By Robert Peston
Business editor, BBC News
Goldman Sachs is endeavouring to convert the taxpayer loans to Northern Rock into bonds for sale to investors, the BBC has learned.
The government is trying to decide what to do about Northern Rock
Goldman is the investment bank advising on what to do about the approximately £26bn that has been lent by the Bank of England, with Treasury guarantees.
But in order to make them sellable, these new Rock bonds would need a triple-A credit rating.
And that would mean they still had to be guaranteed by the government.
To use the jargon, they would have to be "wrapped".
In other words, they would be the equivalent of gilt-edged stock.
However, if the bonds were guaranteed exclusively by the government, the European Commission would see such a deal as state aid and therefore illegal.
So this deal will only fly if Goldman can find some other financial institutions to insure the bonds alongside the government.
It believes one or more of the world's giant commercial reinsurers might take over some or all of the government guarantee.
Reinsurers, such as the one run by the world's most successful investor, Warren Buffett, still have immensely deep pockets, even after the credit crunch.
But they would charge for taking on the Rock risk from the government; for providing the cherished triple-A rating.
The big question, which Goldman has not yet answered, is whether the reinsurers can do this at a price that is not excessive and in a way that placates the European Commission.
Success or failure
To be clear, this is not some intellectually fascinating bit of financial engineering.
Goldman's success or failure in securitising this debt will decide the very future of the Rock.
If the securitisation can be done on sensible terms, it means that a rescue deal with the consortium led by Virgin or with Olivant (or, as a very long shot, the Gooding/Five Mile group) may yet happen.
Virgin, which gave an update on Wednesday to the Rock's board, remains remarkably bullish about its prospects.
That is a bit odd, since the big shareholders in the Rock say they are profoundly uninterested in what Virgin has to offer, and those shareholders have the power of veto (much to the chagrin of the Treasury).
The other generic option is partial nationalisation.
Full nationalisation seems to have been more or less ruled out.
Instead, the Treasury's fallback plan would effectively be the status quo, except that new senior management would be parachuted into the Rock and the Treasury would take a minority stake in the business (possibly via a warrant or share-option arrangement).
A lot of preparation has been made for this partial nationalisation.
A senior banker has been lined up as a possible new chief executive.
For the Treasury, it is an insurance policy, because a private-sector rescue may turn out to be impossible.
And it is a realistic option, because retail depositors have at last stopped withdrawing their funds from the Rock.
Retail deposits have stabilised at something over £9bn, which reinvents Northern Rock as a small-to-medium bank.