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Week in Review: July 2

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Week in Review

A round-up of some of the week’s most significant corporate events and news stories.

Ikea issues US’s biggest furniture recall

Europe's biggest Ikea store is pictured in Kungens Kurva, south-west of Stockholm on March 30 2016©AFP

Ikea this week issued the US’s biggest furniture recall. The Swedish group’s recall of 29m chests of drawers came after three children died as a result of its furniture toppling on to them over the past two years, write Lindsay Whipp and Richard Milne.

The recall of its Malm drawers and other designs comes amid a push by the US Consumer Product Safety Commission to reduce the number of children being killed in furniture and television tip-over accidents in the country, which has reached one every two weeks.

Last year, Ikea offered free wall-anchoring kits with many of its chests and dressers, after reports of two deaths. However, subsequently a 22-month-old child died in February after an Ikea chest fell and crushed him. The chest had not been secured to the wall.

“We have no information of any tip-over incidents with a properly anchored chest of drawers,” Ikea said.

“This is why we are committed to raising awareness among consumers of the tip-over risks and how to prevent them.”

Ikea added that there would be a financial impact, including the “significant investment” it was making in its campaign to educate consumers about preventing tip-overs, but not a lasting one.

The CPSC said that in addition to the deaths, there have been reports of 41 incidents of Ikea Malm chests tipping over, resulting in 17 injuries, all to children aged between 19 months and 10-years-old.

In addition, there have been reports of 41 incidents of other Ikea chests toppling over since 1989, with 19 injuries and three deaths, according to the CPSC.

BHS pushes Goldman into client review

Michael Sherwood, Vice Chairman pf Goldman Sachs BHS hearings - RSS Business, Innovation and Skills Committee and Work and Pensions Committee Wednesday 29 June 2016

A top Goldman Sachs executive has conceded that the US investment bank’s reputation had not been enhanced by its involvement in BHS, a corporate failure that has cost 11,000 UK jobs, writes Mark Vandevelde.

Goldman provided informal — and unpaid — advice to the retail tycoon Sir Philip Green ahead of the sale of the now collapsed department store chain to the former bankrupt Dominic Chappell.

Michael Sherwood, co-head of Goldman in Europe, said the group was now reviewing whether to keep Sir Philip as a client, adding: “The frequency with which we review clients will be looked at again.”

Sir Philip has insisted that Goldman’s observations helped to persuade him to sell BHS to Mr Chappell for £1 last year. “If they had said, ‘Don’t deal with this guy’, that would have been the end of it,” he told MPs earlier this month. “But that is not the advice that we got.”

However, Mr Sherwood said on Wednesday: “I absolutely do not accept blame. He [Mr Chappell] never passed our sniff test. All we highlighted was observations about the risks around Mr Chappell and the transaction.”

Mr Sherwood was brought up in north London a few miles from Sir Philip and has stayed close to the billionaire since the two worked together on a failed takeover bid for the retailer Marks and Spencer more than a decade ago.

But Mr Sherwood said the bank had received very little money from Sir Philip since the 2004 M&S bid, describing any fees it had charged as “de minimis”.

Two European banks fail US stress tests

Pedestrians pass a Banco Santander SA branch in Madrid, Spain, on Monday, Jan. 30, 2012. Banco Santander SA, Spain's biggest lender, said fourth-quarter profit plunged 98 percent as it anticipated tougher rules on recognizing real-estate losses at home and earnings declined in the U.K. and Brazil. Photographer: Denis Doyle/Bloomberg©Bloomberg

Two European bank subsidiaries failed US “stress tests” this week — but shareholders in the biggest Wall Street institutions were given a clean bill of health, allowing them to pay up to $96bn to shareholders, writes Alistair Gray.

In the second and final round of the Federal Reserve’s annual evaluation, which checks the banks’ ability to cope with catastrophic shocks, the US subsidiary of Banco Santander failed for a third consecutive year, while Deutsche Bank’s US unit fell short for a second.

Both were judged to have “broad and substantial weaknesses” in their capital planning, and were rebuked for making insufficient progress since the last round of tests in March 2015.

In addition, Morgan Stanley was given notice that it needed to improve its internal systems, or risk having its payouts to shareholders blocked.

But the other 30 banks under scrutiny passed without conditions, and were given the green light to go ahead with dividend and share buyback plans.

According to estimates from RBC Capital Markets, these will return 16 per cent more capital to investors than was the case a year ago — about $96bn in total.

