Morgan Stanley Changes the Guard

There's little mystery in the resignation of John Mack, the CEO of Morgan Stanley. He will be succeeded by James Gorman, a co-president of the firm. The appointment of Gorman, 50, reflects Morgan Stanley's shift in emphasis from investment banking, trading, hedge funds, and private equity to a more conservative business model in which asset management plays a central role.

During the last year, Morgan Stanley (like Goldman Sachs) reorganized itself as a federally regulated bank. Of the two institutions, the shift in business model appeared more fundamental at Morgan Stanley. Goldman is likely to retain its focus on proprietary trading, hedge funds, and private equity, areas well within its comfort zone. Morgan Stanley, however, has truly moved in a new direction by combining its wealth-management business with that of Citi's Smith Barney unit. That joint venture is overseen by Gorman. His background and skills make him a logical choice to lead Morgan Stanley during the new era.

Mack—once the chairman of Pequot Capital, who, at Morgan, earned the name Mack the Knife during rounds of cost cuts—has a background in investment banking. Back in 2001, he lost a battle for leadership of Morgan Stanley to Phil Purcell, who oversaw the acquisition of the Dean Witter brokerage. Mack spent several years at Credit Suisse First Boston and Pequot before returning to Morgan Stanley in 2005, as Purcell was ousted in an insurrection by investment bankers. Mack dropped the Dean Witter brand from the company's name and focused more on banking, hedge funds, and private equity.

Mack leaves a mixed legacy. He didn't succeed in realizing his strategic plans, but he won't be ranked among goats like Charles Prince of Citi or Stan O'Neal of Merrill Lynch. He led the company during a period in which survival was victory. Morgan Stanley survived, and Mack is probably ready for a break.

With Gorman's appointment, Morgan Stanley completes a shift back to a model that's a bit closer to what Purcell had in mind, albeit with less of a narrow retail focus, and hopefully, stronger management.