Buffett's help seems over for now
After taking advantage of a market panic and helping to soothe investor nerves in the process, he looks all tapped out for now.
FORTUNE (New York) -- Warren Buffett has put nearly $10 billion of his shareholders' money to work in the past week, cheering market optimists who've had little to smile about.
If the world's greatest investor is buying, the thinking goes, the current turmoil in the financial system may start to ebb.
Perhaps, but it's worth noting that in his deals with Goldman Sachs and Constellation Energy, the CEO of Berkshire Hathaway (BRK.A) wrangled extraordinary terms from distressed sellers.
And Buffett is unlikely to give the stock market any more psychological lifts soon, because he's spent down Berkshire's cash hoard about as far as he would likely consider prudent.
Buffett agreed Tuesday to buy $5 billion in Goldman Sachs (GS, Fortune 500) preferred stock. The deal comes with a rich 10% dividend and the right to buy $5 billion worth of Goldman common stock at a discount.
That's a steep price for Goldman to pay to raise capital. Oppenheimer analyst Meredith Whitney said Wednesday the deal's "exorbitantly expensive" terms "provide insight into how truly challenging current market conditions are."
On the other hand, having Buffett on board allowed Goldman to announce a $5 billion public offering of its common stock without sending the price of its shares lower. Goldman shares rose 3% Wednesday amid a mild gain in the market in general.
Goldman marked Buffett's second splurge during a September market uproar that has sent highly leveraged companies scrambling for fresh sources of funding.
But other cash-strapped companies shouldn't look to Omaha for help. That's because Goldman and Constellation Energy (CEG, Fortune 500), which last week agreed to a $4.7 billion buyout just 48 hours after Buffett's MidAmerican Energy approached the Baltimore energy merchant, are likely to be the last recipients of big infusions of Berkshire money for a while.
At June 30, Berkshire had $31 billion in cash and cash equivalents, giving Buffett an enormous amount of latitude to find attractive deals. Even if Berkshire doesn't immediately exercise its warrants to buy Goldman common stock, Buffett's recent dealmaking will eat up more than half of that sum.
Given the billions in cash Berkshire needs to keep on hand to operate its many businesses, it stands to reason that Buffett isn't itching to place any more big bets in coming months.
In April, Buffett agreed to put $6.5 billion into the deal by closely held chocolate manufacturer Mars' agreement to purchase Chicago gum-maker Wrigley (WWY, Fortune 500). The Berkshire money came in the form of a $4.4 billion subordinated debt investment and a $2.1 billion post-closing equity stake in Wrigley.
In July, he invested $3 billion in cumulative convertible perpetual preferred stock in Dow Chemical (DOW, Fortune 500), the Midland, Mich., chemical company that was preparing to buy Rohm & Haas (ROH, Fortune 500) of Philadelphia. Both mergers are expected to close later this year or early next.
Buffett took an August break from dealmaking, but swung back into action with authority in September after the government's surprise takeover of Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) sent debt markets reeling anew.
Treasury Secretary Henry Paulson's decision to essentially wipe out the preferred shareholders in the government sponsored mortgage companies effectively cut other troubled financial firms off from their best options for raising new capital, renewing the flight of investors from riskier assets in general and from questionable trading parties in particular.
One nonfinancial company that felt the impact was Constellation, which owns the Baltimore Gas & Electric utility but makes most of its money trading energy and other commodities.
In an echo of the problems that brought down Lehman Brothers and forced sweeping changes at other big Wall Street firms, Constellation found itself struggling to raise cash for a business model that Bank of Montreal analyst Michael Worms recently described as being "driven by almost insatiable demand for new capital."
With the markets declining and rating agencies threatening a downgrade that could have forced Constellation to come up with more than $3 billion in new cash, Buffett saw an opening. His MidAmerican Energy agreed to pay just $26.50 a share - plus a $1 billion preferred investment - for a company whose shares had traded in the low $80s just six weeks earlier.
Goldman wasn't as obviously desperate for cash, but Buffett won excellent terms there as well. In investing in Goldman, Buffett got a $500 million annual dividend and a warrant to buy shares at an 8% discount to Tuesday's closing price. He won a pledge from three top Goldman officers including CEO Lloyd Blankfein to refrain from selling shares for the next three years.
That said, there's still risk in both the Constellation and the Goldman deals - perhaps more so in the case of Goldman, which despite its sterling reputation and deft handling of the mortgage crisis was under attack only last week and may yet meet more turbulence before the financial meltdown is brought under control.
For all that, Buffett remains enthusiastic about the deal.
"Goldman Sachs," Buffett said Tuesday, "is an exceptional institution." Not to mention, for Berkshire shareholders, an excellent profit-making opportunity. 
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