American Capital Agency Management Presents at Barclays Americas Select Franchise Conference (Transcript)

| About: AGNC Investment (AGNC)
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American Capital Agency (NASDAQ:AGNC) Barclays Americas Select Franchise Conference May 22, 2013 9:15 AM ET


Gary Kain – President and CIO



Okay good afternoon. Thanks for joining. We’re pleased to introduce the team from American Capital. We have got presenting today Gary Kain for those you who don't know Gary, he is the President and CIO of both of the REITs that are managed by American Capital both AGNC and MTGE, AGNC being the larger now the second largest agency only mortgage REIT helped in large part by significant outperformance of the sector. If you look at total economic returns, this company has generated over the last three to four years, it's well in excess of others and that’s from I think attributable to really good significant alpha generation. So with that I’ll hand it off to Gary and we look forward to your comments.

Gary Kain

Thanks Mark, and thanks for the opportunity to be here at Barclays. What I want to do today is just quickly give a very high level intro into America Capital Agency, the larger of the two REITs that we manage and then get into kind of what we’re thinking about in terms of this current environment and I want to spend some time toward the end on a topic that’s gotten a lot of discussion off late especially in light of some of the questions around by the FSOC around mortgage REITs and interest rate risk management and so toward the end of this presentation I will spend a fair amount of time on the interest rate risk management piece of our business, which is obviously quite important to us. Just quickly on page two, we’re an agency mortgage REIT and what that means is, we invest only in Freddie, Fannie or Ginny, mortgage-backed securities, so really don't take credit risk and I think people mistake don't take credit risk as you know well you have government guaranteed securities. There is not that much risk, clearly the big thing that differentiates mortgage backed securities is prepayment risk and so securities can either shorten, if rates fall and prepayments pick up or lengthen or extend if rates go up and prepayment slow.

And so managing interest-rate risk on a levered bond portfolio and the idiosyncrasies of prepayments is kind of our key objective in running the REIT.

In terms of our objective in terms of returns we obviously as a REIT pay a significant amount of our taxable income 90% plus out in terms of dividends and so dividends are obviously a priority but we look at it from a total economic return perspective which is the combination of dividends and share price appreciation. The management team has spent on an average the senior management team has close to 20 years of experience in the mortgage business. I personally spent 20 years at Freddie Mac in various roles but, right before leaving I was running the retain portfolio of those asset purchases and hedges. So I have been involved with the agency mortgage market and in the mortgage market for 25 years at this point. One thing I really think is important is AGNC is externally managed and we charge a fee there is no incentive fee, we charge a fee of one in a quarter percent on equity, but remember we’re eight times levered and that is debt to equity if you think about it in assets to equity is nine times and if you then think about the fee on a per asset basis our fee is in the area of 15 basis points or one in a quarter divided by nine. So this is one of the least expensive ways to have an actively managed fixed income portfolio and in particular mortgage portfolio as well and I think it's kind of sometimes misunderstood really how cost effective these vehicle in particular is with respect to the fees.

So with that this is just a very quick history of AGNC, we IPOed in May of 2008. So, we just celebrated our five year anniversary. IPO price was $20 a share since then we paid $25.11 in dividends so you have more than gotten back the initial share price and importantly dividends without share price and book value growth are nice, but the combination is what is critical. We have grown book value by close to 50% around $29 over this period and the market capital of the firm has gone from 300 million at IPO to a little over $11 billion at this point. You can see the returns over that period, we obviously feel very good about the total stock return over reasonable period of time now five years and it's also obviously compelling versus benchmarked. If we take another look at a page four, this is kind of the way that we really think about the year-to-year performance and managing the company, here we compare again economic return which is the combination of dividends in the light blue for AGNC and NAV changes, mark-to-market of the portfolio in the darker blue versus our peers the other agency REITs and as you can see over the last four years, agency has consistently outperformed our peers and also generated above 30% mark=- to-market return in each of the last four years.

