OT- Stock market advice

Yes, I realize that. However, I was referring to the logic behind such investments. Housing prices seem to have bottomed, and my theory is to buy and hold for a long period of time while receiving a steady revenue stream. With AIG, the company has taken on so much debt that it will have to sell assets in order to repay. AIG shares could make money in the long run, but at this point that bet would be based on other investors driving up share prices and not actually based on the overall value of the company.

Preferred shares offer (typically) a superior position in the capital structure vs common shares, coupled with a (typically) mandatory dividend payment of X% and a specific liquidation preference (basically a face value). In short, if the company goes into the toilet, you're ahead of common shareholders in the recovery waterfall - you get paid your full liquidation preference before they get a single penny of value. Plus, you get current income - a defined, usually mandatory dividend stream which (usually) must be paid in full before common shareholders can get a penny of dividends. Pref stock usually comes in retail and institutional denominations - face/liquidation preference of $25-100 per share for retail, and $1,000-1,000,000 for institutional investors. Pref has some of the attributes of fixed income (higher up in the cap structure, defined dividend/cash flow stream), but also some elements of common equity - e.g. either explicit or contingent board representation (usually contingent on failure to pay required dividends in full). Basically, it gets you current income/cash flow while also offering some equity upside. Pref is a great investment when you think a company is getting unfairly pounded in the market. Usually the pref falls with the common (especially if it's retail pref), even though it's senior in the cap structure and its dividends may not be under threat. In the case of financial institutions, equity capitalization rules (fractional reserve requirements, etc.) force them to carry a larger equity cushion than in many other industries, so you end up with multiple tranches of hybrid capital that get full or partial equity credit for capital adequacy calculations. These tranches usually pay pretty good dividend rates (e.g. PNC's 9.875% preferred). If you can buy them below liquidation preference, the cash flow is the same, but the effective yield is higher (you're buying the same cash flow stream at a discount, thus enhancing the yield), plus you get the prospect of absolute return on the trading price of the pref itself. For example: I bought PNC 9.875% pref at $12, it's now trading at $28 or so - thus I got absolute return of $16 per share, plus I still get the 9.875% dividend on the $25 face (just under $2.50 per year per share - for an effective yield of 20%+ - $2.50 on $12 cost basis). If you play it right, it's a great investment.

I am sure I know your friend as I work for the Private Bank Asset Management team @ 270 Park. Good luck with your new position.