Financial Instruments

9 Months Ended

Aug. 31, 2011

Financial Instruments [Abstract]

Financial Instruments

Note 5. Financial Instruments

The following is a summary of our financial assets and liabilities that are accounted for at fair value on a recurring basis as of August 31, 2011 and November 30, 2010 by level within the fair value hierarchy (in thousands):

	As of August 31, 2011
								Counterparty
								and Cash
								Collateral
	Level 1 (3)		Level 2 (3)		Level 3			Netting (2)			Total
Assets:
Financial instruments owned:
Corporate equity securities	$	1,523,277	$	141,909	$	11,412		$	—		$	1,676,598
Corporate debt securities		7,438		4,150,581		55,230			—			4,213,249
Collateralized debt obligations		—		92,298		96,664			—			188,962
U.S. government and federal agency securities		1,932,703		230,780		—			—			2,163,483
Municipal securities		—		682,807		686			—			683,493
Sovereign obligations		1,994,296		690,154		128			—			2,684,578
Residential mortgage-backed securities		—		3,787,720		171,519			—			3,959,239
Commercial mortgage-backed securities		—		488,196		40,195			—			528,391
Other asset-backed securities		—		107,538		3,478			—			111,016
Loans and other receivables		—		364,518		164,163			—			528,681
Derivatives		967,618		1,557,787		155			(1,609,418	)		916,142
Investments at fair value		—		24,405		92,428			—			116,833
Physical commodities		—		369,281		—			—			369,281
Total financial instruments owned	$	6,425,332	$	12,687,974		636,058		$	(1,609,418	)	$	18,139,946
Level 3 assets for which the firm does not bear economic exposure (1)						(68,987	)
Level 3 assets for which the firm bears economic exposure					$	567,071
Cash and securities segregated and on deposit for regulatory purposes	$	407,096	$	—	$	—		$	—		$	407,096
Securities received as collateral	$	40,401	$	—	$	—		$	—		$	40,401
Liabilities:
Financial instruments sold, not yet purchased:
Corporate equity securities	$	1,622,547	$	113,615	$	59		$	—		$	1,736,221
Corporate debt securities		21,901		2,450,144		—			—			2,472,045
U.S. government and federal agency securities		2,381,050		351,749		—			—			2,732,799
Sovereign obligations		1,830,082		715,354		—			—			2,545,436
Residential mortgage-backed securities		—		81,955		—			—			81,955
Commercial mortgage-backed securities		—		117		—			—			117
Loans		—		144,188		11,458			—			155,646
Derivatives		674,857		1,836,983		3,601			(1,919,499	)		595,942
Total financial instruments sold, not yet purchased	$	6,530,437	$	5,694,105	$	15,118		$	(1,919,499	)	$	10,320,161
Obligation to return securities received as collateral	$	40,401	$	—	$	—		$	—		$	40,401

(1)	Consists of Level 3 assets attributable to third party or employee noncontrolling interests in certain consolidated entities.
(2)	Represents counterparty and cash collateral netting across the levels of the fair value hierarchy for positions with the same counterparty.

(3) There were no significant transfers between Level 1 and Level 2 for the three-months and nine-months ended August 31, 2011.

	As of November 30, 2010
								Counterparty
								and Cash
								Collateral
	Level 1		Level 2		Level 3			Netting (2)			Total
Assets:
Financial instruments owned:
Corporate equity securities	$	1,453,744	$	89,430	$	22,619		$	—		$	1,565,793
Corporate debt securities		25		3,557,183		73,408			—			3,630,616
Collateralized debt obligations		—		27,863		31,121			—			58,984
U.S. government and federal agency securities		2,322,204		210,422		—			—			2,532,626
Municipal securities		—		477,462		472			—			477,934
Sovereign obligations		1,600,762		580,651		—			—			2,181,413
Residential mortgage-backed securities		—		3,912,708		132,359			—			4,045,067
Commercial mortgage-backed securities		—		524,614		6,004			—			530,618
Other asset-backed securities		—		286,329		567			—			286,896
Loans and other receivables		—		206,977		227,596			—			434,573
Derivatives		279,811		176,069		—			(336,612	)		119,268
Investments at fair value		—		—		77,784			—			77,784
Total financial instruments owned	$	5,656,546	$	10,049,708		571,930		$	(336,612	)	$	15,941,572
Level 3 assets for which the firm does not bear economic exposure (1)						(204,139	)
Level 3 assets for which the firm bears economic exposure					$	367,791
Securities received as collateral	$	48,616	$	—	$	—		$	—		$	48,616
Liabilities:
Financial instruments sold, not yet purchased:
Corporate equity securities	$	1,554,489	$	83,845	$	38		$	—		$	1,638,372
Corporate debt securities		—		2,375,925		—			—			2,375,925
U.S. government and federal agency securities		1,688,684		51,604		—			—			1,740,288
Municipal securities		—		170		—			—			170
Sovereign obligations		2,180,667		814,163		—			—			2,994,830
Residential mortgage-backed securities		—		127,547		—			—			127,547
Commerical mortgage-backed securities		—		1,837		—			—			1,837
Loans		—		124,050		47,228			—			171,278
Derivatives		241,860		240,866		2,346			(425,520	)		59,552
Total financial instruments sold, not yet purchased	$	5,665,700	$	3,820,007	$	49,612		$	(425,520	)	$	9,109,799
Obligation to return securities received as collateral	$	48,616	$	—	$	—		$	—		$	48,616

