A Top Fund Manager Takes the Feds to Task

Bob Rodriguez of First Pacific Advisors was kind enough to give RealMoney.com his thoughts on the markets. His flagship fund, FPA Capital Fund (FPPTX), has averaged 7.38% over the last 10 years, vs. 0.4% for the S&P 500 (as of Oct. 31, 2008). That's almost a 7% margin of outperformance!

Rodriguez has been a step ahead of the financial turmoil that we have seen many times during the last few years. He has kept a large percentage of his portfolio in cash, and that has saved his clients this year. His numbers this year were even better until recently, when his oil explorers were sold off with everything else.

When asked about his view of the government's actions in the crisis, his response was, "The Federal Reserve and Treasury have been on the wrong road and have been behind the curve of every stage of this crisis." When asked about Henry Paulson, secretary of the Treasury, Rodriguez replied, "They blew it." According to Rodriguez, Paulson did not think about the details of the TARP and the conflicts of interests of allowing money managers to buy troubled assets.

Paulson argued against putting capital in banks, and Rodriguez said that shows that Paulson did not realize the severity of the problem. When Paulson announced the recent change in the TARP, it "eliminated what little credibility he still had. The Treasury Department is a nonentity."

To fix the problem, Rodriguez said that we should "let financial institutions go under, unemployment goes very high, and risk is reintroduced to the U.S. financial system." He pointed to a shareholder letter, available on First Pacific's Web site, entitled "Crossing the Rubicon."

This letter articulates FPA's view on our government's and financial institutions' involvement with our current crisis. It states that the Greenspan era created too many institutions that were "too big to fail." Each successive bubble has decreased the Fed's ability to handle financial crises. The Bernanke administration has responded to our problems with acts of desperation and not long-term solutions. Rodriguez said he is amazed that Greenspan could go to China and see a bubble in its stock market but could not identify financial bubbles in the U.S.

---

At the time of publication, Osborne had no positions in the stocks mentioned.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider HMN to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

Holmes R. Osborne III is a private money manager, founder of investment newsletter StockRoyalty.com and frequent author of financial columns. He has a degree in finance from the Martin J. Whitman School of Management at Syracuse University and is a CFA charter holder. Osborne is a member of the Pacific Council on International Relations, Malibu Rotary, Business Forum International and was formerly on the board of the L.A. National Association of Business Economists. He spoke this year at the fifth annual Value Investor Conference.