Valuation

12 Months Ended

Dec. 31, 2011

Valuation [Abstract]

Valuation

3. Valuation

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

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

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

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

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

The table below reflects the value of the Company's Level 1, Level 2, and Level 3 financial instruments at December 31, 2011:

(In thousands)
Description	Level 1		Level 2			Level 3		Total
Assets:
Investments at fair value—
U.S. Treasury and Agency residential mortgage-backed securities	$	—	$	769,120		$	5,337	$	774,457
Private label residential mortgage-backed securities		—		—			417,533		417,533
Private label commercial mortgage-backed securities		—		—			16,093		16,093
Commercial Mortgage Loans		—		—			4,400		4,400
Total investments at fair value		—		769,120			443,363		1,212,483
Financial derivatives-assets at fair value—
Credit default swaps on corporate indices		—		963			—		963
Credit default swaps on asset backed securities		—		—			61,498		61,498
Credit default swaps on asset backed indices		—		40,303			—		40,303
Interest rate swaps		—		95			—		95
Unrealized appreciation on futures contracts		12		—			—		12
Total financial derivatives-assets at fair value		12		41,361			61,498		102,871
Repurchase agreements		—		15,750			—		15,750
Total investments, financial derivatives-assets and repurchase agreements	$	12	$	826,231		$	504,861	$	1,331,104
Liabilities:
Investments sold short at fair value—
U.S. Treasury and Agency residential mortgage-backed securities	$	—	$	(462,394	)	$	—	$	(462,394	)
Financial derivatives-liabilities at fair value—
Credit default swaps on asset backed indices		—		(9,548	)		—		(9,548	)
Total return swaps		—		(274	)		—		(274	)
Interest rate swaps		—		(17,218	)		—		(17,218	)
Total financial derivatives-liabilities at fair value		—		(27,040	)		—		(27,040	)
Total investments sold short and financial derivatives-liabilities	$	—	$	(489,434	)	$	—	$	(489,434	)

Investments under the U.S. Treasury and Agency residential mortgage-backed securities Level 3 category are investments in Agency interest only RMBS securities. There were no transfers between Level 1, Level 2 or Level 3 financial instruments during the year ended December 31, 2011.

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

(In thousands)
Description	Level 1			Level 2			Level 3		Total
Assets:
Investments at fair value—
U.S. Treasury and Agency residential mortgage-backed securities	$	—		$	905,378		$	—	$	905,378
Private label residential mortgage-backed securities		—			—			338,839		338,839
Private label commercial mortgage-backed securities		—			—			1,850		1,850
Total investments at fair value		—			905,378			340,689		1,246,067
Financial derivatives-assets at fair value—
Credit default swaps on asset backed securities		—			—			102,850		102,850
Credit default swaps on asset backed indices		—			96,690			—		96,690
Interest rate swaps		—			1,795			—		1,795
Total financial derivatives-assets at fair value		—			98,485			102,850		201,335
Repurchase agreements		—			25,684			—		25,684
Total investments, financial derivatives-assets and repurchase agreements	$	—		$	1,029,547		$	443,539	$	1,473,086
Liabilities:
Investments sold short at fair value—
U.S. Treasury and Agency residential mortgage-backed securities	$	—		$	(775,145	)	$	—	$	(775,145	)
Financial derivatives-liabilities at fair value—
Credit default swaps on corporate indices		—			(186	)		—		(186	)
Credit default swaps on asset backed indices		—			(18,278	)		—		(18,278	)
Interest rate swaps		—			(1,676	)		—		(1,676	)
Unrealized depreciation on futures contracts		(890	)		—			—		(890	)
Total financial derivatives-liabilities at fair value		(890	)		(20,140	)		—		(21,030	)
Total investments sold short and financial derivatives-liabilities	$	(890	)	$	(795,285	)	$	—	$	(796,175	)

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

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

The tables below include a roll-forward of the Company's financial instruments for the years ended December 31, 2011, 2010, and 2009, respectively (including the change in fair value), for financial instruments classified by the Company within Level 3 of the valuation hierarchy.

Level 3—Fair Value Measurement Using Significant Unobservable Inputs:

Year Ended December 31, 2011

(In thousands)	Beginning Balance as of December 31, 2010		Accreted Discounts / Amortized Premiums			Realized Gain/(Loss)		Change in Net Unrealized Gain/(Loss)			Purchases		Sales			Transfers In and/or Out of Level 3		Ending Balance as of December 31, 2011
Assets:
Investments at fair value—
U.S. Treasury and Agency residential mortgage-backed securities	$	—	$	(1,457	)	$	97	$	(2,078	)	$	9,930	$	(1,155	)	$	—	$	5,337
Private label residential mortgage-backed securities		338,839		16,259			17,246		(43,559	)		342,360		(253,612	)		—		417,533
Private label commercial mortgage-backed securities		1,850		539			1,121		(2,987	)		27,564		(11,994	)		—		16,093
Commercial Mortgage Loans		—		114			—		(389	)		4,675		—			—		4,400
Total investments at fair value		340,689		15,455			18,464		(49,013	)		384,529		(266,761	)		—		443,363
Financial derivatives- assets at fair value
Credit default swaps on asset backed securities		102,850		—			9,969		(5,721	)		5,942		(51,542	)		—		61,498
Total financial derivatives- assets at fair value		102,850		—			9,969		(5,721	)		5,942		(51,542	)		—		61,498
Total investments and financial derivatives-assets at fair value	$	443,539	$	15,455		$	28,433	$	(54,734	)	$	390,471	$	(318,303	)	$	—	$	504,861

All amounts of net realized and change in net unrealized gain (loss) in the table above are reflected in the accompanying Consolidated Statement of Operations. The table above incorporates changes in the net unrealized gain (loss) for both Level 3 financial instruments held by the Company at December 31, 2011, as well as Level 3 financial instruments disposed of by the Company during the year ended December 31, 2011. For Level 3 financial instruments held by the Company at December 31, 2011, change in net unrealized gain (loss) of $(39.6) million and $(14.2) million for the year ended December 31, 2011 relate to investments and financial derivative-assets, respectively, held by the Company at December 31, 2011.

