Not all toxic assets will have to be written off. They don't neccesarily represent defaulted mortgages, they may be long term mortgage backed securities or CDOs of currently low or uncertain value. They affect balance sheets in the short term, and the banks want to get rid of them, but their value may increase as liquidity improves and property prices rise.
Alex, sorry, but your contention here is totally misguided. As someone who works with distressed assets, I can tell you that liquidity only returns to the market with massive declines in value at this stage of the cycle. Unfortunately banks tend to be one of the fools on the side of the equation that loses money in this market, and will tend to always sell off at the bottom of the cycle.
Classic distressed assets are illiquid until the market bottom is reached. You are right - many will return to reasonably value, but the profile of the valuation certainly plays out for worse first.