Annaly Capital Management Inc (NLY) 2008 Q2 法說會逐字稿

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, 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 a period, 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 financings; changes in the market value of our assets; changes in business conditions and the general economy; and risks associated with the investment advisory business of FIDA, 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.

Thank you, Gracie, and good morning, everyone, and welcome to the call for the second-quarter results of Annaly Capital Management. I am 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 Jay Diamond, who are managing directors with the company.

As usual, there is a little bit of a 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 us over the past 15 years has 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 the Department of Treasury's support for the GSEs, 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 legislation soon followed, which was enacted into 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 will probably never know what truly spurred the actions of the Treasury and the Federal Reserve that weekend. Perhaps the macroeconomic realities of falling property prices and their effects on virtually every institution and citizen finally registered with policymakers, investors, regulators, and the administration simultaneously. While there were 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, its denial by people who should know better -- remember the phrase, it is contained -- and the future state of affairs, I want to take a moment to reflect on the present.

First, I want to commend the Federal Reserve. I know this is not 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 light to understand, quantify, and react to the roller coaster 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 passed an earmarked project designed to get him reelected. Rather, he is there to get the job done. As I've 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 interest groups pointing and sniping at each other and brokered a solution on a $1 trillion problem. As far as I can tell, Mr. Paulson is not receiving a placement fee for his investment 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 could never dream to do in a politically correct way.

Imagine for a moment where the markets would be if the Federal Reserve moved lending rates higher by several hundred basis points or so. That is what the credit markets have done over the past year. It is the polar opposite of what the Federal Reserve's actions have been designed to do.

There's a lot of talk about inflation in the markets. And we are on record in stating that what we thought we think we 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 from household wealth has been taken by the US stock market. Globally, the numbers are even greater.

On the other hand, the cumulative gains in commodities, as measured by the increase in the CRV, has only created about $300 billion in gains. In our judgment, the restraint of credit and the losses in equity valuations swamp any long-term inflationary effect from the commodities market.

Inflation in the 1970s was closely linked to the relationship between wages, which are much more contractually-based to industrial America, and prices. That effect is still having its effect on America's industrial companies today, as evidenced by GM and Ford's cost base versus foreign competitors. That was the backdrop of our fourth quarter's earnings call, welcome to the Keynesian nightmare.

This scenario leads us to the recent GSE reform bill hurried through the House and the Senate in the last two weeks and signed by President Bush yesterday. This is the second time in my career that the GSEs have been swept up in the riptides of macroeconomic politics. Fannie Mae was technically insolvent in the early 1980s, but the lines of credit that were linked to the US Treasury cemented the financial standings for both companies, Fannie and Freddie.

These lines, as modest as they may appear against today's trillion dollar balance sheets, were a large influence in determining the nature of the relationship between the United States and the GSE financial statements. It is important to understand that the lines have never been used, ever -- not in the 1980s, when the yield curve was severely tested; not in the 1990s during the RTC liquidations; and not even in the early 21st century, when they were restating five years of financial results. According to our research, foreclosures and serious delinquencies in their portfolios would have to double from today's levels for them to get even close to touching the newly-established lines for support.

As we have stated in the past, Annaly is most concerned about the GSEs in two important dimensions, both of which are being underlined in the markets today. In no particular priority, here are our focus points.

We care about the GSEs as a servicer of the loans which secure our assets. This is a fundamental business priority for the GSEs. They have a large, disciplined organizational structure dedicated to the underwriting, origination, and servicing of their mortgage-backed book of business. They audit the chain-link of activities within the payment system to make sure that investors like us receive our monthly payments of principal and interest on a timely basis.

As many investors in structured products have found, maintaining current information and actually getting your checks on time is a priceless commodity today. The fact that NLY receives them through the Federal Reserve banking system via Fedwire actually makes that functionality worth even more.

On an equal standing in terms of priority is the GSEs role as an insurance company for our mortgage-backed securities. They have never, ever, missed one penny of payment. Insurance companies can live forever as long as they have access to funding and equity. If nothing else is accomplished in terms of healing the residential sector in the US, the Housing and Economic Recovery Act of 2008 has seen to that.

Here is my vision of the future for the GSEs, both short-term and long-term. With the ongoing stress in the real estate sector claiming more and more banking entities, the GSEs, along with the FDIC, are positioned to be the new Resolution Trust Corporations. The real-estate-owned parts of their portfolio will grow as foreclosures continue, and they will be deliquidating properties across the nation. Fannie Mae and Freddie Mac will service, repair, and re-underwrite the residential sector, and the FDIC will handle the commercial sector, along with the banking deposit bases.

The United States Treasury is the immediate backstop for all of these activities. The Federal Reserve will be providing financing and some oversight. The new regulator that will be created will be a powerful restraint against any desire to dilute underwriting and investment standards.

Over the short term, the dynamics involved in the GSE debt and insured products should generate strong net interest margins for the GSEs, albeit against the backdrop of a much slower origination and refinancing business. These conditions, plus the amortization for monthly principal paydowns on existing portfolios in the loans, have created a scenario where the mortgage market is shrinking for the first time in my career.

Yes, you heard that correctly. The overall pool of mortgage debt will relentlessly become smaller, but its composition increasingly will reflect agency-based industry standards. Shrinking day by day, month by month, payment by payment. This should set the stage for increasingly tighter spreads for agency securities relative to their benchmarks.

With that completed, we open up the call for questions. Grace Ann, can you please line them up?

(OPERATOR INSTRUCTIONS) Mike Widener, Stifel Nicolaus.

Good morning, guys. Thanks for taking my questions and congratulations on a pretty solid quarter.

Thank you.

Just two questions, if I may. First one, just a comment on leverage. I know you guys raised a little bit of money in the quarter. And just wondering how much that might have had to do with where you ended the leverage or if it's just kind of conservatism, given the current environment.

Then I guess really the question is, as we build our models out for the rest of the year and looking into '09, should we expect you guys down in the sort of below 8 range, which is pretty rare for you guys, or should we look for something more in the customary range?

