American Capital Agency Corp. (AGNC) Risk Factors. Have you read and understand them?

AGNC published its 2010 annual report a month or so ago.  There are 18 pages of risks.  I have summarized them for you here.  Many of them will occur in the future due to the fragile nature of the fractional reserve banking system and the national socialist government interference into the mortgage markets.  I urge you to read and understand these risks before you invest your hard earned capital into American Capital Agency Corp.

I have said many times in the past that AGNC will continue to be a ultra high dividend stocks for the near term, but they will be decimated in the long term.  Plan and invest accordingly.  I believe that there are much better high dividend stocks out there in the stock market attractively priced with a safe dividend and a strong balance sheet.  I like the dry bulk shipper Safe Bulkers (SB) the best.  See my articles on this company for an example of a quality high dividend stock.

For a better understanding of the fraud that is fractional reserve banking read Murray Rothbard’s “The Mystery of Banking”.  This is the book that the FED would most want burned.  http://mises.org/resources/614/Mystery-of-Banking-The

For a brief introduction and warning on GSE’s (Fannie Mae and Freddie Mac) written back in the early 2000’s: http://mises.org/freemarket_detail.aspx?control=391

Item 1A. Risk Factors

You should carefully consider the risks described below and all other information contained in this Annual Report on Form 10-K, including our annual consolidated financial statements and the related notes thereto before making a decision to purchase our securities. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us, or not presently deemed material by us, may also impair our operations and performance.

If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. If that happens, the trading price of our securities could decline, and you may lose all or part of your investment.

Risks Related to Our Investing, Active Portfolio Management and Financing Strategy

1.     We may experience significant short-term gains or losses and, consequently, greater earnings volatility as a result of our active portfolio management strategy.

2.     The potential of the U.S. Government to limit or wind down the role Fannie Mae and Freddie Mac play in the mortgage-backed securities market may adversely affect our business, operations and financial condition.

3.     To the extent that we invest in agency securities that are guaranteed by Fannie Mae and Freddie Mac, we are subject to the risk that these U.S. Government-sponsored entities may not be able to fully satisfy their guarantee obligations or that these guarantee obligations may be repudiated, which may adversely affect the value of our investment portfolio and our ability to sell or finance these securities.

4.     New laws may be passed affecting the relationship between Fannie Mae or Freddie Mac, on the one hand, and the U.S. Government, on the other, which could adversely affect the availability and pricing of  agency securities and the ability to obtain financing against agency securities.

5.     Market conditions have disrupted the historical relationship between interest rate changes and prepayment trends, which make it more difficult for our Manager to analyze our investment portfolio.

6.     Continued adverse developments in the broader residential mortgage market may adversely affect the value of the agency securities in which we invest.

7.    Federal Reserve programs to purchase securities could have an adverse impact on the agency securities in which we invest.

8.    Changes in the underwriting standards by Freddie Mac or Fannie Mae could have an adverse impact on the agency securities in which we invest.

9.    Failure to procure adequate repurchase agreement financing, or to renew (roll) or replace existing repurchase agreement financing as it matures, would adversely affect our results of operations and may, in turn, negatively affect the market value of our common stock and our ability to make distributions to our stockholders.

10.  Pursuant to the terms of borrowings under our master repurchase agreements, we are subject to margin calls that could result in defaults or force us to sell assets under adverse market conditions or through foreclosure.

11.  If our lenders pursuant to our repurchase transactions default on their obligations to resell the underlying agency security back to us at the end of the transaction term, or if the value of the underlying agency security has declined by the end of the term or if we default on our obligations under the transaction, we will lose money on these transactions.

12.  Differences in timing of interest rate adjustments on adjustable-rate agency securities we may acquire and our borrowings may adversely affect our profitability and our ability to make distributions to our stockholders.

13.  Interest rate caps on mortgages backing our adjustable rate agency securities may adversely affect our profitability.

14.  An increase in interest rates may cause a decrease in the volume of newly issued, or investor demand for, agency securities, which could adversely affect our ability to acquire assets that satisfy our investment objectives and to generate income and pay dividends, while a decrease in interest rates may cause an increase in the volume of newly issued, or investor demand for, agency securities, which could negatively affect the valuations for our agency securities and may adversely affect our liquidity profile.

15.  Because we invest in fixed-rate securities, an increase in interest rates on our borrowings may adversely affect our book value or our net interest income.

