WASHINGTON — Wells Fargo was once held up as the gold standard for large banks — a huge institution that could stay focused on traditional banking, keep customers happy and largely avoid the scandals and mistakes that have plagued its competitors.

Not anymore.

The revelation that thousands of its employees were fired for defrauding customers is not only a blot on Wells' reputation, but a threat to the rest of the big banks. It's a sign that no matter how well run a bank appears to be, it can't necessarily detect systematic problems within its own ranks. In less than a week, Wells Fargo has become Exhibit A in the long-running debate over whether large banks are simply "too big to manage."

Even regular critics of the big banks said they were astonished by the Wells enforcement action.

"Wells Fargo has been held out — even by me — as a relatively well-run megabank," said Simon Johnson, a professor at MIT and an outspoken proponent of breaking up the big banks. "I've been seeing Wells Fargo as an exception. I don't think it is an exception anymore. They've put themselves in the category of too complex to manage."

That's a different question from whether large institutions are uniquely prone to take big risks and likely to require bailouts. The fraud committed by more than 5,300 employees didn't amount to much money, and the fines and restitution paid by the bank — $190 million — were peanuts for the deep-pocketed institution. The scandal in no way threatens Wells as a going concern.

Yet the episode provides potent ammunition for those seeking to break up the banks. That's because Wells' defense — that it was individual bad actors who were opening unauthorized accounts in order to meet sales quotas — suggests management ignorance. It effectively says that the millions spent on compliance, risk management systems and auditors wasn't enough to stop fraud that occurred over a period of years. 

"I can see this going on for a couple months maybe in a region," said Brian Levy, a mortgage banking attorney with Chicago-based Katten & Temple. "But this went on for three to five years with 5,300 employees and 2 million accounts. It blows my mind. I can't imagine how this happened. So I'm left with the conclusion that it is just too big to manage."

Johnson called it "a remarkable admission that they didn't have the appropriate controls in place."

"That is really shocking to hear them say that," he said.

Oscar Suris, the head of corporate communications for Wells, pushed back against the idea that the inappropriate behavior was widespread. He noted that it amounted to only roughly 1% of Wells' workforce and that other larger retailers and smaller firms could experience similar issues.

"We acknowledge that this has been a reputation challenge," he said. "But reputation challenges aren't driven by size alone. They can occur at a medium-size company or smaller company."

While he emphasized that Wells was not trying to downplay the enforcement actions against it, Suris added that although the numbers "out of context are certainly large numbers to many Americans, they are not representative." Wells analyzed more than 93 million accounts to determine which ones had been affected, discovering 2 million where it was unclear if they were properly authorized. Of those accounts, only 115,000 had any fees associated with them, Suris said.

Still, when Wells Chief Executive John Stumpf testifies in front of the Senate Banking Committee on Tuesday, he is likely to face tough questions from lawmakers on both sides of the aisle about how such a thing could have happened, particularly for a bank known for its risk management systems.

"This goes to the heart of the question of whether a bank can get so large that it cannot be managed," Jaret Seiberg, an analyst with Cowen Washington Research Group, wrote in a note to clients. "This makes it that much harder to defend the ability to manage the biggest banks. It is not just a few rogue employees."

Another interpretation, floated by some observers, is that Wells, which prided itself on cross-selling, was making so much money in that department that it simply didn't want to look closely — or refused to invest in systems that could have made fraud easier to detect.

Suris dismissed that argument, saying the bank identified the problems and has worked hard to fix them. On Tuesday it announced it was scrapping its incentive payment process that likely played a role in encouraging employees to open unauthorized accounts.

"We are trying to be very responsive to this matter," Suris said. "It is the No. 1 priority that we have right now."

But it's worth noting that many big-bank supporters have been notably silent on the issue since the Wells case came to light. Representatives for several groups that represent large banks either did not return requests for comment or declined to weigh in for this article.

The Wells settlement comes after several other big-bank scandals, including the London Whale case at JPMorgan Chase and the manipulation, at numerous global banks, of the London interbank offered rate and of foreign exchange rates. But the Wells case may have even more staying power, in part because it directly affected customers, who were hit with fees and other charges related to accounts they didn't open.

Moreover, it's easy for consumers to grasp. Unlike many other scandals, the details of which often involve technical terms and concepts that are difficult to understand, this one is exceedingly simple.

Anat Admati, professor of finance and economics at Stanford University School of Business and a frequent critic of the big banks, said the public may view the Wells scandal more harshly than other blockbuster settlements.

But while breaking up the big banks may still be important, she said, size alone is not the root of the problem — a permissive or willfully ignorant management and a lack of any credible threat of prison time for criminal wrongdoing are the main culprits.

"This has been going on or a long time, it's just that this time people can relate to it because it's about customers and accounts," Admati said. "Just breaking up [the banks] won't necessarily fix the problem. Even a small company can defraud customers."

There are also those who are skeptical of Wells' explanation.

"It's frankly hard for me to believe that people didn't understand that something was going on," said Marcus Stanley, head of regulatory affairs with Americans for Financial Reform, and a frequent bank critic. Thousands of "employees are opening fake accounts — I mean, if they didn't know, they should have known. They were pushing pressure down the system."

The Justice Department has reportedly opened a criminal probe into the bank's actions, according to The Wall Street Journal, to determine whether senior executives were aware of employees' actions.

Alan Blinder, the former vice chairman of the Federal Reserve Board and now a visiting fellow at the Brookings Institution, said the case was "horrifying because it's so many people."

If "there were three bad apples in some branch of this far-flung empire, and the people in San Francisco had no idea what was happening, then I'm completely on board with the idea that they're too big to manage," Blinder said in an interview. "But when you've got 5,300 employees doing something like that, you have to wonder about the leadership of the bank. It's an awful lot of people."

Stumpf defended the firm in a recent interview with The Wall Street Journal, stressing that it was rogue employees who committed the fraud. Suris, the bank spokesman, said that if this were a broader cultural issue or if high-level executives had approved of inappropriate behavior, the numbers would be far higher.

"If this were a broad-scale, wholly encouraged systematic thing across our entire footprint, I would think you would have some different numbers there," he said.

But that explanation does not satisfy everyone.

The idea that some higher-level executives might have known what was taking place but haven't been fired or received criminal charges raises a different set of issues. Instead of a discussion around "too big to manage," the case would fuel questions about whether some bankers are "too big to jail."

"It's either too big to manage or a criminal conspiracy by the top executives," Johnson said. "Take your pick."

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