Nightmare on Wall Street

• See how the new model of mortgage lending went wrong

But its biggest impact is likely to be on the financial sector, which made billions of dollars in profits in the past few years by betting heavily on the sub-prime market.

Already the big Wall Street banks have revealed losses totalling $50bn (£24bn), and the head of the biggest bank - Chuck Prince of Citigroup - and the biggest investment firm - Stan O'Neill of Merrill Lynch - have departed.

Show and tell

SUB-PRIME LOSSES SO FAR Citigroup: $11bn Merrill Lynch: $8bn Morgan Stanley: $3.7bn Bear Stearns: $3.2bn UBS: $3.4bn Deutsche Bank: $3.2bn Credit Suisse: $1bn Wachovia: $1.1bn IKB: $1bn: Source: Company reports

But experts estimate that the total losses facing the financial sector could amount to between $150bn and $450bn, and that many of the banks have hidden losses that have been concealed in off-balance sheet instruments like "special investment vehicles".

The big Wall Street banks and investment houses who are most exposed could find their profits, and much of their capital base, wiped out.

To restore their profits, and indeed in some cases to remain solvent, they will be forced to sell off many assets and lay off many workers, as well as cutting the bonuses of their remaining staff and limiting their future lending.

The size of the financial sector in the US economy - with banks making up 30% of the profits of all US companies last year - means that the effects will be felt both in the real economy and on the stock market.

And with $2.8 trillion in distressed mortgage bonds, including $1.3 trillion in sub-prime bonds, there is enough distress to go around.

Dick Syron, the head of Freddie Mac, a government-sponsored agency that also trades mortgage-backed securities, reckons he has never seen circumstances so bad, and that the credit crunch is having a "dramatic effect" on the US housing market.