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American Capital Agency (NASDAQ:AGNC)

Q4 2008, Shareholder Call

February 05, 2009; 11:00 am ET

Executive

Malon Wilkus - Chairman of the Board, President, Chief Executive Officer

John Erickson - President of Structured Products & Chief Financial Officer

Robert Grunewald - Vice President & Managing Director of Financial Services Group

Gary Kain - Senior Vice President & Chief Investment Officer

Katie Weishover [Ph] - Investor Relations

Analyst

Steve Delaney - JMP Securities

Mike Widner - Stifel Nicolaus

Jason Arnold - RBC Capital Markets

Jim Fowler - JMP Asset Management

Ken Bruce - Bank of America

Jim Delisle - Cambridge Place

Matthew Howlett - Fox-Pitt Kelton

Sam Macintyre [Ph] - Macintyre Asset

Carey Robinson - Private Investor

Operator

Ladies and gentlemen thank you for standing by. Welcome to the AGNC Shareholders conference call. At this time all participants are in a listen-only mode. Later we will conduct the question-and-answer session. Instructions will be given at that time. (Operator Instructions)

I would now like to turn the conference over to our host Katie Weishover [Ph]; please go ahead.

Katie Weishover

Thanks Roxanne. Thank you for joining American Capital Agency’s fourth quarter 2008 earnings call. Before we begin, I’d like to review the Safe Harbor Statement. This conference call and corresponding slide presentation contains statements that to the extent they are not recitations of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

All such forward-looking statements are intended to be subject to the Safe Harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from those forecast, due to the impact of many factors beyond the control of AGNC.

Certain factors that could cause actual results to differ materially are included in the Risks Factors section of AGNC’s prospectus, dated May 15, 2008, and periodic reports filed with the Securities and Exchange Commission. Copies are available on the SEC’s website at www.sec.gov. We disclaim any obligation to update our forward-looking statements.

An archive of this presentation will be available on our website and the telephone recording can be accessed through February 19, by dialing 800-475-6701 and the replay pass code is 982407.

To view the Q4 slide presentation turn to our website www.agnc.com and click on the Q4 2008 Shareholder Presentation link in the upper right corner. Select the conference call option to view the streaming slide presentation or the webcast option for both slides and audio. If you have any trouble with the webcast during this presentation please hit F5 to refresh.

At this time I’d like to turn the call over to Malon Wilkus

Malon Wilkus

Thank you, Katie and thanks everyone for joining us. Here with me is John Erickson, President of Structured Products and the Chief Financial Officer; Bob Grunewald, who is Vice President and Managing Director of our Financial Services Group; and Gary Kain, our new Senior Vice President and Chief Investment Officer.

Garry most recently served as Senior Vice President of Investments and Capital Markets of the Federal Home Loan Mortgage Corporation and Garry was responsible for managing all of Freddie Mac’s mortgage investment activities for the company’s $700,000 retained portfolio.

I have to say that the depth and breadth of Garry’s experience in managing all assets of Freddie Mac’s mortgage investment portfolio, investment strategy, liability management, hedging and interest rate risk management, highlights his extensive knowledge of the agency mortgage-backed security market and we’re very pleased to have Garry here and Garry will be conducting a substantial portion of this presentation.

Let me move to slide five to get started. We’re very please to report that agency was able to successfully maneuver through a very haring fourth quarter with good results and that led us to declare and pay a $1.20 per share of dividend. We produced $0.73 per share of net income and $0.47 of that was related to our option strategy, which we’ll take more about, but I do want to point out that we have closed out call our option positions prior to December 31 ’08.

In the fourth quarter we had a 15.5% annualized return on equity and on an annualized basis we had an interest rate spread of about 1.19%. That was down in part because of new assumptions having to do with the repayment. We’ll talk more about that in a few minutes; but as of December 31 our annualized net interest spread is 1.46%. We have $1.6 billion of investment portfolio at the end of the year and we ended the year with 5.2 times leverage and a $17.20 book value.

Inceptions to date we declared and paid $2.51 in dividend and earned $2.36 per share of net income. $0.78 of that was related to our option strategy and we had a 21.4% annualized return on equity for the year and of course this is a sub-year starting at our IPO on May 20. We had an annualized net interest rate spread for the year, of 2.41% and then we have ended the year with $0.29 of undistributed taxable income which we intent to payout the dividend in 2009.

The biggest development in the fourth quarter, which I’m sure all of you are pretty aware of, was the tremendous volatility in the mortgage market and so on slide seven we show the MOVE Index, which is an index of mortgage market volatility and you can see that it recorded it’s highest level in it’s history. In the third and fourth quarter of 2008, the high point occurred on October 10 at 265 on that index.

We were concerned about the potential of great volatility in the mortgage market prior to the fourth quarter and so in the third quarter de-levered quite substantially down to approximately five times and as it developed, we are very pleased that we took that initiative.

We think that had the Federal government not set into back stock commercial paper in the week of October 10, that the volatility would actually exceeded the high of 265 and would have extended out for a very long time and in that kind of environment, we want to and it is much safer to be far or less levered than normal.

So, we took that initiative in the third quarter in addressing and adjusting to the developments that were happening in the capital market; we de-levered and at the same time we entered into a variety of options, that contract which we felt we’re able to take advantage of this great volatility that we were anticipating.

