EXHIBIT Mario Ugoletti 1 May 15, 2015 Washington, D.C. IN THE UNITED STATES COURT OF FEDERAL CLAIMS 2 - - - - - - - - - - - - - - - X 3 FAIRHOLME FUNDS, INC, et al., : 4 5 Plaintiffs, : v. : 6 THE UNITED STATES, : 7 Defendant. : 8 9 10 - - - - - - - - - - - - - - - Case No. 13-465C X Washington, D.C. Friday, May 15, 2015 11 CONFIDENTIAL - PROTECTED INFORMATION TO BE 12 DISCLOSED ONLY IN ACCORDANCE WITH PROTECTIVE ORDER 13 Videotaped Deposition of MARIO UGOLETTI, a 14 witness herein, called for examination by counsel for 15 Plaintiffs in the above-entitled matter, pursuant to 16 notice, the witness being duly sworn by AMANDA 17 BLOMSTROM, a Notary Public in and for the District of 18 Columbia, taken at the offices of Cooper & Kirk, 19 1523 New Hampshire Avenue NW, Washington, D.C., at 20 9:34 a.m., Friday, May 15, 2015, and the proceedings 21 being taken down by Stenotype by AMANDA BLOMSTROM, 22 CRR/RMR/CLR/CSR, and transcribed under her direction. Page 1 Alderson Reporting Company 1-800-FOR-DEPO A064 Mario Ugoletti May 15, 2015 Washington, D.C. Page 166 Page 168 1 first three-quarters of 2012, did you also assume 1 those options were. So it was not a -- there was not 2 that FHFA was under a mandate to ensure the companies 2 a plan for them that I -- that I saw. So consistency 3 were operated in a sound and solvent manner? 3 with a plan, no. 4 A. That's another one of conservatorship, 4 5 6 7 keep going, but we've kind of got into a natural Q. And what does that mean to you? 6 break point in my questioning. So I don't know if A. Well, a sound manner means that companies, 7 you want to take lunch now or ... 8 as I talked about some of the examples earlier, that 8 9 they are operating their businesses under a 9 10 traditional supervisory regime. Examiners go out 10 11 there and look at, you know, their processes. 11 12 There's a whole host of issues that a regular 12 13 examiner would look at and make sure that they're 13 14 doing things in a sound manner. 14 15 16 Q. Okay. And what about capital levels, how did that relate to soundness? foundation. THE WITNESS: Well, the capital levels, 19 15 MS. HOSFORD: Well, we had talked about 12:45, but if Mr. Ugoletti is fine with lunch now, then I am fine with lunch now. THE WITNESS: I'm a little hungry. MR. THOMPSON: Okay. So we're off the record. THE VIDEOGRAPHER: We're off the record. The time on the video is 12:30 p.m. (Recess taken.) 16 MS. HOSFORD: Objection; lack of 17 18 MR. THOMPSON: Ms. Hosford, I'm happy to 5 yes. THE VIDEOGRAPHER: We're back on the 17 18 record. The time on the video is 1:34 p.m. 19 BY MR. THOMPSON: 20 the solvency aspect of that regulation was suspended 20 Q. Now, sir, welcome back. 21 shortly after the enterprises were -- or around when 21 A. Thank you. 22 they were put into conservatorship. 22 Q. And wanted to do, to do a little bit of Page 167 1 2 3 4 5 6 Page 169 1 BY MR. THOMPSON: Q. But does capital have to do with soundness 2 3 as well? A. Well, it does. But there was no capital, 4 5 so it was suspended. Q. When you were thinking about the future 6 7 profitability of Fannie and Freddie in the first 7 8 three-quarters of 2012, did you assume that the 8 9 companies were going to be operated consistent with 9 10 the -- consistent with the Administration's plans for 10 11 them? 11 12 13 14 MS. HOSFORD: Objection; lack of 12 13 foundation. THE WITNESS: You know, I -- I don't know 14 15 what the Administration's plans exactly were for 15 16 them. I mean, the Administration had three years to 16 17 come up with a plan for them. 17 18 And, in my view, I think, in Acting 18 19 Director DeMarco's view, that plan needed to be a 19 20 legislative solution. I didn't see any legislative 20 21 solutions from the Administration. I saw a white 21 22 paper that had three options that everybody knew what 22 cleanup before we got to some new topics. With respect to the periodic commitment fee, do you know if anyone at FHFA ever tried to calculate what the value of it would be? A. No. Q. Okay. And do you know if anyone at Treasury ever tried to calculate the value of it? MS. HOSFORD: Objection; calls for speculation during a particular time period. THE WITNESS: Not that I'm aware of. BY MR. THOMPSON: Q. Okay. What is the basis for your statement that it would be incalculably large if no one calculated it? A. Right, I think I went through a fair amount of that at, at the last round, but, I mean, my basis for that is it is to fully compensate Treasury for the value of the guarantee they are providing and a market value. And I do not think that there was any market value you could have put on, given their financial condition, the 100 billion that we started out, I don't even think -- I think it was very 43 (Pages 166 to 169) Alderson Reporting Company 1-800-FOR-DEPO Mario Ugoletti May 15, 2015 Washington, D.C. Page 170 Page 172 1 difficult on that. Doubling it to 200 billion and 1 2 then taking on an unlimited commitment, I just don't, 2 Q. And I'm sorry if you've answered this -- 3 I don't see a market value that corresponds to that, 3 A. Yeah. 4 that anybody would even come up with a price that 4 Q. -- and I'm too dense to pick up on it, but 5 anybody would be willing to put that amount of 5 just to be clear on the record, are you -- in August 6 capital at risk in those situations. 