FAIR VALUE DISCLOSURES

Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (also referred to as an exit price).

In determining fair value, Farmer Mac uses various valuation approaches, including market and income approaches. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. When available, the fair value of Farmer Mac's financial instruments is based on quoted market prices, valuation techniques that use observable market-based inputs or unobservable inputs that are corroborated by market data. Pricing information obtained from third parties is internally validated for reasonableness prior to use in the consolidated financial statements.

When observable market prices are not readily available, Farmer Mac estimates fair value using techniques that rely on alternate market data or internally-developed models using significant inputs that are generally less readily observable. Market data includes prices of financial instruments with similar maturities and characteristics, interest rate yield curves, measures of volatility and prepayment rates. If market data needed to estimate fair value is not available, Farmer Mac estimates fair value using internally-developed models that employ a discounted cash flow approach. Even when market assumptions are not readily available, Farmer Mac's assumptions reflect those that market participants would likely use in pricing the asset or liability at the measurement date.

The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. The hierarchy gives highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The standard describes the following three levels used to classify fair value measurements:


Level 1	Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.


Level 2	Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly.


Level 3	Prices or valuations that require unobservable inputs that are significant to the fair value measurement.

Farmer Mac performs a detailed analysis of the assets and liabilities carried at fair value to determine the appropriate level based on the transparency of the inputs used in the valuation techniques. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Farmer Mac's assessment of the significance of a particular input to the fair value measurement of an instrument requires judgment and consideration of factors specific to the instrument. While Farmer Mac believes its valuation methods are appropriate and consistent with those of other market participants, using different methodologies or assumptions to determine fair value could result in a materially different estimate of fair value for some financial instruments.

The following is a description of the fair value techniques used for instruments measured at fair value as well as the general classification of such instruments pursuant to the valuation hierarchy described above. Fair value measurements related to financial instruments that are reported at fair value in the consolidated financial statements each period are referred to as recurring fair value measurements. Fair value measurements related to financial instruments that are not reported at fair value each period but are subject to fair value adjustments in certain circumstances are referred to as non-recurring fair value measurements.

Recurring Fair Value Measurements and Classification

Available-for-Sale and Trading Investment Securities

The fair value of investments in U.S. Treasuries is based on unadjusted quoted prices in active markets. Farmer Mac classifies these fair value measurements as level 1.

For a significant portion of Farmer Mac's investment portfolio, including most asset-backed securities, corporate debt securities, senior agency debt securities, Government/GSE guaranteed mortgage-backed securities, commercial paper and preferred stock issued by GSEs, fair value is primarily determined using a reputable and nationally recognized third party pricing service. The prices obtained are non-binding and generally representative of recent market trades. The fair value of certain asset-backed and Government guaranteed mortgage-backed securities are estimated based on quotations from brokers or dealers. Farmer Mac corroborates its primary valuation source by obtaining a secondary price from another independent third party pricing service. Farmer Mac classifies these fair value measurements as level 2.

For certain investment securities that are thinly traded or not quoted, Farmer Mac estimates fair value using internally-developed models that employ a discounted cash flow approach. Farmer Mac maximizes the use of observable market data, including prices of financial instruments with similar maturities and characteristics, interest rate yield curves, measures of volatility and prepayment rates. Farmer Mac generally considers a market to be thinly traded or not quoted if the following conditions exist: (1) there are few transactions for the financial instruments; (2) the prices in the market are not current; (3) the price quotes vary significantly either over time or among independent pricing services or dealers; or (4) there is a limited availability of public market information. Farmer Mac classifies these fair value measurements as level 3.

