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Russ Mitchell recaps the historical events that occurred on March 18th in this video clip from This Day in History. Henry Wells and William Fargo founded their company, Wells Fargo Shipping and Banking Company, making it the first nationwide express. It was founded during the Gold Rush to transport people and goods across the nation. Also, the Schick company released the first electric razor, and the first Soviet cosmonaut walked in space. On this day, Great Britain also repealed the Stamp Act, as it caused rebellion in the American colonies.
Column: That Wells Fargo accounts scandal was even worse than you can imagine
One useful rule of thumb when it comes to business scandals is that they often seem to get worse after the initial disclosures, even after a string of “official” investigations. The unauthorized-accounts scandal at Wells Fargo is an exemplary case, and we don’t mean that as a compliment.
The latest revelations about the Wells Fargo scandals have come to us from the Office of the Comptroller of the Currency, a key federal banking regulator.
Late last week the OCC carpet-bombed a clutch of former executives at the bank, levying new charges about their alleged malfeasance and nonfeasance in connection with the unauthorized-accounts scandal and demanding millions of dollars in fines and other disciplinary actions.
I was in the 1991 Gulf War. . I had less stress in the 1991 Gulf War than working for Wells Fargo.
Employee message to Wells Fargo management
Former Wells Chairman and Chief Executive John F. Stumpf settled the OCC charges by agreeing to a permanent ban from the banking industry and a $17.5-million fine. That’s on top of $41 million in equity awards he forfeited when he stepped down from Well Fargo in 2016, and another $28 million in compensation the bank clawed back from him in the wake of the scandal.
Two other former executives also settled with the OCC for a combined $3.5 million. Five other executives, however, are challenging OCC penalties in public hearings before an administrative law judge. Chief among them is Carrie Tolstedt, who as head of the Wells Fargo community bank division allegedly oversaw the conditions that led to the scandal. The OCC is seeking $25 million from Tolstedt and a total of $10.5 million from the four others.
If you’ve ever wondered how businesses can get away with making transparently false or deceptive claims about themselves or their products — “The Best Tasting Juice in America,” Wrigley’s gum is “for whiter teeth, no matter what,” etc., etc. — the answer is an all-purpose legal dodge known as the “puffery” defense.
A lawyer for Tolstedt said she would be vindicated and that she had acted with “utmost integrity and concern for doing the right thing.” Lawyers for most of the others similarly declared their clients’ innocence.
The OCC backed up its charges with a 100-page notice that adds new details to the conditions that led to the scandal and the failure of top executives and the Wells Fargo board to take action, even when articles in The Times first exposed the unauthorized-accounts practices in 2013. The OCC document effectively lays out a road map for how to foment extensive wrongdoing by rank-and-file employees and how to willfully avoid stamping it out once it occurs.
The document is replete with testimony and documentary evidence of how rank-and-file workers were harassed, intimidated and humiliated into breaking the law by opening unauthorized accounts to meet sales goals that their own superiors acknowledged were “unattainable.” The picture the employees painted was of bank sales offices that resembled sweatshops of the 1930s or retail warehouses of the present day.
“I was in the 1991 Gulf War,” one employee wrote to Stumpf’s office in 2013, according to the document. “I had less stress in the 1991 Gulf War than working for Wells Fargo.” Others said they were warned that “if they did not achieve sales goals, they would be ‘transferred to a store where someone had been shot and killed’ or ‘forced to walk out in the hot sun around the block.’”
“The noose around our necks ha[s] tightened,” another worker complained to Tolstedt and Stumpf. “This type of practice guarntees high turnover . [and] bankers who are really financial molesters [and] cheaters.”
The document also points to the consequences of doing so Wells Fargo, the OCC observes, has struggled to regain its reputation for integrity while also paying hundreds of millions of dollars in legal settlements and administrative costs and also facing potentially billions more.
The bank’s current CEO, Charles Scharf, the former CEO of Visa and BNY Mellon, told employees last week that the conditions outlined by the OCC were “inexcusable. Our customers and you all deserved more from the leadership of this company.”
To recap, sales employees at Wells Fargo’s community bank — that is, the retail arm responsible for consumer savings and checking accounts and credit and debit cards — were discovered to have opened millions of unauthorized accounts and issued millions of unauthorized cards to meet punishing sales goals, on pain of termination. The practice went on for about 14 years, beginning as early as 2002.
On the surface, the Federal Reserve seemed really to lay the hammer on Wells Fargo & Co. for its accounts scandal and serial wrongdoing.
For much of that period, top executives, including Stumpf, were well aware of the problem. But because Wells Fargo’s reputation among investors was based in part on its purported success at “cross-selling” — that is, getting customers to open multiple accounts and sign up for multiple services — they turned a blind eye to the mushrooming issues. In fact, the sales force was ripping off customers, sometimes saddling them with unwarranted fees and even damaging their credit reports.
The outlines and many details of this affair have been reported before, starting with The Times articles in 2013. But the OCC report provides shocking new details about the pressures that workers were subjected to and the extent of willful blindness at the top.
Customer complaints about unauthorized accounts flowed into the bank’s complaint lines. Some reached Stumpf and his underlings directly. In 2014, the OCC says, an acquaintance of Stumpf’s complained to bank officials “about some debit cards he received in the mail without consent.”
In 2012, a former Wells Fargo executive complained directly to Tolstedt that his wife had received two debit cards she hadn’t requested. The OCC says Tolstedt asked the executive “to stop telling the story because she thought it reflected poorly on the Community Bank.”
