INTRO: Ah, Wells Fargo, the 3rd largest bank in the
US with a total of $1.78 trillion in assets under management. Aside from being massive
in size, Wells Fargo also has a massive history being founded nearly 200 years ago in 1852.
Given their rich history and dominant position, you would think that Wells Fargo is one of
the most respected and trusted financial institutions in the world, but this couldn’t be further
from the truth. In fact, Yahoo ranked Wells Fargo as the second most hated company in
the US in 2020, only beaten out by the Weinstein company. For people who don’t bank with
Wells Fargo or follow the financial industry too closely, this might be a bit surprising.
But it just takes one glance at their history to understand why they’re so despised. On
their Wikipedia page, for example, the Lawsuits, fines, and controversies section is literally
longer than their history section. So, here’s the controversial history of Wells Fargo and
why they’re so dominant despite all their shortcomings.
STARTING WITH A BAILOUT: Taking a look back, the history of Wells Fargo
circles back to two men named Henry Wells and William Fargo. These two were actually
co-founders of American Express, which was at the time a pretty popular express company
in New York. William and Henry wanted to expand American Express to California and leverage
the gold rush, but the board opposed this decision. Reluctant to give up the idea, the
duo ended up starting Wells Fargo on March 18, 1852. Given their history with express
services, Wells Fargo was also naturally an express company, but they also dabbled in
banking as well. At first, things were looking super bright as depositors flooded in throughout
the early 1850s, but it didn’t take long to understand why Amex’s board refused to
expand to California. In 1855, news arrived that the parent company of the bank Page,
Bacon, & Company had collapsed due to over speculation. This triggered a bank run which
quickly escalated into a statewide banking panic. Within just a week, customers withdrew
so much money that Wells Fargo lost ⅓ of their total assets. While this was disastrous
for banks that went under, and customers who couldn’t retrieve their money, this actually
worked out quite well for Wells Fargo. You see, Wells Fargo was one of the few banks
that survived the panic which gave them 2 major advantages. First of all, Wells Fargo
had very little remaining competition in California, and secondly, surviving the panic gave Californians
much more trust and confidence in Wells Fargo. I’m not sure if this trust was really deserved
though as it didn’t take long for Wells Fargo to delve into a sketchy investment.
Wells Fargo turned around and lent these new deposits to a startup called Overland Mail
Company. The first red flag was the reasoning behind the loan as it’s not clear if the
loan was made based on merit or nepotism. You see, the founders of Overland Mail had
substantial stakes in Wells Fargo and American Express. And the president of the company
was Amex’s third cofounder John Butterfield. Anyway, things started off decent in 1858
as Overland had a contract from the US government, but the problem was that this was their primary
source of revenue. And in 1859, when Congress failed to pass the annual post office appropriation
bill, Overland received no funding which led them to take out even more debt from Wells
Fargo. It didn’t take long for Overland to become a default risk and in 1860, Wells
Fargo threatened to foreclose on Overland. The founders of Overland didn’t resist much
and they agreed to let Wells Fargo take over the company, but this didn’t help much given
their dire situation. Another express company that was founded around the same time and
facing a similar issue called Pony Express would actually shut down just 6 months later.
So, things were looking pretty sketchy, but luckily for Wells Fargo, the US government
awarded Overland a $1 million express contract in 1861. Wells Fargo hadn’t even been around
for 10 years yet, but somehow, they had already received their first bailout.
SMOOTH SAILING: Despite that early encounter with Overland,
the next century was pretty smooth for Wells Fargo. Throughout the rest of the 1800s, Wells
Fargo mainly focused on growing its express business which proved to be quite lucrative.
In 1869, for example, Wells Fargo paid a massive premium to acquire the Pacific Union Express
Company which gave them exclusive rights to the Central Pacific Railroad for 10 years.
However, this deal also stipulated that the leader of Pacific Union Lloyd Tevis would
takeover over Wells Fargo as president. William Fargo felt that this was a beneficial trade
for the company long-term, and in 1872, he would resign as president and return to American
Express. Under Lloyd’s leadership, the banking and express offices grew from 436 in 1871
to 3500 by the end of the century. Wells Fargo also established America’s first transcontinental
express line which leveraged over a dozen railroads. This allowed them to expand into
the lucrative northeast market, but Lloyd wasn’t satisfied with just that. He also
expanded the express service internationally into Japan, Australia, Hong Kong, South America,
Mexico, and Europe. On top of this, Lloyd also expanded into the money order business
and Wells Fargo marched into the 1900s full force. But the early 1900s wasn’t that pleasant
for Wells Fargo due to external circumstances. In 1906, San Francisco was hit with an earthquake
that destroyed Wells Fargo’s national bank building. The bank’s vault did survive but
Wells Fargo was forced to spend significant resources on building back. On the bright
side, citizens and other businesses also spent significant money on their own properties
which led to a massive influx of capital. Within the next 18 months, Wells Fargo’s
deposits increased from $16 million to $35 million. Unfortunately, though, this didn’t
last long as another banking panic came around in 1907. Wells Fargo didn’t have any liquidity
problems, but the panic was quite painful as they lost $1 million worth of deposits
every week for 6 weeks straight. This was nothing though compared to what they would
lose in 1918. Due to World War 1, President Wilson would approve the nationalization of
all express companies, so Wells Fargo was forced to give up their express business.
