Banking System

I said at the time they were nowhere near "stressful" enough in their "more adverse" scenario.

I was right.

Here's the table (thanks to Northwoodspete for pulling and posting it on the forum)

How about a bit of reality?

Real GDP looks to be a fairly decent guess on "more adverse", but the problem is unemployment.  The "average" estimate for 2009 was 8.4%, the "more adverse" was 8.9. 

But we are now at 10.2, and that's the "headline" number, not including the "disgruntled" or "not in labor force" folks.

The entire premise was that we would turn the corner on or before now, with the usual "lagging indicator" factor on the headline unemployment number.

That hasn't happened, as I reproduce again in this chart:

The turn upward in this chart was a near-exact correlation with the end of the recession in the early part of the decade.  Not only are we dramatically worse now, we haven't even begun to turn, and those who have exited the labor force continues to skyrocket.

The key item here is loan losses. 

They will not begin to stabilize until year-over-year job loss turns.

The Treasury "stress tests" did not envision this outcome.  I said at the time they were nowhere near pessimistic enough and did not demand enough capital be raised (probably because they couldn't.) 

But one of the premises of modeling outcomes is that your "worst case" scenario has to be worse than the expected range of outcomes.  That clearly has not happened, and leaves open the question of whether the banks that were pronounced "safe" really are.

I'd argue that based on the stress tests and actual economic performance the answer is a resounding NO!

Gee, who saw this one?

Anyway, the point stands.  The FDIC is clearly out of money, and this is nothing more than yet another legalized accounting fraud game, where they'll get "the money" now but allow the banks to "recognize" that "charge" over time.

And now we find that this is not a short-term issue either:

NEW YORK (CNNMoney.com) -- The government insurance fund designed to protect consumer bank deposits will likely stay in the red through 2012, Federal Deposit Insurance Corp. chief Sheila Bair said Wednesday.

I know I have brought this up repeatedly, but these sorts of losses simply should never happen.  In fact, if the law is followed with regards to the FDIC, they can't happen.

What this deficiency shows is that the law has not been followed.  It has instead been wantonly and recklessly ignored, as I have repeatedly pointed out:

In a scathing, more-than-100 page sealed complaint, the US and a complainer (Rudy Vigil) allege that some of the nation's largest banks, including JP Morgan/Chase and Citigroup, have defrauded the US Federal Government by running what amounts to the same scam that happened with subprime lending in the student loan arena.

Specifically:

"The alleged False Claims Act violations arise out of Nelnet's false records, statements and certifications of compliance with Higher Education Act ("HEA") statutes, regulations and Department of Education ("DOE'd") policies that (1) forbid the offering of inducements to any individual in order to secure applicants for FFELP loans such as Consolidation, Stafford and PLUS loans and (2) forbid engaging in fraudulent or misleading advertising.

Gee, really?

Where have we seen this before?

Undisclosed "yield spread premium" anyone?

The difference here is that "ysp" was not, at the time, unlawful.  However, offering "inducements" (or if you prefer the more common terms, kickbacks or bribes), under the Higher Education Act, is.

Indeed, there is a long list of specifically-prohibited actions, including discrimination against those not on preferred lender lists, illegal inducements including the payment of points, premiums, payments or other inducements.  "The rules prohibit inducements to educational institutions, individuals, or other parties. In particular, inducements to colleges and their employees, as well as inducements to students, are prohibited."

Further, the rules go on to disqualify violating lenders from the HEA under conditions where that lender commits a prohibited act, specifically:

DISQUALIFICATION FOR USE OF CERTAIN INCENTIVES. -- The term "eligible lender" does not include any lender that the Secretary determines, after notice and opportunity for a hearing, has after the date of enactment of this paragraph --

1. offered, directly or indirectly, points, premiums, payments, or other inducements, to any educational institution or individual in order to secure applicants for loans under this part;
2. conducted unsolicited mailings to students of student loan application forms, except to students who have previously received loans under this part from such lender;
3. offered, directly or indirectly, loans under this part as an inducement to a prospective borrower to purchase a policy of insurance or other product; or
4. engaged in fraudulent or misleading advertising.

