By ADAM GELLER
AP National Writer
Sean Grossberg closed the textbook for his financial derivatives class and sank into the couch. If all went according to plan, a year from now he'd be finished with school and working on Wall Street. But now he needed a break.
The University of Wisconsin senior hit the remote control and the second half of a Sunday afternoon football game filled the 100-inch screen.
Then his cell phone signaled a text message from a fellow finance major. The mess they'd been watching in the financial markets "has hit the fan," wrote his friend.
It was 6:29 p.m. Grossberg flipped open his laptop and pored over the news: Without the government to prop them up, one of Wall Street's most storied investment banks, Merrill Lynch, was surrendering. Another, Lehman Brothers, was hours from collapse.
"Indeed," Grossberg texted back.
By the time he headed for bed, after hours of scouring the Internet for more information, his mind was racing.
By then, a crowd blocked most of a sidewalk 900 miles away, outside a glass tower at Seventh Avenue and 49th Street in midtown Manhattan. Tourists in shorts and T-shirts jostled at police barricades, snapping pictures with their cell phones.
Employees of one of the nation's oldest and most prestigious financial firms lugged cardboard boxes stuffed with their belongings to the curb. Some wrapped each other in hugs. Others walked out with tears streaming down their faces. Atop one man's box a framed poster stuck out with a one-word headline: "Survivor."
"What's going on?" one man asked. The answer: This is the house of Lehman and it is about to fold.
"You've got to be kidding me. Lehman Brothers?"
Outside the Wall Street bubble, most people sidestep the usual thin stream of business headlines when a weekend is under way. For a day or two, we can do without the reminders that the economy is struggling. We feel it at the gas pump or the grocery store, see it in the paycheck, hear it in a friend's lament about a lost job. That's enough.
Besides, what are we supposed to make of all these reports about arcane securities backed by subprime mortgages. That's just a Wall Street problem, right?
Little did we know.
For the moment, though, on this Sunday night, the nation was just getting ready for bed, leaving behind a weekend of baseball pennant races and presidential politicking, of back-to-school shopping and barbecues. In a few hours, alarm clocks would wake people for their jobs on Main Street â and on Wall Street, like any other Monday.
But as people unfolded newspapers, logged on to computers, and began reconnecting with the world of overdue bills and to-do lists, a daunting new reality would become clear.
The fortresses of wealth and power where we invest our futures were swaying wildly.
The financial assumptions and assurances of yesterday had, seemingly within hours, turned queasily shaky.
It was already clear this would be no ordinary Monday.
And the stock market hadn't even opened yet.
At 8 a.m., dozens of Wall Street analysts dialed in to a conference call to hear the captains of Merrill Lynch and Bank of America lay out the terms of their deal.
"As you all know," BofA Chief Executive Ken Lewis told them, "the financial system is operating under almost unprecedented stress."
A few words later, the connection was cut off.
But the message was spreading, nonetheless:
The sky was still dark when Dan Fagan, a financial adviser, began the 40-minute drive down the Wilbur Cross Parkway to his office at TIAA-CREF in New Haven, Conn. The overnight news about Merrill Lynch and Lehman Brothers â which had finally announced its bankruptcy filing in a 1 a.m. press release poured from the radio.
At 6:15 a.m., Fagan's boss called.
"Can you believe it?" she asked.
They spent the rest of the drive talking about how to deal with what was sure to be a firestorm. By the time Fagan walked into the office he had 10 voicemail messages and 20 e-mails waiting from worried investors.
In St. Louis, Paul Spector turned on "Today," and grimaced at the news from Wall Street.
"Here we go again," he thought.
He and his wife, Anna, owned Mezzanine, a women's clothing store. Over the last two months, the number of shoppers had dropped sharply. Between them, the couple was staffing every shift, replacing five part-time employees they'd let go. And Tuesday, Anna was leaving for New York, where she'd have to decide how much to buy for spring.