I have to say we had kind of the worse that happened in holding those contracts. Where they took all our asset away, we would have just ended up the quarter with a lower level of leverage, which had that were to have happened, we would have been pleased about. So, we were pleased with the option strategy, but as I said earlier, we have unwound that entirely and we’re starting this first quarter entirely in a position where we have no options.

With that I should also point out that the volatility has declined quite considerably and it’s back to levels that are more consistent with the average experience of the MOVE index and with that I’d like to turn to slide eight and hand it over to Gary to make a few comments.

Gary Kain

Well, thank you Malon very much and good morning everybody. I’m really excited about have joined the AGNC team and I am looking for to meeting many of you over the next few months. Today I want to focus to my discussion in four areas. First I want to give my perspective on successful mortgage investing; then I want to do a quick recap of the market during the fourth quarter; an overview of AGNC’s investment portfolio and how I see our portfolio evolving, given the current market opportunities.

We’ll beginning on slide eight with an overview of the investment framework we’ll use going forward. Successful mortgage investing is built on three critical components; asset selection, risk management and funding, and all three are necessary to generate attractive returns while protecting shareholder value.

The first step is obviously assets selection. I think everyone would agree that selecting securities that provide superior risk adjusted returns is job one, but the real question is how we’re going to go about during that. So, first we need to isolate the sectors of the agency mortgage market that provide the best relative value at any given time. To do this effectively we must look at all areas of the market, from short reset ARMS to 30 year fixes.

Then within each of these factors and even sub-sectors below those, we must diligently and proactively isolate individual securities that are going to outperform. It is absolutely essential to evaluate the loan characteristics backing the individual pools, even though they all have the agency guarantees in order to optimize our prepayment performance and while this is generally the case it is imperative now, because of the large number of borrowers that face significant hurdles to refinance.

Now it’s important to note, we can’t make these evaluation in a vacuum and we must consider the broader fixed income trends and the macro developments within the global markets and the global economy and American Capital and its management can provide some unique insight into some of these trends.

Now let’s shift over to the right side of the page and talk about the funding piece. Very cheap assets rate, but they’re not going to translate into good returns if they can’t finance at attractive levels and if they can’t delever. This is something that will continue to be a focus of ours at AGNC. Our mandate to stay 100% within the agency or government market helps a lot in this regard, so we got to be careful that even within the agency market, there is varying liquidity amongst different types of securities.

Let’s face it; it’s a lot easier to finance a 30 year mortgage when it is a typical trench. So lastly, when we’re employing leverage, appropriate hedging strategies and risk management are essential to protecting shareholder value and that’s why risk management is at the center of successful investing.

Yes, it begins with appropriate asset selection and prudent use of leverage, but it goes well beyond this. It is important to correctly assess the various risks inherent in our portfolio and this starts with interest rate risk, including duration and convexity and volatility, but it’s important to note, these risks can’t be evaluated and hedged without careful consideration of the prepayment uncertainty and the spread risk.

In today’s market, the bottom line is that the latter two issues really can dwarf generic interest rate risk issues for a lot of the assets that we’re going to be talking about, and as many of you know, the historical correlations between assets and hedges don’t apply as much anymore. A very simple example of this is, take a floating rate security that has very, very little interest rate risk, but it has a long average life. This instrument still has substantial spread risk and therefore price risk and this was very evident during the fourth quarter.

So look, we’re committed to evaluating the total of these risk in an effort to balance protecting book value and maintaining net interest income. That being said, we are not attempting to eliminate risks, but we are willing to take some chips off the table to manage the portfolio within acceptable risk balance.

So with that said, let’s move to slide nine and I want to briefly talk about Q4. So, it seems like every quarter people have said this on calls throughout the financial services industry, but the volatility during the fourth quarter was unprecedented and even by today’s standards.

A rapidly deteriorating economy, coupled with the events that transpired in September, including the conservative ship of the GSEs, the Lehman bankruptcy, AIG in the force bank mergers, led to a complete loss of confidence as we entered the fourth quarter. LIBOR shut out to over 4% and the availability of repo financing was scare to say at the least.

Asset prices set new lows and spread widened in all sectors and this included the agency mortgage market. Governments around the globe were forced to intervene, as Malon mentioned in attempt to add stability and restore liquidity in the markets. Treasury made substantial capital infusions into the largest financial institution, the feds cut the funds target to between zero and 25 basis point that announced a number of other liquidity oriented facilities.

Importantly, they’ve also announced they would buy $500 billion in MDS and $100 billion in agency debt. This was again in addition to the treasuries on going mortgage purchases and GSE activity. Treasury rates fell to levels not seen since the 50’s with the five year closing at around 1.5%, which was down at least about 150 basis points for the quarter. Five year swap rates dropped almost 190 basis points and by the end of the quarter one month LIBOR had fallen 350 basis points.

The Fed announcements and these market conditions allow current coupon mortgage rates to participate in the rally and provided support to the mortgage market as a whole. That being said, premium mortgages and other sectors of the market, while substantially higher in dollar price, it did lag current coupons as prepayment uncertainty really moved to the fore front of peoples minds. With this is as the backdrop, why don’t we move on to slide ten and talk about the AGNC portfolio.

Now, I’ve been here for a little over a week, but I already feel comfortable with the portfolio and it’s not because I’ve been pulling all-nighters, but because the portfolio is actually very straight forward. As you can see on slide nine, the portfolio is comprised of 100% fixed rate mortgages, which has been beneficial in an environment where liquidity and financial pressures have been paramount.

