Pitying fools as hard as I can...
We tried it with keeping all allies and attachments, and even without the "rally step" it was still far too easy. Like you say, we had fun though. The problem with nightmare mode is that it just encourages stalling. With reshuffles you can easily get down to 0 threat if you're willing to manage and balance long enough. So, yeah, haven't really found a balance that works.
Are you using 50 card decks? I just have not found a way to get the threat reducing cards to cycle through often enough to result in a net negative, even on the easy quest...