Note 1: Business Developments, Risks and Uncertainties, and Liquidity

Summary

MBIA Inc., together with its consolidated subsidiaries, (collectively, "MBIA" or the "Company") operates one of the largest financial guarantee insurance businesses in the industry and is a provider of asset management advisory services. These activities are managed through three business segments: United States ("U.S.") public finance insurance, structured finance and international insurance, and advisory services. The Company's U.S. public finance insurance business is primarily operated through National Public Finance Guarantee Corporation and its subsidiaries ("National"), its structured finance and international insurance business is primarily operated through MBIA Insurance Corporation and its subsidiaries ("MBIA Corp."), and its asset management advisory services business is primarily operated through Cutwater Holdings, LLC and its subsidiaries ("Cutwater"). The holding company, MBIA Inc., and certain of its subsidiaries also manage certain other business activities, the results of which are reported in its corporate, asset/liability products, and conduit segments. The corporate segment includes revenues and expenses that arise from general corporate activities. While the asset/liability products and conduit businesses represent separate business segments, they may be referred to collectively as "wind-down operations" as the funding programs managed through those businesses are in wind-down. Refer to "Note 15: Business Segments" for further information about the Company's reporting segments.

Business Developments

As a result of insured losses and realized investment losses during the period from 2007 to 2011, the Company has seen ratings downgrades, a near cessation of new insurance business written by the Company, and increasing liquidity pressure. The Company has been unable to write meaningful amounts of new insurance business since 2008 and does not expect to write significant new insurance business prior to an upgrade of the credit ratings of its insurance subsidiaries. As of December 31, 2011, National was rated BBB with a developing outlook by Standard & Poor's Financial Services LLC ("S&P") and Baa2 with a negative outlook by Moody's Investors Service, Inc. ("Moody's"). As of December 31, 2011, MBIA Insurance Corporation was rated B with a negative outlook by S&P and B3 with a review for a possible downgrade by Moody's.

In August 2011, S&P issued new guidelines that reflect significant changes to its rating methodology for financial guarantee insurers. These new guidelines were effective immediately. The changes to S&P's rating methodology substantially increase the amount of capital, among other qualitative factors, required to achieve its highest ratings, implement a new Largest Obligors Test and incorporate additional qualitative considerations into the ratings process. In November 2011, S&P affirmed its rating on National at BBB and on MBIA Insurance Corporation at B. In addition, in December 2011, Moody's downgraded National's insurer financial strength rating from Baa1 to Baa2 and changed its outlook from developing to negative, downgraded MBIA Inc.'s senior debt rating from Ba3 to B2, and placed the ratings of MBIA Insurance Corporation under review for possible downgrade. Moody's cited the primary reason for its rating actions was the weakening of the overall MBIA group's market standing, mainly due to the deterioration of MBIA Insurance Corporation's credit profile. If the Company is unable to establish high stable S&P and Moody's ratings, the Company's ability to write new insurance business, the premiums the Company can charge, and the future acceptance of its financial guarantee insurance products may be adversely impacted.

During 2011, the Company continued to seek to reduce both the absolute amount and the volatility of its liabilities and potential liabilities through purchases of securities at discounts and commutations of insurance policies. The combination of payments to reduce liabilities, claims payments and the failure of certain mortgage originators to honor contractual obligations to repurchase ineligible mortgage loans from securitizations the Company had insured has increased liquidity pressure on MBIA Insurance Corporation and MBIA Inc. The liquidity position of MBIA Inc. primarily comprises the liquidity positions of its corporate and asset/liability products activities. As of December 31, 2011, MBIA Inc. had $226 million of cash and highly liquid assets available for general corporate liquidity purposes, excluding the amounts held in escrow under its tax sharing agreement, and $160 million of cash and liquid assets not pledged as collateral in its asset/liability products activities. The Company believes this liquidity position provides MBIA Inc. with sufficient funds to cover expected obligations through 2012. The liquidity position of MBIA Inc. experienced significant stress in 2011 primarily as a result of the deterioration in the market values of assets as a result of macroeconomic stress.

