View Filing Data

Document and Entity Information - shares	3 Months Ended
Document and Entity Information - shares	Mar. 31, 2011	Apr. 30, 2011
Document and Entity Information
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Mar. 31, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q1
Entity Registrant Name	American Capital Agency Corp
Entity Central Index Key	0001423689
Entity Filer Category	Large Accelerated Filer
Current Fiscal Year End Date	--12-31
Entity Common Stock, Shares Outstanding		128,828,759
Trading Symbol	AGNC

Consolidated Balance Sheets - USD ($) $ in Thousands	Mar. 31, 2011	Dec. 31, 2010
Assets:
Agency securities, at fair value (including pledged assets of $23,263,144 and $12,270,909, respectively)	$ 28,192,575	$ 13,510,280
Cash and cash equivalents	300,574	173,258
Restricted cash	75,221	76,094
Interest receivable	102,438	56,485
Derivative assets, at fair value	142,047	76,593
Receivable for agency securities sold	298,320	258,984
Principal payments receivable	42,667	75,524
Receivable under reverse repurchase agreements		247,438
Other assets	1,121	1,173
Total assets	29,154,963	14,475,829
Liabilities:
Repurchase agreements	21,994,039	11,680,092
Other debt	67,845	72,927
Payable for agency securities purchased	3,504,600	727,374
Derivative liabilities, at fair value	92,658	78,590
Dividend payable	135,280	90,798
Obligation to return securities borrowed under reverse repurchase agreements, at fair value		245,532
Accounts payable and other accrued liabilities	16,040	8,452
Total liabilities	25,810,462	12,903,765
Stockholders' equity:
Preferred stock, $0.01 par value; 10,000 shares authorized, 0 shares issued and outstanding, respectively
Common stock, $0.01 par value; 150,000 shares authorized, 128,829 and 64,856 shares issued and outstanding, respectively	1,288	649
Additional paid-in capital	3,314,119	1,561,908
Retained earnings	76,379	78,116
Accumulated other comprehensive loss	(47,285)	(68,609)
Total stockholders' equity	3,344,501	1,572,064
Total liabilities and stockholders' equity	$ 29,154,963	$ 14,475,829

Consolidated Statements of Operations and Comprehensive Income - USD ($) shares in Thousands, $ in Thousands	3 Months Ended
	Mar. 31, 2011	Mar. 31, 2010
Interest income:
Interest income	$ 164,493	$ 38,797
Interest expense	35,648	15,510
Net interest income	128,845	23,287
Other income, net:
Gain on sale of agency securities, net	4,220	27,408
Gain on derivative instruments and trading securities, net	11,529	5,920
Total other income, net	15,749	33,328
Expenses:
Management fees	8,454	1,784
General and administrative expenses	2,597	1,681
Total expenses	11,051	3,465
Net income	$ 133,543	$ 53,150
Net income per common share-basic and diluted	$ 1.48	$ 2.13
Weighted average number of common shares outstanding-basic and diluted	90,304	25,002
Dividends declared per common share	$ 1.4	$ 1.4
Comprehensive income:
Net income	$ 133,543	$ 53,150
Other comprehensive income (loss):
Unrealized (loss) gain on available-for-sale securities, net	(39,802)	1,933
Unrealized gain (loss) on designated derivative instruments, net	61,126	(13,476)
Other comprehensive income (loss)	21,324	(11,543)
Comprehensive income	$ 154,867	$ 41,607

Consolidated Statement of Stockholders' Equity shares in Thousands, $ in Thousands	3 Months Ended
	Mar. 31, 2011 USD ($) shares
Statement [Line Items]
Balance, value	$ 1,572,064
Balance, Preferred Stock, shares \| shares	0
Balance, Common Stock, shares \| shares	64,856
Net income	$ 133,543
Other comprehensive income (loss):
Unrealized loss on available-for-sale securities, net	(39,802)
Unrealized gain on designated derivative instruments	61,126
Issuance of common stock, value	1,752,812
Stock-based compensation	38
Common dividends declared	(135,280)
Balance, value	$ 3,344,501
Balance, Preferred Stock, shares \| shares	0
Balance, Common Stock, shares \| shares	128,829
Preferred Stock [Member]
Statement [Line Items]
Balance, value
Balance, Preferred Stock, shares \| shares
Net income
Other comprehensive income (loss):
Unrealized loss on available-for-sale securities, net
Unrealized gain on designated derivative instruments
Issuance of common stock, value
Issuance of restricted stock, value
Stock-based compensation
Common dividends declared
Balance, value
Balance, Preferred Stock, shares \| shares
Common Stock [Member]
Statement [Line Items]
Balance, value	$ 649
Balance, Common Stock, shares \| shares	64,856
Other comprehensive income (loss):
Issuance of common stock, value	$ 639
Issuance of common stock, shares \| shares	63,964
Issuance of restricted stock, shares \| shares	9
Balance, value	$ 1,288
Balance, Common Stock, shares \| shares	128,829
Additional Paid-in Capital [Member]
Statement [Line Items]
Balance, value	$ 1,561,908
Other comprehensive income (loss):
Issuance of common stock, value	1,752,173
Stock-based compensation	38
Balance, value	3,314,119
Retained Earnings [Member]
Statement [Line Items]
Balance, value	78,116
Net income	133,543
Other comprehensive income (loss):
Common dividends declared	(135,280)
Balance, value	76,379
Accumulated Other Comprehensive (Loss) Income [Member]
Statement [Line Items]
Balance, value	(68,609)
Other comprehensive income (loss):
Unrealized loss on available-for-sale securities, net	(39,802)
Unrealized gain on designated derivative instruments	61,126
Balance, value	$ (47,285)

Consolidated Statements of Cash Flows - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2011	Mar. 31, 2010
Operating activities:
Net income	$ 133,543	$ 53,150
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of agency security premiums and discounts, net	48,019	12,259
Amortization of interest rate swap termination fee		3,676
Stock-based compensation	38	17
Gain on sale of agency securities, net	(4,220)	(27,408)
Gain on derivative instruments and trading securities, net	(11,529)	(5,920)
Purchases of trading securities	(410,023)
Proceeds from sale of trading securities	410,586
Proceeds from reverse repurchase agreements, net	247,438
(Increase) decrease in interest receivable	(45,953)	1,732
Decrease in other assets	52	126
Increase (decrease) in accounts payable and other accrued liabilities	7,588	(1,334)
Net cash provided by operating activities	375,539	36,298
Investing activities:
Purchases of agency securities	(14,688,180)	(3,056,410)
Proceeds from sale of agency securities	1,900,341	1,916,207
Net (payments on) proceeds from derivative instruments not designated as qualifying hedges	(227,507)	794
Principal collections on agency securities	795,371	175,205
Net cash used in investing activities	(12,219,975)	(964,204)
Financing activities:
Cash dividends paid	(90,798)	(34,050)
Decrease (increase) in restricted cash	873	(7,002)
Proceeds from repurchase agreements, net	10,313,947	809,281
Repayments on other debt	(5,082)
Net proceeds from common stock issuances	1,752,812	62,138
Net cash provided by financing activities	11,971,752	830,367
Net change in cash and cash equivalents	127,316	(97,539)
Cash and cash equivalents at beginning of period	173,258	202,803
Cash and cash equivalents at end of period	$ 300,574	$ 105,264

