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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark One)
ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
For the quarterly period ended March 31, 2010
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File Number 001-32958

Crystal River Capital, Inc.
(Exact name of registrant as specified in its charter)

Maryland (State or other jurisdiction of incorporation or organization)		20-2230150 (I.R.S. Employer Identification No.)
Three World Financial Center, 200 Vesey Street, 10th Floor, New York, NY		10281-1010 (Zip Code)
Three World Financial Center,
(Address of principal executive offices)
200 Vesey Street, 10th Floor, New York, NY		10281-1010
(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, including area code: (212) 549-8400

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. Yes ý No o

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 o No o ~~[This~~ ~~requirement is currently not applicable to the registrant.]~~

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.

Large accelerated filer o Accelerated filer ýo Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company oý

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

The number of ~~shares~~ outstanding shares of the registrant's common stock, par value $0.001 per share, as of ~~November~~May 514, ~~2009~~2010 was 24,909,256.

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CRYSTAL RIVER CAPITAL, INC. ~~INDEX~~

Part I.	Financial Information
	Item 1.	Financial Statements	1
		Consolidated Balance Sheets—September 30, 2009 (unaudited) and December 31, 2008	1
		Consolidated Statements of Operations—Three and Nine Months Ended September 30, 2009 and 2008 (unaudited)	2
		Consolidated Statement of Changes in Stockholders' Deficit—Nine Months Ended September 30, 2009 (unaudited)	3
		Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2009 and 2008 (unaudited)	4
		Notes to Consolidated Financial Statements (unaudited)	6
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	74
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	125
	Item 4.	Controls and Procedures	125
Part II.	Other Information
	Item 1.	Legal Proceedings	II-1
	Item 1A.	Risk Factors	II-1
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	II-3
	Item 3.	Defaults Upon Senior Securities	II-3
	Item 4.	Submission of Matters to a Vote of Security Holders	II-3
	Item 5.	Other Information	II-3
	Item 6.	Exhibits	II-3
		Signatures	S-1

INDEX


Part I.	Financial Information
	Item 1.	Financial Statements	1
		Consolidated Balance Sheets—March 31, 2010 (unaudited) and December 31, 2009	1
		Consolidated Statements of Operations—Three Months Ended March 31, 2010 and 2009 (unaudited)	2
		Consolidated Statement of Changes in Stockholders' Deficit—Three Months Ended March 31, 2010 (unaudited)	3
		Consolidated Statements of Cash Flows—Three Months Ended March 31, 2010 and 2009 (unaudited)	4
		Notes to Consolidated Financial Statements (unaudited)	6
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	71
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	121
	Item 4.	Controls and Procedures	121
Part II.	Other Information
	Item 1.	Legal Proceedings	II-1
	Item 1A.	Risk Factors	II-1
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	II-1
	Item 3.	Defaults Upon Senior Securities	II-1
	Item 4.	(Removed and Reserved)	II-2
	Item 5.	Other Information	II-2
	Item 6.	Exhibits	II-2
	Signatures		S-1

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EXPLANATORY NOTE

Except where the context suggests otherwise in this report, the terms "Crystal River," "we," "us" and "our" refer to Crystal River Capital, Inc. and its subsidiaries; "our Manager" refers to our external manager, Crystal River Capital Advisors, LLC and in certain contexts, may refer to our external manager and its affiliates that provide advisory services to us, including our sub-advisors; "BIM" refers to Brookfield Investment Management Inc., a sub-advisor that has been retained by us and our Manager; "Brookfield Sub-Advisor" refers to Brookfield Crystal River Capital L.P., a sub-advisor that has been retained by us and our Manager; and "Brookfield" refers to Brookfield Asset Management Inc., the indirect parent company of our Manager, BIM and Brookfield Sub-Advisor, together with its subsidiaries. References in this report to the rating of a debt security reflects the lowest of the credit ratings for such security issued by each of Fitch, Inc., Moody's Investors Service, Inc. and Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc.

FORWARD-LOOKING INFORMATION

Some of the statements under "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report on Form 10-Q constitute forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by terms such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "goal," "objective," "potential," "project," "should," "will" and "would" or the negative of these terms or other comparable terminology.

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us or are within our control. If a change occurs, the performance of our portfolio and our business, financial condition, liquidity and results of operations may vary materially from those expressed, anticipated or contemplated in our forward-looking statements. You should carefully consider these risks before you invest in our common stock, along with the following factors that could cause actual results to vary from our forward-looking statements:

•: the factors referenced in this report, including those set forth below in "Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Part II, Item 1A. Risk Factors;"
•: the impending maturity of our senior revolving credit facility, our lack of access to additional financing and our current financial condition raise substantial doubt regarding our ability to continue as a going concern;
•: recent adverse developments in the mortgage finance and credit markets and our current inability to make new investments;
•: risks relating to our proposed merger with Brookfield, which we refer to as the Merger, as well as risks relating to our failure to complete the Merger;
•: changes in our business strategy;
•: availability of qualified personnel;
•: conflicts of interest with our Manager;
•: terrorist attacks;
•: our reliance on a single tenant for all three of our commercial real estate properties;

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•: increased rates of default and/or decreased recovery rates on our investments;
•: increased prepayments of the mortgage and other loans underlying our mortgage-backed or other asset-backed securities;
•: changes in governmental regulations, tax law and rates and similar matters;
•: changes in generally accepted accounting principles by standard-setting bodies;
•: to the extent we have investable cash, availability of investment opportunities in real estate-related and other securities; and
•: the degree and nature of our competition.

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PART I.
FINANCIAL INFORMATION

Item 1. Financial Statements

Crystal River Capital, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share and per share data)

				September 30, 2009			December 31, 2008
				March 31, 2010			December 31, 2009
				(Unaudited)
				(unaudited)
ASSETS:
	Investment securities, at fair value
	Investment securities, at fair value:
		Commercial MBS
		Commercial MBS:
			Available-for-sale	$	11,886		$	14,317
			Available-for-sale ($28 and $28 related to consolidated VIEs)	$	3,236		$	5,227
			Held-for-trading		46,599			43,776
			Held-for-trading ($26,877 and $32,886 related to consolidated VIEs)		26,877			32,886
		Non-Agency Residential MBS
		Non-Agency Residential MBS:
			Available-for-sale		2,~~333~~027			72,~~298~~091
			Held-for-trading		3,010			7,525
			Held-for-trading ($2,075 and $2,622 related to consolidated VIEs)		2,075			2,622
	Real estate loans				2,520			9,034
	Real estate loans held for sale				—			5,903
	Real estate loans held for sale				5,058			5,058
	Real estate loans of consolidated VIEs, at fair value				4,441,066			—
	Commercial real estate, net				~~223~~220,~~380~~128			~~228~~221,~~259~~754
	Other investments				~~1,550~~—			1,550
	Intangible assets				7168,~~316~~499			7569,~~541~~908
	Cash and cash equivalents				3,335			6,239
	Cash and cash equivalents ($918 and $442 related to consolidated VIEs)				5,937			3,336
	Restricted cash				16,926			26,107
	Restricted cash ($1,016 and $1,016 related to consolidated VIEs)				17,780			16,489
	Receivables:
		Principal paydown			93			10
		Interest ($21,979 and $1,470 related to consolidated VIEs)			22,322			2,049
		Interest			5,158			4,152
		Rent enhancement receivables, related party			10,835			11,439
		Rent enhancement receivables, related party			12,035			13,828
		Other receivables			4,488			4,196
		Other receivables			4,058			3,135
	Prepaid expenses and other assets				234			1,046
	Prepaid expenses and other assets				1,186			939
	Deferred financing costs, net				219			1,457
	Deferred financing costs, net				1,476			1,533
		Total Assets		$	4,825,723		$	381,953
		Total Assets		$	411,919		$	448,301
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Liabilities:
	Accounts payable and accrued expenses			$	36,~~697~~336		$	2,~~652~~836
	Dividends payable				2,526			2,511
	Intangible liabilities				65,415			66,785
	Intangible liabilities				68,155			72,265
	Collateralized debt obligations, at fair value				31,340			33,617
	Collateralized debt obligations, at fair value				43,248			45,429
	Securitized debt obligations of consolidated VIEs, at fair value				4,418,577			—
	Junior subordinated notes				~~51,550~~—			51,550
	Mortgages payable				219,380			219,380
	Secured revolving credit facility, related party				28,920			3228,920
	Interest payable				2,141			1,357
	Interest payable ($25,699 and $906 related to consolidated VIEs)				25,736			1,614
	Derivative liabilities				4039,~~996~~045			5735,~~646~~378
		Total Liabilities			460,613			485,710
	Other liabilities of consolidated VIEs				13,909			—
		Total Liabilities			4,848,658			440,080
Commitments and Contingencies
Stockholders' Deficit:
	Preferred Stock, par value $0.001 per share, 100,000,000 shares authorized, no shares issued and outstanding				—			—
	Common Stock, $0.001 par value, 500,000,000 shares authorized, 24,909,255 and 24,905,252 shares issued and outstanding, respectively				25			25
	Common Stock, $0.001 par value, 500,000,000 shares authorized, 24,909,256 shares issued and outstanding				25			25
	Additional paid-in capital				564,~~762~~867			564,~~560~~832
	Accumulated other comprehensive loss				(147,~~097~~067	)		(97,~~815~~087	)
	Accumulated deficit				(~~599~~580,~~384~~760	)		(~~592~~615,~~179~~897	)
		Total Stockholders' Deficit			(4822,~~694~~935	)		(3758,~~409~~127	)
		Total Liabilities and Stockholders' Deficit		$	~~411~~4,~~919~~825,723		$	~~448~~381,~~301~~953

See accompanying notes to consolidated financial statements.

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Crystal River Capital, Inc. and Subsidiaries Consolidated Statements of Operations (in thousands, except share and per share data) (~~Unaudited~~unaudited)

				Three Months Ended September 30,						Nine Months Ended September 30,
				Three Months Ended March 31,
				2009			2008			2009			2008
				2010			2009
Revenues:
Interest and dividend income:
	Interest income—investment securities			$	62,~~314~~438		$	2113,~~069~~888		$	~~27,298~~		$	~~85,361~~
	Interest income—real estate loans				~~229~~157,753			~~936~~458			~~915~~			~~5,755~~
	Other interest and dividend income				3733			~~185~~19			97			~~1,072~~
		Total interest and dividend income			6160,~~580~~224			2214,~~190~~365			~~28,310~~			~~92,188~~
Rental income, net					5,~~284~~367			5,~~399~~604			~~16,334~~			~~16,611~~
		Total revenues			11,864			27,589			44,644			108,799
Other income of consolidated VIEs					615			—
Expenses:
		Total revenues			166,206			19,969
	Interest expense				5,919			9,302			18,647			44,302
Expenses:
	Management fees, related party				—			243			—			1,328
	Interest expense				181,385			6,533
	Professional fees				1,006			480			1,811			1,733
	Management fees, related party				—			—
	Depreciation and amortization				3,022			3,022			9,066			9,066
	Professional fees				1,792			444
	Insurance expense				488			480			1,395			1,290
	Depreciation and amortization				3,022			3,022
	Compensation and directors' fees				209			86			380			366
	Insurance expense				488			424
	Public company expense				92			105			370			518
	Compensation and directors' fees				408			85
	Commercial real estate expenses				428			348			1,203			1,185
	Public company expense				61			111
	Provision for loss on real estate loans				—			4,401			6,758			20,850
	Commercial real estate expenses				376			393
	Other expenses				85			237			249			1,158
	Provision for loss on real estate loans				—			6,758
		Total expenses			11,249			18,704			39,879			81,796
	Servicing fees of consolidated VIEs				3,106			—
			Income before other revenues (expenses)		615			8,885			4,765			27,003
	Other expenses				105			82
Other revenues (expenses):
		Total expenses			190,743			17,852
	Realized net gain (loss) on sale of investment securities, real estate loans and other investments				21			97			130			(4,951	)
			Income (losses) before other revenues (expenses)		(24,537	)		2,117
	Realized and unrealized gain (loss) on derivatives				(13,078	)		(6,152	)		(2,711	)		(44,183	)
Other revenues (expenses):
	Total other-than-temporary impairments on available-for-sale securities				(56,374	)		(26,876	)		(99,486	)		(112,340	)
	Realized net gain on sale of real estate loans				10			40
	Portion of other-than-temporary impairments recognized in other comprehensive income				9,658			—			32,637			—
	Gain on extinguishment of debt				39,916			—
	Net change in assets and liabilities valued under fair value option				5,955			(32,305	)		(2,952	)		(134,508	)
	Realized and unrealized gain (loss) on derivatives				(6,996	)		3,871
	Loss from equity investments				—			—			—			(40	)
	Total other-than-temporary impairments on available-for-sale securities				(468	)		(5,784	)
	Other				(2,093	)		(397	)		(4,150	)		(950	)
	Portion of other-than-temporary impairments recognized in other comprehensive income				(118	)		—
		Total other expenses			(55,911	)		(65,633	)		(76,532	)		(296,972	)
	Net change in assets and liabilities valued under fair value option				1,731			(9,876	)
Net loss				$	(55,296	)	$	(56,748	)	$	(71,767	)	$	(269,969	)
	Net change in assets and liabilities of consolidated VIEs valued under fair value option				23,661			—
Per share information:
	Other				(279	)		(349	)
		Net loss per share of common stock
		Total other revenues (expenses)			57,457			(12,098	)
			Basic	$	(2.19	)	$	(2.28	)	$	(2.85	)	$	(10.88	)
Net income (loss)				$	32,920		$	(9,981	)
			Diluted	$	(2.19	)	$	(2.28	)	$	(2.85	)	$	(10.88	)
Per share information:
		Dividends declared per share of common stock		$	0.10		$	0.10		$	0.30		$	1.08
		Net income (loss) per share of common stock
		Weighted average shares of common stock outstanding
			Basic and diluted	$	1.30		$	(0.40	)
			Basic		25,230,669			24,882,612			25,184,316			24,813,649
		Dividends declared per share of common stock		$	0.00		$	0.10
			Diluted		25,230,669			24,882,612			25,184,316			24,813,649
		Weighted average shares of common stock outstanding
			Basic and diluted		25,374,451			25,131,361

See accompanying notes to consolidated financial statements.

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Crystal River Capital, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders' Deficit For the ~~Nine~~Three Months Ended ~~September~~March 3031, ~~2009~~2010 (in thousands, except share data) (~~Unaudited~~unaudited)

		Common Stock	~~Common Stock~~
											Accumulated Other Comprehensive Loss	~~Accumulated Other Comprehensive Loss~~
		Shares	~~Shares~~		Par Value	~~Par Value~~		Additional Paid-In Capital	~~Additional Paid-In Capital~~					Accumulated Deficit	~~Accumulated Deficit~~		Total	~~Total~~		Comprehensive Income	~~Comprehensive Loss~~
Balance at December 31, 2008				24,905,252		$	25		$	564,560		$	(9,815	)	$	(592,179	)	$	(37,409	)
Balance at December 31, 2009			24,909,256		$	25		$	564,832		$	(7,087	)	$	(615,897	)	$	(58,127	)
Cumulative effect of the adoption of FASB ASC 320-10-65-1													(72,126	)		72,126			—		$	(72,126	)
Cumulative effect of the adoption of FASB ASC 810-10-65-2															2,217			2,217
Net loss																(71,767	)		(71,767	)		(71,767	)
Net income															32,920			32,920		$	32,920
Change in deferred unrealized gains on securities available for sale													66,775						66,775			66,775
Net change in available-for-sale securities												(282	)					(282	)		(282	)
Amortization of net realized losses on cash flow hedges												302	~~1,069~~					302	~~1,069~~		302	~~1,069~~
Comprehensive loss																					$	(76,049	)
Comprehensive income																				$	32,940
Dividends declared on common stock and deferred stock units																(7,564	)		(7,564	)
Amortization of stock based compensation									35									35
Shares issued for dividend reinvestment				3						—									—
Balance at March 31, 2010			24,909,256		$	25		$	564,867		$	(7,067	)	$	(580,760	)	$	(22,935	)
Issuance of stock based compensation:
	Issuance of restricted stock			4,000			—			7									7
	Issuance of deferred stock units			—			—			89									89
Amortization of stock based compensation										106									106
Balance at September 30, 2009				24,909,255		$	25		$	564,762		$	(14,097	)	$	(599,384	)	$	(48,694	)

See accompanying notes to consolidated financial statements.

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Crystal River Capital, Inc. and Subsidiaries Consolidated Statements of Cash Flows (in thousands) (~~Unaudited~~unaudited)

				Nine Months Ended September 30,
						Three Months Ended March 31,
				2009			2008
						2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net loss			$	(71,767	)	$	(269,969	)
	Net income (loss)					$	32,920		$	(9,981	)
	Adjustments to reconcile net loss to net cash provided by operating activities:
	Adjustments to reconcile net income (loss) to net cash provided by operating activities:
		~~Amortization of stock based compensation~~	Amortization of stock based compensation		~~136~~		35	~~279~~		35
		~~Amortization of net premium (accretion of net discount) on investment securities and real estate loans~~	Amortization of net premium (accretion of net discount) on investment securities and real estate loans		~~8,545~~		2,544	~~(15,102~~	)	(1,128	)
		Realized net (gain) loss on sale of available-for-sale securities and real estate loans			(130	)		4,791
			Accretion of net discount on real estate loans of consolidated VIEs				(2,409	)		—
		Impairment of available-for-sale securities, net			66,849			112,341
			Amortization of net premium on debt obligations of consolidated VIEs				26,876			—
		Provision for loss on real estate loans			6,758			20,850
			Realized net gain on sale of real estate loans				(10	)		(40	)
		Net change in assets and liabilities valued under fair value option			2,952			134,508
			Impairment of available-for-sale securities				586			5,784
		Accretion of interest on real estate loans			(235	)		—
			Provision for loss on real estate loans				—			6,758
		Amortization of net realized cash flow hedge loss			1,069			1,031
			Net change in assets and liabilities valued under fair value option				(1,731	)		9,876
		Realized and unrealized (gain) loss on derivatives			(6,727	)		39,097
			Net change in assets and liabilities of consolidated VIEs valued under fair value option				(23,661	)		—
		Amortization and write-off of deferred financing costs			56			1,046
			Gain on extinguishment of debt				(39,916	)		—
		Management fee expense paid in stock			—			1,112
			Accretion of interest on real estate loans				—			(235	)
		Loss from equity investment			—			40
			Amortization of net realized cash flow hedge loss				302			468
		Depreciation and amortization			9,066			9,063
			Realized and unrealized (gain) loss on derivatives				3,674			(8,111	)
		Amortization of intangible liabilities			(4,110	)		(4,110	)
			Amortization of deferred financing costs				11			19
		Other			4,220			1,004
			Depreciation and amortization				3,022			3,022
	Changes in operating assets and liabilities:
			Amortization of intangible liabilities				(1,370	)		(1,370	)
		Net payments on settlement of derivatives			—			(3,384	)
			Other				78			391
		Net deposits of restricted cash			(1,017	)		—
	Changes in operating assets and liabilities:
		Interest receivable			(1,006	)		7,303
			Net deposits of restricted cash				(2,384	)		(1,477	)
		Interest receivable, derivative			—			169
			Interest receivable ($24,557 and $0 related to consolidated VIEs)				25,002			40
		~~Rent enhancement receivables, related party~~	Rent enhancement receivables, related party		~~(575~~	)	(167	—)		(200	)
		~~Other receivables~~	Other receivables		~~(922~~	)	(314	~~(837~~)	)	(187	)
		~~Prepaid expenses and other assets~~	Prepaid expenses and other assets		~~(257~~	)	812	~~(520~~	)	645
		~~Accounts payable and accrued expenses~~	Accounts payable and accrued expenses		~~1,175~~		2,140	~~(101~~	)	1,214
		Due to Manager			—			(621	)
			Interest payable ($16,718 and $0 related to consolidated VIEs)				(16,232	)		764
		Interest payable			859			(6,799	)
			Other liabilities of consolidated VIEs				(6,751	)		—
		Interest payable, derivative			—			(3,893	)
		Net cash provided by operating activities					3,057			6,287
		Net cash provided by operating activities			14,939			27,298
CASH FLOWS FROM INVESTING ACTIVITIES:
CASH FLOWS FROM INVESTING ACTIVITIES:
	Principal payments on real estate loans of consolidated VIEs						208,016			—
	Return of capital from equity investment				—			426
	Principal payments on investment securities and real estate loans						263			61
	Principal payments on investment securities and real estate loans				674			73,734
	Proceeds from the sale of available-for-sale securities						2,500			—
	Proceeds from the sale of available-for-sale securities				—			1,178,357
	Proceeds from rent enhancement						771			830
	Proceeds from the sale and repayment of real estate loans and other investments				—			141,107
	Cash paid to terminate swaps						—			(2,463	)
	Proceeds from rent enhancement				2,368			2,637
	Net deposits of cash for interest reserve of consolidated VIEs						(1,790	)		—
	Proceeds from repayment of real estate loans				—			9,664
	Net receipts of restricted cash for investment						1,093			—
	Cash paid to terminate swaps				(10,000	)		(30,249	)
	Net receipts of restricted cash from credit default swaps						—			2,400
	Net receipts of restricted cash for investment				—			4,111
		Net cash provided by investing activities					210,853			828
	Net receipts of restricted cash from credit default swaps				10,200			13,261
	Funding of real estate loans				—			(924	)
		Net cash provided by investing activities			3,242			1,392,124

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Crystal River Capital, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (Continued)

(in thousands) ~~(Unaudited)~~

		Nine Months Ended September 30,
		2009			2008
CASH FLOWS FROM FINANCING ACTIVITIES:
	Payment on settlement of derivatives		—			(10,466	)
	Principal repayments on collateralized debt obligations		(9,610	)		(12,175	)
	Principal repayments on senior mortgage-backed notes, related party		—			(99,815	)
	Net receipts from (deposits to) restricted cash		(2	)		17,266
	Dividends paid		(7,473	)		(41,033	)
	Net payments on repurchase agreements		—			(1,267,786	)
	Net payments on secured revolving credit facility, related party		(4,000	)		(25,899	)
	Other		—			—
	Net cash used in financing activities		(21,085	)		(1,439,908	)
Net decrease in cash and cash equivalents			(2,904	)		(20,486	)
Cash and cash equivalents at beginning of period			6,239			27,521
Cash and cash equivalents at end of period		$	3,335		$	7,035
Supplemental disclosure of cash flows:
	Cash paid during the period for interest	$	16,736		$	53,715
Supplemental disclosure of noncash investing and financing activities:
	Dividends declared, not yet paid		2,526			2,498
	Cumulative effect upon adoption of FASB ASC 825-10-45-1		—			179,422
	Classification of real estate loans as held for sale		—			20,375
	Noncash component of dividends on deferred stock units		91			—

(unaudited)

			Three Months Ended March 31,

			2010			2009
CASH FLOWS FROM FINANCING ACTIVITIES:
	Principal repayments on securitized debt obligations of consolidated VIEs			(207,987	)		—
	Principal repayments on collateralized debt obligations			(433	)		(5,362	)
	Net deposits to restricted cash			—			(2	)
	Dividends paid			—			(2,491	)
	Cash paid for extinguishment of debt			(2,889	)		—
	Net payments on secured revolving credit facility, related party			—			(4,000	)

	Net cash used in financing activities			(211,309	)		(11,855	)

Net increase (decrease) in cash and cash equivalents				2,601			(4,740	)
Cash and cash equivalents at beginning of period				3,336			6,239

Cash and cash equivalents at end of period			$	5,937		$	1,499

Supplemental disclosure of cash flows:
		Cash paid during the period for interest	$	174,791		$	5,316
Supplemental disclosure of noncash investing and financing activities:
		Exchange of real estate loans to settle debt		(5,903	)		—
		Exchange of available-for-sale security to settle debt		(65	)		—
		Cumulative effect adjustment upon adoption of FASB ASC 810-10-65-2		2,217			—
		Real estate loans of consolidated VIEs		10,652,848			—
		Securitized debt obligations of consolidated VIEs		10,598,060			—
		Deconsolidation of real estate loans of consolidated VIEs		(6,494,519	)		—
		Deconsolidation of securitized debt obligations of consolidated VIEs		(6,471,689	)		—
		Dividends declared, not yet paid		—			2,511
		Principal paydown receivable		8			—
		Noncash component of dividends on deferred stock units		53			20

See accompanying notes to consolidated financial statements.

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Crystal River Capital, Inc. and Subsidiaries Notes to Consolidated Financial Statements ~~September~~March 3031, ~~2009~~ 2010 (dollars in thousands, except ~~share and~~ per share data) (unaudited)

1. ORGANIZATION

References herein to "we," "us" or "our" refer to Crystal River Capital, Inc. and its subsidiaries unless the context specifically requires otherwise.

We are a Maryland corporation that was formed in January 2005 for the purpose of acquiring and originating a diversified portfolio of commercial and residential real estate assets and structured finance investments. We commenced operations on March 15, 2005, when we completed an offering of 17,400,000 shares of common stock (the "Private Offering"), and we completed our initial public offering of 7,500,000 shares of common stock (the "Public Offering") on August 2, 2006. We are externally managed and are advised by ~~Hyperion Brookfield~~ Crystal River Capital Advisors, LLC (the "Manager") as more fully explained in Note 1417.

We ~~have~~ elected to be taxed as a Real Estate Investment Trust ("REIT") under the Internal Revenue Code for the 2005 tax year. To maintain our tax status as a REIT, we plan to distribute at at least 90% of our taxable income. In view of our election to be taxed as a REIT, we have tailored our balance sheet investment program to originate or acquire loans and investments to produce a portfolio that meets the asset and income tests necessary to maintain qualification as a REIT.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Quarterly Presentation

The accompanying unaudited consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, they do not include all of the information and footnotes required by ~~Generally~~accounting ~~Accepted~~principles ~~Accounting~~generally ~~Principles~~accepted in the United States ("GAAP") for complete financial statements. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and changes in cash flows have been made. These consolidated financial statements should be read in conjunction with the annual financial statements and notes thereto for the year ended December 31, ~~2008~~2009, included in our Annual Report on Form 10-K/A ~~(Amendment No. 1)~~ for the year ended December 31, ~~2008~~2009, filed with the Securities and Exchange Commission (the "SEC").

In the third quarter of 2009, we adopted the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC"). The ASC does not alter current GAAP, but rather integrates existing accounting standards with other authoritative guidance. The ASC provides a single source of authoritative GAAP for non-governmental entities and supersedes all other previously issued non-SEC accounting and reporting guidance. The adoption of the ASC did not have any effect on our results of operations or financial position. All prior references to GAAP have been revised to conform to the ASC. Updates to the ASC are issued in the form of Accounting Standards Updates ("ASU").

Principles of Consolidation

Our consolidated financial statements include the accounts of Crystal River Capital, Inc., three wholly-owned subsidiaries created in connection with the issuance of our collateralized debt obligations and senior mortgage-backed notes, wholly-owned subsidiaries established for financing purposes, three wholly-owned subsidiaries established to own interests in real property, our domestic taxable REIT subsidiary ("TRS") and variable interest entities ("VIEs") in which we are the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation.

As of March 31, 2010, our consolidated balance sheet includes an aggregate of $4,461,928 of assets and $4,456,118 of liabilities related to two newly consolidated VIEs and derecognized our interest of $4,531 in those VIEs. See Note 6 for additional information on our investments in VIEs.

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

(dollars in thousands, except per share data)

(unaudited)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

~~owned subsidiaries~~ ~~established~~Going ~~to own interests in real property and our domestic taxable REIT subsidiary ("TRS"). All significant intercompany balances and transactions have been eliminated in consolidation.~~ Concern

We ~~Use~~held cash and cash equivalents of ~~Estimates~~approximately $5,937 at March 31, 2010, which amount excludes restricted cash of approximately $17,780 that is used to collateralize our credit default swap, certain commercial real estate and financing obligations, funds held by the trustee for CDO II and funds held in escrow for one of our financing subsidiaries relating to a yield-maintenance agreement for certain real estate loans that we sold. As of March 31, 2010, we owed $28,920 to an affiliate of our Manager under our secured credit facility. The maturity date of the credit facility was extended to August 31, 2010, unless sooner terminated as provided in the credit agreement; provided, however, that, notwithstanding the foregoing, the term of the credit facility will expire upon the latest of (i) May 25, 2010, (ii) the effective time of the Merger and (iii) thirty (30) calendar days following the termination of the merger agreement relating to the Merger, which we refer to as the Merger Agreement, but in no event later than August 31, 2010. If the Merger with an affiliate of our Manager is not consummated and this facility is not extended and we cannot obtain alternative financing, we do not expect to have sufficient cash on hand or to generate sufficient cash flow from operations to repay such indebtedness. Given our financial condition, the current lack of liquidity in the credit markets and the current economic climate, we expect to have difficulty obtaining alternative financing if our credit facility is not extended. If we cannot obtain alternative financing or extend our credit facility, it increases the risk that we will be unable to continue as a going concern. On March 24, 2010, our independent registered public accounting firm, Ernst & Young LLP, issued an opinion on our consolidated financial statements as of and for the year ended December 31, 2009, which states that our inability to refinance or extend the maturity of indebtedness maturing in 2010 raises substantial doubt about our ability to continue as a going concern.

