It was early on Sept. 17, when executives at Pershing Square, Bill Ackman’s hedge fund, began getting nervous calls and e-mail messages from investors. Ackman, 42, has been a top Wall Street player for 15 years, making his clients — and himself — billions of dollars.

But now, Ackman and his colleagues were taken aback by what they were hearing. His big investors were worried about all of the Pershing assets held by Goldman Sachs, the blue-chip investment bank, whose stock had come under siege.

Never mind that Goldman kept Pershing’s assets in a segregated account, and that the money was safe. And never mind that Ackman believed Goldman was the world’s best-run investment bank and would come through the credit crisis unscathed.

Pershing investors still feared their money might be exposed. Up and down Wall Street, hedge funds with billions of dollars at Goldman and Morgan Stanley, another storied investment bank, were frantically pulling money out and looking for safer havens.

Panic was spreading on two of the scariest days ever in financial markets, and the biggest investors — not small investors — were panicking the most. Nobody was sure how much damage it would cause before it ended.

This is what a credit crisis looks like.

It’s not like a stock market crisis, where the scary plunge of stocks is obvious to all. The credit crisis played out in places most people can’t see. It’s banks refusing to lend to other banks — even though that is one of the most essential functions of the banking system. It’s a loss of confidence in seemingly healthy institutions like Morgan Stanley and Goldman — both of which reported profits even as the pressure was mounting. It is panicked hedge funds pulling out cash. It is frightened investors protecting themselves by buying credit-default swaps — a financial insurance policy against potential bankruptcy — at prices 30 times what they normally would pay. It was this 36-hour period several weeks ago — from the morning of Wednesday, Sept. 17, to the late afternoon of Thursday, Sept. 18 — that spooked policymakers by opening fissures in the worldwide financial system.

In their rush to do something, and do it fast, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson concluded the time had come to use the “break the glass” rescue plan they had been developing.

That Thursday evening, time was of the essence. In a hastily convened meeting in the conference room of the House speaker, Nancy Pelosi, the two men presented, in the starkest terms imaginable, the outline of the $700 billion plan to congressional leaders.

“If we don’t do this,” Bernanke said, according to several participants, “we may not have an economy on Monday.”

Setting the stage

Wall Street executives and federal officials had known since the previous weekend that it was likely to be a difficult week.

With the government refusing to offer the same financial guarantees that helped save Bear Stearns, Fannie Mae and Freddie Mac, efforts on Saturday to find a buyer for Lehman Brothers had failed.

Sunday was spent preparing to deal with Lehman’s bankruptcy, which was announced Monday morning. Merrill Lynch, fearing it would be next, had agreed to be bought by Bank of America. The American International Group was near collapse. (It would be rescued with an $85 billion loan from the Federal Reserve on Tuesday evening.)

With government policymakers appearing to careen from crisis to crisis, the Dow Jones industrial average plunged 504 points on Monday, Sept. 15. Panic was in the air.

At those weekend meetings, Wall Street executives and federal officials talked about the possibility of contagion — that the Lehman bankruptcy might set off so much fear among investors that the market “would pivot to the next weakest firm in the herd,” as one federal official put it.

That firm, everyone knew, was likely to be Morgan Stanley, whose stock had been dropping since the previous Monday, Sept. 8. Within three hours on Tuesday, Sept. 16, Morgan Stanley shares fell another 28 percent, and the rising cost of its credit-default swaps suggested investors were predicting bankruptcy.

To allay the panic, the firm decided to report earnings a day early — after the market closed Tuesday afternoon instead of Wednesday morning. The profit was terrific — $1.425 billion, just a 3 percent decline from 2007 — and the thinking was that would give investors the night to absorb the good news.

“I am hoping that this will generally help calm the market,” Morgan Stanley’s chief financial officer, Colm Kelleher, said in an interview late that afternoon. “These markets are behaving irrationally. There’s a lot of fear.”

