April 14 (Bloomberg) -- Goldman Sachs Group Inc., buoyed by profit that exceeded the most optimistic Wall Street estimates and a 54 percent jump in its stock price, plans to raise $5 billion to repay federal rescue funds and shed government limits on executive pay.

Chief Executive Officer Lloyd Blankfein, eager to redeem the $10 billion his New York-based bank received in October, announced the fundraising plan yesterday as the company reported a $1.81 billion profit in the first quarter. The bank earned $3.39 a share, more than double the $1.64 average of 16 analysts surveyed by Bloomberg News.

“They’ll do better now in terms of what it costs to raise money than they can for the rest of the year,” said Christopher Whalen, a managing director at Torrance, California-based Institutional Risk Analytics. “I don’t think the rest of this year will be good.”

Goldman Sachs was the most profitable Wall Street firm before converting to a bank last year and posting its first quarterly loss since the company went public in 1999. The bank also said yesterday that it lost $780 million, or $2.15 a share, in the month of December, before the start of its new fiscal year.

The bank said it will use proceeds from the common stock offering plus “additional resources” to pay back the funds it got from the Troubled Asset Relief Program. Andrew Williams, a spokesman for the Treasury Department, declined to comment on Goldman Sachs’s announcement.

‘Eye of Storm’

U.S. regulators are unlikely to object to the repayment. 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.

“They can raise capital now; clearly the stock is strong,” said Peter Sorrentino, a senior portfolio manager at Huntington Asset Advisors, which has about $13.3 billion under management. “This is like the eye of the storm passing.”

Goldman Sachs traded at $126.44 before the start of New York Stock Exchange trading today. The stock climbed 4.7 percent yesterday to $130.15 in New York trading, valuing the firm at $65.7 billion.

AIG ‘Rounded to Zero’

Chief Financial Officer David Viniar said on a conference call today 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.

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.

The company remains “cautious about the near-term outlook,” Viniar said.

The firm’s business model depends on its ability to attract top traders and bankers with promises of lucrative bonuses, a Wall Street pay model that is now under attack by politicians incensed at multimillion-dollar payouts to executives in an industry blamed for causing the economic crisis. The government imposed limits on executive compensation at banks such as Goldman Sachs that accepted more than $500 million in TARP funds.

Compensation Costs Rise

Before last year, Goldman Sachs set two consecutive Wall Street pay records. Even last year, 953 of the bank’s employees made more than $1 million, the Wall Street Journal reported, citing unidentified people familiar with the matter. Lucas van Praag, a spokesman at Goldman Sachs, declined to comment.

This year, the bank set aside $4.71 billion for compensation and benefits, 18 percent more than during the first quarter a year earlier. The expense totaled 50 percent of revenue, up from 48 percent in last year’s first quarter, even as the firm’s workforce shrank 12 percent to 27,989.

Blankfein said last week at a conference in Washington sponsored by the Council of Institutional Investors that the U.S. funds Wall Street firms received weren’t intended to be “permanent capital.”

‘Return the Money’

“The minute that an institution is allowed to return the money and is capable of returning the money, while still carrying out its obligations and its role in the capital markets effectively, then it should do it that minute,” Blankfein said.

Viniar said in February that the firm would like to repay the money because “operating our business without the government capital would be an easier thing to do.”

If Goldman Sachs returns the TARP money, it may pressure other banks to follow suit or risk appearing dependent on the government, said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York who rates Goldman Sachs “market perform.”

The better-than-expected earnings will also make it difficult for competitors that are scheduled to report their own results this week or next week, said Sorrentino.

“This makes life much more difficult for everyone else out there,” he said. “To merely beat your numbers now will be viewed as, ‘What’s wrong?’”

Goldman Sachs Results

Book value per share rose to $98.82 at the end of March compared with $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, Goldman Sachs said.

First-quarter revenue was $9.43 billion. The highlight was Goldman’s fixed-income, currencies and commodities business, known as FICC, in which trading revenue was a record $6.56 billion, 34 percent higher than its previous high, as client- driven income outweighed an $800 million loss on commercial mortgage loans, excluding hedges.

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.

“FICC operated in a generally favorable environment characterized by client-driven activity, particularly in more liquid products, and high levels of volatility,” the bank said in a statement. “Illiquid assets generally continued to decline in value.”

Fewer Rivals

The loss of competitors including Lehman Brothers Holdings Inc. and Bear Stearns Cos. meant Goldman Sachs attracted more trading business, said Huntington’s Sorrentino.

“A lot has to do with the fact that they really narrowed the playing field,” he said. “All that business has to be flowing through to someone.”

Because trading revenue is so hard to predict, “the market’s going to value asset management and investment banking and retail brokerage higher than it’s going to value trading,” said Bernstein’s Hintz. “As an analyst you have to ask yourself, ‘Is this sustainable?’”

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

Equity trading revenue was $2.0 billion as slower activity outside the U.S. meant the firm generated fewer trading commissions than a year ago.

Investment Banking

Investment banking revenue of $823 million compared with $1.17 billion in the first quarter of 2008, reflecting a decline in leveraged finance activity and fewer mergers and share offerings.

Asset management fees slumped 28 percent to $949 million as assets under management fell 3.3 percent. Securities services, which include the firm’s prime brokerage unit, made $503 million, 30 percent less than the first quarter of 2008.

Goldman Sachs had a $1.41 billion net loss from principal investments, including a $151 million loss from the firm’s investment in Industrial and Commercial Bank of China Ltd.

Total assets on the 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.

Goldman Sachs raised $5.75 billion by selling shares at $123 apiece in September in an offering that started after the company announced that Warren Buffett’s Berkshire Hathaway Inc. bought $5 billion in preferred stock.

A month later, Goldman Sachs was among nine financial institutions that shared $125 billion in the first payments from the Treasury’s $700 billion bailout program.

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

Last Updated: April 14, 2009 08:00 EDT