REGISTRATION RIGHTS AGREEMENT

THIS REGISTRATION RIGHTS AGREEMENT (this Agreement) is made and entered into as of August 12, 2004, by and between KKR Financial Corp., a Maryland corporation (the Company), and Friedman, Billings, Ramsey & Co., Inc., a Delaware corporation (FBR) for the benefit of the Holders (as defined below).

THE PARTIES ENTER THIS AGREEMENT on the basis of the following facts, understandings and intentions:

A.                                    The Company, FBR and KKR Financial Advisors LLC (KKR Advisors) entered into that certain Purchase/Placement Agreement dated as of August 5, 2004 (the Purchase Agreement) in connection with the offering and sale (the Offering) of up to 84,000,000 shares of common stock, par value $0.01 per share, of the Company (Common Stock).

B.                                    In order to induce the investors who are purchasing the Common Stock in the Offering to purchase such Common Stock and FBR to enter into the Purchase Agreement, the Company has agreed to provide the registration rights provided for in this Agreement for the holders of Registrable Shares (as defined below).

C.                                    The execution and delivery of this Agreement is a condition to the closing of the transactions contemplated by the Purchase Agreement.

NOW, THEREFORE, in consideration of the premises and the mutual covenants of the parties hereto, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

1.                                       Definitions.  As used in this Agreement, the following terms shall have the following meanings:

Additional Shares:  Shares or other securities issued in respect of the Shares by reason of or in connection with any stock dividend, stock distribution, stock split, or similar issuance.

Agreement:  As defined in the Introductory Paragraph of this Agreement.

Affiliate:  As to any specified Person, (i) any Person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the specified Person, (ii) any executive officer, director, trustee, managing member or general partner of the specified Person and (iii) any legal entity for which the specified Person acts as an executive officer, director, trustee, managing member or general partner.  For purposes of this definition, control (including the correlative meanings of the terms controlled by and under common control with), as used with respect to any Person, shall mean the possession, directly, or indirectly through one or more intermediaries, of the power to direct or cause the direction of the management and policies of such Person, whether by contract, through the ownership of voting securities, partnership interests, membership interests or other equity interests or otherwise.

Business Day:  With respect to any act to be performed hereunder, each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions in New York, New York are authorized or obligated by applicable law, regulation or executive order to close.