Goldman Sachs Group Inc's vaunted trading operations helped the dominant Wall Street firm quadruple its earnings, but investment banking results were lackluster and its shares fell.

Goldman, whose lavish compensation has drawn scrutiny, stayed on pace to hand out more than $20 billion in year-end bonuses. That would be equivalent to more than $630,000 per employee and could beat a record set for compensation in 2007.

But in a sign of weakness, Goldman's investment banking and asset management revenues were lower. The bank fell to No. 2, behind Morgan Stanley , in merger and acquisition adviser rankings for deals announced globally through the third quarter, according to Thomson Reuters. It also dropped a spot to No. 7 in global capital markets.

Goldman produced great numbers but apparently didn't live up to those heightened expectations, said Peter Jankovskis, co-chief investment officer at Oakbrook Investments.

Their real earnings, the question is how repeatable are they, he said. Trading gains come and go. They're genuine earnings at the time, but it's not like something you rely on quarter to quarter.

Fixed income, currency and commodities (FICC) trading nearly quadrupled, helping propel overall revenue to a forecast beating $12.37 billion.

Yet the $5.99 billion in FICC revenue, fueled by credit products and mortgages, also lagged the second quarter and fell short of some high expectations.

While it is difficult to call $6 bln in FICC trading a miss, we suspect the recent run-up in GS shares reflected expectations for a stronger trading revenue number, analyst Jeff Harte of Sandler O'Neill wrote in a research note.

The New York-based firm posted third-quarter net income for common shareholders of $3.03 billion, or $5.25 a share, up from $845 million, or $1.81 per share, a year earlier.

It easily beat analysts' average forecast of $4.24 a share, according to Thomson Reuters I/B/E/S. But one analyst noted the beat was helped by Goldman's decision to set aside less than usual for compensation.

'HEIGHTENED EXPECTATIONS'

Goldman, which has been under fire from some quarters over gold-plated pay so soon after taking government bailout funds, allocated 43 percent of net revenue in the third quarter to compensation and benefits, down from 49 percent in the first half.

Stellar results by rival JPMorgan Chase & Co on Wednesday may have prompted investors to raise the bar for Goldman.

JPMorgan's lift from fixed income -- its trading revenues in that area rose more than five-fold to $5 billion -- in particular led analysts and investors to expect a similar or larger jump at Goldman, which has a reputation as a more aggressive risk-taker than the commercial bank.

Goldman shares fell 2.0 percent to $188.45 in afternoon trading, underperforming the Amex Securities Broker dealer index <.XBD>, which was 1.2 percent lower. The shares are up nearly 124 percent this year.

Goldman Sachs Chief Financial Officer David Viniar said results lagged behind the second quarter's record earnings in part because of the summer downturn in the mergers and acquisitions business. He said the calendar for fourth-quarter equity underwriting appeared robust.

Viniar, speaking on a conference call, declined to compare Goldman's performance with that of JPMorgan, saying it was always hard to compare two companies quarter over quarter.

Citigroup Inc , which also reported results on Thursday, posted a loss of 27 cents per share as it suffered $8 billion of credit losses.

Goldman's earnings included the firm's repurchase of $1.1 billion worth of warrants issued to the U.S. Treasury stemming from its participation in last year's banking bailout. Goldman recorded the purchase as a reduction to shareholder equity.

Goldman has paid back $10 billion in taxpayer bailouts it received from the U.S. Treasury's Troubled Asset Relief Program, and the firm also benefited from other government programs, including the bailout of insurance giant American International Group Inc . Goldman said in March that it did nothing wrong when it accepted payments to close out trades with AIG.

COMPENSATION POOL

Goldman set aside $5.4 billion for compensation during the quarter, raising the total to $16.8 billion so far this year. The firm has drawn fire from politicians and the public for setting aside so much for bonuses so soon after repaying a $10 billion taxpayer bailout.

Goldman, which has been working on burnishing its image, said it made a $200 million contribution to the Goldman Sachs Foundation, an education charity. That helped raise its non-compensation expenses 2 percent to $2.23 billion.

Viniar, in the conference call, was bombarded by questions from reporters about the firm's plans for doling out bonuses. He said Goldman would not make a decision on the matter until the end of the year.

I would prefer people were focused on the performance of the business, he said.

STRONG TRADING REVENUE

Net revenue in equities was up 78 percent to $2.78 billion, helped by a strong performance in derivatives and shares.

Principal Investments posted net revenue of $1.26 billion after a $453 million loss in the year-ago quarter.

Net revenue in investment banking and financial advisory fell during the quarter, reflecting the decline in mergers and acquisitions.

Investment banking net revenue was $899 million, down 31 percent from the third quarter of 2008. Results in financial advisory were $325 million, down 47 percent.

Net revenue in Asset Management and Securities Services was down 29 percent to $1.45 billion.

Rival Morgan Stanley is expected to report quarterly results next Wednesday.

(Reporting by Steve Eder, Paritosh Bansal and Elinor Comlay; Editing by John Wallace, Gary Hill)

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