##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from:to
 Commission File Number 001-13937
 ANTHRACITE CAPITAL, INC.
  Maryland
    
    13-3978906(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)40 East 52nd Street, New York, New York
    
    10022(Address of principal executive offices)
    
    (Zip Code)
 (212) 810-3333
  (Former name, former address, and for new fiscal year; if changed since last report)
  þ o
 þ o
  o þ o
  o þ




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##### 



PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    5Consolidated Statements of Financial Condition (Unaudited)
At September 30, 2006 and December 31, 2005
    
    
    5Consolidated Statements of Operations (Unaudited)
For the Three and Nine Months Ended September 30, 2006 and 2005
    
    
    6Consolidated Statement of Changes in Stockholders Equity (Unaudited)
For the Nine Months Ended September 30, 2006
    
    
    8Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2006 and 2005
    
    
    9Notes to Consolidated Financial Statements (Unaudited)
    
    
    11Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    32Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    66Item 4. Controls and Procedures
    
    
    71Part II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    72Item 1A. Risk Factors
    
    
    72Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    72Item 3. Defaults Upon Senior Securities
    
    
    72Item 4. Submission of Matters to a Vote of Security Holders
    
    
    72Item 5. Other Information
    
    
    72Item 6. Exhibits
    
    
    72SIGNATURES
    
    
    73Certification of Chief Executive OfficerCertification of Chief Financial OfficerSection 1350 Certification
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
  Forward-Looking Statements
   (1)
    
    the introduction, withdrawal, success and timing of business initiatives
and strategies;(2)
    
    changes in political, economic or industry conditions, the interest rate
environment or financial and capital markets, which could result in changes in the
value of Anthracites assets;(3)
    
    the relative and absolute investment performance and operations of
Anthracites Manager;(4)
    
    the impact of increased competition;(5)
    
    the impact of capital improvement projects;(6)
    
    the impact of future acquisitions or divestitures;(7)
    
    the unfavorable resolution of legal proceedings;(8)
    
    the extent and timing of any share repurchases;(9)
    
    the impact, extent and timing of technological changes and the adequacy
of intellectual property protection;(10)
    
    the impact of legislative and regulatory actions and reforms and
regulatory, supervisory or enforcement actions of government agencies relating to
Anthracite, BlackRock, Merrill Lynch & Co., Inc. or PNC;(11)
    
    terrorist activities and international hostilities, which may adversely
affect the general economy, domestic and global financial and capital markets,
specific industries, and Anthracite;
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##### Table of Contents



(12)
    
    the ability of BlackRock to attract and retain highly talented
professionals;(13)
    
    fluctuations in foreign currency exchange rates;(14)
    
    the impact of changes to tax legislation and, generally, the tax position
of the Company;(15)
    
    BlackRocks ability to successfully integrate the Merrill Lynch
Investment Managers (MLIM) business with its existing business; and(16)
    
    the ability of BlackRock to effectively manage the former MLIM assets
along with its historical assets under management.
  4




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Anthracite Capital, Inc. and Subsidiaries
 
 Consolidated Statements of Financial Condition
 (in thousands)
 (unaudited)
 September 30, 2006
    
    
    December 31, 2005ASSETSCash and cash equivalents
    
    
    
    
    
    $
    31,646
    
    
    
    
    
    
    $
    40,556Restricted cash equivalents
    
    
    
    
    
    
    20,501
    
    
    
    
    
    
    
    1,246Securities available-for-sale, at fair value:Subordinated commercial mortgage-backed securities (CMBS)
    
    $
    874,792
    
    
    
    
    
    
    $
    826,955Investment grade CMBS
    
    
    1,623,583
    
    
    
    
    
    
    
    1,157,164Residential mortgage-backed securities (RMBS)
    
    
    150,809
    
    
    
    
    
    
    
    92,817Total securities available-for-sale
    
    
    
    
    
    
    2,649,184
    
    
    
    
    
    
    
    2,076,936Commercial mortgage loan pools, at amortized cost
    
    
    
    
    
    
    1,276,471
    
    
    
    
    
    
    
    1,292,407Securities held-for-trading, at estimated fair valueCMBS
    
    
    22,067
    
    
    
    
    
    
    
    21,264RMBS
    
    
    139,217
    
    
    
    
    
    
    
    166,209Total securities held-for-trading
    
    
    
    
    
    
    161,284
    
    
    
    
    
    
    
    187,473Commercial mortgage loans, net
    
    
    
    
    
    
    507,743
    
    
    
    
    
    
    
    365,806Equity investments
    
    
    
    
    
    
    183,227
    
    
    
    
    
    
    
    110,650Interest rate swap agreements, at fair value
    
    
    
    
    
    
    33,401
    
    
    
    
    
    
    
    31,172Other assets
    
    
    
    
    
    
    62,530
    
    
    
    
    
    
    
    58,013Total Assets
    
    
    
    
    
    $
    4,925,987
    
    
    
    
    
    
    $
    4,164,259LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Borrowings:Collateralized debt obligations (CDOs)
    
    $
    1,480,632
    
    
    
    
    
    
    $
    1,066,930Secured by pledge of subordinated CMBS
    
    
    127,059
    
    
    
    
    
    
    
    83,213Secured by pledge of other securities available-for-sale
    
    
    799,385
    
    
    
    
    
    
    
    606,209Secured by pledge of commercial mortgage loan pools
    
    
    1,257,004
    
    
    
    
    
    
    
    1,278,908Secured by pledge of securities held-for-trading
    
    
    133,266
    
    
    
    
    
    
    
    176,361Secured by pledge of commercial mortgage loans
    
    
    193,183
    
    
    
    
    
    
    
    229,556Junior subordinated notes to subsidiary trust issuing preferred securities
    
    
    180,477
    
    
    
    
    
    
    
    77,380Total borrowings
    
    
    
    
    
    $
    4,171,006
    
    
    
    
    
    
    $
    3,518,557Payable for investments purchased
    
    
    
    
    
    
    42,519
    
    
    
    
    
    
    
    Distributions payable
    
    
    
    
    
    
    17,613
    
    
    
    
    
    
    
    16,673Interest rate swap agreements, at fair value
    
    
    
    
    
    
    18,222
    
    
    
    
    
    
    
    8,907Other liabilities
    
    
    
    
    
    
    24,461
    
    
    
    
    
    
    
    22,104Total Liabilities
    
    
    
    
    
    $
    4,273,821
    
    
    
    
    
    
    $
    3,566,241Commitments and ContingenciesStockholders Equity:Common Stock, par value $0.001 per share; 400,000 shares authorized;
57,638 shares issued and outstanding in 2006;
56,339 shares issued and outstanding in 2005
    
    
    
    
    
    
    58
    
    
    
    
    
    
    
    569.375% Series C Preferred stock, liquidation preference $57,500
    
    
    
    
    
    
    55,435
    
    
    
    
    
    
    
    55,435Additional paid-in capital
    
    
    
    
    
    
    627,403
    
    
    
    
    
    
    
    612,368Distributions in excess of earnings
    
    
    
    
    
    
    (131,566
    )
    
    
    
    
    
    
    (130,038
    )Accumulated other comprehensive income
    
    
    
    
    
    
    100,836
    
    
    
    
    
    
    
    60,197Total Stockholders Equity
    
    
    
    
    
    
    652,166
    
    
    
    
    
    
    
    598,018Total Liabilities and Stockholders Equity
    
    
    
    
    
    $
    4,925,987
    
    
    
    
    
    
    $
    4,164,259
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Anthracite Capital, Inc. and Subsidiaries
 
 Consolidated Statements of Operations (Unaudited)
 (in thousands, except per share data)
 For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Income:Interest from securities available-for-sale
    
    $
    44,707
    
    
    $
    35,480
    
    
    $
    126,684
    
    
    $
    103,024Interest from commercial mortgage loans
    
    
    11,052
    
    
    
    5,362
    
    
    
    28,041
    
    
    
    15,643Interest from commercial mortgage loan pools
    
    
    13,230
    
    
    
    13,460
    
    
    
    39,743
    
    
    
    40,617Interest from securities held-for-trading
    
    
    1,750
    
    
    
    3,797
    
    
    
    5,522
    
    
    
    8,057Earnings from equity investments
    
    
    2,986
    
    
    
    2,870
    
    
    
    22,001
    
    
    
    8,499Earnings from real estate joint ventures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59Interest from cash and cash equivalents
    
    
    828
    
    
    
    969
    
    
    
    1,746
    
    
    
    1,471Total income
    
    
    74,553
    
    
    
    61,938
    
    
    
    223,737
    
    
    
    177,370Expenses:Interest
    
    
    54,185
    
    
    
    40,940
    
    
    
    148,345
    
    
    
    113,501Interest  securities held-for-trading
    
    
    1,875
    
    
    
    1,864
    
    
    
    5,597
    
    
    
    4,777Management and incentive fees
    
    
    4,176
    
    
    
    2,799
    
    
    
    13,900
    
    
    
    8,039General and administrative expense
    
    
    1,144
    
    
    
    933
    
    
    
    3,382
    
    
    
    2,691Total expenses
    
    
    61,380
    
    
    
    46,536
    
    
    
    171,224
    
    
    
    129,008Other gains (losses):Gain on sale of securities available-for-sale, net
    
    
    446
    
    
    
    31
    
    
    
    386
    
    
    
    88Gain (loss) on securities held-for-trading, net
    
    
    (18
    )
    
    
    897
    
    
    
    2,297
    
    
    
    (1,781
    )Foreign currency gain (loss)
    
    
    682
    
    
    
    87
    
    
    
    997
    
    
    
    (257
    )Loss on impairment of assets
    
    
    (361
    )
    
    
    
    
    
    
    (5,795
    )
    
    
    (3,231
    )Total other gain (loss)
    
    
    749
    
    
    