Thank you, Mike. Our view of the markets, as we have expressed over the past two earnings calls, the fourth and the first quarter, is that the markets continue to create history on the run here. At the end of first quarter, you had the merger between JPMorgan and Bear Stearns. At the end of the second quarter, you had essentially Lehman Brothers and others being attacked in the markets. And at the beginning of the third quarter, on the 4th of July, the real fireworks in the markets, in our minds, was the GSEs.

And I think against that backdrop, the wider spreads that are out there on the asset side are allowing us to maintain short duration and capture spread in a way that rivals going back to when we first started in the late 1990s, 1997. That is the last time that our leverage was this low. With these spreads out there, we can do a great job of creating spread income and taking advantage of dislocations in the market as people are liquidating things. We keep our powder dry.

And I think that against the backdrop of an entire financial section that is cutting dividends and simultaneously taking write-downs on assets, I think that the backdrop we want to be in is to take advantage of that and keep our powder dry and pick up pieces that are cheap along the way here, as those dislocations work themselves through the system.

So the answer is that with spreads out here, we can afford to run lower amounts of leverage and we feel comfortable doing that and we have done it before. Our history would show you that we have done it. Against that backdrop, we are creating a high teens ROE. If investors can find that elsewhere in the market, I am sure that they are going to find it. But in our mind, if you can do that with short durations philosophy and low leverage, you are supposed to do that.

Thanks. That makes a lot of sense to me. Yes, it is hard to argue with the ROEs you guys have at this point, even at the low leverage.

One more quick one, if I may. One of the things I was pleasantly surprised to see was book value actually up a little bit in the quarter. I was wondering if you could comment on sort of the marks that you guys took on the different assets. I think most people expected that the fixed-rate securities were going be down a fair bit in the quarter, and swaps would offset that.

But curious about how the hybrids and the ARMs that you have on the portfolio might have offset what I would have expected to be generally downward pressure as opposed to a slight increase.

There was certainly pressure in the mortgage market at the end of the second quarter, because you had the GSEs essentially on hold while they were working through their issues. You had concern in the markets 30 days ago. People were talking about the Fed rising interest rates at the August meeting. Everybody remember that conversation. No one talks about that anymore. But the combination of the fixed that is on our books is much shorter duration than traditionally people might be used to looking at in the fixed market.

There's no question that if you want to take a long-duration bet in the mortgage market today, you can buy long-duration fixed assets as one definition of all of the plethora of securities that are out there, and leverage them up against a very short liability structure and increase your spread income.

We don't think that's prudent for what we do for a living. We think that it's a business model that can work for a while, and that's great, but you need to be prepared for a lot of different scenarios. And we have relied on the barbell now for 15 years, and we think that the returns that we have created through all the different cycles over 15 years justify that prudence and that philosophy in the barbell.

So the answer is that within fixed, there are many different definitions, and those spreads knock around based off of duration, not off of necessarily stated maturity. And one of the issues that the mortgage market is definitely dealing with now are slower prepays, and you have duration drift going on because of that. And you need to be careful as you manage that.

Great, thanks. Just to clarify that, when you say shorter duration fixed, do you mean basically by buying up in coupon or is there more to it?

Combination of both. It could be structured product. It could be going up in coupon. We obviously are not going to speak to the specifics of the portfolio on an open call.

You can't divulge the trade secrets, all right. Well thanks a lot, guys. I definitely appreciate the clarity, and again, I think it was great results in a very tough market.

Thank you, Mike.

Jason Arnold, RBC Capital Markets.

Good morning, everyone. Mike, fantastic commentary, as usual. I think you guys are spot on across the board. I think the previous person ended up asking most of my questions. But I was wondering if you could offer the remaining tenor, average tenor on swaps, and also the pay fixed rate.

We do not disclose the tenor, but the pay rates on the swap is a -- sorry, just a second -- 4.78. And the received rate is a 2.47.

Okay. And then perhaps you could also offer us a little bit of color on FIDAC as well, please.

Yes, we are excited about FIDAC. We are excited about the advisory nature of the business. The things that we're doing in there, several months ago, we started to invest in a higher people to take advantage of different business opportunities that are out there.

Included in the numbers that you are seeing now is a growing advisory business on liquidation list and CDOs. We expect that business to grow dramatically over the next two years. We've got a staff of people working on that. That's contributing income and has been contributing income since the first quarter. We are over 50% of the market share in that market. We act as a liquidation auction agent for some of the larger trustees and administrators as these deals break apart. We have a tremendous amount of information and database that we have created as a result of that and an expertise based out of our CDO business and structuring business as well, and our surveillance business.

So from the advisory point of view, we are picking up new relationships and new clients all the time, and working on different assets classes outside of the GSE collateral. We think that is going to pay off for us as the markets do restructure themselves in the future.

I appreciate your comments about the commentary, because to me, the number one question is, for all of us on these calls, is what is the future of the GSEs. In effect, Fannie Mae and Freddie Mac have become the new Ginnie Mae and they are part of the solution; they are not part of the problem. We did not think they were part of the problem during the great buildout for credit from 2002 to 2007. They were restrained from participating in that party.

And now that the markets have settled the first $5 trillion worth of debt that is out there that is guaranteed by the GSEs, it's the other $5 trillion that has to be dealt with. And we have the tools and the mechanisms within FIDAC to do that, and we're very excited about that opportunity.

Fantastic, thank you. I agree completely. I think that without Fannie and Freddie, we would be in a much bigger world of hurt. So thank you very much and great job this quarter.

Bob Napoli, Piper Jaffray.

Good morning, Mike. A question, I guess, on the repo lines. In this world and historically, as I have looked at financial companies, one thing that seemed to constrain people is at some point in time -- and your assets may be different than some of those other companies -- but size. I think you have $50 billion in repo lines. And in today's market, can you really -- is there some constraint on you as an organization in being able to increase repo lines, even with your current low leverage versus historical levels in today's market? And do you think long term that could be a constraint on your organization?

