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Annaly Capital Management, Inc. (NYSE:NLY)

Q1 FY08 Earnings Call

May 1, 2008, 10:00 AM ET

Executives

Michael A. J. Farrell - Chairman, President and CEO

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and COO

Kathryn Fagan - CFO and Treasurer

Analysts

Michael Widner - Stifel Nicolaus & Company. Inc.

Steven Delaney - JMP Securities

Jason Arnold - RBC Capital Markets

Donald Fandetti - Citigroup

Bose George - Keefe, Bruyette & Woods

Jason Deleeuw - Piper Jaffray & Co.

Brock Vandervliet - Galleon Group

Dale E. Benson - Wells Capital Management

Stephen Laws - Deutsche Bank

Matthew Howlett - Fox-Pitt Kelton

Justin Bates - Daniel Stewart

John Barrett - Trafelet & Company

Operator

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

This earnings call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1993 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements which are based on various assumptions, such of which are beyond our control, may be identified by reference or future period or periods, or by the use of forward-looking terminology, such as may, will, believe, expect, anticipate, continue or similar terms or variation 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 interest rates, changes in the yield curve, changes in repayment rates, the availability of mortgage-back securities for purchase, the availability of financing and if available the term of any financing, changes in the market value of our assets, changes in business conditions and the general economy, the risks associated with the investment advisory business are FIDAC including the removal of FIDAC's clients of the assets FIDAC manages, FIDAC regulatory requirements and competition in the investment advisory business, changes in government regulations affecting our business, and our abilities to maintain our classification for federal income tax purposes.

For a discussion of the risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, read risk factors in our most recent Annual Report on Form 10-K and all subsequent quarterly reports on our Form 10-Q. We will not undertake and specifically disclaim any obligation to publicly release the results of any revision 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 would now like to turn the conference over to Mr. Michael Farrell, Chairman, CEO and President of Annaly Capital Management Incorporated. Please go ahead, sir.

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

Thank you, Sorita. Good morning everyone. Welcome to the first quarter earnings call. I'm joined here today by Wellington Denahan-Norris, our Chief Investment Officer and our Chief Operating Officer; Nick Singh, our General Counsel; Kathryn Fagan, our Chief Financial Officer and two managing Directors, Ron Kazel and J. Diamond.

As usual, we've got some prepared comments and then we'll go into Q&A. The title of this prepared comment is To Serve Man. As fans of the Twilight Zone will recall, to serve man is tale of the arrival on earth of seemingly kind and generous nine-foot tall human beings from another planet called the Kanamit. These giant aliens arrive in peace, promising only to help humans enjoy a better life. As they share their advance thinking technology and methods, it's clearly that they can quickly solve all the impediments to progress on Earth. They eliminate hunger, disease, greed and as a result the need for war. Even the most skeptical among earth citizens are converted, particularly after the title one Kanamits books, is translated.

After all the title of the book, 'To Serve Man' clearly sets forth the benevolence of their mission. As the story moves ahead, massive numbers of satiated, complacent citizens of earth begin to line-up eagerly to travel on to the alien spaceships, to see Kanamits home planet, a virtual risk-free paradise. It's so wonderful there apparently that no one ever wants to return to the Earth.

In the final scene, the remaining skeptical on earth is carried away screaming by the crowd. You see us finally analyze and crack the rest of the code in the alien's book. To Serve Man is a not a book of instructions on how to assist mankind, rather it is a cookbook with instructions on how to make earthlings complacent, fatter and healthier for slaughtering consumption. I think it's appropriate to compare this Twilight Zone episode with the test several years of credit complacency, financial engineering in capital markets feeding the global consumer desire for better lives.

In retrospect the 2002-2007 credit criteria for underlying debt could have just as easily arrived from another planet. The cookbook was the computer model designed to financially fatten up the credit cycle by making below investment grade cash flows suitable for mass consumption and thereby curing the hunger for a better life with no money down low-equity lifestyle. Instead of an encoded book, the recipe was locked in inscrutable offering documents, fluid models that were blessed by over-maturating agencies, over-zealous underwriters and negligent regulators, who didn't understand what the cookbook said. Now that book has been decoded, the challenge in these markets is to identify the opportunities left in the wake of the massive re-pricing of those cash flows.

As the first quarter came to a close, the financial markets got a chance the watch history unveil itself. The Federal Reserve accelerated its sprint to ease balance sheet stress not only at the banking level but also at the primary dealer level. With the combination of Bear Sterns, JPMorgan Chase, the term securities lending facility, the primary dealer credit facility and the slashing of short-term funding rates, the credit markets wobbled through a shaky first quarter's end. Indeed commercial banks were so stuffed with cash at March 31st, that they actually began to direct money away from their balance sheets and into competing money market funds.

In the last weeks of March, I believe we witnessed the preview of the new financial world order. We are now firmly set towards the path of reconstructed underwriting criteria that will be the new Sarbanes-Oxley of the debt and structured finance world. There is a deeply seeded desire for simplicity at every level of banking and investment. This need will be satisfied by our long overdue regulatory updates, many of today's formulas and calculations were written in the 1930s and only lightly amended on eased overtime.

This provided numerous chances for financial engineering to push market activities beyond the boundaries of regulatory oversight to the point where we arrived at the wreckage of the last six months. What does this leave us? We see disarray and dislocation for many levels of mortgage-backed securities, municipal securities, corporate securities, auction rate preferreds, student loans and asset-backed securities.

The Federal Reserve and its international counterparts are taking unprecedented steps in providing liquidity to the system. As evidenced by the experience of cash investors on March 31st, the issue is not about liquidity. There's plenty of cash around. It is however, about counterparty pricing, trust and execution. The global consumer who benefited from the rush to riskless spreads over the last ... past several years will now be paying the price in terms of risk-adjusted spreads as this trust is rebuilt. This is going to take two things; first a long time, second a steep yield curve globally.

