MORGAN STANLEY HAS conflicting obligations to clients in its investment banking and retail businesses. The bank must resolve these conflicts to manage its franchise risk.

Morgan's investment bankers are advising CIT Group Inc. in its restructuring. Morgan Stanley is also expanding its retail services to small businesses. CIT is a flashpoint in the sensitivity around small business access to credit.

CIT factors the accounts of roughly a million small businesses, chiefly in the manufacturing, textile and garment industries, by purchasing their accounts receivables and collecting the sums due.

CIT's restructuring involves measures to retain credit balances of small business accounts, which exceed the equity value of CIT.

The restructuring process imposes severe hardship on the small business sector for CIT's failure to release the cash balances in a timely manner.

On July 13, Dow Jones Newswires reported that according to senior sources in the commercial finance industry, on that date, CIT was continuing to purchase invoices, exposing it to possible charges of "conversion." Conversion is the purchase of an asset without the ability to pay for it.

On July 16, Bew White, CEO of Summer Classics, an Alabama manufacturing company that factors some of its receivables with CIT, explained on CNBC the effect of conversion on small businesses, that are "invoicing every day, they're turning the invoice over to CIT .. and they [CIT] can't pay you because they don't have cash."

The following day, Moore-Handley Inc., an Alabama hardware distributor, stated in court papers that it was forced into a Chapter 11 bankruptcy because it was owed cash that CIT, its sole factoring provider, refused to release.

Mr. White's company has other sources of bank funding and another factoring provider in addition to CIT.

In converting to bank holding status to qualify for $2.3 billion funds under the Troubled Assets Relief Program last year, CIT placed itself under the enforcement authority of the U.S. Federal Deposit Insurance Corp.

Small businesses may report their concerns about CIT's practices through the FDIC's Web site, an action that initiates an investigation by bank examiners and the appropriate enforcement action.

The FDIC stated that it has a longstanding policy of not commenting on open banks, but allows its enforcement actions to speak for themselves.

Senior sources in the commercial finance industry told Dow Jones Newswires that their companies welcome the opportunity to assist CIT's small business clients if CIT releases them to do so.

Therein lies the dilemma for Morgan Stanley, as CIT's shareholders benefit from retaining the small business credit balances.

Following its conversion to a bank holding company in November, Morgan Stanley hired two senior banking veterans from Wachovia to expand the services offered to Morgan Stanley's 3 million individual and small business accounts.

Consistent with this initiative, a spokeswoman for Morgan Stanley emphasized the "strategic priority of small business clients."

Morgan Stanley stated that it regards its investment banking business as separate from its retail business.

Eventually, these small businesses will conclude that Morgan Stanley's actions are diametrically opposed to their interests, as CIT's restructuring efforts impose severe pain upon them. If Morgan Stanley values the small business banking segment, it must resolve the conflict inherent in its competing interests between the institutional and the retail businesses.

Managing conflicting interests is the greatest risk Morgan Stanley faces in the CIT capital crisis.

(Donna Childs is a senior columnist for Dow Jones Newswires.)

Write to Donna Childs at donna.childs@dowjones.com