v2.3.0.11
Valuation
 6 Months Ended
Jun. 30, 2011
Valuation  
Valuation

3. Valuation

The following is a description of the valuation methodologies used for the Company's financial instruments.

Level 1 valuation methodologies include the observation of quoted prices (unadjusted) for identical assets or liabilities in active markets, often received from widely recognized data providers.

Level 2 valuation methodologies include the observation of (i) quoted prices for similar assets or liabilities in active markets, (ii) inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves) in active markets and (iii) quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3 valuation methodologies include (i) the use of proprietary models that require the use of a significant amount of judgment and the application of various assumptions including, but not limited to, prepayment and default rate assumptions, and (ii) the solicitation of valuations from third parties (typically, broker-dealers). Third-party valuation providers often utilize proprietary models that are highly subjective and also require the use of a significant amount of judgment and the application of various assumptions including, but not limited to, prepayment and default rate assumptions. The Manager utilizes such information to assign a good faith valuation (the estimated price that would be received to sell an asset or paid to transfer a liability in an orderly transaction at the valuation date) to such financial instruments. The Manager has been able to obtain third-party valuations on the vast majority of the Company's financial instruments and expects to continue to solicit third-party valuations on substantially all of the Company's financial instruments in the future to the extent practical.

The Manager uses its judgment based on its own models, the assessments of its portfolio managers, and third-party valuations it obtains, to determine and assign fair values to the Company's Level 3 financial instruments. Because of the inherent uncertainty of valuation, estimated values may differ significantly from the values that would have been used had a ready market for the financial instruments existed, and the differences could be material to the consolidated financial statements.

 

The table below reflects the value of the Company's Level 1, Level 2, and Level 3 financial instruments at June 30, 2011:

 

Description

    Level 1     Level 2     Level 3      Total  

Assets:

          

Investments at value-

          

U.S. Treasury and Agency residential mortgage-backed securities

    $ —        $ 823,143,747      $ 5,227,032       $ 828,370,779   

Private label residential mortgage-backed securities

      —          —          357,894,063         357,894,063   

Private label commercial mortgage-backed securities

      —          —          10,942,490         10,942,490   

Commercial Mortgage Loans

      —          —          4,650,000         4,650,000   
  

 

 

    

 

 

    

 

 

     

 

 

  

Total investments at value

      —          823,143,747        378,713,585         1,201,857,332   
  

 

 

    

 

 

    

 

 

     

 

 

  

Financial derivatives-assets-

          

Credit default swaps on asset backed securities

      —          —          69,828,936         69,828,936   

Credit default swaps on asset backed indices

      —          54,923,398        —           54,923,398   

Interest rate swaps

      —          959,933        —           959,933   
  

 

 

    

 

 

    

 

 

     

 

 

  

Total financial derivatives-assets

      —          55,883,331        69,828,936         125,712,267   
  

 

 

    

 

 

    

 

 

     

 

 

  

Repurchase agreements

      —          22,437,500        —           22,437,500   
  

 

 

    

 

 

    

 

 

     

 

 

  

Total investments, financial derivatives-assets and repurchase agreements

    $ —        $ 901,464,578      $ 448,542,521       $ 1,350,007,099   
  

 

 

    

 

 

    

 

 

     

 

 

  

Liabilities:

          

Investments sold short-

          

U.S. Treasury and Agency residential mortgage-backed securities

    $ —        $ (540,155,406 )    $ —         $ (540,155,406 ) 
  

 

 

    

 

 

    

 

 

     

 

 

  

Financial derivatives-liabilities-

          

Credit default swaps on corporate indices

      —          (220,124 )      —           (220,124 ) 

Credit default swaps on asset backed indices

      —          (5,031,909 )      —           (5,031,909 ) 

Interest rate swaps

      —          (5,366,758 )      —           (5,366,758 ) 

Unrealized depreciation on futures contracts

      (368,863 )      —          —           (368,863 ) 
  

 

 

    

 

 

    

 

 

     

 

 

  

Total financial derivatives-liabilities

      (368,863 )      (10,618,791 )      —           (10,987,654 ) 
  

 

 

    

 

 

    

 

 

     

 

 

  

Total investments sold short and financial derivatives-liabilities

    $ (368,863 )    $ (550,774,197 )    $ —         $ (551,143,060 ) 
  

 

 

    

 

 

    

 

 

     

 

 

  

Investments under the U.S. Treasury and Agency residential mortgage-backed securities Level 3 category are investments in Agency interest only RMBS securities. There were no transfers of financial instruments between Level 1, Level 2, or Level 3 during the six month period ended June 30, 2011.

