Claimants

V Hong
First
Exhibit VH1
14 April 2016

IN THE HIGH COURT OF JUSTICE Claim Nos. HC-2013-000106

HC13F01247 and Ors
HC14F01714
HC14F01704 and Ors

CHANCERY DIVISION

IN THE CASE OF: -

THE RBS RIGHTS ISSUE LITIGATION

________________________________________

WITNESS STATEMENT OF
VICTOR HONG
________________________________________

I, VICTOR HONG, of ........,,,,,,,,...., New York City, New York, will say as follows:

Introduction

1. I am a finance professional specializing in valuation and risk in investment

banking. I am also a former employee of RBS Greenwich Capital Markets, Inc
(“RBS Greenwich”) a wholly owned subsidiary of the Royal Bank of Scotland
Group plc (“RBS”).

2. In this statement I address matters relating to my employment at RBS Greenwich

and events leading up to and postdating that employment.

3. Document references in this statement in the form {RBSXXXXXX/X} are references

to document ID number of documents disclosed to date by the Defendants (in the
form {Document number/page number} where relevant). In relation to documents
referred to herein that have not been disclosed to date in these proceedings, there

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 is shown to me and exhibited hereto a paginated bundle marked VH1. References
in the form [VH1/page number] refer to page numbers in VH1.

4. Save insofar as is otherwise stated, the facts set out below are within my own
knowledge or are derived from the documents to which I refer, and I believe the
same to be true.

Education and background

5. In 1977 I attended Northwestern University and then transferred to the

University of Wisconsin. In 1981 I was awarded a Bachelor of Arts degree in
Economics, with honors, by the University of Wisconsin.

6. In 1985 I was awarded an MBA in Finance by the University of Chicago and

was placed on the Dean’s List.

Employment history

7. Between 1981 and 1983 (in the period between my undergraduate degree and
my MBA) I worked as an Equity Options Trader for FP Quinn and Co in
Chicago.

8. On completion of my MBA I worked as a Government Bond Trader for Salomon

Brothers, Inc. in New York City. I was responsible for pricing and executing up
to $3.5 billion of client business daily and actively underwrote Treasury debt
auctions.

9. I continued to work as a Government Bond Trader for Security Pacific Merchant

Bank in Los Angeles (1988) and Continental Bank in Chicago (1989).

10. In 1990 I began to develop other transferable financial-analytical skills to assist

with the development of my non-trading financial career by taking on a role at
Forsythe/McArthur Associates in Skokie, Illinois, as a Lease Syndication
Specialist.

11. Continuing my move away from trading, from 1991 to 1992 I was employed as a
Fixed Income Salesperson by Kidder Peabody & Co in Chicago. I specialized in
zero-coupon treasury sales.

12. From 1993 to 1996 I was a Vice President and then Associate Director of Fixed
Income Research at Bear, Stearns & Co (“Bear, Stearns”) in New York City. In

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 this position it was necessary to develop a strong understanding of the entire
fixed income market and to continue developing strong relationships across the
industry.

13. In 1996 I joined Credit Suisse First Boston (“CSFB”) as a Vice President and
then was promoted to Director and Global Head of Fixed-Income Price
Verification. I remained there until 2004. I obtained expertise in valuing esoteric
and complex assets (such as subprime residuals, non-agency RMBS put
options and CDO warehouses) which, over time, helped me develop an
industry-leading valuation risk practice. Between 2002 and 2004, my team
uncovered chief trader mis-marking of valuations which led to substantial
financial restatements by the firm.

14. In 2004 I became a Director at WestLB in New York City, with responsibility for
Market Risk Management. My work there built on my previous experience, and I
was responsible for scrutinizing non-linear, complex products in order to
supplement Value at Risk (“VaR”) model analysis.

15. On 1 June 2006 I was recruited to join JP Morgan in New York City as a Vice
President and North America Head of Market and Valuation Risk for Securitized
Products, and was promoted immediately to Executive Director. Using my
experience in the ABS CDO market I was able to identify how the pools of the
underlying loans in these products were quickly degrading due to “default
correlation” (I explain this concept in further detail at paragraph 73 below). Until
this point, it had been thought that if a few of the underlying loans in the pool
defaulted, this did not have much impact on the value of the overall portfolio. In
fact, as the loans generally had common underlying drivers of default such as
credit quality or falling house prices, the default of a loan would be
accompanied by other associated loans defaulting and a degradation in value
across all tranches of the product. This could have a huge impact on the
valuations of these products. I also identified critical gaps in JP Morgan’s
model-validation analysis, as the models being used ignored this possibility of
default correlation and the fact that other firms were factoring it in when pricing
their own portfolios.

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 16. In September 2007 I was recruited by RBS Greenwich and the circumstances of
my recruitment, employment and resignation at the firm are set out in more
detail below. I resigned from RBS Greenwich in November 2007.

17. In February 2008 I re-joined Bear, Stearns as Managing Director-Principal of

Market and Valuation Risk Management. Via its merger rescue, I then re-joined
JP Morgan as an Executive Director of Finance and Valuation Policy.

18. From 2009 to 2011, I was employed as a Credit Risk Officer at the Federal
Reserve Bank of New York.

19. From 2011 to 2012, I was Managing Director for Liquidity and Risk at Cerberus
Capital Management, New York.

20. From 2013 to December 2015 I worked as a Regulatory and Risk Consultant at
institutions such as Bank of America Merrill Lynch and Citibank.

21. In December 2015, Bank of America Merrill Lynch hired me as a full-time

Market Risk Internal Auditor.

Terminology and products

22. In this statement, I use a number of abbreviations relating to credit market

products and structures. I set out in the Appendix to this statement definitions
and / or explanations of the abbreviations.

Recruitment by RBS

23. RBS first tried to recruit me in 2004 but I did not pursue this approach.

24. In mid-2007, while I was working at JP Morgan, Bruce Jin (“Jin”), who was Head
of Market Risk at RBS Greenwich contacted me and told me that they needed
me. I knew Jin well having worked with him at CSFB from 1996. Jin had heard
that in my role as Head of Market and Valuation Risk at JP Morgan I had
successfully raised concerns regarding warehousing of ABS CDOs in its US
business as I was unhappy with the risk that those products attracted. Jin said
that my experience in market risk, credit risk and valuation risk would be helpful
to enhance risk management at RBS Greenwich.

25. Jin knew that I had expertise in commercial and residential mortgages, CDOs
and other fixed income products and said that I would do a lot of good at RBS

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 Greenwich. I knew that RBS Greenwich was a firm whose business was
primarily in fixed income products and mortgage backed securities. With my
background, I considered that my expertise was a good fit.

26. I attended interviews in July 2007, and met Jay Levine (“Levine”), the CEO of
RBS Greenwich, Carol Mathis (“Mathis”), the CFO of RBS Greenwich and Ian
Gaskell (“Gaskell”), Managing Director of Market Risk. They asked me about
the ABS super-senior market and explained that if I were to join RBS Greenwich
I would need to focus on that area.

27. I was recruited to become a Managing Director, and Head of Fixed-Income

Independent Price Valuation (“IPV”) and Risk Management for RBS Greenwich.
This role had been previously fulfilled by Lauren Schwartz Rieder (“Rieder”).
She was moving to become a trader on the US Treasury desk.

28. I was specifically recruited to work at RBS Greenwich, RBS’s US investment

bank, which was then based in Greenwich, Connecticut. It is now located in
Stamford.

29. I was due to start with RBS Greenwich on 28 September 2007. The evening
before (27 September 2007) I had dinner with Jin and Gaskell at Eleven
Madison Park. At the dinner, I asked them what I should focus on once I joined
the firm. Gaskell looked at Jin and said words to the effect of “I guess we can
tell him now”. He told me that RBS Greenwich was trying to get a handle on its
ABS CDOs. He told me that there was slow turnover in their inventory and that
they had an idea of what they were holding but that they did not know what it
was worth.

30. I asked them what marks they were currently taking on the ABS CDOs at RBS
Greenwich. Gaskell told me that the RBS Greenwich inventory was marked
around 95 cents. I was very surprised by this as the mark seemed far too high
compared to what other firms were doing in the market. I told Gaskell and Jin
that while I was at JP Morgan, I had observed the forced liquidation in June
2007 at around 74 cents on the dollar of super-senior ABS CDO tranches which
a Bear, Stearns-sponsored hedge fund owned. Since that date, the market had
continued to deteriorate and so even if RBS Greenwich’s portfolios were a
better quality than the Bear, Stearns-sponsored fund, the 74 cents figure
seemed likely to be too high for subprime ABS CDOs at the end of September

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 2007. Accordingly, the approximately 95 cents on the dollar marks RBS
Greenwich were taking made me very concerned about what I would find when
I started the next morning.

31. My view at that time was that the majority of mezzanine ABS CDOs in the
market were losing most of their value, quickly. They were backed with pools of
BBB-rated subprime RMBS, which were becoming increasingly at risk of total
principal defaults. They appeared to be underwater from a credit perspective as
there was nothing of worth in the collateral. In other words, not only were the
income streams drying up due to the underlying mortgage holders defaulting on
interest payments and capital repayments, but the state of the housing market
meant that the underlying home properties on which the mortgages were
secured could not be sold for sufficient money to cover monies owed by the
mortgage holders. My view was that once you had wiped out the BBB-rated
RMBS tranches backing these CDOs, then there was nothing left to pay off
even the most senior, high-rated tranches of the CDOs. As soon as these BBB-
rated RMBS were wiped out, all CDO tranches created from them were going to
be wiped out as well. The subprime ABS CDO market was becoming
increasingly illiquid and the ABX index, referencing subprime RMBS, was
falling.

32. However, despite my concerns, I had no fixed ideas of what I would find at RBS
Greenwich. In fact, specifically, I had heard good things about their IT systems
and processes. I approached the new role with an open mind.

