The Economist reports on the Wall Street mess

Today:

Even if markets can be stabilised this week, the pain is far from over—and could yet spread. Worldwide credit-related losses by financial institutions now top $500 billion, of which only $350 billion of equity has been replenished. This $150 billion gap, leveraged 14.5 times (the average gearing for the industry), translates to a $2 trillion reduction in liquidity. Hence the severe shortage of credit and predictions of worse to come.

Indeed, most analysts think that the deleveraging still has far to go. Some question how much has taken place. Bianco Research notes that while the credit positions of the 20 largest banks have fallen by $300 billion, to $1.3 trillion, since the Fed started its special lending facilities, the same amount has been financed by the Fed itself through these windows. In other words, instead of deleveraging, the banks have just shifted a chunk of their risk to the central bank. As spectacular as this weekend was, more drama is on the way.

That last point is important, as the Federal Reserve's own balance sheet now carries significantly more risk than it did even a year ago.

From a previous post:

... The Fed's latest balance sheet... does, in fact, show a drop of approximately 40% in their Treasury holdings. They hold around $480 billion in Treasuries now, the figure was about $780 billion a year ago. The overall size of the portfolio is unchanged, so the takeaway is that the risk the Fed is exposed to has shot up. They've essentially been taking on risky assets from shaky institutions.