Morgan Stanley Chairman and Chief Executive John Mack has tapped co-President Zoe Cruz, a long-time lieutenant who oversees trading and banking, as the leading candidate to succeed him, a person familiar with the situation said on Friday.

Cruz's candidacy was not harmed by $3.7 billion of losses on subprime mortgage trades disclosed by Morgan Stanley on Wednesday, the source said, nor was she tarnished by her brief service as co-president under former CEO Philip Purcell.

Morgan Stanley declined to comment on the matter.

Cruz, 52, is the highest-ranking woman on Wall Street. Her hard-charging manner has earned her the nickname Cruz Missile. She is married and has three children.

Morgan's succession planning comes as the accelerating meltdown in U.S. mortgage markets leads to growing losses and disruption in the banking industry. The heads of two Wall Street giants have lost their jobs: Citigroup CEO Charles Prince and Merrill Lynch CEO Stan O'Neal.

Citigroup and Merrill did not have clear succession plans in place and are now searching for candidates outside the banks. The pool of candidates is seen as limited.

Mack turns 63 this month and 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.

STAYING POWER

The fact that Cruz could be the next CEO of the world's second-largest investment bank illustrates her staying power and Mack's esteem for her abilities.

She joined the firm in 1982 and rose through the ranks as a foreign exchange trader. By 2000 she ascended to worldwide head of fixed income, commodities and foreign exchange trading and reported to Mack, who at the time was president of Morgan Stanley Dean Witter.

Mack quit in 2001, after losing a power struggle with Purcell, while Cruz continued to run Morgan's massive debt trading operations worldwide.

Cruz caused some resentment at the firm in 2005 when she accepted a promotion to co-president under Purcell, the Dean Witter brokerage and Discover Card executive who remained aloof from the securities division.

Purcell came under fire after he ousted Vikram Pandit and other securities division executives as part of a broader investment banking shake-up. Cruz, along with co-president Steve Crawford, supported Purcell during three months of turmoil that followed.

The management changes triggered a shareholder campaign by former partners frustrated by years of poor stock price performance, and prompted dozens of executives, such as senior dealmaker Joe Perella, to quit.

After Purcell left and Mack returned in June 2005, Crawford resigned and took a $32 million severance package. Cruz turned down a similar payout and stayed on, working for several months as acting president.

Last year she was named a co-president and has won praise as Morgan's banking, trading and brokerage operations took off. In reviewing Morgan's record second-quarter results, fueled by blockbuster trading profits, Mack publicly praised Cruz.

Cruz has the office adjacent to Mack's, a seat on the company's management committee, and attends all board meetings.

There are other internal candidates to succeed Mack, but their chances are considered slimmer: Walid Chammah is chairman of Morgan's European and Middle East operations and its former investment banking head; James Gorman is a former Merrill Lynch executive recruited by Mack to revive Morgan's wealth management unit. (Reporting by Joseph A. Giannone; Editing by Steve Orlofsky and John Wallace)

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