The truly nasty part of this lawsuit is that it appears that Nelnet was well aware of these practices and in fact had been sued in the past over them.  Specifically, the above link has the following paragraphs:

On April 20, 2007, the Nebraska Attorney General announced a settlement with Nelnet Inc., an education lender. Nelnet agreed to pay $1 million to an education fund and to adhere to a code of conduct similar to the one established by the New York Attorney General. It prohibits revenue sharing, opportunity loans, gifts and trips to higher education employees, and paid advisory board service. In some regards it is stronger than the New York Attorney General's code of conduct. For example, Nelnet also agreed to provide borrowers with the better of the direct-to-consumer channel or school channel rates regardless of how the prospective borrower reached Nelnet. Nelnet also supports requiring a minimum of three lenders on preferred lender lists, at least two of which are unaffiliated. In other ways it is weaker. For example, the restriction on paid service on advisory boards is limited to financial aid administrators who are involved with student lending. The prohibition on staffing financial aid offices merely requires proper disclosure and transparency. Nelnet agreed to adopt this code of conduct nationally by August 15, 2007.

On April 25, 2007, the New York Attorney General announced settlements with Bank of America and JP Morgan Chase, where both lenders agreed to adopt the attorney general's code of conduct. Johns Hopkins University announced that it was adopting the Code of Conduct and that it was dropping all preferred lender lists. The University of Texas system had also previously dropped all preferred lender lists.

On July 18, 2007, Nelnet published a summary of findings to date with regard to an ongoing review of its marketing practices, announcing, among other measures, that it was terminating its referral fee relationship with approximately 120 college and university alumni associations.

On July 31, 2007, the New York Attorney General announced an agreement with Nelnet in which Nelnet agreed to contribute $2 million to the national education fund and to adopt the code of conduct. Nelnet also agreed to stop paying alumni associations for loan referrals. This settlement is in addition to the $1 million settlement with the Nebraska Attorney General. However, the New York Times reported on August 1, 2007 that Nebraska Attorney General Jon Bruning has decided to forgive Nelnet's $1 million settlement with Nebraska in light of the $2 million settlement with New York. Higher Ed Watch criticized this lender forgiveness, noting campaign contributions from Nelnet to the Nebraska Attorney General. This may represent a violation of the Nebraska Rules of Professional Conduct. On August 10, 2007, Nebraska Attorney General Jon Bruning announced that Nelnet has agreed to pay the original $1 million settlement after all. The Associated Press reported that the Attorney General approached Nelnet about reinstating the settlement in order to avoid creating the "perception of a conflict of interest".

Reading the entirety of the above link is well worth your time, as is pondering whether there is truly ANY corner of lending in our economy that has not been punctuated with acts that at best violate ethics and at worst violate the law.

More importantly these alleged scams in the education sector have been part and parcel of the reason that college education cost has risen at such an outrageous rate.  Absent the "free money" afforded by rip-offs such as are alleged here no university system or college could have possibly maintained an escalation of price at multiples of the increase in wages within our economy.

As such merely accusing the banks of such conduct is insufficient.  We the parents must also rise and demand that the outrageously opportunistic parasitic games played by colleges and universities end immediately, and withdraw our consent to the exploitation of our children at the hands of these latter-day robber barons.

If our young adults wish to be exploited in such a fashion that is their right and privilege as adults, but it is my considered opinion after examining a litany of such abuses for more than a decade, all of which have gone unchecked and all of which have occurred with the full knowledge and consent of the colleges and universities in the United States, that I will not subscribe to nor assist in any such scam when it comes to my daughter. 

I therefore call for a general boycott by all parents in the completion, filing, or provision of ANY family financial information, including but not limited to the FAFSA.  Specifically, the following is an outright scam and fraud upon our young adults:

Under Federal law your family is primarily responsible - to the extent they are able - for paying for your college expenses. To determine how much your family can afford to pay towards your college expenses, we must collect your financial information and if you are a dependent student, we must also collect your parents' financial information.

This statement, by the way, is a lie.