33. I started at RBS Greenwich on 28 September 2007. I was responsible for the
IPV of all securitized credit products including ABS CDOs, CLOs, plus
leveraged loans, interest-rate products, and corporate credit products like credit
default swaps, although at Jin and Gaskell’s request I focused on CDOs, and to
a lesser extent CMBS and commercial loans, and subprime, Alt-A and prime
RMBS. I explain the remit of my role further at paragraphs 50-53 below.

Management of Risk at RBS Greenwich

34. Two of the important risk management functions at RBS Greenwich were
Market Risk and Product Control.

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 35. The Market Risk function included the calculation of potential losses under both
normal market conditions and during stressed market moves. This was used to
calculate risk capital.

36. People in the Product Control function were, however, meant to evaluate the
position of RBS Greenwich’s credit market portfolio on a regular basis. IPV
(which I was now heading) was part of Product Control but my work on market
research and valuations also fed into Market Risk.

37. In effect, the function of Product Control was to report on what the situation
currently was whereas Market Risk had to report on what could happen under a
range of scenarios.

38. One of the important tasks undertaken by Market Risk was the calculation of
VaR. VaR is a statistical method of measuring the market risk associated with
investments based on historical data. To check if assumptions and predictions
about a portfolio and its associated risks are correct it is necessary to compare
the calculated VaR against the actual profit and loss on an ongoing basis. If an
actual loss exceeds the maximum loss predicted by the VaR calculation then
this is what is known as a “backtesting exception” and it shows that the VaR
methodology for estimating market risk has failed to predict that risk accurately.
It is normal practice that these backtesting exceptions must be reported to
regulators.

39. VaR was calculated on super-senior ABS CDOs as part of RBS Greenwich’s
analysis of market risk. There was very little historical data of losses in AAA
securities. I had always been of the view that VaR had its limitations as a tool to
predict risk, especially in relation to mortgage products as it was based on
historical data that might not reflect current conditions

Colleagues and reporting lines at RBS Greenwich

40. As mentioned above, Levine was the CEO of RBS Greenwich and he reported
in to RBS senior management in London.

41. Gaskell had previously been a fixed income trader but moved from trading into
the compliance and risk function. I was not aware of all of the politics of this, but
Gaskell’s move was seen as a demotion for Jin as Gaskell was effectively
brought in above him. Gaskell reported to Riccardo Rebonato (“Rebonato”), the

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 Global Head of Market Risk who was based in London and whom I never met.
Rebonato reported directly to Johnny Cameron (“Cameron”), the Chairman of
the whole of RBS’s Global Banking and Markets division (“GBM”) whom I never
met either.

42. Jin was my direct line manager and was responsible for market risk and
valuation risk. Valuation risk was a hybrid area that was split between the
finance function under the umbrella of Product Control that reported to the CFO,
Mathis, and the risk function beneath Jin and Gaskell. I reported in to Jin and
Gaskell on the risk function side and Mathis on the finance function side.

43. As mentioned above, Rieder had been Head of IPV until I replaced her, and she
was due to move into a trading role.

44. Navdeep Dhaliwal (“Dhaliwal”) was a member of my IPV team and reported to
me, but his main responsibilities were in relation to VaR supporting Jin’s Market
Risk team. He covered structured credit and CLOs. He was not really involved
with mortgage related products, focusing instead on corporate credit
instruments. Michael Harris (“Harris”) was a Vice President in my IPV team.

45. Henry Asare (“Asare”) was a senior Market Risk manager for Structured Credit
products. He reported in to Jin.

46. Ming Lin (“Lin”) was a Vice President in Mortgage and ABS Market Risk Desk
and reported to Jin. Lin shared an office with me. Atul Shrivastava
(“Shrivastava”) was a mortgage trader and research analyst, who had moved
over into the Risk function in the same team as Lin, reporting in to Jin.

47. Joe Walsh (“Walsh”) was Head of Fixed Income trading. Johan Eveland
(“Eveland”) was a non-agency and subprime mortgage loans and RMBS trader
reporting in to Walsh. Ron Weibye (“Weibye”) was a residential mortgage loans
and non-agency RMBS trader.

48. Fred Matera (“Matera”) was Head of Structured Credit Trading. I discovered
that it was Matera who requested that I be recruited as he had worked with me
previously at CSFB and knew my skills and strengths. In his role, Matera was
responsible for trading a lot of the assets that fell under my IPV remit. Matera
reported into Walsh.

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 49. Evan Gerhard (“Gerhard”) was a trader within Matera’s Structured Credit
Trading team and mainly traded structured credit products i.e. CDO and CLO
products.

Role as Head of IPV

50. The role of the IPV function within any firm is to check independently that the
valuations (or “marks”) placed by traders on their portfolio are accurate by
comparison against market data, the value of the underlying assets and any
other relevant sources of information. IPV reviewed the marks on credit, rates
and other fixed income trading assets. The IPV function cannot force a trader or
manager to re-mark their portfolio, but if our work shows that the marks cannot
be independently verified, the IPV variances between the marks and market
reasonable pricing are reported to management. Management should then take
a decision on how to resolve those variances and should recommend changing
the marks to a market reasonable pricing level. As Head of IPV, I was ultimately
responsible for these reports and seeking to get traders to explain and justify
any variances and to persuade management to change the marks to a level
with which I was comfortable. The IPV function is necessary to provide
independent expertise and judgement and detect problems. My experience of
the IPV function and IPV report in practice at RBS Greenwich was, however,
quite different to what was meant to happen, as explained below.

51. The formal IPV report at RBS Greenwich was compiled at the beginning of
every month to report on variances to trader valuations (i.e. where IPV
disagreed with the marks given by traders) as at the last working day of the
previous month. It was then my key responsibility as Head of IPV to sign off the
report once it had been compiled. My understanding was that the sign-off for
each month-end usually occurred sometime around the second week of the
following month.

52. On a day-to-day basis, my role involved liaising with my IPV team to produce
analysis and share research on the valuation of the products for which we were
responsible.

53. From my arrival, I concentrated mainly on the CDO portfolio at Jin and Gaskell’s
request. The focus of work in IPV is (and was at the time) generally driven by
emerging risk priorities rather than a set remit, and Jin and Gaskell had

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 recognised this was likely to be the most problematic area. During my short time
at RBS Greenwich, meetings within the IPV team were informal and focused on
the immediate concerns about ABS CDOs. I reported my findings to Jin, Gaskell
and Mathis, either in emails or in informal face-to-face meetings. I was
responsible for signing off on US-focused RBS Greenwich IPV reports, but not
global or management IPV reports. It was Jin and Gaskell’s role to report my
work to Levine who then reported it to RBS management in London and
attended global/management IPV meetings.

Actions at RBS Greenwich

54. When I started at RBS Greenwich on 28 September 2007, I quickly gathered

information on RBS Greenwich’s holdings so I could take a view on the
accuracy of the marks. I obtained position reports (i.e. reports produced by
traders listing their trading positions showing name, notional size, whether they
are short or long, mark and market value) from my IPV team, Market Risk and
Trading. I discussed the marks with Rieder, Jin, Matera and Asare, among
others. This information confirmed what Jin and Gaskell had told me the night
before, i.e. that the ABS CDO and subprime RMBS portfolios were being
marked at approximately 95 cents in the dollar.

55. On that first day at RBS Greenwich, Rieder told me I would need to sign off the
September 2007 month-end IPV report, once it had been compiled in early
October. She told me that there was no material unresolved mis-marking of the
ABS CDO and subprime RMBS trading portfolios.

56. I told Rieder that I disagreed as I did not believe the marks to be accurate or
fair value and that if the ABS CDO portfolio was marked correctly, total losses
in RBS Greenwich would be about $2 billion. My view was based on research
at that time which was quoting super-senior tranches as worth 60 cents in the
dollar or lower. The RBS Greenwich ABS CDO portfolio had a notional value of
around $5 billion, so a mark down by around 40% would incur a $2 billion loss.
In response to this, Rieder said words to the effect of: “Shut the fuck up, don’t
fuck up our bonuses. We’re not doing any markdowns, this year. Nobody will
approve them. You have to find some way to get comfortable with sign-off.” I
believe this conversation was on or around 1 October 2007.

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 57. As I was concerned about the unsupportable 95 cents in the dollar
approximate valuation, I decided to distribute articles and research regarding
ABS CDO valuations to share my view with my new colleagues that firms were
overvaluing these products and that more caution should be exercised.

58. There was an internal email distribution group called GCM Risk, intended to be
used to share market risk and credit risk information between the IPV team and
the Market Risk team responsible for calculating VaR. On 1 October 2007, I
used this distribution list to circulate {RBS298304}, a research paper dated 28
September 2007 published by Credit Suisse {RBS141901} covering the rapid
deterioration of underlying collateral in structured finance CDOs. It stated that
the prices of super-senior tranches for almost all structured finance CDOs had
dropped dramatically, with many marked at 60 cents in the dollar or lower. My
concern was that there were indications in the market (or “market color” as I
would term it) of pricing relevant to the RBS Greenwich portfolio and this
market pricing was not accounted for in the current trader marks for that
portfolio.

59. Shortly after sending this, I received a response from Asare {RBS298304}
saying that he agreed with me and that he had been telling “them” (which I
understood to mean Jin and senior management) this for 5 to 6 months but
they did not want to hear. His email also said that he had heard that Citibank
and UBS would be taking massive writedowns in Q4 of 2007 (which I
understood to mean writedowns of their ABS CDO portfolios).

