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French President Nicolas Sarkozy said the euro region is ready to rescue Greece should the government struggle to fund its budget deficit, arguing that the country is “under attack” from so-called speculators.

“I want to be very clear: if it were necessary, the states of the euro zone would fulfill their commitments,” he said in Paris yesterday after a meeting with Greek Prime Minister George Papandreou. “There can be no doubt in this regard.” While Greece doesn’t need assistance right now, “we have measures, we are ready, we are determined,” he said.

Sarkozy’s comments are among the strongest by an EU leader to signal the bloc would bail out Greece as they try to warn investors off making further bets against the euro and Greek bonds. Papandreou’s government last week passed a further round of austerity measures and sold 5 billion euros ($6.8 billion) in government debt. Europe’s single currency has dropped 8 percent in the past three months.

“Speculators and the markets should know that solidarity means something and that, if there’s a problem, we are there,” said Sarkozy. “The sooner we say that and the more firmly we say that, the more rapidly we settle the problem.”

The spread between the yield on Greek 10-year bonds and their German counterparts fell to the lowest in three weeks on March 3. Papandreou, who meets President Barack Obama in Washington tomorrow, said he wants a “normalization” in Greek market interest rates after the deficit-cutting steps.

Greece faces more than 20 billion euros in debt redemptions in April and May.

Green Light

Sarkozy wouldn’t say what steps the EU would take and German Chancellor Angela Merkel, who runs Europe’s largest economy, has so far refused to give the green light to any aid package. Merkel said after meeting Papandreou on March 5 that the question of a bailout “‘absolutely doesn’t arise.” Her coalition partner, Guido Westerwelle, said he won’t sign a “blank check” for Greece.

“Nobody can doubt how reluctant the Germans are, and I am starting to think that if official money is needed in May, then there may first be a major discussion between the Germans and the French how to do this,” said Erik Nielsen, chief European economist at Goldman Sachs Group Inc. in London, in an e-mailed note. “It really comes down to some very fundamental issues of how the euro-zone will function going forward.”

European Monetary Fund

German Finance Minister Wolfgang Schaeuble indicated that his government is already thinking about how another Greek crisis can be avoided, saying that the euro region should consider creating an institution similar to the International Monetary Fund.

“We shouldn’t rule anything out, including the creation of a European Monetary Fund,” he said in an interview with the Welt am Sonntag newspaper published yesterday.

The comments come after proposals for a European Monetary Fund were put forward last month by Deutsche Bank AG Chief Economist Thomas Mayer and Daniel Gros, director of the Centre for European Policy Studies in Brussels.

The EMF could ease the disruption caused by the failure of a euro member to pay its bills by offering investors new EMF bonds in exchange for the defaulted securities, they said. Investors would be required to take a “haircut.”

“Setting up a European Monetary Fund is superior to the option of either calling in the IMF or muddling through on the basis of ad hoc interventions,” Mayer and Gros wrote in an article in the Economist last month.

Flaws in the euro region’s governance were also indentified by former Federal Reserve Chairman Paul Volcker, who said in an interview on March 6 that the lack of a political union to back up the European Central Bank is a “structural crack.”

“Maybe fortunately it’s tested with a country as small as Greece, which doesn’t present an insuperable financing problem,” he said.

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Federal Reserve chairman Ben Bernanke told Congress on Wednesday that government action has helped start an economic recovery, but that he’s worried about the state of the job market.

Bernanke also changed his stance and said he’d be willing to consider supporting some legislation that’s pending before Congress that would make the Fed more accountable.

In testimony about monetary policy before the House Financial Services Committee, Bernanke noted that the recession continues to abate, but not when it comes to the job market, which "has been hit especially hard," he said.

"The job market remains quite weak, with the unemployment rate near 10 percent and job openings scarce," Bernanke said.

The Fed chairman said he’s particularly worried about the long-term impact on workers skills and wages and the increasing incidence of long-term unemployment.

"Indeed, more than 40 percent of the unemployed have been out of work six months or more, nearly double the share of a year ago," he said.

Bernanke also said that he expects inflation to remain in check for some time, as oil prices have flattened out and housing costs have risen very slowly, thanks to high vacancy rates.

"According to most measures, longer-term inflation expectations have remained relatively stable," he said.

