1181 That's correct. A: 1211 when it purchased securities on the million.What would be the value of 1101 1191Q: Tell me not necessarily about 1221wholesale markets it paid the market that portfolio today? what 1 1 YOU told them and what you w price 1111 A: That's a lot of hypotheticals 1121 but valued forthem1211 just tellme what there.The value of that portfolio today, Page 38 valuation means in 1221 general. 1131hypothetical as it is, would be the 111 for those securities as well? -..~ aresent 1141 value of. aeain. the net cash ", . rage J J ?lo& streak 113 flowing to the institut- 121 A: That's correct. I 111 A: Let me just be a little bit more 121 ion, the difference 1161 between the 131Q: With those answers let me try my specific.Ididn't necessarilyworkwith 131 interest earned on the assets 1171acquirthe people from Shawmut on their ed and the interest due to the 1181 141 hypothetical again. If you borrow $100 151million at market price, market actual 141 valuation. I provided in- liabilities acquired. rates,and 161then take that $100 million formation to them 151in order to enable 1191Q: How would you discount the 1201 and purchase 171Securitiesalsoat market them to do valuation. 161 Valuation is interest due on the liabilities acquired? rates wouldn't the 181 value of that essentiallya manerof 171determiningthe 1211A: I'm sorry. How would I discount portfolio,assetsand 191liabilities,bezero? netpresentvalueof future 181cash flows. 1221those,at what rate? 1 1101A: No,not necessarily at all. 191Q: SOvou would take a Danicular 1101 Page 36 1 1111Q: What'sthe marketvalue ofthe 1121 asset and you would e&mate what I liabilities? future 1111 earnings or cash flows this 111 Q: Yes, sir. asset would 1121 generate and then you 1131A: That will depend on the term of A: I I not in a would discount them to 1131the present position to be able to answer that 1141the liabilities,essentially on the term. value? question. 141 Discount rates vary from 1151 Q: Right, but if you got $100 million 1141 A: Right.Well, I don't know that I1151 time to time and 151that's a matter that 1161 liabilitiesat market rates wouldn't of would do that in this particular case. 1161 would require study. I 161 - I couldn't by 1171 detinition their value be $100 Presumably Shawmut was doing that. answer that right now. million? 1171Q: Fine. 1181A: The - not all financial 1191 inVI Q: Would you discount each cash basedon the risk inherent in that struments are valued in the same man1181A: Of course, there are - rather 1191 flow 161 than necessarily going through all of 191particular cash flow? ner. 1201 So shall we say the discount rate those 1201 financial projections the- 1101 A: That is certainly one of the 1111 that might 1211 apply to a Federal Home mselves there are 1211 market valuation fundamcntalpremises~~fthcchoiceofa LoanHankadvance,12~1forcx~mple,that I proxies that I imagine they 1221 used in 1111 discount rate, that it should reflccl would price that advance place of that. It would not make the 1131 risk associated with the cash flow. Page 38 0""- " A " , !0 . ' I I I at a certain rate,that rate - and,of 121 1141Q: So if a cash flow has a risk 1151 111much sense to go through that son of associated with it, according to the course, liabilities in this regard aren't 131 121 valuation exercise. If you had a purchased. They're assumed. So Norsecurity (31 that was publicly waded the market, 1161 of 6 percent then the dis theast 141 Savings in this particular case count rate should 1171 be 6 percent? market price is 141 the price asset in the would 151 effectively borrow money publickrkct.which l i ~ ~ r e s u m a b l ~ o n 1181A: Not necessarily. We're getting 1191 ratherfromits I61 retailsourcesbutfroma a fundamental basis is based 161on that son into tinance theory here. Interest rates 1201 associated interest rates in the - let's say from 171 the Federal Home of valuation process. capital 1211 markcts should reflccl both Loan Bank and would agree 181to accept 171 Q: So the market price would tell you the underlvina 1121 basic level of intcrest the liability for a particular 191 term of 181 what cash flows that asset would time at a given interest rate.The 1101 only generate in 191the future discounted to rates, whiih varies way that the utilization ofthose funds in1 the present value, 1101today's value? P-=- 37 in the wholesale market would vield a . a m -. 1111 A: Correct. llifrom time to time.That basiclevelof 121 net 1121 value of zero would bLif the 1121 Q: In your time there do you knowof interest rates is subject to current 131 discount rate 1131 on the assets were if the 1141 discount rate 1131 any time when Northeast sold any outlooks on inflation among other priced at a applied and the valuation of 1151 the assets at 1141less than fair market value? thines and 141also to a risk oremium.and . . - . ~ . those risk 151premiums Mryfrom t h e to assets was the same as the rate on the 1161 1151 A: BY detinition any assets sold into liabilities and that was never the case. t h e also. 1161 the market is being sold at its fair market 1171 value provided that it is a 161Soit's- it'snotaquestionolthat leads 1171And I know from my simulation 1181 third-party, 1181 arms-length transaction. itself necessarily to a (61straightforward experience that there was - there was All assets that 1191 were sold by the answer.And panies may 191disagree on never 1191a time that I'm aware of in institutionwere soldon 1201thatbasisand what an appropriate discount 1101rate is running our bank 1201 simulation model therefore all would have been 1211 sold at or a component of that discount rate 1111 forthe -well,forat 1211 least the ifwe what was at that time a fair market 1221 both in terms of the interest rate corn go from '88 through to 1221 '95 there's 1 ponent 1121 and the risk premium corn never a time in my experience value.
