This paper studies cascades of failures in a network of interdependent financial organizations, focusing on how discontinuous changes in asset values trigger further failures and how this depends on network structure. Integration (greater dependence on counterparties) and diversification (more counterparties per organization) have different, nonmonotonic effects on the extent of cascades. Diversification connects the network initially, permitting cascades to travel; but as it increases further, organizations are better insured against one another's failures. Integration also faces trade-offs: increased dependence on other organizations versus less sensitivity to own investments. The paper illustrates the model with data on European debt cross-holdings. Globalization increases financial interdependencies among organizations, leading to cascading defaults and failures. Recent examples include government interventions in AIG, Fannie Mae, Freddie Mac, and General Motors. These interventions highlight the need to study the risks created by financial interdependencies. The paper develops a general model to understand financial contagions and cascades of failures among organizations linked through financial interdependencies. Organizations' values depend on each other, and if an organization's value falls below a threshold, it loses further value, imposing losses on its counterparties. The paper analyzes how asset values and failure costs propagate through the network of interdependencies. It shows that failures can occur in "waves" of dependencies. The paper introduces a methodology to compute the extent of cascades by using a formula to propagate failure costs at each stage. The main results show how the probability of cascades and their extent depend on integration and diversification. Integration refers to the level of exposure of organizations to each other, while diversification refers to how spread out cross-holdings are. The paper finds that integration can increase the likelihood of a cascade once an initial failure occurs but can also decrease the likelihood of that first failure. Diversification has trade-offs but on different dimensions. The paper shows that an economy is most susceptible to widespread financial cascades when integration is intermediate and organizations are partly diversified. The paper also considers what a regulator or government might do to mitigate the possibility of cascades of failures. It shows that preventing a first failure prevents potential ensuing cascades, but any fair exchange of cross-holdings or assets involving the organization most at risk of failing makes that organization more likely to fail. The paper illustrates the model in the context of cross-holdings of European debt. It shows that intermediate levels of diversification and integration can be the most problematic. The paper also studies how the integration of a financial network interacts with a core-periphery structure and with segregation, and other correlation structures. The paper provides a detailed analysis of the model, including the dependency matrix and the effects of failure costs on market values. It also discusses the implications of the model for policy and regulation.This paper studies cascades of failures in a network of interdependent financial organizations, focusing on how discontinuous changes in asset values trigger further failures and how this depends on network structure. Integration (greater dependence on counterparties) and diversification (more counterparties per organization) have different, nonmonotonic effects on the extent of cascades. Diversification connects the network initially, permitting cascades to travel; but as it increases further, organizations are better insured against one another's failures. Integration also faces trade-offs: increased dependence on other organizations versus less sensitivity to own investments. The paper illustrates the model with data on European debt cross-holdings. Globalization increases financial interdependencies among organizations, leading to cascading defaults and failures. Recent examples include government interventions in AIG, Fannie Mae, Freddie Mac, and General Motors. These interventions highlight the need to study the risks created by financial interdependencies. The paper develops a general model to understand financial contagions and cascades of failures among organizations linked through financial interdependencies. Organizations' values depend on each other, and if an organization's value falls below a threshold, it loses further value, imposing losses on its counterparties. The paper analyzes how asset values and failure costs propagate through the network of interdependencies. It shows that failures can occur in "waves" of dependencies. The paper introduces a methodology to compute the extent of cascades by using a formula to propagate failure costs at each stage. The main results show how the probability of cascades and their extent depend on integration and diversification. Integration refers to the level of exposure of organizations to each other, while diversification refers to how spread out cross-holdings are. The paper finds that integration can increase the likelihood of a cascade once an initial failure occurs but can also decrease the likelihood of that first failure. Diversification has trade-offs but on different dimensions. The paper shows that an economy is most susceptible to widespread financial cascades when integration is intermediate and organizations are partly diversified. The paper also considers what a regulator or government might do to mitigate the possibility of cascades of failures. It shows that preventing a first failure prevents potential ensuing cascades, but any fair exchange of cross-holdings or assets involving the organization most at risk of failing makes that organization more likely to fail. The paper illustrates the model in the context of cross-holdings of European debt. It shows that intermediate levels of diversification and integration can be the most problematic. The paper also studies how the integration of a financial network interacts with a core-periphery structure and with segregation, and other correlation structures. The paper provides a detailed analysis of the model, including the dependency matrix and the effects of failure costs on market values. It also discusses the implications of the model for policy and regulation.