April 14 (Bloomberg) -- Goldman Sachs Group Inc., buoyed by better-than-expected earnings and a 54 percent gain in its stock price, raised $5 billion in the largest stock sale this year to help repay $10 billion in government rescue funds.

The bank sold 40.65 million shares at $123 each, 5.5 percent less than yesterday’s closing price, the New York-based company said today in a statement. The price was the same as when Goldman Sachs last sold shares in September. Until last week, the stock hadn’t closed above $123 since Oct. 6.

Chief Executive Officer Lloyd Blankfein, 54, wants to refund money received from the U.S. Treasury’s Troubled Asset Relief Program in October to run his bank without any limits on compensation. The company, which set a Wall Street pay record in 2007, announced the share sale as it unveiled first-quarter profit that exceeded the most optimistic Wall Street estimates.

“There are a lot of banks looking to raise money right now and Goldman has put itself at the head of the queue,” said Richard Staite, a London-based analyst at Atlantic Equities LLP who rates the stock “neutral.” Repaying TARP money “frees them up to retain talented staff with better compensation.”

Even after repaying the funds, Goldman Sachs intends to take advantage of government help by continuing to sell low- interest debt backed by the Federal Deposit Insurance Corp., Chief Financial Officer David Viniar said on a conference call today.

FDIC Backing

Goldman Sachs has sold one $2 billion bond without an FDIC guarantee and about $22 billion with the backing since the government program became available in October.

“It’s still attractive to have the FDIC-insured debt,” Viniar said in an interview today. “We’ve issued some non- guaranteed, we expect to issue more non-guaranteed, but the FDIC insured is also attractive.”

Goldman Sachs fell 5.8 percent to $122.59 as of 11:29 a.m. in New York Stock Exchange composite trading. The 5.5 percent discount of the new stock to yesterday’s closing price is more than triple the 1.6 percent discount at which the bank sold $5.75 billion of common stock in September.

The sale is the biggest stock offering this year, surpassing Nomura Holdings Inc.’s $3.2 billion sale last month, according to Bloomberg data.

First Quarter

Goldman Sachs, the most profitable Wall Street firm before it converted to a bank last year and posted its first quarterly loss since going public in 1999, said yesterday it earned $1.81 billion, or $3.39 a share, in the first quarter. A surge in trading revenue outweighed asset writedowns, and the result beat the $1.64 estimate of 16 analysts surveyed by Bloomberg.

“Given the challenging fundamental backdrop in the global economy, we continue to be cautious about the near-term outlook for our businesses,” Viniar said on the call today.

The company, which changed its fiscal year to end in December instead of November, also reported results for the month of December today. They showed the bank lost $780 million or $2.15 per share, as losses in fixed-income trading and principal investments overwhelmed revenue from other units.

Viniar said first-quarter profit didn’t benefit from marking up illiquid assets, which instead were mostly lower. He also said that profit resulting from American International Group Inc. payments to the firm “rounded to zero” in the first quarter. Most of the cash flow from AIG payments took place prior to the end of the year, he said. In the interview, he said that any profits from AIG also “rounded to zero” in December.

AIG Swaps

After AIG was rescued by the U.S. from collapse last year, banks that bought credit-default swaps got $22.4 billion in collateral and $27.1 billion in payments to retire the contracts, the insurer said last month. Lawmakers have called for a federal probe into whether banks including Goldman Sachs received more funds than necessary from the bailout.

Goldman Sachs’s book value per share rose to $98.82 at the end of March from $98.68 in November, and return on equity, a gauge of how effectively the firm invests earnings, was 14.3 percent in the first quarter, the company said.

First-quarter revenue was $9.43 billion. Revenue from fixed-income, currencies and commodities, known as FICC, was a record $6.56 billion, 34 percent higher than its previous mark, as client-driven income outweighed a $800 million loss on commercial mortgage loans, excluding hedges.

Bid-Ask Spread

Goldman Sachs benefited as the gap between what banks pay to buy fixed-income securities and the price at which they sell, the so-called bid-ask spread, almost doubled to 19 basis points in six months, according to data compiled by Bloomberg.

“Our record FICC performance was principally driven by favorable competitive dynamics, wider margins, a shift to more plain vanilla liquid transactions and higher volatility which more than offset lower volumes,” Viniar said.

Total assets on Goldman Sachs’s balance sheet rose 5 percent from the end of November to $925 billion as of March 27. Of that, about $59 billion qualified as “Level 3” assets, which are the hardest to value, down from $66 billion at the end of November.

The decline in Level 3 assets was mostly because of writedowns on commercial real estate and corporate principal investments, Viniar said in the interview.

Every other business unit had lower revenue compared with the first quarter of 2008, or reported a loss.

‘Sustainable’ Results

“We are assuming some of the 1Q09 is sustainable, although this is mitigated somewhat by weaker results elsewhere,” David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia, wrote in a note to investors today.

Trone also called the bank’s decision to increase its so- called liquidity pool of cash or cash-like instruments to $163 billion during the quarter “a bit puzzling, unless a cash acquisition is looming, such as a large asset manager.”

Viniar said the increase reflected more opportunities in liquid assets than illiquid assets and a sense of “prudence” about the environment.

“It made sense to have a lot of liquidity from a defensive and offensive point of view, so you know to protect ourselves and also to take advantage of opportunities to buy illiquid assets if they come about,” Viniar said. He said he “wouldn’t be holding my breath” for an acquisition of something like an asset manager.

While many analysts and investors applauded Goldman Sachs’s plan to repay the TARP money, others said it may pressure other banks to follow suit or risk appearing dependent on the government.

The government favors letting banks return money if they fare well on stress tests completed by the end of this month and can get private capital, according to people familiar with the matter.

To contact the reporters on this story:
Christine Harper in New York at 
charper@bloomberg.net;
Poppy Trowbridge in London at 
ptrowbridge@bloomberg.net.

Last Updated: April 14, 2009 12:00 EDT