Now she had to wonder: Do we gird ourselves for a downturn? Or do we gamble on the future?
In Sioux Falls, S.D., home builder Kyle Eberts pondered the news while he put in his paces on the treadmill. Eberts, a former stockbroker, had never forgotten about market psychology.
"I hope people don't panic," he told himself. If they did, what might that mean for sales of the $350,000 homes he was building? For now, the only thing to do was watch and wait.
When stock markets opened 90 minutes later, the Dow Jones Industrial average immediately fell by more than 200 points. By the time it closed, the market would drop 504 points, the biggest one-day point loss since the aftermath of Sept. 11, 2001.
Not everyone was a loser. Sitting in his room at Otterbein College in central Ohio, 19-year-old George Schubert stared at his computer screen. He'd scheduled his classes so he had plenty of time to watch the stock market. And in August, he'd put his amateur investing skills to work by placing a short position on American International Group â a bet that the stock of the world's largest insurance company would fall.
Now, like Lehman and Merrill, AIG â which insured the dubious investments that were pulling the big banks down â was also under attack. By day's end, its shares were down 61 percent. Schubert could barely contain his excitement â that is, as long as he could stay awake.
"I never drank so much Red Bull in my life," he said. He would cash in his AIG bet a day later, making a healthy (but undisclosed) profit as AIG fell from $70 last October to $3.
In his office in New Haven, meanwhile, Fagan was still at his desk.
The market had been closed for more than two hours. Investors were still calling.
By Tuesday afternoon, it was clear to Rabbi Doug Sagal that, at least in his corner of the world, he needed to address the fallout from the financial world.
His congregation, Temple Emanu-El in Westfield, N.J., is filled with Wall Streeters. He sat down with his staff to plan a spiritual response. The result would be an e-mail to the entire congregation: Please, if you need someone to talk to, we're here.
"When I first became a rabbi, I served in a small town in Connecticut that was hit very hard by the closing of factories, homes being sold. Here I am, 20 years later, in a maybe more affluent community than I started in, with the same issues," Sagal said.
A similar meeting convened at St. Bartholomew's, the Episcopalian church in the heart of Wall Street. The staff crafted a special note for the upcoming bulletin.
"Trust and security used to be bywords in banks â along with those steel safes the size of chapels," it says. "Events in the markets this week, in our city particularly, have shattered a good deal of what was left of trust and security. Where, after all the changes and chances of this life, do you find security? What, or whom do you trust?"
At 6 p.m., on Capitol Hill, the nation's two most powerful financial officials â Treasury Secretary Henry Paulson and Ben Bernanke, the Federal Reserve chairman â called congressional leaders into a meeting. There is no choice, they said: The government must step in and take over AIG to keep the crisis from worsening. The meeting broke up a little less than an hour later and rumors of the plan sent the Dow up 142 points for the day.
But now there was something new to worry about.
In New York, The Reserve Fund â operator of a huge money market fund â announced it would be forced to do something unseen in more than a decade. Investors put their money in money markets specifically because they are so safe. You may not make much money, but you will not lose anything, or so goes conventional wisdom.
Reserve's Primary Fund, though, had so much invested in Lehman Brothers debt securities that every $1 share would now be worth just 97 cents.
The news broke as Richard Keeling, a research biologist, arrived home in University City, a suburb just outside St. Louis. Keeling had no money in The Reserve. But after watching the markets from the sidelines, his steadfast confidence is shaken for the first time. Keeling is 51 and his house is paid off, but the stock drop had already convinced him to shelve thoughts of an early retirement.
He logged on to his Vanguard account, and stared at the numbers: $10,000, parked in a money market account. What could go wrong?
Better not to wait for an answer.
With a few taps of the keyboard, Keeling moved the money out of the mutual fund and into his savings account. There, it would be safe. That, at least, he still believed.
