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Fair Value Of Financial Instruments | 6 Months Ended
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Jun. 30, 2011
Fair Value Of Financial Instruments |
Fair Value Of Financial Instruments | Note 6: Fair Value of Financial Instruments Financial Instruments The following table presents the carrying value and fair value of financial instruments reported on the Company's consolidated balance sheets as of June 30, 2011 and December 31, 2010:
|  | As of June 30, 2011 |  |  | As of December 31, 2010 |
In millions |  | Carrying Value |  |  | Estimated Fair Value |  |  | Carrying Value |  |  | Estimated Fair Value |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investments held as available-for-sale and held at fair value |  | $ | 10,691 |  |  | $ | 10,691 |  |  | $ | 11,739 |  |  | $ | 11,739 |
Other investments |  |  | 160 |  |  |  | 160 |  |  |  | 188 |  |  |  | 188 |
Cash and cash equivalents |  |  | 626 |  |  |  | 626 |  |  |  | 366 |  |  |  | 366 |
Receivable for investments sold |  |  | 76 |  |  |  | 76 |  |  |  | 8 |  |  |  | 8 |
Derivative assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Insured derivatives |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Non-insured derivatives |  |  | 3 |  |  |  | 3 |  |  |  | 4 |  |  |  | 4 |
Total derivative assets |  |  | 3 |  |  |  | 3 |  |  |  | 4 |  |  |  | 4 |
Assets of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash |  |  | 735 |  |  |  | 735 |  |  |  | 764 |  |  |  | 764 |
Investments held-to-maturity |  |  | 3,934 |  |  |  | 3,703 |  |  |  | 4,039 |  |  |  | 3,760 |
Fixed-maturity securities held as available-for-sale |  |  | 280 |  |  |  | 280 |  |  |  | 339 |  |  |  | 339 |
Fixed-maturity securities held as trading |  |  | 4,835 |  |  |  | 4,835 |  |  |  | 5,241 |  |  |  | 5,241 |
Loans receivable |  |  | 2,320 |  |  |  | 2,320 |  |  |  | 2,183 |  |  |  | 2,183 |
Loan repurchase commitments |  |  | 905 |  |  |  | 905 |  |  |  | 835 |  |  |  | 835 |
Derivative assets |  |  | 680 |  |  |  | 680 |  |  |  | 699 |  |  |  | 699 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment agreements |  |  | 1,632 |  |  |  | 1,799 |  |  |  | 2,005 |  |  |  | 2,172 |
Medium-term notes |  |  | 1,763 |  |  |  | 1,258 |  |  |  | 1,740 |  |  |  | 766 |
Securities sold under agreements to repurchase |  |  | 387 |  |  |  | 385 |  |  |  | 471 |  |  |  | 454 |
Short-term debt |  |  | - |  |  |  | - |  |  |  | 65 |  |  |  | 65 |
Long-term debt |  |  | 1,843 |  |  |  | 1,167 |  |  |  | 1,851 |  |  |  | 1,155 |
Payable for settlement of derivatives and investments |  |  | 235 |  |  |  | 235 |  |  |  | 2 |  |  |  | 2 |
Derivative liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Insured derivatives |  |  | 5,676 |  |  |  | 5,676 |  |  |  | 4,375 |  |  |  | 4,375 |
Non-insured derivatives |  |  | 258 |  |  |  | 258 |  |  |  | 242 |  |  |  | 242 |
Total derivative liabilities |  |  | 5,934 |  |  |  | 5,934 |  |  |  | 4,617 |  |  |  | 4,617 |
Warrants |  |  | 23 |  |  |  | 23 |  |  |  | 58 |  |  |  | 58 |
Liabilities of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Variable interest entity notes |  |  | 10,449 |  |  |  | 10,183 |  |  |  | 10,590 |  |  |  | 10,285 |
Long-term debt |  |  | 360 |  |  |  | 338 |  |  |  | 360 |  |  |  | 340 |
Derivative liabilities |  |  | 2,160 |  |  |  | 2,160 |  |  |  | 2,104 |  |  |  | 2,104 |
Financial Guarantees: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Gross |  |  | 4,666 |  |  |  | 4,402 |  |  |  | 5,275 |  |  |  | 3,906 |
Ceded |  |  | 114 |  |  |  | 120 |  |  |  | 112 |  |  |  | 48 |
Valuation Techniques Valuation techniques for financial instruments measured at fair value and included in the preceding table are described below. The Company's assets and liabilities measured at fair value have been categorized according to the fair value hierarchy based on the lowest level input that is significant to the fair value measurement in its entirety. Fixed-Maturity Securities (including short-term investments) Held as Available-For-Sale and Fixed-Maturity Securities Held at Fair Value U.S. Treasury and government agency —U.S. Treasury securities are valued based on quoted market prices in active markets. The fair value of U.S. Treasuries is based on live trading feeds. U.S. Treasury securities are categorized in Level 1 of the fair value hierarchy. Government agency securities include debentures and other agency mortgage pass-through certificates as well as to-be-announced ("TBA") securities. TBA securities are liquid and have quoted market prices based on live data feeds. Fair value of mortgage pass-through certificates is obtained via a simulation model, which considers different rate scenarios and historical activity to calculate a spread to the comparable TBA security. Government agency securities generally use market-based and observable inputs. As such, these securities are classified as Level 2 of the fair value hierarchy. Foreign governments —Foreign government obligations are generally valued based on quoted market prices in active markets, and are categorized in Level 1 of the fair value hierarchy. When quoted market prices are not available, fair value is determined using a valuation model based on observable inputs including interest rate yield curves, cross-currency basis index spreads, and country credit spreads for structures similar to the financial instrument in terms of issuer, maturity and seniority. These financial instruments are generally categorized in Level 2 of the fair value hierarchy. Bonds that contain significant inputs that are not observable are categorized as Level 3. Corporate obligations —Corporate obligations are valued using recently executed transaction prices or quoted market prices where observable. When observable price quotations are not available, fair value is determined using a valuation model based on observable inputs including interest rate yield curves, CDS spreads for similar instruments, and diversity scores. Corporate obligations are generally categorized in Level 2 of the fair value hierarchy or categorized in Level 3 when significant inputs are unobservable. Corporate obligations are classified as Level 1 of the fair value hierarchy when quoted market prices in an active market for identical financial instruments are available. Mortgage-backed securities and asset-backed securities —Mortgage-backed securities ("MBS") and asset-backed securities ("ABS") are valued using recently executed transaction prices. When position-specific quoted prices are not available, MBS and ABS are valued based on quoted prices for similar securities. If quoted prices are not available, MBS and ABS are valued using a valuation model based on observable inputs including interest rate yield curves, spreads, prepayments and volatilities, and categorized in Level 2 of the fair value hierarchy. MBS and ABS are categorized in Level 3 of the fair value hierarchy when significant inputs are unobservable. State and municipal bonds —State and municipal bonds are valued using recently executed transaction prices, quoted prices or valuation models based on observable inputs including interest rate yield curves, bond or CDS spreads, and volatility. State and municipal bonds are generally categorized in Level 2 of the fair value hierarchy, or categorized in Level 3 when significant inputs are unobservable. Investments Held-To-Maturity The fair values of investments held-to-maturity are determined using recently executed transaction prices or quoted prices when available. When position-specific quoted prices are not available, fair values of investments held-to-maturity are based on quoted prices of similar securities. When quoted prices for similar investments are not available, fair values are based on valuation models using observable inputs including interest rate yield curves, and bond spreads of similar securities. Other Investments Other investments include the Company's interest in equity securities. Fair values of other investments are determined by using quoted prices, or valuation models that use market-based and observable inputs. Other investments are categorized in Level 1, Level 2, or Level 3 of the fair value hierarchy. Cash and Cash Equivalents, Receivable for Investments Sold and Payable for Settlement of Derivatives and Investments Purchased The carrying amounts of cash and cash equivalents, receivable for investments sold and payable for the settlement of derivatives and investments purchased approximates fair values due to the short maturities of these instruments. Loans Receivable at Fair Value Loans receivable at fair value comprise loans held by consolidated VIEs consisting of residential mortgage loans, commercial mortgage loans and other whole business loans. Fair values of residential mortgage loans are determined using quoted prices for MBS with similar characteristics and adjusted for the fair values of the financial guarantee obligations provided by MBIA Corp. on the related MBS. Fair values of commercial mortgage loans and other whole business loans are valued based on quoted prices of similar collateralized MBS. Loans receivable at fair value are categorized in Level 3 of the fair value hierarchy. Loan Repurchase Commitments Loan repurchase commitments are obligations owed by the sellers/servicers of mortgage loans to either MBIA as reimbursement of paid claims or to the RMBS trusts as defined in the transaction documents. Loan repurchase commitments are consolidated under the amended accounting principles for the consolidation of VIEs. This asset represents the rights of the trusts against the sellers/servicers for representations and warranties that the securitized residential mortgage loans sold to the trust comply with stated underwriting guidelines and for the sellers/servicers to cure, replace, or repurchase mortgage loans that fail to comply. Fair value measurements of loan repurchase commitments represent the amounts owed by the sellers/servicers to the trusts. Loan repurchase commitments are not securities and no quoted prices or comparable market transaction information are observable or available. Loan repurchase commitments at fair value are categorized in Level 3 of the fair value hierarchy. Fair values of loan repurchase commitments are determined using discounted cash flow techniques based on observable inputs including:
| • |  | estimates of future cash flows for the asset;
| • |  | expectations about possible variations in the amount and/or timing of the cash flows representing the uncertainty inherent in the cash flows;
| • |  | time value of money, represented by the rate on risk-free monetary assets;
| • |  | the price for bearing the uncertainty inherent in the cash flows (risk premium); and
| • |  | other case-specific factors that would be considered by market participants.
