Does Wells Fargo's Fraud Date Back to 1998?

By John

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When Wells Fargo's (NYSE: WFC) Chairman and CEO John Stumpf testified before Congress last month about the bank's fake-account scandal, the possibility was raised that the fraud began as far back as 2007 -- four years before the bank has admitted to.

But now there's reason to believe that it went back even further. The New York Times published a piece today quoting former employees of the bank who started reporting the scam to supervisors, the human resources department, and the bank's ethics hotline as early as 2005.

This got me thinking: Maybe the fraud actually dates back to 1998. That was the year Wells Fargo merged with the Minneapolis-based Norwest Bank and handed the reins over to Norwest CEO Dick Kovacevich and his understudy Stumpf.

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It was Kovacevich who pushed the combined banks so hard to cross-sell financial services. Here he is writing in the combined banks' 1998 letter to shareholders:

He then goes on to say that:

Kovacevich then conditioned those under him, as well as analysts and commentators outside the bank, to focus maniacally on the bank's cross-sell ratio -- the number of financial products (checking accounts, savings accounts, credit cards, mortgages, etc.) that its average customer used. He even stopped referring to the bank's locations as branches, preferring "stores" instead.

However, the most revealing part of that shareholder letter was an anecdote about one of its top-selling bankers. The employee had only one year's worth of experience in a Wells Fargo store. Yet, according to Kovacevich, she already ranked as "one of our best in key measures of sales performance among thousands of her peers in our 21 banking states."

What's strange is that she was based in Billings, Montana -- Norwest's traditional stomping grounds. I spent a lot of time in that area growing up and love it, but in terms of the demand for banking products, it would pale in comparison to Los Angeles or San Francisco, Wells Fargo strongholds.

It's worth asking, then, how a banker in Billings outperformed her colleagues in two of the nation's biggest cities. Maybe she was genuinely an outlier. But maybe not. I mean, after all, she did have only one year's worth of experience in a branch. And it seems unlikely that she brought a huge book of business to the job, as the previous four years she had worked in a Norwest call center.

In 1998, the average customer at the combined banks used 3.2 products. Fast-forward to the end of the most recent quarter, and that had grown to 6.27 products per customer. And, mind you, that's after Wells Fargo's cross-sell ratio declined following its 2008 acquisition of its larger rival Wachovia.

Wells Fargo's goal was to increase this number to eight products per customer. With eight? Here's Kovacevich's successor, Stumpf, writing in the bank's 2010 shareholder letter:

Now, to be fair, my wife and I use more than a dozen financial products. But we don't live paycheck to paycheck, which, according to industry experts I've spoken to in the past, is the case for something like 40% of retail customers at the nation's biggest banks. Suffice it to say, if you're not saving money, you probably don't need a whole bunch of accounts.

And, in fact, this is exactly what happened at Wells Fargo. Take this exchange from last week's episode of NPR's Planet Money between podcast co-host Robert Smith and a former Wells Fargo employee named Ashley, who was fired after refusing to ply customers with accounts they didn't need:

The point here is that it's very reasonable to think that this fraud started occurring long before even the earliest estimates that have surfaced over the past few weeks.

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John Maxfield owns shares of Wells Fargo. The Motley Fool owns shares of and recommends Wells Fargo. The Motley Fool has the following options: short October 2016 $50 calls on Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.