(FORTUNE Magazine) – Edgar Bronfman Jr. was fairly certain he was doing the right thing. It was the morning of June 20, 2000, and he waited with Vivendi CEO Jean-Marie Messier for reporters to arrive at the French telecommunications and water company's stylish Internet cafe on the ground floor of its headquarters in Paris. Bronfman and Messier had an announcement to make: Vivendi was buying Seagram, the liquor and entertainment company controlled by the Bronfman family, for $34 billion in stock.

Yet before the press conference began, Bronfman felt it necessary to tell Messier one last time why he was doing the deal. He confessed that he was haunted by an old saying about family businesses: The first generation creates, the second becomes wealthy, and the third loses everything. Edgar Bronfman Jr., the third-generation Seagram CEO, said he believed the sale would protect his family for decades to come. "I've talked this over with my dad," he said. "He believes it's the best way to take care of the next generation."

Of course, the deal with Vivendi turned out to be a disaster for the Bronfman clan. Messier promised to build a media giant by wedding Seagram's Universal Studios and Universal Music Group with Vivendi's European Internet, cable television, and wireless divisions. Instead he drove Vivendi to the brink of insolvency with a string of increasingly bizarre deals that left the company with $19 billion in debt and virtually no cash. Vivendi's shares fell from $83.43 when the deal was announced to $13.15 in late October. French prosecutors and the U.S. Justice Department are investigating the company.

Bronfman led a boardroom crusade to oust Messier, and in July he prevailed. But this is not a story with a happy ending. His extended family's stake in Vivendi was valued at $6.5 billion when he and Messier struck their agreement. It has been reduced to $3 billion in company stock and cash from share sales. That paper loss is among the largest sustained by a single family, ever. The Bronfmans will not have any trouble buying groceries, certainly, but they are living through an epic financial disaster. And for Edgar Bronfman Jr. it has the flavor of a Greek tragedy: The oracles predicted his disgrace, he devoted his career to preventing it, and it happened anyway, because of his own action.

The evaporation of $3.5 billion has, not surprisingly, divided the Bronfman dynasty. On one side are the American Bronfmans, led by Edgar Jr. and his father, Edgar Sr., who preceded his son as Seagram CEO. On the other side are the Canadian Bronfmans, led by former Seagram co-chairman Charles Bronfman, Edgar Sr.'s brother. Edgar Sr. says Charles holds the two Edgars responsible for the disaster because they steered Seagram into the capricious business of entertainment. "It's very personal between my brother and myself," Edgar Sr. says. "I think he holds a real grudge." (Charles Bronfman and his two children declined to be interviewed for this story.)

These are painful days for 47-year-old Edgar Jr. Of the 11 members of his generation of Bronfmans, he was the chosen one. He entered Seagram in 1982 when he was 26. Four years later his father anointed him as the company's future chief executive, blurting it out to FORTUNE before telling his oldest son, Sam. At the time, Seagram was one of the world's largest distillers, with brands like Seagram's V.O. and Chivas Regal. Its sales were $2.9 billion, and its annual return to investors was 24%.

Bronfman's coming of age at Seagram was a public event. After all, the distiller was a public company, and from the beginning the press questioned whether the Bronfmans should have picked yet another family member as CEO. Sure, they controlled 38.5% of Seagram shares at the time, but did Edgar Jr. have the right stuff? Skepticism grew as it became clear that Edgar Jr. wanted to be a media mogul. He used shareholder money to buy MCA, owner of Universal Studios. The press merrily chronicled his ups and downs in the entertainment world, which culminated in the Vivendi debacle. Now, for some observers, the verdict has been rendered: New York magazine recently said Bronfman was "possibly the stupidest person in the media business."

