Fair Value Of Financial Instruments

9 Months Ended

Sep. 30, 2011

Fair Value Of Financial Instruments [Abstract]

Fair Value Of Financial Instruments

Note 6: Fair Value of Financial Instruments

Financial Instruments

The following table presents the carrying value and fair value of financial instruments reported on the Company's consolidated balance sheets as of September 30, 2011 and December 31, 2010:

	As of September 30, 2011				As of December 31, 2010
In millions	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Assets:
Investments held as available-for-sale and held at fair value	$	10,182	$	10,182	$	11,739	$	11,739
Other investments		151		151		188		188
Cash and cash equivalents		659		659		366		366
Receivable for investments sold		46		46		8		8
Derivative assets:
Insured derivatives		-		-		0		0

Non-insured derivatives	2	2	4	4
Total derivative assets	2	2	4	4
Assets of consolidated VIEs:
Cash	580	580	764	764
Investments held-to-maturity	3,886	3,492	4,039	3,760
Fixed-maturity securities held as available-for-sale	532	532	339	339
Fixed-maturity securities held as trading	3,276	3,276	5,241	5,241
Loans receivable	2,218	2,218	2,183	2,183
Loan repurchase commitments	938	938	835	835
Derivative assets	713	713	699	699
Liabilities:
Investment agreements	1,635	1,931	2,005	2,172
Medium-term notes	1,636	774	1,740	766
Securities sold under agreements to repurchase	387	385	471	454
Short-term debt	-	-	65	65
Long-term debt	1,841	983	1,851	1,155
Payable for investments purchased	54	54	2	2
Derivative liabilities:
Insured derivatives	4,901	4,901	4,375	4,375
Non-insured derivatives	365	365	242	242
Total derivative liabilities	5,266	5,266	4,617	4,617
Warrants	12	12	58	58
Liabilities of consolidated VIEs:
Variable interest entity notes	9,033	8,572	10,590	10,285
Long-term debt	360	355	360	340
Derivative liabilities	1,888	1,888	2,104	2,104
Financial Guarantees:
Gross	4,580	3,599	5,275	3,906
Ceded	109	97	112	48

Valuation Techniques

Valuation techniques for financial instruments measured at fair value and included in the preceding table are described below. The Company's assets and liabilities measured at fair value have been categorized according to the fair value hierarchy based on the lowest level input that is significant to the fair value measurement in its entirety.

Fixed-Maturity Securities (including short-term investments) Held as Available-For-Sale and Fixed-Maturity Securities Held at Fair Value

U.S. Treasury and government agency —U.S. Treasury securities are valued based on quoted market prices in active markets. The fair value of U.S. Treasuries is based on live trading feeds. U.S. Treasury securities are categorized in Level 1 of the fair value hierarchy. Government agency securities include debentures and other agency mortgage pass-through certificates as well as to-be-announced ("TBA") securities. TBA securities are liquid and have quoted market prices based on live data feeds. Fair value of mortgage pass-through certificates is obtained via a simulation model, which considers different rate scenarios and historical activity to calculate a spread to the comparable TBA security. Government agency securities generally use market-based and observable inputs. As such, these securities are classified as Level 2 of the fair value hierarchy.

Foreign governments —Foreign government obligations are generally valued based on quoted market prices in active markets, and are categorized in Level 1 of the fair value hierarchy. When quoted market prices are not available, fair value is determined using a valuation model based on observable inputs including interest rate yield curves, cross-currency basis index spreads, and country credit spreads for structures similar to the financial instrument in terms of issuer, maturity and seniority. These financial instruments are generally categorized in Level 2 of the fair value hierarchy. Bonds that contain significant inputs that are not observable are categorized as Level 3.

Corporate obligations —Corporate obligations are valued using recently executed transaction prices or quoted market prices where observable. When observable price quotations are not available, fair value is determined using a valuation model based on observable inputs including interest rate yield curves, CDS spreads for similar instruments, and diversity scores. Corporate obligations are generally categorized in Level 2 of the fair value hierarchy or categorized in Level 3 when significant inputs are unobservable. Corporate obligations are classified as Level 1 of the fair value hierarchy when quoted market prices in an active market for identical financial instruments are available.

Mortgage-backed securities and asset-backed securities —Mortgage-backed securities ("MBS") and asset-backed securities ("ABS") are valued using recently executed transaction prices. When position-specific quoted prices are not available, MBS and ABS are valued based on quoted prices for similar securities. If quoted prices are not available, MBS and ABS are valued using a valuation model based on observable inputs including interest rate yield curves, spreads, prepayments and volatilities, and categorized in Level 2 of the fair value hierarchy. MBS and ABS are categorized in Level 3 of the fair value hierarchy when significant inputs are unobservable.

State and municipal bonds —State and municipal bonds are valued using recently executed transaction prices, quoted prices or valuation models based on observable inputs including interest rate yield curves, bond or CDS spreads, and volatility. State and municipal bonds are generally categorized in Level 2 of the fair value hierarchy, or categorized in Level 3 when significant inputs are unobservable.

Investments Held-To-Maturity

The fair values of investments held-to-maturity are determined using recently executed transaction prices or quoted prices when available. When position-specific quoted prices are not available, fair values of investments held-to-maturity are based on quoted prices of similar securities. When quoted prices for similar investments are not available, fair values are based on valuation models using observable inputs including interest rate yield curves, and bond spreads of similar securities.

Other Investments

Other investments include the Company's interest in equity securities. Fair values of other investments are determined by using quoted prices, or valuation models that use market-based and observable inputs. Other investments are categorized in Level 1, Level 2, or Level 3 of the fair value hierarchy.

Cash and Cash Equivalents, Receivable for Investments Sold and Payable for Investments Purchased

The carrying amounts of cash and cash equivalents, receivable for investments sold and payable for investments purchased approximates fair values due to the short maturities of these instruments.

