(FORTUNE Magazine) – IN THE DOOM-LADEN days when Robert Campeau was obsessively chasing Federated Department Stores, a moment flashed when he might have been derailed. It came at 8 A.M. on February 16, 1988, in New York City, as the directors of May Department Stores, then the third-largest U.S. chain to Federated's first, gathered for a suddenly called special meeting. The directors knew their mission: They were to bless a giant deal in which May, well capitalized and tightly managed, would make a white-knight bid for Federated. Across town Federated's representatives, themselves poised to enter a board meeting, were eagerly anticipating May's call -- and an offer they expected to be $67 a share. But May's 54-year-old chief executive, David Farrell, normally punctual to the second, was late this morning. ''When he finally came in,'' says one of the waiting May directors, ''his face was long. I knew then we weren't going to be approving any deal.'' Soberly, Farrell explained that he and his executive team had concluded that the challenge of taking over Federated -- huge, sprawling, and run by managers who would not necessarily cotton to May's exacting ways -- seemed too great to risk. An apologetic telephone call went to a stunned Federated, and the episode was closed. No word of it leaked out. Six weeks later, on April Fool's Day, Campeau -- a Canadian entrepreneur successful in real estate but inexperienced in retailing -- captured Federated. Then 64, Campeau had a widely publicized history of emotional breakdowns, volatile behavior, and aggressive business practices. In this fit of boldness, sashaying in where May had feared to tread, he paid $73.50 a share, for a total of $6.5 billion, almost all borrowed. The price, the debt, and the man. Together they created a financial megabomb that was barely built before it was detonated by a business that had to deliver and didn't. Less than two years down the road, on January 15, 1990, a reeling, shellshocked Federated went into Chapter 11. Its brother in bankruptcy was Allied Stores, which Campeau had nabbed earlier for $3.6 billion, also in a hostile assault, on another appropriate day, Halloween 1986. In ways that even witches could not have foretold, these collapses will be long and despairingly remembered. Behind them, for one thing, is an incredible list of financiers who thought it was a neat idea to give Campeau all those billions and who now are feeling the consequences: Citibank and a string of other U.S. banks; Sumitomo and ten other Japanese banks; three investment banks, First Boston, Paine Webber, and Dillon Read; a giant mortgage lender, Prudential Insurance; innumerable junk bond buyers, among them such big-time players as Equitable Life Assurance and Fidelity Investments, the world's largest mutual fund company; and two of North America's most sophisticated real estate operators, the Reichmann family's Olympia & York and Edward J. DeBartolo Co. In their wake are the other direct, and largely innocent, victims: perhaps 300,000 vendors and suppliers, many of them paid shortly before the bankruptcy with rubber checks; 101,000 employees wondering what happens next; 250 retired executives who are not receiving deferred compensation and supplemental retirement benefits they are owed; and even a booster club from Miamisburg, Ohio, whose members had counted inventories at a Federated store to raise money for the high school band and were stiffed for $3,514.40. Other ripple effects look more like tidal waves. Trying to generate sales that would keep them alive, the Campeau stores took the cleaver to prices and drove their competitors to do likewise. The 1989 holiday season grew ugly for many retailers, especially the highly leveraged, forced to watch their cash flows shrink. One of those was R.H. Macy, which suffered a $39 million loss in its Christmas quarter, against $78 million in profits a year earlier, and whose creditors are nervous. Says a bemused retailing consultant: ''One man, one company. They simply managed to throw a whole industry into turmoil.'' Make that several industries. The early signs of profound trouble in the Campeau empire, which surfaced last September, jolted the junk bond market out of dreamland and sent it into a nightmarish slide that rattled Wall Street and helped push Drexel Burnham Lambert into bankruptcy. Federated and Allied junk bonds headed south, no surprise. But so did the junk bonds of nearly all other issuers, as well as the shares of all companies the market perceived to have too much debt. THUS DID AN AGE of excess unravel, with Robert Campeau as the catalyst and also the symbol of excess carried to its dumbest, most egregious limits. When the financial history of the 1980s is written, when the tales of leverage are limned, the $25 billion RJR Nabisco buyout will no doubt be viewed as the epochal transaction. But the Campeau drama has no rival for absurdity as it proceeded and for shattering effects as it ended. The overarching wonder of this affair is that so many supposedly shrewd lenders forked over so much money to a man whose instability would probably keep him from being hired as a Bloomingdale's salesclerk. Among the credulous was William Mayer, head of merchant banking at First Boston, who recently took a weak stab at explaining just why the firm entrusted hundreds of millions to Campeau: ''In the market of the time, it seemed perfectly plausible.'' In the willing suspension of disbelief that occurred then, the prices that Campeau paid were, of course, called justifiable. But some mathematics show just how stretched his two deals were. In buying first Allied and then Federated, and after setting up initial assumptions that he would sell 25 divisions and pay down more than $5 billion in debt, Campeau was to be left with 11 divisions and the servicing of about $7.9 billion in new and old debt. Most of the debt was to be carried directly by Federated and Allied, the rest by other Campeau companies that borrowed to finance the purchases. Assume, conservatively, that