Updated from 12:10 p.m.

The prospect of a lousy quarter at

Morgan Stanley

(MWD)

finally did in CEO Philip Purcell.

It's no small coincidence that just as Purcell was

running up the white flag Monday, the big Wall Street firm warned investors to expect dismal second-quarter earnings.

On Wall Street and elsewhere in corporate America, what matters most is results, and Purcell hadn't been delivering lately. Surely his foes -- notably a group of disgruntled alumni of the firm -- would have gotten less press had shares of the investment firm kept pace with rivals.

But instead, shares of Morgan Stanley are up a modest 29% over 30 months. That compares to a robust 45% gain for both

Merrill Lynch

(MER)

and

Goldman Sachs

(GS) - Get Report

. Meanwhile, Morgan Stanley's returns look downright puny compared to the 65% appreciation in

Bear Stearns'

(BSC)

stock and the whopping 74% gain in

Lehman Brothers

(LEH)

shares over the same stretch.

So despite the endless stream of criticism from the dissidents, a flood of high-profile defections and an embarrassing lawsuit defeat, Purcell might have survived if only he could have delivered a blowout quarter to get the stock moving.

But when Purcell needed a good quarter most, he came out firing blanks.

Purcell and Morgan Stanely outwardly cast the resigation decision as a voluntary move on his part. But a source says the resignation announcement came about only after an emegergency board meeting this weekend. Up until now the board had been staunchily behind Purcell, but it's believed the poor earnings were the straw that broke the camel's back.

The Morgan Stanley dissident group, which calls themselves the Gang of 8, was curiously silent Monday. Members seemingly had nothing to say even though Purcell's ouster was one of their chief demands. A call to the group's representatives was not returned. The dissidents, who had issued a number of press releases over the past two months denouncing Purcell, had not released any official statement by midafternoon.

Behind Purcell's undoing appears to be the lackluster performance of the firm's proprietary traders, who make bets on stocks, bonds and commodities for the firm's own account.

Morgan Stanley says it expects earnings, which are slated to be announced June 22, to come in between 15% to 20% below the $1.10 a share it earned in the second quarter of 2004. The investment firm blamed the shortfall on "weakened market conditions."

The firm's revised estimate of earnings between 88 cents and 94 cents a share is well below what analysts were expecting. The most recent Thomson Financial consensus estimate had the firm earning $1.08, down just 2% from a year ago.

The irony is that earnings estimates for Morgan Stanley, as well as for other big brokers, already had been pared back in the wake of

J.P. Morgan Chase's

(JPM) - Get Report

similar warning. Now it appears the

outlook for trading revenue at Morgan Stanley may be even more bleak than at J.P. Morgan.

"The nail in the coffin was the decline in trading activity," says David Hendler, an analyst with CreditSights.

Mark Constant, a Lehman brokerage analyst, says the bad quarter creates an untenable situation for Purcell, especially if the "results prove to be more favorable among MWD's peers once again."

For the moment, at least, Wall Street isn't paying much attention to the firm's poor earnings. In morning trading, shares of Morgan Stanley rose $1.37, or 2.75%, to $51.25, as investors obviously were buoyed by the news of Purcell's eventual departure.

But a turnaround at Morgan Stanley may take time.

For starters, Purcell intends to say on at the firm until a successor is named. The firm's board has given itself until next March to find a new leader.

With the prospect of Purcell staying on as a lame duck for several months, Morgan Stanley could be hit by more key defections as employees don't wait around to see who will be tapped as the new leader.

So far, Chuck Knight, the board member heading up the search, has only ruled out potential candidates. He says the new CEO won't be any of the dissidents who led the campaign to oust Purcell, nor will be it be former CEO John Mack.

The leading speculation is that Morgan Stanley will look for an outside candidate, a move that could extend the search process.

"I think going outside and cleaning house is the thing to do," says Timothy Ghriskey, a money manager with chief investment officer of Solaris Asset Management, a Bedford Hills, N.Y., firm that doesn't currently own any Morgan Stanley shares. "If they hire someone who excites investors, I think the stock could recover to its historic level of valuation."

Of course, the longer the process goes on, it will allow room for speculation that Morgan Stanley may simply put itself up on the auction block. Some of the pop in the firm's shares is no doubt due to investor optimism that Morgan Stanley could make an attractive acquisition candidate.

But investors buying shares of Morgan Stanley on merger speculation may want to take heed. After all, a lot of the firm's problems today stem from its inability to smooth over the rough edges and cultural differences that remain from the deal that brought together Morgan Stanley and the old Dean Witter.