The Wrong Long: How TPG Capital Lost $2.0 Billion at Washington Mutual

A few weeks ago, ahead of the second anniversary of Lehman Brothers collapse, I went back into my files to reread what I'd written during 2008 to see if there were any lessons to be learned that hadn't already been tackled in the book explosion arising from the financial crisis. That led me to ask, “If the bet against the housing market by folks like Steve Eisman was ‘The Big Short,' what was ‘The Wrong Long'?" -- or the worst investment made during the crisis?

(To read John Mauldin's article on the implications of additional quantitative easing, click here.)

While there were lots of candidates, including the purchases of Citigroup C preferred by the Abu Dhabi sovereign wealth fund, one deal really stood out: the $7 billion investment in Washington Mutual WFC by a group of investors, led by private equity firm TPG. In April 2008, following the merger of failing investment bank Bear Stearns with JPMorgan JPM, TPG put $2.0 billion of its own money in WaMu, and in its May letter to investors that year, TPG wrote:

(To see Todd Harrison's piece about the effects of David Tepper on the market, click here.)

"We are enthusiastic about the opportunity to invest in an undervalued and attractive deposit franchise, particularly in a security with meaningful downside protection." Not six months later, despite “meaningful downside protection," the investment “vanished," as the New York Times put it at the time, when banking regulators seized WaMu and sold its banking assets to JPMorgan. And in its third quarter 2008 letter, following WaMu's failure and the write off of its investment, TPG offered its investors the following explanation as to what happened:

(To view Michael Comeau's perspective on how Bing might hurt Google, click here.)

“The unprecedented turmoil in global financial markets and resulting macro crisis of confidence has radically changed the dynamics of all financial institutions and led to widespread losses among investors throughout the sector.” Admittedly, TPG was hardly alone in its suffering from the rippling failures of Fannie Mae, Freddie Mac, Lehman Brothers, The Reserve Fund and AIG AIG, but I think it's fair to say that if anyone could have made a good investment in WaMu, it should have been TPG.

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