is a subsidiary of a company which is bankruptcy remote from the main organisation (i.e. protected even if the parent organisation goes bankrupt). The actions of aare usually very tightly controlled and they are only allowed to finance, buy and sell assets.

Thepurpose of a Special-Purpose Vehicleis to allow the parent company to make highly leveraged or speculative investments without endangering the entire company. If theSPVgoes bankrupt, it will not affect the parent company.

The problem, as occurred in the 2007-2008 crisis is that often the parent companies would have guaranteed liquidity lines to theirSPVand when theSPVs started to lose money and lose access to credit, they would draw on the funds of their parent company at a time when the parent was already low on capital, thereby exacerbating the issues.

Read Forum Topics About Special Purpose Vehicles

Adin Lykkenis a member ofWSO Editorial Boardwhich helps ensure the accuracy of content across top articles on Wall Street Oasis. Currently, Adin is an associate at Berkshire Partners. Prior to joining Berkshire Partners, Adin worked for just over three years at The Boston Consulting Group as an associate and consultant and previously interned for the Federal Reserve Board and the U.S. Senate. Adin graduated from Yale. This content was originally created by and has evolved with the help of our mentors.

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