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EXHIBIT 17

LED: NEW YORK COUNTY CLERK 12/10/2012 INDEX NO. 602825/2008SCEF DOC. NO. 3920 RECEIVED NYSCEF: 12/10/2012


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In The Matter Of:

MBIA INSURANCE CORPORATION v.

COUNTRYWIDE HOME LOANS, INC., et al.

___________________________________________________

R. GLENN HUBBARD Vol. 1 July 30, 2012

___________________________________________________

CONFIDENTIAL


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CONFIDENTIALR. GLENN HUBBARD - 7/30/2012

1-800-325-3376 www.merrillcorp.com/lawMerrill Corporation - New York

Page 1

C O N F I D E N T I A L

SUPREME COURT OF THE STATE OF NEW YORK

COUNTY OF NEW YORK

-----------------------------------x

MBIA INSURANCE CORPORATION,

Plaintiff,

-against- Index No.08/602825

COUNTRYWIDE HOME LOANS, INC.,COUNTRYWIDE SECURITIES CORP.,COUNTRYWIDE FINANCIAL CORP.,

COUNTRYWIDE HOME LOANS SERVICING, LPand BANK OF AMERICA CORP.,

Defendants.-----------------------------------x

July 30, 2012

9:33 a.m.

Videotaped deposition of R. GLENN

HUBBARD, taken by Plaintiffs, pursuant to

Notice, at the offices of Quinn Emanuel

Urquhart & Sullivan LLP, 51 Madison

Avenue, New York, New York, before GAIL

F. SCHORR, a Certified Shorthand

Reporter, Certified Realtime Reporter

and Notary Public within and for the

State of New York.


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2 (Pages 2 to 5)

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1 C O N F I D E N T I A L2 A P P E A R A N C E S:3 QUINN EMANUEL URQUHART & SULLIVAN LLP

Attorneys for Plaintiff 4 51 Madison Avenue

New York, New York 100105

BY: PHILIPPE Z. SELENDY, ESQ.6 -and-

THOMAS J. LEPRI, ESQ.7 ([email protected])

([email protected])89 GOODWIN PROCTER LLP

Attorneys for Defendants10 Exchange Place

Boston, Massachusetts 0210911

BY: DAVID J. APFEL, ESQ.12 ([email protected])13 -AND-14 GOODWIN PROCTER LLP

Attorneys for Defendants15 901 New York Avenue NW

Washington, D.C. 2000116

BY: DAVID I. FREEBURG, ESQ.17 ([email protected])18

ALSO PRESENT:19

JOSEPH MASON20

DAVID SANDERS, Videographer21 Merrill Legal Solutions22232425

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1 C O N F I D E N T I A L209:33:28 THE VIDEOGRAPHER: This is the309:33:38 video operator speaking, David409:33:39 Sanders, of Merrill Legal509:33:43 Solutions, 225 Varick Street, New609:33:45 York, New York 10014. Today is709:33:51 July 30th, 2012, and the time is809:33:55 9:33 a.m. We are at the offices of 909:33:59 Quinn Emanuel, 51 Madison Avenue,

1009:34:03 New York, New York, to take the1109:34:06 videotaped deposition of Professor1209:34:10 R. Glenn Hubbard, in the matter of 1309:34:13 MBIA Insurance Corporation versus1409:34:16 Countrywide Home Loans, Inc., et1509:34:19 al., in the Supreme Court of the1609:34:21 State of New York, County of New1709:34:23 York, index number 08/602825.1809:34:30 Will counsel please introduce1909:34:32 themselves for the record.2009:34:33 MR. SELENDY: Philippe Selendy2109:34:35 of Quinn Emanuel, for plaintiff 2209:34:37 MBIA.2309:34:38 MR. LEPRI: Tom Lepri of Quinn2409:34:41 Emanuel, also for plaintiff MBIA.2509:34:44 MR. APFEL: David Apfel from

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1 C O N F I D E N T I A L209:34:46 Goodwin Procter, on behalf of the309:34:49 Countrywide defendants and the409:34:50 deponent, Glenn Hubbard.509:34:52 MR. FREEBURG: David Freeburg609:34:53 of Goodwin Procter, also on behalf 709:34:55 of the Countrywide defendants and809:34:56 the deponent.909:35:00 THE VIDEOGRAPHER: Will the

1009:35:01 court reporter, Gail Schorr of 1109:35:03 Merrill Legal Solutions, please1209:35:04 swear the witness.13 R. GLENN HUBBARD,14 called as a witness, having been15 first duly sworn by the Notary16 Public (Gail F. Schorr), was17 examined and testified as18 follows:1909:35:11 EXAMINATION BY MR. SELENDY:2009:35:11 Q. Dr. Hubbard, would you please2109:35:16 state your full name and address for the2209:35:18 record, please.2309:35:18 A. Sure, my name is Robert Glenn2409:35:22 Hubbard, and my address is2509:35:26 .

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1 R. GLENN HUBBARD - CONFIDENTIAL209:35:26 (Hubbard Exhibit 1 for309:35:26 identification, expert report of 409:35:26 Robert Glenn Hubbard dated February509:35:31 12th, 2012.)609:35:31 (Hubbard Exhibit 2 for709:35:31 identification, expert rebuttal809:35:31 report of Robert Glenn Hubbard909:35:31 dated July 3, 2012.)

1009:35:31 Q. I'm going to show you two1109:35:32 documents that we've marked as Hubbard1209:35:35 Exhibit 1 and 2. The first states expert1309:35:38 report, dated February 12th, 2012 and the1409:35:40 second states expert rebuttal report,1509:35:43 dated July 3, 2012.1609:35:44 Can you confirm whether those1709:35:46 are your initial and rebuttal reports in1809:35:48 this matter?1909:36:01 A. Yes, they appear to be.2009:36:02 Q. And did you write your own2109:36:03 reports?2209:36:04 A. Yes.2309:36:04 Q. Is it fair to say that you're2409:36:05 known as an advocate of deregulation?2509:36:07 A. No, I wouldn't say that at


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3 (Pages 6 to 9)

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1 R. GLENN HUBBARD - CONFIDENTIAL209:36:09 all.309:36:09 Q. Is it your view that certain409:36:13 regulations actually encouraged the509:36:15 growth of high risk mortgage lending?609:36:18 A. Yes, I -- if your question is709:36:21 was regulation in part responsible for809:36:24 changes in the housing industry, the909:36:26 answer to that question is yes.

1009:36:28 Q. And which regulations do you1109:36:30 believe encourage the growth of high risk 1209:36:32 mortgage lending?1309:36:33 A. Well, in particular, the1409:36:35 expansion by the government sponsored1509:36:37 enterprises of guidelines, as I think 1609:36:41 identified by many economists.1709:36:43 Q. Is your only publication1809:36:50 relating to the mortgage sector the 20091909:36:52 article that you cite several times in2009:36:56 your reports?2109:36:56 A. In my refereed work that's2209:36:58 true. I've done a lot of work in housing2309:37:00 policy, but yes, that's my scholarly2409:37:02 paper.2509:37:02 Q. Okay. Is Exhibit 1 of your

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1 R. GLENN HUBBARD - CONFIDENTIAL209:37:06 expert report an accurate list of your309:37:08 publications?409:37:09 A. There are probably things that509:37:10 I've done since this was done, but more609:37:12 or less, yes.709:37:12 Q. Do you have any formal809:37:13 education in statistical sampling?909:37:16 A. Well, as an economist, yes.

1009:37:19 Q. Could you describe your1109:37:20 education in statistical sampling?1209:37:22 A. Well, courses in statistics1309:37:25 and in econometrics.1409:37:26 Q. Is it fair to say that you1509:37:28 offer no rebuttal report to Dr. Cowan's1609:37:31 report in this matter?1709:37:32 A. I do have comments on what1809:37:35 Dr. Cowan did, but what I'm testifying to1909:37:38 is what you see before you. I didn't2009:37:41 offer a report on Dr. Cowan.2109:37:43 Q. What are your current2209:37:44 professional responsibilities?2309:37:48 A. I'm a professor of economics2409:37:50 on the faculty of arts and sciences at2509:37:52 Columbia. I'm a professor of finance in

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1 R. GLENN HUBBARD - CONFIDENTIAL209:37:54 the business school, and I'm also dean of 309:37:56 the business school.409:37:57 Q. Is it correct that you also509:37:58 serve as an advisor to Mitt Romney?609:38:01 A. That's correct.709:38:02 Q. In what capacity?809:38:03 A. On the economics side.909:38:05 Q. Do you give any advice

1009:38:07 relating to the housing markets to Mr.1109:38:09 Romney?1209:38:10 A. I do.1309:38:10 Q. Does that advice include what1409:38:16 regulation you believe to be appropriate1509:38:18 or inappropriate in the housing markets?1609:38:21 A. It certainly encompasses1709:38:24 public policy toward housing and the1809:38:26 future of housing finance and regulation,1909:38:28 yes.2009:38:28 Q. What ties do you have today to2109:38:30 the financial services industry?2209:38:32 A. I'm not sure what you mean by2309:38:34 the question.2409:38:35 Q. Have you served on the board2509:38:36 of financial services companies?

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1 R. GLENN HUBBARD - CONFIDENTIAL209:38:38 A. Yes, I currently do.309:38:39 Q. Okay. Which companies?409:38:41 A. Met Life, which is a large509:38:43 insurance company. And KKR Financial,609:38:47 which invests in debt instruments.709:38:48 Q. How are you compensated for809:38:50 your directorships?909:38:51 A. With director's fees.

1009:38:55 Q. What are those?1109:38:56 A. Both in stock and in cash. I1209:38:57 really don't recall off the top of my1309:38:59 head. They're on EDGAR, you could easily1409:39:01 obtain them.1509:39:02 Q. For the MetLife is it about1609:39:04 $250,000 a year?1709:39:05 A. That's probably about right.1809:39:06 Q. Is it also correct that you1909:39:08 sat on the board of Capmark, a major2009:39:10 commercial mortgage lender until shortly2109:39:13 before its bankruptcy?2209:39:14 A. That's correct.2309:39:15 Q. In that position did you have2409:39:19 any responsibilities relating to the2509:39:23 commercial mortgage lending operations of


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1 R. GLENN HUBBARD - CONFIDENTIAL209:39:26 Capmark?309:39:26 A. That's a management409:39:28 responsibility, but I was certainly on509:39:29 the board at that time.609:39:35 Q. In an interview with Fortune709:39:37 magazine, you were asked the following809:39:38 question: "The financial crisis proved909:39:42 there was a breakdown in leadership and

1009:39:44 ethics. Where should corporate America1109:39:46 go from here?" And you answered "I1209:39:49 actually think pure fraud and ethics1309:39:51 issues were important in the crisis but1409:39:53 not central."1509:39:56 In what respects, in your1609:39:57 view, were pure fraud and ethic issues1709:40:00 important in the crisis?1809:40:00 A. Well, I think if you read the1909:40:02 totality of that interview what I go on2009:40:04 to say is that in every business cycle2109:40:06 there are bad actors at the peak. So2209:40:09 that is not unusual.2309:40:10 Rather, what was unusual about2409:40:13 this business cycle were other economic2509:40:15 factors that I go on to describe in the

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1 R. GLENN HUBBARD - CONFIDENTIAL209:40:17 interview and would happily do so for309:40:20 you.409:40:20 Q. So your view is that it's not509:40:22 uncommon for there to be fraud at every609:40:26 peak of every business cycle?709:40:28 A. Cycles generally work that809:40:30 way, yes, there are bad actors in every909:40:34 cycle.

