Excerpt:

One partnership pursued by Mr. Walsh exemplified his newfound appetite for ever riskier deals: transactions with the SunCal Companies of Irvine, Calif., an operation with an intriguing business model. It bought land, primarily in its home state, and sought government approval for residential development. If it got the green light, it sold the land to builders for an enormous profit. Mr. Walsh lent SunCal more than $2 billion and formed a close relationship with its founder, Boris Elieff. Mr. Elieff did not return calls seeking comment.

“We had other Goldman Sachs and other people who were clamoring to do business with us,” says Louis Miller, a lawyer for SunCal. “Lehman said, ‘No, we want to you to be exclusive with us.’ They loved SunCal.”

But because the cash flow from the SunCal deals was hard to predict, Lehman’s loans to the company were nearly impossible to syndicate. After all, how do you estimate income from raw land that may or may not be approved for development?

After putting about $140 million from the funds into SunCal deals, Mr. Walsh discovered that the investors wanted out. In 2006, he cashed them out with a tidy profit in exchange for effectively transferring their ownership stake onto Lehman’s balance sheet. That left Lehman with even more SunCal exposure, just before the emergence of the subprime crisis that would pummel the Southern California real estate market.