    1,015
    
    
    
    (2,115
    )
    
    
    (5,181
    )Income from Continuing Operations
    
    
    13,922
    
    
    
    16,417
    
    
    
    50,398
    
    
    
    43,181Income from Discontinued Operations
    
    
    
    
    
    
    
    
    
    
    1,366
    
    
    
    Net income
    
    
    13,922
    
    
    
    16,417
    
    
    
    51,764
    
    
    
    43,181Dividends on preferred stock
    
    
    1,348
    
    
    
    1,348
    
    
    
    4,044
    
    
    
    4,044Net income available to common stockholders
    
    $
    12,574
    
    
    $
    15,069
    
    
    $
    47,720
    
    
    $
    39,137Net income per common share, basic:
    
    $
    0.22
    
    
    $
    0.28
    
    
    $
    0.84
    
    
    $
    0.73Net income per common share, diluted:
    
    $
    0.22
    
    
    $
    0.28
    
    
    $
    0.83
    
    
    $
    0.73
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For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income from continuing operations per share
of common stock, after preferred
dividendsBasic
    
    $
    0.22
    
    
    $
    0.28
    
    
    $
    0.82
    
    
    $
    0.73Diluted
    
    $
    0.22
    
    
    $
    0.28
    
    
    $
    0.81
    
    
    $
    0.73Income from discontinued operations per share of
common stockBasic
    
    
    
    
    
    
    
    
    
    $
    0.02
    
    
    
    Diluted
    
    
    
    
    
    
    
    
    
    $
    0.02
    
    
    
    Weighted average number of shares outstanding:Basic
    
    
    57,167
    
    
    
    54,115
    
    
    
    56,970
    
    
    
    53,573Diluted
    
    
    57,458
    
    
    
    54,124
    
    
    
    57,164
    
    
    
    53,583Dividend declared per share of Common Stock
    
    $
    0.29
    
    
    $
    0.28
    
    
    $
    0.86
    
    
    $
    0.84
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Anthracite Capital, Inc. and Subsidiaries
 
 Consolidated Statement of Changes in Stockholders Equity (Unaudited)
 For the Nine Months Ended September 30, 2006
 (in thousands)
 Series
    
    
    
    
    
    
    
    
    
    
    AccumulatedCommon
    
    
    C
    
    
    Additional
    
    
    Distributions
    
    
    Other
    
    
    
    
    
    
    TotalStock,
    
    
    Preferred
    
    
    Paid-In
    
    
    In Excess
    
    
    Comprehensive
    
    
    Comprehensive
    
    
    StockholdersPar Value
    
    
    Stock
    
    
    Capital
    
    
    Of Earnings
    
    
    Income
    
    
    Income
    
    
    EquityBalance at January 1, 2006
    
    $
    56
    
    
    $
    55,435
    
    
    $
    612,368
    
    
    $
    (130,038
    )
    
    $
    60,197
    
    
    
    
    
    
    $
    598,018Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51,764
    
    
    
    
    
    
    $
    51,764
    
    
    
    51,764Unrealized gain on cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,638
    
    
    
    8,638
    
    
    
    8,638Reclassification of losses from
cash flow hedges included in net
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,925
    
    
    
    3,925
    
    
    
    3,925Change in net unrealized gain on
securities available-for-sale, net
of reclassification adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,076
    
    
    
    28,076
    
    
    
    28,076Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,639Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    92,403Dividends declared-common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (49,248
    )
    
    
    
    
    
    
    
    
    
    
    (49,248
    )Dividends declared  preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,044
    )
    
    
    
    
    
    
    
    
    
    
    (4,044
    )Issuance of common stock
    
    
    2
    
    
    
    
    
    
    
    15,035
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,037Balance at September 30, 2006
    
    $
    58
    
    
    $
    55,435
    
    
    $
    627,403
    
    
    $
    (131,566
    )
    
    $
    100,836
    
    
    
    
    
    
    $
    652,166Disclosure of reclassification adjustment:Unrealized holding gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    27,902Reclassification for realized gains
previously recorded as unrealized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    174$
    28,076
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Anthracite Capital, Inc. and Subsidiaries
 
 Consolidated Statements of Cash Flows (Unaudited)
 (in thousands)
 For the Nine
    
    
    For the NineMonths Ended
    
    
    Months EndedSeptember 30, 2006
    
    
    September 30, 2005Cash flows from operating activities:Net income
    
    $
    51,764
    
    
    $
    43,181Adjustments to reconcile net income to net cash provided by operating
activities:Net decrease (increase) in trading securities
    
    
    28,487
    
    
    
    (37,777
    )Net (gain) loss on sale of securities
    
    
    (2,683
    )
    
    
    1,693Gain on sale of real estate held for sale
    
    
    (1,366
    )
    
    
    Earnings from subsidiary trust
    
    
    (325
    )
    
    
    (2
    )Distributions from subsidiary trust
    
    
    294
    
    
    
    Earnings from equity investments and real estate joint ventures
    
    
    (22,001
    )
    
    
    (8,558
    )Distributions of earnings from equity investments and real estate joint
ventures
    
    
    13,215
    
    
    
    5,512Amortization of collateralized debt obligation issuance costs
    
    
    1,913
    
    
    
    1,744Amortization of junior subordinated note issuance costs
    
    
    126
    
    
    
    2Premium amortization (Discount accretion), net
    
    
    3,670
    
    
    
    (645
    )Loss on impairment of assets
    
    
    5,795
    
    
    
    3,231Unrealized net foreign currency (gain) loss
    
    
    (9,926
    )
    
    
    1,229Proceeds (disbursements) from sale of interest rate swap agreements
    
    
    15,253
    
    
    
    (2,108
    )(Increase) decrease in other assets
    
    
    (2,325
    )
    
    
    3,935Increase (decrease) in other liabilities
    
    
    13,771
    
    
    
    (6,187
    )Net cash provided by operating activities
    
    
    95,662
    
    
    
    5,250Cash flows from investing activities:Purchase of securities available-for-sale
    
    
    (651,852
    )
    
    
    (321,808
    )Proceeds from sale of securities available-for-sale
    
    
    109,021
    
    
    
    55,082Principal payments received on securities available-for-sale
    
    
    34,898
    
    
    
    2,636Funding of commercial mortgage loans
    
    
    (234,098
    )
    
    
    (83,519
    )Repayments received from commercial mortgage loans
    
    
    100,079
    
    
    
    82,971Repayments received from commercial mortgage loan pools
    
    
    6,607
    
    
    
    5,899Purchase of real estate held-for-sale
    
    
    (5,435
    )
    
    
    Proceeds from sale of real estate held-for-sale
    
    
    6,801
    
    
    
    Increase in restricted cash equivalents
    
    
    (19,255
    )
    
    
    (69,358
    )Investment in subsidiary trust
    
    
    
    
    
    
    (2,380
    )Return of capital from equity investments and joint ventures
    
    
    14,742
    
    
    
    26,869Investment in equity investments
    
    
    (72,202
    )
    
    
    (12,359
    )Net cash used in investing activities
    
    
    (710,694
    )
    
    
    (315,967
    )Cash flows from financing activities:Net increase in borrowings under reverse repurchase agreements
and credit facilities
    
    
    154,685
    
    
    
    70,793
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##### Table of Contents



For the Nine
    
    
    For the NineMonths Ended
    
    
    Months EndedSeptember 30, 2006
    
    
    September 30, 2005Repayments of borrowings secured by commercial mortgage loan pools
    
    
    (11,811
    )
    
    
    (5,899
    )Issuance of collateralized debt obligations
    
    
    417,000
    
    
    
    239,660Issuance costs for collateralized debt obligations
    
    
    (7,057
    )
    
    
    (5,025
    )Repayments of collateralized debt obligations
    
    
    (4,073
    )
    
    
    (776
    )Issuance of junior subordinated notes to subsidiary trust
    
    
    100,000
    
    
    
    77,380Issuance costs of junior subordinated notes
    
    
    (3,208
    )
    
    
    (2,250
    )Dividends paid on preferred stock
    
    
    (4,044
    )
    
    
    (4,044
    )Proceeds from issuance of common stock, net of offering costs
    
    
    12,937
    
    
    
    24,923Dividends paid on common stock
    
    
    (48,307
    )
    
    
    (44,770
    )Net cash provided by financing activities
    
    
    606,122
    
    
    
    349,992Net (decrease) increase in cash and cash equivalents
    
    
    (8,910
    )
    
    
    39,275Cash and cash equivalents, beginning of period
    
    
    40,556
    
    
    
    23,755Cash and cash equivalents, end of period
    
    $
    31,646
    
    
    $
    63,030Supplemental disclosure of cash flow information:Interest paid
    
    $
    149,806
    
    
    $
    78,685Investments purchased not settled
    
    $
    42,519
    
    
    $
    87,829Supplemental disclosure of non-cash investing and financing activities:Investments in subsidiary trusts
    
    $
    3,097
    
    
    $
    2,380Incentive fees paid by the issuance of common stock
    
    $
    2,100
    
    
    $
    
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##### Table of Contents



Anthracite Capital, Inc. and Subsidiaries
 
 Notes to Consolidated Financial Statements (Unaudited)  (Dollar amounts in thousands, except share and per share data)
 Note 1 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
        Recent Accounting Developments
 Accounting Changes and Corrections
 Accounting Changes and Error Corrections
 11




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##### Table of Contents



Reporting Accounting Changes in Interim Financial Statements
 Stock Based Compensation
 Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
 Reverse Repurchase Agreements
 Accounting for Certain Investments in Debt and Equity Securities, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities
 12




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##### Table of Contents



Variable Interest Entities
 Consolidation of Variable Interest Entities
 Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
 Impairment of Investments
 The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments Accounting for Certain Investments in Debt and Equity Securities The Equity Method of Accounting for Investments in Common
Stock
 13




