Morgan Stanley Chief Executive John Mack is stepping down and will be replaced by retail brokerage head James Gorman, signaling the storied bank is embracing stable businesses after losing big on risky ones.

Mack, 64, a former trader who rose to CEO after a coup toppled Philip Purcell, will remain chairman of Morgan Stanley, which posted a second-quarter loss of $1.26 billion even as other banks posted profits. The changing of the guard is slated for January 1, 2010.

Under Mack, Morgan Stanley was willing to bet more of the bank's own money, a strategy that yielded big rewards in years like 2006, but also helped push the investment bank to the brink of collapse in 2008.

The shift to Gorman, 51, who runs Morgan Stanley's brokerage and has been overseeing its expansion through a joint venture with Citigroup's Smith Barney unit, could be a sign of a wider shift in the industry, analysts said.

All these large financial institutions are going to replace their head honchos with someone with a background in a business with a more consistent, predictable revenue stream -- commercial banking, retail brokerage, or asset management, said Bill Fitzpatrick, equity research analyst for financials at Optique Capital Management in Milwaukee.

But Gorman, in an interview with Reuters, rejected the notion that his appointment signals that the bank is taking a conservative turn.

Gorman said the fact that he has been involved in developing the retail business has nothing to do with his overall vision for the firm.

Gorman will join Morgan Stanley's board when he becomes CEO.

FIGHTING FOR SURVIVAL

The Australian-born Gorman has long been seen as a front runner for the top job at Morgan Stanley, the bank founded 74 years ago when the Glass-Steagall act forced JPMorgan & Co to focus on either commercial banking or investment banking. JPMorgan chose lending, leaving businesses like securities trading for a new company -- Morgan Stanley.

Gorman is widely seen as having turned around Morgan Stanley's retail brokerage business, long seen as an also-ran in the industry.

Prior to joining Morgan Stanley in 2006, Gorman worked at Merrill Lynch & Co. From 2001 to 2005, he led Merrill's global private client business.

Gorman has really earned his stripes, said Anton Schutz, president of Mendon Capital Advisors in Rochester, New York, which owns Morgan Stanley shares. He did a great job at Merrill, he's doing a good job at Morgan Stanley, and the timing for a change seems to be good, because we've made it through the worst of the crisis.

Walid Chammah, another Morgan Stanley co-president who had also for a time been a candidate for the top job, was named chairman of Morgan Stanley International. Chammah had expressed a desire to stay in London, the bank said.

Mack had told the bank's board that he planned to step down from the CEO post when he turned 65 in November, the bank said in a statement on Thursday.

Mack told Reuters, The legacy for me will be getting this firm through the crisis.

Others, though, have criticized Mack for steering the company into the crisis by making ill-timed purchases, ramping up risk at the wrong time and reverting to a conservative approach in the first half of 2009 as rival Goldman Sachs Group Inc found a windfall in trading profits.

Mack said his firm's underperformance relative to Goldman so far this year played absolutely zero role in the timing of the announcement.

To Mack's credit, Morgan Stanley's shares have come roaring back this year. Late last year, it fought for survival in the wake of the Lehman Brothers collapse, helped by the U.S. government and an investment from Japanese bank Mitsubishi UFJ <8306.T> that Mack took the lead in negotiating.

But since Mack took the reins at Morgan Stanley in June 2005, the bank's shares have fallen 35 percent, compared with a 71 percent increase for Goldman's. The Standard & Poor's 500 <.SPX> has shed 12 percent during that period.

Morgan Stanley earlier this year paid $2.75 billion to acquire a controlling stake in Citi's Smith Barney retail brokerage, a move that could provide a more stable source of revenue to offset some of the investment bank's more volatile businesses.

Mack said he will work closely with Gorman.

I don't believe I'm leaving, Mack said. I'm just moving on to the chairman role where I can focus on clients and be someone James can use to help him on decisions.

STANDING OVATION

Mack has a long history with Morgan Stanley, spearheading the bank's groundbreaking 1997 merger with retail brokerage and credit card company Dean Witter, Discover & Co, a deal that sparked a wave of consolidation among the biggest banks.

But four years later, Dean Witter chief Phil Purcell won the CEO spot and Mack left the firm.

In 2005, a group of former senior executives agitated for Purcell's ouster and brought back Mack, who received a standing ovation on Morgan Stanley's trading floor. Purcell was cast as excessively risk averse and too disengaged from Morgan Stanley's key banking and trading businesses.

But critics said Mack took the bank in the other direction and was behind the curve far too often. The bank took more trading risk at the tail end of the credit crisis, only to scale it back last year, missing out on trading profits this year. But to some analysts, the fact that the bank survived is a victory.

Mack made some missteps, but he did remove silos at Morgan Stanley and make it one company, and he hired Gorman, which was huge, Schutz said. There were some missteps, but he didn't end up going the route of Bear or Lehman, either.

(Reporting by Christian Plumb, Dan Wilchins, Steve Eder, Joseph A. Giannone, Jonathan Stempel, and Jonathan Spicer; Editing Bernard Orr, Gary Hill)

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