Lehman

'All is not resolved' is how Morgan Stanley's Arnaud Mares begins his latest diatribe on the debacle that is occurring in Europe. While a disorderly default seems to have been avoided (for now), the Greek problem (as we have discussed extensively) remains unsolved as debt sustainability seems questionable at best, economic recovery a remote hope, and the growing political tensions across Europe (and its people) grow wider. Critically, Mares addresses the seeming complacency towards a Greek exit from the euro area noting that it is no small matter and has dramatic consequences (specifically a la Lehman, the unintended consequences could be catastrophic). Greece (or another nation) leaving the Euro invites concerns over the fungibility of bank deposits across weak and strong nations and with doubt over the Euro, the EU could collapse as free-trade broke down. The key is that, just as in the US downgrade case last year, a Euro-exit implies the impossible is possible and the impact of such an event is much, much higher than most seem to realize. While the likelihood of a Greek euro-exit may remain low (for now), the scale of the impact makes this highly material and suggests the EU will do whatever it takes (print?) within their mandates to hold the status quo. For all practical purposes, it would be the end of the euro as a genuine single currency and to preserve the euro if Greece left would require total federalism in the rest of the area.

Although no one can be sure of Buffett's motives, it would be naïve to believe that someone as intelligent as Buffett has not considered the benefits of pushing through this tax structure. Higher taxes are always problems for entrepreneurs and regular people in the economy. However, they're often beneficial to the well-connected, who receive government bailouts and favors. And with Buffett even on the president's lips, he is becoming more connected to the power mechanism in D.C. every day. With many of Berkshire's companies, your loss as a taxpayer will be their gains.

One thing is for certain, the litigation is beginning to shift from minor players to major players at the core of the Financial Crisis. Investors take note, this is a major shift and needs to be monitored as it will have major implications for market dynamics going forward.

The equities market is acting like we know Greece's default will be orderly and no threat to financial stability. It is also acting like we know the U.S. economy can grow smartly while Europe contracts in recession. Lastly, the high level of confidence exuded by market participants suggests we know central bank liquidity is endlessly supportive of equities. What do we really know about the coming default of Greece? Whether we openly call it default or play semantic games with "voluntary haircuts," we know bondholders will absorb tremendous losses that are equivalent to default. We also suspect some bondholders will refuse to play nice and accept their voluntary haircuts. Beyond that, how much do we know about how this unprecedented situation will play out?

In a late, and somewhat underplayed, story from the WSJ, it appears that we may finally get some answers on exactly what former-Treasury-Secretary-to-be Geithner knew and sanctioned in the lead up to the Lehman fail. More specifically how JPMorgan illegally siphoned billions of dollars from Lehman in the final days, potentially via Geithner's FRBNY-overseen tri-party repo market. We discussed this at length almost two years ago as the FRBNY was concerned at the ongoing risk of the market being structurally vulnerable to a repo run and furthermore why Lehman's suit against JPMorgan had grounds. Critically, with Geithner being the man at the helm of the entity that approved repo entry and exit and in the final stages clearly sided with JP Morgan as collateral calls rained down, it makes sense to at least find out what he knew and decided - under oath.

Are we really in an economic recovery or is it a figment of the Fed's quantitative easing? This will be the biggest factor in the 2012 elections.

When Greece defaults, the fall-out will be much, much larger than people expect simply by virtue of the fact that everyone is lying about their exposure to Greece.

Now everybody's bank bashing, of course the reason to bash the banks is 4 years old, despite Bove-like analysis to the contrary. I will discuss this on CNBC for a FULL HOUR tomorrow from 12 pm to 1pm.

Hubris is at the heart of this. Everyone says this cannot happen – we won’t allow it. Says who? The EU says: if it is written in an agreement, it must be totally correct, unchangeable, and followed at all costs. New realities can’t intervene and no slippage is allowed. Why the Germans are so sure that they know the future is beyond me. They are fallible too, but they won’t admit it, and the Greeks can’t make them budge. Haven’t they looked around? Santorini has a different economic and social cost structure than Wiesbaden. Humanity (and common sense) seems totally lacking in the negotiations with the Greeks and a violent backlash would be totally understandable. Why the countries that have been fattening up their current account surpluses selling products to Greeks, whom they should have known were basically broke – just as they always have been – should be paid 100% on the euro is beyond me. Major losses should apply not only to sovereign borrowings but also to accounts receivable for cars, electronics, and other consumer goods. The market has not opened its eyes to the impact this Greek unraveling will have. The Eurozone will be mortally wounded and the world will suffer a significant recession – maybe as deep as 2008. European banks will lose much of their capital base and many should be bankrupt, but just as in the Lehman aftermath, the governments will try to save the banks and the banks’ bondholders, solvent or not. As the bank appetite for Eurozone sovereign paper will be decimated, austerity will probably follow shortly, followed by deflation and uncontrollable money creation. The European recession should be one for the record books.