For MBIA Corp., cash and liquid assets have also declined, from $1.2 billion as of December 31, 2010 to $534 million as of December 31, 2011 as a result of claims and commutation payments. Claims payments primarily resulted from the failure of certain mortgage-backed securities ("MBS") sponsors to honor contractual obligations to repurchase ineligible mortgage loans. In 2011, MBIA Corp. made $835 million in gross claim payments, and commuted or agreed to commute $32.4 billion of gross insured exposure primarily comprising commercial mortgage-backed securities ("CMBS") pools, investment grade corporate collateralized debt obligations ("CDOs"), multi-sector CDOs, among other types of exposures for which it paid $2.5 billion. The Company's ability to commute insured transactions may be limited by available liquidity as determined based on management's assessment. As a result of the decline in its liquid assets, the Company undertook actions in 2011 to mitigate liquidity stress through intercompany lending arrangements and the monetization of illiquid assets.

In connection with MBIA Corp. obtaining approval from the New York State Department of Financial Services ("NYSDFS"), previously referred to as The New York State Insurance Department or NYSID, to release excessive contingency reserves as of September 30, 2011 and December 31, 2011, MBIA Corp. agreed that it would not pay any dividends without prior approval from the NYSDFS. Due to its significant negative earned surplus, MBIA Corp. has not had the statutory capacity to pay dividends since December 31, 2009 and is not expected to have any statutory capacity to pay any dividends in the near term. In addition, in connection with the approval of the December 31, 2011 contingency reserve release, the Company agreed that National would not pay any dividends without prior approval from the NYSDFS until July 19, 2013 (which is 15 months after the expiration of the period during which National has agreed not to pay dividends in connection with the court proceeding challenging the approval of National's unassigned surplus reset, as described in "Note 23: Commitments and Contingencies"). Refer to "Note 17: Insurance Regulations and Dividends" for more information about MBIA Corp.'s release of excessive contingency reserves.

The reference herein to "ineligible" mortgage loans refers to those mortgage loans that the Company believes failed to comply with the representations and warranties made by the sellers/servicers of the securitizations to which those mortgage loans were sold (including mortgage loans that failed to comply with the related underwriting criteria), based on the Company's assessment of such mortgage loans' compliance with such representations and warranties, which included information provided by third-party review firms. The Company's assessment of the ineligibility of individual mortgage loans could be challenged by the sellers/servicers of the securitizations in litigation and there is no assurance that the Company's determinations will prevail.

Risks and Uncertainties

The Company's financial statements include estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The outcome of certain significant risks and uncertainties could cause the Company to revise its estimates and assumptions or could cause actual results to differ from the Company's estimates. While the Company believes it continues to have sufficient capital and liquidity to meet all of its expected obligations, if one or more possible adverse outcomes were to be realized, its statutory capital, financial position, results of operations and cash flows could be materially and adversely affected.

Significant risks and uncertainties that could affect amounts reported in the Company's financial statements in future periods include, but are not limited to, the following:

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MBIA Corp.'s efforts to recover losses from the second-lien securitization originators could be delayed, settled at amounts below its contractual claims or potentially settled at amounts below those recorded on its balance sheets prepared under accounting principles generally accepted in the United States of America ("GAAP") and statutory accounting principles ("U.S. STAT"). Contractual claims could become subject to bankruptcy proceedings of the originators. As of December 31, 2011 and 2010, the Company's estimated recoveries after income taxes calculated at the federal statutory rate of 35%, were $2.0 billion and $1.6 billion, respectively, which was 119% and 58% of the consolidated total shareholders' equity of MBIA, excluding preferred stock of subsidiaries and noncontrolling interests. As of December 31, 2011 and 2010, the related measures calculated under U.S. STAT were 89% and 59%, respectively, of the statutory capital of MBIA Corp. Refer to "Note 6: Loss and Loss Adjustment Expense Reserves" for information about the Company's second-lien residential mortgage-backed securities ("RMBS") loss recoveries.