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##### Table of Contents



Certain Hybrid Financial Instruments
 Accounting for Certain Hybrid Financial
Instruments Accounting for Derivative Instruments and Hedging
Activities, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
 
 
 
  Determining the Variability in a Potential VIE
 Determining the Variability to be Considered in
Applying FASB Interpretation No. 46(R) Consolidation of Variable Interest Entities
  14




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##### Table of Contents



Accounting for Uncertainty in Income Taxes
 Accounting for Uncertainty in
Income Taxes and Related Implementation Issues Accounting for Income Taxes
 Fair Value Measurements
 Fair Value Measurements
 Effects of Prior Year Misstatements
 Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements
 Reclassifications
  15




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##### Table of Contents



Note 2 NET INCOME PER SHARE
 Earnings Per Share
 For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Numerator:Net income available to common stockholders
    
    $
    12,574
    
    
    $
    15,069
    
    
    $
    47,720
    
    
    $
    39,137Numerator for basic and diluted earnings per share
    
    $
    12,574
    
    
    $
    15,069
    
    
    $
    47,720
    
    
    $
    39,137Denominator:Denominator for basic earnings per shareweighted
average common sharesOutstanding
    
    
    57,166,798
    
    
    
    54,114,955
    
    
    
    56,969,930
    
    
    
    53,573,433Dilutive effect of stock options
    
    
    2,925
    
    
    
    9,391
    
    
    
    2,148
    
    
    
    9,084Dilutive effect of stock based incentive fee
    
    
    288,190
    
    
    
    
    
    
    
    192,127
    
    
    
    Denominator for diluted earnings per shareweighted
average common shares outstanding and common stock
equivalents outstanding
    
    
    57,457,913
    
    
    
    54,124,346
    
    
    
    57,164,205
    
    
    
    53,582,517Basic net income per weighted average common share:
    
    $
    0.22
    
    
    $
    0.28
    
    
    $
    0.84
    
    
    $
    0.73Diluted net income per weighted average common share and
common share equivalents:
    
    $
    0.22
    
    
    $
    0.28
    
    
    $
    0.83
    
    
    $
    0.73
  16




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Note 3 SECURITIES AVAILABLE-FOR-SALE
  Gross
    
    Gross
    
    EstimatedAmortized
    
    Unrealized
    
    Unrealized
    
    FairSecurity Description
    
    Cost
    
    Gain
    
    Loss
    
    ValueCMBS:CMBS interest only securities (IOs)
    
    $
    84,383
    
    
    $
    624
    
    
    $
    (1,799
    )
    
    $
    83,208Investment grade CMBS
    
    
    761,527
    
    
    
    59,361
    
    
    
    (8,080
    )
    
    
    812,808Non-investment grade rated subordinated
securities
    
    
    630,025
    
    
    
    64,220
    
    
    
    (4,330
    )
    
    
    689,914Non-rated subordinated securities
    
    
    63,788
    
    
    
    5,053
    
    
    
    (775
    )
    
    
    68,067Credit tenant leases
    
    
    24,581
    
    
    
    872
    
    
    
    (660
    )
    
    
    24,793Investment grade REIT debt
    
    
    248,141
    
    
    
    6,225
    
    
    
    (3,563
    )
    
    
    250,803Multifamily agency securities
    
    
    455,138
    
    
    
    3,140
    
    
    
    (6,307
    )
    
    
    451,971CDO investments
    
    
    116,810
    
    
    
    3,858
    
    
    
    (3,857
    )
    
    
    116,811Total CMBS
    
    
    2,384,393
    
    
    
    143,353
    
    
    
    (29,371
    )
    
    
    2,498,375Single-family RMBS:Agency adjustable rate securities
    
    
    1,816
    
    
    
    12
    
    
    
    
    
    
    
    1,828Residential CMOs
    
    
    137,073
    
    
    
    520
    
    
    
    (1,236
    )
    
    
    136,357Hybrid adjustable rate mortgages (ARMs)
    
    
    12,950
    
    
    
    
    
    
    
    (326
    )
    
    
    12,624Total RMBS
    
    
    151,839
    
    
    
    532
    
    
    
    (1,562
    )
    
    
    150,809Total securities available-for-sale
    
    $
    2,536,232
    
    
    $
    143,885
    
    
    $
    (30,933
    )
    
    $
    2,649,184
    17




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##### Table of Contents



Less than 12 Months
    
    12 Months or More
    
    TotalEstimated
    
    Gross
    
    Estimated
    
    Gross
    
    Estimated
    
    GrossFair
    
    Unrealized
    
    Fair
    
    Unrealized
    
    Fair
    
    UnrealizedValue
    
    Losses
    
    Value
    
    Losses
    
    Value
    
    LossesCMBS IOs
    
    $
    18,988
    
    
    $
    (671
    )
    
    $
    30,062
    
    
    $
    (1,128
    )
    
    $
    49,050
    
    
    $
    (1,799
    )Investment grade CMBS
    
    
    41,504
    
    
    
    (417
    )
    
    
    136,965
    
    
    
    (7,663
    )
    
    
    178,469
    
    
    
    (8,080
    )Non-investment grade
rated subordinated
securities
    
    
    181,578
    
    
    
    (3,412
    )
    
    
    24,757
    
    
    
    (918
    )
    
    
    206,335
    
    
    
    (4,330
    )Non-rated subordinated
securities
    
    
    15,912
    
    
    
    (678
    )
    
    
    2,432
    
    
    
    (97
    )
    
    
    18,344
    
    
    
    (775
    )Credit tenant leases
    
    
    
    
    
    
    
    
    
    
    15,729
    
    
    
    (660
    )
    
    
    15,729
    
    
    
    (660
    )Investment grade REIT debt
    
    
    9,966
    
    
    
    (107
    )
    
    
    67,485
    
    
    
    (3,456
    )
    
    
    77,451
    
    
    
    (3,563
    )Multifamily agency
securities
    
    
    122,842
    
    
    
    (574
    )
    
    
    175,454
    
    
    
    (5,733
    )
    
    
    298,296
    
    
    
    (6,307
    )CDO investments
    
    
    30,916
    
    
    
    (3,857
    )
    
    
    
    
    
    
    
    
    
    
    30,916
    
    
    
    (3,857
    )Residential CMOs
    
    
    93,193
    
    
    
    (1,236
    )
    
    
    
    
    
    
    
    
    
    
    93,193
    
    
    
    (1,236
    )Hybrid ARMs
    
    
    
    
    
    
    
    
    
    
    12,624
    
    
    
    (326
    )
    
    
    12,624
    
    
    
    (326
    )Total temporarily
impaired securities
    
    $
    514,899
    
    
    $
    (10,952
    )
    
    $
    465,508
    
    
    $
    (19,981
    )
    
    $
    980,407
    
    
    $
    (30,933
    )
   18




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Note 4 IMPAIRMENTS  CMBS
 Recognition of Interest Income and Impairment on Purchased and Retained Beneficial
Interests in Securitized Financial Assets
   Note 5 COMMERCIAL MORTGAGE LOAN POOLS
 Consolidation of Variable Interest Entities
   19




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Note 6 SECURITIES HELD-FOR-TRADING
  Note 7 COMMERCIAL MORTGAGE LOANS
  Par
    
    
    Book ValueBalance at December 31, 2005
    
    $
    373,625
    
    
    $
    365,806Adjustment for discount accretion and foreign
currency
    
    
    
    
    
    
    7,918Proceeds from repayment of mortgage loans
    
    
    (100,079
    )
    
    
    (100,079
    )Investments in commercial mortgage loans
    
    
    249,014
    
    
    
    234,098Balance at September 30, 2006
    
    $
    522,560
    
    
    $
    507,743
 20




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##### Table of Contents



Carrying Value
    
    Weighted AverageSeptember 30, 2006
    
    December 31, 2005
    
    YieldProperty Type
    
    Amount
    
    %
    
    Amount
    
    %
    
    2006
    
    2005Retail
    
    $
    189,933
    
    
    
    37.4
    %
    
    $
    76,502
    
    
    
    20.9
    %
    
    
    7.9
    %
    
    
    7.3
    %Office
    
    
    142,753
    
    
    
    28.1
    
    
    
    94,432
    
    
    
    25.8
    
    
    
    8.5
    
    
    
    8.9Residential
    
    
    53.158
    
    
    
    10.5
    
    
    
    57,466
    
    
    
    15.7
    
    
    
    9.0
    
    
    
    8.6Hotel
    
    
    48,981
    
    
    
    9.6
    
    
    
    79,840
    
    
    
    21.8
    
    
    
    9.7
    
    
    
    8.6Industrial
    
    
    34.942
    
    
    
    6.9
    
    
    
    2,423
    
    
    
    0.7
    
    
    
    8.3
    
    
    
    8.1Storage
    
    
    34,059
    
    
    
    6.7
    
    
    
    32,913
    
    
    
    9.0
    
    
    
    9.0
    
    
    
    9.1Other Mixed Use
    
    
    3,917
    
    
    
    .8
    
    
    
    2,230
    
    
    
    0.6
    
    
    
    8.0
    
    
    
    8.1Communication Tower
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    5.5
    
    
    
    
    
    
    
    9.4Total
    
    $
    507,743
    
    
    
    100.0
    %
    
    $
    365,806
    
    
    
    100.0
    %
    
    
    8.5
    %
    
    
    8.5
    %
   Note 8 EQUITY INVESTMENTS
  BlackRock
    
    
    
    
    
    
    
    
    
    Dynamic IndiaDiamond
    
    Carbon I
    
    Carbon II
    
    Fund IV
    
    TotalBalance at
December 31, 2005
    
    $
    51,004
    
    
    $
    18,458
    
    
    $
    41,188
    
    
    $
    
    
    