the blended interest rate on that $7.9 billion was 11%. That would be annual interest of $869 million. Yet in their best years ever, which in the cyclical department store business seldom appear consecutively, the 11 chains Campeau planned to keep had made pretax, pre-interest profits totaling only $680 million. So even on this conservative 11% assumption and even ignoring the ups and downs of this business and the general hazards of an LBO, Campeau was looking at a prospective annual gap between interest and the operating earnings available to pay it of nearly $190 million. In truth, Campeau's blended rate of interest turned out to be higher, in part because he paid rates of 16% and 17 3/4% on two Federated junk bond issues that accounted for around $700 million of the company's debt. BUT DON'T leveraged companies think of cash flow rather than earnings? They do, constructing a cash flow figure called EBITDA -- earnings before interest, taxes, depreciation, and amortization. But this amount is not entirely available to service debt, since it must also cover capital expenditures. These are significant in the department store business: Even if expansion halts, the refurbishing and freshening of existing stores is an absolute necessity and a steady drain on cash flow. As a result, ''free cash flow'' -- the amount legitimately available to pay interest -- typically does not differ much from operating earnings. Campeau, nonetheless, had definite ideas for handling his debt. Most important, he planned to secure annual savings of perhaps $300 million by cutting the payroll and streamlining operations. The payroll indeed fell, and in time the Allied and the Federated corporate bureaucracies were reduced to one. But what counted was profits, and in the bitterly competitive retail industry, they did not begin to meet the expectations that Campeau, ever the optimist, had built into his projections. Even a small shortfall would have been a killer: There was no room for error in these deals. There were lenders who thought from the start that the transactions were uneconomic. One was Bankers Trust, a big player in the leveraged-buyout business, which declined to finance both takeovers. The bank is unwilling today to spell out its reasons. But a clue to its thinking may be culled from some comments CEO Charles Sanford made to security analysts in January. ''Optimistic growth assumptions,'' he said, can plunge a buyer into trouble: ''If you look back at transactions gone bad, more often than not the problem was paying too much.'' Most of the lenders who saw things differently are not seeking publicity today. If victory has a thousand fathers and defeat is an orphan, this baby, in the sense of there being anyone willing to claim parentage, is an outright virgin birth. Partly because the bankruptcy is a sump sure to breed lawsuits, few people will speak freely on the record. Off the record, the principals tend to shift the blame away from themselves and on to some nearby convenient back.

Campeau himself is not speaking to the press, and neither are Federated's top executives. Bruce Wasserstein, the investment banker, is an especially interesting non-talker, since it was his fame and financial resources that originally converted Campeau from a Canadian mystery man to an American presence. For this article Wasserstein agreed to an interview, provided no shred of it would be quoted or attributed to him. FORTUNE said no to the terms and the interview. TO UNDERSTAND all that happened in this wrong-headed affair, it is necessary to understand Bob Campeau's status when it began four years ago. Though he was largely unknown in the U.S., he had put his stamp on Canada. A French Canadian, he was born to a poor, devout Catholic family in an Ontario mining town, dropped out of school at 14, and later fell almost by accident into homebuilding. Physically slight but smart and superenergetic, he went on to earn a nationwide reputation for creative, well-constructed real estate developments. ''A Campeau-built house'' is to this day a term that connotes quality in Canada. Toronto's impressive downtown skyline boasts several buildings put up by Campeau Corp., including the dramatic tower, Scotia Plaza, in which the company makes its headquarters. The boss had meanwhile exhibited his unconventionality and high-strung temperament. He suffered two mental breakdowns, the first in 1970 -- after which he added to the board of Campeau Corp. the head of the psychiatric clinic where he had been treated -- and the second in 1985. Campeau also developed a reputation for cheating at golf. In 1980 he audaciously tried to take over a bastion of English Canada's banking establishment, Royal Trustco. Repulsed in that assault, he emerged with a conviction that he could never crack what he saw as a closed society. The double life he had once led did not improve his chances. For public consumption, he was married and the father of a girl and two adopted boys. Back street, he had a mistress, Ilse Luebbert, by whom he fathered a daughter, Giselle, and a son, Robert Jr. In 1969 he was divorced from his wife and shortly after married Ilse, who then bore him another son, Jan Paul. German by birth, Ilse, 50, is regally tall and, says an American acquaintance, ''attractive -- if you're into Valkyries.'' She served on the Campeau board until last fall and remains her husband's closest business confidante. By 1986 the shared confidences included Campeau's determination to move into U.S. retailing. He viewed the American culture as free and open, and he was drawn to retailing by a vision of linking it to real estate. His target of choice was Allied, then the sixth-largest department store chain. As the Canadian saw it, Allied's lead chains -- Ann Taylor, Bon Marche, Brooks Brothers, Jordan Marsh, Maas Brothers, and Stern's -- would provide anchor and specialty stores for the shopping centers he planned to develop. Campeau Corp.'s profits were then under $10 million a year (in U.S. dollars), and its common stock had a market