Being muzzled is one of the most ego-bruising experiences that can befall a bank analyst but there's more at stake than self-image.

For investment banks, a sell-side analyst's blunt criticism of a client can translate into sharp revenue losses. Yet investors who count on analysts for an independent assessment of a company's health and prospects can be shortchanged when an analyst is told to tone down the rhetoric.

The issue of independence was thrust into sharp relief recently by Bear, Stearns & Co.'s crackdown on analyst Sean Ryan, who covers large and mid-capitalization banks. His negative assessments of First Union Corp., beginning in January, nearly cost Bear Stearns' fixed-income unit $10 million a year in revenue. By June, Bear Stearns had instructed him not to write or say anything about First Union. In recent days, his dealings with the press have been curtailed.

Safeguarding business while allowing analysts free rein is a perennial balancing act for investment banks. The very firms that cover banking companies also rely on them for lucrative revenues in areas such as trust management, trading, and advising. They count on analysts to bring in new business to feed those pipelines, even if it means soft-pedaling a downgrade or placing a gag order on an analyst.

"All sell-side analysts have to deal with the realities that their job encompasses -- not only doing the research but also talking to customers and selling that research to the client base," said Lawrence Cohn, an analyst for Ryan, Beck & Co. in Livingston, N.J. "This is still a business, and we hope to get paid."

But the resulting tension can strain the credibility of the sell-side analyst and undermine individual investors' trust in their brokerages.

"The upshot is we realize the Chinese wall is not quite as high and wide as it is supposed to be," said Scott Edgar, a buy-side research director for the Sife Trust Fund in Walnut Creek, Calif. "Ultimately it impacts the entire investment industry. If you're an investor who really relies heavily on analyst research for making an informed decision, you come up on the short end."

Relatively positive stock recommendations are one manifestation of the juggling act confronting investment banks' research staffs, according to a study by Siva Nathan, an associate professor at Georgia State University in Atlanta.

Analysts who have relationships with investment banks issued 25% more buy recommendations than analysts who work for pure brokerage firms, Mr. Nathan found in a survey last year. He reviewed 250 reports prepared by analysts at both types of firms.

The survey also showed that analysts with investment banking links put earnings forecasts 6% higher on average.

Why the disparity? "A lot of the analysts' compensation is based on how much investment banking business they can generate for the firm," Mr. Nathan said. "So the analysts feel a lot of pressure to be optimistic for clients. Analysts are not being paid millions of dollars because they can make an accurate forecast."

Still, it is unusual for a banking company to flex its muscles over an analyst's remarks, partly because taking criticism is part of the equation for companies that want coverage. Bankers say analysts are candid even when their views don't mesh with their firms' agendas.

"Analysts are fiercely independent," said Steven Goldstein, chief financial officer at Centura Bank in Rocky Mount, N.C. "They are objective. They don't always agree with me."

"Having said that, analysts know where the firm is making money,'' he said. ''It is not that they are unaware of potential conflicts, I just don't think they are particularly sensitive to them."

Mr. Ryan of Bear Stearns, who is 30, has been known for brash, edgy commentary. Some personal jabs he took at First Union's chief executive officer, Edward E. Crutchfield, may have intensified the reaction, both internally and externally, to his criticism of the $230 billion-asset banking company.

The breaking point apparently came with a June 24 comment he made to Reuters. ''Quite literally, there is no doubt in my mind that First Union will be acquired because the company and the stock are doomed to underperform until the management changes," he told the wire service.

But circumstances like Mr. Ryan's are by no means unprecedented. Charles Peabody, now a bank analyst for Mitchell Securities in New York, faced a similar situation a decade earlier, when he was at the defunct Kidder, Peabody.

Mr. Peabody who is unrelated to the firm's co-founder -- turned negative on NCNB Corp., the predecessor of NationsBank, which was bought by Bank of America Corp., and informed his customers that the Charlotte, N.C., company had dragged its feet in recognizing loan problems. Kidder Peabody reportedly lost underwriting business and potential financing as a result.

Mr. Peabody said the incident prompted him to set out on his own in 1991, rather than "play the rules of the game" at Wall Street firms. "If you choose to play, you have to understand those are the rules and you have to live by them or get out."

The lesson, he said, was that when push comes to shove, a securities firm will always value revenues more than analyst independence. "The brokerage firms go out of their way to make sure that aspect of the business hasn't changed one iota," Mr. Peabody said.

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