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Business Owners: Do You Prefer Small Banks or Big Ones?

If you were running a small to medium-size business, would you rather negotiate with a ginormous bank based in New York or a moderately sized one in your hometown? If your answer to this question is the latter, then you should be thinking hard about the proposals to bust up the big banks.

Otherwise, contemplate the Second Coming of J.P. Morgan himself.

There is something peculiarly Washington about how this idea is gaining steam only at the end of the process. The New York Times publishes a piece about the debate over breaking up banks, and ABC News does an interview with Sen. Ted Kaufman, the Delaware Democrat who advocates a bank breakup.

It's as though the learning process only got underway when President Obama decided to confront Wall Street directly (though not as directly as his predecessor, FDR) and when the SEC put Goldman Sachs (GS), everybody's favorite proxy for Wall Street, on the defensive.

A less charitable interpretation: Washington only started talking about the best, most decisive solution once Congress neared the end of the debate on reform -- a time when legislators are tweaking final drafts rather than contemplating big steps.

The facts have been clear for some time. About 15 years ago, the six biggest banks in the United States had assets equal to 17 percent of the nation's GDP; today that number is 63 percent.

What do you expect when JP Morgan Chase (JPM) alone swallows up Bank One, Bear Stearns and Washington Mutual in a short period? It's as though J. Pierpont Morgan himself has come back from the grave to announce that, again, he is again the dominant force in finance.

Kaufman's solution is simple: impose hard caps on what portion of the nation's insured deposits can be held by a single bank (10 percent) and limit the liabilities that banks themselves can assume when they borrow money. (The massive liabilities the banks incurred were, after all, the reason for the financial crisis.)

Unsurprisingly, small business organizations have rallied to his cause. The Main Street Alliance, a coalition of the kinds of firms you see driving through town every day, is supporting him.

William Dunkelberg, a professor at Temple University and the chief economist of the National Federation of Independent Businesses would turn the clock back to the time before Congress repealed the Glass-Steagall Act in 1999. That law, a cornerstone of Depression-era reforms, made banks choose either investment or commercial and retail banking. They could take deposits and lend money, or construct and market securities, but not both.

And you know what? Glass-Steagall aligned commercial banking interests with those of small and medium-sized businesses. For one to succeed, both had to.

"Glass-Steagall reinstatement of some sort might get more attention to lending to smaller firms," Dunkelberg told me in an email.

In the end, that's what it is about: a level playing field between businesses and banks. The banks would rather continue the investment-banking party of the last decade than be forced to focus on their traditional clients.

So, business owners out there: What would you prefer?

J.P. Morgan image via Wikimedia Commons