Summary of Significant Accounting Policies	3 Months Ended
Summary of Significant Accounting Policies	Mar. 31, 2011
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies	Note 3. Summary of Significant Accounting Policies *Investments in Agency Securities* Accounting Standards Codification ("ASC") Topic 320, Investments—Debt and Equity Securities ("ASC 320"), requires that at the time of purchase, we designate a security as held-to-maturity, available-for-sale or trading, depending on our ability and intent to hold such security to maturity. Securities classified as trading and available-for-sale are reported at fair value, while securities classified as held-to-maturity are reported at amortized cost. We may, from time to time, sell any of our agency securities as part of our overall management of our investment portfolio. Accordingly, we typically designate our agency securities as available-for-sale. All securities classified as available-for-sale are reported at fair value, with unrealized gains and losses reported in other comprehensive income (loss) ("OCI"), a component of stockholders' equity. Upon the sale of a security, we determine the cost of the security and the amount of unrealized gains or losses to reclassify out of accumulated OCI into earnings based on the specific identification method. Interest-only securities and inverse interest-only securities (collectively referred to as "interest-only securities") represent our right to receive a specified proportion of the contractual interest flows of specific agency and CMO securities. Interest-only securities are measured at fair value through earnings in gain (loss) on derivative instruments and trading securities, net in our consolidated statements of operations and comprehensive income. Our investments in interest-only securities are included in agency securities, at fair value on the accompanying consolidated balance sheets. We estimate the fair value of our agency securities based on a market approach using Level 2 inputs from third-party pricing services and dealer quotes. The third-party pricing services use pricing models that incorporate such factors as coupons, primary and secondary mortgage rates, prepayment speeds, spread to the Treasury and interest rate swap curves, convexity, duration, periodic and life caps and credit enhancements. The dealer quotes incorporate common market pricing methods, including a spread measurement to the Treasury or interest rate swap curve as well as underlying characteristics of the particular security including coupon, periodic and life caps, rate reset period, issuer, additional credit support and expected life of the security. We evaluate securities for other-than-temporary impairment ("OTTI") on at least a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. Based on the criteria in ASC 320, the determination of whether a security is other-than-temporarily impaired involves judgments and assumptions based on subjective and objective factors. When an agency security is impaired, an OTTI is considered to have occurred if (i) we intend to sell the agency security (i.e. a decision has been made as the reporting date) or (ii) it is more likely than not that we will be required to sell the agency security before recovery of its amortized cost basis. If we intend to sell the security or if it is more likely than not that we will be required to sell the agency security before recovery of its amortized cost basis, the entire amount of the impairment loss, if any, is recognized in earnings as a realized loss and the cost basis of the security is adjusted to its fair value. We did not recognize any OTTI charges on any of our agency securities for three months ended March 31, 2011 and 2010. *Interest Income* Interest income is accrued based on the outstanding principal amount of the agency securities and their contractual terms. Premiums and discounts associated with the purchase of agency securities are amortized or accreted into interest income over the projected lives of the securities, including contractual payments and estimated prepayments using the interest method in accordance with ASC Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs ("ASC 310-20"). We estimate long-term prepayment speeds using a third-party service and market data. The third-party service estimates prepayment speeds using models that incorporate the forward yield curve, current mortgage rates, current mortgage rates of the outstanding loans, loan age, volatility and other factors. We review the prepayment speeds estimated by the third-party service and compare the results to market consensus prepayment speeds, if available. We also consider historical prepayment speeds and current market conditions to validate the reasonableness of the prepayment speeds estimated by the third-party service and based on our Manager's judgment we may make adjustments to their estimates. Actual and anticipated prepayment experience is reviewed quarterly and effective yields are recalculated when differences arise between the previously estimated future prepayments and the amounts actually received plus current anticipated future prepayments. If the actual and anticipated future prepayment experience differs from our prior estimate of prepayments, we are required to record an adjustment in the current period to the amortization or accretion of premiums and discounts for the cumulative difference in the effective yield through the reporting date. In addition, pursuant to ASC 310-20, the yield on our adjustable rate securities assumes that the securities reset at a rate equal to the underlying index rate in effect as of the date we acquired the security plus the stated margin. Consequently, future reset rate assumptions incorporated in our asset yields may differ materially from future reset rates implied by the forward yield curve and the actual reset rates ultimately achieved. Further, notwithstanding changes to our actual and projected constant prepayment rate ("CPR") assumptions, the lower our reset rate assumption is pursuant to ASC 310-20 than the current fixed rate in effect, the greater the rate of premium amortization we will recognize over the initial fixed rate period. Our adjustable rate portfolio was acquired for a premium above par value and most securities were acquired during a period of historically low index rates. Accordingly, the majority of the premium balance on our adjustable rate securities will be amortized prior to their first reset date, regardless of actual or forecasted prepayment speeds and changes in the underlying index rates prior to actual reset. Adjustable rate securities acquired during a different interest rate environment may experience a different premium amortization pattern even as current index rates remain near their historical lows. *Derivative and other Hedging Instruments* We maintain a risk management strategy, under which we use a variety of strategies to hedge some of our exposure to interest rate risk. The objective of our risk management strategy is to reduce fluctuations in book value and generate additional income distributable to stockholders. In particular, we attempt to mitigate the risk of the cost of our variable rate liabilities increasing during a period of rising interest rates. The principal instruments that we use are interest rate swaps and options to enter into interest rate swaps ("interest rate swaptions"). We also purchase or sell to-be-announced forward contracts ("TBAs"), forward contracts for specified agency securities and U.S. Treasury securities, purchase or write put or call options on TBA securities and invest in other types of mortgage derivatives, such as interest-only securities, and synthetic total return swaps, such as the Markit IOS Synthetic Total Return Swap Index ("Markit IOS Index"). We account for derivative instruments in accordance with ASC Topic 815, Derivatives and Hedging ("ASC 815"). ASC 815 requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet and to measure those instruments at fair value. Hedging instruments that are not derivatives under ASC 815 are accounted for in accordance with ASC 320. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives that are intended to hedge exposure to variability in expected future cash flows are considered cash flow hedges. For derivatives designated in qualifying cash flow hedging relationships, the effective portion of the fair value adjustments is initially recorded in OCI (a component of stockholders' equity) and reclassified to income at the time that the hedged transactions affect earnings. The ineffective portion of the fair value adjustments is immediately recognized in gain (loss) on derivative instruments and trading securities, net. When the underlying hedged transaction ceases to exist, any amounts that have been previously recorded in accumulated OCI would be reclassified to net income and all subsequent changes in the fair value of the instrument would be included in gain (loss) on derivative instruments and trading securities, net for each period until the derivative instrument matures or is settled. For derivatives not designated in hedging relationships under ASC 815, the fair value adjustments are recorded in gain (loss) on derivative instruments and trading securities, net. Derivatives in a gain position are reported as derivative assets at fair value and derivatives in a loss position are reported as derivative liabilities at fair value in our consolidated balance sheet. In our consolidated statements of cash flows, cash receipts and payments related to derivative instruments are classified according to the underlying nature or purpose of the derivative transaction, generally in the operating section for derivatives designated in hedging relationships and the investing section for derivatives not designated in hedging relationships. The use of derivatives creates exposure to credit risk relating to potential losses that could be recognized in the event that the counterparties to these instruments fail to perform their obligations under the contracts. We attempt to minimize this risk by limiting our counterparties to major financial institutions with acceptable credit ratings and monitoring positions with individual counterparties. Interest rate swap agreements We use interest rate swaps to hedge the variable cash flows associated with short-term borrowings made under our repurchase agreement facilities. We generally enter into such derivatives with the intention of qualifying for hedge accounting under ASC 815. We estimate the fair value of interest rate swaps based on inputs from a third-party pricing model. The third-party pricing model incorporates such factors as the Treasury curve, LIBOR rates, and the pay rate on the interest rate swaps. We also incorporate both our own and our counterparties' nonperformance risk in estimating the fair value of our interest rate swap and swaption agreements. In considering the effect of nonperformance risk, we consider the impact of netting and credit enhancements, such as collateral postings and guarantees, and have concluded that our own and our counterparty risk is not significant to the overall valuation of these agreements. Interest rate swaptions We may purchase interest rate swaptions to help mitigate the potential impact of increases or decreases in interest rates on the performance of our investment portfolio (referred to as "convexity risk"). The interest rate swaptions provide us the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay and receive interest rates in the future. The premium paid for interest rate swaptions is reported as an asset in our consolidated balance sheets. The premium is valued at an amount equal to the fair value of the swaption that would have the effect of closing the position adjusted for