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AIG (NYSE:AIG) yesterday announced a deal with the Federal Reserve that will have the effect of increasing the Fed’s bailout financing to AIG from $85 billion to in excess of $167 billion (and most likely counting).  Any seasoned distressed company investor knows that the first new money put into any failing company is likely to be lost unless the investor is prepared to follow the initial investment with a lot more (sometimes referred to as “good money after bad”).  More than one wag has described this phenomenon as “the second mouse gets the cheese."

The other big economic news of the day revolved around the proposed bailout of General Motors (NYSE:GM).  Clearly something is likely to happen here with three million jobs at stake and a lot of political power in play with the United Auto Workers.  Given the inevitable, wouldn’t it make more sense if the money comes in as part of a pre-packaged Chapter 11 which cleans up the company’s balance sheet before the money comes in?

I’ve never seen a successful turnaround that keeps the old, failed management on board to steer the sinking ship.  Perhaps it would make more sense to put together an ownership group that includes some Japanese auto manufacturing skill.  Toyota (NYSE:TM), Honda (NYSE:HMC), et. al. clearly know something about running a successful auto plant and they are not afraid of investing in the United States.  They also have a bunch of bucks in their Treasury that could be used to fund the recovery, green initiatives, etc.

Disclosure: no positions

Source: Auto Industry: In for a Penny, In for a Pound