Stocks continue to struggle, with no equity sectors standing out with significant strength as a new collapse in the banks overshadow everything else.

It would be impossible for me to overstate the significance of the plunge in the value of U.S. financial institutions large and small. I’m sure you know that Citigroup is down 53% this year, while Bank of America is off 59% and JP Morgan is down 27%.

Yet you should also be aware that several banks once thought to be largely immune have also suffered this year, as we have seen US Bancorp sink 44%, Bank of Hawaii sink 27% and smaller regionals like Sterling Financial plunge 76%.

These are all year-to-date figures, mind you. These stocks aren’t screaming values. They aren’t going to rise to their feet and lope again, as they did in 1990, once they are recapitalized.

At best, the biggest among them will manage to maintain their current values over the next year, but many will either declare bankruptcy, suffer the indignity of a take-under by stronger entities (if any can be found), or become wards of the state by being fully nationalized.

They should only be played by traders, because they could be up 50% in a couple of days on a hope and a prayer, and down 80% the next day.

In short, despite all the excitement about the new administration, there is not going to be a happy Hollywood ending for banks. It will be more like the final scene of “Bonnie & Clyde” instead of “Rocky.”

A crime movie? Yes, because it is becoming clear that fraud, or at least criminal stupidity was involved in the ruin of our banking system. It is important to note that much of the collapse came after the government swooped in to help in the autumn.

So if you’re looking for the government to heal banks now, you will be disappointed. In fact, the new administration will be looking for culprits to prosecute, making matters even worse.

Could it Get Worse?

Remember back in March, when the Bear Stearns rescue meant the worst was over? Or back in July, when the Fannie Mae/Freddie Mac rescue meant the worst was over? Or back in September when the Lehman Brothers bankruptcy and Merrill Lynch takeover meant the worst was over?

Yet the Financial SPDR (XLF), shown above, is down 65% since January 2008 — and 50% since the Troubled Asset Recovery Program was launched Oct. 3rd.

By now it should be clear that the government has little control over the forces of de-leveraging. And thus, if there is one credo that we need to live by in 2009, it is this: All asset prices will adjust to a level that is sustainable in a low-growth, low debt world.

No one really knows what that level is, except that it is lower. The old world of high growth and high price/earnings multiples fueled by high debt loads is gone, like the city of Atlantis and your baby teeth.

That doesn’t mean we won’t make money in stocks. Far from it. We’ll do great in the coming year, as I’m very excited about all the opportunities that are becoming apparent. It just means that banks are not going to be the way to go, even though they look cheap.

Banks In the Tank

I have managed to save subscribers a lot of money and heartache by urging them to stay far, far away from banks for the past 18 months. Why is it not time to buy them yet, with prices seemingly so low, and with executives claiming to have thrown the kitchen sink into the last quarter of abysmal results?

It’s because as bad as Q4 ’08 was, the current quarter will likely be worse. This is not pessimism. It’s an acknowledgment of the way the system is set up.

You see, the banks still own a lot of mortgage-backed derivatives such as collateralized debt obligations, residential mortgage backed securities and commercial mortgage-backed securities. They are only allowed to mark them down one quarter at a time.

And yet these instruments are also pledged as collateral for money borrowed to pay for other investments and expenses, so their value as collateral is constantly falling as well.

Due to the way accounting rules work, execs can’t just mark these all down to zero and be done with it as a one-time charge. They are yoked together in a downward spiral that can only progress in a step function three months at a time.

The situation therefore cannot get better until the value of the homes and commercial real estate underlying the mortgages either goes to zero or radically improves.

Witness even late last week when Bank of America announced it would take $20 billion from the government in exchange for paying an 8% dividend. The stock rallied overnight in Europe and briefly in the morning on Wall Street on the news, as if this was a good thing.

Apparently investors didn’t understand that BAC had already cut its regular dividend to 0.5% because it didn’t have the wherewithal to pay it. If it couldn’t pay its own dividend, how’s it going to pay the government’s dividend?

Late in the session, it dawned on people that BAC was just as bad off as ever, and that was essentially it just getting cab fare to hell, and the stock rolled over.

It’s kind of amazing that BAC chief Ken Lewis has turned one of the best and largest banks in America into an insolvent ward of the state in just seven years’ time.

His path can only be described as a toxic mix of greed, hubris and machismo. The intensity of his desire to make BAC the biggest bank in America apparently trumped all reason, and is a real lesson for us in trying to understand the psychology of executive management.

The purchase of nearly defunct mortgage lender Countrywide was beyond my understanding in the spring, but Lewis swore he knew what he was doing and had performed ample due diligence, and he boasted to shareholders that it would make the bank stronger.

Then in October, he compounded the mistake by purchasing Merrill Lynch, and boasted to employees that his company didn’t require any money from the TARP Fund — only to discover in December, so he says, that its books were a lot weaker than originally believed.

Bank analysts applauded both deals, but we were opposed both times. The transactions reminded me of what my late father, a successful independent business owner who rarely borrowed, called ”buying trouble.”

It should have been clear that not even a financial superman could have done enough due diligence in the amount of time that BAC had for either deal.

Let’s remember that, as it may well happen again with another prospective corporate parent as the banking saga unfolds.

Going forward, the key thing to keep in mind is that none of these problems is over, as the ravages of deleveraging will continue.

It’s like a forest fire that must burn until it runs out of fuel. You can still short U.S. and European banks if you are so inclined — with Wells Fargo and JP Morgan among your two best prospects — but the best way to take advantage of this idea going forward might be to get short China again when an opportunity arises.

Banks are the largest holdings of the China ETFs, and are highly leveraged to all the bad stuff that is going on in Asia today, including investments in hundreds of failing regional banks, manufacturers and transportation systems. Their valuations are way too high, and therefore they have a long way to fall.

To learn how to make money on these trends, check out Trader’s Advantage, where we have been cashing in regularly with both short and long positions in this volatile, exciting market.

This article was written by Jon Markman, contributor to InvestorPlace Media. For more actionable insights likes this, visit www.InvestorPlace.com.