nonperformance risk, if any. The difference between the premium and the fair value of the swaption is reported in gain (loss) on derivative instruments and trading securities, net in our consolidated statement of operations and comprehensive income. If a swaption expires unexercised, the loss on the swaption would be equal to the premium paid. If we sell or exercise a swaption, the realized gain or loss on the swaption would be equal to the difference between the cash or the fair value of the underlying interest rate swap received and the premium paid. We estimate the fair value of interest rate swaptions based on the fair value of the future interest rate swap that we have the option to enter into as well as the remaining length of time that we have to exercise the option. TBA securities A TBA security is a futures contract for the purchase or sale of agency securities at a predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date. The specific agency securities delivered into the contract upon the settlement date, published each month by the Securities Industry and Financial Markets Association, are not known at the time of the transaction. TBA securities are exempt from ASC 815 and are accounted for under ASC 320 if there is no other way to purchase or sell that security, if delivery of that security and settlement will occur within the shortest period possible for that type of security and if it is probable at inception and throughout the term of the individual contract that physical delivery of the security will occur (referred to as the "regular-way" exception). Alternatively, we may designate the TBA security as a qualifying cash flow hedge under ASC 815 if the regular-way exception is not met and at the time of the purchase or sale of the security, and throughout the term of the individual contract, it is probable that the forecasted transaction will occur and the hedging relationship is expected to be highly effective. For TBA security contracts that we have entered into, we have generally not asserted that physical settlement is probable or that the forecasted transaction is probable of occurring and, therefore, we typically have not designated these forward commitments as hedging instruments. Realized and unrealized gains and losses associated with TBA contracts not subject to the regular-way exception or not designated as hedging instruments are recognized in our consolidated statement of operations and comprehensive income in the line item gain (loss) on derivative instruments and trading securities, net. We estimate the fair value of TBA securities based on similar methods used to value agency securities. Put and call options on TBA securities We may purchase put and call options on TBA securities to hedge against short-term changes in interest rates. Under a purchased put option, we have the right to sell to the counterparty a specified TBA security at a predetermined price on the option exercise date in exchange for a premium at execution. Under a purchased call option, we have the right to purchase from the counterparty a specified TBA security at a predetermined price on the option exercise date in exchange for a premium at execution. The premium paid for a put or call option is reported as an asset in our consolidated balance sheets. The premium is valued at an amount equal to the fair value of the option that would have the effect of closing the position adjusted for nonperformance risk, if any. The difference between the premium and the fair value of the option is reported in gain (loss) on derivative instruments and trading securities, net in our consolidated statement of operations and comprehensive income. When a purchased put or call option expires unexercised, a realized loss is reported in our consolidated statement of operations and comprehensive income equal to the premium paid. When a purchased put or call option is exercised, a realized gain or loss is reported in our consolidated statement of operations and comprehensive income equal to the difference between the premium paid and the fair value of the exercised put or call option. In addition, a derivative asset is recorded in our consolidated balance sheet for the TBA security resulting from the put or call option exercise. We may also write put and call options on TBA securities. Under a written put option, the counterparty has the right to sell us a specified TBA security at a predetermined price on the option exercise date in exchange for a premium at execution. Under a written call option, the counterparty has the right to purchase from us a specified TBA security at a predetermined price on the option exercise date in exchange for a premium at execution. The premium received from writing a put or call option is reported as a liability in our consolidated balance sheets. The premium is valued at an amount equal to the fair value of the option that would have the effect of closing the position adjusted for nonperformance risk, if any. The difference between the premium and the fair value of the option is reported in gain (loss) on derivative instruments and trading securities, net in our consolidated statement of operations and comprehensive income. When a written put or call option expires unexercised, a realized gain is reported in our consolidated statement of operations equal to the premium received. When we terminate a written put or call option, a realized gain or loss is reported in our consolidated statement of operations equal to the difference between the termination payment and the premium received. When a written put or call option is exercised, a realized gain or loss is reported in our consolidated statement of operations equal to the difference between the premium received and the fair value of the exercised put or call option. In addition, a derivative asset or liability is recorded in our consolidated balance sheet for the TBA security resulting from the put or call option exercise. We estimate the fair value of put and call options on TBA securities based on the fair value of the underlying TBA security as well as the remaining length of time to exercise the option. Forward commitments to purchase or sell specified agency securities We may enter into a forward commitment to purchase or sell specified agency securities as a means of acquiring assets or as a hedge against short-term changes in interest rates. Contracts for the purchase or sale of specified agency securities are accounted for as derivatives if the delivery of the specified agency security and settlement extends beyond the shortest period possible for that type of security. We may designate the forward commitment as a qualifying cash flow hedge if at the time of the purchase or sale of the security, and throughout the term of the individual contract, it is probable that physical delivery of the security will occur. Realized and unrealized gains and losses associated with forward commitments not designated as hedging instruments are recognized in our consolidated statement of operations and comprehensive income in the line item gain (loss) on derivative instruments and trading securities, net. We estimate the fair value of forward commitments to purchase or sell specified agency securities based on similar methods used to value agency securities as well as the remaining length of time of the forward commitment. U.S. Treasury securities We may purchase or sell short U.S. Treasury securities to help mitigate the potential impact of changes in interest rates on the performance of our portfolio. We may borrow securities to cover short sales of U.S. Treasury securities under reverse repurchase agreements. We account for these as securities borrowing transactions and recognize an obligation to return the borrowed securities at fair value on the balance sheet based on the value of the underlying borrowed securities as of the reporting date. Realized and unrealized gains and losses associated with purchases and short sales of Treasury Securities are recognized in gains (losses) on derivative instruments and trading securities, net in our consolidated statements of operations and comprehensive income. Total return swaps We may enter into total return swaps to obtain exposure to a security or market sector without owning such security or investing directly in that market sector. Total return swaps are agreements in which there is an exchange of cash flows whereby one party commits to make payments based on the total return (coupon plus the mark-to-market movement) of an underlying instrument or index in exchange for fixed or floating rate interest payments. To the extent the total return of the instrument or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, we will receive a payment from or make a payment to the counterparty. The primary total return swap index in which we invest is the Markit IOS Index. Total return swaps based on the Markit IOS index are intended to synthetically replicate the performance of interest-only securities. We determine the fair value of our total return swaps based on published index prices. Realized and unrealized gains and losses associated with changes in market value of the underlying index and coupon interest are recognized in gain (loss) on derivative instruments and trading securities, net in our consolidated statements of operations and comprehensive income. *Variable Interest Entities* ASC Topic 810, Consolidation ("ASC 810") , requires a qualitative assessment in determining the primary beneficiary of a variable interest entities ("VIEs") and ongoing assessments of control over such entities as well as additional disclosures for entities that have variable interests in VIEs. We may enter into transactions involving a CMO trust (e.g. a VIE) whereby we transfer agency securities to an investment bank in exchange for cash proceeds and at the same time enter into a commitment with the same investment bank to purchase to-be-issued securities collateralized by the agency securities transferred. We will consolidate a CMO trust (as it relates to the assets transferred or contributed by us and the related liabilities issued by the trust) if we are the CMO trust's primary beneficiary; that is, if we have a variable interest (or combination of variable interests) that provides us with a controlling financial interest in the CMO trust. An entity is deemed to have a controlling financial interest if the entity has the power to direct the activities of a VIE that most significantly impacts the VIE's economic performance and the obligation to absorb losses of or right to receive benefits from the VIE that could potentially be significant to the VIE. In determining if we have a controlling financial interest, we evaluate whether we share the power to control the selection of financial assets transferred to the CMO trust with an unrelated party. We may share power in the selection of assets for certain CMO trusts (i.e., both we and the unrelated party must consent to the transfer of such assets to the CMO trust); however, if our economic interest in the CMO trust is disproportionate to the shared power, we may be deemed to be the primary beneficiary. *Recent Accounting Pronouncements* In April 2011, the Financial Accounting Standards Board issued ASU No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements ("ASU 2011-03"), which is intended to improve the accounting for repurchase agreements by removing from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, as well as implementation guidance related to that criterion. ASU 2011-03 is effective for the first interim or annual period beginning on or after December 15, 2011 and the guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. We do not believe the adoption of ASU 2011-03 will have a material impact on our consolidated financial statements.

