Cavemen did it – how hard could it be? But when reinventing the wheel means possibly going back to the slow-and-steady-wins-the-race thing, that’s when a lot of fired-up bankers start to feel a little bit wistful for the good old days. Here’s how major institutions such as Merrill Lynch and Citigroup plan to toe the line.

With mortgage-related losses at big banks and brokerages now topping $100 billion, Wall Street is going back to basics.

A number of businesses that fall under the umbrella of structured finance, from packaging mortgages to big corporate loans, have been hit hard, forcing companies such as Merrill Lynch & Co. and Citigroup Inc. to focus their energies on sometimes less-profitable but steadier businesses.

After announcing nearly $15 billion in fourth-quarter write-downs yesterday, Merrill Chief Executive Officer John Thain emphasized the importance of the firm's bread-and-butter business of selling stocks and bonds to investors, which has taken a back seat in recent years as the firm pushed into riskier areas. This week, while preparing to unveil the worst results in the firm's 94-year history, Mr. Thain flew to Arizona for a day to meet with management in the firm's wealth-management unit.

"I think Merrill Lynch is known for its client focus and its wealth-management businesses," Mr. Thain said in an interview. "We are still going to have a trading component to our business, but it is not going to be of the same nature."

Merrill's stock dropped $5.64, or 10%, to $49.45 on the New York Stock Exchange, leading a marketwide decline. The Dow Jones Industrial Average tumbled 2.5%. Merrill declined because its losses more than doubled analysts' expectation for a loss of $4.93 a share, and on fears that some bond insurers that hedge some of Merrill's remaining roughly $30 billion in mortgage assets may lose their triple-A credit rating.

By recognizing that its hedges with one insurer may be worthless, Merrill confirmed the validity of investors' past worries about its remaining exposures to several others, said analyst David Trone of Fox-Pitt Kelton. "While investors have for some time worried about new areas of exposure, Merrill's impairment actions in these areas officially marks the transition from possibility to realization," Mr. Trone said.

Like Merrill, other big financial players are undergoing similar shifts as they pull back from riskier businesses. Big banks such as Citigroup are holding on to more of the loans they make, rather than sell them to investors. That requires that they set aside more capital on their balance sheet, a move that drags on future earnings growth.

Financial firms "are going to have to slow things down," said David Hendler, senior analyst at CreditSights. "They're going to see less transaction volume and less complexity; there will be more of a focus on generic product lines."

The result: Banks and brokers, whose returns in recent years have regularly topped 20% and at times 30%, are more likely to see this measure of profitability fall to the "mid-to-high teens in good years and high single digits in the bad years," Mr. Hendler said.

Overall, the losses experienced by major financial players are shaping up to…

(Continue reading on The Wall Street Journal)

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