    $
    110,650Contributions to
investments
    
    
    41,901
    
    
    
    
    
    
    
    32,782
    
    
    
    3,850
    
    
    
    78,533Distributions from
investments
    
    
    (2,389
    )
    
    
    (16,109
    )
    
    
    (9,459
    )
    
    
    
    
    
    
    (27,957
    )Equity earnings
    
    
    12,357
    
    
    
    807
    
    
    
    8,837
    
    
    
    
    
    
    
    22,001Balance at
September 30, 2006
    
    $
    102,873
    
    
    $
    3,156
    
    
    $
    73,348
    
    
    $
    3,850
    
    
    $
    183,227
  21




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Note 9 REAL ESTATE, HELD-FOR-SALE
 22




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Accounting for the Impairment or Disposal of Long-Lived Assets
  Note 10 BORROWINGS
   Reverse
    
    
    
    
    
    Commercial
    
    Collateralized
    
    TrustRepurchase
    
    Credit
    
    Mortgage
    
    Debt
    
    Preferred
    
    TotalAgreements
    
    Facilities
    
    Loan Pools
    
    Obligations
    
    Securities
    
    BorrowingsOutstanding
borrowings
    
    $
    909,783
    
    
    $
    343,883
    
    
    $
    1,256,231
    
    
    $
    1,480,632
    
    
    $
    180,477
    
    
    $
    4,171,003Weighted average
borrowing rate
    
    
    5.34
    %
    
    
    5.35
    %
    
    
    3.98
    %
    
    
    6.18
    %
    
    
    7.64
    %
    
    
    5.33
    %Weighted average
remaining maturity
    
    22 days
    
    
    1.1 years
    
    
    6.1 years
    
    
    7.4 years
    
    
    29.4 years
    
    
    5.8 yearsEstimated fair
value of assets
pledged
    
    $
    959,809
    
    
    $
    463,821
    
    
    $
    1,276,471
    
    
    $
    1,727,571
    
    
    
    
    
    
    $
    4,427,673
 23




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##### Table of Contents



Reverse
    
    
    
    
    
    Commercial
    
    Collateralized
    
    TrustRepurchase
    
    Credit
    
    Mortgage
    
    Debt
    
    Preferred
    
    TotalAgreements
    
    Facilities
    
    Loan Pools
    
    Obligations*
    
    Securities
    
    BorrowingsWithin 30 days
    
    $
    886,860
    
    
    $
    10,523
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    897,38331 to 59 days
    
    
    22,923
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,92360 days to less
than 1 year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1 year to 3 years
    
    
    
    
    
    
    333,360
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    333,3603 years to 5 years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Over 5 years
    
    
    
    
    
    
    
    
    
    
    1,256,231
    
    
    
    1,480,632
    
    
    
    180,477
    
    
    
    2,917,340$
    909,783
    
    
    $
    343,883
    
    
    $
    1,256,231
    
    
    $
    1,480,632
    
    
    $
    180,477
    
    
    $
    4,171,006
 
 *
    
    At September 30, 2006, collateralized debt obligations are comprised of $405,772 of CDO debt with
a weighted average remaining maturity of 5.79 years, $291,573 of CDO debt with a weighted average
remaining maturity of 6.16 years, $366,565 of CDO debt with a weighted average remaining maturity
of 6.89 years, and $416,722 of CDO debt with a weighted average remaining maturity of 10.18 years.
 Reverse Repurchase Agreements and Credit Facilities
     24




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CDOs
   Trust Preferred
   25




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Senior Unsecured Notes
  Note 11 COMMON STOCK
      26




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##### Table of Contents



Note 12 TRANSACTIONS WITH AFFILIATES
     For the Three Months
    
    For the Nine Months EndedEnded September 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Management fee
    
    $
    3,179
    
    
    $
    2,799
    
    
    $
    9,339
    
    
    $
    8,039Incentive fee
    
    
    
    
    
    
    
    
    
    
    2,708
    
    
    
    Incentive fee  stock based
    
    
    997
    
    
    
    
    
    
    
    1,853
    
    
    
    Total management and
incentive fees
    
    $
    4,176
    
    
    $
    2,799
    
    
    $
    13,900
    
    
    $
    8,039
 27




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28




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##### Table of Contents



Note 13 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
 Accounting for
Derivative Instruments and Hedging Activities,
   29




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Foreign Currency
 30




---



##### Table of Contents



31




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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  I. General
         32




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Carrying Value atSeptember 30, 2006
    
    December 31, 2005Amount
    
    %
    
    Amount
    
    %Commercial real estate securities
    
    $
    2,520,442
    
    
    
    52.8
    %
    
    $
    2,005,383
    
    
    
    49.7
    %Commercial mortgage loan pools(1)
    
    
    1,276,471
    
    
    
    26.7
    
    
    
    1,292,407
    
    
    
    32.0Commercial real estate loans(2)
    
    
    584,247
    
    
    
    12.2
    
    
    
    425,453
    
    
    
    10.6Commercial real estate equity(3)
    
    
    106,723
    
    
    
    2.2
    
    
    
    51,003
    
    
    
    1.3Total commercial real estate assets
    
    
    4,487,883
    
    
    
    93.9
    
    
    
    3,774,246
    
    
    
    93.6Residential mortgage-backed securities
    
    
    290,026
    
    
    
    6.1
    
    
    
    259,026
    
    
    
    6.4Total
    
    $
    4,777,909
    
    
    
    100.0
    %
    
    $
    4,033,272
    
    
    
    100.0
    %
 
 (1)
    
    Represents a Controlling Class CMBS that is consolidated for accounting purposes.
See Note 5 of the consolidated financial statements.(2)
    
    Includes the Companys investments in Carbon Capital, Inc. (Carbon I) and
Carbon Capital II, Inc. (Carbon II, and collectively with Carbon I, the Carbon Capital
Funds) at September 30, 2006 and December 31, 2005.(3)
    
    Includes the Companys investments in BlackRock Diamond Property Fund (BlackRock
Diamond) at September 30, 2006 and December 31, 2005 and Dynamic India Fund IV at
September 30, 2006.  33




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Summary of Commercial Real Estate Assets
  Total
    
    TotalCommercial
    
    Commercial
    
    Commercial
    
    Commercial
    
    Commercial
    
    CommercialReal Estate
    
    Real Estate
    
    Real Estate
    
    Mortgage
    
    Real Estate
    
    Real EstateSecurities
    
    Loans(1)
    
    Equity
    
    Loan Pools
    
    Assets
    
    Assets (USD)USD
    
    $
    2,374,104
    
    
    $
    303,039
    
    
    $
    102,873
    
    
    $
    1,276,471
    
    
    $
    4,056,487
    
    
    $
    4,056,487GBP
    
    £
    28,041
    
    
    £
    44,014
    
    
    
    
    
    
    
    
    
    
    £
    72,055
    
    
    $
    134,859EURO
    
    
    73,978
    
    
    
    156,720
    
    
    
    
    
    
    
    
    
    
    
    230,698
    
    
    $
    292,687Indian Rupees
    
    
    
    
    
    
    
    
    
    Rs176,907
    
    
    
    
    
    
    Rs176,907
    
    $
    3,850Total USD Equivalent
    
    $
    2,520,442
    
    
    $
    584,247
    
    
    $
    106,723
    
    
    $
    1,276,471
    
    
    $
    4,487,883
    
    
    $
    4,487,883
 
 (1)
    
    Includes the Companys investments in the Carbon Capital Funds at September 30,
2006.  Total
    
    TotalCommercial
    
    Commercial
    
    Commercial
    
    Commercial
    
    Commercial
    
    CommercialReal Estate
    
    Real Estate
    
    Real Estate
    
    Mortgage
    
    Real Estate
    
    Real EstateSecurities
    
    Loans(1)
    
    Equity
    
    Loan Pools
    
    Assets
    
    Assets (USD)USD
    
    $
    1,968,063
    
    
    $
    295,499
    
    
    $
    51,003
    
    
    $
    1,292,407
    
    
    $
    3,606,972
    
    
    $
    3,606,972GBP
    
    £
    16,334
    
    
    £
    33,139
    
    
    
    
    
    
    
    
    
    
    £
    49,473
    
    
    $
    85,027EURO
    
    
    7,809
    
    
    
    61,642
    
    
    
    
    
    
    
    
    
    
    
    69,451
    
    
    $
    82,247Total USD Equivalent
    
    $
    2,005,383
    
    
    $
    425,453
    
    
    $
    51,003
    
    
    $
    1,292,407
    
    
    $
    3,774,246
    
    
    $
    3,774,246
 
 (1)
    
    Includes the Companys investments in the Carbon Capital Funds at December 31, 2005.  34




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Commercial Real Estate Assets Portfolio Activity
  AdjustedCommercial real estate
    
    
    
    
    
    Carrying
    
    Dollar
    
    Purchase
    
    Dollar
    
    Expectedsecurities outside CDOs
    
    Par
    
    Value
    
    Price
    
    Price
    
    Price
    
    YieldInvestment grade CMBS
    
    $
    125,586
    
    
    $
    137,851
    
    
    
    97.81
    
    
    $
    143,848
    
    
    
    103.28
    
    
    
    4.51
    %Investment grade REIT
debt
    
    
    23,000
    
    
    
    21,244
    
    
    
    92.36
    
    
    
    22,845
    
    
    
    99.32
    
    
    
    5.49
    %CMBS rated BB+ to B
    
    
    142,293
    
    
    
    157,001
    
    
    
    89.74
    
    
    
    154,552
    
    
    
    89.67
    
    
    
    7.92
    %CMBS rated B- or lower
    
    
    112,420
    
    
    
    39,543
    
    
    
    35.17
    
    
    
    36,471
    
    
    
    32.44
    
    
    
    6.53
    %CDO Investments
    
    
    423,268
    
    
    
