Since my earlier article on the Google Transferables, several

facts have emerged. Those are:

1. Morgan Stanley has gathered a total of four bidders

for the transferables. Those are Credit Swiss, Morgan Stanley

itself, UBS Securities and Citicorp. Will these bidders

fight amoung themselves, as traders on options exchanges do,

to win a bid to the Google Employees. No, the bids will be

co-ordinated and the bids will be below theoretical, because

if the bids were fair value, there would be no profit for this

gang of four.

In a Filing with the SEC, called a Form S-3, on

February 22, 2007 Google made the following statement

under the heading Risk Factors.

It said:

"The price you receive for selling your option in the

TSO program may not reflect the value of your option".

And further under the same heading, Google says:

"You may realize less value from selling your options

under the TSO program than the theoretical value or

"time value" of your option".

Both of the above statements suggest that it may be

possible for the price you receive to reflect the value

or "theoretical value" or "time value" of the option.

The fact is that you will receive two years "time premium"

discounted for the Four Bidders profit and costs, where

the "theoretical value" of your options include 100% of

the "time value" not discounted for anyone's profit or costs. If

your options have 5 or 6 years life, then the "theoretical

value" includes 5 or 6 years "time value" not two years

"time value". The truth is that it will be impossible to

receive the value of your options whether the value is

called "theoretical value" or "time value". You will receive

perhaps 30% to 50% of the options "time value" in most

cases. In other words if the value of the options have

little or no "intrinsic value", the value you receive from

the gang of four will be 30-50% of its value your

depending on the time remmaining to expiration.

Those two statements are deliberately deceptive and

are designed to influence the employee to think he may

get "theoretical value" or something close to it, when his

chances are zero of that happening.

If Google wanted to allow their employees a fair

price, all they would have to do is to reload the optionee

with new ESOs with a value equal to the legitimate

"fair value" of the time premium forfeited upon

premature exercise. Google could set the number of

years of time premium at whatever they wished.

This would eliminate the middle man of the four bidders

and make matters better for the employee/optionee and

the company.

2. The bidders will be allowed to sell (write) listed calls

to hedge away the risks of their holding the 2 year option that

they just bought from the un-informed Google optionees.

For example:

Let's assume that a Google employee/optionee has vested

TSOs to buy 1000 shares of Google at 300 with 5 years of

expected life remaining (i.e. 6.5 years of nominal life) on

05/02/07. Google is actually assuming for purposes of

calculating options expenses that the expected time to

expiration of the recently granted options is 3.6 years

at grant day for the options having 10 nominal years to

expiration. That assumption artificially understates the

expenses by about 30-35%.

Stock Price $469:

The stock is trading at $469. The assumed volatility is

29 and the current appropriate interest rate is 5.1%.

The "Fair Value" would be $247. (169 of intrinsic value and

78 of time premium).

The Bidders would probably pay $196 (169 of intrinsic value

and 27 time premium) because the bidders would have only

2 years of time remaining on the options when purchased.

The bidders would then turn around and write 20.5 month listed

calls (Jan 2009 calls) with a strike price of 300 with a probable

market of 199 (the market trading price today May 3, 2007),

thereby buying a time spread for a credit. The bidders would

actually need zero capital invested as the 3 points profit would

be immediately caluculated and their account capital credited

when the trade is made. In my ten years of trading as a

market maker on the CBOE and the PSE,

I have never heard of a market so inefficient as to

allow the purchase of a call time spread for a credit.

But this Google Option Market provided by the Morgan bidders

is not meant to be efficient. It is meant to extract maximum

profits for the Morgan gang of four. That is why they will not

show the bids to the public. If their bids were reasonably

efficient, they would under these above circumstances be

paying probably a $5.5 debit. If Google allowed perhaps

50 bidders, the bidders would pay more and the employees

would receive more. So, when the bidders buy 1000

TSOs, they will buy those TSOs with perhaps a $7,500 - $8.500

advantage to Fair Value and a ready market to hedge and

essentially lock in that profit.

If a mere 1 million of the 6.6 million outstanding shares were

sold to the Morgan bidders, they would make the $7,500 a

total of 1000 times or $7,5 - $8,500,000. Morgan will then expect

to convince other companies to come along for the same ride.

Taxes

When the Google optionee sells his 1000 TSOs he gets

$196,000 for something worth $247,000. He then pays a tax

as high as 40% on the $196,000.

He nets after tax less than $120,000 for the options worth

$247,000. He is then encouraged by Wealth Managers from

Morgan, Credit Swiss, Citicorp and UBS to diversify into a

portfolio managed by one of the four firms for a fee perhaps

of just a couple thousand per year.

The Google Employee will have been put through a wringer,

the consequence of which will be very similar to when a

person prematurely removes his funds from a 401 K or

traditional IRA plan.

Google write off.

And Google is going to write off $260,000,000

(now $230,000,000) against earning to allow this scam for

6.6 million options.

There will be countless millions of future expenses for the

transferable factor which has very little value to the employee.

Perhaps, Google officials really do not understand

options or what is being done or maybe Morgan is calling the

shots for Google. Once the employees and the investors discover

this trick and its costs to themselves and the share holders,

Google could have a volatile ride on the down side.

Short it now.

Just as I predicted in December, 2006, the near term historical

and the implied volatility in Google have dropped. This makes

every Google ESO and listed option less valuable.

DO NO EVIL EXCEPT IF IT BENEFITS THE GANG OF FOUR

John

Post Script:

One point that has been ignored by observers of Google. Google assumes that the expected life of options granted over the last three years is between 3-3.6 years, although the nominal life is 10 years. This artificially lowers the "fair value" of the options and lowers the expense against income, thereby overstating their profits.