Level 3—Fair Value Measurement Using Significant Unobservable Inputs:

Year Ended December 31, 2010

(In thousands)	Beginning Balance as of December 31, 2009			Accreted Discounts/ Amortized Premiums			Realized Gain/(Loss)			Change in Net Unrealized Gain/(Loss)			Purchases		Sales			Transfers In and/or Out of Level 3		Ending Balance as of December 30, 2010
Assets:
Investments at fair value—
Private label residential mortgage-backed securities	$	210,364		$	11,632		$	22,933		$	20,083		$	324,286	$	(250,459	)	$	—	$	338,839
Private label commercial mortgage-backed securities		—			(13	)		—			13			1,850		—			—		1,850
Total investments at fair value		210,364			11,619			22,933			20,096			326,136		(250,459	)		—		340,689
Financial derivatives-assets at fair value
Credit default swaps on corporate bonds		8,476			—			(2,281	)		(2,650	)		1,713		(5,258	)		—		—
Credit default swaps on asset backed securities		95,199			—			11,415			(20,085	)		45,369		(29,048	)		—		102,850
Other swaps		257			—			335			(257	)		—		(335	)		—		—
Total financial derivatives-assets at fair value		103,932			—			9,469			(22,992	)		47,082		(34,641	)		—		102,850
Total investments and financial derivatives-assets at fair value	$	314,296		$	11,619		$	32,402		$	(2,896	)	$	373,218	$	(285,100	)	$	—	$	443,539
Liabilities:
Financial derivatives-liabilities at fair value
Credit default swaps on asset backed securities	$	(10,548	)	$	—		$	(1,657	)	$	3,881		$	8,324	$	—		$	—	$	—
Total financial derivatives-liabilities at fair value		(10,548	)		—			(1,657	)		3,881			8,324		—			—		—
Total investments sold short and financial derivatives-liabilities at fair value	$	(10,548	)	$	—		$	(1,657	)	$	3,881		$	8,324	$	—		$	—	$	—

All amounts of net realized and change in net unrealized gain (loss) in the table above are reflected in the accompanying Consolidated Statement of Operations. The table above incorporates changes in net unrealized gain (loss) for both Level 3 financial instruments held by the Company at December 31, 2010, as well as Level 3 financial instruments disposed of by the Company during the year ended December 31, 2010. For Level 3 financial instruments held by the Company at December 31, 2010, change in net unrealized gain (loss) of $18.9 million and $(21.0) million for the year ended December 31, 2010 relate to investments and financial derivative-assets, respectively, held by the Company at December 31, 2010.

Level 3—Fair Value Measurement Using Significant Unobservable Inputs:

Year Ended December 31, 2009

(In thousands)	Beginning Balance as of December 31, 2008			Accreted Discounts/ Amortized Premiums		Realized Gain/(Loss)			Change in Net Unrealized Gain/(Loss)			Purchases		Sales			Transfers In and/or Out of Level 3		Ending Balance as of December 30, 2009
Assets:
Investments at fair value—
Private label residential mortgage-backed securities	$	124,819		$	15,735	$	(6,348	)	$	70,409		$	205,460	$	(199,711	)	$	—	$	210,364
Auction Rate Securities		17,955			—		(7,054	)		7,695			—		(18,596	)		—		—
Trade claims		—			—		5,316			—			—		(5,316	)		—		—
Total investments at fair value		142,774			15,735		(8,086	)		78,104			205,460		(223,623	)		—		210,364
Financial derivatives-assets at fair value
Credit default swaps on corporate bonds		10,085			—		(1,403	)		(420	)		5,124		(4,910	)		—		8,476
Credit default swaps on asset backed securities		108,126			—		6,218			(1,443	)		41,911		(59,613	)		—		95,199
Other swaps		22			—		—			235			—		—			—		257
Total financial derivatives-assets at fair value		118,233			—		4,815			(1,628	)		47,035		(64,523	)		—		103,932
Total investments and financial derivatives-assets at fair value	$	261,007		$	15,735	$	(3,271	)	$	76,476		$	252,495	$	(288,146	)	$	—	$	314,296
Liabilities:
Financial derivatives-liabilities at fair value
Credit default swaps on corporate bonds	$	—		$	—	$	1		$	—		$	389	$	(390	)	$	—	$	—
Credit default swaps on asset backed securities		(10,652	)		—		(320	)		(911	)		1,424		(89	)		—		(10,548	)
Total financial derivatives-liabilities at fair value		(10,652	)		—		(319	)		(911	)		1,813		(479	)		—		(10,548	)
Total investments sold short and financial derivatives-liabilities at fair value	$	(10,652	)	$	—	$	(319	)	$	(911	)	$	1,813	$	(479	)	$	—	$	(10,548	)

All amounts of net realized and change in net unrealized gain (loss) in the table above are reflected in the accompanying Consolidated Statement of Operations. The table above incorporates changes in net unrealized gain (loss) for both Level 3 financial instruments held by the Company at December 31, 2009, as well as Level 3 financial instruments disposed of by the Company during the year ended December 31, 2009. For Level 3 instruments held by the Company at December 31, 2009, change in net unrealized gain (loss) of $33.0 million, $1.6 million and $(1.2) million for the year ended December 31, 2009 relate to investments, financial derivative-assets and financial derivative-liabilities, respectively, held by the Company at December 31, 2009.