Agency Securities

3 Months Ended

Mar. 31, 2011

Agency Securities

Agency Securities

Note 4. Agency Securities

The following tables summarize our investments in agency securities as of March 31, 2011 (dollars in thousands):


	As of March 31, 2011
	Fannie Mae			Freddie Mac			Ginnie Mae			Total
Agency securities classified as available-for-sale:
Agency securities, par	$	17,870,437		$	9,072,872		$	115,198		$	27,058,507
Unamortized discount		(1,007	)		(1,100	)		—			(2,107	)
Unamortized premium		773,614			315,195			4,766			1,093,575

Amortized cost		18,643,044			9,386,967			119,964			28,149,975
Gross unrealized gains		60,690			21,532			428			82,650
Gross unrealized losses		(88,710	)		(61,319	)		(372	)		(150,401	)

Available-for-sale securities, at fair value		18,615,024			9,347,180			120,020			28,082,224

Agency securities remeasured at fair value through earnings:
Interest-only securities, amortized cost(1)		43,087			60,246			—			103,333
Gross unrealized gains		3,519			3,739			—			7,258
Gross unrealized losses		(197	)		(43	)		—			(240	)

Agency securities measured at fair value through earnings, at fair value		46,409			63,942			—			110,351

Total agency securities, at fair value	$	18,661,433		$	9,411,122		$	120,020		$	28,192,575


Weighted average coupon as of March 31, 2011(2)		4.59%			4.49%			4.28%			4.56%
Weighted average yield as of March 31, 2011(3)		3.49%			3.45%			2.18%			3.47%
Weighted average yield for the three months ended March 31, 2011(3)		3.49%			3.23%			1.98%			3.39%

(1)

Interest-only securities represent the right to receive a specified portion of the contractual interest flows of the underlying unamortized principal balance of specific CMO securities. The underlying unamortized principal balance of our Fannie Mae and Freddie Mac interest-only securities was $340.3 million and $450.6 million, respectively, or a total of $790.9 million, and the weighted average contractual interest we are entitled to receive was 5.27% of these amounts as of March 31, 2011.

(2)

The weighted average coupon includes the interest cash flows from our interest-only securities taken together with the interest cash flows from our fixed-rate, adjustable-rate and CMO securities as a percentage of the par value of our agency securities (excluding the underlying unamortized principal balance of our interest-only securities) as of March 31, 2011.

(3)

Incorporates an average future constant prepayment rate assumption of 10% based on forward rates as of March 31, 2011 and an average reset rate for adjustable rate securities of 2.73%, which is equal to the average underlying index rate of 0.91% based on the current spot rate in effect as of the date we acquired the securities and an average margin of 1.82%.


	As of March 31, 2011
	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
Fixed-Rate	$	22,968,175	$	45,533	$	(137,799	)	$	22,875,909
Adjustable-Rate		4,898,586		30,010		(12,602	)		4,915,994
CMO		283,214		7,107		—			290,321
Interest-only securities		103,333		7,258		(240	)		110,351

Total agency securities	$	28,253,308	$	89,908	$	(150,641	)	$	28,192,575

The following tables summarize our investments in agency securities as of December 31, 2010 (dollars in thousands):


	As of December 31, 2010
	Fannie Mae			Freddie Mac			Ginnie Mae			Total
Agency securities classified as available-for-sale:
Agency securities, par	$	8,207,464		$	4,599,712		$	100,408		$	12,907,584
Unamortized discount		(930	)		(1,044	)		—			(1,974	)
Unamortized premium		350,747			220,465			4,670			575,882

Amortized cost		8,557,281			4,819,133			105,078			13,481,492
Gross unrealized gains		56,181			11,929			384			68,494
Gross unrealized losses		(53,893	)		(42,356	)		(196	)		(96,445	)

Available-for-sale securities, at fair value		8,559,569			4,788,706			105,266			13,453,541

Agency securities remeasured at fair value through earnings:
Interest-only securities, amortized cost(1)		18,957			33,447			—			52,404
Gross unrealized gains		1,559			3,356			—			4,915
Gross unrealized losses		(91	)		(489	)		—			(580	)

Agency securities measured at fair value through earnings, at fair value		20,425			36,314			—			56,739

Total agency securities, at fair value	$	8,579,994		$	4,825,020		$	105,266		$	13,510,280


Weighted average coupon as of December 31, 2010(2)		4.63%			4.83%			4.37%			4.70%
Weighted average yield as of December 31, 2010(3)		3.34%			3.28%			2.14%			3.31%
Weighted average yield for the year ended December 31, 2010(3)		3.49%			3.42%			2.22%			3.44%

(1)

Interest-only securities represent the right to receive a specified portion of the contractual interest flows of the underlying unamortized principal balance of specific CMO securities. The underlying unamortized principal balance of our Fannie Mae and Freddie Mac interest-only securities was $230.0 million and $314.7 million, respectively, or a total of $544.7 million, and the weighted average contractual interest we are entitled to receive was 4.95% of these amounts as of December 31, 2010.

(2)

(3)

Incorporates an average future constant prepayment rate assumption of 12% based on forward rates as of December 31, 2010 and an average reset rate for adjustable rate securities of 2.76%, which is equal to the average underlying index rate of 0.94% based on the current spot rate in effect as of the date we acquired the securities and an average margin of 1.82%.


	As of December 31, 2010
	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
Fixed-Rate	$	9,144,352	$	39,844	$	(82,717	)	$	9,101,479
Adjustable-Rate		3,942,937		20,955		(13,728	)		3,950,164
CMO		394,203		7,695		—			401,898
Interest-only securities		52,404		4,915		(580	)		56,739

Total agency securities	$	13,533,896	$	73,409	$	(97,025	)	$	13,510,280

Actual maturities of agency securities are generally shorter than the stated contractual maturities. Actual maturities are affected by the contractual lives of the underlying mortgages, periodic principal payments and principal prepayments. The following table summarizes our agency securities classified as available-for-sale as of March 31, 2011 and December 31, 2010, according to their estimated weighted average life classification (dollars in thousands):


	As of March 31, 2011							As of December 31, 2010
Weighted Average Life	Fair Value		Amortized Cost		Weighted Average Coupon			Fair Value		Amortized Cost		Weighted Average Coupon
Less than or equal to one year	$	4,243	$	4,296		4.39	%	$	—	$	—		—
Greater than one year and less than or equal to three years		103,442		102,369		4.97	%		133,123		132,520		5.05	%
Greater than three years and less than or equal to five years		7,254,072		7,224,166		4.70	%		3,841,282		3,821,992		4.92	%
Greater than five years		20,720,467		20,819,144		4.30	%		9,479,136		9,526,980		4.31	%

Total	$	28,082,224	$	20,149,975		4.40	%	$	13,453,541	$	13,481,492		4.49	%

The weighted average life of our interest-only securities was 6.5 and 6.2 years as of March 31, 2011 and December 31, 2010, respectively.

The weighted average lives of the agency securities as of March 31, 2011 and December 31, 2010 incorporates anticipated future prepayment assumptions. As of March 31, 2011, our weighted average expected constant prepayment rate ("CPR") over the remaining life of our aggregate investment portfolio is 10%. Our estimates differ materially for different types of securities and thus individual holdings have a wide range of projected CPRs. We estimate long-term prepayment assumptions for different securities using third-party services and market data. These third-party services estimate prepayment speeds using models that incorporate the forward yield curve, current mortgage rates, mortgage rates of the outstanding loans, loan age, volatility and other factors. We review the prepayment speeds estimated by the third-party services and compare the results to market consensus prepayment speeds, if available. We also consider historical prepayment speeds and current market conditions to validate reasonableness. As market conditions may change rapidly, we use our judgment in making adjustments for different securities. Various market participants could use materially different assumptions.