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Document 147-2
NORTHEAST SAVINGS, EA . Filed 11/01/2006 Page 6 of 19 . v. UNITED STATES OF AMERICA
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111 where there was not a positive spread on the 121difference betweenthe return on the 131 wholesale assets and that on
1111 tradedinstitutionitsstockpriceisthe
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111 constituents' interests. 121 Q: Howdoesd~dendpolicyaffect3 11 shareholder value in Northeast, for 141 instance? 1 1 A: I don'tknow- Idon'tknowthat (61 5 I can answerthat,to be honest with you. [71 OrganiZations the common lay person's 181view that it's better to get a dividend than 191 not to get a dividend ain't necessarily so. 1101 Obviously it depends on a lot of things 1111having to dowiththepanicularinstitution~~~] but1 - I have to do some thinkine about 1131 about how that would have played into 1141Northeast's case. 1151Q:Who decides how much of a dividend 1161 to declare or whether to declare a dividend 1171in Northeast? 1181A: Well, of course, ultimately it 1191 would be up to the board. It would have I ~ certainly been at the recom I mendation of -1211 in the times when George and Kirk worked 1221 there I would expect it would have been up
the wholesale 141 liabilities. The institutionserveda 151usefuland beneficial intermediary function 161 in terms of matching up wholesale funding 171sources with wholesale asset suppliers. 181Q: What's that function? 191 A: The intermediary function of 1101 putting them together. Again, on a 1111 theoretical basis an individual willing to 1121 provide - or aninstitutionailling to 11% provide funds to the Federal Home LoanBank 1141 that are then packaged in terms of advances 1151 to other institutions,those institutions 1161 are not necessarily in a position or willing 1171 to provide those funds directly into the 1181 credit market in the purchase of the assets 1191 in the way that Northeast Savings 1201 functioning as an intermediary in the market 1211did. 1221a: How did the new management of
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111Northeast view the wholesale pan of the 121 portfolio,the wholesale assets and 131 wholesale liabilities? 141A: I'mnot ina positionto be able 151to speak for what George's reaction was when 161 he came on board the institution. I can 171 certainly tell you, though, that all the way 181 through the conclusion, through the merger 191 with Shawmut, the institution maintained a [ l o ) book of - if you'll say a wholesale bank 1111 book that even at the end exceeded $700 1121million in size.And I experience because I was had direct 1131 managing that at 1141the end, at the end game, if you will. 1151 1 Are you familiarwith the term r 161 " 2 maximizing shareholder value"? 117)A: I am indeed. 1181 Q : What does that term mean? 1191A: It well, 1 think it's 1201 selfexplanatory. In a business environment 1211 it means doing - taking those business 1221 actions that will add the most value to the
measure of the value. 1131a : So if you want to determine 1141 whether an anionis goodor bad for the 1151 institution you would see whether that 1161action would increase or decrease the market 1171 value of the institution? I181 A: If there were a way to test that 1191 that would be wonderful. Typically there is 1201 not. One has to make judgments about what 1211 will be good for the institution and act on 1221 that basis.And at the same time it is one
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1121 ultimate
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of the, of course, functions of an investors 121relationsfunctionis to inanv publicly-131traded institutionisto info& the market (41 as best as it can as to the nature of those 61actions so that they understand what's being 161 done because investorsmaynot -I don't PI mean to sound like I'm preaching here, la] either, if it's coming across that way. 191 Q: Phrase your answers the way you'. rr I it11 most comfortable Iundersland it's know beforehand whether a hard to 1111 certain action 1121 will increase your value or decrease your 1131 value. My question is the ultimate test of 1141 whether an action is good or bad is 1151 determined bv whether that action increases 1161or becreases the value ofthe institutions. 1171 ISthat fair to sav? 1181A: I would say that's fair to say. I 1191 think that's difficult to determine when one 1201takes those measures. 12119: I mean, nobody does anything to 1221reduce the value of their institutions
111
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Hopefully not. times people undertake 141 actions that they think will enhance the 151 value but in retrospect turn out to diminish 161 the value? 171A: Sometimesthe actionsdon't work. la! Sometimes they're not understood by ( the 191 market. ~ I O I Q: And was the ultimate goal of 1111 Northeast to maximize shareholder val121 A:
BI Q: Oiien
to the recommendation of senior manaaement 121 to do that. However. paym&t of dividends 131 is essentially a distribution of either (r! canital or - of retained earnings, a i51 of capital. Through most of my tenure at 161 Northeast the institution was not in a m position to pay dividends because of (81 concerns over capital adequacy. 191 Q: Absent the concernsfor capital 1101 adeauacvwould the comDanvhave naid . , 1111dividinds? 1121A: I believe it would have. It was 1131 payingdividendswhrn1arrivedtherc in :LPI at the stan of my career.1believe I'm 1151correct on thai. I would have to go back 1161and check records but I believe it was 1171paying a dividend. 11819:And, again, I understand with all 1191 of these questions I'm asking you about 1201 things that happened in the past and you're 1211 not going to remcmberevcrything but I do 1221 appreciate you giving me your best
