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Fair Value Of Financial Instruments | 9 Months Ended
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Sep. 30, 2012
Fair Value Of Financial Instruments | Note 6: Fair Value of Financial Instruments Fair Value Measurement Fair value is a market-based measure considered from the perspective of a market participant. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those which it believes market participants would use in pricing an asset or liability at the measurement date. The fair value measurements of financial instruments held or issued by the Company are determined through the use of observable market data when available. Market data is obtained from a variety of third-party sources, including dealer quotes. If dealer quotes are not available for an instrument that is infrequently traded, the Company uses alternate valuation methods, including either dealer quotes for similar instruments or modeling using market data inputs. The use of alternate valuation methods generally requires considerable judgment in the application of estimates and assumptions, and changes to such estimates and assumptions may produce materially different fair values. The accounting guidance for fair value measurement establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available and reliable. Observable inputs are those the Company believes that market participants would use in pricing an asset or liability based on available market data. Unobservable inputs are those that reflect the Company’s beliefs about the assumptions market participants would use in pricing an asset or liability based on the best information available. The fair value hierarchy is broken down into three levels based on the observability and reliability of inputs, as follows:
| • |  | Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that the Company can access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail any degree of judgment.
| • |  | Level 2—Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Level 2 assets include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, securities which are priced using observable inputs and derivative contracts whose values are determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.
| • |  | Level 3—Valuations based on inputs that are unobservable and supported by little or no market activity and that are significant to the overall fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques where significant inputs are unobservable, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
The availability of observable inputs can vary from product to product and period to period and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new and not yet established in the marketplace, and other characteristics particular to the product. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the Company assigns the level in the fair value hierarchy for which the fair value measurement in its entirety falls, based on the least observable input that is significant to the fair value measurement. 1. Financial Assets (excluding derivative assets) Financial assets, excluding derivative assets, held by the Company primarily consist of investments in debt securities. Substantially all of the Company’s investments are priced by independent third parties, including pricing services and brokers. Typically the Company receives one pricing service value or broker quote for each instrument, which represents a non-binding indication of value. The Company reviews the assumptions, inputs and methodologies used by pricing services to obtain reasonable assurance that the prices used in its valuations reflect fair value. When the Company believes a third-party quotation differs significantly from its internally developed expectation of fair value, whether higher or lower, the Company reviews its data or assumptions with the provider. This review includes comparing significant assumptions such as prepayment speeds, default ratios, forward yield curves, credit spreads and other significant quantitative inputs to internal assumptions, and working with the price provider to reconcile the differences. The price provider may subsequently provide an updated price. In the event that the price provider does not update their price, and the Company still does not agree with the price provided, the Company will try to obtain a price from another third-party provider, such as a broker, or use an internally developed price which it believes represents the fair value of the investment. The fair values of investments for which internal prices were used were not significant to the aggregate fair value of the Company’s investment portfolio as of September 30, 2012 or December 31, 2011. All challenges to third-party prices are reviewed by staff of the Company with relevant expertise to ensure reasonableness of assumptions. In addition to challenging pricing assumptions, the Company obtains reports from the independent accountants for significant third-party pricing services attesting to the effectiveness of the controls over data provided to the Company. These reports are obtained annually and are reviewed by the Company to ensure key controls are applied by the pricing services, and that appropriate user controls are in place at the Company to ensure proper measurement of the fair values of its investments. In the event that any controls in these reports are deemed as ineffective by independent accountants, the Company will take the necessary actions to ensure that internal user controls are in place to mitigate the control risks. No deficiencies were noted for significant third-party pricing services used. 2. Financial Liabilities (excluding derivative liabilities) Financial liabilities, excluding derivative liabilities, issued by the Company primarily consist of investment agreements and MTNs within its wind-down operations, and debt issued for general corporate purposes. Investment agreements, MTNs, and corporate debt are typically recorded at face value adjusted for premiums or discounts. Financial liabilities that the Company has elected to fair value or that require fair value reporting or disclosures are valued based on the estimated value of the underlying collateral, the Company’s or a third-party’s estimate of discounted cash flow model estimates, or quoted market values for similar products. These valuations include adjustments for expected nonperformance risk of the Company. 3. Derivative Assets and Liabilities The Company’s derivative liabilities are primarily insured credit derivatives that reference structured pools of cash securities and CDSs. The Company generally insured the most senior liabilities of such transactions, and at the inception of transactions its exposure generally had more subordination than needed to achieve triple-A ratings from credit rating agencies. The types of collateral underlying its insured derivatives consist of cash securities and CDSs referencing primarily corporate, asset-backed, residential mortgage-backed, commercial mortgage-backed, CRE loans, and CDO securities. The Company’s insured credit derivative contracts are non-traded structured credit derivative transactions. Since insured derivatives are highly customized and there is generally no observable market for these derivatives, the Company estimates their fair values in a hypothetical market based on internal and third-party models simulating what a similar company would charge to assume the Company’s position in the transaction at the measurement date. This pricing would be based on the expected loss of the exposure. The Company reviews its valuation 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 or securities prices are observable for similar transactions, those spreads are an integral part of the analysis. New insured transactions that resemble existing (previously insured) transactions, if any, would be considered, as well as negotiated settlements of existing transactions. The Company may from time to time make changes in its valuation techniques if the change results in a measurement that it believes is equally or more representative of fair value under current circumstances. 4. Internal Review Process All significant financial assets and liabilities, including derivative assets and liabilities, are reviewed by committees created by the Company to ensure compliance with the Company’s policies and risk procedures in the development of fair values of financial assets and liabilities. These valuation committees review, among other things, key assumptions used for internally developed prices, significant changes in sources and uses of inputs, including changes in model approaches, and any adjustments from third-party inputs or prices to internally developed inputs or prices. The committees also review any significant impairment or improvements in fair values of the financial instruments from prior periods. From time to time, these committees will reach out to the Company valuation experts to better understand key methods and assumptions used for the determination of fair value, including understanding significant changes in fair values. These committees are comprised of senior finance team members with the relevant experience in the financial assets their committee is responsible for. For each quarter, these committees document their agreement with the fair values developed by management of the Company as reported in the quarterly financial statements. Valuation Techniques Valuation techniques for financial instruments measured at fair value and included in the tables that follow are described below. Fixed-Maturity Securities (including short-term investments) Held as Available-For-Sale, Fixed-Maturity Securities at Fair Value, Investments Pledged as Collateral, Investments Held-to-Maturity, and Other Investments Fixed-maturity securities (including short-term investments) held as available-for-sale, fixed-maturity securities at fair value, investments pledged as collateral, and other investments include investments in U.S. Treasury and government agencies, foreign governments, corporate obligations, MBS and ABS (including CMBS and CDOs), state and municipal bonds and equity securities (including perpetual preferred securities and money market mutual funds). These investments are generally valued based on recently executed transaction prices or quoted market prices. When quoted market prices are not available, fair value is generally determined using quoted prices of similar investments or a valuation model based on observable and unobservable inputs. Inputs vary depending on the type of investment. Observable inputs include contractual cash flows, interest rate yield curves, CDS spreads, prepayment and volatility scores, diversity scores, cross-currency basis index spreads, and credit spreads for structures similar to the financial instrument in terms of issuer, maturity and seniority. Unobservable inputs include cash flow projections and the value of any credit enhancement. The fair value of the investments held-to-maturity is determined using discounted cash flow models. Key inputs include unobservable cash flows projected over the expected term of the investment discounted using observable interest rate yield curves of similar securities. Investments based on quoted market prices of identical investments in active markets are classified as Level 1 of the fair value hierarchy. Level 1 investments generally consist of U.S. Treasury and foreign government and agency investments. Quoted market prices of investments in less active markets, as well as investments which are valued based on other than quoted prices for which the inputs are observable, such as interest rate yield curves, are categorized in Level 2 of the fair value hierarchy. Investments that contain significant inputs that are not observable are categorized as Level 3. Cash and Cash Equivalents, Receivable for Investments Sold, and Accrued Investment Income The carrying amounts of cash and cash equivalents, receivable for investments sold, and accrued investment income approximate fair values due to the short-term nature and credit worthiness of these instruments. Loans Receivable at Fair Value Loans receivable at fair value are comprised of 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 adjustments for the fair values of the financial guarantees 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 assets of the consolidated VIEs. This asset represents the rights of MBIA against the sellers/servicers for breaches of representations and warranties that the securitized residential mortgage loans sold to the trust to comply with stated underwriting guidelines and for the sellers/servicers to cure, replace, or repurchase mortgage loans. Fair value measurements of loan repurchase commitments represent the amounts owed by the sellers/servicers to either MBIA as reimbursement of paid claims or to the RMBS trusts as defined in the transaction documents. 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 inputs including:
| • |  | breach rates representing the rate at which the sellers/servicers failed to comply with stated representations and warranties;
| • |  | recovery rates representing the estimates of future cash flows for the asset, including estimates about possible variations in the amount of cash flows expected to be collected;
| • |  | expectations about possible variations in the timing of collections of the cash flows; and
| • |  | time value of money, represented by the rate on risk-free monetary assets.
