Annaly Capital Management, Inc. (NLY) Q2 2012 Earnings Conference Call August 2, 2012 9:00 AM ET Executives Michael Farrell – Chairman, CEO and President Kathryn Fagan – CFO and Treasurer Wellington Denahan-Norris – VC, CIO and COO Analysts 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 Presentation Operator
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. Michael 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. Read the rest of this transcript for free on seekingalpha.com