I do want to point out because it is important that in Q1 2013, agency given concerns about an early Fed exit, agency mortgages perform poorly. We did have a negative return from an economic perspective. We did pay our dividend but book value dropped materially. We have had multiple quarters where we have outperformed our peers by a large margins. We do take basis risk in running the business and these kind of quarters are going to show up especially in light of the significant gains that we had in book value throughout 2012 as the market started to price in and did price in the announcement of QE3 and we have clearly given a little of that back in the first quarter.

But you know moving on from kind of a history and the returns I really want to take a step back and look at one of the things that we hear from investors often which is, this is great, had a near zero funding cost for a number of years and the yield curve has been really pretty steep. So, mortgage REIT’s had a great run, but this business doesn’t work if interest rates go up and if the yield curve is flatter and there is a lot of people with that view on mortgage rates.

And so what we’re trying to show here is sort of a more normalized environment where let’s say interest rates, mortgage rates are 5% they could obviously be higher than that, they are actually now more like 3.5% and right now if you looked at margins over the past three years, they probably average closer to 2%, but let’s think about a world in the future where margins come in further and maybe they are a 100 basis points versus the 200 we have seen and even with maintaining leverage at ball park eight times as you can see you can get a gross ROE of 13% with that scenario and that’s still a reasonable kind of return picture in an environment where interest rates are a couple of 100 basis points higher and where the yield curve is flatter. Now the question is what was the 100 basis point margin attainable in that type of environment? yes that’s really sounds conservative relative to where you have been, but is that still a stretch and we don’t feel that way and in the past, in other flatter yield curve environments, it may have been more of a challenge to hit those kind of numbers and the reason it would have been a challenge was because of Freddie and Fannie and Freddie and Fannie’s portfolios could lever 40 to 50 to one.

And so even a 50 basis point spread with 40 times leverage produced a 20% ROE. So with that in periods where interest rates were higher and the yield curve was flatter and there wasn’t a lot of mortgage production because there wasn’t a lot of refinancing activity, someone who could lever 10 to 1 couldn’t compete with a GSE that could lever 40 or 50 to one had favorable funding they could also fund 10 or 20 basis point lower and could lock in funding over a longer period of time.

But now that GSEs are out of the picture not running for profit, portfolios are shrinking their, for-profit portfolios in an environment in the future, there is no one with the ability to lever considerably more than eight to 10 times and that’s of enough size to kind of to impact the market and so almost by definition, market pricing has to be consistent with where the next best fit is and so we feel we’re certainly in that category and so I think this is an important take away for people which is we don’t believe that the REIT is the agency mortgage REIT or the hybrid mortgage REIT business models are dependent on zero interest rates and a steep yield curve in the future and I think this will be one of the biggest surprises for people overtime and looking at the with that what are going to be the drivers of long term success and first of all like any investment business and that’s the business we’re in it comes down to asset selection. The number one thing for all of you in terms of your business it comes down to finding the right assets and as I mentioned at the beginning finding the right assets and mortgages is finding assets with slow and predictable prepayments and it doesn’t always have to be slow but it has to be predictable in order to be able to manage a portfolio and then the other thing is that especially if you’re talking about larger portfolios the diversification is important as well.

We’re in a world where there is some idiosyncratic risk around policy changes and around obviously other variable like the housing market and the interest rate environment. So you know putting all of your eggs in one basket is also something that you should try to generally avoid like you would in any business. And so diversification while still finding value added securities is clearly a positive.

But then that takes you to the next piece of this which is risk management. You will not make money in the business overtime with your hedging strategies. And if you’re trying to then that’s a recipe for problems, what you can do with your hedging strategies is lock-in or try to preserve the value of good assets. So again risk management and hedging can’t make up for bad assets, you need to have the right assets and then you need to have a hedging process in place that can preserve the value of those assets over a range of interest rate scenarios. And then lastly and something that I think is more important now in this industry as it's grown is transparency and disclosure. We take disclosure very seriously at AGNC. We want investors to understand the assets that we have, the exposures that we take, the hedges that we have in place and yes they will change quarter-over-quarter and we’re not completely predictable and we don’t want to be but we do feel that it is important that both investors larger and smaller have a feel for our positions and have the ability to kind of ascertain what our exposures are.

