Less than a day after the Fed cut interest rates to stave off recession, and Wall Street is in the grip of fear and loathing. The big indices fell 2 per cent, led by the financial sector headed up by the world's biggest bank Citigroup. There were also some surprise problems with Exxon, Credit Suisse and bad consumer spending figures. Add to that The Wall Street Journal report that Merrill Lynch, which ended up with $8 billion of writedowns, was doing deals with hedge funds to cover up its mortgage related problems.

Investors are getting nervous. Clearly, they have been made even more jittery after the Federal Reserve pumped a massive $41 billion in temporary reserves to the American banking system overnight. That's the biggest one-day cash infusion since September 2001 and bigger than anything injected during the depths of credit crunch in August.

So how do we interpret it? From one perspective, the cash injection is just a nuanced two-step by the Fed: a rate cut pause if the economy gains momentum, but at the same time, add liquidity, should conditions warrant, says Joseph Lazzaro at BloggingStocks.

But that's unlikely to reassure investors. As Liz Moyer at Forbes writes, the problem seems to be that the banks need more capital because of their exposures. About twice as much capital. Add to that the problems confronting insurers who insure mainstream debt instruments, such as subprime mortgages and their associated credit derivatives. Investors are selling out because they're worried the insurers won't have enough money to cover potential losses as more and more subprime mortgages and their associated derivatives are downgraded or default.

Twitchy times ahead for market players with expectations that there will be more writedowns at the big banks and Betsy Graseck, an analyst at Morgan Stanley in New York, telling the Financial Times there will be "contagion" from subprime mortgage lending to prime mortgages and to car and credit card loans