(FORTUNE Magazine) – NOTHING IS QUITE as it seems when you pass through the looking glass into the fiscal fantasyland where Donald Trump resides. His 26th-floor office in Manhattan's Trump Tower is really only 18 floors above Fifth Avenue. In this arena of marble and mirrors, where hype and high finance somehow blend into one, the difference between a billionaire and a bankrupt turns out to be a measly $20 million. That is the sum Trump's banks lent him in June, saving him at the last possible moment from a default that could have demolished his empire. Trump, 44, seems almost certain to survive this near catastrophe. Now that he has an agreement in principle with his banks -- they are unlikely to sign final contracts before August -- he's back in business. In July he paid his New York City taxes on time and signed a lease worth some $60 million with French retailer Galeries Lafayette. But survival will be costly, for Trump virtually had to sell his soul to the banks. ''It's a good deal,'' he told FORTUNE in an interview, ''except that I had to go through a cancer operation to get there.'' Gone, perhaps forever, is the entrepreneurial freedom that enabled this pushy and imaginative dealmaker to rise from the obscurity of Queens, New York, to a level of glitzy notoriety unmatched by any businessperson on this part of the planet. Trump got this far by thinking big and talking bigger. But henceforth (or at least until the next renegotiation), bankers will force his freewheeling, privately held Trump Organization to behave more like a sober public company. He must hire an experienced manager as his No. 2, provide consolidated financial reports to the banks, and stick to a business plan that effectively bars audacious new ventures. In this atmosphere of forbidding rationality, Trump may wilt like a plucked flower. But if he prospers -- and of course he claims he will -- his company could possibly emerge healthier than many of its brethren from the 1980s era of heedless high leverage. Trump is a more complicated character than his public image suggests -- personally nuttier and more charming, and in business a wilder mix of brilliance and flat-footedness. Described by people who know him as almost totally incapable of introspection, Trump may actually believe the absurdly inflated claims that are his trademark: ''I have the best assets of anybody I know. Take a list of your top people, the best assets of anybody's are Trump's.'' The bone-deep conviction that Trump and everything Trump touches are sublime has made this man an unbeatable promoter. As a businessman he is simultaneously fabulous and a flop. He grew up in real estate, where his abilities nicely match the job. The self-styled master of the art of the deal is a gifted negotiator. He also has vision and flair: Not only did he sell out the apartments in Manhattan's Trump Tower at then super-premium prices of $700 or more per square foot but he also transformed its atrium -- some of it basement space -- into a major tourist attraction. Nor is he without managerial skill. His buildings, complex projects all, routinely come in on time and on budget, and anyone who visits a Trump site is likely to be impressed by the way the place shines. The man seems the master of a million details. But at the same time, his business is losing money. Calling his enterprise the Trump Organization is oxymoronic -- one former employee calls it the Trump Disorganization. In truth it is little more than one man's investment portfolio. Over 15 years Trump's expanding collection of businesses has become a queer jumble of free-standing operations badly in need of coherent management. Trump owns three Atlantic City casinos, the former Eastern Air Lines shuttle, the retail space in Trump Tower, plus the Plaza hotel and numerous other major and minor pieces of New York City real estate -- far too much for Trump or anyone else to run out of his pocket. At its headquarters the company has 12 executives, eight of whom bear the title of executive vice president and report directly to the Donald. The boss has always behaved like a brash entrepreneur: trusting his gut; charming his executives one minute, bellowing at them the next; second- guessing and often firing employees; suing his suppliers; making wild public statements; nagging the custodians who polish his brass; and by some accounts even allowing his reputed mistress, Marla Maples, to choose the theme of the Oysters restaurant in his Trump Plaza casino. His trouble is not that his businesses are such stinkers. The assets are worth billions, and almost all Trump's operations are profitable before the cost of debt service is considered. But like so many impatient tycoons, Trump has built his empire on a none too stable scaffold of debt, $3.2 billion worth, which costs roughly $370 million in annual interest. Junk bonds, issued through Bear Stearns and Merrill Lynch to finance the casinos, account for $1.2 billion. These instruments have tough terms -- annual interest of around 14% and early repayments of big chunks of principal. The other $2 billion consists of a crazy patchwork of bank loans to , individual Trump operations and to the man himself, charging interest a little over the prime