Farmer Mac's investment securities include callable, AAA-rated auction-rate certificates ("ARCs"), the interest rates on which are reset through an auction process, most commonly at intervals of 28 days, or at formula-based floating rates as set forth in the related transaction documents in the event of a failed auction. These formula-based floating rates, which may at times reset to zero, are intended to preserve the underlying principal balance of the securities and avoid overall cash shortfalls. Accordingly, payments of accrued interest may also be delayed and are ultimately subject to cash availability. Beginning in mid-February 2008, there were widespread failures of the auction mechanism designed to provide regular liquidity to these types of securities. Consequently, Farmer Mac has not sold any of its ARCs into the auctions since that time. All ARCs held by Farmer Mac are collateralized entirely by pools of Federal Family Education Loan Program ("FFELP") guaranteed student loans that are backed by the full faith and credit of the United States. Farmer Mac continues to believe that the credit quality of these securities is high, based on the underlying collateralization and the securities' continued AAA ratings. To date, Farmer Mac has received all interest due on ARCs it holds and expects to continue to do so.

Farmer Mac classifies its estimates of fair value for ARCs as level 3 measurements. During 2011 and 2010, Farmer Mac used unadjusted quotes from a broker specializing in these types of securities to determine the estimated fair value of these investments as of each quarter end. Through discussions with the broker, Farmer Mac gained an understanding of the assumptions underlying the broker quotes and independently benchmarked those quotes against other dealer price indications. Farmer Mac believes the broker quotes are the best indication of fair value as of the measurement date, although there is uncertainty regarding the ability to transact at such levels. Considering there is no active secondary market for these securities, although limited observable transactions do occasionally occur, price quotes vary significantly among dealers or independent pricing services, if provided at all, and there is little transparency in the price determination, Farmer Mac believes these measurements are appropriately classified as level 3. During 2009, Farmer Mac used a discounted cash flow model to determine the estimated fair value of these investments and classified the ARCs fair value measurements as level 3.

Net transfers in and/or out of the different levels within the fair value hierarchy are based on the fair values of the assets and liabilities as of the beginning of the reporting period. There were no transfers within the fair value hierarchy for fair value measurements of Farmer Mac's investment securities during 2011. Transfers within the fair value hierarchy for the fair value measurements of Farmer Mac's investment securities during 2009 and 2010 are described below.

During second quarter 2009, Farmer Mac transferred its investment in the subordinated debt of CoBank, ACB with a par value of $70.0 million from level 2 to level 3 for purposes of estimating its fair value. Farmer Mac determined that the third party pricing service used to estimate fair value for this security as a level 2 investment, in second quarter 2009, provided a price that, while representative of a recent market trade, was not reflective of an orderly transaction. Farmer Mac used its internally-developed models as an alternative valuation technique to estimate fair value as a level 3 investment.

During first quarter 2010, Farmer Mac transferred its investments in the subordinated debt and preferred stock of CoBank, ACB and its investment in the preferred stock of AgFirst Farm Credit Bank, with par values of $70.0 million, $88.5 million and $88.0 million, respectively, as of December 31, 2009, from level 3 measurements to level 2 measurements. Taking into consideration its own recently executed trades during first quarter 2010, along with an increase in observable trading activity for these securities, Farmer Mac determined that the best estimates of fair value for these securities as of March 31, 2010, and continuing throughout 2011, were the fair values provided by an independent third party pricing service.

Available-for-Sale and Trading Farmer Mac Guaranteed Securities and USDA Guaranteed Securities

Farmer Mac estimates the fair value of its Farmer Mac Guaranteed Securities and USDA Guaranteed Securities by discounting the projected cash flows of these instruments at projected interest rates. The fair values are based on the present value of expected cash flows using management's best estimate of certain key assumptions, which include prepayment speeds, forward yield curves and discount rates commensurate with the risks involved. Farmer Mac classifies these fair value measurements as level 3 because there is limited market activity and therefore little or no price transparency. On a sample basis, Farmer Mac corroborates the fair value of its Farmer Mac Guaranteed Securities and USDA Guaranteed Securities by obtaining a secondary valuation from an independent third party service.