Investment Agreements The fair values of investment agreements are determined using discounted cash flow techniques based on contractual cash flows and 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. As the terms of the notes are private, and the contract cash flows are not observable, these investment agreements are categorized as Level 3 of the fair value hierarchy. Medium-Term Notes The fair values of MTNs are based on quoted market prices provided by third-party sources, where available. When quoted market prices are not available, the Company applies a matrix pricing grid based on the quoted market prices received and the MTNs’ stated maturity and interest rate to determine fair value. Nonperformance risk is included in the quoted market prices and the matrix pricing grid. The Company has elected to record three MTNs at fair value as they contain embedded derivatives which cannot accurately be separated from the host debt instrument and fair valued separately, therefore, these three MTNs are carried at fair value with changes in fair value reflected in earnings. The remaining MTNs, which are not carried at fair value, do not contain embedded derivatives. As these MTNs are illiquid and the prices reflect significant unobservable inputs, they 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 and unobservable inputs. Observable inputs include interest rate yield curves and bond spreads of similar securities. Unobservable inputs include the value of any credit enhancement. 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. 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. Long-term debt is categorized as Level 2 of the fair value hierarchy. Derivatives—Asset/Liability Products The asset/liability products business has entered into derivative transactions primarily consisting of interest rate swaps, cross currency swaps, and CDS contracts. 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 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 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 the Company cannot be legally traded and generally do not have observable market prices. The Company determines the fair values of insured credit derivatives using valuation models. Approximately 81% of the balance sheet fair value of insured credit derivatives as of September 30, 2012 was valued using the Binomial Expansion Technique (“BET”) Model. Approximately 19% of the balance sheet fair value of insured credit derivatives as of September 30, 2012 was valued using the internally developed Direct Price Model. An immaterial amount of insured credit derivatives were valued using the 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. 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. 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, are 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 inception-to-date unrealized gain or loss on a transaction 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. Spread Hierarchy:
| • |  | Collateral-specific credit spreads when observable.
| • |  | Sector-specific spread tables by asset class and rating.
| • |  | Corporate spreads, including Bloomberg spread tables based on rating.
| • |  | Benchmark from most relevant market source when corporate spreads are not directly relevant.
There were some transactions where the Company 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. As of September 30, 2012, sector-specific spreads were used in 9% of the transactions valued using the BET Model. Corporate spreads were used in 46% of the transactions and spreads benchmarked from the most relevant spread source were used for 45% of the transactions. 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 77% 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 use more observable spread hierarchies defined above. However, the Company may on occasion move to less observable spread inputs due to the discontinuation of data sources or due to the Company considering certain spread 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. While diversity score is a required input into the BET model, due to current high levels of default within the collateral of the structures, diversity score does not have a significant impact on valuation. 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. 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 September 30, 2012. 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 The Direct Price Model uses quoted market prices of financial assets correlated to the underlying collateral of the pool of assets backing the liabilities guaranteed by certain insured derivative liabilities. These quoted market prices are adjusted to reflect the unique characteristics of the liabilities of the entities backed by the correlated assets and unique terms of the insured derivative contracts. 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 September 30, 2012 and December 31, 2011, the Company’s net insured derivative liability was $3.3 billion and $4.8 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 $4.4 billion and $5.7 billion lower than the net liability that would have been estimated if the Company excluded nonperformance risk in its valuation as of September 30, 2012 and December 31, 2011, 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. 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, net of expected recoveries, (iii) the cost of capital reserves required to support the financial guarantee liability, (iv) operating expenses, and (v) discount rates. The MBIA Corp. CDS spread and recovery rate are used as the discount rate for MBIA Corp., while the CDS spread and recovery rate of a similar municipal insurance company are used as the discount rate for National, as National does not have a published CDS spread and recovery rate. The carrying value of the Company’s gross financial guarantees consists of unearned premium revenue and loss and LAE reserves, net of the insurance loss recoverable 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 and unpaid losses as reported within “Other assets” on the Company’s consolidated balance sheets. Significant Unobservable Inputs The following table provides quantitative information regarding the significant unobservable inputs used by the Company for assets and liabilities measured at fair value on a recurring basis as of September 30, 2012. This table excludes inputs used to measure fair value that are not developed by the Company, such as broker prices and other third-party pricing service valuations.
In millions |  | Fair Value as of September 30, 2012 |  |  | Valuation Techniques |  | Unobservable Input |  | Range (Weighted Average) |
Assets of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |
Loans receivable at fair value |  | $ | 1,892 |  |  | Quoted market prices adjusted for financial guarantees provided to VIE obligations |  | Impact of financial guarantee |  |  | 0% - 22% (4%) |
Loan repurchase commitments |  |  | 1,051 |  |  | Discounted cash flow |  | Recovery rates |  |  | 9% - 96% (43%) |
|  |  |  |  |  |  |  | Breach rates |  |  | 65% - 94% (78%) |
Liabilities of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |
Variable interest entity notes |  |  | 1,885 |  |  | Quoted market prices of VIE assets adjusted for financial guarantees provided |  | Impact of financial guarantee |  |  | 0% - 20% (6%) |
Credit derivative liabilities, net: |  |  |  |  |  |  |  |  |  |  |  |
CMBS |  |  | 1,533 |  |  | BET Model |  | Recovery rates |  |  | 20% - 90% (51%) |
|  |  |  |  |  |  |  | Nonperformance risk |  |  | 8% - 62% (57%) |
|  |  |  |  |  |  |  | Weighted average life (in years) |  |  | 0.3 - 5.9 (4.6) |
|  |  |  |  |  |  |  | CMBS spreads |  |  | 1% - 22% (12%) |
Multi-sector CDO |  |  | 628 |  |  | Direct Price Model |  | Nonperformance risk |  |  | 63% - 63% (63%) |
Other |  |  | 1,156 |  |  | BET Model |  | Recovery rates |  |  | 42% - 75% (47%) |
|  |  |  |  |  |  |  | Nonperformance risk |  |  | 8% - 63% (50%) |
|  |  |  |  |  |  |  | Weighted average life (in years) |  |  | 0.2 - 19.0 (3.1) |
Sensitivity of Significant Unobservable Inputs The significant unobservable input used in the fair value measurement of the Company’s loans receivable at fair value of consolidated VIEs is the impact of the financial guarantee. The fair value of loans receivable is calculated by subtracting the value of the financial guarantee from the market value of VIE liabilities. The value of a financial guarantee is estimated by the Company as the present value of expected cash payments under the policy. As expected cash payments provided by the Company under the insurance policy increase, there is a lower expected cash flow on the underlying loans receivable of the VIE. This results in a lower fair value of the loans receivable in relation to the obligations of the VIE. The significant unobservable inputs used in the fair value measurement of the Company’s loan repurchase commitments of consolidated VIEs are the recovery rates and the breach rates. Recovery rates reflect the estimates of future cash flows reduced for litigation delays and risks and/or potential financial distress of the sellers/services. The estimated recoveries of the loan repurchase commitments may differ from the actual recoveries that may be received in the future. Breach rates represent the rate at which the mortgages fail to comply with stated representations and warranties of the sellers/servicers. Significant increases or decreases in the recovery rates and the breach rates would result in significantly higher or lower fair values of the loan repurchase commitments, respectively. Additionally, changes in the legal environment and the ability of the counterparties to pay would impact the recovery rate assumptions, which could significantly impact the fair value measurement. Any