Over the past year, Bernanke has faced a mixed reception whenever he’s appeared on Capitol Hill. Lawmakers credit him for pulling the economy out of the greatest recession since the Great Depression. But they also blame him for missing signals of the recession and for overlooking consumer protections.

However, the Senate voted overwhelmingly in January to confirm him for a second term.

Before Bernanke spoke, several Republican lawmakers said they particularly wanted to ask the Fed chairman about why the job market remains weak, even though Congress passed a massive $700 billion stimulus package last year quick payday loans.

House Financial Services Chairman Barney Frank, D-Mass., noted that after the stimulus package passed, fewer jobs were lost.

"It is possible to debate what is the best way to do the stimulus, but no sensible human being can deny that the stimulus had a positive effect," Frank said.

Frank asked Bernanke, specifically, whether stimulus helped stem job losses and Bernanke answered "Yes.""I think most economists would agree that the stimulus created jobs, relative to the baseline," Bernanke said.

Surprising endorsement

Bernanke also said he is prepared to support pendinglegislation authorizing Congress’ Government Accountability Office to audit "the operational integrity, collateral policies, use of third-party contractors, accounting, financial reporting, and internal controls of these special credit and liquidity facilities."

Previously, Bernanke has fought any move by Congress to audit the Fed. But his new support is for a limited audit that would not venture into monetary policy.

He also said he now supports revealing the names of firms who got emergency cheap Fed loans during the financial crisis, "after an appropriate delay." The Fed has, in the past, fought such revelations.

But he drew the line at making immediately available the names of banks coming to the discount window on a short-term basis, saying it could undermine confidence.

– CNN senior producer Scott Spoerry contributed to this report 

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Federal Reserve chairman Ben Bernanke took a half-step out of the shadows Wednesday. But for all his talk of transparency, Bernanke seems more intent on shoring up the Fed’s political flanks than on opening up the central bank’s books.

Bernanke said in testimony before the House Financial Services Committee that he would support a Government Accountability Office review of the Fed’s emergency lending facilities, and would back legislation identifying the firms taking Fed funding in these programs "after an appropriate delay."

This represents a softening of Bernanke’s opposition to an audit of some Fed operations by the GAO, the investigative arm of Congress.

In November, a congressional subcommittee approved an amendment calling for a full-fledged audit, prompting Bernanke to warn that a "takeover" of monetary policy by Congress could undermine market stability.

But Bernanke hasn’t forgotten about the Fed’s cherished independence. His pledge Wednesday to cooperate with an expanded GAO audit stops well short of giving Congress any oversight of monetary policy — the decisions the Fed makes regarding interest rates and banking reserves that affect the amount of money sloshing around in the economy.

"Clearly he’s trying to offer Congress something of a compromise, so he can keep monetary policy out of the discussion," said Mark Calabria, a former Senate Banking Committee staffer who is now director of financial regulation studies at the libertarian Cato Institute in Washington.

Bernanke’s proposal comes as anger over the financial bailouts of 2008 and 2009 has continued to build. Critics say the Fed has failed to fully explain how it arrived at bailout decisions that cost taxpayers billions of dollars.

Bernanke was expected to win reconfirmation to his four-year post as Fed chief in routine fashion. But the outcome appeared in doubt for much of last month before lobbying by the White House in Congress finally pushed the Senate to a 70-30 vote to reconfirm him.

With the economy struggling through the early stages of a jobless recovery and the government widely perceived to be in the pocket of Wall Street, it behooves Bernanke to meet his less vocal critics in Congress halfway, in hopes of forging a deal to preserve the Fed’s independence to set monetary policy.

"My sense is that he has seen the writing on the wall and realized that they cannot hide behind a veil of secrecy given the public outrage," said University of Oregon economics professor Tim Duy, who follows monetary policy at his Fed Watch blog fast cash without a hassle.

Yet it would be a mistake to make too much of this latest shift, given all the loopholes in the sort of audit Bernanke evidently envisions.

For instance, much of the anger over the bailouts has focused on the Federal Reserve Bank of New York’s handling of its multistage, multibillion-dollar rescue of AIG (AIG, Fortune 500). Documents subpoenaed by Congress this year show the New York Fed pressured the insurer not to disclose the terms of the bailout in securities filings even when the company wanted to.

