Annaly Capital Management Inc (NLY) 2008 Q3 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the third-quarter earning 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. (Operator Instructions). This earning call may contain forward-looking statements within the meaning of Section 27A in the Securities Act of 1933 and the 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 the future period or periods or by the use of the forward-looking terminology such as may, will, believe, expect, anticipate, continue, or similar terms, a [verication] of those terms of negative of those terms.

Actual results may differ materially from those set forth in the forward-looking statements due to a variety of factors, including, but not limited to, changes in interest rates, changes in yield curve, changes in prepaid rates, the ability of mortgage-backed securities for purchase, the ability of financing and, if available, the terms of financings, changes in the market value of our assets, changes in the business conditions and the general economy, and the risks associated with the investment advisory business of the FIDAC, including removal by FIDAC's claims and assets, FIDAC's manage, FIDAC's regulation requirements in competition in the investment advisory business, changing in the governmental regulations affecting our business, and our ability to maintain our classification as a REIT for federal income tax purposes.

For a discussion on the risks and uncertainties, which can cause actual results to differ from those contained in the forward-looking statements, see risk factor in our most recent annual report on Form 10-K and all the subsequent quarterly reports of Form 10-Q. We do not undertake and disclaim any obligation to publicly release the results as any revised which may be made in the forward-looking statements to reflect the occurrence in anticipated or unanticipated events and circumstances, after the state of such statements.

I would now like to turn the conference over to Mr. Michael Farrell, Chairman, CEO, and President of Annaly Capital Management Inc.. Please go ahead, sir.

Thank you. Good morning, everyone, and welcome to Annaly's third-quarter earning call. I'm joined here today by members of the management team, notably, Wellington Denahan, the Vice Chairperson and the Chief Investment Officer and Chief Operating Officer, Kathryn Fagan, our Chief Financial Officer, Nick Singh, our General Counsel, and two managing directors, Jay Diamond and Ron Kazel.

As usual, we will open up with just a comment, and then we will open at it up for Q&A. The name of this commentary is, it is contained, it is decoupled, and it is only notional. It is different this time. Surveying the wreckage of the capital markets battlefield, it appears though, as Thomas Friedman said in his book, The World Is Flat. More aptly, the world has been flattened. It is being flattened by the weight of government borrowing throughout the globe being brought to incredible levels as measured by a percentage of GDP. This is a continuation of the crowding-out effect we spoke about in the 2007 fourth-quarter's earning call.

An updated copy of that chart is provided in the commentary section on our website. As we reported on that call, in the post-World War II economy, US government debt, federal, state, and local, accounted for 55% of the total debt outstanding in the United States. At the end of 2007, government debt represented 15.7%, while nongovernment debt represented 84.3%. As I said at that time, we would be on the watch for much deeper, much, much deeper government deficits, and a surge in government debt issuance going forward.

With the borrowing need growing from all the takeovers, the TARP, and the other guarantees and liquidity programs, analysts are now coming to a similar conclusion. Current estimates are for a $1 trillion deficit next fiscal year, and up to $2 trillion in net new federal government borrowing. If these estimates are correct, and we think they will be, then US government borrowing in fiscal 2009 will amount to a staggering 13% of currently projected gross domestic product. Even more when you factor in state and local government deficit spending.

In comparison, fiscal-year 2008 estimates equaled $770 billion and 5% of GDP. For those of you who may have not have heard this before from us in previous NOI releases and commentaries, let me reiterate, this is not contained from the real economy. In our earlier calls, we were questioned as the vulnerability of global markets. Our ongoing reply was that the overwhelming story for the second half of 2008 would be the softening of international monetary rates, while the world's wealthiest consumer economy slowed its growth due to reduced access to credit and the decline in asset valuations.

It is happening. As I packed my son off for London for a semester abroad in late August, I purchased GBP100 for about $200. At this writing, I could have reduced that amount to about $150. As a 20-year-old junior finance major in London, he texted me about customers lining up outside of UK banks to withdraw money and deposit it into Irish banks, who had just had their deposits guaranteed by the Bank of Ireland.

Remember when the supermodel Gisele demanded to be paid in Euros? That was probably right about the time that the Euro was approximately 1.6 to the dollar.

Winston Churchill best summed up the American spirit in the following statement -- Americans can always be counted on to do the right thing after they have exhausted all of the alternatives. Having exhausted all the alternatives, we believe the Federal Reserve and the Treasury are doing the right things. The ECB now needs to do the same. Validate its constitution, act as one currency, and fix their regional problems in a coordinated fashion.

In the words of Dr. Neal Soss of Credit Suisse, Europe needs an Alexander Hamilton. If this is a decoupling, then it is apparent that the Euro has been decoupled from the desire of the ECB to fight the last war, inflation, instead of the current war, asset deflation.

Lastly, we discussed the issue of a $64 trillion, in notional value, of a deregulated insurance industry that grew from the desire to have modern risk management tools, giving investors the bizarre notion that they were hedging their risks by transferring it to all elements of the financial industry. Defenders of this innovation argue that the market's astronomical growth was only notional in value, and that the net number would have a much less effect on the market.

They were wrong. The first, second, and third tier effects of liquidations was enough to take out money market funds, large insurance companies, and small countries. The unwinding of the credit default swaps market started a powerful daisy chain of events that crushed Ambac and MBIA, led Fannie Mae and Freddie Mac into conservatorship, force Merrill Lynch to sell its near-worthless CDO holdings at $0.22 on the $1, and cast Lehman and AIG to their noble fates.

In CDOs, credit default swaps were not used to provide protection against credit risk so much as they were used to synthetically go long a cash asset that didn't exist in sufficient size.

At FIDAC, we have auctioned millions in credit default swaps positions in our CDO liquidation business and what we have learned is that the carnage we are witnessing now would have been much more contained, to use that overworked word, without CDS.

The definition of a notional value is a derivatives value at the spot price. The spot price, and the liquidity needed to support it, could not hold these positions together. That is what insurance is supposed to do. It is not supposed to create a flock of black swan events.

Three phrases not to be forgotten -- it is contained, it is decoupled, and it is only notional. And with that said, we open up the call for questions.

(Operator Instructions). Jason Arnold, RBC Capital Markets.

Good morning. As usual, great commentary and spot-on. I was wondering if you could offer us some of your thoughts on agency MBS spreads remaining wide, so after conservatorship of Fannie and Freddie, and perhaps what you think will be the catalyst for spreads tightening up again?

I think the catalyst is just continued liquidations across all asset classes, which, as we discussed in the first and second quarter's earnings calls, we think that that is an ongoing event that the markets are coping with. The fundamentals behind mortgages are extremely powerful right now. The Fed is putting in placement all of the different aspects that they need to in the money market funds and the commercial paper arena and the repo arena to make this more liquid and work better. And we are seeing that in our operations.