Starting in 2012, the OCC says, the bank began monitoring the sales force for misconduct. But it designed the monitoring to minimize its findings and looked only for certain misdeeds, avoiding numerous other red flags of unauthorized account-opening.
The $1-billion fine levied Friday by federal regulators on Wells Fargo and Co. for its string of customer-abuse scandals certainly sounds like a big number.
“Employees were referred for investigation only if they engaged in sales practices misconduct so frequently” that they ranked as the “top 0.01% or 0.05% of total offenders.” That meant that although 30,000 employees per month exhibited suspect activity, only as few as three per month were investigated.
At one point, security officials opened a few undercover accounts not tied to real customers to ferret out misconduct. Within 24 hours of the accounts being opened, two sales employees ordered debit cards for the customers, claiming they had spoken to the customers directly.
“Geeeez,” one of the security officials later said. “All I could do is shake my head.”
The activities of sales employees were not hard to understand, given the pressures they were under. As punitive as the sales goals were, some workers were threatened with discipline for not exceeding them. Turnover reached 35%, which should have caught management’s eye, if only because turnover of that magnitude imposes heavy costs for recruitment and training.
Tolstedt and Stumpf deflected questions about the scandal by continuing to ascribe it to a few “bad apples” on the sales force. But as the OCC observes, “employees were much more likely to be disciplined for failing to meet their sales goals . than for engaging in sales practices misconduct.”
The bank eventually said that it had fired 5,300 employees for sales misconduct, but more than 8,500 for performance issues, including failing to meet sales goals, from 2011 through late 2016. The firings for misconduct were just “the tip of the iceberg,” security officials told the OCC.
Tolstedt and other executives kept dismissing the seriousness of the misconduct, but it appears that at least one board member wasn’t fooled by a presentation by Tolstedt in October 2015. She showed “no recognition . of the extent or seriousness of the matter,” the director told the OCC. “So I had a very negative personal reaction. . I just said [Tolstedt’s presentation] was, well, excuse my language. I think I had called it a piece of [expletive].”
Wells Fargo, staggered by a scandal tied to bogus consumer accounts and allegations of identity theft, is responding like most big companies with a sullied reputation: with an ad campaign promising to “make things right” for its alleged victims, without being too specific about how.
The OCC report identifies this director only as the former chair of the board’s risk committee, not by name. The risk committee chair at the time was Enrique Hernandez Jr., a Pasadena business executive who is no longer on the Wells Fargo board but serves as non-executive chairman of McDonald’s. Hernandez didn’t respond to messages left at his family business, Inter-Con Security.
The most pertinent issue raised by the OCC report may be the consequences of allowing working conditions this harsh to goad workers into misconduct while consistently failing to recognize and root out the real cause — that is, the environment created by management.
Wells Fargo not only caused serious harm to its own customers, but serious financial harm to itself, the OCC observes. So far, the company has paid $70 million to law firms to investigate the scandal, $185 million in settlements with government agencies, $97 million to consultants tasked with fixing the problem, and $142 million in settlements with customers. The company says it may face another $3.9 million in costs related to the scandal.
As of 2017, according to American Banker, the bank’s reputation was in “freefall.” In 2018, the bank spent hundreds of millions of dollars on a marketing campaign titled “Re-Established” to suggest that it had put its problems behind it. Around the same time, however, the company asserted in court that its statements that it was working to “restore trust” among its customers and “trying to be more transparent” about its scandals — statements made by its then-CEO Tim Sloan — were just “puffery.”
Investors have shown little faith in Wells Fargo’s efforts to rebuild its reputation. As the OCC observes, the bank’s competitors have experienced healthy growth in their stock prices since the first Wells Fargo settlement in September 2016, while Wells Fargo shares have barely budged.
So far, the sales scandal and others that have emerged have cost Wells Fargo two CEOs — Stumpf and Sloan, who stepped down last March. The bank has partially remade its board, but six directors who were serving during the scandal and in its aftermath, two as far back as 2009, are still in place. Why is that?
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Los Angeles Times columnist Michael Hiltzik writes a daily blog appearing on latimes.com. His seventh book, “Iron Empires: Robber Barons, Railroads, and the Making of Modern America,” has just been published by Houghton Mifflin Harcourt. Follow him on Twitter at twitter.com/hiltzikm and on Facebook at facebook.com/hiltzik.
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William George Fargo was born in Pompey in Onondaga County, New York on May 20, 1818.  He was the eldest of twelve children of William C. Fargo (1791–1878) (formerly of New London, Connecticut) and Stacy Chappel Strong (1799–1869). His younger brother was James Congdell Strong Fargo (1829–1915), president of the American Express Company for 30 years. William's education consisted only of the rudiments taught in a country school as he left school at the age of 13 to carry the mail in Pompey and help support his family. 
His father, who was born in New London, Connecticut, fought in the War of 1812. The elder Fargo was stationed at Fort Niagara and fought in the battle of Queenston Heights under General Van Rensselaer that resulted in the death of British General Isaac Brock. Fargo was wounded in right thigh, just before the Americans took possession of the ground. 
His grandfather was William Beebe Fargo (1757–1801), who served with distinction in the American Revolutionary War,  the son of William Fargo (1726–1813). His great-grandfather was the son of Moses Fargo (1691–1798)  and the grandson of Moses Fargo (1648–1742), who was born in Lyons, France. His father Jacent Fargeau, had emigrated with his wife and children to Wales, from where Moses and his elder brother Aaron went to Norfolk, Connecticut in 1670.
