Cohen & Company Inc (COHN) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Alesco Financial Inc. Second Quarter 2008 Earnings Conference Call. Before we begin, Alesco Financial would like to remind everyone that information provided in its earning release and during this call contains forward-looking statements which involve a number of risks and uncertainties.

Alesco Financial cautions readers that any forward-looking information is not a guarantee of future performance and that actual results could differ materially from those contained or implied in the forward-looking information.

Factors that may affect future results are contained in Alesco Financials filings with the SEC which are available at the SEC's website at www.sec.gov. At this time, all participants have been placed in a listen-only mode. I would like now to turn the call over to Jay McEntee, President and CEO. Sir, you may begin.

Thank you, Operator. Good morning, everyone, and thank you for joining us. Also representing the Company with me today is John Longino, our Chief Financial Officer, as well as several other members of the Company's management team.

Today I would like to provide a brief update on the current business model and planned future strategy for Alesco Financial. Next I'll provide an overview of our financial position and asset performance through the end of the second quarter of 2008. Then I will hand it over to John Longino, who will provide more details on our results this second quarter.

As previously discussed, a special committee of our Board of Directors has been investigating various strategic options and alternatives. We have considered a number of alternatives, one of which was endorsed by management and the committee. However, we have not been able to effectuate this transaction on terms that we believe are in the best interest of shareholders.

As a result, we are continuing to consider a variety of transactions that may be available to us as well as reviewing a number of very attractive investment opportunities that exist right now. Although the turmoil and the financial services marketplace has had adverse consequences on us, the fact is that it has also created many opportunities and we are considering several of them at the present time.

I will now provide a brief overview of our financial position and asset performance through the end of the second quarter of 2008. Our unrestricted cash balance increased to approximately $136 million during the quarter and remains as $120 million today after having paid the $15 million Q208 cash dividend on July 10th. In addition, we continue to have no short term recourse financing. Cash and liquidity positions remain very strong for our Company.

Significantly during the quarter, after considerable effort and negotiation, we completed a transaction which enabled us to realize gains on all of our open CDS positions by selling the subsidiary which held those positions to a third party.

We view this as an important transaction for Alesco as we closed out our CDS positions in a very positive way and removed any counterparty and market risk related to the cash earned on these positions. Overall, our cumulative net profit on our CDS positions has been approximately $90 million.

An item which has been discussed in some detail on recent calls is the ongoing viability of the Kleros Real Estate deals and their ability to provide re-qualifying income and assets. KRE III was liquidated during the quarter. However, the remaining three KRE deals continue to generate re-qualifying income.

Moreover, we have now generated sufficient re-qualifying income for 2008 such that, even if all three of the remaining deals were to liquidate, we should be able to maintain REIT status to at least the end of 2008 without having to purchase significant additional re-qualifying assets. However, management and the Board will continue to evaluate the advantages and disadvantages of Alesco continuing to operate as a REIT versus moving to a PTP or C-Corp structure.

With respect to the bank portfolio, we continue to experience significant challenges, most notably the seizure of IndyMac Bancorp by the OTS. The seizure of IndyMac resulted in AFN recording a tax loss of $86 million. While we have no additional bank deferrals or defaults since then, we continue to expect to see an increase in the number of problem banks being places on the FDIC's watch list and ultimately in bank deferrals and defaults as compared to historical levels.

As of June 30, the aggregate principal amount of trust preferred securities in deferral was $282 million, representing approximately 5.5% of AFN's consolidated trust preferred securities portfolio at an aggregate of $4.5 million in quarterly interest payments to the eight CDOs in which AFN invests. AFN's proportionate share of the interest income is approximately $3.1 million, or $0.5 per diluted common share per quarter.

These deferrals resulted in over collateralization failures in six of our eight TruPS CDOs. We currently expect three of the six affected CDOs to cure over collateralization failures and recommence making equity distributions within three to six quarters, while the other three may not cure for anywhere from 20 to 35 quarters. These estimates could change if there are additional deferrals.

We continue to see no material credit issues in our insurance trust portfolio comprising $1.1 billion of our total assets and our middle market loan portfolio comprising $853 million of our total assets is also performing well. With respect to the middle market loan business, as of June 30, we had $170 million of middle market loan assets on a warehouse facility secured by $40 million of cash from AFN.

This warehouse facility expires in May of 2009. The warehouse line is non-recourse to AFN beyond posted cash equity. It is not subject to market margin calls and AFN has no liability with respect to this line beyond the posted cash collateral. We continue to believe that the middle market loans that have been acquired through our Emporia platform will provide an attractive return on investment for Alesco.

The average borrower in our portfolio comprises 0.76% of the entire portfolio. Approximately 90% of our loans are senior secured first lien loans make the companies in over 30 different industry sectors.

In addition, given the low cost of the debt in the structures holding these loans, as repayments occur we expect to be able to replace existing loans with those of similar credit quality but with wider spreads. Going forward, we remain positive of this business for both the mid and long term. I will now turn the call over to John Longino, our Chief Financial Officer, who will discuss the Company's financial results.

Thank you, Jay. For the second quarter of 2008, Alesco Financial reported a GAAP net loss of $81.2 million or $1.36 per diluted share based on $59.5 million weighted average shares outstanding as compared to GAAP net income of $84.9 million or $1.43 per diluted based on $59.4 million weighted average shares outstanding for the first quarter.

