Feb. 12 (Bloomberg) -- Banks that have taken the Treasury Department’s bailout money say they plan to repay it as soon as possible. They also say it’s not debt.

Those conflicting postures don’t make sense to a lot of investors. After all, how can the banks call this money capital if they feel they must return it? The accounting mandarins who are letting the banks and their regulators get away with this ruse have much to answer for.

One after another yesterday, the chief executive officers of banks that took the Treasury’s cash under the Troubled Asset Relief Program swore before members of Congress that taxpayers would get their money back.

Speaking for Bank of America Corp., which has $45 billion from the government, CEO Ken Lewissaid, “We intend to pay all the TARP funds back as soon as possible.” Goldman Sachs Group Inc. CEO Lloyd Blankfein, whose firm received $10 billion, said, “We look forward to paying back the government’s investment so that money can be used elsewhere to support our economy.”

In one form or another, the CEOs of Morgan Stanley, Bank of New York Mellon Corp., Wells Fargo & Co., State Street Corp., JPMorgan Chase & Co., and Citigroup Inc. also vowed to pay back the government’s TARP money.

The banks get to call these infusions equity on their financial statements, rather than debt, because the government structured them as so-called perpetual preferred stock. That means there is no fixed redemption date, which is the bright-line test under the Financial Accounting Standards Board’s rules.

Nice Theory

In theory, the banks can keep making quarterly interest payments for all eternity and never have any contractual obligation to repay the principal. The annual rate under the government’s initial investments last October starts at 5 percent. It jumps to 9 percent after five years, which by then might seem usurious, for all we know now.

That’s the form. In substance, the banks want to purge this money as soon as they can, if for no other reason than to end the public’s potshots over such things as Bank of America’s naming rights for the Carolina Panthers’ football stadium, or Goldman Sachs’s conferences at plush digs in Las Vegas.

The Treasury’s preferred stakes in these and other banks marked the breaking point that caused many investors to lose faith in banking regulators’ main solvency measure, known as Tier 1 capital. Normally, capital is a simple calculation: assets minus liabilities, or shareholder equity. The Tier 1 way is more forgiving and complex.

Dual Meaning

In addition to letting banks count certain types of other debt as capital, the Tier 1 metric excludes losses on various securities, as long as the banks say they intend to hold them until their values recover.

Intent, in the world of banking regulators, isn’t a two-way street. Intending to hold a losing position in toxic mortgage- backed securities lets banks exclude the red ink. Yet intent to repay preferred stock doesn’t turn this obligation into debt, under either the Tier 1 regime or the FASB’s rules. That means it counts as capital. Go figure.

The Treasury Department knew when it designed its preferred shares that the banks would feel obligated to repay the money. It also wanted to create the appearance that the government had injected them with lots of extra capital, making them safe. Hence, the hybrid.

Discredited Measure

Investors didn’t take long to see through the legerdemain. And now virtually all Tier 1 capital figures have become discredited.

Instead, investors today are fixated on the most bare-bones measure of capital there is: tangible common equity. That excludes not only preferred stock, but also intangible assets such as mortgage-servicing rights that could have value in a forced liquidation. Even Treasury Secretary Tim Geithner concedes the government needs to devise a new way of measuring capital, because the current one isn’t useful.

While the rules for preferred stock have been the same for years, the accounting-standards board in 2007 issued a report recommending they be simplified. The only financial instrument classified as equity would be common stock. Everything else would be an asset or a liability. Specifically, an instrument would count as equity only if it “is the most subordinated claim” that “entitles the holder to a share of the entity’s net assets.”

Last November, though, the FASB backtracked, deciding it would keep the current accounting treatment in place. That ensured the U.S. rules would be in line with those of the London- based International Accounting Standards Board.

The timing was convenient, just weeks after the Treasury paid nine banks $125 billion for its initial round of preferred- share stakes. Outsiders could be forgiven for assuming the FASB changed its mind because it didn’t want to upset the banks or their regulators.

It’s not too late for the accounting gnomes to get it right again. Investors already have figured out that preferred stock is debt by a different name. The FASB just needs to take their cue.

Sometimes, following the crowd is the smartest thing for leaders to do.

(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Jonathan Weil in New York at jweil6@bloomberg.net

Last Updated: February 12, 2009 00:01 EST