1009:40:34 Q. Have you had your deposition1109:40:37 taken before?1209:40:37 A. I have.1309:40:38 Q. In what matters?1409:40:40 A. A number of matters over many1509:40:43 years.1609:40:43 Q. Okay, over the last five1709:40:45 years, what matters have you had your1809:40:48 deposition taken in?1909:40:48 A. I'm going from memory because2009:40:50 apparently it doesn't come in reports in2109:40:52 New York State, but certainly some2209:40:54 antitrust matters, matters relating to2309:40:59 mutual fund fees, plus this proceeding.2409:41:04 That's probably about, about it.2509:41:06 Q. Is this the only RMBS

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1 R. GLENN HUBBARD - CONFIDENTIAL209:41:08 proceeding in which you've had your309:41:10 deposition taken?409:41:10 A. It's the only one in which509:41:12 I've had my deposition taken, yes.609:41:13 Q. And are you offering expert709:41:15 services in other RMBS matters?809:41:17 A. I am not presently, no.909:41:20 Q. Have you previously served as

1009:41:23 a testifying or consulting expert for1109:41:25 Countrywide?1209:41:26 A. I have.1309:41:27 Q. In connection with which1409:41:28 matters?1509:41:29 A. I'm not sure if I can1609:41:32 disclose.1709:41:32 MR. APFEL: I think he can say1809:41:33 the number of matters, you know,1909:41:35 and you can explore questions along2009:41:38 those lines, but not the specifics.2109:41:40 MR. SELENDY: I'll accept2209:41:41 that.2309:41:41 Q. How many other Countrywide2409:41:42 matters?2509:41:43 A. I would say one and a bit.

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1 R. GLENN HUBBARD - CONFIDENTIAL209:41:45 The reason I say a bit is one didn't go309:41:48 very far and then one that actually409:41:49 produced a report.509:41:50 Q. Were any of those regulatory609:41:51 matters?709:41:51 A. I'm not sure what you mean by809:41:53 regulatory.909:41:53 Q. Were any of those in response

1009:41:55 to investigations of Countrywide as1109:41:56 opposed to civil litigation brought by1209:41:59 private parties?1309:42:00 A. No, no, civil litigation.1409:42:01 Q. Have you worked as an expert1509:42:02 for Bank of America before?1609:42:03 A. I have a little bit. There1709:42:08 was a thing that I started for them but1809:42:10 it never went to deposition or trial.1909:42:13 Q. That was not in connection2009:42:16 with RMBS?2109:42:17 A. No.2209:42:18 Q. All right. So the only other2309:42:20 RMBS matter you've been involved in is2409:42:22 another one for Countrywide; is that2509:42:23 fair?


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5 (Pages 14 to 17)

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1 R. GLENN HUBBARD - CONFIDENTIAL209:42:23 A. That's correct.309:42:24 MR. APFEL: Two.409:42:25 A. Well, that's why I said one509:42:27 and a bit. One was started, but yes.609:42:29 Q. And in the other one and a709:42:32 bit, did you, did you offer testimony809:42:36 relating to the effect of housing prices909:42:38 on mortgage loan performance?

1009:42:41 A. I didn't, if I'm understanding1109:42:43 the way you're using the word, I didn't1209:42:45 offer testimony, I didn't have a1309:42:47 deposition, but I certainly wrote that in1409:42:48 the report.1509:42:49 Q. Okay. So you wrote a report1609:42:51 but the matter was resolved before you1709:42:53 testified?1809:42:53 A. I'm not even sure what I can1909:42:54 say.2009:42:55 MR. APFEL: I think you can2109:42:56 say, I think you can answer that2209:42:57 question for both the matter and2309:43:00 the bit matter.2409:43:02 A. Sorry. So not, not a live2509:43:06 proceeding.

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1 R. GLENN HUBBARD - CONFIDENTIAL209:43:06 Q. So this then will be the first309:43:09 matter in which you actually give409:43:11 testimony on the effect of housing prices509:43:13 on mortgage loan performance?609:43:16 A. Yes, sir.709:43:17 Q. Have you in the past ever809:43:18 given any opinions on the effect of 909:43:21 unemployment on loan performance?

1009:43:23 A. No, sir.1109:43:23 Q. So this will also be the first1209:43:25 occasion on which you give such1309:43:27 testimony?1409:43:27 A. That's correct.1509:43:28 Q. Is that also true with respect1609:43:30 to the effect of loan characteristics1709:43:32 such as the CLTV on loan performance?1809:43:36 A. Correct.1909:43:37 Q. Have you ever worked in the2009:43:39 mortgage banking industry?2109:43:41 A. No, sir.2209:43:41 Q. All right. I take it you've2309:43:45 never underwritten a loan?2409:43:47 A. I'm not an underwriter, no.2509:43:48 Q. And you've never structured or

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1 R. GLENN HUBBARD - CONFIDENTIAL209:43:49 bought or sold a mortgage-backed309:43:53 securities?409:43:53 A. I have not.509:43:54 Q. Is it fair to say that609:43:55 mortgage-backed securitizations are not709:43:57 your specialty?809:43:58 A. I'm not sure what you mean by909:43:59 that. If you're asking me do I have

1009:44:01 experience structuring mortgage-backed1109:44:03 securities, I already told you no, I'm1209:44:05 not a practitioner. As someone who has1309:44:07 studied it, been on the Boards of 1409:44:10 Directors of firms that are players, I1509:44:12 certainly have great familiarity, but I'm1609:44:13 not a practitioner, if that's your1709:44:15 question.1809:44:15 Q. Are you an expert in1909:44:17 mortgage-backed securitizations in your2009:44:19 view?2109:44:19 A. I don't know what you mean by2209:44:20 that.2309:44:20 Q. Okay.2409:44:21 A. Insofar as you're talking the2509:44:23 economic analysis, yes. If you're

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1 R. GLENN HUBBARD - CONFIDENTIAL209:44:25 talking about expert in structuring309:44:27 deals, I'm not a practitioner.409:44:28 Q. So you have general economics509:44:30 expertise which you've applied to this609:44:32 sector; is that fair?709:44:33 A. That's fair.809:44:34 Q. And other than your general909:44:37 economic training and whatever you've

1009:44:39 gleaned from sitting on the boards of 1109:44:41 companies, you don't have any particular1209:44:43 expertise in mortgage-backed1309:44:47 securitizations, correct?1409:44:48 A. As a practitioner, no, I do1509:44:50 not.1609:44:50 Q. I take it you don't have any1709:44:53 expertise in servicing loans, correct?1809:44:54 A. As a practitioner, no.1909:44:58 Q. And with respect to housing2009:44:59 markets, your familiarity, again, would2109:45:01 be through your general economic2209:45:04 abilities, right?2309:45:04 A. Yes, and through the research2409:45:06 I've done on housing finance.2509:45:09 Q. What research have you done on


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6 (Pages 18 to 21)

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1 R. GLENN HUBBARD - CONFIDENTIAL209:45:12 housing finance other than in connection309:45:14 with your 2009 article?409:45:15 A. That is my research on housing509:45:17 finance.609:45:17 Q. When were you first retained709:45:19 by Countrywide in this matter?809:45:20 A. I don't know the exact date.909:45:23 My recollection would be perhaps spring

1009:45:25 of 2010.1109:45:26 Q. How are you being compensated?1209:45:28 A. I'm being compensated at an1309:45:30 hourly rate for my work.1409:45:31 Q. Do you know your hourly rate?1509:45:33 A. Yes, it's $1200 an hour.1609:45:35 Q. What was your assignment?1709:45:36 A. My assignment in the first1809:45:38 report was to examine the consequences of 1909:45:43 macroeconomic effects on the housing2009:45:46 market during the period at issue, and to2109:45:49 address from the perspective of an2209:45:51 economist the allegations from MBIA that2309:45:54 there had been misrepresentation about2409:45:56 the quality of loans on the part of 2509:46:00 Countrywide.

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1 R. GLENN HUBBARD - CONFIDENTIAL209:46:00 Q. Did your assignment change309:46:03 with respect to your rebuttal report?409:46:04 A. Well, no and yes. I mean no509:46:08 in the sense that it's still the same609:46:10 body of work. Yes in the sense that I709:46:11 was now also asked to respond to work 809:46:15 that had been presented since my first909:46:17 report.

1009:46:17 Q. Okay. What assumptions, if 1109:46:20 any, were you asked to make in conducting1209:46:23 your assignment?1309:46:24 A. I was asked to --1409:46:26 MR. APFEL: The initial, the1509:46:28 initial assignment?1609:46:29 MR. SELENDY: Yes.1709:46:30 A. I was given the assignment,1809:46:32 but I wasn't asked to make assumptions.1909:46:34 Q. Did you make any inquiry into2009:46:36 how Countrywide actually originated its2109:46:38 loans?2209:46:43 A. I'm not sure exactly what you2309:46:45 mean by that.2409:46:45 Q. You understand there was a2509:46:47 process by which Countrywide originated

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1 R. GLENN HUBBARD - CONFIDENTIAL209:46:49 the loans that it included in the309:46:50 securitizations?409:46:50 A. Yes.509:46:51 Q. And there was also a process609:46:53 by which Countrywide examined the loans709:46:55 that it purchased from other originators809:46:57 for inclusion in securitizations?909:46:58 A. Correct.