The key issue there was a list of the securities that had been insured by AIG and the banks that had purchased the derivatives conferring insurance. The New York Fed repeatedly opposed the release of this list, which shows that big banks including Goldman Sachs (GS, Fortune 500) and Deutsche Bank (DB) of Germany received full compensation for securities worth much less in the market.

Duy said Bernanke’s proposal wouldn’t make such a list of securities accepted as collateral or purchased by the Fed available to the public, though "this is what I think most critics really want."

That said, it wasn’t clear what one of the loudest and most persistent foes of the Fed, Rep. Ron Paul, R-Texas, was after Wednesday in his questioning of Bernanke.

Apparently making a case for an audit, Paul rambled on about the Fed’s alleged loans to Saddam Hussein in the 1980s and its purported plans to fund a bailout of Greece.

Bernanke responded that the allegations were "absolutely bizarre" before adding that the Fed has no plans to participate in a bailout of any foreign country.

As wacky as the exchange was, it could actually strengthen the case for a full audit. Regular reports from the GAO can only boost the pitifully low level of economic understanding in Congress, Calabria said.

And with rates already near zero and the Fed having spent more than $1 trillion supporting housing, the Fed may already appear to be bowing to political pressure to make sure the economy doesn’t deteriorate further in a key election year.

"I’m open to the case that we need Fed monetary independence, but I just don’t know that the Fed has made it persuasively," Calabria said. "It’s hard to believe Congress could make policy any looser than it is." 

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New home construction rose more than expected in January, while the number of building permits issued in the month dropped, according to a government report issued Wednesday.

Construction of new homes climbed to an annual rate of 591,000 during the month, up 2.8% from December’s revised rate of 575,000, the Commerce Department said. This is an increase of 21.1% from the 488,000 rate in January 2009.

Economists surveyed by Briefing.com expected January housing starts to rise to an annual rate of 580,000.

"We’re continuing to see signs of stabilization," said real estate analyst Mike Larson of Weiss Research. "We had this Olympic ski slope-looking plunge starting in 2005 and 2006, and it looks like we’re almost getting to the bottom of that."

Larson said that housing starts picked up in January as the new home supply dwindled.

"All the excess inventory that had built up has been exhausted, and when the supply gets so lean, builders start constructing homes again," he said.

The number of building permits issued during January fell to a seasonally adjusted annual rate of 621,000. That was 4.9% below the revised December rate of 653,000, but up 16.9% from the January 2009 rate of 531,000.

Economists had expected building permits would fall to 620,000.

The decline in permits and gain in housing starts were each led by activity in the multi-family sector: Multi-family building permits plummetted 26% while starts jumped 17.6%.

Meanwhile, single-family housing starts and building permits were both up last month. Single-family starts climbed 1.5% from December and permits edged up 0.4%.

Larson said that the increase in single-family activity was an encouraging sign of stabilization, but with such a large supply of existing homes, "nothing suggests a vigorous upturn."

"I think we’re going to be treading water in this range for some time," he said. "We’re going to be making small gains or losses throughout 2010, we’re not going to be making new lows or rebounding." 

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The German government may offer an aid package to Greece and other debt-ridden European nations in an effort to stave off the default concerns that have stunted global markets, according to reports.

The Wall Street Journal, citing unnamed sources, said a loan guarantee plan would be led by Germany but completed along with European Union partners.

The threat of a default in Greece has given investors pause, as the effect would likely ripple to other members of 16-nation euro zone. Other debt-choked nations in the bloc include Portugal, Spain, Ireland and Italy.

European Union officials are set to meet Thursday to discuss the economy, and Greece is expected to be a major topic on the docket.

In December, Greece’s credit rating was downgraded. S&P’s move came after health care companies complained that the country was behind on payments related to its public health system.

Investors across the globe have been trying to digest what impact such a crisis would have on the nascent signs of recovery, and ripple-effect fears have sent worldwide markets lower payday loans.

The WSJ article said Germany’s finance minister, Wolfgang Schaeuble, has discussed the aid idea in with European Central Bank President Jean-Claude Trichet.

But earlier Tuesday, Reuters reported that German government spokesman Ulrich Wilhelm called reports that a decision was already in effect "unfounded."

A bailout of Greece would mark the first time any EU country rescued a euro zone member.

