Fair Value Measurement

6 Months Ended

Jun. 30, 2012

Fair Value Measurement

Fair Value Measurement

Fair value is a market-based measure considered from the perspective of a market participant. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those which it believes market participants would use in pricing an asset or liability at the measurement date. 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 instruments 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 such estimates and assumptions may produce materially different fair values.

The accounting guidance for fair value measurement establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available and reliable. Observable inputs are those the Company believes that market participants would use in pricing an asset or liability based on available market data. Unobservable inputs are those that reflect the Company’s beliefs about the assumptions market participants would use in pricing an asset or liability based on the best information available. The fair value hierarchy is broken down into three levels based on the observability and reliability of inputs, as follows:

• Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that the Company can access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail any degree of judgment.

• Level 2—Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Level 2 assets include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, securities which are priced using observable inputs and derivative contracts whose values are determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.

• Level 3—Valuations based on inputs that are unobservable and supported by little or no market activity and that are significant to the overall fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques where significant inputs are unobservable, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

The availability of observable inputs can vary from product to product and period to period and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new and not yet established in the marketplace, and other characteristics particular to the product. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the Company assigns the level in the fair value hierarchy for which the fair value measurement in its entirety falls, based on the least observable input that is significant to the fair value measurement.

1. Financial Assets (excluding derivative assets)

Financial assets, excluding derivative assets, held by the Company primarily consist of investments in debt securities. Substantially all of the Company’s investments are priced by independent third parties, including pricing services and brokers. Typically the Company receives one pricing service value or broker quote for each instrument, which represents a non-binding indication of value. 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 internally developed expectation of fair 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. The fair values of investments for which internal prices were used were not significant to the aggregate fair value of the Company’s investment portfolio as of June 30, 2012 or December 31, 2011. All challenges to third-party prices are reviewed by staff of the Company with relevant expertise to ensure reasonableness of assumptions.

In addition to challenging pricing assumptions, the Company obtains reports from the independent accountants for significant third-party pricing services attesting to the effectiveness of the 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 the Company to ensure proper measurement of the fair values of its investments. In the event that any controls in these reports are deemed as ineffective by independent accountants, the Company will take the necessary actions to ensure that internal user controls are in place to mitigate the control risks. No deficiencies were noted for significant third-party pricing services used.

2. Financial Liabilities (excluding derivative liabilities)

Financial liabilities, excluding derivative liabilities, issued by the Company primarily consist of 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 flow model estimates, or quoted market values for similar products. These valuations include adjustments for expected nonperformance risk of the Company.

3. Derivative Assets and Liabilities

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, if any, would be 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.

4. Internal Review Process

All significant financial assets and liabilities, including derivative assets and liabilities, are reviewed by committees created by the Company to ensure compliance with the Company’s policies and risk procedures in the development of fair values of financial assets and liabilities. These valuation committees review, among other things, key assumptions used for internally developed prices, significant changes in sources and uses of inputs, including changes in model approaches, and any adjustments from third-party inputs or prices to internally developed inputs or prices. The committees also review any significant impairment or improvements in fair values of the financial instruments from prior periods. From time to time, these committees will reach out to the Company valuation experts to better understand key methods and assumptions used for the determination of fair value, including understanding significant changes in fair values. These committees are comprised of senior finance team members with the relevant experience in the financial assets their committee is responsible for. For each quarter, these committees document their agreement with the fair values developed by management of the Company as reported in the quarterly financial statements.

Valuation Techniques

Valuation techniques for financial instruments measured at fair value and included in the tables that follow are described below.

Fixed-Maturity Securities (including short-term investments) Held as Available-For-Sale, Fixed-Maturity Securities at Fair Value, Investments Pledged as Collateral, Investments Held-to-Maturity, and Other Investments

Fixed-maturity securities (including short-term investments) held as available-for-sale, fixed-maturity securities at fair value, investments pledged as collateral, investments held-to-maturity, and other investments include investments in U.S. Treasury and government agencies, foreign governments, corporate obligations, MBS and ABS (including CMBS and CDOs), state and municipal bonds and equity securities (including perpetual preferred securities and money market mutual funds).

These investments are generally valued based on recently executed transaction prices or quoted market prices. When quoted market prices are not available, fair value is generally determined using quoted prices of similar investments or a valuation model based on observable and unobservable inputs. Inputs vary depending on the type of investment. These inputs include contractual cash flows, interest rate yield curves, CDS spreads, prepayment and volatility scores, diversity scores, cross-currency basis index spreads, value of any credit enhancement, and credit spreads for structures similar to the financial instrument in terms of issuer, maturity and seniority.

