The following analysis of the unaudited condensed consolidated financial condition and results of operations of Friedman, Billings, Ramsey Group, Inc., which began doing business as Arlington Asset Investment Corp. in the first quarter of 2009, and its subsidiaries, including FBR Capital Markets Corporation (FBR Capital Markets) (unless the context otherwise provides, collectively, "we", "us", "our" or the "Company"), should be read in conjunction with (i) the Company's audited consolidated financial statements and notes thereto included in Annual Report on Form 10-K for the year ended December 31, 2008; (ii) FBR Capital Markets' unaudited condensed consolidated financial statements and notes thereto included in its Quarterly Report on Form 10-Q for the quarter ended March 31, 2009; and (iii) FBR Capital Markets' audited consolidated financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2008.

The Company's unaudited condensed consolidated financial statements include the results of its majority-owned subsidiary, FBR Capital Markets. The Company's wholly-owned subsidiary, FBR TRS Holdings, Inc. (FBR TRS Holding), owned approximately 57% of the outstanding shares of FBR Capital Markets as of March 31, 2009. FBR Capital Markets is a publicly-traded holding company for various subsidiaries that conduct capital markets (investment banking and institutional brokerage), asset management and merchant banking businesses. As of March 31, 2009, FBR Capital Markets' primary operating subsidiaries include Friedman, Billings, Ramsey & Co., Inc., which changed its name to FBR Capital Markets & Co. (FBCM & Co.) on April 1, 2009, Friedman, Billings, Ramsey International, Ltd. (FBRIL), FBR Investment Management, Inc. (FBRIM) and FBR Fund Advisors, Inc. (FBR Fund Advisors). FBR Capital Markets is managed under the direction of its board of directors, a majority of whom are independent of both the Company and FBR Capital Markets.

The discussion of the Company's consolidated financial condition and results of operations below may contain forward-looking statements. These statements, which reflect management's beliefs and expectations, are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of the risks and uncertainties that may affect the Company's future results, please see "Forward-Looking Statements" immediately following Item 4 of this report on Form 10-Q.

Executive Summary

Our revenues consist primarily of gains recognized from the extinguishment of our long-term debt, net interest income and gains and losses in principal investing and capital markets, which consist of revenue generated by our majority-owned subsidiary, FBR Capital Markets.

During the three months ended March 31, 2009, we completed the extinguishment of $201.7 million of long-term debt at a gain of $132.5 million and reduced our MBS portfolio by $100.0 million, substantially completing the current phase of the strategy announced on October 23, 2008. In addition, FBR Capital Markets also liquidated its remaining MBS portfolio of $454.3 million and related interest rate caps and repurchase agreements, recognizing an aggregate net investment loss of $1.0 million. The Company also liquidated $550.0 million of its U.S, Treasury bond holdings and related repurchase agreements, recognizing no gain or loss from the transaction.

Historically, the Company has conducted its business within four reportable segments: capital markets, asset management, principal investing and mortgage banking operations. In January 2008, as a result of filing a voluntary petition for bankruptcy protection by First NLC, we deconsolidated First NLC, which included the origination and sale of non-conforming residential mortgage loans and was previously reported as the mortgage banking segment. Due to organizational changes effective January 1, 2009, the Company's chief operating decision maker reviews financial information within two reportable segments:
capital markets and principal investing. The capital markets segment includes the operations of FBR Capital Markets and its subsidiaries, and includes the asset management and principal investing operations by FBR Capital Markets, which were previously reported separately. Accordingly, as of January 1, 2009, the Company has reflected the change in

segment reporting in accordance with the criteria for segment reporting as set forth in SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information."

On January 1, 2009, we adopted SFAS 160, "Noncontrolling Interests in Consolidated Financial Statements-an Amendment of ARB No. 51." This statement clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Accordingly, we reclassified the noncontrolling interest in our majority-owned subsidiary, FBR Capital Markets, as a component of equity in the consolidated financial statements.

Principal Investing

Mortgage-Backed Securities

We invest in agency-backed and, to a lesser extent, private-label mortgage-backed securities (MBS). The Company recorded net interest income of $2.4 million and $6.4 million from MBS held in its principal investment portfolio for the three months ended March 31, 2009 and 2008, respectively. The decrease in net interest income during the three months ended March 31, 2009 is due mainly to the decrease in the average balance of MBS investments held in our portfolio.

