Lehman Brothers, Goldman Sachs Beat 1Q Expectations
Both banks report earnings that are lower than last year but beat forecasts.
March 18, 2008— -- NEW YORK (AP) -- Stocks rallied Tuesday as investors, relieved by better-than-expected results from Lehman Brothers and Goldman Sachs, also anticipated a massive interest rate cut from the Federal Reserve. The Dow Jones industrial average surged more than 200 points.
A rate cut from the Fed in the afternoon would come just two days after the central bank backed JPMorgan's buy of Bear Stearns Cos., and relaxed its own lending practices.
Though the stock market wants more details about the souring mortgage-related bets on investment banks' books, its tone Tuesday was significantly more upbeat than it has been in recent days.
Two rivals of Bear Stearns -- Lehman Brothers Inc. and Goldman Sachs Group Inc. -- both posted quarterly profits that were significantly lower than they were a year ago, but higher than analysts had anticipated.
Investors had sent stocks plunging late last week and Monday morning, after JPMorgan Chase & Co. said Sunday it was buying Bear Stearns for just $2 a share, or $236 million (euro149.65 million). Lehman Brothers, being the investment bank most similar in structure and exposure to Bear Stearns, was particularly hard hit Monday.
But early Tuesday, Lehman shares spiked back up 16.7 percent, by $5.31 to $37.06, while Goldman shares rose 8.2 percent, by $12.36 to $163.38.
In the first hour of trading, the Dow rose 202.23, or 1.69 percent, to 12,174.48.
Broader stock indicators also surged. The Standard & Poor's 500 index rose 26.19, or 2.05 percent, to 1,302.79, while the Nasdaq composite index rose 43.43, or 1.99 percent, to 2,220.44.
The Fed on Sunday, in addition to guaranteeing up to $30 billion (euro19.02 billion) of Bear Stearn's most troubled assets for JPMorgan, lowered its discount rate -- the rate it charges banks directly -- by a quarter-point. It also is allowing more types of financial firms to borrow from the central bank, and is accepting more various types of collateral.
After these signals that the Fed is ready to use everything in its arsenal to boost liquidity in the financial system, traders who bet on the Fed's next rate move are pricing in a 100 percent chance of a full-point rate cut. That would bring the target fed funds rate -- the rate that banks charge each other for overnight loans -- to 2 percent from 3 percent.
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