The deal helped solidify Lampert’s place in American business lore. He worked under Robert Rubin at Goldman Sachs, left the bank over Rubin’s strong objections, then became a protégé of Texas investor Richard Rainwater. He struck out on his own at the age of 27 and made a series of savvy, concentrated bets on undervalued companies. An early win was an investment in I.B.M. at an early point in Lou Gerstner’s reign, a storied turnaround that Lampert refers to in letters to shareholders as a model for Sears.

For years, money managers like Lampert have been in the ascendancy, taking over all sorts of companies with the idea that they can manage them better or flip them for a quick profit. Financiers are now running some of the most storied names in American business—Chrysler, Hilton, Hertz, and Reader’s Digest. Mostly, private equity firms have been taking over companies through buyouts. But Lampert-style activist investing has also been in vogue, reenergizing people like Carl Icahn and Nelson Peltz, who champion their strategies for companies and sometimes make takeover bids or grab seats on the board.

Many of these financiers insist they are in it for the long term. But in truth, they didn’t have to be. Returns came easily. Companies could be flipped back to the public or another buyer in short order, generating huge gains. But now those tricks are played out. Financial markets have seized up. Cheap financing isn’t available. For the first time, financiers are being forced—gasp—to manage their companies. They have claimed to have expertise in doing this very thing; now they have to prove it. And if Lampert’s experience is any gauge, the challenge is going to be tougher than any of them expect.

This year, the cost cutting and slashing of capital spending caught up with Lampert. Net income at the company cratered, dropping 99 percent in the third quarter to $2 million. Sales at stores open a year or more, a key measure of retail performance, have continued to drop at both Sears and Kmart. And in the all-important holiday shopping season, things probably worsened. Sears stock fell nearly 40 percent in 2007. “We cannot blame our results entirely on the retail and macroeconomic environments,” Sears C.E.O. Aylwin Lewis said in a prepared statement. “We have much on which to improve and are working hard to do so.”

The problems at Sears and Kmart have also been costly for Lampert’s hedge fund and for his status as a canny financier. His main $15 billion fund—made up substantially of Sears stock—was down a stunning 25.7 percent through November, according to a person privy to the results. Once hailed as the Warren Buffett of his generation, Lampert, at 45, now has another turnaround job on his hands: his own reputation.