The answer is is that any hesitation that other counterparties had about taking on agency collateral because of the lack of support from Treasury or from the Federal Reserve was basically answered over the Fourth of July weekend and legislation signed by the President on the 30th.

And the one thing that has been a constant since last August when this first broke out is that in the agency space, the lenders have not taken a lot of hits on lending on repo for agency securities. The answer is because the transparency and clarity of the collateral pricing has given the lenders, both in terms of money market funds, corporations, etc., who create these tri-party repos or the other side of the repo markets, has certainty in terms of what the value of that collateral is.

Now, the bigger question that you should have been asking me five years ago is that as all these SIVs and CDOs and other of these ABC commercial paper entities are out there grabbing repo share, are you concerned about them crowding out the agency paper? No one ever asked us that question, but that was certainly a challenging environment for everybody who was in the repo markets back then. And I would argue that our cost of capital was actually higher during that period because we were competing with those guys for capital on the repo lines.

In today's world, all of those competitors are dead. There's a growing pile of capital in the cash markets -- I think $1.5 trillion quarter-over-quarter growth -- that needs to be collateralized, that needs the ability to have access to this kind of entity, if you will, a tri-party. Certainly during this period there have been write-downs by the intermediaries who we borrow from.

But their balance sheets have been constrained by their own investments on their own balance sheets of super senior pieces and AAA pieces, not by lending to counterparts on GSE collateral. In fact, even in the case of the well-known Carlyle liquidation, there was very little collateral damage after the first go-round on that in terms of valuation because of the value of the securities and the ability to price them.

So there is an acceptance. The only thing that people will take on the repo side right now are Treasuries and agencies, and we think that that pool of money is going to continue to grow.

So do you have -- if you had to, if you wanted to tomorrow and you wanted to go out and increase the repo loss up to $60 billion, you have the equity capital to do it. Is it not difficult for you to do?

There is certainly capacity. There is certainly cash out there waiting for more repo. The question is that you get me through a quarter and you price into your model when there's not a global economic meltdown going down at some large commercial bank or some government agency going out of business and being threatened with going out of business, and then we will start to take a look at how much more leverage do we want to put on the balance sheet. But if I can give you a high teens return using lower amounts of leverage in this environment and have certainty and access to that collateral and to Federal Reserve system, then that is the business model I want to run.

When do you think the Fed raises rates? I think -- and do you think that it's totally off the table that they cut rates? US can't have short-term interest rates well below the rest of the developed world for a long time, I don't think. Or do you think the rest of the developed world is coming down?

I think the big story for the second half of 2008 will be the reversal in interest-rate policy by the Bank of Japan, the Bank of England, and the European Bank.

The headline will read, "It's not contained."

Right. You have not seen the numbers come out of the European banks yet like you've seen the financials come out of the US. So the Fed is going to pick up here. They are already picking up space to go on hold because of the collapsing commodity prices over the past couple of weeks. And that will give them -- this is the slowing growth scenario that they have been talking about.

And I think post the Olympics, once China stops buying everything to try to get the Olympic stadiums done, within the next week or so, you're going to see a real pullout in the commodities markets, especially from infrastructure and steel, etc. I mean you point to me at a time in history when the Federal Reserve raised rates when unemployment was rising, and I will eat crow. But that has never happened.

The bigger story for the next year is that the gap between the currencies is going to be filled by companies like us who are generating high-teen returns in dollar-denominated form at a time when you can't get those returns in foreign markets.

And just on the DFC and the structure of the US mortgage market, I think clearly people going through this are going to stand back and take a look at the US mortgage market probably much more in depth than they have, and look at other forms of capital, whether it's covered bonds -- you look at the success of the -- at least to this point -- of the Canadian mortgage market.

And so I do think that there is some risk that the US mortgage market is going to change. I do think that one could argue that the GSE format is actually working, although in today's day and age, that would not be a popular position to have.

I agree. The mortgage market is going to change. It is getting smaller. Demographically, the access to credit that the private markets are constraining credit and underwriting criteria looks remarkably like what the GSEs have been underwriting for the past 50 years. So a lot of the growth in credit is coming through with much more normal underwriting standards, 80% loan-to-value, no first loss pieces in Fannie Mae and Freddie Mac without private insurance in between it on higher rates.

I think that the mortgage market is going to change going forward, and that is what I love about our advisory business, that is what I love about the other infrastructure that we built out in here, is that as it changes, it is going to be great to do.

The one thing I can guarantee you we will not change going forward is the need to get a rate on cash. And how the money markets are adjusting to this, I think is a very healthy and creative chance. People forget that the lenders who have the cash are also concerned about the banking intermediaries as a middleman, and that they are finding their way into different structures.

And I think all that creation is going to take place over the next several quarters, and we are at the forefront of it. I feel very good about our position in that respect.

Thanks. It's nice to see the Yankees buying the pennant again too. Thanks.

I will see you at the Cubs Stadium in October.

Sounds good.

Steve Delaney, JMP Securities.

Good morning, everyone. Mike, thanks. On that opening statement, I think the most important you gave us here was a blueprint of everybody's focused on these wide OAS spreads, and I think the concerns about whether there is going to be too much supply or not enough demand; and I think he gave us a great blueprint of how the supply -- from a technical side -- how the supply might be contracting and sort of an argument for why, over the long term, we can expect those to tighten in. So it's really clearly stated and appreciated.

My question was really about pricing on repos. It strikes me that since maybe May or early June, we have probably seen prices relative to funds or LIBOR move up about 15 or 20 basis points, just roughly, to the 240 range -- at a time when LIBOR was really flat throughout that. So obviously for all of us, it is a modeling issue looking forward.

And I guess my question to you is, is this like a systemic credit more expensive as you were talking about earlier, or what has to change in the world maybe for us to get back to the kind of pricing levels that we were seeing back in May?

Steve, I am glad that you are the guy that asked this question because I know that you will keep me honest and drive this answer the way that it needs to be explained, in case I start to ramble a little bit.