1009:46:58 Q. Did you make any factual1109:47:01 inquiry into the nature of either the1209:47:03 process of origination or the process of 1309:47:05 due diligence by Countrywide?1409:47:06 A. I'm not an underwriter in this1509:47:10 proceeding, so neither of the assignments1609:47:12 that I told you would require such.1709:47:13 Q. In other words, you sought to1809:47:17 give an opinion as to the effect of 1909:47:24 performance on the Countrywide loans by2009:47:27 various factors, correct?2109:47:29 MR. APFEL: Objection.2209:47:31 A. Well that's not quite what I2309:47:32 said. I think what I said was two parts.2409:47:34 One, the importance of macroeconomic2509:47:36 effects, and second, the allegations that

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1 R. GLENN HUBBARD - CONFIDENTIAL209:47:38 MBIA made about misrepresentation,309:47:40 alleged misrepresentation on the part of 409:47:43 Countrywide.509:47:43 Q. And it's fair to say that you609:47:44 gave your opinions without any inquiry709:47:46 into how Countrywide actually originated809:47:48 its loans or how Countrywide examined the909:47:52 characteristics of the loans that it

1009:47:53 purchased from other originators,1109:47:55 correct?1209:47:56 MR. APFEL: Objection.1309:47:57 A. I'm not an underwriter. As an1409:47:58 economist, what I can do is look at the1509:48:00 implications of the claims made by MBIA1609:48:04 and its experts.1709:48:04 Q. So is that a yes in response1809:48:06 to my question?1909:48:07 A. You have to tell me the2009:48:10 question again.2109:48:10 MR. APFEL: Objection.2209:48:11 Q. It's a fairly simple question.2309:48:13 You gave your opinions without any2409:48:15 inquiry into how Countrywide actually2509:48:18 originated its loans, correct?


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1 R. GLENN HUBBARD - CONFIDENTIAL209:48:19 A. I did not underwrite.309:48:20 Q. Have you ever worked on a case409:48:27 for investors?509:48:29 A. I'm not sure what you mean by609:48:31 that.709:48:31 Q. Today you've said that you809:48:34 have worked for Countrywide and for Bank 909:48:37 of America. You've also testified that

1009:48:38 you've sat on the boards of various1109:48:40 financial services institutions.1209:48:42 My question is have you ever1309:48:44 worked for investors as opposed to for1409:48:47 the banks?1509:48:48 A. Yes, I have.1609:48:48 Q. In what cases?1709:48:49 A. There was a case, I think it1809:48:51 goes back prior to your five year1909:48:53 question, for the Merrill Lynch funds,2009:48:56 involving the HBOC/McKesson merger. But2109:49:02 it was, the funds were the plaintiff and2209:49:04 I was their witness.2309:49:05 Q. Have you ever worked for2409:49:07 insurance companies such as MBIA?2509:49:08 A. As an expert, no.

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1 R. GLENN HUBBARD - CONFIDENTIAL209:49:10 Q. Now coming back to your309:49:16 initial report. If you could turn to409:49:18 paragraph 5, which is on page 3, in509:49:28 subsection 2 of paragraph 5 you state you609:49:31 were asked "to assess the impact, if any,709:49:33 of Countrywide's alleged809:49:36 misrepresentations of its loan909:49:37 origination and underwriting practices on

1009:49:40 the performance of the loans underlying1109:49:41 the securitizations."1209:49:43 Do you see that?1309:49:44 A. Yes, sir.1409:49:44 Q. And you've just said that you1509:49:46 didn't actually reunderwrite the loans at1609:49:48 issue in this case, right?1709:49:49 A. For this report I had no1809:49:50 access to underwriting or reunderwriting.1909:49:53 I did in the second report.2009:49:54 Q. So you have no direct2109:49:56 knowledge of the extent of Countrywide's2209:49:59 representations regarding underwriting2309:50:02 practices, right?2409:50:04 MR. APFEL: Objection.2509:50:04 A. Now you've changed your

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1 R. GLENN HUBBARD - CONFIDENTIAL209:50:06 question. Your first question was about309:50:09 misrepresentation of quality. Now it's409:50:10 about misrepresentation of a practice or509:50:12 standard. Those aren't the same thing,609:50:14 but...709:50:14 Q. Do you agree with me that you809:50:16 have no direct knowledge of the extent of 909:50:18 Countrywide's misrepresentations

1009:50:19 regarding its underwriting practices?1109:50:22 MR. APFEL: Objection.1209:50:23 A. I would disagree with that. I1309:50:25 think the benchmarking exercise that I1409:50:27 did gets at the very core of how an1509:50:30 economist would test for whether that1609:50:31 allegation were true.1709:50:33 Q. Okay. You would characterize1809:50:35 that in your view as direct knowledge?1909:50:39 A. Of the implications which is2009:50:40 what you directed me to 5 (ii), yes.2109:50:45 Q. You actually don't know the2209:50:47 percentage of Countrywide's loans that2309:50:49 were affected by misrepresentations, do2409:50:51 you, sir?2509:50:52 MR. APFEL: Objection.

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1 R. GLENN HUBBARD - CONFIDENTIAL209:50:53 A. Well that as you know is at309:50:55 issue in this proceeding. What I can do409:50:57 as an economist is say do a set of loans509:51:02 appear to have this sort of departure609:51:05 from underwriting guidelines.709:51:06 In the second report you've809:51:08 actually given me more information and I909:51:10 can look directly at that, and did.

1009:51:12 Q. What you do not do, sir, is1109:51:14 test the amount of losses that were1209:51:16 actually caused by misrepresentations1309:51:20 because you don't look at actual1409:51:24 misrepresentations in your reports, what1509:51:26 you do is instead, design various ex post1609:51:30 scenario analyses built on certain1709:51:33 modeling assumptions, right?1809:51:36 MR. APFEL: Objection.1909:51:36 A. I disagree with virtually the2009:51:38 entirety of everything you just said.2109:51:39 Q. Go ahead and explain why.2209:51:41 A. The way an economist would2309:51:42 address this is underwriting standards,2409:51:47 guidelines, whatever you want to use, are2509:51:49 about observable variables, FICO scores,


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1 R. GLENN HUBBARD - CONFIDENTIAL209:51:54 CLTV, whatever variables you wish. What309:51:57 an economist can do is say, controlling409:51:59 for everything was there any evidence of 509:52:01 under-performance.609:52:02 A second thing an economist709:52:05 could do would be to actually look at an809:52:09 underwriter's take on defects and test909:52:11 whether the defects matter. That I was

1009:52:14 able to do in the second report and not1109:52:15 the first report.1209:52:16 Those are the two things an1309:52:17 economist can do. Neither one of those1409:52:19 did your experts do.1509:52:20 Q. When you say controlling for1609:52:21 everything, what do you mean?1709:52:22 A. In other words, controlling1809:52:24 for other factors that would affect loan1909:52:28 performance.2009:52:28 Q. Factors other than2109:52:33 misrepresentations, is that what you2209:52:35 mean?2309:52:35 A. Correct.2409:52:39 Q. And you admit there's little2509:52:41 question that in any pool involving

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1 R. GLENN HUBBARD - CONFIDENTIAL209:52:43 thousands of loans there will be some309:52:45 incidents of misrepresentation or409:52:48 improper underwriting, right?509:52:50 MR. APFEL: Objection.609:52:51 A. I think it's highly likely.709:52:52 It could be a combination of borrower809:52:55 fraud, errors, it could be a lot of 909:52:56 things, but I think I say explicitly in

1009:52:58 the report that that's there. Indeed,1109:53:00 MBIA's own due diligence looks for that.1209:53:02 Q. You would agree in general, I1309:53:04 take it, that improper underwriting will1409:53:06 have an effect on loan performance; is1509:53:09 that fair?1609:53:09 A. That's correct and testable,1709:53:11 yes.1809:53:11 Q. Okay. So when you say it's1909:53:14 testable, what you did in your initial2009:53:16 report fundamentally was to compare the2109:53:18 performance of the Countrywide2209:53:20 securitizations and loans with non-2309:53:23 Countrywide securitizations and loans; is2409:53:25 that fair?2509:53:26 A. That's part of it. I did

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1 R. GLENN HUBBARD - CONFIDENTIAL209:53:31 exactly the exercise you mentioned. I309:53:32 also did a more detailed set of exercises409:53:34 with controls, but yes, that's true. In509:53:36 the second report I did an expanded set609:53:38 of exercises.709:53:38 Q. What was the purpose of your809:53:40 comparison?909:53:41 A. Well, again, it's about

1009:53:43 benchmarking. So if, if the allegation1109:53:45 is that Countrywide's underwriting1209:53:49 practices as opposed to stated guidelines1309:53:53 were somehow deficient, it ought to be1409:53:55 the case that if one controls for other1509:54:00 variables that would affect loan1609:54:01 performance, that there's a systematic1709:54:04 under-performance of Countrywide. That's1809:54:06 what it means to have underwriting1909:54:10 practices that differ from underwriting2009:54:12 standards.2109:54:12 Q. Are you making any assumptions2209:54:14 about the non-Countrywide securitizations2309:54:17 and loans when you use them as a control2409:54:20 group for your benchmarking exercise?2509:54:22 A. Only that they're appropriate

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1 R. GLENN HUBBARD - CONFIDENTIAL209:54:25 to do so. Securitizations around the309:54:27 same time and the same range of data,409:54:29 yes.509:54:29 Q. How did you determine whether609:54:34 the non-Countrywide securitizations and709:54:36 loans were properly comparable?809:54:38 A. Well, I used the same data as909:54:40 the, as an issue for the securitizations

1009:54:43 in this case, 2004 to 2007. And I looked1109:54:48 at ranges, data where ranges were similar1209:54:52 to the ranges in the Countrywide1309:54:55 securitizations.1409:54:55 Q. Is it fair to say that your1509:54:58 comparison is based on disclosed borrower1609:55:01 and loan characteristics?1709:55:02 A. Yes.1809:55:08 Q. And what borrower and loan1909:55:10 characteristics do you identify as2009:55:12 material to loan performance?2109:55:13 A. Well, perhaps we can go2209:55:15 through together. Should we talk about2309:55:18 the pool or the loan or which?2409:55:20 Q. Well I could direct you to2509:55:22 page 25, paragraph 45 of your report


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1 R. GLENN HUBBARD - CONFIDENTIAL209:55:25 where you list a series of factors under309:55:28 the heading "Factors impacting loan409:55:30 performance."509:55:32 A. All right, those are basically609:55:34 the factors that I use. I explain how I709:55:36 do them in the -- in the report. But809:55:38 things like house price changes and909:55:42 unemployment which are macro factors and

1009:55:45 then other more micro factors, loan size,1109:55:48 credit scores and what-not.1209:55:50 Q. So the variables that you1309:55:52 identify as material to loan performance1409:55:55 include, among others, equity which is1509:55:59 based on the CLTV ratio, loan1609:56:03 documentation borrower credit score, and1709:56:09 whether the property is owned or1809:56:10 occupied?1909:56:11 A. Yes. And there's more than2009:56:14 that, but -- Exhibit 22 lists all, but.2109:56:17 Q. The values you use for your2209:56:19 regression analysis were the values2309:56:21 actually reported by Countrywide and2409:56:22 other mortgage originators; is that2509:56:25 right?

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1 R. GLENN HUBBARD - CONFIDENTIAL209:56:25 A. I'm not sure when you say the309:56:27 values. You mean the data?409:56:28 Q. The data, yes.509:56:29 A. Yes.609:56:29 Q. If these are variables I'm709:56:31 referring to the data as the values809:56:33 corresponding to those variables?909:56:34 A. Yes.

