Well, I think it is obligatory that the first cuts be made to divide the diverse functions with each other, regardless of relative size. After those divisions, then those which are too big to fail could be subdivided. Market cap could be considered, but one has the problem that some of the parts that resulted after the functional division might have a negative market cap. That is, they are initially insolvent after allocated assets properly. By properly, I mean that money which was inappropriately diverted from savings (a commercial bank function) to some risky investment segment would be restored to the bank, even if it left the investment segment in deficit. Likewise, assets would be moved to a severed insurance operation in an amount which would give them what are considered adequate reserves for an insurance company with a given value of policies extant. I understand that this would leave a deficit component in many (most?) cases, but with the industry in the amount of trouble which we see, that is inevitable. In general, I would not feel too badly if those portions which specialized in high risk investment fail, preferring to leave the portions which represent more conservative (see, I said that!) business segments whole and functioning.

Each of the final partitions would be issued a number of shares equal to that of the "parent" entity, and stockholders would receive one share of each of the partitions for each share they held in the parent entity. Bonds which were held by the parent entity would be divided according to their riskiness among the partitions in a manner which represented, as nearly as possible, the kinds of bonds that each partition would be likely to hold.

I understand that this partitioning is complex, but what we have now is even more complex and just funding the existing hybrids and allowing them to continue doing what they have been doing (which seems to me to be what Bush/Paulson/Bernanke have in mind) makes absolutely no sense. We have to reallocate resources in a manner which leads to a stable future in the real economy.