Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2011

Fair Value of Financial Instruments

Fair Value of Financial Instruments

NOTE 5 - Fair Value of Financial Instruments

We measure certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents, trading securities owned, available-for-sale securities, investments, trading securities sold, but not yet purchased, and derivatives.

The degree of judgment used in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Pricing observability is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established, and the characteristics specific to the transaction. Financial instruments with readily available active quoted prices for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment used in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have less, or no, pricing observability and a higher degree of judgment used in measuring fair value.

The following is a description of the valuation techniques used to measure fair value on a recurring basis:

Cash Equivalents

Cash equivalents include highly liquid investments with original maturities of three months or less. Actively traded money market funds are measured at their net asset value, which approximates fair value, and classified as Level 1.

Financial Instruments (Trading securities and available-for-sale securities)

When available, the fair value of financial instruments are based on quoted prices in active markets and reported in Level 1. Level 1 financial instruments include highly liquid instruments with quoted prices, such as equities listed in active markets, certain corporate obligations, and U.S. treasury securities.

If quoted prices are not available, fair values are obtained from pricing services, broker quotes, or other model-based valuation techniques with observable inputs, such as the present value of estimated cash flows and reported as Level 2. The nature of these financial instruments include instruments for which quoted prices are available but traded less frequently, instruments whose fair value have been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data, and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed. Level 2 financial instruments generally include U.S. government securities, mortgage-backed securities, corporate obligations infrequently traded, certain government and municipal obligations, asset-backed securities, and certain equity securities not actively traded.

Level 3 financial instruments have little to no pricing observability as of the report date. These financial instruments do not have active two-way markets and are measured using management's best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. We have identified Level 3 financial instruments to include certain corporate obligations with unobservable pricing inputs, airplane trust certificates, and certain municipal obligations, which include auction rate securities ("ARS"). Investments in certain corporate obligations, airplane trust certificates and municipal obligations with unobservable inputs are valued using management's best estimate of fair value, where the inputs require significant management judgment. ARS are valued based upon our expectations of issuer redemptions and using internal discounted cash flow models that utilize unobservable inputs.

Investments

Investments valued at fair value include ARS, investments in mutual funds, U.S. treasury securities, investments in public companies, private equity securities, partnerships, and warrants of public or private companies.

Investments in certain public companies, mutual funds and U.S. treasury securities are valued based on quoted prices in active markets and reported in Level 1. Investments in certain private equity securities and partnerships with unobservable inputs and ARS for which the market has been dislocated and largely ceased to function are reported as Level 3 assets. Investments in certain equity securities with unobservable inputs are valued using management's best estimate of fair value, where the inputs require significant management judgment. ARS are valued based upon our expectations of issuer redemptions and using internal discounted cash flow models.

Investments in partnerships and other investments include our general and limited partnership interests in investment partnerships and direct investments in non-public companies. The net assets of investment partnerships consist primarily of investments in non-marketable securities. The underlying investments held by such partnerships and direct investments in non-public companies are valued based on the estimated fair value ultimately determined by us in our capacity as general partner or investor and, in the case of an investment in an unaffiliated investment partnership, are based on financial statements prepared by an unaffiliated general partner.

Warrants are valued based upon the Black-Scholes option-pricing model that uses discount rates and stock volatility factors of comparable companies as inputs. These inputs are subject to management judgment to account for differences between the measured investment and comparable companies and are reported as Level 3 assets.

The valuation of these investments requires significant management judgment due to the absence of quoted market prices, inherent lack of liquidity, and long-term nature of these assets. As a result, these values cannot be determined with precision and the calculated fair value estimates may not be realizable in a current sale or immediate settlement of the instrument.

Derivatives

Derivatives are valued using quoted market prices when available or pricing models based on the net present value of estimated future cash flows. The valuation models used require market observable inputs, including contractual terms, market prices, yield curves, credit curves, and measures of volatility. These measurements are classified as Level 2 and are used to value interest rate swaps.

