Cohen is the third top candidate who has withdrawn from a potential Treasury job.
The previous candidate for Deputy Treasury Secretary, Annette Nazareth, pulled herself out of the running when she realized she'd face questioning over her failure to catch Bernie Madoff's Ponzi scheme during her time at the Securities & Exchange Commission. Caroline Atkinson, who was up for Undersecretary for International Affairs, was told she had to withdraw because of tax problems.
Cohen, a partner in New York law firm Sullivan & Cromwell LLP, has counseled Wall Street's biggest bankers and would likely have gotten an official nomination from Obama for the deputy post.
An "issue" arose in the final vetting process as top Democrats went over Cohen's credentials, Democratic sources said.
One source said that it was "back to the drawing board" for Treasury candidates.
The Treasury Department is severely understaffed - Secretary Timothy Geithner is running the show alone, single-handedly attempting to fix the country's fiscal crisis.
Cohen's withdrawal will likely fuel the fire for critics of the Obama administration, who claim that the new commander in chief has been unable to retain any quality candidates for positions inside his cabinet.