Investments based on quoted market prices of identical investments in active markets are classified as Level 1 of the fair value hierarchy. Level 1 investments generally consist of U.S. Treasury and foreign government and agency investments. Quoted market prices of investments in less active markets, as well as investments which are valued based on other than quoted prices for which the inputs are observable, such as interest rate yield curves, are categorized in Level 2 of the fair value hierarchy. Investments that contain significant inputs that are not observable are categorized as Level 3.

Cash and Cash Equivalents, Receivable for Investments Sold, and Accrued Investment Income

The carrying amounts of cash and cash equivalents, receivable for investments sold, and accrued investment income approximate fair values due to the short-term nature and credit worthiness of these instruments.

Loans Receivable at Fair Value

Loans receivable at fair value are comprised of 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 adjustments for the fair values of the financial guarantees 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 assets of the consolidated 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 to 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 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; and

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

Investment Agreements

The fair values of investment agreements are determined using discounted cash flow techniques based on contractual cash flows and 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. As the terms of the notes are private, and the contract cash flows are not observable, these investment agreements are categorized as Level 3 of the fair value hierarchy.

Medium-Term Notes

The fair values of MTNs are based on quoted market prices provided by third-party sources, where available. When quoted market prices are not available, the Company applies a matrix pricing grid based on the quoted market prices received and the MTNs’ stated maturity and interest rate to determine fair value. Nonperformance risk is included in the quoted market prices and matrix pricing grid.

The Company has elected to record three MTNs at fair value as they contain embedded derivatives which cannot accurately be separated from the host debt instrument and fair valued separately, therefore, these three MTNs are carried at fair value with changes in fair value reflected in earnings. The remaining MTNs which are not carried at fair value do not contain embedded derivatives.

As these MTNs are illiquid and the prices reflect significant unobservable inputs, they 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 and unobservable inputs including interest rate yield curves, bond spreads of similar securities and the value of any credit enhancements. 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.

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. Long-term debt is categorized as Level 2 of the fair value hierarchy.

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 over-the-counter derivatives are determined using valuation models based on observable inputs, nonperformance risk of the Company’s own credit and nonperformance risk of the counterparties. Observable and market-based inputs include interest rate yields, credit spreads and volatilities. These derivatives are categorized in Level 2 or Level 3 of the fair value hierarchy based on the 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 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 the Company 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.

Approximately 79% of the balance sheet fair value of insured credit derivatives as of June 30, 2012 was valued using the Binomial Expansion Technique (“BET”) Model. Approximately 21% of the balance sheet fair value of insured credit derivatives as of June 30, 2012 was valued using the internally developed Direct Price Model. An immaterial amount of insured credit derivatives were valued using the 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.

A. Description of the BET Model

1. Valuation Model Overview

The BET Model estimates what a bond insurer would charge to guarantee a transaction at the measurement date, based on the market-implied default risk of the underlying collateral and the remaining structural protection in a deductible or subordination.

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, are 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 inception-to-date unrealized gain or loss on a transaction 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.

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.

There were some transactions where the Company 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. As of June 30, 2012, sector-specific spreads were used in 9% 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 44% of the transactions. 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 76% 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 use more observable spread hierarchies defined above. However, the Company may on occasion move to less observable spread inputs due to the discontinuation of data sources or due to the Company considering certain spread 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. While diversity score is a required input into the BET model, due to current high levels of default within the collateral of the structures, diversity score does not have a significant impact on valuation.

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. 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 June 30, 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 uses quoted market prices of financial assets correlated to the underlying collateral of the pool of assets backing the liabilities guaranteed by certain insured derivative liabilities. These quoted market prices are adjusted to reflect the unique characteristics of the liabilities of the entities backed by the correlated assets and unique terms of the insured derivative contracts.

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 June 30, 2012 and December 31, 2011, the Company’s net insured derivative liability was $3.3 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 $4.3 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 June 30, 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.

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 CDS spread and recovery rate of a similar municipal insurance company are used as the discount rate for National, as National does not have a published CDS spread and recovery rate.

The carrying value of the Company’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 within “Other Assets” on the Company’s consolidated balance sheets.

Significant Unobservable Inputs

The following table provides quantitative information regarding the significant unobservable inputs used by the Company for assets and liabilities measured at fair value on a recurring basis as of June 30, 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.

