Note 3. Financial Instruments:

Fair Value Hierarchy

The following tables set forth financial instruments accounted for under ASC 820 by level within the fair value hierarchy as of December 31, 2011 and December 31, 2010. As required by ASC 820, assets and liabilities that are measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

Financial Instruments Measured at Fair Value on a Recurring Basis

	December 31, 2011
	Total			Level 1			Level 2		Level 3
MBS, at fair value Trading
Agency-backed MBS	$	636,872		$	-		$	636,872	$	-
Available-for-sale
Agency-backed MBS		139			-			139		-
Private-label MBS
Senior securities		9,311			-			-		9,311
Re-REMIC securities		170,116			-			-		170,116
Total available-for-sale		179,566			-			139		179,427
Total MBS		816,438			-			637,011		179,427
Derivative assets, at fair value		504			-			504		-
Derivative liabilities, at fair value		(63,024	)		(63,024	)		-		-
Interest-only MBS, at fair value		1,060			-			-		1,060
Total	$	754,978		$	(63,024	)	$	637,515	$	180,487

	December 31, 2010
	Total			Level 1		Level 2			Level 3
MBS, at fair value
Trading
Agency-backed MBS	$	174,055		$	-	$	174,055		$	-
Available-for-sale
Agency-backed MBS		174			-		174			-
Private-label MBS
Senior securities		51,038			-		-			51,038
Re-REMIC securities		201,697			-		-			201,697
Total available-for-sale		252,909			-		174			252,735
Total MBS		426,964			-		174,229			252,735
Derivative liabilities, at fair value		(2,398	)		-		(2,398	)		-
Interest-only MBS, at fair value		6,327			-		-			6,327
Total	$	430,893		$	-	$	171,831		$	259,062

The total financial assets measured and reported at fair value on a recurring basis and classified within Level 3 were $180,487, or 18.90%, and $259,062, or 56.90%, of the Company's total assets as of December 31, 2011 and December 31, 2010, respectively.

There were no significant transfers of securities in or out of Levels 1, 2 or 3 during the years ended December 31, 2011 and 2010.

Level 3 Financial Instruments Measured at Fair Value on a Recurring Basis

As of December 31, 2011, the fair value of the Company's Level 3, available-for-sale, private-label MBS was $179,427. These securities are primarily senior and re-REMIC tranches in securitization trusts issued between 2005 and 2010. The senior securities represent interests in securitizations that have the first right to cash flows and absorb losses last. The re-REMIC securities category represents interests in re-securitizations of senior MBS and pro-rata mezzanine securities. For re-REMIC securities, the cash flows from, and any credit losses absorbed by, the underlying MBS are allocated among the re-REMIC securities issued in the re-securitization transactions based on the re-REMIC structure. For example, prime and non-prime residential senior securities have been resecuritized to create a two-tranche structure with a re-REMIC senior security and a re-REMIC subordinated security. In these re-REMIC securities, all principal payments from the underlying securities are directed to the re-REMIC senior security until the face value is fully paid off. Thereafter, all principal payments are directed to the re-REMIC subordinated security. For pro-rata mezzanine securities, principal payments from the underlying MBS are typically allocated concurrently and proportionally to the mezzanine securities along with senior securities. The re-REMIC subordinated and mezzanine securities absorb credit losses, if any, first; however, these credit losses occur only when credit losses exceed the credit protection provided to the underlying securities. Senior, re-REMIC and mezzanine securities receive interest while any face value is outstanding.