So there's two things that we have been watching carefully. One is look at the auctions that are going off in Fannie and Freddie debentures. Not the mortgage-backed securities, but the auctions on their unsecured. Since the beginning of the third quarter, those spreads have been tightening up pretty dramatically. So as those costs come down, that will improve the net interest margins for Fannie Mae and Freddie Mac as they issue debt and that debt gets displaced -- or placed throughout the system. So that gives Fannie and Freddie better operating margins and allows them to come in and be more supportive of the secondary market.

The second thing that we have been watching is, obviously, balance sheets with the intermediaries. And they can make money in here. They are making money on repo. There's no question about it. And that is keeping some of the spreads on the assets at a wider spread.

Now, as this begins to pick up, there's two things that I think will happen. Once the regulatory body, OFHEO, is comfortable that Fannie and Freddie are now operating underneath all of the guidelines that they put out there for them, they will immediately begin to raise and eliminate those penalty capital charges that they have on them. Which they already took off 10%. There's another 20% to go.

That has the effect on the portfolio of allowing Fannie and Freddie to go in and buy more product. And we think that is underway and you are probably going to experience that before the end of the third quarter, that you will see some more lightning there.

Once that happens, combined with the changes that are going on at the Federal Home Loan Bank, which is allowing the banking system to add more Fannie and Freddie product simultaneously, you're going to have this twin dynamic of more money chasing fewer assets going forward. The demand for those assets is going to be strong in lending accounts and in repo counterparties because you have more money against a backdrop of a weakening US economy in cash looking for a return.

So like I said earlier in the call, 30 days ago, we were all talking about and we were answering questions to basically everybody about the Fed is going to tighten in August. They're going to tighten in October, etc., etc. And our answer was the same answer that we gave today, is that the mistake that the Japanese made in the early 1990s was that they began to reverse course on interest rates too early in the cycle once they had put a floor underneath some of their inflationary problems coming out of real estate. They thought their economy was okay and they tightened, and what they did was create a second leg down.

I believe that the Fed understands that. They wrote a paper on it several years ago critical of that move, understanding move. And when you speak to a Japanese ex-central banker, which I have had the opportunity to speak to some of these guys over the year, they recognize that that was a mistake, too.

It is hard for me to imagine a scenario where, against a backdrop of General Motors and Ford, the airlines, the financial system, lease companies not being able to follow on to lease cars -- that's like 20% of their sales -- we figure, what would be the impetus to move rates higher, unless it was an inflationary concern? And we think that inflationary concern is a very narrow part of the investment philosophy of the country and the world. You had a lot of money go into commodities and drive up the price of oil, which are relatively small markets compared to the equity and the debt markets in the United States.

So I think that we are going to gradually grind those spreads tighter. It is not going to happen overnight. It is not a miracle cure. But you are gradually going to see these spreads get tighter. And if originations are falling off of a cliff, new housing activity doesn't pick up the way that people project it to be, then you've still got, like in the case of Florida, five years' worth of housing supply in the market that has got to be eaten into. You've got an opportunity here to have low rates for a long period of time.

Now, I am not saying that the entire yield curve will move in tandem with that, because the penalty, in my mind, will be in the long end of the curve and in the credit piece of the curve. Which the credit piece of the curve today, as you know, is extremely steep. You can't imagine that the Federal Reserve has cut interest rates from 5.25% to 2% and you still have to pay more when you go get a house in terms of rates -- terms. And your ability to refinance has gone away because your loan-to-value ratio hasn't been kept in tact.

That is a real restraint on the growth of the economy going forward. It holds down rates. It keeps people more defensive in terms of equity trading and equity investing while they wait for that to settle out, which means more cash in money market funds and corporations building up.

So my gut feeling is we are in for a long, steep yield curve, an L-shaped recovery, with some financial problems along the way. We will walk in on any given Sunday and we will find some bank failure taking place or some shotgun marriage being arranged by the FDIC.

The good thing that I feel about is that there's a great report out by Bridgewater Associates that handicaps the United States banking system, and puts out a six-month implied probability of default against the top 10 banks in the United States, and we don't have any exposure to any of them. There is no direct exposure at Annaly to any of those 10.

So from my perspective, you just go through this very cautiously. It's almost the polar opposite, Steve, of what we discussed in 2003. In 2003, when everybody was piling onto Annaly and screaming at us that we didn't get the new paradigm and we should be going into credit and that our rate of return was so great, but we should be using that money to go and take advantage of the 1% to 3% Fed funds environment that was out there, it was our decision back then that in a 1% Fed funds rate, we should not be creating a 20% return on equity. That in fact, if we were, we were creating a return that was unsustainable over time, and that when it did reverse itself, it would expose a lot of the weaknesses, which obviously, over the next three years, it did expose a lot of the weaknesses in the system.

I would say we are at the opposite end of that spectrum now. In a deflationary environment, which no central banker alive has experienced, including Alan Greenspan, the risks that are being created in other asset classes outside of government-guaranteed asset classes, need to be understood in a different light. And against that backdrop, maybe you shouldn't be creating 20-plus return on equity. Because while the S&P is paying a 1% dividend rates, why should this sector be paying 20%? It just doesn't make sense to me.

So the bottom line is that by using lower amounts of leverage for wider spreads, you can become more sustainable and do a better job protecting book.

Thank you, Mike. One thing I did detect from that -- and as you advertised, you did ramble a little bit, but it's your call, so we are not going to -- we're going to certainly give you that courtesy -- it does sound like you see a link between these wide OAS spreads in repo pricing. And maybe as the OAS comes in because of these demand factors, it will -- as the actual collateral becomes tighter, we might see better pricing on repo as well.

Yes, I think you want to watch the long end of the LIBOR curve, Steve. Like 1995 -- you remember 1995 -- when the long end of the LIBOR curve started to come down, and you had a hell of a rally take place in OAS spreads.

Yes. We got a nice drop in one-year LIBOR today.

