Annaly Capital Management Inc (NLY)

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Annaly Capital Management, Inc. (NLY)

Q1 FY08 Earnings Call

May 1, 2008, 10:00 AM ET


Michael A. J. Farrell - Chairman, President and CEO

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and COO

Kathryn Fagan - CFO and Treasurer


Michael Widner - Stifel Nicolaus & Company. Inc.

Steven Delaney - JMP Securities

Jason Arnold - RBC Capital Markets

Donald Fandetti - Citigroup

Bose George - Keefe, Bruyette & Woods

Jason Deleeuw - Piper Jaffray & Co.

Brock Vandervliet - Galleon Group

Dale E. Benson - Wells Capital Management

Stephen Laws - Deutsche Bank

Matthew Howlett - Fox-Pitt Kelton

Justin Bates - Daniel Stewart

John Barrett - Trafelet & Company



Good morning and welcome ladies and gentlemen, for the First Quarter Earnings Call for Annaly Capital Management Incorporated. 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 1993 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements which are based on various assumptions, such of which are beyond our control, may be identified by reference or future period or periods, or by the use of forward-looking terminology, such as may, will, believe, expect, anticipate, continue or similar terms or variation on 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, changes interest rates, changes in the yield curve, changes in repayment rates, the availability of mortgage-back securities for purchase, the availability of financing and if available the term of any financing, changes in the market value of our assets, changes in business conditions and the general economy, the risks associated with the investment advisory business are FIDAC including the removal of FIDAC's clients of the assets FIDAC manages, FIDAC regulatory requirements and competition in the investment advisory business, changes in government regulations affecting our business, and our abilities to maintain our classification for federal income tax purposes.

For a discussion of the risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, read risk factors in our most recent Annual Report on Form 10-K and all subsequent quarterly reports on our Form 10-Q. We will not undertake and specifically disclaim any obligation to publicly release the results of any revision 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 would now like to turn the conference over to Mr. Michael Farrell, Chairman, CEO and President of Annaly Capital Management Incorporated. Please go ahead, sir.

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

Thank you, Sorita. Good morning everyone. Welcome to the first quarter earnings call. I'm joined here today by Wellington Denahan-Norris, our Chief Investment Officer and our Chief Operating Officer; Nick Singh, our General Counsel; Kathryn Fagan, our Chief Financial Officer and two managing Directors, Ron Kazel and J. Diamond.

As usual, we've got some prepared comments and then we'll go into Q&A. The title of this prepared comment is To Serve Man. As fans of the Twilight Zone will recall, to serve man is tale of the arrival on earth of seemingly kind and generous nine-foot tall human beings from another planet called the Kanamit. These giant aliens arrive in peace, promising only to help humans enjoy a better life. As they share their advance thinking technology and methods, it's clearly that they can quickly solve all the impediments to progress on Earth. They eliminate hunger, disease, greed and as a result the need for war. Even the most skeptical among earth citizens are converted, particularly after the title one Kanamits books, is translated.

After all the title of the book, 'To Serve Man' clearly sets forth the benevolence of their mission. As the story moves ahead, massive numbers of satiated, complacent citizens of earth begin to line-up eagerly to travel on to the alien spaceships, to see Kanamits home planet, a virtual risk-free paradise. It's so wonderful there apparently that no one ever wants to return to the Earth.

In the final scene, the remaining skeptical on earth is carried away screaming by the crowd. You see us finally analyze and crack the rest of the code in the alien's book. To Serve Man is a not a book of instructions on how to assist mankind, rather it is a cookbook with instructions on how to make earthlings complacent, fatter and healthier for slaughtering consumption. I think it's appropriate to compare this Twilight Zone episode with the test several years of credit complacency, financial engineering in capital markets feeding the global consumer desire for better lives.

In retrospect the 2002-2007 credit criteria for underlying debt could have just as easily arrived from another planet. The cookbook was the computer model designed to financially fatten up the credit cycle by making below investment grade cash flows suitable for mass consumption and thereby curing the hunger for a better life with no money down low-equity lifestyle. Instead of an encoded book, the recipe was locked in inscrutable offering documents, fluid models that were blessed by over-maturating agencies, over-zealous underwriters and negligent regulators, who didn't understand what the cookbook said. Now that book has been decoded, the challenge in these markets is to identify the opportunities left in the wake of the massive re-pricing of those cash flows.

As the first quarter came to a close, the financial markets got a chance the watch history unveil itself. The Federal Reserve accelerated its sprint to ease balance sheet stress not only at the banking level but also at the primary dealer level. With the combination of Bear Sterns, JPMorgan Chase, the term securities lending facility, the primary dealer credit facility and the slashing of short-term funding rates, the credit markets wobbled through a shaky first quarter's end. Indeed commercial banks were so stuffed with cash at March 31st, that they actually began to direct money away from their balance sheets and into competing money market funds.

In the last weeks of March, I believe we witnessed the preview of the new financial world order. We are now firmly set towards the path of reconstructed underwriting criteria that will be the new Sarbanes-Oxley of the debt and structured finance world. There is a deeply seeded desire for simplicity at every level of banking and investment. This need will be satisfied by our long overdue regulatory updates, many of today's formulas and calculations were written in the 1930s and only lightly amended on eased overtime.

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