Annaly Capital Management Inc (NLY) 2009 Q1 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the first-quarter earnings call for Annaly Capital Management, Incorporated. At this time I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the Company, we will open the conference up for questions and answers after the presentation.

This earnings call may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements, which are based on various assumptions, some of which are beyond our control, may be identified by a reference to the future period and periods of -- by the use of forward-looking terminology such as may, will, believe, expect, anticipate, continue, or similar terms, or variations of 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 ability of mortgage-backed securities purchase; the ability of financing; and if available, the terms of financing; changes in the market value of our assets; changes in the business conditions and general economy; changes in government regulations affecting our business; and our ability to maintain our classification as REIT for federal income tax purposes; risks associated with the broker-dealer business of subsidiary; and risks associated with the investment advisory business of the subsidiaries including the removal by clients as access to management, the regulator requirements, and competition in the investment advisory business. For a discussion of the risks and uncertainties which could cause actual results to differ from those contained in forward-looking statements, see Risk Factors in our most recent annual report of Form 10-K and all the subsequent quarterly reports of 10-Q.

We do not undertake and disclaim any obligation to publicly release the results of revision which may be made in 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 conference over to Mr. Michael Farrell, Chairman, CEO, and President of Annaly Capital Management, Incorporated. Please go ahead, sir.

Thank you, Jasmine. Good morning, everyone. Welcome to the first quarter's earnings call. I'm joined here today by members of the management team. Some members here include Wellington Denahan, the Chief Investment Officer and Chief Operating Officer of Annaly Capital; Kathryn Fagan, who is the Chief Financial Officer; Nick Singh, who is our General Counsel; and Ron Kazel and Jay Diamond, who are Managing Directors in our structure.

As always, we have some opening comments and then we will go right into the Q&A. Today's title is You Can't Always Get What You Want, Or How to Learn to Love the New Economy. And these will be posted on our website after the call today.

In the early years of my life, when someone got a new car it was a big event in the neighborhood. We heard about the visit to the dealer, the discussion about the picking of desired colors and features, and the projected delivery date. The anticipation was almost as exciting as waiting for a new baby.

On the scheduled delivered date as the proud owner drove home his car, all the neighbors gathered by the curb, waiting to greet the new addition. It was customary in some neighborhoods to throw loose change on the passenger's side for good luck and to make a wish for a long, happy life together.

Every family was linked to a manufacturer. We often heard at family gatherings that grandpa was a Buick man, Uncle Joe was a Ford acolyte, and Aunt Betty loved her Dodge Dart more than she loved her late husband.

One home was enough for most families. Second mortgages were whispered scandals best discussed in the corners of living rooms -- oh my gosh, Bill and Sue took out a second mortgage on their home. This was a true early warning sign of financial ruin.

People never moved. Young adults lived at home longer, married earlier, rented, and then saved, and only began to acquire and build their nest.

The mobility ascribed to America's workers today didn't really take hold until the late 1960s, mostly -- in my view -- as a byproduct of the youthful rebellion against social, economic, and political stagnancy. Exhausted by the uncertainties of the 1930s and the 1940s, the older generation just felt lucky to be alive, and they settled into a time of saving, preservation of capital, and lowered expectations as consumers.

The Baby Boomers, on the other hand, were ready to move up and out. Not only were they eager to pursue the American dream, but they were adapting to a much higher degree of comfort with the use of credit to attain it. And our country and its financial institutions were more than obliging too, understanding the growth potential in the democratization of credit and the socialization of risk.

We now know how this story has turned out, but where do we go from here? During recent discussions with investors, we have suggested that one possible outcome for the US economy is to look a lot like the 1950s.

If you look at my remarks posted on our website, you'll see a graph of a trend in the percentage of US debt to gross domestic product over the past 60 years. You will see that during the Eisenhower years, real progress was made in reducing the high relative debt levels of the war years, and also in planting the seeds for the new kind of consumption-based economy. On our website, my posted remarks show the graph.

So much had this changed that in the Kennedy administration tax codes were relaxed and the private economy began to supplant the public economy. The impact was so dramatic that up until the record-setting 120-month expansion of 1991 to 2001, the longest expansion on record was the 106-month trough to peak of February 1961 to December of 1969.

