Morgan Stanley Embraces Discover

Under Mack, the bank reconsiders its credit card spinoff.
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Updated from 4:35 p.m. EDT

John Mack's vision for

Morgan Stanley

(MWD)

includes credit cards.

The Wall Street firm, whose six-month-long management soap opera concluded two months ago with Mack's appointment as CEO, said late Wednesday that has reconsidered the planned spinoff of its Discover unit, and now plans to retain the business.

Instead, the company will sell its aircraft leasing business, a division that's often been a drag on earnings.

The Discover spinoff was the brainchild of Phillip Purcell, who Mack deposed as chief executive at the end of June. Purcell proposed spinning-off during the spring as the internal and external drumbeat against his tenure began to mount.

But spinning off Discover never made much sense, especially since the era of standalone credit card companies appears to be over. Within the past several months,

Washington Mutual

(WM) - Get Report

announced a deal to acquire

Providian

(PVN)

and

Bank of America

(BAC) - Get Report

is buying card giant

MBNA

(KRB)

.

It's become difficult for stand alone credit cards to compete with card companies that are part of bank or other financial services firm.

So instead of Discover, Morgan Stanley is axing its ailing aircraft leasing business, which has been hurt by the slumping performance of the airline business. Over the past several years, the leasing business has resulted in three big writedowns. A year ago, Morgan Stanley, for instance, took a $109 million pretax impairment charge on its aircraft leasing business.

The firm's exit from the aircraft business will likely result in a $1 billion charge against third-quarter earnings.

"Having looked closely at the Discover business, the board and I are convinced that Discover is not only a strong business, but also an attractive asset for Morgan Stanley," Mack said.

"It is a unique, successful franchise with growth opportunities that gives Morgan Stanley a consistent stream of stable, high-quality earnings and substantial cash flow, diversifies the company's earnings and broadens our scale and capital base."

According to the company, Discover's pretax earnings of $1.27 billion in 2004 were a record and made up 19% of the company's pretax income. It returned more than 19% on equity.