##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q







|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended: June 30, 2009

OR



| ̈ | 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: 001-32026





ALESCO FINANCIAL INC.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Maryland                                                       |  | 16-1685692                          
|(State or other jurisdiction of Incorporation or organization) |  | (IRS Employer Identification Number)

Cira Centre

2929 Arch Street, 17thFloor

Philadelphia, Pennsylvania 19104

(Address of principal executive offices, Zip Code)

(215) 701-9555

(Registrants telephone number, including area code)





Indicate by check mark
whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes     ̈  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).     ̈  Yes     ̈  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (check one)



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer         |  | x
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller reporting company |  |  ̈

Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the
Exchange Act).     ̈  Yes    x  No

As of August 14, 2009 there were 60,169,240 shares of common stock ($0.001 par value per share) of Alesco Financial Inc. outstanding.









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##### Table of Contents

ALESCO FINANCIAL INC.

TABLE OF CONTENTS



|                              |  |                                                                                       |  |   
|----------------------------- |  | ------------------------------------------------------------------------------------- |  | --
|Part I. Financial Information |  | 1                                                                                    
|                              |  |                                                                                      
|Item 1.                       |  | Financial Statements (Unaudited)                                                      |  | 1 
|                              |  |                                                                                      
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 26
|                              |  |                                                                                      
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 50
|                              |  |                                                                                      
|Item 4.                       |  | Controls and Procedures                                                               |  | 51
|                              | 
|Part II. Other Information    |  | 52                                                                                   
|                              |  |                                                                                      
|Item 1.                       |  | Legal Proceedings                                                                     |  | 52
|                              |  |                                                                                      
|Item 1A.                      |  | Risk Factors                                                                          |  | 52
|                              |  |                                                                                      
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 52
|                              |  |                                                                                      
|Item 3.                       |  | Defaults Upon Senior Securities                                                       |  | 53
|                              |  |                                                                                      
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                   |  | 53
|                              |  |                                                                                      
|Item 5.                       |  | Other Information                                                                     |  | 53
|                              |  |                                                                                      
|Item 6.                       |  | Exhibits                                                                              |  | 53





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##### Table of Contents

PART I. FINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS (UNAUDITED).
|------- | ---------------------------------

Alesco
Financial Inc.

Consolidated Balance Sheets

(Unaudited and in thousands, except share and per share information)



|                                                                                                                                                                                                        |  |                    |           |   |                                     |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | --------- | - | ----------------------------------- | - | --------- | -
|                                                                                                                                                                                                        |  | As ofJune 30, 2009 |           |   | As ofDecember 31, 2008(As Adjusted) |  
|Assets                                                                                                                                                                                                  |  |                    |           |   |                                     |   |           |  
|Investments in debt securities and security-related receivables, at fair value                                                                                                                          |  | $                  | 2,349,220 |   |                                     | $ | 2,079,750 |  
|Investments in loans                                                                                                                                                                                    |  |                    |           |   |                                     |   |           |  
|Residential mortgages                                                                                                                                                                                   |  |                    | 839,668   |   |                                     |   | 901,491   |  
|Commercial mortgages                                                                                                                                                                                    |  |                    | 7,464     |   |                                     |   | 7,464     |  
|Leveraged loans (including amounts held for sale at fair value of $105,452 and $63,601, respectively)                                                                                                   |  |                    | 808,728   |   |                                     |   | 780,269   |  
|Loan loss reserve                                                                                                                                                                                       |  |                    | (158,512  | ) |                                     |   | (68,428   | )
|                                                                                                                                                                                                        |  |                    |           |   |                                     |   |           |  
|Total investments in loans, net                                                                                                                                                                         |  |                    | 1,497,348 |   |                                     |   | 1,620,796 |  
|Cash and cash equivalents                                                                                                                                                                               |  |                    | 88,922    |   |                                     |   | 86,035    |  
|Restricted cash and warehouse deposits                                                                                                                                                                  |  |                    | 69,668    |   |                                     |   | 54,059    |  
|Accrued interest receivable                                                                                                                                                                             |  |                    | 20,901    |   |                                     |   | 31,435    |  
|Deferred tax asset                                                                                                                                                                                      |  |                    | 3,676     |   |                                     |   | 25,036    |  
|Other assets                                                                                                                                                                                            |  |                    | 27,855    |   |                                     |   | 37,820    |  
|                                                                                                                                                                                                        |  |                    |           |   |                                     |   |           |  
|Total assets                                                                                                                                                                                            |  | $                  | 4,057,590 |   |                                     | $ | 3,934,931 |  
|                                                                                                                                                                                                        |  |                    |           |   |                                     |   |           |  
|                                                                                                                                                                                                        |  |                   
|Liabilities and equity                                                                                                                                                                                  |  |                    |           |   |                                     |   |           |  
|Indebtedness                                                                                                                                                                                            |  |                    |           |   |                                     |   |           |  
|Trust preferred obligations, at fair value                                                                                                                                                              |  | $                  | 138,203   |   |                                     | $ | 120,409   |  
|Securitized mortgage debt                                                                                                                                                                               |  |                    | 789,598   |   |                                     |   | 844,764   |  
|CDO notes payable (including amounts at fair value of $1,401,422 and $1,647,590, respectively)                                                                                                          |  |                    | 2,106,752 |   |                                     |   | 2,342,920 |  
|Warehouse credit facilities                                                                                                                                                                             |  |                    | 106,582   |   |                                     |   | 126,623   |  
|Recourse indebtedness                                                                                                                                                                                   |  |                    | 77,703    |   |                                     |   | 77,656    |  
|                                                                                                                                                                                                        |  |                    |           |   |                                     |   |           |  
|Total indebtedness                                                                                                                                                                                      |  |                    | 3,218,838 |   |                                     |   | 3,512,372 |  
|Accrued interest payable                                                                                                                                                                                |  |                    | 19,682    |   |                                     |   | 30,530    |  
|Related party payable                                                                                                                                                                                   |  |                    | 6,512     |   |                                     |   | 4,880     |  
|Derivative liabilities                                                                                                                                                                                  |  |                    | 191,087   |   |                                     |   | 266,984   |  
|Other liabilities                                                                                                                                                                                       |  |                    | 13,286    |   |                                     |   | 12,165    |  
|                                                                                                                                                                                                        |  |                    |           |   |                                     |   |           |  
|Total liabilities                                                                                                                                                                                       |  |                    | 3,449,405 |   |                                     |   | 3,826,931 |  
|Equity                                                                                                                                                                                                  |  |                    |           |   |                                     |   |           |  
|Preferred stock, $0.001 par value per share, 50,000,000 shares authorized, no shares issued and outstanding                                                                                             |  |                    |          |   |                                     |   |          |  
|Common stock, $0.001 par value per share, 100,000,000 shares authorized, 60,169,240 and 60,171,324 issued and outstanding, including 659,076
and 985,810 unvested restricted share awards, respectively |  |                    | 60        |   |                                     |   | 59        |  
|Additional paid-in-capital                                                                                                                                                                              |  |                    | 484,934   |   |                                     |   | 484,612   |  
|Accumulated other comprehensive loss                                                                                                                                                                    |  |                    | (12,705   | ) |                                     |   | (14,223   | )
|Accumulated deficit                                                                                                                                                                                     |  |                    | (67,664   | ) |                                     |   | (405,496  | )
|                                                                                                                                                                                                        |  |                    |           |   |                                     |   |           |  
|Total parent stockholders equity                                                                                                                                                                       |  |                    | 404,625   |   |                                     |   | 64,952    |  
|Noncontrolling interests in subsidiaries                                                                                                                                                                |  |                    | 203,560   |   |                                     |   | 43,048    |  
|                                                                                                                                                                                                        |  |                    |           |   |                                     |   |           |  
|Total equity                                                                                                                                                                                            |  |                    | 608,185   |   |                                     |   | 108,000   |  
|                                                                                                                                                                                                        |  |                    |           |   |                                     |   |           |  
|Total liabilities and equity                                                                                                                                                                            |  | $                  | 4,057,590 |   |                                     | $ | 3,934,931 |  
|                                                                                                                                                                                                        |  |                    |           |   |                                     |   |           |  

See accompanying notes.



1



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##### Table of Contents

Alesco Financial Inc.

Consolidated Statements of Income (Loss)

(Unaudited and in thousands, except share and per share
information)



|                                                                                                   |  |                                             |            |   |                                                          |   |            |                                           |  |   |                                                        |   |  |   |            |  
|-------------------------------------------------------------------------------------------------- |  | ------------------------------------------- | ---------- | - | -------------------------------------------------------- | - | ---------- | ----------------------------------------- |  | - | ------------------------------------------------------ | - |  | - | ---------- | -
|                                                                                                   |  | For theThree-MonthPeriod EndedJune 30,
2009 |            |   | For theThree-MonthPeriod EndedJune 30,
2008(As Adjusted) |   |            | For theSix-MonthPeriod EndedJune 30,
2009 |  |   | For theSix-MonthPeriod EndedJune 30,
2008(As Adjusted) |  
|Net investment income (loss):                                                                      |  |                                             |            |   |                                                          |   |            |                                           |  |   |                                                        |   |  |   |            |  
|Investment interest income                                                                         |  | $                                           | 90,382     |   |                                                          | $ | 137,520    |                                           |  | $ | 190,265                                                |   |  | $ | 311,415    |  
|Investment interest expense                                                                        |  |                                             | (53,403    | ) |                                                          |   | (101,588   | )                                         |  |   | (112,355                                               | ) |  |   | (241,372   | )
|Provision for loan losses                                                                          |  |                                             | (49,696    | ) |                                                          |   | (7,891     | )                                         |  |   | (100,154                                               | ) |  |   | (15,455    | )
|                                                                                                   |  |                                             |            |   |                                                          |   |            |                                           |  |   |                                                        |   |  |   |            |  
|Net investment income (loss)                                                                       |  |                                             | (12,717    | ) |                                                          |   | 28,041     |                                           |  |   | (22,244                                                | ) |  |   | 54,588     |  
|                                                                                                   |  |                                             |            |   |                                                          |   |            |                                           |  |   |                                                        |   |  |   |            |  
|                                                                                                   |  |                                             |            |  
|Expenses:                                                                                          |  |                                             |            |   |                                                          |   |            |                                           |  |   |                                                        |   |  |   |            |  
|Related party management compensation                                                              |  |                                             | 3,389      |   |                                                          |   | 4,197      |                                           |  |   | 6,842                                                  |   |  |   | 8,942      |  
|General and administrative                                                                         |  |                                             | 4,242      |   |                                                          |   | 3,545      |                                           |  |   | 8,638                                                  |   |  |   | 7,160      |  
|                                                                                                   |  |                                             |            |   |                                                          |   |            |                                           |  |   |                                                        |   |  |   |            |  
|Total expenses                                                                                     |  |                                             | 7,631      |   |                                                          |   | 7,742      |                                           |  |   | 15,480                                                 |   |  |   | 16,102     |  
|Other income and expense:                                                                          |  |                                             |            |   |                                                          |   |            |                                           |  |   |                                                        |   |  |   |            |  
|Interest and other income                                                                          |  |                                             | 184        |   |                                                          |   | 1,131      |                                           |  |   | 592                                                    |   |  |   | 2,625      |  
|Net change in fair value of investments in debt securities and loans and non-recourse indebtedness |  |                                             | 540,908    |   |                                                          |   | (132,651   | )                                         |  |   | 547,785                                                |   |  |   | 70,208     |  
|Net change in fair value of derivative contracts                                                   |  |                                             | 36,492     |   |                                                          |   | 37,055     |                                           |  |   | 31,739                                                 |   |  |   | (45,808    | )
|Credit default swap premiums                                                                       |  |                                             |           |   |                                                          |   | (1,536     | )                                         |  |   |                                                       |   |  |   | (2,872     | )
|Impairments on other investments and intangible assets                                             |  |                                             | (2,670     | ) |                                                          |   | (4,286     | )                                         |  |   | (4,748                                                 | ) |  |   | (12,844    | )
|Loss on disposition of consolidated entities                                                       |  |                                             |           |   |                                                          |   | (5,558     | )                                         |  |   |                                                       |   |  |   | (5,558     | )
|Net realized loss on sale of assets                                                                |  |                                             | (4,281     | ) |                                                          |   | (1,742     | )                                         |  |   | (16,126                                                | ) |  |   | (3,191     | )
|                                                                                                   |  |                                             |            |   |                                                          |   |            |                                           |  |   |                                                        |   |  |   |            |  
|Earnings (loss) before benefit (provision) for income taxes                                        |  |                                             | 550,285    |   |                                                          |   | (87,288    | )                                         |  |   | 521,518                                                |   |  |   | 41,046     |  
|Benefit (provision) for income taxes                                                               |  |                                             | (8,380     | ) |                                                          |   | 2,975      |                                           |  |   | (22,568                                                | ) |  |   | 3,402      |  
|                                                                                                   |  |                                             |            |   |                                                          |   |            |                                           |  |   |                                                        |   |  |   |            |  
|Net income (loss)                                                                                  |  |                                             | 541,905    |   |                                                          |   | (84,313    | )                                         |  |   | 498,950                                                |   |  |   | 44,448     |  
|Less: Net (income) loss attributable to noncontrolling interests                                   |  |                                             | (168,240   | ) |                                                          |   | 3,109      |                                           |  |   | (161,118                                               | ) |  |   | (40,765    | )
|                                                                                                   |  |                                             |            |   |                                                          |   |            |                                           |  |   |                                                        |   |  |   |            |  
|Net income (loss) attributable to common stockholders                                              |  | $                                           | 373,665    |   |                                                          | $ | (81,204    | )                                         |  | $ | 337,832                                                |   |  | $ | 3,683      |  
|                                                                                                   |  |                                             |            |   |                                                          |   |            |                                           |  |   |                                                        |   |  |   |            |  
|                                                                                                   |  |                                             |            |  
|Earnings (loss) per sharebasic:                                                                   |  |                                             |            |   |                                                          |   |            |                                           |  |   |                                                        |   |  |   |            |  
|Basic earnings (loss) per share                                                                    |  | $                                           | 6.21       |   |                                                          | $ | (1.36      | )                                         |  | $ | 5.61                                                   |   |  | $ | 0.06       |  
|                                                                                                   |  |                                             |            |   |                                                          |   |            |                                           |  |   |                                                        |   |  |   |            |  
|Weighted-average shares outstandingBasic                                                          |  |                                             | 60,169,240 |   |                                                          |   | 59,512,594 |                                           |  |   | 60,170,794                                             |   |  |   | 60,550,247 |  
|                                                                                                   |  |                                             |            |   |                                                          |   |            |                                           |  |   |                                                        |   |  |   |            |  
|                                                                                                   |  |                                             |            |  
|Earnings (loss) per sharediluted:                                                                 |  |                                             |            |   |                                                          |   |            |                                           |  |   |                                                        |   |  |   |            |  
|Diluted earnings (loss) per share                                                                  |  | $                                           | 6.21       |   |                                                          | $ | (1.36      | )                                         |  | $ | 5.61                                                   |   |  | $ | 0.06       |  
|                                                                                                   |  |                                             |            |   |                                                          |   |            |                                           |  |   |                                                        |   |  |   |            |  
|Weighted-average shares outstandingDiluted                                                        |  |                                             | 60,169,240 |   |                                                          |   | 59,512,594 |                                           |  |   | 60,170,794                                             |   |  |   | 60,550,247 |  
|                                                                                                   |  |                                             |            |   |                                                          |   |            |                                           |  |   |                                                        |   |  |   |            |  
|Distributions declared per common share                                                            |  | $                                           |           |   |                                                          | $ | 0.25       |                                           |  | $ |                                                       |   |  | $ | 0.50       |  
|                                                                                                   |  |                                             |            |   |                                                          |   |            |                                           |  |   |                                                        |   |  |   |            |  

See accompanying notes.



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##### Table of Contents

Alesco Financial Inc.

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited and in thousands)



|                                                                |  |                                             |          |   |                                                          |   |         |                                           |  |   |                                                        |   |  |   |         |  
|--------------------------------------------------------------- |  | ------------------------------------------- | -------- | - | -------------------------------------------------------- | - | ------- | ----------------------------------------- |  | - | ------------------------------------------------------ | - |  | - | ------- | -
|                                                                |  | For theThree-MonthPeriod EndedJune 30, 2009 |          |   | For theThree-MonthPeriod EndedJune 30, 2008(As Adjusted) |   |         | For theSix-MonthPeriod EndedJune 30, 2009 |  |   | For theSix-MonthPeriod EndedJune 30, 2008(As Adjusted) |  
|Net income (loss)                                               |  | $                                           | 541,905  |   |                                                          | $ | (84,313 | )                                         |  | $ | 498,950                                                |   |  | $ | 44,448  |  
|Other comprehensive income (loss):                              |  |                                             |          |   |                                                          |   |         |                                           |  |   |                                                        |   |  |   |         |  
|Net change in cash-flow hedges                                  |  |                                             | 1,386    |   |                                                          |   | 41,924  |                                           |  |   | 2,771                                                  |   |  |   | 44,507  |  
|                                                                |  |                                             |          |   |                                                          |   |         |                                           |  |   |                                                        |   |  |   |         |  
|Comprehensive income (loss)                                     |  |                                             | 543,291  |   |                                                          |   | (42,389 | )                                         |  |   | 501,721                                                |   |  |   | 88,955  |  
|Comprehensive income attributable to noncontrolling interests   |  |                                             | (168,867 | ) |                                                          |   | 2,441   |                                           |  |   | (162,371                                               | ) |  |   | (42,060 | )
|                                                                |  |                                             |          |   |                                                          |   |         |                                           |  |   |                                                        |   |  |   |         |  
|Comprehensive income (loss) attributable to common stockholders |  | $                                           | 374,424  |   |                                                          | $ | (39,948 | )                                         |  | $ | 339,350                                                |   |  | $ | 46,895  |  
|                                                                |  |                                             |          |   |                                                          |   |         |                                           |  |   |                                                        |   |  |   |         |  

See accompanying notes.



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##### Table of Contents

Alesco Financial Inc.

Consolidated Statements of Equity

(Unaudited and in thousands, except share information)



|                                          |  |              |  |                          |    |                                   |   |         |                    |   |         |                                 |  |                                        |          |   |             |   |         |  |   |         |   |  |   |         |  
|----------------------------------------- |  | ------------ |  | ------------------------ | -- | --------------------------------- | - | ------- | ------------------ | - | ------- | ------------------------------- |  | -------------------------------------- | -------- | - | ----------- | - | ------- |  | - | ------- | - |  | - | ------- | -
|                                          |  | Common Stock |  | AdditionalPaid InCapital |    | AccumulatedOtherComprehensiveLoss |   |         | AccumulatedDeficit |   |         | Total ParentStockholdersEquity |  | NoncontrollingInterests inSubsidiaries |          |   | TotalEquity |  
|                                          |  | Shares       |  | Par Value                |    |                                   |   |         |                    |  
|Balance, December 31, 2008 (As Adjusted)  |  | 59,185,514   |  | $                        | 59 |                                   | $ | 484,612 |                    | $ | (14,223 | )                               |  | $                                      | (405,496 | ) |             | $ | 64,952  |  | $ | 43,048  |   |  | $ | 108,000 |  
|Net income                                |  |             |  |                          |   |                                   |   |        |                    |   |        |                                 |  |                                        | 337,832  |   |             |   | 337,832 |  |   | 161,118 |   |  |   | 498,950 |  
|Other comprehensive income                |  |             |  |                          |   |                                   |   |        |                    |   | 1,518   |                                 |  |                                        |         |   |             |   | 1,518   |  |   | 1,253   |   |  |   | 2,771   |  
|Stock-based compensation expense          |  | 324,650      |  |                          | 1  |                                   |   | 322     |                    |   |        |                                 |  |                                        |         |   |             |   | 323     |  |   |        |   |  |   | 323     |  
|Distributions to noncontrolling interests |  |             |  |                          |   |                                   |   |        |                    |   |        |                                 |  |                                        |         |   |             |   |        |  |   | (1,859  | ) |  |   | (1,859  | )
|                                          |  |              |  |                          |    |                                   |   |         |                    |   |         |                                 |  |                                        |          |   |             |   |         |  |   |         |   |  |   |         |  
|Balance, June 30, 2009                    |  | 59,510,164   |  | $                        | 60 |                                   | $ | 484,934 |                    | $ | (12,705 | )                               |  | $                                      | (67,664  | ) |             | $ | 404,625 |  | $ | 203,560 |   |  | $ | 608,185 |  
|                                          |  |              |  |                          |    |                                   |   |         |                    |   |         |                                 |  |                                        |          |   |             |   |         |  |   |         |   |  |   |         |  

See accompanying notes.



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##### Table of Contents

Alesco Financial Inc.

Consolidated Statements of Cash Flows

(Unaudited and in thousands)



|                                                                                                   |  |                                           |          |   |                                                        |   |          |  
|-------------------------------------------------------------------------------------------------- |  | ----------------------------------------- | -------- | - | ------------------------------------------------------ | - | -------- | -
|                                                                                                   |  | For theSix-MonthPeriod EndedJune 30, 2009 |          |   | For theSix-MonthPeriod EndedJune 30, 2008(As Adjusted) |  
|Operating activities:                                                                              |  |                                           |          |   |                                                        |   |          |  
|Net income                                                                                         |  | $                                         | 498,950  |   |                                                        | $ | 44,448   |  
|Adjustments to reconcile net income to cash flow from operating activities:                        |  |                                           |          |   |                                                        |   |          |  
|Provision for loan losses                                                                          |  |                                           | 100,154  |   |                                                        |   | 15,455   |  
|Stock-based compensation expense                                                                   |  |                                           | 323      |   |                                                        |   | 960      |  
|Net premium and discount amortization on investments and loans                                     |  |                                           | (2,310   | ) |                                                        |   | 239      |  
|Amortization of deferred financing costs                                                           |  |                                           | 716      |   |                                                        |   | 1,068    |  
|Accretion of discounts on indebtedness                                                             |  |                                           | 353      |   |                                                        |   | 565      |  
|Net change in fair value of derivative contracts                                                   |  |                                           | (70,408  | ) |                                                        |   | 29,530   |  
|Net change in fair value of investments in debt securities and loans and non-recourse indebtedness |  |                                           | (547,785 | ) |                                                        |   | (70,208  | )
|Impairments on other investments and intangible assets                                             |  |                                           | 4,748    |   |                                                        |   | 12,844   |  
|Net realized loss on sale of assets                                                                |  |                                           | 16,126   |   |                                                        |   | 3,191    |  
|Loss on disposition of consolidated entities                                                       |  |                                           |         |   |                                                        |   | 5,558    |  
|Proceeds from sale of real estate owned                                                            |  |                                           | 5,607    |   |                                                        |   |         |  
|Changes in assets and liabilities:                                                                 |  |                                           |          |   |                                                        |   |          |  
|Accrued interest receivable                                                                        |  |                                           | 10,573   |   |                                                        |   | 13,018   |  
|Other assets                                                                                       |  |                                           | 19,293   |   |                                                        |   | 69,433   |  
|Accrued interest payable                                                                           |  |                                           | (13,816  | ) |                                                        |   | (25,035  | )
|Related party payable                                                                              |  |                                           | 1,632    |   |                                                        |   | 405      |  
|Other liabilities                                                                                  |  |                                           | 2,292    |   |                                                        |   | (3,598   | )
|                                                                                                   |  |                                           |          |   |                                                        |   |          |  
|Net cash provided by operating activities                                                          |  |                                           | 26,448   |   |                                                        |   | 97,873   |  
|Investing activities:                                                                              |  |                                           |          |   |                                                        |   |          |  
|Purchase of investments in debt securities and security-related receivables                        |  |                                           |         |   |                                                        |   | (10,122  | )
|Principal repayments from investments in debt securities and security-related receivables          |  |                                           | 14,478   |   |                                                        |   | 15,945   |  
|Purchase of loans                                                                                  |  |                                           | (23,452  | ) |                                                        |   | (133,312 | )
|Principal repayments from loans                                                                    |  |                                           | 89,391   |   |                                                        |   | 131,289  |  
|Proceeds from sale of loans                                                                        |  |                                           | 16,692   |   |                                                        |   | 68,197   |  
|Proceeds from sale of investments in debt securities and security-related receivables              |  |                                           |         |   |                                                        |   | 15,215   |  
|(Increase) decrease in restricted cash and warehouse deposits                                      |  |                                           | (15,609  | ) |                                                        |   | 3,964    |  
|                                                                                                   |  |                                           |          |   |                                                        |   |          |  
|Net cash provided by investing activities                                                          |  |                                           | 81,500   |   |                                                        |   | 91,176   |  
|Financing activities:                                                                              |  |                                           |          |   |                                                        |   |          |  
|Proceeds from issuance of CDO notes payable                                                        |  |                                           | 10,000   |   |                                                        |   | 42,386   |  
|Repayments of CDO notes payable                                                                    |  |                                           | (36,517  | ) |                                                        |   | (32,493  | )
|Proceeds from warehouse credit facilities                                                          |  |                                           |         |   |                                                        |   | 131,890  |  
|Repayments of warehouse credit facilities                                                          |  |                                           | (20,041  | ) |                                                        |   | (157,187 | )
|Repayments of securitized mortgage debt                                                            |  |                                           | (55,471  | ) |                                                        |   | (71,203  | )
|Repayments of other derivative contracts                                                           |  |                                           | (1,173   | ) |                                                        |   | (3,190   | )
|Distributions to noncontrolling interests in CDOs                                                  |  |                                           | (1,859   | ) |                                                        |   | (9,550   | )
|Distributions paid to common stockholders                                                          |  |                                           |         |   |                                                        |   | (33,907  | )
|                                                                                                   |  |                                           |          |   |                                                        |   |          |  
|Net cash used in financing activities                                                              |  |                                           | (105,061 | ) |                                                        |   | (133,254 | )
|                                                                                                   |  |                                           |          |   |                                                        |   |          |  
|Net change in cash and cash equivalents                                                            |  | $                                         | 2,887    |   |                                                        | $ | 55,795   |  
|Cash and cash equivalents at the beginning of the period                                           |  |                                           | 86,035   |   |                                                        |   | 80,176   |  
|                                                                                                   |  |                                           |          |   |                                                        |   |          |  
|Cash and cash equivalents at the end of the period                                                 |  | $                                         | 88,922   |   |                                                        | $ | 135,971  |  
|                                                                                                   |  |                                           |          |   |                                                        |   |          |  
|                                                                                                   |  |                                          
|Supplemental cash flow information:                                                                |  |                                           |          |   |                                                        |   |          |  
|Transfer of residential mortgage loans to real estate owned                                        |  | $                                         | 11,493   |   |                                                        | $ | 12,791   |  
|Distributions payable                                                                              |  |                                           |         |   |                                                        |   | 15,239   |  
|Non-cash purchase of debt securities                                                               |  |                                           | 4,999    |   |                                                        |   |         |  
|Non-cash sale of debt securities                                                                   |  |                                           | 4,999    |   |                                                        |   |         |  
|Non-cash decrease in assets upon disposition of consolidated entity                                |  |                                           |         |   |                                                        |   | 313,950  |  
|Non-cash decrease in liabilities upon disposition of consolidated entity                           |  |                                           |         |   |                                                        |   | 313,950  |  

See accompanying notes.



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Alesco Financial Inc.

Notes to Consolidated Financial Statements

As of June 30, 2009

(Unaudited and in thousands, except share and per share amounts)

NOTE 1: THE COMPANY

Alesco Financial Trust (AFT) was organized as a Maryland real estate
investment trust (REIT) on October 25, 2005 and commenced operations on January 31, 2006. On January 31, 2006, February 2, 2006, and March 1, 2006, AFT completed the sale of 11,107,570 common shares of
beneficial interest at an offering price of $10.00 per share in a private offering. AFT received proceeds from this offering of $102.4 million, net of placement fees and offering costs.

On October 6, 2006, the merger between AFT and Sunset Financial Resources, Inc. (Sunset) was completed and the combined company was
renamed Alesco Financial Inc. Pursuant to the terms of the Amended and Restated Agreement and Plan of Merger, as amended by letter agreements dated September 5, 2006 and September 29, 2006, upon the completion of the merger, each share of
beneficial interest of AFT was converted into 1.26 shares of common stock of Sunset, which resulted in the issuance of 14,415,530 shares of common stock. In accordance with U.S. generally accepted accounting principles (GAAP), the
transaction was accounted for as a reverse acquisition, and AFT was deemed to be the accounting acquirer and all of Sunsets assets and liabilities were required to be revalued as of the acquisition date. As used in these consolidated financial
statements, the term the Company, we, us and our refer to the operations of AFT from January 31, 2006 through October 6, 2006, and the combined operations of the merged company subsequent to
October 6, 2006. Sunset refers to the historical operations of Sunset Financial Resources, Inc. through October 6, 2006, the merger date.

Sunset was incorporated in Maryland on October 6, 2003, completed its initial public offering of common stock on March 22, 2004 and was traded on the New York Stock Exchange (the NYSE) under the
ticker symbol SFO. Sunset elected to be taxed as a REIT for U.S. federal income tax purposes and the Company intends to continue to comply with these tax provisions. On October 9, 2006, the Company began trading on the NYSE under
the ticker symbol AFN. On November 27, 2006, the Company closed a public offering of 30,360,000 shares of the Companys common stock, par value $0.001 per share, at a public offering price of $9.00 per share, net of placement
fees and offering costs. On June 25, 2007, the Company closed a public offering of 8,000,000 shares of the Companys common stock, par value $0.001 per share, at a public offering price of $9.25 per share, net of placement fees and
offering costs.

The Company is a specialty finance company that has historically invested primarily in the following target asset classes,
subject to maintaining the Companys status as a REIT under the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, and its exemption from regulation under the Investment Company Act of 1940, as amended, or the Investment
Company Act:



| |  |  | subordinated debt financings, primarily in the form of trust preferred securities, or TruPS, issued by banks or bank holding companies and insurance companies, and
surplus notes issued by insurance companies;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | leveraged loans made to small and mid-sized companies in a variety of industries, including the consumer products and manufacturing industries; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | mortgage loans, other real estate-related senior and subordinated debt securities, and residential mortgage-backed securities, or RMBS.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------

The Company has historically financed investments in these target asset classes on a short-term basis with on and
off-balance sheet warehouse facilities or other short-term financing arrangements and on a long-term basis with securitization vehicles, including collateralized debt obligations (CDOs) and collateralized loan obligations
(CLOs).

The Company may also invest opportunistically from time to time in other types of investments within its
managers and Cohen Brothers, LLCs (Cohen & Company or Cohen) areas of expertise and experience, subject to maintaining its qualification as a REIT and an exemption from regulation under the Investment
Company Act.



