Dwight Brock's Indifference to Risk -- A Warning and a Cry for Help

Guest Commentary

By Michael Lissack

Has County Clerk Dwight Brock fully considered the potential consequences of allowing an unregistered out of state 75 year old manage the County's investment pool?

Me thinks not.

What one might ask is wrong with having a county employee manage the money?  After all he only costs $85,000 per year?  An outside manager would cost much more.

The problem with the use of John Kannengieser is not his age. It's his lack of being up to date with regard to risk.  Does he really understand the risks inherent in the investment pool?  Does he know what he does not know? 

Because Kannengieser has not been registered with the SEC for more than 20 years he faces no continuing education requirements and there is no evidence that Brock or the County has demanded that he stay up to date regarding risk.

This scenario has a very disturbing precedent.  From 1990-1994, Robert Citron the treasurer of Orange County California was hailed as an investment genius.  Orange County continually showed better returns on its investments than the California state investment pool.  (Much like Collier County does as Dwight likes to brag.)  But those returns came with risks which Citron did not understand.  In December 1994 Orange County filed for bankruptcy and ultimately lost more than $1 billion.  As one of Orange County banker's during that period I was among those who tried to get Citron to see the risks he was entering into.  All discussions fell on deaf ears -- much like Georgia Hillier's prescient questions to Dwight Brock.

The risks to the County are considerable.  Are the investments actually safe? Dwight will argue well they are all highly rated.  That counts for little.  We must remember that many of the mortgage backed securities and their ilk carried AAA ratings up until days before they defaulted in the 2005-2012 period.  Are the investments understandable?  Are there hidden derivative investments in the securities held by the County and if so what are their risks?  Any bank or government authority which held vanilla debt issued by Long-Term Capital Management in 1998 discovered the hidden risks only when bankruptcy loomed.

Much the same set of questions pertains to Dwight's selection of First Integrity Bank.  Does the County understand its risk if "volatile" funds leave the bank?  Does the County understand the investment risk it accepted when taking on Fed Funds investments versus Libor?  And if Brock claims yes the County does understand these risks then why were they not openly discussed at the selection meeting?  Who is the repository of this supposed understanding?  John Kannengieser?  Dwight Brock?  The County Commissioners surely know better than to claim that they understand issues which were never even brought before them.

Thus far the County's investment record seems to have been okay.  But the same was argued by Robert Citron in 1993.  It is time for some education about risk.  John Kannengieser cannot supply the County with that education and Dwight appears to be indifferent.  With ignorance comes risk.  With deliberate ignorance comes the potential for peril.

Collier County please take this as a warning.  You need help.