"Own Goal" in the Bond Market

In The Meltdown Years, Wolfgang Munchau says:

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.

Uh--right. With Munchau, I am sure there are "stories." And it does indeed sound like just exactly the sort of travellers tales that one of our brave venturers would bring home from the banking wars. But is it any more than that? Can anyone identify a confirmed sighting?

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.