(FORTUNE Magazine) – SOMETIMES the people you get into business with can drag you into trouble. This happens even to supposedly smart operators. Take the involvement of the Reichmann brothers, who run the giant Olympia & York real estate company, with Robert Campeau, the flamboyant French Canadian developer who founded Campeau Corp. (annual revenues: $8.7 billion). What a study in contrasts: The Reichmanns are shrewd Talmudic scholars, extremely modest in manner and dress. Campeau is a paragon of superglitz, given to fancy houses, face lifts, and somewhat public nervous breakdowns. After several of them, he appointed a psychiatrist, reportedly his own, to his board of directors. For all the differences between the two parties, the Reichmanns have ended up immersed in Campeau's financial woes and now find themselves presiding over a debacle. The billionaire brothers -- Albert, 61; Paul, 59; and Ralph, 56 -- own 38% of Campeau Corp. shares, fully diluted. After the National Bank of Canada seized 13 million of Robert Campeau's shares in early January, Paul Reichmann, who had maintained a leadership position behind the scenes, took on a more public role in directing the company. The decisions he and others make will determine the fate of some of the biggest names in U.S. retailing -- Bloomingdale's, Burdines, Lazarus, Rich's, and Jordan Marsh among them. By the time the Campeau saga ends, most of these famed department stores are likely to have changed hands. Also on the line is the Reichmanns' reputation as high-octane dealmakers. They have already sunk $700 million or so into Campeau's operations and, worst case, could wind up losing half of it. Campeau's problems have come to be an unwelcome distraction from O&Y's real estate projects, which include the massive $5.6 billion Canary Wharf office and retail complex in London's East End. Says Cedric Rabin, a money manager with the Altamira investment advisory firm in Toronto, where Olympia & York has its headquarters: ''The Reichmanns made a bad decision to back Campeau. They don't know anything about stores, and I don't think they suspected how bad the cash position was.'' If the Reichmanns have erred in linking up with Campeau, it will have been a rare misstep for them. The brothers, born in Hungary and Austria, fled to Paris as youngsters, just ahead of the Nazis, and eventually settled in Tangier. Their father, a successful currency and commodities trader, moved the family to Toronto in the 1950s, and the boys joined him in running companies that exported steel and tiles. They veered into real estate after a few years and made millions building office towers in downtown Toronto and Ottawa. In the late 1970s the brothers invaded the U.S., putting up major office buildings in New York, Boston, Chicago, and Los Angeles. They are now the largest owners of commercial real estate in New York City. Last year FORTUNE estimated their personal wealth at $8.4 billion. While he hasn't made it that far, Campeau, 65, also started out from a base in Canadian real estate and prospered mightily. Unlike the Reichmanns, strictly observant Orthodox Jews who shun publicity, rarely socialize, and avoid the customary trappings of corporate power, Campeau has plunged headlong into life in the glittering world. He owns a lavish mansion outside Toronto, enjoys ski trips with former Prime Minister Pierre Trudeau, and divorced his first wife to marry his mistress -- who had already borne him two children.

