Relief at Goldman and Lehman results

by Dave Nixon

Story link: Relief at Goldman and Lehman results

New York was cloaked in dark on Tuesday but bankers and investors were basking in an uncommon ray of sunshine.

Following days dominated by the collapse of Bear Stearns and rumours of additional financial bloodshed, better-than-expected results from Goldman Sachs and Lehman Brothers helped Wall Street breathe a huge sigh of relief.

Goldman Sachs recorded a 53 per cent drop in net earnings to $1.5bn in the quarter to February, while Lehman suffered a 57 per cent decrease in net earnings to $489m in the same period.

But given the shadow that had prevailed since Sunday’s government-sanctioned, cut-price takeover of Bear by JPMorgan Chase, the fact that Goldman and Lehman started off the reporting season with an encouraging bolt from the blue was enough to activate a rally in financial stocks.

The good news was predominantly needed by Lehman, whose shares had tumbled 19 per cent on Monday in the midst of fears its business model and financial exposure to risky assets were treacherously comparable to Bear’s.

Tuesday’s results helped to allay those concerns, sending Lehman shares nearly 35 per cent higher to $42.43 in mid-afternoon New York trading.

The investment bank’s much-feared writedowns on mortgage-backed securities and leveraged loans totalled $1.8bn, less than analysts’ forecasts.

The smaller-than-expected blow was principally attributable to a successful hedging strategy on Lehman’s $32bn of mortgage securities and loans, which reduced the loss on those devalued assets from $3bn to $800m.

The results furthermore gave Lehman’s management the opportunity to repeat Monday’s reassurances concerning the firm’s financial health.

Lehman stressed that its long-term capital was more than $153bn and the latest rumors had not affected its capacity to raise short-term funding, if required.

Ms Callan said Lehman would use a new liquidity window opened by the Federal Reserve at the weekend following the Bear disaster.

She said the terms offered at the window, which lets investment banks to borrow directly from the Fed, were eye-catching compared to market rates and there was no disgrace attached to tapping the monetary authorities at times like these.

Nonetheless, she recognized that Bear’s downfall meant investment banks such as Lehman would have to work harder to prove their worth to investors.

David Viniar, Goldman Sachs’ chief financial officer, made equally reassuring noises on his bank’s liquidity and said it was well-positioned to take gain of any pick-up in takeover and credit activity.

Goldman suffered $1bn of net losses on residential mortgage loans and securities, in addition to net losses of $1bn on corporate loans and the declining value of its investments.

However, the largely positive tone of the results helped the bank’s shares to rise more than 18 per cent to $169.06 by mid-afternoon in New York.

The performance of the two firms decorated how diversification can assist investment banks cushion the blow of sharp downturns in some markets.

The highlights at both Goldman and Lehman were in less-heralded businesses such as asset management and equity trading.

At Goldman, incentive fees, a function of a fund’s performance, more than doubled from a year ago, helping net revenues in the asset management division to rise 23 per cent to $1.3bn.

People close to Goldman said the performance was driven by good results in its hedge funds of funds.