Would the Dow Dump General Motors?

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.

Then there's Bank of America ( BAC), Citigroup ( C), JP Morgan Chase ( JPM) -- all received help in some form, whether it was the purchase of their commercial paper or the extension of cheap credit.

At this point, it's not clear if the government will be willing to take on the horribly mismanaged automaker. It's one thing to save a financial firm that continues to make money and another thing to rescue a business that for decades has been unable to control labor and legacy costs or deliver a product that consumers want. GM could be allowed to declare bankruptcy.

Lehman was not deemed too big to fail, and it had assets of over $600 billion.GM clocks in at $111 billion in assets.

Bankruptcy could result in a better, leaner company. The airlines know all about recovering from bankruptcy. And perhaps, later down the road, GM could re-enter the Dow once it gets its act together.

General Electric > ( GE) knows that game. It' been kicked out before.

But for some reason nostalgic Americans refuse to let the carmakers take a hit and learn from their mistakes. A bailout seems to be preferred. It worked so well for Chrysler.

Is it important to the Dow editors to keep an auto presence in the index?

Ford's in no better position than GM. Chrysler's not an option since Daimler ( DAI) sold it to Cerebus Capital Management. And since the Dow is meant to be a barometer of the U.S. market, Toyota ( TM) and Honda ( HMC) can't be considered.

Then again maybe they should leave a bankrupt company in the Dow. It might be the most accurate barometer of the market yet by tracking all the blue chips that have gone bankrupt.

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