significant challenges by the counterparties to the Company’s determination of breaches of representations and warranties could significantly adversely impact the fair value measurement. Recovery rates and breach rates are determined independently. Changes in one input will not necessarily have any impact on the other input. The significant unobservable input used in the fair value measurement of the Company’s variable interest entity notes of consolidated VIEs is the impact of the financial guarantee. The fair value of VIE notes is calculated by adding the value of the financial guarantee to the market value of VIE assets. The value of a financial guarantee is estimated by the Company as the present value of expected cash payments under the policy. As the value of the guarantee provided by the Company to the obligations issued by the VIE increases, the credit support adds value to the liabilities of the VIE. This results in an increase in the fair value of the liabilities of the VIE. The significant unobservable inputs used in the fair value measurement of the Company’s CMBS credit derivatives, which are valued using the BET Model, are CMBS spreads, recovery rates, nonperformance risk and weighted average life. The CMBS spread is an indicator of credit risk of the collateral securities. The recovery rate represents the percentage of notional expected to be recovered after an asset defaults, indicating the severity of a potential loss. The nonperformance risk is an assumption of the Company’s own ability to pay and whether the Company will have the necessary resources to pay the obligations as they come due. Weighted average life is based on the Company’s estimate of when the principal of the underlying collateral of the CMBS structure will be repaid. A significant increase or decrease in CMBS spreads or weighted average life would result in an increase or decrease in the fair value of the derivative liabilities, respectively. Any significant increase or decrease in recovery rates or the Company’s nonperformance risk would result in a decrease or increase in the fair value of the derivative liabilities, respectively. CMBS spreads, recovery rates, nonperformance risk and weighted average lives are determined independently. Changes in one input will not necessarily have any impact on the other inputs. The significant unobservable input used in the fair value measurement of the Company’s multi-sector CDO credit derivatives, which are valued using the Direct Price Model, is nonperformance risk. The nonperformance risk is an assumption of the Company’s own ability to pay and whether the Company will have the necessary resources to pay the obligations as they come due. Any significant increase or decrease in the Company’s nonperformance risk would result in a decrease or increase in the fair value of the derivative liabilities, respectively. The significant unobservable inputs used in the fair value measurement of the Company’s other credit derivatives, which are valued using the BET Model, are recovery rates, nonperformance risk and weighted average life. The recovery rate represents the percentage of notional expected to be recovered after an asset defaults, indicating the severity of a potential loss. The nonperformance risk is an assumption of the Company’s own ability to pay and whether the Company will have the necessary resources to pay the obligations as they come due. Weighted average life is based on the Company’s estimate of when the principal of the underlying collateral will be repaid. Any significant increase or decrease in weighted average life would result in an increase or decrease in the fair value of the derivative liabilities, respectively. Any significant increase or decrease in recovery rates or the Company’s nonperformance risk would result in a decrease or increase in the fair value of the derivative liabilities, respectively. Recovery rates, nonperformance risk and weighted average lives are determined independently. Changes in one input will not necessarily have any impact on the other inputs. Fair Value Measurements The following tables present the fair value of the Company’s assets (including short-term investments) and liabilities measured and reported at fair value on a recurring basis as of September 30, 2012 and December 31, 2011:
|  | 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 September 30, 2012 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed-maturity investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable bonds: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and government agency |  | $ | 860 |  |  | $ | 101 |  |  | $ | - |  |  | $ | - |  |  | $ | 961 |
Foreign governments |  |  | 257 |  |  |  | 72 |  |  |  | 12 | (1) |  |  | - |  |  |  | 341 |
Corporate obligations |  |  | 1 |  |  |  | 1,136 |  |  |  | 91 | (1) |  |  | - |  |  |  | 1,228 |
Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed agency |  |  | - |  |  |  | 1,073 |  |  |  | - |  |  |  | - |  |  |  | 1,073 |
Residential mortgage-backed non-agency |  |  | - |  |  |  | 169 |  |  |  | 7 | (1) |  |  | - |  |  |  | 176 |
Commercial mortgage-backed |  |  | - |  |  |  | 19 |  |  |  | 30 | (1) |  |  | - |  |  |  | 49 |
Asset-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collateralized debt obligations |  |  | - |  |  |  | 64 |  |  |  | 30 | (1) |  |  | - |  |  |  | 94 |
Other asset-backed |  |  | - |  |  |  | 116 |  |  |  | 73 | (1) |  |  | - |  |  |  | 189 |
State and municipal bonds |  |  | - |  |  |  | 888 |  |  |  | 71 | (1) |  |  | - |  |  |  | 959 |
Total taxable bonds |  |  | 1,118 |  |  |  | 3,638 |  |  |  | 314 |  |  |  | - |  |  |  | 5,070 |
Tax-exempt bonds: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
State and municipal bonds |  |  | - |  |  |  | 925 |  |  |  | 23 | (1) |  |  | - |  |  |  | 948 |
Other fixed-maturity investments |  |  | - |  |  |  | 10 |  |  |  | - |  |  |  | - |  |  |  | 10 |
Total fixed-maturity investments |  |  | 1,118 |  |  |  | 4,573 |  |  |  | 337 |  |  |  | - |  |  |  | 6,028 |
Money market securities |  |  | 593 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 593 |
Perpetual preferred securities |  |  | - |  |  |  | 28 |  |  |  | 3 | (1) |  |  | - |  |  |  | 31 |
Other |  |  | 20 |  |  |  | - |  |  |  | 11 | (1) |  |  | - |  |  |  | 31 |
Total investments |  |  | 1,731 |  |  |  | 4,601 |  |  |  | 351 |  |  |  | - |  |  |  | 6,683 |
Cash and cash equivalents |  |  | 298 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 298 |
Derivative assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Insured derivative assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit derivatives |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | 1 |
Non-insured derivative assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate derivatives |  |  | - |  |  |  | 95 |  |  |  | 4 | (1) |  |  | (96) |  |  |  | 3 |
Total derivative assets |  |  | - |  |  |  | 95 |  |  |  | 5 |  |  |  | (96) |  |  |  | 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 September 30, 2012 |
Assets of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed-maturity investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate obligations |  |  | - |  |  |  | 219 |  |  |  | 83 | (1) |  |  | - |  |  |  | 302 |
Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed non-agency |  |  | - |  |  |  | 852 |  |  |  | 8 | (1) |  |  | - |  |  |  | 860 |
Commercial mortgage-backed |  |  | - |  |  |  | 409 |  |  |  | 13 | (1) |  |  | - |  |  |  | 422 |
Asset-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collateralized debt obligations |  |  | - |  |  |  | 191 |  |  |  | 173 | (1) |  |  | - |  |  |  | 364 |
Other asset-backed |  |  | - |  |  |  | 126 |  |  |  | 66 | (1) |  |  | - |  |  |  | 192 |
State and municipal taxable bonds |  |  | - |  |  |  | 41 |  |  |  | - |  |  |  | - |  |  |  | 41 |
Money market securities |  |  | 15 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 15 |
Total fixed-maturity investments |  |  | 15 |  |  |  | 1,838 |  |  |  | 343 |  |  |  | - |  |  |  | 2,196 |
Cash |  |  | 143 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 143 |
Loans receivable |  |  | - |  |  |  | - |  |  |  | 1,892 |  |  |  | - |  |  |  | 1,892 |
Loan repurchase commitments |  |  | - |  |  |  | - |  |  |  | 1,051 |  |  |  | - |  |  |  | 1,051 |
Total assets |  | $ | 2,187 |  |  | $ | 6,534 |  |  | $ | 3,642 |  |  | $ | (96) |  |  | $ | 12,267 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Medium-term notes |  | $ | - |  |  | $ | - |  |  | $ | 168 | (1) |  | $ | - |  |  | $ | 168 |
Derivative liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Insured derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit derivatives |  |  | - |  |  |  | 14 |  |  |  | 3,318 |  |  |  | - |  |  |  | 3,332 |
Non-insured derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate derivatives |  |  | - |  |  |  | 305 |  |  |  | 4 | (1) |  |  | (311) |  |  |  | (2) |
Currency derivatives |  |  | - |  |  |  | 1 |  |  |  | 1 | (1) |  |  | - |  |  |  | 2 |
Other liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Warrants |  |  | - |  |  |  | 18 |  |  |  | - |  |  |  | - |  |  |  | 18 |
Liabilities of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Variable interest entity notes |  |  | - |  |  |  | 1,741 |  |  |  | 1,885 |  |  |  | - |  |  |  | 3,626 |
Derivative liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate derivatives |  |  | - |  |  |  | 157 |  |  |  | - |  |  |  | - |  |  |  | 157 |
Currency derivatives |  |  | - |  |  |  | - |  |  |  | 23 | (1) |  |  | - |  |  |  | 23 |
Total liabilities |  | $ | - |  |  | $ | 2,236 |  |  | $ | 5,399 |  |  | $ | (311) |  |  | $ | 7,324 |
(1) - | Unobservable inputs are either not developed by the Company or do not significantly impact the overall fair values of the aggregate financial assets and liabilities.
