Bailing out troubled financial institutions, private equity firms have discovered to their chagrin this year, can be like catching a falling knife. It's better to wait and pick it up off the floor.

In April, TPG Capital stepped up to lead a $7 billion bailout of savings and loan Washington Mutual Inc. to help see the troubled Seattle-based institution through the downturn in the housing and mortgage markets. TPG co-founders David Bonderman and James Coulter had ties to WaMu and its predecessors going back 20 years, and TPG stumped up $2 billion of its own money for a 13.7% stake, spurring some of WaMu's existing institutional investors to pony up the other $5 billion in a bid to protect their earlier investments.

Last week it looked as though TPG had grabbed the WaMu knife in midair. On Thursday, after a four-day melee in the financial sector, the shares TPG bought at $8.75 were worth barely $2. The collapse was dizzying: The shares fell 3.5% Monday, 20% Tuesday and 30% Wednesday before bouncing back 22% on Thursday.

At one point, WaMu's market capitalization was down to a mere $4.8 billion.

As the stock plummeted, fears that WaMu might become insolvent looked like they could become self-fulfilling. With each tick down in the stock, it looked less likely that WaMu would be able to raise new equity if it needed to.

The bank said again last week that it was well capitalized and did not foresee the need to raise new capital. In investor presentations it cites its $8.5 billion loan reserves and $11 billion in excess capital, plus $6 billion in pretax, pre-write-off operating income, arguing that they are more than sufficient to cover the $17 billion in loan and credit card write-offs it foresees.

Unlike Lehman Brothers Inc., the other chief victim of last week's market panic, WaMu derives more than half of its funding from retail bank deposits, which are unlikely to evaporate because they are federally insured.

Its business does not depend on the faith of short-term creditors and counterparties in the way that a brokerage and investment bank such as Lehman or Bear Stearns Cos. does.

WaMu could bounce back. Shares of bond insurer MBIA Inc. suffered a similar collapse earlier this year despite a two-stage, $800 million cash injection by PE firm Warburg Pincus. MBIA's stock, which traded at $31 when the investment was announced last December, fell below $5 by July, putting Warburg's warrants, exercisable at $16.20 to $31 per share, far out of the money.

But the insurer's stock recovered to trade above $15 in early September.

Investors and short sellers are betting that WaMu is in an irreversible nosedive, and there are worrying signs. WaMu is offering 5% on four- and five-year certificates of deposit -- more than 1% above competitors -- suggesting that it may be having trouble attracting retail deposits. If there were a run on the bank or if losses on its subprime loans or its huge portfolio of home equity loans exceed projections, its capital could be impaired. At press time, there was speculation that federal regulators were working on some kind of takeover or orchestrated sale, though no confirmation.

TPG and Warburg Pincus are not alone in finding their bailout investments in the financial sector under water. Corsair Capital LLC is also looking at a loss after leading a $7 billion rescue of Cleveland-based National City Corp. in April.

Corsair and other investors bought 69% of the bank at $5 a share. The stock dipped as low as $3.60 in July and was still trading around $4.75 last week.

But the loss on WaMu could be on a much larger scale and would be a huge hit, even for a firm the size of TPG. A TPG spokesman declined to say whether the money came entirely from TPG's nearly $20 billion Fund VI, which just recently closed, or in part from a separate $6 billion financial industry bailout fund TPG raised earlier this year. Either way, a total or near-total loss would put TPG in a deep hole and would stain the reputation of a firm that is widely admired by its competitors.

It would be particularly embarrassing to Bonderman, who helped run a WaMu predecessor, American Savings Bank, before it was acquired by WaMu in 1996 and then sat on WaMu's board until 2002.

The TPG spokesman declined to comment on the investment.