RJR preferred stock was unusual in its structure. For a payment of $22, each share could be converted to 1½ shares of Reynolds Common. So, above $44, if RJR Common rose $1.00, the preferred stock rose $1.50. It was rare, but occasionally the preferred stock would sell for less than its conversion value. Wall Street arbitrageurs could pick up a few quick bucks by taking advantage of the difference.
There were literally scores, if not hundreds, of such obscure potential arbitrages, and Wall Street traders followed their movements and acted swiftly if the prices got out of balance.
I was made very when I was a guest at a Goldman Sachs lunch in New York. A group of young men from Goldman spotted my nametag. One of them said, “Oh, you’re RJR, you have that stock with the funny $22 thing,” not something even a normal stock trader would know. But being Goldman Sachs, this team was surely knowledgeable about any that offered a good trading opportunity from time to time.
I was impressed, but probably should have been more impressed. One of that group was a very young Robert Rubin, later the co-chair of Goldman Sachs and then the Treasury Secretary under President Clinton.
Initially, the preferred stock paid a slightly higher dividend than the Common, but the dividend on the Common stock rose over the years and when the dividend on the Common became more than the $2.25 that the preferred paid each year, shareholders paid their $22 and converted.