WHAT THEY DO
Morgan Stanley can never be accused of flying under the radar. The company has four business arms now, but in September 2007 the Discover credit card unit will be spun off into a separate public entity, as C.E.O. John Mack announced in December 2006. The move allows Goldman Sachs’ No. 1 rival to focus on investment management, brokerage services, and institutional securities—and finally regain its position at the top of Wall Street investment banks.

WHERE THEY CAME FROM
The very company that spawned Morgan Stanley, J.P. Morgan, is now a major competitor. It all began in 1934, when J.P. Morgan dropped its investment-banking business to comply with regulations imposed after the 1929 stock market crash. Two of the firm’s leading employees, Henry Morgan and Harold Stanley, seized the opportunity to establish their own investment bank, Morgan Stanley, capitalizing on the corporate relationships they had developed at J.P. Morgan. By the time Morgan Stanley took a seat at the New York Stock Exchange in 1942, it had developed a stellar reputation as a bond issuer. The firm was flying high through the ’80s, securing such high-profile clients as General Electric. In 1997, Morgan Stanley (which had gone public in 1986) merged with brokerage firm Dean Witter and Discover & Co., the financial-services business that Sears had spun off in 1993. Five years later, the Morgan Stanley Dean Witter Discover & Co. tongue twister became known simply as Morgan Stanley.

WHAT THEY GOT RIGHT
Morgan Stanley started strong—after just one year, the firm was handling $1.1 billion in stock and bond issues—and has a track record of innovation.

In 1964, Morgan Stanley created the world’s first computer model for economic analysis, an application that introduced Wall Street to the massive role technology would soon play and pulled the bank away from the pack. In the ’50s, Morgan Stanley was considered the gold standard for bond issues, handling deals for giants like General Motors, U.S. Steel, and AT&T. During the ’70s, it established the financial industry’s first-ever mergers-and-acquisitions department. In 2000, Morgan Stanley managed Deutsche Telekom’s corporate bond issue, the largest to date: $14.6 billion.

The first Wall Street firm to launch a Chinese-language website (in 1994), Morgan Stanley has always been lauded for its worldliness. This reputation was strengthened in 2006 when the company set up shop in Dubai.

WHAT THEY GOT WRONG
In 2005, Philip Purcell resigned as C.E.O. under heavy, public pressure from a group of former Morgan Stanley execs known as the Group of Eight. In addition to missing out on blockbuster merger deals with J.P. Morgan, Bank One, and most recently BlackRock, Purcell was blamed for failing to integrate Dean Witter’s retail operations with Morgan Stanley’s investment-banking services. Friction between Purcell and top executives triggered an employee exodus from 2000 to 2005; Mack, president at the time, was among those who fled.

Mack’s departure in 2001 didn’t come as a surprise. In the late ’90s, he had suggested to Purcell that Morgan Stanley merge with Chase Manhattan. Purcell told Mack that J.P. Morgan was a better option, but then missed the boat: In 2000, J.P. Morgan swooped in and purchased Chase Manhattan. Mack said goodbye a year later, when he lost a fight with Purcell over who would head Morgan Stanley; he moved on to become the co-C.E.O. of Credit Suisse First Boston. He went back to Morgan Stanley as C.E.O. in 2005.

By 2005, eight years after the Dean Witter Morgan Stanley merger, the investment bank still accounted for two-thirds of the company’s earnings. The Discover Card business’s outstanding balance had been shrinking since 2002, but record profits for the unit in 2006 finally allowed Mack to go ahead with the long-planned divestiture.

WHAT'S NEXT
Since his return, Mack has been doing everything in his power to undo Purcell’s legacy. He wants to transform Morgan Stanley’s culture by encouraging employees to take risks and jump on deals before it’s too late. Will the company regain its golden reputation? It’s difficult to say. Morgan Stanley has already sent the Discover Card business in another direction. Some analysts predict Mack will eventually cave in and sell the entire firm to J.P. Morgan, a move that would send Morgan Stanley back to the firm from which its founding partners split in 1935. —Jessica Liebman