Color us appalled. Just as stocks rallied on new hopes that the so-called “toxic” bank – a global waste-disposal unit for highly rancid assets – might materialize to wash away the subprime sins of the world, ratings agency Standard & Poor’s quietly boosted its estimate of those mortgage assets it expects will be written off by, oh, another $100 billion. Check out the new bill of damaged goods.

As markets trembled on Thursday, Standard & Poor’s, the US rating agency, detonated another small grenade. After announcing in March that it expected banks to write off $285bn of mortgage assets, it casually raised that estimate by $100bn-odd, owing to falling asset values.

Compared with recent dramas, that $100bn might not look so disastrous (Nouriel Roubini, the American economist, expects $2,000bn total credit losses before the end.)

However, the S&P revision highlights a problem that explains much about the current storm: namely that recent events have left investors and financial institutions so utterly disorientated, that there is widespread confusion about what anything might now be worth. The financial world, in a sense, has lost its compass.

And that has left investors so disorientated they are either rushing for safety, or simply refusing to trade at all. The result is gridlock and panic.

This marks the culmination of problems that have been quietly intensifying for a year. This decade, investors have relied heavily on rating agencies to act as a compass in the world of complex financial products. However, when the agencies started to downgrade mortgage-linked securities last summer – sometimes moving AAA securities to junk – confidence in the ratings was shattered.

At that point, some investors looked to markets to make sense of complex finance. After all, American capitalism has an in-built reverence for market price signals; so much so, that regulators have increasingly forced financial institutions to mark their books to market prices this decade.

However, over the past year, trading has dried up in many corners of the complex financial world, making it almost impossible to get real market prices. So, in desperation, investors and auditors have started using other, potentially flawed sources of valuations – such as the so-called “ABX” index, which tracks the cost of insuring mortgage-backed bonds against default.

That has had devastating implications for the banks. Over the last year, the ABX has tumbled: the implied price of some AAA instruments was just 45 per cent of face value on Thursday.

As a result, financial institutions, such as AIG or Merrill Lynch, have reported massive mark-to-market losses – often seemingly out of the blue.

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