By the time LBJ had become President, he was already prepared to spend the prosperity generated by this growth on his vision of the Great Society.

Since those days, private sector debt growth, mortgages, credit cards, car loans, second liens, fueled continuously by dilutive underwriting standards, totally rebalanced the composition of private/public sector debt and created a new weighting of GDP where consumers, US consumers, represented 70% of domestic growth and 20% of global growth.

We are now experiencing the transition back to a greater composition of government borrowings as a percentage of total outstanding debt. It isn't over yet, and it will continue for the foreseeable future.

So what will the new America look like? The Rolling Stones summed it up in their 1970s hit -- You Can't Always Get What You Want. Inventory on demand is a thing of the past. Operating margins will be defended by managing inventories on an order-by-order basis. The new car, when purchased, will take weeks to ship from wherever it is being assembled.

Deflationary price discovery and distribution will dominate the economic landscape. It's no surprise to me that Amazon.com, the online shopping marvel, continues to outperform.

The US went through this in a post World War II-Korean War economy. Its framework may sound familiar to you. Low front-end interest rates. Quantitive easing across the yield curve, especially in longer maturities. Large drops in GDP, while the wartime enterprises reengineered themselves for coming consumer boom.

Inflation was subdued except for brief episodes of supply-demand shocks. Equity markets that were largely range-bound for years exploded upwards in the mid-1950s as the transition to consumers took hold.

The Dow Jones Industrials didn't break out of the 1929 high of 381 until the end of 1954, but almost doubled to 680 by the end of 1959 and the end of the Eisenhower administration. We may not be coming out of a guns and butter and bombs wartime experience, but I doubt anyone will disagree that the resources of our government and the private sector are most definitely fighting a war.

For those of you reading this on our website, please note the I Like Ike button at the top of the page. The reason for the button is the determined hope by this observer that legislators, regulators, and our political leaders see the reality and push down hard on the disciplines and policies needed to stabilize and emerge from this traumatic transition that we are currently experiencing.

The transition to the new era is always painful to those caught up and invested in old-era business models. Stabilization at this point would be good, but it is not a sign that the worst is over.

Like the older generation in the 1950s, the current generation is exhausted, spent out, and settling into lowered expectations. When will the new Woodstock generation emerge? We will discuss that in the next quarter's earnings call when we answer the question -- Who Is John Galt? Thanks, and now we'll take your questions.

(Operator Instructions) Andrew Wessel, JPMorgan.

Hey, everybody, good morning. Just I guess a couple questions on the investment outlook. First, in terms of leverage, you continue to kind of track lower, despite keeping ROEs high due to widening spread, which is obviously fine from an earnings and dividend perspective.

But just your thoughts on if there is some level of stabilization and you feel better about bank health and the volatility going down. Is there an idea that leverage could go higher later this year? Or are you just happy with the current ROE given -- and the [rich view word], given by a lower leverage?

Wellie will answer your question.

Yes, Andrew, leverage is easily dialed up. There are a lot of things going on in the positive side. The repo markets are certainly improving. The lack of collateral, thanks to the Fed and Treasury taking a lot of bonds out of the market, is making repo bid much more aggressively.

It also is having the consequence of changing the reinvestment rate. So we are taking the tack that we could easily get very aggressive on the leverage front if we wanted to.

And given the fact that the Fed just came out and recently kind of put their -- they didn't throw any new buy programs in. They basically stuck with what they had. Mortgage rates have not changed dramatically from when they started their program. Current coupon rates are slightly higher than when they started buying in January.

So I do think that there is a possibility for us to dial it up here in the future. So we continue to monitor the risk-reward trade-off between the programs that they are doing, and the positive and negative impacts that it's having on the market.

The one big unknown out there still is how dramatic the refi activity may become in the future. It has been still somewhat subdued, although at higher levels.

So we just want to be in a position that we can easily take advantage of some of the opportunities that unfold down the road.

Great. Then just in terms of the current spread you're seeing, is it still kind of that 250 on a -- if you're going to keep a hedge around or swaps around 30%, 250 basis points is about right for us to be thinking, or is it a little more, little less?

No, depending on where you are in the coupon stack it could be anywhere from 175 to 250, depending on what you want to do. It's still very attractive.

Right.

