Switching to my rose colored glasses, this Melo situation may be a unique opportunity. Apparently, he felt disrespected somehow by Denver (jealous of attention given to Billups?) and told Denver he won't come back. "I'm Melo dammit!" Denver is in a bizarre situation. They have a bunch of other players who can leave as free agents after the season - JR, Nene, KMart... but they have a vet PG paid to win now - Billups and paid for Harrington. What to do? HellifIknow.

But they do need to get something for Melo, and that might be the bottom line - just getting as much as they can for him and go from there.
Well, we have a star available. If we trade Arenas and either Thornton or Howard and a protected pick, what's the risk - even if we are not able to re-sign Melo? There are a whole bunch of free agent 3's to replace Thornton or Howard, and they might want to get rid of Gil's contract, anyway. So, we lose a protected 1st - a small price to pay to give us a much better shot at signing Melo and still having some space. Once he gets here, he sees the great opportunity to play with Wall and be close to his family. And Denver can make other moves to balance their roster - trade either JR or Billups for front court help. Ok, time to take off the rose colored glasses.
"A common mistake that people make when trying to design something completely foolproof is to underestimate the ingenuity of complete fools." - Douglas Adams