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Actions temporarily trumped words at Morgan Stanley Wednesday with the resignation of the firm’s two best-known investment bankers, vice chairman Joseph Perella and head of investment banking Tarek “Terry” Abdel-Meguid. The resignations of Perella, 63, and prot�g� Meguid, 49, surprised many and, sources say, was a huge blow to morale in Morgan Stanley’s biggest moneymaking division, investment banking. It also represented the most recent twist in the continuing war of words between CEO Philip Purcell and the Morgan Stanley board against the so-called Group of Eight dissidents, consisting of former executives of the firm. “People have been asking, ‘What is the vulnerability for Purcell?’ Short of a scandal or earnings restatement, it’s the ability to stop the bleeding of key players,” said Patrick McGurn, senior vice president of proxy firm Institutional Shareholder Services, which challenged Morgan Stanley’s board earlier this year on Purcell’s compensation. “It’s something the investment community cannot ignore,” said McGurn, because the departures of rainmakers like Perella will eventually hit Morgan Stanley’s bottom line. Sources said Perella went on roughly 400 client calls last year to 280 investment banking clients. Analyst Richard X. Bove of Punk, Ziegel & Co. said the departures reflected what he called Purcell’s “ivory tower” leadership style. “This is an unbelievable turnaround for a guy [Perella] to say, ‘I love you, I’m going to stay here forever,’ and then, 10 days later, say, ‘Goodbye, I’m going,’” said Bove. “It’s a sign that there’s no communication between these two men … even though they’re in the same cage.” Just after Morgan Stanley’s March 28 management restructuring, which made Zoe Cruz and Stephen Crawford co-presidents, Perella made noises to colleagues that he would leave the firm, possibly taking Meguid with him. Purcell then moved to lock in Perella with a promotion from chairman of institutional securities to vice chairman of the firm. But, sources said, Perella signed on with Purcell only on a wait-and-see basis. Finding himself muzzled, he chose to move on. “They were asked by the two co-presidents to sign on for this loyalty program,” one source familiar with the firm said. Others suggested that Perella may also have wanted a seat on the board that was not forthcoming. The “loyalty program” the banker referred to was not the loyalty oath — dubbed the Stalin Letter — that Purcell tried to make former executives Vikram Pandit and John Havens sign. Instead, it’s continuing pressure on top Morgan Stanley executives to prove their loyalty to Purcell. The Group of Eight called the resignations “a sad day at the firm,” a spokesman said. In a statement, he again chided the Morgan Stanley board for not moving against Purcell. The G-8 also received a terse letter from Morgan Stanley’s board that declared “full confidence in Phil Purcell and the strategy that management is pursuing” and asking the G-8 to “desist” from “ill-considered … attacks … damaging the firm and our shareholders.” One analyst, who asked not to be named, speculated that the board letter, which was essentially a legal cease-and-desist letter, was meant to protect directors in case of future litigation or as a basis for the board to sue the G-8. Hedge fund manager and Morgan Stanley shareholder Scott Sipprelle has already threatened a lawsuit against the firm. Morgan Stanley named two bankers to replace Meguid: Michael Uva, the London-based head of European investment banking, and Cordell Spencer, a New York-based technology banker and former deputy head of worldwide investment banking. Both are 20-year veterans, but neither are brand names like Perella. One headhunter noted that the departures only intensified efforts to pull coveted bankers out of Morgan Stanley to other firms. Morgan Stanley was No. 1 in global M&A in 2004 and has 800 investment bankers, nearly all of whom are now considered fair game. The chief competition for the headhunters may be Perella himself. A spokesman for Perella said he will do something else in finance. If he chooses to start his own firm, or join a competitor, Perella may get his pick of Morgan Stanley’s top bankers, one headhunter said. Copyright �2005 TDD, LLC. All rights reserved.

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