NEW YORK (Bloomberg) — The US government, majority owner of American International Group Inc. after rescuing the insurer in 2008, is considering a two-year plan to dispose of its stake, said a person with knowledge of the discussions.

The proposal involves converting preferred stock into common shares for sale on the open market, said the person, who declined to be identified because talks with AIG are private. If the New York-based firm consents to the strategy and there is sufficient investor demand, the Treasury Department plan could be announced as early as the fourth quarter, the person said. Treasury has invested about $47 billion in the insurer.

"You don't want to dump shares all at once into the market, you want to do it in an orderly way so the market can digest them," said Charles Calomiris, a finance professor at Columbia Business School in New York. "It's looking like taxpayers are going to get more of their money back," he said.

Treasury Secretary Timothy Geithner has said he doesn't want the US to own private firms for "a day longer than necessary." AIG, rescued during the depths of the financial crisis to prevent an economic collapse, secured deals this year to divest two divisions for about $51 billion. That will allow AIG to pay down a Federal Reserve loan and turn to repaying Treasury, chief executive officer Robert Benmosche has said.

The timetable of one year to two years for disposals reflects the fact that the US owns almost 80 percent of AIG from the September 2008 bailout, in addition to preferred shares obtained in subsequent rescues. Treasury will probably convert and sell preferred shares in increments to remain below that threshold, the person said. A holding of more than 80 percent could force the insurer to change accounting and require the government to put AIG on its balance sheet.

Meg Reilly, a spokeswoman for Treasury, and Mark Herr of AIG declined to comment.

The plan may depend on completion of the division sales and was designed so that AIG can maintain an A credit grade, the person said. Ratings firms typically assign a higher value to common equity over preferred shares, which have characteristics similar to debt. Absent government support, AIG's ratings would be five levels lower, Standard & Poor's said on April 1.

Downgrades could force the insurer to post more collateral to trading partners or discourage commercial or individual clients from buying policies.

If US sales of AIG shares succeed, the firm may issue preferred shares to private investors to raise funds to redeem Treasury holdings, the person said. Treasury named two directors this year to AIG's board because the company skipped dividend payments on preferred shares for four quarters.

Periodically divesting holdings is considered the primary option unless competitors emerge with large enough bids for remaining AIG units to retire the company's obligations, a scenario that is considered unlikely, the person said.

AIG has surged 36 percent in New York trading this year through yesterday, as the company's holdings rebounded and investors bet that there will be value remaining for common shareholders after taxpayers are repaid. The company declined 4.5 percent last year and 97 percent in 2008, the year it posted almost $100 billion in net losses tied to soured housing bets.

Benmosche, 65, said in an April 1 interview that Treasury's planned sale of a 27 percent stake in Citigroup Inc. is a possible model for AIG's path to independence. The divestitures of AIG's largest non-US life insurance divisions, AIA Group Ltd. and American Life Insurance Co., should be completed by year-end, he said.

After the transactions are finished, "we've got to begin to look at what are the alternatives we have to raise sufficient money so that we can pay back" Treasury, Benmosche said.