~~The~~Our consolidated ~~preparation of~~ financial statements inincluded ~~conformity with GAAP requires us to make a significant number of estimates~~ in ~~the preparation~~this ofreport ~~the~~do ~~financial~~not ~~statements.~~reflect ~~These~~any ~~estimates~~adjustments ~~include~~related ~~determining~~to the ~~fair~~recoverability ~~market value~~ of ~~certain investments, debt obligations and derivative~~ assets and liabilities, ~~amount and timing of credit losses, prepayment assumptions, allocation of purchase price to tangible and intangible assets on property acquisitions, and other items~~ that ~~affect~~might ~~the~~be ~~reported~~necessary ~~amounts~~should ofwe ~~certain assets and~~be ~~liabilities~~unable as of the date of the consolidated financial statements and the reported amounts of certain revenues and expenses during the reporting period. It is likely that changes in these estimates (e.g., market values change due to ~~changes~~continue inas ~~supply~~a ~~and~~going ~~demand, credit performance, prepayments, interest rates or other reasons; yields change due to changes in credit outlook and loan prepayments) will occur in the near future~~concern. ~~Our estimates are inherently subjective in nature and actual results could differ from our estimates and differences may be material.~~

~~Cash~~Variable ~~and~~Interest ~~Cash Equivalents~~Entities

We ~~classify~~consolidate ~~highly~~all ~~liquid~~VIEs ~~investments~~for which we are the primary beneficiary. Generally, a VIE is an entity with ~~original~~one ~~maturities~~or more of 90the following characteristics: (a) ~~days~~the ortotal ~~less~~equity ~~from~~investment at risk is not sufficient to permit the ~~date~~entity ofto ~~purchase~~finance asits ~~cash~~activities ~~equivalents.~~without additional subordinated financial support; (b) as a ~~Cash~~group, ~~and~~the ~~cash~~holders ~~equivalents~~of ~~may~~the ~~include~~equity ~~cash~~investment ~~and~~at ~~short~~risk ~~term~~lack ~~investments.~~(i) the ~~Short~~ability ~~term~~to ~~investments~~make ~~are~~decisions ~~stated~~about atan ~~cost~~entity's activities through voting or similar rights, ~~which~~(ii) the ~~approximates~~obligation ~~their~~to ~~fair~~absorb the ~~value~~expected losses of the entity, ~~and~~or ~~may~~(iii) the ~~consist~~right to receive the expected residual returns of ~~investments~~the inentity; ~~money~~or ~~market~~(c) the equity investors have voting rights that are not proportional to ~~accounts~~their economic interests and substantially all of the entity's activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights.

Effective January 1, ~~Restricted~~2010, ~~Cash~~ we adopted the provisions of FASB Accounting Standards Update 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities ("FASB ASC 810-10-65-2"), on a prospective basis. FASB ASC 810-10-65-2, which modified the

Restricted cash consists primarily of funds held on deposit with brokers to serve as collateral for credit default swap agreements, funds held by the trustee for CDO II (See Note 9) and funds held in escrow for one of our financing subsidiaries relating to a yield-maintenance agreement for certain real estate loans that we sold in June 2008 (See Note 10).

Securities

We invest in commercial mortgage-backed securities ("CMBS"), U.S. Agency mortgage pass-through certificates, which are securities issued or guaranteed by the Federal National Mortgage Association ("Fannie Mae"), Federal Home Loan Mortgage Corporation ("Freddie Mac") or Government National Mortgage Association ("Ginnie Mae") and Agency Collateralized Mortgage Obligations issued by Fannie Mae or Freddie Mac backed by mortgage pass-through securities and evidenced by a series of bonds or certificates issued in multiple classes (collectively, "Agency MBS"), Non-Agency residential mortgage-backed securities ("Non-Agency RMBS", and collectively with Agency MBS, "RMBS") and other real estate debt and equity instruments. We account for our investments in CMBS, Agency MBS, RMBS, asset-backed securities ("ABS") and other real estate and equity instruments, which we refer to as our investment securities, in accordance with FASB ASC 320-10-50-2

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Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

(dollars in thousands, except per share data)

(unaudited)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

~~(previously~~guidance ~~SFAS 115)~~in FASB ASC Topic 810, introduces a more qualitative approach to evaluating VIEs for consolidation and requires a company to perform an analysis to determine whether its variable interests give it a controlling financial interest in a VIE. WeThis ~~classify~~analysis ~~our~~identifies ~~securities~~the primary beneficiary of a VIE as ~~available-for-sale~~the orentity ~~held-for-trading~~that ~~because~~has we(a) the ~~may~~power ~~dispose~~to direct the activities of ~~them~~the ~~prior~~VIE that most significantly impact the VIE's economic performance and (b) the obligation to ~~maturity~~absorb inlosses or the right to receive benefits that could potentially be significant to the VIE. In determining ~~response~~whether it has the power to ~~changes~~direct inthe activities of the ~~market~~VIE that most significantly affect the VIE's performance, ~~liquidity~~FASB ~~needs~~ASC or810-10-65-2 ~~other events~~requires a company to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed, requires continuous reassessment of primary beneficiary status rather than periodic, event-driven assessments as previously required and incorporates expanded disclosure requirements.

~~All~~In ~~investment~~determining ~~securities~~whether we are ~~reported~~the atprimary ~~fair~~beneficiary ~~value,~~of ~~based~~a onVIE, ~~quoted~~we ~~market~~consider ~~prices~~qualitative ~~provided~~and byquantitative ~~independent pricing sources~~factors, ~~when available~~including, ~~from~~but ~~quotes~~not ~~provided~~limited byto: ~~dealers~~which ~~who~~activities ~~make~~most significantly ~~markets~~impact inthe ~~certain securities, or from our management~~VIE's ~~estimates~~economic inperformance ~~cases~~and ~~where~~which ~~the~~party ~~investments~~controls ~~are~~such ~~illiquid.~~activities; Inthe ~~making~~amount ~~these~~and ~~estimates,~~characteristics ~~our~~of ~~management utilizes pricing information obtained from dealers who make markets in these securities. However, under certain circumstances we may adjust these values based on~~ our ~~knowledge~~investment; of the ~~securities~~obligation ~~and~~or ~~the~~likelihood ~~underlying~~for ~~collateral.~~us ~~Our~~or ~~management also~~other ~~uses~~investors ato ~~discounted~~provide financial ~~cash~~support; ~~flow model, which utilizes prepayment~~ and ~~loss~~the ~~assumptions~~similarity ~~based~~with ~~upon historical experience, economic factors~~ and ~~the~~significance ~~characteristics of the underlying cash flow~~ to ~~substantiate~~ the ~~fair~~business ~~value~~activities of ~~the~~us ~~securities.~~and ~~The assumed discount rate is based upon~~ the ~~yield~~other ofinvestors. ~~comparable~~Significant ~~securities.~~judgments ~~The~~related ~~determination~~to ofthese ~~future~~determinations ~~cash~~include ~~flows~~estimates ~~and~~about the current ~~appropriate~~and ~~discount~~future ~~rates~~fair ~~are inherently~~values ~~subjective~~ and, asperformance aof ~~result,~~real ~~actual~~estate ~~results~~held ~~may~~by ~~vary~~these ~~from~~VIEs ~~our~~and ~~management's~~general ~~estimates~~market conditions.

~~Unrealized~~As ~~gains~~a ~~and~~result ~~losses~~of ~~for~~our ~~investment~~adoption ~~securities~~of ~~for which we have not elected the fair value option under~~ FASB ASC ~~825~~810-10-4565-12 ~~(previously SFAS~~on January ~~159)~~1, ~~are~~2010, ~~recorded~~we asconcluded awe ~~component~~were ofthe ~~accumulated~~primary ~~other~~beneficiary ~~comprehensive~~of ~~income~~six ~~(loss)~~VIEs. inWe ~~stockholders'~~applied the ~~equity~~practicability ~~(deficit),~~exception ~~unless~~for ~~unrealized~~our ~~loss~~initial ~~amounts~~measurement ~~are~~of ~~determined~~the toconsolidated beVIEs ~~impaired~~and asaccordingly ~~described~~recognized ~~below.~~the ~~For~~consolidated ~~investment~~assets, ~~securities~~liabilities ~~for~~and ~~which~~non-controlling weinterests ~~have~~at ~~elected the~~ fair value ~~option~~effective January 1, we2010. ~~reclassified~~We ~~these~~also ~~securities~~applied ~~from available-for-sale to held-for-trading and changes in~~ the fair value ofoption, ~~these securities are recorded~~ in ~~our~~accordance ~~consolidated~~with ~~statements of operations. This did not result in a change to our intent as it relates to these securities. As a result of the adoption of~~ FASB ASC 825-10-45-1 on(previously ~~January~~SFAS 1159), ~~2008, we recorded a cumulative effect adjustment of $181,092 as an increase~~ to ~~stockholders' deficit and reclassified all unrealized gains on our securities that served as collateral for our CDOs to accumulated deficit from accumulated other comprehensive loss. Electing~~ the ~~fair~~real ~~value~~estate ~~option~~loans ~~for~~owned ~~the~~by ~~investment securities~~ and ~~CDOs (including derivatives) for our CDO entities enables us to correlate more closely~~ the ~~values~~securitized ofdebt ~~the~~obligations ~~assets~~issued ~~and liabilities~~by ~~that~~these ~~are~~six ~~paired within the same securitization entity and to reduce the complexity of accounting, especially for derivatives under FASB ASC 815-10-50-1 (previously SFAS 133)~~VIEs.

~~Periodically,~~Upon ~~all~~consolidation ~~available-for-sale~~of ~~securities~~these ~~are~~six ~~evaluated~~VIEs ~~for~~on ~~other-than-temporary impairment in accordance with FASB ASC~~January ~~320-10-65-~~1, ~~(previously FSP FAS 115-2)~~2010, ~~and~~we ~~FASB~~consolidated ~~ASC 310-20-60-1 (previously EITF 99-20)~~$10,712,068 asof ~~amended~~assets byand ~~FASB~~$10,709,851 ~~ASC 325-40-65-1 (previously FSP EITF 99-20-1). An impairment that is an "other-than-temporary impairment" is a decline in the fair value~~ of anliabilities ~~investment~~and ~~below~~recorded ~~its~~$2,217 ~~amortized cost attributable~~ to ~~factors~~beginning ~~that~~retained ~~indicate~~earnings ~~the decline will not be~~as ~~recovered~~a ~~over~~cumulative ~~the~~effect ~~remaining life of the investment~~adjustment. ~~Under~~Upon ~~the guidance of FASB ASC 320-10-65-1~~consolidation, ~~should an other-than-temporary impairment be deemed to have occurred~~$13,334 ~~the total other-than-temporary impairment is bifurcated into (i) the amount related to credit losses, and (ii) the amount related to all other factors. The portion~~ of ~~the~~CMBS ~~other-than-temporary~~securities ~~impairment~~were ~~related~~eliminated toagainst ~~credit losses is calculated by comparing~~ the ~~amortized~~liabilities ~~cost~~ of the ~~security~~six ~~to the present value of cash flows expected to be collected, discounted at the security's current yield, and is recognized through earnings on the~~ consolidated ~~statement of operations~~VIEs. ~~The portion of the other-than-temporary~~

On March 15, 2010, we sold a majority of our controlling class interests in four VIEs and concurrently ceased to be the primary beneficiary, which therefore resulted in a deconsolidation of those four VIEs. We recorded interest income and interest expense for these four VIEs for the period from January 1, 2010 to March 15, 2010. The deconsolidation of these VIEs resulted in a decrease of $6,510,110 of assets and $6,508,979 of liabilities and an increase of CMBS securities of $7,923 on our March 15, 2010 balance sheet.

As of March 31, 2010, as a result of the adoption, we recorded $4,461,928 of assets and $4,456,118 of liabilities of the newly consolidated VIEs and derecognized our interest of $4,531 in those VIEs. The disclosure requirements under FASB ASC 810-10-65-2 are included in Note 6 to these consolidated financial statements.

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

(dollars in thousands, except per share data)

(unaudited)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

~~impairment~~ The ~~related~~following toitems ~~all~~were ~~other~~considered ~~factors~~in isour ~~recognized~~evaluation ~~as a component~~ of ~~other~~the ~~comprehensive~~primary ~~income~~beneficiary ~~(loss)~~of onVIE's ~~the~~we ~~consolidated~~are ~~balance~~involved ~~sheet.~~with:

•: Design of the entity (including the purpose for which the entity was established);
•: Potential significant risks relating to the entity;
•: Activities that most significantly impact the entities' economic performance; and
•: Factors most indicative of control or the power to direct such activities that most significantly impact the entities' economic performance.

In performing ~~Real~~our ~~Estate~~evaluation ~~Loans~~ we made the following assumptions relating to the factors that indicate control or the power to direct the activities that most significantly impact the entities' economic performance:

•: Real Estate Loans—the power to direct the activities of the underlying assets securing the loan (i.e., sell or lease the property) remains with the borrower until an event of default occurs. Upon the occurrence of an event of default, the lender that has the ability to directly foreclose on the underlying assets in the case of a foreclosure proceeding would then have control over the underlying assets and thus be considered the primary beneficiary.
•: RMBS—the ability to re-negotiate or foreclose on delinquent loans is generally afforded to the Special Servicer of the trust. Thus, the RMBS holder with the ability to designate the Special Servicer of the trust is considered to have the power to direct the activities that most significantly impact the entities' economic performance. Trusts of this type of security generally empower the majority holder of the highest-rated or most secured outstanding tranche of securities issued by the trust with this ability. The majority of our RMBS investments are the junior-rated tranches.
•: CMBS—the ability to re-negotiate or foreclose on delinquent loans is generally afforded to the Special Servicer of the trust. Thus, the CMBS holder with the ability to designate the Special Servicer of the trust is considered to have the power to direct the activities that most significantly impact the entities' economic performance. Trusts of this type of security generally empower the holder(s) of a majority of the most junior-rated or lowest-rated outstanding tranche of securities issued by the trust (referred to as the "Controlling Class") with this ability.

~~Real~~The financing ~~estate~~structures ~~loans~~that ~~are~~we ~~carried~~offer atto ~~cost,~~the ~~net~~borrowers ofon ~~unamortized~~certain ~~loan~~of ~~origination~~our ~~costs~~real ~~and~~estate ~~fees,~~loans ~~discounts,~~involve ~~repayments,~~the ~~sales~~creation of ~~partial interests~~entities inthat ~~loans~~could ~~and~~be ~~unfunded~~deemed ~~commitments,~~to ~~unless~~be ~~the~~VIEs ~~loan~~and, istherefore, ~~deemed~~are subject to beFASB ~~impaired~~ASC 810-10-65-2. We ~~account~~have ~~for~~evaluated our real estate loans and inhave ~~accordance~~concluded ~~with~~that none of those real estate loans are VIEs that are subject to the consolidation rules of FASB ASC ~~310~~ 810-2010-0565-2. ~~(previously~~See ~~SFAS~~Note ~~91)~~8 for further discussion of our real estate loans.

Real estate loans are evaluated for possible impairment on a periodic basis in accordance with FASB ASC 310-10-35-13 (previously SFAS 114). Impairment occurs when we determine it is probable that we will not be able to collect all amounts due according to the contractual terms of the loan. Upon determination of impairment, we establish a reserve for loan losses and recognize a corresponding charge to the statement of operations through a provision for loan losses. Significant judgments are required in determining impairment, including making assumptions regarding the value of the loan and the value of the real estate, partnership interest or other collateral that secures the loan, current economic conditions, the potential for natural disasters, loan portfolio composition, delinquency trends, credit losses to date on underlying loans and remaining credit protection. If the credit performance of our real estate loans is different than expected, we adjust the allowance for loan losses to a level deemed appropriate by management to provide for estimated losses inherent in the real estate loan portfolio. Once a loan is 90 days or more delinquent, or a borrower declares bankruptcy, we adjust the value of our accrued interest receivable to what we believe to be collectible and stop accruing interest on that loan.

Real Estate Loans Held for Sale

Real estate loans that we have committed to sell or that we have the intent and ability to sell in the near future are classified as real estate loans held for sale. These real estate loans are carried at the lower of cost or fair value on a loan-by-loan basis. Any market valuation adjustments on these loans are recognized in our consolidated statements of operations in accordance with FASB ASC 948-10-05-4 (previously SFAS 65). The fair value of loans held for sale is based on actual bids or, in the absence of such bids, management's discounted cash flow analysis, which utilizes spreads supplied by dealers.

Commercial Real Estate

Commercial properties held for investment are carried at cost less accumulated depreciation. In accordance with FASB ASC 805-10-05-4 (previously SFAS 141R), upon acquisition, we allocate the purchase price to the components of the commercial properties acquired: the amount allocated to land is based on its estimated fair value; buildings and existing tenant improvements are recorded at depreciated replacement cost; above- and below-market in-place operating leases are determined based on the present value of the difference between the rents payable under the contractual terms of the leases and estimated market rents; lease origination costs for in-place operating leases are determined

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

(dollars in thousands, except per share data)

(unaudited)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

~~based on~~ ~~the~~Involvement ~~estimated~~with ~~costs~~VIEs ~~that~~relating ~~would be incurred~~ to ~~put~~CDOs ~~the existing leases in place under the same terms~~ and conditions; and tenant relationships are measured based on the present value of the estimated avoided net costs if a tenant were to renew its lease at expiry, discounted by the probability of such renewal. MBS

~~Depreciation on~~In ~~buildings~~November is2005, ~~provided~~we onissued acollateralized ~~straight-line~~debt ~~basis~~obligations ~~over~~through ~~the~~two ~~useful~~newly-formed ~~lives~~financing ofsubsidiaries, ~~the~~Crystal ~~properties~~River toCDO 2005-1, Ltd. aand ~~maximum~~Crystal ofRiver 40CDO 2005-1 ~~years.~~LLC ~~Depreciation~~(collectively isreferred ~~determined with reference~~ to ~~each~~as ~~rental~~"CDO ~~property's~~I"). ~~carried~~In ~~value~~January 2007, ~~remaining~~we ~~estimated~~issued ~~useful~~collateralized ~~life~~debt ~~and~~obligations ~~residual~~through ~~value.~~two newly-formed ~~Acquired~~financing ~~tenant improvements~~subsidiaries, ~~above-~~Crystal ~~and~~River ~~below-market~~Capital inResecuritization 2006-~~place~~1 Ltd. ~~operating leases~~ and ~~lease~~ ~~origination~~Crystal ~~costs~~River ~~are~~Capital ~~amortized~~Resecuritization ~~on a straight~~2006-~~line~~1 LLC ~~basis~~(collectively referred ~~over~~to ~~the~~as ~~remaining~~"CDO ~~terms of the leases~~II"). ~~The~~CDO ~~value~~I ~~associated~~and ~~with~~CDO ~~acquired~~II ~~tenant~~represent ~~relationships~~VIEs iswith ~~amortized~~respect onto ~~a straight-line~~which ~~basis~~we ~~over~~have ~~the~~determined ~~expected~~we ~~term~~are of the ~~relationships.~~primary ~~All~~beneficiary ~~other tenant improvements~~ and, ~~re-leasing~~accordingly, ~~costs~~we ~~are~~have ~~deferred~~consolidated ~~and~~them ~~amortized~~in onour ~~a straight-line~~consolidated ~~basis~~financial ~~over~~statements. ~~the~~We ~~terms~~determined ofthat ~~the~~we ~~leases~~are tothe ~~which~~primary ~~they~~beneficiary ~~relate.~~of ~~Depreciation~~both onCDO ~~buildings~~I and ~~amortization~~CDO ofII ~~deferred~~as ~~leasing~~we ~~costs~~have ~~and~~the ~~tenant~~highest ~~improvements~~level ~~that~~of ~~are~~variability ~~determined~~of toreturn bedue ~~assets~~to of the ~~company are~~credit ~~recorded~~risk inof ~~depreciation~~the ~~and~~underlying ~~amortization expense~~assets. For ~~All~~additional ~~above-~~information ~~and~~relating ~~below-market tenant leases and tenant relationships are amortized~~ to ~~rental~~the ~~income.~~consolidated ~~Above-~~assets and ~~below-market~~liabilities ~~ground~~of ~~leases~~CDO ~~are amortized~~I toand ~~commercial~~CDO ~~real~~II, ~~estate~~see ~~expenses~~Note 12.

~~Properties~~We ~~are~~have ~~reviewed~~invested ~~for~~in ~~impairment~~CMBS ~~whenever~~and ~~events~~RMBS orthat ~~changes~~were inissued ~~circumstances~~by ~~indicate~~special ~~the~~purpose ~~carrying~~securitization ~~value~~entities. ~~may~~Prior ~~not~~to beFASB ~~recoverable.~~ASC ~~For commercial properties~~810-10-05-8, anwe ~~impairment~~measured ~~loss is~~variability ~~recognized~~by ~~when~~using aboth ~~property's~~interest ~~carrying~~rate ~~value~~and ~~exceeds~~credit ~~its~~risk ~~undiscounted~~to ~~future~~determine ~~net~~whether ~~cash~~we ~~flow.~~are ~~The impairment is measured as~~ the ~~amount~~primary bybeneficiary ~~which~~of ~~the~~such ~~carrying~~securitization ~~value exceeds the estimated fair value~~entities. ~~Projections~~ ofAfter ~~future cash flow take into account~~ the ~~specific~~effective ~~business~~date ~~plan for each property and management's best estimate~~ of ~~the~~FASB ~~most probable set of economic conditions anticipated to prevail in~~ASC ~~the~~810-10-05-8, ~~market.~~credit Werisk ~~recorded~~now noserves ~~impairment~~as ~~losses on our commercial real estate investments during~~ the ~~nine~~primary ~~months~~measurement ~~ended~~of ~~September 30,~~variability ~~2009~~of ~~or September 30, 2008~~return.

From the ~~Accounting~~initial ~~for~~date ~~Derivative~~of ~~Financial~~our ~~Instruments~~involvement with the VIEs discussed in the preceding paragraphs, we have had no reconsideration events with respect to our CDOs, CMBS and ~~Hedging~~RMBS. ~~Activities~~ We have made no additional contributions to these VIEs since inception/purchase nor have the VIEs' governing instruments or contractual arrangements changed in a manner that changes the characteristics or adequacy of the equity investment that we have at risk in those VIEs. Our CMBS and RMBS assets and CDO liabilities were financed at inception through our issuance of debt or equity and we have not incurred any subsequent financing in relation thereto. We have not provided financial or other support to any of these VIE entities during the three months ended March 31, 2010 or 2009.

We account for our derivative and hedging activities in accordance with FASB ASC 815-10-05-4 (previously SFAS 133). FASB ASC 815-10-05-4 requires us to recognize all derivative instruments at their fair value as either assets or liabilities on our balance sheet. The accounting for changes in fair value (i.e., gains or losses) of a derivative instrument depends on whether we have designated it, and whether it qualifies, as part of a hedging relationship and on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, we must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, a cash flow hedge or a hedge of a net investment in a foreign operation. We have no fair value hedges or hedges of a net investment in foreign operations as of September 30, 2009 or December 31, 2008.

FASB ASC 815-10-65-1 (previously SFAS 161), amends and expands the disclosure requirements with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under FASB ASC 815-10-65-1 and its related interpretations and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

(dollars in thousands, except per share data)

(unaudited)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

~~cash~~ The ~~flows.~~following ~~FASB~~table ~~ASC 815-10-65-1~~summarizes ~~requires~~our ~~qualitative~~involvement ~~disclosures~~with ~~about~~these ~~objectives~~variable ~~and~~interest ~~strategies~~entities: for using derivatives, quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

As required by FASB ASC 815-10-05-4, we record all derivatives on our balance sheet at fair value. Accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives also may be designated as hedges of foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. We may enter into derivative contracts that are intended to economically hedge certain of our risk, even though hedge accounting does not apply or we elect not to apply hedge accounting under FASB ASC 815-10-05-4.

											Variable Interest Entities

							For the Three Months Ended March 31, 2010				Current Face Amount of Assets held by the Company				Current Face Amount of Liabilities issued by the Company
			As of March 31, 2010														Current Face Amount of Liabilities issued by the VIE
													Current Face Amount of Assets within the VIE
							Interest Income(1)(2)		Interest Expense(1)(2)
			Assets		Liabilities		Interest Income(1)(2)		Interest Expense(1)(2)
Consolidated VIEs
CDO I
	CMBS		$	2,965	$	—	$	208	$	—	$	102,104	$	8,119,901	$	—	$	8,119,901
	Non-Agency RMBS			2,075		—		1,149		—		76,165		6,356,298		—		6,356,298
	CDOs			—		4,429		—		459		—		—		131,827		283,677
CDO II
	CMBS			23,940		—		270		—		313,799		80,884,412		—		80,884,412
	CDOs			—		26,911		—		664		—		—		323,002		388,384
COMM 2005-C6
	Real estate loans			1,856,613		—		24,831		—		—		2,037,826		—		—
	Securitized debt obligations			—		1,849,190		—		30,638		—		—		—		2,037,826
BSCMS 2006-PW13
	Real estate loans			2,584,453		—		36,937		—		—		2,820,948		—		—
	Securitized debt obligations			—		2,569,387		—		50,380		—		—		—		2,820,948

		Total	$	4,470,046	$	4,449,917	$	63,395	$	82,141	$	492,068	$	100,219,385	$	454,829	$	100,891,446

Unconsolidated VIEs
CMBS			$	3,208	$	—	$	93	$	—	$	208,466	$	47,019,824	$	—	$	47,019,824
Non-Agency RMBS				2,027		—		718		—		40,194		3,925,281		—		3,925,281

	Total		$	5,235	$	—	$	811	$	—	$	248,660	$	50,945,105	$	—	$	50,945,105

~~For~~ ~~derivative~~ ~~instruments that are designated and qualify as a cash flow hedge~~ (~~i.e., hedging the exposure to variability in expected~~1)The ~~future~~net cash ~~flows~~flow ~~that are attributable~~ to ~~a particular risk),~~ the ~~effective~~Company ~~portion~~from ofthese ~~the~~VIEs ~~gain~~was or$5,710 ~~loss~~for on the ~~derivative~~three ~~instrument~~months isended ~~reported~~March 31, ~~as a component of other comprehensive~~ 2010. (2)Interest income and ~~reclassified~~ ~~into earnings in the same line item associated with the forecasted transaction in the same period or periods during which the hedged transaction affects earnings (i.e., in "~~interest expense" ~~when~~related ~~the~~to ~~hedged transactions are interest cash flows associated with floating-rate debt). The remaining gain or loss on~~ the ~~derivative~~four ~~instrument~~VIEs inthat ~~excess~~were ofdeconsolidated ~~the~~totaled ~~cumulative changes in the present value of future cash flows of the hedged item~~$95,918 ifand ~~any~~$95,364 isfor ~~recognized in~~ the ~~realized~~three ~~and~~months ~~unrealized gain (loss) on~~ended ~~derivatives in current earnings during the period of change. For derivative instruments not designated as hedging instruments~~March 31, ~~such as credit default swaps~~2010, ~~the gain or loss is recognized in realized and unrealized gain (loss) on derivatives in the current earnings during the period of change~~respectively. ~~Income and/or expense from interest rate swaps are recognized as an adjustment to interest expense. We~~ ~~account~~ ~~for income and expense from interest rate swaps on an accrual basis over the period to which the payments and/or receipts relate.~~

Our ~~Dividends~~maximum exposure to ~~Stockholders~~ loss with respect to those VIEs in which we determined we were not the primary beneficiary as of March 31, 2010 was $34,215.

We record dividends to stockholders on the declaration date. The actual dividend and its timing are at the discretion of our board of directors. We intend to pay sufficient dividends to avoid incurring any income or excise tax. During the nine months ended September 30, 2009, we declared dividends in the amount of $7,564, or $0.30 per share, of which $2,491 was distributed on April 30, 2009 to our stockholders of record as of March 31, 2009, $2,491 was distributed on July 31, 2009 to our

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in thousands, except share and per share data) (unaudited)~~ 2010

(dollars in thousands, except per share data)

(unaudited)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

~~stockholders of~~ ~~record~~Use as of ~~June 30, 2009, $2,491 was distributed on October 30, 2009 to our stockholders of record as of September 30, 2009 and $91 related to dividends on deferred stock units.~~ Estimates

The ~~Trust~~preparation ~~Preferred~~of ~~Securities~~ financial statements in conformity with GAAP requires us to make a significant number of estimates in the preparation of the financial statements. These estimates include determining the fair market value of certain investments, debt obligations and derivative assets and liabilities, amount and timing of credit losses, prepayment assumptions, allocation of purchase price to tangible and intangible assets on property acquisitions, and other items that affect the reported amounts of certain assets and liabilities as of the date of the consolidated financial statements and the reported amounts of certain revenues and expenses during the reported period. It is likely that changes in these estimates (e.g., market values change due to changes in supply and demand, credit performance, prepayments, interest rates or other reasons; yields change due to changes in credit outlook and loan prepayments) will occur in the near future. Our estimates are inherently subjective in nature, actual results could differ from our estimates and differences may be material.

~~Trusts~~ ~~that~~Cash we form for the sole purpose of issuing trust preferred securities are not consolidated in our financial statements in accordance with FASB ASC 810-10-25-50 (previously FIN 46R) as we have determined that we are not the primary beneficiary of such trusts. Our investment in the common securities of such trusts is carried at cost and isCash ~~included in other investments in our consolidated financial statements.~~ Equivalents

We ~~Revenue~~classify ~~Recognition~~ highly liquid investments with original maturities of 90 days or less from the date of purchase as cash equivalents. Cash and cash equivalents may include cash and short-term investments. Short-term investments are stated at cost, which approximates their fair value, and may consist of investments in money market accounts.

