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 March 31, 2012 and December 31, 2011:


	As of March 31, 2012				As of December 31, 2011
In millions	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Assets:
Investments held as available-for-sale and held at fair value	$	7,989	$	7,989	$	8,586	$	8,586
Other investments		68		68		107		107
Cash and cash equivalents		711		711		473		473
Receivable for investments sold		98		98		32		32
Derivative assets:
Insured derivatives		10		10		-		-
Non-insured derivatives		2		2		2		2

Total derivative assets		12		12		2		2
Assets of consolidated VIEs:
Cash		144		144		160		160
Investments held-to-maturity		3,093		2,871		3,843		3,489
Fixed-maturity securities held as available-for-sale		856		856		432		432
Fixed-maturity securities held as trading		2,883		2,883		2,884		2,884
Loans receivable		2,025		2,025		2,046		2,046
Loan repurchase commitments		1,076		1,076		1,077		1,077
Derivative assets		445		445		450		450
Liabilities:
Investment agreements		1,576		1,809		1,578		1,853
Medium-term notes		1,692		1,164		1,656		1,187
Securities sold under agreements to repurchase		149		149		287		286
Long-term debt		1,839		1,168		1,840		1,117
Payable for investments purchased		35		35		3		3
Derivative liabilities:
Insured derivatives		4,513		4,513		4,808		4,808
Non-insured derivatives		317		317		356		356

Total derivative liabilities		4,830		4,830		5,164		5,164
Warrants		22		22		38		38
Liabilities of consolidated VIEs:
Variable interest entity notes		8,704		8,183		8,697		8,051
Long-term debt		-		-		360		368
Derivative liabilities		803		803		825		825
Financial Guarantees:
Gross		1,111		1,436		1,305		1,451
Ceded		101		99		104		94

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 —MBS and 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 are categorized in Level 1, Level 2, or Level 3 of the fair value hierarchy. 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 observable inputs. For other investments where there are no observable inputs, inputs of similar investments are used in the cash flow modeling to derive a fair value.

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-term nature 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 MBIA against the sellers/servicers for breaches of 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. Fair value measurements of loan repurchase commitments represent the amounts owed by the sellers/servicers to either MBIA as reimbursement of paid claims or to the RMBS trusts as defined in the transaction documents. Loan repurchase commitments are not securities and no quoted prices or comparable market transaction information are observable or available. Loan repurchase commitments at fair value are categorized in Level 3 of the fair value hierarchy. Fair values of loan repurchase commitments are determined using discounted cash flow techniques based on unobservable inputs including:

•

breach rates representing the rate at which the sellers/servicers failed to comply with stated representations and warranties;

•

recovery rates representing the estimates of future cash flows for the asset, including estimates about possible variations in the amount of cash flows expected to be collected;

•

expectations about possible variations in the timing of collections of the cash flows;

•

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.

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 three 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 swaps, cross currency swaps, and CDS contracts. Fair values of OTC 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 March 31, 2012, the Company had $67.4 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 March 31, 2012, the gross par outstanding of the Company's insured credit derivatives totaled $60.6 billion. The remaining $6.8 billion of gross par outstanding on insured derivatives as of March 31, 2012 primarily related to insured "interest rate" and "inflation-linked" swaps for which the Company has insured counterparty credit risk.

MBIA insures CDS contracts requiring either payments for losses of the principal outstanding under the contracts when losses on the underlying referenced collateral exceed a predetermined deductible ("deductible") or payments of timely interest and ultimate principal ("P&I"). MBIA's gross par outstanding and maximum payment obligation under deductible contracts as of March 31, 2012 was $45.9 billion. The underlying referenced collateral for contracts executed in this manner largely consists of investment grade corporate debt, structured CMBS pools and, to a lesser extent, other corporate credit and multi-sector CDOs. MBIA had $14.7 billion of gross par outstanding on insured P&I CDS contracts.

Valuation Models Used

Approximately 79% of the balance sheet fair value of insured credit derivatives as of March 31, 2012 was valued using the BET Model. Approximately 21% of the balance sheet fair value of insured credit derivatives as of March 31, 2012 was valued using the internally developed Direct Price Model. An immaterial amount of insured credit derivatives were valued using the dual-default model.

