Annaly Capital Management Inc (NLY) 2010 Q1 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the first-quarter earnings call for Annaly Capital Markets 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 earnings call may contain certain forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933 and Section 21-E of the Securities Exchange Act of 1934. Forward-looking statements, which are based on various assumptions, some of which are beyond our control, may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as may, will, believe, expect, anticipate, continue, or similar terms or variations on those terms or the negative of those terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including but not limited to changes in interest rates; changes in yield curve; changes in prepayment rates; the availability of mortgage-backed securities for purchase; the availability of financing and if available, the terms of any financings; changes in the market value or assets; changes in business condition and the general economy; changes in governmental regulations affecting our business and our ability to maintain our classification as a REIT for federal income tax purposes; risks associated with the broker-dealer business or our subsidiary; and risks associated with the investment, advisory business or our subsidiaries, including the removal by clients of assets they manage; their regulatory requirements; and competition in the investment advisor 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 on Form 10-K and all subsequent quarterly reports on Form 10-Q.

We do not undertake and specifically disclaim any obligation to publicly release the results of any revisions which may be made in any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

I would now like to turn the conference over to Mr. Michael Farrell, Chairman, CEO and President of Annaly Capital Markets Inc.

Thank you. Good morning everyone and welcome to Annaly's first-quarter earnings call.

Joining me today is Wellington Denahan-Norris, Kathryn Fagan, Nick Singh, and Jay diamond. As usual, will begin today's call with some prepared comments, after which we will take your questions.

In addition, we are trying something new this quarter. We have taped a short video that serves as a companion piece to the remarks made today. The text of my comments, as well as the companion video, will be available on our website after the conclusion of today's call at www.Annaly.com. I look forward to hearing your feedback.

Now, to begin. The topic at hand is GSE reform, which has been on the tongues of almost every caller that's called into our Investor Relations line. The title of this summary is "It's a Wonderful Rack".

One thing that's clear from the discourse in Washington is that the old GSE model will not reemerge after conservatorship. The argument over what Fannie Mae and Freddie Mac will look like ultimately focuses on their two main lines of business -- the insurance wrap that investors pay for when they purchase assets originated to government guidelines and the balance sheet management of primary and secondary market portfolios. Since this debate will play out over the coming years, especially after the 2010 election, we thought that we would provoke some thoughts about the impact of one scenario that has been receiving consideration, a complete exit by the government from conforming mortgage business.

For purposes of analysis, we have created a typical American family, the Grimms. The Grimms have an annual household income of $52,029 according to the U.S. Census Bureau. Their federal, state, and municipal tax rate is about 30%, which nets them out to about $36,421 annually, or about $3035 per month. Their healthcare insurance is about $400 a month, or $4800 a year. Transportation, gas, tolls, parking, maintenance and car insurance is about $333 per month, or $4000 per year. They have a $180,000 conforming mortgage with a principal and interest payment of about $960 assuming a 5% borrowing rate. Their property tax rate is $2000 per year, or $106 per month and the homeowners insurance is about $1000 a year or $83 a month. The average credit card debt per household is $16,007. Assuming a 15% annual percentage rate, the minimum monthly payment is about $360. Adding it all up, monthly carrying costs for these categories is $2303, or $27,636 annually. So, the Grimms have roughly $730 per month left over to cover essentials like food, heat, phone, cable, Internet, and the occasional broken pipe or window leak or even entertainment. They juggle their payments, they are occasionally late and they are just barely above water as long as they stay employed. There is not a lot of room for error.

The government sponsored enterprises were created to provide reliable and affordable capital to the housing and finance markets throughout entire economic cycles. Historically, this is a relatively new development. America survived for almost two centuries without the GSEs. However, when you are able to view the markets within the context of the growth in private sector debt growth, since the baby boomers became of age or more specifically became of borrowing age, the power of the Grimms and their cohorts to access the AAA rating of the sovereign United States via mortgage loan becomes fully visible.

Until the late 1960s when Ginnie Mae was established and Fannie Mae was chartered as a private shareholder owned company, families like the Grimms primarily depended on the private markets for mortgage credit. Their rates and terms were much harsher and much less reliable than the rates and terms afforded by the GSEs and the securitization market. The power enjoyed by the Grimms and many other of government guaranteed insurance for fixed-rate 30 year mortgage rate borrowings is demonstrated in an accompanying chart and it is easy to compare to the primary for corporate borrowers in the United States. We have this chart up on our website.

What this chart demonstrates is the success of federal policy in smoothing out the cost of funding to the average American family for housing. What it does not show is the relative difficulty in obtaining credit prior to the 1970s when loans were not securitized and sold into the secondary markets in a standardized and efficient way. For lack of a better characterization, we'll call this Mr. Potter's Bank of Consumer Finance named after the famous character portrayed in It's a Wonderful Life by Lionel Barrymore.

