Daniel J. Castro Jr., a globally-recognized expert in fixed income and structured finance markets, joins the discussion on IMS Insights Podcast to share his thoughts on a wide range of subjects. He discusses best practices for expert witness engagements in high-stakes litigation, talks about the importance of good mentorship and provides career advice for younger people just starting out in the field, and looks ahead to the emerging litigation trends he’s seeing in the wake of the COVID-19 pandemic
Teresa Barber: Dan, can you tell us a little bit about your background? How did you first get engaged specifically as an expert witness?
Dan Castro: Well first, just (to give a little) background, I've been doing structure finance for over thirty years; I was actually involved when the market started. At its inception, I worked on one of the very first deals – and I (don’t) want to date myself here – back in the mid-80s. And since then, I've been in mortgage origination, underwriting servicing, (and) mortgage banking. I ran research – the research group at Merrill for twelve (or) thirteen years. I've also been a banker, (a) rating agency analyst, and I've been on the investment side as a collateral manager, (a) hedge fund manager, and (a) fund manager – so a lot of background there.
Dan Castro: Back in, I think it was 2008, when I was working on the buy side, I got a call from a guy at a hedge fund up in Connecticut, and he said they needed help because they had some litigation on a CDO (Collateralized Debt Obligations) that they'd done. And he (was) like, "Well, you're one of the biggest CDO managers out there, so we think you can help us." I go, "Well, sure. What do you need, some data?" And they said, "No, we need an expert witness." I was like, "What's that?" I didn't know what that was at the time.
Dan Castro: And he explained what they wanted. He said, "Well talk to our lawyers, and they'll give you more details." And then he said, "And they'll pay you pretty well." So I talked to him, (and) I said, "I can do this." So, I started working on my first case, and it turned out pretty well. I did really well, and they did well on the case, and I started doing that on the side. I did that for three or four years, and I think it was 2011 when I had my last, what I'll call Wall Street job, (where) I was actually an employee.
Dan Castro: And then, I had my contract ended and I wanted to move on. I didn't know what I was going to do next. So, I thought, "Well..." I was working on a case like, "I'll do this until the next thing comes along." And then after the financial crisis, that was right about the time that the litigation just exploded. And all of a sudden, I'm getting inundated with requests. I got one of the major banks call(ing) me — and they had like seventeen cases — because they'd inherited another bank during the financial crisis in the consolidation, and they had literally seventeen cases for me to work on.
Dan Castro: And it just went from there. And then I had things on the auto side, (and) on the credit card side. Ultimately, probably the biggest one I ever worked on was the Lehman bankruptcy. And they interviewed a lot of people for that. And I thought, "Well, why not? I'll talk to them." And then they chose me to do it, and that was huge. I mean, the mortgage exposure to Lehman Brothers on that was around 220 billion, so (that was the) biggest thing I’ve ever done out there. And there's still stuff from the financial crisis (that’s) still out there a little bit.
Teresa Barber: Trickling (out) as we look at the next peak.
Dan Castro: Yeah.
Teresa Barber: So, clearly you enjoy working as an expert witness and working with attorneys on litigation? Can you talk to us about what you do enjoy about working as an expert witness?
Dan Castro: Actually, I like the whole process. But it's going to sound funny, because the thing(s) I enjoy the best (are) trials and depositions, and most experts think that's the worst part. I'm just the opposite – I think that's the best part. And the reason I say that is well, one, I have to know every detail about the litigation, the case, the material, all of it. And I've got people on the other side that are going to attack everything I've said – and not just in that case. They will look at everything I've done in my career. They'll bring (up) research I wrote ten (or) fifteen years ago, (or) interviews – and I've done lots of print interviews that have been (published). But I've also got a dozen TV interviews I've done on the major networks – on Bloomberg, on all the CNBC (shows), all those people.