Welcome to the planet of the Kanamit. The cookbook has been decoded and is being rewritten. The recipes have been and notably changed for corporations, consumer banks and broker dealers. It is a world, where risk premiums have been reintroduced, assets spreads are wider and as a result, capital is being reallocated. We described this world in the February 5th commentary entitled "Welcome to the Keynesian Nightmare." In the reference chart in that paper, we described the crowding-out effect that government borrowing will have to provide, so that the general economy can reinflate. Against this background, all capital allocators are faced with the judgment call of estimating what will be an acceptable rate of return in a world, where the primary competitors for capital are federal level issuers who can liquefy markets at will and can print money simultaneously.

The write-downs and recapitalizations are happening at a faster rate now than ever before in history in the banking sector. Our recent JPMorgan research paper tallied the total write-downs so far at $300 billion and totaled capital raise at $200 billion. Every day brings a new announcement of distressed capital raising. Do you think that these bank risk mangers surveying the future courses of their business will be seeking more or less risk, more certainty or a principle return or more risk-based returns?

As investors in Japan of have learned since 1987, asset deflation is painful and rates of return on government-backed debt are nominally lower than one could ever have imagined 20 years ago. Whether you call it asset deflation or stagflation, all analyses leads to one compelling desire, the need for more alphas in portfolios along with the certainty of principle return.

As of March 31st, Annaly's cumulative rate of return... total rate of returns, since its NYSE-listing in late 1997, was 291% or 14% on an annual basis. The S&P over that period by contrast generated a cumulative of total rate of return of 71% or 5.3% annualized. Most of our returns in NOI has always come from alpha our dividend, quarterly dividends where you decide how to compound your returns. Come to think of it, John Maynard Keynes was almost as tall as a Kanamit. He peacefully and benevolently espoused deficit spending and debt capital formation in order to jumpstart our recessionary economy. The fact that this theory was adopted and provided by financial engineers in the private sector as more less a permanent state of affairs, guide us into the mass we are in today. Perhaps Keynes' book, the General Theory of Employment Interest and Money, was more of a cookbook than we ever could have imagined.

With that said, we close our formal comments and we open ourselves for questions.

Question And Answer

Operator

Thank you sir. The question-and-answer session will begin at this time. [Operator Instructions]. And your first question comes from the line of Mike Widner of Stifel Nicolaus. You may proceed.

Michael Widner - Stifel Nicolaus & Company. Inc.

Good morning guys, good quarter. Couple of questions that are related here; first one, just looking through your balance sheet, I see a new line item there for reverse repurchase agreement. I'm guessing, you guys aren't so flushed with liquidity that you've entered the repo-lending business. So, I was wondering if you could just give us a quick comment on exactly what that is and why it's showing up?

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

Well, as I said in the opening comments and this is something that everybody should focus on as to what was really happening in the last three weeks of the first quarter, commercial banks... large commercial banks was still flushed with cash that they literally would not take any deposits. I want everyone to pause and think about that, because that's exactly the condition of having a flush of liquidity in the systems that's not seeking a risk premium. So in essence, what you see during that period is there is plenty of money around and it's being used to support that which is the most clear and transparent price. As regards, our takes on the inside of the business, I will ask Welly to comment.

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

I mean we... as we are all fully aware and as we have all witnessed, liquidity was a key asset on anybody's balance sheet and going through that environment, we felt that it more prudent to have excess liquidity and it shows up in our cash and cash equivalents and reverse repo. The reverse repo shows that we sold it into the repo market, cash and cash equivalents would show that we sold it into the money market. But it's a snapshot in time, going over probably one of the most volatile quarters, I think in the history of Wall Street, certainly for some had fared better than others, but we felt that there was no question that having liquidity on your balance sheet was the prudent thing to do.

Michael Widner - Stifel Nicolaus & Company. Inc.

So, I would certainly agree with all of that and I appreciate the clarity there. Let me just make sure I understand though, what the reverse...

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

I mean we basically sell cash and reverse collaterals in.

Michael Widner - Stifel Nicolaus & Company. Inc.

So basically you are a repo lender?

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

Yes, to collateralized loans.

Michael Widner - Stifel Nicolaus & Company. Inc.

Right. And I guess the thing that concerns us there is that, without knowing what the collateral that backs that is...

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

It's a 100% AAA collateral. It's a normal course of... if you have excess cash and you don't have a repo that you're paying down, you would go to a dealer and say, I'll sell you this cash and you sell them the cash and they give you collateral.

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

You have a choice, you can sell it unsecured at fed funds instead of banking system or you can sell a secured into the repo markets.

Michael Widner - Stifel Nicolaus & Company. Inc.

I mean certainly I understand the benefits of that, the drawbacks are potentially are what happened to the repo lenders of it, so it's the AAA-rated collateral from all of the Alt-A lenders and all of the sub-prime lenders before that and Thornburgh more recently.

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

Yes. I would say that you have to live in a world... in order to understand the world that we look at it, you have to live in the world that was pre-St. Patrick's Day and post-St. Patrick's Day.

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

Yes. And I can assure you the losses... the bulk of the losses in the system right now, did not come from repo lending.

Michael Widner - Stifel Nicolaus & Company. Inc.

That is certainly true. I wanted you to hear that but...

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

Even on Thornburgh or Carlisle or any of situations out there, the bulk of the problems did not come from the repo market.

Michael Widner - Stifel Nicolaus & Company. Inc.

All right. Well, I appreciate the clarity on that. Let me just ask some follow-up questions that are related to that. A quick one; in your written comments, you mentioned that the weighted-average yield on assets at end quarter end was 536. Just wondering if that is... I'm assuming that that reflects all interest earning assets, meaning cash and cash equivalents, the repo agreements and MBS and the agency debentures et cetera.

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

That's correct.

Michael Widner - Stifel Nicolaus & Company. Inc.

Okay. It struck me as a little; do you have an indication of what the ending yield would be on the MBS portfolio by itself?

