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Tale of 2 banks, turbulence

Earnings show Goldman Sachs soared while rival Bear Stearns stumbled.

September 21, 2007|From Times Wire Services

Goldman Sachs Group Inc. weathered the summer market turbulence far better than expected, while rival investment bank Bear Stearns Cos. stumbled, the companies' fiscal third-quarter earnings reports showed Thursday.

Profit at Goldman Sachs soared 79% to $2.85 billion, or $6.13 a share in the quarter ended Aug. 31, from $1.59 billion, or $3.26 a share, a year earlier, as bets against mortgage-backed bonds helped boost earnings amid the meltdown in those securities.

Bear Stearns' profit plunged to a five-year low in the quarter, sinking 61% to $171.3 million, or $1.16 a share, from $438 million, or $3.02. Results were hurt by sub-prime mortgage-related write-downs, an 88% slide in fixed-income trading revenue and $200 million in costs from the collapse of two of the firm's hedge funds.

Analysts on average expected per-share profit of $4.37 at Goldman and $1.78 at Bear Stearns, according to Reuters Estimates.

Goldman said mortgage- related profit rose "significantly" after the company bet correctly that prices of securities tied to home loans would decline.

The summer plunge in bonds tied to sub-prime home loans triggered a widespread pullback in risk-taking in global markets. In turn, stock prices plummeted amid record trading volume.

Goldman's savvy "short selling" of mortgage securities showed the firm's "ability to not only navigate choppy waters, but make a ton of money doing so," said Glenn Schorr, an analyst at UBS in New York.

Total revenue at Goldman jumped 63% to $12.3 billion as investment banking revenue rose 67% to $2.15 billion, equity trading revenue more than doubled to $3.13 billion, and revenue in the asset management and securities services unit rose 35% to $1.96 billion -- even after two of Goldman's largest hedge funds fell more than 20% in August.

Investment banking revenue advanced 67% to $2.15 billion.

Goldman shares rose as high as $211 on Thursday, then pulled back to close off $1.97 at $203.53. The stock has rebounded from $165 in mid-August and is up 2% year to date.

At Bear Stearns, Chief Executive James Cayne said results suffered from "extremely difficult" securitization markets and high volatility across markets. Total revenue dropped 38% to $1.33 billion in the latest quarter.

The company, long a leader in packaging home loans into mortgage-backed bonds, said fixed-income revenue crumbled to $118 million from $945 million a year earlier as investor demand for mortgage securities collapsed.

"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.

The collapse of two hedge funds hurt Bear Stearns' wealth management unit, which posted a $226-million pretax loss, compared with an $18-million profit a year earlier.

Brighter spots included a 53% jump in equity trading and a 30% rise in revenue from global clearing services, which includes fees from hedge fund clients.

Bear Stearns shares, down 29% this year, slipped 18 cents to $115.46 on Thursday. The stock may have gotten support from Samuel Molinaro, the firm's chief financial officer, who told analysts that "the worst is definitely behind us."

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