1009:56:35 Q. So let me ask you as a general1109:56:41 rule, is it fair to say that if you take1209:56:43 flawed inputs for a regression model then1309:56:47 you can expect that there will be flawed1409:56:49 outputs unless you run a correction to1509:56:51 deal with the errors?1609:56:53 MR. APFEL: Objection.1709:56:54 A. It really depends on what kind1809:56:57 of measurement issue you're talking1909:56:59 about, whether it's model2009:57:00 misspecification, omitted variables,2109:57:03 noisy data. We could talk about any of 2209:57:07 those if you like.2309:57:07 Q. When you refer to model2409:57:09 misspecification, what do you mean?2509:57:10 A. Model misspecification would

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1 R. GLENN HUBBARD - CONFIDENTIAL209:57:12 be using equation A to model something309:57:16 when in fact equation B and the409:57:18 formulation there is the true underlying509:57:20 model.609:57:20 Q. Okay. And if the data itself 709:57:22 is faulty, would you agree with me that809:57:24 you're going to have problems with the909:57:26 outputs of your regression model unless

1009:57:28 you can correct for the data that's input1109:57:30 into it?1209:57:30 MR. APFEL: Objection.1309:57:32 A. Not necessarily. It depends1409:57:33 whether it's simply noisy or1509:57:35 systematically biased, and indeed that's1609:57:38 testable, which is what I do.1709:57:39 Q. Did you adopt any measures to1809:57:41 test for error in your regression1909:57:44 analyses?2009:57:44 A. I'm not sure what you --2109:57:46 that's not a well posed question, so.2209:57:48 Q. Okay, you just stated it's2309:57:51 testable, it's testable whether the data2409:57:53 errors are simply noisy or systematically2509:57:58 biased. Did you in fact run any such

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1 R. GLENN HUBBARD - CONFIDENTIAL209:58:00 test on data error in your regression309:58:02 analyses in this case?409:58:03 A. Well, what I can certainly509:58:05 conclude even from the first report that609:58:07 if you think that you have these noisy709:58:11 variables, then again, you would not809:58:14 expect to see the pattern I got in the909:58:16 data. If Countrywide had simply

1009:58:19 misrepresented, you would not expect to1109:58:21 see that pattern.1209:58:23 I also have since the second1309:58:25 report done analyses in response to all1409:58:27 of the issues raised by Dr. Cowan and1509:58:30 Dr. Mason and find them all unpersuasive.1609:58:33 Q. Okay. Let's have an answer to1709:58:35 my question, please. In your initial1809:58:37 report do you anywhere disclose any tests1909:58:39 that you ran for data error?2009:58:43 MR. APFEL: Objection.2109:58:44 A. I think I just answered that.2209:58:46 If you -- if you think that there's some2309:58:48 systematic data error for Countrywide,2409:58:51 then you would expect to see the2509:58:52 under-performance that I don't find. In


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1 R. GLENN HUBBARD - CONFIDENTIAL209:58:56 the follow-up, when your experts make a309:59:00 series of complaints, whatever you want409:59:03 to call them, I have since then responded509:59:06 in my mind to each of those.609:59:08 Q. All right. With respect to709:59:10 your initial report, and I do require an809:59:13 answer to this question, do you anywhere909:59:15 disclose any tests that you ran for

1009:59:18 errors in the data that you put into your1109:59:20 models?1209:59:21 MR. APFEL: Objection.1309:59:22 Q. And if you do, I'd like you to1409:59:24 direct me to the page in your report1509:59:25 where you show such a test.1609:59:27 MR. APFEL: Objection.1709:59:28 A. The question you asked as1809:59:30 asked is not well posed. The answer to1909:59:32 the question I think you're asking,2009:59:34 because it's the one you asked a couple2109:59:35 of questions ago, is the test, the2209:59:38 benchmarking itself necessarily gets at2309:59:41 that.2409:59:41 If you're asking me about2509:59:42 something specific, we can have that

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1 R. GLENN HUBBARD - CONFIDENTIAL209:59:44 conversation. If you want to talk about309:59:45 omitted variables, you want to talk about409:59:48 this, you want to talk about that, maybe509:59:49 a specific question would help.609:59:50 Q. I think you do understand my709:59:52 question, I think you're not answering809:59:53 it, sir, but we will come at it a909:59:56 different way.

1009:59:56 MR. APFEL: Objection.1109:59:57 Q. In your report, your initial1209:59:59 report, while you talk about your1310:00:01 benchmarking comparison to what you state1410:00:04 is a control, you nowhere run tests to1510:00:08 determine if the data in either the1610:00:12 non-Countrywide securitizations or the1710:00:13 non-Countrywide loans is incorrectly1810:00:16 reported; isn't that correct?1910:00:18 MR. APFEL: Objection.2010:00:19 A. Now you're asking a different2110:00:21 question. Is the -- are there data2210:00:24 errors? What I'm saying is that if there2310:00:28 are systematic data errors on the part of 2410:00:30 Countrywide, that should have shown up in2510:00:32 what I did. That's --

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1 R. GLENN HUBBARD - CONFIDENTIAL210:00:33 Q. What you did, sir, was assume310:00:34 that the data for your control group was410:00:36 accurately reported, correct?510:00:37 A. Yes.610:00:38 Q. All right. And you nowhere710:00:41 ran any tests to determine whether the810:00:43 data for your control group was not910:00:45 accurately reported, correct?

1010:00:47 A. So far as I'm understanding1110:00:48 your question, I don't even know what you1210:00:50 would do, but...1310:00:51 Q. You don't even know how to1410:00:53 test for that you're saying?1510:00:54 A. I can ask a question that I1610:00:56 could answer, but I can't answer yours.1710:00:59 Q. Is it fair to say that you did1810:01:00 not run any test on the accuracy of the1910:01:03 data in the control group that you used2010:01:05 in your initial report?2110:01:07 A. I don't --2210:01:08 MR. APFEL: Objection.2310:01:09 A. -- think that's fair for the2410:01:10 reason I have been answering and will2510:01:12 continue to answer all morning if you'd

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1 R. GLENN HUBBARD - CONFIDENTIAL210:01:13 like to continue.310:01:14 Q. Please identify anywhere in410:01:15 your initial report where you ran any510:01:17 test on the validity of the data in the610:01:20 non-Countrywide securitizations and710:01:21 non-Countrywide loans?810:01:22 A. If you think there's910:01:23 systematic issues with Countrywide,

1010:01:25 there's a predictable effect that you1110:01:27 would get in the benchmarking and I don't1210:01:29 find it.1310:01:29 Q. That's not my question, sir.1410:01:31 And I think you know that.1510:01:32 With respect to the data that1610:01:34 you used in the non-Countrywide1710:01:36 securitizations, and the non-Countrywide1810:01:39 loans, is there anyplace in your report1910:01:42 where you ran any test on the validity of 2010:01:45 such data?2110:01:45 MR. APFEL: Objection.2210:01:46 A. Again, I'm just not sure what2310:01:49 you have in mind.2410:01:49 Q. The answer is no, isn't it,2510:01:51 sir, there's nothing in your report to


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1 R. GLENN HUBBARD - CONFIDENTIAL210:01:53 test the validity of such data?310:01:55 MR. APFEL: Objection.410:01:56 A. I honestly don't understand510:01:57 your question.610:01:58 Q. Sir, the point of taking the710:02:00 control group and of assuming as you did810:02:02 that the data was valid was so that you910:02:06 could test whether the Countrywide data

1010:02:08 appeared to be valid or not, right?1110:02:13 MR. APFEL: Objection.1210:02:13 A. No, as you just asked the1310:02:15 question, that's not the exercise.1410:02:16 Q. You were testing the1510:02:18 performance of the Countrywide1610:02:19 securitizations against the1710:02:21 non-Countrywide securitizations?1810:02:22 A. That is true, yes.1910:02:22 Q. And from that you were drawing2010:02:24 an inference about the validity of the2110:02:27 Countrywide data, correct?2210:02:28 A. That is not true.2310:02:29 Q. All right. So your testimony2410:02:31 is that you were not drawing any2510:02:32 inference about the quality of the

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1 R. GLENN HUBBARD - CONFIDENTIAL210:02:34 Countrywide representations based on the310:02:36 performance of the Countrywide410:02:37 securitizations?510:02:38 A. The whole exercise here is610:02:41 about unobservables, that's what it means710:02:44 to go after underwriting, that's why I'm810:02:46 having a tough time understanding what910:02:48 your questions are.

1010:02:49 So the issue here is simply1110:02:51 whether, conditioned on the observables,1210:02:53 there's some unobservable under- or1310:02:58 over-performance of Countrywide. That's1410:02:59 what an economist can do.1510:03:00 Q. Well, an economist has a1610:03:02 responsibility if he's using a control1710:03:04 group to ensure that is truly a control1810:03:07 group; isn't that right?1910:03:08 A. Now you're asking an entirely2010:03:09 different question than you did.2110:03:10 Q. I am asking a different2210:03:13 question as I'm entitled to do.2310:03:14 A. Fine. We'll keep changing the2410:03:17 channel. Yes, of course that's -- and2510:03:20 that's what I think I have done.

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1 R. GLENN HUBBARD - CONFIDENTIAL210:03:21 Q. You understand your obligation310:03:22 is to answer my questions to the best of 410:03:24 your ability, including as the questions510:03:26 change, as they will throughout the610:03:27 course of the day?710:03:27 A. I promise to be as nonlinear810:03:29 as you would like me to be.910:03:31 Q. That's not my question, sir.

1010:03:32 Can you respond truthfully and1110:03:34 comprehensively to my questions today?1210:03:36 MR. APFEL: Objection.1310:03:37 A. That's insulting. The answer1410:03:38 is of course yes.1510:03:39 Q. That's what I'm asking you to1610:03:41 do. All right. So let's take a look at1710:03:44 your examination of the control group.1810:03:47 A. Okay.1910:03:48 Q. In paragraph 10 of your2010:03:50 report, you conclude "Had the loans in2110:04:02 the securitizations been originated using2210:04:05 poorer underwriting standards than those2310:04:07 used by other lenders, one would expect2410:04:10 the loans to have experienced a higher2510:04:12 level of default and delinquency than

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1 R. GLENN HUBBARD - CONFIDENTIAL210:04:14 loans in non-Countrywide310:04:16 securitizations."410:04:17 Do you see that?510:04:17 A. Yes, sir.610:04:18 Q. First of all, what do you mean710:04:20 by the term "poorer underwriting810:04:23 standards"?910:04:23 A. In other words, something that

1010:04:25 couldn't be detected from the right-hand1110:04:27 side variables, so there's something1210:04:30 unobservable about Countrywide. That's1310:04:31 what it means to have shady underwriting.1410:04:33 Q. When you refer to the1510:04:34 right-hand side variable, what do you1610:04:36 mean?1710:04:36 A. The control variables, in1810:04:37 either the pool regression or the loan1910:04:40 level regression, those are controlling2010:04:42 for observable variabilities but when2110:04:45 you're questioning underwriting it's2210:04:47 about unobservables.2310:04:49 Q. Right. And in paragraph 212410:04:51 you make a reference to loosening2510:04:53 underwriting standards. Are you using


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1 R. GLENN HUBBARD - CONFIDENTIAL210:04:58 poorer and loosening as synonyms here, or310:05:02 do you mean them in different ways?410:05:03 A. No, they're, they're quite510:05:04 different. And this actually goes to a610:05:06 core of the economic issues at least as I710:05:07 see them in the case. Standards810:05:10 loosening are an observable variable.910:05:13 They're known to borrowers and lenders.

