Sept. 26 (Bloomberg) -- TPG Inc. lost $1.3 billion with yesterday's seizure by regulators of Washington Mutual Inc., showing why most private-equity firms won't come to the rescue of the nation's troubled banks.

``For a private-equity firm to wade into the banking sector now with anything less than control would be crazy,'' said Michael Holland, chairman of Holland & Co. in New York, which manages $4 billion of assets. ``If that's done, it's at the peril of investors.''

TPG, like other leveraged buyout investors, usually acquires control of a company and works to improve performance so it can later sell at a profit. With WaMu, the firm bought common stock as part of a $7 billion capital-raising in April by the Seattle-based thrift aimed at remaining independent. While TPG founder David Bonderman joined WaMu's board, the Fort Worth, Texas-based firm was a passive minority investor.

Bonderman made the unconventional deal because U.S. law limits how much of a bank outside investors can own without having to submit to regulations that private-equity firms seek to avoid. His experience may strengthen the conviction of most LBO firms that it's not worth pumping money into a struggling bank unless they can guide a turnaround, Holland said.

The U.S. Office of Thrift Supervision yesterday took over WaMu, saying it became ``unsound'' after customers withdrew $16.7 billion since Sept. 16. WaMu's stock had fallen 86 percent this year amid rising losses on mortgage-backed securities and loans. JPMorgan Chase & Co. bought its branches and assets for $1.9 billion, leaving equity and debt holders with uncertain prospects for recovering any of their investments.

TPG Group

``Obviously, we are dissatisfied with the loss to our partners from our investment,'' TPG spokesman Owen Blicksilver said yesterday. ``The unprecedented turmoil in global financial markets and resulting macro crisis of confidence has radically changed the dynamic for financial institutions and led to widespread losses.''

TPG in April led a group of investors who bought WaMu shares at $8.75 apiece, a 33 percent discount to the stock price at the time. Others included Capital Group Cos., Brandes Investment Partners LP and Hotchkis and Wiley Capital Management LLC, according to a regulatory filing. Washington Mutual was forced to raise capital after more than $3 billion of home- mortgage writedowns and loan losses.

TPG, whose funds oversee $50 billion, initially held about $2 billion of WaMu shares. It sold some to other investors.

American Funds

The group owned 13.4 percent of WaMu, according to data compiled by Bloomberg. By July, their investment had lost two- thirds of its value as the global financial crisis deepened and investors fled bank stocks. WaMu dropped $1.53 to 16 cents at 4:17 p.m. in New York Stock Exchange composite trading.

Los Angeles-based Hotchkis and Wiley declined to comment. Brandes in San Diego couldn't be reached immediately for comment.

After the TPG-led investors, Capital Group, the closely held firm that manages American Funds, was WaMu's largest shareholder as of June 30, according to data compiled by Bloomberg. The funds held 9.2 percent of the shares, valued at $772.5 million at the time.

The funds also held $1.5 billion of debt issued by WaMu, including subsidiaries, Bloomberg data show. The biggest chunk, 1 percent, was in the $36.8 Bond Fund of America, according to Capital Group spokesman Chuck Freadhoff in Los Angeles. The $12.7 billion American High-Income Trust held 0.79 percent.

The third-largest shareholder was hedge-fund firm Tosca Asset Management LLC, which controlled 6.2 percent of WaMu as of July 16, according to a filing with the U.S. Securities and Exchange Commission. Washington Mutual's failure is a blow to its London-based Toscafund, which had already tumbled 39 percent this year through Sept. 19. Martin Hughes, who runs the fund, was traveling and couldn't be reached for comment.

Vanguard Group

Fund manager Vanguard Group Inc. held 1.8 percent of the bank's stock. Linda Wolohan, a spokeswoman for the closely held firm in Valley Forge, Pennsylvania, said the biggest WaMu holdings was in the $426 million Vanguard Capital Value Fund, at 0.7 percent. The $41 billion Windsor II Fund had 0.6 percent and the $17 billion Windsor Fund had 0.5 percent.

The firm also held $236.4 million in WaMu debt. Vanguard's $5.59 billion Long-Term Investment Grade Fund had the biggest slice, at 0.6 percent, as of June 30. No other fixed-income fund owned more than 0.3 percent.

Pressing Fed

Firms including Carlyle Group and Blackstone Group LP have pressed the U.S. government to loosen the rules around investing in banks. The Federal Reserve this week clarified the guidelines, allowing the potential for an additional board member and more communication between the investors and management of the bank.

Private-equity firms also have explored creating separate funds dedicated to banks in order to gain control of such investments while still protecting their existing investors in other funds.

Other firms made similar minority bets on banks. Corsair Capital LLC led a group of investors in a stake of National City Corp., Ohio's biggest bank. Those investors bought at a discounted $5-a-share. National City fell as low as $2 in New York trading today.

Continental Air, TXU

TPG, formerly known as Texas Pacific Group, has made successful investments in distressed companies including Continental Airlines Inc. The firm joined with KKR & Co. LP last year to acquire electricity producer TXU Corp. for $43 billion including debt, the largest U.S. leveraged buyout.

The investment in WaMu accounted for about 2.5 percent of the firm's assets. The firm's fourth buyout fund, launched in 2003, has delivered average annual returns of 31 percent, according to the California Public Employees' Retirement System, an investor in a number of TPG's funds.

``Bonderman is one of the smartest people ever in private equity,'' Holland said. ``For him to be hit like this shows how perilous the environment has become and how critical control is.''

To contact the reporters on this story: Jason Kelly in New York at jkelly14@bloomberg.net; Jonathan Keehner in New York at jkeehner@bloomberg.net

Last Updated: September 26, 2008 17:37 EDT