60. As I learned what was in the portfolio at RBS Greenwich, I became increasingly
concerned about the marks that had been taken. I learned from conversations
with Matera what the securities inside the CDOs consisted of, the tranche
structures and which tranches RBS Greenwich held. They were mainly
mezzanine ABS CDOs with some high grade and were all subprime or non-
agency RMBS. I also researched information available from Intex (a provider of
cashflow models and analytics for securitizations and structured products such
as RMBS, ABS, CMBS and CDOs) which showed me what RMBS and ABS
were inside RBS Greenwich’s ABS CDOs and the delinquency rates on those
assets. I used Bloomberg to compare these with RMBS/ABS inside other ABS
CDOs which RBS Greenwich did not own.

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 61. I knew from my time at JP Morgan that many of the underlying mortgage loans
were defaulting and were backed with highly distressed collateral. The
underlying mortgages were also highly correlated, meaning that mortgage
defaults would affect every tranche of the structured products, so it did not
matter which tranche the firm held. Even very recently completed
securitizations were seeing defaults in the underlying mortgages within 30-90
days of the deals closing. The content of RBS Greenwich’s portfolios was no
different to those held by other institutions in these respects.

62. These investigations confirmed my view that the entire RBS Greenwich
portfolio was significantly over-marked. The marks across the entire portfolio
had moved insufficiently from being held at 100 cents in the dollar. I was
particularly concerned about the valuations of the super-senior CDOs.

63. When I challenged the marks taken at RBS Greenwich in the first few days of
my employment with Jin, Rieder, Mathis and Gaskell, as well as some of the
traders, the general response was that the RBS Greenwich CDO portfolio was
of a different, better quality than the holdings at other institutions, and so the
marks at RBS Greenwich would be different. However, my analysis of the
collateral pools underlying the CDOs at RBS Greenwich showed they were
generally of a worse quality than holdings at other institutions because their
delinquency rate in many instances was higher. This was not due to any
particular characteristic of the holdings such as vintage (when the relevant
securitization had been created) or geographical location, simply that the
default rates on the underlying home loans were so severe across all the
collateral pools underlying RBS Greenwich’s CDOs. This meant that the trader
over-pricings were larger than I initially thought and therefore in greater need of
writedowns to lower than 60%.

64. In my first week at RBS Greenwich, I told Jin that we needed writedowns on
the ABS CDO portfolio. Although he told me he agreed with my findings, he
said that he could not get any writedowns agreed by senior management and
told me words to the effect of “Don’t worry, just sign off [the IPV report], if you
get caught we’ll protect you.” While the marks were supposed to be
independently verified by the IPV function, it was made clear to me by each of
Mathis, Rieder, Gaskell and Jin in various conversations at that time that if IPV
did not sign off on the front office’s marks then bonuses (across all functions)

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 would not get paid. Each of them made it clear to me that it was expected that I
would sign off the IPV report so that senior management in the front office
could delay writedowns until 2007 profits were finalised and bonuses were
paid.

65. RBS Greenwich set internal thresholds for the amount by which trader
valuations could differ from the independently verified values. Generally, no
action would be taken or breach recorded if positive or negative trader mis-
valuations were within that threshold. If they breached that threshold, then the
trader mis-valuations had to be reported. Some thresholds worked on
percentage or market value terms, but on the whole they operated on absolute
dollar values. If variances exceeded a certain level then they had to be
escalated to Product Control and Risk so any profit and loss revisions could be
included in VaR and backtesting. If there were going to be any writedowns then
Finance had to be made aware.

66. My view of the marks prevailing in RBS Greenwich in early October 2007 was
that, if correct marks were taken instead, the actual losses would exceed the
thresholds by a great amount. Some of the thresholds were around $100,000,
in contrast to my view that the RBS Greenwich ABS CDO portfolio was over-
marked by about $2 billion in early October 2007.

67. On 2 October 2007 Rieder sent an email to Mathis, Jin, Gaskell and me,
amongst others {RBS303216}. She stated that “due to the current lack of
transparency/liquidity in the market for ABS CDO super-senior positions, they
we [sic] will not be subject to independent price verification for 09/28/07”. This
was contrary to credible, independent market data which I had already
distributed to and discussed with traders, Mathis, Jin, Gaskell, Rieder, and
other risk managers.

68. Mathis replied on 2 October 2007 and said “I assume we will use alternative
means to get comfortable with the valuation” {RBS303216}. Rieder responded
on 2 October 2007 saying: “Unfortunately there are no alternative mechanism
[sic] for us to get comfortable with the market price as this sector has not
experienced reliably observable trading data.” {RBS303216}. Mathis replied
saying that she, Jin and Gaskell would deal with it {RBS303216}. I then told
Rieder that I had already given her Credit Suisse research containing reliable

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 super-senior ABS CDO quotes, and that she had verbally acknowledged
reading it before sending her e-mails. She told me that her claims of there
being no available market data was her ongoing means to get comfortable with
2007 IPV sign-offs without there having to be writedowns on the CDO portfolio.

69. While Rieder was partially correct in saying that the market was illiquid at the
time, that did not mean that the relevant assets could not be priced. Data, such
as the Credit Suisse research referred to above, showed that US subprime
RMBS had sharply depreciated below 100 cents in the dollar amid homeowner
defaults. Since subprime RMBS were the collateral of ABS CDOs, any
institution could buy these subprime RMBS and create new super-senior ABS
CDO tranches for much cheaper than 100 cents in the dollar. It could already
be seen that the super-senior ABS CDO tranches were falling from 100 cents
in the dollar themselves.

70. There were also other methods of valuing complex structured products such as
ABS CDOs. Net Asset Value (“NAV”) is an approach that can be used to see
what a portfolio is worth. This method involves looking at and valuing the
collateral pools and assets underlying the CDOs to calculate the cost of
recreating the CDO from scratch.

71. There was also a liquidation value approach. Because the CDOs were in such
distress, portfolio managers were considering what value could be recovered if
the CDOs were unwound and liquidated with the underlying assets being sold,
thereby allowing a ‘salvage’ value to be ascribed to the CDO based on how
much notional value could be recovered. By way of example, for a CDO with a
notional value of $1 billion with a super-senior tranche of $600 million, making
the assumption that the whole CDO deal was under single ownership and
could be unwound and sold, the underlying subprime RMBS collateral might be
valued at 30 cents in the dollar, realizing $300 million. This would all go to
paying off the super-senior part, giving the super-senior part a value of 50
cents in the dollar.

72. Another source of data used in IPV is indices such as the ABX and TABX
which helped track ABS CDO prices across the market. The TABX indices
essentially refocused the value of an ABS CDO created with tranches of
subprime RMBS, specifically the same subprime RMBS comprising the ABX

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 indices. The ABX index publicly reported where subprime RMBS assets were
trading and the TABX was for similar trading quotes on subprime-RMBS-
backed ABS CDOs. The ABX was valuing the subprime products anywhere
from 0 to 50 cents on the dollar around October 2007. At [VH1/1-2] is a Markit
graph of the ABX index for BBB rated subprime bonds from the end of 2006 to
2010 (which I obtained from the JPMorgan Fixed Income Securities Data
Query website).

73. A further feature of the market that could be taken into account for IPV was
default correlation risk. A number of large institutions (including Credit Suisse,
Merrill Lynch, Citibank and UBS) held products like ABS CDOs. Where
securities were derived from US subprime RMBS, the valuations of those
securities were all linked because the underlying assets were all home
mortgages, often to borrowers with weak credit histories and high debt
burdens. When the securities were created, assumptions had been made that
residential property prices would never fall, but they did, everywhere.
Geographical diversification made little difference to valuations because such
valuations were linked to house prices and those house prices were dropping
in value towards distressed-liquidation prices regardless of where that
residential property was located. Therefore, institutions holding similar ABS
CDOs were all seeing similar trading losses on those assets.

74. With falling property prices and increasing levels of default, the seniority of
CDO tranches began to matter very little. If the subprime RMBS within the ABS
CDOs were falling dramatically in value even the most highly rated, senior
CDO tranche created from them would fall dramatically in value as well. If the
income from the underlying mortgages and the ability to recover capital was
falling, it did not matter which tranche of the CDO was entitled to receive that
income first, it would still fall in value.

75. When institutions marked down ABS CDO values that provided an indicator of
pricing which was available to the market. As a result of my views on the over-
marking and in an attempt to ensure that my colleagues understood the reality
of the ABS CDO valuations, I sent out market research and deal information
from other institutions, and highlighted my concerns in emails to management,
as set out in the following paragraphs.

15
 76. On 3 October 2007 I emailed the GCM Risk list {RBS143191} a research
document from UBS {RBS143192}. This report said that the market was
“obviously pricing in no chance of principal repayment” in the A and BBB rated
tranches of CDOs and therefore these tranches were being valued at a multiple
of the coupon being paid on the tranche. For single A rated tranches, pricing
was at 4 x the 6.8% coupon, for example, thus equating to a value of 27.2
cents on the dollar. Further, across UBS’s 110 CDO deals closed in 2006 –
2007, at the single A tranche 85% of those deals had suffered some losses
with the average loss at 90%. (I followed up on 9 October 2007 by forwarding
my email and the attached UBS report to Harris, Rieder and Jin highlighting
market pricing data found at page 28 of the UBS report {RBS143191}. I
finished my email by saying “Please check your recent price verification, as a
sanity check, and let me know what you find.”)

77. On 6 October 2007 I sent a Wall Street Journal article {RBS142961} about
CDO revaluations at Merrill Lynch to Jin, Gaskell, Rieder and Matera. I said in
my email that the article indicated that the $5 billion dollar writedown at Merrill
Lynch came from super-senior ABS CDO tranches. This reinforced my view
that RBS Greenwich was significantly overvaluing its holdings of this type and
that writedowns were needed.

