Banks see a brighter day
The financial sector bounces back as profits at Lehman Brothers and Goldman Sachs clear Wall Street's lowered bar.
NEW YORK (Fortune) -- Maybe the financial system isn't on the verge of collapse after all.
Bank and brokerage stocks soared Tuesday after solid fiscal first-quarter earnings at Lehman Brothers (LEH, Fortune 500) and Goldman Sachs (GS, Fortune 500) sent investors who had bet against the sector running for cover. The gains come after two days of panic selling spurred by the near implosion of Bear Stearns (BSC, Fortune 500), the No. 5 U.S. brokerage house - a spectacle that raised fears about the health of the financial system, as well as worries that another firm could soon fall victim to Wall Street's stampede into safer investments.
The effects of Tuesday's broad rally were most visible on stocks that fell the most during the previous two days of market tumult, with Bear Stearns soaring 31% to $6 and change - more than three times the amount shareholders are due to receive in the firm's shotgun marriage with JPMorgan (JPM, Fortune 500).
For its part, Lehman jumped 33% after the New York-based firm said earnings for the quarter ended Feb. 29 fell to $489 million, or 81 cents a share, from the year-ago $1.15 billion, or $1.96 a share. Wall Street analysts had been looking for a 72-cent profit.
"In what remains a challenging operating environment, our results reflect the value of our continued commitment to building a diversified platform and our focus on managing risk and maintaining a strong capital and liquidity position," CEO Richard Fuld said. "This strategy has allowed us to support our clients through these difficult and volatile markets, while continuing to build and strengthen our global franchise for our shareholders."
Markets have been particularly difficult and volatile for Lehman in recent days. The stock lost 30% of its value over Friday and Monday after Bear Stearns ran out of cash as clients pulled their funds out of the firm. The run on Bear, which necessitated a Sunday night sale at $2 a share to JPMorgan Chase, led some investors to bet that Lehman too would run short of cash.
But led by Fuld, Lehman has spared no effort in getting out the message that it is much better positioned than Bear was to deal with fearful credit markets. In this morning earnings release, the firm noted its "robust liquidity pool" of $34 billion as of quarter-end. With Tuesday's results offering no unhappy surprises - Lehman took a first-quarter mark-to-market writedown of $1.8 billion, which was in line with analysts' expectations - there is hope that the worst of the storm has passed.
Similarly, Goldman Sachs reported first-quarter numbers that were sharply below year-ago levels but better than Wall Street had been expecting. Goldman made $1.51 billion, or $3.23 a share, for the quarter ended last month, down from the year-ago $3.22 billion, or $7.01 a share. Analysts were looking for $2.58.
Revenue fell in trading and investment banking, as merger-and-acquisition activity slowed sharply from a year ago and the firm took a $1 billion loss on its credit products line. But asset management revenue rose 28% from a year ago. Goldman shares rose 12% after hitting a 52-week low yesterday, as investors renewed their optimism that the firm - which was alone among the big Wall Street firms in finding a way last year to profit from the collapse of the subprime mortgage business - will find a way to make more money no matter how the economy and the markets fare.
"Although market conditions present many challenges at the moment," CEO Lloyd Blankfein said, "they also offer considerable opportunities."
For a day, at least, many investors share that view. 
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