As far as I understand, a 1.6Ghz AMD Jaguar is faster in single threaded performance than a 3.2Ghz Xbox 360 CPU (whatever it was called, Xenon or Xenos or whatever).
So, if decent games were playable current gen, and next gen includes not only a bump in single threaded performance, but more than double the cores, much more memory and memory bandwidth, and massively increased GPU power, we should be good.
Also, AMD was probably the frontrunner in terms of cost - but the problem is, which CPU to choose. For the same die area and energy consumption, let us assume that AMD could over the following CPU options:
1. 8 AMD Jaguar cores
2. 1-2 PileDriver modules
3. 2-4 upgraded Stars cores
Of those, AMD Jaguar is the most modern and most efficient. PileDriver is faster in single threaded performance owing to its clock speed, but in performance per watt, its a lot less efficient. That means increased heat output, which we know MS does not want.
2-4 Stars cores would have been an interesting alternative, but I think the cost in retooling them to get fabbed on a more advanced TSMC process would have been prohibitive. Just not worth the investment versus what Jaguar cores already offer.