In general, the Company values its agency MBS and other AAA-rated private label MBS using quoted market prices provided by a broker or dealer, or alternative pricing sources with reasonable levels of price transparency. The independent brokers and dealers providing market prices are those who make markets in these financial instruments. Therefore, in accordance with SFAS 157, the Company generally classifies these securities within Level 2 of the fair value hierarchy.

Merchant Banking and Long-Term Investments

The total value of our merchant banking portfolio and long-term investments, excluding FBR Capital Markets, was $5.0 million as of March 31, 2009. Of this total, $2.9 million was held in the merchant banking portfolio and $2.1 million was held in alternative asset funds. Net unrealized losses in the merchant banking portfolio included in accumulated other comprehensive income (AOCI) totaled $0.1 million as of March 31, 2009.

During the three months ended March 31, 2009, we recorded a $1.0 million other-than-temporary impairment write-down as part of the Company's quarterly assessments of unrealized losses in its portfolio for potential other-than-temporary impairments.

Capital Markets

Capital markets segment includes all of the operations and activities of our majority-owned subsidiary, FBR Capital Markets and its subsidiaries. Capital markets activities include investment banking and institutional sales, trading and research and management of a broad range of pooled investment vehicles, including mutual funds, hedge funds, venture capital and private equity funds and separate accounts. The total value of FBR Capital Market's merchant banking and long-term investments was $39.9 million as of March 31, 2009. Net unrealized losses in the merchant banking portfolio included in AOCI totaled $0.2 million as of March 31, 2009.

The operating loss from capital markets segment increased to $15.6 million for the first quarter of 2009 from $11.0 million for the first quarter of 2008. This increase in loss is primarily attributable to a $62.1 million decrease in investment banking revenues during the first quarter of 2009, reflecting a lower volume of capital raising activity and a decrease in advisory revenues. The lower volume of capital raising activity during the first quarter of 2009 and the year ended December 31, 2008 reflects the continued effect that the dislocation in credit markets has had on the U.S. equity markets and equity underwriting activity. FBR Capital Markets' institutional brokerage sales and trading revenues increased from $31.4 million for the quarter ended March 31, 2008 to $39.6 million for the quarter ended March 31, 2009. This increase in institutional brokerage sales and trading revenues is attributable to both the expansion of FBR Capital Markets' sales and trading platform and the increased volatility in the market due to the

current economic environment. A decrease in FBR Capital Markets' asset management activities reflect a decrease in base management fees (including mutual fund administrative fees) from $4.6 million for the three months ended March 31, 2008 to $2.4 million for the three months ended March 31, 2009. The decrease in management fees during the first quarter of 2009 reflects the effects of the decrease in average assets under management for the quarter compared to the quarter in the prior year. FBR Capital Markets' total net assets under management were $1.2 billion at March 31, 2009, decreasing from $1.4 billion at December 31, 2008. Net assets under management decreased 14.3%, or $0.2 billion, during the first quarter reflecting the continued downturn in the equity markets. Variable expenses decreased $31.2 million, or 59.7%, which is attributable to reduced compensation expense and costs related to the decrease in net revenues. The decrease in fixed and other compensation expenses of $18.6 million reflects cost reduction initiatives which include a reduction in employees undertaken by FBR Capital Markets.

Results of Operations

Three months ended March 31, 2009 compared to three months ended March 31, 2008

Net income increased from $45.1 million in the first quarter of 2008 to $101.6
million in the first quarter of 2009. Net income included the following results
of operations by segment (dollars in thousands):



                                                                   For the quarter ended
                                                                         March 31,
                                                                    2009            2008
Capital markets                                                 $    (15,558 )    $ (10,981 )
Principal investing                                                  (12,537 )      (20,150 )
Other                                                                     -          (2,523 )

Operating loss                                                       (28,095 )      (33,654 )
Gain on extinguishment of debt, disposition of subsidiary,
and other income, net                                                132,314         73,037

Income before income taxes and noncontrolling interest               104,219         39,383
Income tax provision (benefit)                                         9,555           (806 )
Noncontrolling interest in losses of consolidated subsidiary          (6,900 )       (4,913 )

Net income attributable to FBR Group shareholders               $    101,564      $  45,102

The increase in net income attributable to FBR Group shareholders is primarily due to the $132.5 million gain on extinguishment of long-term debt in the first quarter of 2009.

