Barclays Guts Lehman

Before this weekend, Lehman Brothers (NYSE: LEH  ) had floated a number of ideas to stabilize its business, including spinning off the company’s distressed assets to its shareholders -- the “good bank/bad bank” option. Perhaps this gave Bob Diamond, the president of U.K. bank Barclays (NYSE: BCS  ) , his inspiration for what looks like a brilliant move.

I’ll just take the good assets, thank you
Barclays announced today that it would acquire Lehman’s U.S. broker-dealer subsidiary for $1.75 billion. The deal gives Barclays immediate heft in the U.S. debt and equity capital markets and in providing advice for corporate clients such as General Electric (NYSE: GE  ) and Hewlett-Packard (NYSE: HPQ  ) -- a good complement to its existing businesses.

Crucially, the deal, which still requires the approval of the bankruptcy court, doesn’t include any exposure to the $85 billion in toxic assets that were the roadblock in the sale of the entire company. Indeed, Barclays ended talks this weekend to acquire Lehman’s holding company because U.S. authorities were unwilling to provide any guarantees with respect to the firm’s bad assets, as they had in the rescue of Bear Stearns by JPMorgan Chase (NYSE: JPM  ) .

But I don’t want to pay up for them
By waiting for the bankruptcy process to play out, Barclays’ Bob Diamond sidesteps that mine and makes away with some of Lehman’s prize assets for a song: $1.75 billion. Deducting the estimated market value of Lehman’s headquarters and two data centers which are included in the transaction ($1.5 billion), he is paying approximately $250 million for a great franchise with good earnings power.

By my (very rough) estimate, Lehman’s U.S. investment banking and capital markets divisions had a net profit before tax of $2.28 billion in the fiscal year ended Nov. 30, 2007.

If anyone is eyeing this deal with envy, it must be Bank of America (NYSE: BAC  ) CEO Ken Lewis. Lewis walked away from acquisition talks with Lehman this weekend only to make an overly aggressive offer to acquire Merrill Lynch (NYSE: MER  ) . For its generosity, Bank of America gets to assume all of Merrill’s liabilities. With its deal for Lehman post-bankruptcy, Bob Diamond has shown Ken Lewis that a little patience can pay big dividends.

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