> they all understood that CDOs would not pay off if
> national house prices fell.
I think this is way less nuanced than I'd put it. I don't believe that anyone involved in purchasing these securities viewed it as a macro play on national housing, with an up=win/down=lose payoff. I also believe that many people were quite surprised by their actual exposure as opposed to what they told themselves they were doing. Yes, the reality was in the prospectus; yes, there was some collective delusion; yes, there was some misleading marketing. It continues to be interesting to watch the fallout in the legal sphere about these securities: I think you can tell which ones were worse than others based on the effort to recover losses.
/jordan