TPG, the US buyout firm, is in advanced discussions to inject $5 billion (£2.5 billion) into Washington Mutual (WaMu), America’s largest building society, which has been rocked by the US housing crisis.

The buyout firm, previously known as Texas Pacific, is leading a consortium that is hoping to buy a “substantial minority” of the savings and loan institution, which has lost about three quarters of its value in the past year. This decline left WaMu with a market capitalisation of just under $9 billion at the start of the week.

Under the terms being discussed, TPG would get a mixture of common stock and preferred shares and a seat at the group’s 14-member board. Preferred shareholders get paid before common stockholders if a company goes into liquidation, while TPG would probably also have the option to convert them into common stock in the future.

In return, WaMu will receive a much-needed cash infusion that could avert the need for a fire sale to a large financial institution such as JPMorgan Chase. Sources said that a deal could be announced as early as today, but may still fall through.

WaMu, the 119-year-old group, which has its headquarters in Seattle, capital of Washington State, has been badly hit by the surge in defaults on mortgages in recent months. In the fourth quarter, it reported a $1.87 billion loss after a big bet on sub-prime mortgages led to a sharp rise in loan- related writedowns. It has already cut its dividend, eliminated 3,000 jobs and raised $3.7 billion via a rights issue. Its shares leapt 32 per cent, or $3.26, to $13.43 at midday yesterday.

The deal will give some comfort to the market that the dramatic share price drops recorded by many financial services groups in the past year may be coming to an end. Adam Compton, an analyst at RCM Investors, said: “Clearly these private equity firms believe that the share price will go up, otherwise they would not have invested.”

Meanwhile, Dick Bove, a Punk Ziegel & Co analyst, said recently: “The last time an opportunity of this nature existed to buy bank stocks this cheap was in 1990. The next time will be in 20 years. This is a once-in-a-generation opportunity.”

Before yesterday’s share price jump, the 2,500-branch group was trading at less than half of its book value at the end of 2007. As of Friday, WaMu’s stock had fallen a further 25 per cent this year. If the deal gets done, it would mark the first private equity investment in a significant US commercial or investment bank since 1990, when Kohlberg, Kravis, Roberts invested $283 million into Fleet Financial, to help to finance its acquisition of the ailing Bank of New England. Fleet Financial was bought by Bank of America in 2003.

The deal would also add private equity to the list of investors who have collectively injected about $140 billion globally into banks such as Citigroup, Merrill Lynch and Morgan Stanley in the past few months.

Most of that capital has come from sovereign wealth funds, such as GIC, the Kuwait Investment Authority and Temasek, although last week Lehman Brothers raised $4 billion in a rights issue and UBS announced plans to raise $15 billion by selling stock.

TPG declined to comment on whether it was in discussions with WaMu.

— TPG will buy a 50 per cent stake in CIA International, a Russian pharmaceutical distributor, for $800 million cash, Igor Rudinsky, the owner of CIA, said yesterday. CIA has a 22 per cent market share and a turnover of 65 billion roubles ($2.75 billion).

Times Recommends

• Unemployment rises at fastest rate in 17 years
• Alchemy leads in Fraser and Mosaic bid talks
• US and UK shares slump as recession looms