I would say that the one thing that perhaps you need to account for when you have spread-tightening is the second aspect of the Treasury programs coming in. There has been a lot of announcements by the Treasury in terms of support and willingness to inject capital into the system, etc.. But all those have been so far mostly is just announcements. The checks have not cleared, so to speak.

From that perspective, that would be the catalyst, I think, that you would see spreads starting to tighten. Once you see that balance sheet introduced into the market in a meaningful way, and not just being announced to the market.

Fantastic. Then, I guess, maybe you can offer us a little color on your outlook for leverage? Could we expect still a little bit of a modest decline here, given that we're probably coming into year-end and potentially some more system turmoil? What are your thoughts there, I guess?

We have been very cautious over the course of the year. We are making terrific return on equity, 16.73%, in the current environment, as noted in the release. We are defending book very well. We had a 2.5% change in overall book, quarter over quarter, June 30 to September 30. Our spread was over 200 basis points.

When I look at Annaly in terms of its value to investors over the long run, and not from quarter from quarter, its ROE from inception to 9/30 was 269.43%. If you compare that to the S&P during the same period, that total rate of return was 49.61%, a difference of 219.82%. That's how much you earned from us in quarterly dividends, quarter over quarter, against an average ROE probably during that period of a low teens ROE of 13 or so.

So we're earning above average ROEs on lower amounts of leverage, the Fed is doing a lot of work for us on the front end, and we are perfectly positioned as the markets heal themselves to lever ourselves back up and take advantage of it on a larger basis once we feel that that -- we are through the window of liquidations and volatility.

We'd like to go through a quarter where you don't have seven major financial institutions in the world being liquidated or taken over by the government.

That would be helpful, wouldn't it?

It would be good for everybody on the call, if we could just see that once.

Absolutely. Absolutely. Yes, certainly some great return there and, yes, it seems you have some real dry powder there as well. So that is great. And I guess, finally, I was just wondering if you could share with us some color on the small broker-dealer acquisition and why it was appealing to you here at this point in time.

Yes. It was not an acquisition. It was a filing that we undertook at the beginning of the year. Ranger Capital is the name that we released it under. And we are in the final stages of having that up and running. It takes about six months to go through the process with the NASD and FINRA once you begin it and we have had staff in place during that period that are putting together the systems and the methods and procedures from a regulatory point of view.

And all of this has been taken, along with our acquisition of Merganser back during the summer, in the asset-backed space, which is also experiencing massive liquidations and grade valuation changes. All of this has been undertaken with the strategic view by the team here that we are moving to a more regulated and a higher oversight, more transparent view. And as everyone on this call is aware, we have always been an advocate of transparency and liquidity. Ranger will continue to be a major step, I think, in that direction, allowing us to have multiple different assets as an asset manager that we are now going to have access to.

We have to embrace regulation going forward, and I think that is what everyone needs to be comfortable with, and the capital markets structures that we are putting in place were prior to the strategic plan that has been executed over the past five years and just a continuing growth of the business for our shareholders.

Fantastic. Thank you and great job.

Andrew Wessel, JPMorgan.

I was hoping that you could just give me some color on the state of the repo market through this last quarter and now, with LIBOR obviously coming back down significantly, what you're looking at today, what average funding costs would be, and what your view is on how you plan to structure that going forward?

Wellie is going to answer your question.

There is certainly, obviously, with all the things that have taken place, there is -- people are still -- in a hunker-down mode. But we are seeing some positive signs out there, a lot of people willing to go longer. But you still need -- I think it is very early in the progression towards year-end and we are expecting, although there has been many things put in place to improve things, that we are still expecting some continued volatility, so we're prepared for that. I think you'll see tremendous improvements into next year. It is just everybody needs to get into next year, initially.

And LIBOR is certainly coming down. We were, all along, seeing huge divergence between LIBOR and Fed funds, you know, on days where LIBOR is at 4%, you might be rolling assets at 50 basis points, depending on where the Fed effective was. So you're starting to see things come a little bit more into line, a little more uniformity, but nonetheless, we continue to expect surprises and things like that.

We did notice a major trend, and some of you may have heard me say this, that every quarter in '08 got worse than the prior quarter. So you have to be prepared -- we have been joking here today that the Fannie and Freddie situation where -- it was only in September that they were brought into conservatorship. It seems like it was two years ago.

But again, so, you just have to remain in somewhat cautious position.

On the margins today, are you looking at, if you need to fund something, it would probably be shorter as opposed to longer from the bank's standpoint and that would be more --?

I think in general -- I mean, I think you see it everywhere -- that money likes to be as close to time-zero on the risk curve. Bills -- you see it in bills. So, as things start to improve, what you would start to see is people willing to move out on the risk curve. And we are starting to see that, with some of the terms. But we don't expect that that is going to be uniform across the board and you just have to be prepared for anything that might happen. But again, you are seeing positive movements out of all the things that have been put into place.

Greta, so when you reference that 50 basis points, was that -- you are talking about rolling something at that point in time might be LIBOR plus 50, whereas today --?

No, no, I am saying 50 basis points (multiple speakers).

No, 50 basis points.

You mean towards total cost?

Yes. We do have a money-market relationship, where we do repo directly with the money market that we've had for probably about five years now. And so, on any -- they could be at 50 basis points why everybody else is at two, three.

It depends on who you are borrowing from and what the term and duration of those contracts were and those agreements are. But you could -- you could have been rolling overnight during the quarter while Feds funds was at 2%. Well below 1% from a US bank, but well above 1% -- you know, 300 basis points above if you were talking to a European bank or an Asian bank. (multiple speakers). It is extremely volatile.

I mean, you would see -- . You would see periods where Fed funds opens up at 5% and closes down at 25 basis points. That is not the kind of volatility that they want to see. But that is the kind of volatility that's

I think it is important to your point, Andrew, and to your question is, I think it's important for everybody to understand that in the second quarter's earnings call, which took place in July, there was a fairly long discussion, I just listened to that call's transcript this week. There was a fairly long discussion on that call. People were asking us what was going to happen when the Fed began to tighten interest rates in August and October.

So the Fed has had a great deal of difficulty, along with the other central banks, in controlling their announced benchmark rates, and all of that definitely speaks to the talents and the skills of being able to read the tea leaves of marching ourselves into a position where we are defending book and taking advantage of it at every opportunity. During the quarter, we did five-year repos with major commercial banks. And we did some overnight stuff, too. So, those costs of funds were inverted sometimes and sometimes they were flat, but it certainly is an amazing thing to watch. And if the central bank can't tell you where funds are going to be, no one on this call is going to tell me. And I'm not going to be able to tell you.

Fair enough. So putting all that kind of into perspective, what are you seeing today as your -- if you can, the marginal spread on each new dollar invested?

