Until now, the underwriters were required only to charge investors who bought a municipality’s bonds a fair price. They had no such obligation for their dealings with states and cities. Many bond deals over the last decade were so complex it was hard for local officials to even understand how they worked, much less confirm that the terms were fair. Underwriters will also be required to tell their municipal clients about any payments received from other firms like bond insurers taking part in bond transactions.

The prospect of eventual defaults among the hundreds of outstanding bonds underscores the risks inherent in forecasting tobacco payments decades down the road. In the rush to market, many overlooked a basic conflict: the states were banking on a certain level of payouts, even as they adopted antismoking measures that would reduce those amounts. As a result, the historically safe municipal bond market has been peppered with something unusual, a type of muni that actually defaults.

This system is being threatened by three forces: the "Volcker rule" that will ban U.S. banks from trading on their own account, more stringent capital requirements, and regulatory efforts to inject more transparency into bond and derivative trading.