The market seems to be bracing itself for the next shoe to drop with the two Bear Stearns hedge funds which had bet big on subprime mortgage sector now virtually worthless. The $1.6 billion bailout puts Bear Stearns in serious trouble and in danger of a takeover, writes David Weidner at MarketWatch.

But more importantly, it could have enormous ramifications for the broader market with Fed chief Ben Bernanke warning the subprime mortgage sector had "deteriorated significantly" and that for many homeowners and communities, there could be problems "that likely will get worse before they get better".

Wall Street is waiting for the next shoe to drop, and expectations have been running high that Lehman will be issuing some bad news.

The problem really comes down to those collateralized debt obligations, or CDOs. That's the term for a bundle of risky debt that includes mortgages and bonds backed by some of the riskiest home loans in the subprime market. CDOs are too clever by half. They are a time bomb and I have explained why here.

As Bloomberg's Mark Gilbert points out, even the investors who thought they were smart and safe buying what had been packaged as the most secure AAA rated CDOs could be in for a nasty shock. All it would take would be a 1 per cent decline in national US house prices. True, we're only part of a market that's booming. But as Gilbert says, things can turn very quickly.

"Consider the following, though. Is the stock market roaring ahead because earnings growth is fantastic, or is it driven by mergers and leveraged buyouts? The latter looks more likely ... So what happens when the easy money financing those LBOs dries up as the subprime CDO collapse makes banks and investors more risk-averse? The merger engine driving the stock market begins to misfire. And if U.S. consumers can't re-mortgage to pay for that new car, and can't rely on an ever-ascending stock market to boost their personal wealth, what happens to the economy? It's too early to tell. The signs, though, are ominous."