For as long as I can remember there have been two premier investment-banking franchises: Goldman Sachs and Morgan Stanley. While Goldman Sachs continues to lead the pack in terms of winning lucrative mergers and acquisition business, Morgan has begun to slip badly, so badly in fact that many people are now questioning whether Morgan can continue as a leading franchise in one of Wall Street’s most important and profitable businesses.

          Morgan’s ranking for the first quarter of this year can be summed up in one word: Dismal. So far, the firm is ranked 10^th overall in terms of deal size, according to Thomsen Financial. That’s a 49% decline from last year, when they were ranked in third place. It’s their worst start in at least seven years, and Morgan’s performance worldwide isn’t much better. At this time last year they were ranked number one, according to Thomsen, now they’re ranked number seven.

          One of the big problems with what’s happening in the M&A department at Morgan is that poor performance there, often translates into poor performance in other areas, such as stock underwriting, another place where Morgan has been among the best in the business. Morgan’s rankings have slipped there as well.

          The people at Morgan concede that they have problems in the investment-banking area, but they contend it’s not a franchise-threatening issue. They say they’ve bounced back from weak starts in the past, and they point to the firm’s recent strong earnings. Meanwhile, they say Morgan is getting a bum rap because it was shut out of the AT&T/BellSouth deal, which skewed the numbers for everybody else. Discounted for that deal, they say they aren’t doing so bad.

          But what they fail to realize is that a firm like Morgan Stanley is supposed to get that deal. In the past Morgan was AT&T’s banker, but that was before the old Ma Bell was purchased by SBC, and simply kept the more recognizable AT&T brand name. Morgan officials say they have no relationship with the new company.

Now that the New York Stock Exchange has completed its public offering and merged with Archipelago, people at the exchange say there will be massive changes in the way trading is done at the 214-year old Big Board.

          One possible change isn’t sitting well the floor traders and “specialists” who for most of the NYSE’s history matched buyers and sellers of stocks on the floor of the exchange.

          According to three officials at major specialists firms, the exchange is considering a plan that would route some trading “order flow” directly to the Archipelago system, bypassing the specialists altogether. These trades involve something called Exchange Traded Funds, or ETFs, which are essentially mutual funds that are listed on the Big Board and trade like stocks.

          Under the plan that has been disclosed in various meetings with specialists as part of the NYSE’s merger with Arca, NYSE officials are envisioning a system where Arca matches most of the buyers and sellers of ETFs, and those that can’t be matched electronically, will go to the specialists.

          Now ETFs aren’t a huge moneymaker for specialists; the trading volume isn’t nearly as large as that of stocks. But the people I’m speaking with say this is a significant business, and being handed the leftover ETFs will place a big dent in their earnings, already under pressure now that the exchange is moving away from humans to an electronic market making system.

          Richard Adamonis, a spokesman for the exchange, says no plan to change the way ETFs are trading is imminent. He states if there is a change, it will begin with non-listed ETFs, though he concedes that most ETFs aren’t listed on the NYSE even if they trade there.

That’s why specialists worry that this is just the opening salvo in the exchange taking trading orders from them and moving it to Arca. It’s also another reason for the specialist firms to hate the most powerful man at the New York Stock Exchange, aside of course from CEO John Thain. Before joining forces with the NYSE, Archipelago founder Jerry Putnam had made a career out of bashing the specialist system; he once had a song written called “Joey the Specialist,” which basically described the floor traders as crooks.

Charles Gasparino - CNBC

The New York Stock Exchange puts the finishing touches on its grand redesign this morning, taking the 213-year old club and converting it into a public company, but the heavy lifting will be in the weeks and months ahead. The exchange will now have to answer to public shareholders, not the 1,366 “seat holders,” many of them retirees in Florida who has simply leased their seats out to others for the privilege of trading at the stock exchange. That means the new NYSE will have to grow revenues, develop new products, and most of all convince many more companies that now list on its rival Nasdaq stock market to jump ship and list on the stock exchange.

And the guy at the center of this massive sales job will be John Thain, the NYSE’s CEO.

Thain has done a masterful job since he got to the stock exchange back in 2004 after 25 years at Goldman Sachs, where he was effectively CEO Hank Paulson’s No. 2. As the No. 1 guy at the stock exchange he has survived controversy surrounding the purchase of the all electronic Archipelago trading platform, lawsuits from seat holders angry that the NYSE’s specialist system, where humans rather than computers, make markets in stock, will be phased out, an attempt by former board member Ken Langone to take over the stock exchange, not to mention the continued controversy surrounding former NYSE chairman Dick Grasso’s pay package, which has generated a ton of negative publicity to the exchange.