So quickly with respect to asset selection, this is just an example of prepayment speeds on Fannie Mae 4% coupon mortgages all originated in 2011 so 30 year mortgages all again good credit, all originated under the new terms tighter underwriting and as you can see the prepayments fees of different types of mortgages have been very different. The top line, the yellowish orange line is jumbo conforming mortgages which is loan balances above 417,000 and below 625,000. These are the largest loans kind of securitized by the GSEs and if you look at the prepayments feeds over the last year or so they have averaged around 50 CPR that’s a big number what that means 50% of the pool will prepay over the course of the year and so if you paid a premium for this security half of it is gone at par over that period and we will look at it in a second the implication in terms of returns.

But on the other end of the spectrum the silver or grey line at the bottom are smaller loans, these are loans that average, that are pooled specifically with loans between 85,000 and a 110,000 so call them a 100,000 average loan size. And then these are good credit, they are different geographies than the larger loans but same origination, same coupon, and those are paying at 10 CPR. So why does that happen? There is a couple of reasons, this isn't a rocket science, people have known about this for a while, but the reason is there are cost to refinance and let say those are $1500 for example and if you have a $100,000 loan that’s a 0.5%. If you have that you have to essentially eat for things like title insurance and appraisal and settlement cost. If you have a $500,000 loan you divide that 0.5 by five you’re talking about 30 basis points of upfront cost. So it's much more economical to quickly refinance a higher loan balance pool, but that’s only half the equation. The other is how prepayments are in a sense manufactured. The people doing the refinance let’s say at the Wells Fargo or JPMorgan Chase let’s say you’re talking about a particular branch and they can refinance a 100 people at this branch in a month. And they get paid 1% for every loan they do or they are going to do a 100 loans at a $100,000 loans that you pay them a $1000 a loan or if they have the opportunities or they are going to pick every larger loan, $500,000 loan or $5000 per loan I think they will pick the larger loans and process them at the expense of smaller loans, you get an advantage on both sides, but I think that’s straight forward, but the magnitude of a prepayment differences are pretty substantial.

The two lines in the middle are different versions of what’s called TBA or generic mortgages that you would expect to get delivered, the universe, and then the red line on the bottom are loans originated through the HARP program that have higher LTVs and because of their LTV and because it's a one-time program they are also difficult to refinance, but this gives you again a pretty good perspective on how different these can be, but I think what you really need to do is put this together with page eight and on page eight what you can see is the return differential for a mortgage security purchased and again it assumes the same price for all of these with slow prepayments the 10 CPR example is a yield of 2.51% if you assume 80 basis points and cost of funds you get a net margin of a 171 basis points and if you apply eight times leverage to that you get a gross ROE that’s very attractive of 16%.

If you look at 30 CPR and obviously from our chart we saw a lot of things at 30. The universal was at 30 for the last year or so. But what we saw even something’s faster than that, but here it's a very different picture. It's a 11 yield, net margin of 30 basis points and a gross ROE of just over 3%, that’s gross not net. So, when you look at this chart and you look at the prior chart it really kind of tells you the importance of having predictable and slower in the current environment prepayment, but there is another benefit to this which is that pools that are predictable and that are slower you can afford to hedge them more and so if I had a pool that’s were type of mortgage generic mortgage that could speed up dramatically if interest rates fell. I can’t afford because I can’t count on the cash flows, I can’t afford to hedge that pool as much. So, what’s interesting and sort of counter-intuitive sometimes is that pools that prepay slowly can actually do okay if rates rise because you have the kind of the ability to put more hedges in place because they will perform better in a falling rate environment.

Just quickly on slide nine, this is from our Q1 earnings release, it shows kind of a breakdown of the portfolio a couple of different ways. I think what’s most important here is the actual prepayment speeds on the top right, where you can see the top-line there is the universe the grey line and again it shows prepayments in the 25 to 30 kind of zipcode over the last year or six months and you can see AGNC’s prepayments right around 10 CPR. We have been in the range between eight and 12 really over the last couple of years and we obviously have a fair amount of smaller loans and securities originated under the HARP program as well as some newer generics securities.