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Proposed Merger with Cohen & Company

On February 20, 2009, the Company signed a definitive merger agreement with Cohen & Company, the parent of the Companys manager. The
Companys Board of Directors and Cohens Board of Managers have each unanimously approved the transaction. In the proposed merger, Cohen & Company will merge with a subsidiary of the Company and will survive the merger as a
subsidiary of the Company. In the proposed merger, (i) members who own Class A units of membership interest and Class B units of membership interest in Cohen & Company will have the option to exchange their membership units
in Cohen & Company for either 0.57372 shares of the Companys common stock or 0.57372 replacement units of membership interest in Cohen & Company and (ii) Daniel G. Cohen, who owns Class C units of membership
interest in Cohen & Company, will be entitled to receive one share of our Series A Voting Convertible Preferred Stock, par value $0.001 per share, which is referred to herein as the Series A share. The Series A share will have no economic
rights but will entitle the holder thereof to elect a number equal to at least one-third (but less than a majority) of our board of directors. Beginning in July 2010, the holder of the Series A share may convert the Series A share into our Series B
Voting Non-Convertible Preferred Stock, par value $0.001 per share (referred to herein as the Series B shares), which will have no economic rights but will entitle such holder to vote together with our stockholders on all matters presented to our
stockholders and to exercise approximately 31.9% of the voting power of our common stock. Any outstanding Series A share and Series B shares shall be redeemed by us on December 31, 2012 for cash equal to the aggregate par value of the shares.
The replacement units of membership interest in Cohen & Company may be redeemed for cash or an equivalent number of our common stock in the future, at our option after specified lock-up periods. Holders of the Companys common stock
will continue to hold their shares of the Company. Pursuant to the merger agreement, the Company expects to complete a 1 for 10 reverse split of its common stock. It is currently expected that the Companys current shareholders will own 56.5%
of the Companys shares of common stock immediately after the merger and former unit holders of Cohen & Company will hold the balance; however, the actual percentages will not be known until members of Cohen & Company have
made their elections to receive the Companys common stock or replacement units of Cohen & Company. If all Cohen & Company membership interests were to be redeemed in the future, if the Company were to elect to issue shares of
its common stock upon such redemption and if no other changes in the number of the Companys outstanding shares of common stock were to occur, the Companys current shareholders would own 38.5%, and former Cohen & Company members
would own 61.5%, of the combined company. Cohen & Company will be treated as the acquirer for accounting purposes.

The proposed
merger, which is expected to close during the second half of 2009, is subject to a number of closing conditions, including the receipt of third party consents and other conditions set forth in the definitive merger agreement. In addition, the merger
is subject to approval by the affirmative vote of a majority of the votes cast by holders of the Companys common stock, provided that the number of votes cast on the matter represents over 50% in interest of all securities entitled to vote on
the matter.

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been
prepared by management in accordance with GAAP. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and
regulations, although we believe that the disclosures included are adequate to make the information presented not misleading. The unaudited interim consolidated financial statements should be read in conjunction with our audited financial statements
for the period ended December 31, 2008, included in our Annual Report on Amendment No. 2 to the Form 10-K/A for the year ended December 31, 2008, filed with the Securities and Exchange Commission (the SEC) on August 17, 2009. See
Item 8-Financial Statements and Supplementary Data included in our Annual Report on Amendment No. 2 to the Form 10-K/A for the year ended December 31, 2008 filed with the SEC on August 17, 2009. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments necessary to present fairly our consolidated financial position and consolidated results of operations and cash flows, are included. The results of operations for the interim periods
presented are not necessarily indicative of the results for the full year.

The preparation of consolidated financial statements in
conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Principles of Consolidation

The consolidated
financial statements reflect the accounts of the Company and its majority-owned and/or controlled subsidiaries and those entities for which the Company is determined to be the primary beneficiary in accordance with Financial Accounting Standard
Board (FASB) Interpretation No. 46(R), Consolidation of Variable Interest Entities (FIN 46R). The Company adopted Statement of Financial Accounting Standards (SFAS) No. 160,
Noncontrolling Interests in Consolidated Financial Statements-an amendment of Accounting Research Bulletin No. 51 (SFAS No. 160) on January 1, 2009. Accordingly, for consolidated subsidiaries that are less than
wholly owned, the third-party holdings of equity interests are referred to as noncontrolling interests. The



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portion of net income attributable to noncontrolling interests for such subsidiaries is presented as net income (loss) attributable to noncontrolling
interests on the consolidated statements of income, and the portion of the stockholders equity of such subsidiaries is presented as noncontrolling interests in subsidiaries on the consolidated balance sheets. All significant intercompany
accounts and transactions have been eliminated in consolidation.

The Companys parent stockholders equity includes the effects
of accounting for each of the underlying assets and liabilities of our consolidated variable interest entities (VIEs) as a separate unit of account. The creditors of each VIE consolidated within the Companys consolidated financial
statements have no recourse to the general credit or assets of the Company. The Companys maximum exposure to loss as a result of its involvement with each VIE is limited to the capital that the Company has invested in warehouse first-loss
deposits and the preference shares or debt of the CDO, CLO or other types of securitization structures.

When the Company obtains an
explicit or implicit interest in an entity, the Company evaluates the entity to determine if the entity is a VIE, and, if so, whether or not the Company is deemed to be the primary beneficiary of the VIE in accordance with FIN 46R. The Company
consolidates VIEs of which the Company is deemed to be the primary beneficiary or non-VIEs which the Company controls. The primary beneficiary of a VIE is the variable interest holder that absorbs the majority of the variability in the expected
losses or potentially the residual returns of the VIE. When determining the primary beneficiary of a VIE, the Company considers its aggregate explicit and implicit variable interests as a single variable interest. If the Companys variable
interest absorbs the majority of the variability in the expected losses or the residual returns of the VIE, the Company is considered the primary beneficiary of the VIE. The Company reconsiders its determination of whether an entity is a VIE and
whether the Company is the primary beneficiary of such VIE if certain events occur. If the Company determines that it is no longer the primary beneficiary of a VIE, the deconsolidation of the VIE is accounted for as a sale of the entity for no
proceeds.

The Company has determined that certain special purpose trusts formed by third party issuers of TruPS to issue such securities
are VIEs (Trust VIEs) and that the holder of the majority of the TruPS issued by the Trust VIEs would be the primary beneficiary of the special purpose trust. In most instances, the Company is the primary beneficiary of the Trust VIEs
because it holds, either explicitly or implicitly, the majority of the TruPS issued by the Trust VIEs. The acquisition of TruPS issued by Trust VIEs may be initially financed directly by CDOs, through on-balance sheet warehouse facilities or through
off-balance sheet warehouse facilities. Under the TruPS-related off-balance sheet warehouse agreements, the Company usually deposits cash collateral with an investment bank and bears the first dollar risk of loss, up to the Companys collateral
deposit, if an investment held under the warehouse facility is liquidated at a loss. This arrangement causes the Company to hold an implicit interest in the Trust VIEs that issued TruPS held by warehouse providers. The primary assets of the Trust
VIEs are subordinated debentures issued by third party sponsors of the Trust VIEs in exchange for the TruPS proceeds and the common equity securities of the Trust VIE. These subordinated debentures have terms that mirror the TruPS issued by the
Trust VIEs. Upon consolidation of the Trust VIEs, these subordinated debentures, which are assets of the Trust VIE, are included in the Companys consolidated financial statements and the related TruPS are eliminated. Pursuant to Emerging
Issues Task Force Issue No. 85-1: Classifying Notes Received for Capital Stock, subordinated debentures issued to Trust VIEs as payment for common equity securities issued by Trust VIEs to third party sponsors are recorded net of
the common equity securities issued.

Fair Value of Financial Instruments

Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements
(SFAS No. 157), which establishes a framework for measuring fair value by creating a three-level fair value hierarchy that ranks the quality and reliability of information used to determine fair value, and requires new disclosures
of assets and liabilities measured at fair value based on their level in the hierarchy. SFAS No. 157 also defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date.

SFAS No. 157 establishes a hierarchy for inputs used in measuring fair value that
maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the financial
instrument developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Companys estimates about what assumptions market participants would use in pricing the financial
instrument developed based on the best information available in the circumstances. The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:



| |  |  | Level 1: Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Since
valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Financial instruments utilizing Level 1 inputs generally include exchange-traded equity securities listed in active markets and most U.S. Government securities.



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| |  |  | Level 2: Valuations based on quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not
active or for which all significant inputs are observable, either directly or indirectly.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Financial instruments utilizing Level 2 inputs
generally include certain mortgage-backed securities, or MBS, and corporate debt securities and certain financial instruments classified as derivatives, including interest rate swap contracts and credit default swaps, where fair value is based on
observable market inputs.



| |  |  | Level 3: Inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or
liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has
been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and
considers factors specific to the asset or liability.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Financial instruments utilizing Level 3 inputs generally include investments in
TruPS and TruPS security-related receivables, MBS, leveraged loans classified as held for sale, and CDO notes payable.

The fair value of
the Companys financial instruments is generally based on observable market prices or inputs or derived from such prices or inputs, provided that such information is available. When quoted market prices are not available because certain
financial instruments do not actively trade in the public markets, fair value is based on comparisons to similar instruments or from internal valuation models.

The availability of observable inputs can vary depending on the financial instrument and is affected by a wide variety of factors, including, for example, the type of financial instrument, its age, whether the
financial instrument is traded on an active exchange or in the secondary market, the current market conditions, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less
observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. In certain
cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is
determined based on the lowest level input that is significant to the fair value measurement in its entirety.

Fair value is a market-based
measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Companys own assumptions
are set to reflect those that management believes market participants would use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that management believes are current as of the measurement date, including
during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or Level 2 to
Level 3.

Many financial instruments have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price
that the Company and others are willing to pay for an asset. Ask prices represent the lowest price that the Company and others are willing to accept for an asset. For financial instruments whose inputs are based on bid-ask prices, the Company does
not require that fair value always be a predetermined point in the bid-ask range. The Companys policy is to allow for mid-market pricing and adjusting to the point within the bid-ask range that results in the Companys best estimate of
fair value.

Fair value for certain of the Companys Level 3 financial instruments is derived using internal valuation models. These
internal valuation models include discounted cash flow analyses developed by management using current interest rates, estimates of the term of the particular contract, specific issuer information and other market data for securities without an
active market. In accordance with SFAS No. 157, the impact of the Companys own credit and creditworthiness of consolidated CDOs is also considered when measuring the fair value of liabilities, including derivative contracts. Where
appropriate, valuation adjustments are made to account for various factors, including bid-ask spreads, credit quality and market liquidity. These adjustments are applied on a consistent basis and are based upon observable inputs where available.
Managements estimate of fair value requires significant management judgment and is subject to a high degree of variability based upon market conditions, the availability of specific issuer information and managements assumptions.

Financial instruments that are generally classified in Level 3 of the fair value hierarchy primarily consist of investments in TruPS and
TruPS security-related receivables, certain MBS, and CDO notes payable. The valuation techniques used for those financial instruments classified in Level 3 are described below.

TruPS and TruPS Security-Related Receivables: The fair value of investments in TruPS is estimated using internal valuation models. These
investment securities generally do not trade in an active market and, therefore observable price quotations are not available. Fair value is determined based on prices of comparable debt securities, or discounted cash flow models using current



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interest rates, estimates of the term of the particular contract, specific issuer information, including estimates of comparable market credit spreads and
other market data.

MBS:The fair value of investments in MBS is determined based on external price and spread data. When
position-specific external price data are not observable, the valuation is based on prices of comparable bonds.

CDO Notes Payable:
The fair value of CDO notes payable liabilities is estimated using external price data (where observable), or internal valuation models. In the absence of observable price quotations, fair value is determined based on prices of comparable notes
payable, or discounted cash flow models using current interest rates, estimates of the term of the particular instrument, specific underlying collateral information, including estimates of credit spreads and other market data for securities without
an active market.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159 provides entities with an irrevocable option to report most financial assets and liabilities at fair value, with subsequent changes in fair value
reported in earnings. The election can be applied on an instrument-by-instrument basis. SFAS No. 159 establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement
attributes for similar types of assets and liabilities, and became effective for the Company on January 1, 2008. The Company elected to apply the fair value option for its investments in TruPS and TruPS security-related receivables, MBS, TruPS
CDO notes payable, MBS CDO notes payable, and TruPS obligations. The Company elected the fair value option for these instruments to enhance the transparency of its financial condition.

Investments

The Company invests primarily in TruPS and MBS debt securities, residential and
commercial mortgage portfolios, and leveraged loans and may invest in other types of real estate-related assets. The Company accounts for its investments in debt securities under Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, as amended and interpreted (SFAS No. 115), and designates each investment as a trading security, an available-for-sale security, or a held-to-maturity
security based on managements intent at the time of acquisition. Under SFAS No. 115, trading securities are recorded at their fair value each reporting period with fluctuations in fair value reported as a component of earnings.
Available-for-sale securities are recorded at fair value with changes in fair value reported as a component of other comprehensive income (loss). Fair value of investments subsequent to the adoption of SFAS No. 157 is described above. Upon the
sale of a security, the realized gain or loss is computed on a specific identification basis and is recorded as a component of earnings in the respective period.

Effective January 1, 2008, the Company classifies its investments in TruPS and MBS as trading securities (see Fair Value of Financial Instruments). These investments are carried at estimated fair
value, with changes in fair value of these instruments reported in income. Unamortized premiums and discounts on trading securities that are highly rated are recognized over the contractual life, adjusted for estimated prepayments using the
effective interest method. For securities representing beneficial interests in securitizations that are not highly rated (i.e., subordinate tranches of MBS), unamortized premiums and discounts are recognized over the expected life, as adjusted for
estimated prepayments and estimated credit losses of the securities using the guidance set forth in Emerging Issues Task Force Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests on
Securitized Financial Assets (EITF No. 99-20). Actual prepayment and credit loss experience are reviewed quarterly and effective yields are recalculated when differences arise between prepayments and credit losses originally
anticipated compared to amounts actually received plus anticipated future prepayments.

Effective January 1, 2008, the Company
accounts for its investments in subordinated debentures owned by Trust VIEs that the Company consolidates at fair value, with changes in fair value of these instruments reported in income. These Trust VIEs have no ability to sell, pledge, transfer
or otherwise encumber a company or the assets of a company until such subordinated debentures maturity. The Company accounts for investments in securities where the transfer meets the criteria as a secured financing under Statement of
Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS No. 140) as secured loans at fair value. The Companys investments in
security-related receivables represent interests in securities that were transferred to CDO securitization entities by transferors that maintain some level of continuing involvement.

The Company accounts for its investments in residential and commercial mortgages and leveraged loans at amortized cost. The carrying value of these
investments is adjusted for origination discounts/premiums, nonrefundable fees and direct costs for originating loans which are amortized into income over the terms of the loans using the effective yield method adjusted for the effects of estimated
prepayments based on Statement of Financial Accounting Standards No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases (SFAS No. 91).

The Company maintains an allowance for residential and commercial mortgages and leveraged loan losses based on managements
evaluation of known losses and inherent risks in the portfolios, including historical and industry loss experience, economic conditions and trends, estimated fair values, the quality of collateral and other relevant quantitative and qualitative
factors. Specific allowances for losses may be established for potentially impaired loans based on a comparison of the recorded carrying value of the loan to either the present value of the loans expected cash flow, the loans estimated
market price or the estimated fair value of the underlying collateral. The allowance is increased by charges to operations and decreased by charge-offs (net of recoveries).



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An impaired loan may be left on accrual status during the period the Company is pursuing repayment of the
loan; however, the loan is placed on non-accrual status at such time as the Company believes that scheduled debt service payments may not be paid when contractually due or the loan becomes greater than 90 days delinquent. While on non-accrual
status, interest income is recognized only upon actual receipt.

Loans Held for Sale

Loans held for sale are carried at the lower of cost or fair value. If the fair value of a loan is less than its cost basis, a valuation adjustment is
recognized in the consolidated statement of operations and the loans carrying value is adjusted accordingly. The loans classified as held for sale generally do not trade in an active market and, therefore observable price quotations are
generally not available. Fair value is determined based on prices of comparable loans, or internal valuation models that consider current interest rates, estimates of the term of the particular contract, specific issuer information, including
estimates of comparable market credit spreads and other market data. The valuation adjustment may be recovered in the event the fair value increases, which is also recognized in the consolidated statement of operations.

Transfers of Financial Assets

The Company
accounts for transfers of financial assets under SFAS No. 140 as either sales or financing arrangements. Transfers of financial assets that result in sale accounting are those in which (a) the transfer legally isolates the transferred
assets from the transferor, (b) the transferee has the right to pledge or exchange the transferred assets and no condition both constrains the transferees right to pledge or exchange the assets and provides more than a trivial benefit to
the transferor, and (c) the transferor does not maintain effective control over the transferred assets. If the transfer does not meet each of these criteria, the transfer is accounted for as a financing arrangement. Dispositions of financial
assets that are treated as sales are removed from the Companys accounts with any realized gain (loss) reflected in earnings during the period of sale. Dispositions of financial assets that are treated as financings are maintained on the
balance sheet with proceeds received from the legal transfer reflected as secured borrowings and no gain or loss is recognized.

Revenue Recognition

The Company recognizes interest income from investments in debt and other securities, residential and commercial mortgages, and
leveraged loans over the estimated life of the underlying financial instruments on an estimated yield to maturity basis.

In accordance
with Emerging Issues Task Force Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets (EITF No. 99-20), the Company recognizes interest
income from purchased interests in certain financial assets, including certain subordinated MBS, on an estimated effective yield to maturity basis. Management estimates the current yield on the reference amount of the investment based on estimated
cash flows after considering prepayment and credit loss expectations. The adjusted yield is then applied prospectively to recognize interest income for the next reporting period.

Derivative Instruments

The Company uses derivative financial instruments to attempt to hedge
all or a portion of the interest rate risk associated with its borrowings. In accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and
interpreted (SFAS No. 133), the Company measures each derivative instrument (including certain derivative instruments embedded in other contracts) at fair value and records such amounts in its consolidated balance sheet as either an
asset or liability. Derivatives qualifying and designated as cash-flow hedges are evaluated at inception and at subsequent balance sheet dates in order to determine whether they qualify for hedge accounting under SFAS No. 133. The hedge
instrument must be highly effective in achieving offsetting changes in cash flows of the hedged item attributable to the risk being hedged in order to qualify for hedge accounting. Derivative contracts are carried on the consolidated balance sheet
at fair value. For derivatives designated as cash flow hedges, the effective portions of changes in the fair value of the derivative are reported in other comprehensive income (loss). Changes in the ineffective portions of cash flow hedges are
recognized in earnings. Realized gains and losses on terminated contracts that were designated as hedges are maintained in accumulated other comprehensive income or loss and amortized into the consolidated statement of income over the contractual
life of the terminated contract unless it is probable that the forecasted transaction will not occur. In that case, the gain or loss in accumulated other comprehensive income or loss is reclassified to realized gain or loss in the consolidated
statement of income. The Company had no instruments designated as hedges during the six month periods ended June 30, 2009 and 2008, respectively.

The Company enters into derivatives that do not qualify for hedge accounting or for which the Company may not elect hedge accounting, including interest rate swaps, interest rate caps and floors, credit default and
total return swaps, under SFAS No. 133. These derivatives are carried at their fair value with changes in fair value reflected in the consolidated statement of income. The fair value of credit default swaps is based on quotations from
third-party brokers.



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Income Taxes

For tax purposes, Sunset is deemed to have acquired AFT on October 6, 2006. Sunset elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code and subsequent to the merger the
Company continues to comply with these requirements. Accordingly, the Company generally will not be subject to U.S. federal income tax to the extent of its distributions to stockholders and as long as certain asset, income, distribution and share
ownership tests are met. If the Company were to fail to meet these requirements, it would be subject to U.S. federal income tax, which could have a material adverse impact on its results of operations and amounts available for distributions to its
stockholders. Management believes that all of the criteria to maintain the Companys REIT qualification have been met for the applicable periods, but there can be no assurances that these criteria will continue to be met in subsequent periods.

The Company maintains domestic taxable REIT subsidiaries (TRSs), which may be subject to U.S. federal, state and local income
taxes. Current and deferred taxes are provided for on the portion of earnings (losses) recognized by the Company with respect to its interest in domestic TRSs. Deferred income tax assets and liabilities are computed based on temporary differences
between the GAAP consolidated financial statements and the federal and state income tax basis of assets and liabilities as of the consolidated balance sheet date. We evaluate the realizability of our deferred tax assets and recognize a valuation
allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of our deferred tax assets will not be realized. When evaluating the realizability of our deferred tax assets, we consider estimates of
expected future taxable income, existing and projected book/tax differences, tax planning strategies available, and the general and industry specific economic outlook. This realizability analysis is inherently subjective, as it requires management
to forecast our business and general economic environment in future periods. Changes in estimate of deferred tax asset realizability, if any, are included in income tax expense on the consolidated statements of income.

During the three and six-months ended June 30, 2009, the Company recorded $8.4 million and $22.6 million of provision for income taxes primarily
relating to increases to the fair value of certain leveraged loans classified as held-for-sale. The $21.4 million decrease in the Companys deferred tax asset as of June 30, 2009 as compared to the deferred tax asset as of
December 31, 2008 is also primarily attributable to the change in fair value of certain leveraged loans classified as held-for-sale.

Certain TRS entities are domiciled in the Cayman Islands and, accordingly, taxable income generated by these entities may not be subject to local income taxation, but generally will be included in the Companys income on a current
basis, whether or not distributed. Upon distribution of any previously included income to the Company, no incremental U.S. federal, state, or local income taxes would be payable by the Company.

Recent Accounting Pronouncements

In December
2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of Accounting Research Bulletin No. 51 (SFAS No. 160). SFAS
No. 160 requires reporting entities to present noncontrolling (minority) interests as equity (as opposed to as a liability or mezzanine equity) and provides guidance on the accounting for transactions between an entity and noncontrolling
interests. SFAS No. 160 applies prospectively as of the first annual reporting period beginning on or after December 15, 2008, except for the presentation and disclosure requirements which will be applied retrospectively for all periods
presented. As of January 1, 2009, the Company adopted SFAS No. 160 and the adoption of SFAS No. 160 resulted in the following changes to the presentation of the Companys prior period consolidated financial statements:
(1) reclassified all amounts previously included within the Minority interests financial statement caption to the Noncontrolling interests in subsidiaries financial statement caption, which is included within the equity
section of the Companys consolidated balance sheets; (2) consolidated net income (loss) was adjusted to include net income (loss) attributable to both the controlling and noncontrolling interests; and (3) consolidated comprehensive
income (loss) was adjusted to include comprehensive income (loss) attributable to both the controlling and noncontrolling interests. The adoption of SFAS No. 160 did not have an impact on net income (loss) for any prior periods. However, the
net income attributable to the Companys common stockholders for six months ended June 30, 2009 increased $14.4 million or $0.24 per diluted share, as a result of SFAS No. 160s requirement that noncontrolling interests continue
to be attributed their share of losses even if that attribution results in a deficit noncontrolling interest balance. There was no impact to net income for the three months ended June 30, 2009 as a result of the adoption of SFAS No. 160.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), Business Combinations
(SFAS No. 141(R)). SFAS 141(R) requires the acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction (whether a full or partial acquisition);
establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; requires expensing of most transaction and restructuring costs; and requires the acquirer to disclose to investors and other
users all of the information needed to evaluate and understand the nature and financial effect of the business combination. SFAS No. 141(R) applies to all transactions or other events in which the Company obtains control of one or more
businesses, including those sometimes referred to as true mergers or mergers of equals and combinations achieved without the transfer of consideration, for example, by contract alone or through the lapse of minority veto



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rights. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008.

In March 2008, the FASB issued Statement of Financial Accounting Standards
No. 161, Disclosures about Derivative Instruments and Hedging Activities  an amendment of SFAS No. 133 (SFAS No. 161). SFAS No. 161 requires enhanced disclosure related to derivatives and hedging
activities and thereby seeks to improve the transparency of financial reporting. Under SFAS No. 161, entities are required to provide enhanced disclosures relating to: (a) how and why an entity uses derivative instruments; (b) how
derivative instruments and related hedge items are accounted for under SFAS No. 133 and its related interpretations; and (c) how derivative instruments and related hedged items affect an entitys financial position, financial
performance and cash flows. The statement is effective for fiscal years beginning after November 15, 2008. The adoption of SFAS No. 161 did not have a material impact on our consolidated financial statements.

In May 2008, the FASB issued FASB Staff Position (FSP) No. Accounting Principles Board 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), or FSP APB 14-1, which clarifies the accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon
conversion. FSP APB 14-1 requires issuers to account separately for the liability and equity components of certain convertible debt instruments in a manner that reflects the issuers nonconvertible debt (unsecured debt) borrowing rate when
interest cost is recognized. The equity component is presented in parent stockholders equity and the accretion of the resulting discount on the debt is recognized as part of interest expense in the consolidated statement of operations. FSP APB
14-1 requires companies to retroactively apply the requirements of the pronouncement to all periods presented. As of January 1, 2009, the Company adopted FSP APB 14-1 and the effect of adoption was not material to the three months and six
months ended June 30, 2009 and 2008. However, the consolidated financial statements as of and for the year ended December 31, 2008 have been retroactively restated for the adoption, which resulted in an increase to the Companys net
loss of $1.6 million, or $0.03 per diluted share, and a $2.2 million increase to equity at January 1, 2008.

In June 2008, the FASB
issued FSP Emerging Issues Task Force 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1). FSP EITF 03-6-1 addresses whether instruments granted
in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method as described in Statement of Financial
Accounting Standards No. 128, Earnings per Share. Under the guidance in FSP EITF 03-6-1, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal
years. As of January 1, 2009, the Company adopted FSP EITF 03-6-1 and all prior-period earnings per share data presented was adjusted retrospectively. The effect of adoption had no material impact to the three-months and six months ended
June 30, 2008, and reduced basic and diluted earnings (loss) per share by $0.08 for both the three-months and six months ended June 30, 2009.

In June 2008, the FASB ratified the consensus reached by the Emerging Issues Task Force on Issue No. 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entitys Own
Stock (EITF No. 07-5). EITF No. 07-5 provides guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entitys own stock. EITF No. 07-5 applies to any
freestanding financial instrument or embedded feature that has all of the characteristics of a derivative or freestanding instrument that is potentially settled in an entitys own stock (with the exception of share-based payment awards within
the scope of SFAS 123(R)). To meet the definition of indexed to own stock, an instruments contingent exercise provisions must not be based on (a) an observable market, other than the market for the issuers stock (if
applicable), or (b) an observable index, other than an index calculated or measured solely by reference to the issuers own operations, and the variables that could affect the settlement amount must be inputs to the fair value of a
fixed-for-fixed forward or option on equity shares. EITF No. 07-5 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption of EITF No. 07-5 did not have a
material impact on our consolidated financial statements.

In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4). FSP FAS 157-4 provides additional guidance for estimating fair value in
accordance with FASB Statement No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased. FSP FAS 157-4 also includes guidance on identifying circumstances that
indicate a transaction is not orderly. FSP FAS 157-4 emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a
fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at
the measurement date under current market conditions. FSP FAS 157-4 is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted FSP FAS
157-4 in the second quarter of 2009 and the adoption did not have a material effect on our consolidated financial statements.



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In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments (FSP FAS 115-2 and FAS 124-2). FSP FAS 115-2 and FAS 124-2 amends the other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the
presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. FSP FAS 115-2 and FAS 124-2 does not amend existing recognition and measurement guidance related to other-than-temporary
impairments of equity securities. FSP FAS 115-2 and FAS 124-2 is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company does not have any
securities classified as available-for-sale and therefore, upon adoption in the second quarter of 2009, FSP FAS 115-2 and FAS 124-2 did not have a material effect on our consolidated financial statements.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1
and APB 28-1). FSP FAS 107-1 and APB 28-1 amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements. FSP FAS 107-1 and APB 28-1 also amends APB Opinion No. 28, Interim Financial Reporting,to require those disclosures in summarized financial information at interim
reporting periods. FSP FAS 107-1 and APB 28-1 is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted FSP FAS 107-1 and APB 28-1 in
the second quarter of 2009.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events, or SFAS No. 165,
which codifies the guidance regarding the disclosure of events occurring subsequent to the balance sheet date. SFAS No. 165 does not change the definition of a subsequent event (i.e. an event or transaction that occurs after the
balance sheet date but before the financial statements are issued) but requires disclosure of the date through which subsequent events were evaluated when determining whether adjustment to or disclosure in the financial statements is required.
SFAS No. 165 was effective for the three-month period ended June 30, 2009. For the three-month period ended June 30, 2009, we evaluated subsequent events through August 17, 2009 and provided the appropriate disclosures
on any subsequent events identified. The adoption of SFAS No. 165 did not have a material effect on our consolidated financial statements.

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140 (SFAS 166). SFAS 166 amends the derecognition guidance in SFAS
No. 140 and eliminates the concept of qualifying special-purpose entities (QSPEs). SFAS 166 is effective for fiscal years and interim periods beginning after November 15, 2009. Early adoption of SFAS 166 is prohibited. The
Company will adopt SFAS 166 on January 1, 2010 and does not expect the adoption to have a material effect on its consolidated financial statements.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS 167) which amends the consolidation guidance applicable to variable interest
entities (VIEs). An entity would consolidate a VIE, as the primary beneficiary, when the entity has both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the
entitys economic performance and (b) the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. Ongoing
reassessment of whether an enterprise is the primary beneficiary of a VIE is required. SFAS 167 amends FIN 46(R) to eliminate the quantitative approach previously required for determining the primary beneficiary of a VIE. SFAS 167 will be effective
for fiscal years and interim periods beginning after November 15, 2009. The Company will adopt SFAS 167 on January 1, 2010 and has not yet determined the effect of the adoption on its consolidated financial statements.

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles (SFAS 168). This standard identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements that are presented in conformity with GAAP. SFAS
168 establishes the FASB Accounting Standards Codification (Codification) as the single source of authoritative accounting principles recognized by the FASB in the preparation of financial statements in conformity with GAAP. Codification
does not create new accounting and reporting guidance rather it reorganizes GAAP pronouncements into approximately 90 topics within a consistent structure. All guidance contained in the Codification carries an equal level of authority. Relevant
portions of authoritative content, issued by the SEC, for SEC registrants, have been included in the Codification. After the effective date of SFAS 168, all nongrandfathered, non-SEC accounting literature not included in the Codification is
superseded and deemed nonauthoritative. SFAS 168 will be effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company will adopt SFAS 168 on September 30, 2009 and will update all
disclosures to reference Codification in its Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009.

NOTE 3: INVOLVEMENT
IN VARIABLE INTEREST ENTITIES

The following table presents information as of June 30, 2009 with respect to how the Companys
involvement with VIEs affects the Companys consolidated financial position, financial performance and cash flows.