At the age of 13, Fargo left school and started carrying mail for his native village of Pompey, New York. In the winter of 1838, Fargo started working with Hough & Gilchrist, grocers, from Syracuse. He remained there for a year until he went to work with the grocers Roswell and Willett Hinman. After three years, Fargo obtained a clerkship in the forwarding house of Dunford & Co., Syracuse.  In 1841, he became a freight agent, an express messenger between Albany and Buffalo, for the Auburn and Syracuse Railroad in Auburn. A year later in 1843, Fargo was a Resident Agent in Buffalo, New York.  He left the Auburn and Syracuse Railroad and joined Livingston, Wells & Co., as messenger. 
American Express Company Edit
On April 1, 1845, along with Henry Wells and Daniel Dunning, Fargo organized the Western Express which ran from Buffalo to Cincinnati, St. Louis, Chicago and intermediate points, under the name of Wells & Co. At that time, there were no railroad facilities west of Buffalo, and Fargo, who had charge of the business, made use of steamboats and wagons. 
In 1845, Daniel Dunning withdrew from the company and in 1846, Henry Wells sold out his interest in this concern to William A. Livingston, who became Fargo's partner in Livingston, Fargo & Company.  In 1850, three competing express companies: Wells & Company (Henry Wells), Livingston, Fargo & Company (Fargo and William A. Livingston), and Wells, Butterfield & Company, the successor earlier in 1850 of Butterfield, Wasson & Company (John Warren Butterfield),  were consolidated and became the American Express Company, with Wells as President and Fargo as Secretary. 
In 1866, upon the resignation of Henry Wells and American Express' merger with the Merchants Union Express Company, Fargo was elected President of the American Express Company. He was the company's president until his death in 1881, at which point his brother, J. C. Fargo, assumed the presidency, holding the post until 1914. 
Wells Fargo & Company Edit
In 1852, Henry Wells and Fargo created Wells Fargo & Co. when Butterfield (and other directors of American Express) objected to the extension of its operations to California. The original Wells Fargo & Co. was created to facilitate an express business between New York and San Francisco by way of the Isthmus of Panama and on the Pacific coast.  The new company offered banking services, which included buying gold and selling paper bank drafts, and express services, which included rapid delivery of gold and anything else valuable.  The company opened for business in the gold rush city of San Francisco, and soon the Company's agents opened offices in the other new cities and mining camps in the West. 
In 1861, Wells Fargo & Company bought and reorganized the Overland Mail Co., which had been formed in 1857 to carry the United States mail, and of which Fargo had been one of the original promoters.  
Fargo was a director and vice-president of New York Central Railroad Company, a director and shareholder of the Northern Pacific Railway, a director of the Buffalo, New York and Philadelphia Railroad Company, and a shareholder in the Buffalo Coal Company and the McKean and Buffalo Railroad Company.  He was also a stockholder in several large manufacturing establishments in Buffalo. 
In 1861, he was elected mayor of Buffalo, serving from 1862 to 1866, as he was elected to a second term in 1863.  During his term as mayor, the Buffalo riot of 1862 took place. Fargo was a lifelong Democrat and stood against secession. He supported the Union during the Civil War by paying a part of the salary of his employees that were drafted. 
In January 1840, Fargo married Anna H. Williams (1820–1890), daughter of Nathan Williams, one of the proprietors of Pompey, with whom he had eight children: 
- Georgia Fargo (1841–1892), who died unmarried
- Alma Cornelia Fargo (1842–1842), who died young
- Sarah Irene Fargo (1843–1854)
- William George Fargo, Jr. (1845–1872), who married Minerva Elizabeth Prendergast (1848–1873) 
- Hannah Sophia Fargo (1847–1851), who died young
- Mary Louise Fargo (1851–1852), who died young
- Helen Lacy Fargo (1857–1886), who married Herbert G. Squiers (1859–1911), a diplomat who served as Minister to Cuba (1902–1905) and Panama (1906–1909)
- Edwin Morgan Fargo (1861–1865), who died young
In 1868, when he was 50, Fargo bought 5.5 acres (2.2 ha) on the Buffalo's west side and between 1868–1872, he built the Fargo Mansion at Jersey and Fargo Streets, which was Buffalo's largest mansion. The home was completed in 1872 at a cost of $600,000 (equivalent to $12,962,000 in 2020). Another $100,000 (equivalent to $2,160,000 in 2020) was spent to furnish and decorate the 22,170-square-foot (2,060 m 2 ) mansion.  Michael Rizzo, a Buffalo historian, wrote: 
the 'most elaborate and costly private mansion in the state,' outside of New York City. The house took two city blocks, from Pennsylvania Avenue, West Avenue, Jersey Street, and Fargo Avenue. There was a central tower five stories high. At his request it contained wood from all the states of the Union. It was the first home in the city to contain an elevator in it, and it was said to have gold doorknobs."
He died on August 3, 1881 after battling an illness for several months.  After his funeral on August 7, 1881,  he was buried at Forest Lawn Cemetery. At the time of his death, only two of his children were living, Georgia and Helen Fargo. William's brother, J.C. Fargo, succeeded him as President of American Express after his death.
Fargo's wife Anna died in 1890 and their two surviving children lived elsewhere so the Fargo Mansion stood vacant for 10 years. It was deemed too expensive to maintain and with no buyer, the mansion was demolished and the block cut into residential lots in 1901. The mansion and estate grounds were only 30 years old. 
Fargo Avenue in Buffalo the Fargo Quadrangle at the University at Buffalo  and Fargo, North Dakota are named after him.
