Two Wall Street investment banks had markedly different success weathering summer market turbulence as results at Goldman Sachs easily exceeded expectations while those at Bear Stearns fell far short.
Third-quarter profit at Goldman , the largest securities firm by market value, soared 79% to $2.85 billion, or $6.13 per share, from $1.59 billion, or $3.26 per share, a year earlier, as bets against mortgages helped boost revenue from fixed-income trading to a record.
At Bear Stearns , profit plunged to a five-year low, sinking 61% to $171.3 million, or $1.16 per share, from $438 million, or $3.02 per share. Results suffered from an 88% decline in fixed-income trading revenue, and $200 million of costs from the collapse of two hedge funds.
Analysts on average expected profit per share of $4.37 at Goldman and $1.78 at Bear Stearns, Reuters Estimates said.
In morning trading, shares of Goldman rose $3.45 to $208.95, while Bear Stearns rose $1.37 to $117.08. "As long as they didn't completely fall out of bed the market was going to be OK," said Michael Church, a portfolio manager at Church Capital Management in Philadelphia.
Wall Street investment banks this week turned in mixed results after the collapse of the subprime mortgage market caused investors to cut risk tolerance for a wide variety of securities.
Results at Lehman Brothers topped forecasts while those at Morgan Stanley's fell short. Profit at both fell. Merrill Lynch reports results next month.
A seizing up of credit and capital markets and the nation's housing slowdown helped push the U.S. Federal Reserve on Tuesday to cut interest rates more than many economists had expected.
"The worst is largely behind us," Bear Stearns Chief Financial Officer Sam Molinaro said on a conference call.
Diversity Helps
At Goldman, Chief Executive Lloyd Blankfein oversaw a 71% increase in revenue from fixed income, currencies and commodities to $4.89 billion, despite $1.48 billion of losses related to write-downs of non-investment grade credits.
This was partly offset by a $900 million gain from the sale of power company Horizon Wind Energy. Investment banking revenue, meanwhile, rose 67% to $2.15 billion, helped by advising on mergers and acquisitions.
Overall net revenue rose 63% to $12.33 billion. "It demonstrates how diverse Goldman is both in terms of its product range as well as its geographic diversity," said Camilla Petersen, an analyst at Atlantic Equities in London.
"Who would have thought they would put out $1.4 billion in advisory fees?
On a conference call, David Viniar, Goldman's chief financial officer, said the subprime meltdown is "closer to the bottom" than it was three months ago. "In the medium to longer term, there's still pretty good economic growth," he said. "That causes us to be optimistic."
Market Turns
At Bear Stearns, Chief Executive James Cayne said results suffered from "extremely difficult" securitization markets and high volatility across asset classes.
The company, long a leader in packaging home loans into mortgage-backed bonds, said fixed-income revenue fell to $118 million from $945 million a year earlier. Total net revenue slid 37.5% to $1.33 billion.
"Bear Stearns is a big fixed-income shop, and when things got frothy in those markets, they weren't ready for things to turn," said Adam Compton, an analyst at RCM Global Investors in
San Francisco, which invests $150 billion. The collapse of two hedge funds hurt results in the wealth management unit, which posted a $226.5 million pre-tax loss, compared with an $18 million profit a year earlier.
Brighter spots included revenue increases of 53% from equity trading and 30% from global clearing services, which includes fees from hedge fund clients. Investment banking revenue fell 9%.
Through Wednesday, Goldman shares were up 3.1% this year, while Bear Stearns shares were down 29%. The Amex Securities Broker Dealer Index was down 2.5%.