As I indicated on last quarter's earnings call, while the adoption of FAS 159 as of January 1, 2008 should significantly reduce the erratic swings previously recorded in our earnings and stockholders' equity, there may continue to be volatility in our GAAP earnings each quarter related to changes in the fair values of assets and liabilities.

As these adjustments, while largely correlative, may not completely offset. To this end, the GAAP net loss for the three months ended June 30, 2008, includes $34.7 million of non-cash net losses resulting from fair value adjustments on financial instruments, net of minority interest allocations, while GAAP net income for the three months ended March 31st includes $72.7 million of non-cash net gains.

We've not reported adjusted earnings this quarter because it would include significant positive non-cash net interest income from the six CDOs that have failed over collateralization tests and would not include realized tax losses on defaulted securities. Therefore, it is not a meaningful measure of performance for the quarter. Also, the realized IndyMac and KRE losses will significantly offset the non-cash income in determining our re-taxable income for the year.

Net investment income which includes the amount earned by minority interest holders and excludes interest rate swap expense, was $28 million or $0.47 per diluted share for the second quarter as compared to $26.5 million or $0.45 per diluted share in the first quarter.

Net investment income for the second quarter net of interest rate swap expense was generated from the following sources; TruPS ,$17.2 million or $0.29 per share; mid market loans, $4.7 million or $0.8 per share; residential mortgages was actually a loss of $5.1 million or $0.9 per share; and then Kleros Real Estate deals, $2.2 million or $0.4 per share. Also included in net investment income is interest expense of $3.9 million or $0.7 per share related to our $190 million of recourse indebtedness.

Net investment income for the residential mortgage loan asset class and the leverage loans asset class include approximately $5.6 million and $2.3 million respectively of provisions for loan losses recorded during the three months ended June 30.

Related party management compensation, which is primarily asset management fees paid by the underlying CDOs, declined to $4.2 million in the second quarter as compared to $4.7 million in the first quarter due to asset management fees being reduced as a result of deferring and defaulting securities in our TruPS CDOs. General and administrative costs for the second quarter remain flat with the first quarter at approximately $3.5 million.

As of June 30, our investment portfolio totaled approximately $6 billion, including $3.2 billion of TruPS and subordinated debentures, $925 million in mortgage backed securities, $962 million in residential mortgages, and $853 million of leverage loans.

Of the $5.8 billion of debt on our balance sheet at June 30, only $190 million is recourse to AFN consisting of $140 million of convertible bonds issued during the second quarter of 2007, and $50 million of TruPS debt. The $5.6 billion of non-recourse indebtedness consists of $4.4 billion of CDO notes payable, $889 million of securitized mortgage debt, $222 million of trust preferred obligations, and $131 million warehouse indebtedness.

GAAP book value at June 30 was $303.4 million or $3.41 per diluted share based on 59.6 million shares outstanding as compared to $258.1 million or $4.34 per share based on 59.5 million shares outstanding as of March 31st.

Given our adoption of FAS 159, book value determined in accordance with GAAP now reflects changes in the fair value of the assets and liabilities associated with our TruPS and MBS related instruments. Therefore, we no longer believe that adjusted book value is a useful alternative measure for investors to consider. At this point, I'd like to turn the call back to Jay McEntee.

Thanks, John. As previously discussed, the realized tax losses that we have experienced during 2008, including those resulting from the failure of IndyMac, are expected to significantly offset or eliminate our taxable income for the 2008 year precluding the requirement for additional dividend distributions to satisfy REIT requirements this year. Decisions regarding future dividends will continue to consider projections regarding our taxable income and are subject to the review and approval by our Board of Directors.

The failure of IndyMac is indicative of the stress that the banking sector is under at the current time and is likely to be under for the foreseeable future. IndyMac's failure has significantly impacted our portfolio, however, as a result of our strong liquidity position, we continue to believe that we have the ability to be patient and to manage through these difficult times.

Also, we may not have yet seen the end of worsening conditions or the bottom of this market, but we do believe there are solid investment opportunities available to us today and we intend to pursue these opportunities vigorously. I would now like to ask the Operator to open the floor for questions.

(OPERATOR INSTRUCTIONS). And your first call comes from the line of [Jack Ruben] from [DB Capital]. Please proceed.

Yes, hello. Thank you for the report. I've been studying AFN, I've been a shareholder for quite some time and I saw in there that there is a trigger within your $140 million of convertible notes and within those notes is a trigger that if the control of AFN were to change outside of Cohen & Company that those notes would be due immediately. And I was just wondering what was the purpose of putting that clause in there, it seems like it protects Cohen & Company but has no -- is not in the best interest of the shareholders.

Yes, sure, Jack. The provision is in there not because AFN or Cohen asked for it. It was a market -- I think is a market based provision that you'll tend to find in converts for companies -- externally managed companies of our size. There are a number of them out there -- you can -- you know go out there and take a look. But it was -- was at RBC's insistence that that provision go in there, not at ours.

Okay. And secondly, on the CDOs, is there any more detail you can provide as far as which of the TruPS CDOs is busted, how close those two remaining are to going over the edge, and if you -- you obviously you've purposely not provided that information, if you could please tell us why you are not providing that information.

