By Lauren Tara LaCapra and Olivia Oran

Sept 10 (Reuters) - The U.S. government cut its stake in American International Group Inc (AIG) to about 21.5 percent on Monday, making a profit of $12.4 billion on the insurer's crisis-era bailout and bringing the unpopular rescue closer to its end.

The Treasury Department sold $18 billion worth of the insurer's shares at $32.50 apiece, in what could yet be the largest ever secondary offering in U.S. history. The underwriters have the option to buy another $2.7 billion worth of AIG shares, which they can exercise in the next 30 days.

The offering represents the government's biggest sell-down of AIG shares since it rescued the insurer with bailouts in 2008 and 2009. At one time, the government pledged as much as $182.3 billion to prop up the company, as mounting subprime losses forced the insurer to come up with a lot of cash quickly. In exchange, the government received a nearly 80 percent equity stake in the company.

The Treasury's sale comes as President Barack Obama campaigns for a second term and has been forced to defend his support of decisions to use taxpayer money to prop up companies during the crisis.

A White House spokesman said on Monday that the AIG stock sale represents a "commitment to recover taxpayer money" and that President Obama is pleased with progress in winding down the government's stake.

The administration has been unwinding its position in the politically unpopular financial crisis programs ahead of the Nov. 6 election amid Republican campaign pressure over the role of the government in the private sector.

The government has recouped $342 billion out of $411 billion disbursed to financial institutions through the most prominent bailout, the Troubled Asset Relief Program, or TARP. But more than 300 small banks that received TARP funds have yet to repay taxpayers. Rescues of AIG and other large banks also included other bailout programs.

"From the government's point of view, it's political," former AIG Chief Executive Hank Greenberg said in an interview on CNBC, adding that the government had hoped to exit its bailout investments much sooner.

The AIG share sale, which was announced on Sunday, is the largest follow-on stock offering since December 2009, when Bank of America Corp sold $19.3 billion worth of stock, also to pay back taxpayers. It is also the largest equity offering since Facebook Inc's initial public offering in May, according to Thomson Reuters data.

Profit for U.S.

The offering was priced at a 4 percent discount to AIG's closing price of $33.99 on Friday, the last trading day before the Treasury announced plans for the sale.

The Government Accountability Office estimated in May that taxpayers could make a profit of $15.1 billion on the bailout. If exercised, the over allotment will get the government, which includes the Federal Reserve and Treasury, to that figure.

AIG's stock closed 2 percent lower at $33.30 on the New York Stock Exchange on Monday.

Still, the government is exiting the investment faster than many investors had anticipated. The government had steadily reduced its stake down to 53 percent in smaller transactions since early 2011, and many investors expected the latest offering to be smaller.

The stock sale, including the overallotment option, will cut the government's stake to 15.9 percent from 53 percent in one go.

AIG itself bought back $5 billion of its shares in the stock sale, with the rest going to the broader public.

AIG planned to use $3 billion worth of cash and short-term securities, and $2 billion in proceeds from the sale of its stake in Asian life insurer AIA Group to buy back stock from the government, the company said in a securities filing.

Repurchasing shares near their recent trading price - roughly 56 percent of book value - is likely to boost AIG's earnings through an accounting gain, but it will also reduce a good portion of cash, Greenberg said.

The Treasury also owns warrants to purchase another 2.7 million shares, according to AIG's filing. The Treasury has allowed other financial firms to repurchase bailout-related warrants directly or to auction them off.

Regulatory Change

The decrease in the Treasury's ownership triggers an important regulatory change for AIG. Once the Treasury's ownership stake falls below 50 percent, the insurer starts to be regulated by the Federal Reserve as a savings and loan holding company, since AIG owns a small bank.

As a result, AIG will have to comply with new rules under the 2010 Dodd-Frank financial reform law, including the Volcker rule, which limits large financial firms' ability to trade for their own account or own stakes in private equity firms and hedge funds.

Even if AIG were to rid itself of the savings-and-loan subsidiary, the Financial Stability Oversight Council may still designate AIG as a "systemically important financial institution" because of its size.

That would subject it to other, stricter federal regulations for large financial firms, including higher capital requirements, stress tests and possible dividend and buyback restrictions.