The U.S. stock market was cheered by the reports of possible Greek aid, as the blue-chip Dow index (INDU) added almost 2% with less than 2 hours left in the session. The euro also rose in late trading. 

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For the first time in history, the U.S. Environmental Protection Agency is proposing special water quality standards that would apply to only one state – Florida.

The EPA, responding partly to a lawsuit, plans a series of limits on phosphorus and nitrogen – nutrients that come from fertilizer and wastewater – for Florida waters that are different from the rest of the U.S.

A news release from the agency said the new limits are “to protect people’s health, aquatic life and the long-term recreational uses of Florida’s waters, which are a critical part of the state’s economy.”

But, one group already is slamming the proposal as a costly burden for the state. The Don’t Tax Florida Coalition, made up mostly of agricultural interests, sent out a news release, calling the proposed standards “a de facto water tax from Washington that will impose major economic hardship on Florida’s battered economy, with questionable benefits to our environment.”

The coalition said one study estimates a $50 billion infrastructure bill to comply with the standards, which will result in higher water bills.

“It simply makes no sense to force Florida to spend billions of scarce dollars in excess of what is necessary to meet an arbitrary federal regulation,” said Mark Wilson, president and CEO of the Florida Chamber of Commerce, in the coalition’s news release.

The new proposal is the result of a 2009 consent decree between the EPA and Florida Wildlife Federation.

According to the EPA, nutrient pollution can damage drinking water sources; increase exposure to harmful algal blooms, which are made of toxic microbes that can cause damage to the nervous system or even death; and form byproducts in drinking water from disinfection chemicals, some of which have been linked with serious illnesses, such as bladder cancer.

The EPA also said nutrient problems can happen locally or much farther downstream, leading to degraded lakes, reservoirs and estuaries, and to hypoxic “dead” zones where aquatic life can no longer survive short term personal loans. High amounts of nitrogen and phosphorus in surface water result in harmful algal blooms, dead fish, reduced mating grounds and nursery habitats for fish.

“Florida has led the way with rigorous scientific analysis and data collection needed to address nutrient pollution. By relying on the best science, we can set standards that protect people’s health and preserve water bodies used for drinking, swimming, fishing and tourism,” said Peter S. Silva, assistant administrator for EPA’s Office of Water, in a release. “New water quality standards, developed in collaboration with the state, will help protect and restore inland waters that are a critical part of Florida's history, culture and economic prosperity.”

A 2008 Florida Department of Environmental Protection report assessing water quality revealed that about 1,000 miles of rivers and streams, 350,000 acres of lakes and 900 square miles of estuaries are not meeting the state's water quality standards because of excess nutrients. These represent about 16 percent of Florida’s assessed river and stream miles, 36 percent of assessed lake acres and 25 percent of assessed estuary square miles. The actual number of miles and acres of waters impaired for nutrients is likely higher, as there are waters that have not yet been assessed.

The proposed action, announced Friday, also seeks comment on a new regulatory process for setting standards to drive water quality improvements in already impaired waters. The proposed new regulatory provision, called restoration standards, would be specific to nutrients in Florida.

The EPA will accept public comments on the proposed standards and will conduct three public hearings on the proposed rule. The hearings are scheduled for Feb. 16, 17 and 18 in Tallahassee, Orlando and West Palm Beach, respectively.

The West Palm Beach hearing will be 1-5 p.m. and 7-10 p.m., at the Holiday Inn Palm Beach International Airport, at 1301 Belvedere Road.

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JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon, whose bank had promised to build a European headquarters in London, told U.K. Chancellor of the Exchequer Alistair Darling a 50 percent tax on bonuses would unfairly penalize the U.S. lender, a person close to the firm said.

Dimon reminded Darling that JPMorgan never took a U.K. bailout and said plans to build a European headquarters at Canary Wharf show the New York-based company’s commitment to London, the person said. JPMorgan, the second-largest U.S. lender by assets, may scrap its Canary Wharf project because of the bonus tax, the Financial Times reported, citing an unidentified bank executive.

Financial firms may face higher costs after Darling said on Dec. 9 he’d impose a 50 percent tax on discretionary bonuses greater than 25,000 pounds ($40,000). European and U.S. regulators imposed pay curbs after the world’s financial firms ran up $1.7 trillion in losses and writedowns during the global crisis.