Well, no, we're not -- we're not actually not purposely providing information about how the deals work. I do think that we've suffered a number of deferrals throughout all of the transactions and all of the Alesco trust preferred deals are either in OC failure or hovering around it, so additional bank deferrals will shut off -- will continue to have a shut off of the cash flow from those transactions. But I don't think it's fair to say we're trying to hide that from anyone. It's -- you know, the deferrals have a negative impact on these structure.

Can you tell specifically which CDOs are still cash flowing?

Yes, right now Alesco 11 and 17 continue to -- to cash flow.

Okay. Thank you very much.

Sure.

And your next call comes from the line of Jason Arnold from RB Capital. Please proceed.

Hi, guys, good morning. It's RBC Capital Markets.

Jason, how are you doing?

I'm all right. How are you guys?

Good.

Quick question on maybe your expectations for cash earnings expectations going forward. I know that you guys have consolidated net interest income that you kind of will be reporting given some of the GAAP rules. But I'm curious about cash earnings and maybe specifically cash earnings on TruPS that you would expect to see going forward assuming that Alesco 11 and 17 still -- still are cash flowing.

Yes, Jason. With respect to the current deals that are [triggering] the OC tests, I mean we -- that's an impact of $8 million per quarter negative on our cash flow. I mean the other assets are continuing to provide -- if you looked at the net investment income that approximates cash other than the deals that are in the OC trigger.

So it's about $8 million per quarter and now if some of those deals come back then we get more cash and if some -- if the other two deals that are currently cash flowing were to trip, then -- then that's about $2 million more that could go based on those other two deals.

Okay, very good. And then, I was wondering if you could also -- I think you mentioned that you were looking for about $86 million of losses on IndyMac. Is that inclusive of maybe -- and I don't know but you can maybe update me -- would that include some of the additional TruPS deferrals and maybe losses expected there, or is that exclusively IndyMac and what, I guess to what degree would you expect taxable earnings to be offset? Would it be -- I know you said through the end of 2008 -- would it be beyond at this point or was that just a rough estimate?

Well there's a number of factors there. But with respect to the $86 million, first of all, that is the realized tax loss specifically related to IndyMac and that's our share effectively across all the deals that IndyMac was in. So -- then there are other tax losses relative to other investments that we had that have gone bad. But then there's also various gains as you know for CDS positions et cetera.

So there's a lot of factors that are going to impact or could impact REIT taxable income through the end of the year and into 2009. So depending upon what we do over the next several months, there could be a positive impact or a negative impact on our REIT taxable -- what is currently a REIT taxable loss.

Okay. And actually on that note, perhaps you could give us a little bit more color on kind of what would -- you would expect to have to pay out on a tax basis on the gains on the credit default swaps?

What -- you mean what we might have to distribute to shareholders? Some of the REIT rules?

No. I guess, you know since it's a gain, what you -- assumably you have to pay a tax on it, right?

No, the -- the way that we actually triggered those gains by selling the entity was in such a manner that we are able to use losses available to us. We had capital gains respectively on that transaction and we have -- we have capital losses available to us to offset those gains basically.

Okay. Okay, I got you. So the net -- the net impact -- I guess I was just curious about on a gross basis what you would have paid out, but --

We actually have -- some of the gains if you look at the $90 million total gain cumulatively as Jay mentioned earlier, effectively $60 million of that was realized if you will as part of the transaction that we just did this quarter, $30 million had already been realized or recognized in re-taxable income, some last year, some early this year. And so you can look at that portion as being at least considered in whether or not it's a redistribution. There may again --

Okay.

-- be other losses to offset that.

Okay. And then, I guess to what degree you can, can you give us a little bit of an update on you mentioned briefly looking at some of the different structures that you could -- you could really flow into? Maybe you can kind of give us a ideal of where you are leaning in terms of PTP or C-Corp or liquidating trusts perhaps?

Yes, Jason. We don't have a leaning or an ideal to layout at this point. What we're presented with by virtue of the IndyMac tax loss is really enhanced optionality, meaning that clearly we believe that it's fairly straightforward to maintain REIT status through '08 and we don't have mandatory additional distributions. We may make additional distributions but they're not required for REIT status.

And as a result we'll be -- we'll have the free option to consider this issue into next year and I think that's a valuable option for us to have. I think the structural alternatives are -- present good opportunities for us and it may be that by the time we get to having to make a decision we've engaged in a transaction or a resetting of the business model that makes maintaining REIT status not only easy but appropriate.

And so keeping that optionality for us I think is important. That being said, standing where we stand today, there would be significant challenges for us to maintain REIT status beyond the 2008 year, so shareholders should understand and expect that this issue is not -- we haven't made a decision -- we're not foreclosed from de-REITing next year. It's something that is very relevant to us and we're focused on it.

Okay. And I guess the last question -- you'd mentioned that there are some interesting investment opportunities out there. Maybe could you give us a little flavor for what those are?

Well I think there are -- are a number of things happening in the places that we have our core competency, the trust preferred arena as well as in the middle market loan business and for that matter in the ABS business there are a number of opportunities to participate in what I would characterize the forced liquidation of portfolios is I think some of it a once in a lifetime opportunity for investors and it's something we're very, very focused on and studying hard and looking at some specific opportunities there which if we resolve to proceed with them we'll be announcing in due course.

