Goldman profit rises

By Joseph A. Giannone

NEW YORK (Reuters) - Goldman Sachs Group Inc (GS.N) said on Tuesday fourth-quarter earnings rose 2 percent, beating expectations and capping a record year, but its shares fell more than 3 percent after it gave a cautious outlook.

The world's largest securities firm by market value -- which largely sidestepped the credit crisis that afflicted its competitors -- said net income rose to $3.22 billion, or $7.01 a share, in the quarter ended November 30, from $3.15 billion, or $6.59, a year earlier.

Net revenue rose 14 percent to $10.74 billion as higher merger advisory fees and surprisingly strong debt trading bolstered results.

The results exceeded analysts' expectations of earnings of $6.68 a share. But Goldman's shares fell 3.4 percent to close at $201.51 because the firm said trading and investment banking markets would make earnings growth challenging.

"We're cautious about the near-term outlook for our businesses as we see dislocation in some of the world's capital markets has continued," said Goldman Chief Financial Officer David Viniar in a conference call with reporters.

Viniar declined to provide details on mortgage-related write-downs, except to say losses and offsetting gains from hedges were both "modest." Exposures to leveraged loans, mortgage-related securities and so-called Level 3 assets all decreased during the quarter.

Goldman's muted outlook, combined with Lehman Brothers Holdings Inc LEH.N last week reporting a 12 percent decline in earnings, cast a pall on financial stocks. The shares of Morgan Stanley (MS.N), expected to report a quarterly loss on Wednesday, fell 3 percent as analysts forecast Wall Street's worst earnings season since the Internet bubble burst in 2001.

RECORD YEAR

The Goldman results capped a record year for the investment bank, which generated a 33 percent return on equity, despite the turmoil in credit markets and a slump in leveraged buyouts.

And while the rest of Wall Street recorded billions in mortgage and credit write-downs, Goldman's losses were modest.

Goldman Chief Executive Lloyd Blankfein "avoided the land mines that exploded the competition and made a profit in a challenging environment because clients stayed with him," said Michael Holland of money management firm Holland & Co.

Employees of Goldman certainly profited, as salaries, bonuses and benefits surged 23 percent to $20.2 billion for the year. With head count growing 15 percent to 30,500 people, average compensation was about $660,000.

Once again, it was the firm's traders and principal investment desks that set the pace, generating nearly two- thirds of the revenue.

Fixed-income, currency and commodities trading revenue rose 6 percent to $3.3 billion. Goldman included $800 million in gains from its sale of Cogentrix Energy power plant interests, which it regards as part of the commodities business. The quarter also included higher revenue from mortgages.

Viniar declined to comment on Goldman's current mortgage trading position -- he had disclosed a large gain made from betting against subprime mortgages during the third quarter -- but he cautioned that the subprime crisis is not yet over.