Carol Mathis

Witness Statement
Defendants
Exhibit: CM1
15 April 2015

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

Claim Nos: HC13F01247

HC13D01192
HC14F01704

IN THE CASE OF:

THE RBS RIGHTS ISSUE LITIGATION

WITNESS STATEMENT OF CAROL MATHIS

I, CAROL MATHIS, of 173 Long Neck Point Road, Darien, Connecticut 06820, WILL SAY as
follows:
1.

At the time of the Rights Issue and the events described in this witness statement, I was
the Chief Financial Officer ("CFO") of Greenwich Capital Markets and GBM in the
Americas, reporting to Chris Kyle ("Mr Kyle").

2.

Save where otherwise indicated, I have adopted the definitions used in the Amended
Consolidated Particulars of Claim and Re-Amended Defence. This includes the reference
"RBS" which is a reference to the RBS Group of companies collectively. Where I want to
refer to specific RBS entities, I will identify the entity by name.

3.

The purpose of this witness statement is to give my account of:

3.1

the securitization activities of the business of the Greenwich Capital group of

companies (which I shall refer to together as "Greenwich Capital"); and

3.2

the difficulties faced when valuing super senior CDOs in late 2007 and how RBS
addressed this issue.

4.

Save where otherwise indicated, the facts and matters contained in this witness statement
are within my own knowledge, and are described here to the best of my recollection.
However, most of the events which I describe below took place more than eight years ago,

and as a result my recollection has inevitably faded to some extent.

My recollection of

some of the events which are described within this witness statement has been assisted by
my review of documentation disclosed in the current proceedings. In particular, I have been
shown the documents referred to in this statement, which together comprise Exhibit CM1.
Herbert Smith Freehills has inserted the relevant disclosure numbers to identify those
documents.
A. My Background and Experience
5.

I graduated from Georgetown University in 1984 having completed a Bachelor of Science

Degree in Biology and I went on to complete a Masters in Business Administration at St.
John's University.

6.

Following completion of my Masters in 1988, I joined PwC (Coopers & Lybrand LLP as it
was then) as a Staff Accountant in the Assurance practice. I remained at PwC for the next
12 years, during which time I was promoted to the Partnership of the firm.

7.

In December 2000, I left PwC to become CFO at Greenwich Capital. From August 2006, I
was promoted to be the CFO of GBM in the Americas.

8.

In July 2013, my role was expanded, as I was named the Chief Operating Officer for the
Americas of RBSs Corporate and International Banking (C&IB) division (the successor to
GBM), which includes Greenwich Capital (now known as RBS Securities Inc.). Further, in
April 2014, I was appointed Head of Transition, Americas, to oversee the restructuring and
downsizing of the C&IB business in the Americas.

9.

My role at RBS came to an end in March 2016, and I am not currently employed.
B. My Role and Reporting Lines

10.

During the time period relevant to this witness statement (from approximately September
2007 through April 2008), I was the CFO of Greenwich Capital. As CFO, teams under my
supervision were responsible for, among other things,

profit and loss analysis and

reporting, maintaining the books of the firm in accordance with the relevant accounting
requirements, management reporting, treasury functions, US tax-related issues, and
liaising with certain financial regulators, including with respect to local or US capital
requirements. My function also reported financial information and results into RBS in the
United Kingdom for inclusion in the consolidated accounts of RBS Group.
11.

Throughout this period, in addition to my US-based superiors at Greenwich Capital, I

reported to the CFO of GBM in London, Mr Kyle.

C. Securitization Activities of Greenwich Capital

12.

Among other things, Greenwich Capital engaged in the structuring, distribution, and trading
of asset-backed securities, including collateralised debt obligations (CDOs) and
residential mortgage-backed securities (RMBS).
12.1

As part of its business, Greenwich Capital purchased asset-backed securities,

including those backed by US sub-prime mortgages, and packaged them into
structured securities (CDOs) for subsequent sale to investors.

12.2

In addition, Greenwich Capital bought residential mortgages, including US subprime mortgages, and packaged them into structured securities (RMBS) for sale to
investors. However, Greenwich Capital did not originate residential mortgages
(sub-prime or otherwise).

Nor did Greenwich Capital service any residential

mortgages.
12.3

Trading desks at Greenwich Capital were also engaged in secondary market

trading of structured products, including CDOs and RMBS.

D. Valuation and Write-Downs of Super Senior CDOs

13.

When the business at Greenwich Capital structured and sold CDOs, as I recall, it often
retained certain interests in super senior tranches of those CDOs on its books. The super
senior tranches retained exposed it to the US sub-prime market, at least to the extent that
the CDOs referenced collateral comprising US sub-prime mortgages.

14.

As I recall, in 2007, the super senior CDO positions retained by Greenwich Capital (held by
an affiliate, Greenwich Capital Financial Products) were largely 'mezzanine' CDOs and
were held on the trading book. Such assets were required to be held at 'fair value' for
accounting purposes. I do not recall there being much if any trading in the super senior
tranches of CDOs, but more junior tranches were sold and the underlying securities were
traded. As I recall, the valuation of the super seniors was derived from, among other things,
the CDO structure and the valuation of those junior tranches and underlying securities (or
comparable securities) which were traded. Prior to the second half of 2007, from this
process, management was comfortable that the super senior tranches (which were rated
AAA) should be carried at par value.

