April 7 (Bloomberg) -- Washington Mutual Inc., the largest U.S. savings and loan, rallied the most in almost 25 years in New York trading as a group led by David Bonderman's TPG Inc. considers a $5 billion investment in the Seattle-based company.

An agreement with the TPG group could be announced within days, said a person familiar with the discussions, who declined to be identified. Washington Mutual has lost 67 percent of its market value in the past 12 months and needs the funds after reporting more than $3 billion of home-mortgage writedowns and loan losses.

At least 14 banks and securities firms have sought cash from outside investors in the past year after more than $230 billion of global markdowns and losses caused by the collapse of the U.S. subprime mortgage market. Washington Mutual Chief Executive Officer Kerry Killinger told investors in January he expected a ``dramatic'' increase in loans that need to be modified to avert defaults.

The company needs cash ``in order to stave off insolvency,'' said Richard Clayton, research director of CtW Investment Group, which advises unions holding about 4.5 million shares. ``This is indicative of our point that the company wasn't properly evaluating risk.'' His group is opposing the election of two Washington Mutual directors.

Stock Price

Washington Mutual advanced $2.98, or 29 percent, to $13.15 at 4:15 p.m. in New York trading, and rose as high as $13.90, a 37 percent gain. That's the most since August 1983. The talks were reported earlier by the Wall Street Journal, which said the new investors may own a stake of less than 25 percent. The company's market value of $11.6 billion has declined from a peak of $44 billion in May 2006.

TPG spokesman Owen Blicksilver and Washington Mutual's Derek Aney declined to comment. TPG is based in Fort Worth, Texas.

Washington Mutual reported its first loss since 1997 in the fourth quarter after writing down the value of its home-mortgage unit by $1.6 billion and setting aside $1.5 billion to cover bad loans. The lender also said in January that it will have to put aside $1.8 billion to $2 billion in provisions for the first quarter.

The company's Tier 1 ratio, a measure of financial strength, was 6.84 percent as of Dec. 31. Bank regulators consider banks with ratios of at least 6 percent to be ``well capitalized.''

Commonly known as WaMu, the company ranks sixth with a 3.2 percent share of U.S. bank deposits behind Bank of America Corp., JPMorgan Chase & Co., Wachovia Corp., Wells Fargo & Co. and Citigroup Inc., Killinger said in a Jan. 29 investor conference. It had $194.3 billion in deposits as of Dec. 31.

Good Flip

TPG'S possible investment suggests Bonderman views the slide in financial stocks may be over, said Arnold Danielson, chairman of Danielson Capital, a Vienna, Virginia-based adviser for financial services companies.

``They apparently view this as a way to invest in WaMu with the idea of looking for a good flip within two or three years,'' he said. ``WaMu is essentially a savings institution that has been trying to play with Bank of America and Wells Fargo and they can't keep up.''

As a WaMu director from January 1997 through December 2002, Bonderman knows Killinger well and isn't likely to push for a management change, Danielson said. While Killinger, 58, led WaMu from a thrift with less than $500 million in assets to its current size, ``I suspect he realizes he doesn't have 10 more years, so he's looking for as good of an ending as possible,'' Danielson said.

Board Seat

WaMu in 1996 acquired American Savings Bank of Irvine, California, from Keystone Holdings Inc., a firm owned by investor Robert Bass. Bonderman had been chief operating officer of Bass's company, which bought American in a government-assisted rescue in 1988. American was among the biggest U.S. savings and loans to fail in the 1980s.

The investment group led by TPG would purchase both common and preferred shares, the Journal reported. TPG, co-founded by Bonderman, probably would get a seat on the company's board and Killinger may keep his job, the newspaper said. TPG, which joined with Kohlberg Kravis Roberts & Co. to buy Dallas-based power producer TXU Corp. last October, is seeking more than $15 billion for a new fund, potential investors said in February.

TPG Partners IV, the $5.3 billion fund the firm started in 2003, has since returned an average of almost 36 percent a year to investors, according to data on the Web site of the California Public Employees' Retirement System. The firm's 1994 fund also had an annual return of 36 percent, according to data compiled by an Oregon state investment fund.

Capital Raising

The investment committee of the Washington State Investment Board last month agreed to invest as much as $750 million in TPG Partners VI fund, spokeswoman Liz Mendizabal said Feb. 12. It would be the Washington pension fund's fifth investment in TPG, following a $750 million investment in 2006, she said.

Ron Schmitz, chief investment officer of the Oregon Public Employees Retirement Fund, said they invested $750 million in the most recent TPG fund, which he said raised about $15 billion overall.

Losses from the subprime market have affected more than 40 companies, according to Bloomberg data. Zurich-based UBS AG, Switzerland's biggest bank by assets, announced plans last week to seek 15 billion Swiss francs ($14.8 billion) in a rights offer to replenish capital, while New York-based Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, raised $4 billion in a stock sale.

Subprime Fallout

Washington Mutual ranked sixth among U.S. mortgage companies last year, according to trade publication Inside Mortgage Finance. During the height of the real estate boom, WaMu ranked No. 11 among subprime lenders, or companies that specialized in customers with the weakest credit.

Those loans typically have the highest default rate, and bad subprime mortgages set a record in the fourth quarter, according to the Mortgage Bankers Association. That contributed to the current U.S. housing slump, the worst in at least a quarter of a century.

More than 100 home lenders have sought buyers, halted loans or gone out of business since the start of 2007, according to data compiled by Bloomberg.

Analysts are becoming bearish about Washington Mutual's prospects because of higher credit costs. Frederick Cannon of Keefe Bruyette & Woods Inc. told clients last week he estimates the company will post a loss of $3.15 a share this year, compared with his earlier prediction of $1.45. WaMu is likely to report expenses from soured home loans of $10 billion this year and $7 billion in 2009, Cannon said.

Caution Urged

``We're telling our investors to be very careful until we know the details of this recapitalization,'' Paul Miller, an analyst at Friedman Billings Ramsey & Co., said on a Bloomberg TV interview. ``We're at $9 billion to $10 billion in losses now and we don't know how bad it's getting out there.''

Separately, Proxy Governance Inc. today said it is joining proxy advisers CtW, RiskMetrics/ISS and Glass Lewis in opposing the re-election of some WaMu directors, citing the company's mounting losses from home loans and executive pay decisions.

To contact the reporters on this story: Edward Evans in London at at eevans3@bloomberg.net; David Mildenberg in Charlotte at dmildenberg@bloomberg.net

Last Updated: April 7, 2008 18:37 EDT