The table below reflects the value of the Company's Level 1, Level 2, and Level 3 financial instruments at December 31, 2010:

 

Description

    Level 1     Level 2     Level 3      Total  

Assets:

          

Investments at value-

          

U.S. Treasury and Agency residential mortgage-backed securities

    $ —        $ 905,377,119      $ —         $ 905,377,119   

Private label residential mortgage-backed securities

      —          —          338,839,441         338,839,441   

Private label commercial mortgage-backed securities

      —          —          1,850,000         1,850,000   
  

 

 

    

 

 

    

 

 

     

 

 

  

Total investments at value

      —          905,377,119        340,689,441         1,246,066,560   
  

 

 

    

 

 

    

 

 

     

 

 

  

Financial derivatives-assets-

          

Credit default swaps on asset backed securities

      —          —          102,851,109         102,851,109   

Credit default swaps on asset backed indices

      —          96,689,232        —           96,689,232   

Interest rate swaps

      —          1,795,031        —           1,795,031   
  

 

 

    

 

 

    

 

 

     

 

 

  

Total financial derivatives-assets

      —          98,484,263        102,851,109         201,335,372   
  

 

 

    

 

 

    

 

 

     

 

 

  

Repurchase agreements

      —          25,683,750        —           25,683,750   
  

 

 

    

 

 

    

 

 

     

 

 

  

Total investments, financial derivatives-assets and repurchase agreements

    $ —        $ 1,029,545,132      $ 443,540,550       $ 1,473,085,682   
  

 

 

    

 

 

    

 

 

     

 

 

  

Liabilities:

          

Investments sold short-

          

U.S. Treasury and Agency residential mortgage-backed securities

    $ —        $ (775,145,098 )    $ —         $ (775,145,098 ) 
  

 

 

    

 

 

    

 

 

     

 

 

  

Financial derivatives-liabilities-

          

Credit default swaps on corporate indices

      —          (185,847 )      —           (185,847 ) 

Credit default swaps on asset backed indices

      —          (18,277,976 )      —           (18,277,976 ) 

Interest rate swaps

      —          (1,676,505 )      —           (1,676,505 ) 

Unrealized depreciation on futures contracts

      (890,001 )      —          —           (890,001 ) 
  

 

 

    

 

 

    

 

 

     

 

 

  

Total financial derivatives-liabilities

      (890,001 )      (20,140,328 )      —           (21,030,329 ) 
  

 

 

    

 

 

    

 

 

     

 

 

  

Total investments sold short and financial derivatives-liabilities

    $ (890,001 )    $ (795,285,426 )    $ —         $ (796,175,427 ) 
  

 

 

    

 

 

    

 

 

     

 

 

  

There were no transfers of financial instruments between Level 1, Level 2, or Level 3 during the year ended December 31, 2010.

At December 31, 2010, the Company held money market investments that are included in cash and cash equivalents on the Consolidated Statement of Assets, Liabilities and Shareholders' Equity and are considered Level 1 financial instruments.

The tables below include a roll-forward of the Company's financial instruments for the three month periods ended June 30, 2011 and 2010, respectively (including the change in fair value), for financial instruments classified by the Company within Level 3 of the valuation hierarchy.

 

Level 3—Fair Value Measurement Using Significant Unobservable Inputs:

Three Month Period Ended June 30, 2011

 

    Beginning
Balance as of
March 31,
2011		     Accreted
Discounts /
Amortized
Premiums		     Realized
Gain/(Loss)		     Change in Net
Unrealized
Gain/(Loss)		     Purchases     Sales     Transfers In
and/or Out of
Level 3		     Ending Balance
as of June 30,
2011		  

Assets:

                

Investments at value-

                

U.S. Treasury and Agency residential mortgage-backed securities

   $ 4,298,160      $ (326,936 )    $ 97,393      $ (158,414 )    $ 2,471,946      $ (1,155,117 )    $ —        $ 5,227,032   

Private label residential mortgage-backed securities

     354,681,940        3,671,436        3,380,108        (15,999,987 )      89,832,304        (77,671,738 )      —          357,894,063   

Private label commercial mortgage-backed securities

     13,083,485        148,163        125,553        (1,230,947 )      1,405,580        (2,589,344 )      —          10,942,490   

Commercial Mortgage Loans

     4,675,000        46,142        —          (71,142 )      —          —          —          4,650,000   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total investments at value

     376,738,585        3,538,805        3,603,054        (17,460,490 )      93,709,830        (81,416,199 )      —          378,713,585   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Financial derivatives- assets

                

Credit default swaps on asset backed securities

     90,382,805        —          2,627,724        (1,489,650 )      27,971        (21,719,914 )      —          69,828,936   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total financial derivatives- assets

