Most lending of banks was either to corporations or to private people. Lets first have a closer look on the corporations:

Corporations have various ways to finance themselves, that have different forms and degrees of priority to pay for, one is credit, another is equity and various mixed forms.
Credit usually means a fixed payment and is most oftenly negotiated for a limited time. When the company comes into trouble and has to roll over credit, usually the conditions under which the company can refinance itself with credit get worse. All equity of the company has to be used to service the credit debt, so risk of losses is small as long as the company does fairly well.
Equity is the other extreme. Its valuation has strong variations, it will be wiped out before the credit, but the returns are quite better than for credit. Another big bonus is, that equity usually means, you own the company, you can name the CEO, etc.
At least to some degree in the last years companies - especially banks, but by far not only - tried to reduce the (expensive) equity with the cheaper credit. When volatility of earnings was low and the direction of earnings was only up, there was no reason to bother with a huge equity buffer, that helps the company in tough times, and reduces the money you can make for the (remaining) owners or as bonuses for your top management.
I think this crisis has shown that the attempts to kill the business cycle once and for all with hyper aggressive rate cuts by the central banks doesn't work. The equity ratios are inadequate. Therefore corporations need much more than bank credits more equity like methods of financing, that reduce their cost when the company gets into trouble. The gov't could use its money therefore as good by buying into non financial companies as into the banks, and this would solve another problem, about which I'll speak later.

While there maybe some reason to make banks to relend to corporations, there is no really good reason, why banks should be made to relend to people? The trouble came, because people had unsustainable consumption patterns. To make the banks to resuming to lend to private people will just shift the problem a couple of years into the future. There are two obvious solutions to this problem, none that involves the banks:

• people can change their consumption patterns (my favourite)
  
• instead of lending, the money could be transfered from those who have the money to those who want to spend it. So to say, the money stream would be the same, but without the promise to reverse the stream later. Cross country this might be difficult, but there I don't want even more state owned banks sinking tax payers money in the US. Inside countries, well a commy might get an idea with this picture of cummulated wealth distribution divided in deciles: (for Germany, but other countries look similar)

Then what are the reasons banks didn't lend, event after they were recapitalised? The most obvious answer: The fast deterioting economy makes companies less credit worthy. And after the bankers have proven incompetent in their risk management, isn't it reasonable to be careful? The banks would do a bad job, if they would lend to bad risk companies. Doing their job properly means NOT to lend right now, when they have anyhow enough assets in the books and expensive borrowing conditions (and if any normal gov't is guaranteeing all borrowing of all banks, the result will probably be high rates for that gov't, too).
Ok, the banks can charge appropriate rates for higher risks. But a) that higher rates themselves can (and usually do) cause more bankruptcies than otherwise, and b) the only reason to recapitalise banks and not directly the companies that want the credit from the banks is the leverage of the bank (recapitalise with 1, get lending to corporations of 20). But risky credits can't be leveraged very high. But then there is nothing wrong with getting a share in the non-financial corporations and influence THEIR business strategety (e.g. make car companies to build cars, that live long; or make the food companies to use less drugs, or whatever you want fromt he branch you think is worth to rescue)

Of course at all banks, that get any assistance, the stock holders should get wiped out. But not doing that won't do much damage. Instead of that changing the insolvency laws in a way, that bondholders of the bank can get some hair cut, obligations to the management (in form of already promised, but not yet payed bonuses and 'wages') don't have to be honoured, will be enough to keep the financial system from collapsing. A bank insolvency will be much cheaper then, than when you guarantee all of its debt. Of course that way banks will try to stay out of gov't help as long as possible. But that is irrelevant, because either

• we recapitalise the winners, not the losers: the state helps those banks that survived among least scathed to get big enough to fulfill the role of the former bank champions
  
• we set up entirely new banks (in Germany the KfW could play a much larger role)
  

In the end a special for Germany; some public banks are run even much much worse than the private banks. No bank without state influence was hit as hard as some Landesbanken or the IKB. The Commerzbank needed public money mostly because of the merger with Dresdner, into which it was talked by politicians, that wanted to create a second 'national champion' in Germany. Otherwise perhaps some Chinese would have bought Dresdner from Allianz recently.
As well the biggest German bank, Deutsche Bank, was influenced by the gov't to take the Postbank, that was held by the largely state owned Post before - and of course it turned out Deutsche couldn't pay for the Postbank without some help. But there seems to be a desire to create huge STAMOCAP (state monopoly capitalism) corporations in Germany, but as state ownership is disliked as well, keep those monsters private. However, Ackermann, probably one of the more anti-state-influence guys in the bizz, manouvered his Deutsche fairly well through the storm.
Hypo Real Estate, another private bank, that needed state help, had a maturity mismatch on the balance sheet and relies on cheap funding. So despite the huge sums, a minor problem compared to the Landesbanken, that have the largest chunk of the nearly 70000 Euro per Icelandic capita, that German banks lent to this nearly bankcrupt island. They can wait until hell freezes over, to see their money back.

Ok, I think the length of the diary is sufficient to have it as diary instead as just another comment ;-)