Wells Fargo’s (WFC) plan to buy Wachovia (WB) for $15 billion in stock is weighing on Citi (C). Citi shares dropped 10% in premarket trading Friday, giving back the gains they made over the past week after the financial services giant reached a deal to buy Wachovia’s banking operations in a deal backed by the Federal Deposit Insurance Corp. Buying Wachovia would have given Citi a much bigger branch network and added substantially to its deposit base, at the cost of just $2 billion in stock and $12 billion in preferred shares issued to the FDIC.

But now, those benefits will accrue to Wells, the San Francisco bank whose biggest shareholder is Warren Buffett’s Berkshire Hathaway. The Wells-Wachovia deal looks like another win for Berkshire which, like Wells, ranks among the few financial-related stocks to be up in a year that has seen the collapse of the U.S. brokerage sector and steep declines in shares of many banks. Just over the past month, Berkshire has taken big preferred stakes in Goldman Sachs (GS) and GE (GE) at very favorable terms, and agreed to buy energy merchant Constellation Energy at a third of its recent high.

One bet that hasn’t been paying off recently for Berkshire is its big bet on the railroads, which went into free fall Thursday amid worries that the global economy is headed for a recession. Big Berkshire holding Burlington Northern (BNI), for instance, has dropped 15% over the past week. But on balance, Buffett will probably take the past week without too many complaints.

The Warren Buffett halo effect isn’t quite as great at General Electric (GE) as it was at Goldman Sachs (GS). GE shares dropped in early trading Thursday, after the Fairfield, Conn., conglomerate sold $12 billion worth of common stock to the public at $22.25 a share.

That’s a 9% discount to the stock’s closing price Wednesday. Thursday’s selloff comes after GE announced that Buffett, CEO of Berkshire Hathaway (BRKA), would plow $3 billion into the company by buying preferred stock paying a 10% dividend. In contrast, shares of Goldman rose 6% last Thursday after the company said Buffett would buy $5 billion of preferred stock and the public would take $5 billion of common.

GE said its $15 billion capital raise will bolster its financial flexibility, but the steep cost has the shares trading near the 52-week low they reached Wednesday before the Buffett announcement was made, amid questions about the health of its GE Capital unit.

“The equity offering in conjunction with the Buffett investment and Buffett’s statement of support should alleviate near term liquidity concerns,” writes Citi analyst Jeffrey Sprague. “However, GE is potentially taking 6-7% dilution and selling shares near a five-year low.” GE shares recently were off 7% at $22.75.

Warren Buffett can’t pass up a blue-chip bargain. The billionaire investor and CEO of Berkshire Hathaway (BRKA) has come to the rescue of another embattled U.S. firm, with Wednesday’s announcement that Berkshire will buy $3 billion worth of preferred stock in General Electric (GE).

The deal’s terms are practically identical to the ones Buffett got last week in making a $5 billion investment in Goldman Sachs (GS). Buffett will buy preferred shares paying a rich 10% dividend and redeemable by the issuer at a 10% premium. Berkshire also gets warrants to buy an equal amount of common stock at a discount to recent prices.

Meanwhile, GE plans to sell at least $12 billion in common shares to raise capital to shore up its struggling GE Capital unit. GE announced last week that it would miss profit targets for the third quarter and year, suspend its stock-buyback program and seek to reduce the leverage at GE Capital, saying its results were being pressured by “unprecedented weakness and volatility in the financial services markets.”

Worries about the health of GE Capital sent General Electric shares tumbling earlier Wednesday. The stock dropped as much as 10% before the company announced the capital-raising plans and said it remains on track to meet the financial goals outlined in last week’s press release. GE shares were lately down 4%.

“I have been a friend and admirer of GE and its leaders for decades,” Buffett said in a press release. “They have strong global brands and businesses with which I am quite familiar. I am confident that GE will continue to be successful in the years to come.”

A glance at Buffett’s frenzied dealmaking pace in recent months led Fortune to venture last week that the Goldman deal had likely left the Oracle of Omaha all tapped out. Obviously, however, Berkshire’s golden balance sheet always leaves him with room to take deals that he deems too good to pass up.

Warren Buffett is back on the warpath. The billionaire investor and CEO of Berkshire Hathaway (BRKA) said Tuesday evening he’ll put $5 billion into Goldman Sachs (GS) via a purchase of preferred stock paying a cool 10% dividend. Buffett also gets five-year warrants to buy $5 billion in Goldman common shares at $115 a pop - an 8% discount to Tuesday’s closing price of Goldman shares.