(1)	Consists of Level 3 assets which are either financed by nonrecourse secured financings or attributable to third party or employee noncontrolling interests in certain consolidated entities.
(2)	Represents counterparty and cash collateral netting across the levels of the fair value hierarchy for positions with the same counterparty.

We elected to apply the fair value option to loans and loan commitments made in connection with our investment banking and sales and trading activities and certain investments held by subsidiaries that are not registered broker-dealers. Loans and investments at fair value are included in Financial instruments owned and loan commitments are included in Financial instruments owned — Derivatives and Financial instruments sold, not yet purchased — Derivatives on the Consolidated Statements of Financial Condition. The fair value option was elected for loans and loan commitments and investments held by subsidiaries that are not registered broker-dealers because they are risk managed by us on a fair value basis. We have elected to apply the fair value option to certain secured financings that arise in connection with our securitization activities. At August 31, 2011 and November 30, 2010, $-0- million and $85.7 million, respectively, in secured financings, are included within Other liabilities on the Consolidated Statement of Financial Position, are accounted for at fair value and are classified as Level 3 liabilities. Cash and cash equivalents, the cash component of Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations, Receivables — Brokers, dealers and clearing organizations, Receivables — Customers, Receivables — Fees, interest and other, Payables — Brokers, dealers and clearing organizations and Payables — Customers, are not accounted for at fair value; however, the recorded amounts approximate fair value due to their liquid or short-term nature.

The following is a description of the valuation basis, including valuation techniques and inputs, used in measuring our financial assets and liabilities that are accounted for at fair value on a recurring basis:

Corporate Equity Securities

• Exchange Traded Equity Securities: Exchange-traded equity securities are measured based on quoted exchange prices, which are generally obtained from pricing services, and are categorized as Level 1 in the fair value hierarchy.

• Non-exchange Traded Equity Securities: Non-exchange traded equity securities are measured primarily using broker quotations, pricing service data from external providers and prices observed for recently executed market transactions and are categorized within Level 2 of the fair value hierarchy. Where such information is not available, non-exchange traded equity securities are categorized as Level 3 financial instruments and measured using valuation techniques involving quoted prices of or market data for comparable companies, similar company ratios and multiples (e.g., price/EBITDA, price/book value), discounted cash flow analyses and transaction prices observed for subsequent financing or capital issuance by the company. When using pricing data of comparable companies, judgment must be applied to adjust the pricing data to account for differences between the measured security and the comparable security (e.g., issuer market capitalization, yield, dividend rate, geographical concentration).

• Equity warrants: Non-exchange traded equity warrants are generally classified within Level 3 of the fair value hierarchy and are measured using the Black-Scholes model with key inputs impacting the valuation including the underlying security price, implied volatility, dividend yield, interest rate curve, strike price and maturity date.

Corporate Debt Securities

• Corporate Bonds: Corporate bonds are measured primarily using pricing service data from external providers and broker quotations, where available, prices observed for recently executed market transactions of comparable size, and bond spreads or credit default swap spreads of the issuer adjusted for basis differences between the swap curve and the bond curve. Corporate bonds measured using these valuation methods are categorized within Level 2 of the fair value hierarchy. If broker quotes, pricing data or spread data is not available, alternative valuation techniques are used including cash flow models incorporating interest rate curves, single name or index credit default swap curves for comparable issuers and recovery rate assumptions. Corporate bonds measured using alternative valuation techniques are classified within Level 3 of the fair value hierarchy and comprise a limited portion of our corporate bonds.

• High Yield Corporate and Convertible Bonds: A significant portion of our high yield corporate and convertible bonds are classified within Level 2 of the fair value hierarchy and are measured primarily using broker quotations and pricing service data from external providers, where available, and prices observed for recently executed market transactions of comparable size. Where pricing data is less observable, valuations are classified in Level 3 and are based on pending transactions involving the issuer or comparable issuers, prices implied from an issuer’s subsequent financings or recapitalizations, models incorporating financial ratios and projected cash flows of the issuer and market prices for comparable issuers.

