SVB Financial clashes with FDIC over fate of $2 billion in bankruptcy hearing

Lawyers for the part of Silicon Valley Bank that has been put into bankruptcy protection accused US banking regulators of “draining” about $2 billion in cash from the institution, setting the stage for a battle that will determine how much investors, including Appaloosa and Pimco , bring into the restructuring.

The remarks on Tuesday came at an opening hearing in the bankruptcy of SVB Financial – the unit of SVB that includes the investment banking and venture capital businesses – which filed for Chapter 11 protection last Friday.

The Federal Deposit Insurance Company took control of SVB̵[ads1]7;s commercial banking business on March 10 after depositors tried to withdraw $42 billion from the lender, in the biggest bank failure since the Great Financial Crisis.

The bankruptcy case will help determine how creditors who lent to SVB Financial, the parent company that owned SVB’s namesake commercial banking business, are repaid.

The parent company’s assets included $2.1 billion in cash, a sum that creditors such as Appaloosa believe could go toward repaying them. A conflict over the money was expected, but court papers and Tuesday’s hearing revealed a disagreement over which side should hold the funds in the interim.

A slide presentation by SVB Financial’s lawyers at Sullivan & Cromwell accused the agency of blocking or attempting to reclaim wire transfers made by SVB Financial from its bank account to other external accounts it had set up.

SVB Financial was able to transfer just over $93 million out of its accounts at SVB before they were locked, and has a total of about $186 million deposited into Citizens Bank and Bank of New York Mellon. The company is expected to use that cash, which is expected to last at least several months, to fund it during bankruptcy.

But the bulk of the cash — about $1.9 billion — remains in Silicon Valley Bridge Bank, the bank created by the FDIC when it took over SVB. Sandy Qusba, an attorney at Simpson Thacher, counsel for SVBB, said SVBB was unable to process withdrawals or do anything with that account without the FDIC’s blessing.

Creditors are wary that the FDIC will soon try to put in a claim on that cash. In court papers, the agency said SVB Financial’s bank account simply made it a creditor of the bank. “Instead of pursuing the demand for deposits [in court]the debtor seeks to have its claim actually approved in full and paid at the first day hearing,” the FDIC wrote.

“We don’t think it’s the case that the FDIC has the right to recover a deficiency,” argued Marshall Huebner, an attorney representing SVB Financial creditors. “Who is entitled to the benefits of these Chapter 11 estates? The estate’s own creditors and stakeholders, or the trustee for one of its now former subsidiaries?”

The parent company, the bank and the FDIC were asked to form a “working group” to immediately sort out day-to-day management issues. The parent company lacks any of its own employees — it instead relies on workers legally linked to SVB’s commercial banking unit.

SVB Financial wants to sell its investment banking and investment management units. These proceeds, along with cash and $6 billion in “net operating losses” that can be applied to future profits, form the basis for the recovery of SVB bonds and preferred stock, now largely owned by distressed debt firms.

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