Exactly. One day does not make a quarter, but it is on its way. It will grind tighter as those mechanics become more comfortable.

Thank you, Mike.

[Dan Perkins], a private investor.

Good morning, Michael. Two quick questions. With the elimination of the implied guarantee with the actual guarantee, would you expect to see the spreads between Fannies and Freddies and Ginnies to narrow? And the second question is with the slowing of the market, I understand the mortgage market is a large market, but would you expect supply problems?

I would say that $5 trillion is a lot of supply to manage, and obviously there's a lot of different ways to use that. I think my interpretation of what has happened here is Fannie and Freddie are the new Ginnie Maes in terms of credit spreads, so I would continue to see those spreads tighten to each other.

I also like to point out, just for historical purposes, and I've spoken about this in the past, is that one of the dirty little secrets about Ginnie Mae is that Ginnie Mae actually was initially the first subprime kind of lender, and that a lot of the delinquencies and defaults on first-time homebuyers actually already flow through the government budget in Fannie Mae's prepays as they take back properties and redistribute them back out into the market.

Ginnie Mae.

Ginnie Mae, I'm sorry. So Ginnie Mae was created for the first-time home buyer who didn't have access to the kind of credit capabilities or the balance sheet capabilities of more conventional buyers, and that has been a drain on the budget, I would say, for years. I don't how to quantify it because they don't break in the house, but certainly that is something that deserves some scrutiny from people who look at the United States budget.

At the end of the day, you're going to have Fannie, Freddie, and Ginnie being big supporters in the market, which means that their underwriting standards -- 80% loan-to-value, a multiple valuation techniques, strong servicing behind it, cash flows that flow through the Federal Reserve system -- will be the standard and the access for credit for a while. Most of the originations that are going through today have to be conforming.

So I would say that you will see some compression in the spreads there, yes.

Michael, back in the mid-80s, when the Ginnie Mae mortgage pool became a great fixed income alternative -- as Wall Street normally does, it takes a great idea and destroys it with excess amounts of money -- given the spreads, even at the low level of leverage that you're talking about today, would you expect to see new competitors come into the market because of the spread opportunity and the, as you say, high double-digit -- high-teen returns?

You know, I think the beauty of the American banking system -- and this is something that we have spoken about in past calls, and I thank you for giving me an opportunity to talk about this a little bit -- is that we are not currency experts here.

But one of the things that we said on the third-quarter call last year, in reviewing my notes, was that when you begin to see these returns on equity, created in the banking system -- and this return on equity is relatively high compared to our history as well -- it is not the highest we have ever done, but it is high -- the dollar actually begins to perform better, because it begins to sift away capital from other currencies, because you can get government-guaranteed cash flows with a relatively high ROE, and you can't get that in other markets while they are going through their slowdowns, etc.

So from my perspective, that will attract more money into existing structures. I am not sure that new competitors can come into the space, simply because the due diligence that's required is -- well, tell me how you did in 1998. Tell me how you did in 2000. Tell me how you did in 2001. Tell me how you did in 2003. And now let me see how you did in 2007.

If I was a foreigner bringing cash into this market, you are going to decide in the checklist, am I going to deal with a public company that has been through this and uses outside pricing techniques, doesn't have a black box and is basically transparent and liquid, Sarbanes-Oxley compliant, New York Stock Exchange registered, or am I going to put it into a hedge fund? Everyone has to answer that question for themselves.

Thank you, Michael.

Jim Ackor, Stern Agee.

Good morning, guys. It has been a while. Been enjoying the call immensely. It's the first one I've listened to for a few quarters, but I'm back off the beach. And was wondering, Mike, given all the macro commentary that you are make and you're so good at, it seems to me that in the midst of all of the topics that are being discussed here, the one topic that seems to -- or I think has the potential to impact one way or the other a lot of what's being discussed here on this call is the US housing market, which appears to be, in many people's minds, still in a freefall.

I was curious as to whether or not you might be willing to make any commentary regarding what your thoughts are on the housing market here in the US, what inning -- to kill an old cliche -- we might be in with regard to the housing market. And then whether or not you see any of the housing problems spilling over into other places. A lot of people seem to be focusing on England right now and what sort of the implications might be for the rate environment here in the United States. Thanks.

Thank you, Jim. We do watch housing very carefully, and obviously over the past seven years we've taken some heat from people because we did feel the bubble was there and it took a while for it to play out.

I can't handicap it in terms of innings, but I will point out the following problems, is that this is not a US phenomenon, as we've said on other calls. If you have contacts in Ireland or if you have contacts in Spain, you know that the housing bubble has also broken there -- the property bubble has broken there. Ireland and Spain are extremely frustrated with the European Central Bank because they tightened rates at a time when their growth economies are falling, which were based off of housing buildouts, et cetera.

At one point in the past few weeks, Spain actually threatened to issue their sovereign debt in dollars instead of euros, because they felt like they needed to make a statement to the European Central Bank. And it is important to understand also that the European Central Bank still does not have a constitution that links -- an approved constitution across all of these different economies.

The Japanese have been in real estate deflation for 20 years. They have been dealing with it in a different way. Australia, New Zealand, definitely feeling the heat now, even though they are commodities-based countries. So from the perspective of what we look at at the US, you now have record amounts of supply that have to be worked through. Some of those houses will never be occupied. They will -- they are the new ghost towns of the West, as one of the Federal Reserve members said. And I think that it's going to take a long time for us to work through this, because you are seeing the effects at the municipal level.

There is an article in yesterday's New York Times about the State of New York and because of the downturn on Wall Street, the financial crisis that is being created in the state's budget, where they're looking at emergency cuts in services and personnel. New Jersey is certainly another one. California, we read a commentary a few weeks back that California spends more than $1 billion a day than it takes in currently in tax receipts. So the housing buildout -- Las Vegas, which was always recession-proof allegedly, now is in a crisis. So this is a period where we are going to be juggling from crisis to crisis over the next few years between consumers, the economy, municipalities, and the federal government.