6 of 2012, prior to the Net Worth Sweep, were you 7 thinking along these lines? Were you thinking, You 7 Q. Did you discuss your view that it was an companies. 8 incalculably large fee or would have been with anyone 8 know, that periodic commitment fee is incalculably 9 at Treasury? 9 large? 10 A. Not that I recall. 10 11 Q. Anyone at FHFA? 11 12 A. Not that I recall. The issue did not -- 12 how you get from waiving -- waiving the periodic THE WITNESS: I -- I think that -- that's 13 commitment fee if -- there's two different forms of 14 Q. Yeah. And did you -- 14 compensation, periodic commitment fee that could be 15 A. Nobody was looking to calculate it, so ... 15 set -- could be set at what it was set in the third 16 Q. Okay. And at the time of the Net Worth 16 amendment at or the Net Worth Sweep. I mean, so ... 17 BY MR. THOMPSON: 13 17 wasn't coming up. MS. HOSFORD: Objection; vague question. Sweep, I'm not talking about afterwards but I'm -- 18 A. Yeah. 18 19 Q. -- talking about at the time, had you 19 looking at it? I understand you're saying, you know, Q. But was that, in fact, how you were 20 given any thought to what the value of the periodic 20 you could look at it that way; but I'm saying, in 21 commitment fee would be? I mean, I understand now 21 fact, did you look -- you have these thoughts in 22 you're saying you think it would be incalculably 22 August of 2012? Page 171 Page 173 1 large, but I'm saying back in August 2012 were you 1 2 thinking about the size of the commitment fee? 2 3 A. Well, I don't recall any of those 3 A. Well -MS. HOSFORD: Objection; ask- -- asked and answered. 4 discussions, but I, I think that -- I mean, you may 4 THE WITNESS: -- I can't -- I can't sit 5 -- there was a trade-off made in the third amendment, 5 here and say what I was thinking in August of 2012. 6 right? The third amendment traded off a waiver, the 6 That's, like, a long time ago, in August of 2012. 7 periodic commitment fee for the Net Worth Sweep -- 7 But I don't think the view that I am -- that I've 8 Q. Yep. 8 just stated about how you would think about the 9 A. -- right? 9 periodic commitment fee wasn't something I came up 10 Going back, I mean, the compensation that 10 with after August of 2012. BY MR. THOMPSON: 11 Treasury got prior to the third amendment -- we 11 12 talked about this before -- was liquidation 12 13 preference, 10 percent dividend, periodic commitment 13 14 fee, warrants. After the third amendment, they got 14 something that was embedded in the whole sort of 15 Net Worth Sweep, warrants were still out there, and 15 nature of the PSPAs and the substantial financial 16 their liquidation preference was still in place. 16 commitment that Treasury made. 17 So I don't know if anybody shared that 17 Q. When did you come up with it? A. I don't know, but, I mean, it was Q. Now, let me ask you -- I also want to make 18 particular view, but, to me, that, the swapping out 18 sure the record is crystal clear on another thing 19 of those things, indicates that it was an 19 that we did discuss -- 20 incalculably large amount; and the only way that you 20 A. Um-hmm. 21 could come up with something that approached an 21 Q. -- which was the alternatives. 22 incalculably large amount was the earnings of the 22 If -- if we're looking at a funding 44 (Pages 170 to 173) Alderson Reporting Company 1-800-FOR-DEPO Mario Ugoletti May 15, 2015 Washington, D.C. Page 174 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 commitment that could be diminished -A. Yep. Q. -- and we're thinking about alternatives, I want to make sure the record is clear as to what alternatives were considered to deal with that situation. One is the Net Worth Sweep -A. Yep. Q. -- correct? Okay. A second that you described was, well, having a Net Worth Sweep but having it kick in at, you know, a particular dollar level, whether it's a hundred billion or something like that, correct? A. That's correct. Q. Okay. Were there any other alternatives that were discussed either internal at FHFA or at Treasury? A. Not that I'm aware of. Q. Okay. Was the PIK, the option of letting the companies do a payment in kind to preserve the funding commitment, discussed? MS. HOSFORD: Objection; vague. Considered by, discussed by whom? What Page 176 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 under oath that the periodic commitment fee was incalculably large in your view, right? A. Um-hmm. Q. And was that a phrase that you came up with or a lawyer came up with? MS. HOSFORD: Objection. Instruct you not to answer to the extent that it involves discussions with Counsel about obtaining legal advice. BY MR. THOMPSON: Q. So did -- did you come up -A. Wait, wait. I don't understand. I was instructed not to answer, right? Or -Q. So let me -- let me -A. You're -Q. -- try to ask the question -A. I want -- I want to understand the process. Q. Sure. A. When she says not to answer, I don't -- I don't answer; and you're trying to do another question on this. Q. Well, you can answer, but in any event -- Page 175 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 PIK are you talking about? BY MR. THOMPSON: Q. Do you want me to repeat the question? A. Yeah, that would