Washington Mutual near $5 bln TPG deal - sources

By Megan Davies and Jonathan Stempel

NEW YORK (Reuters) - Washington Mutual Inc WM.N, the largest U.S. savings and loan, is close to obtaining a $5 billion injection from investors led by private equity firm TPG Inc, people familiar with the situation said on Monday.

An investment would ease the thrift's need for capital as losses have soared from subprime mortgages and other loans.

A transaction could be announced Monday or Tuesday, said the people, who declined to be named because they were not authorized to speak.

Shares of Washington Mutual were up $2.89, or 28.4 percent, to $13.06 in late afternoon trading on the New York Stock Exchange. Financial stock indexes also outperformed stocks in general.

An investment could dilute holdings of existing shareholders but could also provide stability for WaMu, as the thrift calls itself.

Meanwhile, some investors who had "shorted" the thrift's shares may have bought the stock to cover their bets on a decline, contributing to Monday's gains.

TPG and WaMu declined to comment.

Seattle-based WaMu would join more than a dozen commercial and investment banks seeking cash from outside investors in the last year, after more than $200 billion of write-downs and credit losses tied to the nation's housing and credit crisis.

"The Washington Mutual news doesn't mean there won't be another shoe to drop," said Matt McCall, president of Penn Financial Group in Denver. "What I see tells me we are definitely in a bottoming process."

A $5 billion investment would represent more than half of Washington Mutual's $9 billion market value on Friday.

According to The Wall Street Journal, the investment would give investors common and preferred shares. TPG would receive a seat on WaMu's board, the newspaper said.

The investment could be a sign of confidence in the banking system, but would also expose TPG to losses if WaMu's business soured further.

Fort Worth, Texas-based TPG was once known as Texas Pacific Group, and said it invests more than $30 billion of capital.

WaMu lost $1.87 billion in the fourth quarter, hurt by exposure to housing markets such as California and Florida.

Analysts expect more losses at least through 2008, and several have said the thrift has not set aside enough to cover bad loans.