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|                                                                          |  |           |           |                                         |   |         |                                   |  |   |                             |   |       |   |         |  |   |          
|------------------------------------------------------------------------- |  | --------- | --------- | --------------------------------------- | - | ------- | --------------------------------- |  | - | --------------------------- | - | ----- | - | ------- |  | - | ---------
|                                                                          |  | TruPSCDOs |           | Leveraged LoanCLOs andWarehouseFacility |   |         | ResidentialMortgageSecuritization |  |   | KlerosReal Estate(MBS) CDOs |   | Total
|Consolidated VIE assets                                                   |  | $         | 1,942,348 |                                         | $ | 816,356 |                                   |  | $ | 753,104                     |   |       | $ | 433,345 |  | $ | 3,945,153
|Consolidated VIE liabilities                                              |  |           | 1,323,728 |                                         |   | 816,761 |                                   |  |   | 793,566                     |   |       |   | 433,345 |  |   | 3,367,400
|Noncontrolling interests in consolidated VIE subsidiaries                 |  |           | 205,663   |                                         |   | (2,103  | )                                 |  |   |                            |   |       |   |        |  |   | 203,560  
|                                                                          |  |           |           |                                         |   |         |                                   |  |   |                             |   |       |   |         |  |   |          
|Net assets attributable to common stockholders                            |  | $         | 412,957   |                                         | $ | 1,698   |                                   |  | $ | (40,462                     | ) |       | $ |        |  | $ | 374,193  
|                                                                          |  |           |           |                                         |   |         |                                   |  |   |                             |   |       |   |         |  |   |          
|                                                                          |  |           |           |                                         |  
|                                                                          |  | TruPSCDOs |           | Leveraged LoanCLOs andWarehouseFacility |   |         | ResidentialMortgageSecuritization |  |   | KlerosReal Estate(MBS) CDOs |   | Total
|Maximum exposure to loss:(1)                                              |  |           |           |                                         |   |         |                                   |  |   |                             |   |       |   |         |  |   |          
|Debt and equity interests in CDOs, CLOs and other securitization vehicles |  | $         | 218,570   |                                         | $ | 48,100  |                                   |  | $ | 45,566                      |   |       | $ | 90,000  |  | $ | 402,236  
|Warehouse facility                                                        |  |           |          |                                         |   | 38,475  |                                   |  |   |                            |   |       |   |        |  |   | 38,475   
|                                                                          |  |           |           |                                         |   |         |                                   |  |   |                             |   |       |   |         |  |   |          
|Total maximum exposure to loss                                            |  | $         | 218,570   |                                         | $ | 86,575  |                                   |  | $ | 45,566                      |   |       | $ | 90,000  |  | $ | 440,711  
|                                                                          |  |           |           |                                         |   |         |                                   |  |   |                             |   |       |   |         |  |   |          



|(1) | Represents our total investments in VIEs, and is not adjusted for losses incurred to date.
|--- | ------------------------------------------------------------------------------------------

As of June 30, 2009, consolidated VIEs represent $374.2 million of net assets attributable to common stockholders (excluding non-controlling
interests). For the three and six-month periods ended June 30, 2009, net income from consolidated VIEs included in the Companys net income attributable to common stockholders was $376.5 million and $346.2 million, respectively. As of
June 30, 2009, the Company estimates that the fair value of the Companys investments in the preference shares and subordinated interests of consolidated VIEs is approximately $3.3 million. For the three and six months ended June 30,
2009, the Company received $4.4 million and $8.8 million in cash distributions from consolidated VIE entities.

NOTE 4: FAIR VALUE OF FINANCIAL
INSTRUMENTS

Effective January 1, 2008, the Company adopted SFAS No. 157, which requires additional disclosures about the
Companys assets and liabilities that are measured at fair value. The following table presents information about the Companys assets and liabilities (including derivatives that are presented net) measured at fair value on a recurring
basis as of June 30, 2009, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. The Companys assessment of the significance of a particular input to the fair value
measurement in its entirety requires judgment, and considers factors specific to the asset or liability.



|                                                           |  |                                                          |   |         |   |         |  |       |           |  |   |          
|---------------------------------------------------------- |  | -------------------------------------------------------- | - | ------- | - | ------- |  | ----- | --------- |  | - | ---------
|                                                           |  | Assets and Liabilities at Fair Value as of June 30, 2009
|                                                           |  | Level 1                                                  |   | Level 2 |   | Level 3 |  | Total
|Assets:                                                    |  |                                                          |   |         |   |         |  |       |           |  |   |          
|Investment in TruPS and TruPS security-related receivables |  | $                                                        |  |         | $ |        |  | $     | 1,927,585 |  | $ | 1,927,585
|MBS                                                        |  |                                                          |  |         |   |        |  |       | 421,635   |  |   | 421,635  
|Leveraged loans (classified as held for sale)              |  |                                                          |  |         |   |        |  |       | 105,452   |  |   | 105,452  
|                                                           |  |                                                          |   |         |   |         |  |       |           |  |   |          
|Total Assets                                               |  | $                                                        |  |         | $ |        |  | $     | 2,454,672 |  | $ | 2,454,672
|                                                           |  |                                                          |   |         |   |         |  |       |           |  |   |          



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|                        |  |                                                          |   |         |   |         |  |       |           |  |   |          
|----------------------- |  | -------------------------------------------------------- | - | ------- | - | ------- |  | ----- | --------- |  | - | ---------
|                        |  | Assets and Liabilities at Fair Value as of June 30, 2009
|                        |  | Level 1                                                  |   | Level 2 |   | Level 3 |  | Total
|Liabilities:            |  |                                                          |   |         |   |         |  |       |           |  |   |          
|TruPS CDO notes payable |  | $                                                        |  |         | $ |        |  | $     | 1,060,808 |  | $ | 1,060,808
|MBS CDO notes payable   |  |                                                          |  |         |   |        |  |       | 340,614   |  |   | 340,614  
|TruPS obligations       |  |                                                          |  |         |   |        |  |       | 138,203   |  |   | 138,203  
|Derivative liabilities  |  |                                                          |  |         |   | 190,487 |  |       | 600       |  |   | 191,087  
|                        |  |                                                          |   |         |   |         |  |       |           |  |   |          
|Total Liabilities       |  | $                                                        |  |         | $ | 190,487 |  | $     | 1,540,225 |  | $ | 1,730,712
|                        |  |                                                          |   |         |   |         |  |       |           |  |   |          

The tables presented below summarize the change in asset and liability carrying values associated
with Level 3 financial instruments during the six-month period ended June 30, 2009 (amounts in thousands):



|                                  |  |                        |           |   |                                                         |   |           |                  |  |   |                       |   |  |       |         |   |  |   |           |  
|--------------------------------- |  | ---------------------- | --------- | - | ------------------------------------------------------- | - | --------- | ---------------- |  | - | --------------------- | - |  | ----- | ------- | - |  | - | --------- | -
|Assets                            |  |                        |           |   | Investment inTruPS and TruPSSecurity-RelatedReceivables |   |           | MBS              |  |   | LeveragedLoans        |   |  | Total |        
|Balance at December 31, 2008      |  |                        |           |   |                                                         | $ | 1,621,480 |                  |  | $ | 458,270               |   |  | $     | 63,601  |   |  | $ | 2,143,351 |  
|Net payments, purchases and sales |  |                        |           |   |                                                         |   |          |                  |  |   | (13,154               | ) |  |       | (21,171 | ) |  |   | (34,325   | )
|Net transfers in/(out)            |  |                        |           |   |                                                         |   |          |                  |  |   |                      |   |  |       |        |   |  |   |          |  
|Gains/(losses) recorded in income |  |                        |           |   |                                                         |   | 306,105   |                  |  |   | (23,481               | ) |  |       | 63,022  |   |  |   | 345,646   |  
|                                  |  |                        |           |   |                                                         |   |           |                  |  |   |                       |   |  |       |         |   |  |   |           |  
|Balance at June 30, 2009          |  |                        |           |   |                                                         | $ | 1,927,585 |                  |  | $ | 421,635               |   |  | $     | 105,452 |   |  | $ | 2,454,672 |  
|                                  |  |                        |           |   |                                                         |   |           |                  |  |   |                       |   |  |       |         |   |  |   |           |  
|                                  |  |                        |           |   |                                                        
|Liabilities                       |  | TruPS CDONotes Payable |           |   | MBS CDONotes Payable                                    |   |           | TruPSObligations |  |   | DerivativeInstruments |   |  | Total |        
|Balance at December 31, 2008      |  | $                      | 1,314,037 |   |                                                         | $ | 333,553   |                  |  | $ | 120,409               |   |  | $     | 850     |   |  | $ | 1,768,849 |  
|Net payments, purchases and sales |  |                        | (21,012   | ) |                                                         |   | (15,505   | )                |  |   |                      |   |  |       |        |   |  |   | (36,517   | )
|Net transfers in/(out)            |  |                        |          |   |                                                         |   |          |                  |  |   |                      |   |  |       |        |   |  |   |          |  
|(Gains)/losses recorded in income |  |                        | (232,217  | ) |                                                         |   | 22,566    |                  |  |   | 17,794                |   |  |       | (250    | ) |  |   | (192,107  | )
|                                  |  |                        |           |   |                                                         |   |           |                  |  |   |                       |   |  |       |         |   |  |   |           |  
|Balance at June 30, 2009          |  | $                      | 1,060,808 |   |                                                         | $ | 340,614   |                  |  | $ | 138,203               |   |  | $     | 600     |   |  | $ | 1,540,225 |  
|                                  |  |                        |           |   |                                                         |   |           |                  |  |   |                       |   |  |       |         |   |  |   |           |  

Impact of Market Conditions on Fair Value Estimates

Fair value for certain of the Companys Level 3 financial instruments is derived using internal valuation models. These internal valuation models
include discounted cash flow analyses developed by management using current interest rates, estimates of the term of the particular instrument, specific issuer information and other market data for securities without an active market. The credit
markets in the United States began suffering significant disruption in the summer of 2007. This disruption began in the subprime residential mortgage sector and extended to the broader credit and financial markets generally. During the third quarter
of 2008, it became clear that the global economy has been adversely impacted by the credit crisis. Available liquidity, particularly through asset-backed securities (ABS) CDOs and other securitizations, declined precipitously during the second half
of 2007, and continued to decline in 2008 and 2009. Concerns about the capital adequacy of financial services companies, disruptions in global credit markets, volatility in commodities prices and continued pricing declines in the U.S. housing market
have led to further disruptions in the financial markets, adversely affected regional banks and have exacerbated the longevity and severity of the credit crisis.

All of these influences significantly disrupted the financial markets in which the Companys assets and liabilities trade; therefore, access to and the quality of external market data for use in the
Companys valuation analyses used to support the fair values presented within the consolidated balance sheets was extremely limited. The limited nature and variability of that market data required the Company to apply significant judgment in
its determination of the appropriate assumptions to use in the determination of fair value. While attempting to develop assumptions that would be used by a market participant, the Company noted that the limited access to and quality of external
market data would increase the range of estimates that could be considered fair value.

TruPS and TruPS Security-Related Receivables

The market conditions described above impacted the volume of observable inputs available to the Company in estimating the fair value of its TruPS and
TruPS security-related receivables. As of June 30, 2009, the Company estimated that the fair value of its TruPS portfolio was, on average, approximately $35 for every $100 of par. The Company arrived at this estimated fair value using a
discounted cash flow approach to value each individual TruPS. However, the Company notes that the range of fair value estimates for



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these securities is wide and that different market participants may arrive at different estimates based on how a market participant may evaluate the
characteristics of individual securities, combined with judgments regarding the timing of economic recovery, and changes in interest rates and issuers ability to call. If the Company were to value the TruPS portfolio using the average dollar
price at the high and low point of an estimated range that was determined based on 200 bps increases and decreases to the Companys estimated credit spread assumptions, it would result in the fair value of the TruPS portfolio increasing by $294
million or decreasing by $(225) million as compared to the amount recorded in the financial statements.

MBS Portfolio

As a result of the ongoing disruption in the housing market and the downturn in the overall economy, the non-agency subprime, Alt-A, and prime jumbo MBS
market experienced significant turmoil in 2007 and 2008, and the amount of current trading activity was extremely limited. As a result, the methods used to derive pricing for the Companys MBS portfolio were limited to pricing services and
broker quotes. In many instances, both the differential between the prices received from different sources for the same security and the bid/ask spreads widened significantly as compared to prior periods. These factors were considered by the Company
in making judgments as to the appropriate estimates of fair value, and the Company noted these factors would increase the range of estimates that could be considered fair value.

As of June 30, 2009, the Company estimated that the fair value of its MBS portfolio was, on average, approximately $19 for every $100 of par, based
on its best estimate of fair value for each individual MBS. However, the Company notes that the range of fair value estimates for these securities is wide and that different market participants may arrive at different estimates, based on how a
market participant may evaluate the characteristics of individual securities, combined with judgments regarding the timing of economic recovery, and changes in interest rates and prepayment speeds. If the Company were to value the MBS portfolio
using the dollar price at the high and low point of an estimated range that was determined to be 10% above or below the average dollar price of $19, it would result in the fair value of the MBS portfolio increasing by $42 million or decreasing by
$(42) million as compared to the amount recorded in the financial statements.

MBS and TruPS CDO Notes Payable and Trust Preferred Obligations

The market conditions described above also have an impact on the volume of observable inputs available to the Company in estimating the
fair value of the CDO notes payable and trust preferred obligations that finance the Companys MBS and TruPS portfolios. The MBS and TruPS assets serve as the sole source of collateral and cash flows for the MBS and TruPS CDO notes payable and
trust preferred obligations. As a result, the Company generally expects that there will be significant correlation between its fair value estimates of the CDO notes payable and its fair value estimates for the associated MBS and TruPS assets. This
expected price correlation between the underlying assets and the CDO notes payable was consistent with what the Company had historically experienced and observed in the market. However, during the three months ended June 30, 2009, changes in
market conditions significantly impacted the degree of this correlation. Changes in market conditions during the quarter had a significant positive impact on the pricing of credit risk associated with our individual TruPS investments. The change in
market perceptions regarding the benefits or risks associated with our investments in TruPS assets did not have a significant impact on the markets perception regarding the credit risk and other market risks of our CDO notes payable. As a result,
the correlation of the changes in fair value of our TruPS assets and CDO notes payable was not consistent with our historical experience and therefore, the changes in the fair value of our TruPS assets were significantly greater than the changes in
fair value of our TruPS related CDO notes payable during the three months ended June 30, 2009. If the Company were to value the MBS and TruPS CDO notes payable using the dollar price at the high and low point of an estimated range that was
determined to be 10% above or below the average dollar price of $18, it would result in the fair value of these instruments increasing by $140 million or decreasing by $(140) million as compared to the amount recorded in the financial statements.

Impact to the Company

While market
conditions existing at June 30, 2009 may cause significant variability in fair value estimates of the Companys consolidated investments in TruPS and TruPS security-related receivables, MBS and related MBS and TruPS CDO notes payable and
trust preferred obligations, the non-recourse nature of these assets and liabilities to the Company means that changes by the Company to recorded fair values of such instruments in the Companys financial statements do no have a material
economic impact on the Company.

The maximum loss from investments in TruPS and TruPS security-related receivables is limited to the
aggregate $219 million that the Company originally invested in the eight TruPS CDO entities through purchases of preference shares. As of June 30, 2009, the TruPS CDO entities, which the Company consolidates in accordance with FIN 46R, have
experienced $386.5 million of bank and insurance company defaults and $670.2 million of securities currently deferring interest, or 20.6% of the Companys combined TruPS portfolio. The TruPS deferrals and defaults described above have resulted
in the over-collateralization tests being triggered in all eight



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TruPS CDOs. The trigger of an over-collateralization test in a TruPS CDO means that the Company, as a holder of preference shares and subordinated interests,
will no longer receive current distributions of cash in respect of such interests until sufficient cash or collateral is retained in the CDOs to cure the over-collateralization tests, and the Company cannot predict when or if such an event will
occur. For this reason, the Company believes the fair value of its investments in preference shares and subordinated interests in the TruPS CDO entities is negligible and, therefore, changes by the Company to recorded fair values of the underlying
TruPS and TruPS security-related receivables collateral within the ranges described above would not have a material economic impact on the Company.

The maximum loss from investments in MBS which are all held by three Kleros Real Estate CDOs (Kleros Real Estate CDO I, II and IV) is limited to the $90 million that was originally invested by the Company into these Kleros Real Estate CDOs
through purchases of equity interests. All of the Kleros Real Estate CDOs are governed by indentures that provide the Company with no rights to the CDOs assets and provide the CDO noteholders with no recourse to the assets of the Company. The
Company consolidates the Kleros Real Estate CDOs in accordance with FIN 46R, which requires that the Company records the financial position and results of operations of the CDOs in the consolidated financial statements, without consideration that
the Companys maximum economic exposure to loss is $90 million. The Kleros Real Estate CDOs have all failed over-collateralization tests as a result of significant ratings agency downgrade activity and are no longer making cash distributions to
the Company related to its equity interests. The net cash flows of the Kleros Real Estate CDOs are currently being used to pay down the controlling class debtholders in each of the Kleros Real Estate CDOs. As previously disclosed, the Company has
received written notice from the trustees of Kleros Real Estate I, II, and IV that each CDO experienced an event of default. These events of default resulted from the failure of certain additional over-collateralization tests primarily due to credit
rating agency downgrades. The events of default provide the controlling class debtholder in each CDO with the option to liquidate all of the MBS assets collateralizing the particular CDO. The proceeds of any such liquidation would be used to repay
the controlling class debtholder. As a result of these circumstances, the Company believes that the fair value of the Companys equity interests in the Kleros Real Estate CDOs is zero, and that changes by the Company to recorded fair value of
the underlying MBS collateral within the ranges described above would not have a material economic impact on the Company.

NOTE 5: INVESTMENTS IN DEBT
SECURITIES

The following table summarizes the Companys investments in debt securities and security-related receivables as of
June 30, 2009:



|                                                                   |  |               |           |                                   |   |            |                     |  |                       |           |  |                                  |   |  |     
|------------------------------------------------------------------ |  | ------------- | --------- | --------------------------------- | - | ---------- | ------------------- |  | --------------------- | --------- |  | -------------------------------- | - |  | ----
|Investment Description                                             |  | AmortizedCost |           | CumulativeNet Change inFair Value |   |            | EstimatedFair Value |  | WeightedAverageCoupon |           |  | Weighted-AverageYears toMaturity
|TruPS and subordinated debentures and security-related receivables |  | $             | 5,531,390 |                                   | $ | (3,603,805 | )                   |  | $                     | 1,927,585 |  | 4.0                              | % |  | 27.1
|MBS                                                                |  |               | 1,994,023 |                                   |   | (1,572,388 | )                   |  |                       | 421,635   |  | 2.4                              | % |  | 7.0 
|                                                                   |  |               |           |                                   |   |            |                     |  |                       |           |  |                                  |   |  |     
|Total                                                              |  | $             | 7,525,413 |                                   | $ | (5,176,193 | )                   |  | $                     | 2,349,220 |  | 3.6                              | % |  | 21.8
|                                                                   |  |               |           |                                   |   |            |                     |  |                       |           |  |                                  |   |  |     

TruPS shown above include (a) investments in TruPS issued by Trust VIEs of which the Company
is not the primary beneficiary and which the Company does not consolidate and (b) transfer of investments in TruPS to the Company that were accounted for as a sale pursuant to SFAS No. 140. Subordinated debentures included above represent
the primary assets of Trust VIEs that the Company consolidates pursuant to FIN 46R. The Companys investments in security-related receivables represent securities owned by CDO entities that are collateralized by TruPS and subordinated
debentures owned by a consolidated subsidiary where the transfers are accounted for as financings under SFAS No. 140. These transactions are accounted for as financings due to certain constraints that limit further pledging or exchanging of the
assets and the continuing involvement of investment banks with each of these transactions.

As of June 30, 2009, the aggregate
principal amount of investments in the 64 TruPS investments that have defaulted or are currently deferring interest payments is $1.1 billion, representing approximately 20.6% of the Companys combined TruPS portfolio. As of June 30, 2009,
the $386.5 million of defaulted securities have been completely written-off in the Companys consolidated financial statements. For the six-month period ended June 30, 2009, investment interest income is net of a $20.4 million reserve for
interest income related to the $1.1 billion of currently deferring and defaulted securities.

The TruPS deferrals and defaults described
above have resulted in the over-collateralization tests being triggered in all eight CDOs in which the Company holds equity interests. The trigger of an over-collateralization test in a TruPS CDO means that the Company, as a holder of equity
securities, will not receive current distributions of cash in respect of its equity interests until sufficient cash or collateral is retained in the CDOs to cure the over-collateralization tests.

At June 30, 2009 approximately 76% of the Companys investments in MBS were rated below AAA. Additionally, 11% of MBS have a weighted-average
FICO score less than 625 (generally considered to be subprime).



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As previously disclosed, we received written notice from the trustees of Kleros Real Estate I, II and IV
that each CDO experienced an event of default. These events of default resulted from the failure of certain additional over-collateralization tests primarily due to credit rating agency downgrades. The events of default provide the controlling class
debtholder in each CDO with the option to liquidate all of the MBS assets collateralizing the particular CDO. The proceeds of any such liquidation will be used to repay the controlling class debtholder. As of the current date, the controlling class
debtholders of Kleros Real Estate I, II and IV have not exercised their rights to liquidate any of the CDOs. Since the Company is not receiving any cash flow from its investments in any of the Kleros Real Estate CDOs, the events of default described
above do not have any further impact on the Companys cash flows. However, the assets of the Kleros Real Estate I, II and IV CDOs and the income they generate for tax purposes are a component of the Companys REIT qualifying assets and
income. If more than one of the three remaining Kleros Real Estate CDOs is liquidated, the Company may have to deploy additional capital into REIT qualifying assets in order to continue to qualify as a REIT. If the Company is not able to invest in
sufficient other REIT qualifying assets, its ability to qualify as a REIT could be materially adversely affected.

Substantially all of the
Companys investments in TruPS, subordinated debentures and MBS collateralize debt issued through consolidated CDO entities, consolidated Trust VIEs, or warehouse credit facilities. Consolidated CDO entities are generally subject to an
indenture which dictates substantially all of the operating activities of the CDO. These indentures generally require that certain credit quality and over-collateralization tests are met. To the extent a CDO fails to pass such tests, cash flows from
the assets may be directed to be used to repay the CDO debt obligations. The assets of the Companys consolidated CDOs collateralize the debt of such entities and are not available to the Companys general creditors. Similarly, the debt of
such entities is not recourse to the Company.

NOTE 6: LOANS

The Companys investments in loans are accounted for at amortized cost and in the case of certain leveraged loans, at the lower of cost or market. The following table summarizes the Companys investments in
loans as of June 30, 2009:



|                                          |  |                        |           |                               |   |         |                                 |  |   |                |   |                |   |                              |  |       |                                         |      |      |  |          
|----------------------------------------- |  | ---------------------- | --------- | ----------------------------- | - | ------- | ------------------------------- |  | - | -------------- | - | -------------- | - | ---------------------------- |  | ----- | --------------------------------------- | ---- | ---- |  | ---------
|                                          |  | UnpaidPrincipalBalance |           | UnamortizedPremium/(Discount) |   |         | CumulativeUnrealizedGain/(Loss) |  |   | CarryingAmount |   | Numberof Loans |   | Weighted-AverageInterestRate |  |       | Weighted-AverageContractualMaturityDate
|5/1Adjustable rate residential mortgages  |  | $                      | 568,430   |                               | $ | 6,391   |                                 |  | $ |               |   |                | $ | 574,821                      |  | 1,390 |                                         | 6.2  | %    |  | July 2036
|7/1Adjustable rate residential mortgages  |  |                        | 196,119   |                               |   | 3,182   |                                 |  |   |               |   |                |   | 199,301                      |  | 461   |                                         | 6.5  | %    |  | Dec 2036 
|10/1Adjustable rate residential mortgages |  |                        | 64,354    |                               |   | 1,192   |                                 |  |   |               |   |                |   | 65,546                       |  | 175   |                                         | 6.7  | %    |  | Sept 2036
|Commercial loan                           |  |                        | 7,464     |                               |   |        |                                 |  |   |               |   |                |   | 7,464                        |  | 1     |                                         | 21.0 | %    |  |         
|Leveraged loans                           |  |                        | 857,750   |                               |   | (11,505 | )                               |  |   | (37,517        | ) |                |   | 808,728                      |  | 438   |                                         | 5.4  | %    |  | May 2013 
|                                          |  |                        |           |                               |   |         |                                 |  |   |                |   |                |   |                              |  |       |                                         |      |      |  |          
|Total                                     |  | $                      | 1,694,117 |                               | $ | (740    | )                               |  | $ | (37,517        | ) |                | $ | 1,655,860                    |  | 2,465 |                                         | 5.9  | %(1) |  |          
|                                          |  |                        |           |                               |   |         |                                 |  |   |                |   |                |   |                              |  |       |                                         |      |      |  |          



|(1) | Weighted-average interest rate excludes non-interest accruing commercial loan.
|--- | ------------------------------------------------------------------------------

As of June 30, 2009, the Company continues to classify all of the leveraged loans included in its warehouse facility with a third party as held for sale. During the fourth quarter of 2008, the Company determined
that it no longer had the intent to hold these particular loans to maturity or for the foreseeable future. During the three and six-month periods ended June 30, 2009, the Company recorded increases of $23.0 million and $63.0 million,
respectively, to the fair value of these leveraged loans. The fair value increases were primarily attributable to a tightening of estimated credit spreads as evidenced by comparable market leveraged loan data. The warehouse facility that provides
short-term financing for approximately $143.3 million of par value of leveraged loans matured in May 2009 and, as previously disclosed, is currently in default. The Company expects that the warehouse lender will liquidate all of the $143.3 million
of par value of leveraged loans during the third quarter of 2009. As a result of the liquidation of the collateral, the Company will likely lose the first loss cash that is deposited with the warehouse lender in the amount of $38.5 million, which is
the maximum amount of loss that the Company is exposed to from the warehouse facility.

The Company has the positive intent and ability to
hold its loan portfolios, except the leveraged loans included in the warehouse described above, until maturity or at least for the foreseeable future. The held for investment portion of our portfolio is financed on a long term basis through
securitization vehicles.

The estimated fair value of the Companys residential mortgages was $357.7 million as of June 30, 2009.
The estimated fair value of the Companys leveraged loans was $654.6 million as of June 30, 2009. The estimated fair value of the Companys commercial loan was $7.5 million as of June 30, 2009.



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The Company maintains an allowance for loan losses based on managements evaluation of known losses
and inherent risks in the portfolios, which considers historical and industry loss experience, economic conditions and trends, estimated fair values and the quality of collateral and other relevant quantitative and qualitative factors. Specific
allowances for losses are established for potentially impaired loans based on a comparison of the recorded carrying value of the loan to either the present value of the loans expected cash flow, the loans estimated market price or the
estimated fair value of the underlying collateral. The allowance is increased by charges to operations and decreased by charge-offs (net of recoveries). The following table summarizes the Companys allowance for loan losses:



|                      |  |                    |        
|--------------------- |  | ------------------ | -------
|                      |  | As ofJune 30, 2009
|Leveraged loans       |  | $                  | 66,869 
|Residential mortgages |  |                    | 91,643 
|                      |  |                    |        
|Total                 |  | $                  | 158,512
|                      |  |                    |        

The following table provides a roll-forward of our loan loss reserves:



|                           |  |                                     |         |  
|-------------------------- |  | ----------------------------------- | ------- | -
|                           |  | For theSix-MonthsEndedJune 30, 2009 |        
|Balance, December 31, 2008 |  | $                                   | 68,428  |  
|Additions                  |  |                                     | 100,154 |  
|Charge-offs                |  |                                     | (10,070 | )
|                           |  |                                     |         |  
|Balance, June 30, 2009     |  | $                                   | 158,512 |  
|                           |  |                                     |         |  

The following table summarizes the delinquency statistics of the Companys residential
mortgage loans (dollar amounts in thousands):



|                     |  |                     |  |                 |        
|-------------------- |  | ------------------- |  | --------------- | -------
|                     |  | As of June 30, 2009
|Delinquency Status   |  | Numberof Loans      |  | PrincipalAmount
|30 to 60 days        |  | 74                  |  | $               | 27,221 
|61 to 90 days        |  | 45                  |  |                 | 18,176 
|Greater than 90 days |  | 409                 |  |                 | 170,611
|                     |  |                     |  |                 |        
|Total                |  | 528                 |  | $               | 216,008
|                     |  |                     |  |                 |        

As of June 30, 2009, the Company has placed $170.6 million of residential mortgage loans on
non-accrual status. During the three and six-month periods ended June 30, 2009, the Company did not recognize approximately $1.9 million and $3.3 million, respectively, of interest income for loans that were in non-accrual status.

As of June 30, 2009, the Company had 36 REO properties with a fair value of $5.3 million which are classified as REO. The Company records REO
property at fair value within other assets in its consolidated balance sheet. The fair value of REO property is determined based upon internal valuation models that consider current third party market data on trends in home prices, geographic
location of the property, estimated costs to sell and other observable market data that is available. During the three and six-month periods ended June 30, 2009, the Company recorded impairments of $2.3 million and $4.3 million, respectively,
as a result of changes in fair value of REO property. Additionally, during the three and six-month periods ended June 30, 2009, the Company sold REO properties with a fair value of $5.6 million and $8.2 million, respectively, for realized
losses of $2.2 million and $2.3 million, respectively.

As of June 30, 2009, our leveraged loan portfolio has experienced seven
defaults in an aggregate principal amount of $18.9 million. The over collateralization requirements in the leveraged loan CLOs are typically triggered in the event that we experience significant losses on the sale of assets below par, as well as
unrealized fair value adjustments on certain assets as mandated by the indentures which govern our leveraged loan CLOs. The primary cause for such fair value adjustments are default activity, and credit downgrades in the underlying asset pool.
Subsequent to June 30, 2009, we experienced an interest diversion test failure in Emporia Preferred Funding II, Ltd. The failure was primarily attributable to an increase in defaulted assets collateralizing the CLO. As a result of the interest
diversion test failure in Emporia Preferred Funding II, Ltd., the Company did not receive any of its quarterly distribution in July 2009, and, assuming no additional defaults or significant credit downgrades, the Company does not expect to receive
its quarterly cash distribution for several quarters.



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As of June 30, 2009, the Company has placed $18.9 million of leveraged loans on non-accrual status.
During the three and six-month periods ended June 30, 2009, the Company did not recognize approximately $0.4 million and $0.6 million, respectively, of interest income for loans that were in non-accrual status.

As of June 30, 2009, approximately $827.1 million of the principal amount of the Companys residential mortgages was pledged as collateral for
securitized mortgage debt. In addition, all of the carrying value of the Companys leveraged loan portfolio is pledged as collateral for CLO notes payable or warehouse debt.

As of June 30, 2009, 47.9% of the carrying value of the Companys residential mortgages were concentrated in residential mortgages
collateralized by property in California.

