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Before World War II, most ethnic Catholic parishes-German, Irish, Italian and Polish-had their own orphanages. Protestant denominations, too, had their own orphanages, as did Jews. These institutions-now largely extinct-were mostly populated by kids from unwanted pregnancies and from homes left impoverished by the death or disappearance of one or both of the parents.

Then, along with the weakening of traditional church and community support systems after World War II, came the dramatic rise in divorces, hovering for two decades now at the 50 percent rate. The increase, too, in drug and alcohol addiction brought serious problems-including crime, violence and sexual abuse-into the lives of children,

”I think that by the time I got here in 1973, the kids were pretty much the same as those we have today,” Close says. ”We just didn`t have the staff or facilities to deal with them. We were run like an old-fashioned orphanage, with four social workers and 18 child-care workers, who made sure the kids got up, got breakfast, got to school and had supper, studied and went to bed at night. Only a few `disturbed` kids got to see a social worker once a week. We didn`t really try to get into fixing the dysfunctional kid.”

THE MAJORITY OF THE MERCY youths then were wards of the state. ”We were under contract to DCFS, which paid us according to a per-diem schedule for each kid, which accounted for a sizable portion of our budget,” Close says.

”If the state didn`t like your operation, it could take their kids-and their funding-away overnight, and the home would go belly up.”

In an era of de-institutionalization, many public-health officials began to consider it better to take children out of orphanages and put them in foster homes, a process that emptied most Chicago orphanages. For about 15 percent of the children, however, foster homes simply didn`t work. The youths were repeatedly shifted from home to home; many needed therapy but received none.

Against this background, Close made two surprising decisions soon after he took over at Mercy. First, he terminated the home`s contract with the state and asked DCFS to remove all of its wards from the home. He did so, he says, because he didn`t want the home to be dependent on state money and he didn`t think the home was up to properly caring for the kinds of seriously troubled youths the state was sending him. Second, he decided to go back to school. But instead of studying child psychology, an apparently obvious choice, he went for a master`s degree in business at the University of Notre Dame.

What pushed him into business school was a legacy left behind by Father Kelly. The home since its 1887 opening was something of an orphan among orphanages. It catered to kids who fell through the cracks of the ethnic parish system, taking out-of-town runaways, bootblacks and newsboys with no constituency to look after them. It had always taken in boys of all races and creeds.

Traditionally, Mercy had operated on the largesse of various Catholic women`s groups around the city who staged periodic benefits for the home. During the Great Depression, however, funding for the home dried up. Father Kelly barely kept it open by ducking bill collectors and scrounging slightly damaged foods from sympathetic wholesalers.

Then he began to make the boys spend an hour a night scouring out-of-town phone directories for likely Catholic family names and sending out handwritten appeals for funds. It was a pioneering attempt at direct-mail fundraising, and it worked. Still going strong 55 years after Kelly started it, the direct-mail effort brought in $3.5 million of the home`s $5.5 million in revenues last year.

”We are better known nationally than we are locally,” Close says.

”Through the years, Father Kelly continued to build on those early lists of donors made out by his boys, and 90 percent of our donor base still is outside of Illinois.”

Using his new business skills, Close modernized and computerized the home`s fundraising methods and put the place on a more solid financial footing. He also took an active, day-to-day role in working with the kids and gradually built up a staff of professional child-care workers.

That staff today is working with kids who are far more troubled than those of even just 10 years ago. Consider the following backgrounds of three typical kids in the home today:

– A 15-year-old boy came to the home about a year ago when his mother kicked him out of the house and juvenile authorities told him Mercy was his last chance before he found himself doing serious jail time. His father was a drug addict, and the boy started drinking heavily and smoking marijuana by the time he was 8. Cherubically innocent-looking but also gruff and weary, he speaks of life with a street gang on the South Side, six stints in the Audy Home for auto theft, assault and battery, burglary, possession of narcotics and possession of weapons. Despite a high IQ, he was a straight-F student when he arrived, bristling with hostility and anxious to resume a lucrative trade selling stolen guns on the street.

– A 16-year-old boy who came to the home about the same time after alternating between his mother`s home and foster homes since he was 6. Both parents are alcoholics. The father completely abandoned the boy, his two brothers and sister after divorcing the mother before the boy was 5. All the children repeatedly have been carted off to foster homes during their mother`s drinking binges. Once an honor student, he flunked out of his freshman year after habitually skipping school with his brother. After continual conflicts with his last foster parents, he became frightened by his own increasingly uncontrollable anger and sought out the Mercy Home himself.