Federal law does not change legal realities as ensconced in The Constitution of The United States, as The Constitution is the supreme law of the land.  At the age of 18 you are a legal adult, entitled to all of the rights and privileges thereupon (excepting the consumption of alcohol.)  You may tell your parents to piss off and never speak to them again.  Your parents do not have a right, at 18, to control your coming and going, they cannot control where you live, who you sleep with or what you eat or drink.  Your right to travel, live as you wish, and determine the path of your own life is unrestricted irrespective of your parents' wishes, as a matter of The Constitution. 

This does not (and should not) prevent your parents from contributing, on their own volition, to a young adult's education but it most certainly must prohibit the rubric of mandatory "contributions" to someone who is, under The Constitution, Federal and State law, a legal adult with all rights, duties and privileges that attach.

There is in fact no federal law that states that a parent is required to pay for their child's college education.  What the law actually states is that The Government will not provide you with free money unless your parents "contribute" to the extent that their formulas say they can.  That's a very different thing indeed, but the government, like your college, is not above lying to you as a student - or the parent of one.  The parents of a student are in fact under no legal obligation to provide any information requested.  Of course the government isn't obligated to provide you with "free money" (really, money they stole from a taxpayer at gunpoint) either! 

If you're a student, do you want to attend a school that lies to you before you even get there?

If you're a parent, do you want to "contribute" to a school that lies to you (and your son or daughter) before they even set foot on the campus?

It is time to break the backs of these lenders and universities that have declared financial war on this nation, including a long-standing pattern of conduct of violating the law with impunity, all of which has caused the spiraling of college costs to a degree that is absolutely unsupportable by any means other than raw theft from the public.

If you EVER want to see college educations return to an affordable status then you must support and enforce within your own household a total and complete boycott on this rank attempt by the financial industry to extend to you, as an adult, a demand for payment at any rate a college so chooses for "educational expenses" for another legal adult (even though they may be your progeny.)

College education used to be something that could be paid for through working while attending school along with scholarship monies for those who showed promise in their educational future. 

Today, college educations are virtually dependent upon transfer payments and tens or even hundreds of thousands of dollars in debt taken on by families and students, induced and coerced by both schools and lenders who do not even comply with the law in an astounding number of cases, and whom have together lobbied for Federal Laws that are blatantly unconstitutional attachments of financial obligation for those who are, under the law, legal adults.

This is Constitutionally indefensible and amounts to nothing other than preying upon our youth through the use of them as "levers" to both induce them to take on unconscionable debt and, when possible, abuse their parents - all for the benefit of the banksters who, this lawsuit alleges, don't even comply with the thin protections that Federal Law is supposed to provide!

The Parade Of Mendacity continues in The Capitol today, with a committee hearing on the reform of the OTC Derivatives market.

The witness list reads as a who's who of the den of wolves, of course.  We have the obligatory commercial interests who use derivatives (Cargill and John Deere) along with SIFMA via Morgan Stanley, the Managed Funds Association, the insurance companies (Prudential) and the mandatory academics.

Many of the witnesses make the obvious point that derivatives are useful to hedge off risks of various types, some of which are "custom" in their implications - that is, there is no currently-corresponding exchange-traded instrument that duplicates what they are trying to accomplish.  In this they are correct.

But two pieces of testimony are deeply troubling; those of James Hill and Dave Hall of SIFMA and Chatham Financial, respectively.

James asserts as his opening volley:

We believe that a guiding principle for congressional action should be not to impose new regulations that will limit the availability or usefulness of derivatives or increase their cost unless there is a compelling reason to do so.

In other words, James asserts that there should be no regulation that provides for actual safety improvements to the system, because such improvements will of course increase their cost.

He goes on to say:

It was the lack of meaningful regulation of AIG’s derivatives affiliate that allowed poor business practices to lead to a situation in which the federal government had to invest tens of billions of dollars in that enterprise in order to avert what could possibly have been a systemically significant business failure. The Act would address this regulatory shortcoming by creating a legislative and regulatory framework that ensures such a lapse should not occur again.

That's a nice sentiment, but it does not take Mr. Hill long to gut his own prescription.  See, AIG's problems revolved around a simple reality: It was operating while insolvent, and allowed to become not only insolvent but ridiculously insolvent, to the point that it literally threatened to be unable to cover ANY of its outstanding derivative positions.