    116,811
    
    
    
    26.73
    
    
    
    116,810
    
    
    
    26.75
    
    
    
    15.33
    %CMBS Interest Only
securities (IOs)
    
    
    3,267,755
    
    
    
    83,208
    
    
    
    2.55
    
    
    
    84,383
    
    
    
    2.58
    
    
    
    7.64
    %Multifamily agency
securities
    
    
    449,094
    
    
    
    451,972
    
    
    
    100.64
    
    
    
    455,138
    
    
    
    101.35
    
    
    
    5.03
    %Commercial mortgage
loan pools
    
    
    1,214,471
    
    
    
    1,276,471
    
    
    
    105.11
    
    
    
    1,276,471
    
    
    
    105.11
    
    
    
    4.14
    %Total commercial real
estate assets outside
CDOs
    
    
    5,757,887
    
    
    
    2,284,101
    
    
    
    38.84
    
    
    
    2,290,518
    
    
    
    39.00
    
    
    
    5.34
    %Commercial real estate
loans and equity
outside CDOsCommercial real
estate loans
    
    
    241,943
    
    
    
    396,287
    
    
    
    
    
    
    
    387,771Commercial real estate
    
    
    96,453
    
    
    
    106,723
    
    
    
    
    
    
    
    96,453Total commercial real
estate loans and
equity outside CDOs
    
    
    6,096,283
    
    
    
    2,787,111
    
    
    
    
    
    
    
    2,774,742Commercial real estate
assets included in CDOsInvestment grade CMBS
    
    
    691,805
    
    
    
    695,204
    
    
    
    100.49
    
    
    
    638,124
    
    
    
    92.24
    
    
    
    7.79
    %Investment grade REIT
debt
    
    
    223,445
    
    
    
    229,559
    
    
    
    102.74
    
    
    
    225,297
    
    
    
    100.83
    
    
    
    6.04
    %CMBS rated BB+ to B
    
    
    587,420
    
    
    
    492,538
    
    
    
    83.85
    
    
    
    437,621
    
    
    
    74.50
    
    
    
    10.05
    %CMBS rated B- or lower
    
    
    186,239
    
    
    
    70,718
    
    
    
    37.97
    
    
    
    66,889
    
    
    
    35.92
    
    
    
    8.55
    %Credit tenant lease
    
    
    23,928
    
    
    
    24,793
    
    
    
    103.61
    
    
    
    24,581
    
    
    
    102.73
    
    
    
    5.67
    %Commercial real
estate loans
    
    
    199,074
    
    
    
    187,960
    
    
    
    94.42
    
    
    
    187,958
    
    
    
    94.42
    
    
    
    9.67
    %Total commercial real
estate assets
included in CDOs
    
    
    1,911,911
    
    
    
    1,700,772
    
    
    
    88.96
    
    
    
    1,580,470
    
    
    
    82.66
    
    
    
    8.39
    %Total commercial real
estate assets
    
    $
    8,008,194
    
    
    $
    4,487,883
    
    
    
    
    
    
    $
    4,355,212
 35




---



##### Table of Contents



AdjustedCommercial real estate
    
    
    
    
    
    Carrying
    
    Dollar
    
    Purchase
    
    Dollar
    
    Expectedsecurities outside CDOs
    
    Par
    
    Value
    
    Price
    
    Price
    
    Price
    
    YieldInvestment grade CMBS
    
    $
    150,128
    
    
    $
    151,889
    
    
    
    96.22
    
    
    $
    161,314
    
    
    
    102.17
    
    
    
    4.00
    %Investment grade REIT
debt
    
    
    23,000
    
    
    
    21,828
    
    
    
    94.90
    
    
    
    22,828
    
    
    
    99.25
    
    
    
    5.49
    %CMBS rated BB+ to B
    
    
    104,784
    
    
    
    90,289
    
    
    
    78.38
    
    
    
    92,931
    
    
    
    80.69
    
    
    
    7.77
    %CMBS rated B- or lower
    
    
    132,242
    
    
    
    47,854
    
    
    
    34.05
    
    
    
    45,070
    
    
    
    31.59
    
    
    
    9.17
    %CDO Investments
    
    
    423,349
    
    
    
    124,549
    
    
    
    29.42
    
    
    
    112,577
    
    
    
    26.59
    
    
    
    17.29
    %CMBS IOs
    
    
    3,505,646
    
    
    
    103,363
    
    
    
    2.95
    
    
    
    103,120
    
    
    
    2.94
    
    
    
    6.58
    %Multifamily agency
securities
    
    
    256,398
    
    
    
    263,362
    
    
    
    102.72
    
    
    
    268,319
    
    
    
    104.65
    
    
    
    4.77
    %Commercial mortgage
loan pools
    
    
    1,221,302
    
    
    
    1,292,407
    
    
    
    105.82
    
    
    
    1,292,407
    
    
    
    105.82
    
    
    
    4.14
    %Total commercial real
estate securities
outside CDOs
    
    
    5,816,849
    
    
    
    2,095,541
    
    
    
    17.19
    
    
    
    2,098,566
    
    
    
    17.24
    
    
    
    5.43
    %Commercial real estate
loans and equity
outside CDOsCommercial real
estate loans
    
    
    368,433
    
    
    
    405,782
    
    
    
    
    
    
    
    404,217Commercial real estate
    
    
    50,704
    
    
    
    51,004
    
    
    
    
    
    
    
    50,704Total commercial real
estate loans and
equity outside CDOs
    
    
    419,137
    
    
    
    456,786
    
    
    
    
    
    
    
    454,921Commercial real estate
securities included
in CDOsInvestment grade CMBS
    
    
    375,502
    
    
    
    377,291
    
    
    
    100.48
    
    
    
    354,561
    
    
    
    94.42
    
    
    
    7.37
    %Investment grade REIT
debt
    
    
    223,445
    
    
    
    233,939
    
    
    
    104.70
    
    
    
    226,583
    
    
    
    101.40
    
    
    
    6.15
    %CMBS rated BB+ to B
    
    
    656,207
    
    
    
    566,181
    
    
    
    86.28
    
    
    
    513,446
    
    
    
    78.24
    
    
    
    9.16
    %Credit tenant lease
    
    
    24,317
    
    
    
    24,837
    
    
    
    102.14
    
    
    
    24,995
    
    
    
    102.79
    
    
    
    5.68
    %Commercial real
estate loans
    
    
    20,175
    
    
    
    19,671
    
    
    
    97.49
    
    
    
    20,160
    
    
    
    99.93
    
    
    
    6.96
    %Total commercial real
estate assets
included in CDOs
    
    
    1,299,647
    
    
    
    1,221,919
    
    
    
    94.02
    
    
    
    1,139,745
    
    
    
    87.70
    
    
    
    8.17
    %Total commercial real
estate assets
    
    $
    7,535,633
    
    
    $
    3,774,246
    
    
    
    
    
    
    $
    3,693,232
   36




---



##### Table of Contents



Collateral at September 30, 2006
    
    Debt at September 30, 2006WeightedAdjusted
    
    Loss Adjusted
    
    Adjusted Issue
    
    Average Cost
    
    NetPurchase Price
    
    Yield
    
    Price
    
    of Funds *
    
    SpreadCDO I
    
    $
    445,631
    
    
    
    9.24
    %
    
    $
    405,772
    
    
    
    7.27
    %
    
    
    1.97
    %CDO II
    
    
    327,750
    
    
    
    8.01
    %
    
    
    291,573
    **
    
    
    5.95
    %
    
    
    2.06
    %CDO III
    
    
    378,387
    
    
    
    7.28
    %
    
    
    366,565
    **
    
    
    4.96
    %
    
    
    2.32
    %CDO HY3
    
    
    454,109
    
    
    
    8.72
    %
    
    
    416,722
    **
    
    
    6.35
    %
    
    
    2.37
    %Total
    
    $
    1,605,877
    
    
    
    8.38
    %
    
    $
    1,480,632
    
    
    
    6.18
    %
    
    
    2.20
    %
 
 *
    
    Weighted Average Cost of Funds is the current cost of funds plus hedging expenses.**
    
    The Company chose not to sell $10,000 of par of CDO II debt rated BB, $13,069 of par of CDO
III debt rated BB and $47,000 par of CDO HY3 debt rated BB. Securitizations
 Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
  Net realized gain related to sale of CDO HY2
    
    $
    16,523Increase in accumulated other comprehensive income
    
    
    9,611Total stockholders equity impact
    
    $
    26,134
 Real Estate Credit Profile of Below Investment Grade CMBS
 37




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##### Table of Contents



WeightedAdjusted
    
    
    
    
    
    AverageEstimated
    
    Dollar
    
    Purchase
    
    Dollar
    
    SubordinationPar
    
    Fair Value
    
    Price
    
    Price
    
    Price
    
    LevelBB+
    
    $
    146,146
    
    
    $
    134,470
    
    
    
    92.01
    
    
    $
    120,059
    
    
    
    82.15
    
    
    
    3.58
    %BB
    
    
    168,187
    
    
    
    147,853
    
    
    
    87.91
    
    
    
    127,583
    
    
    
    75.86
    
    
    
    3.02
    %BB-
    
    
    111,869
    
    
    
    88,357
    
    
    
    78.98
    
    
    
    79,871
    
    
    
    71.40
    
    
    
    3.36
    %B+
    
    
    66,851
    
    
    
    47,041
    
    
    
    70.37
    
    
    
    44,659
    
    
    
    66.80
    
    
    
    2.14
    %B
    
    
    80,356
    
    
    
    55,097
    
    
    
    68.57
    
    
    
    47,679
    
    
    
    59.34
    
    
    
    2.00
    %B-
    
    
    57,804
    
    
    
    32,474
    
    
    
    56.18
    
    
    
    30,438
    
    
    
    52.66
    
    
    
