AIG stock sale raises questions about investor appetite

The offering represents the government's biggest sell-down of AIG since rescuing the insurer with bailouts in 2008 and 2009. The planned stock sale would be the largest secondary stock offering since December 2009, and the largest equity offering since Facebook Inc's initial public offering in May, according to Thomson Reuters data.

In Monday afternoon trade, AIG shares were down 1.8 percent to $33.37, but up from a morning low of $32.90.

Companies have been hesitant to sell stock recently due to market volatility and a lack of INVESTOR (INVEB.ES)appetite. Through September 7, year-to-date equity capital markets proceeds were down 27 percent from the same period in 2011, according to Thomson Reuters data, with IPOs down 47 percent and follow-on offerings down 16 percent.

Investors had widely expected the Treasury to cash out of its AIG shares, but many investors had expected the sales to happen over a longer period of time.

"Everyone wants the government to eventually get out of the stock because it's been a hangup for the company," said Eric Steiman, an individual investor who owns AIG shares and publishes his investment approach on the web site Covestor. "It's just a matter of, 'can the market handle a huge offering?'"

The stock sale, announced on Sunday, will reduce the government's stake in AIG to roughly 20 percent from a current level of 53 percent.

It would be the biggest follow-on offering since Bank of America Corp sold $19.3 billion worth of stock in 2009, according to Thomson Reuters data. If overallotment options are exercised, the offering could top $20 billion, which would amount to the largest secondary stock offering in history.

The Treasury Department and Federal Reserve extended a combined $182 billion lifeline to AIG at the peak of the financial crisis, after losses on subprime-mortgage derivatives and credit rating downgrades 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, a high interest rate on loans it extended and some level of management control including board seats and a say on executive pay.

Some of the bailout money was never used and the bulk of the remaining funds have been recouped through stock offerings and asset sales. AIG still owes U.S. taxpayers $24.2 billion, according to the company.

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 financial 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 November 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 included other bailout programs.

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

AIG will 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 on Monday.

AIG's largest private shareholder, Bruce Berkowitz, declined to comment on the upcoming stock sale through a spokeswoman.

Underwriters for the deal include Citigroup Inc , Deutsche Bank AG , Goldman Sachs Group Inc , JPMorgan , Bank of America Corp's Merrill Lynch division, Barclays PLC , Morgan Stanley , Royal Bank of Canada's RBC Capital Markets division, UBS AG , Wells Fargo & Co , Credit Suisse and Macquarie Group Ltd .

(Reporting By Dan Wilchins, Ben Berkowitz and Lauren Tara LaCapra; Editing by Andrea Ricci, Tim Dobbyn and Andrew Hay)