American International Group (AIG.N) shares fell 2 percent on Monday as investors braced for the Treasury Department to unload at least $18 billion (11.26 billion pounds) worth of stock in what could be the largest follow-on offering in the history of the U.S. stock market.
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 (FB.O) initial public offering in May, according to Thomson Reuters data.
If investor appetite is strong enough for an additional $2.7 billion worth of overallotment options, the AIG stock sale could be the largest secondary offering on record. IPO Boutique, which advises on equity offerings, said on Monday afternoon the deal was oversubscribed and expected to trade on Tuesday.
AIG's stock closed 2 percent lower at $33.30 on the New York Stock Exchange on Monday, the first trading day since the Treasury Department announced on Sunday its plan to sell shares.
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.
Companies have been hesitant to sell stock recently due to market volatility and a lack of investor 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.
"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?'"
A stock sale of $18 billion would be the biggest follow-on offering since Bank of America Corp (BAC.N) sold $19.3 billion worth of stock in 2009, according to Thomson Reuters data.
It would also reduce the government's stake in AIG to roughly 20 percent from a current level of 53 percent.
That decrease will trigger an important regulatory change for AIG, because once the Treasury's ownership stake falls below 50 percent, the insurer will start 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 Dodd-Frank financial reform law that was passed in 2010, 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 Federal Reserve 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.
The threat of increased regulation also caused some concern among investors, Sandler O'Neill analyst Paul Newsome said in a report.
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.
"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.
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 repurchasing shares near its current price - roughly 56 percent of book value - is likely to boost earnings through an accounting gain, but it will also reduce a good portion of cash, Greenberg said.
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 (C.N), Deutsche Bank AG (DBKGn.DE), Goldman Sachs Group Inc (GS.N), JPMorgan (JPM.N), Bank of America Corp's (BAC.N) Merrill Lynch division, Barclays PLC (BARC.L), Morgan Stanley (MS.N), Royal Bank of Canada's (RY.TO) RBC Capital Markets division, UBS AG UBSN.VX, Wells Fargo & Co (WFC.N), Credit Suisse CSGN.VX and Macquarie Group Ltd (MQG.AX).
(Reporting By Dan Wilchins, Ben Berkowitz and Lauren Tara LaCapra; Editing by Andrea Ricci, Tim Dobbyn and Andrew Hay)