UPDATE 2-Lehman cuts Goldman, Morgan Stanley forecasts

(Adds more analyst comments, share movement)

May 20 (Reuters) - Lehman Brothers cut its earnings forecast for Wall Street investment banks Goldman Sachs (GS.N) and Morgan Stanley (MS.N) to reflect losses from hedging.

"This past quarter we have seen a meaningful dislocation between cash and derivative prices across several assets classes including commercial mortgages, leveraged loans and corporate debt," Lehman analyst Roger Freeman said.

"We believe that the brokers will incur hedging program losses due to this basis risk."

Freeman said broker stocks could come under further pressure as consensus estimates continue to come down as the market factors in the far-reaching impact of spread basis risk this quarter.

Structured debt marks should not come as a surprise to the market as brokers have in the past indicated that these gains would reverse when broker credit spreads compressed again, he said, noting that recent estimate cuts had been focused on the reversal of structured debt gains.

"Effectively the second quarter is looking to be a messy quarter, but not one exposing incremental fundamental weaknesses in balance sheets," the analyst said.

Freeman cut his second quarter earnings estimate on Goldman Sachs to $3.18 a share from $3.75 and 2008 estimate to $15.04 a share from $15.60. He cut his second quarter estimate on Morgan Stanley to $0.87 a share from $1.31 and 2008 estimate to $4.72 a share from $5.16.

"We expect further losses in Alt-A residential mortgage assets, as we believe hedging for this 'murky' mortgage asset class is much more difficult," Freeman noted.

The below-prime Alt-A loans often go to people who cannot fully document income or assets.

Freeman said in Alt-A, both Goldman and Morgan Stanley have meaningful exposure, $5 billion and $4.6 billion respectively, that he believes will generate losses during the quarter.

"...the economic environment (with an expectation of weak 4Q and 1Q GDP and a new round of Fed cutting) will temper sustainable post-quarter gains in the stocks, though we acknowledge that near-term sentiment around the economy appears to have temporarily improved," he wrote.

Shares of Goldman were trading down $2.30 at $182.10, while Morgan Stanley stock was down $1.59 $44.61 in morning trade on the New York Stock Exchange. (Reporting by Neha Singh, Nachiket Kelkar in Bangalore; Editing by Jarshad Kakkrakandy)