The portfolio totals $1.6 billion and its split between Fannie’s, Freddie’s and Ginnie’s. 30 year fixes comprise the vast majority of the portfolio and that’s evidenced by the average coupon of 6.11%.

I want to quickly tough on a couple of key points here. First, given the substantial drop in mortgage rates, prepayment expectations have picked up significantly. AGNC is now projecting lifetime speeds of around 36% on the portfolio, but it’s important to note that this allows for speeds to peak around CPR for a while, before declining overtime. As of point of reference, speeds on the portfolio average 13% CPR during the quarter, so our current projections incorporate of very substantial increase in prepayments.

Let’s turn to slide 11 and I want to take a quick look at the liabilities and hedges. First of all, the $1.3 billion in repo was diversified over a wide variety of counterparties, with no more than 8% of our equity with any one company.

Additionally the vast majority of the repo entered into during the quarter was in excess of 30 days and as you can see in the table, on bottom left, while this adversely impacted the funding cost for the quarter, it did greatly reduce our financing risk over year end. Importantly for Q1, the weighted average maturity as of December 31 was only 23 days, so these higher cost repos will be rolling of relatively quickly.

Now let’s look at the swap position at the bottom right. Rates have fallen since the swaps were put on, so swaps will clearly increase our weighted average funding cost going forward. That being said, given our low leverage as of December 31, spreads on incremental purchases will not be affected by these positions.

So, if we turn to slide 12, we can take a quick look at the business economic for Q4. First thing I want to point out to you is the asset yield. I notice that the average asset yield for Q4, 4.24% which is at the top left most column, was 74 basis points lower than the 4.98% yield at December 31 and that’s in the column on the right. This is because of catch-up amortization, which results from the significant increased in the prepayment expectations that I discussed earlier.

Thus while this materially impacted our net interest income in Q4, in the absence of further increases in prepayment fees, from the 36% CPR, the 74 basis point catch-up component won’t effect us in Q1, but again the 4.98% yield already incorporates these faster speed assumptions.

The next thing I want to highlight is the funding cost numbers. Our weighted average funding cost was 3.05% during Q4 and 3.52% at year end. These increases were a function of the spike in LIBOR, the extension to the term of our repos and the swap cost. Clearly, we anticipate our funding cost dropping materially during the current quarter given the market conditions. For example, we have already rolled over $1 billion in Repo at average rates below 75 basis points.

The last area to highlight is the leverage ratio, which as Malon mentioned remains low at 5.2% at year end. When you look at this picture, it’s important to evaluate the combination of these three issues. The impact of catch-up and the decline in Repo rates and the potential to increase leverage, when assessing the earnings power of the portfolio going forward.

I think Malon covered the remainder of this page in his overview, including the impact of the option strategy. So, I’ll ask you to turn to page 13, so we can look at the changes in book value. First off, book value per share declined slightly from $17.85 to $17.02 per share during the quarter. This on its own was a respectable outcome, but I want to highlight for you the key driver of that decline, because it’s pretty important.

First, let’s look at the unrealized gain on the asset portfolio, coupled with the unrealized losses on the slot book. Notice, they largely offset each other, despite the very volatile quarter and that’s important. The majority of the decline in book value, actually resulted from the difference in the size of our dividend $1.02 per share, which is again based on taxable income versus the $0.73 of GAAP net income. Thus the bulk of the book value decline, related to the dividend payment and thus the GAAP versus tax differences, rather than a deterioration in the performance of portfolio or a mismatch between the swaps and the asset performance.

Having said that, we’ve now covered the first three topics I discussed at the beginning and so I want to move on to the last and the most important part of the call from my perspective. The current market and how I see our portfolio evolving, given the current investment landscape.

So, as we look forward to 2009, the investment landscape changed dramatically. First and foremost, interest rates have plummeted and the government has committed to massive purchases of agency for fixed rate mortgages. While the combination of these developments has lowered mortgage yields and increased prices as I mentioned earlier, risk adjusted returns on many sectors of the agency market are still attractive. This is especially true given the significant improvement we’ve seen on the funding side.

Against that backdrop, our current plans are to increase our leverage to levels closure to that of our peers and to being to diversify our portfolio to take advantage of opportunities in the other sectors of the agency mortgage market and we have recently begun that process. That being said, these changes will take time and will be done prudently and opportunistically.

So, let’s take a little closer look at opportunities within the mortgage market. Despite the increase in prices, we believe the risk adjusted returns on premium 30 of fixed rate mortgages, seasoned 15 year product and some components of the ARM market offer attractive returns. In general, yields on these instruments average between the low 3% area on season hybrids, to the mid 4% area on some of the more attractive 30 year mortgages.

Now these yields incorporate prepayment assumptions that allow for peak speeds on 30 years to reach 50% CPR and again have average speed between 35 and 40, but even in the more pessimistic scenario where peak speeds could reach 70 CPR and lifetime speeds are in mid 50s yields could still come in around 3.5% on third year fixes for example, given current market prices.

With respect to the seasoned 15 year and hybrid ARMS, yields are somewhat lower, generally 25 to 75 basis points depending on the instrument, but there is less extension and obviously less exposure to the long end of the curve and so the lower ARM funding cost can provide us with very competitive risk return profile.

In these sectors individual security selection is more important as these markets are clearly less liquid and harder to evaluate. However I want to be clear, given my background, I actually view this is an opportunity to add incremental value for our investors rather than a concern.