be good. Q. Yeah, yeah. Was the option of preserving the funding commitment -A. Yeah. Q. -- by having the companies pay a 12 percent payment-in-kind dividend, was that something that was discussed at FHFA, you know, in the leadup to the Net Worth Sweep? A. Not that I recall and for the reasons that we talked about. I mean, one of them was the basic 10 percent versus 12 percent, that it just -- that had been -- unless there was some economic aspect that would make that an economic transaction, it wasn't even part of the discussion. So that's -- that's one that I would point to at FHFA. So it really wasn't -- it just never was on the table. Q. Okay. Now, when you -- you've stated Page 177 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 MS. HOSFORD: No. I instructed you not to answer. THE WITNESS: I've been instructed not to answer. BY MR. THOMPSON: Q. Okay. But -- but just, let me -- was that a phrase that you came up with, with -- wholly apart from what the lawyers told you to say, was that a phrase you came up with? Now, if you can't answer, you can't answer. MS. HOSFORD: Objection; calls for attorney-client privileged discussions. I instruct you not to answer. BY MR. THOMPSON: Q. So I don't want to know anything about what the lawyers told you, okay? But did you independently come up with that? MS. HOSFORD: You may answer. THE WITNESS: I may answer? I had another word that was similar. BY MR. THOMPSON: 45 (Pages 174 to 177) Alderson Reporting Company 1-800-FOR-DEPO A067 Mario Ugoletti May 15, 2015 Washington, D.C. Page 302 Page 304 1 that particular meeting was about. 1 2 BY MR. THOMPSON: 2 BY MR. THOMPSON: Q. Okay. What was their reaction when they 3 Q. Okay. Now, you did not raise the topic of 3 told all of their income would be swept to the 4 the Net Worth Sweep with the companies until just a 4 federal government? 5 couple of days before August 17th; is that right? 5 6 7 8 9 MS. HOSFORD: Objection; assumes facts not in evidence. THE WITNESS: I do not recall ra- -- I did not raise the topic with them. I'm not sure when 6 THE WITNESS: I don't, I don't recall a 8 specific reaction that I could sit here and say -- 9 BY MR. THOMPSON: Acting Director -- I can't, on this time line, I 10 11 can't recall when Acting Director DeMarco actually -- 11 12 and I'm pretty sure he called both companies and 12 13 talked them through it. They did get a copy of what 13 14 became close -- what became the final version to 14 15 review. But that's, that's -- in terms of the time 15 16 line, that's as far as I can remember. 16 17 BY MR. THOMPSON: 17 19 Q. But they weren't involved in the negotiations over the Net Worth Sweep, were they? A. No. They weren't involved in negotiations facts. 7 10 18 MS. HOSFORD: Objection; misstates the Q. Well, a -A. -- this, this CEO said that, that CEO said that, I don't recall, I don't recall a specific one. Q. Do you have a recollection of the general reaction? A. Well, I think their general reaction was they probably were not too happy about it. Q. Why not? 18 A. Well, in many camps within Fannie Mae and 19 Freddie Mac, I mean, I think there were people, they, 20 they certainly never liked the Treasury Department 21 over the PSPAs or any of the amendments to the PSPAs, 21 saying that they were going to be wound down. They 22 or this amendment to the PSPA. 22 didn't want to be wound down, right. You don't want 20 Page 303 1 2 Q. But this amendment to the PSPA was driven by a perceived problem, right? Page 305 1 to be wound down. You want to be Fannie Mae and 2 Freddie Mac. 3 So to the extent that they perceived this 4 in evidence. 4 as further somehow taking that possibility away, they 5 BY MR. THOMPSON: 5 might not have been very happy about it. 3 6 7 8 9 MS. HOSFORD: Objection; assumes facts not Q. A problem that their funding commitment might be exhausted, right? A. Right, and you've showed me enough of their views on what they thought the base case looked 6 Q. And it did make it more remote that they 7 would be rehabilitated because they'd never be able 8 to build their capital under the Net Worth Sweep; is 9 that right? 10 like, so why -- what -- so I understand what their 10 11 views were. 11 MS. HOSFORD: Objection; misstates the testimony. THE WITNESS: Well, again, I will go back 12 Q. Okay. But my question is: Why not talk 12 13 to them and see if they have thoughts on whether 13 to, back to 2008 and say that if they, if they 14 there are different alternatives to solve this 14 weren't, if they weren't put into conservatorship 15 problem? 15 with the PSPAs, the employees would be working for 16 our firms right now, so ... 17 BY MR. THOMPSON: 16 17 18 A. Just not an issue that we would talk to the companies about. Q. You didn't value their opinion? 18 Q. I, I understand that, but -A. Yeah. 19 MS. HOSFORD: Objection; argumentative. 19 20 THE WITNESS: We valued their opinion and, 20 Q. -- if we put ourselves and we compare 21 their opinion and understand what their opinion is, I 21 Fannie Mae and Freddie Mac on August 16th, the day 22 understand it. 22 before the Net Worth Sweep, and August 18th, the day 77 (Pages 302 to 305) Alderson Reporting Company 1-800-FOR-DEPO Mario Ugoletti May 15, 2015 Washington, D.C. Page 306 Page 308 1 after the Net Worth Sweep, it was less likely they 1 2 were going to be rehabilitated because they weren't 2 3 going to be able to rebuild capital; isn't that 3 4 right? 