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In a shocking reversal of fortune profits at Fortune 500 companies fell 87% from the peak in 2006 until the end of 2008.

From the all-time high of $785 billion in 2006, Fortune 500 earnings slipped to a robust, even bubble-level, $645 billion in 2007. The real damage came last year, when profits plunged to $98.9 billion for 2008, a decline of 87% from 2006. Results are compared by Fortune Magazine for 2008 results with 2006, since it was the previous profit peak.

Why did profits fall so fast? The economy’s fall was precipitous, leaving companies almost no time to adjust and pushing the 500 from the summit to something resembling an earnings depression. “We’ve never seen such a sudden, severe decline in profit performance,” says John Lonski, chief economist for Moody’s Investor Service.

The decline in earnings were lead by banks and securities firms that bet recklessly on the housing boom. They suffered epic losses as their assets turned toxic, most notably the packages of risky mortgages known as collateralized debt obligations (CDOs) that have collapsed in value as millions of Americans default on their home loans. The losses on those toxic instruments, which take the form of massive write-downs, have been overwhelming.

Those who think that the recent reported earnings improvements among financial firms signal that they have turned the corner and that their stocks are cheap at distressed prices may want to reconsider their views. With the housing market still in decline, with credit card losses with bank cards soaring, with commercial real estate starting to give way, and with the unemployment rate in a merciless climb, the bottom is probably still far, far away.

Even when the stock market bottom is reached the stock market as well as the economy in general may remained in depression for many years. There will no going back to the heady go go years of 2006 and 2007 as that world no longer exists.

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