Donald T.

Nicolaisen HIGHLY CONFIDENTIAL

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UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA IN RE: FEDERAL NATIONAL MORTGAGE ASSOCIATION SECURITIES, DERIVATIVE, AND ERISA LITIGATION _________________________ IN RE: FANNIE MAE SECURITIES LITIGATION ) ) ) ) ) ) ) MDL No: 1668 CONSOLIDATED CIVIL ACTION 1:04-cv-1639(RLJ)

HIGHLY CONFIDENTIAL PURSUANT TO PROTECTIVE ORDER Videotaped Deposition of Donald T. Nicolaisen Washington, D.C. November 19, 2009 Reported by: Bonnie L. Russo JOB NO. 97320

APPEARANCES: For the Lead Plaintiffs: JAMES R. CUMMINS, Esq. WAITE, SCHNEIDER, BAYLESS & CHESLEY CO., LPA 1513 Fourth & Vine Tower One West Fourth Street Cincinnati, Ohio 45202 513-621-0267 and FRANCIS P. KARAM, Esq. BERNSTEIN LIEBHARD, LLP 10 East 40th Street New York, New York 10016 and DANIEL S. SOMMERS, Esq. COHEN, MILSTEIN, SELLERS & TOLL, PLLC 1100 New York Avenue, N.W. Suite 500, West Tower Washington, D.C. 20005 202-408-4600

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November 19, 2009 9:08 a.m.

1 2 3 4 Videotaped Deposition of Donald T. Nicolaisen 5 held at: 6 7 8 Cohen, Milstein, Sellers & Toll, PLLC 9 1100 New York Avenue, N.W. 10 Suite 500, West Tower 11 Washington, D.C. 20005 12 13 14 15 Pursuant to notice, before Bonnie L. Russo, 16 Notary Public 17 18 19 20 21 22

For Fannie Mae: ROBERT M. STERN, Esq. SARAH JOHNSON, Esq. O'MELVENY & MYERS, LLP 1625 Eye Street, N.W. Washington, D.C. 20006 202-383-5300 and JEROME L. EPSTEIN, Esq. JENNER & BLOCK, LLP 1099 New York Avenue, N.W. Suite 900 Washington, D.C. 20001 202-639-6000 For Franklin Raines: ALEX G. ROMAIN, Esq. JEFFEREY D. BAILEY, Esq. 725 12th Street, N.W. Washington, D.C. 20005 202-434-5000

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involved in investigating circumstances, whether it was -- I'm not going to say whether it was with respect to these particular issues, then everything would be appropriately funneled through the Division of Enforcement to make sure that their work would not be compromised. Q. I understand. Have you ever come to the conclusion that the content of these two letters somehow misrepresented aspects of Fannie Mae's accounting policies and practices? MR. ROMAIN: Objection. MR. STERN: Objection. THE WITNESS: Without going through it in detail, I couldn't respond to that. BY MR. CUMMINS: Q. Okay. Did you at the conclusion of this inquiry believe that the Commission had received sufficient information on which you could reach a decision on the issues that were presented to the Commission -- to the office? MR. REGAN: Object to form.

again, I wanted to say we didn't audit, we didn't test, we didn't verify. We weren't -we had a myriad of questions that you could have posed and could have continued the process indefinitely in terms of trying to understand and have somebody come back and present something to me. What -- what I had concluded was that there was enough question about the accounting applied by Fannie Mae that I couldn't tell you what amounts would need to be restated, but that the process of restatements should begin, that people should be brought in, that experts should be involved, and that the effort should be undertaken to make sure that the financial statements were presented fairly and so I didn't reach a conclusion. To be very clear, I didn't reach a conclusion that said I know what the answer is. I was only dealing with these two issues and did these two issues comply essentially with GAAP. With respect to FAS 91, if my memory

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Jim, you asked him whether the Commission. Are you referring to -MR. CUMMINS: I misspoke. Let me withdraw the question. BY MR. CUMMINS: Q. Did you at the conclusion of the inquiry believe that the Office of the Chief Accountant had received sufficient information on which you could render a decision on the issues that were presented to the office? MR. STERN: Objection. Calls for expert opinion. THE WITNESS: I received all the documents that anyone cared to provide and we considered the information that was provided to us. BY MR. CUMMINS: Q. And -A. Maybe -- maybe this is an appropriate time, maybe it isn't, to describe to some extent the -- while the description of what is being provided, what is being done,

