MORE ON THE FRAGA AFFAIR

Not too long ago a hedge fund offered me a retainer in return for occasional briefings - and advance copies of my articles. My first thought was that this was perfectly legal - not at all comparable to the cases I knew about in which developing-country officials had been paid for inside information. After all, I'm just a private citizen, free to tell my opinions to whomever I wish.  My second thought was that I should not touch that proposal with a ten-foot pole. Even if I was perfectly innocent, even if there was no substantive difference between giving people advance drafts and doing ordinary business consulting, I should not put myself in a position where my role could be suspect in that way.

All of which explains why the reports that I received insisting that Quantum Fund had speculated heavily on Brazilian debt just before Arminio Fraga's appointment as central bank governor were both credible and disturbing. I had no reason to believe that Fraga gave Quantum briefings about internal Brazilian affairs - but that would not have been necessary. Simply knowing that Fraga was under consideration would have been a dead giveaway that the irresponsible policies then being rumored were not in fact being planned.

Well, I've just had a conversation with Fraga, and he insists that the best possible scenario - that his former employer had no knowledge of his new job until after the fact - is in fact the way it happened. That is, he says that the Brazilian government popped the question to him without prior warning, and that there was no lead time in which speculation based on inside information could have taken place.

As I said in the earlier note today, I am delighted to hear that. But I do not believe that either Fraga or Quantum have been treated unfairly in this episode. Especially in unstable times like these, the threat of insider trading in national currencies and debts is extremely real - indeed, it happens all the time - and governments must bend over backward to avoid even the appearance of conflicts of interest. Enormous care should have been taken in appointing a top hedge fund manager to such a sensitive post, and it wasn't.

Perhaps this episode will make governments reluctant to hire future officials directly from organizations that speculate in the very assets most affected by those officials' policies. Without prejudice to Fraga, let me say that this would not be such a bad thing.

A postscript: I have spoken again to Fraga, so let me say more forcefully that I am convinced that he did nothing wrong - that he conveyed no inside information (I never suspected he did) and that he also did not, even inadvertently, give Quantum advance notice of his appointment. The issue of insider trading in currencies and sovereign debts is a real one, but Fraga is in the clear. He is a good economist and a good man; we should all leave him alone to do his new job.