I just happened to be cruising the Wikipedia entry on Heathcliff today when I saw the reference to one of the dudes being called Mongo. Then I remembered your post and thought, "What if the kid was saying 'mongo'?"

Was Erika the only baby there who was presumably of Asian descent? If so, I think maybe that's what he was saying, especially given the reactions of the parents. I've seen people who, in a fit of rage or whatever, dropped slurs they would never otherwise say, and once they returned to their normal emotional plateau, recovered enough to realized their mistake and be appropriately remorseful of having said it.

It makes me wonder if that was the case here, though even if it is, there isn't much you can do about it. I want to say that the circumstances would seem to indicate that it was a term referenced by accident (if the parents were flaming racist a-holes, why would they seem embarrassed rather than totally comfortable with what the baby was saying?) but racism is still racism is still racism.

Hopefully, it was something innocuous, but if not, I hope the parents took that as a lesson of just how much babies tend to echo and mirror.