serves me right, Fannie Mae essentially concluded that they had -- that they would go ahead and restate for a statement 91. With respect to 131, far more detail involved. They made their presentation. I looked at their presentation. In my view, it didn't result in my ability to say that they complied with GAAP and therefore I instructed them to restate. I don't want you to conclude that I knew what the answer was or what the restatement would produce. Q. I understand that. A. Okay. Q. I think you may have misspoken slightly. You said FAS 131. A. Sorry. 133. I did, yes. Sorry. Q. The -- so can you tell me for the record what was the -- what were the essential facts that were brought to your attention that led you to reach the decision that these -that the financial statements of this registrant needed to be restated?
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MR. STERN: Objection. Calls for an expert opinion under 702. MR. ROMAIN: Objection. BY MR. CUMMINS: Q. It's the essential facts that came to your attention that led you to this decision that we're inquiring about? MR. STERN: Objection. Calls for an expert opinion. MR. DELINSKY: Objection. Scope. BY MR. CUMMINS: Q. Go ahead, sir. A. There -- the -- the broad context with respect to 133 primarily related to use of the short-cut method by Fannie Mae and the manner in which they undertook documentation and testing, in particular, seemed short of -to me, was -- was not sufficient to permit the use of that methodology. But there were -there were many other areas within 133 where we had questions, where I had questions and where there was enough judgment on my part to say

to the amount of losses that were deferred on derivative hedging contracts. I don't recall the exact amount, but it was 10 billion or north. BY MR. CUMMINS: Q. And that -- those indications on the financial statements were part of the factual basis that led you to -A. No. Q. -- conclude that? MR. STERN: Objection. Misstatement. THE WITNESS: The factual basis was the submission of Fannie Mae in the facts that they presented to us. BY MR. CUMMINS: Q. Okay. And with respect to the quantity or the amount of -- that the restatement would result in, you didn't know whether it was going to add to or subtract from the earnings of the company, did you, at the time?

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this really needs to be looked at in more detail and that's where -- that's what happens in a restatement process. BY MR. CUMMINS: Q. When you say, "looked at in more detail," you mean the registrant has to -A. Has to really go back and reopen its books and records and all of the details and their conclusions and bring in sufficient resources to ensure that either the accounting that they did was appropriate or that there were -- that there are restatements that are necessary. Q. And at the time you rendered your decision you didn't have any information, or did you, that indicated what the amount of the restatement would be; is that correct? A. No. I would not have known the amount. MR. ROMAIN: Object to scope. THE WITNESS: But certainly there are indicators in the financial statements as

MR. STERN: Objection. THE WITNESS: Yeah. I mean, the information -- the information is actually in the financial statements as to losses that are deferred on hedging contracts. A lot of that has already been -- had been recorded through equity, not through the income statement. So when you look at the financial statements, you can be -- their financial statements at that point in time, you can be quite certain it's not going to result in a gain. But if you restate the financial statements, the gain that that loss then would be recognized earlier in gains would be recognized subsequently. End of the day net zero, it's the periods in which the gains and losses are recognized for accounting purposes. It's different than the economics of the transaction. It's different than the -- how someone may manage their business, but the accounting itself calls for recognition based upon defined criteria in specific periods of
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and that you have appropriately informed investors and that the earnings as you would apply hedge transactions differ from hedge accounting, you're free to talk about that. You're free to -- you're free to describe that end of the day this is -- it's not -- it's not -- again, it's a zero sum game. That is, if you recognize the loss now, you recognize the gain later. If you recognize -- if you don't recognize the loss currently, you recognize the loss later. If you have managed your business differently than that, you certainly could continue to talk to your investors on the basis on which you manage your business. Now, I'm not sure that's clear, that I have been clear to you or that you understand what I'm saying. Q. I understood the context. I can follow on with that. And I do understand, I think, what you've just said. A. But what I was saying is I'm not --

A. -- my conclusion was that the basis for the hedge accounting as applied -particularly hedge accounting, but also FAS 91 as applied by Fannie Mae was not sufficient and therefore restatement should be undertaken and that restatement would then deal with the -the GAAP financial statements. BY MR. CUMMINS: Q. Do you recall any specific facts that stand out in your mind now that form the basis for your decision to -- to require the restatement because some -- that relate somehow to this clause about provide investors with appropriate information? MR. REGAN: Objection. MR. EPSTEIN: Objection. MR. STERN: Objection. MR. DELINSKY: Objection. Scope. MR. STERN: Counsel, just because you're not using the word "opinion" doesn't mean you're not asking for an opinion. MR. CUMMINS: I'm sorry, I didn't