Farmer Mac made no transfers within the fair value hierarchy for fair value measurements of Farmer Mac Guaranteed Securities and USDA Guaranteed Securities during 2011. Transfers out of level 3 during 2009 and 2010 resulted from the consolidation of certain trusts whereby the underlying assets were no longer reported at fair value on a recurring basis. Transfers out of level 3 are based on the fair values of the assets as of the beginning of the reporting period and are described in more detail below.

In first quarter 2009, Farmer Mac transferred $263.4 million amortized cost basis of available-for-sale Farmer Mac I Guaranteed Securities to loans held-for-sale upon the consolidation of certain trusts in which Farmer Mac held 100 percent of the beneficial ownership interests. Farmer Mac then terminated the trusts and sold a portion of the underlying loans. Because loans held-for-sale are subject to fair value adjustments only when the amortized cost exceeds the fair value, these fair value measurements will be classified as level 3 on a nonrecurring basis.

Upon the adoption of the new consolidation guidance on January 1, 2010, Farmer Mac was deemed to be the primary beneficiary of certain VIEs where Farmer Mac held beneficial interests in trusts used as vehicles for the securitization of agricultural real estate mortgage loans or rural utilities loans. Prior to 2010, Farmer Mac presented these beneficial interests as "Farmer Mac Guaranteed Securities" on the consolidated balance sheets and reported them at their fair value. Upon consolidation, Farmer Mac transferred these assets from "Farmer Mac Guaranteed Securities" to "Loans held for investment in consolidated trusts." These loans are reported at their amortized cost and are no longer included in recurring fair value measurements. Farmer Mac transferred these securities out of level 3 based on their fair values as of the beginning of first quarter 2010.

Financial Derivatives

The fair value of exchange-traded U.S. Treasury futures is based on unadjusted quoted prices for identical financial instruments. Farmer Mac classifies these fair value measurements as level 1.

Farmer Mac's derivative portfolio consists primarily of interest rate swaps, credit default swaps and forward sales contracts on the debt of other GSEs. Farmer Mac estimates the fair value of these financial instruments based upon the counterparty valuations. Farmer Mac internally values its derivative portfolio using a discounted cash flow valuation technique and obtains a secondary valuation for certain interest rate swaps to corroborate the counterparty valuations. Farmer Mac also regularly reviews the counterparty valuations as part of the collateral exchange process. Farmer Mac classifies these fair value measurements as level 2.

Certain basis swaps are nonstandard interest rate swap structures and are therefore internally modeled using significant assumptions and unobservable inputs, resulting in level 3 classification. Farmer Mac uses a discounted cash flow valuation technique, using management's best estimate of certain key assumptions, which include prepayment speeds, forward yield curves and discounted rates commensurate with the risks involved.

As of December 31, 2011, the consideration of credit risk, Farmer Mac's and the counterparties, resulted in an adjustment to the valuations of Farmer Mac's derivative portfolio of $0.2 million. As of December 31, 2010, the consideration of credit risk, Farmer Mac's and the counterparties', resulted in an adjustment to the valuations of Farmer Mac's derivative portfolio of $(0.4) million.

Nonrecurring Fair Value Measurements and Classification

Loans Held-for-Sale

Loans held for sale are reported at the lower of cost or fair value in the consolidated balance sheets. Farmer Mac internally models the fair value of loans by discounting the projected cash flows of these instruments at projected interest rates. The fair values are based on the present value of expected cash flows using management's best estimate of certain key assumptions, which include prepayment speeds, forward yield curves and discount rates commensurate with the risks involved. The fair values of these instruments are classified as level 3 measurements. As of December 31, 2011, the fair values of loans held for sale exceeded their cost amounts. Accordingly, Farmer Mac recorded no adjustment to report these loans at the lower of cost or fair value. As of December 31, 2010, Farmer Mac recorded an adjustment of $8.7 million to report loans held for sale at the lower of cost or fair value.

Loans Held for Investment

Certain loans in Farmer Mac's held for investment loan portfolio are measured at fair value when they are determined to be impaired. Impaired loans are reported at fair value less estimated cost to sell. The fair value of the loan generally is based on the fair value of the underlying property, which is determined by third-party appraisals when available. When third-party appraisals are not available, fair value is estimated based on factors such as prices for comparable properties in similar geographical areas and/or assessment through observation of such properties. Farmer Mac classifies these fair values as level 3 measurements.