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Henry Wells, (born December 12, 1805, Thetford, Vermont, U.S.—died December 10, 1878, Glasgow, Scotland), pioneering American businessman who was one of the founders of the American Express Company and of Wells Fargo & Company.
Wells’s father, the Rev. Shipley Wells, was a preacher, and his mother led an itinerant life for 20 years. In 1814 the family settled permanently in Seneca Falls amid the glaciated lakes, religious upheaval, and social ferment of upstate New York.
Henry Wells was a dominating man, more than 6 feet (1.8 metres) tall and broad-shouldered. He was friendly but contrarian. Apprenticed to a shoemaker, he looked beyond that trade, and about 1824 he began opening a series of schools to cure stuttering, an affliction from which he too suffered. As he traveled through New York, Pennsylvania, and Ohio teaching, he discerned lines of freight travel. By 1836, he was a freight forwarder from Albany to Buffalo on the Erie Canal, sending his cargoes then overland to the Ohio and Mississippi rivers. As he did so, Wells impressed Daniel Drew, owner of the Hudson River steamboats Erastus Corning, creator of the New York Central Railroad and Ezra Cornell, the largest stockholder of the Western Union Telegraph Company.
The tumultuous 1840s brought opportunities suited to Wells’s talents. When Pres. Andrew Jackson’s longstanding hostility toward the Bank of the United States helped eliminate that institution and its check-clearing system in 1841, chaos and high rates resulted. That same year, Wells went to work for William F. Harnden, founder in 1839 of the first express company he served as Harnden’s agent in Albany, New York. The novel operation facilitated collections and transferred bank notes while alleviating many of the inconveniences of financial transactions during the mid-19th century. When Harnden then turned to Europe for growth in this business, Wells looked west.
For the next 10 years, Wells operated several small express companies along the route from Albany to Buffalo, New York. William G. Fargo had joined Wells as a messenger in 1842 and as a partner in 1845. Regardless of harsh, unpleasant conditions on roads, rails, and lakes, Wells declared, “It was the duty of the Express to go.” He had “one very powerful business rule,” summed up in one word: that his workers would deal with customers—all customers, regardless of race, creed, or condition—with “courtesy.”
During the 1840s, the federal government’s mail service was deeply tied to distance, with rates varying from 6 cents to 25 cents. Wells and other northeastern expressmen delivered letters for 5 cents, forcing the government to cut rates to a uniform 5 cents. In 1845 Wells joined former stagecoach driver John Butterfield and others to construct a telegraph from Buffalo to New York after Boston and New York capitalists saw no need for the speed of electricity. On November 7, Wells’s 30-mile (48.3-km) segment between Buffalo and the Erie Canal town of Lockport became the pioneer commercial telegraph.
Wells’s next venture was the American Express Company, which was founded on March 18, 1850. After the board of American Express vetoed the company’s expansion to California, Wells and other investors established the Wells, Fargo & Company to handle the banking and express business prompted by the California Gold Rush.
The American Civil War years brought huge profits to American Express and Wells Fargo but declining health to Wells. Following his retirement from the board of Wells Fargo in 1867 and from American Express in 1868, Wells turned his attention to the “dream of [his] life”: higher education for women. With the help of benefactors, land near his home in Aurora, New York, was transformed into Wells Seminary (later Wells College) for women (now coed). In his final years, Wells traveled for his health, eventually settling in Glasgow, Scotland, where he died in 1878.
Sept. 29, 2016
Just over a week after facing blistering questions in front of a Senate panel, Stumpf went back to Capitol Hill, where he received verbal lashings and further calls to resign from members of the House Financial Services Committee over the scandal.
The hearing lasted for more than four brutal hours, with Republicans and Democrats lambasting Stumpf.
The committee chairman, Jeb Hensarling, R-Texas, opened by saying: "Fraud is fraud. Theft is theft. And what happened at Wells Fargo over the course of many years cannot be described any other way."
The beginning of an industry
In 1841, William Harnden, the nation’s first expressman, hired Wells to find a solution for people needing delivery service between New York City and Albany, New York. At the time, many people preferred to hire a courier instead of sending letters by the U.S. Postal Service when things needed to arrive quickly. For people who couldn’t afford that option, they handed their valuable packages and letters to stagecoach drivers, railroad conductors, or steamship crew and hoped for the best. Dedicated express messengers like Wells offered an affordable and secure alternative by acting as a paid courier for multiple customers.
Docks near Maiden Lane in New York City in 1828. Before express companies, people gathered by the dock to find a friend willing to make a delivery. Photo Credit: Courtesy of the Metropolitan Museum of Art
After working with his customers and learning their business needs, Wells told Harnden there was demand for extending services west of Buffalo, New York Chicago and St. Louis. Harnden replied, with little foresight, “If you choose to run an Express to the Rocky Mountains, you had better do it on your own account I choose to run an Express where there is business.” Wells left Harnden’s company to start a business of his own.
At that time, traveling between Albany and Buffalo required riding on multiple train and stage lines over three days and four nights. For 18 months, Wells spent 18 of every 21 days on the road with a carpetbag filled with money and valuables and a trunk filled with odd packages of all kinds.
A stagecoach leaving Buffalo, New York, in 1841. Henry Wells took the stagecoach to Buffalo to deliver packages and money for customers in the early 1840s. Photo Credit: Picture Book of Earlier Buffalo, Frank H. Severance, 1912
One of his fondest memories during the early days of his business was when he successfully delivered fresh oysters to Buffalo. As Wells later described it, the residents gathered around him as his delivery “created almost as much excitement as the locomotive on its first trip through the country.”
