UPDATE 2-FBR Capital Markets Q4 loss widens five-fold, shrs fall

* Q4 loss/shr $2.23 vs $0.43 last year

* Q4 investment losses $66 million

* Eliminates mortgage investments, sees Q1 charge

* Retires all debt

* Shares down more than 19 pct

BANGALORE, Feb 25 (Reuters) - FBR Capital Markets Corp (FBCM.O) reported a nearly five-fold increase in quarterly loss, hit by an 80 percent drop in investment-banking revenue and a significant rise in investment losses, but said it eliminated all debt on its balance sheet.

Shares of FBR Capital Markets, investment and institutional brokerage firm of Friedman Billings Ramsey Group Inc (FBR.N), sank more than 19 percent to a 52-week low of $2.44, before paring some losses to trade down 16 percent at $2.53 on Nasdaq.

The company, which reported a loss for the fifth straight quarter, said it also liquidated its mortgage-backed securities portfolio and recognized significant writedowns in its merchant-banking investments.

On a conference call, FBR Capital Markets Chief Executive Rick Hendrix, who succeeded former CEO Eric Billings in December, said 50 percent of the mortgage-backed securities in the company's portfolio were sold in February.

The company expects to recognize a related charge of $1.5 million in the first quarter, the CEO added.

Net investment losses in the fourth quarter included $34 million of losses on mortgage-backed securities, Hendrix said.

"Our first priority is to preserve capital and maintain liquidity on our balance sheet. This is one of the reasons we took the actions related to the sale of the mortgage-backed securities," CEO Hendrix said.

As of Dec. 31, 2008, FBR Capital Markets had $1.4 billion of assets under management, down from $2.5 billion at the end of 2007.

Hendrix also said the company, in order to cut costs, had lowered fixed expenses by about $45 million annually, reduced 25 percent of its workforce, and closed offices and scaled back international operations during 2008.

The company recorded $10.4 million in severance costs during the fourth quarter.

Q4 LOSS WIDENS

FBR Capital Markets reported a net loss of $130.7 million for the fourth quarter, compared with a net loss of $27.8 million a year earlier.

Core operating loss, which excludes certain items, narrowed to $21.8 million for the quarter, from $24.7 million last year.

Revenue from the company's investment-banking segment was $6.1 million, down 80 percent from $30.6 million last year.

Net investment losses for the quarter totaled $66.0 million, compared with $8.7 million a year ago. (Reporting by Adheesha Sarkar in Bangalore; Editing by Vinu Pilakkott, Himani Sarkar)