Sheets Shifts to Lew’s Frontman From Bernanke Emissary Role

Nathan Sheets, the Federal Reserve’s behind-the-scenes international emissary during the global financial crisis, is returning to the fray as Treasury Secretary Jacob J. Lew’s frontman on the world economic stage.

Sheets, 49, will attend a Group of 20 meeting starting tomorrow in Sydney as a counselor to Lew while awaiting Senate confirmation to be the Treasury’s undersecretary for international affairs. Finance chiefs and central bankers from the biggest emerging and developed economies are convening in Australia’s most populous city to discuss global growth, regulations and the latest spell of market turbulence.

A former economics student of Stanley Fischer at the Massachusetts Institute of Technology, Sheets is shifting to the Treasury after a 2 1/2-year stint at Citigroup Inc. at a time when the department needs his expertise on issues ranging from Europe’s financial system to China’s central bank. Eighteen years of Fed experience on his resume may also help him explain to his G-20 counterparts how U.S. monetary policy will affect their economies.

“Nathan is an accomplished economic diplomat as well as an expert economist,” former Fed Chairman Ben S. Bernanke, a distinguished fellow in residence at the Brookings Institution in Washington, said in a statement. “We depended on both his broad knowledge of international economics and his extensive and cordial relationships with his counterparts around the world.”

Citigroup Economist

Before joining the Treasury, Sheets was Citigroup’s global head of international economics since September 2011. Lew was a chief operating officer and a managing director at Citigroup from 2006 to 2009.

Sheets joined the Fed in 1993 after graduating from MIT in Cambridge, where his Ph.D. thesis was overseen by professors Rudiger Dornbusch and Fischer, whom President Barack Obama nominated last month to be Fed vice chairman after Janet Yellen was promoted to Fed chair. The thesis was titled “Exchange Rates, Public Capital and Productivity.”

In his more recent writings for Citigroup, Sheets said foreign central banks and policy makers have “limited and imperfect” tools to protect themselves against the spillover effects from the Fed’s eventual tightening of monetary policy and rising U.S. long-term interest rates.

Research Topics

The topics of his research notes at Citigroup varied from “Is Immigration the Antidote to Aging Demographics in the Advanced Economies?” to “Is a Renaissance in U.S. Manufacturing Forthcoming?” In an October report, Sheets estimated that demographic changes in China will trim 3.25 percentage points from the country’s economic growth over the next two decades.

Sheets declined to comment. Following protocol until he’s confirmed for the Treasury job, he won’t likely have a public role at the Sydney G-20 talks. No confirmation hearing has yet been scheduled.

At the Fed, Sheets advanced through the ranks to become the director of the international finance division in 2007, one of three so-called barons -- heads of divisions crucial to the Federal Open Market Committee’s decision-making.

In that position, he accompanied Bernanke and former Fed Governor Kevin Warsh on international trips such as the meetings of Group of Seven or G-20.

Crisis Adviser

“He led the international finance division during the seeming calm before the financial crisis and presided during the depth of the financial crisis,” Warsh, now a distinguished visiting fellow at Stanford University’s Hoover Institution and a lecturer at its Graduate School of Business near Palo Alto, California. “He neither gets overly excited when there is a period of financial crisis, nor is he overly complacent when things seem to be going smoothly.”

Sheets was key to the Fed’s 2010 efforts to prevent Europe’s sovereign-debt crisis from crossing the Atlantic and undermining the fragile U.S. economic recovery. He participated in meetings of a new unit the Fed set up to look for weaknesses that could plunge the U.S. financial system into a panic.

Analysis by staff including Sheets allowed Bernanke on May 9, 2010, to make currency swap lines worth billions of dollars available to central banks in Europe, Japan and Canada.

Sheets was in Basel, Switzerland, that day with other Fed officials preparing for the meeting of central bank governors at the Bank for International Settlements. It was his daughter’s 15th birthday, and Mother’s Day in the U.S. He stayed up until 2 a.m. helping craft the swap deal.