NOTE 7: INDEBTEDNESS

The following table summarizes the Companys total indebtedness as of June 30, 2009 (includes recourse and non-recourse indebtedness):



|                                |  |               |           |                                   |   |            |                |  |                    |           |  |                                      |   |  |                                     |   |                     |          |  |   |          
|------------------------------- |  | ------------- | --------- | --------------------------------- | - | ---------- | -------------- |  | ------------------ | --------- |  | ------------------------------------ | - |  | ----------------------------------- | - | ------------------- | -------- |  | - | ---------
|Description                     |  | AmortizedCost |           | CumulativeNet Changein Fair Value |   |            | CarryingAmount |  | Interest RateTerms |           |  | CurrentWeighted-AverageInterest Rate |   |  | Weighted-AverageContractualMaturity |   | EstimatedFair Value
|Non-recourse indebtedness:      |  |               |           |                                   |   |            |                |  |                    |           |  |                                      |   |  |                                     |   |                     |          |  |   |          
|Trust preferred obligations     |  | $             | 385,600   |                                   | $ | (247,397   | )              |  | $                  | 138,203   |  | 3.3% to 8.7                          | % |  | 4.2                                 | % |                     | Oct 2036 |  | $ | 138,203  
|Securitized mortgage debt       |  |               | 789,598   |                                   |   |           |                |  |                    | 789,598   |  | 5.0% to 6.0                          | % |  | 5.7                                 | % |                     | Dec 2046 |  |   | 361,012  
|CDO notes payable (1)           |  |               | 8,422,554 |                                   |   | (6,315,802 | )              |  |                    | 2,106,752 |  | 0.5% to 7.9                          | % |  | 1.5                                 | % |                     | Mar 2039 |  |   | 1,706,030
|Warehouse credit facilities     |  |               | 106,582   |                                   |   |           |                |  |                    | 106,582   |  | 3.7                                  | % |  | 3.7                                 | % |                     | May 2009 |  |   | 106,582  
|                                |  |               |           |                                   |   |            |                |  |                    |           |  |                                      |   |  |                                     |   |                     |          |  |   |          
|Total non-recourse indebtedness |  | $             | 9,704,334 |                                   | $ | (6,563,199 | )              |  | $                  | 3,141,135 |  |                                      |   |  |                                     |   |                     |          |  |   |          
|                                |  |               |           |                                   |   |            |                |  |                    |           |  |                                      |   |  |                                     |   |                     |          |  |   |          
|                                |  |               |           |                                   |   |            |               
|Recourse indebtedness:          |  |               |           |                                   |   |            |                |  |                    |           |  |                                      |   |  |                                     |   |                     |          |  |   |          
|Junior subordinated debentures  |  | $             | 49,614    |                                   |   |           |                |  | $                  | 49,614    |  | 5.4% to 9.5                          | % |  | 7.8                                 | % |                     | Aug 2036 |  |   | 33,144   
|Contingent convertible debt     |  |               | 28,089    |                                   |   |           |                |  |                    | 28,089    |  | 7.6                                  | % |  | 7.6                                 | % |                     | May 2027 |  |   | 20,733   
|                                |  |               |           |                                   |   |            |                |  |                    |           |  |                                      |   |  |                                     |   |                     |          |  |   |          
|Total recourse indebtedness     |  | $             | 77,703    |                                   |   |           |                |  | $                  | 77,703    |  |                                      |   |  |                                     |   |                     |          |  |   |          
|                                |  |               |           |                                   |   |            |                |  |                    |           |  |                                      |   |  |                                     |   |                     |          |  |   |          
|Total indebtedness              |  | $             | 9,782,037 |                                   | $ | (6,569,335 | )              |  | $                  | 3,218,838 |  |                                      |   |  |                                     |   |                     |          |  |   |          
|                                |  |               |           |                                   |   |            |                |  |                    |           |  |                                      |   |  |                                     |   |                     |          |  |   |          



|(1) | Excludes CDO notes payable purchased by the Company which are eliminated in consolidation. Carrying amount includes $1.4 billion of liabilities at fair value.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

Recourse indebtedness refers to indebtedness that is recourse to the general assets of the Company. As indicated in the
table above, the Companys consolidated financial statements include recourse indebtedness of $77.7 million as of June 30, 2009. Non-recourse indebtedness consists of indebtedness of consolidated VIEs (i.e. CDOs, CLOs and other
securitization vehicles) which is recourse only to specific assets pledged as collateral to the lenders. The creditors of each consolidated VIE have no recourse to the general credit of the Company. As of June 30, 2009, the Companys
maximum exposure to economic loss as a result of its involvement with each VIE is the $440.7 million of capital that the Company has invested in warehouse first-loss deposits and the preference shares or debt of the CDO, CLO or other types of
securitization structures. None of the indebtedness shown in the table above subjects the Company to potential margin calls for additional pledges of cash or other assets.



|(a) | Repurchase agreements
|--- | ---------------------

As of June 30,
2009, the Company is not financing any investments with short-term repurchase agreements that subject the Company to margin calls or potential recourse obligations in excess of posted first loss deposits.



|(b) | Trust preferred obligations
|--- | ---------------------------

Trust preferred
obligations finance subordinated debentures acquired by Trust VIEs that are consolidated by the Company for the portion of the total TruPS that are owned by entities outside of the consolidated group. These trust preferred obligations bear interest
at either variable or fixed rates until maturity, generally 30 years from the date of issuance. The Trust VIE has the ability to prepay the trust preferred obligation at any time, without prepayment penalty, after five years. The Company does not
control the timing or ultimate payment of the trust preferred obligations. Effective January 1, 2008, the Company elected the fair value option pursuant to SFAS No. 159 for trust preferred obligations.



|(c) | CDO notes payable
|--- | -----------------



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CDO notes payable represent notes payable issued by CDO entities used to finance the acquisition of
TruPS, MBS, and leveraged loans. Substantially all of the TruPS collateralizing CDO notes payable are obligations of banks, bank holding companies and insurance companies. The obligors under the leveraged loans come from a variety of industries.
Generally, CDO notes payable are comprised of various classes of notes payable, with each class bearing interest at variable or fixed rates. Effective January 1, 2008, the Company elected the fair value option pursuant to SFAS No. 159 for
TruPS and MBS CDO notes payable.



|(d) | Warehouse Credit Facilities
|--- | ---------------------------

As of
June 30, 2009, the Companys consolidated financial statements included $106.6 million of warehouse credit facility debt in the form of short term notes payable. Warehouse credit facility debt relates to an on-balance sheet warehouse
facility entered into by a subsidiary of the Company with the intention of financing the acquisition of leveraged loans on a short-term basis until longer-term financing is available. As of June 30, 2009, the Company has invested $38.5 million
of capital in this financing arrangement, which contractually matured in May 2009. As previously disclosed, the warehouse is currently in default and therefore, there is no borrowing capacity, the facility is bearing a penalty interest rate equal to
the daily commercial paper rate plus 300 basis points, and all principal and interest collections are used to amortize the warehouse credit facility debt. The Company expects that the warehouse lender will liquidate all of the $143.3 million of par
value of leveraged loans during the third quarter of 2009. As a result of the liquidation of the collateral, the Company will likely lose the first loss cash that is deposited with the warehouse lender in the amount of $38.5 million, which is the
maximum amount of loss that the Company is exposed to from the warehouse facility.



|(e) | Recourse Indebtedness  Contingent Convertible Senior Notes
|--- | -----------------------------------------------------------

On May 15, 2007 and June 13, 2007, the Company sold $140 million aggregate principal amount of contingent convertible senior notes. The notes are senior, unsecured obligations of the Company and rank equally
in right of payment with all of the Companys existing and future unsubordinated, unsecured indebtedness. The notes are subordinated in right of payment to the Companys existing and future secured indebtedness to the extent of such
security, and structurally subordinated to any liabilities and other indebtedness of the Companys subsidiaries. The notes bear interest at an annual rate of 7.625%. The notes mature on May 15, 2027.

As discussed in Note 2, the Company has adopted FSP APB 14-1 effective as of January 1, 2009 and has retrospectively applied FSP APB 14-1 to the
terms of its contingent convertible debt as they existed for all periods presented. FSP APB 14-1 requires the Company to account separately for the liability and equity components of its contingent convertible debt in a manner that reflects the
Companys nonconvertible debt (unsecured debt) borrowing rate. Pursuant to the retrospective application of FSP APB 14-1, at January 1, 2008, the Company recorded a $2.2 million increase to additional paid-in-capital relating to the equity
component and a corresponding discount to its contingent convertible debt. The unamortized discount was $0.6 million as of December 31, 2008 and June 30, 2009, respectively, and will be amortized through May 2012.

As of the date of this filing, $28.7 million principal amount of the Companys contingent convertible debt securities remains outstanding. The
holders of the Companys remaining $28.7 million aggregate principal amount of convertible debt will have the right to require us to repurchase their notes at 100% of their principal amount together with accrued but unpaid interest thereon if,
among other things, the Companys common stock ceases to be listed on the NYSE, another established national securities exchange or an automated over-the-counter trading market in the United States.

The notes will be convertible prior to the maturity date into cash and, if applicable, shares of the Companys common stock, par value $0.001 per
share, under certain circumstances, at an initial conversion price per share of $11.70, which represents a conversion rate of approximately 85.4701 shares of common stock per $1,000 principal amount of notes. If converted, the holders of the notes
will receive an amount in cash per note equal to the lesser of (i) $1,000 and (ii) the average of the daily conversion values for each of the twenty consecutive trading days of the conversion reference period. Daily
conversion value means, with respect to any trading day, the product of (1) the applicable conversion rate and (2) the volume weighted average price of the Companys common stock on such trading day.

The Company may redeem all or part of the notes for cash (i) at any time prior to the date on which they mature to the extent necessary to preserve
the Companys qualification as a REIT for U.S. federal income tax purposes or (ii) on or after May 20, 2012, at a redemption price equal to 100% of the principal amount of the notes, plus accrued and unpaid interest and additional
interest, if any, to, but excluding, the redemption date. The holders of the notes may require the Company to repurchase all or a portion of their notes for cash on May 15, 2012, May 15, 2017 and May 15, 2022 for a repurchase
price equal to 100% of the principal amount of the notes, plus accrued and unpaid interest and additional interest, if any, to, but excluding, the repurchase date.

NOTE 8: DERIVATIVE FINANCIAL INSTRUMENTS

The Company and the VIEs included in the Companys consolidated financial
statements may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with its borrowings. The principal objective of such arrangements is to minimize the risks and/or costs associated with certain
operating and financial structures as well as to hedge



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specific anticipated transactions. The counterparties to these contractual arrangements are major financial institutions with which the Company and its
consolidated VIEs may also have other financial relationships. In the event of nonperformance by the counterparties, the Company is potentially exposed to credit loss for the free-standing derivative arrangement and its consolidated VIEs are
potentially exposed to credit loss for all other derivative instruments detailed below.

The table below summarizes the aggregate notional
amount and estimated net fair value of the Companys derivative instruments (amounts in thousands):



|                         |  |                     |           |                |   |          |  
|------------------------ |  | ------------------- | --------- | -------------- | - | -------- | -
|                         |  | As of June 30, 2009 |          
|                         |  | Notional            |           | Net Fair Value |  
|Interest Rate Related:   |  |                     |           |                |   |          |  
|Interest rate swaps      |  | $                   | 1,820,159 |                | $ | (191,114 | )
|Basis swaps              |  |                     | 350,000   |                |   | 627      |  
|Free-standing derivative |  |                     | 8,750     |                |   | (600     | )
|                         |  |                     |           |                |   |          |  
|Total                    |  | $                   | 2,178,909 |                | $ | (191,087 | )
|                         |  |                     |           |                |   |          |  

The following table summarizes by derivative instrument type the effect on income for the
following periods (amounts in thousands):



|                                                 |  |                                                                     |       |                                                                                               |                                         |        |                                                                     |  |   |                                                                                               |   |  |   |         |  
|------------------------------------------------ |  | ------------------------------------------------------------------- | ----- | --------------------------------------------------------------------------------------------- | --------------------------------------- | ------ | ------------------------------------------------------------------- |  | - | --------------------------------------------------------------------------------------------- | - |  | - | ------- | -
|                                                 |  | For the six-months endedJune 30, 2009                               |       |                                                                                               | For the six-months endedJune 30, 2008   |       
|Type of Derivative                               |  | Amounts Reclassifiedto Earnings forEffective Hedges Gains (Losses) |       | AmountsReclassified toEarnings forHedgeIneffectiveness &Non-HedgedDerivatives
Gains (Losses) |                                         |        | Amounts Reclassifiedto Earnings forEffective Hedges Gains (Losses) |  |   | AmountsReclassified toEarnings forHedgeIneffectiveness &Non-HedgedDerivatives
Gains (Losses) |  
|Interest rate swaps                              |  | $                                                                   | 2,771 |                                                                                               | $                                       | 28,730 |                                                                     |  | $ | (4,041                                                                                        | ) |  | $ | (58,917 | )
|Basis swaps                                      |  |                                                                     |      |                                                                                               |                                         | (12    | )                                                                   |  |   |                                                                                              |   |  |   | 35      |  
|Free-standing derivative                         |  |                                                                     |      |                                                                                               |                                         | 250    |                                                                     |  |   |                                                                                              |   |  |   |        |  
|Credit default swaps                             |  |                                                                     |      |                                                                                               |                                         |       |                                                                     |  |   |                                                                                              |   |  |   | 17,115  |  
|                                                 |  |                                                                     |       |                                                                                               |                                         |        |                                                                     |  |   |                                                                                               |   |  |   |         |  
|Net change in fair value of derivative contracts |  | $                                                                   | 2,771 |                                                                                               | $                                       | 28,968 |                                                                     |  | $ | (4,041                                                                                        | ) |  | $ | (41,767 | )
|                                                 |  |                                                                     |       |                                                                                               |                                         |        |                                                                     |  |   |                                                                                               |   |  |   |         |  
|                                                 |  |                                                                    
|                                                 |  | For the three-months endedJune 30, 2009                             |       |                                                                                               | For the three-months endedJune 30, 2008 |       
|Type of Derivative                               |  | Amounts Reclassifiedto Earnings forEffective Hedges Gains (Losses) |       | AmountsReclassified toEarnings forHedgeIneffectiveness &Non-HedgedDerivatives
Gains (Losses) |                                         |        | Amounts Reclassifiedto Earnings forEffective Hedges Gains (Losses) |  |   | AmountsReclassified toEarnings forHedgeIneffectiveness &Non-HedgedDerivatives
Gains (Losses) |  
|Interest rate swaps                              |  | $                                                                   | 1,386 |                                                                                               | $                                       | 35,729 |                                                                     |  | $ | (1,458                                                                                        | ) |  | $ | 32,494  |  
|Basis swaps                                      |  |                                                                     |      |                                                                                               |                                         | (623   | )                                                                   |  |   |                                                                                              |   |  |   | (205    | )
|Free-standing derivative                         |  |                                                                     |      |                                                                                               |                                         |       |                                                                     |  |   |                                                                                              |   |  |   |        |  
|Credit default swaps                             |  |                                                                     |      |                                                                                               |                                         |       |                                                                     |  |   |                                                                                              |   |  |   | 6,224   |  
|                                                 |  |                                                                     |       |                                                                                               |                                         |        |                                                                     |  |   |                                                                                               |   |  |   |         |  
|Net change in fair value of derivative contracts |  | $                                                                   | 1,386 |                                                                                               | $                                       | 35,106 |                                                                     |  | $ | (1,458                                                                                        | ) |  | $ | 38,513  |  
|                                                 |  |                                                                     |       |                                                                                               |                                         |        |                                                                     |  |   |                                                                                               |   |  |   |         |  

Cash Flow Hedges

The Company has entered into various interest rate swap contracts to hedge interest rate exposure relating to CDO notes payable and warehouse credit facilities that are used to finance investments in our target asset
classes.



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Prior to January 1, 2008, the Company designated interest rate swap contracts as cash flow hedges at
inception and determined at each reporting period whether or not the interest rate swap contracts are highly effective in offsetting interest rate fluctuations associated with the identified indebtedness. Certain of the Companys interest rate
swap contracts were not designated as interest rate hedges at inception; therefore the change in fair value during the period in which the interest rate swap contracts were not designated as hedges was recorded within net change in fair value of
derivative contracts in the consolidated statements of income (loss). Effective January 1, 2008, we adopted the fair value option under SFAS No. 159 for our TruPS and MBS CDO notes payable and therefore, have discontinued hedge accounting
for all of the interest rate swaps associated with those transactions.

As of June 30, 2009, the maximum length of time over which the
Company was hedging its exposure to the variability of future cash flows for forecasted transactions is approximately 8 years. Based on amounts included in the accumulated other comprehensive loss as of June 30, 2009 from designated interest
rate swaps, the Company expects to recognize a decrease of $3.0 million in interest expense over the next twelve months.

Credit Default Swaps

During June 2008, the Company sold the subsidiary that owned $87.5 million notional value of CDS positions for $70.4 million in
proceeds. Following the June 2008 sale, the Company no longer holds any investments in CDS.

Free-Standing Derivative

During October 2007, a subsidiary of the Company entered into a derivative arrangement with a third party. Under the agreement, the Company is obligated
to make payments to the third party in the event that the Class A-1 Notes of Alesco Preferred Funding XIV, Ltd. (Alesco XIV CDO) fails to: (1) make scheduled principal or interest payments on its $430 million senior secured notes due in
2037; and (2) the debt issued by a particular insurance issuer that collateralizes Alesco XIV defaults. The notional amount of the contract is $8.8 million. The Company is also subject to margin requirements in the event that the Class A-1
Notes of Alesco XIV CDO are downgraded below AAA and the Companys stockholders equity decreases below $250 million. During the six-months ended June 30, 2009, the Class A-1 Notes of Alesco XIV CDO were downgraded to
A+; however, the Company was not required to post margin collateral as of June 30, 2009. The maximum amount of the margin exposure is equal to the notional amount of the contract and the amount of required margin varies based upon
the Companys outstanding equity balance and the rating level assigned to the Alesco XIV Class A-1 Notes.

NOTE 9: EARNINGS (LOSS) PER SHARE

The following table presents a reconciliation of basic and diluted earnings per share for the following periods (dollars in thousands,
except per share data):



|                                                           |  |                                         |            |                                                      |   |            |                                       |  |                                                    |            |  |   |           
|---------------------------------------------------------- |  | --------------------------------------- | ---------- | ---------------------------------------------------- | - | ---------- | ------------------------------------- |  | -------------------------------------------------- | ---------- |  | - | ----------
|                                                           |  | For the three-months endedJune 30, 2009 |            | For the three-months endedJune 30, 2008(As
Adjusted) |   |            | For the six-months endedJune 30, 2009 |  | For the six-months endedJune 30, 2008(As Adjusted)
|Net income (loss) attributable to common stockholders      |  | $                                       | 373,665    |                                                      | $ | (81,204    | )                                     |  | $                                                  | 337,832    |  | $ | 3,683     
|                                                           |  |                                         |            |                                                      |   |            |                                       |  |                                                    |            |  |   |           
|Weighted-average common shares outstandingBasic & Diluted |  |                                         | 60,169,240 |                                                      |   | 59,512,594 |                                       |  |                                                    | 60,170,794 |  |   | 60,550,247
|                                                           |  |                                         |            |                                                      |   |            |                                       |  |                                                    |            |  |   |           
|Earnings (loss) per shareBasic                            |  | $                                       | 6.21       |                                                      | $ | (1.36      | )                                     |  | $                                                  | 5.61       |  | $ | 0.06      
|                                                           |  |                                         |            |                                                      |   |            |                                       |  |                                                    |            |  |   |           
|                                                           |  |                                         |            |                                                     
|Earnings (loss) per shareDiluted                          |  | $                                       | 6.21       |                                                      | $ | (1.36      | )                                     |  | $                                                  | 5.61       |  | $ | 0.06      
|                                                           |  |                                         |            |                                                      |   |            |                                       |  |                                                    |            |  |   |           
|Anti-dilutive shares                                       |  |                                         |           |                                                      |   | 1,361,342  |                                       |  |                                                    |           |  |   |          
|                                                           |  |                                         |            |                                                      |   |            |                                       |  |                                                    |            |  |   |           

NOTE 10: MANAGEMENT AGREEMENT AND RELATED PARTY TRANSACTIONS

The Companys Chairman of the Board and other officers serve as executive officers of Cohen & Company, of which the manager is an affiliate.
The manager handles the Companys day-to-day operations, provides the Company with office facilities, and administers the Companys business activities through the resources of Cohen. The management agreement was executed on
January 31, 2006 between the manager and AFT and, upon the closing of the merger on October 6, 2006, the Company assumed the management agreement. The initial term expired on December 31, 2008 and was renewed for an additional one
year term. The management agreement will continue to be automatically renewed for a one-year term on each anniversary date thereafter unless two-thirds of the independent directors or the holders of at least a majority of the outstanding shares of
common stock vote not to automatically renew the management agreement.



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The management agreement provides, among other things, that in exchange for managing the day-to-day
operations and administering the business activities of the Company, the manager is entitled to receive from the Company certain fees and reimbursements, consisting of a base management fee, an incentive fee based on certain performance criteria,
reimbursement for certain operating expenses as defined in the management agreement, and a termination fee if the Company decides to terminate the management agreement without cause or if the manager terminates the management agreement due to the
Companys default. The base management fee and the incentive fee otherwise payable by the Company to the manager pursuant to the management agreement are reduced by the Companys proportionate share of the amount of any CDO and CLO
collateral management fees that are paid to Cohen and its affiliates in connection with the CDOs and CLOs in which the Company invests, based on the percentage of equity it holds in such CDOs and CLOs.

During the three-months ended June 30, 2009 and 2008, the Company incurred $0.1 million and $0.9 million, respectively, in base management fees and
no incentive fees. During the three-months ended June 30, 2009 and 2008, the aggregate base management fees and incentive fees payable were reduced by collateral management fee credits of $0.1 million and $0.9 million, respectively.

During the six-months ended June 30, 2009 and 2008, the Company incurred $0.2 million and $2.3 million, respectively, in base management fees and
$0 and $0.9 million, respectively, of incentive fees. During the six-months ended June 30, 2009 and 2008, the aggregate base management fees and incentive fees payable were reduced by collateral management fee credits of $0.2 million and $3.2
million, respectively.

During three-months ended June 30, 2009 and 2008, the consolidated CDO entities that are included in the
Companys consolidated financial statements incurred collateral management fees that are payable to Cohen & Company of $3.3 million and $3.8 million, respectively. During the same periods, Cohen & Company earned origination,
structuring and placement fees of $0 and $0.6 million, respectively, relating to services provided to warehouse facilities and CDOs that the Company is invested in. In addition, during the same periods, Cohen & Company received $0 and $28
thousand, respectively, from warehouse facilities and consolidated CDO entities as reimbursement for origination expenses paid to third parties.

During six-months ended June 30, 2009 and 2008, the consolidated CDO entities that are included in the Companys consolidated financial statements incurred collateral management fees that are payable to Cohen & Company of
$6.7 million and $8.1 million, respectively. During the same periods, Cohen & Company earned origination, structuring and placement fees of $0 and $1.4 million, respectively, relating to services provided to warehouse facilities and CDOs
that the Company is invested in. In addition, during each of the periods, Cohen & Company received $43 thousand from warehouse facilities and consolidated CDO entities as reimbursement for origination expenses paid to third parties. During
the six-months ended June 30, 2009, Cohen & Companys broker-dealer subsidiary earned $0.2 million of commission income as a result of an exchange transaction involving a TruPS VIE entity, which is included in our consolidated
financial statements.

Base management fees and incentive fees incurred, stock-based compensation expense relating to shares of restricted
common stock granted to the manager, and collateral management fees paid to Cohen & Company are included in related party management compensation on the consolidated statements of income (loss). Expenses incurred by the manager and
reimbursed by the Company are reflected in the respective consolidated statement of income (loss) non-investment expense category based on the nature of the expense.

As previously disclosed, on February 27, 2009, Cohen & Company sold each of the Emporia I, II and III collateral management contracts (the Company has equity interests in Emporia II and III) to an
unrelated third party. The sale of the collateral management contracts resulted in a servicer default under our leveraged loan warehouse facility and the terms of the warehouse facility required that all principal and interest proceeds be
utilized to amortize the warehouse lenders outstanding debt balance. The leveraged loan warehouse facility contractually matured in May 2009 and we expect the warehouse collateral will be liquidated in the third quarter of 2009. The sale of
the Emporia II and III collateral management contracts required the Companys consent as holder of the equity interests in Emporia II and III. In consideration for the Companys consent to enter into such transaction, Cohen &
Company and the Company entered into an arrangement which requires Cohen & Company to pay $3 million to the Company in the event that the proposed merger is not completed. The purpose of the payment is to compensate the Company for
amounts that it would have otherwise received had the servicer default not occurred under the leveraged loan warehouse agreement. In the event that our proposed merger with Cohen & Company is consummated, Cohen & Company shall not
be obligated to pay the $3 million to the Company. If the merger agreement with Cohen & Company is terminated, such amount shall be paid by Cohen & Company to the Company within 10 business days of the termination date.
Additionally, Cohen and the Company agreed that the Company shall be permitted to continue to offset the monthly base management fee and the quarterly incentive fee by the Companys proportionate share of the collateral management fees paid in
Emporia II and III.

NOTE 11: COMMITMENTS AND CONTINGENCIES AND OTHER MATTERS

Commitments

The leveraged loan CLO vehicles consolidated by the Company may be committed to
purchase interests in debt obligations of corporations, partnerships and other entities in the form of participations in leveraged loans, which obligate the CLO vehicle to



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acquire a predetermined interest in such leveraged loans at a specified price on a to-be determined settlement date. As of June 30, 2009, the
consolidated CLO vehicles had commitments to fund $23.5 million of leveraged loans. The CLO vehicles will use amounts currently included in restricted cash to fund these commitments.

As of June 30, 2009, the consolidated CLO entities have requirements to purchase $35.3 million of additional collateral assets in order to complete
the accumulation of the required amount of collateral assets. Of this amount, $30.8 million has already been advanced to consolidated CLOs through CLO notes payable and is included within restricted cash on the consolidated balance sheet as of
June 30, 2009.

Contingencies

The Company is party to various legal proceedings which arise in the ordinary course of business. The Company is not currently involved in any litigation nor, to our knowledge, is any litigation threatened against us, the outcome of which
would, in our judgment based on information currently available to us, have a material adverse effect on our financial position or results of operations.

NYSE Continued Listing Standard

On October 10, 2008, the Company was notified by the NYSE that it was not in
compliance with an NYSE continued listing standard applicable to its common stock. The standard requires that the average closing price of any listed security not fall below $1.00 per share for any consecutive 30 trading-day period. On
October 15, 2008, the Company notified the NYSE of its intent to cure this deficiency. After exploring different alternatives for curing the deficiency and restoring compliance with the continued listing standards, the Company currently expects
to effectuate a 1 for 10 reverse stock split of the outstanding shares of its common stock. Under the NYSE rules, the Company has six months from the date of the NYSE notice to comply with the NYSE minimum share price standard. If the Company is not
compliant by that date, its common stock will be subject to suspension and delisting by the NYSE. However, on February 26, 2009, the NYSE granted NYSE-listed companies a reprieve from the NYSEs $1 minimum price requirement until
June 30, 2009, which reprieve was subsequently extended for an additional month through July 31, 2009. In addition, the NYSE permanently decreased its market-capitalization standard to $15 million for listed companies, which previously
required that average market capitalization of a NYSE-listed company be at least $25 million over any 30 consecutive trading day period. We therefore have until September 13, 2009 to become compliant with the NYSE minimum share price
standard. If we fail to meet any of the NYSEs other listing standards, however, we may be delisted for failing to comply with the continued listing standards.



|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|------- | --------------------------------------------------------------------------------------

Certain statements contained in this Quarterly Report on Form 10-Q, including without limitation statements regarding the objectives of management for
future operations and statements containing the words believe, may, will, estimate, continue, anticipate, intend, expect and similar expressions
constitute forward-looking statements within the meaning of the federal securities laws. Such forward-looking statements are subject to known and unknown risks, uncertainties and assumptions which may cause actual results, performance or
achievements to differ materially from those anticipated or implied by the forward-looking statements. These risks include our failure to successfully execute our business plan, continued disruption in the U.S. credit markets generally and the
mortgage loan and CDO markets particularly, our ability to timely consummate the merger with Cohen & Company, our inability to gain access to additional financing, the limited availability of additional investment portfolios for future
acquisition, performance of our existing investments, our failure to maintain REIT status, our ability to restore compliance with NYSE continued listing standards, or, in the event that we are unable to maintain our listing with the NYSE, our
ability to comply with the initial listing standards of the NYSE or another securities exchange, the cost of capital, as well as the additional risks and uncertainties detailed in our periodic reports and registration statements filed with the
Securities and Exchange Commission (the SEC). We disclaim any obligation to update any such statements or publicly announce any updates or revisions to any of the forward-looking statements contained herein to reflect any change in our
expectation with regard thereto or any change in events, conditions, circumstances or assumptions underlying such statements.

Managements discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements
requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On a regular basis, we evaluate these estimates, including
fair value of financial instruments and provision for loan losses. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these
estimates.



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Overview

We are a specialty finance company that has historically invested in the following asset classes, subject to maintaining our qualification as a REIT under the Internal Revenue Code and our exemption from regulation under the Investment
Company Act:



| |  |  | subordinated debt financings, primarily in the form of TruPS issued by banks or bank holding companies and insurance companies, and surplus notes issued by
insurance companies;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | leveraged loans made to small and mid-sized companies in a variety of industries, including the consumer products and manufacturing industries; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | mortgage loans, other real estate-related senior and subordinated debt securities and RMBS.
| | - |  | -------------------------------------------------------------------------------------------

We may also invest opportunistically from time to time in other types of investments within our managers areas of expertise and experience, subject
to maintaining our qualification as a REIT and our exemption from regulation under the Investment Company Act. Our investment guidelines do not impose any limitations on the type of assets in which we may invest.

We are externally managed and advised by Cohen & Company Management, LLC, whom we refer to as our manager, pursuant to a management agreement.
Our manager is a wholly-owned subsidiary of Cohen Brothers, LLC, d/b/a Cohen & Company, an alternative investment management firm, which, since 2001, has provided financing to small and mid-sized companies in financial services, real estate
and other sectors.

Our investment strategy has historically been focused on investing in our target asset classes. The disruption in the
credit markets has directly impacted and continues to directly impact our business because our investment strategy is primarily focused on making investments in our target asset classes and financing those investments on a short-term basis through
on and off-balance sheet warehouse facilities or other short-term financing arrangements and financing those investments on a long-term basis with securitization vehicles, including CDOs and CLOs. Our historical financing strategy involved the use
of significant amounts of leverage, which has resulted in increased losses in our portfolios. We expect that our use of leverage will continue to have the effect of increasing losses in this current period of unfavorable economic conditions.