4 DeMarco said this many times, the, the strategic 5 plan, the second strategic plan was the next chapter in a story that needs an ending, right. The ending 5 A. I don't generally believe that because the Q. And was that an objective that FHFA shared? A. FHFA also believed, and I think Director 6 solution to this whole issue all along, in my view, 6 7 needed to be a legislative solution. So if the 7 was for Congress to pass legislation. The ending was 8 Congress of the United States says, you know, this is 8 not for Fannie and Freddie Mac to emerge from 9 all that's happened, this is all the draws, this is 9 conservatorship. 10 all the dividends, this is everything that happened, 10 11 and we think Fannie Mae and Freddie Mac should be 11 12 rehabilitated under this structure, and this is the 12 13 housing system that we want for the next 30 years, 13 14 you have a good chance to do that. 14 Q. And did the Net Worth Sweep further that goal? MS. HOSFORD: Objection; calls for speculation. THE WITNESS: I'll speculate. And, and Q. Well, but, wait a minute, when you -- when 15 the speculation I will give you is the answer I gave the, when the Net Worth Sweep was entered into, you 16 you not that long ago which was, emerging from 17 knew that because the companies were going to have 17 conservatorship under the structure of the PSPAs is 18 the capital taken out of them, that when Congress 18 going to be very difficult, right. And we can 19 eventually turned to this situation, they're going to 19 recall, and we can go through that whole process 20 be looking at two companies with no capital? 20 again where, if they were going to emerge from 21 conservatorship, they would have to go out and raise 22 private equity of a hundred and 87.5 billion total 15 16 21 22 MS. HOSFORD: Objection. Can you tell me where in the Court's order this type of questioning Page 307 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 is authorized. It seems beyond the scope of the Court's order. I'm going to direct him not to answer unless you can find -MR. THOMPSON: Let me -MS. HOSFORD: -- you can persuade me. MR. THOMPSON: Let me try to tie this to the Court's order. BY MR. THOMPSON: Q. Do you know whether Treasury wanted to ensure that these companies did not reemerge well capitalized in the form that they had had before 2008? MS. HOSFORD: Objection; calls for speculation. THE WITNESS: Well, I'll speculate on that. I think Treasury had been pretty clear that they -- I mean, they were pretty clear all along from a legislative perspective that they wanted to see a wind-down and they wanted to see a new housing finance structure. I think Secretary Paulson was clear before that. BY MR. THOMPSON: Page 309 1 and whatever the two were split up, 116 and 75. 2 Raise private equity. Pay off the liquidation 3 preference. Raise enough private equity to be able 4 to dilute the 79,9 warrants from Treasury and raise 5 enough private equity to do all that and become a 6 well-capitalized institution under regulatory 7 standards that, by the way, had changed fundamentally 8 from when HERA was passed, because I would think in 9 any corner of the world, if they were going to be in 10 any corner of the United States, if there was going 11 to be companies these -- this large, they were likely 12 going to be systemically important financial 13 institutions under Dodd-Frank and they were going to 14 have to hold capital well in excess of anything that 15 HERA or at least that pre-HERA envisioned, well in 16 excess in anything of that. So the, the amount would 17 have been huge. 18 And the PSPAs also have a provision that, 19 given that, they don't go away. If you exit 20 conservatorship under the PSPAs as, as you were 21 before, the financial commitment from Treasury goes 22 with you. That's, that's how it works. And so there 78 (Pages 306 to 309) Alderson Reporting Company 1-800-FOR-DEPO A069 Mario Ugoletti May 15, 2015 Washington, D.C. Page 310 Page 312 1 was a provision in there that even if, even if they 1 Finance, you could get it from CNN, you can get it 2 did all those things I talked about, and FHFA finally 2 from Bloomberg. So your colleague requested a URL, 3 put the stamp of approval on them and said, By God, 3 there is no URL for Bloomberg, it's a proprietary 4 you did it, you've made the capital, you raised all 4 service, so what we're instead giving you is the 5 that money, and even if we had the SIFI standard, you 5 information. 6 would meet it, and the Federal Reserve won't have to 6 7 supervise you, Treasury still has to approve them 7 8 coming out of conservatorship because it's still the 8 If it's not helpful, I apologize, and you can 9 financial backing of the PSPAs goes with them. 9 disregard it. 10 11 So did the third amendment change any of that stuff? No. Very little. MR. THOMPSON: We're trying to be helpful. MS. HOSFORD: But I don't understand, I 10 11 mean, there's different dates, different data, how -- 12 there seems to be no relationship between this and 13 Bates number of FHFA 103596. 13 this except -- 14 (Exhibit No. 29 marked.) 