Refer to the discussion of "RMBS Recoveries" within "Note 5: Loss and Loss Adjustment Expense Reserves" for a further description of how these estimates of future cash flows for the assets are determined, as well as the additional risk margins and discounts applied. Investment Agreements The fair values of investment agreements are determined using discounted cash flow techniques based on observable interest rates currently being offered for similar agreements with comparable maturity dates. Investment agreements contain collateralization and termination agreements that substantially mitigate the nonperformance risk of the Company. Medium-Term Notes The fair values of medium-term notes ("MTNs") are determined using discounted cash flow techniques based on inputs including observable interest rates currently being offered for similar notes with comparable maturity dates, and nonperformance risk. Nonperformance risk is determined using the Company's own credit spreads. The Company has elected to record four MTNs at fair value. Fair values of such notes are determined using quoted market prices or discounted cash flow techniques. Significant inputs into the valuation include yield curves and spreads to the swap curve. As these notes are not actively traded, certain significant inputs (e.g., spreads to the swap curve) are unobservable. MTNs are categorized as Level 3 of the fair value hierarchy. Variable Interest Entity Notes The fair values of VIE notes are determined based on recently executed transaction prices or quoted prices where observable. When position-specific quoted prices are not observable, fair values are based on quoted prices of similar securities. Fair values based on quoted prices of similar securities may be adjusted for factors unique to the securities, including any credit enhancement. When observable quoted prices are not available, fair value is determined based on discounted cash flow techniques of the underlying collateral using observable inputs including interest rate yield curves and bond spreads of similar securities. VIE notes are categorized in Level 2 or Level 3 of the fair value hierarchy based on the lowest level input that is significant to the fair value measurement in its entirety. Securities Sold Under Agreements to Repurchase The fair values of securities sold under agreements to repurchase are determined using discounted cash flow techniques based on observable inputs including interest rates on similar repurchase agreements. Securities sold under agreements to repurchase include term reverse repurchase agreements that contain credit enhancement provisions including over-collateralization agreements to sufficiently mitigate the nonperformance risk of the Company. Long-term Debt Long-term debt consists of notes, debentures, surplus notes and floating rate liquidity loans. The fair value of long-term notes, debentures and surplus notes are estimated based on quoted prices for the identical or similar securities. The fair value for floating rate liquidity loans are determined using discounted cash flow techniques of the underlying collateral pledged to the specific loans, as these loans are non-recourse and fully backed by a pool of underlying assets. Derivatives—Asset/Liability Products The asset/liability products business has entered into derivative transactions primarily consisting of interest rate, cross currency, credit default and principal protection guarantees. Fair values of over-the counter derivatives are determined using valuation models based on observable inputs, nonperformance risk of the Company's own credit and nonperformance risk of the counterparties. Observable and market-based inputs include interest rate yields, credit spreads and volatilities. These derivatives are categorized in Level 2 or Level 3 of the fair value hierarchy based on the lowest level input that is significant to the fair value measurement in its entirety. The Company has policies and procedures in place regarding counterparties, including review and approval of the counterparty and the Company's exposure limit, collateral posting requirements, collateral monitoring and margin calls on collateral. The Company manages counterparty credit risk on an individual counterparty basis through master netting arrangements covering derivative transactions in the asset/liability products and corporate segments. These agreements allow the Company to contractually net amounts due from a counterparty with those amounts due to such counterparty when certain triggering events occur. The Company only executes swaps under master netting agreements, which typically contain mutual credit downgrade provisions that generally provide the ability to require assignment or termination in the event either the Company or the counterparty is downgraded below a specified credit rating. The netting agreements minimize the potential for losses related to credit exposure and thus serve to mitigate the Company's nonperformance risk under these derivatives. In certain cases, the Company also manages credit risk through collateral agreements that give the Company the right to hold or the obligation to provide collateral when the current market value of derivative contracts exceeds an exposure threshold. Under these arrangements, the Company may receive or provide U.S. Treasury and other highly rated securities or cash to secure the derivative. The delivery of high-quality collateral can minimize credit exposure and mitigate the potential for nonperformance risk impacting the fair values of the derivatives. Derivatives—Insurance The derivative contracts insured by MBIA cannot be legally traded and generally do not have observable market prices. MBIA Corp. determines the fair values of insured credit derivatives using valuation models. These models include the Binomial Expansion Technique ("BET") model and an internally developed model referred to as the "Direct Price Model." For a limited number of other insured credit derivatives, fair values are determined using a dual-default model. The valuation of insured derivatives includes the impact of its own credit standing. All of these derivatives are categorized as Level 3 of the fair value hierarchy as their fair value is derived using significant unobservable inputs. Description of MBIA's Insured Derivatives As of June 30, 2011, the Company had $100.5 billion of gross par outstanding on insured derivatives. The majority of MBIA's insured derivatives are "credit derivatives" that reference structured pools of cash securities and CDS. The Company generally insured the most senior liabilities of such transactions and, at transaction closing, the Company's exposure generally had more subordination than needed to achieve triple-A ratings from credit rating agencies (referred to as "Super Triple-A" exposure). The collateral backing the Company's insured derivatives was cash securities and CDS referencing primarily corporate, asset-backed, residential mortgage-backed, commercial mortgage-backed, CRE loans, and CDO securities. As of June 30, 2011, the gross par outstanding of the Company's insured credit derivatives totaled $92.4 billion. The remaining $8.1 billion of gross par outstanding on insured derivatives as of June 30, 2011 primarily related to insured "interest rate" and "inflation-linked" swaps for which the Company has insured counterparty credit risk. Most of MBIA's insured CDS contracts require MBIA to make payments for losses of the principal outstanding under the contracts when losses on the underlying referenced collateral exceed a predetermined deductible. MBIA's gross par outstanding and maximum payment obligation under these contracts as of June 30, 2011 was $71.9 billion. The underlying referenced collateral for contracts executed in this manner largely consist of investment grade corporate debt, structured CMBS pools and, to a lesser extent, corporate and multi-sector CDOs (in CDO-squared transactions). MBIA's multi-sector and CDO-squared transactions contain substantial RMBS-related collateral. As of June 30, 2011, MBIA also had $20.5 billion of gross par outstanding on insured CDS contracts that require MBIA to make timely interest and ultimate principal payments. Valuation Models Used Approximately 79% of the balance sheet fair value of insured credit derivatives as of June 30, 2011 was valued using the BET Model. Approximately 20% of the balance sheet fair value of insured credit derivatives as of June 30, 2011 was valued using the internally developed Direct Price Model. An immaterial amount of insured credit derivatives were valued using other methods, including a dual default model. A. Description of the BET Model 1. Valuation Model Overview The BET Model estimates what a bond insurer would charge to guarantee a transaction at the measurement date, based on the market-implied default risk of the underlying collateral and the remaining structural protection in a deductible or subordination. This approach assumes that bond insurers would be willing to accept these contracts from the Company at a price equal to what the Company could issue them for in the current market. While the premium charged by financial guarantors is not a direct input into the Company's model, the model estimates such premium and this premium increases as the probability of loss increases, driven by various factors including rising credit spreads, negative credit migration, lower recovery rates, lower diversity score and erosion of deductible or subordination. Inputs to the process of determining fair value for structured transactions using the BET Model include estimates of collateral loss, allocation of loss to separate tranches of the capital structure, and calculation of the change in value.
| • |  | Estimates of aggregated collateral losses are calculated by reference to the following (described in further detail under "BET Model Inputs" below):
| • |  | credit spreads of underlying collateral based on actual spreads or spreads on similar collateral with similar ratings, or in some cases is benchmarked; for collateral pools where the spread distribution is characterized by extremes, each segment of the pool is modeled separately instead of using an overall pool average;
| • |  | diversity score of the collateral pool as an indication of correlation of collateral defaults; and
| • |  | recovery rate for all defaulted collateral.
| • |  | Allocation of losses to separate tranches of the capital structure according to priority of payments in a transaction.
| • |  | The unrealized gain or loss on a transaction inception to date is the difference between the original price of the risk (the original market-implied expected loss) and the current price of the risk based on the assumed market-implied expected losses derived from the model.
Additional structural assumptions of the BET Model are:
| • |  | Default probabilities are determined by three factors: credit spread, recovery rate after default, and the time period under risk.
| • |  | Frequencies of defaults are modeled evenly over time.
| • |  | Collateral assets are generally considered on an average basis rather than being modeled on an individual basis.
| • |  | Collateral asset correlation is modeled using a diversity score which is calculated based on industry or sector concentrations. Recovery rates are based on historical averages and updated based on market evidence.
2. BET Model Inputs a. Credit spreads The average spread of collateral is a key input as the Company assumes credit spreads reflect the market's assessment of default probability for each piece of collateral. Spreads are obtained from market data sources published by third parties (e.g., dealer spread tables for assets most closely resembling collateral within the Company's transactions) as well as collateral-specific spreads on the underlying reference obligations provided by trustees or market sources. Also, when these sources are not available, the Company benchmarks spreads for collateral against market spreads or prices. This data is reviewed on an ongoing basis for reasonableness and applicability to the Company's derivative portfolio. The Company also calculates spreads based on quoted prices and on internal assumptions about expected life, when pricing information is available and spread information is not. The Company uses the spread hierarchy listed below in determining which source of spread information to use, with the rule being to use CDS spreads where available and cash security spreads as the next alternative. Cash security spreads reflect trading activity in funded fixed-income instruments while CDS spreads reflect trading levels for non-funded derivative instruments. While both markets are driven partly by an assessment of the credit quality of the referenced security, there are factors which create significant differences. These factors include CDS spreads driven by speculative activity as the CDS market facilitates both long and short positions without ownership of the underlying security, allowing for significant leverage. Spread Hierarchy:
| • |  | Collateral-specific credit spreads when observable.
| • |  | Sector-specific spread tables by asset class and rating.
| • |  | Corporate spreads, including Bloomberg and Risk Metrics spread tables based on rating.
| • |  | Benchmark from most relevant market source when corporate spreads are not directly relevant.