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

The cash and cash equivalents is only a small portion, when compared to the MBS. So it is close to this number. The yield does take into account where our projected interest rates are going to go.

Kathryn Fagan - Chief Financial Officer and Treasurer

I mean the weighted average... the current coupon mortgage is close to 5.5% right now.

Michael Widner - Stifel Nicolaus & Company. Inc.

Right and so, that was I mean... I was wondering a model out with assuming that the MBS yields at the end of the quarter are going to be in the range of 5.5 rather than 14 basis points lower at 536.

Kathryn Fagan - Chief Financial Officer and Treasurer

Yes, I mean you have... remember we do have floating rates, which is tied closer to LIBOR. And LIBOR is roughly around the 270, 280 right now. So you're blending some return there, we are not 100% fixed rate here.

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

Yes, I think Mike, the two things that you should take away from this is that as you can see at the end of the quarter, there were a number of dynamics. One is that we operated at lower amounts of leverage profitably. The second thing is that we had a very powerful liquidity position and on the first month's call back at the end fourth quarter in January, essentially what we told people is that we were going to be extremely cautious and prudent going through this quarter, because we were concerned about March being Japanese year end and where repo [ph] would be, some more concerns that we're being in drawing out in the market. We began to execute that very early in the first quarter. So the result of that is that you got... some analyst models had us running $0.51 at 10:1 leverage. As you can see we're running at 8:1 leverage during this snapshot and we have a very powerful liquidity position as a result underneath it, when you take cash and cash equivalents into account in unencumbered security.

Michael Widner - Stifel Nicolaus & Company. Inc.

Definitely I appreciate the color and clarity and wholeheartedly agree. Thank you guys. You are in a great position and glad to see you pull through the quarter in what I would consider outstanding shape. Let me leave you with one final question; the topic of capital raise is one that we get from investors from time to time, asking what do you think you guys and really the others in the space are going to do. So, it would be interested if any comments you have or how you would think about the opportunity to raise capital here and any lessons you may have garnered from the last cycle and sort of what happened at that time?

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

Two things that I'd like to draw to that comment. The first one is that, one of the big opportunities that we have been able to take advantage of is the fact that we've raised so much money early in the cycle starting in 2006. So, unlike every other financial company that's out in the world today for the most part, our legacy portfolio is extremely powerful, it was all acquired at lower dollar prices and higher yields. So, unlike some of the banking counterparts who are having problems with their legacy portfolio and that's a minus for them, our legacy portfolio is actually is a huge plus for us as a result. The issue of capital raising addresses into the formal comments about the total rate of return that we created in this quarter, describing what we just outlined with you, a very powerful liquidity position and acting prudently and opportunistically throughout the quarter. As you saw we took profits where necessary, we added some securities as well. I think it speaks to the value that we've embedded overall in the portfolio since ten years ago, but the net-net is that capital raising is extremely opportunistic thing that we've always been able to do accretively for shareholders and that's how we view the opportunities in the markets today. I'm sure Welly has got something.

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

Yes. I just want to say that we're looking at a market where you potentially have very long running opportunities. I know that Fed kind of indicated yesterday that it would like nothing better than to do no further move. However, market participants and I think the bond market has been justified now in its call, couple of years ago that we're going to go into probably one of the greatest recessions that we've had in the long time. That this is going to be a long running situation and as Mike indicated in his comments, it's going to take time. And the few beneficiaries of that kind backdrop are people like us. And there's no question that the opportunities are out there and as always, we will be opportunistic for our shareholders to go ahead and take advantage of them.

There's no question that things have stabilized somewhat. One of the guys in our desk here made somewhat of a... put some comments saying that the credit crises started with Bear Stearns and ended with Bear Stearns, and now it's basically turned its attention to the economy. And that's something that is not easily fixed and the banking system is still wounded but there's a lot of positive things going on in that arena that make our business much better.

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

And I think the way we look at the business isn't simply also from just capital raising on the spreads and the long-term opportunities that Welly described. But in the FIDAC umbrella, we continue to be extremely active in that space. We're currently one of the top auction liquidation agents in the CDO space, which we've used our expertise in structuring products and putting that stuff together. We are not doing principle transactions, but we are building a giant database of information about how to use that stuff and to call out of it for other participants. So you can continue to see how many advisory business grow as well underneath this and I think that all of those cannons are all firing now. We are going at full pace to add incremental value for these shareholders not only in spread transactions but in just business transactions in general, business development underneath. So I feel pretty good that the prudence of the management team in the core mother ship is what we will call it, has helped broaden out the reputation of Annaly across a lot of different sectors and now we are getting ready to exploit those.

Michael Widner - Stifel Nicolaus & Company. Inc.

Great well thank you very much guys and again congratulation on the great quarter.

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

Thank you.

Operator

And your next question comes from the line of Steve Delaney of JPM (sic) [JMP] Securities. You may proceed.

Steven Delaney - JMP Securities

So I suppose this is probably directed to Willington. Your book value came in materially better than we have estimated. It looks the swap mark was right in line and that's the easy side I guess, but the MDS look like you had a positive mark of about 200 million. And I think where we were wrong is we were just way too negative on CMO prices, especially floaters just because of all the color and the talk in the market. Could you may be just share with us sort of some thoughts about what you saw in the volatility of CMO prices, during March and how the assets have recovered to the current time and also and how the markets is treating those... that paper today in the repo market?

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

Yes I mean in general as LIBOR continue to pull on the downward trend, LIBOR floaters will under perform other things in the market and spreads will typically widen the lower you go because, I think the world is transitioning to paying more attention be as the fact that it doesn't have the ability to leverage as much as it used to, to absolutely turn over spread returns. So Libor has to compete with that. With that said the Carlyle situation... anybody who didn't sell immediately actually did better. There were people that held out, the paper actually moved pretty well. They have different paper than we do. We tend not to go in as lower cap as some of the newer participants in the markets were involved with. So our assets performed better there. The other thing is there's a lot... a of the CMO papers we have are fixed-rate CMOs, which even though widen because there was such rally in the treasury market, you're still net-net doing okay in those securities. So, I think there is a big misconception that spread widening automatically results in a negative price movement which is not necessarily the case.