• Auction Rate Securities: Auction rate securities (“ARS”) included within corporate debt securities include ARS backed by pools of student loans and auction rate preferred securities issued by closed end mutual funds. ARS are measured using market data provided by external service providers, as available. The fair value of ARS is also determined by benchmarking to independent market data and adjusting for projected cash flows, level of seniority in the capital structure, leverage, liquidity and credit rating, as appropriate. ARS are classified within Level 3 of the fair value hierarchy based on our assessment of the transparency of the external market data received.

Collateralized Debt Obligations

Collateralized debt obligations are measured based on prices observed for recently executed market transactions or based on valuations received from third party brokers and are classified within Level 2 or Level 3 of the fair value hierarchy depending on the observability of the pricing inputs.

U.S. Government and Federal Agency Securities

• U.S. Treasury Securities: U.S. Treasury securities are measured based on quoted market prices and categorized in Level 1 of the fair value hierarchy.

• U.S. Agency Issued Debt Securities: Callable and non-callable U.S. agency issued debt securities are measured primarily based on quoted market prices obtained from external pricing services. Non-callable U.S. agency securities are generally classified within Level 1 of the fair value hierarchy and callable U.S. agency securities are classified within Level 2.

Municipal Securities

Municipal securities are measured based on quoted prices obtained from external data providers and generally classified within Level 2 of the fair value hierarchy.

Sovereign Obligations

• G-7 Government and non-G-7 Government Bonds: G-7 government and non-G-7 government bonds are measured based on quoted market prices obtained from external pricing services. G-7 government bonds are categorized within Level 1 of the fair value hierarchy and non-G-7 government bonds are generally categorized within Level 2.

• Emerging Market Sovereign Debt Securities: Valuations are primarily based on market price quotations from external data providers, where available, or recently executed independent transactions of comparable size. To the extent market price quotations are not available or recent transactions have not been observed, valuation techniques incorporating foreign currency curves, interest rate yield curves and country spreads for bonds of similar issuers, seniority and maturity are used to determine fair value. Emerging market sovereign debt securities are generally classified within Level 2 of the fair value hierarchy.

Residential Mortgage-Backed Securities

• Agency Residential Mortgage-Backed Securities: Agency residential mortgage-backed securities include mortgage pass-through securities (fixed and adjustable rate), collateralized mortgage obligations, interest-only and principal-only securities and to-be-announced securities and are generally measured using market price quotations from external data providers and categorized within Level 2 of the fair value hierarchy.

• Agency Residential Inverse Interest-Only Securities (“Agency Inverse IOs”): The fair value of agency inverse IOs is estimated using expected future cash flow techniques that incorporate prepayment models and other prepayment assumptions to amortize the underlying mortgage loan collateral. We use prices observed for recently executed transactions to develop market-clearing spread and yield curve assumptions. Valuation inputs with regard to underlying collateral incorporate weighted average coupon, loan-to-value, credit scores, geographic location, maximum and average loan size, originator, servicer, and weighted average loan age. Agency inverse IOs are categorized within Level 2 of the fair value hierarchy. We also use vendor data in developing assumptions, as appropriate.

• Non-Agency Residential Mortgage-Backed Securities: Fair values are determined primarily using discounted cash flow methodologies and securities are categorized within Level 2 or Level 3 of the fair value hierarchy based on the observability of the pricing inputs used. Performance attributes of the underlying mortgage loans are evaluated to estimate pricing inputs, such as prepayment rates, default rates and the severity of credit losses. Attributes of the underlying mortgage loans that affect the pricing inputs include, but are not limited to, weighted average coupon; average and maximum loan size; loan-to-value; credit scores; documentation type; geographic location; weighted average loan age; originator; servicer; historical prepayment, default and loss severity experience of the mortgage loan pool; and delinquency rate. Yield curves used in the discounted cash flow models are based on observed market prices for comparable securities and published interest rate data to estimate market yields.

Commercial Mortgage-Backed Securities

• Agency Commercial Mortgage-Backed Securities: GNMA project loan bonds and FNMA DUS mortgage-backed securities are generally measured by using prices observed for recently executed market transactions to estimate market-clearing spread levels for purposes of estimating fair value. GNMA project loan bonds and FNMA DUS mortgage-backed securities are categorized within Level 2 of the fair value hierarchy.

• Non-Agency Commercial Mortgage-Backed Securities: Non-agency commercial mortgage-backed securities are measured using pricing data obtained from third party services and prices observed for recently executed market transactions and are categorized within Level 2 and Level 3 of the fair value hierarchy.

Other Asset-Backed Securities

Other asset-backed securities include, but are not limited to, securities backed by auto loans, credit card receivables and student loans and are categorized primarily within Level 2 of the fair value hierarchy. Valuations are determined using pricing data obtained from third party services and prices observed for recently executed market transactions.

