Updated from 4:18 p.m. EDT

John Mack became proof Thursday that there are second acts on Wall Street.

Morgan Stanley

(MWD)

officially announced that it will turn over the reins of power to Mack, the firm's former president, who left in 2001 after losing out in a power struggle with Philip Purcell.

Now it's Purcell who finds himself on the losing end, forced to cede the firm to his rival after three months' of criticism from a group of former Morgan Stanley alumni. Purcell announced he would step down two weeks ago.

In a press release announcing Mack's appointment, Morgan Stanley's board said the decision was unanimous and that Mack will take over "immediately.''

Mack's return to Morgan Stanley has been the subject of speculation for more than week. His return marks a major victory for the investment banking arm of Morgan Stanley over the firm's large retail brokerage operation.

The irony, of course, is that Mack had as big a role as Purcell in orchestrating the 1997 deal that led to the merger of Morgan Stanley, one of Wall Street's storied investment banks, with Dean Witter Discover, a mass-market retail brokerage. At the time of deal, Purcell was the head of Dean Witter.

In a late afternoon interview with CNBC, Mack defended the merger, saying he would do the deal again.

But to the investment bankers and traders from the Morgan Stanley side, Purcell was always an outsider -- he continued to live in Chicago, not New York. Mack, meanwhile, was always one of their own, starting at the firm in 1972 as a bond salesman.

Purcell was driven out in a high-profile putsch led by former and current employees with ties to the old Morgan Stanley. The executive's bruising management style never wore well at the firm and he was unable to overcome the clash of culture that was spawned by merging an old-line investment bank with a big retail brokerage group.

In going back to the future with Mack, some believe Morgan Stanley, which has seen its stock languish compared to its peers, can return to its glory days. Mack's supporters hope his arrival can stem the flood of departures at the firm, lure back some of the stars who have left, and put an end to what has been Wall Street's longest-running soap opera.

The press release, however, made no mention of recently departed employees, and didn't address the issue of Morgan Stanley's board, many of whom were Purcell loyalists. The group of former Morgan Stanley alumni who helped push Purcell out the door have been demanding a voice on the board too.

Late Thursday, however, Zoe Cruz and Stephen Crawford, two executives Purcell had recently named co-presidents and appointed to the Morgan Stanley board, announced they were giving up their board seats. The elevation of Cruz and Crawford was the spark that started the protests that led to Purcell's ouster.

Morgan Stanley's press release also traffics in some revisionist history. Charles Knight, the board member who headed up the search for a new CEO and initially ruled out Mack as a candidate, is quoted as calling Mack "the very best candidate to lead the firm.''

Knight says the board conducted "an intense, thorough search process and evaluated a number of outstanding candidates.'' Given that it's been only two week since Purcell announced his resignation, the thoroughness of the search is open to question.

There's danger in revisiting the past as Morgan Stanley is now doing. While Mack was a beloved figure by many at the old Morgan Stanley, he also was feared. It was at Morgan Stanley that he earned the sobriquet of Mack the Knife, a reference for his penchant for cost-cutting, usually in the form of lost jobs. His return also could fuel a new round of defections among Purcell loyalists.

After Mack left Morgan Stanley, he took the top job at

Credit Suisse First Boston

(CSR)

, and lived up to his nickname. Over a three-year stretch, Mack eliminated nearly 10,000 jobs. While his ax-wielding helped return CSFB to profitability, he also clashed with other top managers at Credit Suisse, the Swiss bank that owns the investment firm.

Last summer, Mack, for the second time this decade, was pushed out of his job, after Credit Suisse decided not to renew his contract. For the past year, Mack has been without a job. Recently, he was named chairman of

Pequot Capital Management

, one of the nation's largest hedge funds.

In coming back to Morgan Stanley, Mack will have his hands full. He will have to work quickly to heal any feelings hurt in the bruising battle of the past few months, and must become an internal peacemaker. He also will have to make decisions about whether to keep Morgan Stanley together or pursue a sale of some of its parts.

One of the first things Mack will have to decide is what to do with the firm's Discover credit card business. In a bid to save his job, Purcell announced a hastily drawn plan to spin off Discover, even though Purcell always talked up the advantages of Morgan Stanley being in the credit card business.

After Purcell announced he would step down, the board indicated it was rethinking the spinoff. Analysts have questioned whether Discover could survive on its own without a huge capital investment by Morgan Stanley.

It's become increasingly difficult for credit card companies to function as stand alone businesses, as evidenced by

Bank of America's

(BAC) - Get Report

$35 billion offer on Thursday for

MBNA

(KRB)

, the largest independent credit card company.

Analysts say the BofA/MBNA deal makes it less likely that Morgan Stanley will go ahead with the spinoff. Rather, Morgan Stanley could seek a buyer for Discover, given that other big banks will now be looking to bolster their credit card offerings.

David Hendler, an analyst with CreditSights, says he thinks Mack will not immediately look to sell Discover. He says Mack has been away from the company for several years and will need time to assess the situation.

In the CNBC interview, Mack did not reveal much about his plans, noting he had only been back at the company for three hours. He said he didn't forsee any majors changes, just "fine tuning,'' noting that Morgan Stanley is a "great franchise.''