A. Description of the BET Model

1. Valuation Model Overview

The BET Model was originally developed by Moody's to estimate the loss distribution on a diverse pool of assets. The Company has modified this technique in an effort to incorporate more market information and provide more flexibility in handling pools of non- homogeneous assets. The modifications are (a) the Company uses market credit spreads to determine default probability instead of using historical loss experience, and (b) for collateral pools where the spread distribution is characterized by extremes, the Company models each segment of the pool individually instead of using an overall pool average.

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 March 31, 2012, sector-specific spreads were used in 8% of the transactions valued using the BET Model. Corporate spreads were used in 47% 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 78% 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 $21.5 billion gross par of MBIA's insured derivative transactions as of March 31, 2012 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 March 31, 2012. The CDS spreads assigned to each deal are based on the weighted average life of the deal. The Company limits the nonperformance impact so that the derivative liability could not be lower than the Company's recovery derivative price multiplied by the unadjusted derivative liability.

B. Description of Direct Price Model

1. Valuation Model Overview

The Direct Price Model was developed internally to address weaknesses in the Company's BET Model specific to valuing insured multi-sector CDOs, as previously discussed. 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 March 31, 2012 and December 31, 2011, the Company's net insured derivative liability was $4.5 billion and $4.8 billion, respectively, and was primarily related to the fair values of insured credit derivatives, based on the results of the aforementioned pricing models. In the current environment, the most significant driver of changes in fair value is nonperformance risk. In aggregate, the nonperformance calculation resulted in a pre-tax net insured derivative liability that was $4.4 billion and $5.7 billion lower than the net liability that would have been estimated if the Company excluded nonperformance risk in its valuation as of March 31, 2012 and December 31, 2011, respectively. Nonperformance risk is a fair value concept and does not contradict the Company's internal view, based on fundamental credit analysis of the Company's economic condition, that the Company will be able to pay all claims when due.

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 2011 and 2012. 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, net of expected recoveries (iii) the cost of capital reserves required to support the financial guarantee liability, (iv) operating expenses, and (v) discount rates. The MBIA Corp. CDS spread and recovery rate are used as the discount rate for MBIA Corp., while the 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.

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

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

Valuation of Financial Instruments

The fair value measurements of financial instruments held or issued by the Company are determined through the use of observable market data when available. Market data is obtained from a variety of third-party sources, including dealer quotes. If dealer quotes are not available for an instrument that is infrequently traded, the Company uses alternate valuation methods, including either dealer quotes for similar contracts or modeling using market data inputs. The use of alternate valuation methods generally requires considerable judgment in the application of estimates and assumptions and changes to these variables may produce materially different values.

The fair value pricing of assets and liabilities is a function of many components which include interest rate risk, market risk, liquidity risk and credit risk. For financial instruments that are internally valued by the Company, as well as those for which the Company uses broker quotes or pricing services, credit risk is typically incorporated by using appropriate credit spreads or discount rates as inputs.

1. Financial Assets

Substantially all of the Company's investments are priced by independent third parties, including pricing services and brokers. The fair values of investments for which internal prices were used were not significant to the aggregate fair value of its investment portfolio as of March 31, 2012 or December 31, 2011. Typically the Company receives one pricing service value or broker quote for each instrument, which represents a non-binding indication of value. When a price is received from more than one source, the Company uses the lower of the prices provided. The Company reviews the assumptions, inputs and methodologies used by pricing services to obtain reasonable assurance that the prices used in its valuations reflect fair value. When the Company believes a third-party quotation differs significantly from its internal value, whether higher or lower, the Company reviews its data or assumptions with the provider. This review includes comparing significant assumptions such as prepayment speeds, default ratios, forward yield curves, credit spreads and other significant quantitative inputs to internal assumptions, and working with the price provider to reconcile the differences. The price provider may subsequently provide an updated price. In the event that the price provider does not update their price, and the Company still does not agree with the price provided, the Company will try to obtain a price from another third-party provider, such as a broker, or use an internally developed price which it believes represents the fair value of the investment. All challenges to third-party prices are reviewed by staff of the Company with relevant expertise to ensure reasonableness of assumptions and compliance with internal control and documentation procedures.