The words sting, even though it's unfair to single out Bronfman: Yes, Vivendi shares have dropped 84% since the merger was announced, but shares of AOL Time Warner (parent of FORTUNE's publisher) have plunged 78% since Steve Case and Gerald Levin announced their merger deal. There is a lot more that is gnawing at Edgar Jr. He says he feels fine, but family members and colleagues all say he feels terrible. He says he doesn't feel responsible for the debacle--that it was all Messier's fault--yet it was he who did the deal, and today he is spending almost all his time sifting through the rubble for something to salvage. He still has some control: The Bronfman family remains Vivendi's largest shareholder, with 4.8% of the stock. Bronfman's goal is to get the stock price up, and he feels that the hidden value in Vivendi lies in the former Seagram entertainment assets. Associates say he is pushing for the French company to spin them off in an IPO, perhaps next year.

Even if his plan succeeds, there are Bronfmans who may never forgive what Edgar Jr. did with the family business. Still, it may be the only way for him to win the redemption he clearly craves.

"I can't think of anything I could have or should have done differently," Edgar Bronfman Jr. insists. "I sold the company at the right time for shareholders for tremendous value. What has happened since has been a general market meltdown, a specific meltdown of media stocks, and even more specifically a meltdown at Vivendi around a liquidity crisis."

It's an October afternoon, and Bronfman is discussing the Vivendi mess in his office in the Lever House, one of New York City's great postwar skyscrapers. Through the window, a visitor can glimpse an even grander tower of the same vintage: the Seagram Building, designed by Ludwig Mies van der Rohe at the request of the company's creator, Samuel Bronfman, Edgar Jr.'s grandfather. It's a poignant reminder of where the third generation sits in relation to the first.

The Bronfmans still move in an elegant world where the fabulously rich mingle with the powerful and famous. Edgar Jr.'s aunt Minda married a French banker with Rothschild ties and became a baroness. His father belongs to that small circle of New Yorkers who can get Presidents to answer their telephone calls. Edgar Jr.'s friends include the director Steven Spielberg and Senator Thomas Daschle.

One of the reasons the Bronfman dynasty has retained a glittering aura is that family members, though rich, have never been content to sit on their wealth and watch the world from afar. Edgar Sr. became president of the World Jewish Congress and exposed former United Nations Secretary General Kurt Waldheim's Nazi past. His brother, Charles, is one of the founders of Birthright Israel, which pays for young Jewish people to visit the country. Now, however, the family may have to scale back its philanthropic endeavors because of what happened to Vivendi. "It hasn't [affected my charitable giving] yet," says Edgar Sr. darkly, "but it will."

Edgar Jr. blames Vivendi's problems entirely on Messier. "Jean-Marie drove an otherwise healthy company to the brink of bankruptcy," he says. "That's extremely frustrating for the shareholders, but if I may say even more so as the guy who built [the Seagram] businesses that are really supporting the company, and built the management teams. I've watched those people suffer under this heroic display of hubris. It's very frustrating. But the businesses remain. The management teams remain, and the opportunity remains. That's what we have to focus on."

But he can't help focusing on the past too, says his older brother, Sam Bronfman II, chairman of global wines for Diageo, which bought part of Seagram from Vivendi. "I just think the toughest thing for Edgar is this whole sense of responsibility," Sam says. "He's [wondering], 'Is there some point in here where I could have made a different decision?'"

How could it be otherwise for the Seagram heir? His grandfather, Samuel Bronfman, built one of the largest fortunes in North America, starting out by selling Canadian whiskey to U.S. bootleggers during Prohibition. At the close of America's "noble experiment," Sam extended the reach of his Montreal-based firm into the U.S., eventually controlling more than one-fifth of the American liquor market.

The Seagram patriarch, whom underlings referred to as "Mr. Sam," fretted that his heirs would undo his work. "You've heard about shirtsleeves to shirtsleeves in three generations," Mr. Sam told FORTUNE in 1966. "I'm worried about the third generation. Empires have come and gone."

Nevertheless, he was determined that his family control Seagram in decades to come. He established a web of trusts, through which he passed 32% of Seagram's shares to his children. Of that stake, 60% went to his two sons, Edgar Sr. and Charles.

Sam's eldest, Edgar Sr., was more refined than his father, but similarly headstrong. He joined Seagram at age 22. As soon as he turned 26 and was no longer eligible to be drafted into the U.S. Army, he moved to New York and became an American citizen. His father didn't want him meddling with the liquor brands, so he expressed what he called his "creative side" in show business. When he made an unsuccessful bid to take over MGM, Mr. Sam was puzzled: Was his son doing this to meet women? "Father," his son famously replied, "you don't have to spend $56 million to get laid."