value of about $200 million. Allied was 30 times as big in profits and ten times as large in market value. Bob Campeau had little spare cash, but he was a real estate man accustomed to borrowing however much creditors would lend. In 1986 the U.S. leveraged-buyout market was in a state of heat, and he correctly assumed he could get whatever it took to buy Allied. IN THE CAMPEAU SAGA, the taking of Allied and its early history under the Canadian are seldom given the attention they deserve. Allied was the evidence that lenders had to look at as they surveyed Campeau's plans for buying Federated, and in the kindest reading possible, the evidence was mixed. Certain financial accomplishments were visible: Campeau had moved fast on divestitures, for example, and was ahead of schedule in paying down debt. But his erratic, undependable, overreaching nature was also on display. An early punching bag was Paine Webber, the first investment banker that Campeau turned to when he began his American campaign. Paine Webber advised Campeau for several months in the spring and summer of 1986, as he pursued a friendly merger with Allied. But when hostilities began to look inevitable, Campeau concluded he needed a more high-powered banker and engaged First Boston. Paine Webber was sent to the sidelines. In Paine Webber's pocket, however, was a contract, signed in September, providing without qualification that the firm would be paid $5.75 million if and when Campeau acquired Allied. So when that acquisition was done, Paine Webber rendered its bill for the $4.6 million still owed it -- and Campeau refused to pay, claiming that Paine Webber had contributed nothing to his victory. Paine Webber eventually sued, collected, and went its way, supposedly wiser. First Boston had by then forged an enduring relationship with Campeau. The firm was brought into the picture in September 1986 by Allen Finkelson, a Cravath Swaine & Moore partner who was Campeau's lawyer and whose help Campeau ( enlisted when he was looking for new investment-banking firepower. Finkelson put Campeau together with merger and acquisition experts from three firms, who came in relays to meet him at his Waldorf Towers suite in Manhattan. A banker involved has a snapshot memory of how Campeau perched on the couch as they talked -- ''his feet tucked up, a shirt button popping open across his stomach.'' One firm in this beauty contest, Shearson Lehman, bowed out because it had a client conflict. The meeting between Campeau and another, Morgan Stanley, went poorly. Says Eric Gleacher, then head of mergers and acquisitions at the firm: ''When we got down on the street, I said to the guys with me, 'I don't know about you, but I didn't understand a word he was saying.' Turns out, they didn't either.'' Gleacher called up Finkelson and said, ''Count us out.'' But First Boston's Bruce Wasserstein and Campeau clicked. Wasserstein was then a 38-year-old M&A rocket, celebrated both for his creative thinking and for his determination to make First Boston a player in every deal going. He had a ''dare to be great'' speech aimed at stroking his clients' egos, and in that first meeting he laid it very effectively on Campeau, a willing subject if ever there was one. In the next few weeks the two men turned their guns on Allied, which tried frantically to escape by making a deal with Edward J. DeBartolo, a shopping center developer who had his own vision of melding real estate and retailing. Campeau's counteroffensive was a tender offer at $66 a share, a bid more than $20 above the price two months before. But on October 24, he suddenly abandoned the offer and instead bought huge blocks of Allied's stock in the open market at $67, raising his stake to a controlling 53% in 30 minutes. Allied sued to undo this ''street sweep,'' claiming it subverted the tender- offer rules, and was supported by the SEC. The court, however, let the sweep stand. Soon after, the commission forbade such tactics. THE ALLIED SWEEP was a Wasserstein brainstorm, and he was the man without whom this deal could not have been done. His prestige lent Campeau credibility in the financial markets, and his clout at First Boston produced hard cash. Initially First Boston promised Campeau all the money he needed to acquire more than 50% control, a giant $1.8 billion. But when Citibank stepped up with an offer of bank financing, First Boston was able to reduce its contribution -- a bridge loan -- to $865 million. Despite the knockout punch of the street sweep, and a merger agreement signed on Halloween, the Allied deal promptly turned into a cliffhanger. The master plan called for a Campeau company to merge with Allied and simultaneously buy the stock still outstanding. For tax reasons, that transaction had to be completed by the end of 1986. By the same date Bob Campeau had to come up with something he didn't have: $300 million in equity capital to add to the more than $3 billion in debt First Boston and a Citibank syndicate were making available for the merger. A partial solution was provided by Citibank itself, which lent Campeau Corp. $150 million that it could contribute to Allied as ''equity.'' A possible lender of the other $150 million was, of all people, DeBartolo. But while Santa Claus came and went and while squads of negotiators filed in and out of a Manhattan conference room, Campeau kept haggling with DeBartolo about terms on an amount that constituted less than 5% of the value of the deal. Recalls an exasperated witness: ''That was when I knew for sure that Campeau was Looney Tunes.'' An Allied stockholders' meeting to approve the merger was postponed from December 29th to the 30th, and then to the 31st. Only hours before the throngs gathered in Times Square to ring out the year, a wrung-out set of negotiators concluded a transaction in which Campeau Corp. borrowed the money Campeau still needed from DeBartolo. As he left the scene, a Campeau adviser recalled a half-jesting question posed earlier by Citibank's lead negotiator, Carolyn Buck Luce: ''What have we