It's an understatement to say that Morgan Stanley (NYSE:MWD) CEO Philip J. Purcell has had a terrible year so far. Eight former Morgan bigwigs revolted, going public with their grievances and demanding Purcell's head on a platter. The resulting chaos led to a variety of high-ranking defections (more than 30 since March). And billionaire Ron Perelman won a massive court judgment against Morgan, alleging that they misrepresented a client's situation.

But, yesterday, Purcell gave Wall Street a big surprise: He announced his retirement. According to Purcell, there were too many distractions because of the "continuing personal attacks."

Morgan board member Charles Knight will lead the search for a new CEO. In the meantime, the company will continue to pursue its spin-off of the Discover credit card unit.

On the conference call yesterday, Morgan indicated that its earnings will fall anywhere from 15% to 20% lower than last year's, to between $0.88 cents and $0.94 cents a share. The company reports on June 22. Morgan shareholders are doubtlessly wondering: Where and how was the damage done?

Investment banking is a relationship business. Banks must cultivate an environment in which rainmakers can excel, whether they're maintaining relationships with existing clients or establishing new ones. The turmoil surrounding Purcell's departure, and the associated discontent among current and former bigwigs, does not bode well for either task.

Keep in mind that turnover is quite common at investment banks. If a better deal comes along, a rainmaker will often go for the top dollar. (Hey, isn't that what dealmakers do?) But the recent defections have become headline news for Morgan. For example, late last week, nine employees from Morgan's derivatives unit bolted to Wachovia.

What's worse, it appears that Morgan is experiencing a slowdown in M&A and IPO transactions. A similar slump seems to be dogging other investment banks, such as Goldman Sachs (NYSE:GS). But for Morgan, currently leaderless, things may be even worse. Uncertainty over the new CEO could mean more defections and recruitment problems.

It's not easy to find someone with experience in managing a global financial institution, but Morgan will need to act quickly to hire its next CEO.

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Fool contributor Tom Taulli does not own shares mentioned in this article.