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It’s been raining write-downs and credit problems on Wall Street as of late, leaving many investors in search of a warm, dry brokerage to shield them from the storm. According to Sanford C. Bernstein & Co., the safest shelter is Morgan Stanley.

“Morgan Stanley is the best-positioned firm to weather the difficult fixed income market conditions that we expect will continue through the remainder of 2008,” Bernstein said in a note to clients. As a result, the firm rates Morgan Stanley shares at outperform with a $65 price target, the only outperform rating in Bernstein’s large-cap broker coverage.

Senior Bernstein analyst Brad Hintz said Morgan Stanley Chairman John Mack has empowered his management team to shift direction and reposition the firm to weather a prolonged tough credit environment that has plagued the market since August. Hintz noted that unlike Morgan Stanley’s major competitors, the brokerage is reducing its balance sheet exposure, shedding troubled assets and reducing its leverage ratios.

“Based on the normalized business mix of brokers, Morgan Stanley is the right firm to own during this uncertain point in the cycle,” Hintz continued. The analyst said Morgan Stanley is less exposed to fixed income, commodity and currency net revenue than Lehman Brothers and Goldman Sachs and has less capital-intensive revenue than either of the two firms. Bernstein also said Morgan Stanley is more exposed to client asset price net revenue than Lehman or Goldman and less exposed to decline in private equity investment revenue than either Goldman or Merrill Lynch.

“Bernstein believes the diversification of Morgan Stanley - which constrained the firm’s performance during the 2005 to 2006 trading boom - makes Morgan Stanley less exposed to the institutional downturn and market turmoil still ahead,” Hintz said. He noted that Morgan Stanley, along with Merrill Lynch, has the strongest liquidity position among the large-cap brokerage firms, leaving Morgan Stanley well positioned to address any incremental pressures to its funding base and allowing Bernstein to recommend the stock as a “reasonable holding in this difficult and volatile fixed income market environment.”

In the wake of Bear Stearns’ meltdown, everyone on Wall Street seems to be trying to figure who else is vulnerable? The name that keeps coming up is Merrill Lynch. One day after Buckingham Research said the New York-based broker comes to mind on the “who’s next” list, Wachovia Capital Markets added fuel to investor concerns, crowning the company the “riskiest of the remaining monoline banks.”

“Merrill had gross subprime collateralized-debt-obligation exposure of $30.4 billion, 3.3 times the group average,” Wachovia told clients. “Merrill also had the worst liquidity ratio at 52% compared to Goldman Sachs and Lehman Brothers and now has the highest leverage in the industry at 31.9 times.”

Wachovia senior analyst Douglas Sipkin noted that Merrill ended 2007 with $79 billion in its excess liquidity pool and that the broker had $22.3 billion available to it through a number of credit facilities at the end of the fourth quarter. “In the event of a ratings downgrade,” Sipkin said, “Merrill Lynch must post additional collateral and make termination payments of $4 billion, highest among the group.” Another issue of note, Wachovia contends, is Merrill’s agreement on its $6.2 billion capital raise with Temasek Holdings and Davis Select Advisors. The firm said a price reset agreement is in place with the two parties in that if Merrill raises additional common stock or convertible securities with a price or reference below $48 a share within one year of closing, Merrill must pay both Temasek and Davis the aggregate excess amount.

Sipkin also believes Merrill is most at risk to future write-downs because it is still holding $3.5 billion in monoline exposure despite ACA Capital-related write-downs in the second half of 2007. The company also had leverage loan commitments of $18 billion at the end of the quarter. In terms of mortage-related positions, the analyst said Merrill has net exposure to $4.8 billion in super senior U.S. asset-backed securities CDOs, $2.7 billion in subprime residential mortgage-related positions, and $4.2 billion in subprime related securities in its bank investment portfolio.

But the news wasn’t all bad. “Merrill’s best-in-class retail broker business does provide a substantial fee-based cushion in the event of a banking and trading downturn,” Wachovia wrote.

Wachovia also believes the failure of Bear Stearns was “more a management issue than a market issue” and that the Fed’s recent action to allow dealers access to the discount window “will dramatically level the playing field for brokers.” Investors are showing themselves in Merrill’s camp so far Tuesday, sending the stock up almost 8% as the whole financial sector rallied on strong results from Goldman Sachs and Lehman Brothers.

By Christie Rizk and Ryan Vlastelica

New York Governor Eliot Spitzer was elected in 2006 by a historic margin, after having campaigned on a record of tough stances against corporate corruption, an approach that earned the then-attorney general the title “the sheriff of Wall Street.” Before the March 10 news broke that he had used a pricey escort service - news that prompted a ticker tape-like parade of calls for his resignation from Wall Street - he was considered one of the scourges of the financial world.

No surprise then that the Wall Street Journal said the following day, “It’s schadenfreude time on Wall Street.”

Spitzer first caused headaches for the Street in 2001, when the burst of the dot-com bubble, corporate scandals, a recession and the Sept. 11 attacks were straining the economy. In an early case, he sued Merrill Lynch for conflict of interest on the grounds that it had downgraded a company because it refused to do business with Merrill. A subsequent investigation suggested that when the firm gave financial advice to clients, the advice was affected by Merrill’s own financial interests.

Spitzer used in-house e-mails from the broker in his investigation, which ended with Merrill Lynch settling for $100 million. Ironic, because it was text messages that helped bring the on the current mess for Spitzer.

He achieved a similar victory the following year, when 10 brokers settled for a total of $1.4 billion following the accusation that they gave stock advice based on their own interests.

But many felt that Spitzer  overstepped his role when he sued former New York Stock Exchange Chief Executive Richard Grasso in 2004 in the most notorious decision of his career, demanding that Grasso repay some $100 million from the pay package he received from the NYSE.

Spitzer claimed that the NYSE was a non-profit organization, and as such violated New York’s non-profit laws that state executive at non-profits receive reasonable compensation. Spitzer said the $139.5 million payout Grasso received in the summer of 2003 wasn’t only unreasonable, it just didn’t seem right.

Spitzer was by no means the only one questioning whether Grasso had gotten more money than he deserved. But there were some who thought Spitzer was going overboard with the tough lawmaker routine when he took aim at Grasso’s character, when he questioned his secretary about a possible affair the two might have had and started looking into whether  Grasso has an illegitimate child.

Grasso and his supporters alleged Spitzer was simply picking on him in order to make himself look good for his gubernatorial bid.

Now, Grasso and his cronies are gleefully enjoying their moment of revenge. Longtime Grasso friend Andrew Sabin told the Wall Street Journal that he’d like to buy Grasso some champagne. And former Grasso colleague Ken Langone told CNBC news, “Everyone has a personal hell. I hope his hell is hotter than everyone else’s.”

If hell means a man who was once celebrated for sticking up for the little investor will now be remembered as ushering in the first major sex scandal to rock politics since Ken Starr became a household name, then Eliot Spitzer is down so deep that not even Dante could find him. Though Grasso will be sure to try.