"To stabilize and then restructure the company with a very substantial positive gain for the American taxpayer is a significant accomplishment," Treasury Secretary Tim Geithner said in a statement.

"But we need to continue the critical task of implementing Wall Street reform so that the American economy is never put in this position again."

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Mr. Phelps

Yup, its Obamas' fault that the previous administration bailed out AIG with TARP....

The U.S. negotiators drove a hard bargain. Under terms hammered out Tuesday night, the Fed will lend up to $85 billion to AIG, and the U.S. government will effectively get a 79.9% equity stake in the insurer in the form of warrants called equity participation notes. The two-year loan will carry an interest rate of Libor plus 8.5 percentage points. (Libor, the London interbank offered rate, is a common short-term lending benchmark.) Sept 16, 2008

September 12 2012 at 10:18 AM Report abuse rate up rate down Reply

How much taxes will the government owe on that huge profit?

September 12 2012 at 9:59 AM Report abuse rate up rate down Reply

There is the low B word where is the the T word.

September 12 2012 at 9:29 AM Report abuse rate up rate down Reply

This "profit" won't even make one month's interest on the US debt. To regular citizens it sounds like a lot of money, to the government it isn't EVEN a drop in the bucket.

By the way. All these shares that the Government is selling...who's buying?

September 12 2012 at 8:16 AM Report abuse +1 rate up rate down Reply

Profit they claim yet we're HOW deep in Dept.?????? ...... TYPICAL DEMOCRATIC SPIN....... Did the same thing when GM aka Goverment Motors paid off some of their Dept. using OUR money.... OBUMMER When you Recover ALLLLLLL the TARP $$$$$$ and you THEN see a profit come to me with your Story to sell your Party.... Till then Im a INDEPENDENT who THINKS and right now I think your simply a Liar ....

“I promise that I support traditional marriage-1 man-1 woman.
“I promise 100% transparency in my administration.”.
“I promise NO NEW TAXES on a family making less than $250K a year.”.
“I will allow 5 days of public comment before I sign any bills.”.
“I will remove earmarks from PORK projects before I sign any bill.”.
“I will end Income Tax for seniors making less than $50K a year.”.
"I will bring ALL of our troops home within ONE year."
“I’ll put the Health Care negotiations on CSPAN so everyone can see who is at the table!”.
“I’ll have no lobbyists in my administration."
"I'll close Guantanamo."
"I'll resign if I don't cut the deficit in half by the end of four years."
"I'll unite the people of this great country."

September 12 2012 at 6:47 AM Report abuse +1 rate up rate down Reply
Lenny Moore

And all this money will be put to good use, like paying down the national debt... Right ???

September 12 2012 at 5:58 AM Report abuse +1 rate up rate down Reply

B.O. stinks!
Romney/Ryan in '12

September 12 2012 at 2:48 AM Report abuse rate up rate down Reply
Practical Nomad

Good work President Obama. For those who followed this, and AIG, over the last four years, AIG is/was an incredibly arrogant company. They took Government monies and paid their top Execs huge bonuses. Everything they were to do with the funds, they did not.

September 12 2012 at 2:24 AM Report abuse +3 rate up rate down Reply

President Obama just made a substantial profit and is recovering money the government was owed from the bailout. Not bad. Perhaps Mitt Romney isn't the best businessman in the presidential race. The investment paid off just about like planned. And the loans to the auto companies are coming back with profits. Saved industries, make profits for the American people...not bad Mr. President. I have a feeling we will be hearing about this in the debate.

September 12 2012 at 1:10 AM Report abuse rate up rate down Reply
1 reply to tdhbob's comment

"Loans to the auto companies are coming back with profits" That is an out right lie! Latest government figures indicate that the losses on the loans is likely going to be in the $25 Billion dollar range. Now how is that a profit?

September 12 2012 at 8:19 AM Report abuse rate up rate down Reply

Who gives a flipping bleep about who did what? The fact is this bailout worked and nobody is the wiser. End of the story.

Bailouts? Bailouts? What bailouts? Hello world, here we come! USA proud!!

September 12 2012 at 12:46 AM Report abuse +1 rate up rate down Reply