78. On 9 October 2007, I forwarded the email chain between Mathis and Rieder
regarding the ability to verify the CDO super-senior marks referred to in
paragraph 67 above to Jin, Rieder and Asare {RBS291519} explaining that I
planned to talk to Mathis one-on-one soon, ideally that day. I noted that I had
spoken to Matera regarding the haircuts that were being taken on the principals
for CDO over-collateralization tests (meaning that the deals were facing
effective over-collateralization shortfalls, even if a default had not been
triggered, with the result that the risk and fair values of the senior and junior
tranches could quickly converge). By way of explanation, typically CDO
structures were created with more underlying mortgage bonds than were
required to service the coupons that were paid out to the holders of the CDO
tranches as a form of credit enhancement of the CDO. This meant that a
certain number of mortgages could default without causing the CDO to be
unable to pay out the coupons on some of its tranches. When sufficient
underlying mortgages have defaulted to cause the CDO to be unable to pay

16
 out the coupons on all its tranches (an over-collateralization shortfall) there
would be insufficient cashflow from the underlying mortgages to service not just
the junior tranches but also the senior tranches, causing the values of the
senior tranches to fall towards or converge with the low values of the junior
tranches. I also noted that the TABX index was showing price flatness i.e.
small differences between the different tranches for these products.

79. On 10 October 2007 I sent an e-mail to Rieder, Gaskell, Jin and others
{RBS143339} with an attached research document from JP Morgan
{RBS143340} analysing delinquency pipelines and the trigger status of
subprime ABS deals. I indicated in my email how the delinquency related
performance levels of the underlying subprime ABS deals would drive the
performance of RBS Greenwich’s super-senior ABS CDOs.

80. Although in the first weeks of October 2007 I had raised my concerns about the
level of the marks taken at RBS Greenwich with Mathis, Jin and Gaskell, I did
not have any direct reporting lines to RBS management in London. Levine, as
CEO, was ultimately responsible for the marks at RBS Greenwich, and he had
to justify them to RBS management in London. Gaskell stopped the information
from going to London at that stage as he did not want to upset the pending
ABN AMRO merger (I describe this in further detail at paragraphs 107-111
below). Gaskell and Rieder told me to keep my concerns about marks off of
emails as much as possible and that if I felt that writedowns were necessary I
should only discuss this orally. Gaskell stated that he did not want any
documentation about misrepresented trader profits or risk reports available for
regulators or external auditors to discover later on.

81. Mathis said much the same when I spoke to her in early October 2007 on a
one-to-one basis about my concerns. She told me that nothing which could
upset the ABN AMRO deal, like writedowns, could happen without Levine and
Cameron’s sign off. I told her that mark to market was not something that
required a sign off to happen as it was an obligation simply to match something
you see in the market; it was a question of reality, not interpretation. I told her
that deliberate, material mis-marks of trading assets and risk under-reporting
were violations of the Sarbanes-Oxley Act.

17
 82. By this time, I was becoming very worried about the situation I had got into by
taking the role at RBS Greenwich. The mismarking appeared to be deliberate
and part of the firm’s culture. However, as I had only been in my role for a short
time, I remained hopeful that I could persuade others that my view was correct
and was backed up by external market color.

September 2007 IPV Report

83. I first saw a copy of the September 2007 IPV report around 10 October 2007.
It soon became apparent to me that I was expected to sign off whatever IPV
report was prepared whether I agreed with it or not, and was not expected to
verify it myself. Asare, Lin, Shrivastava and Harris expressed to me their
concerns about subprime RMBS, subprime mortgage loans, and super-senior
ABS CDO tranches, and warned me not to sign off the report without being
very careful about what I was signing. They said that Rieder had approved the
unchanged marks at September month-end despite the lower marks being
reported in the market and that Rieder hoped that I would sign off on them to
avoid hurting 2007 bonuses, especially her own.

84. I discussed the marks on the ABS CDO portfolio at length with Matera in the
first weeks in October 2007. He initially disagreed with me but soon realized
that I was correct. It was a difficult valuation process. We sat down and
analyzed the ABS CDOs on an asset basis by looking at their NAV and
calculated what it would cost to reconstruct the deals from scratch from their
component parts. For example, if a trader were to buy subprime RMBS in the
open market, pool them to create an ABS CDO deal, hold its super-senior
tranche and sell all the other tranches, the net proceeds would be the NAV, or
so-called ‘creation value’ of the super-senior tranche. That creation value was
the value that could be used to give a good indication of what the mark should
be on the deal. Matera concluded that he had to agree with me that the current
valuations were not supportable and that it was necessary to action
writedowns. Matera, like me, did not want to sign off on valuations with which
he disagreed. Of course, Matera was responsible for his desks’ valuations,
whereas I was responsible for the IPV of those, and other traders’ valuations.

85. The valuations suggested by the NAV approach contrasted with the much
higher valuations produced by the model-based approach used by RBS

18
 Greenwich to support its ABS CDO valuations, which was based around a
valuation model known as the Loss Severity of Default or LSD model.

86. I did not consider the LSD model to produce accurate or fair valuations. While it
fitted to pre-crisis experiences for mortgage models (although in the pre-crisis
period I understand that even RBS marked to market and not to model), it
ignored important inputs based on what was actually happening in the market
at the time. For example, the LSD model did not take into account that the ABX
indices were at that time trading far below 100 cents in the dollar, implying that
the subprime RMBS comprising the indices were highly likely to suffer
substantial principal losses (even if their credit ratings were still good). It also
ignored the large proportion of delinquent loans within the underlying mortgage
pools that were ready to default. The LSD model approach gave counterfactual
projections divorced from the actual situation where the underlying mortgage
pools were losing 15% of the loans to delinquency. It calculated losses for
future stressed positions that were less than those which were already being
experienced.

87. However, my understanding of the use of the LSD model approach by others at
RBS Greenwich was that it gave them (and especially Eveland, Walsh and
Levine) a justification for taking the higher marks that they wanted. Using a
NAV approach would reveal the true picture of the RBS Greenwich marks
being too high.

88. This split between the valuations which could be derived from the LSD model
and the reality of ABS CDO valuations was one of the things that convinced
Matera to join me in using the NAV approach. I also had discussions with the
more junior traders such as Gerhard and gave them information about pricing
and marks. They did not challenge my methodology process or approach.

89. Following our discussions, Matera told me that while he had the responsibility
to value positions correctly, he did not have the authority to change any marks.
Matera told me that as Head of Trading he had suggested new marks to
Walsh, but Walsh had refused outright to allow any writedowns.

90. After my conversations with Matera where he had agreed with me that the ABS
CDO marks needed changing, I spoke to Walsh in person and demanded that
the ABS CDO marks be changed which would have then required writedowns.

19
 Walsh absolutely refused to agree to any writedowns until after 2007 bonuses
had been fixed (which would be in March 2008), and said that Levine would not
allow any writedowns. My conversations with Walsh continued throughout
October 2007, but he did not change his mind.

91. This concerned me greatly as it meant that the IPV function was effectively a
sham and was not independent at all. There was no protection for the IPV
function in the event differences were found between trader marks and
independent valuations. I would have expected variances between trader
marks and IPV valuations to be corrected once the variances had been
recorded, especially when they were of this magnitude. Once writedowns had
been blocked by Walsh, the only further escalation available to me was to go
above his head to Levine. I did not do this because, by that time, I understood
from conversations with Jin, Mathis and Gaskell that Levine could only act with
approval of RBS senior management in London, particularly Cameron, Fred
Goodwin (“Goodwin”) the CEO of RBS, Guy Whittaker (“Whittaker”) the Global
CFO of RBS and Brian Crowe (“Crowe”) the Trading Head of GBM. Further, I
understood that the RBS senior management in London did not want any
writedowns, particularly to avoid causing any issues with the merger with ABN
AMRO and therefore that Levine did not want to agree to any writedowns
through fear of upsetting RBS senior management in London.

92. Rieder pressured me continually for sign-off of her September 2007 IPV report
and on several occasions complained that my willingness to quantify and
demand large writedowns was explained by my bonus being contractually
guaranteed regardless of RBS Greenwich’s financial performance, unlike her
bonus and that of many other people at RBS Greenwich.

93. Around the beginning of the second week in October 2007 I made it clear to
colleagues including Mathis, Jin, Rieder, Gaskell, Matera, Gerhard, Asare and
Harris that I would refuse to sign off on the September 2007 month-end IPV
report if it did not contain marks that were acceptable to me. This did not seem
to raise the compliance issues I expected it to. There was no compliance
oversight of this issue. No one said “IPV won’t sign off so there must be
something wrong.” Mathis would not force traders to explain and resolve
material pricing variances with reference to market data, ignoring the
requirement to mark trading books to market. The process that was in place

20
 was short and self-defeating, because Mathis deferred the decision on
writedowns to Walsh in his role as Head of Fixed Income Trading, rather than
exercising the proper role of Finance to be an independent financial control on
trading valuations.

94. Gaskell and Mathis tried to get me to change my mind and sign off the IPV
report but I refused. So instead they told me “to get comfortable with current
trading marks, because nothing will change in 2007” (or words to that effect). It
became obvious to me that if I did not sign off the report then Rieder would do
so instead, even though she no longer had any responsibility for the monthly
IPV sign off, and it was my sole responsibility to verify the price information. I
told Rieder not to sign off, as the data was incorrect, but she ignored me.

95. Rieder signed off on the September 2007 month-end IPV report on 10 October
2007 {RBS748138}. She did so despite the market data and information that I
had provided her with and the conversations and emails between us. When
Rieder signed the document as a result of my refusal to do so, Jin told me to
just look the other way.

Continued concerns about ABS CDO valuations

96. Throughout the rest of October 2007, I remained concerned about the falling
values of ABS CDOs and the failure of RBS Greenwich to reflect this in its
marks, and I carried on my research into relevant market information on this
issue. I also continued to send the results of my research to the relevant
people in RBS Greenwich to ensure that they were aware of the market
information relevant to the portfolios they were responsible for, and to express
my views in emails and discussions with colleagues.

