In response to my suggestion that I would block comments on this site unless coherent argument was offered, both Tim Knight and Roger Morley have posted erudite comments on my blogs on Northern Rock and SIVs. It would have been churlish to block them..

And let's be clear: both commentators clearly know what they are talking about, at least within their own limits. But its about those limits that I disagree with them.

Tim Knight argues that creating money in the way I have described here is not doing so "out of thin air", as I put it. His technical argument seeks to justify the process used. But greater minds than mine have seen through such technical explanations. J K Galbraith said:

The process by which banks create money is so simple that the mind is repelled.

As so many have before, Tim seeks to deny this by giving the process a technical veneer. I have sought to remove it. Of course we differ. I can't imagine Tim sides with Galbraith. I do. I confess I likewise think Tim seeks to use technical explanation of the difference between solvency and liquidity as a cover for suggesting Northern Rock's regulatory situation was a contributory factor in its failure. As an accountant I disagree with his interpretations. But more important, I do not think discussion of the rules is appropriate: it's akin to discussing the number of angels on a pinhead when the pin is in the wrong place and was the wrong tool for the job in any event.

Perhaps I can elaborate by commenting on Roger's approach. He also resorts to technical analysis to differentiate Special Purpose Vehicles (which are on balance sheet,as were Northern Rock's) from Structured Investment Vehicles (SIVs)s, which are the same entities when kept off balance sheet (and I know I simplify the issue - but that is the core of it). In doing so he challenges my understanding of the technical aspects of this - and I'm happy to concede he will know more than me - but what he and Tim fail to see is that I am questioning something much bigger - and this is why in an earlier post I suggested that from my distance from the City I have a greater sense of perspective on this issue.

That bigger issue is this. Whether an entity is an SPV or an SIV makes little odds, the structure is broadly similar. A company is created to issue debt. It is legally owned by a charitable trust and that is supposedly controlled by professional trustees but in practice the whole arrangement is a set up, managed and controlled in practice by the entity whose debt the SPV or SIV issues (it makes no real odds at the end of the day which is which - and again I now I am simplifying issues). The reason it makes no difference is not because of the technicality of the debt, or the location of it on or off accounts. The problem is the charade within these structures, the only real difference between which is whether or not the charade is extended far enough to claim that the trustees do control the entity - which makes it an SIV, or not, which makes it an on-balance sheet SPV.

Either way I have called that charade a fraud. I have specifically applied that term to the Granite structure that Northern Rock used, but in so doing I stress that fraud does not in this case imply criminality. It means misrepresentation made for gain. In my opinion the Granite structure was a misrepresentation of the nature of the economic transactions that were really taking place.

Let me be clear why I think that. In its prospectus on of the Granite entities said it was owned by the Law Debenture Intermediary Corporation plc, but that despite this the entire issued share capital was in fact held on trust by them under the terms of a discretionary trust for the benefit of one or more charities. In other words, the Law Debenture company was not the real owner: the trust was . Which already creates two claims on ownership, despite which Northern Rock then consolidated the accounts of the company in question into its own accounts because it had the power to govern financial and operating policies so as to obtain benefits from their activities, something it had always intended to be the case. So, for all practical purposes, this meant Northern Rock claimed it owned Granite as well.

Now, it might be commonplace in the City for it to be accepted that a company can have as many owners as are required to suit the needs of securing debt, saving tax, mis-stating accounts or whatever. But I will be as blunt as was Galbraith. The process of creating such structures is so convoluted that the mind is repelled.

I'd go a little further. I'd call the creation of a structure with intent that two people can deliberately and legally both claim to own one company a sham, which is a description of a pretence. But since as a result of that pretence Granite secured a lower cost of financing than Northern Rock could have done as it had a better credit rating than Northern Rock we're back to the definition of a fraud because as a result of the misrepresentation on the legal ownership of this company a financial advantage was secured. That is my honestly held opinion - based upon objective evidence. The fact that 'those in the know' knew all this does not change this misrepresentation - it was inherent and integral to the process.

I am not worried about the technicalities of SIVs and SPVs in this context: both rely upon this misrepresentation that I consider fraudulent. The fact that it is commonplace makes no difference. In the tale of the King's New Clothes it was commonplace to pretend that the King was wearing clothes - even though he wasn't. Herds can get things very wrong.

And that's exactly what is happening in the City right now. When Goldman Sachs can report that it has $72bn of 'level-three assets' on its balance sheet then it is time that someone definitely said the King is naked. That's what I'm doing. And it's appropriate since level-three assets are ones that cannot readily be identified or valued. They have been termed 'mark to myth' or 'mark to make-believe' by some analysts. That's because no one knows what backs them - even though their value is based on the security of the charge on that unknown mix of assets - all of which are no doubt SIV and SPV created.

So let's not worry about the rules right now: regulating the wrong thing will never put things right. Let's worry about why we reached this absurd situation that misrepresentation has become so commonplace that supposedly intelligent people can buy $72 billion of assets which may not be assets at all and wonder why no one said "The King is naked" before. Because that's the real question - and I'll continue to shout he's naked for a long time yet - at least until the time that the SPV / SIV fraud that has so perverted City minds that they think such misrepresentation commonplace has ceased to be normal.