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I did not conclude that the economics of Fannie Mae's activities were improper in any way. Q. I understand. What did you observe or what do you understand to -- let me withdraw the question. What was it that you saw, if anything, that led you to determine that Fannie Mae had not delivered appropriate information to its investors or to the marketplace? MR. STERN: Objection. MR. REGAN: Objection. MR. EPSTEIN: Misstates testimony and the document. MR. STERN: And it calls for a legal conclusion. Jim, this is entirely inappropriate for a fact witness. BY MR. CUMMINS: Q. Go ahead. A. What -- again, separate economics from accounting -Q. Yes.

hear you. MR. STERN: This is impermissible testimony. MR. CUMMINS: I'm sorry. I can't hear you. MR. STERN: I said just because you don't use the word "opinion" doesn't mean you're not asking for an opinion. This is still impermissible testimony under Rule 702. I'm going to continue to object. MR. CUMMINS: Noted. BY MR. CUMMINS: Q. Go ahead, sir. A. Again, I may be repeating myself, but what I believe to be inappropriate was the GAAP financial statements, the use of hedge accounting as undertaken by Fannie Mae and the accounting for that, not -- not the transaction, but the accounting for it and therefore investors are entitled to have GAAP financial statements that are consistent with the accounting standards that are part of it.
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perhaps, one or more of their legal advisers did as well, but I don't recall a statement. Q. Can you tell me what Mr. Raines asked at this meeting, please? A. I'm not sure that I could frame his question other than in the context of what I understood him to ask, which was along the lines of hedge accounting is fairly complicated and he had heard that were a range of views out there, and how -- how far off the mark did I think Fannie Mae was with respect to their accounting. Q. And how -- did you respond to that question? A. I did. Q. What did you say? MR. ROMAIN: Objection. THE WITNESS: In trying to illustrate it I simply picked up a blank piece of paper and said that if the target for perfect accounting was the center of that page and the entire page were things that you could

record to reflect that I believe the witness pointed to a place off the page that was approximately one inch off of it. MR. CUMMINS: Yeah. I didn't measure it, but the video will show. I would like to just take about a five-minute break so we can see how much further we need to go. I'm pretty sure we're getting to at least a point where we can take a suitable lunch break. But I just want to conclude this area. If you don't mind, let's just take a five-minute break. THE VIDEOGRAPHER: Off the record at 11:20 a.m.. (A short recess was taken.) THE VIDEOGRAPHER: This is the beginning of Tape No. 3. Back on the record at 11:28 a.m.. BY MR. CUMMINS: Q. Mr. Nicolaisen, would you put before you Exhibit No. 4, it's the release? And I wanted to call your attention --

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accept in certain situations, that I didn't believe Fannie Mae was even on the page. BY MR. CUMMINS: Q. Okay. And just for the clarity of the record, could -- if you don't mind, could you just hold up a piece of paper and show how you were trying to demonstrate that concept to -- in response to Mr. Raines' -MR. ROMAIN: Objection. MR. STERN: Objection. BY MR. CUMMINS: Q. -- question? A. Sure. It was simply a blank piece of paper and I believe I drew a little circle in there and said if this is the perfect target, this is where you would like everybody to be, but, you know, we can live within these parameters. Fannie Mae wasn't on the page. They didn't say this. They didn't say this. They just said not on the page. Q. All right. Thank you. MR. DELINSKY: I would just like the

A. If you don't mind, I'm not sure we completely exhausted the meeting. If you -you asked what was said, what was the conduct of the meeting. We got to the description of my views. Q. Yes. A. Are you interested in anything beyond that? Q. Of course. A. Okay. Q. Just whatever you have observed during the course of that meeting. A. Generally, as I recall -- very distinctly I recall Frank Raines saying I respect that decision. Fannie Mae will restate, will undertake that process, and a very -- the meeting very quickly then broke into sub groups where Fannie Mae wanted to make sure that they put out a press release at the same time acknowledging their -- their responsibilities and willingness to abide by the conclusion.

