Investors are not buying the latest bailout. By some strange mathematics, Citi's market capitalization is 12% of the value of the common, $69 billion ($25 billion/36%), implied by the U.S.'s 36% stake bought for $25 billion. Meanwhile, the boost in Citi's tangible common equity from $30 billion to $81 billion did nothing to stop Moody's from cutting Citi's credit rating to A3 from A2 and S&P from changing its outlook on Citi's debt to negative from stable.

Meanwhile AIG -- which has gotten $150 billion from the U.S. -- is about to post a $60 billion loss for the fourth quarter. But one analyst thinks AIG is going to cost the taxpayers $100 billion more before it stabilizes. The way AIG got into this mess is complex -- it used its AAA credit rating to sell Credit Default Swaps (CDSs) with collateral provisions and did not set up reserves in the event that there was a claim against them.

Let me try to translate:

• AAA credit rating. AIG was for decades viewed as the safest and strongest insurer which enabled it to take enormous risks that should have slashed the rating.
• CDSs. These were bets that a bond issuer would not make its bond payments. AIG got huge fees to take these bets -- figuring that the premiums they received for the CDSs were risk free because AIG did not anticipate the possibility that a bond issuer would default.
• Collateral provisions. The idea here is that AIG could get even higher CDS fees if it agreed to put up cash if the bond issuer's credit rating dropped. Again AIG did not think this could possibly happen.
• No reserves. All of these features would be less costly were it not for the fact that AIG did not set up reserves for a rainy day. The reasons for the lack of reserves were two: Deregulation -- CDSs were unregulated and therefore did not require reserving and Greed -- AIG would have trimmed its profits if it had to set aside reserves.

We could potentially let Citi and AIG fail if we could solve the underlying problem -- which is to extinguish the 15% of bad mortgages that are the cancer inside the mortgage-backed securities (MBS). My colleague's plan to give the FDIC $80 billion to buy these bad mortgages at book value would let the MBSs trade freely. This would help put a value on Citi's assets and take away some uncertainty. We could also create an exchange for CDSs -- which is being proposed. That exchange would enable AIG to figure out how much it would cost to unwind its bad bets and potentially find buyers for them.

Letting Citi and AIG fail is something I believe will happen eventually. The uncertainty is how much more taxpayer money will be spent to keep them alive -- $1 trillion? $5 trillion? -- when the U.S. should instead be focusing on how to let them die a good death.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and is the author of You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He owns AIG and Citi shares.