14 MR. THOMPSON: Other than it's the same 15 MS. HOSFORD: Mr. Thompson, would it be 15 stocks, and the one that you have in your right hand 16 is inclusive of all the information in your left hand. 12 16 MR. THOMPSON: Now, Ugoletti 29 has a MS. HOSFORD: All right. okay if we took a, like a three-minute break? 17 MR. THOMPSON: Sure. 17 18 THE VIDEOGRAPHER: This concludes Disk 18 MS. HOSFORD: So but why did you not -- 19 No. 3 in the video deposition of Mario Ugoletti. The 19 20 time on the video is 4:44 p.m. We are off the 20 MR. THOMPSON: It doesn't exist. 21 record. 21 MS. HOSFORD: Well, how -- 22 MR. THOMPSON: It's not available on the 22 (Recess taken.) why did you not give us a URL for this one? Page 311 THE VIDEOGRAPHER: This begins Disk No. 4 Page 313 1 Internet. You have to pay Bloomberg, and so I can't 2 in the video deposition of Mario Ugoletti. The time 2 give you a URL for it. 3 on the video is 4:53 p.m. We are on the record. 3 1 4 5 MS. HOSFORD: Counsel, a question: What is this document that you've handed us? MS. HOSFORD: Oh, so you're trying to -- 4 MR. THOMPSON: I'm trying to be helpful. 5 Your colleague said, We'd like something we could 6 MR. THOMPSON: Oh, yeah. So your 6 verify. So I tried to give you something that was 7 colleague had requested something that was verifiable 7 verifiable. 8 with a URL. The prior screenshot we gave you, I 8 9 believe, was from Bloomberg, and that's not -- 9 MS. HOSFORD: So you're trying to give me something that, that -- 10 there's no URL, you have to be a subscriber; so we 10 11 wanted to give you something that had an Internet 11 12 source for the same information. We've given you a 12 13 CNN.com, we could also give you a Google Finance if 13 14 you want. 14 MR. THOMPSON: It has all of the same 15 information. And if it's not helpful, I apologize. 16 We weren't obligated to do this. We did it in a. 15 16 MS. HOSFORD: But how does this document relate to this document? MR. THOMPSON: Verifies the information that we provided to the witness in a way -MS. HOSFORD: Or this has some of the same information. It's not verifying this. 17 MR. THOMPSON: It's the same information. 17 Spirit to try to be helpful. 18 MS. HOSFORD: How did this document get 18 Was it helpful to you, Mr. Dintzer? 19 created then? Is this a screenshot from the same 19 MR. DINTZER: No, actually, it wasn't. 20 site as this? 20 But, I mean, I -- you hand -- you handed something to 21 the witness, and you represent it's whatever -- 22 actually, it doesn't even represent, you said it 21 22 MR. THOMPSON: It's, it's -- it's stock price information, so you could get it from Google 79 (Pages 310 to 313) Alderson Reporting Company 1-800-FOR-DEPO A070 Mario Ugoletti May 15, 2015 Washington, D.C. Page 318 Page 320 1 THE WITNESS: No, not -- not to my 1 mean, we've talked about this numerous times. These 2 knowledge it had anything to do with that. I mean, 2 were projections based on various -- various sources; 3 my -- my take from this is, you know, we had done, as 3 in this case, Moody's opinion on house prices. And 4 we went through earlier today, a lot of back and 4 if Moody's was, even in the base case, if -- if 5 forth with negotiation on Treasury on these potential 5 markets performed better than that, they were likely 6 third PSPA amendments back in June. 6 to have an outperformance. And the Treasury Department has a whole 7 7 Q. Okay. A. So, I mean, that's ... 8 process that they need to go through to try to get 8 9 something that they're ready to complete. So, I 9 10 mean, I just had taken it that, you know, they're 10 11 working their process and, you know, when they get 11 A. Are you done with this? 12 something that's -- they think they're ready to go, 12 Q. Yes, sir. 13 they'll let us know. 13 14 BY MR. THOMPSON: 14 tax assets insofar as earlier in 2012, were you aware 15 that Treasury had written back up AIG's deferred tax 16 assets? 15 16 Q. And, I'm sorry, so -- so why were they -why was there a renewed push? MS. HOSFORD: Objection; asked and 17 18 answered. THE WITNESS: Yeah, I -- I mean, I -- I 19 Q. Now, Treasury had experience with writing -- -- had experience with writing up deferred 17 MS. HOSFORD: Objection; lack of 18 foundation, also not within the scope of the Court's 19 discovery order. 20 took this to be that -- you know, we had done a lot 20 21 of work on this on June. We had worked on the 21 absolutely are, and I'm entitled to ask him if he MR. THOMPSON: The deferred tax assets 22 language in June. And, you know, the Treasury 22 knew whether Treasury had written up AIG's. Page 319 Page 321 1 Department, to get a document all the way through to 1 2 the Secretary and to get all their other ducks lined 2 3 up in a row, it takes some time. So I figured it's 3 4 somewhere over there and -- and they're working the 4 5 process. 5 6 MR. THOMPSON: Okay. This next one is 6 7 going to be Ugoletti 30. It has a Bates number of 7 8 FHFA 102247. 8 9 10 11 (Exhibit No. 30 marked.) 9 BY MR. THOMPSON: 10 Q. So the top email is from Ms. Tagoe to you 11 12 and to others, August 9th, 2012. And at the bottom 12 13 is an email from a reporter with the American Banker. 13 14 And this reporter, Mr. Horwitz, says in the second 14 15 sentence of his email "It looks like the GSEs are 15 16 vastly outperforming even the most optimistic outcome 16 17 listed." 