More than ever before, Wall Street's buy and sell recommendations are viewed skeptically by investors who are wary of unstated allegiances to investment-banking clients.

But what's really going on when one brokerage firm rates the stock of another? Mere self defense at a time when Wall Street's biggest players are all in the crossfire of regulators and government agencies? Or a truly objective assessment that the brokerage-industry selloff has been overdone?

Thursday morning, Salomon Smith Barney, a unit of

Citigroup

(C) - Get Report

, raised its rating on

Merrill Lynch

(MER)

. Both firms are under investigation by the New York state attorney general's office for possible conflicts of interest between their research departments and their investment banking arms.

Salomon, which has been named as one of nine Wall Street firms that New York Attorney General Eliot Spitzer is examining for possible misconduct, upgraded Merrill Lynch to buy from outperform, saying that the firm's

price-to-book ratio is close to trough levels.

Regardless of the pall over the sector, the timing of the upgrade suggests to some that this was an objective call. "There's way more to be lost at this point than to be gained by helping each other out in that regard," said Brian Pears, head trader at Victory Capital Management, a division of Key Asset Management.

Nonetheless, one broker's upgrade of another while both are being forced to answer questions from the government, clients and shareholders, has raised questions once again about analysts' objectivity and the real value of research in an environment of disintegrating trust.

Perspective on Probes

Merrill Lynch has been under investigation for emails that showed analysts in the company's Internet group publicly touting stocks while privately disparaging them. The company recently agreed to provide more disclosure about its banking relationship with companies it covers with research reports.

"Clearly, there is overhang from the legal issues, and we believe Merrill is more affected than other firms we cover even as the investigation spreads," analyst Guy Moszkowski said in a research note. Still, he believes, the amount of market capitalization Merrill has lost since early April "far exceeds any reasonable expectation of the costs of dealing with the issue."

If the legal problems prove overwhelming and management can't achieve its margin targets, or if capital issues threaten the investment banking franchise, "a sale remains an option," he said.

Moszkowski also raised his rating on

Lehman Brothers

(LEH)

and

Goldman Sachs

(GS) - Get Report

, both of which Salomon has had an investment banking relationship with during the past three years.

"The skepticism, whether warranted or not, is certainly understandable," Victory Capital's Pears said. "But I think the brokers have always been careful about how they treat the broker firms they follow, just because it's such an easy target."

Prudential Securities analyst David Trone, who estimated that the legal costs associated with the Merrill probe could reach up to $2 billion, agrees that shareholders are selling too much of the company's stock at a time when they could buy on the hysteria. "Most brokers have a pretty rational understanding of what this could cost," he said.

Trone believes Merrill is a "screaming buy" at these levels, saying the market is worried about a more ominous scenario than is justified. "I put out a $2 billion estimate, but $10 billion of market cap has gone from Merrill, so you can do the math," he said.

Merrill Lynch has fallen almost 20% since news of the probe was first announced.

John Buckingham, portfolio manager at Al Frank Asset Management and co-editor of

The Prudent Speculator

, said this was a "common sense" call based on the fact that the stock has gone down. "If the stock breaks 40, we'd be ready to add to our positions," he said.

More Brokers on Brokers

The Salomon action on Merrill, Lehman and Goldman wasn't the only broker-on-the-brokers commentary Thursday. In a separate research note, J.P. Morgan Chase lowered its earnings estimates on

Morgan Stanley

(MWD)

and Goldman Sachs (the recipient of the Salomon upgrade), citing a tough equity trading environment.

J.P. Morgan cut its 2002 earnings estimate for Morgan Stanley to $3.35 a share from $3.45. The firm also cut its 2002 earnings estimate for Goldman to $4.28 from $4.40.

"Equity volumes and volatility have declined from low (first-quarter) results and will likely create a more difficult trading environment," analyst Michael Freudenstein wrote in a research note.

Shares of the brokerage firms have been under pressure for several days, but most of the members of the group were rising in recent trading. Goldman rose 1.7% to $80.54, while Merrill added 1.6% to $42.79. Lehman was up 3.2% to $61.90, and Morgan Stanley inched ahead 0.3% to $48.15.

Bear Stearns

(BSC)

and

J.P. Morgan

(JPM) - Get Report

were also higher.