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N.Y. Fed Chooses Continuity in Selecting Geithner's Replacement

By Neil Irwin
Washington Post Staff Writer
Tuesday, January 27, 2009 12:05 PM

William C. Dudley, a behind-the-scenes engineer in the Federal Reserve's response to the financial crisis, is being promoted to a starring role.

Dudley has been named president of the Federal Reserve Bank of New York today, replacing Timothy F. Geithner, who was sworn in as Treasury Secretary last night. Dudley has been an executive vice president at the New York Fed since 2007, helping design numerous programs to try to guard the financial system against the worst crisis in generations.

He has been in charge of the bank's operations to manage the money supply by buying and selling Treasury securities, and was at Geithner's side through the bailout of Bear Stearns, the decision to allow Lehman Brothers to fail, and the government takeover of American International Group.

With the decision to appoint Dudley, made by the New York Fed's board of directors and approved by Fed Chairman Ben S. Bernanke, those officials opted for continuity over abrupt change. Other leading candidates for the job -- said to include Fed Governor Kevin Warsh, New York Fed official Terrence Checki, and former Treasury official David McCormick -- would also have provided a sense of stability, as they have all been heavily involved in the government's response to the crisis.

Dudley will become the Fed's emissary to Wall Street, where he confronts huge challenges. He will be the primary regulator of the nation's largest financial institutions, including Citigroup and J.P. Morgan Chase. And he will play a leading role in managing the Fed's $2 trillion balance sheet, which has swollen as the central bank undertakes elaborate new efforts to try to restart lending throughout the economy.

He will also be vice chairman of the Federal Open Market Committee, the Fed body that sets monetary policy, and thus an influential voice in fulfilling the central bank's core function of managing the money supply.

Before coming to the New York Fed in 2007, Dudley was chief economist at Goldman Sachs, the investment bank. He had been at Goldman since 1986, and has a doctorate in economics from the University of California at Berkeley.

While he was a frequently quoted economic commentator in his Goldman Sachs days, Dudley has had a low public profile since joining the Fed. He has delivered speeches since the onset of the financial crisis, however, with wry titles such as "May You Live In Interesting Times" and "May You Live in Interesting Times Part II"

"How did the problems in the subprime mortgage area -- with losses that probably will ultimately turn out to be in a range of $100-200 billion -- lead to such broad market distress?" he asked in a speech in October 2007. In his view, the key was that those subprime loans were embedded in a broad array of complicated securities, and the losses made investors less willing to invest in them more generally.

"Investors lost confidence because highly rated securities that referenced subprime assets performed poorly and because investors found it difficult to value complex structured-finance products," Dudley said.

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