Michael Farrell - Annaly CEO - comments on mREIT impact by a SP downgrade:
".....We’ve done a complete study going back into 2008. One of the things that people should be aware of on this call is that the definition of a government security starting with that of a broker dealer rule 50 c31-1 under the SEC. It’s stated pretty much along these lines. In case of a security issued or guarantee as the principal of interest by the United States or any agency there, the applicable percentages or the market value, the net or long or short position in each of the categories is specified below and then they are broken out by percentages and also by maturity date.
The bottom line is, is that there is a no link in any of the broker dealer documents, the banking documents, the money market funds or any of these investment adventures that cover agency investments across board with the exception or perhaps of some corporate funds that rely on either S&P, Moody’s or Fitch or any outside credit rating agency. It refers to sovereign credit. Therefore, anyone who has concerns about selling off of assets under force liquidation because of a downgrade, it’s making the severe misjudgment in my view.
The second thing is that in the event of a default or if there really was a default by the government, mortgages have been excluded since 2008 as pass through securities and in fact, they were verified by the Housing Reform Act, ATRA in 2008. It’s been outside and we hold a private claim under constitution on those cash flows. So, under the extreme circumstances over default by the United States government, the agency securities because they are off balance sheet and that $5 trillion market is secured by loans and borrowing activities underneath the Fannie and Freddie umbrella and Ginnie Mae umbrella. Those asset cash flows are to be outside of any default that would happen to the general obligation debt of the agencies and/or the treasury market.
So, I think that there is a great deal of hysteria in this information about that and in fact, we are prepared to talk about it at length if you want to go any deeper than that. But, that’s the highlights of that conversation...."