What a difference a year makes. Twelve months ago, the optimists were still hoping that the credit crunch, like the First World War, might be over by Christmas. Goldman Sachs even bucked the market by reporting a record annual profit. Now things look very different.

For the first time in a decade as a publicly listed company, Goldman is expected to report a loss for the fourth quarter next Tuesday. Analysts reckon chief executive Lloyd Blankfein could post a loss of $2 billion (£1.35 billion) - as much as $5 per share in the red. That compares to $7.01 per share in the black for the same quarter in 2007. Even though the bank will be in profit over the whole year, it's still a significant milestone. As if to underline the point, this week Goldman's London HQ has been laying off staff as part of a 10% global cull.

The timing matters. Those staff who have survived the cull will learn the size of their bonus - or if they are going to get one this year - around the time the results are announced. Banks don't tend to say anything publicly about bonuses, of course. The clue is in the size of the total compensation and wages bill. It's likely to have shrunk.

Goldman, which had to give up its status as an investment bank to get access to Government funds in October, is the first of the major banks to announce full-year results. The pain will continue on Wednesday when Morgan Stanley, another fallen investment banking giant which had to become a holding bank, becomes the second firm to report to the market.

Chief executive John Mack is expected to be in the red - 77 analysts forecast a loss of between 30 and 35 cents a share. That would be only the second quarterly loss for Morgan Stanley since it went public in 1986. The previous quarterly loss was 12 months ago ,and it was worse - a thumping $3.61 per share.

The results for these two firms, which employ 10,000 people in London, are likely to be a good guide for the rest of the bank reporting season, which continues in earnest in mid-January. In the old days, Lehman and Bear Stearns also reported in mid-December - and we know what happened to them.

Few will be surprised that banks have lost money in the last quarter when stock markets tanked, pushing us closer to global recession. And the grim reality is that some banking analysts on both sides of the Atlantic think the worst may not be over. Standard & Poor's estimates Goldman Sachs and Morgan Stanley could have further exposure to toxic mortgage securities and other assets totalling $14.5 billion and $7.7 billion respectively.

Meredith Whitney, star analyst at US firm Oppenheimer, who correctly forecast many of the big US bank writedowns more than a year ago, told CNBC this week: "The big banks are going to be on life support for at least 18 months, if not 36 months. The big banks will not fail, but the big banks will not grow, in my opinion, for at least another two years."

She argues that much of the US state bailout cash is helping banks such as Goldman and Morgan Stanley - each of which took $10 billion from the Troubled Asset Relief Programme - to fill holes in their balance sheet rather than ease liquidity. "You've had massive asset deflation - there's more of this to come," says Whitney.

Sandy Chen, an influential bank-watcher at UK firm Panmure Gordon, was even more bearish in a note this week: "We think the mutually reinforcing combination of deflation and deleveraging will lead to a deadly spiral of falling prices, bad debts, credit contraction and bankruptcies that will take years to play out. Banks' shareholders will bear the brunt of the pain; big Keynesian bailouts will only deepen and prolong this crisis, in our view."

While Chen was talking about UK banks, his comments apply equally to America: "As prices fall further, we expect more loan covenants will be breached, leading to more bankruptcies and more forced selling."

His forecast for 2009 is blunt: "Further economic contraction and a further rise in bad debts and bankruptcies."

Given this parlous state, many bank board directors have led by example by waiving their bonuses for this year. The top tier at Goldman and Morgan Stanley, as the first to report earnings, have led the way. Yet despite intense political pressure, banks have been keen to retain the right to reward key staff. Overall bonuses could be down 70%.

Michael Sherwood, co-chief executive of Goldman Sachs International in London, who has waived his bonus, remains optimistic: "Over 23 years, I've seen very bad times but the markets always come back quickly."

However, banks will have to take a fundamentally more risk-averse approach. That means smaller profits.And in the short term, a lot of London bankers are going to be counting the cost of those smaller bonuses.

Neither Goldman nor Morgan Stanley give an official snapshot of their UK earnings but there is a clue in the annual reports for their London-based international operations, lodged at Companies' House. The caveat is these figures are not comprehensive, include some staffing outside the UK, and may also exclude some other UK operations.

Even so, they show Goldman Sachs International in London had a wages and bonuses bill of $5.737 billion in 2007. The highest-paid director, unnamed but almost certainly based in London, earned $23.4 million. Morgan Stanley International in London uses different criteria for its accounts. They suggest it spent $2.75 billion on staff costs last year. The highest-paid director, also unnamed, earned $10.4 million.

So the misfortunes of those big US banks, when they report next week, are likely to see the London economy suffer a big hit too.