Goldman Weathers Storm, Barclays Bargain Hunts

Source: http://feeds.feedburner.com/~r/USMoneyMorning/~3/394535270/
Posted on Tuesday, September 16th, 2008 | In Market Commentary

Contributed by: Money Morning (http://moneymorning.com) -

Goldman Sachs Group Inc. (GS) and Barclays PLC (BCS) yesterday (Tuesday) continued to avert the perils posed by the economic catastrophe that has ensnared the financial sector, as the former reported earnings that, again, topped Wall Street estimates and the latter endeavored to pick apart the remains of the languishing Lehman Bros. Holdings Inc. (LEH).

Third-quarter profit at Goldman Sachs fell 70% to $845 million, or $1.81 a share, from $2.85 billion, or $6.13 a share, a year earlier. The three months ended Aug. 29 amounted to the worst quarter for the firm since it went public in 1999, but results still managed to beat analysts’ expectations. Projections prior to the announcement were $1.71 per share, according to analysts polled by Thomson Reuters. Goldman has now beaten estimates for 13 straight quarters.

“Despite the deteriorating market conditions, the focus of our people and strength and breadth of our client franchise produced a solid performance in a tough environment,” Chairman and CEO Lloyd Blankfein said in a statement. “We remain well-positioned to meet the needs of our clients and identify and act on the right market opportunities.”

Goldman has fared far better than many of its cohorts, clinging to profitably as the likes of Bear Stearns and Lehman Bros. collapse around it. But credit markets are steadily deteriorating and so is Goldman’s revenue.

The company saw third-quarter revenue slump 51% from a year ago to $6.04 billion. Fixed-income, currencies and commodities, the company’s biggest source of revenue, generated $1.6 billion, down 67%. Financial advisory revenue fell 56% to $619 million.

“This was a challenging quarter as we saw a marked decrease in client activity and declining asset valuations,” said Blankfein.

As the financial crisis deepens, Goldman will find it increasingly difficult to distinguish itself from the broader financial services sector that continues to crumble. Goldman’s stock has plummeted more than 40% so far this year, and will continue its plunge so long as investors continue to panic.

“Goldman is just one company in the midst of a financial system the backbone of which appears to have been broken,” Mike Lenhoff, chief strategist at Brewin Dolphin Holdings PLC (PINK: BDNHF) in London, told Reuters. “There’s almost a sense of hysteria in the market, and however good the results, they’re not going to stand in the way of markets wanting to push values lower.”

Barclays Buys Lehman Assets

As Goldman sits tight and waits for the current financial firestorm to blow over, Barclays is trolling the wreckage for opportunities. The United Kingdom’s third largest bank late yesterday agreed to purchase Lehman’s U.S. capital-markets businesses for $2 billion, the Wall Street Journal reported.

Barclays is not buying any of Lehman’s real estate, real-estate-backed securities, derivatives positions, or over-the-counter trades. These assets were apparently the major stumbling blocks that prevented a deal from being struck in the past weekend’s emergency negotiations.

Because Lehman is under bankruptcy-law protection, its “bad assets” can be left at the holding company level to be liquidated according to the bankruptcy court’s instructions, which means Barclays was able to get what it really wanted in the first place.

As many as 9,000 former Lehman employees will make the move to Barclays as part of the deal.

Analysts anticipate the acquisition will make Barclays a broader, more diversified global financial firm.

“If you want to transform yourself from a minor player into a major firm, this is the time to do it,” said Roger Nightingale, a global strategist at Pointon York in London. “It’s so difficult to do that in an ordinary period.”

The agreement was put before a New York bankruptcy court judge for approval yesterday afternoon, but the official announcement is expected to come this morning.

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