You heard it here first!

Yesterday:

Greenspan Calls to Break Up Banks ‘Too Big to Fail’
October 15, 2009
NYT
Alan Greenspan, the former Federal Reserve chairman, said Thursday that banking regulators should consider breaking up large financial institutions considered “too big to fail.”
...
“If they’re too big to fail, they’re too big,” Mr. Greenspan said. “In 1911 we broke up Standard Oil — so what happened? The individual parts became more valuable than the whole. Maybe that’s what we need to do.”

Note Greenspan's reference to Standard Oil - busted by anti-trust legislation.

Recall what PrivateBuffoon had to say back in February:

Re-visiting anti-trust legislation: "too big to fail"
...
The original intent of anti-trust legislation was to "encourage competition in the marketplace".

Given the underpinnings of the current mess - with so many financial institutions deemed "too big to fail" - perhaps it's time to revisit anti-trust laws with an eye more towards practices "deemed to hurt" consumers. Among these I would today count practices that encourage entities to become "too big to fail".

I note that Citi is divesting itself of large chunks of its business - making itself smaller.
Now we learn than AIG may be headed in the same direction.

Perhaps if they'd not become so big in the first place, we'd now be spared the $750Bn bailouts.

I'm guessing that the original intent of the various mergers & acquisitions that created these super-entities was marketplace efficiency, and from a pure "efficiency" standpoint it's likely to be difficult to argue against such mergers and acquisitions.
BUT - when the resulting entities become such large players that their individual failures threaten our entire economic system, something is out of whack. (See, e.g., Lehmann Bros.)

Could rational legislation be crafted that would prohibit any corporate entity becoming "too big to fail" without seriously impairing market efficiency?

I don't know... but it seems worth considering.

I came to this conclusion 8 months before the demi-god Greenspan!