If current market-based spreads are not available, the Company applies either sector-specific spreads from spread tables provided by dealers or corporate spread tables. The sector-specific spread applied depends on the nature of the underlying collateral. Transactions with corporate collateral use the corporate spread table. Transactions with asset-backed collateral use one or more of the dealer asset-backed tables. If there are no observable market spreads for the specific collateral, and sector-specific and corporate spread tables are not appropriate to estimate the spread for a specific type of collateral, the Company uses the fourth alternative in its hierarchy. This includes using tranched corporate collateral, where the Company applies corporate spreads as an input with an adjustment for its tranched exposure. As of June 30, 2011, sector-specific spreads were used in 7% of the transactions valued using the BET Model. Corporate spreads were used in 49% of the transactions and spreads benchmarked from the most relevant spread source were used for 44% of the transactions. When determining the percentages above, there were some transactions where MBIA incorporated multiple levels within the hierarchy, including using actual collateral-specific credit spreads in combination with a calculated spread based on an assumed relationship. In those cases, MBIA classified the transaction as being benchmarked from the most relevant spread source even though the majority of the average spread was from actual collateral-specific spreads. The spread source can also be identified by whether or not it is based on collateral weighted average rating factor ("WARF"). No collateral-specific spreads are based on WARF, sector-specific and corporate spreads are based on WARF, and some benchmarked spreads are based on WARF. WARF-sourced and/or ratings-sourced credit spreads were used for 90% of the transactions. Over time, the data inputs change as new sources become available, existing sources are discontinued or are no longer considered to be reliable or the most appropriate. It is always the Company's objective to move to higher levels on the spread hierarchy table defined above. However, the Company may on occasion move to lower priority inputs due to the discontinuation of data sources or due to the Company considering higher priority inputs no longer representative of market spreads. b. Diversity Scores Diversity scores are a means of estimating the diversification in a portfolio. The diversity score estimates the number of uncorrelated assets that are assumed to have the same loss distribution as the actual portfolio of correlated assets. A lower diversity score represents higher assumed correlation, increasing the chances of a large number of defaults, and thereby increasing the risk of loss in the senior tranche. A lower diversity score will generally have a negative impact on the valuation for the Company's senior tranche. The calculation methodology for a diversity score includes the extent to which a portfolio is diversified by industry or asset class, which is either calculated internally or reported by the trustee on a regular basis. Diversity scores are calculated at transaction origination, and adjusted as the collateral pool changes over time. MBIA's internal modeling of the diversity score is based on Moody's methodology. c. Recovery Rate The recovery rate represents the percentage of par expected to be recovered after an asset defaults, indicating the severity of a potential loss. MBIA generally uses rating agency recovery assumptions which may be adjusted to account for differences between the characteristics and performance of the collateral used by the rating agencies and the actual collateral in MBIA-insured transactions. The Company may also adjust rating agency assumptions based on the performance of the collateral manager and on empirical market data. d. Input Adjustments for Insured CMBS Derivatives in the Current Market Approximately $35.3 billion gross par of MBIA's insured derivative transactions as of June 30, 2011 includes substantial amounts of CMBS and commercial mortgage collateral. Since the CMBX is now quoted in price terms and the BET Model requires a spread input, it is necessary to convert CMBX prices to spreads. Through the third quarter of 2010, the Company assumed that a portion of the CMBX price reflected market illiquidity. The Company assumed this illiquidity component was the difference between par and the price of the highest priced CMBX triple-A series. The Company assumed that the price of each CMBX index has two components: an illiquidity component and a loss component. The market implied losses were assumed to be the difference of par less the liquidity adjusted price. These loss estimates were converted to spreads using an internal estimate of duration. Beginning in the fourth quarter of 2010, the Company determined that it would not be appropriate to continue to use a CMBS illiquidity component in the models due to increased liquidity in the marketplace. e. Nonperformance Risk The Company's valuation methodology for insured credit derivative liabilities incorporates the Company's own nonperformance risk. The Company calculates the fair value by discounting the market value loss estimated through the BET Model at discount rates which include MBIA CDS spreads as of June 30, 2011. The CDS spreads assigned to each deal are based on the weighted average life of the deal. The Company limits the nonperformance impact so that the derivative liability could not be lower than the Company's recovery derivative price multiplied by the unadjusted derivative liability. B. Description of Direct Price Model 1. Valuation Model Overview There are three significant model inputs used in determining fair value using the Direct Price Model. Significant inputs include market prices obtained or estimated for all collateral within a transaction, the present value of the market-implied potential losses calculated for the transaction, and the impact of nonperformance risk. 2. Model Inputs
| • |  | Collateral prices
Fair value of collateral is based on quoted prices when available. When quoted prices are not available, a matrix pricing grid is used based on security type and rating to determine fair value of collateral which applies an average based on securities with the same rating and security type categories.
| • |  | Interest rates
The present value of the market-implied potential losses was calculated assuming that MBIA deferred all principal losses to the legal final maturity. This was done through a cash flow model that calculated potential interest payments in each period and the potential principal loss at the legal final maturity. These cash flows were discounted using the LIBOR flat swap curve.
| • |  | Nonperformance risk
The methodology for calculating MBIA's nonperformance risk is the same as used for the BET Model. Due to the current level of MBIA CDS spread rates and the long tenure of these transactions, the derivative recovery rate was used to estimate nonperformance risk for all transactions marked by this model. Overall Model Results As of June 30, 2011 and December 31, 2010, the Company's net insured derivative liability was $5.7 billion and $4.4 billion, respectively, and was primarily related to the fair values of insured credit derivatives, based on the results of the aforementioned pricing models. In the current environment, the most significant driver of changes in fair value is nonperformance risk. In aggregate, the nonperformance calculation resulted in a pre-tax net insured derivative liability that was $7.4 billion and $12.1 billion lower than the net liability that would have been estimated if the Company excluded nonperformance risk in its valuation as of June 30, 2011 and December 31, 2010, respectively. Nonperformance risk is a fair value concept and does not contradict the Company's internal view, based on fundamental credit analysis of the Company's economic condition, that the Company will be able to pay all claims when due. The Company reviews the model results on a quarterly basis to assess the appropriateness of the assumptions and results in light of current market activity and conditions. This review is performed by internal staff with relevant expertise. If live market spreads are observable for similar transactions, those spreads are an integral part of the analysis. For example, new insured transactions that resemble existing (previously insured) transactions are considered, as well as negotiated settlements of existing transactions. MBIA Corp. negotiated settlements of insured CDS transactions in 2010 and 2011. In assessing the reasonableness of the fair value estimate for insured CDS, the Company considered the executed prices for those transactions as well as a review of internal consistency with MBIA's methodology. Warrants Stock warrants issued by the Company are recorded at fair value based on a modified Black-Scholes model. Inputs into the warrant valuation include interest rates, stock volatilities and dividend data. As all significant inputs are market-based and observable, warrants are categorized in Level 2 of the fair value hierarchy. Financial Guarantees Gross Financial Guarantees —The fair value of gross financial guarantees is determined using discounted cash flow techniques based on inputs that include (i) assumptions of expected losses on financial guarantee policies where loss reserves have not been recognized, (ii) amount of losses expected on financial guarantee policies where loss reserves have been established, (iii) the cost of capital reserves required to support the financial guarantee liability and (iv) discount rates. The MBIA Corp. CDS spread and recovery rate are used as the discount rate for MBIA Corp., while the Assured Guaranty Corp. CDS spread and recovery rate are used as the discount rate for National. Discount rates are adjusted to reflect nonperformance risk of the Company. Fair value of gross financial guarantees does not consider future installment premium receipts or returns on invested upfront premiums as inputs. The carrying value of MBIA's gross financial guarantees consists of unearned premium revenue and loss and LAE reserves as reported on MBIA's consolidated balance sheets. Ceded Financial Guarantees —The fair value of ceded financial guarantees is determined by applying the percentage ceded to reinsurers to the related fair value of the gross financial guarantees. The carrying value of ceded financial guarantees consists of prepaid reinsurance premiums and reinsurance recoverable on paid losses as reported on MBIA's consolidated balance sheets. Fair Value Measurements The following fair value hierarchy tables present information about the Company's assets (including short-term investments) and liabilities measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010:
