Alistair Darling made a last-ditch attempt to keep Northern Rock as a private company yesterday by proposing a huge new government guarantee of the troubled bank’s mortgage assets.

The Treasury began direct negotiations with the bank’s board after accepting a plan from Goldman Sachs, its City adviser, that it believes will keep hopes of a private-sector solution afloat. After a week in which nationalisation looked increasingly likely, The Times learnt that negotiations had started on a proposal to “securitise” its £25 billion-£30 billion debt to the taxpayer. The debt would be repackaged into bonds and in effect sold as Treasury gilts, allowing the government loans to be paid back in the short term. The Government would still run a big risk because its guarantee would be backed by mortgage assets. In theory it would have to pick up the cost of mortgage holders defaulting.

The Chancellor’s move will be regarded as a way of helping the existing bidders, Virgin and Olivant, to press on. Both appeared to have exhausted options for financing the purchase of the Rock without government help.

A source close to the negotiations told The Times that ministers felt that in the present market conditions the Goldman Sachs proposal for financing a private-sector solution met the Government’s objectives. Sources said that public ownership remained an option. It is one that Mr Darling and Gordon Brown want to avoid if at all possible.

Gilts are considered by institutional investors such as pension funds to be the safest type of fixed-income asset. The Government’s guarantee would be backed up by the assets that Northern Rock has turned over to the Bank as security against its emergency loan, taken out when it could not secure funding amid the credit crisis.

Sources have cautioned that it may be difficult to persuade institutional investors to snap up the new gilts. “There are not buyers for £25 billion of sterling out there,” one source said.

Mr Brown, speaking in Beijing, told BBC News: “The issue now is to keep all options open, so that Northern Rock’s services have a future in the British economy. No option is ruled out. But whether it is public ownership or private, it’s on the way to being a private-sector solution in the long term.”

Northern Rock announced the appointment of a new non-executive director, Paul Thompson. Sources said that he had been primed to take over as chief executive if a management-led solution won favour.

The tripartite authority of the Bank of England, Treasury and Financial Services Authority appointed Goldman Sachs in September to evaluate potential options for a private sector sale. They gave a cut-off point of mid-January to reach its conclusions.

There were growing expectations last night that a decision could be announced to the Commons by Mr Darling as soon as Monday, probably coupled with another to the Stock Exchange.


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