Annaly Capital Management's CEO Discusses Q2 2012 Results - Earnings Call Transcript
August 7, 2012 1:15 AM ET
Annaly Capital Management, Inc. (NLY)
Q2 2012 Earnings Conference Call
August 2, 2012 9:00 AM ET
Michael Farrell – Chairman, CEO and President
Kathryn Fagan – CFO and Treasurer
Wellington Denahan-Norris – VC, CIO and COO
Jason Arnold – RBC Capital Markets
Jade Rahmani – KBW
Steve Delaney - JMP Securities
Rick Shane – J P Morgan
Jasper Birch – Macquarie
Ken Bruce - Bank of America
Bill Carcache - Nomura Securities
Good morning, and welcome to the Second Quarter Earnings Call for Annaly Capital Management, Inc. At this time I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode (Operator Instructions).
Earnings call may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements which are based on various assumptions, some of which are beyond our control, may be identified by reference to a future period or 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 the yield curve, changes in prepayment rates, the availability of mortgage-backed securities for purchase, the availability of financing and, if available, the terms of any financing, changes in the market value of our assets, changes in business conditions and the general economy, changes in governmental regulations affecting our business, our ability to maintain our classification as a REIT for federal income tax purposes, risks associated with the broker-dealer business of our subsidiary, risks associated with the investment advisory business of our subsidiaries, including the removal by clients of assets they manage, their regulatory 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 the forward-looking statements, see Risk Factors in our most recent Annual Report on Form 10-K and all subsequent Quarterly Reports on Form 10-Q. We do not undertake, and specifically disclaim any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
I will now turn the conference over to Michael A. J. Farrell Chairman, Chief Executive Officer and President. Please proceed Mr. Farrell.
Good morning and thank you. Good morning and welcome to the Annaly Capital Management's Earning Call for the second quarter of 2012. I am Mike Farrell and joining me on the call today are Wellington Denahan-Norris and Kathryn Fagan.
Annaly’s execution and performance in the second quarter was consistent with what we’ve been discussing with investors for some time. We have kept leverage low, we strengthened and executed and extended the right side of our balance sheet. We have been careful on our asset selection and maintained a sizable hedge position, all while continuing to generate mid-teens returns on equity. Our portfolio positioning reflects our view that there are significant risks embedded in the financial system, some of which I will address in my prepared remarks after which we will gladly take questions about the quarter.
As usual my remarks this morning are up on our website already. The title for today’s missive is Fiscal Union Civil War.
As policymakers ponder the next steps to be taken in solving the world's fiat currency issues, I thought it would be helpful to remind people of one precedent in particular for some historical lessons about the fundamental deterioration we are witnessing globally.
Much has been made about the contrast between the fiscal union in the United States and the lack of one in Europe, but recall that in 1861, eleven southern states decided to dissolve their economic and political ties with the United States of America, leaving the Union with twenty members and five border states.
The Confederate States of America had a virtual world monopoly on agricultural goods like cotton and tobacco. These eleven states together ranked as the fourth largest economy in the world. However, they were unable to agree as a group on sharing Treasury functions and responsibilities, so the Confederate Treasury issued unsecured notes. When first distributed in 1861, Confederate notes traded at a premium to gold, based on the assumption that their value was ultimately secured by the combined revenue of the South’s tobacco and cotton assets. Unfortunately, for the South and for Confederate note holders, this was not the case. Since the leaders of the individual states maintained that secession was largely about state’s rights, it would have been inconsistent for them to consolidate Treasury functions under a central government. Besides, South Carolina did not trust a Virginian to run their Treasury, and so the arguments went, state by state.
In late 1861, the Union Navy successfully blockaded the major Southern ports and naval trade routes, effectively killing Confederate trade and, as the graph to the left shows, the value of the Confederate dollar. As exports fell, the value of a Confederate note fell to a 10% discount to gold. This began a downward spiral so violent that by mid-1862 it was a 60% discount, by the end of 1863 a 94% discount and still lower into the last two years of the war.
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