Real Estate Owned

Farmer Mac initially records REO properties at fair value less estimated costs to sell and subsequently records them at the lower of carrying value or fair value less estimated costs to sell. The fair value of REO is determined by third-party appraisals when available. When third-party appraisals are not available, fair value is estimated based on factors such as prices for comparable properties in similar geographical areas and/or assessment through observation of such properties. Farmer Mac classifies the REO fair values as level 3 measurements.

Fair Value Classification and Transfers

As of December 31, 2011, Farmer Mac's assets and liabilities recorded at fair value included financial instruments valued at $5.9 billion whose fair values were estimated by management in the absence of readily determinable fair values (i.e., level 3). These financial instruments measured as level 3 represented 49 percent of total assets and 72 percent of financial instruments measured at fair value as of December 31, 2011. As of December 31, 2010, Farmer Mac's assets and liabilities recorded at fair value included financial instruments valued at $4.6 billion whose fair values were estimated by management in the absence of readily determinable fair values. These financial instruments measured as level 3 represented 49 percent of total assets and 71 percent of financial instruments measured at fair value as of December 31, 2010.

The following tables present information about Farmer Mac's assets and liabilities measured at fair value on a recurring and nonrecurring basis as of December 31, 2011 and 2010, respectively, and indicates the fair value hierarchy of the valuation techniques used by Farmer Mac to determine such fair value:



Assets and Liabilities Measured at Fair Value as of December 31, 2011
	Level 1		Level 2		Level 3		Total
	(in thousands)
Recurring:
Assets:
Investment Securities:
Available-for-sale:
Floating rate auction-rate certificates backed by Government guaranteed student loans	$	—	$	—	$	60,213	$	60,213
Floating rate asset-backed securities	—		178,560		—		178,560
Floating rate corporate debt securities	—		73,833		—		73,833
Floating rate Government/GSE guaranteed mortgage-backed securities	—		764,038		—		764,038
Fixed rate GSE guaranteed mortgage-backed securities	—		3,360		—		3,360
Floating rate GSE subordinated debt	—		52,562		—		52,562
Fixed rate GSE preferred stock	—		84,878		—		84,878
Fixed rate corporate debt	—		38,699		—		38,699
Fixed rate commercial paper	—		10,000		—		10,000
U.S. Treasuries	799,266		—		—		799,266
Senior agency debt	—		117,285		—		117,285
Total available-for-sale	799,266		1,323,215		60,213		2,182,694
Trading:
Floating rate asset-backed securities	—		—		1,796		1,796
Total trading	—		—		1,796		1,796
Total Investment Securities	799,266		1,323,215		62,009		2,184,490
Farmer Mac Guaranteed Securities:
Available-for-sale:
Farmer Mac I	—		—		2,807,627		2,807,627
Farmer Mac II	—		—		35,599		35,599
Rural Utilities	—		—		1,446,046		1,446,046
Total Farmer Mac Guaranteed Securities	—		—		4,289,272		4,289,272
USDA Guaranteed Securities:
Available-for-sale	—		—		1,279,546		1,279,546
Trading	—		—		212,359		212,359
Total USDA Guaranteed Securities	—		—		1,491,905		1,491,905
Financial derivatives	—		40,250		—		40,250
Total Assets at fair value	$	799,266	$	1,363,465	$	5,843,186	$	8,005,917
Liabilities:
Financial derivatives	$	—	$	158,689	$	1,335	$	160,024
Total Liabilities at fair value	$	—	$	158,689	$	1,335	$	160,024
Nonrecurring:
Assets:
Loans held for sale	$	—	$	—	$	—	$	—
Loans held for investment	—		—		10,118		10,118
REO	—		—		1,296		1,296
Total Nonrecurring Assets at fair value	$	—	$	—	$	11,414	$	11,414