Loans Receivable at Fair Value

Loans receivable at fair value comprise loans held by consolidated VIEs consisting of residential mortgage loans, commercial mortgage loans and other whole business loans. Fair values of residential mortgage loans are determined using quoted prices for MBS with similar characteristics and adjusted for the fair values of the financial guarantee obligations provided by MBIA Corp. on the related MBS. Fair values of commercial mortgage loans and other whole business loans are valued based on quoted prices of similar collateralized MBS. Loans receivable at fair value are categorized in Level 3 of the fair value hierarchy.

Loan Repurchase Commitments

Loan repurchase commitments are obligations owed by the sellers/servicers of mortgage loans to either MBIA as reimbursement of paid claims or to the RMBS trusts as defined in the transaction documents. Loan repurchase commitments are consolidated under the amended accounting principles for the consolidation of VIEs. This asset represents the rights of the trusts against the sellers/servicers for representations and warranties that the securitized residential mortgage loans sold to the trust comply with stated underwriting guidelines and for the sellers/servicers to cure, replace, or repurchase mortgage loans that fail to comply. Fair value measurements of loan repurchase commitments represent the amounts owed by the sellers/servicers to the trusts. Loan repurchase commitments are not securities and no quoted prices or comparable market transaction information are observable or available. Loan repurchase commitments at fair value are categorized in Level 3 of the fair value hierarchy. Fair values of loan repurchase commitments are determined using discounted cash flow techniques based on observable inputs including:

• estimates of future cash flows for the asset;

• expectations about possible variations in the amount and/or timing of the cash flows representing the uncertainty inherent in the cash flows;

• time value of money, represented by the rate on risk-free monetary assets;

• the price for bearing the uncertainty inherent in the cash flows (risk premium); and

• other case-specific factors that would be considered by market participants.

Refer to the discussion of "RMBS Recoveries" within "Note 5: Loss and Loss Adjustment Expense Reserves" for a further description of how these estimates of future cash flows for the assets are determined, as well as the additional risk margins and discounts applied.

Investment Agreements

The fair values of investment agreements are determined using discounted cash flow techniques based on observable interest rates currently being offered for similar agreements with comparable maturity dates. Investment agreements contain collateralization and termination agreements that substantially mitigate the nonperformance risk of the Company.

Medium-Term Notes

The fair values of MTNs are determined using discounted cash flow techniques based on inputs including observable interest rates currently being offered for similar notes with comparable maturity dates, and nonperformance risk. Nonperformance risk is determined using the Company's own credit spreads.

The Company has elected to record four MTNs at fair value. Fair values of such notes are determined using quoted market prices or discounted cash flow techniques. Significant inputs into the valuation include yield curves and spreads to the swap curve. As these notes are not actively traded, certain significant inputs (e.g., spreads to the swap curve) are unobservable. MTNs are categorized as Level 3 of the fair value hierarchy.

Variable Interest Entity Notes

The fair values of VIE notes are determined based on recently executed transaction prices or quoted prices where observable. When position-specific quoted prices are not observable, fair values are based on quoted prices of similar securities. Fair values based on quoted prices of similar securities may be adjusted for factors unique to the securities, including any credit enhancement. When observable quoted prices are not available, fair value is determined based on discounted cash flow techniques of the underlying collateral using observable inputs including interest rate yield curves and bond spreads of similar securities. VIE notes are categorized in Level 2 or Level 3 of the fair value hierarchy based on the lowest level input that is significant to the fair value measurement in its entirety.

Securities Sold Under Agreements to Repurchase

The fair values of securities sold under agreements to repurchase are determined using discounted cash flow techniques based on observable inputs including interest rates on similar repurchase agreements. Securities sold under agreements to repurchase include term reverse repurchase agreements that contain credit enhancement provisions including over-collateralization agreements to sufficiently mitigate the nonperformance risk of the Company.

Long-term Debt

Long-term debt consists of notes, debentures, surplus notes and floating rate liquidity loans. The fair value of long-term notes, debentures and surplus notes are estimated based on quoted prices for the identical or similar securities. The fair value for floating rate liquidity loans are determined using discounted cash flow techniques of the underlying collateral pledged to the specific loans, as these loans are non-recourse and fully backed by a pool of underlying assets.

Derivatives—Asset/Liability Products

The asset/liability products business has entered into derivative transactions primarily consisting of interest rate, cross currency, credit default and principal protection guarantees. Fair values of over-the counter derivatives are determined using valuation models based on observable inputs, nonperformance risk of the Company's own credit and nonperformance risk of the counterparties. Observable and market-based inputs include interest rate yields, credit spreads and volatilities. These derivatives are categorized in Level 2 or Level 3 of the fair value hierarchy based on the lowest level input that is significant to the fair value measurement in its entirety.

The Company has policies and procedures in place regarding counterparties, including review and approval of the counterparty and the Company's exposure limit, collateral posting requirements, collateral monitoring and margin calls on collateral. The Company manages counterparty credit risk on an individual counterparty basis through master netting arrangements covering derivative transactions in the asset/liability products and corporate segments. These agreements allow the Company to contractually net amounts due from a counterparty with those amounts due to such counterparty when certain triggering events occur. The Company only executes swaps under master netting agreements, which typically contain mutual credit downgrade provisions that generally provide the ability to require assignment or termination in the event either the Company or the counterparty is downgraded below a specified credit rating. The netting agreements minimize the potential for losses related to credit exposure and thus serve to mitigate the Company's nonperformance risk under these derivatives.

In certain cases, the Company also manages credit risk through collateral agreements that give the Company the right to hold or the obligation to provide collateral when the current market value of derivative contracts exceeds an exposure threshold. Under these arrangements, the Company may receive or provide U.S. Treasury and other highly rated securities or cash to secure the derivative. The delivery of high-quality collateral can minimize credit exposure and mitigate the potential for nonperformance risk impacting the fair values of the derivatives.

Derivatives—Insurance

The derivative contracts insured by MBIA cannot be legally traded and generally do not have observable market prices. MBIA Corp. determines the fair values of insured credit derivatives using valuation models. These models include the Binomial Expansion Technique ("BET") model and an internally developed model referred to as the "Direct Price Model." For a limited number of other insured credit derivatives, fair values are determined using a dual-default model. The valuation of insured derivatives includes the impact of its own credit standing. All of these derivatives are categorized as Level 3 of the fair value hierarchy as their fair value is derived using significant unobservable inputs.

