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UPDATE 1-Ex-AIG CEO loses appeal of bailout lawsuit vs N.Y. Fed

Jonathan Stempel
Wednesday, 29 Jan 2014 | 11:27 AM ET

(Adds details from decision, comments, byline))

NEW YORK, Jan 29 (Reuters) - A federal appeals court upheld the dismissal of a lawsuit by former American International Group Inc Chief Executive Maurice "Hank" Greenberg accusing the Federal Reserve Bank of New York of unlawfully bailing out the insurer at the height of the 2008 financial crisis.

The 2nd U.S. Circuit Court of Appeals in New York said the New York Fed's authority to address threats to the economy in "unusual and exigent circumstances" justified the dismissal of state law breach of fiduciary duty claims by Greenberg's Starr International Co, which once held a 12 percent AIG stake.

Writing for a unanimous three-judge panel on Wednesday, Circuit Judge John Walker said letting Greenberg pursue his Delaware state law claims would have forced the New York Fed to shirk its obligation to act in the public interest, and instead act in the best interests of AIG shareholders.

Walker said this would have improperly "compromised" the federal effort "to rescue AIG from bankruptcy at the height of the direst financial crisis in modern times."

The 2nd Circuit did not address whether the New York Fed exceeded its authority in rescuing AIG, in a bailout that began on Sept. 16, 2008 and grew to $182.3 billion.

Its decision upheld a November 2012 ruling by U.S. District Judge Paul Engelmayer in Manhattan, who had endorsed broad central bank power to address financial crises.

Starr had accused the New York Fed of engineering a "backdoor" bailout for Goldman Sachs Group Inc and other Wall Street banks at the expense of AIG shareholders, by forcing the insurer to unwind bets on mortgage debt through hundreds of billions of dollars of credit default swaps.

The company and Greenberg have also been suing the government in the U.S. Court of Federal Claims in Washington, D.C., employing different legal theories.

AIG is based in New York but incorporated in Delaware.

Starr's lawyer David Boies in a statement said the 2nd Circuit decision addressed only a "narrow issue" of state law preemption and did not affect Starr's constitutional claims in the Washington court, where a trial is scheduled for Sept. 29.

The New York Fed and its lawyer John Kiernan did not immediately respond to requests for comment. AIG spokesman Jon Diat did not immediately respond to a similar request.

The case is Starr International Co v. Federal Reserve Bank of New York, 2nd U.S. Circuit Court of Appeals, No. 12-5022.