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[DewDiligence]

WaMu Fall Crushes TPG

http://online.wsj.com/article/SB122247093070880789.html

›SEPTEMBER 27, 2008
By PETER LATTMAN

It was bad enough that billionaire investor David Bonderman saw his private-equity firm TPG lose its entire $1.35 billion investment in Washington Mutual Inc. in the past week. What made it worse was that he didn't even know when it was happening.

Late Thursday evening, Mr. Bonderman got word of the bank's government takeover and selloff via headlines over Dow Jones Newswires. The Office of Thrift Supervision had seized the bank, keeping WaMu and its board of directors, which includes Mr. Bonderman, fully in the dark.

It was a humbling end to a disastrous bet made just five months ago by Fort Worth, Texas-based TPG, the former Texas Pacific Group, and widely considered among the world's sharpest investors. Those losses, coupled with a $28 billion hit for WaMu's bondholders, illustrate the peril of investing in distressed banks and financial companies. Such losses will likely spook more capital from entering the sector just as it is needed to help rebuild the nation's banks.

TPG's foray is potentially the single worst private-equity deal in history. [I think the word, “potentially” can be removed.] Many other transactions have gone sour on investors, but not with the speed and size of the WaMu deal.

"This is unusual because most private-equity investments are in operating companies where the business can't turn down that quickly," said Steven Kaplan, a professor at the University of Chicago Graduate School of Business. "This was a high-risk bet that went the wrong way."

The developments will also likely be a blow to Martin Hughes, founder of London-based Toscafund Asset Management LLP and Washington Mutual's third-largest shareholder, according to June regulatory filings. Mr. Hughes, whose fund is part of Old Oak Holdings Ltd., already is grappling with heavy losses this year. His flagship fund, which had about $8 billion of assets towards the beginning of the year, was down about 36% for the year through Sept. 4.

Among the U.S. bank's other big investors are some of Europe's largest financial institutions including Germany's Deutsche Bank AG and U.K.-based Barclays PLC unit Barclays Global Investors, according to regulatory filings reflecting holdings through the end of June.

The prospects seemed different back in April, when TPG led a $7 billion capital infusion into WaMu. The firm invested $1.35 billion investment spread across three of its funds, including a new vehicle dedicated to financial-services investments. Several other firms, including San Francisco's Blum Capital Partners and Los Angeles hedge fund Canyon Capital also invested large sums.

TPG's investment thesis was simple: Stabilize the bank's wobbly capital base, suffer through more bad-loan exposure and ride out the economic downturn. When the cycle turned, TPG thought it would own part of a bank with valuable retail deposits spread across a nationwide network of more than 2,000 branches.

The investment was struck at $8.75 per share, which was priced at a sharp discount to where it had been trading that day. Mr. Bonderman took a seat on WaMu's board and owned roughly 9% of the company. Anticipating that further losses in WaMu's sickly mortgage portfolio that could require another capital raise, TPG structured a key downside protection into the deal called a price-reset provision that would compensate TPG if the bank sold more shares at a lower price.

Mr. Bonderman knew WaMu well. [This is what makes the debacle all the more remarkable.] In 1988, Mr. Bonderman and TPG co-founder Jim Coulter helped Texas billionaire Robert Bass buy American Savings Bank, one of the country's largest savings and loans. They helped turned the bank around and it was sold to WaMu in 1996 for about a $750 million profit. It was one of the early deals that helped cement Messrs. Bonderman and Coulter's reputation as shrewd investors.

What TPG couldn't have anticipated was the seriousness of the problems gripping the nation this month -- far worse than what was seen during the savings-and-loan crisis. [I disagree; Sheila Bair anticipated it—why couldn’t Bonderman?] Over ten days since Sept. 15, WaMu customers withdrew $16.7 billion, roughly 9% of the thrift's deposits. The data alarmed federal regulators, which, seeking to stanch the flood of outflows, urged WaMu to sell itself. Under pressure, TPG waived its price-reset provision to encourage other banks to consider a deal.

In recent days, WaMu and TPG grew frustrated with government regulators, whom they regarded as putting too much pressure on the bank. Meanwhile, the uncertainty around the government-sponsored bailout fund was driving away potential buyers, because it was unclear what WaMu assets may be contributed to such a fund.

For its part, TPG maintained that the thrift was well enough capitalized to remain independent and weather the financial crisis. In a memo to its investors sent late Thursday night, the private-equity firm mostly blamed factors beyond its control [naturally]. "We have never run across a situation where the combination of regulatory uncertainty and market disruption has combined to overtake the fundamental aspects of an investment," wrote TPG. "We are clearly perplexed and saddened by this turn of events."‹