– A 16-year-old girl who came to the newly instituted Mercy Girls` Home in October 1988 after living in a series of foster homes since she was 2. Her drug-addicted mother abandoned her and her younger sister early in life, simply disappearing from sight. The girl was later sexually abused in one foster home. She arrived at Mercy flunking out of school, extremely belligerent and prone to threatening violence on the staff and the other girls in the program.

The severity of the emotional problems of those three are about average for the 65 boys and girls in the Mercy Homes. Many arrive far worse off. Virtually every child, whether from lower- or middle-class backgrounds, comes from broken homes with at least one parent addicted to drug or alcohol. Virtually all the girls have suffered sexual abuse by fathers, brothers, stepfathers or mother`s boyfriends. Most boys have encountered violent physical abuse at home, and many have been sexually abused by stepfathers or mothers` boyfriends. Some children have watched their mothers being severely beaten or found them beaten to death. Many have watched their mothers engage in prostitution to support drug habits. Some, both boys and girls, have been forced into prostitution by a parent.

The kids range in age from 14 to 18, and their housing, schooling and treatment cost about $25,000 each a year. Parents are asked to pay something, even a token $50 a month, but parental contributions account for only 1 percent of the home`s budget. The rest has to come from bequests, business services provided by the home, government support and the all-important 100,000 active donors on the direct-mail list.

The main vehicle for communicating with donors is the home`s donor magazine, The Waifs` Messenger, first published in January 1900. Through the decades it has chronicled the tragic circumstances of the youths who come to Mercy and followed their progress and triumphs, from high school and college graduations to their successes as adults.

”My salesmen friends tell me we are selling the `warm fuzzies,` ” says Al Burak, the home`s chief of direct-mail appeals. ”Donors feel they somehow have a personal stake in the home and the kids, that a small part of their lives is doing some inestimable good.”

Reflecting the loyalty of the home`s benefactors, many of them can be traced to Father Kelly`s original telephone-directory list. Most of the original donors have since died, but their children and grandchildren, for whom regular editions of The Waifs` Messenger have become familiar, have taken their places on the list.

THERE WOULDN`T BE ANY WARM fuzzies to sell, of course, unless the home had some tangible results to show. Thanks to Close`s efforts, Mercy can boast of impressive successes. As examples, take the three mixed-up kids mentioned earlier:

– The 15-year-old gun-runner fought the program for three months, secretly continuing to use drugs and running with his old gang during weekend leaves. About to be kicked out of the program, he had a change of heart. He stopped taking drugs, and without the home`s knowledge, he took a weekend visit to his neighborhood to undergo a potentially fatal beating known as

”Circle 7,” a ritual that allows members to drop out of a gang. Far from flunking, he is instead thriving in school and making plans for college.

– The 16-year-old boy who watched parental alcoholism shatter his family is preparing to rejoin a brother in a suburban foster home. The rage and hostility that propelled him into the home is now under control. He has moved from failing grades in school to a spot on the honor roll and is making plans for college.

– The abandoned and sexually abused 16-year-old girl has accepted the home as ”home” for the remainder of her adolescence. Her frequent, violent outbursts against the staff and other residents have disappeared. She has done well in school and already is in the process of choosing a college.

Boys like O`Donnell and Schaffer came into Mercy in the late 1970s and early 1980s, when Close was still building his professional staff. At that time the home used variations of standard therapeutic models for long-term residential care for teenagers. It included the ”Teaching Family Model,” a care philosophy still used with success in Boys Town in Nebraska and at the suburban Maryville City of Youth. It stresses changing antisocial behavior by the example of resident staff members. The Mercy Home staff also has used another popular treatment philosophy called ”Positive Peer Culture,” in which children in the program pressure each other to recognize and modify their negative behavioral patterns.

Twelve years ago the staff began searching for a therapeutic model to serve the home`s special needs. It settled on an adaptation of Bruno Bettelheim`s ”therapeutic community,” an intense immersion of staff workers and patients in a program of living and working together in a closed hospital setting. What eventually evolved in the ensuing years was finally adopted a year ago as Mercy`s therapeutic ”ideology” under the name ”Small Society.” It embraces parts of both family and peer models of therapy but relies heavily on the spirit, though not the exact methodology, of Bettleheim`s therapeutic community.

The home`s approach does not take in psychotic children, as Bettelheim did, and it is not a closed hospital setting. The home also encourages pulling the families of its residents into counseling, which Bettelheim did not. And the Mercy staff does not actually live at the home among the kids, an important component of the Bettelheim method.

Nonetheless, much of what is known as Bettelheim`s ”therapeutic community” is present at Mercy. Everybody at the home-from the kids to Father Close to psychologists and child-care workers to janitors and cooks-is tied in to the therapy.