rate, or recently about 10%. None of the loans is secured by the Trump Organization as a whole; each is backed by individual businesses, some as small as a single building. Says a lawyer employed by one of the banks in the negotiation: ''There was no overall structure to his debt.'' As a result, the interests of Trump's bankers are far from identical. Some banks have much more money and prestige at stake than others, and banks that lent against successful properties have little in common with those that backed losers. The largest lender, Citibank, heads a syndicate with over $1 billion in Trump loans; Citi itself put up something less than a third of that. The Citi loans are backed by hard collateral -- including first mortgages on the Plaza hotel, the shuttle, and the still unfinished Trump Palace condominium in Manhattan -- but some of the debt is, in a syndicate member's delicate formulation, ''undersecured.'' In other words, the collateral isn't worth as much as the loans. Bankers Trust is far more exposed, having relied on Trump's signature to back its lending, which amounts to some $100 million. Manufacturers Hanover, which recently reclassified the bulk of its Trump loans -- $150 million -- as nonperforming, also relied on Trump's personal backing. Chase Manhattan has lent $75 million against Trump Tower, a prime earner, and another $200 million against the 76-acre West Side rail yards in Manhattan. There Trump hopes someday to build the world's tallest building and lots more besides, but for now the yards produce no revenue at all. In April, Trump and the banks suddenly realized that he faced a cash shortfall big enough to topple the edifice of debt. FORTUNE estimates the shortfall at $120 million or more. The immediate cause of the crisis was the collapse of the junk bond market, in which Trump had expected to raise much of the capital he needed. But the real story behind his near bankruptcy is more intricate: The developer knowingly spent $2 billion in a two-year spree, financing his acquisitions and capital improvements with more debt than his enterprises' cash flow could support. He bet everything on the assumption that he could later replace most of his debt with new, longer-term financing that offered easier payments. That recklessness exposed Trump to a whipping when a whole series of external factors ganged up against him, from tighter credit to a recession in Massachusetts. TRUMP'S MISSTEPS began just as his fame and success reached their zenith in 1988. In The Art of the Deal, at the time a No. 1 best-seller, Trump expounded on the need to pay modest prices for even the best assets. In real life, however, he started spending top dollar on what he calls ''trophy properties'': the Plaza hotel ($400 million) and the shuttle ($365 million). He also sank $835 million into Atlantic City's brand-new Taj Mahal casino. He almost certainly overpaid for the shuttle. According to security analyst Helane Becker of Shearson Lehman Brothers, airlines usually trade at four or five times cash flow; Trump paid seven. Asked why he bought it at all, Bruce Nobles, an airline veteran who ran the shuttle until Trump fired him in June, replied: ''Mr. Trump said he'd wanted to own the shuttle for years, because he likes the idea of owning it. It was not a financial decision as far as I can tell.'' In Atlantic City, Trump simply committed too much money to a dirty old town. You can understand why: Measured by gaming revenues, Atlantic City does nearly 90% as much business as Las Vegas. Well-run casinos are marvelous at generating cash, just what Trump needs to finance real estate ventures and pay down debt. And Trump's lavish casinos do look better than most of the competition. But Atlantic City itself is still a dog -- bleak, ugly, hard to get to, and poorly served by New Jersey's overzealous gaming commission. Trump is betting that the enormous, onion-domed Taj Mahal will attract conventions, but so far it has cannibalized his other two casinos, Trump's Castle and the Trump Plaza. In the past two years Trump has also spent lavishly on improvements, some $250 million all told. What helped precipitate the crisis, say bankers, was the $110 million Trump shelled out recently at his Castle casino for a new marina, a tower of luxury suites, and other additions. Some of that money was borrowed from New Jersey's Midlantic National Bank, but $60 million came straight out of the Trump Organization's cash flow. Says a rueful Trump: ''In ten years, as I look back, I'm going to say I'm glad I invested the money. Short term I wish I didn't do it.'' Prodigal though he was, Trump is not entirely to blame for his brush with ruin. As even he concedes, ''There are certain things beyond Trump's control.'' Among them are regional slowdowns in Massachusetts and New York that cut the number of passengers on both the Trump and Pan Am shuttles by 5% last year. Similarly, the overall Atlantic City gambling business has risen only 5% this year -- a tough time to open the Taj Mahal, which by itself increased the city's gaming capacity 18%. THERE'S MORE to this litany of woe: The New York real estate market has entered a cyclical slump, and the Tokyo stock market skidded enough last winter to discourage