Goldman Net Rises 79 Percent, Lifted by Mortgage Bets

By Christine Harper

Sept. 20 (Bloomberg) -- Goldman Sachs Group Inc., the world's largest securities firm, emerged from the worst credit markets in at least nine years to report Wall Street's only profit gain, after bets against mortgages helped produce record fixed-income trading revenue.

Net income rose 79 percent in the third quarter to $2.85 billion, or $6.13 a share, from $1.59 billion, or $3.26, a year earlier, the New York-based company said today in a statement. Earnings beat the $4.35-a-share average estimate of 18 analysts surveyed by Bloomberg, the seventh straight quarter that Goldman has surpassed expectations.

Goldman said mortgage-related revenue rose ``significantly'' after the firm wagered correctly that prices of securities tied to home loans would decline. Goldman Chief Executive Officer Lloyd Blankfein also countered the market turmoil by doubling revenue from equities, reaping record investment-banking fees and booking a $900 million gain on the sale of Horizon Wind Energy LLC.

``They dominate the business in so many different ways,'' said Michael Vogelzang, who helps manage $2.3 billion, including Goldman shares, as president and chief investment officer at Boston Advisors LLC. ``Goldman will tell us what the state of the industry is because they have their hands in most of this stuff.''

Revenue rose 63 percent to $12.3 billion. Return on equity, a measure of how effectively the firm reinvests earnings, was 31.6 percent.

Rival Performance

Morgan Stanley, Goldman's largest rival, and Lehman Brothers Holdings Inc. both reported profit declines this week. Bear Stearns Cos., the smallest of Wall Street's top five securities firms, today said earnings fell 61 percent.

Goldman's revenue in the fixed income, currency and commodities division, the firm's largest, rose 71 percent to $4.89 billion -- even after $1.48 billion of losses for writing down the value of non-investment grade credits. The firm said profits from its short positions on mortgages ``more than offset'' losses on non-prime home loans and securities.

Fixed-income revenue also included the gain from Goldman's $2.15 billion sale of Horizon Wind to EDP-Energias de Portugal SA in July. Goldman bought the developer of wind-power projects, originally called Zilkha Renewable Energy, in March 2005. Analysts estimated the gain at $700 million to $1 billion.

The firm benefited in previous quarters from similar gains on a New Jersey power plant and Japan's Accordia Golf Co.

Shares Rise

Goldman shares rose to $210.35 in 8:47 a.m. trading before U.S. stock exchanges opened, up from a close of $205.50 yesterday. Brokerage stocks rose this week after Lehman said the worst of the credit turmoil had passed and the Federal Reserve cut its benchmark interest rate by half a percentage point.

The perceived risk of owning Goldman's bonds fell after the earnings report, according to credit-default swap traders who bet on the company's creditworthiness. Goldman credit swaps fell 3 basis points to 40, according to broker Phoenix Partners Group in New York. That means it costs $40,000 a year for five years to protect $10 million in Goldman bonds from default.

Investment-banking revenue rose 67 percent to $2.15 billion as Goldman arranged $255 billion of takeovers completed during the third quarter, 78 percent more than a year earlier, according to data compiled by Bloomberg. That increased Goldman's share of completed deals to almost 30 percent from 23 percent.

The firm also managed $11.5 billion of equity offerings during the quarter, more than twice as much as a year earlier, Bloomberg data show.

Equity Trading

Equity-trading revenue more than doubled to $3.13 billion on higher commissions, gains on proprietary bets and increased demand for derivatives. Goldman's principal-investments unit, which hold stakes in companies including Japan's Sumitomo Mitsui Financial Group and Industrial and Commercial Bank of China, had $211 million of revenue, down 51 percent from a year earlier.

Revenue in the asset management and securities services unit rose 35 percent to $1.96 billion, even after two of Goldman's largest hedge funds declined by more than 20 percent in August. The firm said a 40 percent increase in management fees more than made up for a drop in its share of fund profits.

The Global Equity Opportunities fund fell 23 percent in August, its steepest monthly decline ever. Global Alpha, Goldman's biggest hedge fund, dropped 22.5 percent for the month and is down 34.9 percent this year. Goldman injected $2 billion into Global Equity Opportunities and raised $1 billion more from outside investors to keep the fund solvent.

Blankfein's Prediction

Blankfein, who turns 53 today, said in an interview with Germany's Manager Magazin earlier this month that the global credit crisis isn't over and he expects more fallout. A summary of Blankfein's comments was made available by the magazine yesterday. The story will appear in the Sept. 21 edition.

Morgan Stanley's new chief financial officer, Colm Kelleher, said yesterday that the credit-market turmoil is worse than 1998, when Russia defaulted on debt payments.

Goldman's third quarter was five days longer this year. The fiscal period, which ends on the last Friday of the month, finished on Aug. 31 compared with Aug. 25 last year.

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net .
Last Updated: September 20, 2007 08:53 EDT