General Moters moved a step closer to bankruptcy on May 26th -- and a step closer to having Uncle Sam as by far its largest shareholder. GM's bondholders rejected its offer to swap their debt for what they perceived to be too small a share of the equity that would remain. With GM facing a deadline of Monday, June 1st to complete a government-ordered restructuring, its chances of staying out of Chapter 11 are rapidly diminishing. For full details, take a look at this story on businessweek.com.

If GM does end up in bankruptcy, the U.S. and Canada could end up with three-quarters of the company’s stock. The Obama administration’s plan to lend the embattled automaker another $30 billion would make the U.S. government the company’s majority stakeholder, and make the bailout one of the biggest since the economic crisis began, as detailed here by the Washington Post. So far the federal government has given the company $19.4 billion in loans.

The United Auto Workers would also end up with a substantial stake in the restructured company. The union, which has agreed to extensive cuts in labor costs, would get 17.5% of the company to pay for worker and retiree benefits, as our colleagues David Welch and David Kiley report in this story on businessweek.com.

But what makes Sunstein important now is his coming post in the Obama Administration. On April 20, President Barack Obama finally made a formal nomination of Sunstein to be director of the Office of Information Regulatory Affairs (OIRA) in the Office of Management and Budget. In essense, Sunstein will be the nation's regulatory czar, sitting judgment of the government’s regulations.

What is his regulatory philosophy? What will he do in the White House? Business Week tackled these questions last month in a story about Sunstein.

So is this blog. But the action in Washington has only just begun, and we'll give you a ringside seat over on BusinessWeek's new blog about the intersection of business and government, at Money & Politics.

See you there!

Jane Sasseen
Washington Bureau Chief
BusinessWeek

Inaugural festivities got underway in a frigid Washington Saturday morning with a Boeing-sponsored brunch for scores of lobbyists and pols to celebrate the unveiling of an Obama portrait donated to the Smithsonian by Washington power lobbyist couple Tony and Heather Podesta.

Boeing CFO James A. Bell said that he felt particularly moved by the event and Obama's ascension. Bell, an African American who grew up in south central L.A., called it "a wonderful moment that sends a powerful message." He noted that the portrait, which figured prominently in campaign material and has the word "HOPE" at the bottom, conveyed "a simple message of hope that elegantly captured the aspirations of so many Americans."

The bill, championed for more than a year by Sen. Richard Durbin (D-Ill.) -- and backed by many Democrats, including President-elect Barack Obama and Sen. Chuck Schumer (D-NY) -- has been anathema to the financial-services industry for just as long. The industry successfully fought it off several times over the last 18 months, most recently in this fall's negotiation over the Emergency Economic Stabilization Act. And as recently as December, industry officials were promising an ugly fight, and saying they might still be able to head off the measure entirely.

No longer. Citigroup's announcement comes even as the same officials acknowledge that a compromise is likely -- though perhaps not this compromise. "I think the politics, the substance, the economics, the tax angle all work against the industry on this one," a financial-services industry official said in an interview Wednesday night, before the Citigroup agreement was public.

That doesn't mean the deal is done. Much of the industry still opposes the measure -- and some even argue that Citigroup's support can be explained by its own self-interest: the bill could hurt its competitors more than Citigroup.

Tonight, the Treasury said it would funnel $6 billion of the federal bailout funds to GMAC, the big auto-financing company. This is above and beyond the cash infusion for General Motors itself, and Chrysler, that President Bush announced on Dec. 19, and it isn't explicitly tied to GMAC's conversion to a bank holding company.

But wait -- all $350 billion of the funds allocated so far by Congress are spoken for, promised to banks, AIG, Citigroup and the automakers themselves, among others. Congress hasn't unleashed the second $350 billion; Treasury Secretary Henry Paulson hasn't even asked for it yet.

So what gives -- is the Treasury doing a little deficit spending of its own? Kiting checks? Something else?

Obama hinted as much this morning, as his press conference announcing Schapiro's nomination, at which he referred pointedly to "the need to potentially consolidate the regulatory agencies out there, the need to streamline them." And, of course -- as we pointed out last night -- Schapiro also has experience merging similar but once-rival entities: the regulatory arms of the New York Stock Exchange and NASD.

And yet, powerful interests could stand in the way of an actual consolidation of the two agencies. Among them: Congress.