“Jamie is quite a controlled character, so this is an example of the fury that has been created,” said Stuart Fraser, the head of policy for the City of London, the financial district’s lobby. “There is a real sense of indignation and anger about this tax.”

The tax may apply to compensation for about 20,000 people with the cost imposed on employers. During the call, Dimon, 53, mentioned that JPMorgan has paid U.K. taxes and reminded Darling of plans to spend about $2.4 billion on the Canary Wharf project, according to the person, who declined to be identified because the discussions were private.

U.K. Defends Tax

The conversation with Darling was reported yesterday by the London Telegraph. JPMorgan spokesman David Wells declined to comment. A U.K. Treasury spokesman yesterday defended the tax as fair because it would apply to all banks and said he couldn’t confirm the telephone conversation with Dimon.

“The government cannot allow itself to be blackmailed,” Liberal Democrat Vince Cable said today in an e-mailed statement.

Financial firms are threatening to leave the U.K. because they say increased taxes and regulation make London less attractive. Tullett Prebon Plc, the inter-dealer broker, said it will help employees relocate.

BlueCrest Capital Management Ltd., a London-based hedge- fund firm that oversees about $15.4 billion, plans to open a Geneva office, a person familiar with the situation said last month. As many as 50 of BlueCrest’s 300 employees in London may move, the person said.

Deutsche Bank, Nomura

Deutsche Bank AG CEO Josef Ackermann said on Dec. 12 that Germany has a “comparative advantage” over other financial hubs because it doesn’t plan to tax bonuses. The Frankfurt-based bank said it plans to spread the costs of the U.K. bonus tax to its employees worldwide.

Nomura Holdings Inc., the Tokyo-based bank that bought the U.K. operations of the collapsed Lehman Brothers Holdings Inc., has no plans to reconsider its new City of London headquarters.

Nomura, which in August signed a 20-year lease for a 525,000-square-foot (48,774-square-meter) building overlooking the River Thames, will move into new offices in July, spokesman Patrick Meyer said in London today.

European Alternatives

The bonus levy forced Dimon to consider, “Do we want to be in a more tax-friendly, corporate-friendly environment?” said Jeff Harte, an analyst in Chicago for New York-based Sandler O’Neill & Partners LP. “There are opportunities all over Europe. There are a lot of cities that could handle operation hubs.”

JPMorgan agreed to pay about $349 million in November 2008 for land in London’s Canary Wharf financial district to build a 1.9 million-square-foot (176,500-square-meter) tower.

Under the agreement with Canary Wharf’s owners, who will build the offices, JPMorgan can scale back the size of the project. The planned headquarters will house JPMorgan employees from seven other buildings after the bank scrapped plans to build an office in London’s main financial district.

If construction is delayed or canceled, JPMorgan will have to pay a 76 million-pound fee to developer Canary Wharf Group Plc, according to a November 2008 statement when the deal was announced. The bank will be responsible for paying for completed work including design, planning and infrastructure, the statement said.

Banks’ ‘Sticks’

Shifting business centers elsewhere is “one of the sticks they’ll use to try and fight this legislation, but in the end how realistic is it?” said Joe Sorrentino, managing director at executive compensation consultant Steven Hall & Partners specializing in financial services. “This is a people business. How do you get your talent, if they’re U.K-based, to move to other countries?”

The U.K. Treasury is working with banks to identify employees who are excluded from the tax, and Darling said Dec. 16 he will resist calls to change the policy. Banks can’t avoid the levy by arguing that some activities aren’t defined as banking, he said.

Shares of Songbird Estates Plc, which controlled more than half the buildings in the Canary Wharf estate, were little changed at 157 pence at 3:04 p.m. in London trading. A spokesman for Songbird declined to comment. JPMorgan’s stock fell 4 cents to $41.68 at 12:43 p.m. in New York Stock Exchange composite trading.

“It comes as no surprise that the recent, knee-jerk and ill-thought-out tax grab by government to punish bankers is causing some of our most important institutions to consider their options,” said Mayor of London Boris Johnson. “This should act as a strong wake-up call to our leaders that their policies could seriously threaten our competitiveness.”

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The U.S. Treasury Department said Thursday that it will remove the caps on assistance to Fannie Mae and Freddie Mac for the next three years to alleviate market concern about the effect of limited government assistance.

