When the financial world was coming apart last year, it seemed that Morgan Stanley's (NYSE: MS) CEO, John Mack, was making prudent strategic decisions. That is, he tried to lower the overall risk-taking at the firm. Mack had to contend with a deteriorating balance sheet, angry shareholders, a steep drop in business and intrusive regulators.

This was in stark contrast to Mack's prior strategy. If anything, he was a risk junkie. And yes, he made some huge bets on real estate investments that turned sour. In fact, they almost destroyed Morgan Stanley. But somehow Mack was able to wrangle a $9 billion investment from Mitsubishi UFJ Financial Group. There was also a TARP loan for $10 billion (which was actually paid back).

As the sordid tale of Bernard Madoff continues to unspool, it has become increasingly clear that somebody -- in fact, a lot of somebodies -- were asleep at the switch. Beyond the standard warning signs, like Madoff's incredible secrecy, his surprisingly consistent rate of return, and the clubby nature of his selling staff, there were far more obvious portents. For example, Madoff's chief compliance officer was his brother Peter, and one of the compliance attorneys was his niece. For that matter, the fact that Harry Markopolos, a Boston accountant, has been urging the SEC to investigate Madoff for the last nine years should have been a hint. The same, of course, goes for the 2006 SEC investigation that found violations, but didn't feel obliged to take any substantive action.

As the SEC attempts to assign blame in finest Three Stooges form, it's worth noting that this is hardly the first time that a lack of serious governmental regulation has reared its ugly head this year. At the moment, mobs are currently clamoring for Dick Fuld's head, with a healthy side order of Hank Greenberg, John Thain, John Mack, Lloyd Blankfein, Jimmy Cain, and pretty much everyone who works in New York's financial district. The general perspective seems to be that these men engaged in business practices that ran the gamut from risky to actionable and now should be forced to pay for the economy that they have ruined.

Wonder what happened to the hard earned money you paid in taxes? I can't account for all of it but $540 billion that went to six financial institutions is being used, in part, to operate 27 corporate jets. I may be the only one who feels this way, but I don't think the survival of the global economy depends on using taxpayer money to pay for financial executives to fly on their own corporate jets.

Here are the six financial institutions with the amount of taxpayer money they received and the number of corporate jets they're still flying:

• American International Group Inc (NYSE: AIG). $150 billion, seven corporate jets
• Citigroup Inc. (NYSE: C). $330 billion, four jets. (The $330 billion includes Citi's initial $25 billion in TARP money plus its more recent $305 billion in loan guarantees.)
• Wells Fargo & Co. (NYSE: WFC). $25 billion, one jet
• Bank of America (NYSE: BAC). $25 billion, nine jets -- its CEO Ken Lewis used $127,643 worth of its corporate jets
• JPMorgan Chase & Co. (NYSE: JPM) . $25 billion, four jets -- its CEO Jamie Dimon's personal use of its corporate aircraft totaled $211,182 in 2007
• Morgan Stanley (NYSE: MS). $10 billion, two jets -- its CEO John Mack's personal use of its corporate aircraft totaled $358,882 in 2007

Like every other CEO of a financial services firm, Morgan Stanley (NYSE: MS) Chief Executive John Mack has had a rough year. Given today's poor earnings performance, investors have to wonder whether Mack will join the parade of CEOs of financial services classes who headed for the exits.

The once-proud New York investment bank reported a loss of $2.29 billion, or $2.34 a share, for the fourth quarter. It was Morgan Stanley's first quarterly loss this year. Analysts surveyed by Bloomberg were expecting a 34 cent loss, according to Bloomberg News. It's three major business each showed double-digit earnings declines.

There was nothing to cheer about in these results. Here are some highlights:

• Net revenues were $24.7 billion, 12 percent below last year;
• Advisory revenues were $528 million, a 32 percent decrease;
  
• Underwriting revenues of $215 million, down 63 percent from last year;
• Equity underwriting revenues were $107 million, an 69 percent decrease;
  
• Fixed income underwriting revenues decreased 54 percent to $108 million;
• Fixed income sales and trading net losses were $1.2 billion, compared with net losses of $7.9 billion in the fourth quarter of last year;

I have been posting so much bad news over the last couple of years that I thought it would be interesting to try something different for a change: look for something that's truly good. If I can find it, I'll tell you what the good news is, why it's important, and what it means for the rest of the world. Today's installment: Morgan Stanley (NYSE: MS) new approach to paying bankers -- which has the potential to keep what broke Wall Street from happening in the future.

