Need Help With The Economy

Please don't click away because this looks political - I need help. I've done some looking around and cannot figure out a few parameters involved here.

1. Why does it make sense to take out a loan (hundreds of billions of dollars) to pay banks who could not cover their own asses due to bad lending practices? Seems counter intuitive, but very American.

2. Shouldn't people who sign off on a loan that they clearly cannot afford at the outset lose that home? Shouldn't a mortgage company who lies or distorts to trick customers into signing on a loan they clearly cannot cover also lose their license or business? Shouldn't a mortgage company that willingly takes on bad or no-risk credit suffer the widely known consequences for doing so if it blows up on them?

3. Let's say we didn't bail out these banks. What would actually happen? I keep hearing that the economy would collapse, but I don't understand that. Wouldn't the surviving banks just gobble up the old banks at a discount? Isn't that how it works in other lines of business? Is the capacity of the FDIC the issue?

I honestly don't care who is voting for what here, I just want to understand this better.