The two companies, the largest sources of mortgage financing in the U.S., are currently under government conservatorship and have caps of $200 billion each in backstop capital from the Treasury. Under the new deal, these caps can rise as needed to cover net losses over the next three years.

Fannie Mae and Freddie Mac now are using a combined $111 billion of the total $400 billion in available assistance. Treasury Department officials said they did not expect the companies to need assistance beyond what is available under the current caps, barring significant deterioration in the economic outlook.

Thursday’s announcement "should leave no uncertainty about the Treasury’s commitment to support these firms as they continue to play a vital role in the housing market during this current crisis," the Treasury said in a statement in Washington.

The Treasury also relaxed its timeline for Fannie Mae and Freddie Mac to shrink their portfolio of retained mortgages. Previously, the companies were instructed to shrink their portfolios at a rate of 10 percent a year. Now, they will be required to keep their portfolios below a maximum limit, currently $900 billion, that will fall by 10 percent a year.

This means they will not need to take immediate action to reduce their holdings and could allow them to rise payday loans for bad credit. Fannie Mae’s portfolio ended October at $771.5 billion and Freddie Mac’s holdings at the end of November were $761.8 billion, according to the latest figures released by the companies.

The Treasury said Thursday that it is ending its mortgage- backed security purchase program as of Dec. 31, after $220 billion in purchases. The government also is eliminating a short-term credit facility for the two companies and the Federal Home Loan Banks that was never used.

EXECUTIVE PAY

The two chief executives of Fannie Mae and Freddie Mac could get paid as much as $6 million for 2009, despite the companies’ dismal performances this year, which cost taxpayers more than $100 billion.

Fannie’s CEO, Michael Williams, and Freddie CEO Charles "Ed" Haldeman Jr. each will receive $900,000 in salary, $3.1 million in deferred payments next year and another $2 million if they meet performance goals, according to filings with the SEC on Thursday.

The packages were approved by the Treasury and the Federal Housing Finance Agency, which regulates Fannie and Freddie.

The Associated Press contributed to this report.

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WASHINGTON – A U.S. federal appeals court has upheld a US$290-million judgement against Microsoft Corp. in a patent case launched by Toronto-based i4i Inc.

The ruling also includes an injunction, set to go into effect Jan. 11, that would prevent the sale of at least some versions of Microsoft's popular Word word processing software.

The Tuesday decision was on an appeal Microsoft launched against a verdict returned by a Texas jury in favour of i4i . The jury found recent versions of Microsoft Word infringed on a software patent.

I4i sued Microsoft (NASDAQ:MSFT) over the way Word 2003 and Word 2007 customize XML, or extensible markup language, used in encoding and displaying information.

The injunction prevents Microsoft from selling Word products that have the capability of opening an XML file containing custom XML.

Kevin Kutz, Microsoft's director of public affairs, said the world's biggest software company is "moving quickly to comply with the injunction."

Kutz said the injunction "applies only to copies of Microsoft Word 2007 and Microsoft Office 2007 sold in the U.S. on or after the injunction date of Jan. 11, 2010."

"Copies of these products sold before this date are not affected," he added.

"With respect to Microsoft Word 2007 and Microsoft Office 2007, we have been preparing for this possibility since the District Court issued its injunction in August 2009 and have put the wheels in motion to remove this little-used feature from these products," he said.

"Therefore, we expect to have copies of Microsoft Word 2007 and Office 2007, with this feature removed, available for U.S. sale and distribution by the injunction date.

"In addition, the beta versions of Microsoft Word 2010 and Microsoft Office 2010, which are available now for downloading, do not contain the technology covered by the injunction."

Kutz also said Microsoft was considering it legal options, “which could include a request for a rehearing by the Federal Circuit Court of Appeals en banc or a request for a writ of certiorari from the U.S. Supreme Court."

– With files from The Canadian Press

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In a surprise move, General Motors chief executive Fritz Henderson resigned Tuesday, giving the battered government-owned automaker its third boss in less than a year.

The move was announced by GM Chairman Ed Whitacre following what he described as a "hectic" meeting of the company’s board of directors, which had been put in place with government oversight after the company’s trip through bankruptcy earlier this year.

Whitacre said he will take over as CEO of the nation’s largest automaker until a replacement is found, and that a search for a new president and CEO would start immediately.