SIFMA's position becomes clear almost immediately thereafter:

For example, the Act would authorize regulators to impose margin requirements on swaps in which one of the counterparties is an end user. It is difficult to understand why counterparty credit exposure created through a swap transaction should be required to be collateralized when lending arrangements between the parties can be made on an unsecured basis. The Act would direct regulators to allow parties to post non-cash collateral, but even that carries a cost, including reducing the end user’s borrowing capacity and potentially causing an end user to violate negative pledge covenants.

There's the problem with the banking system right there - in your face!  We had multiple failures last year because banks lent money unsecured beyond their excess capital; when that money was not paid back by the supposedly-credit worthy customers in a sufficient number the bank failed, forcing the intervention of the Federal Government.

Worse, we have hard proof that this conduct is still going on in the form of nearly 100 bank failures thus far in the crisis.  In virtually every case it is discovered that these banks are not just insolvent, they are ridiculously beyond insolvent, having burned through their so-called 6% Tier One regulatory capital three, four, five or even six or seven times over before being "caught" and closed.

These deficiencies did not happen overnight.  Indeed this sort of insolvency takes weeks, months or years to develop, during which there has been willful blindness both in Washington DC and the several States to the pending implosion of these firms.  In many states, such as Virginia, Michigan, Maryland, Nevada, North Carolina, Indiana, Missouri this is defined as an offense, and some states define it as a criminal felony for which one can be imprisoned for a term of years.  All of the above named states define such an offense as one that subjects all officers, directors, and branch managers to personal liability for loss of such deposits, and demands personal knowledge of the books of account of such institutions by all these individuals.  While some states apply this only to "state banks", others are far more broad, applying these strictures simply to "banks", strongly implying that these standards apply to any firm that operates a bank in their state by virtue of corporate charter (as a foreign corporation or not!)

Now SIFMA has the gumption to come to The House of Representatives and put forth the position that institutions are "free" to do this sort of thing, exposing themselves to insolvency via lending, they should be able to expose themselves to even greater insolvency via derivatives contracts, and that no margin supervision should be required as a matter of law in order to prevent insolvency from occurring.

This is tantamount to asking for official federal sanction to commit a felonious act under the laws of several states.

Another provision concerns dealer segregation of funds or other property posted as margin. We believe it is important for end users to have that option in connection with over-the-counter swaps, but both the decision to require margin and the details of how it is handled should be left to negotiation between the dealer and the end user in the ordinary course of their lending and risk management processes.

Both Lehman and AIG's failures were systemically significant as a direct consequence of the failure to demand margin segregation.

Lehman is particularly troubling.  As I have previously documented there were tens of billions of dollars in NY Fed money that Lehman had outstanding at the time of its bankruptcy filing.  What appears to have transpired, however, is that The NY Fed was repaid in apparent violation of bankruptcy preference laws after the petition was filed, even though such actions are per-se improper once an insolvency is declared by the firm (indeed, any payment made that appears to be in "preference" looking back prior to the filing for a reasonable time, usually 90 days, can be reversed in bankruptcy.)

The larger issue is simply this: SIFMA is arguing that collateral posted with a bank or other financial institution to secure a current liability under a derivative contract should be available to the institution for general corporate purposes.  This runs contrary to every principle of fiduciary responsibility, agency status for a broker/dealer and common sense.

Indeed, these funds are not, under any circumstances, the broker/dealer's to use.   They are posted as security for performance, just as is an earnest money deposit on a home purchase or margin posted for a short stock position.  These funds are collected for the express purpose of securing performance, nothing more or less, and they need to be held and kept separate under formal escrow protection.

The legislation under consideration does not go far enough to guarantee this protection for customers.  Under no circumstances should the assets of a customer that are posted for margin purposes be able to be co-mingled with the general operating funds of the corporation holding them, nor should they be subject to seizure and conflation with the firm's assets in the event of insolvency.  The money or other collateral in these instances is posted for the specific purpose of securing performance; nothing more or less, and does not belong to the institution holding these funds!

