Is 'too big to fail' a failed idea?

Banks stress test results have leaked out and -- not surprisingly -- Bank of America (BAC) and Citigroup (C) have been told to raise billions in new capital. Since the banks probably can't get that capital, they are making a stink -- rebutting the results of the stress test. And as I posted, the banks may have a point because the stress tests are deeply flawed.

But this news raises a broader question: Why not just let failed companies fail? In my mind, the concept of free markets is that if you succeed, you get a reward and if you fail, you suffer. But in the current economic contraction, the government mechanisms put in place after the Great Depression are not sufficient to dampen the suffering that failed management teams impose on innocent customers or employees.