American International Group is on the verge of becoming thefirst insurance holding company ever regulated by the federalgovernment.

In a statement, the Treasury Department said last night it islaunching a public offering of $18 billion of AIG stock.

Simultaneously, AIG said it would purchase up to $5 billion ofthat stock.

AIG is expected to use cash on hand as well as more than $2billion gained from sale of some of its remaining holdings inAmerican International Assurance, or AIA Group Ltd., its HongKong-based life insurance subsidiary.

That sale took place Friday.

The decline of U.S. ownership below 50 percent wouldtrigger federal regulation, according to a bevy of securitiesanalysts and industry lawyers, some of whom formerly worked at theFederal Reserve Board.

Spokesmen for the Fed would not confirm or deny it.

Under an amendment to the Dodd-Frank financial services reformlaw, if AIG is regulated as a thrift-holding company, it would besubject to consolidated regulation by the Federal ReserveBoard.

In a note to investors Aug. 31, Ray Schoen of WashingtonAnalysis, a buy-side securities analytical group which adviseshedge funds and institutional investors, said, “In short, thecompany is poised to face real regulatory supervision of itsnon-insurance financial business for the first time in itshistory.”

Schoen added, “While Treasury's exit is certainlya long-term positive for AIG, investors should be awarethat federal regulation presents a litany of new restrictionsfor the company, including minimum leverage and risk-basedcapital requirements, as well as restrictions on dividendpayments and share buybacks.”

Robert Benmosche, AIG's president and CEO, previously saidduring the company's Aug. 3 earnings conference call with analyststhat AIG is preparing for federal regulation in addition to stateregulation.

In his comments to analysts that day, Benmosche said, “In a way,we see it as a big positive.”

Currently, the government owns 53.4 percent of AIG, according toan investor's note last week by John Nadel of Sterne Agee &Leach in New York.

If the Treasury Department is able to sell all the shares itseeks to sell at around $34 a share, it would retain approximately23 percent of AIG.

The U.S. needs to average about $28.73 on the sales tobreak even on the stake it acquired as part of a 2008 bailout, notincluding unpaid dividends and fees, according to a study last yearby the Government Accountability Office. The first two offeringswere priced at $29 a share and the second two at $30.50 apiece.

According to Benmosche and the analysts, AIG will be subject tofederal regulation both because it owns a savings and loan holdingcompany based in Wilton, Conn. now regulated by the Fed, andpossibly through its designation by the Financial StabilityOversight Council as systemically significant.

AIG's thrift was formerly regulated by the Office of ThriftSupervision, and its non-insurance financial activities weresupposedly under OTS oversight.

But the OTS was shut down and its authority to charter andoversee insurance companies shifted to the Office of theComptroller of the Currency and the Fed through the Dodd-Frankfinancial services reform law.

The Fed was barred from regulating insurance holding companiesthrough a provision of the 1999 Gramm-Leach-Bliley Act.

That provision was removed through the DFA.

An industry lawyer who asked not to be named says the Fed isexpected to be a much sterner overseer of thrift-holding companiesthan the OTS.

PC360 previously reported that under the supervision of the FedBoard of Governors in Washington, Fed banksin Chicago and Boston are examining the booksof insurance companies and their holding companies in order toestablish metrics that can be used to evaluate their management andsolvency.

In his note, Schoen said AIG may also be required to place itsfinancial activities in a holding company separate from itsnon-financial activities, with new restrictions between the twoentities.

“Going forward, we expect that AIG will need approval from theFed before paying dividends,” Schoen said.

As to the latest offering, Treasury says that besides theinitial $18 billion in AIG stock, it will also grant to theunderwriters in the offering a 30-day option to purchase up to anadditional $2.7 billion in common stock from Treasury to coverover-allotments, if any.

Citigroup, Deutsche Bank Securities Inc., Goldman, Sachs &Co., and J.P. Morgan Securities LLC have been retained as jointglobal coordinators for the offering.

Merrill Lynch, Pierce, Fenner & Smith, Barclays CapitalInc., Morgan Stanley & Co. LLC, RBC Capital Markets, LLC, UBSSecurities LLC, Wells Fargo Securities, LLC, Credit SuisseSecurities (USA) LLC and Macquarie Capital (USA) Inc. have beenretained as joint book-runners for the offering.

Elizabeth Festa also contributed to this story.