There are stories when banks sold default insurance against their own default.Munchau calls this "a logical absurdity," and he's got that one right. Consider
- For consideration given, we promise to pay you $10 million.
- For an additional $330,000, we promise that if we fail to pay you $10 million, we'll pay you $10 million.
You will surmise that I am skeptical. True enough, but I can imagine this: much (most?) credit insurance was written in indexes--e.g., the Itraxx Index, which measures the performance of bonds of companies with good credit ratings. I can imagine that some banks wrote insurance on indexes of which their own bank issues were a part. That's a slightly different matter from what Munchau is proposing, although I grant it is not much less cray.