Dec. 3 (Bloomberg) -- Bill Miller, the Legg Mason Inc. fund manager mired in the worst slump of his 27-year career, said the Federal Reserve should take equity stakes in companies to make money for taxpayers as the market rebounds.

Miller, speaking at an investor conference in New York, called the U.S. government’s rescue last month of Citigroup Inc. a “very good policy” that should be applied to other companies. The U.S. agreed to protect $306 billion of the New York-based bank’s loans and securities. In exchange, Citigroup will provide preferred shares to the U.S. Treasury and the Federal Deposit Insurance Corp.

“The Fed should be buying everything in sight,” Miller, 58, said. “The taxpayer would make a killing.”

Miller, famed for beating the Standard & Poor’s 500 Index for a record 15 years, has been trailing the U.S. benchmark since 2006. This year, his $4.3 billion Legg Mason Value Trust has plunged 60 percent, trailing 99 percent of rival funds tracked by Bloomberg. The fund’s value peaked at $22 billion last year.

The stock market could rise as much as 20 percent next year, if the U.S. can avert a Depression-type scenario with soaring unemployment and a decline in gross domestic product exceeding 15 percent, Miller said.

“It’s hard to keep a state of panic for a sustained period of time,” Miller said. “Things can change quickly in these kinds of dynamic markets. It may be that a bottom has been made. It may be that the market will keep moving sideways.”

Legg Mason, like other fund companies, has been battered by investment losses in the worst period for stocks since 1931, with the S&P 500 falling 43 percent this year. The company said in October that it would cut about one-third of the jobs at Legg Mason Capital Management, the first layoffs at the investment unit run by Miller.

‘Behind the Curve’

Miller said the Federal Reserve didn’t act quickly enough to stabilize the most severe financial crisis since the Great Depression.

“The Fed has been behind the curve,” in rescuing the markets, Miller said. The Fed should have been buying mortgages months ago when the bankruptcy of Lehman Brothers Holdings Inc. deepened the credit crisis.

Legg Mason Value Trust has been run by Miller since its inception in 1982. Miller, who initially co-managed the fund with Ernie Kiehne, took sole responsibility for the fund in 1990, the year before his winning streak began.

To contact the reporter on this story: Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net.

Last Updated: December 3, 2008 14:57 EST