UPDATE: Treasury Sells $6 Billion AIG Shares; AIG Buys Half

The U.S. Treasury Department sold a chunk of its shares in American International Group Inc. (AIG) for $29 each Thursday morning, further reducing the government's stake in the insurer more than three years after it was rescued during the financial crisis.

The sale of about 207 million shares will deliver roughly $6 billion to Treasury coffers. AIG, which has bounced back from the brink of collapse and expects steady profits in coming years, has agreed to purchase about 103.5 million shares worth about $3 billion.

That buyback could help prevent the Treasury's sale from weighing on AIG's share price too heavily, though the stock was down 3.5% to $28.41 in morning trading after the share sale was announced.

Thursday's share sale reduces the government's holding of AIG's common stock to 1.25 billion shares, or about 70%. That's down from 77% before the sale and 92% in early 2011.

The U.S. had wanted to sell off more of its holdings in late 2011, but the sale was delayed when the shares fell in the second half of 2011 and traded below $28.73, the price taxpayers effectively paid for the government's stake. AIG's rescue in 2008 was part of the Troubled Asset Relief Program, or TARP.

"We're continuing to move forward to wind down TARP and exit our stakes in private companies as soon as practicable," said assistant Treasury Secretary for financial stability Tim Massad. "Today is another important step in our efforts to recover the taxpayer's investment in AIG."

The stock turned around after AIG in late February said it was freeing up tax credits it had accumulated as its losses mounted amid the financial crisis. AIG said it would be able to use the massive tax benefit because executives now believed the insurer was likely to report sustainable profits in the years ahead.

Late Wednesday, when Treasury announced its plan to sell its stake, it also said AIG will fully repay the government's remaining $8.5 billion preferred interest in another bailout-era vehicle that was collateralized by AIG's minority portion of Asian life insurer AIA Group Ltd. (1299.HK) and other assets. The majority of the funds AIG will use in the transaction will come from the sale of a portion of its stake in AIA that was scheduled to close Thursday.

In addition, the Federal Reserve Bank of New York has an outstanding $9.3 billion loan to an investment vehicle known as Maiden Lane III, which was formed to absorb AIG's toxic assets. The loan is collateralized by assets that are now worth well more than the outstanding loan.

The Bush administration launched the financial bailout in the autumn of 2008 at the height of the financial crisis. Congress authorized $700 billion in spending, though $414 billion wound up being spent. The government has now recovered about $319 billion of that money, the Treasury said.

At the height of the financial crisis, the Treasury and New York Fed provided about a combined $182 billion in support to AIG. The Treasury said its investment in AIG has now been reduced to $37.8 billion.

At its launch, the AIG bailout was the costliest rescue of the financial crisis, but it has since been eclipsed by the federal takeover of mortgage giants Fannie Mae (FNMA) and Freddie Mac (FMCC). That rescue has cost taxpayers $153 billion to date and is still climbing.

-By Alan Zibel and Randall Smith, Dow Jones Newswires; 202-862-9263; [e-mail]

--Erik Holm and Serena Ng contributed to this article.