97. On 11 October 2007, I sent to GCM Risk {RBS143549} a Bloomberg News

article {RBS143550} and spreadsheet {RBS143551}, regarding Moody’s
downgrade that day of $33.4 billion of subprime bonds, noting in my email how
much of the downgrades covered AAA to A rated bonds, and that that would
have implications for high-grade ABS CDOs.

98. On 12 October 2007, I circulated to GCM Risk {RBS292991} a Moody’s

presentation on RMBS and CDOs, noting that Moody’s warned to expect an
October 2007 review of ABS CDO ratings, as impacted by RMBS/ABS

21
 downgrades (page 39) {RBS292992}. The same day, I sent to the same email
list {RBS303033/17} an article reporting that Moody’s indicated that some
CDOs may be downgraded without review or watchlisting. Matera replied to
that email commenting that he agreed the downgrades were very significant
and would affect valuations. I also sent an email to Jin and Gaskell that day
{RBS433342} sharing my discussions with traders who had told me that their
super-senior ABS CDO tranches may well have fallen further. I attached
research {RBS433343; RBS433344; RBS433345; RBS433346; RBS433347}
showing Goldman Sachs was offering triggered, junior AAA ABS CDOs with
marks in the upper 30s cents in the dollar and A and BBB rated ABS CDOs
were now trading at prices between 10 and 25 cents in the dollar.

99. On 13 October 2007, I circulated to GCM Risk {RBS293019} securitized

products research from Lehman Brothers {RBS293020}. I highlighted that it
warned (on page 3) that the recent Moody’s downgrades would impact
mezzanine-ABS CDOs and that it projected very high default rates for
subprime borrowers if they were unable to refinance at their adjustable rate
mortgage reset, i.e. when the initial lower rate on their mortgage came to an
end. I later (on 16 October 2007) re-sent the Lehman Brothers article to Rieder
{RBS143974} to reiterate the point. Rieder acknowledged receipt of that email,
replying “thanks” [VH1/2-4]. On 16 October 2007, I forwarded to GCM Risk
{RBS143865} a Bloomberg News article regarding Standard & Poor’s
downgrade on 402 classes of US RMBS backed by first-lien subprime
mortgage loans issued during the first three quarters of 2005. I commented in
my covering email that this would force more convergence in the pricing of
2005 deals compared to 2006-2007 deals among subprime ABS and possibly
their resultant ABS CDOs. While 2005 vintage subprime assets had been
viewed by the market as better quality than those from 2006-2007, the
downgrades to the 2005 vintages meant that the prices of those vintages were
likely to fall to match the prices of the 2006-2007 vintages. This was relevant
as RBS Greenwich’s portfolios contained mainly 2006-2007 vintages.

100. On 17 October 2007, I sent to GCM Risk {RBS144014} an extract from

some UBS research regarding SIVs and ABS CDO downgrade risk. Jin replied
asking me whether there was a market consensus on whether the recent spate
of downgrades was justified by the actual projected performance or whether

22
 there was an overreaction, indicating that his guess was that it was the former.
I responded with my view that it was the former i.e. that the severity of the
downgrades were justified {RBS634280}.

101. On 18 October 2007, I sent to GCM Risk {RBS144204} some Citibank

structured credit research {RBS144205}, noting that on page 21 they had
suspended their commercial real estate and ABS CDO spread quotes, as
Merrill Lynch, Morgan Stanley and others had done. I commented that “this
limits the ability to price-verify not only cash and synthetic CDOs, but also CDO
CDS”.

102. Also on 18 October 2007, I sent an e-mail to Jin, Gaskell, Rieder,

Matera, Dhaliwal and Asare {RBS144316} noting a conversation I had had with
the senior MBS/ABS/real estate risk manager at Merrill Lynch, Steve
Cadenhead. Merrill Lynch had recently taken heavy losses on its super-senior
ABS CDO portfolio, concerning cumulative loss assumptions for 2006-2007
vintage subprime ABS and commenting that markdowns of super-senior ABS
CDOs to levels of 50 cents in the dollar which had been rumoured in the
market may yet be insufficient.

103. Against the background of these concerns, we held an IPV team meeting
on 19 October 2007. Prior to the meeting, I circulated {RBS634682} a number
of reports regarding different types of exposures {RBS634683} {RBS294921}
{RBS294922} {RBS294923} {RBS294924} and commented that I wanted my
team to be ready to identify products where it was more difficult to do price
verification. This was because, as I explained in that email, in the environment
of unprecedented market illiquidity and opaqueness, senior management
needed to be made aware of the areas where price verification had become
extremely difficult to accomplish in a standard manner, as opposed to using
alternative methods such as NAV. At the meeting, I explained I wanted the
team to scour other trading books for potential over-marking and report back.
The reason I wanted senior management to be aware of areas where price
verification was difficult was so they could appreciate that the assumptions and
models that had been used to justify the higher marks were no longer valid and
that they needed to look at current market data that showed writedowns were
being taken. By this stage, opaqueness was giving way to the realisation in the
market that the default losses on subprime RMBS were inevitable, and

23
 consequently so were the defaults on the ABS CDOs containing them. This is
why other institutions started to take large writedowns by October 2007.

104. On 22 October 2007, I sent Jin and Gaskell an email {RBS144586}

attaching a Citibank report on MBS and Real Estate ABS {RBS144587}. In my
covering email I highlighted that the market no longer viewed the weakest ABS
CDOs as going-concern cashflow-style deals, but that they were now behaving
effectively as distressed market-value CDOs. This meant that subordinate
tranches of ABS CDOs were being marked down to 1 x the annual coupon, i.e.
assuming that the value was equivalent to the receipt of one year’s interest
after which the mortgages underlying the tranche would default with no
recovery from the underlying collateral. Super-senior tranches which might
benefit from any available sale proceeds in a liquidation might be worth 50
cents in the dollar or less.

105. On 24 October 2007, I sent a Dow Jones Newswire entitled “3Q End
Total ABS CDO-Related Exposure $15.2B” {RBS297009} to Jin, Gaskell,
Rieder, Dhaliwal and Asare, commenting in my covering email that although
some of the exposures could be pre-2006 vintage deals, in the context of the
$7.9 billion writedowns “one would wonder if its super-senior tranche
markdowns were any less than 25:00”. [VH1/5-38]The same day, I commented
in an email chain {RBS144881} with Jin, Gaskell, Rieder, Dhaliwal and Asare
regarding an LSD model analysis of RBS Greenwich’s super-seniors that given
the effective shutdown of the existing refinancing market for existing mortgage
borrowers and their tendency to default well before reset, the potential
cumulative losses for 2006/2007 subprime vintage ABS deals seemed easily
able to hit the mid-teen percentages or higher, and that the ABX indices
reinforced this outlook. I commented that I wondered if the ABS loss
assumptions within the recent analysis, which put the marks across all assets
and tranches around the low teens cents in the dollar, were sufficiently
stringent.

106. On 26 October 2007, I received an email from Asare in which he stated

that he was amazed that senior management had refused to acknowledge the
full extent of RBS Greenwich’s valuation exposure for so long {RBS298304}.

24
 The ABN AMRO acquisition

107. Before 2007, ABN AMRO had not really been known for being in the
ABS CDO business at all. Then in 2007, just as many of the other banks such
as Merrill Lynch, Citibank and UBS were trying to decrease their exposure to
ABS CDO business, ABN AMRO started to build up its holdings dramatically.
Institutions which were trying to get out of the ABS CDO business, just
unloaded their assets onto ABN AMRO and as a result ABN AMRO built a
massive portfolio of very poor ABS CDO assets.

108. I cannot recall the exact date, but at some point during my employment
with RBS Greenwich I was given a hard-copy spreadsheet which contained all
of the ABN AMRO CDO (and similar asset) positions. I believe that this was
after the ABN AMRO merger had taken effect (on 8 October 2007). Asare and
Shrivastava told me that a CD ROM had been obtained from ABN AMRO as
part of the due diligence materials provided to RBS for the merger with ABN
AMRO. I was asked to look at the positions and see what was in the ABN
AMRO portfolio.

109. As mentioned in paragraph 80 above, Gaskell told Rieder, Jin and me

not to put anything on email regarding the writedowns on CDOs, as nothing
should come out of the work I was doing that could upset the ABN AMRO
merger. Cameron, Crowe, Jin and Rebonato were already analysing RBS
Greenwich’s marks and he did not want anything to disrupt them.

110. I recall that Deloitte, the auditors of RBS visited the office at Greenwich. I
saw a representative from Deloitte in the office with Mathis. My IPV team told
me that a meeting had taken place with Deloittte to discuss IPV, but I was not
invited even though I was Head of IPV. I raised my apparent exclusion with Jin,
but he did not seem concerned, and so I did not pursue the matter as I had
other priorities.

111. I had been worried about the $5 billion of ABS CDO exposures held at
RBS Greenwich. I became even more worried when I saw the ABN AMRO
exposures as stated in the documents that I saw at the time. My recollection is
that there was something like a further $35 billion of exposures to these asset
classes. I remember saying to Gaskell, Jin, Rieder, Asare, Shrivastava,
Matera, and Mathis words to the effect that: “If we can’t handle $5 billion in

25
 RBS, how can we handle another $35 billion dollars?”. I told Jin, Gaskell,
Matera, Mathis, Gerhard, and others that “this merger will kill us”.

112. I reached the view that even if I managed to convince RBS Greenwich to
mark its portfolio correctly, it would be of small significance compared to the
ABN AMRO positions and that even if RBS Greenwich were to re-mark its own
ABS CDOs appropriately, the writedowns required from the additional ABN
AMRO portfolio acquired in the merger could be fatal to RBS.

