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Only the Men Survive

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But Purcell couldn’t withstand the G8 attacks, and he announced his resignation two months later. Having cast her lot with the fallen CEO, Cruz was now more vulnerable than ever. The other co-president, Steve Crawford, was offered a $32 million exit package, and he took it and ran. But Cruz refused hers, waiting instead to see if she could survive the transition. Some suspect that as a newly appointed board member, Cruz was lobbying the other directors to rehire John Mack, who had been forced out at Credit Suisse after losing a power struggle with his co-CEO.

It’s unclear whether she was responsible, but the board did rehire Mack—to the annoyance of the G8, who had wanted one of their own, Bob Scott, to replace Purcell. With Mack back, Cruz hoped that she might not simply survive but thrive. “Zoe was lobbying hard to be appointed the sole president,” says a former insider, rather than continue with the title of acting president.

As he explored what to do, Mack was barraged by Cruz’s critics, who suggested that she had “developmental issues” as a manager, says a senior executive at Morgan Stanley. She could be imperious, they claimed, refusing to consider other opinions. To allay concerns, he brought in a management coach to help smooth out some of Cruz’s rough edges. (Cruz’s supporters say the coach was her idea, to help her team communicate better.) He also began meeting with Pandit and the other ousted executives to discuss bringing them back into the fold. They told him they would come, but only if Cruz were gone.

Cruz could be imperious, refusing to consider other opinions. “You cannot disagree with Zoe and continue to be successful at this firm.”

Mack refused the ultimatum. “John kept her on when everyone knew the ranks would have all come back,” says a person close to Pandit. “They couldn’t believe she’d done what she’d done. John must have had his reasons.” Cruz was kept on as co-president, with a new co-president, Robert Scully, to manage alongside her. That summer, Forbes named her No. 16 on a list of the 100 most powerful women in the world.

Mack’s return was a time of excitement and big money for Cruz. Both of them had what Cruz called “a healthy appetite for risk,” and they went in search of “alpha”—outsize returns that surpass market indexes—in the form of complex new investment vehicles called mortgage-backed securities. Revenues in Cruz’s divisions rose by 110 percent in 2006, earning her $30 million that year. In the first quarter of 2007, the firm earned $1 billion by shorting subprime mortgages and beat Goldman Sachs for the first time in several months—an achievement that thrilled Cruz.

At the same time, Mack was becoming more vocal about something he had mentioned as far back as 2001: Zoe Cruz would one day lead the company. At the shareholders meeting in April 2007, Mack noted that the company’s “all-time highs in revenues, in income, and in earnings per share” were “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.”

But even as she was riding high, the events that would bring about her downfall had already been set in motion. It all started with a special trading group Cruz had approved in 2006 to profit from a bear market. A young trader on a hot streak named Howie Hubler had developed a complex trade that, put simply, involved “shorting” (betting against) low-quality subprime mortgages while taking “long” positions (betting on) on the high-quality triple-A mortgages that most analysts considered stable.

The mortgage business constituted about 15 percent of Cruz’s overall balance sheet of roughly $1 trillion and operated three managerial layers below her. Hubler’s top boss was Neal Shear, a well-liked former commodities trader who privately resented Cruz. Shear’s division had made much of the firm’s money in the previous year (earning him a bigger bonus than hers), and some believed that he was hoping to skip over Cruz to run the company some day.

Having convinced Cruz that Hubler had a golden touch, Shear—along with the company’s risk manager, Tom Daula—advised her to stay in Hubler’s trade through the spring of 2007. “They weren’t motivated to unwind these positions because they thought they could make more money on them,” says a person familiar with the situation.

It was in May, after a trip to California, when Cruz started to worry. She had met with a veteran executive in real-estate markets who told her the entire mortgage market—not just subprime—was headed for disaster: “We’re going to have double the default rates and one-half the recovery of the past.” If the triple-A securities got hit, Morgan Stanley would see major losses. Cruz began personally extracting the company from several billion dollars in other mortgage investments, as well as telling clients that they should head for the exits. “She was clearly a bear and clearly extremely concerned, and she called me every couple of weeks,” says one of her former clients, Stanley Druckenmiller, a veteran hedge-fund manager who once operated funds for George Soros.


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