In The Elder Scrolls IV: Oblivion, the player comes to bear many titles such as the Hero of Kvatch, Champion of Cyrodiil, Arch-Mage of the Mages Guild, Sheogorath, and the Gray Fox. That final moniker, the Gray Fox, is a venerated and legendary title reserved for the highest ranking member of the Cyrodiil branch of the Thieves Guild. The Gray Fox has committed a notorious amount of crimes, and is only recognized by the trademark gray cowl that conceals their identity. The infamy of the Gray Fox is so great that many civilians cower in terror, and the local guards will attack the Gray Fox on sight.
The Thieves Guild quest line in Oblivion is largely the story of the Gray Fox - or at least the current Gray Fox. The title is passed on to whomever becomes the Guild's leader. Through helping the current leader of the Thieves Guild in Elder Scrolls 4: Oblivion, the player becomes the highest ranking member of the Guild and dons the cowl, becoming the Gray Fox themselves. Wearing the cowl brings the notoriety of the famous thief, eliciting an immediate and hefty bounty if spotted by any guards.
The Gray Fox is not just an assumed title, though, it is a curse from a Daedric Prince. The Hero of Kvatch is recruited to help banish this curse, a task which requires a powerful artifact: an Elder Scroll, the iconic namesake for The Elder Scrolls franchise itself.
Oblivion: History of the Gray Fox & the Gray Cowl of Nocturnal
The origins of the Gray Fox are largely apocryphal, recorded in a book titled Purloined Shadows, the story of which is impossible to verify. The book can be found in both Oblivion and Skyrim, and tells the tale of the master thief who stole the cloak of the Daedric Princess Nocturnal. The Daedric Princes are one part of The Elder Scrolls' pantheon, rulers of their own realms in Oblivion, a plane of existence which is interpreted by mortals as the blackness of space.
One night the master thief in Purloined Shadows finds a young girl has managed to break into his home, a very impressive task. The girl does not actually want the master's gold, but wishes to become his student. The master tells her that her skills are impressive, and there is nothing else he could teach her beyond better planning for her heists, although her ambition and love of thievery itself make her an inadequate candidate for apprenticeship. The girl insists that the master thief teach her, saying there must be some grand robbery he has been concocting to solidify his place in Elder Scrolls history, one she can help with to learn the art of planning.
The master thief reluctantly accepts the girl's help in a plot to steal from a Daedric Prince. The heist is planned to occur on an annual day of summoning, during which a group of witches commune with the Daedric Princess Nocturnal, who rules over the night and darkness itself. When night falls, the witches perform an unholy ceremony, sapping all light and color from the surrounding forest. Nocturnal appears at the base of a tree filled with crows, reveling in the witches' worship and shedding her cloak to join her prostrate subjects in nakedness.
The girl had been disguised as a group of crows in the tree for the entire day, lying in wait for the ceremony which would summon Nocturnal. Sneakily climbing down the tree toward Nocturnal, the girl became angry when she realized the master thief had abandoned her and the distraction he promised would not come. Just then the master's voice rang out: "Mistress! A thief! Behind you!" Nocturnal whirled around, and enveloped the girl in a lethal darkness.
It was in the moments just before her death that the girl realized that she had been the distraction, and the master thief was making off with the Daedric Princess' cloak. It was this cloak that would become the Gray Cowl of Nocturnal. The Daedric Princess' anger at being robbed of her cloak cursed the Cowl, subjecting the wearer to a life of anonymity and erasing their identity from the annals of history - a cruel twist of fate for the master thief's legacy. Thus the Gray Fox was born.
Oblivion: The Gray Fox & the Thieves Guild in Cyrodiil
The one who stole the cloak from the Daedric Princess and first donned the Gray Cowl of Nocturnal was a man named Emer Dareloth. The curse of the Cowl erased his name from history, sealing his house in the Imperial City and making it the future headquarters of the Thieves Guild. The Gray Cowl of Nocturnal was then passed down to each successive leader of the Guild, ensuring that the legacy of the Gray Fox lived on. Because of this, many denizens of Cyrodiil believe the Gray Fox to be immortal and has been the same being, alive for over 300 years.
When the Hero of Kvatch is recruited into the Thieves Guild in The Elder Scrolls 4, the current Gray Fox is Corvus Umbranox, former Count of Anvil. Becoming the Gray Fox, and wearing the Gray Cowl of Nocturnal, rendered his identity as the Count forgotten. His wife and Countess of Anvil, Millona, believes her husband left her ten years ago. In the final Thieves Guild quest in Oblivion, Corvus tasks the player with stealing an Elder Scroll, which is needed to break the curse put on the Cowl by Nocturnal.
The player must break into the Imperial City Palace and steal an Elder Scroll from the blind priests who guard the sacred artifacts. When it is returned to the Gray Fox, he then gives the player his wedding ring and tasks them with taking it to the Countess in Anvil. After presenting her with the ring, Corvus will appear, renounce his life as the guild master, and give the Cowl to the player. The curse on the Gray Cowl of Nocturnal has been broken, allowing Emer's house to become the new guild headquarters and the Cowl to be worn by the player with no consequence to their legacy - though wearing the Cowl in public will still result in a very high bounty.
The Gray Fox is a legendary figure in the world and lore of Oblivion. Even though the curse is broken by the end of Oblivion's Thieves Guild quest line, the legacy of the feared thief remains. A powerful artifact taken from one of the Daedric Princes, the Gray Cowl of Nocturnal is easily recognized and feared throughout the region. The Elder Scrolls IV: Oblivion lets the player become many things, including a master and immortal thief known as the Gray Fox.
Source: Purloined Shadows (via The Elder Scrolls Wiki)