Description of MBIA's Insured Derivatives

As of September 30, 2011, the Company had $91.6 billion of gross par outstanding on insured derivatives. The majority of MBIA's insured derivatives are "credit derivatives" that reference structured pools of cash securities and CDS. The Company generally insured the most senior liabilities of such transactions and, at transaction closing, the Company's exposure generally had more subordination than needed to achieve triple-A ratings from credit rating agencies (referred to as "Super Triple-A" exposure). The collateral underlying the Company's insured derivatives consists of cash securities and CDS referencing primarily corporate, asset-backed, residential mortgage-backed, commercial mortgage-backed, CRE loans, and CDO securities. As of September 30, 2011, the gross par outstanding of the Company's insured credit derivatives totaled $84.2 billion. The remaining $7.4 billion of gross par outstanding on insured derivatives as of September 30, 2011 primarily related to insured "interest rate" and "inflation-linked" swaps for which the Company has insured counterparty credit risk.

Most of MBIA's insured CDS contracts require MBIA to make payments for losses of the principal outstanding under the contracts when losses on the underlying referenced collateral exceed a predetermined deductible. MBIA's gross par outstanding and maximum payment obligation under these contracts as of September 30, 2011 was $65.5 billion. The underlying referenced collateral for contracts executed in this manner largely consist of investment grade corporate debt, structured CMBS pools and, to a lesser extent, corporate and multi-sector CDOs. MBIA's multi-sector CDOs are classified into CDOs of high-grade U.S. ABS, including one CDO-squared transaction, and CDOs of mezzanine U.S. ABS. As of September 30, 2011, gross par outstanding on MBIA Corp.-insured CDOs of high-grade U.S. ABS totaled $4.4 billion. The majority of the collateral contained within the Company's ABS multi-sector CDOs comprised RMBS. MBIA also had $18.7 billion of gross par outstanding on insured CDS contracts that require MBIA to make timely interest and ultimate principal payments.

Valuation Models Used

Approximately 81% of the balance sheet fair value of insured credit derivatives as of September 30, 2011 was valued using the BET Model. Approximately 19% of the balance sheet fair value of insured credit derivatives as of September 30, 2011 was valued using the internally developed Direct Price Model. An immaterial amount of insured credit derivatives were valued using other methods, including a dual default model.

A. Description of the BET Model

1. Valuation Model Overview

The BET Model estimates what a bond insurer would charge to guarantee a transaction at the measurement date, based on the market-implied default risk of the underlying collateral and the remaining structural protection in a deductible or subordination. This approach assumes that bond insurers would be willing to accept these contracts from the Company at a price equal to what the Company could issue them for in the current market. While the premium charged by financial guarantors is not a direct input into the Company's model, the model estimates such premium and this premium increases as the probability of loss increases, driven by various factors including rising credit spreads, negative credit migration, lower recovery rates, lower diversity score and erosion of deductible or subordination.

Inputs to the process of determining fair value for structured transactions using the BET Model include estimates of collateral loss, allocation of loss to separate tranches of the capital structure, and calculation of the change in value.

• Estimates of aggregated collateral losses are calculated by reference to the following (described in further detail under "BET Model Inputs" below):

• credit spreads of underlying collateral based on actual spreads or spreads on similar collateral with similar ratings, or in some cases is benchmarked; for collateral pools where the spread distribution is characterized by extremes, each segment of the pool is modeled separately instead of using an overall pool average;

• diversity score of the collateral pool as an indication of correlation of collateral defaults; and

• recovery rate for all defaulted collateral.

• Allocation of losses to separate tranches of the capital structure according to priority of payments in a transaction.

• The unrealized gain or loss on a transaction inception to date is the difference between the original price of the risk (the original market-implied expected loss) and the current price of the risk based on the assumed market-implied expected losses derived from the model.

Additional structural assumptions of the BET Model are:

• Default probabilities are determined by three factors: credit spread, recovery rate after default, and the time period under risk.

• Frequencies of defaults are modeled evenly over time.

• Collateral assets are generally considered on an average basis rather than being modeled on an individual basis.

• Collateral asset correlation is modeled using a diversity score which is calculated based on industry or sector concentrations. Recovery rates are based on historical averages and updated based on market evidence.

2. BET Model Inputs

a. Credit spreads

The average spread of collateral is a key input as the Company assumes credit spreads reflect the market's assessment of default probability for each piece of collateral. Spreads are obtained from market data sources published by third parties (e.g., dealer spread tables for assets most closely resembling collateral within the Company's transactions) as well as collateral-specific spreads on the underlying reference obligations provided by trustees or market sources. Also, when these sources are not available, the Company benchmarks spreads for collateral against market spreads or prices. This data is reviewed on an ongoing basis for reasonableness and applicability to the Company's derivative portfolio. The Company also calculates spreads based on quoted prices and on internal assumptions about expected life, when pricing information is available and spread information is not.

The Company uses the spread hierarchy listed below in determining which source of spread information to use, with the rule being to use CDS spreads where available and cash security spreads as the next alternative. Cash security spreads reflect trading activity in funded fixed-income instruments while CDS spreads reflect trading levels for non-funded derivative instruments. While both markets are driven partly by an assessment of the credit quality of the referenced security, there are factors which create significant differences. These factors include CDS spreads driven by speculative activity as the CDS market facilitates both long and short positions without ownership of the underlying security, allowing for significant leverage.

Spread Hierarchy:

• Collateral-specific credit spreads when observable.

• Sector-specific spread tables by asset class and rating.

• Corporate spreads, including Bloomberg and Risk Metrics spread tables based on rating.

• Benchmark from most relevant market source when corporate spreads are not directly relevant.

