In the credit crisis of 2008, many investors lost money on variable muni rates. Under the categories of auction-rate securities and variable rate demand bonds, municipalities borrowed billions of dollars by offering lower, flexible interest rates. At the peak of the market in late 2007, variable rate demand bonds nearly comprised 1/5 of the muni bond market, totaling $500 billion in debt.

In order to offer the variable rates, an issuer would often secure insurance for the debt and would have a last resort buyer guaranteeing investors a sure sell. Issuers would also offer swap contracts from banks, allowing investors to change from floating muni rates to fixed rates. When the economy crashed, so did the agreements. Municipalities had to refinance the debt, often at a high cost. For example, Harvard University exited swaps for a cost of nearly $1 billion. According to Municipal Market Advisors, the credit crisis cost municipalities an estimated $28 billion to exit variable muni rates. The estimate did not include additional costs like legal or advisory fees or commissions paid to secure new debts.

As a solution to the issues contributing to the crash, banks restructured muni rates and developed new systems for them. A new category of muni bonds with variable rates is windows bond, or index bonds. With this type of muni, banks offer auction rate debt with investor safety features carried over from variable rate demand bonds. Despite the new system, investors have yet to respond with cash. Professionals like Brain Hudson, who is Pennsylvania Housing Finance Authority's chief executive, are staying away from all variable muni rates. In June 2009, banks anticipated issuing $10 billion of muni bonds by December 2009. According to industry participants, banks failed to issue even $1 billion.

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