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MBIA Inc. may not have sufficient liquidity to make all payments due on its liabilities and to meet other financial requirements, such as posting collateral, primarily as a result of a deficit of invested assets to debt issued to third parties and affiliates. In addition, it does not expect to receive dividends from its regulated insurance subsidiaries in the near term. Refer to "Note 17: Insurance Regulation and Dividends" for a discussion of dividend restrictions applicable to the Company's insurance subsidiaries. Furthermore, during 2011, MBIA Inc. experienced other-than-temporary impairments and deterioration in the market values of some of its assets. If MBIA Inc. were required to sell invested assets at their current market values in order to settle liabilities, the liquidity position of MBIA Inc. would experience additional stress. A failure by MBIA Inc. to settle liabilities that are also insured by MBIA Corp. could result in claims on MBIA Corp. Resolving the deficit will depend on the Company's ability to successfully implement strategies, such as raising capital and/or receiving further liquidity support under intercompany financing arrangements, and there can be no assurance that the Company will be successful in implementing these strategies or that such strategies will provide adequate liquidity. Refer to the following Liquidity section for additional information about MBIA Inc.'s liquidity position.

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MBIA Corp. has commuted most of its higher risk CMBS pool exposures. However, if the U.S. economy weakens, commercial real estate values decline and commercial real estate servicer behavior does not continue to mitigate potential or actual credit losses in line with current trends, MBIA Corp. could incur substantial losses in that sector. As of December 31, 2011, MBIA Corp. had CMBS pool and commercial real estate ("CRE") CDO insured par exposure of approximately $19.3 billion and $5.6 billion, respectively, excluding approximately $3.4 billion of CRE loan pools, primarily comprising European assets. Since the end of 2007 through December 31, 2011, MBIA Corp.'s CMBS pool and CRE CDO gross par exposure has decreased by approximately $29.1 billion, primarily from negotiated commutations and early settlements. Refer to "Note 6: Loss and Loss Adjustment Expense Reserves" for information about the Company's estimate of CMBS credit impairments.

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Incurred losses from insured RMBS have declined from their peaks. However, due to the large percentage of ineligible loans included within MBIA Corp.'s second-lien portfolio, performance remains difficult to predict and losses could ultimately be in excess of MBIA Corp.'s current estimated loss reserves. Refer to "Note 6: Loss and Loss Adjustment Expense Reserves" for information about MBIA Corp.'s RMBS loss reserves.

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While MBIA Corp. has settled a substantial portion of its insured asset-backed securities ("ABS") CDO exposure at levels within MBIA Corp.'s statutory loss reserves related to those exposures, further economic stress might cause increases in MBIA Corp.'s loss estimates on its remaining exposure. As of December 31, 2011, MBIA Corp.'s ABS CDO gross par outstanding was approximately $6.1 billion, and had decreased approximately $29.8 billion since 2007.

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In recent years, key components of the Company's strategy have included commuting volatile insured exposures, purchasing instruments issued or guaranteed by the Company in order to reduce future expected economic losses and managing the liquidity requirements and risk in MBIA Inc. In order to implement this strategy, the Company put in place intercompany agreements that allocate liquidity resources among its entities in order to fund commutations and provide liquidity, where needed. The intercompany agreements with the Company's insurance subsidiaries have required the approval of the NYSDFS. The Company's ability to continue to draw on intercompany financing, provide other intercompany liquidity and capital support, obtain permission for contingency reserve releases, and the ability of its insurance subsidiaries to pay dividends to MBIA Inc. will in most cases require further approvals from the NYSDFS, and there can be no assurance that the Company will be able to obtain such approvals. In addition, in connection with providing such approvals, the NYSDFS may require the Company or its insurance subsidiaries to agree to take, or refrain from taking, certain actions.

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The Company's recent financial results have been volatile, which has impacted management's ability to accurately project future taxable income. Insurance losses incurred beyond those currently projected may cause the Company to record additional allowances against a portion or all of its deferred tax assets. Refer to "Note 14: Income Taxes" for information about the Company's deferred tax assets.

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Litigation over the NYSDFS approval of National's creation or additional hurdles to achieving high stable ratings may impede National's ability to resume writing municipal bond insurance for some time, reducing its long-term ability to generate capital and cash from operations.

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Municipal and state fiscal distress in the U.S. could adversely affect the Company's operations if it resulted in larger-than-expected incurred insurance losses. Additionally, the sovereign debt crisis in the Eurozone could have an adverse impact on insured European exposures and/or cause a global slowdown in growth, thereby adversely affecting U.S. insured exposures.

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In the event the economy and the markets to which MBIA is exposed do not improve, or decline, the unrealized losses on insured credit derivatives could increase, causing additional stress in the Company's reported financial results. In addition, volatility in the relationship between MBIA's credit spreads and those on underlying collateral assets of insured credit derivatives can create significant unrealized gains and losses in the Company's reported results of operations. Refer to "Note 7: Fair Value of Financial Instruments" for information about the Company's valuation of insured credit derivatives.