created?'' So it was that Bruce Wasserstein, First Boston, and Citibank -- with a last- minute boost from Edward DeBartolo -- godfathered Campeau's entry into U.S. retailing. When Campeau hosted a victory party at the Metropolitan Museum of Art some weeks later, he toasted Wasserstein and lawyer Allen Finkelson, and lectured -- ''unintelligibly,'' says a guest -- about currency rates. Pierre Trudeau, Canada's former Prime Minister and Campeau's fellow French Canadian, was there, as was the cardinal of Toronto. A raft of American politicians and business leaders were also invited, but few showed. Instead the tables were occupied by advisers, lenders, and others who had pocketed the deal's $210 million in fees. Now that the prize was won, it had to be made to work -- ah, yes, that challenge. Campeau announced that he would sell 16 of Allied's 24 divisions, though certainly not such gems as Brooks Brothers and Ann Taylor. He visited Allied's chains to discuss plans for cutting costs, and he prepared to restructure his debt, to stretch some due dates out ten years or more. One financing step took place in March 1987: a $1.15 billion junk bond and preferred stock offering whose proceeds were to be applied to paying off First Boston's bridge loan. The Toronto Globe and Mail's magazine, Report on Business, chose this sensitive moment to publish an article about Campeau that dwelt lingeringly on his mental illnesses and marital history. But the market, bubbly at the time, ignored these disclosures. Equally unwisely, the buyers paid little attention to the fact that Allied was permitted under the bond indentures to sell one business and, instead of paying down debt with the proceeds, buy another. That clause would come back to haunt the Allied bondholders. Finally, the preferred stock part of the offering permitted Allied to pay dividends ''in kind'' -- that is, in more shares -- instead of in cash. Campeau was among the first big users of these payment in kind, or PIK, securities, which later became a financing mania. Hard as it is to believe today, Allied's offering was a solid success. And so, largely, were the efforts to sell divisions. Many people attest to Campeau's tenacity and to his charm -- and both were valuable as he unloaded the divisions. Says a man who used to work for Campeau: ''He is simply the best salesman I have ever met.'' But according to a story that investment banker Felix Rohatyn of Lazard Freres has told friends, Campeau was erratic even in this endeavor. In 1987, Rohatyn and a client, the Limited's Leslie Wexner, met in Manhattan late at night with Campeau to discuss one of the divisions up for sale. After a while, Campeau grew agitated and began to circle the room nervously. ''You think I did right in buying Allied?'' he asked the visitors. ''I hope I didn't overpay. I think I didn't overpay.'' Dismayed and concerned about this behavior, Rohatyn and Wexner left hurriedly. The retailer did not buy a Campeau division. By year-end 1987, Campeau had nevertheless shed about $1 billion of properties and paid down that much debt ahead of schedule. Concurrently he received a commitment from Prudential for up to $460 million in mortgages on properties he had retained, and he changed bankers, replacing Citibank with Security Pacific Bank, which had come calling with very attractive terms on a $1.45 billion loan commitment. Uncharacteristically filled with caution, Citi would not match those terms because it was unsure that Allied's retail operations were chugging along as they should. That was indeed the burning question: Were they? Campeau had by that time been through two Allied bosses and just hired a third. The first was Thomas Macioce, Allied's CEO during the takeover fight, whom Campeau not only left in his post but also made chairman of Campeau Corp. Macioce lasted three weeks. Today owed $5 million in deferred compensation by Allied, he has filed papers in the bankruptcy court that claim Campeau ''undermined'' him, refusing to let him exercise his executive powers. Next Howard Hassler, Allied's chief financial officer, moved up to be president and chief operating officer. He resigned eight months later over disagreements with the boss, at which point Campeau announced that he would run Allied himself. Even then, however, he was wooing an experienced retailer, Robert Morosky, who a few months before had abruptly left the Limited, where he was second in command to Wexner. During the negotiations Morosky, then 46, took his wife to Toronto, where they spent a pleasant day with the Campeaus. The couples, Morosky says, shared an interest in the Catholic church and family. In his due diligence, Morosky somehow failed to uncover Campeau's unchurchly family life, nor did he learn that executive turnover at Campeau Corp. had been high. Had he known those things, Morosky says now, he might have thought twice before joining up. Instead, he took over as Allied's president in November with a contract that promised he would be CEO in six months. In November, Allied also released financial results for the first nine months of 1987, which became the tea leaves of record available to lenders as they later weighed the Federated deal. Absolutely nothing about the figures was reassuring. Operating earnings for the nine months were $44 million, and the smallness of the capital spending budget, held down in part because Campeau was busy shedding divisions, pushed free cash flow to just over $100 million. But interest paid was a thunderous $244 million. So what do you do when you have a limping retailer in tow? If you're Campeau, you buy a spry one and cripple it as well. In the late summer of 1987, he began making plans to go after Federated, owner of an avenue of names: Abraham & Straus, Bloomingdale's, Bullock's, Burdines, Filene's, Foley's, I. Magnin, Lazarus, Rich's, and -- an apple among peers -- Ralphs Grocery, a California supermarket chain. In honor of Federated's hometown of Cincinnati, and its most famous ballplaying gambler, this quest was code-named Project