As expected, he nominated Mary Schapiro, the head of the Financial Industry Reglulatory Authority (FINRA), the industry's self-regulatory body, to head the Securities & Exchange Commission. He named Gary Gensler, the former undersecretary of the Treasury for Domestic Finance in the last two years of the Clinton Administration and a long-time Goldman Sachs executive, to head the Commodity Futures Trade Commission, which has jurisdiction over much of the regulated derivatives market. After leaving Treasury, he was a top adviser to Senator Paul Sarbanes and was one of the key authors of the Sarbanes-Oxley legislation, passed in the wake of the accounting scandals of the early 2000s to bring greater oversight to financial reporting and governance.

During the primaries, Gensler was a top economic adviser to Hillary Clinton, then switched to Team Obama for the general election. One of his key tasks there: building up an extensive network of business executives who threw their support -- both money and advice -- to the President-elect. The public backing of such top executives as Warren Buffett and Google's Eric Schmidt was seen as key to damping down concerns from other executives about whether Obama would be too liberal or too protectionist, and take positions on trade or other areas that might be harmful to business.

The position is highly important because the representative -- often a full member of the cabinet -- negotiates the country's trade agreements. In the midst of the global financial turmoil, there is much concern that the U.S. will adopt a protectionist trade policy that could slow down any economic recovery. Obama has said however that he is not protectionist, but simply seeks fairer trade with U.S. partners.

Kirk, who is a lawyer at Vinson & Elkins in Dallas, has been declining comment apart from acknowledging that he has been interviewed by the Obama transition team.

The latest word comes from Christopher Wenk, a plugged-in lobbyist for the U.S. Chamber of Commerce in Washington. He just distributed an email saying, "Ron Kirk will be USTR pick. Hearing from GOOD sources it is official and will be announced tomorrow afternoon."

Earlier, Washington seemed to have settled on word that Rep. Xavier Becerra of California would be the trade representative. But Becerra yesterday announced that he would stay in Congress, where he will be vice chairman of the House Democratic Caucus.

One surprising thing is that Kirk appears to hold significantly different views on trade from Becerra. Becerra had said that he regretted voting for NAFTA, and opposed the Central American Free Trade Agreement. But As Dallas mayor from 1995 to 2001, Kirk appeared to be more favorable toward free trade.

"Looking at his record, particularly as mayor of Dallas, he certainly understands the benefits of trade," Wenk said in an email exchange.

Obama reportedly was considering Kirk either for trade representative or transportation secretary. Now, however, Congressman Ray Lahood, an Illinois Republican, is going to be designated as the transportation secretary.

It could also signal that the Obama administration wants to combine functions of the SEC and the Commodity Futures Trading Commission, which she headed from 1994 to 1996, and which oversees trading in options, futures and many other derivatives.

Moreover, Schapiro has experience turning around an agency rocked with scandal and, at the time, widely considered ineffectual. That could prove invaluable as questions swirl -- some raised by the agency's current chairman, Chris Cox -- about how well the agency policed the financial industry in the run up to the financial crisis, and whether it missed red flags in the multi-billion-dollar dealings of alleged fraudster Bernard Madoff. (The union representing many SEC employees has fired back at Cox.) Several former SEC employees were cautiously optimistic about Schapiro's nomination.

But, while Schapiro has won praise in many quarters -- including at various times from consumer watchdogs, Republican and Democratic predecessors in the SEC's top job, lawmakers and the financial-services industry -- she's not seen as someone likely to make Wall Street quake with fear. Given the anger of lawmakers, and the public, over the financial industry's failures, that could prove significant.

"If you are looking for a firebrand, an activist, that's not Mary Schapiro," said one longtime SEC watcher. "I think she'll be more of a caretaker than an aggressive enforcer."

Another lobbying firm, Dow Lohnes Government Strategies, quickly severed ties with Madoff’s firm on Dec. 12. Among projects pursued on Madoff’s behalf, according to lobbying registration records: Urging adoption of the $700 billion bailout legislation.

As noted elsewhere, there's nothing quite like the popping of an asset bubble to expose investment scams. But not everybody lost money along the way; beneficiaries of Madoff’s political contributions over the years (assuming they didn't also invest with Madoff) included U.S. senators such as Hillary Clinton, Charles E. Schumer, and Charles Rangel, as well as the Securities Industry Association, records show.

As for U.S. Sen. Frank Lautenberg, another beneficiary of political donations? His charitable foundation invested $12.8 million of its $13.8 million in assets with Madoff, and in 2006, according to this report, returned 12.4 percent. Some 106 organizations benefitted from the charity's donations that year.