Left without a reliable source of capital to compete with, the private sector's loaning terms were one-sided affairs. I remember early in my life attending mortgage burning parties where adults celebrated their final debt payment with the kind of gusto that's usually reserved for newly born babies.

It was only relatively recent in American history that America changed from being a largely rural country dominated by agricultural families with urban dwellers living mostly in small multifamily brownstones, where owners occupied the primary residence and leased out the balance of the house to support the debt payments. On our website is a graph that illustrates the massive rural to urban migration of the country's population over our history.

Think about the great credit transition that has occurred over this time. Imagine three or four family incomes that were needed to support the mortgage on one home that then ended up -- that home as an investment property for owners who took advantage of the post-World War II suburban migration to live in a single-family house in previously unavailable communities. This is the economic world in which our theoretical family, the Grimms, live, a world where government commitment to financing broke the private sector monopoly on consumer access to home credit.

To understand the pre 1970s banking mentality, one just has to go play a game of Monopoly, which was created in the 1930s, or go to our website for a link of the scene with Old Man Potter attempting to pull the credit lines on borrowers to ultimately own half of Bedford Falls. I think it's safe to assume that Potter would not have been the author or underwriter of no money down loans, negative amortization mortgages or ninja loans. At a different time, however, he may have securitized them and sold them off his balance sheet.

If there is no government wrap for people like the Grimms, their mortgage will cost more. Every 100 basis points more that they would have to pay on their mortgage will reduce their discretionary budget to cover heat, food, and entertainment by about $110. What's worse, based on the economics of non-agency securitization markets, I believe that a fully private model would probably charge 200 basis points to 300 basis points higher than the current government wrapped rate.

Let me expand on this a little bit. If Mr. Potter's Bank of Consumer Finance is the only game in town, he will either retain that loan or he will securitize it. If he has to retain it, he will likely will likely charge for access to his balance sheet because his capital is limited and he has to reserve against it and meet a return hurdle for it. He may charge a different rate than a bank in another part of the country with a different balance sheet consideration. Moreover, he is likely to want 20% to 30% down payments. If he securitizes it based on current rating agency guidance and return expectations for secondary market investors in senior and subordinate crunches, the math only works for Potter at a much higher primary mortgage rate.

As the debate develops for the GSE reform in the coming years, we have to remember that the benefits of [democratizing] credit over the past five decades have been accompanied by the downside of socialized credit risk.

As the Grimm story demonstrates, the power of the government credit pendulum has swung so far that it's forced a bubble across all property types, government guaranteed or not, and many sovereign credit markets as well. Now, society is dealing with the cost of that credit risk.

The saddest part of this tragedy is that the housing finance system that was once the envy of the world is now on government life support and many of its citizens were on the ropes financially even before the crisis emerged.

From where I sit, I see no easy answers for GSE reform but there is no question in my mind about the principles that need to underpin a mortgage finance system that works for our country.

As for total government withdrawal from the markets, it's not worthy of serious discussion. Reforming the markets with a firm underwriting guidelines and well drawn margin of safety is. Mortgages should be explicitly guaranteed by a government agency and charged a fee designed to give the taxpayers a return for their government guarantee. Do not make the guarantor subject to two masters, Congress and the private sector. A single line of authority and process is best with the market pricing on mortgage insurance and investment guarantees.

Most homeowners need a plain-vanilla mortgage. The platform should remain scaled for that customer.

The government should not be in the portfolio management business. The public-sector capital markets are willing and able to price the cash flows accordingly. Let them do it. The agency MBS market is a complex $5 trillion-plus market supported by multiple highly regulated pools of private and public capital with diverse motivations. These investors create the necessary investment tension for stable market support and liquid transactions.

The current and future families of America are counting on us to get this right. If we don't, the economic -- the household economics of the Grimm family will have to change dramatically for the worse and they will have lots of company. If we do, we will again have a system of housing finance that will be the envy of the world.

That concludes my prepared remarks. Our website is up for PDF, and you can look at the charts there and the companion video. Now, we will open up the call for questions.

(Operator Instructions). Bose George, KBW.

This is Bose from KBW. Interesting commentary as usual. I just had a question about the dollar amount of the mortgages, whether you have an estimate for the dollar amount of the mortgages that were prepaid related to the buyouts and any color on what that could look like in the second quarter with the increased Fannie Mae prepayments that are going to be happening.

Bose, we have experienced roughly, based on the Freddie Mac and Fannie Mae that we've had so far, amortization twice the levels that we would normally have experienced. The dollar volume, as you can see in our forward purchases, is fairly sizable. I mean I think everybody should understand that you're looking at a historic number of principal paydowns happening in a very short period of time, and a company like anybody exposed to the mortgage market experiences our share of it.

The related question is just on the timing for redeployment of capital. Clearly, you guys deployed the capital you raised this quarter and the leverage that pretty constant. So can we assume that's the second quarter as well in terms of redeploying the paydowns that you guys get?