    1.29
    %CCC
    
    
    9,671
    
    
    
    3,738
    
    
    
    38.65
    
    
    
    3,703
    
    
    
    38.29
    
    
    
    0.88
    %NR
    
    
    225,782
    
    
    
    68,179
    
    
    
    30.20
    
    
    
    64,901
    
    
    
    28.74
    
    
    
    n/aTotal
    
    $
    866,666
    
    
    $
    577,209
    
    
    
    66.60
    
    
    $
    518,893
    
    
    
    59.87
 38




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##### Table of Contents



WeightedAdjusted
    
    
    
    
    
    AverageEstimated
    
    Dollar
    
    Purchase
    
    Dollar
    
    SubordinationPar
    
    Fair Value
    
    Price
    
    Price
    
    Price
    
    LevelBB+
    
    $
    139,541
    
    
    $
    131,676
    
    
    
    94.36
    
    
    $
    120,541
    
    
    
    86.38
    
    
    
    5.64
    %BB
    
    
    92,583
    
    
    
    81,469
    
    
    
    88.00
    
    
    
    76,527
    
    
    
    82.66
    
    
    
    4.43
    %BB-
    
    
    110,514
    
    
    
    92,116
    
    
    
    83.35
    
    
    
    85,829
    
    
    
    77.66
    
    
    
    4.15
    %B+
    
    
    79,564
    
    
    
    56,651
    
    
    
    71.20
    
    
    
    52,828
    
    
    
    66.40
    
    
    
    2.60
    %B
    
    
    132,247
    
    
    
    84,201
    
    
    
    63.37
    
    
    
    77,784
    
    
    
    58.82
    
    
    
    2.81
    %B-
    
    
    23,775
    
    
    
    13,216
    
    
    
    55.59
    
    
    
    12,303
    
    
    
    51.75
    
    
    
    1.24
    %NR
    
    
    96,626
    
    
    
    27,777
    
    
    
    28.75
    
    
    
    25,727
    
    
    
    26.63
    
    
    
    n/aTotal
    
    $
    674,850
    
    
    $
    487,106
    
    
    
    72.18
    
    
    $
    451,539
    
    
    
    66.91
   39




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##### Table of Contents



Vintage
    
    Underlying
    
    Delinquencies
    
    Lehman BrothersYear
    
    Collateral
    
    Outstanding
    
    Conduit Guide1998
    
    $
    5,471,699
    
    
    
    1.17
    %
    
    
    1.26
    %1999
    
    
    601,606
    
    
    
    1.58
    %
    
    
    1.23
    %2001
    
    
    864,078
    
    
    
    2.99
    %
    
    
    1.20
    %2002
    
    
    1,150,810
    
    
    
    0.31
    %
    
    
    0.59
    %2003
    
    
    2,094,083
    
    
    
    1.27
    %
    
    
    0.31
    %2004
    
    
    6,635,391
    
    
    
    0.21
    %
    
    
    0.31
    %2005
    
    
    12,095,190
    
    
    
    0.05
    %
    
    
    0.17
    %2006
    
    
    10,492,884
    
    
    
    0.00
    %
    
    
    0.08
    %Total
    
    $
    39,405,741
    
    
    
    0.38
    %
    
    
    0.38
    %*
 
 *
    
    Weighted average based on current principal balance. Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets
 40




---



##### Table of Contents



September 30, 2006Number of
    
    
    % ofPrincipal
    
    
    Loans
    
    
    CollateralPast due 30 days to 60 days
    
    $
    29,299
    
    
    
    6
    
    
    
    0.07
    %Past due 61 days to 90 days
    
    
    12,120
    
    
    
    4
    
    
    
    0.03
    %Past due 91 days or more
    
    
    7,757
    
    
    
    7
    
    
    
    0.02
    %Real estate owned (REO)
    
    
    94,659
    
    
    
    11
    
    
    
    0.24
    %Foreclosure
    
    
    6,536
    
    
    
    2
    
    
    
    0.02
    %Total delinquent
    
    $
    150,371
    
    
    
    30
    
    
    
    0.38
    %Total principal balance
    
    $
    39,405,741
   41




---



##### Table of Contents



September 30, 2006
    
    December 31, 2005Exposure
    
    ExposureLoan
    
    % of
    
    
    
    
    
    % ofProperty Type
    
    Balance
    
    Total
    
    Loan Balance
    
    TotalRetail
    
    $
    12,422,384
    
    
    
    31.5
    %
    
    $
    9,195,747
    
    
    
    31.0
    %Office
    
    
    12,414,692
    
    
    
    31.5
    
    
    
    9,406,148
    
    
    
    31.7Multifamily
    
    
    8,396,852
    
    
    
    21.3
    
    
    
    6,874,450
    
    
    
    23.2Industrial
    
    
    2,859,728
    
    
    
    7.3
    
    
    
    2,060,953
    
    
    
    7.0Lodging
    
    
    2,580,249
    
    
    
    6.5
    
    
    
    1,670,436
    
    
    
    5.6Healthcare
    
    
    307,943
    
    
    
    0.8
    
    
    
    299,692
    
    
    
    1.0Other
    
    
    423,893
    
    
    
    1.1
    
    
    
    160,923
    
    
    
    0.5Total
    
    $
    39,405,741
    
    
    
    100
    %
    
    $
    29,668,349
    
    
    
    100
    %
   42




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##### Table of Contents



Commercial Real Estate Loan Activity
   Carrying Value
    
    Weighted AverageSeptember 30, 2006
    
    December 31, 2005
    
    YieldProperty Type
    
    Amount
    
    %
    
    Amount
    
    %
    
    2006
    
    2005Retail
    
    $
    189,933
    
    
    
    37.4
    %
    
    $
    76,502
    
    
    
    20.9
    %
    
    
    7.9
    %
    
    
    7.3
    %Office
    
    
    142,753
    
    
    
    28.1
    
    
    
    94,432
    
    
    
    25.8
    
    
    
    8.5
    
    
    
    8.9Residential
    
    
    53,158
    
    
    
    10.5
    
    
    
    57,466
    
    
    
    15.7
    
    
    
    9.0
    
    
    
    8.6Hotel
    
    
    48,981
    
    
    
    9.6
    
    
    
    79,840
    
    
    
    21.8
    
    
    
    9.7
    
    
    
    8.6Industrial
    
    
    34,942
    
    
    
    6.9
    
    
    
    2,423
    
    
    
    0.7
    
    
    
    8.3
    
    
    
    8.1Storage
    
    
    34,059
    
    
    
    6.7
    
    
    
    32,913
    
    
    
    9.0
    
    
    
    9.0
    
    
    
    9.1Other Mixed Use
    
    
    3,917
    
    
    
    .8
    
    
    
    2,230
    
    
    
    0.6
    
    
    
    8.0
    
    
    
    8.1Communication Tower
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    5.5
    
    
    
    
    
    
    
    9.4Total
    
    $
    507,743
    
    
    
    100.0
    %
    
    $
    365,806
    
    
    
    100.0
    %
    
    
    8.5
    %
    
    
    8.5
    %
   
  For the quarters endedSeptember 30,2006
    
    2005Fixed-rate commercial real estate loans
    
    
    9.1
    %
    
    
    9.3
    %Floating-rate commercial real estate loans
    
    
    8.3
    %
    
    
    8.2
    %All commercial real estate loans
    
    
    8.6
    %
    
    
    8.7
    %
 43




---



##### Table of Contents



September 30, 2006
    
    December 31, 2005Carbon I
    
    $
    3,156
    
    
    $
    18,458Carbon II
    
    
    73,348
    
    
    
    41,188$
    76,504
    
    
    $
    59,646
   Commercial Real Estate
   44




---



##### Table of Contents



Critical Accounting Estimates
  Securities Available-for-sale
    45




---



##### Table of Contents



Accounting for Nonrefundable Fees and Costs Associated with Originating
or Acquiring Loans and Initial Direct Costs of Leases
 Impairment  Securities
 Accounting for Certain Investments in Debt and Equity Securities
  Variable Interest Entities
 Consolidation of Variable Interest Entities
 46




---



##### Table of Contents



Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
 Commercial Mortgage Loans
  Equity Investments
 Retention of Specialized Accounting for Investments in Consolidation.
 Derivative Instruments
  47




---



##### Table of Contents



Securitizations
  48




---



##### Table of Contents



II. Results of Operations
  Interest Income:
 For the Three Months EndedSeptember 30,
    
    Variance2006
    
    2005
    
    Amount
    
    %Commercial real estate securities
    
    $
    43,497
    
    
    $
    37,009
    
    
    $
    6,488
    
    
    
    17.5
    %Commercial mortgage loan pools
    
    
    13,230
    
    
    
    13,460
    
    
    
    (230
    )
    
    
    (1.7
    )Commercial real estate loans
    
    
    11,052
    
    
    
    5,362
    
    
    
    5,690
    
    
    
    100.1RMBS
    
    
    2,960
    
    
    
    2,268
    
    
    
    692
    
    
    
    30.5Cash and cash equivalents
    
    
    828
    
    
    
    969
    
    
    
    (141
    )
    
    
    (14.6
    )Total interest income
    
    $
    71,567
    
    
    $
    59,068
    
    
    $
    12,499
    
    
    
    21.1
    %
 For the Nine Months EndedSeptember 30,
    
    
    Variance2006
    
    
    2005
    
    
    Amount
    
    
    %Commercial real estate securities
    
    $
    123,135
    
    
    $
    103,242
    
    
    $
    19,893
    
    
    
    19.3
    %Commercial mortgage loan pools
    
    
    39,743
    
    
    
    40,617
    
    
    
    (874
    )
    
    
    (2.2
    )Commercial real estate loans
    
    
    28,042
    
    
    
    15,413
    
    
    
    12,629
    
    
    
    81.9RMBS
    
    
    9,070
    
    
    