In addition to challenging pricing assumptions, the Company obtains independent auditor reports from significant third-party pricing services regarding their key controls over data provided to the Company. These reports are obtained annually and are reviewed by the Company to ensure key controls are applied by the pricing services, and that appropriate user controls are in place at MBIA to ensure proper measurement of the fair values of its investments. In the event that any controls are identified by independent auditors in these reports as insufficient, the Company will take the necessary actions to ensure that internal user controls are in place to mitigate the control risks. No significant control deficiencies were noted for significant third-party pricing services used.

2. Financial Liabilities

The Company's financial instruments categorized as liabilities primarily consist of insured derivatives within its insurance operations, derivatives used in its wind-down operations, investment agreements and MTNs within its wind-down operations, and debt issued for general corporate purposes. Investment agreements, MTNs, and corporate debt are typically recorded at face value adjusted for premiums or discounts. Financial liabilities that the Company has elected to fair value or that require fair value reporting or disclosures are valued based on the estimated value of the underlying collateral, the Company's or a third-party's estimate of discounted cash flows, or quoted market values for similar transactions.

3. Derivatives

The Company's derivative liabilities are primarily insured credit derivatives that reference structured pools of cash securities and CDSs. The Company generally insured the most senior liabilities of such transactions, and at the inception of transactions its exposure generally had more subordination than needed to achieve triple-A ratings from credit rating agencies. The types of collateral underlying its insured derivatives consist of cash securities and CDSs referencing primarily corporate, asset-backed, residential mortgage-backed, commercial mortgage-backed, CRE loans, and CDO securities.

The Company's insured credit derivative contracts are non-traded structured credit derivative transactions. Since insured derivatives are highly customized and there is generally no observable market for these derivatives, the Company estimates their fair values in a hypothetical market based on internal and third-party models simulating what a similar company would charge to assume the Company's position in the transaction at the measurement date. This pricing would be based on the expected loss of the exposure. The Company reviews its valuation model results on a quarterly basis to assess the appropriateness of the assumptions and results in light of current market activity and conditions. This review is performed by internal staff with relevant expertise. If live market spreads or securities prices are observable for similar transactions, those spreads are an integral part of the analysis. New insured transactions that resemble existing (previously insured) transactions are considered, as well as negotiated settlements of existing transactions.

The Company may from time to time make changes in its valuation techniques if the change results in a measurement that it believes is equally or more representative of fair value under current circumstances.

Significant Unobservable Inputs

Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Instruments that trade infrequently and, therefore, have little or no price transparency are classified within Level 3 of the fair value hierarchy. Also included in Level 3 are financial instruments that have unobservable inputs deemed significant to the instruments' overall fair value. The following table provides quantitative information regarding the significant unobservable inputs for assets and liabilities measured at fair value on a recurring basis as of March 31, 2012. This table excludes inputs used to measure fair value that are not developed by the Company, such as broker prices and other third-party pricing service valuations provided. These primarily relate to fixed-maturity investments with significant unobservable inputs (Level 3 of the fair value hierarchy).

In millions

Fair Value
as of March
31, 2012

Valuation Techniques

Unobservable Input

Range
(Weighted Average)

Assets of consolidated VIEs:

Loans receivable

2,025

Quoted market prices adjusted for financial guarantees provided to VIE obligations

Impact of financial guarantee

0% - 114% (7%)

Loan repurchase commitments

1,076

Discounted cash flow

Recovery rates

25% - 75% (71%)

Breach rates

65% - 94% (76%)

Liabilities of consolidated VIEs:

Variable interest entity notes

2,864

Quoted market prices of VIE assets adjusted for financial guarantees provided

Impact of financial guarantee

0% - 26% (3%)

Credit derivative liabilities, net:

CMBS

2,183

BET Model

Recovery rates

22% - 90% (50%)

Nonperformance risk

4% - 57% (49%)

Weighted average life (in years)

0.2- 6.4 (4.7)

CMBS spreads

1% - 23% (12%)

Multi-sector CDO

928

Direct Price Model

Nonperformance risk

57% - 57% (57%)

Other

1,376

BET Model

Recovery rates

42% - 75% (47%)

Nonperformance risk

10% - 57% (44%)

Weighted average life (in years)

0.2- 13.4 (3.1)

Sensitivity of Significant Unobservable Inputs

The significant unobservable input used in the fair value measurement of the Company's assets of consolidated VIEs: loans receivable is the impact of the financial guarantee. As the perception of the benefit provided by the Company to the obligations issued by the VIE improves, the credit support of the financial guarantee provides more of the expected future cash flow of the VIE, and there is a lower expected cash flow on the underlying loans receivable of the VIE. This results in a lower fair value of the loans receivable in relation to the obligations of the VIE.

