| How high do you think Goldman should trade after this report? |
Goldman Sachs ( GS) shined through the dark clouds hanging over Wall Street, as strong trading results powered its third-quarter numbers past analysts' estimates. Goldman made $2.85 billion, or $6.13 a share, for the quarter ended Aug. 31, up from the year-ago $1.59 billion, or $3.26 a share. Revenue surged to $12.33 billion from $7.58 billion a year earlier. Analysts surveyed by Thomson Financial were looking for a profit of $4.35 a share on revenue of $9.57 billion. "Given the difficult environment of the third quarter, many of our businesses were challenged," said CEO Lloyd C. Blankfein. "But overall, the quality of our franchise produced strong results as clients continue to look to us for advice and execution. The strength of our client relationships, the diversity of our businesses, and the talent and teamwork of our people continue to drive our performance."
Trading revenue surged 70% from a year ago and 24% sequentially to $8.23 billion. Investment banking revenue jumped 67% from a year ago to $2.15 billion, and underwriting revenue rose 8% to $733 million. The news comes as investors have been bracing for weaker numbers at the big investment banks, as the collapse of the mortgage business has led to a credit crunch that threatens to weigh down balance sheets with debt tied to leveraged buyouts.
Goldman wasn't immune to the troubled credit markets. The company reported a loss of $1.71 billion related to non-investment grade credit origination. The loss was $1.48 billion after hedging activities. Goldman said revenue from mortgages was "significantly higher despite continued deterioration in the market environment." It said that "significant losses" on nonprime loans and securities were more than offset by gains on short mortgage positions. One brokerage that showed more evidence of credit-related problems was Bear Stearns ( BSC), whose profit fell sharply from a year ago and missed reduced analyst estimates. Bear Stearns profit plunged 61% in the third quarter after the company reported $200 million in losses from two hedge funds that made big bets on the subprime mortgage business as well as significantly lower revenue from its fixed income business. On the other hand, Bear Stearns made $171.3 million, or $1.16 a share, compared to $438 million, or $3.02 a share, in the year-earlier period. Revenue slumped 38% to $1.3 billion. Analysts expected the New York securities firm, which is thought to have the most exposure to the deteriorating mortgage industry, would make $1.78 a share on $1.6 billion of revenue. Bear Stearns said earnings results included approximately $200 million in losses and expenses related to the BSAM High-Grade hedge funds. Earlier this summer the company warned that the two funds were essentially worthless after losses on big subprime mortgage bets.
"The third quarter was characterized by extremely difficult securitization markets and high volatility levels across asset classes. While our fixed income results clearly reflect these market conditions, we reported solid revenues in investment banking and record revenues in global equities and global clearing services," said CEO James E. Cayne. "I am confident in the underlying strength of our business and proud of the effort and determination displayed by our employees during these challenging times." Revenue from Bear Stearns' capital markets segment dropped 36% to $1 billion primarily from lower business in its fixed income unit. Fixed income plummeted 88% to $118 million as market conditions in both the mortgage and credit businesses turned "extremely challenging." Earlier this week Lehman Brothers ( LEH) and Morgan Stanley ( MS) reported lower earnings tied to losses from leveraged loan commitments that sat on the companies' books as the credit crunch intensified this summer. Goldman shares rose $5.37 to $210.87 early Thursday, while Bear rose $1.33 to $116.95.