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

Monday's decision by U.S. District Judge Paul Engelmayer in Manhattan is a sweeping defeat for Greenberg and his Starr International Co, which once held a 12 percent stake in AIG.

It also provided a ringing endorsement of broad central bank power to preserve the health of the economy and global financial system from threats posed by a large, systemically important company such as AIG, which was bailed out for $182.3 billion.

A spokeswoman for Greenberg's lawyer, David Boies, had no immediate comment. Greenberg's office had no immediate comment. A spokesman for the New York Fed did not immediately respond to requests for comment.

Greenberg, 87, has been pursuing a related case against the Federal Reserve in a Washington, D.C. court, raising different legal theories.

Once the world's largest insurer by market value, AIG was bailed out on September 16, 2008, one day after Lehman Brothers Holdings Inc went bankrupt, as losses skyrocketed from risky bets on mortgage debt through credit default swaps.

"CORPORATE DESPERATION"

Greenberg, who led AIG for nearly four decades before he was ousted in 2005, accused the New York Fed of wasting more than $60 billion of AIG and taxpayer funds in a "backdoor bailout." The lawsuit said the bailout let favored trading partners such as Goldman Sachs Group Inc be repaid in full and freed from legal liability.

He also said the bank circumvented the law by letting the U.S. Treasury take a nearly 80 percent stake in the New York-based insurer without giving existing shareholders a vote.

But Engelmayer said AIG acted out of "corporate desperation" in accepting a bailout, and rejected what he called Greenberg's likening of the New York Fed to a "loan shark" in 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.

ATTAINING CLOSURE

At the time of the bailout, Henry Paulson headed the U.S. Treasury Department, while his successor, Timothy Geithner, had been president of the New York Fed.

Engelmayer found that the central bank appropriately exercised its authority to try to preserve the banking system, reduce the threat of "grave national and international financial repercussions," and minimize losses to the public.

"While driving a hard bargain with the counterparties might have saved AIG and its shareholders money, FRBNY could reasonably conclude that its statutory mission of stabilizing the economy made speed and closure a top priority," he wrote.

"It could reasonably conclude that it was time for the cycle of collateral calls and mammoth rescue loans to end; that the stability of the U.S. economy required decisively terminating AIG's exposure to counterparties; and that paying par value -- as opposed to opening up a bazaar of uncertain and maybe protracted negotiations with counterparties -- was the best means to attain such closure."

Engelmayer dismissed Starr's claims "with prejudice," meaning they cannot be brought again.

D.C. CASE GOES FORWARD

In Greenberg's separate case in the U.S. Court of Federal Claims in Washington, D.C., which handles lawsuits seeking money from the government, he also accused regulators of engineering an unconstitutional bailout. The presiding judge has said the case can go forward.

Starr contended that the AIG bailout deprived shareholders of their due process and equal protection rights through an illegal "taking" of property, a claim it waived in the New York lawsuit.

Since the bailout, the government has been reducing its stake in AIG, which has fallen to about 15.9 percent.

Shares of AIG were up 59 cents, or 1.9 percent, at $32.39 in morning trading New York Stock Exchange. They have lost more than 97 percent of their value since credit conditions began to tighten in mid-2007.

The cases are Starr International Co v. Federal Reserve Bank of New York, U.S. District Court, Southern District of New York, No. 11-08422; and Starr International Co v. U.S., U.S. Court of Federal Claims, No. 11-00779.

(Additional reporting by Lauren Tara LaCapra; Editing by Gerald E. McCormick, Maureen Bavdek and Grant McCool)