Last Updated: April 8, 2008: 11:22 AM EDT
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Private equity to the rescue

A deal at WaMu and a rumored deal at National City could help repair the buyout crowd's reputation.

By Roddy Boyd, writer
David Bonderman's TPG is reported to be investing $5 billion into ailing Washington Mutual.

NEW YORK (Fortune) -- Private equity is back.

For the past year, the buyout crowd has been in retreat. Blackstone (BX) stock has fallen sharply since the firm's huge initial public offering back in June, and Warburg Pincus recently saw the value of its investment in bond insurer MBIA (MBI) plunge more than 60% before the deal even closed. The problems haven't been confined to the market, either: Blackstone chief Steve Schwarzman drew hoots last summer with a lavish birthday party, just as Congress was up in arms about tax laws that let billionaires like Schwarzman pay lower rates than their chauffeurs.

All in all it has been an ugly time in what once was a red-hot business. But chatter in the banking industry over the past week shows that the private equity hardhitters may yet get a new lease on life, in a development that's good for financial sector investors too.

Tuesday, Washington Mutual (WM, Fortune 500) announced that TPG - the David Bonderman-led firm once known as Texas Pacific Group - and other investors will invest $7 billion in the deeply troubled savings and loan. The WaMu deal comes just days after the Journal reported KeyCorp (KEY, Fortune 500) is considering a purchase of struggling Cleveland bank National City (NCC, Fortune 500) in a buyout that would involve a capital injection from Kohlberg Kravis Roberts.

While KKR and TPG are attracted to these deals because they look like profitable investments, the National City and Washington Mutual investments could carry a public relations benefit too. The private equity firms could be cast as saviors of companies with deep roots in their communities, perhaps preserving thousands of jobs.

When a potential deal was announced in the Wall Street Journal Monday, Washington Mutual's stock jumped, with Investors hoping the investment would mark what could be termed "the UBS floor."

The hope is that after UBS' (UBS) $19 billion write-off last week, the worst of the mortgage credit crisis may just be over. With WaMu possibly facing $10 billion in hits to earnings for its troubled home equity and sub-prime portfolio this year, according to CreditSights, an investment would seem to indicate that TPG feels comfortable with the portfolio's risks.

It goes without saying, of course, that these sentiments are just that: hopes and nothing more. There are many arguments built around the collapsed secondary bond markets and continued credit deterioration of bank lending portfolios to point to continued write-offs.

That said, there has been much talk over the past year about where the bottom fishers are, so a private equity sighting in the struggling banks sector could have a powerful positive effect on sentiment. Another bullish argument goes like this: Unlike sovereign wealth funds from the likes of Singapore, private equity shops don't have generation-long time frames and the ability to control how the investment is accounted for. At some point within the next year or so, TPG's investors are going to demand a profit. This is probably quite reassuring to investors who, until recently, were pondering the effect of a possible government action on their bank at some point within the next year. To top of page

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