Let's play, "Assume the Auto Bailout will Happen"

What should it look like, if the American taxpayer will be forced to fund it? A proposed one-page plan for the ‘prepack’ that commenter Rover proposes in Jim’s post below.

In this example, we use GM. The government should put GM into “conservatorship”, similar to a Chapter 11 bankruptcy and reorganization, but with government providing the debtor-in-possession (“DIP”) financing, and without the semantic headache of “bankruptcy”.

Capital structure:

- Preferred equity holders crammed to warrants; common equity holders get nothing (“donut-ed”)

- Donut the subordinate debt, w/ a nominal amount of cash and warrants

- Cram down the second-lien creditors to common, cash, and warrants

- Cram the first-lien creditors to preferred plus new senior notes issued where the debt closed yesterday

- For its DIP financing, government to get preferred equity, pari passu to the new preferred for former first-lien creditors, with warrants for common at the 1998 share price.

Reorganization:

- Enforced change in management, additional large-scale white-collar layoffs

- GM employees all sign up for Medicare (GM is not a health care company, and government can sell this with the “same health care as the President-elect and Senator John McCain), with GM and its pension picking up the difference in premiums

- Pension benefits marginally reduced in exchange for warrants on GM (“defined benefit to employee stock option plan hybrid”)

- Buyout terms mandatory for an additional 20-30% of workforce over 24-36 months; in exchange UAW receives one to two board seats.

- Open asset sales of selected plants and their associated employees to other car companies: sold in a dutch auction starting at fair value and ending at a reserve; plants are chosen by new management, UAW, and selected panel of senators, in an exercise similar to a military base closing panel

- These asset sales (which can also reduce the total headcount reduction required in the buyout bullet above) will continue until either government declares reorganization is over, the company is taken over by another company that intends to run GM as a going concern, or warrants are exercised by the government.

I’d appreciate criticism and comments in the comments.