15.

During the late summer and fall of 2007, there was increasing illiquidity in the broader
RMBS and CDO market, including in the securities underlying the CDOs. By October
2007, I understood that the absence of observable market trading in many of these
securities meant that the normal process for valuing super senior CDOs which depended
on observable market prices was no longer effective. It became clear that this was not a
short term dislocation, and the question that Greenwich Capital and RBS continued to
address was how to assign a 'fair value' to these securities. These circumstances are

reflected in an email to me dated 2 October 2007 {RBS630423} from Lauren Rieder, on

behalf of the Independent Price Verification (IPV) function. At the time in Greenwich, IPV
was conducted by Market Risk rather than by the Finance team which I headed. Ms Rieder
advised me that [d]ue to the current lack of transparency/liquidity in the market for ABS
CDO Super Senior positions, they will not be subject to independent price verification for
09/28/07, and I responded that we would need to use alternative means to get comfortable
with the valuation of the assets. By this I meant that it was not sufficient simply to say that
the usual processes could not be followed we had a responsibility to value these
positions to the best of our ability and so would need to consider other appropriate
alternatives to do so.
16.

The market deterioration gave rise to conversations both internally at Greenwich Capital
principally involving Joe Walsh (head of Mortgage Trading and Finance) ("Mr Walsh"), Jay
Levine (CEO of Greenwich Capital) ("Mr Levine"), Bruce Jin (of the Market Risk function)
(Mr Jin) and myself, and with senior management at GBM (including Mr Kyle and Mr
Cameron), as to how to value the super senior positions.

17.

As I recall, Greenwich Capital was at that stage considering the relative merits of potential
methodologies for valuing the super senior positions, and focusing on two methodologies in
particular:
17.1

Loan level cash flow projections:

Cash flows were produced based upon an

econometric model (known as the LSD model), which was initially developed for
use by the front office traders to assist with the selection of loans for purchase for
the purpose of securitisation but was modified into a valuation tool over time. As I
understood, the model worked by using mortgage loan characteristics and
economic conditions (related to home prices and interest rates) to predict future
loan performance. The mortgage loan cash flows were then used to project CDO
cash flow and the projected write-off amount for the super senior CDOs (if any).
The model was worked on by Mr Jin and Mr Walsh in particular and it became an
important tool for valuation of these super senior CDOs in the absence of
observable market trading activity.
17.2

Market value analysis: At the same time, Mr Jin and the Market Risk team were
working on a market value analysis of the mezzanine super senior CDOs. The
observable prices for the ABS and MBS securities, which made up the collateral
backing a CDO, were compiled, and the proceeds from an assumed liquidation of
the securities at the observed prices would then be compared to the outstanding
balance of the super senior CDO security to derive an implied price for such a
security.

18.

We also examined publicly available information about the CDO write-downs that other
financial institutions were taking during this period of time. However, it was difficult to
determine whether the assets of the other institutions were comparable to our assets, so
this approach was of limited utility.

19.

The substantive work behind the presentations to the London team was undertaken by Mr
Walsh, Mr Jin and Mr Levine, and my role was to review the work product and provide
input on the presentation of the relevant information. The finance team helped format the
document and assisted with the diagrams and tables. As I recall, there were a number of
meetings and conference calls in order to finalise these presentations.

20.

Drafts of the presentation were circulated to GBM Finance and Risk for review and
comments in order to prepare for a meeting on 2 November 2007 at which Mr Walsh was
to give a presentation to Mr Cameron {RBS146225}{RBS146226}. My recollection is that
Mr Cameron probed the strengths and weaknesses of the LSD Model and asked
reasonable questions about the home price appreciation ("HPA") assumptions that were
being used. Following the meeting on 2 November 2007, I emailed Mr Kyle and others
indicating the 'next steps' in relation to the valuation of super senior CDOs {RBS214748}.
One of the next steps was to value the 'high grade' super seniors held by GBM in London
using the LSD model in the same manner as we had the 'mezzanine' super seniors held by
Greenwich Capital in the US.

21.

My recollection is that the relevant London personnel (including Mr Cameron, Mr Kyle and
Mr Whittaker) had been involved in the consideration of the super senior CDOs' valuation
since around late September. In November, they were closely engaged in considering the
details of the LSD model and the market value analysis.

I recall from conversations with

others that Mr Cameron and Mr Whittaker asked to see delinquency data for the super
senior CDOs. In addition, much consideration was given to what assumptions to use
concerning future HPA (a key input to the LSD model), and whether, and to what extent,
the LSD model results needed to be discounted by an appropriate rate in order to reflect
the present value of the future cash flows. On 8 November 2007, Mr Walsh and I were
asked by Mr Cameron to join a call to walk Mr Whittaker through the model in more detail
{HC-024_00000048}.
22.

