Greg Weston

Annaly Capital Management: Epitome of Low Risk, High Reward

Of course it would be a huge shock to the financial system if GSE debt were suddenly worth 0 and there is not way the gov will let that happen, but that is not the question here.

But a forced trade of current GSE debt for explicitly guaranteed debt at 92 or 94 cents on the dollar would only cause major pain to _leveraged_ holders of GSE debt. Like NLY.

You guys think the 14% div on NLY is a free lunch. You are sorely wrong. Repairing bridges, health care for the uninsured, repairing the military after Iraq, or free money for the mostly rich and/or foreign GSE bondholders? No way, not in this political environment.

By the way, the housing bill allows the GSEs to continue to fritter away their money in dividends. That is cash that won't be available for bondholders later on. There was a proposal to stop the GSE dividends, but it was killed.

Also, we are looking at a deficit next year well north of $600 billion, and higher if the FDIC needs a capital infusion. It had $48 billion when the year started, and IndyMac's failure alone is going to wipe out $4 to $10 billion of that. WaMu's impending failure will be several times larger.

NLY is a trip to a casino, and the substantial odds of a 100% loss on the stock in the next 12-18 months just don't justify the extra 11% dividend you get above CD rates. If you want to gamble, there are plenty of bets with much better risk/reward than this.

Not to mention the other concerns raised here about an increase in short-term rates.

Annaly Capital Management: Epitome of Low Risk, High Reward

There is still no explicit guarantee of the GSE debt. That's why there is still a spread to Treasuries.

The basic fact is that the GSEs are insolvent, and there are plenty of ways to add liquidity to the mortgage market short of a _complete_ GSE bondholder bailout.

Again, who says that GSE debt will be completely paid? Maybe the Treasury will buy the GSE debt at 92 cents on the dollar? Such a scenario would send NLY stock to 0.

You seem to think that Congress is going to decide the best use of taxpayer funds during a recession is going to be sending taxpayer funds to the Chinese Government, NLY investors, and Bill Gross. Maybe that will happen, but personally I would not put my own money on that bet.