Financial Stocks Lead Wall Street Turnabout
Wednesday, March 19, 2008
Wall Street giants Lehman Brothers and Goldman Sachs reported earnings yesterday that beat analysts' expectations, calming fears that investment banks were in imminent danger of collapse and sending U.S. stocks to their biggest gains of the year.
The stock market was further boosted late in the trading day when the Federal Reserve cut a key interest rate by three-quarters of a percentage point.
The Dow Jones industrial average of blue-chip stocks rose 420.41 points, or 3.51 percent, to 12,392.66, its biggest gain in nearly six years. The Standard & Poor's 500-stock index, a broader measure, rose 54.14, or 4.24 percent, to 1330.74.
Every major sector gained, but financial stocks led the day. Some enjoyed their largest jumps since a collapse in the subprime mortgage industry struck credit markets last year.
"What a difference a day makes," said James H. Herrick, director of equity trading at Robert W. Baird. "If you love financials, it's great."
Lehman Brothers shares rose 43 percent, to $45.51, wiping out two days of sharp losses. Goldman Sachs was up 16 percent, to $175.59.
Even shares at beleaguered investment bank Bear Stearns jumped nearly 23 percent, to $5.91, after reports that its executives were considering whether to reject an offer by J.P. Morgan Chase to buy Bear for $2 a share. That bid was brokered by the Fed over the weekend in an attempt to keep Bear Stearns out of bankruptcy.
But some on Wall Street remained skeptical about whether the big brokerages had revealed all their losses from mortgage investments.
Most analysts expected profit in the quarter ended Feb. 29 at Lehman Brothers to be far less than in the comparable quarter last year, projecting that earnings would fall by more than half, to 72 cents a share. But in its earnings report, Lehman said profit was 81 cents a share. While profit was still down 57 percent, to $489 million, the shallower decline cheered Wall Street.
The figures reported by Lehman, the fourth-largest investment bank, hinged partly on its calculation of losses from its holdings of troubled mortgage bonds and similar assets. The bank said it had written down risky securities by $1.8 billion but still owns $68 billion worth of such securities.
Lehman has some latitude in determining what the securities in its portfolio are worth. Some analysts who follow the company have criticized Lehman for being too optimistic about their value.
"I still don't believe any of these numbers because I still don't think there is proper accounting for the liabilities they have on their books," said Peter Schiff, president and chief global strategist of Euro Pacific Capital. "People are going to find out that all these profits they made were phony."
Placing a value on mortgage-related securities is difficult because they are now so rarely traded. Market transactions offer little guidance to their true value. With investors refusing to buy such securities, a financial company has to come up with its own estimate of what they are worth.
Yesterday's earnings offered a respite for Lehman, which had come under intense pressure starting last week as rumors spread that it was facing huge losses and running out of cash. Investors worried that Lehman could face default like Bear Stearns because of exposure to mortgage investments. Some clients considered pulling their money from Lehman. The bank's share price fell 15 percent on Friday and 19 percent on Monday.
Executives moved quickly to prevent speculation from becoming a run on the bank. Chief executive Richard S. Fuld Jr., who has spent his entire 39-year career at Lehman, flew back from India over the weekend to address the crisis while keeping in touch with his team by telephone from the plane. Other top managers canceled vacations and met late into the night to formulate a strategy that would save the company.
Lehman managers also launched an aggressive campaign to persuade investors to stay with the firm. The executives phoned the supervisors of traders who had expressed doubts about Lehman's health and gave them details of its cash holdings to demonstrate that the company was healthy. An unprecedented offer from the Fed on Sunday night to provide emergency loans to investment banks also helped reassure Lehman's clients.
Like Lehman's earnings, Goldman Sachs's beat expectations, though the firm warned of tough times ahead. First-quarter profit at Goldman, the largest investment bank on Wall Street, was off 53 percent from a year earlier. The firm reported $2.5 billion of losses on mortgage securities and similar assets. Those losses erased solid results from Goldman's trading divisions, which benefited from volatile markets because traders are busier and earn more fees.
Goldman reported quarterly earnings of $1.51 billion, or $3.23 per share, compared with $3.2 billion, or $6.67 a share, a year earlier. Analysts were expecting earnings of $2.58 a share.
Goldman absorbed $1 billion in losses from its mortgage securities and another $1 billion in losses on investments in private-equity buyouts.
The news that Lehman Brothers and Goldman Sachs had beat expectations allowed investors to shrug off bad reports about wholesale inflation and the housing market.
The Commerce Department said housing starts were down 0.6 percent and building permits fell 7.8 percent in February. The Labor Department reported a 0.3 percent rise in its producer price index for February. But the core index, which excludes food and energy prices, rose 0.5 percent, more than economists had expected.
Staff researcher Richard Drezen contributed to this report.