Our agency securities classified as available-for-sale are reported at fair value, with unrealized gains and losses excluded from earnings and reported in OCI, a component of stockholders' equity. The following table summarizes changes in accumulated OCI for available-for-sale securities for the three months ended March 31, 2011 and 2010 (in thousands):


	Beginning Balance			Unrealized Gains and (Losses)			Reversal of Prior Period Unrealized (Gains) and Losses on Realization			Ending Balance
Three months ended March 31, 2011	$	(27,950	)		(35,581	)		(4,220	)	$	(67,751	)
Three months ended March 31, 2010	$	36,018			29,341			(27,408	)	$	37,951

The following table presents the gross unrealized loss and fair values of our available-for-sale agency securities by length of time that such securities have been in a continuous unrealized loss position as of March 31, 2011 and December 31, 2010 (in thousands):


	Unrealized Loss Position For
	Less than 12 Months					12 Months or More				Total
	Estimated Fair Value		Unrealized Loss			Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss
March 31, 2011	$	16,301,073	$	(150,401	)	$	—	$	—	$	16,301,073	$	(150,401	)
December 31, 2010	$	7,498,384	$	(96,445	)	$	—	$	—	$	7,498,384	$	(96,445	)

As of March 31, 2011, we did not intend to sell any of these agency securities and we believe it is not more likely than not we will be required to sell the agency securities before recovery of their amortized cost basis. The unrealized losses on these agency securities are not due to credit losses given the government-sponsored entity or government guarantees but are rather due to changes in interest rates and prepayment expectations.

Gains and Losses

The following table is a summary of our net gain from sale of agency securities for the three months ended March 31, 2011 and 2010 (in thousands):


	Three Months Ended
	March 31, 2011			March 31, 2010
Agency securities sold, at cost	$	(1,935,457	)	$	(2,117,510	)
Proceeds from agency securities sold		1,939,677			2,144,918

Net gains on sale of agency securities	$	4,220		$	27,408

Gross gains on sale of agency securities	$	18,955		$	30,054
Gross losses on sale of agency securities		(14,735	)		(2,646	)

Net gains on sale of agency securities	$	4,220		$	27,408

For the three months ended March 31, 2011 and 2010, we recognized an unrealized gain of $2.7 million and $2.1 million in gain (loss) on derivative instruments and trading securities, net in our consolidated statements of operations and comprehensive income for the change in value of investments in interest-only securities. There were no sales of interest-only securities during the three months ended March 31, 2011 and 2010.

Pledged Assets

The following tables summarize our agency securities pledged as collateral under repurchase agreements, other debt, derivative agreements and prime broker agreements by type as of March 31, 2011 and December 31, 2010 (in thousands):


	As of March 31, 2011
Agency Securities Pledged(1)	Fannie Mae		Freddie Mac		Ginnie Mae		Total
Under Repurchase Agreements
Fair value	$	14,511,221	$	8,481,140	$	315,041	$	23,307,402
Amortized cost		14,537,123		8,512,587		315,394		23,365,104
Accrued interest on pledged agency securities		51,327		28,702		1,089		81,118

Under Other Debt Agreements
Fair value		72,446		—		—		72,446
Amortized cost		71,824		—		—		71,824
Accrued interest on pledged agency securities		299		—		—		299

Under Derivative Agreements
Fair value		34,189		48,186		—		82,375
Amortized cost		33,965		48,122		—		82,087
Accrued interest on pledged agency securities		129		181		—		310

Under Prime Broker Agreements
Fair value		21,408		44,901		—		66,309
Amortized cost		21,153		44,758		—		65,911
Accrued interest on pledged agency securities		80		156		—		236

Total Fair Value of Agency Securities Pledged and Accrued Interest	$	14,691,099	$	8,603,266	$	316,130	$	23,610,495

(1)	Agency securities pledged include pledged amounts of $265.4 million related to agency securities sold but not yet settled as of March 31, 2011.


	As of December 31, 2010
Agency Securities Pledged(2)	Fannie Mae		Freddie Mac		Ginnie Mae		Total
Under Repurchase Agreements
Fair value	$	7,707,046	$	4,554,541	$	95,066	$	12,356,653
Amortized cost		7,709,785		4,591,245		94,860		12,395,890
Accrued interest on pledged agency securities		27,589		15,642		332		43,563

Under Other Debt Agreements
Fair value		77,906		—		—		77,906
Amortized cost		77,460		—		—		77,460
Accrued interest on pledged agency securities		325		—		—		325

Under Derivative Agreements
Fair value		36,651		30,306		—		66,957
Amortized cost		36,343		30,382		—		66,725
Accrued interest on pledged agency securities		156		118		—		274

Under Prime Broker Agreements
Fair value		6,061		5,997		2,032		14,090
Amortized cost		6,061		6,061		2,024		14,146
Accrued interest on pledged agency securities		28		21		8		57

Total Fair Value of Agency Securities Pledged and Accrued Interest	$	7,855,762	$	4,606,625	$	97,438	$	12,559,825

(2)	Agency securities pledged include pledged amounts of $244.7 million related to agency securities sold but not yet settled as of December 31, 2010.

The following table summarizes our agency securities pledged as collateral under repurchase agreements and other debt by remaining maturity as of March 31, 2011 and December 31, 2010 (dollars in thousands):


	As of March 31, 2011(1)						As of December 31, 2010(1)
Remaining Maturity	Fair Value		Amortized Cost		Accrued Interest on Pledged Agency Securities		Fair Value		Amortized Cost		Accrued Interest on Pledged Agency Securities
30 days or less	$	19,617,054	$	19,671,265	$	67,809	$	9,909,121	$	9,943,239	$	35,151
31 - 59 days		3,762,794		3,765,663		13,608		2,525,438		2,530,111		8,737
60 - 90 days		—		—		—		—		—		—
Greater than 90 days		—		—		—		—		—		—

Total	$	23,379,848	$	23,436,928	$	81,417	$	12,434,559	$	12,473,350	$	43,888

(1)	Agency securities pledged include pledged amounts of $265.4 million and $244.7 million related to agency securities sold but not yet settled as of March 31, 2011 and December 31, 2010, respectively.

Securitizations

All of our CMO securities are backed by fixed or adjustable-rate agency securities and Fannie Mae or Freddie Mac guarantees the payment of interest and principal and acts as the trustee and administrator of their respective securitization trusts. Our involvement with the consolidated CMO trust described below is limited to the agency securities transferred to the trust by the investment bank and the CMO securities subsequently held by us. Accordingly, we are not required to provide the beneficial interest holders of the CMO securities any financial or other support. Whether or not we were involved with the formation of the CMO or purchased the securities from third parties in separate transactions, our maximum exposure to loss related to our involvement with CMO trusts is the fair value of the CMO securities and interest-only securities held by us. As of March 31, 2011 and December 31, 2010, the fair value of all of our CMO securities and interest-only securities, excluding the consolidated CMO trust discussed below, was $400.7 million and $458.6 million, respectively, or $405.3 million and $463.6 million, respectively, including the net asset value of the consolidated CMO trust discussed below.

During fiscal year 2010, we entered into a CMO transaction whereby we transferred agency securities with a cost basis of $85.9 million to an investment bank in exchange for cash proceeds of $80.8 million and at the same time entered into a commitment with the same investment bank to purchase a to-be-issued interest-only strip collateralized by the agency securities transferred for $5.1 million. The investment bank contributed the transferred agency securities to a securitization trust held by Fannie Mae in exchange for CMO securities issued by the trust. Once the transferred agency securities were transferred to the securitization trust, Fannie Mae may only remove such securities upon certain events. Pursuant to the pre-existing commitment, the investment bank transferred to us the interest-only security issued by the trust. Our primary purpose for entering into this transaction was to eliminate the need to finance the principal class by transferring it to third parties, while still retaining the underlying economics of a financed transaction for the transferred securities, which we viewed as favorable. We concluded that we were the primary beneficiary of the CMO trust based on our disproportionate economic interest and, accordingly, we consolidated the CMO trust as it related to the agency securities transferred by us and the related liabilities issued by the trust. The effect of consolidating the CMO trust was that the interest-only security received was eliminated and we continued to recognize the assets transferred to the securitization trust in our total agency securities held and recorded a corresponding liability for the debt issued by the securitization trust, which is classified as other debt in our accompanying consolidated balance sheets. As of March 31, 2011, we recognized agency securities with a total fair value of $72.4 million and a principal balance of $68.4 million collateralized the remaining debt outstanding issued by the securitization trust of $67.8 million. As of December 31, 2010, we recognized agency securities with a total fair value of $77.9 million and a principal balance of $73.5 million collateralized the remaining debt outstanding issued by the securitization trust of $72.9 million. Such agency securities can only be used to settle this debt and the holder(s) of the debt issued by the securitization trust have no recourse to us. Further, there are no arrangements that could require us to provide financial support to this securitization trust. The consolidation did not materially impact our accompanying consolidated statements of operations and comprehensive income and consolidated statements of cash flows.