In millions	Fair Value as of June 30, 2012		Valuation Techniques	Unobservable Input	Range (Weighted Average)
Assets of consolidated VIEs:
Loans receivable at fair value	$	1,903	Quoted market prices adjusted for financial guarantees provided to VIE obligations	Impact of financial guarantee		0% -111% (6%)
Loan repurchase commitments		1,032	Discounted cash flow	Recovery rates		9% -96% (42%)
				Breach rates		65% -94% (77%)
Liabilities of consolidated VIEs:
Variable interest entity notes		1,867	Quoted market prices of VIE assets adjusted for financial guarantees provided	Impact of financial guarantee		0% - 24% (6%)
Credit derivative liabilities, net:
CMBS		1,488	BET Model	Recovery rates		23% -90% (51%)
				Nonperformance risk		11% -61% (55%)
				Weighted average life (in years)		0.5 - 6.1 (4.9)
				CMBS spreads		2% - 20% (12%)
Multi-sector CDO		691	Direct Price Model	Nonperformance risk		61% -61% (61%)
Other		1,106	BET Model	Recovery rates		42% -75% (47%)
				Nonperformance risk		11% -61% (42%)
				Weighted average life (in years)		0.3 - 14.7 (3.2)

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 at fair value 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 are 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 tables present the fair value of the Company’s assets (including short-term investments) and liabilities measured and reported at fair value on a recurring basis as of June 30, 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 June 30, 2012
Assets:
Investments:
Fixed-maturity investments:
Taxable bonds:
U.S. Treasury and government agency	$	851	$	261	$	-		$	-	$	1,112
Foreign governments		263		77		12	(1)		-		352
Corporate obligations		-		1,143		98	(1)		-		1,241
Mortgage-backed securities:
Residential mortgage-backed agency		-		1,112		4	(1)		-		1,116
Residential mortgage-backed non-agency		-		154		30	(1)		-		184
Commercial mortgage-backed		-		20		27	(1)		-		47
Asset-backed securities:
Collateralized debt obligations		-		73		29	(1)		-		102
Other asset-backed		-		128		72	(1)		-		200
State and municipal bonds		-		939		-			-		939
Total taxable bonds		1,114		3,907		272			-		5,293
Tax-exempt bonds:
State and municipal bonds		-		1,045		25	(1)		-		1,070
Other fixed-maturity investments		-		10		-			-		10
Total fixed-maturity investments		1,114		4,962		297			-		6,373
Money market securities		641		-		-			-		641
Perpetual preferred securities		-		46		3	(1)		-		49
Other		20		-		10	(1)		-		30
Total		1,775		5,008		310			-		7,093
Cash and cash equivalents		269		-		-			-		269
Derivative assets:
Insured derivative assets:
Credit derivatives		-		-		3			-		3
Non-insured derivative assets:
Interest rate derivatives		-		96		4	(1)		(98)		2
Total derivative assets		-		96		7			(98)		5

	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 June 30, 2012
Assets of consolidated VIEs:
Corporate obligations		-		216		95	(1)		-		311
Mortgage-backed securities:
Residential mortgage-backed non-agency		-		811		10	(1)		-		821
Commercial mortgage-backed		-		405		12	(1)		-		417
Asset-backed securities:
Collateralized debt obligations		-		229		140	(1)		-		369
Other asset-backed		-		161		42	(1)		-		203
Total fixed maturity securities at fair value		-		1,822		299			-		2,121
Cash		145		-		-			-		145
State and municipal taxable bonds		-		40		-			-		40
Money market securities		109		-		-			-		109
Loans receivable		-		-		1,903			-		1,903
Loan repurchase commitments		-		-		1,032			-		1,032
Derivative assets:
Interest rate derivatives		-		1		-			-		1
Total assets	$	2,298	$	6,967	$	3,551		$	(98)	$	12,718
Liabilities:
Medium-term notes	$	-	$	-	$	151	(1)	$	-	$	151
Derivative liabilities:
Insured derivatives:
Credit derivatives		-		14		3,288			-		3,302
Non-insured derivatives:
Interest rate derivatives		-		124		-			(98)		26
Currency derivatives		-		1		-			-		1
Other liabilities:
Warrants		-		25		-			-		25
Liabilities of consolidated VIEs:
Variable interest entity notes		-		1,771		1,867			-		3,638
Derivative liabilities:
Interest rate derivatives		-		165		-			-		165
Currency derivatives		-		-		21	(1)		-		21
Total liabilities	$	-	$	2,100	$	5,327		$	(98)	$	7,329

(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		207		-		1,739
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		317		-		447
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
Cash and cash equivalents		473		-		-		-		473
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
Cash		160		-		-		-		160
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	$	3,085	$	8,576	$	4,638	$	(93)	$	16,206
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 June 30, 2012 and December 31, 2011 represented approximately 28% and 29%, respectively, of total assets measured at fair value. Level 3 liabilities at fair value, as of June 30, 2012 and December 31, 2011 represented approximately 73% and 77%, respectively, of total liabilities measured at fair value.