Some teachers unions had objected to Joel Klein, New York City's school chancellor, who was also mentioned as a candidate for the job. Others took aim at Linda Darling-Hammond, a Stanford professor whom detractors said was anti-reform.

But a strong hint at Obama's choice came last week when Duncan visited Washington and met with Education Secretary Margaret Spellings.

Duncan is a Harvard graduate who made friends with Obama while playing pickup basketball. Duncan has won praise from some education reform groups for a willingness to make hard choices as to what schools could be fixed, and which had to be closed, while avoiding dramatic public fights over policy, a quality that Obama prizes.

For instance, Duncan won the support of Democrats for Education Reform, which said that he enjoyed "credibility with various factions in the education policy debate and would allow President Obama to avoid publicly choosing sides in that debate in his most high-profile education nomination."

Obama said this evening in Chicago that Chu's appointment would "send a signal to all that my administration will value science, make decisions based on facts and understand that facts require bold action."

Indeed, Obama's team -- excluding anyone with any expertise in oil -- seemed to be a repudiation of Bush's fossil fuel-centered energy policy. In addition to Chu, Obama named Lisa Jackson, the former head of New Jersey's state environmental agency, as head of the U.S. Environmental Protection Agency; and Los Angeles Deputy Mayor for Energy and Environment Nancy Sutley as head of the White House Council on Environmental Quality.

Chu is the star of this bunch -- he is a Nobel Prize laureate in physics. Yet an energy expert whose opinion I've come to trust over many years says that the real power will reside in the White House, and in particular Carol Browner, named to hold the new White House post of energy and climate czar. Browner was EPA administrator under former President Bill Clinton. Still, questions have been raised as to how much true influence Browner will enjoy in a White House filled with heavyweights with perhaps competing agendas.

On the light side, Lynn Yarris, the bundle of enthusiasm and science know-how who serves as Chu's spokesman at Lawrence Berkeley Laboratory, says no one at Berkeley -- with the possible exception of Chu's wife -- even knew that he was interviewing for the energy post.

Chu was in London at the time word started filtering out last week regarding the appointment, and went incommunicado. Yarris said at the time that if the talk was true, Chu was so low-key when they spoke, that he must be the best poker player he had ever encountered.

The Berkeley lab has planned a celebration for Chu on Thursday, but given the arc of events, Yarris isn't sure Chu will be back in town for it.

The view from within the Bush Administration is that “this is bigger than the news media has yet picked up on,” he says. One conjecture is that they expect that the phone records will show that Blagojevich talked to Obama, and perhaps to Axelrod and others.

Of course, that’s not necessarily nefarious. Any contact could have been entirely benign. After all, Blagojevich apparently called Obama a "motherf****" for not playing along with his schemes. But the potential problem for Obama is that he’s already gone on record as saying: “I had no contact with the governor or his office.”

“You can be sure that this will be pursued,” says the GOP source. If the phone records (or other evidence) show communications between the now-disgraced governor and the President-Elect, Obama “has got himself a potential scandal. The conservative community is already all over this like ticks on a hound.”

UPDATE FROM BUSINESSWEEK WRITER THEO FRANCIS:

At a press conference this afternoon on another topic, Illinois Sen. Dick Durbin, told reporters that he and Obama both had chilly relations, at best, with Blagojevich.

When Durbin called Blagojevich's office around Election Day this year, to discuss potential successors for Obama's seat, the governor didn't call back for 12 days, Durbin said. Blagojevich never returned a call Durbin made to congratulate him on his initial gubernatorial election victory.

"We certainly don't enjoy a close relationship," Durbin said.

The senator said he last spoke with Blagojevich two weeks ago, and that his interaction with the Illinois governor's office was "extremely limited." He added that he would say the same of Obama's ties to Blagojevich.

In his own press conference, U.S. Attorney Patrick Fitzgerald -- who also prosecuted Scooter Libby in the Plame affair -- took pains to note that his office says nothing about Obama or his team, according to press accounts. Then again, neither did he absolve the president-elect.

"The complaint makes no allegation whatsoever about the president-elect," The Wall Street Journal quotes Fitzgerald as saying.

"I'm not going to speak for what the president- elect was aware of. We make no allegations that he's aware of anything. And that's as simply as I can put it," Fitzgerald said, according to a transcript of his briefing at The New York Times.

The rumor mill is less sure about the possible pick for Energy Secretary. But the names include Dan Reicher of Google (a former Energy Dept official and cleantech venture capitalist) and Michigan Governor Jennifer Granholm