Human Resource System and the 2008 Financial Crisis - Example

Running head: Financial Crisis Student’s name Institution Course Professor Date A financial crisis is usually a great killer of the economy. It brings economic meltdown to the growing and stable economies in the world. This is due to the inflationary, recession and depression pressures it inserts in the economy. This pressure reduces the confidence in the monetary system of economy and therefore results to shortages of commodities and massive unemployment in the economy (Taylor, 2009). Financial crisis is usually caused by a range of variables in the economy. The 2008 financial crisis is seen by economists as the second worst financial crisis to have happened. This crisis followed the great depression of 1930’s in its negative implications on the economy. According to the federal inquiry on the causes and effects of the financial crisis of 2008, the financial crisis was an avoidable disaster that was caused by widespread failures in the government regulation, corporate mismanagement and heedless risk-taking by Wall Street. The commission faulted two administrations the Federal Reserve and other regulators on one side and the financial institutions on the other side (Taylor, 2009). Human resource is the main guiding too in the running of a business organization. It controls all the activities and policies of the business organization in the running of its business duties. Human resource comprises the total personnel involved in the running of any given organization. It thus involves the specialists and the subordinates. Human resources issues shape the way the business eventual results affects the entire economy (Gupta, 2009). The financial crisis of 2008 was partly caused by human resource issues in the various financial institutions and those of the regulatory departments of the various set up institutions in United States of America and other larger economies of the world. A wide range human resource issues especially concerning policy making were the major factors that greatly caused the financial crisis. The human resource department led the banks in pursuing their agenda of making huge profits through various methods. Human resource operations departments in need of earning more profits pursuit criminal, incompetent credit rating methods. Risky borrowing, incompetent or overworking of supervisors also took place. The human resource departments also introduced wrong incentives and reward systems to its management staff in order to stimulate them towards earning of high profits to their banks or mortgage firms. The actions of the human resource can be analyzed in the following areas: Encouraging predatory lending: The human resource specialists in various financial institutions like the CitiGroup allowed the practices of enticing borrowers to enter into unsafe loans for inappropriate purposes. This is especially loans for buying of homes and construction of homes. They cheated the borrowers, eventually changed the terms of the loans into extensively detailed contracts, and even changed into expensive loan items during the closing days. This was since the agreement put the clients into adjustable rate mortgage (ARM) where the eventual interest rate to be charged would be greater than the stipulated interest to be charged (Dowling, Welch and Denice, 2010). This was put in such a way that the consumer or client could not notice until long after the agreement was sealed and concluded. This lead California Attorney General to sue Countrywide Financial Company for unconstitutional and false advertising due to their ARMs. When time went by and housing prices dropped the homeowners who were high borrowers developed little incentives to pay back the loans. This was because of disappearance of their home equity. This problem can be attributed to the poor human resource practices. This includes working without following ethics and laid down procedures and law. As a human resource manager of Citigroup, I can notice that weak and fraudulent underwriting practices also contributed to the development of the financial crisis. By the final years of the housing bubble in the United States of America, there were 220 professional underwriters. 60% of the mortgages purchased by Citigroup by 2006 from around 1600 mortgage companies were defective. This was because they were not underwritten to policy or did not have required policy supporting materials and documentary evidence (Sood & Ahluwalia, 2009). This was despite the fact that this company had very competent and qualified staffs who were employed to perform the duties of noticing the mistakes that occurred. By 2008, this had risen to 80% of the total mortgages entered into by the company. This was contrary to set standards of the Citigroup that specified how such very important and sensitive contractual obligations are concluded. These mistakes in Citibank and other financial banks lead to heavy financial losses since the banks could not eventually get their money. They hence started to face financial constraints in meeting their daily demands and lastly not meeting demands from customers hence the financial crisis. This mistake can be clearly taken as mistakes in the general human resource department and especially the management level. Easy credit conditions also can be attributed as a cause of the crisis. Despite being largely caused by the Federal Reserve by lowering the interest rates from 6.5% to 1%, some factors can be attributed to the human resource departments of the various financial institutions. The banks and financial institutions continued to lend out funds