N.Y. Fed's Sarah Dahlgren to Resign as Head of Supervision -- 2nd Update

By Ryan Tracy 

The top Wall Street supervisor at the Federal Reserve Bank of New York is resigning at the end of the year, a sudden departure that comes as the regulator takes heat over its ability to oversee the nation's biggest banks.

Sarah Dahlgren, a 25-year veteran and executive vice president at the regional bank, has decided to step down, the New York Fed said Thursday. She will briefly transition to a senior-adviser role on Oct. 1, before leaving the institution at the end of 2015.

Ms. Dahlgren is leaving as the New York Fed faces growing scrutiny over its regulatory prowess and as it wrestles with a power shift that has centralized more authority in Washington. In the years following the 2008 financial crisis, the New York Fed lost power in an internal struggle that gave Washington-based Fed officials the final say over regulatory decisions. Last fall, the Fed inspector general faulted the New York Fed over the "London Whale" trading losses at J.P. Morgan Chase & Co. and lawmakers grilled New York Fed President William Dudley for being too close to Wall Street.

The New York Fed said it would immediately begin searching for her replacement "in consultation with" the Fed's board of governors in Washington, D.C.

Ms. Dahlgren, 51, was known as a so-called lifer at the New York Fed, rising through the ranks after starting as a bank examiner in 1990. Former New York Fed President and Treasury Secretary Timothy Geithner picked her to steer the Fed's crisis-era rescue of American International Group Inc. and she won accolades after the giant insurance company returned from the brink of collapse, had a successful initial public offering and paid back taxpayers. In her current role, as head of the New York Fed's Financial Institution Supervision Group, she led a team supervising Wall Street titans like J.P. Morgan and Goldman Sachs Group, Inc.

"Sarah drew on the lessons of the financial crisis to implement significant reforms and innovations in how we supervise the largest institutions," Mr. Dudley said in a news release Thursday. "I accepted her resignation with great regret and wish her well."

A New York Fed spokeswoman said Ms. Dahlgren wasn't available for comment.

Ms. Dahlgren was appointed head of supervision in 2010, with Mr. Dudley calling her "battle-tested." That same year, Washington, D.C.-based Fed officials, including Fed governor Daniel Tarullo, created a new internal structure that began to remove significant regulatory decision-making from New York, where it had resided for decades.

Incidents like the 2012 "Whale" debacle, in which J.P. Morgan took more than $6 billion in losses related to derivatives, gave more ammunition to those seeking to take power from New York. The Fed inspector general in October said the New York Fed missed a chance to detect J.P. Morgan's problems. Mr. Dudley has said the Fed was strapped for resources at the time and noted that J.P. Morgan had sufficient capital to survive the episode.

Last fall, Mr. Dudley was grilled before Congress after a former New York Fed employee disclosed recordings that purported to show New York Fed examiners cowing to Goldman Sachs bankers in early 2012. Mr. Dudley told lawmakers his institution isn't a captive of Wall Street and has made significant changes to the way it supervises big banks.

In an interview with The Wall Street Journal before assuming the lead supervisor role, Ms. Dahlgren said "there probably needs to be a more forceful posture" in the New York Fed's supervision of banks.

The financial crisis exposed "broad challenges and failures" across the Fed and the financial system, she said. "It would be a shame not to learn from those lessons."

Recently, she spearheaded an effort to move Fed bank examiners out of their offices inside the firms they oversee and into a building near the New York Fed's headquarters in lower Manhattan. She has also implemented the Fed's postcrisis initiatives pushing banks to maintain far more loss-absorbing capital to protect against losses.

Write to Ryan Tracy at [e-mail]

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