Annaly Capital Management Inc (NLY)

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Annaly Capital Management, Inc. (NLY)

Q3 2012 Earnings Call

November 6, 2012 9:00 AM ET


Wellington Denahan-Norris – Vice Chairman, Co-CEO and Chief Investment Officer

Kathryn Fagan – CFO and Treasurer

Kris Konrad – Managing Director, Head Portfolio Manager

James Fortescue – COO


Bill Carcache – Nomura

Jason Arnold – RBC Capital Markets

Douglas Harter – Credit Suisse

Steve DeLaney – JMP Securities



Good morning and welcome to the Third 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 listen-only mode. (Operator Instructions)

At the request of the company, we will open the conference up for questions and answers after the presentation.

Unidentified Company Representative

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 the yield curve, changes in prepayment rates, the availability of mortgage-backed securities for purchase, the availability of financing and, if available, the 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, our ability to maintain our classification as a REIT for federal income tax purposes, risks associated with the broker-dealer business of our subsidiary, 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 all subsequent quarterly reports on Form 10-Q. We do not undertake, and specifically disclaim, any obligation to publically release the result 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 would now turn the conference over to Wellington Denahan-Norris, Chairman and Chief Executive Officer. Please proceed, Ms. Denahan-Norris.

Wellington Denahan-Norris

Thank you, operator. Good morning everyone. Joining me on the call today is Kathryn Fagan, our Chief Financial Officer. I also have with me Kris Konrad, who is Co-CIO of Annaly; James Fortescue, Chief Operating Officer; and Kevin Keyes, who is President of Annaly. I am going to just start with some prepared remarks and then I will open the call up for questionings following these remarks.

First of all, I want to acknowledge and sincerely thank all who offered such warm condolences for Mike Farrell. The outpouring of sympathy has been remarkable. I know Mike’s family and everyone here at Annaly really appreciates all the comforting thoughts and prayers we received. Our thoughts also are with all of those affected by the storm here in the Northeast.

I want to dedicate today’s discussion to Mike and our past earnings calls. Over the years, the daily macroeconomic and market debates of this entire management team have been manifested in Mike’s very colorful commentary. Using personal anecdotes and humorous analogies, he uniquely described the state of the economic conditions through the Annaly lens. So I thought I’d revisit some of the most important market themes our team routinely uncovered well in advance of others, themes which all remain very relevant today, and that Mike translated with such incomparable style.

The first theme is from the second quarter of 2006, when Mike delivered an anecdote titled, The Goldfish is Dead, Senator. This story centered on the passing of the family goldfish, which Mike related to the bursting of the tech and housing bubbles. In an attempt to hide the tragedy from his young children, Mike recounted going to the store to secretly buy a replacement fish. The second fish, however, quickly suffered the same fate as the first.

As the Annaly team predicted at this time, the bubble that we successfully migrated from technology to housing is breaking again. This time, the consequences for our domestic and international economies are much broader than the breaking of a mere tech bubble. We surmised, at the time, that the next discussion would not be about the return on capital, but the return of capital.

From the third quarter of 2007’s earnings calls, Mike wrote a piece which he entitled, Seduced by a Supermodel. The supermodel in this case was an analogy that refers to the complex financial models and financial engineering with which Wall Street became enamored in the years leading up to the financial crisis. As Mike expressed five years ago, structurers, traders, rating agencies, regulators, investors, all became enamored with the same super modeling techniques at the same time. The attractiveness of structured products blinded love-struck market participants, and we all know how painful, even today, the breakup continues to be.

In the first quarter of 2008, Mike retold a story first presented on the Twilight Zone called, To Serve Man. In this particular episode, a seemingly benevolent species of alien called the Kanamits came to earth under the auspices of elevating our standard of living. In the end, the real motive of the Kanamits was to make humans complacent, fatter and healthier for their eventual consumption. As Mike noted back in 2008, these aliens represented the leveraged profile of the global financial system, a boon to our everyday existence until the inevitable consequences became apparent.

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