Image source: The Motley Fool.

If you dig through the history of Wells Fargo (WFC 1.11%), you'll find that its fake-account scandal doesn't reflect the Wells Fargo that existed for most of its 164-year history. There's a reason for this, but let's first look at what the real Wells Fargo stands for.

A short history of Wells Fargo

You probably know that Wells Fargo's roots date to the California Gold Rush of 1849. Or, to be more precise, to 1852, the year Henry Wells and William Fargo replicated their East Coast stagecoach empire, American Express, to serve gold miners who flooded into San Francisco.

Wells Fargo was not originally a bank. Its principal job was to ferry gold dust from inland mines to the San Francisco Bay, where it was loaded onto steamships owned by people like Cornelius Vanderbilt and sent to New York City. Banking thereby developed as an ancillary service, though a fitting one because it was safer for miners to store their gold (the currency then) with Wells Fargo than to keep it stashed in their wooden shanties in places like Sutter's Mill.

When Wells Fargo was founded, it was neither the first nor the biggest express company on the West Coast -- that distinction went originally to the Adams Express Company. For instance, here's a gold manifest from a steamship that sailed from San Francisco to New York City in 1854:

Express Company

Value of Gold Shipment

Page, Bacon & Company


Adams Express Company


Wells, Fargo & Company


Data source: Edward Hungerford, Wells Fargo: Advancing the American Frontier (1949).

But through prudent management, Wells Fargo soon became the most dominant stagecoach line west of the Mississippi River.

The origin of Wells Fargo's prudence

The catalyst for its ascent was the Panic of 1855. A drought that year made it impossible to placer mine, which required running water to sort through pebbles and soil in order to find golden nuggets. This sent the San Francisco economy into a tailspin, causing 200 of its businesses to fail, including Wells Fargo's primary rivals.

"As the only major express company surviving the crash, Wells Fargo could look forward to prosperous days ahead," wrote Edward Hungerford in his 1949 history of the bank. In fact, somewhat reminiscent of the 2008 financial crisis, Wells Fargo's financial position was so strong that it didn't even suspend its dividend in 1855 (to be clear, it did reduce its dividend in 2008, but that was done to appease regulators as well as out of the desire to fund its acquisition that year of its larger rival, Wachovia).

Going back to its very origins, then, Wells Fargo evidenced the culture of prudence that so many analysts and commentators, myself included, had come to take for granted prior to its fake-account scandal.

The seeds of mistreatment?

With all of this said, if you were so inclined, you could argue that the seeds of Wells Fargo's mistreatment of customers was planted in the years immediately after 1901. That was when famed railroad financier Edward Harriman gained control of the company and soon thereafter handed the reins of its banking operations over to I.W. Hellman.

Hellman catered to large commercial customers, somewhat like the East Coast merchant banks did at the time. And in a strange twist of fate, it was the opportunity left in the wake of this policy that led to the founding of the retail-focused Bank of Italy, which was later renamed Bank of America (BAC -0.34%), as Julian Dana discusses in her 1947 biography of Bank of Italy's founder A.P. Giannini.

I nevertheless think this is stretching the case. It's just too remote. And, anyway, over the next nine decades Wells Fargo became much better known for safely and profitably navigating through some of the most treacherous crises in the history of banking, just as it had done in 1855.

Rock-solid performance

Take this chart I drew up earlier this year, which uses data from Wells Fargo's annual report archives to show that the bank hasn't recorded a single loss over the past four-and-a-half decades (and the trend almost certainly dates back further):

Data source: Wells Fargo. Chart by author.

This is impressive. And particularly when you consider that few of its competitors can claim the same thing. Throughout the 1980s, in fact, many analysts and commentators believed that Wells Fargo's closest rival, Bank of America, was on the verge of failure after suffering three consecutive years of substantial losses in the mid-1980s.

Data source: The New York Times archives, Bank of America's 1993 & 1994 10-Ks, and Gary Hector's Breaking the Bank: The Decline of BankAmerica. Chart by author.

And in the event you need additional proof, here's a chart of annual bank failures since the Civil War augured in the era of modern American banking in the 1860s.

Data source: FDIC. Chart by author.

With this in mind, it's pretty clear that Wells Fargo has performed incredibly well through the years, offering arguably the single safest investment in the bank industry. Indeed, it's no coincidence that Warren Buffett, one of the most successful bank investors in our country's history, is its biggest shareholder.

To this end, here's Buffett explaining in 1990, the year Berkshire Hathaway acquired its 10% ownership in the bank, why he admired Wells Fargo so much:

With Wells Fargo, we think we have obtained the best managers in the business, Carl Reichardt and Paul Hazen. In many ways the combination of Carl and Paul reminds me of another-Tom Murphy and Dan Burke at Capital Cities/ABC. First, each pair is stronger than the sum of its parts because each partner understands, trusts and admires the other. Second, both managerial teams pay able people well, but abhor having a bigger head count than is needed. Third, both attack costs as vigorously when profits are at record levels as when they are under pressure. Finally, both stick with what they understand and let their abilities, not their egos, determine what they attempt.

My point is, the Wells Fargo we now seem to know today is not the same Wells Fargo that people like Buffett and others knew in the past. And this brings us to the question that prompted me to write this.

What changed?

The answer is simple: In the wave of bank mergers ignited by the deregulatory wave of the 1980s and '90s, Wells Fargo merged with Minneapolis-based Norwest Bank. But while it kept its storied name, the executives at Norwest took control of the company.

First and foremost among these was Richard Kovacevich, the former CEO of Norwest and later CEO of Wells Fargo from 1998 to 2007, when his understudy John Stumpf assumed the helm. As I discuss at greater length here, it was Kovacevich who introduced the overly aggressive sales culture to Wells Fargo that led to its currently unfolding fake-account scandal. (For those of you who follow banking, this is the same situation at Bank of America, which was taken over by NationsBank the same year.)

Here's Kovacevich writing in 1998 in his first shareholder letter as Wells Fargo CEO:

Over the past 10 years, Norwest built a reputation for having the industry's strongest sales and service culture.

He then goes on to say that:

We intend to propagate effective technology -- and a superior sales and service culture -- across the entire new Wells Fargo. We expect every Wells Fargo business to refer all their customers to other businesses. We want to earn nothing short of all the business of every creditworthy customer. We expect to sell at least one more product to every customer every year.

And that's exactly what the combined banks proceeded to do. Between 1998 and the second quarter of this year, the number of accounts used by the average customer at Wells Fargo increased from 3.2 up to 6.3. As we now know, this was accomplished in many cases by opening accounts for customers who either didn't know about the accounts or had no use for them.

Thus, if it seems like the Wells Fargo of today is different from the Wells Fargo of the past, then you're right. Because it's actually Norwest Bank, which, evidently, approached the trade in a different way.