The New York Times explains that the auction rate market was invented by a Lehman banker in 1984. "The idea was to issue long-term securities that could pay their buyers interest rates only a little above short-term rates." The key mechanism: periodic auctions that constantly reset rates. If an auction failed, meaning no bidders emerged, rates would rise as a penalty to prohibitive levels that would force the issuer to buy back the bond. Well guess what? Auctions are now failing and municipalities are getting stuck with rates they cannot afford. This might lead to some massive selling, which is just what the industry doesn't need.

For more:
- here's the New York Times article