Derivative and Other Hedging Instruments

3 Months Ended

Mar. 31, 2011

Derivative and Other Hedging Instruments

Derivative and Other Hedging Instruments

Note 6. Derivative and Other Hedging Instruments

In connection with our risk management strategy, we hedge a portion of our interest rate risk by entering into derivative and other hedging instrument contracts. We may enter into agreements for interest rate swap agreements, interest rate swaptions, interest rate cap or floor contracts and futures or forward contracts. We may also purchase or short TBA and U.S. Treasury securities, purchase or write put or call options on TBA securities or we may invest in other types of mortgage derivative securities, such as interest-only securities, and synthetic total return swaps, such as the IOS Index. Our risk management strategy attempts to manage the overall risk of the portfolio, reduce fluctuations in book value and generate additional income distributable to stockholders. For additional information regarding our derivative instruments and our overall risk management strategy, please refer to the discussion of derivative and other hedging instruments in Note 3.

As of March 31, 2011 and December 31, 2010, our derivative and other hedging instruments were comprised primarily of interest rate swaps, which have the effect of modifying the repricing characteristics of our repurchase agreements and cash flows on such liabilities. Our interest rate swaps are used to manage the interest rate risk created by our variable rate short-term repurchase agreements. Under our interest rate swaps, we typically pay a fixed-rate and receive a floating rate based on one-month LIBOR with terms usually ranging up to 5 years. Our interest rate swaps are generally designated as cash flow hedges under ASC 815.

Derivative and other hedging instruments entered into in addition to interest rate swap agreements are intended to supplement our use of interest rate swaps and we do not currently expect our use of these instruments to be the primary protection against interest rate risk for our portfolio. These instruments are accounted for as either derivatives, but are not typically designated as hedges under ASC 815, or trading securities. Therefore, any changes in the fair values of the contracts prior to their settlement date are included in earnings. We do not use derivative or other hedging instruments for speculative purposes.

Derivatives Designated as Hedging Instruments

As of March 31, 2011, we had net interest rate swap assets of $20.0 million and, as of December 31, 2010, net interest rate swap liabilities of $37.7 million. The tables below summarize information about our outstanding interest rate swaps as of March 31, 2011 and December 31, 2010 (dollars in thousands):


Interest Rate Swaps Designated as Hedging Instruments	Balance Sheet Location		As of
Interest Rate Swaps Designated as Hedging Instruments	Balance Sheet Location		March 31, 2011			December 31, 2010
Interest rate swap assets		Derivative assets, at fair value	$	80,920		$	33,695
Interest rate swap liabilities		Derivative liabilities, at fair value		(60,872	)		(71,417	)

			$	20,048		$	(37,722	)


	As of March 31, 2011
Remaining Term for Interest Rate Swaps Designated as Hedging Instruments(1)	Notional Amount		Average Fixed Pay Rate			Average Receive Rate			Net Estimated Fair Value			Average Maturity (Years)
1 year or less	$	750,000		1.40	%		0.25	%	$	(3,685	)		0.5
Greater than 1 year and less than 3 years		3,050,000		1.41	%		0.25	%		(20,377	)		2.1
Greater than 3 years and less than 5 years		7,050,000		1.69	%		0.25	%		24,587			3.7
Greater than 5 years		4,100,000		2.35	%		0.25	%		19,523			5.1

Total	$	14,950,000		1.80	%		0.25	%	$	20,048			3.6

(1)	Remaining term includes the effect of deferred start dates for forward starting swaps of $5.6 billion ranging from one to nine months from March 31, 2011.


	As of December 31, 2010
Remaining Term for Interest Rate Swaps Designated as Hedging Instruments	Notional Amount		Average Fixed Pay Rate			Average Receive Rate			Net Estimated Fair Value			Average Maturity (Years)
1 year or less	$	750,000		1.40	%		0.26	%	$	(5,595	)		0.7
Greater than 1 year and less than 3 years		2,850,000		1.54	%		0.26	%		(32,865	)		2.5
Greater than 3 years and less than 5 years		2,850,000		1.78	%		0.26	%		738			4.3
Greater than 5 years		—		—			—			—			—

Total	$	6,450,000		1.63	%		0.26	%	$	(37,722	)		3.1

The following table summarizes information about our outstanding interest rate swaps designated as hedging instruments for the three months ended March 31, 2011 and 2010 (in thousands):


Interest Rate Swaps Designated as Hedging Instruments	Beginning Notional Amount		Additions		Expirations/ Terminations		Ending Notional Amount
Three months ended March 31, 2011	$	6,450,000		8,500,000		—	$	14,950,000
Three months ended March 31, 2010	$	2,050,000		300,000		—	$	2,350,000

The table below summarizes the effect of interest rate swaps designated as hedges under ASC 815 on our consolidated statement of operations for the three months ended March 31, 2011 and 2010 (in thousands):


Interest Rate Swaps in Cash Flow Hedging Relationships	Amount of Gain or (Loss) Recognized in OCI (Effective Portion)			Location of Gain or (Loss) Reclassified from OCI into Earnings (Effective Portion)	Amount of Gain or (Loss) Reclassified from OCI into Earnings (Effective Portion)			Location of Gain or (Loss) Recognized in Earnings (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain or (Loss) Recognized in Earnings (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Three months ended March 31, 2011	$	57,901		Interest expense	$	(23,111	)	Gain on derivative instruments and trading securities, net	$	(132	)
Three months ended March 31, 2010	$	(17,334	)	Interest expense	$	(13,327	)	Gain on derivative instruments and trading securities, net	$	(192	)

As of March 31, 2011, the amount of net interest expense expected to flow through our statement of operations over the next twelve months due to expected net settlements on our interest rate swaps is $186.8 million.

Additionally, during the three months ended March 31, 2011 and 2010, we entered into or held forward contracts to purchase TBA and specified agency securities that were designated as cash flow hedges pursuant to ASC 815. The following table summarizes information about our outstanding forward contracts designated as hedging instruments for the three months ended March 31, 2011 and 2010 (dollars in thousands):


Purchases of TBAs and Forward Settling Agency Securities Designated as Hedging Instruments	Beginning Notional Amount		Additions		Settlement / Expirations			Ending Notional Amount		Fair Value as of Period End			Average Maturity as of Period End (Months)
Three months ended March 31, 2011	$	245,000		—		(245,000	)	$	—	$	—			—
Three months ended March 31, 2010	$	—		66,300		—		$	66,300	$	(10	)		1

The effective portion of gains or losses for TBAs and forward settling specified agency securities is initially recognized in OCI for designated cash flow hedges and is subsequently reclassified to OCI for available-for-sale securities upon acquisition of the underlying hedged item. The ineffective portion of gains or losses is recognized in earnings in gain (loss) on derivative instruments and trading securities, net.

The table below summarizes the effect of purchases of TBAs and forward settling securities designated as hedges under ASC 815 on our consolidated statement of operations and comprehensive income for the three months ended March 31, 2011 and 2010 (in thousands).