The preferred stock sale, together with a plan by Goldman to raise $5 billion in a public offering of common shares, will give the big bank a wad of fresh funds at a time when cash has been tight in the market. Only a week ago, shares of Goldman were falling amid questions about the firm’s massive balance sheet and short-term funding needs. Goldman and rival Morgan Stanley (MS) attempted to answer those questions this weekend by getting Fed approval to operate as bank holding companies, with the capacity to gain more stable funding through deposits.

The deal comes less than a week after Buffett’s MidAmerican Energy agreed to buy Constellation Energy (CEG) in a $4.7 billion deal, saving the energy merchant from a cash shortfall. In both cases, Buffett’s deep pockets - Berkshire has had $30 billion in cash lying around - allowed him to do a deal quickly at terms that practically ensure his shareholders will make a nice profit, while bolstering partners who are desperate to get their hands on funds now.

The Oracle of Omaha is looking all too prescient in the wake of Berkshire Hathaway’s (BRKA) 64% first-quarter earnings drop. Billionaire investor Warren Buffett, Berkshire’s CEO, noted in this year’s annual report that changing market conditions can cause large quarter-to-quarter swings in the conglomerate’s reported earnings, because accounting rules dictate that the fair value of Berkshire’s derivatives holdings be reflected in its quarterly profit statements. And so it was with Berkshire’s numbers out Friday afternoon: Earnings fell to $940 million in the quarter ended March 31 from $2.6 billion a year ago, as the unrealized change in the market value of Berkshire’s derivatives portfolio swung to a $991 million loss from a year-ago $382 million gain.

Buffett, of course, isn’t terribly interested in quarterly earnings, preferring to track the change in the company’s net worth as reflected in the value of its assets, or per share book value. Another measure Buffett is more interested in, operating earnings - excluding investment and derivatives gains and losses - showed a much smaller decline, dropping to $1.93 billion from $2.21 billion a year earlier.

Meanwhile, Buffett indicates he sees the volatility that hurt Berkshire’s numbers this quarter as a sign of beckoning opportunity. “You will recall that in our catastrophe insurance business, we are always ready to trade increased volatility in reported earnings in the short run for greater gains in net worth in the long run,” he said in a section of the annual report excerpted in Friday’s press release. “That is our philosophy in derivatives as well.”

Warren Buffett’s Berkshire Hathaway (BRKA) is coming under fire for its push into bond insurance.
Connecticut’s attorney general is investigating possible conflicts of interest tied to Berkshire’s ownership of a new muni bond insurer, Berkshire Hathaway Assurance, and its 19% stake in ratings agency Moody’s (MCO).

The attorney general, Richard Blumenthal, tells Bloomberg he is examining the “clear and direct conflict of interest for Moody’s to rate a company owned by such a significant Moody’s shareholder.” Moody’s recently gave Berkshire Hathaway Assurance a triple-A rating.

One fact that seems to weaken the conflict case here is the fact that McGraw-Hill’s (MHP) Standard & Poor’s also has given Berkshire Hathaway Assurance a triple-A rating. Beyond that, a triple-A rating for Berkshire seems eminently justifiable given the firm’s pristine balance sheet. Meanwhile, both Moody’s and S&P continue to rate much less well capitalized insurers such as Ambac (ABK) and MBIA (MBI) triple-A, much to the amazement of many observers.

For that and other reasons, it’s all too easy to pick on Moody’s and S&P. They have been rightly criticized for their poor performance in rating bonds tied to subprime mortgages. After initially putting their triple-A rating on hundreds of collateralized debt obligations and residential mortgage-backed securities, the firms have been forced into embarrassing downgrades and repeated revisions of their loss projections. That subpar showing has led critics to conclude that the practice of getting paid by bond issuers clouded the rating agencies’ judgment - a charge the agencies reject.

So it’s tempting to conclude that the Moody’s investment is turning into a headache for Buffett. But that judgment is probably premature: While his holdings in the ratings agency have lost almost half their value over the past year, he’s still up 274% on the investment.

It looks like prosecutors got their way at Berkshire Hathaway (BRKA). The Omaha, Neb., conglomerate said Monday that Joseph Brandon, CEO of its General Re unit, “has decided to resign effective today.” The decision comes just a week after The Wall Street Journal reported that federal prosecutors were demanding Berkshire replace Brandon to pave the way for the end of a long-running probe of General Re.