The following tables present the fair values and carrying values of the Company’s assets and liabilities that are disclosed at fair value but not reported at fair value on the Company’s consolidated balance sheets as of June 30, 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)		Balance as of June 30, 2012		Carry Value Balance as of June 30, 2012
Assets:
Other investments	$	-	$	-	$	11	$	11	$	11
Accrued investment income(1)		57		-		-		57		57
Receivable for investments sold(1)		60		-		-		60		60
Assets of consolidated VIEs:
Investments held-to-maturity		-		-		2,896		2,896		3,051
Total assets	$	117	$	-	$	2,907	$	3,024	$	3,179
Liabilities:
Investment agreements	$	-	$	-	$	1,445	$	1,445	$	1,171
Medium-term notes		-		-		982		982		1,415
Long-term debt		-		1,119		-		1,119		1,837
Payable for investments purchased(2)		43		-		-		43		43
Liabilities of consolidated VIEs:
Variable interest entity notes		-		-		3,216		3,216		3,589
Total liabilities	$	43	$	1,119	$	5,643	$	6,805	$	8,055
Financial Guarantees:
Gross	$	-	$	-	$	975	$	975	$	831
Ceded		-		-		92		92		95

(1) - Reported within “Other assets” on MBIA’s consolidated balance sheets.

(2) - Reported within “Other liabilities” on MBIA’s consolidated balance sheets.

	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 December 31, 2011		Carry Value Balance as of December 31, 2011
Assets:
Other investments	$	-	$	-	$	11	$	11	$	11
Accrued investment income(1)		63		-		-		63		63
Receivable for investments sold(1)		32		-		-		32		32
Assets of consolidated VIEs:
Investments held-to-maturity		-		-		3,489		3,489		3,843
Total assets	$	95	$	-	$	3,500	$	3,595	$	3,949
Liabilities:
Investment agreements	$	-	$	-	$	1,853	$	1,853	$	1,578
Medium-term notes		-		-		1,187		1,187		1,491
Securities sold under agreements to repurchase		-		286		-		286		287
Long-term debt		-		1,117		-		1,117		1,840
Payable for investments purchased(2)		3		-		-		3		3
Liabilities of consolidated VIEs:
Variable interest entity notes		-		-		3,297		3,297		3,943
Long-term debt		-		-		368		368		360
Total liabilities	$	3	$	1,403	$	6,705	$	8,111	$	9,502
Financial Guarantees:
Gross	$	-	$	-	$	1,451	$	1,451	$	1,305
Ceded		-		-		94		94		104

(1) - Reported within “Other assets” on MBIA’s consolidated balance sheets.

(2) - Reported within “Other liabilities” on MBIA’s consolidated balance sheets.

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 June 30, 2012 and 2011:

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended June 30, 2012

In millions	Balance, Beginning of Period		Realized Gains / (Losses)		Unrealized Gains / (Losses) Included in Earnings		Unrealized Gains / (Losses) Included in OCI		Foreign Exchange Recognized in OCI or Earnings		Purchases		Issuances		Settlements		Sales		Transfers into Level 3(1)		Transfers out of Level 3(1)		Ending Balance		Change in Unrealized Gains (Losses) for the Period Included in Earnings for Assets still held as of June 30, 2012
Assets:
Foreign governments	$	12	$	-	$	-	$	-	$	(1)	$	7	$	-	$	(3)	$	(3)	$	-	$	-	$	12	$	-
Corporate obligations		185		-		2		13		(2)		16		-		(15)		(115)		14		-		98		2
Residential mortgage-backed agency		9		-		-		-		-		-		-		-		-		4		(9)		4		-
Residential mortgage-backed non-agency		14		-		-		(4)		-		-		-		(5)		(1)		26		-		30		-
Commercial mortgage-backed		25		-		-		2		-		-		-		-		-		-		-		27		-
Collateralized debt obligations		35		(1)		-		3		-		-		-		(4)		(7)		4		(1)		29		-
Other asset-backed		115		(2)		-		10		-		2		-		(2)		(50)		4		(5)		72		-
State and municipal tax-exempt bonds		27		-		-		-		-		-		-		(2)		-		-		-		25		-
Perpetual preferred securities		-		-		-		-		-		-		-		-		-		3		-		3		-
Other investments		10		-		-		-		-		-		-		-		-		-		-		10		-
Assets of consolidated VIEs:
Corporate obligations		75		-		(6)		(6)		-		28		-		(2)		-		6		-		95		-
Residential mortgage-backed non-agency		25		-		1		-		-		-		-		(2)		(15)		1		-		10		-
Commercial mortgage-backed		15		-		1		-		-		-		-		(1)		(8)		5		-		12		1
Collateralized debt obligations		218		-		(2)		(3)		-		-		-		-		(75)		2		-		140		6
Other asset-backed		71		-		3		-		-		4		-		(3)		(36)		3		-		42		2
Loans receivable		2,025		-		(49)		-		-		-		-		(71)		(2)		-		-		1,903		(49)
Loan repurchase commitments		1,076		-		(44)		-		-		-		-		-		-		-		-		1,032		(44)
Total assets	$	3,937	$	(3)	$	(94)	$	15	$	(3)	$	57	$	-	$	(110)	$	(312)	$	72	$	(15)	$	3,544	$	(82)

