This analyses the problem as mechanical: bad practice and regulation. But when real growth and profitability are in the region of 2%, a 25% return on capital, as routinely demanded by investors, cannot be sustainable. This demand led to leverage and financial engineering. The implication is that with 'better underwriting' etc. we can go back to 25% returns, but more safely. Instead, we may have to get used to the idea that a 4-5% return on investments is really quite good.

-- though nominal UK govt spending has increased by 6% p.a. on average for the last 20 years, which might suggest corporate growth has not been that different. But this doesn't affect the wider point about demand for financial returns in the 20-30% range.

I wonder whether SPVs are actually a bit of a scapegoat. Clearly regulators and governments had no data to aggregate global liability positions. (Would it have made any difference if they had?) But the originators of SPVs knew what they were doing, presumably knew that all their trading partners were in the same game, and were selling paper to buyers who knew what they were buying.

So either the SPVs were not in the end off-balance-sheet - and it's hard to believe they were generally faulty - or they were off-balance-sheet, in which case it's the buyer of the security, not its originator, who has the problem. The issue is really whether the _assets_ have value, not whether a heap of liabilities are suddenly going to re-appear on the balance sheet. It was AIG, who among other things provided the credit guarantees for SPVs, who really copped the liabilities when it became clear that the assets were worthless. Since insurers had been badly burned as recently as the 1990 property crash and have form here. The circle turns back to the credit rating of debt instruments and the aggregation of risk in the companies that support them with guarantees.

To summarise, it seems the task is less to define off-balance-sheet as really on-balance-sheet, as implied by calls for more and more disclosure, but to ensure that the rating of debt instruments takes place outside any bubble surrounding the underlying assets and liabilities.

'Cost of capital' arbitrage - where business is moved to the industry with the lowest reserving requirements against that particular risk - is certainly a feature of insurance-guaranteed mortgage-backed securities. The case would still have to be made that having the same capital reserve requirements everywhere would be better than having different ones.