Radian Group’s U.S. Consolidated federal income tax returns for tax years 2000 through 2007, which include the federal  tax returns of our wholly-owned subsidiary , CMAC of Texas, were examined by the IRS. We are currently contesting proposed  adjustments resulting from the IRS examination of these tax years, which would, if sustained, result in additional income taxes  of approximately $128 million plus proposed penalties of approximately $42 million.  Additionally, we would incur interest on  any sustained adjustments. Radian Group has agreed to indemnify CMAC of  Texas for any tax payments ultimately due to the  IRS for the proposed adjustments, which relate to the recognition of certain tax losses and deductions that were generated  through our investment in a portfolio of non-economic Real Estate Mortgage Investment Conduits (“REMICs”) residual  interests currently held by CMAC of  Texas. This indemnification was made in lieu of an immediate capital contribution to  CMAC of Texas that otherwise would have been required for CMAC of  Texas to maintain its minimum statutory surplus  requirements in light of remeasurement as of December 31, 201 1 of uncertain tax positions related to the portfolio of REMIC  residual interests.See “ The IRS is examining our tax returns for the years 2000 through 2007 .” Cash flows from our investment portfolio, dividends from Radian Guaranty and permitted payments to Radian Group  under tax- and expense-sharing arrangements with our subsidiaries are Radian Group’ s principal sources of cash. Radian  Guaranty’s ability to pay dividends to Radian Group is subject to various conditions imposed by the GSEs and rating agencies  and by insurance regulations requiring insurance department approval. In general, dividends in excess of prescribed limits are  deemed “extraordinary” and require insurance regulatory approval. In light of operating losses in Radian Guaranty , we do not  anticipate that it will be permitted under applicable insurance laws to issue dividends to Radian Group for the foreseeable  future. To the extent Radian Asset Assurance is able to declare dividends, these dividends will be paid to Radian Guaranty and  not to Radian Group. The expense-sharing arrangements between Radian Group and our insurance subsidiaries, as amended,  have been approved by applicable state insurance departments, but such approval may be changed at any time. In addition,  pursuant to the GSE Approvals for RMAI, GSE consent is required to alter , amend or otherwise modify the tax- and expense- sharing arrangements between Radian Guaranty , RMAI and their affiliates.  In light of Radian Group’s long- and short-term needs, we are considering various options to increase our capital and  liquidity position, such as incurring additional debt, by issuing additional equity or by selling assets, any of which we may be  unable to do on favorable terms, if at all.  The need to raise additional capital or the failure to make timely payments on our  obligations could have a material adverse ef fect on our financial condition and operating results. Our reported earnings are subject to fluctuations based on changes in our credit derivatives, trading securities, and other  financial instruments that require us to adjust their fair market value as reflected on our statements of operations. We have significant assets and liabilities that we carry at fair value, with changes in fair market value recorded on our  statements of operations each period.  These assets and liabilities include our credit derivatives, trading securities and  VIE debt  and related assets. Because the changes in fair value of these derivatives and other financial instruments are reflected on our  statements of operations, they af fect our reported earnings and create earnings volatility . Economic conditions, as well as  adverse capital market conditions, including but not limited to, credit spread changes, benchmark interest rate changes, market  volatility and declines in the value of underlying collateral will impact the value of our investments and derivatives, potentially  resulting in unrealized losses. Specifically with respect to our credit derivatives, the gains and losses on these contracts are derived from internally  generated models, which may differ from models used by our counterparties or others in the industry . We estimate fair value  amounts using market information, to the extent available, and valuation methodologies that we deem appropriate in order to  estimate the fair value amounts that would be exchanged to sell an asset or transfer a liability . Considerable judgment is  required to interpret available market data to develop the estimates of fair value. Since there currently is no active market for  many derivative products, we have had to use assumptions as to what could be realized in a current market exchange. In the  event that our investments or derivative contracts were sold or transferred in a forced liquidation or otherwise, the fair values  received or paid could be materially dif ferent from those reflected in our financial statements.  Additionally, our actual ultimate  credit losses on these derivatives could significantly exceed our fair value liabilities.  Temporary market or credit spread changes, as well as actual credit improvement or deterioration in our derivative  contracts, are reflected in changes in fair value of derivative instruments.  We also make an adjustment to our derivative liability  valuation methodology to account for our own non-performance risk by incorporating our observable CDS spread into the  determination of fair value of our credit derivatives. Our five-year CDS spread has increased significantly since January 2007  and was 913 basis points as of December 31, 2012. This market perception of our risk of non-performance has had the ef fect of  reducing our derivative liability valuations by approximately  $615.6 million as of December 31, 2012. Perceived improvement  in our financial condition could cause our CDS spread to tighten. If our CDS spread tightens significantly , and other credit  spreads utilized in our fair value methodologies remained constant, our earnings could be significantly reduced.  77