I know, it's bad to time the market, but...

[WM]

Here's a good primer on asset allocation close to retirement from Rick Ferri. See also, Paul's Investing Essentials Blog, especially max equity exposure table:

I wouldn't concern yourself with how the subprime blowup is going to affect stocks and bonds because (1) you're not likely to understand much of it, (2) you're probably even less likely to know what do with MIL's portfolio if you did understand it, and (3) the market has likely already incorporated the subprime fiasco into the prices of stocks and bonds.

I would try to explain to your MIL that the main goal now is to try not to screw up too badly, or get too complicated - the simplest solution is probably going to be the best solution. For example, 100% stocks is probably not the best choice, as is 100% in a savings account. Keep your investing costs low - meaning brokage fees, taxes, and expense ratios. To quote Warren Buffet:

Ok, this all seems very reasonable

She definitely likes simple, so I think she'll be ok with reducing the equity exposure and I'll look into some more bond funds, maybe ones that stick with govt bonds.