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111 recollection. And I understand that the 121 contemporaneous documents
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111 institution and therefore should ultimately 121 reflect itself in the highest return to 131shareholders in any one of a number of 141 possible ways that shareholders can realize ($1 a return through appreciated stock price, 161 dividends, whatever. 171Q : Is there any way other than la1 appreciation in stock price and dividends? 191 A: If you ask me as a person who rlol holds a CFA designation for a publicly-
(
::;A: Absolutely. 1131Q: And I take it thatwould be the
1141
ultimate goal of any pubxcly-uaded 1151 corpotation? 1161A: I would think it should be. 1171 That'snot to say thatpublicly-uaded (181 institutions don't have constituencies that 1191 need to be attended to in the pursuit of the 1201maximizationof shareholder value. And some 121) of those constituencies may and attention 1221 needs to be paid to those other
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mav have somethinn s~different.That's pekectly understo2; 141 A: We had a situation at the school 151 where I work where we asked students to 161 recognize - to identify a dog that we have 171ona sundialthatwe hadcast. And the dog la1 was the dog that belonged to the veryfirst 191 student at the school. When Ethel Walker 1101 founded the school she had a hard time 1111 soliciting students to stan with and the 1121first student who agreedto comewas
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worked on Northeast's business plans. Is 121 that fair to say? 1 1 A I did. 3 . 141 Q: Did you also work on its capital 151 plan? 161A: Yes. 171 0: You did. And what is the capital 181 plan as you recall? 191A: The capital planwas the document 1101 submitted to 1 and I don't recall the 1111 specikic agency but it was submined to i 1 1 2 1 it wa< submitted to the approp riate 1131government agency in Decem ber if my 1141 recollection serves me correctly, in 1151 December of 1989,as a requirement of - in 1161 response to FIRREA showing how the 1171institution would come into compliance, [la! yeah, how it would come into compliance. 1191 Describe for me the impact that Q: 1201 FIRREA 1211 A: December9th Ithinkwasthe day 1221 it was due, if1 recall. Some dates are
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a woman 1131by the name of Cornelia Biddle. 1141 And she said I'll come to your 1151 school if1 can bring my dog. So she 1161 thought about it and Ethel Walker said okay, 1171you can bring yourdogand the dog's name 1181 was Pat. So we have this dog memorialized 1191on the sculpture. And we set a puzzle to rml students toask who's the dog? What's its 1211 significance? rn1A number of students did some
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Savings,andFirstFederal.Ithink(141First Federal was in Worcester. I believe 1151 Freedom Federal was in Boston. I know this 1161all didn't happen at once. but they happened 1171 in two separate uansactions. 1181My understanding was that that was 1191 a time, of course, when those 1 l at m institutions operating as federally- 1211 chanered institutions were resuicted under 1221 the investment powers that they had from not
Page 53 the sons of things, for lzl1 example,that Schenectady Savings Bank1 as a 131statechartered institution could' invest in. 141 SO the early '80s you had a 1 healthy 151institution in New York State that stepped 161 up to the plate to help! out the federal nl government to take over three federally- 181 chanered institutionsthat were squeezed 191be use of what was happening with intere 1101 rates at that time. 1111In the acquisition as the balance I I Z / sheets of the acquired institutions were 1131 marked to market there was ad excessof 1141Value liability over assets of acquired. 1151That was that excess is termed, of 1161 course, good will in accountingterms.And 1171 provisions the of the agreement with the, llal government were that the institution would I 191be able to amortize that good will as an lml amortizing asset over a 40 - I believe it 1211was a &year time period and that the 1221 institution would not be required to
111 investing in
11) research and came back.One student came (21 back and said it was Cornelia Biddle's dog. 131 It's Pat. It's an Irish temer. Another 141 student came back and said it's Cornelia 151Biddle's dog.His name was Pat.It's an 161Airedale temer. 171 So Iwas the one posingthis w puzzle and1 saidshow me the sourcesyouke 191 got.Both of them came back andgave to me 1101 histories of the Ethel Walker school written 1111 by Ethel Walker herseKAndinone case 1121 she identified the dog as an Irish terrier; 1131in another case she identitied it as an 1141Airedale temer. 1151MR.TODD: No dog questions. 1161 THE WITNESS: The students were 1171 amused. I said that's a lesson in 1181 historical research. 1191BY MR. SAWI: 1201 Q: To the extent dividends were not 1211paidItake ittheywere retained in 1221 Northeast?
