Goldman Sachs continued to navigate the credit crisis better than any of its peers. It reported just an 11 percent drop in profit in the first quarter to $2.1 billion.

The Financial Times says the investment bank is capitalizing on the woes of its competitors, picking up market share with hedge funds from a staggered Bear Stearns and recording near record sales from helping other banks raise capital.

The Wall Street Journal on its Money & Investing front says Goldman thinks its rescue of a $7 billion structured-investment vehicle may be a sign that the market may be near a bottom, but Bloomberg quotes the firm’s chief financial officer saying the bottom was in March.

The New York Times on C4 quotes an analyst who question’s Goldman’s accounting, seeming to suggest that its results may be too good to be true:

“How did they manage through this difficult period with so little in markdowns?” Michael Hecht, a Banc of America Securities analyst, said. “Everyone else is kind of opening up the kimono and giving us a lot more exposure than Goldman.”

But Goldman’s stock analysts issued a “dire” report saying the bust won’t hit bottom until early next year, the Journal tells us in a separate C1 story. That helped send financial stocks sliding nearly 3 percent and pushed the stock market down 108 points. The analysts said financial firms need to raise another $65 billion in capital, something that will be harder to do since they’ve already raised hundreds of billions of dollars from investors who are sitting on sizable losses for their help.

“There is a lack of clarity at every level of the financial system right now, from regulators to companies,” said floor trader Ted Weisberg of Seaport Securities, a New York brokerage. “That breeds uncertainty, and the uncertainty breeds volatility, and that ultimately drives people away from the table.”

As evidence of the volatility, Lehman Brothers and Washington Mutual were each off about 8 percent.

Stagflation watch

Stagflation worries continued to grow as an inflation report came in high and home construction continued to fall.

The producer-price index jumped 1.4 percent in May from a month earlier, the Journal says on A3 and the NYT on C8. Bloomberg says it was the largest increase since November and exceeded forecasts by nearly half a percentage point. Producer costs are up a significant 7.2 percent from a year ago, mostly because of energy prices (minus those and food costs, the “core” increase was 0.2 percent).

Producer prices are key because they measure how much it is costing companies to make goods. They can try to eat rising costs for a time to remain competitive in their respective industries—the FT notes that companies are cutting staff and giving the employees who remain fewer hours—but eventually they attempt to pass much of the new costs on to consumers in the form of higher prices.

Combine that with the “stagnation” part of stagflation. Factory output declined 0.2 percent in May, while housing starts tumbled to their lowest level since 1991, falling 3.3 percent last month (32 percent from the previous May), and April’s numbers were revised sharply downward. Construction permits also declined, by 1.3 percent. Two regional homebuilders became the latest to fold, the Journal says.

The reports put the Federal Reserve in a tough spot. If it raises interest rates to tamp down inflation, it will hurt the already-anemic economy. If it lowers rates to help the economy, it will boost inflation.

Meanwhile, consumer inflation in the U.K. rose to its highest since 1992, the Journal says on A9. The NYT says 1997 on C2.

Welcome to the developed world, China!

The NYT on page one reports on how rising costs in China are leading companies to look elsewhere in Asia for cheap manufacturing.

The Times says wages in China are rising 25 percent annually (in dollars) in “many industries.” That’s being fed by a weak dollar and, surprisingly, a shortage of labor— pushing companies from the “factory of the world” to places like Vietnam, though even that’s complicated by that country’s 25 percent inflation rate.

More than corporate profit margins are at stake. When the cost of making goods in Asia rises, American consumers inevitably feel pain. The Labor Department said Thursday that import prices were 4.6 percent higher in May than a year earlier for goods from China and 6.4 percent higher for goods from southeast Asia.

To keep it in perspective, though, Chinese wages are still less than a buck an hour.

The only recourse is…give me your car, and that TV

The Journal on C1 says commercial real estate is seeing the return of the recourse loan, which requires building owners to give lenders their personal assets if the loan runs into trouble.

During the recent sales frenzy for commercial properties, nonrecourse loans were the norm. Typically, this meant that the developers put up as collateral only the buildings they were purchasing. If they couldn’t pay off the loans, they simply handed the building’s keys to the lender and walked away. The borrowers’ other holdings—including personal assets such as homes and boats—remained intact. The investment banks that originated many of these loans felt comfortable with the arrangement because they typically packaged those loans into commercial-mortgage-backed securities, or CMBS, and sold them as bonds, reducing their own risk if the borrowers couldn’t pay.

Now, with a 90% drop in CMBS sales, banks have all but stopped originating loans aimed at the bond markets. Instead, they are returning to the traditional model of holding on to—as opposed to selling—the loans. “We’re not closing loans for securitization. We’re closing loans for balance sheet,” said Brett Smith, managing director in Wachovia Corp.’s real-estate group. And with the return of balance-sheeting lending comes the return of recourse loans.

This is not going to end well for the landlords, though the Journal notes that it instills “discipline” into the market when borrowers have their own homes and yachts at stake.

A Catch-22 for insurance regulators

The NYT reports on C1 that bond insurer MBIA’s credit-default swaps (contracts that insure against a security’s default) have their regulator in a Catch-22.

The commissioner of the New York State insurance department wants MBIA to shore up its bond-insurance unit with $900 million it has raised and promised to use for that purpose. The Times says stipulations in the swaps contracts provide for their holders to get paid immediately if something happens to the bond-insurance unit. That gives it leverage over the insurance regulator, the paper says.

The NYT nicely catches MBIA lying about the swaps clause in a conference call.

The swaps’ acceleration clauses appear to be a factor in this bit of brinksmanship, although MBIA does not advertise their existence. In a presentation about its first-quarter results, for example, MBIA said its “insurance contracts are not subject to acceleration.”

Asked about this discrepancy, MBIA said the presentation language meant that holders of its swaps have no acceleration rights “as long as the company continues to operate in its current manner,” which it believes it will do.

“Fortunately, for us it’s not something that we have to be concerned about,” said Greg Diamond, director of investor relations for the company.

Right.

States not playing games with toys

The Journal reports on A3 that states are cracking down on the toy industry with safety regulations that are tougher than the federal government’s.

After delays in Congress and continued weak federal oversight, 16 states have devised laws that are in some cases stricter than what Congress envisions. A proposal in Washington state would curb allowable levels of lead in toys and other products to at most 90 parts per million compared with the 100 parts per million proposed by the House and Senate bills. Industry lobbyists said the competing rules will confuse consumers, make compliance difficult and encourage multiple actions against businesses.

The statehouse moves came after a rash of recalls of toys, especially those made in China, last year. The Journal writes that compliance will be tougher for smaller manufacturers.

Sticking it to the poor students

The NYT’s article on lenders cutting back student loans to two-year colleges and “less selective” four-year schools is having an impact already, the paper reports on C1.

Two Democratic senators introduced legislation that would ban the practice, but some say it will just push more lenders out of the business.

Here’s the You’re Telling Me! Quote of the Day:

“Banks are not philanthropic agencies,” said Pat Watkins, director of financial aid at Eckerd College in St. Petersburg, Fla. The institution was recently informed by Wells Fargo that the bank would not extend loans to its students anymore, Dr. Watkins said.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu.