The Irish Independent reports that Irish retail clearing banks tapped the European Central Bank for a record €29.5bn in February, according to the statistics from the Central Bank, as global financial markets went through another period of heightened volatility.
"February was quite a difficult month in the wholesale markets, where funding across the board was in short-term supply. We've since had indications from the ECB and banks themselves that the markets have relaxed -- but even this has been limited to short-term deposits and [debt] securities," said a Dublin-based analyst, who declined to be named.
Settlement
Clearing banks are members of the system for settlement of non-cash payments, such as cheques, credit transfers and direct debits. They include Allied Irish Banks, Bank of Ireland, Danske Bank (parent of National Irish Bank) and Ulster Bank.
The stress in the financial system was also highlighted at the time as the cost of protecting against governments and banks defaulting on their loans soared to record highs. These so-called credit default swaps (CDSs) have since pulled back from their peak.
The retail clearers also saw inter-bank deposits from non-eurozone financial institutions drop €5.7bn to €138m, while deposits from governments outside the region dropped by €4.5bn to €4.3bn. Still, deposits from both institutions and government bodies in Ireland the broader eurozone remained robust.
Analysts warned against reading too much into the extent of the moves, as it may have reflected a small number of large foreign institutions or government organisations harbouring more cash in the reporting month.
Deposits from corporate and retail customers actually rose by €2.1bn month-on-month to €135.5bn, driven by lodgments from abroad.
Stripping the retail clearers out of the broader category of Irish mortgage lenders, the use of short-term ECB funding fell from €24m to €20.7m on the month.
The Irish Independent also reports that company pension funds lost €20bn of their value last year, the highest losses on record.
The value of pension scheme assets crashed from €86.6bn in 2007 to €66.7bn at the end of last year, according to the Irish Association of Pension Funds (IAPF).
Despite this, pension fund managers still took fees estimated at €800m in 2008.
This works out at a charge of €1,000 for each of the 800,000 people paying into an occupational pension scheme.
The schemes, which include both defined benefit and group defined contribution funds, had just under 48pc of assets in equities at the end of last year.
This was down from 66.3pc at the end of 2007, according to the IAPF survey.
Questioned about the high level of fees despite losing €20bn of pension holders' funds, Jerry Moriarty of the IAPF agreed fee levels were a big issue for pension trustees.
The pensions industry was heavily criticised recently by the State's pensions regulator, Brendan Kennedy, who accused pension fund managers and trustees of not focusing enough on risk.
Mr Kennedy said Irish fund losses were the highest in the Organisation for Economic Co-operation and Development (OECD) because most funds were 80pc invested in a combination of equities and property.
Most funds had lost 40pc of their value over the past 18 months, Mr Kennedy said early in March.
But the IAPF said yesterday asset values had fallen by 23pc.
IAPF chairman Patrick Burke said:"The change is less than might have been expected based solely on market conditions and may reflect changes in investment strategy and/or reasonably strong cashflow into pension funds during the year."
Asked if pensions fund holders were not entitled to a refund on fees with such high losses, Mr Moriarty said there were no structures in place to hand back fees. He acknowledged that fees on group schemes vary between 0.3pc and 2pc of fund values per annum.
The Government's Green Paper on pensions assumes typical charge levels of 1.5pc a year.
Mr Moriarty admitted that if fees of 1pc were charged on €86.6bn it would amount to fees in excess of €800m.
"There is no mechanism to reduce fees if losses are recorded. Fund managers still have to pay people, but the issue does raise questions in terms of how the industry is structured in terms of fees."
He added that no other country had a system where pension fund managers reduced or gave a rebate on fees when there were large losses.
Mr Burke said the loss of almost €20bn in pension funds assets emphasised the scale of the problem which pension funds are facing.
This underlined the need not to do anything in next Tuesday's Budget which would cause further damage to the retirement prospects of pension scheme members.
The IAPF survey found a continuing move to defined contribution schemes.
Assets
Some 70.8pc of assets were managed on behalf of defined benefit schemes, 27.3pc were defined contribution schemes with 1.9pc under additional voluntary contribution schemes.
The proportion of assets managed within defined contribution schemes has doubled in the past two years.
The Irish Times reports that the Republic needed a “credible framework” to deal with the challenges posed to public finances by the recession, according to an analyst with the agency which cut the State’s credit rating this week.