And I think it's going to remain that way for quite some time if there's banks out there that need to fill some pretty big capital holes. You certainly want to have them in a position where they can have pretty aggressive carry.

Right. Then just the last question. Obviously not to forecast a dividend, but just this quarter looking at it against core, it was a 90% payout. Typically annually you are looking more closer to 100% payout.

Is there an expectation that that could get built in earlier? Or is that maybe a special dividend coming later in the year? Or has that not really been decided?

I think that what you are seeing in the way that we are managing the dividend is reflective of the wildcard that's out there that Wellie described in the prepayments, which will tend to make that more volatile for everyone in the sector, I think, at the end of the day.

We feel pretty comfortable that we've done a solid analysis over the past couple of years in identifying pockets of opportunities. And certainly the cram-down legislation that was killed this morning, apparently, will give more clarity to how sustainable dividend incomes are.

But as I said in our dividend release, Andrew, we intend to pay out 100% of our earnings on an annual basis, consistent with our past policies and consistent with the REIT rules of at least 90% within a certain framework.

So you can expect that as we go through the quarters and we get more comfortable and get a better read on this stuff, that we are going to pay it out to our shareholders as we recognize those risks and as we feel more comfortable about them.

Great. Thanks a lot. Appreciate it.

Mike Widner, Stifel Nicolaus.

Hey, good morning, guys, and thanks for taking the call. Congrats on a solid quarter.

Just two sort of related topics here. I was wondering if you could comment a little more on how you saw prepayments evolve over the quarter. Specifically how are March levels, and what are you thinking for April relative to earlier in the quarter?

Then second and related to that is, how do you think about the reinvestment opportunities here? Particularly with regard to where yields are and where -- probably more importantly -- where pricing is, at 103, 104 for some of the higher coupon stuff.

You're getting close to that on some of the lower coupon stuff as well.

Right.

No, it's always a relative value trade, and there is always something to do in the coupon stack. Not all coupons will participate in an engineered refi wave by Fed and Treasury.

As far as prepayments go, you still are -- the models are predicting things to be much faster than they have been. And the models are driven off of rate levels, and you are just not seeing that pull through in a lot of the underlying collateral.

So our anticipation is -- we realize that they are definitely trying to engineer a pretty significant refi wave, so we're prepared for that. I think we will certainly be in a very good position if it doesn't happen.

Nonetheless, we expect continued elevated levels -- still much lower than we saw in the 2003 period, when you had a tremendous amount of refi capacity out there. You had house prices appreciating.

There is a lot of talk around trying to facilitate an improvement in the consumer's underlying balance sheet. But the realities of it can be a lot different than the rhetoric. So we will continue -- as we mentioned earlier, about our leverage and our approach to the market -- continue to expect the worse and certainly welcome better.

I would just add to that our judgments are based around the framework that essentially the buying program that the Fed is doing, in my view, replaces the balance sheet loss that Fannie Mae and Freddie Mac have lost in the market.

Typically over our careers, Fannie and Freddie have represented about a $1 trillion balance sheet. So you have seen the Fed come in here and replace that buying strength. Their aggregate purchases so far is only about $400 billion or so, so they still have some weight to do.

I wouldn't say that the purchases are designed to be skillful in the mindset that Wellington and the team might take on the asset side. Monetary policy is a blunt hammer; buying value is a scalpel. And when the mortgage call is active, it creates opportunities across the stack.

Because we've been examining this thing for our entire careers, but especially preparing for this environment for at least two years, we feel that there are opportunities across the mortgage curve that are opening up in different asset classes or different characteristics of the mortgage coupon. For instance, one example of that would be the jumbo market being included in the new TDA market, etc.

[So], if you're not operating with a blunt hammer and you are operating with a scalpel, you'll be able to exact some pretty good returns across all of these different varieties and flavors of mortgage-backed securities for your shareholders. I think that we've demonstrated that we can do that, and I think that we are very well prepared for that.

You have to look at that within the framework of an activist government that is trying to stabilize mortgages.

I would say just for the record that it's been our observation that cash flows are slower than the announced application rates. The market is [pricing] aggressive speeds. That is a good thing, I think, because it is defending capital for the mortgage sector.