He also remembered the bankers and merchants who trusted him to deliver their payments. For the first time, “parties unknown even to each other save by name” could do business across great distances because they trusted Wells to carry their money “without risk and with very small cost.”
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Wells Fargo: What It Will Take to Clean Up the Mess
A series of scandals has sparked a crisis of confidence in Wells Fargo, the nation’s third-largest bank whose roots harken back to the Gold Rush era when it provided financial services to miners in the Wild West. The most recent scandals — which included falsifying and accessing without authorization more than 2.1 million deposit and credit card accounts — has led to one of the biggest stains on the bank’s reputation in its 165-year history.
Last fall, Wells Fargo agreed to pay $185 million to regulators to settle charges of manipulating and creating false accounts in its Community Banking division. It fired 5,300 employees who were implicated, as well as the CEO and other executives. In late July, the bank admitted that it took out auto insurance on behalf of 570,000 car loan customers without telling them, resulting in higher payments and some vehicle repossessions. Its plan to make customers whole would cost $80 million, plus any fines.
The fallout continues. Last week, Wells Fargo disclosed in a Securities and Exchange Commission filing that it is expanding its probe of these falsified and manipulated accounts and warned that there could be a “significant increase” in the number of compromised accounts. Also this past week, it agreed to pay $108 million to the government to settle a 2006 lawsuit alleging that it overcharged veterans in refinancing loans. This week, the bank is facing new charges that it did not refund insurance premiums when consumers paid off their auto loans early, according to The New York Times. Multiple lawsuits were filed.
“It is a very serious set of violations that calls into question whether Wells is in fact too big to manage well,” says Peter Conti-Brown, Wharton professor of legal studies and business ethics. “The problem is either outright fraud from the highest levels or a broad indictment of the Wells Fargo governance system.… The idea that Wells management initially advanced — that this was just a few bad apples — doesn’t add up anymore.”
The bank said these scandals could cost the company $3.3 billion more than what it anticipated, according to an SEC filing. Wells Fargo can afford to pay: It reported 2016 net revenue of $88.27 billion and net income of $20.4 billion or $3.99 per share, with nearly $2 trillion in assets. But the damage goes beyond finances.
“The fine is not the real damage to the company,” says Wharton accounting professor Wayne Guay. “The damage to the company is the [negative] publicity that they have received over the last several months — the CEO got fired, several executives got fired, several executives had to give back millions of dollars in compensation. There was a serious overhaul in the organization and presumably there’s been some goodwill that has been seriously damaged with respect to customers and shareholders.”
Indeed, the scope of wrongdoing is troubling — in the fake accounts debacle alone, thousands of employees had engaged in improper activities that affected millions of accounts. “This offense is clearly pretty egregious. We have not seen similar things in similarly large banks in the U.S. yet,” says Wharton finance professor Itay Goldstein. “Maybe this is just the first one to be revealed and others will follow. We can only wait and see. It definitely seems like there is a serious problem in Wells Fargo and they need to be working hard to fix it.”
Since the scandals emerged, the market has been punishing the bank. “Before the crisis, Wells was the most valuable bank in the world,” says Wharton finance professor Richard Herring. “Since then, its price-to-book value ratio has fallen by 31%. Moreover, Wells has been losing market share to other banks not tainted by this scandal.” In February, the number of checking accounts opened at Wells Fargo fell by 43% from a year ago while credit card applications declined by 55%, the bank reported.
Herring adds that Wells Fargo’s board was reelected in the spring by the “thinnest margin in recent history. Indeed, if the board had not gained the support of Warren Buffett, the single largest shareholder in Wells Fargo, many members of the board would not have been reelected.” Shareholders are right to be concerned about the board’s failure of oversight. “No bank wants to be caught up in this kind of scandal,” he says. “It undermines confidence, which is the most important asset of a bank.”
A ‘Controlling’ Executive
Founded in 1852 as Wells Fargo and Company, the firm provided financial services by steamship, stagecoach, Pony Express, railroad and telegraph. It served pioneer miners, merchants and ranchers in the West — buying and selling gold, offering money orders, traveler checks, fund transfers and others. Wells Fargo’s legendary stagecoaches, which remain part of its logo, at one point traversed 2,500 miles from California to Nebraska and Arizona to Idaho. By sticking to its roots in the West, it survived the Great Depression and two World Wars. The bank focused on consumer banking, auto and home loans as well as small business lending and did not get into complex securities.
“It is a very serious set of violations that calls into question whether Wells is in fact too big to manage well.” –Peter Conti-Brown
Since 1960, Wells has embarked on a merger and acquisition spree that enabled it to expand beyond the San Francisco area. Among its biggest deals were the $11.6 billion takeover of First Interstate Bancorp in 1995, the $31.7 billion merger with Norwest and the $15.1 billion acquisition of Wachovia in 2008, which gave Wells Fargo a major presence coast-to-coast. The purchase of Wachovia gave Wells Fargo an investment banking business but also brought headaches. In 2010, Wells Fargo agreed to make loan modifications worth $2 billion to California homeowners who took out adjustable rate mortgages from Wachovia and World Savings but could not afford payments once interest rates reset. Wachovia bought World Savings prior to its sale to Wells Fargo.
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Today, Wells operates more than 8,500 locations and boasts an ATM network of 13,000 with offices in 42 countries and territories. It employs 271,000 people full time and serves one in three U.S. households, according to an August 4 SEC filing. Wells is also one of the most diverse U.S. banks: Nine of the 15 directors on its board are women or minorities. And until now, it had enjoyed a relatively solid reputation. “Given the very surprising scandal from a team that was held in the highest regard and trust, we believe that providing more disclosures beyond very high level metrics is one of the changes that will give more confidence,” states a recent JPMorgan Chase analyst’s note.
