We may be going into holiday season, but it is going to be a long summer for the senior executives of Wall Street’s biggest investment banks.

And the traditional autumn pick-up in lending will be muted this year, after a surge in defaults on high-risk “sub-prime” mortgages spread across the debt markets in recent weeks and prompted a credit crunch. This has left banks such as Goldman Sachs, Lehman Brothers and JPMorgan holding tens of billions of dollars of loans on their books that they guaranteed but were unable to syndicate. These loans were made to finance leveraged buyouts of companies such as Chrysler and Alliance Boots.

Wall Street banks are estimated to have guaranteed a further $200 billion (£98 billion) of financing for buyouts that they have not attempted to syndicate. Fears are growing that they may be left holding a big slice of this on their balance sheets. This would make the banks far less willing to underwrite leveraged buyouts, a major driver of mergers and acquisitions.

The tightening credit market could also hit corporate growth, which would extend the stock market slump, detering flotations — another of Wall Street’s lucrative sidelines.

That is the worst-case scenario for the investment banks. In the best-case scenario, the fallout from America’s sub-prime mortgage crisis would stop spreading, hedge funds and other debt investors would become less nervous and the market would “reliquify”.

The banks would still take a hit because when they agreed to underwrite recent leveraged buyouts they did so at historically low “spreads” — the difference in interest rate between a loan and US Treasury. The cost of the high-risk debt used to finance buyouts has since leapt.

The risk of owning corporate bonds soared to the highest on record in the US and Europe yesterday on concerns that banks and hedge funds face widening losses on credit-related investments. The banks’ share prices have also suffered.

Whether this is the beginning of a long-term slide, or the end of a short-term one, remains to be seen.

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