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reopen it, but I do want the record reflect that part of, at least, my request on Mr. Howard in the alternative will have to be to bring everyone back and I find that to be very unfortunate, and I regret it. There's a lot of very busy people around this table, but now that we have had a dialogue I just want to put that out there. MR. CUMMINS: Okay. Alex, did you want to make a statement at this time. MR. ROMAIN: It's all been said. MR. CUMMINS: All right. BY MR. CUMMINS: Q. So the question? Can you indicate for the record what facts you based your statement on that reads as follows: "In my view, it was outside professional accounting standards"? What was the factual basis for that statement? MR. DELINSKY: Objection. MR. REGAN: Objection. Scope. Move

Q. It's the very -- right below this sentence that we just looked at. Chairman Baker said: "Is it so difficult for a public operating company to comply with FAS 91 and 133 that it is patterned and practiced within the rest of the public operating company world that companies just don't get it right, or are there other companies out there who, in your view, do not find appropriate manner in which to comply with the rules as you see them?" You answered the following: "I believe that other companies are complying with statements 91 and 133. I have reason to believe that the standards are workable and are being followed." Were any of those -- tell me what the factual basis was for your making this first statement, which is, "I believe that other companies are complying with statements 91 and 133." MR. DELINSKY: Objection.

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to strike elicited testimony. THE WITNESS: What I expressed was my view and professional judgment. There's no question that it was a professional judgment viewing the facts as submitted by Fannie and as presented in OFHEO's report supplemented by lots of discussion and additional questioning as to what things meant, other documents examined by my staff and looked at, and, in my opinion, it was outside the professional bounds. But that is an opinion. I mean, I'll be very clear also in saying a lot of other people concluded otherwise. BY MR. CUMMINS: Q. So they did, apparently. The -- you also indicated in the next question and answer the following -- well, let me read the question. It's right down at the bottom of that page. Chairman Baker -A. Still Page 15? Q. Yes, still 15. A. Okay.

MR. STERN: It's a hypothetical that requires expert opinion. THE WITNESS: Yeah. It clearly is a professional judgment that I'm expressing here. It was -- it was my view, not necessarily shared by others, but it was my view based upon -- and I'm not sure I can give you all of the citations or all the meetings or all the activities that occur where I've had a general view that people were complying with statements 91 and 133. Having said that, I guess, even I was surprised by the number of companies that after the Fannie Mae restatement actually restated for 133. I don't recall much around 91. But I do recall a number of restatements for 133. BY MR. CUMMINS: Q. Okay. And you also indicated in response: "I have reason to believe that the standards are workable and are being followed." What was the basis for that
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of experience in accounting at the time? A. At least. Q. I just want to clarify one thing about the meeting of December 15th, 2004. You indicated that Mr. Raines asked you a question and you responded by holding up a page and explaining what you -- what your professional judgment was as to whether or not Fannie Mae's accounting complied with FAS 133. Do you recall that? A. I do. Q. And I just want to be clear that your testimony or your comment to Mr. Raines about the accounting not being on the page was essentially a comment that you're expressing an opinion that Fannie Mae's accounting policies did not, in fact, comply with GAAP; is that correct? A. That's correct. Q. And as we have indicated before, that opinion was based on your education, training, expertise and experience?

was left out at the top of 31. I just wanted to read that for you. If you want to take a moment to review what you said on 30, that will be fine. A. All right. Let me do it. Q. Sure. A. Okay. Q. Okay. At the top of 31 you said, I quote, "I think you should assume that we will have a thorough investigation, that we will continue our efforts and that we will be prepared to comment on those at an appropriate time. But at the moment, I can't tell you what went wrong in 2001." Did I read that correctly? A. Yes. Q. And, did you, in fact, provide that testimony to Congress? A. Yes. Q. And it was truthful and accurate? A. Yes. Q. The opinions that you expressed with

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A. Right. Maybe just to clarify slightly. The accounting principles of Fannie Mae as described probably were generically like everybody else's, so we're really talking about the practices applied in executing compliance with the accounting standards. Q. Okay. Thank you. Thank you for that clarification. And the opinion that you expressed was, as we indicated before, based on your education, expertise, training and experience, correct? A. Correct. Q. I wanted to clarify a few minor points. If you turn, again, to congressional hearing testimony, Exhibit No. 6 -A. Right. Q. -- and turn to Pages 30 and 31. Mr. Cummins read a portion of your testimony and at the bottom of 30? A. Okay. Q. And there was some testimony that

respect to Fannie Mae's accounting came after your review, and I believe you testified, and I want to make sure it's clear, that it was information that Fannie Mae provided to you, information that OFHEO provided to you and the OFHEO preliminary report that was issued on September 17th, 2004; is that correct? A. That's correct. Q. Okay. And to the extent that you asked additional questions you received answers, correct? A. Correct. Q. Just on that point, if you would turn to Page 13 of your congressional testimony. And maybe three, four paragraphs up from the bottom where it says: "Fannie Mae did not ask the accounting staff," if I could just read -A. Okay. Q. Do you see that? A. Yes. Q. And this is part of your initial
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