If current market-based spreads are not available, the Company applies either sector-specific spreads from spread tables provided by dealers or corporate spread tables. The sector-specific spread applied depends on the nature of the underlying collateral. Transactions with corporate collateral use the corporate spread table. Transactions with asset-backed collateral use one or more of the dealer asset-backed tables. If there are no observable market spreads for the specific collateral, and sector-specific and corporate spread tables are not appropriate to estimate the spread for a specific type of collateral, the Company uses the fourth alternative in its hierarchy. This includes using tranched corporate collateral, where the Company applies corporate spreads as an input with an adjustment for its tranched exposure.

As of September 30, 2011, sector-specific spreads were used in 7% of the transactions valued using the BET Model. Corporate spreads were used in 48% of the transactions and spreads benchmarked from the most relevant spread source were used for 45% of the transactions. When determining the percentages above, there were some transactions where MBIA incorporated multiple levels within the hierarchy, including using actual collateral-specific credit spreads in combination with a calculated spread based on an assumed relationship. In those cases, MBIA classified the transaction as being benchmarked from the most relevant spread source even though the majority of the average spread was from actual collateral-specific spreads. The spread source can also be identified by whether or not it is based on collateral weighted average rating factor ("WARF"). No collateral-specific spreads are based on WARF, sector-specific and corporate spreads are based on WARF, and some benchmarked spreads are based on WARF. WARF-sourced and/or ratings-sourced credit spreads were used for 91% of the transactions.

Over time, the data inputs change as new sources become available, existing sources are discontinued or are no longer considered to be reliable or the most appropriate. It is always the Company's objective to move to higher levels on the spread hierarchy table defined above. However, the Company may on occasion move to lower priority inputs due to the discontinuation of data sources or due to the Company considering higher priority inputs no longer representative of market spreads.

b. Diversity Scores

Diversity scores are a means of estimating the diversification in a portfolio. The diversity score estimates the number of uncorrelated assets that are assumed to have the same loss distribution as the actual portfolio of correlated assets. A lower diversity score represents higher assumed correlation, increasing the chances of a large number of defaults, and thereby increasing the risk of loss in the senior tranche. A lower diversity score will generally have a negative impact on the valuation for the Company's senior tranche. The calculation methodology for a diversity score includes the extent to which a portfolio is diversified by industry or asset class, which is either calculated internally or reported by the trustee on a regular basis. Diversity scores are calculated at transaction origination, and adjusted as the collateral pool changes over time. MBIA's internal modeling of the diversity score is based on Moody's methodology.

c. Recovery Rate

The recovery rate represents the percentage of par expected to be recovered after an asset defaults, indicating the severity of a potential loss. MBIA generally uses rating agency recovery assumptions which may be adjusted to account for differences between the characteristics and performance of the collateral used by the rating agencies and the actual collateral in MBIA-insured transactions. The Company may also adjust rating agency assumptions based on the performance of the collateral manager and on empirical market data.

d. Input Adjustments for Insured CMBS Derivatives in the Current Market

Approximately $35.3 billion gross par of MBIA's insured derivative transactions as of September 30, 2011 includes substantial amounts of CMBS and commercial mortgage collateral. Since the CMBX is now quoted in price terms and the BET Model requires a spread input, it is necessary to convert CMBX prices to spreads. Through the third quarter of 2010, the Company assumed that a portion of the CMBX price reflected market illiquidity. The Company assumed this illiquidity component was the difference between par and the price of the highest priced CMBX triple-A series. The Company assumed that the price of each CMBX index has two components: an illiquidity component and a loss component. The market implied losses were assumed to be the difference of par less the liquidity adjusted price. These loss estimates were converted to spreads using an internal estimate of duration. Beginning in the fourth quarter of 2010, the Company determined that it would not be appropriate to continue to use a CMBS illiquidity component in the models due to increased liquidity in the marketplace.

e. Nonperformance Risk

The Company's valuation methodology for insured credit derivative liabilities incorporates the Company's own nonperformance risk. The Company calculates the fair value by discounting the market value loss estimated through the BET Model at discount rates which include MBIA CDS spreads as of September 30, 2011. The CDS spreads assigned to each deal are based on the weighted average life of the deal. The Company limits the nonperformance impact so that the derivative liability could not be lower than the Company's recovery derivative price multiplied by the unadjusted derivative liability.

B. Description of Direct Price Model

1. Valuation Model Overview

There are three significant model inputs used in determining fair value using the Direct Price Model. Significant inputs include market prices obtained or estimated for all collateral within a transaction, the present value of the market-implied potential losses calculated for the transaction, and the impact of nonperformance risk.

2. Model Inputs

• Collateral prices

Fair value of collateral is based on quoted prices when available. When quoted prices are not available, a matrix pricing grid is used based on security type and rating to determine fair value of collateral which applies an average based on securities with the same rating and security type categories.

• Interest rates

The present value of the market-implied potential losses was calculated assuming that MBIA deferred all principal losses to the legal final maturity. This was done through a cash flow model that calculated potential interest payments in each period and the potential principal loss at the legal final maturity. These cash flows were discounted using the LIBOR flat swap curve.

• Nonperformance risk

The methodology for calculating MBIA's nonperformance risk is the same as used for the BET Model. Due to the current level of MBIA CDS spread rates and the long tenure of these transactions, the derivative recovery rate was used to estimate nonperformance risk for all transactions marked by this model.

Overall Model Results

As of September 30, 2011 and December 31, 2010, the Company's net insured derivative liability was $4.9 billion and $4.4 billion, respectively, and was primarily related to the fair values of insured credit derivatives, based on the results of the aforementioned pricing models. In the current environment, the most significant driver of changes in fair value is nonperformance risk. In aggregate, the nonperformance calculation resulted in a pre-tax net insured derivative liability that was $9.5 billion and $12.1 billion lower than the net liability that would have been estimated if the Company excluded nonperformance risk in its valuation as of September 30, 2011 and December 31, 2010, respectively. Nonperformance risk is a fair value concept and does not contradict the Company's internal view, based on fundamental credit analysis of the Company's economic condition, that the Company will be able to pay all claims when due.

