Once lauded as “Masters of the Universe”, investment bankers have become persona non grata in the wake of the market meltdown.

A story in this week’s Economist looks at the rise and fall of the deal makers. The high-earning, ego-burdened bankers have traditionally been viewed with a mix of envy and disgust by the retail divisions, who do the grunt work for the glory seeking pretty boys on the institutional side.

But it now appears they flew too close to the sun. “They are being folded back into the humble clay of financial services from whence they sprang in the 1980s,” says the magazine..

The story points out that, Dresdner Bank is merging its investment bank, Dresdner Kleinwort Wasserstein, into its overall banking operation, with the loss of 1,500 jobs. “No more talk of autonomy and of an initial public offering for the investment bankers that was promised last April Fool’s Day.” Similarly, CSFB’s new head, John Mack, is looking to cut its bankers’ lucrative contracts and erode their autonomy

“The markets that traditionally make investment banks most money — equities, and mergers and acquisitions — are in the dumps. Several top-tier firms report tumbling profits and are laying off staff. Only a handful, notably Deutsche Bank and Lehman Brothers, both stronger in bonds than in equities, are hiring — at far less (25-30% less, some say) than they had to pay last year. The days of bidding wars and bonuses guaranteed for two or even three years are suddenly over.”

This is “a watershed” moment says the magazine, noting that even the top-tier investment banks, such as Goldman Sachs and Morgan Stanley, are losing business to integrated banking groups. Shops such as Citigroup, J.P. Morgan Chase and Deutsche Bank are getting the jump because they can use their strong balance sheets to offer loans and other credit products along with the usual investment-banking services. CIBC World Markets has been pioneering this strategy in Canada for several years.

The Economist says that the stand-alone investment banks are suffering partly because they are viewed as unaccountable deal machines. “No investment bank has a fool-proof formula for rewarding its dealmakers. In general, employees share the gains but not the losses both of their ‘profit centre’ and of their bank. That encourages them to gamble the firm’s capital. If things go wrong, there’s always another investment bank to move on to.”

“The entire industry has come into disrepute,” Hans-Jörg Rudloff, the chairman of Barclays Capital, who once ran CSFB, tells the magazine. After a huge clean-up, he predicts, “the financial markets will no longer be centre-stage”