Annaly Capital Management Inc (NLY)

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Annaly Capital Management (NLY)

Q2 2009 Earnings Call

July 30, 2009; 10.00 am ET


Michael Farrell - Chairman, Chief Executive Officer & President

Wellington Denahan-Norris - Chief Investment Officer & Chief Operating Officer; Kathryn Fagan - Chief Financial Officer

Ron Kazel - Managing Directors

Jay Diamond - Managing Directors


Bose George - KBW

Jason Arnold - RBC Capital Markets

Steve Delaney - JMP Securities

Andrew Wessel - JP Morgan

Henry Coffey - Sterne, Agee

John McWade - Unidentified Company

Joe Stieven - Stieven Capital

Matthew Howlett - Fox-Pitt Kelton



Good morning and welcome ladies and gentlemen to the second quarter earnings call for Annaly Capital Management, Inc. 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 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, maybe 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 on those terms or the negative of those terms.

Actual results could differ materially from those set forth in forward-looking statements due to the variety of factors including, but not limited to changes in interest rates; changes in the yield curve; changes in prepayment rates; the availability of mortgage-backed securities for purchase; the availability of financing and if available that terms of any financings; changes in the market value of our assets; changes in business conditions and the general economy; changes in governmental regulations affecting our business and our ability to maintain our classification as a REIT for federal income tax purposes; risks associated with the broker dealer business of our subsidiary and risks associated with the investment advisory business of our subsidiaries including the removal by clients of assets they manage, their regulatory requirements and competition in the investment advisory business.

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 on our subsequent quarterly reports on Form 10-Q. We do not undertake and specifically disclaim any obligation to publicly release the results of any revision, which maybe 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. Michael Farrell, Chairman, CEO and President of Annaly Capital Management, Inc. Please go ahead, sir.

Michael Farrell

Thank you, operator. Good morning everyone and welcome to Annaly’s second quarter earnings call. I’m joined here today by Wellington Denahan-Norris, our Chief Investment Officer and Chief Operating Officer; Kathryn Fagan, our Chief Financial Officer; and two Managing Directors, Ron Kazel and Jay Diamond.

As always, I want to begin the call today with some prepared remarks, after which we will take your questions. The text of Ron remarks will be available this afternoon on our website, formatted to include a graph and a link to a YouTube clip that I reference.

While you’re on our website please visit our new bloc that we started early this month called Annaly Salvos, I hope you find it useful. I’d also like to note that some of the data that we collected here was collected by our interns and our research staff and I thank them for doing that work during the course of the summer.

The title to this missive is, Sherlock Holmes and the Mystery Of The Green Shoots. In literature it is difficult to find a protagonist more endearing, clever and flawed than Sherlock Holmes. Peerless is his attention to detail and his limitless powers of perception, what appears to be clear cut and evident to his trained his senses bewilders those of lesser skills.

His foil, Dr. Watson, his counterpart at Scotland Yard, the plotting Inspector Lestrade, and his arch enemy Professor Moriarty all wither in the face of Holmes masterful powers of logic and deduction. That said, I believe even the formidable Mr. Holmes would have a problem figuring out the truth behind the current economic state of affairs.

First, Holmes would review the statistical evidence. There are those who argue that housing has bottomed because there has been a decline in the rate of decline. This belief is truly a leap of faith as long as large non-conforming loans from high FICO borrowers can still not be readily funded, home prices aseptically trend to liquidation levels and foreclosed homes dominate the sales market.

Loan modifications have proven to be a feasting ground for the same mortgage underwriters that initiated the original loans, but unfortunately the results are pretty much the same. Within 90 days about half of the modified loans are once again delinquent. Some have suggested that there are signs of life in the leading indicators and recent corporate earnings. Perhaps, but this ignores clues to the contrary.

For example, the saga of the distended state budgets plays out most tragically on California’s stage, but California is not alone. According to the Center on Budget and Policy Priorities the cumulative total of state budget deficits for fiscal 2009 will be about $111 billion. California, which the New York Times has seemed to be ungovernable due to the splintering effects of special interests, represents one third of this projection by itself.

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