The spreading contagion

But contagion was already spreading. The problem posed by the Lehman bankruptcy was not the losses suffered by hedge funds and other investors who traded stocks or bonds with the firms. As federal officials had predicted, that turned out to be manageable. (That was one reason the government did not step in to save the firm.)

The real problem was that a handful of hedge funds that used the firm’s London office to handle their trades had billions of dollars in balances frozen in the bankruptcy.

Diamondback Capital Management, for instance, a $3 billion hedge fund, told its investors that 14.9 percent of its assets were locked up in the Lehman bankruptcy — money it could not extract. A number of other hedge funds were in the same predicament.

As this news spread, every other hedge fund manager had to worry about whether the balances they had at other Wall Street firms might suffer a similar fate.

It was fear, not greed, that was driving everyone’s actions.

Breaking the buck

There was another piece of bad news spooking investors — and government officials. On Tuesday, the Reserve Primary Fund, a $64 billion money market fund, and two smaller, related funds, revealed that they had “broken the buck” and would pay investors no more than 97 cents on the dollar.

Money market funds serve a critical role in greasing the wheels of commerce. They use investors’ money to make short-term loans, known as commercial paper, to big corporations like General Motors, IBM and Microsoft. Commercial paper is attractive to money market funds because it pays them a higher interest rate than, say, United States Treasury bills, but is still considered relatively safe.

A run on money funds could force fund managers to shy away from commercial paper, fearing the loans were no longer safe. If money market funds became fearful of buying commercial paper, that would make it far more difficult for companies to raise the cash needed to pay employees, for instance. At that point, it would not just be the credit markets that were frozen, but commerce itself.

Just as important, in the eyes of federal officials, was that money market funds had long been viewed by investors as akin to bank accounts — a safe place to store cash and earn interest on that money. Despite lacking federal deposit insurance, these funds held $3.4 trillion in assets.

Since that Monday, big institutional investors — like pension funds and college endowments — had been pulling money out of money funds.

Surprisingly, stock investors — feeling better because of the government’s AIG rescue plan — either did not comprehend or ignored the growing chaos in credit markets; the Dow actually rose 141.51 points on Tuesday.

A dark day

The respite was brief. Wednesday, Sept. 17, was one of those dark, ugly market days that offers not even a glimmer of hope.

Within seconds of the market opening, the Dow was down 160 points. By noon, the Dow was down 330 points. It rallied in the afternoon, but went into free fall in the last 45 minutes, closing down 449 points.

And that was just what investors could see. Behind the scenes, the credit markets had almost completely frozen up. Banks were refusing to lend to other banks, and spreads on credit default swaps on financial stocks — the price of insuring against bankruptcy — veered into uncharted waters.

Moreover, the drain on money funds continued. By the end of business on Wednesday, institutional investors had withdrawn more than $290 billion from money market funds. In what experts call a “flight to safety,” investors were taking money out of stocks and bonds and even money market funds and buying the safest investments in the world: Treasury bills. As a result, yields on short-term Treasury bills dropped close to zero. That was almost unheard of.

A week before, Morgan Stanley’s chief executive, John Mack, watched his firm’s stock trading in the mid-40s. On Wednesday, it fell from $28.70 a share to $21.75 — down about 50 percent over a week.

“There is no rational basis for the movements in our stock or credit default spreads,” Mack wrote in a companywide memo on Wednesday. Mack lashed out at the people he felt were responsible for Morgan Stanley’s woes: the short-sellers, who profit by betting that a stock will fall.

Mack began talks to merge with Wachovia, and called other banks about possible combinations. He also called Warren Buffett for advice, while aides in Tokyo contacted Mitsubishi UFJ, Japan’s biggest lender, hoping to raise additional capital.

The Fed takes action

Bernanke had spent his career studying financial crises. His first important work as an economist had been a study of the events that led to the Great Depression. Along with several economists, he came up with a phrase, “the financial accelerator,” which described how deteriorating market conditions could speed until they became unmanageable.