On Monday, Standard&Poor’s (S&P) cut its rating of the Republic’s ability to repay its debts from “AAA” to “AA+”, a move which could increase the interest rates that the State will have to pay on exchequer borrowing.
The report, written by S&P analysts Trevor Cullinan and Frank Gill, stated the agency was concerned that a “credible multi-year strategy will not emerge until after the next general elections, due by 2012”.
Speaking to The Irish Times yesterday, Mr Gill said that the key issue for the Republic is that“there needs to be a credible plan for dealing with the public finances. It does not matter who puts that plan in place.”
He argued that, as gross domestic product (GDP) – the amount of wealth generated by the economy – is contracting severely, the ratio of the State’s debts relative to GDP will increase.
Mr Gill also pointed out that debt owed by households and businesses comes to 280 per cent of GDP, which will in turn act as a drag on growth. He said that, as households faced difficulty in repaying loans, it could further hit the value and quality of the banks’ assets. “I think what the Government has done so far has been impressive, but the economy is under such pressure that it is going to contract severely, which means that they face an enormous challenge,” he said.
Mr Gill warned that the weakness of both sterling and the dollar could hamper any potential export growth which might result from a pick-up in the world economy next year. He also said that it was not possible to predict whether multinationals would continue to invest in the Republic at the rate at which they have done in the past, something that was key to economic growth in the 1990s and the early part of this decade.
S&P’s move was broadly expected, but its decision came a week before the Government’s planned emergency budget. Falling tax revenues mean that Minister for Finance Brian Lenihan has to bridge a €24 billion gap between income and spending.
Mr Gill indicated yesterday that he agreed with the dual approach of tax increases and spending cutbacks. “They have to do something at the revenue side and they have to do something at the expenditure side,” he said.
Reacting to S&P’s decision to cut the Republic’s rating, economists and market analysts yesterday homed in on its concern that there would not be a credible plan for the public finances until after the next election.
Mr Gill told The Irish Times that the statement was not meant to question the State’s leadership, and simply reflected the challenge facing the Government and the uncertainty surrounding the banks. He also stressed that a AA+ rating was still broadly positive. “That is a very high rating and this suggests an extremely low probability of default,” he said.
The ratings agency is keeping the Republic’s new credit rating on “negative” outlook, meaning that falling tax revenues could result in further downgrades and even larger interest bills for public borrowing.
The Irish Times also reports that electronic tagging for “tax exiles” is being considered by the Department of Finance in advance of next week’s budget.
The measure is aimed at monitoring the presence in the State of individuals who claim to be non-resident for tax purposes.
Last year, 5,803 people claimed non-residency for tax. The Revenue believes that 440 of those are “high net worth” individuals. “These are the people who we’d be aiming this proposal at,” a spokesman for the department said.
Foreign-based Irish millionaires can avoid Irish tax if they spend fewer than 183 days in the State. Last November, Minister for Finance Brian Lenihan abolished the so-called “Cinderella” rule, whereby an individual is not deemed to have spent a day in the country if they leave by midnight.
“We’re still concerned that there are a few fairy tales being told about where people are actually living,” said the spokesman.
Electronic tagging is a form of non-surreptitious surveillance consisting of an electronic device attached to a person, usually certain criminals, allowing their whereabouts to be monitored.
The devices locate themselves using GPS and report their position back to a control centre via a mobile phone network. The devices are usually built into ankle monitors, which are designed to be tamper-resistant and will alert the authorities to tampering attempts. According to the spokesman, certain technical issues remain to be resolved before the plan is implemented.
“For example, many of these people have ‘panic rooms’ in their homes to protect themselves against criminals,”he said.“We’re not absolutely sure of the technicalities, but if these rooms are lead-lined, they might block the signal from the electronic tag.
“In theory it might be possible for a high-net-worth individual to remain in a panic room for days or even weeks without us knowing.”
The Office of the Revenue Commissioners is in discussions with a US-based high-technology security company, FailProof, on providing the service.
The Irish Examiner reports that thousands of over-valued "affordable houses" bought by councils at boom prices are lying vacant because people cannot afford to buy them.
Figures from the Department of the Environment reveal that the number of affordable units has risen 40% — from 2,200 at the end of 2007 to 3,700 today.
Officials are concerned they may only be able to sell off about half the current stock, making the additional 2,270 houses coming on stream this year very problematic to offload.
Local authorities are struggling to sell the homes — despite the fact there are approximately 28,000 on the waiting lists — because prices have not fallen in line with the rest of the market.