Loans and Other Receivables

• Corporate Loans: Corporate loans categorized within Level 2 of the fair value hierarchy are measured based on market price quotations from external data providers where sufficient observability exists as to the extent of market transaction data supporting the pricing data. Corporate loans categorized within Level 3 are measured based on market price quotations that are considered to be less transparent, market prices for debt securities of the same creditor, and estimates of future cash flow incorporating assumptions regarding creditor default and recovery rates and consideration of the issuer’s capital structure.

• Participation Certificates in GNMA Project and Construction Loans: Valuations of participation certificates in GNMA project and construction loans are based on observed market prices of recently executed purchases of similar loans which are then used to derive a market implied spread. The market implied spread is used as the primary input in estimating the fair value of loans at the measurement date. The loan participation certificates are categorized within Level 2 of the fair value hierarchy given the observability and volume of recently executed transactions.

• Project Loans: Valuation of project loans are based on benchmarks of prices for recently executed transactions of related realized collateralized securities and are classified within Level 2 of the fair value hierarchy.

• Escrow and Trade Claim Receivables: Escrow and trade claim receivables are categorized within Level 3 of the fair value hierarchy where fair value is estimated based on reference to market prices and implied yields of debt securities of the same or similar issuers. Escrow and trade claim receivables are categorized within Level 2 where fair value is based on recent trade activity in the same security.

Derivatives

•	Listed Derivative Contracts: Listed derivative contracts are measured based on quoted exchange prices, which are generally obtained from pricing services, and are categorized as Level 1 in the fair value hierarchy.
•	OTC Derivative Contracts: OTC derivative contracts are generally valued using models, whose inputs reflect assumptions that we believe market participants would use in valuing the derivative in a current period transaction. Inputs to valuation models are appropriately calibrated to market data. For many OTC derivative contracts, the valuation models do not involve material subjectivity as the methodologies do not entail significant judgment and the inputs to valuation models do not involve a high degree of subjectivity as the valuation model inputs are readily observable or can be derived from actively quoted markets. OTC derivative contracts are primarily categorized in Level 2 of the fair value hierarchy given the observability of the inputs to the valuation models.
	OTC options include OTC equity and commodity options measured using Black-Scholes models with key inputs impacting the valuation including the underlying security or commodity price, implied volatility, dividend yield, interest rate curve, strike price and maturity date. Discounted cash flow models are utilized to measure certain OTC derivative contracts including the valuations of our interest rate swaps, which incorporate observable inputs related to interest rate curves, and valuations of our foreign exchange forwards and swaps, which incorporate observable inputs related to foreign currency spot rates and forward curves. Credit defaults swaps include both index and single-name credit default swaps. External prices are available as inputs in measuring index credit default swaps and single-name credit default swaps. For commodity and equity total return swaps, market prices are observable for the underlying asset and used as the basis for measuring the fair value of the derivative contracts. Total return swaps executed on other underlyings are measured based on valuations received from third parties.

Physical Commodities

Physical commodities include crude oil and refined products, natural gas, base and precious metals and agricultural products and are measured using observable inputs including spot prices and published indices. Physical commodities are categorized in Level 2 of the fair value hierarchy.

Investments at Fair Value

Investments at fair value include primarily investments in hedge funds, fund of funds, private equity funds and commodity funds, which are measured based on the net asset value of the funds provided by the fund managers and categorized within Level 2 or Level 3 of the fair value hierarchy. Investments at fair value also include direct equity investments in private companies, which are measured using valuation techniques involving quoted prices of or market data for comparable companies, similar company ratios and multiples (e.g., price/EBITDA, price/book value), discounted cash flow analyses and transaction prices observed for subsequent financing or capital issuance by the company. Direct equity investments in private companies are categorized within Level 3 of the fair value hierarchy. Additionally, investments at fair value include investments in insurance contracts relating to our German defined benefits pension plan and shares in non-US exchanges and clearing houses. Fair value for the insurance contracts is determined using a third party and are categorized in Level 3 of the fair value hierarchy. Fair value for the shares in non-US exchanges and clearing houses is determined based on a third party model valuation and are categorized in Level 3 of the fair value hierarchy. The following tables provide further information about our investments in entities that have the characteristics of an investment company at August 31, 2011 and November 30, 2010 (in thousands):

	August 31, 2011
			Unfunded		Redemption Frequency
	Fair Value (f)		Commitments		(if currently eligible)
Equity Long/Short Hedge Funds (a)	$	27,282	$	—	Monthly, Quarterly, Semiannually
High Yield Hedge Funds(b)		993		—		—
Fund of Funds(c)		881		127	Annually
Private Equity Funds(d)		21,198		5,897		—
Commodity Funds(e)		14,569		—	Bi-Monthly
Total(g)	$	64,923	$	6,025