We constantly are in the market deploying the capital as we get it back. Again, you can see from our report that we have a significant amount of forward purchases to absorb some of that paydown. Again, we constantly monitor the market to see how things are going to continue to unfold. The Fed's presence is still there in the rural market. So, there's a lot of things that will influence that but yes, we will continue to -- the market is still, irrespective of everything that has gone, there are still attractive levels to deploy capital. We will continue to do it.

Mike Taiano, Sandler O'Neill.

Just to follow up on your comments in terms of the GSE reform and perhaps the Fed's ultimate unwind of the $1.25 trillion, could you maybe give us a sense of your timing on both of those things at this point?

I think that, from the conversations that we've had at a lot of different levels of government and regulatory bodies and central bankers, that there is a recognition that this is nowhere near over, meaning the economic distress that has emerged over the past couple of years, and that this is certainly a long-term problem. When the Treasury decided to make the decision to back Fannie and Freddie for at least two to three more years, I think that was a message to the markets that certainly the excesses have to be drained out over a longer period time.

I don't expect any meaningful change in GSE policy reform until after the 2010 elections. Then depending on how those elections wind up, I think that would be driven by whatever the mandate is that comes out of the voting booth.

So, from my perspective, I look at it today and I say -- and this is really the critical point that everyone who is concerned about this issue should think about -- is that if Fannie and Freddie did not exist today or didn't exist over the past five years, the government would be scrambling right now to try to create it simply because the lack of credit that's being passed through for nonagency paper is so diminimus that it shows you how tight lending standards have been and how deep those wounds are from the past default cycle. So, if Fannie and Freddie did not exist today, I would argue that Congress would be scrambling to try to create one today. So, I wouldn't say that it's going to go away.

I think that I've been very clear in my discussions about what I think the new thing should look like. The problems with Fannie and Freddie were more based around portfolio management and credit. Credit can be priced with an appropriate premium just like insurance can. And, I think that portfolio management is for the private sector.

I don't anticipate that the Fed will be selling the $1.2 trillion of agency paper any time soon. I think that, when they talk about asset sales, they are talking more about credit asset sales that they've taken on to the balance sheet from Lehman, Bear, AIG, you pick the name. Some of that has been bleeding out into the system, and I think that they have been opportunistic and correctly opportunistic, in our view, to be moving some of that paper out.

That's helpful. Then just a separate question on just the competitive dynamics right now for MBS. It seems like prices have held up pretty well after the end of that purchase program. Could you maybe just give us a little bit of color on what -- who are the buyers? It seems like banks (technical difficulty) given the dearth of lending right now and the steep yield curve, have an incentive to kind of push further and buy more securities. Is that what you're seeing or are you seeing it sort of broad-based across fund managers and hedge funds and things like that?

I think most of the purchases are coming from the banking sector, and it's taking place because they don't have any loan demand in effect, or don't want to fill those demands for loan that they have based on assets.

Interestingly enough, I received a letter from a shareholder this morning from Bellevue, Washington which was extremely complementary about the Company, but I will leave that part out, but he touches that piece exactly. I'd like to take out a quote from that, if I may. I don't have a release for his name but I will just use his words. "I also have a comment concerning on a more macro level. As I listen to the banks currently reporting giant profits, it seems to me that the only way they would be doing this is they have essentially entered your business -- meaning Annaly's business. Going forward, I do wonder if many of these banks have the same investment experience to manage this strategy through the changing interest rate environments without taking on huge risks and/or incurring massive losses. I have no idea whether my concerns in this regard are valid, but if I'm right, it seems to me that someone with knowledge and credibility in this area needs to sound an alarm." Consider the alarm sent.

So, we talked about this 2.5 years ago on one of the earnings calls -- is that one of the unfortunate drawbacks that happens to this cycle is that you are seeing a crowding out of private sector borrowing activity because of the massive amount of government bonds that have to be borrowed. For those of you who are concerned on the line about the steps that Annaly has taken to defend its book value so rigidly over the past 1.5 quarters, you should look at what's happening to Greece this morning in the credit markets as an example of what happens if you don't defend your book value and you don't run a very conservative strategy and do swaps and take advantage of the things that the market are giving you at this time. Those rates have blown out dramatically this morning in the face of the bailout from the IMF.

Mike Widner, Stifel Nicolaus.

Just wondering if we could try and get any more detail from you on kind of the split of Fannie and Freddie impact in the quarter. I guess specifically you make reference in the press release to the amortization spike in the first quarter really being associated with Freddie and then the similar spike from Fannie is still to come. Is that accurate, or was there a little more spreading?

Freddie chose to do it in one month. Fannie has chosen to spread it out over three months. So, you've had some of the Fannie impact. But, I just I want everybody to understand that this is a tremendous amount of refi activity, if you will, whatever you want to call it, crammed into a very short period time. So, I don't think the market should look at it as it's this ongoing situation yet. Near-term we have to deal with it and I think, nonetheless, these are tremendous earnings, even given all of that refi activity that has come out of the buyout. So, I still think it's an incredibly attractive return.