The Company's revenues, net of interest expense, decreased from $92.3 million in the first quarter of 2008 to $49.7 million in the first quarter of 2009 due to the changes in revenues and interest expense described below.

Revenues from our principal investment activities, net of related interest expense, totaled $2.4 million in the first quarter of 2009 as compared to $(6.3) million in the first quarter of 2008. The change in net revenues is primarily the result of the recognition of other-than-temporary impairment losses related to the Company's MBS portfolio and a residual interest in a securitization of non-prime mortgage loans during the first quarter of 2008. No other-than-temporary impairments were recognized in the first quarter of 2009 related to MBS. Revenues from our principal investment activities included the following (dollars in thousands):

                                                         For the quarter ended
                                                               March 31,
                                                         2009           2008
   Net interest income                                $    2,378    $       8,158
   Net investment income (loss)-principal investing            6          (14,659 )
   Dividend income                                            -               206

                                                      $    2,384    $      (6,295 )

The components of net interest income from principal investing segment are summarized in the following table (dollars in thousands):

                                           Three months ended                        Three months ended
                                             March 31, 2009                            March 31, 2008
                                    Average     Income /       Yield /        Average      Income /      Yield /
                                    Balance     (Expense)       Cost          Balance     (Expense)       Cost
Mortgage-backed securities(1)      $ 108,558   $     2,581        9.51 %    $ 1,940,436   $   23,096        4.76 %
Other(2)                                                18                                     1,792

                                                     2,599                                    24,888
Repurchase agreements              $  79,947          (221 )     (1.11 )%   $ 1,760,734      (16,406 )     (3.69 )%
Derivative contracts(3)                   -             -                            -          (324 )

                                   $  79,947          (221 )     (1.11 )%   $ 1,760,734      (16,730 )     (3.80 )%

Net interest income/spread                     $     2,378        8.40 %                  $    8,158        0.96 %

(1) The average balance and the yield/cost are calculated based upon the adjusted par value which includes the effects of any other-than-temporary impairments recorded by the Company. The yield based on unadjusted par value was 5.16% and 4.70% as of March 31, 2009 and 2008, respectively.

(2) Includes interest income on cash and other miscellaneous interest-earning assets.

(3) Includes the effect of derivative instruments accounted for as cash flow hedges.

As shown in the table above, net interest income decreased by $5.8 million from the three months ended March 31, 2008 to the three months ended March 31, 2009. This decrease in interest income was primarily due to a lower average balance on MBS portfolio.

The Company recognized net investment income of $6,000 during the first quarter 2009 compared to net investment loss of $14.7 million in the first quarter 2008. The following table summarizes the components of net investment income (loss) (dollars in thousands):

                                                                    Three months ended
                                                                        March 31,
                                                                   2009           2008
Available for sale and cost method
securities-other-than-temporary impairments                      $  (1,000 )    $  (9,311 )
Loss from investments funds                                             -            (962 )
Realized (losses) gains on sale of available for sale
investments, net                                                      (153 )        3,051
Residual interest in a securitization-other-than-temporary
impairments                                                             -          (7,029 )
Other net investment income (loss)                                   1,159           (408 )

                                                                 $       6      $ (14,659 )

Based upon the evaluation of its MBS portfolio for other-than-temporary impairment, the Company recorded no other-than-temporary impairment losses for the three months ended March 31, 2009 related to its MBS investments.

As part of the Company's quarterly assessments of unrealized losses in its portfolio of marketable equity securities for potential other-than-temporary impairments and its assessment of cost method investments, the Company recorded $1.0 million of other-than-temporary impairment losses during the three months ended March 31, 2009 as compared to $6.4 million for the same period in 2008.

Income from investment funds reflects the Company's earnings from investments in proprietary investment partnerships and other managed investments.

Other net investment income primarily includes net gains and losses from the changes in the fair value of investments in our MBS portfolio.