Now, what I really wanted to spend the remainder on the time on is the risk management, kind of piece of things we have been getting attention and should get attention in this kind of environment. First off, AGNC runs it's portfolio on a daily basis. We run all kinds of shocks and stress scenarios. We use BlackRock Solutions which is an external vendor for risk management runs that we use their models and their system, we have loaded our whole portfolio hedges and all of our assets and we can monitor again our exposure to up and down 300 basis point move flatter yield curve changes in a wide volatility stresses to mortgage spreads versus other instruments.

We have an internal limit framework that you know we compare how we do in these different shocks to kind of either reporting thresholds or other limits which require kind of escalated sign offs as positions or risks show up. So, I think that’s an important starting point, the other thing in terms of hedge composition and I will touch on this in a couple of minute. We use both interest rate swaps or the main hedging tool but we also show treasuries and we buy swaptions and the breakdown of those is a function of market prices and conditions as well as our asset portfolio.

One thing that we get asked about periodically is derivative counter party risk management. So it's are you? What is your exposure is? You’re buying these options if they go in your favor? What if the other guy on the other side isn't there and the key thing to keep in mind is that our counterparty risk is collateralized on a daily basis.

So every day, it's two sided either we’re posting collateral or Barclay’s or whoever else is on the other side is posting collateral to us and so I will never say there is no counterparty risk but the counterparty risk is limited to kind of a very short period of time where there is a move a day or two where you don’t have collateral for that move, but the vast vast majority of all the risk embedded in the derivatives transactions is collateralized on a daily basis and that’s a key mitigant in addition to kind of the diversified set of counterparties.

Our funding repo count, we’ve 30 repo counterparties, we have extended the maturity of our funding. We manage roll over risk and our counterparties are really split all over the world at this point and so from the repo perspective there is substantial diversification.

So on page 11, just in terms of the hedges and I mentioned via swaptions and treasuries this pie chart gives you a feel for the relative sizes of them, so interest rate swaps again are the basic starting point, the average maturity of our swaps was just under five years at the end of the first quarter 4.8 years. We have 51 billion of interest rate swaps, you can think of that as converting a very large percentage of our short term funding to the equivalent of five year type debt. We also were short 13 billion in treasuries with an average maturity of around seven years in addition to the interest rate swaps. So those are kind of the two sets that are fixed hedges and that’s about 64 billion with again on an average more than a five year duration on that.

And then lastly interest rate swaptions and swaptions give you the right to enter into a swap at some point in the future in our case on average of about a year and half and we have the right to enter into relatively long swaps, 7.8 years of the average maturity of the swap that we can enter into. So in a rapid rising environment, those start to approach longer term swaps as they become in the money or at the money. And what’s important is these are put up, you can think of these as put options on interest rate and they are specifically designed not to help us in 10 and 20 basis point moves and rates, but to help us in environment where interest rates move 50, a 100 or 150, 200 because those are the moves that scare us right?

For small moves in interest rates 10 and 15 basis point moves basis risk or the difference between mortgage securities and your hedges is going to dominate, but for moves like a 100 and 200 basis points you really need this out of the money type protection and that’s where your hedges you can count on your hedges kind of really kicking in.

This slide, slide 12 is a slide we added to our earnings presentation this quarter, but I want to take a little bit of time on this because it's kind of important because when people will say what -- how bad is your exposure to rising rates and if you think about some of the comments from Jeremy Stein at the Fed about the potential for some institutions like REITs to have significant interest rate risk because of maturity transformation, this is a good opportunity to look at our interest rate exposure in a 200 basis point immediate 200 basis point parallelship, but before I go to the right side of the page I want to give you a number that’s not on the page which is the duration of our mortgages assets as of 4/30 or April 30th the duration was 3.6 years.

If interest rates would have fall 50 basis points let’s call it a 125 to 150 tenure, the falling rate environment. The duration of our assets would fall to around 2.5 years. So the shortest that our assets could be is in that zip code of 2.5 years that’s kind of we don’t worry about it being much below there. On the other end in the up 200 case because prepayment slowdown and these assets extend they can be 6.5 years.

