It was the morning of Tuesday, February 5, and the City was reverberating with the shock news that one of the key bidders in the battle for Northern Rock had dramatically pulled out of the race 15 minutes before the deadline the night before.

Olivant, the private equity group led by Luqman Arnold, had been busy crunching the numbers, but a last-minute shifting of the goal posts by the Treasury on the previous Friday evening - demanding that bidders repay the £25billion of loans within three years - made it impossible for it to compete.

The bad news for Mr Arnold, the former head of Abbey National was music to the ears of Sir Richard Branson, leaving his consortium in pole position to clinch a deal. The team moved fast.

On the Tuesday morning, Virgin's bankers, James Lupton and Edward Wakefield, from the advisory firm Greenhill, prepared themselves for a conference call with Basil Geoghegan, one of the key partners in Goldman Sachs advising the Government.

The negotiations were fraught. Greenhill thought that it had done enough to secure a victory for Virgin, but Mr Geoghegan told it that there was still plenty of room for improvement.

Meanwhile the lawyers were busy working on the minutiae of EU rules on state aid for troubled companies and whether the Virgin bid would gain the approval of regulators who were worried about competition issues.

Rock had to be seen to be receiving “additional punishment”, as one insider put it, but the pain couldn't be so harsh it would scare the bidders away.

On Wednesday, the conference calls continued, with Greenhill working around the clock to try to stretch the Virgin proposal to meet Goldman's demands of a higher fee for the Government and a bigger share of any upside from a recovered Rock.

“All that week, there was heavy beating up of the bidders in the newspapers to make everyone feel better that the private sector wasn't getting a freebie on this,” a source close to the Virgin camp said. “But in reality that couldn't be farther from the truth.”

By the end of that week, Greenhill had tweaked the proposal to its max and resubmitted it to Goldman. A key part of the plan involved Granite, the offshore fund set up by Northern Rock as a way of raising cheap financing by securitising mortgages through selling bonds to investors.

It was touch and go for Virgin. If Rock's credit rating fell below A1, it would trigger a legal clause that forbade the bank from transferring any new mortgages to Granite. If that happened, Granite would collapse and, with that, £49billion of bonds would need repaying.

“What you didn't want to do was put yourself in a position where you would be at the mercy of the bondholders in Granite,” the source said. However, Mr Lupton and Mr Wakefield managed to find a “workable solution” to the problem and, after a moment of panic, it was all systems go once again.

By February 12, the following week, the Virgin team were confident they'd hit the home straight. One insider said that Goldman Sachs and the law firm Slaughter and May had been told to “fix the documentation” and “iron out the creases” so that Alistair Darling and the Cabinet could make their final decision. With press reports declaring Sir Richard the clear front-runner, the deal seemed all but a slam dunk.

Meanwhile, the hedge funds SRM Global and RAB Capital desperately continued to fight their corner. After the exit of Olivant they had thrown their weight behind Paul Thompson, the man chosen to run Northern Rock if the rival bid from existing management succeeded.

“The hedge funds were fantastically overplaying their hands in their press that week ... but the Rock's managment never stood a chance of winning - Government was never going to pick them,” one well-placed source said.

That is not how Mr Thompson's camp saw it.

During the week of February 11, the management team's bankers, led by John Studzinski, of Blackstone, David Wormsley, of Citigroup, and Richard Slimmon, of Merrill Lynch, held a series of meetings with Goldman, the FSA and the Treasury as they fought to edge out Virgin.

A source said: “We knew that there was always a risk of nationalisation because we kept reading in the papers that the Government still felt that it was an option, but we thought that was as much to extract a better deal out of the bidders than anything else.”

On Friday, February 15, Mr Thompson submitted his final proposal and the wait began. That night, the bid teams breathed a sigh of relief. The race for Rock was reaching a climax and everyone knew an announcement on the winning bidder was imminent.

Saturday dawned, and Goldman, relentless, was back on the warpath, demanding yet more improvements to the offers. The Government wanted a still bigger fee for providing the guarantee on the debt and lower hurdles for when the warrants designed to return upside to taxpayers would kick in.

Over at Greenhill, Mr Lupton worked hard to make the necessary tweaks. In the evening, he spoke by telephone to Mr Geoghegan at Goldman and assured him the changes could be accommodated. Mr Geoghegan advised Mr Lupton to down tools for the evening and said they would regroup on Sunday morning.

It was a clear blue sky on Sunday, February 17, and Virgin's team awoke in high spirits. But as the morning drew on a “deathly silence” fell, one insider said. The sun was shining and so the team went about their day and waited to hear from Goldman.

Meanwhile, Rock's management team met at 9am to work out how to answer Goldman's questions. But the meeting with Goldman had not been organised and everyone separated without hearing from the bankers.

While the two bidding teams waited to hear their fate, Alistair Darling had already made up his mind. He decided that neither of the proposals gave the Government sufficient upside from a recovered Rock. The prospect of Sir Richard Branson or the Rock management pocketing fat profits from a resurgent bank in a few years' time was just too unpalatable given how much taxpayers' cash had been put at risk.

At about 3.30pm, Sir Richard, holidaying in Necker Island, his private Caribbean retreat, received a telephone call from Mr Darling to tell him that the Government was about to announce its intention to nationalise Northern Rock.

Mr Darling did not deign to ring his least-favoured bidder personally. It was John Kingman, a senior Treasury official, who eventually broke the news to Andy Kuipers, Northern Rock's chief executive.

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