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Updated from 5 a.m. EDT.

Goldman Sachs

(GS) - Get Goldman Sachs Group, Inc. Report

shares were sliding Tuesday morning after the firm beat profit expectations, but posted weaker-than-expected third-quarter revenue.

Goldman Sachs earned $1.81 a diluted share on net revenue of $6.04 billion for the quarter ended Aug. 31, vs. $6.13 a diluted share on revenue of $845 billion in the year-ago period. Analysts polled by Thomson Reuters had expected a profit of $1.73 a share on revenue of $6.23 billion.

"This was a challenging quarter as we saw a marked decrease in client activity and declining asset valuations," Chairman and CEO Lloyd Blankfein said in a company statement. "Despite the deteriorating market conditions, the focus of our people and strength and breadth of our client franchise produced a solid performance in a tough environment. We remain well-positioned to meet the needs of our clients and identify and act on the right market opportunities."

Goldman shares were falling 12.5% to $118.55 after the opening bell.

Goldman, who along with

Morgan Stanley

(MS) - Get Morgan Stanley Report

will be the only major independent broker-dealer in the wake of major rivals like

Lehman Brothers


collapsing or selling themselves amid to avoid a similar fate, has shown a Teflon quality in the during the year-long credit crunch, somehow posting strong profits and defying tempered expectations.

"Business in a word has been 'lousy' in the third fiscal quarter," writes Richard Bove, an analyst at Ladenburg Thalmann. "There has been no vitality in the investment banking sector. Trading activity has suffered in virtually every area. Private equity activity has been weak. The credit derivatives market has slowed. Prime brokerage is not doing well. Retail commissions are suffering."

Lauren Smith, an analyst at Keefe, Bruyette & Woods cut her third quarter earnings estimate last week by 77 cents to $1.40 a share.

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"We took another look at our revenue assumptions for

Goldman Sachs and we feel we were too aggressive in equities trading, which consists of market making, structured product and derivatives," Smith writes in a note. "Given the fall-off of volumes in the latter part of the quarter, drop in commodities prices, derivative volatility and poor performance for hedge funds in the quarter, we believe

Goldman equities trading business could be one of the worst in years."

Compared to the fates of its biggest rivals, Goldman's expected dip in profits is tolerable news for investors.

Lehman Brothers


filed for bankruptcy Monday morning, after a weekend-long search for a buyer came up empty.

The firm's demise came after months of flagging share prices, making Lehman a target for

short sellers

. Buyers were unwilling to take on Lehman without the kind of federal assistance provided to

JPMorgan Chase

(JPM) - Get JPMorgan Chase & Co. Report

when it bought

Bear Stearns

after a similar collapse in March.

Fearing it could be next,

Merrill Lynch


on Monday agreed to sell itself at a steep discount to its market value a year ago to

Bank of America

(BAC) - Get Bank of America Corp Report


Goldman shares shed 12.1% to $135.50 Monday, as the

Dow Jones Industrial Average

sold off more than 500 points to 10,917.51.

Bove writes that poor equities markets is the biggest factor in Goldman's third-quarter prospects. "This hurts every aspect of the business," he writes in his note. "This is because even though Goldman is a diversified firm, its main business continues to be equity related activities. This includes underwriting, trading, and proprietary investments.

"While I continue to believe that there is simply no better firm on the street than this one, even this one cannot escape the problems in its key markets," Bove writes.

This article was written by a staff member of