But I think to be a player in the financial services sector, particularly in the parts of it that we have played in and to understand both the structures and the securities that we've been putting together for several years now, is valuable and there is clearly some opportunity for us and for others, obviously, and we're very focused on thinking through how to take advantage of those opportunities.

Okay, very good. Thank you.

And your next question comes from the line of [Kevin Mueller] from RBC Capital Markets. Please proceed.

Hello. I was wondering -- and someone had asked earlier a question about the convertible debt. I noticed that [Rate Financial], earlier in the week announced that they bought back some of the convertible debt at what looks like a pretty attractive price and I was wondering if you had thought about this. To me it looks like an attractive use of capital.

Sure. I mean we think about the full panoply of options open to us for using cash. I think we've had this conversation now every quarter going back to four quarters ago where we've looked at and kind of walked people through how we think about stock buy back.

You know our stock is extremely cheap right now, obviously, we think. And I think there are opportunities on the convert side as well. So we constantly think about it and consider it. I think it's fair to point out that those who have been listening to me over the past year realize that I think cash in this environment is extremely valuable and so parting with it is difficult for me to do.

But we do think about those things and look at it. We watch the trading and all this stuff and it's something that is talked about regularly, internally, but we've not -- we've not bought back anything convert.

Do you have any thoughts on why Rate Financial decided to do this now, or did this look too attractive to them to pass up?

Yes, you really should ask them that. I don't any idea what their thinking is there.

Okay.

And your next call comes from the line of [Phil Dunmars] from [Geode Capital]. Please proceed.

Good morning, guys. Most of my questions have been answered but which of the alternatives, John, was taken off the table by the Board. Can you guys elaborate on that?

Yes. We really don't think it's appropriate for us to layout what exactly it is -- you know we had studied hard and focused on -- I just don't -- I don't want to start down that path. It was something that we thought -- all of us thought was a good transaction but just -- you know we couldn't get it done at levels that we thought made sense for the Company.

It wasn't really an alternative that's been closed by the way. It was a specific transaction. It's not -- like I've said there's one course of action we will not pursue.

Okay, and it involved the entire Company or did it involve a piece of the portfolio? Can you elaborate on that at all?

I think I just prefer not to elaborate on it.

Okay. Okay, thank you, guys.

Okay.

Sure.

And your next question comes from [Harry Zelnick], private investor. Please proceed.

Good morning. On a previous announcement or conference call, I don't recall which, several quarters ago, you pointed out that you had enough capital and enough liquidity to pay a $0.25 per quarter payout, I believe, and if my facts are wrong, please correct me.

Obviously, circumstances have changed. On the other hand, people who have bought your -- your stock many of them bought it for that [fat] dividend at the time. Without the dividend, many of us are in a bad situation and given the fact that you see all these opportunities out there I can understand your reluctance to payout that which is not necessary.

On the other hand, can you address the fact that before you made these suggestions that cash was going to be available and it seems to me that you're basically hurting a whole class of investors that are looking for that dividend income regardless of the effect upon the Company, that's what they look for.

Right. And, Harry, I'm sympathetic to your view. I do believe you've accurately stated, maybe not precisely, but you've accurately stated the gist of what I communicated on prior calls which is that the Company does have the cash flow to -- or the cash to support continued payment of a $0.25 dividend.

The difference between the prior quarter and today, of course, is IndyMac having been affected, in particular, and more generally the impact on the financial services sector that we lend into, but specifically at IndyMac, it has a very significant impact on us in terms of from a short term basis it shuts off much of the cash flow that supports the dividend that we have been paying.

You know that being said, the Company does have the cash to continue to distribute to shareholders and I do not want to foreclose the notion that that might happen and we may continue to do that. I don't think the general proposition returning capital to shareholders which is effectively what we would be doing -- but returning capital to shareholders in the form of a dividend is probably not sound policy.

But we have to examine the alternative uses that we have for cash and for sure we're not going to use that cash unless we think we can do so in very meaningfully, accretive ways and so at the moment we are leaving all options open.

I do think, you know, I've been trying to communicate to people for some period of time now that given how rocky our sector is and you don't have to look at our Company to realize that, but there are hundreds of companies and hundreds of billions of dollars of losses that have been realized in the sector. You don't have to look too far to realize that the cash flow associated with these investments is being threatened and we shouldn't be adhering to a dividend policy just to adhere to a dividend policy.

We should, you know as a general proposition, dividends should reflect earnings of the Company, and when the earnings of the Company aren't going to be there for 2008 to support continued payment of that dividend in 2008. But again that decision has not been made. It is among the options that we will look at at the end of the quarter and make a decision.

But we're very sympathetic, Harry, with your position. We do know that shareholders purchased our stock because they trusted in dividend payments. We totally get it, and are as disappointed as you are in the position that we are in and are doing our best to dig out it. But I can't commit to you that that dividend will be there in Q3.

I understand that. My next -- my follow up question then is what about the shorts that are out there as a means of shaking them loose and perhaps getting some better pricing on your stock.

Right.

If you were -- if you continue to pay the dividends it becomes difficult for the shorts to hold the position.

