Official papers confirm the Treasury rejected a bid to save South Canterbury Finance because it believed the deal would cost the Government too much.
But those supporting the deal say it would have limited the Government's losses.
South Canterbury Finance was put into receivership last year, triggering the Government's deposit guarantee scheme.
Papers from the Treasury released on Thursday reveal a proposal was put up to separate South Canterbury Finance's bad assets from the good.
Under the deal, the Government would have taken some responsibility for the bad assets, but its liability would have been limited.
The Treasury rejected the deal, saying it would have cost the Government more than its then predicted loss of about $700 million.
In a letter to Prime Minister John Key and Finance Minister Bill English in August last year, South Canterbury Finance's chief executive Sandy Maier pleaded for more talks.
Mr Maier said under the deal the Government would have ultimately lost just $250 million to $300 million.