Steven Delaney - JMP Securities

So, I guess what I'm gathering is that, while there was some volatility that you've moved much closer to your cost basis, on that?

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

Yes.

Steven Delaney - JMP Securities

Okay.And what the floaters or value 10%, what percentage of the portfolio in fixed CMOs?

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

You know we have roughly in total CMOs which the floaters are included roughly is 30%.

Steven Delaney - JMP Securities

Okay, so may be another 20. Okay, great and then just my last question, the leverage of 8.1 at March 31, I mean it certainly seems like repo conditions and trading conditions as far as price discovery and agency market on paper is much better, can you comment on whether you've taken leverage back up a little bit or at least offer maybe kind of what range in the near term we would look for leverage to be in?

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

We really want to continue to see; I think the second quarter for all participants need to be the quarter where there is not a disaster on some one's balance sheet or a disaster in the company. So, it's still a time to allow participants to make money, get through the quarter without having to announce these massive write-downs. There is no question that it's positive for us and participants like us to see Citibank go and do $4.5 billion.

Steven Delaney - JMP Securities

Sure.

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

To see that, at some point investor are going to require a return on the equity. And as Mike alluded to, the banks are not going to be getting into the business of massive risk taking. They just came out of that and it didn't pay off. So, what they are going to do in order to get a return on that money is the least capital-intensive, least risk-intensive returns that they can get and that falls right into our arena, and we are seeing that as participants take their head out of the rubble and look around and realize that they need to be in business, and realize they need to get a return on all of the equity that they are raising. That we are the natural place that they would look... seek those kinds of returns.

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

Yes, I think that the Steve if I could just use that question to pose a hypothetical for everyone on the call, not for you, but everyone on the call including you, is that the way that we see the market breaking down is into three separate categories. There are people out there who believe that everything is going back to normal. Normal being 2005 kind of levels and backwards in time and that the operations of the markets are all going to be just as they were. Then there's a camp of, well we are just going to muddle through. And that muddling through will have some hiccups along the way with some more credit write-downs perhaps in other assets categories away from mortgages, but we are just going to kind of muddle through. And then there is the last category which is, the world has changed, it changed on March 17th, it is going to be changed forever going forward. Now against that backdrop and against the capability of a company like ours to create a 16.6% annualized total rate of return or return on equity in that environment. All people on this call need to ask themselves which camp do they fall into and what kind of rate of return can they generate. And can they get it out of company that's going to pay a quarterly dividend, when S&P dividends are being slashed and are already below 2%. So I think that is the huge opportunity here and I think that both in Annaly and FIDAC, we are poised to take advantage of it.

Steven Delaney - JMP Securities

Well that's great. Very helpful Mike, and you can just put me down in category three for what it's worth. Thank you, guys.

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

Alright Steve. I am marking that down.

Steven Delaney - JMP Securities

Alright Mike. Thanks.

Operator

And your next question comes from the line of Jason Arnold of RBC Capital. You may proceed.

Jason Arnold - RBC Capital Markets

Alright good morning; great commentary, as usual.

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

Thank you, Jay.

Jason Arnold - RBC Capital Markets

Mike and Kathy compared the housing and credit market meltdown to the slow motion car wreck controls. So I am wondering if you could share your thoughts on at what stage are we at? Are we still in the impact stage or is the car off-the road on fire, and the bush is somewhere.

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

Well, I think the air bags have... are deploying, which I would say that's capital cushions for an analogy. I think the emergency squad some of the early ENTs got there from the Federal Reserve and they are definitely working on some of the accident victims. But I don't think anybody is falling in the operating room yet. I think a couple of the people have been taken for the operating room and they are worked on by the surgeons in the form of mergers and acquisitions. So, but I do think that there are potential other pile ups that's people are crawling past and as we like to stay in the New York, sort of slowing down to watch the accident that happened on the other side of road. There is still some of that to go on.

I think its extremely important to look back at what we were seeing a few years ago, when we were talking about the slow motion car wreck is that, it's really effective every thing from the immiscible lending to student lending, it's affected the way of life of the average Americans. But they are only beginning to understand the dimensions of those costs right now. And risk premiums are going to be alike for a while. I think Wellington's long-term opportunity discussion on first part of the call, extremely accurate. These spreads are staying out there and the reason they are staying out there is because they over shot on the way down, they go with shot on the way back up. So I would say that the crash has happened there are people that are just looking at the accidents and trying figure out how to take advantage of it but there are still people that involve in accident being worked on and I think it will be more M&A and more discussion about write-downs because until your floor under [ph] housing which we wrote about I guess in 2004, you're not going to be able to get stable cash flows out of non-agency paper. All of the new stuff is working great but there is huge job opportunities in the mortgage arena as a result and literately $2 trillion to $3 trillion worth of capable financing has been taken away from that market and is now being socialized. So that is a big change and that points to I think my third category in the previous call.

Jason Arnold - RBC Capital Markets

I'm in that third camp as well?

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

I'm marking you.

Jason Arnold - RBC Capital Markets

Great. And then I was wondering if you could also share your thoughts on where directionally you think the long end of the curve is going really in the near term.

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

I think it's stagnant. It's going to be stuck in the trading range. Inflation premiums are going to be built into the longer end of the curve. The way I view yesterday's announcement from the Federal Reserve is that the bond market told you everything you needed to know and so does the stock market tell you that the markets... the bond market rallied and the stock market sold off 150 points in about an hour. So, the market participants are speaking with their dollars and they're saying that maybe we are pausing at in 2% but we are sure that we've done yet and long-term rates, that where inflation premiums get built in. If there is inflation in the system, which I seriously think is not the issue. I think it is asset deflation across the entire system, then those rates are going to stay up there for a while. You might get flex [ph] to quality, might get those back 50 basis points, 20 basis points, but the Fed has done an excellent job here. I can't speak highly enough of the work that's been done in the Federal Reserve in terms of reacting to this. They've done an excellent job.

