Why Barclays would sell off iShares

SAN FRANCISCO (Fortune) -- Desperate times call for desperate measures, like conducting fire sales of prized assets in order to bolster capital reserves. Then again, they also give companies cover to make tough decisions that inertia might ordinarily prevent.

Consider two reasons the British bank Barclays (BCS) is shopping its lucrative iShares exchange-traded funds business, a division of its San Francisco-based asset manager, Barclays Global Investors. The first explanation is the conventional wisdom, that Barclays aims to raise money so it can avoid taking on the United Kingdom government as an investor. This would save Barclays from toeing the bureaucratic line on matters large and small, a desire that Citigroup (C, Fortune 500) and AIG (AIG, Fortune 500) executives in the U.S. surely would understand.

Then again, it's equally plausible Barclays sees the sale as an opportunity to ditch a strong consumer-focused arm of an otherwise institutionally oriented unit at a time the parent is making a major commitment to building its non-consumer franchise in America. Last year Barclays bought the remains of Lehman Bros., signaling an investment in the U.S. institutional brokerage industry.

For now, guessing at the motivation of Barclays is just that, guesswork. The 113-year-old bank on Monday confirmed reports in the U.K. media that it was peddling BGI's iShares unit. Having noted speculation about the "potential disposal" of the unit, Barclays confirmed "that it has held discussions with a number of potentially interested parties." Press reports peg the value of the iShares business between $2 billion and $4 billion.

At one level, the news comes as a surprise in that iShares is that rare corporate example of a runaway homegrown success. (Think Apple's iPhone or Hewlett-Packard's printers.) BGI, which started in the 1960s as a unit of San Francisco's Wells Fargo, is known primarily as a data-driven manager of index funds for large institutions. (A low-key financial player, in part because of those unglamorous index funds marketed to faceless clients, BGI had a brief moment on the front pages when former CEO Patricia Dunn became ensnared in a corporate spying scandal at HP, where she was board chairman.) In 2000 it began introducing its ETFs, which behave like index funds but trade like stocks. Today BGI runs 180 ETFs pegged to everything from the S&P 500 to multiple country funds to numerous industry-specific indexes.

BGI manages $300 billion worth of ETFs and would make a fine addition to any number of U.S. competitors, including Vanguard, State Street (STT, Fortune 500), Invesco (IVZ) and even cross-town neighbors Charles Schwab and Wells Fargo (WFC, Fortune 500) itself. The Wall Street Journal speculated Tuesday that a private-equity or sovereign wealth fund might buy iShares, given that so many financial-services firms are so undercapitalized. Could be. But a firm with an existing consumer-oriented wealth-management business would be far better positioned to plug iShares into its menu of products.

Big as the iShares business is, though, it's a fraction of the rest of BGI's $1.2 trillion fund-management business, including a giant hedge fund. It's just as likely that Barclays sees an opportunity to re-focus its San Francisco unit on institutions and let someone else worry about consumers, especially at a time when the investing public is understandably focused more on capital preservation than on investing.

BGI's management clearly knows what matters most, namely the quantitative analysis-based investing that is its hallmark. In a 2006 interview with Barron's, Blake Grossman, BGI's CEO, said the question he most frequently asks himself is, "Are we doing everything we can to keep this the No. 1 place for quant investing?" Selling off the consumer-focused ETF business might help answer that question - with a not-so-gentle push from BGI's owners in London.