Purchases of TBAs and Forward Settling Securities in Cash Flow Hedging Relationships	Amount of Gain or (Loss) Recognized in OCI for Cash Flow Hedges (Effective Portion)			Amount of Gain or (Loss) Recognized in OCI for Cash Flow Hedges and Reclassified to OCI for Available-for-Sale Securities (Effective Portion)			Location of Gain or (Loss) Recognized in Earnings (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain or (Loss) Recognized in Earnings (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Three months ended March 31, 2011	$	12		$	(3,213	)	Gain on derivative instruments and trading securities, net	$	—
Three months ended March 31, 2010	$	(10	)	$	—		Gain on derivative instruments and trading securities, net	$	—

Derivatives Not Designated as Hedging Instruments

As of March 31, 2011 and December 31, 2010, we had contracts to purchase ("long position") and sell ("short position") TBA and specified agency securities on a forward basis. Following is a summary of our long and short TBA and forward settling positions as of March 31, 2011 and December 31, 2010 (in thousands).


	As of March 31, 2011						As of December 31, 2010
Purchase and Sale Contracts for TBA and Forward Settling Securities Not Designated as Hedging Instruments	Notional Amount			Fair Value			Notional Amount			Fair Value
15 Year Securities:
Purchase	$	3,823,000		$	(24,988	)	$	1,532,000		$	10,297
Sale		(2,342,000	)		9,527			(1,454,500	)		(3,127	)

15 Year Securities, Net		1,481,000			(15,461	)		77,500			7,170

20 Year Securities:
Purchase		—			—			125,000			(2,116	)
Sale		—			—			—			—

20 Year Securities, Net		—			—			125,000			(2,116	)

30 Year Securities:
Purchase		494,000			(1,204	)		784,303			3,509
Sale		(3,059,000	)		9,584			(1,835,700	)		6,738

30 Year Securities, Net		(2,565,000	)		8,380			(1,051,397	)		10,247

Total, Net	$	(1,084,000	)	$	(7,081	)	$	(848,897	)	$	15,301

As of March 31, 2011 and December 31, 2010, we had interest rate swap agreements outstanding that were not designated as hedges under ASC 815 consisting of interest rate swap agreements where we pay a fixed rate ("payer interest rate swaps") and interest rate swap agreements where we receive a fixed rate ("receiver interest rate swaps"), summarized in the tables below (dollars in thousands).


	As of March 31, 2011
Interest Rate Swaps Not Designated as Hedging Instruments	Maturity		Notional Amount		Average Fixed Pay (Receive) Rate			Average Receive (Pay) Rate		Fair Value		Average Maturity (Years)
Payer interest rate swaps		2015	$	250,000		1.66	%		0.26%	$	6,036		4.6
Receiver interest rate swaps		2015	$	100,000		-2.50	%		-0.25%	$	1,539		4.5


	As of December 31, 2010
Interest Rate Swaps Not Designated as Hedging Instruments	Maturity		Notional Amount		Average Fixed Pay (Receive) Rate			Average Receive (Pay) Rate		Fair Value		Average Maturity (Years)
Payer interest rate swaps		2015	$	250,000		1.66	%		0.26%	$	4,140		4.9
Receiver interest rate swaps		2015	$	200,000		-2.26	%		-0.26%	$	2,743		4.7

As of March 31, 2011 and December 31, 2010, we had interest rate swaption agreements outstanding consisting of options to enter into interest rate swaps in the future where we would pay a fixed rate ("payer swaptions") and options to enter into interest rate swaps in the future where we would receive a fixed rate ("receiver swaptions"), as summarized in the tables below (dollars in thousands):


	As of March 31, 2011
	Option						Underlying Swap
Swaption	Cost		Fair Value		Average Months to Expiration		Notional Amount		Pay Rate			Average Receive Rate		Average Term (Years)
Payer	$	20,372	$	21,287		7	$	2,100,000		3.16	%		1M LIBOR		6.1
Receiver		369		2		1		250,000		1M LIBOR			1.75%		5.0

	$	20,741	$	21,289			$	2,350,000


	As of December 31, 2010
	Option						Underlying Swap
Swaption	Cost		Fair Value		Average Months to Expiration		Notional Amount		Pay Rate			Average Receive Rate		Average Term (Years)
Payer	$	4,596	$	16,766		4	$	850,000		2.28	%		1M LIBOR		5.6

As of March 31, 2011, we had total return swaps outstanding linked to the Markit IOS Index, summarized in the table below, where we are entitled to receive the stated coupon, net of an implied financing cost equal to one-month LIBOR, plus/(minus) increases/(decreases) in the index market value ("long position"). Long positions linked to the index are intended to synthetically replicate the performance of interest-only securities. Therefore, as interest rates rise and prepayment expectations decline, the index will typically increase in value and, as interest rates fall and prepayment expectations rise, the index will typically decrease in value. As the holder of the long position, we are required to pay a monthly periodic cash settlement equal to a decrease in the index value and, conversely, we are entitled to receive a periodic cash settlement equal to an increase in the index value. Changes, or mark-to-market movements, in the index are measured from the preceding periodic measurement date. Periodic cash settlements of the index mark-to-market movements are netted against periodic cash settlements of the stated coupon, less the implied financing costs. As of March 31, 2011, the linked index values of our total return swaps totaled $215.9 million. As of March 31, 2011, the fair value of these total return swaps reported in derivative assets, at fair value on our consolidated balance sheet was $7.6 million and represents the unrealized mark-to-market change in the linked index value since the preceding measurement date through March 31, 2011. Realized and unrealized gains and losses associated with changes in the underlying linked index value and net coupon interest are recognized in gain (loss) on derivative instruments and trading securities, net in our consolidated statements of operations and comprehensive income. We did not have any total return swaps outstanding as of December 31, 2010.


	As of March 31, 2011
Markit IOS Sub-Index	Notional Amount		Expiration Date		Fair Value
5.0%, 30-year, fixed rate, Fannie Mae MBS pools	$	303,817		January 2040	$	3,038
5.5%, 30-year, fixed rate, Fannie Mae MBS pools		490,713		January 2039		2,760
6.0%, 30-year, fixed rate, Fannie Mae MBS pools		220,784		January 2039		1,760

	$	1,015,314			$	7,558

The table below summarizes fair value information about our derivatives outstanding that were not designated as hedging instruments as of March 31, 2011 and December 31, 2010 (in thousands).


Derivatives Not Designated as Hedging Instruments	Balance Sheet Location		As of
Derivatives Not Designated as Hedging Instruments	Balance Sheet Location		March 31, 2011			December 31, 2010
Purchase of TBA and forward settling agency securities		Derivative assets, at fair value	$	407		$	2,929
Sale of TBA and forward settling agency securities		Derivative assets, at fair value		24,298			16,320
Markit IOS Index total return swaps		Derivative assets, at fair value		7,558			—
Payer interest rate swaps		Derivative assets, at fair value		6,036			4,140
Receiver interest rate swaps		Derivative assets, at fair value		1,539			2,743
Payer swaptions		Derivative assets, at fair value		21,287			16,766
Receiver swaptions		Derivative assets, at fair value		2			—

			$	61,127		$	42,898

Purchase of TBA and forward settling agency securities		Derivative liabilities, at fair value	$	(26,598	)	$	(2,193	)
Sale of TBA and forward settling agency securities		Derivative liabilities, at fair value		(5,188	)		(1,755	)

			$	(31,786	)	$	(3,948	)

Additionally, as of December 31, 2010, we had obligations to return treasury securities borrowed under reverse repurchase agreements accounted for as securities borrowing transactions for a fair value of $245.5 million. The borrowed securities were used to cover short sales of treasury securities from which we received total proceeds of $244.8 million. The increase in fair value of the borrowed securities through December 31, 2010 was recorded as a loss of $0.7 million in gain (loss) on derivative instruments and trading securities, net in our consolidated statement of operations and comprehensive income for fiscal year 2010. As of March 31, 2011, we had no outstanding amounts under reverse repurchase agreements.

