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

Lawyers for the part of Silicon Valley Bank that has been put into bankruptcy protection accused US bank regulators of having “drained” roughly $2bn of cash from the institution, setting the stage for a fight that will decide how much investors, including Appaloosa and Pimco, recoup in the restructuring.

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

The Federal Deposit Insurance Company took control of SVB’s commercial banking operations on March 10 after depositors attempted to withdraw $42bn from the lender, in the biggest bank failure since the Great Financial Crisis.

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

The parent company’s assets included $2.1bn of cash, a sum that creditors such as Appaloosa believe could go towards repaying them. A conflict over that cash had been anticipated, but court papers and Tuesday’s hearing revealed a rift about which side should hold the funds in the interim.

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

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

But the largest portion of its cash — some $1.9bn — remains at Silicon Valley Bridge Bank, the bank created by the FDIC when it took over SVB. Sandy Qusba, an attorney at Simpson Thacher, counsel to 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 attempt to stake a claim on that cash. In court papers, the agency said SVB Financial’s bank account simply made it a creditor of the bank. “Rather than pursuing its deposit claim [in court], the debtor seeks to have its claim effectively allowed in full and paid at its first-day hearing,” the FDIC wrote.

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

The parent company, the bank and the FDIC were instructed 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 who are legally attached to SVB’s commercial banking unit.

SVB Financial is looking to sell its investment banking and investment management units. Those proceeds, along with cash and $6bn of “net operating losses” that could be applied to future profits, form the basis for recoveries of SVB bonds and preferred stock, now largely held by distressed debt firms.