(FORTUNE Magazine) – There's an old saw in banking: If you default on a $200,000 loan, you've got a problem; default on $200 million, and the bank has the problem. That is how Olympia & York Developments Ltd., the big Canadian real estate company, viewed reality when it met its 91 lenders on April 13 to begin negotiating a restructuring of about $9.4 billion in bank debt (out of a total debt of over $12 billion). As discussions continued in the following days, O&Y prepared to file for Chapter 11 bankruptcy in the U.S. The banks must have felt a gun at their heads: They didn't want to take the huge loan write-offs bankruptcy would bring. That they would cave in was the gamble that Paul Reichmann, 61 -- who, with his brothers Albert, 63, and Ralph, 58, owns O&Y -- was taking. At stake was a skyscraper empire of 47.4 million square feet that includes New York City's World Financial Center, Toronto's First Canadian Place and Scotia Plaza, and London's Canary Wharf. Given the depressed state of the commercial real estate market in the U.S., Canada, and Great Britain, however, at most only about 37.4 million square feet of that space was producing rental income for the Reichmanns. When the lenders met with O&Y for the showdown in Toronto, the notoriously secretive developers produced financial data on their properties that was over a year old and incomplete. Even more galling to the bankers was < the Reichmanns' ultimatum: Accept our plans for restructuring the debt, leave us in charge, waive virtually all principal and interest payments due in the next 90 days, and keep lending us millions more to pay bills during that time -- or else. Bold stuff for an outfit that had already missed several loan payments. After the meeting, Robert S. Miller, an investment banker with James Wolfensohn & Co., which has been hired to represent O&Y in the negotiations, put the threat directly: ''If there were a massive refusal by the banking groups to do as the company suggests, O&Y would have to go through a series of filings ((for bankruptcy protection)) in several countries.'' The two men advising the Reichmanns have plenty of experience in this game of chicken -- and it did work last time. Miller, 51, and Gerald Greenwald, 56, are former vice chairmen of Chrysler Corp., where they were senior financial executives. As a result, both are accustomed to dealing with lenders in a crisis. A decade ago Greenwald helped Lee Iacocca negotiate the terms of the U.S. government's bailout of Chrysler, and his first day at work as new president of O&Y coincided with the big meeting with the bankers. Says he: ''In one way or another it seems I've lived my life this way. But I've never been in a restructuring as big as this.'' He never would have been, either, except for Paul Reichmann's determination to deal with the banks as if he still held all the cards. Initially, Reichmann hired Thomas S. Johnson, 51, former president of Manufacturers Hanover bank, to be president of O&Y and to handle the negotiations. But when Johnson, who is highly regarded in banking, finally got on the inside and understood O&Y's situation, he pushed to sell assets quickly. Reichmann, the family's chief strategist, disagreed, and Johnson was out after 20 days on the job. Now O&Y executives are telling reporters that the two men fell out over money, and that Johnson was demanding his seven-figure salary be guaranteed. Johnson refused a request for an interview. Until recently there was no reason to question Paul Reichmann's confidence in himself. So impeccable was his word that he could close a deal on a handshake, and the world's most sophisticated bankers lined up to lend him money despite his refusal to open O&Y's books to them. The family's secrecy engendered rumors that they were worth billions upon billions, a notion vigorously fanned by various O&Y executives. Occasionally the family would spend as if they really had all that loot. The Canadian news magazine Maclean's described a wedding reception for 1,000 guests. At each table there was a bouquet of white roses carefully forced so that during the party they would burst into bloom. The engine of O&Y's growth is Paul Reichmann's canny risk taking. In 1974 the brothers finished building First Canadian Place in downtown Toronto, which, as with so many Reichmann projects, was financed for more than the cost to build. That gave them some of the capital for the deal that put them on the map: the purchase of eight Manhattan office towers for $320 million in 1977 as New York City was struggling with a calamitous fiscal crisis. The Reichmanns refinanced those buildings in the mid-1980s for $1.5 billion, giving them cash for other deals. Then in 1981, during the worst recession since the Depression, Paul Reichmann started building the World Financial Center in downtown Manhattan. Against all odds, that handsome granite, marble, and glass development was successful too. Or so it appeared. Though the towers are 91% leased, their 1992 cash flow to the Reichmanns is only $26.3 million, which is projected to rise gradually to $50.5 million by 2002 -- not much of a return on equity of $525 million. Undaunted, O&Y began work on the first phase of Canary Wharf, the $6.6 billion development in the London docklands, without even bothering to line up construction financing. That's when the worldwide real estate recession, combined with a sharp decline in the value of the family's holdings of natural resource companies, began doing the Reichmanns in. Now the bankers who rushed to lend are mighty unhappy with the way Paul Reichmann is treating them in the restructuring. Says Alain Tuchmaier, a bank analyst at McLean McCarthy, a Toronto brokerage firm: ''The view taken by at least some of the banks was that the O&Y position was unacceptable in its current form.'' Two years ago Paul Reichmann was asked what would happen if Canary Wharf became a financial disaster. ''It would be very unpleasant,'' he said. As it turns out, his biggest gambles have been unpleasant indeed -- for the banks.