Investors are now valuing banks' earnings at less than the average stock market multiples.[33]  That suggests that banking is not thought of as a growth industry. Do you agree?

The multiples tend to vary, because so few people understand that banking is a business. The business is managing risk. As long as you pursue that business within your risk-taking capabilities, you survive. If not, you die. The critical factor is a bank's ability to earn money and absorb losses.

As recently as 1969, no bank charged its earnings for loan losses. The loan loss was a so-called reserve that Congress, set by statute at 2.4 percent. What you did was report your earnings per share, then after doing that, charge your undivided profits and create a reserve for bad debts.

That was a totally false picture of the way a bank operated because loan losses are a cost of doing business just like any other expenditure. In 1969 the accounting profession brought this to the bankers' attention, and there was a great hue and cry about how to account for loan losses sensibly. We had three alternatives. One was to charge earnings directly for losses. Another was to construct a five-year average of loan losses reaching back in time and charging that to earnings. The third was to project a forward five-year moving average. Everybody looked at his hole card and went for the second option, hoping that he would be better off.

What happened was that the historical five-year average got all out of whack because of a bad recession. We found ourselves charging our earnings less than our actual loan losses, which is a poor way to run a business. So we immediately began to charge to our earnings all the losses we had. And then some. In the last six years, Citibank charged about one hundred million dollars more than the actual total of our loan losses.

The stock markets don't understand that we front-end all our loan losses. The loan-loss reserve itself is merely incremental. Besides over the years, we recover about forty cents out of every dollar that's been written off. If an industrial company takes a loss in inventory, or writes off receivables, that's a permanent loss. But in banking 25-to-40 percent will come back eventually. That misunderstanding doesn't help our stock.

Beyond that, I guess it was just the banking industry's turn to supply the target rabbit for open season.

If I had my way, and could talk the accounting profession into it, I would not only write off Citicorp's consumer-loan losses directly against earnings but report it that way. It sounds like a lot of money--seventy million dollars last year on five billion of risk assets, but it's only 1.3 percent, which is right on target as far- as our loss ratio is concerned. Very few people understand that its the ratio of losses to total business that really matters and not the dollar amount. I believe that's been affecting our stock price at the moment. I'm sorry for the long answer to a short question.

[33] One convenient, if not always reliable, indicator of the worth of a stock is its price-earnings multiple, that is, how many times its annual dividend payments is its stock purchase price.