If only they had listened. Back in 1998, Warren Buffett disparaged excessive corporate borrowing and exotic financial structures in his own unique homespun way. He said: "If your actions are sensible, you are certain to get good results; in most cases, leverage just moves things along faster.

"Charlie [his business partner] and I have never been in a big hurry. We enjoy the process far more than the proceeds – though we have learned to live with them also."

The world’s greatest investor has always believed his goal and that of Berkshire Hathaway, the company he chairs, is to maximise its intrinsic value by owning all or part of a diversified group of businesses that generate cash and above-average returns.

In achieving this goal, Buffett foregoes expansion for expansion’s sake and absolutely refuses to become involved in, or sanction the use of, derivative financial products which promise the earth.

When he wrote the words above a decade ago, his estimated net worth was $30bn Today, it’s nearer $50bn.

Eighteen months ago, had you outlined Buffett’s theories to New York’s ‘big five’ investment banks, they would have laughed you out of their expensive steel and glass offices. Restraint was not a word to be found in their collective lexicon.

Today, Bear Stearns and Lehman Brothers are bankrupt, Merrill Lynch gasped and fainted into Bank of America’s much stronger arms, while Goldman Sachs and Morgan Stanley breathed a sigh of relief when the US Treasury waived the normal 30-day application time for both to amend their status to become regular, deposit-taking institutions.

It has become clear that when markets focus solely upon price and return, they encourage wild, uncontrolled gambling which is portrayed as sound investment.

How so? Thirty years ago, the ratio of investment to speculative capital was 9:1. Since 1973, this ratio has reversed.

Structured finance products, leverage and derivative instruments have fuelled an astonishing growth in risk, yet many so-called asset-backed securities were nothing of the sort.

They could not possibly have been, for the value of these paper products actually exceeds the total economic value of the planet.

In 2003, the world’s aggregate derivative trading value was estimated at $85 trillion, even though the world economy was valued at just $49 trillion.

Over the past five years, that gap has widened: latest estimates suggest the value of traded paper instruments exceeds the underlying value of the assets on which they are written by 3:1.

Meanwhile, the real value of the underlying assets, such as American properties, have declined by up to 25 per cent, pushing the ratio higher still.

For such a hard-nosed busness environment, investment banking harboured some seriously creative thinkers and spellbinding mathemeticians who between them could conjure up gold with the wave of a structured finance wand. We may not witness such sorcerery for a while.

As investment banks and hedge funds are expected to contract, the underlying problems caused by derivative products will need to be tackled. The Federal Reserve’s $700 billion bail-out is a start and its call for other central banks to assist it will not go unheeded. Of course, taxpayers will pick up the tab for all of this, which means that taxes will need to rise at precisely the point at which economic growth is slowing.

The quid pro quo for taxpayer-funded bailouts will be fresh, wide-ranging, banking regulation which, in the short term, will curtail the activities of the City’s most practiced illusionists. Warren Buffett will probably concur.