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

There is tremendous opportunity as the market tries to figure out inflation component. But there is opportunity for people like us as the long end of the curve moves around.

Jason Arnold - RBC Capital Markets

Fantastic. And then just one another quick item, I was wondering if you could gives us the average paid fixed rate on your swaps right now.

Kathryn Fagan - Chief Financial Officer and Treasurer

The pay rate is 490 and the receipt rate is at 285.

Jason Arnold - RBC Capital Markets

Excellent. Very good. Thank you guys so much.

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

Okay. Thank you, Jason.

Operator

And your next question comes from the line of Don Fandetti of Citi. You may proceed.

Donald Fandetti - Citigroup

Hi Mike. I have a quick question. Obviously it's early to be talking about a Fed tightening cycle, but do you think your company is better positioned today than let's say the last cycle. Do you plan on using any hedging instruments or would you do just do your organic hedge?

Kathryn Fagan - Chief Financial Officer and Treasurer

We swap. Just in the last tightening cycle, we did not have sub-swaps on.

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

I would say as a group we are much better prepared because of the things that we've changed in the market over time to prepare for tightening; whether the market tightens, as it's doing in the LIBOR side or if it's the central banks tightening. I think the bigger issue is now as that you are going to have the BOE and ECB and perhaps even the Japanese banks, all beginning to ease in order to get their currencies back in line with the U.S as this thing drags out.

Donald Fandetti - Citigroup

And so I would assume your sort of view is that the feds either on hold or cutting and that any type of tightening is far off at this point.

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

You know what? Don, you always want to buy insurance when it's the cheapest. And you will leave money on the table to do that. So, we are fully aware that whether the Fed needs to react to inflation via a tightening or not. The market, we have to be prepared to deal with the market fall out of that. So, I think the portfolio is in so much better position to be able to deal with that than it was prior to 2004.

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

You can't wait for the headlines in order to be prepared for that, I think, for people who listen carefully to what we said on the fourth quarter call in the Q&A is that we described March pretty accurately, in January. We thought that the first quarter would be a tough quarter for financials, maybe a bottoming effect but it was the first Japanese year end and during a credit crunch and that we thought there will be some dislocations and we want to be prepared for. But one of the ways that we prepared for was that leaving money on the table, we brought a lot of our book over quarter end early in the quarter in January and February when things were pretty quite. And then of course, in March that looked tremendous because we had already rolled our quarter end before the Bear Stearns debacle and JPMorgan bailout et cetera. I think that you have to look ahead here but the barbell has worked extremely well because of its market based. People are paying us to interpret the tea leaves and the cash flows of these mortgages and really they teach us a lot about consumer activity and consumer activity is such a large piece of GDP that it can send you warning signs early and we're not going to give all those warning signs on any call. But, it's part of our morning discussion here everyday.

Donald Fandetti - Citigroup

Okay. Thanks Michael a lot.

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

Thank you, Don.

Operator

And your next question comes from the line of Bose George of KBW. You may proceed.

Bose George - Keefe, Bruyette & Woods

Good morning. I have got a couple of things. First, I was just wondering what kind of spreads you are seeing on new investments, and can you just break that out in terms of you know repo-funded or stuff where your terming out your liabilities?

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

You are anywhere between, if you are swapping it out you might be 150. Repo funding, you might be 225-250 depending on what you are doing.

Bose George - Keefe, Bruyette & Woods

Okay, great. And then if you are just switching to... at the end of the fourth quarter you had about $6.5 billion of structured repo. I was wondering if that number has changed much and just can you talk about the general funding benefit on structured repo versus similar swaps?

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

It's changed a little bit. The number I think is at around seven.

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

Yes.

Bose George - Keefe, Bruyette & Woods

And is there...

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

Structured repo is actually and at a lot of times it is much easier, you don't you know have to do hedge accounting on stuff like that and there is no mark-to-market...

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

Yes.

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

Or very little.

Bose George - Keefe, Bruyette & Woods

Is the funding benefit pretty minor or is it...

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

No, actually, I mean a lot of times you can get better than what you can do in a swap market.

Bose George - Keefe, Bruyette & Woods

Okay.

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

The LIBOR curve, as people make their own estimations of, Central Bank activity. Because of the size and track record of the company, we were able to execute some billion trades on our liabilities desk, well below Fed funds during that quarter as people were making bid in the far end of the LIBOR curve. So we had three very powerful aspects available to us during the quarter. One was that we were getting back an immense amount of P&I every month, providing us with our own liquidity to do things and keep ourselves within a primary take advantage of dislocations in the market.

The second thing is we had access to longer-term repo, so we could go out and set up a lot of that structure ourselves and the fact is before the market began to ease. And then lastly, with those two things in mind as we were amortization and reinvesting in it to the market, we could buy larger assets as a result and all those three works very strongly from a fundamental point of view.

Bose George - Keefe, Bruyette & Woods

Just one more question on the liability side. Where are you currently rolling repo?

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

If you are doing new sub today your... on open anywhere between 2% to 20. One month you might be 225 to 250 depending on the counter party.

Bose George - Keefe, Bruyette & Woods

Right. Thanks a lot.

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

Sure.

Operator

And our next question comes from the line of Jason Deleeuw of Piper Jaffray. You may proceed.

Jason Deleeuw - Piper Jaffray & Co.

Thank you. And I just want to congratulate you on the solid quarter in a turbulent market. I think a 16% return on equity is very good in these times.

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

Thank you.

Jason Deleeuw - Piper Jaffray & Co.

And just looking at the credit market phenomenon at least has seemed to gone, it stopped getting worse, stabilized, maybe some what improved I guess depending on what camps you are in. But it seems like short-term LIBOR is elevated from where you would had expected to be and I just wondered if you could comment on that?

