The Federal Reserve Bank of New York won the dismissal of former American International Group Inc. CEO Maurice "Hank" Greenberg's $25-billion lawsuit accusing it of unlawfully bailing out the insurer during the 2008 financial crisis.

The decision issued Monday by U.S. District Judge Paul Engelmayer in Manhattan was a ringing endorsement of broad central bank power to try to preserve the global financial system from systemic threats.

It was also a defeat for Greenberg, 87, and his Starr International Co. Before the bailout, AIG had been the world's largest insurer by market value, and Starr was its largest shareholder, with a 12 percent stake.

"The decision vindicates the Fed at every turn," said David Skeel, a law professor at the University of Pennsylvania. "It shows a willingness, now and in the future, to give the Federal Reserve extraordinary flexibility to respond to a financial crisis without a serious risk of potential legal liability."

Starr accused the New York Fed of engineering a "backdoor" bailout for Wall Street banks including Goldman Sachs Group Inc. at the expense of AIG shareholders, by forcing the insurer to unwind its bets on mortgage debt through hundreds of billions of dollars. Those bets were made using exotic instruments called credit default swaps.

But Engelmayer said AIG acted out of "corporate desperation" in accepting the $182.3-billion rescue. He also rejected Starr's likening the New York Fed to a "loan shark" for providing an initial $85-billion credit line at a 14.5 percent interest rate.

"Merely because the AIG board felt it had 'no choice' but to accept bitter terms from its sole available rescuer does not mean that that rescuer actually controlled the company," Engelmayer wrote.

advertisement | advertise on newsday

The judge also found nothing to suggest that AIG directors who approved the unwinding of the swaps were "in any way less than 100 percent independent."

Starr and Greenberg are still suing the New York Fed in the U.S. Court of Federal Claims in Washington, D.C., under different legal theories.