In June, Lehman Brothers enjoyed leading a golden crop of Wall Street earnings. This quarter, however, first love will be replaced by first blood. August's credit squeeze will ensure investment banks take some nasty earnings hits. Tomorrow, Lehman will have its results crawled over for signs of how bad things really are.

There are a few big short-term tests. First, can Lehman and others get through the messy quarter without a trading blow-up? That would reassure investors that banks really have improved the predictability of their huge trading books and risk controls. Second, can they remain attractively profitable, even after marking all their assets to market? Merrill Lynch estimates Lehman still needs to generate a healthy return on equity averaging about 16 per cent to justify its valuation of 1.6 times book. That is way below the first half's 25 per cent but will still be tough to achieve given the fall out in Lehman's core fixed income and mortgage markets and its exposure to leveraged loans.

Then, sceptical investors must actually believe the announced book values. Sanford Bernstein calculates about 9 per cent of the banks' assets are so-called "Level 3". These are valued on internal estimates because there is no market - "marking to myth" for the cynical. It is a small portion, so should not cause too much alarm unless there is a sharp rise in "Level 3" assets because illiquid markets remove more actual trading prices. "Level 2", where assets are valued on supposedly solid market comparables, will remain the biggest chunk of assets. Lehman and others should bend over backwards to provide enough information to convince investors their "marks to market" are conservative.

Most important, when the dust clears, will be the longer-term outlook. Lehman's revenues, for example, are likely to suffer for many quarters from lower mortgage and structured product volumes. And, of course, there remains the biggest issue of all: if there is a serious economic slowdown, almost all of Wall Street's businesses face a far leaner 2008.