So, what does this mean for spreads? Given the asset yields I touched on earlier and the relatively short durations of our diversified portfolio, we are comfortable that net spreads will be attractive on new purchases, given one month repo rates comfortably below 75 basis points and even two year swap rates around 160 basis points.

Furthermore as I mentioned earlier, there is room for speeds to come in above our base expectations and for returns to still remain competitive. However, I do need to be clear that market conditions can change very quickly as we have seen a number of times and as such, our plans with respect to leverage, product diversification and expected funding mix are going to be sensitive to these changes and could change materially.

In addition, in the environment where government purchases, new legislation and other actions can rewrite the playbook at anytime, prepayment expectations in those yields and net spreads can change overnight. So, our strategies will evolve with these changes if they occur.

I want to conclude by saying that I’m here because I’m extremely optimistic about the prospects for the agency business model and in particular the platform that we are continuing to strengthen here at AGNC. As you all know, the mortgage market has undergone dramatic changes over the past year and many of these are going to endure for the years to come.

The significant decline in both the number of participants and the amount of capital that is dedicated to extracting relative value in the agency market is a really plus for our business model. Where we look at all three dealers, their prop desks, hedge funds, actually foreign investors, this retrenchment is abundantly clear; at least a significant or the changes we’ve seen at the GSEs and with other government mortgage investment activities. While their involvement in the market is massive, their main objective is not risk adjusted returns, but to stabilize and lower mortgage rates.

AGNC’s expertise, commitments of proactively scallering [ph] the entire agency mortgage landscape for value-added investments and a state of the art third party analytics and risk management system, positions us very well to continue to provide our investors with attractive returns, while effectively managing risk. It also allows us to take full advantage of this new and fertile investment landscape.

So that’s all we have with respect to prepared remarks. There are some additional slides included for your reference and with that; actually we’d like to open the lines up for questions.

Question-and-Answer Session

Operator

(Operator Instruction) Our first question comes from the line Steve Delaney with JMP Securities; please go ahead.

Steve Delaney - JMP Securities

Thank you. Good morning everyone and Gary, congratulations to you on your new position. I wonder if you could, given the previous teams that was in there, I think where three individuals that have been together, could you update us on any progress or plans that AGNC has to make any additional hires to help you build out your team for the funding side and the whole bit?

Gary Kain

Yes that’s a great question. Since I’ve been here, I’ve been very impressed with the support and the team that is in place here at American Capital and there is a lot of support already here. That being said, we absolutely plan on adding a few people to the investment team and those individuals will be focused not only on the financing side, but also directly on the mortgage side. We have obviously a number of products to cover and we’re very confident in this market that we can add those resources very quickly; but again I do want to stress that we do have a fare amount of resources here right now.

Malon Wilkus

This is John here. One of the things I would say, it is fortunately right now that we have the ability to build this right in the feds and so that…?

Steven Delaney - JMP Securities

You can surely pick Mcclain and these three are pretty easy catch.

Malon Wilkus

Yes, and I think that’s one benefit in which we like the fact that this is going to be right in our office here which is nice.

Steve Delaney - JMP Securities

Yes understood, thank you John. I guess Gary, your no longer with Freddie and I know maybe your limited to what you can say, but I don’t know if you read Wockhart’s comments yesterday where he spoke to; at least I appreciated the fact that there was an awareness expressed for unintended consequences of possible changes and underwriting, meaning the streamline refi and waiting appraisal.

Any chance you could handicap the odds of that happening for us, given how significant it is for the prepay expectations that we all are worried about?

Gary Kain

Well, let me give you some kind of color on the topic in general. I obviously have not been, up on any recent deliberation around the subjects and it was I think pretty clear from his statements that there are a lot of recent discussions.

The one thing that’s important to keep in mind is that the market has priced in a lot of changes kind of on the refi side; the market is not assuming and market prices are not assuming that all of the credit barriers that are in place right now will be maintained. So, one thing to keep in mind is I think there’s room for some negative surprises on the refi side, without that kind of really hammering mortgages.

On the side of that, even if we get back to the lows in the mortgage market, even if we see negative surprises on the streamline refi side and those things happen; there are a lot of good reasons to believe that prepayments are still going to be below and maybe well below what we saw in 2003. I mean in 2003, a lot of the refis were cash out refis; those were not going to happen.

A lot of the prepayments we saw were related to the housing turnover, obviously I think it goes without saying, a slightly more robust market back then and the difference between the spread that originators were working and the originator capacity was very different back then and so all of these things in addition to the obvious one which are the credit barriers are still going to be there and some of them can be addressed, but many of them can’t. So, I hope that helps with respect to your question?

Steve Delaney - JMP Securities

No, it certainly does in a general sense. So I mean I take it you don’t have a view of the specific issue though of waiting appraisals for the existing guaranteed book.

Gary Kain

No, I don’t.

Steve Delaney - JMP Securities

Okay, I won’t press that then. Then just one final thing for you Gary is its understandable that the leverage was lower while the option strategy was being executed. For modeling purposes, if we go forward; now realize we’re not talking about next quarter, but sort of on a run rate, and given the environment as you see it today, would you say that a leverage ratio of about seven times would seem reasonable to you?

Gary Kain

I think a leverage ratio of around seven seems reasonable to me, but as I mentioned, there is a lot of factors that we need to consider and we’re going to be watching market conditions very closely. Our peers seem to range from the mid six’s to the above eight and I think at this point we would want to wait a little bit before we got to the high end of that range; but we’re going to evaluate market conditions, we’ll evaluate the opportunities, but the 7% number to me doesn’t sound unreasonable.