     90,382,805        —          2,627,724        (1,489,650 )      27,971        (21,719,914 )      —          69,828,936   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total investments and financial derivatives-assets

   $ 467,121,390      $ 3,538,805      $ 6,230,778      $ (18,950,140 )    $ 93,737,801      $ (103,136,113 )    $ —        $ 448,542,521   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

All amounts of net realized and change in net unrealized gain (loss) in the table above are reflected in the accompanying Consolidated Statement of Operations. The table above incorporates changes in net unrealized gain (loss) for both Level 3 financial instruments held by the Company at June 30, 2011, as well as Level 3 financial instruments disposed of by the Company during the three month period ended June 30, 2011. For Level 3 financial instruments held by the Company at June 30, 2011, change in net unrealized gain (loss) of $(16.6) million and $(1.5) million, for the three month period ended June 30, 2011 relate to investments and financial derivative-assets, respectively.

 

Level 3—Fair Value Measurement Using Significant Unobservable Inputs:

Three Month Period Ended June 30, 2010

 

    Beginning
Balance as of
March 31,
2010		     Accreted
Discounts /
Amortized
Premiums		     Realized
Gain/(Loss)		     Change in Net
Unrealized
Gain/(Loss)		     Purchases     Sales     Transfers In
and/or Out of
Level 3		     Ending Balance
as of June 30,
2010		  

Assets:

                

Investments at value-

                

Private label residential mortgage-backed securities

   $ 234,944,268      $ 3,155,804      $ 9,654,774      $ (2,744,250 )    $ 94,980,740      $ (94,472,719 )    $ —        $ 245,518,617   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total investments at value

     234,944,268        3,155,804        9,654,774        (2,744,250 )      94,980,740        (94,472,719 )      —          245,518,617   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Financial derivatives- assets

                

Credit default swaps on corporate bonds

     4,547,488        —          (4,560,582 )      803,011        393,489        (1,183,406 )      —          —     

Credit default swaps on asset backed securities

     119,540,520        —          3,365,728        (6,216,478 )      3,817,848        (7,082,327 )      —          113,425,291   

Other swaps

     323,021        —          335,312        (323,021 )      —          (335,312 )      —          —     
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total financial derivatives- assets

     124,411,029        —          (859,542 )      (5,736,488 )      4,211,337        (8,601,045 )      —          113,425,291   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total investments and financial derivatives-assets

   $ 359,355,297      $ 3,155,804      $ 8,795,232      $ (8,480,738 )    $ 99,192,077      $ (103,073,764 )    $ —        $ 358,943,908   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Liabilities:

                

Financial derivatives- liabilities

                

Credit default swaps on asset backed securities

   $ (6,944,815 )    $ —        $ (1,086,884 )    $ 2,689,816      $ 5,341,883      $ —        $ —        $ —     
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total financial derivatives- liabilities

   $ (6,944,815 )    $ —        $ (1,086,884 )    $ 2,689,816      $ 5,341,883      $ —        $ —        $ —     
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

In January 2010, the FASB issued ASU No. 2010-6 Fair Value Measurements and Disclosures—(Topic 820), Improving Disclosures about Fair Value Measurements, which became effective for fiscal years beginning after December 15, 2010. As a result certain classifications in the above table have been conformed to the current period presentation.

All amounts of net realized and change in net unrealized gain (loss) in the table above are reflected in the accompanying Consolidated Statement of Operations. The table above incorporates changes in net unrealized gain (loss) for both Level 3 financial instruments held by the Company at June 30, 2010, as well as Level 3 financial instruments disposed of by the Company during the three month-period ended June 30, 2010. For Level 3 financial instruments held by the Company at June 30, 2010, change in net unrealized gain (loss) of $(0.2) million, $(5.7) million and $2.7 million for the three month period ended June 30, 2010 relate to investments, financial derivative-assets and financial derivative-liabilities, respectively.

 

Level 3—Fair Value Measurement Using Significant Unobservable Inputs:

Six Month Period Ended June 30, 2011

 

    Beginning
Balance as of
December 31,
2010		     Accreted
Discounts /
Amortized
Premiums		     Realized
Gain/(Loss)		     Change in Net
Unrealized
Gain/(Loss)		     Purchases     Sales     Transfers In
and/or Out of
Level 3		     Ending Balance
as of June 30,
2011		  

Assets:

                

Investments at value-

                

U.S. Treasury and Agency residential mortgage-backed securities

   $ —        $ (419,807 )    $ 97,393      $ (150,203 )    $ 6,854,766      $ (1,155,117 )    $ —        $ 5,227,032   