some of the likeliest potential buyers of Trump properties, both large and small. On top of all that, says Brian J. Strum, chairman of Prudential's real estate division, ''we're going through what might be called a one-industry credit crunch.'' Credit has been tight, and the S&L crisis has spurred regulators to scrutinize banks' real estate loans particularly harshly. The crisis came in April, after the junk bond market ground to a halt. It had been slowing for months as Michael Milken, its creator, came to grief. He ultimately pleaded guilty to six felony charges. Trump unexpectedly found himself unable to refinance $2 billion of expensive junk bonds and bank loans for which he was personally liable. With major amortization payments coming due in June, Trump foresaw that he wouldn't have enough money. He says he had counted on refinancing that part of his debt, nearly two-thirds of the total. Says he: ''I thought capital would be more readily available. It was totally available when I bought the shuttle. And all of a sudden -- boom! -- the curtain came down.'' In fairness, Trump is only the most famous of the many developers who have run out of cash. Until a few months ago bankers were so eager to lend to Trump they were practically spraying him with money. Says a New York developer who has known Trump for years: ''The bankers got mesmerized. They thought it was almost an honor to lend to Donny.'' Frank Creamer, head of real estate lending at Citibank, defends his, er, undersecured lending to Trump in a prepared statement: ''While we can't speak for the other banks, we believe our loans were not imprudent. They were consistent with our underwriting standards and based upon the value of the specific assets, giving effect to Trump's proven ability to take existing assets and add substantial value through capital improvements and improved marketing efforts . . . We believe that over time, the long-term values of Trump's assets will be realized, proving us to have made the right decision.'' The relationship between Trump and his bankers became somewhat surreal. Trump had never intended to repay all money he'd borrowed according to the terms by which he borrowed it; and some of the bankers didn't expect him to, either. They figured he would find a way to refinance. Approached by FORTUNE, Trump's bankers uniformly refused to discuss their confidential relations with him unless their names and affiliations remain secret. On that basis, however, key bankers confirm much of Trump's story. Says one, echoing Trump: ''We understood the risks we took and what it meant for the junk market to dry up. When that financing didn't materialize, the gate came down.''

Trump found out the hard way that his ability to raise capital had evaporated. Although he was short of cash for his debt payments, he also had costly new projects in mind, including a $20 million plan to build penthouse apartments atop the landmarked Plaza hotel. But every major bank Trump approached last spring, from Citi to Chase to Manny Hanny, refused to lend a dime. Trump was dumbfounded. ''You have to understand,'' he says, ''I have a business which is really going well. And all of a sudden you go into a bank where you have a normal banking relationship -- and for the first time they say no.'' It took much of May for the implications of these events to sink in. Trump asked his accounting firm, Arthur Andersen, to prepare a set of cash flow projections for the Trump Organization that outlined the trouble ahead. Then Trump hired Kenneth Leventhal & Co., a Los Angeles firm specializing in workouts, to refine the projections, sharing the results with his bankers. The bankers spent weeks improving the projections still further. Their analysis revealed that Trump needed deferrals of interest and principal payments on almost half his bank debt, plus a major infusion of cash. The only likely alternative was a series of defaults that would force him into bankruptcy. Explains Trump in his patented, endearingly reasonable voice: ''I said to the bankers, 'Listen, fellows, if I have a problem, then you have a problem. We have to find a way out or it's going to be a difficult time for both of us.' '' No one wanted to lend more money. Says a bank lawyer: ''The general perception was that there wasn't a hell of a lot of collateral left.'' And the wised-up lenders finally decided that Trump's signature wasn't worth much more than the ink with which it was inscribed. So executives at such money center banks as Citi and Chase began discussing the problem with each other as well | as with Trump. Before long, everyone agreed that the only way out was for all Trump's banks to join together and share the risk. Thus began what may have been one of the thorniest corporate workout negotiations in U.S. banking history. According to participants on both sides, deciding to bail out Trump was the easy part. Says one key banker: ''Everybody was in a weak position. Some were weaker than others, but everybody needed a restructuring. We all understood that it was not in our interest or Donald's interest for him to file for bankruptcy.'' Under Chapter 11 rules, Trump could have kept the banks away from his assets for years. So they didn't press him too