Abbey and The State – 50 years on

23 June 2009

Now that we have a fistful of state banks it's worth recounting the fate of the State Building Society (yes, we really did have one of that name) which fell from grace back in 1959 as a result of a major scandal and ended up being subsumed into the Abbey National Building Society.
 
I came across the story while researching the Abbey for a feature in the July issue of Lending Strategy – July marks the 20th anniversary of the conversion of Abbey to a mortgage bank and I thought it might be fun to revisit how the whole thing came about and its consequences.
 
In that sense the Jasper scandal, as it was called, was a bonus. Harry Jasper was a Berliner who, after serving as a private in the British Army during World War II, started a small investment bank and in collaboration with a lawyer and a fellow German, Friedrich Grunwald, became a property speculator.
 
Their modus operandi was simple. They’d buy interests in companies, sell off their properties, lease them back, and use the cash to buy more companies.

Blocks of flats, cinemas, factories, all were acquired but the big mystery was who was bankrolling them? Remember, this was the austere 1950s when credit was hard to come buy and regulation was prescriptive and by the book.
 
Herr Grunwald, who also represented The State Building Society, was the facilitator. He tapped funds in the form of mortgages and unsecured loans from the society whose motto, believe it or not, was The Horn of Plenty!
 
The pair got around the strict regulations of the time that called for building societies to itemise all mortgages over a certain size by simply creating close on 500 paper companies but by the summer of 1959 the pair were overreaching themselves.

The cash flow dried up, shares in Jasper & Co collapsed, and Grunwald legged it to Israel, leaving Jasper and the building society to face the music.

But while we are still waiting for regulatory reform from Brown and his ministers following the clear failure of the Tripartite Authorities over the Northern Rock debacle, the government back in 1959 moved swiftly to close the loopholes in regulation exposed by the Jasper scandal and these were incorporated into the Building Societies Act 1960.

Perhaps there were fewer priorities then, or a smaller number of stakeholders to consult and task forces to co-ordinate, or maybe back in 1959 industry leaders and government knew you couldn’t regulate for every eventually so the best thing to do was simply address the immediate problems exposed by the scandal and get on with life.