Assets and Liabilities Measured at Fair Value as of December 31, 2010
	Level 1		Level 2		Level 3		Total
	(in thousands)
Recurring:
Assets:
Investment Securities:
Available-for-sale:
Floating rate auction-rate certificates backed by Government guaranteed student loans	$	—	$	—	$	64,335	$	64,335
Floating rate asset-backed securities	—		29,458		—		29,458
Floating rate corporate debt securities	—		163,188		—		163,188
Floating rate Government/GSE guaranteed mortgage-backed securities	—		576,780		—		576,780
Fixed rate GSE guaranteed mortgage-backed securities	—		4,821		—		4,821
Floating rate GSE subordinated debt	—		55,329		—		55,329
Fixed rate GSE preferred stock	—		84,828		—		84,828
U.S. Treasuries	692,994		—		—		692,994
Senior agency debt	—		5,500		—		5,500
Total available-for-sale	692,994		919,904		64,335		1,677,233
Trading:
Floating rate asset-backed securities	—		—		1,400		1,400
Fixed rate GSE preferred stock	—		84,696		—		84,696
Total trading	—		84,696		1,400		86,096
Total Investment Securities	692,994		1,004,600		65,735		1,763,329
Farmer Mac Guaranteed Securities:
Available-for-sale:
Farmer Mac I	—		—		942,809		942,809
Farmer Mac II	—		—		37,637		37,637
Rural Utilities	—		—		1,926,818		1,926,818
Total available-for-sale	—		—		2,907,264		2,907,264
Total Farmer Mac Guaranteed Securities	—		—		2,907,264		2,907,264
USDA Guaranteed Securities:
Available-for-sale	—		—		1,005,679		1,005,679
Trading	—		—		311,765		311,765
Total USDA Guaranteed Securities	—		—		1,317,444		1,317,444
Financial derivatives	—		41,492		—		41,492
Total Assets at fair value	$	692,994	$	1,046,092	$	4,290,443	$	6,029,529
Liabilities:
Financial derivatives	$	6	$	110,291	$	3,390	$	113,687
Total Liabilities at fair value	$	6	$	110,291	$	3,390	$	113,687
Nonrecurring:
Assets:
Loans held for sale	$	—	$	—	$	331,076	$	331,076
Loans held for investment	—		—		11,971		11,971
REO	—		—		1,925		1,925
Total Nonrecurring Assets at fair value	$	—	$	—	$	344,972	$	344,972

The following tables present additional information about assets and liabilities measured at fair value on a recurring and nonrecurring basis for which Farmer Mac has used significant level 3 inputs to determine fair value. Net transfers in and/or out of level 3 are based on the fair values of the assets and liabilities as of the beginning of the reporting period.



