when the counterparty risk is miscalculated and a party defaults the impending damage can be severe for example the default of so many collateralized debt obligations cdos was a major cause of the real estate collapse in 2008 
mortgages are securitized into cdos for investment and backed by the underlying assets one of the major flaws of cdos before the economic crash was that they contained subprime and low quality mortgages but the cdos were given the same high grade ratings as corporate debt the high credit rating for cdos allowed them to receive institutional investment since funds are required to invest only in highly rated debt when borrowers began defaulting on mortgage payments the real estate bubble burst leaving the investors banks and reinsurers on the hook for massive losses the ratings agencies received a lot of blame for the collapse which eventually led to the financial market meltdown that defined the bear market of 2007 2009 american international group aig offers insurance products for real estate businesses and individuals the company needed a bailout from the u s government during the financial crisis of 2007 2009 for those who were insured by aig they suddenly faced an increase in counterparty risk as mentioned above investors must consider the company that s issuing the bond stock or insurance policy to assess the level of counterparty risk 