Right, I understand. And as I've said on prior calls, I can't allow my corporate finance policy to evolve based upon what shorts do. You know if you've listened to these calls for some period of time now when the stock was at six people were making the same argument and beating me over the head to buy back stock at that level to address the short position.

I just don't think it's sound policy for me to pay a dividend or buy back stock or buy back to convert because of what the shorts are doing to me. I think, you know I think in due course they'll take care of themselves.

Okay. I just was -- wanted to hear your position because earlier -- well, never mind. Thank you very much.

You're welcome.

And your next call comes from [Robert Kyle] from [CSCM, Inc.] Please proceed.

Yes, hi, guys. Difficult quarter. Question regarding the management fee that's payable to Cohen & Company and before I finish I'd just like to observe that clearly the amount of assets under management have obviously dropped due to market defaults, deterioration values, so forth.

Is the management fee payable to Cohen market asset based, or should some consideration be given to the fact that the net value of the assets being managed is considerably less than it was say two years ago? It would seem to me that something like this needs to be addressed. Please go into that a little bit, John. Thanks.

Sure. The way that the management fee structure works at AFN as it does for most of the externally managed REITs is a little bit convoluted and requires some effort to get your arms around. But the base management fee for the REIT management agreement is based upon the equity in the Company and that equity is adjusted as there are, in this case, in negative ways.

There's also an incentive fee based upon returns in the Company that are realized. So -- but you see start with what I would call a very common marketplace REIT management fee structure. But then you look to the underlying CDOs that have been invested in. So, in this case, take the Alesco CDOs where you have inside of those CDOs management fees to Cohen for managing the CDO. The aggregate of those fees offsets a dollar for dollar any management fee that might be due under the REIT management fee.

We have, I don't have the exact numbers in front of me, but from a substantive standpoint the offset has been complete so that there's been no management fees paid under their REIT management fee.

So, you know I answered your question by explaining that the REIT management fee does go up and in this case down based upon the equity of the Company. But you look at the CDO management fee that overcomes the REIT management fee for the time being. The CDO management fees themselves have different metrics.

Typically the fee is divided up into two pieces. One being a senior fee and that senior fee is a function of the assets that are held inside that structure and, as the assets default, the denominator, if you will, that is used to calculate that fee is reduced and then part of the fee is also what we refer to as a subordinated management fee and that fee is dependent upon cash flows being available to distribute to equity holders in those CDOs.

So those subordinate fees are by and large being cut off as well. So it's not quite as straightforward -- I can't answer your question in a very straightforward fashion, but for sure I can tell you that the cash flow to Cohen, the management fees being realized by Cohen, are being materially reduced as a result of the credit performance of the portfolios.

Well it looks like it was reduced by about $200,000 against the prior year quarter and was up by about $2.2 million for the six months, so it's very hard for me to get my arms around that, but whatever. Thanks for the answer.

That actually is the fees inside of the CDOs have declined by $500,000 quarter over quarter and that's because -- that's where you're measuring the asset management.

Right.

And that's quarter over quarter that's not to say what the impact will be now that the CDO is turned off.

You haven't seen the impact on the fee on IndyMac.

Right, you'll see that next quarter. That'll be in the third quarter.

And your next question comes from Jeff Miller from JMG Capital. Please proceed.

Yes. I'm just trying to understand the liquidity position currently. It looks like last quarter you had $130 million of unrestricted cash prior to paying out the dividend. You had about $87 million of restricted cash associated with I think some of your CDOs.

And then this quarter now on your release you've got $136 million of cash, or after backing out the dividend $88 million in restricted cash. Where does the realized gain from your CDS portfolio that you sold? Is that part of the $136 million.

It's part of the -- what -- yes. It's part of what's now $120 million. So that transaction is closed out from accounting perspective it is partially closed out previously and we are realizing cash that was unrestricted cash, but it was unrestricted from an accounting perspective. Technically it was subject to [claw back].

Okay, okay. So last quarter that was in that unrestricted cash number.

That's correct. The $120 million unrestricted after dividends really hasn't changed. The issue is that we paid a $15 million dividend in the second quarter and effectively regenerated about the same $15 million worth of cash between earnings as well as a couple other asset sales.

Okay. So is it safe to say then going forward -- you're basically kind of break even then in terms of cash position quarter over quarter. But is that expected then to obviously drop now that IndyMac has been seized and the cash flow from that has stopped?

That depends on how you look at it. We still expect to have a positive cash flow coming off of our investments you know after debt service and G&A, et cetera. And then the presumption you have there is that we don't -- it depends upon whether we spend any money on anything else and --

Got you.

-- whether it's dividends or buy backs or whatever else we do.

Okay. Fair enough. Thank you.

Yes.

And your next question comes from [Arthur Burns] from [Dell Tech Associates]. Please proceed.

Gentlemen, I know it's been tough for you to run a company that's involved in a marketplace that's deteriorated. But we, as shareholders, have also clearly suffered fairly dramatically from a $10 high to where we are today.

And I think you owe it to us, who have a decision to make, do we continue to go with [MacAtee] & Co. and the Cohens about rebuilding this thing or do we take our 90% loss from the top and go do something else?

