But why does the government need to get involved then? Let the market determine market rates which is only determined by actual transactions. Most likely someone in the market will buy the toxic assets, but not for face value. Because of the uncertainty, someone may only pay $0.10 on the dollar. The financial firms, however, are waiting to see if they can get a better deal/hand-out from the government.

If the government made it clear that these businesses were on their own, then they would be forced to sell the assets at market rate, i.e. the amount the market is willing to pay for them.

If that's not enough, then as Anna implies, then they deserve to fail.