Dan Castro: And they'll pull out something I said in like, 2006 or 2008, and say, "Well, this is what you said before the financial crisis." And I'll say, "Well, at the time that was true, and things change. So, clearly, some of that stuff changed over time. But when I said it, it was spot on." So, they'll bring up stuff like that, but I actually like that. And the people on the other side are generally very bright, very smart, and they know their material. And that forces me (to be better) ... And I like the competition, throw your best at me and let's see how I do. And it's been fine.
Dan Castro: So, I really do enjoy that part of it. And I may like all the rest of it, but that's my favorite part, because then I get to find out, ”Okay, how well did I do my work here?” That's where you get tested.
Teresa Barber: It's great. For someone who’s new, because you can be a very established professional, or executive in your industry or space, but working as an expert is a little bit different. For someone who's new to this space, who's just been engaged as an expert witness, what advice would you have for that person?
Dan Castro: I think the first thing is (to) make sure you understand what your role is. Because on a lot of these cases, if it's a smaller case, you might be the only expert. But on most of the cases I've worked on, they're pretty big matters. There might be three, or four, or even five other experts just on your side of the case and an equal amount on the other side. So, if they pick, let's say, five people to work on it, well, that means that they gave me one thing to do, and they've got other people doing other things. You want to make sure that you don't step on somebody else's toes, and you don't go beyond the parameters. So, you have to have a clear understanding with the law firm, like, “What are the parameters?”
Dan Castro: Then, you have to make sure that you're aware – and it goes back to what I said a few minutes ago – of everything you've ever said or written that might be used against you. Because they will throw everything at you that they can, and they'll take it out of context. And you need to put it back into context when that comes up.
Dan Castro: And the other thing is, don't say or write anything unless you're absolutely confident you can support it. If you can't support it, don't go there. That's the big thing. But I think that the top thing is just to understand your role and make sure that (both) you and the law firm understand what they want you to do. Because, like in my case, I've done so many things (that) I could talk about the entire case, usually. But they don't often want me to, (because) sometimes they have other people (and they want) that other person (to) focus on it.
Dan Castro: So, I have to make sure that I stay away from that, (and) that's usually the hardest part for me. I mean, now it's easy (for me) because I've done it for so long. But when I first started, it was very difficult, because I didn't fully grasp what was going on.
Teresa Barber: That makes sense. What about for a litigator and attorney who's working with an expert witness for the first time – what tips would you provide to that attorney?
Dan Castro: Well, the first thing is to understand the expert. And what I mean by that is, make sure you understand what his or her strengths are, and what his or her weaknesses are. And they're both equally important, because you want to emphasize the strengths and go to their strengths. And to the extent they have weaknesses, you want to minimize those or try to avoid those things. And then, you need to prep them for every possible line of attack on what they're being tasked to do and make them defend everything they've got an opinion on.
Dan Castro: So, you don't want them going into a deposition unless they've been thoroughly vetted and tested, and you've thrown everything at them (already). Because what you don't want – especially for a first-time expert or a new expert – is you don't want them to be surprised. I've done this so long now that there's nobody that can surprise me anymore. They throw things out of left field, and it's fine – or sometimes they'll even ask me things that are unrelated to the case, just to (try to) throw you off.
Dan Castro: And you need to make sure that (your expert is ready for that). When I first started doing this, they did that to me, and it kind of surprised me. I had to think about it a bit and then respond. And that's the other thing, is to make sure that your expert does do that. Don't react immediately to anything. Think about it and consider it. If you need to pause, do that, and then give a thoughtful answer. But that takes training and discipline, and that's the thing lawyers need to get (across) to these new experts.
Teresa Barber: What about collaboration on expert engagements? How do you get involved once you're engaged as an expert?