The Company reviews the model results on a quarterly basis to assess the appropriateness of the assumptions and results in light of current market activity and conditions. This review is performed by internal staff with relevant expertise. If live market spreads are observable for similar transactions, those spreads are an integral part of the analysis. For example, new insured transactions that resemble existing (previously insured) transactions are considered, as well as negotiated settlements of existing transactions. MBIA Corp. negotiated settlements of insured CDS transactions in 2010 and 2011. In assessing the reasonableness of the fair value estimate for insured CDS, the Company considered the executed prices for those transactions as well as a review of internal consistency with MBIA's methodology.

Warrants

Stock warrants issued by the Company are recorded at fair value based on a modified Black-Scholes model. Inputs into the warrant valuation include interest rates, stock volatilities and dividend data. As all significant inputs are market-based and observable, warrants are categorized in Level 2 of the fair value hierarchy.

Financial Guarantees

Gross Financial Guarantees —The fair value of gross financial guarantees is determined using discounted cash flow techniques based on inputs that include (i) assumptions of expected losses on financial guarantee policies where loss reserves have not been recognized, (ii) amount of losses expected on financial guarantee policies where loss reserves have been established, (iii) the cost of capital reserves required to support the financial guarantee liability and (iv) discount rates. The MBIA Corp. CDS spread and recovery rate are used as the discount rate for MBIA Corp., while the Assured Guaranty Corp. CDS spread and recovery rate are used as the discount rate for National. Discount rates are adjusted to reflect nonperformance risk of the Company. Fair value of gross financial guarantees does not consider future installment premium receipts or returns on invested upfront premiums as inputs.

The carrying value of MBIA's gross financial guarantees consists of unearned premium revenue and loss and LAE reserves as reported on MBIA's consolidated balance sheets.

Ceded Financial Guarantees —The fair value of ceded financial guarantees is determined by applying the percentage ceded to reinsurers to the related fair value of the gross financial guarantees. The carrying value of ceded financial guarantees consists of prepaid reinsurance premiums and reinsurance recoverable on paid losses as reported on MBIA's consolidated balance sheets.

Fair Value Measurements

The following fair value hierarchy tables present information about the Company's assets (including short-term investments) and liabilities measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010:

	Fair Value Measurements at Reporting Date Using
In millions	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Counterparty and Cash Collateral Netting			Balance as of September 30, 2011
Assets:
Investments:
Fixed-maturity investments:
Taxable bonds:
U.S. Treasury and government agency	$	749	$	149	$	-	$	-		$	898
Foreign governments		295		70		11		-			376
Corporate obligations		1		1,584		342		-			1,927
Mortgage-backed securities:
Residential mortgage-backed agency		-		1,419		1		-			1,420
Residential mortgage-backed non-agency		-		421		25		-			446
Commercial mortgage-backed		-		35		32		-			67
Asset-backed securities:
Collateralized debt obligations		-		84		67		-			151
Other asset-backed		-		185		272		-			457
State and municipal bonds		-		852		-		-			852
Total taxable bonds		1,045		4,799		750		-			6,594
Tax exempt bonds:
State and municipal bonds		-		2,815		30		-			2,845
Other fixed-maturity investments		-		15		-		-			15
Total fixed-maturity investments		1,045		7,629		780		-			9,454
Money market securities		693		-		-		-			693
Perpetual preferred securities		-		146		1		-			147
Other		27		-		-		-			27
Total		1,765		7,775		781		-			10,321
Derivative assets:
Non-insured derivative assets:
Credit derivatives		-		1		-		-			1
Interest rate derivatives		-		89		3		-			92
Other		-		-		-		(91	)		(91	)
Total derivative assets		-		90		3		(91	)		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 September 30, 2011
Assets of consolidated VIEs:
Corporate obligations		-		204		63		-			267
Mortgage-backed securities:
Residential mortgage-backed agency		-		4		-		-			4
Residential mortgage-backed non-agency		-		1,703		15		-			1,718
Commercial mortgage-backed		-		595		17		-			612
Asset-backed securities:
Collateralized debt obligations		-		437		206		-			643
Other asset-backed		-		275		71		-			346
Total fixed maturity securities at fair value		-		3,218		372		-			3,590
Money market securities		218		-		-		-			218
Loans receivable		-		-		2,218		-			2,218
Loan repurchase commitments		-		-		938		-			938
Derivative assets:
Credit derivatives		-		-		708		-			708
Interest rate derivatives		-		5		-		-			5
Total assets	$	1,983	$	11,088	$	5,020	$	(91	)	$	18,000
Liabilities:
Medium-term notes	$	-	$	-	$	128	$	-		$	128
Derivative liabilities:
Insured derivatives:
Credit derivatives		-		21		4,880		-			4,901
Non-insured derivatives:
Interest rate derivatives		-		450		-		-			450
Currency derivatives		-		6		-		-			6
Other		-		-		-		(91	)		(91	)
Other liabilities:
Warrants		-		12		-		-			12
Liabilities of consolidated VIEs:
Variable interest entity notes		-		1,992		3,131		-			5,123
Derivative liabilities:
Credit derivatives		-		-		1,473		-			1,473
Interest rate derivatives		-		397		-		-			397
Currency derivatives		-		-		18		-			18
Total liabilities	$	-	$	2,878	$	9,630	$	(91	)	$	12,417