Steve Delaney - JMP Securities

Thank you for that; and John one quick final thing to you if I may. I got a question from an account this morning that, we’ve all have understood that the option revenue was new to us, to those of us that have been following the AGNC REITs for many years and at first there was some confusion about weather that would be eligible for it to be included in the calculation for dividends and I think we’ve establish it several months ago and it was reflected in your $1.20 dividend that you guys do. You classified that income such that it is included in the income that must be paid out in dividends, correct?

Malon Wilkus

You got to count all of your income on your tax return, the question is weather it’s qualified or not. So, its not necessarily qualified, we have to manage within that bucket, but nevertheless you got a divided out of all of your income. So it is included in the dividend, but you got to manage it to make sure you don’t have any issues with your qualification.

Steve Delaney - JMP Securities

And that goes to the part of my question. I mean are you comfortable, now of course that it has been paid out and given that the $10 million or so is about 25% of revenue, are your tax guys internally comfortable, that when you get to the spring and file your return, that the nature of that option revenue that you’re not going to have any kind of tax liability associated with that.

Gary Kain

You got to remember, we’ve been the BDC for 11 year and we’ve got a very similar taxes regime; we honor all that very closely, so the REIT regime is not something that doesn’t really goes to Gary’s earlier colors about the infrastructure we have in place. So we’ve got a school of accountants and tax people and legal people that have monitoring in place, so we’re quite comfortable with out tax position.

Steve Delaney - JMP Securities

Thanks for clarifying that John; that does it for me.

Operator

And our next question is from Mike Widner with Stifel Nicolaus; please go ahead.

Mike Widner – Stifel Nicolaus

Hey, good morning guys. Thanks for taking the question. Let me ask you a question on the big amortization hits of this quarter and then I realize it was catch-up for anticipation of higher preface feeds going forward.

Clearly we haven’t seen evidence of pre-paids accelerating yet, may be we’ll find that a little more data tonight or tomorrow, but assuming speeds remains slow, can we expect you to take your amortization rate going forward to a level that’s consistent with the 36% CPR, even if prepaids continue to come in the teens.

Malon Wilkus

I think with gap you end up taking adjustments at differ points in time. As you have data the adjustment prepayments speeds, but keep in mind though that doesn’t really impact the dividend. The dividend comes off the tax borrowings, which for tax purposes you do your tax assumption in the beginning and you hold those overtime, so it won’t necessarily naturally impact the dividend, but you will see the gap earnings move from time-to-time.

So yes, let’s say you create a scenario where you say the government backs away from any of your mortgage plans and prepayment speeds drop significantly, you will see adjustments to the GAAP numbers, once again reflecting that fact.

Gary Kain

And also we would be evaluating prepayment speeds actually on a daily basis. We’ll be seeing results on a monthly basis as you mentioned and there are reports coming out tonight and to the extent that it turns out that our speed assumptions are too conservative. We will overtime revise those and then those would be consumed in terms of the go forward yields.

Malon Wilkus

Yes and keep in mind we use a lot of different modeling tools to do that. We look at a lot of third party data, so we may personally have certain prepayment speed assumptions, but then you tend to look out to third party data and different services that are out there to really come up with what the accounting assumptions are going to be.

Mike Widner – Stifel Nicolaus

And you mentioned in here that there was $0.29 of undistributed taxable; I was trying to do math on getting there and basically it is coming up with about a $0.31 excess in amortization expense. Is that roughly, what you’re talking about, that drives that $0.21 undistributed? I mean because you’re distributed was more than your GAAP, so I guess I’m really trying to get the difference between GAAP and tax and it looks like its most that amortization hit?

Malon Wilkus

Yes, I mean that should effectively be it, because you got a constant of prepayment rate going on for the tax purposes so.

Mike Widner – Stifel Nicolaus

Okay and I guess just one question going forward. A lot of us have looked at you guys and particularly looked at you in the context on an industry that’s had a pretty long tradition of not surprising us from a strategic standpoint. I understand the option strategy is behind you at this point; can we expect that going forward, sort of clearly investing in different agency securities, different flavors in MBS is fine, but can we expect that we’re not going to be surprise quarter-to-quarter by new strategic initiative?

Malon Wilkus

First of all, you got to keep in mind to go back to the MOVE chart right. I mean I think you talked about the unprecedented timeframe and I think as Gary outlines, all the different things that were occurring in September or October and so it was absolutely in our opinion a risk adverse strategy. When we were sitting there October 10, we couldn’t really estimate how much repo is going to be available at 12/31 or the price and so I think that from our standpoint, it was a very risk adverse strategy.

I think that if we get back in that kind of environment as Gary has outlined before, we’re going to have to look at everything that’s available, but I think it was prudent for this timeframe that we came through and as we talked about, we’ve actually closed our resort and you’ve seen the volatility subside and of we’re going with a more normalized strategy. Do you want to add anything to that Garry?

Gary Kain

Yes, just what I’d like to add is writing options is a strategy that’s been employed by a lot of people within the mortgage market to enhance returns at different times and anytime you purchase a mortgage, you are implicitly writing options. I’ll say this was a case of explicitly writing options.