The significant unobservable inputs used in the fair value measurement of the Company's assets of consolidated VIEs: loan repurchase commitments are the recovery rates and the breach rates. Significant increases or decreases in the recovery rate and the breach rate would result in significantly higher or lower, respectively, fair values of the loan repurchase commitments. Additionally, changes in the legal environment and the ability of the counterparties to pay would impact the recovery rate assumption, which could significantly impact the fair value measurement. Breach rates are determined by the Company. Any significant challenges by the counterparties to the Company's determination of breach of contracts could significantly adversely impact the fair value measurement.

The significant unobservable input used in the fair value measurement of the Company's liabilities of consolidated VIEs: variable interest entity notes is the impact of the financial guarantee. As the value of the guarantee provided by the Company to the obligations issued by the VIE increases, the credit support adds value to the liabilities of the VIE. This results in an increase in the fair value of the liabilities of the VIE.

The significant unobservable inputs used in the fair value measurement of the Company's CMBS credit derivatives, which are valued using the BET Model, are CMBS spreads, recovery rates, nonperformance risk and weighted average life. A significant increase or decrease in CMBS spreads or weighted average life would result in an increase or decrease, respectively, in the fair value of the derivative liabilities. Any significant increase or decrease in recovery rates or the Company's nonperformance risk would result in a decrease or increase in the fair value of the derivative liabilities.

The significant unobservable input used in the fair value measurement of the Company's multi-sector CDO credit derivatives, which are valued using the Direct Price Model, is nonperformance risk. Any significant increase or decrease in the Company's nonperformance risk would result in a decrease or increase, respectively, in the fair value of the derivative liabilities.

The significant unobservable inputs used in the fair value measurement of the Company's other credit derivatives, which are valued using the BET model, are recovery rates, nonperformance risk and weighted average life. Any significant increase or decrease in weighted average life would result in an increase or decrease, respectively, in the fair value of the derivatives. Any significant increase or decrease in recovery rates or the Company's nonperformance risk would result in a decrease or increase in the fair value of the derivative liabilities.

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 March 31, 2012 and December 31, 2011:


	Fair Value Measurements at Reporting Date Using
In millions	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Counterparty and Cash Collateral Netting		Balance as of March 31, 2012
Assets:
Investments:
Fixed-maturity investments:
Taxable bonds:
U.S. Treasury and government agency	$	888	$	197	$	-		$	-	$	1,085
Foreign governments		263		94		12	⁽¹⁾		-		369
Corporate obligations		-		1,487		185	⁽¹⁾		-		1,672
Mortgage-backed securities:
Residential mortgage-backed agency		-		1,201		9	⁽¹⁾		-		1,210
Residential mortgage-backed non-agency		-		219		14	⁽¹⁾		-		233
Commercial mortgage-backed		-		27		25	⁽¹⁾		-		52
Asset-backed securities:
Collateralized debt obligations		-		71		35	⁽¹⁾		-		106
Other asset-backed		-		118		115	⁽¹⁾		-		233
State and municipal bonds		-		952		-			-		952

Total taxable bonds		1,151		4,366		395			-		5,912
Tax exempt bonds:
State and municipal bonds		-		1,053		27	⁽¹⁾		-		1,080
Other fixed-maturity investments		-		13		-			-		13

Total fixed-maturity investments		1,151		5,432		422			-		7,005
Money market securities		953		-		-			-		953
Perpetual preferred securities		-		49		-			-		49
Other		29		-		10	⁽¹⁾		-		39

Total		2,133		5,481		432			-		8,046
Derivative assets:
Insured derivative assets:
Credit derivatives		-		-		10			-		10
Non-insured derivative assets:
Interest rate derivatives		-		74		4	⁽¹⁾		-		78
Other		-		-		-			(76)		(76)