Capital markets revenues, generated through FBR Capital Markets and its subsidiaries, decreased 52.1% from $104.1 million in the quarter ended March 31, 2008 to $49.9 million in the quarter ended March 31, 2009. This decrease was mainly attributable to a decrease in investment banking revenue, reflecting a substantially lower volume of capital raising activity and a decrease in advisory revenues. The lower volume of capital raising activity during 2009 reflects the continued effect that the dislocation in credit markets and a world-wide recession has had on U.S. equity markets and equity underwriting activity.

Principal investing interest revenue decreased 89.6% from $24.9 million in the first quarter of 2008 to $2.6 million in the first quarter of 2009. Net investment income increased from a loss of $14.7 million in the first quarter of 2008 to income of $6,000 in the first quarter of 2009. Decrease in interest income year over year was a result of the lower average balance in the MBS portfolio reflecting the Company's plan to downsize the MBS portfolio in order to reduce exposure to deteriorating market conditions while at the same time generating additional cash to fund the extinguishment of long-term debt.

Interest expense, related primarily to long-term debt issued through FBR TRS Holdings, decreased 88.2% from $23.7 million in the first quarter 2008 to $2.8 million in the first quarter 2009 as a result of a decrease in outstanding principal balances and lower LIBOR based interest rates associated with these floating rate borrowings.

Total non-interest expenses decreased 38.2% from $125.9 million in the first quarter 2008 to $77.8 million in the first quarter 2009. This decrease was caused by the fluctuations in non-interest expenses discussed below.

Compensation and benefits expense decreased 41.4% from $77.0 million in the first quarter 2008 to $45.1 million in the first quarter 2009. The decrease was primarily attributable to a decrease in variable compensation of $23.9 million as a result of decreased investment banking revenues as well as a 27% reduction in employees undertaken by FBR Capital Markets.

Professional services expense decreased 61.6% from $12.5 million in the first quarter 2008 to $4.8 million in the first quarter 2009 primarily due to decreased costs associated with the lower volume of investment banking transactions, a reduction in consultants associated with cost reduction initiatives, and a reduction in sub-advisory fees as a result of the decrease in average mutual funds under management.

Business development expenses decreased 51.2% from $12.3 million in the first quarter 2008 to $6.0 million in the first quarter 2009. This change is primarily due to a decrease in expenses associated with investment banking transactions as well as decreased costs associated with the PGA Tour's FBR Open.

Clearing and brokerage fees decreased 8.3% from $3.6 million in the first quarter 2008 to $3.3 million in the first quarter 2009. The decrease during 2009 reflects cost reduction initiatives directed at reducing clearing and brokerage costs and the mix of equity and convertible securities trading volume.

Occupancy and equipment expense decreased 12.0% from $9.2 million in the first quarter 2008 to $8.1 million in the first quarter 2009. The decrease in expenses is attributable to the effects of cost reduction initiatives over the past year including decreased costs associated with technology upgrades during the first quarter of 2009 as compared to the same period in 2008.

Communications expense decreased 13.3% from $6.0 million in the first quarter 2008 to $5.2 million in the first quarter 2009. The decrease in expenses is primarily due to the effects of cost reduction initiatives over the past year including decreased costs related to market data and customer trading services.

The total income tax changed from a benefit of $0.8 million in the first quarter 2008 to a $9.6 million provision in the first quarter 2009. Our tax provision is mostly due to the discrete period reporting of the tax

effects of the gain recognized from the extinguishment of trust preferred debt at FBR TRS Holdings. Our effective tax rate was (1.4)% in the first quarter 2008 as compared to 9.2% in the first quarter 2009. For the first quarter of 2009, our deferred tax assets continue to reflect a full valuation allowance as the Company believes it is more likely than not that the benefits will not be realized in the future.

Net loss attributable to the noncontrolling interest of consolidated subsidiary of $4.9 million represents minority interest holders' share of losses of FBR Capital Markets for the first quarter 2008 as compared to $6.9 million for the first quarter 2009.

