The only way to downgrade the firmware is by overwriting the firmware images, e.g. using ixtab's PW2 images here:
http://www.ixtab.tk/kindle-touch-images/PW2/
Just use those images -- 5.4.0 is both the first ever PW2 firmware and the last Kindle firmware that supports nested collections via CM.
EDIT:
IMPORTANT!!! As knc1 pointed out, this will only work on the original 2GB PW1 -- the newer 4GB PW1 (v2) will not work with older firmware (from v1).
Confusing.
The "bug" that allows downgrading via the forced reboot is PW1 only -- that's why we were surprised to learn it still worked, because we know they blocked it on the PW2.
@carrick, you didn't specify which PW you have, but if it's currently on fw5.6.5 then it isn't the PW1.
The PW3 is a lost cause, it never ran an old enough firmware for nested collections.