~~Interest~~ ~~income~~Restricted for our investment securities and real estate loans is recognized over the life of the investment using the effective interest method and recorded on the accrual basis. Interest income on mortgage-backed securities ("MBS") is recognized using the effective interest method as required by FASB ASC 325-40-35-2 (previously EITF 99-20). Real estate loans generally are originated or purchased at or near par value, and interest income is recognized based on the effective yield method based on the terms of the loan instrument. Any loan fees or acquisition costs on originated loans or securities are capitalized and recognized as a component of interest income over the life of the investment utilizing the straight-line method, which approximates the effective interest method. None of the interest income for the nine months ended September 30, 2009 or September 30, 2008 included prepayment fees. We do not accrue interest on real estate loans that are placed on non-accrual status when collection of principal or interest is in doubt. As of January 1, 2008, a real estate construction loan was placed on non-accrual status and we recorded an additional provision for loan loss of $400 and $7,431 related to this loan during the nine months ended September 30, 2009 and 2008 as we believe that it is probable that we will not recover the entire loan balance, including the capitalized interest thereon. In addition, as of September 30, 2009, we recorded a loan loss allowance of $6,358 related to a mezzanine loan for the entire outstanding face amount of the loan and all accrued interest on the loan. Cash

~~Under FASB~~Restricted ~~ASC 325-40-30-3,~~cash atconsists ~~the~~primarily ~~time~~ of ~~purchase,~~funds ~~our~~held ~~management~~on ~~estimates~~deposit ~~the~~with ~~future~~brokers ~~expected~~to ~~cash~~serve ~~flows~~as ~~and~~collateral ~~determines~~for ~~the~~credit ~~effective interest~~default ~~rate~~swap ~~based on these estimated cash flows and the purchase price. As needed~~agreements, certain wecommercial ~~update~~real ~~these~~estate ~~estimated cash flows~~ and ~~compute~~financing ~~a revised yield based on the current amortized cost of the investment. In estimating these cash flows~~obligations, ~~there~~funds ~~are~~held aby ~~number of assumptions that are subject to uncertainties and contingencies, including~~ the ~~rate~~trustee ~~and~~for ~~timing~~CDO ofII ~~principal payments~~ (~~including prepayments,~~See ~~repurchases, defaults and liquidations~~Note 12), ~~the pass-through or coupon rate~~ and ~~interest~~funds ~~rate~~held ~~fluctuations.~~in Inescrow ~~addition,~~for ~~interest~~one ~~payment shortfalls due to delinquencies on the underlying mortgage loans and the timing and the magnitude~~ of ~~credit~~our ~~losses~~financing onsubsidiaries ~~the~~relating ~~mortgage loans underlying the securities have~~ to ~~be judgmentally estimated. These uncertainties and contingencies are~~a ~~difficult~~yield-maintenance toagreement ~~predict~~for ~~and~~certain ~~are~~real ~~subject~~estate toloans ~~future events~~ that ~~may~~we ~~impact~~sold ~~our~~in ~~management's~~June ~~estimates~~2008 ~~and~~(See ~~our interest~~Note ~~income~~13).

Securities

We invest in commercial mortgage-backed securities ("CMBS"), U.S. Agency mortgage pass-through certificates, which are securities issued or guaranteed by the Federal National Mortgage Association ("Fannie Mae"), Federal Home Loan Mortgage Corporation ("Freddie Mac") or Government National Mortgage Association ("Ginnie Mae") and Agency Collateralized Mortgage Obligations issued by Fannie Mae or Freddie Mac backed by mortgage pass-through securities and evidenced by a series of bonds or certificates issued in multiple classes (collectively, "Agency MBS"), Non-Agency residential mortgage-backed securities ("Non-Agency RMBS", and collectively with Agency MBS, "RMBS") and other real estate debt and equity instruments. We account for our investments in CMBS, Agency MBS, Non-Agency RMBS, asset-backed securities ("ABS") and other real estate and equity instruments, which we refer to as our investment securities, in accordance with FASB ASC 320-10-50-2 (previously SFAS 115). We classify our securities as either available-for-sale or held-for-trading because we may dispose of them prior to maturity in response to changes in the

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

(dollars in thousands, except per share data)

(unaudited)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Wemarket, ~~record~~liquidity ~~security~~needs ~~transactions,~~or other ~~than repurchases of our own stock~~events, oneven ~~the~~if ~~trade~~we ~~date.~~have ~~Realized~~no ~~gains~~current ~~and~~intention ~~losses from security transactions are determined based upon the specific identification method and recorded as gain (loss) on sale~~ of ~~investment~~selling ~~securities~~them in the ~~statements~~immediate ~~of operations~~future.

WeAll ~~account~~investment ~~for~~securities ~~accretion~~are ofreported ~~discounts~~at orfair ~~premiums~~value, based on ~~investment~~quoted market prices provided by independent pricing sources, when available, from quotes provided by dealers who make markets in certain securities, ~~and~~or ~~real~~from ~~estate~~our ~~loans~~management's ~~using~~estimates in cases where the ~~effective~~investments ~~interest~~are ~~yield~~illiquid. ~~method~~In making these estimates, our management utilizes pricing information obtained from dealers who make markets in these securities. ~~Such~~However, ~~amounts~~under ~~have~~certain ~~been~~circumstances ~~included~~we asmay adjust these values based on our knowledge of the securities and the underlying collateral. Our management also uses a ~~component~~discounted cash flow model, which utilizes prepayment and loss assumptions based upon historical experience, economic factors and the characteristics of the underlying cash flow to substantiate the fair value of ~~interest~~the ~~income~~securities. inThe assumed discount rate is based upon the ~~statements~~yield of ~~operations~~ comparable securities. The determination of future cash flows and the appropriate discount rates are inherently subjective and, as a result, actual results may vary from our management's estimates.

WeUnrealized ~~may~~gains ~~sell~~and ~~all~~losses orfor ainvestment ~~portion~~securities offor ~~our~~which ~~real~~we ~~estate~~have ~~investments~~not toelected athe ~~third~~fair ~~party.~~value Tooption ~~the~~under ~~extent~~FASB ~~the~~ASC ~~fair~~825-10-45-1 ~~value~~(previously SFAS 159) ~~received~~are ~~for~~recorded anas ~~investment~~a ~~differs~~component ~~from~~of ~~the~~accumulated ~~amortized~~other ~~cost~~comprehensive ofincome ~~that~~(loss) ~~investment and~~in ~~control~~stockholders' ofequity ~~the~~(deficit), ~~asset~~unless ~~that~~unrealized isloss ~~sold~~amounts isare ~~surrendered~~determined ~~making~~to itbe aimpaired ~~"true~~as described ~~sale,"~~below. asFor ~~defined~~investment ~~under~~securities ~~FASB~~for ~~ASC~~which ~~860-20-50-8~~we ~~(previously~~have ~~SFAS 140)~~elected the fair value option, awe ~~gain~~reclassified orthese ~~loss~~securities ~~on the~~from available-for-sale ~~will~~to held-for-trading beand ~~recorded~~changes in the ~~statements~~fair value of ~~operations~~these assecurities ~~realized~~are ~~net~~recorded ~~gain~~in ~~(loss)~~our onconsolidated ~~sale~~statements of ~~investment~~operations. ~~securities,~~This ~~real~~reclassification ~~estate~~was ~~loans~~not ~~and~~the ~~other~~result ~~investments.~~of Toa change ~~the~~to ~~extent~~our aintent ~~real~~as ~~estate~~it ~~investment is~~relates ~~sold~~to ~~that~~these ~~has~~securities. ~~any~~Electing ~~fees~~the ~~that~~fair ~~were~~value ~~capitalized~~option atfor the ~~time~~investment ~~the~~securities ~~investment~~and ~~was~~CDOs ~~made~~(including ~~and~~derivatives) ~~were~~for ~~being~~our ~~recognized~~CDO ~~over~~entities enables us to correlate more closely the ~~term~~values of the ~~investment,~~assets ~~the~~and ~~unamortized~~liabilities ~~fees~~that are ~~recognized~~paired atwithin the ~~time~~same ofsecuritization ~~sale~~ entity and ~~included~~to inreduce ~~any~~the ~~gain~~complexity orof ~~loss~~accounting, onespecially ~~sale~~for ofderivatives ~~real~~under ~~estate~~FASB ~~investments~~ASC 815-10-50-1 (previously SFAS 133).

WePeriodically, ~~have~~all ~~retained~~available-for-sale ~~substantially~~securities ~~all~~are ofevaluated ~~the~~for ~~risks~~other-than-temporary ~~and~~impairment ~~benefits~~in ofaccordance ~~ownership~~with ofFASB ~~our~~ASC 320-10-65-1 ~~rental~~(previously ~~properties~~FSP FAS 115-2), and ~~therefore,~~FASB weASC ~~account~~310-20-60-1 ~~for~~(previously ~~leases~~EITF 99-20), as ~~with~~amended ~~our~~by ~~tenants~~FASB asASC ~~operating~~325-40-65-1 ~~leases~~(previously FSP EITF 99-20-1). ~~The~~An ~~total~~impairment that is an ~~amount~~"other-than-temporary impairment" is a decline in the fair value of ~~contractual~~an ~~rent~~investment below its amortized cost attributable to factors that weindicate ~~receive~~the ~~from~~decline ~~operating~~will ~~leases~~not isbe recovered. ~~recognized~~Under onthe aguidance ~~straight~~of FASB ASC 320-~~line~~10-65-1, ~~basis~~should ~~over~~an other-than-temporary impairment be deemed to have occurred, the ~~term~~total other-than-temporary ofimpairment is bifurcated into (i) the ~~lease;~~amount related to credit losses and a(ii) the ~~straight~~amount related to all other factors. The portion of the other-~~line~~than-temporary orimpairment ~~free~~related ~~rent~~to ~~receivable,~~credit losses is calculated by comparing the amortized cost of the security to the present value of cash flows expected to be ascollected, ~~applicable~~discounted at the security's current yield, and is ~~recorded~~recognized ~~for~~through earnings on the ~~difference~~consolidated ~~between~~statement of operations. The portion of the ~~rental~~other-than-temporary impairment ~~revenue~~related ~~recorded~~to ~~and~~all other factors is recognized as a component of other comprehensive income (loss) on the ~~contractual~~consolidated ~~amount~~balance ~~received~~sheet. InSince ~~addition~~substantial doubt exists about our ability to continue ~~base~~as ~~rent~~a going concern, ~~the~~we ~~tenants~~have indetermined that it is more likely than not that our ~~commercial~~investment ~~real~~securities ~~estate~~will ~~properties also~~be ~~pay~~required ~~substantially~~to ~~all~~be ~~operating~~sold ~~costs.~~before we recover our amortized cost

Expense reimbursement income arising from tenant leases that provide for the recovery of all or a portion of the operating expenses and real estate expenses of the respective property is accrued in the same period as the related expenses are incurred. These recoverable expenses are included in expenses as commercial real estate expenses.

Income arising from the operation of our parking garages is recognized when the parking spaces are occupied. Expenses related to the operation of the parking garage are included in expenses as commercial real estate expenses.

Dividend income on preferred stock is recorded on the dividend declaration date.

Interest in Equity Investment

We accounted for our investment in BREF One, LLC, a real estate finance fund, under the equity method of accounting since we owned more than a minor interest in the fund, but did not unilaterally control the fund and were not considered to be the primary beneficiary under FASB ASC 810-10-50-12 (previously FIN 46R). The investment was recorded initially at cost, and subsequently adjusted for equity in net income (loss) and cash contributions and distributions to reflect the investment at its book value assuming hypothetical liquidation. In March 2008, we sold our investment in BREF One, LLC to an affiliate of our Manager, as more fully explained in Note 7.

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

(dollars in thousands, except per share data)

(unaudited)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

basis and ~~Income~~accordingly, ~~Taxes~~ all unrealized losses on our investment securities have been recognized in earnings.

We ~~have~~Real ~~elected~~Estate to be taxed as a REIT under the Internal Revenue Code and the corresponding provisions of state law. To qualify as a REIT, we must distribute at least 90% of our annual REIT taxable income to stockholders within the statutory timeframe. Accordingly, we generally will not be subject to federal or state income tax to the extent that we make qualifying distributions to our stockholders and provided we satisfy the REIT requirements, including certain asset, income, distribution and stock ownership tests. If we were to fail to meet these requirements, we would be subject to federal, state and local income taxes, which could have a material adverse impact on our results of operations and amounts available for distribution to our stockholders. Loans

~~The dividends~~Real ~~paid~~estate ~~deduction~~loans ofare acarried ~~REIT~~at ~~for~~cost, ~~qualifying dividends to our stockholders is computed using our taxable income as opposed to using our financial statement~~ net ~~income. Some~~ of ~~the~~ ~~significant~~unamortized ~~differences~~loan ~~between~~origination ~~financial~~costs ~~statement net income~~ and ~~taxable income include the timing of recording unrealized gains/realized gains associated with certain assets~~fees, ~~excess inclusion income~~discounts, ~~the book/tax basis of assets~~repayments, ~~interest~~sales ~~income, impairment, straight-line amortization~~ of ~~rental leases, credit loss recognition related to certain assets (asset-backed mortgages),~~partial ~~accounting~~interests ~~for~~in ~~derivative~~loans ~~instruments, stock compensation, amortization of various costs (including start up costs)~~ and ~~accounting~~unfunded ~~for lease income on net leased real estate assets. The differences between GAAP net income and taxable income are generally attributable to differing treatment~~commitments, ~~including~~unless ~~timing related thereto, of unrealized/realized gains and losses associated with certain assets,~~ the ~~bases,~~loan income, impairment, and/or credit loss recognition related to certain assets, primarily CMBS, accounting for derivative instruments, accounting for lease income on net leased real estate assets, and amortization or various costs. The distinction between GAAP net income and taxable income is ~~important~~deemed to ~~our~~be ~~stockholders because dividends or distributions, if any, are declared and paid on the basis of annual estimates of taxable income or loss~~impaired. We doaccount ~~not pay Federal income taxes on income that we distribute on a current basis, provided that we satisfy the requirements~~ for ~~qualification~~ ~~as a REIT under the Internal Revenue Code. We calculate~~ our ~~taxable~~real ~~income~~estate orloans ~~loss~~in asaccordance ifwith weFASB ~~were~~ASC ~~a regular domestic corporation. This taxable income or loss level determines the amount~~310-20-05-2 of(previously ~~dividends, if any, that we are required to distribute over time to reduce or eliminate our tax liability pursuant to REIT requirements~~SFAS 91).

~~Income~~Real onestate ~~CMBS~~loans ~~investments~~are isevaluated ~~computed~~ for ~~GAAP~~possible ~~purposes~~impairment ~~based~~on ~~upon~~ a ~~yield,~~periodic ~~which~~basis ~~assumes~~in ~~credit~~accordance ~~losses~~with ~~will~~FASB ~~occur~~ASC 310-10-35-13 (~~See~~previously ~~"Revenue~~SFAS 114). Impairment ~~Recognition"~~occurs ~~for~~when ~~further~~we ~~discussion).~~determine ~~The~~that ~~yield~~it ~~to compute~~is ~~our~~probable ~~taxable~~that ~~income~~we ~~does~~will not ~~assume~~be ~~there~~able ~~would~~to becollect ~~credit~~all ~~losses,~~amounts asdue aaccording ~~loss~~to ~~can~~the ~~only~~contractual beterms ~~deducted~~of ~~for~~the ~~tax~~loan. ~~purposes~~Upon ~~when~~determination itof ~~has~~an ~~occurred. Furthermore~~impairment, ~~due~~we establish ~~diligence~~a ~~expense~~reserve ~~incurred~~for ~~related~~loan losses and recognize a corresponding charge to the ~~acquisition~~statement of ~~CMBS~~operations ~~and~~through a provision for loan ~~investments~~losses. ~~not~~Significant ~~originated~~judgments are required toin bedetermining impairment, ~~expensed~~including asmaking ~~incurred~~assumptions ~~for~~regarding ~~GAAP~~the ~~purposes~~value ~~but~~of ~~are~~the ~~included~~loan asand athe ~~component~~value of the ~~cost~~real ~~basis~~estate, ofpartnership interest or other collateral that secures the ~~asset~~loan, ~~and~~current ~~amortized~~economic ~~for~~conditions, ~~tax~~the ~~purposes.~~potential Infor ~~addition~~natural disasters, ~~straight~~loan ~~line~~portfolio ~~rental~~composition, ~~income~~delinquency ~~recognized~~trends, ~~for~~credit ~~GAAP~~losses ~~purposes~~to date on underlying loans and remaining credit protection. If the credit performance of our real estate loans is ~~not~~different ~~recognized~~than expected, we adjust the allowance for ~~tax~~loan ~~purposes~~losses asto ~~taxable~~a ~~income~~level deemed appropriate by management to provide for estimated losses inherent in the real estate loan portfolio. Once a loan is ~~generally~~90 days ~~based~~or onmore ~~contractual~~delinquent, ~~rental~~or ~~income~~a borrower declares bankruptcy, we adjust the value of our accrued interest receivable to what we believe to be collectible and stop accruing interest on that loan.

~~FASB ASC~~ ~~740-10-05-1~~Real ~~(previously~~Estate ~~SFAS 109),~~Loans ~~establishes financial accounting and reporting standards for the effect~~ of ~~income~~Consolidated taxes that result from an organization's activities during the current and preceding years. FASB ASC 740-10-05-05 requires that income taxes reflect the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for book and tax purposes. A deferred tax asset or liability for each temporary difference is determined based upon the tax rates that the organization expects to be in effect when the underlying items of income VIEs

As a result of our adoption of FASB ASC 810-10-65-2 as of March 31, 2010, our balance sheet as of such date includes $4,441,066 of real estate loans from the newly consolidated VIEs. These real estate loans are carried at their fair value, which are estimated by using a discounted cash flow analysis, utilizing expected cash flow and loss assumptions, discount rates estimated by management based on underlying property type, estimated loan to value ratios, geographic region and loan performance.

Real Estate Loans Held for Sale

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

(dollars in thousands, except per share data)

(unaudited)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

~~and expense~~ ~~are~~Commercial ~~realized.~~Real ~~A deferred tax valuation allowance is established if it is more likely than not that all or a portion of the deferred tax assets will not be realized.~~ Estate

Commercial properties held for investment are carried at cost less accumulated depreciation. In ~~addition,~~ accordance with FASB ASC ~~740~~ 805-10-05-64 ~~clarifies~~(previously ~~the~~SFAS 141R), ~~accounting~~upon ~~for~~acquisition, ~~uncertainty~~we inallocate ~~income~~the ~~taxes~~purchase ~~recognized~~price into anthe ~~enterprise's~~components ~~financial~~of ~~statements~~the ~~and~~commercial properties acquired: the amount ~~prescribes~~allocated ato ~~recognition~~land ~~threshold~~is based on its estimated fair value; buildings and ~~measurement~~existing ~~attribute~~tenant ~~for~~improvements are recorded at depreciated replacement cost; the ~~financial~~values ~~statement~~of ~~recognition~~above- and ~~measurement~~below-market in-place operating leases are determined based on the present value of athe ~~tax~~difference ~~position~~between ~~taken~~the orrents ~~expected~~payable tounder bethe ~~taken~~contractual interms aof ~~tax~~the ~~return.~~leases ~~FASB~~and estimated market rents; lease ~~ASC 740~~origination costs for in-~~10-05-6~~place ~~also~~operating ~~provides~~leases ~~guidance~~are determined based on ~~derecognition,~~the ~~classification,~~estimated ~~interest~~costs ~~and~~that ~~penalties,~~would ~~accounting~~be incurred to put the existing leases in ~~interim~~place ~~periods,~~under ~~disclosure,~~the same terms and ~~transition.~~conditions; ~~This~~and ~~interpretation~~tenant ~~was~~relationships ~~effective~~are ~~January 1,~~measured ~~2007.~~based ~~The~~on ~~adoption~~the present value of ~~FASB~~the ~~ASC~~estimated ~~740-10-05-6~~avoided ~~did~~net ~~not~~costs ~~materially~~if ~~affect~~a ~~our~~tenant ~~consolidated~~were ~~financial~~to ~~statements~~renew its lease at expiry, discounted by the probability of such renewal.

WeDepreciation ~~have~~on buildings is provided on a ~~wholly~~straight-~~owned~~line ~~domestic~~basis ~~taxable~~over ~~REIT~~the ~~subsidiary~~useful ~~that~~lives ~~has~~of ~~made~~the properties to a ~~joint~~maximum ~~election~~of ~~with~~40 years. usDepreciation is determined with reference to beeach ~~treated~~rental asproperty's ~~our~~carried ~~TRS~~value, remaining estimated useful life and residual value. ~~Our~~Acquired ~~TRS~~tenant improvements, above- and below-market in-place operating leases and lease origination costs are amortized on a straight-line basis over the remaining terms of the leases. The value associated with acquired tenant relationships is amortized on a straight-line ~~separate~~basis ~~entity~~over ~~subject~~the toexpected ~~federal~~term ~~income~~of ~~tax~~the ~~under~~relationships. All other tenant improvements and re-leasing costs are deferred and amortized on a straight-line basis over the ~~Internal~~terms ~~Revenue~~of ~~Code~~the leases to which they relate. ~~For~~Depreciation on buildings and amortization of deferred leasing costs and tenant improvements that are determined to be assets of the ~~nine~~company are ~~months~~recorded ~~ended~~in ~~September 30,~~depreciation ~~2009~~and amortization expense. All above- and ~~2008,~~below-market wetenant ~~did~~leases ~~not~~and ~~record~~tenant ~~any~~relationships ~~current~~are amortized to rental income. ~~tax~~Above- ~~expense~~and below-market ground leases are amortized to commercial real estate expenses.

AsProperties ofare ~~September 30,~~reviewed ~~2009,~~for weimpairment ~~had~~whenever ~~recorded~~events aor ~~$16,040~~changes ~~valuation~~in ~~allowance~~circumstances onindicate ~~deferred~~the ~~tax~~carrying ~~assets~~value ofmay ~~$16,040~~not ~~attributable~~be torecoverable. ~~income~~For ~~tax~~commercial ~~net~~properties, ~~operating~~an impairment loss ~~carryforward relating to~~is ~~our~~recognized when ~~TRS.~~a ~~The~~property's ~~valuation~~carrying ~~allowance~~value isexceeds ~~based~~its onundiscounted ~~management's~~future ~~estimate~~net ~~that~~cash ~~our~~flow. ~~TRS~~The impairment is ~~not~~measured ~~expected~~as tothe ~~generate~~amount ~~sufficient~~by ~~taxable~~which ~~income~~the tocarrying ~~recover~~value exceeds the ~~deferred~~estimated ~~tax~~fair ~~assets~~value. AsProjections of ~~September 30,~~ ~~2009,~~future wecash ~~did~~flow ~~not~~take ~~have~~into aaccount ~~deferred~~the ~~tax~~specific ~~liability.~~business Asplan offor ~~September 30,~~each ~~2009,~~property weand ~~had~~management's ~~net~~best ~~operating~~estimate ~~loss~~of ~~carryforward~~the most probable set of ~~$35,259.~~economic ~~Almost~~conditions ~~all~~anticipated ofto prevail in the ~~net~~market. ~~operating~~We recorded ~~loss~~no ~~carryforward~~impairment ~~expires in~~losses on our commercial real estate investments during the three months ended March ~~2027~~31, 2010 or 2009.

~~Our policy~~ ~~for~~Accounting interest and penalties on material uncertain tax positions recognized in our consolidated financial statements is to classify these as interest expense and operating expense, respectively. However, in accordance with FASB ASC 740-10-05-6, we assessed our tax positions for ~~all~~Derivative ~~open~~Financial ~~tax~~Instruments ~~years (Federal, years 2005 through 2008~~ and ~~State,~~Hedging ~~years 2005 through 2008) as of September 30, 2009, and concluded that we have no material FASB ASC 740-10-50-15 liabilities to be recognized at this time.~~ Activities

We ~~Deferred~~account ~~Financing~~for ~~Costs~~ our derivative and hedging activities in accordance with FASB ASC 815-10-05-4 (previously SFAS 133). FASB ASC 815-10-05-4 requires us to recognize all derivative instruments at their fair value as either assets or liabilities on our balance sheet. The accounting for changes in fair value (i.e., gains or losses) of a derivative instrument depends on whether we have designated it, and whether it qualifies, as part of a hedging relationship and on the type of hedging relationship. For those

Deferred financing costs represent commitment fees, legal fees and other third party costs associated with obtaining commitments for financing that result in a closing of such financing. These costs are amortized over the terms of the respective agreements using the effective interest method or a method that approximates the effective interest method and the amortization is reflected in interest expense. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financing transactions that do not close are expensed in the period in which it is determined that the financing will not close.

Earnings per Share

We compute basic and diluted earnings per share in accordance with FASB ASC 260-10-50-1 (previously SFAS 128). Basic earnings per share ("EPS") is computed based on net income divided by the weighted average number of shares of common stock and other participating securities outstanding during the period. Diluted EPS is based on net income divided by the weighted average number of shares of common stock plus any additional shares of common stock attributable to stock options,

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

(dollars in thousands, except per share data)

(unaudited)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

~~provided~~derivative instruments that ~~the~~are ~~options~~designated ~~have~~and aqualify ~~dilutive~~as ~~effect.~~hedging Atinstruments, ~~each~~we ofmust ~~September 30~~designate the hedging instrument, ~~2009~~based ~~and~~upon ~~September 30~~the exposure being hedged, ~~2008~~as a fair value hedge, ~~options~~a tocash ~~purchase~~flow hedge or a ~~total~~hedge of ~~130,000~~a ~~shares~~net ofinvestment ~~common~~in ~~stock~~a foreign operation. We have ~~been~~no ~~excluded from~~fair ~~the~~value ~~computation~~hedges or hedges of ~~diluted~~a ~~EPS~~net investment in foreign operations as ~~they~~of ~~were~~March 31, ~~determined~~2010 toor beDecember 31, ~~antidilutive~~2009.

FASB ASC ~~Variable~~815-10-65-1 ~~Interest~~(previously ~~Entities~~ SFAS 161), amends and expands the disclosure requirements with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under FASB ASC 815-10-65-1 and its related interpretations and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. FASB ASC 815-10-65-1 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about the fair value of and gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative instruments.

As required by FASB ASC ~~810~~815-10-5005-84, ~~(previously~~we ~~FIN 46)~~record ~~provides~~all ~~guidance~~derivatives on ~~identifying~~our ~~entities~~balance sheet at fair value. Accounting for ~~which~~changes in the fair value of ~~control~~derivatives isdepends ~~achieved~~on ~~through~~the ~~means~~intended ~~other~~use ~~than~~of ~~through~~the ~~voting~~derivative, ~~rights~~whether we have elected to designate a derivative in a hedging relationship and onapply ~~determining~~hedge ~~when~~accounting and ~~which~~whether ~~business~~the ~~enterprise~~hedging ~~should~~relationship has ~~consolidate~~satisfied athe ~~variable~~criteria ~~interest~~necessary ~~entity~~to ~~("VIE")~~apply hedge accounting. ~~FASB ASC 810-10-50-8~~Derivatives ~~states~~designated ~~that~~and qualifying as a ~~VIE~~hedge isof ~~subject~~the exposure to ~~consolidation~~changes ifin the ~~investors~~fair invalue ~~the~~of ~~entity~~an ~~being~~asset, ~~evaluated~~liability, ~~under~~or ~~FASB~~firm commitment ~~ASC 810-10-50-8~~attributable ~~either~~to doa ~~not~~particular ~~have~~risk, ~~sufficient~~such ~~equity~~as atinterest rate risk, ~~for~~are considered fair value hedges. Derivatives designated and qualifying as a hedge of the ~~entity~~exposure to ~~finance~~variability ~~its~~in ~~activities~~expected ~~without~~future ~~additional~~cash ~~subordinated~~flows, ~~financial~~or ~~support~~other types of forecasted transactions, are ~~unable~~ toconsidered cash flow hedges. Derivatives also may be designated as ~~direct~~hedges ~~the~~of ~~entity's~~foreign ~~activities,~~currency orexposure ~~are~~of ~~not~~a ~~exposed~~net toinvestment in a foreign operation. Hedge accounting generally provides for the ~~entity's~~matching ~~losses~~of the timing of gain or ~~entitled~~loss torecognition ~~its~~on ~~residual~~the ~~returns.~~hedging ~~VIEs~~instrument with ~~within~~the recognition of the ~~scope~~changes in the fair value of ~~FASB~~the ~~ASC~~hedged ~~810-10-50-8~~asset or liability that are ~~required~~ attributable to bethe ~~consolidated~~hedged byrisk ~~their~~in ~~primary~~a ~~beneficiary.~~fair ~~The~~value ~~primary~~hedge ~~beneficiary~~or the earnings effect of the hedged forecasted transactions in a ~~VIE~~cash isflow ~~determined~~hedge. toWe bemay ~~the~~enter ~~party~~into derivative contracts that ~~absorbs~~are aintended ~~majority~~to ofeconomically ~~the~~hedge ~~VIE's~~certain ~~expected~~of ~~losses~~our risks, ~~receives~~even ~~the~~though ~~majority~~hedge ~~of the~~accounting ~~VIE's~~does ~~expected~~not ~~returns,~~apply or ~~both~~ we elect not to apply hedge accounting under FASB ASC 815-10-05-4.

