Wells Fargo & Company said profit fell 25 percent, to $1.64 billion, or 49 cents a share, after absorbing big losses on investments in Fannie Mae, Freddie Mac and Lehman Brothers. It also bolstered its reserves by $2.5 billion as it braces for higher loan losses, and will soon inherit tens of billions in new losses from its takeover of Wachovia.  At State Street Corporation, a custodial bank based in Boston, profit rose 33 percent, to $477 million, or $1.09 a share, as it booked higher trading fees amid volatile markets. But it, too, faced heavy losses on investments, including loan collateral from Lehman Brothers. It also may need to set aside as much as $450 million to prop up some of its battered investors in its fixed-income funds.  The banks were among the nine firms compelled by Treasury Secretary Henry M. Paulson Jr. on Tuesday to take a big cash infusion from the government. Both JPMorgan Chase and Wells Fargo agreed to received $25 billion investments; State Street, which has a much smaller balance sheet, received about $2 billion. Though all of the firms denied needing the money, federal officials hope they use it to increase lending.  Even if the flow of credit improves soon, executives are planning for a future shaped by thousands of lost jobs in the economy, weaker consumer spending and more market turmoil and uncertainty. “We necessarily need to be prepared for a bad environment,” said Jamie Dimon, JPMorgan’s chairman and chief executive.  With losses on housing far worse than anticipated, he said the bank was “getting braced” to increase its reserves against losses on loans over the next couple of quarters, and for “very tough” trading results. The finance chief, Michael J. Cavanagh, said the bank believed the economy was already experiencing “recessionary conditions” that would worsen.  On Wednesday, Ben S. Bernanke, the chairman of the Federal Reserve, warned that the American economy was headed toward an extended period of difficulty in spite of a worldwide effort to stabilize the markets. Investors, fearful that the worst is still to come, sent financial stocks plummeting. The KBW Index, a popular measure of the sector, fell more than 7 percent on Wednesday. It is down more than 45 percent since last year.  A continued contraction may make it even tougher for consumers to pay off loans, especially credit card and auto debt, creating another layer of risk.  And banks are also being hurt by narrower lending margins. Without the volume of new business, banks will find it especially challenging to be profitable. “Profit pressure is picking up at a time when you are trying to build it up as fast as you can to handle these credit problems,” said Gerard Cassidy, an analyst at RBC Capital Markets.  Wells Fargo’s chief financial officer, Howard I. Atkins, warned that the bank faced intense pressure on its huge consumer loan portfolio. He cited weakness in residential real estate, rising unemployment and increases in bankruptcies.  JPMorgan outlined signs of strain already showing up in its big consumer businesses. Its Chase retail banking operations reported $247 million in net income, a 61 percent drop from the period last year. It has pulled back on new lending, tightening standards on mortgages and home equity loans. And Chase’s big credit card division reported $292 million in net income, a 63 percent drop from last year. The unit took a $2.2 billion write-down to buffer against potential losses, as more consumers struggled to pay their credit card balances.  “Credit has deteriorated meaningfully this quarter, and it is going to get worse before it gets better,” Mr. Cassidy said. “That is going to continue to drive the results well into 2009.”  Mr. Dimon, on a conference call with analysts, said he expected lending to return to normal eventually. But now, he added, is the time to be prudent. “We are not going to say, ‘Yahoo, this is over,’ and go extend credit like we did without fear,” he said. “If you are not fearful, you are crazy.”  Ms. Whitney, one of the most bearish banking analysts on the call, shot back, “I’m fearful, thanks.”  Mr. Dimon deadpanned: “We know you are. We are waiting for you to reverse your position.”  A picture caption on Thursday with an article about earnings reports from Wells Fargo and JPMorgan Chase misidentified the event taking place. The picture showed employees of Wachovia, which is being taken over by Wells Fargo, listening to Wells Fargo’s chief executive, John Stumpf, at a ceremony on Wednesday welcoming them to the company. They were not listening to a presentation of Wells Fargo’s earnings report, which was also delivered on Wednesday.  A version of this article appears in print on , on Page B12 of the New York edition with the headline: Banks Brace for Slump As Economy Weakens. Order Reprints| Today's Paper|Subscribe
JPMorgan Chase, Wells Fargo, and State Street announced earnings that beat expectations, but their shares fell on fears of a drawn-out erosion of the economy.