msnbc.com news services
updated 3/18/2008 10:58:19 AM ET 2008-03-18T14:58:19

Investment bank Lehman Brothers Holdings Inc. said Tuesday its fiscal first-quarter earnings fell 57 percent due to a steep decline in its capital markets business, but its shares soared as it easily beat Wall Street forecasts.

Net income for the quarter ending Feb. 29 fell to $489 million, or 81 cents per share, compared with earnings of $1.15 billion, or $1.96 per share, during the same quarter last year. Lehman’s revenue fell 31 percent to $3.5 billion during the first quarter.

Analysts polled by Thomson Financial, on average, forecast earnings of 72 cents per share for the quarter on revenue of $3.35 billion.

Separately, Goldman Sachs Group Inc on Tuesday said first-quarter earnings fell by half after recording more than $2.5 billion of losses on loans and other assets, yet robust trading helped the bank exceed an anxious market’s reduced expectations.

Wall Street’s biggest bank by profits and market value said net income fell to $1.51 billion, or $3.23 a share, in the quarter ended February 29, from $3.20 billion, or $6.67, in the year-earlier period. Quarterly revenue fell 35 percent to $8.34 billion.

Analysts on average expected Goldman to earn $2.57 a share on $7.3 billion of revenue, according to Reuters Estimates.

“Goldman once again shines in difficult times. Times like these do separate the star performers,” said Michael Holland, founder of Holland & Co LLC, a money manager overseeing about $4 billion. “This was a stellar report.”

Lehman Brothers took a $1.8 billion write-down during the first quarter because of deterioration in the credit markets. It had taken about $2.13 billion in write-downs in the previous two quarters combined, while financial services firms have taken about $160 billion in write-downs since the credit markets began to tighten.

Capital markets revenue fell 52 percent to $1.7 billion because of continued deterioration of the credit and mortgage markets. Gains in products like high-grade corporate debt and foreign exchanges were more than offset by investors’ lack of appetite for riskier products such as residential and commercial mortgage securities and acquisition finance.

Lehman’s chairman and chief executive, Richard Fuld, said in a statement the current credit environment remains “challenging,” but the bank maintains a strong capital base and liquidity position.

Lehman has $34 billion in available liquidity at its holding company.

Liquidity problems among investment banks have been a major question in recent days. Lehman’s competitor Bear Stearns Cos. was forced to sell itself Sunday for about $2 per share in order to avoid bankruptcy. The sale came just days after its liquidity evaporated in a matter of hours, as investors and lenders worried over the company’s investments in risky debt.

As mortgages increasingly defaulted in 2007, investors shied away from bonds backed by the risky loans for fear of the bonds defaulting. That lack of investor appetite led banks to cut the value of their holdings, and has severely reduced investment banks’ capital markets and fixed income business.

Investment management operations at Lehman helped lessen the blow of the weakening credit markets. Lehman’s investment management division posted record revenue of $968 million, 39 percent more than the year-ago period.

Goldman’s trading and principal investments revenue fell by nearly half to $5.12 billion from last year, and down by 26 percent from the fourth quarter, reflecting the continued turmoil in financial markets this year.

Goldman also recorded about $1 billion of net losses on residential mortgage loans and securities, as well as net losses of $1 billion on higher-risk corporate loans and the declining value of its investments. Before hedges, those loan write-downs were $1.4 billion.

Turmoil during the quarter also hurt Goldman’s portfolio of direct investments, resulting in a net loss of $532 million as its stake in Industrial and Commercial Bank of China and other corporate investments fell in value.

Meanwhile investment banking revenue fell by a third to $1.17 billion, reflecting a slump in debt underwriting and decline in stock offerings. Goldman said its investment banking transaction backlog decreased during the quarter.

“Market conditions are clearly very difficult,” Chief Executive Lloyd Blankfein said in a statement. “But we saw strong customer activity across many of our franchise businesses.”

The Associated Press and Reuters contributed to this report.

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