[Pen-l] Insolvent bank?

[Carl Dassbach <dassbach@xxxxxxx>]

I am having a hard time grasping what it means for a bank to be 
insolvent and its consequences.  In principle, I understand insolvency 
as meaning to owe more than you have but how is this the case with banks 
and what are the negative consequences?

For example, the owe money to their depositors but deposits up to 
$250,000 are insured by the FDIC (and I would think that on one would 
put more money in a bank than was covered by insurance.  They "owe" 
money to their stock holders but whatever loss the stock holders take is 
their own fault.  Sometimes you gamble and win, sometimes you gamble and 
lose.  (Besides, stockholders still have a claim on the physical 
property of a bank.)  They owe money to other people/organizations that 
they have borrowed money from based on some inflated assets. If a bank 
can't pay these people back, so what?  These people also become 
insolvent.  So what?  It is all fictitious in the first place and 
billions have evaporated from the stockmarket.  Why can't the same thing 
be permitted to happen with banks - a kind of cleansing of the financial 
system instead of trying to prop it up.  I think the only thing that 
matters is that banks should be able to pay depositors.

But I do not understand these things.

CHAD
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