Yes in a capitalist economy as those big institutions like Lehman Brothers and AIG came down, they would have taken everyone with them.. as the counterparty risk was exposed.
After the shareholders are wiped out then it moves to the levels of creditors. First the depositors at the institutions would have been wiped out as they are the most junior creditors. Then moving up the seniority of creditors.
After all the bond loss writedowns and counterparty writedowns, the institutions would be sold for pennies on the dollar. Giving the most senior bond holders something, and wiping everyone else out. Indeed the most senior bondholders would likely choose to hold onto the assets until the process was sorted out.
Whoever bought the mortgage bonds and others that would be sold off in the bankruptcy court would be buying them for again pennies on the dollar. They would then immediately call up the debtors and offer to clear the debt for say 10 cents on the dollar. Then as credit got moving again as the debt was cleared, the offers would not be so generous, and the value of the mortgage bonds would be selling for more.
To make a long story short at the end of the process, the institutions like Goldman Sachs would still be around, only with much reduced balance sheets. But many rich and average people alike would see the vast majority of their investments/savings disappear. Simply as debt is written off, the other side, savings is destroyed.
The system cleared, the game would start over. When the powers that be decided to stop the unwind that was the end of our capitalist system. We now have a zombie economy. Its almost reverse of a normal economy, liek we are happy if the real economy shrinks by only 1%.
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