Finance crisis Introduction

American Freedom Mortgage Inc (AFM) was a private company that was incorporated in early 2001. The company was headquartered in Marietta, Georgia. The company was acting as a direct to consumer correspondent lender as well as a mortgage broker. The company was a multi-state company and was specializing with subprime and Alt-A mortgage loans. The company was also dealing with wholesale mortgage for lending larger investors under the fictitious name AFMI. At the beginning of 2006, the company was leading a subprime and Alt-A mortgage correspondent lender and mortgage broker in the US. The subprime loans were risky as they were given to borrowers who would not qualify for any sort of loan under the traditional way or failed to meet the minimum requirements for the loan. The Alt-A borrowers are nearly the same as subprime. They were the main target of the AFM Company and they were a group of risky borrowers. The group falls below the recommended credit score to secure loan under the normal way.

General motors company, also referred to as GM, is an automobile manufacturing company based in the US. The company manufactures trucks and cars in different countries. The company is the biggest in the US and the second largest in the World.

In 2009, the company faced financial difficulties and filed a bankruptcy according to chapter 11 and it was completed in July 2009. The company therefore majority owned by the US treasury. The ownership was conjoined by the Canadian Development Investment Corporation and the government of Ontario as well (BusinessWeek, 2008).

GM and AFM companies were mostly concerned on the financial gain and profits the company would gain forgetting the strategies that would raise their income on the other hand. GM did not consider the improvement of their vehicles and that brought in stiff competition from other automakers who concentrated on the improvement of their products. Most of the customers, though they were royal to the company there before shifted to other companies and hence it brought about the failure and reduced sales to the company. The company would have considered the improvement of the technology that is a key consideration to most of the buyers in the market. On the other hand, AFM targeted a risky group of people that would either fail to repay the loans or keep on defaulting loan repayments. In this regard, the company started facing financial constrains and could not be able to sustain its business in the market (Mollenkamp et al, 2007)

The AFM faced financial constrains as from 2006 due to increase of nonperforming loans and increased demands from the investors that jeopardized the funding capacity of the company. The company was forced to auction its assets to cater for some of its needs. The company was also litigated by other companies like the HSBC due to loans that were defaulted in early months that were assigned to AFM. AFM lost trust of its customers and its business was greatly affected leading to more losses (Rauch, 2007).

In the 90s, when GM realized that most people had switched to trucks and pickups for their personal transportation, the company shifted to making more trucks and pickups forgetting the improvement of cars forgetting there were some who were still in need of cars. This brought about the failure of the company as there was less to or no improvement on the car sector and performance. The company poured a lot of money and time in development of the SUVs. The Wall Street had already warned the company on the over commitment on the SUVs and trucks development incase the customer preference shifted back to cars. The company also spent more money on the discounts it was offering to keep the sales high. (Mollenkamp et al, 2007)

With most governments and other rights bodies encouraging on development of environment friendly products, the company has not been considering that as its main concern was to have more sales regardless of its effect to the environment. In this regard, most customers shifted to other companies that had less carbon emissive cars in the industry. In this regard, the GM motors remain the most non economical and expensive to maintain vehicle in the industry. GM was not able to compete with other companies in the market like Toyota. GM was still using its old tactic of mass assembling line up while had already shifted to lean manufacturing. These strategies are very different and Toyota would only manufacture vehicles that had ready market already. The GM had different manufacturing plants which used different engineering tactics and staffing methods. This was a complete failure as there was little coordination between different sections in the company (New York Times, 2008)

There were different other problems the GM was facing beside reduced profits. The company had different misguided acquisitions; their cars possessed same shape and had no different features and most of all reduced quality of cars. The other problem that reentry hit the company is the soaring of the fuel prices. Due to high consumption of the GM vehicles, most people shifted to economical vehicles and that also affected the GM sales. The company also concentrated on the bureaucracy that repelled the young and innovative talents. This retarded the company’s improvement and innovations (Rauch, 2007).

There are different things that would have been considered to alleviate the problems these companies have been facing. Financial issues are the key considerations most companies do as it’s the aim of every company in business to make profit. According to the problem analysis of AFM and GM, there was probability that these companies would not have fallen in financial constrains if they were considered.

If the GM had considered the quality of the cars they were making and merge it with the customer preference, there was probability that the company would not have failed. The company considered the amount of money it would get forgetting they needed to have a large number of customers buying their products in order to breakeven. GM failed to consider that despite of some customer’s shift of interest, there were others who were loyal to cars. By the company shifting its power and its financial weight to SUVs and trucks, it failed and let down the car market as there was no any notable improvement thus forcing them to shift to other companies’ models. GM would have given a balance to its manufacturing plant and try to improve their problems as per the market demand.

AFM should have considered a mixed business in its industry. It should not have concentrated more on the risky loads only but should have included other types of loans that would be repaid and cater for some of its needs. The company’s customers were likely to default loans due to their credit history and points and this on the other hand would affect their repayments.

The GM should on the other hand have worked on the customer base and increase their trust through improving their products and having environmental friendly vehicles. This would have saved the company more than shifting to a new venture. On the other hand the company should have tapped on the new talents in the market in order to employ new ideas in the company.

AFM on the other hand should have avoided concentrating much on the subprime and Alt A-mortgage loans and deal with other types loans offered to qualified borrowers. With a large customer base, the company would have used this opportunity to market itself in order to reduce the defaulting of loans. The company was accounting for about one fifth of the US housing mortgage with US$600 Billion.

BusinessWeek (2008) Bankruptcy Is Delphi's Trump Card". 2005-08-08. http://www.businessweek.com/magazine/content/05_32/b3946057_mz011.htm. Retrieved 2010-10-13.

Mollenkamp, C; James,R. Hagerty, R. (2007) "Banks Go on Subprime Offensive". Wall Street Journal. http://online.wsj.com/article/SB117369890345734007.html?mod=mostpop. Retrieved 2010-10-13.

New York Times, (2008) Hazardous Conditions for the Auto Industry. October 1, 2008. Retrieved 13 November 2010.