Over the past year, we've seen a number of days when the stock market fell 300 points. We've been there and done that, and we're quite used to it at this point.

So were all those end-of-the world headlines overblown? Is this the worst that happens when a major investment bank files for bankruptcy? Hard to see what all the fuss is about, really, let alone why the Federal Reserve felt it necessary to put up $29 billion to bail out Bear Stearns.

Of course, it's not nearly as simple as that. For one thing, it's not the stock market that everybody was worried about. This is a credit crisis, and American companies (the ones which weren't bought by private equity shops, anyway) tend to have low levels of debt. Some parts of the economy are highly indebted—investment banks and homeowners, above all. Most of the companies listed on the stock market aren't, and they should be able to weather a financial storm with relative ease.

On the other hand, that financial storm really does seem to be more of a heavy breeze than a major hurricane. The Standard & Poor’s financial-stock index is down by only 3.5 percent this morning—hardly a bloodbath. And the TED spread—a measure of distrustfulness among banks—is up sharply at 192 basis points, but is still below the levels we saw in the summer of 2007, and again in December, and again in March. Indeed, each spike upward in the TED spread seems to be lower than the last, which has to be a positive sign.

The big unanswerable question, though, is what happens next. Hurricanes start out as a heavy breeze, and then get worse—and the preconditions for a financial hurricane are very much in place. If a real hurricane needs high ocean surface temperatures and warm humid air, a financial hurricane needs generalized nervousness and a general lack of liquidity. Once those are in place, a few failed trades are all that is necessary to precipitate a very nasty chain reaction.

In normal times, failed trades are a regrettable part of doing business in financial markets—they slow things down and can cause massive back-office headaches, but they don't pose much in the way of systemic risk.

In times like these, however, failed trades are every banker's worst nightmare because of something known as settlement risk: You fulfill your side of the bargain, but your counterparty goes bust before they can fulfill their side.

How big is settlement risk right now? An indicator one might look at is the number of "fails to deliver" and "fails to receive" reported by primary dealers in U.S. Treasury bonds. Last week, before Lehman was expected to file for bankruptcy, fails to deliver rose by $351 billion to $410 billion; fails to receive rose by $336 billion to $389 billion. (PDF here; Excel file here.) Again, there have been bigger spikes in the past, but they haven't happened at the same time as the bankruptcy of a primary dealer. Right now is the last time that anybody wants to be worrying about failed trades, because they can't have any assurance that their counterparty will still exist by the time they're all worked out.

Lehman Brothers has more than $600 billion in assets that will need to be liquidated as part of its bankruptcy. That's an order of magnitude greater than any bankruptcy the world has ever seen: No one has a clue how to even get started on something so huge, let alone what the repercussions will be. Is there $600 billion in cash sitting on the sidelines of the global financial markets just waiting for an opportunity to snap up assets on the cheap? No. So as Lehman's assets get liquidated, asset prices in general, and bond prices in particular, are likely to be under a great deal of pressure

In turn, that's going to hurt other players in the global financial system, from hedge funds and sovereign wealth funds to small- and medium-sized regional banks. Anybody who's leveraged and who marks their assets to market is at risk of margin calls and possible bankruptcy themselves, depending on the volatility and risk profile of those assets.

The upshot is a state of radical uncertainty: as Paul Krugman says today, "nobody knows what will happen next." Krugman says that in not bailing out Lehman brothers, Treasury Secretary Hank Paulson is "playing Russian roulette with the U.S. financial system."

He's right, although that doesn't alter the fact that Paulson's decision was the right one to make.

There is a very, very long list of things that could go horribly wrong from here on out. The liquidation of Lehman is one; the possible collapse of American International Group is another. Beyond that are countless hedge funds and other financial institutions which, collectively, present significant systemic risk.

But the biggest and most obvious risk of all is the one associated with Lehman's own debt, which is now trading at less than 35 cents on the dollar. That's a big loss for the institutions holding it—but it also means an unknowably huge loss for anybody who wrote credit protection on Lehman Brothers at any point over the past five years. Those sellers of credit protection are staring down the barrel of billions of dollars in claims, and they're going to have to raise that money quick by selling anything they can get their hands on—and that might well include stocks.

So you think that we've dodged a bullet with the Dow still above 11,000? Just wait. This thing ain't over yet. In fact, it's barely begun.