Wall Street's new gambler

Varley, by contrast, fits every American's stereotype of a stiff-upper-lip Brit: an ultrapolite lawyer who wears suspenders to the office and is uncomfortable talking about himself. He lists Ping-Pong and fishing as his hobbies.

Varley and Diamond joined Barclays top management within a year of each other in the mid-1990s and say they have worked closely together ever since. Varley moved from division to division before being appointed CEO in 2004, while Diamond has stayed put at Barclays Capital, as the investment-banking operations are called, building it into an important contributor to the bank's profits.

Diamond's units, which also include wealth and fund management, helped Barclays report five straight years of increased profit through 2007 and contributed about 45% of the bank's $12.3 billion pretax earnings last year. Diamond's $36 million salary and bonus last year far eclipsed the $7.3 million that Varley took home.

Buying Lehman's U.S. operations seemed to Varley and Diamond the easiest way to keep those profits growing. But the deal almost didn't happen. In May, when the Barclays board discussed possible acquisitions, Lehman was on the short list. It was a hypothetical conversation at that stage, but when Lehman hit the rocks in early September, Diamond and his team were ready.

Over four days and nights, they pored through the books nonstop and held detailed discussions with the Federal Reserve and the U.S. Treasury. Diamond became increasingly confident. At 10:30 a.m. on Sunday, Sept. 14, he called Varley in London. "I told him I thought we were going to get it," he recalls.

Less than two hours later the deal fell apart because Barclays wasn't able to guarantee all settlements, as J.P. Morgan had done when it bought Bear Stearns. British regulations required a shareholder vote for that, but time had run out.

Later that evening Diamond's cellphone rang as he was on the way to dinner with his wife and daughter - it was the first time he had seen either for days. It was Lehman COO Herbert McDade. Would Barclays be interested in buying part of Lehman if it filed for bankruptcy?

"I said, Absolutely," Diamond recalls. The deal was much sweeter for Barclays: Now it would acquire Lehman's profitable broker-dealer business but not its toxic assets. "We were able to rifle-shoot the businesses we wanted," Varley adds.

Now the question is, Can the parent company execute? The key to the Lehman acquisition will be integration. So far Barclays is off to a good start: Within 24 hours of the deal's announcement, the firm had rebranded Lehman as Barclays Capital, even changing the huge signs on Lehman's headquarters in New York's Times Square.

The top three levels of management in each division were named, and the process of cutting staff began. Some overlap exists in areas such as fixed income and IT, but Barclays says one of the attractions of the deal is that the two operations are so complementary. Lehman specialized in equities and fixed-income trading, prime-brokerage services for hedge funds, and investment-banking services, including merger advice for the likes of GE (GE, Fortune 500), Hewlett-Packard, and Verizon.

Some of Lehman's top talent has gone, as have some clients, including the Illinois State Toll Highway Authority, which shifted $383 million worth of its municipal bond business to Goldman Sachs (GS, Fortune 500). But Barclays has picked up some businesses too; for example, it has become a primary underwriter, helping GE raise equity.

Back in his London office, Diamond has been eyeing a Tupperware container of salad for the past half-hour. There's a satisfaction about the coup he's pulled off, but also an obvious nervousness about the challenges Barclays faces, with or without Lehman. It isn't the time to boast.

"A number of people have looked at me like, 'You knew what you were doing,'" he says with a laugh. "I wish I was that smart. I wasn't." For Barclays, too, it's an open question as to how smart it has been.  

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