I don't know where everybody is looking for all the great returns that they are getting, but I would have to say that, given the adversity that we have to deal with near-term, not to mention the fact that we've had to deal with a huge balance sheet, pretty much an endless balance sheet, as a constant participant in the market, couple that with Fannie and Freddie and all the other things that go along with it. I think you kind of strip all that away and you're left with a very attractive spread environment still, given everything that has happened.

I wouldn't disagree with that. Let me see if I could just maybe get a little more color on the Fannie specifically. You mentioned three months, three or four months really depending on what you buy, the Fannie stuff that we should've seen early on would be the higher coupon 30-year fixed, which probably much of came in March, but assuming that it's going to run every three or four months, could you provide us a rough estimate of how much of your Fannie exposure you think might've been reflected in first quarter? Are we talking about a third of it or 50% of it or 10% of it or --?

No. You could be -- I would say it was -- what I will give you is that it was more heavily weighted probably.

More heavily weighted (Multiple Speakers)

To the higher coupons.

So more heavily weighted to the first quarter than the second quarter? Is that --?

It's completely unknowable for certain, but you could maybe say that.

Just because the reason is that I've heard varying comments on whether March prepayments -- prepayments that actually happen in March would be reflected in first-quarter results just because you might not actually get the payments and the remittance and everything.

I think, when you calculate the yield and the amortization on the security, you cannot ignore the fact that there is a buyback program in place for the month of March. So, assumption is made based on the yield on the securities knowing that there is a buyback program in place. (multiple speakers) will be changing from March.

That would be my follow-up question. Looking at the 3.78% million number for the yield at the end of the quarter, I'm trying to figure out is that kind of what you assume is a -- it seems awfully low for a lifetime yield and it seems about appropriate for kind of a --

That is the yield snapshot on the last day of the quarter. It does take into assumption -- in the assumption that there is a buyback program in place.

So, the way -- because accounting standards vary on this. Some companies will smooth that over the lifetime, and other will say we know amortization and we know CPR is going to be high for the next two months and then it's going to slow back down. So you would assume a yield, given a specific piece of MBS, you'd assume a, say, 3.78% yield for the next quarter and then bouncing back up as prepayment expectations slowdown in the second half of the year.

That's how Fannie and Freddie got in problems.

Yes, we do not vector -- we do not vector the prepayment scenario in producing that yield. It will be an actual experience over the last one month or three months speed that we have actually experienced.

Let me just finish that point. Part of the problem that Fannie and Freddie dealt with in a restatement of earnings that happened to them [in] the early part of the decade was directly tied to the fact that they thought they knew prepayments better than everybody else during the 2003 period. And they smoothed it out.

For people who want to know about our behavior and how we will interact during a period like that, the best thing about being around for a long time is you can actually look at the 2003 returns and dig down into them, and you can see a very similar prepayment spike much more violent than this one from the perspective it was coming out of private sector. This is really a statement that the taxpayers are taking on a lot of delinquent loans into the Treasury.

So, as things hit the 120-day mark, it might go on further than people may submit. You have to embrace the fact that you've got to take these numbers now, live with those lower rates of return and deploy your capital, making assumptions that speeds will be high.

Okay, so just to be clear then, if we assume the elevated level of prepaids out into -- as long as it takes these things to fully repay, which would be pretty brief if the CPRs are steady, but we would expect the 3.78% yield to continue, in a scenario where the buyouts happen and they slowdown and CPRs go back to, say, 22% in the second half of the year. Just so we're clear, what you're saying is you'll take that when it comes but if that were to happen, that would probably take your yield back up.

That is correct.

Well, I will let others ask questions. Thank you very much. I appreciate the comments and the color.

Thank you Mike. I also -- for the call, I want to make it clear that the announcement by Fannie Mae and Freddie Mac was on February 10, so it happened sort of mid-quarter. While we had been predicting for the past 1.5 years that there would be a spike in prepayments from some sort of federal interference in terms of cash flows in the structures either from modifications, from the administration or whatever, the actual action step to take this didn't happen until mid-February. So, none of the models were really prepared for this kind of a spike. That is now being embedded in the way you acquire assets and that's what Kathryn and Wellington are talking about.

Charlotte Chamberlain, Chamberlain Associates.

One question about bonuses, which were certainly much much higher in '09 than they were in '08, apparently based on book value which admittedly went up rather dramatically although your stock was -- kind of hit dead air from August through the end of the year. Is it reasonable to assume that those bonuses will go down if book value continues to go down this year?

The structure of the contracts that the employees have with the Company are designed to reward them for growth and to grow the Company over time. When we go back and we look at it, the percentages and the formulas for the vast amount of the employees who are under contract with the Company have not changed since day one.

