THE large clock at the front of Government Buildings struck six on Monday evening. Inside, the Angelus bells were ringing on televisions turned on for RTE's Six One News. But the bells also seemed to be tolling for Ireland's banking system.

Next door in the department of finance, Brian Lenihan finished a pre-arranged budget meeting with ICTU boss David Begg, at which he gave absolutely no impression that anything was amiss.

But by this point Ireland Inc had moved from code orange to red alert. And Lenihan, who was being briefed through the day about events, went straight to the meeting room – beside Taoiseach Brian Cowen's office – in Government Buildings. He was joined there by Cowen, the secretary general of the department of finance, David Doyle, the secretary general of the department of the taoiseach, Dermot McCarthy, attorney general Paul Gallagher, the governor of the Central Bank, John Hurley, and the Financial Regulator, Patrick Neary.

Irish bank shares had collapsed that day on the stock market. Everybody in the room would have been acutely aware of the seriousness of the situation. But there must still have been considerable shock at what Hurley and Neary had to say. Those present were told that there was an unacceptably high threat to the banks' financial stability and decisive action was needed.

Up to €15bn had been withdrawn from Irish banks in the previous few days. There was a clear and present danger, not just for one or two Irish banks but, given the huge liquidity crisis, the entire system.

Hurley and Neary withdrew from the meeting to another room, leaving Cowen, Lenihan, Gallagher, McCarthy and Doyle to digest the bad news. They were given more food for thought when they were interrupted to be told that the House of Representatives had just voted down the US bailout package. Not long afterwards, word came through that the top brass from both AIB and Bank of Ireland wanted a meeting. It was agreed that they should come to Government Buildings.

The action was by no means confined to the main meeting room, with various parties shuttling between there and other rooms where parallel discussions were taking place throughout the evening. Those attending these meetings also included the director general of the Central Bank, Tony Grimes, an assistant secretary of the department of finance, William Beausang, and at least one representative of the National Treasury Management Agency.

Weeks earlier, contingency plans had been drawn up by the department of finance, the regulator and the Central Bank to deal with this very eventuality. It was time to take the plans out of the drawer and put at least one of them into action.

Several scenarios were presented to Cowen and Lenihan, discussed and then ruled out. The option of letting one or two banks go to the wall was not palatable, particularly to the two politicians. The impact on confidence on the wider banking sector, not to mention the potentially catastrophic effect on the Irish economy, was deemed to represent an appalling vista.

The Swedish model from the 1990s, of the state bailing out troubled banks and then taking a shareholding in them, was also examined, as was the UK approach in rescuing banks on a case by case basis as problems arose. But there were misgivings about these options also. Did a small state such as Ireland have the up-front financial resources to agree to such a Swedish-style bail-out? Did the state really want to get involved in running banks? And where would one bail-out lead to? Would the state end up getting involved in all the banks? These options were ruled out.

That left arguably the most radical and innovative solution – the state underwriting the entire Irish banking system. The plan had obvious advantages. If all went well, the state wouldn't have to pay out a cent. At a stroke, confidence would be restored to the entire sector. Funds would inevitably pour back into Irish banks. The squeeze on funding would be addressed. It would also give the government considerable leverage in future dealings with the banks.

However, as they munched on sandwiches brought in from the Spar around the corner at Merrion Row, all of those involved were aware of the high stakes. The potential risk to the taxpayer from the scheme was enormous. But the view was that it was the only viable option.

"It was Hobson's choice," said one source close to the meetings. "But the one thing we couldn't do was nothing."

At around 10pm, the chairman and chief executive of AIB, Dermot Gleeson and Eugene Sheehy, and their counterparts in Bank of Ireland, Richard Burrows and Brian Goggin, arrived and were ushered into a nearby room to await their call from the taoiseach. An hour or so later, they joined the meeting and were informed of the draft government decision and asked for their views.

It is understood AIB and Bank of Ireland had previously been opposed to an overall state guarantee, reckoning they were well placed to ride out any difficulties. But that certainly was not the case on Monday night. After Black Monday, all had changed utterly. Sources suggest that none of the banks had access to even short-term money by that point.

The bankers apparently remained poker-faced throughout the meetings but the talks were cordial and businesslike. Throughout the night, phone and fax contact was being maintained with the other four Irish-owned financial institutions affected.

The decision effectively made – with the taoiseach making the final call on it – the formal cabinet stamp of approval was required. This could be done by way of an 'incorporeal cabinet meeting', whereby a quorum of ministers would be phoned by Dermot McCarthy and asked for approval. Some ministers, notably Willie O'Dea, were being kept informed of developments by telephone throughout the night but the formal process of getting cabinet approval began at around 1.30am.

