At Morgan Stanley, Mack steps back

NEW YORK (Reuters) - In his second tour of duty at Morgan Stanley, John Mack kept the Wall Street bank from descending into the oblivion that engulfed fallen rivals Bear Stearns Cos and Lehman Brothers Holdings Inc.

What he did not do was make the bank perform as well as Goldman Sachs Group Inc, its closest rival.

When Mack steps down at year end after 4-1/2 years as Morgan Stanley's chief executive, he will leave behind a much changed bank that withstood the global financial crisis by reducing risk and quickly raising needed capital.

Mack "came in with lots of applause from the trading floor, the people wanted him back, and he came in a very difficult time," said Michael Holland, president of money manager Holland & Co in New York. "But after September of last year, the game changed dramatically."

Since Mack joined the bank in June 2005, Morgan Stanley shares have fallen 35 percent. But Goldman's rose 71 percent. The Standard & Poor's 500 shed 12 percent.

Other rivals were less fortunate. Bear nearly collapsed when it was bought by JPMorgan Chase & Co. Lehman went bankrupt. Merrill Lynch & Co evaded the brink when it was claimed by Bank of America Corp. Citigroup Inc, meanwhile, is now a $5 stock, one-third owned by taxpayers.

The 64-year-old Mack, a son of Lebanese immigrants, is not going far. He will remain chairman, while 51-year-old co-president James Gorman, long considered an heir apparent, will become chief executive.

"I don't believe I'm leaving," Mack said in an interview.

Robert Albertson, chief investment strategist at Sandler O'Neill & Partners LP, said: "You have to assess the man for the sum of what he's done. He's handled more challenges than most people get to deal with, and he usually did the right thing and did it well."

SECOND COMING

When he rejoined Morgan Stanley, Mack replaced Philip Purcell, who had been ousted following a bitter public battle over his leadership. It was widely seen as a form of revenge for Mack, whom Purcell himself had ousted in 2001.

"I am proud to return home," Mack said at the time.

Before the financial crisis and like many rivals, Morgan Stanley ratched up its trading risk, only to suffer billions of dollars of losses.

Some of those losses preceded the surprise November 2007 departure of Zoe Cruz, considered perhaps Wall Street's most powerful woman executive and a potential successor to Mack.

After Lehman went bankrupt last September 15, Mack acted fast, making Morgan Stanley a bank holding company so it could tap more funding sources and be less dependent on capital markets.

Many investors were unconvinced, driving the bank's shares down to $6.71 in October 2008. They closed Thursday at $28.64.

Mack shrank Morgan Stanley's balance sheet and reduced leverage. He also expanded in wealth management through a majority stake in the brokerage joint venture with Citigroup.

Perversely, the changes left the man known as "Mack the Knife" for his aggressiveness and cost cutting prowess -- not for any resemblance to singer Bobby Darin -- open to charges he had become too timid, sallies once leveled at Purcell.

Even as the financial crisis peaked, he won a $9 billion investment from Japan's Mitsubishi UFJ Financial Group Inc, which became its largest shareholder.

And Morgan Stanley took $10 billion as one of the initial aid recipients of the federal bank bailout program, but it was among the first banks to pay the government back. Morgan Stanley has also redeemed the attached stock warrants.

However, results have been muted. Morgan Stanley's loss applicable to shareholders was $1.26 billion in the second quarter, its third straight quarterly deficit.

"Their earnings haven't been as robust and exciting as Goldman Sachs," said Mike Knebel, a fixed-income manager at Ferguson Wellman Capital Management in Portland, Oregon. "That shouldn't reflect poorly on (Mack). He and his firm have done fairly well by their clients."

MOVING ON

A former football player at Duke University, Mack is one of Wall Street's more colorful characters.

He once flirted on a London stage, with more than 1,000 bankers looking on, with Joanna Lumley, the actress who played the dipsomaniac Patsy Stone in "Absolutely Fabulous."

Mack joined Morgan Stanley's bond department in 1972 and rose to president by 1993. He accepted the No. 2 job after a merger in 1997 with the Dean Witter brokerage, led by Purcell.

After being kicked out in 2001, Mack resurfaced at the Swiss bank Credit Suisse Group, eventually become co-chief executive. That arrangement did not last, and the board chose not to renew his contract.

He would then briefly join the hedge fund Pequot Capital Management Inc as chairman in June 2005 before almost immediately leaving for Morgan Stanley.

Holland was encouraged by the appointment of Gorman, saying he has a "strong reputation" and is well regarded internally.

"The most important thing John Mack has done is to prepare the company for his successor," Holland said. "He's got a new team in place, he's done nice work, and it's time for him to move on."

(Reporting by Jonathan Stempel; Additional reporting by Steve Eder, Joseph A. Giannone, Juan Lagorio, Jonathan Spicer, Caroline Valetkevitch and Dan Wilchins; Editing Bernard Orr)