Liquidity and Capital Resources

Liquidity is a measurement of our ability to meet potential cash requirements including ongoing commitments to repay borrowings, fund investments, and lending activities, and for other general business purposes. In addition, regulatory requirements applicable to our broker-dealer subsidiaries require minimum capital levels for these entities. Our primary sources of funds for liquidity have historically consisted of short-term borrowings (e.g., commercial paper issued by Georgetown Funding, repurchase agreements and other short-term mortgage financing facilities), securitization financings, principal and interest payments on MBS and mortgage loans, dividends on equity securities, proceeds from sales of MBS and mortgage loans, internally generated funds, equity capital contributions and credit provided by banks, clearing brokers and affiliates of our principal clearing broker. Potential future sources of liquidity for us include existing cash balances, a substantial portion of which are held by FBR Capital Markets, shares of our subsidiary companies, borrowing capacity through margin accounts and repurchase agreements and future issuances of common stock, preferred stock or debt securities. As a result of the continued disruptions in the market, the availability of third-party sources of liquidity, including short-term commercial paper borrowings, was limited as of March 31, 2009.

Liquidity, or ready access to funds, is essential to our business. Failures of similar businesses have often been attributable in large part to insufficient liquidity. Liquidity is of particular importance to our business and perceived liquidity issues may affect our clients' and counterparties' willingness to engage in transactions with us. Our liquidity could be impaired due to circumstances that we may be unable to control, such as a general market disruption or an operational problem that affects us or third parties. Further, our ability to sell assets may be impaired if other market participants are seeking to sell similar assets at the same time. Additionally, our access to funds held by FBR Capital Markets and its subsidiaries is subject to approval by a majority of the disinterested directors serving on the FBR Capital Markets Board of Directors. We cannot guarantee that we will be able to access these funds. Regulatory requirements applicable to FBR Capital Markets' broker-dealer subsidiaries could also limit our ability to access funds held by FBR Capital Markets and its subsidiaries. We cannot guarantee that we will be able to access funds from our subsidiaries to meet our obligations as they come due. If we cannot obtain funding from third parties or from our subsidiaries, our results of operations could be negatively impacted.

Cash Flows

As of March 31, 2009, the Company's cash and cash equivalents totaled $224.6 million, representing a net decrease in the balance of $30.1 million for the quarter ended March 31, 2009. The cash used in operating activities of $37.6 million was attributable primarily to a reduction in cash related to operating activities of FBR Capital Markets. The cash provided by investing activities of $1.1 billion relates primarily to proceeds from sales and principal receipts of MBS and proceeds from the maturity of U.S. Treasury bonds during the first quarter of 2009. The cash used in financing activities of $1.1 billion relates primarily to repayments of repurchase agreements used to finance a portion of the MBS sold and U.S. Treasury bonds that matured. Of the $224.6 million in cash and cash equivalents, $207.0 million was held by FBR Capital Markets. The Company's use of the funds held by FBR Capital Markets and its subsidiaries is subject to approval by a majority of the disinterested directors serving on the FBR Capital Markets Board of Directors. We cannot guarantee that we will be able to access these funds. In addition, regulatory requirements applicable to FBR Capital Markets' broker-dealer subsidiaries could also limit our ability to access funds held by FBR Capital Markets and its subsidiaries.

The Company manages its short-term liquidity with its MBS portfolio and related repurchase agreement. Excess cash is used to pay down short-term borrowings, and cash is provided by increasing short-term borrowings within the Company's leverage policies. Additionally, MBS may be liquidated within relatively short time periods to provide additional liquidity.

Assets

Our principal assets consist of MBS, cash and cash equivalents, receivables, long-term investments and securities held for trading purposes. As of March 31, 2009, liquid assets consisted primarily of cash and cash equivalents of $224.6 million, $207.0 million of which was held by FBR Capital Markets, and net investments in agency MBS of $1.8 million. Cash equivalents consist primarily of money market funds invested in debt obligations of the U.S. government. The Company's total assets decreased from $1.6 billion at December 31, 2008 to $399.3 million as of March 31, 2009. The decrease in total assets reflects the effects of a decrease in the Company's cash used to extinguish long term debt and a decrease of investments in MBS and U.S. Treasury bonds.

Long-term investments primarily consist of investments in marketable equity and non-public equity securities, and managed partnerships in which FBRIM, a subsidiary of FBR Capital Markets, serves as managing partner. Although our investments in hedge, private equity and venture capital funds are mostly illiquid, the underlying investments of such entities are, in the aggregate, . . .