1010:05:17 Underwriting that departs from a stated1110:05:19 standard is unobservable and that of 1210:05:21 course is what we're talking about here.1310:05:22 Q. Right. Do you understand that1410:05:23 this case is about Countrywide's failure1510:05:26 to adhere to its represented underwriting1610:05:28 standards?1710:05:29 A. That is my understanding, yes.1810:05:30 Q. Right. And so going back to1910:05:32 paragraph 10, did you review the2010:05:35 underwriting standards of the other2110:05:37 lenders in your purported control group?2210:05:41 A. If I'm understanding your2310:05:46 question, no.2410:05:46 Q. It is true though that you2510:05:47 assumed that the other lenders did not

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1 R. GLENN HUBBARD - CONFIDENTIAL210:05:49 deviate from their stated underwriting310:05:52 standards?410:05:53 MR. APFEL: Objection.510:05:54 A. I didn't make any such610:05:56 assumption.710:05:56 Q. What you assumed was that the810:05:58 reported characteristics of loans and910:06:02 borrowers by such other lenders were

1010:06:04 accurate?1110:06:04 A. No, sir. What I'm observing1210:06:08 is MBIA has made an allegation about1310:06:10 Countrywide and so the question is are1410:06:13 the unobservables of Countrywide over- or1510:06:18 under-explaining performance of some1610:06:20 benchmark. That's what I'm doing.1710:06:21 Q. Again, I want to just be clear1810:06:23 about the benchmark, though, about the1910:06:24 control group. And let me put it to you2010:06:27 a different way.2110:06:29 Suppose the benchmark group2210:06:30 that you selected had also systematically2310:06:34 deviated from underwriting guidelines in2410:06:36 just the same way as Countrywide. If 2510:06:38 that were true, would you agree with me

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1 R. GLENN HUBBARD - CONFIDENTIAL210:06:41 that your regression analysis would tell310:06:42 you nothing about the extent to which410:06:46 Countrywide deviated from its510:06:48 underwriting guidelines?610:06:49 MR. APFEL: Objection.710:06:50 A. First of all, it's a810:06:51 hypothetical because there's absolutely910:06:52 no evidence --

1010:06:53 Q. It is a hypothetical?1110:06:54 A. -- in this proceeding. So I1210:06:56 don't even know -- it's not something I1310:06:58 studied. It's not at all the facts in1410:07:00 this proceeding.1510:07:01 Q. You don't know one way or1610:07:02 another whether that's true, correct?1710:07:04 There's no evidence of that one way or1810:07:06 another in this proceeding?1910:07:07 A. Well, not quite so fast. Your2010:07:09 experts have made a number of specific2110:07:12 ways to get at that question and I'd be2210:07:13 delighted to talk with you about any of 2310:07:16 those, but...2410:07:17 Q. Is there any evidence that you2510:07:18 address in your initial report on that

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1 R. GLENN HUBBARD - CONFIDENTIAL210:07:21 issue?310:07:22 A. I don't feel that I need to.410:07:24 Q. Is there any evidence that you510:07:25 address in your rebuttal report on that610:07:28 issue?710:07:28 A. Absolutely.810:07:29 Q. What evidence do you address910:07:31 in your rebuttal report as to whether

1010:07:33 there was systematic deviation from1110:07:37 guidelines by the non-Countrywide1210:07:40 originators?1310:07:40 A. That's a slight change in1410:07:43 question. So what I can do in the second1510:07:46 report is look at Mr. Butler's sample of 1610:07:51 loans, so now we're only looking at1710:07:52 Countrywide. So issues you have about1810:07:54 benchmarks are irrelevant.1910:07:55 Q. Then you misunderstood my2010:07:56 question, because what I asked you about2110:07:58 was whether there was any evidence that2210:08:00 you looked at in your reports as to2310:08:02 whether the non-Countrywide originators2410:08:05 deviated from guidelines, and you2510:08:07 originally testified not your initial


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1 R. GLENN HUBBARD - CONFIDENTIAL210:08:09 report but there was evidence in your310:08:11 rebuttal report. What did you mean?410:08:14 What evidence is there in your rebuttal510:08:15 report?610:08:15 A. Again, the Butler analysis in710:08:18 the rebuttal report doesn't depend on810:08:20 that benchmarking. It's Mr. Butler's own910:08:23 sample.

1010:08:24 Q. Right. Is there any evidence1110:08:27 anywhere in either of your reports as to1210:08:30 the extent to which non-Countrywide1310:08:32 originators deviated from their own1410:08:35 guidelines?1510:08:37 A. I did not study that, no.1610:08:39 Q. Okay. And so when you made1710:08:41 your comparison of the Countrywide1810:08:44 securitizations to the non-Countrywide1910:08:46 securitizations, you have no evidence2010:08:49 anywhere in your reports as to the extent2110:08:52 to which there were deviations from2210:08:54 guidelines by the non-Countrywide2310:08:55 originators, correct?2410:08:57 MR. APFEL: Objection.2510:08:58 A. Again, I think I've answered

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1 R. GLENN HUBBARD - CONFIDENTIAL210:09:00 that. What the benchmarking can do is310:09:01 tell you whether Countrywide under- or410:09:05 over-performs the benchmark. You've now510:09:08 made an allegation not supported by any610:09:10 facts that I'm aware of that all of these710:09:12 others are tainted. I'm just simply not810:09:14 aware of that.910:09:15 Q. You misunderstood, sir. I

1010:09:17 asked you a question about whether you1110:09:18 had made an assumption. I made no1210:09:20 assumption here.1310:09:21 A. I don't need to make an1410:09:22 assumption.1510:09:22 Q. You chose to use the1610:09:24 non-Countrywide originators as your1710:09:26 control group?1810:09:27 A. Yes.1910:09:28 Q. And you chose to do so without2010:09:29 knowing one way or the other whether such2110:09:32 non-Countrywide originators deviated from2210:09:34 guidelines in just the same way as2310:09:36 Countrywide, correct?2410:09:37 MR. APFEL: Objection.2510:09:37 A. I don't feel I need to do that

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1 R. GLENN HUBBARD - CONFIDENTIAL210:09:39 for, for this analysis.310:09:40 Q. You made an assumption,410:09:42 correct?510:09:42 A. I don't -- I wouldn't call it610:09:44 making an assumption. It's a choice.710:09:45 Q. Okay, you've ignored the810:09:47 issue?910:09:47 MR. APFEL: Objection.

1010:09:48 A. I didn't ignore the issue.1110:09:50 It's a lot of discussion in the report.1210:09:52 Q. And the fact is that when1310:09:54 you're testing Countrywide to the1410:09:56 non-Countrywide deals, you don't know one1510:09:58 way or the other whether your benchmark 1610:10:01 group reflects loans that were properly1710:10:03 originated in accordance with the stated1810:10:06 guidelines of the non-Countrywide1910:10:07 originators?2010:10:08 MR. APFEL: Objection. At the2110:10:09 time of the original report?2210:10:10 Q. Right?2310:10:11 A. I think I've already testified2410:10:12 I'm not doing any underwriting here.2510:10:14 Q. Right. And so the answer is

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1 R. GLENN HUBBARD - CONFIDENTIAL210:10:15 you just don't know the answer?310:10:17 MR. APFEL: Objection.410:10:18 Q. To that question, right?510:10:19 A. It's not relevant for my610:10:21 analysis, no.710:10:21 Q. I appreciate your statement810:10:23 that you think it's not relevant. Can910:10:25 you answer my question as to whether you

1010:10:27 know the answer? You don't know one way1110:10:29 or the other, do you?1210:10:30 MR. APFEL: Objection.1310:10:31 A. I did in my penultimate1410:10:34 answer. Read your tape.1510:10:35 Q. So do you agree with me you1610:10:36 don't know the answer one way or the1710:10:38 other as to whether the originators in1810:10:40 your non-Countrywide control group1910:10:42 complied with their stated guidelines?2010:10:44 MR. APFEL: Objection.2110:10:45 A. That question is unanswerable2210:10:49 without specific underwriting and2310:10:52 reunderwriting. In this proceeding the2410:10:54 only such data I had access to was the2510:10:56 reunderwriting for Countrywide and I did


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1 R. GLENN HUBBARD - CONFIDENTIAL210:10:59 indeed study that.310:11:00 Q. Right, okay. Do you know410:11:07 whether the underwriters in your510:11:10 non-Countrywide, so-called control group,610:11:14 are subject to litigation just as710:11:17 Countrywide is here?810:11:17 A. I believe that some of them910:11:19 are, yes. Well, yes, depending what you

1010:11:22 mean, not the literal underwriters, but1110:11:24 the originators, is that what you mean?1210:11:26 Q. Okay, the loan originators?1310:11:28 A. Yes, I believe that's the1410:11:29 case.1510:11:30 Q. You understand that the term1610:11:31 underwriting is also used to underwrite1710:11:33 loans?1810:11:33 A. Yes, but you used the word1910:11:35 underwriter which could have multiple2010:11:37 meanings.2110:11:37 Q. Understood.2210:11:38 A. Hence my asking you to2310:11:39 clarify.2410:11:39 Q. Okay. And in your initial2510:11:41 report you didn't address that question

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1 R. GLENN HUBBARD - CONFIDENTIAL210:11:43 at all, right?310:11:44 A. I'm sorry, what question?410:11:46 Q. The question of the extent to510:11:47 which the non-Countrywide loan610:11:49 originators were also subject to710:11:52 litigation.810:11:53 A. I have subsequently done that.910:11:56 I did not feel the need to do that. You

1010:11:59 can file a lawsuit quite easily, that1110:12:01 doesn't mean --1210:12:01 Q. You didn't do it, right?1310:12:03 A. I didn't feel it was worth1410:12:04 doing. Since you raised it, I have1510:12:06 subsequently done it and would happily1610:12:08 tell you the answer.1710:12:08 Q. And when you say you've1810:12:09 subsequently done it, you mean subsequent1910:12:12 to the date of your rebuttal report?2010:12:13 A. Yes, since Dr. Mason and2110:12:15 Dr. Cowan raised it I followed up on2210:12:17 their suggestion.2310:12:23 Q. Let's go to paragraph 11 of 2410:12:25 your report. Here in your initial report2510:12:27 you say "If the 'true' characteristics,

