Aren't the banks likely to keep all of the 'decent toxic' assets and therefore what will be left to bid on will be just total crap that even with the incentives provided by the government; will drive away most bidders?

That's the point made by Simon Johnson and James Kwak (from The Baseline Scenario) in today's LAT:

Geithner's plan isn't money in the bank - Los Angeles Times

Second, there is a "lemons" problem, also known as adverse selection. Even with a reasonable degree of disclosure, the selling banks will still know more about their assets than the buyers. The banks will be trying to dump their most toxic assets (their lemons); the buyers, fearing exactly this behavior, will reduce all their bids accordingly. This will make it harder for buyers and sellers to meet.