Profits at the big investment banks of Wall Street and the City of London will collapse by 70 per cent in the second half if the credit crunch proves as fierce as in 1998, Standard & Poor’s said yesterday.

The debt rating agency predicted that revenues would collapse by 47 per cent in the second half if the dislocation followed a similar pattern to the dark year when Russia defaulted and the hedge fund Long-Term Capital Management collapsed.

“There’s a strong sense of déjà vu about the environment for securities firms,” Nick Hill, analyst with S&P, said. “This time, rather than a sovereign debt default by Russia, it is rising delinquencies on US sub-prime mortgages that have sparked volatility.”

Applying “harsh but plausible” assumptions to his model for investment bank profits, he said that they could fall from $49.5 billion (£24.5 billion) in the first half to $14.6 billion in the second. That would severely dent City bonuses this year. S&P suggested that revenues could be wiped out in proprietary investments, fall 75 per cent in fixed income trading and 50 per cent in debt underwriting. Equity markets in 1998 almost exactly mirrored shares this year, peaking on the same day in July, Mr Hill said. In 1998 they continued to plunge until October, when they rallied strongly.

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