Edgar Sr. took over as Seagram chief executive after Mr. Sam died in 1971, and he acquitted himself in a manner that would have made his father proud. During his 23 years as CEO, Seagram's sales climbed from $1.5 billion to $5.2 billion. Edgar Sr. also diversified the business. In 1981 he tried to take over Conoco, an oil company. He didn't get it; the victory went to DuPont. But Edgar Sr. threw his support behind DuPont's bid, and Seagram ended up with 20% of the chemical empire, valued at $308 million. By the time he retired, that stake was worth $8 billion. DuPont dividends contributed $289 million a year to Seagram's earnings. "I did a very good job, if I do say so myself," Edgar Sr. says. "Actually, my brother said it at the meeting when I retired as chief executive."

When it was time for Edgar Sr. to select his successor, he tapped his namesake. Edgar Jr., a rebel, had skipped college to try his luck as a movie producer. His best known film was The Border, a 1982 Jack Nicholson vehicle that failed to excite moviegoers. He wrote romantic song lyrics. He eloped with an actress, straining his relationship with his father.

Nevertheless, Edgar Sr. thought Edgar Jr. possessed predatory instincts his older son, Sam, lacked. So he offered Edgar Jr. a job as executive assistant to the president, and told him he might one day be CEO. Edgar Jr. was torn. He knew he would be seen as a rich man's son who'd been handed a job he didn't deserve. But, he says, "it's the family legacy. My father wanted to turn it over to the third generation. I felt that I couldn't really say no."

By most accounts, Edgar Jr. proved up to the task. His record wasn't flawless. But he refocused Seagram's spirits portfolio, getting rid of lower-end brands like Lord Calvert and Wolfschmidt vodka and putting more emphasis on top-shelf brands, like Chivas Regal, with higher margins. He negotiated a lucrative deal with the Swedish government to distribute Absolut. He bought Tropicana and a decade later sold it to PepsiCo for a $1.1 billion profit.

Still, the press portrayed Edgar Bronfman Jr. as a wealthy dilettante. Magazines gleefully printed his overwrought lyrics ("I want to hold your body next to mine/I want to hurry love and take my time...."). True, Bronfman was no Cole Porter. But how many other moguls had Barbra Streisand recording their songs?

The jeers grew louder when Bronfman steered Seagram into Hollywood. For Bronfman, the decision was simple. Liquor consumption was on the decline in the United States; entertainment seemed to have growth potential. In 1995, Seagram sold its DuPont stake for $8 billion and spent $5.7 billion to purchase 80% of MCA--owner of a motley collection of movie, music, theme park, and television businesses--from Matsushita. Like his father, Edgar Jr. faced speculation that he bought into Hollywood to meet starlets. But friends point out how implausible that was. After all, he'd married his second wife, Clarissa Alcock, the glamorous daughter of a Venezuelan oil executive, a year before the MCA acquisition.

The sale of the DuPont stake marked the beginning of the rift in the Bronfman clan. Seagram co-chairman Charles Bronfman bitterly opposed it. He believed the DuPont investment could shield the family's wealth in the future. Now his nephew was cashing it in to buy a movie studio?

Charles could not be ignored. He and Edgar Sr. had grown up together on Mr. Sam's palatial estate in the Montreal suburbs, isolated by their fortune and their Jewish faith. The brothers were close as children and had remained so as adults, partly because Charles happily ceded the running of Seagram to his older brother. New York didn't appeal to him. He stayed in Montreal and became known as the owner of the Expos baseball team.

Even so, Charles was a force on the Seagram board, which he co-chaired with Edgar Sr. after his older brother handed the reins to Edgar Jr. in 1994. There was an unwritten rule that Edgar Jr. could take a proposal to the directors only if his father and his uncle signed off on it first.