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111 A: Yes.Of course,they don'tbecome 121 dividends until they're actually 131
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son of etched in memory. rzr Q: I take it there are provisions in 131 FIRREA that Northeast views as inconsistent 141 with agreements it had with the government? 151A: That'swhy we're all sininghere, 161
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171 Q: Yes. Now, give me your pi understanding ofwhat those provisionsare, 191 the provisions of FIRREA that are consistent 1101 with Northeast's agreement with the 1111 government. 1121 A: I didn't work for Northeast in '82 1131and '83 but in understanding things later 1141Northeast agreed in '82 and '83 to come to 1151 the government's a s sistanceintakingover 1161severalsavings and loan associations that 1171 were in uouble.And Iwon't - I don't 1181 know how bener to characterize itthan 1191 that. 1201Pan ofthe predecessor 1211 institution was a state-chanered savings 1221bank, a mutual, statechartered savings
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contemohted. 141 0: So whateveryoudon't payoutas dividends you inside the
--. .. pmy: , 161 A: Correct. m Q : Andthen youget toinvestthatas I81
I
you invest all the other funds of the 191 company? 1101A: That's right. n--" c . , 'my' One of the rlzl was the I I I bank,Schenectady SavingsBank,been shareholders? Did the government own around lzl a long time, I you any1131prcferredstockthroughanyofitswhen it was founded but it was agencies 1141 in Northeast, either the at the time 141 founded in the FSLIC or FDIC? 19th crntnrv. . - - -.- - , ,. . 1151A: I would have saidinitiallyno to 1161 151 schenectady savings ~~~k went 161 that question but I'm not certain, to be through a tnnsformation, went from a 1171 honest with You. Your question state 171 charterto afederal chaner,went actually 1161seems to to remind froma 181 mutual form of organization to me that in the 1191 early Stages there may a public 191 form, raised capital in the have been a Position lml that that a public markets, [lo] and did that in order government agency took in the lz1l to put itself in a 1111position to be able to company's preferred stock. acquire Hartford 1121 Federal Savings, I believe it was Freedom 1131 Federal 1221 Q: I think you testified that you
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Page 54 essentially for the purposes of calculating 121 regulatory capital charge that good, that 131intangible asset, against its tangible 141 capital. 151 The provisions of FIRREA directly 161 abrogated that agreement in requiring the nr institution to essentially charge that off, la1 thereby substantially reducing its capital. 191Q: Are there any other pans of 1101 FlRREA that in your view were inconsistent 1111withanyagreementNortheast had with the 1121United States? 1131 A: Not that I'm aware of. 11410 : Now that you've I151 A: Some pans that were bad policy. 1161 Q: Fair enough.Just to keep the 1171 deposition short I won't go into those. 1181 Describe for me the impact that the 1191 accelerated phase out of good will under 1201 FIRREA had on Northeast. 1211 A: The institution had to downsize. I221 It had to dramatically and quickly reduce
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you and
1191
1201 Q: Other than that there are no 1211 -..c . xcp, rrr impactsfmmthephaseoutofgood~? 191 Q: It's obviously not an u p t d t e 1101 1221 A: Not that I can think of right now resume from what you told me? 1111A: Right. Page 58 111 but it would be an interesting study. 1121 Q: But let's justlookatwhat'sinr131 it and I'll ask you some questions about it. 121 I didn't mention earlier when I 131 thoughtperhapsIshouldIalsodoteach. 1141 It says here from October 1989 to present 1151 you were senior vice pre141 IS that relevant to my employment sident of financial 1161 planning and history? analysis. ~ b v i o u s ~it's not 1171 up to y 151 Q: AS a matter of fact it is. I got (61 present. sidettackedtakingaboutNortheastbec1181 A: Okay. ause 171 it was SO interesting but tell me what 181 happened to You since 1995, 1191 Q: It says, "Responsible for 12ol p n r taking me all 191 the way back till today. viding comprehensive planning & an. 1101 A: Well, the - I did do some 1111 alysis 1211 to executive management and teaching in fact even when I was - the board of 1221 directors for the corn during 1121 my banking days although it pany and both a Page 56 rudimentarymoneyand was sonofa 1131 Page 61 ~llmindasthe mostdirectactions.The 121 banking course.But 1141 afterthe acquis consequence, of course, of the accele- iti0nIwaS given the I151 OPP~rtunity,n~t 111 corporate-wide and an individual rated 01phase out of good will put the immediately following - I I161 worked business r21 unit basis, including the institution 141 ina positionwhere it could for Shawmut following the acquisition evaluation of 131 smtegic goals and not pay 151 dividends. But I'd actually I171 with Northeast Savings, the merger, alternative business 141smtegies,merger have to go back 161and studythe situation and 1181actually worked for Fleet for a & acquisition analysis, 151 financial modweek and was 1191 interviewed for a eling analysis, capital market 161 uans to see if there was 171 anything else. action analysis." Well let's just take 01 ( : sitting here today,thatfsall you 191 position as controller in 1201 their retail 1 banking division which was 1211 offered them one at a time because I don't want can think of, to me some months later and by the 1221 to 181read the whole thing and then 1101 A: That's all I can think of. timethatcameamundIhaddecidedthat 191A: Okay, 1111 MR. SAWI:This is a good time to 1121 I rlol Q: Beginning with the first item 1111 take a break if that's okay with every- there just tellme what you did there and Page 59 body. what it means. I l l wanted to do something different. 