Goldman Gains in Worst Wall Street Quarter Since '01 (Update5)

Dec. 18 -- Goldman Sachs Group Inc., the world's largest securities firm, reported record earnings in the worst quarter for Wall Street in six years.

Fourth-quarter net income climbed 2 percent to $3.22 billion, or $7.01 a share, from $3.15 billion, or $6.59, a year earlier, the New York-based firm said in a statement. Goldman fell 3.4 percent in New York Stock Exchange composite trading after Chief Financial Officer David Viniar said he was ``cautious about the near-term outlook.''

Goldman's earnings were buoyed by $1.3 billion of gains from the sale of power plant investments and loans to finance leveraged buyouts. Chief Executive Officer Lloyd Blankfein sidestepped mortgage losses that unseated CEOs at Merrill Lynch & Co., Citigroup Inc. and UBS AG.

``You would never have thought there was a subprime problem, not from their numbers anyway,'' said Rose Grant, who helps manage about $2 billion, including Goldman shares, at Boston-based Eastern Investment Advisors.

Goldman fell $7.12 to $201.51 at 4:01 p.m. in NYSE trading, after the firm said revenue in the three months ended Nov. 30 declined from the prior quarter, led by a 32 percent drop in fixed-income trading.

``The weakest thing environmentally in the fourth quarter was the credit markets in November,'' Viniar said in a conference call with analysts. ``It's too early to tell in December'' how the markets are developing.

Core Items?

Compared with the third quarter, ``negatives included weaker fixed-income trading, lower equity trading and debt underwriting,'' Deutsche Bank AG analyst Mike Mayo wrote in a note to investors today. ``There will likely be debate about which items are `core' or not.''

Fourth-quarter revenue in Goldman's fixed income, currency and commodities division, the firm's largest, climbed 6 percent to $3.3 billion from a year earlier. The results included a gain of about $800 million from Cogentrix Energy LLC, the Goldman subsidiary that sold 80 percent of its stake in 14 power plants during the quarter.

Goldman also booked a $500 million gain as loans to finance leveraged buyouts increased in value during the quarter, partially offsetting a $1.48 billion writedown on loans and loan commitments in the previous period.

Firmwide revenue rose to $10.7 billion, up 14 percent from the fourth quarter of 2006, Goldman said. Return on equity, a measure of how effectively the company reinvests earnings, was 34.6 percent in the fourth quarter, down from 41.5 percent a year earlier.

Mortgage Impact

Goldman is the second of Wall Street's five largest firms to post fourth-quarter earnings. Lehman Brothers Holdings Inc., the fourth-biggest by market value, reported last week that profit dropped 12 percent and said losses from the collapse of the subprime mortgage market will probably extend into next year.

Viniar declined to disclose the size of any writedowns or gains on mortgage-related securities, saying only that the total impact on the firm was ``modest.''

Goldman had less than $400 million in collateralized debt obligations at the end of the fourth quarter and less than $1.5 billion in subprime mortgage-related assets, Viniar said. The firm's so-called Level 3 assets, which are hardest to value, fell to 6 percent of total assets in the period from 7 percent in the third quarter, he said.

Rivals Fall

Analysts predict Morgan Stanley and Bear Stearns Cos., the second- and fifth-biggest firms, will report their first-ever quarterly losses later this week because of wrong-way bets on mortgage-related securities. Merrill Lynch & Co., the third- largest, will post its financial results next month. Goldman was expected to earn $3.14 billion in the quarter, according to the average estimate of nine analysts surveyed by Bloomberg.

Total profit for the five companies will decline 61 percent in the fourth quarter, analysts predict. The drop would be steeper than the previous quarter's 53 percent and the worst since the fourth quarter of 2001, when earnings shrank 88 percent.

``Just looking at the world's capital markets and looking at the lack of liquidity that we saw in November, it has to make us cautious,'' Viniar said today in a telephone interview.

Goldman shares gained 1 percent this year, while shares of its major rivals fell. The firm's full-year profit climbed 22 percent to a record $11.6 billion and revenue increased 22 percent to $46 billion.

`Head and Shoulders'

``Goldman's results stand head-and-shoulders above its competitors, many of whom have struggled with the difficulties in the mortgage market this past year,'' said Octavio Marenzi, CEO of Boston-based research firm Celent. ``Goldman took that weakness and turned it to its own advantage.''

Viniar said the firm's so-called unfunded commitments to provide leveraged loans on takeovers fell to $27 billion at the end of the fourth quarter from $42 billion at the end of the previous period.

Goldman sold or canceled $16 billion of the loan commitments during the fourth quarter, funded $9 billion of the commitments and made $10 billion of new commitments, Viniar said on a conference call with journalists today.

Equity trading revenue climbed 22 percent to $2.59 billion. The S&P 500 Index ended November just marginally higher than it started, while the U.K.'s FTSE 100 gained and Japan's Nikkei 225 fell 5.1 percent. Average daily trading volume on the New York Stock Exchange fell 8.7 percent during the period from a year earlier, and rose 10.5 percent on the Nasdaq.

Global Alpha

Investment-banking revenue rose 47 percent to $1.97 billion. Financial advisory revenue, derived mainly from counseling clients on mergers and acquisitions, climbed 98 percent to $1.24 billion.

Goldman, the No. 1 adviser in worldwide announced mergers and acquisitions for the seventh consecutive year, arranged $417.9 billion of takeovers completed during the fourth quarter, more than double a year earlier, according to data compiled by Bloomberg. The company's backlog of pending merger assignments fell during the fourth quarter, Viniar said.

The firm, which ranks second this year behind Zurich-based UBS in managing global equity offerings, arranged $18 billion of equity sales during the quarter, up from $16.7 billion a year earlier, Bloomberg data show.

Revenue from asset management increased 25 percent to $1.17 billion. The firm is starting three new hedge funds, expanding its so-called alternative investment offerings.

Investors pulled about $3 billion from Goldman's so-called quantitative hedge funds during the quarter, Viniar said. About half of the withdrawals were from the Global Alpha fund, he said.

``Redemptions in the first quarter from what we can see will be even greater than that, and again about half of that is going to be Global Alpha,'' Viniar said.