TPG Capital's $2 billion investment in Washington Mutual Inc., the first by a private equity firm in a regional bank, may well prove to be a big blunder. Already, the value of TPG's initial investment has tanked more than 40%, as of June 30. But if history is any guide, it doesn't have to turn out that way.

TPG anchored a $7 billion investment on April 8 in the Seattle regional bank, known as WaMu, contributing $2 billion of equity. The move was followed soon after by a Corsair Capital LLC-led $7 billion capital infusion into Cleveland-based National City Corp., raising expectations for similar actions by other firms.

The idea seemed sound enough at the time. The implosion of the U.S. housing market led to steep losses on banks' books and forced them to raise capital, creating opportunity for investors to snap up stakes in the banks at seemingly attractive discounts. But as the credit and housing turmoil continues unabated, the smart money isn't looking so smart thus far, though it's early days.

"Absolutely no one's made any money in the financial sector -- yet," says one partner at a private equity firm in reference to recent capital infusions in the sector by private equity firms and sovereign wealth funds.

WaMu agreed to sell 176 million common shares at $8.75 a share, a 26% discount to WaMu's stock at the time. The bank issued about 55,000 convertible preferred shares, with a purchase price and liquidation preference of $100,000 a share.

The deal also featured TPG founder David Bonderman's comeback at WaMu. In 1988, Bonderman and Robert Bass, founder of PE firm Oak Hill Capital Partners, bought Irvine, Calif., thrift American Savings Bank for about $500 million. The two sold it to Washington Mutual in 1996 for $1.4 billion, and Bonderman served on WaMu's board from 1996 to 2002.

At the time of the $7 billion capital raise, WaMu's then chairman and CEO, Kerry Killinger, hailed the transaction as salutary. "The substantial new capital ... will position us for a return to profitability as these elevated credit costs subside," Killinger said. "With the support of these investors, we have every confidence in our ability to deal with today's market conditions and restore shareholder value."

Killinger was wrong. Since the deal, WaMu's shares have continued to sink. As of June 30, the company's stock was trading at $4.95, about 43% below the discounted share price TPG and its co-investors received.

The continuing decline in WaMu's fortunes forced the bank's board to strip Killinger of the chairman title July 1. Stephen E. Frank replaced Killinger as CEO. "The problem with these investments is that you have to wonder whether you've put in enough capital to fill the hole," says one financial institutions banker. "In the case of WaMu, any decision on their investment has to revolve around that question."

TPG is left playing the waiting game in the hope that markets eventually will recover. Yet there is some cause for optimism, considering some successful precedents in the sector. Financial services investments have been among the most lucrative for PE firms, which might explain their interest.

In 1988, Kohlberg Kravis Roberts & Co. almost quintupled an initial $221 million investment it made in First Interstate Bancorp of California, selling out when Wells Fargo & Co. bought First Interstate in 1996. Warburg Pincus, which bought a 20% stake in Mellon Bank Corp. in 1988 for $158 million and a 12.5% stake in Dime Bancorp in 2000 for $238 million, profited handsomely from both of those deals, producing a 30% compounded annual return in the Mellon deal as the buyout shop progressively sold its stake in the bank over eight years. Even more lucrative was Dime. The firm's original $238 million investment was valued at $750 million; less than two years later, Washington Mutual bought Dime for $5 billion.

The prospect of such returns are prompting firms such as Carlyle Group to hire prominent financial institution group bankers such as Olivier Sarkozy, former head of FIG at UBS, to raise funds for similar investments. Carlyle also recently brought in Wachovia Corp. corporate treasurer James Burr as managing director, concentrating on financial services investments.

The Federal Reserve may go some lengths to accommodate them. According to reports, regulators such as the Fed and the Office of the Comptroller of the Currency and the Office of Thrift Supervision are considering loosening tight controls over who invests in banks. In the case of the WaMu transaction, for example, the OTS approved TPG's investment, as well as Bonderman's placement on the thrift's board, in one day. The normal approval process takes two to three weeks.

But there are no sure bets. As one banker notes, the financial sector's woes are nowhere near over.

"We probably have two more years of this to go," the banker says.

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