Chalk One Up for the Little Guy

Nate Thoma is not a lawyer, but he is a soft-spoken, yet confident, small investor in Washington Mutual, the big bank that was seized by the federal government in 2008 and ended up in bankruptcy. As for so many other investors, Nate’s stake in the bank was wiped out. Nate became something of a folk hero during that tumultuous period when big banking institutions were failing and the little people always seemed to get the short end of the stick as the messes were being cleaned up.

Nate’s big moment came when, after he had spent untold hours analyzing the Washington Mutual case, the federal bankruptcy judge let him have his say—and at some length—in a hearing that culminated in an investigation of trading by some very large hedge funds and in the rejection of a bankruptcy plan for the bank.

The issues made for a real legal thicket, especially for a novice to sort out. Essentially, Nate’s complaint, on behalf of the many small investors in the bank, was that the hedge funds were buying up the bank’s trust preferred securities that go to the front of the line for any money distributed from the bank’s estate.

The hedge funds also owned the bank’s bonds, so their dominant ownership of both classes of securities would help them control the course of the bankruptcy, to their benefit and to the corresponding detriment of the little guys. Nate’s oral argument and his accompanying 33 pages of supporting documents no doubt played a role in an eventual favorable settlement between small investors like himself and the hedge funds, a settlement that may also have shown the way for the bank’s exit from bankruptcy.