Son of an auto mechanic, Campeau grew up poor in a dismal Ontario mining town and quit school at 14 to help support his seven siblings. He started out doing menial factory jobs, elbowed his way up to foreman, and eventually came to prominence in the 1950s and 1960s as a real estate mogul by building and selling thousands of homes around Ottawa and developing properties on Toronto's lakefront. Campeau and the Reichmanns crossed paths over the years, and in 1987 the brothers bought part of his Scotia Plaza office development in Toronto. Says one Toronto security analyst: ''Their thinking on real estate is similar. Campeau is a very shrewd developer, and each appreciates the other's track record.'' The Reichmanns also appreciated the fact that Campeau Corp. owned choice office and retail properties in Vancouver, Ottawa, and Toronto with an appraised value of $2.9 billion. Those lush holdings may have blinded them to the dangers when Campeau decided to get involved with risky retailing. Says Altamira's Rabin: ''They saw assets that were going to be valuable when broken up, and they were going to cherry-pick the good properties.'' IN 1986 Campeau bought Allied Stores Corp., which owns the Bon Marche, Jordan Marsh, and Stern's chains, for $3.7 billion. These properties were supposed to provide him anchor stores for malls he planned to build. Then in 1988 he got caught up in a bidding war with R.H. Macy over the Federated chain -- Bloomingdale's, Abraham & Straus, Burdines, Goldsmith's, Rich's, Lazarus, and others. He eventually won the battle, paying a pyrrhic $6.6 billion, but his company was saddled with a stupendous $13.4 billion in debt. Inexperienced with the vagaries of the retail marketplace, Campeau grossly overestimated the cash flow his Allied and Federated stores would generate to pay the interest on those Brobdingnagian borrowings. Retail sales have been slow, hobbled by consumer debt at an all-time high, and his stores' margins have been sliced wafer-thin by price competition. Says Kurt Barnard, publisher of Barnard's Retail Marketing Report: ''Mr. Campeau completely failed to grasp the rhythm of retailing. He plunged into that ocean of debt and thought the American public would rescue him, but it just doesn't work that way.'' The Reichmanns have kept Campeau barely afloat, providing a $250 million loan last September so he could stock his shops for Christmas and agreeing to help raise $800 million in bridge financing. Campeau Corp. is negotiating with bondholders to buy back at reduced rates 75% of the debt incurred in the Allied and Federated deals. The process, says Pamela Stubing, an analyst at Moody's Investors Service, amounts to ''an enormous game of chicken'' as bondholders hold out against a possible bankruptcy that would reduce the worth of their paper even more. A Chapter 11 filing may well be the final outcome of the mess. Signs of the company's increasingly parlous condition are abundant. In late December, Citibank declared that Campeau was in technical default on $2.34 billion in loans. The bank vowed to seek immediate full repayment, but later relented and extended the deadline. Some big factoring companies -- they buy receivables from suppliers who sell their goods to retailers -- have advised manufacturers to stop shipments to Campeau stores. Says Stubing: ''It's a nightmare now -- you're looking at pretty decent operations messed up with too much debt.'' Bankruptcy would hamper the Reichmanns' efforts to get their money out of Campeau Corp. because it would probably force the company to sell assets at clearance prices. Some of the Reichmanns' investment is secured by equity in various Campeau properties such as Scotia Plaza, but they also hold about $320 million in subordinated convertible debentures and about $40 million in Campeau stock. If all the breaks go against them, they could lose that $360 million, about half their total investment. WITH OR WITHOUT bankruptcy, in any sale of its assets Campeau Corp. may not be able to get anything like the prices it once hoped for. Bloomingdale's is a case in point. When Campeau bought Federated, Bloomingdale's was said to be worth $2 billion. When the crown jewel chain went up for sale in September, Campeau supposedly thought it might fetch $1.5 billion or so. Now $1 billion may be out of range. Not only are prestige retailers a glut on the market, but in addition Campeau doesn't own the building that houses the flagship store on Manhattan's East Side, and the lease has but 11 years to run. Any new owner will soon have to relocate or face stiff rent increases. Says George P. Hartman, vice chairman of the Toronto brokerage BBN James Capel Inc.: ''The only way Campeau will get $1.5 billion for Bloomie's is if he finds a Japanese investor who thinks it is a painting by van Gogh.'' For the Reichmanns to come out ahead on their Campeau investment, they would have to sell off the retail chains for enough to satisfy the mob of creditors -- an uncertain proposition at best -- and then pick off whatever desirable real estate might be left. Sources close to the family point out that their Campeau investment is but a tiny part of their vast holdings. And so formidable is the brothers' business reputation that some longtime Reichmann watchers are convinced they will somehow pull off a miracle and profit from this venture as well. That may be, but next time around they will probably look a bit harder at any prospective partner.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: CAMPEAU CORP.'S RETAIL EMPIRE