Nov. 24 (Bloomberg) -- Goldman Sachs Group Inc., the biggest U.S. securities firm to convert to a bank, plans to sell notes in the first offering of debt backed by the Federal Deposit Insurance Corp., according to a person with knowledge of the transaction.

Goldman is leading banks in what analysts said may be a wave of as much as $600 billion of government-guaranteed issuance. Goldman’s benchmark sale may price as soon as tomorrow, said the person, who declined to be identified because terms aren’t set. Benchmark size typically means at least $500 million.

The government guarantee opens a new channel for bank funding after the credit seizure sapped demand for financial debt and sent yields to record highs of 7.24 percentage points above Treasuries. Banks, which haven’t sold dollar-denominated bonds since September, may raise $400 billion to $600 billion under the program within six months, Barclays Capital estimated in October.

“With the government guarantee, that will put a lot of nervous-nelly types at ease,” said William Larkin, a portfolio manager at Cabot Money Management in Salem, Massachusetts, which manages about $500 million in assets. “I think there’s going to be a lot of interest in this.”

Banks delayed issuing debt under the FDIC program announced Oct. 14 because the guidelines didn’t state that debt holders would immediately be paid in the event of a default, a clause that would put them on par with owners of other government-backed securities. The FDIC changed some terms at a meeting on Nov. 21, determining that creditors will get a timely payment of principal and interest should an issuer go bankrupt. The reworked FDIC rules match those of the U.K., where banks have sold about $34 billion of debt since Oct. 22.

Backed-AAA Rating

New York-based Goldman is managing the sale of the notes, which will mature in June 2012, the person said. Newly issued eligible bank bonds covered by the FDIC guarantee will receive a backed-AAA ranking from Moody’s Investors Service, the ratings company said today.

The rating reflects that the FDIC guarantee is “unconditional and irrevocable and backed by the full faith and credit of the Aaa rated United States government,” Moody’s said today in a statement.

The notes may price to yield about 85 basis points more than the midswaps rate, a benchmark for corporate borrowing in Europe, the person said. A basis point is 0.01 percentage point.

The size of the sale may be determined tomorrow, the person said. Goldman plans to sell at least $2 billion of the debt, Reuters reported, citing an unidentified person.

Goldman last sold dollar-denominated debt on April 22, raising $1.5 billion in a reopening of 6.15 percent notes due in 2018, according to data compiled by Bloomberg. The senior notes priced to yield 237.5 basis points more than Treasuries of similar maturity, according to the data. The notes were trading at 78.5 cents on the dollar as of Nov. 21, yielding 651.4 basis points more than Treasuries, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

To contact the reporters on this story: John Detrixhe in New York at jdetrixhe@bloomberg.net; Gabrielle Coppola in New York at gcoppola@bloomberg.net

Last Updated: November 24, 2008 17:17 EST