Dan Castro: It varies by the case and parameters of the engagement. But the first thing is, I need to understand precisely what is it that they want (to get out of) my opinion – what do they want me to cover? And what do they want me to stay away from? So first, just understand the parameters. Understand what the law firm’s legal theory of the case is, because they usually have more than one way they can go. So, what are they going to focus on, and what do they not want to focus on? (What) are the things that they want to stay away from, and (what are the) things that they want to focus on? So, make sure you have a good grasp of what that is.
Dan Castro: And then understand what resources they have (available to you). I initially work by myself, but on these big cases, sometimes I need help. Sometimes I need to bring in quant people, or due-diligence people, or folks with specialized knowledge, or sometimes (I) will (want to) bring (in) an economic consulting firm, just (to help) dig out information. So, understand what those resources are, and make sure that they understand the technical nuances. Because one of the things that I'll bring to the table is (that) even with a really experienced lawyer, they don't know the securities as well as I do. They just can't; they haven't had thirty years-plus of training the way I have.
Dan Castro: So, I need to explain (it) to them. What are the nuances of the case? What are the details? What are the technical factors that they need to grasp? And (then I need to) show them the other side and how the other side's thinking. The huge advantage I have most of the time is that I've been on every side of my markets. I've been on the buy side, (I’ve been) on the sell side, I’ve worked for a rating agency. I can literally see (how they think) ... I could be working on the other side, (so) now I know exactly what they're going to do.
Dan Castro: And I can tell them, “This is what the other side is going to do, and this is how they're going to attack you.” And the experienced lawyers know most of that (already), but I can usually tell them something they haven't thought of, so I need to do that. And we go back and forth like that. Everybody's better for it. So that works pretty well.
Teresa Barber: And you mentioned too, having worked in some of the different spaces within your industry, and also as an expert, (how) your career has been (a real) journeyed, Dan – and (now) you're very well established in your space. Can you talk to me about how you got there? Were there building blocks? Did you have a game plan when you were a student?
Dan Castro: I think for me – and it's different for every person – but for me, I'd say two things. I've been both lucky, and I've been opportunistic. And what I mean by that is, for instance, when I got out of school, I started working for a defense contractor. And I was there for a couple years. It was good, (and) I learned a lot of things. But what I found after I was there even (just) a year was the way that place (worked), it (was) not really a meritocracy. It (was) more like, the longer you're there, you move up – and you don't move up until the people above you retire or move to a different job. And I needed something that was more of a meritocracy, so then I moved to the investment side – to the banking side – and that was a better fit for me.
Dan Castro: And that's why I say I'm lucky and opportunistic. So, my first move, I moved to one of the big banks – to Citibank. They were looking for people that did auto lending and home equity lending and manufactured housing lending. And they saw that, when I was in grad school, I had an internship with General Motors. And they saw that, and they said, "This guy knows autos." (I had only been there) three months, (but) yeah, I knew a little tiny bit about it. But compared to all (the others) they were interviewing, like MBAs with a couple of years’ experience … Well, compared to everybody else they interviewed, I was the one at the top of their list, because I had, quote, “auto experience.”
Dan Castro: So, I got the job. And then I'm there, and I'm working on different things and doing the typical things that a lower-level analyst will do – a lot of spreadsheets and analysis and things. And one day they walk in and say, "So these bankers have this new concept. And we want you to look at it for us. “So what’s the new concept?” They're telling us (that) they're going to take the loans that we have on our books and turn them into bonds." I'm like, "What? I've never heard of that." And they said, "Well, it's never been done."
Dan Castro: (They said), "So, (we) want to create a new market, and you're the best guy for this. So, look at it. Tell us what it is, and if it works, then we'll go down the path." And that's what happened. So, I actually got involved in securitization (by) helping create it. I was lucky, and I was opportunistic — so I just jumped at it, and that's kind of the way it works. And every step of the way I had new opportunities. So after (that), I moved from being an issuer at the bank. And then, the investment bank realized that they had this guy working in a subsidiary who's actually done deals – first deals in the market – and they had a whole Banking Group with very senior people (in it), and none of them has as much experience as I did.