Our Proposed Merger with Cohen & Company

As previously disclosed, we entered into a definitive merger agreement with Cohen & Company on February 20, 2009. Our Board of Directors and Cohen & Companys Board of Managers have each
unanimously approved the transaction. In the proposed merger, Cohen & Company will merge with a subsidiary of the Company and will survive the merger as a subsidiary of the Company. In the proposed merger, (i) members who own
Class A units of membership interest and Class B units of membership interest in Cohen & Company will have the option to exchange their membership units in Cohen & Company for either 0.57372 shares of our common stock or
0.57372 replacement units of membership interest in Cohen & Company and (ii) Daniel G. Cohen, who owns Class C units of membership interest in Cohen & Company, will be entitled to receive one share of our Series A Voting
Convertible Preferred Stock, par value $0.001 per share, which is referred to herein as the Series A share. The Series A share will have no economic rights but will entitle the holder thereof to elect a number equal to at least one-third (but not
less than a majority) of our board of directors. Beginning in July 2010, the holder of the Series A share may convert the Series A share into our Series B Voting Non-Convertible Preferred Stock, par value $0.001 per share (referred to herein as the
Series B shares), which will have no economic rights but will entitle such holder to vote together with our stockholders on all matters presented to our stockholders and to exercise approximately 31.9% of the voting power of our common stock. The
replacement units of membership interest in Cohen & Company may be redeemed for cash or an equivalent number of shares of our common stock in the future, at our option, after specified lock-up periods. Holders of our common stock will
continue to hold their shares of the Company. Pursuant to the merger agreement, we will complete a 1 for 10 reverse split of our common stock. It is currently expected that our current shareholders will own 56.5% of our shares of common stock
immediately after the merger and former unit holders of Cohen & Company will hold the balance; however, the actual percentages will not be known until members of Cohen & Company have made their elections to receive our common stock
or replacement units of Cohen & Company. If all Cohen & Company membership interests were to be redeemed in the future, if we were to elect to issue shares of our common stock upon such redemption and if no other changes in the
number of our outstanding shares of common stock were to occur, our current shareholders would own 38.5%, and former Cohen & Company members would own 61.5%, of the combined company. Cohen & Company will be treated as the acquirer
for accounting purposes.

In the near term, the merger of the two companies is expected to provide the combined entity with enhanced
financial resilience, synergies and economies of scale and will allow the combined entity greater flexibility in withstanding the current volatile market conditions than either of the constituent companies on a stand alone basis. Our business model
will shift from a capital investment company to an operating company. If the proposed merger is consummated, we expect that we will cease to qualify as a REIT beginning with our taxable year ending on December 31, 2009. Over the medium to long
term, the combination is expected to create a platform specializing in credit related fixed income trading and management and a combined company with greater capital resources to pursue opportunistic initiatives in a distressed market, which may
include potential acquisitions of other asset management and investment firms.



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The merged company will seek to generate diversified revenue and fee income streams through the following
three operating segments:



| |  |  | Capital MarketsThis business consists of sales and trading, as well as origination, structuring, and placement of fixed income securities through
Cohen & Companys broker dealer subsidiary, Cohen & Company Securities, LLC.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Additionally, this
business provides corporate debt originations and new issue securitizations for a wide variety of corporate clients with a historical focus on the financial services industry.



| |  |  | Asset ManagementThis business serves the needs of client investors by managing assets within a variety of investment vehicles, including investment funds,
permanent capital vehicles, and CDOs.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

This business will seek to generate additional fee income through strategic
roll up acquisitions of credit fixed income contracts at attractive valuations and through the seeding and formation of additional investment vehicles.



| |  |  | Principal InvestingThis business will be comprised primarily of our investment portfolio and Cohen & Companys seed capital in certain
investment vehicles and the related gains and losses that they generate.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The proposed merger, which is expected to close
during the second half of 2009, is subject to a number of closing conditions, including the receipt of third party consents and other conditions set forth in the definitive merger agreement. In addition, the transaction is subject to approval by the
affirmative vote of a majority of the votes cast by holders of our common stock, provided that the number of votes cast on the matter represents over 50% in interest of all securities entitled to vote on the matter. We have filed a registration
statement on Form S-4 with the SEC to register the shares of our common stock issuable in the merger. The registration statement includes a joint proxy statement of us and Cohen & Company with regard to the approval of the transaction by
our stockholders and members of Cohen & Company.

Certain Factors Affecting Financial Condition and Results of Operations

The Companys financial condition and results of operations have been and will continue to be affected by market fluctuations and by economic
factors. In addition, results of operations in the past have been, and in the future may continue to be, materially affected by many factors, including political and economic conditions and geopolitical events; the effect of market conditions,
particularly in the fixed income and credit markets, including residential mortgage, middle market, and bank and insurance company lending; the level and volatility of equity prices, commodity prices and interest rates and other market indices; the
availability and cost of both credit and capital; investor sentiment and confidence in the financial markets; the Companys reputation; the actions and initiatives of current and potential competitors; and the impact of current, pending and
future legislation, regulation, and technological changes in the U.S. and worldwide. Such factors also may have an impact on the Companys ability to achieve its strategic objectives, including its merger with Cohen & Company. For a
further discussion of these and other important factors that could affect the Companys business, see Risk Factors in Part I, Item 1A of the Companys Annual Report on Form 10-K as of and for the year ended
December 31, 2008 and Risk Factors in Part II, Item 1A of this Quarterly Report on Form 10-Q for the quarter ended June 30, 2009.

The following items significantly affected the Companys financial condition and results of operations during the six-months ended June 30, 2009 and the fiscal year ended 2008.

Impact of Market Events on Our Business

The credit markets in the United States began suffering significant disruption in the summer of 2007. This disruption began in the subprime residential mortgage sector and extended to the broader credit and financial
markets generally. During the third quarter of 2008, it became clear that the global economy had been adversely impacted by the credit crisis. Available liquidity, particularly through asset-backed securities (ABS) CDOs and other securitizations,
declined precipitously during the second half of 2007, continued to decline in 2008 and remains depressed as of the date of this filing. Concerns about the capital adequacy of financial services companies, disruptions in global credit markets,
volatility in commodities prices and continued pricing declines in the U.S. housing market have led to further disruptions in the financial markets, adversely affected regional banks and have exacerbated the longevity and severity of the credit
crisis. The disruption in these markets directly impacts our business because our investment portfolio includes investments in MBS, leveraged loans, residential mortgage loans and bank and insurance company debt. In addition, the general disruption
in the structured products markets has prevented us from executing our long-term financing strategy.

Our MBS Investments

We invest in MBS through our Kleros Real Estate CDO subsidiaries and other non-consolidated CDO investments. The principal U.S. rating
agencies have downgraded large amounts of MBS, ABS and debt securities of CDOs collateralized by MBS, including investments that are in our portfolio. Since we finance our investments in MBS through the issuance of equity and debt securities of
CDOs, our exposure to losses on our consolidated MBS portfolios is limited to our investments in such CDOs.

Our maximum loss from
investments in MBS is limited to the $90 million that we have invested in the three remaining Kleros Real Estate CDOs. The CDOs are governed by indentures that provide us with no rights to the CDOs assets and provide the CDO noteholders with no
recourse to us in respect of the debt securities issued by the CDOs. We consolidate the Kleros Real Estate CDOs in accordance with Financial Accounting Standard Board (FASB) Interpretation No. 46(R), Consolidation of Variable
Interest



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Entities (FIN 46R), which requires that we record the financial position and results of operations of the CDOs in our consolidated
financial statements, without consideration that our maximum economic exposure to loss is $90 million. We have effectively written down our remaining $90 million equity investment in the Kleros Real Estate CDOs to zero.

During the second quarter of 2007, the Company began to purchase CDS contracts referenced to certain MBS and CDOs that trade in the public markets. In
June 2008, the Company sold the subsidiary that owned the remaining $87.5 million notional of CDS positions for $70.4 million in proceeds. Following the June 2008 sale, the Company no longer holds any investments in CDS.

As previously disclosed, the Kleros Real Estate CDOs have all failed over-collateralization tests as a result of significant ratings agency downgrade
activity and are no longer making cash distributions to the Company. The net cash flows of the Kleros Real Estate CDOs are currently being used to pay down the controlling class debtholders in each of the Kleros Real Estate CDOs. Despite the fact
that each Kleros Real Estate CDO has failed over-collateralization tests, the net interest earnings of these CDOs continues to be reflected in the Companys net investment income and taxable income. As previously disclosed, we have received
written notice from the trustees of Kleros Real Estate I, II and IV that each CDO experienced an event of default. These events of default resulted from the failure of certain additional over-collateralization tests primarily due to credit rating
agency downgrades. The events of default provide the controlling class debtholder in each CDO with the option to liquidate all of the MBS assets collateralizing the particular CDO. The proceeds of any such liquidation would be used to repay the
controlling class debtholder.

As of the current date, the controlling class debtholders of Kleros Real Estate I, II and IV have not
exercised their rights to liquidate any of the CDOs. Since the Company is not receiving any cash flow from its investments in any of the Kleros Real Estate CDOs, the events of default and liquidation described above do not have any further impact on
the Companys cash flows. However, the assets of the Kleros Real Estate I, II and IV CDOs and the income they generate for tax purposes are a component of the Companys REIT qualifying assets and income. If more than one of the three
remaining Kleros Real Estate CDOs is liquidated, the Company may have to deploy additional capital into REIT qualifying assets in order to continue to qualify as a REIT. If the Company is not able to invest in sufficient other REIT qualifying
assets, its ability to qualify as a REIT could be materially adversely affected.

Our Investments in Residential Mortgages

As a result of the on-going disruption in the housing market and the downturn in the overall economy, we have recorded significant losses
on our residential mortgage loan portfolio, including the loans held directly by us and through our subordinated interests in a securitization trust collateralized by residential mortgage loans. The weighted average origination date for the loans
included in our portfolio was July 2006 and the weighted average FICO of our borrowers at origination was 723. The majority of our loans were originated at the end of a period of unprecedented real estate appreciation to borrowers that were deemed
to be prime borrowers. During the past two years, the values of the properties securing our loans have materially decreased and the credit quality of our average borrower has also materially decreased. We expect to record further losses
on our residential mortgage loan portfolio as a result of the continuing increase in the unemployment rate, continued home price depreciation, lack of refinancing options for many borrowers and continued deterioration in the general macro economic
conditions. As of June 30, 2009, we maintained an allowance for residential mortgage loan losses of $91.6 million.

The significant
amount of losses and delinquencies that have occurred within the residential mortgage portfolio that we hold through our investment in a securitization trust have resulted in a decrease to the amount of cash flows that we receive. These losses are
attributable to an increase in the delinquency rate of the underlying pool of mortgage loans since the closing date of the securitization, which has also caused a reduction in the amount of principal and interest that is collected from the mortgage
loans. To the extent such collections continue to decrease, there may not be sufficient cash flow to pay any principal and interest to the subordinated notes until the senior noteholders have been paid in full.

Although we have recorded an allowance for loan losses of $91.0 million on our securitized residential mortgage portfolio and experienced additional
impairments and losses on the sale of REO properties, our maximum exposure to loss from our investment in securitized residential mortgages is limited to the $45.6 million that we currently have invested in the securitization. We estimate that the
economic value of our direct investments in the subordinated notes of our securitized residential mortgage portfolio is approximately $0.8 million as of June 30, 2009.

Our Bank and Insurance TruPS Investments

We invest in TruPS issued by banks and surplus notes issued by insurance companies through our Alesco CDO subsidiaries. As of June 30, 2009, we have experienced 63 bank deferrals or defaults and one insurance
company default in our TruPS portfolio. As of June 30, 2009, the aggregate principal amount of investments in the 64 TruPS investments that have defaulted or are currently deferring interest payments is $1.1 billion, representing approximately
20.6% of the Companys combined TruPS portfolio. As of June 30, 2009, $386.5 million of defaulted securities have been completely written off in the Companys consolidated financial statements. For the six-month period ended
June 30, 2009, investment interest income is net of a $20.4 million reserve for interest income related to the $1.1 billion of deferring and defaulted securities.

The TruPS deferrals and defaults described above have resulted in the over-collateralization tests being triggered in all eight CDOs in which the Company holds equity interests. The trigger of an
over-collateralization test in a TruPS CDO means that the Company, as a holder of equity securities, will no longer receive current distributions of cash in respect of its equity interests until



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sufficient cash or collateral is retained in the CDOs to cure the over-collateralization tests. We estimate that our direct investment in the preference
shares of the TruPS CDOs has little to no value as of June 30, 2009.

Our Leveraged Loan Investments

We invest in leveraged loans through our Emporia CLO subsidiaries and through investments held in an on-balance sheet warehouse facility. Management
continues to closely monitor and actively manage the leveraged loan portfolio as a result of the continued deterioration in macro-credit conditions and the potential for significant stress on the middle-market companies in our portfolio. As of
June 30, 2009, our leveraged loan portfolio has experienced seven defaults in an aggregate principal amount of $18.9 million. The overcollateralization requirements in the leveraged loan CLOs are typically triggered in the event that we
experience significant losses on the sale of assets below par, as well as unrealized fair value adjustments on certain assets as mandated by the indentures which govern our leveraged loan CLOs. The primary cause for such fair value adjustments are
default activity, and credit downgrades in the underlying asset pool. Subsequent to June 30, 2009, we experienced an interest diversion test failure in Emporia Preferred Funding II, Ltd. The failure was primarily attributable to an increase in
defaulted assets collateralizing the CLO. As a result of the interest diversion test failure in Emporia Preferred Funding II, Ltd., the Company did not receive any of its quarterly distribution in July 2009, and assuming no additional defaults or
significant credit downgrades the Company does not expect to receive its quarterly cash distribution for several quarters. We estimate that the economic value of our direct investments in the preference shares of leveraged loan CLOs is approximately
$2.5 million as of June 30, 2009.

As of June 30, 2009, the Company continues to classify all of the leveraged loans included in its
warehouse facility with a third party as held for sale. During the fourth quarter of 2008, the Company determined that it no longer had the intent to hold these particular loans to maturity or for the foreseeable future. During the three and
six-month periods ended June 30, 2009, the Company recorded increases of $23.0 million and $63.0 million, respectively to the fair value of these leveraged loans. The fair value increases were primarily attributable to a tightening of estimated
credit spreads as evidenced by comparable market leveraged loan data. The warehouse facility that provides short-term financing for approximately $143.3 million of par value of leveraged loans matured in May 2009 and, as previously disclosed, is
currently in default. The Company expects that the warehouse lender will liquidate all of the $143.3 million of par value of leveraged loans during the third quarter of 2009. As a result of the liquidation of the collateral, the Company will likely
lose the first loss cash that is deposited with the warehouse lender in the amount of $38.5 million, which is the maximum amount of loss that the Company is exposed to from the warehouse facility.

NYSE Continued Listing Standard

On October 10, 2008, the Company was notified by the NYSE that it was not in compliance with an NYSE continued listing standard applicable to its common stock. The standard requires that the average closing price
of any listed security not fall below $1.00 per share for any consecutive 30 trading-day period. On October 15, 2008, the Company notified the NYSE of its intent to cure this deficiency. After exploring different alternatives for curing the
deficiency and restoring compliance with the continued listing standards, the Company currently expects to effectuate a 1 for 10 reverse stock split of the outstanding shares of its common stock. Under the NYSE rules, the Company has six months from
the date of the NYSE notice to comply with the NYSE minimum share price standard. If the Company is not compliant by that date, its common stock will be subject to suspension and delisting by the NYSE. However, on February 26, 2009, the NYSE
granted NYSE-listed companies a reprieve from the NYSEs $1 minimum price requirement until June 30, 2009, which reprieve was subsequently extended for an additional month through July 31, 2009. In addition, the NYSE permanently
decreased its market-capitalization standard to $15 million for listed companies, which previously required that average market capitalization of a NYSE-listed company be at least $25 million over any 30 consecutive trading day period. We
therefore have until September 13, 2009 to become compliant with the NYSE minimum share price standard. If we fail to meet any of the NYSEs other listing standards, however, we may be delisted for failing to comply with the continued
listing standards.

Liquidity

During the year ended December 31, 2008, we repurchased and retired $111.4 million par value of our outstanding convertible debt securities for $50.6 million. We realized a gain of $56.4 million on these
transactions, net of a $2.7 million write-off of related deferred costs and a $1.6 million discount.

The holders of our remaining $28.7
million aggregate principal amount of convertible debt will have the right to require us to repurchase their notes at 100% of their principal amount together with accrued but unpaid interest thereon if, among other things, our common stock ceases to
be listed on the NYSE, another established national securities exchange or an automated over-the-counter trading market in the United States. If we are unable to remedy the NYSE listing deficiency and are unable to list our common stock on another
established national securities exchange or automated U.S. over-the-counter trading market, there is a risk that some or all holders of our convertible notes will exercise their right to require us to repurchase their notes.

Additionally, the disruption in the credit markets has severely restricted our ability to complete new CDOs and CLOs. Banks are capital constrained and
this severely limits their ability to provide new financing commitments. We expect this situation to continue for the foreseeable future until markets stabilize, credit concerns dissipate and capital becomes less constrained. We are fortunate that
the substantial portion of our portfolio is financed with in-place, long-term financing. However, as disclosed previously, as of June 30,



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2009, we had $38.5 million of cash deposited with a warehouse lender to collateralize a warehouse facility for leveraged loans. Upon the expected liquidation
of the leveraged loans included in the warehouse facility, we will likely lose the first loss cash that we had deposited with the warehouse lender. In addition, our inability to maintain compliance with the over-collateralization requirements of our
CDO and CLO financing arrangements can materially adversely affect our cash flow from operations and our ability to make distributions to our stockholders for the reasons discussed above. Management will continue to consider projections regarding
our taxable income and liquidity position and decisions regarding future dividends are subject to the review and approval of our board of directors.

Critical Accounting Policies

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared by management in accordance with GAAP. Certain
information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures
included are adequate to make the information presented not misleading. The unaudited interim consolidated financial statements should be read in conjunction with our audited financial statements for the period ended December 31, 2008, included
in our Annual Report on Amendment No. 2 to the Form 10-K/A filed with the SEC on August 17, 2009. See Item 8-Financial Statements and Supplementary Data included in our Annual Report on Amendment No. 2 to the Form 10-K/A for the
year ended December 31, 2008 filed with the SEC on August 17, 2009. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary to present fairly our consolidated financial position and consolidated
results of operations and cash flows, are included. The results of operations for the interim periods presented are not necessarily indicative of the results for the full year.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Principles of
Consolidation

The consolidated financial statements reflect the accounts of the Company and its majority-owned and/or controlled
subsidiaries and those entities for which the Company is determined to be the primary beneficiary in accordance with Financial Accounting Standard Board (FASB) Interpretation No. 46(R), Consolidation of Variable Interest
Entities (FIN 46R). The Company adopted Statement of Financial Accounting Standards (SFAS) No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of Accounting Research Bulletin
No. 51 (SFAS No. 160) on January 1, 2009. Accordingly, for consolidated subsidiaries that are less than wholly owned, the third-party holdings of equity interests are referred to as noncontrolling interests. The
portion of net income attributable to noncontrolling interests for such subsidiaries is presented as net income (loss) attributable to noncontrolling interests on the consolidated statements of income, and the portion of the stockholders
equity of such subsidiaries is presented as noncontrolling interests in subsidiaries on the consolidated balance sheets. All significant intercompany accounts and transactions have been eliminated in consolidation.

The Companys parent stockholders equity includes the effects of accounting for each of the underlying assets and liabilities of our
consolidated variable interest entities (VIEs) as a separate unit of account. The creditors of each VIE consolidated within the Companys consolidated financial statements have no recourse to the general credit or assets of the
Company. The Companys maximum exposure to loss as a result of its involvement with each VIE is limited to the capital that the Company has invested in warehouse first-loss deposits and the preference shares or debt of the CDO, CLO or other
types of securitization structures.

When the Company obtains an explicit or implicit interest in an entity, the Company evaluates the
entity to determine if the entity is a VIE, and, if so, whether or not the Company is deemed to be the primary beneficiary of the VIE in accordance with FIN 46R. The Company consolidates VIEs of which the Company is deemed to be the primary
beneficiary or non-VIEs which the Company controls. The primary beneficiary of a VIE is the variable interest holder that absorbs the majority of the variability in the expected losses or potentially the residual returns of the VIE. When determining
the primary beneficiary of a VIE, the Company considers its aggregate explicit and implicit variable interests as a single variable interest. If the Companys variable interest absorbs the majority of the variability in the expected losses or
the residual returns of the VIE, the Company is considered the primary beneficiary of the VIE. The Company reconsiders its determination of whether an entity is a VIE and whether the Company is the primary beneficiary of such VIE if certain events
occur. If the Company determines that it is no longer the primary beneficiary of a VIE, the deconsolidation of the VIE is accounted for as a sale of the entity for no proceeds.

The Company has determined that certain special purpose trusts formed by third party issuers of TruPS to issue such securities are VIEs (Trust
VIEs) and that the holder of the majority of the TruPS issued by the Trust VIEs would be the primary beneficiary of the special purpose trust. In most instances, the Company is the primary beneficiary of the Trust VIEs because it holds, either
explicitly or implicitly, the majority of the TruPS issued by the Trust VIEs. The acquisition of TruPS issued by Trust VIEs may be initially financed directly by CDOs, through on-balance sheet warehouse facilities or through off-balance sheet
warehouse facilities. Under the TruPS-related off-balance sheet warehouse agreements, the Company usually deposits cash collateral with an investment



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bank and bears the first dollar risk of loss, up to the Companys collateral deposit, if an investment held under the warehouse facility is liquidated
at a loss. This arrangement causes the Company to hold an implicit interest in the Trust VIEs that issued TruPS held by warehouse providers. The primary assets of the Trust VIEs are subordinated debentures issued by third party sponsors of the Trust
VIEs in exchange for the TruPS proceeds and the common equity securities of the Trust VIE. These subordinated debentures have terms that mirror the TruPS issued by the Trust VIEs. Upon consolidation of the Trust VIEs, these subordinated debentures,
which are assets of the Trust VIE, are included in the Companys consolidated financial statements and the related TruPS are eliminated. Pursuant to Emerging Issues Task Force Issue No. 85-1: Classifying Notes Received for Capital
Stock, subordinated debentures issued to Trust VIEs as payment for common equity securities issued by Trust VIEs to third party sponsors are recorded net of the common equity securities issued.

Fair Value of Financial Instruments

Effective
January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS No. 157), which establishes a framework for measuring fair value by creating a three-level
fair value hierarchy that ranks the quality and reliability of information used to determine fair value, and requires new disclosures of assets and liabilities measured at fair value based on their level in the hierarchy. SFAS No. 157 also
defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

SFAS No. 157 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of
unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the financial instrument developed based on market data obtained from sources
independent of the Company. Unobservable inputs are inputs that reflect the Companys estimates about what assumptions market participants would use in pricing the financial instrument developed based on the best information available in the
circumstances. The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:



| |  |  | Level 1: Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Since
valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Financial instruments utilizing Level 1 inputs generally include exchange-traded equity securities listed in active markets and most U.S. Government securities.



| |  |  | Level 2: Valuations based on quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not
active or for which all significant inputs are observable, either directly or indirectly.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Financial instruments utilizing Level 2 inputs
generally include certain mortgage-backed securities, or MBS, and corporate debt securities and certain financial instruments classified as derivatives, including interest rate swap contracts and credit default swaps, where fair value is based on
observable market inputs.



| |  |  | Level 3: Inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or
liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has
been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and
considers factors specific to the asset or liability.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Financial instruments utilizing Level 3 inputs generally include investments in
TruPS and TruPS security-related receivables, MBS, leveraged loans classified as held for sale and CDO notes payable.

The fair value of
the Companys financial instruments is generally based on observable market prices or inputs or derived from such prices or inputs, provided that such information is available. When quoted market prices are not available because certain
financial instruments do not actively trade in the public markets, fair value is based on comparisons to similar instruments or from internal valuation models.

The availability of observable inputs can vary depending on the financial instrument and is affected by a wide variety of factors, including, for example, the type of financial instrument, its age, whether the
financial instrument is traded on an active exchange or in the secondary market, the current market conditions, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less
observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. In certain
cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is
determined based on the lowest level input that is significant to the fair value measurement in its entirety.



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Fair value is a market-based measure considered from the perspective of a market participant who holds
the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Companys own assumptions are set to reflect those that management believes market participants would
use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that management believes are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the
observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or Level 2 to Level 3.

Many financial instruments have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that the Company and
others are willing to pay for an asset. Ask prices represent the lowest price that the Company and others are willing to accept for an asset. For financial instruments whose inputs are based on bid-ask prices, the Company does not require that fair
value always be a predetermined point in the bid-ask range. The Companys policy is to allow for mid-market pricing and adjusting to the point within the bid-ask range that results in the Companys best estimate of fair value.

Fair value for certain of the Companys Level 3 financial instruments is derived using internal valuation models. These internal valuation models
include discounted cash flow analyses developed by management using current interest rates, estimates of the term of the particular contract, specific issuer information and other market data for securities without an active market. In accordance
with SFAS No. 157, the impact of the Companys own credit and creditworthiness of consolidated CDOs is also considered when measuring the fair value of liabilities, including derivative contracts. Where appropriate, valuation adjustments
are made to account for various factors, including bid-ask spreads, credit quality and market liquidity. These adjustments are applied on a consistent basis and are based upon observable inputs where available. Managements estimate of fair
value requires significant management judgment and is subject to a high degree of variability based upon market conditions, the availability of specific issuer information and managements assumptions.

Financial instruments that are generally classified in Level 3 of the fair value hierarchy primarily consist of investments in TruPS and TruPS
security-related receivables, certain MBS, and CDO notes payable. The valuation techniques used for those financial instruments classified in Level 3 are described below.

TruPS and TruPS Security-Related Receivables: The fair value of investments in TruPS is estimated using internal valuation models. These investment securities generally do not trade in an active market and,
therefore observable price quotations are not available. Fair value is determined based on prices of comparable debt securities, or discounted cash flow models using current interest rates, estimates of the term of the particular contract, specific
issuer information, including estimates of comparable market credit spreads and other market data.

MBS:The fair value of
investments in MBS is determined based on external price and spread data. When position-specific external price data are not observable, the valuation is based on prices of comparable bonds.

CDO Notes Payable: The fair value of CDO notes payable liabilities is estimated using external price data (where observable), or internal
valuation models. In the absence of observable price quotations, fair value is determined based on prices of comparable notes payable, or discounted cash flow models using current interest rates, estimates of the term of the particular instrument,
specific underlying collateral information, including estimates of credit spreads and other market data for securities without an active market.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159 provides
entities with an irrevocable option to report most financial assets and liabilities at fair value, with subsequent changes in fair value reported in earnings. The election can be applied on an instrument-by-instrument basis. SFAS No. 159
establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities, and became effective for the Company on
January 1, 2008. The Company elected to apply the fair value option for its investments in TruPS and TruPS security-related receivables, MBS, TruPS CDO notes payable, MBS CDO notes payable, and TruPS obligations. The Company elected the fair
value option for these instruments to enhance the transparency of its financial condition.

Investments

The Company invests primarily in TruPS and MBS debt securities, residential and commercial mortgage portfolios, and leveraged loans and may invest in
other types of real estate-related assets. The Company accounts for its investments in debt securities under Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, as
amended and interpreted (SFAS No. 115), and designates each investment as a trading security, an available-for-sale security, or a held-to-maturity security based on managements intent at the time of acquisition. Under SFAS
No. 115, trading securities are recorded at their fair value each reporting period with fluctuations in fair value reported as a component of earnings. Available-for-sale securities are recorded at fair value with changes in fair value reported
as a component of other comprehensive income (loss). Fair value of investments subsequent to the adoption of SFAS No. 157 is described above. Upon the sale of a security, the realized gain or loss is computed on a specific identification basis
and is recorded as a component of earnings in the respective period.



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Effective January 1, 2008, the Company classifies its investments in TruPS and MBS as trading
securities (see Fair Value of Financial Instruments). These investments are carried at estimated fair value, with changes in fair value of these instruments reported in income. Unamortized premiums and discounts on trading securities
that are highly rated are recognized over the contractual life, adjusted for estimated prepayments using the effective interest method. For securities representing beneficial interests in securitizations that are not highly rated (i.e., subordinate
tranches of MBS), unamortized premiums and discounts are recognized over the contractual life, adjusted for estimated prepayments and estimated credit losses of the securities using the guidance set forth in Emerging Issues Task Force Issue No.
99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests on Securitized Financial Assets (EITF No. 99-20) method. Actual prepayment and credit loss experience are reviewed quarterly
and effective yields are recalculated when differences arise between prepayments and credit losses originally anticipated compared to amounts actually received plus anticipated future prepayments.

Effective January 1, 2008, the Company accounts for its investments in subordinated debentures owned by Trust VIEs that the Company consolidates at
fair value, with changes in fair value of these instruments reported in income. These Trust VIEs have no ability to sell, pledge, transfer or otherwise encumber a company or the assets of a company until such subordinated debentures maturity.
The Company accounts for investments in securities where the transfer meets the criteria as a secured financing under Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities (SFAS No. 140) as secured loans at fair value. The Companys investments in security-related receivables represent interests in securities that were transferred to CDO securitization
entities by transferors that maintain some level of continuing involvement.

The Company accounts for its investments in residential and
commercial mortgages and leveraged loans at amortized cost. The carrying value of these investments is adjusted for origination discounts/premiums, nonrefundable fees and direct costs for originating loans which are amortized into income over the
terms of the loans using the effective yield method adjusted for the effects of estimated prepayments based on Statement of Financial Accounting Standards No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases (SFAS No. 91).

The Company maintains an allowance for
residential and commercial mortgages and leveraged loan losses based on managements evaluation of known losses and inherent risks in the portfolios, including historical and industry loss experience, economic conditions and trends, estimated
fair values, the quality of collateral and other relevant quantitative and qualitative factors. Specific allowances for losses may be established for potentially impaired loans based on a comparison of the recorded carrying value of the loan to
either the present value of the loans expected cash flow, the loans estimated market price or the estimated fair value of the underlying collateral. The allowance is increased by charges to operations and decreased by charge-offs (net of
recoveries).

An impaired loan may be left on accrual status during the period the Company is pursuing repayment of the loan; however, the
loan is placed on non-accrual status at such time as the Company believes that scheduled debt service payments may not be paid when contractually due or the loan becomes greater than 90 days delinquent. While on non-accrual status, interest income
is recognized only upon actual receipt.

Loans Held for Sale

Loans held for sale are carried at the lower of cost or fair value. If the fair value of a loan is less than its cost basis, a valuation adjustment is recognized in the consolidated statement of operations and the
loans carrying value is adjusted accordingly. The loans classified as held for sale generally do not trade in an active market and, therefore observable price quotations are generally not available. Fair value is determined based on prices of
comparable loans, or internal valuation models that consider current interest rates, estimates of the term of the particular contract, specific issuer information, including estimates of comparable market credit spreads and other market data. The
valuation adjustment may be recovered in the event the fair value increases, which is also recognized in the consolidated statement of operations.

Transfers of Financial Assets

The Company accounts for transfers of financial assets under SFAS No. 140 as
either sales or financing arrangements. Transfers of financial assets that result in sale accounting are those in which (a) the transfer legally isolates the transferred assets from the transferor, (b) the transferee has the right to
pledge or exchange the transferred assets and no condition both constrains the transferees right to pledge or exchange the assets and provides more than a trivial benefit to the transferor, and (c) the transferor does not maintain
effective control over the transferred assets. If the transfer does not meet each of these criteria, the transfer is accounted for as a financing arrangement. Dispositions of financial assets that are treated as sales are removed from the
Companys accounts with any realized gain (loss) reflected in earnings during the period of sale. Dispositions of financial assets that are treated as financings are maintained on the balance sheet with proceeds received from the legal transfer
reflected as secured borrowings and no gain or loss is recognized.