I think going forward, our intent is to grow and diversify the portfolio and we are going to look at other strategies on the margin overtime, we’ll try, but they are not going to be or we don’t expect them to be the core strategies, we expect them potentially, whether its options of something else, to be something we might employ on the margin when the opportunities arrive and we’ll be as transparent as we can when those situations arise.

Mike Widner – Stifel Nicolaus

Great, well thanks guys. Appreciate the comment and the color and congrats.

Operator

And our next question is from Ben Michalac [Ph] - Nirvana Capital; please go ahead.

Ben Michalac - Nirvana Capital

Questions been answered, thank you.

Operator

Our next question comes then comes from Jason Arnold - RBC Capital Markets.

Jason Arnold - RBC Capital Markets

Hi, good morning everyone. Gary, you talked about some potential changes to the portfolio, just maybe from adding some hybrid ARM exposure; to what degree would you consider from a portfolio occasion perspective moving into something like a hybrid ARM?

Gary Kain

We’re definitely considering the hybrid ARM market at this point and I’ve spent a lot of my career very focused on the ARM market. We’ve been looking at a lot of ARMs just over the last week and we feel, again as I mentioned on the call, that the risk adjusted returns in the hybrids space are competitive and in some components of the hybrid space though.

I really don’t like the newer issue, 2008 vintages, because I think these borrowers just qualified for new mortgages; they met all the tighter underwriting guidelines, they are in a position to refinance on a dime; they’ve got fresh paper work. So, we’re going to avoid at least for now the new issue hybrid market, but they’re components of the season to hybrid market that we fit the portfolio well and we’re looking at those and look and expect to be adding those types of assets shortly.

Jason Arnold - RBC Capital Markets

Okay, is that kind of to the note you where making earlier about the security selection process looking at different pools from a prepayment perspective; is that kind of what you were mentioning there?

Gary Kain

Absolutely. I mean again as you get in to the ARM market it is impairer to think about not only the prepayment issues, but also things like the index, so I will give you another example. Some time we’ll probably avoid a lot of ARMs. Our index offers a one year CMT and one your CMT has demonstrated over the last year, it doesn’t track LIBOR all that well.

So the reason to buy an ARM is for it to tack your funding costs and so we’ll probably avoid CMT ARMs in favor of LIBOR ARMS unless pricing changes dramatically, but in the ARM market, individual security selection is critical and it goes to the industries and the caps, the amount of seasoning at your point of prepayment profile.

Jason Arnold - RBC Capital Markets

Okay, that makes a lot of sense. Than one more quick question on the premium amortization outlook. It some like 36% is the average over the life, what was the kind of shot term over the next year outlook that you have baked in with the added premium amortization?

Gary Kain

Well, what I said earlier is, I mean you can define a number of different vectors that will get you to a 36% or so percent CPR over time. What we think is reasonable, I mean one sample factor that would catch you there is something they gets up to the neighborhood of 50 CPR and stays there for a while and then starts to come down.

I don’t know exactly what that translation into, into a one year speed, but the bottom line is, given the market conditions we expect peek speeds to occur and given the environment to occur over the next year and then we would expect speeds to burn out like they have in the past and traditional drop from there and that’s how we get to the lifetime speed.

Jason Arnold - RBC Capital Markets

Okay great and just I guess one final question on the options strategy. That quest is now gone away, but did you guys have any securities that were called in the quarter?

Robert Grunewald

This is Bob Grunewald. We did not have nay securities that were called as a result of that strategy.

Jason Arnold - RBC Capital Markets

Okay perfect. Thank you very much I appreciate it.

Operator

Our next question comes from Jim Fowler with JMP Asset Management; please go ahead.

Jim Fowler – JMP Asset Management

Good morning, thank you. Gary, a quick question; I apologies if this has already been answered, but on the page that describes each of the portfolio components, have you given or would you give us some idea of the prepayment speeds that you are assuming on a life basis across the three issuer types please?

Gary Kain

We haven’t discussed and disclosed the individual prepayment speeds for each of the classes, so I won’t give you specific numbers, but what I can say is the coupons as you can see are not that different from each other. In general Ginnie Mae speeds have been faster than Freddie and Fannie speeds.

The Freddie and Fannie speeds is a class we wouldn’t expect to be relatively similar, but the key thing I want to point out is again the individual securities within each of those buckets, while they made be similar in coupon, differ in terms of some are interest first, some actually maybe four year securities.

Some have higher investor concentrations, all of those things effect the underlying speed assumption, so there are a number of variables in there, but we haven’t broken out and disclosed the specific of the individual speeds for each of them.

Jim Fowler – JMP Asset Management

So, I might just follow up with the presumption that Ginnie Mae speeds are typically faster than Fannie, Freddie. I’m assuming that a fair amount of those are loans bought out of pools related to defaults at Ginnie; that’s more so the case than Fannie and Freddie. Will that explain a large portion of the prepaid different that you’re seeing today and would therefore presumably that may slow at some point if defaults decline or am I wrong on that.

Gary Kain

No, that’s actually a very good point, that if we were looking backwards today, that the speed difference that we’ve seen between conventional and Ginnies, a very good chunk of that difference could be attributable to in a sense credit and loans being bought out and those types of issues. That would lead you to believe that Ginnie’s and conventional should be on top of the each other going forward.

The only weakness in that argument is the difference between going back to the question asked earlier; between the streamline REIT kind of options within the Ginnie market versus the conventional market and so if those were to move much closer together, then I think you could expect much more conversions of the speeds, but for right now I think you’ll still see a difference on that front.