	November 30, 2010
			Unfunded		Redemption Frequency
	Fair Value (f)		Commitments		(if currently eligible)
Equity Long/Short Hedge Funds (a)	$	19,865	$	—	Quarterly, Semiannually
High Yield Hedge Funds(b)		1,561		—		—
Fund of Funds(c)		2,622		131	Annually
Private Equity Funds(d)		26,567		6,792		—
Other Investments(h)		287		—	At Will
Total(g)	$	50,902	$	6,923

(a)	This category includes investments in hedge funds that invest in both long and short equity securities in domestic and international markets in both public and private sectors. At August 31, 2011 and November 30, 2010, investments representing approximately 98% and 67%, respectively, of the fair value in this category are redeemable with 30 - 90 days prior written notice. At November 30, 2010, investments representing approximately 30% of fair value cannot be redeemed until the lock-up period expired on December 31, 2010. At August 31, 2011 and November 30, 2010, investments representing approximately 2% and 3% respectively, of fair value cannot be redeemed as they are in liquidation and distributions will be received through the liquidation of the underlying assets of the funds. We are unable to estimate when the underlying assets will be liquidated. At August 31, 2011 and November 30, 2010, an investment representing less than 1% of fair value has no redemption provisions; distributions are received through the liquidation of the underlying assets of the fund which is estimated to be within one to two years.
(b)	This category includes investments in funds that invest in domestic and international public high yield debt, private high yield investments, senior bank loans, public leveraged equities, distressed debt, and private equity investments. There are no redemption provisions and distributions are received through the liquidation of the underlying assets of the funds. At August 31, 2011 and November 30, 2010, these investments are currently in liquidation and we are unable to estimate when the underlying assets will be fully liquidated.
(c)	This category includes investments in fund of funds that invest in various private equity funds. At August 31, 2011 and November 30, 2010, approximately 95% and 41%, respectively, of the fair value of investments in this category is managed by us and has no redemption provisions. Distributions are received through the liquidation of the underlying assets of the fund of funds, which are estimated to be liquidated in one to three years. At August 31, 2011 we requested redemption for investments representing approximately 5% of fair value at August 31, 2011, however we are unable to estimate when these funds will be returned. At November 30, 2010, investments representing approximately 59% of the fair value were approved for redemption and the funds’ net asset values were received in the first quarter of 2011.

(d)	At August 31, 2011 and November 30, 2010, investments representing approximately 81% and 74% respectively, include investments in private equity funds that invest in the equity of various private companies in the energy, technology, internet service and telecommunication service industries including acquired or restructured companies. These investments cannot be redeemed; distributions are received through the liquidation of the underlying assets of the funds and are expected to liquidate in one to ten years. At August 31, 2011, a fund that invests in Croatian companies represents approximately 19% of the total investment in private equity funds. At November 30, 2010, funds that invest in Croatian and Vietnamese companies represent approximately 26% of the total investment in private equity funds.
(e)	At August 31, 2011, this category included investments in funds that invest in various commodity futures contracts on futures exchanges and forward contracts, exchange-traded options on futures contracts and other commodity-related or commodity-linked financial instruments. These investments can be redeemed on the fifteenth and last calendar day of each month with prior written notice within five business days.
(f)	Fair value has been estimated using the net asset value derived from each of the funds’ partner capital statements.
(g)	Investments at fair value, in the Consolidated Statements of Financial Condition at August 31, 2011 and November 30, 2010 include $51.9 million and $26.9 million, respectively, of direct investments which are not investment companies and therefore are not part of this disclosure table.
(h)	Other Investments at November 30, 2010 included investments in closed-ended funds that invested in Vietnamese equity and debt instruments.

At August 31, 2011 and November 30, 2010, our Financial instruments owned and Financial instruments sold, not yet purchased are measured using different valuation basis as follows:

	August 31, 2011						November 30, 2010
				Financial						Financial
	Financial			Instruments Sold,			Financial			Instruments Sold,
	Instruments			Not Yet			Instruments			Not Yet
	Owned			Purchased			Owned			Purchased
Exchange closing prices		10	%		16	%		9	%		17	%
Recently observed transaction prices		7	%		2	%		5	%		2	%
Data providers/pricing services		67	%		74	%		65	%		60	%
Broker quotes		1	%		1	%		12	%		19	%
Valuation techniques		15	%		7	%		9	%		2	%
		100	%		100	%		100	%		100	%

Pricing information obtained from external data providers may incorporate a range of market quotes from dealers, recent market transactions and benchmarking model derived prices to quoted market prices and trade data for comparable securities. External pricing data is subject to evaluation for reasonableness using a variety of means including comparisons of prices to those of similar product types, quality and maturities, consideration of the narrowness or wideness of the range of prices obtained, knowledge of recent market transactions and an assessment of the similarity in prices to comparable dealer offerings in a recent time period.