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Revenue Recognition

The Company recognizes interest income from investments in debt and other securities, residential and commercial mortgages, and leveraged loans over the estimated life of the underlying financial instruments on an
estimated yield to maturity basis.

In accordance with EITF No. 99-20, the Company recognizes interest income from purchased interests
in certain financial assets, including certain subordinated MBS, on an estimated effective yield to maturity basis. Management estimates the current yield on the reference amount of the investment based on estimated cash flows after considering
prepayment and credit loss expectations. The adjusted yield is then applied prospectively to recognize interest income for the next reporting period.

Derivative Instruments

The Company uses derivative financial instruments to attempt to hedge all or a portion of the
interest rate risk associated with its borrowings. In accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted (SFAS
No. 133), the Company measures each derivative instrument (including certain derivative instruments embedded in other contracts) at fair value and records such amounts in its consolidated balance sheet as either an asset or liability.
Derivatives qualifying and designated as cash-flow hedges are evaluated at inception and at subsequent balance sheet dates in order to determine whether they qualify for hedge accounting under SFAS No. 133. The hedge instrument must be highly
effective in achieving offsetting changes in cash flows of the hedged item attributable to the risk being hedged in order to qualify for hedge accounting. Derivative contracts are carried on the consolidated balance sheet at fair value. For
derivatives designated as cash flow hedges, the effective portions of changes in the fair value of the derivative are reported in other comprehensive income (loss). Changes in the ineffective portions of cash flow hedges are recognized in earnings.
Realized gains and losses on terminated contracts that were designated as hedges are maintained in accumulated other comprehensive income or loss and amortized into the consolidated statement of income over the contractual life of the terminated
contract unless it is probable that the forecasted transaction will not occur. In that case, the gain or loss in accumulated other comprehensive income or loss is reclassified to realized gain or loss in the consolidated statement of income. The
Company had no instruments designated as hedges during the six-month periods ended June 30, 2009 and 2008, respectively.

The Company
enters into derivatives that do not qualify for hedge accounting or for which the Company may not elect hedge accounting, including interest rate swaps, interest rate caps and floors, credit default and total return swaps, under SFAS No. 133.
These derivatives are carried at their fair value with changes in fair value reflected in the consolidated statement of income. The fair value of credit default swaps is based on quotations from third-party brokers.

Income Taxes

For tax purposes, Sunset is
deemed to have acquired AFT on October 6, 2006. Sunset elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code and subsequent to the merger the Company continues to comply with these requirements. Accordingly,
the Company generally will not be subject to U.S. federal income tax to the extent of its distributions to stockholders and as long as certain asset, income, distribution and share ownership tests are met. If the Company were to fail to meet these
requirements, it would be subject to U.S. federal income tax, which could have a material adverse impact on its results of operations and amounts available for distributions to its stockholders. Management believes that all of the criteria to
maintain the Companys REIT qualification have been met for the applicable periods, but there can be no assurances that these criteria will continue to be met in subsequent periods.

The Company maintains domestic taxable REIT subsidiaries (TRSs), which may be subject to U.S. federal, state and local income taxes. Current
and deferred taxes are provided for on the portion of earnings (losses) recognized by the Company with respect to its interest in domestic TRSs. Deferred income tax assets and liabilities are computed based on temporary differences between the GAAP
consolidated financial statements and the federal and state income tax basis of assets and liabilities as of the consolidated balance sheet date. We evaluate the realizability of our deferred tax assets and recognize a valuation allowance if, based
on the weight of available evidence, it is more likely than not that some portion or all of our deferred tax assets will not be realized. When evaluating the realizability of our deferred tax assets, we consider estimates of expected future taxable
income, existing and projected book/tax differences, tax planning strategies available, and the general and industry specific economic outlook. This realizability analysis is inherently subjective, as it requires management to forecast our business
and general economic environment in future periods. Changes in estimate of deferred tax asset realizability, if any, are included in income tax expense on the consolidated statements of income.

During the three and six-months ended June 30, 2009, the Company recorded $8.4 million and $22.6 million of provision for income taxes primarily
relating to increases to the fair value of certain leveraged loans classified as held-for-sale. The $21.4 million decrease in the Companys deferred tax asset as of June 30, 2009 as compared to the deferred tax asset as of
December 31, 2008 is also primarily attributable to the change in fair value of certain leveraged loans classified as held-for-sale.

Certain TRS entities are domiciled in the Cayman Islands and, accordingly, taxable income generated by these entities may not be subject to local income taxation, but generally will be included in the Companys income on a current
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distributed. Upon distribution of any previously included income to the Company, no incremental U.S. federal, state, or local income taxes would be payable
by the Company.

Recent Accounting Pronouncements

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of Accounting Research Bulletin
No. 51 (SFAS No. 160). SFAS No. 160 requires reporting entities to present noncontrolling (minority) interests as equity (as opposed to as a liability or mezzanine equity) and provides guidance on the accounting for
transactions between an entity and noncontrolling interests. SFAS No. 160 applies prospectively as of the first annual reporting period beginning on or after December 15, 2008, except for the presentation and disclosure requirements which
will be applied retrospectively for all periods presented. As of January 1, 2009, the Company adopted SFAS No. 160 and the adoption of SFAS No. 160 resulted in the following changes to the presentation of the Companys prior
period consolidated financial statements: (1) reclassified all amounts previously included within the Minority interests financial statement caption to the Noncontrolling interests in subsidiaries financial statement
caption, which is included within the equity section of the Companys consolidated balance sheets; (2) consolidated net income (loss) was adjusted to include net income (loss) attributable to both the controlling and noncontrolling
interests; and (3) consolidated comprehensive income (loss) was adjusted to include comprehensive income (loss) attributable to both the controlling and noncontrolling interests. The adoption of SFAS No. 160 did not have an impact on net
income (loss) for any prior periods. However, the net income attributable to the Companys common stockholders for six months ended June 30, 2009 increased $14.4 million or $0.24 per diluted share, as a result of SFAS No. 160s
requirement that noncontrolling interests continue to be attributed to their share of losses even if that attribution results in a deficit noncontrolling interest balance. There was no impact to net income for the three months ended June 30,
2009 as a result of the adoption of SFAS No. 160.

In December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141(R), Business Combinations (SFAS No. 141(R)). SFAS 141(R) requires the acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction
(whether a full or partial acquisition); establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; requires expensing of most transaction and restructuring costs; and requires the
acquirer to disclose to investors and other users all of the information needed to evaluate and understand the nature and financial effect of the business combination. SFAS No. 141(R) applies to all transactions or other events in which the
Company obtains control of one or more businesses, including those sometimes referred to as true mergers or mergers of equals and combinations achieved without the transfer of consideration, for example, by contract alone or
through the lapse of minority veto rights. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15,
2008.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities  an amendment of SFAS No. 133 (SFAS No. 161). SFAS No. 161 requires enhanced disclosure related to derivatives and hedging activities and thereby seeks to improve the
transparency of financial reporting. Under SFAS No. 161, entities are required to provide enhanced disclosures relating to: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedge items
are accounted for under SFAS No. 133 and its related interpretations; and (c) how derivative instruments and related hedged items affect an entitys financial position, financial performance and cash flows. The statement is effective
for fiscal years beginning after November 15, 2008. The adoption of SFAS No. 161 did not have a material impact on our consolidated financial statements.

In May 2008, the FASB issued FASB Staff Position (FSP) No. Accounting Principles Board 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement), or FSP APB 14-1, which clarifies the accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. FSP APB 14-1 requires issuers to account separately for the
liability and equity components of certain convertible debt instruments in a manner that reflects the issuers nonconvertible debt (unsecured debt) borrowing rate when interest cost is recognized. The equity component is presented in parent
stockholders equity and the accretion of the resulting discount on the debt is recognized as part of interest expense in the consolidated statement of operations. FSP APB 14-1 requires companies to retroactively apply the requirements of the
pronouncement to all periods presented. As of January 1, 2009, the Company adopted FSP APB 14-1 and the effect of adoption was not material to the three months and six months ended June 30, 2009 and 2008. However, the consolidated
financial statements as of and for the year ended December 31, 2008 have been retroactively restated for the adoption, which resulted in an increase to the Companys net loss of $1.6 million, or $0.03 per diluted share, and a $2.2 million
increase to equity at January 1, 2008.

In June 2008, the FASB issued FSP Emerging Issues Task Force 03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to
vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method as described in Statement of Financial Accounting Standards No. 128, Earnings per Share. Under the
guidance in FSP EITF 03-6-1, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included



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in the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. As of January 1, 2009, the Company adopted FSP EITF 03-6-1 and all prior-period earnings per share data presented was adjusted retrospectively. The effect of adoption had no material
impact to the three-months and six months ended June 30, 2008, and reduced basic and diluted earnings (loss) per share by $0.08 for both the three-months and six months ended June 30, 2009.

In June 2008, the FASB ratified the consensus reached by the Emerging Issues Task Force on Issue No. 07-5, Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entitys Own Stock (EITF No. 07-5). EITF No. 07-5 provides guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an
entitys own stock. EITF No. 07-5 applies to any freestanding financial instrument or embedded feature that has all of the characteristics of a derivative or freestanding instrument that is potentially settled in an entitys own stock
(with the exception of share-based payment awards within the scope of SFAS 123(R)). To meet the definition of indexed to own stock, an instruments contingent exercise provisions must not be based on (a) an observable market,
other than the market for the issuers stock (if applicable), or (b) an observable index, other than an index calculated or measured solely by reference to the issuers own operations, and the variables that could affect the
settlement amount must be inputs to the fair value of a fixed-for-fixed forward or option on equity shares. EITF No. 07-5 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal
years. The adoption of EITF No. 07-5 did not have a material impact on our consolidated financial statements.

In April 2009, the FASB
issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4). FSP FAS 157-4
provides additional guidance for estimating fair value in accordance with FASB Statement No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased. FSP FAS 157-4
also includes guidance on identifying circumstances that indicate a transaction is not orderly. FSP FAS 157-4 emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless
of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced
liquidation or distressed sale) between market participants at the measurement date under current market conditions. FSP FAS 157-4 is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods
ending after March 15, 2009. The Company adopted FSP FAS 157-4 in the second quarter of 2009 and the adoption did not have a material effect on our consolidated financial statements.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP FAS
115-2 and FAS 124-2). FSP FAS 115-2 and FAS 124-2 amends the other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary
impairments on debt and equity securities in the financial statements. FSP FAS 115-2 and FAS 124-2 does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. FSP FAS 115-2 and FAS
124-2 is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company does not have any securities classified as available-for-sale and therefore,
upon adoption in the second quarter of 2009, FSP FAS 115-2 and FAS 124-2 did not have a material effect on our consolidated financial statements.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1 and APB 28-1). FSP FAS 107-1 and APB 28-1 amends FASB Statement No. 107,
Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. FSP FAS
107-1 and APB 28-1 also amends APB Opinion No. 28, Interim Financial Reporting,to require those disclosures in summarized financial information at interim reporting periods. FSP FAS 107-1 and APB 28-1 is effective for interim and annual
periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted FSP FAS 107-1 and APB 28-1 in the second quarter of 2009.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events, or SFAS No. 165, which codifies the guidance regarding the
disclosure of events occurring subsequent to the balance sheet date. SFAS No. 165 does not change the definition of a subsequent event (i.e. an event or transaction that occurs after the balance sheet date but before the financial
statements are issued) but requires disclosure of the date through which subsequent events were evaluated when determining whether adjustment to or disclosure in the financial statements is required. SFAS No. 165 was effective for us for
the three-month period ended June 30, 2009. For the three-month period ended June 30, 2009, we evaluated subsequent events through August 17, 2009 and provided the appropriate disclosures on any subsequent events identified. The
adoption of SFAS No. 165 did not have a material effect on our consolidated financial statements.

In June 2009, the FASB issued
SFAS No. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140 (SFAS 166). SFAS 166 amends the derecognition guidance in SFAS No. 140 and eliminates the concept of qualifying
special-purpose entities (QSPEs). SFAS 166 is effective for fiscal years and interim periods beginning after



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November 15, 2009. Early adoption of SFAS 166 is prohibited. The Company will adopt SFAS 166 on January 1, 2010 and does not expect the adoption to
have a material effect on its consolidated financial statements.

In June 2009, the FASB issued SFAS No. 167, Amendments to
FASB Interpretation No. 46(R) (SFAS 167) which amends the consolidation guidance applicable to variable interest entities (VIEs). An entity would consolidate a VIE, as the primary beneficiary, when the entity has
both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the entitys economic performance and (b) the obligation to absorb losses of the entity that could potentially be
significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. Ongoing reassessment of whether an enterprise is the primary beneficiary of a VIE is required. SFAS 167 amends FIN 46(R) to
eliminate the quantitative approach previously required for determining the primary beneficiary of a VIE. SFAS 167 will be effective for fiscal years and interim periods beginning after November 15, 2009. The Company will adopt SFAS 167 on
January 1, 2010 and has not yet determined the effect of the adoption on its consolidated financial statements.

In June 2009,
the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (SFAS 168). This standard identifies the sources of accounting principles and the
framework for selecting the principles used in the preparation of financial statements that are presented in conformity with GAAP. SFAS 168 establishes the FASB Accounting Standards Codification (Codification) as the single source of
authoritative accounting principles recognized by the FASB in the preparation of financial statements in conformity with GAAP. Codification does not create new accounting and reporting guidance rather it reorganizes GAAP pronouncements into
approximately 90 topics within a consistent structure. All guidance contained in the Codification carries an equal level of authority. Relevant portions of authoritative content, issued by the SEC, for SEC registrants, have been included in the
Codification. After the effective date of SFAS 168, all nongrandfathered, non-SEC accounting literature not included in the Codification is superseded and deemed nonauthoritative. SFAS 168 will be effective for financial statements issued for
interim and annual periods ending after September 15, 2009. The Company will adopt SFAS 168 on September 30, 2009 and will update all disclosures to reference Codification in its Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2009.

Our Investment Portfolio

The following table shows the components of our stockholders equity and the net change in cash and cash equivalents attributable to such components, in each case as determined in accordance with GAAP, as of, and
for the six months ended, June 30, 2009. The table is divided between the components of our stockholders equity which are attributable to our assets and liabilities which are not assets and liabilities of consolidated VIEs, and those
which are assets and liabilities of consolidated VIEs. As described elsewhere in this report, the assets of consolidated VIEs are pledged to satisfy the liabilities of the consolidated VIEs. The liabilities of our consolidated VIEs are non-recourse
to us, but similarly we have no rights to use any of the proceeds of the assets held by consolidated VIEs to satisfy any of our recourse liabilities. The components of our stockholders equity attributable to our investments in consolidated
VIEs are determined in accordance with GAAP (under which we consolidate all of the assets and liabilities of the VIEs) and do not reflect the fair value of the interests in the consolidated VIEs owned by us. The Net Change in Cash and Cash
Equivalents column reflects the sources and uses of cash during the period with respect to each component of our stockholders equity.



|                                                          |  |                                                        |         |   |                                                                              |   |        |     
|--------------------------------------------------------- |  | ------------------------------------------------------ | ------- | - | ---------------------------------------------------------------------------- | - | ------ | ----
|                                                          |  | Allocated ParentStockholdersEquity as ofJune 30, 2009 |         |   | Net Change in Cashand Cash Equivalentsfor Three-MonthsEndedJune 30, 2009
(C) |  
|                                                          |  | (in thousands)                                         |        
|Net Assets not Included in Consolidated VIEs:             |  |                                                        |         |   |                                                                              |   |        |     
|Investments in TruPS debt securities                      |  | $                                                      | 6,604   |   |                                                                              | $ | 186    |     
|Investments in residential and commercial loans           |  |                                                        | 8,568   |   |                                                                              |   | 493    |     
|Cash and cash equivalents                                 |  |                                                        | 88,922  |   |                                                                              |   | 99     |     
|Other assets and liabilities, net (A)                     |  |                                                        | 2,552   |   |                                                                              |   | (1,856 | )(D)
|Recourse indebtedness (A)                                 |  |                                                        | (76,214 | ) |                                                                              |   | (2,035 | )   
|                                                          |  |                                                       
|Net Assets of Consolidated VIEs (B):                      |  |                                                        |         |   |                                                                              |   |        |     
|Investments in TruPS CDOs                                 |  | $                                                      | 412,957 |   |                                                                              |   |       |     
|Investments in leveraged loan CLOs and warehouse facility |  |                                                        | 1,698   |   |                                                                              |   | 2,842  | (E) 
|Investment in Kleros Real Estate (MBS) CDOs               |  |                                                        |        |   |                                                                              |   |       |     
|Investment in residential mortgage loan securitization    |  |                                                        | (40,462 | ) |                                                                              |   | 1,527  |     
|                                                          |  |                                                        |         |   |                                                                              |   |        |     
|Total                                                     |  | $                                                      | 404,625 |   |                                                                              | $ | 1,256  |     
|                                                          |  |                                                        |         |   |                                                                              |   |        |     





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|(A) | Recourse indebtedness is net of our $1.5 million investment in common securities of the trusts that issued our junior subordinated debentures. The $1.5 million is recorded within
other assets in our consolidated financial statements.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(B) | We currently hold the following notional amounts of preference shares or subordinated interests in consolidated VIEs: $218.6 million in TruPS CDOs, $48.1 million in leveraged loan
CLOs, $38.5 million in a leveraged loan warehouse facility, $45.6 million in a whole-loan mortgage securitization and $90 million in Kleros Real Estate CDOs. The Companys stockholders equity includes the effects of accounting for each of
the underlying assets and liabilities of our consolidated VIEs as separate units of account. However, if for accounting purposes the Company were to use the notional amounts of preference shares or subordinated interests that it directly owns as the
unit of account, its net asset value could be materially different. As of June 30, 2009, the Company estimates the aggregate fair value of its investments in preference shares and subordinated interests of consolidated VIEs to be approximately
$3.3 million.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(C) | Primary sources and uses of cash of consolidated VIEs include interest income on investments and interest expense on the related debt. The Companys primary sources of cash are
distributions from investments in consolidated VIEs, interest on cash deposits, and interest income on or proceeds from the sale of debt securities and mortgage loans held directly. The Companys primary uses of cash are recourse debt service,
payment of general and administrative expenses, and additional investments. The following reconciles the change in cash and cash equivalents during the three-month period ended June 30, 2009:
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                             |  |   |       
|-------------------------------------------- |  | - | ------
|Cash and cash equivalents, at March 31, 2009 |  | $ | 87,666
|Net change in cash and cash equivalents      |  |   | 1,256 
|                                             |  |   |       
|Cash and cash equivalents, at June 30, 2009  |  | $ | 88,922
|                                             |  |   |       



|(D) | Amount relates to payment of general and administrative expenses incurred directly by the Company. General and administrative expenses incurred and paid by consolidated VIEs reduce
the Companys net distributions, if any, from these consolidated VIEs and are not paid directly by the Company.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(E) | Amount includes $2.8 million of distributions from investments in CLOs. Subsequent to June 30, 2009, we experienced an interest diversion test failure in Emporia Preferred
Funding II, Ltd. The failure was primarily attributable to an increase in defaulted assets collateralizing the CLO. As a result of the interest diversion test failure in Emporia Preferred Funding II, Ltd., the Company did not receive any of its
quarterly distribution in July 2009, and assuming no additional defaults or significant credit downgrades the Company does not expect to receive its quarterly cash distribution for several quarters.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

TruPS Portfolio. During the three and six-month periods ended June 30, 2009, the Company has recorded gains of $532.6 million and $316.4
million relating to changes in fair value of its investments in TruPS. The Company determined that these changes in fair value primarily resulted from tightening of credit spreads, volatility in interest rates, and other qualitative factors relating
to macro-credit conditions. During the three-month period ended June 30, 2009, the estimated fair value of our TruPS debt securities portfolio increased by approximately 40%, net of decreases in the estimated fair value of newly deferring or
defaulted securities. This significant increase in the estimated fair value of TruPS debt securities is consistent with the significant increase in the equity markets, specifically the financial services industry, corporate bond markets, and
high-yield debt markets during the second quarter of 2009. The fair value of investments in TruPS is estimated using internal valuation models. These investment securities generally do not trade in an active market and, therefore observable price
quotations are not available. In the absence of observable price quotations, fair value is determined based on prices of comparable debt securities, or discounted cash flow models using current interest rates, estimates of the term of the particular
contract, specific issuer information, including estimates of comparable market credit spreads and other market data. These assets are classified as Level 3 assets pursuant to SFAS 157.

The portfolio consists of approximately 75% bank related investments and 25% insurance related investments. The terms of each of our long-term CDO
financings include limitations on specific issuer concentrations, which typically limit the par value of the underlying collateral securities included in the CDO from any single issuer to no greater than 3%. As of June 30, 2009, we had three
issuers with concentrations ranging from 2.4% to 2.5% of our total TruPS investment portfolio par value, which includes the defaulted investment securities of IndyMac Bancorp, and no other issuers were greater than 1.7% of our total TruPS investment
portfolio. Additionally, the banks included in our TruPS investment portfolio (excluding defaulted securities) are concentrated in the following states as of June 30, 2009:



|           |  |       |  
|---------- |  | ----- | -
|Texas      |  | 12.4  | %
|Illinois   |  | 9.8   | %
|California |  | 8.0   | %
|Virginia   |  | 4.9   | %
|Minnesota  |  | 4.7   | %
|Others     |  | 60.2  | %
|           |  |       |  
|Total      |  | 100.0 | %
|           |  |       |  



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As of June 30, 2009, the aggregate principal amount of investments in the 64 TruPS investments that
have defaulted or are currently deferring interest payments is $1.1 billion, representing approximately 20.6% of the Companys combined TruPS portfolio. As of June 30, 2009, $386.5 million of defaulted securities have been completely
written off in the Companys consolidated financial statements. For six-month period ended June 30, 2009, investment interest income is net of a $20.4 million reserve for interest income related to the $1.1 billion of deferring and
defaulted securities.

As of June 30, 2009, the aggregate principal amount of CDO notes payable and trust preferred obligations
financing our TruPS portfolio is $5.3 billion and the fair value of these instruments is $1.2 billion. During the three and six-month periods ended June 30, 2009, the Company recorded gains of $20.5 million and $214.4 million relating to
changes in the fair value of its TruPS CDO notes payable and trust preferred obligations. The Company determined that these changes in fair value resulted primarily from specific issuer credit matters with the assets that collateralize the
liabilities, specifically the failure or threat of failure of overcollateralization tests in the CDO structures, general deterioration of pricing on structured debt instruments and other qualitative factors relating to macro-credit conditions. The
fair value of CDO notes payable liabilities is estimated using external price data (where observable), or internal valuation models. In the absence of observable price quotations, fair value is determined based on prices of comparable notes payable,
or discounted cash flow models using current interest rates, estimates of the term of the particular instrument, specific underlying collateral information, including estimates of credit spreads and other market data for securities without an active
market. These liabilities are classified as Level 3 liabilities.

Leveraged Loan Portfolio. We invest in debt obligations of small
and mid-sized corporations, partnerships and other entities in the form of participations in first lien and other senior loans and mezzanine loans, which we collectively refer to as leveraged loans because of the high proportion of debt typically in
the capital structure of the borrowing entities. As of June 30, 2009, we had investments in approximately $808.7 million of leveraged loans, which includes $105.5 million of loans classified as held for sale and recorded at fair value, and an
allowance for loan losses related to these investments of $66.9 million.

During the six-month period ended June 30, 2009, we
increased our allowance for loan losses as a result of an increase in credit risk related to specific borrowers, continued deterioration in macro-credit conditions and the potential impact to the middle-market companies in our portfolio. As of
June 30, 2009, our leveraged loan portfolio has experienced seven defaults in an aggregate principal amount of $18.9 million. The current state of the credit markets and the economy in general increases the likelihood of defaults and ratings
agency downgrades on the underlying collateral of our CLOs. There can be no assurance that in light of the current markets that we will not experience additional significant defaults or downgrade activity in our leveraged loan portfolio that may
result in the failure of overcollateralization tests.

Residential Mortgage Loans. As of June 30, 2009, we owned approximately
$839.7 million aggregate carrying amount of residential mortgage loans, including the loans held directly by us and through our subordinated interests in a securitization trust collateralized by residential mortgage loans. As of June 30, 2009,
we have recorded an allowance for loan losses of $91.6 million relating to these residential mortgage loans. As a result of the on-going disruption in the housing market and the downturn in the overall economy, we have recorded significant losses on
our residential mortgage loan portfolio, including the loans held directly by us and through our subordinated interests in a securitization trust collateralized by residential mortgage loans. The weighted average origination date for the loans
included in our portfolio was July 2006 and the weighted average FICO of our borrowers at origination was 723. The majority of our loans were originated at the end of a period of unprecedented real estate appreciation to borrowers that were deemed
to be prime borrowers. During the past two years, the values of the properties securing our loans have materially decreased and the credit quality of our average borrower has also materially decreased. We expect to record further losses on our
residential mortgage loan portfolio as a result of the continuing increase in the unemployment rate, continued home price depreciation, lack of refinancing options for many borrowers and continued deterioration in the general macro economic
conditions.

The following table summarizes the delinquency statistics of the Companys residential mortgage loans (dollar amounts in
thousands):



|                     |  |               |  |                 |        
|-------------------- |  | ------------- |  | --------------- | -------
|Delinquency Status   |  | NumberofLoans |  | PrincipalAmount
|As of June 30, 2009: |  |               |  |                 |        
|30 to 60 days        |  | 74            |  | $               | 27,221 
|61 to 90 days        |  | 45            |  |                 | 18,176 
|Greater than 90 days |  | 409           |  |                 | 170,611
|                     |  |               |  |                 |        
|Total                |  | 528           |  | $               | 216,008
|                     |  |               |  |                 |        

Additionally, the loans included in our mortgage loan portfolio are concentrated in the following
states as of June 30, 2009:



|           |  |      |  
|---------- |  | ---- | -
|California |  | 47.9 | %



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##### Table of Contents

|           |  |       |  
|---------- |  | ----- | -
|Florida    |  | 8.3   | %
|Arizona    |  | 5.4   | %
|Washington |  | 5.0   | %
|Nevada     |  | 4.9   | %
|Others     |  | 28.5  | %
|           |  |       |  
|Total      |  | 100.0 | %
|           |  |       |  

As of June 30, 2009, the Company had 409 loans that were either greater than 90 days past due
or in foreclosure and placed on non-accrual status. During the three and six-month periods ended June 30, 2009, the Company did not recognize approximately $1.9 million and $3.3 million of interest income for loans that were in non-accrual
status.

As of June 30, 2009, the Company had 36 REO properties with a fair value of $5.3 million which are classified as REO. The
Company records REO property at fair value within other assets in its consolidated balance sheet. During the three and six-month periods ended June 30, 2009, the Company recorded impairments of $2.3 million and $4.3 million as a result of
changes in fair value of REO property. Additionally, during the three and six-month periods ended June 30, 2009, we sold REO properties with a fair value of $5.6 million and $8.2 million for realized losses of $2.2 million and $2.3 million.

MBS Portfolio. As of June 30, 2009, we had investments in $421.6 million of MBS. The $421.6 million of MBS collateralize the
debt of the three remaining Kleros Real Estate CDOs that we have invested in. Our maximum loss from investments in Kleros Real Estate MBS is limited to our remaining $90 million of invested capital. The CDOs are governed by indentures that provide
us with no rights to the CDO assets and provide the CDO noteholders with no recourse to us in respect of the debt securities issued by the CDOs. We consolidate the three remaining Kleros Real Estate CDOs in accordance with FIN 46R, which requires
that we record the financial position and results of operations of the CDOs in our consolidated financial statements, without consideration that our maximum economic exposure to loss is our remaining $90 million investment. We record the MBS
investments and CDO debt at fair value and classify the assets and liabilities as Level 3.

Credit Default Swaps (CDS).During June
2008, the Company sold a subsidiary that owned the remaining $87.5 million notional value of CDS positions for $70.4 million in proceeds. Following the June 2008 sale, the Company no longer holds any investments in CDS.

Recourse Indebtedness. As of June 30, 2009, the Companys consolidated financial statements included recourse indebtedness of $77.7
million. During the year ended December 31, 2008, we repurchased and retired $111.4 million par value of outstanding convertible debt securities for $50.6 million. We realized a gain of $56.4 million on these transactions, net of a $2.7 million
write-off of related deferred costs and a $1.6 million discount.

None of the Companys indebtedness subjects the Company to potential
margin calls for additional pledges of cash or other assets.

Equity.As of June 30, 2009, the Companys consolidated
financial statements included total equity of $608.2 million, of which $404.6 million is attributable to our common stockholders and $203.6 million is attributable to noncontrolling interests in subsidiaries. Approximately $374.2 million of the
equity attributable to our common stockholders is derived from our investments in consolidated VIEs. We estimate that the fair value of our direct investments in the consolidated VIEs is approximately $3.3 million as of June 30, 2009. As of
January 1, 2009, the Company adopted SFAS No. 160 and the adoption of SFAS No. 160 resulted in the following changes to the presentation of the Companys prior period consolidated financial statements: (1) reclassified all
amounts previously included within the Minority interests financial statement caption to the Noncontrolling interests in subsidiaries financial statement caption, which is included within the equity section of the
Companys consolidated balance sheets; (2) consolidated net income (loss) was adjusted to include net income (loss) attributable to both the controlling and noncontrolling interests; and (3) consolidated comprehensive income (loss)
was adjusted to include comprehensive income (loss) attributable to both the controlling and noncontrolling interests.

Results of Operations

Comparison of the Three-Month Period Ended June 30, 2009 to the Three-Month Period Ended June 30, 2008

Net income (loss). We had a net income of approximately $373.7 million for the three-month period ended June 30, 2009 as compared to
net loss of ($81.2) million for the three-month period ended June 30, 2008. Our net income for the three-month period ended June 30, 2009 was primarily attributable to changes in fair value of financial instruments and net investment
income generated by our investments in TruPS, leveraged loans, residential mortgages and MBS, partially offset by loan loss provisions on our residential mortgage and leveraged loan portfolio. Our net loss for the three-month period ended
June 30, 2008 was attributable to changes in fair value of financial instruments recorded in earnings subsequent to our adoption of SFAS No. 159, reclassification into the income statement of MBS related cash flow hedging losses that were
previously included in



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accumulated other comprehensive loss, and net investment income generated by our investments in TruPS, MBS and leveraged loans and investments in residential
mortgages.