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

The European banks are still unveiling their problems.

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

And I mean, LIBOR is the credit rate. There is an old saying, LIBOR is an uncollateralized loan.

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

Like Fed funds.

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

It's telling you that there's still strength in the system. This is probably the first time that the LIBOR market has really been through a global credit crunch in the banking system, even in the early 90s which the Eurodollar markets with not nearly as developed as it is today. It was really more of a thrift problem even though you only can throw a couple of large banks in there but today is pretty much wide spread problems that still manifesting itself in LIBOR. There is nothing like says that its broken, it's telling you what's going on. It may be the new norm you don't know. You can there's benefit to it and depending on where you are. First of all my swaps are doing better if LIBOR stays elevated relative to repo, we pick from that.

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

The European banks from our point of view not so much with multinational banks but with many of the other with European banks, a lot of there liabilities structure was not built around the deposits, it's built around a structured investment vehicles and things like that obviously have been subject from most distress. So as you have that stuff still unwinding and still struggling to identify cash flows, I think this LIBOR fed funds thing can become a powerful ailment to this earning risk in the markets. And I have never seen it like this before but we've discussed this two years ago on a call, we are going to notes last night about this could be one of outcomes where LIBOR bifurcates away from fed funds, because the European banks basically don't have the same kind of financial structure as the U.S. banks have.

Jason Deleeuw - Piper Jaffray & Co.

Thank you very much.

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

Thank you.

Operator

And your next question comes from Amaru Almanaseer of 36 Capital Group [ph]. You may proceed

Unidentified Analyst

Hi thank you, this is Amaru Almanaseer here. Thanks for taking my call. I just actually wanted to ask a little bit more about the financing side as well. What was the average... what is the average life outcome in LIBOR?

Kathryn Fagan - Chief Financial Officer and Treasurer

It's a 229 days.

Unidentified Analyst

229 days. So, I mean basically. I'm trying to understand how cost of fund is going to move going forward, even if it's interest rates are relatively flat for 229 day can we expect the cost of fund to approach. Well I guess that will be the average, and going forward if interested in structure is relatively wet, I mean basically and we feel it rolls off, we can expect cost to funds average is it a kind of like a straight line?

Kathryn Fagan - Chief Financial Officer and Treasurer

Well All else being equal, you should see a continued improvement in it.

Unidentified Analyst

Okay.

Kathryn Fagan - Chief Financial Officer and Treasurer

On cost of funds.

Unidentified Analyst

Okay great. Everything else is taken care about. I also just want to add that I really appreciate this statement mid quarter. Updating situation that made really made it easier to sleep at night. So, thank you for that.

Kathryn Fagan - Chief Financial Officer and Treasurer

Okay, thank you.

Operator

Your next question comes from the line of Richard Sloan of HNR Realty [ph]. You may proceed.

Unidentified Analyst

Mike first compliments on a very creative opening presentation. When I first clicked on I though perhaps I dialed in a call on preview of a Star Wars movie. But on a serious note, I am... I too am interested in the cost of fund. I see it went from 493 average on December to 335 at the end of March you indicated I thought you just said that the new repo rate was running in around 220, I mean where would you put the average cost right now?

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

Here, we don't project that, what we try to say to people on the first quarter I rather in January's call for the fourth quarter is that you know we can be opportunistic because of our size and because of our asset classes in taking advantage of forward-looking LIBOR markets. And the result is that during the quarter while the Fed was still at higher rates in January than they were during the course of what began to explode over February and March. We were actually taking our counterparties and taking them out over the quarter end, pretty aggressively beginning early in the quarter, which means that our overall cost of funds and the total rate of return and the leverage rations and the liquidity that you see here all reflect leaving money on the table during that period in order to make sure that the company was well funded and liquid over that quarter end.

So you see this aberration where it looks like perhaps, if I was in and I was looking at the company, I would say well I have my model at 10:1 at $0.51 but they came in at 8:1 and $0.51 and they had a lot more cash and cash equivalents on the balance sheet as a result and of their cost of funds is slightly higher than what I thought it was going to be, the answer is, that was all part of the operating plan for you know going into the credit crunch. So you know the results are is that, we are rolling off that repo today, sequentially we are rolling into lower rates and now we are taking advantage of it.

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

One thing I want to just clarify is that the forward repo market is not being opportunistic right now so it's not presenting us you know the opportunity that we saw in the first quarter from an inverted you know, repo curve now is you know some what stable In its... the shape of its curve and the rates that I quoted to you are you know new open rates after the Fed easing yesterday.

Unidentified Analyst

Okay. Could you just give me a little more information about the composition of the repo lenders. Are you dealing firstly with roughly how many and are they the same lenders that you had in the past. What's is happening ?

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

Yes, we have roughly 30 to 35 lenders. They are... they have roughly been the same lenders we've had for years. We have a couple new ones obliviously Bear Sterns, JPMorgan situation your there's always times were one of your lenders does weight side however we were under utilized in the bigger... bigger balance sheet there so, so the whole thing could actually work out nicely for us but we have concentration limits. We don't go greater than 30% with any one guy and we roughly maintain a bowed I think our biggest is may be 10% of the book and that's by design so...

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

We added a couple of new lenders during the course of the... early in this quarter.

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

And we do have relationships directly with money funds as well.

Unidentified Analyst

Thank you very much.

Operator

And your next question comes from the line Beverly Broke of Galleon Group. You may proceed.

Brock Vandervliet - Galleon Group

It's actually Brock Vandervliet from Galleon.

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

Hi.

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

Wow Beverly how you doing.

Brock Vandervliet - Galleon Group

That was creative. Anyway, if you could, one talk about the haircuts on repo, my favorite question and also, just how that may link in with how you're thinking about leveling the balance sheet at this point?

