I feel like this line of thought became dominant even though it's inaccurate.

First, Lehman Brothers went bankrupt and was liquidated.

What would nationalization look like? Well, it would mean that the government would become the majority or complete shareholder. This happened with AIG. AIG became government owned until the government eventually sold off its interest to third parties. AIG was nationalized, the government owned the company for several years, and then sold it off.

General Motors went through bankruptcy and came out owned by the government and the union. That's nationalization.

Wachovia and Washington Mutual were sold off at cut-rate prices before they could fail via government intervention. The government could have put up the money itself and nationalized them, but preferred to have private companies take the risk.

In terms of the large banks that still exist, the government got a portion of the company as compensation for the government's capital. The issue for many banks wasn't that they had failed, but that the government wanted them a great distance from failing. Think of it this way, many people need their paycheck to clear before they pay their rent. Similarly, banks need people to pay their mortgages so they have the funds to pay out their obligations. Some banks were getting closer to "paycheck to paycheck" than the government wanted. The government wanted them to take the money because chaos is bad for everyone.

The government could have nationalized these banks. But, that would have required more money and more risk. If they wanted to nationalize the banks, they would have had to pay out a lot more money than they did and accept more risk. By providing less money, the government ended up without owning the whole of the banks, but it also meant that the amount that the government could lose would be less.

In terms of salaries and bonuses, that's an issue of contract law between an employer and employee. It wasn't about whether it would make them look distressed by stopping bonuses. Let's say you work for Chase. The government wants to stabilize Chase and steps in with the government's money. You have an employment contract for the next two years that says you'll get paid $10M per year. Maybe you're the idiot that got them into the mess. Well, is there anything in the contract that lets them terminate or reduce your pay? If not, they can't just alter it because they want to.

So, the question here would have to be: why not pull a GM on the banks? In bankruptcy, compensation packages could be changed, people could be removed, etc. The issue is that the banks weren't going bankrupt, but they were in that "paycheck to paycheck" range that the government didn't want. Since the crisis, the government has been requiring banks to carry healthy amounts of reserves and testing that they have enough to whether another crisis. But if you're a bank that is on the bubble, but still making it work, you're going to keep trying to make it work until it all comes tumbling down if the alternative is wiping out all the shareholders. The banks weren't nearly as bad as GM, AIG, and Lehman. So, the government came along and said, "you're going to take our money. We want you to have more reserves and you're going to give us part of your company." While the investment was semi-forced upon some of the banks, they also realized that it was a reasonable price to pay. If the government came by and said you have to give us 100% of your company, they would have said, "nope, we'll gamble that we'll whether the storm." Think of it this way, you think your paycheck won't clear before your rent is due. If I come along and say, "well, give me your children and I'll cover the rent for the few days" you'd tell me to take a hike. Let's say you thought there was a 10% chance that your paycheck wouldn't clear before the rent and I came along and said, "for $100, I'll handle it in the case that it doesn't". That sounds a lot more reasonable.

The fact is that some institutions were liquidated and some were nationalized, while others were unlikely to fail, but were closer than would be comfortable. In those cases, shareholders of those companies were hit because the loans had to be repaid with interest and the government received warrants for portions of the companies. But the hit to shareholders was going to be proportional, not absolute.

TARP was one of those programs that people really didn't understand, but wanted to be mad about.