Everyone seems to realize at last that banks that are too big to fail are also too big to manage--and too big to exist. Even the Feds understand this now, and are grasping for a solution.

To me, the answer is simple: impose higher capital requirements on banks with more than $100 billion in assets, to reflect the heightened risk such mega-institutions pose to the system. That way, the market, not regulators, could decide if the increased size is worth the attendant extra risk and capital.

We’ve written for some time about the unfair advantages the shadow banking system (notably money market funds and investment banks) enjoys as it competes with the real banking system. The shadow system operates with essentially no regulation, pays no deposit-insurance fees, and isn’t saddled with mandated social missions imposed by legislation such as the Community Reinvestment Act.

The result? Shadow banks weaken the actual banking system by using their advantages to skim off the financial services industry’s most profitable business. Money market funds in particular can offer premium returns to bank deposits and promise bank-like safety--without the cost or safety of the FDIC insurance system

Our recent article criticizing the S.E.C. for the toothless regulation of money market funds it’s proposed drew and outpouring of comment, mainly from readers who stuck up for the funds, and pointed out the value they’ve added to the society in general.

As U.S. taxpayers spend massive amounts to save Citigroup (C), we are reminded yet again why that’s such a hopeless, pointless thing to do.

As the ongoing financial panic unfolds, no event has been more staggering—or dramatic---than the collapse of AIG.

This was once one of the world's great companies, not just in financial services, but in any industry, anywhere. At its peak, the company had a market cap of $190 billion and assets of $1 trillion.

For years, the scale of the disaster that is Citigroup (C) has been something to behold.

The company was run at first by an empire builder, then by two bright non-bankers completely unsuited to the task of managing a monstrosity of such size and reach. Below them toiled middle managers in a bureaucracy that seems to have no end. Some of those managers are competent, others, not so much. But it all added up to vast, costly, unmanageable organization that didn’t do anything particularly well, except regularly engineer major compliance screwups around the globe. Too big to fail, too big to manage.

The more we learn of the decline and fall of Citigroup (C), the more obvious it is that the company has become a dysfunctional, unmanageable organization that’s being “run” by a hapless, egocentric management team.

With the news last week that the federal government will vastly increase its stake in Citigroup (C), we see at last the final collapse of the mega-bank model.

In the U.S., Citigroup has been effectively nationalized -- and Bank of America (BAC) may not be far behind. In the UK, meanwhile, the government has taken over both Royal Bank of Scotland (RBS) and Lloyds.

Our European correspondent, Chris Skinner, posted a piece from the UK last week on the success Banco Santander (STD) is having in Europe, even as so many of its competitors struggle.

I can’t speak to the details of how Santander is doing on the continent—but I beg to differ with Chris on Santander’s performance lately in the U.S. It has been awful.

Based on the market’s reaction yesterday to Treasury Secretary Geithner’s “plan” to bolster the banking system, it’s becoming more and more clear that nothing will be resolved until the government addresses a key cause of the whole credit mess: the insanity of mark-to-market accounting.

Almost every experienced observer this side of the Ivory Tower understands that mark-to-market has vastly exacerbated the credit crunch. Virtually every senior banker has seen first-hand the needless financial destruction that mark-to-market, blindly applied (as is now required) can bring to bank balance sheets. It has been a disaster.

Unbelievable. Amid the calamity his do-deals-no-matter-what mentality has visited upon shareholders, Ken Lewis tells Maria Bartiromo—with a straight face—that at BofA (BAC) since he’s been CEO, “every acquisition was a good acquisition.”

Can he be serious? Here’s a list of the major deals BofA has made under Lewis’s watch:

Even as the Obama administration lambastes Wall Street for rewarding failure by paying big bonuses to the people who helped wreck the economy, it’s providing its own reward for a similar failure, much closer to home.

And it’s a doozy. Bloomberg News reports the administration wants to retain John Dugan as Comptroller of the Currency for the remainder of his term. Yes, that John Dugan: the same regulator who presided over the proliferation of unsound lending practices earlier this decade that have since helped bring the financial system to its knees.

Einstein once famously defined insanity as the act of doing the same thing over and over and expecting a different result. That definition came to mind yesterday—how could it not?—when I read that Citigroup’s (C) board of directors, in its infinite wisdom, has elected Richard Parsons as its new chairman.

Insane. This is the same board of directors, remember, that has already overseen the destruction of what was once the largest banking institution on the planet, and has played no small part in bringing the nation’s financial system to the edge of the abyss.

Two thousand and eight was a cataclysmic year in American banking. The mighty fell (Bear Stearns, Lehman Brothers, Wachovia, Washington Mutual—the list never seems to end), the largest were humbled (Bank of America (BAC) and Citigroup (C), most notably), while the community banking system was staggered.

No corner of the industry seemed safe from the deluge: bank stocks collapsed, hedge funds failed by the score, and even the mighty Goldman Sachs (GS) and Morgan Stanley (MS) had to run for the cover of a bank charter. Then there were the frauds—most notably the scam Bernard Madoff is said to have perpetrated. Even triple-A-rated General Electric (GE) needed government guarantees to finance its public debt.

What is it about Charlotte, N.C., that induces banking executives there to relentlessly dilute their poor, suffering shareholders and pulverize their holdings by embarking on one misbegotten acquisition after another?

Something in the water maybe? The weather? Sunspots? Regardless, for decades now, the CEOs of Bank of America (BAC) and Wachovia (WB) have scoured the globe, from New York, to California, to China, to find (and overpay for) deals that make zero strategic sense and do nothing but eviscerate shareholder value.

Can you imagine anything sorrier than the spectacle of CEOs of three of the great names in American industry, Chrysler, Ford (F), and General Motors (GM), trooping to Washington to ask for $25 billion in taxpayer money?

Pathetic. First of all, even if the bailout made economic sense (which it absolutely does not), $25 billion won't come close to fixing the automakers' problems. Rick Wagoner himself admits GM's share of the money would only carry the company through the first quarter, at most. So what exactly is the point?

The end is nigh for yet another great American company: Citigroup (C), once the greatest U.S. financial institution of them all.

As Tom Brown and I have noted many times, the whole idea behind Citigroup was flawed from the start. Unbeatable scale in financial services? Forget it. We now see the good Citi's size has done for investors: the company has an incoherent, unworkable business model. It is run by a senior management team that's largely unproven, with scant experience operating a large financial institution. And the company's risk controls (if the past few years are any evidence) are hopelessly inadequate to the task.