Total derivative assets		-		74		14			(76)		12

	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 March 31, 2012
Assets of consolidated VIEs:
Corporate obligations		-		165		75	⁽¹⁾		-		240
Mortgage-backed securities:
Residential mortgage-backed agency		-		3		-			-		3
Residential mortgage-backed non-agency		-		1,444		25	⁽¹⁾		-		1,469
Commercial mortgage-backed		-		559		15	⁽¹⁾		-		574
Asset-backed securities:
Collateralized debt obligations		-		331		218	⁽¹⁾		-		549
Other asset-backed		-		211		71	⁽¹⁾		-		282

Total fixed-maturity securities at fair value		-		2,713		404			-		3,117
Money market securities		622		-		-			-		622
Loans receivable		-		-		2,025			-		2,025
Loan repurchase commitments		-		-		1,076			-		1,076
Derivative assets:
Credit derivatives		-		-		443	⁽¹⁾		-		443
Interest rate derivatives		-		2		-			-		2

Total assets	$	2,755	$	8,270	$	4,394		$	(76)	$	15,343

Liabilities:
Medium-term notes	$	-	$	-		$174	⁽¹⁾	$	-	$	174
Derivative liabilities:
Insured derivatives:
Credit derivatives		-		16		4,497			-		4,513
Non-insured derivatives:
Interest rate derivatives		-		390		-			-		390
Currency derivatives		-		3		-			-		3
Other		-		-		-			(76)		(76)
Other liabilities:
Warrants		-		22		-			-		22
Liabilities of consolidated VIEs:
Variable interest entity notes		-		1,897		2,864			-		4,761
Derivative liabilities:
Credit derivatives		-		-		525	⁽¹⁾		-		525
Interest rate derivatives		-		259		-			-		259
Currency derivatives		-		-		19	⁽¹⁾		-		19

Total liabilities	$	-	$	2,587	$	8,079		$	(76)	$	10,590

(1) - Unobservable inputs are either not developed by the Company or do not significantly impact the overall fair values of the aggregate financial assets and liabilities.


	Fair Value Measurements at Reporting Date Using
In millions	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Counterparty and Cash Collateral Netting		Balance as of December 31, 2011
Assets:
Investments:
Fixed-maturity investments:
Taxable bonds:
U.S. Treasury and government agency	$	1,038	$	103	$	-	$	-	$	1,141
Foreign governments		277		62		11		-		350
Corporate obligations		1		1,531		206		-		1,738
Mortgage-backed securities:
Residential mortgage-backed agency		-		1,276		8		-		1,284
Residential mortgage-backed non-agency		-		350		17		-		367
Commercial mortgage-backed		-		34		24		-		58
Asset-backed securities:
Collateralized debt obligations		-		78		60		-		138
Other asset-backed		-		130		318		-		448
State and municipal bonds		-		924		-		-		924

Total taxable bonds		1,316		4,488		644		-		6,448
Tax exempt bonds:
State and municipal bonds		-		1,137		28		-		1,165
Other fixed-maturity investments		-		15		-		-		15

Total fixed-maturity investments		1,316		5,640		672		-		7,628
Money market securities		912		-		-		-		912
Perpetual preferred securities		-		106		1		-		107
Other		25		-		10		-		35

Total		2,253		5,746		683		-		8,682
Derivative assets:
Non-insured derivative assets:
Credit derivatives		-		1		-		-		1
Interest rate derivatives		-		91		3		-		94
Other		-		-		-		(93)		(93)

Total derivative assets		-		92		3		(93)		2

	Fair Value Measurements at Reporting Date Using
In millions	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Counterparty and Cash Collateral Netting		Balance as of December 31, 2011
Assets of consolidated VIEs:
Corporate obligations		-		170		69		-		239
Mortgage-backed securities:
Residential mortgage-backed agency		-		3		-		-		3
Residential mortgage-backed non-agency		-		1,437		21		-		1,458
Commercial mortgage-backed		-		559		22		-		581
Asset-backed securities:
Collateralized debt obligations		-		330		203		-		533
Other asset-backed		-		236		67		-		303