Morgan Stanley has decided to create a program to claw back bonuses if the firm loses money in the future. Instead of paying out tens of millions to bankers all in the year they make it, Morgan Stanley will hold the cash in an account and dole it out over three years. The clawback would be triggered by the need for a restatement of results, a significant financial loss or other reputational harm to Morgan Stanley.

Why does this matter? What the current financial crisis tells us is that it doesn't make sense to do big deals if they end up losing money in the future. That leaves someone else -- in this case government to clean up the mess while the people who made those deals keep their millions.

How so? In 2007, bankers made a total of $38 billion in bonuses alone -- even though their shareholders lost $74 billion in stock market value. That's because their reported profits were fake. In the last few years the top nine banks have reported $305 billion in profits -- but since then they've taken $323 billion in write-offs.

U.S. stocks may continue their record rally from Monday as investors' confidence was buoyed by Treasury Secretary Henry Paulson's plan to invest $125 billion in the nine largest financial institutions. Japan Nikkei 225 Index had its biggest jump in its 59-year history. Benchmarks in 16 out of 17 Western European countries also advanced, according to Bloomberg News.

``The market is saluting the bailout plan,'' said Chicuong Dang, an analyst at KBL Richelieu Gestion in Paris, in an interview with Bloomberg.

Under the Bush Administration's plan, the government will buy preferred shares in nine of the largest financial firms including Goldman Sachs Group Inc. (NYSE: GS), Morgan Stanley (NYSE: MS) and Bank of America Corp. (NYSE: BAC). The money is coming from the recently enacted $700 billion rescue of Wall Street.

Here is a look at other news that may move markets:

• Big-shot hedge fund managers Paul Tudor Jones and Stephen A. Cohen have been forced to sell assets amid tightening credit markets and falling stock prices, according to Bloomberg.
• Morgan Stanley is "in a much stronger position" because of the $9 billion investment its received from Japan's Mitsubishi UFJ Financial Group Inc., Chief Executive John Mack told The Wall Street Journal.
• Google Inc. (NASDAQ: GOOG) and Yahoo Inc. (NASDAQ: YHOO) are in talks with the Justice Department to avoid an antitrust lawsuit on their advertising deal, the Journal said
• Media mogul Sumner Redstone has been forced to sell off large chunks of his holdings in CBS Corp (NYSE: CBS) and Viacom Inc. (NYSE: VIA). the Journal said.
• Commodity prices are falling, putting money into the pockets of consumers when they need it most, the New York Times reported.
• The General Motors Corp. (NYSE: GM) -- Chrysler LLC buyout talks are at a critical juncture. The company and Chrysler's owner Cerberus Capital Management are discussing how much cash the buyout firm will contribut to the joint venture and how much stock it will get in return, the Tiimes said.

The New York Times reports that Morgan Stanley (NYSE: MS) CEO John Mack approached Citigroup head (NYSE: C) Vikram Pandit on Wednesday about a merger. It quotes Mack as saying "We need a merger partner or we're not going to make it." Fortunately, Citi rejected Mack's advances -- I say fortunately because Citi has enough problems of its own without taking on Morgan Stanley's. Why is Morgan Stanley, which just posted a $1.43 billion profit, in such desperate straits?

It's a brilliant negative feedback loop that short sellers are exploiting to enrich themselves as Wall Street collapses. Here's how it works: the hedge funds sell the stock of 'Bank A' short -- borrowing the shares at a higher price and hoping to pay back the stock loan with shares repurchased in the market at a lower one. As the Wall Street dominoes tumble, investors ask who's next and they sell the shares of the next domino to fall.

That decline leads ratings agencies to lower their debt ratings on a bank which boosts the rates it pays in the $62 trillion market for Credit Default Swaps (CDSs). Those higher rates force 'Bank A' to come up with billions in cash which it doesn't have -- raising fears of a collapse and further depressing 'Bank A''s stock price. And the cycle begins anew until 'Bank A' finds a merger partner or goes bankrupt. This short-selling work is very profitable, but it is also destroying the global financial system.

The board of directors of Morgan Stanley (NYSE: MS) has sent a letter to shareholders defending John Mack, the company's chairman and CEO, and urging rejection of one shareholder proposal to push him out of the chairman's job. According to MarketWatch, "The endorsement came in response to a letter earlier this month from CtW Investment Group, an organization representing several unions, calling on shareholders to withhold their votes from Mack." The letter also suggested that two Morgan Stanley directors be pushed out.

Shareholders in the investment bank are understandably red with rage. Morgan Stanley's stock has lost almost 50% of its value over the last year and, at one point, was down almost two-thirds. The brokerage has already fired its president, but some who have lost money do not think that is enough. The CEOs at Merrill Lynch (NYSE: MER) and Citigroup (NYSE: C) have already lost their jobs because their companies where so badly hurt by investments in subprime mortgage instruments.

