Geithner Effort to Staff Treasury Hit by Nazareth’s Withdrawal

March 6 (Bloomberg) -- Treasury Secretary Timothy Geithner’s effort to staff his department and assemble deeper expertise to flesh out his financial-rescue plan received a new blow yesterday with the withdrawals of a potential deputy and undersecretary.

Former U.S. Securities and Exchange Commission member Annette Nazareth took herself out of the running after concern about public scrutiny over her SEC work and frustration at the length of the selection process, according to people familiar with the matter. International Monetary Fund official Caroline Atkinson pulled out of consideration for the Treasury’s top international job, people briefed on the decision said.

The setbacks leave the Treasury chief without any Senate- confirmed senior staff just as he tries to build confidence in his plan to cleanse banks’ balance sheets and jumpstart the market for securities backed by loans. Nazareth’s decision may make it even harder to lure skilled candidates, highlighting the challenge of the nomination process, analysts said.

“The vacuum at the upper levels of the department could hardly have come at a worse time,” said Louis Crandall, chief economist at Jersey City, New Jersey-based Wrightson ICAP LLC. The disarray comes even though “it was clear the moment” the bank-rescue fund “legislation was passed in October that getting the Treasury Department staffed quickly would have to be the top domestic priority for any incoming administration,” he said.

Cohen, Brainard

H. Rodgin Cohen, chairman of New York law firm Sullivan & Cromwell LLP, is being considered for a senior Treasury job, possibly deputy secretary, people familiar with the discussions said. Lael Brainard, a senior fellow at the Brookings Institution in Washington and former deputy director of the National Economic Council under President Bill Clinton, is a contender for undersecretary for international affairs, the people said. Cohen and Brainard didn’t return telephone calls seeking comment.

Geithner has brought in some high-level aides to work in posts that don’t require Senate confirmation, including Gene Sperling, a former head of the White House National Economic Council under Clinton and Lee Sachs, a former Clinton Treasury official. During the administrations of Clinton and George W. Bush, some top Treasury positions went unfilled for months.

“We’re making some progress and we’ll -- we hope to come up for the committee soon with a full slate of very strong people,” Geithner said when asked about staffing at a congressional hearing this week. Treasury spokesman Isaac Baker said yesterday that “with more than 50 political appointees already hard at work, the department is ahead of staffing levels from previous administrations.”

Legal Work

Nazareth, 53, a partner at the Davis Polk & Wardwell law firm in Washington, didn’t immediately return a call seeking comment. Kevin Cavanaugh, a spokesman at the firm, declined to comment. Atkinson wasn’t immediately available for comment.

At the SEC, Nazareth was a driving force in urging a merger of the NASD, an industry-funded regulator of U.S. brokerages, with most of the New York Stock Exchange’s regulatory arm. The SEC approved the consolidation, which formed the Financial Industry Regulatory Authority, in July 2007. That group has come under fire on Capitol Hill for not spotting the $50 billion Ponzi scheme allegedly masterminded by Bernard Madoff.

Before becoming a commissioner in 2005, Nazareth was the staff member in charge of overseeing brokerage firms, market surveillance and stock exchanges. She led the division in 2004 when it designed a program to monitor whether Wall Street’s biggest securities firms had adequate capital and liquidity.

SEC Inspector General David Kotz faulted the program in a September report, saying the SEC failed to respond to “numerous, potential red flags” at Bear Stearns Cos., which collapsed a year ago. Lehman Brothers Holdings Inc. went bust in September.

Volcker Criticism

Former Federal Reserve Chairman Paul Volcker late last month told a congressional committee that the lack of top appointees at the Treasury was “shameful” given the crisis. Bank executives are also upset over their lack of access to the department as it crafts policies that will affect their industry for decades.

The Treasury is aiming to publish more details on its $1 trillion plan to remove distressed mortgage assets from banks’ balance sheets within the next two weeks. President Barack Obama has also ordered his economy team to help form legislation to overhaul U.S. financial rules within weeks.

Cohen, the Sullivan & Cromwell partner, has ties to numerous firms that have been shuttered, bailed out or acquired in the $700 billion financial rescue. Among the companies he has represented are Lehman, Goldman Sachs Group Inc., JPMorgan Chase & Co., Fannie Mae and Wachovia Corp.

While congressional lawmakers this week expressed what some observers termed “bailout fatigue,” some analysts said Cohen’s deep knowledge of financial institutions can only help Geithner.

“He would be an unparalleled choice,” said William Sweet, a banking partner at the Skadden, Arps, Slate, Meagher & Flom law firm in Washington. While Cohen has “certainly represented a great deal of Wall Street, if you don’t have someone with real expertise it’s hard to get things done.”

To contact the reporters on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net.

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net.