Now, you might be thinking that there were more losses to come given that the Great Depression
was just around the corner. But this was actually not the case. The president of Wells Fargo
at the time, Frederick Lipman, was an extremely conservative investor. He chose to reinvest
all the bank’s profits into trusts as opposed to the stock market. So, Wells Fargo didn’t
even feel the Great Depression. In fact, Wells Fargo helped bail out failing institutions
and their deposits actually grew $2 million during the Banking Holiday of 1933. This stellar
performance earned Wells Fargo unprecedented amounts of trust and respect. Wells Fargo
used all this new interest to make loads of financial acquisitions, and by the 1970s,
they emerged as one of the most dominant forces within the banking industry. Unfortunately,
though, it didn’t take long for employees and executives to start abusing this trust.
HOLE IN THE REPUTATION: In January of 1981, Judith MacLardie was just
completing one of her routine audients of Wells Fargo when she uncovered a $21.3 million
hole in the records. At first, most of the banking community refused to believe it. This
must’ve been some sort of error or mistake. There’s no way Wells Fargo was linked to
any sort of fraud. Just three months before this, a top auditing official named Edward
Croak proudly announced that Wells Fargo was in an enviable position thanks to their iron
fist on fraud and embezzlement. Yet, here they were. It turns out that between 1978
and 1981, an employee named Lloyd Benjamin Lewis had been writing fake debit and credit
receipts to Sam Marshall who was the president of Muhammed Ali Professional Sports. Lloyd
had used this tactic to funnel out $21.3 million out of which he received $300,000. Lloyd ended
up pleading guilty and testifying against his co-conspirators. No executives were charged,
but it is a bit suspicious that it took so long to catch the fraud. It’s not like Lloyd
was carrying out a very sophisticated fraud. Something that we should note though is that
the CEO at the time Richard Cooley did resign shortly after in 1982 despite not being charged.
This poked the first holes into Wells Fargo’s reputation in a hundred years, and Wells Fargo’s
deposits started to stagnate for the first time in decades. In order to accommodate for
this slower growth, Wells Fargo placed their emphasis on acquisitions once again. In 1986,
Wells Fargo purchased Crocker National Bank for $1.1 billion, and in 1988, the purchased
Barclays Bank of California for $125 million. Moving into the 1990s, they considered a merger
with American Express, but this fell through after the executives had a disagreement. Nonetheless,
Wells Fargo continued on in their acquisitions spree. In 1996, they purchased Interstate
Bancorp for $11.6 billion, and in 1998, they merged with Norwest. All these acquisitions
allowed Wells Fargo to continue their rapid growth throughout the 80s and 90s, but there
was no way they were going to buy their way out of the dot-com crash. So, like the rest
of the banking industry, they tried to loan their way out and that brings us into the
2008 financial crisis.
FRAUD AFTER FRAUD: The 2008 financial recession really needs
no introduction as it was by no means specific to Wells Fargo. A large number of banks got
involved in risky subprime mortgage lending which eventually came to bite them back hard.
As borrowers began to default, massive banks like Lehman Brothers and Bear Sterns were
taken down completely. After this, the government panicked and decided to bail out the remaining
banks which has since become one of the most controversial decisions in history. Wells
Fargo received a $25 billion bailout, and this permanently tarnished the reputation
of the bank. The silver lining was that competitors like JP Morgan Chase and Bank of America also
received similar bailouts, so the public outrage wasn’t just targetted at Wells Fargo. At
this point, it would’ve been best if Wells Fargo just stayed out of the spotlight and
played it safe, but instead, they decided to stage an ambitious recovery. The executives
started putting out impossible sales goals and ramped up pressure to the max. They had
lost decades of progress throughout the recession, and they were determined to regain their losses.
But the problem was that the sales goals were literally impossible, and desperate to meet
the sales goals, many employees started to fake numbers. Over the next several years,
employees opened up 1.5 million checking and savings accounts under their customers’
names without their consent. They also opened up 500,000 credit cards again without customers’
consent. When this scandal was finally exposed in September of 2016, Wells Fargo lost all
credibility. And I don’t just mean figuratively, Wells Fargo literally lost accreditation with
the Better Business Bureau. On top of this, they were fined $185 million for the fiasco,
but this doesn’t really mean much given that they profit roughly $20 billion per year.
Wells Fargo may have escaped serious financial consequences, but in terms of reputation,
this was the final straw. Applications for credit cards and checking accounts fell off
a cliff, and total assets have stagnated ever since. This might not sound that bad at first
glance, but when you consider the rampant inflation and the parabolic moves within real
estate and the stock market, this is terrible. Chase and Bank of America aren’t really
liked either, but both of them are up about 50% in assets since 2016. So, really, Wells
Fargo is not stagnating, they’re actually declining.
WELLS FARGO TODAY: To make things worse, everything we discussed
so far was just the biggest scandals and frauds. Wells Fargo has also had plenty of smaller
schemes as well. Over the years, they’ve been accused of ignoring money laundering
schemes, discriminating against African American and Hispanic borrowers, violating credit card
laws, committing insider trading, lobbying, and rolling out predatory lending programs.
Considering all this, I don’t think anyone is surprised by Wells Fargo’s high ranking
on the most hated list. And that’s really a shame given that Wells Fargo was the heroes
of the great depression, but nearly all of it was self-inflicted. Looking forward, Wells
Fargo may not have much longer. Almost everyone agrees that given the ludicrous debt levels,
a great deleveraging is inevitable. Ray Dalio has been preaching this for years, and recently,
even Elon Musk jumped on board. And given that Wells Fargo is already on a decline,
they may get wiped out by this upcoming storm just like Lehman Brothers. Who knows though,
Wells Fargo crushed the Great Depression, so maybe they’ll surprise everyone and crush
the great deleveraging as well, but we’ll just have to wait and see. Do you guys think
Wells Fargo will crush the great deleveraging or get crushed themselves? Comment that down
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