hard. On the contrary, bankers had every incentive to remain on friendly terms with Trump. To maintain the value of their collateral, they knew they had to give him time and money to turn his business around. THE HARD PART was getting 70 banks to agree on the details. The sheer complexity of Trump's web of loans was daunting. Lenders familiar only with the assets backing their own loans suddenly had to bone up on the entire Trump Organization. Trump pushed the discussions along by readily making the concessions bankers required, yielding a substantial amount of his autonomy. To placate Bankers Trust and others that had lent a mind-boggling $850 million backed in whole or part by Trump personally, the erstwhile billionaire also agreed to limit his household spending to $450,000 a month. Says a banker: ''Donald understood what we needed.'' The restructuring plan that emerged from these negotiations is a triumph of bankerly skills. The banks will give Trump five years to carve a viable business out of his holdings. Wisely, the arrangement is flexible enough to let Trump decide how to reach the cash flow goals that he and the banks have defined. Obviously he would prefer to raise as much money as possible by improving his operations -- but to the degree that effort fails, Trump must liquidate assets. So the next phase in Trump's career will be a public test of his ability as a manager. Since the banks will not allow him to start any fabulous and expensive ventures for a while, Trump has a reasonably good chance of wringing considerably more cash from his existing properties: -- ATLANTIC CITY CASINOS offer the greatest opportunity -- and challenge. Trump was probably foolish to invest in three separate casinos, yet because of tough New Jersey licensing laws, these are difficult properties to sell. He can, however, capitalize on some obvious economies of scale. Astonishingly, Trump's casinos, which spend hundreds of millions of dollars a year on goods and services, have never done joint purchasing. And far from coordinating marketing plans, they have treated one another as competitors. Merely to service their debt Trump's two smaller casinos will need $80 million this year; last year their combined operating profits were $96 million. But the property to watch is the Taj Mahal, whose breakeven point seems almost impossibly high by industry standards. -- THE SHUTTLE, in which Trump has invested around $400 million, is earning enough to cover its debt service. But to make respectable returns, Trump must either slash costs or pray for a much more favorable economy. On the block for months, the airline has not attracted a single bidder, according to Nobles, its former boss. (Trump claims ''seven major bidders.'') -- THE PLAZA HOTEL, beautifully renovated and popular with travelers, should prove a winner before much longer. According to Trump, its profit before debt service has increased from $16 million in 1988, the year he bought it, to a projected $40 million this year. FORTUNE estimates interest costs at $45 million, so if revenues continue to rise according to projections, the hotel will break even by next year. Given time, Trump might also sell the property, in which he has invested $450 million including improvements. According to a hotel consultant, the Plaza is worth at least $550 million -- and Trump has a long record of selling properties for much more than anyone thinks they're worth. -- TRUMP PALACE, the Manhattan condo project, will be an early indicator of how badly the developer's image has been damaged. In the past, mostly out-of- town and foreign buyers paid big premiums for the Trump brand name. Indeed, Trump already has received some down payments for Palace apartments at typical purchase prices of $600 to $900 per square foot -- much more than comparable units in competing buildings are fetching. To gauge Trump's staying power, watch how the remaining Palace units sell -- and at what prices. -- THE WEST SIDE YARDS (a.k.a. Trump City) will provide another key test. Selling this huge tract of prime Manhattan real estate before it is developed would be an act of desperation. Already Trump executives have begun comparing their company's situation to the entrepreneurial early years of such great institutions as Ford, Walt Disney, and IBM -- as if being young and in trouble were all it took to qualify for that club. If he survives this crisis, Trump probably will emerge a more disciplined manager and a more formidable businessman. But, though Trump executives hint at someday taking the casinos public, the company won't be ready to join the major leagues for years. What has Trump learned from this mess? Not as much as you'd think. ''I always felt that when the business cycle went down I'd never get caught,'' he says. Edward M. Tracy, 37, who recently became boss of Trump's casino group, is even more direct. ''F--- the down cycle,'' says Tracy, whose Atlantic City office is dominated by a bizarre, six-foot-high portrait of Trump, executed in multicolored carpeting. ''The banks are not going to bury you. You're always going to get through the downside. The guys who win are the ones who bet on the upside.'' That's the way Trump always has bet. And probably always will.