Two of Wall Street’s heavy-weight players felt the fallout from America’s mounting housing market crisis yesterday as they reported sharply lower second-quarter revenues at their divisions that trade mortgage securities.

Goldman Sachs added to the gloom with the suggestion that the wheels may be beginning to come off the mergers and acquisitions bandwagon. Goldman’s financial advisory business made $709 million (£360 million) in the three months to the end of May, 18 per cent lower than in the previous quarter.

Quarterly investor updates from Goldman Sachs and Bear Stearns marked the first evidence that the collapse of US house prices this year has had a knock-on effect on the wholesale market, where collections of highly tailored mortgage portfolios are actively traded by investment banks.

Both Goldman and Bear Stearns pointed directly at the sub-prime markets, where higher-risk loans are extended to consumers with patchy credit records. Repayment problems in sub-prime are running at four-year highs.

David Viniar, Goldman’s chief financial officer, said: “The sub-prime business continues to be weak, we haven’t seen the bottom of the market. There will be more pain.”

Sam Molinaro, Bear Stearns’s finance director, added: “We are impacted in a weaker mortgage market until that industry turns around.”

Goldman, a big player in structured trading, told investors that revenues at its fixed income, commodities and currency division had slid 27 per cent in the second quarter to $3.37 billion. Bear Stearns, which also issues such securities, said revenues at its fixed income unit slumped just over a fifth to $962 million.

The dip in revenues at Goldman’s FICC division took the shine off record quarterly after-tax profits of $2.33 billion, 1 per cent above the first quarter and higher than analysts had expected. This was driven by highly profitable underwriting of equity and bond sales. Its shares fell as much as 3 per cent.

David Trone, analyst at Fox-Pitt Kelton, said he expected the shares to drop, “given Goldman’s recent patter of huge upside surprises”.

Overall after-tax profits at Bear Stearns fell 10 per cent to $486 million in the second quarter, excluding an after-tax charge, although revenues hit a record of just under $2.5 billion. Its shares fell 1.5 per cent to $147.22.

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