Total fixed-maturity securities at fair value		-		2,735		382		-		3,117
Money market securities		199		-		-		-		199
Loans receivable		-		-		2,046		-		2,046
Loan repurchase commitments		-		-		1,077		-		1,077
Derivative assets:
Credit derivatives		-		-		447		-		447
Interest rate derivatives		-		3		-		-		3

Total assets	$	2,452	$	8,576	$	4,638	$	(93)	$	15,573

Liabilities:
Medium-term notes	$	-	$	-	$	165	$	-	$	165
Derivative liabilities:
Insured derivatives:
Credit derivatives		-		18		4,790		-		4,808
Non-insured derivatives:
Interest rate derivatives		-		445		-		-		445
Currency derivatives		-		4		-		-		4
Other		-		-		-		(93)		(93)
Other liabilities:
Warrants		-		38		-		-		38
Liabilities of consolidated VIEs:
Variable interest entity notes		-		1,865		2,889		-		4,754
Derivative liabilities:
Credit derivatives		-		-		527		-		527
Interest rate derivatives		-		281		-		-		281
Currency derivatives		-		-		17		-		17

Total liabilities	$	-	$	2,651	$	8,388	$	(93)	$	10,946

Level 3 assets at fair value, as of March 31, 2012 and December 31, 2011 represented approximately 29% and 30% of total assets measured at fair value, respectively. Level 3 liabilities at fair value, as of March 31, 2012 and December 31, 2011, represented approximately 76% and 77% of total liabilities measured at fair value, respectively.

The following fair value hierarchy table presents information about the Company's assets and liabilities that are disclosed at fair value but not recorded at fair value on the Company's consolidated balance sheet as of March 31, 2012:


	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)		Balance as of March 31, 2012
Assets:
Other investments	$	-	$	11	$	-	$	11
Receivable for investments sold		98		-		-		98
Assets of consolidated VIEs:
Investments held-to-maturity		-		-		2,871		2,871

Total assets		98		11		2,871		2,980
Liabilities:
Investment agreements		-		-		1,809		1,809
Medium-term notes		-		-		990		990
Securities sold under agreements to repurchase		-		149		-		149
Long-term debt		-		1,168		-		1,168
Payable for investments purchased		35		-		-		35
Liabilities of consolidated VIEs:
Variable interest entity notes		-		-		3,422		3,422

Total liabilities		35		1,317		6,221		7,573
Financial Guarantees:
Gross		-		-		1,436		1,436
Ceded		-		-		99		99

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 March 31, 2012 and 2011:


Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended March 31, 2012

In millions	Balance, Beginning of Year		Realized Gains / (Losses)		Unrealized Gains / (Losses) Included in Earnings		Unrealized Gains / (Losses) Included in OCI		Foreign Exchange Recognized in OCI or Earnings		Purchases		Issuances		Settlements		Sales		Transfers into Level 3 ⁽¹⁾		Transfers out of Level 3 ⁽¹⁾		Ending Balance		Change in Unrealized Gains (Losses) for the Period Included in Earnings for Assets still held as of March 31, 2012

Assets:
Foreign governments	$	11	$	-	$	-	$	-	$	1	$	6	$	-	$	(6)	$	-	$	-	$	-	$	12	$	-
Corporate obligations		206		(13)		-		17		-		-		-		(1)		(24)		-		-		185		-
Residential mortgage-backed agency		8		-		-		1		-		-		-		-		-		-		-		9		-
Residential mortgage-backed non-agency		17		-		-		1		-		-		-		(1)		-		-		(3)		14		-
Commercial mortgage-backed		24		-		-		2		-		-		-		-		-		-		(1)		25		-
Collateralized debt obligations		60		(3)		-		6		-		-		-		(5)		(2)		6		(27)		35		-
Other asset-backed		318		(116)		-		121		-		1		-		(7)		(202)		2		(2)		115		-
State and municipal tax-exempt bonds		28		-		-		-		-		-		-		(1)		-		-		-		27		-
Perpetual preferred securities		1		-		-		1		-		-		-		-		-		-		(2)		-		-
Other investments		10		-		-		-		-		-		-		-		-		-		-		10		-
Assets of consolidated VIEs:
Corporate obligations		69		-		1		-		-		-		-		(1)		-		6		-		75		2
Residential mortgage-backed non-agency		21		-		5		-		-		-		-		(2)		-		2		(1)		25		4
Commercial mortgage-backed		22		-		1		-		-		-		-		(2)		-		-		(6)		15		-
Collateralized debt obligations		203		-		3		1		-		-		-		-		-		11		-		218		2
Other asset-backed		67		-		3		-		-		-		-		-		-		1		-		71		3
Loans receivable		2,046		-		39		-		-		-		-		(60)		-		-		-		2,025		39
Loan repurchase commitments		1,077		-		(1)		-		-		-		-		-		-		-		-		1,076		(1)