So what we’re trying to manage a levered portfolio of assets that can move from 2.5 to 6.5 years, so we’re not as worried about today’s duration gap because that will move for every 10 and 20 basis points, we’re not worried about that 3.6. The reason our hedges are at 3.5 is not if you look at the liabilities in hedges, it is not because of the position as of April 30 was 3.6 that sort of a like that’s a coincidence. We’re at 3.5 for our fixed hedges because that’s in between 2.5 and 6.5. And we then layer in the swaptions and if you look at what happens kind of in the aggregate if you look at the extension of the portfolio without the swaptions our duration gap would go from near zero to 3.1 years in an immediate up to 100 scenario that’s because treasuries and swaps, the duration of them doesn’t change in a rate move and the assets extend.

So you go from having no duration gap to having a three year duration gap. When you layer in the swaptions, which have the option component of them then they automatically lengthen as interest rates go up and then that duration gap, the net duration gap out of the model is 1.8 years or below two years which is, one thing is important again this scenario is in 200 basis point immediate shock and a duration gap of two years is something that many financial institutions they are willing to operate at that kind of level in a normal environment on a day-to-day basis and so I think that’s important when you think about the interest rate risk component of the industry as a whole but in particular AGNC. We really do pay upfront for the swaptions. We pay for these options to be in a position to manage through these kind of scenarios without being significantly offside and again this example assumes no rebalancing activity and clearly for our a move of 200 basis points it's not going to happen in a day and we would probably be in a position to reduce this meaningfully via day- to-day rebalancing.

So just to summarize before we move onto questions, we have provided you know a good close to 385% total returns since our IPO and outperform people our peers over that period, but I want to be really clear that like the strategies that worked four years ago may not -- wouldn’t have worked two years ago and the strategies that worked nine months ago may not work in the environment ahead. So, we have to committed to being open minded and to changing our asset selection strategies and evolving our hedging strategies as time evolves and as market conditions change and again we will continue to focus our hedging activities on protecting the portfolio against larger moves in interest rates.

Again, we have to take basis risk it's our business protecting the portfolio for a 25 basis point moves in terms of your hedging strategies there. The outcome is going to be dwarfed by kind of again basis risk and then going forward, going back to that the slide that we looked at with the ROEs across different margin and leverage combinations is even as rates change we feel that we will be able to generate attractive risk adjusted returns and the number one thing for management to make sure that we do is handle transitions from one environment to the next. We can’t be caught offside, we can’t end up losing substantial amounts of book value, afraid to move a lot and not be in a position where we can invest in new rate environment and new spread and so forth and so we do view as a key objective for the management team is is to get a manage through transitions and we don’t know when the transition will occur, you know you shouldn’t invest in AGNC because you think we will know exactly a week before rates go up and that’s why we spend the money that we do for protection because we need to be prepared on a consistent basis.

So with that let me stop and open it up for question.

Question-and-Answer Session

Unidentified Analyst

Thanks. First question Gary is it fair to assume that a environment where rates go materially higher, the specified pools should underperform more generic collateral with less pay ups and if the answer is yes, is that also kind of imply that given you still have a pretty large specified pool portfolio that you guys actually are positioned for a much later tapering event in the market seems to be pricing in right now.

Gary Kain

It's a really good question and the way what’s important to keep in mind is and you’re absolutely right that our underperformance in Q1 was a good portion of that was related to the underperformance of prepayment protected mortgages. Obviously, they continue to perform well from the actual prepayment perspective but the prices or pay-ups on them declined in the first quarter. Interestingly, we actually believe that prepayment protected mortgages can perform very well on a hedged basis even if interest rates go up and again it comes down to your portfolio as the combination of your assets and your hedges and so there are two ways you could approach this, you could have this, you could have a generic mortgage with a smaller hedge and then it's not going to have a pay up decline obviously, it's has no pay up in a rising rate environment and alternatively you could have a security with a one percentage point pay up, but if you hedge it to a year or a year and half or you know something like that longer than a generic security then you essentially can have the security priced for the pay up to go down to zero in a 50 to a 100 basis point move and that’s kind of the perspective. See, the thing is with those hedge ratios go to the other side of the equation when interest rates fall the prepayment protected security is something you can keep that will continue to perform well continue to provide good carry, the generic security as we have seen in most coupons will go to 30 CPR or potentially more provide no carry income and underperform from the price perspective.