|  | Fair Value Measurements at Reporting Date Using |  |  |  |
In millions |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |  |  | Counterparty and Cash Collateral Netting |  |  | Balance as of June 30, 2011 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed-maturity investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable bonds: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and government agency |  | $ | 805 |  |  | $ | 137 |  |  | $ | - |  |  | $ | - |  |  | $ | 942 |
Foreign governments |  |  | 330 |  |  |  | 52 |  |  |  | 13 |  |  |  | - |  |  |  | 395 |
Corporate obligations |  |  | 1 |  |  |  | 1,955 |  |  |  | 294 |  |  |  | - |  |  |  | 2,250 |
Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed agency |  |  | - |  |  |  | 1,434 |  |  |  | - |  |  |  | - |  |  |  | 1,434 |
Residential mortgage-backed non-agency |  |  | - |  |  |  | 465 |  |  |  | 28 |  |  |  | - |  |  |  | 493 |
Commercial mortgage-backed |  |  | - |  |  |  | 41 |  |  |  | 50 |  |  |  | - |  |  |  | 91 |
Asset-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collateralized debt obligations |  |  | - |  |  |  | 124 |  |  |  | 162 |  |  |  | - |  |  |  | 286 |
Other asset-backed |  |  | - |  |  |  | 235 |  |  |  | 331 |  |  |  | - |  |  |  | 566 |
State and municipal bonds |  |  | - |  |  |  | 785 |  |  |  | 13 |  |  |  | - |  |  |  | 798 |
Total taxable bonds |  |  | 1,136 |  |  |  | 5,228 |  |  |  | 891 |  |  |  | - |  |  |  | 7,255 |
Tax exempt bonds: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
State and municipal bonds |  |  |  |  |  |  | 2,591 |  |  |  | 32 |  |  |  | - |  |  |  | 2,623 |
Other fixed-maturity investments |  |  | - |  |  |  | 15 |  |  |  | - |  |  |  | - |  |  |  | 15 |
Total fixed-maturity investments |  |  | 1,136 |  |  |  | 7,834 |  |  |  | 923 |  |  |  | - |  |  |  | 9,893 |
Money market securities |  |  | 754 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 754 |
Perpetual preferred securities |  |  | - |  |  |  | 170 |  |  |  | - |  |  |  | - |  |  |  | 170 |
Other |  |  | 32 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 32 |
Total |  |  | 1,922 |  |  |  | 8,004 |  |  |  | 923 |  |  |  | - |  |  |  | 10,849 |
Derivative assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non-insured derivative assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit derivatives |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | - |  |  |  | 1 |
Interest rate derivatives |  |  | - |  |  |  | 38 |  |  |  | 4 |  |  |  | - |  |  |  | 42 |
Other |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (40) |  |  |  | (40) |
Total derivative assets |  |  | - |  |  |  | 39 |  |  |  | 4 |  |  |  | (40) |  |  |  | 3 |
|  | Fair Value Measurements at Reporting Date Using |  |  |  |
In millions |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |  |  | Counterparty and Cash Collateral Netting |  |  | Balance as of June 30, 2011 |
Assets of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate obligations |  |  | - |  |  |  | 219 |  |  |  | 60 |  |  |  | - |  |  |  | 279 |
Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed agency |  |  | - |  |  |  | 13 |  |  |  | - |  |  |  | - |  |  |  | 13 |
Residential mortgage-backed non-agency |  |  | - |  |  |  | 2,600 |  |  |  | 17 |  |  |  | - |  |  |  | 2,617 |
Commercial mortgage-backed |  |  | - |  |  |  | 809 |  |  |  | 27 |  |  |  | - |  |  |  | 836 |
Asset-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collateralized debt obligations |  |  | - |  |  |  | 657 |  |  |  | 201 |  |  |  | - |  |  |  | 858 |
Other asset-backed |  |  | - |  |  |  | 292 |  |  |  | 75 |  |  |  | - |  |  |  | 367 |
Total fixed maturity securities at fair value |  |  | - |  |  |  | 4,590 |  |  |  | 380 |  |  |  | - |  |  |  | 4,970 |
Money market securities |  |  | 145 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 145 |
Loans receivable |  |  | - |  |  |  | - |  |  |  | 2,320 |  |  |  | - |  |  |  | 2,320 |
Loan repurchase commitments |  |  | - |  |  |  | - |  |  |  | 905 |  |  |  | - |  |  |  | 905 |
Derivative assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit derivatives |  |  | - |  |  |  | - |  |  |  | 670 |  |  |  | - |  |  |  | 670 |
Interest rate derivatives |  |  | - |  |  |  | 10 |  |  |  | - |  |  |  | - |  |  |  | 10 |
Total assets |  | $ | 2,067 |  |  | $ | 12,643 |  |  | $ | 5,202 |  |  | $ | (40) |  |  | $ | 19,872 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Medium-term notes |  | $ | - |  |  | $ | - |  |  | $ | 206 |  |  | $ | - |  |  | $ | 206 |
Derivative liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Insured derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit derivatives |  |  | - |  |  |  | 20 |  |  |  | 5,656 |  |  |  | - |  |  |  | 5,676 |
Non-insured derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit derivatives |  |  | - |  |  |  | 2 |  |  |  | - |  |  |  | - |  |  |  | 2 |
Interest rate derivatives |  |  | - |  |  |  | 285 |  |  |  | - |  |  |  | - |  |  |  | 285 |
Currency derivatives |  |  | - |  |  |  | 11 |  |  |  | - |  |  |  | - |  |  |  | 11 |
Other |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (40) |  |  |  | (40) |
Other liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Warrants |  |  | - |  |  |  | 23 |  |  |  | - |  |  |  | - |  |  |  | 23 |
Liabilities of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Variable interest entity notes |  |  | - |  |  |  | 2,026 |  |  |  | 4,513 |  |  |  | - |  |  |  | 6,539 |
Derivative liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit derivatives |  |  | - |  |  |  | - |  |  |  | 1,590 |  |  |  | - |  |  |  | 1,590 |
Interest rate derivatives |  |  | - |  |  |  | 554 |  |  |  | - |  |  |  | - |  |  |  | 554 |
Currency derivatives |  |  | - |  |  |  | - |  |  |  | 16 |  |  |  | - |  |  |  | 16 |
Total liabilities |  | $ | - |  |  | $ | 2,921 |  |  | $ | 11,981 |  |  | $ | (40) |  |  | $ | 14,862 |
|  | Fair Value Measurements at Reporting Date Using |  |  |  |
In millions |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |  |  | Counterparty and Cash Collateral Netting |  |  | Balance as of December 31, 2010 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed-maturity investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable bonds: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and government agency |  | $ | 915 |  |  | $ | 149 |  |  | $ | - |  |  | $ | - |  |  | $ | 1,064 |
Foreign governments |  |  | 409 |  |  |  | 49 |  |  |  | 11 |  |  |  | - |  |  |  | 469 |
Corporate obligations |  |  | - |  |  |  | 2,602 |  |  |  | 246 |  |  |  | - |  |  |  | 2,848 |
Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed agency |  |  | - |  |  |  | 1,548 |  |  |  | 41 |  |  |  | - |  |  |  | 1,589 |
Residential mortgage-backed non-agency |  |  | - |  |  |  | 414 |  |  |  | 48 |  |  |  | - |  |  |  | 462 |
Commercial mortgage-backed |  |  | - |  |  |  | 120 |  |  |  | 41 |  |  |  | - |  |  |  | 161 |
Asset-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collateralized debt obligations |  |  | - |  |  |  | 108 |  |  |  | 191 |  |  |  | - |  |  |  | 299 |
Other asset-backed |  |  | - |  |  |  | 310 |  |  |  | 350 |  |  |  | - |  |  |  | 660 |
State and municipal bonds |  |  | - |  |  |  | 738 |  |  |  | 14 |  |  |  | - |  |  |  | 752 |
Total taxable bonds |  |  | 1,324 |  |  |  | 6,038 |  |  |  | 942 |  |  |  | - |  |  |  | 8,304 |
Tax exempt bonds: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
State and municipal bonds |  |  | - |  |  |  | 2,787 |  |  |  | 36 |  |  |  | - |  |  |  | 2,823 |
Other fixed-maturity investments |  |  | 13 |  |  |  | 19 |  |  |  | - |  |  |  | - |  |  |  | 32 |
Total fixed-maturity investments |  |  | 1,337 |  |  |  | 8,844 |  |  |  | 978 |  |  |  | - |  |  |  | 11,159 |
Money market securities |  |  | 553 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 553 |
Perpetual preferred securities |  |  | - |  |  |  | 192 |  |  |  | - |  |  |  | - |  |  |  | 192 |
Other |  |  | 16 |  |  |  | 5 |  |  |  | - |  |  |  | - |  |  |  | 21 |
Total |  |  | 1,906 |  |  |  | 9,041 |  |  |  | 978 |  |  |  | - |  |  |  | 11,925 |
Derivative assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non-insured derivative assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit derivatives |  |  | - |  |  |  | 3 |  |  |  | - |  |  |  | - |  |  |  | 3 |
Interest rate derivatives |  |  | - |  |  |  | 57 |  |  |  | 5 |  |  |  | - |  |  |  | 62 |
Other |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (61) |  |  |  | (61) |
Total derivative assets |  |  | - |  |  |  | 60 |  |  |  | 5 |  |  |  | (61) |  |  |  | 4 |
|  | Fair Value Measurements at Reporting Date Using |  |  |  |
In millions |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |  |  | Counterparty and Cash Collateral Netting |  |  | Balance as of December 31, 2010 |
Assets of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and government agency |  |  | 4 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 4 |
Corporate obligations |  |  | 7 |  |  |  | 360 |  |  |  | 80 |  |  |  | - |  |  |  | 447 |
Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed agency |  |  | - |  |  |  | 37 |  |  |  | - |  |  |  | - |  |  |  | 37 |
Residential mortgage-backed non-agency |  |  | - |  |  |  | 2,706 |  |  |  | 40 |  |  |  | - |  |  |  | 2,746 |
Commercial mortgage-backed |  |  | - |  |  |  | 907 |  |  |  | 23 |  |  |  | - |  |  |  | 930 |
Asset-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collateralized debt obligations |  |  | - |  |  |  | 583 |  |  |  | 245 |  |  |  | - |  |  |  | 828 |
Other asset-backed |  |  | - |  |  |  | 352 |  |  |  | 83 |  |  |  | - |  |  |  | 435 |
State and municipal taxable and tax-exempt bonds |  |  | - |  |  |  | 4 |  |  |  | - |  |  |  | - |  |  |  | 4 |
Total fixed maturity securities at fair value |  |  | 11 |  |  |  | 4,949 |  |  |  | 471 |  |  |  | - |  |  |  | 5,431 |
Money market securities |  |  | 150 |  |  |  | - |  |  |  |  |  |  |  | - |  |  |  | 150 |
