Chimera Investment Corporation (CIM)

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Chimera Investment Corporation (CIM)

Q2 2008 Earnings Call Transcript

August 1, 2008 10:00 am ET


Matthew Lambiase – President and CEO

Alex Denahan – CFO

Wellington Denahan-Norris – Chief Investment Officer, FIDAC


Steven DeLaney – JMP Securities

Bose George – Keefe, Bruyette & Woods

Jim Young – West Family Investments

Jeff Bronchick – RCB Investment Management

Andrew Wessel – JPMorgan



Good morning, and welcome, ladies and gentlemen, to the Second Quarter Earnings Call for Chimera Investment Corporation. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the Company, we will open the conference up for questions and answers after the presentation.

This earnings call may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements, which are based on various assumptions, some of which are beyond our control, may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as may, will, believe, expect, anticipate, continue, or similar terms, or variations of those terms or the negative of those terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, our ability to obtain financing arrangements, general volatility of the markets in which we invest, interest rate mismatches between our mortgage loans and mortgage-backed securities and our borrowings used to fund such purchases, changes in interest rates and mortgage prepayment rates, effects of the interest rate caps on our adjustable-rate mortgage-backed securities, rate of default or decreased recovery rates on our investments, prepayment of the mortgage and other loans underlying our mortgage-backed and other asset-backed securities, the degree to which our hedging in securities may or may not protect us from interest rate volatility, changes in the governmental regulations, tax law or rates, and similar matters, availability of investment opportunities in the real-estate-related and other securities, market trends in our industry, interest rates, the debt security markets or the general economy.

For a discussion of the risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see Risk Factors in our most recent Annual Report on Form 10-K and all subsequent quarterly reports on Form 10-Q. We do not undertake and specifically disclaim any obligation to publicly release the results of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

I will now turn the conference over to Mr. Matthew Lambiase, Chief Executive Officer of Chimera Investment Corporation. Please go ahead, sir.

Matthew Lambiase

Thank you, Grace-Ann. Good morning, and welcome to the second quarter 2008 earnings call for Chimera Investment Corporation. I'm Matt Lambiase. I'm the CEO and President of Chimera, and joining me today on the call are members of our senior management team, our CFO, Alex Denahan, our Head of Investments, Chris Woschenko, our Head of Underwriting, Bill Dyer, and also jointing me today are Wellington Denahan-Norris, the Chief Investment Officer for FIDAC, and Jay Diamond, a Managing Director at FIDAC and a Director of Chimera. We are all here today to review the results of the second quarter of 2008 and answer any questions that you may have. I'd like to make a few general comments and then Alex will briefly review the headline results for the quarter. Afterwards, we'll take your questions.

As you know, Chimera is in the business to evaluate and manage credit risk in the residential mortgage market. As a long-term business model, it's tried and true, but it has run into some short-term challenges. The dislocations that started in Q1 with the collapse of Carlyle Capital, Thornburg, and Bear Stearns prompted unprecedented reaction by both the Fed and Treasury and has continued to cause tremendous volatility into Q2 and even Q3. Indy Mac and others went into receivership, and even Fannie Mae and Freddie Mac came under attack, resulting in a sweeping new housing bill.

These ongoing strains in the non-agency mortgage market have put stress on the ability to use even modest amounts of leverage in the strategy. This presents some near-term challenges, but also some long-term opportunities. These short-term challenges in the non-conforming sector of the mortgage market are affecting virtually all participants and Chimera is not immune to these challenges. In particular, we see continued pressure on asset valuations and liquidity, irrespective of the actual credit performance, which has proven to be excellent in our portfolio.

During the second quarter, our earnings were negatively affected by a rise in the cost of financing. Our balance sheet and book value were negatively affected by the illiquidity of our asset classes. These market conditions have persisted through July and we believe that they are likely to continue for some time, despite the active response of policymakers to confront some of the challenges in the marketplace.

In this environment, our focus is on liquidity and minimizing our exposure to recourse borrowings. To that end, as we reported earlier, we executed a securitization of our loan portfolio in the second quarter. And, as we reported, we have terminated our whole-loan warehouse lines with Credit Suisse and Deutsche Bank because we were not using them for the foreseeable future. We continue to try to reduce our repo exposure.

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