Expert View: The casualty ward is filling up. Soon the doctors will be overrun

I recently read an account of what it was like working in a hospital during a particularly bad air raid. The doctors began the night well prepared, giving the best care to the first patients who came in. But as the night wore on, the casualties multiplied beyond any sensible planning, and by the end of it, the medical staff were left dis- traught at being forced to leave hopeless cases for dead, to concentrate on potential survivors. I think Mervyn King would understand that feeling.

Watching the Governor squirm before the Parliamentary committee must have made compulsive viewing in Frankfurt, where his recent high handedness towards the European Central Bank, and his boasts about the superior Bank of England strategy, won him few friends. A Parisian banker I know couldn't stop laughing, while a contact in Buenos Aires told me that Argentinians were rubbing their hands with glee.

That we should come to this. But if anyone thinks the worst is over, or Mr King believes he has had to make his last tough decision, they are wrong. This crisis has barely begun, the victims will continue to multiply, and finding a remedy will require all our resourcefulness.

The two most obvious casualty groups are investment banks and hedge funds, but the situation is complex. Some American big-hitters announced figures last week, with Morgan Stanley suffering a 7 per cent earnings drop, and Bear Sterns a 61 per cent collapse in revenues. But Lehman Brothers did better than expected with a 3 per cent fall, and Goldman Sachs posted a mighty 79 per cent earnings rise.

Hedge funds are also much talked about, but there have been very mixed performances. Big names such as Tudor, Caxton and Atticus reported sharp falls in August, and one of the more disappointing performers has been Goldman's North American Opportunities fund, which is reportedly down 32 per cent.

We must certainly pity those caught up in Absolute Capital Management: the shares fell 65 per cent on Tuesday and another 55 per cent on Wednesday. The colourful founder Florian Homm disappeared "on holiday" last week having resigned very publicly. He admitted putting €33m (£23m) of his own money into funds to cover up a loss of 5 per cent or so last month. Following his departure, the board "discovered" that huge amounts of his funds were invested in illiquid US micro-caps – this despite the August report for the "high octane" fund which claimed only 16 per cent in total in US assets and "a strong large-cap bias."

Nevertheless, the average fund across the industry was down only 1.5 per cent in August. In that context, the current crisis would not even rank as one of the worst the industry has seen. Many have made a lot of money – and not just those who shorted Northern Rock.

But let's not be complacent. This is only the beginning.

"Is he OK?" In the midst of the Northern Rock debacle, a friend rang worried about "John in commodities". Brushing his concerns aside – "commodities have nothing to do with this" – I was later shocked to discover that John was indeed struggling to steer his business through the storm. The whipsawing in commodity prices triggered by speculation around the US Federal Reserve's rate cut has claimed many unseen victims.

Casualties are starting to spring up in unexpected places. On Thursday the Spanish real estate company Llanera admitted it was in emergency talks with its bankers. In Korea, small and medium-sized construction firms are falling like flies.

And there is mounting evidence that all this turbulence is feeding into the real world of the global economy, particularly in the US. In a little noticed announcement last week, delivery company FedEx cut its profit expectations – a real bellwether. Meanwhile, Standard & Poor's chooses to warn of a new wave of corporate failures in the US.

All of this adds up to a very soft economic picture as we enter the fourth quarter. That makes the action of the Fed all too understandable, and Mr King's dilemma all the more grave.

Christopher.walker@tiscali.co.uk