	Fair Value Measurements at Reporting Date Using
In millions	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Counterparty and Cash Collateral Netting			Balance as of December 31, 2010
Assets:
Investments:
Fixed-maturity investments:
Taxable bonds:
U.S. Treasury and government agency	$	915	$	149	$	-	$	-		$	1,064
Foreign governments		409		49		11		-			469
Corporate obligations		-		2,602		246		-			2,848
Mortgage-backed securities:
Residential mortgage-backed agency		-		1,548		41		-			1,589
Residential mortgage-backed non-agency		-		414		48		-			462
Commercial mortgage-backed		-		120		41		-			161
Asset-backed securities:
Collateralized debt obligations		-		108		191		-			299
Other asset-backed		-		310		350		-			660
State and municipal bonds		-		738		14		-			752
Total taxable bonds		1,324		6,038		942		-			8,304
Tax exempt bonds:
State and municipal bonds		-		2,787		36		-			2,823
Other fixed-maturity investments		13		19		-		-			32
Total fixed-maturity investments		1,337		8,844		978		-			11,159
Money market securities		553		-		-		-			553
Perpetual preferred securities		-		192		-		-			192
Other		16		5		-		-			21
Total		1,906		9,041		978		-			11,925
Derivative assets:
Non-insured derivative assets:
Credit derivatives		-		3		-		-			3
Interest rate derivatives		-		57		5		-			62
Other		-		-		-		(61	)		(61	)
Total derivative assets		-		60		5		(61	)		4
	Fair Value Measurements at Reporting Date Using
In millions	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Counterparty and Cash Collateral Netting			Balance as of December 31, 2010
Assets of consolidated VIEs:
U.S. Treasury and government agency		4		-		-		-			4
Corporate obligations		7		360		80		-			447
Mortgage-backed securities:
Residential mortgage-backed agency		-		37		-		-			37
Residential mortgage-backed non-agency		-		2,706		40		-			2,746
Commercial mortgage-backed		-		907		23		-			930
Asset-backed securities:
Collateralized debt obligations		-		583		245		-			828
Other asset-backed		-		352		83		-			435
State and municipal taxable and tax-exempt bonds		-		4		-		-			4
Total fixed maturity securities at fair value		11		4,949		471		-			5,431
Money market securities		150		-		-		-			150
Loans receivable		-		-		2,183		-			2,183
Loan repurchase commitments		-		-		835		-			835
Derivative assets:
Credit derivatives		-		-		687		-			687
Interest rate derivatives		-		12		-		-			12
Total assets	$	2,067	$	14,062	$	5,159	$	(61	)	$	21,227
Liabilities:
Medium-term notes	$	-	$	-	$	116	$	-		$	116
Derivative liabilities:
Insured derivatives:
Credit derivatives		-		25		4,350		-			4,375
Non-insured derivatives:
Interest rate derivatives		-		297		-		-			297
Currency derivatives		-		6		-		-			6
Other		-		-		-		(61	)		(61	)
Other liabilities:
Warrants		-		58		-		-			58
Liabilities of consolidated VIEs:
Variable interest entity notes		-		2,007		4,673		-			6,680
Derivative liabilities:
Credit derivatives		-		-		1,455		-			1,455
Interest rate derivatives		-		635		-		-			635
Currency derivatives		-		-		14		-			14
Total liabilities	$	-	$	3,028	$	10,608	$	(61	)	$	13,575

Level 3 assets at fair value, as of September 30, 2011 and December 31, 2010, represented approximately 28% and 24%, respectively of total assets. Level 3 liabilities at fair value, represented approximately 78% of total liabilities for both September 30, 2011 and December 31, 2010.

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, 2011 and 2010:

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	$	-		$	-		$	-		$	(8	)	$	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			-			2		-		(4	)		-			1		(2	)		25		-
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	)		-			2		-		(9	)		-			3		(28	)		272		-
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	)	$	(13	)	$	126	$	2	$	(210	)	$	(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		5,656			79		(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	$	11,307		$	79	$	(1,191	)	$	-	$	(9	)	$	-	$	-	$	(286	)	$	(981	)	$	-	$	-	$	8,919		$	(798	)

(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, 2010
In millions	Balance, Beginning of Period		Realized Gains / (Losses)		Unrealized Gains / (Losses) Included in Earnings			Unrealized Gains / (Losses) Included in OCI		Foreign Exchange Recognized in OCI or Earnings		Purchases, Settlements and Sales, net			Transfers into Level 3 (1)		Transfers out of Level 3 (1)			Ending Balance		Change in Unrealized Gains (Losses) for the Period Included in Earnings for Assets and Liabilities still held as of September 30, 2010
Assets:
U.S. Treasury and government agency	$	27	$	-	$	-		$	-	$	-	$	-		$	-	$	(27	)	$	-	$	-
Foreign governments		12		-		-			-		1		6			-		-			19		-
Corporate obligations		284		-		-			-		3		(101	)		18		(60	)		144		-
Residential mortgage-backed agency		-		-		-			-		-		-			41		-			41		-
Residential mortgage-backed non-agency		30		-		-			2		-		(2	)		50		(1	)		79		-
Commercial mortgage-backed		14		-		-			-		2		(1	)		-		(1	)		14		-
Collateralized debt obligations		111		-		-			5		-		(13	)		100		(2	)		201		-
Other asset-backed		391		-		-			32		-		(31	)		4		(9	)		387		-
State and municipal tax-exempt bonds		38		-		-			-		-		(2	)		-		-			36		-
Perpetual preferred securities		85		-		-			-		-		-			-		-			85		-
Assets of consolidated VIEs:
Corporate obligations		129		-		-			-		-		7			13		-			149		-
Residential mortgage-backed non-agency		53		-		-			-		-		(5	)		30		-			78		-
Commercial mortgage-backed		216		-		3			-		-		(20	)		17		-			216		-
Collateralized debt obligations		327		-		(53	)		-		-		37			34		-			345		-
Other asset-backed		153		-		(19	)		-		-		(4	)		16		(26	)		120		-
Loans receivable		2,608		-		(167	)		-		42		(540	)		-		-			1,943		-
Loan repurchase commitments		792		-		2			-		-		-			-		-			794		2
Total assets	$	5,270	$	-	$	(234	)	$	39	$	48	$	(669	)	$	323	$	(126	)	$	4,651	$	2

Liabilities:
Medium-term notes	$	109		$	-		$	(9	)	$	-	$	10		$	-		$	-	$	-	$	110		$	(9	)
Credit derivatives, net		4,414			(519	)		1,046			-		-			519			-		-		5,460			531
Interest rate derivatives, net		(7	)		-			4			-		(4	)		-			-		-		(7	)		17
Currency derivatives, net		(7	)		-			(7	)		-		(2	)		-			-		-		(16	)		(10	)
Liabilities of consolidated VIEs:
VIE notes		5,045			-			232			-		45			(540	)		-		-		4,782			-
Derivative contracts, net		370			-			17			-		-			155			-		-		542			17
Total liabilities	$	9,924		$	(519	)	$	1,283		$	-	$	49		$	134		$	-	$	-	$	10,871		$	546

(1) - Transferred in and out at the end of the period.