By Wednesday morning, the $85 billion bailout of AIG was all over front pages. But the news hardly calmed the market. It dropped almost 200 points to open and continued to lose ground.
On a Manhattan street corner, in the shadow of Macy's, a worker for the United Homeless Organization called out to pedestrians, trying to coax them into dropping money into the nearly empty plastic jug atop his card table.
"Billions for AIG!" he barks. "Come on. How about a dollar for the homeless?"
As the market tanked, it seemed to suck down all ships.
John Mack, chairman and CEO of beleaguered investment bank Morgan Stanley, tried to calm his capitalist army. "I know all of you are watching our stock price today, and so am I," he wrote, in a late-morning e-mail to all his employees. "What's happening out there? It's very clear to me â we're in the midst of a market controlled by fear and rumors, and short sellers are driving our stock down."
But Dan Fagan, the New Haven investment adviser, was on the front lines, and he knew that explanations and soothing words went just so far in the face of a growing panic. His phone rang and rang; these were wealthy folks, many of them quite savvy, but they were clearly rattled.
A 60-year-old client had been planning to retire this year. But his portfolio was down 25 percent; he was "terrified" that he was not going to be able to retire anytime soon.
Another investor e-mailed: "I'm afraid to look at my statements."
When a client who is a psychiatrist called, they discussed similarities between their jobs.
"We do therapy at times like this," Fagan says.
Across the country, Rich Kerr, manager of the Charles Schwab Inc. branch office in the Phoenix suburb of Chandler, Ariz., was similarly under siege.
Most investors just wanted to talk. But at lunchtime, a 54-year-old client arrived at the office. Usually quite calm, the man was clearly flustered. He told Kerr he wanted to take his entire $2 million in investments and move it into gold, which rose $70 an ounce on Wednesday â the largest one-day jump in history.
After an hour's conversation, Kerr convinced the man to let things be. But he understood: "There was a fear in his heart that everything was going to go into a total economic collapse."
On this day, that fear was truly understandable. The Dow closed down 450 points.
At 4 p.m., lawyers packed into room 601 at the U.S. Bankruptcy Court in lower Manhattan, where Judge James Peck presided over the dismantling of Lehman. Court workers set up chairs in the aisles, but the crowd poured out into the hall. A lawyer presented an offer by Barclays PLC to buy parts of Lehman for $1.75 billion; creditors had hoped to get more.
But opposing lawyers argued that the judge could not afford to wait. Lehmanâ once one of the major forces in the world of financeâ now amounted to a melting ice cube, one said.
Uptown, Anna Spector wrestled with her decision: how much merchandise to order for her struggling clothing store back in St. Louis?
She noticed a change of attitude among the designers offering their wares. They were cutting their prices to give retailers a large profit. That, and the inspiring hustle of the hot-dog vendors outside the hall, convinced her she had to be bold. She called Paul and they decided to order enough clothes to anticipate an increase in sales.
She was still thinking about it as she flagged a taxi for the ride out to the airport that night. The driver tuned to an oldies station. At a song's end, the disc jockey jested.
"AIG no longer stands for All In Good fun," he said.
By the time the 36 seniors in the economics class at Elk Grove High School took their seats, they had fresh material to discuss.
Teacher John Zehnder handed out copies of the Sacramento Bee. "New lows usher in new era," said the headline. He stepped to the dry-erase board at the front of room P-15 and writes "Federal Reserve" and "Ben Bernanke" in orange marker.
The government's decision to step in and save companies like AIG was nearly unprecedented, Zehnder explained. It was also nothing like textbook capitalism.
"In capitalism, we say 'Hey, if you're not strong enough to stay in business, you shouldn't be in business.' So what did the government say about AIG yesterday? Can we afford to let them fail?"
"No," students answered in chorus.
Other teachers also grasped that this was a historic week, filled with teachable moments. At the North Carolina School of Science and Mathematics in Durham, N.C., Jim Litle's students were too young to remember the savings and loan crisis of the 1980s. But they seemed to instinctively grasp the simple idea behind the Wall Street collapse: credit crunch.