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1 R. GLENN HUBBARD - CONFIDENTIAL210:12:33 for example, credit scores and combined310:12:36 loan-to-value ratios of the loans410:12:39 underlying the securitizations had been510:12:41 inferior to the characteristics actually610:12:44 disclosed to MBIA at the time the710:12:46 securitizations were issued, as MBIA810:12:49 alleges, one would expect the performance910:12:51 of the securitizations would have been

1010:12:52 worse than that of comparable1110:12:55 non-Countrywide securitizations."1210:12:56 Do you see that?1310:12:57 A. Yes, sir.1410:12:57 Q. Here when you posit whether1510:13:02 the true characteristics were inferior to1610:13:05 the characteristics actually disclosed,1710:13:07 what you mean is whether those1810:13:09 characteristics were misrepresented,1910:13:13 misrepresented in a way that overstated2010:13:15 the quality of the loans?2110:13:15 A. That's correct.2210:13:16 Q. And what's your thinking,2310:13:26 since you testified you actually don't2410:13:28 know whether the so-called comparable2510:13:31 non-Countrywide securitizations were

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1 R. GLENN HUBBARD - CONFIDENTIAL210:13:35 underwritten and originated in a way such310:13:38 that the characteristics were the410:13:41 characteristics actually disclosed, since510:13:43 you don't know that, what's the thinking610:13:44 behind your comparison here in paragraph710:13:47 11?810:13:48 MR. APFEL: Objection.910:13:48 Q. What allows you in your view

1010:13:50 to make the inference that you want to1110:13:51 make?1210:13:52 MR. APFEL: Objection.1310:13:52 A. Again, the question is1410:13:54 Countrywide versus non-Countrywide. So1510:13:57 what this exercise can tell you is1610:13:59 whether there's something unobservable1710:14:01 about Countrywide that differs from the1810:14:06 control group.1910:14:07 Q. You understand the question in2010:14:09 the case is not Countrywide versus2110:14:11 non-Countrywide, but Countrywide's2210:14:13 representations versus its2310:14:17 representations and warranties, its2410:14:19 actual statements versus its2510:14:21 representations and warranties?


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1 R. GLENN HUBBARD - CONFIDENTIAL210:14:22 MR. APFEL: Objection.310:14:23 Q. Do you understand that?410:14:24 A. I'm not a lawyer, so I can't510:14:26 dispute with you what the case is or610:14:28 isn't about, but I can tell you as an710:14:30 economist I don't think that's right. I810:14:32 think what the issue is is again whether910:14:34 there's an important unobservable effect

1010:14:36 of what Countrywide did that can be1110:14:38 tested. Your experts didn't do it, but1210:14:41 it is testable.1310:14:42 Q. Let me again take you back to1410:14:45 a hypothetical, all right, since you say1510:14:47 you don't have any evidence on this one1610:14:49 way or the other. Let's assume for the1710:14:51 period of 2005 through 2007 for the HELOC1810:14:55 and closed end second deals that you1910:14:57 examined, both of Countrywide and of the2010:15:00 non-Countrywide originators, there were2110:15:03 comparable rates of deviation from2210:15:06 reported characteristics. All right?2310:15:09 Can you make that assumption?2410:15:11 A. I'm not sure what that means,2510:15:13 but I think I know where you're headed.

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1 R. GLENN HUBBARD - CONFIDENTIAL210:15:15 Q. Okay. Let's say for each of 310:15:17 the relevant variables such as CLTV or410:15:19 FICO score or owner occupancy, there were510:15:22 deviations from the reported610:15:25 characteristics of the loans and the710:15:26 borrowers that were comparable with810:15:28 respect to both the Countrywide deals and910:15:30 the non-Countrywide deals. Assuming that

1010:15:33 to be the case, hypothetically, what1110:15:37 inference, if any, could you draw about1210:15:41 whether Countrywide adhered to its1310:15:44 guidelines by looking at the relative1410:15:47 performance of the Countrywide deals1510:15:48 versus the non-Countrywide deals?1610:15:50 MR. APFEL: Objection.1710:15:51 A. Two parts to the answer.1810:15:52 First, the hypothetical would be1910:15:54 difficult to construct because it's about2010:15:56 unobservables and not observables. So we2110:15:59 can observe what guidelines are for2210:16:01 different lenders. Their unobservable2310:16:03 departures are by definition2410:16:06 unobservable, so I don't even know how2510:16:07 you would construct the hypothetical.

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1 R. GLENN HUBBARD - CONFIDENTIAL210:16:10 Were that to be the case, what310:16:11 you would do is look at a reunderwritten410:16:13 set of loans and that of course is the510:16:15 exercise in the second report. If you610:16:17 believe that to be the case, you could710:16:18 look directly at a reunderwritten sample810:16:21 of loans.910:16:22 Q. When you say unobservable, you

1010:16:24 mean unobservable from your perspective1110:16:28 as an economist?1210:16:28 A. Oh, of course, the purpose1310:16:30 looking at the data, the actual1410:16:32 perpetrator, underwriter, whatever you'd1510:16:34 like to call it as a legal matter of 1610:16:36 course knows what he or she did. I can't1710:16:38 know that as someone looking at the data.1810:16:39 Q. Whereas Mr. Butler, when he is1910:16:41 actually reunderwriting the loans, does2010:16:43 observe the data as to deviation from2110:16:47 guidelines, right?2210:16:48 MR. APFEL: Objection.2310:16:48 Q. You can disagree or agree with2410:16:51 his findings, but he is actually2510:16:53 observing the underlying data that you

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1 R. GLENN HUBBARD - CONFIDENTIAL210:16:55 call unobservable?310:16:57 MR. APFEL: Objection.410:16:57 A. He is an underwriter and so he510:17:00 is both entitled and I guess assigned to610:17:03 do exactly that. He simply doesn't get710:17:05 over even the necessary hurdle of his own810:17:08 definition.910:17:09 Q. Now you made use of the term

1010:17:12 empirical evidence multiple times in your1110:17:14 rebuttal report. Do you recall that?1210:17:16 A. I'm sure I did. It's an1310:17:19 empirical report.1410:17:20 Q. Do you know what empirical1510:17:21 evidence means, sir?1610:17:22 A. To me it would mean evidence1710:17:24 based on data, models, structures, tests1810:17:27 of hypotheses.1910:17:28 Q. You said that Mr. Butler2010:17:32 offered no empirical evidence in support2110:17:34 of his conclusions. Do you recall making2210:17:36 that statement?2310:17:36 A. It's certainly true. He did2410:17:39 not.2510:17:39 Q. And you understand that Mr.


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1 R. GLENN HUBBARD - CONFIDENTIAL210:17:43 Butler, unlike you, actually did offer310:17:45 observable data supporting his410:17:47 conclusions about whether Countrywide510:17:50 deviated from its underwriting610:17:52 guidelines, right?710:17:53 MR. APFEL: Objection.810:17:54 A. I would argue that he did not.910:17:55 Mr. Butler did a reunderwriting. He came

1010:17:58 up with a measure of defect, but the1110:18:02 measure of defect violates his own1210:18:05 definition. So I don't think he came up1310:18:06 with much of anything that I would call1410:18:08 empirical. He did reunderwrite, but the1510:18:10 evidence is about a test, he didn't -- he1610:18:12 didn't do a test of anything.1710:18:13 Q. You understand that the1810:18:14 evidence he provided actually does allow1910:18:16 for a review by the finder of fact of the2010:18:20 actual extent of the deviation from2110:18:22 Countrywide of its own guidelines?2210:18:25 MR. APFEL: Objection.2310:18:26 A. That would be an input to the2410:18:27 finder of fact just as Ms. Godfrey's is,2510:18:30 but the finder of fact might also wish to

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1 R. GLENN HUBBARD - CONFIDENTIAL210:18:33 know whether the reunderwriting is310:18:35 consistent with the definition of the410:18:37 underwriting. That's testable, that's510:18:39 what evidence is, that's what Butler does610:18:41 not do, what Mason does not do.710:18:43 Q. You say that Mr. Butler's810:18:45 measure of defect violates his own910:18:47 definition. What do you mean by that,

1010:18:49 sir?1110:18:49 A. He defines it to be a material1210:18:52 increase in risk. That's a testable1310:18:56 hypothesis. He doesn't test it. That's1410:19:00 what evidence means. And of course,1510:19:01 that's where he fails the test as I show1610:19:03 in the report.1710:19:04 Q. And according to you, the way1810:19:05 to test that is what, sir?1910:19:07 A. The way I did it in the2010:19:09 report, to compare the performance of his2110:19:12 alleged significantly defective loans2210:19:15 with nonsignificantly defective loans.2310:19:17 Q. What you do actually is2410:19:29 confuse ex post and ex ante evidence,2510:19:32 don't you, sir?

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1 R. GLENN HUBBARD - CONFIDENTIAL210:19:33 MR. APFEL: Objection.310:19:33 A. No, sir, I don't see it that410:19:36 way at all.510:19:36 Q. What you did was conduct an ex610:19:39 post comparison of the post-closing710:19:42 performance of the Countrywide loans810:19:45 against what you characterize as a910:19:47 benchmark of non-Countrywide loans; isn't

1010:19:49 that right?1110:19:50 MR. APFEL: Objection.1210:19:51 A. It's entirely consistent with1310:19:52 looking at ex ante definitions. I would1410:19:56 draw your attention to the huge body of 1510:19:57 statistical work that rating agencies do1610:19:59 to look at ratings that is all about1710:20:02 using ex post data to see whether ex ante1810:20:05 characteristics make any sense.1910:20:07 Mr. Butler could have done2010:20:08 that, Dr. Mason could have done that, no2110:20:10 one did it for you.2210:20:11 Q. You're saying your methodology2310:20:15 is comparable to that used by the rating2410:20:17 agencies?2510:20:17 MR. APFEL: Objection.

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1 R. GLENN HUBBARD - CONFIDENTIAL210:20:18 A. I'm not saying that. I'm310:20:20 saying there are many examples where to410:20:22 validate an ex ante indicator one uses510:20:24 long periods of data of ex post610:20:26 information.710:20:26 Q. The sample you just adduced810:20:29 was that of the rating agencies?910:20:31 MR. APFEL: Objection.