Teresa Barber: Right.
Dan Castro: So, they hired me to move the investment back in, (and said), "Teach our senior people how to do this stuff, because you've already done it." So, I moved over there and did that for a while. After a bit (spent) doing that, it was a little bit annoying to me because I was working for people who didn't know as much as I did, but they (were) senior to me and getting paid more. And then, one of the rating agencies called me and said, "We need somebody like you,” and they hired me to do ABS and MBS.
Dan Castro: And ultimately, I chaired the rating committees over there for both, and that was great experience. And then after I was there for like four years, the investment bank(s) started calling and one of them said, "Well, we need to create a research group to do structured finance, and you have the perfect background. You've been a banker, you helped create this, and you've got the quantitative background, all of that.” So, I got put in charge of research at Merrill Lynch, and from there just took off. And then I did that for thirteen years, and it was great, because I was on the institutional investor list and was a top research analyst for a number of years, things of that nature.
Dan Castro: So then, I got to move to the buy side. And when I did that, that was a whole new experience for me because instead of advising people on how to invest their money, I was actually investing the money. So that was a different thing. I got to do that, and as I indicated (earlier), later on I was approached about being an expert witness, and I've done that. And now it's come full circle, because I still do the expert witness work. But last year, I started working with an investor, and I chaired their investment committee.
Dan Castro: So now I'm doing both and I'm working as an expert witness, but (I’m) also back on the buy side and chairing an investment committee and buying assets for that. So, it's been an interesting journey.
Teresa Barber: Certainly, you've had some folks who've been influential in your career. Have you had any mentors who've really helped to shape your career or your professional journey?
Dan Castro: Yes, I have. But I think I kind of look at mentors maybe a little different(ly) than most people, because I think there's two kinds of mentors. One is, I guess, more of the traditional kind: what I'll call technical mentors – people who are experts in their field of work and can teach you how to be better at your craft, whatever it may be. In my case, (that would be) investments, and structured finance, all that. And the problem in my case was, from the start, (that) I helped create the market, so I've always known more than my bosses (did going all the way) way back from the mid-80s on ...
Dan Castro: So, I didn't really have a technical mentor in that case – but I'll come back to that in a minute. The other kind of mentor I've had is what I'll call a leadership mentor. And that's somebody who you look at and you say, “Well, just by the way they conduct themselves (and) how they (are as) a role model, I want to be like that person.
Dan Castro: And I have a few examples (of that kind of mentor, but) probably the best one was the guy who hired me when I went to Merrill Lynch. And he was a very bright guy, and he knew all the technical stuff – (although) maybe I knew the technical stuff a little better, just because of what my background was. But the thing about this particular guy was (that) he was always considerate of everybody he dealt with, no matter what their station. Wherever they were – they could be at the bottom of the food chain, or at the top – he treated them all with respect and dignity.
Dan Castro: And the thing at an investment bank is, or a broker dealer, it's a very cutthroat world and everybody there is the best of the best. They were all top five of their class, wherever they went to school. They're all very bright. Most of them think they're brighter than they are, but they're all borderline brilliant, and they're very competitive. And this is a guy that would always do the right thing, whatever decision he made. It wasn't always like, “What's the thing that's going to make us the most money,” but basically, “What's the right thing to do?”
Dan Castro: And sometimes, the right thing to do isn't the thing that makes you the most money, but it's the right thing to do – and this guy always did that. So, that was somebody I looked up to and said, "I want to be more like this guy." So that influenced me, and I still think that way. But going back to what I'll call the technical mentors, the thing in my case (is), like I said, I haven't had any bosses who were better than I was technically, because I actually helped create these markets.
Dan Castro: But what I did do over the years (was that) I hired a lot of people. And what I would do is, I would try to hire people that would help me and make me better. When I first took the job at Merrill, I went back to the place I used to work at, where I (had) chaired the rating committees – that was Moody's. And I brought a guy in from over there, and the thing was, we were roughly equal in our technical background. But there were things he knew better than I did, and things I knew better than him. But you put us together, and there wasn't anything we couldn't cover.