|  | 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, 2011 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed-maturity investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable bonds: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and government agency |  | $ | 1,038 |  |  | $ | 103 |  |  | $ | - |  |  | $ | - |  |  | $ | 1,141 |
Foreign governments |  |  | 277 |  |  |  | 62 |  |  |  | 11 |  |  |  | - |  |  |  | 350 |
Corporate obligations |  |  | 1 |  |  |  | 1,531 |  |  |  | 207 |  |  |  | - |  |  |  | 1,739 |
Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed agency |  |  | - |  |  |  | 1,276 |  |  |  | 8 |  |  |  | - |  |  |  | 1,284 |
Residential mortgage-backed non-agency |  |  | - |  |  |  | 350 |  |  |  | 17 |  |  |  | - |  |  |  | 367 |
Commercial mortgage-backed |  |  | - |  |  |  | 34 |  |  |  | 24 |  |  |  | - |  |  |  | 58 |
Asset-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collateralized debt obligations |  |  | - |  |  |  | 78 |  |  |  | 60 |  |  |  | - |  |  |  | 138 |
Other asset-backed |  |  | - |  |  |  | 130 |  |  |  | 317 |  |  |  | - |  |  |  | 447 |
State and municipal bonds |  |  | - |  |  |  | 924 |  |  |  | - |  |  |  | - |  |  |  | 924 |
Total taxable bonds |  |  | 1,316 |  |  |  | 4,488 |  |  |  | 644 |  |  |  | - |  |  |  | 6,448 |
Tax-exempt bonds: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
State and municipal bonds |  |  | - |  |  |  | 1,137 |  |  |  | 28 |  |  |  | - |  |  |  | 1,165 |
Other fixed-maturity investments |  |  | - |  |  |  | 15 |  |  |  | - |  |  |  | - |  |  |  | 15 |
Total fixed-maturity investments |  |  | 1,316 |  |  |  | 5,640 |  |  |  | 672 |  |  |  | - |  |  |  | 7,628 |
Money market securities |  |  | 912 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 912 |
Perpetual preferred securities |  |  | - |  |  |  | 106 |  |  |  | 1 |  |  |  | - |  |  |  | 107 |
Other |  |  | 25 |  |  |  | - |  |  |  | 10 |  |  |  | - |  |  |  | 35 |
Total investments |  |  | 2,253 |  |  |  | 5,746 |  |  |  | 683 |  |  |  | - |  |  |  | 8,682 |
Cash and cash equivalents |  |  | 473 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 473 |
Derivative assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non-insured derivative assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit derivatives |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | - |  |  |  | 1 |
Interest rate derivatives |  |  | - |  |  |  | 91 |  |  |  | 3 |  |  |  | - |  |  |  | 94 |
Other |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (93) |  |  |  | (93) |
Total derivative assets |  |  | - |  |  |  | 92 |  |  |  | 3 |  |  |  | (93) |  |  |  | 2 |
|  | 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, 2011 |
Assets of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed-maturity investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate obligations |  |  | - |  |  |  | 170 |  |  |  | 69 |  |  |  | - |  |  |  | 239 |
Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed agency |  |  | - |  |  |  | 3 |  |  |  | - |  |  |  | - |  |  |  | 3 |
Residential mortgage-backed non-agency |  |  | - |  |  |  | 1,437 |  |  |  | 21 |  |  |  | - |  |  |  | 1,458 |
Commercial mortgage-backed |  |  | - |  |  |  | 559 |  |  |  | 22 |  |  |  | - |  |  |  | 581 |
Asset-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collateralized debt obligations |  |  | - |  |  |  | 330 |  |  |  | 203 |  |  |  | - |  |  |  | 533 |
Other asset-backed |  |  | - |  |  |  | 236 |  |  |  | 67 |  |  |  | - |  |  |  | 303 |
Money market securities |  |  | 199 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 199 |
Total fixed-maturity investments |  |  | 199 |  |  |  | 2,735 |  |  |  | 382 |  |  |  | - |  |  |  | 3,316 |
Cash |  |  | 160 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 160 |
Loans receivable |  |  | - |  |  |  | - |  |  |  | 2,046 |  |  |  | - |  |  |  | 2,046 |
Loan repurchase commitments |  |  | - |  |  |  | - |  |  |  | 1,077 |  |  |  | - |  |  |  | 1,077 |
Derivative assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit derivatives |  |  | - |  |  |  | - |  |  |  | 447 |  |  |  | - |  |  |  | 447 |
Interest rate derivatives |  |  | - |  |  |  | 3 |  |  |  | - |  |  |  | - |  |  |  | 3 |
Total assets |  | $ | 3,085 |  |  | $ | 8,576 |  |  | $ | 4,638 |  |  | $ | (93) |  |  | $ | 16,206 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Medium-term notes |  | $ | - |  |  | $ | - |  |  | $ | 165 |  |  | $ | - |  |  | $ | 165 |
Derivative liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Insured derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit derivatives |  |  | - |  |  |  | 18 |  |  |  | 4,790 |  |  |  | - |  |  |  | 4,808 |
Non-insured derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate derivatives |  |  | - |  |  |  | 445 |  |  |  | - |  |  |  | - |  |  |  | 445 |
Currency derivatives |  |  | - |  |  |  | 4 |  |  |  | - |  |  |  | - |  |  |  | 4 |
Other |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (93) |  |  |  | (93) |
Other liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Warrants |  |  | - |  |  |  | 38 |  |  |  | - |  |  |  | - |  |  |  | 38 |
Liabilities of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Variable interest entity notes |  |  | - |  |  |  | 1,865 |  |  |  | 2,889 |  |  |  | - |  |  |  | 4,754 |
Derivative liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit derivatives |  |  | - |  |  |  | - |  |  |  | 527 |  |  |  | - |  |  |  | 527 |
Interest rate derivatives |  |  | - |  |  |  | 281 |  |  |  | - |  |  |  | - |  |  |  | 281 |
Currency derivatives |  |  | - |  |  |  | - |  |  |  | 17 |  |  |  | - |  |  |  | 17 |
Total liabilities |  | $ | - |  |  | $ | 2,651 |  |  | $ | 8,388 |  |  | $ | (93) |  |  | $ | 10,946 |
Level 3 assets at fair value, as of September 30, 2012 and December 31, 2011 represented approximately 30% and 29%, respectively, of total assets measured at fair value. Level 3 liabilities at fair value, as of September 30, 2012 and December 31, 2011 represented approximately 74% and 77%, respectively, of total liabilities measured at fair value. The following tables present the fair values and carrying values of the Company’s assets and liabilities that are disclosed at fair value but not reported at fair value on the Company’s consolidated balance sheets as of September 30, 2012 and December 31, 2011:
|  | 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) |  |  | Fair Value Balance as of September 30, 2012 |  |  | Carry Value Balance as of September 30, 2012 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other investments |  | $ | - |  |  | $ | - |  |  | $ | 9 |  |  | $ | 9 |  |  | $ | 9 |
Accrued investment income(1) |  |  | 51 |  |  |  | - |  |  |  | - |  |  |  | 51 |  |  |  | 51 |
Receivable for investments sold(1) |  |  | 159 |  |  |  | - |  |  |  | - |  |  |  | 159 |  |  |  | 159 |
Assets of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investments held-to-maturity |  |  | - |  |  |  | - |  |  |  | 2,867 |  |  |  | 2,867 |  |  |  | 3,015 |
Total assets |  | $ | 210 |  |  | $ | - |  |  | $ | 2,876 |  |  | $ | 3,086 |  |  | $ | 3,234 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment agreements |  | $ | - |  |  | $ | - |  |  | $ | 1,254 |  |  | $ | 1,254 |  |  | $ | 993 |
Medium-term notes |  |  | - |  |  |  | - |  |  |  | 1,068 |  |  |  | 1,068 |  |  |  | 1,438 |
Long-term debt |  |  | - |  |  |  | 1,109 |  |  |  | - |  |  |  | 1,109 |  |  |  | 1,836 |
Payable for investments purchased(2) |  |  | 150 |  |  |  | - |  |  |  | - |  |  |  | 150 |  |  |  | 150 |
Liabilities of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Variable interest entity notes |  |  | - |  |  |  | - |  |  |  | 3,166 |  |  |  | 3,166 |  |  |  | 3,468 |
Total liabilities |  | $ | 150 |  |  | $ | 1,109 |  |  | $ | 5,488 |  |  | $ | 6,747 |  |  | $ | 7,885 |
Financial Guarantees: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Gross |  | $ | - |  |  | $ | - |  |  | $ | 866 |  |  | $ | 866 |  |  | $ | 720 |
Ceded |  |  | - |  |  |  | - |  |  |  | 88 |  |  |  | 88 |  |  |  | 94 |
(1) - Reported within “Other assets” on MBIA’s consolidated balance sheets. (2) - Reported within “Other liabilities” on MBIA’s consolidated balance sheets.
