So, what is Buffet's favorite, preferred stock?

Buffet invested in Goldam Sach and GE with preferred stocks. But are preferred stocks?

Preferred stock tends to blur the boundary between equity and debt. In essence, preferred stock issuers are in situations of debt issues. Thus, equity is simply a facade. More important, there are taxing issues related to perferred stocks, which in some cases can create tax-deductible preferred (note that interests can be deducted but dividends can't). According to Financial Accounting Standard (FAS), preferred stocks are treated as debt. They are recorded on the balance sheet at the initial value of the net proceeds, and financial costs are accrued.

There are the following types of preferred stocks, the key differentiator is interest rate and resulting products:

Floating rate preferred stock
Convertible exchangeable preferred stock --- convert to equity, exchange to debt
Mandatory convertible preferred stock
Preferred stock issued by vehicles that invest in debt
Preferred stocks convertible to stock of another company
step-up/step-down preference shares
Catastophe preferred put structures.

We don't know how exactly the contract is constructed. We guess that may be "convertible preferred shares" or one kind of debt investment called "preferred purchase unit".

Convertible preferred shares are used in start-up or corporation reconstructions, where investors wish to have extra risk protection but also will enjoy stock price rising if the company goes well. On the issuers side, it is often used to strengthen their balance sheets without diluting existing equity shareholders. At conversion, preferred stocks could receive a conversion premium over a predefined common stock price. Stock dividend is still entitled before conversion. The type share is also called "depository shares". It will be callable at a predefined mature date.

Preferred purchase units are one kind of monthly income preferred shares (MIPS). A contract requires the debt holder to buy cumulative preferred stock issue on a date. In addition to a coupon on the debt, a holder can also receive income equivalent to x% of the purchase price. That brings in an aggregate coupon rate. The drawback is that this stock is subordinated to all senior debt of the issuer, but it may vary with contracts.

After understanding these, hmm..., not a bad deal at all for Buffet.