During four days last September, Wells Fargo Bank customers were unable to get information on their accounts via telephone.
They didn't know it at the time, but they were on the tip of an iceberg- serious problems stemming from Wells Fargo & Co.'s attempts to absorb First Interstate Bancorp's operations.
The full dimensions are emerging-a rise in what Wells calls its operating loss (see chart) and a 37% earnings decline in the second quarter-of a postmerger integration process that went awry. Expecting to burnish its reputation for cost-control mastery, Wells set overly ambitious goals and underestimated the time needed to achieve them.
With unusual candor, Wells officials are owning up to their mistakes in public and trying to finish the merger processes in relative peace.
"We had too much confidence in ourselves as miracle workers, and we didn't do it this time," said chief financial officer Rodney Jacobs, one of four executives elevated to vice chairman when Wells president William F. Zuendt in May announced his intention to retire.
"This was not a quarter we wanted to see, but it did represent a cleanup of remaining integration issues," Mr. Jacobs said.
Last year, when Wells said it would digest First Interstate in eight months, few outsiders voiced doubts. Wells' 1986 purchase of Crocker National Corp. was widely regarded as the model of swift and effective paring of overlapping operations.
But the First Interstate deal brought some surprises.
For starters, a higher-than-expected number of First Interstate employees accepted buyouts. For senior and executive vice presidents they were worth up to two years' salary, regardless of time at the bank.
Of 506 senior First Interstate managers, 386 left voluntarily. In the technology group, a key piece of the integration puzzle, 16 of the top 18 executives took the buyout.
This may not have seemed troubling because Wells decided both "to go with their management team and with their own systems," said Bruce G. Willison, former chief executive officer of First Interstate's lead bank, and now president and chief operating officer of H.F. Ahmanson & Co.
But Wells quickly discovered it needed help from First Interstate people to manage the transition. The significance of the talent drain became apparent when Wells tried to reconcile its main general ledger with those of acquired First Interstate banks in nine western states.
Because of their unfamiliarity with the acquired systems, Wells personnel had trouble tracking Federal Reserve balances and encountered problems posting transactions. The bank lost track of $150 million and had to write it off.
"An integration with a bank the size of First Interstate had to be more collaborative," said Joel P. Friedman, managing partner of Andersen Consulting's strategic services division. Wells was "presuming that its past success would lead to success again."
Wells officials said they wanted to retain more First Interstate people.
"Many were asked to stay but chose not to," said Randy Kahn, former First Interstate senior vice president of electronic banking who, like Mr. Willison, left for Ahmanson's Home Savings of America.
"Wells was too different," Mr. Kahn said. "I watched the decisions made at the early stages, and I said, 'I am not going to be a constructive part of this. I don't fit this culture, I don't think that way.'"
Mr. Willison said the banks had major philosophical differences.
"To customers, First Interstate had been a relationship bank, while Wells Fargo believes in the transactional approach, which is quicker, more to the point, and driven by cost efficiencies," he said.
Differences in product lines and approaches to managing change also had their effect.
"Wells Fargo was not a cash management bank, and First Interstate was," Mr. Willison said. "Maybe there were problems mapping over the products because the executives running that business were no longer there," he said.
First Interstate had just spent five years converting its deposit accounts to a single system. Observers said it was unreasonable to expect that 975 First Interstate branches could go through another conversion in just eight months.
"If everything had gone perfectly, it would have been one for the 'Guinness Book of World Records,'" said Hayden D. Watson, a former executive vice president at First Interstate and now managing director of bank operations for Fleet Financial Group, Boston.
"There were too many major events occurring simultaneously," Mr. Watson said about Wells' plan to consolidate data centers. "There were unanticipated consequences upon the network itself, and that trickled throughout the bank.
"We had many, many nights when our check processing equipment was unable to communicate with the mainframe computers because of network failure."
All observers seem to agree that the worst of all system failures was the one affecting the telephone service in September.
The trouble began in late August when Wells began adding information ports to the network.
An internal memo from Mr. Zuendt and chief executive officer Paul Hazen said Wells "did not allocate sufficient memory capacity to keep track of the information flows for all the new ports. This led to a condition where the network routers were overflowing with requests."
Normally, the bank's technical experts could fix such a problem in an hour or so without affecting customers, the memo said. Because of complicating factors from the consolidation, it took two days.
Wells technologists said problems of this sort are inevitable in any large-scale conversion. But had the bank given itself more time, the problems "would have been spread out and wouldn't have been as visible to customers and the press," said Leonard A. Gucciardi, senior vice president for telephone banking.
As details of Wells' troubles leaked out, bankers said many had occurred months before and most had probably been fixed. These sources do not share the pessimism about Wells that securities analysts expressed in the wake of the second-quarter earnings announcement.
"The people who are writing them off are not aware of what a powerhouse Wells Fargo is," said Mr. Watson of Fleet. "A year from now, no one will remember" the First Interstate crises.