Loans receivable |  |  | - |  |  |  | - |  |  |  | 2,183 |  |  |  | - |  |  |  | 2,183 |
Loan repurchase commitments |  |  | - |  |  |  | - |  |  |  | 835 |  |  |  | - |  |  |  | 835 |
Derivative assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit derivatives |  |  | - |  |  |  | - |  |  |  | 687 |  |  |  | - |  |  |  | 687 |
Interest rate derivatives |  |  | - |  |  |  | 12 |  |  |  | - |  |  |  | - |  |  |  | 12 |
Total assets |  | $ | 2,067 |  |  | $ | 14,062 |  |  | $ | 5,159 |  |  | $ | (61) |  |  | $ | 21,227 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Medium-term notes |  | $ | - |  |  | $ | - |  |  | $ | 116 |  |  | $ | - |  |  | $ | 116 |
Derivative liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Insured derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit derivatives |  |  | - |  |  |  | 25 |  |  |  | 4,350 |  |  |  | - |  |  |  | 4,375 |
Non-insured derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate derivatives |  |  | - |  |  |  | 297 |  |  |  | - |  |  |  | - |  |  |  | 297 |
Currency derivatives |  |  | - |  |  |  | 6 |  |  |  | - |  |  |  | - |  |  |  | 6 |
Other |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (61) |  |  |  | (61) |
Other liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Warrants |  |  | - |  |  |  | 58 |  |  |  | - |  |  |  | - |  |  |  | 58 |
Liabilities of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Variable interest entity notes |  |  | - |  |  |  | 2,007 |  |  |  | 4,673 |  |  |  | - |  |  |  | 6,680 |
Derivative liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit derivatives |  |  | - |  |  |  | - |  |  |  | 1,455 |  |  |  | - |  |  |  | 1,455 |
Interest rate derivatives |  |  | - |  |  |  | 635 |  |  |  | - |  |  |  | - |  |  |  | 635 |
Currency derivatives |  |  | - |  |  |  | - |  |  |  | 14 |  |  |  | - |  |  |  | 14 |
Total liabilities |  | $ | - |  |  | $ | 3,028 |  |  | $ | 10,608 |  |  | $ | (61) |  |  | $ | 13,575 |
Level 3 assets were $5.2 billion as of June 30, 2011 and December 31, 2010 and represented approximately 26% and 24% of total assets measured at fair value, respectively. Level 3 liabilities were $12.0 billion and $10.6 billion as of June 30, 2011 and December 31, 2010, respectively, and represented approximately 81% and 78% of total liabilities measured at fair value, respectively. The following tables present information about changes in Level 3 assets (including short-term investments) and liabilities measured at fair value on a recurring basis for the three months ended June 30, 2011 and 2010:
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended June 30, 2011 |
In millions |  | Balance, Beginning of Period |  |  | Realized Gains / (Losses) |  |  | Unrealized Gains / (Losses) Included in Earnings |  |  | Unrealized Gains / (Losses) Included in OCI |  |  | Foreign Exchange Recognized in OCI or Earnings |  |  | Purchases |  |  | Settlements |  |  | Sales |  |  | Transfers into Level 3 (1) |  |  | Transfers out of Level 3 (1) |  |  | Ending Balance |  |  | Change in Unrealized Gains (Losses) for the Period Included in Earnings for Assets still held as of June 30, 2011 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign governments |  | $ | 19 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | (6 | ) |  | $ | 4 |  |  | $ | 3 |  |  | $ | - |  |  | $ | - |  |  | $ | (7 | ) |  | $ | 13 |  |  | $ | - |
Corporate obligations |  |  | 211 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | 1 |  |  |  | (1 | ) |  |  | - |  |  |  | 82 |  |  |  | - |  |  |  | 294 |  |  |  | - |
Residential mortgage-backed non-agency |  |  | 43 |  |  |  | (1 | ) |  |  | - |  |  |  | 5 |  |  |  | (2 | ) |  |  | 4 |  |  |  | (6 | ) |  |  | (18 | ) |  |  | 3 |  |  |  | - |  |  |  | 28 |  |  |  | - |
Commercial mortgage-backed |  |  | 51 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | (2 | ) |  |  | - |  |  |  | - |  |  |  | 50 |  |  |  | - |
Collateralized debt obligations |  |  | 123 |  |  |  | (1 | ) |  |  | - |  |  |  | 8 |  |  |  | (9 | ) |  |  | 5 |  |  |  | (4 | ) |  |  | (6 | ) |  |  | 46 |  |  |  | - |  |  |  | 162 |  |  |  | - |
Other asset-backed |  |  | 323 |  |  |  | - |  |  |  | - |  |  |  | (7 | ) |  |  | (1 | ) |  |  | 8 |  |  |  | (2 | ) |  |  | (1 | ) |  |  | 11 |  |  |  | - |  |  |  | 331 |  |  |  | - |
State and municipal taxable bonds |  |  | 12 |  |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 13 |  |  |  | - |
State and municipal tax-exempt bonds |  |  | 34 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 2 |  |  |  | (3 | ) |  |  | (1 | ) |  |  | - |  |  |  | - |  |  |  | 32 |  |  |  | - |
Assets of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate obligations |  |  | 82 |  |  |  | - |  |  |  | (17 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (2 | ) |  |  | - |  |  |  | 4 |  |  |  | (7 | ) |  |  | 60 |  |  |  | - |
Residential mortgage-backed non-agency |  |  | 18 |  |  |  | - |  |  |  | 4 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (2 | ) |  |  | - |  |  |  | - |  |  |  | (3 | ) |  |  | 17 |  |  |  | 1 |
Commercial mortgage-backed |  |  | 29 |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (2 | ) |  |  | (1 | ) |  |  | - |  |  |  | - |  |  |  | 27 |  |  |  | (1 | )
Collateralized debt obligations |  |  | 219 |  |  |  | - |  |  |  | (28 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 24 |  |  |  | (14 | ) |  |  | 201 |  |  |  | 5 |
Other asset-backed |  |  | 81 |  |  |  | - |  |  |  | (7 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1 | ) |  |  | - |  |  |  | 2 |  |  |  | - |  |  |  | 75 |  |  |  | 2 |
Loans receivable |  |  | 2,327 |  |  |  | - |  |  |  | 68 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (73 | ) |  |  | (2 | ) |  |  | - |  |  |  | - |  |  |  | 2,320 |  |  |  | 68 |
Loan repurchase commitments |  |  | 867 |  |  |  | - |  |  |  | 38 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 905 |  |  |  | 38 |
Total assets |  | $ | 4,439 |  |  | $ | (2) |  |  | $ | 59 |  |  | $ | 7 |  |  | $ | (17) |  |  | $ | 25 |  |  | $ | (93) |  |  | $ | (31) |  |  | $ | 172 |  |  | $ | (31) |  |  | $ | 4,528 |  |  | $ | 113 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Medium-term notes |  | $ | 163 |  |  | $ | - |  |  | $ | 39 |  |  | $ | - |  |  | $ | 4 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 206 |  |  | $ | 39 |
Credit derivatives, net |  |  | 5,772 |  |  |  | 193 |  |  |  | (115) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (194) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 5,656 |  |  |  | 897 |
Interest derivatives, net |  |  | (4) |  |  |  | - |  |  |  | (1) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | (4) |  |  |  | 2 |
Liabilities of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
VIE notes |  |  | 4,953 |  |  |  | - |  |  |  | 2 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (262 | ) |  |  | (180 | ) |  |  | - |  |  |  | - |  |  |  | 4,513 |  |  |  | 2 |
Credit derivatives, net |  |  | 926 |  |  |  | - |  |  |  | (6) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 920 |  |  |  | (7) |
Currency derivatives, net |  |  | 12 |  |  |  | - |  |  |  | 4 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 16 |  |  |  | 4 |
Total liabilities |  | $ | 11,822 |  |  | $ | 193 |  |  | $ | (77) |  |  | $ | - |  |  | $ | 4 |  |  | $ | - |  |  | $ | (456) |  |  | $ | (180) |  |  | $ | 1 |  |  | $ | - |  |  | $ | 11,307 |  |  | $ | 937 |
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended June 30, 2010 |
In millions |  | Balance, Beginning of Period |  |  | Realized Gains / (Losses) |  |  | Unrealized Gains / (Losses) Included in Earnings |  |  | Unrealized Gains / (Losses) Included in OCI |  |  | Foreign Exchange Recognized in OCI or Earnings |  |  | Purchases, Settlements and Sales, net |  |  | Transfers into Level 3 (1) |  |  | Transfers out of Level 3 (1) |  |  | Ending Balance |  |  | Change in Unrealized Gains (Losses) for the Period Included in Earnings for Assets still held as of June 30, 2010 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign governments |  | $ | 13 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | (1) |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 12 |  |  | $ | - |
Corporate obligations |  |  | 320 |  |  |  | (1) |  |  |  | - |  |  |  | 9 |  |  |  | (3) |  |  |  | (13) |  |  |  | 11 |  |  |  | (12) |  |  |  | 311 |  |  |  | - |
Residential mortgage-backed agency |  |  | 46 |  |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | (2) |  |  |  | - |  |  |  | (45) |  |  |  | - |  |  |  | - |
Residential mortgage-backed non-agency |  |  | 66 |  |  |  | - |  |  |  | - |  |  |  | 5 |  |  |  | - |  |  |  | (4) |  |  |  | 3 |  |  |  | (40) |  |  |  | 30 |  |  |  | - |
Commercial mortgage-backed |  |  | 17 |  |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | (1) |  |  |  | (3) |  |  |  | - |  |  |  | - |  |  |  | 14 |  |  |  | - |
Collateralized debt obligations |  |  | 202 |  |  |  | (5) |  |  |  | - |  |  |  | 21 |  |  |  | - |  |  |  | (9) |  |  |  | - |  |  |  | (98) |  |  |  | 111 |  |  |  | - |
Other asset-backed |  |  | 442 |  |  |  | - |  |  |  | - |  |  |  | (7) |  |  |  | - |  |  |  | (43) |  |  |  | 5 |  |  |  | (6) |  |  |  | 391 |  |  |  | - |
State and municipal tax-exempt bonds |  |  | 45 |  |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | (8) |  |  |  | - |  |  |  | - |  |  |  | 38 |  |  |  | - |
Perpetual preferred securities |  |  | 83 |  |  |  | - |  |  |  | - |  |  |  | 2 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 85 |  |  |  | - |
Assets of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate obligations |  |  | 81 |  |  |  | - |  |  |  | 76 |  |  |  | - |  |  |  | - |  |  |  | (20) |  |  |  | - |  |  |  | (8) |  |  |  | 129 |  |  |  | - |
Residential mortgage-backed non-agency |  |  | 82 |  |  |  | - |  |  |  | (252) |  |  |  | 2 |  |  |  | - |  |  |  | (4) |  |  |  | 274 |  |  |  | (49) |  |  |  | 53 |  |  |  | - |
Commercial mortgage-backed |  |  | 56 |  |  |  | - |  |  |  | 218 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | (59) |  |  |  | 216 |  |  |  | - |
Collateralized debt obligations |  |  | 326 |  |  |  | - |  |  |  | (27) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 40 |  |  |  | (12) |  |  |  | 327 |  |  |  | - |
Other asset-backed |  |  | 146 |  |  |  | - |  |  |  | 8 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 2 |  |  |  | (3) |  |  |  | 153 |  |  |  | - |