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. For the three months ended September 30, 2011, the net unrealized losses related to the transfers into Level 3 were $5 million and the net unrealized gains related to the transfers out of Level 3 were $11 million.

Transfers into and out of Level 3 were $323 million and $126 million, respectively, for the three months ended September 30, 2010. Transfers into and out of Level 2 were $126 million and $323 million, respectively, for the three months ended September 30, 2010. These transfers were principally for available-for-sale securities where inputs, which are significant to their valuation, became unobservable or observable during the quarter. These inputs included spreads, prepayment speeds, default speeds, default severities, yield curves observable at commonly quoted intervals, and market corroborated inputs. RMBS non-agency, CDOs, RMBS agency and CMBS comprised the majority of the transferred instruments. There were no transfers in or out of Level 1. For the three months ended September 30, 2010, the net unrealized losses related to the transfers into Level 3 were $15 million and the net unrealized gains related to the transfers out of Level 3 were $1 million.

All Level 1, 2 and 3 designations are made at the end of each accounting period.

The following tables present information about changes in Level 3 assets (including short-term investments) and liabilities measured at fair value on a recurring basis for the nine months ended September 30, 2011 and 2010:

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	$	-	$	-	$	-	$	(7)	$	9	$	-	$	(2)	$	-	$	7	$	(7)	$	11	$	-
Corporate obligations		246		(2)		-		(3)		(2)		31		-		(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)		13		-		(14)		(19)		9		(20)		25		-
Commercial mortgage-backed		41		(2)		-		2		1		8		-		(3)		(14)		-		(1)		32		-
Collateralized debt obligations		191		(4)		-		25		-		47		3		(112)		(36)		49		(96)		67		-
Other asset-backed		350		-		-		(26)		-		11		-		(20)		(2)		16		(57)		272		-
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	$	(9)	$	311	$	6	$	(9)	$	183	$	15	$	(480)	$	(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.

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Nine Months Ended September 30, 2010
In millions	Balance, Beginning of Year		Realized Gains / (Losses)			Unrealized Gains / (Losses) Included in Earnings		Unrealized Gains / (Losses) Included in OCI		Foreign Exchange Recognized in OCI or Earnings		Purchases, Settlements and Sales, net		Transfers into Level 3 (1)		Transfers out of Level 3 (1)			Ending Balance		Change in Unrealized Gains (Losses) for the Period Included in Earnings for Assets and Liabilities still held as of September 30, 2010
Assets:
U.S. Treasury and government agency	$	6	$	-		$	-	$	-	$	-	$	21	$	-	$	(27	)	$	-	$	-
Foreign governments		12		-			-		-		1		6		-		-			19		-
Corporate obligations		281		(1)			-		31		(2)		(142)		59		(82	)		144		-
Residential mortgage-backed agency		48		-			-		2		-		(5)		41		(45	)		41		-
Residential mortgage-backed non-agency		64		(3)			-		34		-		(23)		53		(46	)		79		-
Commercial mortgage-backed		20		-			-		1		(1)		(5)		-		(1	)		14		-
Collateralized debt obligations		245		(12)			-		65		-		(89)		116		(124	)		201		-
Other asset-backed		401		-			-		7		-		(12)		17		(26	)		387		-
State and municipal tax-exempt bonds		50		1			-		1		-		(16)		-		-			36		-
Perpetual preferred securities		77		-			-		9		-		(1)		-		-			85		-
Other fixed-maturity investments		19		-			-		-		-		(19)		-		-			-		-
Assets of consolidated VIEs:
Corporate obligations		-		-			76		-		-		68		13		(8	)		149		-
Residential mortgage-backed non-agency		166		(1)			(253)		3		-		(96)		311		(52	)		78		-
Commercial mortgage-backed		3		-			221		-		-		33		18		(59	)		216		-
Collateralized debt obligations		42		-			(80)		-		-		321		74		(12	)		345		-
Other asset-backed		193		-			(11)		-		-		(51)		18		(29	)		120		-
Loans receivable		-		-			28		-		21		1,894		-		-			1,943		-
Loan repurchase commitments		-		-			79		-		-		715		-		-			794		79
Total assets	$	1,627	$	(16	)	$	60	$	153	$	19	$	2,599	$	720	$	(511	)	$	4,651	$	79

Liabilities:
Medium-term notes	$	110	$	-	$	6	$	-	$	(6)	$	-	$	-	$	-	$	110	$	6
Credit derivatives, net		3,799		(366)		1,719		-		-		308		-		-		5,460		1,208
Interest rate derivatives, net		(6)		(8)		7		-		-		-		-		-		(7)		23
Currency derivatives, net		(3)		-		(9)		-		(4)		-		-		-		(16)		(22)
Liabilities of consolidated VIEs:
VIE notes		-		-		366		-		39		4,377		-		-		4,782		-
Derivative contracts, net		-		-		20		-		-		522		-		-		542		20
Total liabilities	$	3,900	$	(374)	$	2,109	$	-	$	29	$	5,207	$	-	$	-	$	10,871	$	1,235

(1) - Transferred in and out at the end of the period.

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 for available-for-sale securities where inputs, which are significant to their valuation, became observable or unobservable during the quarter. These inputs included spreads, prepayment speeds, default speeds, default severities, yield curves observable at commonly quoted intervals, and market corroborated inputs. Corporate obligations and CDOs comprised the majority of the transferred instruments. There were no transfers into or out of Level 1. For the nine months ended September 30, 2011, the net unrealized losses related to the transfers into Level 3 were $5 million and the net unrealized gains related to the transfers out of Level 3 were $33 million.