You are still -- again, depending on where you are, you could be -- 200, 250, depending on what you want to do and the risk you want to take.

There were a number of shareholders who called us during the quarter and expressed their view that they didn't care if we made $0.08 during the quarter so long as we were living to create another day's earnings for them, and I hope that that was satisfied by the announcement yesterday at 4 o'clock.

Bose George, KBW.

I had a question about your quarter-end spread. It was down reasonably materially. I was wondering, is that just sort of quarter-end noise or is there -- was the asset sales driving any part of that?

Yes, when we do do those numbers, it is always a yield to maturity on the assets that's put against a snapshot on cost of funds. But again, going into quarter-end, you have a tremendous amount of volatility. And, you're just taking a snapshot on that day. And a yield production on that day. And that is where it was.

Yes, I mean, the weakest trading days in the yield curve occurred in the second quarter, in the last three days of the quarter.

Yes, I don't think that you can project -- or glean too much from just taking a snapshot right at quarter-end.

Okay, sure, that's -- .

There is no question that the environment is very -- a lucrative environment and it is that way because it is the environment we're in. You have to weigh the risks associated with trying to capture the opportunity out there. And like Michael said, we really would like to see a quarter where we don't have five blow-ups. And sizable ones.

Makes sense. (multiple speakers). Your fixed-rate assets keep trending down into about 65% to the portfolio downturn of 71%. Can you just discuss that? Are you just seeing better opportunities in the hybrid market or -- ?

We are constantly doing relative value judgments and you have to figure in a lot of other things, but we will make the shifts where we think we should and take things back up. I think, as managers for the long term, we have to be prepared to fight the next fight. And I think Michael kind of alluded to it, and maybe nobody is even thinking about it, but there is the possibility that, you know, you see interest rates, whether it is justified or not, at levels that become difficult to deal with if you're not in the right position.

So you are suggesting that -- I mean, you guys are just being careful in duration?

We're just being careful on everything.

We don't manage for one quarter. We don't manage for one quarter nor do we manage for one day. There's a temptation in this market that we've witnessed in other cycles from other players, where you can go extremely short on the duration curve for your liabilities and very long on the duration curve for your assets. And that will work for a while, but in the midst of what is going on, it may be a very painful discovery to find out that that is not a viable business model over time.

And I would caution against trying to maximize any profit. You're not being rewarded for being a hero in this market. Annaly is doing fine, creating a very powerful return on equity, or a very powerful dividend stream. We don't have to reach to do it. We are growing our asset management business. We're growing in the other aspects of our business. We're focused on growth. We're not focused necessarily on whether or not we are going to be able to roll financing tomorrow morning with any one particular counterparty. So, I think that that is a caution that I would interject into every conversation.

Thanks very much, and good quarter.

[Peter Holman], [Parkman].

Excellent quarter, Michael.

Thank you, Peter. Good to hear from you.

Very pleased. Just a couple of things. Does the imminent starting of the broker-dealer operation, does that have implications for your funding costs? Does it change the relationship with the Fed, for example, so that you can access borrowing at the Fed and deposits at the Fed, and all that sort of thing? Or is it more a -- an efficiency benefit?

I think that the broker-dealer basically is an opening that, as the Company has focused on growing its asset management business, which is exactly how we think of ourselves, although we might characterize our tax status as a REIT. There are a lot of windows open to you as a broker (technical difficulty) that are not necessarily open to you as a REIT. And that includes talking to other players in the capital markets, not necessarily deregulated entities but to money market funds or to other cash players in the pension arena, etc., who have a restriction that they can only do business with a broker-dealer.

We have been pretty good at diversifying our borrowings over time. That is going to be one of things that we continue to do, but I think that I look at Ranger as part of a broader aspect of us gathering assets, some of them in cash, some of them in distribution, and the ability to distribute more products along with the acquisition that we did with Merganser, more mutual fund products, etc. (technical difficulty) but distinct [com] plus the opportunity to go forward into broadening all the other asset classes.

We announced during the second quarter that we hired a non-commercial real estate leader. We're going to look at that market going forward. He clearly had been, as an Annaly shareholder, paying for the fleshout in credit. The auction business continues to be a very good business for us. We work 70% of the market share in there. This is all part of the grand scheme going forward and part of probably six business plans that I've had my desk for five years, and we're just dusting them off one at a time.

One other question, which is not meant to be facetious, but may sound it, almost as valuable as the returns you provide us, I find your insights into the environment incredibly useful. Do you know, since no one in The New York Times does, where the $123 billion that AIG has gotten so far has gone?

By a margin call, probably. (multiple speakers).

Probably.

It is probably in the banking (multiple speakers).

It is probably in the banking system. That's my -- I would say that it has been used to satisfy margin calls and to steady the balance sheets of some of the derivative positions that AIG took on. That would be my speculation.

And should one be concerned, from what you hear, just, sort of anecdotally with people you talk with, should one be concerned that it is -- seems to be mostly gone or does that indicate that there's more to come and the fact that it went so quickly is indicative of another AIG-related blowup?

I am not as concerned about the US banking system as I would be about the European banking system. I think that, when I look at what has happened over the past 90 days, one can only draw one conclusion and I alluded to it in the remarks at the beginning, is that what we are witnessing is a crisis -- a currency crisis and I'm not a currency trader or anyone with any particular insight, but clearly, you have a number of countries in Europe that are mature countries and some not so mature, that are a part of a European Union that does not have a Constitution and makes a great grand scheme out of coming forward and making pronouncements about acting as one common union, and then goes back to their bedrooms and cleans up their own rooms.

So, it's very disconcerting to me that the Euro has not been able to find a central figure and a central focus of policy and I think that that is -- that's the broader concern for the markets right now. I believe that the U.S. regulators, I believe that the Treasury and the Fed are working as fast and as furiously as they can as one central bank and one central regulatory authority. And that's not to say that they're doing it quickly or that they are doing it -- they are definitely lurching from problem to problem, but it is our belief that the steps they have taken and the implementation of the things that they are doing as they come online, like the TARP, etc., are working currently at the Federal Reserve level and will work to right the US economy and protect the financial institutions and this [pace]. The question for me is outside of the borders and that is a great unknown right now.

And one final question, do you think that the environment is such that -- you say that you are slowly starting to see activity in the repo markets. Does that translate into slowly seeing what the papers say isn't happening, i.e., banks lending to businesses, some new payrolls, and that kind of activity or is it all sort of dealer-to-dealer stuff?

I think that there is two ways to benefit from what is going on today. There -- the overwhelming theme, I think, our very investors should be the following. One is is to invest side-by-side with the government policy in the companies that they have injected capital into that clearly are going to be survivors because of the injection of that capital, even though they might be merged up or they might be further restricted in terms of the way that they pay executives or -- etc.. That is certainly one theme that is emerging here, clearly.