In a company that pays out 100% of its earnings, there is no retention, so there is no growth element inside the Company. What we do is we align ourselves with investors through a combination of basis points that are viewed towards sequential access to capital for -- the sequential access to capital and the capital markets. The only way we get that sequential access is if we perform. The growth in the bonuses over the past couple of years are simply a recognition of growth in equity that came from investors who were willing to pay for the returns that we've been creating.

Now, speaking to those returns, we keep our one-page roadshow in order to give you an idea of how powerful those returns have been underneath this formula. When we compare ourselves through 3-31 or actually through 12-31, Annaly's total rate of return from the period of the IPO through 3-31-2010 is 485%. 48% of that came from price appreciation or, as you qualified it, lack of price improvement. 436% of that 485% came from dividends, cash back in your pocket. Compare that to Berkshire during the same period, Berkshire Hathaway, which had a price appreciation of 179%, the S&P 500 which had a total of 58.22% which is a split about 50-50 between price appreciation and dividends, and S&P financials which had a minus 18% price appreciation during the same people and dividends of 26% for a total rate of return of 8.74%.

I think it's a very compelling argument and discussion about the way we reward our people, the access to capital, the growth of the Company that comes over time. Indeed, sometimes we have been shut out of the capital markets for years at a time. I give you the example of 1997 to 2001 when the Company was roughly about a $100 million market cap company and had -- was kicking out a 15% to 17% dividend yield but couldn't compete with the .com era and therefore stayed at $100 million.

So, our formulas are designed to reward our key employees over time for protecting book, growing earnings and gaining access to capital. The only way you gain access the capital is if the capital markets are willing to do it. We've never done a dilutive transaction and we've always acted in the best interest of the shareholders, and at 485% I rest my case.

But I'm not talking about the long-term. I'm talking about the near-term where your stock is down more than $2 since the peak in the -- cyclical peak in March and the fact that these bonuses were actually astounding last year, the book value is going down, the earnings are going down this year. My question was not about the long-term but how are we -- how should we kind of expect that these bonuses are going to be for this year if these trends continue which, from your commentary, sounds like is not an unreasonable thing to expect.

I think you are mixing apples and oranges. We are not managing for one quarter. We are managing for an entire cycle. At this rate of return, total rate of return, I think that's proven to be a very powerful component for investors over the long-term. We are not going to manage for one quarter earnings or one quarter solutions. Clearly that's what gets companies into trouble.

Our view is that, when we create a middle teens return, if you take that over a period of time and compare it to almost any other investment in your portfolio and then tack on top of it the fact that it's coming back to you in the form of dividends, cash in your pocket on a quarterly basis, that you can compound, in any way that you choose to do or spend or consume, I think that you would agree on that analysis against almost everything else. I'm not trying to compare us to Google or to any other hypergrowth stock. We have a place in portfolios and essentially that's our goal, is to grow income over time.

Steve DeLaney, JMP Securities.

For starters, just a housekeeping thing, just for clarity -- maybe Kathryn, if I could address this to you, kind of responding to Q&A with Mike Widner. Do I understand that what you were saying about looking at actual and anticipated prepaids and the entirety of the GSE buyouts, not just Freddie but Fannie as well, is it correct to assume that the first-quarter premium amortization of $164 million did include at least some influence from actual or anticipated Fannie Mae buyouts as well as the Freddie buyouts that were reflected in the March factor?

Yes, that's correct.

Okay great, thanks for that. I apologize for having to be redundant, but I just wanted to make sure I interpreted that properly. then I guess, Mike, onto lighter topics I guess and maybe looking more to the future beyond this kind of two-quarter challenge that we have, you guys have been at this 13 years as a public company. I guess I would like -- there seems to be a diversity of opinion as to whether this is an MBS market that should be bought or not or whether it should be bought aggressively or selectively. You guys are replacing runoff, but I'm just curious how attractive you think this environment today is if you weren't -- didn't have capital being thrown at you from the buyouts, would you be buying this market today? I guess how would you compare it to other attractive investment periods over that 13-year history?

I will take just take a stab at it quickly and then Mike can elaborate. But if you just look at the current coupon mortgage spread or yield, relative to the swap market, and you can just say let's -- the swap market has existed actively since the early 2000 period. I would say, in the early '90s, it was a really small market and not a huge percentage of participation. But if you look at it now as this huge liquid market, you can see that mortgage spreads, relative to swaps, are at very attractive levels, regardless of the markets that we have been through. Just they are actually wider today than they were at the height of interest rates. So, from that perspective, the investment environment has its attractiveness.

Now, if you want to weigh in mortgages against all other fixed income sectors, I would argue that there is nothing out there that is outrageously cheap on a relative basis. Whether -- the big question is always is when does this market readjust? But, in the meantime, if you're looking for a hedge position in the mortgage market -- and I'm not saying that anything is perfect -- that if you look at it from that perspective, it's a fairly attractive market.

We look at it often to treasuries and the mortgages look really rich there and haven't widened at all even though the Fed is gone.

They are, they are relative.