~~Our~~For ~~ownership~~derivative ofinstruments ~~the~~that ~~subordinated~~are ~~classes~~designated ~~of CMBS~~ and ~~RMBS~~qualify ~~from~~as a ~~single~~cash ~~issuer~~flow ~~may~~hedge ~~provide~~(i.e., ushedging ~~with~~ the ~~right~~exposure to ~~appoint~~variability ~~the~~in ~~special~~expected future ~~servicer~~cash ~~for~~flows ~~the applicable trust (~~that ~~special servicer~~are ~~will~~attributable ~~control~~to ~~the~~a ~~foreclosure/workout~~particular ~~process on the underlying loans~~risk), ~~which~~the weeffective ~~refer~~portion toof as the ~~Controlling~~gain ~~Class~~or ~~CMBS~~loss ~~and~~on ~~RMBS.~~the ~~Currently,~~derivative ~~there~~instrument ~~are~~is ~~certain~~reported ~~exceptions~~as toa ~~the~~component ~~scope~~ of ~~FASB ASC~~other ~~810-10-50-9,~~comprehensive ~~one~~income ofand reclassified ~~which~~into ~~provides~~earnings ~~that an investor that holds a variable interest~~ in athe ~~qualifying~~same ~~special-purpose~~line ~~entity~~item ~~("QSPE")~~associated iswith ~~not~~the ~~required~~forecasted ~~to consolidate~~transaction ~~that~~in ~~entity unless~~ the ~~investor~~same ~~has~~period ~~the~~or ~~unilateral~~periods ~~ability~~during towhich ~~cause~~ the ~~entity~~hedged totransaction ~~liquidate~~affects earnings (i.e., ~~FASB~~in ~~ASC~~"interest ~~860-10-05-4~~expense" ~~(previously~~when ~~SFAS 140) sets forth~~ the ~~requirements~~hedged ~~for~~transactions anare ~~entity~~interest tocash ~~qualify~~flows asassociated awith ~~QSPE~~floating-rate debt). ToThe ~~maintain~~remaining ~~the~~gain ~~QSPE~~or loss ~~exception,~~on the ~~special-purpose~~derivative ~~entity~~instrument ~~("SPE")~~in ~~must~~excess ~~initially~~of ~~meet~~ the ~~QSPE~~cumulative ~~criteria~~changes ~~and~~in ~~must~~the ~~continue~~present tovalue ~~satisfy~~of ~~such criteria~~future incash ~~subsequent~~flows ~~periods.~~of Anthe ~~SPE's~~hedged ~~QSPE~~item, ~~status~~if ~~can~~any, beis ~~impacted~~recognized in ~~future~~the ~~periods~~realized byand ~~activities~~unrealized ~~undertaken~~gain ~~by its transferor~~(sloss) oron derivatives ~~other~~in ~~involved~~current ~~parties,~~earnings ~~including~~during the ~~manner~~period inof ~~which certain servicing activities are performed~~change. ToFor ~~the~~derivative ~~extent~~instruments ~~that~~not ~~our~~designated ~~CMBS~~as orhedging ~~RMBS~~instruments, ~~investments~~such ~~were~~as ~~issued~~credit bydefault answaps, ~~SPE that meets~~ the ~~QSPE~~gain ~~requirements,~~or weloss ~~record~~is ~~those~~recognized ~~investments~~in atrealized and ~~the~~unrealized ~~purchase~~gain ~~price~~(loss) ~~paid.~~on ~~To the~~derivatives ~~extent~~in the ~~underlying~~current ~~SPEs~~earnings doduring ~~not satisfy~~ the ~~QSPE~~period ~~requirements,~~of wechange. ~~follow~~Income ~~the~~and/or ~~guidance~~expense ~~set~~from ~~forth~~interest inrate ~~FASB~~swaps ~~ASC~~are ~~810-10-50-8~~recognized as ~~the~~an ~~SPEs~~adjustment ~~would be determined to be VIEs.~~

We have analyzed the pooling and servicing agreements governing each of our Controlling Class CMBS and RMBS investments for which we own a greater than 50% interest in the subordinated class and we believe that the terms of those agreements are industry standard and are consistent with the QSPE criteria. We also have evaluated each of our Controlling Class CMBS and RMBS investments as if the SPEs that issued such securities are not QSPEs. Using the fair value approach to calculate expected losses or residual returns, we have concluded that we would not be the primary beneficiary of any of the underlying SPEs. To the extent that there are subsequent changes in the structure of these SPEs (which we believe occur infrequently), we would have to reconsider whether we are the primary beneficiary. If we are deemed to be the primary beneficiary, we would have to consolidate the assets, liabilities and operations of the respective securitization trust. In June 2009, the FASB issued SFAS 167, as defined below, which amends the consolidation guidance applicable to VIEs. We currently are evaluating the impact that the new guidance will have on our investment portfolio.

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

(dollars in thousands, except per share data)

(unaudited)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

~~Our~~to ~~maximum~~realized ~~exposure~~and tounrealized gain (loss) ason aderivatives. ~~result~~We ofaccount ~~our~~for ~~investment~~income inand ~~QSPEs~~expense ~~totaled~~from ~~$776~~interest asrate ofswaps ~~September 30,~~on ~~2009~~an accrual basis over the period to which the payments and/or receipts relate.

~~The financing~~ ~~structures~~Dividends ~~that we offer~~ to the borrowers on certain of our real estate loans involve the creation of entities that could be deemed VIEs and therefore, could be subject to FASB ASC 810-10-25-50. Our management has evaluated our real estate loans and has concluded that none of the real estate loans are VIEs that are subject to the consolidation rules of FASB ASC 810-10-05-8. See Note 5. Stockholders

We ~~Involvement~~record ~~with~~dividends ~~VIEs~~to ~~relating~~stockholders on the declaration date. The actual dividend and its timing are at the discretion of our board of directors. We intend to ~~CDOs~~pay sufficient dividends to avoid incurring any income or excise tax. During the three months ended March 31, ~~MBS~~2010, our board of directors did not declare any dividends. During the three months ended March 31, 2009, we declared dividends in the amount of $2,511, or $0.10 per share, of which $2,491 was distributed on April 30, 2009 to our stockholders of record as of March 31, 2009 and ~~TruPS~~ $20 related to dividends on deferred stock units.

In the ~~November~~fourth ~~2005,~~quarter weof ~~issued collateralized debt obligations through two newly-formed financing subsidiaries~~2009, ~~Crystal~~our ~~River CDO 2005-1, Ltd.~~board ~~and~~of ~~Crystal~~directors ~~River~~elected ~~CDO 2005-1 LLC (collectively referred~~ to assuspend ~~"CDO~~the ~~I").~~quarterly Individend ~~January~~to ~~2007,~~holders weof ~~issued~~shares ~~collateralized~~of ~~debt~~our ~~obligations~~common ~~through two~~stock ~~newly-formed~~to ~~financing~~preserve ~~subsidiaries, Crystal River Capital Resecuritization 2006-1 Ltd~~liquidity. ~~and~~This ~~Crystal~~suspension ~~River Capital Resecuritization 2006-1 LLC (collectively~~has ~~referred~~continued tointo ~~as "CDO II"). CDO I and CDO II represent VIEs with respect to which we have determined we are~~ the ~~primary~~second ~~beneficiary~~quarter ~~and~~of ~~accordingly, we have consolidated them in our consolidated financial statements~~2010. We ~~determined that we~~ are ~~the~~prohibited ~~primary~~from ~~beneficiary~~paying ofany ~~both~~dividends ~~CDO I~~under ~~and CDO II as we have~~ the ~~highest~~Merger ~~level of variability of return due to the credit risk of the underlying assets~~Agreement. ~~For additional information relating to the consolidated assets and liabilities of CDO I and CDO II, see Note 9.~~

~~We invest~~ inTrust ~~CMBS~~Preferred and RMBS that are issued by special purpose securitization entities. Prior to FASB ASC 810-10-05-8, we measured variability by using both interest rate and credit risk to determine whether we are the primary beneficiary of such securitization entities. After the effective date of FASB ASC 810-10-05-8, credit risk now serves as the primary measurement of variability of return. Securities

~~In March~~Trusts ~~2007,~~that wewere formed ~~Crystal River Preferred Trust I (the "Trust")~~ for the sole purpose of issuing trust preferred securities ~~("TruPS").~~are Wenot doconsolidated ~~not~~in ~~consolidate~~our ~~the~~financial ~~Trust~~statements ~~because~~in accordance with FASB ASC 810-10-25-50 (previously FIN 46R) as we have determined that we are not the primary beneficiary asof wesuch ~~have~~trusts. noOur ~~equity~~investment in the common securities of such trusts is carried at ~~risk~~ cost and is included in other investments in our consolidated financial statements. In January 2010, these trust preferred securities were cancelled in connection with the exchange and discharge of our junior subordinated notes.

~~From the~~ ~~initial~~Revenue date of our involvement with the VIEs discussed in the preceding three paragraphs, we have had no reconsideration events with respect to our CDOs, CMBS, RMBS and TruPS. We have made no additional contributions to these VIEs since inception/purchase nor have the VIEs' governing instruments or contractual arrangements changed in a manner that changes the characteristics or adequacy of the equity investment that we have at risk in those VIEs. Our CMBS and RMBS assets and CDO and TruPS liabilities were financed at inception through our issuance of debt or equity and we have not incurred any subsequent financing in relation thereto. We have not provided financial or other support to any of these VIE entities during the nine months ended September 30, 2009. Recognition

Interest income for our investment securities and real estate loans is recognized over the life of the investment using the effective interest method and recorded on the accrual basis. Interest income on mortgage-backed securities ("MBS") is recognized using the effective interest method as required by FASB ASC 325-40-35-1 (previously EITF 99-20). Real estate loans not held within our consolidated VIEs generally are originated or purchased at or near par value, and interest income is recognized based on the effective yield method based on the terms of the loan instrument. Any loan fees or acquisition costs on originated loans or securities are capitalized and recognized as a component of interest income over the life of the investment utilizing the straight-line method, which approximates the effective interest method. Interest income for real estate loans held within our consolidated VIEs is recognized over the life of the investment using the effective interest method and recorded on the accrual basis. The fair value of the real estate loans at the adoption of FASB ASC 810-10-65-2 is the basis for which we determine the effective yield to amortize the premium or discount on real estate loans held within these VIEs. None of the interest income for the three months ended March 31, 2010 or 2009 included prepayment fees. We do not accrue interest on real estate loans that are placed on non-accrual status when collection of principal or interest is in doubt. As of January 1, 2008, a real estate construction loan was placed on non-accrual status and we recorded an additional provision for

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

(dollars in thousands, except per share data)

(unaudited)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

~~The~~loan ~~following~~loss ~~table~~of ~~summarizes~~$0 ~~our~~and ~~involvement~~$400 ~~with~~related ~~these~~to ~~variable~~this loan during the three months ended March 31, 2010 and 2009, respectively, as we believe that it is probable that we will not recover the entire loan balance, including the capitalized interest ~~entities:~~thereon. As of March 31, 2009, a mezzanine loan was placed on non-accrual status and we recorded a loan loss allowance of $0 and $6,358 related to this loan during the three months ended March 31, 2010 and 2009, respectively, as we believe that it is probable that we will not recover the entire loan balance, including the capitalized interest thereon.

											Variable Interest Entities
							For the Nine Months Ended September 30, 2009				Current Face Amount of Assets held by the Company				Current Face Amount of Liabilities issued by the Company
			As of September 30, 2009														Current Face Amount of Liabilities issued by the VIE
													Current Face Amount of Assets within the VIE
							Interest Income(1)		Interest Expense(1)
			Assets		Liabilities
Consolidated VIEs
CDO I
	CMBS		$	8,161	$	—	$	2,965	$	—	$	133,350	$	17,692,835	$	—	$	17,692,835
	Non-Agency RMBS			3,010		—		2,704		—		104,631		10,862,061		—		10,862,061
	CDOs			—		10,592		—		2,342		—		133,908		133,908		284,606
CDO II
	CMBS			38,141		—		12,255		—		390,086		98,044,834		—		98,044,834
	CDOs			—		32,656		—		2,240		—		323,510		323,510		388,892
		Total	$	49,312	$	43,248	$	17,924	$	4,582	$	628,067	$	127,057,148	$	457,418	$	127,273,228
Unconsolidated VIEs
CMBS			$	12,183	$	—	$	7,196	$	—	$	293,919	$	58,406,432	$	—	$	58,238,973
Non-Agency RMBS				2,333		—		2,178		—		60,044		15,881,778		—		15,881,778
TruPS				—		51,550		—		2,969		1,550		51,550		51,550		51,550
	Total		$	14,516	$	51,550	$	9,374	$	2,969	$	355,513	$	74,339,760	$	51,550	$	74,172,301

Under FASB ASC 325-40-30-3, at the time of purchase, our management estimates the future expected cash flows and determines the effective interest rate based on these estimated cash flows and the purchase price. As needed, we update these estimated cash flows and compute a revised yield based on the current amortized cost of the investment. In estimating these cash flows, there are a number of assumptions that are subject to uncertainties and contingencies, including the rate and timing of principal payments (including prepayments, repurchases, defaults and liquidations), the pass-through or coupon rate and interest rate fluctuations. In addition, interest payment shortfalls due to delinquencies on the underlying mortgage loans and the timing and the magnitude of credit losses on the mortgage loans underlying the securities have to be judgmentally estimated. These uncertainties and contingencies are difficult to predict and are subject to future events that may impact our management's estimates and our interest income.

We record ~~(1)The net~~security ~~cash~~transactions, ~~flow~~other tothan repurchases of our own stock, on the ~~Company~~trade date. Realized gains and losses from ~~these~~security ~~VIEs~~transactions ~~was~~are ~~$28,301~~determined ~~for~~based upon the ~~nine~~specific identification ~~months~~method ~~ended~~and ~~September 30,~~recorded ~~2009.~~as gain (loss) on sale of investment securities in the statements of operations.

~~Our~~We account ~~maximum~~for ~~exposure~~accretion toof ~~loss~~discounts ~~with~~or ~~respect~~premiums toon ~~these~~investment ~~VIEs~~securities and real estate loans using the effective interest yield method. Such amounts have been included as a component of ~~September 30,~~interest ~~2009~~income ~~was~~in ~~$63,828~~the statements of operations.

We may ~~Stock~~sell ~~Based~~all ~~Compensation~~ or a portion of our real estate investments to a third party. To the extent the fair value received for an investment differs from the amortized cost of that investment and control of the asset that is sold is surrendered making it a "true sale," as defined under FASB ASC 860-20-50-8 (previously SFAS 140), a gain or loss on the sale will be recorded in the statements of operations as realized net gain (loss) on sale of investment securities, real estate loans and other investments. To the extent a real estate investment is sold that has any fees that were capitalized at the time the investment was made and were being recognized over the term of the investment, the unamortized fees are recognized at the time of sale and included in any gain or loss on sale of real estate investments.

We have ~~account~~retained ~~for~~substantially ~~stock-based~~all ~~compensation~~of inthe ~~accordance~~risks ~~with~~and ~~the~~benefits ~~provisions~~of ownership of ~~FASB ASC 718-10-10-2~~our ~~(previously~~rental ~~SFAS 123R)~~properties and therefore, ~~which~~we ~~establishes~~account ~~accounting~~for ~~and~~leases ~~disclosure~~with ~~requirements~~our ~~using~~tenants ~~fair~~as ~~value~~operating ~~based~~leases. ~~methods~~The total amount of ~~accounting~~contractual ~~for stock-based~~rent ~~compensation~~that ~~plans.~~we ~~Compensation~~receive ~~expense~~from ~~related~~operating toleases ~~grants~~is recognized on a straight-line basis over the term of ~~stock~~the lease; and ~~stock~~a ~~options~~straight-line ~~are~~or ~~recognized~~free ~~ratably~~rent ~~over~~receivable, as applicable, is recorded for the ~~vesting~~difference ~~period~~between ofthe ~~such~~rental ~~grants~~revenue ~~based~~recorded onand the ~~estimated~~contractual ~~fair~~amount ~~value~~received. onIn addition to base rent, the tenants in our commercial real estate properties ~~grant~~also ~~date~~pay substantially all operating costs.

Stock compensation awards granted to the Manager and certain employees of the Manager's affiliates are accounted for in accordance with FASB ASC 505-50-30-11 (previously EITF 96-18), which requires us to measure the fair value of the equity instrument using the stock prices and other measurement assumptions as of the earlier of either the date at which a performance commitment by the counterparty is reached or the date at which the counterparty's performance is complete.

Concentration of Credit Risk and Other Risks and Uncertainties

A significant portion of our investments are concentrated in MBS that pass through collections of principal and interest from the underlying mortgages and there is a risk that some borrowers on the

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

(dollars in thousands, except per share data)

(unaudited)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

~~underlying~~ Expense ~~mortgages~~reimbursement ~~will~~income ~~default.~~arising ~~Therefore,~~from ~~MBS~~tenant ~~bear~~leases ~~exposure~~that toprovide ~~credit~~for ~~losses.~~the ~~Our~~recovery ~~maximum~~of ~~exposure to loss due to credit risk if~~ all ~~parties~~or toa ~~our~~portion ~~investment~~of ~~securities~~the ~~failed~~operating ~~completely~~expenses ~~to perform~~and ~~according~~real toestate ~~the~~expenses ~~terms~~ of the ~~contracts~~respective asproperty ~~of September 30, 2009~~ is accrued ~~$63,828.~~in ~~Our~~the ~~real~~same ~~estate~~period ~~loans~~as ~~and~~the ~~other~~related ~~investments~~expenses ~~also~~are ~~bear exposure to credit losses~~incurred. ~~Our~~These ~~maximum~~recoverable ~~exposure~~expenses ~~to loss~~are ~~due~~included toin ~~credit~~expenses ~~risk~~as ifcommercial ~~parties to our~~ real estate ~~loans, including real estate loans held for sale, and other investments failed completely to perform according to the terms of the loans and other agreements as of September 30, 2009 is $9,128~~expenses.

WeIncome ~~bear~~arising ~~certain~~from ~~other~~the ~~risks~~operation ~~typical in investing in a portfolio~~ of ~~MBS. Principal risks potentially affecting~~ our ~~financial~~parking ~~position,~~garages ~~income~~is ~~and~~recognized ~~cash~~when ~~flows include~~ the ~~risk~~parking ~~that (i) interest~~spaces ~~rate~~are ~~changes~~occupied. ~~can~~Expenses ~~negatively~~related ~~affect the market values of our MBS, (ii) interest rate changes can influence decisions made by borrowers in the mortgages underlying the securities~~ to ~~prepay those mortgages, which can negatively affect both~~ the ~~cash~~operation ~~flows from, and the market value~~ of, ~~our MBS and (iii) adverse changes in~~ the ~~market~~parking ~~value~~garage ofare ~~our~~included ~~MBS and/or our~~in ~~inability~~expenses toas ~~renew~~commercial ~~short~~real ~~term~~estate ~~borrowings would result in the need to sell securities at inopportune times and cause us to realize losses~~expenses.

~~Other~~Dividend ~~financial~~income ~~instruments~~on ~~that~~preferred ~~potentially~~stock ~~subject~~is usrecorded toon ~~concentrations~~the ofdividend ~~credit~~declaration ~~risk consist primarily of cash and cash equivalents and real estate loans~~date. We place our cash and cash equivalents in excess of insured amounts with high quality financial institutions. The collateral securing our real estate loans and other investments are located in the United States.

~~Credit risk~~ ~~also~~Income arises from the possibility that tenants may be unable to fulfill their lease commitments. We have a significant concentration of rental revenue from our commercial properties given that JPMorgan Chase is the sole tenant of all three properties. Therefore, we are subject to concentration of credit risk, and the inability of this tenant to make its lease payments could have an adverse effect on us. Our exposure to this credit risk is mitigated since we have long-term leases in place for all three properties with a tenant that has an investment grade credit rating. Taxes

We ~~Other~~have ~~Comprehensive~~elected ~~Income~~to ~~(Loss)~~ be taxed as a REIT under the Internal Revenue Code and the corresponding provisions of state law. To qualify as a REIT, we must distribute at least 90% of our annual REIT taxable income to stockholders within the statutory timeframe. Accordingly, we generally will not be subject to federal or state income tax to the extent that we make qualifying distributions to our stockholders and provided that we satisfy the REIT requirements, including certain asset, income, distribution and stock ownership tests. If we were to fail to meet these requirements, we would be subject to federal, state and local income taxes, which could have a material adverse impact on our results of operations and amounts available for distribution to our stockholders.

~~Comprehensive~~The dividends paid deduction of a REIT for qualifying dividends to our stockholders is computed using our taxable income ~~(loss)~~as ~~consists~~opposed ofto using our financial statement net income. ~~(loss)~~Some of the significant differences between financial statement net income and ~~other~~taxable ~~comprehensive~~income include the timing of recording unrealized gains/realized gains associated with certain assets, excess inclusion income, (the book/tax basis of assets, interest income, impairment, straight-line amortization of rental leases, credit loss recognition related to certain assets (asset-backed mortgages)., accounting ~~Our~~for ~~other~~derivative ~~comprehensive~~instruments, ~~income~~stock compensation, amortization of various costs (~~loss~~including start up costs) and accounting for lease income on net leased real estate assets. The differences isbetween ~~comprised~~GAAP ~~primarily~~net income and taxable income generally are attributable to differing treatment, including timing related thereto, of unrealized/realized gains and losses onassociated ~~available-~~with certain assets, the bases, income, impairment, and/or credit loss recognition related to certain assets, primarily CMBS, accounting for~~-sale~~ ~~securities~~derivative instruments, accounting for lease income on net leased real estate assets, and amortization or various costs. The distinction between GAAP net ~~unrealized~~income and ~~deferred~~taxable ~~gains~~income is important to our stockholders because dividends or distributions, if any, are declared and ~~losses~~paid on the basis of annual estimates of taxable income or loss. We do not pay Federal income taxes on ~~certain~~income ~~derivative~~that ~~investments accounted~~we distribute on a current basis, provided that we satisfy the requirements for qualification as ~~cash~~a ~~flow~~REIT ~~hedges~~under the Internal Revenue Code. We calculate our taxable income or loss as if we were a regular domestic corporation. This taxable income or loss level determines the amount of dividends, if any, that we are required to distribute over time to reduce or eliminate our tax liability pursuant to REIT requirements.

Income on ~~Repurchase~~CMBS ~~Agreements~~ investments is computed for GAAP purposes based upon a yield, which assumes credit losses will occur (See "Revenue Recognition" for further discussion). The yield to compute our

In repurchase agreements, we transfer securities to a counterparty under an agreement to repurchase the same securities at a fixed price in the future. These agreements are accounted for as secured financing transactions as we maintain effective control over the transferred securities and the transfer meets the other criteria for such accounting. The transferred securities are pledged by us as collateral to the counterparty.

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

(dollars in thousands, except per share data)

(unaudited)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

taxable ~~FASB~~income ~~ASC~~does ~~860-10-55-54~~not ~~(previously~~assume ~~FSP~~there ~~FAS 140-3)~~would ~~relates~~be tocredit ~~repurchase~~losses, ~~financings~~as ~~for~~a ~~financial~~loss ~~assets~~can ~~previously~~only ~~transferred~~be ~~between~~deducted ~~the~~for ~~same~~tax ~~counterparties,~~purposes ~~that~~when isit ~~entered~~has ~~into contemporaneously~~occurred. ~~with~~Furthermore, ordue indiligence ~~contemplation~~expense ~~of,~~incurred ~~the~~related ~~initial transfer. FASB ASC 860-10-55-54 establishes criteria~~ to ~~determine~~ the acquisition ~~accounting treatment~~ of ~~transactions~~CMBS ~~involving the transfer,~~ and ~~subsequent~~ ~~repurchase~~loan ~~financing,~~investments ofnot ~~financial~~originated ~~assets~~are ~~with~~required ~~the~~to ~~same~~be ~~counterparty.~~expensed ~~Transactions~~as ~~that~~incurred dofor ~~not~~GAAP ~~meet~~purposes ~~the~~but ~~criteria~~are ofincluded ~~FASB~~as ~~ASC~~a ~~860-10-55-54~~component doof ~~not~~the ~~qualify~~cost ~~for~~basis ~~QSPE~~of ~~accounting~~the ~~treatment~~asset ~~under FASB ASC 860-10-15-3~~ and ~~will~~amortized befor ~~treated~~tax purposes. asIn ~~a derivative~~addition, ~~requiring~~straight-line ~~further~~rental ~~evaluation~~income ~~under~~recognized ~~FASB~~for ~~ASC~~GAAP ~~815-10-05-2~~purposes ~~(previously~~is ~~SFAS 133). We did~~ not ~~enter~~recognized ~~into~~for ~~any~~tax ~~repurchase~~purposes, ~~financing~~as ~~transactions~~taxable ~~during~~income ~~the~~generally ~~nine~~is ~~months~~based ~~ended~~on ~~September 30,~~contractual ~~2009~~rental income.

FASB ASC ~~Segment~~740-10-05-1 ~~Reporting~~ (previously SFAS 109), establishes financial accounting and reporting standards for the effect of income taxes that result from an organization's activities during the current and preceding years. FASB ASC 740-10-05-05 requires that income taxes reflect the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for book and tax purposes. A deferred tax asset or liability for each temporary difference is determined based upon the tax rates that the organization expects to be in effect when the underlying items of income and expense are realized. A deferred tax valuation allowance is established if it is more likely than not that all or a portion of the deferred tax assets will not be realized.

In addition, FASB ASC ~~280~~ 740-10-5005-206 ~~(previously~~clarifies ~~SFAS 131),~~the ~~establishes~~accounting ~~standards~~for onuncertainty ~~reporting operating segments~~ in ~~interim~~income ~~and~~taxes ~~annual~~recognized ~~financial~~in ~~reports. FASB ASC 280-10-50-20 defines~~ an ~~operating~~enterprise's ~~segment~~financial asstatements and prescribes a ~~component~~recognition ofthreshold anand ~~enterprise~~measurement attribute for ~~which discrete~~the financial ~~information~~statement isrecognition ~~available~~ and ismeasurement ~~reviewed~~of ~~regularly~~a bytax ~~the~~position ~~chief~~taken ~~operating decision-maker,~~ or ~~decision~~expected ~~making group,~~ to ~~evaluate~~be ~~performance~~taken ~~and~~in ~~make~~a ~~operating~~tax ~~decisions~~return. WeFASB ~~have~~ASC ~~identified our chief operating decision~~740-~~maker~~10-05-6 asalso ~~our~~provides ~~chief~~guidance ~~executive~~on ~~officer.~~derecognition, Weclassification, ~~have~~interest ~~determined~~and ~~that~~penalties, weaccounting ~~operate~~ in ~~two~~interim ~~reportable segments: a Securities~~periods, ~~Loans~~disclosure and ~~Other~~transition. ~~Investments segment and a~~This ~~Commercial~~interpretation ~~Real~~was ~~Estate~~effective ~~segment~~January 1, 2007. The ~~reportable~~adoption ~~segments~~of ~~were~~FASB ~~determined~~ASC ~~based~~740-10-05-6 ondid ~~the~~not ~~allocation~~materially ofaffect our ~~investment~~consolidated ~~portfolio~~financial ~~between investment activity and commercial real estate operations in which separate performance data is produced and analyzed by management and the chief operating decision-maker~~statements.

We have ~~Recently~~a ~~Adopted~~wholly ~~Accounting~~owned ~~Pronouncements~~ domestic taxable REIT subsidiary that has made a joint election with us to be treated as our TRS. Our TRS is a separate entity subject to federal income tax under the Internal Revenue Code. For the three months ended March 31, 2010 and 2009, we did not record any current income tax expense. As of March 31, 2010, we had recorded a $16,040 valuation allowance on deferred tax assets of $16,040 attributable to income tax net operating loss carryforwards relating to our TRS. The valuation allowance is based on management's estimate that our TRS is not expected to generate sufficient taxable income to recover the deferred tax assets. As of March 31, 2010, we did not have a deferred tax liability. As of March 31, 2010, we had net operating loss carryforwards of $35,254. Almost all of the net operating loss carryforwards expire in 2027.

~~FASB~~Our policy ~~ASC 810-10-65-1~~for ~~(previously~~interest ~~SFAS 160,~~and ~~which~~penalties ~~the~~on ~~FASB~~material ~~issued~~uncertain intax ~~December~~positions ~~2007) clarifies~~recognized ~~the classification of non-controlling interests~~ in our consolidated ~~statements of~~ financial ~~position~~statements ~~and~~is ~~the~~to ~~accounting~~classify ~~for and reporting of transactions between a company and holders of~~ such ~~non-controlling~~interest ~~interests. Under FASB ASC 810-10-65-1, non-controlling interests are considered equity~~ and ~~should~~penalties ~~be reported~~ as aninterest expense ~~element~~and ofoperating ~~consolidated~~expense, ~~equity~~respectively. ~~The~~However, ~~current~~in ~~practice~~accordance ofwith ~~classifying minority interests within a mezzanine section of the statement of financial position will be eliminated. Under~~ FASB ASC ~~810~~ 740-10-6505-16, ~~net~~we ~~income~~assessed ~~will~~our ~~encompass~~tax ~~the~~positions ~~total~~for ~~income of~~ all ~~consolidated~~open ~~subsidiaries~~tax ~~and~~years ~~will~~(Federal, ~~require separate disclosure on the face of the~~years ~~statements~~2005 ofthrough ~~operations~~2009 ~~of income (loss) attributable to the controlling~~ and ~~non-controlling~~State, ~~interests.~~years ~~Increases~~2005 ~~and~~through ~~decreases~~2009) ~~in the non-controlling ownership interest amount will be accounted for~~ as ~~equity~~of ~~transactions. When a subsidiary is deconsolidated~~March 31, ~~any retained~~2010, ~~non-controlling equity investment in the former subsidiary~~ and ~~the~~concluded ~~gain~~that orwe ~~loss~~have onno ~~the~~material ~~deconsolidation of the subsidiary must be measured at fair value.~~ FASB ASC ~~810~~ 740-10-6550-~~1 is effective for fiscal years beginning after December~~ 15, ~~2008~~liabilities ~~and~~to ~~earlier application is prohibited. The~~be ~~adoption~~recognized ofat ~~FASB~~this ~~ASC 810-10-65-1 did not have a material impact on our consolidated financial statements~~time.