As of December 31, 2011, the Company's senior securities and re-REMIC securities were collateralized by residential Prime and Alt-A mortgage loans and had a weighted-average original loan-to-value of 71%, weighted-average original FICO score of 729, weighted-average three-month prepayment rate of 16% and weighted-average three-month loss severities of 52%. These underlying collateral loans had a weighted-average coupon rate of 5.32%. These securities are currently rated below investment grade. The significant inputs for the valuation model include the following weighted-averages:

	December 31, 2011						December 31, 2010
	Senior Securities			Re-REMIC Securities			Senior Securities			Re-REMIC Securities
Discount rate		7.00	%		8.75	%		7.46	%		13.64	%
Default rate		10.30	%		5.55	%		8.15	%		6.22	%
Loss severity rate		60.00	%		43.06	%		48.54	%		42.10	%
Prepayment rate		17.30	%		15.20	%		15.08	%		15.15	%

The tables below set forth a summary of changes in the fair value and gains and losses of the Company's Level 3 financial assets and liabilities that are measured at fair value on a recurring basis for the years ended December 31, 2011 and 2010.

	Year Ended December 31, 2011
	Senior Securities			Re-REMIC Securities			Total
Beginning balance, January 1, 2011	$	51,038		$	201,697		$	252,735
Total net gains (losses)
Included in earnings		3,631			8,718			12,349
Included in other comprehensive income		(6,912	)		(16,760	)		(23,672	)
Purchases		330			16,860			17,190
Sales		(37,229	)		(41,983	)		(79,212	)
Principal payoffs		(2,293	)		(12,096	)		(14,389	)
Net accretion of discount		746			13,680			14,426
Ending balance, December 31, 2011	$	9,311		$	170,116		$	179,427

The amount of net gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to Level 3 assets still held at the reporting date	$	(173	)	$	(1,050	)	$	(1,223	)

	Year Ended December 31, 2010
	Senior Securities			Re-REMIC Securities			Total
Beginning balance, January 1, 2010	$	94,380		$	64,308		$	158,688
Total net gains (losses)
Included in earnings		6,518			4,316			10,834
Included in other comprehensive income		3,392			51,599			54,991
Purchases		34,153			125,058			159,211
Sales		(78,899	)		(38,992	)		(117,891	)
Principal payoffs		(13,649	)		(11,763	)		(25,412	)
Net accretion of discount		5,143			7,171			12,314
Ending balance, December 31, 2010	$	51,038		$	201,697		$	252,735

The amount of net gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to Level 3 assets still held at the reporting date	$	-		$	-		$	-

Gains and losses included in earnings for the years ended December 31, 2011 and 2010 are reported in the following statement of operations line descriptions:

	Other (loss) income, Investment (loss) gain
	2011			2010
Total gains included in earnings for the period	$	12,349		$	10,834

Change in unrealized gains (losses) relating to Level 3 assets still held at the reporting date	$	(1,223	)	$	-

Level 3 Financial Instruments Measured at Fair Value on a Non-Recurring Basis

The Company also measures certain financial assets at fair value on a non-recurring basis. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets due to impairments. Due to the nature of these financial assets, enterprise values are primarily used to value these financial assets. In determining the enterprise value, the Company analyzes various financial, performance and market factors to estimate fair value, including where applicable, market trading activity. As a result, these financial assets are classified within Level 3 of the fair value hierarchy. As of December 31, 2011, these financial assets are classified within the other investments category and represent the Company's interest in non-public equity securities and investment funds. For the year ended December 31, 2011, the Company recorded a loss of $85 in the carrying value of these financial assets. For the year ended December 31, 2010, there were no material changes to the carrying value of these financial assets.

MBS, at Fair Value (1) (2), consisted of the following as of the dates indicated:

	December 31, 2011											December 31, 2010
	Fair Value		Net Unamortized Premium (Discount)			Percent of Total Fair Value			Weighted Average Life		Weighted Average Rating(3)	Fair Value		Net Unamortized Premium (Discount)			Percent of Total Fair Value			Weighted Average Life		Weighted Average Rating(3)
Trading
Fannie Mae	$	432,039	$	-			52.92	%		5.7	AAA	$	174,055	$	-			40.77	%		4.7	AAA
Freddie Mac		204,833		-			25.09	%		6.0	AAA		-		-			-			-		-
Available-for-sale:
Agency-backed
Fannie Mae		139		-			0.01	%		5.2	AAA		174		-			0.04	%		3.3	AAA
Private-label
Senior securities		9,311		(5,196	)		1.14	%		5.0	CC+		51,038		(20,812	)		11.95	%		5.6	CCC
Re-REMIC securities		170,116		(131,541	)		20.84	%		9.1	NR		201,697		(168,282	)		47.24	%		9.2	NR
	$	816,438	$	(136,737	)		100.00	%				$	426,964	$	(189,094	)		100.00	%

