Short form: Decision makers at ATF allowed perhaps on the order of 2500 firearms, including automatic weapons, to be sold illegally to other people who then took them south to Mexico and used them to commit drug-related crimes. "Most notably, two turned up last December at the murder of Border Patrol Agent Brian Terry in Arizona."
The theory was apparently that they would track these weapons through a series of "little fish" and somehow use them to bring down "big fish". Apparently this was a ATF only operation, not involving other US or Mexican law enforcement, at least as far as I can tell. The operation has not been "successful" for any obvious definition of success.
It's hard to know what to do with this. While there is a partisan element to all rhetoric involving the ATF (Republicans hate it entirely, and want it to go away, and keep blocking appointments to head the agency, so it is now running around headless like, er, a headless federal agency), this doesn't feel like a partisan issue. This feels like groupthink stupidity. But I guess we'll learn more as the story develops.