without looking at the abilities of the borrowers to repay the funds. They started just lending money just because of their rational behavior of making profits. This can be attributed to the financial institutions becoming too highly leveraged hence increasing their appetite of investing in risky ventures. This hence made them resilience in case of losses reducing. This can be attributed to off-balance sheet securitization, derivatives, shadow-banking system among other business activities that increases profitability (Taylor, 2009). The government does not directly regulate most of these business activities. Thus allowing them to assume additional debt obligations relative to their total financial base. The experts in the financial sector before the crisis considered the real sector as the main economic sector in the general market of the United States of America. This was despite the fact that the people who work in these sectors were highly educated and very financial innovators. Most of the loans and finances were directed to this sector while neglecting the other sectors like the food industry. This was against the Keynesian principle of investing in increasing consumption as the population grows (Wyat, 2008). This did not hence provide additional something for people to eat to live. Investors hence invested in financial products rather than increasing the necessary consumption products. Consumption was maintained artificially by granting loans to poor debtors who eventually not able to repay. This hence led to long run shortage in demand both in investment and consumer goods market. The human resource experts in the financial sector can thus be blamed for the crisis. This is because the specialists did not take into consideration the impacts of their policies in the economy both in the short run and in long run. They were just interested in the increasing the current profitability without caring about their long-term net worth and the general economic conditions their policies could bring. The 2008 financial crisis had a wide range of effects in the various areas of the business operations and the general economy at large. The financial status as the main controlling sector of the business organization was the largely affected area of the business. The backbone of any business is its financial capability (Taylor, 2009). If a business capability is affected the other operations of the business are also compromised since they relied on the financial capability of their operations. One of the sectors badly affected is the human resource sector. The financial crisis gave rise to three key issues in human resource management. These key issues provide the HR in financial service companies the chance to portray the values of their expertise and elevate its images and value of its status within them (Haugh, Ollivaud and Turner, 2009). The issues are pay structure, intelligent and effective downsizing and new means of managing, engaging and retaining staff in leaner organizations where financial rewards are significantly reduced. Pay structure: The economic crisis resulted into massive financial setbacks to the companies like Citigroup, AIG, Lehman Brothers, Bear Stearns among other great financial organizations and mortgage companies. This made then meeting financial obligations difficult that hence lead to coming up with solution measures. The governments of the various countries thus come up with various measures like bailing them out, nationalization, mergers and takeovers among other measures. The companies in response to this had to come up or forced to adapt some policies (Nuti, 2009). Among the measures was the pay-cut measure. There was also pressure from the government, media and the public to reduce the pay they pay to their staff including the high-level managers. As a human resource manager of Citigroup a multinational corporation, I will accept the situation and the existing challenges and implement the pay cuts so that collectively the crisis is resolved. The reduction in the pay of various employees will be a demoralizing factor to most of the employees. This may result to some of the very efficient employees looking for greener pasture elsewhere. When some specialist who my company relay on move to other places .It will be very difficult to adapt to the situation given the fact that some operations of the organization will not be efficiently carried out given the problem of lack of experienced and qualified personnel. New and potential qualified staff will be discouraged from coming into the company given the fact that the salaries and wages offered are greatly reduced and hence are not attractive to them. Pay cuts are hence costly effect of the financial crisis and may completely negatively affect the recovery of the business. Another challenge my company faced is the need of downsizing. There was need to reduce the labor force without compromising the general operations of the organizations. There is need of restructuring my company and reshaping the personnel and the different management levels. This should be aimed at reducing the labor force. The challenge here is which individual employees should be retrenched and which should be retained in the complex restructuring process. It will be a challenge for me as a human resource manager to stamp my authority in deciding which departments to merge and the type of the employees to retrench without affecting the eventual productivity of the organization. The dilemma thus is mainly in maintaining professionalism and succession in the human resource department. The human resource department was the mainly disadvantaged