So what really happened at Wells Fargo? Thus far, the most detailed explanation comes from the bank itself — on the biggest scandal of falsifying accounts. It hired a law firm to conduct a probe and the results were published in a report in April. The board has expanded the scope of the investigation and the review is expected to be completed in the third quarter.
According to the April report, a confluence of factors caused the wrongdoing. Wells has a culture of independence: Its internal mantra to division heads is to “run it like you own it.” The decentralized set-up ensured that control resided in the hands of division chiefs, who presumably knew what their market needed because they were closest to them. But it also became a weakness because autonomy led to wrongdoing — with poor oversight from the corporate office until it was too late.
In the fake accounts debacle, wrongdoing occurred in the Community Banking division, where employees were given tough sales goals to meet. Some low-level managers also encouraged workers to create bogus accounts, the report said. Employees were afraid they would get fired if they missed their targets, even though senior managers privately believed only 50% of the regions could meet them. Some managers would call employees several times a day to check on their sales.
The head of the Community Banking division was Carrie Tolstedt, whom the bank described as a “controlling manager who was not open to criticism” and “notoriously resistant to outside intervention and oversight.” But she had the ear of CEO John Stumpf because her unit drove at least half of bank revenue.
Stumpf was a champion of decentralization and cross-selling of additional products to existing customers. Indeed, Wells Fargo was known for its above-average ability to cross-sell products and services. Ironically, this prowess turned out to be its undoing when combined with an aggressive sales culture. “They were the envy of the banking industry for their ability to cross-sell products to their customers,” Herring says. “It would have been productive for the board to inquire why they were so successful at cross-selling, but I suspect this got little to no board attention because it was assumed to be a strength based on the Wells culture.”
“No bank wants to be caught up in this kind of scandal. It undermines confidence, which is the most important asset of a bank.” –Richard Herring
As for Stumpf, the bank said he didn’t move quickly or far enough to change errant sales practices, which first came to light as far back as 2002. Instead, these practices were seen as “tolerable,” “minor infractions” and “victimless crimes” that were handled by increased training, stepped up detection of wrongdoing and firing of offenders. But he didn’t make systemic changes.
Stumpf “failed to appreciate the seriousness of the problem and the substantial reputational risk to Wells Fargo,” the report said. The board pointed out that it first noticed these sales practices as a “noteworthy risk” in 2014, the year after a Los Angeles Times expose. In 2015, the city of Los Angeles sued the bank. Federal probes followed that led to a settlement in September 2016.
Wells Fargo fired Stumpf (Morningstar’s 2015 CEO of the Year) and Tolstedt, plus other senior executives. It has taken back $41 million in unvested equity awards from Stumpf and $19 million from Tolstedt, and canceled their bonuses. Wells Fargo also took away Tolstedt’s $47 million in outstanding stock options and Stumpf’s $28 million in incentive compensation. However, both still leave the bank with tens of millions.
As for the auto loan insurance debacle, if the fees led to more revenue for the bank and perhaps bonuses to officers, then they “blunt the initiative to verify that the client is not already insured elsewhere,” says Krishna Ramaswamy, Wharton professor of finance. Further, when bank officers know the processes, rules and products better than the customer, it leads to the possibility of abuse because the client doesn’t know enough to challenge what they’re told, he adds.
Wells Fargo’s board also shares the blame. Abuses in the car loan division were known by the board in 2016 but they were disclosed only last month. “It wasn’t disclosed for over a year, only after it becomes apparent that lawsuits and The New York Times (which broke the story) will reveal the details,” says Wharton accounting professor Daniel Taylor. “Back in September 2016, Wells just settled the fake accounts scandal, and management also had this issue on their hands.” If directors were aware of the issue in 2016 and did not disclose it, he says, directors may have breached their fiduciary duty to shareholders.
Jail Time for Executives?
To the public, it might seem that Stumpf and other implicated executives got off easy despite the scope of the wrongdoing. Would putting executives in prison curtail bad behavior? “Undoubtedly, it would,” Herring says. “Unfortunately, decision-making within banks is often so complex that it is difficult to identify the specific individual who should be held accountable.” Adds Guay: “Getting the CEO fired is one thing finding them criminally responsible for that crime is another issue entirely. In the Wells Fargo case, you would have to show basically beyond reasonable doubt that the CEO was aware of what was going on.”
If prosecutors go after a CEO, he or she will hire the best lawyers to fight a case in court that could drag on for years, says Guay, who is an expert witness on corporate governance and executive compensation cases. And in the end, prosecutors might not even win. That’s why the government prefers to settle quickly with companies caught in improper activities — and companies usually also pay without admitting wrongdoing. To admit guilt is dangerous for companies because it opens the door to potential other litigation down the road.
“It’s not as sensational as putting people in jail and fining companies, but it’s a lot more effective.” –Wayne Guay
“For non-lawyers among us, this is a frustrating outcome,” Herring says. “The costs of pursuing a prosecution are so heavy and, given uncertainty about rulings by judges and juries, the expedient course of action is to reach an agreement in which the corporation does not admit having violated the rule but, nonetheless, pays a substantial penalty or restitution. The public sees through this convention and so it does not protect the bank’s reputation, but it certainly does leave the public with the impression that justice has not been served.”
