Lehman Brothers is considering releasing its second-quarter earnings a week earlier, tying that announcement to news about a plan to raise capital, as the embattled investment bank looks to quiet doubts about its future.

Lehman (LEH) could announce a $5 bn capital raise early next week in advance of what may be its first quarterly loss since going public in 1994. Talk is that Lehman is approaching a US pension fund as well as investors in South Korea and China.

The $5 bn is higher than estimates earlier in the week of $3 bn to $4 bn in a possible capital raise. Michael Mayo, a top bank analyst at Deutsche Bank, says he expects a $4 bn capital raise to deal with second quarter losses after $2.9 bn in credit market writedowns. That could equate to a quarterly loss of about $200 mn.

The funds would help avoid another ratings downgrade, as Standard & Poor's has recently downgraded the firm due to anticipated write-downs, problems with hedging and its leverage ratios.

Sources have dismissed one idea, that Lehman will do a stock rights offering, where employees receive a right to buy the shares at a discount. Instead Lehman is seeking out other sources, as the amount of capital raised in a rights offering may not be sufficient. Lehman has already raised $4 bn selling preferred stock in April.

The capital raise comes as two Federal Reserve Bank presidents, the Richmond Fed president Jeffrey Lacker and the Philadelphia Fed president Charles I. Plosser, warned on Thursday the Fed's decision in March to lend to Wall Street securities firms could create future financial crises. The Federal Reserve is on schedule to shut the new Fed facility, put in place after the near-collapse of Bear Stearns, in September.

Lehman says it has more than $40 bn in liquid assets, up from $34 bn in the prior quarter. It also says that its holding company had unencumbered assets of $64 bn and its regulated units had $99 bn at the end of the last quarter. It had $7.6 bn in cash and equivalents on the balance sheet as of the last quarter.

The questions about Lehman's prior quarterly results continue to mount. David Einhorn, who runs Greenlight Capital hedge fund and is short Lehman, as well as other analysts on Wall Street are poring through Lehman's results and are finding a growing number of discrepancies (see bottom).

Besides the discrepancies, when Lehman reports second quarter results, keep tabs on its sagging balance sheet, watch whether its assets and liabilities have risen, watch too whether its leverage is dropping (it says its at 25:1) and also watch potentially quirky, though legit, accounting moves that made its important valuation measures look better (see blog, "The Fire-Engine Red Flags at Lehman Brothers).

With volume heavy recently at 133 million shares, more than four times the usual, in just the past three days, Lehman's stock has fallen 18%, dropping to its lowest level since August 2003.

Lehman's total assets of $786 bn at the end of its fiscal first quarter were up 14% from the fiscal fourth quarter of 2007 and a steep 40% a year earlier (it is now about twice the size of Bear's assets at $399 bn). Of that sum, a big $695 bn was for its financial instruments and collateralized agreements. Sanford Bernstein estimates that one third of Lehman's assets are "illiquid" or "less liquid."

Lehman also had $761 bn in total liabilities (versus Bear's $387 bn). Lehman, like other firms, now seeks to delever its balance sheet. As we reported to you early Wednesday morning, it has sold $100 bn in assets, cutting its leverage ratio to 25:1 from 31.7:1. But it faces a frozen market already struggling to digest the potentially $500 bn in assets Citigroup (C) is also seeking to dump. 

Questions swirl around the size of a potential writedown at Lehman, specifically with regards to Lehman's exposure to an estimated $6.5 bn worth of potentially collateralized debt obligations and its gauge of illiquid assets, called level 3 assets (the quarterly marked the first time Lehman disclosed its CDOs).

According to a footnote in Lehman's last quarterly report, its CDO book has exposures "to franchise lending, small business finance lending, or consumer lending." With that disclosure, there seem to be no residential mortgages, despite the fact there is no explanation of how Lehman defines ‘consumer lending.'

How much of that sum could be written down? The footnote says "approximately 25% of the positions held at February 29, 2008 and November 30, 2007 were rated BB+ or lower (or equivalent ratings) by recognized credit rating agencies." That means $1.6 bn could be at risk as they are below investment grade.

Einhorn says he queried Lehman's chief financial officer Erin Callan about this, and that Callan declined to explain the "modest" writedown, but "instead stated that based on current price action, Lehman ‘would expect to recognize further losses' in the second quarter."

