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Would the Dow Dump General Motors?

Stocks in this article: gm aig f axp

General Motors (GM) may get dumped by the Dow Jones Industrial Average if the nation's biggest carmaker strikes the wrong kind of bailout deal with the government.

Just like American International Group (AIG), membership in the Dow may depend on the kind of deal it strikes with the government, said John Prestbo, editor and executive director of Dow Jones Indexes.

"We took out AIG because the government took a big stake in that company, and now GM has its hand out and we'll be taking a close look at what form it takes," Prestbo said. "If it comes at all, then we'll look at replacing GM."

Chrysler got the boot in 1979, when it faced its bankruptcy days. So, the writing is on the wall for GM, which has said it doesn't have enough cash to last another year.

That means that all the ETF's and index funds pegged to the DJIA will need to change accordingly, putting GM in a potential death spiral.

Here's how it goes. Government helps out to save the company. Dow drops GM. Funds and ETF's engage in full-scale selling that drives the value of the stock down even further from its current historic lows.

The assistance that most financial firms have received isn't quite so problematic because the government didn't take an ownership position.

American Express (AXP) is in the Dow and will get huge relief from the Federal Reserve by putting up credit card payments as collateral in exchange for loans.

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