Luckily for Thain, all of these problems played to his strengths as a manager. During his years at Goldman, Thain was not what’s known on Wall Street as a “producer”-he wasn’t good like his boss Hank Paulson at convincing corporations to bank with Goldman. Rather, he was a guy who understood issues like market structure, and helped the firm develop strategic plans about what businesses it should be involved in.

And that’s why many people I speak to question whether Thain can do what’s necessary to make sure the world’s largest stock market stays that way. Thain, in short, was never a salesman, yet he will have to become a good one in the months ahead when he goes toe-to-toe with the Nasdaq for listings and tries to sell the exchange in a global market place.

The controversy surrounding Dick Grasso’s pay package could take an important turn today as the former New York Stock Exchange chairman begins a marathon session of depositions with New York Attorney General Eliot Spitzer.

Spitzer has filed a civil case against Grasso on the grounds that his $140 million pay package was excessive and violates New York State law governing not-for-profits. Later today, the NYSE will lose its not-for-profit status, as it becomes a public company with a historic IPO.

But the Grasso case rolls on. Grasso is expected to show up to a law office in midtown Manhattan to begin his deposition around 9am this morning, and last four days. The judge in the case decided on a neutral site after lawyers for Grasso complained about Spitzer’s initial demand to hold the depositions in his offices in downtown Manhattan.

The Grasso depositions are expected to be the most important of this controversial case, pitting the New York Attorney General Eliot Spitzer, who is running for Governor against a man who was among the most important people on Wall Street during his eight years as chairman of the exchange. Grasso’s fame reached new heights for his work getting the exchange up and running following the 9-11 terrorist attack, and then sunk about as low as you can go on Wall Street following revelations about his pay package that forced his resignation in Sept. 2003.

The following year, Spitzer filed suit against Grasso seeking a return of most of the money, and since then both sides have been battling it out with depositions of former NYSE board members, who also happen to some of the top people in corporate America and Wall Street, people Goldman Sachs CEO Hank Paulson, Jimmy Cayne, the CEO of Bear Stearns, and John Reed, the former co-CEO of Citigroup, who took over for Grasso and called on Spitzer to investigate the pay package.

In my view, the pressure is on both sides. For Spitzer the case hasn’t gone very as many of the people who were thought to be key witnesses against Grasso, people like Hank Paulson, have come out and in their depositions supported Grasso case, namely that he was worth every dime of his pay package. Grasso, meanwhile, will be grilled by lawyers for Spitzer as well as those representing New York Stock Exchange attorney who will no doubt hammer away at the excesses of his eight years as chairman, including not just his enormous salary but look for them to delve into how much he paid his inner circle as well as his use of expenses like private jets.

            The Securities and Exchange Commission is taking a major step toward dealing with burgeoning problem of identity theft at major financial institutions, CNBC has learned.

            As we all know identity theft often involves hacker who bypass security controls at major companies that use customer data for a variety of reasons. The SEC examinations unit, which inspects investment banks, mutual funds, and hedge funds has launched a major crackdown on the way in the way financial institutions handle sensitive customer data by demanding that these players provide better security systems.

The area that the SEC appears to be focusing on now involves just how well banks and other financial institutions check the backgrounds of people who handle customer data. You would think that anyone at a major bank who deals with customer social security number and other information would get fully vetted, including whether these people have been convicted of a crime.

But what the SEC has discovered is that the background checks that are being done are leaving gaping holes that are so large that criminals are actually slipping through the cracks and getting access to the personal information of clients. The case that has sparked the SEC effort involves a former accomplice of Marty Frankel, who bilked more than $200 million from insurance companies about seven years ago.

The accomplice, Sonia Radencovich billed herself as having experience in data processing. She was to be vetted by employment agency, which gave her a clean bill of health, before starting work at TIAA-CREFF the massive pension fund for teachers. But what the background check failed to pick up was that she was convicted of her involvement with Frankle, that her real name was Sonia Howe, and that just days before she began work, she was sentenced to four years in jail for her role in the scam, a sentence that was to begin in about three months.

During that time, she had access to customer data, and downloaded some of it onto her personal computer. She was ultimately discovered and fired when a co-worker familiar with the Frankel scam notified management.