I think that the distinction that needs to be made in every investor's mind is that, as Welly said in the fourth-quarter call, that the economy is only now beginning to deal with this. Joe Six-pack, she said, is only beginning to realize that he doesn't have access to credit and he doesn't experience the same sorts of things that are going on on Wall Street. Wall Street is taking the hit first because it's using assumptions to knock down these securities and to knock down these assets so they can price it for what the economy is going to be dealing with in the future.

So in my mind, if you can separate between the assets that have been created out of the bubble and the assumptive nature you use to price those, I think that the Fed, the banking system are getting their arms around that, and that a lot of that stuff is priced in.

The consequences of that cost, however, are only now beginning to be borne by the consumer. And what has his reaction been? His reaction has been, I am not going to Starbucks. I'm not going to Bennigan's. If I've got to spend $4 on something, it is going to be on a gallon of gas so I can get to work. And we are going to choose to eat in more as opposed to eat out more. Which means that when we eat in, we are going to make more choices; maybe we are not going to have filet tonight, we're going to have hamburger.

So from my point of view, there is a circling of the wagons going on of a 70% chunk of the American economy in terms of the consumer, who is also 20% of the global economy. And that could be going on for a while, while he shifts from managing his balance sheet of debt to trying to save for the future and maintain growing tax pressures from municipalities and the federal government and the results of lower asset prices as a result.

By the way, I would like to say that Joe Six-pack is also running some of the community banks.

Right. So I think it is going to take a while, Jim. And I have to separate it as an investment professional between the difference in the real economy, which my family and my brothers and sisters operate in, and the economy that is operating around that, which is the structural economy of Wall Street and assets and liabilities.

Okay, that makes a lot of sense. So if you had to handicap, just real quick, the odds of short-term interest rates going up in the United States versus the odds of short-term interest rates coming down in Europe, what is sort of -- what is your (inaudible) spread there?

Well, I am fairly confident that -- there was a story this morning about the Bank of Japan, highest unemployment rates in years, slowing economy, going to reverse course, bring down rates, be more monetary compliant. I think that the BOE is probably the next one. They have a very weak government, and I think that they have also been dealt a hand here where there's going to be a reversal. We do business in England, so we are very knowledgeable about what has been going on there and what the lag effect is between the bubble and the break.

Simultaneously, the euro zone, the European Central Bank has one mandate, and that is to defend against inflation, which in my mind, they are fighting the last war, not the current war. So they need to come to that conclusion. Obviously, there are not a lot of American consumers going to Italy this summer at $1.50 or $1.60 on the euro. I have always been stunned about how expensive London is in terms of being there either for business or personal reasons.

So the real problem in all of these economies has been that incomes and wages have not kept up with the costs of housing, first, and then food and energy services. And incomes are not going to be rising against the backdrop of slowing economies. That is the bottom line.

Thanks very guys. I appreciate it.

Bose George, KBW.

Morning. I had a couple of more company-specific questions. One, just your quarter-end spread was slightly lower than the 199. I know there are usually quite a few moving parts, so can we assume that was the reason for the change, or did the asset sales have any impact?

No, it is just that quarter-end spread is an annualized yield that is based off of forward adjustments and interest rates. So it is not reflective. It is an annualized number -- that's what I should leave it at.

Okay. Secondly, what percentage of your portfolio was agency CMOs during the quarter, and are the repo markets treating those securities any differently in terms of haircuts still, like what's --?

You know what? The repo markets have always treated the CMOS differently. They are structured products. It is only a slight difference, and the percentage in the portfolio is less than 30%.

Okay. And then just switching to spreads, where are you seeing spreads on your new investments?

You're still looking at relatively attractive spreads in the market. Depending on where you are on the curve and depending on what risks you are willing to take, it could be anywhere from 180 to to 225ish. It depends on where you want to be.

Okay, great. And then just finally, I wanted to refer back to something, Mike, you had mentioned. It seemed like you alluded to the potential disintermediation of some of the Wall Street players in repo relationships. Can you elaborate on that a little further? Are there structures that could happen like that?

Yes, I do think that now that you have the underwriting standards for repo clearly being honored and dictated by the Federal Reserve, which has never happened before in my career, which was part of the reforms that came out of the Bear Stearns/JPMorgan, what have the lenders learned here? What have they learned?

They've learned that they need even more transparency as to what the underlying collateral is and that they are concerned about the intermediaries on the bank balance sheets as well. So the banks need to make a decision -- as Welly said in the past, when the rubble is settling, they have to stick their head up and see where are they making money and where they have the ability to that on a relatively low reserve requirement business that is relatively risk-free. And that is the agency and Treasury securities market, right)

If you don't have cash coming in, you can turn around and put it into the Fed, and you can turn it into cash if you are a primary dealer or a bank. You can charge higher spreads and you can make money, because LIBOR is out of sync with where this all is, which keeps the asset spreads on a relative basis wider than they should be.

So until you start to see changes in the that, the dealers are probably doing pretty well just on their net interest rate margins on this collateral. And if they are in the money management business, they want to make sure they are keeping that cash under their control, because it is hard to get cash back once you have let it go, as Bear Stearns learned. So you need to constantly have a bid for that collateral.

And obviously, dealer banks, broker-dealers, primary dealers are running lower inventories right now. So they need intermediaries and they need collateral to collateralize that cash. They don't have as many principal balances as they had. Certainly look at the announcement by Merrill Lynch in the past week. They have a lot fewer principal balances than they did six months ago.

So that deleveraging opens up opportunities eventually into the repo market. And the concerns that lenders have, they express to us directly, and we have the opportunity, I think, to make some significant changes structurally here going forward. And the dealers are always going to be there and they are good partners to us in the way that they handle things. They have behaved very well with us over the course of the past several months, and that is because we have behaved well within the markets.

Where they have needed information, we have given it to them. From a financial point of view, Kathryn has been totally available to all of our lenders on a regular basis. One of the things and the beauties about being in New York is that you can speak to these guys on a regular basis, they can walk over and speak to you, and we can look them in the eye and go through everything with them.

