Warsh Won’t Succeed Geithner At Fed. Dudley Now Top Pick.

Kevin Warsh, the 38-year-old Fed governor and former M&A executive at Morgan Stanley, was thought to be the lead contender to succeed Tim Geithner as the head of the New York Fed when Geithner takes over as Treasury Secretary under President Obama. But now the number two speculative pick, former Goldman Sachs economist William Dudley, is in the top spot. Not because of competition but because Warsh was deemed too important to a properly functioning Fed in his existing role:

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.

…Warsh’s departure from the Fed Board in Washington 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.

…Warsh, who worked in the mergers and acquisitions department of Morgan Stanley from 1995 to 2002 and later served on the White House staff, was an architect of the terms the Treasury dictated to nine of the biggest U.S. banks in October in return for a $125 billion injection of government funds. He also played a central role in negotiating the sale of the ailing Wachovia Corp., mediating a takeover fight that erupted between Citigroup Inc. and Wells Fargo & Co.

…Before the Treasury’s October decision to take stakes in the nine banks, Bernanke had assigned Warsh to find a way to inject government funds to recapitalize banks while protecting taxpayers and keeping shareholders from fleeing.

…While Dudley is the leading inside candidate for the New York Fed post, 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.

…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.