17 18 Was that true; were they "vastly 18 19 outperforming even the most optimistic outcome 19 20 listed"? 20 21 A. I'm not going to parse adjectives here in 21 22 terms of "vastly," or whatever, but they were. I 22 MS. HOSFORD: Objection; speculative, and it has nothing to do with this case. You may answer. THE WITNESS: No. BY MR. THOMPSON: Q. Okay. FHFA reviewed Fannie and Freddie's 10-Ks and 10-Qs; is that right? A. That is correct. Q. Okay. This next one is going to be Ugoletti 31. It has a Bates number of FHFA 3584 through 3738. (Exhibit No. 31 marked.) BY MR. THOMPSON: Q. We have -- this is the 10-Q -- we have produced select pages. If you or DOJ wants the full 400 pages, we can print it out. MS. HOSFORD: I'm just going to object that this is not going to represent the full document; and to the extent that Mr. Ugoletti attempts to interpret any information in this document, it will not be reliable. BY MR. THOMPSON: 81 (Pages 318 to 321) Alderson Reporting Company 1-800-FOR-DEPO A071 Mario Ugoletti May 15, 2015 Washington, D.C. Page 322 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Q. Now, sir, if we look at this document and you turn to page -- it's hard to read, but -A. That's why I have my glasses. Q. -- 3737, "Deferred Taxes Asset, Net," it says "Our valuation allowance decreased by $989 million to $34.7 billion during the six months ended June 30, 2012 primarily due to a decrease in deferred tax assets. After consideration of the" value "allowance, we had a net deferred tax asset of $3.1 billion, primarily representing the tax effect of unrealized losses on our available-for-sale securities. We continue to be in a tax loss carryforward position." This reflects the fact that the companies were, in fact, decreasing their valuation allowance right on the eve of the Net Worth Sweep; isn't that right? MS. HOSFORD: Objection; lack of foundation, assumes facts not in evidence. THE WITNESS: I'm not the accounting expert here on -- on how -- how the deferred tax asset is -- how the valuation allowance is Page 324 1 don't know what the -- what the rationale was. 2 BY MR. THOMPSON: 3 Q. Now, if they had positive inc- -- they had 4 positive income in the second quarter of 2012; 5 Freddie did, right? MS. HOSFORD: Objection; assumes facts not 6 7 in evidence. THE WITNESS: Yeah, they had positive 8 9 income, but the general rules, as I understand them, 10 on reversing a valuation allowance of a deferred tax 11 asset require that sometime in the future you've 12 accumulated enough income that you can do a reversal. So whether this was for some portion of 13 14 that or whether this was from -- from some other 15 aspect of that account, all it says is, We reversed 16 this. It doesn't say why, it doesn't say what 17 portion of it it was, or anything else about it. So 18 I don't know why they did it there. 19 BY MR. THOMPSON: 20 Q. Now, do you know that the Audit Committee 21 of Fannie and Freddie every quarter were looking at 22 the deferred tax assets in assessing whether it Page 323 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 constructed, but there may be, in my recollection, that there are some portions of it that have different rules than other portions of it, but my under- -- my recollection was that when you make a determination, it is closer to an all-or-nothing determination for certain portions of it, for the large portion of it. But that's -- I'm not an accounting expert. BY MR. THOMPSON: Q. But FHFA would have been aware that the valuation allowance was, in fact, being reduced by 989 million? A. Yeah, but -MS. HOSFORD: Objection; lack of foundation, calls for speculation. THE WITNESS: Right, and it doesn't say why it was being reduced there. I -- I don't know what portion of the rules in the deferred tax asset world that portion of the valuation allowance was being decreased by. I don't know, maybe some of them expired, couldn't use them anymore. I -- I don't know. I Page 325 1 needed to be -- the valuation allowance needed to be 2 reversed -- 3 A. I'm generally aware of that, yes. 4 Q. Okay. 5 6 7 8 9 And the next document is going to be Ugoletti 32. MS. HOSFORD: Thank you. (Exhibit No. 32 marked.) BY MR. THOMPSON: 10 Q. This says "Grant Thornton Questions for 11 Fannie Mae Forecasting Group." It's got a Bates 12 number of FHFA 95951, so it was produced to us out of 13 the FHFA's own files. It's dated July 26, 2012. 14 15 16 17 18 "Fannie Mae Forecasting Group," do you know what that was? MS. HOSFORD: Objection; lack of foundation. THE WITNESS: Well, again, I think I 19 described this process earlier, right, that, you 20 know, Grant Thornton -- we went through a Grant 21 Thornton document -- Grant Thornton, you know, does 22 the Treasury financial statements, so every year they 82 (Pages 322 to 325) Alderson Reporting Company 1-800-FOR-DEPO A072 Mario Ugoletti May 15, 2015 Washington, D.C. Page 326 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 have to come in and do their valuation assessments of Treasury's holding. We went through one of those documents, so -BY MR. THOMPSON: Q. Okay. A. -- as part of that process, Treasury asked FHFA if Grant Thornton can come over and talk to, I believe