GROUND FLOOR: Even if things are improving in corporate America (and your view on that can change from day to day if not from hour to hour), investors - both personal and professional - have a long way to go before the scars of the past couple of years are erased from memory.

A whole lot of money has gone down the drain on dubious ventures, which is making it more difficult for newer, less cash-burn crazy enterprises to get off the ground.

According to a recent report by Mr Edward Altman, professor of finance at New York University, the default picture for high-yield corporate bonds over the first half of this year has been staggering. In fact, defaults and "distressed" issues make up around 35 per cent of the entire high-yield and defaulted debt markets.

The estimated face value of the paper concerned is around $750 billion (€764 billion), although the market value is closer to $420 billion, which is a lot of money lost in anyone's language. The defaults in the first half of 2002 hit record levels of 6.97 per cent (almost $46.6 billion) and, of those defaults, telecom companies accounted for 36 per cent.

All of this is very depressing for investors and entrepreneurs. If investors have taken such a complete bath in high-yield stocks, they're unlikely to return in a hurry.

Yet high-yield issues are an integral part of raising funds, and just because a company is paying up for borrowings it doesn't mean that it's set for failure.

In the past, investors expected to get a significant return over government paper for lower grade corporates, but the effect of the defaulting and distressed borrowers has been a negative spread to 10-year treasuries of minus 10.43 per cent. That is not what the corporate-bond trader wants to be reporting at the end of the year.

At the same time it's almost frightening to think that high-yield bonds with that horrible negative return have actually outperformed the stock market!

You expect to see default rates increase in times of recession so none of this is entirely unexpected, but there were a number of record-breaking additions in this year's numbers. There was a higher average default amount per issue - thanks to a total of 203 defaults courtesy of 62 different companies. Also, the average size of the telecom defaults was much larger than those of other companies.

Most of the defaults have occurred within three years of issuing the paper, which fits the general picture of companies borrowing at the top of the boom only to find they are unable to service the debt when the bubble bursts.

Sadly (especially for bond traders), many companies that defaulted didn't start out as high-yield issuers - it was the downgrading of their original investment-graded debt that caused the problems. This year around $90 billion of bonds that were issued as high-grade paper found themselves downgraded (although WorldCom accounts for nearly $30 billion of that) while a mere $6 billion were upgraded.

Some of the results are skewed by companies like WorldCom and K-Mart, but it still means a lot of underperforming investments.

And so, for the investment banks in particular, 2002 has been a nightmare. The trading arms have been hammered, there's little to be made out of IPOs and many senior executives are worried that the next phone call might be from a federal investigator.

The last lot of banking results were fairly awful - Morgan Stanley announced a 17 per cent fall in profits, Lehman's returns were down a third from the same period last year, while JP Morgan Chase had a terrible second quarter and isn't expecting anything better from the third, plus they've had to take a downgrading from S&P to AA- on the chin, as well as announcing further job cuts in addition to the 15,000 already made this year.

According to Dealogic, a company that analyses mergers and acquisitions, the value of investment banking deals for the first half of the year is down by a whopping 37 per cent. In the US, the value of mergers and acquisitions has fallen by more than half, which has left the banks in a difficult situation - they're still overstaffed and, worryingly, they're still under investigation.

When Mr Andrew Fastow, the former chief financial officer of Enron, was indicted on fraud, money-laundering and conspiracy charges last week, a criminal complaint was also filed alleging that Merrill Lynch helped the company to conceal debt, thus distorting its true financial situation.

In the meantime, a Congressional committee is investigating Credit Suisse First Boston, Salomon Smith Barney and Goldman Sachs on reports that they made preferential allocations of shares in once-hot IPOs.

The driving force in all economies is the availability of funding for business. With the professionals all sitting on heavy losses and potential fines from the past couple of years, raising funds has become more difficult, even for firms that have honest-to-goodness business plans.

While the average punter is merely thinking that they won't bother with the stock market again, the knock-on effect is that less money is put into the hands of people who could actually have something worthwhile to offer.

A business acquaintance recently told me that he couldn't see any point in coming to the market. Everyone was still too short-sighted, he said.

It isn't possible to have spectacular growth every quarter and, despite the fact that many people talk about how impossible it is, they aren't prepared to invest unless they think they're going to get big returns quickly. Even now.

It seems fear and greed are still the ruling emotions when it comes to the stock markets.