The confirmation on Tuesday that Barclays was talking to Lehman about buying its brokerage business presents some interesting scenarios for the exchange-traded funds and mutual funds industry.

Such a deal would mean that the venerable U.S. investment banker's indexing services group would be swallowed by the parent of the leading ETF provider. That's because Lehman's brokerage business includes the Lehman index services unit. (See related story.)

Consider that some 29 different bond ETFs carry the Lehman brand. And 14 of those are part of the iShares family of Barclays Global Investors. The iShares ETFs branded with the Lehman name have more than $30 billion in assets.

Barclays' interest in acquiring the failed bank's brokerage-dealer operation is centered on the potential to raise its profile in securities underwriting and advising on mergers and acquisition, according to published reports.

Barclays is No. 1 in ETFs tied to Lehman indexes, followed by: 10 SPDRs, three Van Eck bond funds and two ProShares bond portfolios.

As one ETF industry observer put it after hearing the news: "It's like when Enron went belly up and the stadium in Houston had to be renamed. This is more like a sports-stadium branding question than an investment issue, but is still something to think about."

Barclays president Robert Diamond has been vocal about his desire to exploit the credit crunch by taking more market share from Wall Street heavyweights and raising its profile in the U.S. The indexing group at Lehman is part of the company's fixed-income research unit. That's separate from the firm's asset management group and part of the broker-dealer side of the business.

The brokerage unit, like asset management, was not included in Lehman's bankruptcy filing, and a deal could include the absorption of as many as 10,000 jobs, in addition to the lucrative index licensing business. Lehman's underwriting arm ranked seventh in the world last year.

Liability Linchpin 

The linchpin in receiving approval for a deal will most likely rest on proving to shareholders that liability from taking on Lehman business will be limited. Barclays had earlier walked away from a deal to acquire Lehman in its entirety due to fears about liability and the government's unwillingness to provide assurances.

The index unit maintains and publishes thousands of indexes that are used around the world by both active and passive money managers to track different markets. According to Lehman's estimates, the group had a total of roughly $6.9 trillion benchmarked to those products by the end of last year.

In particular, Lehman has become known for its expertise in covering fixed-income markets. It was the first to publish a total returns bond index, and the Lehman Brothers Aggregate U.S. Bond index remains the de facto standard for broad indicators of fixed-income markets for advisors and managers domestically. Some industry insiders have speculated that this may make the index unit more attractive to potential suitors than other Lehman units, such as asset manager Neuberger Berman.

ETF and index mutual funds generally hold much if not all of the underlying securities in an index. The risk to investors if Lehman actually stopped providing the underlying indexes could be a reconstitution of entire portfolios and a switch to new benchmarks. Even in that event, plenty of other index providers are around to step in, say analysts.

Before a profitable enterprise such as Lehman's indexing business falls off the map, though, it's considered likely that rival indexing firms will at least initiate talks with Lehman about taking over its lucrative bond index business.

Now, it appears Barclays is ahead of the field, not only in trying to snag Lehman's indexing group but also its fixed-income and equities trading desks and a vast broker-dealer network. As a result, if the London-based financial conglomerate's negotiations turn out to be for the entire broker-dealer unit of Lehman, the impact could have widespread implications for mutual funds along with ETF markets.