Rose. ONCE the class of its industry, Federated had fallen in prestige and profit margins during the 1980s. Though he was no admirer of the company's top management, Campeau thought Federated was a better-run operation than Allied. He also envisioned one vastly slimmed corporate staff and other efficiencies to be gained by combining the two companies. Morosky knew from the start that Campeau wanted to acquire other chains, but he was startled to hear shortly after he was hired that the target was Federated, which was three times Allied's size. Says he: ''You really couldn't say that we had Allied in shape yet, and here we were proposing to take on a job that would be Herculean and loaded with financing problems. I told Bob that it would be like acquiring the U.S. Navy. But in the end, I voted yes just like everybody else.'' On January 25, 1988, Campeau hit the market with a $47-per-share bid for a company whose stock had been selling at $33 four weeks before. He was eventually driven up to the final price of $73.50 as his attack set off a media circus and propelled Federated into an intense search for an escape. Meanwhile, he shocked one of the unsuspecting lenders, Prudential, with which he had just done business. Says Garnett Keith, vice chairman of Prudential: ''We were appalled that anyone who had hocked himself to the gills could turn around and add another layer on top of that.'' Campeau's initial bid for Federated was followed by the prolonged takeover battle called ''store wars,'' in which May aborted its takeoff but Macy's ultimately screamed into full flight. In the weeks of war, Campeau was . . . Campeau. He scheduled meetings for 3 A.M. Using a Gulfstream III that belonged to Allied, he disappeared on trips, taking Citibank's Lawrence Small, who had helped bring Campeau's business to the bank, to the Calgary Olympics, and Ilse back home to Germany. He was en route to Germany, in fact, when the Federated board suddenly agreed, after weeks of refusal, to a face-to-face meeting with its northern nemesis. He did not speed back. Instead a team headed by Wasserstein appeared before the Federated board. To the end, the directors never did meet Campeau. His absences signaled no waning of desire. On the contrary, he had become fixated on Federated. Davis Weinstock, a New York City public relations consultant then working with Campeau, recalls his client's mood: ''I knew as the deal went on that he was either going to win or die. He was not going to be reasonable. He was flying.'' He was also not to be hauled back to earth by his investment bankers. Their ingrained propensity to indulge the folly of clients -- deals create fees and reputations, bigger deals create bigger fees and bigger reputations -- was intensified by special circumstances at First Boston, which was riven by internal rivalry. Wasserstein and his co-head of investment banking, Joseph Perella, had been waging a turf battle with CEO Peter Buchanan and the other traders who dominated the firm. Beat back, the two rebels abruptly left First Boston to form Wasserstein Perella & Co., taking a clutch of First Boston people with them. The date was February 2, one week after Campeau made his bid. Campeau quickly said he would work with both Wasserstein and First Boston. From the former he wanted advice; from the latter, a bridge loan and the firm's capacity to market and trade junk bonds. For its part, First Boston was left with a decimated mergers department and an ego-driven determination to prove it could nonetheless pull off this deal. With everyone rabid to do a takeover, the bids for Federated passed the bounds of rationality. That could not have been proved, however, by the investment bankers' computers, which kept turning out deal analyses -- ''iterations'' is the buzzword -- that validated whatever price Campeau and his opponent, Macy's CEO Edward Finkelstein, had decided they needed to pay. Even today some members of Campeau's group argue that the price for Federated could not then have been too high if Finkelstein, a master retailer, was willing to pay as much. The argument is frail because there is no evidence that Finkelstein could have coped with Federated had he bought it. Macy's itself has hardly turned out to be an LBO luminosity. In any case, the battle between Campeau and Macy's was intricate and also frustrating for Federated's directors, who were by then both playing auctioneer and yearning for calm. One of the board's attorneys, James C. Freund of Skadden Arps Slate Meagher & Flom, says the directors had a favorite, not named Campeau. They would have preferred to see Finkelstein, an experienced, respected merchant -- and a man, yes, whom they had actually met $ in the flesh! -- buy the company. But they also had a legal responsibility to get the highest price for shareholders, and Campeau offered that price. On March 31, 1988, the board prepared to declare Campeau the winner, only to watch Macy's lob in still one more, higher bid. At that point somebody desperate for peace -- reports say it was Joseph Flom, the lead Skadden Arps lawyer advising the Federated directors -- whispered ''compromise,'' and suddenly Campeau and Finkelstein were in a long meeting that stretched beyond midnight. From the tryst came this all-time April Fool's joke, better known then as a ''win-win'' pact. Macy's would drop out of the bidding in return for the opportunity to buy I. Magnin and Bullock's, two divisions it coveted, for $1.1 billion. Macy's would also be granted $60 million to cover expenses and fees. Campeau was to get the rest of Federated. Suits us, said the Federated board when daylight came, and that was it. The final merger agreement included hogtie provisions, however, that suggest the board had definite qualms about the new owner. Campeau was required, for example, to retain Federated's employee benefit plans, and he was forbidden to withdraw equity capital from the company for a year. And to give these promises bite, three Federated directors were to go on Campeau Corp.'s board as watchdogs.

