Paulson Loses Closest Wall Street Adviser After Steel Quits

By Brendan Murray and Rebecca Christie

July 10 (Bloomberg) -- The resignation of Robert Steel as the U.S. Treasury's top domestic finance official leaves Secretary Henry Paulson without his closest Wall Street adviser as the economy struggles to rebound and credit turmoil deepens.

Steel, a former vice chairman to Paulson at Goldman Sachs Group Inc., quit yesterday to lead Wachovia Corp., the fourth- biggest U.S. bank. The former undersecretary led talks with bankers and securities firms in the past year as the Treasury orchestrated the administration's reaction to the credit crisis.

The departure may leave the Bush administration with diminished clout with Wall Street just as Treasury officials are pushing securities dealers away from reliance on government help. The announcement came on the eve of Paulson's testimony to Congress on overhauling financial regulations, an initiative Steel's department had led.

``Losing him will be a great blow,'' said Joseph Mason, a banking professor at Louisiana State University, in Baton Rouge who used to work at the Treasury's Office of the Comptroller of the Currency, one of five federal bank regulators. ``Right now you want somebody like Steel, who's well known and who carries more of a reputation with the Street.''

The Treasury said in a statement that Anthony Ryan, who worked under Steel as assistant secretary for financial markets, will take on a ``broader role,'' and other aides will also take on more duties.

Wachovia Loss

Steel, 56, joined the Treasury in October 2006. He worked at Goldman for three decades, departing as a vice chairman. He takes charge at Charlotte, North Carolina-based Wachovia after Chairman Lanty Smith, 65, ousted Kennedy Thompson on June 2 following the lender's surprise first-quarter loss.

``I know he will excel in his future endeavors,'' Paulson, 62, said in a statement. ``I have great confidence in the abilities of the domestic finance team at Treasury to adjust to this change and not miss a beat.''

The Treasury chief is scheduled to testify at the House Financial Services Committee today at 10 a.m. in Washington. Paulson may reprise his proposals for increased ``market discipline'' among financial firms, a wider supervisory role for the Federal Reserve and a liquidation procedure for failing investment banks.

``The secretary is in full gear,'' Steel said in an interview yesterday, adding that the hearing is in part a result of the ``blueprint'' for changes the Treasury laid out in March.

Paulson said in a July 2 speech in London that ``it is imperative that market participants not have the expectation that lending from the Fed or any other government support is readily available.'' Fed Chairman Ben S. Bernanke also testifies at today's hearing.

Ryan Steps Up

Ryan, 45, started at the Treasury in 2006, and previously was a portfolio manager at PanAgora Asset Management and State Street Corp.

Steel's position required Senate confirmation. Finding a permanent replacement may be difficult because the Democratic- majority Senate may not rush to confirm any nominee by President George W. Bush, who's term ends Jan. 20. The Senate has already failed to act for more than a year on two of Bush's three candidates for the Fed Board.

``With the confirmation process on hold until the election, the Treasury, like the Fed, will be increasingly short-handed as the year goes on,'' said Louis Crandall, chief economist at Wrightson ICAP LLC, a Jersey City, New Jersey-based research firm. The elections are in November.

Worst Crisis

Steel tapped his experience and contacts from Goldman years to become the secretary's eyes and ears on Wall Street, during a financial crisis former Fed Chairman Alan Greenspan has called the worst since World War II.

Like Paulson, he resisted calls in Congress for a taxpayer bailout of homeowners stuck with mortgages they can't afford, while helping advise on the Fed's lending to Bear Stearns Cos. that secured the firm's takeover by JPMorgan Chase & Co.

The Treasury, concerned at the so-called moral hazard of aiding an investment bank, advised a cheaper purchase price for the collapsing firm. Moral hazard is the danger of firms taking on more risk in anticipation of government assistance should their bets go wrong.

JPMorgan initially agreed to pay $2 a share, later raised to $10. The company's stock reached a high of $172.61 in January 2007.

Regulatory `Blueprint'

At the end of March, the Treasury announced its ``blueprint'' for overhauling financial regulators. Steel helped lead the effort, which pre-dated the credit crisis. He had campaigned to end what he called a ``patchwork quilt'' of regulation that had developed over decades and left unclear lines between one supervisor and another.

Analysts anticipate that legislation enacting regulatory changes won't come until next year, once a new administration takes office.

``Nothing that this Treasury produces at this point is going to become statutory policy,'' said William Black, a former deputy director of the Federal Savings and Loan Insurance Corp. and now an associate professor of economics and law at the University of Missouri in Kansas City. ``They're not going to get any substantive legislation passed.''

Steel received a bachelor's degree from Duke University and a master's degree in business administration from the University of Chicago.

To contact the reporters on this story: Brendan Murray at brmurray@bloomberg.net