The following is a summary of changes in fair value of our financial assets and liabilities that have been classified as Level 3 for the three months ended August 31, 2011 (in thousands):

	Three Months Ended August 31, 2011
																Change in
			Total gains/			Purchases,										unrealized gains/
			losses			sales,										(losses) relating to
			(realized and			settlements,			Transfers		Transfers			Balance,		instruments still held
	Balance,		unrealized)			and issuances,			into		out of			August 31,		at August 31, 2011
	May 31, 2011		(1)			net			Level 3		Level 3			2011		(1)
Assets:
Financial instruments owned:
Corporate equity securities	$	18,230	$	1,720		$	2,631		$	861	$	(12,030	)	$	11,412	$	(154	)
Corporate debt securities		39,688		(4,069	)		6,230			14,425		(1,044	)		55,230		(7,349	)
Collateralized debt obligations		84,046		(3,417	)		9,325			19,029		(12,319	)		96,664		(5,413	)
Municipal securities		858		11			(183	)		—		—			686		1
Sovereign obligations		—		—			128			—		—			128		—
Residential mortgage-backed securities		206,721		(12,527	)		15,276			41,510		(79,461	)		171,519		(12,917	)
Commercial mortgage-backed securities		33,516		(3,652	)		(292	)		17,364		(6,741	)		40,195		(3,690	)
Other asset-backed securities		9,352		(329	)		2,773			99		(8,417	)		3,478		(329	)
Loans and other receivables		261,056		710			(92,362	)		27,077		(32,318	)		164,163		(116	)
Investments at fair value		71,008		2,397			19,045			11		(33	)		92,428		(938	)
Liabilities:
Financial instruments sold, not yet purchased:
Corporate equity securities	$	38	$	21		$	—		$	—	$	—		$	59	$	20
Net derivatives (2)		2,739		696			—			—		11			3,446		687
Loans		6,398		(230	)		5,290			—		—			11,458		(230	)

(1)	Realized and unrealized gains/ losses are reported in Principal transactions in the Consolidated Statements of Earnings.
(2)	Net derivatives represent Financial instruments owned — Derivatives and Financial instruments sold, not yet purchased — Derivatives.

Analysis of Level 3 Assets and Liabilities for the Three Months Ended August 31, 2011

During the three months ended August 31, 2011, transfers of assets of $120.4 million from Level 2 to Level 3 are primarily attributed to:

• Non-agency residential mortgage-backed securities, collateralized debt obligations, and commercial mortgage backed securities due to less observable trading activity and vendor quotes that were not corroborated to market transactions;

• Loans and other receivables due to lower number of contributors comprising vendor quotes to support classification in Level 2; and

• Corporate debt securities due to lack of observable market transactions.

During the three months ended August 31, 2011, transfers of assets of $152.4 million from Level 3 to Level 2 are primarily attributed to:

• Non-agency residential mortgage-backed securities, collateralized debt obligations, other asset-backed securities, and commercial mortgage backed securities for which market trades were observed in the period for either identical or similar securities or for which vendor prices were corroborated to actual market transactions;

• Loans and other receivables due to greater number of contributors comprising vendor quotes supporting classification into Level 2; and

• Corporate equity securities due to announced market transactions or more observable market data on comparable securities used as a benchmark.

During the three months ended August 31, 2011 there were no transfers of liabilities from Level 2 to Level 3 and $.01 million transfers of liabilities from Level 3 to Level 2.

Net losses on Level 3 assets were $19.2 million and net losses on Level 3 liabilities were $0.5 million for the three months ended August 31, 2011. Net losses on Level 3 assets were primarily due to decreased valuations of various residential mortgage-backed securities, corporate debt, collateralized debt obligations, and commercial mortgage-backed securities, offset by sales of certain investments at fair value, corporate debt, and collateralized debt obligations.

The following is a summary of changes in fair value of our financial assets and liabilities that have been classified as Level 3 for the three months ended August 31, 2010 (in thousands):