I think that this is not going to be like 2003, where you get prolonged for underwriting standards from private-label mortgages competing with today's capital stack. You're realigning the coupons; the Fed is in; their going to be in for a while. You have to get used to that and you have to monitor where value is being created.

Great, I appreciate the color and the commentary there. Just one other thing if I can. Just wondering if you can give us the principal balance and the WAC on the portfolio at the end of the quarter.

Kathryn is scurrying through the numbers for you.

The principal balance is $56.7 billion and the coupon was 5.46.

Great, well thanks, guys. I appreciate the comments and the color.

[John McQuade], a private investor.

Good morning and congratulations on a good quarter. I've been following the overcollateralization, and I have a question about that. It looked to me for the first three quarters of '08 the overcollateralization on your borrowings was about 1.7%, 0.7%, I guess. Then in the fourth quarter, it jumped up to 111%.

I was wondering what it was in the first quarter and what's going on in the marketplace for the future.

You know, the repo markets are certainly in a state of improvement. Anybody who was watching everything that was going on, you were in the middle of some pretty serious balance sheet deterioration; and a normal response to that is to ask for more collateral.

Obviously, since the Fed and Treasury have been in, you're seeing an improvement there. You're just looking at a snapshot in time. I don't think you can glean too much from trying to extrapolate from one picture and one number what the overall trend is.

I would concur with that. I would say that memories are short, and every quarter has appeared to be seven years long the way things have been going on here.

But it's important for everybody on the call to understand that Fannie and Freddie just happened last summer. AIG happened last fall with Lehman. And in December you had Citibank basically going back to the government again and almost being out of business.

So the Fed and the Treasury have definitely taken steps here to stabilize this very important market for the consumers and for the government. Those are improvements that I think are becoming embedded and improving every day. But you had to be able to manage through it. There is no question about it.

Thank you.

Thank you, John. Thanks for calling.

Douglas Harter, Credit Suisse.

Thanks. I was just wondering if you could talk about the prospects for if and when the government stops buying mortgages, how that will likely play out in the market and sort of how you're prepared for that.

Well, at my wake you'll all be talking about how they just added the next trillion, and that will be roughly in about 25 years, according to my calendar.

So, you know, I think that the markets have to understand that the mortgage market, while many people a few years ago said that it was contained -- and we were skeptical about that in our press releases -- I think for the US mortgage market we can make a statement now that, in terms of the residential market, that the problem today is at least defined. Not confined, but defined.

And that as I said earlier, with Fannie and Freddie coming in and supporting the markets over the first 20 years or so of my career, at the size of about a $1 trillion balance sheet each, the Fed is now in there kind of replacing that, and it will be extremely difficult for them to exit gracefully from that market.

However, they are, I think, providing very good support and will continue to do whatever is necessary. I think that's what Ben Bernanke has been on the record as saying and which we certainly speak about in some of our investor calls.

You are witnessing and you're watching a federal government that is all-in, in terms of Texas Hold-Em poker kind of terminology, in their attempt to stabilize the property markets -- on the residential side especially, which, I would point out, are populated mostly by voters throughout the United States.

And that their withdrawal from that market is going to first evidence itself I think in a lack of buying, not necessarily in selling. The mortgage markets are in their wisdom defining spreads at fairly wide and attractive levels to defend against that.

So the call is a very active thing and, as Wellie has said in the past, it's the beauty and the curse of mortgages. They are trying to re-engineer a refi wave. I think that they are going to be successful in doing that with many mortgages. But there's a lot of mortgages that will not qualify for that.

We are in the Great American Workout Phase. So I don't see the Fed moving away from their role anytime soon.

Thanks.

Gabe Poggi, FBR.

Regarding leverage, a question kind of thinking outside the box regarding the PPIP and TALF. Have you all had any conversations with officials over the FOMC, regarding potential participation kind of down the line, as you think about employing more leverage if and when CPRs come in higher and prove to be manageable?

The agency market, just so you know, has plenty of liquidity. That is not the issue and that's not what they are trying to address through the financing there. There is a lot of cash out there.

And in deference to your question, Gabe, we have a lot of discussions with the Treasury and Federal Reserve officials, and we are not going to disclose those comments on any call or any discussion. We consider that a private discussion between us and the regulators and the people who are trying to fix the problem that's in the economy.