Private label residential mortgage-backed securities

     338,839,441        7,320,793        14,556,334        (22,637,757 )      186,259,638        (166,444,386 )      —          357,894,063   

Private label commercial mortgage-backed securities

     1,850,000        230,972        897,963        (1,478,534 )      16,750,783        (7,308,694 )      —          10,942,490   

Commercial Mortgage Loans

     —          60,981        —          (85,981 )      4,675,000        —          —          4,650,000   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total investments at value

     340,689,441        7,192,939        15,551,690        (24,352,475 )      214,540,187        (174,908,197 )      —          378,713,585   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Financial derivatives- assets

                

Credit default swaps on asset backed securities

     102,851,109        —          5,308,298        (4,740,333 )      403,551        (33,993,689 )      —          69,828,936   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total financial derivatives- assets

     102,851,109        —          5,308,298        (4,740,333 )      403,551        (33,993,689 )      —          69,828,936   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total investments and financial derivatives-assets

   $ 443,540,550      $ 7,192,939      $ 20,859,988      $ (29,092,808 )    $ 214,943,738      $ (208,901,886 )    $ —        $ 448,542,521   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

All amounts of net realized and change in net unrealized gain (loss) in the table above are reflected in the accompanying Consolidated Statement of Operations. The table above incorporates changes in net unrealized gain (loss) for both Level 3 financial instruments held by the Company at June 30, 2011, as well as Level 3 financial instruments disposed of by the Company during the six month period ended June 30, 2011. For Level 3 financial instruments held by the Company at June 30, 2011, change in net unrealized gain (loss) of $(17.5) million and $(9.9) million for the six month period ended June 30, 2011 relate to investments and financial derivative-assets, respectively.

 

Level 3—Fair Value Measurement Using Significant Unobservable Inputs:

Six Month Period Ended June 30, 2010

 

    Beginning
Balance as of
December 31,
2009		     Accreted
Discounts /
Amortized
Premiums		     Realized
Gain/(Loss)		     Change in Net
Unrealized
Gain/(Loss)		     Purchases     Sales     Transfers In
and/or  Out of
Level 3		     Ending Balance
as of June 30,
2010		  

Assets:

                

Investments at value-

                

Private label residential mortgage-backed securities

   $ 210,363,731      $ 5,938,803      $ 11,899,982      $ 4,344,547      $ 158,225,948      $ (145,254,394 )    $ —        $ 245,518,617   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total investments at value

     210,363,731        5,938,803        11,899,982        4,344,547        158,225,948        (145,254,394 )      —          245,518,617   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Financial derivatives- assets

                

Credit default swaps on corporate bonds

     8,475,895        —          (2,281,392 )      (2,650,145 )      1,713,374        (5,257,732 )      —          —     

Credit default swaps on asset backed securities

     95,199,131        —          11,470,519        (15,155,697 )      38,112,949        (16,201,611 )      —          113,425,291   

Other swaps

     257,212        —          335,312        (257,212 )      —          (335,312 )      —          —     
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total financial derivatives- assets

     103,932,238        —          9,524,439        (18,063,054 )      39,826,323        (21,794,655 )      —          113,425,291   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total investments and financial derivatives-assets

   $ 314,295,969      $ 5,938,803      $ 21,424,421      $ (13,718,507 )    $ 198,052,271      $ (167,049,049 )    $ —        $ 358,943,908   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Liabilities:

                

Financial derivatives- liabilities

                

Credit default swaps on asset backed securities

   $ (10,547,540 )    $ —        $ (1,657,578 )    $ 3,881,292      $ 8,339,356      $ (15,530 )    $ —        $ —     
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total financial derivatives- liabilities

   $ (10,547,540 )    $ —        $ (1,657,578 )    $ 3,881,292      $ 8,339,356      $ (15,530 )    $ —        $ —     
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

In January 2010, the FASB issued ASU No. 2010-6 Fair Value Measurements and Disclosures—(Topic 820), Improving Disclosures about Fair Value Measurements, which became effective for fiscal years beginning after December 15, 2010. As a result certain classifications in the above table have been conformed to the current period presentation.

All amounts of net realized and change in net unrealized gain (loss) in the table above are reflected in the accompanying Consolidated Statement of Operations. The table above incorporates changes in net unrealized gain (loss) for both Level 3 financial instruments held by the Company at June 30, 2010, as well as Level 3 financial instruments disposed of by the Company during the six month-period ended June 30, 2010. For Level 3 financial instruments held by the Company at June 30, 2010, change in net unrealized gain (loss) of $3.4 million and $(16.0) million for the six month period ended June 30, 2010 relate to investments and financial derivative-assets, respectively.