And the second thing is is that you can invest in things that ride parallel to those benefits that do not have the complete handcuffs on it and are not totally underneath the umbrella, and I would characterize our organization as fitting into that second category. And I think that is the overwhelming theme out there going forward.

I think that what the Fed is doing is heroic and they are moving, as much as they can, as quickly as they can, into policy and weighing it. It will mean that you will see some dislocations because there are unintended consequences sometimes. My gut is telling me that the way that I have seen this operate before, whether it was long-term capital or the Asian crisis, Y2K, all of the other things we have been through, what they are doing is working in the repo markets and it may mean going out on the risk curve a little bit but it doesn't necessarily mean that you're going to be able to borrow at a bank at the same rate as Joe Sixpack right now, if you are a high net worth borrower.

Well, anyway, congratulations. I think you guys do a great job.

Thank you, Peter. I appreciate your comments for the team.

Matthew Howlett, Fox-Pitt Kelton.

Thank you for taking my question. Michael, you mentioned you thought the government sort of -- has been all talk right now and eventually we're going to see action. I think the Treasury Department announced $5 billion of purchases in September. What are your expectations going forward and if they do get what appears they want -- that is, taking down mortgage rates -- do you think there is a risk of a refinance wave and what are you doing to prepare Annaly for that?

Well, first off, if there is a refinance wave, that would be the greatest celebratory event in the history of the United States.

The problem in the markets, in our view, is that the capital stack is inverted and the cost of credit is inverted.

Let me give you a simplified example of that, if I may. If I go out today and I buy a $2 million home and I put down $1 million at today's valuations and I walk into a major money center bank and I asked for a loan where I have a relationship, that loan is going to be quoted to me between 9% and 10%.

If I am Joe the Plumber and I go into Detroit and decide that I want to buy a $100,000 home and put down 10%, my cost of capital is going to be below 6% or right on top of 6%.

There is something fundamentally wrong with that. And that is the problem that is faced in the banking system currently is that there is a $3 trillion mongoose in the middle of the boa, and it is being swallowed up and digested slowly because that market is that dislocated. So, against the backdrop of falling house prices and the ability of more inventory still coming on because unemployment is going up, the good news in the market is that the mortgage market has recognized, in the jumbo space especially, what the severity rates of a depression can look like. And you can project those cash flow assumptions onto the assets and you can make pretty good decisions about them. It is highly unlikely you're going to see them but certainly, a number of those assets are priced for worst-case scenario right now.

That is what I think happened in the fourth quarter -- in the third quarter, was you saw a capitulation by the mortgage market to those levels.

You are not going to see a refi wave until you get some steadiness in home prices and I don't think that that is going to come for a significant amount of time. The consumer is going to continue to be under pressure and I think that there are parts of the market that are going to be under even more pressure from a regulatory and a legislative point of view, like the option ARMs, etc., where the cure is going to be some judge slamming down his gavel and saying, let's refinance this loan into the agency market and we're going to forgive the debt on an option ARM. That is a real risk in those assets and it is the reason why Wellie and the team have chosen to avoid that market totally in good times and in bad.

So the focus, I think, needs to be to be concerned about legislative cures going on in some of the jumbo space, especially as it relates to pay option ARMs and negative am-ARMs. And if we are able to stabilize house prices, then I think that the market will have to revisit the prepayment assumption in a meaningful way but I don't think that that is a concern for the next several quarters.

But the view that we have as a team, and this is what we expressed on the second quarter's call, is that we are in a multiyear corrective phase here, where Fannie Mae and Freddie Mac are the new RTCs for the residential arena. The FDIC will be taking over banks for years to come as they collapse from bad consumer loans or bad construction loans or development loans, and they will be spitting those assets out into the private sector and into the TARP, and they will be selling off branches and they will be selling off deposits to the other remaining banks.

Certainly, I think the Treasury policy, Federal Reserve policy, congressional policy is focused on institutions that are systemic risks as opposed to institutions that are regional risks. And in that case, I would point to the $125 billion being injected into nonsystemic candidates and Nat City being acquired by PNC as a regional risk, and I think that is the model that is emerging here and we are prepared in our businesses to take advantage of that.

Good color. And then, in terms of the direct Treasury purchases, any guess or estimate what you think that will be in October and, sort of, over the next 12 months?

You know, I wish we were having this call on November 5, and that Meg Whitman was installed as the new Treasury Secretary, and we knew exactly what the policy and procedures were going to look like.

Based on where things are, it does not look like it is going to be a big number.

So, maybe bigger than the $5 billion but not as high as (multiple speakers).

Annaly alone could purchase $5 billion in a quarter.

We buy $5 billion.

You know, just based on where spreads are and prices are, it doesn't look like -- at least today, it's -- but we will see.

And then, just on top of that, I don't think you gave the -- sort of the average haircut where it moved quarter-over-quarter. Are you assuming that maybe volatility will come down, like you said, in the beginning of next year, where (multiple speakers).

Yes, I mean, you have to -- I think everybody would be very naive not to think that, fourth quarter, people are getting to a position where they've got to make sure that they're well covered from a haircut prospective. I don't anticipate haircuts going down into the fourth quarter. So we are seeing, on average, I think everyone is acting pretty in line with, you know, where I think -- where the Fed would prefer them to be. So average haircuts might be anywhere from five to seven, across the board, and you're always, if you go out longer, your haircut is always a little bit bigger.

But, again, again, I do expect that once people kind of dig into the new calendar year and some of these programs really start to flow, and my understanding is that the banks that got the $125 billion just got their checks yesterday. So some of that stuff will start to work its way in but there is no reason for anybody to do anything other than pure caution in the fourth quarter. So that is what I think everybody has to be prepared for.

Is any indication you could give us whether you would sell assets in the fourth quarter to keep the leverage stable? Sort of (multiple speakers).

We are going to be opportunistic.

Yes.

We're -- the guidance that we are giving you is that we are going to be opportunistic and cautious.

Great, thank you.

Stephen Mead, Anchor Capital.

Looking at the accumulated other comprehensive loss line, the $661 million, which was up from 180 -- about $182 million from the June quarter. What is in that? And as you shrunk the assets, as a percentage of your assets, that was a higher number. But how do you see that sort of playing out over time?

I -- this is -- it's just reflective of mark-to-market on the position and you're going into -- you know, coming out of the third quarter, you had just tremendous, tremendous volatility and in my mind, it held up very well through all of that. Obviously, you have Treasury coming in in a bigger way to purchase assets and the market just continuing to kind of shrink. You should see improvement in that. I -- we look at a lot of that as you have a lot of opportunity there and we are taking advantage of what we can from through -- and still be cautious about how we do it. But it is just reflective of mark-to-market in the current environment.

