NEW YORK (MarketWatch) -- Wall Street brokers Goldman Sachs and Bear Stearns said Thursday that persistent weakness in the subprime mortgage market weighed on second-quarter earnings.

Goldman shares fell 3.4% to close at $225.75, while Bear stock rose 11 cents to $149.60 on Thursday.

Goldman Chief Financial Officer David Viniar said in a conference call that the subprime sector's woes are not over and to expect "more pain" before the problem is purged.

"U.S. residential mortgage activities remained challenging during the quarter as difficulties in the subprime markets served to reduce market activity," Sam Molinaro, chief financial officer at Bear Stearns, said during a conference call.

Goldman Sachs (GS ) said second-quarter net income rose about 1% from a year ago as revenue slipped 1%. The company reported net income of $2.33 billion, or $4.93 a share compared with $2.31 billion, or $4.78 a share. Net revenue was $10.18 billion.

Analysts polled by Thomson First Call had expected the company to earn $4.79 a share, on revenue of $10.16 billion.

Bear Stearns (BSC ) fiscal second-quarter earnings fell 33% to $361.7 million, or $2.52 a share, from $539.3 million, or $3.72 a share, a year earlier. Excluding items, the New York firm earned $486 million, or $3.40 a share, for the latest second quarter. Net revenue increased to $2.51 billion from $2.50 billion.

Analysts polled by Thomson First Call had expected the company to earn $3.40 a share on $2.33 billion in revenue.

At Goldman, net revenues in fixed income, currency and commodities [FICC], which includes the firm's mortgage business, were $3.37 billion, 24% lower than the second quarter of 2006.

According to the company, the weakness included "lower net revenues in commodities and weak results in mortgages, principally attributable to continued weakness in the subprime sector."

At Bear, fixed income net revenues were $962 million for the 2007 second quarter, down 21% from record revenues of $1.2 billion recorded in the second quarter of 2006.

A wave of delinquencies and defaults by subprime borrowers has sent several mortgage companies into bankruptcy and hurt a swath of businesses from homebuilders through lenders to investment banks. See full story.

Lehman Brothers (LEH) on Tuesday said its second-quarter net income rose 27% from a year earlier and beat analyst forecasts, but the housing slump and continued weakness in residential mortgages weighed on its fixed-income business. See full story.

Lehman also said it plans to combine its U.S. residential mortgage businesses, cutting about 400 jobs from the unit that offers subprime mortgages.

"For Lehman and Bear, mortgage results were generally as expected while Goldman's were a little worse than expected," Jeff Harte, an analyst at Sandler O'Neill, said in an interview.

"Mortgages are a challenge and we all know that. But it doesn't sound like it's been more challenging than we thought," he added. "I don't expect mortgages to be a major near-term revenue driver for the investment banks, but they won't cause major problems."

The high level of delinquencies and defaults from subprime mortgages originated in 2006 continue to "be a challenge," but that hasn't spilled into other areas of the market, Bear's Molinaro said.

Tighter underwriting standards and the "sluggish home price situation" have caused "significant" declines in the overall level of mortgage origination, he noted.

Still, Molinaro said there are signs of improvement in the business of securitizing home loans.

"Transactions are getting done, new vintage collateral is being well received in the market, spreads are tightening [and] business is slowly improving," he explained.

A hedge fund run by Bear, called the High-Grade Structured Credit Strategies Enhanced Leverage Fund, is scrambling to sell about $4 billion in mortgage-backed bonds to raise cash, The Wall Street Journal reported on Thursday, citing people close to the fund and traders who have been solicited to buy the debt.

The fund had slumped 23% this year through April and is highly leveraged with roughly $6 billion in assets, the newspaper explained. The fund is liquidating positions to free up cash to meet investor redemptions and to prepare for possible margin calls, the WSJ said.

"That's an issue that's getting a great deal of attention here," Molinaro said, according to a transcript of Thursday's conference call. "We're very focused on trying to maximize the value of our clients' assets, and we're taking every action we can to ensure that we get a successful outcome."

Bear Stearns didn't invest much of its capital in the fund and its exposure is small, so the problems shouldn't have any material impact on future results, he added.

"There's been an over-reaction as far as the impact of this on Bear," Harte said. "They had small investments in the fund and they have lots of other alternative investment funds that generate fees and have been doing well."