As of December 31, 2011, the Company had $1.7 billion of shareholders' equity and MBIA Insurance Corporation and National had $2.3 billion and $2.8 billion, respectively, of statutory capital. Statutory capital, defined as policyholders' surplus and contingency reserves, is a key measure of an insurance company's financial condition under insurance laws and regulations. Failure to maintain adequate levels of statutory surplus and total statutory capital could lead to intervention by the Company's insurance regulators in its operations and constitute an event of default under certain of the Company's contracts, thereby materially and adversely affecting the Company's financial condition and results of operations.

Liquidity

As a financial services company, MBIA has been materially adversely affected by conditions in global financial markets. Current conditions and events in these markets, in addition to the failure by the originators of RMBS to repurchase the ineligible loans in securitizations that the Company has insured, have put substantial stress on the Company's liquidity resources.

The Company has utilized a liquidity risk management framework, the primary objectives of which are to monitor liquidity positions and projections in its legal entities and guide the matching of liquidity resources to needs. The Company monitors its cash and liquid asset resources using stress-scenario testing. Members of MBIA's senior management meet regularly to review liquidity metrics, discuss contingency plans and establish target liquidity cushions on an enterprise-wide basis. As part of the Company's liquidity risk management framework, the Company evaluates and manages liquidity on a legal entity basis to take into account the legal, regulatory and other limitations on available liquidity resources within the enterprise.

The majority of the Company's liquidity management efforts focus on:

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The liquidity resources of MBIA Inc., which are subject to uncertainty in the timing and amount of cash inflows from dividends paid by National and MBIA Corp., the necessity of having to support the liquidity needs of the asset/liability products business, and potential cross-defaults of holding company debt with other obligations in the consolidated group. The asset/liability products business of MBIA Inc. is subject to ongoing negative cash flow and has a deficit of invested assets to liabilities. In addition, the liquidity resources of MBIA Inc. are subject to collateralization requirements in connection with the liabilities it has issued to third parties and affiliates and in connection with third party derivative contracts;

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The liquidity resources of MBIA Corp. which are subject to losses on insured exposures, payments to counterparties in consideration for the commutation of insured transactions, and delays in the collection of contract claim recoveries related to ineligible mortgage loans in certain insured transactions; and

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The liquidity resources of National, for which the Company has not observed material liquidity risk to date but which are exposed to unexpected loss payments on its insured transactions, liquidity support arrangements with its affiliates and the need to meet ongoing operating expenses.

In order to address these liquidity risks and efficiently manage liquidity across the entire enterprise, certain of the Company's subsidiaries which are less liquidity constrained have entered into intercompany agreements that provide resources to subsidiaries that are more liquidity constrained. These resources include intercompany agreements described further below between the Company's primary insurance subsidiaries and between these insurance subsidiaries and the asset/liability products business (through MBIA Inc.), which in each case were approved by the NYSDFS and are subject to ongoing monitoring by the NYSDFS.

Key Intercompany Lending Agreements

National Secured Loan

In December 2011, National provided a secured loan to MBIA Insurance Corporation ("National Secured Loan") under which National loaned MBIA Insurance Corporation $1.1 billion at a fixed annual interest rate of 7% and with a maturity date of December 2016. MBIA Insurance Corporation has the option to defer payments of interest when due by capitalizing interest amounts to the loan balance, subject to the collateral value exceeding certain thresholds. MBIA Insurance Corporation's obligation to repay the loan is secured by a pledge of collateral having an estimated value in excess of the notional amount of the loan as of December 31, 2011. The National Secured Loan was approved by the NYSDFS as well as by the boards of directors of MBIA Inc., MBIA Insurance Corporation and National in order to enable MBIA Corp. to fund settlements and commutations of its insurance policies. Any increase or other amendment to the terms of the loan would be subject to regulatory approval by the NYSDFS.

