These are not naive questions. They are in fact absolutely fundamental questions that no one has answered properly.

The argument is that on a cash flow basis the "toxic" assets should be worth more than anyone is willing to pay for them. However as nobody knows the future rate of default nobody actually knows what they are worth.

The reason that many people dislike the bankruptcy solution is that they fear that everything involved in a bankruptcy will be time consuming and complicated. The argument is that the time and uncertainty involved in a bankruptcy proceeding will only fule further paralysis. I think that bankruptcy would probably be a better option because it would force everything to unwind.