sector of the business after the economic crisis. It was the mandated sector of continuing the daily activities of the particular companies given the bad economic conditions both externally and internally. As an international manager coordinating, staffing, organizing, controlling and among other activities of my company will be very difficult to implement. Without enough current working capital running of a business is very difficult since meeting current expenditures like workers salary, wages is not possible, and hence this problem may continue to unforeseeable future if rescue measures are not available. Financial crisis requires many interventions to bring the economy to the normal condition. The various stakeholders in the economy should totally join hands in the formulation and undertaking the necessary measures required in the solving the situation. There should be a clear coordination and cooperation among the players since the actions jointly contributed to the upcoming of the crisis and jointly required in solving the same. Therefore, for the government great role in fighting the crisis to bear fruit the multinational corporations and the local industries must play their part. The human resource department is the main sector of the multinational corporation that would spearhead the recovery process of the economy of the crisis. This will help not only the general economy but also is in seeing that the corporations continue to exist and make profits when economy recovers. As a human resource manager, my role will largely be to help the company in undertaking the above-mentioned responsibility. This will be undertaken through the available feasible and viable means. As an International HR manager of a MNE, I will undertake the following measures: I will study my company very well and look for another company(s) to undergo merging. Business mergers also referred to as integration is one of the strategic growth or stability method. My company has very little finance due to the worsening of the financial market. This makes it very difficult to survive alone. One solution towards ensuring the continued profitability will be to look for another company in the same or different line of business and enter into mutual collaboration. As a human resource manager, I have a great role of ensuring this takes place since I am in charge of controlling nearly everything in the company. I will coordinate my staff in ensuring they study well the market and shop for a good companion. The success of mergers largely depends on the good selection of the combining company and the eventual good running of the resulting business unit. My HR department with the help of the general management and board of governors will ensure that we use both the internal and external specialists in ensuring that the merging and afterwards activities are undertaken with necessary competence, skills and taking into consideration the influence of the various variables that may affect the profitability of the resulting business. All the legal procedures should be totally followed in the merging process. This ensures that legal battles from the merging process do not eventually negatively influence the profitability of the companies. Good mergers usually ensures the companies enjoy a larger market, ensures risks a widely spread, ensures the companies enjoy economies of scale among other many advantages. If my company merger with another company in the non-financial sector it will greatly enjoy the good economic conditions experienced by that company since the other sectors where not greatly affected by the financial crisis. Merging will also help the entire economy in ensuring quick recovery of the economy from the crisis. This is because it helps in the revival of the financial sector companies and hence bringing stability and growth in the collapsed sector. Mergers, takeovers, nationalization and integration of the deeply affected companies and firms will be the only realistic means of ensuring their continued existence beyond the crisis period. This is clearly evidence by the large number of mergers and takeovers after the crisis and also the speed at which the various governments run up nationalization measures to ensure the economy does not collapse due the collapsing of the financial sector. Another measure of fundamental importance during this recovery period is the investment of energy in cost reduction as a first hand measure of serving the corporations and companies. The crisis totally consumed the huge amount available funds of the corporations and also totally reduced and eliminated their previous continued profitability. To adopt to these current economic conditions the corporations needs to implement cost reduction measures in order to be able to carry out the very essential activities necessary for their survival while relaxing the implementation of noncurrent and long-term projects. As a human resource manager, I am in a good place to help the company in the cost reduction exercise. The human resource sector is one of the highest cost-consuming sectors in the economy. As a manager of this sector, I will come up with various cost cutting measures. Some of the wide ranges of measures I will implement towards the recovery from the economic crisis include the following: I will implement wage and salary reduction scheme in the company. I will in consultation with other stakeholders of the company design a pay-cut in the company that will see nearly all the employees’ salaries being reduced in certain proportions depending on the total salary each use to earn. I will undertake this measure cautiously