Asset Swap

National maintains simultaneous repurchase and reverse repurchase agreements ("Asset Swap") with MBIA Inc. for up to $2.0 billion based on the fair value of securities borrowed. The Asset Swap provides MBIA Inc. with eligible assets to pledge under investment agreement and derivative contracts in the asset/liability products business. As of December 31, 2011, the notional amount utilized under each of these agreements was $1.3 billion and the fair value of collateral pledged by National and MBIA Inc. under these agreements was $1.4 billion and $1.5 billion, respectively. The net average interest rate on these transactions was 0.34%, 0.35% and 1.70% for the years ended December 31, 2011, 2010 and 2009, respectively. The NYSDFS approved the Asset Swap in connection with the re-domestication of National to New York. National has committed to the NYSDFS to use commercially reasonable efforts to reduce the amount of the Asset Swap over time.

MBIA Corp. Secured Loan

MBIA Corp., as lender, maintained a secured lending agreement with MBIA Inc. ("MBIA Corp. Secured Loan") for the benefit of MBIA Inc.'s asset/liability products business, which totaled $2.0 billion at inception and which was scheduled to mature in November 2011. In the fourth quarter of 2011, the maturity of the MBIA Corp. Secured Loan was extended with the approval of the NYSDFS to May of 2012 with a maximum outstanding amount of $450 million. The interest rate on the MBIA Corp. Secured Loan is 2.43%. As of December 31, 2011, the amount outstanding under the MBIA Corp. Secured Loan was $300 million after repayments of $675 million during 2011. The fair value of the collateral pledged by MBIA Inc. to MBIA Corp. under this agreement was $168 million as of December 31, 2011.

Conduit Repurchase Agreement

During the fourth quarter of 2010, MBIA Inc. entered into a repurchase agreement with Meridian Funding Company, LLC ("Conduit Repurchase Agreement"), under which $1.0 billion notional amount may be utilized, subject to a pledge of collateral. The Conduit Repurchase Agreement had an average interest rate during 2011 of 2.41%. As of December 31, 2011, the notional amount utilized by MBIA Inc. under this agreement was $80 million.

MBIA Inc. Liquidity

The activities of MBIA Inc. consist of holding and managing investments, servicing outstanding corporate debt instruments, investment agreements and medium-term notes ("MTNs") issued by the asset/liability products and conduits segments, posting collateral under financing and hedging arrangements and investment agreements, making payments and collateral postings related to interest rate and foreign exchange swaps, and paying operating expenses. The primary sources of cash within MBIA Inc. used to meet its liquidity needs include available cash and liquid assets not subject to collateral posting requirements, as well as scheduled principal and interest on assets held in its investment portfolio, dividends from subsidiaries, payments under tax sharing agreements with these subsidiaries (once the payments become unrestricted) and the ability to issue debt and equity. There can be no assurance as to the amount and timing of any such dividends or payments under the tax sharing agreements. MBIA Inc.'s corporate debt, investment agreements, MTNs, and derivatives may be accelerated by the holders of such instruments upon the occurrence of certain events, such as a breach of covenant or representation, a bankruptcy of MBIA Inc. or the filing of an insolvency proceeding with respect to MBIA Corp. MBIA Inc.'s obligations under its loans from MBIA Global Funding, LLC ("GFL") may be accelerated only upon the occurrence of a bankruptcy or liquidation of MBIA Inc. Refer to "Note 15: Business Segments" for a description of the GFL loans. In the event of any acceleration of the Company's obligations, including under its corporate debt, investment agreements, MTNs, or derivatives, the Company likely would not have sufficient liquid resources to pay amounts due with respect to its corporate debt and other obligations that are not already collateralized.

During 2011, pursuant to the tax sharing agreement, National paid MBIA Inc. $114 million related to the 2010 tax year and $144 million of estimated taxes related to the 2011 tax year. Consistent with the tax sharing agreement, these amounts were placed in an escrow account until the expiration of National's two-year net operating loss ("NOL") carry-back period under U.S. tax rules. At the expiration of National's carry-back period, any funds remaining after any reimbursement to National in respect of any NOL carry-backs would be available for general corporate purposes, including to satisfy any other obligations under the tax sharing agreement.

MBIA Inc. is subject to material liquidity risks and uncertainty. To mitigate these risks, the Company seeks to maintain cash and liquid investments in excess of its expected cash requirements over a multi-year period. The Company seeks to manage liquidity within a number of risk and liquidity parameters and maintains cash and liquidity resources that it believes will be sufficient to make all payments due on its obligations and to meet other financial requirements, such as posting collateral, through 2012.

