The Bubble

By that Thursday evening, Pons was attending a community schools buffet dinner, not eating, still wondering how he would pay his teachers the next day. He stepped out on the patio, a cellphone to each ear -- one silver for official business, the other blue usually for personal calls -- talking to the school board attorney and other officials. Pons, born and raised in Tallahassee, knew that the head of the local bank lived in town. He called the banker at home.

Thomas A. Barron, president of Capital City Bank, was at dinner with his family. He took the call at his antique mahogany desk in his home office, confronted by a situation he'd never faced in 34 years of banking: "Not that kind of money and not overnight and not just to make payroll," he said.

But Barron reckoned the school district was good for the money. He authorized the loan on the spot, calling his lawyers and bankers to get the paperwork going. The next morning, Friday, Pons and the bank president signed for a $10 million week-long loan. It cost the school district $13,000 in interest. A bank executive stood in line at the teller window to deposit the funds in the school account.

Pons felt hugely relieved; his teachers would get paid. He didn't even mind when he became the butt of a joke around town: "If you need $10 million," people would tell him, "don't call me."

Chapter X Loaded for Bear

Jan. 10, 2008. In his first public remarks of the year, Fed Chairman Ben S. Bernanke acknowledges that the problems that had begun in the subprime market now "affected the prospects for the broader economy."

Unemployment was rapidly rising, hitting its highest point -- 5 percent -- since November 2005. On Jan. 19, a Saturday, a weekend of urgent conference calls among Fed officials began.

Bernanke and his colleagues -- Vice Chairman Donald L. Kohn, Fed Governor Kevin M. Warsh, New York Fed President Timothy F. Geithner and others -- agreed that the central bank needed to sharply cut interest rates to stimulate the economy. But they debated whether a big cut before a routine meeting -- only a week and a half later -- would make the Fed seem as if it were simply responding to declining stock markets. Bernanke implored the group: If it's time to act, the Fed should act.

Two days later, on Martin Luther King Jr. Day, stock markets throughout the world suffered some of their largest drops since Sept. 11, 2001. Meeting by videoconference, the Fed voted to cut its key rate three-quarters of a point, the biggest single-day cut in nearly a quarter-century, and announced the move before U.S. markets opened Tuesday. The Fed continued to lower rates but couldn't stop the economy's plunge. More banks reported losses.

Meanwhile, President Bush, working with Congress, signed into law a $168 billion economic stimulus package, offering tax rebate checks.

On March 12, concern intensified about the soundness of one important financial player with heavy exposure to subprime securities: Bear Stearns. The chief executive of the 85-year-old New York investment bank, Alan Schwartz, tried to calm investors by going on television to say his firm had a $17 billion cash cushion.

Overnight, though, Bear Stearns's lenders cut off the company. Customers demanded their cash. Bankruptcy was imminent. On March 13, Schwartz called Jamie Dimon, chief executive of J.P. Morgan Chase, who answered on a special cellphone reserved for his three daughters and few others. Schwartz wanted J.P. Morgan to buy Bear Stearns. Dimon wouldn't agree to do so without more time but promised to work on the problem. He dispatched hundreds of J.P. Morgan employees back to the office to review Bear Stearns's books.

As he learned about the unfolding crisis, Bernanke feared a global economic collapse if Bear Stearns went under. Money-market funds where Americans deposit billions of dollars in savings had lent money to Bear Stearns. And the company's important role in the financial markets -- trading countless securities for big investors -- would come to a halt. Other investment banks, Bernanke worried, would be next.