Two Companies Dealing With Financial Recession

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Introduction

Despite the big size and financial capacity of the giant corporations, economic recession heavily affected their operations. The year 2007 and 2008 will historically be remembered as the giant corporation went down economically. The severity of the situation was noted as the corporations’ sort to obtain bankruptcy protection from their creditors all over the world while others totally closed down. In addition, there was enormous closure of various branches and lay-off of human capital as the company tried to cut down its operating expenses. This paper seeks to analyze the “too big to fail” problem.

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General Motors Downfall

After a long time of prosperous domination in the motor industry, GM finally found itself in a great financial difficulty it has never experienced in its lifetime. Different people have argued differently on the issue such that no one seems to know the actual cause of the downturn. Jacoby (para. 2) attributed the GM manufacturing techniques as among the cause of the downfall. According to Sanford, GM has continuously used its old technology in their productions which have retained high production costs. The company has also neglected the taste and preferences of its consumers who have switched to alternative companies in the same industry. Moreover, the failure of the company to invest heavily in research and development has also seen the downfall of the corporation.

Despite the fact that the firm has had very high profits, it failed to acknowledge that it is only through research and technology that the future can be guaranteed. As a result of this, other competitors in the motor industry have absorbed the unsatisfied GM customers. A very good example of a competitor firm that has heavily invested in research and development is Toyota. The Toyota Company has also elevated the needs of its customers such that new models are being developed now and then. GM continued retention of the same old employees has greatly impacted the company’s labor costs. The company has as a result continued to pay out large sums of money to the retiring and the ailing employees (Fisher 351). The labor unions have continued to put more pressure on the company as the employees seek better services. The poor company management has resulted in the withdrawal of the large capital from the company by the stakeholders in fear of losing their invested amount. Indeed, the stakeholders’ attempt to withdraw their support from the company did not only worsen the company’s financial stability but also led to a significant reduction in the company’s reputation.

GM decided to seek protection from the US federal government after filing bankruptcy protection in early June 2009. The bankruptcy plea not only affects the current company employees who were to be laid off, but it also affected the ones who had lately retired from the company. This is because, despite the fact that the company is supposed to pay pensions and other retirement benefits, the company is not capable of doing that in its current situation. Poor investment priorities negatively impacted GM’s financial positions. For instance, the company proceeded and spent $5 billion in Hughes Aircraft Co. shares, a move that led to an increased withdrawal of the investment capital in the 1980s.

In an article written by Maynard Micheline, Mr. Wagoner, the seating GM chief executive officer was noted saying that among the major things which led to the downfall of the GM was; the expensive labor costs that the company continued to maintain in the workers’ welfare. The move has, as a result, overburdened the company since this is a recurrent expenditure which the company has to keep on paying (High expenses led to GM downfall para. 4). He also accepted that the company has not fully invested in the research and development program, and therefore same high production costs have continued to dominate in the production. Development failure has also limited the company from establishing mass line production which can lower the production costs. The CEO also noted that the company has been insensitive to market demands. The current market demand for smaller cars has overwhelmed the market in the recent past, but GM had not invested in that mode of cars (Farber 39). As a result of this, people have switched to alternative firms which offer what suits their needs.

Possible remedies

General Motors needs to downsize its labor force. Since salaries and wages are recurrent expenditures, the company needs to re-look at the amount it should be spending on its employees. The company should emphasize on few, but competent workers since they will improve the quality of production. Similarly, the company ought to invest in research and development programs mainly because it is only by so doing that simpler manufacturing techniques can be designed. Such development will also lower the production costs and therefore save on the company’s expenditure. The company management needs to be streamlined in order to ensure accountability and also increase output. Checks should be established to guide and regulate management performance.

The management should also consider closing down the unproductive branches to mitigate loss incurrence. In order to win the market, the company should commit itself to meet the current needs of the customers in the market. This calls for GM to consider investing in the small cars since they have a higher demand in the current market compared to the company’s big cars. In order to accommodate the welfare of all customers, the company ought to consider manufacturing affordable cars. It is also advisable for the GM Company to seek acquisition from another small but well-performing motor company to boost its financial capacity.

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The Lehman Brothers Holdings Inc

This was among the largest global financial service provider not only in the US but also in the rest of the world. The corporation was headquartered in New York City and had quite a several subsidiaries which included Aurora Loan Services, SIB Mortgage Corporation, and Lehman Brothers Bank. In addition, the Inc. also had a regional base in London and Tokyo from where all the operations were controlled from.

The downfall of the Lehman Brothers Holdings Inc

September 15, 2008, marked history in the holdings as it filed for bankruptcy protection due to the financial difficulties that the firm experienced. Various reasons have been connected to the holding’s downfall. Among the major reasons included: first, the massive shift of the firm’s clients to other institutions as they anticipated huge loss on their investments. The shift greatly affected the firm’s operations and also led to loss incurrence. The second factor that significantly contributed to the holdings downfall was the drastic and continuous loss on stocks and credit rating in the industry.