Thanks.

Joe Stieven, Stieven Capital.

Morning. First of all, most of my questions have been answered, and congratulations on a real good quarter. Mike, just -- you know, the Fed as you even said is trying to engineer this refi boom. But it seems like rates are getting very sticky in here.

I mean, while you're not betting on it, but do you think the Fed can get rates down much more? Or are we sort of stuck do you think here, on the mortgage rate side?

I think that it has to do with loan-to-value ratios and house price deterioration, HPD, and that is what is going to make this sticky.

The applications roughly -- from our anecdotal conversations with originators, etc., and our analysis across all the different things that we do, including underwriting in Chimera, etc. -- we think that about 50% of the applications just don't qualify under the current tight underwriting standards that are out there. Many people are upside down in their homes.

And investors, I don't think really want to pile all into a 3% current coupon Ginny, Fannie, Freddie product with the steps that are being taken in terms of budget and cash being pushed into the economy.

So the refi wave will come through I think this year. We'll have some early idea on it in this quarter. But I don't think it's going to be as long and as sustained as it was in 2003.

Our steps in 2003, I think, were extremely noteworthy to look at, because we began to hunker down for a couple years in our balance sheet, because we realized that the underwriting standards were bad.

I think we've got a lot of great information internally here in our think tank, and I think that we are positioned to take advantage of what we think is an outcome here.

We're not betting on it. But as I said earlier, it's a scalpel, and Wellie and her team are in there doing some microsurgery. And so far they've been able to exact great value for the past 15 years. So that that's where I have got my bet, on these guys.

Okay. Thank you and congratulations again.

Thank you, Joe. Great to hear from you.

Matthew Howlett, Fox-Pitt Kelton.

Thanks for taking my question. How do you envision the portfolio mix at 12/31/09? I'm assuming we are going to see more of a shift to ARMS. Will it look more like two-third ARMS, one-third fixed after we go through sort of this refi wave this summer?

You know, we are still running roughly two-thirds adjustable floating to one-third fixed, after giving effect to the interest rate swap.

Okay. Just after the summer I think Fannie Mae [fixes] are -- the Street is projecting sort of mid-50 CPR now. Would you replace some of that fixed-rate book today? Would you sort of let that run off and shift into more the hybrid? I'm just trying to --?

No, it's all -- we will constantly run relative value based on our outlook. I'm not going to commit to this is exactly what we're going to do; it's a constantly evolving -- you have constant repricing of the risks in the market.

We will continue to assess that. Overall, though, I don't see us getting away from the roughly two-thirds adjustable floating to one-third fixed that we've carried for a long time.

I think that it's important to remember from the opening comments, Matt, that we think the best outcome that we can hope for as taxpayers and as a nation is to try to get back towards a 1950s kind of economy. And in that economy you had an activist government buying unlimited amounts of quantities of longer-dated Treasuries and holding down interest rates on the front-end for almost 10 years.

These numbers that are out there today certainly rival what happened in post-World War II America. So that is the framework that I think any discussion about reinvestment risk has to take.

I think at the same time, the market rates are going to drive this. We are leaving a lot of money on the table by swapping out and insuring that part of the Barbell. It's roughly $0.30 a quarter, but it's an insurance policy that I think is extremely wise and has paid off for us over the years and helped us build book the way we've built it.

I think that is a pretty damn good outcome against the backdrop of all the alternatives that are out there.

It certainly worked well for you. In terms of other investment strategies, would you consider to pulling some of the excess capital to something like a Chimera vehicle or -- I don't know if you still have that -- the hedge fund business going? Is there any other, anything out there else we should think of?

Sure, I mean if you think about what we've achieved in the past year against the backdrop of everything that's gone on, the hedge fund business performed very well for us and has done an exceptional job of allowing us to maintain a window on the equity market and express our views and ideas in credit.

We've capitalized RCap as a dealer, which we are going to internalize our operations in terms of distributing our fund products through there as well. RCap I think is a great vehicle for us to recapture some of the fee income that we pay out on fund distribution, etc., and financing as well.

We acquired Merganser in the asset-backed loop.

If you look at FIDAC, FIDAC's assets have tripled in the past year. Our margins in that business are extremely good, I think. The assets under management are actually bigger than the equity in Annaly for the first time in five years.

