The damage from state arbitrage could increase the scale of defaults in the second type of municipal securities: Revenue Bonds.

For example, Buffett managed to scoop up bargains ranging from municipal bonds to securities of Goldman Sachs, ge, and others. "When it's raining gold," he writes, "reach for a bucket, not a thimble."

Their ratings of corporate debt may have held up well, but they were way off in structured securities, not a lot better in sovereign debt, and now their municipal-bond ratings, too, are under fire.