THE REQUIREMENT about equity capital grew from the deal's financing, which was a Campeau special: enormously complex, tortuous to arrange, and rewarding to the advisers and bankers, who took home more than $350 million in fees. Among the components was a $2 billion bridge loan from investment banks First Boston, Dillon Read, and -- ready? -- Paine Webber. Once burned but plainly not twice shy, Paine Webber ponied up $500 million for this transaction. In explaining this bizarre behavior, Paine Webber cites the need to be competitive. The firm was not a contender in bridge loan financing, and it wanted to put itself on the map. Paine Webber says that it has since made money on bridge loans. But hardly on this one: Though much of the bridge loan was paid down, Paine Webber is today an unsecured Federated creditor owed $96 million. The $6.5 billion deal also included a large bank loan commitment from a Citibank and Sumitomo syndicate and $1.4 billion in equity, a bounteous sum by LBO standards. But under the microscope, this equity specimen could be seen as mostly Campeau debt. One of the contributors to the $1.4 billion pot was the wealthy Reichmann family of Toronto, owner of the immensely successful real estate company Olympia & York. The Reichmanns admired Campeau's real estate skills and even owned some Campeau Corp. stock and convertible debentures. When Bob Campeau showed up hat in hand, they refused to become equity investors in the Federated deal but did buy $260 million more of Campeau Corp.'s convertible debentures, from which $227 million was passed along to Federated. There is no evidence that the Reichmanns, brilliant though their reputation is, dug deeply into the economics of this transaction. In other words, they seem to have goofed. Ed DeBartolo, having been repaid the money he had lent for the Allied deal, decided on another fling, a risk equivalent to trying bungee jumping twice. He lent a Campeau Corp. subsidiary $480 million and received 7.5% of Federated's stock -- Campeau held the rest -- along with 50% of a partnership that had ambitious plans for developing five to ten shopping centers and malls a year. Another chunk of the $1.4 billion in equity came from a $500 million, steep- interest loan that Bank of Montreal and Banque Paribas made to that same subsidiary and that had to be repaid in one dangerous year. Campeau wrenched the remaining millions of equity capital that he needed from a party that certainly couldn't spare it: Allied. Though he had vowed to keep Allied's Brooks Brothers clothing stores, he now sold them to Marks & Spencer for a splendid $750 million. Most of that went to pay down bank debt. But with $193 million left over, Allied took advantage of the loose covenants in its junk bond indentures and bought 13.8% of Federated's stock. Though the fine price Campeau received for Brooks Brothers muted criticism of this brassy maneuver, the implications for Allied's bondholders were huge. Campeau had in effect exchanged a stake in Brooks Brothers, an income- producing property, for a stake in Federated, a debt-loaded entity whose ability to pay dividends to Allied was nil. With that final off-the-wall piece of the capitalization in place, Federated was launched as a leveraged buyout on July 29, 1988. Not quite 18 months later it slid haplessly into Chapter 11. It is fair to say that almost nothing good happened to the company in the interim. That was not apparent, however, from Campeau's public statements, which brimmed with hope and cheer and swell thoughts. Perhaps the most pretentious of these appeared in an expensive, self-congratulatory book that Campeau Corp. published about itself in early 1989. It included a corporate credo that began: ''Because we can be no more than what we aspire to be, we will always aspire to be more than the best of what we are.'' The ''we'' who aspired, alas, kept expiring. Days after he had clutched the billions needed for Federated's stock, Campeau confronted Robert Morosky, the man who was supposedly going to run the entire Federated-Allied retailing empire, and told him he would not be made CEO after all, regardless of what it said in Morosky's contract. It seems that Campeau had soured on Morosky, in part, no doubt, because the Federated organization had immediately judged him to be an arrogant no-goodnik. Not willing to be anything other than CEO, Morosky quit. Campeau thereupon began stalking the Federated officers who had just taken their golden parachutes and split. His first choice, Allen I. Questrom, 50, who had been a Federated vice chairman, rejected the CEO's job because he thought Campeau's retailers too leveraged. The next offer went to John Burden III, 53, another former vice chairman, and he accepted with the stipulation that he would serve only 18 months. Burden was a merchant by training and needed an operating executive and numbers man as president. That job went to James Zimmerman, 46, who had been expertly running the Rich's division. The weird upshot: Campeau, who had thought he needed an outsider to shape Federated up, ended up with two insiders in charge. WHILE the financial world was still digesting these bewildering events, Campeau suddenly announced that Allied would sell Ann Taylor, another of those beauties he had sworn faithfully to love, honor, and cherish. The reason was that $500 million loan from Bank of Montreal and Paribas, coming due all too soon. In a Tinker-to-Evers-to- Chance transaction, Allied cavalierly used the Ann Taylor proceeds to raise its stake in Federated to 50%, buying the shares from a Campeau subsidiary, which promptly relayed cash to the two banks to erase that $500 million loan. You didn't have to be an Allied bondholder to despise what was going on; catcalls were coming from everywhere. In the early fall of 1988, First Boston was rebuffed when it tried to offer $1.15 billion of Federated junk bonds at rates averaging 14%. Only after the firm cut the offering to $723 million and reset the coupons to a dizzying 16% and 17 3/4% was it able to sell the bonds. The cutback was a blow to First Boston, since the proceeds were slated to repay the $1.1 billion still outstanding on the bridge loan that it, Paine Webber, and Dillon Read had made. Instead, the three bridge lenders were left holding about $400 million of their loan. Call it justice.

