Next morning the people are amazed to see a castle standing on an island in the middle of the lake. Laimdota tells Burtnieks that Bearslayer has spent the night in the castle, and the old man realizes at once that Bearslayer has broken the magic spell and saved the Sunken Castle. Laimdota and Burtnieks enter the castle and wake Bearslayer. He claims Laimdota as his bride, and Burtnieks gives his blessing, saying that the union of the two clans (Burtnieks and Lielvarde) will save the Latvians.
One evening, later, Laimdota reads to Bearslayer from the ancient books found in the Sunken Castle. She reads how the ancient Latvians were led to the Baltic Sea from a land far to the east by Perkons. With the favour of the gods, they settled in a valley, built a castle, and established a golden age on Earth.
However, this made the Devil jealous, and he commanded a whirlwind to suck up a lake and deposit it in the valley. This was done and the valley, including the castle, was drowned. The people would have died too, but Liga, the Goddess of Song, saved them by using the music of her kokle to open up under the lake a tunnel that led them to safety. The castle is the one Bearslayer raised, and the tunnel the one he used to enter the castle.
On another occasion, Laimdota reads to Bearslayer the story of the creation. In eternal space there was once nothing except a celestial light. In it lived God and a second mighty spirit-the Devil. At that time the Devil still obeyed God, although he was already growing rebellious. God decided to create the Earth and sent the Devil to fetch a handful of slime. The Devil was curious and kept a second handful for himself, hiding it in his mouth. When he brought the slime to God, God commanded the slime to form the Earth, throwing it down. The slime began to grow, and formed the level plains of the Earth. However, the slime in the Devil's mouth also obeyed God and grew until the Devil could no longer hold it in his mouth. He spat it out and it fell to the newly created Earth, forming the mountains.
From His own substance God created the Sun and Moon. He was so pleased with the Earth and Sun He had just created that He also created the first living creatures: the Sons of the Gods and the Daughters of the Sun. The Moon took a gigantic Daughter of the Sun as his wife, and the stars are their thousands of children. The Sons of the Gods divided up the Earth among themselves.
The Devil grew more rebellious and began to defy God. A great rivalry grew up between them, and the Devil tried in vain to outdo God, who, however, always had the upper hand. Eventually, God created humans and made them capable only of good, but the Devil interfered and gave them the power to be evil as well as good. God grew furiously angry at seeing His creation ruined, and banished the Devil to Hell. There the Devil created evil demons and with them rose up from Hell and fought against God and all good spirits. Eventually, the Devil was defeated and driven back to Hell, after Perkons intervened in the fight
Later Laimdota reads from the teachings of the guardian of the Latvian race, in which he listed the tasks of worthy human beings: to seek perfection of the human race, to fight against evil by obeying the ancient teachings, to make just laws and drive out bad rulers, and to love nature.
All Souls' Eve comes. The people of Burtnieks's Castle celebrate this in the traditional Latvian way. Next morning, however, Laimdota and Koknesis have vanished, and Bearslayer sets off to find them, vowing never to return unless he is successful. Meanwhile, a German ship has arrived at the mouth of the Daugava, and Dietrich and Kangars persuade the the local Latvian Lord, Kaupa, to return in it to Rome with Dietrich. Kangars stays behind, but knows that the Germans' friendship is only a trick to gain control of Latvia.
The ship sails. Just then Bearslayer rides up. He knows full well that Kangars and Spidala have kidnapped Laimdota, and demands that they give her back. Spidala tells him that she is on the ship just vanishing over the horizon. Kangars says that she and Koknesis are lovers. Bearslayer does not believe this lie, although he experiences some doubts, and rides off in deep despair. Spidala gloats over his sorrow. She has her revenge, and Bearslayer's life is worse than death.
Bearslayer returns to Lielvarde, his home. He is greeted warmly, but his father sees that something is wrong. Bearslayer tells him all, and his father consoles him with wise words of hope: Perhaps Laimdota loves him still and will yet be saved. Bearslayer spends his days roaming the cliffs above the Daugava brooding, and longing to go with the waters down to the sea to fight against the North Wind and meet the North Wind's Daughter. One day he vanishes, and no-one knows where he has gone.