Dan Castro: And the group was small back then – (it) was me and him and a couple (of) junior people, and that was it. Over the years, that group grew globally, it was like thirty, or forty people at its peak. So, that was one person (where) the collaboration worked really well. Then there was another person, a little afterwards, that I hired, who was a woman who (was) an investor in a large insurance company. And what I got from her was, I (had been) advising investors, but I hadn't actually been an investor.
Dan Castro: (But then I was) working with somebody who is an investor, who could help me think about, “Okay, how is this investor looking at it?” Whether it's a hedge fund (or an) insurance company, what are they thinking about when they're making this investment? And I learned so much from her about how investors think. So, when I became an investor, I knew a lot of that already. I had a leg up on that. But it was really good to have that.
Dan Castro: And then later on, there was another guy I hired (after) I'd been focused more on CEOs and ABS and things of that nature. But I'd moved away from the mortgage market, so I hired a guy who was basically the best guy I could find on that. And since (I’d) been out of the market for a while, he taught me some things (about) how the market had evolved a little bit there, and (he) helped me up. So, it's not always somebody who's senior to you (that can be a mentor). I can think of at least those three examples of people that, technically, were junior to me – but in terms of their knowledge, they really weren't. And they were people I collaborated with.
Dan Castro: And I learned so much from those folks, (and) that's the thing. The way I look at it is, you want people that are going to help you out, and you can help them out – and as you collaborate, everybody benefits, and everyone's better — and that's kind of my goal there. So, they were mentors in terms of (how) they filled in the gaps I didn't have and made me better.
Teresa Barber: Dan what about for … I could kind of see you in this spot at some point much earlier (in your) career, or (your) life – an intellectually curious, super bright middle school student, (or) high school student, or even (a) college student who might not have a role model in their immediate circle. What advice would you give that person on how to navigate into that profession of their dreams?
Dan Castro: Yeah, well, I think there's a few things you can do. I think the first thing (for) a student who's curious – the first thing they should do is, before (they do) anything else, learn as much as they can on their own. There's so many resources online, depending on what industry they want to get in. There's a lot of information online — that's the place to start. And you learn about that and find out (what you can). Depending on what the industry is, a lot of (companies) have entry level positions, or even part-time jobs, depending on what it is.
Dan Castro: And if you can snag one of those and you've got your foot in the door, then once you're there, you can look up the chain and say, "Okay, meet the people that are there." And you can create a mentor like that. The other thing is, when they move up — I think you said high school students — but when they get to the college level, well, the first thing to (do) is (to) look at the professors that may have worked in that particular industry – because they will have contacts, and they can help you with that. And they can also help you get internships at the next level up in those things.
Dan Castro: I've got two kids in college right now, and they both seem to have security internships for next summer already. Actually, one of them I think got like three offers (but hasn’t) decided which one to take. And my daughter's got a couple choices (as well). They do different things, and they’re at different schools — but that’s what they’re doing, and I told them … One of them is doing things that are completely different than what I've ever done, so I can't be real helpful there other than to say, “Find the people that are (there).” Although I know some people that are in the field that she wants to go into, so that helped, and (I) made those introductions and she took them there.
Dan Castro: And in my son's case, he's doing things – some of it’s related to what I do, and some of it's different, but I could point him in the right direction there too. But that's the thing – the big thing is, they have to do the work themselves. I can give them a little push, and give them some connections, but ultimately, they need to do the work – and it's the same with any student. It's like, if they're curious, first, learn as much as you can. Then, find a way to get into somebody in that industry, whatever that industry is. I mean, I know about my industry, but there's a whole world of things out there to do.