The following table summarizes the valuation of our financial instruments by pricing observability levels as of September 30, 2011 and December 31, 2010 (in thousands):

	September 30, 2011
	Total		Level 1		Level 2		Level 3
Assets:
Cash equivalents	$	16,152	$	16,152	$	0	$	0
Trading securities owned:
U.S. government agency securities		71,333		0		71,333		0
U.S. government securities		12,202		12,202		0		0
Corporate securities:
Fixed income securities		264,623		61,151		202,271		1,201
Equity securities		40,886		40,515		371		0
State and municipal securities		137,400		0		137,400		0
Total trading securities owned		526,444		113,868		411,375		1,201
Available-for-sale securities:
U.S. government securities		904		0		904		0
State and municipal securities		84,012		0		17,388		66,624
Mortgage-backed securities:
Agency		506,767		0		506,767		0
Commercial		265,925		0		265,925		0
Non-agency		18,257		0		18,257		0
Corporate fixed income securities		409,817		301,871		95,946		12,000
Asset-backed securities		27,102		0		27,102		0
Total available-for-sale securities		1,312,784		301,871		932,289		78,624
Investments:
Corporate equity securities		4,676		4,283		393		0
Mutual funds		33,811		33,811		0		0
Auction rate securities:
Equity securities		64,203		0		0		64,203
Municipal securities		7,044		0		0		7,044
Other		38,816		436		777		37,603
Total investments		148,550		38,530		1,170		108,850
	$	2,003,930	$	470,421	$	1,344,834	$	188,675

      The Company's investment in a senior preferred interest in Miller Buckfire & Co. LLC, which is included in investments in the consolidated statements of financial condition, is carried at cost and therefore not included in the above analysis of fair value at September 30, 2011.

	September 30, 2011
	Total		Level 1		Level 2		Level 3
Liabilities:
Trading securities sold, but not yet purchased:
U.S. government securities	$	109,568	$	109,568	$	0	$	0
Corporate securities:
Fixed income securities		129,226		55,375		73,851		0
Equity securities		33,071		33,032		39		0
State and municipal securities		325		0		325		0
Total trading securities sold, but not yet purchased		272,190		197,975		74,215		0
Securities sold, but not yet purchased (1)		16,815		16,815		0		0
Derivative contracts (2)		25,672		0		25,672		0
	$	314,677	$	214,790	$	99,887	$	0
(1) Included in other liabilities in the consolidated statements of financial condition.
(2) Included in accounts payable and accrued expenses in the consolidated statements of financial condition.

	December 31, 2010
	Total		Level 1		Level 2		Level 3
Assets:
Cash equivalents	$	15,675	$	15,675	$	0	$	0
Trading securities owned:
U.S. government agency securities		86,882		0		86,882		0
U.S. government securities		9,038		9,038		0		0
Corporate securities:
Fixed income securities		221,145		47,001		133,901		40,243
Equity securities		46,877		46,395		482		0
State and municipal securities		80,228		0		80,228		0
Total trading securities owned		444,170		102,434		301,493		40,243
Available-for-sale securities:
U.S. government agency securities		25,030		0		25,030		0
State and municipal securities		26,343		0		14,907		11,436
Mortgage-backed securities:
Agency		697,163		0		697,163		0
Commercial		67,996		0		67,996		0
Non-agency		29,273		0		29,273		0
Corporate fixed income securities		154,901		34,897		120,004		0
Asset-backed securities		12,008		0		12,008		0
Total available-for-sale securities		1,012,714		34,897		966,381		11,436
Investments:
Corporate equity securities		3,335		3,335		0		0
Mutual funds		32,193		32,193		0		0
U.S. government securities		8,751		8,751		0		0
Auction rate securities:
Equity securities		76,826		0		0		76,826
Municipal securities		6,533		0		0		6,533
Other		51,298		10,489		2,307		38,502
Total investments		178,936		54,768		2,307		121,861
	$	1,651,495	$	207,774	$	1,270,181	$	173,540
Liabilities:
Trading securities sold, but not yet purchased:
U.S. government securities	$	131,561	$	131,561	$	0	$	0
U.S. government agency securities		664		0		664		0
Corporate securities:
Fixed income securities		61,026		18,815		37,526		4,685
Equity securities		6,800		6,780		20		0
State and municipal securities		89		0		89		0
Total trading securities sold, but not yet purchased		200,140		157,156		38,299		4,685
Securities sold, but not yet purchased (1)		19,935		19,935		0		0
Derivative contracts (2)		9,259		0		9,259		0
	$	229,334	$	177,091	$	47,558	$	4,685
(1) Included in other liabilities in the consolidated statements of financial condition.
(2) Included in accounts payable and accrued expenses in the consolidated statements of financial condition.