Yes, but I guess what really matters in terms of your spread and earnings model is what's your spread against your cost of funds. That's probably better reflected by looking at swaps than treasuries.

That is our business, and that is the Bank's business. Now, whether people feel a need to hedge a change in interest rates, some of them probably don't feel that need. It does cost us a bit of money every single quarter, around $0.30 or so, to maintain that hedge position. But, nonetheless, we still are able to produce the kinds of numbers that we're producing, which I would say in the grand scheme of things are attractive on a lot of different levels.

I would go a little deeper than [Wellie] on my view about the current mortgage market is that, ultimately, investors that I speak to can only wind up in one of two camps. Either this huge move that's happened in the industrials and in the Dow is confirming that we are in a riproaring recovery, in which case rates should go higher and the markets will take them higher before the Fed does anything in order to confirm it, which certainly does not seem to be the case. You have this -- I have to use this word "conundrum" where interest rates on treasuries are staying low and the Dow seems to be confirming some sort of business activity that is either extremely powerful and temporary but unsustainable and cannibalistic in some ways as companies eat other's lunch buying market share -- or we are in a low growth environment where treasuries are confirming that rates are going to stay low for a long time and that relative rates will return in general and investment expectations should be lower as a result of that. I think it's impossible to ignore those two things, and you have to tread very carefully through this emerging window of credit distress.

We first spoke about Greece 2.5 years ago and the euro, about it not being conditioned under a constitution like the dollar is. Certainly, you're seeing a case now where the people who have to live with the austerity in Ireland and in Greece are not happy, and people in Iceland are certainly not happy at all. But there's more of those countries to come and there is more currency volatility behind that. I think that, peppered with the amount of supply that's coming out of the treasury as it throws $1.5 trillion at a slow growth economy is going to lead to a lot of volatility all across the curve, including mortgages. I love the position that our team has put us in to be able to create these rates of return and have the amount of capital and flexibility across all the business units to be prepared to buy these things at wider spreads as they occur.

Part of that flexibility I guess is a 5.6 times leverage ratio.

Yes, it's the lowest, among the lowest leverage that we've ever had and also, the ability to use all the other elements of our dealer operations, etc., to get more balance sheet diversification, borrowing diversification away from banks that -- or countries that we think may have problems. So, we are in pretty good command of our destiny, I believe, as best command as we can possibly make it going forward.

I think that, at the end of the day, if we are in a riproaring recovery and you vote for that, well then you should be happy that Annaly is levered at 5.7 times or whatever the number is and is prepared to get the assets as they bleed back up because the markets will move first. If you're terrified because you see what's going on in the world around you and you're buying gold and you're getting into the bunker, then you should be happy that Annaly is bunkered down with you and has its capital walls up and is protecting that equity and being able to take advantage of the things that are going on in the market. So, I would characterize myself as pretty happy. I'm a shareholder.

Appreciate the comments guys. Thanks.

Ken Bruce, Banc of America Merrill Lynch.

You know, Wellington, you mentioned the current coupon spread to swaps. I'm wondering. Is that indicative of where you are buying today or is that just a reference point that you are choosing to use?

It's just a reference point. We obviously will navigate up and down the stack and do things outside of the TBA market, but I think that just shows you a fairly good reference point over the long-term.

Right. You know, when you look at the higher coupons, obviously the yield is much different at those levels and the whole dynamic changes there. How do you feel about the premium end of the coupon range? What are you thinking in terms of the ability for those yields to actually be earned or if there was any specific distortions in that part of the curve?

I think the general consensus on the street is that, once you get this pent-up delinquency bought out, that you should have a more stable profile going forward. So, I think the market has maybe been overly aggressive on its pricing of that, but there's a lot of other things that should figure into constant repricing of that option. So, I just think there are tremendous opportunity up and down the stack, depending on your view. Some people definitely have differing views than us, and we always try and take advantage of that for the shareholders. I think, looking at the current coupon spread, the swaps, you just get a general sense of being kind of in the middle where your long-term spread can fall out.

Mike, circling back to your initial comments about the reform at Fannie and Freddie and how that may play out over a period time. What is your view as to how private mortgage insurance plays into that? Obviously, there's been a recapitalization or there is recapitalization going on within the private mortgage insurance area. In the near term, it looks like FHA is ultimately the real insurer of choice.

Do you think that there's going to be any change in terms of how Fannie and Freddie are viewed within the context of whether they're choosing to use private MI or whether the government would actually underwrite that business itself? How does that change or potentially change the investment dynamic for Annaly in the process?

I think that -- I think we have to admit first off that the mortgage insurance business will survive in some way, shape, or form. I think one of the things that should be extremely disturbing for everybody that's on this call is that Fannie Mae and Freddie Mac, under the old model, were actually very rarely ever in a first-loss position in terms of mortgage insurance, which means that as poor loans were underwritten through the system typically because of higher appraisals that were brought on by private sector abuses and dilution and underwriting credit, that first loss piece in the mortgage insurance business had to be eaten through before you got to Fannie and Freddie's credit problems that brought them into conservatorship. So, that's something that we should all just reflect on for a second, about how powerful this move and pricing power is in the largest asset of everybody's lives.