Total assets	$	4,188	$	(132)	$	51	$	150	$	1	$	7	$	-	$	(86)	$	(228)	$	28	$	(42)	$	3,937	$	49


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 March 31, 2012
Liabilities:
Medium-term notes	$	165	$	-	$	5	$	-	$	4	$	-	$	-	$	-	$	-	$	-	$	-	$	174	$	5
Credit derivatives, net		4,790		20		(303)		-		-		-		-		(20)		-		-		-		4,487		(286)
Interest rate derivatives, net		(3)		-		(1)		-		-		-		-		-		-		-		-		(4)		7
Liabilities of consolidated VIEs:
VIE notes		2,889		-		158		-		-		-		-		(183)		-		-		-		2,864		158
Credit derivatives, net		80		-		2		-		-		-		-		-		-		-		-		82		2
Currency derivatives, net		17		-		2		-		-		-		-		-		-		-		-		19		2

Total liabilities	$	7,938	$	20	$	(137)	$	-	$	4	$	-	$	-	$	(203)	$	-	$	-	$	-	$	7,622	$	(112)

(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 March 31, 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 March 31, 2011
Assets:
Foreign governments	$	11	$	-	$	-	$	-	$	-	$	3	$	-	$	(2)	$	-	$	7	$	-	$	19	$	-
Corporate obligations		246		-		-		7		2		10		-		(32)		(12)		6		(16)		211		-
Residential mortgage-backed agency		41		-		-		1		-		1		-		(1)		(1)		-		(41)		-		-
Residential mortgage-backed non-agency		48		-		-		5		-		7		-		(5)		(1)		5		(16)		43		-
Commercial mortgage-backed		41		-		-		2		1		8		-		-		-		-		(1)		51		-
Collateralized debt obligations		191		(1)		-		20		-		2		-		(29)		(1)		2		(61)		123		-
Other asset-backed		350		-		-		8		-		1		-		(9)		(1)		2		(28)		323		-
State and municipal taxable bonds		14		-		-		(2)		-		-		-		-		-		-		-		12		-
State and municipal tax-exempt bonds		36		-		-		-		-		-		-		(2)		-		-		-		34		-
Assets of consolidated VIEs:
Corporate obligations		82		-		-		-		-		-		-		(2)		-		4		-		84		-
Residential mortgage-backed non-agency		40		-		(2)		3		-		-		-		(3)		-		-		(20)		18		1
Commercial mortgage-backed		23		-		6		-		-		-		-		-		-		-		-		29		7
Collateralized debt obligations		245		-		16		-		-		-		-		(2)		-		14		(54)		219		16
Other asset-backed		81		-		(2)		-		-		-		-		(1)		-		1		-		79		(2)
Loans receivable		2,183		-		228		-		-		-		-		(84)		-		-		-		2,327		228
Loan repurchase commitments		835		-		20		-		-		-		12		-		-		-		-		867		20

Total assets	$	4,467	$	(1)	$	266	$	44	$	3	$	32	$	12	$	(172)	$	(16)	$	41	$	(237)	$	4,439	$	270


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 March 31, 2011
Liabilities:
Medium-term notes	$	116	$	-	$	39	$	-	$	8	$	-	$	-	$	-	$	-	$	-	$	-	$	163	$	39
Credit derivatives, net		4,350		386		1,421		-		-		-		-		(386)		-		-		-		5,771		1,580
Interest rate derivatives, net		(5)		-		1		-		-		-		-		-		-		-		-		(4)		1
Liabilities of consolidated VIEs:
VIE notes		4,673		-		421		-		-		-		-		(141)		-		-		-		4,953		421
Credit derivatives, net		768		-		158		-		-		-		-		-		-		-		-		926		158
Currency derivatives, net		14		-		(2)		-		-		-		-		-		-		-		-		12		(2)

