Desmond warned bank guarantee was 'temporary solution'

A paper written by billionaire financier Dermot Desmond was circulated among senior Fianna Fáil politicians and bankers only three weeks after the bank guarantee warning that it was only a "temporary solution".

Mr Desmond wrote the paper on October 20th, 2008. In it, he said that guaranteeing the banks would only hold the banking system together for a while and that “there can be no confidence that the same crisis will not re-occur when the guarantee period is up”.

“In fact, in the absence of change, a crisis is highly likely to occur again,” Mr Desmond said. He argued that a “new structure” was needed to restore confidence which would see the world’s central banks work together to establish an “international monetary exchange” which would be unconditionally supported to ensure banks began to trade together again.

A copy of Mr Desmond's paper was passed to The Irish Times by a senior figure in the banking crisis, who said it was discussed at both a political and a senior banking level but that its ideas gained no traction at the time.

The same day that Mr Desmond completed his paper, then minister for finance Brian Lenihan insisted publicly not only was the guarantee working but it was model that should be adopted in other countries.

The State bank guarantee, minister Lenihan told the Irish Banking Federation national conference, "gives absolute comfort to investors". "It is noticeable that smaller countries liked the guarantee approach because there is less financial exposure and they don't have the huge capital reserves as states that allow them to invest in financial institutions on a grand scale," he said.

Essential points

Mr Desmond’s paper shows he clearly did not agree it was anything near enough. He later published the essential points of his paper in a column in

The Irish Times

on December 22nd, 2008.

The Cork-born financier declined to comment last week on what his views of the bank guarantee were, or how and when he communicated them.

By January 2009, the State was forced to nationalise Anglo Irish Bank as otherwise it would have collapsed as investor confidence in the bank guarantee began to fall away.

Mr Desmond is one of the best connected and respected financiers in Ireland.

During the recent Anglo trial, he was described by Matt Moran, Anglo Irish Bank's former chief financial officer, as a "sophisticated investor who might have knowledge of Ireland and was willing to take a view".

Mr Moran said he "mused" with David Drumm, the bank's then chief executive, about approaching Mr Desmond to help Anglo, but he said no approach was ever made.

Mr Desmond did, however, play a role in providing “solutions” to other banks via a company called QED Investments which he founded in 2007.

On its website, QED states it works with “international financial institutions” and “to date QED has helped our institutional partners restructure over $45 billion of risk assets”.

Its board includes Mr Desmond, Michael Walsh – the former chairman of Irish Nationwide who was also a director at Mr Desmond's International Investment and Underwriting investment vehicle – and two others.

It is not known what transactions QED may have worked on. In Ireland, it was the vehicle that Mr Desmond was reported to have used to help the FAI acquire €60 million in loans from Danske Bank.