So from our perspective the absolute duration or kind of the size of the price move isn't the issue it's kind of the predictability and the evenness of the move and so we find that you know in most environments it is better to have an asset with kind of good two sided performance make up for the longer duration of the fact that you know the pay up is going to drop with your hedges and now what some of you maybe thinking well that sounds really good but in the first quarter interest rates went up some, you lost a lot of you know you lost book value due to the decline in pay ups. But what I want to remind people is what happened in the first quarter was the interest rates the five year treasury moved five basis points, so the 10 year moved nine basis points.

This was an environment where interest rates moved, it was an environment where psychology change and so if pay ups decline because we go up 50 basis points we can hedge most of that, all right if pay ups decline and interest rates don’t move then that’s the basis risk that were accepted.

Unidentified Analyst

If you could provide an update on just on kind of where we are conceptual with book value because we have had a lot of volatility right? You were down last quarter when you reported earnings you were fairly back up part of the way and we had another sell off since then are we close to where you closed first quarter or?

Gary Kain

Well the short answer is we don’t give inter-quarter updates on book value and then depending on exactly when Bernanke is speaking which is probably right around now I don’t know whether my answer will be accurate anyway it might be accurate before or after. So I think the bottom-line is to your point I mean conceptually what’s happened in the mortgage market is April was a pretty strong recovery in mortgage prices and what we had said on earnings call that we had recovered a portion of the declines in book value I was asked like seven times what a portion was and I wouldn’t define a portion because there is so much volatility right now. To your point I think it is absolutely accurate to say that May up until this point has been a month of weaker mortgage performance and mortgages versus hedges have underperformed in May and again there has been in this environment where there is a lot of idiosyncratic risk. I mean let’s face it you have got the biggest variable is the term taper okay, and the number of times taper is mentioned by a Fed kind of governor on a daily basis you know affects the performance of mortgages. We’re good over the next couple of months we kind of I think a lot more you know insight as to the trajectory of QE3 and even and I mean our view on kind of the issue for the market is I think the market can perform okay, the mortgage market even with the tapering I think it's right now the uncertainty of it and one thing about the mortgage market is the Fed every month that they are in the market they are buying 70 billion in mortgages and they are going to by the time they stop at least around 25% of the mortgage market or more in which case it's hard to assume to see a scenario where that isn't a positive impact on where the spreads are. The fact that in a more environment if rates went up and there were all these hedging requirements in the part of private investors or even in the old days of the GSEs which always put pressure on mortgages with 25% of the most negatively convex mortgages sitting at the Fed then that relieves the pressure on the mortgage market and so I think we feel that just time alone of kind of getting through all this noise is something that when that will kind of stabilize mortgage valuations but there is no question that volatility release in 2013 in terms of mortgage spreads has been pretty high.

Unidentified Analyst

It's actually the entrance of a lot of more mortgage REITs in the market, doesn’t that affect your returns?

Gary Kain

That’s a good question. I mean there are a lot more in the way of mortgage REITs, but in terms of the size of the newer players compared to the size of the mortgage market it really isn't that big of a deal, so when you think about the entire amount of assets held by the mortgage REITs it's 400 billion plus and you’re talking about $6 trillion market and if you think about what the Fed is buying, just putting that in perspective, the Fed buys 70 billion a month in mortgages, yet mortgages have been widening right and so when you think about new REITs coming in and the involvement of the REITs, it's actually pretty small in the grand scheme of things. Now there could be environments where all the REITs want to buy the exact same type of mortgage that could where it could present some pressure on some things, but those things don’t happen all that often and I think luckily the REITs just like any other investor base kind of everyone has their own kind of objectives and their way of running the business. So the short answer is relative to the size of the market, the size of the REITs is actually pretty small and we say we bump into money manager, hedge funds and banks in a way more than we have bumped into the REIT community.

Unidentified Analyst

How should we put that (inaudible).