Liquidity risk within MBIA Inc. is primarily a result of the following factors:

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Currently, the majority of the assets of MBIA Inc. are pledged against investment agreement liabilities, intercompany and third party financing arrangements and derivatives, which limits its ability to raise liquidity through asset sales. In addition, if the market value or rating eligibility of the assets which are pledged against these obligations were to decline, the Company would be required to pledge additional eligible assets in order to meet minimum required collateral amounts against these liabilities. In such event, the Company may sell additional assets, potentially with substantial losses, finance unencumbered assets through intercompany or third party facilities, use free cash or other assets, in some cases with NYSDFS approval, although there can be no assurance that these strategies will be available or adequate to meet liquidity requirements.

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There is a deficit of invested assets to liabilities issued to third-parties and affiliates of $591 million as of December 31, 2011. This deficit is expected to increase as a result of on-going expected operating losses. This deficit will need to be reversed prior to the maturity of the liabilities in order to ensure that there are sufficient funds available to fully retire the liabilities. The Company expects that MBIA Inc. will be able to eliminate the deficit prior to the maturity of the related liabilities from distributions from its operating subsidiaries and by raising third party capital, although there can be no assurance that MBIA Inc. will be able to eliminate the deficit through such means.

Because the majority of MBIA Inc.'s assets are pledged against the obligations described above, the widening of credit spreads would have an adverse impact on the market value of these assets and increase collateralization requirements for the portfolio. The following table presents the estimated pre-tax change in fair value of the asset/liability products business' assets as of December 31, 2011 from instantaneous shifts in credit spread curves. This table assumes that all credit spreads move by the same amount; however, it is more likely that the actual changes in credit spreads will vary by investment sector and individual security. The table presents hypothetical increases and decreases in credit spreads of 50 and 200 basis points. Because downward movements of these amounts in some cases would result in negative spreads, a floor was assumed for minimum spreads.


	Change in Credit Spreads (Asset/Liability Products Business)
In millions	200 Basis Point Decrease		50 Basis Point Decrease		50 Basis Point Increase			200 Basis Point Increase
Estimated change in fair value	$	266	$	75	$	(71	)	$	(265	)

In 2011, MBIA Inc. maintained three intercompany financing facilities to provide it with additional resources to meet its liquidity requirements within the asset/liability products business: the Asset Swap, the MBIA Corp. Secured Loan and the Conduit Repurchase Agreement. Refer to the preceding "Key Intercompany Lending Agreements" section for a description of these facilities.

During 2011, MBIA Inc. experienced deterioration in the market values of some of its assets, resulting in increased collateral requirements. During the fourth quarter of 2011, the Company extended the maturity date of the MBIA Corp. Secured Loan, with NYSDFS approval, to May 2012 for a maximum outstanding amount of $450 million, to provide additional liquidity in the event of future declines in asset values.

Stressed credit market conditions in 2012 could cause MBIA Inc. to have insufficient resources to cover collateral and/or other liquidity requirements in 2012. Management has identified certain contingent actions within its control to mitigate this risk. These contingent actions include: (1) sales of encumbered and other invested assets exposed to credit spread stress risk; (2) termination and settlement of interest rate swap agreements; and (3) other available advances from subsidiaries. These actions, if taken, are expected to result in either additional liquidity or reduced exposure to adverse credit spread movements. There can be no assurance that these actions will be sufficient to fully mitigate this risk. In the event that the Company cannot implement the contingent actions identified above to raise liquidity, or eliminate the deficit, it may have insufficient assets to make all payments on its obligations as they come due, which could result in a default by MBIA Inc. on its obligations and the potential for MBIA Corp., as guarantor of the investment agreements and GFL MTNs, to be called upon to satisfy obligations on those instruments as they come due.

MBIA Corp. Liquidity

Liquidity available in the structured finance and international insurance segment is affected by the payment of claims on insured exposures, payments made to commute insured exposure, the Company's ability to collect on receivables associated with loss payments, a reduction in investment income, any unanticipated expenses, or the impairment or a significant decline in the fair value of invested assets. The Company may also experience liquidity constraints as a result of New York Insurance Law ("NYIL") requirements that the Company maintains specified, high quality assets to back the Company's reserves and surplus.