The houses were bought at pre-recession prices and developers are not renegotiating price cuts despite the drastic change in market conditions.
Added to this, potential buyers cannot secure mortgages because banks will not sanction loans on these overvalued properties, leaving councils searching for other options to deal with the massive housing glut.
Labour spokesman on housing and local government Ciaran Lynch insisted local authorities should talk with developers to find a more equitable price, but a spokesman for the Department of the Environment said this was not likely to happen.
"The problem is that local authorities are contractually committed to the arranged price and developers know councils cannot insist on reducing it."
The department is finalising a circular to all local authorities in an effort to overcome the problem. Suggestions include transferring the properties to the rental accommodation scheme, or using them as temporary social housing support.
Mr Lynch said people hoping to buy under the scheme were finding it hard to get mortgage approval because banks felt the houses were worth less than the sale price. "I know of one couple with mortgage approval in principle for e250,000 and who wanted to buy an affordable house from their local authority.
"The local authority wanted to charge e216,000 for the house, but their mortgage provider only valued the house at e196,000. As a result they would not provide the loan for the house" said Mr Lynch.
Fine Gael spokesman Terence Flanagan said first-time buyers are abandoning affordable housing, as they no longer reflect "affordable" prices.
Mr Flanagan’s Freedom of Information documents show a 141.91% rejection rate across the six Dublin council areas last year. During 2008 there were 6,014 offers made to applicants to view properties, but only 18% viewed the properties.
In response, the Affordable Homes Partnership said it was wrong to state that there is no difference between open and affordable prices. It said affordable housing continues, in the main, to be at a discount to the open market price, but people are waiting to see how things will develop.
The Financial Times reports that less risky, less profitable, and probably a lot smaller – that is the prognosis for the world’s banks as they attempt to rebound from the worst financial crisis of the postwar era.
This epochal shift in the financial climate means that even those institutions that come through the downturn intact will face a struggle to adapt to the new environment.
Amid the turmoil, it might seem futile to sketch out the future banking landscape. Most banks are struggling to forecast their performance over the next three months, let alone the coming five years. Bad loan charges are still rising.
Even though the world’s banks had raised more than $900bn in fresh capital by the end of 2008, capital ratios have improved only slightly and further equity injections from governments and outside investors are likely.
The regulatory framework is also uncertain.
Regulators are drawing up plans to force banks to hold greater levels of capital and stronger buffers of liquidity, though it remains far from clear how these will work in practice.
Some central bankers and policymakers, especially in the US, are advocating a complete separation of investment banking from retail banking.
Even if this is avoided, global banks could face stricter constraints in some countries that will make cross-border operations less attractive.
Nevertheless, a few trends are clear. First, returns are going to be lower. According to analysts at Citigroup, European banks earned a return on equity of 18-23 per cent between 2003 and 2007 compared with 12-15 per cent in the mid-1990s.
This shift mainly reflected more borrowing: European banks’ leverage – the value of their assets as a proportion of their equity – rose from 24 times on average in 1995 to 39 times in 2007.
That trend is now going into reverse. Banks will need to hold more assets on their balance sheets, and keep them there longer – a change that will further depress profitability.
Conduits and off-balance sheet vehicles that were popular during the boom have disappeared. Along with money market funds, these vehicles were among the most active buyers of mortgage-backed securities and other instruments that banks used to both shift risk off their books and pocket hefty fees.
The crisis has also highlighted the importance of deposits as a stable source of funding.
Many banks have beefed up efforts to attract more retail savings in an attempt to reduce their dependence on expensive and unpredictable wholesale markets.
But with interest rates at or close to zero per cent in most of the developed world, offering attractive rates on savings accounts will prove expensive.
By contrast, margins on mortgages and other loans have improved dramatically. Threatened with extinction some institutions such as Morgan Stanley, once a proud example of a white-shoe Wall Street investment bank, have taken the hybrid route of chasing wealthy savers.
Regardless of their strategy, in such an austere climate, most banks will have to cut costs.
But slashing staff or moving more jobs offshore could prove politically tricky, especially for banks that have received government support.
Pressure to reduce costs could also lead to further consolidation once the industry stabilises. But large domestic mergers could fall foul of authorities already concerned about reduced competition, while further cross-border deals are likely to be difficult until regulators can work out credible plans to rescue multinational banks.
