Northern Rock: Goldman Sachs offers financial engineering, not a solution

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The FT reports that:

Goldman Sachs is examining turning into bonds some of the £25bn owed by Northern Rock to the Bank of England, as a possible solution to the crisis surrounding the refinancing of the stricken bank.

Now I've nothing against bonds: in fact I promote their use by local authorities and for specific circumstances. But let's be clear that's not what is happening here. As the article also notes:

Goldman has suggested that part of the Bank loan can be converted into bonds, which can then be sold to investors. However, Northern Rock, which is dependent on government support for its current credit rating, might use that guarantee to issue bonds. It could then decide to lay off some of the potential risk with a specialist insurer.

Let's be clear then what this actually means:

1) The risk is still on the government

2) Anyone will however ask 'why buy these bonds when gilts are available instead/', so the cost will be higher

3) Laying off potential risk is just putting this stuff back in the CDS market in which some $45 trillion is currently 'insured' (although this is not a regulated insurance market) and no one has any clue what the ramifications of that are right now anyway.

Put together this is not a solution to a problem; it's a typical merchant bankers attempt to repackage a financial product with a margin for themselves. Which is the reason why we had the whole sub prime crisis in the first place.

Is that really the best Goldman Sachs can do? If so, sack them.