    8,069
    
    
    
    1,001
    
    
    
    12.4Cash and cash equivalents
    
    
    1,746
    
    
    
    1,471
    
    
    
    275
    
    
    
    18.7Total interest income
    
    $
    201,736
    
    
    $
    168,812
    
    
    $
    32,924
    
    
    
    19.5
    %
 49




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##### Table of Contents



For the Three Months EndedSeptember 30,
    
    Variance2006
    
    2005
    
    Amount
    
    %Interest Income
    
    $
    71,567
    
    
    $
    59,068
    
    
    $
    12,499
    
    
    
    21.1
    %Earnings from
BlackRock Diamond
    
    
    660
    
    
    
    
    
    
    
    660
    
    
    
    n/aEarnings from Carbon I
    
    
    94
    
    
    
    951
    
    
    
    (857
    )
    
    
    (90.1
    )Earnings from Carbon II
    
    
    2,232
    
    
    
    1,919
    
    
    
    313
    
    
    
    16.3Total Income
    
    $
    74,553
    
    
    $
    61,938
    
    
    $
    12,615
    
    
    
    20.4
    %
 For the Nine Months EndedSeptember 30,
    
    Variance2006
    
    2005
    
    Amount
    
    %Interest Income
    
    $
    201,736
    
    
    $
    168,812
    
    
    $
    32,924
    
    
    
    19.5
    %Earnings from
BlackRock Diamond
    
    
    12,357
    
    
    
    
    
    
    
    12,357
    
    
    
    n/aEarnings from Carbon I
    
    
    807
    
    
    
    4,375
    
    
    
    (3,568
    )
    
    
    (81.5
    )Earnings from Carbon II
    
    
    8,837
    
    
    
    4,124
    
    
    
    4,713
    
    
    
    114.3Earnings from real
estate joint ventures
    
    
    
    
    
    
    59
    
    
    
    (59
    )
    
    
    (100.0
    )Total Income
    
    $
    223,737
    
    
    $
    177,370
    
    
    $
    46,367
    
    
    
    26.1
    %
 Retention of
Specialized Accounting for Investments in Consolidation.
 50




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##### Table of Contents



Interest Expense:
 For the Three MonthsEndedSeptember 30,
    
    Variance2006
    
    2005
    
    Amount
    
    %Collateralized debt obligations
    
    $
    22,889
    
    
    $
    18,758
    
    
    $
    4,131
    
    
    
    22.0
    %Commercial real estate securities
    
    
    10,861
    
    
    
    5,371
    
    
    
    5,490
    
    
    
    102.2Commercial mortgage loan pools*
    
    
    12,594
    
    
    
    12,760
    
    
    
    (166
    )
    
    
    (1.3
    )Commercial real estate loans
    
    
    2,229
    
    
    
    1,273
    
    
    
    956
    
    
    
    75.1RMBS
    
    
    3,878
    
    
    
    2,594
    
    
    
    1,284
    
    
    
    49.5Junior subordinated notes  net
    
    
    3,444
    
    
    
    66
    
    
    
    3,378
    
    
    
    5,118.2Cash flow hedges
    
    
    (9
    )
    
    
    1,588
    
    
    
    (1,597
    )
    
    
    (100.6
    )Hedge ineffectiveness**
    
    
    174
    
    
    
    394
    
    
    
    (220
    )
    
    
    (55.8
    )Total Interest Expense
    
    $
    56,060
    
    
    $
    42,804
    
    
    $
    13,256
    
    
    
    31.0
    %
 For the Nine Months EndedSeptember 30,
    
    Variance2006
    
    2005
    
    Amount
    
    %Collateralized debt obligations
    
    $
    57,603
    
    
    $
    50,523
    
    
    
    7,080
    
    
    
    14.0
    %Commercial real estate securities
    
    
    28,218
    
    
    
    11,334
    
    
    
    16,884
    
    
    
    149.0Commercial mortgage loan pools*
    
    
    37,872
    
    
    
    38,285
    
    
    
    (413
    )
    
    
    (1.1
    )Commercial real estate loans
    
    
    8,216
    
    
    
    3,771
    
    
    
    4,445
    
    
    
    117.9RMBS
    
    
    11,221
    
    
    
    7,119
    
    
    
    4,102
    
    
    
    57.6Junior subordinated notes  net
    
    
    9,103
    
    
    
    66
    
    
    
    9,037
    
    
    
    13,692.4Cash flow hedges
    
    
    2,110
    
    
    
    5,514
    
    
    
    (3,404
    )
    
    
    (61.4
    )Hedge ineffectiveness**
    
    
    (401
    )
    
    
    1,666
    
    
    
    (2,067
    )
    
    
    (124.1
    )Total Interest Expense
    
    $
    153,942
    
    
    $
    118,278
    
    
    $
    35,665
    
    
    
    30.2
    %
 
 *
    
    Includes $63 and $144 of interest expense for the three and nine months ended September 30, 2006
from short-term financings of securities related to the consolidation of commercial mortgage loan
pools. Includes $62 and $79 of interest expense for the three and nine months ended September 30,
2005 from short-term financings of securities related to the consolidation of commercial mortgage
loan pools.**
    
    See Note 13 of the consolidated financial statements, Derivative Instruments and Hedging
Activities, for a further description of the Companys hedge ineffectiveness. 51




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##### Table of Contents



Net Interest Margin and Net Interest Spread from the Portfolio:
   For the three
    
    
    For the ninemonths ended
    
    
    months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Interest income
    
    
    71,567
    
    
    
    59,068
    
    
    
    201,736
    
    
    
    168,812Interest expense
related to the
consolidation of
commercial mortgage
loan pools
    
    
    (12,594
    )
    
    
    (12,760
    )
    
    
    (37,872
    )
    
    
    (38,285
    )Short term interest
expense related to
commercial mortgage
loan pools
    
    
    63
    
    
    
    62
    
    
    
    144
    
    
    
    79Adjusted interest income
    
    
    59,036
    
    
    
    46,370
    
    
    
    164,008
    
    
    
    130,606
 For the three
    
    
    For the ninemonths ended
    
    
    months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Interest expense
    
    
    56,060
    
    
    
    42,804
    
    
    
    153,942
    
    
    
    118,278Interest expense related
to the consolidation of
commercial mortgage loan
pools
    
    
    (12,594
    )
    
    
    (12,760
    )
    
    
    (37,872
    )
    
    
    (38,285
    )Short term interest
expense related to
commercial mortgage loan
pools
    
    
    63
    
    
    
    62
    
    
    
    144
    
    
    
    79Hedge ineffectiveness
    
    
    (174
    )
    
    
    (394
    )
    
    
    401
    
    
    
    (1,666
    )Adjusted interest expense
    
    
    43,355
    
    
    
    29,712
    
    
    
    116,615
    
    
    
    78,406
  52




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##### Table of Contents



For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2006
    
    2005
    
    2006
    
    2005Adjusted interest Income
    
    $
    59,036
    
    
    $
    46,370
    
    
    $
    164,008
    
    
    $
    130,606Adjusted Interest expense
    
    $
    43,355
    
    
    $
    29,712
    
    
    $
    116,615
    
    
    $
    78,406Net interest margin
    
    
    2.0
    %
    
    
    2.8
    %
    
    
    2.1
    %
    
    
    3.0
    %Average yield
    
    
    7.5
    %
    
    
    7.8
    %
    
    
    7.4
    %
    
    
    7.6
    %Cost of funds
    
    
    6.1
    %
    
    
    5.6
    %
    
    
    6.1
    %
    
    
    5.4
    %Net interest spread
    
    
    1.4
    %
    
    
    2.2
    %
    
    
    1.3
    %
    
    
    2.2
    %
 Other Expenses:
 For the Three Months EndedSeptember 30,
    
    Variance2006
    
    2005
    
    Amount
    
    %Management fee
    
    $
    3,179
    
    
    $
    2,799
    
    
    $
    380
    
    
    
    13.6
    %Incentive fee
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    n/aIncentive fee  stock based
    
    
    997
    
    
    
    
    
    
    
    997
    
    
    
    n/aGeneral and administrative expense
    
    
    1,144
    
    
    
    933
    
    
    
    211
    
    
    
    22.6Total other expenses
    
    $
    5,320
    
    
    $
    3,732
    
    
    $
    1,588
    
    
    
    42.6
    %
 For the Nine Months EndedSeptember 30,
    
    Variance2006
    
    2005
    
    Amount
    
    %Management fee
    
    $
    9,339
    
    
    $
    8,039
    
    
    $
    1,300
    
    
    
    16.2
    %Incentive fee
    
    
    2,708
    
    
    
    
    
    
    
    2,708
    
    
    
    n/aIncentive fee  stock based
    
    
    1,853
    
    
    
    
    
    
    
    1,853
    
    
    
    n/aGeneral and administrative expense
    
    
    3,382
    
    
    
    2,691
    
    
    
    691
    
    
    
    25.7Total other expenses
    
    $
    17,282
    
    
    $
    10,730
    
    
    $
    6,552
    
    
    
    61.1
    %
  53




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##### Table of Contents



Other Gains (Losses):
 Income from Discontinued Operations:
 Dividends Declared:
 54




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##### Table of Contents



Changes in Financial Condition
 Securities Available-for-sale:
 September
    
    
    
    
    
    December30, 2006
    
    
    
    
    
    31, 2005Estimated
    
    
    
    
    
    EstimatedFair
    
    
    
    
    
    FairSecurity Description
    
    Value
    
    Percentage
    
    Value
    
    PercentageCommercial
mortgage-backed securities:CMBS IOs
    
    $
    83,208
    
    
    
    3.1
    %
    
    $
    103,363
    
    
    
    5.0
    %Investment grade CMBS
    
    
    812,808
    
    
    
    30.7
    
    
    
