The investor admitted he misjudged the government's intentions with the insurer. What does that mean for Berkowitz's giant stake?

FORTUNE -- With AIG stock cratering nearly 50% this year, all eyes have turned to investor Bruce Berkowitz, AIG's largest private shareholder. The 52-year-old fund manager looked especially smart last year while amassing 40 million shares of the insurance giant. Back then, AIG shares were skyrocketing and embarrassing hedge fund managers like Steve Eisman who were betting on the stock's collapse.

Bruce Berkowitz

Berkowitz was mum on AIG (AIG) this year until yesterday, when the Wall Street Journal first reported that he took his lumps and told his investors in a conference call that he had made a critical error. Instead of the U.S. Treasury selling its huge 92% stake in AIG -- about 1.7 billion shares worth -- for prices near AIG's book value (upwards of $47 a share), Berkowitz said he now expects the government to sell them closer to the current market price of $27-$29 a share. The significance of his miscalculation is obvious: instead of potentially supporting AIG's share price in the mid-$40s, the U.S. Treasury's share sale is likely to depress the value of Berkowitz's own stake, which includes shares purchased at prices ranging from the mid-$20s to mid-$40s.

It became apparent last year that the government would begin unloading its stake in the first half of 2011. But at the end of 2010, when AIG shares traded above $50, it looked as if the sale would produce a tidy profit. Berkowitz said as much in a December Q&A with Fortune:

The government had a pretty good record selling its shares in Citi without hurting the stock price. Do you think that will happen with AIG?

Yes, I do. If the marketplace understands that the Treasury is not going to be forced to sell its position at a poor price, then the value of the company will start to be judged based upon its intrinsic value rather than a constant focus on the stock overhang. I mean, if you take a look now at the amount of the government shares, the government is going to do great. 1.66 billion shares at $46 is a lot more than they're owed. More