Instead of a bailout, can we just let the banks go bellyup, and then the taxpayers can buy up their remains...?

That's the problem. Banks aren't wanting to take the losses. There are willing buyers for these ets, but the banks don't want to take the huge write-downs. Paulson is trying to get the banks to start lending again, they can't lend if they don't even have enough money to pay-off their debts and constantly lossing money via write-downs. But I overall agree with you, their's got to be a better solution than what Paulson wanted.