Considering the fact that the holding was the primary player in the New York Stock Exchange and also in the London Stock Exchange, stock loss hugely impacted its operations. The main reason for the stock loss was attributed to the people’s withdrawal of the invested capital from the market due to fear of loss. The economic recession also heightened the financial difficulties which further led to the withdrawal as the people needed cash to cater for their daily expenses. According to New York Times (para. 1) the Lehman collapse has begun in 2007 with the mortgage crisis and a continued fall in stock prices. This immensely reduced the investor’s confidence which consequently led them to withdraw their investment from the holding. Although the Inc has a history of using its financial capacity and strength to overcome economic hardships as it did in 1998, 2007-2008 proved hard for them to overcome (Jónsson 57).

The 2001 belief that real estate was the best form of investment to undertake saw the bank take huge borrowings as it attempted to undertake the investment. The housing investment, therefore, increased the financial capacity of the Lehman Brothers in the 2001-2006 periods, but the shrink of the housing market in 2007 negatively impacted the firm as huge investments had already been directed towards that line. The deterioration of the housing industry further led to huge loss approximated to be around $613 billion in the year 2008 (Boedihardjo para. 2). Since the world had never experienced a great depression in the housing sector, a significant effect was observed in the firms which had heavily invested in that sector. The Lehman Brothers bank also heavily rented its money to the low-income earners whose probability of paying back the lump sum was very high. In an attempt to safeguard themselves from the defaulters, the bank colluded with the insurance companies who were to indemnify their amount in case the borrowers defaulted.

The year 2007 nevertheless saw an increased number of defaulters than the bank expected. The collateralized debt obligation (CDO) which the Brothers heavily invested in had a lot of hidden risks that the bank never thought of. Huge losses, therefore, were incurred as a result of the plan. The loss also resulted in a reduction of confidence in the borrowers who opted to call off their loan arrangements (LaRocco & Giuliani 119).

As creditors and other external financiers’ sort to seek an injunction from the court, fines and penalties were bound to be paid to the affected parties. The move also brought the bank into the public limelight, thus worsening its reputation. The poor reputation greatly impacted the bank’s operations, thus worsening the financial positions of the firm (Guerrera, Baer & Bullock, 2010).

Possible remedies

Since the bank closed its overall operations, an overhaul restructuring is encouraged in order to win the consumer’s support. The restructuring should start from the name and then extending to all the firm’s products. This will aim at giving the holdings a new look in the market. The new firm should first try out by opening few branches and then expand as the products demand increases. The reconstructed firm should use the Lehman experience as a learning ground in order to ensure the future and continuity of the firm.

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Comparison between the two articles

The GM is still operational in the market and improvement strategies therefore should be sought. In order to ensure that the company goes back to its original performance, more funding from the federal government would be important. On the other hand, the Lehman Brothers Holdings ceased its operations and therefore only an overhaul restructuring can be applicable to the firm. The GM can still continue using its brand name in its products and marketing channels since all that is required is model’s improvement and a shift of the company’s target to the low- and medium-income earners. Affordable cars should therefore be manufactured in order to capture the market. On the other hand, a complete change should be done in order to give a new look to the restructured firm.

Conclusion

It is believed that the economic crisis heavily affects the small and developing firms, but this fact was only to be proved otherwise after giant corporations were significantly hit by the 2007-2009 economic recessions. The severity of the recession was observed after the closure of quite a good number of firms as others filed bankruptcy protections in an attempt of reducing the creditor’s pursuit. Proper and efficient financial strategies should be sought by all investing companies in order to prevent such an occurrence in the future. Firms should also not consider their financial capacity and size as a defense of not been affected by the crisis. They should therefore invest wisely and always measure the risk involved in an investment. This will reduce loss incurrence in the future of such companies.

Works cited

Boedihardjo, Horatio. “How maths killed Lehman Brothers.” How maths killed Lehman Brothers. 2009. Web.

Farber, David. Sloan rules: Alfred P. Sloan and the triumph of General Motors. New York, University of Chicago Press. 2002. Web.

Fisher, Kenneth. 100 Minds That Made the Market. New Jersey, John Wiley and Sons. 2007. Web.

Guerrera, Francesco, Baer, Justin & Bullock, Nicole. ‘Lehman liquidators challenge bank claims.” Lehman liquidators challenge bank claims. 2010. Web.

“High expenses led to GM downfall”. ArticlesBase.com. 2009. Web.

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Jacoby, Sanford. “GM: What led to the downfall of a corporate giant?” UCLAToday. 2008. Web.

Jónsson, Ásgeir. Why Iceland? New York, McGraw Hill Professional, 2009. Web.

LaRocco, Lori Ann & Giuliani, Rudy. Thriving in the New Economy: Lessons from Today’s Top Business Minds. New Jersey, John Wiley and Sons. 2009. Web.

Maydard, Micheline. At G.M., Innovation Sacrificed to profits. New York Times. 2008. Web.

The New York Times. “Lenman Brothers Holdings Inc. topics.” nytimes.com. 2010. Web.

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