http://www.npr.org/blogs/money/2010/09/24/130107647/what-doe...
There are different classes of bond holders within their bond fund. Toxie was a lower ranked class that was assuming more risk, and we've now reached a point where a sufficient number of mortgage holders within the bond fund have defaulted, that there will never be enough mortgage payments coming in to pay the holders of Toxie-class bonds within this fund. Other people within the fund are still getting paid.
If I recall correctly from earlier Planet Money podcasts, this was part of the problem. The overall fund would receive a low-risk rating, and those parts would be bought up by the really big institutional investors. The crappier bits of the same funds would then be sold to your local teachers retirement fund or similar, bought by investors who were savvy enough to realise they were assuming more risk.
(I've almost certainly got some of that wrong - someone correct me!)
Regardless: listen to Planet Money - it's 12-20 minutes 3 times a week, and they make a lot of complicated stuff relatively easy to understand and accessible.
http://www.npr.org/rss/podcast/podcast_detail.php?siteId=944...