Zoe Cruz steps down as Morgan Stanley co-president

NEW YORK (Reuters) - Morgan Stanley Co-President Zoe Cruz is retiring, the investment bank said on Thursday, as the subprime mortgage crisis ends a 25-year tenure for a woman who had been seen as the front-runner to succeed Chief Executive John Mack.

The resignation was part of a broad management shake-up at the second-largest U.S. investment bank. Walid Chammah and James Gorman were named co-presidents. Robert Scully, co-president with Cruz, is joining a new Office of the Chairman. Morgan Stanley's co-trading head, Neal Shear, is now chairman of the company's commodities business.

Cruz resigned three weeks after Morgan Stanley said it suffered $3.7 billion of subprime mortgage-related losses in September and October.

"Zoe clearly is accepting responsibility for the trading disappointment in the fourth quarter," said Brad Hintz, analyst at Sanford C. Bernstein & Co. Morgan Stanley's shares are down 23 percent this year, a worse performance than its peers.

Cruz, 52, joined Morgan Stanley in 1982 as a foreign exchange trader and rose to become head of fixed income trading by 2000.

A source said on November 9 that Mack had tapped Cruz as the leading candidate to succeed him, despite the write-downs that had been disclosed two days before.

Mack, 63, has a five-year contract that extends to 2010. He is not expected to leave Morgan Stanley any time soon, but his close links to Hillary Clinton, front-runner for the Democratic presidential nomination, have fueled speculation that he could become the next U.S. Treasury Secretary.

The hard-charging Cruz was nicknamed "Cruz Missile" at Morgan Stanley, but she was respected. She was paid $30 million in 2006, making her No. 1 on Fortune's list of 25 highest-paid corporate women.

At Morgan Stanley's annual meeting on April 10, Mack noted the company had posted record results in fiscal 2006 and in the first quarter of 2007, and said "that strong performance is in large part due to Zoe Cruz and the institutional securities group, which manage a tremendous amount of risk in a very smart and disciplined way."

HANDLING RISK -- OR NOT

But many firms that seemed to have an excellent handle on risk management didn't.

Merrill Lynch & Co posted a 31 percent increase in second quarter earnings in July, and the company's chief financial officer, Jeff Edwards, said on a conference call that "we have very effective risk management."

Three months later, the company wrote off $8.4 billion tied to mortgages. Within a week, Chief Executive Stanley O'Neal had resigned.

Meanwhile, Citigroup Inc Chief Executive Charles Prince resigned on November 4 as the largest U.S. bank by assets announced some $8 billion to $11 billion in write-downs, though in the months before he left, a number of senior executives were fired, including a fixed-income trading head.

"When something goes wrong, most CEOs don't stand up and say 'it's my fault,' they try to find someone they can point their finger at," said Jim Huguet, co-chief executive of Great Companies LLC, which manages $410 million.

Morgan Stanley's shares fell 2.2 percent on Thursday to $52.34. They have fallen nearly twice as much in percentage terms as the broader sector as measured by the Amex Securities Broker Dealer index. .XBD>

PURCELL PROMOTES

Cruz caused some resentment in 2005 when she accepted a promotion to co-president from then-chief executive Philip Purcell, a former Dean Witter brokerage and Discover Card executive whom investment bankers considered aloof from the securities division.

She was a close Purcell ally, but stuck with the firm as Purcell was kicked out, and managed to retain her position under Mack. As co-president, she oversaw banking, trading, and Gorman's brokerage business.

Gorman, 49, joined Morgan Stanley in 2006 from Merrill Lynch, where he had headed the brokerage group.

Walid Chammah, 53, joined Morgan Stanley in 1993, and most recently was chairman and chief executive officer of Morgan Stanley International overseeing the company's operations in Europe, the Middle East, and Africa.

Morgan Stanley named Michael Petrick, 45, head of the company's trading business.

The ranks of senior women on Wall Street are thin. Earlier this year, Sallie Krawcheck, chief financial officer at Citigroup, was reassigned to head wealth management.

As of June 2007, 15 women served as chief executives of Standard & Poor's 500 .SPX> companies, up from 12 in 2006, according to a report from recruiting firm Spencer Stuart.

(Additional reporting by Jonathan Stempel, Paritosh Bansal and Mark McSherry; Editing by Gary Hill)