And combine that with the fact that we have never, ever marked to model. We have always used third-party marks in our model and outside marking services and audited returns, as a result, to distribute our results. So they don't have to question valuation; they can point to a screen. I think that is an interesting development that people are starting to understand.

As Welly said on the fourth-quarter call, up until last August, nobody really paid attention to our road show when we said they could take our collateral and turn it into the Fed. A lot of people pay attention to that screen now. You know, you are a banking analyst, so you understand that there are going to be more shotgun marriages in the banking sector. And I don't know when the Federal Reserve has ever raised rates against the backdrop of having this many banks in financial distress.

So I don't think that's going to change. The amount of cash that is there is a growing pile of cash that can make relatively high ROEs in this spread, and I think that will balance the dollar out and I think it will attract new capital.

And just going forward, do you think that we will see some of these -- some slightly different structures coming out in the market in terms of that we're -- where the dealers have less control over it?

I wouldn't say control. I think you're going to want them as partners in it, and I think that certainly the Fed and the Treasury are working with all of the players in the market, including us, to discuss what are the options. How do you change this? How do you make it better? How do you make it stronger to protect money market funds, so you don't have a break-the-buck issue? You don't have these puttable liquidity issues back onto the balance sheets of the banks.

Those are things that can be fixed pretty easily. There are structures out there. Up until now, the rating agencies didn't want to deal with them because they were so busy rating all of these other CDO structures and SIVs and the other -- CLOs, etc. that were out there. Well, there is a genuine focus on this stuff now. And without giving away the secret sauce, I think over the course of the next year, you are going to see some dramatic changes in the way that this works, and I think it is going to work a lot better for everybody -- dealers, lenders, and borrowers.

Great. Thanks very much.

[Rich Sloan], private investor.

Thanks for taking my call. Mike, your presentation seems to rest on two pillars. One, we are in a deflationary environment. Two, that Fannie and Freddie are basically going to continue operating in their present form. If that is so, how would you explain the fact that the capital rates that Fannie did in May with the preferred issuer 8.25, that preferred is trading around $17. What is the market saying about Fannie and Freddie that you haven't addressed?

Well, I think that -- that is not to -- when I talk about their present form, Rich, what I'm talking about is the role that they've played for us, especially in terms of servicing the outstanding pool of mortgages that they guarantee and the insurance guaranty that they put on top of it.

Now, financially, investors have to make a decision, do they want to invest in the equity of a company that does that and has a credit tail where they're going to be liquidating and acquiring properties and selling it off? Or where those preferreds and the debentures might be restructured in such a way so that they don't perform as well in the future, and that there are other alternatives out there for cash, right?

So the financial structures will be dealt with. I personally am comfortable with the outstanding debentures and preferreds and the equity that is out there in terms of they want this to operate, meaning Treasury wants this to operate as an independent company. They don't want to try to have these lines of credit out there forever. They are looking for free-market solutions.

Now, depending on what happens in November of 2008 with the election, I don't see that changing too much over the course of the next four years. But certainly new processes will emerge here that may change the rate of return expectations of those coupons. But I do think that those coupons on the preferreds, the debentures, the unsecured debt of the agencies, I think it is money good. I think it is a buying opportunity for people who want to be in them, and they can use that return in a meaningful way.

And I think that's what the market is saying, is that there may be structural changes in the way the balance sheets of these companies -- they may redeem those preferreds. They may change the coupons. They renegotiate things. And that uncertainty won't be known until you have the regulators started and overlooking everything that's going on.

Okay, thanks for your comments.

Matthew Howlett, Fox-Pitt Kelton.

Thanks for taking my question. Mike, the first question is if we both believe mortgages are cheap and they look like they are trending sort of [10-year-wise]; maybe you have a better answer on that. Is now the time to grow assets, or do you feel like now it's a time to put on assets, particularly if you think the GSEs will be buying at some point in time or continue to grow their portfolios? And if you don't want to take your leverage up, does that mean we are going to see more deals in the future?

I do think it is a great time to be investing. I think there's huge opportunities across the entire spectrum of mortgage credit. The dislocations that are going on, evidenced by what went on with Merrill Lynch this week in a very public way, speaks to the plethora of opportunity that there is out there across all the credit.

Now, my feeling is that when you are in this market, where you have such uncertainty about the banking system in general and what the reaction would be -- I know this is going to sound like a heretic compared to what other people might be saying in the market -- but against the backdrop of what I think the outcome might be here over the next several months, I could actually make a case where the Fed begins to lower interest rates again.

Simply because if there is no inflation, if what we are seeing is a temporary blip in energy and food prices, and you still have this massive asset deflation weighing on the markets, then they are fighting the wrong battle. They need to reinject the risk premium back into the market. With a $5 trillion market, you will have an opportunity to get in there and do it, and we have the power to do it in the existing portfolio.

So I think as people's return expectations become much more realistic about what the opportunities are in a deflationary environment against that backdrop, in a case where the S&P dividend is 1% or below, that is when I think we will be aggressively chasing these assets in a meaningful way from capital raising, etc.

But while you are going through this swap, you have people who want to give us money today, to operate, that would be great. But you know what? As I outlined at the beginning, it is the polar opposite of 2003 in my mind. In 2003, the biggest arguments we ever had as a management team was when the markets thought that the yield curve was steep. And our research and our forecast told us that the mortgage curve was actually inverted and negative duration, and nobody believed us. But it was. And that's what was going on.

Against that backdrop, to go out and chase credit and continue to flatten it was a mistake. And that mistake is being unwound in the markets and has been unwound for the past year.

In the environment that creates today, to be paying a return on equity and a yield that we are paying today, I think that that is great, and it just gives you opportunity. But as long as these spreads are out there historically, we've always operated at lower [bound] of leverage. And I think that that ultimately will pay off for our shareholders in a big way going forward.