Jim Fowler – JMP Asset Management

Got it thanks

Operator

Our next question is from Ken Bruce of Bank of America; please go ahead.

Ken Bruce - Bank of America

As you move away from the south strategy and towards a more conventional REIT strategy, investment strategy, there are obviously quite a few trade offs that need to be made and I was hoping that you might discuss within the context of your risk management, what risk your willing to take; ultimately what’s your managing to, maybe specifically what kind of swap concentrations you’re looking to run, going forward please.

Malon Wilkus

I think that’s a very good question, as I mentioned to Jim and there’s an important balance that we need to achieve, which is between maintaining attractive net interest income and managing book value and both of those are important considerations for us.

I think when you think about the risks, the old way of talking about that purely in the mortgage market would have been things like duration, convexity and so forth, but I think realistically what people have learnt is that funding and obviously prepayments in this environment and those kind of issues and in general just specific spread risk are also key considerations.

So, when you put all those things together, we’re focused on kind of the combination of those risks. So, I’m not going to tell you we have this exact duration kind of limit for the portfolio, because it has to be intertwined with the prepayment expectations, but I think you can say that one of the key reasons to diversify the portfolio relate to avoiding concentrations in anyone of those risks and I think by having a mix of seasoned 15 year, having ARMs and 30 year, we will be doing exactly that and diversifying across different risks. That being said, we’ll do that being very conversant of relative value.

When it comes to our swap positions, their ARMs are going to be very depended on our asset positions and what we expect our funding to be overtime. So the swap positions will be designed to lock in funding that’s appropriate for the asset positions that we end up with. I think know that’s general, but I hope that gets to the point of your question.

Ken Bruce - Bank of America

I’m sure we can refine that over time. I’m just trying to get a better sense as to, as you migrate towards this new strategy, where you’re looking to position yourself, either across the curve or in terms of what risks you’re willing to take within the portfolio and maybe take it offline, but that does it for me. Thank you.

Malon Wilkus

Just one quick follow-up; I think again we will be looking at seasoned 15 year ARMs, which will reduce some exposure to the long into the curve.

Operator

And our next question comes from Jim Delisle with Cambridge Place; please go ahead.

Jim Delisle - Cambridge Place

Hi, good morning everybody. I hate to be the one to address the elephant in the room, but I might as well. Your largest shareholder has approximately 20 to 25 days worth of volume in your stock right now. I’d like to ask a couple of questions about how that stock is held, just so I can get a understanding as to what the technical headwind might be going forward? There’s more on your sort around right?

Malon Wilkus

Yes. We own approximately a third of the company and have about a $100 million invested in the company.

Jim Delisle - Cambridge Place

Your 5 million shares, how is that registered right now? Is it registered available for sale? Is it subject to quick turnaround registration? What is the current classification of it?

Malon Wilkus

Yes, it’s not registered and so if we were to sell it in the market we’ll need to register it. We have a lock upon half of the stake that expires I think in May, on the anniversary of the IPO and right now of course American Capital has about approximately $10 billion of assets that we invest in portfolio companies. AGNC is one of those investments and our job is to make good investments and I think AGNC has been a very successful one for us.

Jim Delisle - Cambridge Place

Have you used them or are they currently being used as margin against any loans; and in the current form are they in fact margin able, should the answer being no, when you decide to do so in the future?

Malon Wilkus

No, we have no collateralized loans at American Capital.

Jim Delisle - Cambridge Place

No, I’m saying do you have any loans that are collateralized by the agency paper?

Malon Wilkus

No, American Capital has no secured debt I should say, other than these securitizations that we’ve used to fund ourselves, but these assets do not reside in the securitization.

Jim Delisle - Cambridge Place

And I also do the numbers on ACAS and by my calculation with 725 worth of debt coming due in your OCAS, 125 on ACAS and then you’re still over dividend requirement. It’s like $1 billion worth of cash needed over the next several months. From a corporate point of view...

Malon Wilkus

Just to interrupt you, first of all European Capital is a portfolio company of American Capital. Its debts are the obligations of European Capital and not of the obligations of the American Capital and then with respect to other payments, it spread out.

Robert Grunewald

But more generally we should keep this call in reference to American Capital Agency and maybe your intentions for our stake is somewhat related, but that’s the limit on really what we’re going to talk about on this call.

Jim Delisle - Cambridge Place

Alright. You certainly got to understand how the technical home overhang might be a question mark.

Robert Grunewald

Fairly, we would have to make appropriate filings if we were going to sell our stakes, so I think you would certainly end up seeing those kind of filings.

Jim Delisle - Cambridge Place

Okay and the question about the 50 CPR, you had mentioned earlier that you have 36 CPR as kind of a GAAP assumption and you mentioned that you might see a spike up to 50 CPR over the course of the next year. By my calculation, that would make your taxable income fall far below your GAAP income and also kind of with the two week lag that would be kind of difficult to make delivery on a lot of the pools.

Robert Grunewald

This is Bob Grunwewald. I think the point of confusion is that we have a lifetime CPR assumption built into our current GAAP numbers of 36 CPR. What we’re saying is, in that lifetime assumption, there’s actually a vector with different CPR assumptions or different periods of time and that vector assumes a peak somewhere 50 and 60. So, the 36 CPR that’s already based into the GAAP yield in the GAAP income that we provided you is already assuming much higher CPR for the six to eight months.

