Trouble In Exburb Banking?

I must preface this post with the caution that it is only a hunch. The story goes like this:

This beautiful Memorial Day Weekend (Thank You Service Men & Women!) I was returning from my parents beautiful place on Cross Lake with my two wonderful children. We even caught a few (small ) perch. Anyway, on the way home we were driving through the "exburbs" of Elk River, Ramsey, and Anoka and I noticed the local banks were offering 5.45% on a CD. Now, I did not see the terms, however, 5.45% seemed VERY high in an environment where banks are borrowing from the fed at .25%. One year treasuries are going for approximately .49% and a 30 year fixed mortgage is running about 5%.

Why on earth would they still need to pay more for money than they can lend it out for when the federal government is giving it away for free? Answer: It's not enough to fill the hole. The hole that is left by all the bad loans they made to people who bought McMansions in the exburbs that they couldn't afford. If they do not fill the hole they will go under. Therefore, in a desperate attempt to ward off insolvency, they are willing to pay more for cash than they can lend it out at. (at least to creditworthy borrowers - they might be planning on lending it to less creditworthy borrowers to make a buck)

If my logic is anywhere near close to the truth, small community banks are in big trouble. I guess with the new $250,000 FDIC limit this means little to most people.

But it does mean that FDIC itself may not be able to meet its obligations without passing the cost on to the taxpayer. Again.