Edgar Sr. disagreed with Charles about the DuPont stake. Even though acquiring it was perhaps his greatest deal, Edgar Sr. no longer cared for DuPont. "I thought it was a very boring company," he sighs. More important, Edgar Sr. feared his son would get weary of sitting on the shares and collecting dividends. Edgar Jr. wanted to grow Seagram. As the former CEO, his father understood.

Edgar Bronfman Jr. wanted to transform Seagram into another Disney or Time Warner, but he also wanted to be a dutiful family member. The two impulses were difficult to reconcile. Seagram needed to make acquisitions if it was to take on bigger competitors, but Edgar Jr. couldn't issue Seagram shares to pay for them without diluting the family's control.

So Bronfman had to make choices. He felt Universal film studios and theme parks could become industry leaders, but they would never be Seagram's growth engines. MCA's television and music divisions had more potential to drive the company's bottom line, but Bronfman didn't have the money to resuscitate both. So he decided to spend Seagram's money on music.

Charles raised objections every step of the way. He wasn't happy when Edgar Jr. came to the board with a proposal to acquire Time Warner's Interscope label, known for its controversial rap artists like Snoop Dogg, for $200 million. Charles also grilled Edgar Jr. about his plan to buy Polygram NV, then the world's largest record company, for $10.4 billion in 1998. Edgar Jr. got his way, but he was growing weary of selling his deals to his uncle. "When you're trying to transform a company, and you have a major owner who does that reluctantly and makes his reluctance known, it makes your job more difficult, to be sure," Edgar Jr. says today. "It certainly made my job more difficult."

It didn't help that Bronfman kept getting lousy press. Universal Studios' production budget ballooned, but the studio couldn't come up with hits. To raise money for the Polygram deal, he traded television assets for cash and a stake in Barry Diller's USA Interactive. Critics howled--what good was a studio without TV distribution? None of it was lost on his uncle. "There's so much criticism now," Charles once said to him. "How can you stand it?"

"I think I'm right," said Edgar Jr.

For a time it seemed as though he actually was. He hired former Creative Artists Agency president Ron Meyer to run Universal Studios, and in 2000 the movie unit turned a profit of $34 million. He named Doug Morris chairman of Universal Music, and by 2000 that unit had Ebitda of $1 billion--38% more than the spirits and wine division. Even Bronfman's deal with USA Interactive began to look smart as the value of Seagram's stake soared from $3 billion in 1997 to $6 billion three years later.

Yet while Bronfman struggled to justify deals to his uncle, the media industry was reshaping itself. Disney devoured ABC. Viacom snatched up CBS. AOL bought Time Warner. Seagram was left in the dust. Its stock appreciated 71% between 1995 and 2000, but Viacom stock climbed 126% during the same period. Time Warner shares rose by 197%.

Bronfman came to feel that he had been checkmated. He didn't have the money to go head-to-head with Viacom in television, for instance. And even if Universal had better musical acts than Warner Music, Bronfman feared, AOL could promote its artists to its millions of subscribers.

So the Seagram CEO decided it was time to sell. There were talks with Disney, News Corp., and Comcast, but a former Seagram executive says none of them wanted to deal with selling off Seagram's liquor assets after buying the company. Then along came Messier, an energetic French banker with a zeal for dealmaking you don't often see. Messier longed to be an American-style media mogul. He was more than willing to spin off Seagram's spirits division if he could win the company's movie and music businesses.

Messier was willing to trade Vivendi stock for Seagram shares so that the Bronfmans could avoid taxes. He was ready to give them five seats on Vivendi's 20-member board--one for Edgar Jr., one for his father, one for Charles, and two for their representatives. Messier also agreed to give Edgar Jr. a senior management position.

The only sticking point was price. Edgar Jr. sent Messier back to Paris when he offered a mere $60 a share. The Frenchman soon returned to New York with an offer of $77 ("not 1 cent more!"). Edgar Jr. called his uncle in Montreal and told him the price. He says Charles was so excited he had his son, Stephen, also a Seagram board member, pick up an extension to hear the number. "They were both ecstatic," Edgar Jr. recalls.