Level 3 Assets and Liabilities Measured at Fair Value for the Year Ended December 31, 2011
	Beginning Balance			Purchases		Sales			Settlements			Realized and Unrealized Gains/ (Losses) included in Income			Unrealized Gains/(Losses) included in Other Comprehensive Income			Transfers In		Transfer Out			Ending Balance
	(in thousands)
Recurring:
Assets:
Investment Securities:
Available-for-sale:
Floating rate auction-rate certificates backed by Government guaranteed student loans	$	64,335		$	—	$	—		$	—		$	—		$	(4,122	)	$	—	$	—		$	60,213
Total available-for-sale	64,335			—		—			—			—			(4,122		)	—		—			60,213
Trading:
Floating rate asset-backed securities(1)	1,400			—		—			(822		)	1,218			—			—		—			1,796
Total trading	1,400			—		—			(822		)	1,218			—			—		—			1,796
Total Investment Securities	65,735			—		—			(822		)	1,218			(4,122		)	—		—			62,009
Farmer Mac Guaranteed Securities:
Available-for-sale:
Farmer Mac I	942,809			1,801,500		—			(2,031		)	—			65,349			—		—			2,807,627
Farmer Mac II	37,637			3,268		(3,268		)	(4,334		)	—			2,296			—		—			35,599
Rural Utilities	1,926,818			—		—			(476,400		)	—			(4,372		)	—		—			1,446,046
Total Farmer Mac Guaranteed Securities	2,907,264			1,804,768		(3,268		)	(482,765		)	—			63,273			—		—			4,289,272
USDA Guaranteed Securities:
Available-for-sale	1,005,679			404,836		—			(172,785		)	—			41,816			—		—			1,279,546
Trading(2)	311,765			—		—			(102,525		)	3,119			—			—		—			212,359
Total USDA Guaranteed Securities	1,317,444			404,836		—			(275,310		)	3,119			41,816			—		—			1,491,905
Total Assets at fair value	$	4,290,443		$	2,209,604	$	(3,268	)	$	(758,897	)	$	4,337		$	100,967		$	—	$	—		$	5,843,186
Liabilities:
Financial derivatives(3)	$	(3,390	)	$	—	$	—		$	—		$	2,055		$	—		$	—	$	—		$	(1,335	)
Total Liabilities at fair value	$	(3,390	)	$	—	$	—		$	—		$	2,055		$	—		$	—	$	—		$	(1,335	)
Nonrecurring:
Assets:
Loans held for sale	$	331,076		$	—	$	—		$	(4,617	)	$	(964	)	$	—		$	116,395	$	(441,890	)	$	—
Loans held for investment	11,971			—		—			—			(390		)	—			1,100		(2,563		)	10,118
REO	1,925			—		(1,405		)	—			(265		)	—			1,041		—			1,296
Total Nonrecurring Assets at fair value	$	344,972		$	—	$	(1,405	)	$	(4,617	)	$	(1,619	)	$	—		$	118,536	$	(444,453	)	$	11,414


(1)	Unrealized gains are attributable to assets still held as of December 31, 2011 and are recorded in gains on trading assets.


(2)	Includes unrealized losses of $1.8 million attributable to assets still held as of December 31, 2011 that are recorded in gains on trading assets.


(3)	Unrealized gains are attributable to liabilities still held as of December 31, 2011 and are recorded in (losses)/gains on financial derivatives.



Level 3 Assets and Liabilities Measured at Fair Value for the Year Ended December 31, 2010
	Beginning Balance			Purchases, Sales, Issuances and Settlements, net			Realized and Unrealized Gains/(Losses) included in Income			Unrealized Gains/(Losses) included in Other Comprehensive Income			Net Transfers In and/ or Out			Ending Balance
	(in thousands)
Recurring:
Assets:
Investment Securities:
Available-for-sale:
Floating rate auction-rate certificates backed by Government guaranteed student loans	$	72,884		$	—		$	—		$	(8,549	)	$	—		$	64,335
Floating rate GSE subordinated debt	47,562			—			—			—			(47,562		)	—
Fixed rate GSE preferred stock	89,211			—			—			—			(89,211		)	—
Total available-for-sale	209,657			—			—			(8,549		)	(136,773		)	64,335
Trading:
Floating rate asset-backed securities(1)	1,824			(748		)	324			—			—			1,400
Fixed rate GSE preferred stock	88,148			—			—			—			(88,148		)	—
Total trading	89,972			(748		)	324			—			(88,148		)	1,400
Total Investment Securities	299,629			(748		)	324			(8,549		)	(224,921		)	65,735
Farmer Mac Guaranteed Securities:
Available-for-sale:
Farmer Mac I	56,864			892,670			—			(1,340		)	(5,385		)	942,809
Farmer Mac II	764,792			(1,607		)	—			(2,364		)	(723,184		)	37,637
Rural Utilities	1,703,211			212,202			—			11,405			—			1,926,818
Total available-for-sale	2,524,867			1,103,265			—			7,701			(728,569		)	2,907,264
Trading:
Farmer Mac II	422,681			—			—			—			(422,681		)	—
Rural Utilities	451,448			—			—			—			(451,448		)	—
Total trading	874,129			—			—			—			(874,129		)	—
Total Farmer Mac Guaranteed Securities	3,398,996			1,103,265			—			7,701			(1,602,698		)	2,907,264
USDA Guaranteed Securities:
Available-for-sale	—			277,987			—			4,508			723,184			1,005,679
Trading(2)	—			(113,491		)	2,575			—			422,681			311,765
Total USDA Guaranteed Securities	—			164,496			2,575			4,508			1,145,865			1,317,444
Total Assets at fair value	$	3,698,625		$	1,267,013		$	2,899		$	3,660		$	(681,754	)	$	4,290,443
Liabilities:
Financial derivatives(3)	$	(3,653	)	$	—		$	263		$	—		$	—		$	(3,390	)
Total Liabilities at fair value	$	(3,653	)	$	—		$	263		$	—		$	—		$	(3,390	)
Nonrecurring:
Assets:
Loans held for sale	$	28,505		$	—		$	(8,748	)	$	—		$	311,319		$	331,076
Loans held for investment	—			—			(4,743		)	—			16,714			11,971
REO	—			—			(2,183		)	—			4,108			1,925
Total Nonrecurring Assets at fair value	$	28,505		$	—		$	(15,674	)	$	—		$	332,141		$	344,972