The Company believes the current liquidity position of MBIA Corp. is adequate to make expected future claims payments. However, the liquidity position of MBIA Corp. has been stressed due to the failure of the sellers/servicers of RMBS transactions insured by MBIA Corp. to repurchase ineligible mortgage loans in certain insured transactions and payments to counterparties in consideration for the commutation of insured transactions, which have resulted in a substantial reduction of exposure and potential loss volatility. While MBIA Corp. has made and may in the future make payments to counterparties in consideration for the commutation of insured transactions, MBIA Corp.'s ability to commute insured transactions will depend on management's assessment of available liquidity.

Payment requirements for the structured finance and international financial guarantee contracts fall into three categories: (i) timely interest and ultimate principal; (ii) ultimate principal only at final maturity; and (iii) payments upon settlement of individual collateral losses as they occur after any deductible or subordination has been exhausted, which payments are unscheduled and therefore more difficult to predict, and which category applies to most of the transactions on which the Company have recorded loss reserves. MBIA Corp. is generally required to satisfy claims within one to three business days, and as a result seeks to identify potential claims in advance through the Company's monitoring process. While the Company's financial guarantee policies generally cannot be accelerated, thereby mitigating liquidity risk, the insurance of credit default swap ("CDS") contracts may, in certain events, including the insolvency or payment default of the insurer or the issuer of the CDS, be subject to termination by the counterparty, triggering a claim for the fair value of the contract. Additionally, the Company's structured finance and international insurance segment requires cash for the payment of operating expenses, as well as principal and interest related to its surplus notes. In order to monitor liquidity risk and maintain appropriate liquidity resources, the Company uses the same methodology as the Company uses to monitor credit quality and losses within the Company's insured portfolio including stress scenarios. Refer to "Note 6: Loss and Loss Adjustment Expense Reserves" for further discussion.

Since the fourth quarter of 2007 through December 31, 2011, MBIA Corp. has made $10.7 billion of cash payments, before reinsurance and collections and excluding LAE, (including payments made to debt holders of consolidated variable interest entities ("VIEs")) associated with second-lien RMBS securitizations and with commutations and claim payments relating to CDS contracts. These cash payments include loss payments of $730 million made on behalf of MBIA Corp.'s consolidated VIEs. Of the $10.7 billion, MBIA Corp. has paid $6.2 billion of claims on policies insuring second-lien RMBS securitizations, driven primarily by an extensive number of ineligible mortgage loans being placed in the securitizations in breach of the representations and warranties of the sellers/servicers.

MBIA Corp. is seeking to enforce its rights to have mortgage sellers/servicers cure, replace or repurchase ineligible mortgage loans from securitizations and has recorded a total of $3.1 billion of related expected recoveries on its consolidated balance sheets as of December 31, 2011, including expected recoveries recorded in the Company's consolidated VIEs. A substantial majority of the Company's put-back claims have been disputed by the loan sellers/servicers and is currently subject to litigation discussed more fully in "Note 23: Commitments and Contingencies". There is some risk that the sellers/servicers or other responsible parties might not be able to satisfy any judgment the Company secures in litigation. There can be no assurance that the Company will be successful or that the Company will not be delayed in realizing these recoveries. The Company believes that it has adequate liquidity resources to provide for anticipated cash outflows; however, if the Company does not realize or is delayed in realizing these expected recoveries, the Company may not have adequate liquidity to fully execute the strategy to reduce future potential economic losses by commuting policies and purchasing instruments issued or guaranteed by the Company, or to repay any intercompany borrowings.

A portion of the commutation payments made in the fourth quarter of 2011 were financed through the National Secured Loan that was entered into in the fourth quarter of 2011. The National Secured Loan was approved by the NYSDFS as well as by the boards of directors of MBIA Inc., MBIA Insurance Corporation and National in order to enable MBIA Corp. to fund settlements and commutations of its insurance policies. MBIA Insurance Corporation's obligation to repay the loan is secured by a pledge of collateral having a value in excess of the notional amount of the loan. Interest on the loan may be accrued and deferred at any time that the value of that collateral exceeds certain thresholds. MBIA Insurance Corporation's ability to repay the loan and any accrued interest will be primarily predicated on MBIA Corp.'s ability to collect on its future receivables, including its ability to successfully enforce its rights to have mortgage sellers/servicers cure, replace or repurchase ineligible mortgage loans from securitizations it insured. MBIA Insurance Corporation may seek to increase the size of the loan in the future. Any such increase or other amendment to the terms of the loan would be subject to regulatory approval by the NYSDFS.