it was, FHFA and Fannie Mae to get information so they can help improve their calculation for Treasury's financial statements. So I, I don't -- I don't -- I couldn't tell you now who is on the Forecasting Group, but that's the general framework. And so it was some combination, I would think, of those folks for that purpose. Q. Okay. And if we look at this document on the second page under -A. Let me read the first page first. Q. Oh, take your time. You tell me when you're ready. A. Okay. Q. All right. By the way, would Ms. Tagoe Page 328 MS. HOSFORD: Objection; lack of 1 2 foundation. THE WITNESS: Yeah, I wouldn't read it as 3 4 that. I mean, you -- you just -- you just said that, 5 I mean, they go through this process on a regular 6 basis on evaluating what to do about the DTA. I 7 think Grant Thornton just wants to know where they're 8 at in that process and what they're thinking about, 9 what -- what the -- I mean, this is -- this is a 10 document -- a lot of these documents are taking -- 11 like if you -- if you go up to 3.a., "What are the 12 components of 'guaranty fee income' and 'fee and 13 other income'?" So Grant Thornton has a line item on 14 15 Fannie Mae's balance sheet, these two line items; and 16 they're trying to figure out, well, what's all in 17 that line item? You know, so they're just -- they're 18 trying to take what -- you know, a lot of what Fannie 19 Mae has in their published information and in other 20 materials that they have as to how are they 21 developing things. And so this is an issue, so they 22 want to know what the process is and what the Page 327 Page 329 1 have been likely to have been a member of the 1 2 Forecasting Group? 2 3 4 5 6 7 8 9 10 11 A. Either her or someone on her -- her staff, more likely. 3 4 Q. Okay. Do you know who on her staff would -- 5 6 A. No, because there's people -- people have moved around and -- 7 8 Q. Okay. 9 A. -- some people have left, so I'm not sure who -- who at this time would have been -- 10 11 12 Q. Fair enough. 12 13 A. -- would have been that person. 13 14 Q. Okay. Well, if we look at 4, "Other 14 15 Items" -- 15 16 A. Yes. 16 17 Q. -- and we look at b, it says "What are the 17 18 19 plans for the DTA?" 18 So that tells us that on the eve of the 19 20 Net Worth Sweep, FHFA was in discussions with Fannie 20 21 Mae and Grant Thornton about what -- about the DTA; 21 22 is that right? 22 thinking is on it. BY MR. THOMPSON: Q. And what was the -A. My -- my -Q. What was the thinking of Fannie Mae on -MS. HOSFORD: Objection. BY MR. THOMPSON: Q. -- July 26, 2012? MS. HOSFORD: Lack of foundation, calls for speculation. THE WITNESS: I do not know what Fannie Mae's thinking was on July 26th. I was not part of this meeting. I did not really hear much about this issue until January or early February of the next year when the first quarter results were about to come out. BY MR. THOMPSON: Q. And they wanted to reverse the valuation allowance? A. That's right. Q. You have said that the conservator did not envision that the deferred tax assets were going to 83 (Pages 326 to 329) Alderson Reporting Company 1-800-FOR-DEPO A073 Mario Ugoletti May 15, 2015 Washington, D.C. Page 330 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 be written back up in 2013, right? MS. HOSFORD: Objection; misstates prior testimony. THE WITNESS: I think you'd have to, you'd have to go through -BY MR. THOMPSON: Q. Well, let me ask you: Did the conservator, on the eve of the Net Worth Sweep, envision that the deferred tax assets would be written back up in 2013? A. As I just stated, I did not really think that this was a possibility anytime in the near future. And 2013, the early part of 2013 when this became an issue, it became an issue because, well, house prices are continuing to go up and we're going to take -- release more loss reserves, and it looks like it's more probable than not, which is a very low standard, more probable than not, that we're going to have to release the valuation allowance on the deferred tax asset. So that is when it really came home that this was a possibility. Page 332 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 BY MR. THOMPSON: Q. Do you know what Treasury thought about it? MS. HOSFORD: Objection; calls for speculation. THE WITNESS: I do not. BY MR. THOMPSON: Q. Okay. Now, you did know that one of the factors you look at is whether there's a three-year cumulative loss, right? MS. HOSFORD: Objection; mischaracterizes testimony, assumes facts not in evidence. THE WITNESS: I just said, I knew there were some tests that related to how much income, I can't -- I don't know if it was a three-year, I mean, but there was some test that you had to meet that you were going to pass this threshold and that you expected to continue to generate net income in the future to be able to use the tax asset. That's the condition for revaluing it. BY MR. THOMPSON: Q. And we looked at the Grant Thornton Page 331 Page 333 1 Q. To you? 1 2 A. To me. 2 Q. Okay. But I'm asking: Do you have an 3 3 4 opinion on whether FHFA, as conservator, knew that 4 5 the deferred tax assets might be written back up in 5 6 2013? 6 7 MS. HOSFORD: Object -- objection; vague 8 as to time period. 9 BY MR. THOMPSON: 7 8 9 10 Q. On the eve of the Net Worth Sweep. 