Mack's task must be to restore morale

Now comes the hard part. John Mack is taking over a company beset by in-fighting, low morale, mediocre performance, huge legal claims and the loss of key talent.

The Wall Street bank is also facing big strategic questions, particularly the fate of its Discover credit card arm and the struggling brokerage business.

But many on Wall Street believe the scale of the task was greatly exaggerated during the dissidents' successful campaign to oust Philip Purcell.

The head of one rival Wall Street bank said Mr Mack faced a “relatively easy turnaround”. Morgan Stanley's performance had not been that bad and the “franchise” had not been seriously damaged. “It's still Morgan Stanley,” he said.

As Mr Purcell pointed out during the battle over his leadership, much of the dissidents' criticism was highly personal. Whatever they said in public, some say in private that with Mr Purcell gone Morgan Stanley's problems can be easily fixed.

An important early task will be to restore morale, stem the departures and reassure clients, some of which have been horrified at the events of the past few months. Internally, Mr Mack needs to address the tension between the institutional businesses from the old Morgan Stanley and the retail businesses that came with the merger with Mr Purcell's Dean Witter.

A large part of the case against Mr Purcell was his failure to bring the two sides together or to tackle the poor performance of the Dean Witter businesses since the stock market bubble burst.

Given the disappointing performance of the brokerage arm and the asset management business, some insiders believe Mr Mack will move to replace their bosses, John Schaefer and Mitchell Merin.

Some analysts, including Ruchi Madan at Smith Barney, believe Mr Mack's arrival makes it more likely that the brokerage arm will be sold.

However, selling the business would harm Morgan Stanley's important equity underwriting business, some senior executives said. They said that having a large retail brokerage as part of the group helps win it IPO mandates.

Mr Mack may be wary of anything that would weaken the equities business, which insiders said is the most vulnerable of the old Morgan Stanley operations. Although still a formidable force, equities has suffered from several senior departures and dropped from second to fifth place in the global equity capital markets league table in the first half of the year.

Some insiders hope Mr Mack will try to bring back John Havens, who quit as head of equities after Mr Purcell's controversial management reshuffle in March.

Mr Mack will also face an early decision on whether to spin off Discover. Under pressure from investors, Mr Purcell dropped his opposition to a spin-off in April. However, there was a mixed reception to the proposal, which was widely seen as an attempt by Mr Purcell to defuse criticism of his leadership.

Some insiders say Mr Mack's toughest longer-term challenge will be to improve the performance of Morgan Stanley's investment banking businesses. Critics say that compared with some rivals they are not as profitable as they should be, given their size.

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