THE MAULING he got in the junk market infuriated Campeau, and he drastically revised his financial strategy. On Federated's books was an $800 million mortgage bridge loan, due in early 1990, that Campeau had been planning to refinance with longer-term money. Citibank, ever accommodating, appeared ready to deliver the dollars. But in late 1988 Campeau resolved instead to raise $2 billion or $3 billion or $4 billion -- whatever a willing world would give him -- and use the money not only to refinance the $800 million but also to eliminate the vile junk debt. He embarked on an extended, manic search for the money. A half-year later, at the Campeau Corp. annual meeting in July 1989, he was still saying that new mortgage financing was almost in hand. Today most of the other principals in the Campeau catastrophe excoriate Campeau for not having accepted the Citibank financing at an early date. They argue that this debt could have saved Federated from Chapter 11, but it is hard to see how. The refinancing would not have cut interest costs appreciably; it might even have raised them. And interest, have no doubt, was the scourge of this company. An inseparable problem from the interest costs was operating profits that just didn't measure up. For a while during 1988, the profit picture at Federated and Allied was blurred by charges related to large layoffs and the consolidation of certain functions, such as data processing, that each company had handled separately. But by 1989 it was possible to see clearly that these two companies were doing terribly. For example, compare Federated's expectations for 1989 with its actual performance: In the fall of 1988 the company was projecting profits before interest, taxes, depreciation, and amortization of $740 million. The reality was a horrifying half of that, $372 million. Meanwhile, the claims on this money -- modest capital expenditures of $111 million and immodest interest of $516 million -- ran to $627 million. Without question, the widespread publicity about Campeau's troubles that began in September 1989 hurt store traffic, particularly in the high-profile operations like Bloomingdale's. But that excuse is a thin one, because both Federated and Allied had reported weak profits much earlier in the year. Take Allied, which in the first few months of 1989 needed to refinance Security Pacific's loan. It turned to Citibank, which didn't want the business. But on April 7 a Citi syndicate finally made the loan, collecting especially large fees -- more than $40 million for a $1.1 billion commitment. Citi also put a close watch on Allied. For example, the company was supposed to show earnings before taxes and interest of at least $35 million for the quarter that was to end on July 31. But Allied couldn't even do that. Pretax, pre-interest earnings were only $24 million. The engine of trouble does not appear to have been sales, for which projections were being met. Instead, the problem was markdowns and promotions, tactics that made the sales largely profitless. Still more fundamentally, inventories seem to have been out of control. Federated's, for instance, leaped 26% between July 1988 and July 1989, a jump that both strained working capital and forced the stores to shove goods out the door just about any way they could. The inventory problem is partly traceable to one of John Burden's merchandising strategies. He wanted the stores to be deep in ''basics'' -- that is, white shirts, men's underwear, women's panty hose -- and his buyers appear to have carried that notion to a perilous extreme. But a former Federated executive says the problem rose more precisely from the fact that nobody was minding the store: ''We just didn't execute well. Nobody seemed to be paying attention.'' The somebodies who could have done so certainly included Burden and Zimmerman, who must instead have been out to lunch. A Canadian cadre was also assigned to this case. One of its members, Ronald Tysoe, 37, took up residence in Cincinnati, where he served as a real estate expert and as Campeau's man on the spot. In Toronto the troops included Campeau Corp.'s president, James T. Roddy, 47, and Carolyn Buck Luce, 37, who had improbably moved from Citibank to First Boston to Campeau. Her main job, both pinchingly difficult and imperfectly carried out, was to arrange financing for this intricate, wobbly structure that Bob Campeau had cobbled together. Roddy, serious, ruddy-faced, and sometimes abrasive, had once been an executive of Peoples Jewellers, a Canadian retailer. This background made him think he had some expertise to bring to Federated and Allied. But Burden and Zimmerman did not want orders from Canada, and Bob Campeau did not insist that they accept them. Finally, last spring, both Roddy and Buck Luce resigned. As it always is and must be, the ultimate responsibility for the crumbling of the retail operations rested with the boss -- initials, R.C. Reviewing the deterioration in the business and the impossible burden of debt, one principal in this affair says that Chapter 11 filings could logically have occurred as early as the spring of 1989. But Campeau was then still aspiring to be more than he could be and not even entertaining ideas of default. Personally, he was also being his usual outrageous self. In May 1989 he was honored by the New York United Jewish Appeal at a fund-raising cocktail party held at Bloomingdale's. Rising to speak and graciously pledging $50,000, he suddenly veered into a lecture about the unfortunate tendency of Jews to be oversensitive and even paranoid. ''I like Jews,'' one listener distinctly recalls him saying. Campeau observed that he had frequently dealt with Jews in Canada and found them ''honorable.'' He drew comparisons between Hitler and Napoleon, identifying both as ''murderers'' who differed in that Hitler's target was Jews. His audience, made up mainly of apparel manufacturers, cringed. JUST ABOUT that time, the Reichmann family, devout Orthodox Jews whom Campeau certainly included among the Jews he liked, was beginning to take a belated but intense interest in the man's empire. The Reichmann brothers -- Albert, 61, Paul, 59, and Ralph, 56 -- had been unhappily startled in April to receive an emergency loan request from Allied for $75 million. They sent the money, but by June they also had consultants from McKinsey & Co. burrowing into the economics of the retailing operations. McKinsey produced findings that this family of real estate experts easily understood: The businesses did not have -- and weren't likely to have -- enough free cash flow to service their debt. By late summer, Campeau himself had reluctantly accepted that fact and had entered into grave talks with the Reichmanns. From that point on, though there were rumors of a grandiose Reichmann rescue, a restructuring of Federated and Allied was inevitable. The only question was whether it would be done inside Chapter 11, a