FASB ASC 860-10-55-54 (previously FSP FAS 140-3, which the FASB issued in February 2008) relates to repurchase financings for financial assets previously transferred between the same counterparties that are entered into contemporaneously with, or in contemplation of, the initial

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

(dollars in thousands, except per share data)

(unaudited)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

~~transfer. FASB~~ ~~ASC 860-10-55-54~~Deferred ~~establishes~~Financing criteria to determine the accounting treatment of transactions involving the transfer, and subsequent repurchase financing, of financial assets with the same counterparty. Transactions that do not meet the criteria of FASB ASC 860-10-55-54 do not qualify for QSPE accounting treatment under FASB ASC 860-10-15-3 and will be treated as derivatives requiring further evaluation under FASB ASC 860-10-55-54 (previously SFAS 133). FASB ASC 860-10-55-54 is effective for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. Earlier application is not permitted. The adoption of FASB ASC 860-10-55-54 did not have a material impact on our consolidated financial statements. Costs

~~FASB ASC 815-10-65-1~~Deferred ~~(previously~~financing ~~SFAS 161,~~costs ~~which~~represent ~~the~~commitment ~~FASB~~fees, ~~issued~~legal infees ~~March~~and ~~2008)~~other ~~amended~~third ~~and~~party ~~expanded~~costs ~~the~~associated ~~disclosure~~with ~~requirements~~obtaining commitments for ~~derivative~~financing ~~instruments~~that ~~and~~result ~~hedging~~in ~~activities.~~a ~~FASB~~closing ~~ASC 815-10-65-1~~of ~~requires~~such ~~qualitative~~financing. ~~disclosure~~These ~~about~~costs ~~objectives~~are ~~and~~amortized ~~strategies~~over ~~for~~the ~~using~~terms ~~derivative~~of ~~and hedging~~the ~~instruments,~~respective ~~quantitative~~agreements ~~disclosures~~using ~~about fair value amounts of~~ the ~~instruments~~effective ~~and~~interest ~~gains~~method ~~and~~or ~~losses~~a onmethod ~~such~~that ~~instruments,~~approximates asthe effective ~~well~~interest asmethod ~~disclosures~~and ~~about~~the ~~credit-risk~~amortization ~~features~~is reflected in ~~derivative~~ ~~agreements~~interest expense. ~~FASB~~Unamortized ~~ASC 815-10-65-1~~deferred isfinancing ~~effective~~costs ~~for~~are ~~financial~~expensed ~~statements~~when ~~issued~~the ~~for~~associated ~~fiscal~~debt ~~years~~is ~~and~~refinanced ~~interim~~or ~~periods~~repaid ~~beginning~~before ~~after~~maturity. ~~November 15,~~Costs ~~2008~~incurred ~~with~~in ~~early~~seeking ~~application~~financing ~~encouraged.~~transactions Wethat ~~adopted~~do ~~FASB~~not ~~ASC 815-10-65-1~~close atare ~~the~~expensed ~~beginning~~in of the ~~first~~period ~~quarter~~in ofwhich ~~2009,~~it ~~and~~is wedetermined ~~have included~~that the ~~expanded~~financing ~~disclosures~~will ~~required~~not ~~by that statement~~close.

~~FASB ASC 260-10-45-60~~ ~~(previously~~Earnings FSP EITF 03-6-1, which the FASB issued in June 2008) 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 ("EPS") under the two-class method in accordance with FASB ASC 260-10-50-1 (previously SFAS 128). These provisions of FASB ASC 260-10-45-60 are effective for fiscal years beginning after November 15, 2008 and earlier application is prohibited. The adoption of FASB ASC 260 did not have a material impact on our consolidated financial statements. Share

We compute basic and diluted earnings per share in accordance with FASB ASC ~~815~~ 260-10-6550-1 (previously ~~FSP FAS~~ SFAS ~~133-1~~128). ~~and~~Basic ~~FIN 45-4,~~earnings ~~each~~per ofshare ~~which~~("EPS") ~~the~~is ~~FASB~~computed ~~issued~~based inon ~~September 2008),~~net ~~which~~income ~~requires~~divided ~~additional~~by ~~disclosures~~the ~~for~~weighted ~~sellers~~average number of ~~credit~~shares ~~derivative~~of ~~instruments~~common stock and ~~certain~~other ~~guarantees.~~participating ~~FASB~~securities ~~ASC 815-10-50-4A~~outstanding during ~~requires~~ the ~~disclosure~~ ofperiod. ~~the~~Diluted ~~maximum~~EPS ~~potential~~is ~~amount~~based ofon ~~future~~net ~~payments,~~income ~~the~~divided ~~related~~by ~~fair~~the ~~value~~weighted ~~and~~average ~~the~~number ~~current~~of ~~status~~shares of ~~the~~common ~~payment/performance~~stock ~~risk~~plus ~~for~~any ~~certain~~additional ~~guarantees~~shares ~~and~~of ~~credit~~common ~~derivatives~~stock ~~sold.~~attributable ~~FASB ASC 815-10-65-1~~to isstock ~~effective~~options, provided ~~for~~that the ~~first~~options ~~reporting~~have ~~period~~a ~~(interim~~dilutive oreffect. ~~annual)~~At ~~ending~~each ~~after~~of ~~November~~March 1531, ~~2008.~~2010 ~~The~~and ~~adoption~~March 31, of2009, ~~these~~options ~~provisions~~to purchase a total of ~~FASB~~ ~~ASC 815-10-65-1~~130,000 ~~did~~shares ~~not~~of common stock have abeen ~~material~~excluded ~~impact~~from onthe computation ~~our~~of ~~consolidated~~diluted ~~financial~~EPS ~~statements~~as they were determined to be antidilutive.

~~FASB ASC 860-10-50-3~~ ~~(previously~~Stock ~~FSP~~Based FAS 140-4 and FIN 46(R)-8, which the FASB issued in December 2008) requires public entities to provide additional disclosures regarding transfers of financial assets and amends FASB ASC 810-10-25-50 (previously FIN 46R) to require public enterprises, including sponsors that have a variable interest in a VIE, to provide additional disclosures about their involvement with VIEs. FASB ASC 860-10-50-3 is effective for the first reporting period (interim or annual) ending after December 15, 2008. The adoption of these provisions of FASB ASC 860-10-50-3 did not have a material impact on our consolidated financial statements. Compensation

We account for stock-based compensation in accordance with the provisions of FASB ASC 718-10-10-2 (previously SFAS 123R), which establishes accounting and disclosure requirements using fair value based methods of accounting for stock-based compensation plans. Compensation expense related to grants of stock and stock options are recognized ratably over the vesting period of such grants based on the estimated fair value on the grant date.

Concentration of Credit Risk and Other Risks and Uncertainties

A significant portion of our investments are concentrated in MBS that pass through collections of principal and interest from the underlying mortgages, and there is a risk that some borrowers on the underlying mortgages will default. Therefore, MBS bear exposure to credit losses. Our maximum exposure to loss due to credit risk if all parties to our investment securities failed completely to perform according to the terms of the contracts as of March 31, 2010 and December 31, 2009 is $34,215 and $42,826, respectively. Our real estate loans and other investments also bear exposure to credit losses. Our maximum exposure to loss due to credit risk if parties to our real estate loans and

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

(dollars in thousands, except per share data)

(unaudited)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

~~FASB~~other ~~ASC 325-40-65-1~~investments ~~(previously~~failed ~~FSP~~completely ~~EITF 99-20-1,~~to ~~which~~perform ~~the~~according ~~FASB~~to ~~issued~~the interms ~~January~~of ~~2009, and EITF 99-20) amends~~ the ~~impairment~~loans ~~guidance~~and toother ~~align~~agreements itas ~~with~~of ~~the impairment guidance within FASB ASC~~March ~~320-10-50-5~~31, ~~(previously SFAS 115)~~2010 byand ~~removing from FASB ASC~~December ~~325-40-65-1~~31, ~~the~~2009 ~~requirement~~is to$0 ~~place~~and ~~exclusive~~$7,453, ~~reliance~~respectively. onWe ~~market participants' assumptions about future cash~~also ~~flows~~bear ~~when~~credit ~~evaluating~~risk anon ~~asset~~our ~~for~~real ~~other-than-temporary~~estate ~~impairment.~~loans ~~The standard now requires that assumptions about future cash flows consider reasonable management judgment about the probability that the holder~~ of anconsolidated ~~asset~~VIEs ~~will~~as ~~be unable to collect all amounts due. These provisions~~ of ~~FASB ASC~~March ~~325-40-65-1 are effective for interim and annual reporting periods ending after December 15~~31, ~~2008.~~2010 ~~The adoption~~ of ~~these provisions of FASB ASC 325-40-65-1 did not have a material impact on our consolidated financial statements~~$4,441,066.

~~FASB~~We ~~ASC 805-10-05-2~~bear ~~(previously~~certain ~~FSP~~other ~~FAS 141(R)-1,~~risks ~~which~~typical ~~the~~in ~~FASB~~investing ~~issued~~ in ~~April~~a ~~2009)~~portfolio ~~addresses~~of ~~application~~MBS. ~~issues~~Principal ~~raised by~~risks ~~preparers,~~potentially ~~auditors~~affecting our financial position, income and ~~members~~cash offlows include the ~~legal~~risk ~~profession~~that (i) interest onrate ~~initial~~changes ~~recognition~~can ~~and~~negatively ~~measurement,~~affect ~~subsequent~~the ~~measurement~~market ~~and~~values ~~accounting,~~of ~~and~~our ~~disclosure~~MBS, of(ii) interest ~~assets~~rate ~~and~~changes ~~liabilities~~can ~~arising~~influence ~~from contingencies~~decisions inmade aby ~~business~~borrowers ~~combination.~~in ~~These~~the ~~provisions~~mortgages ofunderlying ~~FASB~~the ~~ASC 805-10-05-2~~securities ~~are~~to ~~effective~~prepay ~~for~~those ~~assets~~mortgages, orwhich ~~liabilities~~can ~~arising~~negatively ~~from~~affect ~~contingencies~~both inthe ~~business~~cash ~~combinations~~flows ~~for~~from, ~~which~~and the ~~acquisition~~market ~~date~~value isof, onour orMBS ~~after~~and ~~the~~(iii) adverse changes ~~beginning~~in of the ~~first~~market ~~annual~~value ~~reporting~~of ~~period~~our ~~beginning~~MBS on and/or ~~after~~our ~~December 15,~~inability ~~2008.~~to ~~The~~renew ~~adoption~~short ofterm ~~these~~borrowings ~~provisions~~would ofresult ~~FASB~~in ~~ASC 805-10-05-2~~the ~~did not~~need ~~have~~to asell ~~material~~securities ~~impact~~at oninopportune ~~our~~times ~~consolidated~~and ~~financial~~cause ~~statements~~us to realize losses.

InOther ~~April~~financial ~~2009,~~instruments ~~the~~that ~~FASB~~potentially ~~issued~~subject ~~three~~us ~~ASCs,~~to ~~which~~concentrations ~~included:~~of ~~(i) FASB~~credit ~~ASC 320-10-65-1~~risk ~~(previously~~consist ~~FSP~~primarily ~~FAS 115-2),~~of ~~(ii) FASB ASC 820-10-65-4~~cash ~~(previously~~and ~~FSP~~cash ~~FAS 157-4),~~equivalents and ~~(iii) FASB~~real ~~ASC 825-10-65-1~~estate ~~(previously FSP FAS 107-1)~~loans. ~~All~~We ~~three~~place ofour ~~these~~cash ~~standards~~and ~~are~~cash equivalents ~~effective~~in ~~for~~excess ~~periods~~of ~~ending~~insured ~~after~~amounts ~~June 15, 2009,~~ with ~~earlier~~high ~~adoption~~quality ~~permitted~~financial ~~for periods ending after March 15, 2009~~institutions. The ~~adoption~~collateral ofsecuring ~~FASB~~our ~~ASC 320-10-65-1,~~real ~~820-10-50-2~~estate loans and ~~825-10-65-1~~other isinvestments ~~required to~~are ~~occur~~located ~~concurrently.~~in ~~Accordingly,~~the weUnited ~~adopted all three of these standards as of April 1, 2009~~States.

~~FASB~~Credit ~~ASC 320-10-65-1~~risk ~~(previously~~also ~~FSP~~arises ~~FAS 115-2)~~from ~~provides~~the ~~additional~~possibility ~~guidance~~that ~~for other-than-temporary~~tenants ~~impairments~~may onbe ~~debt~~unable ~~securities. In addition~~ to ~~existing~~fulfill ~~guidance,~~their ~~under~~lease ~~FASB~~commitments. ~~ASC 320-10-65-1,~~We ~~an other-than-temporary~~have ~~impairment is deemed to exist if an entity does not expect to recover the entire amortized cost basis of~~ a ~~security.~~significant Asconcentration ~~discussed above, FASB ASC 320-10-65-1 provides for the bifurcation~~ of ~~other-than-temporary~~rental ~~impairments~~revenue ~~into~~from ~~(i) amounts~~our ~~related to credit losses~~commercial ~~which~~properties ~~are~~given ~~recognized~~that ~~through~~JPMorgan ~~earnings,~~Chase ~~and~~is ~~(ii) amounts related to all other factors which are recognized as a component of other comprehensive income. The adoption of FASB ASC 320-10-65-1 required a reassessment of~~ the ~~cost~~sole ~~basis~~tenant of all ~~our~~three ~~available-for-sale~~properties. ~~securities for which other-than-temporary impairments were recorded~~Therefore, ~~and~~we ~~resulted~~are insubject ato ~~cumulative~~concentration ~~effect adjustment~~ of ~~$72,126~~credit ~~that was reclassified from retained deficit to accumulated other comprehensive loss on our consolidated balance sheet. In addition~~risk, weand ~~reassessed~~ the ~~cost~~inability ~~basis~~ of ~~our~~this ~~held-for-trading~~tenant ~~securities~~to ~~under~~make ~~the~~its ~~guidance~~lease ~~of FASB~~payments ~~ASC 320-10-65-1~~could tohave ~~reflect~~an aadverse ~~consistent~~effect ~~approach to reporting interest income~~ on ~~such securities~~us. AsOur aexposure ~~result~~to of this ~~reassessment,~~credit werisk ~~recorded~~is anmitigated ~~increase in~~since ~~the~~we ~~cost~~have ~~basis~~long-term ~~and~~leases ~~a corresponding adjustment to unrealized gain (loss)~~ in ~~the~~place ~~amount of $283,116 to our held-~~for~~-trading~~ ~~securities.~~all ~~Further,~~three ~~FASB ASC 320-10-65-1~~properties ~~requires~~with ~~certain~~a ~~disclosures~~tenant ~~for~~that ~~securities,~~has ~~which~~an ~~are~~investment grade ~~included~~credit ~~in Note 4 to these consolidated financial statements~~rating.

Other Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). Our other comprehensive income (loss) is comprised primarily of unrealized gains and losses on available-for-sale securities and net unrealized and deferred gains and losses on certain derivative investments accounted for as cash flow hedges.

Repurchase Agreements

FASB ASC 860-10-55-54 (previously FSP FAS 140-3) relates to repurchase financings for financial assets previously transferred between the same counterparties, that is entered into contemporaneously with, or in contemplation of, the initial transfer. FASB ASC 860-10-55-54 establishes criteria to determine the accounting treatment of transactions involving the transfer, and subsequent repurchase financing, of financial assets with the same counterparty. Transactions that do not meet the criteria of

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

(dollars in thousands, except per share data)

(unaudited)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

FASB ASC ~~820~~ 860-10-6555-454 ~~(previously~~do ~~FSP~~not ~~FAS 157-4)~~qualify ~~provides additional guidance~~ for ~~fair~~QSPE ~~value~~accounting ~~measures~~treatment under FASB ASC ~~820~~ 860-10-6515-43 ~~in determining if the market for an asset or liability is inactive~~ and, ~~accordingly,~~will ~~if quoted market prices may not~~ be ~~indicative~~treated ofas ~~fair~~a ~~value.~~derivative, ~~The~~requiring ~~adoption~~further ofevaluation under FASB ASC ~~820~~ 815-10-6505-42 (previously SFAS 133). We did not ~~have~~enter ainto ~~material~~any ~~impact~~repurchase onfinancing ~~our~~transactions ~~consolidated~~during the ~~financial~~three ~~statements~~months ended March 31, 2010.

~~FASB ASC 825-10-65-1~~ ~~(previously~~Segment FSP FAS 107-1) extends the existing disclosure requirements related to the fair value of financial instruments to interim periods in addition to annual financial statements. The adoption of FASB ASC 825-10-65-1 did not have a material impact on our consolidated financial statements. The disclosure requirements under FASB ASC 825-10-65-1 are included in Note 17 to these consolidated financial statements. Reporting

~~In May 2009, the~~ FASB ~~issued FASB~~ ASC ~~855~~ 280-10-0550-120 (previously SFAS ~~165~~131), establishes standards on reporting operating segments in interim and annual financial reports. FASB ASC ~~855~~ 280-10-0550-~~1 establishes~~20 ~~general~~defines ~~standards~~an ofoperating ~~accounting~~segment ~~for~~as ~~and~~a ~~disclosure~~component of ~~events~~an ~~that~~enterprise ~~occur~~for ~~after~~which ~~the~~discrete ~~balance~~financial information ~~sheet~~is ~~date~~available ~~but~~and ~~before~~is ~~the~~reviewed ~~financial~~regularly ~~statements~~by ~~are~~the ~~issued~~chief operating decision-maker, or ~~are~~decision-making ~~available~~group, to beevaluate ~~issued.~~performance ~~It requires~~and ~~the~~make ~~disclosure~~operating ofdecisions. ~~the~~We ~~date~~have ~~through~~identified ~~which~~our anchief operating ~~entity~~decision-maker ~~has~~as ~~evaluated~~our ~~subsequent~~chief ~~events~~executive ~~and~~officer. ~~the~~We ~~basis~~have ~~for~~determined that ~~date,~~we ~~that~~operate ~~is,~~in ~~whether~~two ~~that~~reportable ~~date~~segments: ~~represents~~a ~~the~~Securities, ~~date~~Loans ~~the~~and ~~financial~~Other ~~statements~~Investments ~~were issued~~segment orand ~~were~~a ~~available~~Commercial toReal ~~be issued~~Estate segment. ~~FASB~~The ~~ASC 855-10-05-1~~reportable issegments ~~effective~~were ~~for~~determined ~~interim~~based ~~periods~~on ~~and~~the ~~fiscal~~allocation ~~years~~of ~~ended~~our ~~after~~investment ~~June 15,~~portfolio ~~2009.~~between ~~The~~investment ~~adoption of~~activity ~~FASB~~and ~~ASC 855-10-05-1~~commercial ~~did~~real ~~not~~estate ~~have~~operations ain ~~material~~which ~~effect~~separate onperformance data ~~our~~is ~~consolidated~~produced ~~financial~~and ~~statements.~~analyzed ~~The~~by ~~disclosure~~management ~~requirements~~and ~~are~~the ~~included~~chief inoperating ~~Note 18 to these consolidated financial statements~~decision-maker.

~~In June~~ ~~2009,~~Recently ~~the~~Adopted ~~FASB~~Accounting issued FASB ASC 105-10-05-1 (previously SFAS 168). FASB ASC 105-10-05-1 establishes the ASC as the source of authoritative GAAP, except for rules and interpretive releases of the Securities and Exchange Commission (SEC), which are sources of authoritative GAAP for SEC registrants. FASB ASC 105-10-05-1 is effective for financial statements issued for interim and fiscals years ending after September 15, 2009. The adoption of the ASC was not intended to change or alter existing GAAP and therefore did not have any impact on our financial statements. References to the relevant ASC section and the previously existing GAAP standard have been provided for accounting standards adopted prior to the effective date of the ASC. Pronouncements

In ~~Recent~~June ~~Accounting~~2009, ~~Pronouncements~~the ~~Not~~FASB ~~Yet~~issued ~~Adopted~~ FASB ASC 860-10-65-3 (previously SFAS 166). FASB ASC 860-10-65-3 removed the concept of a QSPE and the exemptions from consolidation for QSPEs; it also requires a transferor to evaluate all existing QSPEs to determine whether those QSPEs must be consolidated in accordance with SFAS 167, as defined below. FASB ASC 860-10-65-3 revises and clarifies the derecognition requirements for transfers of financial assets and the initial measurement of beneficial interests that are received as proceeds by a transferor in connection with transfers of financial assets. In addition, FASB ASC 860-10-65-3 requires additional disclosure about transfers of financial assets and a transferor's continuing involvement with such transferred financial assets. FASB ASC 860-10-65-3 is effective for financial asset transfers occurring after an entity's first fiscal year beginning after November 15, 2009. The adoption of FASB ASC 860-10-65-3 did not have a significant impact 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 accounting and disclosure guidance relating to FASB ASC 860-10-05-1 (previously SFAS 140). SFAS 166 eliminates the exemption from consolidation for QSPEs; it also requires a transferor to evaluate all existing QSPEs to determine whether those QSPEs must be consolidated in accordance with SFAS 167, as defined below. SFAS 166 is effective for financial asset transfers occurring after an entity's first fiscal year beginning after November 15, 2009. We are currently evaluating the impact that SFAS 166 may have on our consolidated financial position, results of operations and cash flows. SFAS 166 will be incorporated into the ASC through an ASU.

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 VIEs. The amendments to the

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Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in thousands, except share and per share data) (unaudited)~~ 2010

(dollars in thousands, except per share data)

(unaudited)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In June 2009, the FASB issued FASB ASC 810-10-65-2 (previously SFAS 167), which amends the consolidation guidance applicable to VIEs. The amendments to the consolidation guidance affect all entities currently within the scope of FASB ASC 810-10-05-8 (previously FIN 46(R)), as well as QSPEs that currently are excluded from the scope of FASB ASC 810-10-05-8 (previously FIN 46(R)). ~~SFAS~~FASB ASC ~~167~~810-10-65-2 is effective for fiscal years beginning after November 15, 2009. WeFASB ~~are~~ASC 810-10-65-2 significantly ~~currently~~changes ~~evaluating~~the criteria by which an enterprise determines whether it must consolidate a VIE. Currently, a VIE is consolidated by the ~~impact~~enterprise that ~~SFAS~~will absorb a majority of the expected losses or expected residual returns created by the assets of the VIE. FASB ASC ~~167~~810-10-65 ~~may~~requires ~~have~~that ona ~~our~~VIE be consolidated ~~financial~~by ~~position~~the enterprise that has both the power to direct the activities that most significantly impact the VIE's economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. FASB ASC 810-10-65 also requires that an enterprise continually reassess, ~~results~~based ofon ~~operations~~current facts and ~~cash~~circumstances, ~~flows~~whether it should consolidate the VIEs with which it is involved. ~~SFAS~~Effective January ~~167~~1, ~~will~~2010, bewe adopted FASB ASC 810-10-65-2 and, accordingly, consolidated certain VIEs that were not included in ~~incorporated~~our ~~into~~consolidated ~~the~~financial statements as of December 31, 2009. The disclosure requirements under FASB ASC 810-10-65-2 ~~through~~are anincluded in Note ~~ASU~~6 to these consolidated financial statements.

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends existing disclosure guidance related to fair value measurements. Specifically, ASU 2010-06 requires (i) details of significant asset or liability transfers in and out of Level 1 and Level 2 measurements within the fair value hierarchy, and (ii) inclusion of gross purchases, sales, issuances, and settlements within the rollforward of assets and liabilities valued using Level 3 inputs within the fair value hierarchy. In addition, ASU 2010-06 clarifies and increases existing disclosure requirements related to (i) the disaggregation of fair value disclosures and (ii) the inputs used in arriving at fair values for assets and liabilities valued using Level 2 and Level 3 inputs within the fair value hierarchy; however, these two requirements have been deferred. ASU 2010-06 is effective for the first interim or annual period beginning after December 15, 2009, except for the gross presentation of the Level 3 rollforward, which is required for annual reporting periods beginning after December 15, 2010 and for interim periods within those years. The adoption of ASU 2010-06 did not have a material impact on our consolidated financial statements.

Presentation

Certain reclassifications have been made in the presentation of the prior periods consolidated financial statements to conform to the ~~September~~March ~~2009~~2010 presentation.

3. ~~FAIR~~COMPLETION ~~VALUE~~OF ~~HIERARCHY~~THE EXCHANGE AND DISCHARGE OF TRUST PREFERRED SECURITIES

On ~~Fair~~January 29, ~~Value~~2010, onwe aentered ~~Recurring~~into ~~Basis~~ an exchange agreement, which we refer to as the Exchange Agreement, with Taberna Preferred Funding VIII, Ltd. and Taberna Preferred Funding IX, Ltd., which we collectively refer to as Taberna, pursuant to which we exchanged certain of our assets described below for the outstanding $50,000 aggregate liquidation preference of trust preferred securities issued

The following tables set forth by level within the fair value hierarchy our assets and liabilities accounted for at fair value on a recurring basis under FASB ASC 815-15-25-4 (previously SFAS 155) and FASB ASC 825-10-50-8 (previously SFAS 159) as of September 30, 2009 and December 31, 2008. As required by FASB ASC 820-10-50-1 (previously SFAS 157), assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

	Fair Value Measurements as of September 30, 2009
	Level 1		Level 2		Level 3		Total
Assets accounted for at fair value:
Investment securities	$	—	$	—	$	63,828	$	63,828
Derivative assets		—		—		—		—
Total assets at fair value	$	—	$	—	$	63,828	$	63,828
Liabilities accounted for at fair value:
Collateralized debt obligations	$	—	$	—	$	43,248	$	43,248
Derivative liabilities		—		—		40,553		40,553
Total liabilities at fair value	$	—	$	—	$	83,801	$	83,801

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

3.(dollars ~~FAIR~~in ~~VALUE~~thousands, ~~HIERARCHY~~except ~~(Continued~~per share data)

	Fair Value Measurements as of December 31, 2008
	Level 1		Level 2		Level 3		Total
Assets accounted for at fair value:
Investment securities	$	—	$	—	$	72,916	$	72,916
Derivative assets		—		—		—		—
Total assets at fair value	$	—	$	—	$	72,916	$	72,916
Liabilities accounted for at fair value:
Collateralized debt obligations	$	—	$	—	$	45,429	$	45,429
Derivative liabilities		—		—		57,280		57,280
Total liabilities at fair value	$	—	$	—	$	102,709	$	102,709

(unaudited)

~~The following~~ is3. aCOMPLETION ~~summary~~OF ofTHE ~~our~~EXCHANGE ~~investment~~AND ~~securities~~DISCHARGE ~~based~~OF onTRUST ~~the~~PREFERRED ~~lowest~~SECURITIES ~~level~~(Continued) ~~input that is significant to each security's fair value measurement in its entirety as of September 30, 2009 and December 31, 2008.~~

	Investment Securities at Fair Value as of September 30, 2009
Security Description	Level 1		Level 2		Level 3		Total
CMBS	$	—	$	—	$	58,485	$	58,485
Non-Agency RMBS		—		—		5,343		5,343
Total investment securities at fair value	$	—	$	—	$	63,828	$	63,828
Level 3 assets for which we do not bear direct economic exposure(1)						49,312
Level 3 assets for which we bear direct economic exposure					$	14,516

by Crystal River Preferred Trust I and backed by $51,550 aggregate principal amount of our junior subordinated notes due 2037. Immediately following the closing of the transaction contemplated by the Exchange Agreement, the junior subordinated notes were cancelled, the indenture under which the notes were issued was discharged and Crystal River Preferred Trust I was dissolved.

Pursuant to the Exchange Agreement, we transferred and assigned to Taberna two real estate loans and a CMBS bond, which collectively had an aggregate carrying value for accounting purposes on our balance sheet as of December 31, 2009 of $5,979, and we also paid to Taberna a $1,000 exchange fee. We also paid $500 to cover all costs and expenses that were incurred by the collateral manager for Taberna, the indenture trustee and their respective advisors. This transaction resulted in a gain on extinguishment of debt of $39,916, or $1.57 per share.

4. CMBS ASSET SALE

On March 9, 2010, we entered into a binding letter of intent (the "Asset Sale LOI"), with Ranieri Partners Management LLC or its affiliates (together, "Ranieri"). Pursuant to the Asset Sale LOI, Ranieri (either directly or through an affiliate) agreed to purchase certain mortgage pass-through certificates (the "LOI CMBS Assets") from us. Further, pursuant to the Asset Sale LOI, we agreed to appoint Ranieri (or its designee) as the replacement manager of CDO I and CDO II. Ranieri agreed to pay us a total purchase price of $8,000 for the sale of those assets to Ranieri, of which $2,500 (plus accrued and unpaid interest through the closing date of that portion of the transaction) was paid upon the sale of the LOI CMBS Assets on March 15, 2010, $2,000 will be paid upon the transfer of the CDO II rights referenced above, and $3,500 will be paid upon the transfer of the CDO I rights referenced above. We also agreed to grant to Ranieri a right of first refusal to purchase all or any portion of our interest in two CMBS securitizations if we sell those securities in the future. The completion of the transfer of the CDO I and CDO II rights set forth in the Asset Sale LOI is subject to various customary closing conditions as well as the execution of definitive agreements. Our board of directors had previously appointed a special committee of disinterested directors, which we refer to as the Special Committee, to, among other things, evaluate our strategic alternatives. The Special Committee, with the assistance of its financial advisor, solicited and received several bids on the assets that are the subject of the Asset Sale LOI. The Special Committee selected the Ranieri bid based on the combination of price and other terms, in particular those providing greater certainty of closing.

In connection with the sale of the LOI CMBS Assets on March 15, 2010, the net gain has been deferred and will be recognized once the entire transaction has been completed as the sale of the LOI CMBS Assets, transfer of the CDO I and CDO II rights and right of first refusal referenced above constitute a multiple-element transaction and because fair value cannot be allocated among the different components within this transaction. The deferred gain was recorded as a liability on our consolidated balance sheet as of March 31, 2010.