10 11 MS. HOSFORD: Lack of foundation. 11 THE WITNESS: I, I don't know who else in 12 12 13 FHFA or what they knew about the potential for that, 13 14 but, as we've gone through here, there were -- our 14 15 accountants were monitoring this situation, they were 15 16 monitoring how they were doing about doing their 16 17 potential, whether to revalue, they had to do it all 17 18 the time, revalue or not revalue, and I do not recall 18 19 knowing about that this was going to be an issue 19 20 until really '13 when it became imminent that, oh, 20 21 this has to happen now, and I don't know what anybody 21 22 else thought about it. 22 September 2011 projections, you recall that, for Freddie? A. Yeah. Q. I know it was a long time ago. Yeah. A. Yeah. Q. And it showed projections of roughly 5 1/2 billion out over the next 10 years; you remember that? MS. HOSFORD: Objection; lack of foundation. THE WITNESS: I would have to go back if you want the actual numbers, but, I mean, it showed, it showed net income being positive, I mean. BY MR. THOMPSON: Q. Yeah, and if, and if that condition persisted for some period of time, then -- and, and Freddie, for example, was making $5 billion a year, year after year, then the deferred tax asset would be written back up; is that right? A. That's an accounting determination that the companies have to make. Q. Yes. 84 (Pages 330 to 333) Alderson Reporting Company 1-800-FOR-DEPO A074 Mario Ugoletti May 15, 2015 Washington, D.C. Page 334 Page 336 Q. Okay. But if they did, they would, right? 1 A. Because they have to sign their financial 1 2 statements, so the companies have to go through the 2 3 process of evaluating this accounting question on a 3 4 regular basis, and between the co- -- the companies 4 5 and their auditors, when they think they are in a 5 to follow what the accounting rules say and they're 6 place where they've hit the thresholds for reversing 6 going to make a judgment based on what they think the 7 a valuation off or putting one on, they are going to 7 accounting rules tell them to do in terms of a 8 follow GAAP because that is what they do. 8 probability more likely than not to use that asset to 9 write it up. 9 Q. But did you ha- -- I understand you're MS. HOSFORD: Objection; asked and answered. THE WITNESS: Asked that -- they're going BY MR. THOMPSON: 10 saying that's an accounting issue for the companies. 10 11 Did you have an opinion on that, as to whether if 11 12 Freddie, for example, made $5 billion year after 12 commentators after the release of the second quarter 13 year, whether the deferred tax asset would be written 13 profits who were saying that Fed -- Freddie and 14 back up? 14 Fannie had made a convincing return to profitability? 15 16 17 18 19 A. It's not -- MS. HOSFORD: Can you -- objection. Can 15 MS. HOSFORD: Objection; asked and answered. THE WITNESS: Yeah, I'm not an accountant. BY MR. THOMPSON: 16 you please put a time frame of when those statements 17 were made. After the second quarter profits is 18 insufficient to tell whether it's in the scope of the 19 Court's order. 20 Q. So you didn't have an opinion on that? 20 21 A. No, I don't have an accounting opinion on, 21 22 Q. Now, were you aware that there were market on the DTA and the finer points of the DTA about when MR. THOMPSON: Within the next two or three days. MS. HOSFORD: Within the next two or three 22 Page 335 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 you would actually hit this trigger and what the triggers are. I generally understand what they are, but I don't have the, I'm not an accountant, I don't have the -- it -- it's not my profession. Q. Yeah, and I don't mean to be difficult, I don't mean to be difficult, but I want to make sure the record's complete. Even if you didn't have a precise understanding of every little test to know exactly what quarter it would be written up, did you have a rough sense as to, you know, if they make 5 billion a year, year after year, that yeah, at some point in the next two, three years they're going to write it back up? MS. HOSFORD: Objection; asked and answered, mischaracterizes prior testimony. THE WITNESS: Yeah, and the only thing I would highlight in what you just asked me is, you said "if." BY MR. THOMPSON: Q. Yeah. A. So, if they didn't, they wouldn't write it up. Page 337 1 days after what? MR. THOMPSON: The release of the second 2 3 quarter earnings. MS. HOSFORD: When were the second quarter 4 5 earnings released? MR. THOMPSON: I believe it was the 6th 6 7 and 7th; it might have been the 8th and 9th. 8 MS. HOSFORD: Of August? 9 MR. THOMPSON: Yes. 10 MS. HOSFORD: Thank you. 11 THE WITNESS: No, I wasn't following what 12 the market commentators were saying. It was a good 13 quarter. That's, that's good. We were hap- -- we 14 were happy it was a good quarter, their underwriting 15 had improved, they were starting to earn some income. 16 But because the market commentators said they had a 17 good -- good quarter and something else is, is a 18 response. That's nice to know. But, I mean, I'm 19 going to ... MR. THOMPSON: Okay. Let's look at the 20 21 next one, which will be Ugoletti 32, FHFA -- 22 THE WITNESS: 33. 85 (Pages 334 to 337) Alderson Reporting Company 1-800-FOR-DEPO A075