In millions	Balance, Beginning of Period		Realized (Gains) / Losses		Unrealized (Gains) / Losses Included in Earnings		Unrealized (Gains) / Losses Included in OCI		Foreign Exchange Recognized in OCI or Earnings		Purchases		Issuances		Settlements		Sales		Transfers into Level 3(1)		Transfers out of Level 3(1)		Ending Balance		Change in Unrealized (Gains) Losses for the Period Included in Earnings for Liabilities still held as of June 30, 2012
Liabilities:
Medium-term notes	$	174	$	-	$	(16)	$	-	$	(7)	$	-	$	-	$	-	$	-	$	-	$	-	$	151	$	(16)
Credit derivatives, net		4,487		443		(1,202)		-		-		-		-		(443)		-		-		-		3,285		(641)
Interest rate derivatives, net		(4)		-		-		-		-		-		-		-		-		-		-		(4)		-
Liabilities of consolidated VIEs:
VIE notes		2,864		-		62		-		-		-		-		(76)		(983)		-		-		1,867		62
Credit derivatives, net		82		-		-		-		-		-		-		-		(82)		-		-		-		-
Currency derivatives, net		19		-		2		-		-		-		-		-		-		-		-		21		2
Total liabilities	$	7,622	$	443	$	(1,154)	$	-	$	(7)	$	-	$	-	$	(519)	$	(1,065)	$	-	$	-	$	5,320	$	(593)

(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 June 30, 2011

In millions	Balance, Beginning of Period		Realized Gains / (Losses)		Unrealized Gains / (Losses) Included in Earnings		Unrealized Gains / (Losses) Included in OCI		Foreign Exchange Recognized in OCI or Earnings		Purchases		Issuances		Settlements		Sales		Transfers into Level 3(1)		Transfers out of Level 3(1)		Ending Balance		Change in Unrealized Gains (Losses) for the Period Included in Earnings for Assets still held as of June 30, 2011
Assets:
Foreign governments	$	19	$	-	$	-	$	-	$	-	$	4	$	-	$	(3)	$	-	$	-	$	(7)	$	13	$	-
Corporate obligations		212		-		-		-		1		1		-		(2)		-		82		-		294		-
Residential mortgage-backed non-agency		43		(1)		-		5		(2)		4		-		(6)		(18)		3		-		28		-
Commercial mortgage-backed		51		-		-		-		-		1		-		-		(2)		-		-		50		-
Collateralized debt obligations		123		(1)		-		8		(9)		5		-		(4)		(6)		46		-		162		-
Other asset-backed		322		-		-		(7)		(1)		8		-		(1)		(1)		11		-		331		-
State and municipal taxable bonds		12		-		-		1		-		-		-		-		-		-		-		13		-
State and municipal tax-exempt bonds		34		-		-		-		-		2		-		(3)		(1)		-		-		32		-
Assets of consolidated VIEs:
Corporate obligations		84		-		(13)		-		-		-		-		(2)		-		-		(7)		62		-
Residential mortgage-backed non-agency		18		-		1		-		-		-		-		(2)		-		-		-		17		1
Commercial mortgage-backed		29		-		1		-		-		-		-		(2)		(1)		-		-		27		(1)
Collateralized debt obligations		219		-		(26)		-		-		-		-		-		-		22		(14)		201		5
Other asset-backed		79		-		(6)		-		-		-		-		(1)		-		1		-		73		2
Loans receivable		2,327		-		68		-		-		-		-		(73)		(2)		-		-		2,320		68
Loan repurchase commitments		867		-		38		-		-		-		-		-		-		-		-		905		38
Total assets	$	4,439	$	(2)	$	63	$	7	$	(11)	$	25	$	-	$	(99)	$	(31)	$	165	$	(28)	$	4,528	$	113

