April 1 (Bloomberg) -- Credit market turmoil poses the most severe crisis for banks in 30 years, surpassing Black Monday in 1987, the Asia currency crisis and the bursting of the dot-com bubble, Morgan Stanley and Oliver Wyman said in a joint report.

Revenue from investment banking may drop 20 percent in 2008, with credit businesses declining 60 percent, analysts led by Huw van Steenis said in a note to clients today. Six quarters of earnings will be erased by writedowns and falling revenue by this month, rivaling the collapse of the junk bond market at the end of the 1980s that put Drexel Burnham Lambert Inc. out of business, the report said.

``The industry is facing the most severe investment banking crisis in 30 years,'' the analysts wrote in the report. ``Global securities markets are in the midst of profound cyclical and structural change.''

UBS AG and Deutsche Bank AG, two of Europe's biggest banks, posted today a combined $23 billion of writedowns linked to the collapse of the subprime mortgage market. In all, investment banks may post $75 billion in markdowns in 2008, according to the report. Writedowns and losses on subprime-infected assets have already cost the world's biggest banks about $230 billion since the start of 2007.

Investment-banking revenue has also stalled as the pace of takeovers and initial public offerings declined in the first quarter of 2008. Mergers and acquisitions bankers suffered a 35 percent drop in fees during the first quarter as the value of announced takeovers fell to $656 billion from $971 billion a year earlier, according to data compiled by Bloomberg.

Crisis Duration

Banks' earnings have been hurt for the past three quarters by the turmoil in the credit markets. In total, the crisis may last for eight to 10 quarters, exceeding the six-quarter duration of the Asia crisis and bailout of LTCM in 1997-8, and the seven- quarter fallout from the bursting of the dot-com bubble, the report said. The 1987 stock market crash hurt earnings in just a single quarter, according to the report, entitled ``Outlook for Investment Banking and Capital Market Financials.''

Regulators will also push the industry to retain more capital as a cushion, hurting banks' return on equity in the long term, the group added. Treasury Secretary Henry Paulson proposed yesterday the biggest overhaul of U.S. financial rules since the Great Depression, saying the Federal Reserve should expand its oversight of financial services beyond banks.

Banks are also finding their cost of capital is increasing relative to other investment-grade companies. Traditional sources of money, like structured investment vehicles, are less available, the report said. Banks are struggling to offload loans, leaving leverage ratios high, it said.

Diversified Funding

``Firms with diverse sources of funding, with retail and commercial deposits clearly helping, and a diversified business will have a funding advantage over the coming years,'' the analysts wrote. ``This may lead to a material reassessment of business models over time.''

Zurich-based UBS today posted an additional $19 billion of writedowns and said it would seek $15.1 billion in a rights offering to replenish capital. Deutsche Bank, Germany's biggest bank, also said today it expects to book about 2.5 billion euros ($3.9 billion) in writedowns for the quarter.

Separately, Merrill Lynch & Co. and Citigroup Inc. had their first-quarter earnings estimates cut by Goldman Sachs Group Inc., which said the two banks may post $14 billion in writedowns on assets linked to collateralized debt obligations.

To contact the reporter on this story: Edward Evans in London at at eevans3@bloomberg.net

Last Updated: April 1, 2008 09:29 EDT