Goldman Sachs, Lehman Brothers take lower than expected hits

19 March 2008

In the general gloom and doom pervading global equity markets, less bad news is good news. That would explain the rising stock prices of investment banks Goldman Sachs and Lehman Brothers today even after reporting 50 per cent-plus declines in quarterly profits, simply because these results were better, or not as bad as what analysts had predicted.

While Goldman Sachs, the largest Wall Street bank by market value reported a 53 per cent drop in first-quarter profits, Lehman Brothers, the fourth largest, reported corresponding declines of 57 per cent. As a result of these unexpected numbers, Goldman and Lehman shares enjoyed considerable gap-up openings in the US exchanges.

This was a relief on the Street after last week's sudden collapse of the venerable Bear Stearns, which had earlier been preceded by the bankruptcy of Carlyle Capital in Amsterdam (See: Carlyle heads for liquidation as creditors refuse bailout).

In fact, there had been speculation that Lehman Brothers might be the next target for a takeover after the acquisition of Bear Stearns by JPMorgan Chase for a mere $2 per share on Sunday. Analysts are waiting with bated breath for the next banking major, Morgan Stanley, to announce its first-quarter results tomorrow.

The impressive climb in share prices today must rank high in the annals of Goldman Sachs and Lehman Brothers. While the former climbed the most in more than seven years, the latter posted its steepest gain ever. This was in spite of the banks reporting the worse results in almost a decade.

As for beating forecasts, here are the figures. While analysts on average expected Goldman to earn $2.57 per share on revenue of $7.29 billion, the bank reported revenue of $8.34 billion, earning it $3.23 per share. This was in contrast to per share earnings of $6.67 a year earlier. Net income had reduced from $3.20 billion last year to less than half at $1.51 billion. This was for the quarter ended 29 February.