UNTIL last week, Zoe Cruz was the most powerful woman on Wall Street.

Tipped as a successor to the top job at Morgan Stanley, the 52-year-old mother of three had just been ranked fourth in The Wall Street Journal’s list of “50 Women to Watch”.

Now she has become the latest victim of the credit crisis rocking the financial sector.

Cruz’s departure comes weeks after Morgan Stanley revealed $3.7 billion (£1.8 billion) of losses on sub-prime mortgage trades in September and October.

The company’s shares are down 23% this year. But until last week Cruz seemed to have escaped the axe that has claimed the jobs of senior Wall Street executives, including the bosses of Citi and Merrill Lynch.

After Morgan Stanley revealed its losses, John Mack, chief executive, was at pains to stress that Cruz was staying. She had an impressive track record and was also a survivor of Morgan Stanley’s 2005 management turmoil that led to the ousting of ex-boss Philip Purcell. Mack told fellow executives that the hard-charging exec – known as “Cruz missile” – was still in the running to succeed him.

As recently as last April at the company’s annual meeting, Mack noted the company’s 2006 results and said that “strong performance is 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”.

His change of heart has left analysts, including Richard Bove at Punk Ziegel, wondering if there are further big losses to come at the bank.

“The number I’m using is $5 billion,” said Bove. “But who the hell knows? If Morgan Stanley knew, maybe Cruz would still have her job.”

In a statement, Mack said markets “are changing rapidly, and we’re putting in place a leadership team that is ideally suited to help Morgan Stanley realise the opportunities ahead, while continuing to navigate the current challenging conditions”.

Cruz, a Harvard MBA who was born in Greece, started her Morgan Stanley career in 1982 as a bond trader, becoming a managing director in 1990.

A divisive figure, Cruz had long believed she should be allowed to take bigger trading risks to improve revenue at the bank.

According to Blue Blood & Mutiny: The Fight for the Soul of Morgan Stanley, by Patricia Beard, before Mack arrived Cruz’s attitude led to a clash with her former boss, Vikram Pandit.

In 2005 Cruz became a more divisive figure still at the firm, after she was promoted to co-president along with then chief financial officer Stephen Crawford over the heads of other bankers.

Senior executives, including Pandit, John Havens, Terry Meguid and Joe Perella quit the firm in protest, triggering a vicious power struggle at the bank that cost Purcell his job.

Many had thought she might fall when Mack returned. But while Crawford was shown the door, Cruz became Mack’s heir-apparent as the two bonded over their plans to create a more risk-taking Morgan Stanley.

Now she’s gone, her job has been divided between Walid Chammah, head of Morgan Stanley’s European, Middle East and Africa operations, and James Gorman, head of wealth management and co-head of strategic planning.

But some Wall Street watchers charge that Mack, not Cruz, should ultimately he held responsible for Morgan Stanley’s losses.

Mack spent 30 years at Morgan Stanley before being ousted in another bitter power struggle in 2001. When he returned two years ago, he spoke of adopting a higher-risk profile as he pushed the firm into then fashionable investment areas such as sub-prime mortgages, lending to private-equity firms and making big trades with the firm’s own capital.

Last December the firm paid $705m to buy Saxon Capital, a mortgage provider that also services home loans to people with dodgy credit histories. Value-at-risk, an estimate of the potential losses that the firm’s trading division could sustain in one day, jumped to an average of $87m in the third quarter from $56m a year earlier.

A similar, higher-risk strategy was also being pursued at Merrill Lynch, then led by Stanley O’Neal.

For a time it was a strategy that worked for the bank and its executives. Cruz made $30m in 2006, when Morgan Stanley said profit had risen 51% to a record $7.47 billion.

Now it seems clear that neither Morgan nor Merrill had a full grip on the risks they were taking, and both have racked up record losses.

Bove said Mack, too, should lose his job over the losses, but he said the chief executive was probably secure.

“He should be fired. He implemented the strategy, he increased the risk. It looks like the company is going to lose a lot of money. Why should he stay?” asked Bove.

But the analyst said ultimately he believes Mack will stay because Morgan Stanley cannot afford another management makeover just two years after the last one.

“You can’t overturn a management team every two years,” he said.

Things seemed so different when Cruz gave a speech at Harvard Business School in 2005. With Mack back at the helm, Cruz noted that some appeared to wish that changes at the bank had been slower and less sensationalised by the press.

“Change is good, and any institution that doesn’t evolve is destined to die,” she said. Morgan Stanley had once again “become a vibrant place, starting to exude the old confidence it had”.

Two years on Morgan Stanley is in turmoil again and some other advice Cruz gave the Harvard students now seems prophetic: “If you do not learn from your mistakes, you will not do well.”

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