Passing the Fed’s stress tests was welcome news for investors in Bank of America and Citigroup — institutions that have struggled with the process in recent years.

They were among several to confirm their capital return plans shortly after the Fed published its results.

Gerard Cassidy at RBC said Citigroup was set to distribute $10.4bn in dividends and buybacks, Bank of America $8bn, and JPMorgan Chase $17.4bn — each up more than half from a year ago.

News of these plans lifted Citi’s shares by 2 per cent, Bank of America’s by 1.4 per cent and JPMorgan’s by 0.9 per cent in after-hours trading on Wednesday. However, Morgan Stanley’s test result added to concerns raised by analysts after the first round. In the Fed’s “severely adverse” scenario, it stood to lose up to 45 per cent of its equity capital as a proportion of risk-weighted assets.

VW’s costly scandal

KLETTWITZ, GERMANY - NOVEMBER 25: A car undergoes standard emissions testing under laboratory conditions during a workshop for media on automobile emissions at the DEKRA testing facility on November 25, 2015 in Klettwitz, Germany. European authorities are reconsidering their emissions testing procedures for cars in the wake of the Volkswagen diesel emissions cheating scandal. DEKRA is Germany's biggest independent automotive technical testing agency. (Photo by Sean Gallup/Getty Images)©Getty

A car undergoes standard emissions testing in laboratory conditions in Germany

Volkswagen, US environment authorities and more than 44 states agreed this week to the largest car-related consumer class settlement in history, writes Patrick McGee.

The $15.3bn package is meant to punish the carmaker for equipping half a million diesel engine cars with software to cheat official emissions tests.

The agreement, which needs court approval later this month, will see VW set aside $10bn so that it can offer owners of the cars between $5,100 and $10,000, and then also buy back or fix them.

Volkswagen will be in a position to shave billions off that figure if it can convince most car owners to keep their cars. However, environmental authorities have not yet approved a modification that would limit emissions without sacrificing performance and durability.

The price VW will pay to buy back the cars is based on their “pre-scandal” value from September 2015, even if VW owners wait until a deadline of December 2018.

Chart: VW settlement data

VW has also agreed to pay $2.7bn, over three years, to fund an environmental remediation trust operated by the Environmental Protection Agency. It will also invest $2bn over 10 years into zero emission technology, such as battery charging infrastructure, and pay 44 US states and two territories $600m to resolve legal claims.

The agreement does not solve all of VW’s civil and criminal complaints in the US, nor does it apply to Europe, where 8.5m cars were rigged. However, emissions standards on diesel cars are less strict outside the US and VW has already received approval to offer relatively quick fixes on millions of units in Europe.

A status hearing on Thursday confirmed that the authorities are still vetting VW’s proposed solution to fix 85,000 three-litre cars in the US that also pollute beyond the standards.

Rio clears the decks for new chief

Rio Tinto Plc signage is displayed on a monitor on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Friday, May 20, 2016. U.S. stocks rose, with the S&P 500 bouncing from a seven-week low, led by a rally in technology shares amid ebbing anxiety over the potential for higher interest rates as early as next month. Photographer: Michael Nagle/Bloomberg©Bloomberg

Global mining companies have endured a torrid few years due to overexuberant investment and an economic slowdown in China. However, Rio Tinto is emerging from the slump in better shape than most due to its deep cost-cutting, shedding of non-core assets and focus on quality assets, writes Jamie Smyth.

This week the Anglo-Australia group made another bold decision — to give away its 53.8 per cent shareholding in a huge copper mine with tens of billions of dollars of proven resources and sever its ties with resource rich, but politically unstable, Papua New Guinea. Rio also revealed it was reducing its exposure to tax havens following a review prompted by public concern about tax avoidance.

The decisions were announced as Jean-Sébastien Jacques prepares to take over as Rio’s new chief executive on Saturday from industry veteran Sam Walsh. The 44-year-old Frenchman faces a tough challenge to position Rio for growth following a period of retrenchment — prompting Rio’s management to tie up as many loose ends as possible before he takes charge.

Rio’s decision to transfer its shares in Bougainville Copper Limited, which owns the mothballed Panguna mine in PNG, to the autonomous government in Bougainville and the PNG federal government, should extricate the company from a delicate political situation.

The mine may hold valuable resources of copper and gold but it is located in a remote and dangerous part of PNG. Analysts estimate it could cost up to $10bn to rebuild infrastructure, and political instability is likely ahead of an independence referendum scheduled for 2019.

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