In millions	Balance, Beginning of Period		Realized (Gains) / Losses		Unrealized (Gains) / Losses Included in Earnings		Unrealized (Gains) / Losses Included in OCI		Foreign Exchange Recognized in OCI or Earnings		Purchases		Issuances		Settlements		Sales		Transfers into Level 3(1)		Transfers out of Level 3(1)		Ending Balance		Change in Unrealized (Gains) Losses for the Period Included in Earnings for Liabilities still held as of June 30, 2011
Liabilities:
Medium-term notes	$	163	$	-	$	39	$	-	$	4	$	-	$	-	$	-	$	-	$	-	$	-	$	206	$	39
Credit derivatives, net		5,772		218		(116)		-		-		-		-		(218)		-		-		-		5,656		897
Interest rate derivatives, net		(4)		-		(1)		-		-		-		-		-		-		1		-		(4)		2
Liabilities of consolidated VIEs:
VIE notes		4,953		-		2		-		-		-		-		(262)		(180)		-		-		4,513		2
Credit derivatives, net		926		-		(6)		-		-		-		-		-		-		-		-		920		(7)
Currency derivatives, net		12		-		4		-		-		-		-		-		-		-		-		16		4
Total liabilities	$	11,822	$	218	$	(78)	$	-	$	4	$	-	$	-	$	(480)	$	(180)	$	1	$	-	$	11,307	$	937

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

Transfers into and out of Level 3 were $72 million and $15 million, respectively, for the three months ended June 30, 2012. Transfers into and out of Level 2 were $15 million and $72 million, respectively, for the three months ended June 30, 2012. These transfers were principally for residential mortgage-backed non-agency, and corporate obligations 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. Residential mortgage-backed agency and other asset-backed comprised the majority of the transferred instruments out of Level 3. There were no transfers into or out of Level 1. For the three months ended June 30, 2012, net unrealized losses included in other comprehensive income on securities transferred into Level 3 were $8 million and net unrealized losses included in other comprehensive income on securities transferred out of Level 3 were $2 million.

Transfers into and out of Level 3 were $166 million and $28 million, respectively, for the three months ended June 30, 2011. Transfers into and out of Level 2 were $28 million and $166 million, respectively, for the three months ended June 30, 2011. These transfers were principally for available-for-sale securities where inputs, which are significant to their valuation, became observable or unobservable during the quarter. These inputs included spreads, prepayment speeds, default speeds, default severities, yield curves observable at commonly quoted intervals, and market corroborated inputs. Corporate obligations and commercial mortgage-backed comprised the majority of the transferred instruments. There were no transfers into or out of Level 1. For the three months ended June 30, 2011, net unrealized losses included in other comprehensive income on securities transferred into Level 3 were $2 million and net unrealized losses included in other comprehensive income on securities transferred out of Level 3 were $8 million.

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

The following tables present information about changes in Level 3 assets (including short-term investments) and liabilities measured at fair value on a recurring basis for the six months ended June 30, 2012 and 2011:

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Six Months Ended June 30, 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 June 30, 2012
Assets:
Foreign governments	$	11	$	-	$	-	$	-	$	-	$	13	$	-	$	(9)	$	(3)	$	-	$	-	$	12	$	-
Corporate obligations		207		(15)		5		26		-		15		-		(16)		(138)		14		-		98		5
Residential mortgage-backed agency		8		-		-		1		-		-		-		-		-		4		(9)		4		-
Residential mortgage-backed non-agency		17		-		-		(3)		-		-		-		(7)		(1)		26		(2)		30		-
Commercial mortgage-backed		24		-		-		4		-		-		-		-		-		-		(1)		27		-
Collateralized debt obligations		60		(4)		-		9		-		-		-		(9)		(10)		10		(27)		29		-
Other asset-backed		317		(61)		-		73		-		4		-		(8)		(252)		6		(7)		72		-
State and municipal tax-exempt bonds		28		-		-		-		-		-		-		(3)		-		-		-		25		-
Perpetual preferred securities		1		-		-		-		-		-		-		-		-		4		(2)		3		-
Other investments		10		-		-		-		-		-		-		-		-		-		-		10		-
Assets of consolidated VIEs:
Corporate obligations		69		-		(5)		(6)		-		28		-		(3)		-		12		-		95		1
Residential mortgage-backed non-agency		21		-		6		-		-		-		-		(4)		(15)		3		(1)		10		5
Commercial mortgage-backed		22		-		2		-		-		-		-		(3)		(8)		5		(6)		12		1
Collateralized debt obligations		203		-		-		(2)		-		-		-		-		(75)		14		-		140		7
Other asset-backed		67		-		5		-		-		4		-		(3)		(36)		5		-		42		4
Loans receivable		2,046		-		(10)		-		-		-		-		(131)		(2)		-		-		1,903		(10)
Loan repurchase commitments		1,077		-		(45)		-		-		-		-		-		-		-		-		1,032		(45)
Total assets	$	4,188	$	(80)	$	(42)	$	102	$	-	$	64	$	-	$	(196)	$	(540)	$	103	$	(55)	$	3,544	$	(32)

