My experience as an accountant for a firm in NY specializing in small business shows that in some respects both of you are right. Legal firms are closing down because the demand for their services at inflated rates has dropped considerably. Other small businesses which we service are facing a similar demand reduction. Building contractors in the trades, such as plumbing, electrical etc are having their financing lines closed down by the banks. The reason is that these companies are losing money due to demand contraction in NY and the banks do not want to financing their losses.
The banks are using a very large brush in pursuing risk aversion while they try to rebuild their balance sheets. There appears to be a tendency to avoid loss recognition and higher capital requirements by not selling distressed assets at this time. Some insights are available in this Harvard business school study:
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