It would have been easy to root out the rot; let the bad banks fail, and let the good banks stay afloat. “Lend without limit, to solvent firms, against good collateral, at 'high rates' - Bagehot's rule. Geithner and company argued that doing so would destroy the system. If it turned out that all the banks were bad, maybe it would serve the citizens best to have a new system.
Unfortunately Bush the Lesser, for all his strutting around in flight suits, turned out to be a chickenshit when the big bad Treasury Secretary barged into his office and hollered that he had to "act now!" Anyone with a spine would have kicked that corrupt asshole to the curb immediately. Instead, we got bailouts.
A bank's purpose is to manage credit risk. If a bank's management can't make money on the spread between the Fed lending rate and the mortgage lending rate, they should get out of the business. I don't know whether the top echelon of circa-2007 bank management should be in prison or not, but I do know they ought to be working as baristas or something rather than continuing to run businesses they aren't competent to manage.
Finance sector is 40% of US GDP so while it's cool to throw around theoretical "solutions" they would need to account for this simple fact. So let them fail was not a realistic solution.
Free-market fundamentalism, as I have advocated for above, may be too much to ask of capitalism. I do think it's fair to ask whether US citizens, who have been asked to spend Trillions on the 'free market's' behalf (see the Fed's balance sheet pre- and post-crisis [0]), were best served by the way in which it was done. Keeping housing prices high and the existing management in place was not the only way to use those new funds.