SIFMA's objection is both self-serving and outrageous.  By permitting the corporate use of these funds not only are the banks able to "double dip", that is, earn interest lending out money that is not theirs, effecting theft (even if temporary) by conversion, they also expose customers to the risk of loss in the event of a firm's insolvency - a risk that is not disclosed clearly and conspicuously to them when they enter into these derivatives contracts.  Indeed with that disclosure it is likely that no customer in his or her right mind would agree to such a contract, as the very time when a loss occasioned by this would be realized would be when that firm would be making maximal use of its hedging activity via these derivatives.

I will note for the record that other institutions have been caught using customer segregated funds generally for their own corporate purposes in recent years, and subjected to fines for doing so.  This is insufficient; such a violation should be punishable by criminal sanction as well as revocation of a firm's operating charter, as this is nothing more or less than theft by conversion.

Dave Hall echoes the sort of ridiculous statement of SIFMA with regards to margin:

Margin – Any requirement for business end users to cash collateralize hedging transactions would create an extraordinary and unnecessary drain on working capital.

Huh?  The exposure on a short transaction that has gone "against" the customer is real!  The requirement to post margin comes out of the fact that performance, assuming the position remains where it is or continues to move adversely, will require the payment of those funds.  Posting of margin may "drain working capital" but so does performance!  What will be next?  Repudiation of swaps that go the wrong way for the customer?

Mr. Hall goes on to say:

To illustrate this point, a bank may choose to make a loan without collateral if the business is creditworthy, therefore it is reasonable that a derivative should be allowed to be offered to a business end user without margin if the business end user is creditworthy.

And again I note that we have nearly 100 proved cases thus far in the form of bank seizures where so-called "credit-worthy" customers in fact were not and the refusal of those institutions to maintain the sound banking practice of never lending unsecured beyond the bank's own collateral has resulted in insolvency from three to nine times over (vis-a-vis the Tier 1 Regulatory Capital) prior to seizure.

In short OTC derivatives, over the previous ten years, have become a mechanism for avoidance of sound financial regulations and gross abuse of regulatory arbitrage.  These abuses have led to billions of dollars of losses in the case of Lehman and taxpayer expense of over $100 billion dollars that was passed through AIG to counterparties that, on their face, had a claim to exactly nothing following AIG's recognition of inability to pay as agreed.

These failures were not accidents, they were systemic and intentional abuses that, under the laws of several states, should have been charged and prosecuted as felonies.  That there is no corresponding federal law prohibiting a financial institution from accepting funds and/or operating while it is in a negative equity position and criminalizing this conduct - that is, operating while insolvent - is an outrage. 

SIFMA and The Chatham Financial Corporation wish to not only continue this charade but, it appears, to be given formal permission from The Federal Government to expand it.

Their requests not only must be denied but Congress must also write into law criminal penalties mirroring that of states such as Nevada, which formally define the operation of a "bank" (but extending it to all financial institutions) while insolvent as a felonious act, exposing all officers and directors not only to prison time but also to personal liability for all losses suffered by customers and counterparties as a consequence thereof.

It is time to "clear the decks" and talk about exactly what a sound banking system is - and is not.

It is time to identify that which is an exercise in capitalism, and that which is an exercise in fraud.

It is time to strip back the mask of the so-called "moneychangers" and lay bare for all to see exactly what has been going on for the last two decades, and more importantly, to identify whether or not there is a kernel of respectability contained therein.

And finally, it is time to dispense with many of the calls from all corners for "hard money" and the demise of fractional lending as nothing more than an interesting philosophical exercise masquerading as an intentional (or horribly-misguided) misdirection.

Let's first define a few terms; these should be familiar:

• Principal: The amount of money you borrow for a given term of time.
  
  
• Interest: The amount of money you pay, usually expressed as a percentage, to cover three risks and costs - the risk you will not be able to pay the principal, the risk of currency devaluation and the demanded profit on the loan by the lender.
  
  
• Collateral: The item or items you post with the lender to secure your indebtedness.  While "collateral" in the broadest sense includes anything that could be seized after a judgment should you fail to pay (including your labor at subsequent points in time), for the purpose of this discussion we will limit the term "collateral" only to that specific physical, tangible property you post to secure a specific loan, explicitly excluding anything of a speculative nature (such as your ability to earn money in the future.)
  