113. I remember that the $35 billion or so of assets held in ABN AMRO was
held at a notional carrying value of around $34 billion, indicating it was marked
very close to 100 cents in the dollar. I concluded that this could not have been
a correct set of valuations, given what was happening in the rest of the market.

114. It appeared to me that the flawed price verification process at RBS

Greenwich gave senior management within the RBS Group an over-inflated
view of what RBS’s assets were worth, and so led to an inflated view of what
the ABN AMRO ABS CDO assets were worth, and thus an inaccurate view of
the financial risks associated with the ABN AMRO merger.

Other Concerns

115. As mentioned at paragraph 33 above, my focus at RBS Greenwich was

on the IPV of the CDO portfolios, driven by the immediate risk priority. Although
ultimately Jin and Gaskell were unwilling to act on the mis-marking in 2007,
they recognised that the mis-valuation of those portfolios would dwarf all other
potential mis-valuations on the CMBS and commercial loan portfolios and the
non-agency and subprime RMBS underwriting business, hence why they
asked me to concentrate my work in that area.

116. However, I had other concerns about risk management at RBS

Greenwich. Chris McCormack (“McCormack”) ran the CMBS trading desk. I
discovered that the CMBS and commercial loan traders were mismarking their
positions to suit their own devices. They significantly marked down the
commercial fixed loan portfolio by 10% to use as a “rainy day fund”, or
“piggybank” that could be used to offset losses in other portfolios. This meant
that, if there were unexpected losses on other portfolios, they could undo the
under-marks on the commercial fixed loan portfolio thereby showing an

26
 apparent profit and offsetting the unexpected losses. This “rainy day fund”
could be deployed if necessary to ensure that profit and loss targets were met
and annual bonuses achieved, and if not, held over until the next year. This
practice would misleadingly show a stable profit and loss picture in otherwise
volatile markets which risked misrepresenting the volatility of RBS Greenwich’s
positions to shareholders and regulators. I attended a meeting on 5 October
2007 with McCormack and Perry Gershon (“Gershon”) to discuss the loan
marks in which they admitted the marks were understated as a “piggybank” to
offset against losses later. Afterwards, I told Jin this was intolerable, but he told
me it was accepted practice at RBS Greenwich. As my concerns mounted over
the course of that month, I later (on 31 October 2007) emailed myself a note of
that meeting and my conversation with Jin {RBS303033/10}.

117. Other areas which gave me cause for concern included commercial
mortgages under Mark Finerman (“Finerman”) and in relation to residential
mortgages and subprime mortgage warehousing under Weibye and Alt-A and
subprime mortgage securities under Eveland. As US home prices fell in 2007,
non-agency (prime or Alt-A) and subprime home borrowers began to default
very rapidly, sometimes just months after origination. Banks engaged in
origination and securitization found that their mortgage loan inventories,
underwritten aggressively on the basis of sustained home appreciation, were
unexpectedly experiencing default losses, with increasing amounts of
mortgages unsuitable for securitization and worth substantially below principal
value. Concerned of these risks in the RBS mortgage underwriting business, I
examined the RMBS and raw loan trading portfolios of the RBS Greenwich
traders.

118. On 29 October 2007, I found that Eveland had substantially over-marked

many of his prime and Alt-A RMBS tranches, not appropriately reflecting high
underlying loan delinquencies and default losses. Where investors had also
bought tranches from the same deals, they also experienced losses. I
discussed my analysis with Eveland on that date {RBS303033/42} [VH1/39]
and he agreed to mark them down, although he told me he would need to find
gains to offset them and get approval from Walsh. I was concerned that this
was an evasion of market risk and valuation risk controls, again approved by
front office management. To state the obvious: any exposure marked to fair

27
 value that had reduced in fair value needed to be marked down, whether or not
there was a gain elsewhere and irrespective of how palatable the loss was to
individuals involved or senior management. Marking was not a strategic
management decision, it was an accounting requirement, but RBS Greenwich’s
culture was directly counter to this basic accounting requirement.

119. On 31 October 2007, Harris emailed Jin, Gaskell and me to let us know
Weibye would be marking down both his Alt-A and subprime books for month
end in response to Harris’s monthly IPV email of exceptions. Harris noted that
he thought Weibye would be using the $16 million “print” (i.e. recognizing $16
million in the profit and loss on the book) on the SVHE-OPT5 deal to offset the
markdowns {RBS775091}.

120. On 1 November 2007, I found that Finerman, Gershon and McCormack

had not reported the origination fee income from the GCCFC 2007-GG11 deal
and raw commercial loans, and then later reported it in order to offset other,
unrelated trading losses and thereby “smooth” profit and loss volatility.

121. Both Eveland and Weibye told me that they had to wait before taking
losses and that they could only take losses if they had been signed off by
senior management or if they could demonstrate equal gains in other portfolios.
I emailed Jin on 1 November 2007 to report my concerns regarding these
practices, stating that if I was to get comfortable with monthly IPV sign-off, such
issues must be resolved rather than tolerated {RBS303033/57}.

Resignation

122. Having refused to sign off on the September month-end IPV report, by
the end of October 2007 I knew that pressure would be mounting on me in
November to sign off the October 2007 month end IPV report. I still did not
agree with the CDO, RMBS, ABS, CMBS, and commercial loan trader marks,
their resultant effect on profit and loss, or the risk reporting on these products. I
made it clear to Jin, Rieder, Mathis, Levine, and others that I would be unwilling
to sign off anything which I did not agree with. At this stage, the super-senior
ABS CDO tranches were worth less than 50 cents in the dollar, as shown by
the JP Morgan and Citibank CDO research that I refer to at paragraphs 79 and
104 above, and their value was still going down.

28
 123. On the afternoon of 26 October 2007, I had a long discussion with Jin
during which he agreed with me that the super-senior ABS CDO marks were
too high. He cited the information which had led him to this view as Merrill
Lynch’s writedowns of its super-senior ABS CDO tranches, market analysis
provided to him by Dhaliwal, Asare and me, Matera’s recommendations and
the ongoing credit degradation of the underlying subprime ABS following the
Merrill Lynch write downs. He told me that senior management (which I took to
mean both within RBS Greenwich and in London) were unwilling to post the
loss because it might disrupt the ABN AMRO integration. I told Jin that I could
not sign-off on the October IPV report if the ABS CDO tranches were not re-
marked properly.

124. I told Jin that the disclaimer (that had appeared on the September 2007
month end report and I assumed would be replicated on the October 2007
report) was false. The disclaimer read “results do not cover the independent
price verification of ABS Super-seniors (mkt value $3.5bb mkt value) which due
to lack of market liquidity and transparency has not been performed since
07/31/07”. Jin’s response was that if the positions stayed mis-priced because
of senior management inaction, Risk Management might need to resign en
masse. I sent myself a record of this conversation the following day
{RBS298987}.

125. On 29 October 2007, Asare emailed me research from Derivatives Week

{RBS303033/37} indicating that dealers were now marking down super-senior
ABS CDO towards 25 cents in the dollar. I told Gaskell this and he admitted
that the recommendation to mark RBS Greenwich’s positions down to 75 cents
in the dollar was now outdated, but that he did not feel Risk Management
needed to act further until senior management had decided what to do. I made
a note of this conversation in an email to myself {RBS299532}.

126. Around this time, on instructions from Cameron, Jin had asked Dhaliwal
and others to justify the marks that they were taking. On 29 October 2007, Jin
forwarded Dhaliwal, Shrivastava and me an email chain {RBS300218} between
himself, Cameron and others. During an RBS/ABN Offsite meeting, Cameron
had made a request for a “plain english” note regarding why “the Super-Senior
position end result is so sensitive to changes in the underlying assumptions”.
The responses from Rebonato and Jin explained the issues with the BBB

29
 tranches losing their value and the huge impact on the value of super-senior
tranches of even a very small rise in defaults above a certain level, and the
“inherent flaw” (in Jin’s opinion) with the marks being so reliant on the LSD
model projected credit losses. Jin suggested that instead they should be
marked comfortably below the central assumption.

127. On 30 October 2007, I sent an email to Mathis attaching an Economist

article that she had requested to see regarding AAA CDO default losses and
market depreciation to marks at around 20 cents in the dollar {RBS303033}.
She acknowledged receipt of the email, replying ‘thanks’.

128. The same day I spoke with Jin and Rieder about my concerns. Jin
praised my performance and told me that I had performed above and beyond
his highest expectations despite both insufficient resources and senior
management’s unwillingness to re-mark the super-senior ABS CDO tranches. I
urged Jin and Rieder to convince senior management to mark down the super-
senior ABS CDO tranches by at least 50%. Jin and Rieder said that while
waiting for management to approve such action, I should sign off the October
2007 month-end IPV report even if the marks were not corrected to keep our
processes going without visible disturbance. I told Jin, via email, that such a
course of action would be intolerable to me {RBS302355}.

129. Consequently, I told Jin that I believed that RBS Greenwich had
breached its obligations to me as per my contract, and proposed to resign. He
told me that he was going to London with Levine for management meetings
and asked me to wait until he returned the following Monday (5 November
2007) in case senior management in London agreed to act on my
recommendations of writedowns. I told Jin that the writedown to 75 cents in the
dollar that was being considered was too minor in light of the market sell-offs
that had occurred during October 2007. After the conversation with Jin I
emailed him to say I would wait until Monday to see what might be decided
(referring to what senior management in London would decide about the
marks). I emailed myself a record of this conversation on 31 October 2007
{RBS300910}.

130. On 31 October 2007, I sent an email to Asare commenting that I had

repeatedly told Mathis that senior management should approve a substantial

30
 re-marking of the super-senior ABS CDO tranches to be in line with the marks
that the TABX BBB- and BBB index was showing. I noted that Mathis had
expressed hope of this happening before the final close of October 2007
financial reporting {RBS301201}.