The small $200 mn writedown comes as Lehman reported in its last quarter $40.2 bn worth of illiquid assets for which management could not get a price tag on, and instead relied on its own internal models to value, called level 3 assets. That sum is up from $38.88 bn in the fourth quarter of 2007.

According to Einhorn, Lehman provided different level 3 sums in its investor conference call about its last quarterly report versus what it posted in its filing.

For example, in its last quarterly report, Lehman said it had $228 mn of realized and unrealized gains. Einhorn though says that Callan said on the conference call that Lehman actually had an $875 mn loss instead. He says he "asked Lehman, "did you write-up the level 3 assets by over a billion dollars sometime between the press release and the filing of the 10-Q?" and that it replied "no, absolutely not."

Einhorn says in a follow-up e-mail that Lehman said "that the movement between the conference call and the 10-Q is ‘typical' and the change reflects ‘re-categorization of certain assets between level 2 and level 3.'" How such a "re-categorization" created a $1.1 bn swing is the question.

In addition, Lehman booked a $722 mn gain last quarter in its $8.4 bn portfolio of level 3 corporate equities, despite the fact that during the quarter the S&P fell 10%.

Einhorn says: "This is particularly odd since about one-quarter of this bucket is Archstone-Smith, a multi-family REIT that Lehman says it wrote down by a sizable, but undisclosed, amount."

Einhorn says Lehman attributed the gain to a large profit on a pre-IPO financing round for KSK Energy Ventures Limited, a power development company in Asia that operates three small power plants. According to Lehman, it booked a $400 mn to $600 mn unrealized gain on the investment in the first quarter.

But Einhorn says Lehman eventually only bought the stake for $86.5 mn in January. How does an asset rise to nearly $600 mn from just $86.5 mn in less than six weeks?

It appears Lehman may be using a valuation for KSK that estimates what Lehman says it would want to sell the stake for if the company eventually does go public, which it has yet to do.

Einhorn says when he pointed out the discrepancy, Callan told him that "during the first quarter ‘a new party' came in and completed a pre-IPO round in February at a much higher valuation than Lehman paid. She said Lehman valued the stake at a 30% discount to where the new party came in to reflect the restricted securities Lehman held."

But Einhorn says that KSK Energy Ventures filed a "prospectus in India on February 12, 2008 that revealed a different set of facts" with smaller numbers.

He says the prospectus shows that instead, "Lehman had made an initial $112 mn investment in KSK Electricity Financing in November 2005. The company completed a restructuring on January 20, 2008, through which Lehman sold its original investment for a gain of about $65 mn.

It then "concurrently purchased about one-third of KSK Energy Ventures for $86.5 million. The only other significant shareholder, KSK Energy Limited, owns 65% of the remaining equity and did not contribute capital during this round."

Einhorn says he "confronted them [Lehman] with the evidence that there was no subsequent round and that Lehman was the lead, if not the only, investor in the January restructuring. Suddenly, the story changed."

He says that "management responded that it was ‘not sure' if Lehman was the lead on the round. It took what it ‘thought was the most conservative approach at the time and the low end of what all those data points produced.' Management followed-up in an e-mail stating that in February it had ‘revalued' its January investment based on a variety of analyses," including forward cash flow multiples, an analysis of comparable companies and a third-party research report. Einhorn says one of his partners noted: "This seems like one helluva power plug!"

Additionally, Lehman had $39 bn of exposure to commercial mortgages at the end of last year year. But during the last quarter Lehman marked down its level 3 mortgages by $750 mn, or only 3%, Einhorn says, despite Lehman saying that only about a fifth of the level 3 mortgage assets are in markets that performed well, such as in Asia, with the rest representing many low quality assets. Remember, management gets to price-tag illiquid assets when the markets for them freeze up.

Einhorn says that the index of AAA commercial mortgage backed securities declined about 10% in the quarter. Lower rated bonds fell even further. "Since Lehman's portfolio is less than AAA, it would seem its write-down probably should have been more than 10 points," versus "less than three points gross," he says.

Einhorn adds that "part of the commercial mortgage exposure is a venture called SunCal, where Lehman is a lender and equity investor. SunCal is a large land developer, principally in California's Inland Empire. This is one of the hardest hit housing markets in the country. A number of publicly-traded home builders have written land holdings in this area down to pennies on the dollar," but that "Lehman has not disclosed a material charge on its SunCal investment."