He felt vindicated. Seagram's market cap was $13 billion at the time of the DuPont sale in 1995. Now he was selling the company for $34 billion. But there were no toasts at the June 2000 board meeting when Seagram approved the sale. Tears filled Edgar Jr.'s eyes. Things would never be the same for the Bronfmans.

Charles, though, was immediately remorseful. "Over the summer," Edgar Sr. says, "Charles and his family hired investment bankers to see if he could buy Seagram back." But nothing came of it.

Edgar Bronfman Jr. was named Vivendi's vice chairman, its second-highest executive, overseeing its Internet and music operations. It seemed like an important role: One of Vivendi's central strategies was to sell music to cellphone users though a wireless Internet portal. But Messier relegated Bronfman to the sidelines. Vivendi's CEO wanted to be considered a peer of AOL's Steve Case and News Corp.'s Rupert Murdoch, and when he showed up at, say, Herb Allen's annual Sun Valley media conference, the last thing he wanted was to look like a clueless foreigner led around by an American deputy.

His condescension was breathtaking. "I think Edgar feels better being No. 2 than No. 1," Messier told FORTUNE in 2001. "He is free to say anything, knowing he doesn't make the final decision, so for me it's a perfect fit." The French CEO tried to move a Mark Rothko painting purchased by the Bronfmans from the Seagram Building to his Park Avenue apartment. When Bronfman and his father protested, Messier hung the painting in his office.

Messier's behavior did not go unnoticed. "He did a lot of silly, egotistical things when it came to Edgar," says Robin Richards, former CEO of Vivendi's American Internet division. "He always wanted to take the stage at major events [where Universal artists like U2 and Sheryl Crow performed] when he could hardly pronounce their names. Jean-Marie had this unhealthy desire to one-up Edgar."

Bronfman, by most accounts, didn't complain. What he really cared about was Vivendi stock. By August 2001 it had tumbled 31% from the moment Vivendi announced the plan to buy Seagram. He protested behind the scenes when Messier went on a shopping spree to increase Vivendi's visibility in the U.S. He told Messier that $2.2 billion was too much to pay for Houghton Mifflin, the Boston textbook publisher. He was livid when Messier bought back USA Networks in a deal that valued Seagram's former television assets at $10 billion--a price Bronfman thought was absurd. "I can't do this anymore," Bronfman told his friend Harvey Weinstein, head of Miramax Films. "This is insanity. People are going to start thinking these are my decisions."

But as much as he might wish to now, Bronfman can't distance himself from those decisions altogether. He publicly hailed Messier's scheme to distribute content through cellphones--even after the CEO himself wisely began to back off. He supported Messier's acquisitions in the boardroom. A former top Vivendi executive calls Bronfman "childish" for declining to share responsibility.

Bronfman says he might have acted differently if he had known Vivendi was headed off a cliff. But, he alleges, Messier hid the company's financial condition from the board. (A source sympathetic to Messier insists that all Vivendi's financial information was properly disclosed.)

That would partially explain why Bronfman didn't turn on Messier immediately after resigning from his management position at the end of 2001. He needed some prodding, and ironically, it came from his uncle's camp. Charles had resigned his seat on Vivendi's board and appointed his longtime financial advisor, Sam Minzberg, as his replacement. Minzberg was incensed to discover in a footnote that Vivendi had made an options bet that would cost it nearly $1 billion. Minzberg suspected that Messier wasn't being honest about Vivendi's finances. He attacked him at board gatherings, horrifying Messier's French directors.

Soon the Edgars began seeing things Minzberg's way. Edgar Jr. became convinced Messier had to go after Vivendi's chief executive was asked about operating expenses at the annual meeting last April. Messier said Vivendi had sold two airplanes. Then he added: "By the way, I've heard rumors that Vivendi owns an Airbus. That's absolutely false!"

Bronfman was stunned. Vivendi, he was certain, did own an Airbus. Why, he wondered, would Messier say such a thing? "That's when I realized he was a congenital liar," Bronfman says. (The source sympathetic to Messier says the Airbus was leased by a Vivendi subsidiary.)