(1)	The Company's MBS portfolio was primarily comprised of fixed-rate MBS at December 31, 2011 and adjustable-rate MBS at December 31, 2010. The weighted-average coupon of the MBS portfolio at December 31, 2011 and December 31, 2010 was 4.85% and 5.13%, respectively.

(2)	As of December 31, 2011 and December 31, 2010, the Company's MBS investments with a fair value of $731,432 and $233,885, respectively, were pledged as collateral for repurchase agreements.

(3)

The securities issued by Fannie Mae and Freddie Mac are not rated by any rating agency; however, they are commonly thought of as having an implied rating of “AAA.” There is no assurance, particularly given the downgrade of the U.S.'s credit rating to “AA” by Standard & Poor's during the quarter ended September 30, 2011, that these securities would receive such a rating if they were ever rated by a rating agency. The weighted-average rating of the Company's private-label senior securities is calculated based on face value of the securities.

The Company has generally purchased private-label MBS at a discount. The Company, at least on a quarterly basis, estimates the future expected cash flows based on the Company's observation of current information and events and applying a number of assumptions related to prepayment rates, interest rates, default rates, and the timing and amount of cash flows and credit losses. These assumptions are difficult to predict as they are subject to uncertainties and contingencies related to future events that may impact the Company's estimates and its interest income.

Interest income on the private-label MBS that were purchased at a discount to face value is recognized based on the security's expected effective interest rate. At acquisition, the accretable yield is calculated as the difference between the undiscounted expected cash flows and the purchase price which is expected to be accreted into interest income over the remaining life of the security on a level-yield basis. The difference between the contractually required payments and the undiscounted expected cash flows represents the non-accretable difference. Based on actual payment activities and changes in estimates of undiscounted expected future cash flows, the accretable yield and the non-accretable difference can change over time. Significant increases in the amount or timing of undiscounted expected future cash flows are recognized prospectively as an adjustment to the accretable yield.

The following table presents the changes in the accretable yield on available-for-sale, private-label MBS for the years ended December 31, 2011 and 2010.

	Year Ended December 31,
	2011			2010
Beginning balance	$	316,029		$	207,094
Accretion of discount		(26,279	)		(32,083	)
Reclassifications, net		(47,478	)		20,769
Acquisitions		24,163			225,482
Sales		(71,816	)		(105,233	)
Ending balance	$	194,619		$	316,029

For the available-for-sale, private-label MBS acquired during the year ended December 31, 2011, the contractually required payments receivable, the cash flow expected to be collected, and the fair value at the acquisition date were as follows for the periods indicated:

	Year Ended December 31,
	2011		2010
Contractually required payments receivable	$	47,228	$	490,142
Cash flows expected to be collected		43,909		381,987
Basis in acquired securities		19,746		156,505

The Company's available-for-sale MBS are carried at fair value in accordance with ASC 320, Debt and Equity Securities (ASC 320), the securities with resulting unrealized gains and losses reflected as other comprehensive income or loss. Gross unrealized gains and losses on these securities were the following as of the dates indicated:

	December 31, 2011
	Amortized
	Cost/		Unrealized
	Cost Basis(1)		Gains		Losses		Fair Value
Agency-backed MBS	$	128	$	11	$	-	$	139
Private-label MBS
Senior securities		8,397		914		-		9,311
Re-REMIC securities		132,661		37,455		-		170,116
Total	$	141,186	$	38,380	$	-	$	179,566

(1)	The amortized cost of MBS includes unamortized net discounts of $136,737 at December 31, 2011.

