Would Goldman Sachs have survived had AIG been allowed to fail? Probably not.

In the run-up to the crisis, AIG had sold enormous amounts of insurance to banks in the form of CDS contracts. In exchange for a yearly fee, it agreed to pay the bank a nominal amount if the company covered by the contract failed. When Lehman failed, AIG found itself unable to honor these contracts, and the taxpayer had to step in. (The desk selling the insurance contracts had been too busy collecting fees and paying themselves huge bonuses, and had forgotten to set aside sufficient capital to cover losses.) When taxpayers bailed out AIG with $85 billion (and much more later), Goldman Sachs received a $13 billion payment, and Societe Generale and Deutsche Bank $12 billion each, to mention only the largest beneficiaries.

Goldman Sachs (GS) once declared that they would have survived AIG's collapse, as they had taken insurance (entered CDS contracts) on AIG with other institutions. This argument is either naive, or self-serving.

For simplification, say GS had taken $15 billion worth of insurance on AIG with Societe Generale. It is quite possible that Societe Generale would have failed without the $13 billion bailout payment, and would have been unable to honor its contract with GS. Of course, you can imagine that GS had taken insurance on Societe Generale, or that Societe General had taken insurance on AIG with Deutsche Bank. You get the point: The chain reaction may have been longer and more complex, but at that moment, there was a real chance of a systemic collapse of the financial system. And in that case, even if it had been the last standing giant among the ruins of the system, Goldman Sachs would have failed eventually.