process that Bob Campeau doubted the stores could survive, or outside it. The outside route required that the holders of Federated and Allied junk bonds -- debt so junior ! that it was essentially equity -- be persuaded to exchange their securities for new pieces of paper carrying terms that would ease the companies' interest burden. Willing to try that plan, the Reichmanns exacted an agreement from Campeau that Bloomingdale's would be put on the block, promised the stores $250 million in working capital, and said the family would possibly commit more money if a junk bond deal could be devised. The plan never had a prayer. The reports of trouble that oozed out in September exacerbated the retailing problems to the point that bankruptcy was inevitable. In this climate nobody even cared to consider paying up for Bloomingdale's. Operationally, Campeau's last sources of credit -- vendors and the factoring companies that finance them -- began to slide away and refuse to ship merchandise. The suppliers that stoutly accepted credit risk to the end, including the largest factoring company, CIT, are in the crowd stuck with bounced checks. Many of the stores suffered miserably in this chaotic period. Says a former Federated executive: ''I walked into Bloomingdale's before Christmas, and I almost cried. It was dirty; it was schlocky; there were round tables in the aisles. It was criminal.'' By that time planning for the Chapter 11 filings was in full, if covert, swing. The management structure was also undergoing drastic change. In January, days before the filing, Campeau Corp.'s board, by then strongly influenced by the Reichmanns, stripped Bob Campeau of authority over retailing and put the operation on its own. Then the board put Federated, Allied, and 65 subsidiaries into Chapter 11. As boss of what is now called Federated Stores Inc., the directors installed G. William Miller, 65, who was once the head of Textron, then chairman of the Federal Reserve Board, Secretary of the Treasury, and still later a Federated director who went on the Campeau board as one of the three, ahem, watchdogs. In his new job Miller proceeded to form a management team. Burden resigned. Zimmerman stayed on, and so did Tysoe. To head retailing, Miller got the fellow Campeau couldn't, Allen Questrom, who was persuaded to leave the job of CEO at Neiman Marcus and take on this monumental challenge. Questrom did not sign on unprotected: Under his employment contract, a $10 million trust fund has been established to guarantee that he gets paid. Not similarly swaddled, vendors have been asked to resume business as usual, and most have complied. Few truly see an alternative, since they cannot afford to lose customers this big. In the Cincinnati court handling this case, the long rolls of creditors include some names that were accomplices before the fact: First Boston is owed $425 million, which is unsecured. Citibank, which sold off many of its Federated loans to smaller banks, is a secured creditor due $288 million. The bank is also still trying to make money off this crowd: It has signed up to finance Federated as it plows through bankruptcy. Ed DeBartolo is due his full $480 million loan but is considered to be relatively well secured, in part by shares of Ralphs Grocery. The Reichmann's Olympia & York is owed $525 million by Campeau Corp., which is not in bankruptcy -- though neither is it paying interest on most of that debt. Olympia & York also has a 38% fully diluted common stock position in Campeau Corp., for whatever that means. Last August the stock was at an irrational $16 per share; now it bumps along around $1. Bob Campeau has lost control of his company. That stark fact must trouble him the most, because he has for many years fanatically protected his equity. Furthermore, most of his Campeau stock, in which he has a 43% fully diluted position, is collateral for loans. The biggest of these is $150 million he owes to National Bank of Canada. Campeau has recently announced plans to buy back the stock that bank holds for $80 million, half of that to be paid promptly, the rest when the bankruptcy court approves a plan for getting Federated and Allied out of Chapter 11. But no one knows where that money will come from, since Campeau is not assumed to be flush with cash. Says a longtime associate: ''This is a man who had all of his eggs in one basket, Campeau Corp. I know one thing: He's scrambling.'' AND THE PROSPECTS for Federated and Allied? Convoluted. They include a possible entanglement in something called a ''fraudulent conveyance'' suit, an action based on the premise that a seller cannot make a deal through which a company becomes so burdened by debt that it is unable to pay existing claims, such as outstanding bonds or rents, or those that will arise as it plies its trade, such as the bills due vendors. Says Lewis S. Rosenbloom, a bankruptcy specialist with the Chicago law firm of Winston & Strawn: ''Creditors have a right to expect that a company that has historically been profitable and never had its viability threatened will continue after it is sold to be able to satisfy its obligations in the ordinary course of business.'' In the Federated and Allied situations, no fraudulent conveyance action has yet been brought, but reports persist that one or more are coming. All manner of folk could be sued by creditors, among them Campeau for piling on the debt, various lenders for letting him do it, and the former Federated directors for playing along. Indeed, a spokeswoman for Federated Stores Inc. mentioned the possibility of fraudulent conveyance suits as a reason current management -- including former Federated director Miller -- could not be interviewed. Litigation, therefore, could interfere with Bill Miller's goal to get the bankruptcies over quickly. So could the deep complexity of the Chapter 11 filing and various operational imponderables. The question of how much debt the two retailing businesses can stand is unanswerable at present because their health is undeterminable. Says one investment banker close to the facts: ''At this point, nobody really knows what the normalized cash flow of these companies is. When we do, we can reach some conclusions about the debt.'' An experienced retailing consultant adds his opinion that the Federated and Allied chains have the strength to survive this trauma -- ''if only their creditors will let them.'' His reading makes sense. But wouldn't it have been grand if the creditors had headed off this trauma altogether, by refusing to let Bob Campeau have money when he first went south to get it? Restraint of that kind might have prevented the preposterous deals that made the Eighties the Eighties -- and whose repair will make the Nineties the Nineties.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: WHAT CAMPEAU KEPT AND SHED

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: THE CAMPEAU CORP. STOCK SLIDE