By LOUISE STORY and EDMUND L. ANDREWS

THE OLD WALL Street is giving way to a new one.
As the tectonic shifts within the American financial industry are shaking the world’s markets, many experts are predicting a new period of painful change for Wall Street.
The predictions were sobering. Investment banks will be smaller. Their profits will be leaner. Jobs in finance will be scarcer. And the outsize role of Wall Street in the American economy will shrink.
It is still unclear what lies ahead for Wall Street now that only two major American investment banks, Goldman Sachs and Morgan Stanley, remain independent. While Wall Street has gone through tough times before only to emerge bigger and stronger, some question whether the industry can rebound quickly after using high levels of leverage, or borrowed money, to binge on risky investments. Those investments have proved to be disastrous. Worldwide, financial companies have reported more than $500 billion in charges and losses stemming from the credit crisis - a figure some experts say could eventually exceed $1 trillion.
“We’ve gone from a golden era of banking and financial services,” Kenneth D. Lewis, the chief executive of Bank of America, said in a press briefing on September 15, as the bank he heads prepared to buy Merrill Lynch.
“It’s going to be tougher,” Mr. Lewis said. “There are going to be fewer companies, and we are going to have to be better at what we do.”
As investors tried to comprehend the abrupt downfall of two of Wall Street’s mightiest firms - Lehman Brothers, which spiraled into bankruptcy, and Merrill Lynch, which was bought by Bank of America - even optimists said the immediate future would be difficult. United States Treasury Secretary Henry M. Paulson Jr. and the United States Federal Reserve are paving the way for the few strong survivors to lead an industry turnaround, while letting the weaker ones fail or be subsumed by larger rivals.
Missteps in the mortgage market cost Merrill Lynch more than $45 billion over the last year. Its sale could be a step toward the broader consolidation within the industry.
“We are all in this business conditioned to cycles in crises and we’re also conditioned to markets snapping back relatively quickly because the crisis can be identified and measured,” said Donald B. Marron, chief executive of the private equity firm Lightyear Capital, which is focused on financial services, and former chief of PaineWebber Group. “What’s different now is you can’t do either.”
Executives like John A. Thain, the chief executive of Merrill and a former Goldman executive, say investment banks will need large bases of deposits to shore up their capital for times of trouble. “As we go forward, size is going to matter,” Mr. Thain said.
Mr. Paulson has told Wall Street executives that he isn’t happy about the shrinking number of investment banks, even though his own former firm, Goldman Sachs, is one of the two that are likely to benefit from the industry consolidation.
Mr. Paulson has said to executives that greater consolidation on Wall Street could increase risk in the financial system, because the risks will be concentrated in a smaller number of firms. But Treasury officials view risk as the lesser of two evils, if the alternative is to prop up sick firms and increase instability.
What seems to be clear to most everyone on Wall Street is that the era of large trading profits and deals fed by extreme bank borrowing is over, at least for now. That will clamp down profits across the industry for some time.
Wall Street has always used other people’s money to amplify its profit, but in recent years, the use of debt ballooned. The finance industry’s credit market instruments increased more than one and a half times in the last decade, to $15 trillion last year, according to Moody’sEconomy.com, and climbed at a pace that was two times faster than the growth of the broad economy.
At its peak last year, investment banks had borrowed $32 on average for every dollar of their assets, according to research from Ladenburg Thalmann, a financial services company. The borrowing helped the industry turn record profits, hire more people and pay out immense bonuses. And it pumped up financial stocks, making them the largest segment of the Standard & Poor’s 500-share index from 2001 until this spring.
“This is a bubble in financial services that was very similar to every other bubble,” said Olivier Sarkozy, the head of financial service investing at the Carlyle Group, a private equity firm.
Wall Street reinvents itself all the time. Many executives say it will do so again, even as historical firms and others face questions about their futures.
“This industry is a dynamic industry that has evolved in unanticipated ways in the last 30 years and created pools of earnings that previously did not exist,” said James P. Gorman, co-president of Morgan Stanley.
As Wall Street firms of all size reduce their borrowing to reduce risk, it comes in some cases at the cost of higher profits. The shift has forced senior executives to rethink business models, and more firms are focusing on their tried and true asset management units. Industry observers say the firms are grappling with the loss of relationship banking that occurred 30 years ago.
“Wall Street for a number of years has been gripped by a quiet crisis, beneath all the financial wizardry and mathematical formulas, beneath all the financial engineering, there has been an increasingly desperate search for new sources of profit,” said Ron Chernow, the author of a book about J. P. Morgan’s empire, called “The House of Morgan.”
Already, Wall Street firms are reducing their debt levels, and regulators are expected to create new rules about leverage (the degree to which an investor is using borrowed money), liquidity and capital levels.
The financial sector seems poised for lower paydays across the board. “They can’t borrow, so they’re going to have cut down,” said Peter J. Solomon, chairman of an independent investment bank that bears his name. “As they cut down, they will have to fire people.”