Wall Street hits a slump during the holiday season, and all investors, excepting Rosedale and Wellington Bry, suffer financial losses. Rosedale is rumored to have doubled his fortune, thus smoothing his path to acceptance in New York society. He has been friendly with Carry Fisher, who has been beneficial in introducing him to influential persons and to social customs. He desires, however, a more individualized woman in his life and has set his cap in Lily Bart's direction.
The narrator recounts a holiday party thrown by Mrs. Peniston to welcome returning newlyweds Jack and Gwen Stepney. Mrs. Peniston's cousin, Grace Stepney, had thought herself invited to the dinner, but discovered she had been removed from the guest list. She suspects that Lily is responsible for the slight, and the relationship between the two women becomes strained.
Seizing an opportunity to revenge her slight, Grace tells Mrs. Peniston about the rumors that are circulating about Lily and Trenor. Grace tells Mrs. Peniston that people are talking about an estrangement between Lily and Judy, a result of a flirtation between the younger woman and Trenor. Grace continues that people have been saying that Trenor is paying Lily's bills, including her gambling debts. This statement reveals to Mrs. Peniston that Lily is playing cards for money, an activity unheard of in Mrs. Peniston's limited purview. To further her point, Grace tells Mrs. Peniston that it was Lily's gambling that frightened Gryce away.
Grace also informs Mrs. Peniston that it is rumored that Lily has been seen with Dorset, another married man. She recounts that Evie had seen several expensive items of apparel that were being sent to Lily, indicating that Lily is spending extravagantly and beyond her limited means.
As Chapter XII opens, Lily has ingratiated herself with the Dorsets in the belief that mending fences with Bertha allows her to find "a subtler pleasure in making use of [an] antagonist than in confounding him." Lily spends much of her time humoring Dorset, an activity far simpler than keeping the increasingly difficult Trenor at bay.