Dan Castro: And it's really (all about) getting your foot in the door and being persistent. If one door closes, find another door. And ultimately, you'll find a way there. And you'll succeed, if you're persistent and you just keep at it.
Teresa Barber: Dan, could you leave us with some practical tips for our listeners – what key areas should we be monitoring related to potential litigation and risk in the year ahead?
Dan Castro: I think there's a few things. I mean, the most obvious one is things that are pandemic-related, because there's going to be a lot of litigation for a while related to the pandemic. We're going to see people using different legal theories – the one that comes to mind immediately to me, because I was involved in something in this regard, is a legal theory called frustration of purpose — and that fits the pandemic purposely. Basically, what that means is if you have a contract, and the purpose of that contract was frustrated because of an unforeseen event, well, the pandemic was an unforeseen event.
Dan Castro: And there have been some recent cases that I've seen recently where they've used frustration of purpose, saying, "Well, the pandemic came, and I had this contract and that just eliminated all value of the contract. So, I should be dismissed from my obligations because of that." So, I think you're going to see a lot more people figure out that that's a good legal theorem that a lot of law firms have figured out. So, there's going to be a lot of litigation in that way.
Dan Castro: There's also going to be a lot of litigation related to what I'll call ongoing lockdowns in some jurisdictions, because what you have is tension between government mandates on the one side, and individual freedom and unalienable rights on the other. And some people are angry about it, and they're going to be litigating, and that's not going to stop until the lockdown stops, until the government steps back a bit.
Dan Castro: And we're not there yet, so you're going to continue to see that. I think that's mostly going to be in the next twelve to eighteen months, (and) after that it should sort of dissipate, as things get out there. And then the other thing is (that) because of the pandemic, you've got a lot of financial hardship that persists in a lot of pockets, both personal and business financial problems will create litigation.
Dan Castro: And this is, again, a parallel to the financial crisis – that's what happened then. And the pandemic was more severe, in terms of the financial hardship created, (than) the financial crisis was, so you're going to see litigation; it's inevitable. And again, like we talked about before, subprime auto lending is certainly one place (where) that was already on the radar, but this exacerbated the issues there.
Dan Castro: So, you're going to see a lot of litigation opportunities there. And then, the last one is another one that it seems obvious. I don't know what everybody thinks about (it), but the US is very divided politically right now, almost straight down the middle. And the political parties will battle with each other on any number of issues, (and) a lot of those are going to end up in court. People take sides one way or the other, and there's just going to be a lot of litigation, either directly or indirectly, as a result of that.
Dan Castro: So, there's just a lot of stuff. But I do think (it will be) just like the financial crisis, (where) there was an explosion of litigation afterwards. (But it seems like) this current crisis, it's getting towards the end of it, with the vaccinations and everything. I've had all my shots already, so that's a good thing. But it's going to go on for a while, because a lot of people lost a lot of money. And there's a lot of these programs that are going to keep going on, and that's just ripe for litigation. So, there's just a lot of it.
Dan Castro: As with the financial crisis, maybe the biggest winners at the end (of the day) are the law firms. So yeah, I think there's just no shortage of opportunities here. There's going to be a lot of things, and people just have to keep their eyes open. And that's why I get a lot of news feeds and I connect with a lot of people in law firms and other people in the markets. And I hear about a lot of things before they actually get litigated, but the radar is there, so you can see it coming sometimes.
Dan Castro: And it's just like what I've done (throughout) my career: I position myself where the things that are suitable for me (are). A lot of this stuff isn't suitable for me – but the stuff that is, if it has to do with finance or investments, then I make sure that I'm in the right (place) to deal with that.
Teresa Barber: Dan, thank you. This has been a really enjoyable conversation, and I feel like our listeners are really going to enjoy it as well. So, I can't thank you enough for taking the time to share your thoughts, share your insights, and give us a little bit of guidance about what's coming ahead this year.
Dan Castro: It was my pleasure. Thank you.
