Here's a "fair use" excerpt from today's Barrons, a lengthy article on the probable outcomes for various auction rate securities.  I've extracted a portion on Muni CEF leverage, which explains why the workout is both complex and lengthy.

Municipal Closed-End Funds

These funds, which own municipal bonds, face all the above problems with an added twist. Dividends on auction-rate preferred securities of municipal closed-end funds are tax deductible. If the same funds sold debt, the interest payments wouldn't be deductible, and their interest rates would have to be higher.

So fund families that sold closed-end muni-bond funds have been scrambling to create a new preferred security. At Nuveen it's called Variable Rate Demand Preferred. At Eaton Vance, it's Liquidity Protected Preferred stock.

The securities vary but generally involve a frequent auction to set the dividend rate. If the auction fails, existing holders would have an option to put the security back to a bank that would agree to hold it for a preset term. On some securities the preferred dividend rate would rise so high the fund family would be forced to repurchase them from the bank.

Some funds have asked the SEC to allow money-market funds to purchase the security because it has a put option. If so, that would bring a huge new buyer to the market and the added liquidity might get the auctions working again. "We expect to be able to respond affirmatively fairly quickly in the next couple of weeks," says Robert Plaze, associate director, division of investment management at the SEC.

That said, the security faces tax questions. Will Treasury deem it preferred stock or debt, given the fund will ultimately buy it back? And again, banks must go along.

Municipal closed-end funds have about $28 billion of auction-rate preferred stock outstanding."