Two years on from the run on Northern Rock in September 2007 and Lloyds Banking Group (LON:LLOY) should be cursing the regulators for blocking its bid to rescue the mortgage bank. Lloyds Banking Group would have lost the whole of the £1.7bn bid price and more – but still saved that sum many times over.

The traditional route for propping up small banks in trouble is to bring in a larger bank and do a weekend deal to rescue it before the world knows that a collapse was the alternative.

That’s how Bear Stearns, Merrill Lynch and Bradford & Bingley were mopped up later in the financial crisis, but Northern Rock was the first domino to fall and the Financial Services Authority was too young to know about tradition and the Bank of England was sulking. Lloyds was thus told that its cosy proposed takeover was a non-runner.

Lloyds Banking would have paid 400p a share before customers lined up outside branches to withdraw their savings, valuing the bank at £1.7bn. It even considered a bid afterwards when the share price had halved, but was shunned. Instead the government held a protracted auction in which Virgin remained a bidder until the end but still lost out to the government, which chose to keep the Rock for itself.

Lloyds Banking would have lost the whole of its purchase price as the credit crunch tightened during 2008, house prices fell and recession started. It would have had to inject new funds too, just as the government has. As owner of other mortgage businesses, including Cheltenham & Gloucester, it might have squeezed some synergies that the state has not, but it would still have suffered losses.

But when HBoS got into trouble later in 2008, Lloyds would not have bid for that when it was still absorbing Northern Rock and, while government ministers ignored competition rules to waive through the HBoS takeover, they could not have done that if Lloyds already owned the Rock.

So if Lloyds Banking had bought Northern Rock it would not have bought HBoS and it would thus not have had to bear the crippling losses that have caused its share price to sink and the state to take a 43 per cent stake that could still turn into majority control.   Sir Victor Blank would still be chairman, his reputation blemished only by the Rock’s modest losses, and Lloyds’ balance sheet would be strong enough for it to continue lending to business.

And the taxpayer, instead of bearing the Rock’s losses would have had to take total control of HBoS, as it has Royal Bank of Scotland – though the state share stake would be over 90 per cent – and would have had to provide extra funding above that.

If Virgin had bought Northern Rock however, it would have encountered the same further losses that the government has had to finance and would have had to seek such funding from outside sources that its own independence would be in doubt.

Perhaps the government would have rescued Sir Richard Branson’s financial operation?  How different history would have been if only Lloyds had been allowed to rescue the Rock.

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