To an alarming degree, the credit crisis had played out as his academic work predicted. But his research also led Bernanke to the view that “situations where crises have really spiraled out of control are where the central bank has been on the sideline,” according to Mark Gertler, a New York University economist who has collaborated with Bernanke on some papers.

Bernanke had no intention of keeping the Fed on the sidelines. As the crisis deepened, it took more aggressive steps. It added liquidity to the system. It opened the discount window — the emergency lending facility that had been reserved for troubled banks — to investment banks. It also agreed to absorb up to $29 billion in Bear Stearns losses and made an $85 billion loan to keep AIG afloat.

Since the Bear Stearns bailout, Treasury and Fed officials had discussed what a broad government intervention might look like. Almost from the start, they concluded the best systemic solution was to buy hard-to-sell mortgage-backed securities.

On Wednesday morning, during a conference call with other top officials, including Jean-Claude Trichet, the president of the European Central Bank, Bernanke sounded them out on a big government bailout. The other officials sounded relieved; their main questions were about whether Congress could act quickly.

By Thursday morning, the need for dramatic action had grown even more urgent. The crisis was not easing up.

One bank’s solution

Lloyd Blankfein, Goldman Sachs’s chief executive, had arrived at the firm’s office on 85 Broad Street just before 7 a.m. Thursday, anticipating another bad day. The investment bank’s stock had already been pummeled. From nearly $250 a share last October, it had fallen to $114.50 on Wednesday — after hitting a low of $97.78 that day.

One idea he had been exploring was to transform Goldman into a bank holding company. Mack, meanwhile, was also considering such a move for Morgan Stanley, and both were in separate discussions with the Fed. There was safety in that notion — they would become depository institutions regulated by the Fed and others — though it also meant they would not be able to pile on as much debt as they had as investment banks.

By 1 p.m., the Dow had fallen another 150 points — meaning that in a day and a half it was down nearly 600 points. Goldman’s stock dropped to $85.88, its lowest in nearly six years.

Just then, a prankster piped “The Star-Spangled Banner” over the firm’s loudspeaker system on the 50th floor. Fixed-income traders stopped and stood at attention, some with hands on their hearts. Oddly, it was at precisely that moment that the market — and Goldman’s shares — started to rise.

The traders began to cheer.

Curbing short-selling

What happened? At 1 p.m. New York time, the Financial Services Authority in Britain, which regulates that nation’s financial institutions, announced a ban on short-selling of 29 financial stocks that would last at least 30 days.

Realizing that the SEC was likely to follow suit, hedge funds began “covering their shorts” — that is, buying the stocks they had borrowed to short, even if it meant taking a loss.

That caused all kinds of stocks to begin rising. Sure enough, the SEC followed suit the next day, placing a temporary short-selling ban on 799 financial stocks.

A few hours later came the second event. At 3:01 CNBC reported the Treasury and the Fed were planning a giant fund to buy toxic mortgage-backed assets from financial institutions. Though there had been hints of this earlier in the afternoon, and stocks had started rising around 2:30, the wide dissemination set off a huge rally. In a 45-minute burst, the Dow gained another 300 points, closing the day up 410 points.

Meeting on Capitol Hill

Two hours later, Paulson and Bernanke trooped up to Capitol Hill for a somber session with congressional leaders. “That meeting was one of the most astounding experiences I’ve had in my 34 years in politics,” Sen. Charles Schumer recalled.

As the members of Congress and their aides listened, the two laid out their plan.

After Bernanke made his remark about the possibility that there might not be an economy on Monday without this plan, you could hear a pin drop.

“I gulped,” Schumer said.

Congressional leaders were nearly unanimous in saying that it needed to be done for the good of the country. Hearing that Bernanke and Paulson wanted legislation passed in a matter of days, Senate Majority Leader Harry Reid expressed astonishment.

“This is the United States Senate,” he said. “We can’t do it in that time frame.” His Republican counterpart, Sen. Mitch McConnell, replied, “This time we can.”

He was right — after a week of wrangling, political infighting and compromise.