If you look at the -- if you just look at what happened in the events during the quarter, at one snapshot in time, you had probably the most remarkable rise in book value that I have ever witnessed as a percentage of book, when spreads came in by almost 50 basis points in two days and then, over the course of the balance of the quarter, they widened out to where, quarter over quarter, you had a 2.5% change in book value. So it was extremely volatile quarter and snapshots are the way to look at that, that over time, it all kind of comes out like that. The way that we look at it is more like what would happen if all of the assets paid off at par over the life and we were in runoff, and that would equate to a book value with a 13 handle, I think. If everything paid off at par, and we were just doing runoff, then book value would be above 13.

So we know we're going to get 100 cents on the dollar back. The question is when and that is what we're being paid to estimate, when we make these investment decisions, the value of the prepayment option.

And then, the loss on other than temporarily impaired securities of $31 million. What drove that number, versus the other accumulated balance sheet number?

Well, if you look at the footnote in the financial statement, it discusses that it's a loss on Chimera and equity holding that the Company had.

It is a mark-to-market on the position of (multiple speakers).

Chimera's -- okay.

That was about $0.05, I think, or so like that.

And then, just one other question. Just on the asset management, how are you -- what is your, sort of, duration and how are you managing, sort of, duration at this point?

Actually, duration on the portfolio relative to Treasury turned out to be negative. The empirical duration, if you just calculate book value movements and interest rate movements. You know, we are still -- as a manager in a leveraged space, we continue to run the book at a fairly short duration and apply leverage to it. And I think in this market, considering what you potentially have with your next war that you have to deal with, is massive sovereign borrowers out there driving the cost of capital higher, that you have to be in a position to migrate into that environment. So, having the portfolio in a fairly short-duration position so that it can handle that migration is our objective. And also, just to be able to handle near-term volatility in the market. So we keep the duration fairly short but, as I said, the empirical duration turned out to be negative.

I would say that, in summary to that, we are constantly trying to judge in our minds, whether we're in Japan or whether we are in 1980 United States, from an interest rate structure. And the decisions that we make are based off of defending ourselves through both of those scenarios and those are real extremes.

Good luck.

Good luck to all of us. That's right.

Bob Napoli, Piper Jaffray.

Good morning. Nice job on the quarter and Michael, great call on foreign interest rates just three months ago. It didn't take long for that to kick in.

More to come, I think, my friend.

Just, I'd like to understand a little bit better your repo funding and who some of the major players are in that market and how you are protecting yourself from unknowns. You did a great job, I think, avoiding having Lehman as a significant player, for example.

We never discussed the current relationships that we have. We do -- suffice it to say that it is with major money center banks, cash players, and primary dealers, etc.. Our concerns about Bear and Lehman started off as economic concerns and competitive concerns and a review of our internal credit policies versus those economic concerns and what you learned from all of that. So that is an ongoing process here that's handled by the credit process that we go through and the investment process that we go through. So we are not inclined to really discuss that at length.

Maybe think about it this way. If you -- okay, major money center banks probably US and international, I would guess. I mean, are any of those institutions suggesting to you guys that hey, we may not -- this business may not be a business we want to be in. I mean, are you concerned that the players in this market, given the obvious capital markets environment that's likely to be with us at least for some time, is going to reduce the availability of capital from your key lenders today?

We have always had policies and procedures that cap those borrowings with these lenders but the summary of my view of your question is is that we, I think, do an outstanding job through Kathryn and Jim Fortescue in having ongoing discussions with virtually every major lender on a regular basis, sometimes twice a day, sometimes once a quarter, but on an ongoing basis with their credit guys and trading desk, etc..

Here are the decisions that people are making, right? You've had several trillion dollars in net worth taken out of the stock market and put into cash accounts and some of those cash accounts actually broke the buck during the course of the third quarter. So the same weight of concern that borrowers have, so do people who are lenders. And the lenders include the larger institutional universe -- the pension funds, etc.. The way I think about it is -- I want everyone to picture an hourglass with sand at the top and very much so the middle is pinched and that is the balance sheets of the banks and the lenders. And at the bottom are companies like Annaly all the way down to consumers, who are borrowers of that cash at the top.

The Federal Reserve and the Treasury know where the cash is. We don't have to think that it has gone away and disappeared. This is a zero-sum game. It's moved around into pieces. All of the major money center banks have a ton of cash and now the Federal Reserve has taken steps where they're paying them interest on that cash. So the Federal Reserve is going to break that logjam in the middle of the hourglass by shoving as much power and Drano as they can through it and they're simultaneously creating [spence] to bypass some of that balance sheet risk. And we are perfectly positioned, through the steps that we have taken as an organization over the past several years, to be a beneficiary of all of those steps.

So, that is the macro view. How it's going to play out, I can't tell you with 100% certainty and in the interests of the shareholders, even if I did have 100% certainty, I wouldn't put it on this call.

What is your view on LIBOR and where we're going to see LIBOR rates three months from today?

LIBOR is expressing to the world that there is a currency crisis in Europe and I don't think anybody is writing about it. This is your opportunity, Bob, to write about it. The European Union does not a Constitution, period. Germany has the same credit rate as Italy and Greece. The markets are going to have to decide whether or not that crediting rate is correct or not, and I think that the vote over the past quarter has been that there are dislocations there that need to be adjusted.

The stronger players in the Euro are going to have to question whether or not they want to play in the Euro or should they just pack up their bags and go back to their own currency. Should they be subsidizing currencies and countries that do not have the same disciplines, economic strength, or budgetary controls that they have? That is a big question and it is much bigger than this conference room and this call.

But I think that is what you're seeing in LIBOR and I think one of the best things about our investment philosophy, bringing it back home to our case, is that Wellie and the team several years ago changed the middle of the barbell to reflect interest rate swaps that are uncapped where we pay out fixed and we receive floating and certainly that dislocation in LIBOR has been beneficial to us in terms of the interest rates that we are experiencing on what we're getting back in LIBOR, relative to what we're paying out in fixed.

Usually that is a much bigger drain in a declining interest rate. But I think we're in a steep yield curve environment for a long time and we're on -- we are in a case where credit curve is unbelievably steep right now and you don't have to be aggressive while you go after it and capture net interest margins. Every financial institution in the United States is receiving the beneficial elements that the Fed is putting in there of that steep margins. It's just going to take a lot longer for it to bleed through the system and repair their earnings stream.

Do we have a math a portion of our economy that is affected obviously by LIBOR and, to the extent that LIBOR is affected by issues in Europe, what do you think is done long term and is off-topic for your company, but that's -- that we have real-life Main Street Joe the Plumber who has a mortgage tied to LIBOR?