So there is a lot of things that we've been working on. We've talked about other opportunities that are emerging in different spaces, and we are certainly going to be activist and doing.

We just did the Chimera deal, which was a huge success. We started out at $500 million and we raised almost $900 million. All of these things are extremely accretive and I think great windows of opportunity, as Wellie described, for all of the opportunities across different credit and coupon stacks.

And we did maintain our stake in Chimera, so it does give Annaly exposure to that marketplace.

We continue to look for opportunities as parts of the mortgage market roll into a repricing, whether it's commercial or anything else associated with a lot of the damage that has taken place.

So would that imply another Chimera-type vehicle that could be in commercial MBS?

We're not going to comment, but certainly that is one of the alternatives out there for us. Yes, Matt.

Great. Great, thank you.

Ben Mackovak, Rivanna Capital.

Hey guys. Thanks. Nice quarter. Most of my questions have been asked.

What was the main reason for the decrease in selling of the mortgage-backed securities? I guess you guys had about $835 million versus about $4 billion in the previous quarter.

You know what? It varies all the time. You just take opportunities where you can. There is no -- we don't have any kind of set selling quota or anything like that. We just continue to try and fine-tune the portfolio; and if it results in sales, you know, so be it. It's not a target.

Okay. Thanks.

Bose George, KBW.

Good morning. Actually most of my questions have been answered as well, but let me ask just one about extension risk.

I was just wondering how you guys are thinking about that -- what you think about the securities that are coming out now, especially with the high LTV borrowers in there as well, and how you're just viewing that whole thing.

Obviously, Bose, you have to weigh the unintended consequences of the flipside of everything that is going on. We certainly, as Mike mentioned, would have much higher earnings if we had no interest rate swaps on. But those are designed to help shield some of the fallout from basically re-creating the coupon stack.

It's still, even after giving effect for interest rate swaps, there is still tremendous spread. Obviously there is risks associated with everything, but there are things you can do, and we'll see.

We certainly are -- and part of the reason our leverage is lower -- is continuing to weigh how all of this intervention is going to ultimately reshape the way the mortgage market looks. It's not like we have blinders on to what is going on.

Yes, I would say although it's a unique period, Bose -- and certainly there is very hard evidence that strikes this as looking a lot like the wartime economy in 1940s and the 1950s. That the call and mortgages is extremely dynamic and the ability to analyze value in that call is going to be more valuable than ever as things reverse themselves, if and when they do that.

But certainly there will not be a bell that starts and rings unless and lets us know that that's happening. We have always prepared for bad outcomes in terms of managing the Barbell, whether it is fine-tuning the portfolio or leaving our money on the table in order to do the swaps.

Great, thanks for the detail; and great quarter, guys.

Thank you.

Don Fandetti, Citi.

Hi, good morning. Mike or Wellington, as you look at your G&A as a percentage of average assets, going back over the years it just goes higher and higher. I was curious if you think you're as efficient as you were several years ago, or if it's just factoring in some of the new initiatives and that's why that ratio is going up.

I mean one thing I would say is, outside of leverage being lower just off of average assets, we have trended leverage down. But I'll let Mike talk about the other initiatives that we did earlier.

You know, we're running the lowest amount of leverage probably in our history, still making tremendous return on equity. That speaks to efficiency, period. There is no other way to describe it.

So from our perspective, we have reinvested capital in. If we were running at 8 to 12 to 1 -- let's say we were at 8, you would be reducing that number significantly in terms of G&A because average assets would be a lot higher.

So I think it's prudent to be running lower amounts of leverage in here. I would encourage some reflection by anybody who thinks that they can double-down and run high amounts of leverage in this very volatile legislative and interest rate environment.

I also think that you have to look at how we're investing the capital and where we're putting it. We have put $100 million into RCap. We have purchased another asset manager. All of that should be showing up in numbers that are accretive in terms of multiples for our asset management business underneath it. And I think we will be rewarded for that over the long run.

Then finally, in a world where other REITs are converting their dividends from cash into common shares and diluting shareholders, where banks are going to be changing their capital structure by getting rid of their converts and moving it over into common equity and changing the dilution of that, Annaly is the highest capitalized company on the New York Stock Exchange, paying the rate of dividend that it's paying, by almost over 1,000 basis points over the S&P.

