The Chancellor, Alistair Darling, will stand up in the Commons today in the hope of mapping a way out of one of the sorriest messes in British banking history.
For six months Mr Darling and Gordon Brown have endured the mocking headlines and the cruel "Northern Crock" jokes as the Government found itself propping up the debt-ridden Northern Rock bank to the tune of £54bn. All of the money came, of course, from the British taxpayer. Both Mr Brown and Mr Darling knew that situation could not last indefinitely. So the Chancellor has come up with what he clearly believes is a cunning plan. Whether it will wash with the voters is another matter.
The Chancellor is to announce that the Government will guarantee about £24bn of Northern Rock bonds to secure a private-sector deal and repay the Bank of England. The Treasury expects the bonds to be sold to investors in stages on similar terms to government securities and for the entire £24bn to be sold within months.
In addition to the £24bn rescue, the Government has also given guarantees worth £30bn on wholesale deposits and derivative transactions at Northern Rock, bringing the taxpayers' exposure to £54bn.
Despite Mr Brown's insistence that the Treasury was handling the rescue plan, he approved the plan – which was dreamed up by Goldman Sachs, at yet further cost to the taxpayer, at a Downing Street meeting with Mr Darling last Thursday.
Desperate not to nationalise Northern Rock, but with private buyers struggling to find enough cash to do a deal in the middle of a credit crunch, Mr Darling appears to be seeking a middle way: by guaranteeing the bank bonds for the foreseeable future, any future private buyer is being offered much of the gain from a Northern Rock renaissance with the prospect of minimal pain.
Senior government sources denied that the Goldman Sachs plan meant a private sale of Northern Rock was inevitable and said the bond issue would still be "the right thing to do" even if the bank were to be nationalised. Officials stressed yesterday that Mr Darling's announcement would not be an "end result" to the Northern Rock crisis but the Government's preferred route for the next stage of the process. A two-week auction of Britain's most notorious bank will now begin.
Enter Sir Richard Branson. The billionaire boss of Virgin is in pole position to gain from the Government's guarantees – if his consortium can negotiate terms with the Treasury. Virgin was chosen as "preferred bidder" by Northern Rock in November.
The other two options for the Government are a rival bid by Olivant, an investment firm headed by the former boss of Abbey National, and a proposal from Northern Rock's revamped management that they could go it alone.
But the terms of the Government's engagement with the private sector have infuriated Mr Darling's critics. This might be a sweet deal for Sir Richard, if he pulls it off. But what about the long-suffering British taxpayer?
Vince Cable, Treasury spokesman for the Liberal Democrats, has accused the Government of a confidence trick. "This is not a private sector solution. The private sector isn't taking any risks. It is the taxpayer that is taking all of the risks," he said.
His anger was echoed by George Osborne, the shadow Chancellor, who said: "Gordon Brown is mortgaging the taxpayer to try to get him out of the political hole he's dug for himself." Even the EU plans to investigate Mr Darling's proposals, on the grounds that the offered deal may infringe Brussels rules on state aid.
Unsurprisingly, the coincidence that Sir Richard has spent the past few days travelling with the Prime Minister has not passed unnoticed. Sir Richard has been seen at Mr Brown's side during a 25-strong trade mission that started in China last week and ended in India.
Both men denied reports that they had secretly discussed a deal that would pave the way for the Virgin Group to buy Northern Rock. Mr Brown said: "I can reassure people entirely that any negotiations about Northern Rock will be taking place in London. If a number of commercial companies are expressing interest in the future of Northern Rock then it's right that the Government explore all options available to us."
For his part, Sir Richard insisted the only reason he was on the trip was to discuss links with China and India rather than the future of Northern Rock. "I have spent no one-to-one time with Gordon Brown, and just harangued him on stage about universities taking copyright from entrepreneurs," he said. "It will be the Treasury that will make the decision, alongside shareholders and other people."
But he did add that he had spoken briefly with Mr Brown when he was on his way to talk to journalists about the bonds proposal. "He mentioned it to me," Sir Richard said.
So far so innocent. But the suspicion remains among government critics that the Northern Rock bonds represent a cracking deal for the next private owner of the bank, whoever that may be, and an extremely poor one for the taxpayer. And Sir Richard knows a good deal when he sees one.
Mr Darling will try to head off the attacks by demanding that bids should allow the taxpayer to benefit if the bank recovers under the government guarantee. Olivant has already said it would offer the Government "high-value warrants" covering 5 per cent of the bank's equity that could be cashed in after a number of years if the share price rose to a certain level.
The Chancellor will also try to minimise the Government's risk by telling bidders to come up with as much of their own cash as possible to soak up losses if mortgage defaults rise. With recession threatening the economy, the Government's under-fire regulator, the Financial Services Authority, is pushing bidders to build an economic bloodbath into their proposals to make sure there are no further bail-outs of the bank.
But whatever caveats Mr Darling builds into today's proposal, many will draw only one conclusion. The British taxpayer has been mugged again.
How the crisis unfolded
12 Sept: Bank of England gives Northern Rock emergency help to deal with cash flow problems arising from US sub-prime mortgage crisis.
13 Sept: The Bank's emergency intervention is revealed by the BBC. Investors are urged not to panic.
14 Sept: Northern Rock insists it is "business as usual", but its shares collapse by almost a third. Queues form outside branches.
17 Sept: As customers withdraw £2bn and fears grow for the bank's survival, the Chancellor, Alistair Darling, says the Government will guarantee all the bank's deposits.
20 Sept: Mervyn King, the Governor of the Bank of England, tells MPs he wanted to secretly support Northern Rock, but regulations made that impossible.
25 Sept: Northern Rock discloses it is in preliminary talks with potential buyers for all or part of the business.
12 Oct: A consortium led by Sir Richard Branson's Virgin Group offers to take over the bank and call it Virgin Money.
14 Nov: Savers said to have withdrawn £10.5bn, raising fears the bank could be put in to administration.
17 Nov: Number of potential bidders hits 10.
19 Nov: Mr Darling says any takeover needs government approval.
26 Nov: Northern Rock says it prefers the Virgin bid, which promises to immediately repay £11bn of the £25bn owed to the Bank of England.
7 Dec: The Olivant group unveils a rival rescue bid, promising to repay £15bn.
12 Jan: The Treasury recruits Ron Sandler to head Northern Rock if it is nationalised.
18 Jan: Gordon Brown backs a plan to convert Bank of England loans into bonds.
19 Jan: Mr Brown confirms talks are taking place to secure a private sale, but adds that nationalisation has not been ruled out.