since it is a delicate procedure given the high weight employees attach to their salaries for their continued provision of service to the company. The employees should be very involved in this process because it directly affects their personal financial conditions and also due to the generally economic hardships they face individually because of the worsened economy. Reducing wages and salaries will totally save the company’s’ net out-flow and hence ensuring the company remains with some money to spend in other areas. Another means of cost reduction is through reduction of the number of employees. As stated earlier the financial crisis brings about the need of restructuring of the organization and reducing its work force. Reducing of the labor force may be carried through stopping overtimes, stopping temporary and internship employees, retrenchments among other means. Downsizing as a means of cost reduction achieves its intended function but results to other negative implications to the corporation. By reducing the labor force, the remaining work force will not complete the usual company work effectively, efficiently and in the necessary time. This may hence result to unsatisfactory service delivery to customers. The workers themselves will also be overworked and hence demoralized. Nevertheless, this measure should be undertaken and try as much as possible to balance the usual work among the remaining work force. Another method of cost reduction is through the introduction of effective and faster service delivery means and other cost saving means of production in the company. This will reduce the production costs and fasten the service time to clients. These are some of the cost reduction means. Training and development of human resource is also necessary during these times. Training should be conducted to educate the workers on the new working systems especially after undergoing restructuring, mergers, nationalization or takeovers among other current changes in the organization. Training and development of the labor force ensure workers are well conversant with the new situations and their requirement. This will help in coming out of this crisis. This will therefore ensure the goals of the corporation are carried out in a team and hence easy and quick to achieve. There should be also the necessary good communication structure in place to pass over the necessary knowledge information. Information is a powerful tool especially where there are several changes every now and people have to be informed of them to act accordingly. Human resource sector will be also in place to help the general management of the corporation in carrying out any change the government or the relevant control bodies may want the corporation to undertake. Generally the human resource department has a great role to play in ensuring the crisis has to end and the recovery of the respective company to its former profitability level before the crisis. The financial crisis of 2008 had many negative consequences to both the entire economy and that of the respective/individual companies. However, the crisis comes by with some few advantages to the existing companies. The labor market is argued that it never experienced any advantage because of the high unemployment rate it created. The main advantage of the financial crisis is the forcing of the companies to enter into mergers and acquisitions. Merging resulted into the emergence of very big profitable organizations. This also helped the financial sector in spreading risks to other sectors existing in the economy instead of only depending on the financial sector and mortgage industry. One of the great acquisitions at these moments was the acquisition of Wachovia by Wells Fargo in 2008. Generally, the economic crisis had very little advantages to the entire economy or the individual multinational corporations. Conclusion Human resource system of an organization plays a very great role in ensuring that there is no financial crisis. In the financial crisis of 2008 the human resource contributed both in its creation and in the solution of the crisis. The human resource is the main operating system of the business. It controls the direction taken by the business in determining the internal working conditions and the entire economic conditions of the world. Activities of various multinational corporations when combined may bring negative economic conditions in the entire world. Human resource despite the fact that it controls nearly the entire business operations is also the department of the business that is drastically affected by an economic crisis. From this, it is therefore necessary for businesses to ensure that an effective human resource management put in place for both the stability and growth of the business and entire economy to be realized. Reference Sood, A.; Ahluwalia, V. 2009. Mergers and Acquisitions in the Banking Sector: An Appraisal, Icfai University Journal of Banking Law 7(1): 20–36. Dowling, Peter.J & Welch, Denice E, 2010 “International Human Resource Management” Gupta, .S.C, 2009 “Human Resource Management”, Ane Books Pvt.Ltd. Zoellick, Bob, 2009. Speech at the Brussels Forum, Brussels, March 21, 2009. http://www.gmfus.org/brusselsforum/2009/docs/BF_Release_Zoellick_21March09.pdf Wen Jiabao, 2009. Government Work Report, Opening Meeting of the Annual Full Session of the National People's Congress (NPC), Beijing, 5 March 2009. http://www.chinadaily.com.cn/china/2009-03/05/content_7539770.htm Watson Wyatt .2008.Effect of the Economic Crisis on HR Programs, www.watsonwyatt.com Trichet, 2009. 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