Even if regulators do not break them up, large banks will be under pressure from investors to abandon global ambitions.
The struggle for survival at Citigroup, once regarded as the epitome of a global financial supermarket, underscores the problems faced by banks trying to be all things to all consumers.
In this new environment, however, there will still be room for different business models.
Commercial and investment banks are likely to concentrate on serving corporate clients and processing large trade volumes.
They may also underwrite securities and offer advice on mergers and acquisitions, though some of this business may shift to boutiques that are less constrained by rules on bankers’ compensation.
Fundamentally, the banking sector is entering an era in which its performance will be linked to the underlying economic growth of the economies in which it operates.
Some may produce better results because they are better run.
But as long as investors and regulators can remember the crisis, any bank that consistently generates above-average returns is likely to be seen as a target for suspicion, rather than praise.
The FT also reports that Eurozone inflation has fallen significantly closer to negative territory, strengthening the case for further European Central Bank action to boost the economy and head off risks of deflation.
The annual inflation rate in the zone fell more than expected to 0.6 per cent in March (from 1.2 per cent in February), Eurostat, the European Union’s statistical unit, reported on Tuesday.
This was the lowest figure since comparable records began in the early 1990s, and pointed to substantial undershooting of the ECB’s target of an annual rate “below but close” to 2 per cent.
The Organisation for Economic Co-operation and Development warned the ECB that mounting “disinflationary pressures” in the next two years implied that the “remaining scope for cutting policy [interest] rates should be used quickly, and quantitative easing policies implemented”.
On current trends, eurozone inflation could turn negative by June, economists said. Oil prices probably accounted for much of the March fall, but weakness of the eurozone added to the downward pressure. Spain, Italy and Ireland were “seeing quite a significant deceleration in underlying inflationary pressures”, said Nick Matthews, European economist at Barclays Capital.
With the eurozone recession broadening, Germany reported a pick-up in the rate of increase in unemployment. The number of jobseekers rose by a seasonally adjusted 69,000 in March to 3.4m – the highest since January last year – pushing the jobless rate up to 8.1 per cent from 8 per cent in February.
Further rises are expected in the coming months as companies stop taking advantage of wage subsidies that have prevented mass layoffs.
The Paris-based OECD expects advanced economies to contract by 4.3 per cent in 2009, with little or no growth in 2010. While the downturn will leave no advanced economies unscathed, the OECD believes that it will be less severe in the US and UK, which are less dependent on trade, even though their banking systems have proved more fragile.
The US is expected to suffer a 4 per cent decline in gross domestic product this year, followed by no growth in 2010, but the eurozone is forecast to contract by 4.1 per cent this year and 0.3 per cent next. Within the eurozone, Germany is expected to see the worst recession, with a 5.3 per cent decline in GDP in 2009.
The ECB is expected to cut the main policy interest rate by a further half point to 1 per cent on Thursday. To fight recession it has focused on flooding the banking sector with unlimited, low-interest liquidity. But it is considering further steps, including buying private-sector debt.
The New York Times reports that for nearly 30 years, American presidents have arrived at economic summit meetings with nearly identical talking points: the solution to most ailments lies in more economic integration, unleashing free markets and using a light touch to tame capitalism.
As President Obama landed here Tuesday night to attend the Group of 20 summit meeting, almost every one of those principles appeared up for debate.
Economic integration is in retreat. Some countries have tried to wall themselves off from the troubles sweeping the world, noting that those less tied to the global economy have suffered less. Heavy regulation is back, this time with Washington’s agreement. On Tuesday the French hinted they would walk out of the Thursday Group of 20 summit meeting if other nations did not agree to set up a robust international financial regulatory agency.
For all of Mr. Obama’s early optimism that the rest of the world would follow his lead on big stimulus packages, there is no clear move in that direction. By last weekend the White House was signaling that it would not confront the nations, notably Germany, that resisted more deficit spending.
All of this suggests a rebuke of American economic leadership. Yet Mr. Obama is still likely to dominate the discussions here. And there is no clear alternative to his strategy for reviving the world economy.
Many in Europe and Asia who depend heavily on the United States market favor Mr. Obama’s spending, hoping an American rebound will revive their economies — and ease the pressure on them to spend more.
“Here’s the central paradox,”said Jeffrey E. Garten, a professor at the Yale School of Management and a former top Commerce Department official in the Clinton administration.“Everyone has lost confidence in the U.S. system because the more that is revealed, the more it feels as if we pursued capitalism in a very irresponsible way. But everyone is now waiting for the U.S. to bail them out.”
