SFO Merrill Lynch

Western Investment LLC announced that it had sent the following letter to the Board of Directors of Sunset Financial Resources, Inc. (NYSE: SFO). -0- *T WESTERN INVESTMENT LLC 2855 East Cottonwood Parkway, Suite 110 Salt Lake City, Utah 84121 June 16, 2006 Sunset Financial Resources, Inc. 10245 Centurion Parkway North, Suite 305 Jacksonville, Florida 32256 Attention: Board of Directors Gentlemen: *T Western Investment LLC, together with certain of its affiliates, is the beneficial owner of an aggregate of 1,016,300 shares of common stock of Sunset Financial Resources, Inc., a Maryland corporation ("Sunset" or the "Company"), representing approximately 9.7% of Sunset's outstanding common stock. As the beneficial holders of a significant number of the Company's shares, we are deeply concerned about the increasing disregard for stockholder interests that the Board of Directors has displayed over the past several months, culminating in the decision to merge with Alesco Financial Trust. Since August 2005, the Board has taken the following actions to the detriment of Sunset stockholders: -- Making it more difficult for Sunset stockholders to call a special meeting by increasing the percentage of the outstanding shares required to call a special meeting from 25% to 50%; -- Implementing complex procedures governing stockholder-requested special meetings and advance notice of stockholder nominees for directors; -- Refusing to appoint a stockholder representative to fill a vacancy that existed on the Board; and -- Failing to hold an annual meeting for the election of directors on a timely basis consistent with past practice. The crowning blow, however, was delivered to stockholders by way of Sunset's proposed merger with Alesco. Alesco is a private company (1) that commenced operations less than five months ago, (2) for which sophisticated investors paid $10.00 per share on January 31, 2006 and (3) whose book value was $9.40 per share on March 31, 2006 as opposed to Sunset's book value on such date of $10.42 per share. Yet, in the proposed merger, Sunset is offering Alesco stockholders a premium of 1.26 Sunset shares for each Alesco share, effectively valuing Alesco at $13.13 per share. In addition, as a result of the proposed merger, Sunset's senior executive officers will receive a severance package estimated by Sunset to be between $2.3-$2.7 million. Furthermore, Cohen Brothers Management, Alesco's external manager, is already earning a 1.5% management fee to manage Sunset's assets, which are being transitioned into assets consistent with Alesco's investment strategy, a fundamental change in Sunset's investment strategy that occurred without first obtaining stockholder approval. We question the wisdom of fundamentally changing Sunset's investment strategy to invest in what we believe to be a highly leveraged portfolio of credit-sensitive assets at this point in the business cycle. It appears that everyone wins in the proposed merger, except for Sunset's stockholders, who will suffer a dilution in the book value of their shares from $10.42 to $7.77. We do not understand how the proposed Alesco merger could possibly be viewed as maximizing stockholder value. We do not believe the terms of the currently proposed merger are advisable or in the best interests of Sunset's stockholders. It is our current intention to vote against the proposed merger. We also believe that the Board has superior alternatives to the merger other than liquidating the Company or simply "staying the course," one of which is to actively pursue better management for the Company. We have had discussions with Michael Tokarz regarding his (or his affiliate) managing all or a portion of Sunset's portfolio. Mr. Tokarz has over 30 years of lending and investment experience, including, currently, as Chairman and Portfolio Manager of MVC Capital, Inc. (NYSE: MVC), a publicly traded business development company that makes private debt and equity investments; and as Chairman of The Tokarz Group, a private merchant bank that he founded; and, formerly, as a General Partner with Kohlberg Kravis Roberts & Co. (KKR), one of the world's most experienced private firms. We believe that Mr. Tokarz is a superior portfolio manager with an exceptional record, and that the Board should explore fully the opportunity to retain his services. We would like to discuss this matter further to determine if we can reach an amicable resolution to our concerns relating to the future direction of the Company and the maximization of stockholder value. We sincerely hope that the Board will demonstrate a similar commitment to Sunset stockholders by favorably responding to our request. Please note, however, that, if an amicable resolution cannot be reached, we are prepared to take any and all actions to protect stockholder interests, including proceeding with a solicitation to oppose the proposed merger. We request that any correspondence concerning this matter be delivered to the undersigned at the address set forth above and copies of such correspondence should also be simultaneously delivered to our counsel, Olshan Grundman Frome Rosenzweig & Wolosky LLP, Park Avenue Tower, 65 East 55th Street, New York, New York 10022, Attention: Steven Wolosky, Esq., telephone (212) 451-2333, facsimile (212) 451-2222. -0- *T Sincerely, WESTERN INVESTMENT LLC By:/s/ Arthur D. Lipson Arthur D. Lipson Sole Member *T CERTAIN INFORMATION CONCERNING PARTICIPANTS Western Investment LLC, together with the other Participants (as defined below) named herein (collectively, the "Western Group"), intend to make a preliminary filing with the Securities and Exchange Commission of a proxy statement and accompanying proxy card to be used to solicit votes against the proposed merger involving the Company and Alesco Financial Trust and related proposals to be submitted to a vote of the stockholders of the Company at a special meeting of stockholders to be called by the Company. THE WESTERN GROUP STRONGLY ADVISES ALL STOCKHOLDERS OF THE COMPANY TO READ THE PROXY STATEMENT AND OTHER PROXY MATERIALS AS THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. SUCH PROXY MATERIALS WILL BE AVAILABLE AT NO CHARGE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT HTTP://WWW.SEC.GOV. IN ADDITION, THE PARTICIPANTS IN THE SOLICITATION WILL PROVIDE COPIES OF DEFINITIVE PROXY MATERIALS, WITHOUT CHARGE, UPON REQUEST. REQUESTS FOR COPIES SHOULD BE DIRECTED TO THE PARTICIPANTS' PROXY SOLICITOR, INNISFREE M&A INCORPORATED, AT ITS TOLL-FREE NUMBER: (888) 750-5834. The participants in the solicitation are anticipated to be Western Investment LLC, Western Investment Hedged Partners LP, Western Investment Institutional Partners LLC, Western Investment Activism Partners LLC, Arthur D. Lipson, Matthew S. Crouse, James S. Schallheim, D. James Daras, Marshall W. Coburn and Gerald Hellerman (collectively, the "Participants"). Information regarding the Participants and their direct or indirect interests is available in their Schedule 13D initially filed with the Securities and Exchange Commission on March 17, 2005, as subsequently amended on March 29, 2005, May 6, 2005, August 29, 2005, September 23, 2005, October 4, 2005, November 1, 2005, December 5, 2005, December 13, 2005 and May 3, 2006.