I think you've got to lay out without giving details, it's not important that you tell us what deal you missed and the magnitude of the deal, but I do think you owe us a game plan going forward. And I know you've been involved simply righting the ship. But you made the comment you think the stock is cheap.

You've got liquidity. IndyMac's a big problem. We know that, but that's now in the past. But what can you do to make this a $3 stock or a $5 stock a year from now, two years from now, five years from now. And I think you owe it to us instead of hiding behind "I can't tell you this, I can't tell you that," about what your game plan is to rebuild this thing. I think you have failed to do that and I think you owe it to us.

Well, I appreciate your comments and I'm sympathetic with the position you're in and it is a bad situation that the Company has suffered greatly by virtue of the sector that we're playing in, I think.

But my real concern, I'm not trying to hide anything. What I'm trying not to do though is articulate -- there are number of things that we can do and I'll go through some of those at eye level. But what I'm trying not to do is point to one or point to another and then build expectations in shareholders that were going to proceed down a particular path and then as we try to go down that path the terms and conditions under which execution of that plan required are not acceptable to me or to the Board or to the rest of management.

And then suddenly while we think it's a good idea -- you know the fact that it's too expensive precludes us from doing it and then suddenly everyone has this expectation that we're going to do A, B and C and we don't do it and it's just not a productive exercise.

You people have an expertise now in an area that's been trashed.

Right.

And I see these people who bought the Merrill Lynch portfolio at $0.22 financed to the tune of 75%, I mean it would seem to me that that is in a smaller scale an area that you people could think about doing.

But just by telling us that you're thinking about that can help us to decide whether we want to stand pat and see if this thing can be rebuilt or if we should just take our losses and go do something else.

Sure.

And I think just giving us some idea of what you're thinking as opposed to sort of downplaying all of what the Board is thinking and so on about the future I think we're not getting a big enough picture.

Sure, well that's fair. And I will affirm for you that what you've laid out is frankly part of or one of the exact things that we are thinking about. Which is to say that there are opportunities across structured finance that are I think very compelling opportunities if you look within the sectors that we know best which again are the, you know, the trust preferred arena and the middle market loan sectors.

I think within those there are particularly good opportunities. The trust preferred sector is one that's not surprising getting hammered as all of you can see. And there is much forced selling going on and probably more that's about to go on. And we think it's an opportunity for us.

Now, executing on that opportunity is never easy and there are a number of uncertainties along that path that we would have to overcome, but certainly doing something along those lines is potentially quite valuable to us.

There are other things as well. Internalizing management for the Company is something that we've considered and will continue to consider. Focusing more on the loan sector is something that I think is -- presents some opportunities today, but not without risks.

On the one hand lenders today can be incredibly choosy in borrowers that they choose. Very different than it was 18 months ago and one of the reasons why we were unsuccessful in growing the loan platform in the -- in the ways that we had originally projected --

Spreads got too narrow, I'm sure.

Spreads got narrow and there was too much money flowing around so you started seeing covenant free loans and things that just made us very uncomfortable. Now that's -- it's paying dividends in the sense that the deals that we did do seem to be performing quite well. I think the economic conditions will affect our portfolio. But we seem to be working through it well.

But I think today those conditions are on their head. You can get very wide spreads, you can get any covenant you want, and you can be very choosy with respect to the borrowers that are out there. The problem, of course, is you can't get financing for those loans and so you've got to put a lot of equity to work.

So all of these things need to be balanced in order to choose the right path or paths for moving forward, but you've certainly pointed to an arena that absolutely is one that we're focused on, and are quite focused on it and we have not, as I mentioned I think on the last call, we spent most of last year making sure that the ship didn't tip over and we achieved that. Certainly not free of problems, but the ship did not turn over.

And we've been focused for the better part of this year on looking at these different alternatives and have gone down the path on a couple, but it's important that all the terms are terms that are good for the Company, not most of the terms but all of the terms. And it's not necessarily easy to achieve that, we're working hard to do it.

I'm very confident we will, but we are going to go forward in a judicious manner and make sure that we do maximize shareholder value and not just do something to satisfy those that are beating me over the head to act. I mean it is important to act, and we do want to act, and there are things that we can do, but it's quite important that we cover all the bases when we do so.

Agreed 100% and the only advice that I would give you is encourage us a little more as beaten down shareholders that there are opportunities out there and that you think you might be able to take advantage of them.

Well we absolutely feel that way.

Great.

You haven't seen anybody running away from the opportunities here. We have stayed focused and are working hard to try and realize them.

Thank you very much.

You're welcome.

And your next call comes from the line of [Joseph Zidow], private investor.

Yes, I have a quick question about the CDOs that take years to recover.

Sure.

Which one are those?

The transactions of Alesco 14 and 15 are the ones that we project will take the longest.

Okay. And are we going to get the names of the various banks in the CDOs?

No, I probably do this on every call. It's problematic to start selectively listing these things and we can -- but we can list the banks with respect to which where we have an issue and are focused and obviously IndyMac was one of those that we have listed. But from a materiality standpoint, IndyMac and E-Trade were the largest exposures that we had and I think we've been pretty good about getting those names out.

Well, no, I don't think so. That's two out of 320. And I went to the shareholder meeting and I was told that this would be made more public at this point, at least that we would know which banks would be above 1%. So we're not going to get those names?