In fact, Mr. Obama’s biggest challenge may be to convince the other nations at the summit meeting that the United States, while committed to recovery, does not envision a return to voracious American consumption.
“The irony,”Mr. Garten said,“is that most of our partners, after berating us for being irresponsible and greedy, want to return to the era when American consumers supported the world, when we spent too much and saved too little.”
Little of this will be said explicitly. No one wants to rattle the markets further by suggesting disharmony, at least during the 36 hours of the Group of 20 summit meeting. A draft of the communiqué that circulated Tuesday and that will be in front of the leaders at the summit meeting commits every nation to make efforts to refloat their economies, but it sets no targets.
There will be some agreements, worded to avoid controversial details. For the first time, there will be a broad agreement about the need to regulate hedge funds and to force tax havens in places like the Caribbean and Switzerland to meet some global standards. Mr. Obama will arrive pledging an overhaul of the United States’ patchwork of regulations, which left institutions like A.I.G. without adequate supervision. (The American delegation will also be fending off pressure for international oversight of American regulatory actions.)
The meeting’s host, Prime Minister Gordon Brown of Britain, has been jetting around the world to encourage a veneer of broad accord. But the frictions are clear.
At the previous Group of 20 summit meeting, participants agreed to resist protectionist tendencies. Few have. By several official counts, 17 nations, the United States included, have taken at least preliminary actions to limit imports or to make sure that their stimulus money is spent at home.
“This is a classic case of countries bending to domestic political pressure because it is too difficult to make the political argument that if everyone restricts imports, everyone loses,”said Charlene Barshefsky, who served as the United States trade representative in the late 1990s, boom years for globalization.
“You would think that leaders would get religion from the fact that global trade this year could be down by 10 percent, precisely the trend that happened between 1930 and 1933,”she said. “But try making that argument at home, in front of lawmakers who say we’re not going to be spending government money to buy someone else’s products.”
The size of the Group of 20 contributes to the chafing. Its membership, of necessity, includes a broad swath of the world economy, accounting for about 85 percent of the global gross domestic product. Few doubt that its meetings will eclipse the annual meeting of the Group of 7.
At Group of 20 meetings, with China and India in the room, and with countries as diverse as Indonesia, Saudi Arabia, Brazil and Turkey represented, there is no shared assumption that economic interdependence is necessarily a good thing. In fact, China has expressed worries about its American investments in surprisingly blunt terms, and it is watching its industrial cities closely for signs of unrest now that millions of Chinese factory workers are being laid off.
Inside the European Union, the richest nations of Western Europe do not want to spend heavily to bail out their poorer eastern neighbors — a task they want to leave to the International Monetary Fund. Treasury Secretary Timothy F. Geithner has committed the United States to increasing its contribution to the I.M.F. by about $100 billion, or a fifth of the needed $500 billion. But getting that amount through Congress, at a time when Mr. Obama is seeking more aid for countries like Afghanistan and Pakistan, will be an enormous challenge.
Mr. Obama has promised a new form of engagement. His aides have been debating how to mix expressions of humility with the exercise of influence. It will be a delicate dance, made more difficult by the fact that the broad goal of remaking the world’s economic architecture has given way to each nation trying to avoid the equivalent of domestic foreclosure.
“In any international meeting, other leaders are going to want to hear that we understand what went wrong in the U.S. and abroad, that we care how it affects them and that we are working to fix it,”said David Lipton, the special assistant to Mr. Obama for international economic affairs. “It is hard to imagine a meeting with a foreign leader who isn’t interested in those questions.”
The NYT also reports that the government is seeking to ease General Motors into what it calls a “controlled” bankruptcy, somewhere between a prepackaged bankruptcy and court chaos, by persuading at least some creditors to agree to a plan that would cleave the company into two pieces, according to people briefed on the matter.
Instead of signing on every creditor as is typically required in prepackaged deals, administration officials are using as leverage the promise of taxpayer financing. Many regard the government as the only lender willing to step up with money — in bankruptcy or out.
“They’re going to have tremendous power,” said Lynn M. LoPucki, a law professor at the University of California, Los Angeles. “They can call off the money and the whole thing fails.”
G.M.’s new chief, Fritz Henderson, also said that the pressure from the government pushed the automaker closer to bankruptcy.
