Two Wall Street investment banks had dramatically different success in weathering summer market turbulence as results at Goldman Sachs Group Inc easily exceeded expectations, while those at Bear Stearns Cos Inc fell far short.
Third-quarter profit at Goldman, the largest securities firm by market value, soared 79 percent 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 percent to $171.3 million, or $1.16 per share, from $438 million, or $3.02. Results were hurt by write-downs of subprime mortgages, an 88 percent slide in fixed-income trading revenue, and $200 million of costs from the collapse of two of its hedge funds.
Analysts on average expected profit per share of $4.37 at Goldman and $1.78 at Bear Stearns, Reuters Estimates said.
Goldman had a stellar performance, no question about it, said Mark Batty, an analyst at PNC Wealth Management in Philadelphia, which invests $77 billion. Bear had a challenging quarter. They have more exposure to the mortgage business, and they suffered for it.
In afternoon trading, shares of Goldman rose $2.22 to $207.72, while Bear Stearns shares rose $2.61 to $118.25.
Bear Stearns recovered early losses after Chief Financial Officer Sam Molinaro said on a conference call: The worst is largely behind us.
Wall Street banks this week turned in mixed results after simmering trouble in the subprime mortgage market came to a boil over the summer, causing investors to reduce their risk tolerance for a wide variety of securities.
Results topped forecasts at Lehman Brothers Holdings Inc and fell short at Morgan Stanley. Profit at both fell. Merrill Lynch & Co 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 the federal funds rate by half a percentage point to 4.75 percent, more than many economists had expected.
DIVERSITY HELPS GOLDMAN
At Goldman, Chief Executive Lloyd Blankfein oversaw a 71 percent 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.
That was partly offset by a $900 million gain from the sale of power company Horizon Wind Energy LLC.
Investment banking revenue, meanwhile, rose 67 percent to $2.15 billion, helped by merger advisory fees. Overall net revenue rose 63 percent to $12.33 billion, the second-highest ever.
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 three months ago. He also said Goldman may have a chance to buy mortgage assets at low, distressed prices.
In the medium to longer term, there's still pretty good economic growth, he said. That causes us to be optimistic.
MARKET TURNS FOR BEAR STEARNS
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 percent 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 Bear Stearns structured credit 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 percent from equity trading and 30 percent from global clearing services, which includes fees from hedge fund clients. Investment banking revenue fell 9 percent.
Through Wednesday, Goldman shares were up 3.1 percent this year, while Bear Stearns shares were down 29 percent. The Amex Securities Broker Dealer Index. of which both banks are members, was down 2.5 percent.
(Writing by Jonathan Stempel; Additional reporting by Kristina Cooke and Dan Wilchins)