1010:20:32 Q. Can you be more specific as to1110:20:33 what work of the rating agencies you're1210:20:35 relying upon to validate the use of ex1310:20:38 post data for an analysis of ex ante1410:20:40 risk?1510:20:40 MR. APFEL: Objection.1610:20:41 A. I don't need the rating1710:20:43 agencies to do that. Finance 101 would1810:20:45 give me that in just an asset pricing.1910:20:48 Q. I'm asking for what rating2010:20:50 agency work you're referring to?2110:20:51 MR. APFEL: Objection.2210:20:52 A. For rating agencies I'm2310:20:55 referring to decades of work on corporate2410:20:57 credit.2510:20:58 Q. And your view is that that


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1 R. GLENN HUBBARD - CONFIDENTIAL210:21:00 rating agency work was a successful310:21:03 indicator of risk going into the housing410:21:04 crisis?510:21:05 MR. APFEL: Object.610:21:06 A. Your question confuses two710:21:07 things commonly confused about rating810:21:09 agencies. The words I used were910:21:11 corporate credit. You've now asked about

1010:21:13 RMBS.1110:21:13 But either way, the1210:21:15 statistical exercise, which is what our1310:21:16 discussion was about, is using ex post1410:21:18 data to get at the validity of ex ante1510:21:21 characteristics.1610:21:21 Q. Okay, the question made no1710:21:24 comparison of corporate credits to RMBS.1810:21:24 You can be contentious all day long. It1910:21:27 will be faster, and I understand you2010:21:28 think you have a very busy schedule, it2110:21:30 will be faster for us both if you just2210:21:33 answer the questions that I ask you. Do2310:21:35 you understand that?2410:21:35 MR. APFEL: Objection.2510:21:35 A. You can instruct me all day

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1 R. GLENN HUBBARD - CONFIDENTIAL210:21:37 long, sir. I answered the question. It310:21:38 was confusing. I tried to help.410:21:40 Q. Do you understand that the510:21:41 relevant legal standard here is the ex610:21:44 ante degree of risk created by the710:21:48 misrepresentation as of the closing date810:21:48 of each securitization?910:21:49 MR. APFEL: Objection.

1010:21:50 A. I'm not a lawyer, but that1110:21:51 would seem entirely appropriate as an1210:21:53 economist, yes.1310:21:54 Q. That's the risk measured as of 1410:21:55 the closing date of each deal, right?1510:21:57 A. Correct, that would be the1610:21:59 appropriate standard.1710:21:59 Q. That's not what you measured,1810:22:01 is it?1910:22:02 MR. APFEL: Objection.2010:22:02 A. Completely false.2110:22:03 Q. Isn't it your view that the2210:22:05 housing crisis was a highly unlikely2310:22:06 event if we go back to 2005 or 2006?2410:22:09 A. I don't know that that's a2510:22:10 fair characterization of my view. It's

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1 R. GLENN HUBBARD - CONFIDENTIAL210:22:12 certainly a fair characterization that310:22:14 market participants collectively thought410:22:16 house prices would continue to rise510:22:18 rapidly much longer than they did, yes.610:22:20 Q. Is it your testimony that back 710:22:21 in 2005 and 2006 you, unlike most market810:22:25 participants, had the view that we had an910:22:27 imminent housing crisis in store?

1010:22:30 MR. APFEL: Objection.1110:22:31 A. I certainly was very concerned1210:22:32 and gave remarks to that effect. I1310:22:35 can't, unfortunately I didn't trade, I'm1410:22:36 not a billionaire, I screwed up, but.1510:22:39 Q. And in any case, whatever you1610:22:42 now say about your views back then, I1710:22:44 take it you would agree that the market1810:22:45 consensus in 2005 and 2006 was not that1910:22:49 there would be an imminent housing2010:22:52 crisis?2110:22:52 MR. APFEL: Objection.2210:22:53 A. I think that's certainly true2310:22:55 and actually very important in this case2410:22:58 that market participants thought or had2510:23:00 high expectations for house price growth.

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1 R. GLENN HUBBARD - CONFIDENTIAL210:23:01 Q. And so when you compared the310:23:04 performance of Countrywide securitizations410:23:05 to non-Countrywide securitizations, what510:23:07 you were doing was comparing the610:23:09 performance of the loan pools in just this710:23:12 one highly unlikely scenario, the housing810:23:14 crisis itself?910:23:15 MR. APFEL: Objection.

1010:23:16 Q. Right?1110:23:16 A. Now you've lost me. I'm not1210:23:19 sure what the question is.1310:23:20 Q. You say that you're trying to1410:23:21 look at ex ante risk, but your approach1510:23:24 is to look at ex post performance, and1610:23:26 your approach specifically is to look at1710:23:29 ex post performance through the housing1810:23:32 crisis, a highly unlikely scenario that1910:23:35 unfortunately occurred?2010:23:36 A. Okay, now --2110:23:37 MR. APFEL: Objection.2210:23:38 Q. Right?2310:23:38 A. Now we've merged two trains of 2410:23:40 thought and maybe this is what you2510:23:41 intended to do, but because they're so


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1 R. GLENN HUBBARD - CONFIDENTIAL210:23:43 different I want to take them apart.310:23:45 You were asking me about Mr.410:23:46 Butler and underwriting and ex ante and510:23:49 ex post. Now we've segued back to the610:23:51 benchmarking exercise which is an710:23:53 exercise about performance. But it's the810:23:56 same idea, if that's what you're asking,910:23:58 that you use ex post information about

1010:24:00 performance. Maybe that's what you're1110:24:02 asking. It wasn't clear.1210:24:03 Q. Well let's make it simple. I1310:24:05 thought you already agreed with me that1410:24:06 the way you tried to test ex ante risk 1510:24:08 was not by actually reunderwriting the1610:24:11 loans as Mr. Butler did, but instead1710:24:14 looking at the ex post performance of the1810:24:17 loans compared to what you believe to be1910:24:20 a control group, right?2010:24:22 A. You --2110:24:23 MR. APFEL: Objection.2210:24:24 A. I'm sorry, the question is not2310:24:25 right. It's not about risk, it's about2410:24:28 the unobservable component, that's what2510:24:31 I'm after. I mean there could be very

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1 R. GLENN HUBBARD - CONFIDENTIAL210:24:33 risky, not very risky. As long as that's310:24:36 known, no harm, no foul. The question is410:24:39 whether it's not known and that's --510:24:41 that's what we're talking about. So it's610:24:43 the ex ante unobservable risk.710:24:46 Now Mr. Butler, who is an810:24:47 underwriter, has given me information,910:24:48 he's said that in his opinion he has

1010:24:51 identified what the ex ante risks are.1110:24:54 All I'm saying is it's very unusual that1210:24:56 his definition doesn't appear to hold1310:24:59 water controlling for other variables.1410:25:02 So it's not exploiting the housing1510:25:04 crisis.1610:25:05 Q. Let's try and make it simple1710:25:07 for you. The way in which you test1810:25:09 performance is only through one scenario,1910:25:12 specifically the scenario of events that2010:25:15 actually occurred, the housing crisis,2110:25:17 right?2210:25:18 MR. APFEL: Objection.2310:25:19 A. If you're asking me is my2410:25:20 empirical work the reality that happened,2510:25:23 yes.

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1 R. GLENN HUBBARD - CONFIDENTIAL210:25:23 Q. And you agree with me that the310:25:26 reality that happened was at the time of 410:25:29 closing of these securitizations thought510:25:31 to be highly unlikely by the market,610:25:33 correct?710:25:34 A. I would agree with that.810:25:35 Q. So what you did in order to910:25:38 test for material misrepresentations or,

1010:25:46 equivalently in my view, the risk 1110:25:48 characteristics ex ante, was to look at1210:25:51 the post-closing performance in just that1310:25:53 one unlikely scenario, right?1410:25:56 MR. APFEL: Objection.1510:25:57 A. First of all, it's about1610:25:59 unobservable ex ante risk and that's1710:26:01 exactly the right thing to do because1810:26:02 everything comes at around the same time.1910:26:04 The question is whether departures from2010:26:07 anything that could have been observed by2110:26:08 borrowers, lenders, underwriters in real2210:26:10 time have an effect.2310:26:11 Q. Methodologically, would you2410:26:13 agree with me that there are many2510:26:15 different ways of looking at the risks of

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1 R. GLENN HUBBARD - CONFIDENTIAL210:26:21 the loan pools as of the closing dates?310:26:24 You chose an ex post comparative410:26:27 assessment, Mr. Butler chose an ex ante510:26:30 assessment of the underwriting defects?610:26:33 MR. APFEL: Objection.710:26:34 A. That's not consistent with810:26:36 what either of us did. Mr. Butler wasn't910:26:38 engaged in this exercise. He did what he

1010:26:40 was asked. He did a reunderwriting.1110:26:42 Q. Correct.1210:26:43 A. What I'm saying is he used a1310:26:44 definition there. That definition has an1410:26:46 implication. It's not borne out by the1510:26:49 data. That's a necessary hurdle for his1610:26:51 definition to work. There's also a1710:26:52 sufficient one that he doesn't even try,1810:26:54 but he doesn't get over the necessary1910:26:57 hurdle.2010:26:57 Q. Well what you're saying is2110:26:58 that in order to see whether there was a2210:27:00 material adverse effect on risk, you're2310:27:02 saying if there were such a material2410:27:05 adverse effect on risk we ought to have2510:27:07 seen some disproportionate effect on the


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1 R. GLENN HUBBARD - CONFIDENTIAL210:27:11 performance of the Countrywide310:27:12 securitizations in fact?410:27:14 A. No, sir. What I'm suggesting510:27:15 and what Mr. Butler did is define group A610:27:18 over here as significantly defective and710:27:20 group B over here as not significantly810:27:22 defective and they're all at the same910:27:24 time. So the housing crisis doesn't help

1010:27:26 you here.1110:27:27 If there's any meaning to a1210:27:28 definition of significant defect, it must1310:27:30 be that it is a greater likelihood, all1410:27:32 other things equal, of under-performance.1510:27:34 So it would be a necessary condition for1610:27:37 that definition to work, and it fails.1710:27:38 Q. Okay, you're confusing two1810:27:40 points. I'm not now talking about Mr.1910:27:42 Butler's separate set of not2010:27:45 significantly defective loans compared to2110:27:47 the significantly defective loans. I'm2210:27:50 talking about the identification by Mr.2310:27:53 Butler of underwriting defects as the2410:27:56 first step. I understand you then try2510:27:58 and make a comparative assessment of the

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1 R. GLENN HUBBARD - CONFIDENTIAL210:28:00 two subsets of data that he develops.310:28:04 Now, Mr. Butler is looking at410:28:07 the actual deviations from guidelines510:28:10 based on the results of his reunderwriting610:28:13 analysis. From that one can conclude710:28:16 various things about the extent of 810:28:20 misrepresentation from guidelines and the910:28:22 effect on ex ante risk.