“By no later than June 1, if we’re not able to accomplish this outside bankruptcy, we’ll be in bankruptcy,”he said at a news conference in Detroit on Tuesday. “It’s pretty clear. The government was unequivocal.”
The effort is a new role for the government, which has not pushed companies into bankruptcy in the past as much as it has stepped in when all else fails.
“As lawyers would say, it’s sui generis, at least in my experience,”said Joel B. Zweibel, the retired co-head of restructuring at the law firm O’Melveny & Myers. He worked on big bankruptcy cases like those of Eastern Airlines and LTV Steel.
The administration appears to be drawing in part from a playbook used with troubled banks, with the goal of creating a new, healthier G.M., but leaving behind its liabilities and less valuable assets, perhaps for liquidation. More often referred as the “good bank-bad bank” model, the approach can infuriate those with claims against the bad bank.
Under a plan being worked out by the administration, G.M. would file for prearranged bankruptcy, according to these people. It would then use a sale authorized under Section 363 of the bankruptcy code to quickly sell off the desirable assets to a new company financed by the government. These good pieces might include Cadillac and Chevrolet, as well as assets the company needs to run the business.
Less desirable assets, brands like Hummer and underperforming factories, would be left in the old company. Proceeds from the sales, including stock in the new company, would be given to the old G.M., helping to settle claims.
The plans are still being discussed, and the details are subject to change, people familiar with the talks said.
G.M. joins a long list of companies in industries like airlines, railroads and steelmakers that have faced the prospect of being remade in bankruptcy. Typically, a troubled company usually seeks to line up creditors, employees and other stakeholders for a plan of reorganization before a bankruptcy filing. Failure to achieve this agreement can create a prolonged and messy court process as the company battles its creditors while its business and financing rapidly deteriorate.
Elements of the government’s plans for G.M. are in some ways similar to the demise of Lehman Brothers last fall. A day after filing for Chapter 11 protection, the securities firm agreed to sell the bulk of its North American business to Barclays Capital, the British bank. The sale was completed in a little more than three days.
The administration hopes to win support from some of G.M.’s creditors, notably the United Automobile Workers, which would be forced to pare its health care benefits and whose pension obligations would probably remain in the old company. But the bankruptcy code allows a judge to approve a sale even over creditor objections in an emergency under Section 363, legal experts say. Such was the case with the Lehman sale.
While the automaker would not be the biggest company ever to file for bankruptcy protection — Lehman holds that dubious distinction — it is woven into a complex international web of suppliers and subsidiaries. One goal of any reorganization plan would be to minimize disruption to other businesses.
“This would rank as one of the most, if not the most complex bankruptcy in history,”said Stephen F. Cooper, founder and former chairman of Zolfo Cooper, a turnaround firm. Mr. Cooper, who ran Enron during its bankruptcy, added that politics would influence any plan.
There will be pressure to keep plants open, to keep employment in communities high, he said, “because typically G.M. or Ford or Chrysler are very substantial contributors to the local tax receipt flow.”
History offers almost no precedent for a G.M. bankruptcy filing. Companies like Continental Airlines and the Delphi Corporation, the auto parts maker, have used the courts to transform their businesses and reduce their costs. But none matched the size and interconnectedness of G.M.
Delphi used a bankruptcy judge’s threat to void union contracts to wring concessions out of its workers, said Gary N. Chaison, a professor of industrial relations at Clark University in Worcester, Mass.
“That’s a very potent threat, to withdraw from the collective agreement in bankruptcy,”Mr. Chaison said.
Several airlines also used bankruptcy proceedings to force unions to modify agreements. Continental Airlines took that step before its rivals, to its advantage, Mr. LoPucki said. But much of Continental’s work took place before changes in bankruptcy laws made it more difficult to void worker contracts.
There are critical differences between the airlines and G.M. There was no question of the demand for air travel in the United States, while critics of American automakers have questioned whether there is demand for their products and whether reducing costs will produce viable businesses.
The government’s plan to dictate terms as the provider of G.M.’s bankruptcy financing — known as a debtor-in-possession loan — is not without risk.
“You’re introducing politics into the process,”said David A. Skeel, a law professor at the University of Pennsylvania.
The administration may still encounter surprises in its efforts, Mr. Skeel said.
“The hope is that if we call it a controlled bankruptcy, that’s what it will be,” he said.