In June, fearing that the company might be running out of cash, Bronfman urged Messier to have Goldman Sachs prepare an analysis of Vivendi's cash flow for the board. Goldman presented its findings to Bronfman, Messier, and a group of key executives on June 24, one day before a scheduled board meeting, and they confirmed Bronfman's fears. Afterward, in Messier's office, Bronfman told him, "I think you have to resign."

Messier, smoking a cigar, asked Bronfman to meet him for breakfast the next day.

The French CEO made no apology the following morning when he arrived 15 minutes late. "I have two questions to ask you," Messier said. "If I refuse to resign, will you still take your proposal that I resign to the board?"

Bronfman said he would. As he recalls it, Messier asked: "What if I tell you if I resign, [co-COO] Eric Licoys, [telecom chief] Philippe Germond, [CFO] Guillaume Hannezo, and [publishing chief] Agnes Touraine will resign with me?"

"It doesn't much concern me whether you resign, five people resign, or 500 people resign," Bronfman replied. "The board will find the management it needs."

The ten European directors backed Messier at the meeting that day. But a week later, with Vivendi's bankers pressing for his resignation, the board voted unanimously to replace him with former Rhone-Poulenc CEO Jean-Rene Fourtou.

While French board members haggled with European bankers, Bronfman tracked down Citigroup director Robert Rubin at a country club by phone, interrupting his tennis game. Citigroup signed on to help Vivendi out of its cash crunch. So did Credit Suisse First Boston and Deutsche Bank. At 5:30 A.M. on July 10, they finalized a deal for Vivendi to receive a $1 billion line of credit.

Fourtou has since announced that Vivendi would sell off assets like Houghton Mifflin to raise cash, and he has said that Bronfman would play an important role in reshaping the company. "He has all the skills that we need, and I think he is very clever," Fourtou said at a press conference.

If only it were as simple to heal the Bronfman family.

It's a painful subject for Edgar Jr., one he doesn't care to discuss. Edgar Sr. says things are ugly between his brother and his son. "They don't have a good relationship," he says. "It's much worse than the one I have with my brother."

Part of the reason for the rancor is that the American Bronfmans sold a big chunk of Vivendi stock, pocketing $1 billion, as soon as the family's 90-day lockup period expired. The Canadian Bronfmans chose to sell only about $100 million worth of their shares. Worse, they dumped 2.7 million shares last August, when the stock price was hovering around $12. "For whatever reason, they didn't [sell earlier]," Edgar Sr. says. "I think in hindsight my brother's very upset about that."

"One of the things that appears to be difficult for the Charles side of the family generally to do is take responsibility for its own decisions," says Edgar Jr. "They could have sold all of their position for $65 or $70 a share."

Charles and his family would probably like to put Vivendi behind them. They continue to sell shares, and they show little interest in Edgar Jr.'s efforts to boost the stock.

Edgar Jr., though, can think of little else. He believes the key is spinning off the former Seagram entertainment assets as a U.S. company. That makes some sense. Vivendi's total market cap is $14 billion, but Merrill Lynch values the assets at $23 billion (not accounting for any debt). The problem, according to Edgar Jr., is that U.S. investors aren't likely to put money into them as long as they are subject to French governance and accounting rules. An associate says Vivendi is negotiating with Barry Diller, CEO of Vivendi Universal Entertainment, to prepare a U.S.-listed IPO by next year. Neither Vivendi nor Diller would comment.

A successful IPO could make a lot of money for Edgar Bronfman Jr. and his American relatives. They are holding their remaining Vivendi shares, hoping the worst is over. But this isn't just about money for Bronfman. The Vivendi IPO would create a company almost identical to the one Bronfman built at Seagram--the one whose strengths, he feels, were obscured by Messier's misdeeds. Like his uncle who wanted to buy back Seagram's liquor company, Bronfman is having a bad case of seller's remorse. Clearly what he'd like to do is turn back the clock, but if he can't have that, perhaps he can find redemption by undoing the Vivendi deal.

A friend recently asked Edgar Jr., "You're not taking this too personally, are you?"

"Well, it's hard not to," he replied.

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REPORTER ASSOCIATE Doris Burke