The following table summarizes the changes in fair value carrying values associated with Level 3 financial instruments during the three and nine months ended September 30, 2011 (in thousands):

	Three Months Ended September 30, 2011
	Financial Assets												Financial Liabilities
				Available-for-sale			Investments
	Corporate Fixed Income Securities (1)		State and Municipal Securities			Corporate Fixed Income Securities	Auction Rate Securities - Equity		Auction Rate Securities - Municipal		Other		Corporate Fixed Income Securities (2)
Balance at June 30, 2011	$	18,342	$	44,678	$	0	$	66,616	$	7,117	$	38,958	$	2,435
Unrealized gains:
Included in changes in net assets (3)		37		0		0		162		52		(692)		0
Included in OCI (4)		0		316		0		0		0		0		0
Realized gains/(losses) (3)		(380)		43		0		0		0		(94)		(16)
Purchases		66		21,987		12,000		1,650		0		170		0
Sales		(16,500)		(24,126)		0		0		(125)		0		(2,419)
Redemptions		(112)		(400)		0		(4,225)		0		(739)		0
Transfers:
Into Level 3		0		0		0		0		0		240		0
Out of Level 3		(252)		0		0		0		0		0		0
Net change		(17,141)		21,946		12,000		(2,413)		(73)		(1,355)		(2,435)
Balance at September 30, 2011	$	1,201	$	66,624	$	12,000	$	64,203	$	7,044	$	37,603	$	0

	Nine Months Ended September 30, 2011
	Financial Assets																	Financial Liabilities
					Available-for-sale				Investments
	Corporate Fixed Income Securities (1)			State and Municipal Securities				Corporate Fixed Income Securities	Auction Rate Securities - Equity			Auction Rate Securities - Municipal			Other			Corporate Fixed Income Securities (2)
Balance at December 31, 2010	$	40,243		$	11,436		$	0	$	76,826		$	6,533		$	38,502		$	4,685
Unrealized gains/(losses):
Included in changes in net assets (3)		(283	)		0			0		452			(44	)		2,872			0
Included in OCI (4)		0			2,403			0		0			0			0			0
Realized gains/(losses) (3)		356			858			0		0			0			(681	)		(52	)
Purchases		166,549			48,974			12,000		3,725			4,105			994			6,663
Sales		(198,572	)		(24,126	)		0		0			(2,900	)		0			(11,296	)
Redemptions		(828	)		(775	)		0		(16,800	)		(650	)		(4,324	)		0
Transfers:
Into Level 3		0			27,854			0		0			0			240			0
Out of Level 3		(6,264	)		0			0		0			0			0			0
Net change		(39,042	)		55,188			12,000		(12,623	)		511			(899	)		(4,685	)
Balance at September 30, 2011	$	1,201		$	66,624		$	12,000	$	64,203		$	7,044		$	37,603		$	0
(1) Included in trading securities owned in the consolidated statements of financial condition.
(2) Included in trading securities sold, but not yet purchased in the consolidated statements of financial condition.
(3) Realized and unrealized gains/(losses) related to trading securities and investments are reported in other income in the consolidated statements of operations.
(4) Unrealized gains related to available-for-sale securities are reported in accumulated other comprehensive income in the consolidated statements of financial condition.

The results included in the table above are only a component of the overall investment strategies of our company. The table above does not present Level 1 or Level 2 valued assets or liabilities. The changes to our company's Level 3 classified instruments were principally a result of: purchases of ARS from our customers, unrealized gains and losses, and redemptions of ARS at par during the three and nine months ended September 30, 2011. There were $0.2 million and $6.2 million of transfers from Level 3 to Level 2 during the three and six months ended June 30, 2011, respectively, related to securities for which market trades were observed that provided transparency into the valuation of these assets. There were $28.1 million of transfers of financial assets into Level 3 during the nine months ended September 30, 2011 primarily related to municipal ARS, which we transferred from held-to-maturity to available-for-sale during the second quarter of 2011. Given that there has been no recent trade activity observed, we transferred them into available-for-sale as Level 3 assets. There were no changes in unrealized gains/(losses) recorded in earnings for the three and nine months ended September 30, 2011 relating to Level 3 assets still held at September 30, 2011.

Transfers Within the Fair Value Hierarchy

We assess our financial instruments on a quarterly basis to determine the appropriate classification within the fair value hierarchy, as defined by Topic 820. Transfers between fair value classifications occur when there are changes in pricing observability levels. Transfers of financial instruments among the levels are deemed to occur at the beginning of the reporting period. There were $4.8 million and $29.3 million of transfers of financial assets from Level 2 to Level 1 during the three and nine months ended September 30, 2011, respectively, primarily related to tax-exempt securities and equity securities for which market trades were observed that provided transparency into the valuation of these assets. There were $5.1 million and $22.3 million of transfers of financial assets from Level 1 to Level 2 during the three and nine months ended September 30, 2011, respectively, primarily related to tax-exempt securities for which there were low volumes of recent trade activity observed.

