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.