MBIA Corp. also insures third party holders of the Company's asset/liability products segment's obligations. If the Company was unable to meet payment or collateral requirements associated with these obligations, the holders thereof could make claims under the MBIA Corp. insurance policies. In 2008, to provide additional liquidity to the asset/liability products business, MBIA Corp. lent $2.0 billion to the segment on a secured basis under the MBIA Corp. Secured Loan, the outstanding balance of which loan was $300 million as of December 31, 2011. The MBIA Corp. Secured Loan was originally scheduled to mature in the fourth quarter of 2011, but has been extended with the approval of the NYSDFS to May 2012 with a maximum outstanding amount of $450 million. During the year ended December 31, 2011, a total of $675 million was repaid.

As of December 31, 2011, MBIA Corp. held cash and available-for-sale investments of $1.5 billion, of which $534 million comprised cash and highly liquid assets. The Company believes that MBIA Corp.'s liquidity resources will adequately provide for anticipated cash outflows. In the event of unexpected liquidity requirements, the Company may have insufficient resources to meet its obligations or insufficient qualifying assets to support its surplus and reserves, and may seek to increase its cash holdings position by selling or financing assets, or raising external capital, and there can be no assurance that the Company will be able to draw on these additional sources of liquidity.

National Liquidity

Despite continued adverse macroeconomic conditions in the U.S., the incidence of default among U.S. public finance issuers remains extremely low and the Company believes that the liquidity position of its U.S. public finance insurance segment is sufficient to meet cash requirements in the ordinary course of business.

Liquidity risk arises in the Company's U.S. public finance insurance segment primarily from the following:

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The insurance policies issued or reinsured by National, the entity from which the Company conducts its U.S. public finance insurance business, provide unconditional and irrevocable guarantees of payments of the principal of, and interest or other amounts owing on, insured obligations when due; or, in the event that the insurance company has the right, at its discretion, to accelerate insured obligations upon default or otherwise, upon the insurance company's election to accelerate. In the event of a default in payment of principal, interest or other insured amounts by an issuer, National generally promises to make funds available in the insured amount within one to three business days following notification. In some cases, the amount due can be substantial, particularly if the default occurs on a transaction to which National has a large notional exposure or on a transaction structured with large, bullet-type principal maturities. The fact that the U.S. public finance insurance segment's financial guarantee contracts generally cannot be accelerated by a party other than the insurer helps to mitigate liquidity risk in this segment.

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National has entered into certain intercompany transactions to support the liquidity needs of its affiliates. These include the National Secured Loan to MBIA Insurance Corporation in the fourth quarter of 2011 and the Asset Swap through which National provides liquid assets to the Company's asset/liability products business. These transactions may impair National's ability to implement its business plan while they remain outstanding as the repayment of the National Secured Loan will primarily be predicated on MBIA Corp.'s ability to successfully enforce its rights to have mortgage sellers/servicers cure, replace or repurchase ineligible mortgage loans from securitizations it insured, while changes in the market value of securities sold to National under its Asset Swap with the asset/liability products business can adversely affect its liquidity position.

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The Company's U.S. public finance insurance segment requires cash for the payment of operating expenses. Declines in operating cash inflows due to depressed new business writings, declines in cash inflows from investment income, unanticipated expenses, or an impairment or significant decline in the fair value of invested assets could negatively impact its liquidity position.

As of December 31, 2011, the notional amount utilized under the Asset Swap was $1.3 billion and the fair value of collateral pledged by National under the agreement was $1.4 billion. The Asset Swap provides yield enhancement to the Company's U.S. public finance insurance investment portfolio as a result of increased net interest earnings from the agreement. The net average interest rate on this transaction was 0.34%, 0.35% and 1.70% for the years ended December 31, 2011, 2010 and 2009, respectively.

National held cash and short-term investments of $771 million as of December 31, 2011, of which $703 million was highly liquid and consisted predominantly of highly rated municipal, U.S. agency and corporate bonds. With the exception of its loan to MBIA Insurance Corporation, most of National's investments, including those encumbered by the Asset Swap, are liquid and highly rated.