April 13 (Bloomberg) -- Goldman Sachs Group Inc., the sixth-biggest U.S. bank by assets, plans to raise $5 billion to repay U.S. government rescue funds after posting profit that exceeded the most optimistic Wall Street estimates.

The New York-based bank said today it will use proceeds from the common stock offering plus “additional resources” to redeem the $10 billion it got from the U.S. Treasury’s Troubled Asset Relief Program. The company said it earned $1.81 billion, or $3.39 a share, in the first quarter as a surge in trading revenue outweighed asset writedowns, beating the $1.64 estimate of 16 analysts surveyed by Bloomberg.

Chief Executive Officer Lloyd Blankfein, 54, is raising capital to shore up finances and repay government money the bank got in October after the bankruptcy of Lehman Brothers Holdings Inc. 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 only toxic thing on their balance sheet is the TARP and they want to get rid of that as soon as they can,” said Gary Townsend, president of Hill-Townsend Capital LLC. in Chevy Chase, Maryland. The earnings show “they’re taking enormous market share away from virtually everyone else.”

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.

Book Value

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. Fixed-income trading revenue was a record $6.56 billion, 34 percent higher than its previous mark, 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.

Equity Trading

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 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.

The bank set aside $4.71 billion to pay compensation and benefits, 18 percent more than the first quarter a year earlier. The expense totaled 50 percent of revenue, up from 48 percent in the first quarter last year. The number of employees, which fell 7 percent during the quarter to 27,989, is 12 percent lower than the first quarter of last year.

Assets Rose

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.

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.

“A stock sale would be a good thing for the government; it would be a good thing for Goldman Sachs or any other bank which was able to do it, especially if they were also able to repay the TARP,” said Roy Smith, a finance professor at New York University’s Stern School of Business and a former partner at Goldman Sachs. “They would be free of the high cost of the dividend paid in after-tax dollars and the other restrictions, which everybody realizes they would like to get out of.”

Rivals Pressure

If Goldman Sachs returns the TARP money, it may pressure other banks to follow suit or risk appearing dependent on the government, Brad Hintz, an analyst at Sanford C. Bernstein Co. in New York, said before today’s announcement.

“The right thing for government officials to do will be to delay the GS repayment until a significant group of banks are able to repay simultaneously under some organized plan,” Hintz said.

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 wasn’t intended to be “permanent capital.”

‘That Minute’

“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.

Goldman Sachs has gained 55 percent this year to close at $130.15 today in New York Stock Exchange composite trading. The price is more than double the stock’s closing low of $52 on Nov. 20.

The company will hold a conference call tomorrow at 7 a.m. New York time to discuss the results and its outlook.

Credit-default swaps protecting against a default by Goldman Sachs dropped 15 basis points after the earnings announcement to 210 basis points, according to broker Phoenix Partners Group. The contracts have fallen 58 basis points the past week and are trading at the lowest since Oct. 14, prices from CMA DataVision show.

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

Last Updated: April 13, 2009 18:12 EDT