In the largest U.S. follow-on in the history, Uncle Sam sold a record $20.7 billion worth of stocks from American International Group, Inc. (NYSE:AIG)’s 2008 bailout. The Treasury Department, which had earlier announced plans to sell $18 billion in AIG stocks, increased the offering by $2.7 billion. It surpassed the Bank of America Corp (NYSE:BAC) stock sale, also by the Treasury, of $19.3 billion in December 2009.

AIG

Treasury Department said on Tuesday, that the underwriters exercised the option to purchase an additional 83.1 million shares of American International Group, Inc. (NYSE:AIG) at $32.50 per share for a total of $2.7 billion. After this sale, the Treasury’s stake in the insurer has fallen to 15.9 percent, and it is no longer the biggest shareholder in the insurance company. American International Group, Inc. (NYSE:AIG) alone made up about 30 percent of all the U.S. follow-on stock offerings this year, according to Reuters.

The Treasury spent over $182 billion during the economic crisis to rescue American International Group from collapse. It said that the taxpayers would get a “positive return” from AIG. The ownership of the government in American International Group, Inc. (NYSE:AIG) reached a record 92 percent, before it started selling its stake. The move to invest in AIG in September 2008 has been heavily criticized. But, Treasury Secretary Timothy Geithner defended the move.

“Keeping AIG afloat was something the government should never have had to do, but we had no better option at the time to protect the American economy from the damage that would have been caused by the company’s collapse,” Timothy Geithner said.

Before this week’s offering, the government’s stake in AIG stood at 53 percent. According to a Treasury statement, the Federal Reserve and Treasury have recovered  $197.4 billion, including the latest stake sale from the once-troubled insurer. AIG also bought its own shares, worth $5 billion, in the offering.

The Treasury still owns 234 million shares in AIG, which will generate additional profits for the government in future sellings. However, it hasn’t announced any timetable for the next sale.

Talking to CNBC on Tuesday, American International Group, Inc. (NYSE:AIG) CEO, Robert Benmosche, said that the insurer will now focus on reducing the debts. He expects that the company will be in a position to pay dividends to its shareholders next year.

The Treasury’s stake in AIG is now a minority position, and AIG will move into a new stage where Federal Reserve Bank regulation assesses capital adequacy While this may limit some flexibility over the short term, the seemingly biggest impediment to investor ownership–the government majority stake could cease to be an overhang.

Deutsche Bank Research has an interesting take on the valuation. They think investors are ignoring AIG’s large deferred tax asset. The analysts state;  with a projected $3.45 in 2013 EPS, skeptical investors see the stock fairly valued at a 10x earnings multiple. This method ignores the value of the DTA which is effectively shielding AIG from much of its tax obligations. We believe 10x 2013 plus $8 in a DCF of the DTA ($42) is a more appropriate valuation.

AIG shares jumped 1.7% to $35.02 on Friday, showing a 3 percent gain this week.