Fair Value of Financial Instruments

The following reflects the fair value of financial instruments, as of September 30, 2011 and December 31, 2010, whether or not recognized in the consolidated statements of financial condition at fair value (in thousands).

	September 30, 2011				December 31, 2010
	Carrying value		Estimated fair value		Carrying value		Estimated fair value
Financial assets:
Cash and cash equivalents	$	214,619	$	214,619	$	253,529	$	253,529
Restricted cash		6,880		6,880		6,868		6,868
Cash segregated for regulatory purposes		26		26		6,023		6,023
Securities purchased under agreements to resell		121,004		121,004		123,617		123,617
Trading securities owned		526,444		526,444		444,170		444,170
Available-for-sale securities		1,312,784		1,312,784		1,012,714		1,012,714
Held-to-maturity securities		159,132		157,085		52,640		52,984
Loans held for sale		114,452		114,452		86,344		86,344
Bank loans		568,293		571,716		389,742		376,176
Investments		176,550		176,550		178,936		178,936
Financial liabilities:
Securities sold under agreements to repurchase	$	52,805	$	52,805	$	109,595	$	109,595
Non-interest-bearing deposits		21,405		21,398		8,197		7,980
Interest-bearing deposits		2,099,358		2,072,029		1,615,371		1,565,199
Trading securities sold, but not yet purchased		272,190		272,190		200,140		200,140
Securities sold, but not yet purchased (1)		16,815		16,815		19,935		19,935
Derivative contracts (2)		25,672		25,672		9,259		9,259
Liabilities subordinated to the claims of general creditors		6,957		6,617		8,241		7,739
(1) Included in other liabilities in the consolidated statements of financial condition.
(2) Included in accounts payable and accrued expenses in the consolidated statements of financial condition.

The following, as supplemented by the discussion above, describes the valuation techniques used in estimating the fair value of our financial instruments as of September 30, 2011 and December 31, 2010.

Financial Assets

Securities Purchased Under Agreements to Resell

Securities purchased under agreements to resell are collateralized financing transactions that are recorded at their contractual amounts plus accrued interest. The carrying values at September 30, 2011 and December 31, 2010 approximate fair value.

Held-to-Maturity Securities

Securities held to maturity are recorded at amortized cost based on our company's positive intent and ability to hold these securities to maturity. Securities held to maturity include asset-backed securities, consisting of corporate obligations, collateralized debt obligation securities and ARS. The estimvated fair value, included in the table above, is determined using several factors; however, primary weight is given to discounted cash flow modeling techniques that incorporated an estimated discount rate based upon recent observable debt security issuances with similar characteristics.

The decrease in estimated fair value below the carrying amount of our asset-backed security at September 30, 2011 and December 31, 2010 is primarily due to unrealized losses that were caused by: illiquid markets for collateralized debt obligations, global disruptions in the credit markets, increased supply of collateralized debt obligation secondary market securities from distressed sellers, and difficult times in the banking sector.

Loans Held for Sale

Loans held for sale consist of fixed-rate and adjustable-rate residential real estate mortgage loans intended for sale. Loans held for sale are stated at lower of cost or fair value. Fair value is determined based on prevailing market prices for loans with similar characteristics or on sale contract prices. The carrying values at September 30, 2011 and December 31, 2010 approximate fair value.

Bank Loans

The fair values of mortgage loans and commercial loans were estimated using a discounted cash flow method, a form of the income approach. Discount rates were determined considering rates at which similar portfolios of loans would be made under current conditions and considering liquidity spreads applicable to each loan portfolio based on the secondary market.

Financial Liabilities

Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase are collateralized financing transactions that are recorded at their contractual amounts plus accrued interest. The carrying values at September 30, 2011 and December 31, 2010 approximate fair value.

Non-Interest-Bearing Demand Deposits

The fair value of non-interest-bearing demand deposits was estimated using a discounted cash flow method.

Interest-Bearing Deposits

The fair value of money market and savings accounts represents the amounts payable on demand. The fair value of other interest-bearing deposits, including certificates of deposit, was calculated by discounting the future cash flows using discount rates based on the expected current market rates for similar products with similar remaining terms.

Liabilities Subordinated to Claims of General Creditors

The fair value of subordinated debt was measured using the interest rates commensurate with borrowings of similar terms.

These fair value disclosures represent our best estimates based on relevant market information and information about the financial instruments. Fair value estimates are based on judgments regarding future expected losses, current economic conditions, risk characteristics of the various instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in the above methodologies and assumptions could significantly affect the estimates.