During this period of time, I wanted this issue -- how to value the super senior CDO
positions so that an appropriate write-down could be taken -- to be resolved as soon as
reasonably possible, and I believe that others did as well. However, as reflected in an email I sent to Mr. Cameron on 14 November 2007 {RBS648017}, I knew from a telephone
call that I received from Mr Whittaker that the issue was then being considered at the most
senior level at RBS.

I understood from that call that it was necessary for those senior

personnel (including Mr Cameron, Mr Whittaker, and Mr Goodwin) to have sufficient time to

understand and consider this complex issue before making a final decision.
23.

On 20 November 2007, Mr Kyle informed me by e-mail that, following a meeting with Mr

Goodwin, a decision had been reached on the valuation issue {RBS310911}.

As

communicated to me by Mr Kyle, the decision was to use the LSD model to value the super
senior positions, using certain assumptions regarding future HPA and a LIBOR +50bp
discount rate. In addition, a central reserve (or 'buffer') would be added to increase the
write-down derived from the model valuation in order to cover potential model
deficiencies. As Mr Kyle explained it, the net effect was that the super senior 'mezzanine'
CDO positions would be marked at 70, and the anticipated trading statement would explain
that the amount of this write-down resulted from RBSs use of a proprietary model with a
prudent margin. Mr. Kyle also noted that the super senior 'mezzanine' CDO positions
would be sold by Greenwich Capital Financial Products to RBS plc (GBM). I understood
the rationale for this was so that the bank could manage and monitor the CDO positions
within the Group centrally from London.

This ultimately occurred in December 2007

around Christmas time at the 70 price. After this, I had limited involvement in valuing the
super senior CDO positions.
24.

I was satisfied by this conclusion, which was the result of a robust process, involving a
number of people both in the US and the UK, including those with expertise in the relevant
assets, and from independent functions such as Risk and Finance, as well as senior
executives. While reasonable minds might disagree about what the precise 'fair value' of
these assets was in the absence of observable prices, and the available valuation
methodologies were not perfect, as I recall, I did not object to the 70 mark because it was
consistent with the valuation work that had been undertaken with both the LSD model and
the market value approach. Valuation of the CDO positions during this period of volatility
and illiquidity was a very difficult and judgmental exercise. To my knowledge, no one who
participated in the process of arriving at this result ever expressed the view that the 70
mark was unreasonable.

25.

I shall briefly address the resignation of Victor Hong ("Mr Hong"), who had arrived at
Greenwich Capital to become the new head of the IPV function in late September 2007. As
I have briefly mentioned above, IPV sat in Market Risk, and so Mr Hong did not report to
me but to Mr Jin as the head of Market Risk at the time. Shortly afterwards, as described
above in paragraph 15, IPV reminded me that the super senior positions would not be
subject to IPV because of the lack of transparency and liquidity in the market. Mr Hong
resigned approximately six weeks later, on 8 November 2007, around the time when the
executives in London were becoming more heavily engaged in the valuation process (as
described above), and well before that process reached its conclusion on 20 November
2007.

Although Mr Hong did not report to me, I had some conversations with him,

including about the marks on the 'mezzanine' super senior CDOs.

When Mr Hong

expressed his view that these positions needed to be marked down, I told him that the
issue had been escalated and that there was a process that needed to be followed to
establish a valuation methodology to determine the fair value. I do not recall Mr Hong ever
providing me with any substantive analysis of the value of the super senior CDOs owned
by RBS or any substantive criticism of the analyses that others were conducting. My
recollection is that Mr Hong e-mailed press reports to me about CDO write-downs at other
institutions, without an analysis of how that information could help us arrive at a fair
valuation of our CDOs {ID005870}, {RBS147159}. It was unclear to me how Mr Hong was
participating in the process, so I asked Mr Jin if he could try to obtain analysis from Mr
Hong rather than press reports, as I would have welcomed any substantive analysis from
him.
26.

When Mr Hong resigned, I heard from others that he had said that he resigned because
RBS had not yet reached a conclusion with respect to the super senior CDO valuation
{RBS147352}. I understood to some extent the frustration about the length of time it was
taking to reach a conclusion as to the valuation, but I also understood, as I have explained
above, that it was necessary for senior management to have sufficient time to understand
such a complex issue and arrive at an appropriately considered decision. Mr Hong's
resignation e-mail referred to persistent discrepancies between trader marks and
analytical fair-market values, but it is unclear to me what he meant by that because, as
noted above, I was not aware of Mr Hong's involvement in determining any analytical fairmarket values for the super senior positions.
E. December 2007 Trading Statement

27.

Apart from confirming the accuracy of certain statements regarding vintages and the lack of
exposure to SIVs and SIV lites, I did not contribute to the narrative text of the Trading
Statement issued by RBS on 6 December 2007, though of course I had supported the
process of arriving at the super senior CDO write-downs announced therein, and my
function would have provided other information including with respect to Greenwich
Capital's trading inventory and securitization residuals.

F.

April 2008 Rights Issue

28.

I had no direct involvement in the preparation of the Prospectus for the Rights Issue
undertaken in April 2008. Members of my team within Greenwich Capital would have
provided information to RBS for inclusion in financial disclosures in the usual way.