Total liabilities	$	9,916	$	386	$	2,038	$	-	$	8	$	-	$	-	$	(527)	$	-	$	-	$	-	$	11,821	$	2,197

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

Transfers into and out of Level 3 were $28 million and $42 million, respectively, for the three months ended March 31, 2012. Transfers into and out of Level 2 were $42 million and $28 million, respectively, for the three months ended March 31, 2012. These transfers were principally for available-for-sale securities where inputs, which are significant to their valuation, became observable or unobservable during the year. These inputs included spreads, prepayment speeds, default speeds, default severities, yield curves observable at commonly quoted intervals, and market corroborated inputs. 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 March 31, 2012, net unrealized losses on securities transferred into Level 3 were $10 million and net unrealized losses on securities transferred out of Level 3 were $3 million.

Transfers into and out of Level 3 were $41 million and $237 million, respectively, for the three months ended March 31, 2011. Transfers into and out of Level 2 were $237 million and $41 million, respectively, for the three months ended March 31, 2011. These transfers were principally for available-for-sale securities where inputs, which are significant to their valuation, became observable or unobservable during the year. These inputs included spreads, prepayment speeds, default speeds, default severities, yield curves observable at commonly quoted intervals, and market corroborated inputs. CDOs, corporate obligations, RMBS non-agency 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 March 31, 2011, net unrealized losses on securities transferred into Level 3 were $1 million and net unrealized losses on securities transferred out of Level 3 were $1 million.

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

Gains and losses (realized and unrealized) included in earnings pertaining to Level 3 assets and liabilities for the three months ended March 31, 2012 and 2011 are reported on the consolidated statements of operations as follows:


	March 31, 2012
							Consolidated VIEs
In millions	Unrealized Gains (Losses) on Insured Derivatives		Net Realized Gains (Losses)		Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange		Net Realized Gains (Losses)		Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange
Total gains (losses) included in earnings	$	303	$	(152)	$	(4)	$	-	$	(111)

Change in unrealized gains (losses) for the period included in earnings for assets and liabilities still held as of March 31, 2012	$	286	$	-	$	(12)	$	-	$	(113)


	March 31, 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	$	(1,421)	$	(387)	$	(48)	$	-	$	(311)

Change in unrealized gains (losses) for the period included in earnings for assets and liabilities still held as of March 31, 2011	$	(1,580)	$	-	$	(48)	$	-	$	(307)

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 table presents the changes in fair value included in the Company's consolidated statements of operations for the three months ended March 31, 2012 and 2011 for all financial instruments for which the fair value option was elected:


	Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange
	Three Months Ended March 31,
In millions	2012		2011
Fixed-maturity securities held at fair value	$	(1)	$	213
Loans receivable at fair value:
Residential mortgage loans		18		101
Other loans		(39)		43
Loan repurchase commitments		-		32
Other assets		-		(40)
Long-term debt		(7)		(367)

The following table reflects the difference between the aggregate fair value and the aggregate remaining contractual principal balance outstanding as of March 31, 2012 and December 31, 2011 for loans and variable interest entity notes for which the fair value option was elected:


	As of March 31, 2012						As of December 31, 2011
In millions	Contractual Outstanding Principal		Fair Value		Difference		Contractual Outstanding Principal		Fair Value		Difference
Loans receivable at fair value:
Residential mortgage loans	$	2,659	$	1,850	$	809	$	2,769	$	1,895	$	874
Residential mortgage loans (90 days or more past due)		274		63		211		259		-		259
Other loans		138		46		92		129		43		86
Other loans (90 days or more past due)		201		66		135		324		108		216

Total loans receivable at fair value	$	3,272	$	2,025	$	1,247	$	3,481	$	2,046	$	1,435

Variable interest entity notes	$	13,361	$	4,761	$	8,600	$	13,583	$	4,754	$	8,829

Substantially all gains and losses included in earnings during the three months ended March 31, 2012 on loans receivable and variable interest entity notes reported in the preceding table are attributable to credit risk. This is primarily due to the high rate of defaults on loans and the collateral supporting the variable interest entity notes, resulting in depressed pricing of the financial instruments.