Here's a question I've been trying to understand:

Since the government sets reserve requirements, and also the issue is banks failing due to supposed short term dip in MBS/CDO asset values, why doesn't the government just ignore reserve requirements for, say, 1 year?

This is what happened in the Latin America debt crisis.

Then the no-reserve requirement issue can be extended until the banks can make enough money to overcome their losses from MBS/CDO assets but at more realistic valuation for said assets.

Why the haste to buy them up and make them all go away?

Perhaps it really is bailing out the US creditors which is the issue.