At least, oversight of financial firms has intensified. Herring says all major institutions must now show three lines of defense: those actions responsible for ensuring compliance with rules and policies at the line of business and those responsible for independent risk management oversight, as well as creating an independent internal audit function to monitor the effectiveness of the first two lines of defense. “These three lines of defense are monitored carefully by the bank regulatory and supervisory authorities.… The hope is this heightened oversight within banks and by regulators will deter this kind of bad behavior.”
Taylor says that the frequency of corporate scandals shows the need for stronger consumer protections. “There have been recent calls for relaxing consumer protections and defunding consumer protection agencies,” he says. “It’s pretty clear, without getting into specific protections, that there is a need for consumer protection agencies.… Without those protections, there will be significant customer abuses.”
Taylor says the banking industry has been consolidating and getting less competitive, further opening the door to consumer abuses. He also notes that fines should be higher because repeat offenses imply the penalties are not a sufficient deterrent. If a company repeats offenses in the same area, it suggests that there is a clear corporate culture problem. “If the problem is systemic, then a CEO resignation isn’t going to change the culture, especially if the replacement is internal,” Taylor says.
A Better Way
Guay sees a better solution: “If we’re going to try to think about how to prevent these kinds of things from happening in the future, to my mind that’s the place to focus (executive compensation and corporate governance structures). Relying on regulators, relying on the court system, those things might have some marginal benefit, but making sure the board of directors has the right internal controls, the right risk management and corporate governance in place, that’s going to be the single biggest, most important thing we can do to make sure that these things don’t happen.… It’s not as sensational as putting people in jail and fining companies, but it’s a lot more effective.”
“It definitely seems like there is a serious problem in Wells Fargo and they need to be working hard to fix it.” –Itay Goldstein
The board’s main tools are structuring and setting compensation for senior executives and firing managers who don’t live up to board expectations, Herring says. Executives then are responsible for setting up incentive systems and oversight to ensure that employees are acting in the best interest of the bank. While this system of governance can break down at different points, “it is generally quite resilient and adaptive in responding to errors.”
Boards are quite effective in dealing with problems once they are identified, and business units that suffer losses receive heavy scrutiny, Herring says. “A more insidious problem is that boards seldom focus on areas that are quite profitable, but they should. The only way the bank can be more profitable in one line of business consistently is if it really has some advantage that no other competitor can gain, has had an incredible string of luck or is doing something unethical or implausible.”
Wells Fargo’s board is trying to right the ship. It named COO Tim Sloan to the CEO job and replaced two directors. The bank’s 15-member board now has 14 independent directors and one insider, Sloan. The roles of CEO and chairman have been separated, and by-laws have been changed to make sure the chairman is an independent director. Wells Fargo also ended the sales program at the Community Banking division — linking incentive compensation to customer service instead of sales. It is centralizing the control functions and has created a new Office of Ethics, Oversight and Integrity. Also, whenever a new account is opened, the customer gets an email notification. Credit card applications also will need documented consent, the bank said.
Will these measures work? Time will tell but at least Wells Fargo is taking the right steps to clean up the mess. “The board of directors is making a very conscious decision to try to put better internal controls in place,” Guay says. “And that’s where you would expect these things to get started — the board of directors.” When unsavory activities happen in a company, people get fired or replaced and an internal probe ensues. “The board of directors have to pick up the pieces and move forward.”
Henry Wells was born in 1805 in Thetford, Vermont, the son of Dorothea "Dorothy" (Randall) and Shipley Wells, a Presbyterian minister at what is now the First Presbyterian Church of Seneca Falls, New York who moved his family to central New York State in the westward migration of Yankees out of New England.  He was a member of the seventh generation of his family in America. His original ancestor was an English immigrant Thomas Welles (1590–1659), who arrived in Massachusetts in 1635 and was the only man in Connecticut's history to hold all four top offices: governor, deputy governor, treasurer, and secretary. In this capacity, he transcribed the Fundamental Orders into the official colony records on 14 January 1638, OS, (24 January 1639, NS). 
As a child, Henry worked on a farm and attended school in Fayette. In 1822, he was apprenticed to Jessup & Palmer, tanners and shoemakers at Palmyra, New York.
In 1836, Wells became a freight agent on the Erie Canal  and soon started his own business. Later he worked for Harnden's Express in Albany. When Wells suggested that service could be expanded west of Buffalo, New York, William F. Harnden urged Wells to go into business on his own account.  In 1841, the firm of Pomeroy & Company was formed by George E. Pomeroy, Henry Wells and Crawford Livingston. In the express business they competed with the United States Post Office by carrying mail at less than the government rate.  Popular support, roused by the example of the penny post in England, was on the side of the expressmen, and the government was compelled to reduce its rates in 1845  and again in 1851. 
Pomeroy & Company was succeeded in 1844 by Livingston, Wells & Company, composed of Crawford Livingston, Henry Wells, William Fargo and Thaddeus Pomeroy.  On April 1, 1845, Wells & Company's Western Express – generally known simply as Western Express because it was the first such company west of Buffalo – was established by Wells, Fargo and Daniel Dunning.  Service was offered at first as far as Detroit, rapidly expanding to Chicago, St. Louis, and Cincinnati.  
In 1846, Wells sold his interest in Western Express to William Livingston, whereupon the firm became Livingston, Fargo & Company. Wells then went to New York City to work for Livingston, Wells & Company, concentrating on the promising transatlantic express business. When Crawford Livingston died in 1847, another of his brothers entered the firm, which became Wells & Company. (However, Livingston, Wells & Company continued to operate under that firm name in England, France and Germany.) 
