How funny you should mention that. That's what Goldman did with AIG. AIG sold puts on basically the entire US housing market. GS, et al, were on the other si

How funny you should mention that. That's what Goldman did with AIG. AIG sold puts on basically the entire US housing market. GS, et al, were on the other side of this trade. If AIG couldn't pay off, effectively Goldman's house is burning down, but their fire insurance company (AIG) has just gone broke. That is, until the US Government bails out AIG (and by extension Goldman). GS has argued that they didn't need AIG b/c they were flat exposure to AIG. Technically, this may have been true, but unlikely. In any case, if AIG went under other folks who owed GS money would not be able to pay because AIG could not pay (and AIG owed everyone money). So really GS was very much tethered to AIG. But you do bring up a good point. It's very difficult to make money betting on the end of the world, because if the world ends, who will be around to pay you. For these reasons, central governments/banks have been the underwriter of end of the world insurance through their lender of last resort functionalities.