That's the fairy tale version, but the history is more complicated.
This was charming but I'm not sure it quite lived up to its conceit. The gimmick -- how this city happened and how it vanished -- needed to be trumped by its characters. The characters are vivid and entertaining (the Merlinian librarian, the ninja assassin, the one who can organize, the one who wants revenge, many others) but I didn't think any one of them had quite enough heft to hold down the story. I guess it was supposed to be an ensemble cast; maybe it should have kept the librarian center-stage.
Nonetheless, full marks for storytelling in the (inevitable) nested-Arabian-Nights mode. Imagine if someone who wasn't Catherynne Valente decided to write a Catherynne Valente novel. (Or, hm, okay, I have no idea if that's a compliment or not. Sorry.)