So, I think there is pretty hard value embedded in what we've done and how we do it. I think efficiency speaks to being able to achieve higher teens returns, middle to high teens returns at the lowest amount of leverage in the history of the Company.

Okay. No, that's a good point. Thank you.

Rob Schwartzberg, Compass Point.

Good morning, everyone. I have two questions. One, it seems like the earnings beat was driven mostly by a declining cost of funds. Can you talk a little bit about the outlook for your spread going forward, based on where we are in the curve? That's my first question.

No, we never project on that. But obviously, funds and LIBOR have improved as the first quarter was ending and as the second quarter began to evolve. So we never project that.

Okay. Then my second question I don't know if you can talk about or not. But I mean given your incredibly strong capital position and what's going on in the banking sector with the availability of franchises, have you ever thought about maybe this being the time to look at acquiring a banking franchise?

You know, as we've evidenced in the past year, we're looking across selectively and strategically all of the different parts that would fit into our business model that we've explained as basically a hub-and-spoke structure.

FIDAC clearly in the asset management business; but that number grew over 21%. We started our own dealer operation; that will be accretive to our operations as that evolves. It only started business in the first quarter, and I think it's a phenomenal opportunity for us. And certainly banking to us is something that we're looking at.

Thanks, appreciate it.

Bob Napoli, Piper Jaffray.

Thank you. Good morning. Mike, I was just wondering if you could give a little more color on what your economic outlook -- what is the economic outlook that Annaly (inaudible) currently holding for 2009 and 2010?

Yes, I go back to my opening remarks. They are on the website, but I think that you are in a healing period in the economy. The government is going to be extremely interventionist.

Stabilization will not mean normalization. If you think that we're going back towards a 70% consumer-based economy GDP, I think that you need to have your head examined. And that inventory management and efficiency of distribution is going to be key to the survival of a lot of companies against that backdrop.

So higher unemployment, stagnant to lower wages, lower consumption, interventionist government.

Higher taxes.

Higher taxes.

Certainly.

Death Star the plague, locusts, and maybe even swine flu.

There are a fair amount of concerns about once the economy maybe stabilizes, that with all the capital, that there is going to be a fair amount of inflation. Do you think that that is a very low-risk event over the next two years, in 2010?

I think for the immediate future, the risk is further deflation, not inflation. I think that there is obviously a wave of deflation that has happened in the real estate markets, the equity markets; and I think that it is playing over now into commercial assets as well. And that's going to weigh heavily on the mindsets and the resetting of the economy to lower levels. I think that's what all CEOs are faced with.

In our case, what does it mean? Steep yield curve; intervention at Fed; new policies; an alphabet soup of government agencies being created and trying to manage their way through this; and across the coupon stack of managing data management.

I think we've got an outstanding model by which to exploit all of those different opportunities and reconfigure the debt that's out there into new equity investments. That is our gift and that's what our mandate is.

Do you have your own outlook for -- there's a number and you're managing, I understand, you are managing your business and understand what the government is trying to do.

But your own forecast for mortgage originations, I mean, there's a pretty broad range; and it seems like the Mortgage Bankers Association is a little optimistic at $2.8 trillion.

Well, yes, I think originations is a very broad word, because whether it's tied to new housing is really what the question is for the economy.

I think what you're seeing is a reshuffling of the deck into lower coupons where it's available and if it's available for borrowers. And that as I said in my earlier comments, that the mortgage market, the residential mortgage market has defined the problem, which will lead to stability in terms of assets, but not necessarily in terms of house price depreciation or more domestic turmoil of foreclosures and delinquencies.

How much further do you think home prices decline broadly from here?

Our feeling is 15% to 20% off of our best guess.

Okay, great. Thank you.

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

Thank you, Jasmine. I would like to thank everybody for taking the time this morning to listen to our call. We look forward to speaking to you at the end of the second quarter.

I would like to congratulate the management team on a brilliant job exploiting the values in the market. Thank you all, and we will speak to you soon.

Ladies and gentlemen, if you wish to access the replay for this call you may do so by dialing 617-801-6888 or 888-286-8010 with the ID number of 73428940.

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