Net investment income (loss). Our net investment income decreased $40.7 million to a net investment loss of
($12.7) million for the three-month period ended June 30, 2009 from net investment income of $28.0 million for the three-month period ended June 30, 2008. The table below summarizes net investment income (loss) by investment type for the
following periods:



|                                               |  |                          |         |                           |   |          |                         |  |   |                           |   |  |   |         |  
|---------------------------------------------- |  | ------------------------ | ------- | ------------------------- | - | -------- | ----------------------- |  | - | ------------------------- | - |  | - | ------- | -
|For the Three-Month Period Ended June 30, 2009 | 
|                                               |  |                          |         |                          
|Investment Type                                |  | InvestmentInterestIncome |         | InvestmentInterestExpense |   |          | Provisionfor LoanLosses |  |   | NetInvestmentIncome(Loss) |  
|                                               |  | (in thousands)           |        
|Investments in TruPS                           |  | $                        | 51,039  |                           | $ | (30,050  | )                       |  | $ |                          |   |  | $ | 20,989  |  
|Investments in leveraged loans                 |  |                          | 12,609  |                           |   | (4,623   | )                       |  |   | (21,452                   | ) |  |   | (13,466 | )
|Investments in MBS                             |  |                          | 14,641  |                           |   | (4,796   | )                       |  |   |                          |   |  |   | 9,845   |  
|Investments in residential mortgages           |  |                          | 12,069  |                           |   | (12,288  | )                       |  |   | (28,244                   | ) |  |   | (28,463 | )
|Other investments                              |  |                          | 24      |                           |   |         |                         |  |   |                          |   |  |   | 24      |  
|Recourse indebtedness                          |  |                          |        |                           |   | (1,646   | )                       |  |   |                          |   |  |   | (1,646  | )
|                                               |  |                          |         |                           |   |          |                         |  |   |                           |   |  |   |         |  
|Total                                          |  | $                        | 90,382  |                           | $ | (53,403  | )                       |  | $ | (49,696                   | ) |  | $ | (12,717 | )
|                                               |  |                          |         |                           |   |          |                         |  |   |                           |   |  |   |         |  
|                                              
|For the Three-Month Period Ended June 30, 2008 | 
|                                               |  |                          |         |                          
|Investment Type                                |  | InvestmentInterestIncome |         | InvestmentInterestExpense |   |          | Provisionfor LoanLosses |  |   | NetInvestmentIncome       |  
|                                               |  | (in thousands)           |        
|Investments in TruPS                           |  | $                        | 73,457  |                           | $ | (49,379  | )                       |  | $ |                          |   |  | $ | 24,078  |  
|Investments in leveraged loans                 |  |                          | 14,908  |                           |   | (7,866   | )                       |  |   | (2,331                    | ) |  |   | 4,711   |  
|Investments in MBS                             |  |                          | 34,149  |                           |   | (26,436  | )                       |  |   |                          |   |  |   | 7,713   |  
|Investments in residential mortgages           |  |                          | 14,439  |                           |   | (13,993  | )                       |  |   | (5,560                    | ) |  |   | (5,114  | )
|Other investments                              |  |                          | 567     |                           |   |         |                         |  |   |                          |   |  |   | 567     |  
|Recourse indebtedness                          |  |                          |        |                           |   | (3,914   | )                       |  |   |                          |   |  |   | (3,914  | )
|                                               |  |                          |         |                           |   |          |                         |  |   |                           |   |  |   |         |  
|Total                                          |  | $                        | 137,520 |                           | $ | (101,588 | )                       |  | $ | (7,891                    | ) |  | $ | 28,041  |  
|                                               |  |                          |         |                           |   |          |                         |  |   |                           |   |  |   |         |  

Our investment interest income decreased $47.1 million to $90.4 million for the three-month period
ended June 30, 2009 from $137.5 million for the three-month period ended June 30, 2008. The decrease in investment interest income is primarily due to a decrease in LIBOR and an increase in deferring and non-accrual balances. We
experienced a decrease in the weighted-average coupon rates in our target asset classes from 5.0% for the three-month period ended June 30, 2008 to 3.6% for the three-month period ended June 30, 2009 and a decrease in the Companys
average investment balances from $11.3 billion par value for the three-month period ended June 30, 2008 to $9.9 billion par value for the three-month period ended June 30, 2009.

Our investment interest expense decreased $48.2 million to $53.4 million for the three-month period ended June 30, 2009 from $101.6 million for the
three-month period ended June 30, 2008. The decrease in investment interest expense is attributable to a decrease in the weighted-average coupon rate for CDO notes payable from 3.3% as of June 30, 2008 to 1.6% as of June 30, 2009 and
a decrease in the Companys average CDO notes payable from $9.1 billion par value for the three-month period ended June 30, 2008 to $8.4 billion par value for the three-month period ended June 30, 2009.

Our provision for loan losses relates to investments in residential mortgages and leveraged loans. The provision for loan losses increased by $41.8
million to $49.7 million for the three-month period ended June 30, 2009 from $7.9 million for the three-month period ended June 30, 2008. The increase is a result of the continued increases in the number of delinquent residential mortgage
loans experienced in 2009 as a result of the turmoil in the housing markets. The 60-plus day delinquencies in our residential mortgage portfolio increased from 7.2% as of June 30, 2008 to 25.7% as of June 30, 2009. Additionally, the
increase in our leveraged loan provisioning is primarily the result of continued deterioration in macro-credit conditions and the resulting impact to the middle-market companies that we lend to. As of June 30, 2009, our leveraged loan portfolio
has experienced seven defaults in an aggregate principal amount of $18.9 million. We maintain an allowance for residential and commercial mortgages and leveraged loan losses based on managements evaluation of estimated losses and inherent
risks in the portfolios. Specific allowances for losses are established for



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impaired loans based on a comparison of the recorded carrying value of the loan to either the present value of the loans expected cash flow, the
loans estimated market price or the estimated fair value of the underlying collateral.

Expenses. Our non-investment
expenses decreased by $0.1 million to $7.6 million for the three-month period ended June 30, 2009 from $7.7 million for the three-month period ended June 30, 2008. During the same periods, these non-investment expenses consisted of related
party management compensation of $3.4 million and $4.2 million, respectively, and general and administrative expenses of $4.2 million and $3.5 million, respectively. During the three-months ended June 30, 2009 and 2008, the Company incurred
$0.1 million and $0.9 million, respectively, in base management fees and no incentive fees. During the three-months ended June 30, 2009 and 2008, the aggregate base management fees and incentive fees payable were reduced by collateral
management fee credits of $0.1 million and $0.9 million, respectively. The Company recognized stock-based compensation expense related to shares of restricted common stock granted to the officers of the Company and key employees of the manager and
Cohen & Company of $0.1 million and $0.4 million during the three-month periods ended June 30, 2009 and 2008, respectively.

During the three-month periods ended June 30, 2009 and 2008, the CDO entities that are included in the Companys consolidated financial statements incurred collateral management fees that are payable to Cohen & Company of
$3.3 million and $3.8 million, respectively. The collateral management fees are expenses of consolidated CDO entities and relate to the on-going collateral management services that Cohen & Company provides for CDOs. The decrease in related
party management compensation is attributable to the decrease in CDO collateral management fees resulting from the defaulted and deferring TruPS CDO collateral.

Our general and administrative expenses are primarily attributable to professional service expenses, including legal services, CDO trustee compensation, rating agency fees, audit and audit-related fees, tax compliance
services, and consulting fees relating to Sarbanes-Oxley compliance.

Interest and other income. Our interest and other
income decreased by $0.9 million to $0.2 million for the three-month period ended June 30, 2009 from $1.1 million for the three-month period ended June 30, 2008. This decrease is primarily attributable to $0.8 million in reduced interest
earned on cash deposits with financial institutions and interest earned on restricted cash of our consolidated CDO entities. The average total unrestricted and restricted cash balance decreased from $205.1 million for the three-month period ended
June 30, 2008 to $155.1 million for the three-month period ended June 30, 2009, while the average interest rate earned on cash decreased from 2.2% to 0.5% over the same period.

Net change in fair value of investments in debt securities and loans and non-recourse indebtedness. On January 1, 2008, we adopted SFAS
No. 159 and elected to apply the fair value option for our investments in TruPS and TruPS security-related receivables, MBS, TruPS CDO notes payable, MBS CDO notes payable, and TruPS obligations. During the three-month period ended
June 30, 2009, the net change in fair value of investments in debt securities and loans and non-recourse indebtedness was a $540.9 million gain. The net change in fair value is comprised of approximately $573.6 million of gains recorded on our
investments in debt securities and loans, which was offset by approximately $32.7 million of losses recorded on liabilities. During the three-month period ended June 30, 2008, the net change in fair value of financial instruments was ($132.7)
million. The net change in fair value is comprised of $1.22 billion of decreases recorded on our investments in debt securities, which was partially offset by $1.09 billion of gains recorded on liabilities.

Net change in fair value of derivative contracts. During the three-month period ended June 30, 2009 and 2008, we recorded a net change
in fair value of derivative contracts of $36.5 million and $37.1 million, respectively. Upon the adoption of FAS No. 159, we discontinued hedge accounting on a significant portion of our interest rate swaps and therefore all changes in fair
value of these interest rate swaps are recorded in earnings. The change in fair value during the three-month period ended June 30, 2009 is primarily attributable to unrealized gains on derivative contracts of $57.0 million partially offset by
net periodic interest payments of $(20.5) million. The change in fair value during the three-month period ended June 30, 2008 is attributable to a $30.9 million gain on interest rate swap contracts and a $6.2 million gain on our CDS positions.

Impairments on other investments and intangible assets. Impairments on other investments and intangible assets decreased by
$1.6 million to $2.7 million for the three-month period ended June 30, 2009 from $4.3 million for the three-month period ended June 30, 2008. The impairments on investments and intangible assets for the three-month period ended
June 30, 2009 is attributable to write-downs of REO property. The impairments on investments and intangible assets for the three-month period ended June 30, 2008 is primarily attributable to $4.1 million of write-downs on REO property.

Loss on disposition of consolidated entities.During June 2008, the Company sold a subsidiary that owned the remaining $87.5
million notional value of CDS positions for $70.4 million in proceeds. During the three-month period ended June 30, 2008, the Company recorded a net loss upon disposition of the consolidated subsidiary of $5.6 million, which was offset by
approximately $6.2 million of unrealized gains on CDS recorded during the same period. The Company records both realized and unrealized changes in fair value on the CDS contracts within net change in fair value of derivative contracts in the
consolidated statements of income (loss). Following the June 2008 sale, the Company no longer holds any investments in CDS.



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Net realized loss on sale of assets. During the three-month period ended June 30,
2009, the Company recorded losses on the sale of assets of approximately $4.3 million. These losses are attributable to the sale of leveraged loans, for which losses were recorded of $2.2 million, and a $2.1 million realized loss on the sale of
property included in the residential mortgage portfolio. During the three-month period ended June 30, 2008, the Company recorded losses on the sale of assets of approximately $1.7 million, which is attributable to the sale of on-balance sheet
TruPS with a par value of $8.2 million for cash proceeds of $6.5 million.

Benefit (provision) for income taxes. Our domestic
TRSs are subject to U.S. federal and state income and franchise taxes. During the three months ended June 30, 2009, we recorded income tax expense of $8.4 million primarily relating to increases to the fair value of leveraged loans classified
as held for sale. An income tax benefit was recorded of $3.0 million relating to a $2.6 million federal tax refund and net operating loss carryforwards from on-balance sheet warehousing facilities for the three-month period ended June 30, 2008.

Net (income) loss attributable to noncontrolling interests. Net (income) loss attributable to noncontrolling interests
represents the portion of net income (loss) generated by consolidated entities that are not attributable to our ownership interest in those entities. Net (income) loss attributed to noncontrolling interests changed $171.3 million to ($168.2) million
for the three-month period ended June 30, 2009 as compared to $3.1 million for the three-month period ended June 30, 2008. This change is primarily attributable to the noncontrolling interest impact of the net change in fair value of
financial instruments and the allocation of net investment income (loss) and other expenses of our consolidated CDO entities to noncontrolling interest holders.

Comparison of the Six-Month Period Ended June 30, 2009 to the Six-Month Period Ended June 30, 2008

Net income (loss). We had a net income of approximately $337.8 million for the six-month period ended June 30, 2009 as compared to net income of $3.7 million for the six-month period ended June 30, 2008. Our net
income for the six-month period ended June 30, 2009 was attributable to changes in fair value of financial instruments and net investment income generated by our investments in TruPS, leveraged loans, residential mortgages and MBS, partially
offset by loan loss provisions on our residential mortgage and leveraged loan portfolio. Our net income for the six-month period ended June 30, 2008 was attributable to changes in fair value of financial instruments recorded in earnings
subsequent to our adoption of SFAS No. 159, reclassification into the income statement of MBS related cash flow hedging losses that were previously included in accumulated other comprehensive loss, and net investment income generated by our
investments in TruPS, MBS and leveraged loans and investments in residential mortgages.

Net investment income (loss). Our
net investment income decreased $76.8 million to a net investment loss of ($22.2) million for the six-month period ended June 30, 2009 from net investment income of $54.6 million for the six-month period ended June 30, 2008. The table
below summarizes net investment income (loss) by investment type for the following periods:



|                                             |  |                          |         |                           |   |          |                         |  |   |                           |   |  |   |         |  
|-------------------------------------------- |  | ------------------------ | ------- | ------------------------- | - | -------- | ----------------------- |  | - | ------------------------- | - |  | - | ------- | -
|For the Six-Month Period Ended June 30, 2009 | 
|                                             |  |                          |         |                          
|Investment Type                              |  | InvestmentInterestIncome |         | InvestmentInterestExpense |   |          | Provisionfor LoanLosses |  |   | NetInvestmentIncome(Loss) |  
|                                             |  | (in thousands)           |        
|Investments in TruPS                         |  | $                        | 109,574 |                           | $ | (63,882  | )                       |  | $ |                          |   |  | $ | 45,692  |  
|Investments in leveraged loans               |  |                          | 25,314  |                           |   | (10,136  | )                       |  |   | (43,026                   | ) |  |   | (27,848 | )
|Investments in MBS                           |  |                          | 30,767  |                           |   | (10,105  | )                       |  |   |                          |   |  |   | 20,662  |  
|Investments in residential mortgages         |  |                          | 24,556  |                           |   | (25,021  | )                       |  |   | (57,128                   | ) |  |   | (57,593 | )
|Other investments                            |  |                          | 54      |                           |   |         |                         |  |   |                          |   |  |   | 54      |  
|Recourse indebtedness                        |  |                          |        |                           |   | (3,211   | )                       |  |   |                          |   |  |   | (3,211  | )
|                                             |  |                          |         |                           |   |          |                         |  |   |                           |   |  |   |         |  
|Total                                        |  | $                        | 190,265 |                           | $ | (112,355 | )                       |  | $ | (100,154                  | ) |  | $ | (22,244 | )
|                                             |  |                          |         |                           |   |          |                         |  |   |                           |   |  |   |         |  
|                                            
|For the Six-Month Period Ended June 30, 2008 | 
|                                             |  |                          |         |                          
|Investment Type                              |  | InvestmentInterestIncome |         | InvestmentInterestExpense |   |          | Provisionfor LoanLosses |  |   | NetInvestmentIncome       |  
|                                             |  | (in thousands)           |        
|Investments in TruPS                         |  | $                        | 167,554 |                           | $ | (122,075 | )                       |  | $ |                          |   |  | $ | 45,479  |  
|Investments in leveraged loans               |  |                          | 31,915  |                           |   | (18,042  | )                       |  |   | (4,970                    | ) |  |   | 8,903   |  
|Investments in MBS                           |  |                          | 80,898  |                           |   | (64,785  | )                       |  |   |                          |   |  |   | 16,113  |  
|Investments in residential mortgages         |  |                          | 29,988  |                           |   | (28,561  | )                       |  |   | (10,485                   | ) |  |   | (9,058  | )
|Other investments                            |  |                          | 1,060   |                           |   |         |                         |  |   |                          |   |  |   | 1,060   |  



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|                      |  |                          |         |                           |   |          |                         |  |   |                     |   |  |   |        |  
|--------------------- |  | ------------------------ | ------- | ------------------------- | - | -------- | ----------------------- |  | - | ------------------- | - |  | - | ------ | -
|Investment Type       |  | InvestmentInterestIncome |         | InvestmentInterestExpense |   |          | Provisionfor LoanLosses |  |   | NetInvestmentIncome |  
|                      |  | (in thousands)           |        
|Recourse indebtedness |  |                          |        |                           |   | (7,909   | )                       |  |   |                    |   |  |   | (7,909 | )
|                      |  |                          |         |                           |   |          |                         |  |   |                     |   |  |   |        |  
|Total                 |  | $                        | 311,415 |                           | $ | (241,372 | )                       |  | $ | (15,455             | ) |  | $ | 54,588 |  
|                      |  |                          |         |                           |   |          |                         |  |   |                     |   |  |   |        |  

Our investment interest income decreased $121.1 million to $190.3 million for the six-month period
ended June 30, 2009 from $311.4 million for the six-month period ended June 30, 2008. The decrease in investment interest income is primarily due to a decrease in LIBOR and an increase in deferring and non-accrual balances. We experienced
a decrease in the weighted-average coupon rates in our target asset classes from 5.4% for the six-month period ended June 30, 2008 to 3.8% for the six-month period ended June 30, 2009 and a decrease in the Companys average investment
balances from $11.5 billion par value for the six-month period ended June 30, 2008 to $10.0 billion par value for the six-month period ended June 30, 2009.

Our investment interest expense decreased $129.0 million to $112.4 million for the six-month period ended June 30, 2009 from $241.4 million for the six-month period ended June 30, 2008. The decrease in
investment interest expense is attributable to a decrease in the weighted-average coupon rate for CDO notes payable from 4.0% as of June 30, 2008 to 1.7% as of June 30, 2009 and a decrease in the Companys average CDO notes payable
from $9.3 billion par value for the six-month period ended June 30, 2008 to $8.4 billion par value for the six-month period ended June 30, 2009.

Our provision for loan losses relates to investments in residential mortgages and leveraged loans. The provision for loan losses increased by $84.7 million to $100.2 million for the six-month period ended
June 30, 2009 from $15.5 million for the six-month period ended June 30, 2008. The increase in the residential mortgage loan component is a result of the continued increases in the number of delinquent residential mortgage loans
experienced in 2009 as a result of the turmoil in the housing markets. The 60-plus day delinquencies in our residential mortgage portfolio increased from 7.2% as of June 30, 2008 to 25.7% as of June 30, 2009. Additionally, the increase in
our leveraged loan provisioning is primarily the result of continued deterioration in macro-credit conditions and the resulting impact to the middle-market companies that we lend to. As of June 30, 2009, our leveraged loan portfolio has
experienced seven defaults in an aggregate principal amount of $18.9 million. We maintain an allowance for residential and commercial mortgages and leveraged loan losses based on managements evaluation of estimated losses and inherent risks in
the portfolios. Specific allowances for losses are established for impaired loans based on a comparison of the recorded carrying value of the loan to either the present value of the loans expected cash flow, the loans estimated market
price or the estimated fair value of the underlying collateral.

Expenses. Our non-investment expenses decreased by $0.6
million to $15.5 million for the six-month period ended June 30, 2009 from $16.1 million for the six-month period ended June 30, 2008. During the same periods, these non-investment expenses consisted of related party management
compensation of $6.9 million and $8.9 million, respectively, and general and administrative expenses of $8.6 million and $7.2 million, respectively. During the six-months ended June 30, 2009 and 2008, the Company incurred $0.2 million and $2.3
million, respectively, in base management fees and $0 and $0.9 million, respectively, of incentive fees. During the six-months ended June 30, 2009 and 2008, the aggregate base management fees and incentive fees payable were reduced by
collateral management fee credits of $0.2 million and $3.2 million, respectively. The Company recognized stock-based compensation expense related to shares of restricted common stock granted to the officers of the Company and key employees of the
manager and Cohen & Company of $0.2 million and $0.8 million during the six-month periods ended June 30, 2009 and 2008, respectively.

During the six-month periods ended June 30, 2009 and 2008, the CDO entities that are included in the Companys consolidated financial statements incurred collateral management fees that are payable to Cohen & Company of
$6.7 million and $8.1 million, respectively. The collateral management fees are expenses of consolidated CDO entities and relate to the on-going collateral management services that Cohen & Company provides for CDOs. The decrease in related
party management compensation is attributable to the decrease in CDO collateral management fees resulting from the defaulted and deferring TruPS CDO collateral.

Our general and administrative expenses are primarily attributable to professional service expenses, including legal services, CDO trustee compensation, rating agency fees, audit and audit-related fees, tax compliance
services, and consulting fees relating to Sarbanes-Oxley compliance.

Interest and other income. Our interest and other
income decreased by $2.0 million to $0.6 million for the six-month period ended June 30, 2009 from $2.6 million for the six-month period ended June 30, 2008. This decrease is primarily attributable to $1.9 million in reduced interest
earned on cash deposits with financial institutions and interest earned on restricted cash of our consolidated CDO entities. The average total unrestricted and restricted cash balance decreased from $192.2 million for the six-month period ended
June 30, 2008 to $150.9 million for the six-month period ended June 30, 2009, while the average interest rate earned on cash decreased from 2.7% to 0.8% over the same period.

Net change in fair value of investments in debt securities and loans and non-recourse indebtedness. On January 1, 2008, we adopted
SFAS No. 159 and elected to apply the fair value option for our investments in TruPS and TruPS security-related receivables, MBS, TruPS CDO notes payable, MBS CDO notes payable, and TruPS obligations. During the six-month period ended
June 30,



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2009, the net change in fair value of investments in debt securities and loans and non-recourse indebtedness was a $547.8 million gain. The net change in
fair value is comprised of approximately $355.9 million of gains recorded on our investments in debt securities and loans and approximately $191.9 million of gains recorded on liabilities. During the six-month period ended June 30, 2008, the
net change in fair value of financial instruments was $70.2 million. The net change in fair value is comprised of approximately $2.0 billion of losses recorded on our investments in debt securities, which was offset by approximately $2.1 billion of
gains recorded on liabilities.

Net change in fair value of derivative contracts. During the six-month periods ended
June 30, 2009 and 2008, we recorded a net change in fair value of derivative contracts of $31.7 million and ($45.8) million, respectively. Upon the adoption of FAS No. 159, we discontinued hedge accounting on a significant portion of our
interest rate swaps and therefore all changes in fair value of these interest rate swaps are recorded in earnings. The change in fair value during the six-month period ended June 30, 2009 is primarily attributable to unrealized gains on
derivative contracts of $70.4 million partially offset by net periodic interest payments on interest rate swaps of ($38.7) million. The change in fair value during the six-month period ended June 30, 2008 is attributable to a $62.9 million loss
on interest rate swap contracts and a $17.1 million gain on our CDS positions.

Impairments on other investments and intangible
assets. Impairments on other investments and intangible assets decreased by $8.1 million to $4.7 million for the six-month period ended June 30, 2009 from $12.8 million for the six-month period ended June 30, 2008. The impairments
on investments and intangible assets for the six-month period ended June 30, 2009 is attributable to write-downs of REO property. The impairments on investments and intangible assets for the six-month period ended June 30, 2008 is
attributable to the complete impairment of our goodwill of $5.0 million, $6.4 million of write-downs of REO property, and $1.4 million of impairments on other investments.

Net realized loss on sale of assets. During the six-month period ended June 30, 2009, the Company recorded losses on the sale of
assets of approximately $16.1 million. These losses are attributable to the sale of TruPS in a consolidated CDO entity, for which losses were recorded of $10.1 million, the sale of leveraged loans, for which losses were recorded of $2.7 million, and
a $3.3 million realized loss on the sale of property included in the residential mortgage portfolio. During the six-month period ended June 30, 2008, the Company recorded losses on the sale of assets of approximately $3.2 million. These losses
are attributable to the sale of leveraged loans and TruPS during the period, for which losses were recorded of $1.4 million and $1.8 million, respectively.

Benefit (provision) for income taxes. Our domestic TRSs are subject to U.S. federal and state income and franchise taxes. During the six months ended June 30, 2009, we recorded income tax expense of
$22.6 million primarily relating to increases to the fair value of leveraged loans classified as held for sale. An income tax benefit was recorded of $3.4 million relating to a $2.6 million federal tax refund and net operating loss carryforwards
from on-balance sheet warehousing facilities for the six-month period ended June 30, 2008.

Net (income) loss attributable to
noncontrolling interests. Net (income) loss attributable to noncontrolling interests represents the portion of net income (loss) generated by consolidated entities that are not attributable to our ownership interest in those entities. Net
(income) loss attributed to noncontrolling interests changed $120.3 million to ($161.1) million for the six-month period ended June 30, 2009 as compared to ($40.8) million for the six-month period ended June 30, 2008. This change is
primarily attributable to the noncontrolling interest impact of the net change in fair value of financial instruments and the allocation of net investment income/(loss) and other expenses of our consolidated CDO entities to noncontrolling interest
holders.

Liquidity and Capital Resources

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain investments, pay dividends and other general business needs. We believe our available cash
balances and cash flows from operations will be sufficient to fund our currently anticipated liquidity requirements for the next twelve months, but our ability to grow our business will be limited by our ability to obtain future financing. In
addition, our liquidity could be adversely affected by a decline in our stock price, as discussed below. Management has evaluated our current and forecasted liquidity and continues to monitor evolving market conditions. Future investment
alternatives and operating activities will continue to be evaluated against anticipated current and longer term liquidity demands.

We are
currently financing our TruPS, MBS and leveraged loan portfolio with a warehouse facility and CDO notes payable. As of June 30, 2009, the Company is not financing any investments with short-term repurchase agreements that subject the Company to
margin calls or potential recourse obligations in excess of posted first loss deposits. We currently have no commitments for any additional financings, and we may not be able to obtain any additional financing at the times required and on terms and
conditions acceptable to us. If we fail to obtain needed additional financing, the pace of our growth would be adversely affected. Furthermore we are a party to a derivative contract that may subject us to margin calls up to a maximum amount of $8.8
million in the event the Class A-1 notes of the Alesco XIV CDO are downgraded below AAA and the Companys stockholders equity decreases below $250 million. During the six-months ended June 30, 2009, the
Class A-1 Notes of Alesco XIV CDO were downgraded to A+; however, the Company was not required to post margin collateral as of June 30, 2009. The maximum amount of the margin



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exposure is equal to the notional amount of the contract and the amount of required margin varies based upon the Companys outstanding equity balance
and the rating level assigned to the Alesco XIV Class A-1 Notes.

On October 10, 2008, the Company was notified by the NYSE that
it was not in compliance with an NYSE continued listing standard applicable to its common stock. The standard requires that the average closing price of any listed security not fall below $1.00 per share for any consecutive 30 trading-day period. On
October 15, 2008, the Company notified the NYSE of its intent to cure this deficiency. After exploring different alternatives for curing the deficiency and restoring compliance with the continued listing standards, the Company currently expects
to effectuate a 1 for 10 reverse stock split of the outstanding shares of its common stock. Under the NYSE rules, the Company has six months from the date of the NYSE notice to comply with the NYSE minimum share price standard. If the Company is not
compliant by that date, its common stock will be subject to suspension and delisting by the NYSE. However, on February 26, 2009, the NYSE granted NYSE-listed companies a reprieve from the NYSEs $1 minimum price requirement until
June 30, 2009, which reprieve was subsequently extended for an additional month through July 31, 2009. In addition, the NYSE permanently decreased its market-capitalization standard to $15 million for listed companies, which
previously required that average market capitalization of a NYSE-listed company be at least $25 million over any 30 consecutive trading day period. We therefore have until September 13, 2009 to become compliant with the NYSE minimum share
price standard. If we fail to meet any of the NYSEs other listing standards, however, we may be delisted for failing to comply with the continued listing standards.

During the year ended December 31, 2008, we repurchased and retired $111.4 million par value of our outstanding convertible debt securities for
$50.6 million. We realized a gain of $56.4 million on these transactions, net of a $2.7 million write-off of related deferred costs and a $1.6 million discount. As of the date of this filing, $28.7 million principal amount of our contingent
convertible debt securities remain outstanding. The holders of our remaining $28.7 million aggregate principal amount of convertible debt will have the right to require us to repurchase their notes at 100% of their principal amount together with
accrued but unpaid interest thereon if, among other things, our common stock ceases to be listed on the NYSE, another established national securities exchange or an automated over-the-counter trading market in the United States. If we are unable to
remedy the deficiency described above and remain listed on the NYSE and if we are unable to list our common stock on another established national securities exchange or automated U.S. over-the-counter trading market, there is a risk that some or all
holders of our convertible notes will exercise their right to require us to repurchase their notes. There can be no assurance that we would be able to satisfy such repurchase requests.

As of June 30, 2009, the Companys consolidated financial statements include $88.9 million of cash and cash equivalents and total indebtedness
of $3.2 billion. Total indebtedness includes recourse indebtedness of $77.7 million and $3.1 billion of non-recourse debt relating to consolidated VIEs. The creditors of each consolidated VIE have no recourse to the general assets or credit of the
Company. The Companys maximum exposure to loss as a result of its involvement with each consolidated VIE is the equity that the Company has invested in warehouse first-loss deposits and the preference shares or debt of the CDO, CLO or other
types of securitization structures.

Our primary cash needs include the ability to:



| |  |  | make required distributions of earnings to maintain our qualification as a REIT, which is based upon the existence of current taxable income;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | pay costs of borrowings, including interest on such borrowings and expected CDO, CLO and other securitization debt;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | pay base and incentive fees to our manager and pay other operating expenses;
| | - |  | ----------------------------------------------------------------------------



| |  |  | fund investments and discretionary repurchases of our debt and equity securities;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | make payments as our debt comes due;
| | - |  | ------------------------------------



| |  |  | make margin deposits on derivative instruments; and
| | - |  | ---------------------------------------------------



| |  |  | pay federal, state and local taxes of our domestic TRSs.
| | - |  | --------------------------------------------------------

We intend to meet these short-term requirements through the following:



| |  |  | revenue from operations, including interest income from our investment portfolio;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | interest income from temporary investments and cash equivalents; and
| | - |  | --------------------------------------------------------------------



| |  |  | proceeds from future borrowings or offerings of our common stock.
| | - |  | -----------------------------------------------------------------

From our inception through the beginning of the credit crisis in August 2007, we sought to finance our assets on a long-term basis through CDOs and CLOs. The disruption in the credit markets has substantially
forestalled our ability to execute new CDOs and CLOs. If the securitization markets re-open in the future, the costs of securitizing assets may be higher than what we experienced in the past. Increased securitization costs may cause us to realize
lower returns on our equity for investments in future CDOs as compared with the returns that we have realized to date on completed CDOs that have lower financing costs. If securitization costs become unacceptably high, or if securitization financing
remains unavailable, we may not be willing or able to complete our historical investment strategy of securitizing assets that have been purchased using short-term warehouse lines. If we are unable to deploy our



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capital in high-yielding CDO investments quickly or at all, we would need to find alternative investments which may be lower yielding.

