As the Financial Times pointed out this week, an "information problem" lies at the bottom of the latest financial market turmoil. Let's put it simply: no-one knows how big the losses are going to be and where the exposures lie.

Now we are about to find out how much toxic waste is on the balance sheets of the big banks with a new American accounting rule SFAS157 that goes into effect on November 15 . It will force banks to rate their assets according to how liquid they are. It ranges from "Level 1" to "Level 3" and assets at "Level 3" are the most illiquid. As Martin Hutchinson points out in the Asia Times, that's going to be a problem for the banks which have until now been happy to value the assets however they like. Easy enough to do when it doesn't have a market price since no-one wants to buy it. And the problem is that level three assets are just filled with junk and garbage that stinks to high heaven. If you want to know about where the subprime exposure exposures like, go straight to level three.

But wait, it gets worse. Level Three extends well beyond subprime. As Hutchinson says, it would include mortgages other than subprime, securitized credit card obligations, leveraged buyout bridge loans, asset backed commercial paper, complex derivatives contracts, credit default swaps. And that spells disaster for the banks, he says.

"Given the piling of risk upon risk that has been engaged in over the last few years, and the size of the losses in the mortgage market alone that seem probable - my own estimate last spring of $980 billion looks increasingly likely to be somewhat below the final figure - it appears almost inevitable that in a bear market in which liquidity dries up and investors become skeptical, Wall Street's capital will be wiped out. Only the commercial banks like wachovia and Bank of America whose investment banking ambitions have been largely thwarted and whose portfolios of Level 3 rubbish are correspondingly lower, are less likely to disappear."

It's a real horror story because many Wall Street firms are likely to have level three assets that exceed their equity base.

As Nouriel Roubini points out in his blog, Citigroup's level three to equity ratio is 105 per cent, at Goldman Sachs it's 185 per cent, at Morgan Stanley 251 per cent, Bear Stearns 154 per cent and Lehman Brothers 159 per cent. Scary stuff, huh?

All this at a time when gold is trading at a 28-year high of $824 and oil is close to $100 a barrel.

And yet commentators expect stocks are set for a rebound as investors switch their money from the bad boys in the financial sector to the tech sector. Yeah, don't ever think that markets are rational.