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 June 30, 2012
Liabilities:
Medium-term notes	$	165	$	-	$	(11)	$	-	$	(3)	$	-	$	-	$	-	$	-	$	-	$	-	$	151	$	(11)
Credit derivatives, net		4,790		463		(1,505)		-		-		-		-		(463)		-		-		-		3,285		(571)
Interest rate derivatives, net		(3)		-		(1)		-		-		-		-		-		-		-		-		(4)		7
Liabilities of consolidated VIEs:
VIE notes		2,889		-		221		-		-		-		-		(260)		(983)		-		-		1,867		165
Credit derivatives, net		80		-		2		-		-		-		-		-		(82)		-		-		-		-
Currency derivatives, net		17		-		4		-		-		-		-		-		-		-		-		21		4
Total liabilities	$	7,938	$	463	$	(1,290)	$	-	$	(3)	$	-	$	-	$	(723)	$	(1,065)	$	-	$	-	$	5,320	$	(406)

(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 Six Months Ended June 30, 2011
In millions	Balance, Beginning of Year		Realized Gains / (Losses)		Unrealized Gains / (Losses) Included in Earnings		Unrealized Gains / (Losses) Included in OCI		Foreign Exchange Recognized in OCI or Earnings		Purchases		Issuances		Settlements		Sales		Transfers into Level 3(1)		Transfers out of Level 3(1)		Ending Balance		Change in Unrealized Gains (Losses) for the Period Included in Earnings for Assets still held as of June 30, 2011
Assets:
Foreign governments	$	11	$	-	$	-	$	-	$	-	$	7	$	-	$	(5)	$	-	$	7	$	(7)	$	13	$	-
Corporate obligations		247		-		-		7		3		11		-		(35)		(12)		88		(15)		294		-
Residential mortgage-backed agency		41		-		-		1		-		1		-		(1)		(1)		-		(41)		-		-
Residential mortgage-backed non-agency		48		(1)		-		10		(2)		11		-		(11)		(19)		8		(16)		28		-
Commercial mortgage-backed		41		-		-		2		1		9		-		-		(2)		-		(1)		50		-
Collateralized debt obligations		191		(2)		-		28		(9)		7		1		(33)		(8)		48		(61)		162		-
Other asset-backed		349		-		-		1		(1)		9		-		(10)		(2)		13		(28)		331		-
State and municipal taxable bonds		14		-		-		(1)		-		-		-		-		-		-		-		13		-
State and municipal tax-exempt bonds		36		-		-		-		-		2		-		(5)		(1)		-		-		32		-
Assets of consolidated VIEs:
Corporate obligations		82		-		(13)		-		-		-		-		(4)		-		4		(7)		62		(1)
Residential mortgage-backed non-agency		40		-		(1)		3		-		-		-		(5)		-		-		(20)		17		2
Commercial mortgage-backed		23		-		7		-		-		-		-		(2)		(1)		-		-		27		6
Collateralized debt obligations		245		-		(10)		-		-		-		-		(3)		-		37		(68)		201		19
Other asset-backed		81		-		(8)		-		-		-		-		(2)		-		2		-		73		(2)
Loans receivable		2,183		-		296		-		-		-		-		(157)		(2)		-		-		2,320		296
Loan repurchase commitments		835		-		58		-		-		-		12		-		-		-		-		905		58
Total assets	$	4,467	$	(3)	$	329	$	51	$	(8)	$	57	$	13	$	(273)	$	(48)	$	207	$	(264)	$	4,528	$	378

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 June 30, 2011
Liabilities:
Medium-term notes	$	116	$	-	$	78	$	-	$	12	$	-	$	-	$	-	$	-	$	-	$	-	$	206	$	78
Credit derivatives, net		4,350		605		1,307		-		-		-		-		(605)		-		-		-		5,657		2,128
Interest rate derivatives, net		(5)		-		-		-		-		-		-		-		-		1		-		(4)		1
Liabilities of consolidated VIEs:
VIE notes		4,673		-		584		-		-		-		-		(564)		(180)		-		-		4,513		584
Credit derivatives, net		768		-		152		-		-		-		-		-		-		-		-		920		151
Currency derivatives, net		14		-		2		-		-		-		-		-		-		-		-		16		2
Total liabilities	$	9,916	$	605	$	2,123	$	-	$	12	$	-	$	-	$	(1,169)	$	(180)	$	1	$	-	$	11,308	$	2,944