Separating the CEO and chairman jobs at banks and brokerages is probably a good idea, especially if the chairman has the role of overseeing risk management. Boards seem to have been blind to the massive chances that financial companies took when they put substantial sums into volatile securities.

Mack should count himself lucky to keep his job at all. Remaining CEO and passing the chairman's job to someone else to encourage a balance of power make sense and should be a model for other firms. Someone has to keep an eye on the risk profile of companies that have already lost billions of dollars.

Douglas A. McIntyre is an editor at 247wallst.com.

Give Morgan Stanley (NYSE: MS) CEO John Mack credit for honesty and character in the wake of a tough year for the company. Mr. Mack received a salary of just $800,000 for fiscal 2007 (WSJ subscription required), and no bonus -- at his own request. Since setting a high over more than $75 in April, shares of the investment bank have declined to $42, their lowest level since 2005, on large subprime write-downs.

Mr. Mack is to be commended for his character, but investors shouldn't lose sight of the real issue: paying $800,000 for an executive whose company lost more than $25 billion in market value in one year is hardly a bargain.

But it's good news compared to the CFO who took home an $11.7 million package for a year that was an abysmal failure. Politically, Mr. Mack's decision is a good one. It will assuage disgruntled investors and should keep him from joining the cadre of executives hauled before Congress to explain their huge pay packages that came right after huge write-downs.

Hopefully more executives will follow his lead. Even if it's largely a symbolic gesture, taking responsibility is nice to see, and has been tragically rare at the subprime-decimated investment banks.

The subprime write-down/Sovereign Wealth Fund (SWF) -- government investment funds totaling $2 trillion to $15 trillion -- duet continues. This is the new dance invented in the last month in which a U.S. pillar bank writes down billions in bad subprime mortgage-related investments while selling a huge chunk of itself to another country whose economic and political interests are not aligned with ours.

Today, according to The Associated Press, Morgan Stanley (NYSE: MS) was the latest to step on the subprime/SWF dance floor. It is writing off $9.4 billion worth of mortgage-related investments and accepting a $5 billion investment from China Investment Corp. one of several SWFs that have been swooping into the U.S. financial system to rescue the U.S. from the Greenspan-backed subprime securitization disaster. Morgan Stanley's write-off cost former President Zoe Cruz her job and CEO John Mack his bonus.

As I posted last week, the subprime writedown/SWF dance is not new. In my view, it makes sense to mark the toxic waste to market and to raise capital at the same time. But with the European Central Bank (ECB) pouring $500 billion into the global banking system and Alan Greenspan suggesting the U.S. pay subprime borrowers to bail them out of their bad loans, the question is whether throwing so much cash into the system will really restore bank's confidence to lend -- in particular to each other.

The Wall Street Journal reported that Morgan Stanley Inc. (NYSE: MS) ousted its co-president Zoe Cruz in the wake of its $3.7 billion in mortgage-related losses.

Cruz already had two strikes against her. Colleagues reported that her leadership style was "difficult." She had also remained loyal to fired and unpopular CEO Philip Purcell during a 2005 struggle for control of Morgan Stanley. Purcell's successor John Mack stood by Cruz, but the trading losses gave him a reason to question her leadership.

Mack was the one responsible for ramping up Morgan Stanley's risk levels. Brad Hintz of Sanford Bernstein & Co. thinks that Morgan Stanley will end up writing down a total of $4.9 billion, or $1.2 billion more than it's already announced, which would wipe out all Morgan Stanley's proprietary trading profit resulting from Mack's risk ramp up.

If Hintz is right, perhaps Morgan Stanley's board will throw Mack under the bus along with Cruz -- a possibility about which I posted earlier this month.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Morgan Stanley securities.

Will Morgan Stanley (NYSE: MS) CEO John Mack be the next Wall Street CEO to get whacked?

The New York-based firm may have to take a $6 billion write down, in line with the $8.4 billion bath Merrill Lynch & Co. (NYSE: MER) took and trailing the Citigroup Inc.'s (NYSE: C) $11 billion pill that it might have to swallow. That estimate -- which Morgan won't comment on -- comes courtesy of David Trone, an analyst with Fox-Pitt Kelton Cochran Caronia Waller. It's double the $3 billion estimated by CNBC.

"We suggest an outright avoidance until either management discloses more specific exposure data and it proves smaller than we thought, or they actually take writedowns big enough to get beyond this,'' Trone wrote in a note to clients, according to Bloomberg News.