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

I think the way that I characterize it, Brock is that what happen to haircuts in the agency space for the most part, was not something we haven't seen before in our operating history record Annaly and FIDAC. And in fact when we built out this leverage range 8 to 12 to 1 that's equity it was based of a lot of experience gained in 1990s, the early 1990s are got around high net worth money on leverage transaction in agency securities. The Federal Reserve is now I think creating standards as you saw in air press release is about were haircut is going to be the fact is we leaves you with lot more unencumbered securities on your balance sheet lower the haircuts go but you will always need to be prepared for changes in haircut its the one thing you can't hedge out in terms of lending rates.

I would characterized the following is that the one important lesson that the regulators learned over the past six months and that the markets learnt over the past six months is that when lenders try to widen out haircuts on agency security that were liquid that in fact that said more about the lenders then it did about the assets or the borrowers. And it triggered the kinds of I think reforms and investigation is that you're going to see going into the repo markets you saw our there was a press release last week about Thornburgh, that's the first time in my career where I've seen the SEC going and looking at haircuts and margins calls on repo position. So I would say that there's a new sheriff on the new job and that sheriff is pretty serious and he can take a lot of action in here and haircuts I think are stabilizing as a result of that. So you know where people try to move haircuts out on us we took our collateral back and put it into other places, so that's kind of where its will fallen out the haircuts reflect lenders can create liquidity for themselves if they trying to out to 20 points on NC collateral that's telling you that they are in trouble that not the borrower is in trouble.

Brock Vandervliet - Galleon Group

And as those come in, would you all of sequel tend to dial up the leverage somewhat?

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

Well we are going to be opportunistic. It's 16.6% with all the metrics that what we have described or else you are going to get that rate to return.

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

You know Brock we can be acquainted. We are constantly assessing the situation there's no question that as the banking systems continues to recapitalize itself and not knock out all that new capital with more write-down it's a positive for the backdrop of what we do. Haircuts, right now here anywhere from three to five on pass-throughs and five to seven on CMOs which is expected, I think as in we have tremendous liquidity cushion to deal with any further changes that we may see there's no question that after the Bear Stearns, JPMorgan's bail out not everything stabilized. It really did stabilize and whether the cop on beat was the one who laid the law down, there's no question that it certainly a more predictable, stable operating environment and we will continue to assess whether it remains so before we you know make changes or significant changes in the way the balance sheet looks right now.

Brock Vandervliet - Galleon Group

Thanks, great color.

Operator

And your next question comes from the line of Dale Benson of Wells Capital Management. You may proceed.

Dale E. Benson - Wells Capital Management

Yes thank you. I just had one question that just kind of puzzled me a little bit. I know that during the first quarter Fannie and Freddie 5.5 have trade pretty much below par in fact and then in March brought some for a client at less than 99 and now they are par and a half. But you point out that your net premium remains in unamortized virtually double from December 31st from a $195 million to $383 million and that would suggest that you brought a lot of assets at a premium. I am kind of curious can you kind of give us some additional color on that?

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

Yes we will go across the coupon spectrum and again I am not going to, you know give as much detail because there is always the possibility that people are listening that you know who are not investors.

Kathryn Fagan - Chief Financial Officer and Treasurer

You know also it's looking at year-to-year numbers and...

Dale E. Benson - Wells Capital Management

No I am talking about $283.3 million for the March period but a $195 million at December.

Kathryn Fagan - Chief Financial Officer and Treasurer

That was March '07.

Dale E. Benson - Wells Capital Management

I am sorry. I am sorry, I misread that yes your about flat for the quarter. I apologize.

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

Dale, what are you doing to me? Come on.

Dale E. Benson - Wells Capital Management

I am just flipping up the numbers.

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

I will take all your five and half's as 99 right now.

Dale E. Benson - Wells Capital Management

No they are no longer there. They are five and a half better than that.

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

You better tell that to the other newbie REITs that are being launched in Wellington.

Dale E. Benson - Wells Capital Management

Yes.

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

And Dale I don't think it is a good idea when people overly focused on the dollar prices or premium because there's risk by not having any premium and there's risk by having it and you're just trying balance that in... what we try and do is look at the landscape before us to take advantage, what we see as the best set of cash flow in an environment.

Dale E. Benson - Wells Capital Management

Well that's exactly right its cash versus GAAP. Thank you anyway.

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

Okay thank you Dale.

Operator

And your next question comes from the line of Stephen Laws of Deutsche Bank. You may proceed.

Stephen Laws - Deutsche Bank

All right, good morning.

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

Good morning Steve.

Stephen Laws - Deutsche Bank

You guys have hit on most everything but two questions, is anyway could kind of break out... kind of traditional FIDAC versus Chimera contribution on management fees there to give us a comparison?

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

I don't break them out, typically, you do not ask chimera was outstanding for the company for the entire quarter I mean it was not last quarter, so it is the only thing I can mention

Stephen Laws - Deutsche Bank

Okay. And then I guess from higher level from the capacity stand point you guys have grown quite a bit and I released that the asset class your investing is huge so I want to touch more on the liability side, is there a point that you get to where you have difficulty increasing your repo capacity because the counter party [ph] want limit some type of exposure to an individual company or can you talk about the capacity there, how much more could you grow give in... if continue raise capital and expected opportunistically do it going forward, are there any issues there?

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

Well I want to talked to that in broad term so that people can really have the frame work of the way that we are thinking about it Steve, if I may

Stephen Laws - Deutsche Bank

Yes that will be great

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

This is a broad discussion and its not specific to ask asset quest which is only $5 trillion, or so, from period 2002, 2001 to 2007, we and everybody else were competing in the markets on the liability side against structured investment vehicles, asset debt commercial paper, Auctioneer preferred structures, all of the different financially engineered CDO that were out there and COO that there were out there, four liability structures in the world... globally.