  
• Monetary Base: The monetary base of all credit-based monetary systems is the sum total of all unencumbered assets against which one is both able and willing to borrow.  (No, it is not "M1", "M'" or any such nonsense.)  If you run into a so-called "Economist" who claims to have letters after his name yet makes the argument that "base money" (or any such thing) is the monetary base in a debt-based system find out where he got those letters from and petition them to revoke his degree; he fails at the fundamental skill of logic and deduction, yet it is a near-certainty that he carries proof that his claimed position is wrong in his wallet (a credit card, which spends identically to the dead president it resides next to.)

Ok, having settled on definitions, we will now turn to the fundamental reality of fractional reserve banking.  Many people claim that banks "create money" or "print money."  This is not true; a bank recycles money, that is, it increases the velocity of a given amount of money in circulation, but an ordinary bank (not a Central Bank) never creates new money.

We'll start with our hypothetical bank that has no assets and no deposits, and a 10% fractional reserve requirement.  Joe walks in and deposits $10,000 and leaves.  The bank now has $10,000 in assets (cash) and $10,000 in liabilities (a book entry that says it owes Joe that $10,000 on his demand.)

Jane now walks in and wants to borrow money to buy a car.  She borrows $9,000 from the bank and posts as security the title for the car she purchased.  The bank now has exchanged $9,000 of the cash asset that it had for a piece of paper (the title to a car and a promissory note.)   Let's, for the sake of argument, agree that Jane paid half cash for the car and that it is worth far more than the $9,000 she borrowed (this becomes important in a minute.)

Now the car dealer comes in and deposits the $9,000 that Jane spent.  The books look like this:

This is where the complaint that the bank is "printing money" comes from; notice that there was only $10,000 in the beginning, but there is now suddenly $19,000 worth of both assets and liabilities. 

The "purists" will argue that both the car dealer and Joe can't come in and demand their money - its not there (only $10,000 is, not $19,000.)

This is false: The bank holds a piece of paper worth at least $9,000 and can sell it immediately into the market if necessary.  As such it CAN pay both the car dealer and Joe should they both demand their money by disposing of the asset it holds in lieu of the other $9,000 - Jane's loan.

This also looks ok from an accounting perspective - both sides of the ledger balance.  Let's keep going.

Steve now comes into the bank and opens a credit card account with a $8,100 credit line.  He immediately blows the entire line on an exotic cruise vacation.  The cruise line deposits the funds.  This is what we've got now (note that the $8,100 he borrowed was 90% of the deposit from the car dealer; I have grouped the transactions to make it simpler to follow.)

Now we have a problem.  See, the "Credit Card" loan that Steve took out is unsecured.  That is, it is nothing more than a raw promise to pay in the future, backed by nothing other than Steve's word, and what's worse, Steve immediately consumed the entire $8,100 - it's gone.

So now if the cruise line, car dealer and Joe all come into the bank and demand their money the bank has a very high probability of not being able to pay.  It may be able to sell Steve's paper (the card account) for $8,100, but that line, being unsecured, is likely going to be subject to some sort of haircut in the market - maybe a big one.  The particular "haircut" is entirely dependent on the exact state of the economy at any given point in time, along with Steve's personal financial situation.

The important point is that the asset that the bank holds from Steve is nothing more than a signature and promise.

This is unacceptable and in fact is the cause of every economic Depression featuring a deflationary credit collapse over time, as defaults begat more defaults and those defaults, uncovered with capital, cascade through the system instead of being isolated to the failed institution.  All of them.  1873, 1929 and the present mess were all caused by systemic and pernicious violation of the most fundamental rule of sound banking: One must never lend out more unsecured than one has in excess capital. 

So how could the bank have avoided this?  Simple.  Let's say that the bank had taken in capital in the form of stock issued to the public; it thus might have a balance sheet that looks like this:

Now everything is fine.  Why?  Because the shareholder equity can get whacked as required.  Let's assume Steve defaults; we now have:

Notice that the books balance, but the loss was taken out of the shareholder's hide.