(1)	Unrealized gains are attributable to assets still held as of December 31, 2010 and are recorded in gains on trading assets.


(2)	Includes unrealized losses of $2.0 million for assets still held as of December 31, 2010 that are recorded in gains on trading assets.


(3)	Unrealized gains are attributable to liabilities still held as of December 31, 2010 and are recorded in (losses)/gains on financial derivatives.



Level 3 Assets and Liabilities Measured at Fair Value for the Year Ended December 31, 2009
	Beginning Balance			Purchases, Sales, Issuances and Settlements, net			Realized and Unrealized Gains/(Losses) included in Income			Unrealized Gains/(Losses) included in Other Comprehensive Income			Net Transfers In and/or Out			Ending Balance
	(in thousands)
Recurring:
Assets:
Investment Securities:
Available-for-sale:
Floating rate auction-rate certificates backed by Government guaranteed student loans	$	178,577		$	(119,850	)	$	—		$	14,157		$	—		$	72,884
Floating rate GSE subordinated debt	—			—			—			(1,570		)	49,132			47,562
Fixed rate GSE preferred stock	—			(114		)	—			(1,332		)	90,657			89,211
Total available-for-sale	178,577			(119,964		)	—			11,255			139,789			209,657
Trading:
Floating rate asset-backed securities(1)	2,211			(785		)	398			—			—			1,824
Fixed rate GSE preferred stock(2)	161,552			(1,168		)	18,421			—			(90,657		)	88,148
Total trading	163,763			(1,953		)	18,819			—			(90,657		)	89,972
Total Investment Securities	342,340			(121,917		)	18,819			11,255			49,132			299,629
Farmer Mac Guaranteed Securities:
Available-for-sale:
Farmer Mac I	349,292			(2,219		)	—			(2,197		)	(288,012		)	56,864
Farmer Mac II	522,565			228,773			—			13,454			—			764,792
Rural Utilities	639,837			1,045,000			—			18,374			—			1,703,211
Total available-for-sale	1,511,694			1,271,554			—			29,631			(288,012		)	2,524,867
Trading:
Farmer Mac II(3)	496,863			(77,881		)	3,699			—			—			422,681
Rural Utilities(1)	442,687			(11,994		)	20,755			—			—			451,448
Total trading	939,550			(89,875		)	24,454			—			—			874,129
Total Farmer Mac Guaranteed Securities	2,451,244			1,181,679			24,454			29,631			(288,012		)	3,398,996
Total Assets at fair value	$	2,793,584		$	1,059,762		$	43,273		$	40,886		$	(238,880	)	$	3,698,625
Liabilities:
Financial Derivatives(4)	$	(3,719	)	$	—		$	66		$	—		$	—		$	(3,653	)
Total Liabilities at fair value	$	(3,719	)	$	—		$	66		$	—		$	—		$	(3,653	)
Nonrecurring:
Assets:
Loans held for sale	$	—		$	—		$	(139	)	$	—		$	28,644		$	28,505
REO	—			(41,786		)	—			—			41,786			—
Total Nonrecurring Assets at fair value	$	—		$	(41,786	)	$	(139	)	$	—		$	70,430		$	28,505


