Size wasn't the issue in Wells Fargo debacle

Could the fake accounts scandal mean it's time to break up Wells Fargo & Co.?

It's certainly a big operation, with about 268,000 employees at last count. Nearly 31,000 of them were "platform bankers," Wells Fargo's salespeople. Plus there are about 23,000 Wells Fargo mortgage consultants and licensed securities reps also out selling.

Wells Fargo is America's largest lender, with almost $1 trillion in loans. It makes the most home mortgages, has the most consumer deposits and has about 70 million customers. It's also the bank that's issued the most debit cards.

Of course, we now know that some customers didn't know they even had a Wells Fargo debit card.

In the uproar that followed the disclosure of Wells Fargo's settlement last month with regulators over the creation of more than 2 million accounts without the customers' permission or knowledge, it's become popular to say that this bank is dangerously large.

Breaking up big banks, of course, is hardly a new idea. It's routinely debated by well-informed people, including at the Federal Reserve Bank of Minneapolis.

To be clear, though, the Wells Fargo fake accounts scandal has nothing to do with the systemic risk problem those people are talking about. A little bank can sink without a ripple, but the reason to worry about a big bank is that if enough bank capital gets vaporized through bad loans or bad trades it raises fears about the bank's ability to meet its obligations come Monday morning, and then the fear ripples throughout the financial system.

Two million fake accounts can't bring down the financial system. They can't even bring down a Wells Fargo branch. The amount of money involved here, about $2.5 million, is almost a rounding error for a bank that earned nearly $5.6 billion last quarter.

So imagine that the advocates for breaking up Wells Fargo win the argument and see it broken into four roughly comparable pieces, never minding just how they would pull that off. If a quarter-sized Wells Fargo was run the way the big one has been, it still would have had about 18 million customers and 8,000 salespeople. And, of course, it likely would have just owned up to opening 500,000 fake accounts.

That's not to suggest size isn't a management challenge. But once a bank gets bigger than a branch, staying informed isn't easy. It's a problem Wells Fargo CEO John Stumpf seems to understand.

"By the time things come to me, through five layers of management, even shoe polish tastes like ice cream," he observed about a year ago, at the Fortune Global Forum in San Francisco.

The thing is, at least five years before Wells Fargo's sales efforts became grist in the presidential campaign, information had clearly gotten to Stumpf about the brewing problems. Wells Fargo had a dedicated team to root out and fix improper sales beginning in 2011.

Two years later, Stumpf needed no update to know how it was going. He could read the Los Angeles Times.

Its reporting described a Florida branch manager who said she was routinely told she would end up working at McDonald's if she didn't meet aggressive sales quotas. The pressure to sell started building in the morning and ended with a 5 p.m. conference call, when 60 peers would listen in as a branch manager was humiliated for falling short that day.

The Times report described a branch manager who was dismayed to find out a homeless woman had been talked into opening six checking and savings accounts. Readers learned of Wells Fargo bankers scouring a database to find customers who had been preapproved for credit cards — and then ordering them even without customer requests.

One customer complained of discovering an $8,200 Wells line of credit she didn't ask for, another of seeing his Social Security number and birth date used to open accounts he didn't know about, in his name as well as fictitious businesses.

The year this account appeared, 2013, was when the firings within Wells Fargo for cheating to meet sales goals peaked. Altogether the total number of employees cut loose would rise to about 5,300.

Two years then went by, and a regulator who looked at Wells Fargo's sales practices didn't like what it saw. This led Wells Fargo to hire a global accounting firm to dig deeper. But even as late as last November, in the Wall Street Journal, a current Wells Fargo employee was still describing a manager making his life "like hell" for falling short.

Only now has Wells Fargo decided to immediately dump its retail sales quotas.

Dave Kvamme, CEO of Wells Fargo Minnesota, acknowledged the bank should have reacted quicker. "We own what has happened, we realize our customers and clients deserve better and we'll prove that we can deliver on that."

The only thing that seems to adequately explain how this problem went on for years was that the bank's senior leadership knew what was happening but never quite figured out the actual problem. It wasn't a cheating problem. It was a sales incentive and sales management problem.

So much of this new account activity was clearly a waste of a banker's time, as a Bloomberg writer was the first to point out. These were things like a small line of credit for a millionaire, an online bill-paying service for someone with no money to pay bills or a checking account that was never going to have money in it.

Think about that for a minute. The Wells Fargo sales reward (and punishment) system was so fouled up that it led employees to do things that not only did the customers no good, they did the bank no good.

You know this is not an outcome Stumpf could possibly have wanted. So why didn't he fix it?

The problems weren't hidden in a distant corner of Wells Fargo's vast operations. They weren't obscured by management layers and organizational structures. They were easily visible to the bank's leaders for at least half a decade.

The lesson here isn't about the bank being too big to effectively manage. If the boss lacks the will to see to it that big problems get solved, they probably won't. That's true at Wells Fargo and at a Dairy Queen franchise.

lee.schafer@startribune.com 612-673-4302