Merrill Lynch has shocked the market by announcing it plans to clean up its toxic balance sheet by raising $8.5 billion through a public share offering. That's after revealing another $5.7 billion in write-downs on subprime mortgages.

Significantly, Merrill Lynch's total writedowns are now put at close to $40 billion.

Merrill's woes coincide with the warning from the International Monetary Fund that things are going to get worse.

"Credit quality across many loan classes has begun to deteriorate with declining house prices and slowing economic growth. Although banks have succeeded in raising additional capital, balance sheets are under renewed stress and bank equity prices have fallen sharply," the IMF warns.

Batten down the hatches. We are in for a rough ride.