On the face of it, there is one issue supporting the upgrade that Goldman Sachs bestowed on General Electric (GE) Thursday.

One of the biggest issues dogging the conglomerate over the last year has been the question of the adequacy of its liquidity levels. If GE were to be forced to off-load its capital operations - the central question tackled in the Goldman upgrade - chances are it would have to first boost the financial arm’s capital level.

That could mean another dilutive equity issue, another sale of preferred stock - Warren Buffett already has made some $2 billion on paper on his GE investment - or further asset sales.

The central thesis of Goldman’s upgrade of the stock to a buy is that it believed, based on the latest remarks from legislators, that a regulatory initiative that could have otherwise forced industrials like GE to relinquish their financial operations had lost steam. That’s meant chances have increased measurably that GE will be able to retain its capital arm, something the company has insisted all it wanted to do.

The bigger question is whether that’s the best course for the company and its shareholders.

Before the comments of congressmen suggested that GE might escape a government-mandated divestiture of its financial operations, GE seemed to face a future with three alternatives: convert its capital arm to a bank and sell it; convert the operation to a bank and retain it; or, keep it in its current - that is, non-bank - form, and hold onto the operation.

The first alternative would now seem to be off the table. At least, a forced divestiture seemed to have been removed from the scenario. GE could yet decide to sell the operation, whether as a bank or without.

A sale of the operation could resolve the lingering liquidity worries, and allow the industrial conglomerate operations of GE to trade at a premium multiple.

According to a note issued Thursday by Sterne Agee, if GE converts the financial operations to a bank and sells it by fiscal 2011, GE’s valuation would be pegged to a multiple of 18 to 20 times earnings. Assuming those earnings come in at about 80 cents a share, GE would trade at about $15 to $16.

Under either of the other scenarios, GE would command a significantly lower multiple, and its valuation would decline. If the financial arm converted to a bank and is retained, GE would trade for about 14 to 16 times 2011 earnings, translating to $15 or $16 a share. If it doesn’t convert to a bank, and is retained - meaning the liquidity overhang would persist - GE would trade at 12 to 14 times and command a market value of about $11 a share.

So while Goldman’s perspective answers some short-term hesitation about buying into GE, the longer-term issues aren’t addressed by holding onto the capital operation. With GE now trading at about $13 a share, it’s likely already discounting the value of retaining the financial operations.