Just to follow on that, if you think the Fed is going to cut again or you may have a bias towards that, just where discounts are trading today, it's just at historic all-time-[wise]. Wouldn't it make sense to just bring a deal and say -- how much added risk would it be if you just raised capital, if you had the capacity in your lines to keep leverage to 7 times and raise capital and buy Fannie Mae (inaudible) or something?

You know, we are always pregnant, as I like to say.

Have you mentioned a bit on haircuts, where they are right now on a weighted average basis and where they have been trending?

Haircuts, as Welly said earlier, when we started this business 15 years ago together, the assumption that we made in terms of haircuts was based off of running managed money for private, high-net-worth individuals. And we have not seen anything change in the agency space in haircuts that is outside of our historical experience.

Now, that may not be true for other players in the market. They may not have experienced the wider haircuts in the past. They may not be used to operating in that. But haircuts are part of the lending and borrowing businesses, and you need to be prepared to deal with wider haircuts. That is how we run our business model.

Yes, we have actually -- since the Fed has put in all of its financing and liquidity facilities there, since the first quarter, haircuts have stabilized to slightly improved in the agency space. We would expect if you continue to have volatility, there's no question that you have to be prepared for changes. And as a prudent management team, you should always be in a position to deal with changes relative to the volatility that should be in the market.

So -- but as of right now, things have stabilized to slightly improved over the volatility that we saw earlier in the year.

Okay, great. Thanks again.

[Joe Stevens], Stevens Capital.

First of all, great quarter to the entire management team. All of my questions have been answer, though. We'll follow up later if we have anything else. But thanks again.

Thank you, Joe, and I appreciate your comments. I do want to comment that it is a team.

Jim Delisle, Cambridge Place.

Hi, gang.

Jim, I want just want to point out for the record that you didn't call me on the second-quarter call when the Giants beat the Patriots.

Well, this is still title town. And I was out at ASF drinking far too much. Anyway, --

I was expecting you to be on that call, Jim.

Thank you. I would like to -- so one of the questions that has been strangely silent -- people have been strangely silent on whenever Mr. Paulson or any of these people speak is at what part of the capital stack -- common, preferred, subdebt -- the Treasury envisions investing in Fannie Mae or Freddie Mac, if the situation requires it?

I'd be interested in -- my opinion is that people are told not to ask that question because they don't want to talk about it. But I'm interested in your opinion.

I have to qualify it by saying it is an opinion, and it is a speculation, but I do feel as though -- here is my backdrop for it. I've just got a tell a little anecdotal story and then I will give you my answer. Is that we were at a dinner about a year ago where Alan Greenspan was asked a question that I always wanted to ask him, which is why were you so quick to hit the bid of the RTC to get that $400 billion of assets out of the banking system and into private sector hands? Why didn't the government just try to take it on longer and get some of the profit for themselves and to take advantage of it?

I have always wanted to ask him that question, and somebody did ask him this question at the dinner. It was after he had retired. And his answer was a very simple answer, which is bankers don't like to own property and we don't like to cut lawns. And if you look at capitulation events like the RTC, like the guarantee of Fannie and Freddie, that may lead to the decisions that you need to make as an investor on the capital structure.

It may be difficult to be an equity holder in here, but they can get relief on equity through a lot of different measures, and the assumptive nature of the mortgage market is telling us that they don't necessarily have to go to the markets to raise capital under the current regulatory structures that they have. They have a credit tail. The credit tail is being priced in very aggressively. It is a credit tale that suggests, from an assumption point of view, that we are in a depression, not a recession, in housing, and that they may need credit going forward.

As I said in my earlier comment, as an insurance company, that is what we care about them, is that they have access to financing through the Fed, they can pay off their claims over time. Obviously MBIA and AMBAC still have not missed one payment of insurance, which is kind of stunning when the market thinks about it.

So in that note, I think to myself, you know what? The equity markets might be a good place for Fannie to be invested in or Freddie to be invested in. And that the capital structure that I would go after, if I was the Federal Reserve, I would go into the equity. Because if that is a capitulation event and that is telling you that you're going to see a turn in here and if standards will dictate it -- and so many people, starting with King George, have lost so much money betting against the United States on a property deal, that it's not a very good bet. So from my perspective, I guess I would go after the equity.

Okay. And the second questions specific to you. You've said in the past that you are exploring different counterparties, if you will, and getting beyond the historic -- your normal counterparties, the street, primary dealers and the like. Are there any new counterparties that you have started getting funding from on your agencies?

There is nothing that I want to share on this call currently right now.

We're not giving out any numbers.

Right.

All righty.

I love that you asked the question.

Someone had to. See you.

[Justin Bates], Daniel Stewart.

Hi, guys. As us in England, can I thank you very much for depressing us and telling us that we have got it worse than you guys have? So thanks for that.

In terms of questions, mine has actually been asked, I think, but it was really just on the interest rate spread at the period end and during the period. I was really wondering if you were indicating from that that the spreads had peaked, and if that was the case, what your ability was -- did you have the ability to gear up quick enough in order to ensure that your returns stayed at current levels?

Justin, I know everybody forgets now that some of the events have unfolded most recently, that there was a lot of talk about the Fed tightening in August, and then starting a tightening campaign throughout the rest of the year. So you do have a lot of dealers being opportunistic, and rightly so; if you can get away with it, you certainly do it.

The spread, you know, at period end, it's just a snapshot in time. And we are always rebalancing the portfolio and doing a lot of shifts within the portfolio. So I wouldn't characterize it as a peak in spreads.

Okay, thanks very much.

If there are no further questions, I will now turn the conference back to Mr. Farrell.

Thank you, Grace Ann, and thank you all. I know it has been a long call and we have had a chance to discuss a lot of things. We hope, again, that the comments that we have made clarify for a great deal of the investment pool that's out there how we feel about things and how the market works. Obviously, we are always available to discuss the stuff in the markets.

My comments from the beginning will be put on the website, if they are not already there, and we look forward to speaking to you on our third-quarter call in the fall. Have a good summer and be safe.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 888-286-8010 or 617-801-6888, with an ID number of 98762217. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.