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

3.(dollars ~~FAIR~~in ~~VALUE~~thousands, ~~HIERARCHY~~except ~~(Continued~~per share data)

	Investment Securities at Fair Value as of December 31, 2008
Security Description	Level 1		Level 2		Level 3		Total
CMBS	$	—	$	—	$	58,093	$	58,093
Non-Agency RMBS		—		—		14,823		14,823
Total investment securities at fair value	$	—	$	—	$	72,916	$	72,916
Level 3 assets for which we do not bear direct economic exposure(1)						51,032
Level 3 assets for which we bear direct economic exposure					$	21,884

(unaudited)

~~(1)Consists of Level 3 assets that are financed by our collateralized debt obligations~~5. WeFAIR ~~own~~VALUE ~~an interest in these securities through our investment in the subordinate classes of notes issued by these CDOs.~~ HIERARCHY

Fair Value on a Recurring Basis

The following tables set forth by level within the fair value hierarchy our assets and liabilities accounted for at fair value on a recurring basis under FASB ASC 815-15-25-4 (previously SFAS 155) and FASB ASC 825-10-50-8 (previously SFAS 159) as of March 31, 2010 and December 31, 2009. As required by FASB ASC 820-10-50-1 (previously SFAS 157), assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

	Fair Value Measurements as of March 31, 2010

	Level 1		Level 2		Level 3		Total
Assets accounted for at fair value:
Investment securities	$	—	$	—	$	34,215	$	34,215
Real estate loans of consolidated VIEs		—		—		4,441,066		4,441,066

Total assets at fair value	$	—	$	—	$	4,475,281	$	4,475,281

Liabilities accounted for at fair value:
Collateralized debt obligations	$	—	$	—	$	31,340	$	31,340
Securitized debt obligations of consolidated VIEs		—		—		4,418,577		4,418,577
Derivative liabilities		—		—		38,608		38,608

Total liabilities at fair value	$	—	$	—	$	4,488,525	$	4,488,525

	Fair Value Measurements as of December 31, 2009

	Level 1		Level 2		Level 3		Total
Assets accounted for at fair value:
Investment securities	$	—	$	—	$	42,826	$	42,826
Derivative assets		—		—		—		—

Total assets at fair value	$	—	$	—	$	42,826	$	42,826

Liabilities accounted for at fair value:
Collateralized debt obligations	$	—	$	—	$	33,617	$	33,617
Derivative liabilities		—		—		34,937		34,937

Total liabilities at fair value	$	—	$	—	$	68,554	$	68,554

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

3.(dollars ~~FAIR~~in ~~VALUE~~thousands, ~~HIERARCHY~~except ~~(Continued~~per share data)

~~Level 3~~(unaudited) ~~Gains and Losses~~

~~The~~ ~~table~~5. ~~below~~FAIR ~~sets~~VALUE ~~forth~~HIERARCHY a(Continued) ~~summary of changes in the fair value of our assets with significant valuation inputs classified as Level 3 for the nine months ended September 30, 2009.~~

			Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
			Investment securities— available-for- sale			Investment securities— held-for-trading at FVO			Total
Balance, December 31, 2008			$	21,615		$	51,301		$	72,916
	Total net gains or losses on assets still held at September 30, 2009:
		Included in earnings—interest income		(3,476	)		(4,549	)		(8,025	)
		Included in earnings—impairments		(66,209	)		—			(66,209	)
		Included in earnings—mark to market on held-for-trading securities (FVO)		—			4,228			4,228
		Included in earnings—other		(839	)		(621	)		(1,460	)
		Included in accumulated other comprehensive income (loss)		65,234			—			65,234
	Total net gains or losses on assets disposed/redeemed during the period:
		Included in earnings—interest income		(389	)		(139	)		(528	)
		Included in earnings—impairments		(640	)		—			(640	)
		Included in earnings—mark to market on held-for-trading securities (FVO)		—			249			249
		Included in earnings—other		(2,289	)		(433	)		(2,722	)
		Included in accumulated other comprehensive income (loss)		1,541			—			1,541
	Net purchases, dispositions and settlements			(329	)		(427	)		(756	)
	Transfers in and/or out of Level 3			—			—			—
Balance, September 30, 2009			$	14,219		$	49,609		$	63,828

The following is a summary of our investment securities based on the lowest level input that is significant to each security's fair value measurement in its entirety as of March 31, 2010 and December 31, 2009.

During the nine months ended September 30, 2009, our assets measured at fair value on a recurring basis reflected as Level 3 decreased, largely as a result of principal repayments on CMBS and Non-Agency RMBS totaling $756 and spread widening on our CMBS and Non-Agency RMBS. A significant amount of our investment securities are reflected as Level 3 as a result of the reduction of liquidity in the capital markets that has resulted in a decrease in the observability of the significant inputs used in determining fair value.

	Investment Securities at Fair Value as of March 31, 2010

Security Description	Level 1		Level 2		Level 3		Total
CMBS	$	—	$	—	$	30,113	$	30,113
Non-Agency RMBS		—		—		4,102		4,102

Total investment securities at fair value	$	—	$	—	$	34,215	$	34,215

Level 3 assets for which we do not bear direct economic exposure(1)						28,980

Level 3 assets for which we bear direct economic exposure					$	5,235

	Investment Securities at Fair Value as of December 31, 2009

Security Description	Level 1		Level 2		Level 3		Total
CMBS	$	—	$	—	$	38,113	$	38,113
Non-Agency RMBS		—		—		4,713		4,713

Total investment securities at fair value	$	—	$	—	$	42,826	$	42,826

Level 3 assets for which we do not bear direct economic exposure(1)						35,536

Level 3 assets for which we bear direct economic exposure					$	7,290

(1): Consists of Level 3 assets that are financed by our collateralized debt obligations. We own an interest in these securities through our investment in the subordinate classes of notes issued by these CDOs.

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in thousands, except share and per share data) (unaudited)~~ 2010

3.(dollars ~~FAIR~~in ~~VALUE~~thousands, ~~HIERARCHY~~except ~~(Continued)~~per share data)

~~The table~~ ~~below sets forth a summary of changes in the fair value of our assets with significant valuation inputs classified as Level 3 for the nine months ended September 30, 2008.~~ (unaudited)

			Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
			Investment securities— available-for- sale			Investment securities— held-for-trading at FVO			Total
Balance, January 1, 2008			$	169,883		$	398,681		$	568,564
	Total net gains or losses on assets still held at September 30, 2008:
		Included in earnings—interest income		2,846			12,739			15,585
		Included in earnings—impairments		(112,340	)		—			(112,340	)
		Included in earnings—mark to market on held-for-trading securities (FVO)		—			(268,005	)		(268,005	)
		Included in earnings—other		(963	)		—			(963	)
		Included in accumulated other comprehensive income (loss)		692			—			692
	Total net gains or losses on assets disposed/redeemed during the period:
		Included in earnings—interest income		(26	)		—			(26	)
		Included in earnings—realized loss on sale		(1,894	)		—			(1,894	)
		Included in accumulated other comprehensive income (loss)		(13	)		—			(13	)
	Net purchases, dispositions and settlements			(6,008	)		(4,225	)		(10,233	)
	Transfers in and/or out of Level 3			—			—			—
Balance, September 30, 2008			$	52,177		$	139,190		$	191,367

5. FAIR VALUE HIERARCHY (Continued)

~~During the~~ ~~nine months ended September 30, 2008, our assets measured at fair value on a recurring basis reflected as~~ Level 3 ~~decreased,~~Gains ~~largely as a result of the sale of CMBS totaling $2,245, principal repayments on CMBS~~ and Non-Agency RMBS totaling $8,185 and spread widening on our CMBS and Non-Agency RMBS. A significant amount of our investment securities are reflected as Level 3 as a result of the reduction of liquidity in the capital markets that has resulted in a decrease in the observability of the significant inputs used in determining fair value. Losses

The table below sets forth a summary of changes in the fair value of our assets with significant valuation inputs classified as Level 3 for the three months ended March 31, 2010.

			Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)

			Investment securities— available-for- sale			Investment securities—held- for-trading at FVO			Real estate loans of consolidated VIEs at FVO			Total
Balance, December 31, 2009			$	7,318		$	35,508		$	—		$	42,826
	Adoption of FASB ASC 810-10-65-2			(926	)		(12,407	)		10,652,848			10,639,515
	Total net gains or losses on assets still held at March 31, 2010:
		Included in earnings—interest income		(896	)		(1,659	)		2,409			(146	)
		Included in earnings—impairments		(586	)		—			—			(586	)
		Included in earnings—mark to market on held-for-trading securities/real estate loans of consolidated VIEs		—			(113	)		488,344			488,231
		Included in earnings—other		(112	)		(155	)		—			(267	)
		Included in accumulated other comprehensive income (loss)		645			—			—			645
	Total net gains or losses on assets disposed/redeemed during the period:
		Included in earnings—interest income		3			8			—			11
		Included in earnings—impairments		—			—			—			—
		Included in earnings—mark to market on held-for-trading securities (FVO)		—			—			—			—
		Included in earnings—other		(3	)		(10	)		—			(13	)
		Included in accumulated other comprehensive income (loss)		—			—			—			—
	Net purchases, dispositions and settlements			(180	)		(143	)		(208,016	)		(208,339	)
	Deconsolidation of VIEs due to sale of CMBS (Note 4)			—			7,923			(6,494,519	)		(6,486,596	)
	Transfers in and/or out of Level 3			—			—			—			—

Balance, March 31, 2010			$	5,263		$	28,952		$	4,441,066		$	4,475,281

During the three months ended March 31, 2010, our assets measured at fair value on a recurring basis reflected as Level 3 increased largely due to the real estate loans of the newly consolidated VIEs as a result of the adoption of FASB ASC 810-10-65-2 on January 1, 2010 (see Note 6). Our investment

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

3.(dollars ~~FAIR~~in ~~VALUE~~thousands, ~~HIERARCHY~~except ~~(Continued~~per share data)

~~The table~~ ~~below~~(unaudited) ~~sets forth a summary of changes in the fair value of our assets with significant valuation inputs classified as Level 3 for the three months ended September 30, 2009.~~

			Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
			Investment securities— available-for- sale			Investment securities— held-for-trading at FVO			Total
Balance, June 30, 2009			$	14,540		$	42,713		$	57,253
	Total net gains or losses on assets still held at September 30, 2009:
		Included in earnings—interest income		(1,425	)		(3,160	)		(4,585	)
		Included in earnings—impairments		(46,205	)		—			(46,205	)
		Included in earnings—mark to market on held-for-trading securities (FVO)		—			10,625			10,625
		Included in earnings—other		105			(173	)		(68	)
		Included in accumulated other comprehensive income (loss)		48,780			—			48,780
	Total net gains or losses on assets disposed/redeemed during the period:
		Included in earnings—interest income		(388	)		(77	)		(465	)
		Included in earnings—impairments		(511	)		—			(511	)
		Included in earnings—mark to market on held-for-trading securities (FVO)		—			251			251
		Included in earnings—other		(1,658	)		(370	)		(2,028	)
		Included in accumulated other comprehensive income (loss)		1,101			—			1,101
	Net purchases, dispositions and settlements			(120	)		(200	)		(320	)
	Transfers in and/or out of Level 3			—			—			—
Balance, September 30, 2009			$	14,219		$	49,609		$	63,828

5. FAIR VALUE HIERARCHY (Continued)

~~During~~securities ~~the three months ended September 30, 2009, our assets measured at fair value on a recurring basis reflected as Level 3 decreased, largely as a result of principal repayments on CMBS~~ and ~~Non-Agency~~real ~~RMBS~~estate ~~totaling~~loans ~~$320 and spread widening on our CMBS and Non-Agency RMBS. A significant amount~~ of ~~our~~consolidated ~~investment~~VIEs ~~securities~~ are reflected as Level 3 as a result of the reduction of liquidity in the capital markets that has resulted in a decrease in the observability of the significant inputs used in determining fair value.

The table below sets forth a summary of changes in the fair value of our assets with significant valuation inputs classified as Level 3 for the three months ended March 31, 2009.

			Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)

			Investment securities— available-for- sale			Investment securities—held- for-trading at FVO			Total
Balance, December 31, 2008			$	21,615		$	51,301		$	72,916
	Total net gains or losses on assets still held at March 31, 2009:
		Included in earnings—interest income		447			678			1,125
		Included in earnings—impairments		(5,784	)		—			(5,784	)
		Included in earnings—mark to market on held-for-trading securities (FVO)		—			(14,423	)		(14,423	)
		Included in earnings—other		(298	)		(73	)		(371	)
		Included in accumulated other comprehensive income (loss)		196			—			196
	Total net gains or losses on assets disposed/redeemed during the period:
		Included in earnings—interest income		—			—			—
		Included in earnings—impairments		—			—			—
		Included in earnings—mark to market on held-for-trading securities (FVO)		—			—			—
		Included in earnings—other		(6	)		—			(6	)
		Included in accumulated other comprehensive income (loss)		(1	)		—			(1	)
	Net purchases, dispositions and settlements			(66	)		(24	)		(90	)
	Transfers in and/or out of Level 3			—			—			—

Balance, March 31, 2009			$	16,103		$	37,459		$	53,562

During the three months ended March 31, 2009, our assets measured at fair value on a recurring basis reflected as Level 3 decreased, largely as a result of principal repayments on CMBS and Non-Agency RMBS totaling $51 and spread widening on our CMBS and Non-Agency RMBS. A significant amount of our available-for-sale securities are reflected as Level 3 as a result of the

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

3.(dollars ~~FAIR~~in ~~VALUE~~thousands, ~~HIERARCHY~~except ~~(Continued~~per share data)

			Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
			Investment securities— available-for- sale			Investment securities— held-for-trading at FVO			Total
Balance, June 30, 2008			$	80,577		$	215,259		$	295,836
	Total net gains or losses on assets still held at September 30, 2008:
		Included in earnings—interest income		13			2,924			2,937
		Included in earnings—impairments		(26,876	)		—			(26,876	)
		Included in earnings—mark to market on held-for-trading securities (FVO)		—			(77,801	)		(77,801	)
		Included in earnings—other		(410	)		—			(410	)
		Included in accumulated other comprehensive income (loss)		(1,033	)		—			(1,033	)
	Total net gains or losses on assets disposed/redeemed during the period:
		Included in earnings—interest income		—			—			—
		Included in earnings—realized loss on sale		—			—			—
		Included in accumulated other comprehensive income (loss)		—			—
	Net purchases, dispositions and settlements			(94	)		(1,192	)		(1,286	)
	Transfers in and/or out of Level 3			—			—			—
Balance, September 30, 2008			$	52,177		$	139,190		$	191,367

5. FAIR VALUE HIERARCHY (Continued)

~~During~~reduction ~~the three months ended September 30, 2008, our assets measured at fair value on a recurring basis reflected as Level 3 decreased, largely as a result~~ of principal repayments on CMBS and Non-Agency RMBS totaling $1,251 and spread widening on our CMBS and Non-Agency RMBS. A significant amount of our investment securities are reflected as Level 3 as a result of the reduction of liquidity in the capital markets that has resulted in a decrease in the observability of the significant inputs used in determining fair value.

The table below sets forth a summary of changes in the fair value of our liabilities with significant valuation inputs classified as Level 3 for the three months ended March 31, 2010.

			Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)

			Derivative Liabilities		Collateralized Debt Obligations at FVO			Securitized Debt Obligations of consolidated VIEs at FVO			Total
Balance, December 31, 2009			$	34,937	$	33,617		$	—		$	68,554
	Adoption of FASB ASC 810-10-65-2			—		—			10,598,060			10,598,060
	Total net gains or losses (realized/unrealized) still held at March 31, 2010:
		Included in earnings—interest expense		—		—			26,734			26,734
		Included in earnings—mark to market on collateralized/securitized debt obligations (of consolidated variable interest entities)		—		(1,844	)		464,683			462,839
		Included in earnings—realized and unrealized loss on derivatives		3,671		—			—			3,671
	Net issuances, dispositions and settlements			—		(433	)		(208,132	)		(208,565	)
	Deconsolidation of VIEs due to sale of CMBS (Note 4)			—		—			(6,462,768	)		(6,462,768	)
	Transfers in and/or out of Level 3			—		—			—			—

Balance, March 31, 2010			$	38,608	$	31,340		$	4,418,577		$	4,488,525

During the three months ended March 31, 2010, our liabilities measured at fair value on a recurring basis reflected as Level 3 increased largely due to the securitized debt obligations of the newly consolidated VIEs as a result of the adoption of FASB ASC 810-10-65-2 (see Note 6).

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

3.(dollars ~~FAIR~~in ~~VALUE~~thousands, ~~HIERARCHY~~except ~~(Continued~~per share data)

~~The table~~ ~~below~~(unaudited) ~~sets forth a summary of changes in the fair value of our liabilities with significant valuation inputs classified as Level 3 for the nine months ended September 30, 2009.~~

			Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
			Derivative Liabilities			Collateralized Debt Obligations			Total
Balance, December 31, 2008			$	57,280		$	45,429		$	102,709
	Total net gains or losses (realized/unrealized) still held at September 30, 2009:
		Included in earnings—mark to market on collateralized debt obligations		—			7,429			7,429
		Included in earnings—realized and unrealized gain on derivatives		(6,727	)		—			(6,727	)
	Net issuances, dispositions and settlements			(10,000	)		(9,610	)		(19,610	)
	Transfers in and/or out of Level 3			—			—			—
Balance, September 30, 2009			$	40,553		$	43,248		$	83,801

5. FAIR VALUE HIERARCHY (Continued)

~~During~~The ~~the~~table ~~nine~~below ~~months~~sets ~~ended~~forth ~~September 30,~~a ~~2009,~~summary ~~our~~of ~~liabilities~~changes ~~measured~~in atthe fair value onof aour ~~recurring~~liabilities ~~basis~~with ~~reflected~~significant valuation inputs classified as Level 3 ~~decreased,~~for ~~largely~~the ~~due~~three tomonths ~~unrealized gains~~ended ~~on our interest rate swaps and payments in respect of our credit default swaps~~March 31, ~~which we refer to as CDS~~2009.

The table below sets forth a summary of changes in the fair value of our liabilities with significant valuation inputs classified as Level 3 for the nine months ended September 30, 2008.

			Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)

			Derivative Liabilities			Collateralized Debt Obligations at FVO			Total
Balance, December 31, 2008			$	57,280		$	45,429		$	102,709
	Total net gains or losses (realized/unrealized) still held at March 31, 2009:
		Included in earnings—mark to market on collateralized debt obligations		—			(4,546	)		(4,546	)
		Included in earnings—realized and unrealized gain on derivatives		(6,926	)		—			(6,926	)
	Net issuances, dispositions and settlements			(3,688	)		(5,362	)		(9,050	)
	Transfers in and/or out of Level 3			—			—			—

Balance, March 31, 2009			$	46,666		$	35,521		$	82,187

			Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
			Derivative Liabilities			Collateralized Debt Obligations			Total
Balance, January 1, 2008			$	32,908		$	299,034		$	331,942
	Total net gains or losses (realized/unrealized) still held at September 30, 2008:
		Included in earnings—mark to market on collateralized debt obligations		—			(133,497	)		(133,497	)
		Included in earnings—realized and unrealized loss on derivatives		5,593			—			5,593
	Net issuances, dispositions and settlements			(19,780	)		(12,175	)		(31,955	)
	Transfers in and/or out of Level 3			232			—			232
Balance, September 30, 2008			$	18,953		$	153,362		$	172,315

During the three months ended March 31, 2009, our liabilities measured at fair value on a recurring basis reflected as Level 3 decreased, largely due to unrealized gains on our interest rate swaps and payments in respect of our credit default swaps, which we refer to as CDS.

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

3.(dollars ~~FAIR~~in ~~VALUE~~thousands, ~~HIERARCHY~~except ~~(Continued~~per share data)

~~During the~~ ~~nine~~(unaudited) months ended September 30, 2008, our liabilities measured at fair value on a recurring basis reflected as Level 3 decreased, largely due to the decrease in valuation of our CDO obligations which are based on non-binding broker quotes. In addition, we reclassified our CDS as Level 3 liabilities as a result of the reduction of liquidity in the capital markets that has resulted in a decrease in the observability of the significant inputs used in determining fair value, offset in part be derivative liabilities that we closed out during the nine month period.

~~The table~~ ~~below~~5. ~~sets~~FAIR ~~forth~~VALUE aHIERARCHY ~~summary~~(Continued) ~~of changes in the fair value of our liabilities with significant valuation inputs classified as Level 3 for the three months ended September 30, 2009.~~

			Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
			Derivative Liabilities		Collateralized Debt Obligations			Total
Balance, June 30, 2009			$	30,752	$	40,538		$	71,290
	Total net gains or losses (realized/unrealized) still held at September 30, 2009:
		Included in earnings—mark to market on collateralized debt obligations		—		4,921			4,921
		Included in earnings—realized and unrealized gain on derivatives		9,801		—			9,801
	Net issuances, dispositions and settlements			—		(2,211	)		(2,211	)
	Transfers in and/or out of Level 3			—		—			—
Balance, September 30, 2009			$	40,553	$	43,248		$	83,801

The table below sets forth a summary of changes in the fair value of our assets with significant valuation inputs classified as Level 3 for the three months ended March 31, 2010.

During the three months ended September 30, 2009, our liabilities measured at fair value on a recurring basis reflected as Level 3 decreased, largely due to unrealized gains on our interest rate swaps and payments in respect of our credit default swaps, which we refer to as CDS.

			Investment Securities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)

			CMBS			Non-Agency RMBS			Real estate loans of consolidated VIEs at FVO			Total
Balance, December 31, 2009			$	38,113		$	4,713		$	—		$	42,826
	Adoption of FASB ASC 810-10-65-2			(13,333	)		—			10,652,848			10,639,515
	Total net gains/losses on securities still held at end of period:
		Included in earnings—interest income		(2,844	)		289			2,409			(146	)
		Included in earnings—impairments		(455	)		(131	)		—			(586	)
		Included in earnings—mark to market on held-for-trading securities/real estate loans of consolidated VIEs		332			(445	)		488,344			488,231
		Included in earnings—other		—			(267	)		—			(267	)
		Included in accumulated other comprehensive income (loss)		443			202			—			645
	Total net gains/losses on securities disposed/redeemed during period:
		Included in earnings—interest income		—			11			—			11
		Included in earnings—impairments		—			—			—			—
		Included in earnings—mark to market on held-for-trading securities (FVO)		—			—			—			—
		Included in earnings—other		—			(13	)		—			(13	)
		Included in accumulated other comprehensive income (loss)		—			—			—			—
	Net purchases, dispositions and settlements			(66	)		(257	)		(208,016	)		(208,339	)
	Deconsolidation of VIEs due to sale of CMBS (Note 4)			7,923			—			(6,494,519	)		(6,486,596	)
	Transfers in and/or out of Level 3			—			—			—			—

Balance, March 31, 2010			$	30,113		$	4,102		$	4,441,066		$	4,475,281

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in thousands, except share and per share data) (unaudited)~~ 2010

3.(dollars ~~FAIR~~in ~~VALUE~~thousands, ~~HIERARCHY~~except ~~(Continued)~~per share data)

~~The table~~ ~~below sets forth a summary of changes in the fair value of our liabilities with significant valuation inputs classified as Level 3 for the three months ended September 30, 2008.~~ (unaudited)

			Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
			Derivative Liabilities		Collateralized Debt Obligations			Total
Balance, June 30, 2008			$	18,811	$	204,769		$	223,580
	Total net gains or losses (realized/unrealized) still held at September 30, 2008:
		Included in earnings—mark to market on collateralized debt obligations		—		(45,496	)		(45,496	)
		Included in earnings—realized and unrealized loss on derivatives		142		—			142
	Net issuances, dispositions and settlements			—		(5,911	)		(5,911	)
	Transfers in and/or out of Level 3			—		—			—
Balance, September 30, 2008			$	18,953	$	153,362		$	172,315

5. FAIR VALUE HIERARCHY (Continued)

~~During~~ ~~the~~ The ~~three~~table ~~months~~below ~~ended~~sets ~~September 30,~~forth ~~2008, our liabilities measured at fair value on~~ a ~~recurring~~summary ~~basis~~of ~~reflected~~changes asin ~~Level 3 decreased, largely due to~~ the ~~decrease~~fair ~~in valuation~~value of our ~~CDO~~assets ~~obligations~~with ~~which~~significant ~~are~~valuation ~~based~~inputs onclassified ~~non-binding broker quotes. In addition, we reclassified our CDS~~ as Level 3 ~~liabilities~~for ~~as a result of~~ the ~~reduction~~three ofmonths ~~liquidity in~~ended ~~the capital markets that has resulted in a decrease in the observability of the significant inputs used in determining fair value~~March 31, 2009.

			Investment Securities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)

			CMBS			Non-Agency RMBS			Total
Balance, December 31, 2008			$	58,093		$	14,823		$	72,916
	Total net gains/losses on securities still held at end of period:
		Included in earnings—interest income		614			511			1,125
		Included in earnings—impairments		(3,318	)		(2,466	)		(5,784	)
		Included in earnings—mark to market on held-for-trading securities (FVO)		(11,053	)		(3,370	)		(14,423	)
		Included in earnings—other		—			(371	)		(371	)
		Included in accumulated other comprehensive income (loss)		214			(18	)		196
	Total net gains (losses) on securities disposed/redeemed during period:
		Included in earnings—interest income		—			—			—
		Included in earnings—realized gain (loss) on sale		—			—			—
		Included in earnings—impairments		—			—			—
		Included in earnings—mark to market on held-for-trading securities (FVO)		—			—			—
		Included in earnings—other		—			(6	)		(6	)
		Included in accumulated other comprehensive income (loss)		—			(1	)		(1	)
	Net purchases, dispositions and settlements			—			(90	)		(90	)
	Transfers in and/or out of Level 3			—			—			—

Balance, March 31, 2009			$	44,550		$	9,012		$	53,562

Valuation Techniques

In accordance with FASB ASC 820-10-50-1 (previously SFAS 157), valuation techniques used for assets and liabilities accounted for at fair value are generally categorized into three types:

Market Approach— Market approach valuation techniques use prices and other relevant information from market transactions involving identical or comparable assets or liabilities. Valuation techniques consistent with the market approach include comparables and matrix pricing. Comparables use market multiples, which might lie in ranges with a different multiple for each comparable. The selection of where within the range the appropriate multiple falls requires judgment, considering both quantitative and qualitative factors specific to the measurement. Matrix

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

3.(dollars ~~FAIR~~in ~~VALUE~~thousands, ~~HIERARCHY~~except ~~(Continued~~per share data)

~~The~~ ~~table~~(unaudited) ~~below sets forth a summary of changes in the fair value of our investment securities with significant valuation inputs classified as Level 3 for the nine months ended September 30, 2009.~~

			Investment Securities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
			CMBS			Non-Agency RMBS			Total
Balance, December 31, 2008			$	58,093		$	14,823		$	72,916
	Total net gains/losses on securities still held at end of period:
		Included in earnings—interest income		(6,194	)		(1,831	)		(8,025	)
		Included in earnings—impairments		(57,880	)		(8,329	)		(66,209	)
		Included in earnings—mark to market on held-for-trading securities (FVO)		6,639			(2,411	)		4,228
		Included in earnings—other		(166	)		(1,294	)		(1,460	)
		Included in accumulated other comprehensive income (loss)		57,993			7,241			65,234
	Total net gains (losses) on securities disposed/redeemed during period:
		Included in earnings—interest income		—			(528	)		(528	)
		Included in earnings—realized gain (loss) on sale		—			—			—
		Included in earnings—impairments		—			(640	)		(640	)
		Included in earnings—mark to market on held-for-trading securities (FVO)		—			249			249
		Included in earnings—other		—			(2,722	)		(2,722	)
		Included in accumulated other comprehensive income (loss)		—			1,541			1,541
	Net purchases, dispositions and settlements			—			(756	)		(756	)
	Transfers in and/or out of Level 3			—			—			—
Balance, September 30, 2009			$	58,485		$	5,343		$	63,828

5. FAIR VALUE HIERARCHY (Continued)

pricing is a mathematical technique used principally to value certain securities without relying exclusively on quoted prices for the specific securities but comparing the securities to benchmark or comparable securities. Level 3 includes financial instruments that are marked to model using relevant empirical data to extrapolate an estimated fair value. The models' inputs reflect assumptions that market participants would use in pricing the instrument in a current period transaction and outcomes from the models represent an exit price and expected future cash flows (adjusted for credit risk).

Income Approach— Income approach valuation techniques convert future amounts, such as cash flows or earnings, to a single present amount, or a discounted amount. These techniques rely on current market expectations of future amounts.

Cost Approach— Cost approach valuation techniques are based upon the amount that, at present, would be required to replace the service capacity of an asset, or the current replacement cost. That is, from the perspective of a market participant (seller), the price that would be received for the asset is determined based on the cost to a market participant (buyer) to acquire or construct a substitute asset of comparable utility.

The three approaches described within FASB ASC 820-10-50-1 (previously SFAS 157) are consistent with generally accepted valuation methodologies. While all three approaches are not applicable to all assets or liabilities accounted for at fair value, where appropriate and possible, one or more valuation techniques may be used. The selection of the valuation method(s) to apply considers the definition of an exit price and the nature of the asset or liability being valued and significant expertise and judgment is required. For assets and liabilities accounted for at fair value, excluding real estate held for sale, valuation techniques generally are a combination of the market and income approaches. Real estate held for sale valuation techniques generally combine income and cost approaches. For the three months ended March 31, 2010, the application of valuation techniques applied to similar assets and liabilities has been consistent.

Fair Value on a Non-Recurring Basis

Certain assets are measured at fair value on a non-recurring basis and are not included in the tables above. These assets include real estate loans and real estate loans held for sale that are reported at the lower of cost or market and loans held for sale that initially were measured at cost and have been written down to fair value as a result of being designated for sale.

Real estate loans—As of March 31, 2010, we had one real estate construction loan and one mezzanine loan that are held for investment where allowances for loan losses have been calculated based upon the fair value of the underlying collateral and by using a fundamental cash flow valuation analysis resulting in a carrying value of zero. The cash flow analysis includes cumulative loss assumptions derived from multiple inputs including current housing prices, costs to complete the construction of the underlying collateral, expected recoveries from supporting collateral and other market data.

