June 17 (Bloomberg) -- Goldman Sachs Group Inc., the world's biggest securities firm, surpassed analysts' estimates as gains in prime brokerage, asset management and commodities buoyed second-quarter profit.

Net income declined 11 percent to $2.09 billion, or $4.58 a share, in the three months ended May 30 from $2.33 billion, or $4.93, a year earlier, the New York-based company said today. The earnings exceeded the highest estimate of 19 analysts surveyed by Bloomberg.

Chief Executive Officer Lloyd Blankfein exploited diverse revenue streams and the firm's investment banking and energy- trading businesses to manage a credit crisis that cost fixed- income reliant Bear Stearns Cos. its independence and shook investors' confidence in Lehman Brothers Holdings Inc. Lehman reported a $2.8 billion second-quarter loss yesterday, its first as a public company. Goldman finance chief David Viniar said today that March marked ``the bottom, at least for now,'' for credit markets.

``They're the strongest of the investment-banking firms,'' said Rose Grant, managing director at Eastern Investment Advisors in Boston, which manages $1.8 billion and holds Goldman stock. ``If you look at Lehman or what happened to Bear Stearns, I think Goldman is going to be a beneficiary.''

Goldman fell $2.65, or 1.5 percent, to $179.44 in New York Stock Exchange composite trading, the best performer of the biggest U.S. investment banks. So far in 2008 the stock is down about 17 percent, compared with the 23 percent drop of the 11-member Amex Securities Broker/Dealer Index.

Revenue Decline

Goldman has gained almost 11 percent since falling to a three-month low on June 11. The advance may mark the peak in a paired trade that has returned 40 percent since the start of the year: betting Goldman will fall and shares of Wal-Mart Stores Inc. rise. The strategy returned 48 percent as of last week.

While Goldman's profit exceeded analysts' estimates for the 12th consecutive quarter, the earnings amount to the lowest second-quarter result since 2005. Revenue decreased 7.5 percent to $9.42 billion from $10.2 billion a year earlier.

The annualized return on average common shareholders' equity, a measure of how well the firm reinvests stockholders' money, was 20.4 percent, compared with 14.8 percent in the first quarter and 26.7 percent in the second quarter of 2007.

Goldman's so-called Tier 1 capital ratio, which bank regulators monitor to gauge a lender's ability to absorb loan losses, was 10.8 percent. Viniar said the ratio was higher than necessary because of the market environment and should normally be around 10 percent. Lehman said yesterday that its Tier I ratio was more than 10 percent. U.S. investment banks are releasing their capital ratios under the Basel II global banking regulations for the first time this quarter.

Tax Rate

Goldman benefited from a lower tax rate, which declined to 27.7 percent for the first half of the year from 34.1 percent for the firm's 2007 fiscal year. Viniar, Goldman's chief financial officer, said on a conference call today that the rate fell because the company did more business ``in jurisdictions with lower tax rates.'' He declined to be specific. He said the firm earned 57 percent of its revenue in the U.S. during the quarter.

The 29 percent drop in fixed-income revenue was affected by $775 million of writedowns and credit market losses, Goldman said in its statement. Lehman said yesterday it had negative fixed-income revenue of $3 billion in the second quarter as the New York-based firm marked down the value of debt securities and lost money on investments designed to help hedge the losses.

Available Cash

Goldman's fixed-income revenue included $500 million in losses from trades on credit indexes that were meant to act as hedges, Viniar said. He said the losses, which resulted from indexes rallying before individual securities, weren't a surprise and ``we would much prefer that environment than an environment where everything is going down.''

The company's global core excess liquidity, a pool of cash and liquid securities, jumped to an average of $88 billion in the quarter from about $64 billion in the first quarter and is probably the highest ever, Viniar said. Goldman also reduced its reliance on borrowed money by cutting its gross leverage ratio to 24.3 times in the second quarter from 27.9 times in the first quarter. The adjusted leverage ratio fell to 14.7 from 18.6, Viniar said.

``Every meeting I have I get asked about leverage within the first 10 minutes,'' Viniar told analysts on a conference call today, when asked why the firm cut assets after he said three months ago that it didn't need to. ``Being a little bit smaller we thought was a sensible thing.''

Commodities Trading

The proportion of the firm's assets that are classified as ``Level 3,'' which are the hardest to value, fell to about 7 percent from about 8 percent in the first quarter, Viniar said.

Goldman, which dominates the business of commodities trading along with Morgan Stanley, said revenue from commodities was higher in the second quarter than a year earlier. The firm doesn't provide any separate figures for the business, instead reporting it under the broader category of fixed-income, currencies and commodities.

``The first quarter was a near-record quarter for commodities and this quarter was strong,'' Viniar, 52, said in an interview. ``It's a good environment, as was the first quarter. Customer flows were good but not as good as in the first quarter.''

Crude oil futures doubled in the past year, and the price of products from gold to corn soared to record highs. Finance ministers from the Group of Eight nations said June 15 that surging food and fuel prices replaced the credit squeeze as the biggest threat to the world economy.

Equity Trading

Goldman's revenue from asset management rose 10 percent from a year earlier as funds under management jumped to a record $895 billion, the company said. Securities services, which includes Goldman's prime brokerage for hedge fund clients, reported a 30 percent increase in revenue to $985 million in the quarter.

Revenue from trading equities was little changed at $2.49 billion as the Standard & Poor's 500 Index climbed 5 percent during the quarter. Goldman said that higher net revenue from client business was offset by ``significantly lower'' revenue from proprietary trading. Viniar said the firm's proprietary trading unit is suffering from market conditions that are hurting relative value traders.

Financial advisory revenue, which includes income from the firm's top-ranked mergers and acquisitions group, rose 13 percent to $800 million in the quarter from a year earlier. Debt underwriting fell 59 percent, while equity underwriting climbed 72 percent. The firm's so-called backlog of investment banking business dropped during the second quarter, Viniar said.

Compensation Costs

Gains on principal investments declined 8 percent to $725 million. The value of Goldman's stake in Beijing-based Industrial & Commercial Bank of China Ltd. increased by $214 million.

Goldman set aside $4.52 billion in the second quarter for compensation and benefits, 7 percent less than the same period a year earlier. In the first quarter, Goldman cut its compensation and benefits expense to $4 billion, 35 percent below the same period of 2007.

Viniar declined to comment on reports that the firm cut jobs in investment banking as recently as last week. He said the company still expects to increase its total number of employees by a percentage in the low single-digits during fiscal 2008, excluding the addition of about 1,200 people from the acquisition of Litton Loan Servicing LP earlier this year. The new jobs will be concentrated outside the U.S. and in areas such as investment management and operations, he said.

Morgan Stanley, the second-biggest U.S. securities firm after Goldman, is scheduled to report earnings tomorrow. The average estimate of analysts surveyed by Bloomberg is for a 59 percent drop in net income.

The table below shows Goldman's second-quarter earnings from 2000 to present, in U.S. dollars:

    2008:  2.09 Billion
    2007:  2.33 Billion
    2006:  2.31 Billion
    2005:  0.87 Billion
    2004:  1.19 Billion
    2003:  0.70 Billion
    2002:  0.56 Billion
    2001:  0.58 Billion
    2000:  0.76 Billion

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

Last Updated: June 17, 2008 16:32 EDT