A Harbinger of wireless risks to come

By Anthony Effinger and Katherine Burton
Saturday, October 23, 2010; 5:13 PM

Philip Falcone left his hometown of Chisholm in northern Minnesota's rusting Iron Range in 1980 in the passenger seat of a 12-year-old Mercury Cougar that cost $150.

Neil Sheehy, from nearby International Falls, had offered Falcone a ride to Harvard University, which had recruited both of them to play hockey for the Crimson. The car stalled in front of Falcone's house, and Sheehy had to restart it on a hill while Falcone's mother and one of his sisters sobbed their goodbyes.

"It'll be all right, Mrs. Falcone; it'll be all right," Sheehy recalls telling Caroline Falcone as the car chugged to life and headed east.

Phil was the youngest of nine children and had grown up poor. His mother worked in a shirt factory, and his father never made more than $14,000 a year as a superintendent at a local utility.

Falcone rode to Cambridge, Mass., with his feet on the dashboard because Sheehy had packed a skate-sharpening machine on the floor of the front seat. Halfway there, the roof liner came loose and showered the young men with fiberglass insulation that stuck to them as they sweated in the late summer heat.

Now, when he goes home to Minnesota, Falcone can fly in his own jet. He and his wife, Lisa Maria, are renovating a 27-room mansion in New York for which they paid $49 million. The household includes a potbellied pig named Wilbur.

Falcone, 48, is the founder of New York-based Harbinger Capital Partners. In 2008, Harbinger was one of the world's most successful hedge funds, with assets of $26 billion. Falcone succeeded by coaxing value out of stocks and bonds of struggling companies. Beginning in late 2006, Falcone bet millions that securities cobbled together from subprime mortgages would collapse.

When they did, in 2007, Harbinger made $11 billion, driving a 116 percent return for its flagship, Harbinger Capital Partners Fund. Then, Falcone lost his touch. His funds, which had loaded up on shares of iron-mining companies and power producers, plunged as the economy slowed. The Capital Partners fund fell 50 percent from its peak in mid-2008 to the end of that year. It rose again in 2009, but its 42 percent return made up only for 2008 losses. Spooked investors asked for their money back.

These days, Falcone manages $9 billion, a third of his boom-time pile. Many hedge funds have had a lackluster 2010. The private pools of cash - raised from wealthy families, pensions and endowments - returned 1.45 percent on average in the first eight months of 2010, according to Hedge Fund Research in Chicago.

Managers who are still in the game - 2,900 hedge funds closed from the beginning of 2008 to June 30 - are paring risk. Many are shunning investments in private companies, which have proved hard to sell since the credit markets went into convulsions two years ago.

Taking on Verizon

Falcone is trying to recover with his biggest bet ever. He's building a wireless network powered by satellites and cell towers that will cover the entire United States and compete with AT&T, Verizon and billionaire Craig McCaw's Clearwire to deliver fast Internet service to smartphones. Falcone says Harbinger has spent $2.9 billion on its broadband company - called LightSquared - which in turn plans to pay Nokia Siemens Networks $7 billion to build and operate its network over the next eight years.

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