Joe the Plumber also has the ability to go into the United States covered bond program, which is called Fannie Mae and Freddie Mac, and he can do that swap and tie himself out for 30 years at a fixed rate of 5.5% or 6%, if he is concerned about LIBOR going up. The difference, and this goes back to the previous question, is that whether or not he's going to have the equity in his house to meet one of those programs and whether Barney Frank and Nancy Pelosi are going to allow him to get some sort of tax benefit for writing off a loss on real estate.

So, it is not like the financing opportunities are not there. Even in the case of IndyMac, the FDIC has come out and said that there was 60,000 loans that they were working on to repair and that 40,000 actually fit into government programs. So, these fixes are available. It is a question of what is your judgment of unemployment, falling incomes, stagnant incomes in an deflationary environment.

Last question. Your asset management business, I mean, you guys -- it is very difficult, as large as your REIT portfolio is, for an asset management business to become material to shareholders of Annaly. At least, it appears that way. I mean, is that -- is that a fair statement? Are the asset management businesses used more as developing skill sets? How do -- with your portfolio as large as it is, you need a really large asset management business to make a difference. Is that the goal, is to dramatically grow the asset management business at a much faster pace than the REIT?

My answer to that would be that Annaly Capital Management, what you would design and describe as a REIT business, that is an asset management business. It is as valid an asset management business as any other asset management business is in the United States. We provide people, through what we do, access to a $5 trillion market. We elect to be treated as a real estate investment trust because that is a tax benefit for our shareholders and allows the Corporation to get a benefit of flowthrough.

It means that we take a longer-term view of things and I would suggest to everybody on this call that -- you know, one of the things that we have witnessed over the past 10 years is that the business model has worked pretty well against a backdrop of all of the same things that have happened in the markets, starting with long-term capital, etc..

So, if we're going to talk about the asset management business, let's talk about the asset management business that starts with managing mortgage-backed securities and then is parceled back out into an SEC advisory business that does a lot of different things. That is how we've always viewed the business. So, I take exception to the view that it is classified as -- the REIT income is just so big. That is an asset management thing.

Yes, it is. I mean, that's fair. I guess that is the returns -- and your returns over the long term, as you pointed out, have been very good. But I guess the return on capital and the capital risk associated with the [fidot] -- the non-asset intensive portion of managing assets, I guess, is what I was referring to (multiple speakers).

You mean the fee-based? Yes, I mean, if you want to talk about the fee-based business, look, [it's raised] at every asset manager gets income. Either he gets it off a spread or fees, right? So you guys tell me, on a company that is giving you 100% of its earnings net back out and providing a double-digit yield, against the backdrop of every other financial company in the United States, every other asset management company in the United States cutting their dividends, you guys tell me what you think that is worth. I think it is worth a lot more than the markets are giving it credits for.

Thank you and great job.

Thank you so much, Bob.

Peter Holman, Parkman.

I'm sorry. I completely forgot to ask this question before. The Paulson plan started out as a plan to purchase MDSs and basically get bad collateral off of banks' balance sheets, and it morphed into making direct investments -- it seems, anyway. If that is the correct analysis, one, are we going to see them -- see the Treasury and the Feds getting involved in the original MDS purchasing mode or does what they're doing with their capital now have more or less the same effect?

I think that they're going to do both and I think that they are in the -- the easy take was to put the capital into the banks because the Treasury is not prepared, in my mind. They do not have a market of great dimension. Yes, (technical difficulty) they are building it back up. They (technical difficulty) eliminated (technical difficulty) it underneath the O'Neill (technical difficulty) the Treasury, and that that has been a hindrance (technical difficulty) policy, but make no mistake about it, I think that they're building that back up with some strong people and those people are going to take advantage of the opportunities and have to manage what's out there in the markets, going forward. The difference being that the markets are going to distinguish, and the Treasury will distinguish, between what is systemic risk and what is regional risk, as will the rest of the countries around the world.

Jim Ackor, Stern Agee.

A couple of questions. Would -- $17 a share, by the way, is what it's worth, in my opinion.

Next question.

With regard to alternative sources of financing, whether it be direct or through nonprimary dealer sources, can you just kind of give us a little bit of a global view of the progression that Annaly, as well as maybe the industry as a whole, is making? It just seems as though, with such variability in pricing from one large entity to another, particularly at the quarter end, it kind of reeks of price gouging in some instances. If capitalism is going to ever rear its ugly head again, then one would presume that alternative sources might sprout up rather quickly if that continues. Just maybe an update on what you are seeing there.

My view is is that we are moving toward a new operating structure where the Fed is going to be in these businesses for a long time and we need to get used to how that's going to operate. They're getting in the commercial paper facility to help out some of the industrial companies that need to roll their commercial paper. That's also going to serve some of the states that were experiencing problems and will experience problems going forward.

The issues are going to be driven more by domestic rates rather than international rates, I think, but you're going to have to compete against that credit and certainly, you know, the [BoV] now recognizes that they need to bring down rates materially in order to get themselves in line with a deflationary economy and I think the ECB needs to straighten out its act in terms of acting as one union.

So, anything I could say on this call would be total speculation, but I do believe domestically that the Fed has taken a number of steps. If you look at what they are doing in terms of paying interest as reserves, from a bond geek point of view, they are in the repo markets. They know where the cash is. They're paying a rate of return on it and, over time, they will migrate out into finding borrowers who are going to take benefit of that cash. It will come down to capital spec and it'll be -- we will take care of the systemic guys first, the regional guys second.

I think all of that healing is going on. And I think they're working very hard and very diligently to get there. And it has been our experience and our observation that this is going to work. You may not like the speed with which it works, if you are General Motors or Ford or Chrysler or pretty much any -- an airline or whatever, but it is going to work.

Okay. I understand that completely. With regard to repos specifically as it pertains to an asset class that the United States' government has obviously gone to great lengths to defend, and is there any sense or development that there might be access to a discount window for companies of your stature or in your space?

I'm not going to comment on that, Jim.

Thanks very much. Great quarter.

John Carmichael, Private Investor.

Just an investor and own a bunch of shares and am glad that you guys are continuing to give us some returns, but I do have a couple of questions. You guys kind of talked around about Ranger and the last question talked about access to the discount window and I guess the question that I have been wondering if you guys were going to answer is that, is Ranger going to provide that access to the Fed, regardless of whether the Fed directly decides to provide access to REITs in general?

We have not implied to anyone that Ranger is going to have -- provide access to the Fed. That is speculation that people are -- you know, putting that on our operations. That is not something that we are endorsing or we're trying to create thought around.

Ranger will perform as a regulated broker-dealer, which, in my view, gives us greater access to cash players who are just as frustrated with the lack of numbers of diversity of counterparties as the borrowers are on the other side. That is a shrinking pool. They're looking for new players. Many of them have investment indentures that allow them to do a significant amount of financing or lending back and forth with broker-dealers but not necessarily was something that might be classified as a mortgage REIT or some other financial company.