Fed’s Lifeline

Coupled with the bailout package of almost $1 trillion mostly from the European Union and unprecedented bond purchases by the European Central Bank, the swap lines showed the Fed’s willingness to step up as the world’s lender of last resort for dollars.

The Standard and Poor’s 500 Index rose 4.4 percent the following day, the most in more than a year, following a 7.2 percent gain in the Stoxx Europe 600 Index, the biggest since November 2008.

Warsh said Sheets was particularly interested in the health of the European banking system and the response of the ECB, experience that comes in handy as Lew focuses this year on pressing European officials to follow the U.S.’s lead in adopting tougher banking regulations.

Transcripts of Fed’s 2008 meetings released today show Sheets briefed policy makers on European banks’ exposure to emerging-markets sovereign debt and assessed the risks of losses on swap lines the Fed was considering with some emerging markets.

Conference Call

During an Oct. 7, 2008 conference call with Federal Open Market Committee, Sheets painted a picture of deterioration in the euro area, the U.K., Japan and developing economies.

“If there is any good news for me to report, it’s that the softening outlook for global growth has continued to put downward pressure on the price of oil and other commodities,” he said.

In 2005, Sheets was a co-author of a Fed paper that showed changing exchange rates were having a declining direct impact on U.S. import prices.

Sheets is the latest in the stream of people shuffling between the Treasury and the central bank.

Awaiting congressional approval as deputy Treasury secretary is Fed Governor Sarah Bloom Raskin. Recruited to serve as department’s assistant secretary for economic policy is Karen Dynan, who spent 17 years on the Fed staff. Obama picked Sheets on Feb. 12 to replace Lael Brainard, who has been nominated to join the Fed’s Board of Governors.

Close Ties

While the personnel choices emphasize continuity in U.S. international policy, they raise some concerns about close ties between the Treasury and the Fed, said Mark Calabria, director of financial regulations studies at the Cato Institute, a Washington-based research group that espouses limited government.

“It is certainly a continuation of that revolving door between the Treasury and the Fed,” said Calabria, a former aide to Senator Richard Shelby, a Republican from Alabama. “There’s a little bit too much of that closeness and that undermines the independence of the Fed from the Treasury.”

Ted Truman, who led the Fed’s division of international finance from 1977 to 1998 and later became Treasury assistant secretary for international affairs, said the move reflects cooperation, not influence, between the Treasury and Fed.

China Knowledge

Clay Lowery, who used to sit next to Sheets at international meetings when their bosses -- former Treasury Secretary Henry Paulson and Bernanke -- were speaking at global forums, said Sheets’s relationships with his Chinese counterparts might be of particular value to the Treasury. The Treasury has a strategic and economic dialogue with Chinese officials including top-level meetings each year.

“Nathan has great experience in international financial circles, is an excellent economist, and has a big brain,” said Lowery, vice president at Rock Creek Global Advisors LLC in Washington, who was the Treasury’s assistant secretary for international affairs from 2005 to 2009. “A completely qualified nomination.”

Lewis Alexander, chief U.S. economist for Nomura Holdings Inc. in New York, knew Sheets when they both worked at the Fed, and said that early on, Sheets primarily worked on industrial countries, especially Japan. His knowledge of that economy might help the Treasury shape policies during the U.S.’s current economic predicament.

Low Inflation

“We are dealing with some of the same issues -- aftermath of the financial crisis, sluggish growth in the wakeup of the recession, low, very low inflation,” Alexander said. “All those issues were in Japan as well.”

Sheets quit the Fed in August 2011 to go to Citigroup. Truman recalled Sheets’ reasoning behind the decision to him over the phone. “He explained that he has found that it’s just taking too much out of him, because he was working 24/7,” Truman said.

After less than three years at Citigroup, Sheets, who is married with four children, is back on the road. Lowery describes the role he’s in line for as a “killer job from a travel and workload perspective.”

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