Brandon was running the company when it did a reinsurance deal with AIG (AIG) that allowed the big insurer to make its reserves look stronger than they really were. Four former General Re execs were convicted in a criminal fraud trial tied to that episode, including Elizabeth Monrad, who reported directly to Brandon.

Brandon had been a favorite of Berkshire chief Warren Buffett’s, as noted in Berkshire’s annual report. But that doesn’t mean his departure is necessarily a big blow for the company. His successor, Tad Montross, won praise in this year’s report as well. Even so, Felix Salmon argues at Portfolio.com, the reality is that Buffett caved in.

Meanwhile, Buffett says in the latest issue of Fortune that the credit crisis is far from over - though he sees opportunity, Nicholas Varchaver writes, in the hard-hit auction rate securities market.

Ambac (ABK) could finally get its capital infusion this week, but a deal apparently won’t include a split of the company’s muni bond insurance arm from its riskier structured finance side. The Financial Times reports eight banks led by Citi (C) and UBS (UBS) are preparing to inject $2 billion or more into the company, which has seen its shares swoon over the past year as investors fretted that Ambac would lose its triple-A rating. An agreement could be announced as early as Wednesday, the FT reported, and could for now forestall any prospect of a damaging downgrade by the ratings agencies. Moody’s said Friday that it was still reviewing Ambac’s ratings for a possible downgrade because the company’s capital levels fell below the agency’s triple-A target levels. Moody’s and S&P recently affirmed their triple-A ratings on Ambac rival MBIA (MBI), which has raised $2.6 billion this year and indicated last month that it plans to split its muni and structured businesses within five years.

Even if Ambac does get its capital infusion, it and MBIA are facing a drastically changed landscape. Some municipalities have gone to Berkshire Hathaway Assurance to insure bonds that already carry an Ambac or MBIA wrap, Berkshire (BRKA) chief Warren Buffett said Monday. And now California is dropping insurance of municipal bonds altogether, CNBC reported. A spokesman for the state treasurer’s office sums up the big problem for the bond insurers:  “In the current market - and given the condition of the bond insurers - it makes no sense” to pay for insurance.

The decline of the dollar - it bounced Monday off a 35-year low after European officials expressed concern about the currency’s health - is putting the U.S. trade deficit under the spotlight. Berkshire Hathaway (BRKA) chief executive Warren Buffett noted in the firm’s annual report, issued Friday, that Americans are shipping some $2 billion a day in assets and IOUs overseas - an unhappy fact that goes a long way toward accounting for the sharp decline of the dollar in recent years, as well as the recent rise of sovereign wealth funds.

While worries about the trade deficit and the weakness of the dollar are widespread, Buffett noted on CNBC this morning that he outlined the problem back in a 2003 article in Fortune - and even proposed a solution. Buffett advocated the issuance of so-called import certificates that would effectively subsidize U.S. exporters while driving up the cost of imported goods. “Perhaps there are other solutions that make more sense than mine,” Buffett wrote. “However, wishful thinking - and its usual companion, thumb sucking - is not among them.” Unfortunately, the fact that we’re still having this discussion in 2008 suggests that wishful thinking continues to dominate the agenda.

Berkshire Hathaway (BRKA) has found a novel way to profit from the bond insurance mess. CEO Warren Buffett said on CNBC this morning that Berkshire has started writing insurance policies on some municipal bonds that already are insured by struggling bond insurers Ambac (ABK) and MBIA (MBI). Issuers began seeking out additional insurance amid worries that Ambac or MBIA could face downgrades that could set off a wave of selling by institutions that aren’t allowed to hold bonds unless they carry a triple-A rating. Berkshire last month offered to take over MBIA and Ambac’s muni businesses in exchange for $9 billion in payments - an offer that Buffett admitted Monday found no takers.

Even so, Buffett’s comments offer the latest evidence that risk-averse municipalities have been backing away from MBIA and Ambac. MBIA said last week in its annual report filed with the Securities and Exchange Commission that it was writing “very little” new bond insurance business amid worries about possible downgrades. Ambac, for its part, recently slashed its quarterly dividend for the second time this year in a bid to conserve cash. Both companies have said they will face additional writedowns tied to mortgage-market declines early in 2008. The worst of the downgrade worries appear to have lifted for now, but these companies need to find new business if they’re going to avoid being forced into runoff.