So what Ranger is positioned to do is to take advantage of opportunities across the spectrum, whether it is distribution of fund products or distribution of commercial paper and notes, distribution and the retention of more assets than cash, etc.. That is our view and that is our strategic vision for that Company.

If, as Fed policy emerges here along the lines of what we are discussing, clearly they are going to create access for more regulated entities rather than less. They are not going to -- if they are going to create a checklist of people that they're going to allow access to any one of these facilities, those facilities can be credit scrutinized, etc., and you better be prepared for that scrutiny from the Federal Reserve as evidenced by Lehman and AIG, etc., Bear Stearns.

And part of that scrutiny would be, are you a public company? Are you listed? Are you Sarbanes-Oxley? How transparent is your asset base? How good are those assets? If you go to Rule 13A in the Federal Reserve documents website, you will see that it is a fairly easy thing under unusual and exigent circumstances for the Fed to lend against, but part of the decision-making process for them is whether or not they want to allow it based off your assets, etc.. And I think we would be very high in that category, if it ever came to that.

But, our view is is that what the Fed is doing is working. It is unclogging the middle of the system and they are now designing [spence] around that blockage. We are very carefully observing what they're doing and learning from what they are doing and we think that the steps that we instituted at the end of 2006 and in 2007 to start some of the things that we're doing today, and we have done, are going to benefit the shareholders longer term.

Sound like you're saying, maybe. Maybe he'll provide access to the Fed but that the hope is that, at the very least, it'll provide access, direct access to money market funds, etc., that will give you guys better rates.

I've said what I said.

Second question relates to if you could comment on Chimera and what happened there and if that is still an appropriate investment, and especially with respect to the necessity, as it turned out, for the repo line and the losses and what is going on with that, and if that's appropriate given that it's supposed to be all agency investments.

Let me just, from Annaly's perspective, first off, it is a totally 100% appropriate investment. It is certainly in line with our view of opportunities and risks that are in the market and where those opportunities lie.

In terms of the credit line that has been extended, that is an arms-length transaction. That is done with part of the cash that we generate on a daily and monthly basis through our operations, and we have to make choices every day what to do with that cash and for investors who listened to our first quarter's earnings call, you will recall that, at the end of the first quarter in the wake of the Bear Stearns system breakdown, that we actually had $1.5 billion worth of cash that we wanted to deposit with our clearing bank, which is a major New York City clearing bank, and they could not take the deposit because they had so much cash that they did not have sufficient reserves to cover it, so we actually wind up having to sell it into 10 approved money market funds. And we broke it down into $150 million lots.

Every day, when we sell cash, we're making a credit decision about who we're going to sell that cash to. We could have sold it to Lehman. We could have sold it to Bear Stearns. We chose not to do that. We could be selling it to another dealer who could be turning around and selling it to Chimera. Chimera's assets are extremely clean from a credit performance point of view. Chimera executed its business plan according to its indenture and what its roadshow documents were. The one issue in Chimera's balance sheet was that the leverage was not sustainable, even at a small amount of leverage against extremely clean assets.

So, from our view, that is a huge opportunity to provide liquidity in there and also, we know the balance sheet, we know the assets, and the worst thing that happened could be that Annaly owns $600 million worth of assets that are worth 15% to 20% in yields for cash. So that is a terrific opportunity for anybody and certainly speaks to Chimera's conference call, which will be coming in the near future, and that is really a discussion for that. But we are perfectly comfortable with our investment, we're perfectly comfortable with the Company's operations, and I think it was a spectacular effort by the team to raise the amount of capital they raised against the backdrop of the volatility that existed in the markets last week.

Yes, I was amazed myself but I guess the question was, did that take away from maybe raising capital for Annaly and making that model go forward?

It is two different pools of investors, I would say. We certainly have done a very good job of building up an investor base in Annaly and I'm very proud of that. Three years ago, I was the third largest shareholder in Annaly and today I'm like number 30, and I've done nothing but acquire shares during that period. And Annaly has plenty of opportunity and has proven that is creating a great ROE on its current equity base. So I think that will serve it well in any future capital raises.

Do I take from your comment that Chimera is going to be less leveraged going forward? Is that what I'm hearing?

No, I'm not really going to discuss Chimera's operations. I think you want to wait for that earnings call and everything. This is the Annaly call and that is what I do. FIDEC is the manager of Chimera and clearly, they will have their own call and go through this.

Then, just a general last question about your comment about that it's -- be wary of statements that it's contained. Do you think it will be and if so, do you have any thoughts about when?

It is contained to Planet Earth and I think that the domestic economy of the United States is now going through the trauma that the mortgage market went through for two years and the thing that always troubled me when I would listen to media is, is this affecting the real economy? That suggests to me that there is a fake economy out there somewhere and all of these pieces are intertwined and I think we identified the trend in 2002. We took heat for staying away from it in 2003 and 2005. And now, the economy and the equity markets are realizing the cost of that overlevered and underpriced risk position that was created. And a lot of that [say classes], not just in mortgages.

So, I think it is going to take a while for this reality to play out and, as I said, we are preparing our operations here at Annaly for a multiyear corrective cycle where the FDIC will be taking over banks on a regional basis and breaking them up into other players, similar to what went on with PNC and NatCity, and that systemic players will continue to receive support from the Treasury and from the Federal Reserve, and companies like Annaly and Chimera and FIDAC will be benefiting from helping people manage through that or creating pools of capital where you can take advantage of it in an opportunistic form. And that goes back to my earlier comments to Bob Napoli about, when I look at Annaly, I look at an asset management company, while others may see it as something else, but that is the way I look at it.

I guess I was just cognizant of your thoughts and I think everybody has some fears that things could get out of hand with respect to the Treasury's ability to continue to borrow at very favorable rates. And the thing that interest rates could get really out of control if they start to wonder about the size of the national debt, etc.

I think your -- here's my note of optimism and hope and redemption. How's that? As I said in early comments, and these will be posted on the website so people can go back and check the numbers, but post-World War II, there was no consumer and corporate debt of any size and consequence in the United States relative to today's size. And what we are witnessing, in my view, is a transition from a percentage of overall debt that has been built up over a 40-year supercycle where consumers and corporations had a debt load that they began to carry out and that crowded out the percentage of treasuries.

You know, the United States treasury was 55% post-World War II, trying to restart the economy during the Eisenhower years. So, from my perspective, what you are seeing is these two lines are on their way towards intersecting where consumer debt and corporate debt are going the opposite way and government debt is going to be a bigger percentage going forward. I think we are closer to what you have witnessed in Japan, rather than closer to what you saw in 1980. I think that is going to speak to relatively low ROEs across the board. Certainly, if a financial company has been changed from a broker-dealer to a commercial bank holding company, the guidance on that ROE is going to be different than it was one year ago. And that -- against that backdrop, companies will be operating on a prudent basis within that backdrop and that is how I view what we are doing.

That is hopeful and I hope that is true. Or proves true, I should say.

Well, vote for me on November 4. Only teasing. I don't want the job.

Richard [Rago], [Alpha] Capital.

Hi, guys. I just had one quick question on the net interest spread. The volatility in that had -- in the early part of the year, had been pretty high, in the right direction, obviously. Quarter on quarter, it did not move that much. Do you expect much volatility going forward in that or have we settled down on that regard?

You have had LIBOR definitely improve. So if that trend continues and mortgages kind of stay where they are, hopefully you'd see an overall improvement in it. Again, I just think you can't try and extract some normality out of this environment until you see a couple of things in play -- Treasury, Fed, and, as Michael and I mentioned, getting through a quarter without someone blowing up. So, I think you have to be happy that you have the kind of returns that you do in the midst of all of this.

And as things normalize, to whatever the new normal is, I think you will start to see more consistency. I think that the Fed is only beginning to address the economic effects of all of this fallout. So, I would suspect that if LIBOR continues to trend closer to where Fed Funds are, that you see a long-term environment where you have some pretty steep yield curves and very profitable for the banking and the financial system, and us being out there, we will also be a great beneficiary of all of that.

Speaking of yield curves, the swap curve against governments -- you get out to 30 years last year -- or last week. It is (multiple speakers) actually negative. Is that -- ?

Right. I don't know if there's a lot of technical stuff going on, you know, maybe map is macro unwinds, and things like that that are influencing it, but I don't think the market is that forward-looking in coming to the suggestion that there is some credit out there that is better than the U.S. government right now. So I don't think that people are making that bet. Although they have made a bet in the past.

In 1980s, you had a case where IBM debt traded negative spread to Treasuries because the thinking was, in the 1980s, that IBM was capable of handling inflation better than the United States government was. And certainly, more than one corporate bond trader got carried out on that trade, trying to short IBM against that backdrop. But I think those are our fundamentals and I don't think --ultimately, it is part of that transition that we spoke about, which is more government debt, less consumer debt, and people are juggling in trying to get debt. So I think it's a little early to make an interpretation on that.

Just another one of the oddities of the interest rate markets these days.

I think there's oddities of a lot of markets.

Absolutely. Thanks a lot. Good to hear from you guys.

We're going to take one more question. It's been an half and a half, and I'm sure people have better things to do with their time than talk to us.

[Amu Amalyshar], 36 Capital Group.

Good morning and great job. Now that you've kind of proven that the business model can withstand not necessarily the worst of the credit crunch but an extreme credit crunch. The last thing that keeps me up at night is the 1980 scenario. Now, you guys are running a short-duration portfolio so how damaging would a 1980 scenario be and how bad would it need to get (multiple speakers)?

It depends on how it happens, how quickly. I mean, there is so many variables that -- you know, if it goes 20% overnight, you may as well kiss everything goodbye. But again, I actually want to get back to the start of your comment. So the worst of the credit crunch is not here yet?

Oh no, I don't know -- I would assume -- (multiple speakers).

Well, I just wondered if maybe you had some insight that (multiple speakers).

No, I said what I would hope to be the worst of the credit crunch. I would hope it moves from -- well, I don't hope, I hope the financial part of this is over in that, we're just facing the economic part, but you never know.

I would say, having lived through 1979, 1980, I'll just give you some perspective from a guy who learned how to trade in that period. If this sounds familiar, then forgive me but it is what the reality was. The market was much simpler then and the guys who were teaching me how to trade Ginnys, Fannies, and Freddies back then were very resolute in the view that the United States government would never let mortgage rates in the United States go above 9% because it would just shut down the entire economy. And I was trading Ginny Mae current coupons at the time and I started out doing discounts first, which were Ginny Mae 8s at a dollar price in the 60s and within a few years, I was trading current coupons at Freddie Mac 17s.

So my perspective is is that that economy was running on an inflationary bias based off of a lack of investment in new technologies, a highly unionized employee base, and an inability by the companies within the economy to control wages and, I think, GM and Ford are still paying the price in their pension funds for those decisions made in the 1970s, 30 years later.

So today's economy is constructed in a much more creative way in terms of incomes and ability of companies to hire and fire and to downsize without impacting too much of that. Some companies, obviously, are not and you're seeing that. So it is a much different thing today than it existed in 1980. That is not to say that the overall effect is that much different but the Treasury has the capability to ease not only on the front end -- or rather, the Fed can, not only ease just on the front end, but it could ease across the spectrum.

And the important thing for everybody to understand is that there is very little new debt production coming out of the private sector in terms of mortgages, corporates, etc.. It is going to come out of munis and governments going forward and that mix is going to be very different. So you're in a position here, at least as regards the asset classes that we care most about, where you potentially have more money chasing fewer assets as those piles of assets are shrinking through amortization and government purchases.

So, as I said earlier in the comments, how do you take advantage of that? You ride along with government policy and you ride along as parallel to it as you can to get a benefit from it, and I think that is the opportunity that a company like Annaly provides. So, that is our view.

And for what it's worth, I would agree with you on the Japan scenario. I just -- I fear the market is going to worry about the inflation [sense] and spike interest rates up. Another kind of question here is when the stock is trading at 10 in the midst of the panics that we saw earlier this month and perhaps in the future on some inflation concerns or something like that, why not buy back stock?

That is always a possibility. But we don't really focus too much on stock price.

The one thing -- yes.

If you think about stock price in terms of what is going on in the equity markets, that to us is a needless distraction from the business of the Company and focusing on what is greater long-term returns for the Company. And I am not going to react to a liquidation event that is going on in a mutual fund or some player in the market where he has to dump a lot of stock in a given period of time in order to get cash ready for himself. If it is there for a long time, certainly, if the math works and the ROE is there, it is one of the things that we will consider.

I can certainly respect that viewpoint, but the excess volatility would -- is one factor that would keep the stock price lower.

It has not been our experience that it stays at that level very long. We certainly saw it in 1998 for a very brief period and we put in to go buy stock back in the open market and the minute we put that bid in, we did not buy a share. So, it is like the markets know everything.

It is part of the math. It is part of what we decide but it's served to be bigger in here, not smaller, right? And certainly bigger is going to be the catchword going forward.

With that said, we're prepared to end the call here. We're grateful for your participation and for listening to our rantings and ravings. I hope it has been helpful for you. We look forward to speaking to you on the fourth quarter's call. And I'd like to congratulate the management team on an excellent job in the third quarter against a backdrop of an unbelievable amount of volatility and a flock of black swan events. Thank you all.

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 the ID number of 13478087. This concludes your conference call for today. Thank you for attending and have a nice day. All parties may disconnect.

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This transcript has not been reviewed or approved by Annaly Capital Management, Inc.