1131(Recess) (131 A: The comprehensive planningand THE WITNESS: ~ ~ ~1151 121 SOI essentially had a sabbatical, 131 if k l d ~ ~ ~ ~ ~ ~ ~ ~ repeat your last question to me? IS that YOU will,make yourowntype sabbatical. 1141 analysis to executive management forthe 1151 company onboth a COrporate141I spent some time writing a book not 1161something wide and an 1161individual business unit 151financial related at all and did start 161 1171 MR. SAWI:It sure is.You can rlal ask teaching,Itau&tthecoWtatefinancial basis, this goes to 1171 describe my the court because Ihave [I91 activities and you'll note that 1181 this is 171 management course in the MBA idea what it was. programat ra~BentleyCollegeforayear.l dated from 1989.At the time when 1191 1201 (The reporter read the record as 1211 also taught 191 and continue to this day to Kirk Walters came to Northeast my requested.) teach an adult ILOI degree program re~obg~zo~relationshi~changedandI1 I repofled offered by Alberta Magnus 1111CoUege,a shonly after 1211 his a 1221 THE WITNESS: Okay, so that small liberal am college in N~~ 1121 directly to him, had 1221 not done that Page 57 had not been in Haven, Connecticut, and I've taught had not business 1131ethics,economics, and cor111 question was speciiic regarding the Page 62 phase 121 out ofgoodwillratherthanthe porate finance. I l l a directreporringrelationshippriorto I 1141 In early 1998 I took a position as 115) impacts of 131 FIRREA. And I think thought of this as 141 I stood up, that my essen~iallyb~siness managerattheEthel I2lthat butstaning 1989started I3l Kirk. response regarding the a preferred 1 1161 Waker School, an all-girls prep stock,lmean,thatwasnotan16loutcome school in 1171 Simsbury, Connecticut, 141 And Kirk's initial position in the I51 company was as executive vice presiofthe phase-0utofgoodwill.That 171was where I getto wear (181 lots of hats.And another pmvision of the - as I l 1 I've continuedinthat r191positiontothis dent, 161 chief financial officer. He may a have had m some other thines attached understand it. another omvision of the dav -,e law. 19' So I amend that 1.1 MR. SAWI:L.et me mark this as 1211 on to there. He 181and ~ e o k worked closely on of plaMing comment. Exhibit 1. analysisandmy department,my IIOI crew 1101 BY MR. SAWI: 1221 (Deposition Exhibit No. 1 was and I, provided the financial analysis 1111 1111 Q: Otherthanthatamendmentabout to Kirkthat he andGeorgethenwedand Page 60 1121 preferred stock, are there any other in 1121some cases provided directly to the 1131impacts? 111marked for identification.) board 1131 for the evaluation of future 1141A: NO. 1 121 BY MR. SAWI: I strategic; for 1141 the institution.
size. else? 131 A: It took there were steps that 141it had to take in order to get the capital 151 that it had in hand to qualifyas capital 161 under the new under FIRREA. I have to nl say my recollections on this are h a z ~ . h d ha* lal that was to with preferred stock. 191So that's - and there may be other things 1101 that I would recaustudyingdocumentsbut llllthat'sthat'smyrec0uecti0natthe(121moment. 1131 Q: So you've described reductionin 1141 the size of the institution and some other 1151 actions that the institutions to get I'61 the preferred to qualify as regulatory 1171capital? 1181A: Yes. 1191 Other than these rwo items were Q: 1201there any other effects of the phase out of 1211 good will on Northeast? 1221 A: Well,those actions come to my
121 Q: Anything
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1151 Q: So the Only impacts as far as 1161 know are the reduction in size the 1171non-payment of dividends?
131 Q: Sir, y o u t e
141 been
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been handed what has marked as Exhibit 1. 151A: Yes. 161Q: Do you recognize what that is? 171A: Well, it looks like a resume for 181
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share basis there's a possibility that the 1171 value that an individual share represents in 1181the company becomes less than what it was 1191 before even if the ownership stays the same. lzol But that thenmeansthat whenthe ownerof 1211 the mock goes to sell it the value of the r221 stock then could be d i s h e d . ' Now, I m
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I 1 Q: Whatwasthesiteofthisoffering161 5
1
171 A:
1 8Q: Can
I don't recall. you give me a ballpark num
ber?
191A: I would
- no. I can't.
1101 Q : I takeityowownshareholders 1111
should you be successful in raising it? 1181 I honestly don't recall.1would 1191 A: need to EO back and look at the documents. 1201 Q : DO YOU recall at all what the 1211 company in its planning would do with 1221 capital if it had additional capital?