That said, I think that the mortgage insurance business is going to be an extremely effective tool going forward. It's going to be a necessary component; it will be expensive. I would like to see, as I said in my opening comments, I would like to be in the position than I am in today ten years from today, where I feel that Annaly is performing a social good by financing $100 billion or so worth of consumer loans throughout the country that are our neighbors and that we are in effect transferring the dividend income in that over into investment pools nationally and internationally as cash flows allow. I think that is a great business model for us to cure some of the problems and also create income at a time when incomes are under a lot of constraint.

So, from the perspective of MI, I would like to see the government take advantage of that. I would like it to be priced into the Fannie and Freddie policy the way that it was in the past, maybe with a slightly richer blend for the insurer or the average taxpayer. I like investing in Joe Ditch Digger's home. He lives next door to me. He's a guy I can see everyday. I know what's going on. Nationally, I want to help that guy and I can do that by investing in Fannie and Freddie and Ginnie Mae securities as a professional investor. That's the position I want to be in. We would then be, as a nation, in control of our own destiny. If not, then we are back to the private markets again. I go to my Mr. Potter analogy and just remember that scene where he is pulling half of Bedford Falls underneath his umbrella.

Okay, as always, very interesting comments. Thanks again and good job in the quarter.

Douglas Harter, Credit Suisse.

My questions have been asked and answered.

Stephen Mead, Anchor Capital Advisors.

Help me again. I know the question has been asked, but when you report a year-end -- when you report a quarter-end yield as the 3.78%, how much assumption of, say, amortization is in that yield figure?

Steve, the way that yield is generated is we take the three-month speed, which is the actual past three-month speed. So, this yield that we have published here, it does incorporate the buyout activity by Freddie and some of the buyout activity by Fannie. But, what that yield does is it takes that three-month speed and holds it for the life of the asset.

What we were trying to say earlier is we do not project a slowdown in the presentation of that number.

So on of Freddie Mac stuff that was being repaid, what was the, in a sense, the -- you report a CPR across your whole portfolio.

That's right.

But for the Freddie Mac segment of that portfolio, what kind of CPR rates are we talking about?

You don't break it out, but there's no question you experience incredibly fast numbers. I mean, you had some pools where they may have come in at $90 million. But, blending the entire portfolio together just is what you see in our published number is that blend.

Going back to the question about sort of the attractiveness of the market today as it relates to managing the leverage thing, I would sort of assume that your leverage is a reflection that you don't think the market is very attractive today.

Know what (inaudible) our leverage is also a reflection of is we may be wrong. This may be as good as it gets. You can never be too sure that your opinion on the market is the only opinion on the market and is the only right one.

If I back up and say, looking historically at these spreads, irrespective of the fact that they are at lower interest rates, you can still, once that spread -- and there are other risks that you have to manage around. I'm not saying it's a riskless spread. But, just looking at it historically, it still is attractive relative to where it's been. But again, they get more attractive and they get less attractive. I think our business is to be in a position where we can deploy some capital and also have liquidity if things get a lot cheaper, which is my hope.

Is the $1.3 billion unamortized premium that you reported at quarter end, does that include your assumptions in terms of the -- or that's accurate?

It's an actual remaining premium.

That's the remaining premium after you've already taken the hit or --?

Correct. Yes.

Then one last question -- just in terms of the world, relative to when you declared the dividend and lowered the dividend down to the $0.65 level, I'm just curious how things have played out relative to the way things were back when you had to initially lower that dividend to the $0.65 level.

At that time, we were doing estimates based on what we think the buyback program is going to be. So, I think it played out pretty well. You see our core earnings are at $0.62 per share. Included in that dividend for the first time in a long time is a portion of capital gains. If you have held our stock or followed us since '05 and '06, we did actually take some tax losses at the time. Over time, we have offset those with capital gains. For the first time since then, a portion of our dividend is from capital gains. But I think that it played out very close to what we had estimated.

I would also say that our net interest margin at the end of the quarter, the snapshot of 202.13%, is still unbelievably high relative to the average that has created a 13% average ROE for the 13-year period that we've been public. So, I think that the asset selection and the ability to determine what will be callable or not callable, I think that we had a well thought out plan coming into this and we executed it the moment we understood it and did some in anticipation of it based on our experience in 2003. So, effectively we have a company today that has wiped out all of its realized losses and can be very opportunistic going forward in terms of the way that it expresses that opinion on the call of the options and also taking advantage of any capital gains that are in the portfolio now.

Daniel Furtado, Jeffries.

Thank you for your time. I just wanted to know what your thoughts were on the recent nonagency RMBS deal that was completed?

Which one? The redwood deal?