Transfers into and out of Level 3 were $720 million and $511 million, respectively, for the nine months ended September 30, 2010. Transfers into and out of Level 2 were $511 million and $720 million, respectively, for the nine months ended September 30, 2010. These transfers were principally for available-for-sale securities where inputs, which are significant to their valuation, became unobservable or observable during the quarter. These inputs included spreads, prepayment speeds, default speeds, default severities, yield curves observable at commonly quoted intervals, and market corroborated inputs. RMBS non-agency, CDOs, RMBS agency and CMBS comprised the majority of the transferred instruments. There were no transfers in or out of Level 1. For the nine months ended September 30, 2010, the net unrealized losses related to the transfers into Level 3 were $13 million and the net unrealized gains related to the transfers out of Level 3 were $45 million.

Gains and losses (realized and unrealized) included in earnings pertaining to Level 3 assets and liabilities for the three months ended September 30, 2011 and 2010 are reported on the Company's consolidated statements of operations as follows:

	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 Realized Gains  (Losses)		Net Gains (Losses)  on Financial Instruments at Fair Value and Foreign Exchange
Total gains (losses) included in earnings	$	777	$	(79	)	$	77	$	—	$	328
Change in unrealized gains (losses) for the period included in earnings for assets and liabilities still held as of September 30, 2011	$	388	$	—		$	73	$	—	$	331

	Three Months Ended September 30, 2010
									Consolidated VIEs
In millions	Unrealized Gains  (Losses) on Insured Derivatives			Net Realized Gains (Losses)		Net Gains (Losses)  on Financial Instruments at Fair Value and Foreign Exchange			Net Realized Gains  (Losses)		Net Gains (Losses)  on Financial Instruments at Fair Value and Foreign Exchange
Total gains (losses) included in earnings	$	(1,046	)	$	519	$	3		$	—	$	(15	)
Change in unrealized gains (losses) for the period included in earnings for assets and liabilities still held as of September 30, 2010	$	(531	)	$	—	$	(7	)	$	—	$	(15	)

Gains and losses (realized and unrealized) included in earnings pertaining to Level 3 assets and liabilities for the nine months ended September 30, 2011 and 2010 are reported on the consolidated statements of operations as follows:

	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 Realized Gains (Losses)		Net Gains (Losses)  on Financial Instruments at Fair Value and Foreign Exchange
Total gains (losses) included in earnings	$	(530	)	$	(683	)	$	(12	)	$	—	$	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	)	$	—		$	(6	)	$	—	$	281

	Nine Months Ended September 30, 2010
									Consolidated VIEs
In millions	Unrealized Gains  (Losses) on Insured Derivatives			Net Realized Gains (Losses)		Net Gains (Losses)  on Financial Instruments at Fair Value and Foreign Exchange			Net Realized Gains (Losses)		Net Gains (Losses)  on Financial Instruments at Fair Value and Foreign Exchange
Total gains (losses) included in earnings	$	(1,719	)	$	374	$	2		$	—	$	59
Change in unrealized gains (losses) for the period included in earnings for assets and liabilities still held as of September 30, 2010	$	(1,208	)	$	—	$	(1	)	$	—	$	59

Fair Value Option

The Company elected to record at fair value certain financial instruments of the VIEs that have been consolidated in connection with the adoption of the accounting guidance for consolidation of VIEs, among others.

The following tables present the changes in fair value included in the Company's consolidated statement of operations for the three months ended September 30, 2011 and 2010 for all financial instruments for which the fair value option was elected.

	Three Months Ended September 30,
	2011						2010
In millions	Net Gains (Losses)on FinancialInstruments at FairValue and ForeignExchange		Net RealizedGains(Losses)		TotalChanges inFair Value		Net Gains (Losses)on FinancialInstruments at FairValue and ForeignExchange		Net RealizedGains(Losses)		TotalChanges inFair Value
Fixed-maturity securities held at fair value	$	(286)	$	-	$	(286)	$	90	$	-	$	90
Loans receivable at fair value:
Residential mortgage loans		(65)		-		(65)		(164)		-		(164)
Other loans		(37)		-		(37)		38		-		38
Loan repurchase commitments		33		-		33		2		-		2
Other assets		(162)		-		(162)		(1)		-		(1)
Long-term debt		481		-		481		91		-		91

The following tables present the changes in fair value included in the Company's consolidated statements of operations for the nine months ended September 30, 2011 and 2010 for all financial instruments for which the fair value option was elected.

	Nine Months Ended September 30,
	2011						2010
In millions	Net Gains (Losses)on FinancialInstruments at FairValue and ForeignExchange		Net RealizedGains(Losses)		TotalChanges inFair Value		Net Gains (Losses)on FinancialInstruments at FairValue and ForeignExchange		Net RealizedGains(Losses)		TotalChanges inFair Value
Fixed-maturity securities held at fair value	$	(338)	$	-	$	(338)	$	337	$	21	$	358
Loans receivable at fair value:
Residential mortgage loans		65		-		65		204		220		424
Other loans		(30)		-		(30)		56		-		56
Loan repurchase commitments		103		-		103		296		63		359
Other assets		(184)		-		(184)		(3)		159		156
Long-term debt		367		-		367		(332)		(333)		(665)

The following table reflects the difference between the aggregate fair value and the aggregate remaining contractual principal balance outstanding as of September 30, 2011 and December 31, 2010 for loans and long-term debt for which the fair value option has been elected.

	As of September 30, 2011						As of December 31, 2010
In millions	ContractualOutstandingPrincipal		Fair Value		Difference		ContractualOutstandingPrincipal		Fair Value		Difference
Loans receivable at fair value:
Residential mortgage loans	$	2,842	$	2,079	$	763	$	3,334	$	2,014	$	1,320
Residential mortgage loans (90 days or more past due)		238		-		238		243		-		243
Other loans		299		92		207		412		124		288
Other loans (90 days or more past due)		154		47		107		149		45		104
Total loans receivable at fair value	$	3,533	$	2,218	$	1,315	$	4,138	$	2,183	$	1,955
Long-term debt	$	17,361	$	5,123	$	12,238	$	17,217	$	6,680	$	10,537

Substantially all gains and losses included in earnings during the nine months ended September 30, 2011 on loans receivable and long-term debt reported in the preceding table are attributable to credit risk. This is primarily due to the high rate of defaults on loans and the collateral supporting the long-term debt, resulting in depressed pricing of the financial instruments.