16.  Changes in prepayment rates may adversely affect our profitability.

17.  Changes in accounting rules may adversely affect our profitability.

18.  Our hedging strategies may not be successful in mitigating the risks associated with interest rates.

19.  Our use of certain hedging techniques may expose us to counterparty risks.

20.  Pursuant to the terms of our master swap agreements, we are subject to margin calls that could result in defaults or force us to sell assets under adverse market conditions or through foreclosure.

21.  We may fail to qualify for hedge accounting treatment.

22.  Our strategy involves significant leverage, which may cause substantial losses.

23.  Our rights under our repurchase agreements will be subject to the effects of the bankruptcy laws in the event of the bankruptcy or insolvency of us or our lenders under the repurchase agreements.

24.  Future offerings of debt securities, which would rank senior to our common stock upon our liquidation, and future offerings of equity securities, which could dilute our existing stockholders and may be senior to our common stock for the purposes of dividend and liquidating distributions, may adversely affect the market price of our common stock.

25.  We have not established a minimum dividend payment level and we cannot assure you of our ability to pay dividends in the future.

26.  The stock ownership limit imposed by the Internal Revenue Code for REITs and our amended and restated certificate of incorporation may restrict our business combination opportunities.

27.  The stock ownership limitation contained in our amended and restated certificate of incorporation generally does not permit ownership in excess of 9.8% of our common or capital stock, and attempts to acquire our common or capital stock in excess of these limits will be ineffective unless an exemption is granted by our Board of Directors.

28.  Anti-takeover provisions in our amended and restated certificate of incorporation and bylaws could discourage a change of control that our stockholders may favor, which could also adversely affect the market price of our common stock.

Risks Related to Conflicts of Interest in Our Relationship with Our Manager and American Capital

1.     The management agreement was not negotiated on an arm’s-length basis and the terms, including fees payable, may not be as favorable to us as if it were negotiated with an unaffiliated third party.

2.     We have no employees and our Manager is responsible for making all of our investment decisions. Certain of our Manager’s officers are employees of American Capital and are not required to devote any specific amount of time to our business and each of them may provide their services to American Capital, its affiliates and sponsored investment vehicles, which could result in conflicts of interest.

3.     We are completely dependent upon our Manager and certain key personnel of American Capital who provide services to us through the management agreement and the administrative services agreement and we may not find suitable replacements for our Manager and these personnel if the management agreement and the administrative services agreement are terminated or such key personnel are no longer available to us.

4.     We have no recourse to American Capital if it does not fulfill its obligations under the administrative services agreement.

5.     If we elect to not renew the management agreement without cause, we would be required to pay our Manager a substantial termination fee. These and other provisions in our management agreement make non-renewal of our management agreement difficult and costly.

6.     Our Manager’s management fee is based on the amount of our Equity and is payable regardless of our performance.

Risks Related to Our Business Structure

1.     Loss of our exemption from regulation pursuant to the Investment Company Act would adversely affect us.

2.    We are exposed to potential risks from legislation requiring companies to evaluate their internal control over financial reporting.

3.    We are highly dependent on information and communications systems. Any systems failures could significantly disrupt our business, which may, in turn, negatively affect our operations and the market price of our common stock and our ability to pay dividends to our stockholders.

Risks Related to Our Taxation as a REIT

1.    If we do not qualify as a REIT or fail to remain qualified as a REIT, we will be subject to tax as a regular corporation and could face a substantial tax liability, which would reduce the amount of cash available for distribution to our stockholders.

2.    Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

3.    REIT distribution requirements could adversely affect our ability to execute our business plan.

4.    Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.

5.    Complying with REIT requirements may cause us to forgo otherwise attractive opportunities.

6.    Complying with REIT requirements may force us to liquidate otherwise attractive investments.

7.    The failure of agency securities subject to repurchase agreements to qualify as real estate assets could adversely affect our ability to qualify as a REIT.

8.    Liquidation of assets may jeopardize our REIT qualification.

9.    Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.

10.  Qualifying as a REIT involves highly technical and complex provisions of the Internal Revenue Code.

11.  As a REIT, if we derive net income from prohibited transactions (as defined in the Internal Revenue Code provisions) it is subject to a 100% tax.

Risks Related to Our Common Stock

1.    Changes in laws or regulations governing our operations or our failure to comply with those laws or regulations may adversely affect our business.

2.    The market price of our common stock may fluctuate significantly.

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Published in: on June 16, 2011 at 2:43 pm  Leave a Comment  

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