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didn't &ve vou the arice the comaanvat the 112j%1-n; though was reasonable! Page 78 1131A: No, the process here is 1141 es111sayingthisoffthetopofmyheadhere. sentiallyaprocessof-the processis 1151 121 Q: Now,just so 1get the mechanics,l31 not altogether dissimilar from just a 1161 I've if the company issues these share- general public offering.N~w, got 1171 again, I don't want to seem like I'm holders' 141 rights offers to the current shareholders, 151 if we assume for the hedging 1181myself more than I should sake of argument all 161 the shareholders but my experience 1191with this is really say yes, this is a good 171 deal, we'll limited to this 1201 particular transaction. exercise the right, and 181 everybody But the IZII presentations that we made to the investment 1221 community were exercises that right then there 191woul- not made just to existing dn't be any dilution because Page 81 1101A: There's no change in the I l l 1 arowrtional ownership of the corn 111shareholders but were madein fact to bn$;1121 however,thep;rsharevalueof - &e r21 investment community ingeneral. an 1131 individualowner's Der sharevalue We had 131roadshows. went on the road. in th; 1141company may be diminished. met w i t h 1 4 1institutiinal investors with Andthat may 1151have animpactthenon the expectation 151 that in fact o w the ability of that 1161 individual to reap individual shareholders 161 that a good the initial value that 1171 the individual number if not the majority of PI these put intostartwith froma 1181subsequent rights would in fact be acquired by 181 other interested parties in - other sale. 1191Q: you're talking about a 1201 Paflies 191 interested in acquiring the situationwhere the company sellsthese c'-""Pan~'sstock. rho1 And it was through o w experience 1211 shares too cheap, in other words. I mean, 1221 if it sold it at fair value then 1111 in conversations with these roadshows and r121 talking with potential there investors that we 1131 reaked that the Page 79 price that we were going 1141to get for these was notgoing to meet what rul we 111wouldn't be any dilution, correct? 121 A: I I - it seems logical to 131 needed to meet to achieve our goals. answeryes tothat.] hesitate to saythat,l41 1161 Q : I take it you yourself went on 1171 though,because,again,fairmarketvalue these roadshows? is 151what isdeterminedby the m*et.If 1181A: I did - my recollectionis that1 1191 you do 161a stock rights offering andl was at one in Boston but you'd think think this n~isthesituationhere ifyou rd12o1be able topicme a scene for it but do a stock 181rights offering the market's 1 Izll can't. valuing the 191 security as offered to it 1221 Q : I don't want to sound derogatory without regard rlol necessarily to the value of the other 1111 securities, the Page 82 other equity securities, 1121 that remain but did you work on the company3s, outstanding. So one could Pay a 1131fair like,the 121 companyrspitch on why you m*et price for the securities offered should buy our shares? the 1141 to the market but in doing so that right word, the 141 company's could 1151 have a dilutive effect on the 151A: I don't think it's necessarily 161 securities 1161already outstanding. derogatoryto describe it as a sales pitch our judgment was that that prospectus On it, was, again, what would have happened 171 but the J that the Y ~ S 181did wo*on that,provided some had we 119raccepted the was lzol willing to offer us for assistance. 191 1 have vague recollection those shares because 1211 that price of a document that ilol had advantages would not have allowed the IZZI corn On it but I I I I I Q: I'm not asking you to recite what pany to do what it needed to do to 1121 the document said or anything like Page 80 that but 1131 just from being senior vice president 1141 working at the company 111 generate the earnings streamon the 121 additional capital to keep o w original 131 what is it that you I151 were telling shareholders, if you will, to maintain potential investors you would 1161 do with the capital that you would raise 1171 their 141value. But I'm -
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don't recall at this point what 121 our - what o w what our plans in 131 response to that were. 141 Q : Do you recall any time where 151 anybody at the company was saying if we only 161had additionalcapital we do this 171project or that project or this investment 181 strategy? Do you recall1 that at all? 1 1 A: I do recall occasions on which -1 9 1101I do recall occasions on which we thought 1111 that we could wtentiallv participateinthe r121 acquisitibns n r p t , for other retail 1131financial institu ons hadwe hadthe 1~41~ca~italavailableto us., 1151 : So if you had capital available to/ Q 1 161you one thing you would do is - say it in 1171your own words, please. 1181A:At that time - I mean, my 1191 recollection is that there was a bidding IZOI process that financial institutions were 1211 invited to participate in for institutions IZZI that were going to be seized by the FDIC and
111A: I
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itioned 121 to new ownership.There was a time during 131 that process when Northeast Savingswasnot 141able to be a 1 participant in that because of a o w capital situation. 161Q : Later when the capital situation PI improvedyou did participate inthese 181 things? 191 A: To a limited extent, yes. 1101 Q : Soone thingyouwouldhavedone 1111 if you had additional regulatory capital 1121 would be to participate even to a greater 1131 ementinbuyingwoubled institutions fmm 1141 the FDIC or the RTC. 1s that fair to say? 1151A: We would have had the o p portunity 1161-we would have had the opportunity to 1171 entertain options there.Ihesitate to say 1181we wouldhave done that because that's a 1191 hypo thetical and I'mnot sure I can speak 1201 for what the institution would have done.1211Butwe-Icansaywecenainly were aware (221 of the f a n that there were options closed