Jim Delisle - Cambridge Place

And so your saying that 36 is not flat lined for GAAP purposes, but is vectored in there and 36 is just the average that you’re reporting?

Robert Grunewald

Correct.

Jim Delisle - Cambridge Place

Alright. Well, thank you very much.

Operator

Our next question comes from Matthew Howlett with Fox-Pitt Kelton; please go ahead.

Matthew Howlett - Fox-Pitt Kelton

Great. Thank for taking my question; I just have a few quick questions. Could you give us a breakdown on the vintages that underlie the portfolio? I’m sure you see where I’m going with the question?

Malon Wilkus

Sure, and I understand the reason for the question and clearly in discussion I stress the importance of the underlying collateral and so forth. I think you’re aware, in a sense the beginning day of AGNC and so you should be relatively confident that the collateral is not brand new, but we haven’t disclosed a complete breakout of the vintages of the underlying collateral. I will say, again a lot of the collateral is specified collateral and there was a desire to pick collateral that would perform well.

Matthew Howlett - Fox-Pitt Kelton

Right. It looks as if your speeds are slower than what’s coming on average in the fixed rate market, but we’ll go from there. Then the second question I had was related to sort of the repo market as you look at. Gary, you spent a lot of time at Freddie Mac; I mean where do you see it evolving to. Could Fannie, Freddie both potentially being repo providers at some point; do you see it moving away from the primary dealer market and directly to the money markets? I mean could you give us sort of any color and a long term view in that?

Gary Kain

Yes, definitely I can give you some color. I think what you’d seen is with short terms rates basically hovering near zero and with people very concerned about making sure they have safe collateral, I’m highly confident that AGNC mortgage collateral continues to be the favorite amongst repo providers.

The end providers of repo financing will continue to be depository institutions and funds and short term money market funds and so I’m pretty confident that given again the lack of yield that’s available kind of in the safe short end of the curve, that it makes sense for large financial institutions and others to provide repo funding.

Exactly which institutions are going to do that, I think will evolve; but I do want to reiterate that the number of counterparties that we have is relatively high, but it goes beyond the quantity of the counterparties and it goes to the fact that at this point our counterparties seem very willing to kind of increase their alliance with us and so forth. So we do feel like things are going in the right direction.

Matthew Howlett - Fox-Pitt Kelton

Great and then just a last question; the average hair cut today if possible and how many of your kind of take it down haircuts have you seen in the year? Thank you.

Gary Kain

The haircuts are in the 5% to 7% range in general, there’s some there maybe a little below that, but nothing that we’re concerned of. Yes, haircuts of anything seem like they are going in the right direction rather than in the wrong direction and given our anticipated leverage, the haircuts are not a concern to us.

Operator

Our next question comes from Sam Macintyre [Ph] - Macintyre Asset [Ph]. Please go ahead.

Sam Macintyre - Macintyre Asset

Thank you. Given ACASs portfolio financial position and your desire to get more invested, what’s the chance that you’ll raise equity in this environment?

Malon Wilkus

Well I think American Capital Agency will take its opportunities of raising additional equity and it would make sense for it. It is certainly in a very good position to expand and grow and really beyond that we probably can’t make any other comments about it.

Sam Macintyre - Macintyre Asset

Would you sell equity below book?

Malon Wilkus

American Capital Agency; it probably would not make sense.

Sam Macintyre - Macintyre Asset

Okay any dividend guidance going forward?

Malon Wilkus

No we’ve only pointed out that we would generally intend to payout dividends that at minimum meet or requirements as a REIT.

Sam Macintyre - Macintyre Asset

Okay, thank you.

Malon Wilkus

You’re welcome.

Operator

Your next question is from, Carey Robinson, a private investor; please go ahead.

Carey Robinson – Private Investor

Good morning. I probably missed it, but I wanted to talk about the dividend. I am a retired agent and enjoy the dividend that we’ve and look to the future?

Gary Kain

Yes we are not forecasting dividends at AGNC. What we have to make clear is that we will continue to operate, so that we can maintain our REIT status and that would require paying out taxable income and that so far has been substantial in 2008 and we will have to see now AGNC performance as we go forward in 2009 to make dividend decisions.

Malon Wilkus

But its worth in reiterating what Gary has already said which is that given the cost of funds and net spreads on our existing portfolio and additional assets as we increase leverage are attractive from a historical perspective?

Robert Grunewald

Right, but also just keep in mind that long term maybe following all AGNC REITs. The dividend is not a steady and growing one; it is volatile based on how the spreads in that market changes from time-to-time.

Carey Robinson – Private Investor

But it’s still going to paid out quarterly.

Malon Wilkus

Yes.

Carey Robinson – Private Investor

Thank you very much.

Malon Wilkus

You’re welcome.

Operator

And that concludes the question-and-answer sessions. There are no other people in queue.

Malon Wilkus

Thank you very much. We appreciate everyone joining us today and look forward to talking to you again in three months. Have a good day.

Operator

Ladies and gentlemen this conference will be made available for replay after 2:00 pm today, until February 19, 2009 at mid night. You may access the AT&T Executive Playback Services at anytime by dialing 1800-475-6701 and entering the access code 982407. International participants may dial 1-320-365-3844, again the numbers are 1800-475-6701, international 1-320-365-3844 and the access code is 982407. Investors Relations can be contacted at 301-968-9300 or by emailing ir@agnc.com.

That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.

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Source: American Capital Agency Q4 2008 Shareholder Call
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