In principle, the different tranches of the CDO were isolated from each other. If they went bad, they went bad in reverse order, and it was thought that they couldn’t all go bad since different people held different parts of the bond and the underlying markets were uncorrelated. Unfortunately, it turned out that the underlying markets were quite strongly correlated. Adding Manhattan to Arizona and Baltimore in a single security made them correlated. The sheer volume of cash invested in real estate created one big market in US real estate across the world that became increasingly correlated to equities, particularly to the equities of the banks that were trading real estate. When the income streams of the riskiest (junior) part of the bond dried up as NINJA mortgagers walked away from their debts, investors in the more-secure tranches took fright and dumped their assets as part of the general search for liquidity.

Mark Blyth, Austerity, loc. 97