Overcollateralization and Other Credit Enhancement Tests

The terms of the CDO and CLO and other securitization vehicles that we use to finance our investments generally provide that the principal amount of assets must exceed the principal balance of the related securities
to be issued by the securitization vehicle by a certain amount, commonly referred to as over-collateralization. The terms of the securitization generally provide that, if certain delinquencies and/or losses exceed the specified levels
based on the analysis by the rating agencies (or any financial guaranty insurer) of the characteristics of the assets collateralizing the securitization vehicle securities, the required level of over-collateralization may be increased or may be
prevented from decreasing as would otherwise be permitted if losses or delinquencies did not exceed those levels. Other tests, based on delinquency levels or other criteria including downgrades by the rating agencies of the underlying portfolio
securities of the securitization vehicle, may restrict our ability to receive cash distributions from assets collateralizing the securitization vehicle securities. The performance tests may not be satisfied. In addition, collateral management
agreements typically provide that if certain over-collateralization ratio tests are failed and an event of default occurs, the collateral management agreement may be terminated by a vote of the security holders and the security holders have the
option to liquidate the underlying collateral securities. If the assets held by a securitization vehicle fail to perform as anticipated, our liquidity may be adversely affected.

The following summarizes certain key over-collateralization test matters for each of our respective target asset classes:



| |  |  | MBSAs previously disclosed, the Kleros Real Estate CDOs have all failed over-collateralization tests as a result of significant ratings agency
downgrade activity and are no longer making cash distributions to the Company. The net cash flows of the Kleros Real Estate CDOs are currently being used to pay down the controlling class debtholders in each of the Kleros Real Estate CDOs. Despite
the fact that each Kleros Real Estate CDO has failed over-collateralization tests, the net interest earnings of the three remaining CDOs will continue to be reflected in the Companys net investment income and taxable income. We have received
written notice from the trustees of Kleros Real Estate I, II and IV that each CDO experienced an event of default. These events of default resulted from the failure of certain additional over-collateralization tests primarily due to credit rating
agency downgrades. The events of default provide the controlling class debtholder in each CDO with the option to liquidate all of the MBS assets collateralizing the particular CDO. The proceeds of any such liquidation will be used to repay the
controlling class debtholder. As of the current date, the controlling class debtholders of Kleros Real Estate I, II and IV have not exercised their rights to liquidate any of the CDOs.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Securitized Residential MortgagesThe majority of our investments in residential mortgage loans are included within a securitization trust in
which we own all of the subordinated notes including an interest-only subordinated note. When principal and interest are collected from the underlying residential mortgage loans, such cash flow is distributed sequentially to the
senior notes, then to the interest-only subordinated note, and finally to the remainder of the subordinated notes. Losses are allocated to the notes in reverse sequential order such that losses are borne
by subordinated notes ahead of the senior notes. Significant losses have been realized on the subordinated notes to date and are expected to continue. Approximately 30% of the notes owned by the Company have already been reduced to
zero as a result of such allocation of losses. These losses are attributable to an increase in the delinquency rate of the underlying pool of mortgage loans since the closing date of the securitization, which has also caused a
reduction in the amount of principal and interest that is collected from the mortgage loans. To the extent such collections continue to decrease, there may not be sufficient cash flow to pay any principal and interest to the subordinated notes
until the senior noteholders have been paid in full.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | TruPSOur investments in TruPS are also financed with CDOs that are subject to over-collateralization requirements. The over-collateralization
requirements in the TruPS CDOs are typically triggered in the event that more than three percent of the par value of collateral securities that collateralize the CDO debt defer on a principal or interest payment or are otherwise determined to be
defaulted in accordance with the indenture for the particular CDO. As of June 30, 2009, we have experienced 63 bank deferrals or defaults and one insurance company default in our TruPS portfolio. As of June 30, 2009, the aggregate
principal amount of investments in the 64 TruPS that have defaulted or are currently deferring interest payments is $1.1 billion, representing approximately 20.6% of the Companys consolidated trust preferred securities portfolio. The TruPS
deferrals and defaults described above have resulted in the over-collateralization tests being triggered in all eight CDOs in which the Company holds equity interests. The trigger of an over-collateralization test in a TruPS CDO means that the
Company, as a holder of equity securities, will no longer receive current distributions of cash in respect of its equity interests until sufficient cash or collateral is retained in the CDOs to cure the over-collateralization tests. The Company does
not expect to receive cash distributions from its TruPS CDOs for the foreseeable future. There can be no assurance that we will not experience additional deferrals or defaults that will result in further over-collateralization test failures or be
able to extend the cure periods of the deals currently failing over-collateralization tests.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Leveraged LoansThe over-collateralization requirements in the leveraged loan CLOs are typically triggered in the event that we experience
significant losses on the sale of assets below par, as well as unrealized fair value adjustments on
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | certain assets as mandated by the indentures which govern our leveraged loan CLOs. The primary cause for such fair value adjustments are default activity,
and credit downgrades in the underlying asset pool. In the event that an over-collateralization failure occurs in a leveraged loan CLO, changes to the priority of payments will result in the equity holders, including us, of the CLO not receiving any
cash flows until such time as the over-collateralization failure is cured. Management continues to closely monitor and actively manage the leveraged loan portfolio as a result of the continued deterioration in macro-credit conditions and the
potential for significant stress on the middle-market companies in our portfolio. Subsequent to June 30, 2009, we experienced an interest diversion test failure in Emporia Preferred Funding II, Ltd. The failure was primarily attributable to an
increase in defaulted assets collateralizing the CLO. As a result of the interest diversion test failure in Emporia Preferred Funding II, Ltd., the Company did not receive any of its quarterly distribution in July 2009, and assuming no additional
defaults or significant credit downgrades the Company does not expect to receive its quarterly cash distribution for several quarters.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Warehouse Financing Arrangements

As of June 30, 2009, we were party to the following agreement which is
collateralized by the assets shown below (dollars in thousands):



|                                                        |  |                  |  |                       |              
|------------------------------------------------------- |  | ---------------- |  | --------------------- | -------------
|Financing Facilities (and Aggregate Borrowing Capacity) |  | Termination Date |  | Assets Being Financed
|Leveraged loan related warehouse facility               |  | May 2009         |  | $                     | 143.3 million

As of June 30, 2009, the Companys consolidated financial statements included $106.6
million of warehouse credit facility debt in the form of short term notes payable. Warehouse credit facility debt relates to an on-balance sheet warehouse facility entered into by a subsidiary of the Company with the intention of financing the
acquisition of leveraged loans on a short-term basis until longer-term financing is available. As of June 30, 2009, the Company has invested $38.5 million of capital in this financing arrangement, which contractually matured in May 2009. As
previously disclosed, the warehouse is currently in default and therefore, there is no borrowing capacity, the facility is bearing a penalty interest rate equal to the daily commercial paper rate plus 300 basis points, and all principal and interest
collections are used to amortize the warehouse credit facility debt. The Company expects that the warehouse lender will liquidate all of the $143.3 million of par value of leveraged loans during the third quarter of 2009. As a result of the
liquidation of the collateral, the Company will likely lose the first loss cash that is deposited with the warehouse lender in the amount of $38.5 million, which is the maximum amount of loss that the Company is exposed to from the warehouse
facility.

Inflation

We believe that
the principal risk to us from inflation is the effect that market interest rates may have on our floating rate debt instruments as a result of future increases caused by inflation. We expect to mitigate against this risk through our financing
strategy to match the terms of our investment assets with the terms of our liabilities and, to the extent necessary, through the use of hedging instruments.

Fair Values

For certain of the financial instruments that we own, fair values will not be readily available since there are
no active trading markets for these instruments as characterized by currency exchanges between willing parties. Accordingly, fair values can only be derived or estimated for these investments using various valuation techniques, such as pricing of
comparable financial instruments computing the present value of estimated future cash flows using discount rates commensurate with the risks involved. However, the determination of estimated future cash flows is inherently subjective and imprecise.
Minor changes in assumptions or estimation methodologies can have a material effect on these derived or estimated fair values. These estimates and assumptions are indicative of the interest rate environments as of June 30, 2009 and do not take
into consideration the effects of subsequent interest rate fluctuations.

We note that the values of our investments in MBS, residential
mortgages, TruPS, and derivative instruments will be sensitive to changes in market interest rates, interest rate spreads, credit spreads and other market factors. The value of these investments can vary materially from period to period.

Securities Repurchases

In August 2007, our board
of directors authorized us to repurchase up to $50 million of our common stock from time to time in open market purchases or privately negotiated transactions. We may also repurchase convertible debt securities from time to time in open market or
privately negotiated transactions. We did not repurchase any shares of our common stock or any of our convertible debt securities during the six months ended June 30, 2009. As of the date of this filing, $28.7 million principal amount of the
Companys contingent convertible debt securities remains outstanding. There can be no assurance as to the timing or amount of any future securities repurchases we may complete.



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Off-Balance Sheet Arrangements and Commitments

We may maintain arrangements with various investment banks regarding CDO securitizations and off-balance sheet warehouse facilities. Prior to the
completion of a CDO securitization, historically our off-balance sheet warehouse providers have acquired investments in accordance with the terms of the warehouse facility agreements. Pursuant to the terms of the warehouse agreements, we receive all
or a portion of the difference between the interest earned on the investments acquired under the warehouse facilities and the interest accrued on the warehouse facilities from the date of the respective acquisitions. Under the warehouse agreements,
we are required to deposit cash collateral with the warehouse providers, and as a result, we bear the first dollar risk of loss up to our warehouse deposit if an investment held under the warehouse facility is liquidated at a loss. Upon the
completion of a CDO securitization, the cash collateral held by the warehouse provider is returned to us. In the event that we are unable to obtain long-term CDO financing for the accumulated warehouse collateral, our cash collateral is at risk and
may not be returned to the Company. The duration of a warehouse facility is generally at least nine months. These arrangements are deemed to be derivative financial instruments and are recorded by us at fair value in each accounting period with the
change in fair value recorded in earnings. We were not party to any off-balance sheet arrangements as of June 30, 2009.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|------- | -----------------------------------------------------------

Our exposure to market risk pertains to losses resulting from changes in interest rates and equity security prices. We are exposed to credit risk and interest rate risk related to our investments in assets in our target asset classes.

Market Risk

The credit markets
in the United States began suffering significant disruption in the summer of 2007. This disruption began in the subprime residential mortgage sector and extended to the broader credit and financial markets generally. During the third quarter of
2008, it became clear that the global economy had been adversely impacted by the credit crisis. Available liquidity, particularly through asset-backed securities (ABS) CDOs and other securitizations, declined precipitously during the second half of
2007, continued to decline in 2008 and remains depressed as of the date of this filing. Concerns about the capital adequacy of financial services companies, disruptions in global credit markets, volatility in commodities prices and continued pricing
declines in the U.S. housing market have led to further disruptions in the financial markets, adversely affected regional banks and have exacerbated the longevity and severity of the credit crisis. The disruption in these markets directly impacts
our business because our investment portfolio includes investments in MBS, residential mortgages, leveraged loans and bank and insurance company debt. We have historically financed our investments with on and off-balance sheet warehouse facilities
and on-balance sheet CDOs and CLOs. We continue to have exposure to these markets and products and as market conditions continue to worsen the fair value of our investments could further deteriorate. In addition, market volatility, illiquid market
conditions and disruptions in the credit markets have made it extremely difficult to value certain of our securities. Subsequent valuations, in light of factors then prevailing, may result in significant changes in the values of these securities in
future periods. Any of these factors could require us to take further writedowns in the fair value of our investments portfolio, which may have an adverse effect on our results of operations in future periods.

The disruption in the credit markets has severely restricted our ability to complete new CDOs and CLOs. In addition, banks are capital constrained and
this severely limits their ability to provide new financing commitments. We expect this situation to continue for the foreseeable future until markets stabilize, credit concerns dissipate and capital becomes less constrained. We are fortunate that
the substantial portion of our portfolio is financed with in-place, long-term financing. However, as of June 30, 2009, we had $38.5 million of cash deposited with a warehouse lender to collateralize a warehouse facility for leveraged loan
assets. Upon the expected liquidation of the collateral in the warehouse, we will likely lose the first loss cash that we had deposited with the warehouse lender in the amount of $38.5 million.

Interest Rate Risk

Interest rates may be affected by economic, geopolitical, monetary and fiscal policy, market supply and demand and other factors generally outside our control, and such factors may be highly volatile. Our interest rate risk sensitive assets
and liabilities and financial derivatives typically will be held for long-term investment and not held for sale purposes. Our intent in structuring CDO and CLO transactions and other securitizations is to limit interest rate risk with a financing
strategy that matches the terms of our investment assets with the terms of our liabilities and, to the extent necessary, through the use of hedging instruments.

We generally make investments that are either floating rate or fixed rate. Our floating rate investments will generally be priced at a fixed spread over an index such as LIBOR that reprices either quarterly or every
30 days based upon movements in effect at each measurement date. Given the frequency of future price changes in our floating rate investments, changes in interest rates are not expected to have a long term material effect on the value of these
investments. Our net investment income will be subject to an increase or decrease in the event that there is a fluctuation in interest rates between the period which the assets and liabilities reprice



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(typically a five to ten day period). Increases or decreases in LIBOR will have a corresponding increase or decrease in our interest income and interest
expense, thereby generally mitigating the net earnings impact on our overall portfolio. In the event that long-term interest rates increase, the value of our fixed-rate investments would be diminished. We have hedged this risk where the benefit
outweighs the cost of the hedging strategy. Such changes in interest rates would not have a material effect on the income of these investments, which generally will be held to maturity.

Through June 30, 2009, we entered into various interest rate swap agreements to hedge variable cash flows associated with CDO notes payable. These
interest rate swaps have an aggregate notional value of $2.2 billion and are used to swap the variable cash flows associated with variable rate CDO notes payable into fixed-rate payments. As of June 30, 2009, the interest rate swaps had an
aggregate liability fair value of $191 million. Changes in the fair value of interest rate swaps are recorded in earnings.

There have been
no material changes in quantitative and qualitative disclosures in 2009 from the disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2008. See discussion of quantitative and qualitative disclosures about
market risk under Item 7A-Quantitative and Qualitative Disclosures About Market Risk included in our Annual Report on Form 10-K for the year ended December 31, 2008.



|ITEM 4. | CONTROLS AND PROCEDURES.
|------- | ------------------------

Evaluation of Disclosure Controls and
Procedures

We have established disclosure controls and procedures to ensure that material information relating to the Company,
including our consolidated subsidiaries, is made known to the officers who certify our financial reports and to other members of senior management and the board of directors. Under the supervision, and with the participation of our Chief Executive
Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934 (Exchange
Act) as of June 30, 2009. Based on that evaluation, the principal executive officer and the principal financial officer concluded that our disclosure controls and procedures were effective at June 30, 2009, to ensure that information required
to be disclosed by us in the reports we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.

Remediation Steps to Address Material Weakness

During July 2009, we discovered computational errors in certain valuation models used by the Company to develop valuation estimates used in the preparation of our financial statements. Upon identifying these errors, we undertook a broad
review of our valuation processes and methodologies. After performing this additional work, we determined these errors did not result in a need to modify previously issued financial statements. However, we have determined that the sufficiency of
controls over the development and validation of the valuation models, together with the management review controls over the valuations not being at a sufficient level of detail, made it reasonably possible that a material error in the valuations of
certain assets could go undetected.

To remediate the material weakness in internal control over financial reporting described above,
management enhanced its controls over financial reporting by completing the following remediation steps:



| |  |  | Corrected the computational errors in our internal valuation models; and,
| | - |  | -------------------------------------------------------------------------



| |  |  | Enhanced our internal valuation process to include additional validation procedures, including more formal review and comparison of internal valuation model results
to observable market data.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We believe that the actions described above and the resulting improvements in controls have
strengthened our internal control over financial reporting relating to our valuation process.

Changes in Internal Control Over Financial Reporting

Other than as described above, there were no changes in our internal control over financial reporting during the quarter ended June 30,
2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

On June 8, 2006, our loan
to Beech Thicket Spring, Inc., Communities of Penland, LLC, COP Preservation Partners, LLC, F.W., Inc., The Penland Reserve Tract, LLC, and Triad Apartment Group, LLC in the original principal amount of $16.7 million (the Penland Loan)
matured. The outstanding balance at maturity was $11.7 million. The Penland Loan was guaranteed by five individuals, Anthony R. Porter, Dorothy M. Porter, Frank A. Amelung, Eugenia Amelung and Richard L. Amelung (collectively
Guarantors). On March 29, 2007, we obtained a judgment against the Guarantors for $13.1 million in the case styled Alesco Financial Inc. v. Anthony R. Porter, Dorothy M. Porter, Frank Amelung, Eugenia Amelung and Richard
Amelung, in the United States District Court in the Middle District of Florida, Case No.: 3:07-cv-00032-HWM-HTS. Frank A. Amelung, Eugenia Amelung and Richard L. Amelung sought protection in the United States Bankruptcy Court in the Southern
District of Florida, West Palm Beach Division, In Re: Frank A. Amelung, Jr. and Eugenia Marie Amelung, Chapter 7 Debtors, Case No.: 07-15492-BKC-PGH, and In Re: Richard L. Amelung, Debtor Chapter 7, Case No.: 07-15493-BKC-PGH,
respectively. Alesco has made a claim in both cases for the amount of the Judgment, reduced as the Penland Loan otherwise is collected. In a compromise with the Trustee in both bankruptcy cases, Alesco has agreed to an uncontested unsecured claim in
the full amount as originally filed. At least two parties, including the Trustee in each case, have filed pleadings objecting to the discharge of Frank A. Amelung and Richard L. Amelung. Euginia Amelung has been discharged. The Trustee in both cases
continues to liquidate assets and collect assets for the estates. The ability to collect a material amount of the Judgment in the bankruptcy proceedings is slight, and we do not believe the other Guarantors have significant assets for levy. We
retain our primary collateral consisting of real property in the Mountains of North Carolina.

The Attorney General of North Carolina on
June 6, 2007, filed suit against one or more of the Borrowers and Guarantors of the Penland Loan described above, among others, in the case styled State of North Carolina ex rel, Roy Cooper, Attorney General vs. Peerless Real Estate
Services, Inc., Village of Penland, L.L.C., MFSL Landholdings, L.L.C., Communities of Penland, L.L.C., COP Land Holdings, L.L.C., PG Capital Holdings, L.L.C., Anthony Porter, Frank Amelung, Richard Amelung, J. Kevin Foster, Neil ORourke,
Michael Yeomans, and A. Greg Anderson, General Court of Justice, Superior Court Division, State of North Carolina, Wake County, Case No.: 07-CVS-9006. The North Carolina Attorney General alleged that the defendants in the case obtained monies
from consumers in violation of North Carolina law relating to unfair or deceptive practices affecting commerce. The court in this case has issued an order appointing a receiver for the assets of the corporate defendants in the case, Peerless Real
Estate Services, Inc., Village of Penland, L.L.C., MFSL Landholdings, L.L.C., Communities of Penland, L.L.C., COP Land Holdings, L.L.C., and PG Capital Holdings, L.L.C., and has since added the rest of our Borrowers not originally named as
defendants for receivership. We are not a named party in this action, but the receivership includes substantially all of the North Carolina real property collateral held by us to secure the Penland Loan. The complaint filed by the North Carolina
Attorney General seeks to void all contracts between the named defendants and consumers in the alleged deceptive scheme identified in the complaint, the return of all monies obtained by the named defendants in the alleged deceptive scheme, civil
penalties against the named defendants and attorney fees from the named defendants. The Order Appointing Receiver authorizes the Receiver, among other things, to sell and dispose of property of the Borrowers in the receivership free and clear of all
liens and other collateral interests, which liens or other collateral interests will then attach to the proceeds. We have not received notice of any such sale or disposition of our collateral, and we plan to protect vigorously any and all liens and
other collateral interests in the collateral for the Penland Loan. In the pleadings in this case, we have learned that two of the Guarantors and other officers of our Borrowers have pled guilty to one or more felony counts relating to fraud
involving the sale of real property in and around our remaining collateral in North Carolina and that the Receiver also has been appointed Special Master in the restitution proceedings in the criminal cases. Our collection activities have been
slowed by the Amelung bankruptcies, criminal proceeding against Guarantors and officers of the Borrowers and the Receivership described above. We intend to coordinate with the Receiver to maximize collateral values and continue to foreclose some or
all our collateral, which may require this courts approval, and pursue collection by all other available means.



|Item 1A. | Risk Factors
|-------- | ------------

In addition to the information set
forth in this Quarterly Report on Form 10-Q, you should also carefully review and consider the risk factors contained in our other reports and periodic filings with the SEC, including without limitation the risk factors contained under the caption
Item 1A  Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2008, which could materially and adversely affect our business, financial condition and results of operations. The risk factors
discussed in that Form 10-K and in this Quarterly Report on Form 10-Q do not identify all risks that we face because our business operations could also be affected by additional factors that are not presently known to us or that we currently
consider to be immaterial to our operations.



If we fail to maintain
effective internal control over financial reporting and disclosure controls and procedures in the future, we may not be able to accurately report our financial results, which could have an adverse effect on our business.

If our internal control over financial reporting and disclosure controls and procedures are not effective, we may not be able to provide reliable
financial information. Subsequent to the filing of our annual report on Form 10-K for the year ended December 31, 2008, we determined that our internal control over financial reporting as of December 31, 2008 was not effective due to
the existence of a material weakness in our processes for determining the fair value of certain investments. Although we have implemented additional procedures that we believe have improved our processes for estimating the fair value of our
investments, we cannot be certain that these measures will ensure that we will maintain adequate controls over our financial reporting process in the future. If we discover additional deficiencies, we will make effort to remediate these
deficiencies; however, there is no assurance that we will be successful either in identifying deficiencies or in their remediation. Any failure to maintain effective controls in the future could adversely affect our business or cause us to fail to
meet our reporting obligations. Such non-compliance could also result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements. In addition, perceptions of our business
among customers, suppliers, rating agencies, lenders, investors, securities analysts and others could be adversely affected.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

None.



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|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

None.



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

None.



|Item 5. | Other Information
|------- | -----------------

None.



|Item 6. | Exhibits
|------- | --------

(a) Exhibits  see Exhibit
Index.



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                      |  |                       |  |                          
|--------------------- |  | --------------------- |  | -------------------------
|                      |  | ALESCO FINANCIAL INC.
|                      |  |                      
|                      |  | By:                   |  | /s/ James J. McEntee, III
|                      |  |                       |  | James J. McEntee, III    
|Date: August 17, 2009 |  |                       |  | Chief Executive Officer  
|                      | 
|                      |  | ALESCO FINANCIAL INC.
|                      |  |                      
|                      |  | By:                   |  | /s/ John J. Longino      
|                      |  |                       |  | John J. Longino          
|Date: August 17, 2009 |  |                       |  | Chief Financial Officer  



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EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                                                                                                                                                                                              
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                  
|2.1         |  | Agreement and Plan of Merger, dated as of February 20, 2009, by and among Alesco Financial Inc., Fortune Merger Sub, LLC and Cohen Brothers, LLC (incorporated by reference to Exhibit 2.1 to
our Current Report on Form 8-K filed with the SEC on February 23, 2009).                                                                                                                       
|            | 
|2.2         |  | Amendment No. 1 to Agreement and Plan of Merger, dated as of June 1, 2009, by and among Alesco Financial, Inc., Fortune Merger Sub, LLC, Alesco Financial Holdings, LLC, and Cohen Brothers, LLC.
(incorporated by reference to Exhibit 2.1 to Alesco Financial Inc.s Current Report on Form 8-K filed with the SEC on June 2, 2009).                                                       
|            | 
|3.1         |  | Second Articles of Amendment and Restatement (incorporated by reference to Exhibit 3.1 to Amendment No. 1 to our Registration Statement on Form S-11 (Registration No. 333-111018) filed with the
SEC on February 6, 2004).                                                                                                                                                                  
|            | 
|3.2         |  | Articles of Amendment changing our name to Alesco Financial Inc. (incorporated by reference to Exhibit 3.1 to our Registration Statement on Form S-3 (Registration No. 333-138136) filed with the
SEC on October 20, 2006).                                                                                                                                                                  
|            | 
|3.3         |  | By-laws, as amended (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed with the SEC on October 11, 2005).                                                                                                                                                                                                                                                     
|            | 
|4.1         |  | Form of Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to our Quarterly Report on Form 10-Q filed with the SEC on August 9, 2007).                                                                                                                                                                                                                                     
|            | 
|4.2         |  | Form of 7.625% Contingent Convertible Senior Notes due 2027 (incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K filed with the SEC on May 21, 2007).                                                                                                                                                                                                                 
|            | 
|4.3         |  | Registration Rights Agreement, dated as of May 15, 2007, by and between Alesco Financial Inc. and RBC Capital Markets Corporation (incorporated by reference to Exhibit 4.3 to our Current Report
on Form 8-K filed with the SEC on May 21, 2007).                                                                                                                                           
|            | 
|4.4         |  | Indenture, dated as of May 15, 2007, by and between Alesco Financial Inc. and U.S. Bank National Association (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed
with the SEC on May 21, 2007).                                                                                                                                                                
|            | 
|4.5         |  | Junior Subordinated Indenture, dated as of June 25, 2007, by and between Alesco Financial Inc. and Wells Fargo Bank, N.A. (incorporated by reference to Exhibit 4.1 to our Current Report on Form
8-K filed with the SEC on June 29, 2007).                                                                                                                                                  
|            | 
|4.6         |  | Indenture, dated as of June 29, 2007, by and among Bear Stearns ARM Trust 2007-2, Citibank, N.A. and Wells Fargo Bank, N.A. (incorporated by reference to Exhibit 4.6 to our Quarterly Report on
Form 10-Q filed with the SEC on August 9, 2007).                                                                                                                                            
|            | 
|10.1        |  | Management Agreement, dated as of January 31, 2006, by and between Alesco Financial Trust and Cohen Brothers Management, LLC (incorporated by reference to Annex E to our Proxy Statement on
Schedule 14A filed with the SEC on September 8, 2006).                                                                                                                                          
|            | 
|10.2        |  | Shared Facilities and Services Agreement, dated as of January 31, 2006, by and between Cohen Brothers Management, LLC and Cohen Brothers, LLC (incorporated by reference to Exhibit 10.3 to
Amendment No. 1 to our Registration Statement on Form S-3 (Registration No. 333-137219) filed with the SEC on October 5, 2006).                                                                  
|            | 
|10.3        |  | Letter Agreement, dated January 31, 2006, by and between Alesco Financial Trust and Cohen Brothers, LLC, relating to certain rights of first refusal and non-competition arrangements between the
parties (incorporated by reference to Exhibit 10.4 to Amendment No. 1 to our Registration Statement on Form S-3 (Registration No. 333-137219) filed with the SEC on October 5, 2006).      
|            | 
|10.4        |  | Assignment and Assumption Agreement, dated as of October 6, 2006, by and between Alesco Financial Inc. and Cohen Brothers Management, LLC, transferring the agreement referred to in Exhibit 10.1
hereto to Alesco Financial Inc. (incorporated by reference to Exhibit 10.2 to our Registration Statement on Form S-3 (Registration No. 333-138136) filed with the SEC on October 20, 2006).
|            | 
|10.5        |  | Letter Agreement, dated October 18, 2006, by and between Alesco Financial Inc. and Cohen & Company, LLC, transferring the agreement referred to in Exhibit 10.1 hereto to Alesco Financial
Inc. (incorporated by reference to Exhibit 10.5 to our Registration Statement on Form S-3 (Registration No. 333-138136) filed with the SEC on October 20, 2006).                                  
|            | 
|10.6        |  | Purchase Agreement, dated as of May 9, 2007, by and between Alesco Financial Inc. and RBC Capital Markets Corporation) (incorporated by reference to Exhibit 1.1 to our Current Report on Form 8-K
filed with the SEC on May 10, 2007).                                                                                                                                                      



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|            |  |                                                                                                                                                                                                                                                                                                                                                                                              
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                  
|10.7        |  | Underwriting Agreement, dated June 20, 2007, by and between Alesco Financial Inc. and RBC Capital Markets Corporation (incorporated by reference to Exhibit 1.1 to our Current Report on Form
8-K filed with the SEC on June 22, 2007).                                                                                                                                                      
|            | 
|10.8        |  | Amended and Restated Trust Agreement, dated as of June 25, 2007, by and among Alesco Financial Inc., Wells Fargo Bank, N.A., Wells Fargo Delaware Trust Company and the administrative trustees
named therein (incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K filed with the SEC on June 29, 2007).                                                              
|            | 
|10.9        |  | Amended and Restated Trust Agreement, dated as of June 29, 2007, by and among Structured Asset Mortgage Investments II Inc., Wilmington Trust Company, Wells Fargo Bank, N.A. and acknowledged by
Alesco Financial Inc. (incorporated by reference to Exhibit 10.13 to our Quarterly Report on Form 10-Q filed with the SEC on August 9, 2007).                                              
|            | 
|10.10       |  | Mortgage Loan Purchase Agreement, dated as of June 29, 2007, by and between Alesco Financial Inc. and Structured Asset Mortgage Investments II Inc. (incorporated by reference to Exhibit 10.14 to
our Quarterly Report on Form 10-Q filed with the SEC on August 9, 2007).                                                                                                                  
|            | 
|10.11       |  | Sale and Servicing Agreement, dated as of June 29, 2007, by and among Structured Asset Mortgage Investments II Inc., Bear Stearns ARM Trust 2007-2, Alesco Financial Inc., Citibank, N.A. and
Wells Fargo Bank, N.A., as securities administrator and master servicer (incorporated by reference to Exhibit 10.15 to our Quarterly Report on Form 10-Q filed with the SEC on August 9, 2007).
|            | 
|10.12       |  | Guarantee Agreement, dated as of June 29, 2007, by and between Alesco Financial Inc. and Alesco Loan Holdings Trust (incorporated by reference to Exhibit 10.16 to our Quarterly Report on Form
10-Q filed with the SEC on August 9, 2007).                                                                                                                                                  
|            | 
|10.13       |  | 2006 Long-Term Incentive Plan, as amended (incorporated by reference to Annex A to our Proxy Statement on Schedule 14A filed with the SEC on April 30, 2007).                                                                                                                                                                                                                                
|            | 
|10.14       |  | Form of Restricted Share Award Agreement (incorporated by reference to Exhibit 10.7 to our Annual Report on Form 10-K filed with the SEC on March 16, 2007).                                                                                                                                                                                                                                 
|            | 
|10.15       |  | Form of Indemnification Agreement by and between Alesco Financial Inc. and each of its directors and officers (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed
with the SEC on October 20, 2006).                                                                                                                                                          
|            | 
|11.1        |  | Statement Regarding Computation of Per Share Earnings.***                                                                                                                                                                                                                                                                                                                                    
|            | 
|31.1        |  | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended.*                                                                                                                                                                                                                                                                         
|            | 
|31.2        |  | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended.*                                                                                                                                                                                                                                                                         
|            | 
|32          |  | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended.**                                                                                                                                                                                                                                            



|* | Filed herewith.
|- | ---------------

|** | Furnished herewith.
|-- | -------------------

|*** | Data required by Statement of Financial Accounting Standard No. 128, Earnings per Share, is provided in Note 8 to the consolidated financial statements included in this
report.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

All other schedules have been omitted because the required information of such other schedules is not present, or is
not present in amount sufficient to require submission of the schedule.



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