The selling in equities that occurred in the first full week of trading in 2009 was not overly alarming to investors in the wake of a better-than-expected “Santa Claus rally.” But this week’s action, which saw the S&P; 500 lose more than 4% of its value amid a slight rise in Libor and a bit of renewed concern in the credit markets cannot be easily sloughed off.

The week was dominated by the hijinks of Citigroup and Bank of America, both of whom have discovered, far too late, that building a profitable, successful company for the long haul need not be done by utilizing a strategy that most would associate with taking the 72-ounce steak challenge at the Big Texan Ranch in Amarillo, Texas.

Those that choose to participate in that enjoyable activity only endanger those in the immediate vicinity with the after-effects — whereas the entire country has been forced to react to the banking mess, and to watch the bewildering sight of executives going back to the government kitty to complete an acquisition that they botched the first time around.

But to hear Mr. Lewis tell it, it’s being done out of patriotism. When asked Friday on his company’s conference call as to why the company did not decide to back away from the proposed acquisition of Merrill Lynch when it suddenly realized that the brokerage’s balance sheet was more disastrous than had been thought, Mr. Lewis said that “we just thought it was in the best interest of our company and our stockholders, and the country, to move forward with the original terms and the timing.”

How nice. A company that’s been given tons of money from the government runs back for more money in order to complete a transaction that a prudent manager of risk would have walked away from. Mr. Lewis, it should be reminded, did not successfully land a plane (which included some of his employees) in the icy Hudson River.

Investors had almost become convinced that the banks had managed to pull themselves from the brink even as the U.S. economy nosed closer to the ledge. But with the banking sector still trying to remove itself from the chasm, the drumbeat of layoff announcements picked up this week, from the likes of Saks, Barnes & Noble, Advanced Micro Devices, Pfizer, and the liquidation of Circuit City, which was unable to find a buyer and instead will hold a fire-sale of DVDs and other items.

(b) Those that are picked are now owned by us. Screw it. If we are pumping money into them we dictate how they are run. As the people’s bank, we choose where the money goes.

(c) Bad assets get forced down either by cram-downs or mark to market. Bring all of it into the open. Those that make it, survive another day. Those that don’t, implode on their bad loans and should be gone.

(d) Ramp up FBI/DOJ prosecutions. Those that bet on this market and caused this bubble deserve to have their money yanked from them. Create a trust fund where all their wealth is taken into custody for the greater good. That should yield a few billion.

(e) Triage foreclosures. Someone making $30,000 will not make it in a $300,000 home. Foreclose. Someone making $70,000 will not be able to manage their $500,000 mortgage in California. Foreclose. Do this quickly and get it over with. All these other programs are only prolonging the pain. We have another viable option. It is called renting. Over 50 percent of the 10,000,000 people in L.A. County do this. We need to get away from this “American Dream” according to the real estate industry meaning everyone deserves a F-150 and a 3,000 square foot McMansion with a plasma in every room.

Citigroup and Bank of America are receiving another round of funding to shore up their capital bases even though the outlook remains depressing. Economic weakness, the fractured real estate market and the horrific-looking balance sheets of these financial-services companies are likely to translate to losses for an ongoing period of time, until the market somehow recovers, or the institutions collapse.

“We’re funding operating losses and we’re only buying time,” says Christopher Whalen of Institutional Risk Analytics.

Citigroup is receiving at least $45 billion to stabilize itself after announcing an $8.3 billion loss amid plans to split into two businesses. Bank of America, meanwhile, reported big losses and nailed down plans to receive $20 billion from the government to handle losses related to its acquisition of Merrill Lynch.

But when does all of this end? That’s the germane question here — and to some, it points to an eventual takeover by the Federal Deposit Insurance Corp., where the bank deposits and certain other assets are sold off, piecemeal, to other banks, and the company’s debt remains with a shell company. Debtholders eventually lose a ton of money in bankruptcy.

“The debt must be reduced — if it means the debtholders lose money along with shareholders and depositors it must occur,” says Chris Wang, portfolio manager at hedge fund SYW Capital Management LLC in New York, who has short positions in the financial sector. “It’s not politically viable to let depositors lose money so it’s only through debtholders losing money can credit flow again. Then, we’ll be able to let companies that bought them operate in a stronger situation, because they’ll be able to conduct business.”

That all sounds incredibly easy on paper, but one only need look at the wrangling that has accompanied the slow spiral into nothingness of the U.S. automakers to see that debtholders won’t go gently into the night, particularly if the perception remains that the underlying company in question still remains viable (which is how people see Bank of America and its stronger brethren, J.P. Morgan Chase).

But Campbell Harvey, professor of finance at Duke University says taxpayers shouldn’t have to subsidize a bad bet by Bank of America when it purchased Merrill Lynch at $29 a share. “We’re in a situation where the government is continuing to bail out mistakes and continuing to throw good money after bad and then take a back-seat position — they have to stop or [management] will continue to do this,” he says.

The next day he drove up and said, “Sorry son, but I have some bad news, the donkey died.”

Bob replied, “Well, then just give me my money back.” The farmer said, “Can’t do that. I went and spent it already.” Bob said, “Ok, then, just bring me the dead donkey.”

The farmer asked, “What you going to do with him?” Bob said, “I’m going to raffle him off.”

The farmer said, “You can’t raffle off a dead donkey!” Bob said, “Sure I can. Watch me. I just won’t tell anybody he’s dead.”

A month later, the farmer met up with Bob and asked, “What happened with that dead donkey?” Bob said, “I raffled him off. I sold 500 tickets at two dollars a piece and made a profit of $998.00.”

The farmer said, “Didn’t anyone complain?” Bob said, “Just the guy who won. So I gave him his $2 back.”

Last September, as the financial markets skidded out of control, Merrill Lynch CEO John Thain sought to keep his firm from going the way of rival Lehman Brothers by selling out to Bank of America (BAC). At the time, B of A chief Ken Lewis was touted as a shrewd opportunist who seized upon a desperate rival.

Now, it appears, Lewis is the one groping for a helping hand.

According to the Wall Street Journal, the Treasury Department is preparing to offer up billions of dollars to help Bank of America complete the transaction. As in Citigroup’s (C) recent bailout, where the federal government assumed the risk for a pool of distressed assets, taxpayers are about to buy Merrill’s book of truly toxic debt.

Bank of America approached the Treasury Department in December, claiming it might have trouble closing the sale after learning Merrill’s fourth-quarter losses would be larger than expected. Fearing the deal’s collapse could inflict irreparable damage on the already wounded financial system, the Treasury is continuing to spend TARP money it doesn’t have. With the first $350 billion already allocated, Treasury Secretary Hank Paulson is dipping into funds earmarked for a second round of capital allocation that hasn’t yet been authorized.

The fact that Bank of America needs yet more money — on top of the $25 billion it received just last October — is evidence that, once again, regulators and bank executives have underestimated the scope of the debt crisis gripping the country’s financial system. Deleveraging is underway – and it’s gaining momentum. Nevertheless, lawmakers and regulators alike insist on using taxpayer money to try and slow down the accelerating juggernaut of bad debt.

To quote a recent op-ed in the Journal, which likened the government response to the current financial crisis to the circumstances described in Ayn Rand’s Atlas Shrugged:

“Politicians invariably respond to crises — that in most cases they themselves created — by spawning new government programs, laws and regulations. These, in turn, generate more havoc and poverty, which inspires the politicians to create more programs . . . and the downward spiral repeats itself until the productive sectors of the economy collapse under the collective weight of taxes and other burdens imposed in the name of fairness, equality and do-goodism.”