    509,835
    
    
    
    24.5Non-investment grade rated subordinated securities
    
    
    689,914
    
    
    
    26.1
    
    
    
    675,995
    
    
    
    32.5Non-rated subordinated securities
    
    
    68,067
    
    
    
    2.5
    
    
    
    26,411
    
    
    
    1.3Credit tenant leases
    
    
    24,793
    
    
    
    0.9
    
    
    
    24,837
    
    
    
    1.2Investment grade REIT debt
    
    
    250,803
    
    
    
    9.5
    
    
    
    255,767
    
    
    
    12.3Multifamily agency securities
    
    
    451,971
    
    
    
    17.1
    
    
    
    263,362
    
    
    
    12.7CDO investments
    
    
    116,811
    
    
    
    4.4
    
    
    
    124,549
    
    
    
    6.0Total CMBS
    
    
    2,498,375
    
    
    
    94.3
    
    
    
    1,984,119
    
    
    
    95.5Single-family RMBS:Agency adjustable rate securities
    
    
    1,828
    
    
    
    0.1
    
    
    
    76,491
    
    
    
    3.7Residential CMOs
    
    
    136,357
    
    
    
    5.1
    
    
    
    725
    
    
    
    0.1Hybrid adjustable rate mortgages
    
    
    12,624
    
    
    
    0.5
    
    
    
    15,601
    
    
    
    0.7Total RMBS
    
    
    150,809
    
    
    
    5.7
    
    
    
    92,817
    
    
    
    4.5Total securities available-for-sale
    
    $
    2,649,184
    
    
    
    100.0
    %
    
    $
    2,076,936
    
    
    
    100.0
    %
  Borrowings:
 55




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##### Table of Contents



For the Nine Months EndedSeptember 30, 2006September 30,2006
    
    Maximum
    
    Range ofBalance
    
    Balance
    
   MaturitiesCDO debt*
    
    $
    1,480,632
    
    
    $
    1,480,632
    
    
    
    5.8 to 10.2 yearsCommercial mortgage loan pools
    
    
    1,256,231
    
    
    
    1,278,908
    
    
    
    2.3 to 12.2 yearsReverse repurchase agreements
    
    
    909,783
    
    
    
    956,663
    
    
    
    17 to 58 daysCredit facilities
    
    
    343,883
    
    
    
    344,219
    
    
    27 days to 1.4 yearsJunior subordinated notes
    
    
    180,477
    
    
    
    180,477
    
    
    29.4 years**Total borrowings
    
    $
    4,171,006
 
 *
    
    Disclosed as adjusted issue price. Total par of the Companys CDO debt at September 30, 2006 was
$1,492,390.**
    
    $77,380 of the Companys junior subordinated notes can be redeemed at par beginning in October
2010, $51,550 can be redeemed at par beginning in March 2011 and $51,547 can be redeemed at par
beginning in April 2011. Hedging Instruments:
  At September 30, 2006Estimated Fair
    
    Unamortized
    
    Average RemainingNotional Value
    
    Value
    
    Cost
    
    Term (years)Cash flow hedges
    
    $
    779,200
    
    
    $
    1,879
    
    
    $
    
    
    
    
    7.58CDO cash flow hedges
    
    
    900,313
    
    
    
    9,551
    
    
    
    
    
    
    
    7.44Trading swaps
    
    
    100,000
    
    
    
    3,496
    
    
    
    
    
    
    
    5.21CDO timing swaps
    
    
    223,445
    
    
    
    (6
    )
    
    
    
    
    
    
    6.33CDO LIBOR cap
    
    
    85,000
    
    
    
    260
    
    
    
    1,407
    
    
    
    6.65
 56




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##### Table of Contents



At December 31, 2005Estimated Fair
    
    Unamortized
    
    Average RemainingNotional Value
    
    Value
    
    Cost
    
    Term (years)Cash flow hedges
    
    $
    500,350
    
    
    $
    6,234
    
    
    $
    
    
    
    
    8.42CDO cash flow hedges
    
    
    701,603
    
    
    
    10,616
    
    
    
    
    
    
    
    7.51Trading swaps
    
    
    133,000
    
    
    
    4,032
    
    
    
    
    
    
    
    6.83CDO timing swaps
    
    
    223,445
    
    
    
    (37
    )
    
    
    
    
    
    
    7.08CDO LIBOR cap
    
    
    85,000
    
    
    
    1,419
    
    
    
    1,407
    
    
    
    7.40
 Capital Resources and Liquidity
    57




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##### Table of Contents



Reverse
    
    
    
    
    
    Commercial
    
    Collateralized
    
    TrustRepurchase
    
    Credit
    
    Mortgage
    
    Debt
    
    Preferred
    
    TotalAgreements
    
    Facilities
    
    Loan Pools
    
    Obligations
    
    Securities
    
    BorrowingsOutstanding
borrowings
    
    $
    909,783
    
    
    $
    343,883
    
    
    $
    1,256,231
    
    
    $
    1,480,632
    
    
    $
    180,477
    
    
    $
    4,171,006Weighted average
borrowing rate
    
    
    5.34
    %
    
    
    5.35
    %
    
    
    3.98
    %
    
    
    6.18
    %
    
    
    7.64
    %
    
    
    5.33
    %Weighted average
remaining maturity
    
    22 days
    
    1.1 years
    
    6.1 years
    
    7.4 years
    
    29.4 years
    
    5.8 yearsEstimated fair
value of assets
pledged
    
    $
    959,809
    
    
    $
    463,821
    
    
    $
    1,276,471
    
    
    $
    1,727,571
    
    
    
    
    
    
    $
    4,427,673
  Reverse
    
    
    
    
    
    
    Commercial
    
    
    Collateralized
    
    
    TrustRepurchase
    
    
    Credit
    
    
    Mortgage
    
    
    Debt
    
    
    Preferred
    
    
    TotalAgreements
    
    
    Facilities
    
    
    Loan Pools
    
    
    Obligations*
    
    
    Securities
    
    
    BorrowingsWithin 30 days
    
    $
    886,860
    
    
    $
    10,523
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    897,38331 to 59 days
    
    
    22,923
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,92360 days
to less than 1 year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1 year to 3 years
    
    
    
    
    
    
    333,360
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    333,3603 years to 5 years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Over 5 years
    
    
    
    
    
    
    
    
    
    
    1,256,231
    
    
    
    1,480,632
    
    
    
    180,477
    
    
    
    2,917,340$
    909,783
    
    
    $
    343,883
    
    
    $
    1,256,231
    
    
    $
    1,480,632
    
    
    $
    180,477
    
    
    $
    4,171,006
 
 *
    
    At September 30, 2006, collateralized debt obligations are comprised of $405,772 of CDO debt with
a weighted average remaining maturity of 5.79 years, $291,573 of CDO debt with a weighted average
remaining maturity of 6.16 years, $366,565 of CDO debt with a weighted average remaining maturity
of 6.89 years, and $416,722 of CDO debt with a weighted average remaining maturity of 10.18 years. Credit Facilities
    58




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##### Table of Contents



CDOs
    59




---



##### Table of Contents



Trust Preferred
    Senior Unsecured Notes
  60




---



##### Table of Contents



Common Equity Issuances
    Off Balance Sheet Arrangements
    61




---



##### Table of Contents



Cash Flows
    62




---



##### Table of Contents



Contingent Liability
  Transactions with Affiliates
   63




---



##### Table of Contents



For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2006
    
    2005
    
    2006
    
    2005Management fee
    
    $
    3,179
    
    
    $
    2,799
    
    
    $
    9,339
    
    
    $
    8,039Incentive fee
    
    
    
    
    
    
    
    
    
    
    2,708
    
    
    
    Incentive fee  stock based
    
    
    977
    
    
    
    
    
    
    
    1,853
    
    
    
    Total management and
incentive fees
    
    $
    4,156
    
    
    $
    2,799
    
    
    $
    13,900
    
    
    $
    8,039
      64




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##### Table of Contents



REIT Status:
  65




---



##### Table of Contents



ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
 Market Risk:
   66




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##### Table of Contents



Projected Percentage Change In
Earnings Per Share
Given LIBOR Movements
 Change in LIBOR,
    
    Projected Change in+/- Basis Points
    
    Earnings per Share-200
    
    $0.00-100
    
    $0.00-50
    
    $0.00Base Case+50
    
    $(0.00)+100
    
    $(0.00)+200
    
    $(0.00)
 67




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##### Table of Contents



Duration  GAAP book value at September 30, 2006
    
    
    7.7Less:Duration contribution of CDO I liabilities
    
    
    (1.2
    )Duration contribution of CDO II liabilities
    
    
    (1.0
    )Duration contribution of CDO III liabilities
    
    
    (1.0
    )Duration contribution of CDO HY3 liabilities
    
    
    (0.7
    )Duration contribution of Series C Preferred Stock
    
    
    (0.1
    )Duration contribution of Junior subordinated
notes
    
    
    (1.1
    )Economic duration at September 30, 2006
    
    
    2.6
  Credit Risk:
  68




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##### Table of Contents



69




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##### Table of Contents



Asset and Liability Management:
  Currency Risk:
  70




---



##### Table of Contents



ITEM 4. Controls and Procedures
   71




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##### Table of Contents



Exhibit No.
    
    Description31.1
    
    Certification of Chief Executive Officer31.2
    
    Certification of Chief Financial Officer32.1
    
    Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
 72




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##### Table of Contents



ANTHRACITE CAPITAL, INC.Dated: November 9, 2006
    
    By:
    
    /s/ Christopher A. MilnerName:
    
    Christopher A. MilnerTitle:
    
    Chief Executive Officer(duly authorized
representative)Dated: November 9, 2006
    
    By:
    
    /s/ James J. LillisName:
    
    James J. LillisTitle:
    
    Chief Financial Officer
 73