American Express and Wells Fargo Edit
Early in 1850, Wells formed Wells, Butterfield & Company with John Butterfield as the successor of Butterfield & Wasson. The same year the American Express Company was formed as a consolidation of Wells & Company Livingston, Fargo & Company and Wells, Butterfield & Company. Wells was president of American Express from 1850 to 1868.  About the time the company was formed, he relocated in Aurora, New York, which remained his home for the rest of his life.  There he built a grand residence, called Glen Park. It was designed by noted architect A.J. Davis, with grounds by Andrew Jackson Downing, another notable architect. The property later became part of Wells College, which Wells founded. 
When John Butterfield and other directors of American Express objected to extending the company's service to California, Wells organized Wells, Fargo & Company on March 18, 1852, to undertake the venture. Edwin B. Morgan of Aurora was the company's first president, and Wells, William Fargo, Johnston Livingston and James McKay were on the boards of both Wells Fargo and American Express. 
In September 1853, Wells Fargo & Company acquired Livingston, Wells & Company, which had been its express and banking correspondent in England, France and Germany. By the spring of 1854, some of the directors of Wells Fargo had become convinced that the purchase had been brought about through unspecified misrepresentations by Wells, Johnston Livingston, William N. Babbitt and S. De Witt Bloodgood. Wells and his associates made good any losses to Wells Fargo, and Livingston, Wells & Company wound up its affairs when its Paris office was closed in October 1856. 
Wells was president in 1855 of the New Granada Canal & Steam Navigation Company.  In Aurora he was president of the First National Bank of Aurora and in 1867 also the first president of the Cayuga Lake Railroad. 
Later life Edit
Wells retired from the board of Wells Fargo in 1867. He also retired as president of American Express in 1868 when it was merged with the Merchants Union Express Company under the presidency of William Fargo. Also in 1868, Wells founded Wells College in Aurora with an endowment to make it one of the first women's colleges in the United States.  
One of Wells' last ventures was the Arizona & New Mexico Express Company, of which he was president in 1876. 
On September 5, 1827, Wells married Sarah Caroline Daggett (1803–1859), the daughter of Levi Daggett (1768–1835) and a descendant of the Doggett colonial settlers. They had four children: 
- Charles Wells
- Mary Elizabeth Wells (1830–1884), who married James H. Welles (1819–1873)
- Oscar A. Wells (1833–1909) 
- Edward Wells
After his first wife's death on October 13, 1859 in Albany, New York, he married Mary Prentice of Boston in 1861. 
Wells died in Glasgow, Scotland, on December 10, 1878, two days short of his 73rd birthday.  He was brought home for burial in Aurora and was buried at Oak Glen Cemetery in Aurora.   His body was transported back to the United States aboard the steam-ship Ethiopia.  His funeral was held at his home in Aurora. 
The bank traces its history to the Woolworth National Bank in San Francisco. Charles Crocker, who was one of The Big Four of the Central Pacific Railroad and who constructed America's First Transcontinental Railroad, acquired a controlling interest in Woolworth for his son William Henry Crocker. The bank was renamed Crocker Woolworth National Bank, later Crocker-Anglo Bank, Crocker-Citizens National Bank, then Crocker First National Bank and finally Crocker National Bank. It had many branches, mostly in the northern half of California. In 1963, Crocker-Anglo Bank later merged with Los Angeles' Citizens National Bank, to become Crocker-Citizens Bank. and later, Crocker Bank.
In the 1970s and early 1980s, Crocker cultivated a reputation for customer service and convenience, including expanded hours. As a part of its promotional campaign, the bank gave "Crocker" Spaniel plush toys to parents who opened an account in the early 1980s. It was also one of the first California banks to offer automated teller machine service. One early television commercial showed a young businessman confidently using the machine, while speaking to it as if it were a person. He was then followed by an elderly woman approaching it for the first time, and greeting it with a very uncertain "Hello."
Crocker National Bank was purchased by the British financial institution Midland Bank in 1981, but after a series of financial losses it was sold on to Wells Fargo Bank in 1986. Crocker's executive vice president and two-thirds of the top 70 executives lost their jobs because of the merger. 
A Carmichael, California branch of the bank was robbed by several members of the Symbionese Liberation Army on April 21, 1975. A 42-year-old woman named Myrna Opsahl was killed during the robbery when SLA member Emily Harris fired her shotgun.
In the early 1970s Crocker ran a series of television commercials produced by Hal Riney, featuring a commissioned song "We've Only Just Begun," written by Paul Williams and Roger Nichols. This was later re-recorded by The Carpenters and sold as a single: it became the duo's signature song. The ads showed three pivotal moments in a young couple's life: their wedding, a husband's first day at a new job, and the first home move for a family with a small boy. The commercials ended with the tag line "You've got a long way to go. We'd like to help you get there. The Crocker Bank."
As of January 2012 Wells maintains the Crocker name as a current federally registered trademark at its "Crocker Office Branch" at 1 Montgomery St. San Francisco, California in a wall display of the Crocker Bank history.
Scott Adams worked at Crocker during his first years in the business world.  It is said to have inspired the evil Bank of Ethel in Adams' Dilbert comic strip.
A Crocker Bank sign appears in the movie Death Wish 2 as Paul Kersey (Charles Bronson) is trying to get home from the Mental Hospital murder (1:23:27). Another sign appears in the Clint Eastwood movie Sudden Impact (47:02) as well as the film "Koyaanisqatsi" during "The Grid" sequence (48:55).