The tables below summarize the effect of derivative instruments not designated as hedges under ASC 815 on our consolidated statement of operations and comprehensive income for the three months ended March 31, 2011 and 2010 (in thousands):


	For the Three Months Ended March 31, 2011
Derivatives Not Designated as Hedging Instruments	Notional Amount as of December 31, 2010		Additions			Settlement, Expiration or Exercise			Notional Amount as of March 31, 2011		Amount of Gain/(Loss) Recognized in Income on Derivatives(1)
Purchase of TBA and forward settling agency securities	$	512,303		12,267,693			(8,463,896	)	$	4,316,100	$	(15,795	)
Sale of TBA and forward settling agency securities	$	1,361,200		18,320,770			(14,281,935	)	$	5,400,035		18,863
Payer interest rate swaps	$	250,000		—			—		$	250,000		965
Receiver interest rate swaps	$	200,000		—			(100,000	)	$	100,000		(1,773	)
Payer swaptions	$	850,000		1,550,000			(300,000	)	$	2,100,000		(5,036	)
Put options	$	—		(200,000	)		200,000		$	—		1,133
Receiver swaptions	$	—		250,000			—		$	250,000		(367	)
Short sales of U.S. government securities	$	250,000		2,915,000			(3,165,000	)	$	—		869
Markit IOS total return swaps—long	$	—		1,089,420			(74,106	)	$	1,015,314		9,556

											$	8,415

(1)

This amount excludes $2.7 million recorded as a gain for interest-only securities re-measured at fair value through earnings, a loss of $0.1 million for hedge ineffectiveness on our outstanding interest rate swaps designated as hedging instruments and a gain of $0.6 million from trading securities in gain on derivative instruments and trading securities, net in our consolidated statement of operations and comprehensive for the three months ended March 31, 2011.


	For the Three Months Ended March 31, 2010
Derivatives Not Designated as Hedging Instruments	Notional Amount as of December 31, 2009		Additions		Settlement, Expiration or Exercise			Notional Amount as of March 31, 2010		Amount of Gain/(Loss) Recognized in Income on Derivatives(1)
Purchase of TBA and forward settling agency securities	$	596,516		835,876		(1,247,724	)	$	184,668	$	4,238
Sale of TBA and forward settling agency securities	$	616,747		966,166		(1,247,913	)	$	335,000		2,746
Payer Swaptions	$	200,000		—		—		$	200,000		(1,791	)
Receiver Swaptions	$	100,000		100,000		(100,000	)	$	100,000		(376	)
Put Options	$	—		75,000		—		$	75,000		37
Interest rate swaps	$	—		100,000		(100,000	)	$	—		(831	)

										$	4,023

(1)

This amount excludes $2.1 million recorded as a gain for interest-only securities remeasured at fair value through earnings and a loss of $0.2 million for hedge ineffectiveness on our outstanding interest rate swaps designated as hedging instruments in gain (loss) on derivative instruments, net in our consolidated statements of operations and comprehensive for the three months ended March 31, 2010.

Credit Risk-Related Contingent Features

The use of derivatives creates exposure to credit risk relating to potential losses that could be recognized in the event that the counterparties to these instruments fail to perform their obligations under the contracts. We minimize this risk by limiting our counterparties to major financial institutions with acceptable credit ratings and monitoring positions with individual counterparties. In addition, we may be required to pledge assets as collateral for our derivatives, whose amounts vary over time based on the market value, notional amount and remaining term of the derivative contract. In the event of a default by a counterparty we may not receive payments provided for under the terms of our derivative agreements, and may have difficulty obtaining our assets pledged as collateral for our derivatives. The cash and cash equivalents and agency securities pledged as collateral for our derivative instruments is included in restricted cash and agency securities, respectively, on our consolidated balance sheets.

Each of our ISDA Master Agreements contains provisions under which we are required to fully collateralize our obligations under the swap instrument if at any point the fair value of the swap represents a liability greater than the minimum transfer amount contained within our agreements. We were also required to post initial collateral upon execution of certain of our swap transactions. If we breach any of these provisions, we will be required to settle our obligations under the agreements at their termination values.

Further, each of our ISDA Master Agreements also contains a cross default provision under which a default under certain of our other indebtedness in excess of a certain threshold causes an event of default under the agreement. Threshold amounts vary by lender. Following an event of default, we could be required to settle our obligations under the agreements at their termination values. Additionally, under certain of our ISDA Master Agreements, we could be required to settle our obligations under the agreements at their termination values if we fail to maintain certain minimum shareholders' equity thresholds or our REIT status or comply with limits on our leverage above certain specified levels.

As of March 31, 2011, the fair value of our interest rate swaps in a liability position related to these agreements was $60.9 million. We had agency securities with fair values of $82.4 million, and restricted cash of $75.2 million, or $157.6 million in total agency securities and restricted cash, pledged as collateral against our interest rate swaps, including initial collateral posted upon execution of interest rate swap and total return swap transactions, as of March 31, 2011. Termination values of interest rate swaps in a liability position totaled $62.7 million as of March 31, 2011. The difference between the fair value liability and the termination liability represents accrued interest and an adjustment for nonperformance risk of our counterparties.

Consolidated Balance Sheets (Parenthetical) - USD ($) shares in Thousands, $ in Thousands	Mar. 31, 2011	Dec. 31, 2010
Consolidated Balance Sheets
Agency securities, pledged assets	$ 23,263,144	$ 12,270,909
Preferred stock, par value	$ 0.01	$ 0.01
Preferred stock, shares authorized	10,000	10,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	150,000	150,000
Common stock, shares issued	128,829	64,856
Common stock, shares outstanding	128,829	64,856

Unaudited Interim Consolidated Financial Statements	3 Months Ended
Unaudited Interim Consolidated Financial Statements	Mar. 31, 2011
Unaudited Interim Consolidated Financial Statements
Unaudited Interim Consolidated Financial Statements	Note 1. Unaudited Interim Consolidated Financial Statements The interim consolidated financial statements of American Capital Agency Corp. (together with its consolidated subsidiary, is referred throughout this report as the "Company", "we", "us" and "our") are prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Our unaudited consolidated financial statements include the accounts of our wholly-owned subsidiary, American Capital Agency TRS, LLC, and variable interest entities for which the Company is the primary beneficiary. Significant intercompany accounts and transactions have been eliminated. In the opinion of management, all adjustments, consisting solely of normal recurring accruals, necessary for the fair presentation of financial statements for the interim period have been included. The current period's results of operations are not necessarily indicative of results that ultimately may be achieved for the year. Through March 31, 2011, there has been no activity in American Capital Agency TRS, LLC.

Organization	3 Months Ended
Organization	Mar. 31, 2011
Organization
Organization	Note 2. Organization We were organized in Delaware on January 7, 2008, and commenced operations on May 20, 2008 following the completion of our initial public offering ("IPO"). Our common stock is traded on The NASDAQ Global Select Market under the symbol "AGNC". We have elected to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). As such, we are required to distribute annually 90% of our taxable net income. As long as we qualify as a REIT, we will generally not be subject to U.S. federal or state corporate taxes on our taxable net income to the extent that we distribute all of our annual taxable net income to our stockholders. We are externally managed by American Capital Agency Management, LLC (our "Manager"), a majority-owned subsidiary of a wholly-owned portfolio company of American Capital, Ltd. ("American Capital"). We earn income primarily from investing in residential mortgage pass-through securities and collateralized mortgage obligations ("CMOs") on a leveraged basis. These investments consist of securities for which the principal and interest payments are guaranteed by government-sponsored entities ("GSEs"), such as the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), or by a U.S. Government agency, such as the Government National Mortgage Association ("Ginnie Mae"). We refer to these types of securities as agency securities and the specific agency securities in which we invest as our investment portfolio. Our principal objective is to preserve our net asset value while generating attractive risk-adjusted returns for distribution to our stockholders through regular quarterly dividends from our net interest income, which is the spread between the interest income earned on our interest earning assets and the interest costs of our borrowings and hedging activities, and net realized gains and losses on our investments and other supplemental hedging activities. We fund our investments primarily through short-term borrowings structured as repurchase agreements.