Multi-master and multi slave
Problem
When a Master is also a Slave, you need to have log-slave-updates.
From what you described, each Master does not have log-slave-updates configured.
Solution
STEP 01) STOP SLAVE; on Slave1
STEP 02) STOP SLAVE; on Slave2
STEP 03) STOP SLAVE; on Master1
STEP 04) STOP SLAVE; on Master2
STEP 05) On Master1, add this to /etc/my.cnf
[mysqld]
log-slave-updates

STEP 06) On Master2, add this to /etc/my.cnf
[mysqld]
log-slave-updates

STEP 07) On Master1, Run service mysql restart --skip-slave-start
STEP 08) On Master2, Run service mysql restart --skip-slave-start
STEP 09) START SLAVE; on Slave1
STEP 10) START SLAVE; on Slave2
STEP 11) START SLAVE; on Master1
STEP 12) START SLAVE; on Master2
That's it. Everything should replicate properly from here.
Give it a Try !!!
I have discussed this before

Dec 05, 2012 : MySQL Slave Relay Logging but not logging Binary Log
May 29, 2012 : mysqld-multi with first DB as Slave and second DB as Master
May 07, 2012 : Setting Circular Replication in mysql