"You people are all going to college," he told the class. But unless banks trusted each other and consumers, none of them would have the money on hand to lend them for tuition.
"Somehow we've got to create some way for people to trust each other. Trust is really hard in the financial world," Litle said.
Stocks fell through the morning. In Somerville, Mass., Richart Shortt watched with alarm. Shortt is 63 and semiretired, working as a business consultant. He had seen his stocks fall from $290,000 a year ago to $230,000 a week ago and now to $210,000.
Shortt had planned to quit working altogether over the next couple of years. Now, he told himself, he might have to put off retirement. But would he be able to find work in a down economy, as small businesses cut back on their own expenses?
So many questions, so few answers. When Fagan, the investment adviser, arrived at his New Haven office on Thursday, there were 20 voicemails from clients and 50 e-mails.
The most alarming call was from a 50-year-old client who moved his money out of stocks months ago and still felt insecure. He told Fagan he'd just come from the bank, where he had tried to withdraw his entire savings, but was told he could only withdraw $10,000 at a time. Now, he wanted to cash out of his brokerage account, too.
"Do you think this is the beginning of the end?" he asked Fagan.
Fagan reassured him that everything was fine, and that even having large amounts of cash on hand came with risks. The man decided not to put his money under a mattress.
By mid-afternoon, the market was down sharply.
But around 2 p.m., investors sent shares soaring on early reports of what could be a huge new gambit by the government â a massive buyup of the Wall's Street poisonous securities. Could this be the magic balm the market had been searching for?
By the time it closed, the Dow had gained 410 points.
"Bear markets are very sensitive to news," said Scott Fullman of WJB Capital Group in New York. "And on a scale of 1 to 10, this one is a 13."
As soon as the opening bell sounded Friday morning, investors poured money into stocks, pushing the Dow up 450 points in less than half an hour. By day's end â after assurances from President Bush and his Treasury secretary â the Dow finished with a 370 point gain.
Which left it almost precisely where it was when the roller-coaster week began.
In her office in Bloomingdale, Ill., about 30 miles from Chicago, mortgage broker Jodi York-Caraballo took inventory. After the government had seized control of home finance giants Fannie Mae and Freddie Mac on Sept. 8, she'd sent out more than 200 e-mails to potential customers inviting them to take advantage of a resulting drop in interest rates. But with lenders seized by uncertainty, fewer than 10 had been able to qualify.
The announcement by the Federal Reserve and the recovery in the markets wouldn't solve that problem. But when three customers called her Friday morning asking for her assessment, York-Caraballo answered with measured optimism.
Don't expect rates to drop dramatically, she told them, but "as the dust settles, we should see an improvement."
Out beyond Wall Street, in the economy ordinary people call home, the recovery in the market left most doubts unresolved.
In St. Louis, the Spectors' clothing store was a "ghost town" on Friday, Anna said. Even a huge gain in stocks was not going to get people in a spending mood.
Her husband expressed dismay at the notion that the government might spend billions in taxpayer money to clean up banks' bad debt. In the shopping district near the couple's store, half a dozen businesses have closed recently. None of them were offered a government lifeline.
"It seems really, really hypocritical," he said. "Basically, all these companies that did wrong to get those people into bad mortgages â it's like they're just getting away with it."
This story was reported by Dave Carpenter in Chicago, Emily Fredrix in Milwaukee, Mark Jewell in Boston, Chris Leonard in St. Louis, Judy Lin in Elk Grove, Calif., Dirk Lammers in Sioux Falls, S.D., Justin Pope in Raleigh, N.C., Alan Zibel in Washington, D.C., and Eileen AJ Connelly, Anne D'Innocenzio, Tim Paradis, Ellen Simon, Chris Sullivan and Vinnee Tong in New York.