Yes, yes, in terms of how it kind of reconciles with opening comments and how it fits into your outlook on the mortgage market.

Well, you could do that all day as long as you don't want to make money. The mortgage market could be fully functioning as long as you don't want those to be moneymaking transactions.

We think the nonagency spaces being well executed under our umbrella of Chimera in the secondary markets and that there are much greater opportunities along that market.

Yes. I think that it was -- when you're looking at the new issue nonagency market, there is still a disconnect between the securities trading in the secondary market and rating agency levels in the primary market.

It's not immaterial. It's hundreds of basis points difference.

Now, what about the thought of just from the standpoint of Annaly, have you given any thought to this sense of like reaching some type of critical mass? I guess what I'm trying to figure out is, is there a size that you get that you become too big to outperform the overall agency market or do you think that it's such a deep market that that's not a concern of yours at this point?

It's a $5 trillion market. It's the second-largest market in the world at the end of 2010 after treasuries gets done issuing what it's got to issue. There's certainly a lot of room for us to grow underneath that market.

I think that what you've watched us do over the past couple of years, especially in terms of filling out the hub and spoke and adding in companies like Merganser on separately managed accounts, our RCap dealer operation which has given us a tremendous amount of flexibility on our balance sheet and the ability to navigate the differences that are going on in the funding side of the market and the reforms that are taking place there underneath the table -- I think that from the perspective of the way that we've built out the Company, I don't worry about the size of the Company. I worry about being opportunistic for the shareholders and to use the capital that we've been given in a different way.

For instance, and I'll give you an example of this, with interest rates at 0%, on February 9, we priced a convertible deal that was the first bought deal. It was an unrated bond deal, in our mind. We had just issued our Q. We had the largest dividend that we've ever paid. We were at the highest book valuation that we ever occurred. We borrowed that money at effectively 4% on -- as an unrated company for five years. The next day, a BBB GMAC piece of paper was done -- asset backs at about 8.5%.

So effectively, our cost of capital dropped from 17%, whatever our dividend rate was at that stock price, down to 4% for that chunk of our capital with some pollution, which we would rather take but there is no better time to put a foot in the sand that and to be a better diversified company than there is when rates are at 0 because, we can only assume that rates are only going to go one way from there. As I said earlier, all we have to do is speak to the Prime Minister of Greece to understand what 400 basis points means in two hours of trading one morning.

So, from our perspective, I think we've been extremely opportunistic. We've opened up new markets. We are talking to new investors. We continue to be opportunistic along those lines. We've been blessed with the ability to have some foresight about the markets and be able to execute on them. People like Redwood we have tremendous amount of respect for. They are long-term survivors in the markets. They have watched a lot of different cycles, as we have, from both sides of the coin. I think there's a lot of room in these markets to grow, and it's across the board.

Thanks for your time and good luck in the quarter.

With no time for further questions, I would now like to turn the conference back over to Mr. Farrell.

Okay, well, I want to thank you all for participating with us this morning. I hope we've been able to answer many of the questions that have emerged over the past quarter.

I would like to summarize with the current threat assessments as we view everything that's going on around the markets. As we came into the year, we were concerned about Fed asset sales on the last call. Clearly, I think that has been addressed during the course of this conversation. The Fed exit, we dealt with that on 3-31. We explained to you that we felt that the markets were ready to do that and we think they are robust enough to handle it. I would like to compliment the Federal Reserve. I think they've done an excellent job of being creative and dynamic in replacing some of the buying power and balance sheet that was needed in these markets to operate.

We do recognize, though, against that backdrop that the Fed is winding down these programs and that there's no other way to characterize that as a removal of stimulus away from the markets. We continue to watch that very carefully.

We are concerned about currency issues. We've been speaking about them for 2.5 years. We think that the euro is in trouble and will continue to be in trouble. The Chinese currency issue is going to change. Last night, the Australian central bank raised interest rates. World of global rate structures and currency structures, when one bank raises rates, all banks raise rates, just for the record.

The GSE buyout program started on February 10. We think it's going to continue to impact us over the short-term. But, as I said earlier in the call, we only manage for the long-term. We don't worry about quarter-to-quarter. We prepare the Company and protect capital for the long-term.

As an investor, you have to decide is the economy healing or stagnating? We would argue in the case of stagnation with low rates and low rates of return are what should be expected throughout this. We think the stock market has gotten ahead of itself, but we're not the best judges of it. As [Wellie] said earlier in the call, what if we are wrong? That's what we prepare for.

In closing, I would like to point out, for the Grimm family, the nonbusiness U.S. bankruptcy filings by quarter rose to the highest level since the law was changed at the end of 2005 in the most current quarter. So if we think that an economy that's driven by 70% consumer consumption can grow at the same rates that it used to without bank support from lending and without real income growth, I think we're all making a mistake as a nation.

With that, we close off and we'll see you at the end of next quarter.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1-866-286-8010 with an ID number of 46872981.

This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.