The US Federal Reserve says its actions to rescue AIG at the height of the financial crisis in 2008 were “legal, proper and effective”.

The central bank last week defended its role in the bailout after the US Court of Federal Claims ruled AIG’s major shareholder in 2008, Starr International Co, is not entitled to compensation for the Federal Reserve’s actions.

Although the court ruled against compensation, it did say the action was illegal. Federal law does not allow the Government to take over a private corporation as though it is the owner.

Starr’s leading shareholder and AIG’s former CEO, Hank Greenberg, led the action for damages of $US40 billion ($51.86 billion) and says Starr will appeal.

The Federal Treasury acquired a 79.9% stake in AIG in return for an $US85 billion ($74.87 billion) emergency loan. Starr says the Government grabbed the stake illegally and without paying fair compensation to shareholders.

The Federal Reserve says its actions “prevented losses to millions of policyholders, small businesses and American workers who would have been harmed by AIG’s collapse during the financial crisis”.