Turmoil in the US mortgage market took a toll on earnings at Goldman Sachs, Bear Stearns and Freddie Mac amid suggestions that Wall Street’s long run of record-breaking profits may be coming to an end.
Wall Street’s second-quarter results are being closely watched because of fears that soaring US subprime mortgage delinquencies, rising interest rates and choppy equity markets are bringing an end to the near-perfect conditions that led to record first quarter profits.
The money is still flowing in, as evidenced by record results posted by Lehman Brothers on Tuesday. But Thursday’s reports suggested the party on Wall Street is quietening at several banks.
“We don’t have a down environment at all. We have a good environment,” said David Viniar, chief financial officer at Goldman Sachs. “But the first quarter was as good as you can have.”
Goldman said second-quarter profits rose only 1 per cent to $2.33bn, or $4.93 a share, up from $2.31bn, or $4.78 a share, last year. The results beat analysts’ expectations of $4.79 a share. But profits were down from a record $3.2bn in the first quarter – typically Wall Street’s strongest – and revenue fell 1 per per cent to $10.2bn.
The drag came from the bank’s fixed income, currency and commodities business, where revenue dropped 24 per cent to $3.37bn, partly as the result of the problems in the mortgage market.
Bear Stearns, which has the most exposure to the mortgage market among Wall Street banks, said second-quarter earnings sank 10 per cent to $486m, or $3.40 per share, excluding a one-time charge. Fixed income revenue dropped 21 per cent to $962m, reflecting a decline in residential mortgage origination and securitisation volumes.
Bear Stearns said lenders have tightened their criteria for mortgage loans, partly under pressure from regulators, which has sharply reduced the volume of new mortgages. Sam Molinaro, chief financial officer of Bear Stearns, said new subprime mortgage loans were down about 35 per cent in the period.
While rising defaults have not spread into the Alt-A sector, where borrowers have higher credit scores, volumes of new Alt-A mortgages are also down.
“Volumes are gradually building back, but subprime and Alt-A volumes are going to stay under pressure for a while,” he said.
Freddie Mac, the giant mortgage lender, reported a surprise loss of $211m due to wider credit spreads on mortgage assets in its portfolio.
Goldman Sachs shares were down 3.5 per cent to $225.54 in late trade. Bear Stearns shares were up 0.3 per cent to $149.95.
”I think earnings and revenues are going to slow,” said Jon Fisher, who helps manage $1.7bn at Fifth Third Asset Management. “Business is strong but the comparisons [with previous quarters] are tough and the cycle is maturing so we are in a decelerating growth phase right now.”