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

3.(dollars ~~FAIR~~in ~~VALUE~~thousands, ~~HIERARCHY~~except ~~(Continued~~per share data)

~~The table~~ ~~below~~(unaudited) ~~sets forth a summary of changes in the fair value of our investment securities with significant valuation inputs classified as Level 3 for the nine months ended September 30, 2008.~~

			Investment Securities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
			CMBS			Non-Agency RMBS			Preferred Stock			Total
Balance, January 1, 2008			$	399,410		$	168,422		$	732		$	568,564
	Total net gains/losses on securities still held at end of period:
		Included in earnings—interest income		7,493			8,092			—			15,585
		Included in earnings—impairments		(56,330	)		(54,870	)		(1,140	)		(112,340	)
		Included in earnings—mark to market on held-for-trading securities (FVO)		(188,099	)		(79,906	)		—			(268,005	)
		Included in earnings—other		—			(963	)		—			(963	)
		Included in accumulated other comprehensive income (loss)		605			(321	)		408			692
	Total net gains (losses) on securities disposed/redeemed during period:
		Included in earnings—interest income		16			(42	)		—			(26	)
		Included in earnings—realized gain (loss) on sale		(1,894	)		—			—			(1,894	)
		Included in accumulated other comprehensive income (loss)		2			(15	)		—			(13	)
	Net purchases, dispositions and settlements			(2,576	)		(7,657	)		—			(10,233	)
	Transfers in and/or out of Level 3			—			—			—			—
Balance, September 30, 2008			$	158,627		$	32,740		$	—		$	191,367

5. FAIR VALUE HIERARCHY (Continued)

Real estate loans held for sale—As of March 31, 2010, we did not have any real estate loans held for sale.

The following table shows the hierarchy for those assets measured at fair value on a non-recurring basis as of December 31, 2009.

	Assets Measured at Fair Value on a Non-Recurring Basis Using Significant Unobservable Inputs (Level 3) as of December 31, 2009

Asset Description	Level 1		Level 2		Level 3		Total
Real estate loans	$	—	$	—	$	—	$	—
Real estate loans held for sale		—		—		5,903		5,903

Total assets at fair value	$	—	$	—	$	5,903	$	5,903

Real estate loans—We had one real estate construction loan and one mezzanine loan that are held for investment where allowances for loan losses have been calculated based upon the fair value of the underlying collateral and by using a fundamental cash flow valuation analysis. The cash flow analysis includes cumulative loss assumptions derived from multiple inputs including current housing prices, costs to complete the construction of the underlying collateral, expected recoveries from supporting collateral and other market data.

Real estate loans held for sale—We designated one mezzanine loan and one whole loan as being held for sale as of December 31, 2009 as we have committed to sell them, or we have the intent and ability to sell them in the near future. The fair values of the mezzanine loan and the whole loan held for sale were based on management's discounted cash flow analysis.

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

3.(dollars ~~FAIR~~in ~~VALUE~~thousands, ~~HIERARCHY~~except ~~(Continued~~per share data)

			Investment Securities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
			CMBS			Non-Agency RMBS			Total
Balance, June 30, 2009			$	50,297		$	6,956		$	57,253
	Total net gains/losses on securities still held at end of period:
		Included in earnings—interest income		(3,846	)		(739	)		(4,585	)
		Included in earnings—impairments		(45,143	)		(1,062	)		(46,205	)
		Included in earnings—mark to market on held-for-trading securities (FVO)		10,218			407			10,625
		Included in earnings—other		(166	)		98			(68	)
		Included in accumulated other comprehensive income (loss)		47,125			1,655			48,780
	Total net gains (losses) on securities disposed/redeemed during period:
		Included in earnings—interest income		—			(465	)		(465	)
		Included in earnings—realized gain (loss) on sale		—			—			—
		Included in earnings—impairments		—			(511	)		(511	)
		Included in earnings—mark to market on held-for-trading securities (FVO)		—			251			251
		Included in earnings—other		—			(2,028	)		(2,028	)
		Included in accumulated other comprehensive income (loss)		—			1,101			1,101
	Net purchases, dispositions and settlements			—			(320	)		(320	)
	Transfers in and/or out of Level 3			—			—			—
Balance, September 30, 2009			$	58,485		$	5,343		$	63,828

5. FAIR VALUE HIERARCHY (Continued)

Fair Value Option

The following reflects the assets and liabilities accounted for under the fair value option and the change in fair value recorded in our consolidated statement of operations:

				Changes in Fair Values for the Three Months Ended March 31, 2010, For Items Measured at Fair Value Pursuant to the Election of the Fair Value Option

		Fair Value Option March 31, 2010		Interest Income/ (Expense)(1)			Net Mark to Market Adjustments on Investment Securities— Held-for- Trading			Net Mark to Market Adjustments on Collateralized Debt Obligations
Assets accounted for under the fair value option:
Held-for-trading securities:
	CMBS	$	26,877	$	(1,858	)	$	332		$	—
	Non-Agency RMBS		2,075		207			(445	)		—
Real estate loans of consolidated VIEs			4,441,066		2,409			488,344			—

		$	4,470,018	$	758		$	488,231		$	—

Liabilities accounted for under the fair value option:
Collateralized debt obligations		$	31,340	$	—		$	—		$	(1,844	)
Securitized debt obligations of consolidated VIEs			4,418,577		26,734			—			464,683

		$	4,449,917	$	26,734		$	—		$	462,839

(1): Represents accretion of net discount only.

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in thousands, except share and per share data) (unaudited)~~ 2010

3.(dollars ~~FAIR~~in ~~VALUE~~thousands, ~~HIERARCHY~~except ~~(Continued)~~per share data)

~~The table~~ ~~below sets forth a summary of changes in the fair value of our investment securities with significant valuation inputs classified as Level 3 for the three months ended September 30, 2008.~~ (unaudited)

			Investment Securities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
			CMBS			Non-Agency RMBS			Preferred Stock			Total
Balance, June 30, 2008			$	241,685		$	54,127		$	24		$	295,836
	Total net gains/losses on securities still held at end of period:
		Included in earnings—interest income		1,365			1,572			—			2,937
		Included in earnings—impairments		(17,843	)		(9,009	)		(24	)		(26,876	)
		Included in earnings—mark to market on held-for-trading securities (FVO)		(65,768	)		(12,033	)		—			(77,801	)
		Included in earnings—other		—			(410	)		—			(410	)
		Included in accumulated other comprehensive income (loss)		(995	)		(38	)		—			(1,033	)
	Total net gains (losses) on securities disposed/redeemed during period:
		Included in earnings—interest income		—			—			—			—
		Included in earnings—realized gain (loss) on sale		—			—			—			—
		Included in accumulated other comprehensive income (loss)		—			—			—			—
	Net purchases, dispositions and settlements			183			(1,469	)		—			(1,286	)
	Transfers in and/or out of Level 3			—			—			—			—
Balance, September 30, 2008			$	158,627		$	32,740		$	—		$	191,367

5. FAIR VALUE HIERARCHY (Continued)

Valuation Techniques

				Changes in Fair Values for the Three Months Ended March 31, 2009, For Items Measured at Fair Value Pursuant to the Election of the Fair Value Option

		Fair Value Option March 31, 2009		Interest Income(1)		Net Mark to Market Adjustments on Investment Securities— Held-for- Trading			Net Mark to Market Adjustments on Collateralized Debt Obligations
Assets accounted for under the fair value option:
Held-for-trading securities:
	CMBS	$	32,971	$	248	$	(11,053	)	$	—
	Non-Agency RMBS		4,488		430		(3,370	)		—

		$	37,459	$	678	$	(14,423	)	$	—

Liabilities accounted for under the fair value option:
Collateralized debt obligations		$	35,521	$	—	$	—		$	(4,546	)

In ~~accordance with FASB ASC 820-10-50-1~~ (~~previously SFAS 157~~1)~~, valuation techniques used for~~Represents ~~assets~~accretion ~~and~~of ~~liabilities~~net ~~accounted~~discount ~~for~~only. at ~~fair value are generally categorized into three types:~~

~~Market Approach—Market approach valuation techniques use prices and other relevant information from market transactions~~Total ~~involving~~financial ~~identical or comparable~~ assets orat ~~liabilities.~~fair ~~Valuation~~value ~~techniques~~classified ~~consistent~~within ~~with~~Level 3 ~~the~~were ~~market~~$4,475,281 ~~approach include comparables~~ and ~~matrix~~$48,729 ~~pricing.~~as ~~Comparables~~of ~~use market multiples~~March 31, ~~which~~2010 ~~might lie~~and inDecember 31, ~~ranges~~2009, ~~with~~respectively. aSuch ~~different~~amounts represent ~~multiple~~93% ~~for~~and ~~each~~13% ~~comparable. The selection~~ of ~~where~~"Total ~~within~~assets" ~~the~~on ~~range~~ the ~~appropriate~~consolidated ~~multiple~~balance ~~falls~~sheet ~~requires~~as ~~judgment~~of March 31, ~~considering~~2010 ~~both quantitative~~ and ~~qualitative factors~~December 31, ~~specific~~2009, ~~to the measurement~~respectively. ~~Matrix~~Excluding ~~pricing~~assets isfor awhich ~~mathematical~~we ~~technique~~do ~~used~~not ~~principally~~bear todirect economic ~~value~~exposure, ~~certain~~Level 3 ~~securities~~assets ~~without~~were ~~relying~~0% ~~exclusively~~and on2% ~~quoted~~of ~~prices~~"Total ~~for~~assets" ~~the~~as ~~specific~~of ~~securities but~~March 31, ~~comparing~~2010 ~~the~~and ~~securities~~December 31, to2009, ~~benchmark~~respectively.

Total financial liabilities at fair value classified within Level 3 were $4,488,525 and $68,554 as of March 31, 2010 and December 31, 2009, respectively. Such amounts represent 93% and 16% of "Total liabilities" on the consolidated balance sheets as of March 31, 2010 and December 31, 2009, respectively.

As of March 31, 2010 and December 31, 2009, our CDO notes had a face value of $454,829 and $455,262, respectively, and fair value of $31,340 and $33,617, respectively.

Derivative Financial Instruments

Currently, we use interest rate swaps to manage our interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments)

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

3.(dollars ~~FAIR~~in ~~VALUE~~thousands, ~~HIERARCHY~~except ~~(Continued~~per share data)

~~or comparable~~ securities. Level 3 includes financial instruments that are marked to model using relevant empirical data to extrapolate an estimated fair value. The models' inputs reflect assumptions that market participants would use in pricing the instrument in a current period transaction and outcomes from the models represent an exit price and expected future cash flows (~~adjusted for credit risk~~unaudited).

~~Income~~ ~~Approach—Income approach valuation techniques convert future amounts, such as cash flows or earnings, to a single present amount, or a discounted amount~~5. ~~These~~FAIR ~~techniques~~VALUE ~~rely~~HIERARCHY on(Continued) ~~current market expectations of future amounts.~~

~~Cost Approach—Cost approach valuation techniques are based upon~~ and the ~~amount~~discounted ~~that,~~expected atvariable ~~present,~~cash ~~would~~payments be(or ~~required~~receipts). toThe ~~replace~~variable ~~the service~~cash ~~capacity~~payments ~~of an asset,~~ (or ~~the~~receipts) ~~current~~are ~~replacement~~based ~~cost.~~on ~~That~~an ~~is,~~expectation ~~from the perspective~~ of afuture ~~market~~interest ~~participant~~rates (~~seller~~forward curves), ~~the~~derived ~~price~~from ~~that would be received for the asset is determined based on the~~observable ~~cost to a~~ market ~~participant~~interest ~~(buyer)~~rate ~~to acquire or construct a substitute asset of comparable utility~~curves.

~~The~~To ~~three~~comply ~~approaches~~with ~~described~~the ~~within~~provisions of FASB ASC 820-10-50-19 (previously SFAS 157), ~~are~~we ~~consistent~~incorporate ~~with~~credit ~~generally accepted~~ valuation ~~methodologies.~~ ~~While~~adjustments ~~all~~to ~~three~~appropriately reflect ~~approaches~~both ~~are~~our ~~not~~own ~~applicable~~nonperformance torisk ~~all~~and ~~assets~~the orrespective ~~liabilities~~counterparty's ~~accounted~~nonperformance ~~for~~risk atin the fair value, ~~where~~measurements. ~~appropriate~~In ~~and~~adjusting ~~possible,~~the ~~one~~fair orvalue ~~more~~of ~~valuation~~our ~~techniques~~derivative ~~may~~contracts befor ~~used.~~the ~~The selection~~effect of nonperformance ~~the~~risk, ~~valuation~~we ~~method(s)~~have toconsidered ~~apply considers~~ the ~~definition~~impact of annetting ~~exit price~~ and ~~the~~any ~~nature~~applicable ofcredit ~~the~~enhancements, ~~asset~~such oras ~~liability~~collateral ~~being~~posting, ~~valued~~thresholds, ~~and~~mutual ~~significant~~puts ~~expertise~~ and ~~judgment is required~~guarantees. For ~~assets~~ ~~and~~the ~~liabilities~~three ~~accounted~~months ~~for~~ended March 31, at2010 ~~fair~~and ~~value~~March 31, ~~excluding~~2009, ~~real~~we ~~estate~~recorded ~~held~~$(773) ~~for~~and ~~sale~~$3,068, ~~valuation~~respectively, ~~techniques~~into ~~generally~~earnings ~~are~~as a ~~combination~~gain of(loss), ~~the~~which ~~market~~is ~~and~~reflected ~~income~~in ~~approaches.~~realized ~~Real estate held for sale valuation techniques generally combine income~~ and ~~cost~~unrealized ~~approaches.~~gain ~~For~~(loss) ~~the~~on ~~nine~~derivatives on ~~months~~our ~~ended~~consolidated ~~September 30,~~statement ~~2009, the application~~ of ~~valuation~~operations, ~~techniques~~relating ~~applied~~ to ~~similar~~our ~~assets~~nonperformance ~~and liabilities has been consistent~~risk.

Although we ~~Fair~~have ~~Value~~determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by ourselves and our counterparties. As of March 31, 2010, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are significant to the overall valuation of our derivatives. As a ~~Non-Recurring~~result, ~~Basis~~ we have determined that our derivative valuations in their entirety are classified in Level 3 of the fair value hierarchy.

~~Certain~~In addition, ~~assets~~we ~~are~~have ~~measured at fair value on~~ a ~~non-recurring~~credit ~~basis~~default ~~and~~swap ~~are~~that ~~not~~is ~~included~~held inas ~~the~~an ~~tables above~~investment. ~~These~~The ~~assets include~~valuation ~~real~~of ~~estate~~this ~~loans~~derivative ~~and~~is ~~real~~based ~~estate~~on ~~loans~~the ~~held~~expected ~~for~~creditworthiness ~~sale~~of ~~that~~the ~~are~~underlying ~~reported~~asset atdiscounted based ~~lower~~on ofcurrent ~~cost or~~ market ~~and~~rates ~~loans~~utilized ~~held~~by ~~for~~dealers. ~~sale~~The ~~that~~determination ~~initially~~of ~~were~~expected ~~measured~~credit atassumptions ~~cost~~requires ~~and~~certain ~~have~~judgments ~~been~~which ~~written~~cannot ~~down~~be attributed to ~~fair~~ ~~value~~observable asmarket inputs. As a result, ofwe have ~~being~~determined ~~designated~~that ~~for~~our ~~sale.~~credit ~~The~~default ~~following~~swap ~~table~~is ~~shows~~classified ~~the~~in ~~hierarchy~~Level 3 ~~for~~of ~~those~~the ~~assets measured at~~ fair value ~~on a non-recurring basis as of September 30, 2009~~hierarchy.

	Assets Measured at Fair Value on a Non-Recurring Basis Using Significant Unobservable Inputs (Level 3) as of September 30, 2009
Asset Description	Level 1		Level 2		Level 3		Total
Real estate loans	$	—	$	—	$	—	$	—
Real estate loans held for sale		—		—		5,058		5,058
Total assets at fair value	$	—	$	—	$	5,058	$	5,058

6. VARIABLE INTEREST ENTITIES

In accordance with FASB ASC 810-10-65-2, we consolidate all VIEs for which we are the primary beneficiary. As of March 31, 2010, our consolidated balance sheet includes approximately $4,461,928 of assets and $4,456,118 of liabilities from two consolidated VIEs. These VIEs are securitization vehicles that invest in real estate debt instruments, which investments were not originated or transferred to the VIEs by us. As a result of consolidation, our ownership interests in these VIEs have been eliminated, and our balance sheet reflects both the assets held and debt issued by these VIEs to third parties. Similarly, our operating results and cash flows include the gross amounts related to the assets and liabilities of the VIEs, as opposed to our net economic interests in these entities. Upon our adoption of FASB ASC 810-10-65-2, we also applied the fair value option, in accordance with FASB ASC 825-10-45-1 (previously FAS 159), to the assets and liabilities of the VIEs.

Our interest in the assets held by these VIEs, which are consolidated on our balance sheet at their fair value, is restricted by the structural provisions of these entities, and a recovery of our investment in the VIEs will be limited by each entity's distribution provisions. The liabilities of the VIEs, which also

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

3.(dollars ~~FAIR~~in ~~VALUE~~thousands, ~~HIERARCHY~~except ~~(Continued~~per share data)

~~Real~~ ~~estate~~(unaudited) loans—We had one real estate construction loan and one mezzanine loan that are held for investment where allowance for loan losses have been calculated based upon the fair value of the underlying collateral and by using a fundamental cash flow valuation analysis. The cash flow analyses include cumulative loss assumptions derived from multiple inputs including current housing prices, costs to complete the construction of the underlying collateral, expected recoveries from supporting collateral and other market data.

~~Real~~ estate loans held for sale—We designated one mezzanine loan as being held for sale as of September 30, 2009 as we have committed to sell it, or we have the intent and ability to sell it in the near future6. ~~The~~VARIABLE ~~fair~~INTEREST ~~value~~ENTITIES of(Continued) ~~the mezzanine loan held for sale was based on management's discounted cash flow analysis that utilized spreads supplied by dealers.~~

~~The~~are ~~following~~consolidated ~~table~~on ~~shows~~our ~~the~~balance ~~hierarchy~~sheet ~~for those assets measured~~ at their fair value, onare a non-~~recurring~~recourse ~~basis~~to asus, ofand ~~December 31~~can generally only be satisfied from each VIE's respective asset pool. We are not obligated to provide, ~~2008~~nor have we provided, any financial support to these VIEs.

	Assets Measured at Fair Value on a Non-Recurring Basis Using Significant Unobservable Inputs (Level 3) as of December 31, 2008
Asset Description	Level 1		Level 2		Level 3		Total
Real estate loans	$	—	$	—	$	400	$	400
Real estate loans held for sale		—		—		5,058		5,058
Total assets at fair value	$	—	$	—	$	5,458	$	5,458

The following disclosures relate specifically to the assets and liabilities of these VIEs, as stated on our consolidated balance sheets.

~~Real~~ ~~estate loans~~Assets—WeReal ~~had~~Estate one real estate construction loan that is held for investment where an allowance for loan losses has been calculated based upon the fair value of the underlying collateral and by using a fundamental cash flow valuation analysis. The cash flow analysis includes cumulative loss assumptions derived from multiple inputs including current housing prices, expected recoveries from supporting collateral and other market data. Loans

~~Real~~Our ~~estate~~consolidated ~~loans~~VIEs' ~~held~~assets ~~for~~consist ~~sale—We designated one mezzanine loan as being held for sale as~~ of ~~December 31,~~real ~~2008~~estate asloans weand ~~have~~interest ~~committed~~receivable. toThe ~~sell it,~~following oris wea ~~have~~summary ~~the~~of ~~intent and ability to sell it in~~ the ~~near~~real ~~future.~~estate ~~The fair value~~ loans of the ~~mezzanine~~consolidated ~~loan~~VIEs ~~held~~as ~~for~~of ~~sale~~March 31, ~~was~~2010: ~~based on management's discounted cash flow analysis that utilized spreads supplied by dealers.~~

Loan Type		Face Value		Carrying Value

Whole loans	434	$	4,858,774	$	4,441,066	5.75	%	06/2010 - 07/2030	5.58

Total	434	$	4,858,774	$	4,441,066

The maturities of the real estate loans of our consolidated VIEs as of March 31, 2010 are as follows:

	Face Amount

Remainder of 2010	$	238,576
2011		119,955
2012		56,737
2013		131,944
2014		27,898
Thereafter		4,283,664

	$	4,858,774

As of March 31, 2010, the fair value of real estate loans within our consolidated VIEs in which interest payments are more than 90 days past due, and therefore on non-accrual status, totaled $131,761 with a face amount of $217,249.

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

3.(dollars ~~FAIR~~in ~~VALUE~~thousands, ~~HIERARCHY~~except ~~(Continued~~per share data)

~~Fair~~(unaudited) ~~Value Option~~

~~The~~ ~~following~~6. ~~reflects~~VARIABLE ~~the~~INTEREST ~~assets~~ENTITIES ~~and~~(Continued) ~~liabilities accounted for under the fair value option and the change in fair value recorded in our consolidated statement of operations:~~

				Changes in Fair Values for the Nine Months Ended September 30, 2009, For Items Measured at Fair Value Pursuant to the Election of the Fair Value Option
		Fair Value Option September 30, 2009		Interest Income(1)			Net Mark to Market Adjustments on Investment Securities— Held-for- Trading			Net Mark to Market Adjustments on Collateralized Debt Obligations
Assets accounted for under the fair value option:
Held-for-trading securities:
	CMBS	$	46,599	$	(3,790	)	$	6,639		$	—
	Non-Agency RMBS		3,010		(759	)		(2,162	)		—
		$	49,609	$	(4,549	)	$	4,477		$	—
Liabilities accounted for under the fair value option:
Collateralized debt obligations		$	43,248	$	—		$	—		$	(7,429	)

Liabilities—Securitized Debt Obligations

Our ~~(1)Represents accretion~~consolidated VIEs' liabilities consist of ~~net~~securitized ~~discount~~debt ~~only~~obligations, interest payable and other liabilities. As of March 31, 2010, we consolidated $4,418,577 of securitized debt obligations at fair value. The following is a summary of each entity's outstanding securitized debt obligations:

VIE	Face Value		Carrying Value

COMM 2005-C6	$	2,037,826	$	1,848,949	5.30	%
BSCMS 2006-PW13		2,820,948		2,569,628	6.07

Total	$	4,858,774	$	4,418,577

The maturities of the securitized debt obligations as of March 31, 2010 are as follows:

	Payment due by Period

Securitized Debt Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
COMM 2005-C6	$	2,037,826	$	257,407	$	98,855	$	89,581	$	1,591,983
BSCMS 2006-PW13		2,820,948		30,316		193,675		214,368		2,382,589

Total	$	4,858,774	$	287,723	$	292,530	$	303,949	$	3,974,572

7. INVESTMENT SECURITIES

Our investment securities are classified into two categories, available-for-sale and trading, in which both are carried at their estimated fair values. The amortized cost and estimated fair values of our investment securities as of March 31, 2010 and December 31, 2009 are summarized as follows:

Available-for-sale Securities

			Unrealized

	Amortized Cost		Unrealized
	Amortized Cost		Gains(1)		Losses(1)		Fair Value
March 31, 2010
CMBS	$	1,637	$	1,599	$	—	$	3,236
Non-Agency RMBS		1,825		202		—		2,027

Total	$	3,462	$	1,801	$	—	$	5,263

December 31, 2009
CMBS	$	3,144	$	2,083	$	—	$	5,227
Non-Agency RMBS		2,091		—		—		2,091

Total	$	5,235	$	2,083	$	—	$	7,318

(1): Included in accumulated other comprehensive income (loss).

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

3.(dollars ~~FAIR~~in ~~VALUE~~thousands, ~~HIERARCHY~~except ~~(Continued~~per share data)

				Changes in Fair Values for the Nine Months Ended September 30, 2008, For Items Measured at Fair Value Pursuant to the Election of the Fair Value Option
		Fair Value Option September 30, 2008		Interest Income(1)		Net Mark to Market Adjustments on Investment Securities— Held-for- Trading			Net Mark to Market Adjustments on Collateralized Debt Obligations
Assets accounted for under the fair value option:
Held-for-trading securities:
	CMBS	$	121,093	$	7,293	$	(188,099	)	$	—
	Non-Agency RMBS		18,097		5,446		(79,906	)		—
		$	139,190	$	12,739	$	(268,005	)	$	—
Liabilities accounted for under the fair value option:
Collateralized debt obligations		$	153,362	$	—	$	—		$	133,497

(unaudited)

~~(1)Represents accretion~~7. ofINVESTMENT ~~net~~SECURITIES ~~discount~~(Continued) ~~only.~~

				Changes in Fair Values for the Three Months Ended September 30, 2009, For Items Measured at Fair Value Pursuant to the Election of the Fair Value Option
		Fair Value Option September 30, 2009		Interest Income(1)		Net Mark to Market Adjustments on Investment Securities— Held-for- Trading		Net Mark to Market Adjustments on Collateralized Debt Obligations
Assets accounted for under the fair value option:
Held-for-trading securities:
	CMBS	$	46,599	$	2,675	$	10,218	$	—
	Non-Agency RMBS		3,010		485		658		—
		$	49,609	$	3,160	$	10,876	$	—
Liabilities accounted for under the fair value option:
Collateralized debt obligations		$	43,248	$	—	$	—	$	(4,921	)

Trading Securities

(1)Represents accretion of net discount only.

			Unrealized

	Amortized Cost		Unrealized
	Amortized Cost		Gains(1)		Losses(1)		Fair Value
March 31, 2010
CMBS	$	14,810	$	12,067	$	—	$	26,877
Non-Agency RMBS		1,720		355		—		2,075

Total	$	16,530	$	12,422	$	—	$	28,952

December 31, 2009
CMBS	$	23,049	$	9,837	$	—	$	32,886
Non-Agency RMBS		2,617		5		—		2,622

Total	$	25,666	$	9,842	$	—	$	35,508

(1): Included in consolidated statements of operations.

We pledge our investment securities to secure our collateralized debt obligations and borrowings under our secured revolving credit facility. The fair value of the investment securities that we pledged as collateral as of March 31, 2010 and December 31, 2009 is summarized as follows:

Pledged as Collateral:	March 31, 2010		December 31, 2009

For borrowings under collateralized debt obligations	$	28,980	$	35,536
For borrowings under secured revolving credit facility, related party		5,235		6,450

Total	$	34,215	$	41,986

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

3.(dollars ~~FAIR~~in ~~VALUE~~thousands, ~~HIERARCHY~~except ~~(Continued~~per share data)

				Changes in Fair Values for the Three Months Ended September 30, 2008, For Items Measured at Fair Value Pursuant to the Election of the Fair Value Option
		Fair Value Option September 30, 2008		Interest Income(1)		Net Mark to Market Adjustments on Investment Securities— Held-for- Trading			Net Mark to Market Adjustments on Collateralized Debt Obligations
Assets accounted for under the fair value option:
Held-for-trading securities:
	CMBS	$	121,093	$	1,779	$	(65,768	)	$	—
	Non-Agency RMBS		18,097		1,145		(12,033	)		—
		$	139,190	$	2,924	$	(77,801	)	$	—
Liabilities accounted for under the fair value option:
Collateralized debt obligations		$	153,362	$	—	$	—		$	45,496

(unaudited)

~~(1)Represents accretion~~7. ofINVESTMENT ~~net~~SECURITIES ~~discount~~(Continued) ~~only.~~

~~Total~~The ~~financial~~aggregate ~~assets~~estimated at fair ~~value~~values ~~classified~~by ~~within~~underlying ~~Level 3~~credit ~~were~~rating ~~$68,886 and $78,374 as~~ of ~~September 30,~~our ~~2009~~investment ~~and~~securities ~~December 31, 2008, respectively. Such amounts represent 17% and 17% of "Total assets" on the consolidated balance sheet~~ as of ~~September~~March 3031, ~~2009~~2010 and December 31, ~~2008,~~2009 ~~respectively. Excluding assets for which we do not bear direct economic exposure, Level 3 assets~~ were ~~4% and 5% of "Total assets"~~ as offollows: ~~September 30, 2009 and December 31, 2008, respectively.~~

Total financial liabilities at fair value classified within Level 3 were $83,801 and $102,709 as of September 30, 2009 and December 31, 2008, respectively. Such amounts represent 18% and 21% of "Total liabilities" on the consolidated balance sheets as of September 30, 2009 and December 31, 2008, respectively.

