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Mark,

Happy to weigh in. NLY has long been given low marks on governance. Here is an older 2010 clip from the corporate library blog (no longer active?) which was on the II board.

CEO Pay at Annaly Capital Management

Due to ongoing executive compensation concerns, The Corporate Library is affirming our governance risk rating for Annaly Capital Management. CEO Michael A. J. Farrell receives an annual bonus that is calculated as a percentage of the company’s book value. However, the actual determination of the bonus is loaded with discretionary elements so that the actual award is not actually performance-based. To this effect, the company did not adequately disclose the process used to award $17,722,781 to Mr. Farrell in fiscal 2009. Furthermore, his bonus amount is the second highest bonus (discretionary or otherwise) in our Board Analyst database. On top of that, Mr. Farrell’s base salary ($2,430,000) is more than 140% over the IRC tax deductibility limit and is the 13th highest total in our Board Analyst database for 2009. Finally, the only form of equity granted to the CEO in 2009 was in the form of stock options—a discretionary grant of 400,000 options—meaning that he received no equity that was truly performance-based. Taken together, these facts suggest that compensation practices at Annaly Capital Management are not sufficiently linked to company performance and therefore are not aligned with shareholders’ interests.


After Farrell's passing, and I believe in part due to criticism like this, the corporate structure has been reworked to NLY being managed by an outside entity that earns a % of assets under management (book value). The outside entity is owned by the NLY management. One might want to compare this to American Capital Agency (AGNC), which is managed by American Capital Asset Management LLC an indirect subsidiary of American Capital Ltd (ACAS) all effectively run by Malon Wilkis. And AGNC pays its 'related' manager 1.25% of shareholder equity, more than the 1.05% NLY pays.

Some, like John, see the outside management structure as selling the company to themselves for nothing. I don't concur. By requiring both stock ownership and having compensation tied to book value, NLY is reasonably aligned with shareholders in my opinion.

http://investor.annaly.com/file.aspx?IID=113558&FID=1669...

I'd point out that under the prior agreement (and even this one to a degree), NLY managers had no incentive at all to do a share buyback. But they did. Now, if there is very little activity on the buyback this past quarter, I will surely be disappointed.

I've listened to this company for years. They are unabashed capitalists, who have every intention of enriching themselves. But I have always felt they put shareholder interests at least in line with their own. This is a mREIT which has already survived periods where others failed; others that tried to milk the MBS market for all it could before it all fell apart, not manage to stay solvent for the long term. NLY is often making choices for the long term, often at the detriment of the short term gain. They would be the first to tell you this is both self serving, and in the interest of shareholders, and I agree.

I will also say, as a onetime investor of Chimera, that the situation there was quite worthy of strong criticism. I appreciate the effort to try to create an entity to take advantage of the non agency MBS market at the time of distress, but the quality of the effort was lacking. NLY tried to do this with commercial MBS and Crexus as well, but that effort has been largely unwound.

Ralph
Helical Investor
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