	December 31, 2010
	Amortized
	Cost/		Unrealized
	Cost Basis(1)		Gains		Losses		Fair Value
Agency-backed MBS	$	163	$	11	$	-	$	174
Private-label MBS
Senior securities		43,161		7,877		-		51,038
Re-REMIC securities		146,844		54,853		-		201,697
Total	$	190,168	$	62,741	$	-	$	252,909

(1)	The amortized cost of MBS includes unamortized net discounts of $189,094 at December 31, 2010.

The Company recorded other-than-temporary impairment charges of $1,223 for the year ended December 31, 2011 related to deterioration in credit quality on available-for-sale, private-label MBS with a cost basis of $11,071. The Company recorded no other-than-temporary impairment charges on MBS during the year ended December 31, 2010.

The following table presents a summary of the other-than-temporary impairment charges included in earnings for the periods indicated:

	Year Ended December 31,
	2011		2010
Cumulative other-than-temporary-impairment beginning balance	$	7,371	$	7,371
Additions:
Other-than-temporary impairments not previously recognized		1,223		-
Increases related to other-than-temporary impairments on securities with previously recognized other-than-temporary impairments		-		-
Cumulative other-than-temporary-impairment ending balance	$	8,594	$	7,371

The following table presents the results of sales of MBS for the periods indicated:

	December 31, 2011				December 31, 2010
	Agency- Backed MBS		Private-Label MBS		Agency- Backed MBS		Private-Label MBS
Proceeds from sales	$	242,673	$	79,211	$	253,394	$	117,865
Gross gains		620		13,220		240		10,891
Gross losses		251		191		2,153		84

Other Investments

The Company's other investments consisted of the following as of the dates indicated:

	December 31,
	2011		2010
Interest-only MBS	$	1,060	$	6,327
Non-public equity securities		975		975
Investments funds		911		985
Total other investments	$	2,946	$	8,287

Note 4. Borrowings:

Repurchase Agreements

The Company has entered into repurchase agreements to fund its investments in MBS. As of December 31, 2011, the amount at risk related to $177,402 and $219,737 of repurchase agreements with Credit Suisse Securities USA LLC and Barclays Capital Inc., respectively, was $46,848 or 25.55% and $19,995 or 10.90%, respectively, of the Company's equity with a weighted average maturity of 16 and 12 days, respectively. As of December 31, 2010, the amount at risk related to $19,852 of repurchase agreements with Credit Suisse Securities USA LLC was $31,943, or 14.74% of the Company's equity with a weighted average maturity of 35 days. The following tables provide information regarding the Company's outstanding repurchase agreement borrowings as of the dates and periods indicated:

	December 31,
	2011			2010
Outstanding balance	$	647,977		$	190,220
Value of assets pledged as collateral
Agency-backed MBS		653,322			174,055
Private-label MBS		78,110			59,830
Cash		-			1,300
Weighted-average rate		0.49	%		0.53	%
Weighted-average term to maturity	13.1 days			15.4 days
Weighted-average outstanding balance during the year ended	$	559,086		$	157,968
Weighted-average rate during the year ended		0.36	%		0.37	%

Long-Term Debt

As of December 31, 2011 and 2010, the Company had $15,000 of outstanding long-term debentures. The long-term debentures accrue and require payments of interest quarterly at an annual rate of three-month LIBOR plus 2.25% to 3.00%. The weighted average interest rate on these long-term debentures was 3.15% and 3.04% as of December 31, 2011 and 2010, respectively. All of these borrowings mature between 2033 and 2035. The Company extinguished $236,689 of this long-term debt at a gain of $160,435 during 2009. There were no extinguishments of long-term debt during the years ended December 31, 2011 and December 31, 2010.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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