* AIG to buy back $5 billion of offering
* Sale likely to bring AIG under Fed oversight
* Execs expect full government exit by 2013
By Soyoung Kim and David Henry
NEW YORK, Sept 9 (Reuters) - The U.S. Treasury Department said it will sell most of its stake in insurer American International Group Inc, making the government a minority investor for the first time since it rescued the company in the depths of the financial crisis four years ago.
While the Treasury was universally expected to sell stock this month, the magnitude of the planned $18 billion offering was a surprise that will take the government stake in what had been the world's largest insurer to around 20 percent from 53 percent currently.
The sale announced on Sunday will trigger a number of changes for AIG, the most important of which is that it will now fall under Federal Reserve regulation as a savings and loan holding company since the company owns a small bank. The Treasury will also lose the ability to dictate the terms of further stock sales.
AIG said it would buy up to $5 billion of the offering. Last week the company sold part of its stake in the Asian insurer AIA to help fund that buyback.
A number of analysts who follow AIG said at the time they were disappointed the company was not buying back more shares, although they also assumed the eventual government offering would be much smaller than it has turned out to be.
Barclays Capital, in a research note Friday, said investors were likely to be disappointed if the government was not out of the stock by the November election.
POLITICS AT PLAY?
The sale, Treasury's biggest sell-down of its AIG stake so far, 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.
The administration has been unwinding its position in the politically unpopular financial crisis programs ahead of the election, amid heavy Republican campaign pressure over the value of the bailouts, with more than 300 small banks having yet to repay taxpayers.
The government also still owns 74 percent of Ally Financial Inc, the former General Motors auto finance unit that was wrecked by bad mortgage loans.
Likewise, The government has redeemed all of its holdings of Citigroup Inc except for $3 billion of preferred securities on which it receives an 8 percent dividend.
But the Treasury has steadfastly denied it was rushing to exit the AIG stake before the election, a stance it reiterated on Sunday, even as the repeated profitable sales of the insurer's stock burnished the reputation of the crisis-era rescue programs. That boost could help the president in his election battle with Republican nominee Mitt Romney.
The announcement also comes in the week that the Federal Reserve is expected to announce it is providing the U.S. economy with further monetary stimulus, probably through a third round of so-called quantitative easing.
Expectations of the Fed action helped to drive the S&P 500 to its highest level in more than four years last week, meaning market conditions could be welcoming for the larger AIG sale. The stock has also benefited from that run-up, gaining more than 10 percent in the last month.
MORE TO COME
With the Treasury's break-even point at $28.72 and AIG shares closing Friday at $33.99, this sale is likely to be profitable as were the government's four prior offerings of the company's stock.
If the Treasury were to sell $18 billion at AIG's Friday closing price, it would be selling roughly 529 million shares.
Treasury said it will also grant to the underwriters a 30-day option to purchase up to an additional $2.7 billion of common stock to cover any over-allotments. If that option were exercised in full, it would cut Treasury's stake in the company closer to 15 percent.
The announcement on Sunday comes just a month after the Treasury sold 188.5 million AIG shares for $5.75 billion in a public offering. That sale was priced at $30.50 per share.
AIG executives, among them CEO Bob Benmosche, have said of late they expect the government to be out of the insurer by 2013.
Benmosche, who has been fighting cancer while running the company over the last couple of years, is widely credited with saving AIG from a fire sale of assets and redirecting it toward the form it has taken today.
The company's three pillars are the global property insurer Chartis, the U.S. life insurance and annuity company SunAmerica and the market-leading mortgage insurer United Guaranty.
Still to be determined is the fate of airplane leasing business ILFC. AIG filed to take it public last year, but the planned offering has languished amid weak markets.