		March 31, 2010					December 31, 2009

Security Rating		Estimated Fair Value		Percentage			Estimated Fair Value		Percentage
AAA		$	—		—	%	$	—		—	%
AA			—		—			—		—
A			—		—			—		—
BBB			—		—			3,724		8.70
BB			—		—			5,451		12.73
B			17,140		50.10			15,506		36.20
CCC			11,049		32.29			9,049		21.13
CC			—		—			—		—
C			5,215		15.24			6,698		15.64
Not rated			811		2.37			2,398		5.60

	Total	$	34,215		100.00	%	$	42,826		100.00	%

AsThe offace ~~September 30,~~amount ~~2009~~ and ~~December 31,~~net ~~2008,~~unearned ~~our~~discount ~~CDO~~on ~~notes~~our ~~had~~investment asecurities ~~face~~as ~~value~~ of ~~$457~~March 31,~~418~~ ~~and~~2010 ~~$467,027, respectively,~~ and ~~fair value of $43~~December 31,~~248~~ ~~and~~2009 ~~$45,429,~~were ~~respectively.~~as follows:

Derivative Financial Instruments

Description:	March 31, 2010			December 31, 2009

Face amount	$	749,616		$	921,994
Net unearned discount		(729,624	)		(891,093	)

Amortized cost	$	19,992		$	30,901

~~Currently, we use interest rate swaps to manage our interest rate risk. The valuation of these instruments is determined using widely~~For ~~accepted valuation techniques, including discounted cash flow analysis on~~ the ~~expected~~three ~~cash~~months ~~flows~~ended ofMarch 31, ~~each~~2010 ~~derivative.~~and ~~This analysis reflects~~ the ~~contractual~~three ~~terms~~months ofended ~~the derivatives~~March 31, ~~including the period to maturity~~2009, ~~and~~net ~~uses~~discount ~~observable~~(premium) ~~market-based~~on ~~inputs,~~investment ~~including~~securities ~~interest~~accreted ~~rate~~into ~~curves and implied volatilities. The fair values of~~ interest ~~rate~~income ~~swaps are determined using the market standard~~totaled ~~methodology of netting the discounted future fixed cash receipts~~ $(~~or payments~~2,544) and ~~the~~$1,125, ~~discounted expected variable cash payments (or receipts)~~respectively. ~~The variable cash payments (or~~

Commercial Mortgage Backed Securities ("CMBS")—Our investments include CMBS, which are mortgage backed securities that are secured by, or evidence ownership interests in, a single commercial mortgage loan or a partial or entire pool of mortgage loans secured by commercial properties. The securities may be senior, subordinated, investment grade or non-investment grade.

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

3.(dollars ~~FAIR~~in ~~VALUE~~thousands, ~~HIERARCHY~~except ~~(Continued~~per share data)

~~receipts) are~~ ~~based on an expectation of future interest rates~~ (~~forward curves~~unaudited) ~~derived from observable market interest rate curves.~~

~~To comply~~ with the provisions of FASB ASC 820-10-50-9 (previously SFAS 157), we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements7. InINVESTMENT ~~adjusting~~SECURITIES the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral posting, thresholds, mutual puts and guarantees. For the nine months ended September 30, 2009, we recorded $7,845 into earnings as a loss, which is reflected in realized and unrealized gain (~~loss~~Continued) on derivatives on our consolidated statement of operations, relating to our nonperformance risk, and for the three months ended September 30, 2009, we recorded $5,162 into earnings as a loss, which is reflected in realized and unrealized gain (loss) on derivatives on our consolidated statement of operations, relating to our nonperformance risk.

~~Although~~The wefollowing ~~have~~is ~~determined~~a ~~that~~summary ~~the majority~~ of ~~the inputs used to value~~ our ~~derivatives~~CMBS ~~fall~~investments ~~within~~as ~~Level 2~~ of ~~the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level~~March ~~3 inputs~~31, ~~such~~2010 ~~as estimates of current credit spreads to evaluate the likelihood of default by ourselves~~ and ~~our counterparties. As of September~~December 3031, 2009,: we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 3 of the fair value hierarchy.

4.March 31, ~~INVESTMENT SECURITIES~~2010

Our investment securities are classified into two categories, available-for-sale and trading, in which both are carried at their estimated fair values. The amortized cost and estimated fair values of our investment securities as of September 30, 2009 and December 31, 2008 are summarized as follows:

									Weighted Average

			Gross Unrealized						Weighted Average
	Amortized Cost		Gross Unrealized				Estimated Fair Value					Book Yield(1)			Market Yield(2)			Term (yrs)
Security Rating	Amortized Cost		Gains		Losses		Estimated Fair Value		Coupon			Book Yield(1)			Market Yield(2)			Term (yrs)
AAA	$	—	$	—	$	—	$	—		—	%		—	%		—	%		—
AA		—		—		—		—		—			—			—			—
A		—		—		—		—		—			—			—			—
BBB		—		—		—		—		—			—			—			—
BB		—		—		—		—		—			—			—			—
B		10,888		5,406		—		16,294		5.43			63.50			224.72			5.91
CCC		5,118		5,269		—		10,387		5.20			194.35			897.05			7.32
CC		—		—		—		—		—			—			—			—
C		358		2,532		—		2,890		5.10			573.11			3,836.37			6.56
Not rated		83		459		—		542		5.18			1,091.01			2,603.90			7.79

Total CMBS	$	16,447	$	13,666	$	—	$	30,113		5.22			120.50			846.05			6.49

			Unrealized
	Amortized Cost
Available-for-sale Securities			Gains(1)		Losses(1)(2)			Fair Value
September 30, 2009
CMBS	$	9,154	$	6,498	$	(3,766	)	$	11,886
Non-Agency RMBS		9,693		—		(7,360	)		2,333
Total	$	18,847	$	6,498	$	(11,126	)	$	14,219
December 31, 2008
CMBS	$	13,675	$	642	$	—		$	14,317
Non-Agency RMBS		7,216		82		—			7,298
Total	$	20,891	$	724	$	—		$	21,615

December 31, 2009

(1)Included in accumulated other comprehensive income (loss). (2)$34,532 of other-than-temporary impairment was included in the unrealized losses as of September 30, 2009.

									Weighted Average

			Gross Unrealized						Weighted Average
	Amortized Cost		Gross Unrealized				Estimated Fair Value					Book Yield(1)			Market Yield(2)			Term (yrs)
Security Rating	Amortized Cost		Gains		Losses		Estimated Fair Value		Coupon			Book Yield(1)			Market Yield(2)			Term (yrs)
AAA	$	—	$	—	$	—	$	—		—	%		—	%		—	%		—
AA		—		—		—		—		—			—			—			—
A		—		—		—		—		—			—			—			—
BBB		3,724		—		—		3,724		5.20			9.74			44.67			5.93
BB		4,895		556		—		5,451		5.34			7.77			44.11			6.59
B		10,374		4,285		—		14,659		5.50			28.36			86.59			6.40
CCC		4,833		3,460		—		8,293		5.19			37.80			614.49			7.78
CC		—		—		—		—		—			—			—			—
C		2,078		1,790		—		3,868		5.09			95.23			487.22			6.64
Not rated		289		1,829		—		2,118		5.11			256.44			2,157.59			9.19

Total CMBS	$	26,193	$	11,920	$	—	$	38,113		5.21			31.43			347.01			6.86

(1): Book yield as reflected above is the implied loss-adjusted yield based on our expectation of future cash flows (i.e., taking into account assumed defaults) and the amortized cost of the security.
(2): Market yield as reflected above is the implied yield based on a zero-loss scenario (i.e., not taking into account any assumed defaults) and the fair value of the security.

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in thousands, except share and per share data) (unaudited)~~2010

4.(dollars ~~INVESTMENT~~in ~~SECURITIES~~thousands, ~~(Continued~~except per share data)

			Unrealized
	Amortized Cost
Trading Securities			Gains(1)		Losses(1)			Fair Value
September 30, 2009
CMBS	$	68,211	$	15,475	$	(37,087	)	$	46,599
Non-Agency RMBS		12,370		18		(9,378	)		3,010
Total	$	80,581	$	15,493	$	(46,465	)	$	49,609
December 31, 2008
CMBS	$	43,634	$	142	$	—		$	43,776
Non-Agency RMBS		7,493		32		—			7,525
Total	$	51,127	$	174	$	—		$	51,301

(unaudited)

~~(1)Included in consolidated statements of operations~~7. INVESTMENT SECURITIES (Continued)

~~We pledge~~Residential ~~our~~Mortgage ~~investment~~Backed ~~securities~~Securities to("RMBS")—Our ~~secure~~investments ~~our~~include ~~collateralized~~RMBS, ~~debt~~which ~~obligations~~are ~~and~~securities ~~borrowings~~that ~~under~~represent ~~our~~participations in, and are secured by ~~revolving~~or ~~credit~~payable ~~facility.~~from, ~~The~~mortgage ~~fair~~loans ~~value~~secured ofby ~~the~~residential ~~investment~~properties. ~~securities that~~Our weRMBS ~~pledged~~investments asinclude ~~collateral~~Non-Agency aspass-through ofcertificates ~~September 30,~~that ~~2009~~are israted ~~summarized~~classes asin senior/subordinated ~~follows:~~structures ("Non-Agency RMBS").

Pledged as Collateral:	September 30, 2009
For borrowings under collateralized debt obligations	$	49,312
For borrowings under secured revolving credit facility, related party		6,508
Total	$	55,820

The following is a summary of our Non-Agency RMBS investments as of March 31, 2010 and December 31, 2009:

March 31, 2010

			Gross Unrealized						Weighted Average

Security Rating	Amortized Cost		Gains		Losses		Estimated Fair Value		Coupon			Book Yield(1)			Market Yield(2)			Term (yrs)
AAA	$	—	$	—	$	—	$	—		—	%		—	%		—	%		—
AA		—		—		—		—		—			—			—			—
A		—		—		—		—		—			—			—			—
BBB		—		—		—		—		—			—			—			—
BB		—		—		—		—		—			—			—			—
B		826		20		—		846		1.74			73.30			58.62			5.58
CCC		662		—		—		662		3.82			148.58			152.42			7.29
CC		—		—		—		—		—			—			—			—
C		1,895		430		—		2,325		4.74			1,151.59			20,332.75			5.47
Not rated		162		107		—		269		2.63			75,652.82			46,191.35			5.40

Total Non-Agency RMBS	$	3,545	$	557	$	—	$	4,102		3.92			4,119.72			14,589.41			5.78

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

4.(dollars ~~INVESTMENT~~in ~~SECURITIES~~thousands, ~~(Continued~~except per share data)

~~The aggregate~~ ~~estimated~~(unaudited) ~~fair values by underlying credit rating of our investment securities as of September 30, 2009 were as follows:~~

	September 30, 2009
Security Rating	Estimated Fair Value		Percentage
AAA	$	—		—	%
AA		—		—
A		—		—
BBB		9,324		14.61
BB		3,775		5.91
B		16,318		25.57
CCC		14,460		22.65
CC		—		—
C		8,824		13.82
Not rated		11,127		17.44
Total	$	63,828		100.00	%

7. INVESTMENT SECURITIES (Continued)

~~The face~~ ~~amount and net unearned discount on our investment securities as of September~~December 3031, 2009 ~~was as follows:~~

Description:	September 30, 2009
				Gross Unrealized						Weighted Average
Face amount	$	986,929
Security Rating	Amortized Cost			Gains		Losses		Estimated Fair Value		Coupon			Book Yield(1)			Market Yield(2)			Term (yrs)
Net unearned discount		(887,501	)
AAA	$	—		$	—	$	—	$	—		—	%		—	%		—	%		—
Amortized cost	$	99,428
AA		—			—		—		—		—			—			—			—
A		—			—		—		—		—			—			—			—
BBB		—			—		—		—		—			—			—			—
BB		—			—		—		—		—			—			—			—
B		847			—		—		847		1.73			9.77			59.24			5.65
CCC		756			—		—		756		3.98			12.06			135.51			7.44
CC		—			—		—		—		—			—			—			—
C		2,830			—		—		2,830		4.34			24.81			14,757.34			5.58
Not rated		275			5		—		280		2.87			4,299.67			5,212.70			4.48
Total Non-Agency RMBS	$	4,708		$	5	$	—	$	4,713		3.77			270.27			9,204.46			5.82

~~For~~ ~~the~~ ~~nine~~ (1)Book yield ~~months~~as ~~ended~~reflected ~~September 30,~~above ~~2009~~is ~~and~~ the ~~nine~~implied ~~months~~loss-adjusted ~~ended~~yield ~~September 30,~~based ~~2008,~~on ~~net~~our ~~discount~~expectation ~~(premium)~~of onfuture ~~investment~~cash ~~securities~~flows (i.e., ~~accreted~~taking into ~~interest~~account ~~income totaled~~assumed ~~$(8,553~~defaults) and ~~$15,181,~~the ~~respectively.~~amortized ~~For~~cost of the ~~three~~security. (2)Market yield ~~months~~as ~~ended~~reflected ~~September 30,~~above ~~2009~~is ~~and~~ the ~~three~~implied ~~months~~yield ~~ended~~based ~~September 30,~~on ~~2008,~~a ~~net~~zero-loss ~~discount~~scenario (~~premium)~~i.e., ~~on investment securities~~not ~~accreted~~taking into ~~interest~~account ~~income~~any ~~totaled~~assumed ~~$(5,050~~defaults) and ~~$2,938,~~the ~~respectively~~fair value of the security.

~~Commercial~~ Other ~~Mortgage~~Securities—We ~~Backed~~invested ~~Securities~~in ~~("CMBS")—Our~~the ~~investments~~preferred ~~include~~stock ~~CMBS,~~of ~~which~~Millerton ~~are~~I ~~mortgage~~CDO ~~backed~~with ~~securities~~an ~~that~~estimated ~~are~~fair ~~secured~~value byof $0 as of each of March 31, or2010 ~~evidence~~and ~~ownership~~December 31, ~~interests in~~2009, aand ~~single~~the ~~commercial~~preferred ~~mortgage~~stock ~~loan~~of orMillerton II aCDO ~~partial~~with oran ~~entire~~estimated ~~pool~~fair value of ~~mortgage~~$0 ~~loans~~as ~~secured~~of byeach ~~commercial~~of ~~properties~~March 31, 2010 and December 31, 2009. The ~~securities~~preferred ~~may~~stock beof Millerton ~~senior,~~I ~~subordinated,~~CDO ~~investment~~was ~~grade or~~rated ~~non-investment~~C ~~grade~~and the preferred stock of Millerton II CDO was not rated at March 31, 2010.

Unrealized Losses—We did not own any available-for-sale securities with unrealized losses as of March 31, 2010 or December 31, 2009. Since substantial doubt exists about our ability to continue as a going concern, we have determined that it is more likely than not that our investment securities will be required to be sold before we recover our amortized cost basis and, accordingly, all unrealized losses on our investment securities have been recognized in earnings.

Other-Than-Temporary Impairments—For the three months ended March 31, 2010, we recorded other-than-temporary impairments totaling $586. Impairments on RMBS and CMBS totaled $131 and $455, respectively. The impairments for the three months ended March 31, 2010 were attributed to both credit and non-credit losses. To determine the component of the gross other-than-temporary impairment related to credit losses, we compared the amortized cost basis of each

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

4.(dollars ~~INVESTMENT~~in ~~SECURITIES~~thousands, ~~(Continued~~except per share data)

~~The following~~ is(unaudited) ~~a summary of our CMBS investments as of September 30, 2009:~~

			Gross Unrealized							Weighted Average
Security Rating	Amortized Cost		Gains		Losses			Estimated Fair Value		Coupon			Book Yield(1)			Market Yield(2)			Term (yrs)
AAA	$	—	$	—	$	—		$	—		—	%		—	%		—	%		—
AA		—		—		—			—		—			—			—			—
A		—		—		—			—		—			—			—			—
BBB		32,113		—		(23,479	)		8,634		5.40			32.18			44.73			6.13
BB		7,349		192		(3,766	)		3,775		5.50			36.25			51.32			7.56
B		19,267		4,275		(7,435	)		16,107		5.60			60.45			71.40			6.82
CCC		10,804		7,720		(5,053	)		13,471		5.14			88.46			91.85			8.55
CC		—		—		—			—		—			—			—			—
C		3,843		1,930		(23	)		5,750		5.24			57.20			127.48			6.90
Not rated		3,989		7,856		(1,097	)		10,748		5.07			59.26			214.60			8.35
Total CMBS	$	77,365	$	21,973	$	(40,853	)	$	58,485		5.24			50.11			102.71			7.45

7. INVESTMENT SECURITIES (Continued)

other-than-temporarily impaired ~~(1)Book yield~~security asto ~~reflected~~the ~~above~~present isvalue ~~the~~of ~~implied~~its ~~loss~~revised expected cash flows, discounted using its pre-~~adjusted~~impairment yield. ~~based~~Significant onjudgment ~~our~~of management ~~expectation~~is ofrequired ~~future~~in ~~cash~~this ~~flows (i.e.~~analysis that includes, ~~taking~~but ~~into~~is ~~account~~not ~~assumed~~limited ~~defaults)~~to, ~~and~~assumptions regarding the ~~amortized~~rate ~~cost~~and timing of ~~the~~principal ~~security.~~ payments (~~2)Market~~including prepayments, repurchases, defaults and ~~yield~~liquidations), asthe ~~reflected~~pass-through ~~above~~or iscoupon rate and interest rate fluctuations. Other factors considered in determining the ~~implied~~component ~~yield~~of other-than-temporary impairments related to credit losses include current subordination levels, interest payment shortfalls, credit ratings and delinquency rates. Other-than-temporary impairment related to non-credit losses was determined based on aour ~~zero-loss~~assessment ~~scenario~~that ~~(i.e.,~~it is more likely than not ~~taking~~ ~~into~~that ~~account~~our ~~any~~securities ~~assumed~~will ~~defaults)~~be required to be sold before we recover their amortized cost basis, and ~~the~~therefore ~~fair~~this ~~value~~impairment ofwas ~~the~~recognized ~~security~~in earnings. The following table summarizes the amount of other-than-temporary impairments related to credit and non-credit losses for the three months ended March 31, 2010:

Residential Mortgage Backed Securities ("RMBS")—Our investments include RMBS, which are securities that represent participations in, and are secured by or payable from, mortgage loans secured by residential properties. Our RMBS investments include Non-Agency pass-through certificates that are rated classes in senior/subordinated structures ("Non-Agency RMBS").

		Gross Other- Than- Temporary Impairments		Other-Than- Temporary Impairments Included (Offset) in Other Comprehensive Income(1)			Net Other- Than- Temporary Impairments Included in Earnings

December 31, 2009		$	77,202	$	5,039		$	72,163
	Additions due to change in expected cash flows		429		232			197
	Additional increases related to credit loss for OTTI previously recognized in OCI		—		(282	)		282
	Reductions due to requirement to sell		39		(68	)		107

March 31, 2010		$	77,670	$	4,921		$	72,749

(1): The balance as of March 31, 2010 represents the remaining OTTI in OCI of certain securities that are in a net gain position after including accumulated unrealized gains. The net unrealized gain in OCI as of March 31, 2010 was $1,801.

For the three months ended March 31, 2009, we recorded impairment charges totaling $5,784, which was reclassified out of other comprehensive income. Impairments on RMBS and CMBS during the period totaled $2,467 and $3,317, respectively. The impairments were attributed to the decline in the projected yields related to changes in the cash flow assumptions, such as timing and prepayments, on the underlying assets, and other than temporary declines in the market values, which was primarily a consequence of wider spreads affecting market values of the securities.

Sale of Available-for-Sale Securities—During the three months ended March 31, 2010, in connection with the sale of the LOI CMBS Assets on March 15, 2010 (see Note 4), a net gain has been deferred and will be recognized once the entire transaction has been completed as the sale of the LOI CMBS Assets, transfer of the CDO I and CDO II rights and right of first refusal referenced above constitute a multiple-element transaction and because fair value cannot be allocated among the different

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

4.(dollars ~~INVESTMENT~~in ~~SECURITIES~~thousands, ~~(Continued~~except per share data)

~~The following~~ is(unaudited) ~~a summary of our Non-Agency RMBS investments as of September 30, 2009:~~

			Gross Unrealized							Weighted Average
Security Rating	Amortized Cost		Gains		Losses			Estimated Fair Value		Coupon			Book Yield(1)			Market Yield(2)			Term (yrs)
AAA	$	—	$	—	$	—		$	—		—	%		—	%		—	%		—
AA		—		—		—			—		—			—			—			—
A		—		—		—			—		—			—			—			—
BBB		2,301		—		(1,611	)		690		1.91			77.56			52.56			6.05
BB		—		—		—			—		—			—			—			—
B		2,069		—		(1,858	)		211		2.46			93.29			185.68			5.16
CCC		4,743		—		(3,754	)		989		4.15			93.32			117.44			7.34
CC		—		—		—			—		—			—			—			—
C		11,269		2		(8,197	)		3,074		4.36			403.13			9,272.78			5.54
Not rated		1,681		16		(1,318	)		379		2.60			7,007.80			71,287.88			4.43
Total Non-Agency RMBS	$	22,063	$	18	$	(16,738	)	$	5,343		3.78			776.46			10,429.89			5.85

7. INVESTMENT SECURITIES (Continued)

components within ~~(1)Book yield~~this astransaction. ~~reflected~~The ~~above~~deferred isgain ~~the~~was ~~implied~~recorded ~~loss-adjusted~~as ~~yield~~a ~~based~~liability on our ~~expectation~~consolidated ofbalance ~~future~~sheet ~~cash~~as ~~flows (i.e.~~of March 31, ~~taking~~2010. ~~into~~Also ~~account~~during ~~assumed~~the ~~defaults)~~three ~~and~~months ~~the~~ended ~~amortized~~March 31, 2010, ~~cost~~we oftransferred ~~the~~and assigned one CMBS security~~. (2)Market yield~~, asamong ~~reflected~~other ~~above~~consideration, isin ~~the~~exchange ~~implied~~for ~~yield~~the ~~based~~cancellation onof aour ~~zero-loss~~junior ~~scenario~~subordinated notes (isee Note 3).~~e.,~~ ~~not taking~~During ~~into~~the ~~account~~three ~~any~~months ~~assumed~~ended March 31, ~~defaults)~~2009, ~~and~~we ~~the~~did ~~fair~~not ~~value~~sell ofany ~~the security~~securities.

~~Other Securities—We invested in the preferred stock of Millerton I CDO with an estimated fair value of $0 as of September 30, 2009 and the~~ Average ~~preferred~~maturity ~~stock~~ of ~~Millerton~~our IIinvestment ~~CDO~~securities ~~with~~at ~~an estimated fair value of $0 as of September~~March 3031, ~~2009.~~2010 ~~The preferred stock of Millerton I CDO~~ was ~~rated~~as Cfollows: ~~and the preferred stock of Millerton II CDO was not rated at September 30, 2009.~~

Unrealized Losses—The following table shows the fair value of our available-for-sale securities with unrealized losses as of September 30, 2009 for which other-than-temporary impairments have not been recognized in earnings:

		Weighted Average Life

CMBS			4.17
Non-Agency RMBS			3.47

	Less Than 12 Months				Greater Than 12 Months					Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
CMBS	$	—	$	—	$	4,110	$	(3,766	)	$	4,110	$	(3,766	)
RMBS		—		—		2,332		(7,360	)		2,332		(7,360	)
Total	$	—	$	—	$	6,442	$	(11,126	)	$	6,442	$	(11,126	)

8. REAL ESTATE LOANS AND REAL ESTATE LOANS HELD FOR SALE

~~We did~~ ~~not~~Real ~~own~~Estate ~~any available-for-sale securities with unrealized losses as of December 31, 2008.~~ Loans

We invest in mezzanine loans, B Notes, construction loans and whole loans. A mezzanine loan is a loan that is subordinated to a first mortgage loan on a property and is senior to the borrower's equity in the property. Mezzanine loans are made to the property's owner and are secured by pledges of ownership interests in the property and/or the property owner. The mezzanine lender can foreclose on the pledged interests and thereby succeed to ownership of the property subject to the lien of the first mortgage.

A subordinated commercial real estate loan, which we refer to as a B Note, may be rated by at least one nationally recognized rating agency. A B Note typically is a privately negotiated loan that is secured by a first mortgage on a single large commercial property or group of related properties, and is subordinated to an A Note secured by the same first mortgage on the same property.

A construction loan represents a participation in a construction or rehabilitation loan on a commercial property that generally provides 85% to 90% of total project costs and is secured by a first lien mortgage on the property. Alternatively, mezzanine loans can be used to finance construction or rehabilitation where the security is subordinate to the first mortgage lien. Construction loans and mezzanine loans used to finance construction or rehabilitation generally would provide fees and interest income at risk-adjusted rates.

A whole mortgage loan is a loan secured by a first lien mortgage that provides mortgage financing to commercial and residential property owners and developers. Generally, mortgage loans have maturities that range from three to 10 years for commercial properties and up to 30 years for residential properties.

Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

~~September~~March 3031, ~~2009 (in~~2010 ~~thousands, except share and per share data) (unaudited)~~

4.(dollars ~~INVESTMENT~~in ~~SECURITIES~~thousands, ~~(Continued~~except per share data)

~~As of~~ ~~September 30,~~(unaudited) 2009, we did not hold any available-for-sale securities with unrealized losses that had been in a loss position for 12 months or less. As of September 30, 2009, we held 56 available-for-sale securities, with unrealized losses totaling $11,126, that had been in a loss position for more than 12 months. The unrealized losses on our securities were primarily the result of market factors such as changes in interest rates, current market dislocation and distressed conditions in the markets, rather than credit impairment, and we have performed credit analyses in relation to such securities that support our belief that the carrying values of such securities are fully recoverable over their expected holding period. Other factors considered included current subordination levels, industry analyst reports and delinquency rates. Because we do not intend to sell the securities and is not more likely than not that we will be required to sell the securities before recovery of their amortized cost basis, which may be maturity, we do not consider these investments to be other than temporarily impaired at September 30, 2009.

~~Other-Than-Temporary~~ ~~Impairments—The~~8. ~~following~~REAL ~~table~~ESTATE ~~summarizes~~LOANS ~~activity~~AND ~~related~~REAL toESTATE ~~the~~LOANS ~~amount~~HELD ~~of other-than-temporary~~FOR ~~impairments~~SALE ~~related~~(Continued) ~~to credit losses during the six months ended September 30, 2009:~~

		Gross Other- Than- Temporary Impairments		Other-Than- Temporary Impairments Included in Other Comprehensive Income		Net Other- Than- Temporary Impairments Included in Earnings
April 1, 2009		$	72,126	$	—	$	72,126
	Impact of change in accounting principle(1)		—		72,126		(72,126	)
	Additions due to change in expected cash flows		93,702		32,637		61,065
September 30, 2009		$	165,828	$	104,763	$	61,065

The following is a summary of our real estate loans, excluding real estate loans of consolidated VIEs (see Note 6), as of March 31, 2010 and December 31, 2009:

(1)Represents a reclassification to other comprehensive income of other-than-temporary impairments on securities which were previously recorded in earnings. As discussed in Note 2, upon adoption of FASB ASC 320-10-65-1 (previously FSP FAS 115-2) these impairments were reassessed and determined to be related to factors other than credit losses.

Loan Type		Face Value		Carrying Value

March 31, 2010
Construction loans	1		14,602		—	—(1	)	11/2008	(2)	—
Mezzanine loans	1		6,358		—	—(3	)	5/2009	(4)	—

	2	$	20,960	$	—

December 31, 2009
Construction loans	1		14,602		—	—(1	)	11/2008	(2)	—
Mezzanine loans	1		6,358		—	—(3	)	5/2009	(4)	—

	2	$	20,960	$	—

To ~~determine~~ ~~the~~ (1)This construction ~~component~~loan ofbears ~~the~~interest ~~gross~~at ~~other-than-temporary~~16.00%, ~~impairment~~but ~~related~~we tohave ~~credit~~placed ~~losses,~~it weon ~~compared~~non-accrual ~~the~~status ~~amortized~~and ~~cost~~accordingly, ~~basis~~do ofnot ~~each other-than-temporarily~~include ~~impaired~~it ~~security~~in to the calculation ~~present value~~ of ~~its~~the ~~revised~~weighted ~~expected~~average ~~cash~~interest ~~flows,~~rate. (2)The construction ~~discounted~~loan ~~using~~was ~~its~~due ~~pre-impairment~~in ~~yield.~~November ~~Significant~~2008 ~~judgment~~and ~~of management~~currently is ~~required~~ in ~~this~~default. (3)This mezzanine ~~analysis~~loan ~~that~~bears ~~includes,~~interest ~~but~~at ~~is not limited to~~15.00%, ~~assumptions~~but ~~regarding~~we ~~the~~have ~~rate~~placed ~~and~~it ~~timing~~on ofnon-accrual ~~principal~~status ~~payments~~effective ~~(including prepayments~~March 31, ~~repurchases,~~2009 ~~defaults~~ and ~~liquidations)~~ accordingly, ~~the~~do not ~~pass~~include ~~through~~it ~~or coupon rate and interest rate fluctuations. Other factors considered~~ in ~~determining~~ the ~~component~~calculation of ~~other-than-temporary~~the ~~impairments~~weighted ~~related to~~average ~~credit~~interest ~~losses~~rate. (4)The mezzanine ~~include~~loan ~~current~~was ~~subordination~~due ~~levels,~~in ~~interest~~May ~~payment~~2009 ~~shortfalls,~~and ~~credit~~currently ~~ratings~~is ~~and~~in ~~delinquency rates~~default.

~~Sale~~ There were ofno ~~Investment~~unamortized ~~Securities—During~~underwriting ~~the~~fees ~~nine~~as ~~months~~of ~~ended September~~March 3031, ~~2009,~~2010 weand ~~did not sell any securities. During the nine months ended September~~December 3031, ~~2008,~~2009. ~~we sold 40 securities for proceeds of~~

In 2005, we originated a mezzanine construction loan to develop luxury residential condominiums in Portland, Oregon. The loan was in technical default as of January 1, 2008 and was placed on non-accrual status at such date, and we have received no principal or interest payments during the three months ended March 31, 2010 and the three months ended March 31, 2009 on the loan. We have not made any additional advances on this loan during the three months ended March 31, 2010 and have no funding obligations under this loan. In January 2009, the senior lender notified the borrower that the senior construction loan was in default, triggering a blockage period of 120 days with respect to our mezzanine construction loan during which period we were precluded from exercising our rights under the mezzanine construction loan. We currently account for this loan as a troubled debt restructuring under FASB ASC 310-40-15-3 (previously SFAS 15), and FASB ASC 310-10-35-13 (previously SFAS 114). As of March 31, 2010, we have recorded a loan loss allowance for the entire outstanding face amount of the loan. As of each of March 31, 2010 and December 31, 2009, the carrying value of the loan totaled $0 (inclusive of a loan loss provision of $14,602).

Filing Compare · Crystal River Capital, Inc.