131. On 1 November 2007, I sent Matera {RBS438988} some CDO research

by Citibank {RBS438989} noting that on page 14 it showed exposures to
mezzanine ABS CDO deals and their exposure to ratings-driven over-
collateralization haircuts, and on page 16 high-grade ABS CDO deals and their
holding buckets in ABS CDOs. The point I was making was that the structural
protections within ABS CDOs to allow more cash flow to the super-senior
tranches were no longer relevant. There was so little cash flow that there was
no money to divert, even up to the highest rated tranches.

132. In a conversation in my office on 1 November 2007 Rieder admitted to

Lin and me (I shared an office with Lin) that she should not have knowingly
represented in the September 2007 month-end IPV report sign off that no data
existed to challenge the marks. I recall that Lin was surprised that Rieder had
only accepted this at this later stage. I emailed myself a record of this
conversation on 2 November 2007 {RBS302355} which also included details of
my conversation with Jin and Rieder on 30 October 2007. She also said that
she wished she had not done so, and that she wished to be able to destroy the
distributed reports. I immediately saved a copy of the signed IPV report for
safekeeping, and emailed it to myself with the subject line “Sign-off for no ABS
CDO market data, September/2007……….contrary to fact” and annotating the
email to note that Rieder signed off the September report on 10 October 2007
{RBS303033/12}. I also annotated the disclaimer page to record my view at the
time that this was “not [sic] truthful disclaimer about no market data to
challenge marks” {RBS303033/14}, as I had discussed with Jin on 26 October
2007 (as referred to in paragraphs 123-124 above). Around that time, Rieder
also asked if I could destroy an e-mail about external market research
indicating that RBS Greenwich was drastically over-marking its CDO inventory.

133. On 2 November 2007, while he was (I believe) in London, Jin forwarded

me an analysis compiled by Brett Bishop (“Bishop”) which appeared to be
premised upon BBB/BBB- subprime ABS being worth between 60 cents and 80
cents in the dollar {RBS302809}. I was stunned by this analysis.

31
 134. I replied and told Jin that 10 cents to 25 cents in the dollar was more
appropriate. Jin responded that the 60-80 figure was just a “make up price” to
indicate why a liquidation value of super-senior positions should be a cap on
the value of super-senior positions. I sent myself an email recording my
thoughts about these “made up” prices and how using made up prices to
project the value of super-senior ABS CDOs was questionable, especially if
such a methodology was being used by senior management to attempt IPV. I
concluded by saying “I cannot tolerate signing off on such results”
{RBS302809}. While Jin’s e-mail stated that these figures were just indicative,
my concern at that time was that the figures could be used to justify the high
marks that RBS Greenwich had taken, as Dhaliwal and Jin were dedicating a
great deal of time to creating and justifying their analysis.

135. Jin told me at that time that the audience for the “made up” figures was
Cameron, Crowe, Tom McKillop (the Chairman of RBS), Rebonato, and
Whittaker. If these numbers were just for internal RBS Greenwich illustrative
purposes then I could see no reason why they would be communicated to
London other than to justify RBS Greenwich’s marks to senior management
there. Before the trip to London with Jin, Levine told me that he would discuss
writedowns with senior management. He asked me to wait until he got back to
see what writedowns he could offer me. Levine said he would communicate my
concerns to Goodwin, Cameron, Crowe and Whittaker. I do not know if he did
so, but when he and Jin returned, they said that they could offer to reduce
marks to 75 cents in the dollar. These marks were not good enough and were
still too high.

136. Although I do not remember the exact date, around this time I had a
conversation with Mathis in which she told me that it was her intention to move
the “bad positions” from the RBS Greenwich trading book into the London
banking book. Such a transfer would need to be recorded in RBS Greenwich’s
books at the fair value of the assets being transferred. I could not allow this to
happen at the prevailing, off-market valuations at which the ABS CDO portfolio
was being marked while I was still at RBS Greenwich and her proposal
strengthened my conviction that I should resign – I could not allow myself to be
associated with it, especially if the assets were transferred at the prices derived
from Bishop’s “made-up” numbers.

32
 137. If RBS Greenwich took struggling assets out of the trading book, they
would no longer be subject to the IPV regime applicable to the trading book
and would no longer be subject to the VaR regime for managing market risk.
Taking bad assets out of the VaR regime would reduce the number of
backtesting exceptions that were likely to happen when losses had to be taken
on those bad assets and would have the knock-on effect of shrinking the level
of risk weighted assets, artificially improving capital ratios. As it was, the
underreporting of ABS CDO and other losses meant that RBS Greenwich did
not trigger VaR backtesting exceptions, when taking fair markdowns would
have done so.

138. In the first few days of November 2007, I was told in conversations with
Mathis and Jin that if I did not sign off on the October 2007 month-end IPV
report then I should still remain at RBS Greenwich and “look the other way”.
When I refused, Mathis told me that if I did not like the marks that RBS
Greenwich had taken then I should simply not sign off and someone else could
sign off for me, as they had done the previous month. I told them that I could
not allow that to happen.

139. Much like in my conversation on 30 October 2007, I made it known that I

was prepared to resign rather than sign off incorrect marks. I had further
specific discussions about resigning with both Matera and Jin.

140. In my conversation with Matera, he told me that he and other traders had
spoken to Walsh, Levine and Mathis about writedowns but that they had been
rebuffed. Matera told me that he was going to resign as a result.

141. On 5 November 2007 I had a further conversation with Jin following my

discovery that CMBS and ABS traders (McCormack, Eveland, Gershon and
Finerman) had been “smoothing” financial results. Jin asked me to remain with
RBS Greenwich while he was trying to convince senior management to mark
assets down. I again told him that I could not sign off on the current marks. He
agreed with me that the senior management’s recommendation to mark the
ABS CDOs down to 75 cents in the dollar was still insufficient in light of my
view that we should immediately be marking well below 50 cents in the dollar.

142. Jin said that my proposed resignation was an overly drastic protest
against RBS Greenwich practices and that I had not allowed senior

33
 management sufficient time to act. I reminded Jin that other firms such as
Merrill Lynch, UBS and Citibank had observed sufficient market information for
them to re-price their super-senior ABS CDOs sharply lower by 30 September
2007 and that RBS Greenwich had no excuse to delay. I reminded him that this
delay created inaccurate financial, regulatory and risk reports. I promised to
think on matters overnight and give him my decision on resignation the
following day. I emailed myself a record of this conversation in the early hours
of 6 November 2007 {RBS303691}.

143. On 6 November 2007 I met with Levine to discuss my concerns. I asked

him how we could allow our super-senior ABS CDO tranche prices to remain
flat despite serious market disruption and multi-billion dollar writedowns by
competitors. I reminded him of our mark-to-market obligations and said that I
could not tolerate actively signing off on, or passively overseeing, the price
verification of those positions. He agreed that there was a problem which he
was trying to solve with senior management during their meetings in London
and asked me to be patient. He said that marks would be reduced towards 75
cents in the dollar before the October 2007 month-end books were closed and
said that if senior management came back with a proposal he found
unjustifiable then he would resign himself. I said that even the 75 cents in the
dollar mark would be intolerable to me as the open market data was pointing
towards a valuation of lower than 40 cents in the dollar. I emailed him that
evening {RBS304522} to thank him for the meeting and told him that my only
objective was to do the right thing for shareholders, colleagues and ourselves.
I also emailed myself a record of the conversation from earlier in the day
{RBS304522}, and emailed Jin a summary of our conversation so he was
aware of the discussion, in particular Levine’s promise to address the issue
with management in London {RBS304713}.

144. Between 6 and 8 November 2007 I attempted to carry on as normal in

my role and continued to contact colleagues with my concerns over marking
and writedowns:

a. On 6 November 2007, I sent Jin and Gaskell {RBS303910} copies of

Citibank research on MBS and Real Estate ABS {RBS303911} and some
ABS CDO research from JP Morgan {RBS303912}, noting that these
documents reaffirmed how the market was regarding 2006/2007

34
 mezzanine ABS CDOs as adversely liquidating vehicles and thereby
pricing and offering super-senior tranches far below 50 cents in the
dollar, in line with my prior analysis. Shortly after that email, I sent
another to Gerhard and Matera {RBS303955}, attaching the JP Morgan
research {RBS303956} and commenting that the super-senior tranches
of 2006/2007 deals were worth around 33 cents in the dollar under the
very likely scenario of event-of-default dissolution and asset liquidation.
Following up on a conversation I had had with Gerhard, I commented
that I agreed with him that their effective sale values may be far lower.

b. On 7 November 2007, Eric Li (Credit Markets) circulated a Creditflux

article {RBS304826} reporting that Citibank strategists had reported that
they expected to see around $64 billion of dealer writedowns emerging,
the bulk of which was likely to come from exposure to super-senior
CDOs of ABS. I forwarded this email to a number of people within my
own team {RBS304825}.

c. On 7 November 2007 I emailed Mathis and Jin showing that McCormack

and the CMBS team had undervalued their loans by 10% {RBS146995}.

d. On 7 November 2007 I emailed Harris, copying in Lin and Jin, chasing to

see if the portfolio of delinquent, second-lien mortgages in the SVHE
2007-WMC1 deal that he had emailed me about on 31 October 2007
(referred to at paragraph 119 above) had yet been marked down. I had
challenged the marks with Weibye as early as 16 October 2007
{RBS442449}. The mortgages were marked at around 88 cents in the
dollar. However, delinquent second-lien mortgages tend to recover
minimal, if any, principal when liquidated. I emailed Weibye on 31
October 2007 to ask whether he had re-marked them yet. I chased him
again via email on 7 November 2007, and spoke to him on 8 November
2007, and he confirmed he would be marking them down to single digits
by 30 November 2007. I reported this via email to Jin, Lin and
Shrivastava, and then forwarded the chain to Rieder. She replied that we
should mark where we believe the value is (if any), even if that resulted
in aggressive variance (i.e. overstated gains or understated losses). I
replied to Rieder, Jin, Lin and Shrivastava, commenting that I agreed
with Rieder, but on that basis the marks should have been updated

35
 before 31 October 2007. The full email chain can be found at
{RBS665712}.

e. On the evening of 8 November 2007, McCormack emailed a number of

people, including me, to say that his CMBS trading team had gone
through the portfolio of floating rate loans and B-notes as well as Fixed
Rate B-notes and that they had taken new marks. The result of these
marks was that they would write Floating Rate Loans and B-notes down
$6 million, and wrote up $6 million in the Fixed Rate note account. This
seemed like a remarkable coincidence to me and a likely further example
of the ‘smoothing’ discussed above, and I queried it with Jin and Gaskell.
I told them that the fixed-rate loans should be marked higher by at least
$15 million and that the floating rate loans should be marked much
lower. I told them that this near-exact coincidence troubled me
{RBS305941}.