1010:28:24 What you are doing is looking1110:28:26 at the performance ex post in the one1210:28:31 scenario of the housing crisis which you1310:28:32 have data for and you are drawing1410:28:35 conclusions on the basis of that.1510:28:37 Generally speaking, is that accurate? Or1610:28:40 do you wish to quibble with that?1710:28:42 MR. APFEL: Objection.1810:28:43 A. It's accurate but1910:28:45 misrepresented. It's accurate in the2010:28:46 sense that of course I'm using real data.2110:28:48 But it doesn't help you for Mr. Butler.2210:28:51 Because I'm taking Mr. Butler's own2310:28:52 reunderwriting all done at the same time2410:28:55 and his definition of whether something2510:28:56 is defective. I'm actually using that,

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1 R. GLENN HUBBARD - CONFIDENTIAL210:28:59 that is a real underwriting definition310:29:01 that I'm using. He just can't get over410:29:03 that hurdle.510:29:04 Q. I understand you want to talk 610:29:06 about your rebuttal report and you can710:29:07 jump to that for a moment?810:29:08 A. Mr. Butler is not in my first910:29:10 report.

1010:29:10 Q. I'm trying to keep the focus1110:29:12 on your ex post analysis in your initial1210:29:14 report. But let's go for a second to1310:29:16 that comparison that you want to talk 1410:29:18 about.1510:29:18 Let me give you a1610:29:20 hypothetical. If I am a drug1710:29:23 manufacturer and producing various1810:29:27 quantities of drugs off a production1910:29:29 line, and there's a QC process that2010:29:33 determines that fully 50 percent of those2110:29:35 drugs are defective based on the results2210:29:38 that can be observed through the QC, the2310:29:42 QC process by hypothesis is not a hundred2410:29:44 percent effective, it can't observe2510:29:47 everything.

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1 R. GLENN HUBBARD - CONFIDENTIAL210:29:48 Would you then conclude that310:29:50 as to the 50 percent of drugs for which410:29:54 the QC process did not identify problems510:29:57 those would be okay, or would you instead610:29:59 say that the production pipeline was so710:30:02 defective that one can't rely upon any of 810:30:04 the drugs coming out of that?910:30:05 MR. APFEL: Objection.

1010:30:06 Q. And let me just ask if you1110:30:08 understand what I'm getting at here?1210:30:09 MR. APFEL: Objection.1310:30:10 A. I don't, so let me restate it1410:30:12 and then you tell me whether I got it1510:30:13 right. So basically 50 percent is a1610:30:16 known defect rate.1710:30:17 Q. Correct.1810:30:18 A. And so we've deviations around1910:30:21 the 50, because that part I got. And then2010:30:23 there was a second part I didn't get.2110:30:24 Q. We have an issue with are you2210:30:27 going to take the drugs or not, okay,2310:30:29 will you buy the loans or not, it's the2410:30:31 analogy. And the question is what you2510:30:33 know is that there is a high rate of


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1 R. GLENN HUBBARD - CONFIDENTIAL210:30:35 defect in the production. What you also310:30:38 know is that your process of QC'ing,410:30:42 testing the drugs or reunderwriting the510:30:44 loans isn't going to tell you in all610:30:46 instances whether the product is710:30:47 defective. If that's the case, how can810:30:51 you possibly conclude that the drugs910:30:54 which escape the QC process and are not

1010:30:57 identified as defective, that those are1110:31:00 nonetheless a valid control group for1210:31:02 comparison?1310:31:03 MR. APFEL: Objection.1410:31:03 Q. You don't know that those1510:31:04 drugs are acceptable either given the1610:31:06 rate of defect, what you do know is that1710:31:08 the production process is so flawed that1810:31:11 you're not going to want to take any of 1910:31:13 those drugs?2010:31:14 MR. APFEL: Objection.2110:31:14 A. Okay, now I really don't2210:31:16 understand, but let me try again. The2310:31:18 case of drugs is very different. Even2410:31:20 with a known defect rate of 50 percent,2510:31:22 that's just so unacceptable, no seller

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1 R. GLENN HUBBARD - CONFIDENTIAL210:31:24 exists, no buyer exists.310:31:25 Now the question is here a410:31:27 known defect of any size of course can be510:31:30 priced, and that's, that's not an issue.610:31:34 MBIA does its own due diligence without a710:31:35 zero defect assumption. The question is810:31:38 the unknown defects.910:31:41 Now what I do is say well, Mr.

1010:31:43 Butler has already taken a stab at that.1110:31:45 He's actually told me which are1210:31:48 significantly defective. I don't have to1310:31:49 make any judgment. Indeed, I'm not an1410:31:52 underwriter, I can't make that judgment.1510:31:54 But I can test his and that's what I'm1610:31:55 doing.1710:31:55 Q. Mr. Butler has not told you1810:31:57 that the loans as to which he was unable1910:31:59 to find significant defects were properly2010:32:01 underwritten, do you understand that,2110:32:03 sir, or did you just assume that he was2210:32:05 saying those loans were properly2310:32:07 underwritten?2410:32:08 MR. APFEL: Objection.2510:32:08 A. It is inconceivable to me

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1 R. GLENN HUBBARD - CONFIDENTIAL210:32:11 given the way Mr. Butler described, that310:32:14 there is not a difference between not410:32:16 significantly defective and significantly510:32:18 defective.610:32:18 Q. That's not my question.710:32:20 A. Indeed, he defines it that810:32:21 way.910:32:21 Q. That's not my question. Mr.

1010:32:22 Butler is not saying that the very small1110:32:27 incidence of loans as to which he did not1210:32:28 find a material breach were properly1310:32:30 underwritten. Do you understand that?1410:32:33 MR. APFEL: Objection.1510:32:33 Q. Or did you just assume that he1610:32:35 was saying that for purposes of your1710:32:37 rebuttal report?1810:32:38 MR. APFEL: Objection.1910:32:39 A. I listed exactly his2010:32:40 categories in my report so you know very2110:32:42 well what I assume. But the word2210:32:45 significantly defective has no meaning2310:32:47 but for a difference from something else.2410:32:50 He could have tested it, he didn't. I2510:32:52 did.

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1 R. GLENN HUBBARD - CONFIDENTIAL210:32:52 Q. There is an evident meaning310:32:56 between significantly defective loans as410:32:58 to which Mr. Butler was able some years510:33:01 later to demonstrate material breaches610:33:04 and loans as to which he was not able to710:33:07 identify that. But what you did, sir,810:33:09 was assume that the loans for which he910:33:11 was not able to identify significant

1010:33:13 defects were actually properly1110:33:15 underwritten loans, correct?1210:33:17 MR. APFEL: Objection.1310:33:18 A. I simply said if you were1410:33:20 going to call something significantly1510:33:21 defective and you define it as a material1610:33:24 increase in credit risk, then there's a1710:33:27 clear implication of that definition.1810:33:29 Q. I'd like an answer to my1910:33:31 question.2010:33:31 MR. SELENDY: I mean we can2110:33:32 fence all day, but we're going to2210:33:34 call this witness back a second day2310:33:36 if that's what we do.2410:33:38 MR. APFEL: He's answering2510:33:40 your questions.


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1 R. GLENN HUBBARD - CONFIDENTIAL210:33:40 MR. SELENDY: No, I'd like an310:33:40 answer to this question.410:33:40 A. I just answered it.510:33:40 Q. I'm going to read it again.610:33:43 All right. What you did, sir, was assume710:33:45 the loans for which Mr. Butler was not810:33:47 able to identify significant defects were910:33:49 properly underwritten loans, correct?

1010:33:51 MR. APFEL: Objection.1110:33:52 A. That is not my assumption, no.1210:33:55 Q. Okay.1310:33:56 A. Is that they're a different1410:33:58 category, not significantly defective.1510:33:59 Q. All right. So when we look at1610:34:01 your conclusions then we can say that you1710:34:03 make no assumption as to which, as to1810:34:05 whether the category of not significantly1910:34:07 defective loans are properly underwritten;2010:34:11 is that fair?2110:34:11 A. They are different in Mr.2210:34:14 Butler's categorization from significant2310:34:16 defective, that's what I explored.2410:34:19 Q. And you make no further2510:34:21 assumption as to whether they're properly

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1 R. GLENN HUBBARD - CONFIDENTIAL210:34:22 underwritten?310:34:23 A. Well I'm not an underwriter.410:34:25 I'm accepting his definition.510:34:26 Q. All right, all right. And so610:34:27 your conclusions then are open to question710:34:30 to the extent the not significantly810:34:33 defective loans are also not properly910:34:36 underwritten, right?

1010:34:38 MR. APFEL: Objection.1110:34:39 A. I don't think so, no.1210:34:41 Q. Okay. And that's because you1310:34:43 you're not making conclusions as to1410:34:44 whether any loans were properly1510:34:46 underwritten?1610:34:47 A. I'm accepting Mr. Butler's1710:34:50 representation.1810:34:51 Q. And you're just comparing1910:34:53 performance?2010:34:54 A. Well --2110:34:55 MR. APFEL: Objection.2210:34:55 A. Well, just comparing2310:34:57 performance is what Mr. Butler should2410:34:59 have done. And Dr. Mason.2510:35:02 Q. That's what you're doing,

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1 R. GLENN HUBBARD - CONFIDENTIAL210:35:03 right, you're comparing performance?310:35:04 A. Correct.410:35:05 Q. And you accept that different510:35:08 scenarios of actual events, different610:35:11 scenarios of events could lead to710:35:12 different performance pathways for the810:35:14 loans, right?910:35:15 A. Oh, absolutely. If you're

1010:35:16 asking if house prices were high, house1110:35:19 prices were low.1210:35:19 Q. Right. Did you make any1310:35:21 attempt to look at, as of the date of 1410:35:26 closing of each transaction, different1510:35:28 scenarios of possible performance?1610:35:31 MR. APFEL: Objection.1710:35:32 Q. And then run your expected1810:35:34 results?1910:35:35 MR. APFEL: Objection.2010:35:35 A. That wouldn't really help you2110:35:37 here because it's in Mr. Butler's own2210:35:39 sample, so that exercise wouldn't help2310:35:42 you.2410:35:43 Q. So you did not do so?2510:35:44 A. It would have been

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1 R. GLENN HUBBARD - CONFIDENTIAL210:35:46 inappropriate to do so.310:35:47 Q. Okay. You believed it was410:35:48 inappropriate and you did not do so?510:35:49 A. Correct.610:35:50 Q. As of the closing date of each710:35:54 securitization, you understand that from810:35:55 the perspective of the insurer, the910:35:57 insurer is looking at risks across

1010:36:00 multiple pathways of possible performance,1110:36:02 right?1210:36:03 MR. APFEL: Objection.1310:36:04 A. I would assume the insurer has1410:36:06 that model in its head, scenarios, of 1510:36:08 course.1610:36:08 Q. And what you compared was just1710:36:11 one pathway, the performance through the1810:36:13 unlikely event of the housing crisis,1910:36:16 right?2010:36:17 MR. APFEL: Objection.21

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