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and then you can respond. 151 You obviously worked in the 161 institution fmm '86 to '95. You rose 171 through the ranks, you worked all the 181 business plans and the capital plans, and 191 you reponedto the boardof directors. So 1101you obviously would know fmm all sources 1111 and all types of conversations what the 1121 company'splans and strategies were.And 1131you would knowwhat the companywouldwant 1141 to do if it had additional regulatory 1151 capital. 1161I obviously understand that nobody 1171can know for sure what they would have done 1181in a world that didn't exist but you 1191 certainly knew what the company would want 1201 to do if it had additional regulatory 1211 capital. Is that fair to say? 1221 A: I would qualify that by saying
Page 86 I l l this. And my subsequent experience has 121certainly taught methat there are people 131 play different roles on managementteams. 141Mymleinthispmcess was much more the 151 analytical role than, quite frankly, the 161 creative role and as a consequence I'm PI reluctant to say that I in fact would know 181 everything we would have done because the 191 creative role in terms of formulating 1101 options was typically taken by George and 1111 K r and not by me. ik 1121 So there were options presented to 1131me to say well,let's takea look at this, 1141let's take a look at this.1~ was one of my 1151professional objectives, of course, to be 1161 able to make positive contributions to those 1171 considerations. r l w I have to tell you quite candidly 1191 that my ability to keep up with those guys 12orwasnot good.Theywerealways a step ahead 1211 of me in terms of thinking of alternatives, 1221 and I was trying to keep up with them in
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under George's push to 131 back the basics, that would be difficult for rl me to speculate on. I51 0 : Was there mera limewhereeither 161 .Mr.GromeRutlandorMr.Waltersrver said 171 thaf if we only had the superwouldlike to visorygood [s~willwhatwe do with it is 191 have more mongagebacked securities or 1101other wholesale assets on the balance sheet? 1111A: No, they did not say that but 1121 George Rutland and Kirk Walters were not the 1131type of people who engaged in that son of 1141 "if only if." 1151 Q: No.1 undcrswnd.Didthcy ever1161 indicate that ifthrv had more regulatory 1171 ~apitalthewaythe~wouldGeitist6 1181 b o m w money on the wholesale market and use 1191 that money to buy wholesale assets such as 1x11 mongagebacked securities? 1211 A: They didn't,no,there wasnevera 1221 Statement to that effect.
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1171Q: I understand you would not 1181 necessarily know everything he knows so I'm 1191 only asking you about what you know. 1201 A: Okay. 1211 Q:As far as you know what investment 1221 projects would the corn pany have pursued if
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it had additional regulatory capital? And 121 when I asked you before you mentioned it rs~would have or could have been more involved 141 in the bidding process for RTC institutions. 151 Do you recall that, sir? 161A: That's right, yes.Yes. 171 Q: Anything else? n A: In answering that auestion it 191 partly depends onkhat --where you'& I IOI taklna as , vour starring aoint. Had the 1111 institution had the reGatorycapital 1121 through this period of time that got phased 1131 out as a result of FIRRBA I believe the 1141 institution would have been - would have 1151 maintained its assetsize atorneartothe 1161levelthat it had in 1988. There was to my 1171 reckoning no compelling reason for the 1181 organization other than compliance with 1191FIRREA to have downsized. 1201 0 : What would those assets have been? 1211 Would they have been the same type ofassets 1221theinstitutionhad on its balance sheet in
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121 A:
Not entirely because for one thing
131the institution did have a portfolio of 141 high-yield, low-investment grade bonds which 151it had to divest as a result
rage s,
I I Ijustdoingtheanalysisofthose.SoI'm-(
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121 Q: George and Kirk, you mean 131 Mr. George Rutland and Mr. Kirk Walters? 141A: That's right. 151 Q: Andhowoftenwouldyou talk to 1 1 6 these gentlemen? 171 A: I talked to Kirk regularly.1181 talked to George on matters like this very 191 occasionally.I did not repon directly to 1101 George.Ireponed to Kirk andmy 1111 conversations were largely with him then. 1121 Q: You talked to him on a daily 1131 . .. baas! 1141A: It would be fairto characterize 1151 it thatway.If itwasn't dally it might as 1161 well have been.
of FIRRW. 1610 : Divest those as a result of the VI phase out ofgoodwill or as a result of 181 other provisions of F ? 191 A: I believe and I'd have to go 1101 back and refresh my memory o n h i s . I 1111 belleve that was a result of other 1121 . provisions of FIRREA but I'm not - I'm not 1131 certain. Page 92 111things that would have enhanced the 11410: What would those additional a s 121 performance of the institution.And I sets 1151that the institution would have had in the 1161world where it kept the think 131 we would have looked aggres sively at ways in 141which to do that. good will? 151 Q: Iappreciate youranswerhutthe 161 1171 A: I think initially it would have 1181 looked more like the oortfolio of 1191 answer that you gave w s focused as to l mongagr-backedsecuniies,the large 1214 what n the hstit6tion wouldhave done. portfolio of monwgr-backed securities. My 181questionisfocusedondideither~9~ Mr. Walters or Mr. Rutland ever in any ~ Ithattheinstit&nhadonitsbooksat I way 1101 say, hint, do anything to make 1221 that time. How that balance sheet you believe 1111 that the way theywould would behave if they had 1121 access to rePage 90 gulatory capital is to borrow 1131 more money on the wholesale market and 1141 111 have potentially changed or been transformed 121 over subsequent years invest in wholesale assets?
