Warsh to Remain at Fed Board as Successor Sought for Geithner

By Craig Torres

Jan. 18 (Bloomberg) -- Federal Reserve Governor Kevin Warsh, once a leading contender to succeed Timothy Geithner as president of the New York Fed, is no longer in the running.

Warsh, 38, will remain Chairman Ben S. Bernanke’s chief liaison with the Treasury Department and other regulators as the central bank prepares to roll out billions of dollars in new programs to revive lending, said a person familiar with the matter. Warsh’s withdrawal leaves William Dudley, 56, the New York Fed’s top markets official and a former Goldman Sachs Group Inc. economist, as the leading internal candidate for the job.

“Bill is an economist who spent most of his career following the Fed and monetary policy,” said Robert Eisenbeis, a former research director at the Atlanta Fed, who worked with Dudley when both were at the Fed Board in the 1980s. “He also knows the market side.”

Warsh’s departure would have left Bernanke and Fed Vice Chairman Donald Kohn as the only experienced governors in the midst of the biggest expansion of the central bank’s role in the economy since the Great Depression. The newest governor, Elizabeth Duke, has been in her position since August, and there are still two vacancies at the Board in Washington.

Directors have also spoken in recent weeks with Credit Suisse executive Paul Calello; Terrence Checki, the New York Fed’s head of emerging markets and international affairs, and David McCormick, outgoing Treasury undersecretary for international affairs, according to people familiar with the process. H. Rodgin Cohen, chairman of the New York law firm Sullivan & Cromwell LLP, isn’t considered a frontrunner.

Treasury Nominee

The New York Fed is seeking a replacement for Geithner, who has been nominated by President-elect Barack Obama to be Treasury secretary and faces Senate confirmation hearings as soon as next week. The New York Fed chief administers more than half of the central bank’s $2 trillion of assets and serves as its main link with financial markets.

With the economy mired in a recession and financial markets still shaky, the head of the New York Fed will be a central figure in the discussions on cleansing bad assets from bank balance sheets, shaping bank regulations, and eventually unwinding the central bank’s emergency lending programs.

The Fed’s lending is “not as elegant as we might like,” Dudley said Jan. 4 at a conference in San Francisco. Still, “if we don’t do anything to slow down the pace of that adjustment” in banks’ balance sheets, “it’s going to do very significant damage to the macro economy,” he said.

Expanding Role

Some regional Fed bank presidents have been critical of the Board and New York Fed decisions to expand the central bank’s role. The central bank is financing $334 billion in commercial paper, some of it issued by non-bank corporations, and participating in a government program to insure the troubled assets of Bank of America Corp. and Citigroup Inc. The Fed is also financing American International Group with $82.6 billion in emergency credits.

“The critical policy question of our time is where to establish the boundaries around the public-sector safety net,” Richmond Federal Reserve Bank President Jeffrey Lacker said in a speech two days ago. “The dramatic recent expansion in Federal Reserve lending, and government support more broadly, has extended public sector support beyond existing supervisory reach.”

Regional Fed bank presidents are nominated by their boards and subject to approval by the Board of Governors in Washington, which already has two vacancies. Warsh’s term as Fed governor expires Jan. 31, 2018, leaving him the option of remaining in Washington for a prolonged period. He joined the Fed in February 2006, taking up part of an unexpired 14-year term.

Berkeley Degree

Before joining the New York Fed in January 2007, Dudley spent more than two decades as an economist at Goldman Sachs, taking over the U.S. research team in 1995. Dudley worked at the Fed in Washington from 1981 to 1983, another period of recession. He earned a doctorate in economics from the University of California at Berkeley.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net