"At that time, SAFE was certainly shocked by the news that the U.S. government decided to take over WaMu "

An interesting aspect to WaMu from Reuters:

"By George Chen, Asia Private Equity Correspondent

HONG KONG (Reuters) - China's foreign exchange watchdog, the State Administration of Foreign Exchange, will cut back on overseas equity buys next year after suffering major losses on the collapse of U.S. lender Washington Mutual, according to sources.

Earlier this year, SAFE, which controls around $2 trillion of China's foreign reserves, agreed to invest up to $2.5 billion in fund of U.S. private equity giant TPG TPG.UL -- its first foray into a foreign private equity fund, people close to the situation told Reuters.

In April, TPG, one of the world's largest private equity firms, led a $7 billion investment in Washington Mutual to help the troubled lender boost its capital.

TPG put money into WaMu through several of its funds, including one SAFE invested in, said the sources who declined to be identified due to the sensitive nature of the deal.

Just five months later, WaMu, the largest U.S. savings and loan firm, was closed by the U.S. government, making it one of the largest U.S. bank failures in history.

Its banking assets were sold to Wall Street bank JPMorgan (JPM.N) for $1.9 billion, wiping out about $1.35 billion that TPG and its institutional investors, known as "Limited Partners" had invested.

"At that time, SAFE was certainly shocked by the news that the U.S. government decided to take over WaMu and there was almost nothing that SAFE could do to save its investment," said one of the sources.

"It's a good lesson for SAFE and you can imagine how unhappy it was, just like every other LP of TPG for the deal," he said.

TPG's losses from the WaMu deal are publicly known but the names and investment contributions of limited partners of private equity firms usually remain under wraps.

It is still unclear how much in total SAFE lost from its bet on TPG and WaMu.

One source said SAFE agreed with TPG's plan to rescue WaMu, contributing at least 10 percent of TPG's initial $2 billion investment in WaMu. Other sources confirmed TPG informed SAFE of its plan to invest in WaMu before it took the action and SAFE supported TPG's plan.

NO MORE QUICK DEAL

SAFE was not the first choice of TPG as a partner to rescue WaMu.

In China, the private equity firm is well known for its landmark investment in Shenzhen Development Bank 000001.SZ in 2004, making it the first foreign investor to own a controlling stake in a Chinese lender.

Sources said TPG initially approached China Investment Corp, lobbying the country's official sovereign wealth fund to become a major limited partner of its new private equity fund.

CIC, which was set up by the Communist government last year to earn higher returns on a $200 billion portfolio of its foreign exchange reserves, declined the offer mainly due to concerns about investment risks and poor prospects of U.S. markets, the sources said.

Instead, TPG's dealmakers contacted SAFE and the foreign exchange regulator agreed on condition that TPG would also jointly invest some of its own money in the WaMu deal, the sources said.

The big losses by SAFE in the WaMu deal through its investment in the TPG fund have drawn attention from top government leaders in Beijing, who have urged both CIC and SAFE to be more cautious on its overseas investments next year.

CIC has already attracted massive criticism at home over its deals in U.S. firms, which have been battered by the credit crisis, with its stakes in private equity house Blackstone Group (BX.N) and Morgan Stanley (MS.N) diving in value.

One of the sources said both CIC and SAFE would focus more on overseas investments in fixed income areas rather than equities deals in 2009."

I guess we'll see more bond buying.

"Explaining how you lost money on your safe investments isn’t fun."

Brad Setser about the flight from risk:

"Central bank reserve growth has unquestionably slowed. Indeed, global reserve growth in October was almost certainly negative. But the Fed’s custodial holdings are still rising. That could imply that central banks are moving out of euros and into dollars, reinforcing the dollar’s rise. More likely though it is evidence that central banks are moving out of money market funds and other dollar assets with a bit of credit risk. No central bank wants to be in the same position as the China Investment Corporation. Explaining how you lost money on your safe investments isn’t fun.

The general flight out of risk by central banks is one reason why the Treasury’s bailout of the Agencies has failed to halt the central bank run on Agencies. The flight out of Agencies — and flight into Treasuries — over the past two months has been stunning. Last week continued the trend: central banks added close to $20b to their Treasury portfolio at the New York Fed while cutting their Agency holdings by $7 billion. That helps support the Treasury market amid all the new supply, but hasn’t done wonders for the Agency market."

How can change the avoidance of risk? When will things change?

"Former (and perhaps future) Treasury Secretary Summers has argued that “You can usually date the end of the crisis to the first moment when a public official makes a forecast that proves too pessimistic.” I don’t think we are there yet. The IMF’s latest forecast still strikes me as rather optimistic. I increasingly suspect that one indicator that the financial crisis has truly turned a corner will come when the Fed’s balance sheet starts to shrink …"

You might try changing your view on risk. Viewing risk as more likely when things are good, and taking chances when things are bad.