Goldman Profits Surge, Bear Stearns Tumbles

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Goldman Sachs Group Inc. reported the third-best profit in its 138-year history after betting against the mortgage bonds that roiled credit markets and left Bear Stearns Cos. with its biggest earnings decline in more than a decade.

The world’s largest securities firm said net income rose 79% in the third quarter to $2.85 billion, or $6.13 a share, beating the highest analyst estimate by more than 20%. Earnings at Bear Stearns fell 61% to $171 million, or $1.16 a share.

Goldman said mortgage profits rose “significantly,” after wagering correctly that prices of securities tied to home loans would decline. While the chief executive officer, Lloyd Blankfein, also doubled revenue from equities and reaped record investment-banking fees, his counterpart at Bear Stearns, James “Jimmy” Cayne, floundered in the market turmoil as bad mortgage bets saddled the firm with $200 million of hedge fund losses.

“They’re apples and oranges,” a manager of more than $1 billion at Johnson Asset Management in Racine, Wis., William Fitzpatrick, said. “If there was ever a time that’s going to show up, it’s going to be here, when the American fixed-income market is deteriorating. Goldman has other businesses to offset that, and Bear definitely doesn’t.”

Revenue rose 63% to $12.3 billion, Goldman said in a statement yesterday. Return on equity, a measure of how effectively the firm reinvests earnings, was 31.6%. Bear Stearns’s return on equity was 5.3%.

Bear Stearns’s chief financial officer, Samuel Molinaro, said on a conference call that “the worst is definitely behind us.” Investors remain skeptical. The firm’s shares have dropped 29% this year and trade at only 1.3 times book value, down from more than two as recently as February.

Goldman’s price-to-book ratio is about 2.5, illustrating the premium shareholders are willing to pay for its assets and the leadership of Mr. Blankfein, who turned 53 yesterday.

“They dominate the business in so many different ways,” the president and chief investment officer at Boston Advisors LLC, Michael Vogelzang, said. “Goldman will tell us what the state of the industry is because they have their hands in most of this stuff.” Morgan Stanley, Goldman’s largest rival, and Lehman also reported profit declines this week. Goldman got an added boost from an extra-long reporting period. The firm, which closes its books on the last Friday of the month, ended the third quarter on August 31, compared with August 25 last year.

Investors are betting that pressure on the securities industry will ease in future quarters now that the Federal Reserve has lowered its benchmark interest rate by half a percentage point. When overnight interest rates decline, banks can make money by borrowing cheap and investing in longer-term assets with higher yields.

Shares of the five largest Wall Street firms have advanced since the Fed’s September 18 cut. They fell yesterday, with Bear Stearns dropping 18 cents to $115.46 as of 4:02 p.m. on the New York Stock Exchange. Goldman fell $1.97 cents, or less than 1%, to $203.53.

“We think that the outlook for our businesses is pretty good,” the chief financial officer of Goldman, David Viniar, said in an interview yesterday. Goldman has no plans to slow hiring, he said.

Revenue in Goldman’s fixed income, currency and commodities division, the firm’s largest, rose 71% to a record $4.89 billion — even after $1.48 billion of losses for marking to market the value of non-investment grade credits.

Analysts had expected Goldman to earn $4.35 a share, the average estimate of 18 surveyed by Bloomberg. The high estimate was $5.08. In the year-earlier period, Goldman’s profit was $1.59 billion, or $3.26 a share.

“The numbers are great,” an analyst at UBS AG in New York, Glenn Schorr, wrote in a note to investors yesterday. The earnings demonstrate Goldman’s “ability to not only navigate choppy waters, but make a ton of money doing so,” he said.


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