The onslaught of 'favorable' jobs numbers continues with the latest initial claims printing at 348K, down from an upward revised 361K, on expectations of a rise to 365K. This was the lowest number since March 2008. As a reminder, the abnormally warm January and February weather as discussed previously by David Rosenberg is a key reason in the ongoing favorable impression of the economy that this data skew creates. Granted the self-delusion of employers is just as palpable as that of market participants: claims went from sub 400K in the days before Lehman to nearly 600K in the weeks after. Continuing claims printed at 3.426MM down from 3.526MM, on expectations of 3.495K. Those seeing the 99-week expire increased as 23K people dropped out of EUCs and Extended Claims. Expect to see this "favorable" trend reverse within weeks, as the groundwork for more easing has to be set (more on that shortly). Elsewhere, the headline PPI came below expectations of 0.4%, printing at 0.1%, up from -0.1% previously, while Core PPI, paradoxically, beat this time, rising from 0.3% to 0.4%, on consensus of a decline to 0.2%. Finally Housing Starts was a meaningless and noisy 699K on expectations of 675K, where it has been crawling along the bottom for years. Permits Missed Expectations of 680K coming at 676K.

While these pages have been warning for about a month that a Greek default is precisely what Europe wants, a self-deluded market has been ignoring this reality. That is no longer the case as the default (pardon the pun) thought is now one of Greek default. As for the assumption that "it is all priced in"... that too is being scrapped as revisionist histories of Lehman come to mind. As a result the EURUSD is drifting ever lower, and has been trading with a 1.29 handle for the first time in weeks. Needless to say, Europe is on the verge of panic as the nearly 2-month impact of the LTRO is now truly gone, and with unmistakable stigma (sorry Jernej Omahen - read this) associated with LTRO banks, we shudder at the thought how many banks will voluntarily subject themselves to being seen as desperately needing European Discount Window access in two weeks. Moody's downgrade of key insurance companies and threat to cut most banks, has not helped. Finally, some unpleasant news out of China, where commerce ministry said that the trade outlook is "grim" while a research with the Chinese Academy of Sciences said that Chinese EFSF contribution should be capped at Spain's €92.6 billion, rounds out the rout. So while we wait patiently as reality in Europe truly seeps into risk prices, here is Bloomberg with a summary of overnight catalysts.

For a while now we have said that the very weakest link in Europe is not the banks, not the ECB, not triggered CDS, and not even the shadow banking system (well, infinitely rehypothecated Greek bonds within a daisychain of broker-dealers, which ultimately ends up at the ECB at a negligible repo discount, that could well be the weakest link - we will have more to say about this over the weekend) but two very specific insurers: Italy's mega insurer Assecurazioni Generali, which at last check had more Greek bonds as a % of TSF than anyone else, and Europe's biggest insurer and Pimco parent, Allianz, which is filled to the gills with pretty much everything (for more on Generali, or as we like to call it by its CDS ticker ASSGEN read here, here, here, and here). Well, Moody's just gave them, and the entire European space, the evil eye, and soon the layering of margin calls upon margin calls, especially if and when Greece defaults and a third of ASSGEN's balance sheet is found to be insolvent, will make anyone who still is long CDS those two names rich. Assuming of course the Fed steps in and bails out the counterparty the CDS was purchased from.

What is better than a one-front European war on insolvency? Why two-fronts of course. But not before many "soothing" words are uttered (no really). From Reuters: "Portugal's international lenders arrived in Lisbon on Wednesday to review the country's bailout, with soothing words of support likely to dominate as Europe gropes for success stories to counteract its interminable Greek headache. As the euro zone's second weakest link, Portugal's ability to ride out its debt crisis will be key to Europe's claim that Greece is a unique case. Despite a groundswell of concerns that Portugal - like Greece - may eventually have to restructure its aid programme, the third inspection of Lisbon's economic performance in the context of its ongoing 78-billion-euro rescue should make that contention clear. "The review will be all about peace and harmony," said Filipe Garcia, head of Informacao de Mercados Financeiros consultants. "The important thing for Europe is to isolate Portugal from Greece, to put it out of Greece's way in case of a default or even an exit from the euro." That makes sense - after all even Venizelos just told Greece that the country is not Italy. And if that fails, the Don of bailouts, Dr Strangeschauble will just give the country will blessing to use a few billion in cash. Oh but wait. It can't. Because as as we pointed out in late January, and as the market has so conveniently chosen to forget, Portugal, unlike Greece, has simple, clean and efficient negative pledge language in its non-local law bonds. Which means "no can do" to any additional bailouts under its current capitalization. Which may very well mean that Portugal is stuck with its existing balance sheet unless the country succeeds in doing an exchange offer which takes out all UK- and other strong-protection bonds. All of them. And as Greece has shown, that is just not going to happen.

The complacency of the markets is amazing given the risks at hand. I don't think I'm that smart, so is it that so many others are that stupid? It can't be, can it?

Equity markets are dislocating from credit and volatility risk. "Real " risk markets suggest something bigger could be happening sooner than later. We see some similarities to the famous 2008 Lehman week.