The Treasury Department, which owns 61% of GM stock, was informed of the move but not consulted in advance, according to GM spokesman Chris Preuss.

An administration official said the decision "was made by the board of directors alone" and that the administration was not involved in the decision.

Henderson, 51, a career GM employee, took over as CEO after Rick Wagoner was forced out in March by the Obama administration as part of GM’s government-supervised restructuring.

Whitacre did not answer any questions about the change or the reasons behind them.

"While momentum has been building over the past several months, all involved agree that changes needed to be made," he said.

At the time of his appointment as CEO, many analysts questioned whether Henderson, who has worked at GM for 25 years since graduating from business school, was the right executive to change GM’s insular culture.

Others have said, however, that bringing in an outsider would have been risky given the size and scope of GM and the complexity of its problems.

Steven Rattner, the former head of a Treasury task force that led the government takeover, wrote in Fortune in October that Henderson was originally offered the title of interim CEO but asked not to have the "interim" attached to his title because he didn’t want his authority undercut.

For his part, Henderson had pointed out that the board could fire him at any time.

Whitacre said Tuesday that he and the board are convinced that GM is moving in the right direction.

But GM recently reported a loss of $1.2 billion since its emergence from bankruptcy on July 10 through Sept. 30. Meanwhile, rivals Toyota Motor (TM) and Ford Motor (F, Fortune 500) reported surprise profits in the period due to the spike in sales from the Cash for Clunkers program.

GM also suffered setbacks in its reorganization effort.

The announced sale of its Saturn brand to the Penske Automotive Group (PAG, Fortune 500) fell through earlier this summer. Last week a Swedish buyer for its Saab brand backed out, citing delays in GM closing the sale.

The failed deals forced GM to announce plans to close Saturn and look for an alternative buyer for Saab. GM said Tuesday that it would weigh various offers for Saab for another month, but that closing it was an option.

GM also has not been able to finalize the sale of its Hummer brand to a Chinese manufacturer on the announced timetable.

Finally, last month GM said that it had decided not to sell a majority stake in its main European brand Opel to a group led by Canadian parts supplier Magna International (MGA). It is now seeking help from European governments to restructure that business to end losses there.

David Cole, chairman of the Center for Automotive Research, a Michigan think tank, said he believes that Henderson and the board were on the same page on the Opel deal. He said he doesn’t believe the Saab deal was big enough to spark a falling out, but that it’s possible it was seen as a sign by the board that Henderson was not able to execute the company’s plans.

"My guess is it is something that materialized very quickly," Cole said. "This is not something that was brewing for some time."

Still others say they saw the writing on the wall.

"This does not come entirely as a shock," commented Edmunds.com Senior Analyst Michelle Krebs. "Ed Whitacre was the government’s choice to lead the company and the Automotive Task Force always appeared lukewarm about the idea of Fritz staying in the top job," she said.

"In recent months, the board and Henderson appeared as if they were not on the same page," added Krebs.

Tom Libby, president of the Society of Automotive Analysts, said he had heard rumors recently that Vice Chairman Bob Lutz would replace Henderson. Libby believes that Lutz is still in the running.

Lutz, 77, is credited with helping to change GM’s slow-moving insular culture and with greatly improving its product lineup in his recent role as global head of product development. Lutz now heads GM’s marketing efforts.

"It’s indisputable that, as a product person, he’s been very successful, but this is a very different situation," Libby said.

Cole said he’d be surprised if GM went with an insider to be the new CEO. The job should be attractive to outside candidates even with wage limits imposed by government ownership.

"With the reorganization, they’ve take a lot of costs out of each vehicle," Cole said. "When industrywide sales start to improve, they should get very profitable very fast."

But industrywide sales have yet to show much improvement. On Tuesday industrywide sales for November came in little changed from the weak sales levels of a year ago for the second straight month.

Henderson announced last month that GM would start to repay its $6.7 billion loan to Treasury and make a $1 billion payment by the end of the year. But the government’s ability to recover most of the $50 billion it sunk into the reorganization of GM will depend on its ability to sell stock to the public at an improved price.

GM, because of the bankruptcy, has not disclosed Henderson’s 2009 pay. Treasury Department records show that the company’s top executive salary this year is $950,000 in cash and total compensation of $5.4 million. 

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