And now, if you listen carefully of that list a lot of those assets and the ability to create them no longer exist, therefore, you'll have conditions that are right for what we saw at the end of March, which I think needs to be heard again and again. That the commercial banks, the large commercial banks may is so stuffed with cash, the mattress was so stuffed with cash that they refuse deposits. We need to all think about that, what that's telling you is that there is a growing pool of capital that needed collateral, and the collateral that will be needed is price transparent, Fed viable collateral that has very low beta risk for the lenders. That's the business that the banks are going to get back into first in a large web. That's the opportunity for the sector, that's the opportunity for Annaly and then the simultaneously, you have a $5 trillion mortgage sector that because of the lack of housing activity is not growing anymore, it's actually aromatizing down for the first time in my carrier.

We need to understand those fundamental, it's a very powerful fundamental, so, you have all this things going on and I think its speaks to the prudence and the cautions that we exhibited over the past two years and definitively showed on this earnings release about what the opportunities are there that out there and the results are as Welly said this is a longer term kind of opportunity describes and a risk spread probably stay a little wide so you can be really opportunistic and you have the ability to be selective about how you have enter the market and issue an retire equity and also do the same one on the liability side, so you know you had a lot of buying power added to this market in the past several weeks as all those Fed changes and regulatory changes that OFHEO and Fannie and Freddie and FHA have taken place, but we all have to come to the realization that the mortgage market is shrinking, just like the house prices are shrinking.

Stephen Laws - Deutsche Bank

Great. I appreciate the color.

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

Thank you, Steve.

Operator

And your next come from the line of the Matthew Howlett of Fox-Pitt Kelton. You may proceed.

Matthew Howlett - Fox-Pitt Kelton

Thanks for taking my question, Mike just enough date on Fannie and Freddie. Do you think that the potential, to the worst of it some of their forward purchases in March were up, could they potential be in the market synthetically at some time in the future?

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

I think you know first aspect that they are going to go through are capital raises. I think that they are gone raise money. I think their leverage fell over the five year period that we just described from 77 to 1 debt's equity down 18 to1 debt equity. They have the capability to be extremely powerful partners I was also listening to Hank Paulson last night in an interview where he said the exact opposite of what the Bush administration had been thanking Fannie and Freddie for five years.

He has now made the commitment I think and also the administration in congress has made the commitment that Fannie and Freddie are huge parts of the solution, they are no longer parts of the problem so I expect to see the gloves taking off their Fannie and Freddie to be much more opportunistic going forward. But I think the first level will be going through raising capital and getting balance sheet much more powerfully situated to take the advantage of any following credit issues that they might have their credit tail is really what the issue is now. It's interesting from my perspective that the jumbo loans that they are taking on the securitization model right now for the most part are post summer 2007 loans. So, they are taking really great collateralized stuff which gives them a great credit tail story in my mind.

Matthew Howlett - Fox-Pitt Kelton

Good. Do you see them really as any threat to tightening spreads may be on there's floater side or the hybrid side or do you think it's just sort of too far out to see them as a sort of tightening your spread... a tightening spread driver here in the future?

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

I just think the fundamentals are pretty powerful in favor of agency security in general both from the funding side and also from the fact that the market is not going to grow. There was a time in my life where Fannie man and Freddie Mac were positioned specially in late eighties the early 90s where they were are going to own every piece of real state and secure every piece of real state between Texas and Alaska. That's not the case that prove not to be the case because you have all these new products to come in with lower under items standards. Fannie and Freddie really miss most of the bubble, because they did not dilute this standard, they weren't allowed to but OFHEO in effect of Congress. But spreads have gone pretty tight over time going into the early 90s I like to remember collateral trading at 75 off, as all the fundamental kicked in, post the blow up in the RTC and the recapitalization in the banking sector back then. During March we sold them at 206 deals. I think that they could be volatile but that the fundamentals are in favor of spread tightening here.

Matthew Howlett - Fox-Pitt Kelton

Great. Thank you.

Operator

And your next question comes from the line of Justin Bates of Daniel Stewart. You may proceed.

Justin Bates - Daniel Stewart

Hi guys. I think you have more than answered this question but I was just trying to read into the message that your perhaps giving us on the dividend payout ratio and I think the comments you made about returns being higher, gearing being lower I, correct me if I am wrong here, is pointed to the healthier payout ratio going forward. Is that correct?

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

There is always that potential Justin.

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

Absolutely, absolutely potential to do that.

Justin Bates - Daniel Stewart

Great. Thank you.

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

Thank you.

Operator

And your last question comes from the line of John Barrett of Trafelet. You may proceed.

John Barrett - Trafelet & Company

Hey guys. I had a question for you on the repo side. I know that you said that you made the right move and used a lot of repo over quarter end. Could you quantify how much that was, ballpark how much of an impact that may have had?

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

You know we are not going to do that John, but I will say it was substantial.

Wellington J. Denahan-Norris - Vice Chairman, Chief Investment Officer and Chief Operating Officer

Yes, and I also want to just basically say that our financing debt did a tremendous job and I would like all the investors to know that these guys are some of the best out there, if not the best out there in navigating this market.

John Barrett - Trafelet & Company

Great, that was it. Thanks guys.

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

Thank you.

Operator

And at this time, we have no further questions in queue. I would now like turn the conference back to Mr. Farrell for closing remarks.

Michael A. J. Farrell - Chairman, President and Chief Executive Officer

Okay, thank you. Well in closing, I'd like to congratulate Welly and the team here about the job that was executed over the past year in terms of identifying the opportunities and taking advantages of them benefit to shareholders, and I think that the message is clear that as people think about what their returns need to be for 2008 and 2009. They have to consider those three terms of whether are not during they are in the camp that things that are going to be better, or going to muddle through or in a new paradigm. And as you think about those things, we'd love to hear those comments and we'd love to be engaged in discussions about them, to make sure that our thoughts are correct in that matter.

With that said, we look forward to seeing you in July at the second quarter's earnings call and we thank you all for your time today.

Operator

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 888-286-8010 or 617-801-6888 with an ID number of 269-09-379. This concludes our conference for today. Thank you for participating and have a nice day. All parties may now disconnect.

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Source: Annaly Capital Management, Inc. Q1 2008 Earnings Call Transcript
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