Actual bankruptcy could have resulted in a chain of collapses that might have left large areas of the Western economy without functional banking for weeks or even months.
But the bailout should have had a lot more "never again" in it, rather than "how can we get back to the old normal of bubble finance as quickly as possible".
Ideally when there is a sufficiently large disaster an inquiry is held which suggests measures to prevent the disaster, and these measures are implemented and enforced. Air safety is closest to the ideal on this. Politics and political economy is often very far from it, especially when it's possible to profit from a disaster.
Part of the explicit aim of the bailout was to preserve the finance industry status quo, one of very unequal incomes and widespread effects on people by forces outside their control. In the long run this has turned into a sort of formless populist anger that's been successfully transmuted into racial hatred, but there is a real and persistent sense of injustice that needs to be addressed.
Turning this into specific plans is too big a question for me. All that has really been done to prevent it happening again has been a raising of European regulatory capital requirements.
> Politics and political economy is often very far from it, especially when it's possible to profit from a disaster.
Sure, but financial services oversight is not that far from air safety (NTSB, FAA). The SEC, FDIC, CFTC, FSOC (established in 2010 via the Dodd-Frank Act), the Fed, and a few others are rather technical agencies. If they have enough power to request certain kinds of data from financial institutions and fine them if they are deemed not secure/stable/compliant enough, they can and will prevent any similar upcoming crisis.
The problem is, of course, that rules are gradually rolled back due to politics, and the oversight agencies understaffed and underbudgeted. Thus they are not proactive, they are reactive, and there was nothing they could have done in 2008 when it was already too late. (So the Fed stepped in with QE, and Congress with TARP, and with ARRA - but that was too small, so recovery took too long.)
That said, yes, absolutely the incentives aligned toward preserving the status quo. Which is not necessarily wrong, as doing something radical was likely unhelpful. What needs to be done is clear (better effective proactive expert oversight) but it's politicized. Just like the FCC regulation with the TelComms industry. And so on.
Breaking up banks would create the Bell -> AT&T situation. Sure, better than nothing, as at least there are 3 offspring companies. Though the US has no shortage of competing banks. (But the big banks have too much influence, that's undeniable.)
> We basically gave them a big sack of cash
We had no other choice, really. They paid it back.
> and asked them not to do it again.
There is a long list of new regulation overseeing systemic risk related concerns. (We shall see their effectiveness and longevity.)
> No one went to prison and GS went back to paying out bonuses.
Intent is key for successful criminal prosecution, and it's very hard to prove.
The solution is known, and old. A competent proactive expert non-understaffed and non-underbudgeted oversight agency that can react to the changes in the market/industry (eg new products [investment vehicles, etc.] appearing) without Congress.
And serious compliance regulation that creates a paper trail for proving intent. (To deter people from stupid shit.)
But the bailout should have had a lot more "never again" in it, rather than "how can we get back to the old normal of bubble finance as quickly as possible".