When Wall Street's biggest firms settled with regulators in April 2003 over charges of fraudulent stock research, the industry promised a new era of independence. Marc Lackritz, president of the Securities Industry Association, promised Wall Street would ensure that "the quality and integrity of financial analysis is beyond reproach."

The recent highly critical report by federal regulators on Fannie Mae's accounting practices, though, may rekindle questions about Wall Street's ability to issue unbiased research. Fannie is one of Wall Street's best clients, issuing close to $2 trillion in debt to provide cheap loans for home buyers, and those figures don't include other huge fees Wall Street earns in helping Fannie. Fannie's top five underwriters have earned close to $700 million in fees since 1999, according to Thomson Financial. Those same firms have provided continuing upbeat assessments despite growing signs Fannie was facing financial difficulties. Merrill Lynch, Fannie's largest underwriter, maintained its "buy" rating last week. A Merrill spokesman said the firm's research is objective, adding: "Our buy rating is in line with the consensus of research on this company." Other leading underwriters--Goldman Sachs, Lehman Brothers, Morgan Stanley, and JPMorgan--declined to comment.

There is one analyst who raised some red flags: Josh Rosner of Medley Global Advisors, which sells research analysis to big investors. Rosner says Fannie's questionable accounting was readily apparent to anyone closely following the company. Last October, Rosner alerted investors that Fannie was engaging in the same balance-sheet management techniques that seemed to be at the heart of Freddie Mac's financial woes (the kind of information that would affect the stock price for all investors). At the time, Goldman's analyst, Robert Hottensen, issued a note saying "investors should not rush to tar Fannie Mae with the same brush." (Fannie's former CEO, James Johnson, is a Goldman Sachs director who heads a committee that monitors compliance with analyst-compensation policies.) In hearings last week, CEO Franklin Raines defended Fannie's accounting. A Goldman official said Johnson and Hottensen declined to comment. Rosner also wrote that Fannie downplayed the number of borrowers who were delinquent on loans, and that it lowered lending standards. "How could 30 analysts get it so wrong?" says Rosner.

It's not just Rosner who's wondering. "Once again the analysts ignored warning signs and touted a stock from a company that paid huge banking fees," says Jacob Zamansky, a lawyer who filed the first successful lawsuit charging that fraudulent research misled investors. Wall Street may not be quite beyond reproach just yet.