LONDON—The mood is so grim here that even those seeking distraction in the Max Mosley trial have been rudely reminded of the financial carnage.

London has been riveted by the trial of a lawsuit brought by Mosley, the head of the Formula One governing body and son of Britain's best-known fascist of the 1930s, against the News of the World. In a sting organized by the Murdoch tabloid, Mosley was caught on tape being flogged by strapping blond prostitutes until his buttocks bled. (Frequent flogging, it turns out, makes the skin prone to bleeding easily.)

Mosley appeared to win a crucial victory last week, when the News' star witness was a surprise no-show. Known only as Woman E, the prostitute could not testify because of her fragile emotional state, the News' lawyers claimed.

There may have been some payback, however. The News had promised her £25,000 (roughly $50,000) to secretly videotape the German-prison-theme orgy; in the end the paper paid her only £12,000, citing the credit crunch.

Yes, the financial pain is being felt everywhere—even where pain is the object.

In Britain, the panic and pessimism over the economy is nearly as intense as it is in the United States.

The London stock market has joined the U.S. market in bear-market territory, with the FTSE 100 index down 20 percent from its peak in June of last year. Economic growth is slowing, and unemployment has just started to creep up. Consumer confidence last month was just a tick above its all-time lows reached in 1990. Inflation is at a 10-year high, and home prices are sliding.

And Britain's housing bubble was arguably worse than ours, with home prices peaking in the fall of last year at six times average income, about double what they were in the United States. Since then, the Halifax house price index is down about 10 percent.

Homebuilder stocks are plummeting. Shares of Barratt Developments plunged 90 percent before it obtained a last-minute reprieve from its lenders. Retailers are hurting as well. Marks & Spencer, the iconic British retailer, posted an earnings warning earlier this month.  

The worst problems lie with the banks. Shares of Bradford & Bingley, a mortgage bank that specialized in lending to Britain's version of speculators—the "buy-to-let" crowd—bounced gingerly last week, as prospects that it would succeed in raising much-needed capital brightened.

But the markets continue to reel in the aftermath of Northern Rock's failure last year. Investors simply don't trust that the banks are capitalized enough or that the regulators are sufficiently on the ball. The Financial Services Authority, the British equivalent of the Securities and Exchange Commission, has been pushing for the banks to raise additional capital. But the worry is that there may not be enough capital to go around for all the U.K. banks.

British banks are too cheap to sell, but too dangerous to buy. The question now for the global markets is how bad things may get for two of the biggest: Barclays, which has a huge investment bank, and HSBC.

Shares of HSBC have held up relatively well. The management team has received credit for having taken big charges and cleaned up the mess around its acquisition of American subprime mortgage lender Household International. But like Wachovia's Golden West purchase, Household looks like the gift that will keep on giving. One hedge fund manager told me he has covered all of his British bank shorts, except for HSBC, arguing that it is vulnerable to a slowdown in China on the one hand and further problems with Household on the other.

Among many analysts and investors it is widely believed that Barclays will have to raise more money and that the bank has not yet come clean on the full extent of its charges. Analysts at Citigroup estimated late last month that the bank would have to raise £9 billion on top of the £4.5 billion it has already raised. After raising the capital, the bank still has a woefully thin safety margin, with 1.5 percent tangible equity to assets, ranking the bank the sixth weakest in Europe, according to the analysts. By comparison, at the end of the first quarter, Citigroup, which is thinly capitalized by U.S. standards, sat at about 3 percent.

Ominously, Barclays still looks overexposed to monoline insurers, as well as to commercial real estate and to Alt-A mortgage holdings in the United States. The Citigroup analysts ran the numbers as if Barclays had to take similar write-offs to those of Royal Bank of Scotland and found that Barclays would need an additional £9 billion in write-downs on top of the £4 billion it has already taken.

Poor Max Mosley. If it was pain he wanted, he should have put his money into financial stocks. It would have lasted longer and been so much less publicly embarrassing.

Achtung, baby!