	Three Months Ended August 31, 2010
																Change in
			Total gains/													unrealized gains/
			losses			Purchases,										(losses) relating to
	Balance,		(realized and			sales,			Transfers		Transfers			Balance,		instruments still held
	May 31,		unrealized)			settlements,			into		out of			August 31,		at August 31, 2010
	2010		(1)			and issuances			Level 3		Level 3			2010		(1)
Assets:
Financial instruments owned:
Corporate equity securities	$	21,918	$	1,327		$	2,751		$	—	$	(417	)	$	25,579	$	(789	)
Corporate debt securities		100,275		(714	)		3,149			54		(1,480	)		101,284		(813	)
Collateralized debt obligations		21,957		(495	)		352			4,492		—			26,306		(615	)
U.S. issued municipal securities		436		(7	)		—			—		—			429		(7	)
Residential mortgage-backed securities		148,833		5,914			(8,770	)		23,143		(1,281	)		167,839		404
Commercial mortgage-backed securities		1,000		—			50			—		(1,000	)		50		—
Other asset-backed securities		369		—			(369	)		—		—			—		—
Loans and other receivables		145,181		(4,735	)		(55,105	)		—		—			85,341		(4,139	)
Investments at fair value		72,297		8,060			(3,724	)		2,723		—			79,356		9,145
Liabilities:
Financial instruments sold, not yet purchased:
Corporate equity securities	$	38	$	—		$	—		$	58	$	—		$	96	$	—
Corporate debt securities		14,365		(1,275	)		(13,090	)		—		—			—		—
Net derivatives (2)		1,271		523			—			—		(500	)		1,294		523
Loans		68,242		—			(42,130	)		—		—			26,112		—

(1)	Realized and unrealized gains/ losses are reported in Principal transactions in the Consolidated Statements of Earnings.
(3)	Net derivatives represent Financial instruments owned — derivatives and Financial instruments sold, not yet purchased — derivatives.

During the three months ended August 31, 2010, we had transfers of assets of $30.4 million from Level 2 to Level 3, which are primarily attributed to transfers of non-agency mortgage-backed securities for which no recent trade activity was observed for purposes of determining observable inputs. Transfers of assets from Level 3 to Level 2 during the three months ended August 31, 2010 were $4.2 million.

Net gains on Level 3 assets were $9.4 million and net gains on Level 3 liabilities were $0.8 million for the three months ended August 31, 2010. Net gains on Level 3 assets were attributed to sales of residential mortgage-backed securities and due to increased valuations of various alternative investments.

The following is a summary of changes in fair value of our financial assets and liabilities that have been classified as Level 3 for the nine months ended August 31, 2011 (in thousands):

	Nine Months Ended August 31, 2011
																Change in
			Total gains/			Purchases,										unrealized gains/
			losses			sales,										(losses) relating to
	Balance,		(realized and			settlements,			Transfers		Transfers			Balance,		instruments still held
	November 30,		unrealized)			and issuances,			into		out of			August 31,		at August 31, 2011
	2010		(1)			net			Level 3		Level 3			2011		(1)
Assets:
Financial instruments owned:
Corporate equity securities	$	22,619	$	2,905		$	(3,040	)	$	816	$	(11,888	)	$	11,412	$	(422	)
Corporate debt securities		73,408		(487	)		(22,533	)		6,304		(1,462	)		55,230		(5,906	)
Collateralized debt obligations		31,121		10,423			54,351			779		(10	)		96,664		9,632
Municipal securities		472		89			125			—		—			686		78
Sovereign obligations		—		—			128			—		—			128		—
Residential mortgage-backed securities		132,359		(8,354	)		64,906			29,901		(47,293	)		171,519		(25,284	)
Commercial mortgage-backed securities		6,004		1,625			25,574			6,992		—			40,195		112
Other asset-backed securities		567		(604	)		3,156			926		(567	)		3,478		(604	)
Loans and other receivables		227,596		2,476			(57,473	)		9,006		(17,442	)		164,163		(1,452	)
Investments at fair value		77,784		9,326			8,421			—		(3,103	)		92,428		6,495
Liabilities:
Financial instruments sold, not yet purchased:
Corporate equity securities	$	38	$	21		$	—		$	—	$	—		$	59	$	20
Net derivatives (2)		2,346		1,100			—			—		—			3,446		1,200
Loans		47,228		(230	)		(35,540	)		—		—			11,458		(230	)

(1)	Realized and unrealized gains/ losses are reported in Principal transactions in the Consolidated Statements of Earnings.
(2)	Net Derivatives represent Financial instruments owned — derivatives and Financial instruments sold, not yet purchased — Derivatives.

Analysis of Level 3 Assets and Liabilities for the Nine Months Ended August 31, 2011

During the nine months ended August 31, 2011, transfers of assets of $54.7 million from Level 2 to Level 3 are primarily attributed to:

• Non-agency residential mortgage-backed securities and commercial asset backed securities due to a tightening in the historical trading period used for corroborating market data and a greater scrutiny of vendor prices;

• Loans and other receivables due to lower number of contributors comprising vendor quotes to support classification in Level 2; and

• Corporate debt securities due to lack of observable market transactions.

During the nine months ended August 31, 2011, transfers of assets of $81.8 million from Level 3 to Level 2 are primarily attributed to:

• Non-agency residential mortgage-backed securities for which market trades were observed in the period for either identical or similar securities or for which vendor prices were corroborated to actual market transactions;

• Loans and other receivables due to greater number of contributors comprising vendor quotes supporting classification into Level 2; and

• Corporate equity securities due to announced market transactions or more observable market data on comparable securities used as a benchmark.

