Goldman Sachs Group, Inc. and Lehman Brothers Holdings Inc. released earnings before market open on Tuesday — and the news was surprisingly not as bad as analysts had been expecting. Goldman reported a 53 percent drop in quarterly earnings, with profit falling to $1.51 billion, or $3.23 per share, versus $3.2 billion in earnings one year earlier. Lehman, widely speculated to be facing a potential cash crunch similar to rival Bear Stearns, posted a 57 percent drop in earnings; first-quarter net income declined to $489 million, or $.81 per share, from $1.15 billion, or $1.96, a year earlier. Both earnings figures bested analysts estimates, buoying the stock market in early trading. Bloomberg reported that analysts had estimated a mean of $2.59/share for Goldman, and $.72/share for Lehman. Shares in battered Lehman Brothers had jumped nearly 16 percent in morning trading, rising to $36.80 when this story was published. Goldman Sachs had risen roughly 8 percent. Fixed income revenue at Lehman did take a substantial hit, however; the firm recorded roughly $1.8 billion in writedowns during the quarter tied to its mortgage-related exposure, including residential mortgage-backed securities and collateralized debt obligations built from mortgage-backed assets. The write-down depressed fixed income revenue to just $262 million — an 88 percent drop from year-ago numbers. Writedowns have been the substantial focus of investors as they attempt to get a grasp on the net exposure of many of Wall Street’s largest investment banks to the mortgage mess. And while Lehman touted a liquidity pool of $34 billion in its press statement, Bloomberg finds a quote alluding to a classic issue of solvency instead:

“The game here is confidence,” said James Hardesty, president of Baltimore-based Hardesty Capital Management LLC, which oversees $700 million for clients. “The profit figures depend on how illiquid assets are marked to market, and investors don’t trust those numbers.”

The challenge for many Wall Street firms amidst the current housing market is to determine what the real value of their mortgage-related holdings really are — no easy feat, given the deep freeze the secondary market for mortgages has been in. And its that certainty of valuation that’s ultimately needed, analysts have said, in order to restore calm to the financial markets. Christopher Whalen at Institutional Risk Analytics said yesterday that firms are staring at a so-called race to zero in their write-down efforts, given current accounting rules and the expected continued slide in U.S. home prices. “What fair value accounting is doing is forcing everyone to write anything they can’t value today to zero,” he said. “That’s a wonderful, classical approach to accounting, but if we do that we’re going to deleverage our financial system in a way that will make the 1930s looks like a trial run.” Disclosure: The author owned no positions in any publicly-traded firms mentioned in this story when it was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.