Loans receivable |  |  | 2,434 |  |  |  | - |  |  |  | 214 |  |  |  | - |  |  |  | (40) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 2,608 |  |  |  | - |
Loan repurchase commitments |  |  | 715 |  |  |  | - |  |  |  | 77 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 792 |  |  |  | 77 |
Total assets |  | $ | 5,074 |  |  | $ | (6) |  |  | $ | 314 |  |  | $ | 35 |  |  | $ | (45) |  |  | $ | (106) |  |  | $ | 336 |  |  | $ | (332) |  |  | $ | 5,270 |  |  | $ | 77 |
In millions |  | Balance, Beginning of Period |  |  | Realized (Gains) / Losses |  |  | Unrealized (Gains) / Losses Included in Earnings |  |  | Unrealized (Gains) / Losses Included in OCI |  |  | Foreign Exchange Recognized in OCI or Earnings |  |  | Purchases, Settlements and Sales, net |  |  | Transfers into Level 3 (1) |  |  | Transfers out of Level 3 (1) |  |  | Ending Balance |  |  | Change in Unrealized (Gains) Losses for the Period Included in Earnings for Liabilities still held as of June 30, 2010 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Medium-term notes |  | $ | 118 |  |  | $ | - |  |  | $ | 2 |  |  | $ | - |  |  | $ | (11) |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 109 |  |  | $ | 2 |
Credit derivatives, net |  |  | 5,950 |  |  |  | 90 |  |  |  | (1,536) |  |  |  | - |  |  |  | - |  |  |  | (91) |  |  |  | - |  |  |  | - |  |  |  | 4,413 |  |  |  | (1,546) |
Interest derivatives, net |  |  | (5) |  |  |  | - |  |  |  | (2) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (7) |  |  |  | 2 |
Currency derivatives, net |  |  | (12) |  |  |  | - |  |  |  | 6 |  |  |  | - |  |  |  | (1) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (7) |  |  |  | (3) |
Liabilities of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | - |
VIE notes |  |  | 5,340 |  |  |  | - |  |  |  | 119 |  |  |  | - |  |  |  | (12) |  |  |  | (402) |  |  |  | - |  |  |  | - |  |  |  | 5,045 |  |  |  | - |
Derivative contracts, net |  |  | 349 |  |  |  | - |  |  |  | 21 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 370 |  |  |  | 21 |
Total liabilities |  | $ | 11,740 |  |  | $ | 90 |  |  | $ | (1,390) |  |  | $ | - |  |  | $ | (24) |  |  | $ | (493) |  |  | $ | - |  |  | $ | - |  |  | $ | 9,923 |  |  | $ | (1,524) |
(1) - Transferred in and out at the end of the period. Transfers into and out of Level 3 were $173 million and $31 million, respectively, for the three months ended June 30, 2011. Transfers into and out of Level 2 were $31 million and $173 million, respectively, for the three months ended June 30, 2011. These transfers were principally for available-for-sale securities where inputs, which are significant to their valuation, became observable or unobservable during the quarter. These inputs included spreads, prepayment speeds, default speeds, default severities, yield curves observable at commonly quoted intervals, and market corroborated inputs. Corporate obligations and commercial mortgage-backed comprised the majority of the transferred instruments. There were no transfers into or out of Level 1. For the three months ended June 30, 2011, the net unrealized losses related to the transfers into Level 3 was $2 million and the net unrealized gains related to the transfers out of Level 3 was $8 million. Transfers into and out of Level 3 were $336 million and $332 million, respectively, for the three months ended June 30, 2010. Transfers into and out of Level 2 were $332 million and $336 million, respectively, for the three months ended June 30, 2010. These transfers were principally for available-for-sale securities where inputs, which are significant to their valuation, became unobservable or observable during the quarter. These inputs included spreads, prepayment speeds, default speeds, default severities, yield curves observable at commonly quoted intervals, and market corroborated inputs. RMBS non-agency, CDOs, RMBS agency and CMBS comprised the majority of the transferred instruments. There were no transfers in or out of Level 1. For the three months ended June 30, 2010, the net unrealized gains related to the transfers into Level 3 was $1 million and the net unrealized gains related to the transfers out of Level 3 was $32 million. All Level 1, 2 and 3 designations are made at the end of each accounting period. The following tables present information about changes in Level 3 assets (including short-term investments) and liabilities measured at fair value on a recurring basis for the six months ended June 30, 2011 and 2010:
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Six Months Ended June 30, 2011 |
In millions |  | Balance, Beginning of Year |  |  | Realized Gains / (Losses) |  |  | Unrealized Gains / (Losses) Included in Earnings |  |  | Unrealized Gains / (Losses) Included in OCI |  |  | Foreign Exchange Recognized in OCI or Earnings |  |  | Purchases |  |  | Issuances |  |  | Settlements |  |  | Sales |  |  | Transfers into Level 3 (1) |  |  | Transfers out of Level 3 (1) |  |  | Ending Balance |  |  | Change in Unrealized Gains (Losses) for the Period Included in Earnings for Assets still held as of June 30, 2011 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign governments |  | $ | 11 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | (6) |  |  | $ | 7 |  |  | $ | - |  |  | $ | 1 |  |  | $ | - |  |  | $ | 7 |  |  | $ | (7) |  |  | $ | 13 |  |  | $ | - |
Corporate obligations |  |  | 246 |  |  |  | - |  |  |  | - |  |  |  | 7 |  |  |  | 3 |  |  |  | 11 |  |  |  | - |  |  |  | (34) |  |  |  | (12) |  |  |  | 88 |  |  |  | (15) |  |  |  | 294 |  |  |  | - |
Residential mortgage-backed agency |  |  | 41 |  |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | (1) |  |  |  | (1) |  |  |  | - |  |  |  | (41) |  |  |  | - |  |  |  | - |
Residential mortgage-backed non-agency |  |  | 48 |  |  |  | (1) |  |  |  | - |  |  |  | 10 |  |  |  | (2) |  |  |  | 11 |  |  |  | - |  |  |  | (11) |  |  |  | (19) |  |  |  | 8 |  |  |  | (16) |  |  |  | 28 |  |  |  | - |
Commercial mortgage-backed |  |  | 41 |  |  |  | - |  |  |  | - |  |  |  | 2 |  |  |  | 1 |  |  |  | 9 |  |  |  | - |  |  |  | - |  |  |  | (2) |  |  |  | - |  |  |  | (1) |  |  |  | 50 |  |  |  | - |
Collateralized debt obligations |  |  | 191 |  |  |  | (2) |  |  |  | - |  |  |  | 28 |  |  |  | (9) |  |  |  | 7 |  |  |  | 1 |  |  |  | (33) |  |  |  | (8) |  |  |  | 48 |  |  |  | (61) |  |  |  | 162 |  |  |  | - |
Other asset-backed |  |  | 350 |  |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | (1) |  |  |  | 9 |  |  |  | - |  |  |  | (11) |  |  |  | (2) |  |  |  | 13 |  |  |  | (28) |  |  |  | 331 |  |  |  | - |
State and municipal taxable bonds |  |  | 14 |  |  |  | - |  |  |  | - |  |  |  | (1) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 13 |  |  |  | - |
State and municipal tax-exempt bonds |  |  | 36 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 2 |  |  |  | - |  |  |  | (5) |  |  |  | (1) |  |  |  | - |  |  |  | - |  |  |  | 32 |  |  |  | - |
Assets of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate obligations |  |  | 80 |  |  |  | - |  |  |  | (17) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (4) |  |  |  | - |  |  |  | 8 |  |  |  | (7) |  |  |  | 60 |  |  |  | (1) |
Residential mortgage-backed non-agency |  |  | 40 |  |  |  | - |  |  |  | 2 |  |  |  | 3 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (5) |  |  |  | - |  |  |  | - |  |  |  | (23) |  |  |  | 17 |  |  |  | 2 |
Commercial mortgage-backed |  |  | 23 |  |  |  | - |  |  |  | 7 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (2) |  |  |  | (1) |  |  |  | - |  |  |  | - |  |  |  | 27 |  |  |  | 6 |
Collateralized debt obligations |  |  | 245 |  |  |  | - |  |  |  | (14) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (2) |  |  |  | - |  |  |  | 40 |  |  |  | (68) |  |  |  | 201 |  |  |  | 19 |
Other asset-backed |  |  | 83 |  |  |  | - |  |  |  | (9) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (2) |  |  |  | - |  |  |  | 3 |  |  |  | - |  |  |  | 75 |  |  |  | (2) |
Loans receivable |  |  | 2,183 |  |  |  | - |  |  |  | 296 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (157) |  |  |  | (2) |  |  |  | - |  |  |  | - |  |  |  | 2,320 |  |  |  | 296 |
Loan repurchase commitments |  |  | 835 |  |  |  | - |  |  |  | 58 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 12 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 905 |  |  |  | 58 |
Total assets |  | $ | 4,467 |  |  | $ | (3) |  |  | $ | 323 |  |  | $ | 51 |  |  | $ | (14) |  |  | $ | 57 |  |  | $ | 13 |  |  | $ | (266) |  |  | $ | (48) |  |  | $ | 215 |  |  | $ | (267) |  |  | $ | 4,528 |  |  | $ | 378 |
In millions |  | Balance, Beginning of Year |  |  | Realized (Gains) / Losses |  |  | Unrealized (Gains) / Losses Included in Earnings |  |  | Unrealized (Gains) / Losses Included in OCI |  |  | Foreign Exchange Recognized in OCI or Earnings |  |  | Purchases |  |  | Issuances |  |  | Settlements |  |  | Sales |  |  | Transfers into Level 3 (1) |  |  | Transfers out of Level 3 (1) |  |  | Ending Balance |  |  | Change in Unrealized (Gains) Losses for the Period Included in Earnings for Liabilities still held as of June 30, 2011 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Medium-term notes |  | $ | 116 |  |  | $ | - |  |  | $ | 78 |  |  | $ | - |  |  | $ | 12 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 206 |  |  | $ | 78 |
Credit derivatives, net |  |  | 4,350 |  |  |  | 547 |  |  |  | 1,307 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (548) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 5,656 |  |  |  | 2,128 |
Interest derivatives, net |  |  | (5) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | (4) |  |  |  | 1 |
Liabilities of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
VIE notes |  |  | 4,673 |  |  |  | - |  |  |  | 584 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (564) |  |  |  | (180) |  |  |  | - |  |  |  | - |  |  |  | 4,513 |  |  |  | 584 |
Credit derivatives, net |  |  | 768 |  |  |  | - |  |  |  | 152 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 920 |  |  |  | 151 |
Currency derivatives, net |  |  | 14 |  |  |  | - |  |  |  | 2 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 16 |  |  |  | 2 |
Total liabilities |  | $ | 9,916 |  |  | $ | 547 |  |  | $ | 2,123 |  |  | $ | - |  |  | $ | 12 |  |  | $ | - |  |  | $ | - |  |  | $ | (1,112) |  |  | $ | (180) |  |  | $ | 1 |  |  | $ | - |  |  | $ | 11,307 |  |  | $ | 2,944 |
(1) - Transferred in and out at the end of the period.
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Six Months Ended June 30, 2010 |
In millions |  | Balance, Beginning of Year |  |  | Realized Gains / (Losses) |  |  | Unrealized Gains / (Losses) Included in Earnings |  |  | Unrealized Gains / (Losses) Included in OCI |  |  | Foreign Exchange Recognized in OCI or Earnings |  |  | Purchases, Settlements and Sales, net |  |  | Transfers into Level 3 (1) |  |  | Transfers out of Level 3 (1) |  |  | Ending Balance |  |  | Change in Unrealized Gains (Losses) for the Period Included in Earnings for Assets still held as of June 30, 2010 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and government agency |  | $ | 6 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | (6) |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |
Foreign governments |  |  | 12 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 12 |  |  |  | - |
Corporate obligations |  |  | 281 |  |  |  | (1) |  |  |  | - |  |  |  | 32 |  |  |  | (5) |  |  |  | (15) |  |  |  | 41 |  |  |  | (22) |  |  |  | 311 |  |  |  | - |
Residential mortgage-backed agency |  |  | 48 |  |  |  | - |  |  |  | - |  |  |  | 2 |  |  |  | - |  |  |  | (5) |  |  |  | - |  |  |  | (45) |  |  |  | - |  |  |  | - |
Residential mortgage-backed non-agency |  |  | 64 |  |  |  | (3) |  |  |  | - |  |  |  | 32 |  |  |  | - |  |  |  | (21) |  |  |  | 3 |  |  |  | (45) |  |  |  | 30 |  |  |  | - |
Commercial mortgage-backed |  |  | 20 |  |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | (2) |  |  |  | (5) |  |  |  | - |  |  |  | - |  |  |  | 14 |  |  |  | - |
Collateralized debt obligations |  |  | 245 |  |  |  | (12) |  |  |  | - |  |  |  | 61 |  |  |  | - |  |  |  | (76) |  |  |  | 16 |  |  |  | (123) |  |  |  | 111 |  |  |  | - |
Other asset-backed |  |  | 401 |  |  |  | - |  |  |  | - |  |  |  | (25) |  |  |  | - |  |  |  | 17 |  |  |  | 13 |  |  |  | (15) |  |  |  | 391 |  |  |  | - |
State and municipal tax-exempt bonds |  |  | 50 |  |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | (13) |  |  |  | - |  |  |  | - |  |  |  | 38 |  |  |  | - |
Other fixed-maturity investments |  |  | 19 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (19) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Perpetual preferred securities |  |  | 77 |  |  |  | - |  |  |  | - |  |  |  | 9 |  |  |  | - |  |  |  | (1) |  |  |  | - |  |  |  | - |  |  |  | 85 |  |  |  | - |
Assets of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate obligations |  |  | - |  |  |  | - |  |  |  | 76 |  |  |  | - |  |  |  | - |  |  |  | 61 |  |  |  | - |  |  |  | (8) |  |  |  | 129 |  |  |  | - |
Residential mortgage-backed non-agency |  |  | 166 |  |  |  | (1) |  |  |  | (253) |  |  |  | 3 |  |  |  | - |  |  |  | (91) |  |  |  | 281 |  |  |  | (52) |  |  |  | 53 |  |  |  | - |
Commercial mortgage-backed |  |  | 3 |  |  |  | - |  |  |  | 218 |  |  |  | - |  |  |  | - |  |  |  | 53 |  |  |  | 1 |  |  |  | (59) |  |  |  | 216 |  |  |  | - |
Collateralized debt obligations |  |  | 42 |  |  |  | - |  |  |  | (27) |  |  |  | - |  |  |  | - |  |  |  | 284 |  |  |  | 40 |  |  |  | (12) |  |  |  | 327 |  |  |  | - |
Other asset-backed |  |  | 193 |  |  |  | - |  |  |  | 8 |  |  |  | - |  |  |  | - |  |  |  | (47) |  |  |  | 2 |  |  |  | (3) |  |  |  | 153 |  |  |  | - |
Loans receivable |  |  | - |  |  |  | - |  |  |  | 195 |  |  |  | - |  |  |  | (21) |  |  |  | 2,434 |  |  |  | - |  |  |  | - |  |  |  | 2,608 |  |  |  | - |
Loan repurchase commitments |  |  | - |  |  |  | - |  |  |  | 77 |  |  |  | - |  |  |  | - |  |  |  | 715 |  |  |  | - |  |  |  | - |  |  |  | 792 |  |  |  | 77 |
Total assets |  | $ | 1,627 |  |  | $ | (17) |  |  | $ | 294 |  |  | $ | 116 |  |  | $ | (28) |  |  | $ | 3,265 |  |  | $ | 397 |  |  | $ | (384) |  |  | $ | 5,270 |  |  | $ | 77 |
In millions |  | Balance, Beginning of Year |  |  | Realized (Gains) / Losses |  |  | Unrealized (Gains) / Losses Included in Earnings |  |  | Unrealized (Gains) / Losses Included in OCI |  |  | Foreign Exchange Recognized in OCI or Earnings |  |  | Purchases, Settlements and Sales, net |  |  | Transfers into Level 3 (1) |  |  | Transfers out of Level 3 |  |  | Ending Balance |  |  | Change in Unrealized (Gains) Losses for the Period Included in Earnings for Liabilities still held as of June 30, 2010 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Medium-term notes |  | $ | 110 |  |  | $ | - |  |  | $ | 16 |  |  | $ | - |  |  | $ | (17) |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 109 |  |  | $ | 16 |
Credit derivatives, net |  |  | 3,799 |  |  |  | 153 |  |  |  | 674 |  |  |  | - |  |  |  | - |  |  |  | (213) |  |  |  | - |  |  |  | - |  |  |  | 4,413 |  |  |  | 677 |
Interest derivatives, net |  |  | (6) |  |  |  | (8) |  |  |  | 3 |  |  |  | - |  |  |  | 4 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (7) |  |  |  | 6 |
Currency derivatives, net |  |  | (3) |  |  |  | - |  |  |  | (2) |  |  |  | - |  |  |  | (2) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (7) |  |  |  | (12) |
Liabilities of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
VIE notes |  |  | - |  |  |  | - |  |  |  | 134 |  |  |  | - |  |  |  | (6) |  |  |  | 4,917 |  |  |  | - |  |  |  | - |  |  |  | 5,045 |  |  |  | - |
Derivative contracts, net |  |  | - |  |  |  | - |  |  |  | 3 |  |  |  | - |  |  |  | - |  |  |  | 367 |  |  |  | - |  |  |  | - |  |  |  | 370 |  |  |  | 3 |
Total liabilities |  | $ | 3,900 |  |  | $ | 145 |  |  | $ | 828 |  |  | $ | - |  |  | $ | (21) |  |  | $ | 5,071 |  |  | $ | - |  |  | $ | - |  |  | $ | 9,923 |  |  | $ | 690 |
(1) - Transferred in and out at the end of the period. Transfers into and out of Level 3 were $216 million and $267 million, respectively, for the six months ended June 30, 2011. Transfers into and out of Level 2 were $267 million and $216 million, respectively, for the six months ended June 30, 2011. These transfers were principally for available-for-sale securities where inputs, which are significant to their valuation, became observable or unobservable during the quarter. These inputs included spreads, prepayment speeds, default speeds, default severities, yield curves observable at commonly quoted intervals, and market corroborated inputs. Corporate obligations and CDOs comprised the majority of the transferred instruments. There were no transfers into or out of Level 1. For the six months ended June 30, 2011, the net unrealized losses related to the transfers into Level 3 was $1 million and the net unrealized gains related to the transfers out of Level 3 was $22 million. Transfers into and out of Level 3 were $397 million and $384 million, respectively, for the six months ended June 30, 2010. Transfers into and out of Level 2 were $384 million and $397 million, respectively, for the six months ended June 30, 2010. These transfers were principally for available-for-sale securities where inputs, which are significant to their valuation, became unobservable or observable during the quarter. These inputs included spreads, prepayment speeds, default speeds, default severities, yield curves observable at commonly quoted intervals, and market corroborated inputs. RMBS non-agency, CDOs, RMBS agency and CMBS comprised the majority of the transferred instruments. There were no transfers in or out of Level 1. For the six months ended June 30, 2010, the net unrealized gains related to the transfers into Level 3 was $2 million and the net unrealized gains related to the transfers out of Level 3 was $44 million. Gains and losses (realized and unrealized) included in earnings pertaining to Level 3 assets and liabilities for the three months ended June 30, 2011 and 2010 are reported on the Company's consolidated statements of operations as follows:
|  | Three Months Ended June 30, 2011 |
|  |  |  |  |  |  |  |  |  |  | Consolidated VIEs |
In millions |  | Unrealized Gains (Losses) on Insured Derivatives |  |  | Net Realized Gains (Losses) |  |  | Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange |  |  | Net Realized Gains (Losses) |  |  | Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange |
Total gains (losses) included in earnings |  | $ | 115 |  |  | $ | (193) |  |  | $ | 40 |  |  | $ | - |  |  | $ | 60 |
Change in unrealized gains (losses) for the period included in earnings for assets and liabilities still held as of June 30, 2011 |  | $ | (897) |  |  | $ | - |  |  | $ | 37 |  |  | $ | - |  |  | $ | 114 |
|  | Three Months Ended June 30, 2010 |
|  |  |  |  |  |  |  |  |  |  | Consolidated VIEs |
In millions |  | Unrealized Gains (Losses) on Insured Derivatives |  |  | Net Realized Gains (Losses) |  |  | Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange |  |  | Net Realized Gains (Losses) |  |  | Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange |
Total gains (losses) included in earnings |  | $ | 1,536 |  |  | $ | (91) |  |  | $ | (5) |  |  | $ | - |  |  | $ | 56 |
Change in unrealized gains (losses) for the period included in earnings for assets and liabilities still held as of June 30, 2010 |  | $ | 1,539 |  |  | $ | - |  |  | $ | 8 |  |  | $ | - |  |  | $ | 56 |
Gains and losses (realized and unrealized) included in earnings pertaining to Level 3 assets and liabilities for the six months ended June 30, 2011 and 2010 are reported on the consolidated statements of operations as follows:
|  | Six Months Ended June 30, 2011 |
|  |  |  |  |  |  |  |  |  |  | Consolidated VIEs |
In millions |  | Unrealized Gains (Losses) on Insured Derivatives |  |  | Net Realized Gains (Losses) |  |  | Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange |  |  | Net Realized Gains (Losses) |  |  | Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange |
Total gains (losses) included in earnings |  | $ | (1,307) |  |  | $ | (547) |  |  | $ | 79 |  |  | $ | - |  |  | $ | (414) |
Change in unrealized gains (losses) for the period included in earnings for assets and liabilities still held as of June 30, 2011 |  | $ | (2,128) |  |  | $ | - |  |  | $ | 77 |  |  | $ | - |  |  | $ | (359) |
|  | Six Months Ended June 30, 2010 |
|  |  |  |  |  |  |  |  |  |  | Consolidated VIEs |
In millions |  | Unrealized Gains (Losses) on Insured Derivatives |  |  | Net Realized Gains (Losses) |  |  | Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange |  |  | Net Realized Gains (Losses) |  |  | Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange |
Total gains (losses) included in earnings |  | $ | (674) |  |  | $ | (145) |  |  | $ | (1) |  |  | $ | - |  |  | $ | 74 |
Change in unrealized gains (losses) for the period included in earnings for assets and liabilities still held as of June 30, 2010 |  | $ | (691) |  |  | $ | - |  |  | $ | 20 |  |  | $ | - |  |  | $ | 74 |
Fair Value Option The Company elected to record at fair value certain financial instruments of the VIEs that have been consolidated in connection with the adoption of the accounting guidance for consolidation of VIEs, among others. The following tables present the changes in fair value included in the Company's consolidated statement of operations for the three months ended June 30, 2011 and 2010 for all financial instruments for which the fair value option was elected.
|  | Three Months Ended June 30, |
|  | 2011 |  |  | 2010 |
In millions |  | Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange |  |  | Net Realized Gains (Losses) |  |  | Total Changes in Fair Value |  |  | Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange |  |  | Net Realized Gains (Losses) |  |  | Total Changes in Fair Value |
Fixed-maturity securities held at fair value |  | $ | (265) |  |  | $ | - |  |  | $ | (265) |  |  | $ | 231 |  |  | $ | - |  |  | $ | 231 |
Loans receivable at fair value: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage loans |  |  | 29 |  |  |  | - |  |  |  | 29 |  |  |  | 130 |  |  |  | - |  |  |  | 130 |
Other loans |  |  | (35) |  |  |  | - |  |  |  | (35) |  |  |  | 44 |  |  |  | - |  |  |  | 44 |
Loan repurchase commitments |  |  | 39 |  |  |  | - |  |  |  | 39 |  |  |  | 77 |  |  |  | - |  |  |  | 77 |
Other assets |  |  | 18 |  |  |  | - |  |  |  | 18 |  |  |  | (2) |  |  |  | - |  |  |  | (2) |
Long-term debt |  |  | 252 |  |  |  | - |  |  |  | 252 |  |  |  | (123) |  |  |  | - |  |  |  | (123) |
The following tables present the changes in fair value included in the Company's consolidated statement of operations for the six months ended June 30, 2011 and 2010 for all financial instruments for which the fair value option was elected.
|  | Six Months Ended June 30, |
|  | 2011 |  |  | 2010 |
In millions |  | Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange |  |  | Net Realized Gains (Losses) |  |  | Total Changes in Fair Value |  |  | Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange |  |  | Net Realized Gains (Losses) |  |  | Total Changes in Fair Value |
Fixed-maturity securities held at fair value |  | $ | (52) |  |  | $ | - |  |  | $ | (52) |  |  | $ | 248 |  |  | $ | 21 |  |  | $ | 269 |
Loans receivable at fair value: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage loans |  |  | 130 |  |  |  | - |  |  |  | 130 |  |  |  | 368 |  |  |  | 220 |  |  |  | 588 |
Other loans |  |  | 7 |  |  |  | - |  |  |  | 7 |  |  |  | 18 |  |  |  | - |  |  |  | 18 |
Loan repurchase commitments |  |  | 70 |  |  |  | - |  |  |  | 70 |  |  |  | 293 |  |  |  | 63 |  |  |  | 356 |
Other assets |  |  | (22) |  |  |  | - |  |  |  | (22) |  |  |  | (1) |  |  |  | 159 |  |  |  | 158 |
Long-term debt |  |  | (115) |  |  |  | - |  |  |  | (115) |  |  |  | (424) |  |  |  | (333) |  |  |  | (757) |
The following table reflects the difference between the aggregate fair value and the aggregate remaining contractual principal balance outstanding as of June 30, 2011 and December 31, 2010 for loans and long-term debt for which the fair value option has been elected.
|  | As of June 30, 2011 |  |  | As of December 31, 2010 |
In millions |  | Contractual Outstanding Principal |  |  | Fair Value |  |  | Difference |  |  | Contractual Outstanding Principal |  |  | Fair Value |  |  | Difference |
Loans receivable at fair value: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage loans |  | $ | 3,034 |  |  | $ | 2,144 |  |  | $ | 890 |  |  | $ | 3,334 |  |  | $ | 2,014 |  |  | $ | 1,320 |
Residential mortgage loans (90 days or more past due) |  |  | 240 |  |  |  | - |  |  |  | 240 |  |  |  | 243 |  |  |  | - |  |  |  | 243 |
Other loans |  |  | 304 |  |  |  | 108 |  |  |  | 196 |  |  |  | 412 |  |  |  | 124 |  |  |  | 288 |
Other loans (90 days or more past due) |  |  | 191 |  |  |  | 68 |  |  |  | 123 |  |  |  | 149 |  |  |  | 45 |  |  |  | 104 |
Total loans receivable at fair value |  | $ | 3,769 |  |  | $ | 2,320 |  |  | $ | 1,449 |  |  | $ | 4,138 |  |  | $ | 2,183 |  |  | $ | 1,955 |
Long-term debt |  | $ | 23,448 |  |  | $ | 6,539 |  |  | $ | 16,909 |  |  | $ | 17,217 |  |  | $ | 6,680 |  |  | $ | 10,537 |
Substantially all gains and losses included in earnings during the six months ended June 30, 2011 on loans receivable and long-term debt reported in the preceding table are attributable to credit risk. This is primarily due to the high rate of defaults on loans and the collateral supporting the long-term debt, resulting in depressed pricing of the financial instruments.

X
- Definition Fair Value of Financial Instruments [Abstract] + Details
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Namespace Prefix: | mbi
Data Type: | xbrli:stringItemType
Balance Type: | na
Period Type: | duration

X
- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=6925170&loc=d3e19296-110258 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 159 -Paragraph 17-22, 27, 28 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=6947722&loc=d3e13433-108611 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15C, 15D -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. 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Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=6947722&loc=d3e13537-108611 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 44A, 44B -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. 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