That'll Teach You

José R. Fernández (’85)

President, CEO and Vice Chairman, Oriental Financial Group Inc., San Juan, Puerto Rico

The CHALLENGE:

Becoming a first-time CEO of a major bank at the brink of the global economic crisis

The STORY:

José R. Fernández had been preparing for years to take over as CEO of Puerto Rico’s Oriental Bank and Trust. The opportunity finally arrived in January 2005.

As he describes the period, the bank was coming under increasing pressure to improve earnings, and its competitors were aggressively lending in the residential and construction markets. The bank’s officers began considering a major investment in then-lucrative and popular collateralized mortgage obligations, aka mortgage-backed securities. The new CEO had his doubts. He believed competitors were offering irrational rates on commercial loans and deposits, which was why he had curtailed lending.

The island was already technically in a recession. In fact, Fernández
believed that if things didn’t improve, the banking sector could collapse by 2007. Just as concerning, he didn’t entirely understand how the complex mortgage securities worked. Weighing against these doubts, however, was a feeling of loyalty to his mentor and predecessor, who favored the investment, and his awareness that he was so new to the CEO role. He says he voiced his concerns but didn’t push back with all his might.

In December 2006, the bank invested $750 million in the securities. In the fall of 2008, the global financial crisis descended, precipitated by the collapse of the mortgage-bloated housing sector. In 2009, Fernández decided to take the painful step of dumping the bank’s mortgage-backed securities at a loss of $75 million.

The company’s stock price fell to less than $1 from more than $20 a share 13 months earlier. But things were worse for the bank’s competitors. The collapse Fernández had predicted for 2007 arrived in 2010. All of Oriental’s domestic competitors either failed or had to be bailed out by the government. The comparatively prudent action of Oriental’s management led bank regulators to ask Oriental to bid on one of island’s other banks that had gone into receivership, Eurobank. Oriental successfully acquired the bank in April 2010.

The LESSONS:

Never invest in what you don’t understand. Stick to your core strategy. Don’t manage for the short term or try to “keep up with the Joneses.” Trust your instincts. Speak your mind. And when you’ve made a mistake, admit it and correct it as soon as possible—no matter how painful.