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More worryingly, the credit market now believes that the unthinkable, a Citigroup default, is thinkable. Citi’s credit default swaps once traded at less than 7.54 basis points over Treasuries – implying it was safer than most governments. During last week’s panic over Bear Stearns, they ballooned to almost 250bp and remain near 150bp. As Citi is far too big to be allowed to fail, the chance of it defaulting is roughly equal to the chance of a systemic financial collapse.

That such fears were even countenanced suggests the argument for heavier regulation seems overwhelming. That would help remove fears of a meltdown – but also guarantee lower profitability for financial groups in future. Ten years on, this is a Faustian bargain that the market would now accept.

There were many interesting Chinese companies that would like to list, Mr Wood said, but they would have to wait until liquidity improved or vendors had changed their price expectations.

“There’s no shortage of ideas but there’s no investor appetite,” he added.

Chinese authorities are controlling bank loans and credit to developers as well as restricting foreign investment in the sector.

They have also made it harder for consumers to obtain mortgages.

The notion that future banking crises can be averted by better regulation demonstrates unrealistic expectations of what regulation might achieve. Banking supervision asks public agencies to second-guess the decisions of executives who earn millions in bonuses and business strategies that yield billions in profit. If Hank Paulson, US Treasury secretary, were doing the job of day-to-day regulation personally, he might – just about – have the respect and competence to get away with it. But the work is done by relatively junior administrators who lack the authority to intimidate the bankers and who have little confidence that their controversial decisions will win political support.

Perhaps there was once a golden age when the authority and wisdom of central bankers were so great that such regulation was possible and effective, although the recurrence of bank crises suggests otherwise. Today the financial services industry is the most powerful political lobby in the country and public trust in and respect for regulation are low. All regulators feel buffeted by threats of legal action; there is no easier way to win applause from business audiences than by denouncing red tape

But in financial services, the demand today is for more regulation. That call should be resisted. The state cannot ensure the stability of the financial system and a serious attempt to do so would involve intervention on an unacceptable scale. But to acknowledge responsibility for financial stability is to assume a costly liability for failure to achieve it. That is what has happened.

Since financial stability is unattainable, the more important objective is to insulate the real economy from the consequences of financial instability. Government should protect small depositors and ensure that the payment system for households and businesses continues to function. There should be the same powers to take control of essential services in the event of corporate failure that exist for other public utilities. The deposit protection scheme should also have preferential creditor status to restrict the use of retail deposits as collateral for speculative activities.

It takes guts to sacrifice $100bn of league table credit and a sack of financing fees in this anxious market, yet Merrill Lynch is right to have done so. The bank refused to lend the Brazilian mining group Vale money to fund a possible bid for Xstrata and as a result has been fired as its lead adviser.

Here’s what happened: Merrill’s M&A team originated the idea of the takeover and took it to Vale’s chief executive late last year. The bank pledged to provide some of the financing and was formally engaged, along with Lehman Brothers, to advise on the process. But Vale then demanded commitments from Merrill on multiple financing structures for the cash and shares bid which the bank believed were unreasonable. Merrill advised its client – as it was paid to do – that these structures would be bad for Vale shareholders.

FT: Have you changed all of that?

JT: Yes, actually all of that. We’ve brought in another person, Noel Dunahue, who actually has a lot of experience. Most recently he was at a hedge fund, but he had ten years of experience at Goldman’s risk management before that.

We’ve combined the credit and market risk management functions. They now report directly to me so it’s clear to all the businesses the importance of the risk management functions.

We actually have a weekly risk committee meeting that includes the heads of all the businesses and we’ve changed the compensation philosophy so that now people get paid first based upon how well the firm as a whole does. That will fundamentally change behaviour.

FT: The character of some of these new structures and also some of the individual people you’ve brought in are very typical of Goldman. Has there been any resistance to sort of the Goldmanisation of Merrill?

JT: Well, I think it’s important to distinguish two different things. We’re not trying to Goldmanise Merrill. Merrill has a unique culture. It has a unique mix of businesses. It is a very client-driven franchise. It of course has a high net worth business that really is better than any in the world.

But the piece that we are trying to do, which is still Goldman-like, is focusing on team work, getting a much more collaborative effort across the firm, making sure that everyone understands what our direction is, what our strategy is, where we’re going and really open up the organization so that no one feels that they can’t ask about any other part of the business.

FT: Should we expect a relative shift back to Merrill’s retail roots? Is that going to become more important?

JT: You know, it’s funny. There was never a shift away from those retail or really high net worth roots. If you look at the high net worth business, it’s a great business and it continued to grow even in 2007. At the end of 2007, we had 1.75 trillion assets under management. We have 16,000 plus financial advisors.

Even in the most difficult time, in the fourth quarter of last year, which was difficult in the market environment, also obviously difficult for Merrill Lynch, the net new assets raised, $30bn. So that financial advisor network has continued to function, has continued to grow, its margins actually improved last year. So, its always been a very important part. We’re just re-emphasizing it.

FT: That wealth management business though has been overshadowed particularly in recent quarters by newer ventures, newer areas that Merrill got into that maybe wasn’t so good at managing. Are we going to see a pull back from those riskier areas of business?

JT: Well, there’s no question as it relates to the asset backed CDOs in sub-prime areas. Yes, we’re bringing those dramatically down.

We’re also going to focus on managing the risk of the firm so that it’s sized properly to the businesses themselves. So, you will see us pull back from that slice, but that’s a relatively narrow slice.

If you looked at the ABS CDOs and subprime businesses and things related to that, even back in 2006 it was only 15 percent of fixed total revenues. So the rates business, the currency business, the commodity business, the commercial mortgage business, all of those businesses are good businesses and they’ll continue to grow. It’s really just the sub-prime related pieces that we’re going to shrink.

FT: You’ve said that you don’t need to raise more capital. Can you imagine wanting to raise more capital? And if so, what sources are the most interesting for you?

JT: Well, I don’t think we would want to raise more capital in the foreseeable future. So certainly for the next year. We deliberately raised more capital than we needed. We actually in the second round, we could have raised twice as much capital.

We had people who we turned away. We had people who we scaled back in terms of the amount of capital that we raised with them. So, we deliberately raised the $12.8bn that we did, but we really didn’t want anymore. That’s really not going to change.