April 14 (Bloomberg) -- The U.S. government is considering swapping some of the $13.4 billion it lent General Motors Corp for an equity stake in a stripped-down version of the carmaker, people familiar with the matter said.

A government stake would mean a smaller share of the new company for bondholders, who own $27.5 billion in GM debt. Bondholders had been offered 90 percent of the new entity’s equity by the company. The swap would be part of an effort to cut GM’s debt as the carmaker approaches a June 1 deadline to come up with a plan to become viable, the people said.

“What the government is doing is stepping them down and easing the blow,” said Albert Angrisani, a turnaround executive who was assistant secretary of labor under President Ronald Reagan. In doing that, “they lessen the rights of the creditors in bankruptcy,” he said.

Bankers and other GM advisers are working to estimate how much a restructured company, consisting of only profitable GM assets, might be worth in a debt-for-equity swap, said the people, who declined to be named because discussions are private.

U.S. Treasury spokeswoman Jenni Engebretsen declined to comment. GM spokesman Randy Arickx declined to comment.

The government might favor a quick sale of its stake once the new entity began operating in a probable bankruptcy that would liquidate unprofitable assets and debt not wiped out in an equity exchange, one of the people said.

Nationalized GM

A speedy sale of the government’s GM stock would be designed to counter any criticisms that the administration had become socialist, after also taking stakes in banks and insurance companies as part of its bailout of the financial industry, the person said.

A government stake, “means you essentially have a nationalized General Motors until such time as the government sells off its equity to someone else, which won’t happen for a while,” said Gerald Meyers, a professor at the University of Michigan Ross School of Business and a former chairman of American Motors Corp. “The problem is it’s political. On the other hand, it’s a cheap way for the good GM to keep going and probably solidify its strengths.”

Previously the U.S. government intended to seek payment of its bailout loans once a GM restructuring, in bankruptcy court or out, got under way.

Retirees Get More

GM has been seeking to reduce its obligations to a union- run health care fund, owed $20.4 billion, and bondholders, whose debt is trading at as little as 8 cents on the dollar. Talks with those constituents are held up because of uncertainty about the value of the new company and the unprofitable assets it would leave behind for creditors to fight over, the person said.

Retirees owed health benefits would probably get more equity in the new company than bondholders, who would likely get only “a sliver,” the person said.

Banks and other creditors also have $6 billion in secured claims that would not be part of the debt-for-equity calculations, the person said.

The Treasury’s secured loans give it a senior status to other bondholders, which may make it easier for GM to force a restructuring plan on other creditors.

The automaker plans to create a new company with its best brands, including Chevrolet and Cadillac, and plans to eventually sell the new company to pay stakeholders.

Obama View

President Barack Obama believes bankruptcy is the most likely way for GM to become a competitive automaker, people familiar with the matter said.

While GM has made preparations to file bankruptcy papers, it still has seven weeks to try to avoid that process by coming up with deeper cost and debt reductions than it proposed in a February bailout plan, the person said.

More than 100 lawyers, accountants and other professionals, led by attorneys at New York-based Weil Gotshal & Manges LLP, have been working overtime on GM’s restructuring plans, he said.

Details of the financing GM might need to fund its restructuring, called a debtor-in-possession loan, haven’t been settled, he said. Without projections for revenue and cash flow for the stripped-down GM, the government has no way of knowing what size loan is needed, the person familiar with the debt-swap plan said.

Government Financing?

The government might provide some money itself, or provide a guarantee after pressuring banks that have received bailout money to advance the cash, he said.

Before Chief Executive Officer Rick Wagoner was removed last month, bondholders were balking at a proposal from GM that called for them to swap more than three-quarters of their stake for equity, according to a person familiar with the talks. That offer would have given bondholders 90 percent of the equity in the reorganized automaker and a combination of cash and new unsecured notes, the person said at the time.

GM Chief Executive Officer Fritz Henderson, who took over March 29 after Obama asked Wagoner to step down as CEO and chairman, has said he’s racing to get an agreement with bondholders, unions and others to avoid a government-ordered bankruptcy. If he can’t reach an accord, GM has said it will accept a U.S.-led filing for court protection.

GM is meeting this week with a team from the U.S. Treasury to craft a revised plan to restructure the company.

More Meetings

The meetings, which started last week, are led for the Treasury by Harry J. Wilson, a former partner in Silver Point Capital LP, and about 14 other people including advisers from Boston Consulting Group and Rothschild Group, Josh Earnest, a White House deputy press secretary, said last week.

GM’s board met April 4 and April 5, and more discussions are planned inside the company and with the Obama administration, people familiar with the talks said. The discussions are part of a plan to develop a new GM business model either in or out of bankruptcy, they said.

Shareholders often get little or nothing in a bankruptcy. Reflecting the risk, GM shares in the past year dived 91 percent. Today, they rose 7 cents, or 4.1 percent, to $1.78 at 4:15 p.m. in New York Stock Exchange composite trading.

To contact the reporters on this story: Linda Sandler in New York at lsandler@bloomberg.net; Rebecca Christie in Washington at rchristie4@bloomberg.net; Jeff Green in Southfield, Michigan, at jgreen16@bloomberg.net.

Last Updated: April 14, 2009 17:25 EDT