|  | Fair Value Measurements at Reporting Date Using |  |  | Fair Value Balance as of December 31, 2011 |  |  | Carry Value Balance as of December 31, 2011 |
In millions |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |  |  |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other investments |  | $ | - |  |  | $ | - |  |  | $ | 11 |  |  | $ | 11 |  |  | $ | 11 |
Accrued investment income(1) |  |  | 63 |  |  |  | - |  |  |  | - |  |  |  | 63 |  |  |  | 63 |
Receivable for investments sold(1) |  |  | 32 |  |  |  | - |  |  |  | - |  |  |  | 32 |  |  |  | 32 |
Assets of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investments held-to-maturity |  |  | - |  |  |  | - |  |  |  | 3,489 |  |  |  | 3,489 |  |  |  | 3,843 |
Total assets |  | $ | 95 |  |  | $ | - |  |  | $ | 3,500 |  |  | $ | 3,595 |  |  | $ | 3,949 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment agreements |  | $ | - |  |  | $ | - |  |  | $ | 1,853 |  |  | $ | 1,853 |  |  | $ | 1,578 |
Medium-term notes |  |  | - |  |  |  | - |  |  |  | 1,187 |  |  |  | 1,187 |  |  |  | 1,491 |
Securities sold under agreements to repurchase |  |  | - |  |  |  | 286 |  |  |  | - |  |  |  | 286 |  |  |  | 287 |
Long-term debt |  |  | - |  |  |  | 1,117 |  |  |  | - |  |  |  | 1,117 |  |  |  | 1,840 |
Payable for investments purchased(2) |  |  | 3 |  |  |  | - |  |  |  | - |  |  |  | 3 |  |  |  | 3 |
Liabilities of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Variable interest entity notes |  |  | - |  |  |  | - |  |  |  | 3,297 |  |  |  | 3,297 |  |  |  | 3,943 |
Long-term debt |  |  | - |  |  |  | - |  |  |  | 368 |  |  |  | 368 |  |  |  | 360 |
Total liabilities |  | $ | 3 |  |  | $ | 1,403 |  |  | $ | 6,705 |  |  | $ | 8,111 |  |  | $ | 9,502 |
Financial Guarantees: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Gross |  | $ | - |  |  | $ | - |  |  | $ | 1,451 |  |  | $ | 1,451 |  |  | $ | 1,305 |
Ceded |  |  | - |  |  |  | - |  |  |  | 94 |  |  |  | 94 |  |  |  | 104 |
(1) - Reported within “Other assets” on MBIA’s consolidated balance sheets. (2) - Reported within “Other liabilities” on MBIA’s consolidated balance sheets. 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 September 30, 2012 and 2011: Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended September 30, 2012
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 |  |  | 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 September 30, 2012 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign governments |  | $ | 12 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 1 |  |  | $ | 9 |  |  | $ | - |  |  | $ | (10) |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 12 |  |  | $ | - |
Corporate obligations |  |  | 98 |  |  |  | - |  |  |  | 4 |  |  |  | (2) |  |  |  | - |  |  |  | 2 |  |  |  | - |  |  |  | (13) |  |  |  | - |  |  |  | 10 |  |  |  | (8) |  |  |  | 91 |  |  |  | 3 |
Residential mortgage- backed agency |  |  | 4 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1) |  |  |  | - |  |  |  | - |  |  |  | (3) |  |  |  | - |  |  |  | - |
Residential mortgage- backed non-agency |  |  | 33 |  |  |  | (1) |  |  |  | - |  |  |  | 2 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (5) |  |  |  | - |  |  |  | 1 |  |  |  | (23) |  |  |  | 7 |  |  |  | - |
Commercial mortgage-backed |  |  | 27 |  |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | 30 |  |  |  | - |
Collateralized debt obligations |  |  | 29 |  |  |  | (4) |  |  |  | - |  |  |  | 9 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (4) |  |  |  | - |  |  |  | 4 |  |  |  | (4) |  |  |  | 30 |  |  |  | - |
Other asset-backed |  |  | 69 |  |  |  | (2) |  |  |  | - |  |  |  | 2 |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | (1) |  |  |  | - |  |  |  | 4 |  |  |  | - |  |  |  | 73 |  |  |  | - |
State and municipal taxable bonds |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 71 |  |  |  | - |  |  |  | 71 |  |  |  | - |
State and municipal tax-exempt bonds |  |  | 25 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (2) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 23 |  |  |  | - |
Perpetual preferred securities |  |  | 3 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 3 |  |  |  | - |
Other investments |  |  | 10 |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 11 |  |  |  | - |
Assets of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate obligations |  |  | 95 |  |  |  | - |  |  |  | (10) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (2) |  |  |  | - |  |  |  | 3 |  |  |  | (3) |  |  |  | 83 |  |  |  | 1 |
Residential mortgage- backed non-agency |  |  | 10 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1) |  |  |  | - |  |  |  | 2 |  |  |  | (3) |  |  |  | 8 |  |  |  | - |
Commercial mortgage-backed |  |  | 12 |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 13 |  |  |  | 1 |
Collateralized debt obligations |  |  | 140 |  |  |  | - |  |  |  | (5) |  |  |  | 2 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1) |  |  |  | - |  |  |  | 37 |  |  |  | - |  |  |  | 173 |  |  |  | (2) |
Other asset-backed |  |  | 42 |  |  |  | - |  |  |  | (1) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (5) |  |  |  | - |  |  |  | 30 |  |  |  | - |  |  |  | 66 |  |  |  | 1 |
Loans receivable |  |  | 1,903 |  |  |  | - |  |  |  | 61 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (72) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,892 |  |  |  | 61 |
Loan repurchase commitments |  |  | 1,032 |  |  |  | - |  |  |  | 19 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,051 |  |  |  | 19 |
Total assets |  | $ | 3,544 |  |  | $ | (7) |  |  | $ | 70 |  |  | $ | 14 |  |  | $ | 1 |  |  | $ | 13 |  |  | $ | - |  |  | $ | (117) |  |  | $ | - |  |  | $ | 163 |  |  | $ | (44) |  |  | $ | 3,637 |  |  | $ | 84 |
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 |  |  | 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 September 30, 2012 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Medium-term notes |  | $ | 151 |  |  | $ | - |  |  | $ | 14 |  |  | $ | - |  |  | $ | 3 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 168 |  |  | $ | 14 |
Credit derivatives, net |  |  | 3,285 |  |  |  | - |  |  |  | 32 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 3,317 |  |  |  | 33 |
Interest rate derivatives, net |  |  | (4) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 4 |  |  |  | - |  |  |  | - |  |  |  | 5 |
Currency derivatives, net |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | 1 |  |  |  | - |
Liabilities of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
VIE notes |  |  | 1,867 |  |  |  | - |  |  |  | 128 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (110) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,885 |  |  |  | 128 |
Currency derivatives, net |  |  | 21 |  |  |  | - |  |  |  | 2 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 23 |  |  |  | 2 |
Total liabilities |  | $ | 5,320 |  |  | $ | - |  |  | $ | 176 |  |  | $ | - |  |  | $ | 3 |  |  | $ | - |  |  | $ | - |  |  | $ | (110) |  |  | $ | - |  |  | $ | 5 |  |  | $ | - |  |  | $ | 5,394 |  |  | $ | 182 |
(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 Three Months Ended September 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 |  |  | 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 September 30, 2011 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign governments |  | $ | 13 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | (2) |  |  | $ | 3 |  |  | $ | - |  |  | $ | (3) |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 11 |  |  | $ | - |
Corporate obligations |  |  | 294 |  |  |  | (1) |  |  |  | - |  |  |  | (10) |  |  |  | (5) |  |  |  | 19 |  |  |  | - |  |  |  | (32) |  |  |  | (38) |  |  |  | 115 |  |  |  | - |  |  |  | 342 |  |  |  | - |
Residential mortgage- backed agency |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | - |
Residential mortgage- backed non-agency |  |  | 28 |  |  |  | (1) |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | 4 |  |  |  | - |  |  |  | (4) |  |  |  | - |  |  |  | 1 |  |  |  | (2) |  |  |  | 27 |  |  |  | - |
Commercial mortgage-backed |  |  | 50 |  |  |  | (2) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (3) |  |  |  | (13) |  |  |  | - |  |  |  | - |  |  |  | 32 |  |  |  | - |
Collateralized debt obligations |  |  | 162 |  |  |  | (2) |  |  |  | - |  |  |  | (3) |  |  |  | - |  |  |  | 39 |  |  |  | 2 |  |  |  | (79) |  |  |  | (28) |  |  |  | 1 |  |  |  | (25) |  |  |  | 67 |  |  |  | - |
Other asset-backed |  |  | 331 |  |  |  | - |  |  |  | - |  |  |  | (27) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (9) |  |  |  | - |  |  |  | 3 |  |  |  | (28) |  |  |  | 270 |  |  |  | - |
State and municipal taxable bonds |  |  | 13 |  |  |  | 1 |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (15) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
State and municipal tax-exempt bonds |  |  | 32 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (2) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 30 |  |  |  | - |
Perpetual preferred securities |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | 1 |  |  |  | - |
Assets of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate obligations |  |  | 62 |  |  |  | - |  |  |  | (5) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1) |  |  |  | - |  |  |  | 7 |  |  |  | - |  |  |  | 63 |  |  |  | (2) |
Residential mortgage- backed non-agency |  |  | 17 |  |  |  | - |  |  |  | 3 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1) |  |  |  | (6) |  |  |  | 2 |  |  |  | - |  |  |  | 15 |  |  |  | 1 |
Commercial mortgage-backed |  |  | 27 |  |  |  | - |  |  |  | (1) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (11) |  |  |  | 2 |  |  |  | - |  |  |  | 17 |  |  |  | (2) |
Collateralized debt obligations |  |  | 201 |  |  |  | - |  |  |  | (17) |  |  |  | (7) |  |  |  | - |  |  |  | 60 |  |  |  | - |  |  |  | (1) |  |  |  | (21) |  |  |  | 12 |  |  |  | (21) |  |  |  | 206 |  |  |  | (14) |
Other asset-backed |  |  | 73 |  |  |  | - |  |  |  | 5 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (6) |  |  |  | - |  |  |  | (1) |  |  |  | 71 |  |  |  | 5 |
Loans receivable |  |  | 2,320 |  |  |  | - |  |  |  | (36) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (66) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 2,218 |  |  |  | (36) |
Loan repurchase commitments |  |  | 905 |  |  |  | - |  |  |  | 33 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 938 |  |  |  | 33 |
Total assets |  | $ | 4,528 |  |  | $ | (5) |  |  | $ | (18) |  |  | $ | (45) |  |  | $ | (7) |  |  | $ | 126 |  |  | $ | 2 |  |  | $ | (216) |  |  | $ | (123) |  |  | $ | 144 |  |  | $ | (77) |  |  | $ | 4,309 |  |  | $ | (15) |
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 |  |  | 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 September 30, 2011 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Medium-term notes |  | $ | 206 |  |  | $ | - |  |  | $ | (69) |  |  | $ | - |  |  | $ | (9) |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 128 |  |  | $ | (69) |
Credit derivatives, net |  |  | 5,657 |  |  |  | 78 |  |  |  | (777) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (78) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 4,880 |  |  |  | (388) |
Interest rate derivatives, net |  |  | (4) |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (3) |  |  |  | 5 |
Liabilities of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
VIE notes |  |  | 4,513 |  |  |  | - |  |  |  | (194) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (207) |  |  |  | (981) |  |  |  | - |  |  |  | - |  |  |  | 3,131 |  |  |  | (194) |
Credit derivatives, net |  |  | 920 |  |  |  | - |  |  |  | (154) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 765 |  |  |  | (154) |
Currency derivatives, net |  |  | 16 |  |  |  | - |  |  |  | 2 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 18 |  |  |  | 2 |
Total liabilities |  | $ | 11,308 |  |  | $ | 78 |  |  | $ | (1,191) |  |  | $ | - |  |  | $ | (9) |  |  | $ | - |  |  | $ | - |  |  | $ | (286) |  |  | $ | (981) |  |  | $ | - |  |  | $ | - |  |  | $ | 8,919 |  |  | $ | (798) |
(1) - Transferred in and out at the end of the period. Transfers into and out of Level 3 were $168 million and $44 million, respectively, for the three months ended September 30, 2012. Transfers into and out of Level 2 were $44 million and $168 million, respectively, for the three months ended September 30, 2012. Transfers into Level 3 were principally for state and municipal taxable bonds, CDOs, other asset-backed and corporate obligations where inputs, which are significant to their valuation, became unobservable during the year. These inputs included spreads, prepayment speeds, default speeds, default severities, yield curves observable at commonly quoted intervals, and market corroborated inputs. Residential mortgage-backed non-agency and corporate obligations comprised the majority of the transferred instruments out of Level 3. There were no transfers into or out of Level 1. Transfers into and out of Level 3 were $144 million and $77 million, respectively, for the three months ended September 30, 2011. Transfers into and out of Level 2 were $77 million and $144 million, respectively, for the three months ended September 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, CDOs and other asset-backed comprised the majority of the transferred instruments. There were no transfers into or out of Level 1. 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 nine months ended September 30, 2012 and 2011: Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Nine Months Ended September 30, 2012
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 September 30, 2012 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign governments |  | $ | 11 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 1 |  |  | $ | 22 |  |  | $ | - |  |  | $ | (19) |  |  | $ | (3) |  |  | $ | - |  |  | $ | - |  |  | $ | 12 |  |  | $ | - |
Corporate obligations |  |  | 207 |  |  |  | (15) |  |  |  | 9 |  |  |  | 24 |  |  |  | - |  |  |  | 18 |  |  |  | - |  |  |  | (29) |  |  |  | (140) |  |  |  | 25 |  |  |  | (8) |  |  |  | 91 |  |  |  | 8 |
Residential mortgage- backed agency |  |  | 8 |  |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1) |  |  |  | - |  |  |  | 4 |  |  |  | (12) |  |  |  | - |  |  |  | - |
Residential mortgage- backed non-agency |  |  | 17 |  |  |  | (1) |  |  |  | - |  |  |  | (1) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (11) |  |  |  | (3) |  |  |  | 31 |  |  |  | (25) |  |  |  | 7 |  |  |  | - |
Commercial mortgage-backed |  |  | 24 |  |  |  | - |  |  |  | - |  |  |  | 5 |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | (1) |  |  |  | 30 |  |  |  | - |
Collateralized debt obligations |  |  | 60 |  |  |  | (9) |  |  |  | - |  |  |  | 18 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (12) |  |  |  | (10) |  |  |  | 14 |  |  |  | (31) |  |  |  | 30 |  |  |  | - |
Other asset-backed |  |  | 317 |  |  |  | (58) |  |  |  | - |  |  |  | 71 |  |  |  | - |  |  |  | 5 |  |  |  | - |  |  |  | (11) |  |  |  | (250) |  |  |  | 5 |  |  |  | (6) |  |  |  | 73 |  |  |  | - |
State and municipal taxable bonds |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 71 |  |  |  | - |  |  |  | 71 |  |  |  | - |
State and municipal tax-exempt bonds |  |  | 28 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (5) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 23 |  |  |  | - |
Perpetual preferred securities |  |  | 1 |  |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 4 |  |  |  | (3) |  |  |  | 3 |  |  |  | - |
Other investments |  |  | 10 |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 11 |  |  |  | - |
Assets of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate obligations |  |  | 69 |  |  |  | - |  |  |  | (15) |  |  |  | (6) |  |  |  | - |  |  |  | 28 |  |  |  | - |  |  |  | (5) |  |  |  | - |  |  |  | 15 |  |  |  | (3) |  |  |  | 83 |  |  |  | 3 |