Gary Kain

I can give you a direct answer to the swaption piece and as of --so this 22 billion in swaptions that we had that provide a lot of protection against an uprate scenario, the total mark-to-market value at the end of Q1 was about 330 million or $0.80 a share. So if that entire option portfolio just expires worthless then our book value or the cost of that from the end of the first quarter forward would be about $0.80. We view that as a small price to pay and you know I want to reiterate I will love it, I will be extremely happy if those swaptions all expire worthless, that means we haven't had a big move in interest rates and given our portfolio we feel like it will perform well but that’s one kind of variable and then the swaps the cost of the swaps is embedded already in our net interest margin. So then the only kind of thing that’s not, that we haven't touched is the cost of the treasuries and again they are roughly 13 billion it's not a huge cost for the maintaining those short positions. But I do think the option kind of putting the options in perspective about having a significant amount of disaster protection you know for the potential again of that costing you from here a little over 300 million is a risk or is the decision we’re comfortable with.

Unidentified Analyst

You mentioned the Fed is buying 70 billion a month of agency paper. So doesn’t that mean that they are competing against you for buying this stuff, they got infinite money than a carry bag what return they get? How do you compete with someone like that, that’s my first question and second question I think I don’t really follow this, but did (inaudible) go out and buy corporate debts off people and I sort of sensed that was because they found the fund in the agency market too difficult fighting the Fed and isn't that something going back to your question about not all your eggs in one basket, doesn’t that mean that maybe you should move out of the agency market and go corporate.

Gary Kain

So the short answer is every business is going to have cycles where good times and bad times and we still actually feel this is a reasonably good time, you know the Fed was involved in QE1 in 2009 which was one of our best years. I think what’s important is yes the Fed the expectation was that the Fed was going to tighten up mortgages to the point where agency mortgages for the point where they were unattractive. The reality has been that mortgages are only marginally tighter than they were when Fed started the program which is confusing to me okay personally, I mean we didn’t expect them to perform the way they did but what’s happened is other investors have basically concluded as you have which is, if Fed is going to buy this I’m out and because a large number of other people, other investors have been crowded out and what they have done is pretty evident from some of the discussions today is they have invested in high yields, they have moved towards taking credit risk, the equity market and so what you have seen is a crowding out effect that’s pushed people into higher risk assets and so the offset of the Fed’s buying a lot, but more relative values investors who are trying to make money with their mortgage purchases have moved somewhere else and actually we on a relative basis would love to have the Fed as a in a sense competition as opposed to a Pimco or BlackRock because the Fed’s are not trying to make money.

They are not buying something because they think this is the best relative value, they are buying it because it's large and liquid and it's been produced and that’s where they want to be. So generally speaking competing with some of this not trying to make money is actually usually better as long as they are completely tightening up the market. Now I do want to just before we close I just want to comment on your on the point of what maybe the agency market over the long run and AGNC and we feel that the market wants agency REITs. Agency REITs have become you know there are some large and liquid agency REITs, they are investors that don’t want to take mortgage credit risk and so we feel that this is a really good option for investors that they have enjoyed over a 15 year period and we setup a separate vehicle, MTGE which is a public company, it's a market capital of a 1.5 billion and it has the scope to invest throughout the mortgage market to take credit risk and so forth and we feel that giving people the option to choose.

The good thing about an agency REIT is in a portfolio it's very counter cyclical in a period when stocks and other types of risk on assets are performing well agency REITs may underperform. On the other hand in a kind of weaker economy where interest rates stay low or go lower from here then an agency REIT is probably going to perform pretty well and it's a good match for a lot of portfolios and so from that perspective we want to continue not saying we wouldn’t do something different but we want to continue to offer the market that option and then we provide another option via the other vehicle which can invest throughout the mortgage phase, but I want to be clear 92% of all the mortgages being originated over 90% are going through the GSEs right now.

And the through-in and this is a huge $6 trillion market. There will be good times, there will be bad times but there will be some form changes obviously to the GSEs, but we feel this market is something that’s going to be around for a long time and you know we will always consider new things but we don’t think it's time to call quits on the agency model.

Unidentified Analyst

Thanks for your time.

Gary Kain

Thank you. I appreciate it.

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