"Paid in Capital" is one of several types of "excess capital" that a bank can hold.  A bank could also issue bonds and it can retain earnings; all three are actual hard cash.

Therefore, the fundamental rule is this:

No bank may be permitted, under any circumstances, to have outstanding more in unsecured lending than it has in actual excess capital.

So long as this rule is adhered to there is never a risk of depositor loss and "deposit insurance" such as the FDIC is irrelevant.  Indeed, the FDIC should exist only to cover the malfeasance of government officials who have failed in their essential task - that is, guaranteeing that the banks under its supervision never exceed their excess capital in unsecured lending.

The counter-argument - that one cannot quantify asset prices accurately and thus incursion of this rule will occur "accidentally" - is often raised.  This is a chimera - the standard is that it may never happen, and it is the responsibility of bank management to decide how close they want to fly to the Sun!  That is, the more leverage they take on, the lower the down payments they permit for their asset-based lending and the closer they run in today's market prices for the assets they hold to their excess capital the greater the risk that an economic dislocation of some sort will render them instantly insolvent and closed, wiping out the entirety of their unsecured bond and stockholders.

In point of fact any bank which has outstanding more in unsecured lending than it has in excess capital is at that moment insolvent, in that it has no security against the amount outstanding in loans that exceed excess capital.

Note that this has exactly nothing to do with whether you are on a Gold Standard nor does it have anything to do with fractional reserve lending.  In fact the Depressions of both 1873 and the 1929/1930s occurred while on "hard money".  A gold standard (or any other "hard" currency) will do nothing to stop this, because the problem has never been the fiat nature of currency - it is the fact that credit is being extended without collateral beyond the actual cash reserves of the institution in question.

Now here's the nasty: It is illegal in many states for a bank to accept a deposit while in this condition.  As just one of many examples (Nevada):

 1.  It is unlawful for a president, director, manager, cashier or other officer or employee of any bank to permit the bank to remain open for business, or to assent to the reception of deposits or the creation of debts by the banking institution, after he has knowledge of the fact that it is insolvent or in failing circumstances. An officer, director, manager or agent of a bank shall examine the affairs of the bank and shall know its condition. Upon the failure of any such person to discharge his duty of examination, he must be held, for the purpose of this title, to have had knowledge of the insolvency of the bank, or that it was in failing circumstances, and shall be deemed to have assented to the receipt of deposits while the bank was insolvent or in failing circumstances. A person who violates the provisions of this subsection is individually responsible for deposits so received, and all such debts so contracted, but any director who has paid more than his share of such liabilities has a remedy at law against other persons who have not paid their full share of such liabilities for contribution.

....

3.  A person who violates the provisions of this section, or who is an accessory to, or permits or connives at, the receiving or accepting of any such deposits, or the giving of such preferences, is guilty of a category D felony and shall be punished as provided in NRS 193.130.

Each and every bank officer and manager is not only civilly liable for any loss suffered (e.g. balances beyond insured limits) but is also CRIMINALLY liable for the acceptance of deposits while the bank they work for is factually insolvent in many of these states, including Nevada.

If The Federal Government will not close these institutions and will not act in this fashion then we must insist that the STATES do so in accordance with their legal code.

These laws exist for a simple reason: When you walk into a bank and deposit money you have a contractual understanding that it will be returned to you either immediately on demand or in a relatively short period of time (effectively on demand.)  This is even true for so-called "time deposits"; you will forfeit some amount of interest (sometimes all of it!) but if you cash a CD early they are still required to hand over your money.

If the bank does not have it nor can they raise it immediately as a consequence of lending out money unsecured in amounts that exceed their excess capital then they have committed the common-law crime of fraud; they have induced you to lend them money with a promise to repay that they know is entirely speculative in terms of their capacity to perform. Unless that is disclosed to you before you tender your funds to them they have committed fraud by concealing the speculative nature of their ability to return your funds on demand.  It is that simple and a number of states recognize this as a formal section of their legal code.

IF THE FEDERAL GOVERNMENT WILL NOT DO ITS  JOB THEN IT IS TIME FOR WE THE PEOPLE TO DEMAND THAT THE STATE GOVERNMENTS DO SO FOR THEM!