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I don't want to limit you to a 121 statement.Did theyever sayor do orhint 131 at anything that made you think that that's 141 what they would want to do with additional 151regulatory capital? 161A: I think that had that regulatory PI capital been available to the company the 1 1 company would have been o b 8 ligated to 191leverage that capital in the way most 1101 beneficial to its shareholders. Leveraging 1111that capital requires actions on both sides 1121 of the balance sheet, and what those 1131 specific actions would be would have partly 1141 depended on the n m of the a fmancial n51markets at that time. 1161The institution had, prior to the 1171 passage of FIRRW, of cowse,portfolios on I 181both sides that it potentially could have 1191 carried f o c ~ ~ rHow those d. would have been iml changed would have panly been a subject of 1211 the institution's opponunity to replace 1221 either funding sources or asset sources with
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BETA REPORTING (202) 638-2400
ALBERT J. BRENNER Case 1:92-cv-00550-MCW February 2 8 , 2 0 0 3
some 1131 judgment on &at the future course of^ interest rdtes might be but indoisingout 1151 business plans uied to devise theminaway 1161thst theywere as, if you will, neutral to 1171the future course of interest rates as could 1181 reasonably be expected given the p m bable 1191direction that rates might take. 1201And that's a lot of caveats but 1211 one thing that's clear, the institution 1221 nevertookbetsoninterest rates because
Document 147-2
NORTHEAST SAVINGS, FA. Filed 11/01/2006 Page 11 of 19 v. UNITED STATES OF AMERICA
rates to the extent 141 you can prudently I18lmottgagethatonehasotiginatedthat do so? is 1191 otoducina for the institution the a1 A: That's correct. Iagree with 161that. s o n o i 1201varigble income sweam that m Q: What are some of the tools at your the institution 1211 wants to match its liabilitypottfolio. (221 Rates may fall to a 181 disposal if you want to protect the value of 191 the portfolio against rising point where now it's interest rates 1101or falhng interest rates? Page 136 1111A: The basic strategyor the basic 1121 I I I attractive to that homeowner to toolthat the bankusedwas to minimize - refinance 121 that loan, let's say, into a 1131and when 1 say "minimize" I think it fixed-rate 1311oan.Now the institution is ~ might 1141h e h ~ e v e n t o ~ o s o h r a s t o s afaced with the 141 prospect of having to llrl eliminate virtually the bookingof 1161 fillup its balance ~s~sheet,ifyouwill,at Page 131 a fixed-rate assets. ~ h - yes, I mean, 1171 time when 161consumers, home buyers, r 111that we didn't think was prudent. that's - loan originations were geared are not finding ~ I I adjustable-rate mor121 Q: Did youat any time feel that you (31 1181 towards the origination loan can reasonably predict the course of 141 originations 1191 for a portfolio were tgages attractive. interest rates? geared towards the IZOI origination of 181 And that's a different type of 191 151A: No,Iusedto Isaidthis -I161said variable-rate loans. The 1211 purchase of interest rate risk from simply having to this to Kirk Wdters, I probably said 171 mortgage-backed securities was 1221 1101haveanactualinterestcatemismatch. this to the board,and I say it and believe geared towards the purchase of ad- Now 1111 it'sa matter of how do Ifill up the 1121 balance sheet if the ARMS are lei it. Predicting interest .rates is like 191 iustableconvening to 1131 low-rate, fixed-rate riding a roller coaster blindfolded.The loans, which by 1141 strategy the inPage 134 I I O I S e ' s uue for the stock market I stitution would choose not to 1151hold. might 1111 note. You know when it's 111 rate mortgage-backed secutities on 1161Q: IS it f i to say that the 1171 inar going up, you know 1121 when it's going the asset 121 side. down, but you can't tell 1131 when it's 131 On the liability side the steps 141taken stitution wanted to immunize the value going to change. there were to try to attract deposits 151in of 1181its portfolio and the income of its 1141 One can make general observations so far as it was possible to steer 161 1191 ponfolio to fluctuations in interest 11,1about wherethelevelofinterest rdtes consumer behavior, which is somewhat rates 1201 to the extent that that can prudently be 1211 done? 1161might be at a particular point in time 171 limited, but to the extent possible to 1171relative to the long-term wend and try 181 to attract consumer deposits in 1221 A: Absolutely. expect I 181 there will be some mersion those terms, 191 in those products, that Page 137 to the mean. 1191 example, today one would give the IIOI institution - that For could make I think a IZUI highly c&dible would leave it the most I I I I immune to 1110: And why did it wdnt to do that? 121 statement that interest 1211rdtes in the future changes in interest rates. Let's say if you feel or predict or believe future will at some point in 1221 the 131 that interest rates are going to drop 1121 Let me add one more thing to that. future will be higher than they ate why 141 wouldn't you want to put your 1131Q: Sure. institutionin ol apositionwhere itsvalue Page 132 1141A: The institution had utilized 1151 would be 161 significantly enhanced interest rateswapsinthe early daysofmy when interest rates o~in fact droaaed? - ~ I11 today. ~-~~ ~ r r 1161 career there in order to manage 121 Q: But that's as far as you can go? ,81 A: During the time that ,91 interest 1171rate tisk butthose were allNo~eastSavingsthererU nevera time 131 A: That'sasfaras you can goandwe 141 r'811can [lo] when, as I said before, where . didn't eoanvvfunherthanuvine tomake , they were all 1191booked before, either agement 1111 engaged in predicting in151those generalobsenatiois
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