Shares of New York-based Morgan, which have slumped 18% since Halloween, fell $1.80 to $53.79 today as investors fretted about the size of the shoe that's about to drop.

With the downfall of Stan O'Neal and Chuck Prince, the departure of Mack would leave the one spot open in the disgraced Wall Street CEO golf foursome. My suspicion, though, is that spot is being reserved for Bear Stearns Companies Inc. (NYSE: BSC)'s Jimmy Cayne.

The official election is more than a year away; but the Democratic party is trouncing the Republics in the CEO money primary. According to Bloomberg News, some of George W. Bush's top 2004 fund-raisers, are now helping Democrats running for president.

Among the 60 executives writing checks to Democrats such as Senators Hillary Clinton of New York and Barack Obama of Illinois are these formerly pro-Bush CEOs:

• Morgan Stanley's (NYSE: MS) CEO John Mack, a Bush Ranger, held a fund-raiser for Clinton in July. He wrote to his executives "I personally believe that [the best] person [running for president in 2008] is Hillary Clinton."
• Yahoo Inc.'s (NASDAQ: YHOO) former CEO Terry Semel gave $2,000 to Bush in 2004 and $50,000 to the Republican National Committee. Semel has given the maximum, $4,600, to Clinton and $2,300 to Obama.
• News Corp. (NYSE: NWS) CEO Rupert Murdoch, who donated $25,000 to the Republican National Committee in 2004, has given Clinton $2,300.

Back in 1982 I was a third-year broker/branch manager with Dean Witter Reynolds (remember that name?) when the announcement came across the tape that Sears, Roebuck, and Co. would in one fell-swoop buy Dean Witter and Coldwell Banker, the real estate giant. Wow, Sears was diversifying in a huge, dramatic way. That move spawned the expression "buy your stocks where you buy your socks!" Dean Witter brokers, Allstate agents (Sears already owned Allstate) and Coldwell Banker agents, all to be found within a Sears department store. The whole thing was a flop, but it took nearly ten years to figure this out.

In the mix, Sears CEO and chairman, Ed Telling, selected a young McKenzie & Co. consultant to run the triumvirate. His name was Philip Purcell and he brought an intelligence and energy to the job second to none. He carefully explained that the glue to the whole thing working out masterfully would be the launch of the Discover card. The Discover card was launched in 1984 with a mega advertising and marketing campaign. If you had a pulse, you got a card.

In the early 1990s, Sears realized the "synergies" of Dean Witter, Dean Witter , and Coldwell Banker just was not working according to the dream. The dream took on a new look as all three companies were spun off or went public. The association with Sears became just a memory. Then in 1997, Phil Purcell engineered the coup of coups: merging "Main Street" Dean Witter with glitterati firm Morgan Stanley (NYSE:MS). Phil was named CEO, another masterful coup. All the while, the Discover card was building itself into a formidable business. The Morgan Stanley white shoe bankers "certainly did not have one in their wallets" was the quote most often heard as the Morgan bankers were annoyed with this low-level credit card.

Former Morgan Stanley (NYSE: MS) CEO Phil Purcell started his career as a management consultant who jumped to his client, Sears Holdings Corp. (NYSE: SHLD), which implemented a "stocks and socks" strategy. After dumping Purcell in June 2005, his successor John Mack has finally decided to sell Discover on the heels of a 72% increase in its pretax income.

Sears' idea was that people could buy everything from clothing to financial services in a one-stop-shopping experience. To implement the strategy, Sears acquired stock broker Dean Witter in 1981 and in 1986 started a credit card business called Discover. But the strategy did not work, so in 1993 Purcell helped spin out Dean Witter from Sears. In 1997 Purcell merged Dean Witter with Morgan Stanley. The impetus behind the original merger between Dean Witter, a down-market stock brokerage, and blue chip Morgan Stanley always eluded me. But there was a significant amount of discussion -- led by Sanford Weill of Citigroup (NYSE: C) -- that one-stop shopping for financial services was a great idea.

With the stock up 2.6%, the stock market seems to like the idea of getting rid of Discover and using the capital to invest in Morgan Stanley's core strengths. But debt rating agency Fitch Ratings cut Morgan Stanley's credit outlook to "negative," noting Discover generates substantial cash. I think Mack is smart to spinoff Discover when it's showing such great results -- since the shares will get a higher value.

My concern is whether he will be able to find a profitable place to invest the proceeds.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm, and a Professor of Management at Babson College. He has no financial interest in Morgan Stanley or Sears Holdings and he owns shares in Citigroup.