Even with all the advantages of modern communication, the process was not without its hitches. Green Party leader John Gormley was sound asleep in bed with his phone ringing unanswered downstairs. A garda driver had to be sent around to ring the doorbell of his house in Ringsend and wake up the environment minister. It is understood there were difficulties in contacting at least one other minister for similar reasons.

Cabinet agreement secured, work began on the official government press release, with final changes agreed by around 3am. Half an hour later, Lenihan left for home, but the taoiseach and a small number of officials, who were working on further details, stayed on.

At around 4am, official contact was made with the EU Commission to inform it of the decision. Cowen left at around 5am, but an hour later his finance minister was back at his desk for a series of calls to the likes of Jean-Claude Juncker, the Luxembourg prime minister and finance minister and a key player in the EU, French finance minister Christine Lagarde, the European Commission, the European Central Bank and opposition figures.

With the opening of the continental markets in mind, the government press release was issued at 6.45am. Lenihan did an interview with RTE's Morning Ireland and then, ever the Fianna Fáil politician, honoured an earlier commitment to attend a function of the Small Firms Association at 8.30am, before returning to Government Buildings for a 9.30am press conference and that morning's cabinet meeting. As TDs and senators arrived at Leinster House there was talk of nothing else.

At 3.30pm that day, the taoiseach took questions in the Dáil from Fine Gael's Enda Kenny and Labour's Eamon Gilmore. The concerned look on Brian Cowen's face said a lot about the seriousness of the situation. His voice wavered as he said, "How far back do people think the country would be if we were to wake up this morning…were we to find a failed banks system on our hands?"

The Dáil adjourned until 6pm when the party whips returned to say that the emergency legislation was not ready to be debated. The attorney general, senior civil servants, and a team of legislative draftsmen were locked away in a room in the department of finance furiously drafting the Credit Institutions (Financial Support) Bill 2008.

At 6pm the party whips returned to the chamber to say it was still being drawn up. This angered the opposition, with Enda Kenny claiming "it is a shambles the way this house is being run".

It was 7.30pm before government chief whip Pat Carey could tell the chamber that a copy of the legislation had just arrived in his office, prompting more fury from the opposition and another suspension of the house. At 8.30pm, almost 13 hours after the announcement was made, copies of the emergency bill were finally circulated. And in keeping with the chaotic nature of the day, the Dáil was again suspended at 9pm. Enda Kenny described the situation as "high farce" and Eamon Gilmore suggested postponing the debate until the morning.

The financial markets would have opened by then. While Irish banks had recovered Monday's losses, there was grave concern at the impact a suspension of the Dáil might have on the markets.

Gilmore's intervention prompted agitated whispering from concerned-looking ministers along the front row and the sense of panic seemed palpable. Cowen, looking strained, apologised for the situation and managed to get agreement that the second stage of debate could go ahead that night. The committee and report stages would be rushed through the following day.

At 10pm the debate on the bill finally began. Fine Gael's Richard Bruton and Labour's Joan Burton criticised the bill, which Burton described as "an extraordinary blank cheque for the minister for finance". But the bill passed its first stage just before midnight.

By the following morning, the government was made aware that its action had caused irritation across the Irish Sea. British chancellor of the exchequer Alastair Darling phoned Brian Lenihan twice that morning, and a third time the next day.

"He wasn't pleased," said one government source with considerable and deliberate understatement.

Back in the Dáil, a succession of TDs made lengthy speeches at a chaotic amendments stage. Mayo TD Michael Ring shouted for bankers to be jailed as the house was meant to be discussing the first amendment of the bill. With progress painfully slow, Burton, Bruton and Lenihan were seen deep in discussion in the Dáil corridor at 6pm.

The pace of debate did improve, and by 2.10am the Dáil was adjourned after overwhelmingly passing the bill, by 124 votes to 18. Only Labour voted against it.

Meanwhile, the 60 members of the Seanad waited to be called into active service. Most of them waited in their offices while some of them went to the Dáil bar and nearby watering holes such as Buswell's Hotel.

Often ignored, they got to have their moment in the limelight, albeit in the middle of the night.

At 3am, Marc MacSharry, son of the former finance minister and EU commissioner Ray MacSharry, commended the government for its "innovation and forthright leadership" while senators such as Shane Ross argued that "the banks should be saved, but not the bankers".

As senators yawned and bags formed under their eyes, a half-hour break was called at 5.10am. There was no food available but everyone got an essential caffeine hit from the self-service tea and coffee machines in the Dáil canteen.

With the sound of the birds singing outside and the sun rising, each of the amendments was sifted through before the Seanad passed one of the most sensational pieces of legislation in recent history.

At 8.05am, the Seanad proceedings concluded. A tired senator told the Sunday Tribune, "There was no real feeling of elation when it was over... please God we did the right thing".