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How Steve Jobs threw out US$10 billion. By Brett Arends, WSJ.com and MarketWatch

Apple chief blunders on options swap

BOSTON - You've already heard about "the greatest trade ever" - hedge fund manager John Paulson's giant score betting against subprime mortgage bonds.

But no one's told you about the dumbest trade ever.

Sure, there are plenty of contenders.

But this one is a doozy.

It's got everything. Fame. Glamour. The exactly wrong trade at exactly the wrong time. Billions of dollars blown.

And you won't believe who pulled it.
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No, it wasn't some semi-pro hedge fund manager in Greenwich. An obscure European banker. Or a crazy trader in Hong Kong.

You ready?

It was Steve Jobs.

Yes, the man who walks on water. The same genius who invented the iPhone, restored balance to the Force, and rescued Morpheus from the Matrix.

Steve - Luke - "Neo" - Jobs.

"The One."

Everybody knows that Apple Inc. (Nasdaq: APPL) stock has skyrocketed in recent years, thanks to the iPod, iPhone, iPad, and the forthcoming edible iPod Shuffle. A look through the company's proxy shows Jobs is holding a fistful of valuable paper, as you'd expect. He has 10 million shares. At the latest prices, around US$250 each, that's made him a thumping US$2.5 billion.

What isn't so widely known is that it was so nearly more. A lot more.

Let's go back in time.

The moment: March 2003.

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Stock markets worldwide were on the floor, following a brutal three-year bear market. The Iraq invasion was just about to start, casting a further gloom on the economic outlook. Immediate prospects for investors seemed bleak.

And while most shares had done badly, that was only part of the story. The technology industry had been devastated.

After the bursting of the tech bubble in early 2000, the Nasdaq Composite had plunged nearly 80% from its peak. Companies had folded left and right. Those left were staggering. Apple had fared as badly as any. Its stock had plummeted from a peak of US$36 all the way down to about $7. (All prices have been adjusted for a subsequent stock split.)

Jobs and other employees were feeling the pinch. Stock options they had been granted during the boom now seemed completely worthless. After all, Apple stock would have to climb all the way back up to those giddy heights before the options even started to show a profit again.

So Apple employees were allowed to swap many of their options for a smaller number that became valuable at a lower price.

As for Jobs: He volunteered to cancel all his options in return for a far smaller number of shares, worth about US$75 million at the time. The trade made sense - unless Apple boomed again.

Ahem.

The shares Jobs received are worth US$2.5 billion at today's stratospheric prices.

But what would those options have been worth?

Digging through the old proxies reveals a remarkable tale.

Jobs held 15 million options at an exercise price of US$9.15, which meant they started to gain value only if Apple stock exceeded that price, and 40 million options at an exercise price of $21.80. Apple at the time was little more than $7 a share. (These prices have been adjusted to reflect the subsequent stock split.)

Total value: US$12.8 billion.

In other words, Steve Jobs missed out on $10.3 billion in extra profits.

Apple declined to comment for this column.

Back in 2003, the company said Jobs was swapping all his options for a smaller number of shares in order to reduce the "overhang" on the stock and to allow the company to offer more options to other staff. Apparently it wasn't because he figured the collapse in the stock price had left his options completely worthless, whereas at least the shares had some value.

Let's be clear. Steve Jobs, now 55, is hardly hurting. Forbes recently ranked him the 136th richest man in the world. Including his huge stake in Walt Disney Co., he's worth about US$5.5 billion. And he's surely earned his fortune.

But if he'd kept those options, the extra wealth would have bumped him all the way up to number 32 on the Forbes list.

One place ahead of Microsoft Corp. honcho Steve Ballmer.

Say what you like: That's gotta hurt.

Brett Arends is the author of "Storm Proof Your Money," on managing your finances in this era of turmoil.