(1)	Unrealized gains are attributable to assets still held as of December 31, 2009 and are recorded in gains on trading assets.


(2)	Includes unrealized gains of $8.3 million for assets still held as of December 31, 2009 that are recorded in gains on trading assets.


(3)	Includes unrealized gains of approximately $1.4 million attributable to assets still held as of December 31, 2009 that are recorded in gains on trading assets.


(4)	Unrealized gains are attributable to liabilities still held as of December 31, 2009 and are recorded in (losses)/gains on financial derivatives.

Fair Value Option

Accounting guidance on the fair value option for financial instruments permits entities to make a one-time irrevocable election to report financial instruments at fair value with changes in fair value recorded in earnings as they occur. This guidance provides entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.

Farmer Mac made no fair value option elections during 2011, 2010 and 2009. For the years ended December 31, 2011, 2010 and 2009, Farmer Mac recorded gains of $2.2 million, $4.9 million, and $42.9 million respectively, for changes in the fair value of the assets previously selected for the fair value option. These gains are presented in "Gains on trading assets" in the consolidated statements of operations.

Disclosures on Fair Value of Financial Instruments

The following table sets forth the estimated fair values and carrying values for financial assets, liabilities and guarantees and commitments as of December 31, 2011 and 2010:



	As of December 31,
	2011				2010
	Fair Value		Carrying Amount		Fair Value		Carrying Amount
	(in thousands)
Financial assets:
Cash and cash equivalents	$	817,046	$	817,046	$	729,920	$	729,920
Investment securities	2,184,490		2,184,490		1,763,329		1,763,329
Farmer Mac Guaranteed Securities	4,289,272		4,289,272		2,907,264		2,907,264
USDA Guaranteed Securities	1,491,905		1,491,905		1,317,444		1,317,444
Loans	2,971,187		2,894,156		2,642,399		2,558,599
Financial derivatives	40,250		40,250		41,492		41,492
Interest receivable	110,339		110,339		90,295		90,295
Guarantee and commitment fees receivable:
LTSPCs	22,802		15,886		14,191		13,666
Farmer Mac Guaranteed Securities	17,960		15,498		19,058		21,086
Financial liabilities:
Notes payable:
Due within one year	6,091,573		6,087,879		4,510,758		4,509,419
Due after one year	4,288,670		4,104,882		3,530,656		3,430,656
Debt securities of consolidated trusts held by third parties	726,826		701,583		883,669		827,411
Financial derivatives	160,024		160,024		113,687		113,687
Accrued interest payable	60,854		60,854		57,131		57,131
Guarantee and commitment obligations:
LTSPCs	22,047		15,131		13,152		12,627
Farmer Mac Guaranteed Securities	14,771		12,309		15,653		17,681

The carrying value of cash and cash equivalents, certain short-term investment securities, interest receivable and accrued interest payable is a reasonable estimate of their approximate fair value. Farmer Mac estimates the fair value of its loans, guarantee and commitment fees receivable/obligation and notes payable by discounting the projected cash flows of these instruments at projected interest rates. The fair values are based on the present value of expected cash flows using management's best estimate of certain key assumptions, which include prepayment speeds, forward yield curves and discount rates commensurate with the risks involved. Because the cash flows of these instruments may be interest rate path dependent, these values and projected discount rates are derived using a Monte Carlo simulation model. Different market assumptions and estimation methodologies could significantly affect estimated fair value amounts.