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

Transfers into and out of Level 3 were $103 million and $55 million, respectively, for the six months ended June 30, 2012. Transfers into and out of Level 2 were $55 million and $103 million, respectively, for the six months ended June 30, 2012. These transfers were principally for residential mortgage-backed non-agency, corporate obligations and CDOs and other asset-backed 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 and residential mortgage-backed agency comprised the majority of the transferred instruments out of Level 3. There were no transfers into or out of Level 1. For the six months ended June 30, 2012, net unrealized losses included in other comprehensive income on securities transferred into Level 3 were $17 million and net unrealized losses included in other comprehensive income on securities transferred out of Level 3 were $5 million.

Transfers into and out of Level 3 were $208 million and $264 million, respectively, for the six months ended June 30, 2011. Transfers into and out of Level 2 were $264 million and $208 million, respectively, for the six months ended June 30, 2011. These transfers were principally for available-for-sale securities where inputs, which are significant to their valuation, became observable or unobservable during the quarter. These inputs included spreads, prepayment speeds, default speeds, default severities, yield curves observable at commonly quoted intervals, and market corroborated inputs. Corporate obligations and CDOs comprised the majority of the transferred instruments. There were no transfers into or out of Level 1. For the six months ended June 30, 2011, the net unrealized losses included in other comprehensive income related to the transfers into Level 3 were $1 million and the net unrealized gains included in other comprehensive income related to the transfers out of Level 3 were $22 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 relating to Level 3 assets and liabilities for the three months ended June 30, 2012 and 2011 are reported on the Company’s consolidated statements of operations as follows:

	Three Months Ended June 30, 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 Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange
Total gains (losses) included in earnings	$	1,202	$	(446)	$	18	$	(160)
Change in unrealized gains (losses) for the period included in earnings for assets and liabilities still held as of June 30, 2012	$	641	$	-	$	18	$	(148)

	Three Months Ended June 30, 2011
							Consolidated VIEs
In millions	Unrealized Gains (Losses) on Insured Derivatives		Net Realized Gains (Losses)		Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange		Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange
Total gains (losses) included in earnings	$	116	$	(220)	$	(38)	$	63
Change in unrealized gains (losses) for the period included in earnings for assets and liabilities still held as of June 30, 2011	$	(897)	$	-	$	(41)	$	114

Gains and losses (realized and unrealized) included in earnings relating to Level 3 assets and liabilities for the six months ended June 30, 2012 and 2011 are reported on the Company’s consolidated statements of operations as follows:

	Six Months Ended June 30, 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 Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange
Total gains (losses) included in earnings	$	1,505	$	(543)	$	17	$	(274)
Change in unrealized gains (losses) for the period included in earnings for assets and liabilities still held as of June 30, 2012	$	571	$	-	$	9	$	(206)

	Six Months Ended June 30, 2011
							Consolidated VIEs
In millions	Unrealized Gains (Losses) on Insured Derivatives		Net Realized Gains (Losses)		Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange		Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange
Total gains (losses) included in earnings	$	(1,307)	$	(608)	$	(78)	$	(409)
Change in unrealized gains (losses) for the period included in earnings for assets and liabilities still held as of June 30, 2011	$	(2,128)	$	-	$	(79)	$	(359)

Fair Value Option

The Company elected to record at fair value certain financial instruments of 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 and six months ended June 30, 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 June 30,				Six Months Ended June 30,
In millions	2012		2011		2012		2011
Fixed-maturity securities held at fair value	$	(56)	$	(265)	$	(57)	$	(52)
Loans receivable at fair value:
Residential mortgage loans		(117)		29		(99)		130
Other loans		(2)		(35)		(41)		7
Loan repurchase commitments		44		39		43		70
Other assets		-		18		-		(22)
Long-term debt		135		252		128		(115)

Substantially all gains and losses included in earnings during the six months ended June 30, 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.

The following table reflects the difference between the aggregate fair value and the aggregate remaining contractual principal balance outstanding as of June 30, 2012 and December 31, 2011 for loans and variable interest entity notes for which the fair value option was elected:

	As of June 30, 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	$	2,533	$	1,755	$	778	$	2,769	$	1,895	$	874
Residential mortgage loans (90 days or more past due)		258		41		217		259		-		259
Other loans		88		32		56		129		43		86
Other loans (90 days or more past due)		203		75		128		324		108		216
Total loans receivable at fair value	$	3,082	$	1,903	$	1,179	$	3,481	$	2,046	$	1,435
Variable interest entity notes	$	9,362	$	3,638	$	5,724	$	13,583	$	4,754	$	8,829