145. I made up my mind and sent Jin my resignation letter on 9 November

2007 {RBS444240}. This read:

“Dear Bruce: Thank you for the recent opportunity to join as a Managing
Director in Risk Management, at RBS Greenwich Capital Markets. However,
the actual duties, resources, and responsibilities as Head of Independent Price
Verification have differed substantively from the duties upon which we had
agreed, as our contract recites. My expected oversight and sign-off
responsibilities for monthly price verification would be intolerable, based upon
persistent discrepancies between trader marks and analytical fair-market
values. I therefore must choose to resign today, in conjunction with the notice
period stated in my hiring contract. Of course, I will avail myself to assist you
in the transition process. Thank you.”

Jin asked me to reconsider and told me that he wanted me to stay. He told me

that he agreed with my findings and the mark levels I was proposing, but that if
I would just look the other way and hold off on my resignation then I would
receive a “good bonus” at the end of March 2008.

146. Levine also spoke to me about my resignation and asked me not to

resign. He told me that he was sorry to put me into “legal harm’s way”. I
understood this to mean that he was sorry to ask me to expose myself to legal

36
 liability by signing off on incorrect valuations and market risk reports. However,
I had made my decision and I left the RBS Greenwich office on the afternoon of
Friday, 9 November 2007.

147. By the time I resigned I believe that total losses in RBS Greenwich, if
everything I saw had been marked down and written down correctly, would
have been at least $4.5 billion. There was at that time roughly $5 billion of
notional of super-senior tranches that was being marked at 95 cents in the
dollar, but I believed to be worth even less than 50 cents in the dollar, around
20 cents in the dollar, as the market was falling very fast in late October and
November 2007. CDOs alone would account for $3.5-$4 billion.

Post-resignation

148. Matera resigned at the same time as me. From comments he had made
to me previously, I understood that he resigned for the same reasons as me,
being unable to accept senior management’s refusal to apply appropriate
marks to the ABS CDO portfolio at RBS Greenwich.

149. On its 6 December 2007 trading update [VH1/40-48], RBS Greenwich

publicly disclosed marks in the region of 75 cents in the dollar in its 6-K SEC
filings. I received telephone calls from friends who were still at RBS Greenwich
telling me that the trading floor in RBS Greenwich was up in arms as the marks
in that report made them look like a joke. Traders at other banks were calling
up RBS Greenwich traders to make fun of them by offering to sell them
products at the RBS Greenwich mark levels knowing how over inflated the
prices were. I received a call from Andrew P. Wilson, a CDO trader at JP
Morgan, to tell me what a joke the marks were in the 6 December 2007 trading
update.

150. Around that time I became aware from Asare that RBS had pulled their
super-senior CDOs out of the VaR analysis. My understanding was that, in line
with my earlier conversation with Mathis, they were moved from the RBS
Greenwich trading book to RBS’s London banking book. RBS Greenwich
would have needed an IPV sign off on the marks at which any transfer was
made. If the transfer had been made at the marks I considered realistic, there
would have been a profit and loss disaster in the RBS Greenwich trading book
and people would have lost their 2007 bonuses.

37
 The FSA Report

151. In November 2011 I was contacted by the FSA who wanted to speak to
me about the report they were compiling about the failure of RBS. They told me
that they had been trying to track me down for 4 years and that they had not
been able to find me. They told me that RBS had informed the FSA that they
had no details for me and they could not give the FSA any help in contacting
me.

152. I found this strange as I had not changed my address, phone number or
email address since leaving RBS Greenwich and they would have had my
details on file. I also had a LinkedIn page and had a number of friends and
associates within the industry.

153. The FSA contacted me in the early hours of the morning on Wednesday
23 November 2011, the night before Thanksgiving, and left me a voicemail to
tell me that I had 24 hours to respond to their requests. They said that they
needed to obtain my consent for passages in their report that referred to me.
They told me that they had drafted the report with RBS’s assistance.

154. In a subsequent telephone conversation, the FSA told me that they

wished to remove the references in their draft to my resignation letter and in
effect asked me to retract the contents of my resignation letter and disavow the
work I had done while at RBS Greenwich. They asked me to say that my work
in IPV was incomplete and inaccurate and so not worthy of inclusion in their
report. I refused to do this as this would not have been correct. A number of
phonecalls took place between the FSA and me on 24 and 25 November 2011
in the early hours of the morning and so I cannot recall the exact details of
what was discussed in each particular call. At various points I spoke with
Vanessa Smith (“Smith”), William Amos and John Upton.

155. Following those calls, I sent a number of publicly available documents to

the FSA via email demonstrating that the conclusions I had reached in 2007
had been correct [VH1/49-55] but they told me that they would not be material
to the FSA’s conclusion and so would not be included

156. On 29 November 2011, Smith emailed me two marked up draft

paragraphs from the draft report [VH1/56-58] and asked me to comment on

38
 them. She explained that the information was drawn from a previous
investigation and provided a summary of its findings.

157. The draft (referencing paragraphs 131 and 181 of part 3 of the report)
removed passages which stated “the independent price verification (IPV) for
RBS’s trading book super-senior CDOs positions did not occur for the months
between August and November 2007” and cited this as the cause of my
resignation and replaced them with wording saying that there was a “lack of
clarity” concerning the correct valuation of super-senior CDOs which was cited
as the cause of my resignation. This made no sense, as my team and I had
conducted proper IPV on the super-senior CDOs during my tenure and there
was ample market clarity about these assets being marked at too high a value.
I resigned because I was expected to take responsibility for an IPV process
which did not operate properly to address the differences between trader
marks and analytical fair market values, not because there was a lack of clarity
over super-senior CDO valuations.

158. Smith sent a further email that day attaching a re-draft of the sections
following my comments, and asked for my consent to the wording “the
Managing Director for Risk Management at RBS Capital, Victor Hong,
resigned” and stated that other parts of the draft paragraph did not require my
consent.

159. I responded to Smith providing amendments, and asked the FSA to

remove the wording suggesting there was no market data to support the
valuations of the super-senior CDOs [VH1/59-64] In my covering email I
pointed out to the FSA that throughout my tenure at RBS there was ample,
clear, transparent, corroborated, independent data to test the realizable market
sale value of super-senior ABS CDO tranches, as per the market data I had
sent to the FSA. Smith responding asking me if I would consent to a further
minor change from “at this time” to “On 8 November 2007” (in reference to my
resignation) and I agreed. On 1 December 2011, Smith confirmed that new
wording had been approved internally and I heard nothing further from the
FSA.

160. The FSA’s Report on the Failure of RBS was published shortly
afterwards in December 2011. I noted that paragraph 181 of part 3 of the final

39
 version of the report said that there were no actionable breaches of controls
indicated at RBS Greenwich after the point where the passage stating that
“independent price verification (IPV) for RBS’s trading book super-senior
positions did not occur during the period from August to November 2007” had
been deleted. I also noted that paragraph 131 of part 3 of the final published
version of the report no longer contained the statement from the draft sent to
me by Vanessa Smith stating “The accompanying note [to my resignation
letter] from Carol Mathis, the Chief Financial Officer of RBS Greenwich Capital
and GBM North America indicated that her understanding was that the
resignation was in response to a conclusion not yet being reached on the
valuation of super-senior CDOs positions.” which surprised me as Mathis’s
note and understanding were broadly correct.

STATEMENT OF TRUTH

I believe that the facts stated in this Witness Statement are true.

Signed........ Victor Hong ................................................

VICTOR HONG
Date: 14 April 2016

40
 Appendix to Witness Statement of Victor Hong

ABS Asset Backed Securities, a structured credit product backed by

credit assets such as mortgages or loans.

CDO Collateralised Debt Obligations, meaning “A type of structured Asset

Backed Security whose performance, value and payments are
dependent on a portfolio of referenced underlying securitised
assets. Assets are typically corporate loans and bonds, but can
include Mortgage-backed Securities, Residential Mortgage-backed
Securities or any other type of Asset-Backed Securities” (taken from
p. 439 of the FSA Report “The Failure of the Royal Bank of
Scotland” published December 2011).

CLO Collateralised Loan Obligations, a financial instrument similar to a

CDO, but where the securitised assets are loans.

CMBS Commercial Mortgage Backed Securities, meaning securities which

are backed by mortgages granted over commercial real estate.

LSD Loss Severity of Default cash-flow model

MBS Mortgage Backed Securities, typically RMBS or CMBS

RMBS Residential Mortgage Backed Securities, meaning securities which

are backed by mortgages granted over residential real estate.

SIVs Structured Investment Vehicles, also known as conduits, which are

legal entities established by banks or large corporations for the
purpose of acquiring portfolios of assets which, in turn, are financed
through the issuance of asset-backed commercial papers backed by
the assets held by the SIV/conduit.

VaR Value at Risk, a measure of market risk based on a statistical model

which uses historic market data.

41
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