What a Country: Subsidiaries Edition

I have a possibly naive question about corporate structure and financial and accounting laws and regulations. If Company A (say J.P. Morgan) wholly owns Company B (say a structured investment vehicle designed to mimic a CDO, i.e. a synthetic CDO), why is that different from Company B just being part of Company A and not a separate company? In other words, why do any regulations, laws, whatnot allow treating a wholly subsidiary as a separate thing? Doesn’t that just seem like a bad idea that can only make sense if it enables a company to get around some rule they aren’t supposed to get around (in this case, Basel capital requirements, see Tett 2009 and Johnson and Kwak 2010 for more)?

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3 Comments

  1. Jeff

     /  April 22, 2010

    Dan, in my long hours working on Jason Owen-Smith’s USKE project (an NSF-funded study of the US Knowledge Economy), I have crossed the same thought myself. This is just one of the rather obvious ways that our laws allow corporations to act in ways no person would ever be allowed.

    If I buy a gun and give it to a murderer, who summarily uses that gun to kill someone, then I share responsibility for the use of that gun. My “ownership” of the gun, translates into my “responsibility” for the gun. This doesn’t seem to be the case with companies, however. Ownership does not seem to translate into de facto responsibility.

    As an aside, let me share with you something even crazier that I’ve encountered (no kidding here):

    Company B is a wholly-owned subsidiary of Company A.
    Company A is a partially-owned subsidiary of Company C.
    Company C is a wholly-owned subsidiary of Company B.

    This wonderful situation allows Company A to be partially-owned by a company that is a subsidiary of it’s subsidiary.

  2. Max

     /  April 22, 2010

    Wholly owned subsidiaries aren’t always treated as entirely separate. I seem to remember that they are in fact treated as the same for certain capital requirements.
    I don’t know how to give a non-tautological answer to your broader question. Regulations treat wholly owned subsidiaries as separate companies because they’re separate companies. The question I think you want to ask is why we allow companies and individuals to create alter ego entities which they control but have no responsibility for.
    (or, basically, what Jeff said).

  3. UK SIV Guru

     /  April 23, 2010

    Is this question asking specifically about the relationship between Gordian Knot in London and JPMorgan. If so, what precisely is your question??