March 18 (Bloomberg) -- Goldman Sachs Group Inc., the world's biggest securities firm by market value, reported first- quarter profit that beat analysts' estimates as asset writedowns and a drop in fixed-income revenue weren't as bad as expected.

Goldman rose the most in eight years in New York trading after the company said net income fell 53 percent to $1.51 billion, or $3.23 a share, in the three months ended Feb. 29. Analysts had predicted the company would earn about $2.60 a share, according to a Bloomberg survey.

Chief Executive Officer Lloyd Blankfein is navigating a credit market crisis that led the U.S. Federal Reserve and JPMorgan Chase & Co. to organize a bailout and then a takeover of Bear Stearns Cos. after clients withdrew assets and creditors stopped renewing short-term loans. Lehman Brothers Holdings Inc. rallied 46 percent in New York trading as concern abated that lenders and trading counterparties might flee.

``Our liquidity position is stronger than it's ever been,'' Goldman Chief Financial Officer David Viniar said on a conference call with reporters today. ``We keep a tremendous amount of cash on hand.''

Goldman surged $24.57, or 16 percent, to $175.59 at 4 p.m. in New York Stock Exchange composite trading. Lehman rebounded from a record loss yesterday after also reporting earnings that beat analysts' estimates. U.S. stocks rallied the most in five years after the Fed cut its benchmark interest rate by 0.75 percentage point.

11 Quarters

The first quarter marks the 11th straight that Goldman's earnings exceeded analysts' estimates, according to data compiled by Bloomberg. Goldman has declined 18 percent this year in New York trading as losses in subprime mortgages eroded confidence in the credit markets.

Goldman's reserve of cash and liquid assets was more than $60 billion in the first quarter and ``significantly higher than that in the last couple of weeks,'' Viniar told analysts today. That pool was $60.5 billion on average in fiscal 2007, Goldman reported in a regulatory filing. Less than $5 billion of the total is made up of commercial paper, short-term loans that can be less reliable in times of crisis, Viniar said.

Lehman also reassured investors today, saying the firm had $30 billion of cash and $64 billion of assets that can be quickly turned into cash as of yesterday. The firm reported that first-quarter profit fell 57 percent, less than analysts predicted.

``We have 100 percent confidence in Lehman Brothers,'' Goldman's Viniar said today in an interview. ``They're a good, healthy competitor.''

Writedowns and Losses

Banks and brokers have taken more than $195 billion in writedowns and credit losses on securities linked to subprime mortgages since the start of 2007, eroding investor trust in financial institutions.

Bear Stearns, the smallest of the five biggest U.S. securities firms and one of the firm's most tied to the mortgage markets, lost the confidence of lenders last week and was acquired by JPMorgan Chase & Co. for about $240 million, or less than 3 percent of Bear's market value at the start of last week.

Goldman has stayed ``above the fray and probably faces the least amount of risk,'' Ralph Cole at Ferguson Wellman Capital Management in Portland, Oregon, which manages $2.7 billion including Goldman stock, said before the earnings release. ``People have a tremendous amount of confidence in them and that's what it comes down to these days.''

Mortgage Assets

The firm's profit dropped the most since 1999, as Goldman showed its first losses on mortgage-related assets since the credit-market crisis began last year. The company wrote down about $1 billion from mortgages and mortgage securities, mostly because the prices of higher-quality home loans, known as prime or Alt-A, fell in the first quarter, Viniar said.

The firm still holds about $12 billion of prime mortgages, $5 billion of Alt-A mortgages and $2 billion of subprime, Viniar said. Those amounts don't account for any hedges, he added. Last year Goldman's earnings hit a record as rivals recorded losses, in part because the firm made money by betting that subprime mortgage securities would drop in value.

With the higher-quality loans, Viniar said it's unlikely the firm can avoid losses if they continue to lose value because they're harder to hedge.

``If the market continues to deteriorate, we would probably have more losses,'' Viniar said today. ``I happen to think that many of the non-subprime assets are now trading below their true fundamental value.''

Fixed Income

The fixed-income business, Goldman's largest, also lost about $1 billion on high-yield, or leveraged, loans. Goldman cut its loan holdings to about $27 billion in the first quarter from $43 billion in the fourth quarter, Viniar said today. Some of the loans are marked at less than 80 cents on the dollar, he said.

Goldman's so-called Level 3 assets, which are the hardest to value, rose to about 8 percent of the firm's total assets from about 7 percent in the prior quarter, Viniar told analysts. The increase was largely related to commercial real estate loans that were moved from Level 2, where assets are valued in part using market prices, to Level 3.

Principal investments reported a loss of $532 million in the quarter compared with a $1.7 billion gain a year earlier. The swing reflects a $135 million loss from the drop in value of Goldman's stake in Beijing-based Industrial & Commercial Bank of China Ltd. and a $410 million decline in other corporate and real estate holdings.

Biggest Division

Revenue from fixed-income, currencies and commodities, Goldman's biggest division, fell 32 percent to $3.14 billion. Equities trading revenue dropped 19 percent to $2.5 billion from $3.1 billion a year earlier. Investment banking revenue tumbled 32 percent to $1.17 billion from $1.72 billion in the same period last year.

The backlog of investment-banking assignments dropped ``across the board'' during the quarter, Viniar said. ``Until there's more certainty in the world and until people feel better about the global economies I don't see that business picking up,'' he said.

Goldman's overall net revenue dropped 35 percent to $8.3 billion in the first quarter, its biggest decline since the firm went public in 1999. Return on equity, a measure of how effectively the company reinvests earnings, was 14.8 percent in the first quarter, down from 38 percent a year earlier.

``We're getting closer to the bottom, I don't know that we're at the bottom,'' Viniar told reporters today when asked to assess the outlook for the credit markets.

Asset Management

One bright spot was asset management, where revenue climbed 23 percent to $1.32 billion, with net inflows from clients of $29 billion. In the securities-services division, which lends to hedge funds and processes their trades, revenue climbed 38 percent to $722 million.

``People were asking, why would I do business with Bear when Goldman's there?'' Ferguson Wellman's Cole said. ``It seemed like Goldman picked up market share due to lack of confidence in Bear.''

In an extraordinary move aimed at restoring confidence in the markets, the Fed backed JPMorgan's $240 million purchase of Bear Stearns by agreeing to finance $30 billion of the least liquid securities on Bear Stearns's balance sheet. The central bank is also allowing securities firms to borrow cash from the Fed, like banks, using high-grade mortgage-backed and other securities as collateral.

Viniar applauded the Fed's move and said he anticipates that Goldman will borrow money from the Fed's discount window ``over time.''

``The regulators are being very proactive, very on top of what's going on in the markets,'' Viniar told reporters today.

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net.

Last Updated: March 18, 2008 17:38 EDT