????The investment firm plays it safe by holding lots of cash, but some question whether it can repeat its strong first quarter.

????By Colin Barr

????If the worst is over for the financial sector, you'd never know it to listen to Goldman Sachs.

????The New York-based investment firm posted a $1.8 billion first-quarter profit Monday evening, then capitalized on those gains by selling $5 billion in stock Tuesday morning.

????The developments put Goldman (GS, Fortune 500) on track to become the first big bank to repay the funds it received from Treasury last fall in the Troubled Asset Relief Program.

????Once regulators complete their stress test of Goldman and sign off on the repayment plan, the firm will again be free to manage its affairs as it pleases, without fears that details on its pay practices will provoke outrage in Congress.

????Despite this, Goldman chief financial officer David Viniar was hardly celebratory on a conference call with analysts and investors Tuesday morning.

????Viniar said Goldman remains cautious about the economy and suggested that the firm expects the prices of assets such as real estate to continue to fall.

????While further declines may not hammer Goldman, given its reduced exposure to troubled asset classes like real estate and corporate buyout loans, they could weigh on the results of other banks in coming months. Regional banks in particular hold large amounts of commercial real estate on their books.

????"There are headwinds still with values, asset values," Viniar said in response to one question Tuesday. "I think those headwinds are less for us because we don't have that many anymore ... but there are still headwinds and that makes us cautious."

????Goldman shares, which have surged during the bank stock rally of the past month, dropped 5% Tuesday to about $123, in line with the price of the $5 billion offering.

????The drop in Goldman's stock helped lead the KBW Bank index, which has nearly doubled off its multidecade low over the past month, lower in midday trading.

????Shares of beaten down bank Citigroup (C, Fortune 500) were rising, however, while those of seemingly healthier firms such as JPMorgan Chase (JPM, Fortune 500) edged lower.

????Chase and Citi are both scheduled to report their first-quarter results later this week. The stronger-than-expected earnings from Goldman and Wells Fargo last week have spurred hopes that Chase and Citi will post similarly strong results.

????Barclays Capital analyst Jason Goldberg raised his earnings estimates for both banks Tuesday, saying he expects them to benefit from better capital markets results and strong mortgage revenue. He now expects Citi to post its first profit in six quarters.

????Warning signs?

????Even so, Goldman's caution is hard to ignore. The firm said in financial statements released Monday afternoon it had access to an average of $164 billion in cash via its "excess liquidity pool" during the latest quarter -- up some $52 billion from levels in the firm's last reported quarter, which ended in November.

????The big holdings of cash and liquid securities protect Goldman against a run by customers pulling their accounts. Analysts on Tuesday's call asked whether the firm was comfortable accepting near-zero returns on such a large pool of assets -- a decision that stands to weigh on profits in coming quarters.

????"I think in this environment, prudence is the better path," Viniar said in response to those questions.

????At the same time, some observers wondered about whether Goldman will be able to repeat the latest quarter's strong profits, given that the lion's share came from the notoriously volatile fixed income business.

????"You know me well enough ... to know I would never use the words sustainability and revenue in the same sentence," Viniar said.

????Viniar added that while he could hardly guarantee that Goldman would repeat the first quarter's strong performance -- which was centered on the firm's "plain vanilla" and highly liquid trading areas such as interest rates and commodities -- he believes Goldman is adequately diversified to perform well in varying conditions.

????But analysts at CreditSights, a New York-based credit research firm, said Goldman's growing appetite for interest rate risk could leave it exposed to a multibillion-dollar loss if financial markets suddenly turned stormy again.

????Goldman's average daily value at risk on interest rates -- a measure of the amount Goldman might expect to lose in a worst-case scenario on a single trading day -- surged to $218 million in the latest quarter from $106 million in the quarter ended Feb. 29, 2008.

????Viniar attributed the rise in Goldman's value-at-risk reading to higher market volatility and wider credit spreads.

????But CreditSights said the dependence on interest rate bets, together with Goldman's access to low-cost government-backed borrowing and the sizable spread between short- and long-term interest rates, suggests it might be tough for the firm to pull off a repeat performance in coming quarters.

????Analysts at the firm wrote that they would be "more sure this is a sustainable turnaround" once other parts of Goldman's business -- such as the advisory, investment banking, asset management and equity trading units -- began to show signs of improvement. Revenue in all four of those divisions fell in the first quarter from a year ago.