Residential mortgage- backed non-agency |  |  | 21 |  |  |  | - |  |  |  | 6 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (5) |  |  |  | (15) |  |  |  | 5 |  |  |  | (4) |  |  |  | 8 |  |  |  | 3 |
Commercial mortgage-backed |  |  | 22 |  |  |  | - |  |  |  | 3 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (3) |  |  |  | (8) |  |  |  | 5 |  |  |  | (6) |  |  |  | 13 |  |  |  | 2 |
Collateralized debt obligations |  |  | 203 |  |  |  | - |  |  |  | (5) |  |  |  | (1) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1) |  |  |  | (74) |  |  |  | 51 |  |  |  | - |  |  |  | 173 |  |  |  | 5 |
Other asset-backed |  |  | 67 |  |  |  | - |  |  |  | 4 |  |  |  | - |  |  |  | - |  |  |  | 4 |  |  |  | - |  |  |  | (8) |  |  |  | (35) |  |  |  | 34 |  |  |  | - |  |  |  | 66 |  |  |  | 5 |
Loans receivable |  |  | 2,046 |  |  |  | - |  |  |  | 52 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (204) |  |  |  | (2) |  |  |  | - |  |  |  | - |  |  |  | 1,892 |  |  |  | 52 |
Loan repurchase commitments |  |  | 1,077 |  |  |  | - |  |  |  | (26) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,051 |  |  |  | (26) |
Total assets |  | $ | 4,188 |  |  | $ | (83) |  |  | $ | 29 |  |  | $ | 112 |  |  | $ | 1 |  |  | $ | 78 |  |  | $ | - |  |  | $ | (314) |  |  | $ | (540) |  |  | $ | 265 |  |  | $ | (99) |  |  | $ | 3,637 |  |  | $ | 52 |
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 September 30, 2012 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Medium-term notes |  | $ | 165 |  |  | $ | - |  |  | $ | 3 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 168 |  |  | $ | 4 |
Credit derivatives, net |  |  | 4,790 |  |  |  | 463 |  |  |  | (1,473) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (463) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 3,317 |  |  |  | (538) |
Interest rate derivatives, net |  |  | (3) |  |  |  | - |  |  |  | (1) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 4 |  |  |  | - |  |  |  | - |  |  |  | 12 |
Interest rate derivatives, net |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | 1 |  |  |  | - |
Liabilities of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
VIE notes |  |  | 2,889 |  |  |  | - |  |  |  | 348 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (369) |  |  |  | (983) |  |  |  | - |  |  |  | - |  |  |  | 1,885 |  |  |  | 292 |
Credit derivatives, net |  |  | 80 |  |  |  | - |  |  |  | 2 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (82) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Currency derivatives, net |  |  | 17 |  |  |  | - |  |  |  | 6 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 23 |  |  |  | 6 |
Total liabilities |  | $ | 7,938 |  |  | $ | 463 |  |  | $ | (1,115) |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | (832) |  |  | $ | (1,065) |  |  | $ | 5 |  |  | $ | - |  |  | $ | 5,394 |  |  | $ | (224) |
(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 Nine Months Ended September 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 September 30, 2011 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign governments |  | $ | 11 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | (1) |  |  | $ | 9 |  |  | $ | - |  |  | $ | (8) |  |  | $ | - |  |  | $ | 7 |  |  | $ | (7) |  |  | $ | 11 |  |  | $ | - |
Corporate obligations |  |  | 246 |  |  |  | (1) |  |  |  | - |  |  |  | (3) |  |  |  | (2) |  |  |  | 30 |  |  |  | - |  |  |  | (65) |  |  |  | (50) |  |  |  | 202 |  |  |  | (15) |  |  |  | 342 |  |  |  | - |
Residential mortgage- backed agency |  |  | 41 |  |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | 2 |  |  |  | - |  |  |  | (1) |  |  |  | (1) |  |  |  | - |  |  |  | (41) |  |  |  | 1 |  |  |  | - |
Residential mortgage- backed non-agency |  |  | 48 |  |  |  | (2) |  |  |  | - |  |  |  | 11 |  |  |  | (1) |  |  |  | 15 |  |  |  | - |  |  |  | (14) |  |  |  | (19) |  |  |  | 9 |  |  |  | (20) |  |  |  | 27 |  |  |  | - |
Commercial mortgage-backed |  |  | 41 |  |  |  | (2) |  |  |  | - |  |  |  | 2 |  |  |  | 1 |  |  |  | 8 |  |  |  | - |  |  |  | (3) |  |  |  | (14) |  |  |  | - |  |  |  | (1) |  |  |  | 32 |  |  |  | - |
Collateralized debt obligations |  |  | 192 |  |  |  | (4) |  |  |  | - |  |  |  | 25 |  |  |  | - |  |  |  | 46 |  |  |  | 3 |  |  |  | (112) |  |  |  | (36) |  |  |  | 49 |  |  |  | (96) |  |  |  | 67 |  |  |  | - |
Other asset-backed |  |  | 349 |  |  |  | - |  |  |  | - |  |  |  | (26) |  |  |  | - |  |  |  | 10 |  |  |  | - |  |  |  | (20) |  |  |  | (2) |  |  |  | 16 |  |  |  | (57) |  |  |  | 270 |  |  |  | - |
State and municipal taxable bonds |  |  | 14 |  |  |  | 1 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (15) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
State and municipal tax-exempt bonds |  |  | 36 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 2 |  |  |  | - |  |  |  | (7) |  |  |  | (1) |  |  |  | - |  |  |  | - |  |  |  | 30 |  |  |  | - |
Perpetual preferred securities |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | 1 |  |  |  | - |
Assets of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate obligations |  |  | 82 |  |  |  | - |  |  |  | (18) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (5) |  |  |  | - |  |  |  | 11 |  |  |  | (7) |  |  |  | 63 |  |  |  | (2) |
Residential mortgage- backed non-agency |  |  | 40 |  |  |  | - |  |  |  | 2 |  |  |  | 3 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (6) |  |  |  | (6) |  |  |  | 2 |  |  |  | (20) |  |  |  | 15 |  |  |  | 2 |
Commercial mortgage-backed |  |  | 23 |  |  |  | - |  |  |  | 6 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (2) |  |  |  | (12) |  |  |  | 2 |  |  |  | - |  |  |  | 17 |  |  |  | 3 |
Collateralized debt obligations |  |  | 245 |  |  |  | - |  |  |  | (27) |  |  |  | (7) |  |  |  | - |  |  |  | 60 |  |  |  | - |  |  |  | (3) |  |  |  | (21) |  |  |  | 48 |  |  |  | (89) |  |  |  | 206 |  |  |  | 1 |
Other asset-backed |  |  | 81 |  |  |  | - |  |  |  | (3) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (2) |  |  |  | (6) |  |  |  | 2 |  |  |  | (1) |  |  |  | 71 |  |  |  | 2 |
Loans receivable |  |  | 2,183 |  |  |  | - |  |  |  | 260 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (223) |  |  |  | (2) |  |  |  | - |  |  |  | - |  |  |  | 2,218 |  |  |  | 260 |
Loan repurchase commitments |  |  | 835 |  |  |  | - |  |  |  | 91 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 12 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 938 |  |  |  | 91 |
Total assets |  | $ | 4,467 |  |  | $ | (8) |  |  | $ | 311 |  |  | $ | 6 |  |  | $ | (3) |  |  | $ | 182 |  |  | $ | 15 |  |  | $ | (486) |  |  | $ | (170) |  |  | $ | 349 |  |  | $ | (354) |  |  | $ | 4,309 |  |  | $ | 357 |
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 September 30, 2011 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Medium-term notes |  | $ | 116 |  |  | $ | - |  |  | $ | 9 |  |  | $ | - |  |  | $ | 3 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 128 |  |  | $ | 9 |
Credit derivatives, net |  |  | 4,350 |  |  |  | 683 |  |  |  | 530 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (683) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 4,880 |  |  |  | 2,160 |
Interest rate derivatives, net |  |  | (5) |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | (3) |  |  |  | 6 |
Liabilities of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
VIE notes |  |  | 4,673 |  |  |  | - |  |  |  | 75 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (456) |  |  |  | (1,161) |  |  |  | - |  |  |  | - |  |  |  | 3,131 |  |  |  | 75 |
Credit derivatives, net |  |  | 768 |  |  |  | - |  |  |  | (3) |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 765 |  |  |  | (3) |
Currency derivatives, net |  |  | 14 |  |  |  | - |  |  |  | 4 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 18 |  |  |  | 4 |
Total liabilities |  | $ | 9,916 |  |  | $ | 683 |  |  | $ | 616 |  |  | $ | - |  |  | $ | 3 |  |  | $ | - |  |  | $ | - |  |  | $ | (1,139) |  |  | $ | (1,161) |  |  | $ | 1 |  |  | $ | - |  |  | $ | 8,919 |  |  | $ | 2,251 |
(1) - Transferred in and out at the end of the period. Transfers into and out of Level 3 were $270 million and $99 million, respectively, for the nine months ended September 30, 2012. Transfers into and out of Level 2 were $99 million and $270 million, respectively, for the nine months ended September 30, 2012. Transfers into Level 3 were principally related to state and municipal taxable bonds, CDOs, other asset-backed, residential mortgage-backed non-agency and corporate obligations where inputs, which are significant to their valuation, became unobservable during the year. These inputs included spreads, prepayment speeds, default speeds, default severities, yield curves observable at commonly quoted intervals, and market corroborated inputs. CDOs, residential mortgage-backed non-agency, residential mortgage-backed agency and corporate obligations comprised the majority of the transferred instruments out of Level 3. There were no transfers into or out of Level 1. Transfers into and out of Level 3 were $350 million and $354 million, respectively, for the nine months ended September 30, 2011. Transfers into and out of Level 2 were $354 million and $350 million, respectively, for the nine months ended September 30, 2011. These transfers were principally related to 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, CDOs, residential mortgage-backed non-agency and other asset-backed comprised the majority of the transferred instruments. There were no transfers into or out of Level 1. All Level 1, 2 and 3 designations are made at the end of each accounting period. Gains and losses (realized and unrealized) included in earnings relating to Level 3 assets and liabilities for the three months ended September 30, 2012 and 2011 are reported on the Company’s consolidated statements of operations as follows:
|  | Three Months Ended September 30, 2012 |
|  |  |  |  |  |  |  |  |  |  | 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 Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange |
Total gains (losses) included in earnings |  | $ | (32) |  |  | $ | (7) |  |  | $ | (9) |  |  | $ | (65) |
Change in unrealized gains (losses) for the period included in earnings for assets and liabilities still held as of September 30, 2012 |  | $ | (33) |  |  | $ | - |  |  | $ | (16) |  |  | $ | (49) |
|  | Three Months Ended September 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 Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange |
Total gains (losses) included in earnings |  | $ | 777 |  |  | $ | (83) |  |  | $ | 68 |  |  | $ | 328 |
Change in unrealized gains (losses) for the period included in earnings for assets and liabilities still held as of September 30, 2011 |  | $ | 388 |  |  | $ | - |  |  | $ | 64 |  |  | $ | 331 |
Gains and losses (realized and unrealized) included in earnings relating to Level 3 assets and liabilities for the nine months ended September 30, 2012 and 2011 are reported on the Company’s consolidated statements of operations as follows:
|  | Nine Months Ended September 30, 2012 |
|  |  |  |  |  |  |  |  |  |  | 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 Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange |
Total gains (losses) included in earnings |  | $ | 1,473 |  |  | $ | (546) |  |  | $ | 8 |  |  | $ | (337) |
Change in unrealized gains (losses) for the period included in earnings for assets and liabilities still held as of September 30, 2012 |  | $ | 538 |  |  | $ | - |  |  | $ | (8) |  |  | $ | (254) |
|  | Nine Months Ended September 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 Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange |
Total gains (losses) included in earnings |  | $ | (530) |  |  | $ | (691) |  |  | $ | (10) |  |  | $ | 235 |
Change in unrealized gains (losses) for the period included in earnings for assets and liabilities still held as of September 30, 2011 |  | $ | (2,160) |  |  | $ | - |  |  | $ | (15) |  |  | $ | 281 |
Fair Value Option The Company elected to record at fair value certain financial instruments of VIEs that have been consolidated in connection with the adoption of the accounting guidance for consolidation of VIEs, among others. The following table presents the changes in fair value included in the Company’s consolidated statements of operations for the three and nine months ended September 30, 2012 and 2011 for all financial instruments for which the fair value option was elected:
|  | Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange |
|  | Three Months Ended September 30, |  |  | Nine Months Ended September 30, |
In millions |  | 2012 |  |  | 2011 |  |  | 2012 |  |  | 2011 |
Fixed-maturity securities held at fair value |  | $ | 21 |  |  | $ | (286) |  |  | $ | (36) |  |  | $ | (338) |
Loans receivable at fair value: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage loans |  |  | (4) |  |  |  | (65) |  |  |  | (103) |  |  |  | 65 |
Other loans |  |  | (7) |  |  |  | (37) |  |  |  | (48) |  |  |  | (30) |
Loan repurchase commitments |  |  | 19 |  |  |  | 33 |  |  |  | 62 |  |  |  | 103 |
Other assets |  |  | - |  |  |  | (162) |  |  |  | - |  |  |  | (184) |
Long-term debt |  |  | 12 |  |  |  | 481 |  |  |  | 140 |  |  |  | 367 |
Substantially all gains and losses included in earnings during the nine months ended September 30, 2012 on loans receivable and VIE notes 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 VIE notes, resulting in depressed pricing of the financial instruments. The following table reflects the difference between the aggregate fair value and the aggregate remaining contractual principal balance outstanding as of September 30, 2012 and December 31, 2011 for loans and VIE notes for which the fair value option was elected:
|  | As of September 30, 2012 |  |  | As of December 31, 2011 |
In millions |  | Contractual Outstanding Principal |  |  | Fair Value |  |  | Difference |  |  | Contractual Outstanding Principal |  |  | Fair Value |  |  | Difference |
Loans receivable at fair value: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage loans |  | $ | 2,430 |  |  | $ | 1,746 |  |  | $ | 684 |  |  | $ | 2,769 |  |  | $ | 1,895 |  |  | $ | 874 |
Residential mortgage loans (90 days or more past due) |  |  | 241 |  |  |  | 46 |  |  |  | 195 |  |  |  | 259 |  |  |  | - |  |  |  | 259 |
Other loans |  |  | 39 |  |  |  | 16 |  |  |  | 23 |  |  |  | 129 |  |  |  | 43 |  |  |  | 86 |
Other loans (90 days or more past due) |  |  | 206 |  |  |  | 84 |  |  |  | 122 |  |  |  | 324 |  |  |  | 108 |  |  |  | 216 |
Total loans receivable at fair value |  | $ | 2,916 |  |  | $ | 1,892 |  |  | $ | 1,024 |  |  | $ | 3,481 |  |  | $ | 2,046 |  |  | $ | 1,435 |
Variable interest entity notes |  | $ | 9,015 |  |  | $ | 3,626 |  |  | $ | 5,389 |  |  | $ | 13,583 |  |  | $ | 4,754 |  |  | $ | 8,829 |

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 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13504-108611 Reference 2: 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. Reference 3: 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. Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15A -Subparagraph a-d -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 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 3, 10, 14, 15 -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 6: 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=7491637&loc=d3e13433-108611 Reference 7: 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 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=7491637&loc=d3e13537-108611 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15B -Subparagraph a, b -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 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 157 -Paragraph 32, 33, 34 -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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