In the 20 years he spent at the heart of the investment banking community, David Freud saw plenty. It gave the former Warburg investment banker bags of colourful material for his witty memoir, Freud in the City, published two years ago – but he didn’t witness anything like the events of the past few days.

“Wow,” he said yesterday. “You really have to ask: do the remaining investment banks now survive?”

Mr Freud, a great-grandson of the psychologist Sigmund Freud and a cousin once removed of the painter Lucien Freud, is drumming up publicity for the paperback edition, published this month, but he acknowledges that the City he describes in the book seems to be falling apart by the day.

“I tried not to have a theory when I wrote the book,” he said. “It’s interesting if I was witnessing what turns out to be a slow collapse in the industry. It all looks very fragile, doesn’t it?”

Freud hasn’t changed a word for the new edition. He explains that unless you are at the centre of events you never really know the truth. In the book, he describes only discussions at which he was present. “The moment I wasn’t in the room, I, bluntly, got lied to. When I was in the room, I knew what was happening.”

At Warburg, later subsumed into UBS, Freud, a former Lex columnist on the Financial Times, worked on the advisory side, stitching together complex deals, such as the flotations of Eurotunnel and EuroDisney and the financing of the Channel Tunnel rail link. Eventually he became vice-chairman of investment banking at UBS.

“It felt very – what’s the word? – surreal,” he said. “It has become an industry built on leverage, with trading in ever more elaborate instruments. The bit I did, the advisory work, was window-dressing. It didn't make any money. The real money was being made on the trading floors.”

He believes that there will have to be significant reform before the wider world starts to trust investment banks again. That may include having to reintroduce some form of Glass-Steagall, the American legislation repealed in the 1990s that kept investment banks separate from retail banks.

There may also have to be changes to the bonus system. Profits that should have gone to the owners got siphoned off by the employees and loyalty was abandoned, he said. “The rewards are too high, much too high.”

He retired from UBS five years ago, aged 53. “I left the City without being bitter about it. A lot of people leave and are bitter. I really, really enjoyed it. But I was getting bored.”

He is glad to be out of it now, especially in the downturn that leads, inevitably, to sackings. “I’m so relieved that I’m not there now.” he said. “The misery is in the politicking, the fighting, the battling.”

Freud has since carved out a new career. He runs the Portland Trust, the charity attempting to bring peace between the Israelis and Palestinians through economic development. In 2006 he was commissioned by the Government to advise on welfare reform. His report has since been seized upon by James Purnell, the Work and Pensions Secretary, particularly the plans for reducing the millions of people on incapacity benefit.

“Funnily enough it’s happening quite fast. It’s going well,” he said of plans to move a million people off incapacity benefit and into work. He argues that the immediate economic downturn, which will make it hard for anyone to find work, let alone long-term benefit claimants, does not matter because his timeframe is longer. “This is going to take five to six years,” he said. “It will, hopefully, be ready for the next upswing.”

Quote unquote

On Eurotunnel: “The whole thing’s a shambles. Everyone hates them. It doesn’t add up financially.” “While the tunnel was undoubtedly an extraordinary feat of engineering and a major national asset, it was also a financial disaster. As the marketer of the issue, I had successfully sold the market a pup.”

On Euro Disney: “I had engineered an extremely hot issue, which was consequently overpriced and encouraged a level of overspend by the Disney Organisation that led to the subsidary’s collapse and rescue.”

On Railtrack: “Why should we be screwed just because the Railtrack price is mad?”

On investment banking: “When you’re an investment banker no one ever says ‘thank you’.”

On reaching 50: “Fifty is a magic number in investment banking, when colleagues start to expect you to leave, either through retirement or more forcibly. As a result one becomes ‘short-dated’.”

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