(Bloomberg) -- The dust had barely settled after Silicon Valley Bank’s collapse last year when savvy investors began lining up for a big payout, based on a hastily written government press release.

Now, in the ensuing legal fight, the Federal Deposit Insurance Corp. is nearing a high-stakes court ruling that could force the regulator to describe how it crafted an announcement that left it exposed to paying $2 billion from its main insurance fund. The money would go to the failed bank’s bankrupt parent and onward to creditors, at the expense of other big US banks.

At the center of the case is the FDIC’s emergency declaration last March that “all depositors of the institution will be made whole,” even if they were uninsured. One of the biggest turned out to be SVB’s parent, SVB Financial Group, whose stock and bond prices had collapsed.

If the FDIC is forced to fork out the $2 billion, some of the parent’s creditors stand to make a bundle. Recipients would include Pacific Investment Management Co., King Street Capital Management, Hudson Bay Capital Management, Appaloosa Management, Centerbridge Partners and Silver Point Capital, filings show.

But the agency has refused to pay up.

Now, in a volley of filings at federal court in California this month, the regulator is being pressed to hand over internal records detailing its decisions — raising potential political risks — while it also tries to get the case dismissed.

“If I were the FDIC I’d fight like hell,” said Konrad Alt, who advises financial firms and fintechs as co-founder of Klaros Group. “Maybe I’m going to lose in court, but I’d rather go down swinging.”

A spokesperson for the FDIC declined to comment on pending litigation.

Unusual Collapse

It has been a trying year for the FDIC. 

The agency acknowledged lapses in supervision after Signature Bank and First Republic Bank failed. It faces lawsuits over its handling of last year’s regional banking turmoil and separately is undergoing a third-party review of its workplace culture after news reports of misogyny that prompted women to quit.

That’s a comedown from the image it crafted after the 2008 financial crisis, when examiners gained a reputation for their carefully choreographed seizures of ailing banks. As the industry eventually steadied, some FDIC veterans and top brass handed off the reins.

The agency normally insures deposits up to $250,000. But faced with spreading panic last year, the government invoked a so-called “systemic-risk exception” to guarantee all cash at SVB and Signature Bank.

SVB was an unusual case. It collapsed in a matter of hours as companies panicked and demanded their deposits. Normally, the Federal Reserve would have had more time to cajole the bank’s parent to inject capital.

“Holding companies are supposed to be sources of strength for the banks,” former FDIC Chair Sheila Bair said in an interview. “It shouldn’t have been incumbent on the FDIC to spell that out in the systemic-risk exception.”

‘Tantamount to Theft’

The agency has a history of tangling with parent companies over how to split the burden after banking units collapse. In 2009, for example, the agency demanded almost $1 billion from the parent of Montgomery, Alabama-based Colonial Bank once the lender failed. A court ruled in favor of the company.

Investors are betting on a similar outcome this time, too. In one sign of optimism, SVB’s unsecured bonds maturing in 2026 have been trading at about 64 cents on the dollar. Some investors even snapped up the bankrupt parent’s stock.

For a time, it looked like the parent would get its money without any trouble. The $2.12 billion of deposits was moved to a so-called bridge bank, where the parent withdrew $177 million. But then the FDIC halted payouts, saying in October that it was denying that “claim.”

A bankruptcy judge later said the issue would have to be decided in federal court. Representatives for the parent brought their complaint there in December.

“The FDIC’s act was tantamount to theft, and was contrary to its public assurances that all depositors’ funds at Bridge Bank were safe,” lawyers for the plaintiff wrote.

‘Tomato Surprise’

After failing, Silicon Valley Bank ended up getting acquired by First Citizens BancShares Inc., which set out rebuild the business.

Read More: SVB Is in Hiring Mode to Defend Its Turf After Collapse

And as the regional banking turmoil subsided, stronger US banks were tapped to replenish the FDIC’s main insurance fund. The lion’s share of that burden has been steered toward the industry’s largest, such as JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co. and Citigroup Inc.

“If the holding company wins, the FDIC is at least in the position of saying we tried our best,” said Alt, the industry adviser. The regulator “was handed a tomato surprise and is doing the best they can to make the best of the situation.”

--With assistance from Peter Blumberg.

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