With stunning swiftness, the damage from the collapse of the subprime mortgage market is bleeding out to other parts of the economy. And that damage will explode on Monday as investors continue to flee the sector.

How so? Because late Friday afternoon, according to the Wall Street Journal [subscription required] two subprime lenders dropped several bombshells that have left them fighting for their lives:

• New Century Financial Corp. (NYSE:NEW), one of the largest subprime lenders, is facing a federal criminal inquiry into its accounting and trading in its securities. Furthermore, if NEW's lenders don't let it off the hook for meeting the terms of its lending contracts or it does not find new lenders, NEW stated that its auditors are likely to warn of "substantial doubt" over its ability to remain in business. Translation: NEW could go bankrupt very soon.
• Fremont General Corp. (NYSE:FMT) will stop making subprime residential loans and is negotiating to sell that business.

Even before that, I was stunned to read last Friday that subprime was damaging some formerly blue chip names:

• General Motors Corp.'s (NYSE:GM) GMAC's Residential Capital home-lending unit could take cash charges charges for bad subprime mortgage loans of $900 million to $950 million in in the first half of 2007.
• Countrywide Financial Corp. (NYSE:CFC) reported a rise in late payments in many of its mortgage classes -- e.g., payments were 30 days late at the end of 2006 on 2.9% of prime home-equity loans serviced by CFC, up from 1.6% a year earlier and 0.8% at the end of 2004. It also said payments were late on 19% of subprime mortgage loans, up from 15.2% at the end of 2005 and 11.3% at the end of 2004.
• The Goldman Sachs Group, Inc. (NYSE:GS), Morgan Stanley (NYSE:MS), and Merrill Lynch and Co. (NYSE:MER) -- whose bonds are considered to be investment grade -- experienced a significant increase in their risk premiums due to their exposure to the subprime market.

The public doesn't know how widespread the damage from subprime will be. We do know that Goldman has lent money to New Century. And according to the New York Times [registration required], Wall Street players own 27.4% of NEW's common -- Morgan Stanley, Goldman Sachs, Barclays Capital, and Deutsche Bank own 16%, Citigroup, Inc. (NYSE:C) recently bought 5.1%, and Greenlight Capital, a prominent hedge fund, owns 6.3%.

Worries about the subprime-mortgage sector, however, have affected sentiment beyond the banks. There is a lot of concern over what might happen if higher delinquencies on mortgage payments spread to other areas of the economy.

As the subprime economic tornado tears through the economy, who will pay the price? It's too early to tell -- but NEW, NovaStar Financial, Inc. (NYSE:NFI) -- which has fallen 76% since I suggested shorting it on December 18th -- and FMT are poised to plunge when the markets reopen on Monday.

The scary unknown is what else will fall along with them. According to Barron's, last Tuesday's plunge may be likened to the "Babson break" just before the Great Crash of October 1929, writes Brian Reading of Lombard Street Research. Market historians recall that economist Roger Babson -- who has a memorial on the Babson College campus -- had predicted a crash beginning in 1927, but nobody listened until September 4, 1929, which apparently was a slow news day, on which his gloomy prediction received nationwide coverage, according to Reading.

As Barron's wrote, "Substitute 'Greenspan' for 'Babson' to bring the story up-to-date. In which case, this may have been the squall before the real storm, Reading says."

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter He owns shares of Citigroup and has no financial interest in Countrywide Financial, Fremont General, Goldman Sachs, Merrill Lynch, Morgan Stanley, New Century, and NovaStar.