Meanwhile, the necessary debt funding is placed at a politically appropriate level. The debt can't go too high in the capital structure of the company being rescued, because that might cause more turmoil or tick off foreign buyers.

Rather, the debt must go in just right, like porridge - sufficient to knock out the security holders it is politically acceptable to dilute (usually preferred and common stock holders), but keep other interests happy.

Then, you probably want to replace management; after all, they are the ones that got you into this mess. (It will be even better if the government actually takes a stab at fighting moral hazard by stripping the executives of their pay packages.)

The details of the bailout of American International Group are still emerging, but it is already clear that it follows these lines - similar to the rescues of Fannie Mae and Freddie Mac.