The withdrawal of Olivant from the list of would-be rescuers of Northern Rock is a blow for the Treasury. Olivant's proposal was far from perfect but it had some credibility and, more importantly, it provided competition to the other serious contender, Sir Richard Branson.

Olivant's Luqman Arnold was a respected City figure and he had the inestimable virtue of having actually run a listed high street bank. He was also prepared to leave existing shareholders with a sizeable chunk of the recapitalised Rock, thus placating rebel shareholders such as RAB Capital and SRM.

In running this most delicate of auctions, the Treasury and Goldman Sachs had a difficult balance to strike. They needed to set the ground rules so that public money was paid back as quickly as possible, while not making the repayment regime so tough as to frighten away any of the would-be rescuers. In this they have failed. Olivant just couldn't see enough upside left to it.

Its departure now leaves Alistair Darling with two headaches. First, he has virtually no negotiating muscle with Sir Richard as they come down to the nitty-gritty of terms. There is Rock's standalone proposal, but ministers risk making themselves a laughing stock if the company is rewarded for its recklessness by being allowed to orchestrate its own taxpayer-guaranteed rebirth.

Already, Sir Richard appears to be exploiting the weak position of ministers, reducing the amount of fresh equity that he plans to inject into the business. However, it is in negotiating the terms of the loans-for-bonds restructuring that the Virgin founder could really start to turn the screw.

Mr Darling's other problem is the rebel Rock shareholders, who came out in support of the in-house plan led by Charles Thompson within minutes of Olivant's retreat. They may not have much public support outside the North East, but they have deep pockets, thick skins and are capable of serious mischief.

A pain-free final act to the Rock debacle looks farther away than ever - for ministers and taxpayers.

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