It vaporized. An "investment" that was worth, say, $10 billion suddenly is only worth $5 billion. If it can even be priced at all because much of this now-toxic junk can't be priced because there are no buyers So they write it off or maybe a bond insurer ponies up the $, except the insurers don't really have the money now so if they lose their AAA rating then all the bonds they insure do too which could lead to forced selling as pension funds aren't allowed to own bonds less than AAA. (pausing for a breath.)
But it gets much worse than that.
>From Bill Gross<http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2007/IO+December.htm>,
Managing Director of PIMCO, they run $720 billion of bonds.
"The woven tangled web of subprimes has claimed more than its share of victims in recent months. Homeowners by the hundreds of thousands, to be sure, but also those that created, packaged, insured, distributed, and ultimately bought what should have been labeled "junk mortgages," but which by a masterstroke of marketing genius were given a more respectable imprimatur. "Skim milk masquerades as cream," warned Gilbert & Sullivan a century ago and sure enough, modern day subprimes packaged into financial conduits with noms de plume such as "SIVs" and "CDOs" pretended to be AAA rated cubes of butter. Financial institutions fell for the charade hook, line, and sinker and now we all suffer the consequences. Defaults are rising, the dollar's sinking, and good Lord—even Google's stock price is going down. Something must really be wrong here.
It is. What we are witnessing is essentially the breakdown of our modern day banking system, a complex of levered lending so hard to understand that Fed Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August. My PIMCO colleague, Paul McCulley, has labeled it the "Shadow Banking System" because it has lain hidden for years—untouched by regulation—yet free to magically and mystically create and then package subprime mortgages into a host of three-letter conduits that only Wall Street wizards could explain. ...
The publicized and photographed overnight "runs" on Countrywide and the UK's Northern Rock in mid-August were nothing compared to what's taking place in the shadows of the real banking system. Credit contraction, with its inevitable companion of asset destruction, is spreading with the speed of an infectious bacterial disease."
This would appear to be a real life crisis of capitalism. Trouble is, if those mountains fall, they fall on all of us...