Annaly Capital Management, Inc. (NYSE:NLY)

geekdiver (69.79) Submitted: 8/22/2008 4:59:34 PM : Start Price: $8.81 NLY Score: -80.50

Potential zero.

I am cautious about including this, as they may do well. BUT - if there is any sort of haircut put on Freddie and Fannie debt, they're done. Absolutely done.

Instantaneous bankrupt done.

The math is simple - they lever up and buy GSE paper using borrowed funds and their (small) amount of capital.

Nice business, provided nothing happens to that paper.

Instantaneous explosion if something does.

Now here's the issue - Freddie and Fannie's book has 10% of its value (~530 billion between them) in liar loans of various sorts - I/Os, stated income, Option ARMs and Subprime. Why? Because THEY played "hedge fund."

This is why the GSEs WILL blow and why they WILL have to be rescued.

Ok, so what happens if The Fed's new model for that rescue is "tried" on them? You know, the one they talked about today at Jackson Hole? Creditors get a haircut?

Hmmm.... let's see, if the companies go into rundown and the bonds fetch 90 on average, and you're geared 8:1, how much do you lose?

"What is 80% of my money, Alex?"

Oh, and you still have operating expenses to pay, which means you are instantly on the edge of insolvency - if not breathing water.

Yep.