No, I think at the shareholders meeting what I told you was we would revisit the question. We have been revisiting the question.

And so the -- revisiting the question now is that we're not going to get them?

We're not prepared to reveal on a selective basis these names. I think our experience, your experience here, if you look at the other companies that participate similarly in this sector and in similar sectors, we're not unique here. You'll find it across the board. It's just in a public company context to start doing one off names and then not being able to do the private names because we have MBAs. It's just not that simple a thing.

Okay. And do you have TruPS within your portfolio that you can deploy to repair the CDOs that have been broken?

One of the alternatives -- one of the options that may be open to us, the structural issues surrounding these CDOs are not always straightforward, but one of the issues or opportunities may be to take some of the trust deferreds that we have on our portfolio -- in our own portfolio and contribute them to the CDOs that are failing in order to reinvigorate the cash flow from those deals.

There are a couple of issues associated with that. One is it may be good money after bad if there is continued deterioration in that sector. And that's been the main driver behind my reluctance to pursue this strategy.

And the second thing is we're not 100% owner of the equity in those deals, so a turnaround and make that contribution you may in effect be making a gift to the other equity holders and you automatically lose some percentage, typically 40% of what you're contributing.

But as the dust begins to settle, I would prefer to see another full quarter before I'm prepared to say whether or not things have finally settled out, or not. But once that happens, then I think it might be worth devoting more assets to fixing some of these transactions and that's one way to go about doing it.

And there's like $29 million in TruPS right now?

Yes, no we've actually sold --

We've sold off that --

We're down to $20 million. Yes. That's part of (inaudible) cash.

Okay. That's part of the restricted cash or unrestricted cash?

No. That's part of selling some of the TruPS that we hold on our balance sheet generated some of the cash that offset the fact that we paid a $15 million cash dividend but we didn't have $15 million in cash earnings this month.

Okay. One last question. Alesco 10 is the biggest CDO that we have and how long is that one going to take if no other TruPS defer until that one is cash flow positive again?

That's kind of the middle of the ones that we have. It'll be several years.

Okay. All right. Thank you very much.

Yes.

And your next question comes from [Marc Berger] from [MVK Associates].

That's MKB. Can you tell us on a going forward basis now what is let's say for third and fourth quarter your monthly cash flow going forward versus your taxable income going forward in terms of [cents per share]?

Taxable income of course is an annual calculation not quarterly and because of the IndyMac loss we expect the taxable income for the year to be not positive or marginally positive.

The -- from a cash flow perspective, given the OC triggers that we've hit pre-doing something else, in other words absent a dividend, absent a stock buy back, converted buy back, investment and other activities, we expect the Company to be marginally tax flow positive, net-net. So all in, we'll be cash flow positive.

Okay. So now if you go and buy back some of your debt, okay, that would pick up -- it would certainly help the balance, well I should say the book value. It would also increase your taxable income and therefore allow you to continue to pay REIT income towards -- or for the rest of this year. Is that a consideration?

Well certainly buying back to convert at a discount would have a positive impact on book value. It would also have a positive impact on cash flow because we're no longer servicing that portion of the convert that we buy back.

The notion of it creating re-taxable income to allow a dividend, I don't know if we would get there or not, you know depending upon the magnitude or the price. But the ability to pay a dividend is or it's not really a question. We have the ability to pay a dividend. The question is whether it's a sound corporate policy at this point not one's ability.

Okay. And you mentioned that adjusted book value is no longer a good measure of value. Could you tell us what would be a good measure of value and what you would value this Company at?

Marc, I think what we've said was, in the release that we were putting an adjusted book value calculation together in the past because GAAP only allowed us to show one side of the fair value and that was the asset side.

So now that GAAP allows us to mark the assets and the liabilities to fair value, you know GAAP is as good a measure as there is out there. I mean you can't -- any measurement is going to give you some flaw and adjusted book value analysis at this point would -- may or may not include some of the deferrals, and again, you determine whether they are or they're not going to end up being losses. That's the conjecture that can't make at this point and shouldn't make. So you're left with the GAAP book value as an investor and that's really the only place you can look at this point.

And what is the GAAP book value?

The GAAP book value is $3.41 a share.

Okay. So that's the -- all right that wasn't adjusted. Okay. And you said looking for opportunities; the cash that you have available for those opportunities obviously is the cash that's sitting in the bank. Is it also part of the warehouse facilities that you have as well?

I'm not sure I'm following your question. But we have cash available for using -- you know for purposes that we think are appropriate of $120 million. The restricted cash amount, which would include things inside our CDOs and other places that we don't have free access to it but it's available to be deployed for very specific things, would not be available to us to do something outside what's contemplated inside that particular structure.

And what is --

I'm sorry. Let me just clarify. The first loss that we have on our warehouse of $40 million on the Wachovia facility, that actually shows up in our loan line, it's not actually for accounting purposes not really cash, it's part of our loan portfolio.

Okay. So the warehouse facilities that you have available again are specified to what you can use that for?

It's the only warehouse that we have available to us today. It is the middle market loan warehouse. So that warehouse can house additional middle market loans only.

Middle market loans?

Yes.

And obviously that would be an area that you would probably want to pursue.

