How Wells Fargo Became One of the Biggest Banks in America

How does Wells Fargo & Company (WFC) usually make money? Well, they lend it out at a higher rate than they borrow it at. They’re a bank. There isn’t supposed to be much more to it. 

Banking is the ultimate intangible industry, moving assets from lower-valued to higher-valued uses in the most impalpable of ways, but that still leaves plenty that distinguishes Wells Fargo from its major U.S. competitors. Starting with its size and its reach. As of March 29, 2019, Wells Fargo has a market capitalization of $222.96 billion and is the fourth-largest bank in the United States. It employs 259,000 people and serves one in three U.S. households. Wells Fargo reported full year 2018 net income of $22.4 billion earnings, compared with $22.2 billion in 2017.

Wells Fargo was created by a merger of large super-regional banks. Founders Wells and Fargo created their namesake in 1852 to cater to the growing population of gold miners and related hangers-on in California, which back then was in the early stages of its transition from distant backwater to most populous and economically powerful state in the union. After close to a century and a half of steady growth, in 1998 Wells Fargo merged with Norwest Corp. A decade later, Wells Fargo bought out East Coast giant Wachovia. Add them all together, and Wells Fargo can now claim over 70 million customers from coast to coast. 

Officially, Wells Fargo divides its operations into three categories for management reporting purposes. These segments are Wealth and Investment Management; Wholesale Banking; and Community Banking. 

Wealth and Investment Management means financial services for rich people. This end of Wells Fargo’s business doesn't just dispense advice, e.g. on how to minimize taxes, but also helps set up foundations, solve inheritance issues before any might arise, etc. Every crazy rich person knows, at least in the United States, preserving one’s affluence can be almost as much work as it was to get wealthy in the first place. All told, Wells Fargo reported $2.6 billion of net income from wealth management, brokerage and retirement in 2018. If that sounds substantial, it’s easily the least lucrative of the bank’s three areas of operations. 

As for “wholesale,” that word has a slightly different meaning in banking than it does elsewhere. Plenty of banks don’t even use the term, but at Wells Fargo it’s a catch-all for underwriting, and selling asset-backed securities, along with other types of banking for large corporations and even other banks. 

Actually, that doesn't even begin to cover it. Wholesale Banking includes, for instance, equipment financing. If you want to buy a dragline for your surface mining project, and don’t have the $35 million or so on hand to pay for it with cash, Wells Fargo can front you the money. Wells Fargo also handles crop insurance, commercial real estate, energy syndicated loans and more. Many of the Fortune 500 companies do at least some wholesale banking with Wells Fargo. That’s when they’re not transferring their risk. 

When a multinational with tens of millions of dollars in cash on its balance sheet needs somewhere to store that cash, Wells Fargo wholesale is where they do business. To be a Wells Fargo wholesale customer, you need annual revenues of at least $5 million. Wells Fargo’s wholesale operations have even greater reach than its community operations do. The bank has wholesale offices in 42 states, manned by 32,000 employees. That’s to say nothing of its wholesale offices across the globe, from Santiago to Seoul, Calgary to Cairo, and Sydney to St. Helier. All told, net income from wholesale banking totaled $11 billion in 2018, far more than wealth, brokerage and retirement operations.

Which leaves community banking. Community banking net income was $10.4 billion in 2018, on revenue of $47 billion. That margin might seem high, but it really isn’t. If you’ve ever been skeptical of how you can possibly be so big a profit center to a bank, what with your modest checking account balance and your restrained use of your debit card, understand that community banking is more than just ordinary people depositing their paychecks and maybe buying the occasional mortgage. According to the 2018 annual report, the community banking segment includes "checking and savings accounts, credit and debit cards, and automobile, student, mortgage, home equity and small business lending," in addition to "the results of our Corporate Treasury activities net of allocations (including funds transfer pricing, capital, liquidity and certain corporate expenses) in support of other segments and results of investments in our affiliated venture capital and private equity partnerships."

In February 2018, the Fed imposed a cap on Wells Fargo's assets due to its "widespread consumer abuses." The cap is expected to stay in place through the end of 2019 as the bank corrects issues. Here's a long, but not exhaustive, list of the company's scandals. Buckle up.

In December of 2013 it was revealed by the LA Times that some fake accounts and credit cards had been opened by bank employees desperate to meet their sales quotas. At the time of the story, Wells Fargo denied the claims. It was only three years later in 2016 that the company would admit that over 3.5 million unwanted accounts were opened.

Here's what happened:  In order to get bonuses, Wells Fargo employees needed to hit huge sales goals that many felt were unrealistic. Instead of finding real customers, employees just created accounts in existing names of Wells Fargo customers, even using fake email accounts and PIN numbers to sign them up, seemingly hoping no one would notice. Small amounts of money were even transferred to these accounts to make them look real. Needless to say, people were not happy about this, and Wells Fargo has lost much of the trust it had spent years building up. 

Wells Fargo promised to refund customers who had improper fees as a result of this business practice, fired 5,300 employees, and had its CEO step down. According to the New York Times, it paid "more than $1.5 billion in penalties to federal and state authorities, and $620 million to resolve lawsuits from customers and shareholders." 

On April 20, 2018, it was announced that the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency will collectively fine Wells Fargo $1 billion for its mistreatment of its auto loans and mortgage consumers.

In June 2018, the SEC revealed an investigation found Wells Fargo had supported active trading by brokerage clients on high-fee debt products that were supposed to be held to maturity. The bank without admitting or denying guilt, settled by agreeing to repay $1.1 million in ill-gotten gains and interest as well as $4 million in penalty. 

In August 2018, the company paid a penalty of $2 billion for allegedly misrepresenting the quality of residential mortgage loans a decade earlier.

Wells Fargo CEO Tim Sloan, who spent 31 years at the lender and was trying to restore trust in the brand, stepped down unexpectedly in March 2019. "It has become apparent to me that our ability to successfully move Wells Fargo forward from here will benefit from a new CEO and fresh perspectives," he wrote in a statement. Sloan had faced pressure to resign from regulators and critics who saw him as too much of an insider to reform the bank's culture.