During the nine months ended August 31, 2011 there were no transfers of liabilities from Level 2 to Level 3 or from Level 3 to Level 2.

Net gains on Level 3 assets were $17.4 million and net losses on Level 3 liabilities were $0.9 million for the nine months ended August 31, 2011. Net gains on Level 3 assets were primarily due to sales or settlements of various residential mortgage-backed securities, corporate debt securities, loans and other receivables, investments at fair value, and corporate equity securities, increased valuations of certain collateralized debt obligations and investments at fair value, offset by decreased valuations of certain residential mortgage-backed securities and corporate debt securities.

The following is a summary of changes in fair value of our financial assets and liabilities that have been classified as Level 3 for the eight months ended August 31, 2010 (in thousands):

	Eight Months Ended August 31, 2010
																Change in
						Purchases,										unrealized gains/
			Total gains/			sales,										(losses) relating to
	Balance,		losses			settlements,			Transfers		Transfers			Balance,		instruments still
	December		(realized and			and			into		out of			August 31,		held at August 31,
	31, 2009		unrealized) (1)			issuances			Level 3		Level 3			2010		2010 (1)
Assets:
Financial instruments owned:
Corporate equity securities	$	43,042	$	(20,125	)	$	5,467		$	143	$	(2,948	)	$	25,579	$	(22,524	)
Corporate debt securities		116,648		(1,056	)		(1,084	)		75		(13,299	)		101,284		1,060
Collateralized debt obligations		9,570		5,397			4,067			7,272		—			26,306		4,840
U.S. issued municipal securities		420		9			—			—		—			429		9
Sovereign obligations		196		—			—			—		(196	)		—		—
Residential mortgage-backed securities		136,496		21,857			(5,893	)		23,435		(8,056	)		167,839		6,888
Commercial mortgage-backed securities		3,215		11			(1,241	)		—		(1,935	)		50		—
Other asset-backed securities		110		—			(110	)		—		—			—		—
Loans and other receivables		506,542		38,029			(302,151	)		—		(157,079	)		85,341		14,960
Investments at fair value		65,564		13,744			(3,991	)		4,039		—			79,356		11,029
Liabilities:
Financial instruments sold, not yet purchased:
Corporate equity securities	$	—	$	—		$	—		$	96	$	—		$	96	$	—
Corporate debt securities		—		(2,210	)		2,210			—		—			—		—
Net derivatives (2)		6,835		(3,585	)		—			—		(1,956	)		1,294		(3,585	)
Loans		352,420		(344	)		(214,670	)		—		(111,294	)		26,112		—

(1)	Realized and unrealized gains/ losses are reported in Principal transactions in the Consolidated Statements of Earnings.
(2)	Net derivatives represent Financial instruments owned — derivatives and Financial instruments sold, not yet purchased — derivatives.

During the eight months ended August 31, 2010, we had transfers of assets of $35.0 million from Level 2 to Level 3, which are primarily attributed to transfers of non-agency mortgage-backed securities for which no recent trade activity was observed for purposes of determining observable inputs. Additionally, transfers of assets from Level 2 to Level 3 are attributed to certain investments at fair value and investments in managed funds, which have little to no transparency as to trade activity. Transfers of assets from Level 3 to Level 2 during the eight months ended August 31, 2010 were $183.5 million primarily attributed to corporate loans, for which we obtained additional market pricing data from third party sources during the quarter that provided additional transparency into the valuation process for these assets; residential mortgage-backed securities, for which market trades were observed in the period for either identical or similar securities; and corporate debt securities, for which market transactions were announced or market data on comparable securities used as a benchmark became more observable.

Transfers of liabilities from Level 2 to Level 3 were $0.1 million and transfers of liabilities from Level 3 to Level 2 were $113.3 million for the eight months ended August 31, 2010. Transfers of liabilities from Level 3 to Level 2 during the three and eight months ended August 31, 2010 are primarily due to transfers of corporate loans, for which we obtained additional market pricing data from third party sources during the quarter that provided additional transparency into the valuation process for these liabilities.

Net gains on Level 3 assets were $57.9 million and net gains on Level 3 liabilities were $6.1 million for the eight months ended August 31, 2010. Net gains on Level 3 assets were primarily due to increased valuations of various alternative investments, sales of certain corporate loans and improved credit conditions and enhanced recovery estimates for certain residential mortgage-backed securities.

Level 3 cash instruments are frequently hedged with instruments classified within Level 1 and Level 2, and accordingly, gains and losses that have been reported in Level 3 are frequently offset by gains or losses attributable to instruments classified within Level 1 or Level 2 or by gains or losses on derivative contracts classified in Level 3 of the fair value hierarchy.