Well it is an area that we want to pursue. The caveat that I would put on that is the way that the marketplace is functioning or not functioning at the moment. It's not so clear what you do with those assets ultimately. We have a, you know, a belief about what we do but not proof of it. So the inability to get term financing for holding those assets makes it difficult to acquire those assets at this time.

Okay. Thank you.

And your next call comes from the line of [Robert Neff] from [Ironside]. Please proceed.

Thanks. Are the demands reports for your TruPS portfolios, are they publicly available?

No.

Who is the servicer?

There are different trustees for that. Wells is the largest I believe but we use all the service providers.

But if I go to Wells Fargo and their trustee page and I sign in and register I can typically get remittance reports for anything that they're an agent for.

I don't think so.

Okay. And then -- I want to compliment you guys for taking these calls and staying on forever because they often run past an hour. But you haven't really gone around to see shareholders either. Is there any way in the future with some of the strategic directions you're considering that you're going to go actually see shareholders?

Yes, sure. We -- I think that my intention would be when we do finally resolve what it is the direction that we're going to take, absolutely we intend to go out and try to demonstrate the viability of that plan to folks. That being said, frankly we're always available and we're always traveling, so regardless of where you are if you want to see us we're there at some point and into the future.

Okay. Maybe I'll follow up with you on that. And given the situation, it would be -- it would tend to put a pretty good, strong signal to the market if some of the insiders were buying in here. I know you are -- I can read the proxy statements. I realize that you do already own a lot of the shares --

Right.

-- but I would have thought if you really believed what was going on you would be stepping in a buying hundreds and thousands of shares at these kind of prices.

Yes, I think that, you know people always like to see management buy shares and that's something that we think about and you may see that in the future.

Okay. And then the last issue on the dividend, actually just more of a comment because you have many different constituencies, and I'm a constituency that would like you to focus on tax efficiency.

You have a large number of possible buyers or holders of your stock are people who could go and try to buy the equity traunches of distressed CDOs and the issue there if people go and look on doing that, depending on the asset class and what you're buying and whether it's really an equity traunch or it's just one of the middle traunches subordinated to AAAs, but the prices can be anywhere from $0.5 to $0.20 and the yields are 30%, 40%, sort of the like the dividend yield on Alesco.

And the issue in going and doing that, of course, is that your typical buyer pays 35% income tax on that coupon, so the real power of Alesco as a structure are the tax losses you have. And so, I know dividends are nice and a headline dividend yield of 30% is very seductive, but it's incredibly tax inefficient.

So I know you have many constituencies and that people will present good arguments for doing other things, but I just wanted to make sure on the call somebody puts in an argument for you to maximize the after-tax power of the tax losses that you have on your account.

Right. Yes, we get that. And I think that what you see with respect to the execution on the closing out of the CDS portfolio is somewhat demonstrative of our sensitivity and the appropriateness of thinking through what actions we take with the taxman in mind as well as other factors.

We do -- you point out correctly that there a lot of constituencies and you have convert holders, you have common shareholders who are very focused on dividend yield, you have common shareholders who are very focused on value, and the like, and I think that our job as managers is to kind of make sure we think through the appropriate needs of all constituencies and do our best. And we can only put our finger down on one spot. So hopefully everyone will be like mildly unhappy and -- but mildly happy, so that would be a victory I think.

Well, you know, unless you -- despite the share price and whether it converts at trading, it doesn't look to me like you're in the range of insolvency, and so I would just remind you that you don't really care about the converts, they're debt and they're going to be debt unless something really incredible happens. And so your priority is to the shareholders and maximizing their return.

You, you --

Your fiduciary duty at least is to the shareholders and maximizing their return.

You absolutely are correct in how you articulate the standard. You know in fairness to how I get out of bed in the morning, I do think about all the constituencies, but I am --

Of course.

-- very aware of where my legal loyalties lie and I think I've executed -- I've moved forward with that in mind.

Okay. That's great. All right. And then I think that does it. That was more of a comment. But that last thing about the dividend, and that is -- and constituencies, the last caller pointed out you do have a real expertise here that a lot of people don't have and equity traunches have, you know there's various things trading, the Merrill Lynch transaction is a good example.

For people like me who [were] in early, bought in later, but are still on a mark to market basis, dreadfully underwater, there should be ways, if the portfolio is still generating cash, for you to be able to get -- to go out there and earn returns far, far in excess of what any of your basic shareholders can earn themselves.

So typically, in my life as an investor, I'm always telling shareholders to give me their money back. This is like the one time in 10 I'm saying if the opportunities are there and you can do it so that the gains you earn are not taxed anywhere in the structure, and potentially the cash flow that you generate and give back to us could be non-taxed dividends. I just want to encourage you to do that for everyone.

Yes, we get it. Thanks.

Thanks a lot.

And a final question comes for Alan Goldstein from Wachovia. Please proceed.

Yes, hi. I don't know if you have brought this up before or not, but what would you handicap the possibilities of a share -- of some share buy backs?

I wouldn't be handicapping that. I mean we've been talking about this every quarter for over a year now and it's very much on our minds. It's something we think a lot about and consider all the time and we do have a very significant authorization out there that allows us to do it if we want to. It's something we might do, but -- and I just can't handicap it for you. So I believe that concludes the call. Thank you everyone for your interest in our Company.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.