Annaly Capital Management Inc (NLY)

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Annaly Capital Management, Inc. (NLY)

Q2 FY08 Earnings Call

July 31, 2008, 10:00 AM ET


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

Kathryn F. Fagan - CFO and Treasurer


Michael Widner - Stifel Nicolaus

Jason Arnold - RBC Capital Markets

Robert Napoli - Piper Jaffray

Steven Delaney - JMP Securities

Jim Ackor - Sterne Agee

Bose George - Keefe, Bruyette & Woods

Matthew Howlett - Fox-Pitt Kelton

Justin Bates - Daniel Stewart



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 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 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 in interest rates, changes in yield curve, changes in prepayment rates, the availability of mortgage-backed securities for purchase, the availability of financing and if available to terms of financing, changes in the market value of our assets, changes in business conditions in the general economy, and risks associated with the investment advisory business of FIDAC, including the removal by FIDAC's clients of assets FIDAC manages, FIDAC's regulatory requirements, and competition in the investment advisory business, changes in governmental regulations affecting our business and our ability to maintain our classification as a REIT 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, 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 call over to Mr. Michael Farrell, Chairman, CEO and President of Annaly Capital Management Inc. Please go ahead, sir.

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

Thank you, Tracy, and good morning everyone, and welcome to the call for the second quarter results of Annaly Capital Management. I'm joined here today by members of the management team including Wellington Denahan-Norris, our Chief Investment Officer and Chief Operating Officer; Kathryn Fagan, our Chief Financial Officer; Nick Singh, our General Counsel; Ron Kazel and J. Diamond who are Managing Directors with the company.

As usual, there is a little bit of missive before the beginning of the Q&A, and the title of this is The Rebirth of the Resolution Trust Corporation. The number one question asked to us over the past 15 years is always been, what happens if Fannie Mae and Freddie Mac fail. This question of course has always had a theoretical answer, but on Sunday, July 13, 2008 when Secretary Paulson reiterated that Department of Treasury’s support for the GSCs, it got a lot more empirical. On the same day, the Federal Reserve authorized the New York fed to lend directly to Fannie Mae and Freddie Mac if necessary. Sweeping legislations soon followed, which was an accidental law on July 30. These policy responses were logical from a bond investor's point of view. The reality however is that at least on that particular weekend, Fannie Mae and Freddie Mac were nowhere near failing. We'll probably never know what truly spurred the actions of the treasury and federal reserves that weekend. Perhaps the macroeconomic realities of falling property prices and the effects on virtually every institution and citizen finally registered with policymakers, investors, regulators and the administration simultaneously.

While there are certainly significant differences, it reminds me of the capitulation in 1989 when the Resolution Trust Corporation was born and charged with the task of resolving the problems left in the wake of the savings and loan crisis of the 1980s. Unlike many of my missives over the past several years cautioning about the problems in the housing and the mortgage market, it's denial by people who should know better, remember the phrase it's contained, and the future state of affairs. I want to take a moment to reflect on the present.

First, I want to comment on the Federal Reserve. I know this isn’t popular these days, but I do feel as though the people who work there and have worked hard behind the scenes and in the public life to understand, quantify and react to the rollercoaster ride that has been the capital markets for the past year. I believe that the Chairman is applying creative solutions to the hand that he has been dealt.

Mr. Bernanke has never to my knowledge lobbied for or cast an earmarked project designed to get him re-elected. Rather he is there to get the job done. As I have said in the past, listening to congressional hearings is a lot like listening to restaurant patrons argue with management over the number on the check long after the meal has been served and digested.

Secondly, let’s talk about treasury. Secretary Paulson working for a lame-duck administration and in the middle of a dynamic situation managed to create a consensus among all of the varied interested groups pointing and [inaudible] at each other and brokered a solution on $1 trillion problem. As far as I can tell, Mr. Paulson is not residing a placement fee for his investor banking services on this one. The question remains though, what is the problem, because of this uncertainty, corporations, consumers and institutions cannot move forward. The uncertainty is still tied to residential and commercial property prices. In my opinion, the free market is restraining credit and lending in ways that the central bank had dreamed to do in a politically correct way. Imagine for a moment where the markets would be if the Federal Reserve moved the lending rates higher by several 100 basis point or so. That is what the credit markets has done over the past year. It is the polar opposite of what the Federal Reserves’ actions have been designed to do.

There is a lot of talk about inflation in the markets. And we are on record in stating that what we think are witnessing is exactly the opposite. The asset deflation taking place in the property, equity and debt markets far outweigh in dollar terms any inflationary effect that is going on in the commodities markets. The drop in residential housing prices has taken away roughly $2.7 trillion in domestic housing values. $4 trillion dollars from household wealth has been taken by the US stock market. Globally, the numbers are even greater. On the other hand, the cumulative gain in commodities as measured by the increase in the CRB has only created about $300 billion in gains. In our judgment, the re-strength of credit and the losses in equity valuations swap any long-term inflationary effect from the commodities market.

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